The government is holding the Nepal Investment Sum­mit with the goal of attract­ing foreign investment. The sum­mit, which begins March 29, is the second of its kind in the past two years. In 2015, the government had organized a donor conference to solicit international support for post-quake reconstruction, but that was not an investment sum­mit. Political leaders, businesspeo­ple and economists who spoke to APEX say there is a tendency of organizing investment summits with fanfare, but successive gov­ernments have not given priority to other vital aspects such as embrac­ing liberal political and social val­ues, ensuring policy consistency, setting up follow-up mechanisms, clearing bureaucratic hurdles, among others.

 

Says Dipendra Bahadur Chhe­tri, a former Governor of Nepal Rastra Bank (NRB), “We seem to be organizing such summits as a formality. The new government, with a strong support from the parliament, should instead solve various practical problems that are hindering foreign investment.”

 

The communist govern­ment also faces the challenge of demonstrating full commitment to protecting foreign investment and adopting liberal economic policies. “First, the government should convince international investors that it embraces liberal political and economic values as enshrined in the constitution. Sec­ond, there should be follow-ups on the pledged investment after the summit. Third, there should be policy consistency as frequent changes in foreign investment-re­lated laws create confusion,” says Nabindra Raj Joshi, who as then Minister for Industry was in charge of organizing the Investment Summit in 2017.

 

At the same time, economists and businesspeople point out the need for an in-depth study on why the flow of foreign investment in Nepal is small. Speaking at a par­liamentary committee a few days ago, Binod Chaudhari, a billionaire lawmaker from the Nepali Con­gress said, “We should formulate laws only after a detailed study that takes into account the views of all stakeholders. Or we will always revolve around the same issue.”

 

If the flow of FDI doesn’t shoot up, Nepal’s target of graduating to a middle income country by 2030 is unlikely to be met

 

Big commitments, low flow

Government data show that since 1990, although the pledged foreign investment is high, only a small percentage of it has materi­alized. According to official figures, foreign investment constitutes 0.5 percent of the country’s GDP. In the past 20 years, Nepal only saw Rs 170 billion in foreign direct investment out of the Rs 440 bil­lion endorsed.

 

In the last investment summit held in 2017, various countries and donor agencies committed $13.51 billion, but not even half the pledge has materialized, according to official records. Investment was pledged in sectors such as agricul­ture, roads, tourism and railways. “After the summit, there was no regular interaction and follow-up with international investors,” says Joshi. According to a survey released by the NRB in June 2018, FDI inflows into Nepal are substan­tially lower than into neighboring countries. In 2016, the share of the total global FDI that entered Nepal and South Asia was 0.01 percent and 3.1 percent respectively.

 

“Foreign investors from 39 coun­tries have made investment in 252 firms in Nepal. India is the main investor in Nepal in terms of paid up capital. However, West Indies comes ahead of India if we con­sider total stock of FDI by includ­ing reserves and loans,” the NRB report says. The report also reveals that most of the FDI into Nepal comes from tax havens, which means Nepali businesses parked money in those countries through illegal means and brought it back as FDI.

 

Many hurdles

Now that Nepal has a strong gov­ernment with a five-year mandate, there is favorable political climate for foreign investment, but other factors impede FDI. “Nepal needs to make paying taxes easier by simplifying the process of social security-related payments. This is the reason that the recent labor act has made the process more cum­bersome and contributed to push­ing the country down five places to 110th in a global ranking for the ease of doing business”, says an October 2018 World Bank report.

 

According to the annual ranking, Nepal made paying taxes more difficult through a 2017 labor act, which introduced a labor gratuity, medical insurance and accident insurance paid for by employers in a way that places a larger adminis­trative burden on companies that already face considerable red tape.

 

A business licensing system and a proper legal framework have not been created. International inves­tors often complain they face vari­ous obstacles when applying for a license. Multinational companies are facing difficulties in registering their offices in Nepal.

 

In order to clear the bureaucrat­ic hurdles foreign investors are facing, the government has intro­duced a provision of endorsing an investment proposal within seven days if all necessary documents are submitted. The government is preparing to provide all com­pany registration-related services through a one-door policy. Former NRB Governor Chhetri, howev­er, says such a policy had already been introduced in 1993, but was not implemented. “The problem lies not so much in policy as in its implementation,” he says.

 

Settlement of court cases is also a concern for foreign investors, who are not confident Nepal’s judi­ciary would settle cases without prejudice if a legal issues arise. They are also concerned about the visa renewal process for foreign workers in Nepal. Land acquisi­tion has also been a considerable challenge. Stability in politics hasn’t translated into stability in bureaucracy as there are frequent changes of secretaries and chiefs of government bodies.

 

Of late, the activities of the Netra Bikram Chand Biplab-led Nepal Com­munity Party have also spoiled the investment climate. “Such activities have sent mixed messages. The gov­ernment should ensure the country is safe for investment. We now have a strong government and a courageous prime minister, so there’s reason to hope that past trends will change and the country will attract more invest­ment,” says Chhetri.

 

Nepal’s constitution has liberal provisions on foreign investment. It says, “The policy of the state is to encourage foreign capital and techno­logical investment in areas of import substitution and export promotion.” Although the new government has accorded high priority to economic diplomacy, it is still failing to woo international investors.

 

Muted expectations

In the summit, the government is all set to showcase specific projects with detailed investment modali­ties. Nepal Investment Board has selected around six dozen projects under seven broad headings: agricul­ture infrastructure, education and health, energy infrastructure, indus­trial infrastructure, tourism infra­structure, transport infrastructure, and urban infrastructure. This could make the investment process smooth­er for foreign companies.

 

Experts suggest tempering expec­tations though. “If the government takes measures to achieve policy clarity and remove procedural hur­dles, we can expect much from the summit. Otherwise, more investment won’t be forthcoming,” says Chandra Mani Adhikari, an economist.

 

Targeting the investment summit, the government has already made amendments to some laws and a few more are in the cards. The govern­ment has prioritized amending the Special Economic Zone Act and intro­duction of new laws such as Economic Procedures and Fiscal Accountability Act, Public-Private Partnership and Investment Board Act, and Foreign Investment and Technology Transfer Act. Nepal, a Least Developing Coun­try (LDC), has set a target of becoming a middle-income country by 2030. It is virtually impossible to meet the target without huge foreign direct investment, as internal resources are insufficient. If the flow of FDI doesn’t shoot up, Nepal’s target of graduating to a middle income country by 2030 is unlikely to be met.