Ambiguities still a concern as government gears up for investment summit

  • Experts point at some contradictory provisions that can detract investors
- Rajesh Khanal, Kathmandu

Mar 25, 2019-

The first investment summit the government organised in March 2017 had ended on a high note, drawing investment commitment worth $13.5 billion from six countries.

But when it came to realisation, only a fraction of the commitment trickled in. That prompted the government and authorities concerned to figure out where things went wrong.

Some key issues like lack of reforms, byzantine regulations and corruption were identified.

This time, in the lead-up to the second Investment Summit scheduled for Friday and Saturday, the KP Sharma Oli administration introduced new legislation as part of an effort to bring about reforms and facilitate foreign direct investment.

Two key laws that were passed are Foreign Investment and Technology Transfer Act and the Public Private Partnership and Investment Act.

But there are concerns about contradictory provisions in FITTA, which experts say could hinder the investment flow into Nepal.

One of the contentious clauses concerns contract manufacturing operations by multinational companies.

The Foreign Investment Act says multinational companies can hire other firms only to produce accessories and supporting goods and that they cannot do so to produce finished goods.

Currently, numerous foreign investment firms are hiring contract manufacturers to produce finished goods for them. This has given the multinationals a comparative advantage due to various factors, including cheap labour, which lowers the production cost.

But with the introduction of FITTA, multinationals may not be able to hire other firms to produce finished goods, and this could be a setback for prospective investors.

Ravi KC, senior vice-president of Surya Nepal, said the provision could affect multinational companies.

“Multinational companies always seek to invest in areas where they find high advantage. Hiring firms to produce supporting items or finished goods is one of the ways to increase competitive advantage,” KC told the Post. “Not allowing multinationals to hire other firms for the finished goods may also adversely affect the country’s opportunity to link its production sector in the global value chain through contract manufacturing process.”     

However, the Ministry of Industry, Commerce and Supplies, said that multinational companies while making ancillaries and supporting goods via small and medium industries could help such domestic companies to grow.

“If multinational companies wish to contract small firms to produce the finished goods for them, foreign companies can do so by signing an agreement on technology transfer,” said Industry Secretary Yam Kumari Khatiwada.

FITTA has also vested immense power in Investment Board Nepal, the Ministry of Industry, Commerce and Supplies, the central bank and the federal government.

Although the new laws talk about one-stop solution for foreign investors, in many cases the firms need to get approval from various institutions--either in capital injection or technology transfer.  

For instance, FITTA allows the Industry Ministry to approve foreign direct investment of Rs5-Rs10 billion. On the other hand, the Public Private Partnership and Investment Act states that foreign investment worth more than Rs6 billion has to be approved by the Investment Board Nepal.

For a number of projects to be based in provinces, some clauses demand that investors take approval from the federal government, which may create unnecessary hassles for prospective investors.

Similarly, foreign investors need to undergo a labyrinthine process to get permission from the central bank to repatriate profit and to hire local partners for projects.  

“In a number of cases, the law talks about requiring companies to receive approval from the central bank even after getting the approval from the Investment Board of Nepal,” said Semanta Dahal, an advocate. “Improperly defined limit of the central bank could create confusion among investors.”

The law also has a provision that foreign companies that take permission from government agencies need to bring in investment within a set period of time.

Dahal said foreign companies that have to wait for capital generation might often need some time.

“When companies are not in a position to promptly manage the capital, they might abandon their plan to invest in the given timeframe even after receiving approval for the purpose,” he said.

Former finance minister Ram Sharan Mahat, a Nepali Congress leader, said there is a lack of clarity on oversight agencies and that it might discourage investors as they hesitate to pour their capital where there are more complexities.

“Unless some companies’ credibility is in question--or they are blacklisted--there should not be so many conditions while taking permission from multiple government authorities to invest in Nepal,” said Mahat.

A similar ambiguity is there in the laws concerning investment in the hydropower sector.

While FITTA allows the Investment Board to issue production licence for hydropower projects with capacity above 200 megawatt, the Electricity Act says the Ministry of Energy, Water Resources and Irrigation will issue licence for hydropower projects regardless of their production capacities.

The new laws were introduced with the aim to facilitate investors, but they seem to have complicated the matters more, said analysts.

The government has included more sectors--remittance companies, engineering service, education consultancy, travel agencies and number of farm products--in the negative list, thereby barring foreign investment in these sectors.

These sectors were included in the negative list at the last moment following pressure from some private entrepreneurs. The government has argued that including these sectors in the negative list would protect domestic firms.

FITTA is also silent on permitting the companies to issue primary shares to bring in equity capital via foreign stock exchange markets. This will hamper the companies’ long-term capital growth and could work as a detractor for investors.

In addition, companies wishing to issue debentures in the foreign capital market still need to receive permission from the central bank and Securities Board of Nepal to do so.

The laws are also silent when it comes to hedging rules. Hedging rules attempt to mitigate foreign exchange loss that foreign investors investing in Nepal may suffer due to devaluation of the Nepali currency. The amount of hedging premium has also not been fixed and is left for future negotiations, raising questions over the effectiveness of the hedging rules.

The holding companies also need to receive permissions from various government institutions when they offload their shares or repatriate their capital gains.

If domestic companies registered at the provincial level wish transfer of technology to them, they need the permission of both the federal and sub-national governments.

Time and again, investors have also expressed their concern about weak implementation of the intellectual property rights that involve rights on patent, trademark and design.

“However, the government seems to be least concerned as the new Act related to protection of intellectual property rights is yet to be materialised,” said Baniya. “Violation of copyright and patent right law in particular has long been an issue for multinational companies.”

Jyoti Baniya, a lawyer and president of the Consumer Welfare Protection Forum, said FITTA is more like corporate law as it focuses more on the grassroots business segment, such as education consultancy and remittance companies. “It has failed to target the prospect of country’s investment environment to welcome foreign capital,” he said.  

Last summit, China topped the list of countries pledging investments in Nepal. In the upcoming event too, China’s interest is quite visible, as it is sending more than 200 delegates.

So far, India has topped the list of countries from where Nepal receives foreign investment.

At the two-day summit, the government plans to showcase nearly 70 potential projects worth around $24 billion for foreign and domestic investors.

Published: 26-03-2019 06:30

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