68654 IT and IT-Enabled Services Industry in Nepal An Assessment and Prioritized Recommendations World Bank March, 2010 This report is prepared by Tenzin Norbhu, Senior ICT Policy Specialist; Mohan Kharbanda, Senior IT/ITES Specialist; and Siou Chew Kuek, ICT Policy Specialist; at the World Bank. Randeep Sudan, the Lead ICT Policy Specialist at the World Bank, also provided extensive input and guidance during its preparation; and the report is based on a thorough review process by a high-level panel that consists of experts in the IT industry and other relevant specialists. The views expressed in this report are those of the contributors, and do not necessarily reflect the position of the institution they represent. Page 1 of 62 Table of Contents ACRONYMS AND ABBREVIATIONS ......................................................................................................... 3 INTRODUCTION........................................................................................................................................... 4 EXECUTIVE SUMMARY .............................................................................................................................. 5 1. IT/ITES MARKET OVERVIEW .......................................................................................................... 11 1.1 MARKET DEFINITION AND SEGMENTATION ................................................................................................... 11 1.2 MARKET SIZE ................................................................................................................................................ 11 1.3 SOCIO-ECONOMIC BENEFITS ........................................................................................................................ 12 1.3 COMPETITION ................................................................................................................................................ 13 2. OVERALL OPPORTUNITY FOR NEPAL ......................................................................................... 16 3. CURRENT STATE: A MIXED PICTURE ........................................................................................... 20 4. PROGRAM OVERVIEW AND DESCRIPTION .................................................................................. 24 4.1 PROGRAM OVERVIEW ................................................................................................................................... 24 4.2 SKILLS DEVELOPMENT PLANNING ................................................................................................................ 25 4.3 INDUSTRY PROMOTION PLANNING................................................................................................................ 28 4.4 RECONFIRM PLANS FOR OTHER AREAS....................................................................................................... 30 4.4.1 Infrastructure ...................................................................................................................................... 31 4.4.2 Enabling Environment ...................................................................................................................... 34 4.4.3 Financing ............................................................................................................................................ 35 4.5 IDENTIFYING AND IMPLEMENTING QUICK W INS ............................................................................................ 35 4.6 PROGRAM INVESTMENT AND IMPLEMENTATION ROLES ............................................................................... 36 5. SUMMARY OF POSSIBLE ACTIONS AND INVESTMENTS ........................................................... 38 6. DETAILS OF POSSIBLE ACTIONS AND INVESTMENTS .............................................................. 40 6.1 SKILLS DEVELOPMENT .................................................................................................................................. 40 6.2 INDUSTRY PROMOTION ................................................................................................................................. 49 6.3 INFRASTRUCTURE ......................................................................................................................................... 55 6.4 ENABLING ENVIRONMENT ............................................................................................................................. 57 6.5 FINANCING ..................................................................................................................................................... 59 REFERENCES ............................................................................................................................................ 61 Page 2 of 62 Acronyms and Abbreviations Bandh A movement to shut down the commercial and civilian operations, often politically motivated BOT Build-operate-transfer BPO Business process outsourcing. Also see ITES above. CAN Computer Association of Nepal – the national industry group CMMi Capability Maturity Model® Integration (CMMI) is a process improvement approach that provides organizations with the essential elements of effective processes FNCCI Federation of Nepalese Chambers of Commerce and Industry FTE Full Time Employee GDM Global delivery management HLCIT High Level Commission on Information Technology NITC National Information Technology Center ICT Information and communications Technologies IT Information Technology e.g. software development ITES Information Technology Enabled Services such as cash ledger journal entries done in remote low cost locations. ITO IT outsourcing KPO Knowledge process outsourcing MNC(s) Multinational Corporation(s) NASSCOM The National Association of Software and Services Companies (NASSCOM), is a consortium that serves as an interface to the Indian software and Indian BPO industry Off-shoring An IT or ITES task that is outsourced outside the country. PPP Public Private Partnership suggested between Government of Nepal and Industry trade associations. SMB Small, Medium Businesses Page 3 of 62 Introduction The Government of Nepal (GON) has recognized the burgeoning opportunities offered by the global IT services and IT-enabled services (ITES) market for economic growth and employment creation, and has accorded a high priority to this sector. The government has, evolved a national IT Policy to harness the potential of Information Technology similar to what its southern neighbor, India, has already achieved. The World Bank has been assisting Nepal to review the market opportunities and develop enablers to participate in the emerging IT/ITES market opportunities. With funding support from AusAID, the Australian government‘s international aid program, the Bank had assigned a team (Team) to conduct an assessment of the market for Nepal that takes into account the country‘s current status and positioning, and draw conclusions and recommendations. The study commenced in December, 2008; and the output of this study is based on consultations with government officials, industry incumbents, academia and other stakeholders during the Team‘s first mission to Nepal in December 2008, and a subsequent workshop to prioritize actions in August 2009. The focus of this final report is to:  Share an assessment of the current status in Nepal;  Develop a comprehensive, multi-year, implementable program for the industry‘s development; including the strategic planning approaches with examples of important executable initiatives;  Develop investment estimates, key metrics and responsibilities for key initiatives; and  Suggest how public and private core constituents can partner to develop the potential of Nepal. Together, these initiatives are designed to stimulate growth in IT/ITES exports so that the industry is self-sustaining and Nepal becomes a credible destination. The public- private partnerships (PPP) recommended later will need to validate detailed action plans, key targets, metrics, and responsibilities; and develop an internal implementation plan. Page 4 of 62 Executive Summary The IT services and IT-enabled services (IT/ITES) industry is the fastest growing segment of the global IT market – its potential market size is estimated at $500 billion, and it is growing 35% annually until recently (McKinsey & Co., 2008). The rate of growth may decline in the current economic environment, but the crisis is expected to trigger further globalization of services over the longer term. Countries worldwide are competing for a piece of this lucrative market, and the burgeoning demand for these services offers a distinct opportunity for Nepal to enhance incomes and increase employment. However, the IT/ITES industry in Nepal is in a state of infancy and key enablers are not well developed as shown below. Labor costs 35 30 25 Security and stability Labor suitability 20 15 10 5 0 Facilities Broadband Govt support Power Source: Team’s assessment At some $10-$15 million in export revenues in 2007, Nepal‘s IT/ITES industry is operating below its potential and has not emulated the example of its southern neighbor. Normalized for population with India, Nepal‘s export revenue should be about $1.1 billion, with the industry employing 40,000 professionals. This is about 100 times the current revenue. However, the industry is currently fragmented and the incumbents have entered the market due to chance rather than in pursuance of a systematic strategy to realize a collective vision of the country. The industry has expressed the following as key concerns:  Government incentives and policies are not IT/ITES export-friendly in terms of both demand generation (Nepal brand promotion, tax holidays, etc.) as well as supply creation (talent and skills development); Page 5 of 62  Frequent ―bandhs‖ or politically motivated work stoppages cause investor concerns. These will be showstoppers for significant MNC captive investments;  Banks have limited experience in funding business plans for new ventures but expressed an interest in exploring this sector; and  The IT Park is in a remote location from the city center and given the road infrastructure, it can take up to 2 hours each way to commute. It appears better suited as an incubation site rather than an IT/ITES production facility. Nepal has one of the lowest labor costs in the global IT/ITES market. The recent depreciation of the currency gives it further advantage. Business Process Outsourcing (BPO) starting salaries at $1,800 per year is half of India, and the gap increases after tenure of two years. Nepal is far less expensive than most other locations for software developers. The average annual salary for an IT worker in the U.S. with about 3 to 5 years experience is about $75,000. It is about $8,000 in India, and less than $6,000 in Nepal. The quality of talent, however, is uneven and could be improved. Unless Nepal invests in talent development, it will not be able to emerge as a destination in its own right. As a result of the current state, Nepal will need to manage multiple constraints in order to participate meaningfully in the sector. As mentioned earlier, there is no lack of demand. The market will almost double in less than five years, but the Nepal advantage in labor cost will be lost if the issues described in this report are not addressed. Many of the structural problems associated with the Nepal ITES sector do not lend themselves to the ‗stroke of the pen‘ quick solutions, and discourage investment by Nepalese entrepreneurs in potentially high reward or high-risk ventures. Such problems include:  Lack of international promotion;  Average small size of enterprises in the sector;  Low levels of inter-company collaboration and merger and acquisition (M&A) activity;  Skills deficiencies in project management;  General lack of experienced middle managers; and  Difficulty in funding start-ups either through Venture Capital (VC) or banks. The Government of Nepal (GON), Computer Association of Nepal (CAN), and Federation of Nepalese Chambers of Commerce and Industry (FNCCI) could act as powerful catalysts for addressing these challenges but they face a classical chicken and egg dilemma. CAN, unlike India‘s NASSCOM, is run by executives from the private sector who cannot yet dedicate sufficient time until the IT/ITES industry is somewhat developed. Similarly, FNCCI has had to address challenges in the overall business climate and other industries and has not devoted sufficient resources to the ICT sector. A sustainable growth in IT/ITES exports will require that Nepal addresses the challenges described in this report. If Nepal does, it could be one of the second tier outsourcing countries. Vietnam, South Africa, Ghana and others are also focused on Page 6 of 62 these opportunities and are likely to sprint ahead unless Nepal acts with a sense of urgency. The ―select few‖ actions that Government could take are listed below:  Nepal’s government has a significant role to promote IT/ITES. In countries where the ICT off-shore service sector has a potential competitive advantage, the governments have facilitated the creation of an environment where private sector players could drive sector growth. In addition, governments of countries such as Ireland and Singapore, assigned responsibility to a suitably empowered institution to coordinate actions across different ministries. While the GON is focused on drafting the constitution, it is proposed for a PPP to coordinate the IT/ITES efforts of diffused government bodies and industry groups. This will be a new entity with specific goals and charter. The specific roles of the PPP are described later and deal primarily with: o Skills development o Attracting large pioneer/anchor companies o Aggressive marketing and promotion o Establishing Special Economic Zones (SEZ) for the sector, modeled after the Software Technology Parks Initiative (STPI) policy in India. o Studies on infrastructure (power, telecommunications redundancy, etc.) for future investments and implementation. These actions are described in detail in Section 6 of this report. The proposed PPP will be for a limited time as the role of GON will subsequently decline, as the industry finds its footing and becomes self-sustaining.  As mentioned earlier, the IT/ITES industry has significant room to grow. Nepal does not need to necessarily wrest businesses from incumbent players to participate. The overall off-shore market is forecasted to grow to at least $200 billion by 2014. The proposed target for Nepal is $200 million in five years. This is 15 times the current IT/ITES export revenues but still represents only 0.1 percent of the overall global market. The target is modest because it is not expected that Nepal will be able to jump start activities very rapidly, for example, establishing an IT park will take at least 2 to 4 years.  Nepal needs to develop competitive incentives to attract business. Countries in the region have put in place similar incentive packages. Key examples include: o Subsidies to assist industry achieve international certification and for training. Suggested training subsidy is $200 per employee for training or a similar subsidy of $200 per employee per month for apprenticeship; o Zero percent VAT, customs duties and taxes on imports for IT/ITES businesses; o Specific tax holidays through 2016. The tax exemption to the companies will be more than offset by the revenue generated by the new Page 7 of 62 employment. Virtually all countries vying for the IT/ITES opportunity offer some form of tax holidays; and o 100% foreign ownership and dividend/capital repatriation.  While Nepal develops these policies, it will also need to address the laws on venture funding and legal framework for M&A activities. These activities generally lag the development of the IT/ITES industry but will be critical once the industry reaches a reasonable market size, based on an estimate of about $100 million in revenue per annum. Given the security perception issues, Nepal will also need to make some bold moves, such as: o Classification of ITES-BPO industry as ―essential or public utility services‖ enabling 24 x 7 x 365 operations for these companies. Some other countries, or states within the countries, have allowed for this provision by offering ―comfort letters‖ to the companies so that the operations are not disrupted; o Ensure flexibility with respect to both weekly and national holidays for ITES-BPO employees in compliance with labor laws; o Provision for women employees to work in night shifts and ensuring their safety; o Simplify procedures relating to hiring and dismissal of ITES-BPO industry employees; and o Relaxation of laws relating to labor unions for the ITES-BPO industry.  The bandwidth and electricity load shedding issues also need to be addressed: o Bandwidth redundancy and reliability need to be brought up to global standards. This will require regulatory enforcement; and o Exemption from statutory power cuts or load shedding for ITES-BPO establishments. Currently, the power availability is erratic with frequent load shedding. The easier segment to penetrate for Nepal is the ITES sector, also called BPO. In ITES Nepal has some 30 to 40% cost advantage over India in labor costs. Until the industry can be established, it should leverage the cost advantage and participate in the entry- level BPO market.  In the near term, Nepal could focus on processes such as: o Non-voice back office processes; o Graphic design; o Animation; o Geographic Information Systems (GIS); and o Web design.  In the intermediate term, Nepal can also add on voice processes such as: Page 8 of 62 o Customer support; and o Technical support.  Banking and related financial services offers the largest opportunity segments. The recent turmoil in the banking sector has increased incentives to reduce costs, and the rationale for Nepal to focus on this sector is based on the following: o Nepal already has a strong domestic banking industry. o Back office functions remain the largest opportunity; o North America remains more open to off-shoring and is the largest geographical segment; o One or more large ―pioneers‖ should be attracted with special incentives, described later, to gain credibility as a viable destination; and o Ease of entry for Nepal – specifically the sub-sectors that deal with low complexity and low regularity oversight such as application processing, credit evaluation, collateral evaluation, accounting, document preparation, payment processing, loan tracking, collections, check processing, records management, fraud detection, report generation, mortgage processing and claims management.  This target has also been discussed with, and agreed by the Nepalese stakeholder community. To participate in this market, Nepal will need to mitigate security concerns as well. Frequent bandhs will discourage mission critical processes to be off-shored to Nepal. Given the current state of the business, Nepal will also need to make some bold moves, for example: o Negotiated investment guarantees, if necessary, for a leading regional company, or an MNC, that creates in excess of 500 immediate jobs to give the country global credibility and visibility; and o Invite a regionally established CMMi level 5 capable company with global reach and credibility, to set up operations in Nepal either as a captive operation or a joint venture. This will also require special incentives and guarantee of some domestic business. If the above actions, particularly those related to infrastructure, security and talent can be addressed; the target of $200 million in 5 years can be easily achieved. This will create about 10,000 jobs, and establish an eco-system to self-sustain the industry for growth towards a $1 billion industry. The recommended actions are designed to lead Nepal on a path shown below: Page 9 of 62 Note: Graph above is for illustrative purposes only. It is based on multiple assumptions, and is intended to show that unless action is taken, the outcome is expected to be similar to recent past Source: Team assessment and forecast Implementation of some important actions will require a 5-year program divided into 3 phases, with an estimated investment of about $19,250,000 (including planning and evaluation) and the bulk of spending over the first two years. The financing for this investment can come from a number of sources, such as the Nepalese government and the private sector (e.g. if the IT parks are developed on a PPP basis) and the donor community. Assuming that the bulk of the investment is made in the first two years and industry revenue grows linearly over the five years to $200 million with an approximate 10% bottom line profit, the internal rate of return to the economy will be 198%. A McKinsey study for Indonesia showed a net benefit of $14,000 per IT/ITES employee to the Gross Domestic Product (GDP). Lowering it to $10,000/employee for Nepal shows an incremental GDP growth of $80 million per year. Thus a one-time investment of about $19 million, can result in a sustainable and ongoing GDP increase of $80 million. Either methodology makes a compelling financial case for investment. Page 10 of 62 1. IT/ITES Market Overview 1.1 Market Definition and Segmentation IT services typically include IT applications and engineering services, while ITES include a wide range of services delivered over electronic networks. In comparison to the manufacturing industry where products are physically visible, the ―raw materials‖ in the IT/ITES industry are data, information and knowledge. IT/ITES consists of broad segments, and service sophistication varies considerably in each. The table below outlines a few representative segments and associated services. It can be seen that virtually all functions that do not require a real-time hand shake with a customer or a supplier can be outsourced. 1.2 Market Size As reported in several studies sponsored by the World Bank, the IT/ITES market is large and growing (Dongier et. al, 2009). According to the McKinsey estimates, the total potential market in 2008 was $500 billion of which only about 18% had been off-shored. In addition, Gartner Research (2007) estimates that the global market is expected to grow from $160 billion in 2007 to $235 billion in 2011. NASSCOM-Everest (2008) estimates the potential to be more than three times that, at $700–800 billion by 2012. The details of the market profile are available from several reports and are not Page 11 of 62 reproduced here but it is worth noting that ITES (BPO) market has grown about 300% since 2004 as shown below. Global Sourcing of Services is forecasted to double between 2007 and 2010 Source: Hewitt chart based on McKinsey data 1.3 Socio-Economic Benefits Successful participation can have a major positive impact on Nepal‘s economic and social development. Some of the socio-economic benefits presented by the industry include1:  Enhanced job creation: The ITES-BPO industry is highly labor intensive. Scale is achieved by high deployment of people unlike traditional industries, where growth and development does not necessarily imply an increase in the number of jobs;  Export revenues: Earnings from services provided to developed markets have become the mainstay for the majority of the ITES-BPO industry in emerging locations. This provides several related benefits as well, including higher wages and skills upgrading;  Enhancement of education, both quality as well as quantity: IT/ITES industry is talent intensive and requires a large number of educated and qualified resources. In countries where IT/ITES has been successfully launched, it has vastly improved the education system;  Investment in ICT infrastructure: Positive spillover effects also include improvements in ICT infrastructure and business services, which further lead to increased efficiencies within the domestic economy;  Increased participation of women in workforce: The ITES-BPO industry also encourages greater female participation in the workforce, unlike traditional, 1 Hewitt SARS report and various other studies Page 12 of 62 manufacturing industries. It is estimated that in the Philippines, women comprise 65 percent of the employee pool on average in ITES-BPO organizations. In India, the percentage of women employed in the industry was in the range of 30% and is expected to reach 45% in 2010;  Creation of ancillary industries: Another significant benefit, which has arisen from the growth of the ITES-BPO industry, is the creation of ancillary service sectors such as transportation, training, catering, etc. In fact, it is estimated that for every direct job created in the ITES-BPO industry, four additional jobs are created in the economy;  Fiscal, regulatory and legal reforms. Policy reforms are often easier to enact when a ―new‖ export-oriented industry like IT/ITES is targeted, since entrenched special interests are less directly affected than when reforming other sectors;  Improved competitiveness of local companies through acquisition of best-of-breed business and human resource practices, adoption of international standards, etc.; and  Re-positioning of the image of a country, bringing about a ―branding‖ effect that can have profound implications. The multiple direct and indirect benefits a country can derive from IT/ITES are listed below Source: NASSCOM-Deloitte, 2008 1.3 Competition The geography of IT/ITES is changing fast. Relatively unknown locations can become important destinations as the number of countries competing for the off-shore market continues to increase. The large untapped market offers enormous opportunities for countries that meet its requirements, and the challenges to participate in this opportunity for Nepal are significant but not insurmountable. As can be seen from the Page 13 of 62 chart below, the competition is global in scope as countries worldwide are competing for a piece of the lucrative IT/ITES business opportunity. 2007 Market Share India 37% Canada 27% Philippines 15% Ireland 5% China 2% Others Source: NASSCOM Various consulting firms produce regular rankings of country attractiveness. The table below for example, outlines A.T. Kearney‘s Global Services Location Index that is based on (i) financial attractiveness, (ii) people and skills availability, and (iii) business environment. Many countries have focused on improving their ranking and continue to emerge as possible IT/ITES destinations. Even though Nepal is not yet on the radar of consulting companies, it has several potential advantages that can be further strengthened as described in the next section. Page 14 of 62 Page 15 of 62 2. Overall Opportunity for Nepal Geographically, North America presents the largest opportunity (70%) for Nepal as shown below, but India and the Asia/Pacific region also offer unique opportunities for Nepal due to physical proximity, cultural affinity, and tourism-related exposure to Nepal. Source: NASSCOM/Everest study, 2007, BPO market only The easier segment to penetrate for Nepal is the ITES space, also called Business Process Outsourcing (BPO). In ITES:  Most opportunities are in vertical specific services.  Banking and its related financial sectors represent the largest opportunity segments as shown below. The recent turmoil in this sector has increased incentives to reduce costs. Page 16 of 62 Addressable ITES Market by Addressable ITES Market by Vertical Horizontals Others Knowledge Customer 12% services interaction & Travel Banking 11% support 5% 29% 26% Procurement Technology services 7% 19% Telecom 2% Retail Capital 7% Markets 5% Insurance F&A HR Mfrg. 14% 25% 19% 19% Source: NASSCOM-Everest 2008  Nepal has a good domestic banking industry.  Back office functions remain the largest opportunity.  North America remains more open to off-shoring and is the largest geographical segment.  Nepal should first focus on the following geographies: o Middle-sized businesses in North America as these are under penetrated; o Australia, New Zealand and Malaysia; and o Indian market.  One or more large ―pioneers‖ should be attracted with special incentives, described later, to gain credibility as a viable destination. Nepal also has opportunities in many other areas such as back office processes; graphic design, animation, geographical information systems (GIS), medical transcription, web design and technical/customer care support. These should all be pursued, but banking and CMMi 5 certified companies are recommended for scale and visibility. For healthcare, the area of electronic healthcare records is expected to experience an explosive growth once the standards and protocols are developed in the U.S. By most accounts this will be in about three to four years and will certainly be a significant opportunity for Nepal. The exact nature of the work and training is not yet clear but Nepal will need to watch the developments and be ready to participate. Page 17 of 62 As mentioned earlier, the IT/ITES industry has significant room to grow. Nepal does not need to necessarily wrest market share from incumbent players to participate. This is because the overall off-shore market is forecasted to grow to at least $200 billion by 2014. Hence it is proposed that Nepal targets a modest 0.1 percent share of this market i.e. $200 million in revenue in 5 years‘ time, as it is not expected that Nepal will be able to jump start activities very rapidly, e.g. setting up an IT park will take at least 2 years. This $200 million target is developed by balancing various factors such as the current state and constraints, the size of the potential market, realistic assessment of the current political situation in Nepal, and the desire to have a ―stretch goal‖. These factors were considered and agreed by the stakeholders in Nepal. Source: Team’s analysis Page 18 of 62 Recommended Intermediate Goals for Nepal Description Current State Desired State IT/ITES Export Volume $10 - $15 million $200 million (Estimated) Employment 1,500 – 2,000 10,000 (Estimated) IT Park Unoccupied Utilized new facility Talent 8% proficiency in English 15% proficiency in English College graduates/year 25,000 35,000 Salaries Attractive Maintain Government: Incentives Minimal Competitive Policies IT/ITES unfriendly Neutral to positive Broadband accessibility Limited and expensive Competitive and available Promotion Unlisted on key indices Top 30 While 8% proficiency at first glance implies 2,000 employable talent per year, and assumes that all will be needed for the IT/ITES industry to reach the goal of 10,000 jobs in 5 years‘ time, it should be clarified that:  8% proficiency deals with spoken English skills that require limited intervention through on-the-job training. Since most courses are taught in English in Nepal, students already have basic understanding of English and more than 8% can be trained.  In addition, some of the BPO work does not require much emphasis on spoken English e.g. order entry. In these cases, significantly more students are employable.  Finally, it is expected that some of the existing workforce employed in other sectors will see the IT/ITES opportunities, and can be attracted. Based upon this assessment, the 5-year goal to employ 10,000 is attainable. Page 19 of 62 3. Current State: A Mixed Picture Nepal already has some key advantages. These include:  Facility with English language;  Incumbent IT/ITES industry, although very small, has been growing since2000;  Estimated export revenues of $10-15 million;  Employment of 1,500 – 2,000 in the IT/ITES export sector;  Key client verticals in banking, capital markets, and insurance;  Nepal is keen to pursue this emerging opportunity to promote innovation, technology development, establish infrastructure, and offer additional incentives; and  Nepal already has an edge over labor costs in India and the Philippines.. Some incentives are already available to the foreign companies (US FCS & US DOS, 2009): o 100% foreign ownership, and dividend/capital repatriation; o Sale of the share of foreign investment; o Profit or dividend from foreign investment; o Payment of principal and interest on any foreign loan; and o Technology transfer fees.  Other incentives are not yet competitive: o SEZ (Special Economic Zone) ordinance is not publicly available so far; o No special incentives or tax holidays are offered to the industry; and o Trade restrictions regarding imports for the IT/ITES industry.  The labor employment regulations and power outages are similar to India though bandhs (work stoppages) are a concern.  Nepal has one of the lowest labor costs as shown below. The recent currency depreciation of the country gives it further advantage. Page 20 of 62 Cost/FTE for BPO Functions  BPO starting salaries at $1,800 per year are half of India‘s, and the gap increases after a tenure of two years.  Nepal is far less expensive than most other locations for software developers as well. The average annual salary for an IT worker with four years experience in the U.S. is about $75,000. It is about $8,000 in India and in Nepal; it is less than $6,000. Lower labor cost is a major strength, since labor is the largest cost component across most IT/ITES segments as shown below. Typical Cost Structure for an IT/ITES Firm Source: DfID, 2008 Nepal‘s labor quality, however, is uneven and needs to be improved. Unless the country invests in talent development, it will not be able to emerge as a destination in its own right. In addition, Nepal has not yet made progress in moving towards global standards in some areas. For example, the country does not yet have a CMMi level 4 or 5 rated IT company. Page 21 of 62 Nepal, as a result, needs to address multiple constraints in order to grow the industry 15 fold. As mentioned earlier, there is no lack of demand. The market could almost double in less than five years. But Nepal‘s advantages in incentives and labor cost could be dissipated due to many real and perceived issues. Many of the structural problems associated with Nepal‘s ITES sector do not lend themselves to quick solutions. Such problems include: o Inadequate international promotion; o Average small size of enterprises in the sector; o Low levels of M&A activity. As noted earlier, it may require revision of the S57 income tax code; o Skills deficiencies in project management; o Poor customer relations and teamwork; o General lack of experienced middle managers; and o Failure to implement the 2000 IT Policy. Such circumstances discourage innovation, and potentially high reward or high-risk ventures. The GON seems to be committed to act as a powerful catalyst for addressing these issues, and those that need to be addressed as a matter of high priority include: o External perception of Nepal is neutral to unfavorable, and the recent political events and ―bandhs‖ cause a concern; o The quality of resource pool is uneven. This is true in India as well but India has the volume - the sheer number of graduates – advantage from which to source talent; o The incumbent companies have limited know-how on developing external export markets; and o Physical IT infrastructure is modest in areas such as IT Parks, power supply and reliable telecommunications; and o There is difficulty in funding start-ups either through venture capital (VC) or banks. A sustainable economic model will require that Nepal addresses the five challenges listed below. If Nepal does, it could grow into one of the key secondary outsourcing countries. Vietnam, Ghana and other countries are also focused on these opportunities and are likely to sprint ahead unless Nepal acts with a sense of urgency. Page 22 of 62 Potential Initiatives for Nepal Page 23 of 62 4. Program Overview and Description 4.1 Program Overview It is recommended for Nepal to take a strategic, systematic, and gradual approach to IT/ITES industry development. Hence, it is anticipated that a 5-year program with 3 phases will be needed; and the scope, sequence, and timelines is illustrated in the simplified table below: The starting point of the industry development program is to conduct skills development and industry promotion planning. These are deemed necessary as they are the main areas of challenge for Nepal‘s IT/ITES industry, and will constitute the bulk of the activities for the program. The detailed planning processes for these two areas will also involve close collaboration with the local stakeholders - in order to solicit their inputs, and gain ownership by the constituents. The other areas of this program (infrastructure, enabling environment, and financing) do not constitute a significant portion of the proposed program, and could be reconfirmed at the start of the program by the project team. Other actions (such as security and power) are outside the feasible scope of the program. It may be mentioned here that most successful countries have pursued a holistic approach to IT/ITES industry development. For example, Egypt, which has been very successful in quickly improving its position in global rankings, has adopted a holistic framework for developing its industry (refer to diagram below). This could also be used by Nepal to organize the recommendations and actions by relevant strategic groupings. The scope, sequence, and timelines above need to be developed during the program preparation process, and professional consultancy firms with relevant expertise and experiences could be engaged for each of these planning processes. The following provides a brief description of Phase 1. Page 24 of 62 Holistic approach: ITIDA’s Strategy Framework Local market Export growth demand In-sourcing and National education system and mega companies (FDI) Multinational support Enterprise capacity building research centers Innovation, research and development Human capital development IT industry Real estate Legislative intelligence (infrastructure) environment Telecommunications infrastructure Unique focus placed on ensuring vibrant links with the Source: Egypt’s IT Industry Development education system Agency (ITIDA) 4.2 Skills Development Planning The purpose of the skills development planning process is to develop a suitable talent base for supporting the industry, and for attracting IT/ITES companies to set up in Nepal. This planning process should be designed based on the needs of the industry, in order to create an internationally bench-marked talent pool in the country. Even though Nepal has a similar graduates-to-population ratio to India, the country is somewhat disadvantaged in the number of graduates given its small size (refer to chart below). The other emerging destinations in South Asia have a slightly higher enrollment. Nepal, will therefore, need to invest in both the quality, as well as quantity, of education to bridge the talent gap. Page 25 of 62 Source: Team’s analysis The prioritized skills development actions are focused on BPO and software skills training, assessment, and certification; so that the industry has a competitive and ready pool of talent. The following diagram illustrates a possible approach: Skills Development Components Companies CMMi COPC 6 sigma Mangmt TSP/PSP Training Domain R&D Training Software Developer Foundational BPO Certification/CERT Training Universities Knowledge Hub Skill assessments IT Services IT Enabled Services Source: World Bank The diagram presents a framework currently under development as part of a Global ICT Skills initiative taken up by the World Bank in partnership with leading global Page 26 of 62 companies. Each part of the pyramid is being developed as a module based on three criteria namely: (i) employability, (ii) industry alignment, and (iii) industry participation. On the ITES side for example, skill assessments are proposed to be carried out by a firm that has conducted more than 100,000 assessments in the previous year, and has a database of the skill profiles of candidates successfully hired into global ITES firms. Carrying out assessments that are benchmarked against the profiles of candidates who were successfully hired by global firms can provide a clear picture on the quality of the talent pool available in any given country, and offer insights into areas where skills need to improve. Similarly the module on Foundational BPO Training is based on training and certification of trainers and students by leading global ITES firms rather than pure training companies. Such training is extremely important as it can potentially be used as a hook to attract leading ITES companies to invest in the country, once they have trained and certified their trainers and students. A number of countries are participating in the development of the framework through piloting of different modules. For example the module on skills assessment is being piloted in Nigeria, while the module on Foundational Training is being piloted in Kenya. Kenya is also piloting the Software Developer Certification program, which seeks to create a global certification through a leading international university. The examination consists of the candidate performing a series of transformations on source code that demonstrates his/her ability to modify, develop, build, test, and debug software in a particular programming language, for a particular environment and application domain (e.g. C, POSIX, and networking). The candidate might be asked, for example, to detect and eliminate existing defects in the software, perform preventative maintenance, and add new capabilities to the system. The resulting code can then be evaluated for completeness, correctness, performance, maintainability, reliability, robustness, and security. Such an approach is likely to raise the quality of software developers in Nepal to global standards, and the certification program will allow leading companies to base their hiring decisions on the qualified talent pool. Similarly, Mexico is rolling out training in Team Software Process and Personal Software Process in order to create the world‘s largest pool of TSP/PSP trained professionals. Having such professionals makes it much easier and cheaper to acquire CMMi certification. The module on R&D requires a partnership between leading companies and universities on cutting edge technologies. For example, IBM is in discussion with the Nigerian government to establish a ―Collaboratory‖ focusing on mobile applications and technologies. The above framework is presented as an example of the type of initiatives that other countries are pursuing for skills development. Nepal could potentially benefit from adopting and customizing such global initiatives. Page 27 of 62 4.3 Industry Promotion Planning The purpose of this planning process is to develop a strategic, comprehensive, and prioritized approach to industry promotion. Nepal needs then, to promote the industry aggressively both internally and externally to increase awareness and interest that the country is open for business, and to be able to conduct direct business development engagements with potential clients, especially the large MNCs and regional IT/ITES companies. The Nepalese government and the private sector will have a significant role in IT/ITES industry promotion as governments in successful countries have undertaken aggressive and often top-level driven activities to promote the sector. Hence, it is proposed for the country to engage business planning, marketing, business development expertise with domain knowledge of the IT/ITES industry; in order to provide advice and assist the government in this process. For promotion, the plan should cover relevant tools related to: a. Marketing collaterals in terms of brochures, newsletters, flyers, etc.; b. Advertising in the form of print (magazines, trade journals, programs for events), broadcast (Internet, radio or TV as appropriate), direct mail, etc.; c. Promotional activities such as trade shows, fairs, sponsorships, etc.; d. Public speeches at international IT/ITES events and conferences; and e. Media relations campaigns for relationships with relevant trade magazines and newspapers, and includes developing press releases and press kits, etc. It must be mentioned however, that in a world where different countries are vying for the IT/ITES market opportunity, it will be important for Nepal to differentiate itself from the crowd. Nepal needs to take credible actions and adopt strategies that can attract global attention. However, such marketing, advertising, and promotional activities are not expected to succeed unless there is a clear and unique value proposition to be offered. Hence, the plan will identify strategic IT/ITES segments, value propositions, target clients, etc. to guide the promotional process. It is important to have this strategic focus because there are many opportunities in the IT/ITES market, and new entrants such as Nepal, have many paths they could follow. In the segment identification processes, Nepal might also attempt to identify segments where they have industry or domain knowledge due to their location advantage, such as a focus on IT/ITES segments related to tourism and snow since these are unique factors for Nepal. Finland, for example, is attempting to leverage its location advantage to focus on certain technologies. Snowpolis in Vuokatti focuses on wellness, sports, and winter technologies. Nepal could similarly exploit its location advantage by attracting, for example, over the long term, green data centers. These could use renewable hydro power and be located in snowbound locations. This would of course entail significant infrastructural improvements. However, the fact that Nepal has certain location advantages and should take steps to capitalize on such advantages is a point worth mentioning. In addition, the industry development plan could also provide innovative approaches for attracting businesses, such as establishing joint training programs with potential client companies to incent them to Nepal. Page 28 of 62 The government should also develop a unique, credible, and attractive brand and slogan for the country in the industry promotion process. This could be developed with the assistance of relevant expertise, be aligned with the country‘s value proposition, and addresses the interests and needs of the target clients. For example, A slogan like "Nepal the Exciting Technology (NExT) Destination" could result in a new industry promotion organization being branded as NExT. In addition to marketing, it is also important for the country to be able to engage directly with large potential clients through business development activities, both at the government and individual company-level. For example, the highest level of government in Andhra Pradesh took a visionary, committed, and proactive approach to industry promotion. They engaged directly with large potential clients, tailored solutions in their offerings to each client‘s specific requirements, and followed up closely on opportunities from potential to closure. Hence, it is proposed that Nepal develop similar high-level government champions and business development capacity in the public sector for these types of direct engagements with large potential clients. In addition, it is important for Nepal to develop the private sector‘s business development capacity, in order for the local IT/ITES companies to be able to engage their foreign counterparts productively for business opportunities and growth. Source: NASSCOM/Everest 2007 study. Data is for ITES only. A variety of approaches can be taken to determine the strategic focus, and the sample table below provides a possible approach based on: Page 29 of 62 Service Segments: IT/ITES industry is very broad with multiple segments; Nepal, therefore, needs to prioritize target segments based upon consideration of existing domain knowledge and locational advantages. Complexity: Nepal could target segments with lower level complexity due to the current level of technological proficiency of talent, and prepare itself to move up the ladder for more complicated projects in the close future. Operational Size: Smaller-scale operations in the short term are more realistic due to the lack of qualified resources to support large operations of 1,000 - 2,000 employees. Nepal could promote itself aggressively once talent availability increases. Market/Customers: Focus on the typical big markets including U.S. and Europe since they have diverse needs, and identify niche geographic markets where Nepal might have a competitive advantage. Table 12: Competitiveness and Attractiveness Matrix Market Competitive Position Market Attractiveness Segments Software Medium to High Medium to High Development  Good value talent for standard of  Large market with various niche software development (cost possibilities in terms of vertical competitive and acceptable basic applications, or lower-end quality) development for less complex  Moderate supply of good quality solutions such as: computer science graduates  Web & mobile content development  Limited experience in complex  Back office software, solutions and advanced business Animation, practices/processes Desktop publishing  Bandwidth performance and redundancy not critical  Lowest cost services for specialty customers due to good quality software development talent Data Medium Medium Digitization, Processing &  Abundant supply of inexpensive, low-  Large overseas market with high Conversion skilled, production-oriented workers growth rates  Short training time suits local labor  Crowded industry becoming very dynamics competitive and commoditized  Medium to high bandwidth requirements 4.4 Reconfirm Plans for Other Areas The following describes the plans that could be utilized for the other 3 areas of IT/ITES industry development program in Nepal, and could be reconfirmed during the start of the program by the project team. Page 30 of 62 4.4.1 Infrastructure The success of the Stanford Industrial Park (later Stanford Research Park) which morphed into what is now Silicon Valley has further inspired some governments to establish or facilitate the setting up of IT Parks with ambitions beyond provision of basic infrastructure. In Nepal, IT parks will help to:  Cluster knowledge based businesses;  Provide infrastructure and HR talent more efficiently than a dispersed model;  Provide a one-stop shop for administration, training, legal and financial services; and  Help in promoting venture capital, synergies, and policy formulation. Choice of site location is one of the most critical decisions in the development of an IT Park. The current IT Park, assessed against the critical considerations, does not score well as shown below: Criteria Assessment Comments Close to a main population centre with adequate Negative The site is remote and can amenities; including education, housing, take up to 2 hours to reach hospitals, entertainment, shopping etc. Linked by good public transport system, and be Negative The road is being widened but close to major road arterial systems it will still take excessive time from the population centers Close to universities/third level educational Positive Is close to a reputable institutions university Easy and close access to an airport, preferably Negative an international airport Offers balance between buildings and open Positive Seems to have additional area area, with scope for landscaping in order to for expansion create a park-like ambience Cost of land must be acceptable and not Neutral excessive, and there must be scope for future expansion High quality telecommunications available, with Negative The site does not seem to self healing loops to ensure ―redundancy‖ have redundancy availability in the event of loss of main source Source: Team’s analysis Based upon the above criteria, the current IT Park is unsuitable for the growth of the industry and as a consequence it remains unoccupied. Until a suitable IT Park can be developed, it is recommended that Nepal grant ‗Special Economic Zone‘ or a virtual IT Park status to establishments that export IT/ITES-related services. This is similar to what India has done under the STPI policy (the specifics of the STPI policy are highlighted in Page 31 of 62 the box below). Nepal could also take a futuristic approach to the development of IT parks; hence the proposed study could also examine the possibility of including research hotels, disposable parks, mobile incubators, etc. Policy and Benefits of the Software Technology Parks (STP) of India The STP scheme is a 100 percent export-oriented scheme for the development and export of computer software, including export of professional services using communication links or physical media. This scheme is unique in its nature as it focuses on one product/sector, i.e. computer software. The scheme integrates the government concept of 100 percent Export Oriented Units (EOUs) and Export Processing Zones (EPZs), and the concept of Science Parks/Technology Parks operating elsewhere in the world. "The unique feature of the STP scheme is the provisioning of single-point contact services for member units, enabling them to conduct exports operations at a pace commensurate with international practices." Scheme‘s Benefits & Highlights  Approvals are given under single window clearance scheme.  A company can set up STP unit anywhere in India.  Jurisdictional STPI authorities clear projects costing less than Rs.100 million with Indian investments.  100% foreign equity is permitted.  All the imports of hardware & software in the STP units are completely duty free, and import of second hand capital goods is also permitted.  Re-export of capital goods is also permitted.  Simplified minimum export performance norms i.e., " Positive Net Foreign Exchange Earnings"  Use of computer system for commercial training purposes is permissible, subject to the condition that no computer terminals are installed outside the STP premises.  The sales in the Domestic Tariff Area (DTA) shall be permissible up to 50% of the export in value terms.  STP units are exempted from payment of corporate income tax up to 2010.  The capital goods purchased from the Domestic Tariff Area (DTA) are entitled for benefits, such as exemption of excise duty and reimbursement of Central Sales Tax (CST).  Capital invested by foreign entrepreneurs, know-how fees, royalty, dividend etc., can be freely repatriated after payment of income taxes due on them, if any.  Items such as computers and computer peripherals can be donated to recognized, non- commercial educational institutions; registered charitable hospitals; public libraries; public funded research and development establishments; organizations of the government of India; etc.; without payment of any duties after two years of their import.  100% depreciation on capital goods over a period of five years. Page 32 of 62 Source: Ministry of Communications and IT, Government of India at http://www.stpi.in/STP_Scheme.htm Nepal also needs to develop infrastructure in several other areas:  Physical, e.g. reliable telecommunications, uninterrupted power supply, and security;  Legal framework;  Technical and logistical support. Many of these fundamental issues are interlinked and add to the complexity of defining a way forward. The proposed actions are detailed in Section 6. With the exception of broadband redundancy and higher reliability (refer to action A.3.1 below), other actions can wait and only their study is suggested at this time. Page 33 of 62 4.4.2 Enabling Environment The general business and living environment of a country—government policies toward foreign direct investment (FDI), incidence of corruption, labor laws, ease of travel to and from the country, and general quality of life—are also important in a company‘s decision about whether to invest there. There are numerous cases of countries offering special status for IT/ITES investors to speed them through the formalities and insulate them from the more difficult aspects of doing business (Dongier et. al, 2009). Government roles could cover various areas that could be specific (enabling MNCs to cut through red tape) and general (negotiate for increased trade in services through the World Trade Organization, tax treaties, reciprocal market opening steps, removing visa restrictions where appropriate, etc.). The Agency to Promote and Facilitate Investments in Remote Services and Technology (APFIRST) in Andhra Pradesh in India; and the IDA in Ireland, for example, cut through red tape to help IT/ITES companies start local operations, while the broader business environment strengthened more slowly (Dongier et. al, 2009). Hence, the Nepalese government could also take such a proactive role to support the industry‘s growth. In addition, companies doing outsourcing typically focus initially on external risk factors, such as vendor stability, off-shore country stability, and security; and here Nepal scores neutral to negative due to work stoppages called ‗Bandhs‘ (BMI, 2008). There is also a vague perception of low levels of intellectual property (IP) and data security protection. IT/ITES investors typically care deeply about a range of ―on-line‖ issues; and chief among them are ensuring the legal validity of online transactions, data security and data privacy protection, IP protection and safeguards against misuse of computing infrastructure (e.g. cyber crime). Similar issues in India do not seem to elicit similar perceptions. As a background, Nepal‘s ―Electronic Transaction and Digital Signature Act (ETDSA) – 2061‖ was promulgated as an ordinance some years ago. The ordinance included provisions on computer crimes, data protection and privacy, and intellectual property. Nepal therefore has the legal framework to deal with cyber security in place. Nepal also has NepCERT, the national Computer Emergency Response Team. However, it might be necessary for the government to have a fresh look at the whole issue of cyber security. This is an area that will become increasingly important in the future and Nepal would do well to focus on this, while designing its strategies to grow the IT/ITES sector. While the physical security was not assessed during the mission, and is beyond the scope of this project, Nepal should consider a study on the possibility of overcoming this issue. In addition, existing labor practices could be reexamined based on international experiences, such as those in India and Singapore (refer to box below). Page 34 of 62 Labor practices in India, Malaysia, and Singapore Some state governments in India have declared IT/ITES as ―Public Utility Services‖, e.g. West Bengal. This imposes certain restraints on the right to strike under the Industrial Disputes Act 1947. For example, members of a public utility service cannot go on strike "during the pendency of any conciliation proceedings before a conciliation officer". Further, a public utility service can be declared to be an essential service by mere notification in the official gazette. Once declared as an essential service, government can prohibit strikes under the Essential Services Maintenance Act 1981. Another example is from Malaysia. Under Malaysian law, unionization is prohibited in respect of "Pioneer Industries" for the first 10 years. According to the Malaysian Industrial Development Authority, companies undertaking ICT and multimedia activities have been conferred "Pioneer Status" as part of various incentives provided to the industry. For Singapore in mid-1968, in an attempt to woo private foreign investment, Prime Minister Lee Kuan Yew successfully pushed through Parliament a new employment bill and amendments to the 1960 Industrial Relations Act. In order to make factors such as working hours, conditions of service, and fringe benefits predictable, and thus make businesses sufficiently attractive for investors, trade unions were barred from negotiating such matters as promotion, transfer, employment, dismissal, retrenchment, and reinstatement, issues that accounted for most earlier labor disputes". "In the 1982 Amendment to the Trade Union Act, the role of trade unions was defined as promoting good industrial relations between workers and employers; improving working conditions; and improving productivity for the mutual benefit of workers, employers, and the country". Sources: Financial Express. 2003. “Public Utility Service� Provider for All Bengal IT Cos. http://www.financialexpress.com/news/public-utility-service-provider-status-for-all-bengal-it-cos/93182/; For Malaysian laws, please refer to http://bit.ly/8lXDWM and http://bit.ly/93fVUe. Federal Research Division of the Library of Congress. “Country Study Series – Singapore�. http://lcweb2.loc.gov/cgi- bin/query/r?frd/cstdy:@field(DOCID+sg0079) 4.4.3 Financing Generally, mainstream venture funds avoid high risk markets. But most funds have a ―herd‖ mentality and therefore, Nepal needs some momentum in attracting off-shoring business before it can successfully pitch to the mainstream venture funds. The industry‘s long term growth requires nurturing of innovations and individual enterpreneurs through venture financing, and the proposed actions are included in Section 6. 4.5 Identifying and Implementing Quick Wins Phase 1 of the industry development program will also identify and implement quick wins. These quick wins will consist of limited activities that have high and immediate impact on the industry, and have demonstration effects for interested stakeholders. Some examples of quick wins include provision of limited subsidies for specified IT/ITES training, declaring suitable buildings as software technology parks to cater to immediate demands, and organization of business development trips for local IT/ITES companies to relevant international fairs and conferences. Page 35 of 62 4.6 Program Investment and Implementation Roles The proposed program is estimated to cost $19,250,000 over a 5-year period, as illustrated in the table below: Phase Action Description Estimated Investment (USD) 1 Planning for Skills Development and Industry Promotion $600,000 2 Implementation of Actions Identified (detailed estimates are $18,500,000 provided in the next section, and includes cost of quick wins) 3 Program Evaluation $150,000 Grand Total $19,250,000 Given the magnitude of the actions, neither the government nor the industry can implement them alone. Both have roles to play until the industry reaches an inflection point. Several countries have tried PPPs to address such challenges and the proposed model for Nepal is shown below: Source: Team’s analysis The formation of the PPP will require the strengthening and resourcing of the High Level Committee on Information Technology (HLCIT). It will also require the inclusion and Page 36 of 62 institutional capacity-building of CAN, FNCC, and other organizations such as the IT Professionals Forum (ITPF) and National Information Technology Center (NITC); to co- drive the initiative and support the implementation. The rights and responsibilities of each party in a joint Government and private sector partnership will be determined by the shareholders‘ agreement and other relevant documents. In this case, the Government will most likely be responsible for policy and regulatory issues, while the private sector will take responsibility for the promotion, development and management of the actions on a day-to-day basis. The PPP, once formed, will need to socialize the recommendations across all constituents in Nepal to ensure that there is an agreement on the market opportunity, key actions, funding and the next steps. This will help prioritize the actions, assign responsibilities and allocate resources. A number of actions can be performed concurrently, and some may require ―stroke of the pen‖ actions such as approval of laws, regulations and incentives. Page 37 of 62 5. Summary of Possible Actions and Investments The planning processes above should yield action items for all of the 5 areas identified. These actions would be prioritized and sequenced for gradual implementation over the program years. Section 6 will provide the detailed description and investment estimates for these actions, and the table below provides a summary view: Reference Action Description Estimated Investment Section (USD) Breakdown Subtotals 4.2 Planning for Skills Development and Industry Promotion $600,000 6.1 Implementation: Skills Development $14,110,000 1 Special scholarships, or subsidies, for ITES-BPO and $5,040,000 software courses and training 2 Special grants to get specialized ‗train the trainers‘ from $150,000 abroad – especially for CMMi and Lean Sigma 3 To be at par with other off-shore locations, Nepal needs to $550,000 have its ITES companies adopting globally accepted certifications. If the perception of low quality is established early on in the process, it will be difficult to overcome and would require significantly more investments eventually 4 Development of national assessment and certification $1,500,000 standard for ITES-BPO industry 5 Competency assessment framework and certifications by $100,000 national bodies to highlight areas for improvement, allowing customization for further training 6 Management and business training: The top and middle $500,000 management of IT/ITES companies should be trained on marketing, sales, and leadership skills to compete in the global marketplace 7 PPP should add directors to its board from Ministry of $0 Education, HRD, labor and employment agencies, and representatives of the central body of universities, and if possible, key VCs of universities 8 Collaboration with academic institutions for course design $50,000 and implementation 9 Introduction of basic IT courses in primary and secondary $620,000 education, and specialized courses in colleges in line with ITES-BPO industry needs 10 Introduction of English as a mandatory medium of $1,450,000 education, or as a primary subject combined with efforts promoting spoken English from primary school level 11 Provision of IT related equipment (computers, software $4,150,000 etc.) at no charge, or at subsidized rates for educational institutions 6.2 Implementation: Industry Promotion $2,665,000 1 Internally launch a national drive, headed by PPP to $125,000 promote IT/ITES revenue using a catchy slogan 2 Externally publicize that Nepal is open to business by $700,000 highlighting incentives and other advantages through Page 38 of 62 multiple channels 3 Fund industry associations for industry promotion using a $1,020,000 PPP approach 4 PPP to develop relationships with IT/ITES analysts or $100,000 advisory groups to validate Nepal‘s capability in servicing BPO/ITES requirements, and place Nepal on key off- shoring indexes 5 Leverage proximity with established neighbors in IT/ITES. $480,000 Incent a pioneer MNC in the banking sector to establish operations in Nepal. Also, incent an large regional company to establish presence in Nepal. Offer negotiated investment incentives for MNCs that create immediate employment in excess of 500. One such incentive could be free land to the first 10 companies that bring in employment in excess of 500 each over three years. This will reduce the need for a larger IT park 6 Develop IT/ITES champion in government, and build up $240,000 business development capacity in Government 6.3 Implementation: Infrastructure $1,140,000 1 Declare suitable private and public sector buildings into $0 Software Technology Parks to address immediate demand of IT/ITES companies for office space at affordable rates 2 Provision of telecommunications redundancy on fiber with $1,015,000 end-to-end, service level agreements providing at least 99.996 percent uptime 3 Study on strengthening general power infrastructure $25,000 4 Study on establishing ICT incubator facilities, as a part of $100,000 leading large universities to provide necessary support infrastructure and advisory services to ITES-BPO start- ups 6.4 Implementation: Enabling Environment $135,000 1 Implement standards for data security and intellectual $100,000 property at multiple levels to alleviate security concerns associated with Nepal 2 Apply favorable industry and labor law provisions to the $35,000 IT/ITES industry 6.5 Implementation: Financing $450,000 1 Establish infrastructure to attract VC funds $260,000 2 Promote a program for entrepreneurial initiatives $190,000 - Program Evaluation $150,000 GRAND TOTAL $19,250,000 Page 39 of 62 6. Details of Possible Actions and Investments The following are the detailed description of the actions that could be undertaken for developing Nepal‘s IT/ITES industry. The actions cut across the five areas identified, and are selected initially based on the following criteria:  Size of investment;  Impact on 5-year goals;  Political considerations and government involvement; and  Complexity and time to implement. The actions for skills development and industry promotion will have to be confirmed and prioritized based on their associated planning processes in Phase 1 of the program; while the actions for infrastructure, enabling environment, and financing could be confirmed at the start of the program by the project team. 6.1 Skills Development Action # 6.1.1 Special scholarships or subsidies for ITES-BPO skills and SW courses. Rationale Increase the quality and quantity of trained technical expertise Details A number of countries are providing training grants for this purpose. South Africa offers a Training and Skills Support Grant towards the costs of company-specific training up to $1,700 per agent. The President of the Philippines directed the Technical Education and Skills Development Agency to allocate $8 million to provide scholarships for training 70,000 call center agents. The training capacity of Nepal IT/ITES Training Institutes would need to be assessed. Priority High Key Activities- Key Activities Metrics  Agreement with International/Nepalese Training Institutes  Marketing Drive  Selection of Candidates  Conduct of Training Key Metrics  Number of Applicants, trainees, and trained  Feedback post course  Feedback one year later Responsibility PPP Timing Year 1 to Year 5. Budget Category Sub-Category Unit Cost Units Years Sub-Total (USD) (USD) Training: Training grants $400 per 10,000 2 $4,000,000 Software trainee trainees over Developers 4 years & Call Marketing: $30,000/ year 1 campaign $120,000 Center Paper Media /year Agents Marketing: $30,000/ year $120,000 Electronic Media Page 40 of 62 Marketing: $20,000/ year $80,000 Internet Media Admin: Project $2,500/ month 1 person $120,000 Manager- Evangelizer Admin: $650/ month 6 persons $188,000 Regional Coordinator Admin: National $650/ month 3 persons $94,000 Coordinator Admin: Rent / $4,000/ month 1 $192,000 Utilities Admin: Travel $2,000/ month 1 $96,000 CAPEX: $3,000/ 10 persons Once $30,000 Laptops, person total over 4 Printers, years Furniture, Fixtures, Network etc Total $5,040,000 Action # 6.1.2 Special grants to get specialized ‘train the trainers’ from abroad – especially for CMMi and Lean Sigma Rationale Increase number of trainers in the country until a critical mass is reached Details Countries such as Sri Lanka offer grants up to $10,000 for a specialized trainer from abroad under their ‗train the trainer‘ program. The training should be provided to dedicated training companies rather than to IT companies alone. ―Train the trainer‖ is a foundational program required for sustainable success of other programs. Proximity to India should help lower the cost of trainers. Key Activities- Key Activities Metrics  Identification of skills, number and kind of trainers  Agreement with International Training Institutes  Marketing Drive  Selection of Candidates  Conduct of Training Key Metrics  Number of Applicants, trainees, and trained  Quantified feedback post course  Quantified feedback one year later Responsibility Industry group Timing Planning in Year 1, training in Year 2 onwards. Budget Category Sub-Category Unit Cost (USD) Units Years Sub-Total (USD) Training: Foreign $10,000 per 5 programs 2 $100,000 Train the trainers to train program /year Trainers the trainers (including location allowance) Marketing $5,000 1 2 $10,000 Admin $15,000 1 2 $30,000 Overhead CAPEX $10,000 1 Once over $10,000 2 years Total $150,000 Page 41 of 62 Action #6.1.3 To be at par with other off-shore destinations, Nepal needs to have its ITES companies adopt globally accepted certifications. If the perception of low quality is established early on in the process, it will be difficult to overcome this perception and it would require significantly more investments eventually. Rationale  To counter the perception of low quality, many off-shore companies have made concerted efforts to ensure that they are certified in global certifications for quality and maturity. The most common ones being: (Source: Nasscom/Everest Study)  These provide assurance that a consistent level of quality and process maturity will exist at the outsourcer. Details Type: Capacity Building  There are a host of local and international consultants that can provide training  There are no CMMi certified companies in Nepal today. Key Activities- Key Activities Metrics  Selection of consultants companies, certification companies, and candidate companies Key Metrics  Number of selected candidate companies  Number of candidate companies that have completed consultancy phase  Number of candidate companies that have been certified Responsibility PPP nd Timing Begin in 2 quarter Year 2 Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Company Certification $25,000/ 20 Total over 2 $500,000 Certification: Program Company years International (funded by Certification in government) ITES Admin, $50,000 Lump sum N.A. $50,000 Overhead, estimate over Marketing 2 years and CAPEX Total $550,000 Page 42 of 62 Action # 6.1.4 Development of national assessment and certification standard for ITES- BPO industry. Rationale Standards are important determinants of quality and sustainability, and assist in branding. Details Type: Capacity Building The first preference should be the use of global standards and certifications. 50 certifications can be reasonably targeted over two years. Key Activities- Key Activities Metrics  Selection of consulting companies, certification companies, and candidate companies Key Metrics  Number of selected candidate companies  Number of candidate companies that have completed consultancy phase  Number of candidate companies that have been certified Responsibility PPP th Timing 4 quarter Year 2 Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Company Certification $25,000/ 50 over 2 N.A. $1,250,000 Certification: Program Company years ITES-BPO Admin, $250,000 Lump sum $250,000 Overhead, estimate over Marketing 2 years and CAPEX Total $1,500,000 Action # 6.1.5 Competency assessment framework and certifications by national bodies to highlight areas for improvement, allowing customization for further training. Rationale Talent is the single most critical element in attracting IT/ITES business Details Type: Capacity Building  An example of this is the Assessment of Competency introduced by NASSCOM in India. NASSCOM consulted a large number of ITES players to come up with a ‗NASSCOM Assessment of Competence‘ (NAC) framework. This framework is emerging as a national standard for generic skills and recruitment of entry-level talent for the ITES industry in India.  The skill testing themes are shown in Table below. The test scores indicate areas for improvement, allowing customization of further training.  Firms to be selected by PPP would administer the framework. Skill Competence Testing Themes Test Competencies assessed Keyboard skills Typing speed, accuracy Spoken English Voice clarity, fluency, vocabulary, Grammar/ sentence Construction, accent, Situation comprehension Writing Ability Message clarity, comprehension (Multiple Choice & Essay) Listening Comprehension, accent understanding Numerical and Numerical ability, logical reasoning, Analytical Comprehension Page 43 of 62 (Source: NASSCOM 2007) Priority High Key metrics Key Activities  Award of Competency Assessment Framework Study  Completion of Study  Submission of Policy to competent authority for Approval  Approval of policy by competent authority  Establishment of National Certification Bodies Key Metrics  Number of Personnel Certified  Difference in retention rates, remuneration and employee feedback between certified and non-certified personnel Responsibility PPP nd Timing 2 quarter Year 2 Budget Category Sub-Category Unit Cost Units Years Sub-Total (USD) (USD) Talent Development of $50,000 One time over N.A. $50,000 Assessment Assessment 2 years and Framework and Certification: Certification National Level Admin $50,000 Lump sum $50,000 Overhead estimate over 2 years Total $100,000 Action # 6.1.6 Management and business training: The top and middle management of IT/ITES companies should be trained on business planning, marketing, sales, and leadership. Rationale Management and business training is needed for the top to mid-level executives for skills to compete in the global marketplace. This is especially important in the areas of marketing and sales given that industry promotion is one of the key challenges in Nepal. Business planning skills and leadership training is also essential to lead and drive the growth of these local companies, and there appears to be a dearth of suitable middle management skills in Nepal based on the industry‘s feedback. Details Type: Training Program The training programs to be provided should cover these basic areas:  Business planning: key strategic, planning and budgetary issues, etc.  Marketing training: value proposition, target market identification, channel strategies, branding, etc.  Sales training: prospecting, qualifying, solutioning, proposing, negotiating, and closing, etc. skills for direct client engagement and follow-up throughout the sales cycle  Leadership training: coaching, mentoring, performance management, etc. These trainings could be provided by professional training firms (e.g. the use leading sales performance company such as Miller-Heiman for sales training), and executive programs could also be developed with local business schools. The training could be tailored to cover different depths for the top and mid-level executives (e.g. strategic versus tactical/operational focused), and it is suggested for the Government to subsidize 50% of the cost for the first two years, until these Page 44 of 62 skills are embedded and the industry grows. After that, the cost could be borne by the individual companies. Key Activities- Key Activities Metrics  Identification of key skills and course selection  Agreement with training organizations  Selection of Candidates  Conduct of Training Key Metrics  Number of applicants, trainees, and trained  Quantified Feedback post course  Quantified Feedback one year later Responsibility GON/Industry PPP nd Timing Begin planning in 1st quarter and initiate training in the 2 quarter of Year 2. Budget Category Sub-Category Unit Cost (USD) Units Years Sub-Total (USD) Planning Assessment $30,000 Lump sum N.A. $50,000 of training estimate needs, options; and program development Training: Top- 50% Subsidy $5,000 per 40 across 2 $200,000 level for Training executive (based years Management Course on $10,000 per program) Training: Mid- $2,500 per 100 across 2 $250,000 level executive (based years Management on $5,000 per program) Total $500,000 Action # 6.1.7 As a partner in the PPP, the industry group should add directors to its board from Ministries of Education, HRD, labor and employment agencies, representatives of the central body of universities in Nepal, and if possible, key Vice Chancellorsof universities. Rationale The challenge lies in the education system not accepting to integrate and introduce BPO curricula. Responsibility Industry group, GON Timing 4th quarter, Year 1 Budget No Cost Implication. Action # 6.1.8 Collaboration with academic institutions for course design and implementation Rationale IT is a dynamic discipline; therefore course content needs to keep pace with changes in technology. Details Type: Study 1. The scope of this activity should include the development of an overall vision for course curriculum that spans: a. Primary School Education i.e. Grades 5- 8, b. Secondary School Education i.e. Grades 9-12, c. Vocational Training, d. Higher Education i.e. Bachelors, Masters, PhD, and Post Doctoral, e. Professional Training for Senior Managers, Middle Managers, and other Page 45 of 62 professionals. 2. For each tier, the following should be considered: a. Curriculum development and annual review methodology; development of curriculum for each tier b. Demand assessment and nature for each tier and identification of number of targeted students, trainees, institutions, etc. c. Instructor training d. Cost of trainings and requirement for subsidies e. Requirement of facility type, computers, audio-visual, software, admission criteria, instruction feedback and assessment mechanism, and timings of instruction; includes need for provision of computers and software to schools and colleges f. Summer school if applicable g. Distance Learning Key Activities- Key Activities Metrics  Notification of National IT Curriculum Committee  Establishment of Secretariat within education department  Selection of Consultant to conduct Study  Completion of Study  Change in Curriculum  Assessment of results Responsibility PPP, Ministry of Education nd th Timing 2 -4 quarter Year 2 Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Education: Design & $40,000 Lump sum N.A. $40,000 Curriculum Implementati estimate over Design on 2 years Updating of $10,000 $10,000 materials Total $50,000 Action # 6.1.9 Introduction of basic IT courses in primary and secondary education, and specialized courses in colleges in line with ITES-BPO industry needs Rationale Global demand for ITES-BPO services is growing fast. The sector is price- sensitive and Nepal‘s can leverage its key strength i.e. low price of resources. Skills can be developed relatively quickly. Details Target 200 schools and colleges across Nepal. Given 1 instructor can cover 3 schools-colleges, 70 instructors will be needed. However, this number is likely to be much lower if the course curriculum is integrated into the existing courses. Key Activities- Key Activities Metrics  Identification of Training Firms  Identification of participating training institutions  Initiation of Training  Completion of Training Key Metrics  Number of trainees  Number of instructors  Number of training units completed  Quantified feedback on training Responsibility PPP, Ministry of Education st Timing 1 quarter Year 2 Budget Category Sub- Unit Cost Units Years Sub-Total Page 46 of 62 Category (USD) (USD) Education: Course $3,000 70 instructors 2 $420,000 IT & BPO Instructors instructor / Course year Admin, $200,000 Lump sum Once over $200,000 Overhead, estimate 2 years Marketing and CAPEX Total $620,000 Action # Introduction of English as a mandatory medium of education or as a 6.1.10 primary subject combined with efforts promoting spoken English from primary school level. Rationale Prevalence of English in Nepal is a key competitive advantage but this skill exists in a relatively small part (8 percent estimated) of the population. Expanding the prevalence of English will create more off-shoring opportunities Details Type: Training Program This would be a ―train the trainer‖ program where English language skills of instructors would need to be improved; in addition English language courses would be introduced where they are not being offered. Ideally this component needs to be owned by the Ministry of Education. Key Activities- Key Activities Metrics  Identification of Training Firms  Identification of participating training institutions  Initiation of Training  Completion of Training Key Metrics  Number of trainees  Number of instructors  Number of training units completed  Quantified feedback on training Responsibility PPP, Ministry of Education Timing 2nd quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Education: Course $2,000 to 200 instructors 2 $800,000 to English Instructors $3,000 / $1,200,000 Language instructor / year Admin, $250,000 Lump sum Once over $250,000 Overhead, estimate 2 years Marketing and CAPEX Total $1,050,000 to $1,450,000 Action # Provision of IT-related equipment (computers, software etc.) at no charge, 6.1.11 or at subsidized rates to the education institutions. Rationale Educational institutions are a critical link in the preparation of an IT savvy workforce Details Type: Capacity Building Microsoft Corporation already provides significant discounts to academia; free open source software is also available. Computer laboratories with computers, printers, scanners, UPS etc. can be provided to those schools and colleges that can provide space. Page 47 of 62 Key Activities- Key Activities Metrics  Identification of Vendors  Identification of participating training institutions  Initiation of Supply Key Metrics  Number of computers purchased  Number of computers supplied  Number of laboratories established Responsibility Ministry of Education Timing 2nd quarter Year 2. Budget Category Category Unit Cost Units Years Sub-Total (USD) (USD) Education: Subsidy for ~$400/ laptop 10,000 laptops N.A. $4,000,000 Provision of IT Laptops (based on cost over 2 years Equipment of $600/laptop) Admin, $150,000 Lump sum $150,000 Overhead, estimate over Marketing 2 years and CAPEX Total $4,150,000 Page 48 of 62 6.2 Industry Promotion Action # 6.2.1 Internally launch a national drive, headed by PM’s Office to promote IT/ITES Rationale Government IT initiatives can be vital to boost the IT industry Details  Appoint focal points with clear responsibilities and accountabilities in each ministry  Appoint a high-profile government spokesperson  Ensure that IT gets adequate importance on all government websites  Establish IT Parks and assist software parks in marketing programs  Publicize government initiatives for reform in the telecom sector, tax incentives, IT Parks etc.  Develop coherent marketing message and catchy slogan  Create an IT/ ITES Entrepreneurship Challenge with a prize of a significant award (e.g. $200,000 / $500,000) to any company that creates business opportunities in Nepal that contribute to the most dramatic growth in this sector. It will require the creation of measurable and actionable targets and time frame. For example, it could be in the form of a prize of $200,000 for creation of 500 sustainable jobs. (This is not included in the investment summary).  Two studies/plan formulations should be undertaken, one for Government websites and the other for initiative and incentives promotion Priority High Key Activities- Key Activities Metrics  Development of Government Website IT promotion and e-Government Plan.  Government website and e-Government Plan implementation.  Development of IT Industry Initiatives and Incentives Promotion Plan  Promotion Plan Implementation Responsibility Chairman PPP or other Government Spokesman Timing Ongoing after the initial launch in 1st quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Industry/ Export Studies for $15,000 per 2 N.A. $40,000 Promotion: National study Nation Drive Drive Admin, $5,000 Lump sum Once over $5,000 Overhead, estimate 2 years Marketing and CAPEX Promotional $40,000 for One time $80,000 Website development development cost across all and yearly ministries. maintenance $10K/year maintenance/ year Total $125,000 Page 49 of 62 Action # 6.2.2 Externally publicize that Nepal is open to business by highlighting incentives and other advantages through multiple channels Rationale Nepal‘s vague image overseas needs to be countered in order to give confidence to overseas customers and investors to do business in Nepal. Details Highlight competitive incentives in the areas of:  Generous job creation and apprenticeship grants mentioned earlier.  Land at concessions for building IT Parks.  Tax holidays until 2016.  Training grants  Duty exemptions  100% foreign ownership  100% Profit/capital repatriation  Speedy custom clearances External promotion may be best done by:  Advertising in global print media (e.g. newspapers and magazines) that reaches appropriate target markets  Utilizing Internet and associated search technologies. The web has become the starting point for off-shore research. Searchable database of member companies, news/press information, and business opportunities needs to be included  Utilizing existing embassies in target markets (e.g. U.S. & U.K.) for on-site promotion activities Key Activities- Key Activities Metrics  Selection of SEO firm  Selection of PR Firm  Opening of Overseas Offices Key Metrics  Increase in number of unique visitors per month to website Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) External Internet $100,000 for Lump sum Once over $200,000 Promotion: SEO, Social estimate 2 years Internet, PR Media Firms & Local Marketing, Offices Internet advertising Print $400,000 for Multiple $400,000 advertisement over 2 fees in relevant years newspapers, magazines, conference publications, etc. External On-site $25,000 per 2 2 $100,000 Promotion embassy for (U.S. & using Embassy promotional U.K) Network activities Total $700,000 Responsibility PPP st Timing Ongoing after the initial launch in 1 quarter Year 2. Page 50 of 62 Action # 6.2.3 Fund industry associations for industry promotion using a PPP approach Rationale Industry associations have been helpful in organizing industry thinking, harmonizing goals and approaches, driving operational excellence in companies, and creating excitement about the country and its potential; e.g. in –India and Philippines. Industry associations like NASSCOM (in India) have helped in the development of the sector by creating a clear strategy, aligning industry around it, communicating clearly to government what is critical to success and in marketing the national brand to investors worldwide. Details PPP should be adequately funded and vitalized to:  Conduct conferences and for ITES/BPO professionals from the region as well as globally  Prepare marketing materials, such as DVD‘s, brochures and sales collaterals for distribution at major worldwide IT/ITES events, embassies and other events  Conduct industry promotion events bringing key clients for BPO/ITES services from North America, Europe, India and other interested countries.  Arrange business linkage trips for the local industry representatives and ensure follow up with potential customers and facilitate relationship building. It is recommended that Nepal conduct 6 to 7 delegations to the key markets and hold 1 to 2 conferences in Nepal, and for the cost to be split equally between PPP and the private sector. Key Activities- Key Activities Metrics  Date selections for events and trips Key Metrics  Number of conferences held.  Number of attendees including international delegates  Number of Senior executives from client companies that have visited  Number of deals closed and their value Responsibility PPP Timing Ongoing after the initial launch in 1st quarter Year 2. Budget Category Sub-Category Unit Cost Units Years Sub-Total (USD) (USD) External International $100.000/ 1 per year 2 $200,000 Promotion: Conferences Conference Conferences, National $10,000/ 1 per year 2 $20,000 Marketing Conferences Conference Materials & Marketing $200,000 Lump sum N.A. $200,000 Events Material: all estimate for 2 media years including web Industry $10,000 per 50 visitors $500,000 Promotion visitor over 2 years Events Admin $100,000 Lump sum $100,000 Overhead estimate for 2 years Total $1,020,000 Action # 6.2.4 PPP to develop relationships with IT/ITES analysts and advisory groups to validate Nepal’s capability in servicing BPO/ITES requirements, and to place Nepal on key off-shoring indexes Page 51 of 62 Rationale International clients and publications give weight to a country‘s placement on key indices and do their secondary research on companies and countries on the web. A number of mid size companies research potential off-shore partners on the web. Details Type: Study Facilitate IT/ITES data collection in order to position country favorably on key off- shoring indexes e.g. A.T. Kearney‘s Global Services location Index, Global IT Report of the World Economic Forum, Gartner, and other off-shoring indexes and search engines. Studies would need to be conducted to provide data for international studies. Key Activities- Key Metrics Metrics  Number of sites/search engines identified  Number of foreign indexes that have been provided data.  Increase in rating due to initiative Responsibility PPP and other trade bodies Timing Ongoing after the initial launch in 1st quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total (USD) Category (USD) External Study on Key $60,000 / Lump sum 1 $60,000 Promotion: IT/ITES year estimate Placement in Key Indices Off-shoring Marketing $20,000 / Lump sum $30,000 Indices year estimate Admin, $10,000 / Lump sum $10,000 Overhead year estimate Total $100,000 Action # 6.2.5 Leverage proximity with established neighbors in IT/ITES. Incent a pioneer MNC in the banking sector to establish operations in Nepal. Also, incent a regional company to establish presence in Nepal. Offer negotiated investment incentives for companies that create immediate employment in excess of 500. One such incentive could be free land to the first 10 companies that bring in employment in excess of 500 each over three years. This will reduce the need for a larger IT park. Reduce or eliminate 15% tax on technical services for regional outsourced work to Nepal. Rationale  Special incentives to attract a desirable business are a standard practice in the industry. For example, Dell was offered free land (leased for 30 years at no cost) in Andhra Pradesh in India. Apple was offered a similar deal by another state.  It will give Nepal visibility in the outsourcing segment.  A large credible anchor company can be a catalyst and a role model.  Anchor companies can catalyze growth in Nepal in four ways: o Build the country brand e.g., Nokia for Finnish companies in the telecom industry. o Drive venture creation: Anchor MNCs will create spin-offs e.g. Fairchild Semiconductors has spawned 37 firms including Intel. Provide work for sub- contractors o Drive innovation by investing in developing emerging technologies and standards e.g. Sweden has become a leading location for developing wireless Internet equipment and applications largely because of Ericsson.  In addition, to attract outsourcing work from India, eliminate or reduce the 15% tax on services between the two countries. Page 52 of 62 Details  Focus on a company in the financial sector with $5 to $10 billion in revenues. Companies this size are largely under penetrated. The larger ones may already have either captive or third party relationships.  A key success determinant will be the identification of ―coaches‖ within each targeted firm. ―Coaches‖ are described as Miller-Heimann, the premier Marketing Series, as individuals who are not decision makers within client companies, but rather provide critical information and guidance to the seller. Such coaches may be expatriates or friends of Nepal. To launch the program exclusive well-marketed conferences would be held with 30 or so leading expatriates and other ―Friends of Nepal‖ in New York City, San Francisco, and London. The Prime Minister or else the Minister of IT and other Ministers would ideally chair these conferences. The Program would be introduced to expats and their feedback solicited. Expats would sign up to become coaches and commit time for one or two targeted firms. They could be provided recognition and an exclusive audience with the Prime Minister on success.  Focus on the banking industry. It is the largest BPO opportunity, covers a number of sub-segments and Nepal already has expertise in most of them. Key Activities- Key Metrics Metrics  Number of Employees of Targeted Foreign Corporation  Off-shore revenue from Nepal Operations, if available  Number of corporations targeted and qualified  Number of corporations that established off-shore offices in Nepal as a result of initiative Key Activities  Preparation of Incentive Package  Development of target company and qualification criteria  Identify and Qualify Targeted Companies  Identify and establish rapport with ―coaches‖ within each target organization  Meet with Qualified companies and Revise Incentive Packages as necessary  Sign Contract Responsibility PPP Timing 2nd quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Investment Study to $15,000 Lump sum N.A $15,000 Page 53 of 62 Promotion: Develop estimate Incentives for Incentive MNC or Package, Global Qualification Software Criteria & Company Targeted Company Target $15,000 $15,000 Company Identification Admin, Travel $150,000 $150,000 and Follow- up Special $100,000 - $100,000 - Incentives $300,00 $300,00 Total $280,000- $480,000 Action # 6.2.6 Develop IT/ITES champion, and increase IT/ITES business development capacity in Government. Rationale The government should identify and develop a high-level official to champion the industry for the country. In addition, it should set up an IT/ITES business development unit with at least 2 dedicated business development representatives for lead generation, direct engagement with clients, solutioning of offerings to match clients‘ needs, and following up with potential investors. Details Type: Business development A high-level government champion to drive support within the government for the IT/ITES industry, and act as the government‘s high-level representation for large potential clients as needed. Two professional business development persons with proven experience in international sales could be hired to focus on representing the government for direct engagement with investors, and to support the local companies in their sales processes. These persons could be sited at a new industry promotion organization as discussed above, or within the government‘s existing investment promotion agency as a unit responsible solely for IT/ITES. They would also catalyze and orchestrate the government responses to opportunities and prospects. Key Activities- Key Metrics Metrics Number of qualified prospects/investors Number of best few prospects in the ―sales funnel‖ Number and value of deals under negotiation and closed Responsibility PPP and other trade bodies Timing Ongoing after the initial launch in 1st quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total (USD) Category (USD) IT/ITES Business Two $60,000 / 1 2 $ 240,000 Development Business year Development (Including persons for overheads) public sector Total $ 240,000 Page 54 of 62 6.3 Infrastructure Action # 6.3.1 Provision of telecommunications redundancy on fibre with end-to–end connectivity, and service level agreements with at least 99.996 percent uptime Rationale Modest bandwidth seems to exist but Nepal needs to enforce adherence to strict service level agreements (SLAs) and ensure 99.996 percent uptime as per international standards to support BPO industry. This is requirement for mission critical, real time applications. Details Type: Telecommunications Study Adequate bandwidth and redundancy are vital to attract this industry. Nepal has gradually brought down the 2 Mb connectivity costs from $5,000 to $1,200 over two years, but will need to further expand availability and affordability. The country also needs to enforce adherence to strict SLAs and regulation of prices in line with prevailing international prices. A further study may need to be undertaken to identify:  SLA levels required,  Projected increase in bandwidth usage over time,  Currently projected service quality,  Cost of additional backup quality satellite connectivity required,  Ability of IT/ITES companies to bear cost and amount of study required Key Activities- Key Activities Metrics  Consultant selected to conduct study  Study Completed  Contract signed with Communications Provider  Backup Service initiated Key Metrics  New Service Levels  New Rates Responsibility PPP Timing Start 1Q10, Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Infrastructure: Study: To $15,000 Lump sum N.A. $15,000 Bandwidth confirm estimate bandwidth requirement Subsidy of $1,000,000 Lump sum $1,000,000 50% for initial estimate Connectivity allocation Total $1,015,000 Page 55 of 62 Action # 6.3.2 Study on strengthening general power infrastructure Rationale Uninterrupted power supply is essential for service delivery. Scheduled and unscheduled load shedding in Nepal are affecting service quality and cost. Details Power  Ensure augmentation of the existing power infrastructure, if required, for provision of un-interrupted power supply.  Exemption from statutory power cuts or load shedding for ITES-BPO establishments.  Classification of ITES-BPO industry as ‗essential or public utility services‘ enabling 24 x 7 x 365 operations for ITES-BPO companies  Guaranteed supply of fuel/gas for in-house power generation.  Special industrial rates for IT Companies in IT Parks A study is required to a) assess gap between power demand and supply, b) assess cost structure of generators and UPS (Uninterruptable Power Supplies), c) devise and propose policy measures to alleviate power-related problems for IT/ITES industry including exemptions from load shedding, tax and duty rebates on purchase of generators and UPS, d) Policy implementation mechanism to ensure transparency and observance Key Activities- Key Activities Metrics  Selection of Consultant to undertake study  Study Completion and Preparation of Policy Package  Approval of proposed Policy by Competent authority  Incentive Policy implementation Key Metrics  Power up time  Cost of Power Responsibility PPP Timing Start 3Q09, Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Infrastructure: Initial Study $20,000 Lump sum N.A. $20,000 Power estimate Admin & $5,000 Lump sum $5,000 Incentive estimate Policy Approval Total $25,000 Action # 6.3.3 Study to establish ICT incubator facilities, as a part of leading large universities to provide necessary support infrastructure and advisory services to ITES-BPO start-ups. Rationale In countries like Turkey and China, university-based incubators have become important centers of innovation and commercialization of research. Details  Universities we spoke with, are interested in establishing incubators / IT Parks  Activities would include: o Feasibility Study o Project Financing through Debt/Equity Key Activities- Key Activities Metrics  Universities Selected,  Debt Financing Page 56 of 62  Construction Initiated,  Construction Completed  Tenancy initiated Key Metrics  Floors Constructed,  Floors Finished,  Square footage completed;  Square footage rented to PPP member companies; Rental rate Mechanism Special Purpose Vehicle with ownership by investors, developers, and University on PPP model Responsibility PPP to lead Timing Start 4Q10, End 4Q11 Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Financing: ICT Feasibility $100,000 Lump sum N.A. $100,000 Incubators Study estimate Total $100,000 6.4 Enabling Environment Action # 6.4.1 Implement standards for data security and intellectual property at multiple levels to alleviate security concerns associated with Nepal Details Details Type: Promotion Program The Data Confidentiality Act needs to be clarified. This will enable criminal persecution for data theft. These initiatives need adequate publicity and require a marketing campaign. Page 57 of 62 Key Activities- Key Activities: Metrics  Passage of Data Confidentiality Act by Competent Authority  Marketing Campaign on Data Confidentiality Act  Marketing Campaign on Intellectual Protection Responsibility PPP Timing 2nd quarter Year 2. Budget Marketing Campaign on Data Confidentiality Act and Intellectual Property Protection: USD 100,000 (lump sum estimate) Action # 6.4.2 Apply favorable industry and labor law provisions to the IT/ITES industry. Rationale Most of these already exist for many industries but need to be stressed or applied to the IT/ITES sector. 1. Ensure flexibility with respect to both weekly and national holidays for ITES- BPO employees in compliance with labor laws. 2. Relaxation of laws relating to labor unions for the ITES-BPO industry (refer to box on labor laws in India and Singapore) Details Even though there is no known union formation in the IT/ITES industry, the incumbents have concerns about employee bandhs and strikes. Employee security is essential given frequent bandhs– particularly that of female employees. Some possible actions include ensuring all ITES-BPO establishments comply with relevant security measures for transportation provided to employees working in different shift timings, and in particular those relating to female employees Key Activities- Key Activities Metrics  Select Consultant to Conduct Study  Completion of Study  Passage of Legislation Responsibility PPP Timing 1st quarter Year 2. Budget Study USD 35,000 (lump sum estimate) Page 58 of 62 6.5 Financing Action # 6.5.1 Establish infrastructure to attract VC funds Rationale IT/ITES start ups need funding for growth and innovation. Details 1. Create a VC advisory board (VCAB) leveraging the large Ex-pat community in North America, Europe and Middle East. The membership should inlcude experienced executives from VC, high tech, M&A and private equity sectors. Members should be officially notified and recognized. They should be asked to make formal commitments on time investment. VCAB can have around 10 members. VCAB would assist in strategy finalization, networking, and deal closure. 2. Develop a a program to help the local banking industry understand how to assess the risk/returns for the IT/ITES industry. 3. Once the IT/ITES industry is established, invite a large PE/VC fund to establish a Nepal fund with some investments from the local limited partners or Nepal government. The main cost component in this activity would be at the international travel. Key Activities- Key Activities Metrics  Establishment of VCAB  VCAB Strategy Formulation and Networking  VC Fund Establishment Key Metrics  Number of Business Plans Reviewed  Number of Workshops conducted for banks  Number of proposals submitted to VC, PE and Sovereign Funds Responsibility PPP th Timing 4 quarter Year 2. Budget Category Sub- Unit Cost Units Years Sub-Total Category (USD) (USD) Financing: VC VC Advisory $100,000 Lump sum N.A. $100,000 Fund Board estimate for 2 Local Bank $30,000 years $30,000 Education on Risks vs. Returns of ITES Encourage $30,000 $30,000 setup of PE, VC, Sovereign Funds Admin $100,000 $100,000 Overhead Total 260,000 Page 59 of 62 Action # 6.5.2 Promote a program for entrepreneurial initiatives Rationale IT/ITES start ups need funding for growth and innovation Details Hold Business Plan review forums, may be in a speed dating format, with the top few receiving seed capital and mentor support. These can be either through collaborations with the universities or through associations like CAN. Fund IT companies who want to go public for due diligence. Conduct audits (through KPMG, PWC, others) to improve processes for companies to successfully go public. Once a success record is established, enable a $30M VC fund without government funding. Key Activities- Key Metrics Metrics  Number of Business Plans Reviewed  Number of Workshops conducted for banks  Number of proposals submitted to VC, PE and Sovereign Funds  Number of companies funded Responsibility PPP th Timing 4 Quarter Year 2. Budget Category Sub-Category Unit Cost Units Years Sub-Total (USD) (USD) Export Sponsorships for $30,000 Lump sum N.A. $30,000 Promotion: business plan estimate for 2 Entrepreneur- reviews years ship Programs Local Bank $30,000 $30,000 Education on Risks and Returns Encourage setup $30,000 $30,00 of PE, VC, Sovereign Funds Admin Overhead $100,000 $100,000 Total $190,000 Page 60 of 62 References  A.T. Kearney. 2009. “The Shifting Geography of Off-shoring – The 2009 A.T. Kearney Global Services Location Index Findings in the 2009‖. A.T. Kearney Global Services Location IndexTM reflects the current unstable recessionary environment. While some established outsourcing hubs are fading—nine countries dropped nine or more positions in the Index—new rising stars are changing the outsourcing landscape. http://www.atkearney.com/index.php/Publications/global-services-location-index- gsli-2009-report.html  Asian Development Bank, 2009. ―The study "Nepal: Critical Development Constraints‖. 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