MAKING A DIFFERENCE IN INVESTMENT ENVIRONMENT
A good environment will only flourish when politicians and bureaucrats stay true to their words and promises.
The present government came to power with the slogan ‘Prosperous Nepal, Happy Nepali’. Happiness is a vague concept; however, material happiness at least requires overall improvement in the standards of living, economic, social and environmental security. Without massive investments in infrastructures and sustainable development activities, prosperity and happiness remain elusive dreams. The government, therefore, organised the Investment Summit within a year of its formation with a view to attracting investments—those that could help achieve some amount of tangible prosperity and happiness within the remainder of its five-year term in office.
The summit was not disappointing in terms of participation; the number of participants was fairly encouraging. However, the foreign direct investment (FDI) commitment was comparatively lower than those made during such summits held twice before in the last three decades.
It’s been a year since the summit, but there’s not much activity in turning the promised investment into reality. Balance of payment fell into the red for most parts of last year. The recent improvement isn’t because of higher FDI inflow. In contrast, imports declined comprising mostly goods used in manufacturing. Apparently, manufacturing or productive sector has gone into a slump. Lower imports led to BOP surplus and not because of higher FDI. As reported recently in the media, Investment Board Nepal (IBN) is said to be reviewing what really held back investors from executing their commitments.
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.
It is clear from the available evidence that there’s an ostensible lack of inter-ministerial coordination, particularly among Ministry of Finance, Ministry of Industry, Commerce and Supplies and Ministry of Physical Infrastructure and Transport.
With firm governments in federal, provincial and municipal levels, political instability—long cited as the primary hurdle for investor confidence—has ended at least on paper. However, inconsistencies in institutional operations, travesties in policy implementation have all made political stability a farce. There have been several instances in the recent past of policy discriminations benefitting those that are close to the establishment much against the principles of fair governance.
Domestic investors have been complaining, particularly in the past one year, about the unsettling investment climate within the country. Business community has raised its voice against harassment. The outgoing industry minister had grossly accused all business houses as being dishonest and looters.
It’s no wonder that the finance minister has, of late, been trying to console the business community that the government will not resort to harassment in the name of either collecting taxes or enforcing regulatory norms.
Talking about Nepal’s FDI regime, the existing legal framework has also given rise to suspicion among investors. While introducing the Foreign Investment and Technology Transfer Act (FITTA), 2019 just before the summit, the government had claimed that the amendments are progressive and far better than the earlier Act. In fact, the new arrangements are rather regressive. The category of industries included in the negative list and minimum threshold required for foreign investment do not bode well for higher FDI. Restricting competition in certain sectors will only make those sectors inefficient. The perception that foreign investors just bring money is wrong. What is more important for Nepal is advanced technology, management and global networking, which foreign investors can bring in.
In general, there are four major hurdles for foreign investors. Acquisition of land remains as the biggest obstacle for both foreign and domestic investors. The problems faced by Huaxin cement plant in Dhading over land acquisition is a case in point. This is not just one isolated example.
Hongshi Cement plant in Nawalparasi shares a similar experience. Hongshi somehow managed it, but they narrate a bitter story they faced during the initial phase of construction. Several foreign investors in hydropower projects have faced trouble in acquiring requisite land and felling the trees. Unless government proactively facilitates land acquisition for investment, our dream of rapid industrialisation to meet the higher growth and job creation will not be fulfilled.
Second, there is a feeling among many investors that it is hard to bring money to Nepal. Besides some restrictions in FITTA, several other difficulties prevail in Nepal in terms of the characterisation of foreign investment. During an interaction programme related to alternative financing institutions held some two months ago, officials of the Dolma Impact Fund said that they were unnecessarily asked questions about the purpose of the investment and that their files hadn’t been approved for a long time even after they signed a loan agreement with a foreign sovereign wealth fund. Implementing prudential measures to check the flow of tainted money into Nepal is acceptable, but unwarranted delay in verification of money originating from credible sources only discourages investors. In case of Dolma’s investment, Nepal Rastra Bank (NRB) and Department of Industry ostensibly created unnecessary obstacles while Investment Board Nepal (IBN) remained a mere spectator.
There is not much justification in carrying out unnecessary and often lengthy inquiry 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.
Third, there have been debates about foreign-owned companies raising finance from the domestic financial market. The general argument is that foreign investors are taking undue advantage by availing loans from Nepali banks and financial institutions (BFIs). It is further said that it is something against the norms of FDI. The concept that foreign investors should totally be barred from raising money from the domestic financial market is flawed. Investors definitely bring their equity contribution from outside. However, most importantly they bring in technology, management expertise and global networking. FDI flows to countries and areas where financial market is efficient and accessible to foreign investors. If we put any kind of restrictions, then the amount of FDI is also affected negatively. There are instances where even large and pretty advanced economies show magnanimity by allowing access to domestic financial markets. One recent example is how leading American electric car maker, Tesla, set up its first plant outside America—in China—with the loan extended by Chinese banks. The Chinese government directed its state-owned banks to provide the loan to Tesla at favourable interest rates. Foreign investors not only bring capital, but also technology, management techniques and connection to the international markets; these three factors are the most important aspects of FDI. However, in Nepal, there have been objections raised in a few recent instances to the dismay of foreign investors. If foreign investors make better use of domestic resources in generating income and employment for the country, then it should be welcome. It has been in the news that some foreign investors have clearly told the government officials that they will be unable to invest here if they are barred from raising loans within Nepal to invest in projects here. According to them, they will have to pay interest rates and principle amounts in US dollars if they avail loans from international financial institutions which would be much cheaper to them if they raise money from the Nepali financial market.
Fourth, the delay in government permits and different types of problems caused by the vested interest of Nepali investors has also discouraged foreign investors. It has been seen particularly in mining. For example, the limestone mining license issued to Dangote was later snatched from the Nigerian conglomerate and was awarded to a Nepali company.
IBN came into existence in early 2012. Looking back at its last eight years of operation, there’s not much to be happy about in its performance in terms of output that it was supposed to generate. IBN spent its first three 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 IBN’s 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. Due to geographical and geo-political reasons, investments from western countries do not directly come into Nepal. If an American or a British company is to make its way to Nepal, they come via their subsidiaries in India and China.
This has been the case with most of the foreign-owned establishments in Nepal. It should not be a matter of surprise for us why investments in Nepal are mostly from India and China and not directly from the western countries. The geographical, historical and cultural proximities between Nepal and its two large neighbours make it easier for Indian and Chinese investors to invest in Nepal. Therefore, the two neighbours are our primary markets where we have to do most of our investment promotions even as we look to attract investors from western countries.
I have strongly voiced for the sovereign credit rating of Nepal over the last three years and the preparations to start the rating gathered momentum during the previous government. Sovereign credit rating enables potential investors to determine the level of political risks associated with investments in the country. This makes things lot easier for FDI freeing up people in the government in terms of repeatedly assuring foreign investors that risks are low in Nepal. The pressure to perform better in the sovereign rating can help our institutions to improve. Higher level of sovereign rating can also increase government’s credibility and help consolidate political stability.
It is good to note that the current government has given importance to having the rating done and has picked the US-based agency Fitch Ratings for the purpose. Sovereign credit rating could save foreign investors from facing unnecessary questions such as about raising loans within Nepal. This is because the rating agency will also evaluate the efficiency of our BFIs and make financial market foreign investors friendly.
For a long time, corruption has been considered as a major hindrance in bringing foreign investments in Nepal. However, the growth trajectory of Bangladesh tells a different story. Bangladesh, which has a corruption perception that is no different than Nepal’s, has achieved significant economic growth over the past 15 years demonstrating that foreign investors can be attracted, quality goods can be produced and exported despite shortcomings in governance.
The major thing to learn from Bangladesh’s economic development is that top leaders in the government must make good on their promises. Our political leadership and bureaucracy are notorious for breaking promises, whereas Bangladeshi politicians are known for keeping their word when it comes to creating investment-friendly ambience in the country. We cannot improve in all areas at once. It will make a difference if the political leadership stays true to its words.
(Khanal is former Finance Secretary.)
THE SLOWLY DIMINISHING INITIAL BUOYANCY
A more appropriate measure would be to prescribe a sector-specific investment threshold amount.
The Nepal Investment Summit organised in March 2017 was considered to have ended on a high note. The 2017 Summit attracted sixteen investors and a total pledged amount of USD 13.52 billion. Unfortunately, none of these projects could achieve the requisite traction to be converted into large investment deals. The apparent reason given by the government was that projects did not have sufficient studies to back investments.
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. On the eve of the 2019 Summit, two major pieces of legislations were passed: (a) Foreign Investment and Technology Transfer Act (the “FITTA”) and (b) the Public Private Partnership and Investment Act 2075 (2018) (the “PPP and the Investment Act.”).
The immediate perception of this approach was discernable during the Summit itself. The participating investors were eager to understand the provisions in the law. They also had materials to consider before making ballooning pledges during the time of the Summit. Therefore, only a few projects saw serious investors evincing interest.
Subsequent to the summit, amongst the showcased PPP projects, three have scrambled to move ahead slightly. The memorandum of understanding (MOU) for Tamor Hydroelectric Project with consortium of Power China and HIDCL has been signed. Similarly, detailed proposals have been invited for Nijgadh Airport and Lower Arun Hydroelectric Project. However, these projects are yet to move steadfastly enough even perhaps for the government to be fully convinced about their implementation anytime soon.
An investor is ridden by approval anxiety when it has to conduct business in Nepal. The number of steps and approvals required for setting up and carrying a business is the most evident irritant that the investors have always grieved about. A collateral consequence of federalism has been that the number of registration and approvals needed to organise a business in Nepal will be increasing. The governmental entities needed to be approached for service delivery will be organised at all federal, provincial and local levels and will be governed by an independent set of laws and regulations. The anxiety-ridden investor who has experienced lackluster service delivery are bound to have more worries when it comes to dealing and obtaining approvals or permissions from other sub-national government entities.
Both FITTA and PPP and the Investment Act incorporate provisions for the establishment and operation of a One-Stop Service Centre. One-Stop Service Centre under FITTA has been established under the auspices of the Department of Industry and is at a functioning stage now. One the other hand, One-Stop Service Centre envisaged by the PPP and Investment Act is yet to come under full-fledged operation. The primary intent of the one stop service centre is to operate as a single governmental entity to provide services, approvals, registration, exemption, benefits, concession and incentives or motivation to industries or investors in an easy and convenient manner.
It is supposed to serve as a single unit representing various government units and to provide all industrial administration related services. To some extent, the
One-Stop Service Centre established at the Department of Industry has achieved moderate results. The investors are pleased that they do not need to run from pillar to post for service because officials of different government agencies operate under the umbrella of the one-stop service. However, some of the concerns of the investors continue to remain. The have reflected that the centre is a mere conduit for providing service and not the service provider itself. More importantly for them, the creation of the One-Stop Service Centre has neither decreased the number of approvals or permits nor has it resulted in quicker and timely service delivery.
The mere passing of new laws or repealing an older legislation should not be termed as legal reform. Legal reform is an extensive process that requires an analysis about the need for new legislation considering the cost and benefit of introducing the new law, efficiency and matching the new changes in law to administrative resources. The primary drive for legal reform also should be modernisation and simplification of law. Considering these points, it will be difficult to firmly characterise the passage of the new laws before the Investment Summit as a process of legal reform. It can be however,considered as an attempt to frame a new set of laws for promotion and regulation of foreign investment.
Soon after the enactment, the legal changes did receive a highly positive response from government officials assigned with the responsibility of implementing the rules. The foreign investment community regulated by the new rules was also buoyant by the changes. National treatment, one-stop service centre, timely approval provisions, protection of investment and stabilisation of facilities were the main factors behind the initial encouraging response. However, the initial buoyancy is now slowly diminishing. The investors are not fully convinced if legal changes have standardised and simplified the process or if it has ensured quality and timely service delivery.
In enacting foreign investment laws, both matters regarding investment promotion and investment regulation have to be dealt with comprehensively. Investment promotion and investment regulation although may appear as distinct activities but are reciprocally reinforcing. If it were only investments then regulating them would make reasonable sense. Hence, investment regulation should not be an element derailing investment attraction. The question now arises if FITTA and other foreign investment related laws are more focused on investment regulation or investment promotion. The initial impression that FITTA provides is that of a set of rules for screening, negotiation, approval of foreign investment license application and monitoring and enforcing license conditions. Lamentably, the promotional activity finds a secondary place in the law.
Going forward any reform should look at addressing investment promotion and making investment regulation benign. Investment promotion would require the governmental agencies with all appropriate artillery to persuade, appeal and encourage foreign investors to partner in the country's development. Screening of applications should not be taken anxiously by foreign investors. If there are more permits to be obtained, either they have to be decreased or commensurate incentives, or inducements must be granted.
It should be understood that laws governing foreign investment are only the means and not the end for setting up a favourable climate for investment. It is equally important to ensure the laws when prepared are not intricately complicated and internally inconsistent. Foreign investors should be able to understand the laws and should not have to resort to lawyers or the administering professionals. In Nepal's case the government also has to put in a significant amount of work for the translations to be accurate. If the investors can themselves understand the law, it will boost investor confidence.
While legal changes require extensive effort and exercise, procedural reforms can be a daily learning activity. Administering officials should improve the daily procedural shortcomings to make the investment process simpler and more transparent. Investors continue to complain that Nepal still lacks uniform, transparent, standardised and simple fast-track foreign investment approval procedures.
Apart from the legal and procedural matters, the government should not be hesitant in breaking new ground for granting beneficial incentive packages. The package could include internationally competitive tax breaks and favourable import duties.
In accordance with the provisions of FITTA, the government, by issuing notification in the Nepal Gazette, has prescribed a FDI threshold of Rs 50 million. This is an example of a superfluous and counterproductive change to provisions that were working satisfactorily. The threshold of Rs 50 million inhibits small or individual scale industries from attracting foreign investment. Service sector industries are less capital intensive but are also impactful employment generators. The Rs 50 million FDI threshold painfully affects the service and light manufacturing sector. A more appropriate measure would be to prescribe a sector-specific investment threshold amount.
Amongst other things, international capital flow largely depends upon sovereign risk levels. The credit rating of a nation is grounded on macroeconomic, structural and governance indicators. Foreign investors use sovereign credit rating as a way to determine the level of risk while investing in a country.
Without an international rating, the investors will lack the full picture of assessing the risks and making plans regarding the mitigation measures. The outcome of sovereign credit rating will demonstrate the reliability of the investment environment and credit hazard.
"POST-SUMMIT WE ARE LOOKING INTO DIVERSE PROJECTS"
It has been nearly a year since the Nepal Investment Summit 2019 was held. Do you think the objective of the investment summit has been fulfilled?
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.
The Nepal Investment Summit (NIS) 2019 was organised in a much-planned way. We seriously assessed the issues faced in the previous summits to draw important lessons. We did extensive exercises regarding the selection and showcasing of the investment projects. We managed online applications for the projects as well,to make it easier for prospective investors. Overall, the 2019 summit was positively received. 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, LoIs of which have been approved, are very strategic projects. These projects have helped us with our project pipeline and have become a good foundation from which to attract investment in the coming days. There has been substantial progress in making these projects investment-ready. Some examples in this respect are Tamor Storage Hydroelectric Project and Lower Arun Hydropower Project. We have also combined the West Seti and SR6 as a joint hydropower project though we are yet to issue the Request for Proposal (RFP) for it. Likewise, RFP for projects like Sunkoshi Hydropower Project and Nijgadh International Airport have already been issued.
Post-summit, we are looking into diverse projects. Besides the projects that were showcased, investors have shown their interest in unannounced and unsolicited projects such as the bulk cargo terminal project which is an important component for trade facilitation. We are studying such proposals and projects. We have signed several memorandum of understanding (MoU) for many different projects with prospective investors post-summit.
Over the last six months, we have approved investments totaling Rs 200.9 billion. Meanwhile, the investment approvals have also jumped in number at the Department of Industry (DoI) compared to last year. All these indicate that NIS 2019 has encouraged both domestic and foreign investors.
The legal reform drive that was started by amending some important economic laws with the view to fostering a good investment environment is yet to conclude. What legal reformsdo you think are still pending?
The 2019 summit was organised also as an opportunity, in terms of policy and legal improvements, for creating a better investment environment. The Federal Parliament endorsed some important Bills and this has played a crucial role. Among the South Asian countries, Nepal ranks second in terms of investment facilitation. The amendments to the various laws have enabled us to work in areas such as starting the one-stop service centre. Legal reform is a continuous process. There are still many investment related laws in the amendment pipeline which will take some time to complete.
Which laws are in the pipeline currently?
As I understand it, the process to amend the Public Procurement Act has reached the final stage. Similarly, the Intellectual Property Bill is also in the pipeline and foreign investors have shown a considerable interest in this particular law. Another is the Land Acquisition Act. There are ceiling related issues regarding land acquisition, which I hope will be addressed in the near future.
The delay in introducing PPP and Investment Regulation has delayed the restructuring of IBN as envisioned in the PPP and Investment Act. How are things moving in this respect?
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. The restructuring of IBN is being carried out by an internal committee. Likewise, we also need Standard Operating Procedure. We are exercising all these internally.
The construction of Nijgadh International Airport project carries high importance for Nepal. IBN issued RFP and has approached Zürich International Airport for project development. How is it moving ahead?
This project is still in the RFP stage. We have issued RFP under a 45-day deadline. It will need further discussions if RFP is not submitted. We are also discussing the concerns of Zürich Airport International AG.
No matter what the issues are, Nijgadh International Airport is a strategically important project for Nepal. There are issues regarding forest land. While surveying the villages nearby the project site and other areas, we did not find that the project needed massive deforestation. The felling of trees for the project can be compensated through planting an equal number of trees in other areas of the country. The development of this mega project offers more advantages than disadvantages. I think resettling the Tangya village will give us enough space to construct the airport terminal there.
How is the deal with Motrex progressing after signing the PIA for establishing Hyundai and KIA car plants?
Though the Project Investment Agreement (PIA) has been signed with Motrex, the project is yet to see any progress. The land related problems needs to be resolved before the project developer is able to take the work forward. There has been some confusion in the area designated as ‘Sector A’ in the project development agreement (PDA) and we are seeking clarity from the Industrial District Management Limited (IDML) in this regard.
Why was West Seti packaged with the SR6 Project? How many developers have shown interest in this project so far?
The 750MW West Seti Project could not be proved to be a feasible and viable project in terms of cost efficiency for a long time and was abandoned by two developers in the past. Our technical experts packaged this project giving it a new dimension. The West Seti was connected with the 450MW SR6 with the view being that the storage benefit can be shared by both projects. In case the developer faces loss in the upper side of the project i.e. West Seti, the loss can be covered from the lower project i.e. SR6 if the joint project is developed by the same developer.
Until now, we have received two applications for the development of the project. One application did not meet the threshold criteria, and for the other we have not been able to issue RFP as they are yet to bring a concurrence i.e. agreement of all parties involved including the board of directors of the applicant. This project has attracted the interest of investors of different countries including Japan, Qatar and United States. Big foreign firms such asthe Qatari government firm Namras, General Electric, Fuji Electric and Kansai Electric Power have shown their interest in this project. However, we are yet to receive a combined concurrence and not getting it means we can re-issue this project and move ahead in a new way. There is no question about the viability of this project.
What are the major concerns of foreign investors who seek to invest in Nepal?
Investors looking to invest in different areas have different concerns. For instance, prospective investors in hydropower, the most lucrative sector for FDI in Nepal, see if their income stream will be in US dollars or not. It is because they want to mitigate volatility and risks related to foreign exchange. So, most foreign investors seek to sign power purchase agreement (PPA) in US dollar.
Return on investment (RoI) is another area of concern for foreign investors. They invest in sectors with higher level of RoIs. They generally refrain from investing in sectors with lower RoIs as it will be hard for them to repay the bank loans. They also seek profits in hard currency.
One of their key concerns is in the area of investment facilitation. They look for convenience in getting government services, including dealing with various authorities, company registration, paying taxes, getting central bank clearance, customs clearance and repatriation of investment.