Foreign investment in Nepal: High commitments, low actual investment

Kathmandu, September 1 — The cabinet meeting on Thursday decided to renew the license of the telecommunications company Ncell under specific conditions. The government has opted for a renewal payment plan spread over four installments over five years and has also imposed a 10 percent interest rate.

Under the Telecommunication Authority Act, telecommunications licenses are issued for 25 years. Initially, the license must be renewed every 10 years, and subsequently every five years. Each renewal requires a payment of 20 billion rupees to the state.

Previously, Ncell had also paid the renewal fee in installments, but without incurring a 10 percent interest charge. Similarly, government-owned Nepal Telecom renewed its license five years ago without any interest charges, paying only 190 million rupees at that time. The remaining amount was settled last May without any additional interest, penalties, or damages.

This time, however, the renewal process for Ncell has faced significant complications. The company’s license was set to expire on 1^st September, and the renewal decision was made only three days prior. This renewal process has drawn flak as being prejudiced against Ncell vis-à-vis the Nepal Telecom.

Additionally, the government has not recognized the share transfers of Ncell, with Axiata exiting after transferring its shares. The government has blocked this transfer, citing a lack of transparency.

Ncell's representatives have criticized the government's actions as biased and discriminatory against foreign investment companies. They claim the government is succumbing to the influence of interest groups and might be preparing to nationalize Ncell in five years.

According to the Telecommunications Act, if a telecommunications service provider has over 50 percent foreign investment, the government retains ownership of the land, buildings, equipment, and structures after the 25-year license period expires. However, if the foreign investment is less than 50 percent, the government does not retain ownership.

Previously, Huaxin Cement, another foreign-invested company, publicly stated difficulties in establishing its industry in Dhading.

Rule 6 of the Asset Management Regulations, 2022 stipulates that rights to mortgage, sell, or transfer property cannot be executed without the authority’s approval at least three years before the license expires. Nonetheless, the government obstructed the transfer of Ncell’s shares six years ago.

This instance reflects a broader pattern of the government’s varying treatment of foreign-invested companies. For example, Dangote, an African company with substantial investments in cement, chemical fertilizers, and sugar, faced significant hurdles when attempting to establish a cement industry in Nepal. Despite obtaining investment board approval and establishing a company with a paid-up capital of 56.23 billion, Dangote withdrew after being subjected to excessive demands for mining and technical proposals.

A sky-high difference in preaching and practice

The government remains committed to attracting foreign investment, frequently hosting investment conferences to entice investors. However, government statistics reveal that foreign investors in Nepal are still facing challenges, with reported harassment undermining their comfort.

Despite significant foreign investment commitments each year, the actual investment remains notably low. For instance, in the fiscal year 2021-22, foreign investment commitments reached 54 billion rupees, yet only 18.6 billion rupees were actually invested.

In the fiscal year, 2022-23, commitments were 33.4 billion rupees, with 6.5 billion rupees invested.

In the last fiscal year, 2023-24, commitments totaled 61.09 billion rupees, while investments were only 6.5 billion rupees.

The investment conference held last year, which doubled the previous year's commitments, played a significant role. The third investment conference in Kathmandu on April 28-29 led to investment commitments worth 17.5 billion rupees in June-July alone.

Despite the high commitment figures, actual investment remains low. In the fiscal year 2020-21, there were 32 billion rupees in commitments and 19.5 billion rupees in investments.

 In 2019-20, the commitments were 39 billion rupees, with 20 billion rupees in investments.

Experts suggest that internal obstacles prevent the realization of about one-third of the annual commitments. Radhesh Panta, former Chief Executive Officer of the Investment Board, argues that foreign investors lose trust when domestic investors are also mistrusted. “We now have plenty of money for investment in our banks, but local industrialists and businessmen lack the courage to invest,” he says. “We haven’t created a conducive environment for foreign investors.”

Panta cites political and policy instability, corruption, complex immigration and investment laws, delays, difficult personnel administration, and a double taxation system as major barriers to foreign investment. Additionally, challenges related to land acquisition, tree felling approvals, and community obstacles further discourage investors, sending a negative message about the investment climate in Nepal.

No country rating

The government had included a plan for 'country rating' in the budget of fiscal year 2018-19. International rating company Fitch was tasked with the country’s credit rating in January of that year, but the process was postponed due to the COVID-19 pandemic.

Country rating is not the sole factor influencing investment but provides investors with insight into a country’s investment climate. The government needs to act swiftly to have a meaningful impact on investor confidence. Even with a rating, it is crucial for the government to openly communicate this information to potential investors.

The government also announced a 'Country Rating' plan in the budget of fiscal year 2023-24, with officials promising its completion before the investment conference last April. However, the rating process was stalled due to a shift in focus to 'Capacity Building', and the conference took place without the rating being finalized.

A country’s credit rating offers insights into investment environment, security, returns, legal frameworks, and political and administrative stability. It is a vital tool for raising capital through international bonds. Despite vigorous efforts to expand investment, the country rating remains incomplete.

Panta reiterates, “Country rating isn’t everything for investment, but it helps investors understand the country. The government should expedite this process to positively influence investor psychology and openly share the rating results.”