Nepal has to go the extra mile and offer a competitive investment climate to get FDI
It has long been known that Nepal’s development hinges on the exploitation of its vast water resources. But sadly, it has also long been proved that Nepal cannot do that on its own. The fact that Nepal has been able to produce less than 800 MW of hydropower so far, though its first hydropower project started commercial production more than a century ago, proves this. Today, Nepal has become a typical example of a country living in poverty despite being endowed with rich natural resources, including water.
Nepal has a good prospect of attracting Foreign Direct Investment (FDI) especially in three sectors—hydropower, tourism and information technology.
Hydropower is the most promising one among these three sectors. There is huge potential in the country’s hydro-power sector with a feasible generation capacity of more than 42,000 MW. As of today, however, the country hasn’t been able to produce even 800 MW of hydroelectricity.
There could be several reasons for this abject failure such as political instability, lack of policy predictability, bureaucratic hassles, labyrinthine paperwork, etc. But the main reason is Nepal’s inability to attract FDI to its hydropower sector. This inability stems from the country’s failure to create an investment climate conducive for hydropower development.
FDI is globally limited and overstretched. Therefore, Nepal has to go the extra mile and offer a competitive investment environment to attract FDI for the development of its hydro potential. Practically, this means the country needs to put in place investment policies and laws which are more competitive than those of countries like Vietnam, Cambodia and Bangladesh which have become emerging FDI destinations in recent times.
After adopting liberalization in the early 1990s, Nepal enacted the Foreign Investment and Technology Transfer Act (FITTA) in 1992. The main objective of this law was to encourage FDI inflows into the country. There is strong relationship between FDI and economic growth. FDI has the ability to sustain a high trajectory of economic growth in the host country. Similarly, FDI assists with employment generation, which is urgent for long-term economic stability.
At the policy level, Nepal has formulated a liberal and open FITTA with a limited negative list. So this law has opened a number of sectors of the Nepali economy for foreign investment, with the guarantee of non-nationalization, repatriation of profit, share transfer and dividend sharing.
Similarly, Nepal has signed Bilateral Investment Protection and Promotion Agreement (BIPPA) with six countries—France, Germany, the UK, Mauritius, Finland and India. In BIPPA with these countries, Nepal has committed to provide compensation to the investors whose investments suffer losses due to war, armed conflict and any state of national emergency. These are all positive steps to encourage FDI inflows.
Nepal is close to India, which is a very large market. But investors will not come just because there is a large market for Nepal’s hydroelectricity.
Before committing to invest in Nepal’s hydropower, foreign investors will seek a bankable Project Development Agreement (PDA) and a bankable Power Purchase Agreement (PPA). Moreover, it is natural that they want to have a fair rate of return on their investment. It will be in the interest of the country if the government ensured all this through policies and laws.
The extra mile
Almost all countries in the world that seriously want FDI have provided incentives mentioned above to foreign investors. But Nepal could go the extra mile by offering them more, for example extending the concession period, extending the Income Tax holiday period, exempting the Value Added Tax (VAT), offering attractive power purchase rates, etc. Considering that the ownership of hydro plants built under the Build Operate Own and Transfer (BOOT) model is transferred to the government, usually after a period of 30 years, the government should be more liberal to offer incentives to foreign investors.
Besides this, the government should be able to address other difficulties that investors are facing such as the process of contract termination, repatriation of profits and sharing of risks including hydrological risks and foreign exchange risks. Similarly, payment guarantee, policy stability, issues of land acquisition, and increased cost of transactions, infrastructure, government policies and political instability are the other issues that the investors want addressed with urgency. There is much work that needs to be done to create a favorable environment for investors.
The FITTA 1992, for example, was amended in 1996 so that it could guarantee full repatriation of the amount received from the sale of equity, profits or dividend and interest on foreign loans. Foreign currency earners are permitted to retain a certain percent of their foreign currency earnings and are free to maintain foreign currency deposits in local banks. However, the implementation of this provision needs the involvement of the central bank and several other government agencies. The process itself is cumbersome and many investors complain of not being able to repatriate profits.
Likewise, the government should attach high priority to signing Bilateral Investment Treaties (BITs) with those countries from where there are high chances of inflow of large investments, especially in hydropower. It will also give a positive message to other foreign investors, and show that Nepal is committed to safeguarding their interests.
Similarly, the approval process for FDI should be made simple so that there is as little contact between government officials and foreign investors as possible. This will help to reduce corruption and other bureaucratic hassles.
The author is coordinator of Republica’s online edition