Why has Nepal not been able to attract many big foreign investment projects?

Gandhi Pandit, Attorney at Law and Founding Partner of Gandhi and Associates, a private law firm, has over 30 years of experience in practicing law in the fields of corporate law, banking and mega projects such as aircraft lease/purchase agreement, hydro power, BOOT projects (build, own, operate and transfer) in Nepal and USA. He is a Lecturer at Nepal Law Campus, Tribhuvan University, Faculty of Law, and also currently serves as Member of International Court of Arbitration, a dispute resolution wing established by International Chamber of Commerce (ICC).

He has decade-long experience of working as Consultant for Asian Development Bank, World Bank, IFC, AusAid and the Government of Nepal. His professional experience also includes working with international consulting firms in preparing bid documents, preparing proposals and assisting international consulting firms in matters relating to developing and submitting proposal and bid documents.

“Nepal has not been able to witness mega scale foreign investments not because the country has not been able to attract foreign investors, but because it has not been able to provide equal level playing field for foreign lenders who remain crucial for any investor to venture into mega projects”

After working for several years with international firms and investors, Pandit has come to the conclusion that Nepal has not been able to witness mega scale foreign investments not because the country has not been able to attract foreign investors, but because it has not been able to provide equal level playing field for foreign lenders who remain crucial for any investor to venture into mega projects. He claims that Nepal‘s existing laws are not lender friendly hence they shy away from lending big funds to the foreign investors who wish to come to Nepal with huge investment projects.

Ashok Thapa and Unika Joshi from Business 360 º met with Pandit to know more.


Despite many efforts, why has Nepal not been able to attract many big foreign investment projects?

Till date, when we say foreign investment, our focus goes only to the equity investment being made by the developers – those investors who only put in 30 percent of the total investment cost in a project as equity whereas we always neglect the main lender (bank or financial institutions or the consortium). These lenders, in fact are the actual financiers of the project as they outlay 70 percent of the total project cost.  For example, let‘s talk about a mega hydropower project. What really has been the trend so far is that one of the foreign firms turns up with a proposal to develop, say 700 MW project in Nepal. Now what happens is that the firm invests only around 30 percent of the total project cost in the form of equity. But for rest of the 70 percent investment, the firm has to approach any of the foreign banks or lenders or consortium. This is called project financing in which debt-equity ratio remain 30:70 percent.

While talking about small or medium FDI projects, lenders lend money to the project on the basis of recourse financing which means the lender takes the proposed project as collateral plus personal guarantee or property from the developer. The moment the developer of the project pays the loan to the lender, the project finally becomes the possession of the developer. Or if the project fails or the developer cannot pay the loan, the lender has all rights to take over the project or other properties that have been registered as collateral. But there is nothing called recourse financing system in Nepal for mega projects which has been a major legal barrier. Under the system of non-recourse financing model, the lender has access only to the project property to recover its debt and no authority to go after other property of the developer or equity holder as they do in recourse financing.

Again talking about the 700 MW hydropower project that we mentioned before, suppose a lender or a consortium of the lenders lends money for the development of that project on non recourse financing model, and if the project fails or even if the project succeeds and the developer denies paying the loan, the lender or its group have access to recover debt only forfeiting the property of project  as collateral.


Foreign lenders want to have  strong legal system or legal framework to create charges over movable property of the project and perfection of such charges. For this, we need to have strong and workable secured transaction law that helps protect the interest of lender in the project.

The main problem with us is that we do not have a clear policy to encourage non-recourse project financing. Lack of such policy or legal framework has closed the door for those banks or lenders or consortiums that otherwise might be interested to fund project of big size or  magnitude. Without  such law, no lender will be interested to grant loan in mega projects.  In  addition to this, foreign lenders are looking at the  enfacement of recovery of the collateral mechanism in case the borrower fails to pay the debt. Due to lack of effective  mechanism of enforcement and  forfeiture of collateral by the lender, the investment as loan in Nepal becomes more risky for the lender. This is the main reason why lenders shy away from lending money to investors who want to bring in huge projects in Nepal and hence, there have not been any big foreign investment projects so far  by  the private sector in Public Private Partnership (PPP) model.

Does this mean that Nepali laws and policies create bottlenecks for promoting non-recourse project financing for mega projects?

Yes. Nepali laws relating to project financing on non-recourse basis is not encouraging. In fact, our prevailing laws relating to project financing is very traditional and non-encouraging. The sad part is that policy makers of the country have not paid attention to this aspect.

There are certain traditional laws such as Civil Code (Muluki Ain) and some banking laws that are so rigid and obsolete that no foreign lenders would be interested to make loan investment in Nepal. As per the Civil Code, there are some provisions in Monetary Transaction Section which restrict in taking interest of more than 10 percent and penalty on default in loan payment. The same section also prohibits mortgaging of moveable property for more than five years. The Code also restricts creating mortgage in immovable property in Nepal. There are many such small provisions in the Code that pose barriers in bringing foreign investment in the form of loan. In order to promote project financing in non-recourse basis for developing mega projects, the government needs to work immediately to revise the current laws and regulations which at present are not at par with international standards for promoting foreign investment.

Are there no alternatives to secure the lender‘s interests?

In that context too, lenders ask the Nepal government to guarantee the loan on behalf of the foreign developer which the government denies. The government takes loan on its own guarantee with foreign EXIM banks and other lenders to develop its own project, but has not given any guarantee for private foreign companies. In such context, no big foreign investments will come unless the lender‘s issues are addressed.

What is the international practice?

Well in India whenever any project is being developed under the PPP model, they introduce project financing rule. They have recognised non-recourse financing. So under individual agreement, the Indian government has awarded several infrastructure and other projects to foreign companies.

Nam Chung-II Hydropower Project of Cambodia is 1,000 MW and worth 125 billion dollars. They changed their law accordingly to introduce non-recourse financing system and developed the project through foreign investors.

Same has been the formula of Laos that is developing big hydro projects of late.
We also have to learn from Bhutan which has provided safe playing ground for foreign investors, especially from India and has been exporting energy to India making millions of dollars worth revenue annually.

If this issue is critical, why have investors like Sutlej and GMR already signed power development agreement (PDA) with the government?

For more than a decade, these Indian companies seem to be very sluggish about project development. They are now in the stage of financial closure and this is the time they must be facing some issues in finding lenders.

The CWE Investment from China which is willing to build 750 MW West Seti Hydro Project has been seeking guarantee from the Nepal Electricity Authority (NEA) to buy the energy generated from the project to which NEA is apathetic. This is where the project has remained stalled. The Chinese company in fact is conscious about the barriers that it is going to face in the future if it begins to develop the project without addressing these issues.

This is a critical issue that has yet to come to the forefront because there have not been extensive foreign projects yet.

Gandhi Pandit

Gandhi Pandit
Founding Partner of Gandhi and Associates

What about investments through international development partners like the World Bank, Asian Development Bank (ADB) and International Finance Corporation (IFC)?

There is a difference between the investment brought in by these development partners and the investment done by the private sector foreign investors. These partners directly seal agreement with the government which is the greatest and strongest assurance for not having their investments in peril. The current laws and policies that we discussed do not pertain them because these are the bilateral agencies and have special relationship with the Nepal government. But I am specifically talking about private sector projects that are provided with licence by the Nepal government, yet for all other issues investors are responsible. What I am saying is that these laws have turned into roadblocks for investors and must be taken into serious consideration immediately.

There is a trend of FDI inflow into Nepal from the tax heaven nations. There are also discussions underway to prevent such investments. What are your thoughts?

The government should be clear on this. For me, if the shell companies are intending to bring in their investments here in Nepal to evade tax in the countries they are based in or to convert black money into white, they should not be allowed to enter Nepal. But as long as their intention is good and the investment promotes economic development here, I don‘t think we should feel any unease.

When it comes to FDI, there had also been some discussions seeking Nepali investors to take their investment abroad. Do you think they should be allowed to open up their business overseas?

See, since we received membership of World Trade Organisation (WTO) and similar other global organisations, voices are there that the world should be treated as an open global market and that investors are to be left free to take their investments wherever to choose to. But it‘s not the case in Nepal as government has prohibited outflow of investment. For me this ban from the government should change. What I think is the law should not ban outflow of investment rather we have to have better investment atmosphere where local investors flourish their business here. Nobody then would be interested to taking investment overseas.

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