Tuesday, March 26, 2019

Ambiguous investment laws, and Japan as new labor destination

From The Kathmandu Post: 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. […]“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.

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. 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.

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.

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.

>> Here is more on the new laws in Kantipur and on the projects IBN is showcasing during Nepal Investment Summit 2019
>> Here is a detailed report on various aspects ahead of investment summit in Himalkhabar

>> Here are the main issues regarding the new investment laws:
  • Multiple layers & duration of approval: Proposals above Rs6 billion will be approved by IBN, but procedural issues are not truly 'one window'-- foreign loan approval, issuance of bonds, establishment of investment fund, visa referral, income repatriation, etc.
  • Notification to NRB or dual approval: Foreign investment should be approved within seven days (instead of 30 days in previous version of the law). But this excludes the discretion to solicit comments from other ministries or departments, which will take much longer. How practical is seven days given the state of bureaucracy and working tendency? Clause 16(1) of FITTA amendemnet says notification to NRB is enough to bring foreign investment, but subclause 2 of the same says all processes as directed by NRB should be fulfilled first. Until now, investors had to publish a notice according to Foreign Exchange Act and then get approval from NRB (where the Governor had to approve the proposals)
  • Complication in income repatriation: Need approval of both DOI and NRB for each repatriation of each tranche of income. All laws, regulations and conditions during initial agreement with investors should be fulfilled. Previously, submitting audited financial statement and evidence of tax payments were enough. 
  • Cumbersome accounting paperwork: Multinational companies need to submit accounting and other details to Nepali authorities once there are changes to share ownership (through merge or acquisition or changes to valuation)
  • Visa restriction: Large investors are allowed two businesses visa for own and family members (it was five visas previously). Labor Act 2016 (amendment) says upto three investors and their families could get business visa.
  • Manufacturing outsourcing not allowed: Outsourcing of final manufacturing product is not allowed. Foreign firms can outsource manufacturing of intermediate goods, but not final goods. It affects firms that outsource production of branded goods.
  • Negative list violates WTO commitments: Negative list includes retail trade, remittances, internal courier, travel and tour agencies, etc. But, Nepal has committed to allow 80% foreign investment in radio and television equipment, musical goods, records, retail trade of musical scores and tapes and courier services. Similarly, it has committed 51% foreign investment in travel agency and tour operation. 
>> Three articles relevant to the investment summit

Labor deal will eliminate malicious intermediary organizations

From myRepulica: The government of Japan has said that the Memorandum of Cooperation (MoC) to send Nepali workers to Japan will establish a basic framework for information partnership in order to ensure smooth and proper sending and accepting specified skilled workers. Issuing a press statement after the signing labor deal between two countries on Monday, the Embassy of Japan in Kathmandu has believed that this deal will eliminate malicious intermediary organizations and will resolve the problems of sending, accepting and residing in Japan of specified skilled workers.

As per the MoC, a separate unit will be established under the Department of Foreign Employment (DoFE) to facilitate the recruitment process of Nepali workers with the status of residence of SSW (Specified Skilled workers) including call for applicants, facilitate the Japanese side to conduct the language and skills tests and overseeing the deployment of the successful applicants to Japan.

>>Here is a previous news about the same.