Dissecting the Foreign Investment Bill, 2016

Need an investment climate mapping and concrete plans to attract foreign investors

-This article was originally published by Ashesh Shrestha in The Himalayan Times on October 30, 2016.

The Ministry of Industry (MoI) has been very busy lately. It is commendable that the ministry is pushing through some major policy reforms. September saw the new Industrial Enterprise Bill being endorsed, and the ministry is now working on the regulations. It has also been on the news now for the efforts it is making to ease market entry and exit for businesses. The first week of October saw the MoI bring another major bill into public discourse – the Foreign Investment Bill to amend the existing law regulating Foreign Investments in Nepal. In what the ministry has promised is the first of many public discourses it will run on the draft bill, there are a lot of welcome changes. The bill opens doors for private equity and venture capital, grants an access to international capital markets, promises no nationalization, and more. Yet, the Bill seems to have overlooked some major issues.

The ‘ … as prescribed by the law’ provisions

As prescribed by the’ rule refers to the rules made under this Act or notices published in the Nepal Gazette by the Government of Nepal. There are these ‘…as prescribed by the law’ provisions at 60 places in this 16-page bill. In order to know what the rules prescribe, any foreign investor (or anyone who wants to understand the foreign investment law) has to refer to four other documents per page. This is going to be extremely strenuous for anybody other than the regulators. Besides, this gives discretionary powers to the policy-makers when they are drafting the follow-up rules or notices. Such powers hold the potential to lure unfair lobbies and rent-seeking.

The investment limit contradiction

There is a contradiction between articles in the bill regarding setting limits on foreign investment. While it has been provisioned in one of the articles that no limits will be set on the foreign investment, some other articles set ceilings and floors on portfolio investment. Then there is a clause that clearly states that the government could set minimum thresholds as it sees fit. These kinds of provisions diminish predictability. It almost makes one feel that the government thinks it is the foreign investors that have to invest in Nepal (as against any other option in the world) rather than Nepal needing foreign investments.

Disregard to property rights

It has been specified that any company with a foreign investment can acquire land by itself, but has to take permission from the government if it wants to use the land for as a collateral or sell it altogether. If a company is a legal person (and we are not even talking about individual foreign investors here), then this provision is a clear infringement of property right. One of the articles has put a restriction on what a foreign employee can do with his salary. It has been provisioned that a foreign employee can only remit upto 75% of his after-tax income. An employee’s remuneration is a compensation for a service that s/he has delivered. Why should there be any restriction of how he chooses to use it? The point is, after having paid all taxes and liabilities, how can anybody else have any claim on an individual’s property.

Discrimination between different sectors

As per the bill, Government, by publishing a notice in the national gazette can specify industries, in which the foreign investors can invest their money without any permission – mere notification will suffice. All other industries have to take a permission prior to bringing in investments. Similarly, the industries like manufacturing, hydropower, mining, tourism and international airlines services will get income tax rebate. Also, investors investing in electricity and physical infrastructures will get cash subsidies. Hence, investors in these sectors will have unfair advantage, thus distorting free and fair competition. The law seems to step on the toes of fiscal policy with many of these policies. Instead of having special preferences (should need be) being guaranteed by the budget, this bill endows select sectors with blanket privileges. What is more worrying is there is no mention of a timeframe till which these special investors qualify for these preferences.

Equal treatment contradiction

The bill says foreign investments will be treated at par with the investments made by any Nepalese investor. However, some of the policies as aforementioned contradict with this equal treatment clause. Do Nepali investors also get those special privileges and facilities like the tax rebate, subsidies.

Formation of regulatory agency

Total foreign investments have been classified under three categories on the basis of size of investment, and each category is regulated by a different authorities. First of all, we already have Department of Industries and Investment Board of Nepal. So the obvious question is, ‘why do we need more than these agencies to regulate investments?’ Is this an employment generation scheme? Now once an investor gets a permission from one regulator based on its size, say, if the investor wants to scale up (or down) his investment. The bill does not address how these issues will be dealt with; and the issue originates from having multiple agencies doing the same job in the first place.

Once again, it is definitely commendable – the recent efforts of the MoI, and lots of good can be expected out of these new reforms. However, the foreign investment act, rules and regulations associated with it must be as foreign-investment-friendly as can be, and should not be discriminatory. Foreign investments can be a major contributor in creating jobs and inducing growth of Nepalese economy. What we need to do while we are also doing these other exercises is do an investment climate mapping and then figure out how we can lure foreign investors that are going to neighboring and other comparable economies. Although we cannot compete with many countries in many things, we can definitely compete with all countries in one thing, and that is “policy”. By formulating more favorable foreign investment policies, we can attract higher foreign investments in Nepal.