Coming in from abroad

  • Nepal's upcoming FDI policy looks to pose more hurdles to foreign investment in sectors like infrastructure
- Sushila Subedi
Coming in from abroad

May 22, 2014-

Nepal’s proposed Foreign Direct Investment (FDI) policy has caused more controversies before even generating any economic benefit to the nation. This has been primarily due to the lack of nuance and skill from policymakers in the government and the bureaucracy. The recently proposed FDI Policy 2014 is discouraging—the small amount of FDI and the few small market enterprises (SME) allowed look to severely hurt the purpose of opening up the Nepali market to foreign investment. The cap on FDI, which the policy is proposing, is not adequate and will discourage future investment climate perspectives in Nepal.

However, instead of raising the FDI cap, the Government of Nepal would do better to adopt a more liberal economic policy, at least for the next two decades as per international practices. Whether Nepal targets East Asian or Western investors, a firm economic policy is essential, especially if investment is targeting infrastructure that will be sustainable, such as in hydropower generation.

FDI and infrastructure

The key to Nepal’s long-term economic success will depend on FDI and infrastructure development as well as effective market competition for economic growth and efficiency.  However, there is much work the government must do to build a climate conducive to FDI and local investment in small and large infrastructure development projects.

For long, foreign investors have been keen on investing in renewable energy production by means of hydropower. Various stakeholders have prepared and discussed many proposals on energy production, especially given Nepal’s perennial loadshedding woes. However, in the name of FDI, the government is taking a step back, despite decades-long efforts from the private sectors and entrepreneurs to attract FDI. The efforts of private actors have failed mostly because of government policymakers’ myopic vision.  Consequently, the flow of FDI since the 90s has not improved.

For almost two decades, Nepal has been struggling to unbundle its electricity market and build better, more efficient transmission lines. Now, even the Nepal Electricity Authority (NEA) monopoly is running the risk of investment through power purchase agreement (PPA) proceedings against power developers. In this way, the largest sources of FDI, ie, external financing on energy, are on the edge of confusion on whether to invest in energy generation in Nepal.

Nepal, therefore, needs to extend a broad policy to attract investment for other infrastructure development as well as agro or tourism business or even the mining sector. On the other hand, to narrow down the ambiguity on FDI policies, the government needs to unbundle generation, transmission and supply in the energy sector by the ending the NEA’s monopoly and restoring faith among investors. Additionally, the state must harmonise a regulatory framework, at least within South Asia, and then with other market players.

The government, therefore, should have the courage to provide not only provide hydropower but also other sectors for FDI as the state has the right of guarantee to repatriate all profits and investments. However, there must be guarantees for a reduction of taxes on goods imported by investors along guarantees against nationalisation.

Nepal needs foreign private investment for infrastructure development, economic prosperity and growth. Despite already achieving some of these goals, there are still some barriers to private sector investment. Concerning power generation, the recently proposed FDI policy does not address the problem. A recent statement from the NEA, saying that it ‘is not mandatory to sign PPAs with specific generators’ deals a great blow to the expectation of investors and developers. A very odd situation faces the NEA, where it retains a monopoly on transmission and the supply market while at the same time, it has rejected purchasing energy from power generation companies even when the country suffers major power cuts every day.  

Evaluating private investors

FDI would address difficulties related to the measurement of performance efficiency due to a lack of competitive market forces, which could be used as yardstick for the assessment of private investors. Additionally, the price of wholesale energy traded to downstream markets should be subject to regulation to ensure fair procurement procedures and determine relevant market prices.

This can be done by first providing easy access to the flow of FDI within the country and later, regulated endorsements that can help prod the country towards economic prosperity. Our immediate neighbors—China and the Indian state Gujarat—have been sharing success stories on FDI for long.  Similarly, China received FDI from Asian nations as well as western countries in the 90s and that period played a very significant role in helping China lead the global market economically.

Therefore, the proposed FDI Policy must introduce profit and risk mitigation mechanisms in order to assure private sector investment. In addition, the government should build necessary arrangements in support of projects carried out by FDI and injected into local projects. In the meantime, in order to avoid disputes related to private investment in infrastructure, a clear and detailed regulatory framework that is independent of the policy on the FDI policy 2014 is required.

Subedi is an associate consultant specialising in foreign private investment

Published: 23-05-2014 08:47

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