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Micro and Small enterprises in Nepal could do lot better in a more economically free environment

Press Release

Kathmandu, Oct 20, 2014: Micro and Small enterprises in Nepal could do lot better in a more economically free environment, shows the findings of a study conducted by Samriddhi Foundation on Kirana Pasals (small retail stores selling groceries and fast moving consumer goods whose services are used by a vast majority of Nepali people) in Kathmandu Valley. Samriddhi Foundation shared a first of its kind report on how Economic Freedom translates into the day to day lives of micro and small entrepreneurs in Nepal, taking the example of Kirana Pasals. The study (which was conducted from April – September 2013) focused on identifying some key hurdles in the growth of these independent businesses run by entrepreneurial and hardworking people.

Part of the research, two hundred and sixty eight Kirana Pasal  owners were interviewed to capture valuable information, insight and stories on the impediments they face to grow their enterprises. The report reveals that regulatory environment pertaining to registration, taxation and standardisation are immediate areas of concern. The report also highlights the fact that laws and regulations that are applicable to KiranaPasal s are scattered across several acts, regulations and rules; and are enforced through several government agencies, which makes it difficult for these entities to be operating in a fully legal manner.

The report shows that taxes are also something which further suppresses the growth of Kirana Pasals, especially those that are registered. Thus the report highlights the need to reform the tax code by reducing tax rates and simplifying it to widen the tax bracket. This would help Kirana Pasals operate legally and consequently access finances and other resources to grow.

The report also recommends rethinking the current standards applicable to Kirana Pasals and fixing practical and acceptable standards in consultation with the Kirana Store owners and consumer groups. Access to finance was another issue of concern for Kirana Pasals wanting to grow. According to the report, capital available from micro finance institutions (which most Kirana Pasals use) are limited and often more expensive than loans from commercial banks and other financial institutions. Since most owners/manager of Kirana Pasals have limited capital and little formal education in business, documents like business plans, balance sheets, rental contract, letter of approval from municipality, tax documents, asset valuation, etc.  are hard to produce.

Finally, barriers to exit were also considered as barriers to growth as when entrepreneurs fail, they have to have an opportunity to wipe the slate clean and start again. This is almost not an option for retailers such as Kirana Pasal  owners in Nepal as exiting formally is extremely difficult. The report makes recommendations to address the aforementioned impediments to the growth of Kirana Pasals and the recommendations together help increase Economic Freedom in Nepal.

Download the full report here
Download the summary of the report here
Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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Doing Business in Nepal: Ins and Outs of the Company Registration Process in Nepal

In an attempt to increase the ease of doing business in Nepal, the Office of Company Registrar (OCR) made online company registration process mandatory in October 2013. Since then, Nepal has gone up three spots in the Doing Business Index (2014) ranking 105th among 189 global economies.

But does it mean that it is much easier to register a company now? Not Really! My research shows that although corruption and bureaucratic hassles were among the major reasons for the change to an online system, they still remain intact. People still have to go through all the old processes and additionally provide documentation online. Moreover, the decade long problem of people outside the valley, who have to come to Kathmandu to register their companies and incur expensive travel and lodging expenses still exist.

The process map reflects the long bureaucratic procedures and the paragraphs below explain some prominent problems.

©Samriddhi, The Prosperity Foundation

©Samriddhi, The Prosperity Foundation

Corruption remains unscathed

In theory: According to the OCR IT personnel, an email regarding approval of the proposed name of the company or reasons for denial is sent to the applicants within 15 days. Following the approval, producing originals of required documents, paying the registration fee and collecting a signature is enough to get a registration certificate.
In practice: Mostly, applications do not get forwarded for approval unless there is some kind of under-the-table settlement. While the registration process is stuck even after 15 days if bribes aren’t given, the whole process can be completed within 2-3 days with proper connections and handsome payoffs.
Causes

  • OCR officials attributed low government salaries as well as the willingness of the business community to bribe as factors fueling corruption in the company registrar’s office. They also mentioned that performance-based-incentive-systems have been proposed, however if and when the system will be approved is uncertain.
  •  A lawyer mentioned in an interview that even if there was a situation where under-the-table settlements wasn’t necessary to get the registration certificate in 15 days, he would still resort to bribing to remain competitive as other lawyers would be finishing the job in 2-3 days through unofficial settlements.
  • Some applicants try to avoid providing necessary documentation and use shortcuts (settle unofficially) to complete their processes.

With both parties willing, corruption has become a norm in the OCR.

Too early to change?

Some employees within OCR, lawyers, and business people (who have to go through the additional online process) have shown some resistance to the change.
Also, for people who are not acquainted with using a computer (esp. people living in remote areas), finding a service center is a problem. When they do find one, the monopoly provider charges exorbitant fees. FNCCI and CAN have opened up service centers in 11 districts and plan to expand to all 75 districts, but due to lack of awareness among people these service centers do not seem to be very popular.

Technical Problems:

Although generators are set up in the OCR for the long and frequent power outages, they do not always work thus halting the registration process during times of power cuts.
Similarly, people also miss deadlines when server crashes occur due to high volumes of online activity close to the deadline date. The system does not recognize certain Nepali characters and thus spelling the correct company names become a problem. There have also been multiple complaints of the user–friendliness aspect of the system and even tech-savvy people have found it difficult to navigate it. OCR is aware of this fact and they are working on making the system more user-friendly and approachable. The software has been evolving and feedback are welcome at support@ocr.gov.np or info@ocr.gov.np.

Going online has increased costs!

cost of company registration infographics

So does it mean going online is a bad idea?

Absolutely not! The problem is not in going online but in the inability to go fully online. With a fully automated process, people don’t have to spend time or money to travel to the offices and consider office hours to view their documents or submit their applications. Going online makes document access and company existence verification easier, which helps while applying for loans. Transparency is increased when people are able to see information about registration fee, fines and application status online.  Issuing PAN numbers directly not only make it easier for the applicants but also help increase tax nets.

The online system allows applicants to reserve a name until 35 days and this opens up opportunities for people to approach potential clients or investors with the guarantee that their business will have that name. Complete automation would also significantly help remove corruption in the OCR.

Ideal deal

The ideal situation would be complete automation of the company registration process and efficient service centers. Since that will take time, the online system could be made optional until all OCR staffs are well-trained and reliable service centers with reasonable prices are established all over the country. It is also important that people get all the post-online registration work done in one place and a real ‘one-window’ is established. Additionally, provisions should be made to make registration possible in each district for the time being.
Ensuring electricity supply during office hours and making the online system more user-friendly and error-free through a constant feedback system is important.  Also, 15 days is a very long time period just to verify the name of a company and that should be reduced. Moreover, the Government of Nepal and Nepal Rastriya Bank need to find agencies and come up with policies that will recognize digital signatures as well as make e-payment possible so that complete automation can be realized as soon as possible.

What do you recommend to make the company registration process better? Please leave a comment below.

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Research Assistant at Samriddhi, The Prosperity Foundation. She graduated from Mount Holyoke College with a Special Major in Economics and Statistics, and a Minor in Complex Organizations.

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Doing Business in Nepal: A Case Study in Tourism

China and India are set to be among the three largest economies of the world by 2020, accounting for 27% of world GDP in PPP terms. And what’s more? They are travelling. All we have to do is become the coffee-shop between two huge corporate houses, whose staff likes to venture out of the routine jobs every once in a while. But is doing business in Nepal so easy, including the tourism industry? The World Bank’s Doing Business report positions Nepal at 105th in terms of ease of doing business.

Here we will look at a case – the ground realities of the process of acquisition of green number plate licenses that travel and tour operators require.

Ground realities

The number plates are issued after a two-tiered process. First of all the applicant tour operator applies at Tourism Industry Division (TID) under Ministry of Culture, Tourism and Civil Aviation for a permission to apply at Transport Management Office (TMO). Excessive corruption, red-tapism, redundancy, lack of accountability in part of the concerned agencies are commonalities in practice.

Process of acquiring green number plate

Process of acquiring green number plate. CLICK on the image to get a better view.

Lack of Accountability

To begin with, all government agencies are required to host Citizen’s Charters (Nagarik Badapatra) at their premises as a measure of accountability towards the citizens. The charters posted at the TMO premises are a decade old and do not reflect the true processes that are followed at present. Besides, economic ordinances can make annual changes in details like vehicle tax. These issues are not addressed in the citizen’s charters posted at TMO premises. Therefore, if an entrepreneur were to follow the guidelines as mentioned in those charters, he/she would be misled and would be rendered unable to acquire the desired services from TMO.

Redundancy
Most procedures required at TID are repeated again at TMO, only increasing the scope of discretionary powers held by bureaucrats at different sections of TID and TMO. This, complimented by lack of information sharing between these agencies can cause the files to be stuck at one section or the other. For example, while the Travel Section at TID verifies all clauses as included in its 26-point check-list before writing an application to the TMO requesting that a green number-plate license be issued to the applicant tour operator, the road-test procedure conducted by the Technical section at TMO requires the applicant to undergo the similar set of processes to produce the same information all over again.

Too much information (to gather and comprehend)
Interaction with personnel posted at different sections of TMO (who are paid to have that information and share it with the applicant) revealed that they were unsure about the complete procedure for the acquisition of green number plate licenses. A number of personnel shared that they have been transferred to TMO only three or four months back (as of May, 2014) and admit how they themselves do not fully understand the steps that need to be followed yet.

The aforementioned problems lead to one, corruption and two, lawyers taking unfair advantage of the entrepreneurs’ lack of access to information. Some tour operators also expressed how they have been asked to pay a sum exceeding Rs. 100,000 at TMO being told that their vehicles do not meet the technical specifications even after being cleared by the Travel Section at TID.

Possible reform measures
Now we see, the faster the tourism entrepreneurs can acquire licenses – to operate their businesses – the better for the economy. Easy access to information for entrepreneurs and accountability on government agencies’ side is the combo that is the need of the hour. Certain steps can be taken to deal with the aforementioned issues.

A client (tourism entrepreneur) focused manual that includes a list of required documents and processes involved in the process of acquisition of a green number plate license can be developed as a short-term measure. This manual needs to be available online and should be updated as per the change in economic ordinances, for example, the tax codes. This needs to be seconded by an updated citizen’s charter at TMO premises. The concerned agencies (TID and TMO in this case) need to develop a mechanism whereby they share relevant information among themselves such that redundancy and excessive red-tapism can be avoided. Training of personnel at TMO is required at the moment, as evinced by the interaction with the personnel themselves. A medium term focus can be coming up with a one window policy to hasten the process. This will require some homework to be done on the government’s side and will thus take some time. If implemented, however, this will also help cut off the complexities, redundancies and room for corruption.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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O thy expenses, dear law!

O thy expenses, dear law!

O thy expenses, dear law!

Not that long ago, a friend of mine wanted to have his business registered. He asked around a few places, did his market research, did whatever else he needed to do and then went on to hire a middleman do get the official papers done. As a layman in a country where local level systems are set up to help one with legal compliance one would wonder why he did what he did. Might I add, he’s not the only one who finds problems with navigating the legal labyrinth on his own—the country is filled with countless others who have no faith in the legal structure as such. The mistrust is, to say the very least, built in the very process of socialization. From friends who have had property cases that have now started to span over generations to the new and aspiring entrepreneurs who think that paying the middlemen rather than making endless fruitless visits to the government offices for registration of a new business is a viable option to businessmen who do not hesitate to use third party coercion—these are but few in the laundry list of things that are not so ideal in terms of legal compliance in Nepal.

As such, courts are the formalized state structures that deal with the legal issues in the country and being state-run structures they are subsidized by the government and at least on papers provide services at minimal costs to the larger populace. But as a better known fact, courts in Nepal are plagued by their own set of worries—their dockets are overflowing and they face resource (human, technical, financial) crunch. As per Supreme Court’s Annual Report there are 52,098 backlogs in all courts across the country and the number is only growing. As a layman, for me as well as for countless others the choice of the contracting and enforcement mechanism would naturally depend on the cost of using it. The focus is not only on the costs (say, a court fee) that is incurred to get a contract enforced, but on transaction costs (for example, time spent in court, bribes, social detriment in escalating disputes) of getting a service. People make their choice based on these costs and when the costs are high they either look for alternatives or do not undertake such transactions in the first place.

The fact the people struggle with legal compliance in Nepal can be evinced in the journey of my aforementioned friend. After having had the legal assistance from the middleman and a couple of lawyers and having bribed a handful of officials here and there he finally set up a business. It so happened that the business ran breakeven for a few years and it came to a point where he wanted to close it down for good. The forthcoming reality hit him hard—it was difficult to close the business afterall! He needed to appoint liquidators and auditors, get all clearance from his employees and comply with an endless list of procedures—the cost of which became extremely high. There again are middlemen and the added costs. He found himself in a lose-lose situation.

This is what happens to a majority of those who wish to close their business. It takes around 5 years of paying annual taxes and visiting the concerned authorities time and again just in case one wills to close the business down. This is why many companies choose to pay the minimum amount and decide to run for losses, or cut through the red tape. Contrary to what happens in countries like Australia where it takes two months to exit a business.

Smaller private enterprises which usually face greater transactional uncertainty and risks of cheating and have shorter business time-horizons than large enterprises tend to resolve contract disputes largely outside the courtroom, partly due to a lack of confidence in the courts’ ability to enforce judgments in a timely manner. For a transition economy like ours that has been struggling with its micro-economic instabilities, the inability to enforce judgments timely often entails substantial adverse commercial implications. This lack of confidence in the state systems most critically, even a short delay in recovering debt or payment through formal enforcement by “slow” courts can cause significant financial losses in real terms.

Across the globe, the failures of the nation’s public courts—for example, overcrowded dockets, costly delays, and legal uncertainty—have spurred the development of private-sector alternatives. Privatizing dispute-resolution services, and contracting out to the private sector, can offer better service at lower cost. Precautions however, should be taken so as to minimize undue influence by interest groups. Easier said than done!

 

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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