Nepal India power trade, subnational government's budget execution and more

India opens door wider to electricity exporters

From The Kathmandu Post: India opened the door wider to power exporters by removing a discriminatory provision in the Guidelines on Cross Border Trade of Electricity under which Nepali-based hydropower projects which are owned by the Indian government or have a majority Indian share are only allowed to export power to India. This condition essentially bars plants built with Nepali or third country funding from exporting electricity to India, and its removal has been hailed as a major boost for Nepal’s energy sector.

According to the Energy Ministry and the Indian Embassy, the Indian Power Ministry has prepared a new draft of the guidelines minus the provision allowing only Nepali-based companies wholly owned by the Indian government or the public sector or private companies with a 51 percent or more Indian stake to sell power to India. Moreover, companies owned or controlled by the Nepal government will be able to export power to India after getting a one-time approval from Indian authorities, as per the guidelines.

According to the guidelines issued by the Indian Power Ministry in December 2016, other companies wishing to sell power to India have to obtain the approval of the designated authority on a case-by-case basis. The provision was discouraging to foreign investors and private Nepali power developers planning to build export-oriented hydropower projects with an eye on the Indian market.

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Malaysia job: Deal fails to resume worker flow

From The Kathmandu Post: Even as pressure builds on the government to resume movement of Nepalis to work in Malaysia without further delay, officials say it will take more time as both the countries are working for implementation of a bilateral deal. Nepal and Malaysia signed a much-awaited labour agreement on October 29. This was expected to resume departures of Nepali workers for Malaysia, which has been halted since mid-May. However, there has been no significant progress towards that end.

Minister for Labour, Employment and Social Security Gokarna Bista told the Post that the government was working to complete the process so that Nepalis can work in Malaysia again. “The labour deal with Malaysia was signed after years. We need to work for putting the agreement into practice. There is still some work to be done before we allow workers to migrate to Malaysia,” said Minister Bista.

According to him, joint working committees are thrashing out issues. The delay in resuming worker departures for Malaysia five weeks after signing the labour pact has irked recruiting agencies as well as political leaders from the opposition Nepali Congress.

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Provinces blame Kathmandu for dismal spending

From The Kathmandu Post: The federal government’s delay in handing over the key institutions and deputing the required number of civil servants has hit the provincial governments’ ability to spend. In the first five months of the current fiscal year, the provincial governments have spent only two percent of their budget on an average. 

The combined budget of all the seven provinces for the current fiscal year is Rs113.43 billion whereas their combined spending stood at Rs2.36 billion as of December 5. This shows that budget utilisation of the provinces is much below the federal government’s. Singha Durbar spent 20.91 percent of its total budget in the same period, according to the federal finance ministry.

The dismal spending by provincial governments comes at a time when the federal government itself is criticised for its poor spending. Provincial governments, however, blame Kathmandu for the poor implementation of the budget.“The failure of the federal government to depute necessary staff to the provinces and the frequent transfers of officials at the provinces, particularly the secretaries, are the main reasons behind the poor spending,” said Province-2 Finance Minister Bijaya Kumar Yadav. “How can budget be implemented without the bureaucracy?”

According to the Ministry of Federal Affairs and General Administration, only around 12,900 civil servants have been mobilised at the provinces against the need for 21,000.

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Govt takes over projects meant for provinces

From The Himalayan Times: The federal government has taken over some development projects supposed to be under the jurisdiction of provinces. The federal government had stated in the budget that some key development projects would be under the jurisdiction of provinces but now it has taken control of them.

The projects the federal government has taken over include:  The 10  Mid-Mountain Highway Cities, 15 linkage roads of the postal highway in Tarai-Madhes, Jhamak Kumari Ghimire foundation, nine risky settlements including in Bajura and the four municipalities of Province 7 funded by the Asian Development Bank. The  budget had stated that these projects would be under the provincial government’s jurisdiction. According to the Ministry of Urban Development, the provinces have expressed dissatisfaction with the federal government’s decision.

Spokesperson of the Ministry of Urban Development Krishna Prasad Dawadi told THT the Cabinet had decided to this effect on November 19 after consulting the federal finance ministry. “The federal government decided to take over these projects because provincial governments lacked skilled manpower and had failed to open offices to execute the projects,” he added.  He said the other reason was involvement of foreign donors in the projects and the risk of high variation order on account of delay. “The donors had also expressed concerns regarding some projects,” Dawadi added. Dawadi said the federal government would gradually hand over these projects to the provincial governments.

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Latest trade policy review of Nepal

The WTO has released the latest trade policy review of Nepal (prepared by WTO here and by Nepal here). The last review was done in 2012. Nepal has updated its trade policy and export strategies and investment as well as labor legislation since then. However, there is not much to show in terms of its effect on industrial output and exports growth, which suffers from supply-side constraints and inadequate trade facilitation measures. 

Nepal became a member of the WTO on 23 April 2004 when it became the first LDC to join the WTO through the full working party negotiation process. It is also a member of two overlapping regional free trade agreements: South Asia Free Trade Area (SAFTA), and Framework Agreement on the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Nepal has bilateral trade agreement with 17 countries. The transit and trade treaty, railways services agreement and an agreement on cooperation to control unauthorized trade with India are the most consequential ones. The transit treaty with India allows Nepal to trade with other countries through Kolkata/Haldia ports and Vishakapatnam port (since 2016).

Here are some of the highlights from the TPR:

1. Exports have declined since the last review, but imports have more than doubled. Almost two-thirds of export and imports occur with India. As a share of total imports, agricultural (19%), iron & steel (9.7%), non-electrical machinery (8.5%), and transport equipment (8.9%) imports increased. Manufacturing import's (i.e. total minus agricultural and mining imports) share increased from 54.3% to 59.2% over the review period. 

2. Nepal updated its trade policy in 2015 and Nepal Trade Integration Strategy in 2016. MoICS is responsible for implementing trade policy, but MOF has the final say in setting tariffs. Trade related legislation covers customs, export and import licensing, TBTs, SPSs, competition policies, investment regimes, competition policies, government procurement, and intellectual property rights.

3. NTIS 2016 provides the foundation for the implementation of trade policy 2015. It identifies 12 strategic area goods and services: large cardamom, ginger, tea, medicinal and aromatic plants, fabrics textiles yarns and ropes, leather, footwear, chyangra pashmina, knotted carpets, skilled and semi-skilled professionals, IT services and BPO, and tourism. Seven cross costing areas are trade capacity (including trade negotiations), trade and investment environment, trade and transport facilitation, standards and technical regulations, sanitary and phytosanitary standards, intellectual property rights, and trade in services. NTIS 2016 identified 190 actions to be implemented by 2020. 

4.  The bilateral trade and transit treaty with India allows each other unconditional MFN treatment and exemption from customs duties and quantitative restrictions on a reciprocal basis on a mutually agreed list of primary products. Nepal gets non-reciprocal access (no customs duties and quantitative restrictions) of its industrial products to the Indian market except for vegetable fats, acrylic yarn, zinc oxide and copper products under HS headings 74 and 8544. These four products face tariff quotas. The EU provides duty-free and quota-free access to Nepalese exports under its Everything But Arms (EBA) initiative. Nepal is beneficiary under the GSP schemes of Australia, Canada, the European Union, the Eurasian Economic Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, Switzerland, Turkey and the United States. The US is providing duty-free treatment for 779 products to help the country expand its trade and economic development following the devastating earthquakes in 2015. This unilateral preferential agreement started on 30 December 2016 and will last until 21 December 2025. China and Nepal also signed a bilateral agreement on transit transport in March 2016.

5.  FITTA 1992 and IEA 2016 provide the legal basis for regulating, administering and facilitating FDI. There many other laws related to banking, environment, and labor among others that also affect investment. The Company Act, 2006 (as amended in 2017) simplifies and makes the process of establishing, managing and administering companies more convenient and transparent. The Industrial Enterprises Act (amended in 2016) is simplifies and clarifies the procedures for the entry, operation and exit of industrial enterprises. The SEZ Authority Act 2016 provides incentives for investors establishing firms within a SEZ: full tax exemption for first five years, income tax rebates, dividend tax exemption, VAT facility, and custom duty exemptions among others. Investment Board of Nepal and Department of Industry facilitate and approve investment proposals depending on the amount of investment or as specified in respective laws.

6.  There are eight MFN tariff bands: duty-free, 1%, 5%, 10%, 15%, 20%, 30% and 80%. As of 2018/19, there are 5,572 tariff lines at the eight-digit level based on HS2017 nomenclature. The simple average applied MFN tariff (excluding ad valorem equivalents for specified duties) decreased from 12.2% in 2011/12 to 12% in 2018/19. Including ad valorem equivalents, the simple average applied MFN tariff in 2018/19 is 12.4%. The highest ad valorem rate of 80% applies to two tariff lines related to tobacco, along with motor vehicles, and arms and ammunition products.  

7. Tariffs have been increasing, with an average tariff of 9.3% on raw materials (first stage of processing), 11.4% on intermediate goods, and 13.8% on finished goods.  

8. Nepal bound 54 tariff lines at HS eight-digit level, with overall average bound tariff of 26.6%. The average bound tariff for agricultural products is 42.9% and for non-agricultural products 23.9%. However, applied tariffs (average 12.4%) are much lower than the average bound rate except for 38 tariff lines. These are mainly chemical products and some machinery including motor vehicles. 

9. The simple average tariff rate for SAARC members is 9.5% (for non-SAARC members its 12.4%). For agricultural products the average preference margin is 2.2 percentage points compared to the applied MFN tariffs, and for non-agricultural products its 2.9 percentage points. 

10. Other duties and charges imposed by Nepal include an agricultural reform fee of 5% (or 8% on some products) on selected agricultural products imported from India and Tibet Autonomous Region of China; and a road maintenance and reform fee of NRs4 per liter for import of petrol and NRs2 per liter for diesel. A customs service fee of NRs565 per declaration is charged o import consignments worth over NRs5,000. VAT and excise duties are also levied at customs points.

Waiting for the pay-off: Contribution-based social security scheme in Nepal

It was published in The Kathmandu Post, 03 December 2018. Related blog post here.

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Waiting for the pay-off

Prime Minister KP Sharma Oli launched a new contribution-based social security scheme for private sector employees amidst much fanfare and self-congratulation. The opposition bloc cautiously welcomed the initiative, asserting their share of contribution too but censuring the government’s flamboyance.

The new social security scheme, a product of groundwork that began almost a decade ago, is a landmark initiative. It is a win-win for private sector employees and employers (at least on paper) as it offers financial and income certainty for the former and a possibility of investor-friendly workplace environment for the latter. However, the success of the scheme now depends on how effectively and efficiently the government implements it by prioritising institutional set up, and operational and management independence of the fund.

Setting new precedents

The new scheme is in line with contribution-based social security regulation, which reflects the contribution-based social security law passed by the parliament last year. All formal sector firms are required to join the scheme and deposit 31 percent of an employee’s basic monthly salary in the Social Security Fund (SSF), of which 11 percent needs to come directly from worker’s basic salary and the remaining 20 percent must be contributed by the employer. Workers will get a unique social security number that will not change even if their jobs do. 

The SSF offers a number of schemes for workers. First, the health and maternity policy is restricted to medical coverage up to Rs. 100,000  and maternity allowance is equivalent to one month’s salary. If workers need to be absent from work beyond the 12 days of annual leave, then the SSF will provide them 60 percent of minimum salary. Pregnant workers who need to take leave in excess of 60 days (at the maternity level) will also be offered similar facilities. Second, workers will receive financial support in the case of workplace and non-workplace accidents and injuries. Third, workers who have contributed to the fund for at least 15 years are eligible for a monthly pension. Those working less than 15 years can withdraw the contributed money after termination of their employment. Fourth, in cases of deaths of workers, their family members can receive monthly pension equivalent to 60 percent of the worker’s basic salary in the last job. Similarly, children will receive 40 percent of parent’s monthly salary to cover educational expenses up to the age of 18 years.

Compared to existing schemes for workers’ welfare and financial security, these are generous offers. Employees have an incentive to be more disciplined, punctual and productive at workplace- something the private sector wanted since trade unions became unruly, leading to a deterioration of the investment climate - given the promises of not only their own financial and health securities, but also of their dependents. Employers are hoping for an end to labor strikes, often instigated by politically affiliated trade unions, over workers’ welfare and financial allowance. It should help to raise labour productivity (per worker output) if disruptive union politics and dishonest employers do not game the system in their favor. There will also be pressure on informal sector firms to enroll their employees into the program, leading to the formalisation of businesses (and potentially more tax revenue for the government).

The trade unions, which act as sister organisation of political parties, are happy because it is easier for them to make a deal with the government than the private sector (remember that the contribution rates could be changed). The private sector is also happy because now, issues such as planned and ad hoc welfare are now the government’s headache.

Key lies in implementation

The success of the new scheme depends on how effectively and efficiently it is implemented. First, the fund should be operated by an independent agency free from political and trade union pressure. An independent and transparent mechanism to manage fund is quintessential to its operational success and for it to earn higher return on investments. The law allows the government to direct the SSF on issues it thinks are pertinent and of national interest. This provision should not be used by the government to indirectly advance its agenda, especially on matters related to personnel management, daily operation of SSF, and investment decisions. Moreover, the SSF should desist from funding the government’s fiscal deficit—especially if it is due to drastic increase in recurrent expenditure—by purchasing treasury bills and bonds if the returns are not higher than in alternative scenarios.

Previously, the Ministry of Finance indirectly instructed Employees Provident Fund (EPF) and Citizen Investment Trust (CIT) to extend loans to projects it deemed were important and necessary to support the government’s agenda. A recent example includes the loans extended by these semi-autonomous pension funds to Nepal Airlines to purchase aircrafts, whose full operation is uncertain as the company is mired in a controversy over foul play in their procurement processes. This kind of investment, even with sovereign guarantee, increases the odds of incurring losses, which would mean lower than expected payment for employees enrolled in the scheme. Remember that final payment is based on the contribution of employees and the returns earned by the SSF on investments.

Second, a professionally run SSF without political and union interference is paramount to its success. If all formal and informal sector employees enroll, it could easily have over one billion dollars in deposit each year. Acquiring the human resources, and operational and management expertise required to manage such a large fund is quite a behemoth challenge. Furthermore, the failure to invest deposited funds will have an impact on banking sector liquidity unless the SSF adopts the pension fund’s strategy to park deposits in banks offering the highest interest rate.

Third, the government’s liabilities are going to increase drastically because it guarantees payment to workers even if money contributed by the SSF is insufficient. Some of the SSF’s policies, including issues pertaining to workplace accidents and the eligible age for pension schemes, are open ended and therefore, could significantly increase liabilities vis-à-vis its accumulated assets.

Furthermore, if SSF’s investment goes sour, then the liabilities will be even higher. The government is already alarmed by the ballooning retirement payment to public sector employees. Contingent and unfunded liabilities are ever increasing. This calls for a unified social protection scheme that covers public and private sector employees, old age allowance, medical insurance, and unemployment allowance, among others.

Fourth, workers, with their own and familial financial and health securities guaranteed, need to be more disciplined and productive at workplace. This, along with improvements to the investment climate, could result in higher production and investment. Currently, labor productivity of Nepali workers is one of the lowest in South Asia. 

Contribution-based social security scheme in Nepal

Prime Minister KP Sharama Oli formally launched a new contribution-based social security scheme today. It provides health, accident and maternity coverage to workers employed in the private sector. Workers will also get a lifetime pension after retirement. The scheme is in line with Contribution-based Social Security Regulation.

To enroll into the scheme, a sum equivalent to 31% of a worker’s basic monthly salary needs to be deposited in Social Security Fund (SSF). 11% will come directly from the worker’s basic salary and 20% will be contributed by the employer. This is a significant step in terms of financial and social security of workers and will be a win-win scheme for both workers and their employers. It is step toward workers security as well as creating an investor-friendly workplace environment. 

Here are some of the features:

• Enrolled workers will get a unique social security number, which remains unchanged even if they change their job.  
• The fund has four types of social security policy: health and maternity security, dependent family security, accident and disability security, and old age pension security. 
• They must contribute to the fund for at least six months to avail medical insurance, which covers doctor’s fee, hospital charges, medical test fees, and travel expenses among others. 
• They must contribute to the fund regularly for at least 12 months (in the last 18 months) to receive health and maternity coverage. Health coverage is limited to NRs100,000 annually. Maternity coverage is limited to one month of extra salary.
• Workers are getting 12 days of annual leave. If they have to take leave more than that, then SSF will give them 60% of minimum salary 
• Pregnant worker can get 60 days leave. SSF will give 60% of minimum salary if she has to take leave more than that (but not in excess of NRs25,000).
• They will get financial support in the case of workplace accidents and disabilities.
• They must contribute to the fund for at least two years to ensure that all expenses related to occupational diseases are covered. 
• For non-workplace accidents, a maximum coverage of up to NRs700,000 can be availed.
• For those who cannot return back to work after accident, the SSF will provide 60% of minimum salary until they report back to work.
• They are eligible for pension 15 years after they start regular contribution to the fund (and after 60 years of age).
• Workers who have worked less than 15 years can withdraw the deposited money after termination of employment
• Workers who have worked at least 15 years will get monthly pension, which is equivalent to the sum of worker's deposit and profit earned by SSF from its investment divided by 180. If workers retire after 20 years of employment and contribution to the fund, then they will divide it is by 240.
• If a worker dies, then the family members can receive monthly pension equivalent to 60% of the worker’s basic salary in the last job. The worker’s children will receive 40% of parent’s monthly salary to cover educational expenses up to the age of 18. If the worker doesn’t have spouse or children, then his or her parents will get 60% of monthly salary as pension. 

The government is planning to make it mandatory for formal sector firms to enroll in the scheme. It then wants to expand the coverage to informal sector too. Formal sector enterprises need to register by February 22 and submit employees' details by May 21. The exiting social security funds deposited in Citizen Investment Trust and Employees Provident Fund need to be transferred to SSF.

As per the plan as of now, of the total SSF, 3.22% will be allocated for medical treatment, health and maternity security; 4.52% for accident and disability coverage; 0.87% for dependent's family; and 91.39% for old age security. Currently, SSF has NRs20 billion deposited by levying one percent social security tax on basic salary of all private sector employees.  There are an estimated 3.5 million workers currently. The minimum wage as of FY2018 is NRs13,450, of which NRs8455 is basic salary and NRs.4995 is allowance. 

It is a good social security scheme whose groundwork started almost a decade ago. The big question now is how enrollment and fund will be managed and operated transparently. A committee headed by the secretary of Ministry of Labour, Employment and Social Security along with representatives from NRB (deputy governor), finance ministry, law and justice ministry, and cooperatives and poverty alleviation ministry will manage the fund. The executive committee will have three representatives each from trade unions and employers. There will be an executive director at the SSF. If politics is not kept away from SSF, then there is scope for mismanagement of funds (like pressure from MOF to invest in certain projects it deems necessary to support the government's plan). 

Independent and transparent management of fund is quintessential to its operational success and for it to earn profits from the investments. Higher the profits from investments, higher will be the payments to workers enrolled in the scheme. If not, then this is likely to increase fiscal burden of the federal government. 

Another question is how is the SSF going to encourage informal sector firms to enroll in the program (which in a way will force them to operate formally). There are about 0.5 million workers in the formal sector. Monthly contribution from them will be about NRs2.5 billion. 

China's manufacturing transformation

China's trajectory of manufacturing is quite interesting. Here is an abstract from an article in NYT:

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Economic textbooks lay out a common trajectory for developing nations. First they make shoes, then steel. Next they move into cars, computers and cellphones. Eventually the most advanced economies tackle semiconductors and automation. As they climb up the manufacturing ladder, they abandon some cheaper goods along the way.

[...]Look at the evolution of what China sells to the rest of the world. As it ramped up its manufacturing engine in 2000, China was pretty good at making basic products like toys and umbrellas. By 2016, China had moved into more expensive goods like cellphones and computers, while making even more of the cheaper stuff.

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The next phase, which includes the most valuable products in the world, will be harder. China can’t make chips as small and fast as the United States can. Its cars are mostly sold at home. Its manufacturing prowess is built on the back of engineering and expertise from the West.

Both the Apple iPhone and Huawei Mate 10 are assembled in Chinese factories. Both rely on pieces from outside China. The most intricate and expensive technology in the Huawei phone, the motherboard, has a Chinese processor, but it is primarily composed of chips from American, South Korean and Japanese companies. The 2.8-inch board accounts for 52 percent of the cost of the phone, according to data from TechInsights.

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Nepal Airlines seeks bailout, federal government to address tax overlaps and latest private sector diagnostics

Nepal Airlines seeks bailout

From The Kathmandu Post: Less than four months after making the largest jet purchase in the history of Nepali aviation, Nepal Airlines Corporation, which was on a mission to reclaim its long-lost glory, said it is running out of cash and teetering on the edge of bankruptcy.

A statement made public on Thursday by the national flag carrier through a “white paper” shows that the corporation’s monthly cash deficit has reached Rs317.79 million since inducting the first of two long-range Airbus A330s into its fleet. Before that, Nepal Airlines had a monthly revenue surplus of Rs12.54 million. Since summer, Nepal Airlines’ debt-to-equity ratio, which measures the financial health of a company, has swelled to 39.82 percent from 14.40 percent. A higher ratio indicates the company is receiving most of its financing from borrowing, threatening bankruptcy if business continues to decline.

According to the white paper data, revenue earnings from the two wide-body jets from August 1 to September 15 stood at Rs264.8 million, while the expenses nearly tripled to Rs756.6 million, in addition to a staggering deficit of Rs491.8 million. At the moment, the two A330 jets are being utilised for less than seven hours daily, less than half of the required flight time to generate a decent profit. The revelation about the dire state of Nepal Airlines’ finances comes on top of the corporation’s massive loans to various institutions—its long- and short-term loans stand at Rs41.73 billion and it owes more than Rs3.66 billion in interest annually.

The national flag carrier, instead of scoping pilots for the new aircraft, followed its traditional practice—to get the planes first and find the pilots to fly them later. It still has at least three planes sitting on the tarmac at the Tribhuvan International Airport while it frantically looks for capable pilots. It was indeed a gargantuan project to equip the airlines with the youngest fleet in the country—inducting two Airbus A320 aircraft in 2015 and two additional wide-body A330 in 2018. The induction of four jets had been described as a game-changer for the corporation—and the country, allowing the airlines to compete with other international players on long-haul routes to Europe, Japan and the Middle East. However, some airlines officials say the corporation did not plan its operations efficiently.

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Centre to remove tax overlaps

From The Kathmandu Post: The Finance Ministry presented the proposal to the Cabinet for implementing the report that calls for scrapping several taxes levied by the local and provincial governments while broadening the tax base of the sub-national administrations.

The report recommends that the arbitrary taxes should be scrapped and a composite federal revenue law introduced to provide legal clarity. Finance Ministry officials confirmed that the government will instruct the provincial and local governments to follow the recommendations. The Thapaliya-led committee was formed after an uproar over hefty increments in taxes imposed arbitrarily by the provincial and local governments.

The committee concluded that only the federal government has the authority to levy tourism fees, which has to be shared between the provincial and local governments. It also recommends an end to the practice of non-state actors such as various committees and projects collecting tourism-related taxes contrary to the spirit of the constitution. The high-level committee also suggests that local governments cannot impose business taxes—on industries, trade, profession or occupation within a particular local federal unit—on transactions. Such taxes can be imposed only during the registration and renewal of business ventures. The report deems the Patake Sawari Kar (vehicle tax) and the District Export Tax as unconstitutional as they go against Article 236 of the constitution.

While the erstwhile District Development Committees imposed ‘District Export Tax’ on the sale of such goods to another district, the new constitution banned it. However, Clause 11 of the Local Government Operation Act allows the local government to collect sales and export fees on such items. After the Financial Act introduced by the federal government amended the provision of the Local Government Operation Act-2017, local governments complained that the changes breached their right to collect wealth tax. The report suggested implementation of the Act’s provision. The report also stresses the need for a law on taxing the extraction of stones, gravel and sand as there is no legal clarity over their use.

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Private sector diagnostics 

The IFC recently released country private sector diagnostics, which identifies sectors that have potential to support Nepal's growth. In addition to hydropower, the other identified five sectors that have potential to have major impacts on Nepal's growth trajectory are tourism, agribuisness, education, health, and IT. 

The private sector is constrained by institutions/governance and infrastructure. With key sectors such as tourism and agribusiness being highly reliant on connectivity, strengthening infrastructure is the other critical challenge for private sector development. A gap in technical skills and managerial capabilities is constraining growth-oriented firms from scaling up and rising up the value chain. Access to finance and inefficient land markets are also key constraints. Excessive barriers to foreign investment and foreign-exchange transactions also constrain the private sector. Policies on land acquisition and the use of land as collateral, in particular, deter foreign investors and lenders, restricting private sector access to long-term finance.

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Nepal Investment Summit: Rhetoric vs Reality

It was published in The Kathmandu Post, 12 November 2018, p.8

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Lost in summit

Tangible outcomes must be met before holding the next Nepal Investment Summit

The government is planning to organise an investment summit around March 2019 despite having nothing much to show since Nepal Investment Summit in March 2017. The Investment Board of Nepal (IBN), which is spearheading the idea of organising the summit, wants to boast about the government’s ‘stable politics’ and investment policies, especially after the elections. However, this rhetoric means nothing to investors if the government cannot show them tangible outcomes that would facilitate investments in ways that are different from previous years.

Organising a grand summit for fleeting fanfare does not constitute promotion of the country as an investment destination. Investors will be more interested in concrete accomplishments since the last summit, the government’s promises vis-à-vis its pro-activeness in amending and implementing legislations, and the resulting number of successful commercial deals and projects signed. Or else, it will simply be yet another summit that leaves us with little more than photo-ops, self-glorification, and never-ending commitments.

Little progress

Investors from seven countries signed letters of intent to invest US$13.5 billion-in sectors including hydropower, airlines, tourism, agriculture, railways, and infrastructure-during the investment summit in 2017. About 61 percent of it came from Chinese investors.

The summit in 2017-organised to promote Nepal as an investment destination for the next decade-targeted diplomatic missions in the country, current and potential foreign investors, media, nonresident Nepalis, experts, and private actors. The hype before the event and the rousing fanfare immediately after the investment commitments were made tapered off in no time. The investment promotion agencies have not been successful in transitioning from intent to commitment to investment. Although the summit had broad political support, the IBN has failed to do the required follow-up work with the seriousness it deserves. All we are getting is bureaucratic lip service. 

Let’s look at the outputs thus far. First, foreign direct investment (FDI) commitments increased from 0.6 percent of gross domestic product (GDP), or about Rs.150 billion, in 2016/17 to about 1.9 percent of GDP (Rs556 billion) in 2017/18. However, none of the investment commitments in new projects can be traced back to the investment summit in 2017. Meanwhile, actual FDI investment increased from 0.5 percent GDP to 0.6 percent of GDP over the same period. Again, none of these are even remotely related to the investment summit.

Second, one of the main points trumpeted by the IBN to justify the new summit is that the time is different now. Yes, the two big communist parties forged an alliance, forming Nepal Communist Party, and formed a majority government not only at federal level, but also provincial and local levels. However, this alone is not a harbinger of political and policy stability. The previous summit had support from the same political parties and politicians. The co-chair of the ruling party was the prime minister during the investment summit last year.

Third, a cosmetic change in government leadership but not in governance style that produces promised outputs does not mean much to investors. They are interested in whether the government is keeping its promises in a timely manner, and how easier it is for them to invest, earn and repatriate income. There is hardly anything to show on this front. The previous summit was tagged as an effort to promote Nepal for the next ten years. However, after just two years, devoid of any commendable result, the IBN is proposing for a new investment summit. It does not send a good signal of consistent leadership with concrete vision and viable work plan. Furthermore, inconsistencies, especially policy reversals to benefit a particular group of investors, unnerve genuine investors. For instance, the controversy over re-awarding Budhi Gandaki project by the cabinet to a foreign firm with a questionable record in Nepal is a case in point.

Fourth, latest global reports that track the progress of our economy relative to itself and to other economies are not encouraging either. Nepal ranked 109 out of 140 economies in the Global Competitiveness Report 2018, which evaluates an economy on a range of factors such as institutional quality, state of infrastructure, business dynamism and innovation capability. Nepal’s rank was 108 in 2017 but it slipped by one position to be the least competitive economy in South Asia. In terms of enabling environment such as institutions, infrastructure, ICT adoption, and macroeconomic stability, Nepal’s relative standing is not encouraging.

Similarly, Doing Business Report 2019 indicates an economy that did not make any progress in making business operations smooth and hassle-free last year. Nepal scored 59.63 (rank 110 out of 190 economies), lower than 59.95 last year, indicating that doing business, in fact, was made burdensome. Nepal fares notably low in enforcing contracts, resolving insolvency, getting credit and paying taxes.

Simplify process

The overall outcomes since the last investment summit are not encouraging at all. The economy is not agile and future-ready enough to entice investors. It doesn’t even have basic infrastructure and proactively supportive institutions to create a foundation for enhancing productivity. Instead of wasting time and resources on another investment summit, the IBN should do the necessary to follow-up on the investment commitments made during last year’s summit. Meantime, the government should be doing the needful to develop a conducive legal and regulatory framework to attract more FDI, starting with approval of foreign investment and public-private partnership legislation.

The next five years should be marked by notable progress in reducing barriers to doing business in Nepal: aiming for the best investment destination by ensuring speedy clearance of investment proposals, requiring the lowest number of documents to enter, operate and exit the market, and making bureaucracy and government leadership the most efficient in South Asia region. Boasting about these tangible milestones is more meaningful than just claiming political stability under the communist leadership, which is already vulnerable to a resurgence of factionalism within the party.