With Nepal achieving political stability after the three-tier elections held in 2017, the country’s much maligned image as an investment destination has been changed rapidly. The interest and attention of both foreign and domestic investors towards opportunities available in Nepal has increased with the government prioritising policy reforms.
After organising the Nepal Investment Summit 2019 in late March, Investment Board Nepal (IBN) has focused its efforts on realising the investment commitments made by investors during the summit. The authority has been evaluating and approving the investment proposals.
Maha Prasad Adhikari is the CEO of IBN since 2016 after working for 21 years at Nepal Rastra Bank. In an interview with NewBiz Editor Mukul Humagain, Adhikari talked about the post-summit activities of IBN, policy reform initiatives of the government, problems and prospects in some FDI projects in Nepal, and restructuring of IBN, among other topics. Excerpts:
How has the post-event response of the Nepal Investment Summit 2019 been likev?
Taking its objectives and necessities into consideration, the government has already declared foreign investment as an important tool for Nepal’s economic development. To foster an investment-friendly environment in the country, steps have been taken for strategic and legal reforms. Public Private Partnership (PPP) and Investment Act, Special Economic Zone Act and Foreign Investment and Technology Transfer Act (FITTA) were amended prior to the summit while some other laws are currently in the amendment process.
The messages we have been receiving from foreign investors showing interest to invest in Nepal post the summit clearly indicate the success of the event. Nepal Investment Summit has become a milestone in promoting Nepal as a lucrative destination for investment. The proposals from investors in some projects showcased during the summit have entered the decision making stage, while some have already been decided. Such projects will help to bring more investments in the coming days. This is how investments come, i.e, gradually. Similarly, an investment-friendly environment is also being fostered in the country.
Over five dozen projects were showcased during the summit. Can you give information on how have they progressed?
IBN has received a total of 60 proposals for 31 projects showcased in the Nepal Investment Summit 2019. We have to filter the proposals received for the projects. By now, the Board has rejected three proposals for the Tamor Hydropower Project. We are in the process of sending further proposals to the selected companies.
We have also technically evaluated 11 other proposals, of which, the board has approved proposals for block terminals in Birgunj and Bhairahawa, Janakpur, and Biratnagar. Likewise, proposals for the World Buddhist Park in Lumbini and the Industrial Park have also been accepted. In every meeting of the Board, the proposals received for different projects are discussed, and also the companies are shortlisted.
While the government and IBN are trying to woo foreign investors, how do you see the investment scenario in Nepal developing in the next 10 years?
In my opinion, we have been receiving very low investment compared to the direction Nepal is headed towards and what the country requires. There won’t be a surge in investments in the coming days to fulfill our urgent needs.
It needs effective groundwork and homework. The projects that are being implemented at present will serve as the groundwork and homework for tomorrow. Alongside this, the policy arrangements we have been working on will open new doors of opportunities. Not only private investments, there is the possibility of huge investments in public-private-partnership (PPP) projects and other areas as well.
In the past, political stability, political commitment and policy consistency were considered as prerequisites for foreign investment in Nepal. These preconditions have been fulfilled. The government is fully committed to attracting foreign investment and has embarked on a path towards policy reforms. As a result, we are receiving positive responses from foreign institutions.
What are the main concerns of foreign investors show when they seek to invest in Nepal? What areas must Nepal work on in this respect?
There are some policy deficiencies that we have been pointing out for a long time. Foreign investors seek security when it comes to their investment, consistent policies and a predictable ‘doing business’ environment where they do not have to face much hassles. IBN has been working towards this end. There have been improvements in many criteria related to investment security and practical aspects of policy consistency.
Currently, risks associated with foreign exchange and sovereign credit rating of a country are matters of priority for many foreign investors. We should also work towards properly aligning our foreign investment needs with the interests of foreign investors. At present we need infrastructural development but the attraction of foreign investors is not seen much in this area.
What are the areas foreign investors have shown interest in?
Currently, there is a lot of interest in solar power projects among foreign investors. Similarly, hydropower remains the major source of interest for them.
Foreign investors are also interested in railway projects as well. However, we are yet to receive investment proposals for railway development. Meanwhile, development of toll highways and roads can be another avenue for FDI in Nepal.
Nijgadh Airport was one of the showcased projects on which seven proposals have been received. How will this ambitious project be taken ahead as there seems to be some confusion over its construction modality?
The project will be constructed in PPP model. A total of seven proposals have been received for the project, of which, a few are from domestic investors. We have already analysed the proposals. We are preparing to present the proposals in the next Board meeting of the IBN. Nijgadh Airport is a mega project for the country, so there will be more evaluations of the proposals. If Nijgadh Airport is constructed in the PPP model, it will be the first airport in Nepal to be completed on this model. Also, it will be the largest project in Nepal to be facilitated by IBN.
After China Three Gorges withdrew from the West Seti Hydropower Project last year, the government formed a panel to decide the project’s future. How will this project be taken forward as a proposal was received during the summit?
The panel formed at the time is still active. IBN showcased the project in the Investment Summit and also received a proposal for it. We have been evaluating the proposal.
The technical committee had reportedly suggested reducing the capacity of the project. Will West Seti’s capacity be reduced when it will be awarded to a new developer?
IBN hasn’t received any suggestions from the committee. Once the contract of the West Seti is awarded to a company, then IBN will decide on the next step.
Ahead of the investment summit, a South Korean company Motrex had approached the Board for setting up a vehicle assembling plant in Nepal. What is the progress of this proposal?
The FDI for the project has already been approved. We are now ready for the personal insolvency agreement (PIA) with the company. The agreement is yet to happen as the regulations in this regard are yet to be passed. There have been several discussions about this project. The company seems determined to invest in Nepal.
Issues related to Viability Gap Funding (VGF) and land acquisition have hindered foreign investors to invest in infrastructure projects. How are these issues being addressed?
There is a provision for VGF in the new PPP and Investment Act. Its effective execution can be made possible by the intervention of the government and a development partner.
Acquisition of private land, distribution of compensation and relocation of people are considered problematic for construction of large projects the world over. Certain standards have been set for land acquisition in the Act and we have to work accordingly. There are problems, but it is not that such issues cannot be resolved. There are ways, such as by organising different on-site group discussions to find effective ways to address the issues related to land acquisition, compensation and relocation of affected people. We have already started this practice at project areas. We have already started this exercise in the projects that are already implemented.
What kind of institutional mechanism is being formed to facilitate VGF?
Fulfilling viability gap means providing government’s financial support to projects undertaken by the private sector. The structure of VGF will be formed and it will be managed according to a separate work procedure which will be formulated by the Ministry of Finance. However, the size of the fund and the percentage of the financial arrangement of the total cost of the projects will not be set in the work procedure. Rather, the size of the funding will be evaluated and calculated on the basis of the structure of the project and rationale profit it will earn after the funding.
The work procedure will make all these aspects clear. It is not that only certain projects are entitled to use the VGF facility. Nevertheless, VGF will only be made available for infrastructure projects that are unfeasible to be developed by the private sector alone. Similarly, projects offering overall economic benefits to the country but which aren’t attracting private investors and are feasible with the viability gap funding will be eligible to receive the financing. Projects that don’t offer economic benefits will not be eligible for VGF.
The PPP and Investment Act has provisioned establishing a one-stop service centre at IBN. When will this centre start functioning?
The one-stop service centre hasn’t been established as we are yet to finalise some physical infrastructure to start it. We are working on it. But practically, we have been providing one-window service to investors. We still have a mechanism to designate liaison officers to facilitate the projects under our purview. We are working on necessary arrangements for physical infrastructure where officials from all government authorities concerned can work under a single roof.
For now, we are working on providing fundamentally required services of different authorities on a priority basis from the office of IBN. We will start the service soon. In the long term, the one-stop service centre will be arranged through our integrated system.
How will this integrated mechanism work?
This system will have specific software. Its interface will be distributed to all government authorities associated with investment related transactions. For instance, after the introduction of the system, anyone needing foreign exchange services will not have to visit the office of Nepal Rastra Bank (NRB). Once data is entered into the system, NRB officials can download the files to start the process for approval. There will also be a separate mechanism to conduct official interviews.
The government has initiated sovereign rating of the country. How important has the country rating become for Nepal?
The sovereign rating is a very important aspect for attracting FDI. Nepal is an investment destination not only for small foreign investors, promoters and companies; large international investors and companies too are looking to invest here. Their investment projects need to be financially manageable by the local banks. Similarly, if an international bank looks to invest here, it will see if Nepal is a suitable destination for it or not. Sovereign rating of Nepal becomes the main basis for the bank in this regard.
Besides, a country’s rating will improve also with the improvements in its economic indicators. Hence, sovereign rating plays a vital role in attracting FDI.
The process to finalise sovereign rating takes around two and a half years. Prior to this, work is ongoing to see if a ‘shadow rating’ of Nepal can be done. This is being carried out under the Ministry of Finance.
One of the aims of PPP and Investment Act is restructuring IBN. When will the restructuring process be completed?
The Act has not incorporated the institutional structure as we had expected. Nevertheless, we have formed a committee to start the restructuring work in accordance with the legislation. A separate fund for IBN has been provisioned in the Act. Also, provisioned are matters related to how to reimburse out of the fund and how the fund is to be managed. It will be excellent if the fund can be self-sustained. If not there will be budgetary arrangements for the fund.
The Act has also some provisions about Board’s human resource. Always taking assistance from donor agencies is not sustainable. The Act has arrangements that allow the Board to hire the required human resource including technical staff and experts by itself.
The Upper Karnali Hydropower Project is one of the earliest projects that IBN initiated. How is this much-talked project progressing?
The Upper Karnali Hydropower Project is progressing slowly. The Power Purchase Agreement (PPA) hasn’t been finalised yet. Of late, the project is in talks with Bangladesh to supply the power there and we have been encouraging this as well. Bangladesh has agreed in principal to purchase power from Upper Karnali and both parties are currently negotiating to finalise the PPA rate. We haven’t been able to terminate the agreement with the contractor GMR because if we do so the project development of Upper Karnali has to be started again from zero after the termination.
Of late, one major cement project – Huaxin, courted controversy as the parliamentary committee directed the government to cancel the land deal between the company and the local government. Don’t you think it will discourage the investors at a time when the government is trying to woo them?
Any company coming for investment has to abide by the rules of the host country. We – as an authorised body – should also disseminate the right information to foreign companies. We found that some regulations had been breached, so we told them to stop the project. The projects can only use government land on a 30 year lease. In this case, the local government had leased government land for 50 years, which is against the regulations. So, we told the company to work according to the legal provisions. Now, the company has purchased the required land and has started to construct the necessary infrastructure. As there is no land issue now, the project will run smoothly.
There should be no hesitation in stopping any company if it is found breaching the rules. If any company works by breaching regulations, the consequences will be seen in the future. So, we have been working to reduce the risks for companies. The parliamentary committee has not taken an absurd decision. And, the decision of the committee will not affect the project.
Of late, some of the FDI projects have come under criticism for raising loans from Nepali financial institutions. How is the Board observing these trends, especially when a company that comes to Nepal promising FDI, starts raising loans from Nepali banks?
We can look at it from two aspects. Some policies say that only equity investment can be treated as FDI. But, the PPP and Investment Act have stated that equity and debt both can be treated as FDI. If a company registered in Nepal with foreign shareholder raises equity from the local market, it cannot show that as FDI, which is invested by the foreign parent organisation of the company. If you are talking about Hongshi Shivam Cement, Rs 7-8 billion has come from abroad.
So, we should not object if a Nepali company set up with foreign investment raises some capital also from Nepal. Disclosing the amount of capital brought from the international market and how much is raised from the domestic market is important. So, we have started a practice wherein foreign companies disclose the amount of capital raised from both the domestic and foreign market. If this is done, there will be no issues in the future. There are several issues while bringing investment from the international market. The investors go through issues such as exchange rate hedging. So, investors mostly prefer to raise capital from the domestic market. But, if a company has resources in the international market, and can avail cheaper loans, it can bring investment from abroad. All these issues play a big role in attracting FDI, so we should not limit the companies on how much loan can be raised from the local and foreign market.
Some have connected these issues with the banking system of the country. I don’t think we need to worry that credit to foreign companies will dry up the investment-grade liquidity in the banking sector.
While the investment board deals with projects above Rs 6 billion, the government has increased the threshold of FDI investment in Nepal, which many say will discourage foreign investment in small and medium enterprises. What is your view on this issue?
Despite the issue not being connected with the IBN, we have been facing this question for the last few months. There are reasons for increasing the threshold of FDI investment. I don’t want to go into all of it, but the main reason behind it is to promote small entrepreneurs in the country. It is not like a small business can be promoted by increasing the threshold; there are different methods for it. We have said to treat the foreign investors equally.
There are sectors where only domestic investors are encouraged to invest in. There are several reasons behind this. FDI may not always be in huge amounts. Sometimes, smaller amounts of FDI can uplift the economy by creating job opportunities and increasing productivity. So, we should also encourage FDI of smaller amounts. However, the increment in the threshold of FDI has spread a negative message in the international community.
In some sectors such as IT and startup, the investment can be very minimal. It is not about investment; startup businesses need co-operation and co-ordination with the foreign companies. I think we need small investments in startup and IT sectors.