A Call For Stability

Nepal is at crossroads. Much has been written and discussed about the federal structure we are transitioning to and the stability in government that will encourage investment and development. As an emerging economy, business opportunities abound in Nepal. We have already seen this in the private sector which is driving the economy at a remarkable pace. If only we could see the same drive and vigor for development and progress from the bureaucracy, the pace of progress of the nation could switch to another gear. To achieve this, I observe what businesses (and even development sector organisations for that matter) crave the most – legal stability. While I whole heartedly condone the calls from various quarters for reducing red tape in government and simplifying the laws, there are various competing interests, and such transformational changes will take the course of time. But does that mean that we should wait? If the cost of dealing with red tape is less than the reward for starting a business in Nepal, red tape won’t dissuade investors. But if we cannot achieve legal stability, then no matter how much red tape we get rid of, the investment floodgates will not rush to open, it will only continue to drip feed as we see it now. Legal stability is a topic that seems to be glossed over by every commentator. It’s the one thing that will encourage investment in Nepal, both domestic and foreign, increase employment, build infrastructure and grow the economy. It’s the reason England and Delaware are often chosen as registration jurisdiction for many multinational businesses, and why forums such as those in Hong Kong and Singapore are chosen as venues for arbitration. The legal principle of the hierarchy of law and the principle of parliamentary supremacy states that Acts passed by Parliament supersedes all other subordinate legislation that is passed by a government entity. However, in practice in Nepal, there are countless examples of Acts of Parliament being restricted or reverted by Rules and Directives formulated by Ministries of the Government of Nepal. And then, of even bigger concern is the vague language used when such subordinate legislation is drafted. For example, if a list of documents is specified as being required to obtain a license, invariably the last item in such list calls for “such other necessary documents”. Language like this gives wide discretionary powers to government employees, and it must be noted that this encourages bribery and abuse of authority, as it goes against two major pillars of a successful democracy: transparency and accountability. And when there is such discretionary power, it creates uncertainty for entrepreneurs and discourages investment. Businesses always look to minimise risk. Some risks can be mitigated with insurance policies that cover such risks. But haphazard application of the law cannot be mitigated for. A policy of favourable and narrow interpretation would encourage business activity, which in turn will provide employment, which will increase consumerism, which in turn will increase more business activity as industries will expand and adapt to meet the new demand, thus creating more employment. If consumerism is being fulfilled by imports though, this could have a negative effect, and thus the government should focus on encouraging investment in import substituting businesses. But we don’t have much time. As the region moves towards the South Asian Free Trade Area and the sheer economies of scale advantage of other nations means that the ability of our government to correct course is closing rapidly. The international financial market has evolved by leaps and bounds in the past three decades. Today, creative international businesses have exploited various project financing mechanisms with great success. And yet, because of the unfavourable interpretation of our laws, any pioneering entity attempting to replicate that in Nepal almost always encounters problems at government agencies. Instead of negatively viewing any such proposal out of hand, a reasoned debate on the possibility of replicating such a mechanism in Nepal with concrete critical feedback would go a long way to placate investor fears. And they can, where possible, amend their proposals so that it is compliant with a consistent interpretation of the law. It would not be useful if this interpretation of the law changed everytime a new person appointed to that particular position in government. Any interpretation should be accepted by that government agency in the future too, providing consistency for investors. Over time though, we also need to consider changes in the archaic laws that even to this day prevail. And when new law does get made, the consultation process with concerned stakeholders is laughably inadequate. And then there are parallel government entities separately requiring approvals for the same business. But as much as these developments are frustrating, investors would accept as a “cost of doing business” if the cost is consistent and justifies the rewards they hope to earn if the business is successful. But if the success of the business is contingent on the stability of the law, and the law can be changed at a whim, investors will continue to be discouraged. Take the case of our two giant neighbors, China and India. While arguably over the past two decades both nations have taken massive strides towards liberalising their respective economies, there are still various barriers to entry in certain industries. And despite this, most multinational companies have established their presence in these two countries, because the profits they derive from doing business outstrips the cost associated with overcoming the barriers to entry. And while the comparison may not be fair when comparing with two markets with populations of well over one billion, the general principles still apply. Our South Asian counterparts in Sri Lanka can be held as a proof of this concept. My parting suggestion is that we should embrace the move towards federalism and give sufficient power to states to compete for businesses thus increasing inter-state trade which will hopefully help reduce the import fueled Balance of Trade deficit in the country.

---

Avash Pandit is an associate at Gandhi & Associates providing transactional and contractual advisory to clients, and is also founding board member of the Foreign Investment Society, a special interest group lobbying for promoting foreign investment.