Identifier
Created
Classification
Origin
06KATHMANDU141
2006-01-13 11:25:00
UNCLASSIFIED
Embassy Kathmandu
Cable title:  

2006 INVESTMENT CLIMATE STATEMENT

Tags:  EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR NP 
pdf how-to read a cable
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OO RUEHWEB

DE RUEHKT #0141/01 0131125
ZNR UUUUU ZZH
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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

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