The four months long lockdown followed by the lifting of the restrictions and return to the prohibitory orders amid a surge in coronavirus infections has disrupted almost all industrial, business and development activities in the country like never before. However, there are some businesspersons who are looking to turn the challenges into opportunities even in this gloomy environment. Pawan Kumar Golyan, chairman of Golyan Group is one such industrialist who sees a silver lining behind the dark clouds of uncertainty. In an interview with Madan Lamsal and Mukul Humagain of New Business Age, he talked about his venture into agribusiness, plans of Golyan Group and the government’s response to the Covid-19 crisis, among other issues. Excerpts:
What are your observations on the current macroeconomic environment and the Covid-19 pandemic-induced economic slump? How deep do you think will the current slump be?
It is difficult to predict the scale of the economic slump because it depends on the coronavirus transmission. We are now entering the second phase of virus contagion which is expected to peak in August. Now we need to learn to live with the coronavirus and keep the wheels of the economy rolling. When industrial and business activities are halted, small businesses, be it grocery stores or barber shop, have to face big problems. On top of that, different social problems are emerging from the current crisis. Over 2,000 people have already committed suicide since March.
Conversely, the Covid-19 crisis has created enormous business opportunities. Many of our problems could be resolved if the opportunities are encashed. In FY2019/20, Nepal imported agri commodities and products worth Rs 250 billion which is Rs 50 billion higher than FY2018/19. The ballooning of agri imports is alarming. In the yesteryears, we were facing problems in the agribusiness primarily due to the deficit of workforce. Now with Nepali migrant workers returning in large numbers due to the pandemic-induced economic recession in major labour destinations, we are suddenly worried about providing employment opportunities to the returnees. Currently, over 500,000 people have lost their jobs in Nepal, 1-1.5 million are expected to return and another 500,000 will be job market ready this year. So we are talking about providing jobs to 2.5 million people which is in fact a great opportunity.
Now we need to focus on producing products that are most imported in our country. Big industrialists, who are just several hundred in number in Nepal, alone won’t be able to commercialise agriculture and start mass production of items on their own. We need small and medium enterprises (SMEs) in tens of thousands to engage in large scale agricultural production and food processing. The SMEs can set up industries in areas where particular types of crops are grown in abundance. The list will be very long if we keep on exploring.
How has the Covid-19 crisis affected your existing businesses and investment plans? How is Golyan Group mitigating the impacts of the crisis?
As a group having diversified business interests, we are also taking a significant hit from the Covid-19 fallout. It is difficult to quantify the loss at the moment because the crisis is yet to subside. We had planned for the soft launch of the Hyatt Palace Hotel on January 1. But some necessary items to open the hotel which we have ordered were stranded in China due to the raging Covid-19 transmission. On the other hand, our hydropower projects that are currently under construction have been delayed as equipment and other necessary construction goods for the projects have been stranded in India adding a huge financial burden on us. Similarly, the three-months long lockdown also forced us to face big losses in our manufacturing ventures which are mostly export-oriented. Likewise, the returns from our investments in banks and insurance companies is insignificant currently.
However, we should certainly not lose hope. Personally, I want to move aggressively by taking a different route when there are problems in business. Our Reliance Spinning Mills which has been operational for the last 25 years employing 4,300 Nepali workers, has resumed operations in its full capacity from Ashad 1. The Covid-19 crisis has pushed one of our expansion plans to Poush. Besides, we have recently moved ahead with another plan for expansion for cotton yarn production which will require an investment of Rs 3 billion. This would boost production of cotton in the country and generate new jobs. Similarly, we have also planned to invest in 2-3 hydropower projects recently. Our expansion plans in the agriculture sector has also been affected due to the Covid-19 crisis.
We are not seeking additional investment from banks and will manage money from our own resources for the industries that are operational except hotels and hydropower projects. We consider management of our companies and the 10,000 people who are working with us currently as the biggest strength. We do not want them to think that they risk losing their jobs over this critical situation.
How effective do you think has the government’s response to the Covid-19 crisis been? Has the government fallen short anywhere in the economic measures taken to manage the crisis?
It is praiseworthy that both the government and the central bank have given their preference to the rescue and revival of small and medium enterprises (SMEs) in retail and other sectors, cottage industries and small farmers. I don’t think any other central bank in South Asia has come up with relief measures for SMEs like those announced by NRB in the current fiscal year’s monetary policy. However, the central bank is yet to take concrete steps for providing relief to large businesses. During recent conversations, NRB officials told us that they are working in this regard.
I think the reduction in export refinancing facility for large exporters is the biggest error in the Monetary Policy. Talking about Golyan Group, our Reliance Spinning Mills used to get refinancing facility of Rs 1-1.5 billion for exporting yarns worth Rs 7-8 billion annually. This reduction has increased cost of fund and cost of doing business ultimately making our exports costlier.
Similarly, the Federal Budget has also not encouraged manufacturers and exporters. The reduction in customs duty on import of items like biscuits, in which Nepal is self-reliant, will erode the competitive capacity of Nepali industries. Likewise, customs duty decrease on import of undergarments will also hamper potential future production. While it is good that the government has provided protection to automobile dealers by levying an additional 30 percent on import of vehicles to those who import vehicles other than the authorised dealers, the same type of protection should be provided to domestic manufacturers.
It has been heard that the central bank is working on whether to rescue and provide relief to large hotels, tourism related businesses and export-oriented industries through refinancing facility or other measures.
What specific support manufacturers and exporters are seeking help from the government?
There are many ways the government can promote us. For instance, effectively checking under-invoicing and wrong declarations of imported goods will help domestic producers. Second, strictly controlling smuggling of goods at Nepal-India border points will be very much helpful. The halt in cross-border illegal supply of goods due to the ongoing Covid-19 crisis has shown that products made in Nepal can also get good market if such activities are checked.
Currently, there is an annual demand of textile items ranging from bed sheets to curtains and readymade garments worth Rs 600 billion in Nepal. Officially, the import of such goods amounts to Rs 100 billion while the domestic production of textiles and readymade garments is less than Rs 50 billion. This means the rest, Rs 450 billion, comes to Nepal through smuggling and under-invoicing. Controlling these malpractices will promote domestic production as well as increase government revenue.
Similarly, there are several problems in export of agricultural commodities. The government has increased customs duty on export of farm produces to 9 percent which was 5 percent earlier which is certainly not helpful. Currently, there is high customs duty of 35 percent on big oranges and 85 percent on cardamom to export to Bangladesh. We are required to pay customs duty even to export farm produce to Bhutan. Meanwhile, Nepali producers also face several non-tariff barriers to export their products to India.
It is said that the dominance of the Ministry of Finance over the Ministry of Industry, Commerce and Supplies has led to the difficulties being faced by manufacturers and exporters. Do you think this is correct?
The primary function of the Ministry of Finance (MoF) is to manage government finances. No matter how much MoF officials say they will provide support to the industrial sector, their focus is to collect revenue as much as possible. We need to look at how state protection helps to grow industrial activities. The growth of cement and iron industries in Nepal is an example in this regard. Why can’t the government provide such protection as provided to domestic agri businesses? I don’t see any logic that restricting import of farm produces will result in a price hike of agricultural products.
Whenever there is a new minister or secretary at MoICS, I personally go there to suggest them about what they need to do for industrial development. If we look at other countries, industry and commerce ministers have big roles to play. In India, for instance, key decisions to provide protection to domestic industries, restricting imports of certain goods and setting floor prices of goods etc. are all done by the Ministry of Industry and not by the Ministry of Finance. The latter is required to form a consensus with the former to incorporate key arrangements related to industrial and commercial sectors in the budget. For example, India’s Ministry of Industry and Commerce is said to be working to impose anti-dumping duty on the import of textiles and yarns in a bid to rescue domestic industries. A similar initiation has been observed in Turkey, which is one of our major export markets for yarns, where the Ministry of Industry and Technology has raised the floor price of imported yarns.
A forthcoming report prepared by a government-commissioned task force has recommended that industrialists need to settle the dues they owe to the Nepal Electricity Authority for using dedicated feeders and trunk lines. How do you think this issue can be resolved?
I’ve been saying from the very beginning that people need to pay for the services they’ve availed. A government-commissioned task force in a 2015 report recommended to charge industries full electricity tariff if the power is supplied by NEA 24 hours a day via dedicated feeders. I don’t think any industrialist has an objection whatsoever to clear their dues if their industries have received power round the clock. On top of this, there is a question why NEA did not ask the industries to pay their bills earlier and demanded to settle their dues that cumulated for four years. NEA needs to stop tainting the image of industrialists and blaming them and making baseless claims.
Talking about Reliance Spinning Mills, we received electricity bills amounting to Rs 1 billion in 2019 and 2020. With fines and interest, the amount has now reached Rs 1.7 billion which is more than the company’s capital investment. It is unjustified and illogical to ask an industry which earns Rs 20-22 million yearly to pay such a hefty sum of money. In fact, NEA has stopped providing power through dedicated feeders since 2015. In a public notice issued after the earthquake, the authority had notified us that it had stopped providing electricity to industries through the system due to decrease in water flow in the rivers. No another notice has superseded it regarding the power supply through the dedicated feeders.
I would like to make it clear that Reliance Spinning Mills will not be paying the electricity bills. The industry would rather close than pay the amount which has been baselessly claimed by NEA. If this situation comes, the government will have to bear the responsibility of the 5,000 people associated with the company. Regarding the trunk power line, there are two conditions for the payment of bills. The government has already written its decision in the Red Book that NEA needs to fulfill the conditions of supplying electricity to industries for at least 20 hours with six hours of power cuts to collect the payment under the trunk line system. However, it is not rational for NEA to ask industries to clear their dues without meeting the conditions without downloading power consumption data from the time-of-day (TOD) metres installed in big factories.
Golyan Group has ventured into two new sectors - hospitality and agriculture. What factors are behind this diversification of investments?
It was five years ago when we decided to enter the hospitality sector, and the reason behind it was to help boost the tourism of the country. We felt this as a need also saw potential as well. The government’s announcement to increase the number of tourists to two million in 2020 also help us to invest in this sector.
As for our venture into the agriculture sector, it was because of my plan to do something new instead of staying idle after I turned 60 and retired from day-to-day business works. The agribusiness project that I started in Lamki, Kailali a few years ago was not successful as I could not look after it properly. So after retiring, I had enough time and I found a place in Rangpur, Jhapa to establish the new venture in agribusiness purely with a view of it being a CSR initiative.
I thought to start organic farming with a view to provide benefits to both farmers and consumers. The idea was to supply organic farm produce at affordable prices in the market while also ensuring reasonable rates for the producers and the farmers. Initially it was difficult but later we were able to work with 1,000 farmers from 25 villages and it has turned out to be a very successful business model. We also encountered problems along the way in terms of selling the farm produce. We realised that the presence of middlemen will create difficulties when selling the products in the markets. For some time, we even bought cauliflower from farmers at around Rs 19-22 per kg and sold it at Rs 5 to the consumers which was impossible to carry on for long. Then the brand ‘Mato’ was born with the business modality to do all market related works by ourselves. There is already a ‘Mato’ store and even during the Covid-19 pandemic, three stores have been opened. We have plans to open at least 20 stores in Kathmandu this year. The target is to open 100 stores across the capital valley gradually expanding branches around the country over the next few years. We have a collaboration with the Women Entrepreneurs’ Association of Nepal (WEAN) in Jhapa. Basically, our business model is perennial crop farming and not the contract farming.
How big will the portfolio of Golyan Group’s agribusiness venture be in the future?
Among our entire investment portfolio, agribusiness will be the biggest in the next five years. We established ‘Mato’ to start a retail business creating a big market for organic farm produce. Eventually, there will be profit in agriculture, but the growth will not achieve greater heights by just supplying products to local markets. So, we have planned to start exporting farm produce when Mato will become a certified organic company in the next three years. Currently, we are also engaged in small exports. During the lockdown, we exported water melons and a few other farm produce. The market is recognising our endeavours and the demand for products is also increasing.
Things have not moved in meaningful ways despite a realisation that Nepal needs a shift from subsistence to commercial agriculture. What do you think is needed from the government side and the private sector?
First and foremost, local governments should work on data about land ownership. This will help us know how much land farmers own and the level of dependency of their families on agriculture. This will enable authorities and other institutions to provide the right kind of support to the farmers. We will also know the type of agricultural production in a particular area and move ahead with plans accordingly.
Committees comprising of all agribusiness stakeholders should be established in all local levels. This can help to resolve a number of issues such as market access and availability of equipment for agriculture, among others. Infrastructure deficit is also obstructing the commercialisation of agriculture in Nepal. Large agro procession zones, which would require about 100 bighas of land, need to be established in each province. Collection centres, warehousing facilities, cold and dry storages should be established throughout the country with a view to supplying products to the local markets as well as exports. The investments can be managed in these projects using the public-private-partnership (PPP) model. Investment is not a problem here. Like myself, many Nepali investors are ready to invest in agribusiness. Similarly, we can have foreign investments in commercial farming and agro-processing business, and donor agencies are also ready to provide funds. Now that the liquidity is so high in the banking system the sector can also be a lucrative investment avenue for banks. I think despite the economic hardships, the Covid-19 crisis has presented an opportunity to develop the agriculture sector.
The Monetary Policy for the current fiscal year has mandated banks to lend at least 15 percent to the agriculture sector and it has been termed as ‘unpragmatic’ by many bankers. How do you view this arrangement? Do you see other anomalies like this in the monetary policy?
The arrangement of maintaining at least 15 percent of bank lending in agriculture is the need of the hour. However, we have some reservations in this respect as it will be very difficult for banks to expand their investment portfolio in agriculture. We have asked for an arrangement to allow banks to invest in the proposed agriculture bonds which the Agricultural Development Bank is planning to issue. Even if class ‘A’ banks cannot invest in the bonds, class ‘B’, ‘C’ and ‘D’ financial institutions can invest in the scheme which can really make a difference.
Similarly, the directed sector lending to SMEs, in which the credit amount is below Rs 10 million, should be carried out through development banks, finance companies and microfinance institutions as it is very difficult for commercial banks to lend money under this programme. We are ready to invest in financial institutions of other categories for the purpose, but the central bank should not make commercial banks carry the burden. For example, NMB Bank has a total loan extension of Rs 120 billion and if it provides loans under the directed sector lending, Rs 18 billion will be added to its lending portfolio. It is impossible for any bank to recover Rs 18 billion in loans within three years as provisioned in the monetary policy. Class ‘A’ financial institutions can invest in large agricultural infrastructure development projects and agro-processing industries where significant sums of capital is required.
Likewise, the provision of 10 percent bank lending in hydropower in the Monetary Policy and the arrangement in the Federal Budget are not compatible with each other. The government has discouraged hydropower lending by halting power purchasing agreements (PPAs) with all independent power producers. The central bank on the other hand has asked banks to increase their lending in the hydropower sector. This situation has led us to policy uncertainty. At a time when we are preparing to sell electricity to neighbouring India and Bangladesh, this uncertainty will cost us a lot. If the government cannot do things on its own, it needs to allow the private sector to engage in power trade.
The establishment of the two-thirds majority government in early 2018 had raised hope among the business community that the country will be heading towards a new path of economic prosperity. Do you see this aspiration of the private sector getting realised?
In the past, businesspersons were pushed to engage in trading rather than industrial ventures due to the political uncertainty and incorrect government policies for many years. Sadly, this has not yet changed. This situation has prevailed because of the government’s revenue-centric approach.
As an industrialist, I know how hard it is to sustain businesses, a workforce of 10,000 in this time of crisis. This is something very different for people who are solely engaged in trading business. Our hope that the advent of political stability in the country will result in the development of the industrial sector has been dashed. It is due to the government’s indifference towards us. When the government can provide protection to auto dealers, why can’t industries get any support?
Lately, you are not involved in business bodies like in the past. Why it is that your interest has declined in the affairs of the private sector bodies?
As the founding vice president, I was involved in the Confederation of Nepalese Industries (CNI) since its inception and the organisation came into existence with certain principles. Having felt that the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) failed to come up with a vision for the development of the industrial sector, I decided joining CNI that time. However, after observing that CNI has also started to give priority to the people in the trading business and its leadership has slowly started to drift towards the traders, I exited from the organisation.
Despite my exit, I have continued to work for the interests of the country’s private sector. This is probably for the first time that the three major private sector bodies -FNCCI, CNI and Nepal Chamber of Commerce (NCC) - jointly presented their suggestions to the government and the central bank during the formulation of the budget and the monetary policy. It was I who made the organisations come together. We invited the leaders of the three associations at the Confederation of Banks and Financial Institutions (CBFIN) and requested them to form a consensus to present their suggestions to the government.