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January 2015 Economy and Policy

Published on: 2015-01-29 00:00:00     762 times read    0  Comments
 
In this article, retired Justice Upreti discusses some additional issues that hinder Nepal's infrastructure development. Some other issues were discussed in his article that appeared in December 2014 issue of NewBiz.
 
--By Bharat Raj Upreti
 
CIAA Interventions
Successful implementation of infrastructure projects in any jurisdiction requires an environment of fearlessness - a guarantee that only the authority competent enough to take decisions under the law will take those decisions based on the principle of fairness and legality. Nepal indeed has a sophisticated legal framework and an institutional framework to make the actions of private persons and businesses within their boundaries. Even in the short period following the beginning of liberalization in the early 1990s, the level of legal compliance had increased in the private sector to certain extent. However, the question now is - do the governmental agencies or regulators confine their action within their legal boundary? The present situation of terror created by the activities of the Commission for the Investigation of Abuse of Authority (CIAA) is symbolic to analyze the trend. 
 
The CIAA is entrusted with the role of investigating and initiating legal proceedings against (a) abuse of authority by public officials and (b) corruption. The above list is an exhaustive list and the Interim Constitution, 2006 and the Corruption Prevention Act, 2003 do not provide any further power to the CIAA. Issuing directives to the concerned regulators virtually on everything and on every issue is surely an unconstitutional and illegal act of the CIAA. It has created a situation of fear, insecurity and lawlessness. 
 
Some of the recent activities of the CIAA are discouraging to economic development as they have delayed decision-making by line agencies. Some cases even show that the CIAA had used its authority to serve personal grudges against the responsible officials in other regulatory bodies. The case of the then Governor of NRB and his subsequent acquittal by the Supreme Court can be taken as an example. However, the initiation of corruption proceedings left the NRB under the leadership of acting governor for years. Similarly, the inadvertent act of intervention by CIAA officials is reflected in the case concerning the purchase of aircraft by Nepal Airlines Corporation. It delayed the aircraft purchase process for more than four years. The recent example of issuance of a directive by the CIAA to the Ministry of Energy to revoke and cancel the licenses of several hydropower projects has shown that it has exceeded its legal authority. 
 
The Supreme Court has reminded the CIAA not to exceed its jurisdiction in a number of cases. The Court has reminded CIAA officials that exceeding jurisdictions is itself an abuse of authority, but the CIAA continues to violate the court’s order. Inaction on the part of the government authorities appears to have prompted the CIAA to exceed its jurisdiction. When the CIAA intervenes, a file remains pending with the CIAA for a long time frustrating the investors who eventually abort the projects. Such actions of the CIAA have terrorized the officials in line ministries and government departments. They prefer to refrain from making decisions rather than to face the illegal hassles and tensions. This may not be an unnatural abstention from their perspective. The CIAA detains the project related files for months, delaying the project. How much is the nation losing and how are people suffering due to these illegal actions and inaction? No one has assessed this loss. The political parties in power seem to be clueless on this national loss. 
 
CIAA is just a forerunner in the race of exceeding jurisdiction. Several other regulators are also in the race of trumping legal boundaries where there is chance. Existing policies and laws, too, fail to provide a clear allocation of authorities and responsibilities within the government instrumentality. The tug-of-war among the government authorities (for example, MOE and Investment Board) is apparent in many infrastructure projects. The bureaucratic mindset has also become a real problem. The government machineries are supposed to play the role of a facilitator but in practice in several cases, they appear to be playing the role of the controller and obstructer, knowingly or unknowingly. 
 
Multiple regulators and government instrumentalities will need to act coherently and consistently to achieve the goal of infrastructure development. However, in practice, the lack of inter-governmental co-operation and co-ordination has been a bitter experience for the investors and developers. The much-talked about one-window policy hasn’t been implemented yet. There are multiple "windows" and multiple "doors" responsible for delay and cost increment.  
 
Tolerating the rule breakers further encourages rule breaking, jeopardizing the rule of law. Absence of the rule of law means limited room for predictability, which discourages investment in infrastructure. To meet our aspirations of development in the infrastructure sector, the policy makers should address this situation by devising appropriate mechanism to contain the authorities within the legal boundary. 
 
Meeting the Demand of Locals
The government often makes verbal and written commitments to meet the high aspirations of the local people living in the areas where infrastructure projects are to be built or being built, but it lacks specific and clear-cut policies to deal with those aspirations. This hinders the process of infrastructure development. There is no clear national policy framework to addresses the demands of the locals or project-affected people, among many others. 
 
Local acceptance of infrastructure projects should not be overlooked, but the question is: to what extent can the demands of locals be entertained? The negotiation regarding local benefits takes place on an ad-hoc basis or on need basis. There is virtually no authoritative guidance to refer to, to address the issue of local expectations and benefits. Except for the requirements as to (a) allocate ten percent equity to the people of project affected areas and (b) right of locals to get compensation for land acquisition, there is no policy or legal document which can be taken as reference while negotiating benefit-sharing with locals. 
 
The absence of guiding norms has made the implementation of infrastructure projects very difficult. Delay in the implementation of infrastructure projects due to disruptive local agitations is something which we have already observed in the past. The disruption of construction works of the Trishuli -3 A Hydropower Project by locals demanding (a) at least 20 percent share ownership, (b) free electricity and (c) assurance of free health and education facilities in July last year can be taken as an example. To take another example, a group of people has been creating problems in the operation of the power plant of the 45MW Bhote Koshi hydropower project. The halting of the construction work of the Khimti-Dhalkebar Transmission Line is another example. Such disruption by locals have instilled fear and uncertainty in the minds of the investors. 
 
Whether the list of benefit sharing prepared in consultation with the locals and promised in the Environmental Impact Assessment (EIA) reports of the projects is exhaustive or not is not clear till date. Can the locals ask for benefits beyond what is agreed in the EIA or the concession agreement entered with the relevant contracting authority? This is an unclear issue and requires proper addressing from the government. The issue of resettlement of the project-affected people, too, is not clear despite repeated commitment by the government and its agencies towards large infrastructure projects. All these problems stem from the absence of a clear policy, which would specifically provide for norms on maximum and minimum benefit sharing with locals. 
 
Lack of Effective Dispute Settlement Mechanism 
An effective mechanism to enforce contracts and resolve disputes is a major concern for any investor. In its absence, infrastructure projects do not become attractive targets for investors. Good enforcement procedures enhance the predictability of investment relationship and reduce uncertainty by assuring investors that their contractual rights will be protected and upheld promptly by the local courts/arbitration tribunals. What is the level of enforcement of contracts related to infrastructure development or to what extent contracts are honoured and what level of expertise do the local courts apply while deciding contractual disputes etc. are the basic questions an investor seriously considers before making investment decisions. The answers to the above questions explain the reliability of any jurisdiction in terms of the security of investment. 
 
Unfortunately, Nepal does not have effective mechanism for enforcement of contracts and settlement of commercial and contract related disputes. As per the World Bank's Doing Business Report , 2014, it takes 910 days on an average for enforcement of contracts in Nepal which is ranked 134th among 188 countries in enforcing contracts. The question is how can an investor invest in infrastructure projects if he/she has to wait for 910 days for the resolution of disputes? 
 
It is not that there is no legal framework for swift and effective dispute settlement in Nepal. The Arbitration Act, 1998 has provisioned for a binding alternative dispute settlement mechanism. However, the implementation of the true objective of the Arbitration Act has not been effective due to the inability of the local courts to consider the likely effects of delay in investment and enforcement of the contract. Almost all awards of the arbitrators are challenged at the appellate courts and Supreme Court and it takes years for the final decision. This has killed the very essence of arbitration.
 
The approach of our courts to deal with the infrastructure projects is unpredictable. The practice of granting stay-order to halt the operation of infrastructure projects without bothering to consider the far-reaching implication by such halt is common. It surely is not conducive to infrastructure projects. A simple stay order of the court can stop the infrastructure projects for an indefinite period leading to huge cost escalation. There are no special courts to deal with disputes related to the violation of contract, commercial disputes and other disputes related to development matters. Such disputes are handled by the general courts manned by judges who are not familiar with the laws and the policies related to commerce, banking, investment and other new technology-driven businesses. 
 
If the Government of Nepal really values private investment in infrastructure projects, it should also consider payment of compensation to the investors if their project halts for an indefinite period by hasty and inadvertent court orders, undue delay in decision-making or making decisions not supported by the law and business reality. 
 
Unfriendly Tax Laws  
Investment incentives are economic advantages that governments provide to specific enterprises or groups of enterprises with the goal of steering investment into favoured sectors. However, some provisions in the existing tax laws create barriers instead of facilitating the development projects.
 
 The Government of Nepal ranks infrastructure projects in the first place to receive several tax and non-tax incentives. However, the existing tax laws in Nepal still need to be streamlined to attract private investment in the infrastructure sector. Some of the provisions of the existing income tax laws operate as a serious disincentive for private investment. For example, Section 57 of the Income Tax Act, 2002 imposes tax on a company even if it is in operating loss, if there is change of control in the last three years. As a result, the company running such a project is prohibited from carrying forward the losses and is subjected to income tax on the valuation of the project assets such as land, building, plant and machinery even before its commercial operation. This also restricts the ability of the company to raise fund by inducting new equity investors.  
 
 
Way Forward
The Government of Nepal should develop a consolidated and comprehensive national policy setting out a clear and predictable regime for the financing, construction and operation of privately-financed infrastructure projects with clear and defined set of responsibilities and allocation of authorities among the government ministries, departments and offices. Some of them are noted in the following paragraphs:
 
National Policy on Investment
Nepal should have a national policy on investment covering both local and foreign investment. This policy as such should also specify the nature and size of the projects that would solely be developed by the public sector, by private and public sector jointly and solely by the private sector. 
 
Define the role of National Planning Commission
 The role of and need for institutions like the National Planning Commission (NPC) should be revisited. Why do we need NPC? What is the role of the NPC vis-a-vis the role of the line ministry? There are many other relevant questions. Is it the duty of the NPC to advise the Prime Minister on long-term development irrespective of the policies of the political parties in power? On the other hand, is it to function as a think tank of the political party represented by the incumbent Prime Minister?
 
If Nepal really needs a planning commission, should its present structure continue? Public opinion does not support its existing form and working modality. So if at all Nepal needs a planning commission, it should be restructured. Its members should be selected based on their expertise in planning and development. The present system of appointment based on political loyalty instead of professional expertise is delivering no result. The overriding interest of the nation’s economic development may require such expert body to have membership of experts with guaranteed tenure of service and not the tenure linked with change in successive governments. 
 
Groom a Team of Sector Specific Experts in Bureaucracy
Sector-specific government bureaucracy, especially dealing with concession projects, should be trained and groomed to enhance government efficiency. Frequent transfer is one of the reasons killing expertise and efficiency. Officers appointed at key government ministries and offices should not be transferred except on the grounds of inefficiency and corruption. Frequent transfer of staff at the Office of the Company Registrar is killing its efficiency. There is a need to develop professional efficiency of government institutions such as Nepal Investment Board dealing with concession policies and agreements. A team of experts capable of dealing with their counterparts in private sector should be groomed. The responsibility of prescribing, defining and deciding the issues and condition of concession agreements should be consolidated in one responsible institution and it should not be scattered in different ministries and government departments. Other relevant government agencies should respect and enforce the decisions of such an institution.
 
Ensure Transparency
The process of granting concession and agreed terms and conditions should be transparent and accessible to the general public to avoid the chances of corruption and misuse of authority.
 
Harmonization of Laws and Policies
The government should set up a special commercial court manned by professional judges trained in laws relating to economic development, international trade and settlement of development related disputes. Such judges can be appointed for specific periods of at least 10 or 15 years with full retirement benefits and pensions. This system of courts has produced very positive results in other countries. There is no reason why it should not work in Nepal.
 
 The laws relating to investment, business model, access to finance, concession dispute settlement, closing of business and infrastructure development are scattered. Many of them are outdated, incomplete and contradicting each other. So, there is an urgent need for reforming, updating and harmonizing these laws. Some new laws such as the Trust Law should be enacted. Some of the major laws requiring major reform and harmonization are as follows:
 
i. Company Act, 2063
ii. Foreign Exchange Control Act, 2019
iii. Industrial Enterprises Act, 2049
iv. Foreign Investment and Technology Transfer Act, 2049
v. Insolvency Act, 2063
vi. Banks and Financial Institutions Act, 2063
vii. Insurance Act, 2049
viii. Income Tax Act, 2058
ix. Investment Board Act, 2011
x. BOOT Act, 2063
xi. Blacklisting directive issued by Nepal Rastra Bank, 2071
xii. Labour Act, 2048
 
Attitude Change of Government Bureaucracy
There is an urgent need to tune the bureaucracy to the accepted norm of rule of law. There is a need to change the attitude of bureaucrats. Their attitude needs to be tuned such that they can play a facilitating role in fair business and development initiatives. Transfers without compelling reasons should be stopped. Transfer of government employees with the change in government is a cancer to development and a source of corruption. If an officer is inefficient, transfer is not a solution. Legal action is the proper remedy.
 
Restructure DOI and OCR
The Department of Industries (DoI) is an important government office entrusted with several development related approvals, registration of large-scale industries, project registration, industrial property rights and related dispute settlement. It is over-burdened. Matters related to trademark registration and other industrial property should be taken out of its jurisdiction. A separate and independent legal body manned by trained professionals should be set up for this purpose. 
 
Duplication of approvals in the matter of foreign investment should be removed. It should either be fully entrusted to Nepal Rastra Bank (NRB) or solely to DOI. If DOI is given the sole authority, then only the information of DOI approval to NRB should be sufficient.
 
The Office of the Company Registrar (OCR) is another important government office directly dealing with investors and infrastructure development companies. It should be upgraded and re-organized. The involvement of junior staff should be avoided in all matters related to company administration, registration and deregistration. These functions should be entrusted to officers trained in the issues of company law and its administration. The number of professional officers trained in management, law, and accounting should be increased, and the post of the Company Registrar should be upgraded from first class to special class.
 
Form a High Level Commission
The government should constitute a high-level commission with the mandate to conduct a detailed study on the existing laws and policies relating to privately financed infrastructure projects. This commission should identity the contradicting laws, policies and practices and provide recommendations for the harmonization of the existing laws and policies as well as for the reformation of the government machinery dealing with infrastructure projects. Such a commission should directly report its recommendations to the Prime Minister for immediate action. 
 
Upreti is a former justice of the Supreme Court of Nepal. The article is adapted from a paper he presented at the Infrastructure Summit organised in Kathmandu on 11-12 November 2014.

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