Wednesday, October 26, 2011

Nepal-India Bilateral Investment Promotion and Protection Agreement (BIPPA) simplified

It was published in Republica, October 26, 2011, p.7. It is about Bilateral Investment Promotion and Protection Agreement (BIPPA), which was signed on October 21, 2011, between Nepal and India.

Nepal-India BIPPA simplified

There has been a lot of buzz about Bilateral Investment Promotion and Protection Agreement (BIPPA), which was signed on October 21, 2011, between Nepal and India. While some political leaders have censured the government on grounds of it being “anti national”, others have shied away from appreciating the signing of the agreement by this administration despite supporting the idea of BIPPA itself. Rarely has the interest of general public been so intense on a bilateral economic issue and support of private sector so high than now. Before breaking Nepal-India BIPPA down to the simplest terms, let me at the outset argue that most of the remonstrations have been outright illogical, misinformed, and pitched to score political points.

What’s BIPPA?

BIPPA is a legal instrument that establishes specific rights and obligations to meet the primary purpose of protecting foreign investments against discriminatory measures (i.e. policy inconsistencies) by the host state. To ensure protection and promotion of investments, and to encourage capital flows along with the commitment to credible liberal economic policies, countries typically enter into investment protection agreements like BIPPA. In principle, it ensures reciprocal encouragement, promotion and protection of investments, thus enabling conditions conducive to increase investment by investors.

It guarantees rights of foreign investors, and ensures them fair and equitable treatment, security, and dispute resolution mechanism. The contracting parties are obliged to treat investments at least as favorably as they do to domestic and third party foreign investments. In case of nationalization or expropriation of investment, nondiscriminatory compensation is guaranteed. Generally, compensation is equal to the market value of the investment expropriated (plus interest at ‘fair and equitable’ rate) “immediately before the expropriation or before the impending expropriation becomes public knowledge”. Investors are allowed to freely transfer returns to investment. Dispute resolution could happen both at the level of investors and a contracting party or two governments, i.e. both at investor-to-state level or state-to-state level.

Nepal-India BIPPA

While Nepal has already signed BIPPA with six countries (including India), India has signed such agreement with 80 countries (as of May 2011), out of which 70 BIPPAs have already come into force and the remaining are in the process of being enforced. Nepal signed its first BIPPA with France on May 2, 1983. It was followed by agreements with Germany (October 20, 1986), the UK (March 2, 1993), Mauritius (August 3, 1999), Finland (February 3, 2009) and India. In South Asia, India has BIPPA with Sri Lanka, Bangladesh and Nepal.

While a majority of the issues in the agreement between Nepal and India are similar to other BIPPAs signed internationally, a few provisions and scope of definitions have created confusion and led to misinformed debate. According to the BIPPA, the investments should “not be subjected to nationalization, expropriation or any other measure having similar effects except for reasons of public purpose in accordance with the law, on a non-discriminatory basis and against fair and equitable compensation”. To avert confusion, it specifically defines what constitute indirect expropriation (having an equivalent effect to direct expropriation without formal transfer of title or outright seizure) and how it is determined (a case-by-case, fact-based inquiry considering a set of relevant factors outlined in the agreement). Furthermore, in case of losses because of war, armed conflict, emergency or insurrection or riots, Indian investors should be treated and compensated as we do to our own investors or to third party investors. This addresses the confusion regarding if we will have to compensate for events internal to firms such as labor strikes and supply-side issues such as increase in cost (or decrease in profits or increase in losses) resulting from load-shedding.

Regarding compensation, if investors deserve one, then it will be equivalent to the “fair market value of the investment expropriated, immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier”. The investors, based on the laws of the host country, can ask for review of compensation being offered. Additionally, while the interpretation of these provisions is subject to contention, it should be realized the scope of the definition of these issues apply equally to investments in both countries. It is not applicable to compensation claims made before the enforcement of the agreement, which means that some Indian companies like UTL and Dabur Nepal cannot claim compensation for losses already inflicted upon their business.

The Nepal-India BIPPA remains in force for ten years and will be automatically extended thereafter unless one of the countries intends to terminate it.

FDI and employment

The overarching objective of BIPPA is to increase FDI inflows. On this respect, latest studies show that investment protection agreements like BIPPA indeed have positive impact on FDI, especially when it flows to low income countries from relatively high income and high exporting countries. The impact is higher in countries with weak domestic institutions because investors feel relatively more confident investing in the country following investment protection agreements. Regarding employment, there is evidence that, on average, foreign investors pay relatively higher wages and employ more workers than domestic counterparts in certain sectors, particularly manufacturing. We have already seen this to hold true in our case as well.

That being said, just because we singed BIPPA with India does not mean investors will flock to Nepal. The BIPPA has definitely given more confidence to Indian investors on investment protection and have shielded them from losses due to arbitrary policy changes. However, BIPPA is not panacea for all industrial ills and a substitute for real policy reform domestically that could increase foreign and domestic investments. For investments to increase sizably, Nepal needs to address constraints such as lack of power supply, inadequate supply of infrastructures, labor disputes, rising cost of raw materials, policy inconsistencies, and high interest on credit to key sectors.

The major determinants of FDI are macroeconomic, policy and political stability; large and growing market size; and being in proximity of emerging countries with large market size so that goods could be exported there. While Nepal has large markets enveloping it and the BIPPA has guaranteed investment certainty to some extent at the policy level, it urgently needs to fix the others factors restraining investment. Nepal has a lot of work to do to increase FDI from the existing level of US$39 million, which is about one percent of gross fixed capital formation. FDI inflows (percent of gross fixed capital formation) to Bangladesh and India are about 3.7 percent and 4.5 percent respectively.

Misinformed debate

Most of the debate over BIPPA is based on misinformation and inaccurate comprehension of the scope and depth of the agreement. While the private sector has openly welcomed BIPPA, selfish political leaders are politicizing it to make themselves heard by hook or by crook. For instance, former Prime Minister Jhalanath Khanal rebuked the government for signing BIPPA, which he thinks is not in our national interest. He seems to be so lost in the dirty political game that he forgot what was mentioned in Economic Survey 2009/10 published by the Ministry of Finance during his tenure as PM. It stated that “a Bilateral Investment Promotion and Protection Agreement is signed with India to promote Indian Investment in Nepal, while preparation is being made to continue such agreements with other countries as well” (see page 187). This shows how poor our leaders like Khanal’s are in understanding economic issues and also remembering what they officially endorsed while at the helm of power. Similarly, some influential leaders have been arguing that BIPPA is against the interest of our country and the workers. Their argument is that BIPPA will increase Indian dominance and erode rights of domestic workers.

These arguments are senseless, baseless and outright illogical. If BIPPA is against our national interest, then why did we not hear loud outcry of this level when Nepal signed BIPPA with other countries. Importantly, the self-centered leaders opposing BIPPA should explain how exactly Nepal was dominated and workers rights eroded by signing such agreement with five countries before it was done India. In our investment strapped economy, more investment is definitely a good thing and is in our national interest because it will lead to more jobs, revenue and potentially stimulate growth.

National interest

In whichever way the leaders might justify their claims, the fact is that all these illogical and inconsistent assertions against BIPPA are being raised to score political points, which at times are against our national economic interests of stimulating growth and generating more jobs and employment opportunities.

In a nutshell, BIPPA is in our national interest and might help increase FDI by enhancing foreign investors’ confidence on the Nepali economy. However, it cannot be a substitute for the badly needed policy reforms on improving overall investment climate.