Private investments and our dutiesNepal needs to create an investment-friendly environment in order to prosper
The government has scheduled a two-day investment summit starting today. It is a joint effort of the Investment Board Nepal (IBN) and the Ministry of Industry. Around 250 foreign delegates, including the Indian finance minister and the president of the Asian Infrastructure Investment Bank (AIIB), and scores of prominent Nepalis have confirmed their participation.
With the promulgation of a new constitution, Nepal’s prolonged political transition has seemingly ended, and Nepalis are eager for economic development. A massive amount of private investment is urgently required to fix our economy. The summit is expected to attract private investments, particularly Foreign Direct Investment (FDI).
Nepal has a huge potential to attract FDI. We have at least 42,000MW of commercially viable electricity potential, only around 2 percent of which has been harnessed to date. We have around 80,000km of road networks, less than 30 percent of which are black-topped. This indicates the huge potential for transportation networks through the development of metro trains, fast tracks and highways. At least eight of the world’s 11 tallest peaks are in Nepal and it is the birthplace of Buddha. These are great attractions for tourists. We have a large number of youths, who are a source of inexpensive labour.
We are rich in mines and minerals. At least 63 minerals have been identified so far. We are a member of the World Trade Organization (WTO), and we have signed the Bilateral Investment Protection and Promotion Act (BIPPA) with six countries, including India, to secure foreign investments in Nepal. We have introduced the Foreign Investment Technology Transfer Act (FITTA), which is undergoing a revision process now. Nepal is a member of the Multilateral Investment Guarantee Agency (MIGA), a World Bank group that insures foreign investors against non-commercial risks such as currency transfers, breach of contract, and war and civil disturbance. Our strategic location between two large economies guarantees potential markets right across the border.
Nepal started welcoming private investments with the introduction of the ‘Foreign Investment and One-Window Policy’ in the early 1990s. Later, the government created the Investment Board in 2011 to mobilise private investments through Private Public Partnerships (PPP). Likewise, a number of other laws and policies, including the Industrial Enterprises Act 2016, have been introduced.
Analysing the problem
But the facts on FDI are not promising. According to recent Nepal Rastra Bank (NRB) reports, annual FDI in Nepal averaged around $28 million between 2001 and 2016. Meanwhile, Bangladesh, Sri Lanka, Pakistan, and India are enjoying FDIs of more than $1 billion on average.
Highlighting the acute need of private investments, the World Bank states that, by 2020, Nepal needs to invest at least $13 to 18 billion in infrastructure to graduate to a developing country status by 2022 and to a middle income country by 2030. We need to start spending at least 7 to 8 percent of our Gross Domestic Product (GDP) on infrastructure to achieve this target. Unfortunately, we have the lowest expenditure in the SAARC region. We spend around 3 percent of GDP on infrastructure while India and China spend 4.5 percent and 8.5 percent respectively. Likewise, our GDP growth has hovered around 3.8 percent during the last decade while India and China have managed to double that.
The summit needs to make a diagnostic study on why we are still lagging behind in attracting FDI and what our major constraints for economic development are.
Unstable politics and red tape
Unstable politics is a major disincentive for investors’. The investors want a stable government and policy consistency. Unfortunately, frequent changes in governments have been the norm in Nepal. This has stopped institutional capital, which is key to building investors’ confidence, from being accumulated.
A competent, transparent and supportive bureaucracy is instrumental for attracting FDI. Constantly running into bureaucratic red-tape dents the investors’ confidence. Navigating Nepali bureaucracy, according to investors, has been a nightmare. They have to frequent as many as 30 government agencies to run their businesses. The government’s tools to deal with business-related issues are either outdated or fraught with complexities. For instance, investors are disappointed when they encounter land acquisition issues in Nepal. The requirement of land for land replenishment discourages the investors. They also need to plant two trees for each one they fell, and manage the forest for at least five years. Such difficult provisions deter investors.
The summit needs to discuss these critical issues and solicit strong commitment from political leaders and bureaucrats to secure private investments. It is high time Nepal changed its style of doing business and introduced investment-friendly policies and actions. Such steps are critical at a time when the IBN, under the leadership of the prime minister, has readied eight big projects and is finalising a list of at least 100 projects for private investment.
Ojha works for the Investment Board Nepal; views expressed here as his own