China’s contribution to foreign direct investment in Nepal - CWG

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Mamata Paudel
Associate, Lex Advisers
Kathmandu, Nepal

It goes without saying that for an underdeveloped country such as Nepal, foreign direct investment (FDI) plays a predominant role as a catalyst in economic development, modernisation, income growth and employment generation. A preponderance of studies show that FDI triggers technology spill-overs, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development.^[1] All of these contribute to greater economic growth, which is the most potent tool in poverty alleviation in developing countries.^[2] Correspondingly, Nepal’s lack of modern technology and means to finance large infrastructure projects has made the country crave foreign assistance in economic development.

Nepal opened up to foreign investors in the early 1990s after political change and the establishment of a multi-party democracy and was able to gain traction in terms of FDI, primarily in the hydropower development sector. The interest, however, declined in the late 1990s and early 2000s due to political unrest and Maoist insurgency. Pertaining to the signing of the 2006 Peace Accord and political transition that followed, Nepal has been welcoming FDI from around the globe ever since. As set out by the 2019 Foreign Investment and Technology Transfer Act (the 'Act'), the major forms of foreign investment allowed in the country can be shortlisted as:

• investments in shares (equity);

• reinvestment of earnings derived from the investments in shares;

• investments made in the form of loan or loan facilities;

• investments made through technology transfer; and

• investment made after issuing securities in a foreign capital market by a sector or company incorporated in Nepal.

As pronounced in the Act itself, with a view to attract foreign investment, Nepal has introduced various favourable policies such as one-stop service centre, national treatment provision, 100 per cent ownership allowed for a foreign investor except in a certain few industries, no nationalisation policy, decontrolling of prices, and time bound decision processes, to mention but few. Potential investment sectors such as hydropower, construction, telecoms, agriculture and mines, inter alia have the full bound aptitude to address the overarching need of untapped and unexplored markets for foreign investors. Additionally, the demographic structure, gradually improving business indicators, strategic geographic location, changing consumption patterns, the availability of cheap labour, and the improving legal infrastructure have much to contribute to the changing scene of FDI in Nepal.

Having said that, the fact that Nepal has been unable to move at full throttle in attracting FDI still lingers. Adding to the agony, actual realisation of the contribution, in some cases even after attainment of government approval, remains at a very low stance in comparison to the commitments made for FDI.

Needless to say, the role of China in this ascension of FDI in Nepal is immense. China, which was not placed in the countries with the most FDI contribution in Nepal in its earlier years, has been top of the list for the past three years. Adhering to its ‘go global’ policy, China is investing in areas far and wide. China has been investing in countries full of unexplored natural resources, while keeping an eye out for global domination. Parallel to the various government-to-government projects, numerous projects under Chinese FDI are ongoing in Nepal.

Considering Nepal’s dire need of foreign investment to uplift the economic portfolio, China might look like a saviour to Nepal. For the first quarter of fiscal year 2019/20, China pledged for over 90 per cent of total pledged FDI in Nepal, which reinforces China as dominant foreign investor.^[3] If we look into the figures, in the first quarter of the current fiscal year, Nepal has received an US$88m pledge from China, topping FDI pledges to Nepal in last four consecutive years, compared to total pledge received of US$95m.^[4]

Nepal, being a reservoir of unexplored natural resources, is of much importance to China which is currently facing acute shortages of minerals.^[5] Aligned to China’s national interest, the investments from China are mostly clustered in energy-based industries.^[6] The immense role played by the Chinese investment in hydropower projects and equipment supply cannot go unnoticed. However, demonstrating a shift in areas of Chinese FDI in Nepal, mining-related industries, construction-based industries, forest-based industries among others, have also started to see a hike in Chinese investment.

One of the successful examples of impactful Chinese FDI in Nepal has to be Hongshi Shivam Cement, a joint partnership between Hong Kong Red Lion No 3 Cement Co Ltd (70 per cent), wholly owned subsidiary of Hongshi – China and Shivam Cement Pvt Ltd, Nepal (30 per cent).^[7] Having started its first phase commercial production with an installed capacity of 6,000 MTPD in 2018 and further plans of setting up another 12,000 (MTPD) plant, this project has undoubtedly made an attention-worthy contribution to Nepali cement industry within a short space of time. In addition to local infrastructure development and introducing modern technology to the cement industry, the company has disrupted the market by lowering the price and forcing other players to be equally competitive. Introduction of an in-house clinkerisation plant has contributed to the reduced costs of production, which has now been followed by most of the other manufacturers. Overall, a previously import-oriented cement industry has paved its way towards self-sufficiency and also contributed to reverse migration and female empowerment by creating local employment opportunities.

In the present context too, considering the economic crisis hovering on us post Covid-19 pandemic, China’s role and its contribution through FDI in Nepal will be more important than ever. As the impact of the pandemic is yet to be measured and economic policies accordingly formulated and implemented, an important consideration in bringing Nepal’s economy back to growth would be the continuation of Chinese FDI. The very fact that every country is fighting its own war to stabilise its economy means the limited flow of capital to other countries and, therefore, a considerable decline in potential FDIs in Nepal. The only silver lining is that China dominates a huge chunk of existing FDI flow into Nepal and China’s ‘V’ shaped economic recovery post Covid-19 and hence, the inflow of FDI in Nepal may not witness a massive decline.