Unseen Barriers in Foreign Investment and Technology Transfer Bill

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the March 31, 2019.

Foreign Direct Investment (FDI) brings in a package of resources- capital, skills, technology, management know-how, along with enhanced production activities- to a host economy. It not only increases consumer welfare, pumps up productivity and labor skills, but also encourages technical development and generates better paying employment. Many transition economies have completely turned around their economic performance by adopting FDI friendly policies. While Nepal has failed to be a part of global production networks, countries such as Laos, Bangladesh, Sri Lanka and Vietnam have successfully attracted considerable FDI and have steadily moved up the value chain.

Nepal opened its avenues for foreign investment with the promulgation of Foreign Investment and Technology Act, 1981. In the aftermath of the liberalization that began in the 1990s, the Government of Nepal enacted ‘The Foreign Investment and Technology Transfer Act (FITTA) 1992’, that allowed relaxed requirements of percentage of foreign ownership (except a few sectors included in its negative list), free repatriation, and treatment of equity, debt and technology transfer as foreign investment. Since its inception in 1992, these major elements have received continuity however the Bill has been amended many a times to suit the present context.

Very recently, the Government of Nepal endorsed the ‘Foreign Investment and Technology Transfer Bill 2019’ that replaced the ‘FITTA, 1992’ in a bid to create a more welcoming investment climate and to appease foreign investors. On one hand, the new bill opens up provisions for private equity and venture capital, and grants on accessing international capital market. Also, the Bill envisages automatic routes for investment permission and company registration as well as incorporation of Information Communication Technology (ICT) and one-window policy to ease the bureaucratic procedures. On the other hand, there exist a great deal of layers in the investment process.

Under the new FITTA bill, there exist ambiguity and policy contradiction associated to the approval regime. The Bill stipulates that the Department of Industry (DoI) approves investments under NPR 5 billion while the Industry and Investment Promotion Board (IIPB) approves investment over NPR 5 billion. Likewise, the Private Public Partnership and Investment Bill 2019, provides that the Investment Board of Nepal (IBN) will approve investments above NPR 6 billion. This indicates that there is an overlap between the IIPB and IBN due to IIPB’s narrow margin for approval. This policy inconsistency acts as a setback as it confuses investors and hinders proper participation of a potential investor, both in the domestic and international front.

Moreover, in order to qualify to invest in Nepal, an investor needs to obtain clearance from multitude of government agencies to fulfill any procedure. Section 17 of the FITTA Bill states that the potential investors’ license will be revoked in case the investor is not able to make the specified investment within the stipulated time-period. Since, interdepartmental coordination is weak among the government entities, delays are inevitable. This provision of unwarranted termination may inhibit inward investment because of its inability to provide security to aspiring investors.

Even though the Bill allows investors to repatriate the earnings, dividends, proceeds from liquidation and sales of shares, the investors need to prove that they have complied with laws, agreements and obligations. Unlike the previous editions, the new Bill does not grant repatriation as a right to the foreign investors. Additionally, the Bill backtracks and restricts business visas to a maximum of two people. These provisions may discourage the investors which may further deter foreign investment. Furthermore, the government’s closely watched list- the Negative List- in which foreign participation is regulated, as part of efforts to protect the domestic industry, has been lengthened. In the new Bill while bee keeping and fish farming are open for investment to all, travel agency, trekking and mountaineering are prohibited for foreign investment. This imposition of control requirements by the Nepalese authorities implies lack of investment friendly regulation.

Although Nepal is working towards establishing a favorable investment climate, there are various dimensions and unseen barriers in the Bill that have been grossly overlooked. The lack of investor confidence in the Nepalese market still persists as a daunting challenge to the economy. The government should thus identify the contradictory provisions in the Bills and ensure uniformity among the laws. For this to materialize, the governmental departments must work in tandem to make the bills more investment friendly. If the country is determined to attract FDI, the prevailing rent-seeking tendency must come to an end. It also needs to make foreign investors’ entry and exit flexible as well as simplify administrative processes while doing business in Nepal. It must also limit its negative list to sensitive sectors such as public order and arms and ammunitions.

Therefore, the government needs to divert its focus from regulation and control to facilitation and acceleration of investment.