British International Investment

Investing in Nepal: Where patience breeds great reward

Until 1950, Nepal was closed to the outside world. Wedged between the two giants of India and China, successive prime ministers in charge of the country preferred isolation to open borders. A palace revolt changed all that, restoring power to the crown in 1951. But in 2008, after a decade of violence with Maoist insurgents, Nepal was declared a republic once again.

The country is perhaps best known as home to the highest mountains in the world. In fact, three-quarters of it is covered in mountains, with powerful rivers running through the deep, transverse valleys south of the Himalayas. Nepal’s topography and diverse climate means that it is frequently affected by extreme weather events such as floods and earthquakes, and is particularly vulnerable to the complex impact of climate change.

But the same topography also lends itself to the country’s economic development. For example, relying on the immense force of water from the rivers, CDC intends to develop reliable and sustainable power to support Nepal’s economic transformation.

Breaking new ground

In 2019 – along with a consortium of lenders – we signed a $453 million debt financing package to help build a hydro-electric plant in the Upper Trishuli region of central Nepal.

Upper Trishuli is expected to help create over 20,000 jobs in the Nepalese economy across multiple sectors. The hydro-electric plant will also increase Nepal’s electricity supply by one-third from today’s levels and provide clean, reliable power to millions of people.

When Pritisha Uttamchandani, Impact Management Executive in CDC’s Infrastructure team, started work on Upper Trishuli, she knew she was in for a challenge. The sponsors have been developing the project since 2011 and reaching the signing stage was a real achievement. “Upper Trishuli has set the precedent for every future hydro-electric project in Nepal,” she says. “Because it’s the first of its kind at this scale in the country, it’s been an incredibly rewarding experience. There is plenty of opportunity right now.” The work Pritisha has done – along with the other development finance institutions (DFIs) who invested in the project and the rest of her team at CDC – is now paving the way for other impact investors to follow suit. “The legal framework is now in place,” she says. “It should be easier for the next group of investors to do what we’ve done.”

For CDC, the Upper Trishuli commitment in 2019 swiftly followed a $15 million three-year loan to NMB Bank, one of the country’s leading commercial banks. In the same year we invested $12 million of equity in to the country’s largest private sector internet service provider, WorldLink.

Making connections

Nepal is ripe for growth. Right now, the government is busy smoothing the path for foreign investment – last year it introduced a number of laws to help with this process, as well as hosted a Nepal Investment Summit to send an encouraging message to foreign investors.

These reforms are helping the country move in the right direction. But patience is still required. Nikhil Balaraman, Director of Consumer and TMT Investments, led the WorldLink investment throughout the two-year process. For him, investing in Nepal has been an education in how perseverance pays off. “With the help of our legal advisors, we had to work closely with the authorities and the regulators – and WorldLink themselves – to help understand what a private equity transaction in Nepal should look like. There’s a lot of learning on all sides, including for us.”

When it comes to investing, the development impact is what sets Nepal apart from its neighbours. It’s a country where capital makes a clear and profound difference. “It’s visibly obvious that our capital will improve lives and infrastructure around the country,” says Nikhil. “We met the owner of a small travel agency. WorldLink has already improved his business because he now has a website and can advertise his services.” Armed with CDC’s  capital, WorldLink’s service is set to reach the remote territories that the region’s mountains have closely guarded until now, connecting hundreds of thousands of households and small businesses to the internet.

Encouraging enterprise

Rahul Shah, Director of Debt Investments for CDC Asia, sees a steady rise in Nepal’s prosperity and potential over the coming years. Working on the NMB Bank commitment gave him an inside view of the country’s economic reality, and also the role that DFIs can play in improving environmental and social practices and governance levels for banks in the country. “With real GDP growth looking up and a more stable political outlook, we’re bullish on investing in Nepal,” he says. “Yes, there are uncertainties during the investment process. A lot of policies are nascent, open to interpretation, and entries and exits can take more time than you anticipated. But as a DFI – with a longer-term vision and focus on growing countries through development – we can make a real and lasting impact in Nepal. We can add value by sharing our experience and what we’ve learned from investing in countries like India that have a close resemblance to Nepal.”

DFIs have the power to change the situation in the country. It’s a complicated picture, but healthcare, education and access to credit all need to improve before the country can take real strides away from its position at 145th place on the Human Development Index. Srini Nagarajan, Managing Director and Head of Asia, says that SME funding is vital to get Nepal’s economy moving. “In India there’s a deeper funding for SMEs, both from the banking and the non-banking market. Without it, SMEs get starved of working capital, their cash flows are blocked and they can’t grow. On the healthcare side, the people who can afford it travel to other countries. On the talent side, close to 1,000 youngsters leave the country every day in search of jobs due to lack of local employment generation.”

Srini says that DFIs need to work with the central government now, to put the systems in place for foreign investors to start encouraging local institutions to do SME lending. “We need a legally enforceable bankruptcy system in terms of the regulatory framework. Then the banks will wake up.”

Until regulatory reforms in 2018, Nepalese banks couldn’t raise debt from foreign investors due to restrictions on borrowing in foreign currency. CDC’s investment in NMB Bank aims to allow the bank to grow its lending to key sectors of the Nepalese economy. The bank also wants to focus on lending money to micro, small and medium-sized business in the coming years.

Nepal has decent medium-sized businesses, according to Srini, and many are successful and commercially sustainable too. “High quality first generation entrepreneurs are present and can create business if venture capital and private equity funds are active,” he says. “If you’re serious about the market, get local resources on the ground and support building them. There’s a lot to do with tourism especially, which attracts foreign exchange income. There’s a clear opportunity in Nepal to encourage these young entrepreneurs, and some are internationally savvy, with aspirations to expand, and they’re hungry for success. It’s incumbent upon investors like us to encourage them to grow.”


Insight is our series of practical lessons on private sector investment and development, based on our experiences. Sign up to our monthly newsletter.

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