Promoting Agribusiness Innovation in Nepal

PROMOTING AGRIBUSINESS INNOVATION IN NEPAL
Fea sib ilit y Assessm ent fo r a n Agr ib u sin ess I n n ovat io n Ce nte r
PROMOTING AGRIBUSINESS INNOVATION IN NEPAL

Feasibility Assessment for an Agribusiness Innovation Center
Prepared by infoDev Contributing Authors: Shashi Bhattarai, Neeraj Nepali, Jim Thaller, Anushka Thewarapperuma, Julian Webb
Agribusiness Innovation Center in Nepal: Draft Report
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2013 Information for Development Program (infoDev)/The World Bank 1818 H Street NW Washington DC 20433 Internet: www.infoDev.org Email: info@infoDev.org
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To cite this publication: PROMOTING AGRIBUSINESS INNOVATION IN NEPAL: Feasibility Assessment for an Agribusiness Innovation Center. 2013. infoDev, Finance and Private Sector Development Department. Washington, DC: World Bank.
Agribusiness Innovation Center in Nepal: Report
List of Abbreviations and Acronyms

ABI-ICRISAT - Agri-Business Incubator at International Crops Research Institute for the Semi-Arid Tropics ADB - Asian Development Bank ADB/N - Agriculture Development Bank, Nepal ADO - Agriculture Development Office ADS - Agriculture Development Strategy (of Nepal Government) AEC - Agro Enterprise Centre AEPZ - Agro-Export Promotion Zone AfT - Aid for Trade AGDP - Agriculture Gross Domestic Product AIC - Agribusiness Innovation Center ALFN - Association of Livestock Farming Nepal ANEP - Agriculture Nutrition Extension Project ANSAB - Asia Network for Sustainable Agriculture and Bio-resources APIN - Asia Pacific Incubator Network (of infoDev) APP - Agriculture Perspective Plan AusAid - Australian Aid Agency B2B - Business to Business BDS - Business Development Services BFIs - Bank and Financial Institutes BI - Business Incubation BIC - Business Incubation Center BIIN - Business Incubation Initiative in Nepal BIP - Business Incubation Program (of DCSI) BMO - Business Membership Organization BMZ - German Federal Ministry for Economic Cooperation & Development BO2 - Business Oxygen, SME Venture Fund CAA - Commercial Agriculture Alliance CAF - Commercial Agriculture Fund CADP - Commercial Agriculture Development Project (Financed By ADB) CARD - Centre for Applied Research and Development (of IOE, TU) CBO - Community-based Organization CCIs - Chamber of Commerce and Industries CDCU - Central Dairy Cooperative Union CEAPRED - Centre for Environmental & Agriculture Policy Research, Extension and Development CENTEV-UFV in Brazil Technological Centre of Regional Development of Vicosa CEO - Chief Executive Officer CFUG -Community Forestry User Groups CIDA - Canadian International Development Agency CNI - Confederation of Nepalese Industries CODEX - International Food Standards COP - Cost of Production CPGs - Coffee Producers Groups CSIDB - Cottage and Small Industrial Development Board CSITC - Cottage and Small Industry Training Centre CTEVT - Centre for Technical Education and Vocational Training
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Agribusiness Innovation Center in Nepal: Report CV DADO DCCIs DCPA DCSI DDC DFID DFTQC DLS DOI E4N EDP EIG EU FAO FECOFUN FGD FDO FMC FNBK FNCCI FNCSI FNMEG MORMIN FORWARD FWEAN FY GDP GEM GIZ GoN GTP GTZ HACCP HIMALI HIMCOOP HIN HVAC HVAP IAA-IBP ICIMOD ICT IDA IDE IEDI IFAD IFC IIN ILO - Curriculum Vitae - District Agriculture Development Office District Cooperatives - District Coffee Producers Association - Department of Cottage and Small Industry, Government of Nepal - District Development Committee - Department for International Development (of British Gov.) - Department of Food Technology and Quality Control - Department of Livestock, Nepal - Department of Industry, Government of Nepal - Entrepreneurs for Nepal - Enterprise Development Program - Education for Income generation (USAID Program) - European Union - Food and Agriculture Organization - Federation of Community Forestry Users - Nepal - Focused Group Discussion - Forestry Development Office - Fund Management Committee - Nepal Beekeepers and Cooperative - Federation of Nepal Chamber of Commerce and Industries - Federation of National Cottage and Small Industries - Federation of Nepalese Micro Enterprise Group - Ministry of Foreign Affairs (of Finland) - Forum for Rural Welfare and Agriculture Reform for Development - Federation of Women Entrepreneurs Association of Nepal - Fiscal Year - Gross Domestic Product - Global Entrepreneurship Monitor - German Technical Cooperation (former GTZ) - Government of Nepal - Growth and Transformation Plan - German Technical Cooperation - Monitoring Plan and Hazard Analysis Critical Control Point - High Mountain Agribusiness and Livelihood Improvement Project - Himalayan Tea Producers Cooperatives Limited - Heifer InternationalNepal - Heating, Ventilating, and Air Conditioning - High Value Agriculture Project in Hill and Mountain Areas - Inculcator for Agribusiness & Agroforestry, Bogor, Indonesia - International Centre for Integrated Mountain Development - Information and Communication Technology - International Development Association (of the World Bank) - International Development Enterprise - Industrial Enterprise Development Institute - International Fund for Agriculture Development - International Finance Corporation (of The World Bank group) - Incubator Initiative Nepal - International Labour Organization
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Agribusiness Innovation Center in Nepal: Report INCLUDE infoDev INGO IOE IP IPO ISO IT & BPO ITC ITPF JABAN KPAs KU KUBIC KUSOM LCEAN LH LI-BIRD LIFDC MAP MBA MC MCC ME MEDEP MFIs MMA MOAD MoCS MOEST MOF MOLD MPCs MPFS MSFP NARC NARDF NAST NBA NBF NBI NBIA NBSM NCC NCPA NDA NDSP NEAT NEF - The Inclusive Development of the Economy Programme (GIZ) - Information for Development (of The World Bank Group) - International Nongovernment Organization - Institute of Engineering (of Tribhuvan University) - Intellectual Property - Initial Public Offering International Organization of Standardization Information Technology and Business Process Outsourcing - Indian Trade Centre - Information Technology Professional Forum -Jaributi Association of Nepal - Key Performance Areas - Kathmandu University - Kathmandu University Business Incubation Centre - Kathmandu University School of Management - Large Cardamom Entrepreneurs Association of Nepal - Lotus Holdings - Local Initiatives for Biodiversity, Research and Development - Low Income Food Deficit Country - Medicinal and Aromatic Plant - Masters in Business Administration - Marcy Croups - Morang Chamber of Commerce - Micro-enterprise - Micro Enterprise Development Program - Micro Finance Institutions - Morang Merchant Association - Ministry of Agricultural Development - Ministry of Commerce and Supplies - Ministry of Environment, Science and Technology - Ministry of Finance - Ministry of Local Development - Meat and Poultry Companies - Master Plan for Forest Sector - Multi Stakeholder Forestry Program - National Agriculture Research Council - National Agricultural Research and Development Fund - Nepal Academy of Science and Technology - Nepal Bankers Association - Nepal Business Forum - National Business Initiatives - National Business Incubation Association - Nepal Bureau of Standard and Metrology (GON, MOI) Nepal Chamber of Commerce - Nepal Coffee Producers Association () - Nepal Diary Association - National Development Strategy Paper - Nepal Economic Agriculture and Trade (USAID Project) - Nepal Economic Forum
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Agribusiness Innovation Center in Nepal: Report NEHHPA NFOSTA NgCCI NGPTA NIDC NIMBUS NLBIC NMPFA NNN NPC NPEDC NRB NRs./Rs. /NPR NTCDB NTCDB NTFP NTIS NYBF NYEF NYEF ODOP OECD OVOP PA PA Nepal PAC PAC Nepal PACT PAF PFA PPP PR R&D RECAST RMFDC ROI RTA SAARC SABAL SAS-N SAWTEE SDC SEAM-N SEZP SEZs SME SMEDP SMEs/MEs - Nepal Herbs and Herbal Products Association - Nepal Food Scientists and Technologists Association - Nepaljung Chamber of Commerce and Industry - Nepal Ginger Producer and Traders Association - Nepal Industrial Development Corporation - NIMBUS Holding (Private Agriculture-based Industrial Holding) - Nepal Lotus Business Incubator Centre - Nepal Milk Producer Farmers Association - Nepal NTFP Network - National Planning Commission - National Productivity and Economic Development Centre - Nepal Rastra Bank (Central Bank of Nepal) - Nepalese Rupees - National Tea and Coffee Development Board - Nepal Tea Coffee Development Board - Nontimber Forest Products - Nepal Trade Integration Strategy - Nepal Youth Business Foundation - Nepalese Young Entrepreneurs Forum - Nepal Youth Entrepreneurs Forum - One District One Product - Organisation for Economic Co-operation and Development - One Village One Product (of AEC / FNCCI) - Practical Action - Practical Action Nepal (British NGO) Practical Action Consulting - Practical Action Consulting Nepal (Consulting wing PA Nepal) - Project for Agriculture Commercialization and Trade - Poverty Alleviation Fund - Prevention Food Adulteration - Public-Private Partnership - Public Relations - Research and Development - Research Centre for Applied Science and Technology - Rural Micro Finance Development Corporation - Return on Investment - Regional Trade Agreement - South Asian Association for Regional Cooperation - Sustainable Agri. with Bazar for Advancing the Livelihoods - Society of Agriculture Scientists Nepal - South Asia Watch on Trade, Economics & Environment - Swiss Development Corporation - Strengthening of Environmental Administration and Management at the Local Level in Nepal - Special Economic Zone Project - Special Economic Zones - Small and Medium Enterprise - Small and Micro Enterprise Development Project - Small and Medium Enterprises / Micro-enterprises
Agribusiness Innovation Center in Nepal: Report SNV SP SWOT TA TBI TBT TEIs TOR TOT TPC TTO TU UKAid UN UNCTAD UNDP USAID USD USF VAT VDC VECDAN VIOTH WB WF WEAN WEAN Cooperatives WI WUPAP WWF YES YSESEF - Netherlands Development Organization - Selling Price - Strength, Weakness, Opportunity & Threat - Technical Assistance - Technology Business Incubator - Technical Barriers for Trade - Tartary Education Institutions - Terms of References - Trainings of Trainers - Trade Promotion Centre - Technology Transfer Office - Tribhuvan University - United Kingdom Aid (DFID) - United Nations - United Nations Conference on Trade and Development - United Nations Development Programme - U. S. Agency for International Development - U. S. Dollars - Udhayami Seed Fund - Value Added Tax - Village Development Committee - Veterinary Chemist & Druggist Association of Nepal - Vaidya's Organization of Industries and Trading Houses - World Bank - World Fish - Women Entrepreneurs Association of Nepal - Women Entrepreneurs Association of Nepal Cooperatives - Winrock International - Western Uplands Poverty Alleviation Project - World Wildlife Fund - Young Entrepreneurs Summit - Youth and Small Enterprise Self-Employment Fund
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Table of Contents
1 Executive Summary .................................................................................................... 1 1.1 Objective .................................................................................................................. 1 1.2 Project Beneficiaries ................................................................................................ 1 1.3 Project Rationale ..................................................................................................... 1 1.4 Poverty in Nepal ...................................................................................................... 2 1.5 Feasibility Study Methodology ............................................................................... 3 1.6 Proposed Areas of Focus ........................................................................................ 4 1.7 Services of the AIC .................................................................................................. 7 1.8 Limits of the AIC ....................................................................................................... 9 1.9 Critical Success Factors .......................................................................................... 9 1.10 Implementation of the AIC .................................................................................. 10 1.11 The Role of infoDev ............................................................................................... 14 1.12 Impacts ................................................................................................................... 14 1.13 Budget Requirements ........................................................................................... 14 The Concept of Agribusiness Innovation CenterAIC .......................................... 16 2.1 Accelerating Agribusiness Development through Innovation ........................ 16 2.2 Agribusiness Innovation Centers.......................................................................... 16 The AIC Feasibility and Business Plan Process ........................................................ 19 3.1 The Process ............................................................................................................. 19 3.2 Agribusiness Stakeholders in Nepal ..................................................................... 23 3.3 Policy Support for Agribusiness Incubation in Nepal ........................................ 28 Focusing on Value Addition ..................................................................................... 30 4.1 Value Chains with Market Potential.................................................................... 30 4.1.1 Tea ................................................................................................................... 34 4.1.2 Coffee ............................................................................................................. 35 4.1.3 Honey .............................................................................................................. 35 4.1.4 Ginger ............................................................................................................. 36 4.1.5 Large Cardamom ......................................................................................... 37 4.1.6 Floriculture ...................................................................................................... 38 4.1.7 Potato ............................................................................................................. 38 4.1.8 Milk and Dairy ................................................................................................ 39 4.1.9 Meat ................................................................................................................ 40 4.1.10 Fish ................................................................................................................... 41 4.1.11 Nontimber Forest Products and Essential Oils ............................................ 42 4.2 Donor Value Chain Mapping .............................................................................. 44 4.3 The Focus of the AIC ............................................................................................. 49 Target Clients ............................................................................................................. 53 5.1 Nepalese Agribusiness Entrepreneurs Landscape ............................................ 53 5.2 Nepalese Agribusiness SMEs Needs .................................................................... 55 5.2.1 SME Barriers ..................................................................................................... 55 5.2.2 Gaps in Service Provision to SMEs ............................................................... 57 5.2.3 SME Needs ...................................................................................................... 58 5.3 Entrepreneur PipelinesFeeder Channels and Complementary Organizations .................................................................................................................. 59 5.4 The Market for Business Incubation ..................................................................... 62 5.4.1 Client Targets ................................................................................................. 64 Business Model .......................................................................................................... 67 vii
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6.1 Selecting Clients .................................................................................................... 67 6.2 AIC Service Portfolio .............................................................................................. 68 6.2.1 Payment for Services..................................................................................... 69 6.2.2 Market and Technical Knowledge ............................................................. 70 6.2.3 Advisory Services and Networking .............................................................. 70 6.2.4 Innovation Acceleration Platform ............................................................... 71 6.2.5 Access to Facilities and Locations: Hub and Satellites ............................ 71 6.2.6 Access to Finance ......................................................................................... 73 6.3 A Multistakeholder Networking Approach ........................................................ 74 7 Institutional and Governance Arrangements ......................................................... 78 7.1 Mission, Vision, and Strategic Objectives ........................................................... 78 7.2 Ownership, Governance, and Management ................................................... 80 7.2.1 Options ............................................................................................................ 81 7.2.2 Roles of Stakeholders .................................................................................... 85 7.2.3 Role of the AIC Board and Management ................................................. 91 7.3 Selecting the AIC Host Institution......................................................................... 92 7.3.1 Expression of Interest ..................................................................................... 92 7.4 AIC Personnel ......................................................................................................... 93 8 Implementation Requirements ................................................................................ 97 8.1 Facility and Infrastructure Requirements ............................................................ 97 8.1.1 Access to Testing Facilities ........................................................................... 97 8.1.2 Access to Relevant Technology.................................................................. 97 8.1.3 Access to Packaging .................................................................................... 97 8.1.4 Pre-incubation ............................................................................................... 97 8.1.5 Location .......................................................................................................... 98 9 Financial Plan ............................................................................................................ 99 9.1 Budget................................................................................................................... 100 9.2 Sustainability ......................................................................................................... 101 9.2.1 Royalty .......................................................................................................... 103 9.2.2 Equity ............................................................................................................. 104 9.2.3 Incubation Fee............................................................................................. 104 9.2.4 Finance Brokerage ...................................................................................... 104 9.2.5 Other Revenue ............................................................................................ 104 9.3 Financing Plan...................................................................................................... 105 10 Results and Impacts ................................................................................................ 106 10.1 Outcomes ............................................................................................................. 107 10.2 Social and Economic Impact ............................................................................ 108 10.3 Monitoring and Evaluation ................................................................................. 109 11 Conclusions ............................................................................................................. 110 12 Annexes ................................................................................................................... 111 Annex 1: Stakeholder Support................................................................................. 111 Annex 2: Conclusions of InfoDev Global Good Practices Assessment on Agribusiness Incubation ........................................................................................... 116 Annex 3: Nepalese Agribusiness Donor Mapping ............................................... 119 Annex 4: Nepalese Agri-based and Food Industry Information ......................... 120 Annex 5: Institutional Arrangement of Business Incubators in NepalOperating, Closed, and Planned .................................................................................................. 126 Annex 6: Value Chain Maps.................................................................................... 127 viii
Tea Value Chain Map................................................................................ 127 Coffee Value Chain Map.......................................................................... 128 Honey Value Chain Map .......................................................................... 129 Ginger Value Chain Map .......................................................................... 130 Cardamom Value Chain Map ................................................................. 131 Potato Value Chain Map .......................................................................... 132 Milk and Diary Value Chain Map ............................................................. 133 Meat Value Chain Map ............................................................................ 134 Fish Value Chain Map ................................................................................ 135 NTFP and Essential Oil Value Chain Map ................................................ 136 Floriculture Value Chain Map ................................................................... 137 Annex 7: Phasing of Enterprise Support ................................................................. 138 Annex 8: AICs Prospective Clients ......................................................................... 140 Annex 9: Setting a Royalty Fee ............................................................................... 144 Annex 10: Job and Tax Impacts ................................................................................ 145 Annex 11: Profile of Key Partner Institutions .............................................................. 146 Annex 12: DFTQC Pilot Plant Renovation and Cost ................................................ 152 Annex 13: Preparedness to Pay for Services ............................................................ 153 Annex 14: Learning from Previous Business Incubation Efforts ............................... 155
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List of Figures
Figure 1: AIC Services ............................................................................................................ 17 Figure 2: Nepalese AIC Feasibility Assessment Process .................................................... 19 Figure 3: Composition of Stakeholders Consulted ............................................................ 20 Figure 4: Nepal AIC Feasibility Assessment and Business Planning Methodology ........ 22 Figure 5: Enabling the Development of Innovative Sustainable Agribusiness Sector in Nepal ....................................................................................................................................... 50 Figure 6: Feeder Channels ................................................................................................... 60 Figure 7: Positioning Nepalese Agribusiness SMEs for Growth ......................................... 68 Figure 8: AIC Operation: Hub and Satellite........................................................................ 72 Figure 9: AIC Organization Structure................................................................................... 84 Figure 10: Budget Overview ............................................................................................... 101 Figure 11: Tea Value Chain ............................................................................................... 127 Figure 12: Coffee Value Chain .......................................................................................... 128 Figure 13: Honey Value Chain ........................................................................................... 129 Figure 14: Ginger Value Chain .......................................................................................... 130 Figure 15: Cardamom Value Chain .................................................................................. 131 Figure 16: Potato Value Chain........................................................................................... 132 Figure 17: Milk and Diary Value Chain.............................................................................. 133 Figure 18: Meat Value Chain ............................................................................................. 134 Figure 19: Fish Value Chain ................................................................................................ 135 Figure 20: NTFP and Essential Oil Value Chain ................................................................. 136 Figure 21: Floriculture Value Chain.................................................................................... 137 Figure 22: Phasing of Support to be Provided to AIC Cilents ........................................ 138
List of Tables
Table 1: Benefit Potential of Value Chains ........................................................................... 3 Table 2: Key Value Chains with Potential for Enterprise Growth ....................................... 4 Table 3: Nepal AIC Service Offering ..................................................................................... 8 Table 4: Nepalese AIC Annual Expenses When Established ........................................... 12 Table 5: AIC Revenue Generation Scheme for the First Six Years of Implementation. 13 Table 6: Nepalese Agribusiness Stakeholder Mapping .................................................... 25 Table 7: Nepal Agribusiness Business Innovation / Incubation Ecosystem Gap Matrix26 Table 8: List of Priority Value Chain ..................................................................................... 33 Table 9: Number of Nepal dairies, size and processing capacity .................................. 39 Table 10: Net Meat Production ........................................................................................... 40 Table 11: Donor Mapping Based on Value Chains .......................................................... 44 Table 12: Licensed Food Industries in Nepal until FY 2012/2013 ...................................... 53 Table 13: Department of Industry Registered Agro-based Industries............................. 54 Table 14: Feeder Channels .................................................................................................. 61 Table 15: Selected Agribusiness Projects under MOAD .................................................. 65 Table 16: Client Targets ......................................................................................................... 66 x
Table 17: Nepal AIC Service Portfolio ................................................................................. 69 Table 18: Potential Collaborating Agencies, Projects and Programs ............................ 75 Table 19: Organizational Arrangement for Nepal AIC ..................................................... 81 Table 20: AIC Host Organization Options ........................................................................... 81 Table 21: Key Stakeholders and their RolesNetwork for AIC ........................................ 89 Table 22: AIC Staffing Requirement (at full capacity) ..................................................... 95 Table 23: Budget Summary ................................................................................................ 101 Table 24: AIC Annual Expenses when Established .......................................................... 102 Table 25: AIC Revenue Generation for the First Six years of Implementation ............ 103 Table 26: Nepalese AIC Financing Required (over a four-year period) ...................... 105 Table 27: Aniticipated Impact from AIC .......................................................................... 107 Table 28: Stake Holders Consulted .................................................................................... 111 Table 29: Studied Agribusiness Incubators Quantifiable Outputs................................ 117 Table 30: Nepalese Donor Mapping ................................................................................ 119 Table 31: Categorized List of Licensed Food and Beverage Industries in Nepal until FY 2012/2013.............................................................................................................................. 120 Table 32: Licensed by DFTQC Central Office .................................................................. 121 Table 33: Food Industries Registered at DFTQC, Kathmandu by Fiscal Year .............. 121 Table 34: Food Industries Licensed by DFTQC Biratnagar Regional Office (Eastern Nepal) ................................................................................................................................... 122 Table 35: Food Industries Licensed by DFTQC Hetauda Regional Office (Central Region of Nepal) ................................................................................................................. 123 Table 36: Licensed by DFTQC Bhairhawa Regional Office (Western Nepal) .............. 123 Table 37: Licensed by DFTQC Nepalganj Regional Office (Midwestern Region, Nepal) ................................................................................................................................................ 124 Table 38: Licensed by DFTQC Dhangadi Regional Office (Far Western Nepal) ........ 124 Table 39: Alcoholic Beverage Industry in Different Parts of Nepal (As of 2012/13) .... 124 Table 40: Agro-based Industries with more than NPR 30 Million Fixed Capital Investment ............................................................................................................................ 125 Table 41: Nepalese AIC Target Clients Categorization.................................................. 140 Table 42: Deal Flow of AICs Enterprises ........................................................................... 141 Table 43: Combined Turnover of AICs Client Enterprises .............................................. 142
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1 Executive Summary
1.1 Objective
This report examines the feasibility of an Agribusiness Innovation Center (AIC) in the agro-processing sector in Nepal and proposes a sustainable business model. The proposed AIC will foster and accelerate the growth of Nepals agro-processing sector, thereby helping to commercialize agricultural production, increase agricultural incomes, and reduce poverty. It builds upon infoDevs earlier efforts to develop and expand business incubation in Nepal. Lessons gathered are from various agribusiness incubators (see the Global Good Practices Assessment on Agribusiness Incubation1) and similar feasibility assessments carried out in Ethiopia, Mozambique, Senegal, and Tanzania. The AIC will contribute toward this objective by identifying innovative growthoriented entrepreneurs who are pursuing business opportunities based on postharvest value addition of agricultural commodities. It will provide these entrepreneurs with a holistic service offering that accelerates their growth and increases their sustainability. In the process of doing so, the AIC will engage all stakeholders along the value chain, thus strengthening the innovation and entrepreneurship ecosystem affecting the start-up and growth of innovative agribusiness enterprises. Relatedly, the AIC will strive to have a demonstration or catalytic effect, encouraging a new generation of entrepreneurs to enter, grow, and advance the industry. 1.2 Project Beneficiaries
The AIC will have three groups of beneficiaries. The direct beneficiaries include entrepreneurs and small businesses. high growth potential agribusiness
The indirect beneficiaries are smallholder farmers that supply raw materials to enterprises and tangential service providers, such as logistical support providers and packaging services, who will benefit from the increased demand for their services. Associated beneficiaries include PACT and other agencies supporting the commercialization of agriculture, whose clients involved in agro-processing will receive additional support from the AIC. Project Rationale
1.3
Subsistence agriculture with traditional farming practices predominates in Nepal, resulting in widespread underemployment and poor use of resources. According to
1infoDev.
2011. Growing Food, Products, and Businesses: Apply Business Incubation to Agribusiness SMEs. Washington, DC: World Bank. http://www.infodev.org/en/Publication.1139.html
the Nepal Economic Survey 2011/12, only 1,766,000 hectares out of a total of 2,641,000 hectares of arable land have been irrigated. Agricultural production (typically without any processing), accounts for nearly 26 percent of total exports, mostly to India, although the majority of Nepalese farmers are subsistence farmers, who do not export surplus production. Moreover, Nepal is a mountainous country, in which there are numerous pockets of food-deficit areas, because surpluses are more easily directed to India than to remote mountain regions within Nepal, which have transport difficulties. The major food crops grown in Nepal are paddy, wheat, maize, barley, millet, and pulses. Sugarcane, potatoes, oil seeds, jute, tobacco, fruits, vegetables, honey, tea coffee and cotton, mushroom, and floriculture are the main high value cash crops. Animal products (including milk, meat, eggs, fish, and wool) are produced in the country also. Nepal expects growth in the agriculture sector. In the current fiscal year (2012/13), paddy production is expected to increase by 2.3 percent and maize by 5.4 percent. Similarly, the production of wheat, millet, barley, and buckwheat is expected to increase by 5.9, 4.1, 14.9, and 13.3 percent, respectively. Despite significant livestock numbers and an expected record rise in milk production of 4.6 percent to 1,623,000 MT,2 production does not meet the demand from local consumers. 1.4 Poverty in Nepal
Poverty poses a serious problem for Nepal. The Nepal Economic Survey (20011/12) conducted by Ministry of Finance estimates that 25.2 percent of the population is still living below the poverty line, defined as an average annual income of Rs. 19,261, down from 41.76 percent in 1995/96. However, there are significant differences between urban and rural areas. The urban population living below the poverty line was 21.55 percent in FY 1995/96, which fell to 9.55 percent in FY 2003/04, but which rose to 15.46 percent in FY 2009/10, according to the Nepal Living Standard Survey (III).3 Poverty in rural areas has shown gradual improvement, even though it is still higher than in urban areas. In FY 1995/96, the rural population living below the poverty line was 43.27 percent, which fell to 34.62 percent in FY 2003/04 and 27.43 percent in FY 2009/10. According to the Nepal Life Standard Survey III (2011/12), the Gini Index, which depicts income inequality, declined to 0.33 percent, meaning there has been a decline in income inequality. The Food and Agriculture Organization of the United Nations (FAO)4 lists Nepal as a Low-Income Food-Deficit Country (LIFDC). The key contributing factors are poverty,
Government of Nepal. National Economic Survey-Nepal 2011/12. Nepal Living Standard Survey-II, 2003/04. 4http://www.fao.org/countryprofiles/lifdc.asp
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uncontrolled urbanization, and associated use of agricultural land in accessible lowland areas for real estate development and shortages of manpower in the uplands. Furthermore, climatic factors, poor agricultural facilities, poor agricultural inputs, and malpractices, such as inappropriate cultivation patterns and pesticide use, have contributed to declining agriculture productivity. Agricultural development is the foundation for food security and sustainable economic development in Nepal, because it is the major source of income and employment for most Nepalese and because of the key role it plays in the economy. As such, the government has made agricultural development a priority, recognizing the importance of agricultural commercialization for economic development. 1.5 Feasibility Study Methodology
Agribusiness incubationdefined as the provision of a holistic service offering to growth-potential small and medium enterprises (SMEs)can either focus on one or a few subsectors or value chains, or on a broader model that assists any growthpotential agribusiness enterprises. The choice of model depends in large part on the local market conditions as assessed against the parameters outlined in the table below.
Table 1: Benefit Potential of Value Chains
Indicator
Specific Questions Are there agricultural subsectors and value chains with known comparative advantage that offer sufficient production of adequate quality within economic reach of processors, and can this be increased (if required) to facilitate beneficiation expansion? Do growth entrepreneurs exist or can they be developed or recruited to ensure the growth of beneficiation activities within a suitable geographic cluster? What do they need to access and develop opportunities? Are there gaps in these areas and can an AIC offer solutions? Does suitable and accessible funding exist or can it be facilitated, for development, research and development (R&D), commercialization, and expansion? Are there strong stakeholders that are, or can be, active in supporting the value chain? Can they positively affect the likelihood of implementation? Can markets be identified that are scalable, accessible, and viable now and in the future?
Scalable Production Potential (with comparative advantage)
Geographically Clustered Growth Entrepreneur Capacity
Access to Finance
Clear, Ready Stakeholders (including industry leverage) Scalable, Accessible, and Viable Markets
Infrastructure and Regulatory Constraints
Is there sufficient infrastructure available and does the regulatory environment provide incentives for entrepreneurs to take advantage of the value addition opportunity?
A significant part of the feasibility assessment entailed analyzing the Nepalese market against these parameters, building upon earlier incubator feasibility studies for Nepal, using a methodology that involved a combination of desk research to review literature on agribusiness in Nepal, consulting with stakeholders and agribusiness entrepreneurs, and learning from infoDevs initial work in agribusiness in Sub-Saharan Africa. Individual meetings were held with 67 public and private stakeholders and entrepreneurs. The inception workshop involved 25 people and the stakeholder consultation workshop involved more than 70 people from multiple organizations. The work was undertaken in the second half of 2012. 1.6 Proposed Areas of Focus
Table 2: Key Value Chains with Potential for Enterprise Growth
Coffee: Despite high prices fetched by Nepali coffee in the international market, export volumes have not increased significantly. As per the National Tea Coffee Development Board (NTCDB), production of coffee in the fiscal year 2011/12 was 153 tons5, of which 279,762 kilograms were exported. In the same period, 31,326 kilograms were imported. The government of Nepal is keen on developing a Nepali coffee brand in the country and has approved the Nepali Coffee Logo (brand) and awarded rights to three traders that meet the set standards. Fourteen coffee processors are the members of NTCDB-Nepal, the apex body for the coffee sector. Development organizations working for promotion and commercialization of coffee in Nepal are Project for Agriculture Commercialization and Trade (PACT), International Development Enterprise (iDE), Winrock International (WI), Education for Income Generation (EIG), Local Initiatives for Biodiversity, Research and Development (Li-Bird), Agro Enterprise Centre (AEC), Agriculture Development Office (ADO), U.S. Agency for International Development (USAID). Fish: From water surface area of 26,036 hectares, 26,941 tons of fish are produced per annum. With huge unmet and growing domestic demand for fish and related products, commercialization of this sector has potential for growth and for import substitution. Although the exact number is not known, a large number of farmers are engaged in fish production, particularly in the southern plains of the country and the subsector offers potential for growth and improvement in rural livelihoods. The major organizations, projects and donors working in the sector are PACT, EIG, Forum for Rural Welfare and Agriculture Reform for Development (Forward), Centre for Environmental & Agriculture Policy Research, Extension and Development (CEAPRED), Agriculture Nutrition Extension Project (ANEP), iDE, ADO, USAID, and World Fish (WF). Floriculture: There is a growing demand for cut flowers in the country. By FY 2010/11, 86 flower showrooms had been established in the country and more than 600 nurseries have been established. About 635 firms and individuals are directly engaged in this subsector out of
Ton in this document refers to metric tons. Its abbreviation is t.
Agribusiness Innovation Center in Nepal: Report which only 467 are members6 with Floriculture Association of Nepal FAN. The sector currently displays a growth rate of 10 to 15 percent annually. Ginger: Nepal is the fifth largest producer and the 15th largest exporter of ginger in the world, producing 216,289 tons from 19,081 hectares. The market for ginger is expanding with increasing use by ayurveda pharmaceutical industries in Nepal and India. More than 80 percent of the total production is exported to India, the only export destination of fresh and dried ginger produced in Nepal. Initiatives such as the Ginger and Spice Development Program have commenced, providing technical services to farmers through Department of Agriculture with the government of Nepal emphasizing ginger as a priority for commercialization. Forty-three entrepreneurs, including producers, exporters and processors, were identified by the NEAT activity (USAID funded Project) in the midwestern and eastern regions. The main projects, donors, and nongovernmental organizations (NGOs) in this sector are Micro Enterprise Development Program (MEDEP), Comercial Agriculture Development Project (CADP), PACT, German Technical Cooperation (GiZ), NEAT, PA, EIG, Marcy Croups (MC), AEC, ADO, and USAID. Honey: Nepal has the potential to produce more than 10,000 tons of honey per year. However, the total production of honey at present is estimated to be about 1,500 tons per year. Nepali honey could benefit from international market demand, if appropriate measures are taken and programs are available to strengthen the sector. One of the leading honey companies calculates that if honey consumption increased by 0.1 kilogram per capita then total demand for honey in the domestic market would be about 2,500 tons per year. At present, there are eight major honey processing and exporting companies in the country. Some of the key donor organizations/projects working in the honey value chain are MEDEP, PACT, GiZ, International Centre for Integrated Mountain Development (ICIMOD), AEC, ADO, USAID, and World Bank through various projects. Large Cardamom: Nepal is the worlds largest producer of large cardamom, with annual production exceeding 5.2 thousand tons, which is expected to increase annually. Cardamom is produced and processed by over 70,000 households in the East of Nepal. It ranks consistently in the top 12 export commodities of the country and contributes on average an annual $20 million7 to the national economy, including $12 million in export earnings. During the study, four processing industries were identified. Projects and organizations such as CADP, PACT, NEAT, ADO, Netherlands Development Organization (SNV), USAID, and NTCDB are the major working entities in this subsector. Meat: With a total number of 9,991,520 sheep and goats reared in the country, Nepal produces 55,531tons of meat annually. There are 17 large meat processors in the country, who produce a variety of meat products, including sausage, salami, chicken cuts, and momo. Demand for meat has been increasing, as a result of the growth in population, urbanization, growing income levels, and a desire to shift consumption to quality animal products. A large number of projects and organizations are engaged in strengthening the sector: PACT, High Mountain Agribusiness and Livelihood Improvement Project (HIMALI), Western uplands Poverty Alleviation Project (WUPAP), Education for Income Generation (EIG), Practical Action (PA), Forward, Li-Bird, AEC, ADO and Heifer International-Nepal (HIN). Milk and Dairy:
6FAN, 7
March 2013 updated data.
All dollar amounts are U.S. dollars unless otherwise indicated.
Agribusiness Innovation Center in Nepal: Report Livestock is one of the essential activities for Nepali farmers, important for manure, milk, meat, and religious purposes. The total milk production of the country is about 1.5 million tons. The annual growth of internal consumption of milk is about 8 percent, but production is increasing at only 3 percent. The major milk products of the country are milk powder, buttermilk, curdled milk, cream, cheese, ghee, ice cream, and other sweet products. The Nepal Dairy Association is the apex body for milk processors with 76 members. According to the study conducted by FAO, Nepal in 2010 reported the following dairies: three large, six medium, 26 small, and 215 cottage-industry level. Some of the major organization working in the milk and dairy subsector are MEDEP, PACT, GiZ, Market Access for Smallholder Farmers (MASF), iDE, PA, Forward, AEC, Department of Livestock, Nepal (DLS), USAID and Department for International Development (DFID). NTFP and Essential Oils: With its unique geography, Nepal is rich in biological resources and possesses a diverse variety of nontimber forest products (NTFPs). About 2,171,522 kilograms of NTFP products are collected, with revenues of more than $245,000. There are 108 processors in the NTFP value chain range from small to large, but only 31 of them are under Nepal Herbs and Herbal Products Association (NEHHPA). The small processors produce cosmetic products and essential oils and supply them to the local market; whereas, the large producers mainly export unprocessed commodities. Essential oil and related products and the most important types of products processed, including dementholized oil, eucalyptus oil, mentha arvensis oil, anthopogon oil, artemisia oil, juniper berry oil, spikenard oil, valerian oil, wintergreen oil, Zanthoxylum oil, and massage oil. Other products include handmade paper, morel, herbs, ayurveda herbal teas, organic teas, sorbet (juice) herbal drinks, ayurveda cream, cosmetics, neem soaps, and mentha products. However, Nepal exports about 90 percent of NTFPs in raw form, mostly to India where it is processed into essential oils and used in manufacturing medicines and cosmetic products. Key organizations working in the NTFP sector are MEDEP, PACT, HVAP, WUPAP, GiZ, EIG, iDE, PA, ICIMOD, Forward, ANSAB, AEC, JABAN, Forestry Development Office (FDO), Federation of Community Forestry Users - Nepal (FECOFUN), USAID, DFID and World Wildlife Fund (WWF). Potato: The state of potato production in the country is 2,508,044 tons with a productivity of 13,735 kilograms per hectares. Potatoes are cultivated in all zones of the country. Demand for potato is increasing in Nepal and Nepali potato seeds have a high demand in Bangladesh and India, to where a limited amount is exported at the moment. Although clear records on potato processors are not available, a total of 136 snack and vegetable processing companies of different levels are registered in Department of Food Technology and Quality Control (DFTQC), which may be processing potato related items. The major projects and donors working in this subsector are CADP, PACT, MC, ADO, and EU. Tea: Nepal produces 115,432 tons of green leaves of tea, including 3.2 million kilograms of Orthodox Tea, of which15 percent is exported and of which 85 percent is sold in Kolkata. World tea consumption is increasing, as is the market for organic, fair trade, and value added products, such as specialty, blended, and flavored teas, for which the flavor and aroma of Nepalese tea is an advantage. The Himalayan Tea Producers Cooperative Limited (HIMCOOP) has 19 processing factories and major donor projects. Programs working in this sector are CADP, PACT, NEAT, ADO, SNV, GiZ, USAID, and NTCDB.
The analysis discovered the following: a. No one value chain represents a sufficient quantity of growth-oriented entrepreneurs to warrant a focused incubation model. Therefore, a broader model that works across subsectors and value chains is proposed. b. While the market opportunities outlined in Figure 2 are promising, even these value chains face significant challenges, which many donors and Nepalese government agencies have recognized and are now working to overcome value chain bottlenecks. The timing for the AIC is thus opportune to complement this work by addressing the business-level impediments faced by agro-processors. c. The analysis identified some interesting cross-cutting market opportunities in the areas of branding, certification and compliance, packaging, recycling, dryer innovation, traceability, and logistics. Therefore, the AIC should encourage and enable the start-up and growth of innovative enterprises in these areas. d. The AIC will target existing agro-processing enterprises to accelerate and realize their growth potential, while leaving room for some start-up support. This is being done because of the challenging operating environment and the desire to achieve results quickly. e. Across the dominant value chains of Nepal, the resonating challenge experienced by most existing entrepreneurs is the development of domestic, regional, and international markets. Food processing entrepreneurs struggle to understand the opportunities in both domestic and international markets, distribution options, the industry standards associated with each target demographic, and the logistical constraints, all of which the AIC needs to address. 1.7 Services of the AIC
Traditionally support to entrepreneurs in Nepal has been characterized by support for micro-enterprise development and training, with almost no tangible support for growing firms past the micro stage. Things are changing with agribusiness commercialization services, through such programs as the matching grant program from PACT and similar CADP and CAA programs. Nonetheless, a gap still exists, encapsulated with three quotes from infoDevs earlier stakeholder consultations: Lack of mentorshipeveryone craves advice and mentoring and no one gets it. Business helping business in a dynamic environment is what is needed. Too much training about business from people who have never done business.
Without exception, agribusiness entrepreneurs and participants in focus groups were enthusiastic about the need for business incubation. Most agribusiness entrepreneurs need help with marketing, accessing new markets, networking, branding, and compliance, along with finance. They commonly stress the need for a dynamic environment that engenders trust, courage, fairness, and motivation, without bureaucratic hassles. The needs of entrepreneurs, along with value chain analysis, underpin the AIC service offering as outlined in the table below:
Table 3: Nepal AIC Service Offering Technical Knowledge Market Research and Intellegence Business Training Technical Training Industry Seminars Advisary Services Networking Advisory and Coaching Mentors Value Chain Partner Facilitation Networking Events Innovation Acceleration Platform Competitions Ideation and Prototyping Events Acceleration Events Collobaration Platforms
Access to Facilities Compliance & Certification Early Processiong Space Working Space / Hot Desking Product Showcasing
Access to Finance Investment Facilitation Linking to Matching Grants Connecting to Risk Capital Funds Brokerage for Growth Funding
As illustrated in the table, the AIC will provide entrepreneurs with a comprehensive service offering that will facilitate access to markets, advice, finance, and facilities. The AIC will add value to the PACT service offering by providing tailor-made services addressing the needs of Nepalese agribusiness SMEs, furthering the matching grants offered by PACT, and as a service that will continue beyond PACT, based on revenues from the companies assisted. The services revolve around the following: Agribusiness market development o o o o Market access and information Branding and labeling Certification and compliance (nutritional analysis plus) High-value niche markets Suitable technology for post harvesting and processing Product design and testing Packaging technology Assessing readiness Seed capital / matching grants Finance for growth 8
Technology o o o
Finance o o o
Management support o o o Infrastructureoffice space, product showcasing, and early processing Human resources management Accounting, legal, compliance, and networking
The AIC will provide support to incubatees in partnership with relevant stakeholders, avoiding duplication by complementing and levering their services and addressing service level gaps. It will focus its support services toward expanding domestic and international market opportunities for companies operating in value chains with potential. It will emphasize supporting the activities of PACT and its clients (the primary sponsor of the AIC). The AIC will work with similar organizations and their clients, such as the CAA, the AEC, donor programs, and micro-enterprise development providers. 1.8 Limits of the AIC
Awareness and preincuabtion services (involving workshops and advice to prospective AIC clients prior to the rigorous selection process) will largely be at no or only minimal cost. Once clients are selected, they will pay for the business support, which will be tailored to their unique needs on a case-by-case basis, by way of success sharing arrangements, whereby they pay for the support out of increased sales, increased business value and investment in the business, and payment for use of office and other infrastructure services. The AIC will not directly meet these barriers to the growth of agribusiness enterprises: the development of the primary agriculture sector, a system of supply chain facilities, storage facilities, transport logistics, and a reliable energy supply. The AIC will seek to overcome these particular challenges by working with allied organizations, such as Federation of Nepal Chamber of Commerce and Industries (FNCCI), Federation of National Cottage and Small Industries (FNCSI), AEC and government agencies. In addition, partnerships will be developed with the many donor programs that are focused on value-chain development, thereby leveraging their work. 1.9 Critical Success Factors
As revealed in Growing Food, Products and Businesses8, there are a number of critical success factors for an intervention of this kind: 1) helping clients manage risk; 2) understanding the details of the value chain; 3) maintaining a broader goal of demonstrating innovative business propositions so as to stimulate broader sector take-up; 4) adapting the focus and business model of the incubator; 5) proactively identifying and promoting higher value market opportunities; and 6) designing and
Global assessment carried out by infoDev to understand the impact and lessons from agribusiness incubators and innovation centers available at: http://www.infodev.org/en/Article.800.html.
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operating the business incubator in line with good practice, including ensuring a strong selection process that identifies and cultivates innovative, growth-oriented entrepreneurs, and developing strong partnerships with the public and private sector. The AIC needs the following to fulfill these success factors: 1) staff with extensive experience in the agribusiness sector and in particular in market development, 2) a strong capital structure, and 3) a governance framework that allows the management to operate the AIC in a businesslike manner. 1.10 Implementation of the AIC Institutional Framework infoDev with its knowledge and lessons from similar initiatives elsewhere will provide guidance to local implementers. The AIC is intended to be an autonomous selfsustaining entity, which will be locally owned and operated as a business in a new nonprofit-sharing structure, under private sector leadership and with public sector sponsorship from PACT and the Ministry of Agricultural Development (MoAD). The tailor-made agribusiness service offering requires a key stakeholder partnership (Public Private Partnership [PPP]) with additional mechanisms to involve stakeholders as advisors and service providers. Key government partners include the MOAD (PACT), Ministry of Industry (MOI; DCSI), NARC, and DFTQC, in addition to agribusiness entrepreneurs and private sector organizations. PACT, supported by infoDev, will lead the process to select an implementing institution or consortium and asssit with operational funding and funding for technical assistance. The implementation agency will then need to manage the AIC so it becomes an autonomous and independent self-sustaining organization.
Location The AIC will operate nationally, with a hub in Kathmandu, the largest urban center and market in Nepal, and satellites, levering partners facilities and services, in Nepalgunj in the West, a regional center for NFTP industries, and Birattnagar in the east, a hub for horticulture. From these sites, outreach services will be provided to support entrepreneurs in their own locations, as well as supporting entrepreneurs who locate in the AIC facilities, or drop in to make use of the services. The AIC hub in Kathmandu must be based in an area that is conducive for business, close to regulators of food products, and with proximity to agribusiness entrepreneurs, business mentors, and knowledge centers (R&D). The AIC satellite center locations need proximity to a critical mass of agribusiness entrepreneurs, access to logistics, and access to procurement of raw materials, processing, and packaging infrastructure. The AIC will commence with the hub in Kathmandu
10
followed by satellites in the east at Biratnagar and in the west at Nepalgunj in Year 2, after the hub has is established.
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Business Model The AIC aims for financial self-sufficiency with a number of payment options addressing the needs of agribusinesses at different stages of development. The AIC revenue model includes success sharing, finance facilitation, and fees from services. The success sharing model will align incentives of management with clients, by way of payment arrangements, whereby entrepreneurs only pay if they either increase their sales or the company value, or by securing external finance, with AIC assistance. Options include a 5 to 7 percent royalty on an increase in gross sales for three to four years or AIC equity in the client company ranging from 5 to 7 percent and success fees for helping secure finance. Success sharing will only suit some companies. Others will prefer to pay service fees for their incubation or training. The AIC will have offices and other facilities such as meeting rooms, hot desks, office facilities, and a processing facility within its network for use by clients, for which rent and user pay charges will be levied. Expectations of Sustainability The model seeks to achieve 100 percent financial sustainability within four years. After the initial ramp up period, costs are in the order of $970,000 per annum, in the following categories:
Table 4: Nepalese AIC Annual Expenses When Established
Expenses PersonnelAdministrative Client Services Overheads Building Services Provision for Doubtful Debt Depreciation Total Expenses
152,600 399,000 116,900 161,640 97,593 46,427 974,160
The cost recovery model is justified by the capacity and willingness of the target enterprises to pay to the AIC for services. The agribusiness entrepreneur focus group discussions found that some prefer to pay at full cost and others preferred payment by way of either a small percentage of equity, or with a royalty levied on the increase in their sales for a period. The consultative workshop outcomes showed preference for payment in terms of a share of revenues and consultation fees. This implies the AIC should offer options. Businesses at different stages will have various capacity and potential. For instance, an existing business may find it very complicated to give up equity, but may be prepared to pay for services at full cost at the time, or enter into a royalty agreement. A newer business may be in a position to give up some equity, but may not have the funds to pay for support. 12
Noting further refinement of the flexible model, the revenue projected for the first six years, excluding grants, is summarized in the table below.
Table 5: AIC Revenue Generation Scheme for the First Six Years of Implementation
Year Income Rent Incubation Fee Royalty Finance Brokerage Total Income
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
5,375 10,750 16,125 16,125 16,125 16,125 62,497 124,994 187,491 187,491 187,491 187,491 187,212 456,273 749,966 749,966 749,966 749,966 22,350 22,350 22,350 22,350 22,350 22,350 277,435 614,367 975,932 975,932 975,932 975,932
With four main revenue options, the model has flexibility, for review and adaptation as the AIC is implemented. Despite positive responses in the agribusiness entrepreneur survey, payment for services is not the norm in Nepal and paradigms need to change. Benefits may need to be demonstrated with carefully selected clients in the first year to show the advantages. Selecting Clients The AIC will particularly emphasize networking, engaging, and working collaboratively with PACT, CAA, chambers of commerce, private stakeholders associations and private business development service providers in order to not only identify, but also select and support AIC client enterprises. A detailed selection process will need to be prepared in order to select the enterprises. A number of points are pertinent: 1. Enterprises will need to have a growth focus. 2. Entrepreneurs will need to demonstrate strong entrepreneurial traits, including leadership and innovation. 3. Enterprises will have a track record indicating success and will demonstrate competitive advantages in some ways. 4. The market potential of enterprises will need to be positive to allow for growth activities. 5. The enterprise will not need external financing and be fundable. Selection will follow a process of application, assessment, review, and capacity building. Finally, a selection panel will assess the merits of each enterprise. This panel will include representation from a financial institution, for which Business Oxygen9 is recommended, as well as a professional with sufficient market knowledge in the specific product market to assess the market potential of the product.
9A
$14 million SME venture fund, Business Oxygen, has just been launched with the support of the IFC and the World Bank, in partnership with a local private bank, the Bank of Kathmandu, and Beed Management of Nepal.
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Successful enterprises will be required to formally and legally commit to the conditions of service, including payment regimes and conditions. The initial focus of the selection will be on existing firms to help them grow, although not to the exclusion of new businesses, which will become a more important target in future years. New businesses will piggyback on the experience of pre-incubation programs to develop competitive and viable business propositions. This approach will enable the AIC to more quickly create a set of demonstration clients to show the tangible benefits to other future clients and that payment for services is worthwhile for the entrepreneur. 1.11 The Role of infoDev At the planning and implementation stage, infoDev views its role as providing the technical guidance to plan, resource, and operate the AIC successfully. InfoDev will draw on its decade-long experience in setting up business incubators and innovation centers, its agribusiness incubation training program, and its international network of innovation and entrepreneurship professionals across 107 countries. With a strong commitment to building local institutional capacity, infoDev will harness its experience to guide the board and the AIC manager through important milestones, such as developing a governance framework, client selection processes, service design and execution, marketing, and monitoring and evaluation. In order to ensure sustainability and adequate local capacity, infoDev typically remains engaged for a three to five-year period, gradually scaling down its support as the capacity of the local team and partners increases. 1.12 Impacts Once the AIC is up and running, it is projected that 10 new agribusinesses will be supported per annum with a total of 30 clients under incubation at any one time once the AIC is fully established. With 100 clients over a 10-year period, 50 graduates, and with 30 percent revenue growth per annum, preliminary modeling indicates that over a 10-year period the AIC will create 3,024 direct jobs and 8,649 indirect jobs in 100 companies with an increased turnover of more than $27 million and payment of $2 million in taxes Smallholder farmers produce most of Nepals primary production. The initiative is expected to significantly affect the incomes of small-holder farmers, the suppliers to agribusinesses (in terms of reliability), steady prices, and increased sales. Young people comprise the bulk of Nepals new entrepreneurs and the AIC will directly benefit those involved in agro-processing. 1.13 Budget Requirements The AIC is designed to become 100 percent financially sustainable after four years defined as covering the ongoing operating expenses of the AIC, including depreciation, through earned revenues. A flexible revenue model is proposed in 14
which sustainability may be enhanced once various revenue options are tested. An initial investment of $4 million will be needed as start-up capital in order to achieve this objective. The financing required to initiate the AIC will be provided for the first four years, with income generated during this period being banked. The front-loading of the external investment allows the management to focus on the development of the AIC. It also allows the model to be changed, if it becomes clear after two years that the income generation targets are not likely to be met, or that one revenue option is preferred to another, or a flexible combination is required. This approach allows changes to be made before the AIC has to generate income in later years. The income generating component for the initiative is a mix of royalty fees on turnover, equity, pay-as-you-go fees (incubation fee) and finance brokerage fees. This accommodates a mixed portfolio of clients at varying stages of development.
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2 The Concept of Agribusiness Innovation CenterAIC

2.1 Accelerating Agribusiness Development through Innovation
According to the World Bank, the potential of agricultural growth to reduce poverty is four times greater than the potential of growth from other sectors. The 2008 World Development Report outlined how investments in agribusiness produce significant multiplier effects through their forward and backward linkages, generating demand for agricultural products and associated inputs and services and creating on and off-farm employment. Interventions that can unleash this potential can have a tremendous impact on poverty. Many developing countries have not turned their vast comparative advantage in agriculture into a competitive advantage in value-added processed products. They have subsequently lost out on income generation and job creation opportunities that this value addition opportunity offers. Tanzania, for example, exports raw cashew nuts and imports processed cashew nuts. Senegals retailers stock only a handful of locally manufactured food productspreferring imported products, despite Senegals extensive horticulture industry and rich culinary traditions. Reaching such development goals as job creation and inclusive growth in agriculture will require a greater focus on supporting growth-oriented entrepreneurs engaged in downstream business activities (such as processing) to develop competitive enterprises to link effectively into productive value chains. InfoDev seeks to advance new approaches to accelerating the growth of innovative, technology-enabled agro-processing enterprises, while creating powerful demonstration cases that illustrate how engagement of farmer associations, industry, financiers, and government in creating innovation and market-driven shared value can catalyze the green growth of an inclusive and job creating, competitive agro-processing sector. 2.2 2.2 Agribusiness Innovation Centers
InfoDev is piloting the concept of an AIC as a mechanism to increase the competitiveness and growth of pioneering innovative growth-oriented small or medium agro-processing enterprises that have the potential to become an industry leaders. These SMEs would translate product, process and business model innovation into improved products and larger market share in existing markets or entry into new markets and development of new products for existing or new markets. The AICs are unique from the perspective of their target clientele, their business model, and the holistic service offering. Although the AICS are tailored to the specific needs and characteristics of the target market, they generally provide the following services:
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Market Linkages
Market information, marketing skills and market linkages backwards and forwards in the value chain
Finance
Financial management skills and access to appropriate financing products
Agribusiness Innovation Centers
Technology
Technology information, training and technology access
Business Services
Business center, mentoring and coaching and assistance with navigating regulatory requirements, standards and compliance
Networks
Agribusiness entrepreneur networks, competitions and fairs
Figure 1: AIC Services
Over the past decade, infoDev has accumulated a range of lessons about enabling the start-up and growth of high growth potential enterprises in developing countries. Its recent global assessment: Growing Food, Products and Businesses,10 revealed a number of critical success factors for an intervention similar to an AIC (the conclusions of the global study are available online): Help clients manage risk: Agribusiness is inherently risky, because of its reliance on farming (which is susceptible to such environmental risks as flood, drought, and pests) and perishable products. Critical to the success of an AIC is to help agro-processors manage these risks above and beyond the business Results from Agribusiness challenges that any enterprise faces in any industry. Incubation Understand the characteristics of the value chain: The agribusiness value chain can be long with critical dependencies between each element in the chain. The AIC must understand the state and dynamics of the value chain to assist the agroprocessing enterprise in being successful. The World Bank has found in its review of agribusiness investments that a strong focus on a few crosscutting issues, locations, or
Fundacin Chile: Initial investment: $50 million Entrepreneurs sales: $425 million IAA-IPB, Indonesia: Initial investment: $300,000 Entrepreneurs sales: $8 million
10
The global assessment carried out by infoDev to understand the impact and lessons from agribusiness incubators and innovation center is available at http://www.infodev.org/en/Article.800.html.
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value chains with an established comparative advantage and strong market prospects provides an opportunity to pilot difficult reforms, demonstrate success, and learn from those efforts in scaling up the program. infoDev has, therefore, sought to pro-actively identify a few initial focus areas for each AIC. Proactively identify and promote higher value market opportunities: The agribusiness sector is complex and plagued by information asymmetries that often prevent enterprises from recognizing high-value business opportunities. An important role of the AIC is to help the enterprise gain access to relevant market information. Maintain a broader goal of demonstrating innovative business propositions: The desired catalytic effect of an intervention of an AIC does not necessarily happen without a deliberate, tangible effort. Specific programs must be designed for this purpose. Design and operate business incubation in line with good practice. Business incubation good practices include the following, regardless of sector: o o o Ensuring a strong selection process that identifies and cultivates innovative, growth-oriented entrepreneurs. Developing strong partnerships with the public and private sector. Locating the AIC in a geographic location that is attractive to the target clientele. The World Banks review of agribusiness investments collaborates this lesson: Locations with revealed competitive advantage and proven investor demand should be preferred over attempts to initiate new industries in new areas. Ensuring that the AIC manager and service provider have entrepreneurial, and preferably industry, knowledge and that these staff members have incentives that align with the desired outcomes and impacts of the AIC. Obtaining a strong capital structure. Putting in place a governance framework that allows the management to operate the AIC in a businesslike manner. Continuously adapting the focus and business model of the incubator in line with evolving market conditions.
o o o
infoDev has sought to address each of these factors in the design of the AICs.
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3 The AIC Feasibility and Business Plan Process

3.1 The Process
The feasibility study for establishing an AIC in Nepal builds on earlier studies, recommendations, and observations made through infoDevs activities in Nepal since mid of 2010. These included a study and report for Enabling the Growth of Innovative SMEs in Nepal through Business Incubation (2011); a series of capacity building activities, and an observation tour. Observations on previous incubation attempts in Nepal are provided in Annex 14. The AIC feasibility assessment was conducted in close collaboration with PACT to foster a strong commitment to lasting impact, sustainability, and local ownership. The work was undertaken in the last six months of 2012 and early 2013. The earlier infoDev study, Enabling the Growth of Innovative SMEs in Nepal through Business Incubation (2011), which focused primarily on information and communication technology (ICT) but also agribusiness and NTFP in the eastern and western parts of Nepal, served as the starting point for this study. However, the learning involved and incorporated in the current study, reaches back to 2001, as shown in the diagram below, drawing upon earlier lessons, entrepreneur surveys, studies, and capacity building efforts, conducted by infoDev and other local stakeholders.
Figure 2: Nepalese AIC Feasibility Assessment Process
The key activities for the AIC Study involved are the following: Inception Workshop The inception workshop was organized with the key stakeholders to brief them on business incubation, infoDev, earlier work in Nepal, and the scope of work. It was also done for initial feedback. The feedback from the workshop informed detailed work developing the business model and institutional arrangements for the AIC and helped frame the wider stakeholder consultation workshop. 19
Meetings with Stakeholders and Understanding Local Situation One-to-one meetings were held with 67 public and private stakeholders, including government representatives, business member organizations, leading agribusiness entrepreneurs, leading super market operators, and emerging food processors.
Figure 3: Composition of Stakeholders Consulted
See Annex 9 for the detailed list. The meeting gathered important information regarding: Agribusiness challenges Opportunities for agribusiness Gaps in services to agribusiness entrepreneurs Entrepreneur needs and potential services portfolio Foci of the AIC and services needed to address entrepreneur needs The AIC business model Networks and the role of the AIC Institutional arrangements and governance
Stakeholder Consultation Workshop A multistakeholder workshop attended by more than 70 entrepreneurs, government officials and other key stakeholders discussed the preliminary findings. Following group work, the workshop provided important feedback and endorsement regarding the AIC and included questions for discussion. The following are questions regarding the involvement of the network of stakeholders: Which organizations need to be involved? What role should they play?
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How do entrepreneurs overcome barriers in the business environment? The following are questions regarding institutional arrangements: How should the AIC be structured to ensure that it operates as an entrepreneurial business? How will it reach self-sustainability with revenues from clients? What can and cannot work in Nepal?
Business model: What are the revenue options to underpin sustainability? How will entrepreneurs prefer to pay for the support? o o Large enterprises SME enterprises
What works or does not work in Nepal?
The following are questions regarding services and service providers: What services do growth oriented agribusinesses need? Who in the network is best suited to provide them? What are the main service gaps where the AIC should focus?
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The feasibility assessment and business planning methodology is outlined in the diagram below.
Review of the agriculture & agribusiness sectors and value chains that offer opportunities for growth enterprises. Value Chain Analysis
Stakeholder Identification Identification of stakeholders affecting the success of agribusiness entrepreneurs
Gap Analysis Workshops and interviews -to validate selection of value chains and identify barriers to SME start-up and growth Stakeholder Consultation Interviews to map existing service offerings and planned initiatives
Data gathering to create business model, evaluate locations, principal partners/hosts , etc Business Modeling
Stakeholder Consultation Feedback from local stakeholders Review and inputs from international expert group
Partner Identification
Figure 4: Nepal AIC Feasibility Assessment and Business Planning Methodology
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The process of the AIC feasibility assessment started with a literature review to identify agricultural subsectors and value chains for which Nepal has a comparative advantage. The team examined the market opportunities associated with these products and the quality of the products to narrow down the selection of the subsector and value chains of focus. Stakeholders agreed that the AIC in Nepal should focus on a range of agricultural and NTFP value chains, rather than just one or two. The needs of agribusiness entrepreneurs and the service offering available to them were examined to understand the gaps in the market, derive a potential service offering, and map potential partners. Upon deriving a draft service offering, a business model was developed and verified. The output of this process is a well-motivated business model for the AIC and the identification of a range of offerings that are tailored to the needs and market opportunities of growth-oriented agribusiness entrepreneurs in Nepal. 3.2 Agribusiness Stakeholders in Nepal
The main government agencies most relevant to the AIC include the following: Ministry of Agricultural Development and PACT Nepal Agriculture Research Council Ministry of Industry, DCSI / BIP DFTQC PACT is a key government of Nepal initiative established with the assistance of the World Bank to foster commercialization of agriculture. DFTQC is the lead government agency for licensing of food processing industries. MOI / DCSI / BIP is the lead government agency for promoting business incubation in Nepal.
A diverse set of stakeholders is involved in agribusiness in Nepal, both from the public and private sectors. Their interventions target different sectors, value chains, and value chain segments. The AICs implementation approach will be to engage all actors, affecting the ability of its target clients to succeed and to partner with organizations that have key competencies required to serve these clients effectively. The AIC will seek to complement existing initiatives and strengthen the innovation and entrepreneurship ecosystem required for innovative, growthoriented enterprises to thrive.
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PACT is a key gover nment initiative estab -lished with the assistance of the World Bank to foster commercialization of agriculture. The objective of PACT is to improve the competitiveness of smallholder farmers and the agribusiness sector in selected commodity value chains, mainly vegetables, fish, ginger, coffee, floriculture, and horticulture in 25 districts supported by the project.
PACTKey Components Component 1: Agriculture and Rural Business Development This component helps agro-enterprises, commodity associations, cooperatives, registered farmer groups and organizations, and technology and service providers to engage actively in the development of commodity value chains by partially financing demand-driven investment proposals through competitive matching grants. The component also supports investments aimed at creating viable enterprise-based farmer institutions that are linked to other value chain participants and are actively engaged with the markets. The specific activities under this component are the following: Preinvestment and advisory support Direct financing of approved subproject proposals in technology, information, and market infrastructure support Agribusiness development through partial financing of demanddriven investment proposals
Component 2: Support for Sanitary and Phytosanitary Facilities and Food Quality Management. This component aims to strengthen the efficiency and effectiveness of
PACT plans to sanitary and phytosanitory services in order to reduce existing obstacles to agricultural and food trade. It also aims to support the private sectors achieve the objective efforts to gain market advantage through improved food quality by (i) helping farmer management. groups and cooperatives engage in profitable market-oriented production and improved access to markets through the provision of technology and information services and critical public infrastructure and linkages to agribusiness, ii) creating and strengthening industry-wide partnerships along the value chain, thus forging linkages among producers, traders, processors, and other stakeholders, and (iii) reducing existing obstacles to agriculture and food trade thereby increasing the ability of farmers and agribusiness to respond to sanitary and phytosanitory (SPS) measures and food-quality standards to meet domestic and international market requirements. The main components of PACT are Component 1: Agriculture and Rural Business Development and Component 2: Support for Sanitary and Phytosanitary Facilities and Food Quality Management. The Commercial Agriculture Development Project (CADP) is an Asian Development Bank (ADB) project with relevance to agribusiness incubation. In September 2006, CADP created the Commercial Agriculture Alliance (CAA) as a permanent institution, a notfor-profit-sharing company, with its head office in Biratnagar, in the Morang district of
24
eastern Nepal. CAA is responsible for implementation of Commercial Agriculture Investment and Management," which is one of five outputs of CADP. CAA manages the Commercial Agriculture Fund (CAF), which is a cost-sharing grant facility of CADP. The total budget for CAA is $15 million, including $8 million for CAF (20072013). The CAF facility is available to CAA general members and the DDCs to strengthen market-chain activities and develop linkages within the market chain. CAA is interested in partnering with the AIC for the proposed Biratnagar satellite center. The AIC aims to complement and build upon PACT activities and reinforce CAA activities, as the CADP will be phased out by the end of FY 2013. A quick overview of the key agribusiness stakeholders in Nepal is provided in the table below. Further details on the existing agribusiness support initiatives in the country are provided in Annex 3 as donor mapping.
Table 6: Nepalese Agribusiness Stakeholder Mapping
Agribusiness EntrepreneurshipStakeholders and Ecosystem in Nepal

Government of Nepal / Policy
Ministry of Agriculture Development (MOAD), Ministry of Industries (MoI), Ministry of Commerce and Supplies (MoCS), Ministry of Science and Technology (MoST), Department of Food Technology and Quality Control (DFTQC), Department of Cottage and Small Industries (DCSI), Industrial Enterprise Development Institute (IEDI), Industry Policy 2010, NTIS 2010, Industrial Enterprise Act (draft), Business Incubation Program DCSI, Agriculture Perspective Plan 1995, Agriculture Development Strategy (ADS), Master Plan for Forest Sector (MPFS), Forest Act 1993, Forest Rules 1995, National Conservation Strategy (1983), Annual Budgets World Bank, Asian Development Bank, UNDP, FAO, International Fund for Agriculture Development (IFAD), Finland, DFID, SDC, USAID Nepal Agricultural Research Center (NARC), Nepal Agriculture Research Fund (NARF) International Center for Integrated Mountain Development (ICIMOD) Federation of Nepalese Chamber of Commerce and Industries (FNCCI), Federation of Nepalese Cottage and Small Industries (FNCSI), Confederation of Nepalese Industries (CNI), Agriculture Enterprise Center (AEC-FNCCI), Nepal Chamber of Commerce (NCC), Nepal Youth Entrepreneurs Forum (NYEF), Nepal Bankers Association (NBA) , Nepal Business Initiatives, Nepal Economic Forum NEF Nepal Food Scientists and Technologists Association (NEFOSTA), Society of Agricultural Scientists Nepal (SAS-N), Nepal Veterinary Association, Nepal Herbs and Herbal Products Association, Jadibuti Entrepreneurs Association, Nepal Foresters Association (NFA), Nepal NTFP Network (NNN) Agriculture and Forestry University, Kathmandu University, Tribhuvan University, Pokhara University, Purbanchal University, Business Schools KUSOM, Ace Institute of Management, South Asian Institute of Management Institute of Agriculture and Animal Sciences, Institute of Food Technology, Institute of Forestry, Technology and Innovation Management Program Tribhuvan University Agriculture Enterprise Centre (AEC), Business Incubation Program (BIP GON), Biruwa Venture Pvt. Ltd.
Donors / Bilateral / Multilateral R & D Institutes Business and Professional Communities
University / Academia
Innovation / Entrepreneurship / Incubation
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Agribusiness EntrepreneurshipStakeholders and Ecosystem in Nepal

Industries
Sujal Diary / Foods, Shreenagar Agro Farm, NIMBUS Holdings, Gorkha Aurved Company, Gandaki Honey, The Organic Village, Herbs Processing and Production Ltd, Nepal Ayurved Centre Ltd Baidhyakhana, Bhatbhateni Supermarket Agriculture Enterprise Center (AEC), International Development Enterprise (IDE), Winrock International, ICIMOD, World Wildlife Fund, The Netherlands Development Organization (SNV), Forum for Rural Women Ardency Development (FORWARD), Center for Environmental and Agriculture Policy Research, Extension and Development (CEAPRED), Asia Network for Sustainable Agriculture and Bioresources (ANSAB), Local Initiatives for Biodiversity, Research and Development (LI-BIRD) Sambridhi The Prosperity Foundation, Change Fusion Nepal (Social Entrepreneurship Bazzar, Youth Action Fund Program, Social Entrepreneurship Award), Entrepreneurs for Nepal E4N, Udhayami Seed Fund USF, Kalpasala (IOE), NIMBUS Young Entrepreneurs Summit (YES 2012), Entrepreneurs Lab KUSOM Project for Agriculture Commercialization PACT (WB), Commercial Agriculture Development Project - CADP - Commercial Agriculture Alliance CAA (ADB), High Mountain Agribusiness and Livelihood Improvement Project HIMALI (ADB), High Value Agriculture Project in Hill and Mountain Areas HVAP (IFAD/SNV/AEC), Micro Enterprise Development Program MEDEP (GON/UNDP), Nepal Economic Agriculture and Trade - NEAT (USAID), OVOP AEC Beed Management, Lead International, Practical Action Consulting, Business Age, Lotus BizPort, Future Now, Panos, Saadhya SME Venture Capital, Bank of Kathmandu, National Agricultural Research and Development Fund; Youth and Small Enterprise Self-Employment Fund MOF, FNCCI (YSESEF), Micro, Cottage and Small Industry Development Fund, The World Bank, IFC, infoDev, Asia Pacific Incubator Network (APIN)
INGOs, Informal Groups
Projects / Programs
Consulting / Training Funding and Financiers International
The following table plots the various stakeholder types noted above against business development stages and notes the main gaps.
Table 7: Nepal Agribusiness Business Innovation / Incubation Ecosystem Gap Matrix Stakeholder Domain Government Agencies Agribusiness Development Stages Demonstration Micro-enterprise Scale Up and Development Development and Growth MOAD, DOA, MOI, DCSI, DFTQC, NARC Focused on poverty alleviation, facilitating smallholders, producers & farmers, commercialization at producers level Wealth creation, processing entrepreneurs development, agribusiness promotion, growth orientation, innovation, competitiveness enhancement NARC, ICIMOD, NARF Technical expertise, lab facilities, knowledgebase, fund Innovation & IP, commercial technology transfer, budget Agriculture and forestry, Tribhuvan, Kathmandu, Pokhara, and Purbanchal University Student projects, innovation, lab, knowledgebase, technocrats R&D and Idea Development Commercial
R & D Institutes
Universities Academia
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Stakeholder Domain Agribusiness Development Stages R&D and Idea Demonstration Micro-enterprise Scale Up Development and Development Development and Growth Entrepreneurship, innovation, commercialization NEFOSTA, Society of Agricultural Scientists Nepal (SAS-N), Nepal Veterinary Association Technical expertise, knowledge base Innovation and entrepreneurship promotion Business Communities FNCCI, FNCSI, CNI, NCC, CCIs, NBI, NYEF B2B Linkage, business promotion, lobbying, policy influence Program design, reach to critical mass, over politicized, continuity of projects AEC, IDE, ICIMOD, CEAPRED, ANSAB, LI-BIRD, Sambridhi The Prosperity Foundation, Birewa Venture, Change Fusion Nepal (Social Entrepreneurship Bazzar, Youth Action Fund Program, Social Entrepreneurship Award), Entrepreneurs for Nepal (E4N), Udhayami Seed Fund USF, Kalpasala (IOE), NIMBUS Young Entrepreneurs Summit (YES 2012), Entrepreneurs Lab - KUSOM Innovation and entrepreneurship promotion and facilitation Critical massscale up and growth PACT, CADP, HIMALI, NEAT, HVAP, MEDEP, OVOP Donor supportvalue chain developmentB2B linkagespotential for growth orientation Innovation - growth orientationup-scale commercialization, focused on small holders and producers IEDI, CSIDB, Beed Management, Lead International, PAC, Business Age, Lotus BizPort, Future Now, Panos, Saadhya, Center for Business Development, Birewa Venture Business development consulting services Focus on start-upsYoung entrepreneurs Comprehensive Service PackagesGrowth Limited accessAffordability AEC-FNCCI, IDE, CAA, BIPGON, Birewa Venture, Change Fusion Nepal, Sambridhi CommitmentsResources (though limited) Growth orientationnot to the scaleStrategic partnership MFIs Savings and Credit Cooperatives, Agriculture Development Bank, Bank of Kathmandu, Commercial Banks Micro finance, BFIs - Physical Collateral focused Business Oxygen, the IFCBank of Kathmandu: SME Venture Fundvery early stage Growth financeAngels Network, Other Private Venture funds Institutions Capacity/Strength Gap/Shortcomings
Commercial
Professional Communities
INGOs Informal Groups
Projects Programs
Consulting / Business / Enterprise Development Services
Agribusiness Promotion, Innovation and Incubation
Financiers
LEGEND
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3.3
Policy Support for Agribusiness Incubation in Nepal
The Industry Policy 2010, Agribusiness Policy 2006 and Draft Industrial Enterprise Act 2011 are the specific provisions relevant to the AIC and business incubation. The policies and proposed acts will facilitate the AICs operation. The Agriculture Development Strategy (ADS), Policy Option Report11 paragraph 64, 65, 459, 511, 529, 548, 564, 575 and 582 highlight agribusiness innovation and incubation. Agribusiness Promotion Policy 2006 The Agro-Business Promotion Policy was formulated in 2006 (2063 BS) to transform subsistence-oriented and dispersed agricultural production systems into modern, sustainable, competitive, and commercial production systems. The policy intends to reduce poverty through agriculture commercialization, along with import substitution and export enhancement. The specific objectives of the Agribusiness Promotion Policy are the following: To help market-oriented competitive agricultural production To develop agro-industry to contribute to national and international market development To contribute to poverty alleviation by agriculture commercialization
Industry Policy 2010 The government of Nepal instituted a policy for business incubation, under the new Industrial Policy, for implementation by the Department of Industry, with which the Department of Cottage and Small Industry is to be merged. The gist of the Industrial Policy 2010 for Business Incubation is the following: 11.20 Business incubation services will be operated for agriculture and nontimber forest products and technology related enterprises, in collaboration with private sector apex bodies, including the Federation of Nepalese Cottage and Small Industries, Federation of Nepalese Chamber of Commerce and Industries and National Micro Entrepreneur Group. 11.21 Business incubation services will be provisioned to attract creative, innovative youth, and women into micro, cottage, and small enterprises. 11.22 To support graduated business incubates to run their businesses, angel fund and venture capital fund will be provisioned to create employment opportunities.
ADB 7762-NEP. 2013. Policy Options Report. Technical Assistance for the Preparation of the Agricultural Development Strategy. Asian Development Bank.
11
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Draft of Industrial Enterprises Act 201112 The proposed Industrial Enterprise Act, which will replace the existing Act of 1992 and is posted at the FNCCIs website for comments and suggestions, has the following two provisions relating to the Business Incubation. Business Incubation Centers are to be classified as service industries. There will not be any tax to industries established within Business Incubation Centers (Clause 21, i).
12Source:
http://www.fncci.org.np/downloads.php, in Nepali, accessed April 16, 2013.
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4 Focusing on Value Addition

Agriculture accounts for more than one third of Nepals GDP (35.1 percent), more than 3.6 percent of its export revenue, and 67 percent of jobs.13 Furthermore, the Nepal Labor Force Survey Report 2008 estimates that 84.3 percent of employed women work in the agricultural and forestry sector. Nepal benefits from varied geographical and climatic conditions that make the production of a wide variety of agricultural products possiblefrom a large domestic market of 27 million people, as well as from its proximity to northern India and the Tibetan part of China, which represents a market of more than 16414 and 2.915 million respectively of potential customers for agricultural products produced in Nepal. Given the importance of the sector to the economy and peoples livelihoods, the government of Nepal has made agriculture a key priority in the countrys Growth and Transformation Plan (GTP), in which it gives priority to agro-processing, SME growth, increasing the capacity of women, and job creation. The government has prioritized 19 value chains from different sectors for commercialization, including agriculture, service, and industrial sectors under its Nepal Trade policy (2009) and Nepal Trade Integration Strategy (2010) reports as listed in section 4.1. In line with the governments priorities, the AIC has been designed to accelerate the growth of an indigenous agro-processing sector. By enabling the start-up and growth of value-adding agribusinesses, Nepal should move up the agricultural value chain, capturing a larger share of income for local businesses and small-holder farmers, and creating more jobs. 4.1 Value Chains with Market Potential
The AIC is to focus on value addition through post-harvest processing of agriculture products, for which Nepal has a comparative advantage and significant growth potential. In order to select value chains of focus for the AICs intervention; several of them have been studied in depth. All of them demonstrate the following: Supply-side problems in terms of both quantity and quality, along with issues other stakeholders are addressing and which processors are overcoming themselves. Increasing domestic, regional, and international market demand. There are only a limited number of processors in any specific value chain and a need for more to address the increasing market demand. Poor marketing and management capabilities.
of Agriculture and Cooperatives, 2012.
13Ministry
14http://en.wikipedia.org/wiki/List_of_regions_of_India. 15http://tibetanyouthcongress.org/facts-about-tibet/.
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A priority for local stakeholders.
The Nepal Trade Integration Strategy (NTIS) 201016 study shows that Nepal has comparative advantages in agriculture and agro-processing, medicinal herbs and essential oils, hydro-power generation, and service-based industries, especially tourism and ICT. An ADB study of 130 countries, which assessed the level of opportunity the country has in terms of product upgrading and growth, ranked Nepal second in South Asia. The study stated that from 2001 to 2007, Nepal had a diversified export base with an export basket of around 100 products in which it had a comparative advantage. Ranked 33rd out of 130 countries, the report reaffirmed that the Nepali economy has considerable opportunities to tap into export driven growth. NTIS has identified the following 19 products as those with the best potential for export, out of which seven are agro-based. Agro-food Large cardamom *Ginger *Honey Lentils *Tea Instant noodles *Medicinal herbs and essential oils
Crafts and Industrial Goods Handmade paper Silver jewelry Iron and steel products Pashmina products Wool products
Services *Tourism Labor services * Information Technology and Business Process Outsourcing (IT & BPO) Health
of Nepal, Ministry of Commerce and Supplies, 2010. Nepal Trade Integration Strategy 2010.
16Government
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Education Engineering *Hydro-electricity
Note: * indicates most viable business from the list, as per views of experts and entrepreneurs.
The value chains on which PACT focuses are seeds, vegetables, coffee, ginger, potato, floriculture, honey, mushroom, oilseed (mustard and ground nuts), fruits (citrus, banana, papaya, and mango), lentil, herbs, fish, feed, milk processing, dairy processing, and poultry. The project is designed to achieve the target by helping farmer groups and cooperatives engage in profitable market-oriented production, creating and strengthening industrywide partnerships along the value chains. It also seeks to reduce existing obstacles to agriculture and food trade. In addition, it has provisions for technology and information services and critical public infrastructure and linkages to agribusiness. Eleven key value chains (or value chain groupings) with potential for enterprise growth by way of post-harvest and food processing were identified and analyzed in-depth as those with the best potential for the AIC. These 11 value chains were selected on the basis of their potential for AIC purpose and common priority of NTIS, PACT and FNCCI/AEC, as described below. 1. Coffee 2. Fish 3. Floriculture 4. Ginger 5. Honey 6. Large cardamom 7. Meat 8. Milk and dairy 9. NTFP and essential oils 10. Potato 11. Tea
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The following table lists the value chains selected for the AIC alongside those on which PACT, NTIS, and FNCCIs AEC focus.
Table 8: List of Priority Value Chain
SN 1 2 3 4 5 6 7 8 9 10 11
12 13 14 15 16 17 18 19 20 21 22
PACT Seeds Vegetables Coffee Ginger Potato Floriculture Honey Mushroom Onion Oil Seeds (mustard, sun flower, groundnut) Fruits (citrus, banana, papaya, mango) Floriculture Herbs Rainbow Trout Fish Feed (poultry) Meat Processing Milk (dairy) Poultry
NTIS
FNCCI/AEC
Selected for AIC Study
Ginger
Coffee Ginger Potato Honey
Coffee Ginger Potato Honey
Honey
Junar
Medicinal Herbs/Essential Oil
Orchid NTFP Essential Oil Rainbow Trout Feed Goat /Meat Processing Poultry
Floriculture NTFP/Essential Oils Fish
Meat Milk and Dairy
Large Cardamom Tea Instant Noodles Tomato
Large Cardamom Tea
Total
19
16
11
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The following are the comparative advantages of Nepal common to the 11 value chains: Varied geographical and climatic conditions, from the plains of the northern Indian subcontinent to the Himalayas and its unique mountain ecosystem that make the production of a wide variety of agricultural crops possible. Production by small holder farmers, who by default use natural and organic farming methods, which causes supply constraints, but which can be an advantage as developed countries shift more and more to organic and clean food and for climate change impacts. A large domestic market and labor force, with a population of 26 million people, growing annually by 1.4 percent.17 A widely acknowledged trainable work force. Comparatively cheaper wages than in other countries. The average wage for unskilled labor generally ranges from $2.49 per day. The government has acknowledged these value chains as priorities and is supporting them with favorable policy measures. Agreements with the India, China, and European countries that ensure access to their markets for Nepalese products.
A summary for each of the 11 key value chains identified is presented below and additional information is available in Annex 7. 4.1.1 Tea
Nepal produces 115,432 tons of green leaves of tea, including 3.2 million kilograms of Orthodox Tea production, of which 15 percent is exported and of which 85 percent is sold in Kolkata, India. World tea consumption is increasing, as is the market for organic, fair trade, and value-added products, such as specialty, blended, and flavored teas, for which the flavor and aroma of Nepalese tea is an advantage. The Himalayan Tea Producers Cooperative Limited (HIMCOOP) has 19 processing factories and is one of the major associations for the sector, along with National Tea and Coffee Development Board Nepal, Nepal Tea Association, Nepal Tea Planter Association, Himalayan Orthodox Tea Planters Association, and the Himalayan Orthodox Tea Producers Association-Nepal. Major donor projects and programs working in this sector are CADP, PACT, NEAT, ADO, SNV, GiZ, USAID and NTCDB. The government provides a number of incentives to encourage the industry: exemptions for land ceiling18; land registration fees and land revenue leasing (up to 75 percent) up to 50 years; capital grants for irrigation subsidies on organic certification
17http://census.gov.np/ 18Ceiling
refers to maximum amount of land permitted to use for farming under a single entity.
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(reimbursement of the expenses toward organic certification); and cash incentive for exports (2 to 4 percent, depending upon the value addition of the product). There are several constraints that hinder the growth of the sector. There is a shortage of qualified technical manpower, such as tea tasters, in the processing factories. Most technical manpower comes from Darjeeling, India at high rates. Other obstacles include inconsistent quality, lack of standard international certification (such as ISO, HACCP, organic, fair trade), and high import duties on packaging materials, such as chest or paper. The VAT refund process for exported goods is difficult and there is a serious problem in accreditation of quarantine checks done in Nepal.
4.1.2
Coffee
Despite high prices fetched by Nepali coffee in the international market, export volumes have not increased significantly. As per the NTCDB, production of coffee in the fiscal year 2011/12 was 153 tons of which 279,762 kilograms were exported. In the same period, 31,326 kilograms were imported. Fourteen coffee processors are members of National Tea Coffee Development Board-Nepal, the apex body for the coffee sector. Development organizations working for promotion and commercialization of coffee in Nepal are PACT, iDE, WI, EIG, Li-Bird, AEC, ADO, USAID. Coffee is not the only focus of these organizations and the resources allocated for the coffee sector are comparatively less than some other sectors, such as cereal crops and vegetables. Key stakeholder groups in the coffee sector are Coffee Producers Groups (CPGs), District Coffee Producers Association, Nepal Coffee Producers Association (NCPA), and the National Tea and Coffee Development Board. One of the major constraints to increased export is low production volumes. The government is keen on developing Nepali coffee brand in the country and has approved the Nepali Coffee Logo (brand) and awarded rights to three traders that meet the set standards. Other main challenges are insufficient technical services, poor infrastructure for post-harvest handling, insufficient transportation facilities, and lowquality inputs. Nepal exports coffee beans mostly to Korea, Japan, the United States, and some European countries. 4.1.3 Honey
The total number of beehives in Nepal is estimated to be 140,850 with the potential to produce 13,650 tons of honey per year. However, the total production of honey at present is estimated to be only about 1,500 tons per year19. At present, there are eight major honey processing and exporting companies in the country.
19P.
Pandey. 2009. Market Access of Nepalese Honey AEC/FNCCI, Kathmandu.
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Some of the key donor organizations/projects working in the honey value chain are MEDEP, PACT, GiZ, ICIMOD, AEC, ADO, USAID, and World Bank funding various projects. There is only one association for honey: the Federation of Nepal Beekeepers and Cooperative (FNBK), which is supported by a GiZ project, INCLUDE. Nepali honey could benefit from international market demand, if appropriate measures are taken and programs are available to strengthen this subsector. One of the main issues to be addressed in Nepali honey sector is the stringent sanitary and phytosanitary standards set by importing countries, such as Residue Monitoring Plan and Hazard Analysis Critical Control Point (HACCP) certification required by EU, Grannotoxin free by South Korea, Prevention Food Adulteration (PFA) Rules, and standards by India, other U.S. and Japanese standards, along with CODEX. As a raw commodity, without unique branding and differentiation, Nepali honey is not competitive in terms of international market prices. The total annual domestic demand for honey is estimated to be about 300 to 350 tons. Gandaki Bee Concern, a leading private honey production and processing company in Nepal, calculates that if honey consumption increased by 0.1 kilograms per capita then the total demand for honey in the domestic market would be about 2,500 tons per year.20 Quality control and inadequate infrastructure constrain growth of the industry, including poor storage, lack of quality monitoring and control, inadequate laboratory facilities, and poor institutional mechanisms for ensuring quality and standards. In the absence of these facilities, it is difficult to tap specialty markets, where better pricing is offered for niche products, such as Nepali honey. Policy related constraints compound the problems, including inadequate policies and poor implementation of existing laws and regulations in relation to pesticide monitoring and control, veterinary drug administration, and import and export of honey (assurance of safety and hygiene, import duties, VAT and local taxes, and insurance). All of these problems cause difficulties with SPS measures and international agreements.21 4.1.4 Ginger
Nepal is the fifth largest producer and the 15th largest exporter of ginger in the world, producing 216,289 tons from 19,081 hectares, with a yield of 11.34 tons per hectare.22 The NEAT activity (USAID-funded project) identified 43 entrepreneurs, including producers, exporters and processors, in the mid-western and eastern regions. The main
http://www.gandakibee.com.np/markets.htm. GIZ. 2008. Honey in Nepal Approach, Strategy and Intervention for Subsector Promotion. Kathmandu. 22Full Bright Consultancy Private Ltd. 2008. Product Chain Study: Ginger. Final Report. Biratnagar, Nepal: CADP.
20 21
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projects, donors and international nongovernmental organizations (INGOs) in this sector are MEDEP, CADP, PACT, GiZ, NEAT, PA, EIG, MC, AEC, ADO, and USAID. The Nepal Ginger Producers and Traders Association and the Turmeric and Ginger Producer Peasants' Association are the key associations working in this subsector. The market for ginger is expanding with increasing use by Ayurveda pharmaceutical industries in Nepal and India. More than 80 percent of the total production is exported to India, the only export destination of fresh and dried ginger produced in Nepal. Initiatives, such as the Ginger and Spice Development Program, have commenced, providing technical services to farmers through the DoA. The government emphasizes ginger as a priority for commercialization by its processing (as sutho-dry ginger) in its Agriculture Perspective Plan (APP) through research and development activities. As support to APP, the government in its Three-year Interim plan (2011-13) has targeted commercialization of agriculture products, such as ginger, with special attention given through promotion of cooperatives, irrigation supply, agriculture roads, agriculture credit, research and technology dissemination, rural electrification, and development of market mechanism to increase production and productivity and increase investment of the private sector (P28, Government of Nepal). The major constraints in the ginger sector include low-quality sutho production, farmers lack awareness about ginger processing technology, and intermittent listing of ginger as a restricted import item by India. 4.1.5 Large Cardamom
With a yield of 0.44 kg/ha, Nepal produces a total of 5,517 tons of cardamom annually. Nepal is the worlds largest producer of large cardamom, with an annual production exceeding 5.2 thousand tons and production is expected to increase annually.23 According to Mercy Corps, cardamom is produced and processed by over 70,000 households in the East of Nepal (420,000 people) and ranks consistently in the top 12 export commodities of the country and contributes an annual average of $20 million to the national economy, including $12 million in export earnings. During the study, four processing industries were identified in this subsector for which the major associations are the Nepal Cardamom Producers' Association, Cardamom Development Center, and the Large Cardamom Entrepreneurs Association of Nepal (LCEAN). Projects and organizations such as CADP, PACT, NEAT, ADO, SNV, USAID, and NTCDB are the major working entities in this subsector. The government has promoted development of the subsector, making it a priority commodity in APP, by establishing a Cardamom Development Centre in Fikkal, Illam,
23Stoep
G.A, U. R Pokharel, M. Rajbhandari, K. D. Bibek Shrestha. 2010, Enhancing Competitiveness of Nepals Large Cardamom Value Chain. Kathmandu: SNV.
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and subsidizing sapling costs and interest rates for producers. The major constraints are insufficient access to facilities, such as irrigation, drying furnaces, credit facilities, and storage and transportation system. In addition, adoption of technology for processing is low with insufficient technology transfer and low levels of research and development. 4.1.6 Floriculture
The floriculture sector is gradually emerging as an attractive segment with the establishment of some flower showrooms in the capital city. There is a growing demand for cut flowers in the country and the market is expanding to such cities as Biratnagar, Dharan, Pokhara, and Chitwan. Export of cut flowers and related items was worth NRs 20,874,000 in 2010/11 and NRs 191,453,039in 2011/12. In fiscal year 2010/11, Nepal imported about NRs 9,23,000 worth of cut flowers and related materials, which increased to NRs 11,182,468 in fiscal year 2011/12. According to The Agriculture Statistics Division, by fiscal year 2010/11, 86 flower showrooms were established in the country. There are more than 600 nurseries and 635 firms and individuals estimated to be operating in floriculture subsector. However, the number of producers is still not calculated. Updated data from Floriculture Association Nepal reveal that as of March 2013, floriculture farming is carried out in 36 districts of the country, covering 120 hectares of land in different geographical locations. The investment in the sector is about NRs 4 billion and the yearly transactions amount to NRs 405 million. The sector is achieving a growth rate of 10 to 15 percent annually in terms of commercial transactions. Recognizing the importance and economic contribution of the floriculture subsector, the government has endorsed the Floriculture Promotion Policy 2012. 4.1.7 Potato
The state of potato production in the country is 2,508,044 tons with a productivity of 13,735 kilograms per hectare.24 Potatoes are cultivated in all zones of the country. Demand for potato is increasing, with per capita consumption of 51 kilograms per annum, which almost double what it was in 1990 (FAO 2008). Nepali potato seeds have a high demand in Bangladesh and India, where a limited amount is currently exported. The major projects and donors working in this subsector are CADP, PACT, MC, ADO, and EU. Constraints include insufficient inputs to farmers such as irrigation, fertilizers, credit, quality seed, and seed varieties. At the processing level, inadequate processing companies and activities have been identified. Although clear records on potato processors are not available, a total of 136 snacks and vegetable processing
24Full
Bright Consultancy Private Ltd. 2008. Product Chain Study: Potato, Final Report, CADP, Biratnagar, Nepal.
38
companies of different levels are registered in DFTQC, which may be processing potato related items. The Nepal Potato Producer Peasants' Association is the only association working in this subsector. 4.1.8 Milk and Dairy
Livestock is an essential activity for Nepali farmersimportant for manure, milk, meat, and religious purposes. The total milk production of the country is about 1.5 million tons. The annual growth of internal consumption of milk is about 8 percent, but production is increasing at only 3 percent. Nepal imports milk and its various products to meet demand from Asia, Europe, North America, and Australia. According to AEC/ FNCCI, the demand for milk is expected to double in 15 to 20 years. The Nepal Dairy Association is the apex body for milk processors with 76 members. FAOs study of Nepal in 2010 25 revealed that 54,040 tons of milk was collected in the country by processing plants, among which 2,776 tons were used for cheese production. The same report also stated that the number of dairies corresponding to their processing capacity is as follows:
Table 9: Number of Nepal dairies, size and processing capacity
Size Large Medium Small Cottage
liters/day 30,001 10,001 to 30,000 1,000 to 10,000 Below 1,000
Numberof Dairies 3 6 26 215
The major milk products of the country are milk powder, buttermilk, curdled milk, cream, cheese, ghee, ice cream, and other sweet products.26 Some of the major organizations working in the milk and dairy subsector are MEDEP, PACT, GiZ, MASF, iDE, PA, Forward, AEC, DLS, USAID, and DFID. The important associations of this subsector are the Association of Livestock Farming Nepal, Nepal Milk Producer Farmers Association, Veterinary Chemist and Druggist Association of Nepal (VECDAN), Nepal Dairy Association, and Central Dairy Cooperative Union. The Dairy Development Policy 2064 (2008) guides the overall development of the dairy sector. The policy incorporates the Agriculture Perspective Plan (APP, 1995-2015),
25Food
and Agriculture Organization of the United Nations. 2010. Dairy Sector Study of Nepal. Kathmandu: FAO. 26Ibid, page 80.
39
National Agriculture Policy, 2061, National Milk Marketing and Strategy Study, 2001, and Agriculture Business Promotion Policy, 2063. It aims to develop the dairy sector commercially and competitively for national economic development. Stock raised in Nepal is mostly local, which by default means they have lower milk production capacity than improved breeds. In addition, the quality of feed and fodder, along with proper animal health services, are not available to most farmers, which further limits productivity. Lack of competent manpower and access to markets have been major challenges in this subsector. Private dairies lack appropriate technical manpower. Regular training and assessment is required for increasing and strengthening the productivity of the subsector. 4.1.9 Meat
The total number of sheep and goats reared in the country is 9,991,520, producing 55,531 tons of meat annually. There are 17 large meat processors that produce a variety of meat products and operate at different business scales. According to the Third Livestock Development Project 1999, everyday nearly 5.5 tons of meat are processed, producing sausage, salami, 'momo'27, chicken cuts, smoked, and dried meat.
Table 10: Net Meat Production Meat Net Production (Mt) Years Categories Buffalo Mutton Goat Pig Chicken Duck 2000/01 124848 2856 37769 15239 13259 287 2001/02 127495 2823 38584 15594 14118 281 2002/03 130791 2792 39664 15626 14756 270 2003/04 133600 2779 40540 15389 15881 223 2004/05 138953 2744 41698 15724 15461 237 2005/06 142040 2737 42820 15773 15605 230 219205 2006/07 147031 2747 44933 16035 16126 233 227105 2007/08 151209 2725 46570 16453 16712 231 233900 2008/09 156627 2711 48472 16992 16662 226 241690 2009/10 162213 2691 49851 17066 16527 225 248573 2010/11 167868 2722 52809 17923 36085 218 277625
Total 194258 198895 203899 208412 214817 Source: Department of Livestock Services, 2011.
Demand for goat meat has been increasing, as a result of the growth in population, urbanization, growing income levels, and a desire to shift consumption to quality animal products. Goat meat is regarded as a highly priced elastic product and there are opportunities for niche marketing of hygienic and high-quality goat meat, initially for the domestic market and later to regional markets.28 A large number of momo
27Momo
is a traditional Nepali food consisting of minced or chopped meat, heavily spiced, and wrapped in a light pasty casing. It is served with an array of spicy sauces. It is eaten as a snack food or an entire meal. 28Heifer-Nepal. 2012. A Study on Goat Value Chain in Nepal. Kathmandu.
40
restaurants and street sellers are found in the cities. Momos are also an important restaurant menu item. An estimated 40 percent of the buffalo meat is processed into momo, along with a significant proportion of chicken and goat meat.29 Another traditional form of processing meat is drying, either by sun or smoking. Obstacles include undercapitalized markets, poor physical infrastructure, policies that do not encourage increasing goat numbers (such as restrictions on communal forest areas, which restricts the number of livestock that can be kept), and high transportation costs. The Agriculture Perspective Plan (APP, 19952015) considers livestock sector growth as crucial to meet its AGDP growth and poverty alleviation objectives. APP targets accelerating the annual growth rate of the livestock sector to 6.1 percent from 2.9 percent, in order to increase the livestock contribution from 31 percent to 45 percent by the end of APP plan period. The contribution of the livestock sector to the national GDP is about 18 percent. Dairy is the most important livestock component, contributing the most to the AGDP (62.7 percent of the total livestock sector contribution), followed by meat (32.4 percent) and eggs (5.0 percent).30 The major associations in this sector are the Association of Livestock Farming Nepal, Nepal Feed Industries Association, and Veterinary Chemist and Druggist Association of Nepal (VECDAN). A large number of projects and organizations are engaged in strengthening the sector: PACT, HIMALI, WUPAP, EIG, PA, Forward, Li-Bird, AEC, ADO and Heifer International-Nepal. 4.1.10 Fish With a yield of 3,702 kg/ha, 26,941tons of fish are produced from a water surface area of 26,036 hectares.31 Even though information on production of fish and its productivity is available, the number of farmers and processors is not reported at any level, because the fishery subsector is included as part of the agriculture sector as a whole. The Nepal Fish Farmers' Association is the only association in this subsector. With the huge unmet and growing domestic demand for fish and related products, commercialization of this sector has potential for growth and to substitute imports. The major organizations, projects and donors working in the sector are PACT, EIG, Forward, CEAPRED, ANEP, IDE, ADO, USAID, and WF.
29Poudel. 30CLDP
2010. Market-led Quality Meat Production and Processing. UNFAO: Kathmandu. 2008. 31Lotus Intellect Pvt. Ltd. 2006. Subsector Analysis of Fish In Banke, Bardiya and Kailali, Kathmandu.
41
The main challenges are inadequate production knowledge, underdeveloped market systems, and inadequate input supply. As large numbers of farmers are engaged, particularly in the southern plains of the country. This subsector offers potential for growth and improvement in rural livelihoods, particularly when it comes to rainbow trout, regarding which Nepal could be competitive with India, and specialty niche products. 4.1.11 Nontimber Forest Products and Essential Oils With its unique geography, Nepal has diverse ecosystems and a variety of nontimber forest Products (NTFPs). According to the Department of Forest and Soil Conservation, 2,171,522.3 kilograms of NTFP products were collected, with revenues of more than $245,000. Among the collected NTFP products, the important revenue generating species listed in the annual report by Department of Plant Resources are Himalayan Ye, Loth Salla, Khoto Salla, Angeli, and Khayer. There are 108 processors in this subsector, although only 31 of them are under Nepal Herbs and Herbal Products Association (NEHHPA).The processors in the NTFP value chain range from small to large. The small processors produce cosmetic products and essential oil and supply them to the local market, whereas the large producers mainly export commodities.
Examples of Products Exported
Essential oil and related products are the most important types of products processed.32 The major essential oils produced include dementholized oil, eucalyptus oil, mentha arvensis oil, anthopogon oil, artemisia oil, juniper berry oil, spikenard oil, valerian oil, wintergreen oil, Zanthoxylum oil, and massage oil. Other products include handmade paper, morel, herbs, Ayurveda herbal teas, organic teas, sorbet (juice) herbal drinks, Ayurveda cream, cosmetics, neem soaps, and mentha products. Key organizations working in the NTFP sector are MEDEP, PACT, HVAP, WUPAP, GiZ, EIG, iDE, PA, ICIMOD, Forward, ANSAB, AEC, JABAN, FDO, FECOFUN,
32Poudel,
K.L. 2007. Trade Potentiality and Ecological Analysis of NTFPs in Himalayan Kingdom of Nepal. Kathmandu.
42
USAID, DFID, and WWF. The important associations in this subsector are Nepal Forest Industry Association, JadiButi Entrepreneurs Association of Nepal (JABAN), and Nepal Herbs and Herbal Products Association (NEHHPA). The funding in this subsector consists of $18.9 million by HVAP. Nepal has been exporting about 90 percent of NTFPs in raw form, mostly to India where it is processed into essential oils and used in manufacturing medicines and cosmetic products. Huge potential exists for domestic processing as Nepal imports processed oils and items produced from the exported raw products.33A study conducted by FNCCI titled Wholesale Market Assessment-NTFP showed that Nepalese NTFP processors are unable to run processing plants year round because of a shortage of raw materials, which mainly results from the lack of wholesale collection systems. According to a study conducted by ANSAB, the employment that could be generated by this subsector is estimated to be 26,550,000 man days for local people, which is an equivalent of six months or 180 days a year for 147,550 persons.34 The government has identified about 30 species of NTFP species in its plan. The species prioritized are atis root, emblic myrobalan, common walnut, Persian walnut, bannut tree, picrorhiza, morel, tinospora chireta, tagetes, spikenard, linchen, Nepali piper, toothache tree, cinnamomum leaves and bark, fragrant wintergreen, neem tree, Indian lilac, Himalayan rhubarb, rockfoil, salep long pepper, monks hood (aconite), the sweet flag, deltoid yam, Indian madder, Chinese caterpillar fungus, soapnut, may apple, Himalayan ye, Nepali sassafras, Indian valerian, Wild Asparagus Rauwolfia, Serpent wood and Serpentine. With reference to the 30 prioritized species above, only about 10 species are viable for commercial production, following analysis of each against 17 criteria for Terai, mid-hill, and high mountain regions of Nepal. The quantitative criteria used in the study were market price, past annual export quantity records of Department of Forestry (DoF), average annual export as per Indian Trade Centre (ITC) Tanakpur, annual industrial demand in Kathmandu, and royalty of the species as percentage of market price.35 The qualitative criteria used were ease of cultivation (propagation, domestication, and tissue culture), parts used in trade, bulkiness in transportation, range of distribution (horizontal and vertical), threat category/conservation status, legal framework for protection (CITES, government of Nepal), availability of local processing (existing) techniques, regeneration/ rotation periods, ethnobotanic importance, potentiality of
33Pyakurel,
D. and A. Baniya. 2010. NTFPs: Impetus for Conservation and Livelihood Support in Nepal. Kathmandu: WWF. 34http://www.google.com.np/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CCgQFjAA& url=http%3A%2F%2Fwww.nepjol.info%2Findex.php%2FBANKO%2Farticle%2Fdownload%2F4803%2F3994&ei=H FYCUajSKMmsrAeL5oCIBA&usg=AFQjCNGM7mNH7g8gSSZM4oVb_lwmlujgQw&bvm=bv.41524429,d.bmk 35Keshari, V. 2007. Promotion and Trade of Tropical NTFPs in Central Terai of Nepal. Kathmandu.
43
further processing for value addition, social acceptance for promotion, and possibilities of quality improvement. The result of the study indicates that Amala, chamomile, Pipala and mentha are the priority species for Terai and Siwalik regions; Timur, Tejpat, Chiraito and Ritha for mid-hills; Sugandhawal, Padamchal, Jatamansi, and Bisjara for highmountain, for commercial exploitation with private investors. Technological support for oil extraction, private sector involvement, product certification, international NGOs and NGOs coordination, and research and development are all needed to help this subsector grow. The constraints for this subsector include poor infrastructure, lack of commercial farming, and SPS issues. Moreover, there are few processing companies, minimal quantities are processed, and the bulk is exported in raw form. The NTIS emphasizes activities related to product development and technology, market access, institutional and human resource development, and improvement of the business environment. The major actions planned for strengthening the processing segment are technology for oil extraction, provision of a national laboratory, a publicprivate partnership (PPP), internationally recognized product certificates, promotion of better packaging materials, such as certified aluminum containers, and encouragement of the private sector. 4.2 Donor Value Chain Mapping
Many stakeholders, including donors and government agencies, are undertaking important work to improve value chains and are helping to add value to agribusiness entrepreneurs (see Figure 13 below). Indeed, most donor-funded programs in Nepal focus exclusively on value-chain development. More details are provided in Annex 3.
Table 11: Donor Mapping Based on Value Chains
SN
Donors
Value Chains Banana Cardamom Ginger Mango Orange Potato Tea Vegetables (Tomato, Onion, and Cabbage)
ADB
Projects / International NGOs CADP
Major Activities and / or Objectives (Related to Value Chain) Commercial Agriculture Investment and Management: (a) Assist small and marginal farmers to develop or participate in income-generating agricultural activities and undertake more commercial activities, (b) strengthen stakeholders (farmers, traders, and processors) already partly engaged in commercial agriculture to become fully commercial and be eligible for CAA membership. Market Information Dissemination: Assist farmer groups through partner with NGOs and district agriculture development offices to systemize and replicate group or cooperative-based information systems. Capacity Enhancement (of project partners, including DDCs, NGOs, Department of Agriculture district staff and CAA district branch staff): Basic market development
44
SN
Donors
Value Chains
Projects / International NGOs
Major Activities and / or Objectives (Related to Value Chain) training on post-harvest, marketing, market-chain improvement, primary process methods, product handling, and agribusiness. Economic growth. Environmental sustainability. Private sector development. Gender equity. Poverty reduction and inclusive growth. 36 Climate change. Focus on poverty alleviation through a rights-based approach, by promoting the formation of grassroots level organizations to empower the participants to mobilize their natural, physical, and financial resources to harness 37 external resources and obtain social justice. Increase incomes of MAP producers by 20 percent by designing local, national, and regional interventions through critical assessment of community needs, information, and the knowledge and resource base of the medicinal herbs sector in needy countries. To develop or strengthen three improved supply chains for herbal commodities involving collectors, cultivators, and producers to better access national, regional, and international markets. To promote enabling policies, institutions, and market infrastructure to increase private sector investment by 25 percent and set up quality standards and protocols to develop model public-private-civil society partnerships38 Honey Bee Facilitate and strengthen networks of beekeeping organizations; help communities to learn the art and craft of beekeeping; promote modern beekeeping approaches; and explore the prospects of marketing and business development, including value chains. Support the production, processing, and marketing of 39 products in the selected value chains.
Livestock
HIMALI
AusAid
Livestock, Forestry, Off-season Vegetables and Crops NTFP, Honey Bee Medicinal and Aromatic Plant (MAP)
WUPAP
ICIMOD
BMZ, German Government
Fruit and Vegetables (through riverbed farming), and Medicinal and Aromatic Plants (including
GIZ Include
36http://www.adb.org/projects/37292-042/main 37http://www.wupap.gov.np/About 38http://www.icimod.org/?q=392 39http://www.includenepal.org/projectdetail-promoting-value-chains-and-the-local-business-envi
45
SN
Donors
Value Chains ginger). Honey, Milk. Honey Bee Medicinal and Aromatic Plant (MAP), NTFP
Major Activities and / or Objectives (Related to Value Chain)
CIDA
ICIMOD
DFID
Forestry Livestock Off-season Vegetables and Crops Dairy Vegetables
WUPAP
MASF / iDE Nepal / Practical Action
European Union
Fish, Vegetables, Maize
Agriculture and Nutrition Extension Project (ANEP) /iDE/ World Fish/CIMMYT/ Save the Children
Increase incomes of MAP producers by 20 percent by designing local, national, and regional interventions through critical assessment of community needs, information, and the knowledge and resource base of the medicinal herbs sector in needy countries. To develop or strengthen three improved supply chains for herbal commodities, involving collectors, cultivators, and producers to better access national, regional, and international markets. To promote enabling policies, institutions, and market infrastructure to increase private sector investment by 25 percent and set up quality standards and protocols to develop model public-private-civil society partnerships40 Honey Bee Facilitate and strengthen networks of beekeeping organizations; help communities to learn the art and craft of beekeeping; promote modern beekeeping approaches; and explore the prospects of marketing and business development, including value chains. Focus on poverty alleviation through a rights-based approach, by promoting the formation of grassroots level organizations to empower the participants to mobilize their natural, physical, and financial resources to harness 41 external resources and obtain social justice. Develop appropriate access to services and inputs for women smallholder dairy farmers to decrease their drudgery, which provides more time for other income generating activities, increases opportunities to engage effectively with market actors and provides increased incomes that can be used for household benefit. Further, a wide variety of opportunities for livelihoods have emerged from the dairy sector, such as supporting small and micro-enterprises in rural areas, which will provide 42 employment opportunities to the poor. The project seeks to sustainably raise agricultural productivity and promote effective market linkages to improve the nutrition of poor rural and urban households.
40http://www.icimod.org/?q=392 41http://www.wupap.gov.np/About 42http://practicalaction.org/region_nepal_masf_project
46
SN
Donors
Value Chains Honey Bee, Medicinal and Aromatic Plant (MAP) NTFP
UNDP
Projects / International NGOs ICIMOD
Major Activities and / or Objectives (Related to Value Chain) Increase incomes of MAP producers by 20 percent by designing local, national, and regional interventions through critical assessment of community needs, information, and the knowledge and resource base of the medicinal herbs sector in needy countries. To develop or strengthen three improved supply chains for herbal commodities involving collectors, cultivators, and producers to better access national, regional, and international markets. To promote enabling policies, institutions, and market infrastructure to increase private sector investment by 25 percent and set up quality standards and protocols to develop model public-private-civil society partnerships43 Honey Bee Facilitating and strengthening networks of beekeeping organizations; helping communities to learn the art and craft of beekeeping; promoting modern beekeeping approaches; and exploring the prospects of marketing and business development including value chains Focus on poverty alleviation through a rights-based approach, by promoting the formation of grassroots level organizations to empower the participants to mobilize their natural, physical, and financial resources to harness 44 external resources and obtain social justice. Entrepreneurship development, human resources development, capacity building in marketing for micro enterprises.
IFAD
Forestry Livestock Off-season Vegetables and Crops NTFP (bamboo basket and furniture, tapari, allo rope and twine, and pine charcoal) Maize
WUPAP
MEDEP
Fruits, Medicinal, and Aromatic Plants, Livestock NTFP

43http://www.icimod.org/?q=392
Hill Maize Research Program (HMRP) CYMMIT HVAP/ SNV
Strengthening seed dissemination channels, developing market links and ensuring the decentralized seed quality assurance system and developing more new maize 45 varieties as the demand remains high Integrate the rural poor, especially women and marginal groups in high-value agriculture, and NTFP/MAP value chains and markets, and improve income, employment opportunities, and ability to respond to market demand and opportunities based on marketing agreements with private agribusiness. 46 Development of value chain of selected commodities.
44http://www.wupap.gov.np/About 45http://www.swiss-cooperation.admin.ch/nepal/en/Home/Hill_Maize_Research_Project_HMRP_Phase_4 46http://www.hvap.gov.np/content.php?id=110
47
SN
Donors
Value Chains Products, Vegetables
The World Bank
USAID
Seeds, Vegetables, Coffee, Ginger, Potato, Floriculture, Honey, Mushroom, Oilseed, (mustard and ground nuts) Fruits (citrus, banana, papaya, and mango) Lentil, Herbs, Fish, Feed, Milk Processing, Dairy Processing, Poultry Lentils Vegetables Ginger and OrthodoxTea High-value Vegetable Production (including crops or non-timber forest products such as chamomile and lemon grass), Fisheries Goatrearing Ginger Cardamom
Project for Agriculture Commercialization and Trade (PACT )
Improve the competitiveness of smallholder farmers and the agribusiness sector in selected commodity: a) helping farmer groups and cooperatives engage in profitable market-oriented production and improved access to markets through the provision of technology and information services and critical public infrastructure and linkages to agribusiness. b) creating and strengthening industrywide partnerships along the value chain, thus forging linkages between producers, traders, processors, and other stakeholders. c) reducing existing obstacles to agriculture and food trade, thereby increasing the ability of farmers and agribusiness to respond to sanitary and phytosanitory (SPS) measures and food-quality standards to meet domestic and international market requirement.
Nepal Economic and Trade (NEAT)
Program on value chain development and strengthening.
Education for Income Generation (EIG)
Program on value chain development and strengthening, focusing on smallholder producers and youth.
Mercy Corps
Program on value-chain development and strengthening, focusing on smallholder producers.
48
SN
Donors
Value Chains Potato
This analysis indicates that value chain development, while important, is not a gap with significant opportunities for the AIC. If the AIC focuses on value chain development in one or more value chains, it runs the risk of competing with existing initiatives. Indeed, if the AIC does this, it may miss the main opportunitywhich is to lever the work of other donors and Nepalese government agencies and help entrepreneurs with market development, financing, and business management capabilities, all of which are common impediments to growth. The AIC plans to coordinate closely with the wealth of donor programs focused on value-chain development, complement their work, assist pioneering processing enterprises, and help ensure a solid supply of quality raw materials for processing. Each program works at the farmer level and it is this group that will supply the processors on which the AIC will focus. This mutually complementary relationship offers an opportunity to properly network growers with processors and markets, all the while ensuring quality inputs are used to produce competitive, legally compliant, finished products and developing the market for such products. Almost all of the selected value chains incur major constraints, such as a lack of infrastructure, limited number of processing companies, shortage of skilled manpower, and insufficient research and technology development. In addition, exporters face difficulties maintaining the necessary quality and standards of processed products to satisfy market needs. This is largely because of a lack of an accredited laboratory within the country and difficulties to acquire certification from overseas. At the policy level, the lack of taxation and other incentives for export and local level taxation (mainly local taxes by Village Development Communities VDCs) impede price competitiveness. 4.3 The Focus of the AIC
In Nepal, only a limited number of value adding companies with growth potential exist in any one value chain. This means it will be difficult for the AIC to achieve the necessary critical mass of 20 to 30 companies to underpin a viable business model, if only one value chain is the focus. As well as input and supply problems with which donors and government agencies are helping), processing companies all need additional help with market development and financing problems. These difficulties with market development and financing may provide a more fruitful focus for the AIC than any one value chain. The AIC can have more impact by helping entrepreneurs to overcome these barriers and levering the work of other donors and agencies, than by focusing on a more limited number of value chains. In all value chains, the main potential is with specialty niche products targeted at growing domestic and export 49
markets in which Nepal can be competitive, rather than less differentiated commodity based markets.
Traditional food processing technologies
versus
New processing technologies
Improvements in design & controls
New raw materials ingredients
New processes
Improve d Product Quality Reduce d Energy & Waste Improved Manufacturing Performance Reduce d Energy & Waste New Products
Improved competitiveness / market differentiation Safety

Nutrition & Wellbeing Sustainability
Figure 5: Enabling the Development of Innovative Sustainable Agribusiness Sector in Nepal
From the earlier analysis, the following conclusions can be drawn: a) No one value chain represents a sufficient quantity of growth potential entrepreneurs to warrant a focused incubation model. Therefore, a broader model that works across subsectors is proposed. There is strong interest from agribusiness entrepreneurs 50
across sectors in an agribusiness incubation service offering. The analysis indicates that a sufficient pipeline of growth-oriented or growth-potential enterprises can be secured to enable cost-effective implementation of an agribusiness incubation model that targets enterprises from a broader selection of value chains. b) While the market opportunities are promising, even these selected value chains face significant challenges that cannot be addressed by an agribusiness incubation service offering alone. Infrastructure constraints, poorly coordinated value chains, input and supply problems, and limited access to finance for growth all generally impede agribusiness development. These problems have been recognized and many donors and Nepalese Government agencies are now working to overcome value chain bottlenecks. The timing may be opportune to complement their work by addressing the business level impediments faced by agro-processors. c) Some interesting cross-cutting market opportunities were identified, notably in the areas of packaging, processing and branding, traceability, and logistics. It is recommended that the AIC encourages and enables the start-up and growth of innovative enterprises in such areas. d) Because of the challenging operating environment, it is recommended to primarily target existing enterprises with growth potential , while leaving room for some start-up support. e) Across the dominant value chains of Nepal, one resonating challenge experienced by most existing entrepreneurs is the development of the domestic, regional, and international markets. Food processing entrepreneurs struggle to understand the opportunities for the domestic, regional and international distribution, the industry standards associated with each target demographic, and the logistical constraints that require addressing. For entrepreneurs interested in pursuing a domestic market, the distribution choices are extremely limited. Apart from managing their own distribution with their own trucks, sales team, and regional warehouses, Nepalese entrepreneurs are left with two options: the market system or partnering with a large processor, such as Dabour, and using their distribution channels. The market is a complex network of regional, informal markets that complete with an extensive infrastructure of traders, brokers, wholesalers, local, and regional 51
Example of Products in Local Supermarket
transportation companies. It is perhaps one of the most underutilized opportunities for Nepalese value-added food processors. Most Nepalese food processing entrepreneurs get too focused on the larger, international marketsmost notably the EU markets, while ignoring the domestic and regional market opportunities. In Kathmandu alone, there are more than 10 large supermarkets (five of them Bhatbhetani), that could be suitable for many products. In international markets, Nepalese entrepreneurs face stiff competition and simply cannot compete in many value chains because of the high cost of transportation that occur as result of Nepal being a landlocked country, where exports have to go by road to Kolkata, India or by airfreight. Entrepreneurs have few options and encounter high transportation costs and significant, sometimes unpredictable, timeto-market delays. More readily addressable factors affecting the competitiveness of Nepalese entrepreneurs are the lack of quality packaging (which must be imported), the lack of acceptable laboratory and standards analysis (products must be shipped internationally for analysis), and tax and other incentives for agriproducts export.
52
5 Target Clients
5.1 Nepalese Agribusiness Entrepreneurs Landscape
Food processing SMEs with value-added niche products are the primary target clients for the AIC. This industry is at a nascent stage in Nepal, with 90 percent of enterprises below the small industry level according to the Nepalese scale.47 The total number of food processing industries registered at DFTQC is 1,877, as outlined in the figure below.
Table 12: Licensed Food Industries in Nepal until FY 2012/2013
Serial Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Product Rice, Flour & Pulse processing (Mills) Spice Processed / Mineral water Fat and Oil Fruit and Vegetable Processing Bakery Snacks Dairy Tea and Coffee Confectionery Noodle Biscuit Sugar Honey Health Food Meat Processing and Handling Chura (Bitten Rice) Ice and Ice Cream Maize Grit Soya Products (Grit, Nugget, and others) Miscellaneous Products and Others Total
Number of Industries 238 229 217 202 178 172 146 133 100 65 38 17 14 12 7 6 1 1 1 3 97 1877
Source: DFTQC 2013.
The comparatively larger value adding enterprises are in herbs processing, livestock, fish and poultry, vegetable and fruit, tea, coffee, and diary.
47The
Industrial Enterprise Act, 1992 (prevailing act) defines small industries are those with less than NPR 30 million fixed capital and medium is between NPR 30 to 100 million fixed capital investment.
53
Department of Industry (DOI) data show 214 medium-size or larger agriculture and forest-based industries, including food processing, with fixed capital investment more than NPR 30 million (see Annex Nepal agro-based industry data).
Table 13: Department of Industry Registered Agro-based Industries (More than NPR 30 million fixed capital investment)
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Agriculture & Agro based Industry Category General Agro Business / Industry Herbal Medicine / Herbs Processing Ginger Processing Tissue Culture Livestock, Fish and Poultry (Bird) Silk / Rabbit (yarn and fabric) Floriculture Tree Plantation Sugarcane farming Seed Cardamom Vegetable and Fruit Bamboo Fertilizer / Bio-fertilizer Coffee and Tea Cold Storage Cotton Diary Essential Oil Animal feed Fruit processing Honey Meat processing Mushroom processing Oil & Vegetable Ghee Cereals & Pulse Saw Mill / Wood Processing Starch Total
No. of Industries Remarks 5 15 Ayurbedic medicine 1 1 19 2 3 4 1 2 1 34 Including drying and processing 1 3 74 3 1 15 4 2 6 1 1 3 7 3 1 1 214
Source: Department of Industry, January 2013 (Categorized from long list of agro-industries).
Comparing the DFTQC and DOI data shows 1,663 industries (1877 minus 214) are small industries with agriculture and forest-based food products registered at the DFTQC. This indicates a pool of 1,600 potential AIC clients. However, only a small percentage,
54
typically from 3 percent to 10 percent, will be growth oriented,48 meaning the pool for the AIC is more in the order of between 48 and 160 enterprises. Given the low level of existing entrepreneurship in the country, a pre-incubation phase focused on entrepreneurship awareness and development should be incorporated in the model. Through these activities, network partners would support start-up organizations not yet ready for participation in the AIC.
5.2
Nepalese Agribusiness SMEs Needs SME Barriers
5.2.1
The AIC will need to address the many challenges agribusiness entrepreneurs face. Technology: Absence of suitable technology for post-harvesting and processing. Technologies used for processing of agro-food or medicinal herbs and essential oils are often too small scale to generate a critical mass for commercial returns. Appropriate technologies for simple post harvesting technologies, such as grading and packaging, are lacking. There is a dearth of companies using good production technologies and inadequate transfer of knowledge/skills for use of available technologies. Market access: Limited access to markets, most often with no direct contact with end users of the produce. Agriculture commodities, medicinal herbs, and essential oils are sold through traders located at trading centers. Producers have very limited access to other buyers for their produce. Focus group participants noted these problems: politics in the marketplace; limited information about the market and consumer as mostly they deal with mediators; limited knowledge about suppliers and production process of producers; limited marketing skills; dynamics of market players, which are difficult to understand and influence, and difficulty penetrating markets.
48Research
indicates that only 10 percent of new enterprises grow and that only 3 percent achieve dynamic growth. For example: the Global Entrepreneurship Monitor (2004), page 13 Only 3 per cent of all start-ups qualify as businesses with high potential. Scott Shane, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, 2008: Only 30% of start-ups live past 10 years; fewer than 10% grow, and just 3% grow substantially. For many reasons across the globe most businesses are micro and small and do not grow. They still play an important role in economies and employing people, but incubation is not the tool to use to support them.
55
Production volume: Economies of scale are inadequate to produce the volumes of production and processing to access larger markets. Cultivation and collection of agriculture crops, livestock, and medicinal plants are fragmented and practiced on a small scale, which does not provide enough volume for processing to be viable. The majority of farmers or collectors are smallholders, which limits use of technologies and possibilities for value adding. Furthermore, the majority of producers are at a subsistence level and lack commercial orientation. Infrastructure Lack of infrastructure such as road networks and access to power due to scattered settlements Good roads, transportation facilities, storage facilities, market centers, and power shortages are further impediments for the growth of the agriculture sector. Nepal has one of the lowest road densities among landlocked countries. Investment in infrastructure and basic services has not been cost effective because of the very nature of scattered settlements in hills and mountainous regions. These impediments have hindered competitiveness of the sector. Communication: Communication is vital for timely transaction of commodities. Poor communication systems, lack of information, and communication technology availability have limited growth potential of the agriculture, herbs, and medicinal plants sectors. Research and development: The agriculture sector has suffered, to some extent, because of the insufficient research and development initiatives. Inadequate resources and capacity of existing research and development institutions make it difficult to provide useful and economically viable solutions/innovations to farmers. National research institutions, such as NARC, do not have refined commercialization strategies, or dedicated Technology Transfer Office (TTO) functions to transfer technology and knowledge for adaptation by producers. Political instability: Political instability has created an unstable macro-economy. The governments rules and regulations are not implemented effectively, even when policies are investment friendly. Subsistence Agriculture Agriculture in Nepal is predominant at the subsistence level. Commercialization is a relatively new phenomenon in this sector. Lab testing and quality certification Suitable facilities are not always available or of adequate standard in Nepal, in which case companies have to go to external international agencies, for instance, organic 56
certification, certification for nutritional features, or certification for testing extracted essential oils as required by buyers. 5.2.2 Gaps in Service Provision to SMEs
The main service gap for SMEs is practical support to help enterprises to grow; as the Global Entrepreneurship monitor points out, this will only ever be a small minority of all enterprises.49 MEDEP and other business development services (BDS) providers focus on micro enterprise development, for self-employment and income supplementation, although their strategies going forward are for sustainability and helping businesses to scale up. The potential for business incubation with MSMEs is what can be termed post micro-business support, to help selected entrepreneurs with realistic growth aspirations. Business training is not a major gap, although it can always be improved and often has unrealistic expectations that training will lead to successful businesses, with some stakeholders thinking of business incubation as a training program. Practical support and understanding that entrepreneurs learn best on the job from other entrepreneurs are needed. Two quotes from stakeholder consultations encapsulate this gap: Lack of mentorship everyone craves advice and mentoring and no one gets it. Business helping business in a dynamic environment is what is needed.
This study reinforces findings from the 2004 Helvetas Study,50 which concluded: In Nepal, with the largely rural population and widespread rural poverty, most enterprise development activity is targeted at the development of micro businesses in rural areas, with the aim of providing direct and immediate poverty alleviation. Research undertaken by the International Labour Organization (ILO) and UNDP has concluded that a problem exists in that businesses are not growing past the micro stage, hence the growth trap51. This conclusion was reinforced in our consultations. The main gap that exists in terms of enterprise development services is to assist and foster enterprise growth, which is where international experience has found incubators
49Global
entrepreneurship Monitor (GEM) 2004 estimates about 3 percent of start-ups are those with high growth potential. 50 2004. Overcoming the Growth Trap, Business Incubator Pre-conditions and Potential in Nepal, with more specific consideration of Birgunj and Dhangadhi, as examples of large and middle towns, prepared for Helvetas by BTEC Inc and CREEDA Projects. 51The growth trap is identified in the UNDP ILO Report on Micro and Small Enterprise Policy Review in Nepal, 2003, page iii. The growth trap is a set of conditions that impede or stop the growth of micro and small businesses, in terms of productivity and income.
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have the best impact. There are more cost effective and suitable interventions, such as Business Development Services, for those enterprises which, for whatever reason, do not want to or cannot grow. With regard to micro-enterprise initiatives, which incubators should complement rather than duplicate, the focus proposed may best be considered as post-micro. This implies targeting the services at the micro to small business transition and focusing on helping the percentage that want to grow and become larger, as well as new businesses that have the potential and aspiration to grow and become small and medium, or even large businesses. The focus groups showed that market awareness access and sales are important areas in which enterprises need help, especially for agro-processors. 5.2.3 SME Needs
With infoDev funding, Information Technology Professional Forum (ITPF) conducted a comprehensive feasibility study in 2005. This study involved a survey of 110 MSMEs, selected by random sampling in six industrial cities in all the development regions other than the far western region. For these MSMEs, marketing and product distribution assistance, finding available space and infrastructure, accounting and financial management, and access to financial assistance, process and inventory management and assistance with product design and testing were the major supports sought. Lack of marketing information, inability to frame proper marketing plans, not having proper technical know-how, inability to adapt to the changes in the business environment, and lack of adequate financial management skill were considered to be the main reasons why most of the businesses fail during their initial years of establishment. The interviews found that 62 percent of the sample used support services to improve their performance, 69 percent are willing to pay for the services of a support organization, and 75 percent wanted to grow further, indicating good demand for business incubation from existing businesses. Entrepreneurs in infoDevs focus groups were enthusiastic about the possibility for an AIC and ranked the services needed as the following: 1. Market 2. Enhanced technology and associated information 3. Finance The services focus group participants want from an incubator include the following: Marketing and sales o o Networking Market information 58
o o o o
Narrowing the gap between producers and consumers How to take products to market How to sell services Service / online marketing platform
Technology transfer, especially for existing SMEs who want grow and are interested in sharing proven technology within country, partnering with other SMEs for technology and know-how. Quality certification assistance, for example, organic certification, acid-free certification, nutritional certification, health and safety certification, and others. A user-friendly environment Energy supply (24 hours) Some agribusinesses have specific technology requirements, such as cool storage, distillation technology, preservation technology, or packaging technology.
The consultative workshop reinforced these conclusions, identifying the following priority services for the AIC: Marketing and information systems Technological support Mentoring Inputs, such as certification or quality standards Credit facilities (finance) Advocacy for a conducive environment Policy information Facilitation for registration of businesses
5.3
Entrepreneur PipelinesFeeder Channels and Complementary Organizations
Feeder channels are important to help an incubator identify and access growth oriented agribusiness clients and to institute mechanisms whereby business incubation complements other agribusiness development activity. Incubation needs to work with a wide range of complementary organizations, which can refer suitable entrepreneurs to the incubator, as outlined conceptually in the diagram below.
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Growth Potential in Nepal
Further growth
Physical Business Incubation Virtual Business Incubation
Other Business Support
Analysis and signposting Recycled
Individuals and Ideas
New and Existing Enterprises
Feeder channels: PACT, CAA, BDS, Universities, Networks +++ To deliver entrepreneurs to the incubator
Figure 6: Feeder Channels
The funnel above will be crucial, recognizing that business incubation needs a critical mass of 20 or more growth-oriented business clients under business incubation to underpin a sustainability model and that business incubation works in phases, from preincubation through business incubation to post-business incubation. Accordingly, working with other organizations as feeder channels for clients, around pre-business incubation and to back up loans and other financial investments made to micro, small, and medium enterprises (MSMEs) will be an essential aspect of the Business Incubator Framework. A number of entrepreneur pipelines were identified as feeder channels that can be tapped for the business incubator, which are summarized below.
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Table 14: Feeder Channels
Type of Organization Tertiary Institutions
Organization Agriculture and Forestry University Kathmandu University Tribhuvan University FNCCI *AEC, the agricultural wing of the FNCCI The Nepalese Young Entrepreneurs Forum (NYEF) Nepal Youth Business Foundation (NYBF) Federation of Nepal Cottage and Small Industries (FNCSI) Samriddhi, The Prosperity Foundation Arthalaya School of Economics and Entrepreneurship Change Fusion Entrepreneurs for Nepal WEAN Cooperatives Banks, via the Bankers Association IFCs SME Ventures Fund Business Oxygen Micro-Enterprise Development Program (MEDEP) Lead International Commercial Agriculture Development Project (CADP) Commercial Agriculture Alliance (CAA) Project for Agriculture Commercialization and Trade (PACT) International Development Enterprises (IDE-Nepal) Nepal Education Agriculture and Trade (NEAT) International Centre for Integrated Mountain Development, ICIMOD
Industry Associations and Business Networks
Financial Institutions Business Development Initiatives
Other Organizations
*AEC/FNCCI has been implementing a One Village One Product (OVOP) program since 2006, as a public-private partnership. The overall objectives are to alleviate poverty in local communities and benefit local people through entrepreneurship 61
development. Specific objectives include the following: (i) develop local products and to add value according to market demand, using local peoples skills; (ii) develop competitive products with export potential; (iii) alleviate local community poverty and help enhance economic development; and (iv) develop and to promote the branding of the product Anticipating successful outcomes of OVOP, AIC expects to link with agribusiness champions from across the country, who may seek support to scale up their businesses, such as agriculture processing industries. Initially implemented in 22 villages in 22 districts, the OVOP has been extended to all 75 districts of Nepal as One District One Product (ODOP) since 2012. Out of 75 ODOP, 62 districts are identified as agriculture and NTFP based product districts. 5.4 The Market for Business Incubation
In summary, the AIC will not be value chain specific and will focus on viable firms in competitive value chains that add value by food processing and post-harvest processing primarily, but also with value added input supplies. The AICs clients are likely to be the emerging leaders and pioneers in the value chains in which they operate. They are likely to become role models for others in the future. The market has a number of important features: Entrepreneurial people with growth potential. Only those proponents with entrepreneurial characteristics or teams and which have growth potential will be selected. Existing or new processors. Existing small, micro and medium-size companies will be assisted, as well as new start businesses. Pre-incubation will be used, working with partners such as universities, to nurture the future demand and agribusiness entrepreneurship rates. As outlined earlier, the AIC will focus on a range of competitive value chains rather than one specific value chain.
Accordingly, the market for the AIC comprises a number of segments. Growth-oriented SMEs At least initially, the main market segment for the AIC will be existing small and medium agribusinesses, with turnovers in the order of between $100,000 and $600,000 per annum and which have the potential to achieve annual growth in sales of 30 year or more per annum. These businesses will come from BDS services, such as MEDEP, business organizations, such as FNCSI, agribusiness development initiatives, such as PACT, and CAA and networks, such as Entrepreneurs for Nepal, noting only a small percentage of small and micro businesses either want to or has the capacity to follow a growth path.
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Many micro businesses are motivated by income supplementation, rather than growing a business. Graduating Students Across the globe, the work of graduate students is difficult to incubate, because fresh graduates do not have real world experience, knowledge of markets, and private sector disciplines. IADB research into dynamic companies in Asia and Latin America (those that scale and grow significantly, defined as those between three and 10 years old and which increased their workforce to between 15 and 300, and which are the target for incubation) show that these companies are started by people in their thirties following experience working in corporations or SMEs.52 While students sometimes develop business projects as a part of their studies, these projects are often very difficult to commercialize. Nonetheless, some students do successfully start and grow businesses; for example, a successful meat processing venture started by a recent graduate. If graduates can get a job, then this is often a better path in the short to medium term since starting a business is far harder than finding a job (if jobs exist to be found). Both KU and TU share this understanding. TU noted that 60 percent of their graduates go to further study and KU noted that most of their graduates get jobs relatively easily. Many graduates try to go overseas. Nonetheless, both KU and TU are interested in business incubation, especially pre-incubation, which can bear fruit immediately after graduation or in the future after work experience. Researchers Commercializing Research With only limited R&D budgets and no technology transfer organizations in place, researchers doing commercializing research are only a small segment in the short to medium term, but this segment may grow in the future. Financial Institution Clients Business incubation can lever and mitigate the risk for banks and other investors. The bankers association can offer to promote the business incubator to its member commercial banks, so that they can refer suitable loan clients. The incubator should work closely with the special financing facility, Business Oxygen, currently being established by IFC Ventures and implemented by the Bank of Kathmandu and Beed Management, with the associated training product, Business Edge, being implemented by Lead international. Fresh New Start Businesses This is the traditional market for business incubation in developed countries and is also a part of the market in Nepal. These people may come via feeder channels, such as
Inter-American Development Bank. 2002. Entrepreneurship in Emerging Economies: The Creation and Development of New Firms in Latin America and East Asia.
52
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entrepreneurs for Nepal, from industry, the general community, and other varied sources. Many are expected to be in employment before Potential Client Example Housewife turned Entrepreneur, Hajuri Bista of Navaras Pickle starting their business. 5.4.1 Client Targets
Hajuri Bista started her pickle business soon after completing her training with an initial investment of Rs 20,000 ($230) to tap the unmet market demand for Nepali pickle. She is a successful and proud owner of a well-established brand for preserved food and pickle in Nepal, known as Navaras. Started from her own kitchen, with income of Rs 30,000 ($350) in first three years, now she earns more than ten million rupees ($110,000) annually and employs 15 people full time.
Clearly there is a strong demand for AIC services from agribusinesses in a number of sectors, which can underpin AIC demand, investment, and impact assumptions.
Successful business incubators need a critical mass of at least 20 growthoriented entrepreneurs, The expansion of business took place after her husband either based onsite or offcomplained about the smell of pickle inside the home site, to underpin a viable and suggested she expand production outside, for which she chose a small shed behind her house. and self-sustainable business Ms. Bista received guidance from co-operatives and model and to foster peer-to professional organizations. Her sound handling of -peer learning and employees and maintaining of quality have significantly exchange. It is impossible to contributed to her success. Ms. Bista is planning to expand her market domestically as well as overseas, but quantify all of the demand is facing tough competition with Indian products. that may exist. Insights can Based on: http://e4nepal.com/entrepreneur-2/hajuribista/ be gained from the number of food processing businesses summarized earlier (see MOI and DFTQC data in Section 5.1), the number of clients in various ongoing agribusiness projects by government, summarized below in Figure 19, from the entrepreneur and stakeholder consultations and growing demand for processed, healthy and organic food at the leading supermarkets in Kathmandu.
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Table 15: Selected Agribusiness Projects under MOAD Project Duration Major Activities Number of Clients being Served Commercialization of agriculture CAA. Clients: 267 (133 nongrant recipients) Amount of Assistance (US$) 18,000,000 Partner
Agriculture and rural business 10,500,000 World development; Support for sanitary and Bank phytosanitary facilities and good quality management. Clients: 539 High Value 2009 To integrate into the local rural 18,900,000 IFAD & Agriculture Project in present economy through initiatives that others Hill and Mountain develops small businesses and increase Area (HVAP) trade by building the capacity of rural institutions. Clients: 13, 500 Households High Mountain Agri201117 To reduce poverty in highland areas, by 20,000,000 ADB Business and improving income, employment Livelihood opportunities, and the nutritional status Improvement of poor farm families and women in (HIMALI) Project particular; and by increasing the productivity of the livestock subsector. Clients: The Project impact indicators include: Additional $20 million of gross production value per year of agricultural products Additional 7,500 jobs created by participating enterprises Additional $6.4 million in wages by 2017 Raising Incomes of 201117 Reduce the market and business risks 20,100,000 ADB Small and Medium for small and medium farmers who Farmers Project diversify into high-value commodities (HVCs) in 10 districts of Nepal's MidWestern Development Region and FarWestern Development Region. Clients: Nepal Economic, 201114 To foster a conducive business 30,000,000 USAID Agriculture and Trade environment for private sector-led Activity (NEAT) growth, encourage competitiveness and exports in selected agriculture and nonagriculture commodities or services, initially targeting lentils, ginger, orthodox tea, and vegetables. Clients: 50,000 Household Source: IFAD 2012: Design Completion Report, Crops and Livestock Accelerated Productivity Programme.
Commercial Agriculture Development Project (CADP) Project for Agricultural Commercialization and Trade (PACT)
200713
ADB
200915
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Reinforcing conclusions from stakeholder consultations, the demand is spread across many sectors and a multisector approach, within the agribusiness arena, is warranted, rather than focusing on a particular value chain. This levers the work of other donors, who focus on specific value chains. The incubator has been designed to work with up to 30 clients because of the demand for incubation, the need to be very selective and develop a critical mass of clients under incubation, and the need to underpin a sustainability model without being too optimistic given the political situation. In addition, the AIC will assist early stage clients with development and proof of concept, which will build future deal flow.
Potential Client Example Karnali Organic from Jumla, Nepal Karnali was officially registered as a private company in 2010, but has been operating for 10 years producing 2,000 kilograms of niche honey-based products (a variety of balm, wild honey). All products are sold in Kathmandu/Nepal with more than 75 percent to expats who often take it to their home countries as a souvenir. No direct exporting has been undertaken to date. Karnali uses a broker to reach the farmers, but plans to deal with farmers itself. It needs to resolve the issues of direct exporting and the business plans to expand. Assistance with export marketing, certification, collection management, and growth finance will help the business to grow.
Table 16: Client Targets
Year Clients End of Year New Clients Graduated Clients Accumulated by Year
Yr1 10 10 0 10
Yr2 20 10 0 20
Yr3 30 10 10 30
Yr4 30 10 10 40
Yr5 30 10 10 50
More information on client targets is in Annex 7.
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6 Business Model
6.1 Selecting Clients
As discussed, the highest impact and likelihood of sustainability of the AIC can be achieved by targeting enterprises that demonstrate some understanding of market demand, target the local and regional markets, and have access to a minimum level of equipment. The enterprises, thus, have a foundation that positions them for growth into new markets or products. A detailed selection process will need to be prepared in order to select the enterprises. While this will be the mandate of the management team of AIC during the start-up phase, a number of points are pertinent: 1. Enterprises need to have a growth focus. 2. Entrepreneurs need to demonstrate strong entrepreneurial traits that can be assessed through psychological testing. 3. Enterprises have a track record indicating success and will demonstrate competitive advantages in some ways. 4. The market potential of enterprises will need to be good to allow growth activities. 5. The enterprise should be fundable either via direct commercial loan, or through a seed fund raised to support selected enterprises or with their own resources.
Selection will follow a process of application, assessment, review, and capacity building. Finally, a selection panel will assess the merits of each enterprise. This panel will include representation from a financial institution, as well as a professional with sufficient market knowledge in the specific product market to assess the products market potential. Successful enterprises will be required to formally and legally commit to the conditions of service, including payment regimes and conditions as set out by the AIC. Selecting high growth enterprises is as much an art as a science, combining judgments about the entrepreneurial character of the people involved and the history and potential of the business in the market place. At least initially, the AIC will focus on enterprises with an annual turnover in the order of between $100,000 and $600,000, which have the capability to achieve annual growth in turnover of 30 percent per annum for the anticipated three-year incubation period and after incubation has ceased. These revenue figures underpin the financial sustainability model.
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6.2
AIC Service Portfolio
There is adequate demand from growth-oriented agribusinesses to justify the development of the AIC as a new model for promoting the growth of a competitive value adding agribusiness sector in Nepal. The AIC is a targeted effort to accelerate the growth of a domestic value-adding sector, focusing on value chains that have a demonstrated potential and initially working with existing enterprises, although fresh new start enterprises will be encouraged and supported over time. The benefit will flow beyond the companies supported, which will demonstrate what can be achieved by market and technology development. The situation should catalyze others in the agribusiness sector to do the same. This, in turn, will lead to significant job creation in the processing sector and beyond (studies indicate that for every job created in processing, the multiplier effect in the economy is 2.85), as well as increases in income at the processing and farmer levels. The projected impact of the AIC is discussed in further detail later in the report. The AIC will provide clients with a comprehensive service offering designed to position them for growth into new markets and products.
NEW MARKET
Support new market access
Expand new product markets
EXISTING MARKET
Strengthen product/market position EXISTING PRODUCT
Encourage new products
NEW PRODUCT
Figure 7: Positioning Nepalese Agribusiness SMEs for Growth
As a part of the implementation, especially in the first preparatory year, services will need to be tailored to clients in each of the small, medium, and large business categories. As businesses grow, their needs and capabilities will change. More information on how services can be tailored to the varied needs of micro, small, medium, and large companies with phases of support is in Annex 6.
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The AIC services will respond to the needs, following areas of the portfolio and delivered with network partners: 1. Business management advice 2. Market development and access, along with domestic, local, and regional branding and compliance 3. Business advice and capability development, including pre-incubation 4. Financing brokerage for seed, as well as for growth, finance 5. Access to office, meeting, promotion, and testing facilities These streams of services encompass business coaching, market research, marketing and procurement facilitation, technology identification, facilitation, and training and financial services. These services will provide clients with a comprehensive tailored offering designed to position them for growth in existing and new markets. In addition, the AIC will play an active role in promoting successful introductions and marketing and technology innovations in order to stimulate broader take-up by other emerging agro-processors. It will also actively communicate policy and regulatory constraints faced by high-growth potential value adding processors to government officials, financing constraints to the financial sector, and skills and research needs to academia and research institutes. In this way, the AIC will help strengthen the overall innovation and entrepreneurship ecosystem affecting the ability of the entrepreneur to succeed in the marketplace. The service portfolio of AIC Nepal graphically presented in the following figure.
Table 17: Nepal AIC Service Portfolio Technical Knowledge Market Research and Intellegence Business Training Technical Training Industry Seminars Advisary Services Networking Advisory and Coaching Mentors Value Chain Partner Facilitation Networking Events Innovation Acceleration Platform Competitions Ideation and Prototyping Events Acceleration Events Collobaration Platforms
Access to Facilities Compliance & Certification Early Processiong Space Working Space / Hot Desking Product Showcasing
Access to Finance Investment Facilitation Linking to Matching Grants Connecting to Risk Capital Funds Brokerage for Growth Funding
6.2.1
Payment for Services
Awareness and pre-incubation services (involving workshops and advice to prospective AIC clients prior to the rigorous selection process) will largely be at no or only minimal cost. Once clients are selected, they will pay for the business support, which will be tailored to their unique needs on a case-by-case basis, by way of success sharing 69
arrangements (see Financial Section 9.2 for more information) and payment for use of office and other infrastructure services. 6.2.2 Market and Technical Knowledge
Any initiative focused on enabling the growth of agribusiness enterprises must start with market and technical knowledge, which includes business and technical training, industry seminars, and market development. The AIC needs to invest in developing internal market development capacityan area that is generally deficient in Nepal. The AIC will do the following: Help companies gain agribusiness knowledge through technical and business training and industry seminars Assist companies with exploiting existing domestic markets, helping them to navigate and put in place distributions systems Assist export-ready companies to exploit international markets, navigating complex and limited export pathways Help companies to identify, target, and test new markets and new products Facilitate access to available packaging and address the deficiencies in the packaging options available, including copacking arrangements for the international market Help companies with market research to assess opportunities and to position themselves in the market, with current and new high-value products Help enterprises in identifying and accessing inputs and supplies Facilitate procurement of common commodities in bulk for resale to processors Help companies to identify, target, and conclude sales deals in more lucrative markets Facilitate trade show activities
6.2.3
Advisory Services and Networking
The advisory and networking portfolio includes mentoring, coaching, and advice on business management, technical, and regulatory issues. Specific service offerings include value chain partner facilitation and networking. Although AIC staff will provide the core advice, the AIC will need to create a strong mentoring, coaching, and partner network where external capability exists. The AIC will do the following: Provide focused support in accounting, business strategy, sales, market development, and other aspects of business management. This support will be provided by internal staff and outsourcing to specified experts.
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Negotiate and facilitate access to specialized equipment for new product development and testing. Facilitate processing technology improvements, hygiene improvements, standardization, testing, and access to the latest processing knowledge. Access to packaging facilities, standards, and labeling for both local and international markets. Create a network of support organizations that will be able to support entrepreneurs in areas such as registration, regulatory compliance, sector development, advocacy, R&D linkages, North-South linkages, financing, packaging, testing, and certification and network support. Work with local institutions to identify and meet local standards and with local consumers to identify standards that must be met. Innovation Acceleration Platform
6.2.4
This portfolio will be focusing on generating a critical mass of clients for the AIC. It will emphasize working with network institutions to lever and conduct competitions, ideation and prototyping events, acceleration events, and collaboration events. It needs to use the existing network and ecosystem in Nepal with organizations, such as e4Nepal, Biruwa Venture, and BIP. 6.2.5 Access to Facilities and Locations: Hub and Satellites
The AIC will operate nationally, with a hub in Kathmandu (the largest urban center and market in Nepal) and satellites, levering partners facilities and services, initially in Nepalgunj in the west, a regional center for NFTP industries and Birattnagar in the east, a hub for horticulture. Other satellite locations may emerge over time, on the basis of demand for AIC services from clients and interested local stakeholders, such as Pokara, to capitalize on anticipated increased trade with Tibet. From these sites, outreach services will be provided to support entrepreneurs in their own locations, as well as supporting entrepreneurs who locate in the AIC facilities, or drop in to make use of the services. The AIC will commence with the hub in Kathmandu, followed by the satellites in Year 2. Once the hub is established, final decisions on satellite locations will be made.
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Agribusiness West Satellite Nepalgunj NgCCI JABAN +++ +++
Innovation
Center East Satellite Biratnagar CAA MMA +++ +++
Central Hub Kathmandu Agribusiness Champions NARC DFTQC ICIMOD AEC / FNCCI
Agribusiness Feeder Channels and Service Providers

Figure 8: AIC Operation: Hub and Satellite
The AIC hub in Kathmandu must be based in an area that is good for business, close to regulators of food products, and with proximity to agribusiness entrepreneurs, business mentors, and knowledge centers (R&D). The AIC satellite locations are governed by proximity to a critical mass of agribusiness entrepreneurs, access to logistics and access to procurement of raw materials, and processing and packaging infrastructure AIC will not invest in processing or testing facilities and equipment. Instead it will partner with the institutions whose infrastructure and facilities can be shared. The AIC will focus on existing processors initially, who already have processing facilities of one form or another, which may be improved and expanded with business support and financing. In the future, partner facilities for new start businesses will be used. Renovation of the DFTQCs pilot plant is accounted for in the budget in the third year, to provide testing space for new processing businesses. When renovated, this facility will be managed by DFTQC, a key partner of the AIC. To support entrepreneurs with market development, a product and technology showcase will be established in the AIC facility in Kathmandu. The showcase will also be a base from which to help entrepreneurs navigate the complicated market systems, which many entrepreneurs do not understand, for both marketing of products and sourcing supplies. The AIC will broker and facilitate access to testing and certification facilities, as well as packaging facilities, both in Nepal and internationally, levering partners and networks. For instance, copacking arrangements will be facilitated on- and offshore, so producers can outsource or export in bulk and have their products packed under their own label in existing copacking facilities. The AIC will facilitate access to partners testing laboratories in Nepal and where they are not available, follow existing practice and 72
facilitate international access, for instance, to Indian facilities, until such a time as they are available in Nepal. The AICs office facilities in Kathmandu will provide five offices, hot desking space (online workstations), meeting spaces, reception, and other business center facilities for entrepreneurs, who can use them on a permanent or drop in basis. Moreover, this will serve as a co-creation space for networking and pre-incubation to help aspiring agribusiness entrepreneurs develop viable and competitive plans. On this basis, the AIC will provide access to facilities as follows: A product and technology demonstration center will be made available at the AICs Kathmandu premises. The AIC will link with DFTQC and local institutions to facilitate access to testing and laboratory facilities and where these are not available in Nepal, to international facilities. The AIC will offer offices, meeting rooms, and shared office equipment for entrepreneurs. Early stage processing space will be provided for the start-ups at the premises of DFTQC. Access to Finance
6.2.6
Finance is a key constraint for growth. It is critical that the AIC can offer financial services to its clients. This significant gap needs to be surmounted for enterprise to scale and grow. The AIC will work intensively with clients making them finance ready and then actively facilitate investment from a range of sources: A $14 million SME venture fund, Business Oxygen, has just been launched with the support of the IFC and the World Bank, in partnership with a local private bank, the Bank of Kathmandu, and Beed Management of Nepal. This is the first of its kind in Nepal. Even though the fund is not sector focused, it is a timely initiative to access nonconventional finance to simulate the growth of agribusiness. Matching grant facilities through programs, such as PACT and CADP Linking with the angel investors, such as Fortune Cookies, and interested prospective agriculture-based angel investors Bank financing
The initial strategy is to facilitate and broker finance from these and other existing sources. Financiers will benefit in terms of better prepared applicants, the due diligence undertaken by the AIC with its clients, and then the intensive support provided to clients, which will mitigate the risk financiers take. Should facilitating finance prove inadequate for the needs of client companies, the AIC may need to consider establishing a dedicated early stage fund. Alternatively, the AIC could start a 73
dedicated fund itself from the outset, which would need additional investment likely to be in the order of $3 million over a six-year period to allow for funding of $600,000 per year. As well as PACTs matching grant system, NARDF is an early stage fund the AIC could target. NARDF is an institution for implementing competitive grants in agricultural research and development. The main function and mandate of NARDF is to seek or demand proposals from governmental and nongovernmental organizations, including academic or educational institutions and the private sector, who are interested in contributing to the agricultural research and development of Nepal. NARDF focuses on output-oriented work, aiming to deliver measurable results within a maximum of a threeyear period, in support of national objectives and priorities defined in government policy documents. The governments budget for NARDF for FY 2010/11 was around $766,700. The range of grant is NPR 1 to 3 million (up to around $35,000).53 The following are some priority research topics from the 2012/13 call for proposal cycle: 6.3 Agrotourism Linking farmers into market, including ICT Food safety and quality improvement system Agricultural and livestock market research impact study Production, processing, storage, and marketing of improved seeds Promotion of quality products for export Small agriculture and livestock business promotion Value-addition technologies in fish and meat production Production, processing, and marketing of spice crops A Multistakeholder Networking Approach
The AIC aims to help growth enterprises to expand and accordingly needs to support entrepreneurs in value chains with the best potential. It is important to help these enterprises surmount the challenges they face. Many stakeholders, including donors and government agencies, are undertaking important work to improve value chains and are helping to add value to agribusiness entrepreneurs (see table 13). Indeed, most donor-funded programs in Nepal focus exclusively on value-chain development. The AIC is designed to fill gaps and not to compete with the existing business development services or value chain development work. Instead, the AIC will work closely with these organizations.
53http://www.nardf.org.np
and NARDF, Project Completion Report, June 2012 Annual Progress Report,
MOAD, 2011.
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Entrepreneurship has not been a major part of the Nepalese mentality up to this point. The challenges of getting quality education, information, access to facilities, and financing are most often too daunting for recent graduates. Despite this, there has been a recent surge of entrepreneurs in the food service sector, with new restaurants popping up all over major metropolitan areas, such as Kathmandu, Pokhara, and Biratnagar. However, food processing entrepreneurs are still few and far between in Nepal. It is important for the sustainability of the AIC to implement pre-incubation programs, via strong partnerships, for entrepreneur development, for which funds have been allocated for the AIC operations to institute and refine appropriate programs. University programs in Nepal do not offer entrepreneurship courses, except in Masters in Business Administrative (MBAs) and certain Masters program, with limited success. It is recommended that the AIC conduct a streamlined outreach program with interested universities and technical and vocational training institutions focused on food processing and others promoting entrepreneurship, to fill the pipeline of the incubator with new and emerging entrepreneurs. It is expected that these programs will continue after the first five-year period in which they are funded by the AIC. In this time, a critical mass of new entrepreneurs will have been generated and the programs will become self-sustaining in their host institution. The opportunity identified is for the AIC to focus on the common challenges faced by entrepreneurs, revolving around market development, financing, and business management capabilities. None the less, the AICs success will depend somewhat on how it levers and works with wider networks. Several institutions, government agencies, business associations, projects and programs, and INGOs are well positioned to become collaborators, details of which were presented in the stakeholder mapping in the earlier section. The following are key institutions with whom the AIC needs to partner and cooperate.
Table 18: Potential Collaborating Agencies, Projects and Programs
KEY INSTITUTIONS Government: PACT, MOAD
ACTIVITIES AND COLLABORATION Activities Ownership and internalization of AIC Feasibility Study and its recommendations Implementation of AIC Funding for establishment and operation of AIC until it becomes selfsustained Planning and preparation of exit from AIC at the time when PACT is phased out Collaboration Supporting matching grants made by PACT to processing enterprises Key infrastructure and knowledge sharing partners for AIC Activities Policy and process support in implementation and operation of AIC Representation at strategic advisory committee
Government: MOI / DCSI / BIP
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Agribusiness Innovation Center in Nepal: Report KEY INSTITUTIONS ACTIVITIES AND COLLABORATION Collaboration Linking incubatees to AIC for further growth orientation of BIP agribusiness clients Experience sharing and facilitating to AIC client Pre-incubating services (DCSI-BIP) Activities Involvement in creating AIC as an institution Infrastructure and knowledge sharing partners Eastern regional partner for AIC satellite in Biratnagar (CAA) Collaboration Certification and quality assurance Lab sharing and sourcing of technical mentoring Knowledge creation and sharing Technology research, development, and demonstration Utilization of Knowledge Park at Godavari as needed by AIC client Establishment and operation of Biratnagar Satellite of AIC (CAA) Deal flow Activities Running academic programs relating to food processing, agriculture, post-harvest technology, horticulture, diary, agriculture engineering, and livestock MBA programs, running entrepreneurs lab as well Industry internship Entrepreneurship promotion Participation in Local Innovation Competition (Locus by IOE) Lab facility, research, and innovation with scope to commercialize Possible Collaboration Source of innovative entrepreneurs, mentors, and technology experts Practical training options on entrepreneurship Pre-incubation and business-focused research Laboratory, research, and development access Activities Running successful agriculture and other business ventures Partnership in creation of AIC as an nonprofit sharing company Formation of pool of agribusiness champions and angel investors Collaboration area Support to run AIC as business entities Sending representatives to AIC board Peer review of champions representing in Board of AIC Sourcing of industry and business mentors Activities Focused support through commodity associations, business promotion, lobbying, entrepreneurship promotion, and facilitation (NBI, NYEF, and others) Collaboration Identification and recommendation of partner for West Nepal, Nepaljung satellite of AIC Deal flow and incubation of their growth oriented agribusiness entrepreneurs
Partners: DFTQC NARC ICIMOD CAA
Universities: Tribhuvan, Kathmandu, Pokhara, Purbanchal
Established Entrepreneurs: Agribusiness Champions, Investors, and Successful Entrepreneurs (Pool of Champions and Investors) Business Member Organizations FNCCI / AEC / FNCSI / NCC
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Agribusiness Innovation Center in Nepal: Report KEY INSTITUTIONS Feeder Channels: Biruwa Ventures, E4Nepal, Samridhi, ChangeFusion Nepal ACTIVITIES AND COLLABORATION Activities Entrepreneurship promotion, pre-incubation, angel network Collaboration Sourcing of clients Experience sharing on running of an incubator
Womens Organizations
FWEAN
Activities Entrepreneurship promotion, pre-incubation Collaboration Sourcing of clients Incubation of their growth-oriented women agribusiness entrepreneurs
There are significant issues regarding the level of womens empowerment in the agricultural sector. In Nepal, women have traditionally been excluded from formal processes and structures and lack access to market information, technologies, and productive inputs. Many women also lack the confidence to pursue a business-growth path. However, women play an important role in agriculture and women entrepreneurs are becoming more organized through umbrella organizations. For instance, FWEAN has established a brand for processed foods, such as pickles and spices. FNCCI and NYEF are collaborating with FWEAN and other partners to organize the first National Women Entrepreneurs Summit and a public Mela (local trade fair) in 2013 in Kathmandu. This provides an opportunity for the AIC to work with these organizations to support women agribusiness entrepreneurs to facilitate peer learning among women entrepreneurs and to sensitize men and women to the potential of women-led enterprises.
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7 Institutional and Governance Arrangements

InfoDevs experience in the area of business and technology incubators indicates a) that the governance framework is critical and b) that a public-private partnership offers the highest likelihood for success. In a public-private model, government (which has a public good role), academia (which has a teaching, research, and often a commercialization focus), and the private sector (which has a profit motive) all work together to advance each of their own interests and collectively contribute to growth. The AIC model, unlike many others, is designed for cost recovery and so it must be driven in a Public Mission/Private Management model. To operate as a trusted, transparent business in its own right and to achieve financial sustainability, the AIC must be governed with arrangements that allow private salaries to be paid (which allows fast management decision making to capture business opportunities) and with flexible systems to accommodate changes in the business environment. These features should minimize public sector bureaucracy and maximize the ability to develop trust with the entrepreneurs supported. 7.1 Mission, Vision, and Strategic Objectives
The study team developed the following provisional vision, mission, and statements about objectives following consultations with key stakeholders and potential partners. Vision Our vision is to be a leader in the creation, growth, and success of notable Nepali postharvest processing agribusiness companies. Mission Statement The Agribusiness Innovation Center will identify and develop high-growth sustainable enterprises in agribusiness and other agriculture related growth sectors that will realize the socioeconomic potential of Nepal through the provision of value added professional business services, physical facilities, and business linkages to local and international markets and finance. Objectives 1. To establish a fully functioning agribusiness incubation environment in Nepal by January 2014. 2. On average to graduate 10 enterprises per year after an initial four year establishment period.
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3. To increase turnover of these enterprises (and therefore through success sharing the business incubation environment itself) by an average of 30 percent each year for three years. 4. To utilize funding through PACT of $4 million to establish the AIC.
Value Proposition The AICs value proposition is the following: Its understanding of agribusiness entrepreneurs, business, and business growth Its capacity to identify and support products with high growth potential in priority value chains Its ability to tailor and provide relevant and effective agribusiness growth services Its active facilitation of linkages among stakeholders and other business entities, including the financial sector Its ability to help grow companies and contribute to socioeconomic development of Nepal in a more sustainable manner.
Competitive Edge The agribusiness incubators competitive edge comes from its unique ability to collaborate with and attract high quality growth clients and provide them with value services and linkages that offer an above average chance of success. It will do this by: Becoming a credible agribusiness growth entity that is able to command interest and respect Providing high quality accommodation to resident clients at market related prices and an integrated outreach service to support nonresident clients Ensuring services are high quality, available, and professionally delivered Creating an agribusiness growth network with other credible institutions, including government, intergovernmental, agri-research, financial, market facing, and business-support organizations Growing agribusinesses to levels that both satisfy the needs of entrepreneurs and act as a reference and stimulus for other entrepreneurs Ensuring independence from any vested interest and developing trust with its clients Supporting the socioeconomic development aspirations of Nepal 79
Positioning Statement The Agribusiness Innovation Center is positioned to help entrepreneurs to accelerate the growth of their agribusiness. 7.2 Ownership, Governance, and Management
To succeed in its mission and to provide tangible value to entrepreneurs, the AIC host institution needs the following characteristics: Capabilities to build and manage complex organizations, including strong internal governance frameworks and a track record of fiduciary responsibility and accountability. Proven ability to attract and build a strong team of individuals for project implementation. Understanding of the needs of agribusiness SMEs in Nepal or similar contexts, including experience evaluating agribusiness technologies and incubating earlystage businesses. Strong local and international links with potential partners agribusi ness firms, investors, technical and business experts, policy experts, and leading research and development organizations. Ability to leverage existing and additional sources of funding, both cash and inkind, such as space, equipment, and staff. Ability to implement and maintain procurement and financial management processes and a comprehensive M&E strategy. Ability to operate as an entrepreneurial business entity, paying private sector salaries and working for the best interests of clients as a trusted service provider. An understanding that while the AIC must operate as a business and aims to cover its costs, independent financial self-sustainability will be a challenge. Even if self-sustainable is unlikely to ever be profitable, it should not be seen as a source of financial return for the organizations involved. Any eventual profits should be re-invested in the business, to improve and expand services, rather than being paid out as dividends. The return needs to be understood in terms of socioeconomic benefit, rather than financial returns.
The organizational arrangement needed in the Nepalese context is summarized as follows.
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Table 19: Organizational Arrangement for Nepal AIC
Independent Innovative & Entreprenerual Trusted
Autonomous Flexible Operating as a business Entrepreneurs helping entrepreneurs
By entrepreneurs By stakeholders
Highly capable and experienced HR Private sector salaries
Capable
At the same time, the AIC institution has the opportunity to leverage PACT activities: 7.2.1 Increasing the value added in selected value chains Strengthening the system of standards and food quality management Promoting agribusiness management and innovation Options
A number of options need to be considered in determining the best institutional arrangements for the AIC. The strengths and weaknesses of each are summarized in the table below.
Table 20: AIC Host Organization Options
Option Existing business member organization
Strength Business and industry links Credibility Influence Private sector approach May have valuable complementary services
Weakness May not be seen as independent of vested interest May not be trusted to work for AIC clients interests, as opposed to the organizations members interests Interest may be too narrow, focusing on the particular
Private Agribusiness company
Proven entrepreneurship and private sector 81
approach Knowledge of agribusiness
area in which the company operates. May not be seen as independent of the companies private interests by AIC clients. May have difficulty operating the AIC as an entrepreneurial business organization, paying salaries with minimal bureaucracy. May have difficulty operating the AIC as an entrepreneurial business organization, paying salaries with minimal bureaucracy. May not be business oriented or entrepreneurial. May not have the necessary business and industry linkages. May only have microbusiness development expertise, which is not the same as helping growth oriented entrepreneurs. Un proven
University
Knowledge Resources
Government
Policy influence Resources
NGO
May have valuable complementary services. May be trusted as an honest service provider working for the interest of clients.
New organization
Can start with a clean slate as a demonstrably independent and autonomous entity. Focused on the AIC alone. Can represent a consortium of existing organizations.
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Arguably, the best arrangement for the management and governance of the AIC is for a new independent and autonomous organization, drawing together existing organizations in a consortium, to involve their strengths and mitigate their respective weaknesses. In the end, any consortium for the AIC needs to comprise people and organizations who have a common ethos, who trust each other and who can work together cooperatively for the benefit of the AIC. At the stakeholder consultative workshop, the stakeholders agreed, particularly from PACT and MoAD, that the AIC should be managed via PACT by the private sector, at least initially with a nonprofit structure, to draw together a consortium, for which majority ownership should be with interested private actors. There is an understanding that the role of government is facilitative; that is, the government should provide financial, policy, and business environment support, while the AIC should work like a business and become a permanent entity beyond the PACT project. The CAA has a relevant nonprofit company structure, which may be a model for the legal form of the AIC, but it works as a network institution, providing services to its members, rather than to clients who are not members. This is an important distinction, because the AIC is designed to provide services to clients, not to the members who come together to host the AIC. The AIC has some similarities to private consulting companies who provide strategic and operational advice to companies, but is significantly different in that payment for services will largely be by way of sharing in the clients success, rather than by payment of fees. The relationship with the clients has subtle but important differences. It is more akin to a mentoring relationship, rather than the traditional consultant-client relationship. Consulting firms will have important roles in assisting the AIC, as service providers to the clients. Whatever host organization or consortium is selected, it cannot involve all the interested stakeholders, without making governance overly cumbersome and bureaucratic. Accordingly, a Strategic Advisory Committee is proposed, to draw together a wider group of interested stakeholders, so they can learn from the AIC to provide strategic and other advice without being involved in governance arrangements and work for broader ecosystem improvements.
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In summary, the following institutional arrangement is proposed.
PACT Steering Committee PACT Project Director, AIC Subproject Manager, AIC Implementation Committee AIC AIC Host Company &Consortium Members AIC Strategic Advisory Committee
AIC Board
AIC Client Selection Committee
Agribusiness Innovation Center Management

Figure 9: AIC Organization Structure
Should a new organization be formed, drawing together a consortium of interested organizations and agribusiness entrepreneurs, then a new company not-distributing profits is proposed,54 with a consortium of members as the owners, joined on the board by independent directors. Over time the company could transition to a profit-making structure, if this is warranted. The organization should be set up in such a way that it will provide appropriate community involvement, with built in accountability and transparency at all organizational levels. Under Nepali law, a nonprofit distributing company needs five members. The governance of the AIC must allow the center to function as a business. This is well understood by the entrepreneurs consulted; who also know it is much easier said than done. All too often business member association involvement is perceived to be the way to create such an environment; however, initiatives along these lines have not been as successful as expected; something that the business community has accepted.
54A
company defined by Clause 166 of the Companies Act 2063. This style of company is akin to a Company Limited by Guarantee under British derived law, a 501C3 company under U.S. law.
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Within this structure, the board plays a pivotal role and must be manageable and workable. To that end, it is recommended that the board be kept to a maximum of seven members, the majority of whom are from the private sector. A purely representative board need to be considered with caution, especially for a service that has to operate as a business. Representatives may not have the appropriate commitment, or background, and may simply be on the board because they have been told to, or to improve their CV. If board members are not wholly committed or business minded, then they may make poor decisions or avoid hard decisions. For similar reasons, public institutional stakeholders and their representatives can at times be difficult, if the institutions priorities or key personnel change. This can be mitigated by strong private sector directors, one of whom may be the chair of the board. The credibility of the board directors will be critical for success in levering private investment for clients. AIC clients and Investors want to trust who is responsible for their funds or for supporting the companies in which they invest. However, the board cannot and should not become too involved in the day-to-day management of the AIC or micromanage. 7.2.2 PACT PACT Steering Committee (during PACTs existence as a project in MoAD) Strategic Advisory Committee (MoAD after phasing out of PACT) PACT AIC Subproject management Team PACT funding for AIC made to AIC host institution Roles of Stakeholders
Agribusiness Entrepreneurs Individual successful agribusiness entrepreneurs, or larger corporations in the sector, interested in promotion and investment in innovative agribusiness will play an important role, possibly as mentors and advisors to AIC clients, as consortium members (should a new organization be involved), as directors of the board, or as investors in AIC clients. AIC Host Institution The host institution may draw together a consortium of public institutions, private agribusiness entrepreneurs, other service providers, and knowledge institutions. Role: Own the incubator, appointment of board of directors, provision of services to clients. Board of Directors Role: Governance of the incubatoroversee the operations of the incubator.
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Strategic Advisory Committee Role: Strategic advice to the consortium and the board, although with no involvement in the governance chain, learning about incubation, overall strategic development of the Innovation, and Entrepreneurship Ecosystem. Comprising: Government Ministries o o o Ministry of Agriculture Development Ministry of Industry Ministry of Commerce and Supplies AEC / FNCCI FNCSI FWEAN NCC
Chambers of Commerce o o o o
Donors, including ABD and World Bank Other Interested universities o o All universities running agriculture, forestry, engineering (industrial and processing), and business administration programs Tribhuvan, Kathmandu, Pokhara, Purbanchal BEED Management Samriddhi Change Fusion Biruwa Ventures Other private/professional companies
BDS Providers o o o o o
The Strategic Advisory Committee would be serviced by the AIC, provided with regular information and meet together, perhaps once or twice per year, to both provide strategic advice and learn about incubation. To help maintain information flows and engagement, the committee could be offered an observer position at specified board meetings. Client Selection Committee Role: To select clients for incubation, on advice and recommendation from management, according to stringent entry criteria. 86
Comprising: Board of Directors representatives Calling in external assistance as and when additional sectoral or technical knowledge is required SME Venture Fund RepresentationIFC nominee or Business Oxygen Fund Manager) Management Team
Knowledge Partners: Infrastructure / Knowledge Sharing Institutions Role: Provision of infrastructure, information, and knowledge for clients on terms managed by the institutions, which will be key players in the AICs network. Comprising: NARC DFTQC ICIMOD
Screened Qualified Service Providers Role: Provision of intensive business support services to clients, with management controlling which service providers are referred to on a case-by-case basis. Comprising: Business development service providers and specialist consultants Banks Accountants Lawyers IT Specialists / Mobile App champs Other Service Providers
Satellite Partners for AIC Role: To serve as the local center for the AIC, for their respective geographic regions. They will mobilize their existing office logistics and human resources for the incubator and will nominate people to be trained by the incubator to operate as regional AIC focal persons. Functions of the regional satellite AIC will be guided by a mutual agreement between the AIC and respective partner organization. The AIC may
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compensate for resources used by the partner organizations for the operation of satellite AIC. Potential partners for the satellites: East o Commercial Agricultural Alliance (CAA), Biratnagar CAA, a nonprofit sharing company located in Biratnagaris responsible for managing the Commercial Agriculture Fund (CAF), the cost-sharing grant facility of CADP. o Morang Merchant Association (MMA), Biratnagar MMA, established in 1951, is a founding member of FNCCI and is the leading BMO of eastern Nepal, located at Biratnagar, Morang district of Nepal. West o Nepalgunj Chamber of Commerce and Industry, NCCI, Nepalgunj NCCI is the leading BMO of the midwest, located in Nepalgunj, the major NTFP trading hub of Nepal. o Jaributi Association of Nepal (JABAN) JABAN is a medicinal herbs producers association approximately 25 members who process and export herbs. of Nepal with
Satellites will evolve and may be established in Pokara and other locations where there is demand from clients and local stakeholders interested in establishing satellite centers. The respective roles of stakeholders are outlined further in the table below, noting the plan is still evolving and roles may change as and when a host institution or consortium is selected.
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Table 21: Key Stakeholders and their RolesNetwork for AIC
Key Stakeholder Government Ministry of Agriculture Development (MOAD)
Roles PACT Implementing Body for AIC Sponsor / Sourcing of operational grant to AIC Matching grant / Feeder Channel / Regional offices / Pre-incubation Monitoring and Evaluation of operation of AIC Strategic Advisory Committee member Infrastructure, Knowledge and Technical Support Partner Knowledge and R&D Infrastructure Sharing / Quality Certification / Knowledge and Technical Support Partner Compliance, standards, and certification Strategic Advisory Committee Member Pre-incubation at the DCSI Incubator Deal flow pipe line Responsible for the governments business incubation policy Strategic Advisory Committee member Facilitation for international Business, WTO facilitation, NTIS Strategic Advisory Committee member International market facilitation
NARC Department of Food Technology and Quality Control (DFTQC) Ministry of Industry, BIP (DOI/DCSI/IEDI)
Ministry of Commerce & Supplies Trade and Export Promotion Center International Institutions ICIMOD Knowledge Partner Sharing knowledge Best utilization of Knowledge Park, creating win-win situation Private Sector Key Industry Players Strategic Advisory Committee Members Fortune Cookie Deal flow pipe line: via networks and people who approach them NIMBUS for investment or support Srinagar Agro Farm Provision of services to clients: Gandaki Bee Early-stage investment (angel investment) for incubator Fleur Himalayan clients, when they are investment ready Bhatbhateni A source of business mentors VIOTH International linkages Market for clients AIC Regional Partners CAA / Morang Chamber of Commerce and Industry Nepaljung Chamber of Commerce and Industry / JABAN/IDE
Possible Partner for Biratnagar Satellite Center Deal flow pipeline / feeder channel / district offices Mobilize internal resources for AIC Promotion of entrepreneurship and AIC Operating as AIC satellite in the eastern region Possible partner for Nepalgunj Satellite Center Deal flow pipeline: feeder channel for rural technology innovation Provision of services to clients: Working closely with AIC Nepaljung to help promote the incubation, provide sourcing of clients, and provide facilities and services
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Agribusiness Innovation Center in Nepal: Report Key Stakeholder Roles Universities & Public R&D Universities Strategic Advisory Committee or Service Provider Tribhuvan Deal flow pipeline: A source of new entrepreneurs from the university Kathmandu community (graduating students, faculty, and alumni) Pokhara Provision of services to clients: Purbanchal Interns to work with clients of the AIC and to enhance their Agriculture & Forestry learning experience Consulting service for SMEs Business management training Pre-incubation for students NAST Strategic Advisory Committee (autonomous body Deal flow pipeline: realistically only in the future once it has sorted within Ministry of out their TTO function and have R&D to commercialize with spin out Science and companies suitable for agribusiness incubation. Technology) Business Member Organizations (BMOs) AEC/FNCCI Strategic Advisory Committee Identification of partner for Western Satellite of AIC and potentially for other satellite centers Deal flow pipelinevia networks / regional chambers / ODOP / feeder channel / pre-incubation Service providers via membership Market and supply channels via their membership Finance-matching grant, value chain information FNCSI Strategic Advisory Committee Deal flow pipelinevia networks / regional chambers / feeder channel Other Network, NGOs and BDS MEDEP / INGOs (iDE, Strategic Advisory Committee or Service Provider Practical Action, Deal flow pipeline: referring their best growth oriented clients for Winrock International incubation / facilitation ... Pre-incubation and awareness servicesin agribusiness incubation jargon their BDS services can be considered in this way Biruwa Ventures Deal flow pipeline E4Nepal Promotion of entrepreneurship Sambridhi, The Provision of services to clients: Prosperity Foundation Pre-incubation ChangeFusion Nepal A source of business mentors Entrepreneurs network NEFOSTA Deal flow pipelinevia networks Service providers via members, including: Source of food technologists and scientists A source of business mentors Market and supply channels via their members National Banking Feeder channel for mentors from banking sector / maintaining pool Training Institute (NBTI) of trainers Beed Management in conjunction with Bank of Kathmandu and IFCs SME Ventures Strategic Advisory Committee and Client Selection Committee Deal flow pipelinereferral of suitable people who apply for their finance, levering IFC SME Venture Fund ($10 million) Provision of services to clients:
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Agribusiness Innovation Center in Nepal: Report Key Stakeholder Lead International Roles Finance, with a special arrangement with the incubator Strategic Advisory Committee Deal flow pipeline: levering Business Edge, for which they have a license with the IFC, noting details are not finalized yet. Provision of services to clients: Business Edge training for suitable clients Strategic Advisory Committee Advocacy to banks: both to refer suitable loan clients for incubation and to consider special loan mechanisms for clients referred by the business incubator. Deal flow pipeline: potential feeder channel for rural technology innovation.
Nepal Bankers Association
Practical Action Consulting, Nepal Country Office
More information on the key partners, namely DFTQC, CAA, NARC, NARCDF, and ICIMNOD is in Annex 9. 7.2.3 Role of the AIC Board and Management
In the context of the structure proposed above, the board should be responsible for the following: Strategic planning and future directions Approval of the business plan prepared and submitted by management Approval of strategic, financial, and high-level operational policies Financial oversight Hiring and firing the CEO/Manager, who is then responsible for hiring and firing other staff Monitoring and assessment of management performance Supervision of management, with a special relationship between the chair of the board and the CEO/Manager Promotion of the AIC Obtaining the necessary resources for the AIC
The board must give management the room and delegation to manage the AIC as a business, within an approved policy framework, and avoid micro-management (that is, directly getting involved in day-to-day management itself.) To manage any potential conflicts, management must have the right to control exactly which service provider helps a client for whatever purpose. While the intent is that the
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host institution or consortium can be service providers, management must manage this, without undue pressure from the Board. 7.3 Selecting the AIC Host Institution
Selection of the host institution, or consortium of institutions, for the AIC will be by a public Expression of Interest (EOI) process, to pick the preferred host institution(s), followed by a full Request for Proposal from the chosen institution. This process recognizes the critical importance of selecting the right sort of organization(s) and allows like-minded people and organizations to come together voluntarily, without prejudging the merits of particular organizations and at the same time using a transparent process to determine which organizations are committed and interested and the best fit for the AIC. 7.3.1 Expression of Interest
The Expression of Interest (EOI) will be guided by a terms of reference, selection criteria, and associated procedures. InfoDev will work with PACT to prepare the EOI terms of reference and selection criteria. PACT will manage the EOI process. Following a review of the EOIs submitted, five candidates will be selected by an evaluation committee comprising: 1 x MoAD Joint Secretary 1 x NPC representative 1 x FNCCIs AEC, if they are not involved in an EOI 1 x DFTQC 1 x PACT Under-Secretary 1 x PACT Technical Support Group 1 x infoDev local consultant
The final selection committee will interview the five candidates selected, which will rank the five and then invite the top rank bidder to submit a full proposal, against a formal Request for Proposal (RFP). At this stage, PACT will assist the selected bidder to prepare their proposal and hone the team involved. PACT will evaluate the full RFP, if necessary involving the full committee. If it is acceptable, PACT will proceed to contract negotiations for implementation. If the process fails with the selected bidder then it will be recommenced with the next ranked bidder.
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The final selection committee will comprise: Secretary for MoAD 1x Joint Secretary MoAD 1 x Joint Secretary Ministry of Finance 1 x Joint Secretary NPC 1 x Joint Secretary MoI 1 x potential incubate nominated by the Secretary MoAD 1 x FNCCI AEC Executive Director, if not involved in any of the bids 1 x Member Secretary PACT 1 x IFC 1 x infoDev international consultant The World Bank is expected as an observer.
7.4
AIC Personnel
The caliber of the first and subsequent managers for AIC will be critical for success. The main capabilities to be sought in the CEO/Manager is dynamic leadership and agribusiness entrepreneurial experience. The CEO/Manager will need the ability to gain trust and credibility with clients and stakeholders, to add tangible value to clients businesses and manage the AIC as a business in its own right. The CEO/Manager will lead a small management team and outsourced service provision that will need to comprise a balance of marketing, accounting, and finance and business development experience, with domain knowledge in agribusiness. In general terms some key issues to address with the first and subsequent AIC Managers will be the following: Intimate knowledge and experience of entrepreneurship and agribusiness, with experience in growing food processing companies. Ability to help existing agribusiness ventures to grow and stimulate start-ups. The credibility they are able to generate, particularly with potential agribusiness clients, investors, and stakeholders. A private sector orientation and the ability to manage the AIC as a business. Excellent interpersonal skills. Excellent business counseling and facilitation skills. A high tolerance for ambiguity and flexibility. There are many contradictory aspects to the managers role, such as being a business counselor, mentor, 93
investor, land lord, and debt collector. One has to be responsible to the clients in terms of helping them grow their business, to the board in terms of managing the AIC business, and to investors who have invested in the AIC client. Above average commitment to the project, preparedness to achieve outcomes, and willingness to work longer than average hours. Achievement driven. Confidence, passion, and enthusiasm. Empathy with clients and the ability to engender trust and confidence with clients and investors. Agribusiness market development experience and skills. Networking skills.
To provide the necessary intensity of support to clients and to achieve the incubators own revenue and business targets, eight management staff has been allocated in the budget complemented by provision for AIC to pay for business development services for its clients. 1. Manager/CEOA very high caliber person with international agribusiness market development experience, an international hire, or equivalent Nepalese national. 2. Agribusiness AdvisorsTwo advisors with agribusiness market development experience, focused on working with clients and who are likely to have been involved with an agribusiness on a growth path. One would be employed from the outset and the second in the second year to help work with clients in satellite centers. 3. Outreach/Business Development OfficerFocused on awareness building, preincubation, critical mass creation, public relations, and expansion of the network of the AIC. 4. ICT OfficerUtilization of full potential of ICT, including mobile technology, for be best of AIC and its client, networking with ICT partners as needed. 5. Administration and Accounts OfficerHandle the AIC financial management and guide clients in the AIC Hub, as well as at the satellite centers. 6. Agribusiness Officers and SecretaryFor AIC satellites in East and West, to be employed in Year 2. 7. AIC Secretary, Accounts and Administration Assistant, and MessengersSupport staff for the management of AIC, as well as its client companies. 8. Total staff 14 to be phased in as the AIC hub is established in Year 1 and the satellites are established in Year 2.
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The following is a summary of overall staffing requirement for the AIC when at full capacity:
Table 22: AIC Staffing Requirement (at full capacity)
AIC Hub in Kathmandu Manager/CEO Agribusiness Adviser 1 Agribusiness Adviser 2 Outreach Officer ICT Officer AIC Secretary Admin and Accounts Officer Account and Administrative Assistants Office Assistant/ Messenger Satellite Centers Agribusiness Officers Secretaries Cleaning Security
Positions High caliber in agribusiness market development Agribusiness market development focused on AIC Hub Agribusiness market development focused on satellite centers, to be employed in the second year Awareness / critical mass creation, public relations AIC and client companies Institute secretary, client service AIC and client companies AIC and client companies (Two number) AIC and client companies Positions Two positions, one each for east and west, starting from second year Two position, one each for east and west, starting from second year Outsourced Outsourced
The three critical staff members for the AIC are experienced senior people with solid agribusiness market development experience, one with international experience, perspectives, and linkages, and the other two with local experience perspectives and linkages. The CEO needs to have international agribusiness market development expertise and may need to be hired internationally, if a suitably experienced high caliber Nepali cannot be found, either domestically, or from the Nepali diaspora. The CEO needs support from administrative, analytic, communications, and back office personnel, and agribusiness advisors for lower-level business development work. When the AIC is at full capacity with 30 clients serviced from the hub and satellites, the center will achieve a good ratio of 1:7 for staff who work with clients to the number of clients, to provide the intensive support required, in particular from the CEO, two agribusiness market development staff (Agribusiness Advisors), and outreach officer. 95
No matter how skilled the management team is they will never have all the knowledge, networks, skills, or time required. The staff needs to be supported by a flexible consulting and mentoring budget, to bring in specialist experts and mentors to work with the entrepreneurs at the hub, as well as satellites, for which a budget of $4,600 per client per year has been provisioned. This includes processing and packaging expertise to help clients. Research has shown that when incubators operate in this way, rather than trying to do everything themselves, they are likely to be more successful and more likely to lever venture capital.
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8 Implementation Requirements
With the recommendation to implement the AIC via PACT, implementation will be the PACTs responsibility. This section addresses key implementation elements for the PACT. 8.1 8.1.1 Facility and Infrastructure Requirements Access to Testing Facilities
Agribusiness entrepreneurs need access to testing facilities and laboratories, through brokering relationships, rather than setting up dedicated facilities. Commonly companies have testing done in India or Europe in the absence of local facilities and services. DFTQC facilities and services will be used, as well as international facilities, for services and facilities not currently available at DFTQC. AIC clients may need access to technology testing facilities, for which there may be some overlapfor instance, for testing the safety of water purification technologies. Renovation of the DFTQCs pilot plant is accounted for in the budget in the third year, to provide pilot processing space for new processing businesses, along with the basic generic equipment needed. When renovated, this facility will be managed by DFTQC, a key partner of the AIC. Details of the work and costing are in Annex 10.
8.1.2
Access to Relevant Technology
Technology information, development, and transfer are other important elements of the AIC. In implementing this track, the AIC will need to address the needs of food manufacturing and processing companies in any databases and services that broker access to appropriate technology. 8.1.3 Access to Packaging
Access to packaging in Nepal is an impediment for food processors, who have limited options in Nepal. Advocacy for the development of the packaging industry and brokering relationships in Nepal and abroad are needed. Establishing and working with a solid network of copackers, who will package a manufacturer's product in the manufacturer's brand, is a priority as a part of implementation. The specialist staff referred to earlier, especially the one with international experience, should have adequate knowledge as to what is required and about the networks. Specialist consultants can provide this information. 8.1.4 Pre-incubation
To develop a pipeline of future clients, the AIC needs to develop pre-incubation programs with universities and other incubators and training institutions, enhancing 97
existing entrepreneurship development activity. The AIC has a budget for working in this area with universities and chambers of commerce. 8.1.5 Location
The AIC hub is to be located in Kathmandu with the two satellites in Nepaljung in the west and Biratnagar in the east established in the second year. The AIC will not offer processing facilities for clients to use. Instead it will work with clients in their own facilities, help clients develop their own facilities, and broker relationships to make use of any existing facilities, including helping DTFQC to renovate its old pilot plant so that AIC clients can use it. The AIC hub will primarily offer offices, meeting rooms, hot desking, showcasing facilities, and communication facilities. It needs to be in a good commercial location in Kathmandu, appropriate for showcasing to international clients and close to the DFTQC regulatory center for certification and approval of products. The budget allows for renting appropriate facilities. Virtual services will be provided to client companies located beyond hub and satellite facilities, for which communications and travel need is budgeted.
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9 Financial Plan
The AIC is designed to become financially sustainable after four years. Sustainable is defined as covering the ongoing operating expenses of the AIC, including depreciation, through earned revenues. A flexible revenue model is proposed in which sustainability may be enhanced once various revenue options are tested. An initial investment of $4 million will be needed as start-up capital in order to achieve this objective. The financing required to initiate the AIC will be provided for the first five years, with income generated during this period being banked. The front-loading of the external investment allows the management to focus on the AICs development. It also allows the model to be changed, if it becomes clear after two years that the income generation targets are not likely to be met, or that one revenue option is preferred to another, or a flexible combination is required. Changes can be made before the AIC has to generate its own income in later years. The income generating component for the initiative is a mix of royalty fees on turnover, equity, pay-as-you-go fees (incubation fee), and finance brokerage fees. This accommodates a mixed portfolio of clients at varying stages of development, initially existing SMEs with turnovers in the order of between $140,000 and $640,000 and with the potential to increase sales by 30 percent per year, for the anticipated three-year incubation period and then after incubation. Fresh new start companies will be included over time, once the AIC has an established portfolio of existing SME clients. The model involves the following: Royalty of 7 percent fee on the increase in a clients turnover per year for one three-year period, anticipating that 80 percent of clients will choose this option. The royalty fee is set against income needs of the AIC and the ability of the clients to pay. Modeling an increase in turnover of 30 percent per year, a decrease in the cost of sales of 10 percent, and a decrease in overheads of 10 percent, as a result of the intensive support provided (or a similar increase in the gross profit by achieving better prices) indicate the net profit exceeds presupport net profits after payment of a 7 percent fee. The rationale is that support will improve financial well-being while the client is in the AIC (even with a royalty fee) and that upon leaving, the client will reap full benefits. More detailed information on the royalty arrangement proposed and the benefit to the companies is in Annex 8. Equity of 5 percent, anticipating 0 percent of clients chooses this option at this stage, with a focus on existing companies who will not want to give up equity. Along similar lines to the royalty rationale, improved revenues and profitability will lead to growing company value. While no revenue is budgeted at this stage, it will be an option in future years, especially for fresh new start companies.
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Incubation fee of $31,249 per year, anticipating 20 percent of clients choose this option, which is applicable mostly to larger firms. The fee is commensurate with the average royalty paid by the firms choosing the royalty option and with the same average increase in sales and margins should be affordable. Finance brokerage of between 5 and 2.5 percent on finance raised, anticipating 50 percent of clients are assisted to secure finance from $50,000 to $500,000.
Agribusiness entrepreneurs acknowledge the need to pay for services and the stakeholder consultation workshop supported the options, noting the need to change paradigms and take clients on a learning curve. This reinforced earlier work by infoDev assessing the demand for agribusiness and ICT incubation, for which the preparedness to pay results are summarized in Annex 13. However, the workshop noted trust and accounting are likely to be challenges and suggested they be addressed by accounting transparency and follow up activities. The AIC may need to undertake accounting for some of its clients and needs to lead by example, demonstrating its own transparency and trust. By offering payment options, the model is flexible and adaptable. The income figures factor in that only 90 percent of the funds will be collected given that failures and improper activities will occur (a bad debt ratio of 10 percent). The figures provided below are all expressed in U.S. dollars and depend on successful negotiation of funding and partnership arrangements. 9.1 Budget
The number of staff will increase progressively with the number of clients supported, starting with seven staff in year 1 to reach 13 staff in year 3, which will mean working on a standard of one professional staff member for seven to eight clients. In budgeting, staff directly working with clients are allocated to client services (mentoring and advisory), with the remainder allocated to administrative personnel and overheads. An allocation for communications and marketing expenses is essential, as the awareness level in Nepal is very low. A monitoring and evaluation scheme is critical to ensure the success of such an initiative, which needs to be embedded within the job profile of assigned personnel. The budget overview provided below, includes phone, Internet, ICT support and website development, postage, photocopying, stationery, printing, outreach motor vehicle expenses, advertising and public relations, accounting, audit and legal, insurances, functions and launch, staff training, travel, subscriptions and library, and implementation support.
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Budget by Category for First Five Years

1,200,000 1,000,000 Implementation support 800,000 600,000 400,000 200,000 0 1 2 3 4 5 Depreciation and provisions Building rent and services Mentoring and advisory staffing and overheads
Figure 10: Budget Overview
Table 23: Budget Summary
Category Staffing and Overheads Mentoring and Advisory Building Rent and Services Depreciation and Provisions Implementation Support Totals by Year
Yr1 212,300 357,000 135,040 71,170 61,789 837,299
Yr2 261,100 431,000 160,840 61,437 68,333 982,710
Yr3 269,500 477,000 160,840 141,020 63,514 1,111,873
Yr4 269,500 477,000 160,840 141,020 63,514 1,111,873
Yr5 269,500 377,000 160,840 141,020 56,514 1,004,873
Total 1,281,900 2,119,000 778,400 555,666 313,664 5,048,629
% of Budget 25% 42% 15% 11% 6%
9.2
Sustainability
The model seeks to achieve financial sustainability after four years of operation. It will probably not make significant profits and financial self-sustainability will not be easy. 101
Covering operating costs is the aim and any profits made should be reinvested to improve and expand operations, rather than paid out in dividends. After the initial ramp up period costs are in the order of $970,000 per year, in the following categories:
Table 24: AIC Annual Expenses when Established
Year Expenses PersonnelAdministrative Client Services Overheads Building Services Provision for Doubtful Debt Depreciation Total Expenses
Year 6 152,600 399,000 116,900 161,640 97,593 46,427 974,160
The cost recovery model is justified by the capacity and willingness of the target enterprises to pay to the AIC for services. The agribusiness entrepreneur focus group discussions found that some prefer to pay at full cost and others preferred payment by way of either a small percentage of equity, or with a royalty levied on the increase in their sales for a period. The consultative workshop preferred payment in terms of a share of revenues and consultation fees. This implies the AIC should offer options. Businesses at different stages will have various capacity and potential. For instance, an existing business may find it very complicated to give up equity, but may be prepared to pay for services at full cost at the time, or enter into a royalty agreement. A newer business may be in a position to give up some equity, but may not have the funds to pay for support.
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Noting further refinement of the flexible model, the revenue projected for the first six years, excluding grants, is summarized in the table below.
Table 25: AIC Revenue Generation for the First Six years of Implementation
Year Income Rent Incubation Fee Royalty Finance Brokerage Total Income
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
5,375 10,750 16,125 16,125 16,125 16,125 62,497 124,994 187,491 187,491 187,491 187,491 187,212 456,273 749,966 749,966 749,966 749,966 22,350 22,350 22,350 22,350 22,350 22,350 277,435 614,367 975,932 975,932 975,932 975,932
With four main revenue options, the model has flexibility for review and adaptation as the AIC is implemented. Despite positive responses in the agribusiness entrepreneur survey, payment for services is not the norm and paradigms need to change. Benefits may need to be demonstrated first in taking clients on a learning journey. The model can accommodate this, in that no revenue is anticipated in the first year of establishment, during which carefully selected clients should be supported to demonstrate the benefits. Furthermore, all costs are grant funded for the first five years, when revenues will be banked, giving time to progressively refine the model, based on annual reviews of performance. 9.2.1 Royalty
If all clients pay with 7 percent of their monthly turnover then the AIC would be 100 percent self-sustainable by the end of Year 6, with annual royalty revenues in the order of $750,000 per year. If the royalty is set at 6 percent then the AIC would be 91 percent self-sustainable and at 55, 78 percent self-sustainable. The model is very sensitive to the royalty rate. In implementing the model, varying rates for companies at different stages should be considered, with smaller and newer companies possibly paying a higher rate than larger and older companies. Initially the AIC will focus on existing SMEs with annual turnovers in the order of between $140,000 and $640,000 and with the potential to increase sales by at least 30 percent per year for the anticipated three-year incubation period and after incubation. As well as helping to increase sales, the AIC expects to improve gross profit margins so that even paying royalty fees, the business makes more profit during the incubation period when royalties apply. Annex 8 provides more detailed information on the royalty arrangement proposed and the benefit to the companies.
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9.2.2
Equity
If instead of a royalty on sales, clients were to pay with 6 percent of their equity then the AIC would only be 46 percent self-sustainable by the end of year 6, because it takes far longer to realize returns, For equity to deliver 100 percent self-sustainability then a small number of outlier clients would need to be astoundingly successful. Further modeling of this option needs to be undertaken if it is to be implemented in full or in part. 9.2.3 Incubation Fee
Only a small percentage of the larger and more established clients would have the capacity and interest in paying for support with fees at the time. Modeling assumes 20 percent, generating annual revenue of $187,000. As the fee is set according to the average royalty paid ($31,249 or $2,604 per month), to cover the same level of support as for other clients, the sensitivity is the same as for the royalty option. The AIC expects to both increase sales and profit margins so that the enterprise can pay these fees and still make a higher profit than before incubation. Given the need for holistic support, an incubation fee is preferable to charging consulting fees for each component of assistance, although this may be another option, albeit more complicated. 9.2.4 Finance Brokerage
Brokering finance of between $50,000 and $500,000 with fees of between 5 percent and 2.5 percent generates only $22,000 of revenue per year, assuming the AIC helps 50 percent of clients succeed with finance raising. However, where equity investment is involved (as will be the case with the AICs investment fund, at least in part ) then additional revenue can be expected over time, sharing in the success of the equity investment made by the AIC. This has not been modeled. 9.2.5 Other Revenue
Other revenue possibilities exist but have not been modeled at this stage. They include the following: Training, for which revenue potential largely depends on how much is outsourced to other providers, in which case margins are likely to be low. Strategically outsourcing may be an important way to lever and involve partners. Sponsorship, from corporations interested in supporting the agribusiness sector as a part of their corporate social responsibility programs. Rental of hot desk services, meeting rooms, and other facilities in the AIC premises.
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9.3
Financing Plan
The financing required over a four-year period is a total of just more than $4 million.
Table 26: Nepalese AIC Financing Required (over a four-year period)
Subsidy requiredTotal Subsidy requiredCapital Subsidy requiredOperational
4,029,374 316,610 3,712,764
The financing required to initiate the AIC will be provided to cover all expenses for the first four years, with income generated during this period banked. The front-loading of the external investment allows the management to focus on the development of the AIC. It also allows the model to be changed, if it becomes clear after two years that the income generation targets are not likely to be met, or that one revenue options is preferred to another, or a flexible combination is required. Changes can be made before the AIC needs to rely on self-income generation in later years.
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10 Results and Impacts

The AIC aims to advance the competitiveness of the agribusinesses sector in order to increase growth, and thereby increase jobs and incomes. With infoDevs assistance, a detailed monitoring and evaluation framework will be developed to measure performance (for instance, in relation to progress made toward the financial sustainability of the AIC), outcomes (the number of entrepreneurs who have benefitted from the AIC), and impacts, such as job creation and increases in incomes. This will be done as a part of the AICs comprehensive monitoring and evaluation plan. Broadly, the impacts of the AIC will be measured using the following indicators: The number of enterprises reached The revenue growth of client enterprises The number of jobs created by client enterprises The number of indirect jobs created The number of farmers impacted The increase in farmers income The reduction or prevention of climate impact of the client enterprises
In addition, indicators tracked by the overall PACT project will also be measured. These include the following: Improvement in quality standards of agribusinesses in the food industry Number of samples submitted for analysis Number of project beneficiaries who are female Volume of marketable agriculture products
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While the main impacts will flow from the clients selected for intensive support, many more entrepreneurs will be assisted in incubation awareness and pre-incubation work undertaken to identify, filter, and eventually select clients for the AIC. Even though they are not formal AIC clients, these entrepreneurs will all receive benefit from the AIC. In summary the main anticipated impacts over a 10-year period are the following:
Table 27: Aniticipated Impact from AIC
Indicator Number of entrepreneurs assisted through awareness and pre-incubation Number of companies supported in intensive incubation (3% of the above) Increased revenue of companies supported Increased taxes paid Direct jobs created Indirect jobs created Number of small farmers benefiting (assuming 20 per enterprise) 10.1 Outcomes
Measurement 3,300 100 $27 million $2.5 million 3,024 8,629 2,000
Over 10 years, the AIC will reach 3,300 entrepreneurs through workshops and other general activities, out of which 100 enterprises will directly benefit from the intensive services offered by the AIC. During a five-year period, 50 enterprises will benefit directly from the intensive services. These entrepreneurs will increase sales, productivity, and profitability by cutting waste, implementing quality controls, improving financial margins and marketing, and maximizing processing times. Working with the various institutional partners, innovations will be made to adopt new processing equipment that suits the needs of entrepreneurs. The AIC will promote the success of its clients broadly so they can generate a catalytic effect, serving as role models for others to emulate. Innovations will also be made with regards to product development, marketing the distribution models used by the entrepreneurs involved. During infoDevs interactions with them, most companies agreed that while production and efficiency were major issues, so too were market development and distribution models, which were often inadequate for the entrepreneurs to effectively service their customer base. From small-scale, localized distribution to partnering with large national and international distribution firms, the innovations put forth in this area will have a tremendous impact on the entrepreneurs and their ability to increase local, domestic, and international markets. Finally, the public-private partnership model proposed will contribute to increased dialogue and concrete common initiatives to further the overall agribusiness sector in Nepal.
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10.2 Social and Economic Impact The social impact of AIC interventions will be across the agribusiness sector, including to farmers, ancillary, and supportive services. The impacts will be felt with women, youth, and the unemployed or underemployed. Technical skills will make managerial staff more marketable. In addition, improved quality control, product development, and marketing will open new reliable markets to farmers and suppliers. Employment creation is the most direct and easily recognized impact. With the growth forecasts listed above, companies within the AIC program are expected to double within the first three years of participation. The tables in Annex 8 and 10 show the potential direct impact in terms of job, enterprise, and wealth creation. Over a ten-year period, the AIC will directly support 100 sustainable growth-oriented enterprises. These enterprises are expected to generate an additional $27 million in turnover and create 11,673 jobs over this period. In the first five years, 50 enterprises will be supported, generating an expected additional $12 million in turnover and creating 5,188 jobs. By more than doubling the output of SME producers, their input purchases should double as well, thus having a significant impact on farmers incomes. Assuming each of the 100 clients involves an average of 20 small holder farmers in their supply chains, which may be overly conservative, then 2,000 small holder farmers will benefit. An additional increase in the demand for ancillary products and supportive services is also expected. These products and services include the following: glass, plastic and cardboard packaging; graphic design services; printing; transportation services; animal health services; and laboratory analysis. An increase in demand for these products and services will directly impact the unemployment and underemployment of personnel in each sector. Government taxation gains are another critical area of economic impact. It is estimated that tax revenue would increase government revenue by approximately $2.5 million in the first 10 years and $1.1 million in the first five years. If one includes the tax revenues created from other enterprises that take up the technology and marketing innovations demonstrated by the AIC, the impact on tax revenues will be even greater.
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10.3 Monitoring and Evaluation The AIC will develop a comprehensive monitoring and evaluation framework, with infoDev assistance and in line with the PACT project. It will track enterprise creation and growth (including investment, employment, gender, and growth rates) and capacity building and ecosystem impacts. In developing indicators, the following standard indicators will be incorporated to track client performance over time: Turnover per year Export revenues per year Investment per year Direct and indirect jobs created Company value
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11 Conclusions
The tremendous diversity of ecological zones in Nepal, from the plains to the mountains, enables production of a wide variety of crops. Competitive market opportunities exist for Nepali agricultural products: 11 key value chains (or value chain groupings) were identified as having good potential for growth at this time: tea, coffee, honey, ginger, large cardamom, lentil, potato, milk and dairy, meat, fish, and NTFP, including essential oils. However, significant challenges remain. Most existing entrepreneurs will experience the challenge of developing domestic and international markets and reaching growing consumer markets, not only in Nepal, but also large adjacent markets in India and China. Many donors and government agencies are now working to overcome value chain bottlenecks. The timing may be opportune to complement this work by addressing the business-level impediments faced by agro-processors. The AIC seeks to contribute toward the advancement of a competitive and sustainable agribusiness sector in Nepal. It will provide high-growth potential small enterprises with a holistic service offering, seeking to enable product, process, and business model innovation, thereby accelerating their growth and job creation. The AIC willin partnership with relevant stakeholdersprovide entrepreneurs with a comprehensive service offering that will facilitate the access of Nepali agribusiness SMEs to markets, advice, finance, and facilities. The AIC is designed to become 100 percent financially sustainable after four years which is defined as covering the ongoing operating expenses of the AIC, including depreciation, through earned revenues. A flexible revenue model is proposed in which sustainability may be enhanced once various revenue options are tested. An initial investment of $4 million will be needed as start-up capital in order to achieve this objective. After the initial ramp-up period, costs are in the order of $970,000 per year to implement the AIC. The stakeholder engagement process has already built a strong coalition of partners, led by PACT the main sponsor of the AIC, and has identified a pipeline of potential incubatees that will allow the AIC to hit the ground running and produce tangible impacts over the first six years. Pending the success and outcomes of the AICs programs, its direction, scope, and scale (and business plan) will evolve over time with guidance from a strong management team, board, and Strategic Advisory Committee. Agribusiness-led growth has great potential to contribute to sustained economic development by enabling the development of sustainable, innovative SMEs. The complementarities with donors and the governments existing programs are significant. The suggested business model is ideal to develop a leading and world-class business incubation program from which lessons learned can be applied globally. 110
12 Annexes
Annex 1: Stakeholder Support InfoDev would like to acknowledge the following stakeholders for their, guidance, support, and input throughout the conceptualization and development of this assessment of Agribusiness Innovation Center in Nepal.
Table 28: Stake Holders Consulted
SN
Name
Designation
Organization
Government 1 2 3 4 5 6 Mr. Jai Mukunda Khanal Mr. Kirshna Gyawali Dr. Ganesh Raj Joshi Ms. Jiwan Prabha Lama Mr. Purna Chandra Wasti Mr. Nawaraj Dahal Secretary Secretary Secretary Director General Sr. Food Research Officer Chief MOAD MOI MOAD (former) DFTQC DFTQC DFTQC Training and Pilot Plant Section 7 8 9 10 11 12 13 14 15 Mr. Bagendra S. Poudyal Mr. Narendra Baral Mr. Udaya Kumar Gupta Ms. Raksha Aryal Mr. Yogendra K. Karki Dr. Birendra B. Basnyat Mr. Ram Pd. Tulami Mr. Laxman Bhattarai Dr. Punaya P. Regmi Director General Deputy Director General Member Secretary Enterprise Development Officer Project Director TSG/M&E Expert Joint Secretary Joint Secretary Vice Chairman DCSI DCSI, Government of Nepal Business Incubation Program Business Incubation Program PACT PACT Chief Planning, MOAD MOI Youth & Small Business SelfEmployment Fund MOAD
16
Mr. Kalas R. Chaudhary
Sr. Agro-economist
111
SN 17 18 19
Name Dr. Hari P. S. Neupane Dr. Basant Thapa Ms. Raksha Aryal
Designation Sr. Agro-economist Deputy Team Leader Enterprise Dev. Officer
Organization CADP CADP BIP-DCSI
Research Institute and Academia 20 21 22 23 24 Dr. Dil Bahadur Gurung Mr. Ram Babu Paneru Dr. Hira Kaji Maharjan Prof. Panna Thapa Dr. Bhola Thapa Executive Director Sr. Scientist Director Dean, School of Science Dean, School of Engineering NARC NARC NARC Kathmandu University Kathmandu University
Private Sector 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Mr. Suraj Vaidya Mr. Suresh Pradhan Ms. Anjana Tarmakar Mr. Satya N. Prajapati Mr. Hem Kumar Rai Mr. Pradip Maharjan Mr. Ashok K. Murarka Mr. Badri Narayan Chaudhari Dr. Jyoti Tandukar Mr. Ajay B. Pradhananga Mr. Dileep Agrawal Mr. Vidan Rana Mr. Abhinab Basnyat Mr. Satish C. Shrestha Mr. Min Bahadur Gurung President President Vice President Treasurer Executive Director CEO, AEC Chairman General Manager President President / Managing Director Director Founding Partner Founding Partner Managing Director Owner FNCCI FNCSI FNCSI FNCSI FNCSI AEC/ FNCCI CAA CAA ITPF NYEF / Fleur Himalaya Ltd. Fortune Cookie Ventures Biruwa Ventures Pvt. Ltd. Biruwa Ventures Pvt. Ltd. Shreenagar Agro Farm Bhatbhateni Supermarket
112
SN 40
Name Mr. Dev Bahadur Gurung
Designation Executive Director Owner
Organization Gandaki International Pvt. Ltd. (GIPL) Gandaki Bee Concern
41 42 43
Mr. Leendert Van Den Bosch Mr. Prakesh Adhikari Mr. Sanam Chitkar
Senior Expert Owner Owner
Netherlands Expert for GIPL Mt. Everest Honey Concern N Agro Pvt. Ltd. (Client-Biruwa Ventures) Beed Management Beed Management Young Innovation Pvt. Ltd. (YIPL) Start-up Agribusiness from Dhading NEHHPA Buttabari Tea Pvt. Ltd. Jyoti Group NIMBUS Group Aqua Feed Industry Fish Feed Industry Pvt. Ltd Mulchowk Restaurant South Asian Watch on Trade Economics and Environment Trade and Export Promotion Center
44 45 46 47 48 49 50 51 52 53 54 55
Mr. Sujeev Shakya Mr. Suman Rayamajhi Mr. Bibhushan Bist Mr. Keshab Raj Sharma Mr. Govind Ghimire Mr. Prakash Giri Mr. Saurabh Jyoti Mr. Anand Bagaria Mr. Peter Thomson Mr. Bijay Shrestha Mr. Surendra Shrestha Mr. Niraj Shrestha
Chairperson CEO Executive Director Entrepreneur President Director Director Executive Director Director Managing Director Owner Senior Program Officer
56
Mr. Suyash Khanal
Director
57
Mr. Bimal Nepal
Director
Trade and Export Promotion Center
58
Mr. Basanta Raj Chitrakar
Chief Agro Extension Program
Herbs Production and Processing Co. Ltd
113
SN 59
Name Mr. Tej Thapa
Designation Agriculture Program Manager
Organization Mercy Corps
60
Mr. Pankaj Das
Program Officer
Herbs and NTFP Coordination Committee The Netherlands Development Organization Mercy Corps
61
Mr. Sanjib Chaudhary
Communication Officer
62
Mr. Pratap Rai
Senior Monitoring and Reporting Officer
63
Mr. Udaya Raj Chapagain
President
Himalayan Orthodox Tea Cooperative Himalayan Orthodox Tea Producers Association Floriculture Association of Nepal
64
Mr. John Taylor
Marketing Manager
65
Mr J.B. Tamang (Via telephone)
Program Coordinator
66
Mr. Binod Acharya
Coffee Development Officer
National Tea Coffee Development Board Nepal
Development Projects/Organizations 67 68 69 70 71 72 73 Mr. Ramu Subedi Ms. Stuty Maskey Dr. David Molden Ms. Anja M. Rasmussen Dr. Eklabya Sharma Dr. Dyutiman Choudary Dr. Dhrupad Choudary Team Leader Private Sector Promotion Officer Director General Program Manager Director Market & Enterprise Dev. Specialist Program Manager MSFP MSFP ICIMOD ICIMOD ICIMOD ICIMOD ICIMOD
114
SN 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
Name Ms. Nayna Shakya Mr. Samden Lama Sherpa Dr. Luke Colavito Mr. Binod K. Mishra Dr. Laxman Pun Ms. Maushami Shrestha Dr. Vasant Bikram Thapa Dr. Hari Neupane Dr. Dev Bhkta Shakya Mr. Kari Leppanen Mr. Nabin Dahal Ms. Anita Mahat Dr. Gyatri Acharya Dr. Purna B. Chhetry Mr. Arsalan Alfred M Ni
Designation PPP and External Relations Officer Knowledge Park Manager Country Director Program Director National Program Manager Country Manager Deputy Team Leader Senior Agri Economist Agribusiness Expert Deputy Chief Private Sector Development Advisor Private Sector Development Advisor TTL, PACT Rural Development Specialist Regional SME Ventures Coordinator
Organization ICIMOD ICIMOD IDE Nepal IDE Nepal MEDEP Practical Action Consulting CADP CADP USAID/NEAT Finland Embassy DFID USAID World Bank, Nepal The World Bank, Nepal IFC, Advisory Services in South Asia, Bangladesh IFC, The World Bank, Nepal IFC, The World Bank, Nepal
89 90
Mr. Deep Karki Ms. Anupa A Pant
Coordinator, SME Venture Fund Operations Analyst, SEDF Advisory Services in South Asia
115
Annex 2: Conclusions of InfoDev Global Good Practices Assessment on Agribusiness Incubation In 2011, infoDev conducted a study of 10 agribusiness incubation programs located in eight countries. The full study can be found at http://www.infodev.org/en/Article.800.html. which includes video documentaries of incubation programs in the mountainside of Java, Indonesia, and rural South Africa, as well as rural areas of Brazil, Chile, and Mexico. Examples of the results generated by these programs include the following: Fundacin Chile has spearheaded the development of the salmon industry, which in a span of just slightly more than 10 years has been able to grow by a factor of 1,000 and contributed to $2.2 billion exports and more than 35,000 jobs. The efforts of Technoserve in Mozambique and Fundacin Jalisco in Mexico have led to the upgrading of entire subsectors, such as poultry, cashew nuts, and blueberries. CENTEV-UFV in Brazil has developed a new model for commercialization of agricultural research in Brazil. It has cultivated such successes as a biotechnology business specializing in a fungus that protects plants from parasitic nematodes, a product that could help reduce the yearly $100 billion losses in world agriculture. Timbali Industrial Incubator in South Africa has transformed the life of poor women into assertive entrepreneurs in the highly competitive flower business. ABI-ICRISAT in India has supported the growth of successful biotech companies. IAA-IPB in Indonesia has promoted the growth of zero-stage enterprises owned by women into successful, competitive, and growing medium enterprises.
The table below provides a snapshot of the quantifiable outputs of these incubators vis-vis the public investment in them. The age of the incubators and the vastly different scale of investments must be taken into account when reviewing these results. It should be noted that the ROI calculation does not take into account backward linkages that is, while the calculations would include a processor who increased his/her sales by x, the increased income of the farmer who was able to sell more produce to the processor has not been taken into account. It also does not take into account the impact on copycats, which adopted the production practices that were demonstrated and started or scaled their own businesses. Nevertheless, the calculations provide some indication of what results are achievable.
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Table 29: Studied Agribusiness Incubators Quantifiable Outputs
Incubator
Graduates
Average Sales of Enterprises ($ million) 5
Nr. of Years the Incubator Has Operated 30
Initial Investment in Incubator ($ million) 50
Total Sales of Graduated Enterprises ($ million) 425
ROI Enterprise Sales/ Initial Investment in Incubator 2.3
Fundacin Chile CENTEV Fundacin Jalisco IAA-IPB Timbali
85
24 4
2.5 1.25
16 5
0.7 4
60 5
60.4 1.2
38 140
0.21 0.03
16 8
0.3 2.8
7.98 4.2
18.7 1.3
Not all the programs reviewed have been equally successful. In one case, an incubator focused on commercialization of domestic R&D had not yet achieved successful market entry. The review of the 10 programs, therefore, provided powerful insights into models that can be adopted, as well as factors that are critical to success. It became evident that many viable models exist for agribusiness incubation. Selection of a model depends on the stakeholders core objectives, combined with the unique characteristics of the local business environment and the amount and nature of the funding available to initiate the incubation activity. A commonality of the case studies assessed in this report was that most were structured as public-private partnerships. Beyond that, there were significant differences. The report identifies three types of agribusiness incubators: (i) agribusiness sector/value chain incubators; (ii) agricultural research commercialization incubators; and (iii) technology transfer incubators. Within each type, there are significant differences in terms of public-private partnerships, affiliations, target clients, business models, and organizational design.
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Based on the literature review and the case studies conducted, it appears that the success of agribusiness incubators in creating sustainable and competitive enterprises relies upon six factors. These factors include the ability of the business incubator to effectively do the following: 1. Help the entrepreneur manage the risks associated with an agribusiness enterprise through a combination of technology, institutional, and networking strategies. 2. Understand the value chain affecting the success of the enterprise and assisting the enterprise with positioning itself in the value chain by linking farmers and enterprises to meet the demand of consumers for stable, quality, and affordable products. 3. Identify and demonstrate innovative business propositions so as to catalyze broader sectoral take-up. 4. Adapt the focus and business model of the incubator, and strategically scaling it up in response to market opportunities and market failures. 5. Promote pro-active opportunities. business orientation that actively identifies market
6. Support incubation design basics: leadership with a business mindset and excellent agricultural market knowledge (preferably with agribusiness experience), a lean staff complemented by strong partnerships, an institutional framework that provides sufficient flexibility allowing for learning by doing, strong capital structure, and dense networks including effective linkages with sector leaders.
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Annex 3: Nepalese Agribusiness Donor Mapping As the following table shows, many donors have been addressing agriculture and agribusiness value chain impediments in Nepal by supporting various projects.
Table 30: Nepalese Donor Mapping
SN 1
Projects / INGOs MEDEP
Donors AusAid, UNDP, CIDA
Commodities NTFP (Bamboo basket and furniture, tapari, allo rope, and twine and pine charcoal) Ginger, tea, cardamom, banana, mango, orange, potato, vegetables (tomato, onion and cabbage) Seeds, vegetables, coffee, ginger, potato, floriculture, honey, mushroom, oilseed (mustard and ground nuts), fruits (citrus, banana, papaya, and mango), lentil, herbs, fish, feed, milk processing, dairy processing, poultry) Maize
CADP
ADB
PACT
The World Bank
5 6 7 8
Hill Maize Research Program (HMRP) CYMMIT HIMALI HVAP /SNV WUPAP GIZ Include
IFAD
ADB IFAD AusAid, CIDA, UNDP BMZ, German Government
Livestock Vegetables, fruits, NTFPs, medicinal and aromatic plants, and livestock Livestock, forestry, off-season vegetables and crops Honey, milk, fruit and vegetables (through riverbed farming), and medicinal and aromatic plants (including ginger) Lentils, vegetables, ginger, and orthodox tea Dairy, vegetables High-value vegetable production (including crops or NTFPs, such as chamomile and lemon grass), fisheries, and goat rearing NTFP, honey bee, medicinal and aromatic plant (MAP) Ginger, cardamom, potato
9 10 11
NEAT Activity MASF / IDE Nepal / Practical Action EIG
USAID DFID, USAID USAID
12 13
ICIMOD CADP, Mercy Corps
IFAD, USAID, CIDA, AusAid, UNDP USAID, ADB
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Annex 4: Nepalese Agri-based and Food Industry Information Part I: Nepal Food Processing Industry Data: DFTQC, Government of Nepal
Table 31: Categorized List of Licensed Food and Beverage Industries in Nepal until FY 2012/2013
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Product
Rice, Flour & Pulse Processing (Mills) Spice Processed / Mineral Water Fat and Oil Fruit and Vegetable Processing Bakery Snacks Dairy Tea and Coffee Confectionery Noodle Biscuit Sugar Honey Health Food Meat Processing and Handling
Number of Industries 238 229 217 202 178 172 146 133 100 65 38 17 14 12 7 6
Remarks
Some biscuit industries are included
30+ industries should be in operation
Chura (bitten rice) 1 Ice and Ice Cream 1 Maize Grit 1 Soya products (grit, nugget, and 3 others) 21 Miscellaneous Products and Others 97 Total 1877 Note: Industry scale as large, medium, small, and cottage are not classified in most of the available record.
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Breakdown of licensed food and beverage industries by various DFTQC offices in Nepal.
Table 32: Licensed by DFTQC Central Office
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Product Snacks Dairy Bakery Fats and Oils Spice Fruit and Vegetable Processing Noodle Flour Tea and Coffee Bottled / Processed / Mineral Water Meat Biscuit Honey Confectionery Beverage Sugar Miscellaneous
Total Number 104 49 124 91 97 137 59 35 75 158 4 8 9 26 2 1 11
Notes: 1) Information on industry category by scale of investment is not available. 2) All large-scale industries and industries of Bagmati zone obtain license from DFTQC Central Office. 3) Fruit and vegetable processing total 137 includes candy 47, juice 11, Jam 6, pickle 62, and sauce 11. Table 33: Food Industries Registered at DFTQC, Kathmandu by Fiscal Year S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13
Food Industry Category

Snack Food Diary Bakery Edible Oil Spice (Masala) Candy (Paau) Noodles Flour Tea / Coffee Bottled Water Meat Pickle (Achar) Jam
Food Industries Registered at DFTQC, Kathmandu by Fiscal Year

2012 /13 2011 /12 2010 /11 2009 /10 2008 /09 2007 /08 2006 /07 2005 /06 2004 /05 2003 /04 2002 /03 2001 /02 2000/ 01
Total 104 49 124 91 97 46 59 35 75 158 4 63 6
10 9 27 2 13 6 7 4 5 46 0 13 0
5 2 5 1 6 0 0 5 3 21 0 4 0
4 10 6 6 6 3 7 3 5 19 0 1 0
10 2 5 2 4 4 4 0 3 17 1 5 0
4 3 2 3 5 6 6 0 4 10 0 6 0
13 6 6 9 4 3 7 2 7 8 0 4 0
8 4 22 24 11 1 6 2 9 8 1 4 0
11 2 8 9 2 8 6 0 1 3 0 5 1
14 2 15 18 18 12 5 7 8 15 0 8 1
8 0 6 6 5 0 1 7 1 4 0 8 0
5 1 10 1 11 0 2 0 11 4 1 3 1
6 4 4 4 4 3 4 3 10 1 0 1 0
7 4 8 6 8 0 4 2 8 2 1 1 3
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S. No. 14 15 16 17 18 19 20 21 22
Food Industry Category

Juice Biscuits Honey Confectionery Salt Beverage Sauce Sugar Others Total Food Industry
Food Industries Registered at DFTQC, Kathmandu by Fiscal Year

2012 /13 2011 /12 2010 /11 2009 /10 2008 /09 2007 /08 2006 /07 2005 /06 2004 /05 2003 /04 2002 /03 2001 /02 2000/ 01
Total 11 8 9 26 1 2 11 1 12 993
2 0 1 8 0 0 0 0 1 154
1 1 0 1 0 0 2 0 0 57
3 2 0 1 0 0 0 0 1 77
2 0 0 2 0 0 1 0 3 65
0 1 1 2 0 0 1 0 2 56
1 0 0 2 0 1 1 0 1 75
1 1 0 0 0 0 2 0 2 106
0 0 0 0 0 0 1 0 0 57
0 0 4 4 0 1 3 0 2 137
0 0 2 3 1 0 0 0 0 52
1 2 1 0 0 0 0 0 0 54
0 0 0 1 0 0 0 0 0 45
0 1 0 2 0 0 0 1 0 58
Table 34: Food Industries Licensed by DFTQC Biratnagar Regional Office (Eastern Nepal)
S. No. 1 2 3 4 5 6 7 8 9 10 11 13 14 15 16 17 18 19 20 21 22
Product Ice Meat Biscuit Snacks Confectionery Rice Mill Flour Mill Fats and Oils Rice and Oil Mill Fruit and Vegetable Noodle Dairy Tea Spice Health Food Bakery Biscuit Bottled Processed / Mineral water Weaning Food Unidentified Ghee and oil
Large Scale 0 0 0 1 0 0 0 2 0 0 0 1 1 0 0 0 0 0
Medium Scale 0 0 0 0 1 1 0 3 0 0 1 1 2 0 2 0 0 0
Small Scale 1 1 2 2 5 6 3 6 1 6 11 8 9 9 5 6 3 14
Cottage Scale 0 0 0 1 3 0 0 0 1 5 6 0 1 7 0 11 0 0
Total 1 1 2 4 9 7 3 11 2 11 18 10 13 16 7 17 3 14 1 31 2
0 1 0 0 0 1 25 5 Scale Unidentified Ghee 1, Other-1
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Table 35: Food Industries Licensed by DFTQC Hetauda Regional Office (Central Region of Nepal)
S. No. 1 2 3 4 5 6 7 8 9 10 11
Product Milk and Milk Product Fats and Oil Industries Fruits and Vegetable Spices Industries Tea Packing Industries Salt Industries Cereal, Pulses, and their Products Processed Drinking Water Industries Sweets (sugar and sugary products) Confectionery Industries Other Industries
Total 40 64 23 81 10 0 146 22 13 18 41
Note: Information on scale of individual industries is not available.

Table 36: Licensed by DFTQC Bhairhawa Regional Office (Western Nepal)
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 13 14 15 16
Product Confectionery Rice Mill Flour Mill Fats and Oils Snacks Noodle Spice Bakery Dairy Processed Water Biscuit Honey Fruit and Vegetable Cornflake Tea Maize Grit Soya Grit Meat Others Product Type Not Identified Industry Scale Not Identified
Large Scale 1 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Medium Scale 0 0 1 0 1 0 0 0 1 0 2 0 0 0 0 0 0 0 0 0
Small Scale 8 4 6 10 16 6 9 7 4 17 4 1 3 1 1 1 1 1 3 3
Cottage Scale
Total 9 4 7 11 20 8 11 10 5 17 6 1 4 1 1 1 1 1 3 3 3
3 1 2 3 0 0 0 0 1 0 0 0 0 0 0 0
Oil-1,Weaning Food-1, Instant Noodle-1
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Table 37: Licensed by DFTQC Nepalganj Regional Office (Midwestern Region, Nepal)
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Product Bakery Spice Dairy Rice Oil Noodle Confectionery Snacks Fruit and Vegetable Processed Water Honey Pulse Ice and Ice Cream Chiura (bitten rice) Flour Unidentified Puffed Rice Popcorn Soya Nugget Maseura (Vegetable Nugget)
Small Scale 6 2 12 27 18 3 3 5 0 4 0 4 0 1 1 1 0 2 1
Cottage Scale 15 21 17 8 7 6 0 6 4 2 2 0 5 0 1 0 1 0 0
Total 21 23 29 35 25 9 3 11 4 6 2 4 5 1 2 32 1 1 2 1
Table 38: Licensed by DFTQC Dhangadi Regional Office (Far Western Nepal)
S. No. 1 2 3
Product Noodle Snacks Fruit and Vegetable Processing
Cottage 1 1 1
Total 1 1 1
Table 39: Alcoholic Beverage Industry in Different Parts of Nepal (As of 2012/13)
Product Liquor and Distilled Spirit Beer Wine Total
Number 52 4 6 62
Remarks Mostly medium and large industries Beer industries are mostly large, located in central and western region Cottage and small industries
Note: Information on alcoholic beverage industry obtained by DFTQC from Inland Revenue Department, Government of Nepal Large scale10 and medium scale31 Industries, the rest are small and cottage scale.
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Part II: Department of Industry (DOI, Government of Nepal) Registered Agro-based Industries
Table 40: Agro-based Industries with more than NPR 30 Million Fixed Capital Investment
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Agriculture & Agro based Industry Category General Agro Business / Industry Herbal Medicine / Herbs Processing Ginger Processing Tissue Culture Livestock, Fish and Poultry (Bird) Silk / Rabbit (yarn and fabric) Floriculture Tree Plantation Sugarcane farming Seed Cardamom Vegetable and Fruit Bamboo Fertilizer / Bio-fertilizer Coffee and Tea Cold Storage Cotton Diary Essential Oil Animal feed Fruit processing Honey Meat processing Mushroom processing Oil & Vegetable Ghee Cereals & Pulse Saw Mill / Wood Processing Starch Total
No. of Industries Remarks 5 15 Ayurbedic medicine 1 1 19 2 3 4 1 2 1 34 Including drying and processing 1 3 74 3 1 15 4 2 6 1 1 3 7 3 1 1 214
Source: Department of Industry, January 2013 (Categorized from long list of industries). Note: 1) As per Industrial Enterprise Act, 1992, industries with fixed capital investment NPR 30 million or above are medium-scale or above scale of industries. 2) According to the list received from DOI, eight industries were fixed capital of less that NPR 30 million; however, they were in the list of above 30 million capital investment agro-based industries.
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Annex 5: Institutional Arrangement of Business Incubators in NepalOperating, Closed, and Planned

Business Incubators Institutional Arrangement
PPP Board, Chaired by DG DCSI Board of Directors represented by FNCCI, NAST, Professional Societies, MOST Outsourced management, but intermittent Private initiatives started from early 2011 Supported by networks of E4Nepal, Sambridhi, The Prosperity Foundation, Change Fusion Nepal Private initiatives started from early 2007 Promoted by six leading IT companies Focused on technology startups Private initiatives started in 2003
Status / Lesson Learned

Operating on governments budget Infrastructure provided by government Lacking in image building Weak networking Caught-up by government bureaucracy Not happening as expected Where to focus? Business incubation or venture investment Small scale Lack of infrastructure and budget Very committed, results yet to be seen Interest in venture investment in startups Conflicting objective, business incubation, or venture investment? Dormant but still interested to join consortium of Incubator Operating Institution Too early, very new to Nepal Lack of ecosystem and critical mass Some companies grew but NOT the Business Incubation Company Out of Business Looking for funding for implementation Perceived to start with ICT with provision of extension to agribusiness and NTFP sector Accepted by wider stakeholders 2011
Fortune Cookie Ventures
Lotus Business Incubator Autonomous nonprofit sharing company Consortium of likeminded institutions Board is also represented by members from feeder channels Without direct control of government and business associations Public-private partnership model Led by entrepreneurs Participated by public institutions sharing infrastructure and cost until it becomes selfsustained
infoDev 2011 Feasibility StudyICT focused with a satellite of agribusiness
Agribusiness Innovation Center (AIC)
Accepted by PACT and key stakeholdersNovember 2012
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Annex 6: Value Chain Maps Tea Value Chain Map
Actors/ Enablers
Processes
Retailers At Kolkatta Inorganic About NRs 300/ Kg Organic- NRs 500/Kg
Retailers
Around 90 % of total production
International Buyers Marketing and Sales
International Exporters MoAD, MoICS and MoLD, NTCDB
Himcoop Members: 19
Local Wholesalers
Wholesale price Inorganic- NRs 220/ Kg Organic- NRs 390/Kg AEC/ FNCCI, HOTPA, HIMCOOP, SNV, TCF Medium and Large processors Average price Organic NRs-52-53 Kg Non Organic- Max NRs 28 Small Tea Processers
NRs 3-5/Kg Commission
Traders
Production and Processing
Average Farm level price Inorganic NRs 18/ Kg Organic- NRs- 28/ Kg
Farmers
NTCDB Offices, Farmers and Farmers cooperatives
DADO, SNV, SEAM-N, DDCs
Saplings
Adro-Vet Services
Input Supply
Figure 11: Tea Value Chain
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Coffee Value Chain Map
Processes
Enablers / Actors
Retailers
Retailers
Export and Sales
International Wholesalers Roasted Beans 15-20% expensive compared to Green beans International Wholesalers /Processors
Local Wolesalers
Total Export: 279762 kg About 60% of the green beans are exported No of Registered Processors: 14 Processors and Exporters
Roasters
Green Beans: 800-900/Kg
CTDS NTCBD WINROCK HELVETAS AEC
Production process
IDE Agents Parchment -Rs 175/Kg Pulping Centers Organic Certifying Organizations
Fresh Cherry -Rs 35/Kg
Farmers
WINROCK HELTEVAS
Rs 10 Per Sapling Rs 5 (subsidized)
NARC MOAD/DADO Organic Certifying Organizations
Input
Saplings Providers
Figure 12: Coffee Value Chain
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Honey Value Chain Map
End Consumers
End Consumers
Consumer price in Kathmandu is 250/kg Through own channel
International Wholesalers/ Traders

Financial Institutions
Ayurvedic Companies
Departmental Stores
Bakeries/ Resturants
Identified no of processor: 8
MoAD, DoA District Agriculture Offices Honey Promotion Center Bee Keeper's Associations/ cooperatives
Processors/ Traders
Beekeeping Group/ Association/ cooperative
Intermediaries
Farmers getting NRs 95/Kg Bee Keepers
MEDEP/UNDP API Net
Input Suppliers
Figure 13: Honey Value Chain
Note: Calculation partly based upon Value Chain Analysis of Honey (GIZ 2007).
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Ginger Value Chain Map
Consumers
Consumers
Retailer
Retailer
Indian Wholesaler Transportation Service Providers, Financial institutions
Local /Regional Wholesaler <20% of production
Around 75-80%
Indian Commission Agents
43 entrepreneurs (Including Producers exporters and processors)
Road Head traders/ Vendors
Big Traders
Local Collector
Ginger and Cardamom Development Section (DOA), DADO, CADP, Mercy Crops, PACT,
Producers
NGPTA
Fertilizers and pesticides
Figure 14: Ginger Value Chain
130
Cardamom Value Chain Map
Consumers
Consumers
consumers
Retail seller
Retail seller
Retail seller
Wholesaler
wholeasler
MoAD, MoICS and MoLD
Around 90 % from where 8-9% is directly to Pakistan, UAE, Afghanistan and other Gulf Countries
Indian Collector
Third Countrys Collector
Banking and financial institutions, Transportation Service Providers
Exporters SP- NRs 250/Kg
No of Processor: 4 as most part is exported in raw form Regional Traders/ Wholesalers SP- NRs 225/Kg
Village VendorsNRs 210/Kg
District Traders
NRs 195/Kg
Farmers
CFUs COP- NRs. 73.54 /Kg
Farmers Group, VDC , DDC, Cooperatives, DADO, PACT, Large Cardamom Entrepreneurs Association of Nepal, (LCEAN), SEAM-N, Mercy Crops , Local NGOs, NARC
Nurseries, Agro vet Services
Calculations partly based upon CADP value chain report. Figure 15: Cardamom Value Chain
131
Potato Value Chain Map
Consumers
Consumers
consumers
Retailers
Retail seller
Retail seller
Wholesaler
Regional/ National Wholesaler
DCCIs, , Financial Institution
Expoters
Processing Industries
Commission Agents
Banking and financial institutions, Transportation Service Providers
District Traders
Local Vendors
Farmers Group, , DDC, Cooperatives, DADO, PACT, CADP, NARC Potato Development Program, Potato Research Program, farmers group cooperatives, Mercy Crops
Farmers
Seed and Agro vet Service Providers
Figure 16: Potato Value Chain
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Milk and Diary Value Chain Map
Consumer
End Consumers
End Consumers
Consemers
Nepal Dairy Development Board
Sales Outlets
Tea Shop
Sweet Shop
Shops/ Outlets
Cheese Factories
Dairy Development Corporation
Indian Wholesaler / Dairy
Informal Trading
Private Dairy Plants
DDC Milk Plant
Cheese Factories
Nepal Dairy Association
Inconsistent and Exported only during the flush season/ milk holidays period
76 Dairy Plants
DFTQC Financial Institutions, Transport Service providers
DoC
Department of Livestock Service Milk Cooperatives Financial institutions
Contractor/ Middle men
Private Dairy MCCs
MPCs
DDC MCCs
Only around 10% of the supply passes through the formal channel
Farmers
Veterinary Service Providers
Animal Feed Providers
Figure 17: Milk and Diary Value Chain
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Meat Value Chain Map

International Wholesalers/ Processors Skin, Fiber and other Products Actors/ Enablers Household Consumers Institutional Consumers Processes
Wholesalers
Consumers
Meat Import
Processors/ Retailers (meat shops/fresh house, slaughter slabs) (Type I and II) Total Number 17
Processors
Financial Institutions, Transport Service Providers, DFTQC, Department of Livestock Services Entrepreneurs Associations
23- 40% Traders From India Via Collectors 23-72% Traders 40% of the district market
Production and Transporation District Market
Veterinary Service Providers, NGOs. Projects Multipurpose Cooperatives, District Livestock Services Office
5 -13% Farmers
Actors
AgroVet, Fodder, Forage, Seed Suppliers
Co-opeartives
Breed Providers
Input Supply
*The above map is partly extracted from Heifer 2012, FAO 2010, and DAI/Winrock/IDE 2008. Figure 18: Meat Value Chain
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Fish Value Chain Map
Actors/Enablers
Process
Own Village
Haat Bazaar
Nearby Market Center
National/ Regional markets
India
Consumption
Financial Institutions, Transportation Service Providers, Financial Institutions, Entrepreneurs Associations
Small holders Supply about 60%
Small holders Supply about 30%
8 % of the total Collections
80%
10%
2%
Marketing and Transportation
Traders
Import From India
NARC, DADO, Fish Development Centers, NGOs, Programs and Projects
Farmers, Natural Lake, Reservoir Contractors and Private Fish Hatcheries
Production
Input Providers
Agrovet and feed providers
Fish Development Centres
Input Supply
Partly based upon Lotus Intellect 2006. Figure 19: Fish Value Chain
135
NTFP and Essential Oil Value Chain Map

About 90 % of the NTFP collected are exported to India
End Users
Third Countries
India
Industrial Users
Retail seller
Commission Agents Agents
wholeasler
DoA DoF FNCCI /Nepal Chamber of Commerce Banking and financial institutions Transportation Service Providers
90% of the total collection Local traders Regional Traders Private Processing Industries Government Processing Industries
JABAN
ANSAB, 10 % of the total collection NTFP Network, Individual Collectors Local Collectors / CFUG Farmers
MEDEP
Processing Companies
Input Suppliers
Figure 20: NTFP and Essential Oil Value Chain
136
Floriculture Value Chain Map
Enablers
Processes
Gulf (Mainly Qatar) , European Countries
USA, Australia and Netherland
Export to Europe
End Users Institutional 60 and Individual 40%
FAN, FNCCI/ AEC, TEPC
Processors (Around 5) (Rose oil , Dry Rose etc)
Around 20%
Retailers Cut Flower Import Scenario 90% in Festivals and Big events, 10-20 % in normal days Mainly from India Less than 15% Cut Flower Exporters Wholesalers Number: around 5 (10% Service Charge) Selling Price 2-30 Rs Per Stick 150-1500 Rs Bunch 30% loss during post harvesting Cut Flower Farms FAN, Laxmi Bank, NEPSEMAC, HDD, DADO, FDC Price Rs 4506500 per 1000 Seeds Price Rs 2- 60 Per Bulb Input Suppliers Cut flower seeds, Plant Bulb, Fertilizers, Pesticides and Manure
Vendors
Marketing and Sales
Bulb and Plant Parts Exporters
About 80%
More than 85 %
Nurseries
Production
36 District 120 Hectare
About 95% of Cut flower Seed imported from European Countries (Roughly around 20-25 Million Rs Per year)
Plant Bulb imported from America and Netherlands (Roughly around 1 Billion Rs per year)
Input Supply
Figure 21: Floriculture Value Chain
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Annex 7: Phasing of Enterprise Support Different types of support will be required, depending on the stage and targets of the client enterprises. Below provides an overview of how support could be phased.
EXISTING MARKET NEW MARKET
PHASE 2: Support new market access
PHASE 3: Expand new product markets 1 1
PHASE 1: Strengthen product/market position
PHASE 2: Encourage new products
EXISTING PRODUCT
NEW PRODUCT
Figure 22: Phasing of Support to be Provided to AIC Cilents
Phase 1 Phase 1 support will strengthen current activities with existing products in present markets. Incremental improvements, both technical and managerial, will be the key focus in Phase 1. Improvements in procurement, processing technology, packaging, and sales approaches could reduce costs, improve quality, and expand existing markets and strengthen these enterprises for later phases. Phase 1 support is seen as a means to an end in preparing Level 2 enterprises for accelerated growth. Phase 2New Markets Phase 2 would use the advances made in better procurement, additional equipment availability, more hygienic and advanced processing, better quality packaging and branding, and improved managerial capability to access new markets.
138
Phase 2 may progress very fast for some enterprises, but the test of competitiveness (as a proxy for market acceptance of a good quality, available and well-priced product) will be measured by the consistency of demand over time. Hence, this phase may also run concurrently with Phase 1 in some enterprise contexts. Phase 2New Products Phase 2 will mark the product expansion phase and will signal a stable enterprise with adequate and constant income and with the resources and managerial skill to venture into new products. New products will require investment in product development, test marketing, packaging, and sales. This will be encouraged and supported in enterprises that have the capability. The AIC will facilitate access to packaging services both in Nepal and internationally, because of the following reasons: new product development and testing require a focus on both product and packaging; there is a definite lack of good packaging options; and consumer perception is a critical decider of purchase interest. Phase 2 activities may require a year of support to test reliability of test market outcomes. From a managerial and business expansion perspective, this represents adequate time for scale adjustment (for example, developing accounting or distribution changes that keep pace with growth). Phase 3 Phase 3 activities represent the pinnacle of new growth with new products expanding into new markets. While these can be export markets, national distribution of new products offers significant potential in Nepal in all the sectors under consideration by the AIC. Market expansion is a complex process, especially with new products as it taxes general management and finance, logistics, and marketing in particular. It can be a significant drain on resources and must be well managed. The AIC will offer support in collaboration with partners, such as export promotion agencies, financiers, and logistics linkages. Phase 3 will begin in the third year for most companies and will be supported for at least a year.
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Annex 8: AICs Prospective Clients The financial plan was built on an expected 30 companies supported per year (from year 3). Three levels of client are anticipated:
Table 41: Nepalese AIC Target Clients Categorization
Level
Business Category by Size
Current *Average AIC Support Turnover Range $0 to $ 3,000 per year Pre-incubation
New start and very small micro businesses
Small and businesses
medium
Up to$ 0.5 million per year for small and $ 0.5 to $ 1.5 million per year for medium Above $1.5 million per year
Incubation
Large businesses
Incubation
* Turnover is calculated on the basis of the different level of business category as defined by Industrial Policy 2010. The levels may be segregated further as a part of the implementation, learning from selected clients. Initially to hone the model and drive for revenues, the AIC will focus on Level 2 and 3 clients. The deal flow of Level 2 and 3 enterprises is captured in the table below, which incorporates phases of support, three for level 2 clients and two for level 3 clients, which have been described further in Annex 6:
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Table 42: Deal Flow of AICs Enterprises
CLIENT LEVEL 2 2 2 3 3
CUMULATIVE CLIENTS Year Year Year Year Year Year Year Year Year Year PHASE 1 2 3 4 5 6 7 8 9 10 1 2 3 2 3
6 0 4
6 6 0 4 4
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
6 6 6 4 8
TOTAL NEW CUMULATIVE
10 10 10
20 10 20
30 10 30
30 10 40
30 10 50
30 10 60
30 10 70
30 10 80
30 10 90
30 10 100
Companies enter the AIC for an average of three years, noting that services will be tailored to the unique needs of each and every company with a case management approach. Inevitably some companies will grow and progress faster than others. On the assumption that Level 2 turnover increases by 1.5x in Phases 1 and 2 (combined); and 1.5x in Phase 3 and Level 3 turnover increases by 1.5x; the table below captures the combined turnover of the supported enterprises.
141

Table 43: Combined Turnover of AICs Client Enterprises
CLIENT LEVEL 2
PHASE 1 2 3 2 3 TOTAL
Year 1 1127880 0 0 2215200 0 3343080
Year 2 1127880 1466244 0 2215200 3338400 8147724
Year 3 1127880 1466244 1906117 2215200 6676800 13392241
COMBINED ENTERPRISE TURNOVER Year 4 Year 5 Year 6 Year 7 1127880 1127880 1127880 1127880 1466244 1466244 1466244 1466244 1906117 1906117 1906117 1906117 2215200 6676800 13392241 2215200 6676800 13392241 2215200 6676800 13392241 2215200 6676800 13392241
Year 8 1127880 1466244 1906117 2215200 6676800 13392241
Year 9 1127880 1466244 1906117 2215200 6676800 13392241
Year 10 1127880 1466244 1906117 2215200 6676800 13392241
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Clients will only agree to pay a royalty on their turnover, if the AIC confers tangible benefit in terms of profit to the entrepreneur, by way of increasing turnover and by improving gross profit margins and efficiency. This is depicted in a simple example below, with two scenarios. This calculator highlights the benefit of agreeing to pay a percent of turnover and demonstrates just how far the AIC can go with the percent before it turns negative for the entrepreneur. A percent royalty and with an increase in turnover means the entrepreneur pays a certain amount. Then with an assumed gross profit and overhead margin, one can see whether the entrepreneur gains or loses with the profit or loss they make. It appears gross profits are around 50 percent and overheads 18 percent, which are used as the basic assumptions. With Scenario 1, assuming a turnover of $100, a 30 percent growth in turnover increases the profit by $9.60, but incurs a royalty payment of $9.10 (at 7 percent of the increase in turnover) with a net gain to the entrepreneur of only $0.50. This may not be enough to secure entrepreneur engagement. Scenario 2 assumes the AIC will improve both the gross profit margin and the overhead percentage, resulting in a changed operating profit, because one assumes that not only will the AIC intervention increase turnover, but it will also help the entrepreneur compete on value and improve internal efficiencies. In this example, the net gain to the entrepreneur is $7.10. This demonstrates how the AIC can charge what may seem to be a high percent of operating profit without damaging the business.
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Annex 9: Setting a Royalty Fee
SETTING A ROYALTY FEE

Royalty Growth in turnover COS% of turnover Overhead % of turnover 7.00% 30.00% 50.00% 18.00%
SCENARIO 1. AN INCREASE IN TURNOVER WITH NO CHANGE IN GP or OP AS A % OF TURNOVER (i.e. increased turnover with no efficiency gain from intervention) BEFORE $ 100.00 50.00 50.00 18.00 32.00 32.00% 9.60 9.10 0.50 7.00% and growth of 30.00% confers additional income of $0.50 AFTER $ 130.00 65.00 65.00 23.40 41.60 32.00% 0.22 Royalty fee $ 9.10
Turnover Cost of Sales GP Overhead OP OP% of turnover Royalty % of OP Gain in OP ($) Payment ($) Nett gain ($)
Royalty of
SCENARIO 2. AN INCREASE IN TURNOVER WITH AN INCREASE IN GP and OP (i.e. some efficiency gain from intervention) BEFORE $ Turnover Cost of Sales GP Overhead OP OP% of turnover Royalty % of OP Gain in OP ($) Payment ($) Nett gain ($) 100.00 50.00 50.00 18.00 32.00 32.00% AFTER $ 130.00 58.50 71.50 23.30 48.20 37.08% 0.19 Royalty fee $ 9.10 COS decreased by 1.43 Overheads decreased by
10% 10%
due to intervention due to intervention
16.20 9.10 7.10 decline in overheads confers 10% additional
Royalty of
7.00% and growth of
30.00% with a
10% decrease in COS and
$7.10 profit
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Annex 10: Job and Tax Impacts

Assumptions Tax rate: Taxable income is OP which is Indirect job factor
IMPACT OF COMPANIES 5 YEAR CYCLE IMPACT CLIENT LEVEL 2 PHASE 1 2 3 2 3 Turnover Increase 1301400 1353456 1319619.6 2556000 5392800 11923276 OP Increase 482519 501820 489274 947686 1999484 4420784 Tax Increase 120630 125455 122319 236922 499871 1105196 440 1258 1698 Direct jobs Indirect jobs TOTAL Increased Jobs Per Company Total 5 3 3 4 3 150 72 54 80 84 Turnover Increase 2602800 3045276 3518985.6 5112000 13096800 27,375,861.60 10 YEAR IMPACT OP Increase 965038.2 1129095 1304732 1895372 4855890 Tax Increase 241260 282274 326183 473843 1213973 2537532 970 2774 3744 Direct jobs Indirect jobs TOTAL Increased Jobs Total 300 162 144 160 204
25% 37.08% 2.86 of turnover
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Annex 11: Profile of Key Partner Institutions Department of Food Technology and Quality Control Department of Food Technology and Quality Control (DFTQC) is under the Ministry of Agriculture Development (MOAD) of government of Nepal (GoN). It was established in 1961 as Department of Food and placed in Singh Durbar. Later in 1965 it was shifted to the present location of Barbarmahal, Kathmandu. In 1966, the Department of Food then was renamed as Food Research Laboratory. The laboratory later in 1980 was again converted to Central Food Research Laboratory (CFRL) and known by this name until it became Department of Food Technology and Quality Control (DFTQC) in 2000 under MOAD. From the beginning of its establishment, DFQC played a role in laying down the foundation for food quality control system, research, and development in the field of food science, technology, and nutrition support program. As mandated by government of Nepal, DFTQC is the apex organization responsible for the enforcement of Food Act and Regulations. It has been working for the implementation of the Feed Act and Regulations. Its main aim is to ensure and enhance the quality and safety of food and feed products in the country. The department has a paramount role in augmenting appropriate food processing and post-harvest techniques to promote agribusinesses. DFTQC, which has been entrusted as CODEX contact point for Nepal for more than three decades, has been given the role of National SPS Enquiry Point in 2004.
Nepal Agriculture Research Council Nepal Agriculture Research Council (NARC) was established in 1991 as an autonomous organization under "Nepal Agricultural Research Council Act - 1991" to conduct agricultural research in the country to uplift the economic level of the people. The objectives of NARC include the following:

To conduct qualitative studies and researches on different aspects of agriculture. To identify the existing problems in agriculture and find out the solution. To assist government in formulation of agricultural policies and strategies.
Functions and responsibilities of NARC are the following:

Conduct qualitative agricultural research required for national agricultural policies Prioritize studies and researches to be conducted Provide research and consultancy services to the clients Coordinate, monitor, and evaluate the agricultural research activities in Nepal Document the research activities 146
The following are sources of financial resources for NARC:

Grants from the government of Nepal Grants from national and international donor agencies and governments Funds obtained from research or consultancy services
NARCs Strategic Vision for Agricultural Research (201130) Creating a New Vision for Agricultural Research. NARCs vision is to tap institutional, human, and financial resources from the government and a wider spectrum of stakeholderscivil society, research centers, donors, and ultimately the private sector to move the system from agricultural research and development to agricultural research for development. NARC is also targeting the promotion of commercial agriculture by generating postharvest technologies that create value-added products from cereal crops, cash crops, vegetables and fruits, livestock, poultry and fisheries; and their downstream processing opportunities. By the same token, NARC is also giving attention to crops and horticulture, livestock and fisheries, natural resources management and climate change, biotechnology, outreach, technology, dissemination and extension, to the problems and needs of its client in the input industries and service providers such as, farm machinery, irrigation equipment, agro-chemicals, and animal feed. NARC is highly dependent on funds from the government. The government budget for NARC was NPR 326 million in 1997/98 and NPR 510 million in 2008/09, an increase of 56 percent, in absolute terms. However, in relative terms it declined as core inflation between those periods was about 100 percent. The share of NARC in national budget also decreased substantially. In 1997/98 NARCs share of the national and MOAD budget was 0.53 percent and 14.40 percent, respectively. However, it had declined to only 0.22 percent and 8.85 percent, respectively, in 2008/09 (Source NARC website). Because of declining budgets, staff and administrative costs are consuming an everincreasing proportion of the NARC budget. Allocation for operational costs remained between 22 to 34 percent of total budget and this ratio is declining over the years. Largest year-to-year fluctuation is observed in capital budget ranging from 2 to 30 percent. Within the operational budget, about 28 percent is allocated for crops, 14 percent for horticulture, 20 percent for livestock, 7 percent for fisheries, and 30 percent to multisector activities. Similarly, 5 percent of operational budget is allocated for the high-hills, 65 percent for mid-hills and 30 percent for the Terai (plain part of Nepal). Research projects are grouped into five areas: core research; technology development; policy and socioeconomic; environmental science; new frontier/ exploratory researchclimate change. The priorities of NARC research projects are guided by the overall goal of poverty alleviation through broad based, inclusive and sustainable agricultural growth.
147
The following are the priority issues: Major food crops, such as rice, maize, wheat, and potato Minor food crops, such as barley, buckwheat, millets, and amaranthus Potential commercial crops, such as apple, citrus, mango, banana, and vegetables Cash crops, such as large cardamom, ginger, turmeric, and other spices Industrial crops, such as tea, coffee, jute, sugarcane, cotton, sunflower, and jatropha (bio-fuel) Specialized commodities, such as sericulture, bee keeping, flower, mushroom, and wool animals High-value low volume commodities, such as saffron, yarshagumba, herbs, and nontimber forest products Fish, including cold water fish and warm water fish Dairy animals, such as buffalo, cattle, and yak Animals for meat production such as poultry, goats, sheep, buffalo and pigs Power use in agriculture and agro-industriesdraft animals, solar, biodiesel, and farm waste utilization
Commercial Agriculture Alliance (CAA), Biratnagar Commercial Agriculture Alliance (CAA) is a not-for-profit-sharing company established in September 2006, with its head office in Biratnagar, Morang, Nepal. It is responsible for implementation of "Commercial Agriculture Investment and Management," which is one of five output of Asian Development Banks (ADB) CADP Project. CAA is managing the Commercial Agriculture Fund (CAF), which is a cost-sharing grant facility. Total budget for CAA is $15 million, including $8 million for CAF. The CAF facility is available to CAA general members and the DDCs to strengthen market-chain activities and develop linkages within the market chain. Vision Reduce poverty in the rural communities of 11 Eastern Development Region (EDR) districts of Nepal, through equitable and sustainable commercialization of agriculture.
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Objective The commercial agricultural stakeholders must be engaged in agriculture-based production, processing, or trading within the program districts of the region covered by the company for at least two years with the motive of profit In the case of farmer cooperatives or groups:

To manage commercial agriculture fund and provide support to its members from the fund To promote commercial agriculture in Nepal by developing an alliance between the commercial agricultural stakeholders To manage the Commercial Agriculture Fund and provide support to its members from the fund. To educate its members and other agricultural stakeholders about the importance of market linkage on production, its sustainability, and multiplying capacity To conduct awareness program on intellectual property protection among the members and support its members for the protection of intellectual property right To enter into contract for value with any third party competent to enter into contract To establish branch office required for the fulfillment of the objectives of the company To engage in any other activities, which are ancillary to fulfill the abovementioned principal objectives
Output 1. Commercial agriculture investment and management 2. Inclusive development of stakeholders 3. Market information dissemination 4. Capacity enhancement of project partner
The National Agricultural Research and Development Fund NARDF was established by a Cabinet decision on December 10, 2001, under Section 3 of the Working Fund Act, 1986. The Fund is comprised of money received from the government's allocations and other sources approved by the Ministry of Finance. NARDF is governed by a seven person Fund Management Committee (FMC), chaired by the Secretary of the Ministry of Agricultural Development (MOAD). It is administered and operated by the NARDF Secretariat. The head of the Secretariat is the Member Secretary of the FMC. The Secretariat is supported by a Technical Subcommittee and a panel, or list of peer reviewers. Awards are in the form of grants to successful organizations or collaborative partnerships. 149
The Fund targets government, nongovernment, educational, private sector, civil society, co-operative, and community-based organizations (CBO) involved in agricultural research and development. It aims to encourage these organizations to compete for partial or complete funding for project activities, which are designed to promote the overall development of the agricultural sector. The governments budget for NARDF for FY 2010/11 was around $766,70055. The NARDF is an institution for implementing a competitive grant system in agricultural research and development. The main function and mandate of NARDF is to seek or demand proposals from governmental and nongovernmental organization, academic or educational institutions, private sector, civil society, and community based organizations who are interested in contributing to the agricultural research and development of Nepal. NARDF focuses on output-oriented work aiming to deliver measurable results within a maximum of three-year period in support of national objectives and priorities defined in government policy documents. Since its establishment in the year 2001, NARDF has so far provided financial support for the implementation of 162 research and development projects through various implementing organizations or development partners. Out of these, 105 projects have been completed so far under the first, second, third, fourth, fifth, and sixth calls. The remaining 57 projects are still ongoing. For the 9th Call 221, project concept notes have been received and are undergoing thorough selection procedures. From the fifth call onwards, NARDF has introduced the Small Grants and Thesis Grants Program under its funding umbrella, mainly targeting the grassroots-level local institutions and post-graduate level research students, respectively. The range of research grant is NPR 1 to 3 million (except small and thesis grants). Some priority research topics during the call for research proposal for the 2012/13 cycle included the following:56 Agrotourism Linking farmers to the market, including ICT Food safety and quality improvement system Agricultural /livestock market research impact study Production, processing, storage, and marketing of improved seeds Promotion of quality products for export Small agriculture / livestock business promotion Value addition technologies in fish and meat production Production, processing, and marketing of spice crops
International Centre for Integrated Mountain Development

Source: MOAD. 2011. Annual Progress Report. Source: http://www.nardf.org.np and NARDF. June 2012. Project Completion Report.
55
56
150
The International Centre for Integrated Mountain Development (ICIMOD) is a regional intergovernmental learning and knowledge sharing center serving the eight regional member countries of the Hindu Kush Himalayas: Afghanistan, Bangladesh, Bhutan, China, India, Myanmar, Nepal, and Pakistan. It is based in Kathmandu, Nepal. Globalization and climate change have an increasing influence on the stability of fragile mountain ecosystems and the livelihoods of mountain people. It aims to assist mountain people to understand these changes, adapt to them, and make the most of new opportunities, while addressing upstream-downstream issues. ICIMOD is supporting regional transboundary programs through partnering with regional institutions, facilitating the exchange of experience, and serving as a regional knowledge hub. It strengthens networking among regional and global centers of excellence. Overall, it is working to develop an economically and environmentally sound mountain ecosystem to improve the living standards of mountain populations and to sustain vital ecosystem services for the billions of people living downstream, now and for the future. ICIMOD Knowledge Park, Godavari: located on the southern slopes of the Kathmandu Valley in Nepal, was set up in March 1993 after the generous provision of 30 hectares of land by the government of Nepal. The site provides a practical venue for testing sustainable technologies and farming practices and demonstrating them to the regions peoplefarmers, researchers, students, development practitioners, and civic leadersso they can develop the means to adapt to the impacts of change. The knowledge park also serves as a repository for important biodiversity resources. Each year the knowledge park attracts over 5,000 visitors. At Godavari Knowledge Park activities are carried out in the following areas: agriculture, livestock, and aquaculture; income generation; biodiversity conservation; renewable energy technologies; water, vegetation, and soil management; training; and community outreach. In 2012, ICIMOD developed a plan to enhance the parks activities and facilities. ICIMOD considers private-sector partnerships as an important part of this strategy.
151
Annex 12: DFTQC Pilot Plant Renovation and Cost The cost is calculated based on the unit area rate: Area 493m2 The unit area refurbish / renovation cost = $250/m2 (NPR 2,000 / sq.ft.) o The rate is 50 percent of new construction cost
The unite rate is estimated to cover the following costs: Replacement of existing asbestos corrugated sheets by Corrugated Galvanized Iron (CGI) sheet, utilizing the existing trusses False ceiling Good wall, floor, ceiling finishes Good Manufacturing Practice (GMP) required interior finishes (floor with ceramic tiles, wall and ceiling with washable paints, doors and windows with dust proof shutters / replacement as needed) Normal electrification and water supply system
The cost does not include the following generic plant equipment: Heating, ventilating, and air conditioning (HVAC) system Dedicated Power Generating Set (GenSet) for the pilot plant High quantity water supply system (HQWSS) Transformer for high voltage electricity connection (three-phase 440V connection)
The estimated costs for generic plant equipment are the following: HVAC: GenSet: HQWSS: Transformer: NPR 700,000 NPR 1,800,000 NPR 1,000,000 NPR 500,000
Total: NPR 4,000,000 equivalent $46,512 (which is about $47,000) (1 USD = 86 NPR)
152
Annex 13: Preparedness to Pay for Services With infoDev funding, ITPF conducted a comprehensive feasibility study in 2005 for an ICT and agribusiness incubator. This study involved a survey of 270 students, focusing on those segments more likely to go into business, and to gauge the market from existing businesses structured interviews with 110 MSMEs, selected by random sampling in 6 industrial cities in all the development regions, other than the far western region. Of these, 86 percent were in involved in manufacturing and 12 percent in services. Fresh graduates considered financial assistance the most important support required to successfully operate and manage a business venture. MSMEs, however, ranked marketing and production assistance above finance, which is arguably far more realistic and in accord with experience elsewhere. Without prejudicing the interest and needs of graduating students, it must be remembered that without experience they may well not know exactly where they need the most help. Also perceived as important were provision of business space and infrastructure, marketing assistance and market linkages, education/training, and technical/management assistance. The majority of those students who expressed interest were interested in paying for the service of an organization that advises and assists them to start, sustain, and grow their intended businesses. Management assistance and accessibility and use of ICT were lower priorities, suggesting students are confident of their management ability and exploiting ICT as a tool for successful business operation. They wanted an incubator to be located in an accessible and convenient commercial area of the city. In comparison to students, who are yet to venture into business, MSMEs expressed different needs, as is to be expected. They sought support with marketing and product distribution assistance, finding available space and infrastructure, accounting and financial management, access to financial assistance, process and inventory management, and assistance with product design and testing. Lack of marketing information, inability to frame proper marketing plans, not having proper technical know-how, inability to adapt to the changes in the business environment and lack of adequate financial management skill were considered to be the main reasons why most of the businesses fail during their initial years of establishment. The interviews found that 62 percent of the sample have made use of support services to improve their performance, 69 percent are willing to pay for the services of a support organization and 75 percent wanted to grow further, indicating good demand for business incubation from existing businesses. A significant number of the MSMEs are facing problems (noting the interviews were conducted in 2005) that obstruct their growth and the majority are prepared to pay for the services of an organization providing them with support to improve their performance. Focus groups with BIP clients and other entrepreneurs also explored willingness to pay. It is always hard discussing payment for a service that does not exist, or for which only low value models have been seen and without seeing a service with a high value proposition. Broadly speaking, focus group participants want the incubator to be a quasi partner, adding tangible value to their business and sharing in their success in one way or another. In this context, despite variable responses, almost any model is 153
negotiable, assuming the incubator does offer excellent services. However, it appears there is an overall preference, especially among the agribusinesses consulted, for no upfront fees and payment by way of sharing in increased sales. Comments noted include the following: Incubatees should feel that the Business Incubator fee is not a cost, but the fee paid should be seen as an investment, as one entrepreneur put it, to pay 10, you should earn 40. It should be worth paying.
Fee depends on services Sharing of profit No upfront payment, payment through increased revenue Sharing of sales Equity model is okay for new entrepreneurs, but not for operating SMEs Partnership with BI Any model negotiable Entirely businessprofit oriented center Fee for services
The full report and survey results can be made available on request to infoDev.
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Annex 14: Learning from Previous Business Incubation Efforts Previous incubation efforts by the Department of Cottage and Small Industries, Lotus Holdings, and Fortune Cookies provide useful lessons. The DCSI business incubator was formed on the back of the ITPF feasibility study in 2005 by the Department of Cottage and Small Industries at their site at Tripureshwor in Kathmandu. The Nepal Lotus Business Incubator Centre (NLBIC), an Initiative of Lotus Holdings (LH)/ Lotus Opportunities (LO), was established in 2003, with a strategic decision of the LH board to serve start-up companies with finance plus 57 assistance, but the incubator failed. Six privates sector IT entrepreneurs formed Fortune Cookies as a private initiative in 2006 to incubate new ideas. Two investments were made, which did not bear fruit. Fortune Cookies did not work as envisaged and is now dormant. The main lessons from these incubator initiatives are the following: The DCSI is compromised in terms of its positioning and image by being a part of government. As is understood by PACT and MOAD, business incubation should not be run directly by government in Nepala lesson that is common to many countries. An attempt to institute a private-sector approach, by outsourcing management, was a step in the right direction, but did not work well and is never as effective as outsourcing the entire business incubation function. The center is still hampered by bureaucracy, operating under the guidance and supervision of a board formed under the chairmanship of Director General of DCSI. None the less, there is potential to work with the DCSI on the proper role for government and implications for this and other incubators. Incubation should run with a public-private partnership model and not as a purely private or public venture and takes significant commitment. Budgets need to be adequate. All three attempts were or are hampered by inadequate budgets. Furthermore, private funding alone is inadequate to operate and grow a business incubator, which takes too long to realize returns. Investors do not benefit directly from incubation itself, but by investing in incubates over the long term. Service providers or advisors should have a seasoned entrepreneurial background. The services of management graduates are not adequate to meet incubatees needs. Incubation needs to be the core business of the institution operating the incubator, which needs a dedicated management team. The skills and competence of the management team need to be developed, so that the team members can meet the expectations of start-up companies, particularly regarding marketing and financial needs.
57LH
at its earlier stage believed that financial assistance, through equity financing, is the way to help new business. Hence, LH invested equity in 14 companies, ranging from carpet factories, pashmina, handmade paper, IT, management consulting, and infrastructure development.
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The support systems need to be professional and comprehensive. On its own, a focus on students and student projects will not deliver adequate deal flow. While students are interested, it can be hard to convince them incubation is not there to steal their ideas and often student projects are not able to be commercialized. Scale is important and having only four client firms is too small, as happened with Lotus. Return on investment and impact or results should be planned over the long term and will not be significant in the short term. A thorough feasibility study is important to design the incubator, as well as to develop understanding about business incubation.
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2013 infoDev / The World Bank | 1818 H Street, NW | Washington DC, 20433 Email: info@infoDev.org | Tel + 1 202 458 8831 | Twitter: @infoDev www.infodev.org

Promoting Agribusiness Innovation in Nepal - Full Study

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PROMOTING AGRIBUSINESS INNOVATION IN NEPAL

Agribusiness Innovation Center in Nepal: Draft Report

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Agribusiness Innovation Center in Nepal: Report

List of Abbreviations and Acronyms

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Scalable Production Potential (with comparative advantage)

Geographically Clustered Growth Entrepreneur Capacity

Agribusiness Innovation Center in Nepal: Report

Infrastructure and Regulatory Constraints

Table 2: Key Value Chains with Potential for Enterprise Growth

Ton in this document refers to metric tons. Its abbreviation is t.

March 2013 updated data.

All dollar amounts are U.S. dollars unless otherwise indicated.

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

152,600 399,000 116,900 161,640 97,593 46,427 974,160

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

2 The Concept of Agribusiness Innovation CenterAIC

Agribusiness Innovation Center in Nepal: Report

Financial management skills and access to appropriate financing products

Agribusiness Innovation Centers

Technology information, training and technology access

Agribusiness entrepreneur networks, competitions and fairs

Figure 1: AIC Services

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

3 The AIC Feasibility and Business Plan Process

Figure 2: Nepalese AIC Feasibility Assessment Process

Agribusiness Innovation Center in Nepal: Report

Figure 3: Composition of Stakeholders Consulted

Agribusiness Innovation Center in Nepal: Report

What works or does not work in Nepal?

Stakeholder Identification Identification of stakeholders affecting the success of agribusiness entrepreneurs

Figure 4: Nepal AIC Feasibility Assessment and Business Planning Methodology

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness Innovation Center in Nepal: Report

Agribusiness EntrepreneurshipStakeholders and Ecosystem in Nepal

Donors / Bilateral / Multilateral R & D Institutes Business and Professional Communities

Innovation / Entrepreneurship / Incubation

Agribusiness Innovation Center in Nepal: Report

Agribusiness EntrepreneurshipStakeholders and Ecosystem in Nepal

INGOs, Informal Groups

Consulting / Training Funding and Financiers International

Agribusiness Innovation Center in Nepal: Report

INGOs Informal Groups

Consulting / Business / Enterprise Development Services

Agribusiness Promotion, Innovation and Incubation