Will the new Acts help—or hurt—foreign direct investment in Nepal?The Post’s Mukul Humagain talked with some of the stakeholders who deal with FDI to know whether the new laws address investors' concerns, whether they will entice them into investing in Nepal and whether they are on a par with regional standards.
The government is organising the Investment Summit 2019 on March 29-30. And to attract foreign investors, the government has introduced three vital legislations—foreign Investment and Technology Transfer Act, Public-Private Partnership and Investment Act, and Special Economic Zone Act (First Amendment). The KP Sharma Oli government plans to showcase these Acts as the driving force for more and sustained foreign investment in Nepal.
While the much talked about Foreign Investment and Technology Transfer Act has promised FDI approval within a week and one-stop service at the Ministry of Industry for facilitating investors, there are also concerns over some of the provisions as well as overlapping of authority.
The Post’s Mukul Humagain talked with some of the stakeholders who deal with FDI to know whether the new laws address investors' concerns, whether they will entice them into investing in Nepal and whether they are on a par with regional standards.
The Foreign Investment and Technology Transfer Act, when it was promulgated in 1992 to implement the first wave of economic liberalisation, had significant comparative advantage over the peer legislations in South Asia. Aspects of FITTA 1992 that are worth mentioning include relaxed requirements of percentage for foreign ownership (except few sectors), free repatriation and treatment of equity, debt and technology transfer as foreign investment. These major elements have received continuity in the FITTA Bill.
The requirement under the FITTA 1992 regime—to file an approval even in sectors opened for foreign investment, along with agreement between the parties—were issues of concern for foreign investors. Unfortunately, the new FITTA Bill is not progressive on the approval regime. The procedure to obtain approval is even more complicated, with the creation of three hierarchical entities empowered to clear foreign investment approval based on the amount of investment.
Prior approval for foreign investment has been relaxed significantly in South Asia and this is where Nepal loses advantage. Foreign investors will have to come to grips with the approval regime and clearances required from entities involved in project implementation. Investors will be confident to invest in Nepal if, for instance, One Stop Centre—introduced in both the new FITTA and the new PPP and Investment Bill—is the place for receiving the set of application for approvals for implementing the project from the foreign investors and granting them.
On PPP and Investment Act
The PPP and the Investment Act is a product emanating for two reasons. First, the need to convert PPP Policy 2015 into a law, and second, the Investment Board’s aspiration to become an entity having the potency to remove the obstacles faced by private investors. The first characteristic of the legislation to conduct procurement of PPP projects is clearly laid out.
The provincial and local governments can also rely on this law to procure and implement projects under the PPP for project falling under its jurisdiction. Similarly, at the federal level, there could be ministries and an investment board that could be PPP project implementing entities. But the role of ministries in implementing a PPP project is significantly reduced with IBN exercising authority over hydropower projects over 200MW and other projects above Rs6 billion. However, here is the primary problem. An infrastructure project could be privately financed or funded with government resources. The bill does not address the issue of determination of privately financed or government-funded project and how the determination is to be done.
On Hedging Regulations
Foreign exchange hedging introduced by the Hedging Rules passed under the Foreign Exchange Regulation Act is conceptually different from the Hedge Fund under the Specialized Investment Fund Regulation issued by the Securities Board of Nepal. While Hedging Rules attempts to mitigate the foreign exchange loss that foreign investors making an investment in Nepal may suffer due to the devaluation of Nepali currency, the Hedge Fund, on the other hand, is a specialised pool investment to make an investment in high-risk sectors.
The Hedging Rules allows protection to foreign investors availing the loan in foreign currency, and thus foreign investors have an option to take advantage of the Hedging Rules. The facility is extended only to some critical infrastructure sectors. The amount of loan repayment in foreign currency that a borrower has to make could increase if Nepali rupee devalues from the date of availing the loan. By paying hedging premium to Nepal Rastra Bank, the central bank protects the investor from making the increment in the loan payment. It is not immediately clear, however, if both principal and interest are covered. But the amount of hedging premium is not prescribed and is left for future negotiations, making the entire rules perfunctory.
In addition, the main rationale behind the introduction of hedging in the Dollar PPA Guidelines passed by the Ministry of Energy, Water Resources and Irrigation and adopted by the Nepal Electricity Authority was to ensure that the NEA is protected from foreign exchange losses when it makes payment under power purchase agreement entered with tariff calculated in US dollars. This situation is not considered by the Hedging Regulations.
While legal reforms are always welcome by foreign investors, the law is not a significant determinant to attract foreign investment. What is more important is an independent, consistent, uniform and investment-friendly application of the laws by the entities and persons with authority.
Dahal is an advocate and partners at Abhinawa Law Chambers.
The Foreign Investment and Technology Transfer Act could have been more in tune with what the investors are looking for. Instead, the negative list has been lengthened: there is no more FDI in primary agriculture, and there are new caveats for manufacturing industries that may not outsource their production lines.
It seems the FITTA is only looking at investments from the capital injection part and not from the point of view of technology transfer and international practices.
On empowering investment board
Right now, in Nepal, I don't believe that it is the acts and regulations that are inhibiting investments. What is inhibiting FDI is the implementation side, i.e. the lack of urgency in facilitating the deals and the delays of government agencies. It is a man-made problem on the implementation side, i.e. government agencies have their own manufactured translation of laws that are turning out to be the problems.
I was a member of the Industrial Promotion Board under the Industry Ministry for two years. During this period, I worked with three ministers and the board had just six meetings. The fact that investors have to wait for industrial promotion board to meet to get their investment approval, which does not sit regularly, sums ups how the government system operates.
The same is the issue with the Investment Board Nepal, which requires the prime minister to officiate and sanction the projects. The prime minister's job is not to oversee the ratification of investments. There should have been an investment committee—a smaller working committee that decides and approve the projects. Unless you do that, there are going to be delays. One thing we have to understand is that investors have very little patience. If they are not facilitated and have to wait for different levels of approvals, Nepal will continue to be where it is now, i.e. attracting low amount of investments.
Don’t ignore small investments
It seems more emphasis is given on big investments and little thought is given to small investments—not considering that these small investments can be very big in aggregate. While we focus on big investments that take many years, we actually should be concentrating on how to deal with SMEs (small and medium-sized enterprises). But the focus does not seem to be on SMEs.
Foreign investment is not just about money, it is also about technology transfer. We tend to forget this fact. The international best practices through the investments that come into the country can add so much value. For example, joint venture investments made by Standard Chartered Banks brought technology transfer in the Nepali banking industry. The amount was small in terms of investments but the technology transfer it brought was enormous.
On Private Equity Regulation
The good news for those like us who're working in the private equity space is the introduction of the Specialized Investment Fund Regulation. This has ensured that there will now be a legitimate regulatory body to regulate Private Equity and Venture Capital. It also means there will be no confusion among government agencies about private equity and what it can do.
Having said that, we still need to see how it is implemented. Banks are given a special sort of treatment through Banks and Financial Institution Act (BAFIA). Will this regulation also give private equity a special treatment to invest without the hassles of going through the company act, rules and regulations? Or are you meant to follow all those rules and regulations? We don't know. That’s why harmonisation is extremely important. If there is no harmonisation, the specialised investment regulation will continue to be another layer on top of the existing layer.
Pandey is CEO at Business Oxygen Pvt Ltd, Nepal's first private-equity fund.
It's good to see that the government is serious about bringing the much-needed reforms in the foreign investment regime. However, in the midst of this hype, we must take a closer look to new changes being made and how it will make foreign investors' entry and exit flexible and simplify administrative process while doing business in Nepal.
Why can’t Foreign Investment Technology Transfer Act be called Foreign Investment Facilitation Act? The choice of the word itself is wrong. The amendments are not progressive as they should have been. Why should there be a negative list in the FITTA?
The objective of amending these acts is to ease business and facilitate investments. But our focus has always been on regulation and control. Regulation is not only about controlling, it is also about facilitating. The regulators in the country—Nepal Rastra Bank, Securities Board Nepal, Industry Department—do not realise that one of their jobs is also to make conducting business hassle-free and investors comfortable.
There is a “no welcome” attitude for FDI in Nepal. That is why I often say FDI here means “foreigners don't invest”. We never made foreign investors feel welcome. More than legal issues, we're harassing investors through procedural issues. If we want to execute a larger project (hotel), we need technical manpower from abroad and that should be paid in foreign currency. As per the existing legal arrangement, their remuneration can be paid only after completion of the work. Who will come to Nepal if we continue to have this system? This is where we need intervention.
If Nepal wants to execute mega projects, international legal, accounting and consulting firms must come to Nepal. But we're not seeing top class contractors, consultants coming to Nepal.
Any international company handling a project worth over $1 billion will trust none of the Nepali legal and accounting firms. Even if they have to hire Nepali firms, they will hire them under international consulting firms umbrella. The practical issues—easy availability of working visa, remuneration—have become impediments of late. And this is something the government must look into.
The government has recently introduced new regulations to govern private equity and venture capital, but the document is in Nepali. How can foreign investors understand what is there in the regulations? This shows the narrow vision of Nepali stakeholders. We cannot dream of large scale FDI if we continue to have every document written in Nepali.
Shakya is CEO at Beed Management, a management consulting firm.