Status of Nepal’s investment climate influencing private sector involvement and investment in the forestry sector

The government and international agencies, including donors have been investing to improve the investment climate through formulation or reform of policy and legislative frameworks, infrastructure development, organizational development, institutional reforms, grants and seed funding for community organizations, and developing and demonstrating business models. In the past decade, the government of Nepal invested NRs 43 billion (US $411.38 million) in addition to US $119.92 million from international donors through various forestry projects. These enabling investments have several positive outcomes, including development and reform of various policies, strategies, programs and production of experts in the forestry sector.

The factors influencing the risks, returns and transaction costs at various aspects of the business establishment and operation, such as access to resources, establishment of enterprise, employing workers, access to finance, complying with taxes, trading of forest products and services, and settling disputes and enforcing contracts, which in turn determine the profitability and social image of a business are identified, and a detailed analysis of the present situation has been made to identify issues and possible actions for improvement. The main factors identified are a) policy and regulatory environment governing the forest sector, b) institutional framework and political environment, and c) business development services including infrastructure and finance.

Policy and Regulatory Environment Governing the Forest Sector:

Nepal has been trying to develop the policy and legislative provisions and institutional arrangements to create the investment friendly climate. For example, the provisions of bringing all necessary services in one place under OWP; investment, repatriation, and technological rights under FITTA; security against nationalization of private properties under BOI; and signing Bilateral Trade Agreements and BIPPA with several countries are positive steps to attract investment.

There are provisions for concessions on VAT, income tax and excise duties to some forest-based industries. The Industrial Policy has a provision of providing assistance in technology, market, skills and research for industries based on NTFPs including herbs. The Trade Policy emphasizes institutional and physical infrastructure development relating to foreign trade, developing policy and institutional networks for the protection of intellectual property rights, and providing additional incentives to export oriented industries. Furthermore, the NTIS has prioritized 19 commodities for the export, including herbs, essential oils, handmade paper, and tourism. The engagement of local communities in forestry have developed successful community forestry program, which became an exemplary forest management model reducing deforestation. Similarly, the leasehold forest program is successfully involving poor and excluded distant communities in the management and utilization of forest resources.

The Herbs and NTFP Development Policy, 2004 (HNDP) and the various policies in renewable energy (incl. bioenergy) clearly highlight the role of private sector. The institutional reform in protected areas and buffer zone management is also recognizing the role of the private sector, which can play an active role for strengthening PES system. Nepal has ratified more than 25 Multilateral Environmental Agreements and the private sector can get benefit from it, if Nepal takes steps to fully comply in practice.

However, in actual practice the space for the private sector is limited due to the problems in proper implementation of the existing policy and legislative provisions mainly arising from the contradictions, jurisdictional overlaps, inappropriate assignment of roles, weak coordination, and institutional inefficiencies as well as some gaps, especially implementation instruments, such as procedures and guidelines. There are malpractices that have created a bad social image for the entrepreneurs, especially in timber and some NTFP businesses.

Some of the main issues that need to be addressed are a) complexity and confusion in business registration steps; b) clarity on rights to harvest and process timber from private lands, and contradictory provisions that arise from multiple agencies and procedures; c) complex procedures and high transaction costs in harvesting and utilization of forest products from private land; d) irrational system of fixing and collecting royalties, prices and taxes on forest products, including charging royalties on NTFPs and VAT on timber grown in private land; e) irrational environmental regulations for community forest and NTFP businesses; f) anomalies in fixing size and grading of timber, depository system and stock holding time of timber; g) tariff and non-tariff barriers in trade, especially hurdles in transportation, multiple taxation, and confusion created due to multiple agencies issuing certificate of origin; h) tenure issue on non-forested public land, privately occupied non-registered land and ecosystem services; and i) access of the private sector to suitable leasehold forestland for industrial and commercial purposes.

Institutional Framework Governing the Forest Sector and Political Environment:

A multitude of institutions, both in forestry and beyond, have been established create enabling environment and contribute to increase returns and reduce the risks and transaction costs for the private sector. However, the issues including, the inefficiency and ineffectiveness in delivering services, weak coordination, overlapping jurisdiction and authorities, conflicting and contradictory provisions, and complex bureaucratic processes are challenging the growth of the private sector in forestry.

As reflected in their election manifestos, every major political party has considered forest as an important sector that needs to be developed for national prosperity and unlike in the past, there were no reported cases of widespread illegal felling during the recent constituent election. But, the political parties are found to put unnecessary pressure in transfer of government officials (encouraging bad governance), demanding donations and over backing labor unions and informal groups making this sector unattractive for investment. Presently, the private investors are sceptical due to the long political transition, uncertainty on federal structuring- who the private sector should deal and negotiate with -and their implication on rights. The law enforcement is weak and the overall governance in the forestry sector needs to be improved if Nepal wants to attract and retain responsible investors.

BDS, including Infrastructure and Finance:

The required business development services to improve the investment climate include research and development, capacity building, supply of quality inputs and technologies, business advice and counselling, market information and product promotions, and networking and brokering. Apart from these, the study reveals four most important infrastructure needs for attracting investments, which are transport, electricity, ICT, and other supportive facilities, such as collection centres, warehouses, market infrastructures (wholesale/auction centres), and laboratory facilities.

The proliferation of Bank and Financial Institutions, currently 283 in number with 2492 branches, provide a base for access to finance. However, the lending in forestry sector is still negligible. The factors affecting for not much advancement is attributed on the one hand to capacity constraints of FBEs, which include their informal and unorganized nature of business, financial illiteracy, inability to produce enough collateral, reputation of the sector in general, and on the other hand BFIs’ limitations due to very little knowledge and information about the sector and the lack of appropriate loan products.

This post is based on the findings of the national level study on private sector involvement and investment carried out by ANSAB and its consortium partners Nepal Herbs and Herbal Products Association (NEHHPA) and EnterpriseWorks/VITA-A Division of Relief International (RI/EWV), USA on behalf of the Multi Stakeholder Forestry Programme of the Government of Nepal.