Investment in the industrial sector is considered vital to support economic growth and invigorate the economy. Productivity enhancement, job creation and export promotion are closely linked with manufacturing industries. Opportunities for boosting production are limited in agriculture, while most services are non-tradeable. Rapidly growing economies like China, India, Malaysia, South Korea, Vietnam and Bangladesh have climbed the economic ladder through a strong manufacturing base. China and India are prominent producers and exporters of diverse products, including electronics and electricals, machinery, pharmaceuticals, textiles, and fast-moving consumer goods. Bangladesh has developed its capacity in textiles, garments, and pharmaceuticals. Malaysia and South Korea excel in producing computer chips, electronic devices and motor vehicles. Exports in these sectors have increased government revenue and created employment and income opportunities for large populations.

Emerging economies are making significant investments in the manufacturing sector, attracting both domestic and foreign investors through various incentive measures. A competition is underway among nations to transition from traditional industries, such as textiles, garments, agro-processing, and extractive operations, to high-value manufacturing of products like electronics, computer chips, and mobile phones.

In Nepal, the economy remained largely closed until 1990, with limited private-sector industrial ownership and major industries operated as public enterprises. The political changes of 1990 ushered in an open and liberal economic and trade policy. Industrial and foreign investment policies were introduced, and the Foreign Investment and Technology Transfer Act and the Industrial Enterprises Act were promulgated in 1992. These acts facilitated the entry of domestic and foreign investments in industrial sectors. These policies included incentives such as tax and duty rebates, protection against expropriation, government facilitation in land acquisition, and bonded warehouse privileges.

Public enterprises were privatised under the framework of the Privatization Act of 1994. To adapt to evolving investment demands, the Foreign Investment and Technology Transfer Act and the Industrial Enterprises Act were amended in 2019 and 2020, respectively, making investment regimes more liberal and investor-friendly. The establishment of the Investment Board in 2011 and the development of Special Economic Zones further demonstrated Nepal's commitment to fostering industrial growth.

The government, in collaboration with business chambers, has organised three investment summits in Kathmandu. During these events, the Investment Board Nepal showcased various projects aimed at attracting foreign investment. At the most recent summit in April 2024, the government presented 151 projects spanning sectors such as hydropower, roads, highways, tunnels, airports, and high-value agriculture. While initial responses from potential investors were encouraging in terms of investment pledges, the challenge lies in translating these commitments into actionable investments. Past experiences show that only a fraction of such pledges materialise.

A government report highlights the disparity between pledges and actual investment realisation. In fiscal year 2022/23, the Department of Industry approved 326 FDI projects with a proposed investment of Rs 30.7 billion. However, Nepal Rastra Bank reported that only Rs 6 billion — about one-fifth of the pledged amount — was realised during that period. Similar discrepancies have been seen in other periods too.

Nepal’s FDI performance remains among the lowest in South Asia. According to the World Investment Report 2024, published by UNCTAD, Nepal received foreign direct investment inflows of $65 million in 2022 and $74 million in 2023, which were higher than Bhutan only. The top recipients in the region include India, Bangladesh and Pakistan, followed by the Maldives and Sri Lanka. Despite the government’s efforts to improve the regulatory framework and ease of doing business, no substantial progress has been made in increasing foreign investment flows. The outcomes of the past three investment summits have been insufficient to attract investors to Nepal.

Several factors contribute to the low level of investment in Nepal. First, political instability and frequent government changes create uncertainty for potential investors regarding policy and regulatory stability. Frequent reshuffles result in high-level government officials being transferred, weakening bureaucratic continuity and fostering a reliance on political patronage to secure or maintain desirable postings.

Second, bureaucratic hurdles and lengthy procedures have been hindering business registration and exit processes. Ambiguities and overlapping regulatory roles across the three tiers of government have been further complicate matters, creating significant challenges for investors. Third, the functioning of the One Stop Services Centre (OSSC) has become ineffective as it is suffering from low staffing and inadequate resources. The formation of One Stop Services Centers has been mentioned in four different legislations related to the industries. These legislations posit different numbers and members in the composition of OSSC, and the job responsibilities are divergent, making it difficult to understand their operational modalities.

Fourth, there are coordination issues among government agencies and between government bodies and the private sector remain pervasive. Government agencies often operate in isolation, leading to contradictory policies and a lack of collective responsibility.

Fifth, inadequate transport infrastructure and poor connectivity has been inflating our transaction costs. Existing physical infrastructure like Roads and bridges are poorly maintained, and the country lags behind in developing comprehensive digital connectivity networks.

Sixth, governance issues, including lack of accountability and rent-seeking behaviour, has been undermining investor confidence. This is reflected in the annual reports of the Commission on Investigation of Abuse of Authority (CIAA) and the Auditor General. Significant misuse of public funds has been observed, particularly at the municipal level. Seventh, the public sector has been making slow progress in implementing digital services. Many agencies are still adhering to traditional, in-person processes, despite making promises of faceless, cashless, and contactless service delivery.

While political leaders and government officials are enthusiastically promoting Nepal as a promising destination for investment, their actions often fall short of creating a genuinely investor-friendly environment. Although they call upon investors to fund industrial ventures without hesitation, they have failed to make meaningful efforts to ensure a stable, supportive ecosystem. Providing strong assurances of investment protection and long-term project sustainability should be top priorities of our political leadership. Addressing these domestic issues is essential to attract and retain foreign direct investment on a lasting basis. Without this, the persistent gap between investment pledges and realised investments will remain unresolved, further diminishing Nepal’s appeal as an investment destination and risking a slide toward de-industrialisation.

(Ojha is a former secretary, Government of Nepal.)

(This opinion article was originally published in     December 2024 issue     of New Business Age Magazine.)