Commercial farming and farm insurance in Nepal

Source: Myrepublica  "The government has prepared a draft of the new Agriculture Enterprises Promotion Act that among other, envisages to pave the way for contract or lease farming and promises incentives to insurance companies to sell farm insurance policies. The draft prepared by the Ministry of Agriculture Development (MoAD) in association with the Agro Enterprise Center (AEC) of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) will soon be circulated among local stakeholders in the different development regions for feedback, said a senior government official. Keeping in view the large swaths of land being left fallow by landlords, the government came up with the legal provisions to make sure that proper use of cultivable land through contract and leasing system is introduced in the country. “Though we have large tracks of land abandoned without farming across the country by landlords, we are still dependent on imports to fulfill the domestic demands for food grains, fruits and vegetables. The proposed act will pave the way for massive use of fallow land for commercial farming by making available the unused land on lease or contracts to interested farmers,” Pradip Maharjan, Chief Executive Officer of AIC, who is also a member of the drafting committee, told Republica on Wednesday. The act allows the government and private land owners to give their lands on lease or contract for farming. Existing laws don´t cover the contract or lease farming which has made land owners reluctant to allow others to cultivate their land fearing tenancy by tillers. The proposed act also will make clear provision of insurance on farm products such as crops and animals with incentives to insurance companies which sell insurance policies for all kinds of farming system including contract or lease farming. “This proposed act envisions the certain privileges to insurance companies that will sell their insurance policies for the insurance for cattle and crops. We have proposed that companies that paid compensation against loss of farm properties under such insurance scheme, can deduct the amount from their income before tax,” said Maharjan. At a time when there is nominal market access for farm products, the the act has also attempted to encourage opening up agriculture markets in the land provided in lease and contract. “We have also suggested in the draft that the government encourage banks to issue loan to the entrepreneurs for agro-based market,” he added. He said the proposed act will transform absent landlordism, a trend in which real land lords don´t cultivate by staying away from their own land, into commercialization of farming with the involvement of farmers other than landowners. “As per our rough calculation around 20 percent of land in the terai of mid-Western and Far-Western region has been left fallow by land owners. The proposed act will prove to be instrumental for proper utilization of such land for farm commercialization which will ultimately resolves the problems of unemployment and food insecurity,” he added."

Pvt sector calls for apt farm policy | National | Business | ekantipur.com

Pvt sector calls for apt farm policy | National | Business | ekantipur.com

Taking m-commerce to the next level | National | Business | ekantipur.com

Taking m-commerce to the next level | National | Business | ekantipur.com

Company I am following in Financial Inclusion.... 

Nepali Banks and venture funds will complement each another ....

VCs are no competition threat to existing banks .. they complement each another .................VCs can use banks for deal origination and to provide there investee companies with  working capital loan .....

Reasons how VCs will help Banks......

• Help prop up bad loans 
• VCs have hands on management in their  investee companies,therefore will  help bank to reduce write-off risks...

Source: Dalberg research and analysis

Government of Nepal + Private sector development policy and entrepreneurship

So ..so ...  finally after 20 years of economic liberalization,Nepali government has realize that existing policy for private sector development sucks and it need to be revamped ....The Government has started consultation with    private sector umbrella bodies (FNCCI &CNI) to brain storm on ideas  on what kind of private sector development policy will create long term sustainable economic growth...Employment data from early 1990s to 2010 suggests that it is  not the large scale  industries that help create more jobs and social harmony , but it the SMEs ......... If government objective is to create a sustainable economy  than development of entrepreneurial eco- system  and growth in SMEs should be the focus of  the new private sector development policy.............................

Here are two suggestion for the Nepali government

Suggestion one from Nation Planning Commission-India 

Suggestion two from Steve Blank's article - Why Governments Don’t Get Startups

"Not understanding and agreeing what “Entrepreneur” and “Startup” mean can sink an entire country’s entrepreneurial ecosystem." Click here to read more 

Landscape of social entrepreneurship in Nepal

Here is a summary of  challenges faced by social entrepreneurs in India.I think Nepali social enterprises are also facing similar challenges

  

Barriers	Challenges	Some Solutions
Access to finance	Refers to the financial barriers related to the lack of equity, debt, and working capital for start-up social enterprises and non financial barriers, such as a lack of financial literacy.	-provision of Blended Capital (mix of equity and grant funding) -Angel financing or royalty -based debt - awareness among HNIs on the potential to invest in social enterprises
Access to Talent	Lack of finance to pay market rate salaries is the main cause of this challenge, with the consequence that these businesses are unable to hire or retain qualified and experienced staff.	- Fellowship programs exist to provide emerging talent for impact investors. - Grant funded training programs for employees of social enterprises. - Provision of shared professionals between social enterprises is a potential solution but one that has yet to be implemented.
Scaling Up	Many enterprises fail to scale due to a range of factors including complex legal structures, a lack of state government support and an absence of basic infrastructure.	- Policy studies supported by donor agencies and investors to establish the business case for an innovative inclusive business model in a specific industry. - Collaborative partnerships between social enterprises and third parties that have 'made the last mile linkage' to access consumers.
Regional Inclusiveness	There is a clustering of impact investments in a few geographies as indicated through this research.	- Develop regional specific investment funds. - Establish regional social innovation think tanks and incubators.
Sourcing and Pipeline	The challenge is how to source genuine social enterprises that are located outside the metros at an affordable cost.	- Commission knowledge sharing and policy papers on context specific operating models, and local conditions that drive the ways products and services are distributed and sold in specific Indian States.
Capacity Building and Training Solutions	Social enterprises require significant capacity building and training to attain the education, skills, and access to information in order to execute their business plan.	- Mentoring for building capacity of entrepreneurs. - Expansion of existing or creation of new social enterprise incubators in new geographies replicating models such as Unltd, Dasra and Intellecap
Impact Measurement Transparency and Reporting	The difficultly in measuring impact and an absence in the standardization of impact measurement and third-party assurance of reporting are all industry challenges.	- Creating an India specific platform detailing basic profile information of all the impact investors and incubators operating in the country. - Policy development in partnership with asset owners on their reporting requirements
Ecosystem Coordination, Policy and Regulation	Regulatory issues include the lack of a legal structure for social enterprises, restrictive laws on foreign capital flows, equity investment regulations, and restrictions on blended capital.	- Research policy papers on ssues for social enterprise ecosystem to advocate for change.
Investment Exits	The lack of investments that have resulted in exists, was cited as the most significant to industry growth in a survey by JP Morgan and GIIN.	- Policy studies on other impact investment markets to analyze different models that investors have exited. - Creation of a database of impact investment exits in the Indian market

Source: Enablers for Change -A Market Landscape of the Indian Social Enterprise Ecosystem," September 2012, Prepared for GIZ by Ernst and Young Pvt. Ltd.

Deals/News I followed in Sept-2012

1. Mobile Banking- Nimbus,Finaccess join hands to provide banking to unbanked.click here to read
2. Agribusiness- IFC helps poultry farmers 
3. Hydro power- SN power donwn size Nepali operation 
4. Manufacturing-  Kansai Nerolac Paints is in the process of finalizing its 68% stake in one of the leading paint manufacturers in Nepal, Nepal Shalimar
   http://articles.economictimes.indiatimes.com/2012-06-20/news/32335726_1_hm-bharuka-kansai-nerolac-paints-knpl

   
   

   
   

MEGA BANK Nepal + SMEs + Securitization of Remittances

• Mega Bank, a class A commercial bank in Nepal announced last month that it is going to observe 'SME Bank Year' this current fiscal year. According to the CEO of the Bank - they plan to lend Rs 2.5 billion to SMEs by the end of this fiscal year............ 
  In an interview the CEO of  the bank said - "Remittance — the country’s economic lifeline — should be linked to SMEs"  .. Mobilizing remittances into SMEs will support sustainble economic growth of the country  
  

  
  

  So  here is an idea on how to link SMEs to Remittances ...............we can learn that from Sri Lanka 

  
  
  • "   IFC is using  unique model to help Sri Lanka's Commercial Bank of Ceylon mobilize long-term financing through the securitization of remittances and export proceeds it receives to boost the bank’s SME portfolio.......Worker remittances are systematically important for Commercial Bank.......    Under the terms of IFC’s latest financing of the bank for $65 million, future foreign receipts received by the bank from migrant worker clients will be securitized offshore, enabling Commercial Bank to obtain longer-term funding at a competitive price to boost its SME portfolio."    click here to read more      
                                    

Is Impact Investing creating more inequality in developing countries ?

I think current state of impact investing is creating more income inequality in developing  country like Nepal........My conclusion was influenced by two things I read over the weekend

• Why Nations Fail- the main thesis of the book is that some Nations are poor because  institutions are   "Extractive," serving only a small elite that takes income from everyone else.
• Government of Nepal hikes  minimum  foreign direct investment  to USD 55K

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Last time I checked, the objective of impact investment was to invest in scale-able social enterprises and  SMEs. But if you  look at ground reality things are completely different. To ensure there fund economics work,impact investors both social first or finance first  funds tend to  investment in  companies that can take large amount of capital (large in terms of Nepali context,a company with a fixed asset of more than $130K is defined  as large scale company) . These capital  seeking companies usually fall under some big business house's conglomerate..........................................................................

What it takes to build an entrepreneurial ecosystem

Here is an excellent report from India's Planning Commission  on  strategies to create  vibrant  entrepreneurial eco-system .....Must read for our policy makers and advisers....

 Click here to read this report 

Exit Strategis for private equity/venture Funds in Nepal

I often get asked what are the different exit options  for private equity/venture fund  operating in Nepal since the IPO  route will be a tough sell. .................In a recent interview,Head of Leopard Capital  nicely explained various exit options for PEs  in countries similar to Nepal

1. Front Running Liquidity "We use different strategies. There’s no cookie cutter approach. One thing we look at is the unusual interest that multi-nationals have in accessing new emerging markets like Cambodia, where there’s still not a lot of brand awareness yet. The population is very young, so it is a tantalizing market to multi-nationals whose home countries are stagnating.Pioneer investors like Leopard can front-run the multi-nationals by creating new businesses they will want to acquire later.."
2.  CASH FLOW Trick "A second one is using the business’ cash flow to provide our returns, usually through high-yield debt, enhanced with an equity kicker so that we get both a fixed return plus a variable return based on performance.That structure works best when the cash flow is predictable, usually not in a startup unless there’s a contract in place providing visibility into the cash flow generation." 
3. "A third strategy is investing in companies just before they go public. Here the best approach is to take a small stake in a large company so that you are not subject to a lockup period."  ( In Nepal this strategy could work for hydro and tourism) 
4. "Our fourth strategy is to sell our position back to the company’s promoters or co-investors. In some cases owners may want us in their company for a period of time while they are scaling up. So we can sometimes negotiate put options or pre-planned sales back to our co-investors."  Source:http://leopardcapital.blogspot.com/2012/01/cambodia-new-emerging-market.html

Corporate Governance Issues in Nepali private companies

This is why private equity investors are very skeptical while investing in frontier market like Nepal...... This article has spot-on identified  issues related to corporate hygiene................

"The first gaping imbalance in the emerging markets private equity equation was the accuracy timeliness, and transparency of financial and operating information provided to investors, and the willingness of managers to subject themselves to some degree of accountability to outsiders. Even in the best of circumstances, relationships between investors and the managers of their portfolio companies are complex and often contentious, but the absence of sound corporate governance practice has

sharply accentuated that tension. Nowhere does this issue become more problematic than with family owned firms. Although widespread in all countries, family ownership tends to be even more prevalent

in developing countries. The prototype is an entrepreneur who has built a successful business with virtually no capital or shareholders beyond his or her immediate family and close friends. Absent any

accountability to outside shareholders, the interests of the owner and the firm are indistinguishable, and

financial accounts are frequently intermingled. These traditions of autonomy, secrecy, and independence

run deep within the corporate culture of most developing country firms, rarely challenged until the

need for outside capital becomes imperative. Few entrepreneurs, for example, have ever undergone an independent audit or adhered to international accounting standards that are the prerequisites for virtually every professional investor.The prospective investor is thus at the mercy of the entrepreneur for access to information necessary to make critical judgments about company performance and value. The common practice, for example, of maintaining two or even three sets of accounting records in order to avoid the tax collector frustrates the due diligence team’s task of gaining an accurate picture of performance. Opaque bookkeeping and disclosure habits also may impede access to other important information that might alter

investor perceptions of company value, such as environmental liabilities or unresolved legal disputes. As one investor noted, “One big problem is skeletons in the closet. Many of these great companies have hidden subsidiaries, offshore sales and other tax avoidance schemes.” Nor is the lure of badly needed capital likely to overcome resistance to outside investors who are inclined to push and prod management to make painful changes they believe are needed to increase transparency and enhance company value. It is not surprising, there"

Source:PRIVATE EQUITY INVESTING IN EMERGING MARKETS

Citizen Investment Trust and Nepali Insurance companies should invest in Venture Funds

The government needs to encourage and create an environment where pension funds, insurance companies are drawn into investing in alternative investment asset class (AIAC) like seed, venture capital, and private equity funds.  Institutional investments in AIAC will improve access to risk capital needs of startup and scaling-up companies; which will translates into more job creation in productive sectors and sustainable economic growth.  At present most of the heavy weight institutional investors like Citizen Investment Trust, Army Welfare Fund and insurance companies are routing their majority of their investments through banks rather than investing directly in a company or through private equity fund. Due to the lack of investment avenues like AIAC, institutional investors, particularly insurance companies are facing sever asset liability maturity mismatch. Exploring opportunities in AIAC in one hand will allow institutional investors to diversify their investment risk away from banking sector and on the other hand will easy the supply of risk capital to SME sector.

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Second, remittance is one of the major revenue sources of Nepali economy and it contributes to 25% of the GDP, which translates to about USD 3.5 billion. There is an immense opportunity to channel remittances to productive use in SME sector through financial innovation like securitization of future remittances inflow. Securitization is a financial process in which assets are pooled and securities representing interests in the pool are issued....................Need to go eat maybe will continue writing this blog later..

Private equity investment in Nepali hydro power

 Those of us who are trying to bring in international private equity investment in Nepal assert that despite huge opportunities in Nepal, foreign investors are still reluctant to invest here  mainly because of the numerous  perceived risks.Here are few highlights of an excellent paper ( Hydropower Financing Options for Nepal: Assessing the Prospect of Private Equity Investment) on what needs  to be done to bring in private equity capital in Nepali Hydro power sector

"The high risk perception of the hydropower investment in the Nepalese socio-political

environment is not likely to attract a particular private equity firm to individually undertake such

huge burden of risk. The government of Nepal (GoN) can initiate cross over funds where 

numerous private equity companies can invest  into this fund for the construction of the 

hydropower plant.  The cross over fund can be  invested either into the existing public listed 

companies or it can be invested into the privately held companies.  

The PPP policy support required for investing into this cross over fund will require the

government to devise policy setup which ensures amendment of the foreign investment policy for

allowing the equity participation of the private equity financiers and develop a centralized unit to

intermediate the transparent channelize of the fund into the hydropower project development. The

policy also need to enforce a higher degree of corporate governance requirement for the recipient

public and private firms, ensuring fair and transparent accounting standards and regulations for

protecting the rights of the minority shareholders along with providing effective tax benefits and

alleviation of supplementary vats to provide higher returns to the private equity financiers.

The major constraint in attracting cross over fund in Nepal is the lack of exit mechanism for the

private equity financiers. The high volatility of the stock market of Nepal and the low depth in the 

market makes it very difficult for a large private equity fund holder to exit through Nepal’s 

domestic capital market. For large hydropower plant investments, the government can facilitate 

foreign listing of the holding company. The foreign listing of the holding company will allow the

private equity financiers to exit the market through the international capital market.  .    

Poor reliability and access to  power are the most serious  infrastructure bottlenecks to

growth. Increasing access to electricity in a timely and cost-effective manner is one of the most

significant development challenges facing Nepal today. Considering Nepal’s recent emergence 

from conflict along with the establishment of a new governance system and emerging banking 

sector investing in micro power plants can be a viable option for private investors. Micro power 

plants which is connected to the regional energy grid is a new concept in South Asian countries. 

For Nepal the macro benefits of SHP are also evident, such as booming the economy of hilly areas, 

improving the rural energy structure, bettering the ecosystem, improving the living situation of 

rural people, promoting agriculture, creating more job opportunities and boosting tourism industry 

etc Although these bring no direct economic profit to investors, the local government and people 

can benefit a lot, who in return, give strong support to station construction and its long-term 

operation, and ultimately brings out a huge invisible profit indirectly(Arya, 2007).

Currently, the Banking sector of Nepal also has the capacity to finance the small hydropower 

plants which requires investment of below USD 300 million as the banking sector has a liquid 

fund base of USD 2 billion. However, the possibility of the asset liability maturity mismatches of 

the banking sector constraints the investment of the banking sector into the long horizon 

investments. The major constraint of the banking sector is the regulatory cap on single corporate

obligor and sector exposure limits, the single corporate obligor limits are 50% of the core Tier 1

capital (Total Capital Fund) and currently the banking sector is targeting 25% due to severe

liquidity concerns and credit risks. Currently the total core capital of the Banking sector stands at

NPR 96.854 billion20 (USD 1.3 BN), hence the total Banking sector of Nepal has funding

capacity USD 300 MN (25% of Total Capital Fund).  

The loans to the hydropower are considered as loans to deprived sectors thus no provisioning is

required in the initial periods, but the liquidity of the Banks has the possibility to face serious

setback when the entire financing of the hydropower is done through the banking sector. However,

given the huge number of financial institution of Nepal and the availability of USD 300, there is

window of opportunity to finance the small micro hydropower plants through bank financing.

In order to attract more local and foreign investment in hydropower sector of Nepal, the Nepal 

government needs to revise the existing power tariff structure of electricity and provide more 

incentive to the investors. Due to political pressure against price increase often regulators favor to

keep the energy price constant. In long run without any subsidy, any possible power purchase price

increase needs to adjust with price enhancement at the consumer level. The tariff is typically fixed

in advance and adjustable over time only in accordance with predetermined contractual terms.

Private investment can be attracted  into a hydropower sector only if investors are convinced that

tariffs will be set and periodically adjusted in a manner that ensures an adequate rate of return to

investors. After the decade long political conflict Nepalese government needs to ensure such

predictable return to the investors to attract private sector investors. Equally important, the public

utility character of infrastructure projects requires that the tariff be perceived as "fair" to

consumers. This balance is not always easy to strike, and disputes over tariffs can delay project

implementation" Source: http://www.nrb.org.np/international_conference/confproc_vol2.pdf (page 268-269)