Beyond Clamour of Nepal Investment Summit 2019

Focus By Atul K Thakur 1 & Kamal Dev Bhattarai 2*

Focus

The Special Economic Zone (SEZ) being a new idea for Nepal made news when a project was initiated in Bhairahawa, bordering India though it is not yet operational. The IBN, IFC and SEZ Authority entered an institutional collaboration for developing SEZ in Simara through Public-Private Partnership (PPP).

Nepal Communist Party (NCP) Chairman KP Sharma Oli-led government which was formed in February last year has been on a roller-coaster for different reasons, but it carefully managed to adjust to the ideological preoccupations and chart a course towards market capitalism. However, it couldn’t succeed the same way in attracting foreign investment to fulfill the internal aspirations of economic growth and prosperity.

As it is in public reckoning, the internal resources are insufficient in Nepal, and the country needs substantial foreign investment to meet its domestic needs. Therefore, instead of exploring the dormant resources and channelizing them for strengthening the national economy, the governments have been making desperate attempts and without much care for fiscal management.

At all the major regional and international platforms, it has been a standard feature to see the prime minister, the foreign minister, finance minister and other ministers urging to invest in Nepal. Not surprising, the economic diplomacy has been the centrepiece of its engagement with other countries.

The Nepal Investment Summit 2019 was organized on March 29th-30th in Kathmandu in a bid to draw the attention of international investors. This program was a well thought out event planned and executed by the Investment Board Nepal (IBN). About1400 participants including 700 foreign delegates from various companies attended the occasion. The two-day summit witnessed the highest participation from China followed by India, two of Nepal’s immediate neighbours.

As revealed by a past trend, particularly that of the last edition held in 2017, the commitments made by international investors were not translated into reality. This time around too, there was a considerable mismatch between the terms of projections made by PM Oli and their actual materialization. However, the Summit made a positive impact by creating an interface between the policymakers of Nepal with international business players.

During the Summit, some international investors had shown their initial interest in the projects. Of late, the Summit witnessed the signing of 15 deals between Nepali (as JV Partner) and foreign companies. Similarly, out of 77 projects presented by the government before international companies, there were only 17 applications for 10 projects (Kathmandu Ring Road Bus Rapid Transit Project; Tamor Storage Project; Dhulikhel Medicity; West Seti Hydropower Project; Nijgadh International Airport; International Convention Centre, Bhaktapur; Integrated Agriculture Infrastructure Project Banepa & Chitwan Integrated Agriculture Infrastructure Project Hemja; and Integrated Agriculture Infrastructure Project Urlabari).

Strikingly, the Chaudhary Group, a home-grown conglomerate proved to be the most impactful deal-maker by making four joint-venture agreements in Solar Power, Logistics Park, and Mobile Network Service. Reportedly, the Chaudhary Group has entered into a joint venture agreement with Sharaf Group to develop a multi-modal logistics park and 600MW solar photovoltaic project with the US-based Sky Power. Of this 600MW deal, a 200MW solar power project is in the pipeline in Province 2, near Janakpur. To enter the telecom sector, CG LifeCell announced a joint venture agreement with Istanbul-based Turkcell for 5G mobile network service.

For the already existing Arun-III Hydropower Project, the Nepalese and Indian financial institutions made the much-needed commitment of Rs 78.59 billion. The 900 MW fledgling project would also receive additional financial assurance of Rs 65.60 billion from the State Bank of India and Rs 8.12 billion and Rs 4.87 billion from Nepal’s Everest Bank and Nabil Bank respectively.

The 216 MW Upper Trishuli 1 hydroelectricity project had received an investment of $650 million. The policy decisions from Nepal Electricity Authority Board (NEAB) proved as a catalyst in this regard. The World Bank’s International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) will finance the project.

As part of a critical energy deal, a Joint Development Agreement (JDA) was signed between China’s Yunnan Xinhua Water Conservancy and Hydropower Investment Co Ltd and Nepal’s Hydro Solution for the 164 MW Kali Gandaki Gorge Project.

The Special Economic Zone (SEZ) being a new idea for Nepal made news when a project was initiated in Bhairahawa, bordering India though it is not yet operational. The IBN, IFC and SEZ Authority entered an institutional collaboration for developing SEZ in Simara through Public-Private Partnership (PPP).

Notwithstanding the euphoria, the official figure shows that after the formation of the new government, Foreign Direct Investment (FDI) has gone down which is a matter of concern for the government. According to data provided by the Department of Industry, Government of Nepal, the FDI dropped down by 63 percent in the first eight months of the fiscal year 2018-19 as compared to the same period last year.

Nepal received an FDI commitment of Rs 34.9 billion between mid-July and mid-February in 2017-18; the total FDI commitment in the corresponding period this fiscal plummeted to Rs 11.25 billion. In the previous Nepal Investment Summit held in 2017, international investors pledged to invest Rs 1,446 billion of which a quarter has not been realized yet. According to a survey released by Nepal Rastra Bank (NRB), Nepal’s central bank, in June 2018, FDI inflows in Nepal were substantially low as compared to its neighbouring countries. It shares only a meagre 0.01 percent of the total FDI in the world while South Asia received 3.1 percent of total FDI inflows in 2016.

“Foreign investors from 39 countries have made investments 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,” states the NRB report. It also outlined that most of the FDI in Nepal comes from tax haven countries which means that Nepalese businessmen acquired money in those countries through illegal means and channelized that money as FDI in Nepal. However, there are numerous reasons behind the low influx of FDI in Nepal.

Nepal was marred by a long cycle of insurgency, political violence and instability tilted towards economic liberalisation in 1990. One of the stumbling blocks to foreign investment during the insurgency period was the strike and closure of factories by trade unions which were uncommunicative towards political parties. With the inception of the peace process in 2006 which officially ended the violent insurgency of Maoists, the FDI gradually began to be generated in Nepal.

For more than a decade, the country faced a colossal power outrage which also became one of the key factors for low FDI inflow in the country; a situation which has now resolved to a large extent.

With the formation of the new government, a stable political environment has come into being but other factors such as business licensing system, bureaucratic hassles and proper legal framework call for positive interventions.

According to the annual ranking, Nepal made paying taxes more difficult through a 2017 Labour Act that introduced a labour gratuity, medical insurance and accident insurance paid by employers in a way that places a more substantial administrative burden on companies that already face considerable bureaucracy.

“Nepal needs to make paying taxes easier by simplifying the process of social security related payments. This is the reason that the recent labour 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”, said a World Bank report released in October 2018.

While multinational companies are facing difficulties in registering their offices due to various reasons, international investors are demanding a hassle-free visa process. The government has amended the laws which are now in place, on account of these issues. On the eve of the Summit, the Parliament endorsed the Foreign Investment and Technology Transfer Act, Public-Private Partnership and Investment Act and Special Economic Zone Act (first amendment).

These laws aim towards the ease of doing business in Nepal by clearing bureaucratic hurdles while establishing companies in Nepal in three phases - pre-establishment phase, operational phase and repatriation phase. In order to address the concerns of international investors, the government has simplified the provisions on land acquisition, company registration, environmental assessment and infrastructure development.

The government has pledged to provide all services from one place to ease red tape in bureaucracy; however, it is not sure how this will be implemented. At the same time, there are criticisms that laws have been formulated in a hurry without sufficient stakeholder consultations within the country. IBN presented 77 viable projects worth $31.93 billion (50 public and 27 private projects) during the Summit in key identified areas and could secure only modest success: Energy, Tourism, Industry, Transport Infrastructure, Information and Communication Technology, and Agriculture for foreign investment.

Of late, Nepal’s Transport and Transit Treaty with China and the new electricity guidelines issued by India pave the way for Nepal to trade electricity with third world countries and construction of transmission line with India have generated hope among international investors. The pre-feasibility study of these projects has finally completed, courtesy IBM.

The experts in Kathmandu call out for continuous follow-up after the Summit and creating an appropriate environment for investment. Through rapid economic growth, Nepal aims to graduate from the status of Least Developing Country (LDC) to Middle Income Country (MIC) by 2030. Procedural reforms and macroeconomic stability will be the critical factors in enabling Nepal to attain its goal.

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