Wednesday, November 30, 2011

Designing a Development Strategy for a hypothetical problematic and poverty driven African country

Situation: The Republic of Dongo is a country with many of the characteristics of the sub-Saharan African countries - It is landlocked, post-conflict, poor governance under a nominal democracy, resource-rich, infrastructure-poor, a large aid recipient and caught in a poverty trap. How do we define a development plan to take this country out of its situation?

Considering that the Republic of Dongo shares many of the problematic characteristics prevailing in African countries, it is important to target these characteristics to get the development strategy in place. My recommendations for the country in order of priority are:

1. Increase Governance within the country providing real freedoms to the populations in terms of economic freedoms, security, transparency and social freedoms. This is easy to suggest in theory but difficult to implement in practice considering governments lack of interest in changing their behavior. However, international agencies and countries can provide strict measures in this regards when providing support in terms of trade and if required, aid. Governance has to be targeted in the beginning itself because without effective governance, it will be difficult to remove rent seeking activities and allow overall development.

2. Removal of systemic aid. Humanitarian and development specific aid needs to be provided by systemic aid in terms of budgetary requirements needs to be curbed since it will ensure survival of poor governance regimes, rent seeking activities by the talent pool and curbing of basic freedoms. Corruption also becomes systemic and institutional capability is eroded to ensure power remains within a few individuals. Even if in certain cases, aid is required, it should be channelized through NGO’s and or strong international organizations and should be subject to stringent performance measures by the incumbent government.

3. Natural resources should be exploited but the profits generated from them need to go to building tangible and social infrastructure in the country like roads, education, healthcare etc. It is important to ensure the wealth generated from natural resources does not go out of the country but stays inside for the betterment of the country. Also, the profits need to be used for subsidizing other industries in manufacturing and services so that the economy diversifies and is not just reliant on one sector. This will also help the country to cancel out the Dutch disease.

4. Focus on Trade agreements with other countries and developed nations if possible. The developed countries like the US and Europe should try and ensure that agreements like AGOA and EBA are really useful for a country like Dongo since trade can really take a country out of the poverty trap. Dongo will probably need to lobby for such trade with other countries rather than rely on aid. Also, trading with countries it shares its border with will ensure good relations with them and ensures being landlocked doesn’t harm its interests. The country when it starts generating significant profits can also help in infrastructure building in the neighboring countries which will help these countries too.

5. Focus on building a middle class in the country. Once the country has economic freedoms, and people start generating higher incomes by indulging in economic activity, this will lead to higher taxes to the budget and which in turn will lead to higher capital investment leading to economic growth and finally higher incomes. In the beginning, considering that there is really no growth, no savings and no taxes, the investment support can come from institutional agencies like IMF and world bank but instead of giving money to the governments, it needs to be given to NGO’s or it should help the fledgling private sector. Governments can also work on PPP models and capital can be generated by micro-finance. The important thing is to generate this economic cycle and break the poverty trap. Once that happens and a middle class is created, it will demand better governance and freedoms which can lead to significant positive changes in the country.

Note: This is a paper written as a submission for a subject named Africa - The last Development Frontier, undertaken during the Master's course. I have posted this answer because i think these solutions are indicative of the steps that can be undertaken to help Africa as a whole in coming out of its misery. Furthermore, these solutions can also apply to some Central Asian and some South Asian countries too.   

Tuesday, November 29, 2011

Sector specific guidelines for FDI in India

Source: 2011 Investment Climate Statement – India; U.S. Department of State

I was searching for FDI (Foreign Direct Investment) regulations in India for a project submission and came across the data as part of the Investment Climate Statement that the U.S. Department of State maintains on its website. Thought it would be helpful for all to list this in one place considering the brouhaha happening right now in India over the provision of 51% FDI in multi-brand retail (likes of Walmart, Tesco, Metro etc). It also gives an indication to how difficult the situation is for investors in India due to the sheer complexity of rules and regulations.

2 routes to investing in India:
(i) Automatic Route (e.g., coal and lignite mining, power, industrial parks, petroleum and gas, and non-banking finance) – Only notification to RBI required
(ii) Government Route – Prior approval is required from government before investment (e.g., defence, broadcasting and media, and private banks)

Approving entity different:
(i) DIPP – Single brand retailing proposals, NRI investors, Overseas corporate bodies
(ii) Department of Commerce – Export oriented units
(iii) Foreign Investment Protection Board – All others

1. Advertising and Film: One hundred percent FDI via the automatic route is allowed in the advertising and film industries, which includes film production, exhibition, and distribution, and related services and products.

2. Agriculture: No FDI is permitted in farming except tea plantations. Foreigners are not authorized to own farmland. FDI in agriculture-related activities like the seed industry, floriculture, horticulture, animal husbandry, aquaculture, fish farming, and cultivation of vegetables and mushrooms is permitted without limits under the automatic route. For tea plantations, 100 percent FDI is allowed via the government route. However, there is a compulsory divestment of 26 percent equity in favor of the Indian partner or potential Indian investors within five years from the date FDI enters the country. In other plantation sectors, no FDI is allowed.

3. Airport Infrastructure: One hundred percent FDI is allowed in greenfield projects through the automatic route. FDI up to 74 percent is allowed in existing projects through the automatic route; greater than 74 percent requires FIPB approval. Foreign companies can own up to 74 percent of the ground-handling businesses at airports with 49 percent through the automatic route and FDI in excess of 49 percent to 74 percent permitted via the government route. NRIs are allowed 100 percent FDI in ground-handling services. One hundred percent FDI is allowed through the automatic route for maintenance and repair operations, flight training institutes, and technical training institutes.

4. Airport Transport Services: FDI is limited to 49 percent under the automatic route for air transport services, including domestic scheduled passenger airlines. For non-scheduled, chartered, cargo airlines, the FDI limit is 74 percent. For helicopter and seaplane services, 100 percent FDI is allowed on automatic approval (meaning FIPB is not involved) but requires formal approval by the Directorate General of Civil Aviation. NRIs may own 100 percent of a domestic airline. Although frequently debated, India has yet to open its state-run international airlines to outside investment. The U.S.-India “Open Skies” agreement, signed in April 2005, allows unrestricted access by U.S. carriers to the Indian market and vice versa.

5. Alcoholic Distillation and Brewing: One hundred percent FDI is allowed through the automatic route but still requires a license via DIPP under the provisions of the Industries (Development and Regulation) Act, 1951.

6. Asset Reconstruction Companies: FDI is limited to 49 percent via the government route. No portfolio investments are allowed. Where any individual investment exceeds 10 percent of the equity, the approval is subject to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

7. Automobiles: No FDI caps, local content requirements, or export obligations apply. FDI in automobile manufacturing is allowed under the automatic approval route.

8. Banking: Aggregate foreign investment (from all sources) in all private banks is capped at 74 percent. For state-owned banks, the foreign ownership limit is percent. There are four distinct ways foreign investors can enter the Indian banking sector. The first is by a foreign bank establishing a branch in India. A second alternative is to establish a wholly owned subsidiary. Foreign banks are permitted to have either branches or subsidiaries but not both. A third and least likely method is for a foreign entity to acquire an ailing bank. However, the RBI has yet to authorize this type of transaction. Lastly, foreign institutional investors (FII) can invest in a bank up to 10% of the total paid up capital and 5% in case the FII is a foreign bank/bank group.
Voting rights in private banks and state owned banks are currently capped at 10 percent and 1 percent, respectively, and do not represent ownership. The Banking Regulation (Amendment) bill, which would align voting rights in private banks with shareholding, continues to be with a committee in Parliament and has yet to be introduced.

9. Broadcasting: Foreign investment (including, FDI, NRI persons of Indian origin and portfolio investment) is limited to 20 percent in frequency modulation terrestrial broadcasting, with prior government approval, subject to guidelines issued by the Ministry of Information and Broadcasting. For direct-to-home broadcasting, foreign investment from all sources is limited to 49 percent, with a maximum FDI component of 20 percent and the remainder coming via NRI and/or portfolio investment, again via the government route. In satellite broadcasting, foreign investment (FDI, NRI, persons of Indian origin and portfolio investment) is limited to 49 percent with prior government approval. TV channels, irrespective of ownership or management control, have to up-link from India provided they comply with the broadcast code issued by the Ministry of Information and Broadcasting. FDI is limited to 26 percent, including portfolio investment, in news and current affairs channels up-linking from India. One hundred percent FDI is permitted in entertainment and general interest channels. FDI up to 49 percent is permitted with prior approval of the government for establishing up-linking HUB/Teleports.

10. Business Services: One hundred percent FDI is allowed under the automatic route in data processing, software development, and computer consultancy services. One hundred percent FDI is allowed for call centers and business processing outsourcing (BPO) organizations subject to certain conditions.

11. Cable Network: FDI and portfolio investment is limited to 49 percent, including both FDI and portfolio investment. Prior approval is required, subject to Cable Television Networks Rules, 1994.

12. Coal/Lignite: FDI up to 100 percent is allowed through the automatic route in private Indian companies that have captive coal or lignite mines for either direct power generation or for captive consumption in their iron and steel or cement production plants. Similarly, 100 percent foreign investment in the equity of an Indian subsidiary of a foreign company or in the equity of an Indian company for setting up coal processing plants is allowed, subject to the conditions that such an equity recipient shall not do coal mining or sell washed (processed) coal from such plants in the open market.

13. Coffee and Rubber Processing and Warehousing: One hundred percent FDI is permitted under the automatic route with no conditions.

14. Commodity exchanges: Foreign ownership up to 49 percent, with portfolio investment limited to 23 percent and FDI limited to 26 percent is allowed via the government route. No single foreign investor/entity can hold more than five percent of the total paid-up capital.

15. Construction Development Projects: Construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, townships, housing, commercial buildings, resorts, educational institutions, infrastructure and townships is open to up to 100 percent FDI. Automatic approval is subject to certain minimum capitalization and minimum area-of-development requirements. As of 2010, the minimum capitalization requirement is USD 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners. In the case of serviced housing plots, a minimum of 10 hectares (25 acres) must be developed, while in the case of construction–development projects, the minimum built-up area must be 50,000 square meters. At least 50 percent of the project must be developed within five years from the date of obtaining all statutory clearances.

16. Credit Information Companies: Foreign investment is permitted up to 49 percent and is subject to FIPB and RBI approval. Portfolio investment is limited to 24 percent and no single investor/entity can hold more than 10 percent of the total paid-up capital. Furthermore, any acquisition in excess of one percent requires mandatory reporting to RBI.

17. Courier Services other than distribution of letters: One hundred per cent FDI is permitted; however, FIPB approval is required.

18. Defense and strategic industries: FDI is limited to 26 percent and is subject to a license from DIPP in consultation with the Defense Ministry. Production of arms and ammunition is subject to additional FDI guidelines. There are no automatic approvals. Purchase and price preferences may be given to Public Sector Enterprises as per Department of Public Enterprises’ guidelines. The licensee must establish adequate safety and security procedures once the authorization is granted and production begins.

19. Drugs/Pharmaceuticals: FDI is allowed up to 100 percent for drug manufacturing on an automatic approval route.

20. E-commerce: FDI up to 100 percent is allowed in business-to-business e-commerce under the government approval route. No FDI is allowed in retail e-commerce.

21. Hazardous chemicals: One hundred percent FDI is allowed via the automatic route. However, a license under the provisions of the Industries (Development and Regulation) Act, 1951, is required from DIPP.

22. Food Processing: One hundred percent FDI is allowed with automatic approval for: fruit and vegetable processing, dairy products, meat and poultry products, fishing and fish processing, grains, confections, consumer and convenience foods, soft-drink bottling, food parks, cold chain, and warehousing. The exception is for alcoholic beverages and beer, where a license is required, and items reserved for small scale sector. FDI up to 100 percent is allowed via the automatic route for cold storage facilities.

23. Health and Education Services: One hundred percent FDI is allowed under the automatic approval route.

24. Hotels, Tourism, and Restaurants: FDI at 100 percent is allowed with automatic approval.

25. Housing/Real Estate: No FDI is permitted in the retail housing sector by foreigners. However, NRIs who can obtain “Overseas Citizenship of India” status are allowed to own property and invest in India as if they were citizens. NRIs may invest up to 100 percent FDI with prior government approval in the real estate sector and in integrated townships including housing, commercial premises, resorts, and hotels, as well as in projects such as the manufacture of building materials.

26. Industrial explosives: FDI at 100 percent via the automatic route is allowed, subject to licensing by the appropriate authorities.

27. Industrial Parks: FDI up to 100 percent under the automatic route is allowed, provided: the industrial park includes at least ten units with no single unit occupying more than 50 percent of the area, and at least 66 percent of the area is available for industrial activity.

28. Information Technology: FDI of 100 percent is allowed with automatic approval in software and electronics except in the aerospace and defense sectors.

29. Insurance: FDI is limited to 26 percent in insurance and insurance brokering. While FDI approval is automatic, the Insurance Regulatory and Development Authority (IRDA) must first grant a license. The GOI is considering raising the FDI cap to 49 percent in the insurance sector. After the Finance Standing Committee finishes considering the Insurance Regulatory and Development Authority (Amendment) bill, it will go to the full Parliament for a vote.

30. Infrastructure companies in the securities market (stock exchanges, depositories, and clearing corporations): Foreign investment is capped at 49 percent via the government route. FDI is limited to 26 percent and FIIs are limited to 23 percent. Specific to stock exchanges, total foreign investment, including portfolio investment, is allowed via the government route (FIPB) up to 49 percent. The total FDI limit is 26 percent and the FII cap is 23 percent. Other Securities and Exchange Board of India requirements may apply.

31. Legal services: No FDI is allowed and recent court cases strive to limit the ability of foreign attorneys to provide any sort of legal services. Most foreign attorneys practice in India as legal consultants. In March of 2010, a writ of petition was filed by a Chennai-based attorney on behalf of the Association of Indian against 31 foreign law firms, the Bar Council of India, and the Ministry of External Affairs in the Madras High Court. A similar case was decided against foreign firms in December 2009 in the Bombay High Court. The Madras High Court has repeatedly delayed a decision in order to give the court more time to consult with foreign firms. The implications of these cases are unclear and the status of foreign law firms remains uncertain. The petitioner in the Madras case and other opponents to market liberalization insist U.S. attorneys should be barred from practicing law in India until there is reciprocity in the U.S. market.

32. Lottery, Gambling, and Betting: No FDI of any form is allowed.

33. Manufacturing: GOI approval is required for any foreign investment greater than 24 percent equity when the manufacturer is not a small or micro-sized enterprise (SME) and the entity will manufacture items reserved for the SME sector. Manufacturers in this category are subject to additional licensing and minimum export requirements. Since 1997, the government has been steadily decreasing the number of industry sectors reserved under the small scale industry (SSI) policy, from a peak of 800 industries in the late 1990s to just 21 specific goods/services today. The list can be found on the Ministry of Micro and Small and Medium Enterprises website: http://msme.nic.in/MSME_AR_ENG_2009_10.pdf.

34. Mining: One hundred percent FDI is allowed, with automatic approval for diamonds and precious stones, gold/silver, and other mineral mining and exploration. FDI up to 100 percent is also allowed for mining and mineral separation of titanium-bearing minerals and ores, but such activity requires prior government approval.

35. Non-Banking Financial Companies (NBFC): FDI is allowed up to 100 percent via the automatic route. In India, NBFCs include merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating agencies, housing finance, leasing and finance, credit card businesses, foreign exchange brokerages, money changers, factoring and custodial services, investment advisory services, micro and rural credit. All investments are subject to the following minimum capitalization norms: USD 500,000 upfront for investments with up to 51 percent foreign ownership; USD 5 million upfront for investments with 51 percent to 74.9 percent ownership; USD 50 million total with 7.5 million required up-front and the remaining balance within 24 months for investments with more than 75 percent ownership. One hundred percent foreign-owned NBFCs, with a minimum capitalization of USD 50 million, are not restricted on the number of subsidiaries established for specific NBFC activities and are not required to bring in additional capital. Joint venture operating NBFCs, with up to 75 percent foreign investment, are allowed to set up subsidiaries for other NBFC activities and are also subject to the minimum capitalization norms.

36. Pensions: No FDI is allowed in the pension sector. The Pension Fund Regulatory and Development Authority bill, which would allow FDI in the sector has lapsed and needs to be re-introduced.

37. Petroleum: FDI limits --along with tax incentives, production sharing, and other terms and conditions–- with automatic approval vary by sub-sector as follows:
- Discovered small fields 100 percent
- Refining with domestic private company 100 percent
- Refining by public sector company* 49 percent
- Petroleum product/pipeline 100 percent
- Petrol/diesel retail outlets 100 percent
- LNG Pipeline 100 percent
- Exploration 100 percent
- Investment Financing 100 percent
- Market study and formulation 100 percent
* Needs FIPB approval and disinvestment is prohibited.

38. Pollution Control: FDI up to 100 percent is allowed with automatic approval for equipment manufacture and for consulting and management services.

39. Ports and harbors: FDI up to 100 percent with automatic approval is allowed in construction and manufacturing of ports and harbors.

40. Power: FDI up to 100 percent is permitted with automatic approval in projects relating to electricity generation, transmission, distribution, power trading, and renewable energy other than nuclear reactor power plants.

41. Print Media: Foreign investment in newspapers and news periodicals is restricted to 26 percent under the government approval route. FDI is permitted up to 100 percent in printing science and technology magazines/journals, subject to prior government approval and guidelines issued by the Ministry of Information and Broadcasting.

42. Professional services: FDI is limited to 51 percent in most consulting and professional services, with automatic approval. Legal services, however, are not open to foreign investment.

43. Research and Development Services: One hundred percent FDI is allowed under the automatic route.

44. Railways: FDI is not allowed in train operations, although 100 percent FDI is permitted in auxiliary areas such as rail track construction, ownership of rolling stock, provision of container services, and container depots.

45. Retailing: The government allows 51 percent FDI for single-brand retail (Raised to 100%; under discussions right now), subject to government approval. FDI is not allowed in any other retail activities, including multi-brand retailing (FDI has been raised to 51%; political discussions underway). However, several large multinational retailers are partnering with Indian companies to form joint-venture wholesale enterprises to avoid violating FDI rules.

46. Roads, Highways, and Mass Rapid Transport Systems: FDI up to 100 percent is allowed with automatic approval for construction and maintenance.

47. Satellites: FDI is limited to 74 percent for the establishment and operation of satellites with prior government approval.

48. Security Agencies: Foreign shareholding is restricted to a maximum of 49 percent under the government approval route.

49. Shipping: FDI is limited to 74 percent with automatic approval for water transport services.

50. Special Economic Zones (SEZ): One hundred percent FDI is allowed automatically when establishing a SEZ and an individual unit within a SEZ. Establishing the unit is subject to Special Economic Zones Act, 2005, and the Department of Commerce.

51. Storage and Warehouse Services: FDI up to 100 percent is allowed under the automatic route, including warehousing of agricultural products with cold storage.

52. Telecommunications: This sensitive sector has seen enormous changes in 2010. FDI in the telecom services sector can be made directly or indirectly in the operating company or through a holding company subject to licensing and security requirements. DIPP sets the security conditions prospective investors must follow to participate in the telecom sector. When approving investment proposals, FIPB will note whether the investment is coming from countries of concern or unfriendly countries. FDI in telecom services such as basic, cellular, access services, national/international long distance, V-Sat, public mobile radio trunked services, global mobile, unified personal communication services, ISP gateways, radio-paging, and end-to-end services is limited to 74 percent and FDI proposals above 49 percent must go via the government route. One hundred percent FDI in equipment manufacturing is authorized via the automatic route. FDI in Internet service providers (ISP) without international gateways, voice-mail, and email is allowed up to 100 percent. Below 49 percent, FDI in this category is authorized via the automatic route. Above 49 percent FDI is authorized via the government route. In both cases, 26 percent divestment is required within the first five years of the investment.

53. Trading/Wholesale: FDI of 100 percent is allowed through the automatic route for activities like exporting, bulk imports with export warehouse sales, and cash-and-carry wholesale trading. A wholesaler/cash-and-carry trader cannot open a retail shop to sell directly to consumers. In the case of test marketing, or if the items are sourced from the small-scale sector, then FIPB approval is required. Single-brand retailing is allowed subject to the FIPB approval, and the FDI limit is 51 percent.