Cover

April, 2003

Cover Story

Guiding FDI into Nepal

Tired of facing repeated failures in its efforts to lure foreign investment, Nepal is now pinning high hopes on the an Investors’ Guide prepared by United Nations Conference on Trade and Development (UNCTAD) and International Chamber of Commerce (ICC). So much so that the secretary in the Ministry of Industry, Commerce and Supplies was quoted by newspapers as telling a public meeting early March that because of the Guide the foreign investors would now start flocking into Nepal.

Such optimism may look far fetched, but it also indicates to the desperate need for a credible document that can be used in marketing Nepal as a good investment destination. Scheduled to be launched on March 25 at Kathmandu and then at Delhi, the Guide is the first such comprehensive single document that may help the foreign investors with basic information about Nepal and also the idea about the possible sources of further information they may need before making the decision. Being prepared by an independent party, the new Guide has high credibility value. Though there also were a number of other guides prepared in the past, the Director General of Department of Industry Bharat Bahadur Thapa (see interview in the box) regards them as only “statements of areas of opportunities”, not comprehensive guides.

Another notable aspect about this latest exercise of Guide preparation is the concurrent UNCTAD project in which the investment policies of Nepal are being reviewed. Though the Investment Policy Review (IPR) has been learnt to be already completed and the draft report is already submitted to the Nepali government authorities, both UNCTAD and Nepali government officers are requesting to keep the recommendations of the report secret.

In the past, Nepali government had made several attempts, in addition to preparing guides, to lure foreign investment by, for example, organizing some promotional meetings. Among the two recent such efforts was the Export Promotion Meeting of April 2000. Since it was focused particularly on the trade envoys of Nepal, this meeting was more an orientation seminar for the trade envoys than an investors’ meet, comment some participants of the Meet. Though there also were some business persons other than the trade envoys as participants, such businesspersons were mostly those interested in trading (exporter-importers and travel agencies) than in investing long-term capital to create productive capacity in Nepal.

More extensive was the Nepal Investment Forum meeting of 1992, and it was hailed as something as a grand success by the authorities then. According to Narendra Basnyat, who is now Chairman of Himalayan Distillery Ltd. and was the Chief of the Foreign Investment Promotion Division (FIPD) of the Ministry of Industry when the meeting was held, some 300 project proposals were developed and sold during the meeting which was participated in by investors from 36 countries including Europe, USA and Asia. He also says that 130 Memorandum of Understanding (MOU) were signed during the meeting and an investment of US $ 730 million was committed. “But there was no sufficient follow up on the projects”, he complains explaining why most of these project proposals were not materialized. For this he blames the ensuing political instability of the mid-90s. But he also blames the policy of the then government which scrapped the FIPD, the body that was specialized in marketing the country as foreign investment destination.

After scrapping of the FIPD, the Department of Industry (DOI) was entrusted the responsibility of foreign investment promotion. The logic was that as the licensing system and many other controlling functions of DOI were removed under the Industrial Policy introduced in 1992, DOI’s work load was substantially reduced. Hence it needed some other work. But as the experience of the last one decade shows, the Department is still bogged down to administrative work with little resources left for promotional work. Also the diagrammatic presentation on this page about the critical path that the FDI has to take in Nepal gives some indication about the workload that DoI is still carrying.

More terrible news was broken by the then British Ambassador in a private party a couple of years ago. The investment promotion meeting that he had arranged in London focusing on a few important and interested investors was cancelled after the participants waited till the last minute for the representatives of HMG to turn up at the meeting venue. The blame again went to the political instability that the country was facing.

If similar tendency on the part of the government is continued, also the new Guide will not be able to be of much help, think the experts.

More important constraint seems to lie in the policy and legal regime of the country. As an article by prominent corporate lawyer Bharat Raj Uprety published in this issue of New Business Age has chronicled, the foreign investor has to face considerable difficulty in getting even the visa. Every investor may not be interested to frequently ask DoI to use its good offices.

Uprety’s story also provides the answer to the question why majority of foreign investors in Nepal are known as “lifestyle investors” or “tourist investors”. These investors are individuals who have invested money in Nepal less because they have some business ambitions, but more because such investment entitles them to non-tourist visa which does away with the hassle of frequent trips to the visa office for renewing the tourist visa. Except a few investors such as in the banks (Standard Chartered), five star hotels (Holiday Inn, Hyatt), the personal care products (Uniliver and Colgate-Palmolive), aerated drinks (Coca Cola and Pepsi Cola), Ayurvedic preparations (Dabur), liquor and beer (UB Group, Carlsberg), almost all of the foreign investors in Nepal seem to be individuals, not corporate bodies.

Another important characteristic of FDI in Nepal seems to be its concentration mainly in low-technology, labour intensive areas.

Learning

The process of preparing the guide proved to be a learning experience for Nepal, as Bharat Bahadur Thapa, the Director General of the Department of Industry says. And the learnings were in more than one regard.

First, was about preparing a guide itself. Though there were a number of investors’ guides prepared also in the past, none of them were guides in fact, as Thapa describes them.

On of the major drawbacks in the previous guides was that they were speaking only about the good aspects, sometimes even exaggerating the things. The example is water resource. All the previous guides say Nepal has shortage of power despite the huge potentials. They say that the government has come up with a very fantastic policy to encourage foreign investment in power sector. Then why would not anyone come and invest in Nepal? This is not explained by any of the previous guides, but the new guide has tried to address this concern. More than that, the new guide also provides an account of the experience of the existing investors in doing business in Nepal.

In water resources, one previous guide has gone to the extent of identifying Bhutan as a market where Nepal can export power to. “Any foreign investor who knows that Bhutan is exporting huge quantity of hydroelectricity to India would immediately declare the Guidebook as a joke book”, commented one member of the team while reviewing the literature in a meeting of the consultants which also consisted a member from New Business Age.

Corruption

One very tricky issue to handle while preparing the guide was the question of corruption. While the bureaucrats in Nepal were very much afraid to accept that corruption is rampant in the country, the national and international media were frequently reporting about the problem of corruption in Nepal. Meanwhile, while the report was being finalized, the Commission for Investigation into the Abuse of Authority (CIAA) started cracking down on some senior bureaucrats and political leaders on the charge of corruption. The Transparency International, the global watchdog on corruption, also came out with a study report assigning scores for level of corruption in different fields of Nepal's life.

The Nepal-based study team went by the policy of not lying about the extent of corruption in the country and trying to give as an objective account of the situation as possible on the basis of the available literature. At the same time it also gave as detailed account of the effort being made to fight and control corruption as possible. One tricky situation that the Nepali team encountered was when it contacted an officer of the CIAA and sought his reaction to the saying that the credibility of CIAA would depend on how the court decides on the cases that CIAA filed recently at the special court against the senior bureaucrats and the political leaders. The CIAA officer quipped, “It can also be said that the court decision will also reflect the credibility of the court.”

Timing Problem

The time for preparation of the UNCTAD-ICC guide happened to be characterized by two abnormal situations. First, it was the time immediately after the 2002 amendment in Nepal-India Trade Treaty which reduced or removed some of the liberal clauses that were there in the treaty. Though the amendment was mainly in a few areas (e.g. vegetable ghee, acrylic yarn, copper wire and zinc oxide), the way the things proceeded during the December 2001-March 2002 period, had scared the would-be investors who were pinning their hopes on the access to India market. Thus one very important marketing point of Nepal to attract FDI was lost. The ongoing Maoist insurgency had further complicated the situation.

However, the announcement made by the Maoists in December 2002 came as a very positive development which has been used prominently in the guide though it could not incorporate the later developments of cease-fire in the insurgency and the on-going peace process.

This means the Nepali government and the private sector need to supplement the guide with a separate document explaining the most recent developments. Therefore, as Vishwas Govitrikar, the coordinator of the guide preparation project says, the sooner the guide is used by Nepal, the better will be its efficacy. Fast amendments in the existing investment policy as suggested by UNCTAD under its another project will make the marketing job easier and more effective.

“We're ready to improve”

Bharat Bahadur Thapa
Director General, Department of Industry

How do you evaluate the UNCTAD-ICC Guide for FDI into Nepal?

This is a completely new thing for Nepal that UNCTAD & ICC prepared this guide. Since they have already prepared investment guides to some five other countries, they have a more or less fixed template for such guide. We have heard of success stories of these guides in other countries. So, I hope this will have similar impact also here.

Naturally, we in the government bureaucracy were not comfortable initially with certain contents of the guide as they were too critical of the government. However, we now regard it as something natural for a guide prepared by an independent party. I think, this makes the guide more credible, though we still feel that some of the information contained in it would not have been necessary.

For example, which contents do you feel was not necessary?

Particularly the reference about the Royal Palace incident of June 2001. I had initially questioned the need to include it in the guide when Mr. Govitrikar asked for my comments on the draft. He explained me that since the whole world knew about the incidence and some important people may still have some apprehensions about the repercussions of the incident, it would be better to explain the situation. So I left it to his professional judgment. After all, it is not a document prepared by HMG. In fact we too are learning from it.

So you are satisfied with the content.

Yes, I’m satisfied. But I must also note it here that since December 2002, when the guide was finalized, and now there have been substantial changes in the situation in Nepal. Since the guide is already printed, my concern now as the director of DOI is how to disseminate the information about the latest positive turn in the situation.

How was the participation of the government in the preparation of the guide?

There has been good participation from both the government and the private sector. There were separate workshops for representatives of both private sector and the government. There also was one workshop in which the representatives from both the private sector and the government were participating together. Moreover, from the government it was not only the DOI that participated. There were representatives from across almost all of the agencies concerned of the government. However, this is a guide entirely by UNCTAD and ICC. We only provided the input and feedback. They have accommodated these inputs and feedback according to their own professional judgment.

Do you think that the guide has objectively presented the facts about Nepal or there is any biasedness against the government?

I see it as a complete guide. The rest depends on personal interpretation. I think they have presented those information that they found from various sources.

What improvements do you see in the new guide over the other such guides about Nepal?

I don’t see any such comprehensive investor's guide ever prepared for Nepal. There was one by the EU, but that was particularly targeted for the European investors.

But there were some guides by the Ministry of Industry as well.

Also these were not comprehensive guides. They were just description of some investment opportunities present in Nepal. This latest one is different.

Do you see anything else that would have been better if included in the guide?

I wish we could do something to incorporate the recent changes that have happened in the investment climate in Nepal. Now that the book is already printed we have to look for some other measures. Secondly, I wish they (UNCTAD-ICC) could somehow help us to bring about improvements in those areas where the guide has shown our weaknesses. We are ready to improve, but if we go on our own way it may not meet the international standard. Their international exposure may be a better resource to utilize.

How does the government plan to use this new guide?

We would like to use it as a marketing document. It is being launched also in Delhi. As India is a major investment source in Nepal, this launch in Delhi holds special significance. We also intend to render this guide also in other languages, such as Japanese to help the Japanese investors to make their decision.

“Sooner it is used, the better”

Vishwas Govitrikar
Project Coordinator, UNCTAD

How is this Nepal Guide different from other similar Guides that UNCTAD and you have prepared for the other countries?

The Nepal guide has several new features that the previous guides did not. To mention two of them, the initial page ‘Three good reasons to invest in Nepal’ and the 4 FDI stories. These features make the guide more investor-friendly.

How successful have the other guides been in achieving the objective of increasing foreign investment flow into the country?

The success of the guides in attracting more FDI is effectively impossible to measure. Some reasons: a) The guide is no more than one tool in the Government’s tool-chest. b) Much depends on how the Government uses the tool. c) FDI flows are determined not just by Government efforts but by external factors such as corporate strategies, the efforts (or lack thereof) of competing locations, etc.

How do you describe your experience in preparing the Nepal guide?

Very positive.

Are you satisfied with the content of the guide? How do you say that this guide will really help in attracting more foreign investment in Nepal?

Within the limits of our resources, yes, I’m by and large satisfied with the contents. The guide will help by raising awareness of Nepal as a location with potential. This is essentially a matter of using the guide effectively, in accordance with whatever strategy the Government develops – targeting, for example. UNCTAD will help by distributing some 2,000 guides using a database we’ve developed for this project. It includes some 700 large multinationals, as well as a number of business associations, development agencies, etc. worldwide. In addition, we will (with Government participation) do a regional launch in New Delhi on March 28th, hosted by FICCI.

Here in Nepal we feel that ours is a very fantastic country to do all sorts of business, such as IT, hydropower, tourism, high value agriculture etc. For this reason, we think that the foreign investors should flock in. But they have not. How does the Guide address this concern?

There are basically two things a government needs to do if it wants to attract investment: improve its investment climate and make itself known to investors. As for improving the environment Nepal offers investors, the guide can play no more than an indirect role, by helping to focus dialogue between investors (current and potential) and the government. But when it comes to making itself known as a location that welcomes investors, the guide can help directly — and I’m sure it will.

On the basis of the experience you had while preparing the Guide, what specific suggestions do you make to the government of Nepal in improving the environment for foreign investment?

Since there was another UNCTAD project that ran concurrently with ours which had precisely this aim — to advise the government on improving the investment climate — I don’t think I need to offer any further suggestions. The review of Nepal’s investment policy has been concluded and the recommendations will be discussed at a seminar just before the guide is launched.

What do you suggest the government and the private sector of Nepal to get maximum advantage out of this new Guide?

This is really up to the Government and the private sector. But obviously there are some things they will want to consider. For example, does the Government want to use it for general awareness-raising purposes or in a more targeted campaign — or some combination of the two? As for the private sector, one possible use of the guide is for domestic investors looking for a foreign partner. A key thing to keep in mind is that the benefit from the guide is greater the sooner it is used, since it describes opportunities and conditions as of January 2003.

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