As Nepal prepares for the third edition of the Nepal Investment Summit later this month, the government is gearing up to showcase projects and opportunities to convince investors and attract foreign direct investment (FDI). Recognising its limited internal resources, Nepal’s economic journey hinges significantly towards FDI. Through investment summits and policy reforms, it aims to convey its investment potential to global investors.

Unveiling the past

Nepal’s inaugural Investment Summit in 2017 marked a significant moment as the country transitioned into a federal system under the new 2015 constitution. The highly anticipated summit attracted 16 companies from six countries, securing commitments of nearly US$13.51 billion, predominantly from China for hydro and cement plants. This commitment surpassed half of the country’s estimated GDP for FY 2016/17. The FDI, however, did not increase as per commitments made during the summit.

Building on this, the 2019 summit was carefully planned with substantial policy reforms in acts like the Foreign Investment and Transfer of Technology Act 2019, Companies Act, Special Economic Zone Act, and Labor Act, along with introducing a Hedging Policy to address investment obstacles. Government agencies pledged to act as facilitators with less bureaucratic red-taping. Among the 50 projects showcased, 15 project investment agreements totaling $12 billion, were signed. It included the Nijgadh International Airport, the Kathmandu Outer Ring Road Project and others in hydroelectricity and agriculture. However, FDI inflow fell short by 30 percent compared to the $17 billion committed. Notably, in 2022/23, while the total investment commitment was NRs38.45 billion, the actual FDI inflow amounted to NRs5.98 billion, highlighting a gap in promises and reality.

Navigating the present

The upcoming event aims to attract not just foreign investors but also domestic investors and non-resident Nepalis (NRNs). NRN card distribution has begun, offering investment incentives. Sixty-three projects are being put out, totalling $30 billion. Eleven laws are set for amendment to address project implementation challenges. Had it not been for the summit, the long-awaited legislative changes in Nepal’s FDI and investment policies would not have accelerated. Reforms include viability gap funding (VGF), hedging and country rating regulation. The government has been organising pre-events and bilateral meetings with potential investors globally to align commitments with actual inflow.

Other investment-friendly reforms include opening FDI for travel agencies, allowing 70 percent FDI in ride-sharing services, easing export restrictions for SEZ industries (from 60 percent to 15 percent), land mortgage for loans up to 50 percent, online approval of FDI up to NRs500 million, reducing minimum FDI threshold from NRs50 million to NRs20 million, eliminating approval for FDI in IT-based industries and simplified dividend repatriation.

However, there are concerns amid governance challenges due to recent changes in the government. Recent departures of major investors like Axiata (the parent company of Ncell) and Habib Bank (one of Nepal’s long-standing FDI partners for three decades) add to doubts about Nepal's ability to attract foreign investment.

Despite commendable paper policy reforms, bureaucratic hurdles persist, and implementation efforts need to be improved. Land acquisition issues in projects like the Huaxin Cement Plant and the Hongshi Shivam Cement Plant have resulted in disputes and delays. Furthermore, even with initiatives like a single window system and online registration, investors are still burdened with the inconvenience of submitting physical documents through multiple channels. Even with the Investment Board solely dedicated to hand-holding and facilitating the investors, navigating the system remains daunting.

Therefore, the newly formed government and the investment summit committees carry a heavy responsibility on their shoulders to ensure the summit retains its significance and effectiveness.

Forging the future

The third investment summit is engaging the private sector to explore potential projects and embrace the public-private partnerships (PPPs) model. The enactment of the PPP Act in 2019 led to notable successes, particularly in hydropower projects. For example, Gautam Buddha International Airport (GBIA), constructed by the Northwest Civil Aviation Airport Construction Group, a Chinese institution, was fully operational in May 2022, marking it a PPP success. Similarly, the Arun III Hydroelectric project, developed by the SJVN Arun-3 Power Development Company Pvt. Ltd (SAPDC), an Indian government subsidiary, has reached a 70 percent completion milestone as per the timeline. This showcases another successful collaboration between the government and the private sector in realising transformative projects. Other anticipated PPP projects are the Nijgadh Airport and the Kathmandu-Terai fast track, among many more. Private-public partnerships hold tremendous opportunities for the nation as well as stakeholders.

Furthermore, there should be a greater emphasis on sector-specific investment promotion. Each sector has unique requirements, and policies should be crafted accordingly. For instance, the FDI threshold may restrict the manufacturing and service industry as it demotivates small investors. Similarly, to optimally utilise electricity potential, the Nepal Electricity Authority (NEA) has recently agreed to buy electricity from smaller investors up to the capacity of 10 MW. This initiative immediately prompted 89 small investors to sign contracts with the NEA, amounting to an additional 395 MW of electricity on the national grid. Also, there are prospects for a sustainable energy mix with solar energy and hydrogen energy. These signify the potential for sector-specific investment opportunities. Yezdi Nagporewalla, the chief executive officer of KPMG in India, also suggests that Nepal focus on sector-specific investment promotion for better utilisation of potential and, therefore, economic development.

Furthermore, the potential investment sectors were encapsulated in the acronym TEA (tourism, energy and agriculture). The evolving landscape has transformed it into ICE- TEA (information, communications-technology and exports-TEA. Recent findings from the Institute of Integrated Development Studies highlighted that Nepal’s information technology (IT) service exports marked an annual growth rate of 64.2 percent in 2022. The growth rate in IT companies was 80.5 percent. In response to this mushrooming potential, the minimum FDI threshold for ICT has been eliminated. Therefore, IT-friendly incentives could prove profitable.

Hope amid challenges

Nepal has been advancing towards self-sufficiency in cement and selling more electricity, in addition to relevant policy reforms. While the country has shown resilience in many aspects, it is clear that merely hosting investment summits and introducing targeted policies is not enough to attract sustainable FDIs. Verbal assurances from the authorities must translate into tangible practices to instil confidence. In the face of the summit, the FDI has been reduced by 85 percent, which is demoralising. Investors seek predictability, and our current business scenario screams unpredictability.

In essence, while challenges persist and not all promises may materialise immediately, a steadfast commitment is a must. Simplifying provisions for investment facilitation, project implementation, operations and profit repatriation would best serve investors. Hopefully, the summit can prove to be a testament to Nepal’s resilience and determination amid persistent challenges.