Nepali Times

The government is doing the job for them.

Foreign investment in Nepal is falling, there have been no major new ventures since Colgate, and as if things weren't bad enough, existing investors, fed up with new taxes, deteriorating security and chronic labour problems, want out. Just look at events in the last few weeks:

. Union Carbide India, the first major manufacturing joint venture in Nepal, decides to pull out
. American firms involved with the Bhote Kosi power project put off new investment
. Carlsberg caps its investment level, and threatens to withdraw from Nepal
. The Confederation of Indian Industry (CII) loses interest in its Nepal office
. Enron is re-considering its involvement in the mammoth Karnali hydroelectric project
. Kodak Nepal is still stuck

All this points to a lack of seriousness on the part of successive governments to attract foreign investors: incentives are given and then pulled away, new taxes appear out of nowhere, goalposts are moved all the time, there is new xenophobia in the air, corruption is flourishing, and threats and extortion have become commonplace.

It would almost seem that government is doing everything in its power to dissuade foreign investors. Says Prabhakar Rana of the Soaltee Group: "Investors come here only if they can make slightly more money than they would in their own countries, they don't come here for the love of the mountains." Soaltee is in partnership with two American companies, Dallas-based Panda Energy and Chicago's Harza Engineering Company International, to build the $98.5 million Bhote Kosi hydroelectric plant. Recently the government said it would re-negotiate the power purchase agreements (PPA) with foreign investors. Having spent more than $1 million in lawyer fees alone, Rana is confident that Bhote Kosi has a watertight PPA, mainly because tinkering with it would put hefty penalties on the government. The agreement with hydro-producers allows the government to buy out the investors, but only if it tops a 50 percent penalty over the investment amount. "A country which does not follow its own rules and regulations is not ready for investment," Rana told us. He added, "My partners are not interested in new projects because 36 MW has given us enough headaches." Over at Gorkha Brewery, makers of Carlsberg Beer, workers have just ended a 11-day lockout and went back to work on Monday, but not before severely disrupting pre-Dasain production. Fed up with regular labour problems, Carlsberg has decided to put a cap on its investment levels. "They have requested us to relocate factory from Gaidakot to aplace more strike-free," says Rajendra Khetan, executive director of the Khetan Group. "It has also told us it is ready to withdraw investment if some legislations do not change soon." Nepal Battery Company, the first-ever joint venture manufacturing effort, has decided to wash its hands off Nepal. It is leaving to avoid more losses resulting from a scathing and protracted labour dispute, partly over the hiring of Indian nationals. Nepal Battery, with an authorised capital Rs 34 million, is now looking for buyers to dispose its stock and assets. It was the incentives to foreign investors, especially in hydropower, that had made Nepal a pioneer in private sector power generation in the region. But many of the early gains have been eroded because of regression. The strategy was: to pull foreign investors, Nepal has to be a more investor-friendly than countries with greater economies of scale like Bangladesh and India. Why else would they come? After the December 1996 India-Nepal trade treaty a host of Indian companies like Dabur, Kodak and Colgate-Palmolive invested in Nepal, putting up production facilities to cater to the domestic market as well as export to India. There were incentives like tax-free exports, duty-free import of raw materials and cheaper labour in Nepal. But things soon started turning sour. The companies found that incentives detailed in the foreign investment rules didn't exist or were flouted, and there are hidden taxes and massive payoffs to officials. Refunds for duty on raw material imports aren't made for years. In fact, the Finance Ministry doesn't seem to have made adequate provisions for refunds to foreign investors for duty-free imports. By the middle of 2001, there could be an accumulated Rs 1 billion that the government will owe in refunds to foreign companies, but the ministry has allocated only Rs 200 million for the same in this year's budget. On top of that, labour problems have got politicised, there is an anti-Indian agitation among Nepali staff, and Maoists have targetted Indian joint ventures like Colgate and Surya Tobacco.The message to potential investors is clear: keep out, these guys don't know what they want. And sure enough, a British generator manufacturer that wanted to come to Nepal to start a joint venture recently got spooked and went elsewhere. At the government and bureaucracy levels, there is seemingly little concern about the message that is going out to potential investors and the damage this it is doing to the country. Finance Secretary Bimal Prasad Koirala admits there is a problem. "There is a need to review the labour law which is roundabout and complicated, especially the exit policy," he told us. "We're working on improving our competitiveness by pushing the private sector reforms we promised donors in Paris." This package includes making new laws governing banking and financial sector reforms and amending the Company Act to incorporate rules for public disclosure. Some of these laws would have already been passed if the House had completed its full session. There are roadblocks everywhere: take the corporate income tax, which is 25 percent. Added to it are unseen taxes like a mandatory 10 percent bonus on profits and a five percent housing fund. "Why should I come to Nepal if I have to pay 40 percent corporate income tax?" one potential investor asked us. The end result is that profit-making companies end up paying more and more tax which takes the bottom out of their margins . This year's budget slapped another 1.5 percent tax on exports, hitting profitability further. Other than the free-trade arrangement with India there is very little reason for investors to come to Nepal. The domestic market is small, and Nepal offers no particular advantages over locations in north India. Unskilled labour is cheap but it is also much less productive. Land prices for factories are high. Says one investor: "It is a myth that labour is cheap in Nepal. When you take into account productivity, holidays, it is less attractive than India." Nepal is now competing with other Indian states which in turn are competing among themselves for a more business-friendly environment. The last straw is corruption. This huge indirect cost that investors incur in Nepal just doesn't make doing business a viable proposition. "I wouldn't say all businesses are clean either, but official corruption is something else," says Pradeep Shrestha, chairman of the Federation of Nepalese Chambers of Com-merce and Industry (FNCCI). "Discretionary authority allows officials to squeeze businesses." The attraction that Indian investors had to move to Nepal was the duty differential on raw material imports which made it attractive for companies to produce in Nepal and sell in India. That too is changing with Indian tariffs coming down with every new budget. Another distinct advantage Nepal had over Indian states like Bihar and Uttar Pradesh was industrial peace. No more, in 1998/99 Nepali industry lost 98,600 worker days to strikes and another 14,600 to lockouts. Trade unions are an accepted part of industry, but in Nepal unions are aligned to parties and their allegiance is to their political patrons and not to workers they represent. And often enterprise-level unions don't accept or abide by central-level decisions. Even if everything else was fine, Nepal's labour productivity suffers because of the large number of holidays. Paid government holidays in Kathmandu Valley alone number 132 days-almost five months-in a year. This does not include holidays on the days when the king travels in and out on state visits, special leave for women and the courts, not to mention the bandhs. What is clearly needed, as Secretary Koirala says, is a fully committed effort to look at all laws-maybe even a look back at some recent revisions in the Foreign Investment and Technology Transfer Act and the Company Act which tax both dividends and interest-and the overall political environment. But at the rate things are going, if the Maoists' intention is to scare away foreign investors from Nepal, they needn't bother attacking their factories anymore. The government is doing the job for them.

(11 JAN 2013 - 17 JAN 2013)