Industrial Policy Vision 2020

While the protracted political wrangling is going on, some technocrats are busy with donor agency consultants preparing what they call a vision for the coming 20 years of industrialised Nepal. Participating in the process are the business associations as well which have forwarded their own sets of suggestions to the government team. We present an overview of what the different parties think about the vision.

Planning long-term seems to be the latest fad in Nepal. And the long-term seems to mean 20 years. The trend began with Agriculture Perspective Plan (APP) drafted in mid-90s. Then there were similarly long-term policies in tea, information technology and information and communication. It is a different story that the effectiveness of such long term planning is doubted by some and they have some valid arguments. For example, almost all the situations that serve as the basis for the underlying assumptions in such long-term planning will certainly change drastically over such a long period, turning the forecasts/projections to be mere dreams. Moreover, the experience with the ongoing major long-term plan – the APP – shows that such plans prove to be unrealistic at least in terms of the physical targeting. This is more so when the major policy is to achieve the targets of the plan through the private sector. In order to make the private sector invest in a particular area, mere policy pronouncements are not going to be enough. What matters the most is the relative attraction of a particular sector in terms of profitability at a given period of time and likely sustainability of that profitability for a fairly long period.

Though neither the “Vision 2020” prepared by the UNIDO consultants (which is still at the draft stage) nor the draft Industrial Policy circulated by the Ministry of Industry have fixed any specific physical targets, they however have some indicative figures. For example, the draft Foreign Investment Policy targets to attract US$ 200 million by the year 2005 and US$ 500 million by 2010. The draft industrial policy, however, is not so specific and it only mentions as its objective to have a “substantial increase in the contribution of the industrial sector to the national income”.

Both of the national level chambers – the Federation of Nepalese Chamber of Commerce and Industry (FNCCI) and the recently formed Confederation of Nepalese Industries (CNI) – have forwarded their own sets of reaction to or recommendations for the draft policies. While FNCCI has forwarded only its recommendations, CNI has proposed a detailed alternate draft for the policy (see the table under vision 2020 for the highlights of FNCCI & CNI views.)

Going through the four documents – one each of FNCCI and CNI and two from the Ministry – it can be seen that none of them really differ in vision and priority sectors. But the government still seems to be obsessed with the idea of preparing a very long list of priority sectors. However, the priority sectors proposed now are only 10 as compared to 31 in the existing industrial policy first issued in 1992. While FNCCI has suggested to have only three priority sectors, CNI has suggested eight.

Similarly, the government can also be seen as trying to push in some discretionary powers for the authorities even in this policy despite widespread complaints by the business community against such discretionary powers in any of the other business laws. The example is provided by the cold storage enterprise listed under the priority sectors under the draft policy. Only those cold storages are proposed to be put under the priority sector which are meant for fruits and vegetables. Obviously such a system will be prone to misuse by the authorities. When agriculture is already listed as one of the priority areas, there should be no harm in having cold storage of any type under the priority sector.

Since the major problem that the business sector in Nepal is facing is the frequent change in the policies and rules, the business community has suggested to have the industrial policy valid for 20 years with provisions for reasonable flexibility after review at reasonable intervals. FNCCI has suggested for detailed analysis and revision every 10 years and short/quick evaluation every five years. But the proposed draft from the authorities is silent about the duration, though the persons in the authority have been repeatedly talking about long-term plan in industry.

One major shortcoming in the draft industrial policy is related with the incentives and facilities. The draft follows the same old style of fixing the facilities to different industries on the basis of the industrial classification, location of the enterprise and generation of employment. And this is in sharp contrast to the conviction which the persons in authority have been repeatedly emphasizing on in recent days. They say that investment, whether domestic or foreign, depends not so much on tax holidays as on other environmental aspects such as efficiency of the labour, size of the market, availability of infrastructure and stability of policies. But most of these very essential elements are missing in the government’s draft. Though it has made certain provisions to attract private investment in infrastructure, none of these provisions are much different than what is already there in the existing policy. But despite such policy provisions, infrastructure sector has not received any significant private investment. Though hydroelectricity has received some significant investment in the latter part of the last decade these very provisions which attracted such investment are likely to be changed soon as indicated by the strong opposition being made about these provisions by different political quarters. Therefore, FNCCI has suggested that the Industrial Policy should be based on broad national consensus so that such backtracking will not be there once the policies are effected.

FNCCI has also suggested that the emphasis should be on effective and efficient services rather than on fiscal incentives. It also says that when there are incentives or services stipulated in the policy, law or rules, they should be easily accessible to the investors. Agency or authority responsible for providing the services or incentives should be clearly specified. It also says that the incentives once provided for should not be withdrawn abruptly. Such cases of abrupt withdrawal are very frequent in Nepal. Because of this the 1992 policy has been reduced to a document without any substance as all the facilities provided for under the policy have been withdrawn by now. The most recent example of the frequent change in the provisions of the law is provided by the change in the provisions of new Income Tax Act within three months. The law came into effect on April, 2002, and it was amended by the Fiscal Ordinance in July 2002.

The above suggestion by FNCCI is also related with one other provision proposed in the draft official policy. The draft has proposed for setting up what is called a “one stop facility” to speed up the government services to the investors. Similar system of One Window Committee existing still now under the provision of 1992 policy has proved an utter failure because the policy, law or rules do not clearly specify the authority responsible for providing such services. Due to this fact, Nepal could not receive much foreign investment during the latter part of the last decade while other countries in South Asia could attract much of such investment despite facilities offered by Nepal being much better than by her neighbours. Nepal’s offer were good in early 1990s is substantiated by the fact that the period immediately after the announcement of the 1992 policy had recorded a substantial inflow of foreign investment in Nepal. But that could not be sustained in the latter half of 1990s because the record of the services from Nepali authorities was not good.

Irrespective of what one may think about what specifically the business community has suggested, everyone may agree that the industrial policy must be able to address the weaknesses existing in the economy for industrial growth and capitalise on the opportunities available so that not only the present economic problems are mitigated but also the society benefits in the long run. Analyzing the situation, a study by UNIDO (which is still at draft stage) has identified nine areas (see box - page 39) as Nepal’s weaknesses and threats. To tackle these problems the study report has suggested a four-pronged strategy.

One component of the strategy suggested is to enable the business climate which includes steps not only to restore law and order, but also to reform the tax and administrative system and to promote efficient government. What the draft policy has in this regard is the “one stop facility”, but the private sector is not likely to accept that this provision (which seems to be the same old one window committee in a new garb) is going to make any change in the situation.

The proposed Industrial Policy provides that industries that are likely to have adverse effects on the environment need license from the licensing committee before they will be registered by the Department of Industry. This is an old system that was there also in 1992 policy. Dr. Bhola Nath Chalise, a noted liberal economist (who was one of the persons behind the formulation of 1992 policy) said in a recent newspaper article that the license requirement for such industries should be further liberalised. Chalise says the provision was put there in 1992 because there was no separate rule to regulate the environmental matters. Now that environmental protection act is already in force, there is no convincing logic to continue the old policy, Chalise has argued.

The second component of UNIDO suggestion is to expand public and private investment in physical infrastructure, particularly rural electrification and rural roads which are crucial for small and medium industries in rural Nepal.

The third component of the strategy suggested by UNIDO study is directed at raising the productive efficiency and technological capabilities of Nepali firms in order to raise their price competitiveness and also to enable them to identify and produce innovative products for the world market. The measures include a grant scheme to increase firm-based technology development and training which will be based on technology audit in line with the system followed in UK (Enterprise Initiative), Ireland (National Technology Audit Program), Canada, USA, Switzerland and Finland. It has also suggested to develop Department of Industry as a body able to take more direct responsibility in policy and resource allocation designed to support industrial technology development. The report says the design and implementation of that role can draw on successful experience of organisations such as Economic Development Board of Singapore, Ministry of Commerce, Industry and Energy of Korea and several similar agencies in Ireland, UK and Netherlands.

The fourth component of the proposed strategy is to focus on the quality rather than quantity of the primary, secondary and tertiary education systems, and to upgrade industrial skills both through increased in-plant training and in technical institutions. In tertiary education, the suggestion emphasized on the need to focus on imparting general transferable skills including problem solving, teamwork, preparing and presenting ‘presentations’, report writing and language skills. It also suggests that Department of Industry should conduct skill surveys and regular public-private consultations to identify the manpower attributes required by the manufacturing firms.

The proposed Industrial Policy has noted in the introductory paragraph that the 1992 policy was not able to adequately address the issue of creation of linkages with the other sectors. As a consequence, the sectors of intermediate goods and support services could not grow adequately. As an example of this phenomenon is the vegetable ghee industry which is heavily dependent on imported raw material despite many of these material being feasible for domestic production. Similar is the case in carpet industry which imports wool. Also the readymade garments sector is heavily dependent on imported inputs while the domestic manufacturers of such inputs – e.g. textile factories – have all closed down. All the parties seem to agree that such an anomaly needs immediate attention.

In this regard, FNCCI has also suggested for more decentralization of authority and making the local government bodies as the interested parties in industrial development in their respective areas. As of now they are interested more in extracting benefits from the industries already set up than in helping them to set up and grow. FNCCI has also suggested that the local bodies should be made to compete against each other in attracting investment. This is possible only when the authority of offering incentives is devolved to the local bodies.

Though all the parties concerned about the forthcoming Industrial Policy seem to agree on the basic principles, the final policy is not expected to be announced before five or six months from now as such a policy needs approval from the political leadership which at present is completely bogged down in political debate putting the economic issue on the sideline.

Vision – 2020

Draft Foreign Investment Policy 2002 Summary

Industrial Policy 2002 Summary

Nepal's Problem

(Based on Draft Report of Industrial Development Perspective Plan: Vision 2020, July 2002, Ministry of Industry an UNIDO)

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