Accelerating Private Sector Reform

08.28.2020 | Articles | Sujeev Shakya

CONTEXT

Private Sector in Nepal: Following the restoration of peace and the establishment of liberal economic policies in the 1990s, there have been years of sustained private sector expansion in the country. The Nepali private sector contributed about 80% of the economy’s gross fixed capital formation since 2001, equivalent to about 17% of the country’s Gross Domestic Product (GDP). As of 2019, the gross fixed capital formation contribution of the private sector has increased to 26.85% of GDP. The private sector is mostly dominated by small and medium scale enterprises: more than 90 of registered businesses are SMEs, and they accounted for about 22% of GDP in FY 2012/13. Thus, while most of the private sector still functions in the informal domain, it creates the highest number of jobs and encompasses many people engaged in employment or entrepreneurship. A policy shift toward privatization in the 1990s reduced the size of the public enterprise sector to levels below the South Asian average and concentrated it in just a few sectors, such as utilities. More than 99% of formal firms are privately owned. With the exception of a few large, influential business groups, most firms are small. A few large, mostly family-owned, businesses continue to be significant players in traditional sectors. These business groups have survived Nepal’s political ups and downs by diversifying, and by demonstrating an ability to navigate regulatory hurdles. Apart from these large firms, most other firms are small: only 18% of Nepal’s formal firms have more than 20 employees.

 

COVID 19 Exposes the Private Sector: Nepal’s policy failures can be blamed on the biased structure that governs private sector participation in policy formulation and implementation. Three umbrella organizations of the private sector, the Federation of Nepalese Chamber of Commerce and Industries (FNCCI), Nepal Chamber of Commerce (NCC), and the Confederation of Nepalese Industries (CNI), were granted monopoly by law to dominate the policy formulation discourse. As expected, these business associations advanced their narrow interests, and, without any equally influential countervailing interest GON policies remained largely protectionist. These private sector associations function as the agenda setter and influencer in policy analysis and take on the mandatory position as a member in the policy drafting committees. In addition, they utilize their position as negotiators on behalf of the private sector to lobby for their vested interests. The dysfunction and weak governance of the GON policy process manifested fully, when, despite an abundance of talk about liberalization, the final Foreign Investment and Technology Transfer Act (FITTA) included stronger protectionist provisions, as some industries (e.g., dairy) remained prohibited to foreign investors while the minimum capital requirement for FDI increased ten-fold to half a million dollars.

 

Corruption and Private Sector:  The pandemic further exposed the close ties of private businesses with the government and as corruption cases emerged, it illustrated the extent of government collusion with businesses. For instance, Omni Business Corporate International became a household name as each of the procurement scandals during the pandemic got linked to this company. The Public Account Committee of the House of Representatives has decided to summon Minister for Health, Bhanubhakta Dhakal, after recording statements from officials involved in a controversial deal to procure Covid-19-related medical goods and equipment through Omni Business Corporate International.

The private sector bodies worked with the government to ensure that in mid-May, the Council of Ministers approved of a criterion regarding the vehicular movement pass for industries. To obtain the pass, industries must be registered and have their taxes cleared and must be recommended by the FNCCI and the NCC. For organizations not registered with these political associations, it was impossible to get passes for vehicular movement. Many people complained of the need to grease palms of officials at these institutions to get these passes. Thus, rather than finding strategic and holistic ways to engage with the government on recovery, Nepali private sector bodies were happy to find small opportunities of demonstrating their importance.

Private Sector Busy with Politics: The private sector organizations, especially FNCCI, were busy with the upcoming elections. The elections for national private sector bodies in Nepal have become very important as the key position in this organization gives one a direct seat to government regulatory bodies such as the Investment Board, Securities Exchange Board, and other government organizations. This provides opportunities to get access to critical business information on other competitors and planned businesses. At the same time, government officials also find it easier to work with these business leaders when it comes to settling tax disputes or other matters where there is opportunity to make money.