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OO RUEHWEB

DE RUEHKT #0141/01 0131125
ZNR UUUUU ZZH
O 131125Z JAN 06
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9897
INFO RUEHLM/AMEMBASSY COLOMBO PRIORITY 4062
RUEHKA/AMEMBASSY DHAKA PRIORITY 9113
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 2037
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 9032
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUCPCIM/CIMS NTDB WASHDC PRIORITY

UNCLAS KATHMANDU 000141 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SA/INS 
EB/IFD/OIA (JHATCHER) 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR NP
SUBJECT: 2006 INVESTMENT CLIMATE STATEMENT 
 
REF: 05 SECSTATE 202943 
 
¶1. (SBU) This is Post's 2006 Investment Climate Statement, 
per reftel.  Post has also sent the Investment Climate 
Statement by unclassified email, per reftel. 
 
Begin Text. 
 
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.  At 
present, there are 1,025 foreign investment projects in 
Nepal, worth a total of approximately USD 1.73 billion 
according to official GON statistics.  Indian ventures lead 
the list with 320 projects, or approximately 31 percent.  The 
U.S. ranks fourth with 95 ventures, or approximately 9 
percent.  China, Norway, Japan, South Korea and Germany are 
also prominent. 
 
Government policy changes have signaled to foreign investors 
that Nepal is open for business.  In 2005, the government 
opened up certain 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 allowed.  New banking institutions and a nascent 
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, India's 
inefficient river port), 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, 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.  Policies regarding 
hydropower generation, for instance, have changed to open the 
sector to private development.  By involving the private 
sector in the generation, transmission, and distribution of 
power, the GON intends to diminish the role of Nepal's 
Electricity Authority.  A few sizable private-sector 
hydropower projects have either begun operation or are in the 
planning stages.  Additionally, the Foreign Investment and 
Technology Transfer Act of 1996 abolished the minimum capital 
investment requirement and eliminated significant barriers to 
foreign investment.  However, there is occasional 
backsliding.  The same Act also closed the Nepali market to 
foreign investment in business and management consulting, 
accounting, engineering and legal services.  A hydropower 
policy announced in October 2001 was expected to boost the 
flow of foreign investment into the hydropower s 
ector of Nepal.  However, political instability, a 
deteriorating security environment caused by the Maoist 
insurgency, a lengthy and cumbersome licensing process, and 
the failure to finalize a blanket electric power trade 
agreement with India, which is the only potential market for 
any exportable electricity produced in Nepal, all contributed 
to the indifferent attitude shown by foreign investors toward 
investing in Nepal's hydropower sector. 
 
Legislation 
 
The most significant foreign investment laws are the Foreign 
Investment and One Window Policy of 1992; the Foreign 
Investment and Technology Transfer Acts of 1992 and 1996; the 
 
Finance Act of 2002 and the recent Finance Ordinance 2005 (an 
annual budget act); the Immigration Rules of 1994; the 
Customs Act of 1997; the Industrial Enterprises Act of 1997; 
the Electricity Act of 1992; the Privatization Act of 1994; 
and the Patent, Design and Trademark Act of 1965.  In a 
positive development, Nepal passed the Copyright Act in 2002. 
 This Act includes all types of electronic and electrical 
audio video materials, provides for financial penalties as 
well as imprisonment, and provides for confiscation of sold 
and published unauthorized materials.  The offender would 
also have to pay compensation claimed by the copyright 
holder.  However, the revised Copyright Act is not yet to the 
level required for trade-related intellectual property rights 
necessary 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, as revised in 1996, 
eliminates the minimum investment requirement; clarifies 
rules relating to business and resident visas; exempts 
interest on foreign loans from tax; and gives contract terms 
precedence over Nepali law in investments valued at more than 
Nepali rupees (NRS) 500 million (approximately USD 7.0 
million).  The 2005 Finance Ordinance 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 Ind 
ustrial 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.  The 2002 Copyright Act and the 1965 
Patent, Design and Trademark Act define the terms and 
conditions of intellectual property rights protection. 
 
Institutional Arrangements 
 
The Department of Industry is designated as the "one window 
servicing agency" with the Industrial Promotion Board 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 Investment 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 t 
o 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.  Although investments below NRS 1 
billion (approximately USD 14 million) are referred to the 
Department of Industry for action without the involvement of 
the IPB, in reality, such investment proposals invariably go 
to the IPB.  Foreign 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. 
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 mandates, 
however, that the IPB make a licensing decision within 30 
days of submission of application, provided all necessary 
information has been submitted. 
 
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, Nepal recently opened service 
industries and a few other sectors to foreign investment. 
These 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. 
However, foreign investment is forbidden in the defense 
sector.  Furthermore, 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, Foreign Exchange Regulations restrict repatriation 
of profits/dividends earned from trading shares.  Therefore, 
investment in the local stock market is practically blocked 
for foreign investors.  However, 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. 
 
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 is currently underway.  Two of 
Nepal's largest commercial banks, the Rastriya Banijya Bank 
(RBB) and Nepal Bank Limited (NBL), are being prepared for 
privatization.  Under an agreement signed in January 2003 
with Nepal Rastra Bank (Nepal's Central Bank), a group of 
foreign experts took over the management of RBB. 
 
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. 
 
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 process only 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. 
 
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 and represented the only instance 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 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.  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. 
 
There is also a provision for liquidation in the Company Act. 
 Claimant priorities are: 1) government revenue, 2) 
creditors, and 3) shareholders.  Monetary judgments are made 
in local currency. 
 
Nepal 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 recently opened 
service sectors and some cottage industries, 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.  On 
the other hand, Nepal does employ tax incentives to encourage 
industries to locate outside the Kathmandu Valley due to 
pollution and overpopulation and an interest in developing 
poorer parts of the coun 
try. 
 
In general, there is no income tax on profits from exports. 
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.  In addition, income 
in certain priority industries is taxed at a concessional 
rate of 10 percent, as opposed to the usual 20 percent rate. 
 
The Electricity Act of 1992 governs foreign investments in 
hydropower generation.  That act allows developers an 
exemption from income tax for the first fifteen years of a 
project's operation and a 10 percent reduction in income tax 
for the remaining years.  It also provides for a flat one 
percent customs rate on all construction materials, equipment 
and spare parts. 
 
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 these areas are being 
scaled back. 
 
Nepal does not have a law to guarantee free competition or to 
restrict unfair forms of competition.  However, competitive 
equality is the official standard applied to private 
enterprises in competition with public enterprises with 
respect to market access, credit, and other business 
operations.  That said, there are special subsidies and 
preferred credit arrangements for individual public and 
private companies in select sectors, such as rural 
electrification, fertilizer importation, and the provision of 
agricultural credit.  In a joint initiative of the private 
sector and the Ministry of Industry, Commerce and Supplies, a 
new "Competition Law" is being drafted.  Although Nepal 
committed to the enactment of the Competition Law during the 
negotiation process for its entry to the World Trade 
Organization (WTO), Nepal missed the July 31, 2004 deadline 
for its enactment. 
 
-- 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. 
Patent registration, according to the 1965 Patent Design and 
Trademark Act, is only valid for seven years and can be 
extended twice for a total period of twenty-one years.  In 
addition, Nepal does not automatically recognize patents 
awarded by other nations.  The Copyright Act of 2002 is 
similar in that it does not recognize foreign patents; these 
must be re-registered in Nepal.  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 b 
ring the country into compliance with international norms. 
Nepal has not yet signed the World Intellectual Property 
Organization (WIPO) Copyright Treaty (WCT) and 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 5.73 billion on 15 July 2005, the end of FY 
2004-05.  Banking system capital (total deposit) in the same 
period totaled USD 4.04 billion.  18.7 percent of the total 
asset base is estimated as non-performing as of July 15, 
¶2005.  Foreign commercial lending is also 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.  The GON has 
made certain exceptions to promote Foreign Direct Investment 
(FDI) in tourism and hydropower.  In these sectors, there can 
be 100 percent direct foreign investment or up to 25 percent 
portfolio investment through purchase of stocks on the Nepal 
Stock Exchange, where a few industrial firms are listed. 
Lack of transparency or regular reporting of reliable 
corporate information also presents problems for foreign 
investors in equity markets.  There are no legal provisions 
to defend against hostile takeovers. 
 
-- POLITICAL VIOLENCE 
 
For the past ten years, Nepal has been wracked by a violent 
Maoist insurgency.  The violence has spread to the Kathmandu 
Valley, although to a lesser degree than in the rest of the 
country.  Hardly any district has been left unaffected by the 
insurgency.  On June 6, 2005, Maoists detonated a landmine 
underneath a crowded bus in the Chitwan district (170 km 
southwest of Kathmandu), killing or injuring over a hundred 
civilians.  Foreigners, particularly aid workers, have been 
threatened, and there have been several incidents of Maoist 
insurgents attacking establishments of NGOs and INGOs working 
in different parts of Nepal.  Many business owners report 
they have received extortion threats from the Maoists.  The 
insurgents have increased their rhetoric against 
foreign-owned industries operating in Nepal.  Over the past 
few years, Maoists have set off explosives at several 
foreign-owned as well as domestic industries operating in 
Nepal.  In July 2004, the Maoist-affiliated All Nepal Trade 
Union Federation forced 
more than a dozen local as well as foreign joint venture 
industries to shut down their operations completely; the 
forced closure lasted a little over one month.  In December 
2004, Indian Hotels Company Ltd. (IHCL), owner of the Taj 
hotel chain in India, pulled out of a contract for a 
five-star hotel in Kathmandu, citing security concerns. 
Intensified attacks on industries by Maoist rebels in 2005 
resulted in several large domestic and foreign joint venture 
companies deciding to either suspend or close their 
operations in Nepal. 
 
The Maoists also attacked and destroyed village-level 
government infrastructure, including small electricity 
projects, bridges, and drinking water systems.  Because of 
severe constraints in both personnel and resources, the 
government's ability to protect basic infrastructure, local 
government offices, businesses, and other installations is 
limited.  On January 2, 2006, the Maoists withdrew their 
unilateral ceasefire that began on September 3, 2005.  With 
the end of the ceasefire there is an increasing level of 
uncertainty regarding the security situation in Nepal. 
Recent media reports have stated that the Maoists have moved 
their personnel into urban areas such as Kathmandu and 
Pokhara.  In the past, Maoist urban tactics included attacks 
on government security forces and facilities, indiscriminant 
bombings using improvised explosive devices, and 
assassination attempts against government officials.  Recent 
media reports imply that the Maoists may resume these 
tactics, which were common in 2003 and 2004.  Ope 
n conflict between the Maoists and government security forces 
in rural areas, including popular trekking routes, is also 
possible. 
 
The risk of possible Maoist violence must be taken into 
account by any foreign firm wishing to invest in Nepal.  The 
Department of State Travel Warning for Nepal, dated December 
15, 2005, urges U.S. citizens to defer non-essential travel 
to Nepal.  Maoist supreme commander Prachanda issued a press 
statement on July 1, 2004, threatening to use "more violent 
means" if peace talks with the Government of Nepal were not 
forthcoming or were unsuccessful.  The U.S. Department of 
State continues to regard this as an ongoing statement of 
intent.  The Embassy has periodically received information 
that the Maoists may attempt to attack or take actions 
specifically against U.S. citizens as part of that 
contingency, particularly in regions of the country where 
Maoists are most active.  On a number of occasions, Maoists 
have burned or bombed tourist resorts after foreigners 
staying there were given short notice to evacuate.  Maoists 
also periodically detonate bombs within Kathmandu itself. 
 
The Department of State has designated the Communist Party of 
Nepal (Maoist) as a Terrorist Organization under the 
"Terrorist Exclusion List" of the Immigration and Nationality 
Act and under Executive Order 13224.  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. 
 
U.S. citizens are advised to avoid road travel outside the 
Kathmandu Valley unless they have reliable information that 
they can proceed safely in specific areas at specific times. 
During road closures, Maoist cadres have attacked commercial 
trucks, buses and private vehicles defying their blockades, 
sometimes killing or severely injuring drivers.  In April 
2005, two Russian tourists were injured when a bomb exploded 
on the highway near their taxi while driving east toward 
Jiri, Dolakha district.  During announced road closures in 
the past, the Embassy received widespread reports of Maoists 
forcibly blocking major roads throughout the country, 
including roads to Tibet, India, Chitwan, Pokhara, and Jiri. 
During some closures, some districts were blockaded without 
warning.  At times, Maoists have forcibly blocked all traffic 
coming into and out of the Kathmandu Valley.  U.S. citizens 
are encouraged to contact the U.S. Embassy in Kathmandu for 
the latest security information, and to travel by air 
whenever possi 
ble. 
 
Because of heightened security risks, U.S. official personnel 
do not generally travel by road outside the Kathmandu Valley. 
 All official travel outside 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. 
 
U.S. citizens who travel or reside in Nepal should factor the 
potential for violence into their plans, avoid public 
demonstrations and maintain low profiles while in Nepal. 
U.S. citizens 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.  The Consular 
Section is located at the Yak and Yeti Hotel complex in 
Durbar Marg.  The section can be reached directly at (977-1) 
444-5577 or through the Embassy switchboard.  The U.S. 
Embassy is located at Pani Pokhari in Kathmandu, telephone 
(977-1) 441-1179; fax (977-1) 444-4981.  The Consular Section 
can provide updated information on travel and security. 
 
Public demonstrations and strikes are popular forms of 
political expression in Nepal and may occur on short notice. 
Political parties have indicated that they plan to continue 
to hold protests and/or mass demonstrations against the 
government.  Protestors in the past have used violence, 
including burning vehicles, throwing rocks during street 
demonstrations, and burning tires to block traffic.  In some 
cases, police have responded with tear gas and baton charges. 
 During general strikes, many businesses close for one or two 
days, and transportation and city services may be disrupted. 
These strikes usually result in little or no damage to 
private property. 
 
-- CORRUPTION 
 
U.S. firms and 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 year and a 
half, the CIAA has increased its prosecution of cases and has 
begun investigations of prominent political figures and 
government officials.  In some cases, the Special Court for 
Corruption has convicted t 
he accused and in at least one case the convicted is serving 
a jail sentence. 
 
After the Royal-takeover of February 1, 2005, King Gyanendra 
formed an anti-corruption panel, the Royal Commission for 
Corruption Control (RCCC), to investigate cases of corruption 
in the government, as well as prosecute and judge the 
accused.  The RCCC has since investigated and prosecuted 
several high-level government officials on charges of 
corruption.  In one such case, the RCCC convicted former 
Prime Minister Sher Bahadur Deuba and former Minister Prakash 
Man Singh for corruption and sentenced them to two years in 
jail and a fine of USD 1.28 million.  A case is pending 
before the Supreme Court questioning the constitutionality of 
the RCC, which has been criticized both nationally and 
internationally. 
 
-- 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. 
 
-- LABOR 
 
Nepal lacks a large labor force of skilled and educated 
workers.  The overall literacy rate is only 40 percent, and 
only 25 percent for females.  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 those at the very top of a company or project.  In 
private organizations, however, a significant number of 
professionals from India may be found in mid-level managerial 
positions. 
 
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 trade 
unions are affiliated with legal political parties; the 
Maoists also have an active affiliate trade union.  Total 
union participation is close to 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. 
 
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 sec ret 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. 
 
While industrial actions are infrequent, politically 
motivated actions do sometimes take place.  Unrealistic laws, 
such as the Bonus Act of 1974, which provides that workers 
must receive 10 percent of yearly profits in bonuses 
regardless of improvements in productivity, often hamper 
efforts at collective bargaining.  In the past, labor 
strikes, transporter strikes and other political actions have 
closed all business and transport operations in major cities, 
sometimes for days at a time.  Such strikes have severely 
damaged Nepal's business climate, and have hurt the tourism 
sector in particular.  Strikes are unpopular, but are widely 
viewed as the only available means of political or labor 
protest.  In 2001, there were frequent reports of 
Maoist-affiliated agitators disrupting work at garment and 
carpet factories in the Kathmandu Valley.  From 2001 to 2005, 
with the decline in garment exports, such agitation has 
almost disappeared.  Frequent transportation and business 
closures (bandhs) called by the Maoists a 
nd political parties, however, affected trade and industry in 
2004 and 2005. 
 
The Child Labor Prohibition and Regularization Act of 2000 
prescribes conditions for 14- to 16-year-old laborers, and 
prohibits employees under the age of 16 from work in 
dangerous industries. 
 
-- 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 DECEMBER 27, 
2005) 
 
Total No. of projects           1,025 
 
Agriculture & Forestry             14 
Manufacturing                     478 
Electricity, Water, Gas            21 
Construction                       30 
Hotel & Resort                    246 
Transport & Communication          26 
Housing & Apartment                17 
Service Industries                193 
Total Project Cost:         USD 1,728.90 million 
 
Total Fixed Cost:           USD 1,453.92 million 
 
Total Foreign Investment:   USD   458.16 million 
 
Total Employment Generated:   102,229 
 
Source: Foreign Investment Division, Department of Industry, 
HMG/Nepal. 
 
Note: As of December 15, 2005, India was by far the most 
important foreign investor in Nepal, with over 31 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 
British Virgin Islands, fourth; Norway, fifth; Japan, sixth; 
and South Korea, seventh. 
 
-- U.S. INVESTMENT IN NEPAL (AS OF DECEMBER 27, 2005) 
 
Total No. of projects              95 
 
Agriculture and Forestry            2 
Manufacturing                      30 
(9 units have either been cancelled or closed) 
Energy Based                        1 
Tourism Industry                   25 
(2 units have been cancelled) 
Service Industries                 37 
 
Total Project Cost:         USD   225.53 million 
 
Total Fixed Cost:           USD   204.86 million 
 
Total Foreign Investment:   USD    72.27 million 
 
Total Employment Generated:     8,074 
 
Source: Foreign Investment Division, Department of Industry, 
HMG/Nepal. 
 
End Text. 
MORIARTY