Investment climate: Good or bad?

Nepal needs to take advantage of emerging favorable investment climate to boost private investment from both domestic and foreign investors for accomplishing its target

In recent days, we have been debating whether Nepal’s investment climate is improving or deteriorating. Government agencies and pro-government intellectuals have been highlighting the major developments in creating investment climate while the critics point out weaknesses and lapses seen in attracting investment—both domestic and foreign direct investment (FDI). So the question is: Is Nepal excelling or losing opportunity to attract investment?

International investors or lending agencies make up their financing plan keeping in view not only the investment opportunities and comparative advantages but also the security of investment and viability of the projects in a particular country. To be more precise, international investors make their own decision on the basis of their own judgment putting aside claims of both the pro-government pundits and anti-establishment scholars.

Good signs

Few developments in Nepal’s hydropower sector reflect the improving investment climate in the country. This has led to growing confidence of investors and domestic as well as international financing agencies. In a key milestone in the process of project implementation, SJVN-Arun-3 Power Development Company (SAPDC), the developer of 900 MW Arun-3 Hydropower Project, achieved the highest ever financial closure in the history of Nepal on February 6, 2020 securing the confidence of more than a half dozen reputed financial institutions (five Indian banks and two Nepali banks ). Out of around 63 billion Indian Rupees worth of commitments for investment by those financial institutions more than INR 53 billion is coming from Indian banks (State Bank of India, Canara Bank, Punjab National Bank, Exim Bank and Union Bank of India) and rest is from Nepal’s two leading banks (Nabil Bank and Everest Bank).

Another such encouraging milestone in Nepal’s hydropower investment is financial closure of 216-MW Upper Trishuli-1 on November 1, 2019 which has ensured private investment (most of the amount from nine foreign leading banks and multi-lateral agencies) worth around NPR 65 billion. These two achievements in securing financial closures for two hydropower projects demonstrate that not only investors but the lending agencies are also developing confidence to finance projects in Nepal. Such huge amount of lending commitment from the international lending agencies in very challenging sector like hydropower also depicts Nepal’s improving reputation as investor-friendly nation. This is an encouraging sign. Financing companies don’t decide to lend such a huge amount of money without properly assessing the investment climate. It indicates Nepal’s improving investment environment, which we have to cash in wisely and maintain in a dedicated way.

Financing commitments in Nepal’s projects by internationally reputed financial institutions (FIs) for long-term pay-back period have also encouraged Nepal’s domestic FIs. These lending agencies have offered interest rate far lower than prevalent in Nepali market, for the loan to SAPDC for agreed pay-back period of 13.5 years. Nepali banks also participated in the financing of the largest hydropower project in Nepal in the case of Arun-3 Hydropower Project. It would be great opportunity for Nepali banks to learn huge project-financing lesson and grasp various dynamics of such big-shot ventures. It would also create an environment in Nepal where even investors will get credit on moderate interest rate from lending agencies if the projects are lucrative. Doing Business Report 2020 released by the World Bank also shows that Nepal climbed up 16 notches to 94th position in terms of business climate. Significant improvement in business environment is mainly contributed by impressively improved access of investors to financial institutions.

Another cause to entice foreign investors and lenders to finance in Nepal’s hydropower sector is growing market and prospect of trade of electricity among South Asian nations. Multilateral arrangements such as SAARC Energy Framework, BIMSTEC Grid connectivity and Power Trade Agreement (PTA) between Nepal and India have paved the way for exporting energy from Nepal to not only the southern neighbor but also the other regional member countries. Outcomes of such regional and bi-lateral pacts have started to become visible. Bangladesh government and 900 MW Upper Karnali Hydropower Developer GMR Inc are close to signing a deal for export of 500 MW electricity to Bangladesh. The fresh move in export of Nepal’s energy in international market has encouraged other potential investors.

Reap the benefits

Nepal needs to take advantage of emerging favorable investment climate to boost private investment from both domestic as well foreign investors for accomplishing desired economic growth target. With the full-fledged implementation of federal system in Nepal all levels of the governments (federal, provincial and local) are desperate to welcome investment to push delivery of development projects. Expectation of people has gone up. All governments are responsible for faster delivery by living up to their commitments made before the people during the last elections.

Nepal is aspiring to catch up with regional pace of development with colossal investment, especially in the sectors of energy, transport, tourism and agriculture infrastructures. Given the limited resources with the government, weak technical knowhow and scarcity of qualified human resources within the country, Nepal has no option to attracting FDI into the country to achieve desired prosperity. Nepal needs to invest annually Rs 2025 billion per year from 2016-2030 to achieve Sustainable Development Goals (SDGs) as estimated by National Planning Commission (NPC). The current 15th Plan has also set target to achieve double digit growth, bring down poverty to 11 percent, increase per capita income to USD 1600 and limit unemployment to six percent. To meet these ambitious goals, the government needs to arrange a total of Rs 9200 billion for investment over the current periodic plan, where contribution from public sector, private sector and cooperative sector is expected to stand at 39 percent, 55.6 percent and 5.4 percent respectively. World Bank also estimates that Nepal is required to invest 10-15 percent of Gross Domestic Product (GDP) for the next ten years to plug the investment deficit.

Researches suggest that 10 percent rise in investment in infrastructure will contribute to one percent increase in GDP.

The government has set plan to generate 15000 MW electricity in ten years, a target that requires massive amount of investment, especially contributed by private sector. Huge investment in productive sectors can contain ballooning trade deficit which hovers around three billion rupees per day and generate employment for our youths within the country.

The government should capitalize on the increasing confidence of the international investors and lenders toward Nepal. Along with regular investment promotion events within and outside countries, it is also high time to revisit our existing laws for making them investor-friendly. Institutional capacity of investment promotion and facilitation agencies such as Office of the Investment Board should be strengthened for facilitating investors of large scale projects and promoting Nepal’s investment opportunities in international market.

The author is a consultant to the Office of Investment Board of Nepal