Doing business in federated nepal

Proceedings report Roundtable discussion on:

DOING BUSINESS IN FEDERATED NEPAL 17 January 2018

INTRODUCTION As Nepal transitions into a Federal Democratic Republic, various challenges have been anticipated for doing business in the country. In this context, Nepal Economic Forum held a roundtable discussion with various stakeholders to discuss anticipated challenges and opportunities of “Doing Business in Federated Nepal”.

SUMMARY OF THE DISCUSSION The discussion sought stakeholder perspectives on key areas of doing business under the federal structure. Discussions are summarized below.

Q. Will federalism promote competition or create more barriers to doing business? o

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Federalism was noted to help decrease the existing GDP cluster. As such, competition among provinces would promote business activities thereby increasing the GDP share of other provinces as well.

The constitutional provision of “prohibition to levy tax, fee or charge thereon or to make any kind of discrimination on the carriage or extension of such services or goods while conducting interstate trade” was mentioned in this regard.

Unhealthy competition was acknowledged to happen when there is the problem of tax arbitrage.

The constitution does not allow the local government to fix a rate. Even if they are allowed to fix their rates, it is as per the federal law.

Uncertainties were asserted to rise with different sets of reactions to the federal system, some people would find the system very welcoming while others might find it intimidating.

Forthcoming laws in the federal set up should promote a competitive business environment was a common sentiment echoed in the discussion.

Q: Will federalism increase the cost of doing business? o o

Regarding concerns on double taxation, it was noted that the unified VAT system across Nepal would help prevent the problem of double taxation.

Participants acknowledged that the cost of doing business would decrease if state governments compete in providing factors of production (like land) at a cheaper rate for setting up businesses

o

in their state which might be referred to as competition for states, but an opportunity for businesses.

It was mentioned that to prevent uncertainties in businesses, clarification on timeline for federalism should be provided. The timely framing of necessary rules and regulation was noted to be the key to smoothen the cost of doing business.

Q. Will there be a bitter tussle between the three layers of government? o o o o

Participants agreed that coordination between the different layers of government will be a major challenge in the federal set up.

It was suggested that a committee should be established to discuss the policy discourse and create trust among the three layers of government.

The issue of power sharing was agreed to invite its own set of obstacles. To avoid such situation, drafting of appropriate legal framework was suggested by the participants.

For the new system to function smoothly, it is pivotal to act as per the aspiration and mandate of the people.

Q. Will federalism deliver better services or will people rent seek on the new structure? o o

o o

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The success of federalism in Nepal shall depend on the ability to find local champions or else there would be a proliferation of rent seekers at the provincial and national levels.

Participants acknowledged that the state ministers and the central level agencies should drive the economy by leveraging investments in the public goods. It was pointed that Nepal should focus on manufacturing industries over agricultural development.

Concerns regarding cartel economy trickling down to the local and provincial bodies were raised.

The generic problems of cartels, syndicates and corruption were noted to exist in all forms of government irrespective of their nature. It was also argued that if we do not address these problems, then the legacy could continue in the federal system. It was noted that now is the appropriate time to address these generic problems as we move to the new system of governance.

Participants agreed that federalism should also be viewed as an opportunity for small businesses and startups. The focus has to be on unleashing the potential of enterprises within the country and on the medium-scale capital coming in from abroad ensuring that the country is open for business and investments.

Civil society was mentioned to be an integral part of institutionalizing federalism and delivering better services.

Sujeev Shakya, Chairperson of Nepal Economic Forum, summed up key messages from the discussion as follows: o

Promoting inter-state competition. While promoting competitiveness, quality of service offered by states could act as a key indicator. Regarding the question of healthy vs. unhealthy competition, the question will be whether we will foster an eco-system for entrepreneurs and develop entrepreneurship, or, there will be further proliferation of cartels and syndicates?

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Opportunities of Federalism. Under the federal structure, the state governments can work with neighboring states across the border to bring in investments. Such FDIs will matter to the state governments. The scale of FDI in the coming days should be addressed to whether we will be looking at 100-200 million dollar investment or 1-2 million dollar investment as FDI? Promoting accountability and awareness. Ways to reduce instances of rent seeking in the local governments needs to be well thought of and the culture of accountability and awareness needs to be promoted.

Bottom up approach will be key. A lot of development initiatives in Nepal have been top down in the past. Federalism will provide an opportunity to implement the bottoms up approach to development. It is cultural in Nepal to put the cart before the horse, federalism is an embodiment of that. While this may not be an ideal situation, it is important to make it work.

Nepal Economic Forum is a not-for-profit organization initiated by beed and aimed at becoming Nepal’s premier private sector led economic policy and research institution. neftalk is a platform for policy discourse and discussion on pertinent economic issues For more information visit: http://nepaleconomicforum.org/