Govt officials, private sector differ over IT-park

Kathmandu, June 6: At a time when efforts are on to bridge ‘digital divide’ the world over, there are differences between the government officials and private sector IT entrepreneurs here over the proposed IT park.

The IT Policy-2000 has envisaged to establish an Information Technology (IT) Park at Banepa, Kabhre district, as one of its action plans for achieving the vision of "placing Nepal on the global map of information technology within the next five years".

The IT Policy has also envisioned the private sector’s participation in the development and operation of such IT parks. The government, particularly the Ministry of Science and Technology, has also repeatedly expressed its commitment to it. But, IT entrepreneurs from the private sector here say they are now not much elated at and interested in the IT park at Banepa, some 20 km east of the capital. Why?

"Because the entire business conditions in the IT sector have changed now," retorted Sanjeeb Rajbhandari of Mercantile Office Systems, a pioneer in the private sector IT business in Nepal.

IT institutions say building the IT park was very much relevant and timely when it was planned 5 years ago, but in the past years, IT business conditions have changed so much that it has lost much of the relevance. About 100 private IT institutions are registered with Computer Association of Nepal (CAN).

"(It is of) no use building the IT park now. We can’t justify relocating our staff and properties at Banepa, as so many IT firms are already stationed in the capital along the years," Chief Executive Officer of Unlimited Software Network Pvt. Ltd., Allen Bailochan Tuladhar said. He is former general secretary of CAN.

Agreeing with Tuladhar, Managing Director of World Link Pvt. Ltd. Shyam Agrawal added, "Since IT business is a labour-intensive industry, it is not practical—in the first place—to transport human resources every day to the 20-km distant town. It takes at least 3 hours and the road from the capital is not wide either."

Spokesman of the Ministry of Science and Technology, Punya Prasad Neupane, however, believes the IT park in Banepa still holds no less relevance.

CAN president Lochan Lal Amatya agreed with Neupane but added that the idea envisaged 5 years back is stale, so the IT Park needs a completely new concept and plan.

"The higher the private parties’ participation in the IT Park the better, but it is not that every one must go to Banepa" spokesman Neupane said.

The private sector IT players shared the view that first of all the IT firms need to justify the benefits of relocating their entire establishment in Banepa.

Apart from being a centre with all IT infrastructure under a single roof, the IT Park also plans to offer facilities of uninterrupted electricity and water supplies, reliable communications, conducive working environment and taxation and other fiscal incentives. For communication, Banepa’s physical IT Park will have an optical fibre link with the capital. According to spokesman Neupane, the policy document provides for 1 per cent customs duty to the parties located in the IT Park but which is not available to the virtual IT Parks that interested institutions and individuals can establish at their places as per their convenience.

"Lobbying is going on to extend the facility beyond the physical IT park too," CAN chief Amatya said.

Sanjeeb Rajbhandari questioned why IT firms should be interested in going to Banepa as long as they could get the same benefits and incentives in Kathmandu itself?

The grudge of the IT firms is that building the IT park is already "too late" and, moreover, there are reports of more delays, thereby further sapping Nepal’s potential of capitalising on market opportunities.

"It won’t be in our favour to delay the project," agreed secretary at the Ministry of Science and Technology Mahesh Man Shrestha. "The planning and design of the proposed park is already finalised over and we are currently involved in land acquisition."

"The park has to be completed by 2002/2003," secretary Shrestha informed while talking to The Rising Nepal recently.

"The park will be complete by the stipulated time provided adequate budget is sanctioned and things go as planned," said spokesman Neupane.

Ministry of Science and Technology has urged for allocating a budget of at least 200 million rupees for the IT Park development, it was learnt.

Despite some dissonance over the IT park, both the government and the IT entrepreneurs agree that the persisting difference between them should be sorted out as IT is a viable business with tremendous potential for the country. Independent analysts also observe that the government and private sector should work in tandem to bridge the digital divide in the country, instead of locking horns over the belated IT park construction.

To take advantage of the physical IT Park at Banepa, CAN president Amatya suggested that the government’s plan should include incubator facility where new potential firms are fostered to make them capable within a certain incubation period.

"It should launch marketing campaigns aggressively at the international level about Nepal’s IT products and encourage foreign firms to invest their money and technology in Nepal’s IT Park," he added. "It should coordinate with universities in Nepal for research works and human resource development in the IT sector, and this must go parallel with the IT Park operation."

"To begin with, the government should experiment with a mini IT park right in Kathmandu, and then decide to go to Banepa later if it fared satisfactorily in the incubation period in the Valley," suggested Shyam Agrawal. "It could also reduce the probability of failure and capital loss of the big project at Banepa."

But, CAN’s Lochan Lal Amatya did not subscribe to the idea of centralising all modern facilities in the capital alone.

"Instead, the government may look into the possibility of making Banepa more easily accessible through alternative road links, priority bus service or inter-city railway and offer a lower rent per square metre," Amatya added.

"We are open for looking into all possibilities of facilitating IT development through the IT Park operation," spokesman of the Ministry Punya Prasad Neupane said adding that the government is working with other ministries, CAN, private sector entrepreneurs and all other stakeholders in this connection with a long term perspective,"

Co-ordination and cooperation between government, private sector and all other stakeholders is indispensable now. Experts emphasise that the country missed the industrial revolution and green revolution but cannot afford to miss the IT revolution.

Nepal’s financial sector to support economic growth

Although we sometimes think the pace of change in Nepal is slow, even too slow, a surprising amount has happened since that benchmark meeting. More is about to happen. A number of you have been actively and helpfully engaged in the process.

We want to cover three topics in air remarks.

First, we want to make a brief assessment of the progress of financial sector reforms.

Second, we want to look closely at the ways in which corporate and financial sector governance reforms (or CFG for short) will interact with information and communications technologies (or ICT for short). In fact, the main task of our interactive workshop today is to understand that CFG cannot proceed effectively from this point without a vigorous, interdependent movement of ICT. Much as the fingers of one hand can interlace with the fingers of the other hand, so do modern principles of regulation, management, and disclosure interconnect to information technologies and communications pathways. Because this is an interactive workshop we hope we will all have learned much from each other by the end of the day about how to move ahead together.

Third, we want to demonstrate that the combination of CFG and ICT will, over the next 3 to 5 years, add significantly to Nepal’s rate of economic growth. The main effects will operate on and through Nepal’s service sectors, with spillovers into some components of industry and agriculture.

In the middle of day-to-day routines of work, we sometimes fail to stand back and get a perspective on the broad patterns of change. Quite frankly, we was surprised when we went back to the agenda of CFG reforms we outlined in my prior talk and discovered how much is being accomplished despite obvious frustrations or temporary roadblocks. In every case, the outcomes reflect the involvement of government, private business and professionals, internal and external consultants, and varying levels of donor support.

Here are some highlights of what has been accomplished and we apologize for not being able to mention in full everyone’s contributions:

Progress is being made on the legal front, although bills are beginning to pile up in Parliament’s in-box. A new NRB Act has been reviewed at the Ministry of Law, Justice, and Parliamentary Affairs and is heading to parliament. Laws governing bond and foreign exchange transactions are in process. A Banking and Depository Institutions Act will cover commercial banks, finance companies, and development banks. A new Companies Act, which is he foundation law for corporate and financial governance is heading for submission to the Ministry of Law and Justice. An Insolvency and Reorganisation Act and a Secured Transactions Act are in approximately the same position.

With respect to professional support to implement conditions of standardised reporting and transparency, and provide for knowledgeable and swift resolution of commercial disputes, the Nepal Chartered Accountants Act (Amendment) should permit the Institute of Chartered Accountants of Nepal (ICAN) to emerge very soon as a professional, self-governing body. An Accounting Standards Board and Auditing Standards Board will help Nepal adopt international standards. The National Judicial Academy Bill will advance for cabinet consideration and will provide a national training centre for justices and attorneys.

Another cluster of actions centres on continuing the development of capital markets in Nepal. The Ministry of Finance is considering the Securities Act that will establish an independent Securities and Exchange Board that will feature privatisation, immunity from political interference, and improve disclosure.

Finally, there are strong steps being taken that focus on individual institutions. As everyone knows, the Rastriya Banijya Bank, Nepal Bank Limited, Agricultural Development Bank, the Nepal Industrial Development Corporation, and the five regional Rural Development Banks have serious proportions of non-performing assets. New management teams are in the final stages of selection at the RBB and NBL, while the ADB/N and NIDC are soon to undergo forward-looking accounting and function reviews. The approach to rural banking, associated with microfinance organisations, NGOs, and cooperatives, is to be reexamined, as is the design of a cost-effective regulatory mechanism that will take into consideration the very large numbers of these units, but their very small role in the financial system as a whole. To assist in individual bank operations, there are moves to create a credit bureau and a clearing and payments system.

What ICT does for a bank is to make a dramatic reduction in the costs of handling information and in the transactions costs to the bank and customer of handling a deposit or loan. In Kathmandu, if you have ever stood in line to cash a check, or completed a loan application and moved through all of the steps to eventual approval, or waited for money to be credited to your account following the deposit of a check from outside the valley, we do not need to provide you with a detailed measure of the size of information and transactions costs associated with typical banking transactions. Clearly, their reduction benefits both the bank and its customers.

The impact of high transactions costs is even more acute in rural areas and gravely inhibits access even to basic financial services. Our on-going field work shows that a formal lending rate for a farm loan of, say, 15 per cent is not sufficient to switch business away from informal lenders who charge a rate of 40 per cent or higher. What accounts for the persistence and popularity of money lenders when there is this disparity in interest rates? The answer is that a customer can approach a local moneylender who knows him or her and is confident of repayment. In contrast, when a customer goes to an ADB/N branch, then there are the costs of travel, lost time, and forms and documents to assemble. In effect, if the market is in equilibrium as an economist would expect, then the actual cost for the formal loan converges upward to the same 40 per cent that the moneylender charges.

Simple procedures, better credit histories rapid processing, faster communication between branch and regional office, and superior record-keeping would greatly reduce the information and transactions costs associated with rural small loans of the type ADB/N, the RDB’s, and microfinance institutions typically offer.

ICT not only increases the efficiency of bank operations but permits banks to offer a wider array of services such as ATMs, telephonic banking, and computer banking. ICT facilitates the deeper penetration of credit card services, thereby expediting business transactions. Behind the cenes, an ICT system would permit banks to speed up interbank check clearing and engage in electronic funds transfers such as direct debiting or salary deposits. A credit bureau would enable banks to obtain accurate and immediate information about a customer’s credit history and rating, thus lowering risks, costs, and interest rates.

What is perhaps less well-known, is that ICT does not merely lower information and transactions costs and improve bank efficiency and services. With the development of proper accounting and reporting standards, an ICT system also improves the ability of bank and capital market regulators to track the information they need to regulate financial markets. ICT can help tax and customs authorities to expedite revenue collections and if properly handled greatly reduce the potential for unwarranted side payments.

If the benefits of financial sector reform and the introduction of advanced information technologies go mostly to bank’s stockholders and managers and to an elite class of depositors and borrowers, then they would not be fair or popular or desirable. Fortunatley, it turns out that when we look at the experiences of other countries and when we study closely the likely effects on Nepal’s economy, the news is all very good.

When we talked at the CFG workshop some months ago, we argued that CFG reform would add about +2.0 percentage points to Nepal’s growth rate. Nepal’s per capita income would double every 20 years or so rather than every 50 years. We do not think that Nepalis want to wait for half a century merely to become as well off as Indians are right now. Three independent approaches support the 2 per cent argument and, We will not repeat the details here. First, a standard Harrod-Domar Income accounting exercise shows that a rise in Nepal’s saving rate and a decrease in the nation’s capital/output ratio, both of which would happen with enhance financial intermediation, would yield this impact. Second, very recent and rebust econometric exercises calibrate the extremely strong effects of financial sector development on national growth rates. Third, a large macroeconomic or computable general equilibrium (CGE) model also yields a two percentage point gain when tasked to estimate the consequences of financial sector reform. What is particularly interesting in this model is that un-repressing the sector shifts credit flows and investment into labor-intensive industries and agro-businesses with the result that employment rises, particularly for less skilled workers.

My estimate has so far withstood challenges. This gain is realistic but we want to connect it to two other links. First, on the basis of what we are examining in this workshop, we want to amend what we said about CFG to include the ICT dimensions. We will now say that the gain of +2.0 percentage points arises from the inevitable conjunction of CFG and ICT as applied in Nepal’s financial system. Most of the ICT applications work directly to lower information and transactions costs and improve efficiencies and intermediation. We are conducting field surveys to help estimate these benefits for banks, small businesses, and consumers.

Second, to be confincing, we need to show at least in broad terms how such a large gain is possible. This means looking at the intermediate or meso-level of Nepal’s economic sectors more closely. If we succeed then there will be an unbroken logical chain from the 42.0 per cent gain down to the on-the-ground benefits enjoyed by individual families and firms. In effect, we are looking for leading sectors, that is, sectors that grow faster than average during the process of economic growth. Since about 1995, the shares of agriculture, industry, and services in GDP have been more or less constant at, respectively, 40%, 20%, and 40%. Over the longer time frame since 1980, the share of services has risen from 24 to 40 per cent while agriculture’s has slumped from 63 per cent. In Nepal, the service sector has four subsectors: trade, restaurants, and hotels; transportation, communications, storage; finance and real estate; and, community and personal services. For the last five years, Nepal’s service sector’s growth has averaged 5.6 per cent, industry has done about the same, while agriculture has mustered only 3.8 per cent. The four service subsectors each accounts for about 10 per cent of GDP and all have grown around 5-6 per cent per annum (table 2).

Note: TRH=trade, restaurants, hotels; TCS=transport, communications, storage; FRE finance, real estate; CPS=community and private services.

When we look at the ratio of sector growth rates to that of GDP we can identify leading sector’s when their ratios exceed 1.0. In the last five years, the service sector’s ratios are 1.0, 1.5, 2.0, 0.9 and 1.0 (table 3). Of the the subsectors, transportation-communications-storage and finance-real estate have consistently been above 1.0. On this basis, one can point to these two subsectors as actually and potentially leading sectors. It is of particular interest, of course, that CFG and ICT would have the greatest direct impact on these two subsectors, to which they not only belong but where there are immediate spillover benefits. CFG and ICT will be building on current strength in the economy.

Following this observation, we can next ask what a +2.0 percentage point gain to GDP growth would have to translate into, in terms of sectoral and subsectoral numbers. There are many possibilities but a believable one would see services growing at 9.5 per cent, industry at 7.0 per cent, and agriculture at 3.0 per cent. This would shift the growth function from the current 4.4 per cent path to 6.4 per cent. The main effect of CFG and ICT would be felt in the service subsectors but better allocaitons of credit and more investable resources would push parts of industry faster, too. Very difficult input and technological problems in agriculture make it hard to see more than a small gain from financial liberalization and ICT.

Is this a plausible scenario? Yes, and we have to do no more than look south across the border where India’s service sector has consistently led economic advance. From 1996 to 2000, the growth rate in India’s services sector was, respectively, 10.3, 7.1, 9.0, 8.3, and 8.2 per cent.