NEPAL’s Investment Climate Statement 2008


Source: http://www.buyusa.gov/nepal/en/investment.html

INVESTMENT CLIMATE STATEMENT– OPENNESS TO FOREIGN INVESTMENT

Although the Government of Nepal (GON) is open to foreign direct investment, implementation of its policies is often distorted by bureaucratic delays and inefficiency, political instability, pervasive corruption and persistent insecurity.  At present, there are 1,336 foreign investment projects in Nepal, worth a total of approximately USD 1.85 billion according to official GON statistics.  Indian ventures lead the list with 373 projects and over 43 percent of total foreign investment. The U.S. ranks second with 106 ventures and 13 percent of total foreign investment.  China, Japan, South Korea, UK and Germany are also prominent.

Government policy changes over the past four years have signaled to foreign investors that Nepal is open for business.  In 2005, the government opened some service sectors to foreign investment.  Progress has been made in allowing private operations in some sectors that were previously government monopolies, such as telecommunications and civil aviation. Licensing and regulations have been simplified and 100-percent foreign ownership is now allowed in some sectors.  New banking institutions and a small stock exchange provide alternative sources of investment capital.

Nevertheless, significant problems remain.  They include lack of direct access to seaports (currently all products imported by ship from third countries enter through Kolkata), difficult land transport, lack of trained personnel, scarce raw materials, inadequate power (especially outside the Kathmandu Valley), insufficient water supply, non-transparent and capricious tax administration, inadequate and obscure commercial legislation, difficulty in obtaining long-term visas for investors, and unclear rules regarding labor relations.  Policies intended to establish a “one window policy” and simplify necessary interactions between investors and the host government have produced few results.  Furthermore, there is often a wide discrepancy between the letter of the law and the law’s implementation.  Foreign investors constantly complain about complex and opaque government procedures and a working-level attitude that is more hostile than accommodating.

The government is aware of the deficiencies in Nepal’s investment climate and is slowly moving toward more investor-friendly arrangements.  The Foreign Investment and Technology Transfer Act of 1992 abolished the minimum capital investment requirement and eliminated significant barriers to foreign investment.  The Act also now allows for foreign investment in legal, management consulting, accounting and engineering services up to the limit of 51%.

Policies regarding hydropower generation have changed to open the sector to private development and the government is currently revising the Electricity Act under which hydro-power generation licenses are granted.  A hydropower policy intended to simplify the licensing procedure and break the monopoly of the Nepal Electric Authority (NEA) over all aspects of generation, transmission and distribution was announced in October 2001.  These policy changes were expected to boost the flow of foreign investment into the hydropower sector by involving the private sector in the generation, transmission, and distribution of power.  Although a few sizable private-sector hydropower projects have either begun operation or are in the planning stages, persistent political instability and the poor security environment continue to discourage long term investment in this sector.  In addition, few of the 2001 policy changes have been fully implemented.  The licensing process remains lengthy and cumbersome and the government has not yet passed the legislation necessary to un-bundle the functions of the NEA and create an independent regulatory body.  Private sector development of hydropower for export has also been limited by domestic politics and the government’s inability to finalize a blanket electric power trade agreement with India, the only potential market for any exportable electricity produced in Nepal.

Legislation

The most significant foreign investment laws are: the Foreign Exchange (Regulation) Act 1962; Foreign Investment and One Window Policy of 1992; the Foreign Investment and Technology Transfer Acts of 1992; the Immigration Rules of 1994; the Customs Act of 1997; the Industrial Enterprises Act of 1992; the Electricity Act of 1992; the Privatization Act of 1994 and the annual Finance Act that is passed every fiscal year.   Currently the Finance Act 2007/08 is in force.

The 1965 Patent, Design and Trademark Act and the 2002 Copyright Act define the terms and conditions of intellectual property rights protection. The Copyright Act includes all types of electronic and audio video materials, provides for financial penalties as well as imprisonment, and provides for confiscation of sold and published unauthorized materials.  The offender also has to pay compensation claimed by the copyright holder.  However, the revised Copyright Act is not up to the level required for trade-related intellectual property rights under the World Trade Organization.  Revisions are likely, as Nepal acceded to the WTO in April 2004.

The Foreign Investment and One Window Policy of 1992 restates the desired benefits from foreign investment; lists acceptable forms of investment; allows for foreign shares up to 100 percent in business areas not on a “negative list”; establishes currency repatriation guidelines; and outlines visa arrangements, arbitration guidelines, and a special “one window committee” for foreign investors.  The Foreign Investment and Technology Transfer Act (FITTA), as revised in 1996, eliminated the minimum investment requirement and clarified rules relating to business and resident visas.  In general rule, under the FITTA all agreements related to foreign investment are governed by Nepalese law and subject to arbitration in Kathmandu under UNCITRAL Rules.   However, foreign law can govern in cases where the foreign investment exceeds Nepali rupees (NRS) 500 million (approximately USD 7.9 million) and the parties include a choice of law provision in their agreement.  The FY 2007/08 Finance Act outlines customs, duties, export service charges, sales, airfreight and income taxes, and other excise taxes that affect foreign investment.  The Immigration Rules of 1994 describe visa regulations.  The Customs Act and the Industrial Enterprises Act, as revised in 1997, establish invoice-based customs valuations and eliminate many investment tax incentives, installing in their place a lower, uniform rate.  The Electricity Act defines special terms and conditions for investment in hydropower development.  The Privatization Act of 1994 authorizes and defines the procedures for privatization of state-owned enterprises to broaden participation of the private sector in the operation of such enterprises.

Institutional Arrangements

The Department of Industry is designated as the “one window servicing agency” with the Industrial Promotion Board (IPB) as a focal point for foreign investment under the Foreign Investment and Technology Transfer Act.  The Department of Industry facilitates corporate registration, land transfers, utility connections, administrative services agreements, and coordination among various agencies. The Industrial Promotion Board (IPB), chaired by the Minister of Industry, Commerce and Supplies, is the primary government agency responsible for foreign investment.  The IPB is intended to coordinate policy-level institutions, establish guidelines for economic policies, approve or disapprove foreign investment proposals, and determine applicable investment incentives.  The Department of Industry (under the Ministry of Industry, Commerce and Supplies) registers and classifies foreign investments.  It also serves as the secretariat for the “one window servicing agency,” which manages the income tax and duty drawbacks granted to some foreign investments.

Current administrative procedures do not allow for automatic approval of foreign investments.  Foreign investors are required to obtain licenses for manufacturing or service sector investments, and each license request must be considered individually.  Investments below NRS 1 billion (approximately USD 15.63 million) are referred to the Department of Industry for action and are typically approved at the Department level without the involvement of the IPB.  However, investors frequently complain about bureaucratic delays and lack of transparency in procuring investment licenses.  In most cases, one to six ministries other than the Ministry of Industry review the business proposal and provide input prior to consideration by the IPB.

The Department of Electricity Development under the Ministry of Water Resources is the responsible agency for licensing new foreign and domestic investments in hydropower projects.  However, decisions on project proposals that involve foreign investment are invariably taken by the Ministry of Water Resources itself.  Similarly, Nepal Rastra Bank (NRB), the central bank of Nepal, is responsible for issuing licenses to operate commercial banks and financial institutions.  The Insurance Board (IB) is responsible for issuing licenses to operate insurance companies, both life and general.  The Civil Aviation Authority of Nepal (CAAN) is responsible for granting operating licenses to both domestic and foreign airlines operators and the Nepal Telecommunications Authority (NTA) is responsible for issuing licenses for operating any type of telecommunications and information technology services.

Licensing of new investments can be time-consuming.  Some foreign investors have reported that the licensing process requires a good lawyer and great patience.  The law’s mandate that the IPB make a licensing decision within 30 days of submission of an application is not generally implemented because of the legal proviso that all necessary information must have been submitted.  In practice, multiple meetings are usually required before the information is deemed sufficient.

Eligible Sectors

Foreign investment proposals must fall under existing industry categories, which include agriculture and forestry, manufacturing, electricity (water and gas), construction, hotels and resorts, transport and communication, housing and apartments, and a restricted range of services.  To comply with its WTO commitments, on December 2005 Nepal opened service industries and a few other sectors to foreign investment.  This was accomplished through a GON decree amending certain provisions of the Foreign Investment and Technology Transfer Act 1992.  These new sectors include business and management consulting, accounting, engineering and legal services, travel and trekking services, tourist lodging, international retail sales services, and production of alcohol or cigarettes.  Foreign investment is forbidden in the defense sector and the IPB will not license foreign investments that are judged to be either hazardous to general health or the environment.

Foreign investors are permitted to acquire real estate in the name of the business entity they own, but are not allowed to acquire real estate as personal property.  Although local law permits foreign investors to buy shares on the local stock exchange, in practice foreign investment in the stock exchange is not yet opened to the foreign investors.  This is mainly due to the provisions of the Foreign Investment and Technology Transfer Act 1992 which requires approval of Department of Industry for a foreigner to buy shares in a Nepalese company.  Also, in cases of investment in banks and insurance companies, prior approval of the regulator is required.  Further, approval of Nepal Rastra Bank is also required for such purchase of shares under the Foreign Exchange (Regulation) Act 1962.  All of these hurdles make investment in the local stock market unattractive to foreign investors.  Foreign investors are allowed to buy shares of government corporations by participating in the bidding for privatization of such corporations.  In such cases, Nepal’s Ministry of Finance sells the shares to the buyer after carrying out a lengthy screening during the bidding process.  Through an amendment in the licensing policy of financial institutions, on July 26, 2006, the NRB increased the maximum foreign equity participation limit in domestic financial institutions to 85 percent from 67 percent.  With the recent amendment, equity participation of foreign investors in joint venture financial institutions can range between 20 – 85 percent with the remaining shares open for purchase by the general public.  Joint venture financial institutions with less than 50 percent foreign equity participation are required to earmark at least 30 percent of their shares for sale to the general public.

The Privatization Act of 1994 generally does not discriminate between national and foreign investors.  However, in cases where proposals from two or more investors are identical, the government gives priority to Nepali investors.  To date fifteen state-owned corporations have been privatized, seven corporations have been liquidated and two other corporations have been closed.  The last privatization completed by the government was in January 2006.  Out of the fifteen corporations privatized so far, foreign investors have taken over only two of them.  The privatization process of three other state-owned corporations, which was underway in early 2006, is currently on hold due to major political developments after April 2006.

On April 13, 2004 the state-owned telecom operator, Nepal Telecommunications Corporation (NTC), was converted into a company and the name changed to Nepal Telecommunications Company Limited, but ownership of the company remained entirely with the government.  NTC is among few state-owned enterprises that have been drawing good returns for years largely due to their historical monopolies.  At the time of conversion of NTC into a company, the estimated amounts of paid-up capital and authorized capital of the corporation stood at 15 billion Nepali rupees (USD 238 million) and 25 billion Nepali rupees (USD 397 million) respectively.   On January 6, 2008, the GON announced that it would sell 10 percent of NTC to the general public and 5 percent to NTC employees.  The government is expected to float the shares to the public by April 2008.

Since 2003 the World Bank has been working to restructure two of the largest state-owned commercial banks, the Rastriya Banijya Bank (“National Commercial Bank” or RBB) and Nepal Bank Limited (NBL) to prepare them for privatization.  However, the reform, revitalization, and professionalization of these institutions are long-term tasks and the banks are not expected to be ready for privatization until late 2009 or 2010.

Visas

The GON offers different types of visas to investors and businesses.  Potential investors are generally given six-month visas to conduct research and feasibility studies.  To obtain a six-month visa, applicants must provide biographic information and a description of relevant work and professional experience.  If the Department of Industry can readily identify the applicant as a legitimate business representative, the process can be expedited.  Endorsement by a recognized foreign industrial enterprise is one means of accomplishing this.  However, the Foreign Investment and Technology Transfer Act allows a foreign investor to have only one residential representative in Nepal.  In cases where the foreign investor wishes to have more than one representative, the visa process becomes difficult.  In the past, investors have even had problems obtaining visas for general managers responsible the Nepalese operation.

Business visas are generally issued to approved investors for a period of one to five years.  However, investors describe the business visa process as bureaucratic and time-consuming.  Many say they spend more than 24 work hours per visa, over a period of 20 to 30 days.

Although the GON began issuing five-year, multiple-entry visas to resident foreign investors and their families in 1998, in actuality it has issued very few. In 1999, Nepal lowered its business visa fees; fees range from USD 250 for a five-year visa to USD 100 for a one-year visa.  A non-tourist visa, however, costs USD $60 per month for the initial six-month period.  This visa period can be extended for another six months or more at an additional $60 per month.

— CONVERSION AND TRANSFER POLICIES

The Foreign Investment and Technology Transfer Act of 1992, permits foreign investors to repatriate all profits and dividends, all money raised through the sale of shares, all payments of principal and interest on any foreign loans, and any amounts invested in transferring foreign technology.  Foreign nationals working in industry are also allowed to repatriate 75 percent of their salaries, allowances, and emoluments, etc.  Repatriation facilities (such as opening accounts or obtaining permission for remittance of foreign exchange) are made available on the recommendation of the Department of Industry, which normally provides approval of the original investment.

However, convertibility is difficult and not guaranteed.  Repatriation of any funds needs approval from the concerned GON department and Nepal Rastra Bank, which regulates foreign exchange.  In most cases, approval must be obtained from the Department of Industry.  In other cases, such as telecommunications, the Nepal Telecommunications Authority (NTA) must approve the repatriation.  In joint venture cases, NRB and the Ministry of Finance must approve.  Because commercial banks only process the applications but do none of the oversight, the process slows down when it reaches the NRB, which must verify the authenticity of all requests.  In the end, an overworked and inefficient banking system is to blame for slow approval of foreign exchange facilities.  The actual experience of American and other foreign investors suggests that there are discrepancies between the government’s stated policy of repatriation and its implementation.

To repatriate funds from the sale of shares, foreign investors apply to the Nepal Rastra Bank.  For repatriation of funds connected with dividends, principal and interest on foreign loans, technology transfer fees, expatriate salaries, allowances, and emoluments, the foreign investor applies to the Department of Industry, and then to the Nepal Rastra Bank.  At the first stage of obtaining remittance approval, foreign investors must submit remittance requests to a commercial bank.  Generally, foreign investors rated services provided by private banks as satisfactory.  However, final remittance approval must be made by the NRB foreign exchange department, at which stage the process slows down significantly.  For this reason, foreign investors rated the Nepal Rastra Bank’s administration of exchange regulations as unsatisfactory.

The Finance Act of FY O7/08 has added, on an exceptional basis, a 5 percent tax on capital gains and an additional 5 percent to the existing tax on repatriation of foreign dividends.

In general, Nepalis are not permitted to invest outside of Nepal.  Exceptions, however, can be granted on a case-by-case basis and policing of the prohibition is weak.  In 1995, a private airline was permitted to invest in a regional carrier based in Kolkata, however, the Nepalese airline stopped operation and closed down in 2005.  Again, in 2006 another private airline operator formed a joint venture with a regional carrier based in India to operate flights in Northeastern states of India.  During the peak of the Maoist insurgency in 2004 and 2005 a few industrial houses invested in India and Gulf countries.  These represent the few instances of approved direct foreign investment by Nepalese nationals.

— EXPROPRIATION AND COMPENSATION

The Industrial Enterprise Act of 1992 states that “no industry shall be nationalized.”  Nepal constantly reiterates this point in negotiations with private-sector firms interested in the hydropower sector.  There have been no cases of nationalization in Nepal, nor are any anticipated.

Companies can be sealed or confiscated if they do not pay taxes in accordance with Nepali law.  There are no official policies either existing or planned that suggest official expropriation should be of concern to prospective investors.  There have been instances in the past in which unscrupulous local partners used the tax or regulatory systems to seize control of a joint venture firm from a U.S. investor.  Such cases have not involved major Nepali business houses, however.

— DISPUTE SETTLEMENT

In the event of a dispute with a foreign investor, the concerned parties are encouraged to settle it through consultation in the presence of the Department of Industry.  If the dispute cannot be settled in this manner, cases involving investments less than NRS 500 million (approximately USD 7.9 million) in value will be referred to arbitration in Nepal according to the Arbitration Rules of the United Nations Commission for International Trade Law (UNCITRAL).  For investments that exceed this amount, the government of Nepal will permit stipulation of legal jurisdiction other than Nepal in shareholder agreements and contracts.

There have been two investment disputes over the past few years in which the GON did not honor portions of contracts with foreign investors.  While the Coca-Cola Company has a pending tax dispute with the Department of Internal Revenue, the Bhotekoshi Hydropower Company, which currently has only a 5 percent U.S. stake, has a pending payment dispute with Nepal Electricity Authority and the Ministry of Water Resources.  These disputes have not been frequent, but investors should be aware that the GON might not fully comply with its contracts.

All real property transactions must be registered, and property holdings cannot be transferred without following established procedures.  Even so, property disputes account for half of the current backlog in Nepal’s overburdened court system, and such cases can take years to settle.  Moreover, laws and regulations regarding property registration, ownership and transfer are unclear, and interpretation can vary from case to case.

Liquidation is covered either by the Company Act and Insolvency Act 2006 (2063). If a company is solvent, its liquidation is covered by the Company Act. If the company is insolvent, therefore not able to pay liabilities or liabilities are more than assets, then its liquidation is covered by the Insolvency Act.  Under the Company Act, the claimant priorities are: 1) government revenue, 2) creditors, and 3) shareholders.  Under the Insolvency Act the government ranks with all other unsecured creditors. Monetary judgments are made in local currency.

Nepal is a signatory and adheres to the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards and has updated its legislation on dispute settlement to bring its laws into line with the requirements of that convention.  The Arbitration Act of 1999 allows the enforcement of foreign arbitral awards and limits the conditions under which those awards can be challenged.

— PERFORMANCE REQUIREMENTS/INVESTMENT INCENTIVES

The Nepal Laws Revision Act of 2000 has eliminated most tax incentives, regardless of whether they were connected with performance requirements.  Exports, however, are still favored, as is investment in certain “priority” industries.  There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers.  There is no local content or export performance requirement.  There is no requirement that nationals own shares, that the share of foreign equity is reduced over time, or that technology is transferred.  However, in the service sectors, opened in 2005, permitted foreign investment limits range from 51 to 80 percent; the balance of the investment is reserved for Nepali nationals in order to form a joint venture with a foreign investor.  Foreign investment in cottage industries is still not allowed.  On the other hand, Nepal does employ tax incentives to encourage industries to locate outside the Kathmandu Valley due to pollution and overpopulation in the valley and an interest in developing poorer parts of the country.

Profits from exports are taxed at 20 percent.  Customs, value added tax (VAT), and excise duties are to be reimbursed within 60 days on raw materials used in the production of export items.  In practice, however, these duty paybacks are often extensively delayed.  Although income in certain priority industries such as garments, carpets and jewelry use to be taxed at a concessional rate of 10 percent, the Income Tax Act 2002 removed most of these tax benefits and concessions.

The Electricity Act of 1992 governs foreign investments in hydropower generation.  This act allows developers an exemption from income tax for the first fifteen years of a project’s operation and provides for a flat one percent customs rate on all imported construction materials, equipment and spare parts, provided that such goods are not manufactured in Nepal.

Foreign investors are not required to disclose proprietary information to government agencies as part of the regulatory approval process.  There are no restrictions on participation by foreign firms in government-sponsored research and development programs; however, depending upon the nature and expertise required for the job, government agencies sometimes limit such programs to participation by Nepali nationals only.

— RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Foreigners are free to establish and own business enterprises and engage in all forms of business activity with the exception of a few industries.  Prohibitions exist in the defense industry, real estate, and security printing sectors.  In addition, the form of public participation is restricted in some areas.  For instance, foreign banks have not yet been allowed to open wholly-owned subsidiaries or branch operations in Nepal.

The GON is moving slowly toward open competition in most sectors of the economy.  Former public monopolies in banking, insurance, airline services, telecommunications and trade have already been eliminated, and the remaining restrictions on private and foreign operations in other areas are being scaled back.

The Competition Promotion and Market Protection Act 2006 came into effect on January 14, 2007.  The new act defines and bars anti-competitive practices.   With the enactment of the law, tied selling, bid rigging, cartel formation, collective price fixing, market restrictions, dial-system, market segregation, undue business influences, syndicate and exclusive dealing have now become illegal in the Nepal.   The law also prevents companies from engaging in business takeovers which would help establish monopolies in the market.  Sale of inferior quality goods has also been made punishable.  The law’s effectiveness is yet to be seen, at the Government has not yet established the necessary enforcement mechanisms.  The Act was drafted through a joint initiative of the private sector and the Ministry of Industry, Commerce and Supplies.

— PROTECTION OF PROPERTY RIGHTS

The Contract Act of 2000 incorporates many new features, including provisions recognizing mortgages, sales, appointment of agents, and shipment of goods as contracts.  Protection of intellectual property rights is inadequate.  Patents registration, under the Patent, Design and Trademark Act 2002, is valid for seven years and can be extended twice for a total period of twenty-one years.  Nepal does not automatically recognize patents awarded by other nations.  The Copyright Act of 2002 is similar in that it does not recognize foreign registrations.  However, the Act covers most modern forms of authorship and provides adequate periods of protection.  Enforcement is weak, with the result that much of the software and most sound or video recordings now circulating in Nepal are pirated.  As per the commitment made by the country on its accession to the World Trade Organization, Nepal must enact new legislation on trade-related intellectual property rights to bring the country into compliance with international norms.  Nepal has not yet signed the World Intellectual Property Organization (WIPO) Copyright Treaty (WCT) or the WIPO Performances and Phonograms Treaty (WPPT).

Trademarks must be registered in Nepal to receive protection.  Once registered, trademarks are protected for a period of seven years.  Enforcement is very poor.

— TRANSPARENCY OF THE REGULATORY SYSTEM

Foreign investors in Nepal face a non-transparent legal system.  Firms complain that basic legal procedures are neither quick nor routine.  The bureaucracy is generally reluctant to accept legal precedents.  As a consequence, businesses are often forced to re-litigate issues that had been previously settled.  Furthermore, legislation banning foreign investment in financial, legal, and accounting services has made it difficult for investors to find help cutting through regulatory red tape.

Labor, health, and safety laws exist but are not properly enforced.  Some companies report that the process of terminating unsatisfactory employees is cumbersome and that protective labor laws make it very difficult to bring skilled foreign-national specialists such as pilots, engineers, or architects into Nepal.

— EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Credit is generally allocated on market terms, although special credit arrangements exist for farmers and rural producers through the Agricultural Development Bank of Nepal.  Foreign-owned companies can obtain loans on the local market.  The private sector has access to a variety of credit and investment instruments.  These include public stock and direct loans from finance companies and joint venture commercial banks.

Legal, regulatory, and accounting systems are neither fully transparent nor consistent with international norms.  Though auditing is mandatory, professional accounting standards are low, and many practitioners are either poorly trained or lacking in business ethics.  Under the circumstances, published financial reports are unreliable and investors are better advised to rely on general business reputations, except in the few cases in which companies have applied international accounting standards.

The Nepali banking system is small, fragmented, and, in some cases, plagued by bad loans.  Banking system assets totaled approximately USD 8.13 billion on 15 July 2007, the end of Nepali FY 2006-07.  Banking system capital (total deposit) in the same period totaled USD 5.93 billion.  9.65 percent of the total asset base is estimated as non-performing as of July 15, 2007.  Foreign commercial lending is scarce and expensive.  Currently, there are no resident or non-resident foreign commercial banks that have standing credit limits for loans of a maturity of more than one year.

There is no regulatory system to encourage and facilitate portfolio investment in the industrial sector. Lack of transparency or regular reporting of reliable corporate information also presents problems for potential foreign investors.  There are no legal provisions to defend against hostile takeovers.  The GON has made certain exceptions to promote Foreign Direct Investment (FDI) in tourism and hydropower.  In these sectors, there can be 100 percent foreign investment.  In 2008 the Clean Energy Development Bank (CEDB) has plans to establish a venture/equity fund for making investment in small and medium sized hydropower project development.   The proposed “Hydro Equity Fund” would fill the early-stage financing gap for development of small- and medium-sized hydropower plants in Nepal.

— POLITICAL VIOLENCE

Nepal suffered a violent Maoist insurgency from 1996 to 2006.  The People’s Movement of April 2006, jointly organized by the major political parties of Nepal, popularly known as the Seven-Party Alliance (SPA) and the Communist Party of Nepal – Maoist (CPN-M or Maoists) ultimately compelled the King to end 15 months of direct royal rule and reinstate the Parliament that had been dissolved in May 2002.   The restored parliament initiated a ceasefire with the Maoist rebels, stripped the King of most of his powers and launched a peace process that included the signing of a Comprehensive Peace Agreement (CPA), the drafting of an interim constitution and the launch of the United Nations Mission to Nepal (UNMIN).   In January 2007, an interim parliament, including members of the restored parliament as well as nominated members from the CPN-M and the SPA, was formed.   It approved the interim constitution and began preparing for the election of a constituent assembly (CA) tasked with drafting a new constitution.   In April 2007, the Maoists joined the interim government.   The same month the CA election, which was scheduled for June, was postponed.   In June, it was rescheduled for November.  In September, the Maoists withdrew their ministers.   In October, the election was postponed a second time.  In late December 2007, the Six-Party Alliance (two parties had reunified) and the Maoists agreed to hold the election by April 2008. The CPN-M rejoined the government after the interim parliament amended the interim constitution to abolish the monarchy from the first meeting of the CA.   Current political divisions and the poor security environment, particularly in the southern border region with India, put the CA election now scheduled for April 10 at risk.

While the ceasefire and CPA raised hopes during the early stage of the peace process in 2006 and even 2007, the early optimism is eroding. Political parties have generally failed to respond to concerns of those living outside the Kathmandu valley and certain segments of the population – including groups such as women, youth, lower castes, and ethnic minorities – have been marginalized, have little trust in the political process, and splinter groups have increasingly resorted to violence.  The coalition government has been unable to project a united image.  Partisan lines run deep, and are evident in all government appointments.

Tensions between the ethnic communities in the Terai, the central government and the Maoists remain high. In January 2007, Madhesis in the southern Terai region, fueled by their under representation in the interim government and state agencies, clashed with security forces resulting in the deaths of more than 30 people. In order to return stability to the region, Prime Minister Koirala promised to amend the interim constitution to include a federal system of governance based on proportional representation.  However, little progress has been made in addressing the issues of the Madhesis and other ethnic communities and widespread protests, demonstrations and strikes continue to plague the Terai.  2007 saw the formation of over 30 separate ethnic groups in the Terai, all calling for recognition and many willing to use violence.

Meanwhile, the Maoists have been unable to transform themselves into a bona fide peacetime political party, despite their leaders’ commitment to giving up violence.  Having risen to prominence by violent means, they are reluctant to relinquish violence and continue to engage in extortion and abductions.  Although the Maoist leadership has publicly prohibited their cadres from engaging in human rights abuses, including extortion and kidnapping, local media continue to report numerous incidents in which Maoist cadres extort money, kidnap, kill and threaten Nepalese citizens.

The risk of possible violence by Maoists as well as regional extremist groups must be taken into account by any foreign firm wishing to invest in Nepal.  The Department of State Travel Warning for Nepal, dated September 24, 2007, urges American citizens contemplating a visit to Nepal to obtain updated security information before they travel and to be prepared to change their plans at short notice.  Given the nature, intensity and unpredictability of disturbances, American citizens are urged to exercise special caution during times when demonstrations are announced, avoid areas where demonstrations are occurring or crowds are forming, avoid road travel and maintain a low profile.  All official travel outside the Kathmandu valley, including by air, requires specific clearance by the Regional Security Officer.  As a result, emergency assistance to U.S. citizens may be limited.  Active duty U.S. military and Department of Defense contractors must obtain a country clearance for official and unofficial travel to Nepal.

U.S. citizens who travel to or reside in Nepal are urged to register with the Consular Section of the Embassy by accessing the Department of State’s travel registration site at https://travelregistration.state.gov or by personal appearance at the Consular Section, located at the U.S. Embassy, Maharajgunj, Kathmandu. The Consular Section can provide updated information on travel and security, and can be reached through the Embassy switchboard at (977) (1) 400-7200 or directly by fax (977) (1) 400-7281. Email: consktm@state.gov, web site: http://nepal.usembassy.gov1.

U.S. citizens also should consult the Department of State’s Consular Information Sheet for Nepal and Worldwide Caution Public Announcement via the Internet on the Department of State’s home page at http://travel.state.gov or by calling 1-888-407-4747 toll free in the United States and Canada, or, for callers outside the United States and Canada, a regular toll line at 1-202-501-4444. These numbers are available from 8:00 a.m. to 8:00 p.m. Eastern Time, Monday through Friday (except U.S. federal holidays).

The U.S. Government’s designation of the Communist Party of Nepal (Maoist) as a “Specially Designated Global Terrorist” organization under Executive Order 13224 and its inclusion on the “Terrorist Exclusion List” pursuant to the Immigration and Nationality Act remain in effect. These two designations make Maoists excludable from entry into the United States and bar U.S. citizens from transactions such as contribution of funds, goods, or services to, or for the benefit of, the Maoists.

— CORRUPTION

U.S. firms and many other foreign investors have identified pervasive corruption as an obstacle to maintaining and expanding their direct investments in Nepal.  There are also frequent allegations of corruption by Nepalese government officials in the distribution of permits and approvals, in the procurement of goods and services, and in the award of contracts.

Combating corruption is the responsibility of the Commission for Investigation of Abuse of Authority (CIAA) and of the National Vigilance Center under the Ministry of Home Affairs.  In the past, the Parliamentary Public Accounts Committee (PAC) has also played an active role in publicizing cases of misconduct on the part of GON officials.  Since restoration of the multi-party system, the local media has been particularly proactive in unearthing and reporting cases of corruption within the government.  Investigative commissions and committees are often formed to look into major cases of corruption that come to light.  Officially, giving or accepting a bribe is a criminal act, punishable by imprisonment for one to six years, a fine, or both, depending on the degree of offense committed.

In the past the CIAA had been proactive in prosecution of cases involving prominent political figures and government officials.  In some cases, the Special Court for Corruption has convicted the accused and, in at least one case, the convicted is serving a jail sentence.  After the Chief Commissioner and another Commissioner retired in November 2006, the CIAA was forced to serve with only two Commissioners.  In recent months CIAA’s handling of the corruption cases has come under fire.   In June 2007 the CIAA filed a case against the Governor and one of the executive directors of Nepal’s central bank, the Nepal Rastra Bank (NRB), for alleged misuse of funds.  Critics claimed that the charges were without merit and perhaps brought at the behest of others to deter initiatives taken by NRB against bank defaulters.   The Special Court has postponed the hearing date four times since the case was filed.  Most of the high profile government ministers charged with corruption have been acquitted by the Special Court.

The Public Accounts Committee (PAC) of the Parliament restored in April 2006 has come out heavily against corruption.  The new interim constitution of Nepal has provisions to impeach the Chief Justice or other Judges for lack of competence, bad conduct, not fulfilling his/her responsibility honestly, and unable to perform his/her duty due to mental or physical condition.  The Judge is suspended from his/her job for the duration of the impeachment process.  The Judge will be automatically terminated form his/her job if such motion is passed by the Parliament by a two third majority.

— BILATERAL INVESTMENT AGREEMENTS

Nepal has signed bilateral investment treaties with India, Britain, Germany and Norway.

— OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The Overseas Private Investment Corporation (OPIC) is free to operate in Nepal without restriction.  OPIC is empowered to offer its “extended risk guarantee” facility to prospective U.S. investors in Nepal.  Nepal is also a member of the Multilateral Investment Guarantee Agency (MIGA), which it joined in 1993.

The Export-Import Bank of the United States (Ex-Im Bank) is the U.S. Government’s official export credit agency whose mission is to assist in financing the export of U.S. goods and services to international markets.  Ex-Im Bank provides export credit insurance, loan guarantees and project and structured finance for U.S. exporters and foreign buyers of U.S. goods and services.

— LABOR

Nepal lacks a large labor force of skilled and educated workers.  The overall literacy rate is only 49 percent.  Vocational and technical training is poorly developed, and the national system of higher education is overwhelmed by large enrollments.  Many secondary and college graduates are unable to find employment in positions commensurate with their education because most of the schools and institutions do not provide job-related training. The employment of foreigners is also severely restricted.  Under current law, the Department of Immigration must approve the employment of foreigners for all positions except the most senior ones.  In private organizations, however, a significant number of professionals from India may be found in mid-level managerial positions.  Existing labor legislation is not seen as business friendly and dismissal of employees can be very problematic.

The Constitution provides for the freedom to establish and join unions and associations.  It permits restrictions on unions only in cases of subversion, sedition, or similar conditions.  Despite the institution of parliamentary democracy in 1990, trade unions are still developing their capacity to organize workers, bargain collectively, and conduct worker education programs.  The three largest traditional trade unions are affiliated with legal political parties. Total union participation is estimated to be around 900,000, which accounts for only about 10 percent of the total labor force.  Excluding agriculture labor, a much higher percentage of the formal sector participates in unions.  The Maoists also have an active affiliate trade union All Nepal Trade Union Federation (ANTUF), which has been engaged in a number of disputes and has been condemned for supporting illegal agitations.

In 1992, Parliament passed the Labor Act and Trade Union Act, and formulated enabling regulations.  However, the government has not yet fully implemented those laws.  The laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications.  The laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affects the nation’s economic interests.  Under the Labor Act, 60 percent of a union’s membership must vote in favor of a strike in a secret ballot for the strike to be legal.  The government does not restrict unions from joining international labor bodies.  Several trade federations and union organizations maintain a variety of international affiliations.  While officially there is no government interference in union registration, unions have complained of difficulties in registering members when opposing political parties are in power.

Frequent transportation and business closures (bandhs) called by the Maoists, political parties and other agitating groups have dramatically affected trade and industry.  Strikes are unpopular, but are widely viewed as the only available means of political or labor protest.  In 2007 labor strikes, transporter strikes and other political actions, mainly in the Terai, closed business and transport operations for up to 120 days in the worst-affected district in the Terai.  Such strikes have severely damaged Nepal’s business climate.  The Maoist lead trade union, ANTUF, has been aggressively trying to establishing its control in every industry and business sectors.  This has resulted in violent clashes between the members of ANTUF and the other trade unions.  Several multinational companies, including the Coca-Cola Company, Colgate Palmolive and Unilever, have been forced to suspend operations or reduce production due to violent agitations, protests and persistent problem in importing raw materials and exporting their finished products.

The Child Labor Prohibition and Regularization Act of 2000 prescribe conditions for 14- to 16-

year-old laborers, and prohibits employment of children under the age of 16 from work in dangerous industries.  More recent legislation, including an act to combat trafficking in persons and the interim constitution, define children as persons under the age of 18.   A number of existing laws affecting child labor are in need of harmonization.

— FOREIGN TRADE ZONES/FREE PORTS

Nepal has no Foreign Trade Zones, Free Ports or Export Processing Zones.  However, any industry exporting 90 percent or more of its products is entitled to import raw materials and capital goods without payment of custom duties, excise taxes or sales taxes.

— FOREIGN DIRECT INVESTMENT STATISTICS (AS OF OCTOBER 16, 2007)

Total No. of projects                1,336
Agriculture & Forestry                  14
Manufacturing                            494
Electricity, Water, Gas                  23
Construction                                37
Hotel & Resort                            281
Transport & Communication        31
Housing & Apartment                  18
Service Industries                      438

Total Project Cost:                  USD 1,854.57 million

Total Fixed Cost:                     USD 1,555.53 million

Total Foreign Investment:       USD   595.12 million

Total Employment Generated:  116,986

Source: Foreign Investment Division, Department of Industry, Nepal.

Note: As of October 16, 2007, India was by far the most important foreign investor in Nepal, with about 28 percent of the projects.  It was also involved in five of the ten largest foreign enterprises.  In terms of total foreign investment, the United States is second; China, third; the South Korea, fourth; Norway, fifth; Japan, sixth; and British Virgin Islands, seventh.

— U.S. INVESTMENT IN NEPAL (AS OF OCTOBER 16, 2007)

Total No. of projects                     129
Agriculture and Forestry                  2
Manufacturing                                38
(9 units have either been cancelled or closed)
Energy Based                                 1
Tourism Industry                           33
(2 units have been cancelled)
Service Industries                         55

Total Project Cost:                  USD 237.20 million

Total Fixed Cost:                     USD 214.94 million

Total Foreign Investment:       USD   80.67 million

Total Employment Generated:  10,945

Source: Foreign Investment Division, Department of Industry, Nepal.

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