Nepal Investment News FEB 28th 2012

• IFC’s annual assistance to Nepal could go up to $100 million -$200 million.click here to read 
•  "The government and China´s Three Gorges Corporation (TGC) on Wednesday signed a Memorandum of Understanding (MoU) on construction of the 750-MW West Seti Hydro Electricity Project 
  
  The project will cost USD 1.6 billion. As per the MoU, the Chinese power company will have 75 percent of the total investment, while the Nepal Electricity Authority will bear the remaining 25 percent of the project cost. 
  
  The MoU also requires that the TGC should issue shares of one to five per cent of the its total investment to Nepali nationals." click here to read more

The democratization of social entrepreneurship in Nepal

Twenty year has passed since liberalization of the Nepali economy. Breaking barriers for private sector have supported thousands of household to graduate to the middle class, but at the same time socio-economic inequality have increased and millions of citizen fighting for day to day basic necessities of life has been  largely ignored. Judging by social and economic challenges faced by our country in the past twenty years, it is certain that the time has come for `the democratization of social entrepreneurship in Nepal. Social entrepreneurship is defined as- an innovative entrepreneurial approaches to tackle most pressing social and environmental challenges of the society. Rather than waiting for the government to meet its mandate and fix the problem. Social entrepreneur find out the unmet need, address the need by reinventing the existing system, scale the solution and help catalyze the solution in a different geographic settings. They generate social values as well as equitable financial returns.

In Nepal, approximately 55 percent of the population lives less the $1.25 dollar a day.
 Majority of the Nepali citizens are deprived of basic necessities like adequate access to finance, healthcare, education, alternative energy, drinking water, and food security. Nepal provides enormous opportunity for social entrepreneurs to use their intellectual capital, business acumen, and a passion to make a difference to tackle these challenges, at the same time making marginal profit. Addressing the challenges using economically self-sustaining business models will not just deliver durable solutions but will also support job creation and income generation.

Despite Nepal’s untapped entrepreneurial potential enlistment in the social entrepreneurship space has been very discouraging. Nepal has also failed to capitalize on business tools and technology proven and test by our southern neighbor, which has emerged as a hotbed for sustainable, scalable and frugal innovation. Cumbersome regulations and never ending political bickering has created an environment where rent seeking entrepreneurism (those that fuel consumerisms) are much more appealing then social and productive entrepreneurism (those that supports economic growth) for aspiring and existing entrepreneurs. Great extent of work is needed to democratize social entrepreneurship in Nepal and cross sector collaborative effort will be instrumental to kindle the   momentum. Private sector and Non-government organization (NGOs) needs to synergize to build social entrepreneurship supporting eco-system. The objective of this cross section collaboration should be to actually build capacity and generate income among the deprived population, not simply extract wealth in the form of increasing consumer spending.

Private sectors should not treat social entrepreneurship merely as a corporate social responsibility stint or a deprived sector lending obligation. Serving the low income communities should not be seen as burden but rather as an economic opportunity. Private sector needs to embed inclusive capitalism as a part their core business strategy. Serving the customers in the uncharted areas will require businesses to reinvent their existing model around new product, distribution channels and pricing mechanism. Currently, private sector are reluctant to foray in the rural areas, primary because of high sunk cost ,lack of  relevant human resources and various local level political risk .There is a possibilities for the private sector to hedge the   cost and risks associated by leveraging  the existing  relationship  with local partners and communities of a NGOs operating in the area . For example, If a commercial bank headquartered in Kathmandu wants to increase the outreach of its services in the semi urban and rural in the far west, but is apprehensive of the about the capital expenditure cost it will incur, then the bank could partner with a local NGO working in the area of financial inclusion to deliver its product and services. The local NGO will act as a business correspondent for the commercial bank. Business Correspondents,  will be the intermediary equipped with “mini ATMs”   helping customers in rural areas to access formal  banking services such as cash deposits, withdrawals, remittances and balance enquiries from anywhere in the far flung  areas, similar to the services provided by  ATM facilities available to customers in urban areas. The partnership between the commercial bank and the financial inclusion focused NGO generate mutual competitive advantage. Commercial bank gets access to potentially profitable enterprise opportunities where as the NGOs increases socially benefited outcome of improving financial inclusiveness. More than 50000 NGOs and 50 % mobile phone penetration in the country gives a huge opportunity for the private sector to leverage NGOs and technology as a cost effective platform to deliver essential services like education, healthcare, and banking to the underserved population .NGOs and technology platform can also serve as an intermediary for rural entrepreneur and farmers to find access to market to less there produce.

To their credit, in recent years some NGOs, working in the area of sustainable private sector  development  have worked hard to adapt social entrepreneurships as their operating model and have explore the opportunity to partner with private sector to  develop self-sustaining but yet scalable business  model  to fulfill their organization objective. However, many NGOs has limited the democratization of social entrepreneurships to churning out glossy report and expense workshops often with a title like Value Chain Analysis of a certain product or/ and Role of inclusiveness business in the economic development of Nepal. One thing is for certain if the “business as usual” continues in the NGOs then many will run out of donors funding. In the wake of the global financial crisis, many large donor countries are facing fiscal austerity and are rethinking their approaches to foreign aid. Increasing number of donor countries like US, UK and Germany have started pilot programs that pivot their assistant to developing countries from grants/aid to Impact investments in social enterprises. Also in recent years, many social impact measuring tools like Randomize Control Trial and Global Impact Investing Reporting Standards has been materialized, these tools have the capacity and capability to penetrate well written annual reports and spreadsheets to separate facts from fiction.

 For NGOs to be compatible and synchronize with the continuously changing foreign aid and global capitalism landscape, they need to play a vital role as a bridge that combine best of markets with best of traditional aid. They need to build a strong eco-system that encourages entrepreneurial culture by leveraging their local embeddness, social infrastructure and expertise. NGOs’ source of capital is primary philanthropy; they have little or no obligation to return their capital to the donor. This nature   of its capital allow NGO’s to have  more risk appetite to experiment with social entrepreneurialism in high capital expenditure remote areas compared to commercial investors. NGOs should support market development and seed stage innovation, which could later be scaled using private sector capital and business skills.

For the social entrepreneurship to democratize in Nepal, synergy needs to create between the private sector and the non-for profit sector. Leader of both the sector needs to move beyond the obsolete argument of Market vs.  Aid. Converge between these two sectors in the coming years could help support inclusive economic development of the country.

Financial Inclusion and the role of the government

Source:Click here to read more

Social Venture Fund in Nepal

In recent years board range of organisations has shown interest in adopting impact investing model to  investing in the low income countries . List includes but not limited to investment banks, sovereign wealth funds, and endowments, philanthropic foundations and, international development organization. Traditionally, inflow of foreign capital (not including remittances) in developing countries like Nepal  has taken   place in the form of investment designed to maximize financial returns, while no intentional consideration of social impacts or foreign aid structured to maximize social return, while no expectations for monetary returns. Impact investing provides a platform to blend capital from both foreign aid and foreign investments to support entrepreneurship culture in the developing world. Impact investor operates in the missing middle and fills the capital gap above micro-financing and below institutional financing. They structure there their investment vehicle like a venture capital/private equity fund and investment in businesses in the firm of equity, quasi equity or debt. Some of the investors are also willing to accept below the market financial returns in order to maximize social and environmental returns

To my knowledge their no impact investing funds currently operating exclusively in Nepal, however; there are few initiatives in the pipeline. One of them is Ventures Nepal, which is one of the funds in the International Financial Corporation’s (IFC) SME Ventures program, which will provide risk capital financing and complementary advisory services to small businesses in Nepal. The target size of the Fund is $10 million. Venture Nepal will make risk capital investments of up to $500,000 in small and medium enterprises (SMEs). Another is Dolma Development Fund (DDF), structured as a non-profit domiciled in United Kingdom is currently raising $10 million to investment in SMEs in Nepal.DDF plan to deployed $ 10 million over a period of 3-5 years with a focus on the target sectors like rural connectivity (internet/mobile), health care, affordable private education, clean drinking water, eco-tourism and off grid renewable.

Small businesses are the backbone of any developing economy, not only do small businesses/Startup plays critical role of job creation and poverty reduction across Nepal they also bring wealth of replicable innovations to market. Attracting more impact investors in the Nepal means more startups will have access to capital to scale and impact. Impact investing will extends beyond just a lack of capital; and includes the lack of support, infrastructure and overlaying networks of intermediaries, institutions, and investors. One of the top priorities of the Nepal Investment Board should be to ensure to put in place regulatory incentives and safeguards to attract impact investors that helps build entrepreneurial culture and providing growth capital for achieving sustainable growth and quality jobs in the country. In the short run it is the small size foreign investments that will build appropriate FDI friendly eco-system in Nepal to attract large scale commercial capital.

Nepal Investment Year and Investments in Small Businesses

Another type of foreign investment …………………..

Foreign Direct Investment (FDI) can bring great advantage to the host country. It fuels economic growth, help reduce poverty, create employment opportunities and assist building physical infrastructures. With the same intention, the Government has decided to observe 2012-2013 as Nepal Investment Year and has setup Nepal Investment Board to spur and facilitate foreign investments in the country.

To attract foreign investments, NIB is launching promotional events like road shows in countries like India, UK and USA. NIB is targeting foreign firms that have the resources to investment in mega projects in sectors like energy, tourism, infrastructure development and commercial agriculture. Dr.BRB led cabinet has also passed Investment Board Act ,which ensures to facilitate investment above RS 25 billion through single window policy. A population of 28 million, rising per capita income (mainly due to remittances), demographic dividend, underexplored natural resources, and Non Residential Nepalis’ global network provides enormous market size and opportunities for investments in Nepal.

Having said that, the government and other enthusiasts needs to recognize that simply declaring 2012 -2013 as Investment year will not attract foreign investment. Capital inflow in a particularly country depends on domestic and international Marco economic situation and investment climate. For a traditional foreign investor risk to invest in Nepal is very high. According to the World Bank established international sovereign rating standard, Nepal is rated CCC+. With a CCC+ rating Nepal is boxed under “High Default risk” category. Additionally, due to perpetual “in-house” hurdles like militant labor, extortion, arbitrary government policies, red tapes, corruption, and bandas, Nepal’s foreign private capital attracting capability is also very undeveloped and fragile. In 2010, Nepal attracted least amount of private commercial capital in the South Asia region. According to the World Investment Report 2011; Nepal was ranked 134 out of 141 countries in the Inward FDI Performance Index. Despite the potential market opportunity in Nepal, traditional large scale investors will continue to be reluctant to invest until issues like high investment risk and cost of capital are addressed.

While Government of Nepal through Nepal Investment Board should continue scouting for large scale investors, they should also spotlight and create appropriate environment to lure in a small but strong growing breed of financers called Impact Investors. These investors are willing to take investment risk in developing countries like Nepal and understand the market dynamics of low income countries to reduce the cost of capital, through innovative financial products.  Capital they deploy intends to create positive social and environment impact beyond financial returns. These investors believe in building entrepreneurial culture and   invest in small businesses that use market-based approaches to provide scalable solutions to a number of socio-economic problems.  Investment are generally made  in sectors that serve the people at the base of the economic pyramid (as people earning  less than $3000 per annum per capita  ). Impact investors target sectors like affordable education, healthcare, renewable energy, access to finance and, sustainable agriculture. While government or charity solutions will sometimes provide these products or services, impact investment can complement government and philanthropic capital to reach more people.

Example for Bilateral Investment Promotion and Protection Agreement

 Nepal- India Agreement
"There has been a lot of buzz about Bilateral Investment Promotion and Protection Agreement (BIPPA) signed on October 21, 2011 between Nepal and India. "


What is BIPPA


" BIPPA is a legal instrument that establishes specific rights and obligations to meet the primary purpose of protecting foreign investments against discriminatory measures (i.e. policy inconsistencies) by the host state. To ensure protection and promotion of investments, and to encourage capital flows along with the commitment to credible liberal economic policies, countries typically enter into investment protection agreements like BIPPA. In principle, it ensures reciprocal encouragement, promotion and protection of investments, thus enabling conditions conducive to increase investment ." Click here 


Consequences of  BIPPA - "Irate international investors in telecomcompanies, whose mobile phone permits were cancelled by the Supreme Court on Thursday, may sue the Indian government for damages in a global forum, even as they enlist the support of their respective governments to safeguard their investments here."

an example from India ..click here to read more 

Corporate bonds & Nepali Private sector

Recently read - " IFC, a member of the World Bank Group, and the World Bank are helping governments in emerging markets simplify regulations for corporate bonds, changes designed to increase the volume of non-government bond transactions and improve the diversification and performance of institutional investors’ portfolios. " click here to read more 

 While reading the article few thought came to my mind in context of Nepal

• Our sovereign debt is rated CCC+ ..... corporate bonds are usually more risky  then the government bond.
• Majority of the industrial houses that needs debt,has there own subsidiary bank  ( for example: Nabil Bank- Chaudary Group, Laxmi bank- Khetan group,etc...) .Are the industrial houses willing to get rated when they have acesss to capital through there financial subsidiary.
• As of now, not a single major industrial houses (besides banks ) are listed in Nepal Stock Market...If they have to raise money would not it make more business sense for businesses to raise equity rather then cash ? 
• What else   ?