Promises and Realities of FDI in Nepal

The Department of Industry (DOI) has reported an increase in FDI pledges and commitments in the last quarter. Nepal received FDI commitments worth NRs 19 billion for 89 projects between July and November 2020. Compared to the same period in FY 2019-2020, Nepal had garnered NRs 18.94 billion in FDI pledges. Even the domestic investors have expressed a heightened interest in pledges, especially in the hydropower sector. The increase, though minuscule, is being looked at as an achievement given the ongoing pandemic. However, the point of departure of this piece is not to ponder on the optics of this news but to see what challenges lie ahead in the context of Nepal’s public policy domain. 

In the last fiscal year, the actual FDI received stood at 19 billion against the pledged amount of 38 billion. Even at that rate, an investor must comply with a plethora of regulatory exercises. Any foreign direct investment up to NRs 6 billion has to be approved by the DOI, while an amount either exceeding NRs 6 billion or deemed an investment in a hydropower project with 200MW potential needs approval from the Investment Board of Nepal (IBN). With that in place, an investor must clear the permissibility requirements, in layman’s terms, avoid any sector deemed ‘negative’ by the Foreign Investment Technology Transfer Act(FITTA) 2019 and qualify for the ‘positive’ list by the Industrial Enterprise Act (IEA) 2019. In addition to these, certain aspects of FDIs are subject to Public-Private Partnership and Investment Act(PIA) 2019 as well as Foreign Exchange (Regulation) Act (FERA)1962.

 

In the same way, the procedural pathway of establishing an operation with foreign direct investment involved starts from obtaining regulatory approval from either DOI/IBN and then incorporating the company at the Office of the Company Registrar. This is to be followed by registration at the Inland Revenue Department and subsequently at the local ward office. The local ward office or the municipality then provides a letter of recommendation that is a prerequisite for industry registration with the DOI. The final phase of registration requires approval from the Credit Information Bureau and the Nepal Rastra Bank. This long and cumbersome process is vulnerable to bureaucratic discrepancies and partly the reason why Nepal received less than 50% of the FDI commitment in the last fiscal year. If Nepal is to attract FDI more efficiently, it needs to reinstill confidence in its ability to maintain a competitive practice arena for international firms to thrive. 

The Ministry of Industry, Commerce, and Supplies has commissioned a team led by the spokesperson for the ministry to study legalities surrounding the flow of FDI in Nepal. It is evident that to start with, Nepal can benefit from a one-stop solution with an ICT enabled mechanism that shortens the duration it normally takes to register a business with FDI. Secondly, Nepal must do the groundwork to layout specific legislation to maintain promotion, preserve competition, and strengthen the institutional framework necessary. It is time that the task force formed pays attention to get the basics right before moving on to more tedious tasks. A stable, predictable, and transparent policy environment will be of great essence in sending the right signals to the operators in the long term. 

Navneet Jha

Navneet is a researcher at Samriddhi Foundation.

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