Small construction business face barriers to growth

Kathmandu, Sept. 6

A study on business climate for micro, small and medium enterprises (MSMEs) in construction in Dhading, Nuwakot and Gorkha districts, made public on Friday, has identified critical barriers to growth and how they play out at the local level.

“Small enterprises are the engine of economic growth in Nepal,” said Simon Howarth, Team Leader, Purnima Programme. “But after the earthquake they struggled to provide the services and materials people need to rebuild."

The study highlights the barriers and regulations preventing Nepal’s small businesses in the construction sector from growing. The high cost of doing business is a critical constraint faced by businesses which is even more pronounced for the micro, small and medium businesses, concludes the study.

Small businesses struggle with registration due to high costs, cumbersome processes and lengthy documentation. Unclear jurisdictions of different levels of government result in delays in registration.

Small construction businesses also need to obtain renewal permits and licenses. This not only adds to the costs, but also involves informal payments. “Entrepreneurs have incurred almost 73 per cent of the total registration costs informally,” said Raj Kumar Bhattarai, PhD, study team leader.

Together the three levels of governments levy seven different taxes on small construction businesses, and many entrepreneurs are unaware about the different obligations – suggesting low compliance.

Findings also suggest that small businesses do not have sufficient access to finance. Even though 68 per cent of respondents were aware of subsidised loans, less than one per cent had used such loans.

The cost of credit is high and lenders, rather than being business-friendly, seek high amounts of collateral for loans. Entrepreneurs preferred obtaining credit from banks because interest rates were lower than other micro finance institutions, but still have to deal with overly cumbersome paperwork in the process.

Another concern of MSME entrepreneurs is access to dedicated electricity connections which they said is time-consuming and costly, as is the process of obtaining route permits and renewals for transporters. The poor condition of roads in the districts also adds to costs of transport businesses.

Most MSMEs face labour shortages and increased costs, particularly the post-earthquake reconstruction activities “distorted” local wage rates. Entrepreneurs said wages have increased by 12-25 per cent after reconstruction began to gather speed.

“These findings from the study will guide the policy level dialogue which will be important for entrepreneurs not just in construction sector but to all the small and medium entrepreneurs in Nepal,” shared Bimal Ghimire, Programme Manager, Post-Earthquake Reconstruction, DFID.

The business climate study was carried out by Nepal Development and Research Institute (NDRI), administered by Confederation of Nepalese Industries (CNI) with support from the DFID-funded Purnima Programme on earthquake recovery being implemented in Dhading, Gorkha and Nuwakot districts by Mott MacDonald.

Published in The Rising Nepal daily on 7 September 2019.