29 August, 2024
Industrial Infrastructure
Industries play a pivotal role in contributing to the countries’ economic growth and provide employment opportunity for their citizens. However, the industrial sector in Nepal has not been the most sanguine with its GDP contribution in the fiscal year (FY) 2020-21, being only 13.11%. Outmigration, lack of business-friendly policies, inadequate infrastructure, and political hurdles have been the consequences for a weak entrepreneurial ecosystem in Nepal.
Nepal has a short history in the industrial sector. The first industrial act was Nepal Companies Act 1936 which was followed by the establishment of the first joint venture industry and production plant in Nepal – Biratnagar Jute Mill. The first industrial policy was charted out in 1957. Subsequently, the industrial policy of Nepal was revised or replaced in 1960, 1974, 1981, 1987, and 1992. The Industrial Enterprise Act 2020 is currently the latest act that administers the industrial sector of Nepal. To realize the potential of the industrial sector, other relevant and complementary acts like the Public-Private Partnership and Investment Act 2019, Investment Board Act 2011 and Special Economic Zone Act 2016 were enacted.
Commercial Zones
To enhance economic growth and promote the manufacturing sector, the government of Nepal established the Industrial District Management Limited (IDML) in July/August 1988. The aim for creating an industrial district was to provide physical infrastructure facilities like buildings, electricity, water and other necessary physical infrastructures. At present, there are ten operational industrial areas in Nepal – Balaju, Patan, Bhaktapur, Hetauda, Nepalgunj, Pokhara, Butwal, Dharan, Birendranagar and Gajendranarayan Singh. Additionally, the government of Nepal has declared 7 new industrial estates, namely, Damak, Mayurdhap, Shaktihor, Lakshmipur, Motipur, Naubasta and Daijee. The government plans to declare five other industrial areas. The fifteen five-year plan has targeted to establish 351 industrial villages by 2023-24. But the progress of establishing industrial villages nationwide is currently lumbering in Nepal.
Special Economic Zone
There are seven Special Economic Zones (SEZ) in Nepal with one in each province. The idea of establishing SEZ is to attract both domestic and foreign investment to increase the competitiveness of export-oriented industries in Nepal. These commercial areas have liberal tax regulations with varying degree of exemptions on income tax, excise duty and VAT to create a fecund environment for industrial production. However, SEZs in Nepal have not been able to attract enough investment from private sector due to some infeasible provisions such as very high rental cost and stringent policies in terms of minimum export volume requirement.
Key Outcomes and Suggestions
The current pace at which the government is constructing these commercial zones begs the question of efficacy as they are struggling to allure private investors. While the vision of the government is to increase job opportunities and stop out-migration, these special zones have not been able to reach their potential and harness an entrepreneurial ecosystem. The government should focus on following areas to make these zones an attractive destination for foreign and domestic investors
The private sector has the potential to bring capital as well as innovation for the growth of industrial infrastructure as it has done in telecommunication, information and broadcasting, and energy sector. Therefore, the government should create opportunities for the private sector in the development, operation and management of industrial infrastructure by making commercial zones and SEZ more conducive for business environment.
Nodal infrastructure focused institutions such as NIFRA can work with private sector and public institutions for development of industrial infrastructure by arranging equity and debt for their projects. It can provide debt financing for the project invest equity in the project either through NIFRA promoted separate company or directly.
IFC Country Private Sector Diagnostic Report recommends, there should be improved allocation of land for infrastructure projects by:
(a) implementing land zoning
(b) updating the Land Act and making it consistent with Land Acquisition Policy
(c) developing industrial parks tailored to specific industries
The government should make provisions for banks and financial institutions to mobilize at least 10 per cent of their loans to export-oriented industries.
The role of Public-Private Partnership (PPP) for public infrastructure project is very significant in potential industrial areas. PPP arrangements are useful for large projects that require highly skilled management and a significant cash outlay to get started.