Wednesday, June 28, 2006

Insurance: Handle the golden goose with care

Why insure:
Insurance is the process of sharing financial losses of the 'few' from a common fund created by the contribution of 'many' equally exposed to the same risk. In general, it is a contract in which one party agrees to pay for another party’s financial loss, resulting from a specified and insured event.

Born in the early 1950s, the Nepali insurance sector has shown a tremendous growth in recent times, especially after the enactment of the new Insurance Act-1992 and Insurance Regulation-1993. Today, there are 21 insurance companies, comprising of four life and 17 non-life companies.Considering the present market size, some industry insiders think that the Nepali insurance market is nearly saturated. The government should now either encourage mergers or introduce deterrent factors to stop further proliferation of similar companies, like increasing the amount of paid-up capital, they suggest.
However, S K Gorkhali, general manager of the latest entrant in this field, Siddhartha Insurance, does not agree. He says that there is many a vista that Nepali insurance sector is yet to discover. "The market is not yet saturated. The insurance market can be expanded, as there are more sectors to be explored like house-hold insurance sector, agriculture insurance, cattle insurance and many more,” he adds.
Rajendra Khetan, former president, of the Nepal Insurers' Association agrees with him. “Nepali insurance market is still virgin,” he says. Available data supports his logic. In Nepal, below one per cent of the household savings find their way into life insurance, compared to 30 per cent in Japan, the largest life insurance market in the world.Insurance is the foundation on which the entire superstructure of industry grows and economy stands. For Nepali economy, which is considered vulnerable most of the times, it is the last refuge.
Considering the small capital investment, it is worth the insurers while to insure one's personal or commercial property or assets.“The most important thing for the growth of the insurance sector in Nepal is awareness,” says Murari Raj Sharma, chairman and CEO of the Rastriya Beema Sansthan, the highest contributor to the government bond. “The hindrance has been the low per capita income of Nepalis,” he adds. For making the insurance sector robust, awareness needs to be propped up by a rise in the per capita income, he feels.This sector not only contributes towards the national economy by generating revenue for the government, but it can provide a vast, long-term source of funds that can be used for infrastructure development.
Despite the insurance market in Nepal growing at a rate of around seven per cent to 11 per cent, the share of insurance premium in the Gross Domestic Product (GDP) remains negligible. It could contribute to the GDP more significantly in the long-term, if the government extends supportive measures. Little changes here and there would achieve nothing, feel industry players. It requires a radical departure in terms of policies to change the fortunes of the insurance sector.
In sharp contrast to the need of this fledgling industry to ensure consumer confidence, some insurance agencies are already being accused of a high degree of unethical practices like insurance on credit, poor claim settlements and financial anomalies within the insurance companies themselves. Although, the government has set up an Insurance Board (IB) as the insurance regulatory authority to oversee the operations of insurance companies and safeguard public investments, the charges of malpractice continue to mushroom.
“We have been continuously monitoring the insurance companies. When we find some wrongdoings, we penalise the agency to safeguard customers’ interests,” said Madhav Prasad Upadhayay, chairman of the Insurance Board. The board is also working on standardising accounting practices to raise capacity, effectiveness and credibility of companies, especially in the context of World Trade Organisation (WTO), wherein Nepal has already committed to open up the sector to foreign investors from 2009.
The board has taken initiatives following its findings that the pattern of bookkeeping in insurance companies varied widely and their way of maintaining records was below par. It is more than a responsibility of the board as the total accumulated investment in insurance sector has grown to five billion rupees at present and is increasing.Industry players seem supportive to the Insurance Board’s actions to make the insurance sector more responsible and respectable. They suggest that the board should come up with a strict circular for making additional provisions on uncollected premium.
The sector is marred with many other problems like VAT, from which only the government can relieve it. Industry insiders have also suggested the establishment of a re-insurer within the country. Currently all the 21 companies are venturing out of Nepal for reinsurance. The establishment of a reinsurer can help stop the outflow of foreign exchange and spread a healthy risk within the local market.
In today’s world, to visualise commercial, trading or industrial investment without the backing of insurance protection is impossible, as any entrepreneur first seeks protection for his investment.
Insurance protection is required at each and every step to insulate the investment against any unforeseen perils — natural, accidental or man-made. Nepal cannot remain aloof to the shield of insurance. For the sake of ordinary citizen, business ventures and economy at large, honest attempts need to be made to encourage the insurance sector.

Wednesday, June 21, 2006

Nepali Pharmaceutical Industry needs medication

The National Drug Policy 1995 has directed all the government ministries ‘to include drug industry as a priority sector’. But even after a decade, domestic industries feel that they are not getting enough attention from the government.
“In practice, government policy favours imports,” complained Umesh Lal Shrestha, managing director of the Quest Pharmaceuticals. “Both the Drug policy 1995 and Ausadhi Utpadan Samhita 2041 are outdated. They need to be updated and made supportive to the domestic pharma industry.”
In 1990, when the National Drug Policy was formulated, there were only a few pharmaceutical industries in Nepal. But at present there are more than three-dozen domestic pharma industries that are operational. It is not strange that they want more government support today.
“Nepal needs to treat imported medicines in a similar fashion as Nepali pharmaceutical exports receive in neighbouring countries”, is the general demand from the domestic players.
“While Nepal charges $1,500 as inspection charge from a company from SAARC, India, for example, charges $5,000. For a product registration, while Nepal charges $10, India charges $150. This clearly shows that Indian domestic companies have a greater protection,” Shrestha informed.
"We want our government to lobby for us, like it does for garment sector," said P J Pandey, managing director of Lomas Pharmaceuticals. “We want to take advantage of being a Least Developed Country and sell our products abroad,” he said adding that the government needs to start economic diplomacy to promote the domestic pharma industry abroad.
"With modern technology in place, the Nepali pharmaceutical sector is capable in producing quality drugs. We can export and compete with others, if the government gives us a little support," Pandey added.
One of the major objectives of the National Drug Policy-1995 was to enable the local pharma industry to ‘to produce 80 per cent of the essential drug formulations in the coming ten years’.
“However after ten years, we have achieved only 45 per cent of the total target,” said, Bhupendra Bahadur Thapa, director general at the Department of Drug Administration (DDA). “But we are moving in the right direction,” he added.
“It is possible, if all the domestic companies start producing at least one essential and one life-saving drug,” said Suresh Prasad Pradhan, president of Nepal Chemist and Druggist Association (NCDA).
With an annual projected growth rate of around 19 per cent, pharmaceutical sector is probably one of the fastest growing industries in Nepal.
The domestic sector at present claims a-three billion rupees worth of market, which is around 35 per cent of the total eight billion rupees pharmaceutical market in Nepal.
Foreign companies occupy almost 65 per cent of the drug market. Even among the foreign brands, Indian companies are dominant.
The other problems besetting the Nepali pharmaceutical sector are VAT and smuggling of drugs through the porous Indo-Nepal border.
According to Shrestha, "There should be no VAT on raw materials, packaging material and machines.”
APPON and NCDA both raise concerns over VAT and extra taxes like 1.5 per cent security tax levied on raw materials.
Besides these, issues like too many players and lingering doubts over the quality of the medicines produced, are headaches that the pharmaceutical sector here is still carrying.
Today, there are 40 Nepali companies. Alongwith the 201 foreign companies, they are offering 7,299 brands now.
The debate whether the existence of this large number of pharmaceutical companies is good for Nepal or not continues.
Unlike other products where more brands usually mean more choice for consumers, the large number of brands in the pharmaceutical sector is only encouraging unhealthy practice, feel most industry insiders.
"It is not like noodles that a consumer chooses as which product to eat. Rather, it is prescribed by an expert and a consumer has no choice," said Sarad Chandra Ojha of Sumy Pharmaceuticals.
"We are working on reducing the number of brands to control unhealthy practices," Bhupendra Bahadur Thapa, director general at the DDA said, adding that the practice of giving incentives is unethical in pharma business. “We have been working with APPON and NCDA to control this unhealthy practice.”
Rajesh Shakya, director of the Florid Laboratories, however, does not agree, "More brands mean no harm. But quality should be maintained, a matter that government should continuously monitor.”
“Some foreign companies, which were inspected long time back need re-inspection as it is a matter of life and death to people,” said Shrestha. Pradhan also agreed that the quality control is a must.
“Government should have a well-equipped body for quality control. The quality is tested once when a foreign company registers its products. Further checking is done every year or on specific complaints. This practise should be discouraged,” Shrestha said. “Medicines entering Nepal should be regularly tested at the customs points by the authorities.”

Tuesday, June 20, 2006

Aviation: Cramped for space, stretched on costs

Aviation refers to flying using aircraft, machines designed by humans for atmospheric flight. More generally, the term also describes the activities, industries, and regulatory bodies associated with aircraft.

After the government adopted a liberal aviation policy and opened the skies for private airliners in 1992, the state-owned Royal Nepal Airlines Corporation, now Nepal Airlines Corporation (NAC), received the taste of competition for the first time since its inception in 1958.
The nascent private aviation industry, as was expected, took a little time to take off. In the early 2000, when the Maoists movement neared its peak, the uncertainty that dogged surface transportation has, due to repeated and prolonged bandhs, came as a godsend for domestic airlines.
The resultant boom in the number of air passengers broke the traditional belief that Nepali aviation sector is totally dependent on tourism. Although, there is little doubt that tourism is the backbone of aviation industry. Being a small country with a small population, the scale of numbers obviates the dependence of aviation sector on the tourism industry. However, "In recent times, slack in tourism industry has hit the aviation sector badly," experts claim.
Cosmic Air, in the newfound garb of a budget airline, has triggered a price war in the Nepali aviation industry, making air travel affordable to the general public. But, industry experts doubt the long-term sustainability of such a plan or the very existence of such a company.
Globally, low-cost carriers, also often called as no-frills airlines, have been a resounding success. But since, any domestic aviation company in Nepal can hardly be described as ‘an airlines with frills’, the scope for drastic cost cutting can truly be internecine and self-destructive.
High operational cost and rising fuel prices are something that Nepali airlines can do nothing about and as prices are brought down, the ability to absorb any shock from rising fuel prices becomes paltry.
Due to volatile and limited market, the mortality rate in Nepali aviation industry has already been high. Already, the once market leader in the domestic industry like Necon Air had to bite the dust.
“Every year, one airlines goes bankrupt,” Rabindra Silwal, general manager of the Gorkha Air, said, adding that there is a problem of long-term sustainability due to myopic financial policies and constant fire fighting.
With rising oil prices, wafer-thin margins and intense competition, survival itself is a challenge. To sustain in this cutthroat environment, most private airlines are accused of concentrating on profitable routes only. However, it is not the whole truth.
Air service plays a very important role in transportation, especially in hilly mid-western region. Private airlines also fly to these remote areas, where only NAC used to fly earlier. Many remote districts, which are not connected through road links need air transportation to ferry essential goods like medicines and food grains.
Aviation experts suggested that the government should form a fund from the money they earn from trunk routes and give subsidy to remote areas.
One cannot claim that the size of Nepal's aviation market is growing exponentially. But the market size has not been a constraint. According to a report, three million passenger fly everyday in US. But in comparison to India, which has a much larger population than the US, only 12 million people travel by air, every year.
Despite the growth in the industry, many are skeptical of the long-term survival of airlines as there is no consistency in passenger numbers. “There is an increment in passenger numbers on certain sectors but not all the sectors are doing well,” said Silwal of the Gurkha Air, the oldest operating airlines in the domestic sector that has started its operations in 1996.
Out of the 38 Airlines that received the Air Operator Certification (AOC), only 17 are operational now. Volatile fuel price and poor infrastructure are key reasons that the sector could not grow as desired.
“Fuel costs occupy 20 per cent of the total operational cost. This effects pricing,” said Birendra Bahadur Basnet, managing director of Buddha Air, which claims to occupy the biggest market share of around 60 per cent of the total domestic sector.
"The global fuel market is volatile and so is the Nepali market,” he said, "When the fuel price is hiked, airlines will have no choice but to hike fares."
The other daunting problem is the poor condition of airports. Most airports outside Kathmandu, have no fire fighting measures. Neither do they have passenger waiting hall, baggage clearing facilities, X-ray machines, drinking water, proper toilets, emergency first aid kits or departure/arrival facilities.
Apart from a continuous harassment for passengers, the lack of essential infrastructures like fire fighting mechanisms or X-ray machines may prove a great threat to security.
Compared to other international airports, the standard of facilities and security at the Tribhuvan International Airport (TIA) itself, at best, can be described as pedestrian.
Even the capacity of Tribhuvan International Airport (TIA) is under scanner. The question that is often raised is, ‘can TIA handle the increasing number of aircrafts' flow that the domestic and the international airlines are adding?’
The need of another international airport, of international standard, has also been felt for some time now, which will help manage the flow of international tourists more effectively.
For decades, NAC has been synonymous with the aviation industry in Nepal. Once described as one of the world's finest airlines, NAC has suffered from a loss of image and money in recent years.
Aviation is a very capital-intensive business. To generate more funds, government can look to Non-Resident Nepalis (NRNs) to invest in infrastructure development in the aviation sector.
Apart from that Hotel Association of Nepal (HAN), TAAN, and Nepal Tourism Board (NTB) can also work together to rescue the national flag carrier and the aviation sector as a whole, as they all enjoy what it brings in.
With select international routes having been opened to domestic Nepali airlines, there has been a new glimmer of hope. The rush of migrant labourers in the post-1990 also added shine to this business.
New Nepali airlines like Air Nepal tried to cash in on these routes but without much success.
Another domestic player, Cosmic Air has been making it by the skin of its teeth by flying to neighbouring countries like India and Bangladesh, on and off. It has been flying to the Indian capital New Delhi, Kolkata and Varanasi in India and Dhaka in Bangladesh.
A recent development has indicated that the Air Services Agreement (ASA) with India will be reviewed and the number of destinations where Nepali airlines can fly will be increased.
Nepali airlines could so far fly only to Mumbai, New Delhi, Kolkata, Chennai, Bangalore and Varanasi. But recently India has agreed to let Nepali airlines fly to 18 more Indian cities, which will definitely boost Nepali aviation industry in the days ahead.
Balkrishna Shrestha, general manager of Cosmic Air is hopeful that the recent development might be helpful to increase new destination in India. “Earlier, due to seat limit and destination limit we could not fly to many Indian cities. Now we are planning some more destinations in India.”
With the sudden increase in the number of airlines, not only pilots but also the cabin crew and hordes of other jobs have increased. The aviation industry has played a major role in the overall economic growth of the country and the government should not ignore the possibility of helping the industry in its growth and improvement efforts.
Chronological signposts
1947: A lone pilot landed his glider on the old golf course, which makes the present location of TIA.
1949: The date heralded the formal beginning of aviation in Nepal with the landing of a 4-seater lone powered vintage Beach-craft Bonanza aircraft of Indian ambassador Sarjit Singh Mahathia at Gauchar.
1950: The first charter flight By Himalayan Aviation Dakota from Gauchar to Kolkata.
1955: King Mahendra inaugurated Gauchar Airport and renamed it as Tribhuvan Airport.
1957: Grassy runway transformed into a concrete one.
1957: Department of Civil Aviation founded.
1958: Royal Nepal Airlines (RNAC) started scheduled services domestically and externally.
1959: RNAC fully owned by HMG/N as a public undertaking.
1959: Civil Aviation Act-2015 BS, promulgated.
1960: Nepal attained ICAO membership.
1964: Tribhuvan Airport renamed as Tribhuvan International Airport.
1966: ATC services taken over by Nepali personnel from Indian technicians.
1967: The 3750 feet long runway extended to 6600 feet.
1967: Landing of a German Airlines Lufthansa Boeing 707.
1968: Thai International starts its scheduled jet air services.
1972: Nepali jet aircraft Boeing 727/100 makes a debut landing at TIA.
1975: TIA runway extended to 10000 feet from the previous 6600 feet.
1975: CATC established.
1976: FIC (Flight Information Centre) established.
1977: Nepal imprinted in the World Aeronautical Chart.
1990: New International Terminal Building of TIA inaugurated by King Birendra.
1992: Adoption of Liberal Aviation Policy and emergence of private sector in domestic air transport.
1993: National Civil Aviation Policy promulgated.
1995: Domestic Terminal Building at TIA and Apron Expanded.
1998: CAAN established as an autonomous Authority.
1998: COSCAP-SA Project established.
2002: Expansion of the International Terminal Building at TIA and the construction of a new air cargo complex.
2003: Rara airport (Mugu), Kangeldanda airport (Solukhumbu) and Thamkharka airport (Khotang) brought in operation.
2004: Domestic operation by jet aircraft commenced.
2005: International flights by two private operators began.
(*All updated contents are referenced from Civil Aviation Report 2005)