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February 2016 Economy and Policy

Published on: 2016-02-22 12:28:13     1091 times read    0  Comments
 Is Nepal Really Inviting and Promoting Foreign Investment?

--By Gandhi Pandit

A few days ago, the Bangladesh Chamber of Commerce held its "Nepal Bangladesh Business Forum” in Kathmandu. I was one of the participants. There were more than 60 businesses that had come from Bangladesh to participate, each with the enthusiasm of finding new investment opportunities and market in Nepal for their products. Surprisingly, I found most of the business participants were relatively young. They were dynamic, enthusiastic, and energetic and most had extensive export experience. I was impressed by the way they conducted their meetings, the way they will market their products in Nepal and I had to admire their entrepreneurship and desire to expand their business. 

Despite political uncertainty, deeply-rooted corruption, and a growing disturbance by fundamentalists, the economic growth of Bangladesh is tremendous. Bangladesh’s export trade is currently at USD 33 billion and expecting to reach USD 60 billion within five years.  Eighty percent of their export is based on their garment industry. Recently, even China has ordered more than USD 1 billion worth of garments from Bangladesh. Even China found the low production costs in Bangladesh impressive.

Why is Bangladesh so successful in growing their economy despite prevalent political turmoil and uncertainty? Why are their businesses not obstructed by ubiquitous labour strikes or persistent corruption? Why has Bangladesh been able to attract so much foreign investment?

I was surprised to meet the CEO of a Bangladeshi energy company with more than 700 MW capacity. That kind of private sector utility company could not operate without a conducive business environment and clear government policy. If we compare the power sectors of Bangladesh and Nepal, we find that the Nepal Electricity Authority (NEA), Nepal’s only utility company, has a capacity of only 750 MW.  This is Nepal’s total installed energy production capacity.  In terms of hydropower potential, Bangladesh falls far behind Nepal. Nepal has the potential of producing 40,000 MW of electricity. Bangladesh has much less hydropower potential, but currently produces more than 12,000 MW of power from natural gas alone.  This is despite the various problems plaguing Bangladesh's electrical power sector: administrative corruption, high system losses, delays in construction, low plant efficiencies, erratic power supply, electricity theft, blackouts, and poor plant maintenance funds.

Nepal faces the same problems as Bangladesh, but Nepal is only able to produce 750 MW in total. Is this because of corruption? No, even after obtaining the appropriate licenses, many developers still abandon their Nepal projects.  Is it political instability? No, this worry can easily be overcome by the developer’s desire to sell electricity to Nepal because of the country’s enormous energy shortfall.  Is it high system losses? No, system losses are attributable to the NEA, not energy suppliers. Is it shortage of funds? No, whenever Nepal hydropower companies issue shares publicly, the shares sell out. 

Why then is Nepal not able to capitalise on its immense water resources? The foremost reason is that Nepal’s political leadership lacks deep commitment or a long-term vision for hydropower. Frequent changes in government administrations make them unable to carry out any long term project. There is a lack of government continuity in carrying out even good policies of previous administrations. This uncertainty forces investors to take a wait and see approach after each government turnover.

Nepal needs at least 2,000 MW of electricity just for domestic consumption within next five years. We have the necessary resources. With such a high demand and the potential to match, where are the domestic investors? If domestic investors are not ready or able to invest, then how can we expect foreign investors to invest in Nepal? Before looking abroad, we must look at our own situation.

Bureaucratic apathy towards hydropower development and slow decision-making are two problems that we face. Any proposal for the development of a megaproject is treated unenthusiastically. Instead of looking at such a proposal positively, the bureaucracy operates only negatively.  It interprets the law and procedures in such a way that tends to make foreign investment more difficult or burdensome.  The regulatory framework for foreign investment is so unclear and vague that the multilevel approval process involved is a drag on foreign investment.  

One example is the approval from Nepal’s Central Bank. The Foreign Investment and Transfer of Technology Act (FITTA) is the main statute that allows the Department of Industry (DOI) to regulate and approve foreign investment. Once the DOI approves a foreign investment, that investor can bring capital through Nepal’s banking channels. But the Central Bank of Nepal operates as a roadblock.  It interprets foreign exchange laws and regulations in such a way that further permission for foreign investment is required from the Central Bank. The construction of the Foreign Exchange (Regulation) Act in no way requires this second-level permission. In practice, the Central Bank procedure has undermined the authority vested in the DOI to approve foreign investment. This discourages foreign investment. 

Another problem comes when purchasing land for projects. Prior to 2068, one hydropower project company purchased 300 ropanis of land which the Land Revenue office had approved. Later the project needed another 30 ropanis land. It purchased this 30 ropanis from a private owner and went to the Land Revenue Office to register the transfer. This time the Land Revenue Office decided it needed prior approval from the government. A regulation from 2068 requires each project wishing to purchase more than 75 ropanis of land to first obtain government approval. When the project purchased its first 300 ropanis of land, there was no such policy. But now the project company is asked to produce government approval for the entire 330 ropanis of land. The project company submitted its application, but a decision on the approval was still pending more than a year later, even though it was very close to starting power generation.

Why do we place so many restrictions on foreign investment? A developer needs to obtain approval, separately, from the DOI, the Department of Energy, The Department of Forestry and Mines, the Home Ministry, the Ministry of Environment, the Ministry of Finance, the Ministry of Local Development, Road and Physical Planning, and the Central Bank.  This takes ages. So many layers of regulations and procedures can only create a negative perception among potential investors. 

We need to take a closer look at Bangladesh and other South Asian countries and find out how they are able to promote and attract foreign investment by creating conducive and friendly environment. Nepal, no doubt, has huge potential for developing infrastructure projects, but substantial foreign investment is often required. Until we are not mindful of the needs of foreign investors and open our doors to attract their interest, foreign investment in Nepal will remain restricted. Let us hope this government will take the appropriate steps in removing any unnecessary barrier for foreign investment in Nepal.

Pandit is a corporate lawyer.


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