Shake it up
May 30, 2017 00:35 AM Bishal Thapa
Photo Courtesy : Office of the Investment Board
Focus of IBN must evolve. Instead of looking outside for investors, it must also look inwards and start working with private companies
The shining moment for the Investment Board of Nepal (IBN) this year came in March at the Nepal Investment Summit. In attendance were delegates from 23 countries: over 500 participants and 250 investors. Flanked by leaders across party lines, in what was a bipartisan show of “political consensus for FDI,” investors submitted their letters of intent to much applause.
When all the letters of intent were fully counted, it looked like Nepal’s moment had finally arrived: US $13.7 billion from 26 companies across eight countries targeting 10 sectors. IBN went to proudly announce “Nepal: The investment destination of the next decade.”
By May, however, IBN officials were suggesting that perhaps Nepal hadn’t quite become the “investment destination of the next decade.” Several media outlets reported that IBN was facing difficulty in materializing investment pledges (e.g., The Himalayan Times, May 27, 2017).
Speaking to the press, Maha Prasad Adhikari, the Chief Executive Officer of IBN, said, to quote from the same May 27 news report, “Now what we need at the earliest to capitalize on this investment pledge is to develop a concrete foundation for foreign investment by developing projects as sought by investors and define the modality of the project with clarity on the role and contribution of the government.”
The surprising thing wasn’t that IBN toned down its wishful thinking on Nepal as the investment destination of the next decade but that it took so long—two whole months—for it to happen. For Nepal has a dismal FDI record.
In 2015, net FDI inflow was US $52 million or about 0.2 percent of GDP. At its peak in 2011, net FDI inflow was $94 million (0.5 percent of GDP). By contrast, the average net FDI inflow among low-income countries was 3.9 percent of GDP in 2015 and 5.3 percent of GDP in 2011.
The $13.7 billion investment pledge represents approximately 60 percent of GDP—a quantum leap over our historic track record on FDI. Without meaningful changes in Nepal’s investment policies and climate, the $13.7 billion pledge possibly indicates that Nepal is the investors’ destination of choice (where they would visit for a nice summit) rather than investment destination of choice (where they would send their money).
Despite seemingly boundless opportunities, Nepal continues to struggle to attract FDI. To improve this situation, a number of measures can be taken. First, the government must step back and let the private sector, which can allay geo-political concerns over FDI, take the lead.
Public sector-led investments and grants through the government, and bilateral and multilateral agencies have crowded out FDI in Nepal. While IBN was showcasing the $13.7 billion investment pledges, elsewhere in the world it was the geo-political significance of those pledges that was being closely examined.
In China, stories were about how Chinese investors accounted for approximately 60 percent of all pledges and how China was continuing to retain its lead on FDI in Nepal, a lead it had acquired a few years ago. In India, the stories were about the dire implications of China’s deepening economic ties with Nepal and the need for India to revitalize its engagement with Nepal.
Investment summits cannot be seen only as a platform for the government to talk about all the great things they are doing and why other governments should get excited about it—for that there is the Nepal Development Forum. Investment summits must rather be platforms for the private sector—particularly domestic private sector—to show its belief and leadership in investment opportunities. FDI can only be realized if they are about investment opportunities and not about geopolitics.
Second, the IBN needs a better vision for itself. The failure to attract FDI is often attributed to political uncertainty, poor policies, inadequate legal framework and complex rules with multiple implementing authorities. IBN highlighted several of these concerns in explaining why the investment pledges would be hard to realize.
IBN was established in 2011 as a high-level government agency charged with creating an investment-friendly climate by providing a one-window service for foreign investors. Its key purpose is to help prospective foreign investors in large projects navigate complex rules and manage the political, regulatory and legal uncertainties. In other words, IBN exists, in part, because Nepal’s rules on FDI are so complex that foreign investors need a navigator to help them through the process. But this is an outdated way of thinking.
IBN helping foreign investors navigate their way into Nepal with a “one-window service” is a bit like a driver’s license applicant using a dalal (or a broker). The process of getting a driver’s license is so complex that the best thing to do for most applicants is to get hold of one of the many dalals that line the street outside the Department of Transport. The dalal helps you get the right forms, to stand in the right queue and to pass the required tests. Nepal’s strategy of attracting foreign investment cannot be establishment of a glorified dalal. If policies related to FDI are the problem, then fix the policies.
Third, foreign investors need actual project opportunities not just the prime minister’s speeches on how great the country is doing. Nepal’s domestic private sector has been a poor developer of FDI projects. This may be because it lacks the capacity to develop large and complex projects or because it doesn’t have the capital for early-stage project development, which is often risky.
Whatever the reason, unless the domestic private sector steps forward with projects and financing, investments pledges will largely remain a pie in the sky or simply be reduced to development assistance of some sort.
This is where IBN must have a more contemporary vision—not just as a navigator that drives foreign investors to different government offices to collect approvals, but rather as an aggregator of FDI in Nepal.
The focus of IBN must evolve. Instead of looking outside for investors, it must also look inwards. It must start working more directly with domestic private companies to identify, develop and finance projects. One way to do this is through a pooled service, where it co-invests with the private sector in development of projects and in the process takes a stake in them.
IBN must offer a financing gateway. In many cases, even though the underlying projects may be attractive, the costs and difficulties of conducting due diligence will be too high for foreign investors. This may be because the projects don’t have the economy of scale or are located in complex environments. In such a context, investors may be willing to invest in a portfolio of projects, particularly if the investment vehicle is backed by some government credit guarantee for an interim period, as Nepal establishes a better international credit rating.
But for any of this to happen, IBN must be reborn as an investment company—a sovereign backed company with public-private partnership that offers technical support to the private sector, participates in project development and serves as investment aggregator. There has never been a better time to reshape IBN. A fresh wave of optimism is sweeping across Nepal. International investors are willing to reengage. The domestic private sector is more confident.