Bhutan non-progressive on FDI

Posted On August 3, 2011

When India accepted Bhutan’s invitation to invest in its hydropower, this tiny Himalayan kingdom was overwhelmed and swiftly drafted foreign investment policy in hope that world will see it as land of opportunity for investment. Last year, the government unveiled a new Foreign Direct Investment (FDI) policy which opened Bhutan as possible destination of investment to business community across the globe.

Bhutan’s FDI policy does not allow investment in gambling, tobacco and porn industries rather focuses more on clean and green business areas that toe the Gross National Happiness line. These include the promotion of investment in services that promote Brand Bhutan, promotion of socially responsible, culturally and spiritually sensitive and ecologically sound industries and creation of a knowledge society.

Up to 74 percent FDI is allowed in agro based industries like organic farming, dairy, food processing, water based products, forest based products, manufacturing of electronics, electrical, computer hardware, building materials, construction, four star hotels, vocational education, consultancy and transportation.

Similarly, up to 100 percent FDI is allowed in education, specialized health services, information technology, five star hotels, tunnels, highways, industrial estates, SEZ, dry port, land reclamation, knowledge cities, wellness centres, sports facilities, waste management and urban water supply. However, financial sector has only 51 percent FDI provision.

And FDI is restricted in media and broadcasting, wholesale, retail and trade, general health services, mining for sale of minerals in raw form, three star hotels etc.

Almost after one and half year on the track, the investment climate did not change.

New UN Foreign Investment Report has put Bhutan at the bottom with Nepal, Afghanistan and the Democratic People’s Republic of Korea. Earlier this year, World Bank has also named Bhutan as not investment friendly citing lack of infrastructure as a major reason for poor performance in the investment sector despite doing well in terms of peace and political stability.

A World Bank report ranked-down the FDI prospects in Bhutan by 2 points. The report also mentions lack of long term investment policies and regulatory reforms. The World Bank Country Director for Bhutan, Nicholas J Krafft, said that Bhutan should continue to improve based on the implementation of long term policies, such as regulatory reform to increase FDI. Of the 183 countries ranked, Bhutan occupied 140th position against 142nd last year. See details here

The lack of adequate response from the investors to its call for FDI ventures is partially due to unviable projects that Bhutan presents. Last year, the government mooted for an education city and allocated $100m for its feasibility studies. However, the rate of flow of the FDI into this project has made it almost impossible for now. At a time, when Bhutan is attracting just $100m in FDI in a whole year, investing same amount of money for an education city might be a waste. For Bhutan, FDI typically is investment from India. For instance of the 41 companies with whom DHI held consultation so far for investment in education city, five are from Singapore and rest from India. 15 of them have been identified as potential investors. Bidding will start this month and results will be announced in October.

Policies have been liberalised but not to the extend investors look for. Education city investors will be given development rights for 90 years, and tax holidays and incentives. Against this, the investors are required to invest Nu 15B to Nu 20B, provide a lease fee of Nu 10,000 every year from the start of construction, and provide revenue and equity share to government. Moreover, bidders will be required to deposit a total of Nu 90M as earnest money deposit, performance security and project development cost to DHI. The risks of the project will also be borne by the investors, in case the project fails.

Not only the education city, Bhutan’s major FDI industry – hydro power – has all Indian investment. And business climate within the Indian investment ventures is dwindling which is likely to badly affect the Bhutanese economy in longer run.

Indian investors are not easy to handle. The Indian companies developing major four hydro plants [Chamkarchu (670MW) in Bumthang, Kholongchu (600 MW) in Yangtse, and Wangchu (600MW) and Bunakha reservoir (180 MW) in Chukha] have already started bargaining. These four plants constitute more than one fifth of country’s planned generation. Their demands are:

1. No to mandatory free royalty power to the RGOB which is 12% during the loan repayment period and 18% after the loan is cleared

2. Want project ownership for 35 years and not 30 years

3. Won’t give the project back for free after 30 years but sell it back to RGoB at the then market value

4. Restrict Bhutan’s domestic use of electricity from the four joint venture projects

5. The project has to take the loan as against the earlier agreement of the PSUs taking the loan

As a major development and business partner, Bhutan has no strength than to obey what India prescribes. Early last year Bhutan government bowed to Indian companies’ demand for 51 percent ownership of the hydro power plants in contravention to the Sustainable Hydropower Development Policy. The free royalty demand came as the result of faulty agreement on Tala and Chukha plants. The four projects would worth well over Nu 600 billion in 30 years time (current investment estimate: 120 billion) by which the investors would have already made over Nu 100 billion profits.

Bhutan must look into the fact that multinational companies bypass investment in LDCs where markets are very small. And as a result, is has no options to allow Indian companies invest at their best interests.

Additionally, Bhutan’s private sector has not grown so strongly. Foreign investors look for private sector as investment partners in which Bhutan has failed to show its strength.

Only two FDI projects have been approved in a span of one year of FDI policy revision – Lhaki Steel and Rolling Pvt. Ltd and Bhutan Hotels Private Limited. Inquiries have been made in hydropower, power transmission and schools, but haven’t received any application. Other major applicants expressing interest for investment include Intrepid Global Security, Richard Wolkowitz, Solomon Moses Noah and Omya AG. Most proposals are from India and Bangladesh and very few from Switzerland, US, UK and Thailand. However, companies outside India have not shown any strong desires for investments.

Indian companies include JK Cement, Snowcem Paints Pvt. Ltd, GI Technology Pvt Ltd and AngoraGaon. A Thai investor proposed for pepsi production and Bangladeshi company offered to invest on board manufacturing and hotels.

A total of 22 PDI projects were approved after the introduction of first FDI policy in 2002. These companies now have a total investment of Nu 5 billion. Some of these are G4S Security Services, Quality Gases Pvt. Ltd., Saint Gobain Ceramic Materials, Dralha & R.P Steel Co. Pvt. Ltd., Met Trade (Bhutan) Ltd., East West Co. Pvt. Ltd, Samden Tech Pvt. Ltd., Zimdra Foods Private Ltd., Bhutan Health Food Products Pvt. Ltd., and Norbu Jewelleries and Aman and Uma resorts.

In another major attempt to attract FDI, government decided to revise the Companies Act of 2000 early this year. The old act does not speak clear about holding company and partnership companies which include joint ventures. The act contravenes with the FDI policy which allows foreign ownership of land in Bhutan and requires foreign companies to be registered with the Companies Act of Bhutan. And the act does not differentiate between foreign and domestic companies and considers all FDI companies established in Bhutan to be Bhutanese companies. Once the legislation is approved through parliament, government hopes to see little change in investment climate.

Absence of visits by foreign diplomats to study the ground realities for investment vividly reflects Bhutan’s inability to convince other countries that this Himalayan kingdom is safe and viable for investment. Last year, French ambassador to India, Jerome Bonnafont, was in Bhutan to explore possibilities of his country investing in Bhutan. However, French government and the investors showed no interest at all to Bhutan’s call. French diplomat at that time had consultation on FDI especially in hotel constructions, the hydropower sector and clean energy and food processing.

The government’s projection was that increased FDI would create avenues to absorb the growing unemployed youths. Unemployment among youths, who do not want to take up the blue colour job, has sharply increased in recent years. Crawling private sector absorbs only a small portion of these energetic youths.

Although the private sector appears to have the potential to become an engine of job growth, unemployment has raised rapidly to 13 percent in 2008 among youth who represent a fifth of the population. But survey shows that private firms are growing rapidly and creating more jobs. A typical Bhutanese firm reported an increase of 36 percent in sales and 25 precent in employment between 2006 and 2008.

This is not a big growth for multinational companies. Private sector as well as the government has failed to produce articulate and skilful workforce, which are basic needs for foreign investors. One of the investment climate constraints of labour productivity and skills is the shortage of skilled workers which translates into high labour cost and attrition rates. Workers have little access to vocational or technical training up to market requirements.

The local construction contractors are also teaming up against government’s FDI policy saying they will lose their jobs for foreign experts. They say contracting criteria set out in FDI policy would allow FDI companies to come in and compete against the existing Bhutanese contractors. The low equity requirement will also encourage fronting since the maximum equity can be held by the FDI partner and the balance can also be put in by them with the local partner just ending up being a commission agent.

Other major drawback of Bhutan is its failure to join WTO. Global investment market wobbles around the plans and policies set out by WTO. The WTO members have greater platform to sell their products and investment opportunities. Bhutan is weeping in a corner for FDI while failing to tap the opportunities available in world trade forum. It is finally the fundamentalists carrying ‘westerners erode our culture’ campaigning to ban WTO access and greater FDI opportunities.

It is not only the government who decides on FDI. In a democracy, the people should be given certain rights to investment to develop their locality. Early this year, PM Thinley, despite his government campaigning for foreign direct investment, warned people in Samdrup Jonkhar not to allow any FDI in hotels in that part of the country. He reasoned nothing for this ban.

Unless Bhutan decides to move with the changes across the globe, policies, plans and explanations do not adequately touch sensations of investors.