We'll tell investors that legal and institutional reforms have been made: Maha Prasad Adhikari
Mar 12, 2019-
The government is hosting Nepal Investment Summit on March 29-30. Pitched as one of the flagship events of the KP Sharma Oli government, the summit is being closely watched by many as to how foreign investors will respond to the all-powerful communist government's call for foreign investment, especially when Nepal's foreign investment regime is being questioned for not being investor-friendly. The Post's Mukul Humagain spoke to Maha Prasad Adhikari, chief executive officer of the Investment Board Nepal (IBN), about legal and institutional reforms the government is making ahead of the summit, how it plans to woo investors and expectations from the summit. Excerpts:
The government is all set for yet another investment summit. How are the preparations going? What pitch is the government making during the summit?
As the investment promotion agency of the government, Investment Board's job is to organise this type of promotional activities at regular intervals. Preparations are in the last stage and the response from investors has been extremely positive. As of now, more than 500 international investors have confirmed their participation for the summit. We're getting more queries from various embassies in Kathmandu, asking us to accommodate investors from their respective countries. There will be delegates from around 50 countries. There was participation of only 21 countries in the 2017 summit.
On the government’s part, we'll tell investors that legal and institutional reforms have been made. In fact, a summit like this one also pushes us to take reform measures.
Despite our commitment, we failed to bring reform measures during the last summit. That’s why we're introducing new laws and regulations, amending a number of existing Acts ahead of the summit so as to assure international investors that the investment climate in Nepal is as good as in other countries. This time around, we're also showcasing around four dozen projects to investors, pre-feasibility study of which has already been completed.
Investors make investment only when they see good returns. If we look at Nepal's history, foreign investors who've invested here have been getting good returns on their investments. This attraction will remain there if we back this process up with a sound legal and institutional regime. This government knows domestic resources alone are not enough for economic transformation, and that significant international investment is also required. In this context, our pitch will be: political stability, policy predictability and reforms.
We will tell the investors, unlike in the past where they had to face a number of hurdles to get foreign investment clearance, the state agencies will facilitate them in an efficient and effective manner without bureaucratic hurdles and red-tapism.
How are the new changes made in the laws helpful for investors?
The endorsement of new laws and amendments to existing legislation are not enough. The fundamental issue here is facilitating foreign investments based on the legal regime without hassles. I believe the changes we are bringing in the foreign investment regime will provide a solid base for us to secure more foreign resources in future. The reform measures which we hope to complete before the summit will also boost the confidence of investors, as it provides protection for their investments in Nepal. For example, the Foreign Investment and Technology Transfer Act (FITTA) has proposed one stop service to facilitate foreign investments as well as the protection for investments.
Once the PPP and the Investment Act come into effect, it will give new dimension to the project to be developed under the public private partnership model. With this Act, we can expedite PPP projects in partnership with the private sector for larger infrastructure development. The Act envisioned a PPP Centre within the Investment Board to regulate and facilitate all PPP projects.
The PPP & Investment Act has empowered the Investment Board like never before. Do you think centralising all the authority into one institution helps? Has the board got the capacity to carry out its huge mandate?
When you establish an institution, you have to ensure that it works efficiently and it has the mandate. For this, there was the need to amend the Investment Board Act to enhance its capacity in terms of human resource, financial autonomy and authority.
Despite having been in existence for almost nine years now, the Investment Board was yet to be institutionalised--to some extent. It didn't have its own dedicated fund and it had to rely on donors and the government for resources. Hence, act amendment was necessary also to make the board financially sustainable and autonomous.
Once the Act is amended, it touches upon service autonomy. When I say service autonomy, it means providing all the services for investors under one roof, which is the major issue for any investors who do not want to waste their time visiting many agencies to get their things done.
Currently, the Investment Board has to pool human resource from other agencies to carry out technical studies. But this cannot continue for long.
If the Act is endorsed by Parliament in its current form, it will make the board an institution that would play an important role in the country's development endeavours.
Once we have a proper governance structure within the institution, there won't be any problem to execute the authority that the new Act gives to the Investment Board.
Will this also end the turf war between line ministries and the board as was there in the past?
The new Act provides more clarity amid an overlapping of authority that existed in the past. Since all agencies want to assert their positions, it will take time to resolve issues related to relation and coordination. My belief is that whether it is the IBN or any other government agency, the objectives should be to work for the country, to get foreign investments for the country's overall transformation.
Of the dozen Acts/regulations that are being amended, only three have reached Parliament. Will all these Acts be amended before the summit, how hopeful are you?
I believe the government and parliamentarians understand the urgency of endorsing these Acts/regulations before the summit. While we at the IBN want all laws to be ready ahead of the summit, whatever we can endorse from Parliament will also give a positive message and confidence to investors. It will also show that the government is serious about reforming the foreign investment regime. While we promised the foreign employment law at the 2017 summit, we failed to complete it. Given the discussion going on in various parliamentary committees, I am quite optimistic that these laws will be endorsed by Parliament ahead of the summit.
None of the Letters of Intent signed during the 2017 summit translated into actual investment? And this has been the problem with Nepal--that there is a huge gap between FDI commitments and its realisation. Why is it so?
I agree that FDI utilisation has not been so good compared to the commitments. While we see a lot of interest in investing in Nepal, it takes a long time for them to make actual investment. Let me talk about the 2017 summit where we called for Letters of Intent (LoI) from investors at the last hour. And, we'd showcased only eight projects. The main reason behind those LoIs not being converted into actual FDI was poor project preparedness. All those projects had to be awarded through international competitive bidding for which we had little preparations.
However, the willingness to invest in Nepal was there. For example, we received proposals for the Metro Rail project. This shows investors are interested, but our own machinery failed to take it forward with full preparedness.
Of the $13 billion proposed investment during the last summit, there has been some progress in some of the projects. What we've to understand is that the gestation period for many projects is long. In hydropower projects, the whole process--from getting survey licence to completing the Environment Impact Assessment, Detailed Project Report and Project Development Agreement--takes a considerable amount of time. It took 12 years for the Arun 3 project to reach the construction phase. The bidding was done in 2006; actual spending (FDI) is happening now.
However, I admit that given the situation of Nepal, translating the commitment into actual investment is taking a long time. So, our (board’s) duty is to shorten this time period by enabling an environment whereby investors can invest and kickstart the project in relatively shorter time.
What expectations does the Investment Board have from the Investment Summit? How much of FDI commitments is the board is expecting?
Unlike the earlier summit, where we'd focussed on LoI, we're trying to have deals done between private sectors--as joint venture agreement. Our hope is more than one dozen such deals will take place during the summit, for which a separate desk is operational at the Investment Board. We also expect good response from the investors to the projects which we are showcasing at the summit. This time around, we're presenting diverse projects--from warehouse, solid waste, and rapid bus system to urban development.
Data shows a majority of the FDI that Nepal has received till date is from two countries--India and China. Given the geographical proximity, foreign investment from two close neighbours makes sense, but why is Nepal not getting sizeable FDI from other countries?
As an agency for promotion of foreign investment, we don't have any country-specific target or strategy. But investors while making investments do weigh where they have the relative advantage. Given the geographical proximity, it is natural that countries like India, China, and Bangladesh make investments here. Also, the regional trade arrangement could be a reason that brings them to Nepal.
This doesn't mean that Nepal is out of the radar of other countries such as the United States, Japan, France and Britain. In fact, there will be significant participation from Turkey, Britain, France, Germany and Japan in the upcoming investment summit. When we called for proposals for the feasibility study of Metro Railway, around 10 countries took part. But yes, India and China are ahead when it comes to FDI in Nepal because they have comparative advantage in Nepal.
Why do western countries seem to be less interested in investing in Nepal? Is it because Nepal doesn't have sovereign rating as of now? Do red-tapism and lack of transparency also discourage them?
We organised a conference on blended finance last year. The main outcomes were that there should be sovereign rating of Nepal as well as some kind of hedging instruments.
We have already brought the hedging regulation. The Finance Ministry has already initiated work on sovereign rating. I believe that within the next two [to] three years, we will have Nepal's sovereign rating. The sovereign rating is extremely important for investors, especially the financers who seek such ratings. I agree issues related to governance are extremely critical.
We have a poor track record when it comes to executing projects under the public private partnership model. With the PPP and Investment Act in place, will we see PPP projects gaining momentum?
Since we didn't have the PPP law in Nepal, this is a new practice for us. The PPP and Investment Act incorporates the best international practices and experiences. The law will give us the legal foundation to initiate projects under the PPP model. It was the lack of law that hindered our initiatives to develop projects under PPP in the past. In many PPP projects, the government has to provide viability gap funding. As there was no law in the past, we could not start projects under the PPP.
Once the Act comes into effect, the issue related to viability gap funding will be clearly managed by the subsequent regulations enabling us to push the PPP projects forward. The Finance Ministry will have the discretion about viability gap funding while there will be a PPP centre at the IBN. As for who will decide a project's eligibility for PPP, rules and regulations will define the mechanism.
The Foreign Investment Act and the PPP and Investment Act both talk about having a single window system to facilitate investors. Does it mean we will have two such systems--one at the Industry Ministry and the other at the Investment Board? Do you need them both?
The Investment Board has already been providing one window service. As of now, the Investment Board is connecting investors to the government agencies concerned through our staff. What we are talking about is one-stop service, meaning that all possible clearance related to foreign investors will be done from the Investment Board itself. In future, our plan is to grant all the clearance from the Investment Board for those projects which come under our purview.
The objective of this arrangement is that projects governed by the Investment Board law will get clearance from the Investment Board, and those that come under the Industry Ministry will get clearance from the ministry. The whole idea is providing one-stop service for investors, be it the Investment Board or the Industry Ministry.
A three-member committee was formed to decide the future of West Seti Project after China’s Three Gorges backed out from it. Will there be a new announcement ahead of the summit?
We are planning to call for Expression of Interest (EoI) for some hydropower projects including the West Seti ahead of the summit. We have already prepared necessary documents to showcase the West Seti project at the summit.
There was the need to review the project's capacity as well as other technical aspects after the Chinese developer backed out from the project. Hence, a technical task force led by a joint-secretary at the Energy Ministry was formed. The task force has almost completed its work and we're expecting a report soon.
But another major project, Upper Karnali, has been a non-starter. While Arun 3 has already entered into the construction phase, Upper Karnali is yet to complete its financial closure. It has asked for another financial closure extension. What will the board do?
Unlike Arun 3, GMR--the developer of the Upper Karnali hydropower project--is struggling to take the project into construction. While the developer has completed many tasks--forest clearance, and acquisition of private land, it struggles to complete the financial closure. Since the project is export-oriented, delay in power purchase agreement (PPA) also hit the project. Initially, the Indian government's cross-border power trading guideline emerged as an impediment to the PPA. Since India has amended the guideline, GMR has entered into negotiations with Bangladesh for exporting power generated from the Upper Karnali.
The Investment Board is watching this development closely as it will develop a new market for us as well. Whether we will extend the deadline for financial closure will depend upon how fast the GMR concludes power purchase negotiation with Bangladesh.
Published: 13-03-2019 07:00