NOTE 4 | DECEMBER 2013
in brief Promoting Exports through Improving Quality: Handicraft Testing Lab Due to the addition of harmful chemicals and substances in the export products, the international market has started implementing stringent standards on exports. Therefore, there was a huge need for product testing, mainly for exports, in Nepal which made it important to raise the concerns regarding the establishment of a handicraft testing laboratory. This was largely attributed to the strong import policy of the European Union that warned of banning imports of silver products containing cadmium1 which is more than 0.01% by weight after 2012. Following this warning, the threat of products being rejected for exports led to the immense need for a lab to be established and the government and private sector expedited the process of establishing a cadmium testing lab in the country. The issue was raised in the Industrial Investment Promotion Working Group of the Nepal Business Forum on 4 October 2010. With the facilitation from the Nepal Business Forum and the strong role of Federation of Handicraft Association of Nepal, the lab was set up at the premises of the Nepal Bureau of Standards and Metrology with an equal investment of Nepalese rupees 12 million ($ 146,341) from the Federation of Handicraft Association of Nepal and the Ministry of Industry in December 2011.
The Need for a Silver testing facility The handicraft sector has long been a major line of Nepali exports. Currently, it has been the largest overseas export item of the country next to readymade garments and carpets. Silver items are also one of Nepal’s high value high potential export products, identified as a priority export by the government of Nepal in the Nepal Trade Integration Strategy. In Fiscal Year 2012/13, Nepal exported Nepalese rupees 194.1 million ($ 2 million)2 worth of silver products. The urgent need for setting up a testing facility was primarily to address the following threats and constraints inhibiting exports in this sector: European Union ban on cadmium: Nepal has mainly been exporting its silver goods to the U.S.A., Canada, Germany, Japan, France, China, United Kingdom, Hong Kong, Netherlands, and Italy of which the European Union is the main importer. However, with the EU warning that it would ban imports of silver products containing cadmium from 2010 onwards citing health hazards, the need to set up proper testing facility for cadmium was even more urgent. It was felt that the lab would test the purity of the silver and thus would help in increasing exports of silver products. Lack of an international standard lab in the country: Currently testing and certification facilities do not exist in Nepal and though the lab was mainly set up 1
2
Cadmium is a toxic metal that is very difficult to separate from silver. It causes allergic reactions and sores on the skin, and inhalation of its fumes does serious damage to the respiratory track and kidneys. Citing such health hazards, the EU has announced it will ban entry of cadmium containing goods. Source: Annual Trade Data FY 2069/70,Trade and Export Promotion Centre, Ministry of Commerce and Supplies, Government of Nepal.
“This newly
established testing facility is gaining recognition and traders’ have the confident and assurance as this service is being made available under a joint initiative of the government and the private sector. This will definitely bring benefits in the long run though currently we are only targeting export promotion.” Mr. Ram Adhar Sah, Director General, Nepal Bureau of Standards and Metrology
for export promotion, the certification of the testing lab would increase the confidence among exporters in the European Union. Prior to the establishment of the lab, the then available testing facility used a destructive technology. These tests would determine the presence of different substances in the silver product, however destroying the silver products completely in the process causing a lot of damage and loss to the customers. Also, the waiting time of about 24 hours to two days to receive the test results was long. Therefore, there was a need of using an improved, non-destructive technology with quick testing results for metal products, beginning with silver which would further act and establish as the basis for certification and contribute to the increase in exports.
Contributors: Mr. Krishna Babu Joshi, Results Measurement, NICRP Ms. Akira Dhakwa, Consultant, NICRP
in brief | December 2013 | 2
Facilitation Process The need to set up such testing facility was put forth in the Nepal Business Forum’s Industrial Investment Promotion Working Group meeting dated on 4 October 2010. The Ministry of Commerce and Supplies responded to this issue with its commitment to making space available, though a temporary arrangement, in the premises of Nepal Bureau of Standards and Metrology (a government entity). At the same time, the government of Nepal also requested the private sector for their contribution in purchasing the testing machine and under the Public-Private Partnership concept, the government of Nepal and Federation of Handicraft Association of Nepal agreed to contribute 50 percent of the machine cost. Similarly, a further meeting held on 12 January, 2012 formed a committee with representation from the Ministry of Commerce and Supplies, Ministry of
Industry, Nepal Bureau of Standards and Metrology, Federation of Handicraft Association of Nepal and Nepal Gold and Silver Association to develop the operating guidelines for the testing lab. Federation of Handicraft Association of Nepal, Nepal Bureau of Standards and Metrology and Trade and Export Promotion Centre further signed a Memorandum of Association on 20 February, 2012. Currently in its first phase, the lab started testing gold and silver jewelry for cadmium and issuing certificates for these products and very recently, the services of the laboratory are being used by jewelry manufacturers and artisans. Also in a bid to diversify its services, the lab has provided testing for samples collected during the joint surveillance conducted by the government bodies and testing of toxic metal content in plastic toys.
Benefits of the lab Though the machine has been in operation since January 2012, the initial months were spent in carrying out various trial runs and training the manpower dedicated for the system. During the initial period various tests were also carried out to promote the use of this technology amongst the silver traders. In recent times, FHAN has been creating awareness amongst its members about the existence of the lab and the technology. It has been working with a goal to increase the awareness and promotion in the initial 1-2 years and operate on trial basis whereby they would be in a position to understand the challenges and opportunities of operating a testing lab. With this initiative the following have been the key benefits: l Reduced damage: The new testing methods have significantly reduced damage for customers. As opposed to the harmful methods, the testing service is being provided through Energy Dispersive X-ray Spectrometer machine which is safe in nature. l
Increase in Efficiency: The newly installed machine has a capacity of testing 70-75 samples a day and has added to the efficiency of testing methods and reduced delays in issuing certification for tested products as it produces results within two hours. Earlier it took about 24 hours to 48 hours to receive the test results.
l
“Handicraft
Accreditation and certification: NBSM has introduced the National Accreditation Scheme to accredit testing labs. Although the laboratory has not yet been internationally accredited, the lab results have served as some sort of certification and added to the accreditation factor for many exporters. However, since NBSM lacks international accreditations, recognition of the accredited labs in the international market might be compromised. Therefore, there is need for a few policy interventions from the government in order to facilitate the market. These are:
- Establish minimum standards that need to be adhered to regarding export items that leave the country. This will help increase the business of the lab and assure the quality of exports. - For the domestic market, schemes such as Hallmarking can be introduced for gold products to increase domestic consumer protection.
Testing Lab has played a pivotal role in minimizing the use of hazardous metals in silver products for export. Realizing the importance of quality testing, private jewelry manufacturers have also an introduced testing facility at their premises and this is a very good sign for maintaining quality.” Mr. Hem Ratna Shakya, President, Federation of Handicraft Association of Nepal
- As is the international practice, an autonomous accrediting body needs to be established which will obtain international accreditation. This body will then accredit laboratories in Nepal. This will help assure acceptance of tests conducted in Nepal. - Guidelines and procedures for testing need to be introduced to standardize the process. l
Figure 1: Left to Right: Destructive technology and the newly installed non destructive testing machine at the NBSM.
Increased confidence among exporters: Though accreditation is still an important next step to ensure the certification is internationally accepted and recognized, exporter confidence has been boosted.
in brief | December 2013 | 3
Scalability of the program In comparison to FY 2011/12, silver jewellery witnessed a decline of 14.2 percent in total exports in FY 2012/13. With the decline3 in exports and increasing exporter awareness, it was seen that the number of tests increased over the year. From a total of 68, numbers of tests in FY 2011/12, the number of tests increased to 500 till December 2013. However, the handicraft lab has not reached its full potential regarding the purpose of its establishment and the question of feasibility may arise. Therefore, after the successful establishment of a silver testing facility, FHAN and the authorities at NBSM has underlined few areas of improvement that will help provide improved facilities for silver and other products which could be tested. Some of the challenges are: l Policy interventions from the Government: Certain policy interventions can make the testing market more favorable.
- Proper accreditation with a National Accreditation Scheme: In view of the current Public Private Partnership (Government of Nepal and Federation of Handicraft Association of Nepal) the service seekers are relatively assured of the certification issued by the testing lab. However, there is the requirement of proper accreditation for international recognition of test results to boost exports. But accreditation is considered as the first essential step for facilitating mutual acceptance of test results and measurement data to remove technical trade barriers. Therefore, there is need to create an autonomous body such as one in India, affiliated with international organizations for the purpose of providing accreditations to testing laboratories such as the handicraft lab. International affiliation will increase acceptance of the tests carried out in Nepal as laboratory accreditation enhances 3
4
customer confidence in accepting testing / calibration reports issued by accredited laboratories. Since the Act regarding an independent accrediting board is already pending at the Cabinet, this agenda needs faster implementation. - Guidelines and procedures for testing: The prevalent laws do not make certification of exports mandatory. Setting up of the handicraft lab was only to facilitate cadmium testing so that Nepali exports do not lose their market share in European Union. However, since no mandatory arrangements are in place, such tests are done on a voluntary basis. Also, in the absence of any guidelines that standardizes the testing process, the size of sample testing differs. This leaves the lab with no overarching set of procedures that are to be followed and also no guarantee of tests being conducted. The current practice of waiting for other
Figure 2: Suggested Process for Setting up Internationally Accredited Laboratories
International Laboratory Accreditation Organizations
which will provide accreditation to
Autonomous and Independant National Accreditation Board, Nepal which will thereafter accredit
countries to implement bans and then only testing in Nepal will make Nepal lag behind without a competent structure and laws in place. - Minimum standards for exports and domestic market: The government needs to bring certain minimum standards that need to be adhered to with respect to the quality of exports. By doing so, on a micro level, it will help increase the business of the lab, and on a macro level, assure the quality of exports from Nepal. Also, in order to regulate the domestic gold market, Hallmark testing can be introduced in the policies l Sustainability of the lab: As per the sales figures received from the lab, as of 5 December 2013 the lab has made revenue of approximately Nepalese rupees 243,850 ($ 2738 approx)4 indicating tests carried out for 600 items. In view of the capacity of the testing lab to accommodate approximately 70 tests per day, the current data shows that in an average only one test per day is being conducted. Officials at the lab feel the need to generate demand for these kinds of tests to ensure its capacity utilization. Though FHAN feels that the establishment of the testing lab itself was the need of the hour rather than increasing the number of tests; it is an important issue of sustainability that needs to be addressed. l Affordability:
Initially the fee charged for testing per sample of goods stood at Nepalese rupees 500
Table 1 : Current Volume based Pricing Mechanism at NBSM
Public and Private Testing Laboratories
which will provide testing facilities that are internationally recognized to exporters and the domestic market
This decrease in exports has mainly been due to the ban on the usage of cadmium in silver and the hike in price of silver per se making Nepali good less competitive in the international markets. The conversion rates considered were an average of two years (2012 and 2013).
S.N 1 2 3 4 5 6
Sample Volume (piece) 25 26 to 100 101 to 500 501 to 2000 2001 to 4000 4001 and above
Source: NBSM, 2012
Discount (%) 0 10 30 50 70 80
Price per piece (NPR) 500 450 350 250 150 100
in brief | April 2013 | 4
which were cited as expensive for silver traders and exporters. Therefore, to address the issue of the current uniform pricing policy, the committee developed a volume based pricing policy. This has made testing relatively cheaper for those who wish to test silver products in larger quantities. The proposed is the fee charged for per unit. l Permanent
Location: The physical location of the testing lab at NBSM is only a temporary arrangement hence a permanent location to house such facility is sought. The current location “Balaju” has been cited as an inconvenience for traders due to various security reasons. FHAN has requested the MoCS to provide land at premises of Department of Cottage and Small Industries situated at Tripureswor, Kathmandu to build the handicraft lab. Even the MoU of the testing lab has recognized Department of Cottage and Small Industries as a suitable location for the lab.
l Other
product testing: In the absence of regulations and guidelines in place, the domestic market for precious metal is not regulated, and so the standards of fineness and occurrence of adulteration can be compro-
mised. With the soaring prices of gold and silver, fraudulent practices in the transactions of gold and silver products have surfaced. The recent raid conducted by NBSM on gold jewelers in the city also found irregularities in the products sold, which reiterates the fact that gold testing and standardization has good scope in Nepal. The existing facilities at the lab can provide purity tests on the composition of gold. It will be a necessary step to establish minimum standards for consumer protection as well. Therefore, in order to curb such practices and provide assurance to customers, the facilities of the testing lab can be extended to not to exporters only but to the local consumers and traders as a regular function as this service was very recently being used by jewelry manufacturers and artisans. l Increase consumer awareness regarding quality standards: Various consumer forums can increase awareness regarding the minimum standards of quality for products such as gold sold in the domestic market. This will lead to consumers putting pressure on entrepreneurs to adhere to the standards and perform tests which will help create demand for such tests.
About IFC
IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. Working with private enterprises in more than 100 countries, we use our capital, expertise, and influence to help eliminate extreme poverty and promote shared prosperity. In FY13, our investments climbed to an all-time high of nearly $25 billion, leveraging the power of the private sector to create jobs and tackle the world’s most pressing development challenges. For more information please visit www.ifc.org.
About SEDF
SouthAsia Enterprise Development Facility aims to create opportunities and improve lives. SEDF is managed by IFC, in partnership with the UK Government and the Norwegian Agency for Development Cooperation. SEDF facilitates the growth of small and medium enterprises by helping to improve their access to finance through a supportive financial infrastructure, financial products development and strengthening of financial institutions; and providing business services to strengthen value chains. SEDF also helps businesses adapt to the impact of climate change. SEDF operates in Bangladesh, Bhutan, northeast India and Nepal.
About Nepal Business Forum Nepal Business Forum provides a platform for public-private dialogue which is aimed at accelerating and facilitating the reform process by providing the government and the private sector with a structured, transparent and result-oriented mechanism through which they can deliberate on investment climate issues, and jointly agree on reforms. NBF was created by an Executive Order of the Government of Nepal in May 2010.
The SEDF supported the Government to design NBF based on recommendations and lessons learned from earlier IFC involved public-private dialogue initiatives in a number of other countries. The institutional framework of NBF consists of three committees and eight sectoral Working Groups, supported by a Secretariat. At the apex is the High Level Business Forum chaired by the Prime Minister, the Steering Com-
mittee is chaired by the Industry Minister, the Private Sector Development Committee is chaired by the Chief Secretary, and the eight Working Groups are co-chaired by Secretaries of various ministries and Presidents of business membership organizations. For more details, contact Mr. Gopal Tiwari, NBF Secretariat Coordinator at info@nepalbusinessforum.org