CREATING MARKETS

IN NEPAL
Country Private Sector Diagnostic
NOVEMBER 2018
CREATING MARKETS
IN NEPAL
Country Private Sector Diagnostic
ACKNOWLEDGEMENTS
The Nepal Country Private Sector Diagnostics was prepared by a team led by Volker Treichel, Ashish Narain,
and Siddharth Sharma, including Bradford L. Roberts, Philippe D. Meneval, Deepak P. Adhikary, Vincent
Palmade, Wouter Schalken, Sanjay Jha, Rajan K. Panta, Ruchita Manghnani, Ritika Goel, and Natalia Corral.
The team gratefully acknowledges the guidance of Mengistu Alemayehu, Qimiao Fan, Wendy Werner, Zoubida
Allaoua, Mona Haddad, Takuya Kamata, Faris Hadad-Zervos, Christian Eigen-Zucchi, Paramita Dasgupta,
Esperanza Lasagabaster and Mohammad Rehan Rashid in preparing the report. The peer reviewers were Val
Bagatsing and Michael Engman. Administrative support was provided by Elsikutty P. Moses, Gayatri S. Pathak,
Lata Verma and Savita Ahlawat. Peter Milne and Ryan Flynn provided editorial support.
The team benefited from suggestions and comments from many, including Joy Biswas, Aditi Shrestha,
Raihana Rabbany, and John Perrottet (Tourism); Nandini A. Bhatnagar, Ernest Bethe, Oksana Nagayets, Chris
Jackson, Patrick Verissimo, Karishma Wasti, and Akira Dhakwa (Agriculture); Nandini A. Bhatnagar, Andrew
Myburgh, Charles William Dalton, Alexandre F. Oliviera, Kari L. Hunt and Manav Bhattarai (Health); Nandini
A. Bhatnagar, Veronica Navas, Shwetlena Sabharwal, Sangeeta Goyal and Mohan Aryal (Education); Ruchira
Shukla, Davide Strusani, Carlos Katsuya and Harmish Rokadia (ICT); Ashim Nepal, Ilias Skamnelos, and Sabin
Raj Shrestha (Finance); Serdar Yilmaz (Governance). Santosh Pandey and Elizabeth F. Pennell provided support
in understanding the country context.
CONTENTS
7 | EXECUTIVE SUMMARY

15 | INTRODUCTION

21 | THE STATE OF THE PRIVATE SECTOR

24 | CROSS-CUTTING CONSTRAINTS TO NEPAL’S

PRIVATE SECTOR DEVELOPMENT
24 | Strengthening institutions is critical for policy effectiveness
26 | Insufficient infrastructure has prevented key sectors from fulfilling
their potential
28 | Technical and managerial skills, access to finance, and excessive
regulation of foreign investors are other major issues

33 | HOW THE PRIVATE SECTOR CAN REVITALIZE NEPAL’S

SOURCES OF GROWTH

35 | OPPORTUNITIES AND CONSTRAINTS IN THE KEY SECTORS:

CPSD DEEP DIVES
35 | Tourism
39 | Agribusiness
43 | Health
46 | Education
49 | IT Services

52 | RECOMMENDATIONS
52 | Recommendations on cross-cutting issues and infrastructure
subsectors
54 | Sector-specific Recommendations from the Five Sector Deep Dives
54 | Tourism
57 | Agribusiness
58 | Health
59 | IT services
60 | Education
 63 | ANNEXES
63 | Annex 1: Negative List of Sectors in Which FDI Is Prohibited
64 | Annex 2: Transaction-specific Constraints to Foreign Investment
in Nepal
66 | Annex 3: The Sector Scan
86 | Annex 4: Largest Tourism Segments and Projected Growth Rates
87 | Annex 5: Tourism Destination Options for Nepal
89 | Annex 6: Government Programs in Agriculture
90 | Annex 7: Methodology Used to Assess Investment Appeal of
Agribusiness Subsectors
91 | Annex 8: Data on Higher Value / Higher Growth Subsectors in Nepal
92 | Annex 9: Political Feasibility of Recommendations
93 | Annex 10: International Examples of Approaches to Strengthen
Industry Linkages in the TVET Segment

94 | BIBLIOGRAPHY

96 | REFERENCES
Abbreviations and acronyms

ACAP Annapurna Conservation Area Project MCC

Millennium Challenge Corporation
ADB
Asian Development Bank MCR
Minimum Capitalization Requirement
ADS
Agriculture Development Strategy MFD
Maximizing Finance for Development
BPO
Business Process Outsourcing MICE
Meetings, Incentives, Conferences and
Exhibition Tourism
CAN
Computer Association of Nepal
MIS
Management Information Systems
CEM
Country Economic Memorandum
MOUS
Memorandum of Understanding
CF
Community Forest
NABIC
Nepal Agribusiness Innovation Centre
CTVET
Council for Technical and Vocational
Education and Training NEA
Nepal Electricity Authority
CPSD
Country Private Sector Diagnostic NGOS
Non-Governmental Organizations
DFID
Department of International NVQ
National Vocational Qualifications
Development
PA
Protected Areas
DMO
Designation Management Organization PACT
Project for Agriculture
FAO
Food and Agriculture Organization Commercialization and Trade
FDI
Foreign Direct Investment PPP
Public Private Partnership
FIA
Foreign Investment and Technology SCD
Systematic Country Diagnostic
FITTA
Foreign Investment and Technology Act SCT
Smart Choice Technologies
GCI
Global Competitive Industry SEZ
Special Economic Zone
GDP
Gross Domestic Product SME
Small and Medium Enterprises
GER
Gross Enrolment Rate SOES
State-owned Enterprises
GHT
Great Himalayan Trail SPS
Sanitary and Phytosanitary Measures
GIZ
German Agency for International TSLC
Technical School Leaving Certificates
Cooperation
TVET
Technical and Vocational Education and
GSMA
Global System for Mobile Training
Communications
VAT
Value-added tax
QAA
Quality Assurance and Accreditation WBG
World Bank Group
ICT
Information and Communication WDI
World Development Indicators
Technology
WEF
World Economic Forum
IFAD
International Fund for Agriculture
Development WGI
World Governance Indicators
IFC
International Finance Corporation WHO
World Health Organization
IMF
International Monetary Fund WTTC
World Travel and Tourism Council
ISP
Internet Service Provider UGC
University Grants Commission
IT
Information Technology UNWTO
World Tourism Organization
ITES-BPO
IT-enabled services and business process USAID
United States Agency for International
outsourcing Development
ITMP
Integrated Tourism Master Plan
ITU
International Telecommunications Unit
INFRASAP Infrastructure Sector Assessment
Program

All dollar amounts are U.S. dollars unless otherwise indicated.

Executive Summary
The purpose of this Country Private Sector Diagnostic (CPSD) is to assess opportunities
and constraints holding back private sector growth. It conducts a diagnostic of the
main cross-cutting constraints to private sector competitiveness and growth through
data analysis, synthesis of existing research and stakeholder consultations. This
exercise also identifies sectors that could play a key role in enabling Nepal’s growth,
by either enabling other sectors or capitalizing on Nepal’s inherent comparative
advantage to tap global markets. Sector deep dives help identify private sector
constraints specific to these sectors, including sector-specific manifestations of cross-
cutting constraints. The CPSD analysis finally identifies key recommendations on policy
reforms and investments in public goods (including public-private partnerships) that
could enable growth of a competitive private sector.

NEPAL MUST RECHARGE ITS ENGINES will be critical for Nepal to meet the challenge of
OF GROWTH strengthening its institutions.

Nepal has performed a remarkable feat of poverty With negligible productivity growth, Nepal’s output
reduction, but still remains one of Asia’s poorest and growth has been driven by factor accumulation. In
slowest-growing economies. Despite enduring a period recent decades, growth in total factor productivity
of economic and political crises, the country managed (TFP) has accounted for a miniscule fraction of GDP
to reduce its extreme poverty rate from 46 percent growth. Given diminishing returns to capital, such
in 1996 to 15 percent in 2011.1 But this was mostly accumulation-led growth is not sustainable in the long
brought about by young Nepali men and women term. Moreover, Nepal has a low rate of investment
choosing to work overseas and sending remittances and its rate of public investment is particularly low.
back to their families in Nepal. Over the past 20 While remittances have supported the improvement in
years, Nepal’s real GDP growth rate has hovered at Nepal’s indicators, it creates potential risks from external
4 percent per year, 2.5 percentage points below the impacts on the demand for Nepali migrant workers. It is
South Asian average. estimated that 28 percent of Nepal’s workforce—more
Institutional challenges and a demanding geography than one-quarter—works abroad. Remittance flows were
have made it difficult for Nepal to build on its unique 26 percent of GDP in 2017, the second-highest among
advantages. Nepal is richly endowed with natural all countries with a population of over 1 million.2 While
beauty, fertile land, and an abundance of water, and providing an important source of income, remittances
is located between two economic powerhouses, China have also hurt Nepal’s competitiveness through
and India. But much of the country consists of remote appreciation of the real exchange rate.
mountainous areas and is prone to natural disasters. Nepal’s process of structural transformation has been
In previous decades, deep-seated power imbalances slow and atypical. Though the share of agriculture in
gave rise to political uncertainty and conflict: Nepal output and employment has been declining, the rate of
has had more than 30 governments between 1990 and exit is slow. New jobs are being created mainly in low-
2018. The new constitution and the peaceful transition value services and construction. More worryingly, with
of government now herald a period of stability, which its share in GDP falling from 9 percent since 2001 to

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just 6 percent today, Nepal’s manufacturing base lacks Nepal. In 2015, a new constitution was approved and,
dynamism and is a drag on growth.3 in 2017, a majority government was elected, and a
A symptom of low competitiveness, Nepal has not new system of federalism adopted. A lack of capacity
been able to exploit export markets. For medium-sized in nascent local-government level and clear national
countries such as Nepal, trade can be an important standards could create risks in the transition to this
engine of growth. However, Nepal has been unable new system; at the same time, the devolution of power
to grow or diversify its exports, in terms of either to local governments also offers the prospect for better
products or destinations. Since the late 1990s, the prioritization of key policies.
export-to-GDP ratio has fallen from 25 to 10 percent,
largely due to a collapse in Nepal’s goods exports to SMALL FIRMS AND LOW
just 3 percent of GDP.4 Traditional export mainstays PRODUCTIVITY LEVELS
such as textiles are on the decline. Meanwhile, rising STILL CHARACTERIZE NEPAL’S
services exports have failed to compensate for this PRIVATE SECTOR
decline; moreover, they hinge on demand from tourists.
These problems with export growth are mostly due to Nepal’s public sector has been withdrawing from most
constraints in the domestic business climate. Nepalese sectors of the economy, leaving more room for the
exporters have been unable to benefit from trade private sector. A policy shift toward privatization in
agreements and preferential access largely because the 1990s has reduced the size of the public enterprise
of supply-side constraints. Most remain small, and sector to levels below the South Asian average, and
struggle with increasing their shipments once they concentrated it in just a few sectors, such as utilities.
enter a new market, indicating high variable costs due More than 99 percent of formal firms are privately
to factors such as costly and unreliable electricity, and owned.5 Even social sectors such as health and
limited transportation services. education have a significant private sector presence.
Despite the political uncertainty, private investment has
Nepal will need to increase its rates of investment and
grown and accounts for an increasingly large share of
productivity growth to meet its growth targets, given the
capital formation.
expected decline in remittances and migration flows. If
its investment-to-GDP ratio, growth of human capital, However, productivity levels remain low. While
and growth of productivity stay at recent historical data constraints make it hard to estimate firm-
averages, it will be difficult for Nepal to sustain the GDP level productivity, aggregate labor productivity in
per capita growth rate that is necessary to meet its target manufacturing is one of the lowest among comparators.
of reaching middle-income status by 2030. This suggests that most firms are unproductive, and
that there is a misallocation of resources across firms.
Nepal needs a comprehensive growth strategy that will
Nepal’s export performance also indicates that there
both boost investment and accelerate productivity.
are issues with productivity.
This should include: (a) putting in place policies that
raise the productivity of key enabling sectors (such as With the exception of a few large, influential business
transport, logistics, and telecommunications), reduce groups, most firms are small. A few large, mostly
the cost of doing business, and strengthen integration family-owned, businesses continue to be significant
with the rest of the world; (b) building new sources of players in traditional sectors. These business groups
growth and revitalizing existing sources of growth in have survived Nepal’s political ups and downs by
sectors of comparative advantage; and (c) investing in diversifying, and by demonstrating an ability to
people and putting them to productive use. navigate regulatory hurdles. Apart from these large
Prospects for the implementation of a growth-oriented firms, most other firms are small: only 18 percent of
strategy have recently become more favorable. A Nepal’s formal firms have more than 20 employees.6
confluence of several important political developments Nepal’s private sector is resilient but will require
could mark the beginning a new era of stability for more dynamism to trigger the response required for

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the country’s growth ambitions. Firm entry rates are relatively low road density. This is noteworthy because
low. Most firms do not grow much as they age, which critical sectors such as agri-processing have a relatively
suggests that they are not making investments that high share of transport in their input bundle.10 Limited
would increase their productivity or product quality. air and land connectivity also reduces the attractiveness
Very few firms engage in trade or technology transfer of key tourist destinations. Besides transport, Nepal
with foreign countries. Usage of ICT is also relatively compares unfavorably with its neighbors on other
low. FDI inflows are negligible, at just 0.4 percent of dimensions of infrastructure, such as digital access,
GDP, or one-third of the South Asian average, and electricity consumption per capita, and transmission
concentrated in just a few sectors, such as hydropower.7 losses in the power sector. Not surprisingly, the
share of Nepalese firms identifying electricity or
NEPAL’S PRIVATE SECTOR FACES transportation as major constraints is one of the
A HOST OF BUSINESS CLIMATE highest among Asian comparators.
CHALLENGES, THE MOST CRITICAL Although not binding to the same degree as governance
RELATED TO INSTITUTIONS AND and infrastructure, a gap in technical skills and
INFRASTRUCTURE managerial capabilities is constraining growth-oriented
firms from scaling up and rising up the value chain.
Strengthening institutions is critical for achieving
School enrolment rates have grown, but the quality of
Nepal’s development objectives. Historically, political
teaching is still a constraint. Nepal also underperforms
instability has made it difficult for Nepal to build
strong institutions. Because of this history, Nepal ranks on global indicators of higher education and skills,
low on cross-country indicators of many dimensions such as the Global Competitiveness Index on higher
of governance, such as rule-of-law and the control education and training, and the World Economic
of corruption. With institutions often finding it Forum “Know-How Index,” which measures the
challenging to insulate policymaking from frequent breadth and depth of specialized skills. Firms note that
regime changes, the share of firms citing political a lack of technical and managerial skills has prevented
uncertainty as one of the major obstacles to operations them from moving up the value chain and scaling up.
has been unusually high.8 This uncertainty has deterred Perceptions of strict visa restrictions for skilled foreign
private investment. Nepal also faces the governance workers appear to add to the problem.
challenge of making the process of policy design and Access to finance and inefficient land markets are
implementation more effective and responsive to the also key constraints. Nearly 40 percent of Nepalese
interests of ordinary firms and individuals. This will firms identify access to finance as a major constraint.11
be the key to increasing the ease of doing business A key shortcoming is the absence of an effective
and sustaining productive partnerships between the credit information infrastructure that leads to an
government of Nepal (GoN) and the private sector. The over-reliance on immovable assets, especially land
agenda of strengthening governance is a particularly and buildings, as collateral. In addition, there is no
salient issue in high-potential sectors. For example, the framework for the use of movable assets as collateral,
tourism sector needs revised regulations and stronger which especially impacts small and medium-sized
inter-ministerial coordination to develop strategies that firms. Collateral demands on firms also tend to
will enable it to move up the value chain. be inordinately high. Inequalities in access to land
With key sectors such as tourism and agribusiness therefore translate into inequalities in access to
being highly reliant on connectivity, strengthening finance. Long-term credit is still constrained by limited
infrastructure is the other critical challenge for private financial products and the shallowness of the capital
sector development. Nepal ranked 130 out of 138 market. Nepal’s land market is highly inefficient due
countries on the 2016 Global Competitiveness Index of to institutional gaps, such as poor land records and
infrastructure.9 It is ranked 124 out of 160 countries an ineffective land management policy. This makes it
on the 2016 Logistics Performance Index (LPI) and has difficult to deploy land efficiently for productive uses.

9
Excessive barriers to foreign investment and foreign- With the hydropower sector covered as part of the
exchange transactions also constrain the private sector. forthcoming World Bank InfraSAP report, this CPSD
Linking with international markets can be an important identifies five sectors where greater facilitation of the
driver of growth for medium-sized countries such as private sector could have major impacts on Nepal’s
Nepal. However, foreign direct investment (FDI) is growth trajectory. These five sectors are tourism,
deterred by complex procedures and overly restrictive agribusiness, education, health, and IT.
policies. The latter include sector caps, a long “negative
Tourism and agri-business are “growth drivers” in that
list” of sectors barred from FDI, and restrictions
they are sectors with a strong comparative advantage
on non-equity modes of investment that are often
and the potential to compete in large export markets
implemented in an inconsistent manner. Foreign trade
and spur job creation. In tourism, Nepal has unique
and FDI are also hampered by restrictions on foreign-
endowments: the world’s tallest mountains, vast nature
exchange transactions, such as difficult procedures for
preserves ranging from alpine meadows to tropical
opening U.S. dollar-denominated bank accounts.
forests, and some of the world’s key Buddhist and Hindu
Policies on land acquisition and the use of land as sites. It can capitalize more fully on these endowments
collateral, in particular, deter foreign investors and by diversifying and moving up the value chain toward
lenders, restricting private sector access to long-term medium and high-end tourism, for example, through
finance. Although foreign investors can acquire land developing leisure and outdoor adventure activities in
for commercial purposes, the process is difficult and destinations with high potential, such as Annapurna
uncertain. The creation of mortgage of land in favor and Lumbini. In agribusiness, Nepal’s rare and varied
of foreign lenders needs cabinet approval, and the agro-climatic conditions give it a potential edge in many
enforcement of security by foreign lenders needs a court products, including high-value niche products such as
order. Foreign lenders also have a lower repayment spices, fruit juices, honey, medicinal herbs, tea, coffee,
priority than domestic lenders. Easing these constraints apples, and cut flowers. With more than 70 percent of
on foreign lenders could significantly improve access to the population working in agriculture, creating markets
long-term credit. in high-potential agriculture value chains, such as tea
and spices, could have a substantial impact on living
HOW THE PRIVATE SECTOR CAN standards in rural areas.
BECOME A MORE POWERFUL ENGINE Education and health are important enablers, where
OF GROWTH: HIGH-PRIORITY SECTORS
private sector involvement can help implement a key
In leveraging Nepal’s unique endowments, hydropower pillar of Nepal’s new growth strategy: investing in
will be critical to the new growth strategy, provided people and putting more human capital to productive
that the wealth generated from this sector is channeled use. In education, the private sector is playing an
judiciously. Hydropower could attract massive new increasingly important role in technical and vocational
investments and an increased inflow of resources education and training (TVET), and in tertiary
into the country, potentially stimulating construction education. There are significant opportunities for more
and urbanization.12 It would also increase the professional colleges and TVET institutes to meet
competitiveness of firms in general by easing the supply the need for high-quality and market-relevant skills,
of power. However, there are some downsides: few thereby easing a constraint on firms’ productivity. In
jobs would be created and large increases in electricity health, the private sector could partner with the GoN
exports could lead to Dutch disease, further weakening to improve health access and the quality of health care,
Nepal’s export competitiveness. It would therefore as well as help to expand health insurance coverage.
be important to invest the returns from hydropower The private sector is already active in these sectors but
in removing bottlenecks to private investment and in could play a much larger role, including in parts of the
diversifying the economy by developing those sectors in country that are currently underserved. Health and
which Nepal has a comparative advantage. education also offer better job opportunities to women.

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The IT services sector, although nascent and small, can access to care and to improve quality through greater
help unleash Nepal’s entrepreneurial spirit, and enable private sector involvement. The limited dialogue with
productivity growth in other sectors. In the short run, the private sector has impeded efforts to modernize
it can increase exports of low- to mid-range business and reform service delivery, and devise instruments to
process outsourcing and data analytics. In the longer effectively contract with private actors. In education,
run, the sector could develop niche expertise and raise capacity constraints in the relevant government
the productivity of other sectors, such as tourism and agencies hamper the speedy approval of new colleges,
agribusiness (through tailored software such as apps for TVET providers and courses. Limited government
mountain hiking), retail (e-commerce) and transport capacity to regulate quality undermines the incentives
(logistical software). Glimpses of this potential can of private service providers to improve the quality
already be seen in fledgling start-ups, such as an Uber- of the education that they provide. Finally, the
like personal ride-hailing service for Kathmandu’s development of the IT services sector is constrained by
ubiquitous two-wheelers. The IT sector can also help weaknesses in the education system and by poor access
improve efficiency and transparency in public service to affordable, quality infrastructure, such as IT parks.
delivery and regulatory governance.
The sector deep dives of this CPSD also identified HOW THE PRIVATE SECTOR CAN BE
sector-specific constraints, most of which were in fact ENABLED: HIGH-PRIORITY REFORMS
sector-specific manifestations of key cross-cutting
constraints: infrastructure, governance, and skills. In Cross-cutting constraints need to be urgently addressed
tourism, poor connectivity infrastructure puts many to create a better enabling environment for the private
potential destinations out of reach. the The challenges sector. At the economy-wide level, the following
facing governance/institutions manifest themselves in measures would be advisable:
the need to update laws and regulations in consultation » Ease barriers to firm entry and operations by: (a)
with all stakeholders—including for protected areas, simplifying business regulations and streamlining
where a more nuanced approach is needed to balance processes; (b) introducing single-window interfaces
the public interest in legitimate environmental for regulatory compliance as envisaged under the
protection, while enabling more economic Enterprises’ Act; and (c) establishing a platform
opportunities. Furthermore, a lack of coordination
for regular dialogue between the GoN and the
between ministries to implement policies hinders the
private sector to address pain-points and improve
adoption of an effective strategy to upgrade products to
coordination.
attract tourists in the higher-end segments and close the
wide skills gap. In agribusiness, poor logistics fragment » Strengthen infrastructure13 by: (a) enacting the PPP
domestic markets and increase aggregation costs. This Law and developing a PPP pipeline, together with a
weakens value chains and reduces the competitiveness contingent liability framework; (b) strengthening the
of local produce. This is compounded by inefficiencies Road Board of Nepal and identifying strategic roads
in government procurement and distribution of to be improved through PPPs; (c) prioritizing airport
basic inputs, such as fertilizers and improved seed, development through PPPs and reforming civil aviation
which exclude the private sector and distort markets. policies and regulations (see the tourism sector
Aggregating land is also difficult, which means that deep dive); (d) developing a reform plan to improve
farms often remain small and unproductive, and digital infrastructure (see the IT services sector deep
agribusinesses struggle to scale up. dive); and (e) enabling hydropower expansion and
strengthening the Nepal Electricity Authority (NEA).
The cross-cutting constraints regarding infrastructure,
governance and skills also adversely impact health, » Enhance access to finance by: (a) clarifying
education and IT. In health, current limitations in regulations and procedures needed to operationalize
government capacity to regulate and partner with the Secured Transactions Act; (b) strengthening the
the private sector are curtailing efforts to increase creditor information base; and (c) developing a legal

11
 framework for private equity and venture capital. The CPSD also recommends sector-specific actions
Furthermore, the knowledge base on the financial to open up priority sectors. Sector opportunities, key
sector needs to be deepened, with a view to developing constraints, and priority interventions are listed for
more specific recommendations to boost access to each sector in Table 1.
finance and develop alternative sources of financing. Political will is required to implement these initiatives.
» Improve allocation of land by: (a) implementing The new GoN has signaled a renewed focus on working
land zoning; (b) updating the Land Act and making with the private sector for accelerated growth. This will
it consistent with Land Acquisition Policy; and involve tackling anti-competitive practices in the critical
(c) developing industrial parks tailored to specific transport and other sectors. Key economic institutions
industries. will need to be strengthened, such as those governing
land markets. There is a need to push departments to
» Remove constraints to FDI by: (a) reducing the
better implement existing policies, clarify gaps, and
negative list; (b) adopting a new draft Foreign
coordinate more with other agencies. The potential
Investment Act aligned with international best practice
of the new federal system to improve policy design
and obligations; (c) streamlining processes critical to
and implementation will need to be fully unleashed
entry and operations, such as investment approvals,
by strengthening the capacity of local governments,
repatriation and exit; and (d) streamlining the process
and further clarifying the roles and responsibilities of
of using land as collateral for foreign investors.
different levels of government. These initiatives are
» Improve firms’ capabilities to support scale-up feasible. The World Bank Group can support change by
by introducing a publicly-supported management sharing experience on international best practice, as well
extension program for firms in key sectors. as providing implementation support and financing. n

TABLE 1 Business opportunities and constraints

TOURISM
Development impact/potential: Diversifying products to medium/high-end tourism by capitalizing on Nepal’s
comparative advantages in high potential destinations such as Annapurna and Lumbini, has the potential to create
many better jobs and help less-developed parts of Nepal.
OPPORTUNITIES KEY CONSTRAINTS PRIORITY INTERVENTIONS
» Mid to high-end tourism, notably » Connective infrastructure: » Upgrade the reliability, safety and
nature-based and cultural tourism. • One international airport, already efficiency of the airport system by
Including: exceeding capacity improving operational management of TIA,
• Annapurna and Lumbini/Palpa • Poor road networks in areas with accelerate ongoing airport construction
top priority destinations. tourism potential and assess need for new airports.
• Mid-West Nepal and Langtang » The need to revise regulations and make them » Update aviation policies and regulations
promising potential. more predictable, especially civil aviation (for example, adoption of draft Civil Aviation
• New mid-high range markets
policies and the Foreign Investment Act: Bill, review of tax on plane leasing).
(such as China) and products
• Average five-star hotel project face up
(such as wellness, soft adventure, » Develop plans for development of key
to a six-year delay destinations (Annapurna and Lumbini).
village and ecotourism-related).
» The need to ease restrictions for investment/
» Review policies and regulations
construction in Protected Areas.
governing utilization of protected areas
» The need to improve policy coordination: (National Parks and Wildlife Reserve Act
• Weak destination development planning of 1973 and Forest Regulations of 1995).

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AGRIBUSINESS
Development impact/potential: With more than 70 percent of the population working in agriculture, creating markets
in high potential agriculture value chains, such as tea and spices, could have substantial impact on living standards
in rural areas. Agribusiness in turn could drive the needed structural transformation of the economy toward higher
value-added activities.
OPPORTUNITIES KEY CONSTRAINTS PRIORITY INTERVENTIONS
» Export-oriented niches: » Low agricultural productivity: » Improve efficiency of input provision by
• Relatively established: whole leaf, • Inefficient government seed and fertilizer allowing private sector participation in
organic tea could rival Darjeeling; procurement and distribution systems tenders for procurement and distribution
spices, like cardamom • Difficulty in aggregating land to of fertilizers and seeds.
• Emergent: fresh apples, coffee, commercial scale » Strengthen subsidy allocation efficiency,
honey, and cut flowers » Restrictive enabling environment: including through e-vouchers.
» Non-niche products where Nepal • Strong public sector presence in key » Enhance land availability and consolidation
could achieve competitiveness in markets by: (a) conducting a land governance
local/regional market in medium to • Not enough support for agri-business
assessment, subsequently implementing
long term: scale-ups and building firm capabilities recommendations starting with areas
• Poultry • Weak quality infrastructure that restricts
with the highest agribusiness potential;
• Potatoes access to foreign markets (b) introduce land zoning as required
• Vegetables and ginger • Poor logistics
by the Lands Act (Chapter 9A); and (c)
• Insufficient investment in agri-supply chains
Pilot a land bank to facilitate leasing of
» Low access to finance: unutilized land as proposed in the ADS.
• Limited credit products available for smaller »
Increase ability to reach foreign markets
agribusinesses, with an absence of leasing by (a) identifying priority activities to
or warehouse receipts legislation improve food safety/SPS; and (b) building
critical connectivity infrastructure.

EDUCATION
Development impact/potential: Increase in private sector entry and quality in the tertiary education and TVET
subsectors could ease a major constraint on firms, namely the limited supply of workers with market-relevant
technical and managerial skills.
OPPORTUNITIES KEY CONSTRAINTS PRIORITY INTERVENTIONS
» Professional colleges with/without » Private colleges lack autonomy and industry » Enable market-oriented decision-making
foreign affiliation: linkages needed to respond to the market: by private colleges by developing a
• Engineering and management • Fee structure, class size and instructor framework for operational autonomy
salary and speeding up new course approval
» Large, professionally managed TVET
• Lack of a publicly supported industry procedures.
institutes.
body, such as the Industry Skills » Improve quality by building capacity to
» Innovative low-cost solutions, such Councils, involved in TVET operationalize the Quality Assurance
as e-learning (all mainly oriented to »
Quality is under-regulated: and Accreditation (QAA) process, and
domestic market)
• Information on graduate outcomes publicly disseminating program outcome
by program/course not disseminated, information.
effectively limiting consumer choice. » Improve ease of entry by simplifying
» Entry and operation are over-regulated: guidelines for affiliation of colleges to
• 15-day per year for permission for universities, licensing of colleges with
international affiliation foreign affiliation, and approval of new
• TVET affiliation can take four years TVET courses.
• Slow course approval
• Uncertain, arbitrary licensing decisions

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HEALTH
Development impact/potential: Increase in the number and quality of private providers will help address critical human
capital constraints by enabling better access in underserved areas
OPPORTUNITIES KEY CONSTRAINTS PRIORITY INTERVENTIONS
» Partnering with government » The need to strengthen institutional capacity » Strengthen the provision of private
to improve access outside of to regulate or partner with private sector: sector services to public sector health-
Kathmandu Valley: • Underinvestment in developing physical/ care facilities:
• Referrals from public health centers clinical standards, accreditation, and • Build capacity in public sector to
• Rural health camps in partnership dissemination of quality norms or contract with the private sector
with community health facilities protocols • Support the inclusion of more private
• Private provision of services to • Limited mechanisms to contract services facilities in the national health
public hospitals to the private sector insurance program.
• Ineffective incentives for commercial • Develop financial instruments that
» Health insurance:
health-care providers to focus on poor in incentivize private expansion into
• Participation in the national
underserved locations underserved areas
health insurance program
• Underexploited higher-end segment » Lack of dialogue between public and » Improve “quality of care:”
private health providers leading to distrust • Benchmark “quality of care”
» Rural community pharmacies.
and an unwillingness to collaborate. institutions to evaluate gaps and
identify areas for reform
• Develop and implement a health-care
quality plan as recommended by WHO
• Develop and implement mechanisms
to provide oversight starting with,
accreditation and patient feedback

IT SERVICES
Development impact/potential: Relatively unconstrained by Nepal’s weak physical infrastructure (such as roads),
logistics, high land prices and small domestic market, the IT services sector can expand good job opportunities for
skilled youth, improve the productivity of other sectors and facilitate good governance.
OPPORTUNITIES KEY CONSTRAINTS PRIORITY INTERVENTIONS
» (Short run) Export-oriented IT » Limited higher-level technical and » Improve access to skills through a
services firms, leveraging low-wage managerial skills and experience: collaboration between Ministries of
advantage: • Low quality of technical education Education, IT and Industry to revise
• Low-mid range BPO and data • High turnover of talent graduate courses and introduce IT
analytics internship program.
» Regulatory issues:
» (Medium to long term) e-commerce • Framework for e-commerce and » Improve firm capabilities by supporting the
for domestic market. outsourcing missing development of more business incubators
• Visa difficulties for skilled foreigners and introducing subsidized management
» (Medium to long term) Niche
• Weak IP enforcement capacity extension programs for IT firms.
products
• “Servicification” of value chain » Access to finance: » Improve access to serviced land and
activities, like remote education • Missing market between seed funding infrastructure by upgrading the existing
services and mature stage capital IT Park with greater private sector
• Innovative products, potentially • Challenging FDI regulations involvement, and by developing a reform
exportable, but leveraging home plan for ICT infrastructure sector.
» (Digital) infrastructure:
market advantage: Clean energy
• ICT infrastructure is costly, low quality and
software, mountain hiking and
concentrated in the Kathmandu Valley
tourism apps, geolocation and
• E-payment infrastructure is nascent
meteorology apps.
• Dysfunctional IT Park

14
Introduction
Nepal is at a cross-road. Located in one of the most economically dynamic regions in
the world, its development has long been held back by several factors, most notably
pervasive political instability. Over the past two years, however, the confluence of
a series of favorable political developments has given rise to a wave of optimism
about the country’s future and prospects for the emergence of an environment more
conducive to the development of the private sector.
Against this backdrop, the purpose of this Country difficult to access. It is difficult to build infrastructure
Private Sector Diagnostic (CPSD) is to assess in Nepal, especially given that the country is also prone
opportunities and constraints holding back private to natural disasters, such as earthquakes and floods.
sector growth. It conducts a diagnostic of the Until recently, political instability has also been a key
main cross-cutting constraints to private sector factor influencing Nepal’s development trajectory.
competitiveness and growth through data analysis,
From 1990 to 2018, Nepal had more than 30
synthesis of existing research and stakeholder
governments—an average tenure of less than one year.
consultations. This exercise also identifies sectors
The short tenure of governments hampered policy
that could play a key role in enabling Nepal’s growth,
consistency and the emergence of a civil service capable
by either enabling other sectors or capitalizing on
of implementing reforms. A comprehensive peace
Nepal’s inherent comparative advantage to tap global
accord signed in 2006 ended a decade-long period of
markets. Sector deep dives help identify private sector
violent Maoist insurgency, although this also required
constraints specific to these sectors, including sector-
a prolonged political transition that only ended
specific manifestations of cross-cutting constraints. The
almost one decade later with the adoption of the new
CPSD analysis finally identifies key recommendations
constitution in September 2015.
on policy reforms and investments in public goods
(including public-private partnerships) that could
Nepal’s output and productivity growth
enable growth of a competitive private sector.
remain slow
Nepal’s economic performance has been disappointing,
NEPAL’S DEVELOPMENT CONTEXT
even compared with neighbors facing similar
challenges of geography and political economy.
Difficult geography and political economy have
With real GDP growth hovering around 4 percent
constrained Nepal’s development
over the past two decades, Nepal remains one of
Despite its unique natural endowments, Nepal remains the poorest and slowest-growing economies in Asia
poor. The country is rich in natural endowments, with (Figure 1a). Indeed, in recent years, other landlocked
per capita water availability and forest cover at more and topographically challenged countries, such as
than twice the South Asia average. Yet its per capita Afghanistan, Bhutan, and Lao PDR, have outpaced
GDP of $853 in 2017 is much lower than those of its Nepal in GDP growth. Nepal has also done no better
neighbors in South Asia.14 than Sri Lanka and Pakistan, countries that have been
Geography has played a strong role in shaping Nepal’s severely affected by armed conflict and terrorism,
patterns of development. Nepal’s land-locked position respectively. Over the past 20 years, Nepal’s per capita
and mountainous topography increases the cost of GDP growth has been significantly slower than its
doing business and leaves many regions isolated and closest neighbors in South Asia (Figure 1b).

15
 7.0% 6.5% Bhutan
$8,262
$8,000
5.6%
6.0% $7,000

GDP per capita, current international $ (PPP)

4.7% 4.5% India
5.0% 4.0% $6,000
$6,139

4.0% $5,000

3.0% $4,000
Bangladesh
$3,342

2.0% $3,000
Nepal
$2,469
1.0% $2,000

0.0% $1,000

Nepal Least Low-income South Sub-saharan $0

Developed Countries Asia Africa 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Countries

FIGURE 1A Average real GDP growth per FIGURE 1B Per capita GDP (PPP), 1994–2016
annum, 1994–2016 Source: WDI
Source: WDI

Output growth has been driven by human and emigration is largely a response to Nepal’s inability
physical capital accumulation, not by productivity to create good jobs at home. Youth underemployment
improvement. Nepal’s total factor productivity (TFP) and unemployment are both high, and most people
declined during the conflict years (1996–2006). TFP are stuck in low-productivity sectors in rural areas.18
growth picked up after 2006, but still accounted for Young people entering the labor market have higher
less than 5 percent of GDP growth during 2007–14. educational attainment than older generations and
This is troubling because, as the cross-country evidence aspire to wage jobs outside agriculture. However, such
suggests, closing the GDP gap with high-income jobs are scarce and school-to-work transitions are slow:
countries is impossible without sustained TFP growth.15 30 percent of women and 15 percent of men in the
Nepal has low levels of investment, which is a major 16-to-24 age group are neither working nor in school.
concern for a country whose growth has been The share of rural women aged 16 to 34 who are not
accumulation-led. Public investment levels are relatively in employment, education, or training increased by 20
low: averaging 4.5 percent of GDP during 2007–15, percentage points between 2003/04 and 2010/11.19
public gross fixed capital formation was below the Remittances have helped to rapidly reduce poverty but
mean levels for South Asia (7 percent) and low-income also had adverse effects on Nepal’s competitiveness.
countries (10 percent). Private gross fixed capital Over the past three decades, Nepal has experienced
formation averaged 18 percent of GDP during the same a remarkable reduction in poverty, from 46 percent
period, below average for South Asia, although slightly in 1996 to 15 percent in 2011. This has been largely
above average for low-income countries.16 due to a sharp increase in remittances. Remittances
have also contributed to macroeconomic and
Struggling to remain competitive in export financial stability by providing a steady source of
markets, Nepal’s economic trajectory has been foreign exchange and helping to finance the large
increasingly dictated by remittances trade deficit. 20 However, remittances have also hurt
Nepal’s workforce has become increasingly dependent Nepal’s competitiveness through appreciation of
on emigration for work. It is estimated that 28 percent the real effective exchange rate. Rising imports, in
of Nepal’s workforce works abroad. As a share of GDP, turn, have become an attractive target for taxation,
officially recorded remittance flows increased from prompting an increased reliance on import taxes. The
the equivalent of 2 percent in 2000 to 26 percent in ensuing relatively high trade barriers are an important
2017, the second-highest in the world among countries additional source of economic distortion, exacerbating
with a population of over 1 million.17 Such high the cost disadvantages of the economy.

16
 and services such as real estate, whose share of GDP
100% has increased. Although the transition from agriculture
to services is not necessarily worrisome, in the case
80% 34.8% 38.9%
49.5% of Nepal these sectors do not typically provide high-
56.0%
skilled jobs: even as workers have exited the farm, the
Percent shares

60% 17.5%
21.5%
skill-content of the average wage-earning job has not
15.1% increased.22
40% 14.6%
Foreign remittances aside, Nepal has a relatively
47.7%
20% 39.6% 35.4% 29.4%
closed economy. Gravity models of trade suggest that
Nepal’s export and import shares in GDP are below
0% average, even after the country’s size, remoteness from
1991 2000 2010 2017P main markets, and landlocked status are considered. 23
Indeed, the situation has worsened relative to the
Agriculture Industry Services 1990s. The trade-to-GDP ratio fell from an average of
59 percent in 1995–99, to 46 percent in 2010–14.
FIGURE 2 Sector-wise contribution to GDP Nepal’s goods exports-to-GDP ratio has been flat,
in Nepal
and services exports have not risen fast enough to
Source: Central Bureau of Statistics. Note: “Industry” includes
manufacturing, construction, electricity, gas and water. compensate. As a share of GDP, Nepal’s exports fell
from nearly 25 percent in the late 1990s to 10 percent
Nepal’s structural change has been atypical. Its in 2017 (Figure 3a). This decline was largely due to
economy remains largely agrarian: 70 percent of the failing goods exports: the growth rate of goods exports
workforce is engaged in agriculture, which accounts
(in absolute terms) fell from an average of 19 percent
for around 30 percent of value-added (Figure 2).
per year in the 1990s to just 0.6 percent per year in the
The manufacturing base seems to be vanishing,
decade after. 24 As a result, Nepal’s goods exports have
with the sector accounting for only 6.5 percent of
fallen as a share of GDP, and are at just 3 percent of
GDP, dropping from 9 percent in 2001.21 Unlike the
GDP. Services exports have expanded rapidly, but this
historical experience of today’s high-income countries,
has failed to compensate for the dramatic decline in
Nepal’s structural change has consisted of a shift from
goods exports as a share of GDP.
agriculture to services, rather than from agriculture to
manufacturing. This atypical pattern could be partly At the same time, fueled by remittances, Nepal’s
due to remittance-fueled investment into construction imports have soared. Consequently, the trade deficit

Exports (Goods and Services as percentage of GDP)

30
25
20
15
10
5
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

FIGURE 3A Nepal’s trade performance

Source: WDI

17
reached nearly 33 percent of GDP in 2017. This large services exports. These are largely lower-end products:
deficit has not resulted in a substantial accumulation for instance, the telecom exports of Nepal consist
of net foreign liabilities, as it has been largely financed mainly of calls and mobile data services to foreigners
with workers’ remittances from abroad. Even though, visiting Nepal—a byproduct of tourism. 25 India
with many Nepalis working abroad, the high trade accounts for more than two-thirds of Nepal’s trade.
deficit is financeable, the dependence on remittances Nepal’s goods exports have in fact become increasingly
and the growing concentration of exports may render concentrated in India (Figure 3c).
Nepal vulnerable on the external account. Weak export performance is largely a symptom of
Nepal’s exports remain concentrated in a few supply-side constraints. In part, Nepal’s exporters
destination countries and low-end products. are disadvantaged by high tariffs on crucial imported
Although their predominance has declined since inputs. Nepal has consistently applied higher tariffs
2010, textiles and agri-products still accounted for on the import of intermediate and capital goods than
nearly 65 percent of Nepal’s goods exports in 2016 countries that have benefited from integration into
(Figure 3b). Moreover, in a period when total goods global value chains, such as Vietnam and Malaysia. 26
exports (in absolute terms) have been largely flat, But the main sources of disadvantage for Nepalese
this compositional shift could be due to the declining exporters are internal, and due to a host of business
competitiveness in traditional export mainstays such climate issues, such as electricity supply and red tape.
as textiles, and without increased competitiveness For instance, most exporters remain small even after
in new manufacturing sectors. Services exports are they enter a new export market, and largely do not
concentrated in just two sectors, with travel (tourism) increase their shipments. This suggests that they face
and ICT accounting for more than 80 percent of high variable costs of exporting, which could be due

2010 2016

FIGURE 3B Composition of goods exports of Nepal

Source: MIT Observatory of Economic Complexity.

2010 2016

FIGURE 3C Export destinations of Nepal

Source: MIT Observatory of Economic Complexity.

18
to factors such as high transport and energy costs. 27 prospects for the emergence of an environment that
Nepal’s traditional export drivers, mainly textiles, is more conducive to private sector development. In
have increasingly struggled to compete with rivals September 2015, a modern constitution was adopted
such as Bangladesh and India. Nepalese exporters that addressed many outstanding issues related to
have been unable to benefit from trade agreements socioeconomic inclusion and paved the way for a
and preferential access largely because of supply-side democratic federal system in Nepal.
constraints. For example, evidence suggests that Nepal Federalism offers hope for better governance. With
has only benefited from the South Asian Free Trade the promulgation of the new constitution in 2015,
Area agreement (SAFTA) as an importer, and only Nepal embarked on an ambitious reform path to
minimally as an exporter. Firms have also struggled to shift from a unitary to a federal system. The new
increase the utilization rates of trade preferences (under constitution created three types of government at the
the Generalized System of Preferences, GSP) provided federal, provincial and local levels, with significant
by high-income countries.28 decentralization of decision-making powers and
resources to subnational governments. Local elections
Nepal needs a new growth strategy that is in Nepal were conducted in 2017, while the provincial
driven by a competitive private sector and federal elections were completed in January 2018.
With remittances and migration flows soft, Nepal This new system fundamentally transforms the nature
needs to follow a different growth strategy if it is of governance, with a shift away from a Kathmandu-
to attain its objective of becoming a middle-income centered polity to a much more decentralized system
country. Growth scenarios indicate that if its of administration. The devolution of authority to local
investment-to-GDP ratio, growth of human capital, governments could potentially enhance prioritization
and growth of productivity stay at recent historical in resource utilization and lead to better results. At the
averages, it will be difficult for Nepal to sustain the same time, improving the capacity of local governments
GDP per capita growth rate that is necessary to meet will be a challenge, as will be the development of clear
its target of reaching middle-income status by 2030. and binding national standards. Section 3 of this report
Nepal needs a new approach that will both boost discusses this issue in more detail.
investment and accelerate productivity, while There is less political uncertainty. Recent elections
improving access to external markets. Nepal is resulted in the formation of a government with a
not a large economy, and hence greater outward two-thirds majority, increasing prospects of stable
orientation is vital for its firms to access markets and government. The new government has announced
achieve economies of scale. But to be more successful a private sector-friendly approach to economic
in external markets, Nepal needs to become more policy and, as evidenced by steps to dismantle anti-
competitive. The new growth strategy should: (a) put in competitive practices in the transport sector, has begun
place policies that raise the productivity of key enabling to demonstrate its political will to implement reforms.
sectors (such as transport, energy, and IT connectivity), The government’s new growth vision signals a
reduce the cost of doing business, and strengthen strong commitment to private sector growth. Under
Nepal’s integration with the rest of the world; (b) build Envisioning 2030 the government of Nepal (GoN)
new sources of growth, and revitalize existing sources seeks to achieve all the Sustainable Development
of growth in sectors of comparative advantage with Goals (SDGs) and attain middle-income country
high growth potential; and (c) invest in people and put (MIC) status by 2030. This will be done through
more human capital to productive use. implementing consecutive three-year “Periodic Plans”
that are focused on investments in economic, physical
Prospects for reform have recently improved and social infrastructure. Targeting a growth rate
Several favorable political developments in the past few of 8 percent in 2019 and 9.5 percent by 2021, the
years have given rise to a wave of optimism about the government aims to: increase energy output by 1,401

19
megawatts; build an additional 14,000 kilometers
of transmission lines; irrigate an additional 45,000 Support from the World Bank Group
hectares of land; create 180,000 industrial jobs
The World Bank Group’s Systematic Country
annually; provide internet access to 70 percent of
Diagnostic (SCD) identifies realizing
population; reduce maternal mortality to 125 per
opportunities for faster growth and as one
100,000; increase coverage of primary education of the biggest challenges that need to be
schooling to 99.5 percent and secondary schooling to addressed. The Country Partnership Framework
53 percent; and provide 95 percent of population with (FY2019–FY2023) builds on the SCD and
access to safe drinking water by 2021. To finance this, highlights three focus areas for Bank Group
the government plans to increase its public investment support:
outlay from 34.8 percent of GDP in 2018 to 38.7 • Strengthening public institutions for efficient
percent of GDP in 2021 and increase its aid availability and effective public service delivery, which
to 9 percent of GDP (from 3.7 percent of GDP, aid use are important for private sector investment
in 2018), while keeping the domestic borrowing level
• More and better jobs, and higher growth
below 5 percent of GDP. Recognizing the role of the through private sector investment
private sector in achieving this vision, the government
• Greater inclusion and resilience
is committed to unlocking the critical bottlenecks
constraining private sector participation and foreign IFC in Nepal focuses on jobs, financial inclusion,
direct investment (FDI). n sustainable infrastructure (including power
and connectivity), and high-impact sectors
(including tourism, agri-business, health care,
and manufacturing). As of June 30, 2017, IFC’s
committed portfolio was about $43 million and
its advisory services portfolio was $17 million
across 10 projects. IFC’s portfolio is expected
to substantially increase through several new
projects, especially in hydropower and tourism.

20
The State of the Private Sector
Nepal’s private sector is resilient, but needs to the majority of enrolment in higher education, and in
boost its competitiveness technical and vocational training.31
A retreat from state ownership of enterprises has Nepal’s private investment has shown resilience in the
opened up more space for private firms. Although face of prolonged conflict and an uncertain political
state-owned enterprises (SOEs) were an important part environment. The ratio of private gross fixed capital
of the government’s economic strategy in the 1970s and formation to GDP has been steadily increasing, from
1980s, a major policy shift toward the privatization around 10 percent in 1990 to 23.5 percent in 2017.32
of SOEs in the early 1990s reduced the number of Notwithstanding the resilience of private sector
SOEs from 67 in 1990 to 30 in 2016. The size of the investment, productivity levels are markedly low. Due
SOE sector is now smaller than that in neighbors to data limitations, it is not possible to obtain robust,
such as India and Pakistan (Figure 4). 29 With SOEs internationally comparable firm-level productivity
concentrated in the financial and utilities sectors, the estimates for Nepal. However, the aggregate picture is
private sector dominates most manufacturing and worrying. As shown in Figure 5, Nepal’s manufacturing
service sectors (excluding finance and social sectors). sector has the lowest value-added per worker among
According to the World Bank Enterprise Surveys, 99.5 a set of comparators from South and East Asia.33 For
percent of Nepal’s formal firms are privately owned. example, Nepal’s value-added per worker is about one-
The private sector plays an important role even third that of India. Firm-level evidence from countries
in social sectors such as health and education. In with better data availability, such as India, suggests that
Nepal’s mixed health-care system, the private sector an aggregate low-level productivity in manufacturing is
is especially important in providing service delivery, Value added per worker, 2017
human resources and education, pharmaceuticals,
and health-care financing. It includes both not-for-
profit entities and for-profit commercial entities. In
the education sector, 15 percent of primary school
enrolment in Nepal in 2013 was accounted for by
private not-for-profit and for-profit providers, and 26
percent of secondary schools in 2011 were private.30
Private colleges and training institutes account for

Estimated SOE share of GDP

60
50
40
30
20
10
0
Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

FIGURE 5 Nepal’s low industrial productivity

(value-added per worker)
FIGURE 4Nepal has relatively small SOE
presence in the economy Note: The figure presents real value added per worker in
manufacturing, measured in 2015 US$ PPP terms. Staff
Source: Arrobbio et al., 2017. calculations based on World Development Indicators.

21
the result of two factors. First, it is because the average small. For example, only 18 percent of Nepal’s formal
firm has a low productivity level. Second, there is wide firms have more than 20 employees. This is low even
dispersion in productivity levels across firms within compared with other South Asian countries such as
an industry, and too many resources are allocated to Bangladesh, India, Pakistan and Sri Lanka.37
unproductive firms.34
Firm entry and lifecycle growth rates are low. The
Nepal’s worsening export performance is also increase in the average age of firms between two waves
indicative of the low productivity of its private sector. of the World Bank’s Enterprise Surveys was equal to
As discussed earlier, Nepal’s total goods exports the time-gap between the two survey waves, suggesting
have been declining as a share of GDP. It has been that there was little firm entry.38 Moreover, in common
losing market share in traditional export sectors such with the rest of South Asia, Nepalese firms grow slowly
as textiles and agri-processing. The increase in the over time. For example, firms aged 25 years or more in
country’s services exports is largely driven by low-end Nepal are only 50 percent larger than firms aged less
tourism and associated ‘exports’ of telecom services to than five years.39 In contrast, in the United States firms
foreign tourists. aged 25 years or more are more than seven times larger
than those aged less than 5 years.40
Most firms are small and there is little
firm dynamism Very few Nepalese firms engage in trade or technology
transfer with other countries. The percentage of
Nepal’s private sector is polarized, with a few large
Nepalese firms using technology licensed from foreign
business groups and a multitude of small firms. Nepal
companies, exporting, and possessing internationally-
has a few dominant, large family-run businesses with
recognized quality certificates is low by the standards
interests ranging across multiple sectors, from trading
of comparators in South and East Asia (Figure 6).
to manufacturing and services.35 It is difficult to obtain
accurate statistics on the size and composition of these The ICT adoption rate of Nepalese firms is low, even
business groups, but the anecdotal evidence suggests by the standards of South Asia. Only 80 percent of
that thanks to their size they have endured decades Nepalese firms are connected to the internet, markedly
of political turmoil through diversification and an lower than the South Asian average of 90 percent.
ability to navigate markets and regulations in a way Only about 49 percent of Nepalese firms regularly use
that smaller entrants cannot.36 Most other firms are computers and only 8 percent have purchased software.

Bangladesh India Nepal Pakistan Cambodia Indonesia

40
Lao PDR Myanmar Philippines Thailand Vietnam
35
30
25
20
15
10
5
0
Percent of firms using technology licensed Percent of firms exporting directly or Percent of firms with an internationally-
from foreign companies* indirectly (at least 10% of sales) recognized quality certification

FIGURE 6 Firms engaged in trade and technology transfer—Nepal vs comparators

Source: World Bank Enterprise Survey, 2013.

22
The corresponding South Asian averages are 68 and 23 Pakistan, and 1.2 percent in Sri Lanka.41 A look at
percent, respectively. the sectors that have received FDI shows that most
FDI inflows into Nepal are negligible and are FDI projects that have been announced are in the
concentrated in just a few sectors from a small number hydropower (renewable energies), communications,
of source countries. Nepal has attracted less FDI and transportation sectors. According to a recent
than other countries in the region, as well as other survey conducted by Nepal Rastra Bank (NRB),
comparator economies outside the region. In the past Nepal’s central bank, the country receives FDI from 39
five years (2013–17), annual FDI inflows averaged countries in total. However, in 2016, India and China
0.4 percent of GDP, compared with 1.3 percent in alone accounted for 28 and 18 percent, respectively, of
Bangladesh, 1.8 percent in India, 0.8 percent in the total stock of FDI in Nepal.42 n

23
Cross-cutting Constraints to Nepal’s
Private Sector Development
Nepal’s business climate faces numerous challenges, Strengthening institutions is critical for
but the most critical relate to governance and policy effectiveness
infrastructure. The 2013 World Bank Enterprise Survey Nepal has scope to improve along many dimensions
suggests that the number of “major” business climate of governance. For example, in 2016, Nepal was in
issues is unusually high in Nepal. The survey presents the bottom 20th percentile on the World Governance
firms with a list of issues, asking them to state the Indicator measures of rule-of-law, government
degree to which each issue constrains them. In the case effectiveness, and political stability/absence of violence
of Nepal, as many as five issues were called a major (Figure 8). Furthermore, it ranked in the 23rd percentile
constraint by more than one-quarter of respondents. on regulatory quality and control of corruption.43 Across
The five most often mentioned issues were: electricity, the board, Nepal’s indicators worsened in 2016 compared
corruption, finance, transportation, and competition with 1996. The challenges relating to governance are also
from the informal sector (Figure 7). Only one other reflected in Nepal’s low ease of doing business. In the
country in a set of comparators from South and East 2018 Doing Business report, which ranked 190 countries
Asia had as many major issues as Nepal—Pakistan. It on the ease of doing business, Nepal ranked relatively
is not easy to ascribe Nepal’s private sector challenges poorly on “Dealing with Construction Permits” (157),
to a specific cause. However, as discussed below, two “Enforcing Contracts” (153), “Paying Taxes” (146),
issues seem to outrank the others, namely governance “Getting Electricity” (133), and “Starting a Business”
and infrastructure. (109), with an overall ranking of 105.44

FIGURE 7 Nepal’s firms face many major constraints

Source: World Bank Group staff calculations based on World Bank Enterprise Survey 2011–15. For each listed issue, the chart shows
percent respondents reporting it as a major constraint, with 95 percent confidence interval.

24
 Many sector-specific regulations can be reformed to
ease the entry and operation of the private sector. For
example, in tourism, there is room to revise laws and
regulations, improve coordination between ministries
to implement policies, and strengthen the ability of
government agencies to work with the private sector
to open new tourist destinations. In education, there is
room to streamline entry regulations and modify those
regulations to increase the autonomy of institutions
to respond to changing market needs. These sector-
specific manifestations are discussed in more detail in
the sector deep dives of the CPSD.
It is also important to reduce the gap in policy
implementation. The gap between policy objectives and
FIGURE 8 World Governance Indicators, Nepal, implementation is related to misaligned incentives, the
1996 to 2016 capacity challenges facing government agencies, and
Source: World Governance Indicators. coordination weaknesses across government agencies.
Government employees require a stronger incentive
The combination of a history of political instability structure, and experience high turnover, the limited
and institutional gaps has created a high level of delegation of responsibility, and a lack of effective
economic uncertainty for firms, deterring investment. performance evaluation. There is ambiguity regarding
Weakened institutions struggle to insulate economic
the roles and responsibilities of different government
policy from politics; thus, in the recent past, frequent
agencies, resulting in coordination challenges. For
political regime changes led to frequent policy changes.
example, delayed implementation was a key reason
According to the World Bank’s Enterprise Survey, nearly
behind the cancelation of Nepal’s only IT Park.
49 percent of Nepalese firms pick political uncertainty
as the biggest constraint to their business—a share Implementation capacity is reflected in the efficiency
considerably higher than the average for South and East challenges of (scarce) public investment. Given its low
Asia. Most Nepalese firms are small and do not have levels of public investment, Nepal would be expected to
the resources needed to survive prolonged periods of have high returns on public investment. However, the
policy disruption. Their response to the uncertainty up returns, as measured by the incremental capital output
until now has traditionally been to remain small and ration (ICOR), are estimated to be the lowest in a set of
avoid undertaking large-scale, risky investments. comparator countries from South and East Asia.47

The challenge today, in the new, more stable political Challenges in governance have also impeded PPP
environment, is to make the process of designing and projects. Nepal’s previous attempts at PPP projects in
implementing policies more effective and broadly sectors such as hydropower have been thwarted by the
representative. There is much global evidence that absence of a strong legal framework for PPPs in key
weak institutions increase the chances that policies are ministries. At a deeper level, however, the country’s
unduly influenced by a narrow group of larger firms.45 recent political uncertainty has made it difficult for
Polarized between a few large business houses and Nepal to credibly commit to PPP contracts. Previously
numerous small firms, Nepal’s private sector would frequent political changes led to delays and contractual
appear to be prone to this problem. For example, there issues, while inadequate accountability ensured that the
is evidence that a subset of larger firms obtained tax political cost of such delays was low. In this respect,
exemptions and found it easier to evade taxes.46 It will Nepal’s recent experience is consistent with the cross-
be important to create a more level playing field that country evidence on the relationship between governance
facilitates greater levels of investment by smaller firms. and the likelihood of success in PPP projects.48

25
While federalism will help address these governance Regulatory governance issues that are more specific
constraints, as with any major reform, it needs to be to the priority sectors are discussed in the sector deep
complemented with capacity building measures to fully dives later in this report.
realize its potential. The new more decentralized system
allocates responsibilities over the areas of governance to Insufficient infrastructure has prevented key
federal, provincial and local governments, as well as to sectors from fulfilling their potential
concurrent lists that are shared across different tiers of the
Nepal’s potential growth drivers, such as tourism
government. While this transition brings opportunities,
and agri-processing, are especially reliant on good
several outstanding issues relating to the devolution of funds,
infrastructure. The top export-potential sectors in
functions and functionaries will need to be addressed to
Nepal appear to use more transport services than other
fully implement the federal mode. The following outstanding
issues are of particular relevance to the private sector: manufacturing sectors. For example, 39 percent of the
services inputs provided to processed food exports are
» More clarity is required on responsibility for
transport, compared with 9 percent for manufacturing
regulation and service delivery of concurrent functions.
as a whole.49 Tourism is another critical sector for
In addition to concurrent functions, some areas that
Nepal and that too is reliant on good infrastructure to
might have been left open during the drafting fall
reach far-flung tourist destinations.
within residuary powers and need to be clarified.
» The capacity needs of local governments need to Hence the current state of infrastructure, and unequal
be addressed and empowered. The responsibility access to it, are major challenges for Nepal’s private
for delivering basic services such as education, sector. Nepal’s ranking is 130 out of 138 countries in
health care and local infrastructure has shifted infrastructure, according to the Global Competitiveness
to subnational governments. This requires more Index (World Economic Forum, 2016). For instance,
personnel, financing and stronger technical capacity Nepal scores below the South Asia average on indicators
on the ground to develop and implement programs, of digital access, electricity consumption per capita,
ensure sound financial management, and effectively road network density, and transmission losses in the
manage increased resources. power sector (Figure 9). Although the electricity supply
» More robust public financial management (PFM) has become more reliable now, until recently power
systems need to be developed. There are important cuts were endemic, with parts of Nepal experiencing
gaps in the legal and regulatory framework that outages lasting up to 17 hours a day in 2016–17.50 In the
subnational governments currently operate under. most recent wave of the World Bank Enterprise Surveys
The management of contracts for PPP require (2013/14), two-thirds of Nepalese firms identified
greater clarity on roles and better functional electricity as a major constraint, much higher than the
capacity of subnational governments. regional and global average (Figure 9).51
1600 80
1400
Nepal South Asia Structural peers Bangladesh Indonesia India
70
1200 Cambodia Lao PDR Myanmar
1000 60
Malaysia Nepal Pakistan
800 50
600 Philippines Thailand Vietnam
40
400
200 30
0 20
Fixed line and Electricity Total road Electric power
mobile cellular consumption network (km transmission and 10
subscriptions (kilowatt hours per 100,000 distribution losses
(per 1,000 people) per capita) people) (US$ lost per 1,000
0
Percent of firms identifying Percent of firms identifying
US$ of output)
electricity as major constraint transportation as major constraint

FIGURE 9 Infrastructure access in Nepal and comparators

Source: World Bank Enterprise Surveys, conducted in 2013/14/15/16.

26
 compliance: in 2018, its “Distance to Frontier” ranking
on the World Bank Group’s Doing Business measures
of Trading across Borders (which reflects border
compliance costs) was 77, higher than the South Asian
average of 58.53
Poor connective infrastructure and logistics have
constrained Nepal from fully realizing the potential of
tourism and agribusiness. International benchmarks
suggest that the competitiveness of Nepal’s tourism
sector is undermined by the quality of air, ground,
and tourist service infrastructure. The inadequate
road network, for example, makes it difficult to access
many areas with nature-based tourism potential. There
is an insufficient number of airports serving hill and
FIGURE 10 Logistics Performance Index, 2016 mountain areas, and domestic airlines have a poor
Source: World Bank LPI. https://lpi.worldbank.org/. safety record.54 International arrivals already exceed
the official capacity of Nepal’s only international
airport, located in Kathmandu, and air routes to enter
Logistical issues add to the problems caused by a lack
Nepal are limited for long-haul markets. Similarly, the
of physical infrastructure. Nepal’s ranking is 124 out of
cost and time related to transport/logistics is an issue
160 countries on the World Bank’s Logistics Performance
highlighted by many stakeholders in the agribusiness
Index (with a score of 2.38), notably lower than the
value chain. Nepal’s low road density means that
regional average score of 2.62. Relative to comparators,
land located close to roads is scarce. Highly dispersed
Nepal scores particularly poorly for customs, logistics
production locations and poor road quality create
competence, and infrastructure (Figure 10).
high access-to-market costs and increased levels of
The cost of domestic transportation is high due to poor post-harvest losses. Poor transport infrastructure also
infrastructure and logistics, and this is a bigger issue makes the cost of transacting among regional, central,
for foreign trade than complex border procedures.52 and border markets very high, fragmenting Nepal’s
Relative to comparators in South Asia, Nepal performs

agricultural markets (Shively and Thapa, 2017). This
adequately in terms of the time and cost of border undermines the competitiveness of agri-products.

FIGURE 11 Nepal’s Digital Connectivity Challenge

Source: GSMA Mobile Connectivity Index

27
Digital infrastructure remains nascent. education and low enrolment rates in higher levels of
Telecommunication services have improved in recent education. Nepal’s primary enrolment rates are above
years, but there are still major gaps in coverage, quality, those of comparator countries (Figure 12). However,
and cost. There are also large regional and rural-urban similar to other countries in South Asia, Nepal still
disparities. In 2017, the total penetration rate of fixed has significant scope to improve the quality of primary
lines was only 3.2 percent, centered in Kathmandu and education.60 For instance, in 2010-11, 56 percent of
other urban areas.55 The broadband (ISP) market has females and 28 percent of males aged six or above
grown but still has extremely low penetration (2 percent could not read or write a simple sentence.61 In addition,
in 2017). Internet penetration is low, with only 15 Nepal’s secondary and tertiary enrolment rates remain
percent of households having internet access,56 while 97 below those of its comparators.
percent of all users connect through mobile broadband.57
However, the mobile internet market is still at an early 100
stage of development, with outdated technology and 80
penetration rates below most other Asian countries. 60
Nepal scores below the regional average across all 40
parameters for mobile internet adoption as measured
20
by the Mobile Connectivity Index: infrastructure,
0
affordability, consumer readiness and content (Figure 11). Health and Government Primary Higher Secondary Tertiary Government
primary expenditure education education education education expenditure
education per student, enrollment, and enrollment, enrollment, per student,
Nepal’s infrastructural problems are linked to its (GCI) primary net (%) training gross (%) gross (%) secondary
governance environment: the limitations in efficiency (% of GDP (GCI) (% of GDP
per capita) per capita)
of public investment and the absence of a sound policy
Nepal Structural peers Remittance dependent South Asia region
framework for private investors.58 The government
has enacted several laws to facilitate the construction
FIGURE 12 Nepal performs well on primary
of new industrial infrastructure (the Special Economic education, but poorly on secondary and
Zone Act, 2016), and simplify regulations, incentivize higher education
manufacturing and enhance coordination between Source: Based on Nepal SCD.
government agencies (including the Industrial Enterprise
Act, 2016; and the Company Act Amendments, The lack of availability of medium- to high-skilled
2017). It has also proposed a new Foreign Investment technical and managerial workers is a problem for
and Technology Transfer Act (FITTA) that contains firms seeking to grow or move up the value chain.
several improvements on the current Act, including Around 9 percent of Nepalese firms identify an
most importantly a proposal to reduce the negative list inadequately educated workforce as a major constraint,
(Annex 1). However, implementation of new laws has lower than the South Asia average of 20 percent.62
been suboptimal.59 Similarly, six attempts at devising However, in interviews conducted for the CPSD deep
a PPP model to deliver on a major corridor project, dives, many firms noted that the shortage of skilled
the Fast Track Highway, have been elusive since 1996 technical and managerial workers was making it
(World Bank 2017). difficult for them to scale up. This suggests that skills
are a constraint for upwardly mobile firms. Nepal
Technical and managerial skills, access to performs below its peers on the Global Competitiveness
finance, and excessive regulation of foreign Index (GCI) measures of higher education and training,
investors are other major issues while performing well on primary education and health
(Figure 11). Among comparators in South and East
Lack of technical skills and managerial capabilities Asia, Nepal has a below-average score on the World
have hampered growth-oriented firms Economic Forum “Know-How Index,” which measures
Nepal has done well in expanding primary school the breadth and depth of specialized skills use at work
enrolment, but still suffers from low-quality basic (Figure 13). Further evidence for medium and high

28
skills being in short supply comes from data on wage Small and medium-sized firms face uneven access
premiums: the wage rate increases sharply for higher to finance
levels, with tertiary education completers earning more
Although the share of Nepalese firms that have a bank
than eight times the wage commanded by workers
loan is in line with regional comparators, a relatively
without any education.63
high number of them identify access to finance as
Strict visa regulations for skilled foreign workers a major constraint. According to the World Bank
further reduce the supply of technical and managerial Enterprise Survey, 35 percent of Nepalese firms have a
talent. There is no distinction between temporary and bank loan or a line of credit, and 17 percent have used
permanent movement of workers, and the visa process bank loans to finance investments (Table 2). Both these
is complicated, non-transparent, and expensive.64 numbers compare favorably with other low- to middle-
income countries in South and East Asia. However,
60
nearly 40 percent of Nepalese firms identify access to
50
finance as a major constraint, higher than comparators
40
in South and East Asia.
30
20 There are several gaps in Nepal’s financial
10 infrastructure, limiting its ability to extend credit
0
Cambodia Vietnam Lao PDR Bangladesh Nepal Myanmar Pakistan Indonesia India Philippines Thailand
to firms. As mentioned earlier, most Nepalese firms
are small and medium enterprises (SMES). For
FIGURE 13 World Economic Forum many SMEs, their main assets are moveable assets.65
Know-How Index However, the legal, regulatory, and institutional
Source: World Economic Forum Human Capital Index 2017. Note: framework for moveable asset-based financing needs
The Know -How Index is the sub component of the Human Capital to be strengthened. The Secured Transactions Act
Index. Know-how concerns the breadth and depth of specialized
skills use at work. It is based on four indicators—(1) High-skilled was adopted in 2006 with the aim of strengthening
employment share; (2) Medium-skilled employment share; (3) the institutional framework of this sector. But no
Economic complexity (a measure of the degree of sophistication of a
rules, regulations, or operational procedures have
country’s “productive knowledge” as can be empirically observed in
the quality of its export products); (4) Availability of skilled employees been established to enable its efficient functioning.
(employers’ perceptions of the ease or difficulty of filling vacancies). Furthermore, the Credit Bureau does not have its own

TABLE 2 Access to finance indicators

ECONOMY Percent of firms Proportion of loans Value of collateral Percent of firms Percent of firms
with a bank loan/ requiring collateral (%) needed for a loan using banks to identifying access
line of credit (% of the loan amount) finance investments to finance as a
major constraint
BANGLADESH 34.1 84.4 271.1 19.8 22.8
CAMBODIA 19.9 77.5 165.1 2.5 16.9
INDIA 21.3 84.7 255.1 30.3 15.1
INDONESIA 27.4 80.4 241.1 36.6 16.5
LAO PDR 12.4 96.2 275.9 15.9 5.7
MYANMAR 11.3 98.4 412.9 7.1 9.9
NEPAL 35 89.9 364.2 17 40.1
PAKISTAN 6.7 64 153.4 8.1 13.2
PHILIPPINES 29.9 51 156.7 12.4 10.7
THAILAND 15.5 93.4 320.1 15.3 2.4
VIETNAM 40.8 91 216 29.3 10.8
Source: World Bank Enterprise Survey, 2013

29
statute and its credit information reporting and sharing the absence of a unified legal framework, the sector
is limited, providing only negative information and operates under a combination of laws and regulations
covering a mere 1.7 percent of the adult population.66 (such as the Company Law, laws on banking, and laws
Notably, while Nepal scored 10 on the index measuring on FDI). Since they are not licensed under the Banks
strength of legal rights,67 its score for the depth of the and Financial Institutions Act (BAFIA) legislation, it is
credit information index was zero. unclear if PEVC funds can provide capital in the form
of debt (rather than equity).
Given the lack of credit information in the market,
financial institutions rely on conventional immoveable Strict regulations make it difficult for PE funds to
collateral, and collateral demands can be inordinately operate in Nepal. The central bank has set strict limits
high.68 On average, the value of collateral needed for to lending by foreign institutions, which is allowed
a loan is 364 percent of the principle (Table 2). This only in case of unavailability of domestic debt and
is well above the norm for South and East Asia. In is subject to an interest rate cap of LIBOR plus 5.5
India, for instance, the corresponding number is 255 percent. Strict blacklisting rules are in place for the
percent. These high collateral requirements restrict domestic shareholders and directors of any Nepalese
access to finance to those firms with sufficient land and company that defaults on a loan (the rule does not
immoveable assets. The central bank, Nepal Rastra apply to foreign investors). These include the seizing of
Bank, has tried to improve financial inclusion by passports and cessation of any financial activities. For
mandating increased lending to productive sectors and a fund, it implies the cessation of activities if only one
deprived sectors, as well as branch expansion, but the investment in the portfolio turns sour. This is a major
results have been mixed. impediment to PE investments, which are typically
funded with a mix of equity and debt. Furthermore,
Long-term credit supply is constrained. While
the stock market IPO rules make PE exits difficult.
short-term trade finance credit is available through
Only new shares can be listed—existing shareholders
commercial banks, long-term credit is still constrained
are not allowed to divest their shares at IPO and are
by limited products offering long-term deposits,
subject to a three-year lock-in period. Shares can only
low uptake of corporate bonds, non-existent yield
be priced above book value if the company has at least
curve and the shallowness of the capital market. A
three consecutive years of profits and dividends; even in
regulatory cap on the spread on interest rates that
this case, pricing is not determined by the market but
financial institutions, domestic and international, can
by SEBON valuation rules. There is a limited track-
offer above their base rate reduces the ability of credit
record of IPOs outside the banking sector (75 percent
providers to accurately price in the risk of lending.
of stocks are financial institutions), trading volumes are
The payments system is still at a nascent stage. Several low ($5 million daily average), and foreign investors are
reforms that were identified in the 2014 Financial not allowed to actively trade.
Sector Assessment Program have been progressing
However, the supply of credit may not be as big a
slowly, and these delays are holding back development
constraint on Nepal’s firms as the current condition
of payments gateway and digital financial services. The
of governance and infrastructure. In Nepal’s current
draft Payments and Settlement Bill is in the process
business environment, risk-adjusted returns for lending
of approval and is expected to provide an enabling
to SMEs may simply be too low to be profitable.
framework for implementing digital financial services
There is not enough evidence to assess how much
(DFS) that enhance the safety, reliability and efficiency
of the credit problem faced by firms is due to issues
of the payments system.
specific to financial markets. Moreover, there is limited
Nepal’s capital market infrastructure too is relatively evidence on exactly which specific issues in financial
weak, hindering the availability of long-term financing. institutions and policies are the biggest constraints on
Nepal does not have a specific legal and regulatory the supply of credit to SMEs. More work is therefore
framework for Private Equity/Venture Capital (PE/ required to assess the policy reforms needed to unlock
VC), although a few PE funds are in operation. In access to credit. In this regard, NRB is currently

30
conducting a study on “SME Financing in Nepal” that The creation of mortgages of land in favor of foreign
is expected to identify obstacles and make relevant lenders needs cabinet approval, and the enforcement
policy recommendations. One clear need, however, is of security by foreign lenders needs a court order.
to deepen credit information (see recommendations). The lengthy process and uncertainty regarding
the perfection of security and its enforcement puts
The need to rationalize the regulation of FDI, lenders at risk in the case of default by borrowers, as
access to foreign lenders and foreign-exchange the collateral is not effective and the lender does not
transactions have recourse over the property in the event of an
enforcement action. Hence, foreign lenders often resort
Foreign-exchange restrictions affect the entry of foreign
to partnering with a local bank or a consortium under
investors and constrain links to international markets.
a pari-passu security arrangement for debt recovery.
Many of these problems derive from practice more
Foreign lenders are required to set aside capital at
than from the law itself. For example, although firms
the time of signing loan contracts, with commitment
are formally allowed to open U.S. dollar-denominated
fees accruing only after the NRB’s approval. As a
accounts, small firms and individuals report that this
result, the capital allocation remains uncompensated
is difficult in practice. Even with such an account, it is
during the time lag between the signing of the contract
difficult to pay for services in U.S. dollars due to caps
and disbursement of the loans. Foreign lenders are
on the size of U.S. dollar-denominated contracts. This
subordinated to local banks in terms of the priority
creates a difficult environment for exporters, who often
of repayment. Furthermore, there are interest-rate
need to pay for foreign travel or inputs from foreign
caps on foreign currency loans. These caps, including
suppliers. With the growing importance of services
those on the cost of hedging against foreign-
sector inputs in manufacturing (the “servicification”
exchange fluctuations for long tenure, also reduce
of manufacturing), however, this is an issue that goes
the attractiveness of the Nepalese market for foreign
beyond just services exporters.
banks. Finally, the approval process for foreign loans
There are several regulatory issues that deter foreign is not clearly delineated in written guidelines and, as
investment in Nepal. FDI inflows into Nepal have implemented, include stringent requirements for central
been hurt by unclear policies, complex procedures, bank approvals, including separate approvals for loan
and inadequate investment facilitation. Entry barriers payments (after the loan itself has been approved). The
to FDI include sector caps, a long “negative list” of NRB has begun considering the relaxation of some
sectors barred from receiving FDI,69 and restrictions on restrictions, as evidenced by the monetary policy for
non-equity modes of investment. Offshore funds and 2075/76, although significant work remains.
onshore vehicles with foreign shareholders are both
The process for offshore capital repatriation is
considered foreign investors and require FDI approval
complicated. Nepal has a fixed currency regime
for every new investment in a Nepalese company.
(pegged to the Indian rupee) and closely monitors
Rules, regulations and directives by the NRB and other
foreign-exchange reserves. Offshore funds require
authorities are available only in the Nepalese language.
approval of the NRB to repatriate the proceeds of
FDI approvals can take several months. Lengthy
their divestments. Approvals are granted only for
processes needed to hire foreign workers add to the
amounts calculated under valuation rules set by the
difficulties of foreign investors. regulator, not for the actual proceeds. Strict foreign-
Several restrictive policies on borrowing from foreign exchange controls create an incentive for undervaluing
lenders, particularly those related to land markets, transactions so that less foreign exchange leaves the
hinder access to foreign lenders. Land and buildings country. Furthermore, there has been uncertainty
are the main forms of collateral for lending in the with respect to the enforcement of double taxation
country. But barriers to granting of mortgage over land agreements (DTAs), despite Nepal having many DTAs.
and creating security interest for foreign investors is This could result in yet another layer of uncertainty for
a major constraint to foreign investment and lending. foreign investors when exiting investments.

31
These constraints limit the availability of foreign to consolidate land to achieve economies of scale.
lending and compound the existing difficulties in In October 2017, the Ministry of Land Reform
access to finance. Annex 2 lists these constraints and and Management (MoLRM) issued a Land Ceiling
proposed remedies in more detail. Exemption Order to ease the purchase of land for
industrial institutions. The order sets new rules on the
Accessible land is scarce and misallocated purchase of land by educational or health-sector-related
Nepal’s land market is highly inefficient due to poorly institutions, hydropower projects, industries, and
developed land market institutions and regulations. cooperative farming. The ceilings vary by the type of
This hampers potentially profitable projects from institution, across domestic and foreign investors, and
acquiring land in a timely fashion. As Nepal grows, also depend on whether the land is in mountainous and
land close to roads is becoming scarcer and more hilly regions, or in the lowland Tarai region. Projects
expensive. The challenges of poorly developed must clearly justify the necessity of the land in detailed
institutions and policies add to the problem of project reports and, in general, firms must submit their
acquiring land for productive purposes. The lack of five-year business plans to the MoLRM to be permitted
digitized land records undermines clarity and impedes to buy additional land. Industry representatives note
the transfer of property rights. Unclear pricing criteria that the approval process remains cumbersome.
and an ineffective land acquisition law also make Moreover, firms are not allowed to exchange or sell
it difficult to acquire farmland for industrial uses. land purchased for industrial purposes, even in case
Land acquisition is governed by a Land Acquisition of the shut-down of the industry. Taken together,
Act (government of Nepal, 1977) that is in need of land regulations seem to pose serious constraints on
updating. To ease land acquisition for infrastructure the achievement of efficient plot sizes, which might
projects, in 2015 the government introduced the Land particularly hurt agribusiness and SMEs in rural areas.
Acquisition, Resettlement and Rehabilitation Policy The difficulty faced by foreigners in owning land and
for Infrastructure Development Projects (government using it as collateral is a major constraint to foreign
of Nepal, 2015). However, the Land Acquisition Act investment and lending. While it is possible for firms
and related laws still need to be amended to make owned by foreign investors to acquire land for business
them compatible with the new land acquisition policy. purposes, it is difficult to do so in practice, and there
Such challenges facing land governance mean that is a lack of clarity in procedures and how they are
land acquisition (and resettlement of the affected implemented. Furthermore, as mentioned, the creation
households) often involves costly conflict and is subject of mortgages of land in favor of foreign lenders needs
to capture by powerful vested interests. cabinet approval, and the enforcement of security by
Despite recent reforms, land market polices such foreign lenders needs a court order. These policies are a
as ceilings on ownership make it difficult for firms significant deterrent to foreign investors. n

32
How the Private Sector Can Revitalize
Nepal’s Sources of Growth
The private sector can play a key role in Nepal’s new exports could lead to Dutch disease, further weakening
growth strategy. The private sector will be critical Nepal’s export competitiveness. It will be crucial to
to building new sources of growth and revitalizing use the returns from the hydropower sector to remove
existing sources of growth in sectors with high bottlenecks to larger investment by the private sector,
potential for growth and job creation. Greater private and to diversify the economy in those sectors in which
sector participation could also raise the productivity Nepal has a comparative advantage.
of key enabling sectors (for example, transportation, The CPSD conducted a systematic sector scan to
energy and IT connectivity), reduce the cost of doing identify critical sectors (enablers or growth drivers)
business, and strengthen Nepal’s human capital. other than hydropower (the energy-hydropower sector,
Hydropower will be critical to the new growth as well as transportation, is recognized as a high
strategy, provided that the wealth generated from this priority and as such is covered as part of the InfraSAP,
sector is channeled judiciously.70 Further developing and not as part of this CPSD). The scan assessed the
hydropower would lead to massive new investments “Potential for Development Impact” and “Feasibility”
and an increased inflow of resources to the country of private investments across all sectors of the Nepalese
that would stimulate construction and urbanization.71 economy. The potential for development impact
It would also increase competitiveness in downstream of a sector depends on its likely impact on broader
industries. But there are some downsides: few jobs developmental objectives, such as jobs, resilience,
would be created, and large increases in electricity and environmental sustainability. Feasibility assesses

Summary of scoring results

4

Development impact (potential development impact)

Education Services
ICT

Health Care Food & Beverages

Light Manufacturing Electric Power Tourism
Oil, Gas and Mining Finance & Insurance
Primary Metals
3
Industrial and Professional, Scientific and Technical Services
Consumer Products
Agriculture
Pulp & Paper Chemicals Construction and Real Estate
Other manufacturing Water & Sanitation
Nonmetallic Mineral Transportation
Product Manufacturing
Wholesale and Retail Trade

2
2 3 4
Feasibility (current and after 5 years of reform conditions)

FIGURE 14 Sector development impact and feasibility scores

Source: World Bank Staff Calculations using WDI data

33
the extent to which constraints to the development higher education, and technical and vocational education.
of these sectors can be overcome within a reasonable The potential for development impact is high: education
amount of time (for example, three to five years). Given enables other sectors, and young people can be employed
Nepal’s natural endowments, capital, and institutions, more productively if they have the right skills set.
feasibility could vary across sectors.
Health: The health sector has medium-to-high
Figure 14 summarizes the combined results, while further feasibility. While input and regulatory issues are
details of the sector scan are presented in Annex 3. binding to the same degree as in the education sector,
there may be less demand for specialized health care
The scan identified the following high-priority
owing to the proximity of India as a medical tourism
sectors to be considered for deep dives:
destination. The health sector has high potential
development impact owing to the importance of human
Sectors of comparative advantage:
capital in inducing jobs and growth.
Tourism: High feasibility score due to the unique natural
IT Services: The IT services sector has medium-to-high
endowments of Nepal. High development impact due to
employment potential and scope for increasing backward feasibility in Nepal for two reasons. First, low labor
linkages to the agriculture and horticulture sectors. costs are an advantage for unsophisticated software
development and for business process outsourcing
Food and beverages (agribusiness): High feasibility score
(BPO) activities. Second, ICT exports are less sensitive
due to unique and diverse agri-climatic conditions. Niche
to transport cost constraints. It has high potential
products, such as tea, coffee, cut flowers, vegetables,
development impact due to its potential to create skilled
and fruit all have high potential. Public support and
jobs, build international linkages, and improve the
reforms to address value-chain development, land and
labor constraints appear doable and politically feasible. productivity of other sectors.
High development impact due to extensive backward and Considering the scope for value addition, the CPSD has
forward linkages, including the opportunities to develop conducted fresh deep dives into education, IT services,
high-value niche products and horticulture. and agribusiness, while relying on prior analytical work
for health and tourism. The recommendations section of
Enablers: this CPSD also summarizes recommendations from the
Education: Education has medium-to-high feasibility InfraSAP on the critical infrastructure sectors (transport
for increased private sector involvement, particularly in and energy-hydropower). n

34
Opportunities and Constraints in the
Key Sectors: CPSD Deep Dives

TOURISM
With a higher employment elasticity than in other countries, and much unexploited
potential across the country, Nepal’s tourism sector could be an important source of
growth and job creation, particularly for women and in rural areas. The key challenge
is to diversify the sector’s offerings toward medium- and higher-end products,
particularly by: (a) managing protected areas more effectively; (b) building key
connective infrastructure; and (c) strengthening destination management.

Performance and Opportunities for the Sector investment, including FDI and PPPs; and (b) improving
to be Transformational infrastructure, particularly in aviation. The Visit Nepal
Tourism contributes almost 8 percent to Nepal’s 2020 campaign was launched alongside the recently
GDP and creates more jobs than in other countries. announced budget for FY 2018/19, with an objective of
According to the World Travel and Tourism Council attracting 2 million tourists in the next two years.
(WTTC), travel and tourism made $1.6 billion in direct The number of international tourists traveling to Nepal
and indirect contributions to Nepal’s GDP in 2016.72 has recently increased after sharp declines due to political
The WTTC report estimates that the sector supported instability, the 2008–09 global financial crisis, and the
nearly 1 million (945,000) direct and indirect jobs 2015 earthquake.73 With a low of 540,000 visitors in
in 2016, or roughly 6.4 percent of total employment. 2015, the numbers rebounded to 750,000 visitors in
About 80 percent of these jobs are in the poorest and 2016, and an estimated 940,000 visitors in 2017—a
most remote regions of the country. With every six significant and quick recovery for the sector overall.
tourist arrivals to Nepal, one new job is created (almost
While the relative importance of Western tourists has
double the global average of 1:11). Tourism also has high
declined, they remain the strongest source market.
spillover effects to the agriculture, transport, aviation,
The tourism sector is also benefiting from growth in
and hospitality sectors. Tourist hotels and restaurants
neighboring countries, such as India and China, as well
provide an important market for agricultural products,
as from domestic tourism. Domestic travel and tourism
and there is tourist demand for agri-tourism experiences
represent a growing and very significant market, but
and destination-branded specialty crops (for example,
estimates are difficult due to a lack of data. By one
Nepalese specialty tea) to take home as souvenirs.
estimate, domestic tourism represented around 66
Tourism is a high priority sector for the government. percent of the sector’s contribution to GDP in 2016.74
The government of Nepal has formulated its Tourism
However, these positive trends need to be seen against
Vision 2020 and the comprehensive National
Tourism Strategic Plan 2015–2024, which aim to the global performance of the sector, as well as the
establish Nepal as a leading tourist destination in the specific potential of selected destinations (see Annex 4):
region and diversify current tourism offerings. Key » Business travel: Growth is expected to accelerate by
interventions include: (a) promoting private sector 5 to 7 percent per year over the next three years.

35
» Wellness travel: This high-value segment is a global remaining a destination for high-volume, low-value
phenomenon projected to grow at double the pace of tourism segments.78 Tourism receipts are still relatively
tourism in general, according to the Global Wellness low compared with competing destinations. With
Institute.75 Wellness tourists tend to be well- an average of $592 per international visitor in 2016,
educated, wealthy, and high-spending; they typically Nepal’s international receipts are almost half of the
spend 130 percent more than average tourists. global average and one-third of those of Thailand and
» Adventure tourism: This segment is projected to India.79 Nepal’s total tourism receipts are also low
compared with most other destinations. Figure 16
grow at a compound annual growth rate of over 40
illustrates growth in visitor receipts achieved by four
percent in 2017–20.76 Adventure travelers tend to be
post-conflict countries: Peru, Cambodia, Lao PDR
younger, with an average age of 36.
and Nepal.80 Seen in this context, Nepal’s post-conflict
» Nature-based tourism: As incomes rise and urban recovery has been modest.
populations increase, the desire to spend time in
natural protected areas grows. 5
Peru Cambodia Laos Nepal
The Nepal Tourism Strategic Plan, prepared in 4

collaboration with the World Bank and IFC,

2016 US$ bn
3
summarizes the potential in terms of both spending
and quantity, by market segment, in Figure 15. 2

1
Several indicators show that the sector is
0
operating below its full potential, with limited 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

diversification across locations and along the

value spectrum FIGURE 16 Receipts from tourism in four post-
conflict countries, 1996 to 2016
Nepal has not capitalized on the full potential of
Source: World Tourism Council.
its tourism resources and is facing the prospect of

Recently, there has been a surge of interest in investing

in Nepal’s mid-range and high-end segments. However,
this has mostly been confined to the Kathmandu
Valley area, despite several destinations in different
geographic areas with the potential to attract a
significant number of mid-range to high-end tourists.
Nepal’s 12 main destinations have been ranked
according to 10 criteria used in the World Bank
Group’s new development impact/feasibility approach
(Figure 15).81 T his allows Nepal’s destinations to be
grouped into three main categories, as follows: (a)
destinations with high potential development impact
and feasibility (Mid-West, Terai); (b) destinations with
low potential development impact, as they are already
mature and do not correspond to the overarching
diversification objective (Kathmandu Valley, Everest,
Chitwan); and (c) destinations with lower priority,
FIGURE 15 Analysis of target market segments because they are remote and would attract a low
by volume and send potential77 number of (mid-range to high-end) visitors over the
Source: Nepal National Tourism Strategic Plan 2015–2024. medium term (Far West, East Nepal).

36
Five selected destinations provide the potential to high-end market image, and therefore good
diversify the tourism offering, while having a notable potential for higher-end lodge development that
impact on sustainability and revenues (Annex 5).82 A  n could appeal to cultural sub-segments.
integrated approach in Nepal’s tourism sector could » Manaslu and Gorkha: Upgrading and diversifying
focus on destinations in Provinces 4 and 5, which products for higher yield among mid-range market
include Annapurna and Lumbini.83 These provinces offer segments. This true wilderness destination could
the possibility of improving and developing a mix of attract experienced visitors interested in indigenous
destinations. They fit with the objective of diversification culture and quality mountain experiences, if quality
of products, while building on Nepal’s comparative lodge accommodation along the trails is provided.
advantage in nature-based, wildlife, and cultural This destination is starting to become a “trending
tourism. Langtang in Province 3 has also been identified. destination” through the provision of safety access
» Pokhara and Annapurna: infrastructure, while remaining remote enough for
an exclusive market image. It has, however, been
• Upgrading and diversifying products for higher severely affected by the 2015 earthquake.
yield among mid-range market segments: The
» Bardia and Banke: High-end market segment
southern section of the Annapurna range offers
potential. The park and its landscape linkages offer
accommodated lodge-treks combined with good
the potential for an upmarket wildlife product
access through Pokhara; the town itself appeals
and diversify Nepal as a destination able to attract
to adventure visitors who are known to select
higher-paying segments by enabling higher-level
cheaper accommodation to conduct a diverse
quality accommodation, ideally managed by
set of activities, such as zip-lining, paragliding,
an international brand, around diverse wildlife
gyrocopter flights, and so forth.
experiences. With good accessibility by air (through
• High-end market segment potential: The Nepalganj) and road, high-end market segments
Buddhist trekking destination of Mustang north from neighboring India and long-haul markets can
of Annapurna requires special permits, has a be attracted.

FIGURE 17 International arrivals per destination, 2013–16

Source: Department of National Parks and Wildlife Conservation, Lumbini Development Trust and Anna Purna Conservation Area Project

37
» Lumbini and Palpa: Upgrading and diversifying due to its poor ranking on the “Quality of the Business
products for higher yield among mid-range market Environment” pillar, which reflects sector-specific
segments. Uniquely positioned to take advantage regulatory ease of business.85 According to calculations
of strong growth in Buddhist tourism, as well as made for a World Bank policy note, construction of
established Hindu itineraries. Religious tourism a five-star hotel project faces, on average, a 6-year
segments (including Western visitors seeking delay if all regulatory requirements are followed. Such
introductions into Buddhism) and more affluent requirements include approval of foreign investment,
pilgrims are likely to extend their stay if improved franchising, service outsourcing, management contracts,
services (interpretation of the archaeological sites, the repatriation of funds to foreign investors, access to
Buddhist teachings, meditation sessions) and land, and building permits, among others.86
accommodation become available. Overly strict limitations on tourism activities in
» Langtang: Upgrading and diversifying products for protected areas and forests. Regulators are justifiably
higher yield among mid-range market segments. The wary of opening the door to private sector investment
good access from Kathmandu makes this destination in national parks due to concerns about the adverse
area ideal for the vast (and growing) ‘soft-adventure’ environmental impact of investors’ activities. However,
market comprising long-haul and Asian source the process of allocating permits for ecotourism is overly
markets through the provision of comfortable complex and lacks transparency. Regulations need to
accommodation. The area is accessible for over eight balance the public interest in legitimate environmental
months of the year and visitor experiences can range protection with enabling more economic opportunities.
from single-night stay to one-week itineraries creating Uncoordinated destination management. The creation of
a large potential market with demand further new destinations is constrained by a lack of coordination
enhanced based on a good destination image. in addressing deteriorated infrastructure (trekking trails,
small bridges, camping sites, picnic spots, recreational
Constraints in the Tourism Sector parks), inadequate services (water, waste management,
Given the gap between potential and actual electricity), and poor planning and zoning.
performance, important constraints to the value Lack of access to finance, including access to foreign
capture and competitiveness of the tourism sector need lending. While the government has mandated that local
to be addressed urgently. banks must lend to the tourism sector, in practice the
Low investment in transport infrastructure, transport financial sector is unable to offer attractive financing
services, and connectivity. The competitiveness of packages for most tourism projects. The capital market
Nepal’s tourism sector is undermined by the relatively is unable to ease access to finance because it is largely
poor quality of its air, ground, and tourist service dominated by banks and financial institutions. Only two
infrastructure. The relatively poor road network, for large hotel chains (Soaltee and Hyatt) are listed on the
example, makes it difficult to access many areas with Nepal stock exchange. As mentioned in the cross-cutting
nature-based tourism potential. There are insufficient constraints section, several restrictive policies make the
airports serving hill and mountain areas, and domestic Nepalese market unattractive for foreign lenders, who
airlines have a poor safety record.84 International arrivals could otherwise become a key source of long-term loans.
already exceed the official capacity of Nepal’s only This could be an especially severe constraint on growth of
international airport, located in Kathmandu, and air higher-value tourism as this will require long-term loans.
routes to enter Nepal are limited for long-haul markets. Lack of skilled labor. A lack of skilled labor is seriously
There is a need to revise regulations and render them constraining the feasibility of scaling up the tourism
more predictable. Nepal ranked 103 out of 136 countries offerings in the mid- to high-end segment. Management
on the World Economic Forum’s 2017 Travel and of upscale facilities requires highly qualified staff,
Tourism Competitiveness Index, far behind regional as does the expansion of high-quality services, for
competitors India (40) and Bhutan (78). This is in part example, in mountaineering. n

38
AGRIBUSINESS
Nepal has a comparative advantage in agriculture because of its fertile land and
abundant water resources, as well as its unique topography. A small but growing
private sector has the potential to generate important developmental outcomes.
This will, however, require that: (a) productivity is improved by streamlining access
to inputs such as fertilizers and seeds; (b) value chains are strengthened through
investments, particularly in improving logistics; and (c) private firms are supported to
scale up by improving their capabilities, helping them access finance, and making it
easier to consolidate land on a commercial scale.

Performance and Opportunities for the Sector take the lead. The government’s 20-year Agriculture
to Be Transformational Development Strategy (ADS), adopted in 2015,
Nepal has a natural comparative advantage in recognizes the challenges in the sector and provides a
agriculture. It has three distinct agri-climatic zones, comprehensive roadmap for creating “a sustainable,
with fertile flat plains, upland hills, and mountainous competitive, and inclusive agricultural sector that
regions. These allow both tropical and sub-tropical drives economic growth and contributes to improved
crops to be produced. The production of fruits and livelihoods, and food and nutrition security leading to
vegetables, vegetable seeds, coffee, goats, and honey food sovereignty.”88 However, both public and private
is accelerating. Tea and coffee exports have also done investment in the sector has been limited. For example,
well, and the poultry and dairy processing industries FDI in the sector was only $15 million (out of a total of
are growing fast. $6 billion FDI to Nepal) in 2017.

The agribusiness sector is currently small and focused Opportunities for the Agribusiness Sector89
on the domestic market. It comprises a mix of a few
large business houses with stakes in the larger traditional Table 4 summarizes the assessment of competitiveness
cereal crops, the food and beverage industry, and a fast- of agriculture subsectors. Annexes 7 and 8 provide
moving consumer goods space. Most other subsectors are additional data and explain the methodology. Key
characterized by small-scale agribusinesses and traders. findings are as follows:
In total, there are only about 200 medium-sized and large Spices, fruit juices, and tea are the largest export-
firms.87 Three-quarters of these firms are in livestock generating and fastest-growing agribusiness subsectors.
and dairy, fruits and vegetables, medicinal and aromatic Nepal is the global market leader in large cardamom in
plant products (MAPS), and coffee and tea. In terms terms of both production and value, which is reflected
of food processing, 90 percent of firms are below the in its rapid growth rate. Tea is another growing
small-industry level, highlighting the lack of scale in the subsector in which Nepal is establishing itself as a
sector. In recent years, several segments have had negative niche player in the whole-leaf and organic tea markets.
growth (rice mills in the east and skimmed powder milk Production/processing is mostly in the eastern part of
plants). A few commodities are being exported, such as the country neighboring India’s high-value Darjeeling
lentils, tea, cardamom, fruit, ginger, and MAPs. However, tea industry, with Nepalese tea featuring many of the
exports are small. Table 3 gives a brief overview of the same characteristics.
agribusiness sector with an analysis of current private Fresh apples, coffee, honey, and cut flowers have the
sector participation along the value chain. potential to leverage Nepal’s agri-climatic conditions and
Developing agribusiness is a priority for the build on the perceived uniqueness of Nepalese products.
government, with the private sector expected to They also align well with market trends toward organic

39
TABLE 3 Current private sector participation in agribusiness

INPUTS PRODUCTION PROCESSING SERVICES

PRIVATE LIMITED MODERATE LIMITED LIMITED
SECTOR » Fertilizer: Most chemical » Aggregation: Undertaken » Limited processing » Warehousing: Mainly
ACTIVITY fertilizers are currently imported by both cooperatives and companies across a small private players
by government. Private private entities range of sub-sectors on cold storage
companies can’t compete with » Value: Dominated by low » Most sectors appear » Logistics: 3–4 main
subsidized fertilizer value crops with a small to have multiple actors trucking compaines
» Seeds: Cereal seed development but growing volume of operating within them.
and distribution dominated higher value commodities
by public sector SOEs. Private for both domestic and
participation mainly in vegetable export markets.
seeds.
KEY » Fertilizer: Two main companies » Maize: Probiotech/Nimbus (50 Firms operating in » Logistics: 3–4 main
PLAYERS Agriculture Inputs Company Animal feed) trucking companies
Ltd (AICL) and Salt Trading » Rice: K.L. Dugar Group, Shivashakti Group, Sharda » Banks: Everest
Corporation Ltd (STCL) are Group, Golchha Group Bank, NIB, Nepal
SOEs. SBI, NMB, Bank
» Sugar: Shivashakti Group, Golchha Group
» Seeds: National Seed Company of Kathmandu,
Ltd (NSCL) SOE but with a » Poultry: Valley Poultry, Shreenagar Himalayan Bank
growing private sector presence. » Dairy: Dairy Development Corp. (SOE) » Insurance: Shakir
» Veterinary: Very limited » Tea: Harati Tea Estate, Parajuli Tea Industries, Sachi
information. Pathivara Tea Estate, Modern Tea Ind.
» Top Business Houses with Agri: Khetan Group, Sharda
Group, Vaidya’s Organizations, Jyotie Group
» MoAD

TABLE 4 Summary of initial review of agribusiness subsectors90

PRODUCT IMPACT TARGETED MARKET COMPETITIVENESS

RICE HIGH DOMESTIC LOW
MAIZE HIGH DOMESTIC LOW
POTATO HIGH DOMESTIC MEDIUM
SUGAR MEDIUM DOMESTIC LOW
FRESH FRUIT & VEGETABLES HIGH DOMESTIC; REGIONAL MEDIUM (NICHE)
POULTRY (BROILERS) MEDIUM DOMESTIC MEDIUM
POULTRY (EGGS) LOW DOMESTIC MEDIUM
FRUIT (JUICE) MEDIUM DOMESTIC; REGIONAL LOW
TEA MEDIUM DOMESTIC; GLOBAL MEDIUM (NICHE)
COFFEE LOW DOMESTIC; GLOBAL MEDIUM (NICHE)
DAIRY HIGH DOMESTIC LOW
SPICES HIGH DOMESTIC; REGIONAL; GLOBAL HIGH
MAPS HIGH REGIONAL; GLOBAL HIGH
HONEY LOW DOMESTIC LOW; MEDIUM (NICHE)
MEAT (W/O POULTRY) HIGH DOMESTIC MEDIUM
Source: Nepal National Tourism Strategic Plan 2015–2024.

40
foods. Each subsector is currently small and scaling up additional investment. The government is also offering
will require addressing a multitude of factors. These numerous incentives for investors.93
include variable quality, challenges in aggregation of Rice, maize, and potatoes are large-scale crops but
supply from numerous small-scale farmers, access to currently have limited prospects. Rice and maize
land, and a lack of technology adoption and compliance comprise the two largest cereal crops in Nepal in
with sanitary-phytosanitary measures. terms of both production and the participation
Ginger and vegetables are important products that of smallholders. This creates an opportunity for
could attract investment but require government scale and impact. However, production of each
support on cold chains. Ginger is an export earner. crop is characterized by low yields and high costs
However, an inability to comply with phytosanitary of production.94 On the processing side, despite the
standards is currently constraining growth. Vegetables, presence of larger business houses with processing
a smallholder crop, are grown for the domestic market. facilities, both subsectors are less competitive in
Together with fruits, they are typically sold through efficiency and quality than competitors in India. In
wholesale markets but with limited sorting, grading, fact, it is estimated that up to 80 percent of rice mills in
and cleaning. However, there is a small but growing eastern Nepal have shut down due to inefficiency and
modern retail segment that could be a catalyst for low competitiveness.
longer-term transformation of the fresh fruits and
vegetable subsector, provided additional cold-storage Constraints in the Agribusiness Sector
facilities can be made available. Strengthening the Along with the cross-cutting constraints around
supply chain from farm to retail is needed, but first- consolidation of land, access to finance, and low
mover costs will be high. managerial capabilities, there are three sector-specific
Livestock is a longer-term possibility. The poultry constraints that need to be addressed to create markets.
subsector, both for meat and eggs, is a higher-growth
subsector that benefits from rising incomes and the Low agricultural productivity
lower cost of poultry compared with other meat. Other Low farm productivity, attributable in large part to
kinds of meat are also growing, particularly goat. With the low use of fertilizer and certified high-yielding
little in the way of processing, the fresh meat business seed, keeps input costs high. Nepal’s usage of fertilizer
dominates the industry, keeping it localized, with averages only 50kg per ha, while regional comparators
few larger players outside of poultry.91 Dairy could average 150-200 kilograms per hectare. Seed replacement
also be a subsector where import substitution may for rice in Nepal is around 5–10 percent, compared with
be an opportunity. However, the state-owned Dairy 40 percent in India. The government subsidizes these
Development Corporation controls 40 percent of the inputs through its organized aggregation and distribution
subsector and sets farm-gate prices above world market system. However, the system is underperforming. Supply
prices. Therefore, profitability of the private processing is unable to meet demand, as distribution is ineffective,
sector is under pressure.92 and the provision of fertilizer is not based on the needs
The private sector could provide important agriculture of the soil or the crop. Government policy is also limiting
support services in the medium to long term. Over private sector participation in these markets.
the medium term, storage and warehousing is a Limited agricultural insurance coverage and markets
particularly good opportunity for private sector is also an impediment to improving smallholder
investment. Currently, there are almost no good quality productivity. Uninsured risk results in high levels of
warehouses for agriculture products in Nepal. Demand vulnerability among small- and medium-scale crop
is limited by the high cost of post-harvest storage and and livestock producers and limits innovation. Further
processing, which can vary from 45 to 100 percent of development and scaling up of the insurance market
the farm-gate price. These costs are largely driven by will contribute to reducing the production risks faced
inadequate infrastructure and should come down with by crop and livestock owners.

41
Weak supply chains prices and payment terms during falling commodity
The cost and time related to transport and logistics prices undermines profit margins. In the case of dairy,
is an important issue. As discussed in the section on the SOE crowds out private sector players, making
cross-cutting constraints, highly dispersed production economies of scale difficult to achieve.96
locations and poor road quality create high access-
to-market costs and increased levels of post-harvest Land allocation and consolidation
losses. Poor transport infrastructure also fragments Inefficient land allocation and the difficulty of
regional, central, and border markets for agricultural aggregating land to achieve scale, largely due to the
goods (Shively and Thapa, 2017). This undermines the challenges faced by poorly developed land-market
competitiveness of agri-products. institutions, hamper productivity. The lack of land-use
Poor implementation of SPS regulations hurts quality. planning and management is preventing the efficient
Much quality testing in Nepal is below international use of land. The significant inflow of remittances
food-safety requirements, and SPS certifications issued has driven up land prices in urban/peri-urban areas
in Nepal are not recognized in most countries. This and along major roads, diverting investment capital
creates a barrier to accessing higher-value export from the production system.97 As a result, lower-cost
markets, leaving most Nepalese exports to be sold land is further away from roads, making logistics
as lower-value products to India. Some progress has and aggregation difficult, and reducing its value as
been made under the World Bank Group’s Project for collateral for bank loans. Many farmers also report
Agriculture Commercialization and Trade (PACT). being hesitant to make large investments in land for
However, without additional work to comprehensively fear of future policy changes (for example, zoning
address these issues, Nepal will remain relegated related to poultry farming and slaughtering). The
to lower-value markets for its products (except for lack of institutional arrangements to overcome the
cardamom). This could stifle growth of emerging high- limitations of small and fragmented land holdings,
value subsectors. produced by complex land ceilings, add to the issue,
There are high restrictions on FDI in the agribusiness making it even more difficult for firms to exploit
sector. This is partially attributed to the government’s economies of scale expanding to an economically
“negative list” of subsectors in which FDI is prohibited, efficient size.98 The government recognizes the need
including in poultry, fisheries, and beekeeping. This to consolidate Nepal’s private land. However, the lack
not only limits access to foreign capital, but also the of an efficient and meaningful land-use management
embedded technology and market connections that FDI framework has rendered efforts to regulate land use
can bring.95 and consolidate land largely ineffective so far. These
Government participation in dairy and sugar is include efforts to establish commercial agriculture.99
dampening private sector interest in investing in There is little policy or legal support for mechanisms
these subsectors. Government involvement in setting such as including contract farming and land leasing. n

42
HEALTH100
Access to quality health care in Nepal is poor. Expanding the health sector would help
address this development need while also creating quality jobs. The private sector
has an opportunity to partner with the government to improve access, deliver quality
health care, and expand health insurance coverage. While the government realizes
the importance of this relationship, the role of the private sector is constrained by
limited institutions and a weak regulatory environment. A lack of dialogue with the
private sector has also impeded attempts to modernize, reform the sector, and devise
instruments to tap private sector potential.

Performance and Opportunities for the Sector sector. The National Health Strategy and the State-
to Be Transformational Non-State Partnership Policy have set the stage for
Nepal has a mixed health-care system that relies on increased collaboration between the public and private
both public and private provision of health-related sectors. The policy encourages the government to
services and products (Figure 18). Across Nepal, seek the support of large companies and industry
insufficient access to quality, affordable health-care associations to improve health communication
services, along with the increased incidence of new strategies and source specialized management skills
diseases, is causing high levels of premature deaths, (for example, logistics, inventory, supply chain, and IT
although infant mortality and adult mortality rates have applications). It also encourages private sector support
declined significantly to below the regional average.101 in proposing innovative models for health informatics
Degenerative and non-communicable diseases (NCDs) and telemedicine, among other innovations. It is worth
account for 42 percent of all deaths. They make up 23 noting that the Ministry of Health and Population is
percent of all disability-adjusted life years, a measure of already using PPP arrangements.
the number of years of healthy life lost to disease. This is The private sector already plays a significant role in
projected to rise.102 Poor health outcomes are preventing Nepal’s health sector. It is especially important in
the country from achieving higher levels of productivity the areas of service delivery, human resources and
and living standards. The primary responsibility for education, pharmaceuticals, and health financing.
health-care provision remains with the public sector. It includes both not-for-profit entities, such as non-
However, in an environment of limited fiscal resources government organizations (NGOs) and faith-based
and poorly developed governance institutions in the service providers; and for-profit commercial entities,
public sector, a partnership between the public and such as system-enablers, health-care information/service
private sectors is needed to bridge the existing gap. The providers, and producers of health-related products.
private sector could help to increase access by providing Private players face few regulatory barriers to entry.
services to those with the ability to pay, thereby freeing Health-care businesses require few licenses to operate.
up public resources to focus on lower-income patients, For example, hospitals need only one more, and
especially in the underserved rural and mountainous pharmaceutical manufacturers only three more, than
areas. The public sector could also contract out services the number of licenses required for other Nepalese
to the private sector. International experience shows companies. Obtaining the licenses is not costly (for
that such contracting arrangements can lower costs example, $0.1 for VAT registration, $2,000 for
substantially, while improving quality and safety. business incorporation). However, the time needed to
The overall regulatory and policy landscape in the obtain these licenses can vary from one day to up to
health sector supports partnership with the private one year.103

43
The for-profit health sector has experienced rapid primarily partnered with not-for-profit facilities in the
growth over the past decade. Population growth, rising past, there is also an opportunity to cooperate with
incomes, and higher incidence of NCDs (Figure 19) are the many for-profit hospitals. More than 60 percent
all contributing to a rapid increase in the demand for of patients in the system are referred by public health
health care. Furthermore, there is a growing middle centers from outside the Kathmandu Valley. Many
class that can afford quality health care, which they are seeking specialized care. Private sector providers
associate with private providers. Between 2004 and have expressed an interest in accessing part of this
2014, the size of Nepal’s health-care market increased market by charging fees on a sliding scale, organizing
at an annual rate of 11.8 percent. In 2011, out-of- medical camps in rural areas, often in partnership with
pocket expenditures (largely flowing to the private community-run health-care facilities, and by meeting
sector) totaled $570 million, of which 45 percent was or exceeding the legal requirements to maintain 10
spent on drugs and 27 percent on hospital services percent of all beds for low-income patients.
(curative care). However, private investment is lower
While for equity considerations public health
than required, and many Nepalis continue to travel to
insurance should remain the primary option, there
other countries in the region for treatment.
is an opportunity for private health insurers. A
Local companies are investing in improving capacity, major milestone in this regard was the passage of the
technology, and expertise.104 Furthermore, many National Health Insurance Act in 2017. First, there are
hospitals, diagnostic clinics, and pharmaceutical untapped opportunities for the private sector to work
manufacturers are developing PPPs with foreign with underserved populations through the national
firms, thereby rising to a level of quality that meets health insurance program. At the same time, there
international standards. is also room to grow the private insurance market.
Health insurance is a relatively new product in Nepal
Opportunities in the Health Sector and firms have only penetrated 1 percent of the market.
Partnering with the government could open new There are 17 licensed private health insurers in Nepal.
avenues for private hospitals to improve access. All of them offer similar benefit packages covering
Although the Ministry of Health and Population has major medical expenses (hospitalization), diagnostics,

FIGURE 18 Nepal’s health sector landscape

Source: USAID/Nepal Health Private Sector Engagement Assessment (2017).

44
 training staff and upgrading to modern, standardized
Private Sector General goverment Rest of the world
70% systems that reflect best practice for regulating the
60% private sector. The private sector is valued largely for
50% the better quality it provides. However, the institutional
40% foundations needed to ensure private that firms
30% actually deliver high-quality health care are lacking.
20% In more developed systems, this function is provided
10% through a range of interventions, including inspections,
0% accreditation of facilities, ongoing oversight by payers
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Fiscal Year
of health care (often health insurance companies),
and patient feedback. Little of this currently occurs
in Nepal. The lack of effective regulation has led to a
FIGURE 19Sources of health-care financing in
Nepal, 2000–09 proliferation of health enterprises ranging from world-
Source: USAID/Nepal Health Private Sector Engagement Assessment class facilities to others plagued by poor quality and
(2017). lack of proper quality assurance of drugs procured.
These conditions fuel consumer mistrust of private
and drugs, but exclude preventative care. There are 20
providers and constrain market growth. The low
contracted service providers/hospitals that dominate
quality of care also reduces the scope for the public
the private insurance market, and a few that have
sector to contract out to the private sector, since it
arrangements with Indian and international hospitals.
The industry’s principal clients are global and large typically needs to be assured of the quality that private
Nepalese companies (banks, manufacturers, telecoms) providers deliver before it contracts out to them or
that offer health policies to their employees. However, incorporates private sector providers into social health
the high-income and corporate segments have not yet insurance schemes.
been fully exploited. There are few incentives for commercial health-
Community pharmacies could extend basic health care providers to expand to new populations in new
care to rural populations. The Nepalese health system locations. Private players want to join their non-
currently struggles to reach rural populations. If profit peers in working with the Ministry of Health
supported with quality products and training, privately- and Population in the areas of specialty services and
run pharmacies could be an effective channel to deliver diagnostics. However, most partnership arrangements
services and counseling to rural women and provide
(for example, Memorandums of Understanding, or
other benefits to rural and underserved populations.
MOUs) are informal, ad hoc, and based on personal
relationships. Much work remains to be done to be
Constraints in the Health Sector
able to use contracts as engagement mechanisms. As a
There is a need to revise, streamline and coordinate
result, private health care is mainly confined to high-
the regulation of private health providers. Nepal’s
income groups living in the Kathmandu Valley.
health regulations date back 25 years and no longer
reflect international best practice for governing mixed The lack of dialogue between public and private
public-private health systems. Moreover, the health health providers has led to a significant wariness and
system is governed by multiple agencies, making the hesitation to collaborate. This is unfortunate and
task of reform more complex than previously. As such, a missed opportunity in efforts to modernize and
in today’s environment there is a need for much greater reform the regulatory environment. Moreover, the few
coordination and collaboration between agencies. professional associations that represent commercial
The Ministry of Health and Population, which oversees interests are seen as highly political entities that
private health-care firms, faces the challenges of advance individual—not sector—interests. n

45
EDUCATION
There are considerable opportunities for private sector investment in the tertiary, and
the technical and vocational education and training (TVET) subsectors. Policy reforms
that facilitate entry and enhance autonomy of private institutes are needed for the
private sector to play a greater role. Industry linkages and incentives for improving
quality would also be useful. Private sector investment in the education sector could
ease a major constraint on firms’ growth in Nepal, namely the limited supply of
workers with market-relevant technical and managerial skills.

Performance and Opportunities for the Sector Private providers of tertiary education and TVET will
to Be Transformational be pivotal in easing the skills constraint on Nepalese
There is potential unmet demand for high-quality firms by responding flexibly to market demand.
and affordable private education at all levels. The gap Firms need workers with up-to-date technical and
between potential demand and supply is most apparent vocational skills. This need is particularly urgent
in higher education and TVET. Nepal is undergoing in export-oriented sectors, such as agribusiness and
a demographic youth bulge; almost 45 percent of its tourism, which are crucial to Nepal’s growth strategy.
population is of school or college age. Gross enrolment With limited financial resources, and little capacity to
rates (GER) are a rough indicator of potential unmet respond flexibility to market needs, the public sector
demand. While Nepal’s primary school GER compares alone cannot fill this gap. As described below, there
favorably with the South Asia average, its tertiary-level is already a sizable private sector presence in tertiary
GER is only 12 percent. This is lower than average for education and TVET. The question is how Nepal can
South Asia, suggesting the greatest unmet demand is reform policy to enhance the size and quality of this
in tertiary education (Figure 20).105 Similarly, there is segment of educational service providers.
potential unmet demand for TVET: although nearly Higher education is dominated by nine national
512,000 youth enter Nepal’s labor market every universities, with a significant share of affiliated private
year, less than one-quarter participate in any kind of colleges. Private colleges account for the majority
technical or vocational training.106 share of enrolment in key technical streams, such as

Nepal Bangladesh India Pakistan Sri Lanka 71,130

160%

140% Community
120% Constituent
47,146
100%
Private
34,279
80%

60%

40% 14,868
11,573
20% 5,385 4,406
0%
Gross enrolment ratio, Gross enrolment ratio, Gross enrolment ratio, Engineering Medicine Management
primary, both sexes secondary, both sexes tertiary, both sexes

FIGURE 20Gross enrolment ratios in South FIGURE 21 Enrolment by college type for select
Asian countries, 2016 streams (Tribhuvan University)
Source: UNESCO. http://data.uis.unesco.org. Source: Primary data from Tribhuvan University.

46
engineering and medicine (Figure 21). In addition, Constraints to the Higher Education and
Nepal has some private colleges that are affiliated with TVET Segments
foreign universities.107 The key constraints to a more enhanced role for the
TVET is dominated by small private providers. The private sector in providing high-quality, market-relevant
Council for Technical and Vocational Education and education are policy-related and include the following:
Training (CTVET) approves and monitors programs The key challenge is to ease the regulatory burden on
that offer Technical School Leaving Certificates private providers: O n paper, policy supports private
(TSLC), diplomas, and short-term vocational training. sector involvement in schooling, higher education, and
These courses are offered by community schools, TVET. But there are serious implementation gaps. In
private institutes, and institutes under the direct control addition, some recent changes in policy—such as the
of CTVET. apparent freeze on new licenses for schools—have
There is scope for the entry of larger, more added to the level of uncertainty for private investors.
professionally-run TVET institutes. Although there The lack of a framework for PPPs adds to the sense
are more than 500 private TVET providers in Nepal, of uncertainty. Private sector entry is impeded by
and more are opening, most of them are small and complicated and unpredictable processes for obtaining
offer just a few courses. This restricts economies of official clearance for new institutes and courses. These
scale and scope, leaving little room for the adoption issues affect both tertiary and TVET segments, slowing
of professional management structures. The large down the introduction of high-demand courses in
number of providers makes it difficult to regulate the engineering, medicine, and management.
quality of TVET. Hence, there is opportunity for larger In the tertiary education segment, the regulatory
TVET institutes that leverage modern management and problem is especially severe for foreign-affiliated
economies of scale/scope to offer high-quality training private colleges. A few examples include the difficult
at competitive prices. license renewal process they must undergo every year,
Reforms to facilitate private sector entry and quality and the short window for requesting permission to
offer new courses each year (just 15 days).
in the tertiary and TVET sectors are feasible. The
private sector is present at all levels of education: In the TVET segment, a key issue is that the apex
from pre-school to university, and from elite schools institute for TVET (CTVET) takes between four
to start-ups offering low-cost education, and young and 10 years to approve new training institutes. The
colleges affiliated with foreign universities. However, TVET segment also suffers from a lack of coordination
for now, reforms to further open up the sector to across relevant agencies: in addition to CTVET, there
private providers are more feasible in tertiary and are around 17 ministries that provide TVET in their
vocational education. This is because the policy stance respective sectors. These ministries do not adhere to
toward private sector involvement in primary and common norms and standards, and do not coordinate
secondary schooling is becoming more restrictive with CTVET.110 While Nepal has developed a National
and unpredictable. This is ostensibly due to concerns Vocational Qualifications (NVQ) framework,111 not all
about equitable access. For instance, the Institutional TVET institutes are currently aligned to it.
School Standards and Operations Directive of 2013 A low level of autonomy and excessive control by
imposes restrictions on establishing and operating universities prevents tertiary institutes from responding
private schools; and the government has not issued to market demand. Colleges and other tertiary
new licenses for private schools in recent years.108 institutes are bound by strict university guidelines
Furthermore, in 2017, a high-level commission on on the courses they can offer, the design of course
education reforms recommended that all private curriculums, class sizes, and fees. This limits the ability
institutions be replaced with public institutes over a of colleges to fully utilize their existing faculty and
period of 12 years.109 Such a policy change is not on the improve their profitability.112 There are ongoing efforts
horizon for TVET and tertiary education. to introduce more autonomy in colleges, which is a

47
step in the right direction, but these are proceeding Inadequate linkages between educational institutes and
slowly.113 The University Grants Commission (UGC) relevant industries reduce how responsive they are to
has established a new national accreditation system to market demand. This is particularly concerning in the
facilitate autonomy, but the details of this new initiative TVET segment. With very limited industry involvement
are still unclear. So far, only seven colleges have been
in designing TVET curriculum, many courses are
granted enhanced autonomy under the initiative.
out of date.115 Furthermore, training institutes do not
Inadequate market data and provider incentives keep partner enough with industry to generate internships
the quality of service provision low. Current policy
and placements.116 No publicly supported industry
focuses on regulating entry, rather than improving the
body exists (such as the industry skills councils found
incentives and effectiveness of providers. In particular,
in many other countries) to provide information on the
the government does not produce or disseminate
output-based assessments of the quality of teaching. demand for skills, assist with developing curriculum,
These could facilitate market signals and incentivize help supply trainers, or provide support for placement
more effort and investment into improving the quality services (Annex 10 discusses international experience
and market-relevance of teaching.114 on closer integration of TVET with industry). n

48
IT SERVICES
IT services can offer high-quality jobs for skilled workers, improve the productivity
of other sectors, and facilitate better governance. Furthermore, compared with
manufacturing, IT services are not as constrained by Nepal’s weak transport
infrastructure, poor logistics, high land prices, and small domestic market. While the
sector has grown rapidly in recent years, partly because of Nepal’s low wages, the
lack of higher-level IT skills and managerial capabilities in the workforce, regulatory
hurdles, weak digital infrastructure, and access to finance are all holding it back.

Performance and Opportunities for the Sector In recent years, an emergent digital entrepreneurship
to Be Transformational117 ecosystem has nurtured many IT-enabled companies.
The IT services sector is a nascent but growing one in Local and international incubators and accelerators
Nepal. The sector can be divided into three segments: such as Microsoft Innovation Centre, Rockstart
(a) application services (for example, app development, Impact, and Biruwa Advisors, provide mentorship,
consulting, and systems integration); (b) IT-enabled access to networks, and funding. Some accelerators
services and business process outsourcing (ITeS-BPO); assist in developing business models and skills and
and (c) products (for example, e-commerce, internet provide co-working spaces.120
service providers [ISPs], online payments, and mobile The low labor cost of junior software developers
wallets). Firms in the first two segments are more has been a major factor in the expansion of Nepal’s
export-oriented, providing foreign markets with software application sector and its increasing
services such as call centers, medical transcriptions, exports.121 T he hourly software development rate in
back-office operations, insurance claims processing, Nepal is around $10–$15.75. This is lower than other
and digital content development. The sector is still key Asian outsourcing countries ($50 in China, $30 in
small. In FY 2016/17, the total revenues of registered IT Vietnam, $20 in the Philippines, and $15 in India).122,123
application services firms, ITeS-BPO service providers, With Nepal’s low wages, a junior software developer
and e-commerce firms were estimated to be $100–$200 with less than three years’ experience costs around
million, $50–$100 million, and $50–$100 million, $220 per month compared with an average $500124 in
respectively.118 But the sector is growing rapidly. other Asian countries.125
According to the Computer Association of Nepal Export-oriented IT services firms that exploit Nepal’s
(CAN), employment in IT services is increasing by 15 wage advantage will continue to drive the sector in the
to 20 percent annually. short to medium term, although their wage advantage
IT services firms are small but innovative. While will likely diminish over time. Nepal’s IT firms largely
systematic data on IT services firms are unavailable, the operate in segments in which barriers to entry are low.
anecdotal evidence is that IT services firms in Nepal are It is highly likely that competition from other low-wage
generally small, and that some are not even officially countries (and from new technologies) will increase over
registered. Most IT services firms have only 5 to 20 time. Indeed, Nepal’s IT services sector does not have
employees, and only about 10 firms have more than 100 the scale to follow the same path as India’s low-cost
employees.119 But despite its modest size, the sector has outsourcing industry. For example, only 7,500 students
become a magnet for entrepreneurial talent. Nepalese graduate each year from computer science and ICT-related
IT services firms are devising innovative, tailored courses in Nepal. Of these, only 20 percent remain in
solutions for local problems. These include low-cost Nepal.126 By comparison, 2.6 million Indian students
schooling, ride-hailing, and management systems for graduated from STEM courses in 2016. As such, Nepal
pharmacies, hospitals, restaurants, and hotels. will need to pursue a different growth strategy to India’s.

49
In time, IT services could help drive Nepal’s growth for a significant share of good jobs, if the business
strategy by developing expertise in niche areas environment improves. Notwithstanding constraints,
that complement key sectors such as tourism and there is a high level of start-up dynamism in Nepal.
agribusiness. ICT products and services could help Some IT services firms have managed to stay competitive
increase the productivity and product diversification in export markets for many years.128 The IT services
of key export-oriented sectors such as tourism. sector could also benefit more from proximity to India:
This could include software for real-time booking, firms have learned from India’s experience, but also
property management services, smartphone services, appear to have lost talent to India. Tapping into its
and integration for flights, as well as geolocation diaspora in India and attracting Indian FDI could help
and wearable technology apps to enhance mountain Nepal to benefit from its proximity to India.
hiking.127 Other potential niche areas include activities
in the value chain of other sectors that require a Constraints to IT Services
high degree of local understanding and knowledge Firms are constrained from scaling up or moving up
(language, geography, culture, networks) to function the quality ladder due to a lack of higher-level skills
well. Potential examples include provision of online and management expertise. In interviews conducted
education services for remote areas in Nepal (as for the CPSD deep dives, firms noted that the scarcity
opposed to education software only), and productivity of experienced technical workers and mid-level
tools for transportation and services. managers has made it harder for them to expand.
The emergence of IT-enabled education technology Interviewees also noted that, because of the low quality
(EdTech) firms points to a potentially important role of technical education, many of them must invest in six
for IT in easing Nepal’s skills constraint. Nepal’s to eight months of on-the-job training. Therefore, the
nascent education consulting sector includes a group quality-adjusted cost of skilled workers is high. The
of 15 to 20 IT companies, mostly private, offering high emigration rate of skilled workers worsens the
courses in management information systems (MIS). availability of experienced technical and managerial
There is also a nascent market for EdTech, with private workers. In the ICT sector, for example, emigration
companies offering online courses and practice exams, leads to high employee attrition and a shortage of the
as well as aggregated information on educational most able IT graduates. Firms must continuously invest
institutions and tutors. Looking ahead, the private in hiring and skilling fresh college graduates, while few
sector could offer innovative consulting solutions to remain long enough to become middle managers.
improve the quality of education. Some areas in which Ineffective regulations and supporting policies make
IT-enabled private educational consulting firms can it difficult to conduct business. Overlapping and
play a larger role, perhaps in partnership with the unclear mandates across key ministries (the Ministry
public sector, include: of Information and Communication, and the Ministry
» PPP models for service delivery, such as e-learning, and of Education, Science and Technology) have impeded
» Introducing better management technologies in policy coordination.129 The IT industry has little
schools, colleges, and TVET institutes interface with the government, partly because the sole
industry group (Computer Association of Nepal) has
The IT services sector could also increase efficiency historically focused on IT hardware.130 Furthermore:
and transparency in governance, thereby helping ease
» The IT industry lacks regulations for segments such
a major cross-cutting constraint to the private sector.
For example, the government has announced plans for as IT outsourcing and e-commerce.
e-governance, smart cities, and a national identification » Immigration regulations restrict the supply of skilled
system that will increase the domestic demand for IT foreign workers.131
application services. » A tax exemption for IT firms is only available to
While it will remain small by international standards, firms with more than 300 employees, leaving most
the IT services sector could eventually account unable to claim it.

50
» Privacy and intellectual property rights remain that they are too few relative to the demand from the
important concerns for companies and end-users. IT services sector.
» Apart from the Foreign Investment and Technology Nepal’s weak IT infrastructure and the lack of quality
Transfer Act of 1992, there is no specific legal IT parks have also constrained the IT services sector.
framework that addresses IT-related technology First, IT-services firms are restricted to locations around
transfer issues. Kathmandu, the only area with adequate infrastructure.
» The 2015 IT policy, which aims to support the Second, the extremely low penetration rate of broadband,
and the mediocre quality and cost of mobile internet, limit
sector through infrastructure development,
domestic demand for IT services. Specialized technology
digitization of government services, and promotion
parks can help to provide adequate technological
of various IT subsectors, is still in draft form and
capacities and infrastructure within a limited zone. But
open to public scrutiny.
the only IT Park in Nepal, which is government-run, has
A lack of early-stage finance and business incubation failed to attract firms, largely due to poor infrastructure.
support constrains start-ups. A lack of financing for Other infrastructural issues include:
SMEs is a cross-cutting constraint that poses specific
» High fixed cost of logistics infrastructure (relative to
challenges to IT start-ups. In interviews conducted for
Nepal’s market size).
the CPSD, some IT-services firms noted that they are
at a point where they typically require $500,000 to $1 » Absence of a standardized postal address system.
million to scale up. But accessing long-term bank loans » Cash is still the preferred mode of payment among
or equity investment of this size is difficult for them. In online shoppers in Nepal. Online transactions are
part, this could be due to a lack of advisory support, more expensive, as they include the cost of buying
which could help IT start-ups become better prepared or renting point-of-service terminals and high
to seek such funding. Institutions providing this kind transaction fees (between 1.75 and 3 percent).132
of early-stage finance and business incubation (such as They also have longer settlement cycles in Nepal
the Dolma investment fund) do exist, but firms noted (around 30 days) than in other countries. n

51
Recommendations
This Nepal CPSD identifies what it will take for the private sector to enhance
productivity and create better jobs. The key challenges to be addressed for faster private
sector development are: (a) governance and institutions; and (b) infrastructure. In
addition, Nepal’s inadequate openness to trade limits the degree to which it can benefit
from the vibrant markets on its border and from global markets more broadly. Access
to credit and skills also remains unequal, limiting productivity growth for some firms.
Finally, there is a need to build up firms’ capabilities. There is growing global evidence
that programs that directly provide consulting advice to firms lead to the adoption of
better management practices and have long-term impacts on firms’ performance.133
While there are advantages to addressing some issues necessary. In other cases, however, sector-specific
economy-wide, others may prove more tractable at programs to unleash private sector potential may be
the sector level. There are benefits to addressing some more politically or institutionally feasible.
cross-cutting constraints at the economy-wide level,
Thus, this Nepal CPSD presents both cross-cutting
as these are prerequisites for all economic activity.
and sector-specific recommendations. The first table
These include constraints such as basic infrastructure
(roads and electricity),134 as well as access to land, lists recommendations to address cross-cutting issues,
finance, and basic skills. Similarly, in some cases, firms’ followed by five sector-specific recommendation
capabilities gaps can be addressed through firm-level tables. The two sets are closely connected: where there
support programs, which can cover multiple sectors is potential for overlap, the tables cross-refer to each
while also being tailored to sector-specific needs where other to avoid repetition.

Recommendations on cross-cutting issues and infrastructure subsectors

CONSTRAINT RECOMMENDATION
» Continue and intensify government efforts to simplify and streamline business laws and
regulations.
» Strengthen implementation capacity, including by using technology, in key ministries and
agencies. (Some details for priority sectors are provided in tables below.)
» Introduce a single-window interface for regulatory compliance.
Regulatory governance
» Use institutional frameworks such as the Nepal Business Forum for regular dialogue between
government and the private sector, ensuring representation from industry, with emphasis on
priority sectors such as agribusiness, tourism, health, education and IT.
» Clarify regulatory responsibilities over concurrent functions of the three tiers of government
and undertake required regulatory capacity building measures at provincial and local tiers.
» Facilitate PPP in Infrastructure: (from the InfraSAP):
• Finalize and enact the draft PPP Law after extensive consultations to build consensus among key
stakeholders
Infrastructure • Develop a PPP pipeline and a clearly defined project screening and prioritization process
• Develop standardized documents and tools to support the preparation of high-quality projects
• Develop fiscal commitment and contingent liability framework.

52
CONSTRAINT RECOMMENDATION
» Transport (from the InfraSAP):
• Roads:
• Strengthen the Road Board of Nepal (RBN)
• Increase incentives for high performance in road maintenance contracts. Further strengthening
of the sector can come from identifying a network of strategic roads for increased maintenance
and expansion executed through PPPs
• Airports:
• Articulate a clear and comprehensive strategy to expand and improve the country’s airport
infrastructure, including financing plans
• Adopt international management practices with private sector participation
Infrastructure (cont.) » ITConnectivity: Develop a reform plan to improve the efficiency of digital infrastructure
and encourage investment into it. This should address business entry and competition,
bandwidth availability, passive infrastructure-sharing, and incentives for the private sector to
make the investments and share infrastructure.
» Energy (from the InfraSAP):
• Strengthen the capacity of the Nepal Electricity Authority (NEA) and its subsidiaries
• Establish a short-term (five-year) plan, encourage private participation, prioritize funding from the
Millennium Challenge Corporation (MCC), Asia Development Bank (ADB), and other development
partners, and develop its grid code
• Standardize and improve the processes for PPPs, licenses and permits, and PDA
» Recommendations on strengthening higher education and TVET are presented in the
Access to skilled labor
education deep-dive section of this report.
» Ministry of Industry to:
• Build and support network of business advisors, incl. advisors specializing in key sectors like
Firms’ capabilities agribusiness and IT services.
• Introduce subsidized management extension programs for firms in key sectors, including training on
HR interventions to reduce employee attrition.
» Conduct a comprehensive diagnosis to develop a financing strategy for SMEs, possibly
including alternative finance models such as leasing.
• Based on diagnostics, modify/draft legislation to support development of key financial products
supporting SME growth (warehouse receipts, leasing, secured registries).
» Clarify regulations and procedures needed to operationalize the Secured Transactions Act.
» Strengthen the creditor information base and explore approaches to covering more SMEs in
Access to finance credit information systems.
» Implement a system of lending against warehouse receipts to improve access to finance for
the agriculture sector.
» Develop a legal framework for private equity and venture capital.
» Establish online payment systems in rural areas to ease transactions in tourism, agribusiness
and other industries with rural locations.
» Review negative FDI list with a view to reducing it.
» Review and adopt the draft Foreign Investment Act, repealing the Foreign Investment and
Technology Act, 1992.
Constraints to FDI, • Cabinet should undertake a new round of consultations on latest draft of the Foreign Investment
foreign lenders and Act with domestic and foreign investors as well as international experts135
foreign exchange
» Streamline approvals of investments and repatriation of benefits (Manual of 2012 and
transactions
central bank rules).
» Reassess the Minimum Capitalization Requirement for Offshore PE Funds and consider
reducing it for priority sectors (such as IT).

53
CONSTRAINT RECOMMENDATION
» Reassess the interest rate cap on foreign exchange lending and the cap on interest from
foreign sources for FIs.
» Reassess policies on foreign lenders to ease transactions and grant more equal treatment:
• Consider granting foreign lenders pari-passu treatment with local lenders in priority of investment
Constraints to FDI, • Simplify granting and perfection of security interest process.
foreign lenders and • Reduce time frame for NRB to grant approval
foreign exchange • Permit commitment fees to accrue from the date of submission of the loan documents to NRB but
transactions (cont.) be payable only after NRB approval
» Publish relevant regulations and directives in English.
» Other related sector-specific recommendations are explained in the deep-dive sections of
this report.
» Conduct a diagnostics of land governance to develop a plan to strengthen land governance
and management for easing access to land and improving the efficiency of land allocation.
The plan should include measures to:
• Implement land zoning as required by the Lands Act (Chapter 9A)
• Update the Land Acquisition Act (1977) and make it consistent with the Land Acquisition Policy
Land access and • Ease land-use conversion
allocation • Assess the process for granting land for business purposes to foreign investors and implement
recommendations to make it more transparent and streamlined
• Consider streamlining the procedures for the granting of mortgage over land and creating security
interest for foreign investors
» Developindustrial parks, including parks tailored to priority industries such as agribusiness
to aggregate and title land for commercial use.

SECTOR-SPECIFIC RECOMMENDATIONS
FROM THE FIVE SECTOR DEEP DIVES
TOURISM
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Goal 1: Improve the overall tourism business environment
Medium- to long-term
Modernize key business » Review Tourism Act (1978) against best practices.
laws and regulations » Clarify investment approval criteria under Industrial Enterprise Act,
HIGH
affecting foreign and 2049 (1992).
domestic private investment » Review cap on land ownership preventing large hotels under Land Act
2021 (1964).
Short-term
» Review and clarify policies and regulations governing utilization of

Clarify and simplify protected areas (National Parks and Wildlife Reserve Act of 1973), and
Protected Areas (PA) and community forests (Forest Regulations of 1995):
• Strengthen the process and content of lease, permits and licenses to HIGH
Community Forests (CF)
upgrade private sector, and local communities’ roles in PAs and CFs
regulations and policies
policies and economic activities
• Adopt common guidelines and standards on lodges/teashops in parks,
buffer zones and land of conservation areas

54
TOURISM
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Medium- to long-term
» Revise royalties and entrance fees to adapt to willingness to pay of
Clarify and simplify types of visitors.
Protected Areas (PA) and » Revise status and mandate of National Trust for Nature Conservation
Community Forests (CF) and its regional offices such as ACAP and “contractualize” missions HIGH
regulations and policies with local governments.
(cont.) » Improve enforcement of environmental safeguards.
» Leasing of state-owned land for private investment in destination
gateways and destination areas.
Goal 2: Improve connectivity
Short-term
» Prepare provincial connectivity master plans for key destinations.
Medium- to long-term
Improve road access to » Build and maintain national/local roads facilitating access to core
MEDIUM
core destinations assets of priority destinations and improve safety and rescue capacity.
» Enhance online payment capacity at destination level.
» Encourage private sector to develop and operate facilities for transport,
such as bus stops and terminals, taxi stands, and rest stops.
Short-term
» Upgrade the reliability, safety, and efficiency of the airport system:
• Improve operational management of Tribhuvan International airport and
accelerate construction of Gautam Buddha International airport and
Pokhara airports136
Upgrade air transport • Assess need for Nijgadh Second International Airport
infrastructure and • Assess need for reopening or upgrading local domestic airports HIGH
regulations » Update aviation policies and regulations covering airspace, safety,
airlines, airport services, air services tariffs, and taxes (for example,
adoption of draft Civil Aviation Bill, review of tax on plane leasing).
Medium- to long-term
» Involve the private sector in management and/or construction of
airports through PPPs, as provided under the draft Civil Aviation Bill.
Goal 3: Develop priority destinations
Short-term
» Establish a national tourism steering committee comprising key
ministries, representatives of provinces, and private sector organizations.
» Clarify the sharing of powers regarding tourism and related infrastructure
Establish strategic amongst the federal, provincial, and municipal governments.
coordination and » Designate Destination Management Organizations in charge of
HIGH
monitoring at national development of destination plan and day-to-day coordination of public
and destination levels and private stakeholders of selected destinations.
Medium- to long-term
» Formalize in writing the respective commitments of public and private
tourism stakeholders for destination development over short to
medium term.

55
TOURISM
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Short-term
» Identify selected destination’s growth projections and preferred
development scenario based on (a) a market/demand opportunities
assessment, and (b) an analysis of infrastructure and visitor facilities gaps.
» Prepare a five-year Integrated Tourism Master Plan (ITMP) with active
stakeholder engagement.
Finance and maintain » Implement in parallel a first set of infrastructures needed to fill well
tourism infrastructure identified gaps.
identified through an Medium- to long-term HIGH
integrated destination » Ensure that tourism-related infrastructure identified in the ITMP are
approach budgeted and financed by concerned ministries, provinces, and
municipalities in selected destinations. This includes trekking and scenic
trails, safe drinking water points, rescue shelters, visitor centers, touristic
roads, water, solid waste, signage, as well as infrastructure to facilitate
access to lakes, villages, and mountain tops.
» Involve the private sector in the management and maintenance of
tourism infrastructure.
Short-term
Improve statistical data, » Improve tourism statistics and analytics for effective marketing and
market research and promotion strategy (with other statistical bodies and private sector). MEDIUM
destination marketing Medium- to long-term
» Produce annual tourism reports based on reliable /comprehensive data.
Short-term
» Approach leading operators for higher-end adventure tourism.
Attract investors in
destinations with upscale Medium- to long-term MEDIUM
potential » Advertise internationally selected opportunities for concessions, leases in
PA and/or CA with exclusive rights to areas/ activities, with cost-sharing
for utilities supply and access infrastructure.
Short-term
» Design new standards/labels for innovative products, for example, climate-
smart solutions, new trekking trails such as the Great Himalayan Trail.
Develop local sector » Establish a tourism fund and select local business development services
capacity around new providing small grants, knowledge, and assistance to support innovative/ MEDIUM
products and standards sustainable tourism projects of local communities and private sector.
Medium- to long-term
» Continuously review the performance of small grants and business
development services provided in tourism.
Short-term
» Develop infrastructure for the Mountaineering Training Academy and
improve the training capacity and courses of the Nepal Tourism and
Hotel Management Academy.
» Develop a training and capacity-building program to be delivered at MEDIUM
Enhance training and
quality of service destination level.
Medium- to long-term
» Implement local training offering under PPP-type arrangements with
selected business organizations.

56
AGRIBUSINESS
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Goal 1: Strengthening the production base as a foundation for agribusiness competitiveness
Short-term
» Allow private sector participation in tenders for procurement and
Reform the fertilizer and
distribution of fertilizers and improved seeds. HIGH
seed sector policy
» Implement the e-voucher system proposed in the ADS to reduce
inefficiencies.
Short-term
» Conduct a land governance assessment, and subsequently implement
recommendations starting with areas with the highest agribusiness
Land policies that support potential.
» Pilot a land bank to facilitate leasing of unutilized land as proposed in HIGH
agriculture sector growth
the ADS.
Medium- to long-term
» Introduce land zoning as required by the Lands Act (Chapter 9A).
Goal 2: Supporting scaling up of agribusiness SMEs
Short-term
» Identify priority activities to improve food safety/SPS measures to
Enhance capacity and eliminate bottlenecks for Nepalese products to access higher-value
performance of food safety markets. HIGH
and SPS measures Medium- to long-term
» Build suitable quality infrastructure to implement standards in
collaboration with the private sector.
Support scaling up of Short-term
MEDIUM
agribusiness SMEs » Scale up and/or replicate existing incubator models (NABIC).
Short-term
Evaluate the government’s
» Analyze the potential impact of removing government participation/
direct participation in sugar MEDIUM
and dairy sectors intervention in the sugar/dairy subsectors with the goal of understanding
what those changes could have on crowding in private sector investment.
Goal 3: Improve market linkages
Medium- to long-term
Support value chain » Support/facilitate building linkages between key value-chain players
MEDIUM
linkages (linking producers to agribusinesses) and providing the support needed
(training, capacity building, etc.) to strengthen those relationships.
Medium- to long-term
Investment in improved » Evaluate/benchmark logistics costs of moving agribusiness inputs and
logistics/transport for MEDIUM
outputs, both in the country and to priority destinations.
agribusiness
» Determine public/private investment required to support improvements.

57
HEALTH
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Goal 1: Strengthen the provision of private sector services to public sector health-care facilities
Short-term
» Establish a model for contracting services, starting with easier services
such as diagnostics or medical waste disposal.
» Include more private sector facilities under the envisaged national
health insurance scheme. HIGH
Medium- to long-term
» Develop financial instruments to incentivize the expansion of private
providers into underserved areas.
Goal 2: Strengthen the quality of health care
Short-term
» Benchmark “quality of care” institutions to global standards to
evaluate gaps in institutions and identify areas for reform.
» Develop and implement a health-care quality plan as recommended by
WHO. HIGH
Medium- to long-term
» Develop and implement mechanisms to provide oversight over the
quality of care starting with patient feedback and accreditation.
Goal 3: Build trust through public-private dialogue
Short-term
» Create platforms, and communication/information exchange
mechanisms.
MEDIUM
Medium- to long-term
» Support capacity building of health-care private sector representative
bodies to engage in constructive dialogue.

58
IT SERVICES
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Goal 1: Improve skills and product quality
Short-term
Improve the quality and » Ministry of IT and Education to initiate IT graduate course revision with
market relevance of skills industry input. HIGH
of IT graduates » Introduce internships within three-year graduate courses with course
credits.
Short-term
» GoN to provide information to help private sector identify potential
Develop and implement a niches in higher value-added IT outsourcing.
niche brand/specialization Medium- to long-term MEDIUM
strategy » GoN to provide financial support for technology upgrading and marketing
in niche areas.
» Align skilling strategy to the needs in niche areas.
Goal 2: Improve access to critical infrastructure
Short-term
Establish new IT parks/
» Upgrade the existing IT park, including greater private sector
hubs and reform the HIGH
existing IT Park involvement in infrastructure, management and service provision;
attracting anchor firms to the IT Park.
Goal 3: Better, less burdensome regulation
Short-term
» Clarify
the distinction between requirements for work visas of different
Easing visa procedure for lengths of stay.
MEDIUM
skilled foreign workers » Simplify the visa processes (set fixed timeframes for application
process and renewals and reduce the number of check points during
visa renewal).
Short-term
Clarify and consolidate
» Assign clear mandates for regulation and support to IT services firms, MEDIUM
mandates across agencies
including e-commerce.
Ease regulations related to Short-term
entry, external funds and tax » Reassess and lower the 300-employee threshold for eligibility for tax MEDIUM
incentive for IT industry break.
Short-term
» Reassess forex control policy and cap on contracts in U.S. dollar-
Ease monetary transactions
denominated accounts for IT exporters; implement an international HIGH
for IT firms
e-payments gateway.
» Expedite implementation of e-payment gateway.
Goal 4: Strengthen digital start-up ecosystem
Short-term
Improve business incubation » Promote grant schemes or angel funds for ICT companies.
MEDIUM
support Medium- to long-term
» Provide financal assistance to incubators and business support providers.

59
EDUCATION
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Goal 1: Grant more autonomy to colleges and other tertiary education institutes
Speed up upgrading of Short-term
course curricula to align » Ministry of Education and University Grants Commission to work with HIGH
them better to evolving the universities to speed up new course accreditation and approval
market needs procedures, set fixed timeframes for application review and approvals.
Introduce a framework Short-term
granting more autonomy to » Ministry of Education and University Grants Commission to work with
HIGH
colleges to raise funding the universities to develop framework for operational autonomy for
and respond to the market colleges (in determining fees, raising staff salaries and batch size).
Short-term
» Ministry of Education and University Grants Commission to work with
Support private colleges in universities to develop a strategy to build managerial and financial
building capacity to exercise management capacity gaps in private institutes. HIGH
autonomy Medium- to long-term
» Introduce in-service training and testing to ensure continuous
improvement of teacher capacity.
Goal 2: Strengthen quality regulation and assessment of colleges and TVET institutes
Short-term
» Build capacity to operationalize the newly mandatory Quality Assurance
and Accreditation (QAA) process for higher education institutes:
• Leadership capacity in QAA Division
Strengthen quality • Robust QAA monitoring system
assessment of colleges and • Revise the QAA criteria based on experience to date and stakeholder MEDIUM
TVET institutes consultations
Medium- to long-term
» Ministry of Education to work with CTVET to develop a quality
assessment and assurance framework for TVET institutes.
Short-term
» Disseminate available administrative information on programs’
Strengthen labor market outcomes regarding completion, employment, and graduate salaries.
information to help
Medium- to long-term MEDIUM
prospective students make
better choices » Ministry of Education to partner with universities and CTVET to
strengthen information systems for collecting programs’ student
outcome data (such as tracer surveys).
Goal 3: Improve ease and transparency of entry regulation
Short-term
» Guidelines for the following procedures/laws to be reviewed, simplified
and made more transparent, with explicit processing times:
• Affiliation of colleges to universities
Make procedures simpler
• Licenses for colleges with foreign affiliation HIGH
and more transparent
• Annual license renewal processes for foreign-affiliated colleges
• Approval of new courses in foreign-affiliated colleges (current cap of two
courses and 15-day annual window to be revised)
• Approval of new TVET courses

60
EDUCATION
OBJECTIVES RECOMMENDATIONS PRIORITY LEVEL
Medium- to long-term
Make procedures simpler
» Introduce systems for performance management and applicant feedback
and more transparent HIGH
(cont.) in approving bodies that increase incentives for speed and transparency
in approvals.
Goal 4: Strengthen industry linkages in TVET
Make government role Medium- to long-term
in TVET sector more MEDIUM
» Government to consolidate TVET programs run by 17 ministries.
coordinated
Short-term
» Ministry of Education and CTVET to work with industry to develop
a framework for sector skills councils (not-for-profit industry bodies
Introduce greater industry to advise GoN on industry demand for skills, help create training MEDIUM
participation curriculum, supply trainers and help with placements).
Medium- to long-term
» Establish sector skills councils.

61
Annexes

ANNEX 1: NEGATIVE LIST OF SECTORS IN WHICH FDI IS PROHIBITED

1 Retail business
2 Travel agency
3 Trekking agency
4 Water rafting
5 Pony trekking
6 Horse riding
7 Cigarettes, bidi (tobacco), alcohol (excluding those exporting more than 90 percent)
8 Internal courier service
9 Atomic energy
10 Tourist lodging
11 Poultry farming
12 Fisheries
13 Beekeeping
14 Consultancy services such as management, accounting, engineering and legal services.
15 Beauty parlor
16 Domestic food processing methods in rent.
17 Local catering
18 Rural tourism

63
ANNEX 2: TRANSACTION-SPECIFIC CONSTRAINTS TO FOREIGN
INVESTMENT IN NEPAL

CONSTRAINT ISSUES/PROBLEMS PROPOSED REMEDY

» NRB does not approve repayment » Grant foreign lenders pari-passu treatment with
Foreign lenders are
of foreign lenders if there are local lenders in priority of investment.
subordinated to local
outstanding unsatisfied debts to
banks in priority of
local banks creating a disincentive to
repayment
foreign lenders
» Interest rate cap reduces » Reevaluate the rationale behind an interest rate
Interest rate cap on attractiveness to foreign lenders. cap.
foreign currency loans » Hedging is a separate transaction, » Hedging cost should be separated from the total
from IFIs is fixed at not part of the loans. interest rate cap.
12-month $ LIBOR + 550 » The credit spread of 550 bps applies » Given the different risk profile and loan tenor
bps. This includes the for all sectors, which may not be requirements of different industry sectors,
hedging cost sufficient to compensate for riskier interest rate caps by sector could be explored.
sectors and longer tenor loans.
Creation of mortgage of » The lengthy process of granting and » Simplificationof granting and perfection of
land in favor of foreign perfection of security interest security interest process. For example, requiring
lenders need cabinet the lenders to dispose the collateral instead of
approval and enforcement repossessing them
of security requires a
court order
Foreign lenders are » The capital allocation remains » Seta short time frame for NRB to grant
required to set aside uncompensated during the time lag approval (10 days). Permit commitment fees to
capital at the time of between the signing of the contract accrue from the date of submission of the loan
signing loan contracts. and disbursement of the loans. documents to NRB but be payable only after
Commitment fees accrue NRB approval.
only after NRB’s approval.
» There are no provisions for the MFI/ » Permit investors to offer to its clients’ risk-
FFI to manage the foreign exchange management products, such as cross currency
and interest rate risks swap under which foreign investors would
provide a hedge that matches and offsets
foreign-exchange liabilities incurred by the client
under a non-NPR denominated borrowing.
» Another risk management product such as
interest rate swap would eliminate the interest
Limited risk management rate risk on Borrowers’ floating rate liabilities
products for the clients especially in light of a rising interest rate cycle
from the U.S. This is also consistent with the
recent regulation which allows domestic financial
institutions to undertake U.S. dollar loans
capped at 3.3 percent. Most of these loans are
floating rate by nature and therefore being able
to offer interest rate hedging solutions would
help these financial institutions to manage their
balance sheet more optimally.

64
CONSTRAINT ISSUES/PROBLEMS PROPOSED REMEDY
» With foreign institutional investors being able to
provide hedging solutions, this would kick-start
Limited risk management
a derivative market onshore which would further
products for the clients
attract US-dollar inflows from outside investors
(cont.)
as they would have an instrument to help them
hedge their currency and interest rate risks.
» Highly volatile and speculative capital » Enable the issuance of quasi-equity instruments
Shallow and market hampering the development such as convertibles, preference shares to
underdeveloped capital of debt market foreign investors. Review stock category, pricing,
markets entry/exit barriers and reduce post IPO lock-in
period for financial investors.
Rules/Regulations/ » Lack of timely and accurate » Publish the relevant directives/information in
Directives by the NRB interpretation of the relevant English.
and other authorities are regulations for foreign investors
available in Nepalese
language only

65
ANNEX 3: THE SECTOR SCAN
The objective of the CPSD Sector Scan is to provide The development impact and feasibility of each
a strategic overview of the main Creating Markets/ sector was assessed combining quantitative and
Maximizing Finance for Development opportunities in qualitative analysis. The quantitative analysis used
Nepal. This Annex presents the detailed results from for potential development impact includes multiplier
this analysis. analysis assessing the direct and indirect impact (in
The CPSD sector scan consists in assessing the terms of growth and jobs) of a sector using a Social
“Potential for Development Impact” and “Feasibility” Accounting Matrix (SAM). The quantitative analysis
of private investments across all sectors of the Nepal used for feasibility includes a benchmarking of the
economy as follows: historical performance of more than 7,000 IFC projects
across the world examining how these projects have
» Potential for Development Impact: How private
performed in countries with a similar investment
investments in the sector could help Nepal address
climate to Nepal (based on investment climate
its main development challenges—GDP growth,
international benchmarks, for example, the World
jobs, resilience and environmental sustainability
Bank Group’s Doing Business and the World Economic
» Feasibility: Given Nepal’s geography, natural Forum Competitiveness indicators.
endowments and capabilities, the availability of
inputs and institutional factors, to what extent can Development Impact Analysis
constraints to the development of these sectors be The Social Accounting Matrix (SAM) multiplier analysis
overcome within a reasonable amount of time (for was used to estimate how an increase in sectoral output
example, five years). will affect the country’s GDP and employment. The
To that end, the Nepal economy was segmented into analysis included both direct and indirect effects, the
the following 14 sectors, differentiating between latter consisting of backward/forward production
“enabling” and “enabled” sectors: linkages, as well as consumption linkages.
Figure A-1 shows the results of the SAM multiplier
ENABLING SECTORS ENABLED SECTORS analysis, with the output impact on the Y-axis and
Transport (port, road/ the employment impact on the X-axis. Note that
Mining (including oil and gas)
trucking, rail, air) these results are based on strong assumptions and
should be taken as approximations. Agriculture
Energy (generation, Agriculture (crops, horticulture,
distribution) livestock, fisheries) and food processing sectors have relatively high
GDP multipliers, as do services sectors such as
Manufacturing (labor intensive, communications, business services and insurance.
Water (irrigation, urban)
capital/skill intensive)
Domestic agricultural products have large indirect
IT Connectivity (mobile, Tourism (ecotourism, cultural, effects in Nepal due to their importance in the
broadband) MICE) consumption of the rural population. Such effects are
Finance (and other IT Services (BPO, software, also large for non-tradable services sectors, such as
professional services) data processing) business services, insurance, and communications.
Education (primary, Construction (industrial, Some food-processing sectors also have strong
secondary, tertiary/TVET) commercial, housing) backward linkages with agriculture sectors (with
low penetration of imports). Heavy or high-tech
Health (primary, Retail (and other personal
industries such as chemical, rubber, plastics, electronic
secondary, pharma) services)
equipment and machinery have low multipliers because
of their reliance on imported inputs (weak backward
linkages) and high capital intensity.

66
FIGURE A-1 Results of the SAM jobs and GDP multiplier analysis for Nepal
Source: World Bank Staff Calculations using WDI data

The SAM multiplier analysis was complemented by The statistical benchmarking exercise uses data on the
other estimates of how a sector’s expansion historical performance of more than 7,000 IFC projects
will affect competitiveness, resilience and stability, such across the world, and on the Trade and Competitiveness
as an analysis of export performance and complexity 360 database of cross-cutting constraints. According
data. The SAM analysis was also complemented by to this analysis, labor, energy and transport are major
the Nepal CPSD team’s subjective assessment of each cross-cutting constraints, largely due to issues with
sector’s potential development impact in terms of labor relations, electricity supply and connective
employment, GDP, competitiveness, resilience and infrastructure. Firms’ capabilities are also an issue,
environmental sustainability. The subjective assessment, limiting the feasibility of sophisticated sectors in the
based on a literature review and stakeholder meetings, medium run. Regulatory barriers, rule-of-law, market
is particularly important in Nepal’s case because SAM contestability and macro stability are generally medium-
estimates are not available for key service sectors such level constraints, but with serious issues concerning land
as education, health and tourism. regulation, market dominance and political stability. A
The final development impact score is a weighted average caveat is that these indicators might not have captured all
of scores on the various dimensions. The team assigned the relevant dimensions of regulatory barriers in Nepal.
relatively high weight to employment and competitiveness The results of the statistical benchmarking (Figure A-2)
impacts since jobs is a priority for Nepal. show the relative severity of these constraints does not
vary much by sector. This does not necessarily mean
Feasibility analysis that there are no important sector-specific issues, and
The sector feasibility analysis was based on statistical the results could also be due to data limitations. Hence,
benchmarking and on subjective scoring that relied informed subjective assessment based on sector deep
on a literature review and stakeholder consultations. dives was critical in the final feasibility assessment.

67
FIGURE A-2 Results from the quantitative feasibility analysis
Source: World Bank Staff Calculations using WDI data

Summary of scoring results

4

Development impact (potential development impact)

Education Services
ICT

Health Care Food & Beverages

Light Manufacturing Electric Power Tourism
Oil, Gas and Mining Finance & Insurance
Primary Metals
3
Industrial and Professional, Scientific and Technical Services
Consumer Products
Agriculture
Pulp & Paper Chemicals Construction and Real Estate
Other manufacturing Water & Sanitation
Nonmetallic Mineral Transportation
Product Manufacturing
Wholesale and Retail Trade

2
2 3 4
Feasibility (current and after 5 years of reform conditions)

FIGURE A-3 Results from the quantitative feasibility analysis

Source: World Bank Staff Calculations using WDI data

The results from the development impact and feasibility The next section of this Annex presents a one-page
analysis, including the qualitative analysis based on in- summary for each of the 14 sectors along which we
depth interviews of experts and firms are summarized segmented the Nepal economy.
in Figure A-3.

68
SUMMARY OF THE SECTOR SCAN
Results for each of the 14 sectors along which the Nepal economy was segmented

1. TRANSPORT (from the InfraSAP)

Sector Background and Current Performance Asian peers. The country has 13,000 kilometers of
The share of Nepalese firms identifying transportation roads, of which 53 percent are black topped and 30
as a major constraint for business is one of the highest percent earthen; and 40 percent are national highways,
among Asian comparators. The country faces major while the remaining 60 percent are mostly feeder roads.
connectivity issues with respect to roads and airports. Recent survey based on the International Roughness
Nepal ranks 124 out of 160 countries on the 2016 Index (IRI), found 77 percent of the national highways
Logistics Performance Index (LPI). Nepal’s investment and 82 percent of the feeder roads to be in bad or poor
gap in transport infrastructure is over $1 billion per condition. Roads that carry commercial vehicles have
year until 2025, especially in roads, which will require capacity constraints including inadequate road width
$6.5 billion between 2016 and 2020. (many of the roads have intermediate lanes), narrow
road curvatures and high gradients. In addition, Nepal’s
ROADS urban transport system suffers from inefficiencies and an
uncoordinated public transport network.
The Strategic Road Network (SRN) is the largest
component of the road system; it includes national The cost of transport of goods is high due to long road
highways and feeder roads and a few urban roads alignment with higher gradients, long journey time and
of national importance. The Local Road Network high fuel consumption. For instance, the cost and time
(LRN) comprises of urban and local roads, including related to transport/logistics is an issue highlighted
agricultural roads within the districts, urban and rural by many stakeholders in the agribusiness value chain.
municipalities. On average 10 percent of the SRN roads Highly dispersed production locations, and poor
carry as much as 90 percent of SRN traffic. road quality, create high access-to-market costs and
increased levels of post-harvest losses. Poor transport
The Ministry of Physical Infrastructure and Transport
infrastructure also makes the cost of transacting
(MOPIT) is the apex body in charge of managing
among regional, central, and border markets is very
the full transport sector except airports. However,
high. This causes farm-gate prices to be low and highly
the Department of Roads (DoR) is responsible for
volatile. These costs undermine the competitiveness of
construction, maintenance, and management of the
agricultural products.
SRN. The Ministry of Finance (MOF) collects fuel
levy, vehicle registration charges and allocates funding
to the Department of Roads. This ministry is also in AIRPORTS
charge of donor coordination. The Roads Board Nepal Nepal’s 2015 constitution places national transport
(RBN) handles maintenance funding. It procures toll policy, civil aviation and international airports under
operators and collect toll revenues. Currently, the the federal government’s responsibility. The Ministry
source of funding and financing is largely from annual of Culture, Tourism and Civil Aviation (MCTCA)
budget allocation (government revenue), and grants is responsible for planning and monitoring of air
and loans from development partners. An alternative transport-related infrastructure and services.
funding source has been created in the form of “Road At present, the Civil Aviation Authority of Nepal
Maintenance Fund” using a small fuel surcharge. (CANN) regulates, owns, manages and operates all
Nepal has a low road density compared with South airports in the country, for infrastructure and services.

69
Currently, 25 international airlines fly into Nepal and safety concerns negatively impact Nepal’s airport
and two Nepali airlines fly internationally, while 19 infrastructure.
domestic carriers offer flights in the country.
International arrivals already exceed the official ROADS
capacity of Nepal’s only international airport (TIA) Institutional capacity—For the Strategic Road
in Kathmandu and air routes to enter the country Network, government agencies in procurement
are limited for long-haul markets. Airports require management, construction supervision, and contract
additional investments, including the expansion of management suffer from weak institutional capacity.
Kathmandu Airport and the development of two Public budget allocations are not being executed due to
international airports in Pokhara and Bhairahawa. weakness in public procurement, slow decision making
Domestic airlines have a poor safety record with and contract management and monitoring processes.
international organizations, such as the EU and ICAO, The DoR particularly lacks sufficient, qualified
associating high safety risks with TIA and the Nepali personnel for construction supervision and contract
airlines. (Source: https://www.caanepal.org.np/en/ management and enforcement, which in turn results in
aviation-safety-report/.) delays in project completion.
As a result of poor air and land connectivity, in hill Financial capacity—The sector has suffered from
and mountains areas in particular, many potential under-investment due to budgetary constraints and
destinations are out of reach and the attractiveness procurement delays, creating a high investment
of key tourist destinations is reduced. Nepal received backlog. The MOF does not always transfer all
940,000 visitors in 2017, rebounding from a low of the maintenance funds RBN is entitled to, and the
540,000 in 2015 after the earthquake. (Note: Figures budget provided by RBN for maintenance is low and
are from the government of Nepal, Nepal Tourism insufficient. According to RBN, on average only about
Statistics 2016, Ministry of Culture, Tourism and Civil 36 percent of the total requirement was available for
Aviation. These statistics are mainly based on visas for SRN maintenance, leaving a funding gap of about by
tourists arriving by air, and therefore do not include 64 percent. The key road agencies, DoR and RBN,
Indian visitors arriving by land, who may account for lack the institutional and financial capacity to access
a considerable share of visitors.) commercial sources of financing. At present, funding
made available through the government budget
Development Impact (including about 40 percent of development partner
High. Road connectivity is critical for agribusiness financing) is not being fully utilized due to weak
and air connectivity critical for tourism. As Nepal is institutional capacity.
a landlocked country with weak road infrastructure, Local stakeholders’ capacity—Capacity for managing
business and leisure travelers must get there by air. To projects with private participation in Nepal is low
travel within the country, the safety record of airports across stakeholder groups, beyond government agencies
and of domestic airlines are important considerations such as domestic consulting firms, civil contractors, and
for tourists. academic institutions. Local contractors do not have the
financial and management capacity to undertake larger
Feasibility and Main Issues projects and investments. Although there are more than
Medium. Requires careful prioritization (Connectivity 13,000 registered civil works contractors currently
Masterplan) and private sector leverage (PPPs). in Nepal, there are very few contractors with annual
Feasibility is currently hampered by low institutional turnover higher than NPR 1 billion ($10 million).
capacity of government agencies within the strategic International companies provide the necessary financial
road network including a low maintenance budget and experience related documents to local companies
and poor planning and prioritization of investments. for contract bidding purposes only and leave the
Private sector capacity is also low. Investment delays implementation responsibility to the local partner. As

70
a result, delays in project completion and poor-quality maintain a credible financing plans for these activities.
construction are common and these are mainly due to To enable tourism, the government should, prepare
inefficient management and low financial capacity. provincial connectivity master plans for key
destinations in the short term. In the medium term:
AIRPORT
• Build and maintain national/local roads facilitating
Regulation—The development of the sector is access to core assets of priority destinations and
constrained by lack of an independent regulator, the improve safety and rescue capacity.
need to upgrade regulations and an unpredictable
• Enhance online payment capacity at destination level.
regulatory environment, especially regarding civil
aviation policies. The transition process in Nepal’s • Encourage the private sector to develop and operate
airport sector is expected to initiate with the enactment facilities for transport such as bus stops and
of a draft Integrated Civil Aviation Bill. It proposes terminals, taxi stands, and rest stops.
splitting CAAN into a regulator and a separate service
provider entity for airport and air navigation services. AIRPORTS
The Bill is being placed for Cabinet’s in-principle
The government should articulate a clear and
approval, after which a draft will be prepared by the
comprehensive strategy to expand and improve the
MCTCA to be tabled in the Parliament. At this stage,
country’s airport infrastructure including financing
absence of clarity on policy and legal issues will impede
plans. It includes:
any commercial investors to finance projects.
• Defining regulatory goals and specific actions
Financial capacity—CAAN’s weak financial capacity
related to regulation, safety, structural reforms, and
limits its ability to access commercial borrowing to
management. In the short term, the government could
make new investments in airports. CAAN is being
update aviation policies and regulations covering
supported by various development partners and foreign
airspace, safety, airlines, airport services, air services
governments to provide financing for TIA expansion and
tariffs, and taxes (for example, adoption of draft Civil
the development of two other airports. However, the
Aviation Bill, review of tax on plane leasing).
proposed modernization of TIA has had setbacks due to
contractor’s poor performance and construction delays. • Preparing a medium-term development plan for all
major and regional airports. In the short term, the
Conclusion and Possible Solutions government should upgrade the reliability, safety, and
efficiency of the airport system, including: improving
Most Critical—Covered in the InfraSAP. Transport
operational management at TIA, accelerating
is a highly desirable sector and can help promote
construction of Gautam Buddha and Pokhara
growth if existing constraints are removed. The
International airports and assessing the need for
InfraSAP recommends improving funding practices and
Nijgadh Second International Airport and reopening
raising governance capacity of Nepal’s transport sector
or upgrading local domestic airports.
generally. It also lays out a roadmap to strengthen the
road network, airports, and urban transport. • Establishing a credible financing plan: a thorough
analysis of revenue potential and financing needs of
the sector required to tie up needed financing.
ROADS
The sector can also be supported by adopting
The government should strengthen the RBN and increase
incentives for high performance in road maintenance international management practices with private sector
contracts. Further strengthening of the sector can come participation, such as:
from identifying a network of strategic roads for increased • Introducing international airport management
maintenance and expansion, executed through PPPs expertise into managing its airports in a safe,
or performance-based contracts. It will be crucial to efficient and profitable manner.

71
• Creating a joint task force of CAAN, MCTCA, IBN, individual areas of operation.
and MOF to spearhead key airports management • Strengthening CAAN and its successor entities, by
contracts program. There is indeed high potential developing medium term corporate plans to enhance
for full-scale private management of the entire technical performance, safety, passenger experience
airport operations besides exploring PPP options for and their specific revenue earning potential.

2. ENERGY (FROM THE INFRASAP)

Sector Background and Current Performance increase in consumption. Nepal’s per capita electricity
The Nepal Electricity Authority (NEA) runs and consumption at 139 kWh is well below the South Asia
manages public generation plants, the transmission average of 550 kilowatt hours, and a twentieth of the
grid and a large part of the distribution network, global average at 3200 kilowatts. Around 84 percent
as well as rural electrification schemes. Previous of consumption is residential (of which 75 percent is
liberalization efforts attracted private investment in biogas and biomass from dung and waste).
generation, however it remains limited in both the Around 69 percent of Nepalese firms identified
transmission and distribution segments. The sector is electricity as a major constraint, much higher than
currently undergoing restructuring (per Action Plan of in the region (46 percent) and globally (32 percent).
2016, National Electricity Regulatory Commission Act of Only one-third of electricity connections are on-grid.
2017). NEA is in the process of being unbundled—from a Nepal’s challenge is to expand generation capacity to
vertically integrated utility into state owned companies meet the increasing electricity demand and to reduce
for generation, transmission, and distribution. the outage frequency.
NEA is the sole owner and operator of the
transmission grid and is responsible for construction GENERATION
and maintenance of high voltage lines and
Installed generation capacity is mostly from run of the
substations. NEA also has a monopoly over power
river hydropower; there are over 80 independent power
distribution across Nepal which includes all planning,
producers (IPPs) that sell output to the NEA. Annual
construction and operational tasks involving
generation from hydropower is about 3,635 GWh, or
substations below 33 kilowatts and all connections,
73 percent of total supply (27 percent or 1370 gigawatt
metering, billing and revenue collection functions. In
hours is imported from India), of which 35 percent
2016 NEA had 2.97 million customers who purchased
is from independent power producers or IPP and 65
3746 gigawatts of power, of which 94.2 percent were
percent is sourced from NEA-owned power stations.
residential customers. Industrial and commercial
customers comprised only 2.1 percent of the customer Nepal attracted private investments in hydropower
base but contributed to 40 percent of the electricity and installed generation capacity has grown in recent
while the residential customers made up 48.4 percent years, yet Nepal is still unable to meet its energy needs
of all electricity sales. and experiences seasonal shortages. The country has
only added approximately 30 megawatts annually
Nepal’s energy sector operates very much under
since 2002. Investment needs remain large (each year
potential and is less developed than comparator
around triple the total investments between 2010 and
countries. In Nepal, 76 percent of the population
has access to electricity (72 percent in rural areas),
2015) and untapped potential is especially large in
compared with 94 percent in Pakistan, 89 percent hydropower (c.f. Bhutan).
in Sri Lanka and 79 percent in India. Access has Parts of Nepal experienced cuts lasting up to 17 hours a
improved, although it has not led to a corresponding day in 2016–2017. Supply of electricity has consistently

72
fallen short of the peak demand and the country needs due to gaps in the transmission grid. This leads
to import power from India. Nepal’s imports of oil, to waste/unutilized capacity in generation and is
oil products, coal and electricity from India has grown postponing power trade with India, major potential
from 312 kilograms of oil equivalent (ktoe) in 1990, export candidate, with which connectivity is limited to
or 5.4 percent of supply, to 2,069 ktoe in 2014, or 17.7 about 150 megawatts.
percent of supply. The key constraint on the import
of petroleum is the distance of about 900 kilometers DISTRIBUTION
from the Nepal border to the nearest seaport, Kolkata,
Substandard, damaged and unreliable distribution
on the east coast of India. Nepal has only one storage
networks cause technical losses and compromise power
project, the rest of the generation stations operate on
supply to the end user.
a run of river basis. Installed capacity is expected to
double by 2020 through NEA subsidiaries and new Transmission and distribution losses affect the financial
IPPs. However, shortages are expected to continue in sustainability of the sector along with Electricity Tariff
the dry season (winter months) until storage projects Fixation Commission (ETFC)’s tariffs setting. The NEA
come online. sets the prices for purchase of power from IPPs as off-
taker and ETFC sets tariffs to be paid by the end user.
Although the GoN has begun to liberalize generation,
From 2012 to 2016 NEA suffered severe financial losses
much of it remains based on run of the river hydro
from which it has not recovered yet, as ETFC set end-
projects leading to shortages during the dry season,
user tariffs that did not reflect costs. The gap between the
due to lack of storage. The transmission grid remains
cost of service and the average price of electricity realized
obsolete and much of the additional power being
by NEA has narrowed (currently at −0.76 NPR/kWh).
generated cannot be evacuated due to the absence of an
adequate transmission grid. In addition, inadequacy in In 2017, average price of electricity was at 9.85 NPR
interconnections with India limit the potential for export. per kilowatt hours. In 1998, ADB advised ETFC to
raise consumer tariffs from NPR 4.98 to 7.33 per
Regarding environmental sustainability, Nepal has
kilowatt hour. In 2001, ETFC raised tariffs by only 22
significant unused hydropower, solar and wind energy
percent; increases were stalled for over a decade. Tariffs
potential. It has economically feasible hydropower
were raised again in 2012 and were frozen for four
potential of 42,000 megawatts. Currently around 23
years until 2016.
megawatts of generation comes from micro-hydro
schemes, 12 megawatts from solar PV, and less than 20
Development Impact
kilowatts from wind, compared with 2,100 megawatts
and 3,000 megawatts of commercially viable solar and Very High. It has high development impact because it
wind potential, respectively. is the sector with the highest growth potential (through
exports to India). Competitive hydropower could fuel
the competitiveness of energy intensive manufacturing
TRANSMISSION
(for example, cement and steel). If properly harnessed,
Nepal also compares unfavorably with other countries it could replace remittances as Nepal’s main engine
in the region on transmission and distribution losses of growth, generating the resources that could drive
in the power sector. Transmission line losses (technical a much-faster pace of urbanization and fuel the
losses due to low voltage lines) reached 5 percent in construction and retail sectors—both sectors that have
2017 and were significantly higher than the acceptable significant employment potential.
standard of 2 to 3 percent.
Nepal is lacking transmission grid for effective and Feasibility and Main Issues
efficient evacuation. Newly commissioned power High. It has a high feasibility score given Nepal’s
cannot be evacuated and there have been significant natural endowments for hydropower, although
delays in connecting generation plants to load centers development of the sector faces institutional

73
constraints. As detailed in the InfraSAP, harnessing acquisition, forest clearing, cost of connective
resources from the hydropower sector will require infra (access roads and grid interconnection), and
streamlining of administrative procedures, so that resettlement, create high risk perception for private
viable opportunities can be approved more speedily, investment. Unclear and constantly expanding investor
and improvements in Public Financial Management obligations to satisfy local communities’ expectations
to ensure that revenue and expenditure are being and concerns, makes financial planning difficult.
managed transparently. Ongoing restructuring of the
Regulation—Cross cutting legal and regulatory
National Electricity Authority will likely support the
inconsistencies between various strategies, policies,
sector. Besides administrative bottlenecks, feasibility
laws and regulations across sectors and thematic areas
of this sector is also hampered by inefficiency and a
for example, tax benefits to FDI often not recognized
lack of cross-border energy trade and investment.
for hydropower investors. Lack of harmony in the
Nepal’s main issue in the sector is the mismatch between provisions for permitting, licensing and negotiating
generation, transmission and distribution capacities. procedures governing investments in generation:
The lag between enhanced generation capabilities various pieces of guidance and requirements do not
and the need to upgrade regulations transmission often harmonize, and developers—both domestic and
and distribution leads to waste and supply shortages. FDI—often choose not to engage, or pull out after
Administrative bottlenecks limit private investment and spending resources in scoping needs.
create a high-risk perception for the sector. Risk allocation and process—There is lack of optimal
Lack of expansion/investment plan—Nepal does not allocation of risk between the government and the
yet have a formal comprehensive generation expansion private party in the IPP process coupled with a lack of
plan while investment needs remain large in order to certainty regarding the conclusion of the process. The
provide for reliable and balanced generation to manage Project Development Agreement (PDA) shifts the risks
the fluctuations between dry and wet seasons. Nepal and responsibilities for exploration, due diligence and
also needs to facilitate cross-border trade to realize its stakeholder management to the investor without any
full hydro-electric generation potential and manage guarantee of a PPA at the end of that process. There
peak demand via imports. For transmission, the are protracted negotiations, cumbersome approval
country needs to (a) increase high voltage transmission processes and a lack of guidance regarding dispute
lines to connect power generation corridors to demand resolution.
centers, to modernize distribution assets; (b) modernize
Public Finance Management—Tariffs are not cost
aging distribution assets; (c) improve operational and
reflective exposing the government to losses. The
financial performance of the distribution system and its
ETFC has not increased retail tariffs proportionately
related entities.
to the rising cost of power due to political and civil
Limited development of the financial sector—While unrest and to absence of an automatic tariff adjustment
the credit market has grown steadily, it is still not mechanism, leading to significant gaps in covering costs.
conducive to large infrastructure investments with long
tenors. In 2016, six hydropower companies covered 9 Conclusion and Possible Solutions
percent of the total market capitalization. Nepal’s bond Most Critical—Covered in the InfraSAP. With high
market is not mature and there is no secondary market. development impact and feasibility, the energy sector
Access to finance has been an issue in the hydropower will likely support overall economic development and
sector despite government efforts to provide incentives growth in other key enabling and enabled sectors. The
for private investment sector is undergoing restructuring (per Action Plan of
Investors’ obligation—High concerns related to 2016, National Electricity Regulatory Commission Act of
complex project development and a wide range 2017). The institutional framework is marked by many
of investor obligations which include survey, land actors, new and existing, with various functions and

74
licensing processes for investment. For distribution, • Nepal can supplement hydropower with energy
NEA’s functions are likely to be decentralized with the alternatives, such as solar.
establishment of seven provincial entities. In addition,
• As investments increase, it is necessary to
the creation of the NERC is expected to pave the way
strengthen the capacity of the NEA and its
for an independent tariff review mechanism, but it
subsidiaries.
may take time to implement. The rapid evolution of
the institutional framework has created some overlap • More investment is needed in the transmission and
amongst actors and processes. Supporting new entities distribution segments. The InfraSAP recommends
and providing capacity is key. establishing a shorter-term (five-year) plan,
encourage private participation by developing a
The InfraSAP provides a roadmap for developing
Nepal’s energy sector: coherent operational and investment framework,
prioritize funding from the MCC, ADB, and other
• Given the large untapped potential, hydropower will
development partners, and develop its grid code.
be critical in increasing Nepal’s energy capacity. To
support investment needs, Nepal should improve • Nepal can attract more private investment by
coordination among donor agencies (taskforce), strengthening the currently inconsistent confidence
explore new financial products, engage with of regional investors through reform of IPPs and
cross-border investors in the region, and consider a uniform policy for foreign investments, and by
a Hydropower Commons to build a supporting standardizing and improving the processes for PPPs,
environment for hydropower expansion. licenses and permits, and PDA.

3. WATER (from the InfraSAP)

Sector Background and Current Performance planning, financial management, procurement,

regulatory framework for borrowing, municipal PPPs,
Lack of irrigation facilities and water supply. Quantity
and other incentives can help improve feasibility of the
and quality of drinking water in urban areas suffers
water sector in Nepal.
under rapidly growing population.

Conclusion and Possible Solutions

Development Impact
Important—Covered in the InfraSAP. As outlined
High. Effective water service delivery plays an
in the InfraSAP, a key priority should be improving
important role on building human capital and
capacity of local government by transferring functions
reaching middle-income status by 2030.
and staff, adjusting tax regulations, and clarifying
procedures for fiscal transfers. This will cover
Feasibility and Main Issues
many aspects and will include raising the credit-
Medium. Need to reform regulatory framework worthiness of local government and providing more
toward promoting PPPs. Local government faces legal clarity and consistency on their responsibilities.
challenges in revenue collection, which affect its ability Capacity increases need to include managerial
to fund urban development including water projects. performance, institutional frameworks for planning,
Municipalities such as Kathmandu, Pokhara, Damak, procurement, and execution. Financial performance
and Lahan cannot meet service delivery needs due can be improved through a framework for local and
to investment gaps. Local government, the private municipal government borrowing, monitoring local
sector, and banks lack the required capacity. Improved government debt, and credit ratings.

75
4. IT CONNECTIVITY

Sector Background and Current Performance quality IT parks have also constrained the IT services
Low penetration, poor quality and high cost. sector. First, IT service firms are restricted to locations
around Kathmandu, the only area with adequate
Telecommunication services have improved in recent
infrastructure. Second, the extremely low penetration
years, but there are still major gaps in coverage which
rate of broadband, and the mediocre quality and cost of
is concentrated in the Kathmandu Valley with large
mobile internet, limit domestic demand for IT services.
regional and rural-urban disparities.
Mobile internet market is still at an early stage of Feasibility and Main Issues
development, with outdated technology. While 3G
Medium. Broadband policy reform needed to increase
coverage of the population (90 percent) is above the
competition and coverage. Ineffective regulations
regional average (78.8 percent), penetration of mobile
and supportive policies make it difficult to conduct
broadband remains limited in Nepal (15 percent)
business. There is no sound policy framework for
compared with the region (27.9 percent). Poor quality
private investors. Overlapping and unclear mandates
is limiting the uptake of broadband services, with
across key ministries (ministries of ICT and Science
Nepal scoring 34.3 out of 100 on mobile network
and Technology) have impeded policy coordination.
performance compared with 37.3 on average in the
Entry barriers related to competition, bandwidth
region. Mobile broadband affordability is also limited
availability and upfront investments remain.
compared with regional peers.
Fixed broadband penetration is also limited with 0.8 Conclusion and Possible Solutions
percent of the population subscribing to the services in
Critical—Discussed as part of the IT Services
Nepal compared with 4.0 percent in East Asia and Pacific.
Deep Dive. A reform plan should be developed to
Nepal’s weak IT infrastructure has contributed to the improve the efficiency of digital infrastructure and
low-quality IT parks and constrained development of encourage investment in it. This should address
the IT services sector. business entry and competition, bandwidth
availability, passive infrastructure sharing, and
Development Impact incentives for the private sector to make the
High. Nepal’s weak IT infrastructure and the lack of investments and share infrastructure.

5. FINANCE

Sector Background and Current Performance Nepal’s financial sector comprises 241 banks and non-
bank financial institutions with 30 commercial banks
Fragmented banking system dominated by the State.
which represent 82 percent of the credit market.
High underlying risks due to pervasive evergreening of
Commercial banks’ largest share of lending is for non-
loans, vulnerability to external shocks, limited access to infrastructure sectors such as wholesale and retail (23
finance for SMEs—40 percent of firms access to finance percent) followed by manufacturing. Commercial bank
to be a major constraint. Underdeveloped payment investment in construction, electricity, gas, water and
infrastructure. Difficult access to foreign exchange. transportation is roughly 15 percent.
Nearly 40 percent of Nepalese firms identify access to Nepal’s capital market is relatively small. In 2016, six
finance as a major constraint. hydropower companies covered 9 percent of the total

76
market capitalization. Nepal’s bond market is not small and medium-sized firms. Collateral demands on
mature and there is no secondary market. Access to firms also tend to be inordinately high.
finance has been an issue in the hydropower sector
despite government efforts to provide incentives for Conclusion and Possible Solutions
private investment
Need to develop specific action plan to improve access
to finance—key measures to be supported by the new
Development Impact
Finance and Competitiveness DPO. Key measures
High. Key to promote growth of enterprises— would include reducing the role of the state in banks,
especially SMEs. improving supervision, removing the spread cap on
domestic interest rates and on foreign currency loans,
Feasibility and Main Issues improving collateral markets and registries to reduce
Medium. Reforms are known but difficult due to collateral demands (up to 400 percent of loan value),
vested interests. implementing the 2006 Secured Transactions Act, as
Long-term credit is still constrained by limited well as developing and promoting the Credit Bureau
financial products and the shallowness of the capital in Partnership with the private sector. Develop robust
market. A key shortcoming is the absence of an legal framework to develop the payment system
effective credit information infrastructure that leads leveraging new technologies—e-payment gateway
to an over-reliance on immovable assets, especially and digital financial services (see recommendations
land and buildings, as collateral. Inequalities in access from the 2014 FSAP). Simplify procedures for accessing
to land translate into inequalities in access to finance. forex—for example, increase cap on the size of U.S.
In addition, there is no framework for the use of dollar-denominated contracts. Develop a legal
movable assets as collateral, which especially hurts framework for private equity and venture capital.

6. EDUCATION

Sector Background and Current Performance workers in the IT services sector.

The number of private education providers and

Feasibility and Main Issues
education technology firms is growing in Nepal, as is
share of enrolment in private schools (for example, Medium-High. It has medium-high feasibility due to
from 8 percent in 2005 to 16 percent in 2014 at lower the potential for increased private sector involvement,
secondary level). Over half of colleges (national particularly in technical and vocational education to
higher education) are private and these account for meet the growing demand. The large youth population
would prefer to study in Nepal (rather than India) if
the majority of enrolment in technical fields such as
there were easier access to quality, market-relevant
engineering. Technical and vocational training centers
education. There is already significant private sector
are predominantly small private providers.
participation in education, but there are issues of
quality and scale that could be related to land and
Development Impact
regulatory constraints. Easing guidelines from affiliated
High. The development impact of education is very universities and providing more flexibility can help
high, as the youth population could be employed more raise the profitability and competitiveness of private
productively within Nepal if they have the right set of institutes in the tertiary sector. Regulatory reforms
technical and soft skills. Improvements in education to private education are most feasible in the short to
can also help meet the demand for highly skilled medium term for tertiary and technical education.

77
Conclusion and Possible Solutions Private participation is feasible at the tertiary and
technical levels, especially after the removal of
Critical—Selected for Sector Deep Dive.
remaining constraints. This includes increasing
Strengthening Nepal’s education sector is critical
autonomy under clearer quality control, more
to improving employment outcomes and can help strategic and efficient government efforts to improve
support other key industries such as ICT services. capacity, and increased linkages to industry.

7. HEALTH

Sector Background and Current Performance The quality of private providers fluctuates, due to
Nepal’s health system is composed of a mix of a lack of effective regulation. At the same time, the
current policy landscape supports partnerships with
public and private providers. In 2015, Nepal’s new
the private sector in health care. The largest segments
constitution created a new structure where health
are solo practitioners, then pharmacies and hospitals.
services are provided at three levels: national, under
As a result, commercial clinics and hospitals have
the command of the National MoH; provincial, led by
become an important source of health care in Nepal,
seven Provincial Ministries of Health; and subnational
particularly as there are few barriers to entry. Many
governments. Primary health care, which covers
hospitals, diagnostic clinics, and pharmaceutical
essential and basic health services, is provided
manufacturers are developing PPPs with foreign firms,
mostly by MoH (90 percent). Both public and private
raising to the level of quality that meets international
providers deliver secondary, or out-patient referral,
standards. The MoH recognizes the benefits of
health care but the public/private mix is unknown.
contracting with private health service providers (for
Tertiary health care is highly specialized medical care
example, better quality, greater capacity, lower costs/
and mostly provided by the private sector through
higher volumes) and private providers express interest
hospital (in-patient) services.
in working with the MoH in the areas of specialty
Growth in private health-care provision was rapid in services and diagnostics.
the past decade (averaging nearly 12 percent annually
While for equity considerations public health
between 2004 and 2014) and is expected to continue. insurance should remain the primary option, there
In 2011, out-of-pocket expenditures (largely flowing to is an opportunity for private health insurers. Health
the private sector) totaled $570 million, of which 45 insurance firms have only penetrated 1 percent of the
percent was spent on drugs and 27 percent on hospital market. There are 17 licensed private health insurers
services (curative care). in Nepal. All of them offer similar benefit packages
Local companies are already investing in technology, covering major medical expenses (hospitalization),
human resources and other capacity improvements. diagnostics, and drugs, but exclude preventative care.
There has been strong growth in the for-profit health There are 20 contracted service providers/hospitals
sector, with about 3,000 commercial health-care that dominate the private insurance market, and many
enterprises concentrated in diagnostic and laboratory have arrangements with Indian and international
enters (70 percent), clinics and hospitals (26 percent), hospitals. Principal clients are global and large Nepalese
and pharmaceutical companies (4 percent). The firms (banks, manufacturers, telecoms) offering
number of private hospitals has grown from 69 in coverage to their employees. Yet the high-income and
1995 to 350 in 2013 while the MoH opened only 19 new corporate segments have not yet been fully exploited.
hospitals during the same period. Other areas of the Over the past 10 years, Nepal has accelerated progress
sector, such as private medical colleges (PMCs), have in several health indicators and has performed well
experienced similar growth. in achieving the Millennium Development Goals for

78
health. Between 2004 and 2015, life expectancy at workforce) in inducing job creation and growth,
birth increased from 66.2 and 63.7 years to 71.1 and 68.2 although not to the same extent as education. It is
years for females and males, respectively. The maternal also very important to the competitiveness of the
mortality ratio (MMR) decreased from 444 to 258 Tourism sector as international tourists expect to be
deaths per 100,000 live births, and the infant mortality able to rely on high quality of local health-care services
ratio (IMR) and under-5 mortality ratio (<5MR) also if needed. Private sector participation is especially
declined significantly (48.7 to 29.4, and 63.5 to 35.8, important under the uncertainty of public funding to
respectively). Given the current trends, Nepal should the health-care sector in the transition to federalism
meet the Sustainable Development Goal targets for in Nepal. Nepal’s high levels of premature deaths
IMR and <5MR, although it will be very challenging for underscore the importance of increasing access to high
it to reach the MMR target of 70 deaths per 100,000 quality and affordable health-care services.
births. Other important challenges to Nepal’s health
advancements persist. For instance, incidence of non- Feasibility and Main Issues
communicable diseases has grown, accounting for 42 Medium-High. It has medium-high feasibility, slightly
percent of all deaths. Health inequity is high: only 62 lower than education. While input and regulatory
percent of Nepalese households have access to health issues bind both sectors to the same degree, there
facilities within 30 minutes, and there are significant may be less demand for specialized health care
differences between urban (86 percent) and rural (59 owing to the nearness of India as a medical tourism
percent) access. The Nepal Health Sector Strategy destination. There are few regulatory barriers to
(NHSS) 2015–20 is committed to guarantee access to entry, though reform can help better reflect more
basic health services as a fundamental right and to recent international best practices for health
achieve universal health coverage (UHC) by providing system governance. These reforms should include
free services to all. standardization and quality improvement of training
Health financing as a percentage of GDP and health for health-care staff. The government currently
expenditure per capita are not performing well in competes with the private sector. Public-private
recent years. After an increase from 5.8 percent to partnerships and other government incentives can
6.7 percent of GDP between 2004 and 2011, the total help encourage entry of private providers, especially in
health expenditure (THE) returned to 5.8 percent of rural locations.
GDP in 2014. THE per capita, which rose from $83 to Regulation and accreditation—Private health
$137 between 2004 and 2011, declined in the following providers are governed by cumbersome regulations
years and increased again in 2014, reaching $137—the in need of updating that are administered by several
same value of four years ago. Nepal’s THE per capita is agencies, which compromise quality of care oversight.
lower than India, Afghanistan and Bhutan but bigger Health regulations are 25 years old and do not reflect
than Pakistan and Bangladesh. Public health spending international best practices for governing mixed health
as a share of government health spending is the systems. MoH has not invested in physical/clinical
second highest among all six countries in the region standards, accreditation, dissemination of quality
(11.2 percent). norms, or protocols, nor does it have an adequate legal
Many Nepalis continue to travel to other countries in framework and institutional structure to supervise,
the region for treatment. In addition, although there is monitor, or regulate private health-care providers.
a voluntary health insurance scheme, it covers only a Regulatory Capacity—The Ministry of Health and
small share of the population. Population lacks sufficiently trained staff and modern,
standardized systems that reflect best practices for
Development Impact regulating the private sector. The private sector
High. The sector has high development impact is valued largely for the better quality it provides.
owing to the importance of human capital (a healthy However, the lack of effective regulation has led to a

79
proliferation of health enterprises ranging from world- Conclusion and Possible Solutions
class facilities to others plagued by poor quality and Critical—Selected for Sector Deep Dive. Health
lack of proper quality assurance of drugs procured. care is a critical enabling sector with potential to
The low quality of care also reduces the scope for the improve human capital and support growth in other
public sector to contract to the private sector, since sectors. There is space for increased private sector
quality assurance is required before contracting or participation.
incorporating private providers into social health
Attracting appropriate private sector investment
insurance schemes.
will require an improved regulatory environment,
Governance and PPPs—Private players want to wider social insurance coverage, increased public
join their non-profit peers in working with the sector engagement with the private sector, and
health ministry in the areas of specialty services and market creation. This may require some changes in
diagnostics. But most partnership arrangements are the prevailing mind-set about the role of government
informal, ad hoc, and based on personal relationships; versus the private sector in health care.
much work remains to be done to be able to use
Possible solutions include:
contracts as engagement mechanisms. As a result,
private health care is mainly confined to high-income • Developing partnerships between the government and
groups living in Kathmandu Valley. Despite GoN aims private hospitals to improve access. Although MoH
to use private sector engagement to improve public has primarily partnered with non-profit facilities in the
health coverage, quality, and outcomes, the MoH acts past, there is an opportunity to also cooperate with
as a service provider in competition with the private the many for-profit hospitals. More than 60 percent
sector. This complicates the potential for public-private of patients in the system are referred by public health
collaboration. The NHSS recommends policies for centers from outside the Kathmandu Valley and many
PPPs, but there is limited capacity and varying degrees seek specialized care. Private sector providers have
of interest in advanc MoH’s transition from a direct expressed an interest in accessing part of this market
service provider to a regulator. The lack of dialogue by charging fees on a sliding scale, organizing medical
between public and private health providers has led camps in rural areas, often in partnership with
to significant levels of distrust and unwillingness to community-run health facilities, and by meeting or
collaborate. This has impeded attempts to modernize exceeding the legal requirement to maintain 10 percent
and reform the regulatory environment. Further, of all beds for low-income patients.
professional associations that represent commercial • Supporting community pharmacies with quality
interests are viewed as highly political and focused on products and training for an effective channel to
individual—not sector—interests. deliver services and counseling to rural women and
Health insurance—The mix of the private voluntary provide other benefits to rural and underserved
health insurance and the new public mandatory health populations.
insurance needs to be evaluated to ensure the adequacy • Building MoH capacity to (a) create a seat at the
of the benefits. In 2017 Parliament approved a new policy table for the private sector (for example,
Health Insurance Act, since the current system cannot build associations’ capacity to unify the private
fully identify and protect the poor, the health insurance sector voice); (b) support public-private dialogue to
policy and national health insurance bill mandating address issues of importance to both private and
coverage were an effort to reduce impoverishment public sectors (for example, facilitate information
through catastrophic health expenditure. Poorly flows between private entities and MoH to improve
regulated or designed health insurance schemes, implementation of current subsidies and test new
whether public or private, can exacerbate inequalities, ones such as Special Economic Zones, tax breaks,
provide coverage only for the young and healthy, and land concessions, and looking at models such as
lead to cost escalation. the Dubai Healthcare City); (c) help MoH assess

80
 policies, regulations, and capacity to regulate quality pharmaceutical sector to advance the manufacture
of services for reforms; and (d) establish a system and distribution of affordable drug and health
to collaborate with the private sector (for example, products, including generics. Support would include
conduct an in-depth analysis of the private sector perform market analysis of private sector expertise
and infrastructure requirements to strengthen the
market, segmentation, or scope of activities, to
public supply chain and develop a strategic plan for
establish a knowledge base for future interventions).
improving market efficiencies to expand distribution
• Initiating public-private dialogue in the while ensuring quality.

8. MINING

Sector Background and Current Performance budget crisis when they fall.
Limited revenues and exports from mining and
Feasibility and Main Issues
unknown potential.
Medium. Governance of the sector can be a
Development Impact challenge, especially with limited capacity—
Medium. Limited linkages and capabilities that are decentralization can open up new opportunities.
not easily transferrable to other sectors. Social and Broad and deep international experience available.
environmental risks. Possibility to generate much
needed fiscal resources but these fiscal revenues Conclusion and Possible Solutions
are quite volatile, given that the sector is subject to The first step should be to conduct a geological survey
international mineral prices with the risk that they to better evaluate Nepal’s mining potential, including
lead to the “Dutch disease” when prices are high and for local construction materials.

9. AGRICULTURE (Agribusiness—Food and Beverages)

Sector Background and Current Performance Development Impact

Two thirds of Nepal’s jobs are in the agriculture sector, High. This sector has a high development impact score
mostly in subsistence farming of low-value crops due to extensive backward and forward links, including
for the domestic market. The sector’s production the opportunity to develop high-value niche products
accounts for a quarter of the country’s exports, yet and horticulture. Agribusiness also has the potential to
generate better outcomes for the rural poor.
it is still relatively underdeveloped and not currently
competitive in regional and global markets. Few large
Feasibility and Main Issues
businesses occupy cereals, food and beverages, and
fast-moving consumer goods. Other subsectors are High. It has a high feasibility score due to Nepal’s
unique and diverse agro-climatic conditions, with
characterized by small and below-small businesses.
high potential in niche products, tea, coffee, flowers,
Nepal’s Fitness ranks in the top 50 percent of and vegetable and fruit products. As highlighted by
countries in all agribusiness sectors (crops, beverage/ the lack of FDI, there is potential for public support
tobacco, food and animal products). This points to a and reforms to address value-chain development,
fairly diversified and complex portfolio but also space land, labor, and financing constraints. Feasibility of
to further diversify and upgrade capabilities. the sector can also be improved through faster and

81
more cost-effective transport and logistics, scale- industry in particular has the potential to feed into
up of the agricultural insurance market, and better the Belt and Road network as infrastructure is
implementation of internationally-recognized SPS enhanced in the region.
regulations. Other constraints include lowered
productivity and quality due to a lack of fertilizer and Conclusion and Possible Solutions
technology use. Critical—Selected for Sector Deep Dive.
Nepal has many opportunities to upgrade capabilities Agribusiness can contribute to growth and
and increase diversification in agribusiness. employment in Nepal, particularly in rural areas.
Diversification within low-complexity, unprocessed Improving the sector’s global competitiveness and
crops is most feasible, but opportunities also exist scaling up agribusiness SMEs requires the removal of
in food processing and animal products. Agriculture constraints outlined above, most of which are politically
support services such as warehousing and storage feasible. Land policy reform and privatization in the
are also feasible and growing quickly. The beverage fertilizer industry may be met with some opposition.

10. MANUFACTURING

Sector Background and Current Performance Feasibility and Main Issues

Nepal’s exports are limited and composed largely of Medium. Nepal also has the potential for becoming
textiles (carpets, and synthetic materials) and food a competitive cement and steel producer due to the
products (beverages). The economy’s capabilities (as prospects of competitive hydropower (both cement
indicated by Economic Fitness) stem primarily from and steel require very large amount of power) as well
the textile sector, agribusiness, and natural resource as higher-quality mineral endowments than regional
competitors. Opportunities for capability upgrade
extraction and processing.
exist in chemicals, plastics, extractives (incl. wood),
and textiles sectors. Diversification to new products
Development Impact
in manufacturing is less feasible, though limited
Medium. Interviews with key stakeholders suggest opportunities exist.
that cement and steel have high development impact
due to forward linkages with the construction and Conclusion and Possible Solutions
hydropower sectors. Nepal’s textile industry may offer Promote local construction materials (for example,
opportunities to integrate into the Belt and Rocad building codes—see one-pagers on Mining and the
network under infrastructure improvements in the Construction) and agribusiness (see Agribusiness
region, given Nepal’s complementarity to the demand Sector Deep Dive) and tackle issues in key enabling
of neighboring countries. sectors (transport, energy, finance and education)

11. TOURISM

Sector Background and Current Performance in 2015, and stem from a diversity of source countries
Tourism directly contributed $0.8 billion to Nepal’s including quickly growing India and China. In spite
GDP in 2016 (3.6 percent of total GDP) with an of this positive trend, the sector is operating below
additional $0.8 billion of indirect effects. The number potential with limited geographic diversification. Nepal
of international visits rebounded since the earthquake attracts primarily low-budget tourists and receipts per

82
visitor are lower than in competitor countries, including segments geared at higher-value tourists (business,
other post-conflict countries such as Cambodia. wellness, ecotourism, and adventure tourism).

Development Impact Conclusion and Possible Solutions

High. It has a high development impact score due Critical—Selected for Sector Deep Dive. Though
to its employment potential and scope for increasing capabilities are not easily transferable to other
backward linkages to agricultural sectors. Tourism sectors, tourism has the potential to positively impact
is important for poverty reduction, employment GDP and growth in rural areas if Nepal achieves
generation, and income redistribution, especially in the greater geographic diversification and reaches higher-
country’s poorest regions. Five key destinations are likely value segments.
to positively impact both sustainability and revenues
Targeted reform actions can help upscale Nepal’s
(Pokhara and Annapurna, Manaslu and Gorkha, Bardia
tourist industry. They include (a) addressing regulatory
and Banke, Lumbini and Palpa, and Lantang).
and connectivity constraints, (b) better governance,
Feasibility and Main Issues and (c) diversification of private sector offerings for
mid-range and high-end tourists.
High. It has the highest feasibility score due to Nepal’s
unique natural endowments. Targeted government Many of the recommended reforms have high feasibility,
action can increase tourist numbers and spending, and though resistance is expected toward development of
help attract private investments: As other sectors, protected areas as well as amended foreign exchange
tourism also suffers from Nepal’s infrastructure gaps regulations. In developing Nepal’s tourism sector, it is
and particularly the poor safety record. There is also important to ensure inclusiveness and share revenues
space for more integrated destination management with local communities and governments, as operators
and targeted incentives to attract operators in are currently based mainly in the capital.

12. IT SERVICES

Sector Background and Current Performance Feasibility and Main Issues

Nepal’s IT services sector is growing, with relatively Medium-High. It has medium-high feasibility
high export orientation of firms in the IT applications in Nepal due to a labor cost advantage in low-
segment (including app development, consulting, and sophistication software development and business
systems integration services). Firms are mostly small- process outsourcing (BPO), and because ICT exports
sized, though they are increasingly employing skilled are less sensitive to transport cost constraints.
workers (15 to 20 percent growth in employment per However, the limited supply of highly skilled labor
year). Contribution to GDP is still small. restricts the scale of this sector.

Development Impact The following areas can help improve feasibility:

High. It has high development impact due to its • Regulation: Broadband policy reform is needed
potential for direct skilled job creation, building to increase competition and coverage, especially
international linkages, and improving the productivity in rural areas outside Kathmandu. The IT policy
and supply chain of other sectors. There is potential to enacted in 2015 needs to be implemented. Low
contribute to employment of skilled labor. Domestic labor costs of junior programmers contribute to
demand of IT services is expected to significantly feasibility. Regulatory improvement is also needed
contribute to growth. There is space to increase for IT outsourcing and e-commerce, as is the
exports, particularly in IT applications. immigration of skilled foreign workers. Enforcement

83
 of intellectual property rights remains a concern. • Other: access to finance for scale-up of SMEs in ICT
industry.
• Infrastructure: Improvements in technical and
physical support infrastructure are needed to attract
Conclusion and Possible Solutions
companies to the government-established IT park.
Critical—Selected for Sector Deep Dive. ICT
Better rural IT infrastructure, standardization of
services have the potential to contribute to growth
the postal address system, and cost-effective online
and employment in Nepal. A coordinated strategy
transactions systems can help increase feasibility.
addressing skills gaps and management capabilities of
• Education: Improved training programs are needed Nepalese firms, regulatory reform and enforcement,
to meet increasing demand for highly skilled as well as improved access to finance and
technical and managerial workers. infrastructure will help support this sector.

13. CONSTRUCTION

Sector Background and Current Performance Feasibility and Main Issues

Growth has been fueled by remittances. Largely Medium. Performance of the sector would be
informal at the exception of a few large well- enhanced with improved land and capital markets
connected conglomerates. (resulting in more competition and larger scale
construction) as well as improved building codes to
Development Impact
promote local materials and green buildings as well
Medium. Major sector for jobs. Real estate as standardization. For affordable housing, there
developers play a key role in providing serviced is a remaining trade-off between affordability and
facilities for most key sectors, for example, industrial infrastructure availability, hence a potential for well-
zones for agribusiness, hotels for tourism and targeted and reasonably priced projects (supported
intelligent buildings for ICT. Real estate is also linked by joint private sector investment and public sector
to demand in upstream industries or services (for
effort in infrastructure development). Infrastructure
example, cement, transport, construction, urban
development (access to utilities, roads, and so on)
planning, engineering, and architecture) that are
outside the main cities is still lagging—hence high cost
job creators and downstream services (for example,
of construction for adding access to basic services.
telecoms, water distribution, energy, maintenance,
Land tenure and ownership/titles registration issues
security, and waste management) with high value-
still affect the sector’s development capacity.
added. An increase in construction output would
have above-average direct and indirect impact on
Conclusion and Possible Solutions
growth and slightly below-average impact on jobs.
The sector has the potential to affect the environment Conduct a land market governance framework
(from landscaping to energy efficiency) all along the assessment in the new context of decentralization.
value chain (from cement production to transport and Leverage housing finance to promote new building
waste disposal). codes (see Rwanda CPSD).

84
14. RETAIL

Sector Background and Current Performance Feasibility and Main Issues

Growth has been fueled by remittances. Fragmented Medium. Like for construction, improved land
and largely informal. market would increase competition and large-scale
productive players.
Development Impact
Medium. Very important for jobs and backward Conclusion and Possible Solutions
linkages, for example, agribusiness. Conduct a land market governance framework
assessment in the new context of decentralization.

85
ANNEX 4: LARGEST TOURISM SEGMENTS AND PROJECTED
GROWTH RATES137
Business tourism. In 2016, business tourism worldwide accounted for $1.8 trillion or 23 percent of tourism’s total
contribution to Global GDP. The Global Business Travel Association reports that business travel spending grew by
3.1 percent in 2016. Growth is expected to accelerate: 5.2 percent in 2017, 6.1 percent in 2018, and 7 percent in
2019 and 2020. China is the largest business travel market in the world for the second year, surpassing the United
States.
Wellness travel. Health and yoga retreats are a growing motivator for travel. The high-value wellness segment
is a global phenomenon projected to grow by 9.1 percent a year to 2017, double the pace of tourism in general,
according to the Global Wellness Institute.138 Wellness tourism is an estimated $563 billion global market,
representing 6.5 percent (691 million) of all domestic and global trips, and accounting for 15.6 percent of all
domestic and international tourism expenditures. Wellness tourists are educated, wealthy and high spending; they
typically spend 130 percent more than average tourists.
Adventure tourism. Adventure tourism is projected to grow at a compound annual growth rate (CAGR) of over 40
percent in 2017–20, according to research firm Technavio, as more people gravitate to adventure over other tourism
activities. A 2013 study by the Adventure Travel Trade Association estimates that the adventure travel market from
Europe, North America, and South America is worth $263 billion. Between 2009 and 2012, the adventure travel
market is estimated to have grown an average 65 percent per year. Adventure travelers tend to be younger, with an
average age of 36. Per-trip spending (excluding airfare and gear) increased from $593 in 2009 to $947 in 2012, an
annual increase of nearly 20 percent.
Nature-based tourism. As incomes rise and urban populations increase, the desire to spend time in natural
protected areas grows. Nature-based tourism is estimated to account for 20 percent of international travel, or about
240 million trips a year. A study by the World Wildlife Fund (WWF) found that terrestrial protected areas receive
8 billion visits a year, 80 percent of them in Europe and North America, and generate $600 billion a year in direct
visitor expenditure.
Cruise tourism. Worldwide and in Asia, cruise tourism is increasing as larger, more fuel-efficient and less polluting
vessels enter the market. Mass market cruising is growing at 8 percent per year and has been discovered by the
senior Asian markets. Cruise tourism is worth an estimated $117 billion a year. About 25.8 million passengers were
forecasted to cruise in 2017.

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ANNEX 5: TOURISM DESTINATION OPTIONS FOR NEPAL

FIGURE A-4
Source: World Bank Staff Calculations using WDI data

Methodology for Prioritization of Tourism Destinations in Nepal

1. Methodology and key definitions overnight. It includes tourism products such
a. Tourism market segments as support services and attractions, and
tourism resources within one day´s return
i. LOW-END MARKET SEGMENT: This
travel time. It has physical and administrative
segment generally comprises young and ad-
boundaries defining its management, and
hoc domestic travelers, individual long-haul
images and perceptions defining its market
and regional visitors typically staying more
competitiveness.” (World Trade Organization).
than two weeks, and groups visiting for
religious or pilgrimage purposes. Local tourism destinations incorporate
various stakeholders, often including a host
ii. MID-RANGE MARKET SEGMENT: This
community, and can network to form larger
segment generally comprises more affluent
destinations. Destinations could be on any
domestic travelers and families, regional
scale, from a whole country (for example,
independent leisure travelers, and organized,
Maldives), a region (such as the ‘Himalayas’)
active travelers from long-haul markets.
or island (for example, Bali), to a village,
iii. HIGH-END MARKET SEGMENT: The town or city, or a self-contained center (for
high-end segment typically comprises example, Disneyland).”
individual/small-group travelers who pay
Destination offerings may include:
special attention to the quality of the
• Attractions
experience, as well as specialized hard-
• Public and private amenities
adventure (expedition) travelers.
• Accessibility
b. Destinations • Human resources
i. Definition: “A tourism destination is a physical • Image and character
space in which a visitor spends at least one • Special pricing

87
 In Nepal, destinations include the main and/
CRITERIA (DEVELOPMENT IMPACT) (from 1-Low to 5-High)
or secondary gateway allowing access to
Employment From limited potential over 5 years (for
tourists. creation example, less than 500 jobs) (1) to high
ii. Nepal destinations: According to this potential potential (for example, 5,000+)
definition, 12 main destinations have been Potential impact in addressing poverty,
Impact on
marginalized ethnic groups/gender through
identified, disseminated across the 7 newly inclusiveness
direct, indirect benefits and trickledown effect
formed administrative provinces:
Potential to attract relatively large investors
• East Nepal (Kanchenjunga, Koshi Private sector
(FDI, large investor and medium size
investment
Tappu, Illam, Dhankuta) investor), for example, ‘Tourist hotel’ 3- to
potential
Everest (Numbur, Rolwaling, Lower 5-star accommodation
Solokhumbu, Jiri, Makalu) Product Potential to bring added value to the
innovation and destination/tourist activity, be replicable,
Gaurishankar Conservation Area
value chain and be a substantial value/ “game-changer”
Langtang & Helambu (Panchpokhari) addition to positioning, brand and appeal
Kathmandu Valley and Environs Cultural and Intervention would contribute to better
Chitwan (Parsa, Bara Devghat) environment protect environmental sustainability and/or
Manaslu & Gorkha (Ganesh, Bandipur, protection cultural assets
Manakamana)
Annapurna (Pokhara, Mustang, Dhaulagiri CRITERIA (FEASIBILITY) (from 1-Low to 5-High)
and Manang) Potential for High value of natural & cultural
Greater Lumbini & Palpa more visitors competitiveness in relation to other natural
Bardiya & Banke National Parks (market appeal) & cultural destinations
Mid-West (Humla, Rara, Jumla, Dolpa, Demand is present for higher spending
Potential for
tourist wishing to visit but can’t realize due
Dhorpatan) more spending
to constraint factors such as the lack of
Far West (Khaptad, Suklaphanta, Kailali) by visitors
activities, access and facilities
c. Prioritization criteria Access Infrastructure availability, level and planned
infrastructure development in each area (NTSP criteria)
i. Each of these 12 destinations has been ranked
Alignment
according to a set of ten criteria aimed at w/ national Alignment with national territorial
reflecting the development impact/feasibility and local gov. development policies and NTSP objectives
priorities
approach promoted by the WBG. In the
CPSD, these criteria have been adapted to Empowerment Clarity of local mandates & roles of local
at destination stakeholders, communities involved in
the specific case of the tourism sector and the level tourism
Nepali context.
ii. As a result, the 12 destinations can be 2. Main World Bank background assessments
broadly grouped into three main categories: used as reference
(a) destinations with high development a. Annapurna & Pokhara team assessment 2018
impact and feasibility; (b) destinations
b. Pokhara destination plan 2016
with little development impact, as they are
already mature and do not correspond to c. Far west destination plan 2015
the overarching diversification objective d. East Nepal destination plan 2015
(for example, Kathmandu Valley, Everest,
e. Lumbini & Palpa destination plan 2013
Chitwan); (c) destinations with weak
development impact because they are remote f. Gorkha & Manaslu destination plan 2013
and attract mainly the low-range visitors’ g. Tourism competitiveness diagnostic (WB,
segment (for example, Far West, East Nepal). T&C 2013)

88
ANNEX 6: GOVERNMENT PROGRAMS IN AGRICULTURE
PROGRAM PROJECT OBJECTIVE
Main government strategy to guide policy for the next 20 yrs. Planned $500 million
spending per year to:
» Accelerate investment in Science and Technology. Invest in the Knowledge
Triangle—research, education, and extension (REE).
Agriculture Development Strategy » Ensure broad-based and inclusive agricultural growth. Invest in programs to
(ADS) moderate social and geographic inequalities.
» Integrate smallholder farmers with competitive value chains that are able to meet
the more demanding requirements of growing urban population in Nepal and abroad
» Promote rural infrastructure and rural agroenterprises that energize the economic
texture of rural Nepal.
NTIS focuses on developing action plans to address protracted constraints in
Cardamom, Ginger Tea and Medicinal and Aromatic Plants (MAP). Focus is on a
number of cross-cutting areas which including:
» Institutional capacity building for trade, including capacity for trade negotiations,
» Business environment for investment and trade
Nepal Trade Integration Strategy
(NTIS) » Trade and transport facilitation
» Standards and technical regulations
» Sanitary and phyto-sanitary measures
» Intellectual property rights
» Issues related to trade in services

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ANNEX 7: TOURISM DESTINATION OPTIONS FOR NEPAL

FIGURE A-5 Subsector investment appeal

90
ANNEX 8: DATA ON HIGHER VALUE / HIGHER GROWTH
SUBSECTORS IN NEPAL

SUBSECTOR # OF FARMERS CAGR YIELD vs. COMPARATOR

(estimates)* (2010–14)††
FRESH FRUIT & VEGETABLES 369,856 Veg. 4.75%; Fruit 0% N/A
POULTRY (BROILERS) 50,000 21.8% FCR: 2.0 vs. 1.5 (breed standard)
POULTRY (EGGS) Undef. 9.3% N/A
TEA 20,747 5.5% 1.1 MT/ha vs. 1.7 MT/ha (India)
SPICES 200,000** Lg. Card. 23%; Ginger -1.6% Ginger 12 MT/ha vs. 13.5 (Hm.Pr., India)
MEAT (W/O POULTRY) 4,500,000 †
4.2% N/A

*Based on FAO data (1 farmer/1 ha) **estimate from GIZ †Represents 85 percent of households ††
FAO STAT

SUBSECTOR # OF FARMERS CAGR YIELD vs. COMPARATOR

(estimates)* (2010–13)††
RICE 1,362,908 0.87% 3.0 MT/ha vs. 4.0 MT/ha (region)
MAIZE 897,583 0.17% 2.5 MT/ha vs. 3.5 MT/ha (India)
POTATO 199,971 (-1.25%) 14 MT/ha vs. 21 MT/ha (India)
SUGAR 53,954 (-1.31%) 53 MT/ha vs. 65MT/ha (region)
DAIRY 450,000** 1.8% †
3-5 liters/day vs. 10 liters/day (India)
*Based on FAO data (1 farmer/1 ha) **estimate from Dairy Association †IFCN Dairy 2011-2014 ††
FAO STAT

91
ANNEX 9: POLITICAL FEASIBILITY OF RECOMMENDATIONS

Tourism
Political feasibility of measures in the tourism sector varies. Enhanced management of the aviation sector has
high feasibility, in view of the clear commitment of the government to this reform. Reform of the regime for
protected areas may be difficult and run into resistance from local communities but learning from countries that
have successfully accomplished sustainable development of environmentally sensitive areas (such as Costa Rica,
South Africa and Rwanda) could help develop a regime that is feasible in Nepal’s context. Reform of the foreign
investment act, the preparation of a connectivity plan, as well as the building of capacity in key agencies has a high
degree of feasibility in view of the stated commitment of the government, while the reform of foreign-exchange
(forex) regulations may run into resistance given vested interests and the history of this issue in Nepal.

IT Services
Most of the key recommendations for the IT services are unlikely to face strong political feasibility issues,
except for those regarding the ease of transactions (such as forex transactions). The persistent gap between forex
transaction regulation on paper and in practice suggests that there is some deep-seated opposition to change, but
the exact reasons for that opposition are difficult to identify at this stage. The recommendations about greater
collaboration between ministries and industry to improve the skills supply are consistent with recent government
initiatives to improve coordination between ministries. The idea of subsidizing interventions to build firms’
capabilities may require some convincing as it is a relatively new concept for policymakers, but there is no obvious
political economy issue. The process of developing an ICT infrastructure reform could face undue influence from
dominant firms, so it will be important maintain independence and transparency in the process.

Health
Some of the priority recommendations for the health sector could face a medium level of political resistance, as
they require a change in the prevailing mind-set about the role of the government versus private providers. For the
government to support the private sector in serving underserved areas, and develop a PPP framework, a change in
the mindset about the role of the private sector in this critical social sector may be required. While strengthening
standards and compliance is largely a capacity issue, the general idea of treating the private sector on an equal
footing might run into a similar issue.

Education
As with the health sector, the main political constraint to the priority recommendations for the education sector relate
to the need to change the mindset about the role of the government versus the private sector in education. Efforts to
ease the entry and operations of private colleges could run into this ideological issue. They could also run into some
opposition from universities, which stand to lose some degree of power. However, there is reason for optimism: the
introduction of greater college autonomy has faced similar issues, but gradual progress has already been achieved.

92
ANNEX 10: INTERNATIONAL EXAMPLES OF APPROACHES TO
STRENGTHEN INDUSTRY LINKAGES IN THE TVET SEGMENT
The CPSD recommends that the government should develop a framework for PPPs in TVET, adapting international
models to Nepal’s context. This would involve empowering not-for-profit bodies with industry expertise (known
internationally as ‘Industry Skills Councils’ or ‘Sector Skills Councils’) to become more active in designing course
content, internships and placements. The government can learn from international examples of such sector training
programs that partner trainees with employers,139 such as Malaysia’s Industry Skill Council (ISC).140 In India, for
example, the industry association (NASSCOM) works with the IT-ITeS Sector Skill Council (SSC) on initiatives
including workforce market intelligence, career awareness, skills definitions, and professional development.
In sectors where large firms or multinationals are present, the government could explore PPP training programs
with select large employers. An industry-driven, work-based dual system could also be considered in sectors
with sufficient depth to host such a program, for example, tourism. As a case in point, the Republic of Korea’s
program is led by companies, with their training based on National Competency Standards (NCS) developed
in collaboration with the private sector.141 Finally, performance-based funding models, which have already been
introduced on a small scale, should be institutionalized if found to have positive results.142

93
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28 Ibid.

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32 In contrast, the similar ratio for government investment remained at about 7.3 percent.

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80 percent of the amount budgeted in recent years (World Bank 2017). As a result, Nepal has considerable fiscal space.
59 For example, while Nepal has Special Economic Zones (SEZ), they are not yet fully operational due to inadequate power supply, high taxes per

square meter of land, and the requirement that 75 percent of the output by the factories located within SEZ be exported.
60 Nepal SCD.

61 UNESCO 2015.

62 World Bank Enterprise Survey 2013.

63 Government of Nepal. 2016. Nepal education strategy draft report 2016.

64 UNCTAD 2011.

65 Enterprise Survey.

66 World Bank 2018b.

67 World Bank Doing Business Report 2018.

68 World Bank Enterprise Surveys 2013.

69 Annex 1 details sectors currently on the negative list.

70 The constraints to the power (and transport) sector are being analyzed in the Nepal INFRASAP report.

71 The hydropower sector is discussed in detail in the forthcoming INFRASAP, but a summary of key findings and recommendations is included

in this report.
72 Total contribution of tourism includes direct contributions and wider impacts on the economy such as travel and tourism investments

spending, government spending that helps travel and tourism sector such as tourism marketing and promotion, and domestic supply chain
purchases by sectors directly dealing with tourists. Direct contribution includes total spending within a country on travel and tourism by
residents and non-residents for business and leisure and spending by government on travel and tourism services directly linked to visitors such
as museums”. See https://www.wttc.org/-/media/files/reports/economic-impact-research/countries-2017/nepal2017.pdf.
73 Unless otherwise noted, figures from this section are from the government of Nepal, Nepal Tourism Statistics 2016, Ministry of Culture,

Tourism and Civil Aviation. These statistics are mainly based on visa for tourists arriving by air, and therefore do not include Indian visitors
arriving by land, who may account for a considerable share of visitors.
74 WTTC 2017. Travel & Tourism Economic Impact 2017—Nepal.

75 Global Wellness Institute 2017.

76 Technavio 2016.

77 MICE is Meetings, incentives, conferences and exhibitions tourism.

78 Tourism Market Segments in Nepal: (a) Low-end market segment: This segment generally comprises young and ad-hoc domestic travelers,

individual long-haul and regional visitors staying typically more than two weeks or group visitors for religious and pilgrimage purposes; (b)
Mid-range market segment: This segment will generally comprise more affluent domestic travelers and families, regional independent leisure
travelers and organized, active travelers from long-haul markets (c) High-end market segment: The high-end segment typically comprises
individual/small group travels who pay special attention to the quality levels of the experience over price as well as specialized hard adventure
travels (expeditions).
79 UNWTO Tourism Highlights 2017 edition.

80 Peru—similar topography and attractions to Nepal; Shining Path Maoist insurgency ended in 1992. Cambodia—South-East Asian country

at a similar level of development to Nepal; comprehensive peace settlement signed in 1991. Laos—South-East Asian country at a similar level
of development to Nepal; civil war ended in 1975 and international isolation ended in the early 1990s with the fall of the Berlin Wall. Source:
Visitor Exports, by country, 1996 to 2016 (WTTC).
81 A tourism destination is a physical space with tourism attractions and resources in which a visitor spends at least one night. It has physical

and administrative boundaries defining its management, and images and perceptions defining its market competitiveness. According to
this definition, 12 main destinations can be identified across the seven newly formed administrative provinces. Smaller destinations have
been regrouped into one single destination, considering the potential to link them as an integrated circuit and/or to brand them as a unified
destination.
82 Under the new World Bank Group approach of Maximizing Finance for Development (MFD), the Bank Group systematically identifies

opportunities for the private sector where it can have a strong development impact. Development impact and feasibility dimensions can be
roughly equated to measurements of the social returns (development impact) versus the risk-adjusted private returns (feasibility) of investment
in each sector. A sector needs to score high on both criteria for the private sector to be able to make a meaningful contribution to development
objectives—even if social returns are high, the private sector will not step in unless a sufficient share of the returns can be appropriated by the
investing firm to generate a profit.
83 The numbers assigned to provinces refer to those used by the Nepal government.

84 Civil Aviation Authority of Nepal. 2018. Aviation Safety Report. http://caanepal.gov.np/wpcontent/uploads/2016/11/Safety-Report-2075-4-6-

Final.pdf.

97
85 WEF 2017.
86 Sotes, Griffin and Ahad 2016.
87 Defined as agribusinesses with more than $300,000 in fixed capital investments.

88 The World Bank has two main projects in the sector: the Project for Agriculture Commercialization and Trade (PACT), focused on agriculture

and rural business development that will be closing in June 2018, and the newly approved Livestock Innovation Project that will focus on
promoting inclusive value chains for livestock, promoting regulatory. reforms and modernizing service delivery in the subsector. IFAD, USAID,
FAO, GIZ and other donors are also active in the sector.
89 Annex 9 describes the method used for subsector level assessment in agribusiness.

90 Review based on the situation/data available currently. Impact (# of farmers), Target market (current/most likely markets), Competitiveness

(based on production/processing data, where available). A more in-depth subsector analysis was not carried out due to time/funding
constraints.
91 IFC Industry Specialist John Hatten estimates that GDP/capita of $1500 is the stage when growth and scale make investment more viable.

92 A similar issue arises in sugar where government has fixed prices administratively.

93 Presently, cold storage investments receive a five-year interest holiday; and a concessional 1 percent tax on equipment (versus 5–10 percent).

94 22 percent higher in rice vis-à-vis India. See appendix.

95 The new foreign investment policy indicates a willingness to shrink the list of prohibited subsectors, but the enacting legislation is still pending

before the parliament.

96 IFC considers 100,000 liters/day to be the threshold for investment in a dairy producer, but only the SOE reaches that threshold.

97 There are widely reported increases of instances where agricultural land is transformed to residential use. ADS 2013.

98 The majority of farmers are smallholders, with an average holding of 0.79 hectares in 2001.

99 Paudel, Panit and Reed 2013.

100 This deep dive summarizes the findings of the USAID/Nepal Health Private Sector Engagement Assessment (2017) and quotes extensively from it.

101 WDI.

102 World Health Organization. 2007. Health System in Nepal: Challenges and Strategic Options, November.

103 USAID report.

104 For example, Om, Norvic, B&B, and Grande International hospitals are training their staff (doctors, nurses, technicians) in specialty care and

hospital management.
105 UNESCO Institute for Statistics. http://data.uis.unesco.org.

106 Nepal Economic Survey, Fiscal Year 2016/17, Ministry of Finance, government of Nepal. http://www.mof.gov.np/uploads/document/file/

Economic percent20Survey percent20English percent20- percent202016-17_20170713052055.pdf.

107 Under the Directive for Foreign Educational Institutions Running Higher Level Education, around 70 colleges in Nepal are permitted to offer

approved courses in partnership with foreign universities. Source: Ministry of Education, Nepal: http://www.moe.gov.np/assets/uploads/files/
foreign_affiliated_college_and_program_2071-2-7.pdf.
108 Based on primary interviews.

109 Himalayan Times. 2017. “Implement programs to end disparity in education: HLEC,” December. https://thehimalayantimes.com/kathmandu/

implement-programmes-end-disparity-education-high-level-educationcommission/.
110 Comprehensive TEVT Annual Report 2072/73, Ministry of Education. http://www.np.undp.org/content/nepal/en/home/library/poverty/

comprehensive-tvet-annual-report-2072-73.html.
111 Nepal Vocational Qualification System (NVQS), http://www.swisscontact.org/nc/en/country/south-asia/projects/projectssouth-asia/project/-/

show/nepal-vocational-qualifications-system-nvqs.html.
112 World Bank. 2015. Nepal Higher Education Reforms Project Project Appraisal Document.

113 World Bank. 2018. Higher Education Reforms Project, Mid Term Review Report. Further, in CPSD primary interviews, some experts

suggested that colleges would still have to get approval for the courses they design and offer autonomously.
114 World Bank. 2016. Nepal Education Strategy Note.

115 UNDP. 2012. Initial Findings from the review of Technical and Vocational Education and Training (TVET) Policy 2012. http://www.np.undp.

org/content/dam/nepal/docs/projects/initial-findings-from-the-review-of-technical-and-vocationaleducation-and-training-policy-2012.pdf.
116 CTVET, Tracer Study of the Graduates of Diploma and TSLC Programs under CTVET. http://CTVET.org.np/files/2073percent20Publication

percent20Tracer percent20Study percent20Report.pdf.

117 This section is based on a sector deep dive conducted for the Nepal CPSD. It also draws on the preliminary findings of ICT Strategic

Segmentation Analysis: Nepal, a report prepared by the World Bank Group.

118 See background report on Nepal ICT Sector Deep Dive report for details of estimation.

119 Estimates from a preliminary draft World Bank report ICT Strategic Segmentation Analysis: Nepal.

120 Such as Ncell App Camp, Nepal Entrepreneurship Hub and Startup Weekend.

121 Overseas Development Institute 2017.

122 Average software development cost. See https://qubit-labs.com/average-hourly-rates-offshore-development-servicessoftware-development-

costs-guide-2018/.
123 Medium: Offshore Developer Rates 2017, Global Software Development Prices Overview. https://medium.com/@tecsynt/offshore-developer-

rates-2017-global-software-development-prices-overview-edc144e340b1
124 Payscale Website. https://www.payscale.com/research/IN/Job=Software_Engineer/Salary.

125 It is not clear how a quality-adjusted wage rate would look like; however, the continuous growth of Nepal’s IT industry suggests that

competitiveness is strong.
126 Chaulagain, A. 2017. Post-graduate survey, December. (I. Onugha, Interviewer).

127 Based on primary interviews conducted for CPSD IT deep dive and on suggestions from a preliminary draft report ICT Strategic Segmentation

98
 Analysis: Nepal, under preparation by the World Bank Group.
128 Based on primary interviews, some Nepalese IT services firms have been exporting for more than 10 years.
129 Ministry of Information and Communication, National ICT Policy 2015. http://www.youthmetro.org/uploads/4/7/6/5/47654969/ict_policy_

nepal.pdf; UNCTAD 2011.

130 Oversees Development Institute 2017.

131 UNCTAD 2011.

132 UNCTAD 2017.

133 See review in Cirera, Xavier, and William F. Maloney 2017.

134 Please see InfraSAP for further details on recommendations on infrastructure.

135 World Bank, ADB, DFID. 2016. “Comments on the Draft Foreign Investment Act,” November 6; World Bank. 2016. “Making Nepal’s

National Tourism Strategy Work: Legal Recommendation for Unlocking Investment in Tourism Accommodation Infrastructure,” June.
136 Tribhuwan International Airport (TIA) is located in Kathmandu; Gautam Buddha International Airport (GBIA) is located in Bhairahawa and

serves Lumbini.
137 Sources: Global Business Travel Association; Global Wellness Institute; Adventure Travel Trade Association; Technavio; Cruise Lines

International Association. Due to lack of projections for the nature segment, an available projection for adventure was used.
138 Global Wellness Institute. 2017.

139 World Bank. 2018. “Build on foundations by linking skills training to jobs.” In World Development Report, Chapter 8: Learning to realize

education’s promise. Washington D.C.

140 “Bridging the Gap: The Private Sector’s Role in Skills Development and Employment.” 2016. Conference paper. Cebu City, October 11–12.

https://www.oecd.org/employment/leed/Summary-Report-2016-SouthEast-Asia- percent20FINAL.pdf.
141 Ibid.

142 A recent World Bank-funded project, the Enhanced Vocation Education and Training Project II (EVENT II) offers performance-based quality

improvement grants to select public and private TVET providers. See World Bank, 2017. EVENT II PAD.

99
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