Province 5 is gearing up for an Investment Summit in next few months to attract domestic and foreign investment into provincial level infrastructures and to finance other development works. But the federal government’s laws on for­eign direct investment (FDI) give the Department of Industry (DoI) full authority to decide whether to let provincial governments process any foreign investment. The fed­eral government alone needs $15 billion a year in investment to meet infrastructure gaps, and struggles to keep up with the demands of the provincial and local governments. Yet despite the dire financial need of local and federal governments, there is no conducive environment for investors. Unfavorable regulatory envi­ronment, lack of infrastructure and absence of credit facility are major hindrances for the country’s small and medium enterprises. Large infrastructure projects face even more complex challenges such as in availability of land and long-term financing mechanism. Although the World Bank’s new Doing Business Index has por­trayed Nepal as a better destina­tion for investment compared to some earlier years, actual invest­ment is minimal. The FDI inflow in 2018/19 was around $130 million, or 25.7 percent less than previous year. Overall non-farm enterprise growth in the country is bleak. Yet Nepal has still been ranked 94th in 2020, almost 16 positions up from last year’s position among 190 countries ranked.

Government efforts to attract FDI and engage private sector to develop infrastructures seem mostly ritual­istic. The Ministry of Finance, and especially finance minister Yubaraj Khatiwada, made possible the For­eign Investment and Technology Transfer Act (FITTA) 2019 and the Public-Private Partnership and Investment Act (PPPIA) 2019. These bills were major ‘showpieces’ during the March 2019 investment summit. But the summit organized to present Nepal as a favorable global invest­ment destination has yielded almost no fruit. Nepal’s competition is with countries such as Bangladesh, Kenya and Philippines, which have made significant strides in terms of attract­ing FDI.

Implementation is always a criti­cal hurdle in Nepal. The PPPIA aims to make Investment Board of Nepal (IBN) more functional by dividing it into investment and PPP units, in order to more efficiently manage pure investments and PPP activi­ties. But the government has shown no interest in this pragmatic mea­sure. Only endorsing bills won’t be enough to get more FDI if the acts cannot be implemented.

Engagement of domestic private sector in infrastructures and invest­ment in services is also limited as the government perception of property rights is negative. Finance Minister Khatiwada’s remarks on imposition of property tax while transferring inherited property has played a role in keeping the private sector away from economic activities. Overall performance of the economy might seem healthy as our growth figures are above the average of the past one decade. But the non-farm enter­prises growth is declining and con­tribution of manufacturing sector in GDP is decreasing.

It is a challenge to attract invest­ment given the long list of indus­tries and businesses restricted for foreign investment. Moreover, lack of institutional coordination and communication among institutions such as the Department of Indus­try (DoI), the Nepal Rastra Bank (NRB) and the IBN creates further hindrances for foreign investors. Similarly, undermining the merito­cratic process in appointment of top leaderships of such institutions has direct impact in undermining insti­tutional good governance. In the absence of institutional good gover­nance within key organizations, the process of attracting foreign invest­ment and engaging private sector remains hamstrung. Having a team of weak negotiators on the other side of the table is a waste of time for genuine investors.

In the federal context, provin­cial and local governments should be allowed to attract investment without any intervention from the center, and these provincial and local governments should also be empowered to manage small to medium size foreign investment. Similarly, the government decision to increase minimum FDI threshold from $50,000 to $500,000 has sig­nificant implications on FDI inflow. This policy hurts small and medium enterprises (SMEs), which have been a major driver of Nepal’s service sector. In fact, the contribution of service sector, almost 57 percent of the economy, has been increasing in the past one decade. Against this backdrop, the government should revisit its new FDI cap O

The author is an economist