Special Report

Foreign Investment in Nepal

Cobweb of Foreign Investment In Nepal

 If Nepal is an attractive place to invest in, why are not the foreign investors streaming into Nepal? Ask that question to high placed government officers and pat comes their rebuttal. Unilever, Colgate Palmolive, and Dabur India are some of the impressive names that they cite as foreign investors doing good business in Nepal.

That is not all. Hyatt International, that operates an international chain of hotels, is setting up a deluxe hotel in Kathmandu. US and Scandinavian investors have been developing two hydropower projects - at Bhote Koshi and Khimti rivers. Birla Group of India is preparing to set up a cement factory near Surkhet in the mid-western development region.

If all the foreign investors involved in various sectors of Nepali economy - from tea to paints, garments to cigarettes and liquor to hotels - are considered, the list would be really a very long one. The Department of Industry (DoI) in its annual publication "Industrial Statistics" shows that by mid-April 1999, altogether 499 projects were approved for foreign investment amounting to the equivalent of Rs. 13252 million. The total project cost in those projects is Rs. 60436 million, according to DoI.

Viewed in isolation, these may seem positive signals. Hence the complacency among the bureaucrats. But there also exist cases that are sending some early warning signals (EWS), which if not attended to in time, may prove disastrous for the Nepali economy.

Look at the steady decline over the recent years in the net amount that has been flowing into the country as foreign direct investment (FDI). Two companies (Kodak Nepal and Nepal Battery) have stated in unequivocal terms that if the situation were not improved they would consider packing up from here. On top of these, it is reported that a number of interested foreign investors (e.g. Reynolds - the ball pen makers, Atlas - the bicycle makers and Jain Tubes - the tube makers) have shelved their ideas of investing in Nepal for one reason or the other.

These indicate to two facts: First, the country has not marketed itself as an attractive destination for investments. And second, those investors who seek to invest here are driven away by some initial bad experiences. Marketing seems to be limited to hosting investment promotional meetings and sending delegations abroad. The export promotion meeting held recently in Kathmandu was one such meeting that tried to lure in foreign investors to invest in industries meant to produce goods for exports. Though claimed to be a success by many, the real effects of this meeting are to be seen only in the future.

But the result of one such previous meeting was not so encouraging. Held in 1992, soon after the democratically elected government started with the policy of economic liberalization, the meeting had aroused overwhelmingly positive response initially. Narendra Kumar Basnyat, the incumbent president of Nepal-USA Chamber of Commerce and Industry (NUSACCI) recalls that nearly 125 letters of intent were issued during the meeting itself and foreign investment totaling around US$ 730 million was committed. But that investment has not materialized, points out Basnyat blaming the lack of effective follow up activities from the government for the failure.

Narendra Basnyat

The initial bad experience as learnt about Reynolds, is related with the Environmental Impact Assessment (EIA), which is said to take over one year to complete for a company already existing here. For an outsider it would take even more than that, point out some foreign investors calling for some rethinking about the procedures in this regard.

The function of investment promotion is entrusted by the government to Industrial Promotion Board (IPB) set up under the provision of existing Industrial Enterprise Act, and is supposed to be a very high level body as it is headed by the minister in charge of industry portfolio. But Basnyat, who has served as a senior level bureaucrat in HMG and headed the Foreign Investment Promotion Division of the Ministry of Industry from 1998 to 1992, points out that the IPB has not been effective as it has been functioning more as a licensing authority rather than as a promotional body.

T.V Ramaswamy

Pawan Jagetia, Finance Director of Gorkha Brewery Ltd., a joint venture with Carlsberg A/S of Denmark, says, though the government of Nepal has been trying to attract foreign investment into the country, what is felt lacking is a "concerted effort" toward this. In his view though there are efforts being made to improve the laws from time to time, these improvements and new opportunities developed are not publicized among the target groups.

One such opportunity is provided by Nepal-India Treaty of Trade signed in 1997 providing a free access to India for almost every product with "Made in Nepal" label. The treaty was regarded as a major breakthrough for the virtually India-locked Nepali economy. It was expected that with the treaty foreigners would flock into Nepal to locate their manufacturing facilities here to cater to the Indian market that was till then very much closed to outside world. But that has not happened, because the opportunity was not publicized enough in the initial years among the would-be investors. And the advantage the treaty gave Nepal in 1997 has now substantially reduced for two reasons.

First, India has been increasingly opening its economy to outside world and second, India has also been going on signing treaties with other neighbouring countries allowing their products similar concessional entry into India as enjoyed by Nepali products. India already has similar special trading relations with Bhutan as with Nepal. On top of it, India has already signed a special trade treaty with Sri Lanka and is said to be preparing to sign similar one with Bangladesh. These developments indicate that Nepal is fast losing time in exploiting the opportunity provided by the Nepal-India treaty.

However, Nepal still has one advantage, which has to be marketed vigorously right now. Whatever foreign investment flows into India, the manufacturing units are most unlikely to be located in the Northern Indian states like Bihar, UP or West Bengal, thanks to the situation there. To cater to these markets, even Indian companies would like to set up their factories in Nepal if they are convinced that the facilities here are better.

That gives India as a market where Nepal has to go hunting for potential foreign investors. Jagetia thinks that big MNCs like General Motors are not likely to come to Nepal to produce for Indian markets. However, he also points out that there are foreign investors in other countries also who would love to come to Nepal to invest if they get right opportunities. "I have heard of interest shown by some Thai investors, but they are said to be waiting for good proposal from Nepali businessmen", he says. Similarly interested investors may be found in many other countries as well because they love Nepal for one reason or the other. For example, the British love Nepal for the Gurkha connection, and the Japanese for this being the birthplace of Lord Buddha. The only thing required is marketing at specified target groups.

T.K Gupta

Another critical aspect in inviting foreign investment is the experience of existing MNCs in Nepal. In this count, almost all of the CEOs of MNC units in Nepal describe the environment here as positive for foreign investment. However they are critical of the bureaucratic attitude here because, as one of them says on condition of anonymity, though the policies and rules are quite favorable for foreign investment, the bureaucrats are mostly found trying to look for "excuses not to let things go positively." But, TV Ramaswamy, the Managing Director of Surya Tobacco Company (P) Ltd. (a joint venture with ITC Ltd. of India and BAT) and TK Gupta, the General Manager of Dabur Nepal (P) Ltd. (a joint venture with Dabur India Ltd. of India) opine that the bureaucrats have not favored or unfavored the foreign or domestic investors. Rather they find Nepali bureaucracy more easily "reachable". Being a small country, the bureaucracy also is very small, and it is easy to contact them to "present your case", they think. Director General of DoI Bharat B Thapa also says that the senior level offices are always ready to meet the foreign investors any time they wish to so that their grievances are sorted out immediately. "Nepal at least has not produced complicated laws like in India. But what is needed is implementation and interpretation to suit good positive economic climate", say Ramaswamy. These could be the other selling points for Nepal to market itself among the would of investors, it is pointed out.

However, the foreign investors have complaints about frequent strikes and, similarly, frequent holidays. The government announces national holidays for one reason or the other, but it is not made clear whether these holidays are for the industrial units as well. This uncertainty has been resulting int frequent disputes between the management and workers, which can be easily avoided if the authorities just bothered to make it clear in their announcements whether these holidays are also for the industrial workers or not. Some foreign investors also demand that the number of such holidays be fixed quite in advance.

Vinod Bhandari

Regarding the labour and other law, the unit most severely hit is perhaps Nepal Battery Ltd., a joint venture initially with Union Carbide (India) and now with Eveready Batteries. The company has a capacity to produce 60 million units of dry cell batteries, and was doing so well that its General Manager was awarded the Best Manager of the Year award of 1989 by Management Association of Nepal (MAN). But the company now has experienced steady decline in sales and profits for three consecutive years, and is said to be already in loss this fiscal year.

Explaining the reasons for the decline, Vinod Bhandari, who received the MAN award in 1989, and has now been deputed by Eveready Battery to explore possibilities, if any, to revive Nepal Battery back to a healthy position, attributes the present condition of the company to basically two factors: smuggled batteries and labour problems. "Smuggled batteries are being sold in the market for a price that is cheaper than landed cost of raw material", says Bhandari. According to him, this issue is related with the complaiance of law. "Whoever is complying with the law and paying all the taxes applicable is at a disadvantage", he says. Similarly, he also complains of arbitrary interpretation of labour law. According to him, ten years back it was clear that Indians required work permit, now it is not. Similarly, the company has a case pending in the labour court about whether personnel deputed from the parent company are entitled for bonus or not. Likewise, there is also a dispute going on to decide whether the managers recruited locally are management staff and so whether they can sign and present a charter of demand to the management. "The law categorises Kamdar (labour) and Mahaprabandhak (General Manager) which is very clear. But it also has Karmachari (staff), and it is not clear whether they belong to the labour or management. Hence the dispute", explains Bhandari. Now there has been set up a tribunal to decide on the case, and its decision has to be final, without a scope for appeal, he laments.

Joint venture companies also complain of the restriction on them to import final products from their parent companies to sell in Nepal. As it is not possible to produce locally all the products of their group, because the market volume here is small, they argue that they be permitted to import such goods and sell so that the market for such goods would be created and expanded. They claim that the law does not restrict them from doing so, but the authorities do not permit it. Director General of DoI, Bharat Bahadur Thapa says this issue is handled by Ministry of Commerce, not by DoI, and the concern of DoI is to promote products made in Nepal, not imports. Most affected by this policy are Nepal Lever and Nepal Battery. While STC is importing State Express on its own, Dabur Nepal has set up a subsidiary marketing company and carrying on. Nepal Lever, in its annual report every year, says its proposal for setting up a "robust" marketing system in the country is still pending with the government.

Pawan Jagetia

Jagetia says, Nepal has better chances to attract foreign investment because the laws here are not so complex as in India, and there are no such internal conflicts as in Sri Lanka or Pakistan. Basnyat also points out the good policy framework as the strength. Together with the respect that the country has earned in the world, the fact of being a small country with easily accessible bureaucracy give Nepal a good opportunity to attract foreign investment. The time now is also to publicize the good business that units like Dabur and Nepal Liver are doing here. In domestic front, as Basnyat suggests it would be a good idea to set up a really high level Board of Investment (BoI) under the chairmanship of the Prime Minister to give a message to the investors that Nepal is really serious in this regard.

Foreign Direct Investment
(Rs. in million)

Source: Nepal Rastra Bank

"We’re doing our best to speed up the process"

Director General, Department of Industry

How long will the Indo-Nepal Treaty of Trade give a comparative advantage to Nepal as other countries too are getting similar treaties with India?

So far, we have not targeted South Indian market. Our target markets at present are Northern Indian states Uttar Pradesh and Bihar. There is no way that a country like Sri Lanka can target these markets. We have competitive advantage there. Also, the treaties with Bangladesh and Sri Lanka could be limited to only a few commodities. The treaty with us is a general one.

Various problems in exporting to India have been cropping up. What is being done on these respects?

When you work together difficulties do arise. But we have more or less been solving these difficulties along the way. We have to understand that the goods we send into the Indian market are also manufactured by Indian companies and therefore it is natural that the Indian manufacturers lobby against our products going there. These problems are related with the Nepal-India trate treaty. The Inter Governmental Council (IGC), in which the commerce secretarieates of both countries meet regularly, looks into any problem that crop up in implementation of the treaty provisions. A meeting of the committee was held about two months back in Delhi and the problem of ghee export has been solved. Looking at the developments so far, we believe that the Kodak issue also will be resolved pretty soon.

It is said that although the policies in Nepal are sound, implementation is poor. What do you have to say about that?

We make it a point to ask investors as to the difficulties they are facing and what improvement can be made in the policy for their benefit. We are open and ready to make all possible improvements. Regarding the procedures for investment, we have made manuals for the benefit of the investors, informing them as to how they should apply and all that. If you are talking about minute difficulties faced during the process, then it is different question. But there are no real problems as such.

One of the problems cited by MNCs operating in Nepal is related with duty-drawback. One such company’s duty-drawback is said to be in the tune of Rs. 100 million. Why is it so?

First of all, none of company’s duty-drawback has run into even Rs. 50 million. The law says that the exporter has to apply for duty drawback within a year of the export. In trying to lodge the application within the stipulated time, they fail to present all the required documents. HMG should not be blamed for delays caused by such reasons. But we are doing what we can to speed up the process from our side and make all possible improvements. To make it more simple, we are considering a flat rate for a few of our major export items like carpet and garment.

MNCs also complain that they are not allowed to bring in products of various ranges from the parent company while these products make their entry illegally.

We believe in promoting products that are being manufactured here in Nepal. It is the Ministry of Commerce rather than the Department of Industry that looks into whether or not MNCs should be allowed to be involved in domestic trade activities. About illegal trade, we are taking all measures within our capacity to stop that. We refer the cases to the Department of Revenue Investigation. MNCs have to be able to compete with goods coming in through the proper system. We cannot protect them, they will have to show their competitive strength.

Negative attitude of the bureaucrats is blamed for foreign investors becoming shy about investing in Nepal. What is your opinion?

There are two parts to this. First, because of our lack of exposure, there would be a gap between our behavious and that expected by investors. There are people in the bureaucracy who were brought up under previous regime of restricted business. Improve-ments are definitely required.

The One Window system is also a problem because in practice, the investor is required to go through various systems or windows.

There is no doubt that improvements have to be made. We cannot hide from the facts. As a foreign investment promoting agency, if we are concerned about bringing in maximum amount of foreign investment, the Customs Department has to collect maximum revenue. It cannot be said that the One Window System has been able to perform exactly as it was expected to do. We have to reorient ourselves. Leaving aside duty drawback let’s take other cases. For example, repatriation of dividend. These cases no longer need to be taken to the committee. Decisions are taken on the spot.

Do you feel that there has been enough marketing in bringing in foreign investment?

To be honest, I don’t think there has been enough marketing, although it has been done to a certain extent. In 1992 an Investment Forum was organized, which helped to bring investments to a certain extent. We are organizing an export oriented investment forum this year (April 5-7), which might help in FDIs coming in. But we really have not been successful in doing proper and enough marketing. We have not been able to do anything other than providing information to investors who have themselves come forward showing interest on their own. 

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