Nepal’s political uncertainty discourages foreign investment


    KATHMANDU — Have pity for the bureaucrats who promote foreign direct investment in Nepal, because two decades of political instability have made the country a hard sell.

    Nepal saw a bloody Maoist insurgency from 1996 to 2006, a dramatic end to a centuries-old monarchy in 2008, a massive earthquake in April 2015 with aftershocks that damaged 800,000 buildings and killed up to 8,000 people, and a 135-day trade blockade with India between September 2015 and last January that brought many industries to a standstill. It does not help that Nepal’s recent governments have struggled to last for any more than about nine months.

    “The most serious obstacle to FDI is political instability and the non-continuity of economic policies,” said Maheshwor Neupane, director general of the Department of Industry and secretary of the Investment Promotion Board, two government offices spearheading attempts to attract FDI.

    Another key government agency is the Investment Board of Nepal, set up five years ago to handle FDI “megaprojects” that are worth more than 10 billion rupees ($93.6 million). IPB handles projects in the 2-10 billion rupees range and the DOI handles those under 2 billion rupees.

    For the last fiscal year ending July 15, 2016, Nepal attracted 15.1 billion rupees in pledged FDI, a steep fall of 77.5% from the previous year. Actual FDI inflows were less, at about 0.3% of gross domestic product of about $22 billion, the Asian Development Bank estimates.

    India and China have been the main investors in Nepal, accounting for 37% and 14% of investment commitments, respectively, over the past 30 years. In fiscal year 2015, China accounted for 23% of pledged investments compared with 15% from India.

    FDI has played a relatively small role in Nepal’s economy, one of the world’s least developed nations. FDI inflows to Nepal between 2011 and 2015 amounted to $339.8 million, compared with $2.96 billion for Laos, another poor landlocked mountainous Asian country with high hydropower potential, according to the UN Conference on Trade and Development.

    Missed opportunites

    Laos, unlike Nepal, has succeeded in tapping its energy potential. By the end of 2015, 38 power plants have been built in Laos at an estimated cost of $10 billion with a total capacity to generate 6,265 megawatts, of which 80% is exported to neighboring Thailand, according to official data.

    Nepal, which has an estimated 42,000 MW of commercially feasible hydropower potential, only has a current total capacity of less than 800 MW, not enough to meet domestic demand. Only 40% of the population has access to electricity.

    “Supply is still insufficient,” said Neupane. “Industrial demand is like 600-700 MW, and with household demand the total is like 1,200-1,300 MW. Now the industries are just asking to have a power supply for 12 hours a day in Kathmandu, but the government can’t do it.”

    Recent Nepalese governments have been more concerned about staying in power and coping with a difficult political and constitutional transition rather than with building infrastructure and offering more investment incentives.

    The political transition appeared to reach a watershed in September 2015 with the promulgation of the new constitution, creating a democratic federation. But the approval of the constitution, after eight years of deliberations, sparked protests among Nepal’s ethnic Madhesi minority group in the south. They objected to the boundaries of the new federal districts created by the charter, which they claimed would not adequately represent them. The Madhesi, who have strong ethnic and cultural ties with India, blockaded trade with India, which accounts for two-thirds of Nepal’s imports and exports, for almost five months.

    Alleged mishandling of the blockade forced Prime Minister Khadga Prasad Oli to resign in July, after only nine months in power. He was replaced by Pushpa Kamal Dahal, of the Communist Party of Nepal, who will only serve a nine-month term under a power-sharing agreement with his coalition partner, the Nepali Congress Party. Sher Bahadur Deuba is scheduled to replace him for another nine-month term.

    The Madhesi protest, which can only be resolved through a constitutional amendment if Kathmandu wants to avoid another trade blockade, is just one indication that the new constitution has not ushered in political stability. “Even with the new constitution it will take two or three years for it to be implemented,” said Damir Cosic, country economist for the World Bank in Nepal. “The transition has been for two decades and is on-going.”

    Political obstacles

    But there are measures a Nepalese government could still take to improve the investment climate. “The big issue that has always been highlighted as having potential is the hydropower,” Cosic said. “They have signed some big projects, but then quickly you get into the politics of it.”

    Nepal has signed project development agreements with the GMR Group of India to develop the 900 MW Upper Karnali hydropower project and with SJVN Ltd of India for the 900 MW Arun III plant.

    Both projects await completion of financial details. “The Arun III should be [closed] in November,” said Maha Prasad Adhikari, the head of IBN that is overseeing the projects. “SJVN is more comfortable because they are a government enterprise, so they have the government commitment to finance it.”

    The Upper Karnali plant would export 88% of its power to India, while Arun III would export 79% there, with the rest sold to the domestic grid. But because of the recent trade disruption with India, it is unlikely these big projects will proceed soon.

    Bhutan, Nepal’s landlocked mountainous neighbor to the east, has recently signed and implemented hydropower projects to export electricity to India. Nepal’s total demand for electricity is forecast to reach about 3,000 MW by 2020, whereas India’s has projected in its next five-year plan a 50,000 MW energy deficit.

    While India is the obvious target for Nepal’s potentially vast power exports, China is also entering Nepal’s hydropower sector. Sino Hydro Sagamatha Power, for example, on Sept. 25 launched the first phase of a 50MW power plant in Upper Marsyangdi. The 12 billion rupee-plant took 43 months to build and could be linked to Nepal’s national electricity grid as early as October. By Nepalese standards, the project has been completed in record time, with only one major labor strike.

    Labor unrest has been a big problem for Nepal, which has surpassed only Bangladesh in terms of the number of labor strikes per year in the South Asian region. A proposed new labor act would make it more difficult for the politically powerful trade unions to block production.

    Stronger FDI guarantees

    Parliament is also considering amendments to allow foreign private equity and venture capital companies to operate in Nepal, while guaranteeing that tax incentives for FDI are not changed every fiscal year.

    “In this [amended] act we have provisioned that all FDI incentives will be there for the long term, at least five years,” said Neupane.”Tax incentives, duty waivers, other incentives, whatever incentives they are given should be permanent, not changed in the yearly budget of the finance minister.”

    The World Bank has suggested that the government concentrate its legislative initiatives on fixing its energy sector first, given Nepal’s vast hydropower potential.

    “It takes a slew of transformational sectoral reforms for you to reorganize your energy sector. There needs to be wholesale reform,” Cosic said. “In hydropower, you need a success story. Without reforms, investment in hydropower is not going to take off on a transformative path.”

    Another sector that holds promise for FDI is the cement industry. Nepal has plenty of limestone reserves and demand for cement is soaring because of the need to rebuild structures damaged by the 2015 earthquakes. Government subsidies for housing reconstruction, which were delayed by the trade blockade, have only begun to be distributed during the current fiscal year.

    There are four “mega cement projects” approved by the IBN. Investors include India’s Reliance Infrastructure, China’s Huaxin Cement, Hong Kong’s Hongxi and Nigeria’s Dangote Group, although the fate of the projects remain uncertain. Some 60 local cement companies are opposing the big foreign projects because of their competitive threat.

    Close links between businessmen and politicians remain another obstacle to FDI, said Sujeev Shakya, founder and chief executive of Beed Consult Company and author of “Unleashing Nepal,” a book about the country’s economic challenges. Nepali businessmen are members of parliament and sit on powerful government economic policymaking committees.

    Protectionist sentiment

    “Nepal’s private sector is very insecure. They want to create an insulated, protectionist world that’s North Korea inspired,” Shakya said, noting how international companies, such as the advertising agency J. Walter Thomson, Maersk and DHL initially faced problems in setting up offices in Nepal.

    The Nepal Bar Association is reportedly opposing the entry of the international accounting agencies Deloitte and KPMG for similar reasons, according to banking sources. “They use nationalism as the tool to keep foreign investment away. It’s all about not allowing global forces to come in and operate,” said Shakya.

    Source :Nikkei Asian Review ( Peter Janssen, Contributing writer)