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May 11, 2014

Proposed Foreign Investment Policy 2014: Is that what we need?

Ministry of Industry has recently come up with the draft of the new proposed Foreign Investment Policy 2014 whose lack of common sense has surprised even the most ardent believers of bureaucracy in Nepal. Notwithstanding the fact that countries around the world, especially the ones lacking capital, are courting foreign investors for capital and technology to spearhead their economic growth, Nepal’s attitude seems to be that of a nation who already has too much of an investment and can afford to be selective in choosing investors. The policy is an example of how our bureaucracy is so out of touch with reality. A few provisions proposed by the policy will prove this assertion.

One of the provisions made by this policy is to ban foreign investments of less than 200,000 US Dollars which is a four-fold increase from the existing floor of 50,000 US Dollars. The policy also bans foreign investments on hydro power projects of less than 30 Mega Watts and less than 3 star hotels. It is difficult to understand why the government wants to dissuade small scale investments and investments in smaller hydro power projects as well as smaller tourism establishments when it is already among the countries with least amount of foreign direct investment in the world. As of February 2014, the total foreign investment in Nepal is valued at around US $1.14 billion from 78 countries which is very low compared to not only its huge neighbors but even compared to other economies in the region. Sri Lanka attracted US $870 million as foreign investment in 2013 alone whereas Pakistan received about US $ 1.4 billion during the same period.

Putting a minimum floor on foreign investment not only decreases the amount of foreign investment coming to the country but also helps concentrate those investments towards larger businesses and industries only. This increases the possibility of undue influence among policy makers and government officials by the few large scale investors among. Such a floor also prevents foreign investment and technology transfer in small and medium scale enterprises whose capital requirements are lower compared to their labor requirements such as restaurants, tourism agencies and information technology companies. Majority of the IT companies in Nepal are small and medium enterprises requiring investments much lesser than the minimum floor proposed by the policy. Implementation of such policy would eventually result in elimination of small scale IT companies who have been providing large number of lucrative employment opportunities to Nepalese IT professionals.

Similarly, the provision of not allowing foreign investment in hydro powers of less than 30 Mega Watts will bring nothing more than harm to the economy. The cost of production for one mega watt of hydro electricity ranges from 150 to 180 million Nepalese rupees which is unlikely to be raised from Nepalese investors alone. On the tourism sector too, what we need is more innovations in more destinations rather than large scale investments in already crowded sectors and activities. 

Big Contradictions

Hence, the prudent step for the government would be to encourage more small scale foreign investments not discourage them.Some government officials have been quoted as saying that the minimum floor of investment is needed to prevent some foreigners from opening up small scale enterprises and using such investments as a reason to keep staying in Nepal. One would wonder what the problem in that is. On one hand, Nepal is trying to attract a million plus tourists in Nepal. On the other hand, government does not want these people to make small scale investment and use it as a reason to stay in Nepal. It is definitely hard to find logic in these contradictory approaches. 

And if foreigners staying in Nepal using small scale investment to their advantage is a problem then isn’t it a problem of department of immigration? Banning all the small scale investments just because some foreigners are “misusing” them is tantamount to throwing the baby out with the bathwater. 

Another provision in the policy that raises huge concern is the formation of Foreign Investment Promotion Council. The council, per se, would be a positive step towards facilitating the investment process in Nepal but the way it is staffed raises concern. The council is supposed to be chaired by Minister of Industry and consist of representatives of more than 12 government agencies. Since the membership is so diverse and the council duties are not among the priority for the officials, the council is likely to never convene or be efficient enough for making decisions which will ultimately end up leaving investment processes in limbo.

What next then?

With all these clauses, the new proposed Foreign Investment Policy 2014 is more likely to do more harm than good to the Nepalese economy and can be considered a regressive policy when compared to the existing foreign investment policy. The right thing to do for a developing economy like Nepal, is to attract as much investment (both local and foreign) as possible not discourage them. In this era of globalization, too many countries are courting foreign investments and we cannot afford to be choosy with regards to investment. The best policy for Nepal would be to welcome any investor with any amount of money who is willing to create jobs and prosperity for our citizens. It is imperative that policy makers understand this reality and revise the policy accordingly.

-Surath Giri