--By Madhukar SJB Rana

 

I had the honour to be an architect of the Industrial Policy of 1973, which was a veritable landmark policy document: formulated by a small team of three people (from CEDA, MOIC, and NIDC) and completed and adopted in just four months! It could happen because of the will and drive of the then King Birendra.

 

It was a historic piece of work because it delved into classification of industries so that the sector could be all inclusive and incentives could be provided in an equitable manner depending on whether it was a cottage, small, medium or large industry. It also depended on whether the industry was export-oriented or import-substitution.

 

It was historic because it considered institution building as a foremost need and so gave birth to most of the existing industrial superstructure as now exists.

 

What I have to offer now is based on that legacy, as well as my four year's experience as Adviser in MOIC, and further, as short-term consultant with UNIDO, UCTAD, UNDP and UN ESCAP in the area of industrialization in least developed countries.

 

It is true that the 1973 Industrial Policy was designed to suit the mixed economy model that prevailed universally in developing economies, near universally till 1980 where, more or less, the 'commanding heights of the economy' was given to the public sector. And, significantly, FDI was not given any importance: leaving domestic consumption and foreign aid to be the drivers of our economic growth.

 

It insisted on the necessity of having both an Industrial Plan to be drawn up by the Ministry and also Industry Sector Programmes to be drawn up by the various departments and then, with intra- and inter-sectoral coordination, passed upward to the National Planning Commission (NPC) for final approval as the Five Year Industrial Plan. The Sector Programme could be far beyond a 5-year time span depending on the nature of the industrial product or service.

 

Foreground

Now coming to the Draft FDI Policy 2012 (oh how it has languished!) I would have liked to have some empirical examination of how and why the industrial sub-sectors have languished and what has been the shortcomings and achievements of the One Window Policy of the Industrial Enterprise Act 1992 and the Transfer of Technology Act 1992 and what lessons we can draw for strengthening organization and method (O & M) for industrial administration? Let's be clear about one thing: the bane of our development administration is not policy and plan formulation but their execution.

 

One is told that without political stability we can't hope for FDI. However, let's face it, one is never told about the positive role that can be played by the other executive arm of government -namely the Bureaucracy - to mobilize FDI with all the laws already in place.

 

Sri Lanka managed high growth rates despite the horrendous civil war that lasted 30 plus years-- precisely because of its proactive, dynamic bureaucracy. Where political leadership is at 'war' with each other or does not communicate with each other-- or use the revolutionary advances in ICT -- obviously it will fail just as the other executive arm of government to promote stability: through policy and institutional stability and thus make bureaucratic amends for its lack at the political level.

 

Sri Lanka was the first South Asian nation to want to go the East Asian way right from 1978. Now after the victorious end to the civil war, it has opened its economy wide open to FDI in all sectors with a Negative List, which is being minimised.

 

Thus the bureaucratic leadership can, being the safeguards of the rule law, act to organize, coordinate and build up the required systems and procedures. Alas, all this has been wasted since we are at the very beginning and there is no question of re-engineering since there exists nothing to reengineer by way of O&M. This is where the Bureaucracy has failed the Nation.

 

In particular, one would like to know how efficient, transparent, accountable have these institutions been till now? How many disputes were settled and in what time?

 

All these matter most for a conducive climate for investment, and they compensate for the lack of political stability with firm application of the rule of law. This is the prerogative of the Bureaucracy and the Judiciary.

 

Lessons from Sri Lanka in institution building in an environment of civil war and acute political instability would be desirable for our political, bureaucratic and judicial leadership. Keep in mind that this is a country that has experimented with parliamentary system as well presidential system and is still pondering whether to revert to the parliamentary system. Hence its direct relevance to Nepal.

 

Nepal needs to make FDI into Nepal even more liberal than Sri Lanka, if we wish to commercialize our agriculture and forestry sectors as well as develop our mining and mineral sectors with appropriate value and supply chains. Why is BOT, BOOT etc not valid for agri-forestry? Why is it necessary to open up retail to FDI but with the provision that such FDI should have been operating in more than two countries? It was a policy enunciated in 2005, when I was Finance Minister, which sought to limit the entry of Indian corporates en masse.

 

Let us be clear: we need FDI not just to promote export but also, and more importantly, to substitute imports on a grand scale given the vast opportunities opened up by the Remittance Economy. We should encourage FDI for import substitution in sectors such as petroleum products, fertilizers, cement, pharmaceuticals, automobiles, especially components and spare parts, and not least in rice production for our national food security. We also need it in horticulture, floriculture and organic products to export to West Asia and beyond into Europe.

 

Even defense industries should be open to FDI for the simple reason that we don't have the technology and management know-how for such sophisticated and sensitive products that requires quality and precision. Even India is reconsidering its policy as the shambles in the defense sector is becoming evident day by day suffering from poor technology and massive corruption founded on imports.

 

Let's also be clear also on this: every business, not just large business houses, needs FDI. Every business, be they cottage, village or SMEs need to compete and grow to survive and to develop their niche markets sub-regionally, regionally and globally. Just like Big Business Houses, MSMEs too would like to access the local and international bond and equity markets.

 

Let us have an Industrial Policy that is all inclusive and not simply one to promote and protect our Business Conglomerates by insisting on Joint Ventures of various financial mixes. Our Business Conglomerates need to be modern and strong to be able to compete on the basis of Nepal's competitive advantages as well as to be able to venture abroad with the full support of the State.

 

A Policy Paper that is merely a statement of goals and objectives is a Plan. When such plans go beyond aims and objectives to seek definite outcomes then we have a Strategic Policy statement, which requires that it be grounded on clear cut industrialization plans and programmes.

 

This is what is expected if the Ministryof Industry (MOI) truly subscribes to the practice of Economic Diplomacy. In short, what we need today is a Strategic Industrial Policy Statement valid for a given period-- and not a General Purpose Industrial Policy that is so vague as to be non-actionable by the State being simply limited to the corridors of one Ministry. Industrial Policy should be led by the MOI but executed by all related ministries and local governments in a devolved manner.

 

All the ministries should reach out for FDI as their business and not passively wait for it to come to you on the basis of a piece of paper, which is devoid of an Industrialisation Strategy garnished by Sector Programmes that could be valid for 15-20 years. This is how stability is encouraged, especially when formulated in partnership by the likes of FNCCI, CNI, FNCSI, NCI, NTB and Municipal and District Associations.

 

Sector Programmes should be for 10, 15 and 25 years depending on the Ministry. Sector Plans be taken from this and submitted to the NPC after the approval of the government in power. This will seek a balance between politics and technocracy in decision taking where projects could be picked to suit the government in power to reflect their manifesto's priority.

 

To give meaning to Economic Diplomacy, the MOI should provide our Ambassadors and Consulates specific targets for FDI mobilization on a product and country wide basis depending on the comparative advantages of the countries and the requirement for diversification of investment portfolios to maximize Nepal's independence and economic leverage.

 

So long as entry and exit are not liberal, the One Window Policy will face many a dilemma to make it defunct. So it is vitally necessary to get rid of the License Raj for entry, expansion, diversification and exit. When this is in place,   the One Window should only be for priority projects as recommended by the Ambassadors and Consulates after due vetting of the enterprises.

 

Conclusions and Specific Recommendations

 

1. Needs to be titled as Inward FI policy statement.

 

2. Innovation is necessary in policy formulation and simply following the past methodology will lead to the same results.

 

3. For instance, a new instrument is being introduced -- SEZs, Why not EPZs, EPVS and Bonded Warehouses and Cold Storages? Is FDI to be excluded from the logistics sector which is highly technology driven and capital intensive? 

 

4. There is reference to globalization and regionalism but not to sub-regionalism. Why not?  It is suggested that most investments will be from India and China in the target period and we must also pay heed to sub-regional investments in the interest of regional balance and local entrepreneurship development. Globalization needs localization for any nation to benefit. For example, how can Nepal attract the 'flying geese' industries from China which are being sought by Bangladesh and India too? Sub-regional division of labour could help avoid unnecessary concessions to compete with India and Bangladesh.

 

5. A Strategic Policy must be grounded on dialogue and partnership with stakeholders, especially in respect of creating Value and Supply Chains and Cluster formation in select urban areas.

 

6. Why have a Foreign Investment Council when there is an Investment Board? Note: the absence of representation of Ministry of Foreign Affairs (MOFA) despite calls for economic diplomacy!

 

7. Eradicate the License Raj. It's the mother of all evil.

 

8. Better to have freedom of exit guided by Acts governing closure, bankruptcy, mergers and acquisitions etc. and be subject to due judicial process or indeed arbitration or collective bargaining with the Ministry and Departments remaining neutral.

 

9. Annex 1 : Drastically revise to allow FDI in all sectors with a small negative list that protects national interest and not vested interest. Should Media, TV and Newspapers be restricted to FDI?

 

10. Land acquisition should be market driven and guided by 4Ps, not simply 3Ps at the cost of the local community.

 

11. Leave open all projects subject to 4Ps evaluation to have a case by case approach as to the right mix of fiscal, monetary and foreign exchange incentives based on the divergence of the private and social profitability as exemplified by the respective financial and economic appraisals of the FDI project.

 

12. Industrial Policy think must be an integral part of development think that seeks to integrate all related sectors not least education, labour and financial markets as well as urban development.  It should be drafted with a vew to having, let's assume, the Industrial Sector contributing 15% to GDP and contributing 20% of the labour force employment by 2020.

 

13. Wither Investment Board? One can't have two institutions doing the same thing. It's unclear whether the BOI is a line or a staff organization. It’s unclear also whether it formulates and promotes projects for FDI or executes them too? Whether it adopts a Strategy of targeting or is simply based on open tenders ?

I suggest that IBN /BOI be limited to Ministers only, with the Chief Secretary, Vice Chairman of  NPC and NRB Governor as members, and the CEO of BOI as Member Secretary. It should be a lean organization with highly skilled and efficient professionals but with a substantial budget for hiring of national and international consultants to provide state of the art thinking.

 

14. Empower the BOI to take up all projects that get stuck at the Ministry level and as requested by the investor to trouble shoot. Have it responsible for handling all 4P projects by doing commensurate economic and risk assessment and thus recommending the desired fiscal, monetary, foreign exchange and land acquisition policies to be pursued by the government.

 

 Hopefully, we shall have an innovative and strategical Industrial Policy 2014 along the lines suggested.

 

Former Finance Minister Rana is Professor at South Asian Institute of Management.