--By Bharat Raj Upreti
There is an intrinsic relationship between the law and the pace of infrastructure development. A solid, clear and predictable legal and policy regime forms the foundation for infrastructure development. The importance of such legal foundation becomes more important if infrastructure projects have to be financed and operated by private investors.
In addition to legal and policy foundation, there are two other important prerequisites to facilitate and encourage private sector investment in infrastructure development projects. The first is the efficient and development friendly government bureaucracy. In any form of legal regime, the role of the government and its bureaucracy remains pivotal at every stage including licensing, construction and operation of infrastructure development projects. No decision, delayed decision or wrong decision by government officers concerned is equally responsible for delaying the project and escalating the cost beyond the calculation of any reasonable investor. So, any government committed to encourage and protect private sector investment in infrastructure should ensure the facilitation of governmental support at every stage of infrastructure development from its inception and licensing to project operation and handing over to the government on the expiry of the license period. This assurance requires the government to build a team of officers who are highly trained, efficient, fair and development-friendly. The third prerequisite for development friendly regime is an efficient, fair and predictable dispute settlement mechanism.
Need for Harmonization of Related Laws and Policies
Nepal does not have a national policy on investment. There are separate policies on foreign investment, industrial enterprise and separate sectoral infrastructure policies, for example, the Hydropower Development Policy 2001 only deals with the utilization of hydropower resource. The laws dealing with infrastructure development are also scattered. For example, the act concerning Private Financing in the Construction and Operation of Infrastructures, 2007 ("BOOT Act") and the Rule concerning Private Financing in the Construction and Operation of Infrastructures, 2007 ("BOOT Rules") deal with the development, operation and concession of privately financed infrastructure projects. Similarly, the Investment Board Act, 2011 and Investment Board Rules, 2012 deal with the privately financed mega infrastructure projects.
The different contracting authorities have different regulatory powers depending upon the nature and size of the privately financed infrastructure projects. For example, the Ministry of Energy is the licensing authority for the development of any hydropower project with installed capacity of less than 500 MW. However, Investment Board has the legal authority with regard to the development of hydropower projects with installed capacity of 500 MW or more.
The privately financed infrastructure projects are exposed to multiple barriers ranging from lack of firm political commitment on the part of political parties, lack of clear and predictable legal and policy regime to the social and environmental issues. Few examples are discussed in this article.
A notable number of the existing laws dealing with privately financed infrastructure projects appear to be conflicting with each other and thereby failing to provide a clear, comfortable and predictable basis for private sector investment. Some laws are irrational and are causing duplication in the approval process for foreign investment. For example, the Foreign Investment and Technology Transfer Act, 2049 requires the approval of the Department of Industries (DoI) for foreign investment in Nepal. After months of waiting and rigorous follow up in DoI, the approval arrives, and one has to repeat the same exercise again to get approval on the same matter from Nepal Rastra Bank (NRB). This is as required under the Foreign Exchange Regulation Act. Since both the DoI and NRB work for the Government of Nepal, why is approval from one authority not sufficient? An investment-friendly regime requires the removal of such duplications.
Inconsistency between the laws made by the Parliament and the notifications/directives issued by a sector-specific regulator sometimes create confusions and legal barriers. A single notification issued by a regulator as a part of its regulation is discounting and negating the implementation of parliament-made law in a state of complete futility. The Insolvency Act, 2006 and the Blacklisting Directive issued by Nepal Rastra Bank can be an example. The former allows a debtor to file for insolvency proceedings and to seek reorganization and/or liquidation. However, the blacklisting directives issued by NRB have been a major stumbling block to the insolvency process. An insolvent or financially distressed company is automatically blacklisted if it applies to the court to initiate the insolvency process. The said directive undermines the right of an honest but unfortunate investor to go for a fresh start and reorganization of his business through legal process.
The law makers do not appear to bother much to consider the far reaching implications while discussing bills in parliament and pass the same as law. Sometimes, the act itself allows a notification or a simple notice issued by a regulator to trump over the provisions of law made by Parliament. Bank and Financial Institutions Act, 2006 can be taken as an example. This act puts NRB in superior position over other 300 acts passed by the national parliament. How a delegated legislation issued by the sub-ordinate authority can control the operation of Parliamentary enactment?
The Company Act, 2063 is the basic law for setting up of project companies. This act has proved to be irrelevant and incomplete with the change of time, nature of business and need for more private investment. Same is the case with Foreign Exchange Regulation Act, 2019. This act is insufficient to cater to the present day need for foreign currency investment.
Inconsistency between the BOOT Act and Investment Board Act, 2011 ("IBA 2011") has made the regulatory regime for infrastructure projects even more complicated by allowing the overlapping of authority between the government line ministry and Investment Board. Section 4(1) of the BOOT Act provides that the Government of Nepal can invite letter of intent for development of infrastructure projects costing more than NPR 20,000,000 (Twenty Million Nepalese Rupees) without prescribing the maximum threshold, whereas, Section 9 of the IBA 2011 provides that the execution of the projects, including hydropower projects above 500 MW, fast track road projects, tunnel, railway, projects with fixed assets above NPR 10,000,000,000 (Ten Billion Nepalese Rupees) will be under IBA 2011 - notwithstanding anything specified in other laws. This clearly explains how the laws are formulated on ad-hoc basis without considering the possible overlapping of authority among agencies and potential implication thereafter. This also evidences absence of clear policy and regulatory framework for development of hydropower infrastructure.
Labour laws are also lopsided. This has been the source of conflict between the owner/management and employees/workers. The law prohibits foreign employment even in managerial position in a company substantially owned by foreign investors. Even the Chief Executive of such company with billions of rupees invested in Nepal is forced to go for interview for work permit. This is ridiculous. What is the use of such interview? Whose interest is the interviewer protecting?
To address all of the above issues and guarantee a promising way forward to attract investment in the infrastructure sector, the above mentioned inconsistencies, weaknesses and duplication should be addressed by policy intervention and subsequent rationalization and harmonization of the laws related to investment.
Legal Issues on Financing of Infrastructure Projects
Access to finance is a matter of primary concern that starts right from the contemplation of any infrastructure project. In the absence of a clear and congenial legal and regulatory framework governing the financing of infrastructure projects, the level of confidence on part of the investor will not increase, given the risks associated with lending and equity participation in the projects. The existing policy and laws create several barriers to raise funds from the capital market.
Generally, the possible funding streams into an infrastructure project could be: (a) equity investment, (b) debentures/bonds, loans (long term, short term), working capital, bridge facilities, subordinated debt, and (c) hybrid instruments such as quasi equity investment or equity-debts linked instruments. Companies Act, 2006, Security Act, 2007, Security Market Operation Regulation, 2007, Security Registration and Issue Regulation, 2008, Security Issue Guidelines, 2008, Bank and Financial Institutions Act, 2006, Notifications, Directives and Circulars issued by NRB deal with the process of raising capital.
The conduciveness of the above-mentioned laws in respect of financing should be assessed in the light of: (a) what are the available investment options permitted and regulated? (b) how stable is the regulation regime under the framework? (c) time efficiency in obtaining approvals to collect and inject money into projects, and (d) easy repatriation of the returns, and divestment and overall exit.
To this date, investment in infrastructure projects flows either by equity participation or through debt financing. Investors willing to participate by the way of equity have limited options: issue of ordinary equity or preference share. The participation in the target by way of quasi-equity and hybrid instruments is not in place.
The law does not define pre-condition and requirements applicable to initial public offerings (IPOs) in clear terms. For instance, Rule 7 (6) (h) of the Issue Regulation requires the consent of infrastructure company to maintain the debt-equity ratio as specified in the Issue Guidelines till the construction periods. However, the Issue Guidelines does not provide any reference to the required debt equity ratio.
The requirements to be satisfied under the Companies Act, 2006 for the issuance of the shares at premium has made it virtually impossible for a company and its sponsors to benefit from the value of the project. Companies Act and Issue Guidelines require a company to have a three-year track-record of net profit for it to be able to float the shares at premium rate. Large infrastructure projects have relatively longer gestation periods and require a substantial period to meet the break-even point after commercial operation date. This means that the investors' should wait for next three years after meeting break-even point to reap the fair share of return and exit from the project. The present Issue Guidelines simply ignores the prospects of premium pricing based on prediction of future return/cash flow and simply relies on traditional balance-sheet test. This creates a sense of trapping of fund once it goes in which is very much discouraging for the investors.
The pre-IPO shares or Promoters’ shares of the Project Companies are also subject to a lock-in period of three years from the date of IPO of ordinary shares. In addition to this, the Project Company must have a track record of making profit for three consecutive years. These requirements virtually trap the investments up to next three years after break even date in case of infrastructure projects. The existing laws do not provide liquidity and easy exit even for small promoters.
The existing Issue Regulation and Issue Guidelines do not provide clear legal regulations on raising the fund through segmented IPOs which is normally targeted to sophisticated investors in addition to the general IPOs targeted to scattered general public. This has created barriers in raising funds required for mega infrastructure projects.
NRB directive on blacklisting is equally prohibitive. Once a company is blacklisted, its directors are blacklisted too. A blacklisted company or its directors cannot take loan and other facilities from banks and financial institutions. The Blacklisting Directive has frustrated the whole objective of the insolvency law to protect and promote the skill and entrepreneurship of honest but unfortunate debtors.
While the domestic loan financing is not much an issue, the approval and process of financing through foreign loan is very much complicated and frustrating. The NRB circular/notification on foreign loan imposes an onerous precondition for foreign loan financing; infrastructure companies need to produce evidence to the satisfaction of NRB official that it was impossible to avail the loan with required volume and preferred interest rate from local banks and financial institutions. This means that the local banks and financial institutions must have shut their doors in order to avail loan from the foreign lender. The interest rate is also heavily regulated and surprisingly, such interest rate regulation applies on a case-to-case basis. The dual approval process further delays the process.
The NRB directive discriminates local and foreign lenders irrespective of seniority of loan or debt. The NRB directive blocks the insolvency process. On the one hand, it favours the local lenders at the cost of foreign lenders. On the other, the requirements on repatriation of the principal and interest are even more onerous than availing the foreign loan. Pursuant to the NRB's circular on foreign loan, the resident borrower in Nepal is not allowed to service its foreign debt, if: (a) it is blacklisted for defaulting to service the debt to local bank and (b) has any matured debt payable to any of the local banks and financial institutions. This implies that if a borrower has matured debt of amount say hundred rupees payable to a local bank, it cannot repay any due payable to foreign lenders.
Only the licensed banks and financial institutions are authorized to provide loans and collect deposits under the Nepal Rastra Bank Act 2001. The NRB does not permit investment companies to provide loan even to infrastructure projects. Raising deposits from the general public is certainly a concern for regulators, but, what is the rational for preventing investment companies from granting loan if they do not raise deposits from the general public.
Abuse of Authority and Bureaucratic Attitude
The government plays an inevitable role at every stage of development activities. This is more so especially in the case of infrastructure development projects licensed to and financed by the private sector. The role of government becomes very important in the following three stages: i) licensing/project approval, ii) facilitation during the project construction and implementation phase, and iii) support/regulation during the commercial operation of the project.
The time and speed of decision matter at every stage of the implementation of infrastructure projects. These are highly capital-intensive projects and the clock of the cost runs 24 hours. So, time is money and every delay in decision making by government authorities/officers causes escalation of the project cost and loss to the project’s investors and becomes a burden on the users of the infrastructure.
But the ground reality in Nepal is different. The constitution has liberalized the economy and the sky is open. However, the mindset of the bureaucracy is still closed. Obstruction or delay is their rule rather than facilitation of the process. The prevailing mindset of a majority of officers deputed in all relevant government ministries, departments, officers including Nepal Rastra Bank has not changed. The attitude reflecting master/servant relation still prevails in many government institutions directly dealing with investment, company administration, development project management and foreign currency approvals. The attitude of giver and beggar still prevails in some of the government officers dealing with company administration, foreign currency investment and project development. Government support/services to the people are not provided as a matter of public duty but treated as favour. There is a serious challenge of change of attitude.
Government departments and offices directly dealing with development and company administration matters such as the Department of Industries, Office of the Company Registrar, Nepal Rastra Bank, and Department of Foreign Exchange have several operational problems causing prolonged delay in decision making. The Office of the Company Registrar (OCR) plays pivotal role in the registration and deregistration of companies. No single infrastructure development project, financed by private sector, can be operated without company registration. In addition, regular filings are required. Many documents filed with the OCR need to be certified by it for many practical purposes. Junior staff members handle all such matters. Most of them are not familiar with the Company Law, nor are they given any on-the-job or pre-job training. The other problem that still prevails in OCR is the missing or misplacement of documents submitted by companies. No officer in the said office is willing to take responsibility for this and the service recipients are troubled and harassed with impunity.
There are always complaints of lack of budget and trained work force. This causes delays in getting services, approvals or certification from the OCR. The alternate solution is payment of under the table "facilitation" money publicly reported as "fast track" payment. Such "payment" and "tracks" are not only creating barriers in infrastructure development but also are tarnishing the image of Nepal as an investment destination.
Politicization of the bureaucracy has further compounded the problem. Change in the government or ministers means the transfer of key officers in almost all major government offices. The transfer is being treated as reward and punishment for pleasing or displeasing the movers of the ruling political parties who are divided into factions. This has created a feeling of insecurity and dissatisfaction among the honest and efficient officers. This discounts their efficiency and honesty creating a divide in bureaucracy at the cost of fairness and expeditious decision-making. The process started after the political change in 1990. After that, it has been culminating in such a degree that there may not be an independent national bureaucracy guided by the principle of fairness and the rule of law. If the political parties in power will not take up this matter very seriously, Nepal is going to be ruled by obstructers and not by law and system.