Why FDI?

Published On: August 20, 2016 12:35 AM NPT By: Prabhakar Ghimire

With the paucity of economic resources and our weak technical knowhow, we have no option but to attract FDI for large-scale infrastructure projects
Recently, there have been heated arguments over whether big projects should be developed by Nepal on its own or with the help of foreign direct investment (FDI). Public debate on development issues hints of growing public concern on developing the country’s economic future after the long and painful political transition. People desperately want large-scale development projects, no matter who executes them. For no one can deny that big infrastructure projects are necessary to speed up economic development.  

It sounds pleasing to hear that infrastructure projects should be developed using our own financial and human resources. Definitely, it works if we have the capacity to arrange funds, technology and skilled technicians within the country. However, with our weak economic resources and as weak technical knowhow, we have no option but to attract FDI for large-scale infrastructure projects, at least for the next few years until we build our own capability to undertake such projects. Some argue that Nepal can implement big highway and hydro projects utilizing remittances and domestic sources. In recent time, the public too seems to be in favor of mobilizing internal resources, a mix of people’s money and government resources.

They give example of excessive subscriptions for public shares worth billions of rupees in every Initial Public Offering (IPO), creating a big pool of idle money. But such unutilized public money can be mobilized only for a few projects, and not the ones that need huge funding, skilled human resources and efficient technology. Remittance too is not reliable as international labor market is volatile. Moreover, capital alone is insufficient.

We also need right technology and qualified human resources. FDI is not only about international financing to fill the resource gap but also a key channel of bringing in modern technology and management expertise.

Well-functioning and efficient infrastructure in turn paves the way for higher economic growth, which ultimately leads to poverty reduction.

In this globalized world, the growing role of FDI for infrastructure development can’t be denied, especially for poor countries facing deficits in infrastructure, finances, human resources and technical knowhow. FDI in manufacturing and services are also necessary in order to create new job opportunities and to improve revenue generation. With the entry of multinational companies in manufacturing and services, our economy will be better integrated with international market. In term of size of its economy, Nepal in 2015 was ranked 106th by the World Bank. After posting less than average 4 percent annual growth over a decade, Nepal’s economy last year grew by a meager 0.77 percent. Poor investment in infrastructure has resulted in sluggish growth.

If the Word Bank’s estimation is anything to go by, a 10 percent rise in investment in infrastructure contributes to a percent of GDP growth in any country. But developing countries are plagued with a yawning gap between need and investment. The Asian Development Bank has estimated that Asia needs US $8 trillion in 2010-2020 to plug the infrastructure gap in the region.

Nepal urgently needs better infrastructure to catch up with other peer-group nations. ADB’s ‘Asian Development Outlooks 2015 ‘ has positioned Nepal 132th out of the 147 countries in terms of their infrastructure quality. But Nepal has no experience with implementation of big projects, including hydropower. We also have a bitter experience of cost and time over-runs in even small projects that use domestic financial and human resources. Lack of adequate experience, technology and capital as well as our failure to manage technical, economic and social risks are to blame for this.

Government resources are inadequate to undertake big infrastructure projects. But private sector is also not interested in financing infrastructure.

Consequently, private sector investment in infrastructure is less than a percent point. Likewise, Nepali migrant workers are earning more than Rs 600 billion a year. But over 80 percent of their hard-earned money is spent on consumption and other unproductive sectors. There is no immediate chance of remittance being channeled into productive sectors.

Nepal needs to spend at least Rs 300 billion a year in energy sector to achieve the target of generating sufficient electricity for itself by 2030. A joint study of Investment Board Nepal and National Planning Commission revealed that 10,092 MW of power is required by 2030, assuming that the country achieves five percent annual growth over the period. Nepal is also vying for developing-country status by 2022, a target that requires 9 percent growth and investment of Rs 700 billion a year. Similarly, the Sustainable Development targets set by the government envisage bringing down poverty level to five percent by 2030.

Infrastructure investment in Nepal is less than three percent of GDP, while its FDI contribution is 0.1 percent of GDP. Nepal is 113th in terms of global FDI inflow, despite its huge potential in various sectors. In 2011-20 Nepal needs to invest at least US $13-18 billion in key infrastructure projects, as per the World Bank. It will be a daunting task to arrange the necessary capital. In a dynamic economy, private sector is vibrant and can greatly contribute to developments projects. But that is not the case in Nepal.

Both international and domestic investors calculate the costs and benefits of investing in different countries. Their first priority would be investment security and guaranteed satisfactory return. Nepal, we should not forget, is competing against countries which are offering many advantages and opportunities to outside investors.  

A study conducted in 1990s in Mozambique, Botswana and Uganda showed direct relation between economic growth and FDI. These countries achieved impressive growth on the back of healthy FDI, which not only brought in capital but also much-needed technology and skills to rapidly deliver infrastructure. Even developed countries need FDI to supplement the much-needed capital. World Investment Report, 2015 shows the US and China are not only leading investor countries but they are also among the world’s largest FDI recipients. Global FDI flows reached $1.76 trillion in 2015 with the US topping the list of countries receiving highest FDI, followed by Hong Kong, China, Ireland, the Netherlands, Switzerland, Singapore, Brazil, Canada and India.

In terms of FDI stock also the US and China are ranked first and second respectively. It would thus be immature to say that Nepal doesn’t need FDI in this globalized world, when even the most developed countries are looking to attract investment. Besides attracting capital and technology, influx of foreign capital helps developing countries integrate themselves into global trade and market regimes, to enhance managerial capacity and to use better technology.

To tap the benefits of FDI, the government should thus come up with policies that encourage private sector capital-building and state-intervention in social sectors. It is challenging to stand out as an investment destination these days. Nepal will therefore need to create a favorable environment for investment within a consistent and credible legal, policy and regulatory framework if it wants to develop its infrastructure and in doing so also lift the country out of poverty.


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