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Is Nepal Investment Friendly?

Investors participating in the government hosted investment summit recently have signed letter of intent to invest $13.5 billion in Nepal in various areas from infrastructure to business.  While this is an encouraging sign, the country needs to gear up its reforms to realise the pledge.

Foreign investor interest tells us that the country offers ample opportunities but the implementation aspect is another story.  FDI stands at a dismal two percent of GDP since Nepal opened up for foreign direct investment after the restoration of democracy in 1990.

Attracting investment is tough in the current scenario as economies around the world compete for FDI. To make investment happen, any country must ensure two basic things — protection of investment and guarantee on return. These are two fundamentals for any investment whether domestic or foreign.  Nepal as a liberal economy has assured investors on protection of investment, but political extortion, issues of trade union, frequent strikes, red tape and rampant corruption discourages foreign investors. Investors also have to contend with high cost of production due to high transportation costs, lack of reliable electricity supply, high labour wages, procedural delay from government bodies among other issues.

A major bottleneck we have been talking about over the years is lack of infrastructure. Massive investment in infrastructure is essential to bridge the gap of road and transport, energy and utilisation of information and communication technology (ICT) in service delivery, according to Min Bahadur Shrestha, Vice Chairman of the National Planning Commission, the apex planning body of the government.

Following the delivery of the new constitution, the government has embarked on various reforms in legal and administrative fronts to create a conducive environment for foreign investment. Infrastructure development has been given high priority. New polices and laws have been introduced recently like Special Economic Zone (SEZ) Act which provides a one stop service for foreign and domestic investors to set up industry, tax incentives, custom duty waiver on import of raw material among others.

FDI Approval

• Up to Rs 2 billion- Department of Industry
• From Rs 2 billion to Rs 10 billion- Industrial Promotion Board led by Industry Minister
• Above Rs 10 billion – Investment Board Nepal

Legal provisions for FDI

Establish and Exit
• Domestic Firm
• Industrial Enterprise Act (IEA)
• Company Act
• Contract Act
Foreign Firm (Additionally)
• Foreign Investment and Technology Transfer Act (FITTA)
• Foreign Exchange Regulation Act (FERA)
• Labor/Immigration Act

Laws related with operations (Domestic and Foreign Firm) 

• Industrial Enterprise Act
• Electricity Act
• Environment Protection Act
• Land Acquisition Act
• Labor Act
• Water Resources Act
• Telecommunications Act
• Income Tax Act
• VAT Act
• Excise Duty Act
• Bonus Act
• Patent Design and Trademark Act
• Competition Promotion and Market Protection Act
• Consumer Protection Act
• Copyright Act
• Banks and Financial Institutions Act

The government also introduced the new Industrial Enterprise Act and the Company Act recently. Some crucial acts and policies like the umbrella policy for Intellectual Property Rights, amendment in Foreign Investment and Technology Transfer Act, new Labour Law is underway. Likewise, reforms in administrative fronts like online service for firm registration from the Department of Industry and Office of the Company Registrar has been initiated thus far.

However these steps are insufficient. Foreign investors want a hassle free environment to operate. Existing multinationals and joint ventures in Nepal have urged the government to introspect the ground realities faced by foreign investors in Nepal. Some diplomats have been openly lobbying for the removal of any cap in dividend repatriation in the amended version of Foreign Investment and Technology Transfer Bill. Foreign investors have raised issues on dividend repatriation, labour problem, intellectual property right, mismatch in duty structure and limited trading permission, among others.

Dividend repatriation is tough on foreign investors. “Often times even though the paperwork is fully compliant, authorities demand proof of financial investment,” states Saurya SJB Rana, President of Nepal India Chambers of Commerce and Industry. Many bi-national chambers including India and China have been lobbying with the government for simplification of procedures and provisions. However, the government has not taken any concrete step to facilitate the procedures of dividend repatriation. Some IP-related issues are also a major concern for investors. Though intellectual property right has emerged as a critical issue globally, Nepal sorely lacks the required polices and regulatory mechanism. Virtual absence of an equitable IPR system in the country, lack of legislative framework on IPR-related issues for industries like trademark, patent, design, etc – compatible with the World Trade Organisation and World Intellectual Property Organisation provisions – have been identified as another bottleneck for investment. Very recently, Kansai Nerolac Paints from India lost a case in a trademark dispute with a local company. A local firm registered as Kansai Nerolac Paints Limited had already registered the company and trademark before the arrival of the Japanese Indian joint venture into Nepal.  “This is embarrassing for foreign investors in Nepal when they cannot secure their own trademark due to weak intellectual property laws,” said Rana of NICCI.

Likewise, the government has extended limited trading permission to JVs in Nepal. The country has allowed import of high quality products which cannot be manufactured in the country but JVs are permitted to import finished products only once a year. If there is shortage of imports, the JV cannot import required goods due to stringent government rules. To end this situation, foreign investors have urged the government to permit JVs to import products equivalent to some percentage of their turnover which could be a smaller percentage of the total turnover.

Similarly, labour laws have been identified as another major obstacle. Saibal Ghosh, Country Director, Berger Jenson and Nicholson Nepal has said that labour unrest and lack of progressive laws in accordance with international standards is a major problem for existing foreign investors even. “The labour law should protect the rights of the workers as well as the interests of the investors for which there has to be a structured corelation between labour discipline and industrial productivity,” said Ghosh.
Mismatch in duty has also been hurting investors and has remained a constraint to bring in fresh investments. Ironically, for some products, duty levied at the customs point is higher for raw material than the finished products. Multinationals and JVs have suggested that the government reduce the duty levied on raw materials which hurt the competitive strength of the product. “Producing goods in Nepal has a multiplier benefit for Nepal – employment generation, value addition and revenue for the government. The government needs to understand the importance of job creation for the country,” said Rana of NICCI.

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