Lagani.org

We discuss all aspects of investment in Nepal but we focus more on foreign direct investment (FDI) and issues surrounding FDI - govt policy, best & worst practices, networking with domestic & foreign partners, and specific investment ideas.

Sunday, August 27, 2006

“It's not easy to bring investment in Nepal ”

Visiting Business People
Spotlight, July 2006



“It's not easy to bring investment in Nepal ”

Francois Vitez , Project Manager, Gestion Conseil SCP Inc. of Canada was in Nepal recently. SCP has 25 per cent shares in the Khudi Hydropower Company which is developing the 4-MW Khudi power project in Lamjung. Excerpts from an interview:

How has been the experience of SCP in Nepal as an investor?

It's not easy to bring investment in Nepal . From a Western perspective, there are two major issues. First is the devaluation of Nepali Rupee which is hitting us. It is inevitable, but it can be compensated in some creative manners so that everybody has a win-win situation and the Nepali people would not have to pay too much for the electricity they use.

The second point is the country's stability. Though I stayed for a long time in Nepal , I realise that the more I know about Nepal , the more I don't know about it. I know enough to be comfortable in many situations as an investor. But I also know that things look totally different for an outsider. And it will take a lot for somebody to attract investment here. It will take a lot to promote a positive investment image about Nepal .

Does that mean that you are not interested for further investment here?

Definitely we are interested. First, we want to finish this project well. We want to build a team and that's how we can get successful projects. Now we have done a good part of building team and we want to continue. But we haven't started any specific new project yet.

What is your suggestion to Nepali policymakers about how to go about in developing hydroelectricity potential?

I can make a comparison with Canada ’s Quebec of 1950 and the present day Nepal . Back then, we were looking a bit like a developing country and then a "quite revolution" took place and the engine of that revolution was hydro electricity. The Quebec government started to license some big projects in the north and they had the guts to go to New York and get the money. The big projects thus built became the largest power stations in the world. Now these projects are generating a huge income. We are just like Nepal because we have lots of hydro resources and we also have a neighbour which demands a lot of electricity. Many people had thought it was crazy to do so. I think this happens here in Nepal too. It will require the same level of guts to jump to projects, build alliance with India in order that the next generation, years from now, can look back and say "Oh My God, those guys had the guts" and eventually thank this generation.

What problems are there to develop the projects which have been identified?

There is no project financing for hydro in Nepal. This is a key problem. This means that to be able to develop a project that needs $10 million, you have to have all the $10 million in cash or property to offer as collateral. But think for yourself: why would you need to borrow when you yourself have the money? That's the kind of chicken-egg situation we are in now. In Canada and most other countries, the project is its own guarantee. It's risky but as the banks will become more familiar with the hydro sector and have their own due diligence process that would bring their confidence up, many people would be able to do project financing. We are already taking lots of risk coming to Nepal. To take a risk beyond what we are not taking in our own country would be quite illogical for us or any other foreign investor.


"UPS will be in Nepal for long-term"

Andrew Conelly, Senior Vice-President, South Asia Pacific of United Parcel Service Singapore Pte Ltd. (UPS), was in Nepal in late July for the official opening of UPS' partnership with Shangri-La Tours as the agent in Nepal. On the sidelines of the function, he talked to New Business Age about the plans of UPS for Nepal market. Excerpts of the interview:

Previously you had a different agent. But you changed it recently. Why?

The reason of course is the business diversification of Shangril-La Tours and their ambitions have better suited our ambitions in Nepal .

You also had a court case with your previous agent. What happened with that?

That's correct .We exercised the option not to extend the contract we had with the previous agent. He wanted to contest that decision.

Is that case over now?

I understand the hearing is due sometime in August.

How is the trend of courier business internationally and in Nepal ?

At the moment you suffered from some political instability and that has affected the general economy. As you understand, the courier business doesn't produce anything, it only carries goods manufactured by other people. If the general economy is down the courier business would also be down .But now as stability seems to be coming into economy, so we have better expectations for Nepal business.

Any targets or plan set for Nepal market?

Our partners Shangril-La have plans to expand our presence in the Nepali market . I'm sure that we will be marketing successfully over the coming months and years. Ours is an organisation which is 99-years-old. We have the longevity connected to the name of our organisation so we expect to be in Nepal for many years to come.

We are adding to our portfolio of products and world wide expansion on a continue basis. And the fact that we have gone into partnership here with Shangri-la as goes to demonstrate that purpose and commitment.

Can you tell some figures in terms of your company's market share?

No, we really don't discuss specific market share. I can tell you about our organisation. We are the world's largest package delivery company. Our revenue last year was US$ 43 billion. We employ 407,000 people and are now operating 270 airplanes.

What makes UPS different to its competitors like DHL, TNT, FedEx?

We are unparalleled. Next year we will see the centennial of UPS. We have a global presence which is unrivalled. We have sweeter products and technology that are unrivalled. So we are very large organisation. That is built only on one thing. That is customer care, customer commitment. And the return on that is that it will continue to grow.

What is the situation in terms of the price?

We always want to be competitive.


"Hospital is a word-of-mouth business"

Dennis M Brown, Group Chief Operating Officer of Bumrungrad International that operates the Bumrungrad Hospital at Bangkok that attracts about 1 million clients per year, including about 400,000 from around 190 countries, was in Nepal recently for the inauguration of the representative office of the hospital in Kathmandu in partnership with Temple Tiger Group, one of Nepal's leading tourism business house. On the sidelines of the inauguration, he shared information about his hospital's plan for Nepal. Excerpts:

What is behind the decision to open this agency in Nepal ?

It is based on the fact that the number of persons coming to us from Nepal has been steadily increasing and last year it reached 2000. This office is established to provide additional logistics and administrative support for the individuals seeking care in Bangkok so that we will be able to coordinate visas, appointment schedule, travel arrangements and anything to make it easier for the patients to get to our hospital.

What are your expectations from Nepal market?

We desire to provide a better service to the individuals who arrive in our hospital. Hospital is a very much a word-of-mouth business. We do some general advertising for just name recognition. But people select their doctor and hospital based on the reputation of the doctor and hospital among their friends and relatives. The best way for a hospital to grow its business is to provide superior service. This regional office is an additional step in trying to add to the service level from us.

How many people visit Thailand in a year as health tourists?

Our hospital treats about one million patients a year out of which about 400,000 are of international origin. Last year, we had 76,000 from the Middle East and we expect to see 100,000 this year. We see about 50,000 from US and 30,000 from Australia .

How big is the health tourism in Thailand ?

We believe that roughly about 50 percent of international patients go to Thailand . Overall, Thailand receives a million patients a year. Roughly about half of that comes to Bumrungrad and the rest is distributed to among other high level hospitals in Bangkok .

What is the recent trend in hospital business?

We still see nearly 25 percent growth in our international business every year. Patients around the world are either waiting too long for social health care system or, if they have to pay out of pocket, they seek the most affordable and best care that they can purchase. You will find that countries that are competitive in world currency terms, have a very well skilled and hospitable healthcare work force and are easy to travel to attract health tourists. Thailand scores high on all these counts compared to other Asian countries. We have a very skilled medical capability in Thailand . Medical education has been the focus of the Thailand for number of years. The Thai people are very service oriented. Lastly, the currency crisis of 1997 and devaluation of Baht made Thailand very affordable to international tourists. Now we are trying to see that we are competitively structured not only from the currency issue but also in terms of the cost of providing the care.

Is there any possibility of providing clinical facility or even opening a subsidiary of your hospital in Nepal ?

There are possibilities in expanding our services in different countries. We have established an international subsidiary in Manila and we have build a hospital in Dubai . We are actively looking at a number of other countries as well. There are lots of things that need to occur for us to make the final decision. Such a referral office as in Nepal is the first step towards that direction and we need to see how things go. But it is very early to say anything at this point.

As of now, we want to make sure that people understand we are here to help support the patients and doctors here in Nepal . We also want to make sure with the referral office that the medical information or information about any related activity that occurs elsewhere gets to the doctor here in Nepal so that the continuity of care occurs in the patients’ treatment process. The ability to provide information support to the medical community here is in the best interest of the patients.

Friday, August 25, 2006

As Foreign Investment Rises, India Addresses Security Concerns

As Foreign Investment Rises, India Addresses Security Concerns
By SARITHA RAI
NYT, August 21, 2006

As foreign investors blanket the country, India is preparing with a ramp-up of its own: an expansion of its security laws to thwart possible threats from rapid globalization.

Amid perhaps overly sensitive concerns that some foreign investments might step into areas of national security, the government is drafting legislation to block overseas companies from doing business in India if they are perceived as security risks.

“As investors flood vital sectors such as telecommunications, media, airlines and ports, our priority is to bring in comprehensive safeguards,” said Kamal Nath, minister of commerce and industry. He added, “The intention is not to curb entry of overseas capital but to ensure that money from undesirable origins does not enter critical sectors.”

Amid the unprecedented momentum of foreign investment, top officials from various ministries, including Mr. Nath’s own, held their first meeting earlier this month to discuss security risks. While legislation is likely within the year, the government has asked the Foreign Investment Promotion Board and state-owned firms to screen out investments seen as potential threats.

The legislation being completed by the National Security Council, and even the temporary measures, are expected to have a wide-ranging impact on foreign direct investment, mergers and acquisitions, and even on overseas participation in tenders by government-owned departments and firms.

“The government is arming itself to intervene over and beyond current investment policy,” said Alok Shende, director of the information communication technology practice at the consultancy firm Frost & Sullivan, who predicts delays and a rash of accusations over unfair use.

Until a few years ago, foreign investments were limited to minority stakes, so security issues were manageable as ownership and management control remained with Indians. But that has changed drastically, Mr. Shende said.

Foreign investments in the country’s fiscal year, which ended in March, totaled $5.7 billion. According to official projections, overseas direct investment is expected to touch $10 billion in the current year. A chunk of this investment can still flow in easily, particularly for minority stakes or certain approved industries.

Unlike the United States or Europe, India does not have a formal framework for overseeing security concerns in economic decisions. “Because of the rise of terrorism, security clampdowns are intruding on decision-making in most democracies in the world,” said Dr. V. S. Arunachalam, a robotics expert at Carnegie Mellon University in Pittsburgh and a former military adviser to the Indian government.

Already, there are signs that security concerns have made politicians uneasy about recent economic decisions. For instance, last month Communist parties objected to the appointment of Papa Stefanou Yanni, a Greek chief operating officer, to the newly privatized Delhi International Airport. They argued that a foreigner should not be allowed to manage operations at an airport where high-security flights carrying the president and the prime minister land and take off.

Deciding whether foreign investments conflict with national security interests will be tricky. The consortium that won the bid to manage the Delhi airport — consisting of Indian, German and Malaysian companies — said the tender required the presence of an experienced foreign partner. The German partner, Fraport, had in turn brought in the chief operating officer from abroad. “He has managed 20 airports in his career and it is just incidental that such an industry veteran is of Greek origin,” said Arun Arora, a spokesman for the Delhi International Airport.

The proposal for a new law was first made shortly after terrorist bombings in July ripped through the main commuter train system in Mumbai, the country’s financial hub. In the last couple of months, the Indian government has experienced an increase in threats, from baleful e-mail messages to the president to bomb hoaxes at various cities’ airports and offices. Additionally, investigating agencies said they had found links between the Mumbai terror attacks and terror cells they say may be operating in neighboring Pakistan and Bangladesh through mobile and Internet networks.

So in critical areas like telecommunications, officials in different ministries agree that strict screening of investors has become important, particularly because the government last year raised the ceiling for foreign investments in telecom to 74 percent, from 49 percent. It still requires foreign investments over 49 percent, however, to be submitted for government approval. The government is considering a test case right now, Hutchison Essar, a joint venture between the Indian conglomerate Essar Group and Hutchison International, a telecom company controlled by Li Ka Shing of Hong Kong that has a strong presence in emerging markets. Last year, Hutchison International sold a 19.3 percent stake to Orascom Telecom of Egypt, which gave Orascom a 12 percent holding and the right to nominate a director on Hutchison Essar’s board.

Essar wrote to the Indian government seeking to clarify whether such a share transfer, which the companies considered rather indirect, required prior government approval. Orascom, it said, operates networks in a number of countries including Pakistan. “As a major shareholder, we cannot let an unknown entity surreptitiously come into the joint venture,” said Vikash Saraf, chief executive of the Indian partner, Essar Teleholdings.

The government has yet to respond, Mr. Saraf said, though investment rules clearly require regulators to ban investments from “unfriendly’’ countries. Mr. Nath, the minister, said the government was still examining how changes in the shareholding structure could have an impact on the management of Indian firms like Hutchison Essar.

Even before the Mumbai train bombings, government intelligence agencies had sought stricter scrutiny of the licensing for importing of telecommunication equipment. India is the world’s fastest-growing telecom market, and the world’s largest equipment makers — Motorola, Nokia, Ericsson and Chinese companies like Huawei Technologies and ZTE Corporation — are lining up to corner market share.

The Foreign Investment Promotion Board turned a cold shoulder to an application in March 2005 by Huawei Technologies, one of China’s largest electronics equipment makers, to get a trading license for its India unit. The government has also snubbed the company’s application for setting up a manufacturing base in India and expanding its existing research and development facility in Bangalore. Local newspapers reported that India’s security agencies were concerned about the company’s past links to China’s military establishment.

A spokesman for Huawei Technologies, who declined to be named because he did not have authorization from his headquarters to speak publicly, said the company was at a “competitive disadvantage” but maintained that the proposed national security law was unlikely to have any further impact on its status.

Historically, India has had a troubled relationship with its northern neighbors Pakistan and China.

In another recent case, after months of agonizing, India’s cabinet in July denied security clearance to three Chinese firms trying to bid for container terminal projects at Mumbai and Madras, also known as Chennai, in India’s recently privatized port sector. The companies included Hutchison Port Holdings, which operates the Karachi international container terminal in Pakistan.

Meanwhile, such curbs may permeate other areas as well. For instance, the government will soon mandate that an expert panel of scientists and intellectual property specialists scan all foreign investment in research and development in rapidly expanding areas like drugs, where India is emerging as a global hub. Companies, mainly from the United States, have invested more than $1 billion in research operations in the country, and investments totaling more than three times that are in the pipeline.

Alongside all this, the government is anxious to dispel any impressions that the security law is unfriendly to investors. Mr. Shende, the analyst, said the government did not wish to discourage much-needed foreign investment in sectors like infrastructure. Mr. Nath, the minister, agreed that the government would try to reduce delays and dispel notions of subjectivity while filtering proposals.

Mr. Nath added, “If we have said no, everybody will know why.”

Friday, August 11, 2006

India Says Exploring Investment Options in Nepal's Power Plants

India Says Exploring Investment Options in Nepal's Power Plants
By Ashok Bhattacharjee
Bloomberg, Aug 11, 2006

India is holdings talks with Nepal on possible investments into five hydropower projects in the Himalayan state to generate at least 4,200 megawatts of electricity, Power Minister Sushil Kumar Shinde said.

Implementation of these projects will be taken up after an assessment of the plants' technical and financial feasibility and bilateral agreements, Shinde told the lower house of parliament in New Delhi today.

These projects are ``under discussion at various levels,'' Shinde said, without giving details of the negotiations or the funding required for the projects.

Nepal is seeking an economic package for reconstruction, including Indian investments in hydroelectric projects, to industrialize and bring Communist insurgents into the political mainstream. The country requires at least $5 billion for rebuilding after ending a decade-long conflict with Communist rebels, who fought to end the monarchy in the South Asian nation.

Nepal's economy, which depends on tourism for foreign exchange, has been hurt by the communist insurgency that has crippled the infrastructure in the rural hinterland. It requires investments and sustained economic expansion to lift about 40 percent of its 27 million citizens from poverty.

Starting Small

India may initially invest in a plant generating about 300 megawatts of electricity, Nepal's Finance Ministry Joint Secretary Rameshore Prasad Khanal said in New Delhi on June 8. That will mean a minimum investment of $450 million, he said.

Among the five projects is the 3,300-megawatt Sapta Koshi High Dam Multipurpose Project, which also has a water-storage and diversion component.

``The project could provide irrigation and flood control benefits in Bihar and also power generation, of which the major portion would be available to India,'' Shinde said.

India is seeking to expand generating capacity by 60 percent in the next four years to 200,000 megawatts to meet increasing demand from industry and services and sustain economic expansion at about 8 percent annually. The country's peak power deficit, or the gap between supply and demand during evening hours, widened to 13 percent in the April-May period, compared with a 10.5 percent gap in the nine months ended Dec. 31, 2005.

Thursday, August 10, 2006

The strange paradox of economic nationalism

The strange paradox of economic nationalism
The Financial Times, Aug 9, 2006
By Guy de Jonquières

In his blackly humorous book, Mr China, Tim Clissold relates how he and a US business partner blew some $400m in the 1990s buying mainland companies that turned out to be duds. The pair would have a quite different problem today. Chinese companies are generally better run than a decade ago. But they are becoming harder for foreigners to acquire.

Lengthening official delays in approving deals, combined with a political backlash over foreign companies’ growing role in the economy, have put international investors on guard. China’s door may still be open, but those waiting outside are less sure of a welcome than even six months ago.

Keep-out signs are also being posted elsewhere in Asia. In Japan, “poison pill” defences are multiplying, while takeover rules have been weighted against foreign bidders. In South Korea, where economic nationalism has a long lineage, its latest progeny is the idea of using “golden shares” to block unwelcome bid approaches.

Such reactions are perhaps understandable in long-closed economies that have opened up to foreign capital as never before: most dramatically so in China, whose foreign direct investment stock now equals 28 per cent of gross domestic product. While FDI levels are much lower in Japan and Korea, one-quarter of Tokyo’s stock exchange and almost half of Seoul’s are foreign-owned.

Hostile bids from abroad are still unknown in both countries. But many Koreans seethe at the profits reaped by foreign investors who moved in after its 1998 economic crisis. In Japan, the buccaneering tactics of corporate raiders such as the disgraced Takafumi Horie and the unravelling of cross-shareholdings that long shielded local groups from takeover have left boardrooms fearing that the next wave of “Anglo-Saxon” capitalism could be the real thing.

It should also be no great surprise that economic nationalism is in vogue in Asia when it is already resurgent in the west, with Asian bidders among its prime targets. The US Congress’s veto in 2005 of the bid by CNOOC, the Chinese oil group, for Unocal and European governments’ unsuccessful efforts to stop Mittal Steel buying Arcelor suggest wagons are being circled worldwide.

This outbreak of defensiveness embodies one paradox and several myths. The paradox is that foreign investors offering to build new facilities are courted and fêted almost everywhere. Yet in many countries, trying to buy local businesses, even with their managers’ assent, can lead them into a nationalistic minefield.

The ambivalence reflects a widespread belief that greenfield investments are somehow “better” because they visibly raise national output, employment and exports, while acquisitions diminish local ownership and appear to add little of value to the economy. Yet the distinction is largely meaningless. FDI’s greatest value is as a mechanism for transferring skills, ideas and technology across borders. They can be transmitted just as efficiently – sometimes more so – through acquisitions as through greenfield plants. Renault’s revival of Nissan and the recovery under foreign ownership of troubled Japanese and Korean banks are cases in point.

Another myth is that foreign ownership turns companies into mere branches of remote head offices. Not only is the evidence for that claim moot; it is at odds with multinational companies’ growing tendency to localise decisions and with western workers’ complaints that offshore outsourcing is displacing ever more highly skilled jobs at home. Nor, contrary to popular perceptions, do foreign-owned companies, in general, seem more ruthless than local ones about moving work abroad.

Equally misplaced are fears that foreign takeovers threaten national economic sovereignty. These fears are often greatest in countries such as Korea, where local producers wield excessive power. The critical issue is not nationality of ownership, but the adequacy of market regulation and competition enforcement.

Of course, not all foreign takeovers generate local benefits. But neither do all greenfield projects. The point is that one method of investment is not inherently more beneficial than the other, but that the results depend on the specifics of every case.

The most dangerous myth of all is that some sectors must remain locally owned because of their “strategic” importance. A very few, such as defence contracting, may genuinely qualify. But the idea has more often served to protect weak or failing businesses: airlines in the US, car and computer makers in Europe and steel and shipbuilding companies globally.

The intrinsically elastic definition of “strategic industry” invites its misuse. In France, it has been invoked to defend Danone, a food processor, against the threat of takeover. In China, where the label is applied to thousands of state-owned companies – most far less efficient than their privately owned counterparts – it seems recently to have been extended to a troubled producer of earth-moving equipment.

Typically, the main beneficiaries of such policies have not been national economies, but the managers of “strategic” companies and their bureaucratic overlords. Their status confers state patronage, privileged access to power and, above all, the trump card of protectionist petitioners down the ages: a licence to portray themselves, however misleadingly, as the true representatives and custodians of the national interest.

Bangalesh hopes to net $10.5 billion FDI

Bangalesh hopes to net $10.5 billion FDI

Himalayan News Service
August 9

Bangladesh hopes to attract foreign direct investment (FDI) to the tune of $10.5 billion in the next five years, says the executive chairman of its Board of Investment, Mahmudur Rahman.

“Big investors especially from the Middle East are coming to Bangladesh with a view to investing here,” he said while addressing members of the Economic Reporters Forum (ERF). Rahman said big business groups were continuing their negotiations with the government for investment in different sectors of Bangladesh, the Daily Star reported.

About the FDI prospects, he said Dhabi Group will invest $1 billion, India’s Tata Group $3 billion, Asia Energy $1.5 billion, South Korea-based Luxon Group $1 billion, Saudi-based Kingdom Group $500 million and Pakistan-based Dawood Group $300 million.

Rahman, who heads the official group that evaluates foreign investment offers, reiterated that the investment deal with the India’s Tata Group would be signed during the tenure of the next government. Bangla-desh last month conveyed to Tata that it was ‘suspending’ the proposal in view of the volatile political situation, this being the ‘election year’. Tata has since said it would ‘wait and watch’.

Dhaka’s decision in this regard has been criticised by foreign financial institutions, including Asian Development Bank (ADB). Hua Du of ADB said, “People expect political leadership to take crucial economic decisions”.

Rahman noted that while Bangladesh received a total of $878 million FDI during the 1972-2000 period, $1,705 million was received in the last five years (2001-2006).

The Board of Investment (BoI) chief claimed that the country had a sustainable growth in the manufacturing sector. The contribution of the manufacturing sector to the gross domestic product (GDP) is the highest, pushing behind the agriculture sector, whose share came down to 16.91 per cent. Citing UNCTAD ratings, Rahman said Bangladesh was ninth among the least developed countries in respect of FDI inflow, with a 150 per cent growth in the foreign investment in 2004.

Saturday, August 05, 2006

Benefiting from Carbon Trading

I read an article in the Economist Magazine about carbon trading and it generated my interest in that subject. Then I read a The New York Times article which made to do some basic research. I have heard of carbon trading as being a big business in Australia and New Zealand, and especially in the latter because of its huge forest resource. In fact, the Sydney Futures Exchange has produced a Carbon Trading FAQ

Nepal can benefit from the carbon trading also given that it has signed a Kyoto Agreement. It could give economic incentive to re-vitalize the denudated forests of the country bringing in tremendous environmental benefits and at the same time bring-in foreign earnings for sustainable economic development. An interesting article from Future Harvest discuss the possiblities of win-win proposition for poor villagers & big businesses in a 2002 article.

How Nepal can benefit is discussed in a 2005 article in Spotlight magazine.