As a myriad of factors deter foreign investors from engaging with Nepal, the net foreign direct investment (FDI) in the country reached a nine-year low in the last fiscal year.
the HRM
Infraco Asia, a Singapore-based company, has divested its holdings in Gurans Energy Limited, a joint venture company based in Nepal. While divestment of shares is a normal process, what is interesting is that the Singaporean firm sold its 4.979 million shares in Gurans Energy to Butwal Power Company for a mere total of Rs 120.
Gurans Energy Limited is one of the promoters of the Kabeli ‘A’ Hydropower Project, which is currently under construction. Infraco Asia held a 60 percent stake in Gurans Energy, while the remaining 40 percent was owned by Butwal Power Company.
The Kabeli ‘A’ hydropower project encountered uncertainty when the World Bank withdrew its support, prompting Infraco Asia to reconsider its involvement in Nepal. Additionally, discussions about the potential development of the 762 MW Tamor Reservoir Project have cast doubt on the future of the Kabeli ‘A’ project, as its existence may be threatened if the Tamor Reservoir Project proceeds, leading to inundation.
Infraco Asia is not the first foreign firm to withdraw from Nepal. In 2018, Dangote Group, a Nigerian multinational industrial conglomerate, departed for Nepal, after five years of relentless efforts failed to obtain a license for a cement plant. The harrowing experiences of the Dangote Group offer a picture of how difficult investing in Nepal has become for foreign investors who fall into the trap of corrupt leaders, bureaucrats, and inward-looking local industrialists.
The intricacies of Nepal’s foreign direct investment (FDI) approval procedure become apparent considering that Dabur Nepal, a subsidiary of the Indian multinational company Dabur which established a manufacturing base in Nepal in the early 1990s, waited for two years to get approval for a reinvestment proposal from the Investment Board Nepal (IBN). Dabur Nepal encountered a significant delay in receiving approval from the IBN for its proposed investment expansion within the country, enduring a waiting period of two years. It wasn’t until the last week of April that Dabur Nepal ultimately reached an agreement with IBN to reinvest Rs 9.68 billion in Nepal.
As a nation currently holding the unenviable position of being among the world’s least attractive destinations for FDI, the departure of Infraco Asia, and the protracted delay faced by Dabur Nepal, serve as a stark reminder to policymakers to carefully assess the shortcomings in the country’s foreign investment framework, especially when the government plans yet another investment summit this year.
“Comparing Nepal’s situation to countries like Sri Lanka, Bangladesh, and Nepal in the early 2000s underscores missed opportunities. The South Asian nations used to attract a few million dollars in FDIs, but today, Sri Lanka and Bangladesh have successfully attracted billions, while Nepal has struggled,” said Radhesh Pant, Chairman, VRock & Company.
Despite frequent assurances of a more favorable business regime from high-ranking government officials, Nepal has struggled to attract international investors. Net foreign direct investment (FDI) in the country hit a nine-year low in the last fiscal year. According to data from the Nepal Rastra Bank, net FDI plummeted by a significant 67.88 percent year-on-year, dropping to Rs 5.96 billion in FY 2022/23, in contrast to the Rs 18.56 billion recorded in FY 2021/22.
A similar trend is observed in FDI commitments, where international investors displayed hesitation toward investing in the country. This is evident from the 22.20 percent decline in foreign direct investment (FDI) pledges during the past fiscal year. FDI commitments amounted to Rs 38.45 billion in FY 2022/23, down from Rs 49.43 billion in FY 2021/22.
Government officials attribute the decline in FDI pledges to the global economic downturn and the Nepal government’s tightening of visa rules for foreign investors. However, economists, industrialists, and legal experts specializing in investments say the bureaucratic red tape that prevailed in Nepal for a long continues to push foreign investments away from the country. They stress the urgency of improving existing policies and addressing structural bottlenecks if Nepal aims to position itself as an attractive investment destination. They emphasize that within Nepal, there are both structural and procedural barriers that deter potential investors.
According to Pant, the ease of doing business in Nepal has been on a declining trajectory, primarily due to frequent changes in laws without a corresponding political will to facilitate implementation. “Politicians often make bold claims about Nepal’s favorable investment climate, but the disconnect between their rhetoric and the effective implementation of policies remains a significant concern,” he said.
Stringent Approval Process
According to legal and foreign direct investment (FDI) experts, the primary impediment to FDI lies not so much in the laws and regulations themselves but rather in their implementation. They highlight the lack of urgency in facilitating deals and the recurring delays within government agencies as the key issues. These obstacles, they argue, have discouraged foreign investors from engaging with Nepal.
“In Nepal, the government has opted to make the FDI approval process more rigorous, creating greater challenges for potential investors looking to participate in the country’s economy,” said Semanta Dahal, a lawyer.
Foreign investors frequently express frustration over the overlapping authority of two government agencies responsible for facilitating foreign investments. Despite clear jurisdiction definitions between the Investment Board Nepal (IBN) and the Department of Industries (DoI), persistent issues have plagued foreign investors for years, particularly concerning investment approvals and the government’s lack of urgency.
As per the regulations, the DoI is responsible for approving investments up to Rs 5.99 billion. Any investment exceeding Rs 6 billion must obtain approval from the IBN. Ironically, while the Director General of the DoI has the authority to approve investments up to Rs 5.99 billion, investments above that threshold require endorsement from a board meeting chaired by the Prime Minister at the IBN.
However, securing the Prime Minister’s time for such board meetings proves to be a challenging endeavor, according to members of the private sector. They argue that utilizing the IBN route for investment approvals has resulted in even slower processes, despite the initial intention for it to be more efficient than the one-window system. Although the law specifies that both agencies should complete the approval process within 15 days, this is rarely achieved in practice.
“To provide some context, if investors needed to secure 10 approvals from various ministries and authorities in 2010, this number should have decreased to five by 2020, in line with global trends. However, instead of this reduction, the number of approvals has surged to an alarming 20, creating a substantial deterrent for prospective investors interested in Nepal,” said Dahal.
Too Many Agencies, Inconsistent Policies
If the process of obtaining approval for foreign direct investment (FDI) in Nepal involves multiple authorities, repatriating dividends is also both a costly and time-consuming affair. Repatriation of investments requires approval from various agencies, including the Nepal Rastra Bank and relevant government departments. Additionally, investments in specific sectors, such as telecommunications, necessitate approval from the Nepal Telecommunications Authority, while joint ventures require approval from the Ministry of Finance.
Business community members argue that inconsistent policies have hindered FDI growth in Nepal. An illustrative example is the fluctuating minimum FDI threshold. In May 2019, despite reservations from the private sector, the government raised the minimum foreign investment threshold from Rs 5 million to Rs 50 million. However, three years later, in the federal budget for FY 2022/23, the government lowered the minimum threshold back to Rs 20 million. While the rationale behind this reduction was to encourage FDI in small-scale businesses, insiders contend that even the Rs 20 million threshold remains excessively high.
Nepal also faces a deficiency in risk management tools necessary for mitigating interest rates and foreign currency risks associated with foreign investments. This issue is particularly noticeable in substantial hydropower and infrastructure projects that receive foreign investment in the form of debt. While the revenue from such projects is denominated in Nepali currency, debt repayment must be made in foreign currency.
Despite the recent amendments to the much-anticipated hedging regulation last year, the Finance Ministry is once again considering a third round of amendments. This regulatory revision is under consideration as efforts are underway to designate an institution to offer hedging services.
Two banks, namely Nepal Bank and Nepal Infrastructure Bank (NIFRA), have submitted proposals to the Finance Ministry to provide hedging services after the latter in early December 2022, issued a notice inviting government-owned commercial banks and infrastructure development banks interested in becoming hedging service providers to submit their business action plans.
According to the Finance Ministry, the ongoing discussions are focused on designating the hedging organization through modifications to the Hedging Regulations alone. Another critical factor is the shortage of qualified human resources. Foreign investors frequently encounter challenges in finding the specific skills they require, exacerbated by legal barriers to employing foreign staff. As per the labor law, businesses operating in Nepal can only hire a maximum of 5 percent foreign workers.
Furthermore, foreign investors have repeatedly questioned Nepal’s Copyright Act, asserting that it fails to meet international standards for protecting intellectual property rights. Trademarks and brand names of well-known international companies are frequently infringed upon, resulting in multiple cases of trademark violations. Inadequate enforcement of copyright laws and the safeguarding of intellectual property rights discourage new multinational companies (MNCs) from entering the Nepali market.
Some Momentum of Late
The Department of Industry (DoI), the government body which handles tasks related to foreign investments, has established an online mechanism for the approval of FDIs. This mechanism, which enables automatic approval for FDI worth Rs 100 million, is now in operation.
In November of the previous year, the government reduced the minimum FDI threshold from Rs 50 million to Rs 20 million to attract smaller foreign investors to the country. Since the lowering of the FDI threshold, there has been an increase in the number of industry registrations. However, the level of investment commitments remains below that of the previous fiscal year. Notably, there has been a surge in the registration of companies in the IT sector, with a total of 16 IT companies registered in FY 2022/23 compared to just seven in FY 2021/22.
Discrepancy between Approved FDI and Net FDI
The most recent report from the central bank highlights a substantial gap between the approved foreign direct investment (FDI) and the actual net FDI inflows in Nepal. An FDI approval signifies an intended investment, but it does not guarantee that the investment will materialize, and there can be significant delays between approval and actual investment, as noted by the central bank.
A survey on FDI in Nepal, unveiled by the Nepal Rastra Bank today, reveals that between the fiscal years 1995-96 and 2019-20, the total net FDI inflow amounted to only about 36.5 percent of the total FDI approvals granted during that period.
Government Promise
In addition to hosting an investment summit during the current fiscal year, the federal budget for 2023/24 includes several promises aimed at facilitating foreign investments. The government has pledged to streamline the approval process, allowing for automatic approval when making investments in industries that are open to foreign investment, except those that require permission as stipulated by existing laws.
Furthermore, starting now, reinvesting income generated from foreign investments will no longer necessitate formal approval. The budget also commits to simplifying the procedure for foreign investors to repatriate dividends. Additionally, it outlines plans to advance the negotiation of bilateral investment promotion and protection agreements and double taxation avoidance agreements, with a focus on identifying countries where foreign investments can flow.
The budget emphasizes the importance of building trust among foreign investors by aligning national tax laws with established principles of the international tax system. It also assures a review of the minimum foreign direct investment (FDI) threshold on a sector-specific basis and vows to simplify the FDI approval process.
“Bureaucratic hurdles impede FDI inflows”
Radhesh Pant, Chairman, VRock & Company
The primary cause behind the decline in Foreign Direct Investment (FDI) in Nepal can be attributed to a multitude of factors, with the most significant one being the lack of commitment from the government and political leadership. Persistent delays and bureaucratic hurdles have impeded FDI inflows into the country.
While several other South Asian nations have successfully attracted FDI in recent years, Nepal has fallen behind due to a range of issues. One significant obstacle is the lengthy Environmental Impact Assessment (EIA) process, which not only consumes substantial time but also discourages investors from considering Nepal. The prevalence of rent-seeking behavior in Nepal further dissuades genuine investors.
Politicians often make bold claims about Nepal’s favorable investment climate. But their claims remain as rhetorics as effective implementation of policies have always remain a concern.
Comparing Nepal’s situation to countries like Sri Lanka, Bangladesh, and Nepal in the early 2000s underscores missed opportunities. These nations used to attract a few million dollars in FDI, but today, Sri Lanka and Bangladesh have successfully attracted billions, while Nepal has struggled.
Nepal’s ease of doing business has been on a declining trajectory, primarily due to frequent changes in laws without a corresponding political will to facilitate implementation. There is a lack of accountability and ownership within the government, and despite the existence of the Investment Board Nepal (IBN), it has not been adequately empowered. To stimulate FDI, it is essential to delegate all responsibilities related to FDI to the IBN, with ministries being held responsible for any project delays or hindrances.
“Easing FDI approval process will help to attract foreign investments”
Semanta Dahal, Legal Expert
In Nepal, legal reforms were enacted in 2019 to address the impact of Foreign Direct Investment (FDI) in the country. Unfortunately, these reforms primarily focused on mitigating the negative aspects of FDI, neglecting to harness its positive potential. This approach differs from the strategies employed by many other countries, where governments typically simplify the investment process to attract foreign capital.
In Nepal, the government chose to intensify the rigor of the FDI approval process, making it more challenging for potential investors to participate in the country’s economy.
One of the most significant obstacles for investors in Nepal is the excessive number of approvals required. To provide some context, if investors needed to secure 10 approvals from various ministries and authorities in 2010, this number should have decreased to five by 2020, in line with global trends. However, instead of this reduction, the number of approvals has surged to an alarming 20, creating a substantial deterrent for prospective investors interested in Nepal.
