February 2, 2016 Sujeev Shakya

Reverse Gear

In early January, the Norwegian company Statkraft pulled out of the 650 MW Tamakoshi III Hydropower project after failing to make any major breakthrough with the government even after a decade of attempting to do so. This major news item went relatively unnoticed. The company spent more than $20 million in trying to figure out how best to invest over $1.5 billion  in Nepal. If foreign investments were taken seriously in Nepal, the prime minister would have flown to Norway to persuade Statkraft not to withdraw. However, Nepal is unique and it is highly likely that the public and private sectors are celebrating yet another departure of a foreign investor, rather than working towards creating an investor friendly environment. Statkraft has become yet another example of a project that can be done the Nepali way.

The politicians, along with crony capitalists, may be thinking of a creative structure—perhaps, a trust with shareholders that comprise parliamentarians, politicians and crony capitalists like in several other ventures against the spirit of company law, ownership, management and government structure. Perhaps these parties, along with the bureaucracy that handles approvals, are happy that they will not have to review large sets of documents prepared in English by global law firms and continue to create documents in Nepali that will not have to adhere to global standards. Or perhaps they are happy that yet another project can be negotiated in Nepali where speechmakers well-crafted in making speeches in Nepali can align the project with their whims and fancies; or that Nepal will not be under global scrutiny on adherence to contracts, change of law clauses and accepted international norms that Nepal has always managed to get around. It is important that these issues are looked at seriously as global advisory firms are now considering putting Nepal on a watch list for investments at scales equivalent to some of the worst countries in Africa.

Reversal of Reforms

After the initial period of liberalisation in the 1990s, Nepal has reversed reforms to such a degree that there are now very few international firms remaining in the Nepali market. Every sector that requires accepted international practices—be it the financial sector or the development sector—is now led or run in a uniquely Nepali way that tends to compromise governance and innovation. In their quest to tame problems, regulators have over the years regressed to regulations that global firms do not understand, thereby keeping global investors and firms at bay. Furthermore, the stock market, which has now been reduced to a Ponzi scheme, is seeing great investor interest even when the ratings of the stock offerings are poor and marked as risky. The stock market regulations have ensured that profitable companies are discouraged from listings their stocks. The fact that the stock market reaches its highest index point when the economy is heading towards negative growth following crisis after crisis indicates how far removed it is from the fundamentals that govern properly regulated stock markets.

In any country, if situations such as the current fuel crisis arose, and reached a point where industries have to shut down due to non-availability of fuel from legal sources, there would be utter chaos. Here, various joint venture firms have decided to shut operations, not because they cannot afford to buy fuel from the black market, but because they cannot obtain legal bills for the fuel they buy. While this issue should have impacted all major firms in Nepal, the fact that it has not and that businesses continue to operate raises questions on transparency, accounting and audit standards. As a businessman explained, the costs of procuring fuel from the black market are much lower than the costs incurred in corruption. Nepali firms are therefore not impacted in terms of accounting as the unique Nepali way of doing things is used to deal with this issue.

International Community’s Role

It is perhaps time for international development partners to seriously look at Nepal through a new set of lens, and relook at how issues relating to economic development are currently perceived. Will the current set of projects and programmes tackle poverty? Will working with business associations that have been marred by politics and that promote protectionism in name of nationalism really deliver results? In the absence of large foreign investments, encouragement to transfer global technology owned by global firms and promotion of a culture of entrepreneurship, will long-term economic goals be met? Will subsidising the costs of financial institutions that will fold once donor money dries up really meet the objectives of tackling poverty? These are serious questions that the donor community should ponder.

Perhaps the time has come for international development partners in Nepal to recalibrate their strategy. They need to use their financial and technical assistance to create platforms for large investments that will generate employment and create more diverse and richer local shareholders. Only this will ensure a departure from the current scheme of things and bring about real change in Nepal’s economic future. If development partners do not push Nepal to integrate into global markets the way it has integrated into the world of global social media, Nepal will never emerge out of the quagmire of crony capitalism and weak governance. Time is running out! The international community needs to act now!


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