Tuesday, November 27, 2018

Contribution-based social security scheme in Nepal

Prime Minister KP Sharama Oli formally launched a new contribution-based social security scheme today. It provides health, accident and maternity coverage to workers employed in the private sector. Workers will also get a lifetime pension after retirement. The scheme is in line with Contribution-based Social Security Regulation.

To enroll into the scheme, a sum equivalent to 31% of a worker’s basic monthly salary needs to be deposited in Social Security Fund (SSF). 11% will come directly from the worker’s basic salary and 20% will be contributed by the employer. This is a significant step in terms of financial and social security of workers and will be a win-win scheme for both workers and their employers. It is step toward workers security as well as creating an investor-friendly workplace environment. 

Here are some of the features:
  • Enrolled workers will get a unique social security number, which remains unchanged even if they change their job.  
  • The fund has four types of social security policy: health and maternity security, dependent family security, accident and disability security, and old age pension security. 
  • They must contribute to the fund for at least six months to avail medical insurance, which covers doctor’s fee, hospital charges, medical test fees, and travel expenses among others. 
  • They must contribute to the fund regularly for at least 12 months (in the last 18 months) to receive health and maternity coverage. Health coverage is limited to NRs100,000 annually. Maternity coverage is limited to one month of extra salary.
    • Workers are getting 12 days of annual leave. If they have to take leave more than that, then SSF will give them 60% of minimum salary 
    • Pregnant worker can get 60 days leave. SSF will give 60% of minimum salary if she has to take leave more than that (but not in excess of NRs25,000).
  • They will get financial support in the case of workplace accidents and disabilities.
    • They must contribute to the fund for at least two years to ensure that all expenses related to occupational diseases are covered. 
    • For non-workplace accidents, a maximum coverage of up to NRs700,000 can be availed.
    • For those who cannot return back to work after accident, the SSF will provide 60% of minimum salary until they report back to work.
  • They are eligible for pension 15 years after they start regular contribution to the fund (and after 60 years of age).
    • Workers who have worked less than 15 years can withdraw the deposited money after termination of employment
    • Workers who have worked at least 15 years will get monthly pension, which is equivalent to the sum of worker's deposit and profit earned by SSF from its investment divided by 180. If workers retire after 20 years of employment and contribution to the fund, then they will divide it is by 240.
  • If a worker dies, then the family members can receive monthly pension equivalent to 60% of the worker’s basic salary in the last job. The worker’s children will receive 40% of parent’s monthly salary to cover educational expenses up to the age of 18. If the worker doesn’t have spouse or children, then his or her parents will get 60% of monthly salary as pension. 
The government is planning to make it mandatory for formal sector firms to enroll in the scheme. It then wants to expand the coverage to informal sector too. Formal sector enterprises need to register by February 22 and submit employees' details by May 21. The exiting social security funds deposited in Citizen Investment Trust and Employees Provident Fund need to be transferred to SSF.

As per the plan as of now, of the total SSF, 3.22% will be allocated for medical treatment, health and maternity security; 4.52% for accident and disability coverage; 0.87% for dependent's family; and 91.39% for old age security. Currently, SSF has NRs20 billion deposited by levying one percent social security tax on basic salary of all private sector employees.  There are an estimated 3.5 million workers currently. The minimum wage as of FY2018 is NRs13,450, of which NRs8455 is basic salary and NRs.4995 is allowance. 

It is a good social security scheme whose groundwork started almost a decade ago. The big question now is how enrollment and fund will be managed and operated transparently. A committee headed by the secretary of Ministry of Labour, Employment and Social Security along with representatives from NRB (deputy governor), finance ministry, law and justice ministry, and cooperatives and poverty alleviation ministry will manage the fund. The executive committee will have three representatives each from trade unions and employers. There will be an executive director at the SSF. If politics is not kept away from SSF, then there is scope for mismanagement of funds (like pressure from MOF to invest in certain projects it deems necessary to support the government's plan). 

Independent and transparent management of fund is quintessential to its operational success and for it to earn profits from the investments. Higher the profits from investments, higher will be the payments to workers enrolled in the scheme. If not, then this is likely to increase fiscal burden of the federal government. 

Another question is how is the SSF going to encourage informal sector firms to enroll in the program (which in a way will force them to operate formally). There are about 0.5 million workers in the formal sector. Monthly contribution from them will be about NRs2.5 billion. 

Tuesday, November 20, 2018

China's manufacturing transformation

China's trajectory of manufacturing is quite interesting. Here is an abstract from an article in NYT:

Economic textbooks lay out a common trajectory for developing nations. First they make shoes, then steel. Next they move into cars, computers and cellphones. Eventually the most advanced economies tackle semiconductors and automation. As they climb up the manufacturing ladder, they abandon some cheaper goods along the way.
[...]Look at the evolution of what China sells to the rest of the world. As it ramped up its manufacturing engine in 2000, China was pretty good at making basic products like toys and umbrellas. By 2016, China had moved into more expensive goods like cellphones and computers, while making even more of the cheaper stuff.

The next phase, which includes the most valuable products in the world, will be harder. China can’t make chips as small and fast as the United States can. Its cars are mostly sold at home. Its manufacturing prowess is built on the back of engineering and expertise from the West.
Both the Apple iPhone and Huawei Mate 10 are assembled in Chinese factories. Both rely on pieces from outside China. The most intricate and expensive technology in the Huawei phone, the motherboard, has a Chinese processor, but it is primarily composed of chips from American, South Korean and Japanese companies. The 2.8-inch board accounts for 52 percent of the cost of the phone, according to data from TechInsights.

Sunday, November 18, 2018

Nepal Airlines seeks bailout, federal government to address tax overlaps and latest private sector diagnostics

From The Kathmandu Post: Less than four months after making the largest jet purchase in the history of Nepali aviation, Nepal Airlines Corporation, which was on a mission to reclaim its long-lost glory, said it is running out of cash and teetering on the edge of bankruptcy.

A statement made public on Thursday by the national flag carrier through a “white paper” shows that the corporation’s monthly cash deficit has reached Rs317.79 million since inducting the first of two long-range Airbus A330s into its fleet. Before that, Nepal Airlines had a monthly revenue surplus of Rs12.54 million. Since summer, Nepal Airlines’ debt-to-equity ratio, which measures the financial health of a company, has swelled to 39.82 percent from 14.40 percent. A higher ratio indicates the company is receiving most of its financing from borrowing, threatening bankruptcy if business continues to decline.

According to the white paper data, revenue earnings from the two wide-body jets from August 1 to September 15 stood at Rs264.8 million, while the expenses nearly tripled to Rs756.6 million, in addition to a staggering deficit of Rs491.8 million. At the moment, the two A330 jets are being utilised for less than seven hours daily, less than half of the required flight time to generate a decent profit. The revelation about the dire state of Nepal Airlines’ finances comes on top of the corporation’s massive loans to various institutions—its long- and short-term loans stand at Rs41.73 billion and it owes more than Rs3.66 billion in interest annually.

The national flag carrier, instead of scoping pilots for the new aircraft, followed its traditional practice—to get the planes first and find the pilots to fly them later. It still has at least three planes sitting on the tarmac at the Tribhuvan International Airport while it frantically looks for capable pilots. It was indeed a gargantuan project to equip the airlines with the youngest fleet in the country—inducting two Airbus A320 aircraft in 2015 and two additional wide-body A330 in 2018. The induction of four jets had been described as a game-changer for the corporation—and the country, allowing the airlines to compete with other international players on long-haul routes to Europe, Japan and the Middle East. However, some airlines officials say the corporation did not plan its operations efficiently.

From The Kathmandu Post: The Finance Ministry presented the proposal to the Cabinet for implementing the report that calls for scrapping several taxes levied by the local and provincial governments while broadening the tax base of the sub-national administrations.

The report recommends that the arbitrary taxes should be scrapped and a composite federal revenue law introduced to provide legal clarity. Finance Ministry officials confirmed that the government will instruct the provincial and local governments to follow the recommendations. The Thapaliya-led committee was formed after an uproar over hefty increments in taxes imposed arbitrarily by the provincial and local governments.

The committee concluded that only the federal government has the authority to levy tourism fees, which has to be shared between the provincial and local governments. It also recommends an end to the practice of non-state actors such as various committees and projects collecting tourism-related taxes contrary to the spirit of the constitution. The high-level committee also suggests that local governments cannot impose business taxes—on industries, trade, profession or occupation within a particular local federal unit—on transactions. Such taxes can be imposed only during the registration and renewal of business ventures. The report deems the Patake Sawari Kar (vehicle tax) and the District Export Tax as unconstitutional as they go against Article 236 of the constitution.

While the erstwhile District Development Committees imposed ‘District Export Tax’ on the sale of such goods to another district, the new constitution banned it. However, Clause 11 of the Local Government Operation Act allows the local government to collect sales and export fees on such items. After the Financial Act introduced by the federal government amended the provision of the Local Government Operation Act-2017, local governments complained that the changes breached their right to collect wealth tax. The report suggested implementation of the Act’s provision. The report also stresses the need for a law on taxing the extraction of stones, gravel and sand as there is no legal clarity over their use.

Private sector diagnostics 

The IFC recently released country private sector diagnostics, which identifies sectors that have potential to support Nepal's growth. In addition to hydropower, the other identified five sectors that have potential to have major impacts on Nepal's growth trajectory are tourism, agribuisness, education, health, and IT. 

The private sector is constrained by institutions/governance and infrastructure. With key sectors such as tourism and agribusiness being highly reliant on connectivity, strengthening infrastructure is the other critical challenge for private sector development. A gap in technical skills and managerial capabilities is constraining growth-oriented firms from scaling up and rising up the value chain. Access to finance and inefficient land markets are also key constraints. Excessive barriers to foreign investment and foreign-exchange transactions also constrain the private sector. Policies on land acquisition and the use of land as collateral, in particular, deter foreign investors and lenders, restricting private sector access to long-term finance.

Tuesday, November 13, 2018

Nepal Investment Summit: Rhetoric vs Reality

It was published in The Kathmandu Post, 12 November 2018, p.8

Tangible outcomes must be met before holding the next Nepal Investment Summit

The government is planning to organise an investment summit around March 2019 despite having nothing much to show since Nepal Investment Summit in March 2017. The Investment Board of Nepal (IBN), which is spearheading the idea of organising the summit, wants to boast about the government’s ‘stable politics’ and investment policies, especially after the elections. However, this rhetoric means nothing to investors if the government cannot show them tangible outcomes that would facilitate investments in ways that are different from previous years.

Organising a grand summit for fleeting fanfare does not constitute promotion of the country as an investment destination. Investors will be more interested in concrete accomplishments since the last summit, the government’s promises vis-à-vis its pro-activeness in amending and implementing legislations, and the resulting number of successful commercial deals and projects signed. Or else, it will simply be yet another summit that leaves us with little more than photo-ops, self-glorification, and never-ending commitments.

Little progress

Investors from seven countries signed letters of intent to invest US$13.5 billion-in sectors including hydropower, airlines, tourism, agriculture, railways, and infrastructure-during the investment summit in 2017. About 61 percent of it came from Chinese investors.

The summit in 2017-organised to promote Nepal as an investment destination for the next decade-targeted diplomatic missions in the country, current and potential foreign investors, media, nonresident Nepalis, experts, and private actors. The hype before the event and the rousing fanfare immediately after the investment commitments were made tapered off in no time. The investment promotion agencies have not been successful in transitioning from intent to commitment to investment. Although the summit had broad political support, the IBN has failed to do the required follow-up work with the seriousness it deserves. All we are getting is bureaucratic lip service. 

Let’s look at the outputs thus far. First, foreign direct investment (FDI) commitments increased from 0.6 percent of gross domestic product (GDP), or about Rs.150 billion, in 2016/17 to about 1.9 percent of GDP (Rs556 billion) in 2017/18. However, none of the investment commitments in new projects can be traced back to the investment summit in 2017. Meanwhile, actual FDI investment increased from 0.5 percent GDP to 0.6 percent of GDP over the same period. Again, none of these are even remotely related to the investment summit.

Second, one of the main points trumpeted by the IBN to justify the new summit is that the time is different now. Yes, the two big communist parties forged an alliance, forming Nepal Communist Party, and formed a majority government not only at federal level, but also provincial and local levels. However, this alone is not a harbinger of political and policy stability. The previous summit had support from the same political parties and politicians. The co-chair of the ruling party was the prime minister during the investment summit last year.

Third, a cosmetic change in government leadership but not in governance style that produces promised outputs does not mean much to investors. They are interested in whether the government is keeping its promises in a timely manner, and how easier it is for them to invest, earn and repatriate income. There is hardly anything to show on this front. The previous summit was tagged as an effort to promote Nepal for the next ten years. However, after just two years, devoid of any commendable result, the IBN is proposing for a new investment summit. It does not send a good signal of consistent leadership with concrete vision and viable work plan. Furthermore, inconsistencies, especially policy reversals to benefit a particular group of investors, unnerve genuine investors. For instance, the controversy over re-awarding Budhi Gandaki project by the cabinet to a foreign firm with a questionable record in Nepal is a case in point.

Fourth, latest global reports that track the progress of our economy relative to itself and to other economies are not encouraging either. Nepal ranked 109 out of 140 economies in the Global Competitiveness Report 2018, which evaluates an economy on a range of factors such as institutional quality, state of infrastructure, business dynamism and innovation capability. Nepal’s rank was 108 in 2017 but it slipped by one position to be the least competitive economy in South Asia. In terms of enabling environment such as institutions, infrastructure, ICT adoption, and macroeconomic stability, Nepal’s relative standing is not encouraging.

Similarly, Doing Business Report 2019 indicates an economy that did not make any progress in making business operations smooth and hassle-free last year. Nepal scored 59.63 (rank 110 out of 190 economies), lower than 59.95 last year, indicating that doing business, in fact, was made burdensome. Nepal fares notably low in enforcing contracts, resolving insolvency, getting credit and paying taxes.

Simplify process

The overall outcomes since the last investment summit are not encouraging at all. The economy is not agile and future-ready enough to entice investors. It doesn’t even have basic infrastructure and proactively supportive institutions to create a foundation for enhancing productivity. Instead of wasting time and resources on another investment summit, the IBN should do the necessary to follow-up on the investment commitments made during last year’s summit. Meantime, the government should be doing the needful to develop a conducive legal and regulatory framework to attract more FDI, starting with approval of foreign investment and public-private partnership legislation.

The next five years should be marked by notable progress in reducing barriers to doing business in Nepal: aiming for the best investment destination by ensuring speedy clearance of investment proposals, requiring the lowest number of documents to enter, operate and exit the market, and making bureaucracy and government leadership the most efficient in South Asia region. Boasting about these tangible milestones is more meaningful than just claiming political stability under the communist leadership, which is already vulnerable to a resurgence of factionalism within the party.