--BY DR SHANKAR SHARMA

Macro-economic stability and business friendly environment are essential elements for the development of the private sector. Nepal's macroeconomic indicators are satisfactory. Inflation has remained low and Nepal has the best record in the region in terms of control of fiscal deficit. The balance of payment situation is favourable.  

Nepal also has good potential for development. It has proximity to the giant economies of India and China. Their impressive growth rates are backed by almost 2.5 billion domestic consumers. To benefit from this, Nepal has to develop hydropower and tourism as these are the areas in which Nepal has strong comparative advantage. EU's and India's preferential treatment to Nepali manufactured products also provide incentives to establish and or expand export- oriented industries.

However, Nepal's actual performance is disappointing, mainly because of weak institutions, according to the Global Competitiveness Index 2006. Weak institutions mean problems related to political instability, torrid industrial relations and _ poor infrastructure. There are a number of issues under these categories. However, I would like to focus on four major and fundamental issues that are adversely affecting the Nepali industrial sector. They are: labour related problems, severe power shortage, frequent bandhs, political instability and insecurity.  Trade unions are demanding excessive wage increase for employees and this demand, in fact, has far exceeded productivity. This is neither feasible nor sustainable. The result could be the decline in the rate of return on capital, increase in the number of loss making companies, erosion in the country's competitive position, reduction in future industrial investment and reduction in employment opportunities. This can also adversely affect the health of the banking sector and invite bigger economic crises.  

According to business communities, the trade unions, by mobilising workers and creating disturbances in the industries, are trying to meet the objectives of political parties. If it is so, the eight parties should immediately stop these actions. It is a question of the survival of industries and the livelihood of thousands of workers and their families.  

Alternatively, possible actions to address the demand for wage increases could include the following:  

• Annual wage increase should be negotiated, not forced.  
• Wage increase, if it is substantial, should be implemented over a period of time and not in a single year.  
• Greater use must be made of variable compensation systems such as bonus payments, profit sharing schemes and productivity incentive schemes (which allows higher wage payment in good years).  
• Improvement in corporate governance to make the companies more transparent.  

Business communities and trade unions should negotiate the wage rates through a non-confrontational and harmonious manner to sustain the production of the industrial sector.

Similarly, rigid labour regulations, which lead to retention of unwanted employees could have adverse impact on job creation, resulting — in inefficiency and bankruptcy which leads to more unemployment and underemployment. Labour regulations must be made flexible. It will create more jobs, not reduce them.

However, some sort of income protection or effective training programme tor the reemployment of workers who may be laid-off needs to be initiated and negotiated. Retirement benefits for workers, on the other hand, could be addressed by introducing contributory pension and similar mechanisms.     

Power shortage
Power shortage and excessive load shedding has become a major impediment to the industrial development of the country. Two facts are noteworthy, Firstly, Nepal's power consumption is only about 50 per cent of the average of the least developed countries. Secondly, Nepal has not been able to meet even this scanty demand.

The existing power cut has declined the capacity of operation of enterprises by 25 to 40 per cent. Irregular load shedding has further aggravated this problem.

The continued power shortage in industries can have several effects, which could be the following:
• It is estimated that approximately 100,000 workers will be laid-off from factories
• Production cost will go up by up to 20 per cent.
• It will not be possible to attract new industries
• Industrialists will be compelled to shut down their business.  

The government can initiate the following actions to address these problems:  

• Publish the load shedding schedule and strictly follow it  
• Initiate effective programmes to reduce the present 25 per cent leakages
• Establish captive power plant especially in Hetauda-Birgunj and Sunsari-Morang corridors
• Implement variable tariff during wet and dry seasons, and peak and off-peak hours
• Initiate strong demand-side management to save energy
• Initiate reforms to investment in hydropower
• Utilise turnkey contract to finish project on time.  

Frequent bandhs have been again one of the severe threats in conducting business here. The cost of a one-day bandh is estimated to be over Rs.1 billion in terms of turnover. The raw materials cannot be delivered and exports cannot be transported to the destinations on time. The private sector is deprived of timely services from the government as well as private offices.

The impact of bandhs has been severe. It has resulted in several cancellations of export orders. Several multinationals as well as domestic companies have already decided to close down their factories in recent weeks. This, in turn, has resulted in the lay off of several thousands workers and loss of probably billions of rupees in government revenue. Bandhs should be banned: industrial areas should be declared peace zones and highways should not be closed. Political commitment is required in this area, too.  

Political instability and insecurity
The political parties and the government have failed to create a conducive environment tor investment due to the lack of clear policies regarding investment because of the deteriorating law and order condition,  instability and  lack of consensus even in a minimum economic agenda, frequent change in the government, low priority provided to the economic agenda, contusion about various policy issues among different political parties, including in private sector development, foreign investment, economic reforms, role of the state in education and health and so on. The government should guarantee the country of the existing policies and their effective implementation.

Industries, though operated largely by the private sector, are national assets. They are needed for providing jobs and bringing prosperity the country. They should be given a healthy environment to operate and grow. Most developing countries, particularly our neighbours, are growing very fast. We should be thinking about these issues seriously or we will be left behind and wall again fall in the vicious circle of poverty and conflict.  

(Sharma is a former vice chairman of the National Planning Commission. This article is an extract from a paper presented by the author at the 15th AGM of Nepal German Chamber of Commerce and industry.)