There has been a lot of buzz about Bilateral Investment Promotion and Protection Agreement (BIPPA),
which was signed on October 21, 2011, between Nepal and India. While
some political leaders have censured the government on grounds of it
being “anti national”, others have shied away from appreciating the
signing of the agreement by this administration despite supporting the
idea of BIPPA itself. Rarely has the interest of general public been so
intense on a bilateral economic issue and support of private sector so
high than now. Before breaking Nepal-India BIPPA down to the simplest
terms, let me at the outset argue that most of the remonstrations have
been outright illogical, misinformed, and pitched to score political
points.
What’s BIPPA?
BIPPA
is a legal instrument that establishes specific rights and obligations
to meet the primary purpose of protecting foreign investments against
discriminatory measures (i.e. policy inconsistencies) by the host state.
To ensure protection and promotion of investments, and to encourage
capital flows along with the commitment to credible liberal economic
policies, countries typically enter into investment protection
agreements like BIPPA. In principle, it ensures reciprocal
encouragement, promotion and protection of investments, thus enabling
conditions conducive to increase investment by investors.
It
guarantees rights of foreign investors, and ensures them fair and
equitable treatment, security, and dispute resolution mechanism. The
contracting parties are obliged to treat investments at least as
favorably as they do to domestic and third party foreign investments. In
case of nationalization or expropriation of investment,
nondiscriminatory compensation is guaranteed. Generally, compensation is
equal to the market value of the investment expropriated (plus interest
at ‘fair and equitable’ rate) “immediately before the expropriation or
before the impending expropriation becomes public knowledge”. Investors
are allowed to freely transfer returns to investment. Dispute resolution
could happen both at the level of investors and a contracting party or
two governments, i.e. both at investor-to-state level or state-to-state
level.
Nepal-India BIPPA
While Nepal has already signed BIPPA with six countries (including India), India has signed such agreement with 80 countries (as of May 2011),
out of which 70 BIPPAs have already come into force and the remaining
are in the process of being enforced. Nepal signed its first BIPPA with
France on May 2, 1983. It was followed by agreements with Germany
(October 20, 1986), the UK (March 2, 1993), Mauritius (August 3, 1999),
Finland (February 3, 2009) and India. In South Asia, India has BIPPA
with Sri Lanka, Bangladesh and Nepal.
While a majority of the issues in the agreement
between Nepal and India are similar to other BIPPAs signed
internationally, a few provisions and scope of definitions have created
confusion and led to misinformed debate. According to the BIPPA, the
investments should “not be subjected to nationalization, expropriation
or any other measure having similar effects except for reasons of public
purpose in accordance with the law, on a non-discriminatory basis and
against fair and equitable compensation”. To avert confusion, it
specifically defines what constitute indirect expropriation (having an
equivalent effect to direct expropriation without formal transfer of
title or outright seizure) and how it is determined (a case-by-case,
fact-based inquiry considering a set of relevant factors outlined in the
agreement). Furthermore, in case of losses because of war, armed
conflict, emergency or insurrection or riots, Indian investors should be
treated and compensated as we do to our own investors or to third party
investors. This addresses the confusion regarding if we will have to
compensate for events internal to firms such as labor strikes and
supply-side issues such as increase in cost (or decrease in profits or
increase in losses) resulting from load-shedding.
Regarding
compensation, if investors deserve one, then it will be equivalent to
the “fair market value of the investment expropriated, immediately
before the expropriation or before the impending expropriation became
public knowledge, whichever is the earlier”. The investors, based on the
laws of the host country, can ask for review of compensation being
offered. Additionally, while the interpretation of these provisions is
subject to contention, it should be realized the scope of the definition
of these issues apply equally to investments in both countries. It is
not applicable to compensation claims made before the enforcement of the
agreement, which means that some Indian companies like UTL and Dabur
Nepal cannot claim compensation for losses already inflicted upon their
business.
The Nepal-India BIPPA remains in
force for ten years and will be automatically extended thereafter unless
one of the countries intends to terminate it.
FDI and employment
The
overarching objective of BIPPA is to increase FDI inflows. On this
respect, latest studies show that investment protection agreements like
BIPPA indeed have positive impact
on FDI, especially when it flows to low income countries from
relatively high income and high exporting countries. The impact is
higher in countries with weak domestic institutions because investors
feel relatively more confident investing in the country following
investment protection agreements. Regarding employment, there is
evidence that, on average, foreign investors pay relatively higher wages
and employ more workers than domestic counterparts in certain sectors,
particularly manufacturing. We have already seen this to hold true in
our case as well.
That being said, just because
we singed BIPPA with India does not mean investors will flock to Nepal.
The BIPPA has definitely given more confidence to Indian investors on
investment protection and have shielded them from losses due to
arbitrary policy changes. However, BIPPA is not panacea for all
industrial ills and a substitute for real policy reform
domestically that could increase foreign and domestic investments. For
investments to increase sizably, Nepal needs to address constraints such
as lack of power supply, inadequate supply of infrastructures, labor disputes, rising cost of raw materials, policy inconsistencies, and high interest on credit to key sectors.
The
major determinants of FDI are macroeconomic, policy and political
stability; large and growing market size; and being in proximity of
emerging countries with large market size so that goods could be
exported there. While Nepal has large markets enveloping it and the
BIPPA has guaranteed investment certainty to some extent at the policy
level, it urgently needs to fix the others factors restraining
investment. Nepal has a lot of work to do to increase FDI from the
existing level of US$39 million, which is about one percent of gross
fixed capital formation. FDI inflows (percent of gross fixed capital
formation) to Bangladesh and India are about 3.7 percent and 4.5 percent
respectively.
Misinformed debate
Most
of the debate over BIPPA is based on misinformation and inaccurate
comprehension of the scope and depth of the agreement. While the private
sector has openly welcomed BIPPA, selfish political leaders are
politicizing it to make themselves heard by hook or by crook. For
instance, former Prime Minister Jhalanath Khanal rebuked the government
for signing BIPPA, which he thinks is not in our national interest. He
seems to be so lost in the dirty political game that he forgot what was
mentioned in Economic Survey 2009/10
published by the Ministry of Finance during his tenure as PM. It stated
that “a Bilateral Investment Promotion and Protection Agreement is
signed with India to promote Indian Investment in Nepal, while
preparation is being made to continue such agreements with other
countries as well” (see page 187). This shows how poor our leaders like
Khanal’s are in understanding economic issues and also remembering what
they officially endorsed while at the helm of power. Similarly, some influential leaders
have been arguing that BIPPA is against the interest of our country and
the workers. Their argument is that BIPPA will increase Indian
dominance and erode rights of domestic workers.
These
arguments are senseless, baseless and outright illogical. If BIPPA is
against our national interest, then why did we not hear loud outcry of
this level when Nepal signed BIPPA with other countries. Importantly,
the self-centered leaders opposing BIPPA should explain how exactly
Nepal was dominated and workers rights eroded by signing such agreement
with five countries before it was done India. In our investment strapped
economy, more investment is definitely a good thing and is in our
national interest because it will lead to more jobs, revenue and
potentially stimulate growth.
National interest
In
whichever way the leaders might justify their claims, the fact is that
all these illogical and inconsistent assertions against BIPPA are being
raised to score political points, which at times are against our
national economic interests of stimulating growth and generating more
jobs and employment opportunities.
In a
nutshell, BIPPA is in our national interest and might help increase FDI
by enhancing foreign investors’ confidence on the Nepali economy.
However, it cannot be a substitute for the badly needed policy reforms
on improving overall investment climate.
More on Political Updates Writ Filed against Nepal India Investment Pact
