Investment friendly regimeAlthough recent decades have seen a massive inflow of foreign direct investment (FDI) in developing countries, FDI in Nepal has had a dismal history.
-Although recent decades have seen a massive inflow of foreign direct investment (FDI) in developing countries, FDI in Nepal has had a dismal history. In 2012, FDI inflow to Nepal was $90 million. Then in 2015, it decreased to $51 million, which was merely 0.08 percent of Nepal’s GDP—significantly less than in other South Asian countries such as the Maldives and India, where FDI inflows have reached 10.3 percent and 2.2 percent of GDP respectively.
FDI’s role need not be debated much, as we have seen our neighbours India and China enjoy considerable growth due to FDI inflows. Apart from transferring latest technologies and best global management practices, FDI fills the saving-investment and the foreign exchange gaps, creates job opportunities, reduces poverty, increases living standards and fosters economic growth.
Why the new act?
The Foreign Investment and Technology Transfer Act, 1992 (FITTA) governs foreign investment and transfer of technology in Nepal. A new act was overdue against the backdrop of investors facing numerous problems, such as policy hurdles in terms of registration and approval, raising finances, repatriation, lack of clarity on policies and overlapping and contradictory laws. Likewise, the WTO membership in 2004 and other bilateral agreements made over the years also necessitated a revision of the act. Therefore, the Ministry of Industry has drafted a new bill, which will soon be tabled in Parliament.
The new bill has several forward looking provisions such as a one-window policy, opening up of portfolio investment and venture capital fund to foreign investors, option to list a Public Limited Company in foreign stock markets, permission for domestic investors to raise money abroad, easy access to foreign exchange for foreign investors, among others. Overall, the draft looks promising; however, there are some important provisions that it fails to address and some that look too ambitious.
Firstly, like most acts of Nepal, it fails to address the tsunami of approval and registration needed to start a business. Although a one-window policy should reduce the compliance time for starting a business, the question is whether it would be a one-window or an ‘additional window’. Also, investors still need permission from various government agencies for raising loans abroad, registration and other repatriation provisions, which work against the idea of a one-window policy. Similarly, the act delegates the Industrial and Investment Promotion Board (IIPB), Investment
Board Nepal (IBN) and Department of Industries to approve foreign investment based on paid-up capital. It is difficult to imagine how they can gather the members of the board and bureaucrats, who have many commitments, at one place to discuss a company’s approval. What if we see a rise in foreign investment? Would the board be able to allot time to review all applicants?
Also, with a degree of discretionary power given to respective organs, investors could face inconsistent treatment while acquiring permission.
So if it is easier to get approval from IIPB as compared to IBN, investors could be tempted to bring less investment to Nepal. In the same vein, if an investor wants to reinvest in Nepal or increase their paid up capital, they have to take a long route of getting approval from various agencies. If the government sees the investor fit for doing business in Nepal once, legal provisions such as investment approval could be carried over from the previous investment period. Furthermore, the rationale of the act is to ensure policy stability, but the ‘as prescribed by law’ provision, which is written over 50 times in the 16-page bill, dilutes the policy’s certainty.
Similarly, providing preference in terms of tax cuts, subsidies, land acquisition assistance, security, among others, only to foreign investments might not be a good idea. Apart from distorting competition, we could see the unintended consequence of Nepali investors bringing in ‘domestic’ money as ‘foreign’ to get those benefits. This ultimately encourages the hundi system—already a problem in Nepal.
Likewise, another moot point is whether Nepal should put a minimum capital requirement for investment in the country. On a tangential note, the Nepal Trade Integration Strategy (NTIS) 2016 has listed IT and BPO-IT as a priority sector with the potential to grow and export its products. IT companies can establish themselves with a few computers and an office floor. If we were to put a minimum capital for such sectors, we would not be able to attract investment.
Also, while the draft bill contains provisions on dispute settlement among investors and labourers, it fails to provide guidelines on dispute settlement between the state and a foreign investor. Would an international arbitrator be used or would Nepal’s judicial system handle it? The recent dispute between the state and N-Cell demonstrates the need to address this problem.
Finally, as a member of the WTO, Nepal is obliged to fulfil its commitments. Firstly, Nepal has committed to approve (or reject) a foreign company to operate its business in the country within 30 days of application. Secondly, the TRIMs (Trade Related Investment Measures) agreement on local content requirement, domestic sales requirement and foreign exchange balance and trade balancing requirement is not reflected in the draft bill.
Commendable but inadequate
Drafting encouraging policies is not the only requisite for attracting FDIs in Nepal, as a safe investment climate, manifested by political stability, strong rule of law and better governance, is also an important variable in the FDI equation. Likewise, the nation should also have the capacity to absorb transfer of technology through skilled human resource.
For an LDC like Nepal, with huge prospects in hydropower, FDI’s role is not merely in financing commercial investment but also in the country’s development in terms of infrastructure. With India and China as its neighbours, Nepal has to have unique selling points to attract FDIs. The new bill was overdue, and it is commendable to see active participation in the discussions on it. However, the bill has plenty of room for improvement.
- Neopane is associated with SAWTEE (South Asia Watch on Trade Economics and Environment)