Rethinking Reforms: Nepal's Investment Facilitation Ordinance 2081 (2024)

© 2023 Nepal Economic Forum

Nepal Economic Forum

P.O. Box 7025, Krishna Galli, Lalitpur 3, Nepal

Nepal Economic Forum (NEF) is a not-for-profit organization aiming to be Nepal’s premier private sectorled economic policy and research institution. We are an impact-driven economic and development think tank that seeks to redefine Nepal’s development discourse by analyzing, facilitating and disseminating contemporary issues on society and the economy.

Please write to info@nepaleconomicforum.org if you have questions, comments, or suggestions.

What is a NEFNote?

NEFNote is Nepal Economic Forum’s policy brief papers which provides a succinct yet comprehensive analysisonvarioustopicalissues.Craftedwithprecisionandinsight,theyseektofuelinformeddiscussions and shape public discourse. NEFNote is an addition to NEF’s line of publications, which has gained a reputation for being high-quality and evidence-based resources, providing valuable Nepali insights.

Title – Rethinking Reform: Nepal’s Investment Facilitation Ordinance 2081 (2024)

Authors – Bibhuti Kharel, Chandani Thapa, Regina Khanal, Sukeerti Shrestha, Sushant Dhakal

Bibhuti Kharel is a Research Fellow at NEF and with a Master's degree in Business Administration (Project Management) from Kathmandu University. Her interests lie in investment and development economics.

Chandani Thapa works as the Coordinator at NEF. She holds a Master's in Economics (with specialization in World Economy) from Jawaharlal Nehru University and strives to create a positive impact while advancing her capabilities in research, academia, and policymaking.

Regina Khanal is an intern at NEF and has a bachelor’s degree in Business administration (with specialization in international business and digital marketing). She aspires to excel in economic domains that actively contribute to the welfare of the community.

Sukeerti Shrestha is a member of the NEF and She graduated from Kathmandu University with an undergraduate degree in Business Administration (Finance). She is passionate about development economics and sustainability, and seeks to build on prior experience in consulting and social enterprises.

Sushant Dhakal is a current intern at NEF and an MBA candidate at Kathmandu University School of Management. He is driven by a deep interest in development economics, trade, and financial modeling.

Published by Nepal Economic Forum, May 2024

Rethinking Reform: Nepal’s Investment Facilitation Ordinance 2081 (2024)

by Bibhuti Kharel, Chandani Thapa, Regina Khanal, Sukeerti Shrestha, and Sushant Dhakal

Charting Nepal’s Investment Landscape

Nepal’s journey with Foreign Direct Investment (FDI) traces back to the early 1980s marking a pivotal moment when the country began opening its economy to the world. Since the adoption of multi-partydemocracyinthe1990s,FDIhasplayed a significant role in Nepal’s economic landscape, with its importance growing steadily over the years.1 As of FY 2022/23 AD, total FDI stock constituted 4.8% of Nepal’s total GDP reflecting FDI’s role in bridging resource gap in the economy.2 Despite its evident potential for FDI, Nepal faces challenges such as political instability, widespread corruption, bureaucratic hurdles, and inconsistent implementation of laws.

With the objective of addressing prevalent issues and attracting more foreign investment, Nepal has been organizing the Nepal Investment Summit since 2017. These summits serve as platforms to showcase Nepal's untapped investment potential across various sectors and to introduce policy reforms aimed at improving the investment climateandattractingFDI.However,theoutcomes of the government's policy amendments in the

Source: Industrial Statistics, Department of Industry and Annual Report, Nepal Rastra Bank

Figure 1. Approved FDI vs Actual FDI Inflows over the years

face of the summit have fallen short of expectations. While significant investment commitments were made both times, first in 2017 and then in 2019, the actual inflows were substantially lower. The issue persists. Notably, in FY 2022/23 AD, while the total investment commitment was NPR 38.45 billion, the actual FDI inflow amounted to NPR 5.96 billion indicating a gap in promises and reality.3

Recognizing the need for concrete actions to bridge this gap, the government undertook extensive efforts ahead of the 2024 Investment Summit. Key initiatives included pre-events and bilateral meetings with potential investors to align commitmentswithactualinflowsinadditiontothe ritualistic policy reforms.4 The government has enacted amendments to eight Acts through an ordinanceincessantlyontheeveoftheInvestment Summit held on April 28, 2024.5 The amendments focusonaddressinglong-standingcomplaintsfrom the private sector and fostering a more investment-friendly environment. Nevertheless, it has also raised concerns about effectiveness and coordinationwithinthegovernment.Thisbriefwill discuss the passed ordinance, the changes, and related reservations.

Tracing

the Investment Facilitation Ordinance,2081BS

April 28, 2024, marked not only the inauguration oftheThirdInvestmentSummitbutalsosignificant legislative amendments through an ordinance

aimed at enhancing Nepal's investment climate. In accordance with Article 114 (1) of the 2015 Constitution of Nepal, President Ramchandra Paudel issued the Ordinance Amending Some Nepal Acts Related to Investment Facilitation, 2081.6 This ordinance was recommended by the Council of Ministers on April 22, 2024, following inputs from various government ministries and bodies to amend eight Acts cross-cutting investment in Nepal. The Law Ministry drafted the ordinance, which was then presented to the Council of Ministers and subsequently forwarded to the President for approval. The approved ordinance becomes effective only upon publication in the government gazette.

Before delving into the specifics of the ordinance, it is important to begin by understanding what an ordinance actually is. Table 1 distinguishes among bill, act, and ordinance, according to the Constitution of Nepal, 2015.7 Ordinances serve as temporary laws enacted by the executive branch to address urgent matters when the parliament is not in session. The President of Nepal, upon the Council of Ministers' recommendation, can promulgate an ordinance. Such ordinances carry the same legal weight as Acts passed by the Parliament. However, every ordinance must be presented at the next session of both Houses. If not adopted by both Houses, it automatically expires. The President also holds the authority to repeal an ordinance at any time. Ordinances

automatically expire sixty days after the beginning of a session where both Houses of the Federal

Parliament meet unless they are adopted or repealed.

Table 1. Distinguishing features of bill, act, and ordinance Bill Act Ordinance

It is a draft for proposed law presented to the parliament for discussion. Bills, once passed by both houses, become an Act after the President’s authentication. It is promulgated by President on recommendation of the Council of Ministers

It becomes an act, after being passed by both houses and authenticated by the President.

A bill can be changed, if any of the house rejects it, or the president rejects it with his recommendations.

A bill lapses after the house gets dissolved.

It becomes effective after the authentication. It becomes effective immediately afterpromulgation.

An act can be amended. It expires in sixty days unless adopted by both houses in Parliament.

An act cannot be lapsed. It can be replaced or repealed.

An ordinance shall cease to be effective if not adopted by both houses, or at expiration of sixty days after the day on which a meeting of both houses is held. The provisions of bills are mentioned in Article 110 to Article 114 in Constitution of Nepal, 2015.

It is mentioned in Article 113 (5) in Constitution of Nepal, 2015. The provision of ordinance is mentioned in Article 114 of Constitution of Nepal, 2015

Source: The Constitution of Nepal, 2015

Table 2 highlights the eight amended Acts along withkeychangesbroughtaboutbythe Ordinance Amending Some Nepal Acts Related to Investment Facilitation, 2081.8

While legal reforms enabling investment in Nepal are necessary, the timing and nature of this ordinance raise questions about whether it’s a step in the right direction. The fact that it was passed on the day of the Investment Summit adds to this scrutiny. All the more, it is important to recognize that ordinances serve as stopgap measures until permanent legislation can be enacted by parliament.

1 Land Act, 2021

2 National Parks and Wildlife Conservation Act, 2029

3 Land Acquisition Act, 2034

4 Special Economic Zone Act, 2073

5 Public-Private Partnership and Investment Act, 2075

6 Foreign Investment and Technology Transfer Act, 2075

● Allows industries, trusts, companies or organizations to apply for approval for land use within one year of the subsections commencement.

● Records must be maintained for land exceeding limits held by industries, establishments, companies, or institutions.

● Excess land can be sold within specified limits, subjectto Ministry conditions, without affecting employment and production.

● Provides the Government of Nepal with the authority to designate buffer zones or corridors for conservation purposes and approve various programs related to conservationandcommunityinvolvementwithinornear protected areas.

● Limits compensation to not exceed three times the minimum valuation fixed for registration purposes.

● Permitsindustries'relocationtospecialeconomiczones, allowing registered/licensed industries to operate in such zones by transferring machinery, tools, or equipment.

● Mandates minimum export percentages for goods/services produced in these zones.

● Allows the Government of Nepal to approve the use of forest areas for mineral excavation in national forests if environmental studies show no significant adverse effects on the environment.

● Changed the definition of Non-Resident Nepalis to “those holding Non-ResidentNepaliCitizenshiporNepali identity card under prevailing laws”

● Changed the definition of Technology Transfer to “Agreement between industry and foreign investor or between industries established and operating in Nepal andforeignindustries,firm,orcompany to transfertheir patents, trademarks, designs, goodwill, franchise, formula, process, users’ license, know-how sharing, management and technical services, and reverse engineering.”

● Allowed Nepali companies to transfer their technology to foreign industries, or companies.

● Department of Industries to approve foreign investment regardless of investment capital.

● Any industry with foreign investment can produce any goods or services by contract or subcontract with another industry having similar objectives.

● One business is added to the list of restricted industries or businesses for foreign investment i.e., “Ride sharing

7 Forest Act, 2076

8 Industrial Enterprises Act, 2076

having more than 70% foreign investment”.

● Amended so that the extraction of minerals, stones, and soil for industries approved as national priority projects by the Government of Nepal is not allowed, except for specific purposes like forestation or environmental study.

● Facilitates the registration and operation of startup enterprises or businesses, including eligibility criteria and support measures.

● Amendments to various sections governing large industries, land use, industry support centers, and collaboration between industries for production or service provision.

Source: Ministry of Law, Justice, and Parliamentary Affairs

ContentiousIssueswiththeApproach

Unkept Promises to Investors

Despite having decided to hold the third Investment Summit in November 2023, the Dahalled government only sent over the ordinance to the President’s office on the evening of April 26, 2024.9 With the ordinance reaching the President’s Office after working hours, it was not registered and could not be promulgated before the Investment Summit.10 The government’s delay in finalizing and submitting the ordinance, paired with its lack of urgency in introducing bills beforehand at the parliament for months, drew significant criticism. The ordinance can be interpreted as a short-term policy measure, which does not guarantee actual changes. Data suggests thatordinancesareunlikelytobeenactedintolaw. Within the first five years of the 2015 elections, only 17 of the 19 issued ordinances were enacted.11 An ordinance is a temporary measure, and a more concrete and stable legislative tool would have been ideal to showcase Nepal’s

commitment to becoming a more investmentfriendly nation. It especially rings true considering the year-long time it had to prepare. The amendments being finalized only a few days before the summit and the President approving the ordinance despite a short review period point towards a rushed approach.12 Nepal already struggles to materialize its pledges into actual investments. Failing to keep the promise of lucrative amendments by enacting the ordinance, which covers multiple Acts, within the stipulated time frame, will erode investor trust.13

Inter-Party Conflicts

Nepal has had a notoriously unstable government term following the 2022 elections, with the ruling coalition having changed twice and the cabinet being shuffled 13 times in 14 months.14 Prime Minister Dahal ended the coalition with Nepali Congress in March 2024. Following this, Nepali Congress has obstructed House proceedings multiple times, mainly to protest the appointment of Rabi Lamichhane of Rastriya Swatantra Party as

the Home Minister and for the formation of a Housepanelto investigatehisallegedinvolvement in cooperative fraud.15 Such disruptions have become increasingly common in Nepal, which upsets the lawmaking and legislative process. In July 2023, an ordinance defining and criminalizing loan-sharking became ineffective after it was unable to be replaced with a bill following disruptionsbyCPN-UML,RastriyaSwatantraParty, and Rastriya Prajatantra Party. Regarding the ordinance this brief discusses, the Nepali Congress has openly expressed reservations towards their use to amend important laws.16 Being the largest parliamentary party, it has the upper hand of having a significant amount of influence over the lower house decisions. The friction between the different parties and any obstructions could be critical given the time sensitivity of sixty days.

Undervaluing of the Parliament

The Constitution of Nepal 2015 highlights an ordinance as a tool to be used in a situation necessitatingimmediateactionoranemergency.17

Despite this, ordinances have become relatively commonplace in Nepal, which has led to its fair share of governance concerns. Political leaders have often used ordinances as a way to avoid the House and as a tool to forward their vested interest.18 A controversial example of this would be the approximately three dozen ordinances brought forward during then-Prime Minister Oli’s three-year term (2018-21 AD), which also saw two attempts to dissolve the House.19 The ongoing trend of issuing ordinances has been criticized for skewing the balance of power among the three government bodies, reflecting a dominance of the executive over the legislature.20 Nepali Congress,

the opposition of the current ruling alliance and themajorpoliticalpartyintheParliament,hasalso rebuked the Dahal-led government of weakening the Parliament by skipping the House through issuing ordinances.21 Issues regarding good governance in legal systems are not just limited to matters concerning investment. They are a deeper mirror into the public’s, including the investors’, trust in the system. It is imperative for Nepal to establish a proper balance within the system first to be able to harmoniously carry out projects that affect the community, the society, and the country, at large.

References

1 Department of Industries, “Industrial Statistics FY 2067/68”, Government of Nepal, 2013. https://www.doind.gov.np/uploads/notices/Notices-2021042417444059.pdf

2 Achyut Wagle “Chasing the FDI mirage”, The Kathmandu Post, April 8, 2024. https://kathmandupost.com/columns/2024/04/08/chasing-the-fdi-mirage

3 Department of Industries, “Industrial Statistics 2079/80,” Government of Nepal, 2023. https://doind.gov.np/uploads/notices/Notices-20240107171617414.pdf; Nepal Rastra Bank, “Annual Report 2022/23,” Government of Nepal, March 2024. https://www.nrb.org.np/red/annual-report-202223-english/

4 “Nepal Investment Summit 2024: Invest in Nepal ” Government of Nepal, Accessed April 29, 2024. https://investinnepal.gov.np/this-summit/

5 Dilip Paudel. “Govt amends nine laws through ordinance to attract investors”, My Republica, April 23, 2024. https://myrepublica.nagariknetwork.com/news/govt-amends-nine-laws-to-attract-investorsthrough-ordinance/

6 Office of the President of Nepal, “Ordinance Amending Some Nepal Acts Related to Investment Facilitation, 2081” Government of Nepal, April 28, 2024

https://president.gov.np/%e0%a4%85%e0%a4%a7%e0%a5%8d%e0%a4%af%e0%a4%be%e0%a4%a6%e 0%a5%87%e0%a4%b6-%e0%a4%9c%e0%a4%be%e0%a4%b0%e0%a5%80-14/

7 “The Constitution of Nepal, 2015,” Government of Nepal, September 2015. https://lawcommission.gov.np/en/wp-content/uploads/2021/01/Constitution-of-Nepal.pdf

8Ministry of Law, Justice and Parliamentary Affairs, “Ordinance Amending Some Nepal Acts Related to Investment Facilitation, 2081.” Government of Nepal, April 28, 2024. https://www.moljpa.gov.np/wpcontent/uploads/2024/04/

9 “Congress objects to last-minute ordinance to amend multiple laws,” The Kathmandu Post, April 28, 2024. https://kathmandupost.com/national/2024/04/28/congress-objects-to-last-minute-ordinance-toamend-multiple-laws

10 Ibid.

11 Raghunath Bajagain, “Deep rooted ordinance abuse eroding Nepal’s parliamentary system raising concerns over system integrity” Onlinekhabar, September 17, 2023 https://english.onlinekhabar.com/new-ordinances-nepal-constitution.html

12 Binod Ghimire, “Investment summit approaches but key ordinance pending” The Kathmandu Post, April 26, 2024 https://kathmandupost.com/national/2024/04/26/investment-summit-approaches-butkey-ordinance-pending

13 Dilip Paudel, “Government amends nine laws through ordinance to attract investors” My Republica, April 23, 2024. https://myrepublica.nagariknetwork.com/news/govt-amends-nine-laws-to-attractinvestors-through-ordinance/

14 Bhuwan Sharma, “The Dahal Cabinet was reshuffled 13 times in 14 months!” My Republia, March 5, 2024. https://myrepublica.nagariknetwork.com/news/cabinet-reshuffle-13-times-in-14-months/

15 “Acting on its threat, Nepali Congress obstructs House of Representatives,” The Kathmandu Post, April 24, 2024. https://kathmandupost.com/national/2024/04/10/acting-on-its-threat-nepali-congressobstructs-house-of-representatives

16 “Congress objects to last-minute ordinance to amend multiple laws,” The Kathmandu Post, April 28, 2024. https://kathmandupost.com/national/2024/04/28/congress-objects-to-last-minute-ordinance-toamend-multiple-laws

17 “The Constitution of Nepal, 2015,” Government of Nepal, September 2015. https://lawcommission.gov.np/en/wp-content/uploads/2021/01/Constitution-of-Nepal.pdf

Published by Nepal Economic Forum, May 2024

18 Nishan Khatiwada, “Ordinance: A tool for emergency law or a means to serve politicians’ vested interests?” The Kathmandu Post, December 18, 2022.

https://kathmandupost.com/politics/2022/12/18/ordinance-a-tool-for-emergency-law-or-a-means-toserve-politicians-vested-interests

19 Khim Lal Devkota, “Law-Making Processes in Federal Nepal,” International Center for Public Policy Working Paper 22, May 2022. https://icepp.gsu.edu/files/2022/05/2202-Law-Processes-in-Nepal.pdf

20 Nishan Khatiwada, “Ordinance: A tool for emergency law or a means to serve politicians’ vested interests?” The Kathmandu Post, December 18, 2022.

https://kathmandupost.com/politics/2022/12/18/ordinance-a-tool-for-emergency-law-or-a-means-toserve-politicians-vested-interests

21 “Congress objects to last-minute ordinance to amend multiple laws,” The Kathmandu Post, April 28, 2024. https://kathmandupost.com/national/2024/04/28/congress-objects-to-last-minute-ordinance-toamend-multiple-laws