Framework for Foreign Investment Policy for Nepal

IMG_0352On May 23, 2014, Samriddhi Foundation held a round table meeting to discuss the Framework for Foreign Investment Policy in Nepal. As the latest draft of Foreign Investment Policy (2014), proposed by the Ministry of Industry, has been receiving mixed feedback from stakeholders and experts, it had become important to outline a framework that clarifies the objective of the policy and outlines the application of sound measures and tools to achieve the goal.

International Finance Cooperation (IFC)’s investment policy specialist, Mr. Roberto Enchandi was the speaker for the program and he shared his knowledge and expertise during the discussion. Mr. Enchandi specializes in legal and political economy dimensions of investment issues, dispute resolution and regional trade, among other trade-related subjects. He has also served as the Chief Negotiator for Costa Rica in numerous international negotiations on investment, trade in services and dispute settlement.
The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The event was held at Hotel Yak & Yeti and here is a brief summary of what was discussed during the event.

Mr. Roberto Echandi commenced the discussion by giving a presentation on ‘Improving Investment Climate in Nepal’. He stated that the starting point for Nepal would be making a broad, but concrete and realistic policy framework which prioritizes short term reforms and can be realized within a government’s time; i.e. 2-3 years. He brought to attention that wealth creation is non-linear; simply receiving investment does not ensure growth as can be seen from countries like Nigeria where investment has not resulted in proportional growth or development. Hence, proper investment policies are crucial for managing FDI. His presentation highlighted three key ideas about investment. T

They were:
• “Investment policy is not about choosing between FDI and domestic Investment, it is about connecting            them.”
• “Investment is not a transaction: it is a relationship.”
• “Not all investment is the same, nor has the same impact on economic development.”

Mr. Echandi emphasized that while it is very important to promote and attract FDI, retaining existing investors is equally or even more vital. Keeping investors happy is key to successful FDI management. There are four kinds of investments namely: natural resource-seeking, strategic-asset seeking, market seeking and efficiency-seeking. Therefore, Nepal has to recognize this, decide why it wants investments and create different policies according to the nature of investments. For example, a country rich in natural resources like oil does not have to provide heavy incentives for investment in those sectors. The difference in development between Nigeria and Norway was that while Nigeria failed to differentiate between the types of FDI investments and so its Foreign Exchange appreciated till it was too expensive to produce anything else; Norway realized this difference and started investing in development factors like education.

Lack of transparency and arbitrary changes in the government were responsible for a country losing 25-30% of its existing investments. Thus, sound policies is the secret to success. In making policies, governments need to realize that while efficiency seeking investments might be sensitive and strong bilateral treaties might be required for their attraction and retention; host countries have more power while negotiating natural resource seeking investments which can be used to the countries’ benefit. Currently, Nepal has not been able to attract efficiency seeking FDI. Wealthy countries have diverse export portfolios and this is a phenomenon that is already taking place in Nepal; however, for Nepal is that pie of exports is very small. Even small industries have the potential to make a big difference in terms of export oriented industries, and it is important to start thinking in terms of a Global Vision and where we can fit in that picture.

Following the presentation, there was an open floor discussion moderated by Senior Advocate Anil Sinha.

Some of the key discussion points are summarized below:
• The proposed FI policy only focuses on bigger hotels. Restrictions on promotion for boutique hotels have to  be removed. Training and quality of these smaller hotels also need equal attention. Furthermore, FDI    approval time of 3-9 months is simply too long and needs to be reduced.

• The foreign investment policy of the 90’s and the drive of the government officials then were encouraging to     foreign investors. Now no large foreign investors are interested in investing in hydropower due to political        instability, problems relating to import duty and licenses, difficulty for market access (lack of the power trade agreement), changing laws and policies hence not honoring agreed upon contracts and threats of  nationalization. While problems of larger investments are settled through the investment board, the smaller  investors have no such agencies to solve their problems.
• Strengthening the procurement act is crucial since it is creating havoc in the construction industries.
• Reducing red tape and educating bureaucrats on what the laws are, is important so that discretionary           interpretation of the laws can be avoided, corruption is reduced and the process can move forward quicker.
• Political stability, uninterrupted electricity supply and tackling labor issues will help attract FDI in Nepal.       Furthermore, entering the global value chain area is something Nepal should aspire to.

• Delays in the approval process and discretionary decision making stems from unclear and conflicting regulations. Some policies in the Industrial Enterprise act are not in the Tax Law and so that causes a problem. Furthermore, there are two different agencies doing the same work, which additionally creates unnecessary confusion. This type of system benefits rent seekers. We also have unnecessary environmental clearance hurdles which benefits no one. Moreover, our policies have not been able to change in a timely manner. The Foreign Investment policy is closely related to the labor, foreign exchange and other kind of laws, thus harmonization of such laws is important.
• Information asymmetry exacerbates the problem of opportunists who thrive on the asymmetry. Therefore,        there is little incentive to resolve the information asymmetry problem amongst government bureaucrats.
• It is very important to focus on improving infrastructure, to attract FDI and also to make the tourism sector     more attractive.
• The policy does not address all kinds of investment activities and hence some businesses not listed in the     policy become illegal. Business people thus have to focus their resources on solving matters like this             through loopholes instead of focusing on running their businesses.
• Policies do not focus on retaining investments which is problematic.
• Putting minimum thresholds in sectors like IT, significantly discourage investments in those upcoming           sectors which do not need a lot of investments but have huge growth potential.

The discussion was commented upon by Mr. Echandi and also summarized by Mr. Sinha. The concluding remarks reflected upon the following: Perception is very important for a small country like Nepal thus building a positive image in the international community will help in attracting more foreign investments. As a small country working in the global framework of continuous interaction through mechanisms like World trade Organization and United Nations, one of the major avenues for Nepal to raise and protect its interest is through international agreements and bilateral trade and treaty agreements. Along with building international agreements to defend our interests, a watchdog mechanism to monitor the role and responsibility of government organization is also very important. The process of repatriation and visa requirements need to be hassle free. Conflicting policies and agencies need to be tackled and a harmonization of laws is required to curb discretionary power of bureaucrats. Finally, the Commission for the Investigation of Abuse of Authority needs to not only question but also take affirmative action and be an active and effective agency.