Invest in NepalRadhesh PantInvestment Board Nepal

May 16th, 2014

Area 147,181 sq. km.

Population 27 Million (Est.)GDP USD 19.41 BillionGeographicalLocation

- Landlocked Country situated between India andChina

Average Age ofthe Population 21 Years

Sectors Opento ForeignInvestment

- Most of the sectors now open to foreign investment, with the exception of national security/defense and small-scale/cottage industries

Key Attractions

i) Hydro potential: Only 1.65%of the financially feasible potential being realizedii) 8 of the world’s 10 tallest peaks in Nepal: Opportunities for adventure tourismiii) Birthplace of Lord Buddha: Opportunities for religious tourismiv) Growing demand and rising living standards in northern Indiav) Opportunities in Infrastructure building

Recent Developments

i) Successful completion of elections; Constituent Assembly to promulgate the Constitution within 1 Year

ii) Focus on FDI reflected in the Election Manifesto of all major political parties

Nepal: Snapshot of the Economy

Road Length 24,583 km. 0.91 Km per 1,000population

Secondary Schools 8,2330.304 SecondarySchools per 1,000population

Mobile Phone Penetration 74.97% 2 big players in themarket

Internet Penetration 28.63%

Health Institutions 4,3930.16 Health Institutions per 1,000 population

Energy Demand andSupply (2012-13)

5,446.29 GWh and 4,218.14 GWh respectively

An excess demand of 1228 GWh (0.045 GWh per 1,000 Population

Trade Channels Airways and Roadways Landlocked

Airports 8 1 International

Railways 59 Km 0.002 Km per 1,000 population

Total Export Volume (2012-13) USD 660 million Major country: India

Export to India (2012-13) USD 480 million (approx.) 72.7% of the total exports to India

Total Deposits in commercial banks (2012-13)

USD 9.11 Billion USD 0.337 Million per 1,000 people

Total loans and advances of commercial banks(2012-13)

USD 8.99 Billion USD 0.332 Million per 1,000 people

Statistics: Economic Figures

EconomicGrowth Rate 3.6% (2012/13)

Inflation 9.9% (2012/13)Total Budget USD 5.2 Billion (2013/14)

BudgetAllocated forCAPEX

USD 0.85 Billion

FDI and PrivateInvestment Ensures accountability and efficiency

Why Nepal needs FDI

Government of Nepal’s realization that attracting big FDI volume

would allow government spending to focus on health and

education

Nepal in Dire Need of Physical Infrastructure Investments

5

0

50

100

150

200

250

300

350

400

Projected Infrastructure Spending and Required Spending(NPR in Billions)

Infrastructure SpendingWB Requirements

InvestmentGap

SectorRequired Investment

(NPR in Billions)

Transport 460

Electricity 615

Water Supply and Sanitation 215

Solid Waste Management 45

Telecom 50

Irrigation 195

World Bank and Ministry of Finance, GoN

1

Exchange Rate: 1 USD = NPR 100

2

Nepal was in a decade-long armed conflict that concluded with the signing of the Comprehensive Peace Agreement in 2006

Economic fundamentals were weak and there was not satisfactory level of investment during the conflict period

Liberalization of the Economy

− Simplification of regulations and licensing

− Reform of laws to allow private operations in sectors that were previously govt. monopolies: telecommunication & civil aviation

− 100% foreign ownership now allowed in: travel & tourism, and in the production of cigarettes/alcohol

− Up to 51% foreign ownership allowed in legal & engineering services, and management consulting

− In 2010, per its accession commitments to the WTO, Nepal opened the domestic banking sector to foreign banks (allowed to engage in wholesale banking)

History of Conflict

1

Liberalization and Opening New Sectors

to Foreign Investment

2

Road to Accelerated

Growth

3 Elections completed recently, paving hope for political stability and growing investor confidence

Growing political consensus on the need to attract foreign investment; Investment Board (high-level Board chaired by the Prime Minister) providing ‘one-window solution’ to foreign investors in order to accelerate growth

Nepal: From Conflict to Liberalization to Accelerated Growth

“…we stand by our promises and will take all necessary measures to ensure that investors will be able to operate businesses in a safe and favorable condition in this country ... Drawing from the successes of the emerging Asian economies, we will work to reposition Nepal as an emerging market. This requires economic synergies with other economies and countries.” – PRIME MINISTER’S ADDRESS, NEPAL BUSINESS CONCLAVE (March 2014)

PRIME MINISTER’S COMMITMENT

1

Demonstrated Commitment from the New Government

… Commitment from the stable government to attract investments:

Concrete decisions made in favor of private, foreign, investors at the Meeting held in April 2014:

Income tax holiday for large-scale hydropower investments

Harmonious interpretation of seemingly conflicting Acts/Regulations to remove legal ambiguities

Various fiscal and non-fiscal incentives

13th Investment Board Meeting Decisions (Board

Chaired by the Prime Minister)

2

Strengths of Nepal as an Investment Destination

Cheap and Skilled Labor

Trade Treaty with India

Ease of Doing

Business

Favorable Regulatory Structure

Products manufactured in Nepal can enter custom-free to the vibrant

Indian market

Laws preventing expropriation, laws requiring equal treatment to foreign investment industries; ‘one window

service’ to foreign investors

Major driver for multinationals going offshore to China is cheap labor – a characteristic of the Nepalese economy

Furthermore, abundance of skilled labor (a characteristic attracting investors to India) in Nepal

Nepal a strategic production location to tap into the growing Indian market, given the Trade Treaty with India

Easy Repatriation Procedure -Profits, dividends, payments received as principal or interest, and other forms of earnings can be easily repatriated by the foreign investors

FITTA requires equal treatment to foreign investment industries

Industrial Enterprise Act 1992 prevents industries from being nationalized

Investment Board Act 2011 providing ‘one window service’ to foreign investors

Nepal has a rare combination of the competitive labor characteristics of

two popular investment destinations: India and China

Nepal ranked above many popular investment destinations in World

Bank’s EODB Index

DR

IVE

RS

Developing economies with improving fundamentals provide more upside potential than developed economies

Huge Upside Potential for

Growth

The concentration of producers (of goods & services) of the same category is inversely proportional to the profit opportunity

Few Competitors/Mini

mal Business Threat

Abundance of young, energetic, population ensures the abundance of a robust labor base –an important factor of production

Availability of Young, Energetic,

Population

Location of investment destination and the accessible markets around the destination country is crucial in terms of determining the investment’s fruits

Strategic Geo-Political Location

2 3 41

Key Drivers of Success in Foreign Investment… Nepal holds the characteristics you are looking for:

Nep

al

Strategically located between

two emerging giants (India &

China), the products would have access to vibrant export

markets

Average age of the population in Nepal is 21 years

(lowest in the South Asian

region)

Growth rate of 3.7% in 2013,

Nepal is expected to grow at a

much higher rate in the coming

decade

Since large-scale foreign

investment have only started

entering Nepal, less competition

and minimal threat from

other producers

A B C D

Upward trend in FDI in Nepal over the last decade despite political instability…

10

116

188

213231

171

209227

317

0

50

100

150

200

250

300

350

Approved Number of Projects

ApprovedNumber ofProjects

-7

6

1

39

87

85

92

-20

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012

FDI Inflow (Million USD)

FDI Inflow(Million USD)

UNCTAD World

Investment Report

1

Cyclical Nature of FDI inflow in South Asia

14411

27919

34545

56608

42438

28726

44231

33511

0

10000

20000

30000

40000

50000

60000

2005 2006 2007 2008 2009 2010 2011 2012

Total FDI Inflow in South Asia (including Iran) (million USD)

Total FDI Inflow in South Asia (includingIran)

UNCTAD World

Investment Report

1

FDI In the South Asian Region (UNCTAD World Investment Report) (Million USD)

Region/Country 2006 2007 2008 2009 2010 2011 2012

Afghanistan 271 189 94 76 211 83 94

Bangladesh 845 666 1,086 700 913 1,136 990

Bhutan 6 3 7 18 26 10 16

India 20,328 25,350 47,139 35,657 21,125 36,190 25,543

Maldives 64 132 181 158 216 256 284

Nepal -7 6 1 39 87 95 92

Pakistan 2,201 5,590 5,438 2,338 2,022 1,327 847

Sri Lanka 272 503 752 404 478 981 776

13

Number and FDI vs Country

566 575222 194 179 120

796

2652

376106 55 67 15 17

314

951

0

500

1000

1500

2000

2500

3000

INDIA

CHINA

USA

S. KOREA

JAPAN UK

others Tota

l

Country

Num

ber

Number FDI (RS.100 million)

Country breakdown of foreign investment in Nepal (Till the end of FY 012/13)

Exchange Rate:1 USD = NPR 100

1

14

Sectorial breakdown of foreign investment in Nepal

Low concentration of foreign investment in many sectors shows opportunities for foreign investors

entering in multiple sectors…

118 43 57

827

48

845 714

2652

0

500

1000

1500

2000

2500

3000

Total Number of Approved FDI Projects

Total Number of Approved FDIProjects

South Korea in the 1970s and current Nepal: A Comparison

EconomicGrowth Rate Average of Approx. 10% per annum (1970-80)

Population 35 Million (mid-1970)

GDP USD 19.29 Billion (mid-1970)

Republic of Korea in 1970s

EconomicGrowth Rate 3.6%

Population 30 Million

GDP USD 18.41 Billion

Nepal’s current situation

Trading Economics

1

Nepal’s current situation similar to that of RoK in terms of GDP and Population.

However difference in growth rates suggest that there is much to learn from Korean policymakers and businesses.

SOUTH KOREA-NEPAL PARTNERSHIP: A SNAPSHOT

Korea-Nepal

Partnership

Development Cooperation

Investments

Technical Assistance

(Scholarships, Trainings,

Study Tours, etc.)

Opening Doors for

Employment Opportunities

Approved Korean Investment in Nepal’s history (Till the end FY 012/13)

Categories Number Korean Investment

Other Investment Total Project Cost

Agriculture 9 67 4 71

Construction 4 196 47 243

Energy Based 3 4278 3110 7388

Manufacturing 38 1165 828 1993

Mineral 1 10 10 20

Service 82 2424 101 2525

Tourism 71 346 82 428

Korea Total 208 8486 4182 12668

NPR In million

Exchange Rate: 1 USD = NPR 100

1

Korean Investments in the South Asian Region

South Korea’s Investment in

the South Asian Region

Pakistan:FDI from RoK: $61.24 M. in

the last four years. 20 Major Korean

Companies have established their permanent presence.Investors also interested in

the Energy Sector Bangladesh:Investments in textile,

power generation, development of energy and natural resources, ICT, and shipbuilding.

Private investments worth $658 M. (2010)

India$2.67 B. investments (as

of 2012)Top sectors that attract

investments: metallurgical industries, prime movers, machine tools, automobiles and

electronics

Myanmar:79 Projects with

investments of $3.01 B (July ‘13)

Key Sectors: Mining, Energy, Processing,

Manufacturing

Vietnam: 3400 projects with total

registered capital of $25.73 B. (2013)

Majority of investments in real estate, finance,

and textile

Laos:256 South Korean Projects with approx. $889 M. investments (2013)Majority of investments in hydropower and mining

No. of ProjectsreceivingKorean Aid

8 (FY 2012/13)

No. ofcounterpartministries

5 (FY 2012/13)

HerfindahlIndex

0.25 (Index measuring aid fragmentation; if thenumber is close to 1 it means the portfolio is highlyconcentrated, and if the number is close to 0, itmeans the portfolio is very fragmented)

Involvement inHydropower

Economic Development Cooperation Fund Korea –largest disbursing partner in Chameliya Hydro Project (USD 6 Million disbursed in FY 2012/13, out of total commitment of USD 45 Million)

Korean AidDisbursement USD 14 Million (FY 2012/13)

New Commitment Signed with MoF

USD 4 Million (FY 2012/13)

Development Cooperation: Korea-Nepal Partnership

Korean development cooperation centered around: Energy, Information Technology, Education sectors, among

others

Regulatory Reforms and Support to attract FDI

Regulatory Support for

FDI

Bureaucratic Reforms

Nepal Business Forum

Investment Board Nepal

2011

Tax Concessions

and other Incentives

Department of Industry (DoI) has successfully reduced 8 steps in FDI Approval processSignificantly reduced time taken to get Departmental

ApprovalSignificantly reduced time to get Non-Tourist VisaApprovals now, on average, take 10 days as opposed to

one full month

Future initiatives: Further simplification of FDI approval process Possibility of online FDI application

Bureaucratic Reforms to attract FDI

A dialogue platform to create an alliance between the public and private sectorRaised 120 issues/recommendations and implemented

60+ of them

Some significant achievements:Establishment of first Public -Private Dialogue forum headed

by the Prime MinisterIntroduction of E-bidding for procurement with Public

Procurement Monitoring OfficeReduced industrial strikes resulting the reduction of “Bandh”

(strike) were from 163 days to 23 days in FY 2010/11

Nepal Business Forum: Building Public-Private Alliance

Regulatory support to attract FDI

Key Incentives and Facilitation Measures:S.No Act/Policy Regulatory Support

1. Industrial Enterprise Act 1992

25-30% rebate on income tax depending on the type and location of the enterprise

2. Industrial Policy 2010

From 5 percentage point rebate on corporate rate of income tax to 90% tax rebate for up to 10 years

3. Foreign Investment and Technology Transfer Act

i) Equal treatment to the foreign investment industries

i) Repatriation guaranteed in foreign currency

4. Investment Board Act 2011

i) Providing ‘one window solution’ to foreign investors, removing the bureaucratic hurdles

ii) Giving directions to govt. agencies for the issuance of approvals/licenses

Sector-specific fiscal incentives to attract FDIS.No Sector Fiscal Incentives

1. Energy 100% exemption of Income Tax up to 7 years and 50% exemption for subsequent 3 years

2. Tourism 90% of applicable Income Tax rate

3. Special Economic Zone

100% exemption of Income Tax for 7 years and 50% exemption for subsequent 3 years

4. Road and Highways 60% of applicable Income Tax rate

5. Software Technology Park

i) 50% of applicable Income Tax rateii) 1% Customs Duty on hardware,

software and all kinds of computer spare parts imported by IT Training Institutions

The Investment Board was established by the Parliament per the “Investment Board Act, 2011” to Encourage an orderly and rapid industrialization process in Nepal Create meaningful employment opportunities Contribute to poverty alleviation

The Investment Board has been given the authority to achieve its mandate by Creating an investment-friendly environment Mobilizing and managing PPPs, Co-operatives, Domestic and Foreign

Investments Developing critical Infrastructure Assets

Investment Board Act, 2011

Duties and Responsibilities of the Board Providing ‘one window’ solution to foreign investors Formulating policies to create investor-friendly climate Monitoring, executing, and implementing approved investments Providing appropriate incentives to investors to encourage investments Giving directions to government agencies for the issuance of licenses

Honorable Prime Minister -Chairman

Vice Chairman (Minister

appointed by PM)

Minister of

Industry -

Member

Minister of

Forests -Member

Vice Chairman National Planning Commissi

on -Member

Governor Nepal RastraBank -

Member

Chief Secretary

GoN -Member

Private Sector4 members

Chief Executive

of the Board –Member Secretary

Office of the Investment

Board

High-level Board chaired by the Prime Minister

Minister of

Finance -Member

IBN 14: Projects under the IBN’s Mandate

S.No. Project Sector

1 Arun III Hydropower Project Hydropower

2 Chemical Fertilizer Plant Agriculture

3 Five-Star Hotels Tourism

4 Infrastructure Development Bank Infrastructure/Finance

5 Kathmandu Metro Railway Infrastructure/Transportation

6 Kathmandu Solid Waste Management Infrastructure

7 Kathmandu-Terai Fast Track Infrastructure/Transportation

8 Nijgadh Airport Infrastructure/Airport

9 North-South Corridoor Infrastructure/Transportation

10 Tamakoshi III Hydropower Project Hydropower

11 TIA Upgrade Infrastructure/Airport

12 Upper Karnali Hydropower Project Hydropower

13 Upper Marshyangdi Hydropower Project Hydropower

14 West Seti Hydropower Project Hydropower

IBN Act mandated projects

Fast track road, Tunnel, Railway line, Rope-way, Trolleybus as prescribed by Government of

Nepal

Chemical Fertilizer production industries

Establishing Medical Colleges and state-of-the-art Hospitals or

Nursing Homes that will have three hundred beds or more

Major bridges as prescribed by Government of Nepal

Development of Special Economic Zones (SEZs), Export Promotion

or Export Refinement Zones, Special Industrial Zones or IT

Parks

Solid Waste Management and Treatment in urban areas

Investment required for construction of International and

Regional Airports as well as modernization and management

of existing airports

Establishing Insurance and Re-Insurance Companies Petroleum Refinery Plants

Hydropower projects of 500 megawatt (MW) or more capacity

Banks and financial institutions whose fifty-one percent or more investment is borne by foreign

investors

Clause 9 of IBN Act mandates following projects for IBN:

As well as:▫ Any infrastructure or service industry that has a paid-up capital of Rs. 10 billion or a project cost exceeding that

amount.▫ Support any foreign investment in a productive industry that has a paid-up capital of Rs. 10 billion or a project

cost exceeding that amount,▫ Any project prescribed by Government of Nepal that fall into the categories above.

GoN is engaged in the negotiation process of PDA for 5 large-scale hydropower projects: Upper Karnali, Arun-III, Upper Marsyangdi-II, Tamakoshi-III, and Upper Trishuli

The cumulative installed capacity of these 5 projects is over 3,200 MWs

Contractually obligates both the government and the investor to fulfill their duties

− A legal document that outlines the roles & responsibilities of both the parties during the concession period (typically 30 years)

− Consistent with international best practices; has precise language without ambiguities that gives confidence to financiers

− Ensures accountability from both the parties (Government of Nepal and the developer)

Status

1

Key Features of the PDA

2

Significance of the PDA

3 Overcoming the hurdles that had historically prevented large-scale foreign investment in Nepal

− The PDA to be signed allocates the risk to the party best able to manage that risk

− Government of Nepal will absorb political and country risks so that the investors feel secure

− Through proper risk allocation in the PDA, the document will become “bankable” from a financing standpoint

− Sets a framework for large-scale infrastructure projects in general

Project Development Agreement: Concession Agreement between the investor and the resource owner (government)

Issue of Approval by Foreign Investment

Section, DoI

Company Registration and Tax Registration at

Company Registrar’s Office

(within 35 days of getting the approval

from DOI in the case of industry)

Is EIA/IEE Report

Required?

Documents Required for Company Registration:• Copy of the permission of foreign investment issued by

DOI • Copy of citizenship certificate of Nepalese promoters• Copy of passport of foreign promoters• If the foreign party is a company, copy of minutes of Board

of Directors• Two copies of company’s proposed Articles and

Memorandum of Association in Nepali language• A copy of Certificate of Incorporation, Memorandum of

Association and Article of Association of the company (for Industry registration)

• Registration Fee

Approval of IEE/EIA Report as per EPR 1997 License and

Technology & Environment Section

at DoI

Process Complete

Company Registration

Yes

No

MINING

HEALTH

ENERGY

Priority Sectors for Investment

AGRICULTURE

Hydropower: Key Opportunity

Priority Rationale

• The most untapped sector – only 1.65% of Nepal’s economically feasible potential has been realized

• Holds the key to economic transformation

Opportunities

• Filling the peak shortage of over 500MW (not including the latent demand) domestically

• Export Potential to India–• India’s power deficit is close to 75 million units per year.

• Dhalkebar-Muzaffarpur 400 kV cross-border transmission line being built (others in pipeline)

• Power Trade Agreement moving forward • 66% of the installed capacity in India is thermal(mostly coal)

and shortages in domestic coal is expected to exacerbate the build out of new coal plants

Priority Rationale

• Naturally endowed resources, rich cultural heritage (12 World Heritage Sites and 8 out of the highest peaks) are comparative advantages

• Primary contributor of foreign exchange, one of the largest employer in service sector

• Development of the sector has the potential to uplift rural populations and create linkages with other industries like agriculture, indigenous crafts amongst others

Opportunities

• Huge Market - Total outbound tourists last year from India and China last year around 110 million – Capturing even 2% of that figure would mean an annual inflow of 2.2 million into Nepal, which is 2.75 times higher than Nepal’s total annual inbound tourists

• Steady increase in tourist arrivals after the end of the civil conflict leading to shortage of facilities

• 10% of visitors to Nepal were for religious purposes – Developing related infrastructure around Lumbini, Janakpur and other religious sites could be advantageous

• Less than 25% of identified peaks are open for climbing• Planned Lumbini International Airport provides scope for

religious tourism

Tourism

Priority Rationale

• Contributes 1/3rd to GDP and almost 2/3rd of the labor force is involved

• Majority of people engaged in agriculture live below poverty• Developing the sector a key tool for poverty alleviation and

development

Opportunities

• Commercial Dairy Operations & Livestock – Nepal imports over half of its current meat and milk requirements

• Infrastructure -Slaughter houses, logistics, Fertilizer factory, irrigation projects

• Storage and cold storage facilities – Post harvest loss for offseason vegetable is 25-50%

• Numerous crops for domestic consumption and export – tea, coffee, cardamom, turmeric, fresh vegetables, exotic flowers, chili, mushroom

• Processing and R&D units to Value add businesses based on agricultural products

• Medicinal Herbs – Nepal’s unique topography and climate ideally suited

Agriculture

Priority Rationale

• Poor infrastructure constrains growth in other sectors like Tourism, Agribusiness, …

• Improving connectivity is key to development • Large infrastructure projects generate employment• Specialized zones required to boost exports

Opportunities

• Second International Airport (SIA – Nizgadh) ($0.6 Billion first phase)

• Improving/upgrading airports to international airports – TIA, Pokhara, Lumbini

• Kathmandu Metro Transit System ($5.5 Billion) – Will be country’s first railway transit system

• Kathmandu-Terai Fast Track ($1.0 Billion) - Will provide considerable savings in time and cost, complements the proposed SIA at Nizgadh

• North South Birjgunj-Rasuawagadi Corridoor ($1.7 Billion) - Road project capitalizes on the burgeoning trade between India and China, complements Kathmandu-Terai Fast Track

Infrastructure

Priority Rationale

• Extraction of Nepal’s minerals holds the key to rural development

• Nepal’s mineral reserves are largely unexplored and the industry is largely undeveloped and not mechanized

Opportunities

• Limestone – Known reserves of 1.25 billion MT of cement grade

• Dolomite – Over 5 billion tons of known reserves• Decorative Stones – Marble, granite, quartzite & slate • Gemstones – Tourmaline, aquamarine, ruby, sapphire are

some known precious/semi-precious reserves• Fuel Minerals – No known reserves of Natural gas and

petroleum but international conglomerates continue to explore for them.

Mining & Minerals

Priority Rationale

• Emerging, young, educated and employable labor available at comparatively lower costs

• Capitalize on spillover benefits from India’s IT boom• Generation of high volume and/or high paying employment

opportunities to stem the brain drain

Opportunities

• Over 10M population b/w age 15-30 of which 70% is educated.

• Cheap human resources available for Midsize companies, 500-1000 employees catering to specialized software sectors like banking services, data mining & software design

• Untapped e-governance market for investors to incorporate IT into government services such as MRP passports, computerized citizenship cards, digitized land records

• Scope of internet services - Internet penetration still very low• Low labor cost compared to India and other SA

countries - Comparative Advantage

Information, Communication, and Technology

Priority Rationale

• Health & Education are the most fundamental building blocks for human development and poverty alleviation

• Investments by private sector can ease the burden on GoN, thus allowing it to allocate resources to the most needy

Opportunities

• Institutions of higher learning – In the fiscal year 2012-13, more than 16 thousand students went abroad for higher education

• State of the art medical schools and hospitals – such institutions attract students and patients from South Asia

• Vocational training schools• Largely untapped market for institutions with foreign

affiliations

Health and Education

BiharArea 94,163 sq. km.Population 104.11 Million (2011)GDP USD 27.24 Billion (at constant prices 2012, approx.)GDP GrowthRate 13.13%

Manufacturing opportunities: access to vibrant Indian markets near the Nepal-India border

Uttar PradeshArea 243,286 sq. km.

Population 199.58 Million (2011)

GDP USD 69.84 Billion (at constant prices 2012, approx.)GDP GrowthRate 6.23%

Opportunities to manufacture products in Nepal to meet the growing demand of areas in the south -

Bihar and Uttar Pradesh (growing population base and rapid economic growth)

Investment Climate Going Forward:

-A stable government in place and higher political commitment (FDI a top priority of all major parties) leading to higher investor confidence

-Regulatory efforts to continue; new investment laws to be passed by the new parliament

Nepal is open for business