Investment Opportunities in Nepal Hydropower and Tourism

Transcription

1 Investment Opportunities in Nepal Hydropower and Tourism EIAS Briefing Seminar In Cooperation with the Embassy of Nepal in Brussels 14 February 2014 This EIAS briefing seminar aimed to take stock of the vast investment opportunities Nepal offers to the world and members of the European Union in particular. EIAS had the honour to welcome H.E. Mr Ram Mani Pokharel, Ambassador of Nepal to the Benelux and the European Union who delivered the keynote address. This was followed by a panel discussion chaired by Dick Gupwell, Vice- Chairman, European Institute for Asian Studies; with valuable contributions from Prof Valerie Ndaruzaniye, President, Global Water Institute; Prof Dr Sri Ram Poudyal, Chairperson, Institute of Policy Research, Government of Nepal and Board of Directors, Nepal Rastra Bank; as well as Dr Ram Hari Aryal, Former Secretary, Government of Nepal and Board of Directors, Nepal Rastra Bank. The speakers at the event took a comprehensive sectoral approach in highlighting the benefits of investing in Nepal. An overall introduction was given on the legal framework governing Foreign Direct Investment (FDI) in Nepal, and the particularities of specific sectors followed afterwards. In recent developments last year, The European Investment Bank (EIB) has granted a EUR 55 million (NPR approx 6.41 billion) loan to the Federal Democratic Republic of Nepal to finance the construction and operation of the Tanahu Hydropower plant. This naturally meant that significant attention was on investment opportunities in the hydropower sector. Our panel discussants were right to point out however, that Nepal aims to attract FDI to other sectors as well, including manufacturing and tourism.

2 Introduction Nepal, a relatively small country of 147,181 sq Km with a population of 26.5 millions, finds itself between two booming economies, China and India. It has a GDP of billion, and produced one of the slowest growth rates in the region in 2013 at 3.6 percent. As one of the least developed countries in the world, about one-quarter of Nepal's population live below the poverty line. While cities are more industrialised, rural areas still depend on subsistence economy. Agriculture provides a mean of livelihood for the majority of the population and contributes for about a third of the country's GDP. Meanwhile the industry sector contributes to around 15 percent to the national GDP and is focused on textiles, brick and cement production, and processing agricultural products. The largest share of GDP (49 percent) is produced in the service sector, tourism being a particularly important source of revenues. Nepal has one of highest hydropower potential per square km, but at present it only exploits a small fraction of the total. Moreover, Nepal can benefit from the huge markets hungry for electricity in neighbouring India and China. The investment strategies discussed at the briefing seminar reflected this reality, however some concerns were raised regarding the potentially discouraging effect the volatile political climate has on foreign investment. Since 1951, the Nepalese monarchy has faced numerous attempts at reform, including the 1990 establishment of a democratic, multi-party system within the constitutional monarchy which was preceded by the first visit of a delegation from the European Parliament in The engagement of the European Union with Nepal continued and culminated in the successful negotiation of a Framework Cooperation Agreement which came into force in 1996, and has been the basis of EU-Nepal relations ever since. In the same year, a Maoist insurgency broke out and resulted in a 10-year civil war. Following months of intense negotiations between the government and the Maoists, an interim constitution was put in place in General elections formed a new Constituent Assembly and declared Nepal a Federal Democratic Republic in Internal tensions and instability followed as four different coalition governments came to power in the following three years. In 2011, the Nepal-Maoist Baburam Bhattarai became Prime Minister and called for new elections that finally took place in March Khil Raj Regmi, former chief justice of the Supreme Court, was charged with holding Constituent Assembly elections in December As a result of the elections, since 11 February 2014, the new prime minister is Sushil Koirala. In light of decades of internal strife, the general consensus at the seminar was that the December 2013 Constituent Assembly election hopefully heralds a long period of political stability that is absolutely necessary for investment-led economic growth. Given the geographic realities and its level of development, Nepal is keen to embark on an FDIdriven economic growth path. So far, however, such attempts have encountered difficulties due to the turbulent history of the country. This explains why, in terms of FDI potential index, Nepal ranks the lowest in its region. In this vein, some participants expressed the opinion that perhaps a more stable political environment would be beneficial for attracting further investment from members of the European Union. Advantages of investing in Nepal Speakers from Nepal highlighted that the advantages of investing in Nepal lay in its economic potential and an investment-friendly legal environment. The huge potential for economic development comes partially from its geographic location, located conveniently

3 close to the two enormous markets of China and India, and partially from its cultural, biologic, and topographic diversity. Moreover, as the panel discussion revealed, Nepal's recent experience with democratic government system, the high concentration of hydropower potential, liberal investment laws, and a strong legal framework promoting an investment-friendly environment make Nepal an attractive target for Foreign Direct Investment. Even though the largest sources of FDI are China, India, and the United States, Nepal hopes that the favourable situation in both market availability and resource availability will attract the attention of investors from the European Union as well. Investment in the manufacturing and service industries would mean that European investors can potentially reach China's 1.63 billion and India's 1.24 billion as well as Nepal's 26.5 million population with goods and services. The easy access for Chinese and Indian markets is underlined by the possibilities of the trade-investment nexus between these countries. The Nepal-India Trade Treaty, last renewed in 2009, provides zero tariff access to almost all products manufactured in Nepal. Similarly, China provides zero tariff access to 7,787 Nepali Products that presents excellent export possibility of food grains, sugar, vegetables, and fruits. The improving transport infrastructure of Nepal offers future synergies for utilizing the trade-investment nexus in relation to other countries in the neighbourhood. Nepal boasts comparatively good paved road and air transport connectivity relative to its immediate neighbours. Further incentives for investing in Nepal are the efficiency increasing factors such as cheap labour with a scope for increasing labour efficiency, efficient communications system, large number of management and engineering graduates as well as chartered accountants. A significant immaterial factor that also boosts investment competitiveness is the legal framework governing investment: the Investment Board of Nepal (IBN) promotes an investment-friendly environment as the central agency for FDI facilitation, while a streamlined FDI approval process ensures that large investments in strategic sectors are unhindered by too much bureaucratic pressure. The IBN is chaired by Prime Minister Sushil Koirala, and is the highest level board for promoting economic development. Its priority areas are large hydropower projects above 500 MW, infrastructure, airports, agriculture & herb-processing, solid waste management & fertilizers, financial institutions, and healthcare industry. In order to foster an investment-friendly environment, the investment approval process is significantly simplified for investments with fixed capital of at least 10 billion Nepalese Rupee. For such ventures, the approval is given directly by the Investment Board after which company registration, industry registration, and commissioning can immediately take place. Similarly, the visa procedures for business and feasibility study trips have also been simplified. Moreover, foreign investors making an investment equivalent to more than $100,000 at one time will be granted a residential visa on recommendation of the Nepalese Department of Industry (DOI). The Department of Industry is the sole agency and implementer of the 1992 Foreign Investment & Technology Transfer Act. This law, together with the Industrial Enterprise Act, governs and regulates the entry and operation of Foreign Direct Investment to Nepal. The minimal threshold for FDI is set at $50,000 and it can be either shared investment in existing industries, technology transfer, or establishment of new industries. Although Nepal welcomes investment in many lucrative sectors, some industries are restricted for FDI. These areas mostly cover industries crucial for national security such as Arms and Ammunition Industries, Gunpowder and Explosives, and Industries related

4 to Radio-Active Materials. Meanwhile, other restrictions on FDI are enforced to protect local small and medium businesses in the service sector such as catering services, beauty parlours, and rural tourism. Investing in Hydropower and tourism: pros and cons According to official figures, Nepal is the second richest country in inland water resources with over 818,500 Ha surface water including 6,000 rivers with a total length of 45,000 Km. Although claims of Nepal's economically and technically feasible hydropower potential of 42,000 MW are ever more challenged from the scientific community, it is widely accepted that with proper investment Nepal has the water resources to cover its own energy needs as well as to export electricity to energy hungry India and China. The aforementioned official predictions put Nepal's hydropower electrical energy generating capacity at 73,000 GWh, while recent studies suggest a figure of 47,000 GWh. This would rank Nepal around the 30th place globally in terms of economically and technically feasible electrical energy generation capacity. Debates about the true hydropower potential aside, the most pressing issue seems to be whether the current government policy of heavily promoting big hydropower projects (above 500 MW capacity) is the right approach. Pursuing large projects certainly makes sense from the government's point of view, that would like to take advantage of the economies of scale of large investments instead of having to deal with a massive proliferation of small investment projects. Experts warn however, that Nepal does not yet have the experience and capacity to manage big hydro projects, and also lacks the means to control related environmental and human impacts, making large hydropower developments unsustainable. Indeed, participants at the seminar emphasised the need for thorough feasibility studies prior to hydropower development projects. The necessity of Conceptual Water Budgets, a theoretical tool for hydropower impact assessment was highlighted in particular. Investing in hydropower can have major ecologic and social impacts that must be carefully evaluated to formulate suitable strategies. Hydropower investments can be significant contributors to human security as well as to economic development. As a renewable energy source, hydropower helps fight climate change and it improves the air and drinking water quality. It promotes guaranteed price and energy stability while increasing the reliability of electricity systems. Experts at the seminar argued that Hydropower installations bring electricity, roads security, people s free movement, industry, and commerce to communities. This, in turn develops the local economy, expanding access to basic health and education, and improving the quality of life. Hydropower can also be used to improve relations between nations. Although hydropower developments on trans-boundary rivers have the potential to raise tensions, successfully negotiating water-regimes across borders can lead to increased security, growing trust, and economic co-dependence. Similarly, with its incredibly diverse flora, fauna, and culture, Nepal has the potential to be an inviting tourist destination that attracts investment in the tourism sector as well. The contribution of tourism to the GDP is around 6 percent, but the annual growth rate of tourist arrivals is around 10 percent. It is clear that with increased investment in access, accommodation, and activities, Nepalese tourism could become even more lucrative. To this effect, the Ministry of Culture, Tourism and Civil Aviation is primarily responsible for policy making, coordination, and regulation. The ministry has the vision of developing Nepal as an attractive, pleasing, safe and unique destination in the global tourism map through conservation and promotion of natural, cultural, biological, and human-made

5 heritages of Nepal. Moreover, the ministry works together with other stakeholders in the private sector, the Nepal Tourism Board, as well as local bodies and communities in order to facilitate investment, promote tourism, and encourage infrastructural development projects. Nepal, home to eight out of the ten highest peaks in the world, offers diverse tourist attractions to its visitors. Tourism from neighboring India and China is the most significant in terms of volume, while Sri Lanka, the United States, and the United Kingdom follow afterwards. The touristic appeal of Nepal is due not only to its natural beauty, but also the various activities offered. Popular adventure activities include mountaineering, trekking, mountain biking, mountain marathon, rock climbing, rafting, kayaking, fishing, paragliding, and skydiving. Owing to its ancient and diverse culture, city tours, heritage sites, museums, as well as Buddhist and Hindu sites provide attractions for a wide range of visitors. Future Challenges for the investment environment in Nepal While both the seminar participants and the audience agreed on the business potential of investing in Nepal, some voiced concerns about future challenges. The consensus was that a stable political environment is necessary for future investment to flow into Nepal. The panel discussants as well as members of the audience expressed their hope that the recent elections will bring about a period of political stability that will attract larger amount of FDI from the European Union. It was also agreed that pre-assessment of future hydropower investments will have to account for social and environmental costs, as the high initial investment and the hydrology dependent nature of investment makes such development projects highly sensitive. The hyrdomorphological pressure on water bodies, the possible displacement of local population, flora and fauna, and the possible modification of fish habitat, should also be taken into account for future investment projects. It was also emphasised that the possible distortions in upstream-downstream flow of rivers can create trans-boundary political challenges. For further reading: p