Like many investment buzz words, one that often gets overused to the point of leading us to question its actual meaning is ‘investment climate’. Less than a month before the much-awaited Investment Summit, Kathmandu was rocked by a bomb blast in a blatant attempt to intimidate one of the country’s largest foreign investors. The party that took responsibility—now disqualified—was driven by nationalistic sentiments. It took the law into its own hands to send a message to an investor that had been wrapped in controversy regarding a capital gains tax case. If such outrageous incidents keep happening, there may not be an economically empowered nation tomorrow to tolerate a half-baked nationalistic vision for foreign direct investment-phobia.

The government has recently endorsed the new Foreign Investment Bill with certain provisions that would seemingly make it easier for foreign investors to invest in Nepal. While the bill is an attempt to address problems of delayed approvals faced by foreign investors, it fails to provide a solution. Right now, the country desperately needs a one-stop-shop or automatic route for foreign direct investment approvals, but this bill has simply deferred the provisions to a future government decision. By merely increasing approval thresholds, the bureaucratic and labyrinthine processes for foreign investors to secure approvals to invest in Nepal will not be eased. Nepal not only needs to bring in a number of investment-friendly provisions but has to significantly out-do its neighbours if it is to compete for a limited pool of foreign direct investment inflows.

Bizarre provision

The reality is that investors want a short and simple process. A process where there is a single layer of approval, if not an automatic route. The bill is not clear whether Nepal Rastra Bank will still need to approve investments after the Department of Industry, Industry and Investment Promotion Board or Investment Board Nepal has provided the first approval. There is no need for approval by Nepal Rastra Bank. In most countries, including neighbouring India, the central bank is simply notified of anti-money laundering clearance documents, which should be enough to bring in investments to a country.

Furthermore, the Industry and Investment Promotion Board’s authority to approve foreign direct investment in projects with total investments from Rs5 billion to Rs6 billion seems to be redundant, given that Investment Board Nepal has been set up to approve foreign direct investment in projects with total investments above Rs6 billion. The government should get rid of the Industry and Investment Promotion Board approval.

Another bizarre provision is that ‘capital investment funds’ would need to get approvals each time they invest in the country. Capital investment funds are private equity funds or impact funds with limited partners, that may make several investments in a year. Most of these funds are closed-end funds, meaning they operate for 10-12 years with the same set of investors with the same source of capital. The current problem faced by these funds is that each time they invest in a company, they need to get approvals. Furthermore, they are asked to provide the same documents to the approving authorities every time they make an investment. There have been instances where the regulators have asked investors to notarise publicly available documents such as annual reports of AAA-rated sovereign wealth funds. What is rather unique to our regulators is that they want international documents to be locally notarised, which makes no sense.

Another issue related to capital investment funds is that the regulation conflicts with the rules recently introduced by the Securities Board of Nepal on specialised investment funds that don’t allow foreign investors other than multilateral and bilateral investors to invest in locally registered private equity funds. However, fundamentally what needs to change is the attitude of the approvers towards foreign investors. If you talk to any foreign investor about the hassles they had to go through to invest in Nepal, you could make a never-ending list. This list has to change—by striking out the bullet points—not by adding them.

For a country like Nepal, foreign investors are as important as clients for a services firm. Treat them as clients! Listen to their problems, understand their challenges, be willing to provide solutions. The current state is exactly the opposite. Investors are harassed to provide unnecessary documents; legitimate investors with voluminous funds are treated in the same way as a retail investor; problems are created, rather than solved. The attitude towards foreign investors as guilty until proven innocent needs to change.

The online processing system at the Department of Industry hardly works due to inadequate technology, or is redundant, as hard copies are also required to be submitted despite the online application. There is no turnaround time for approvals. Even if there is one, it is never achieved. Most investments don’t get approved without representatives of investors visiting the offices of the Department of Industry and Nepal Rastra Bank every other day.

Mindset shift needed

It should be said that the government has taken some progressive steps by introducing the new bill. Inclusion of the words ‘automatic route’ gives hope that it is a plan which will be implemented in the near future. But it still falls short. A progressive step is not enough when you are one of the poorest countries among your neighbours, and in dire need of foreign investments if you are to come close to achieving the 2030 Sustainable Development Goals targets. We need transformative change. The regulators need to have a mindset shift and overcome the misconception that by merely taking one forward looking step will open the foreign direct investment flood-gates. For Nepal to meet its growth ambition, the private sector needs to contribute $3 billion per year. Assuming a 20-30 percent contribution through foreign direct investment equity, the foreign investment required per year is $600 million to $900 million, foreign direct investment needs to grow fivefold each year from its current level.

It may be getting warmer in Kathmandu this month, but substantive regulatory moves aimed at making Nepal’s investment climate more attractive to international investors have so far been negligible.

- Satyal is an MBA candidate at the Cornell SC Johnson School of Management.