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An aerial view of a town in Nepal with mountains in the background

Lifting the barriers to growth of small businesses in boom-time Nepal

In response to the 2015 earthquake in Nepal, Mott MacDonald is delivering a UK aid-funded project for reconstruction. Rabindra Singh is managing the initiative to boost economic recovery and development of the private sector, including small businesses. He explains the business constraints and reasons for optimism for entrepreneurs on the roof of the world.

After a major environmental catastrophe, such as an earthquake, hurricane or tsunami, the rehabilitation effort will often focus on major cities and large civil infrastructure. Rebuilding homes, office blocks, roads and bridges in these central areas takes priority over the economic and social recovery in more remote areas.

Following the earthquakes that shook the Himalayas in 2015, Nepal embarked on a massive reconstruction programme. The country has come a long way, with almost 80% of the damaged homes rebuilt, and the capital Kathmandu returning to business as usual. The next phase is to reconnect the outlying communities that still face difficulties in terms of access, water and power.

The UK aid-funded Post Earthquake Recovery Project, known as Purnima and implemented by Mott MacDonald, assists with the planning and rebuilding efforts in rural districts, across physical, economic and social infrastructure. Our private sector development component is helping micro, small and medium enterprises (MSMEs) to grow and expand on the back of the current construction boom.

These entrepreneurs range from small-scale construction businesses to family farmers with a small truck, who deal part-time in aggregates such as stone, sand, iron rods or timbers, or who provide cash services such as welding and carpentry. Despite their intent to compete in this attractive market, they are struggling to survive. We therefore set about diagnosing the constraints they faced with a view to creating a more enabling business environment. The results of our ‘Business Climate Study’ revealed a number of barriers to success, and also clear opportunities to overcome them.

Opening access to finance

The biggest constraint is access to finance. If MSMEs need money, they will typically borrow it from friends and relatives, or rely on inheritance, rather than deal with a bank. This informal way of doing business, based on verbal contracts and blood ties, is still extremely effective, but how long will this last in a changing world of social media, digital communications and global markets?

There is currently a disconnect between the banks and MSMEs, who sit outside the formal economic net. The financiers want their clients to be ‘bank ready’. They insist on detailed transaction records and bring strict conditions for collateral. Even registered MSMEs have a hard time providing a collateral for the loan, and banks consider them too risky. Unregistered MSMEs are therefore especially low priority. The cost of credit is high, and the transaction process is cumbersome, which makes it very difficult for the MSMEs to access formal finance. Many of the entrepreneurs have scant financial literacy or business training, which only adds to the communication breakdown. In return, they view the banks’ procedures and channels as unworkable and complex. For a start, few banks have a rural presence, meaning that businesses from remote areas must take lengthy journeys to access services

Our role is to help stimulate the market to provide sustainable solutions. We are making it easier for banks and MSMEs to link up, demonstrating the lucrative business potential of this major new segment that banks can capitalise on if they offer more appropriate products. MSMEs are now able to write up business plans, which not only speak in a language the banks appreciate, but also provide a practical goal and business strategy for entrepreneurs to follow. Within just a year, the MSMEs have begun accessing finance at lower cost, registering increased incomes and expanding. As a result, they are creating new jobs, which is a critical boost in the current Nepalese context. MSMEs are also adopting better business practices, which allow them to overcome business losses that would have previously had a significant impact.

Closing the information gap

Government policy, processes and practices determine the ease of doing business whether at a central, provincial or local level. We have found that the policies themselves were well drawn up, but the capacity was often lacking to implement them effectively. Due to problems around information dissemination, MSMEs found processes difficult to navigate and therefore restrictive to growth, especially in areas like taxation, business registration at the local level and transportation permits. Our public private dialogue process (PPD) helps shine a light on these systemic constraints and devise mechanisms to help address them. Due to the ongoing federalisation in Nepal, the PPD is timely, as there is a real desire to engage and improve the business environment among the newly-established local government entities.

Women’s economic empowerment

Construction remains a male-dominated sector in Nepal. Wives and sisters are often registered as owners, as this brings subsidies, however it is the husbands and brothers who make the decisions. There is therefore an opportunity to address social stereotyping and promote the rights of women in this sector. Our work has helped alert women to the potential career opportunities in the construction sector. To date, 36 women have received business training and accessed additional finance for their businesses.

This is just the start! Our strategy for transformative change in women’s economic empowerment is geared toward addressing the social taboos and enabling women in business to move up the ladder of economic empowerment, decision making and resilience.

Piloting innovation for increased investment

Our research also underlined the need to incubate innovation in Nepal, in the face of mounting competition from China and India. This threat to local business pre-dates the earthquake, but MSMEs increasingly struggle to match the standards and prices of foreign imports. We are piloting a new initiative where local incubation and acceleration service providers support construction SMEs adopt new technologies, learn better business practices, become investment ready, and connect to impact investors and other sources of private investment. This should create additional income and jobs in the longer-term.

Stemming the migrant flow

While competition from overseas is increasing, human resources are going the other way. Rural Nepal is in the grip of a migration crisis, as young people turn their backs on local employment in search of better paid work, either in other, more urban districts or abroad. Locals are ashamed to be seen doing more menial jobs at home, and so will travel to work in poorer conditions elsewhere. The traditional fabric of agrarian communities is changing with the high turnover of transient workers, which is fast becoming a source of tension. Again, a more enabling business environment will help to reverse this worrying trend and support the social mission of Purnima to ‘leave nobody behind’.

In conclusion, our work has identified several deep-rooted barriers to expansion for MSMEs, however we also encountered a real desire on the ground to close the gap between financiers, government and entrepreneurs. In just a short time, we have seen the benefits of interventions such as business plan training, with potential to scale up.

There is a window of opportunity, if we act now.

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