--BY SANJEEV SHARMA
Things have been progressing quite
encouragingly following the March 2-3 mega-event that was the Nepal
Investment Summit 2017 organised by the Ministry of Industry. Investors,
mostly foreign, expressed letters of intent (LoIs) to invest a total of
USD 13.52 billion, in various sectors in Nepal. Following the summit,
the number of investment intents has grown sharply as the Investment
Board Nepal (IBN), the government body to facilitate investments, has
received additional LoIs amounting to over USD 22 billion till date.
However, some big questions now lie ahead.
Will Nepal be able to realise the investment intents into actual
investments? Is Nepal actually on the path to become a lucrative FDI
destination? Or will the LoIs just end up like the investment pledges
made each year by foreign investors? It is estimated that Nepal receives
just 20-25 percent investment out of the total commitments filed by
investors on a yearly basis.
The FDI data compiled by national and
international institutions show that Nepal has a long way to go to
become an economy with a bed of competitive and comparative advantage
for foreign investors. The self-explanatory government statistics of
investment commitments made by foreign investors versus actual
investments received by the country on a yearly basis over the last five
fiscal years clearly indicates this.
This lacklustre situation is being reflected in the meagre contribution of FDI inflow into the country’s GDP.
Similarly, yearly figures published by the
United Nations Conference on Trade and Development (UNCTAD), a UN body
to help countries in their trade, investment and development efforts,
show that Nepal has been receiving the smallest net FDI inflows in South
Asia after Bhutan. As per UNCTAD, India has successfully maintained its
position as the largest recipient of FDI in the region followed by
Bangladesh, Pakistan, Sri Lanka, Maldives and Afghanistan.
The Discourse on FDI
Though the dust of political uncertainty
is yet to settle, discussions and debates about the economic ambitions
of Nepal and the ways in which to achieve them have been raging in
recent years. Creating an environment conducive for business in the
country has been an issue of focus in such discourses. A recent
discussion titled ‘The Symposium on FDI in Nepal: Sharing Experiences’
organised by the Embassy of India in Nepal in association with
Professional Managers Forum held on March 27 in the capital also
highlighted the issues being faced by joint venture companies operating
in Nepal. The event saw encouraging participation of top officials of
Indian JVs in Nepal, high level government officials, Nepali private
sector leaders and experts. Industry minister Nabindra Raj Joshi and the
newly appointed Indian Ambassador to Nepal Manjeev Singh Puri were also
present in the programme. The officials of Indian JVs namely, Surya
Nepal, Nepal SBI Bank and SJVN Arun III Power Development Company
(SAPDC) shared views on the problems they have been facing in Nepal. In
the panel discussion at the event participated by Naindra Prasad
Upadhyay, Secretary of Commerce, Shanker Koirala, Secretary of Industry
and Maha Prasad Adhikari, CEO of Investment Board Nepal, the JV
representatives pointed to various policy level issues that have been
making their operations in Nepal difficult. According to them, the
issues are related to:
Repatriation: Foreign
investors say they are facing problems frequently when they have to
repatriate funds and dividends, service fees etc. According to them,
authorities demand proof of financial investments even though the
paperwork is complete. “One of the main objectives for anyone coming
here with the FDI will be to maximise the profit and remit the money
back home. Our experience in this regard has been mixed,” shares
Abhimanyu Poddar, CEO of Surya Nepal, a subsidiary of Indian
conglomerate ITC Limited that has been operating in Nepal since 1986.
“There are companies here that have struggled to remit back their
dividends and there are companies that have done it very easily,” he
says. Poddar stresses that there should not be a requirement for foreign
companies to present the same documents year after year. He suggests
that asking the JV investors who have been working here for many years
to show their initial investments is pointless and should be avoided.
“The concerned authorities can ask them about their current profit and
loss accounts and balance sheets,” he mentions. However, he also says
that there are lapses also from the side of the companies. For example,
documentation they prepare may not be clear or the clarifications they
submit may lack clarity. Companies with foreign investments have been
demanding that once they submit the relevant documents to the Department
of Industry (DoI), Office of the Company Registrar and Nepal Rastra
Bank (NRB) with the equity structure approved by DoI, the concerned
authorities should accept the documents and approve the remittance of
dividends.
Taxation: While Nepal is
considered to have reasonable corporate tax rates in the South Asia
region, there are some pertinent issues in the tax system that limit
Nepal’s potential in receiving high FDI inflow. JVs have been asking the
government to reintroduce a tax rebate on profits that gets reinvested.
Such a provision used to exist in the past was discontinued since 2058
BS. Similarly, there are no policies to provide tax incentives to reward
companies for their positive undertakings such as CSR, green energy and
waste water utilisation etc. Though the new Industrial Enterprises Act
has a provision to encourage such initiatives, the same is yet to be
included in the tax law.
The non-existence of a policy to allow
diversified foreign companies, having multiple businesses within one
corporate entity and same tax code to set off losses from different
businesses, a practice common in India and many other countries, is also
an issue. Currently, the government policy does not categorically allow
any company to set off losses arising in one business with profits made
from its other business line even if it has been carrying out business
underthe same PAN number. JVs argue that this issue, if addressed, will
act as an incentive to invest in new businesses leading to new
employment opportunities to Nepali citizens.
Meanwhile, the manufacturing JVs here also
have been facing excise duty related tax issues. They have been asking
the government to grant an excise duty rebate on the import of primary
packaging materials. According to them, such rebate is a common practice
in international taxation to make local manufacturing viable. JVs
suggest the government should abolish the five percent excise duty
levied on products that are classified as packaging under current
arrangements. Internationally, excise duty is not levied or rebated on
packing materials including containers, bottles, caps, laminates, labels
and tubes.
Another major taxation related issue is
the higher duty rates on the import of raw materials than finished
goods. Interestingly, this has been raised every year with government
authorities who seem to appreciate the issue. But whatever policy
changes are made to address this prove to be only marginal.
The customs duty levied upon putty and its
main raw material white cement is another example in this regard.
Customs duty on the import of white cement is presently 30 percent,
whereas it is 10 percent for the import of putty which is the finished
product. As per the companies, the government needs to increase the duty
on the import of putty to 30 percent as this differential duty
structure is detrimental to local manufacturers. Likewise, fruit
concentrate, the raw material used to produce fruit juice, and the
actual fruit juice which is the finished product both are charged 30
percent as import duty. This is particularly disadvantageous for local
manufacturers of fruit juice as their cost of production increases due
to the unreasonably high duty rates on the import of raw materials.
Likewise, depreciation claims of the
companies on assets rented out to their local distributors has been an
area of concern for foreign investors in Nepal. They say any
organisation buying an asset and renting it out to its distributors
should be allowed to claim depreciation on the assets even when there is
an agreement with provision of transferring the assets to distributors
after the rental period. In the meantime, JVs have also been suggesting
change in the legal provision that states the companies can provide
donation only up to Rs 100,000 or five percent of the taxable income,
whichever is lower. This is very low amount because the actual donation
amount is always much higher than that.
Land acquisition: Availability
of land has been one of the most problematic areas for foreign
companies in Nepal. JVs particularly in hydropower, infrastructure and
manufacturing have been facing multiple issues in the acquisition of
land. Such problems are seen as one of the main reasons for
significantly slowing down the progress of various projects. “As per the
PDA, we were supposed to conclude the financial closure by November
2016 which was extended up to September 2017 due to the unavailability
of forest land and the acquisition of private land also got delayed,”
says SC Agarwal, CEO of Arun III HEP developer SAPDC.
According to him, the project’s
construction which is expected to be completed five years after the
finalisation of the financial closure will be delayed if the developer
does not get support from the government to resolve the issues in land
acquisition. SAPDC has not been able to move ahead smoothly due to the
unavailability of forest land for constructing access roads to the
project’s dam and powerhouse sites, and the right-of-way for access
roads has yet to be accorded. As per Agrawal, the government owns 70
percent of the land required for the project and the forest area covers a
large part of it. He urges for a simplification of procedures in order
to address the problems in land acquisition.
The Upper Karnali Hydropower Project,
another mega HEP being constructed by the multinational Indian
contractor GMR, has also been facing similar problems. The project which
had finalised its PDA in September 2014 has still not received the
necessary approvals for acquisition of government and forest land, while
the acquisition of privately owned land is still pending.
Cement manufacturers have also been
dealing with this issue. Construction of the cement plant at Nawalparasi
belonging to Hongshi-Shivam Cement, a Nepal-China JV, for instance,
slowed down last year as the company struggled to acquire the land for
the project. The plant is estimated to cover an area totaling 40
hectares. As per current arrangements, cabinet level approval is needed
for companies to purchase land over eight hectares. Likewise, the JV, a
few months ago, also faced problems in acquiring a quarry at Jyamire in
Palpa where the locals forcefully prevented the company from developing
the limestone mine site. Due to the unclear laws and rules, scuffles
between the local residents and companies are a common sight in Nepal
regarding land acquisition.
Labour issues: Disruptive
activities of labour unions are seen as being one of the major reasons
for degrading the industrial and business environment as investors both
domestic and foreign often feel the brunt of militant trade unionism in
the name of collective bargaining. Colgate-Palmolive, Surya Nepal’s John
Player and various garment plants with foreign investments were forced
to shut down their manufacturing operations in Nepal permanently in the
past due to labour unrest. The month long closure of Unilever Nepal is a
recent example of this. The company over the last 10 years has seen
forced to close its factory units on multiple occasions. Similarly,
strikes are also common in the country’s hospitality sector.
While labour disputes are resolved using
the pragmatic method of Alternate Dispute Resolution (ADR) that includes
arbitration, early neutral evaluation, mediation and conciliation in
developed as well as in many emerging economies, in Nepal, labour
related issues are settled as per the provisions of the Labour Act,
1992. The law has largely become obsolete in today’s global context of
economic competitiveness ultimately obstructing productivity in
industrial and business sectors. Many see the existing law as ambiguous
as its interpretation varies from person to person. The law has reserved
the rights of workers but has failed to secure the interests of
investors. Experts speaking at the Symposium demanded the government to
introduce a progressive labour law in accordance with international
standards which would protect not only the rights of the worker but also
the interests of the investor.
Labour registration: Meanwhile,
the process of labour registration is also burdensome for foreign
companies here. As per the existing arrangements, JVs are required to go
to the Department of Labour where it takes at least six months to
register their employees from other countries. “Labour registration is
among the many problematic areas the government of Nepal needs to
seriously look at,” says Anukool Bhatnagar, CEO of Nepal SBI Bank.
According to him, Nepal needs to have a reciprocal approach if it wants
people from international organisations such as SBI and Standard
Chartered Bank to work here and in turn Nepali citizens to go to work in
places such as Singapore, USA, Canada and Japan to gain relevant
experience. Also problematic is the educational qualification set by the
regulators, especially in the insurance sector. The rules bar JV
insurance companies from bringing expatriate staff to Nepal who have
gained years of relevant experience and expertise working across the
world. As per the directive of the Insurance Board, CEOs of insurance
companies in Nepal are required to hold a Masters Degree in some
specific subjects, whereas the minimum required educational
qualification for the highest level posts in Indian government-owned
insurance companies is graduation. JV leaders say that this directive
narrows the selection base considerably and thus, finding suitable
persons will be a big challenge. “The JV companies that have been
working in Nepal or are interested in coming here have vast experience.
They have employees with decades of relevant experience and considerable
knowledge. If we need such people to work here we need to relax the
requirements of academic qualification,” opines Bhatnagar “The NRB has
been pragmatic in this regard but the Insurance Board is yet to adopt
such a policy,” he adds.
It is the lack of a policy of reciprocity
that has created difficulties for Nepal to welcome the best foreign
talents from whom the country can benefit in terms of knowledge sharing
and bringing in new and effective ways of corporate management and
governance. “There are many employees in our organisation who are
citizens of Singapore working in Australia, trained in USA and UK. But
when it comes to working in Nepal, most are reluctant to come due to the
lack of reciprocity,” shares Bhatnagar, adding, “Such a policy approach
is especially important for the large JVs that are supported by the
governments.”
As per the current provisions, trademarks
are awarded to the applicants under a ‘first come, first served’ basis.
This makes it quite hard for foreign brands to claim themselves as the
rightful owner of their trademark, in case somebody has already
registered the trademark. “There are issues with the IPR that have been
going on for a long time. The case of Kansai Nerolac is a clear example
here,” says Saurya SJB Rana, President, Nepal India Chamber of Commerce
and Industry (NICCI), who was a participant at the Symposium.
Recalling his recent meeting with the
Japanese Ambassador to Nepal, Rana mentioned that the Japanese envoy was
highly upset on this particular issue. “If the foreign companies don’t
get their respective industrial and intellectual property rights, Nepal
will have to face an extraordinary amount of difficulty in terms of
receiving FDIs,” he warns. As per Rana, there are already a lot of
Indian companies whose brands here are registered by some other parties.
“They cannot bring the products due to the IPR problems,” he says.
The irony is that Nepal has not been able
to formulate intellectual property rights (IPR) laws despite being a
signatory of the Paris Convention on the Protection of Industrial
Property and a member of the World Intellectual Property Organisation
(WIPO), a specialised UN body to monitor and promote the protection of
intellectual property across the world, and the World Trade Organisation
(WTO). Nepal joined WIPO in 1997, signed the Paris treaty in 2001 and
became a member of WTO in 2004. Industrial and intellectual property in
Nepal is still governed by the five decades old Patent, Design and Trade
Mark Act, 2022 BS which has become outdated in terms of providing
protection to globally recognised brands.
Infrastructure: Lack of
roads, hydropower plants, industrial facilities along side ports and
customs infrastructures for cross-border trading are impediments to the
high FDI inflow in Nepal. Similarly, the inferior condition of roads
both inside and outside the industrial areas is a matter of concern
particularly for manufacturing JVs as it hinders them to smoothly supply
products from factories to the market. Due to the poor condition of
roads, vehicles with full-load are not operable which adds to the supply
costs of the companies.
The Global Competitiveness Index 2016-2017
published by the World Economic Forum (WEF) ranks Nepal in 130th
position among 138 countries in terms of infrastructure, clearly
indicating the country's deficit in basic infrastructure in connectivity
and energy to attract FDI in the country. This sorry state is primarily
due to the government's inability to increase the capital expenditure
and accelerate and complete the development of infrastructure projects
that are under construction and start new ones. Over the last five FYs,
the capital expenditure has averaged 40 percent in the first nine months
of the fiscal years which only speeds up in the last three months. As
of April 26, the government has just been able to spend 28.03 percent of
the capital expenditure of the Rs 311 billion allocated for FY2016/17.
Except for a few, the progress of most of the “projects of national
pride”, from highways to hydropower and irrigation to the new airports,
have been disappointing given the sluggish pace of spending.
Speakers at the Symposium highlighted the
need to improve existing infrastructure, speed up the processes for
those under construction or are planned for construction, and invest
into new avenues of infrastructure to lure foreign investors.
“Investment is the key to developing next generation infrastructures in
both core and social sectors, in rural and urban areas,” said Manjeev
Singh Puri, Ambassador of India to Nepal. Puri who recently took charge
of the post points out that the next generation of infrastructures
include freight corridors, industrial corridors, high speed railways and
metro train projects, logistics parks, smart cities, regional airports
along with water, sanitation and energy initiatives.
Forex Regulation/ CAC:
The rigid foreign exchange regime has led foreign investors to
experience a number of obstacles in terms of both investing in and
repatriation of profits. Various FDI related laws have not been
harmonised which often creates confusion and exasperation. For example,
the FITTA Act, 1992 permits repatriation of investment in foreign
currency. But provisions in the Foreign Exchange (Regulation) Act, 1962
create difficulties. Investors who come to Nepal are required to show
and convert their investments in Nepali currency which is particularly
risky due to the fluctuation in foreign exchange rates. There is no risk
sharing mechanism or swap market to address this specific problem. On
top of this, cooperation among the government agencies is weak which
spells trouble for investors. Many foreign companies in different
occasion have reported that they have experienced a tough time in
getting permission related to investment and repatriation from DoI
before obtaining clearances from the central bank. The absence of
capital account convertibility (CAC) policy has created problems for
FDI. India can be a good example regarding the adoption of CAC.
Starting from 2006, the country implemented a five-year programme in
three phases to establish a full CAC regime. By removing all forex
barriers, India has become a prime FDI destination in the world.
The Civil Code also contributes to the low
FDI inflow. The law does not recognise debt agreements made abroad by
the investors to invest in projects in Nepal. Due to the absence of a
legal framework, disputes over the projects with abroad debt financing
agreements are settled in courts of countries including Singapore,
Switzerland and London.
Speed of decision making: The
slow pace of decision making has always been a major concern for
foreign investors. They complain that the authorities make them wait for
inordinate lengths of time, sometimes for no apparent reason. There are
various examples that show why companies from other countries shy away
from investing here. SBI Life Insurance Company, a major undertaking of
SBI Bank, for instance, has been trying to enter Nepal but has not
received any confirmation from the concerned authorities even after a
considerable period. The JV is a partnership between some of the
world’s largest names in banking and investment including the
France-based BNP Paribas Cardiff, Singaporean sovereign fund Temasek
Holdings, American multinational private equity firm KKR and Company and
SBI Bank. “In November 2016, the SBI Life Insurance Company notified
the authorities that it was interested in starting a JV undertaking in
Nepal with a capital of Rs 5,200 crore,” informed Nepal SBI Bank CEO
Bhatnagar. “They have said that if they do not get a reply from the
authorities in Nepal in the next five months (there are two months left
for their deadline to end), the project will shift to South Africa.”
Regardless of some policy initiatives to
make the decision making process faster in the recent years, procedural
hassles remain that considerably consumes valuable time of investors.
The Doing Business Report 2017 indicates that the Nepal has not made
significant improvements in reducing the time to give permission to
investors to start new business. As per the World Bank’s flagship
report, which ranks Nepal in 107th position among 190 countries, it
averages 17 days to complete the process of obtaining permission from
the government authorities to start new business compared to the South
Asian average of 15.4 days.
What the government needs to do
The highly flammable mix of political instability, policy issues and inefficient bureaucracy has long haunted Nepal. However, albeit slowly, the country has been moving in a somewhat satisfactory manner at least in the South Asia region in terms of economic competitiveness in recent years. The Global Competitiveness Index 2016-2017 ranks Nepal in 98th position among the 138 countries which makes the Himalayan nation the fourth most competitive economy in South Asia, ahead of Bangladesh (106) and Pakistan (122). India tops the list in 39th position followed by Sri Lanka at 71 and Bhutan at 97. Improvement in doing business in Nepal has moved up two places in the index from 100 last year, as per the World Economic Forum (WEF). The Geneva-based international organisation has pointed out certain areas where Nepal needs to improve to become an economy with competitive and comparative advantage which are prerequisites for FDI.
The highly flammable mix of political instability, policy issues and inefficient bureaucracy has long haunted Nepal. However, albeit slowly, the country has been moving in a somewhat satisfactory manner at least in the South Asia region in terms of economic competitiveness in recent years. The Global Competitiveness Index 2016-2017 ranks Nepal in 98th position among the 138 countries which makes the Himalayan nation the fourth most competitive economy in South Asia, ahead of Bangladesh (106) and Pakistan (122). India tops the list in 39th position followed by Sri Lanka at 71 and Bhutan at 97. Improvement in doing business in Nepal has moved up two places in the index from 100 last year, as per the World Economic Forum (WEF). The Geneva-based international organisation has pointed out certain areas where Nepal needs to improve to become an economy with competitive and comparative advantage which are prerequisites for FDI.
Most Problematic Factors for Doing Business in Nepal
• Government instability
• Inadequate supply of infrastructure
• Corruption
• Inefficient government bureaucracy
• Poor work ethic in national labour force
• Access to financing
• Restrictive labour regulations
• Inflation
• Inadequate educated workforce
• Tax regulations
• Foreign currency regulations
• Insufficient capacity to innovate
• Tax rates
• Poor public health
• Crime and theft
• Government instability
• Inadequate supply of infrastructure
• Corruption
• Inefficient government bureaucracy
• Poor work ethic in national labour force
• Access to financing
• Restrictive labour regulations
• Inflation
• Inadequate educated workforce
• Tax regulations
• Foreign currency regulations
• Insufficient capacity to innovate
• Tax rates
• Poor public health
• Crime and theft
In spite of the problems, the improving
situation indicates that the policy undertakings of the government have
started to take shape after years of dillydallying. The government is
currently engaged in what it calls the ‘second generation of policy
reforms’ that aims to update the outdated laws and formulate new ones to
address the modern day way of doing business and its pertinent issues.
The past eight months have seen an amendment of some old laws such as
the Companies Act and Industrial Enterprises Act and the enactment of
new ones like the Special Economic Zone Act. Similarly, the draft of
FITTA Bill has been finalised which will replace the older Act. The
Acts include progressive provisions that have been considered essential
in order to create a better climate for investment. According to
industry minister Nabindra Raj Joshi who was the chief guest of the
Symposium, the FITTA Bill has included a provision that will allow
investors to repatriate their investments in whatever currency they
invest in here. “The entry related hassles for the investors will also
be gradually eased with the start of the online registration within the
next three months,” he says. Joshi is hopeful that the problems related
to digital signature and online payment will also be resolved. “The
Governor of NRB has assured me that we can sort out the problem of
online payment within the next two months. In the meantime, we are also
working to ease the exit related issues that the foreign investors
complain here of most often,” he shares. The ministry has also been
preparing a draft of the integrated IPR law in order to address the
issues in intellectual and industrial property. The council of ministers
has already approved the National Intellectual Property Policy in this
regard. Likewise, the government has stepped up to implement the
one-window policy which is expected to ease procedural hassles and
reduce the time-consuming processes in decision making.
Following the Nepal Investment Summit
2017, the main committee and three sub-committees formed to monitor and
follow-up on progress of the investment pledges expressed in the summit
have already started their works. Chaired by the industry minister, the
High-level Committee on Investment is composed of tourism, energy,
commerce, physical infrastructure and transport ministers, State
Minister for Industry, secretaries, Governor of NRB, a member of
National Planning Commission, CEO of IBN and presidents of all three
private sector organisations (FNCCI, CNI and NCC). The Policy
Coordination Sub-committee for Foreign Investment is led by a member of
NPC. Similarly, Investment Promotion Sub-committee is under the
coordination of energy secretary and Foreign Investment Projects
Sub-committee is being coordinated by the IBN CEO.
Welcoming the policy reform initiatives,
Nepali private sector leaders are asking the government to do more on
the economic front. “We want the government to introduce the
Anti-Dumping Act which is one of the very important laws for Nepal.
Similarly, we also would like to see the government bring in the IPR
law,” says Hari Bhakta Sharma, President of Confederation of Nepalese
Industries (CNI). He asks for an improvement in the delivery of
services from the government which will also aid in the betterment of
the country’s investment climate.
While the attention of the policymakers at
present has shifted mostly towards policy reforms, experts stress that
it is equally important for Nepal to retain the existing JVs by
satisfying them. Doing this will spread good words about the country
among other probable foreign investors. For this, the government needs
to listen to their concerns seriously and find ways to address the
problems, they say.
