‘Nepal needs to do more than hold summits to lure foreign investment’Experts say foreign investors often lose enthusiasm and back out after encountering bureaucratic hassles.
The third Nepal Infrastructure Summit hosted by the Confederation of Nepalese Industries and the Ministry of Physical Infrastructure and Transport kicked off on Wednesday with the objective of ‘attracting large scale private investment’ in areas of Nepal's core needs and strengths, the organisers said.
The event, which has assembled a group of potential foreign investors, policy experts, politicians and economically minded private sector representatives, will deliberate on issues that shape incentives for investment and enable the private sector to partner for sustainable prosperity.
In recent years, Nepal has organised multiple summits with the view of attracting large foreign direct investment to improve the scenario of capital formation in the country and meet the government’s vision of building 2,000 km of railway in 10 years and five international airports by 2027, bringing five million tourists by 2027, and producing 15,000 megawatts of electricity in 10 years.
But data shows that despite the large investment pledges made by the attendees at such summits and foreign governments, the status of foreign direct investment inflow has remained as bleak as ever.
According to Investment Board Nepal, the country received direct investment commitments totalling Rs53.73 billion in the fiscal year 2017-18, but only Rs17.512 billion of it materialised.
And out of over Rs900 billion in investment approvals in 2018, only three infrastructure projects—including a cable car at the pilgrimage destination of Muktinath, a cement plant and waste management project—entered into agreements and understandings with the board.
Also, the amount of direct investment in Nepal plummeted last year despite the government’s claim that it has introduced and amended investment and trade laws favouring foreign investment.
Data from Nepal Rastra Bank shows that, in 2018-19, the amount of direct investment in Nepal declined 25.4 percent year-on-year to Rs13.06 billion.
Infrastructure experts say that in view of the huge gap between foreign direct investment pledges and realisation, Nepal needs to move beyond summits and deliberations and correct its ways regarding facilitating foreign investment and minimise real risks for investors rather than just amending laws.
“There is global competition for capital, and profit-seeking investors scan regions where it is easy to take the capital, use it and repatriate maximum profits with minimum risks,” said Kumar Pandey, vice-president of the Independent Power Producers’ Association of Nepal. “Judging by the foreign direct investment commitments, we can say investors are interested; but the government’s inability to share business risk and assure investors a high level of socio-economic support has deterred the possibilities.”
Government officials say otherwise.
“Nepal has amended laws pertaining to labour and technology transfer to improve the investment climate; and it is engaged in making policy and process-level changes to improve the condition of doing business in the country,” said Pushpa Raj Kadel, vice-president of the National Planning Commission. “Investors from China, India, the US and Norway, among others, are interested in investing in Nepal; and investors from other countries have also participated in discussions on various projects.”
However, infrastructure experts say amending laws is simply not enough when the bureaucracy cannot put the reforms into practice.
“Foreign investors will not come to Nepal for charity but for profit; and our policies are good on paper, but in practice the country is not investment friendly,” said Swarnim Wagle, former vice-president of the National Planning Commission.
“The ruling party needs to understand that and use its majority to reorient its outlook and practices while facilitating investments. Why would investors choose Nepal with its many investment hassles over Bangladesh, Vietnam, Uganda, Cambodia and sub-Saharan economies which have adopted investment-friendly measures, both in policy and practice?”
As per the confederation, the funding gap in capital projects in the four priority sectors of energy, transport, urban development and water and sanitation is estimated to be between $77 billion and $136 billion.
“To fill this gap, there is a need to expedite public-private partnership at home and attract investments from abroad,” said the confederation. “The currently available financial instruments and modalities for investment in infrastructure are not adequate.”
A recent report by the US Department of State also highlights the institutional and procedural impediments which it says are expected to dissuade all but the most risk-tolerant investors. “While Nepal has established some investment-friendly laws and regulations, significant investment barriers remain," states the report.
As per the report, there are some welcome provisions in several newly enacted laws including the Foreign Investment and Technology Transfer Act, Industrial Enterprise Act and Special Economic Zone Act intended to attract increased foreign investment. However, questions have been raised over the implementation of such reforms, given the government’s past record of making lofty announcements without delivering them in practice.
The State Department report has also quoted a World Bank official as saying that corruption in Nepal is 'endemic, institutionalised, and driven from the top' taking note that corruption takes many forms but is pervasive in the awarding of licences, government procurement, and revenue management.
“In Nepal, projects with foreign investments are not facilitated but politicised, and that has swayed away many investors in the past," said Kishore Thapa, former secretary of the Ministry of Urban Development.
“Investors have time and again witnessed systemic delays by officials, social and financial hurdles such as local obstruction, and lack of clear financial policies on risk hedging and profit repatriation.”
According to Thapa, the production cost in Nepal is one of the highest in South Asia while the country prioritises forming institutions and new laws, but not a favourable environment which reduces such costs and minimises risks.
Multilateral donor agencies have also echoed the US report, and say that Nepal needs to boost investments to meet its development targets by implementing good practices.
“Nepal needs infrastructure investments of around 10 to 15 percent of GDP annually for the next 10 years,” states the Nepal Development Update report prepared by the World Bank. “The success of these investments will depend on the timely implementation of investment-related legislation that meets good practices.”