Econ-ity » Blog Archives

Tag Archives: FDI

Panama Papers and the offshore holdings delusion

Estimated reading time: 3 minutes, 22 seconds. Contains 676 words

The world is abuzz with the articles published by The International Consortium of Investigative Journalists (ICIJ) based on one of the biggest data leaks in history. The articles dubbed as ‘Panama Papers’ are based on leaked data of the Panamanian law firm Mosack Fonseka. The internal documents of the firm were leaked by an anonymous source to the German Newspaper Süddeutsche Zeitung which passed them to ICIJ. The scandalous leak contains about 11.5 million files covering 40 years of operations of offshore accounts and shell companies in tax havens like Panama, British Virgin Islands and the Seychelles. The offshore holdings have been linked with international figures including current and former presidents, prime ministers, monarchs and celebrities. Among the repercussions of this probe have been resignation of Iceland’s Prime Minister Sigmundur Gunnlaugsson to concession of UK’s Prime Minister David Cameroon that he benefited from an offshore trust fund in the Bahamas set up by his father.

The articles claim that high profile politicians and their close associates have used tax havens to hide their wealth. The other accusation that is tied with these offshore holdings is using them for tax evasion. But the fact that not all offshore holdings are linked with illegal activities evades most people. Similarly, most media have focused on the theme of ‘tax evasion’ while the revelations are mostly linked with hiding wrongdoing by corrupt officials not just tax evasion.

The New York Times reported,

“Holding money in an offshore company is generally not illegal, although such financial arrangements can be used in illegal ways — for example, to facilitate tax evasion or money laundering.”

Though the Panama Papers exposed cases where people have used offshore holdings for hiding assets and evading taxes, there is a myriad of legitimate reasons for setting up offshore accounts and shell companies. Generally, people use shell companies because of government restrictions on certain transactions and capital controls. Companies may also use offshore companies for tax efficiency through legal tax planning. Moreover, multinationals use shell companies to reap the benefits of flexible corporate regimes and investment diversification opportunities abroad. The New York Times describes some of the legitimate reasons behind shell companies in the article titled “The Panama Papers: Here’s What We Know,” as follows:

“There are many valid uses of offshore shell companies for multinational corporations, joint ventures and wealthy individuals. Many countries restrict the sale of real estate to their citizens or to companies registered there. American retirees looking to purchase homes in such countries form offshore companies that buy the properties to abide by the law.”

“Companies establishing joint ventures in countries with weak or corrupt legal systems also create offshore companies, based in a jurisdiction like the British Virgin Islands or the Cayman Islands, that own the enterprises.”

The Kathmandu Post reported that the statistics of Department of Industry (DoI) shows that 20 percent of FDI entered Nepal from tax havens till last fiscal year. The government officials suspect that FDI from tax havens may be linked with money laundering. However, the reason why FDI is entering Nepal from tax havens like the British Virgin Islands could be because of our corrupt system and capital restrictions like mentioned above.

One important aspect about ‘tax evasion’ is the case when tax rates cross the threshold that people are willing to abide by. When taxes are excessive, people naturally tend to try to find ways to evade them—whether through offshore holdings or other ways. The other aspect is whether the taxes you are paying to a government are reflected in the services it provides. People may be willing to pay even high taxes if they are satisfied with the way the government uses taxes. Else, even if taxes are low, people may want to evade them. For instance, if a government is not efficient and transparent while handling taxpayers’ funds, people will not be willing to pay taxes even when tax rates are low.

If you are interested in learning other legitimate reasons for setting up shell companies, here’ s the link to Huffington Post’s article titled “5 Legitimate Reasons to Have an Offshore Company

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

Published by:

Regulatory challenges in hydropower development in Nepal

 

Image Source: www.proofpoint.com

Out of 40,000 MW of economically feasible hydropower potential in Nepal only about 791 MW is currently developed. The reason for underutilization of hydropower potential is that there are various challenges to developing hydropower projects in Nepal, namely- technical, financial and regulatory. Foreign Direct Investment (FDI) in hydropower sector in Nepal can be a solution to the technical and financial challenges as developed countries interested in investing in Nepal have necessary finances and have technical knowhow, but they still face regulatory challenges imposed by the government of Nepal. Regulatory challenges arise due to lack of co-ordination among ministries (industry, energy, forest, water, etc.) and political parties. A hydropower project has to deal with 7 ministries, 23 government departments and comply with the terms and conditions of thirty-six Acts. In case of FDI there is additional bureaucratic hurdles on issues related to visa, ownership of capital and exchange rates.

 
In Samriddhi’s new study “Benefit Sharing in Hydropower Projects in Nepal,” which looks into the cost imposed on private hydropower developers due to lack of clear benefit sharing regulations, we  asked private developers to list the major actors and causes that obstruct development of hydropower project in Nepal.  They responded local politics and political leaders along with co-ordination among the parties involved, lack of transmission lines and Power Purchase Agreement (PPA) as major agents and causes.  These agents and causes not only obstruct the construction and operation of projects but also hinder the projects at planning phase from coming into the fruition.

 
Tamakosi III (650 MW) project would have been the biggest FDI in Nepal with estimated cost of $1.5 Billion, but Norwegian company Statkraft decided to back out from the project. The company had been working on the project since 2007. The company cited increased bureaucratic hurdles, fragile political situation, insufficient transmission capacity and absence of necessary policies and regulatory frameworks for operationalizing power sales as causes for backing out of the project. Few years ago, the Australian Snowy Mountain Engineering Corporation (SMEC) also pulled out of the export-oriented West Seti (750 MW) hydropower project in western Nepal after battling bureaucracies for two decades.

 
While Nepal is facing power shortages and lacks sufficient funds and technical skills to build mega hydropower projects, FDI in hydropower sector will be reasonable alternative to solve the current problem. In order to attract FDI for such projects, there must be an environment of ease of doing business so that the investors can feel confident to invest in Nepal. This objective can be achieved with well thought out regulatory framework and well-coordinated bureaucracy. Careful amendments to the Industrial Enterprise Act 1992, the Foreign Investment and Technology Transfer Act 1992 and the Electricity Act 1992 can create favorable environment of  doing business and can attract FDI for mega hydropower projects in Nepal.

Dhruba Bhandari

About Dhruba Bhandari

Dhruba Bhandari is Research Fellow at Samriddhi, The Prosperity Foundation. He joined the Foundation in July 2015. He completed PhD in Development Economics from Oklahoma State University (USA) in 2013. Prior to Joining Foundation, he worked as Research Associate at Oklahoma State University.

Published by:

Of Trade: Your Money (in) My Country

fdi cartoonTrade is a wonderful aspect of modern economy; it enables us to consume products that we have no means of producing. There are many versions of trade: goods for goods, service for service, goods for service, and goods for money are a few examples. Like any rational process, trade also seeks the easiest way in. In order to promote trade it is essential to provide an environment that is supportive to the trading parties. A particular kind of trade that I would like to discuss today is “money for markets,” i.e. trading one party’s money for another party’s resources.

For a budding economy like Nepal, it is important to foster trade and to create an environment that is supportive of trade. Our consumers have acquired many new tastes, like cars, motorcycles, exotic foods, smart-phones and a host of other things. Amazingly, we consume all of these things without producing them. However, it is more than likely that we can also produce goods or services that other countries or economies may not be able to produce. Nepal has a diverse environment but due to our economy’s infantile stage, our production is mostly limited to products that cater to basic needs and necessities. With a stronger industrial base we can easily add value to our products, thereby, increasing the revenue of producers and providing satisfaction to consumers.

Our society is unique and there are distinctive values and ideals that, we, Nepalese pursue. However, globalization has molded our values with images that we have imported. We have also welcomed foreign influences in other, more direct, ways. Foreign investors have set up shop in Nepal to cater to the Nepali market’s needs and in the process have employed many Nepali workers as well. These workers are then introduced to new entrepreneurial skills and management techniques which in turn foster such qualities in our laborers as well. Foreign investments also require technology and skills that may not be available in the host country. In such cases, the investors can bring the required technology and manpower with them which help familiarize us with novel ideas.

Foreign investments are important to Nepal because we do not have enough funds with us to invest in large ventures. Our domestic saving is very low; this may be due to low income, high consumption, or a combination of both. Consumers can consume, save, or invest their disposable incomes, which is whatever part of their income that is remaining after paying taxes. A high rate of consumption without sufficient investment can lead to inflation. Similarly, low rates of saving may lead to high interest rates that could cause pressure on those who wish to invest.

For Nepal, foreign investment is one of the easiest ways to accumulate capital. This new capital will not only employ Nepalese laborers, it will also create avenues for Nepalese households to utilize their money. A wide selection of publicly traded companies might provide incentives for households to consume less and save or invest more. New resource-intensive industries will also help utilize our resources efficiently and provide opportunities for our country’s manpower which could help curb the current “brain drain.”

Protectionist means have been employed by many countries in the past but it was through the removal of such policies that these countries experienced growth. For example, India and China both saw massive growth once they liberally opened up for trade. Similarly, evidence shows that more open countries experience better growth than their closed counterparts. While there are many variables and constants taken into consideration while formulating these conclusions, it cannot be doubted that in order to remain an attractive site for foreign investment, Nepal needs to structure policies that make it as attractive as, if not, more than other countries.

Anurag Pant

About Anurag Pant

Anurag holds a Bachelors of Science in Economics and works as a Research Assistant at Samriddhi, the Prosperity Foundation. He also lectures on Economics at Xavier International College.

Published by:

Economic Policies in Emerging Markets

Samriddhi, The Prosperity Foundation organized a Nepal Leaders’ Circle meet on the topic “Economic Policies in Emerging Markets.” Rt. Hon. Hugo Swire, MP, MInister of State, Foreign and Commonwealth Office, UK was the speaker for the event. While Nepal is looking to graduate into the status of Developing Country by the year 2022, this program sought to bring out valuable inputs from the participants on how Nepal can benefit from the global trends of cross-border investments by setting the right kind of policy environment that offers profitable prospects to the investors.

Attendees discussing Economic Policies for Nepal

Attendees discussing Economic Policies for Nepal

The event was organized at Hotel Himalaya, Kupondole on the 3rd of June, 2014. The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The following is a summary of the entire session:

Rt. Hon. Hugo Swire

Rt. Hon. Hugo Swire commenced the session by talking about why, despite all natural, geographical and human endowments, Nepal has not been able to transform itself into one of the major players in the global economy. He acknowledged how Nepal has been a land of peace in the past and reinstated the same peace in the present, albeit having gone through a period of insurgency in the last decade. He then went on to iterating how Nepal cannot afford to be complacent in being a least developed country in the pretext of the same old civil war and waste its resources like hydropower and tourism, and killing the entrepreneurial spirit in the people in the meantime. He expressed how Nepal needs to acknowledge the need of FDI to uplift itself from the Least Developed Country status. There seems to have been discussions over whether Nepal intends to be under aid and assistance all the time, or change it and shift its focus towards bringing in investments. However, not much action has been done in this regard. Similarly, constitution drafting has taken too long a time already. While Nepal is spending much of its time debating and discussing its political and economic agendas, Nepal has utterly failed to reap the benefits of it resources; the opportunities they provide for attaining Nepal’s economic transformation.

The speaker then went on to justifying his statements by giving examples from international experiences. In India, BJP overthrew the ten-year reign of Congress and UPA by selling hopes of economic reforms. Narendra Modi’s Gujarat reforms were the building blocks of BJP coming to power. In China, despite the communist roots, they have liberalized their economy because they realize that they have to allow economic freedom to the people to protect their own political dominance. Currently, they are planning building hundreds of newer cities. Similarly, in the UK itself, they have acknowledged the fact that in order to keep the pace with globalization and international investments, they have to become more and more inward investment friendly. They need to revamp their infrastructures like the airports, the energy sector and more. For this they need capital investments and they are turning to more international investments in these regards.

The speaker concluded his opening remarks by reiterating how there is no alternative to being open to foreign investments to boost the Nepalese economy. The private steers the market while the public sector caters to the needs of the most vulnerable groups in the society. But he also mentioned that foreigners will not come in just by debating in favor of Foreign Investments (FIs). Investors are mobile these days. They create job opportunities and contribute to economic growth; but in the mean time they look for certain pre-conditions before making investments abroad. Some of such necessary pre-conditions that Nepal needs to be guarantee the foreign investors, as highlighted by Rt. Hon. Hugo Swire were,

  • Clarity in economic polices
  • Certainty in terms of being free of risks that a host country can impose; like nationalization, change in rules of engagement in a retrospective manner
  • Accountability in government
  • Transparency
  • Predictability in the markets
  • Rule of law
  • Fair tax environment

General Discussion

After the speaker concluded his deliberation, the floor was set open for interaction among the participants. Some of the key issues discussed during the interaction session are:

  • A functioning government is a must for allowing the private sector to grow. Government should encourage private sector. When there is wealth creation, that is which can then be redistributed by the government by delivering public services. But if the government hamstrings the private sector, it is not beneficial for any group.
  • Capitalism is being redefined globally. After the 2007/08 economic recession, capitalism has had a bad reputation. The key issue is to get the right balance between regulation and promotion of private sector.
  • The domestic market of Nepal is being over-protected in the fear of its resources being exploited by foreigners and Nepal being converted into a dumping-ground. But the reality is that with foreign investments, the economic sectors of Nepal will be modernized, made more productive and will create more job opportunities. Then Nepal will in fact be able to supply its goods and services to the international market.
  • Nepal needs to send out signals to the rest of the world that it is welcoming FDI. International giants already have lots of places to go to. So Nepal should go to other countries and promote its own market. The foreigners need to be convinced that there is a demand and substantial market for foreign products in Nepal. For example, Oxford University could be lured by selling the prospects of great market by selling the idea of Nepal’s geographical proximity with India and China, both of which are going out for higher studies.
  • Nepal has a minimum threshold on the amount of permissible FDI. Then there is corruption, which in turn creates unpredictability for investors. Things like these discourage investors. Peru, Chile, Brazil, they are all going to London, promoting their markets and negotiating terms of doing business in their respective countries.
  • In the UK, government tries to make sure that the taxpayers’ money is used wisely and optimally. If there is something that the private sector can do better than the government can, the government pulls out.
  • The presence of donor agencies like USAID, DFID, Gtz and many more have turned Neal into a welfare state itself. There seems to be no shame in asking for aids and assistance when seeking the same to support the people who need help, but the idea of FDI is suddenly perceived as a threat to national sovereignty. This needs to change. No country will colonize Nepal. Nepal should open up its markets.
  • Nepal faces severe challenges in terms of having high numbers of rural population and low human capital. But this is not a unique problem in the world. Mongolia a faced similar challenge. But they have found a way around it by using there mineral resources. In Nepal, there is high potential of hydropower generation. This should be tapped in.
  • Political parties need to come together for a economic transformation of Nepal.

Hon. Minendra Rijal, Minister of Information and Communication, GoN

After general discussions Minister of Information and Communication, Hon. Minendra Rijal delivered concluding remarks to formally end the session. Some of the highlights of his deliberation were:

  • Competition is the pre-requisite for economic growth. He used the example of NTC and NCell, one 92% government owned company while the other, an over 80% foreign investment have been competing with each other, delivering better and cheaper services to the consumers than in the days when NTC had a monopoly in the telecommunication sector of Nepal. NTC is even looking for foreign strategic partner and a process of divesting 30% of government ownership has already begun. These activities, he believes, will serve the Nepalese consumers even better in the days to come.
  • Investment Board of Nepal (IBN) is working with foreign investors in the hydropower sector of Nepal.
  • Nepal Telecom, Nepal Army Welfare Fund, Pension Fund and others have huge pools of unused funds. Nepal still needs to work on creating an investment-friendly climate for these domestic institutions. These funds can then be mobilized as investments.
  • Overall, government should realize that there might be times when certain sectors need to be protected from foreign investors, but Nepal should never protect inefficiency.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

What do experts have to say on the proposed Foreign Investment Policy (FIP), 2014 (Draft)

Foreign Investment Policy (FIP), 2014 has been proposed and brought to the public’s attention recently by Ministry of Industry, Government of Nepal. As a think tank which aims to create a greater discourse on sound economic policies, Samriddhi, The Prosperity Foundation hosted its latest edition of Econ-ity (Samriddhi  Foundation’s regular discussion forum) on the proposed Foreign Investment Policy (FIP), 2014. The discussion was attended by lawmakers, entrepreneurs, present and former members of the bureaucracy, legal experts, policy experts and journalists.

Some of the key speakers were Mr. Rameshwore Khanal (Former Finance Secretary), Mr. Purushottam Ojha (Former Secretary, Ministry of Commerce) and Mr. Madhukar SJB Rana (Former Finance Minister). This edition of Econ-ity was moderated by Dr. Biswambher Pyakuryal (Professor of Economics, TU). Mr. Krishna Gyanwali (Secretary, Ministry of Industry) was present at the occasion to discuss and collect the opinions of the participants on the draft policy.

From left,  former finance secretary Rameshore Khanal, economist Bishwambher Pyakuryal, Industry Secretary Krishna Gyawali and former commerce secretary Purushottam Ojha

From left, former finance secretary Rameshore Khanal, economist Bishwambher Pyakuryal, Industry Secretary Krishna Gyawali and former commerce secretary Purushottam Ojha

There were a number of concerns that came up during the discussion. Some of them were as follows:

1)      The issue of minimum thresholds was discussed at length as a negative factor that discourages smaller scale investment (especially those kind that are predominantly coming into IT and Tourism industry of Nepal)

2)      The institutional structure proposed by the policy was commented as being complex and adding on to the bureaucratic hurdles in getting FI.

3)      The negative list was commented upon as having sectors which could benefit from open competition and foreign investment including retail and real estate business.

4)      The minimum requirements placed on a sector specific basis were questioned as the rationale behind such a policy could not be clearly understood.

5)      Small and cottage industries also argued that they could benefit through small scale foreign investment and technology transfer that comes through foreign investment.

6)      Serious concern was raised over the ‘Nationalization Clause’ present by the current draft.

Overall the participants expressed concern over the current draft’s concentration on big industries and investments. It was generally agreed that a Foreign Investment policy should be open and since SMEs form the basis of Nepali economy, they should also be focused upon while devising a Foreign Investment Policy.

Speakers and panelists recommended a thorough revision of the current draft based upon clear strategic vision and objectives and taking a gradual approach based on research of existing FDI patterns rather than hurrying the policy in this way.

Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

Published by:

Tapping small investments – lesson from IT

ITForeign Investment and Technology Transfer Act (FITTA) 1992 has made a provision whereby a foreign investor can invest in any sector in Nepal except arms and ammunition, tourism, cottage industries, personal service business, engineering and legal services and consultancy services. Other than these sectors, an investor can invest as much money as he/she pleases. However, the practice has been such that a foreign investor has to commit to investing at least $50,000. Not only is this practice completely against the spirit of FITTA, it also limits Nepal prospects of realizing foreign investments and the scale is substantial.

Besides being risk-free sources of investment for a host nation, Foreign Direct Investment (FDI) signifies modern technologies, advanced skill sets and lots of employment opportunities. If the business is profitable enough, foreign investors even contribute to developing infrastructure in the sites of their business operation, therefore reducing the fiscal burden of the government.

Nepal, being mired in political instability, inflexible labor laws, poor infrastructure and weak capital markets, bars itself from attracting very large FDIs. Out of tens of billions worth of FDI commitments, investments worth only around one hundred million dollars have been realized till date. If Nepal is to graduate to a Developing Nation status by 2022, we need more economic activities and smaller FDIs can play a big role in the process – IT sector is an example.

IT is one of the fastest growing sectors in Nepal and there are lots of IT companies running on foreign investments and employing hundreds of Nepalese people. One of the characteristics of this sector is that their projects (mostly developing programs) can be carried out with investments ranging anywhere between $8,000 and $12,000. These projects, if they fail to deliver as per the demands of market can be dropped altogether and new projects can be started. Quite a number of projects in this sector are thus dropped. This very fact makes investing in small clusters more preferred to large investments (like the over-$50,000 ones).
However, a move to introduce a floor on amount of permissible FDI – which stems out from the spirit of protecting domestic industries and curbing crime (as some foreigners were found to be conducting illegal activities in Nepal under the protection of a fake small-scale enterprises), has effectively barred genuine small foreign investors from investing in Nepal.

Nepal needs to muster as much foreign capital as it can attract in order to hasten the pace of economic growth. But the lack of bargaining power as a state, owing to the sorry-state of its business environment means that the prospect of realizing heavy investments is miniscule. Therefore, Nepal needs to tap these smaller but scores of investments.

One of the first things to take care of, then, would be to repeal the stipulation that requires at least $50,000 worth of commitment from foreigners to be eligible to invest in Nepal. The Act itself stipulates no such thing. It was introduced through an administrative process and thus a court decision should suffice.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by: