March 28, 2017 8:20 pm JST

Nepal Maoists roll out red carpet for foreign investors

Former revolutionary communists seek overseas funding for development

DEEPAK ADHIKARI, Contributing writer

Pushpa Kamal Dahal, center, Nepal’s Maoist prime minister, greets Asian Infrastructure Investment Bank President Jin Liqun (second from right) and other delegates at an investment summit in Kathmandu on March 2 (Courtesy of Investment Board of Nepal)

KATHMANDU -- When Nepalese Maoists launched an armed insurgency in 1996, one of their targets was Pepsi, a multinational brand owned by PepsiCo of the U.S. On Feb. 16 that year, party members detonated a petrol bomb at a Pepsi plant on the outskirts of Kathmandu. To the communist insurgents, the company symbolized global capitalism, whose rapacious tentacles they wanted to chop off before Nepal was engulfed.

Twenty-one years after the attack, and 10 years after the end of a civil war that followed it, the Maoists are in government, and have made a U-turn. To the chagrin of their fellow communists in neighboring India and elsewhere, the former revolutionary party has abandoned communism and embraced the capitalist economy, agreeing also to play by the rules of parliamentary democracy.

Pushpa Kamal Dahal, chairman of the Communist Party of Nepal (Maoist-Center), now heads a fragile coalition government, and is keen to welcome foreign investors to the impoverished and landlocked country.

Opening a two-day investment summit to attract foreign investors on March 2, Dahal said: "We are committed to ensuring an environment conducive to investment by establishing industrial peace and ensuring law and order." Dahal, who led the 10-year insurgency, spoke about a raft of measures, including fiscal incentives and other policy reforms, that his government has introduced recently to attract foreign investors.

"The abundance of resources, both natural and human, and large and growing markets in our neighborhood ensure one thing -- investment in Nepal is profitable," he told the gathering of roughly 250 Nepalese and foreign business leaders from 20 countries.

The foreign investors rewarded their host by pledging $13.52 billion in investments. Big names included China Machinery Engineering Corporation, one of the largest engineering and trading companies in China, Ashok Steel Industries of India and Japan's Kansai Electric Power. By contrast, Nepal received a total of $144.7 million in foreign direct investment in the fiscal year that ended in July 2016.

While the pledge was a welcome boost for the country, whose economy has been sustained by remittances from migrant workers, it also demonstrated a rare consensus among the three major political parties. Former prime ministers Sher Bahadur Deuba and K.P. Sharma Oli, who also head major parties, said they will cooperate to attract FDI.

Deuba's Nepali Congress is a partner in the governing coalition, and he is in line to succeed Dahal as part of a deal they struck before forming the government in August. Oli's Communist Party of Nepal (Unified Marxist-Leninist) forms the parliamentary opposition.

Liberalization

Despite being a neighbor of two of the world's fastest growing economies --China and India -- Nepal has struggled to lure foreign investors. The country began wooing overseas money in 1990, when it ended a 30-year autocratic regime and entered a multiparty democracy, launching an era of liberalization and open markets.

Annual FDI averaged 1.9 billion Nepali rupees ($18.13 million) in the late 1990s, according to government figures. But as the civil war escalated, inward direct investment dropped sharply, to around $480,000 at the height of the war in 2000.

Despite the end of the war in 2006 Nepal failed to draw investors, in part because of political instability and remaining restrictions on foreign investment in sectors such as education and agriculture. In 2011, a government headed by Baburam Bhattarai, a former Maoist ideologue, established the Investment Board of Nepal, a state agency to handle FDI projects worth more than 10 billion Nepali rupees.

Since its inception, the IBN has helped Nepal to negotiate deals worth $2.4 billion with Indian companies to develop two hydropower plants, each with the capacity to generate 900 megawatts of electricity. Bhattarai, who now heads a new pro-development party, also signed a bilateral investment promotion and protection agreement, which protects the rights and safety of foreign investors, with India in 2011.

China is said to be keen on negotiating a similar agreement with Nepal, which has identified nine sectors for foreign investment, including energy, infrastructure, tourism, information technology, finance, mining and agriculture.

With Dahal championing a vision of economic prosperity, Nabindra Raj Joshi, the minister for industry, has spearheaded a campaign to foster an attractive environment. Under his ministry, 14 special economic zones have been planned, with one in the southern town of Bhairahawa nearing completion.

Aimed at export-oriented industries, the SEZs offer tax incentives, ban strikes, and provide trading areas, recreational centers, technology parks and banking services. Foreign investors get five-year tax breaks, and the government is working to minimize bureaucratic red tape by creating a fast-track mechanism for project approvals. The industry ministry is setting up a panel of top officials who will make decisions on company registrations within three days of applications.

Joshi said that while political stability is hard to achieve, his department is offering investors policy stability. "We want to assure foreign investors that we have laws in place to safeguard their investment," he told the Nikkei Asian Review at his office in Kathmandu. "We found that there's a tremendous interest in Nepal. Now is the time for those who were unsure when to take the plunge."

The fact that Nepal has yet to build the vast infrastructure it requires -- including roads, airports and hydropower plants -- can serve as a major draw for potential foreign investors, Joshi said. "Another advantage for us is the young labor force that is hardworking and sincere," he said. "The joint venture companies that have been here have not only sustained themselves, but are also making good profits."

Joshi cited as examples Unilever Nepal, a listed company that makes detergent and personal care products, and Dabur Nepal, a privately-owned group that produces herbal medicines, as joint ventures that are making profits. Unilever Nepal increased gross profits by 50% in the fiscal year that ended in July 2016, compared with the previous year, and Dabur Nepal increased gross profits by 32%, compared with the same period.

Power outages

Nepal boasts the best macroeconomic environment in South Asia, according to the World Economic Forum, thanks to improvements in health and education. Since October last year, the country has ended power outages that lasted up to 18 hours a day during the dry months of January to March, when hydroelectric generation is reduced.

The uninterrupted power supply, which has been attributed to more efficient management of power distribution and energy imports from India, has boosted confidence among businesspeople, who had been forced into buying expensive diesel generators to maintain power.

A member of the World Trade Organization, Nepal is currently categorized by the World Bank as a "low income country" with gross national income per capita of $1,025, but hopes to be recognized as a "lower middle-income country" with GNI per capita of between $1,026 and $4,035 by 2030. However, it needs infrastructure investment costing up to $18 billion, according to a World Bank study of 2014.

Kenichi Yokoyama, country director of the Asian Development Bank in Nepal, said that Nepal faces serious challenges, due to its position. "Nepal is quite disadvantaged because of its location and geography. The unpredictable weather pattern, for example if the monsoon season is delayed, will have huge impacts on GDP [gross domestic product]."

But he added that Nepal could benefit from rising labor costs in China as producers look elsewhere for cheaper manpower, especially in sectors such as technology and business process outsourcing. Yokoyama also sees huge potential in tourism, especially from China and India. The sector accounts for roughly 4% of GDP.

Ultimately, Yokoyama said, Nepal needs to bring in some big-name investors and hope that others will follow. "You just don't stop at opening the door," he said. "You bring in the investors that are world class. You invite them, protect them and showcase that world-class companies are doing business in Nepal. That will give a very strong message to others."

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