The 2019 summit successfully conveyed message that Nepal is open for business. But much needs to be done in structural reforms to make the country a lucrative investment destination.
Prime Minister KP Sharma Oli during his address to the House of Representatives on February 14, to mark the current government’s second year, highlighted how successful his administration has been in attracting foreign direct investment (FDI) in the country. “There have been investment commitments amounting to around Rs 200 billion in the current fiscal year alone. The Investment Board Nepal (IBN) has approved FDIs worth Rs 323 billion in the last year and a half,” he said. This optimism of the Prime Minister has been echoed by officials at IBN who say that Nepal is on its way to becoming an attractive investment destination in South Asia after the Nepal Investment Summit (NIS) 2019 held on March 29-30 in Kathmandu. According to them, investment proposals worth Rs 200.9 billion have been approved.
At a time when Nepal seeks more investments to boost its ambitions in attaining higher economic growth after ostensibly ending the prolonged political instability, the developments in attracting investment in the country are promising. However, things are yet to move forward in this respect as the actual realisation of FDI has always proven to be the most difficult part.
The Tale of Two Summits
NIS 2019 was a more carefully choreographed event than its previous iteration organised in 2017 which saw heaps of expressions of interest of foreign investors to invest in Nepal, but little in actual realisation. Of the 50 projects showcased during NIS 2019, 15 deals were signed during the summit.
Despite drawing expressions of interest in projects worth USD 13.57 billion, the 2017 summit was considered disorganised. Concerns were raised if the record expressions of interest would ever be realised due to weak follow-up. However, IBN says investment commiments worth Rs 400.50 billion have been realised from the intents signed during the 2017 summit.
Experts see NIS 2019 as important, but without significant achievements. “The summit was not disappointing in terms of participation; the number of participants was fairly encouraging. However, the FDI commitment was comparatively lower than those made during such summits held twice before in the last three decades,” says former finance secretary Rameshore Khanal. He is of the view that there hasn’t been much activity in turning the promised investment into reality.
Opinions are also divided over whether or not the objectives of NIS 2019 have been achieved and Nepal has become a lucrative destination for investors. “The summit’s key objective of promoting investments in Nepal has been fulfilled. Looking at the timeline and achievements, it has been very positive and encouraging,” claims Maha Prasad Adhikari, CEO of IBN. He adds that issues faced in the previous summits were seriously assessed to draw important lessons.
Siddhant Raj Pandey, chairman and CEO of Business Oxygen (BO2), a private equity impact fund, sees implementation of laws, rules and regulations as the most important factor. “The laws and regulations that have been passed recently seem conducive to doing business. However, on the ground, the laws have yet to filter through making the entire process as cumbersome as ever,” he says, adding, “Until we have a facilitating bureaucracy that is less process-orientated and more result-focused, harmonisation of various rules and regulations and a sense towards value of time, the process of registering businesses will continue to be as tardy as before.”
Advocate Semanta Dahal, a partner at Abhinawa Law Chambers, observes that the 2019 summit was held in a much more organised way than the summit in 2017. “Learning from the folly of the 2017 summit, the government modified its approach for the 2019 summit. Firstly, it conducted a preliminary study and preparatory document for showcasing the projects. Secondly, and most importantly, it waived a series of changes in law and ensured their passage from the parliament before the summit,” he shares.
While the summit in 2017 was organised without the backdrop of much meaningful legislative reforms, NIS 2019 was highlighted by the start of a legal reform drive, albeit a hastily made one. Amendments were made in existing laws including Foreign Investment and Technology Transfer Act (FITTA), Companies Act, Special Economic Zone Act, Industrial Enterprises Act and Labour Act, and Hedging Policy was formulated with a view to easing investment related hurdles and to demonstrate that Nepal has become investment-ready after the end of the prolonged political transition. However, the government’s inability to act upon its own planning became even clearer and evident in this respect: out of 17 investment related Bills in the amendment pipeline, only four were endorsed by the Federal Parliament. The much-awaited Intellectual Property (IP) Bill, Land Bill, Mining and Minerals Bill, Public Procurement Bill and Foreign Exchange Bill, among other Bills, are yet to see the light of day.
In terms of participation, NIS 2019 was important in that not only were prospective foreign investors there, but representatives of the Nepali private sector also participated actively signing many investment deals with foreign investors. Top Nepali business houses including Chaudhary Group, Nimbus Holdings and Sanghai Group announced partnerships with various foreign companies for different investment projects designated for the private sector. Of the 77 projects showcased during the summit, IBN had listed as 50 public and 17 as private sector investment projects.
For IBN, the past year has been a busy one. According to the board’s officials, an effective follow-up mechanism is active so as to realise the investment pledges. As of January 3, IBN has secured commiments amounting to USD 11.88 billion after completing pre-qualification of 14 investment proposals that include five hydropower projects, namely Lower Arun Hydropower Project, Tamor Storage Hydropower Project, West Seti and SR6 Joint Storage Project, Sunkoshi II Storage Hydropower Project and Sunkoshi III Storage Hydropower Project, along with seven integrated agricultural infrastructure projects one each in seven provinces, and the Nijgadh Airport and the Kathmandu Outer Ring Road Project.
“Of the 50 projects showcased, we received letter of intents (LoIs) for 30 projects. After evaluating the LoIs, applications for 16 projects did not meet the eligibility criteria. The 14 projects, whose LoIs have been approved, are very strategic projects,” says IBN CEO Adhikari. These projects have helped us with our project pipeline and have become a good foundation to attract investments in the coming days,” he adds.
Post-summit, there have been other developments, with the process to start the sovereign credit rating of Nepal being the most important one. The Ministry of Finance (MoF) in the last week of December selected the US-based rating firm Fitch Ratings for the purpose. The credit rating, which is yet to start, will determine Nepal’s creditworthiness and assess the risks related to investment in the country. Experts say that this will become an important stepping stone to attract foreign investment in the country. “Sovereign credit rating enables potential investors to determine the level of political risks associated with investments in the country. This makes things a lot easier for FDI freeing up people in the government in terms of repeatedly assuring foreign investors that risks are low in Nepal,” says Khanal. He thinks that the pressure to perform better in the sovereign rating can help the country’s institutions to improve.
Besides, sovereign credit rating could also allay foreign investors’ fearsabout facing unnecessary questions such as ones about raising loans from within Nepal. “This is because the rating agency will also evaluate the efficiency of our BFIs and make financial market foreign investors friendly,” says Khanal. In the last few years, project financing of some large FDI projects such as Hongshi-Shivam Cement have come under question for availing consortium loans from banks in Nepal. Hongshi-Shivam Cement, a Nepal-China joint venture, which started commercial production in September 2018, was criticised for ‘violating’ the norms of FDI by taking loans from Nepali banks. The trend to access financing through co-financing has grown in recent years in Nepal. A recent example of this trend is the financial closure of the Himalayan Resort and Spa. The developer of the hotel, which is currently under construction at Namo Buddha in Kavre, Omstone Asia Capital, a Bangkok-based hospitality and real estate company, inked a co-financing deal worth Rs 1.27 billion headed by Sanima Bank. Upon completion, the hotel will be managed by the Thai hotel and resort chain Dusit Thani.
According to advocate Dahal, international capital flow largely depends upon sovereign risk levels, among other factors. “The credit rating of a nation is grounded on macroeconomic, structural and governance indicators,” says Dahal, adding “The outcome of the sovereign credit rating will demonstrate the reliability of the investment environment and credit hazard.”
Doing Business Environment
According to IBN CEO Adhikari, Nepal ranks second among the South Asian countries, in terms of investment facilitation. He attributes this to the legal and institutional reforms initiated in the recent years. “The amendments to the various laws have enabled work in areas such as starting the one-stop service centre,” he says. The integrated facility, which was promised by the government during the 2019 summit, was opened in May 2019 on the premises of the Department of Industry to provide services related to immigration, inland revenue, land management, customs, central bank, electricity and telecommunication among others, under a single roof to investors. While the establishment of the one-stop service centre is an important post-summit development in terms of easing the hurdles faced by investors, the efficiency of the government agencies housed there has come under question. Investors complain that they aren’t getting services as promised and that the officials at the centre are themselves confused about their roles and responsibilities. Many say that this is because the suggestions to provide training to the employees before opening the centre were ignored.
When the World Bank published the 2019 edition of its flagship Doing Business report, people in the government were seen in a celebratory mood. In 2019, Nepal jumped 16 places in the index to 94 spot from 110 in 2018. The most noticeable improvement was in the parameter of access to credit information where the Himalayan nation performed strongly at 37 spot among the 190 economies ranked. At 60, the country also ranked higher in cross-border trade. However, Nepal’s performance was poor in other important areas including paying taxes where it ranked 158, enforcing contracts (154), dealing with construction permits (148) and getting electricity (137). The weaknesses prevailing in these areas contradict the government’s claim to have created a good environment for investment despite the increase in the overall rank in the Doing Business index.
Have Hurdles in Realising Investments Eased?
Despite the attempts made in the past year to attract investments in the country, investors still face several hurdles in their way. The problems faced by Dolma Impact Fund, an international private equity fund focusing on investments in Nepal, serve as an example in this regard. Citing the stringent anti-money laundering/counter financing of terror (AML/CFT) compliance, Nepal Rastra Bank (NRB), has kept the approval of Dolma’s investment pending for the last 11 months. The fund had signed a loan agreement with a foreign sovereign wealth fund to invest in the expansion of the e-commerce portal Sastodeal. According to Shabda Gyawali, investment director at Dolma Impact Fund, they were unnecessarily asked questions about the purpose of the investment and even about a minor spelling error in the document. “We were asked about the rights issue regarding our investment in Sastodeal which I don’t think should concern the central bank,” he says. At the time of writing this story, Gyawali informed that the file pending at NRB will be approved by the last week of February.
According to Khanal, there is not much justification in carrying out unnecessary and often lengthy inquiries into investments availed from sources like sovereign wealth funds, International Finance Corporation (IFC), private sector financing of the Asian Development Bank (ADB) and international banks that have high standards of AML/CFT compliance.
The government has claimed it has laid a sound legal foundation for investment through legislative reforms. But concerns have been raised about some provisions in the laws that can discourage rather than promote investments in Nepal. As per the provisions in the FITTA, FDI threshold has been set at Rs 50 million, which economists and legal experts say inhibits less capital intensive industries from attracting foreign investments. “The threshold painfully affects the service and light manufacturing sector,” says Dahal. He suggests that a more appropriate measure would be to prescribe a sector-specific investment threshold amount. Dahal sees this is an example of a superfluous and counterproductive change to provisions that were working satisfactorily.
Gyawali of Dolma Impact Fund agrees with Dahal. According to him, the threshold bars entrepreneurs in export-oriented sectors such as IT from receiving foreign investments. “Generally, businesses working in areas such as business process outsourcing (BPO) are not capital intensive. Now with the threshold set in FITTA, they will be forced to increase their valuation to bring investments from abroad. It can be counterproductive to them as their own investments will be diluted,” he says.
FITTA has also barred foreign investments in certain areas of the agriculture sector such as poultry and dairy. “This will have a negative impact as it erodes the ability of consumers to get products at affordable market prices and hinders the transfer of technology in these business areas,” opines Gyawali.
Established in 2012, IBN has been mandated to work as a ‘central fast track one window agency’ executing public-private-partnership (PPP) schemes, investment promotions and facilitation. Nevertheless, the body has not been able to work as expected. What holds IBN back is that it has not been able to free itself from political interference and the shackles of bureaucracy to strengthen its institutional capacity in order to play its role effectively.“Looking back at its last eight years of operation, there’s not much to be happy about in its performance in terms of the output it was supposed to generate,” observes Khanal.
IBN spent its first three years in formulating rules, regulations, mechanisms, procedures and planning and organising investment related summits, the first of which was held in 2015. There was a change in its leadership in mid-2016 and it had already signed agreements with investors for just about half a dozen investment projects. “However, to date, except for the completion of a cement project, none of the others are anywhere near commercial operation,” says Khanal.
The process to restructure IBN started sometime after the 2017 summit when a need was felt that legislative reforms were necessary to help the body to focus its efforts in facilitation and promotion of investments in Nepal. As a result, the PPP and Investment Act was enacted before the 2019 summit which has given new powers to IBN. The Act envisages the establishment of a public-private partnership (PPP) centre and investment centre at IBN. The proposed PPP centre has been mandated with activities including identifying projects, facilitating PPP projects, developing a PPP framework, financial management, coordinating with other government agencies to execute projects, among others.
Similarly, the investment centre has been tasked with promoting Nepal as an investment centre and approving investment proposals. However, the Act is yet to be executed as the PPP and Investment Regulation hasn’t been enacted. According to Adhikari, the preparation of the Regulation required to execute the Act is in its final stage.
“Besides, we are also working in some other important areas of regulatory framework. Guidelines related to Viability Gap Funding (VGF), PPP procurement, survey license, among others, are being drafted. The drafts will be refined and will go into the approval process once the Regulation comes,” he says. Adhikari informs that an internal committee is working to carry out the restructuring of IBN. “Likewise, we also need a Standard Operating Procedure. We are exercising all these internally,” he says.
Filling the Investment Gap
The National Planning Commission (NPC) has estimated that Nepal requires investments amounting to Rs 9,246.39 billion in the next five years. Of the total projected investment, the private sector’s share is the largest at 55 percent, while it is 40 percent and 5 percent, respectively, for the government and cooperative sector. As per NPC, this amount of investment is needed to uplift Nepal’s status to a middle-income nation and to achieve the key objectives of the Sustainable Development Goals (SDGs) by 2030. For this, Nepal needs nearly Rs 2,000 billion in investments annually to achieve this ambitious goal. However, there is an investment gap of around Rs 700 billion to invest in the next five years given the current combined capacity of the private sector, government and the cooperative sector.
In this situation, removing policy and procedural hurdles and adopting a more flexible approach to attract investment in the country has become more important than ever, observers say. “One obvious reason for lower than expected FDI inflow is the inability of the relevant government agencies to proactively communicate to investors about the support they are going to extend to investors in the course of executing investments,” says Khanal.
Advocate Dahal shares similar views. “Going forward any reform should look at addressing investment promotion and making investment regulation benign. Investment promotion would require the governmental agencies to have all the appropriate artillery to persuade, appeal and encourage foreign investors to partner in the country's development,” he says.