Nepal can Relax FDI Rules for Priority Sectors

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Nepal can Relax FDI Rules for Priority Sectors

Tim Gocher OBE is the CEO of Dolma Fund Management which manages Dolma Impact Fund I and II, the largest international private equity funds dedicated to Nepal. The funds with over $100 million assets under management generate over 10,000 well paid jobs in Nepal through their investments in renewable energy, healthcare and technology sectors. He is also Hon. Professor of Sustainable Business at University of Nottingham and founder and chairman of non-profit Dolma Foundation which provides scholarships to underprivileged children in Nepal. Tim was awarded the OBE in the year 2022. Madan Lamsal of New Business Age talked to Gocher  on a wide range of issues related to Dolma Fund Management and its projects. Excerpts:

Please tell us how you got motivated to start Dolma Fund Management. 
I came to Nepal in 2003 for trekking. I simply fell in love with the country because I think there is an inner peace here. Not only with the scenery, but also with the culture and the people. It was something I was looking for at the time as a stressed businessman from London. I simply fell in love with it. Nepal was the right place for me at the right time. It was the inspiration of the people that made me want to start working here. And at the time, it was a charity called Dolma Foundation. In 2003, the country was in the middle of the Maoist conflict. So, it wasn't a question to bring investments at that time. But I started with charity, and it grew from there.
How does Dolma operate?
First, it was the Dolma Foundation. We have sent hundreds of children to school, we have rebuilt schools and a whole village of Bridim after the earthquake. I was living here then. In 2011, it dawned on me that the peace process was stable. I looked across the world and tried to point to me a more successful peace process. That does not mean the politicians will stop arguing and bickering. But it does mean the killing and the pain, pauses. And over time, people can heal. By 2011, it was very clear that Nepal wasn't going to slip back into physical conflict. Then I thought that is pretty much the baseline that a private sector investor needs. If my investments are at least not going to be blown up or taken by the Maoists, that is the sort of basic security that I needed. That is why I started Dolma Impact Fund, a private sector investor fund, just to invest in Nepal.
With any private equity fund, you have a fixed timeframe. In our case, we have 10 years, or 10 to 12 years. The first fund was raised in 2014. It took us three years to do that and it was a very difficult process. You can imagine I am sitting in front of investors in European capitals, and I am saying I am raising a private equity fund for Nepal. And they would say, “That's interesting. What's the average rate of return on a private equity investment in Nepal?” To which I would say there's hardly been any private equity investments in Nepal. So I can't tell you. The problem is not that Nepal is risky, it is just that nobody knew how risky because nobody had tried it. I managed to persuade a group of big institutional investors to take a risk. 
In 2014, we started investing. Our first fund will be 10 years old in September next year. We will see if we have to extend the life of that fund. But we have already started the exit process. For example, two of our hydro plants are listed on Nepse. We hope to be able to sell at least some of those shares by the time the fund turns 10. Our second fund was more exciting to me because we did have a track record. We had made eight investments from our first fund, and the investors could see how well they had done. In one case, we had a good exit and on the other you can see how much the revenue had grown or the profits have grown. I felt that was the ultimate validation. That is not just Dolma’s performance, that is Nepal's performance. For the first time, international investors have some data on the performance of Nepali companies.
So how is the performance of Nepal companies?
We have invested across renewable energy, that is hydropower and solar. We have two hydro companies, both of which are now listed, and a solar company. We have a hospital and a pharmaceutical company. And we have three technology companies - two of them are in AI services - Cloud Factory and fusemachines - and one is in e-commerce that is SastoDeal. They are doing very differently. The larger investments are doing well, the smaller investments are struggling. On average, our performance is doing good. But I think the point of having a portfolio in the pool in its early stages of growth and investment is important because you will see energy stocks holding up in this economic downturn, but tech stocks might take a bit more of a hit. They are more sensitive to an economic downturn.
Sometimes people get confused with the Dolma Equity Fund. Is it an NGO, charity or a private equity fund? Or what are the funding sources? What is your response to them?
We have a nonprofit charity called Dolma Foundation. It raises money from mostly individuals wanting to donate money to Nepal. That's purely philanthropic, and we give money and we don't want it back. Then completely separately, we have Dolma Fund Management which manages Dolma Impact Funds. They are purely for profit. In other words, we do want the money back. Where do we raise the money from? At the moment, it is mostly a group called development finance institutions or DFIs. So these are like FMO, BII from the UK, Swedfund from Sweden and IFC,a multilateral part of the World Bank. These are completely private sectors just like any bank or institution. But they can take more risks. Until we and others that they're investing in and the broader market can show a rate of return which is high enough to compensate purely private sector investors for their perceived risk of Nepal, then you really need a DFIs to take that risk. If we can be successful in creating enough returns, our main goal is to bring in as many foreign investors as possible, whether they are DFIs or non-DFIs. I want pension funds in the US and the UK to have an allocation to Nepal investments. But we're somewhere away from that.
You said your funding sources are less commercial and more social? What about the commercial private equity investors?
I think their motivation is commercial. But in being commercial, it has the maximum development impact. If you take FMO, the Dutch development bank, they're allowed to take more risk. They could invest in Nepal, where perhaps a pension fund in London couldn't take that risk because there is not enough data to measure the risk. But it doesn't mean FMO wants us to subsidise returns. FMO wants us to achieve returns which will attract all types of private sector investors. If you look at the international investment market, some of them are these DFIs which are largely sovereign government funded for profit. They don't want me to go easy on companies and just make a low return. The whole point is to post returns that attract all the other types of investors out there. So how much money is out there globally? In insurance funds, pension funds, asset managers, investment banks, and how much money does Nepal need to attract from abroad? If you look at the SDG targets, maybe it needs $4-5 billion a year of which about $3 billion a year needs to come from FDI because there's a limited source of capital here. Even if all the DFIs are put together, they are not going to invest $3 billion a year. So we need to attract those insurance companies, pension funds in the big financial centres like Singapore, London and New York. That's where our work comes in. If we can show that companies can perform well enough, then, I think, the big investors will put their money in.
In cursory look, there are Dolma Fund, Dolma Foundation, Dolma Advisors and Dolma Himalayan Energy (DHE). What were the reasons that they were to set up as separate units? How are they linked?
Dolma was the first girl from the village of Bridim in Langtang National Park to receive a scholarship. Her family inspired me so much that everything is now named Dolma. However, Dolma refers to both a charity and a private equity impact fund, which are completely separate entities. If we encounter a business that doesn't align with these entities, we might consider establishing a company like Dolma Himalayan Energy. As private equity investors, we are not permitted to start or manage companies we invest in, but we provide assistance and advisory services by sitting on the board. Regarding Dolma Himalayan Energy, we recognized an opportunity to address the seasonality of hydropower by utilising large-scale solar and battery systems for consistent electricity generation during the dry season. The only connection between all these entities is me.
You have identified energy, healthcare and technology as your focused areas. How did you arrive at this conclusion?
We spent three years knocking on doors, speaking to businesses and trying to understand where the demand for capital is. I think it is no surprise that energy was one of those requirements. There was a time with big 16-hour load-shedding. So that was obvious. It is both impactful, because it is renewable energy, and it helps people run businesses. Healthcare, I think, is also pretty straightforward. There are not enough hospitals, there are not enough beds, doctors and nurses. There is not enough medicine that is manufactured locally. Both the demand for capital and the impact is obvious. I think what surprised me is technology. In my previous job in London, I was a venture capitalist. I did not expect to find the kind of innovation and startups that I found here. In our three investments in Cloud Factory, fusemachines, and SastoDeal, we invested more than the total we invested in energy or healthcare. I think that's just a reflection, first of all, of the global speed at which entrepreneurship as a culture has swept through the world. The speed with which the technologies - the Internet, the broadband, the cloud - have enabled those business models to function. Also, the innovation of the Nepali entrepreneurs has absolutely astounded me. That has been a big surprise.
The government’s policy is to prioritise a few major sectors such as agriculture, tourism and hydropower. But you have not touched upon these sectors. What do you think are the reasons?
That is true for agriculture. It is mainly because it is on the FDI negative list. Tourism is the sector we have always seen as risky and so do our investors. In fact, we had to agree not to invest in hotels because our investors had so many negative experiences in other countries. But as you have seen during the earthquake and the pandemic, it is very sensitive. It has also got huge upsides, because of the tourism potential. But  we are not allowed to invest in hotels.
You have identified energy as one of the priority sectors for investment. Don’t you think it too is risky because of earthquakes, natural disasters as well as climate change?
Life is uncertain. But you can factor that into your engineering. It is less of an issue with solar plants. Panels may break but they can be replaced. We know that there is an earthquake risk. We factor that into the engineering. I think what is more interesting is the risk of climate change. It feels like a race against time. One of the institutions I enjoy spending time with is ICIMOD. ICIMOD has pointed out that a lot of the melting of the glaciers is caused by black carbon deposits. It is just soot from dirty cars and factories, and lots of coal-fired plants in India. That is a separate effect from global warming. It speeds up global warming; more generally for the glaciers. Imagine if there were thousands of megawatts on the grid, completely catering for electric vehicles so that you have no terrible fossil fuel exhaust. You don’t need to keep the coal fired power in India because we are exporting to India with clean energy. Nobody needs to burn firewood anymore. Imagine if that was the world tomorrow? There would hardly be any black carbon. Nepal does not have the capacity to reverse global warming. But it does have the capacity to reverse black carbon deposits. If you woke up tomorrow, and there were 40,000 megawatts on the grid, there'd be almost no black carbon deposits. It would just take one winter snowfall. And those glaciers become white again. So it feels like a race against time. If we don't win that race, it will be catastrophic for the glaciers. There will be floods and landslides in the downstream Bangladesh and India. But it will also be catastrophic for our hydro industry. I really think it is in everybody's interest to really energise and increase the investment in renewable energy.
What is Dolma Himalaya Energy doing at present?
We got two licences from the Investment Board Nepal for Dolma Himalayan Energy in 2018. Unfortunately, one of those was cancelled after we'd started investing money. We are still waiting for that licence to be renewed on a different site. I do believe that it will be going forward imminently. I think batteries, and storage more generally, is the key for the Nepali grid. If you think of solar, it generates more in the dry season than in the wet season which is exactly what people need. But the problem with solar is it jumps up and down within the day. Also, people need more power after the sun has gone down. If you add battery storage, you can store the electricity when the sun is shining for the evening peak time and also for the morning peak. It makes the grid very flexible, especially when you're dealing with intermittent renewables. We haven't really looked at wind power here, but certainly solar power is the holy grail for these intermittent renewables. We want to be one of the first to install the battery flexibility with solar power.
Dolma Impact Fund I was closed in 2014 and now you are working with Dolma Impact Fund II. How were your struggles and successes with Fund I? How is Fund II going on?
The Fund II is fairly new as we completed our final close only recently. We had said we will not raise more than $75 million because we were confident  that there is enough opportunity to deploy that capital in an efficient and hopefully profitable way. We raised the money during COVID. It was a pretty difficult fundraising environment, but we managed to raise $72 million. We were delighted as we had already made our first few investments. But if you ask me about the struggles and successes, I think there is a commercial struggle because industries have their ups and downs. When tech markets were up, we made the exit from Cloud Factory in 2019. We still are a small shareholder though. If you go to venture capitalists now, they are scared because Nasdaq is down. That is the kind of struggle you see everywhere - London or New York.
In Nepal, it feels like we are laying a path for the first time. It is simply the delays involved in getting money in the country, getting licences to do things, etc that is affecting us. That has been perhaps the unique struggle of Nepal. It took us 13 months to get foreign direct investment approval after signing the legally binding document. Our shareholders are mostly governments which means it is the cleanest money available from the money laundering perspective. I will give you an example. We committed investment to a high-growth tech company. These companies don't make a profit yet, but they grow very fast. But it took us so long to get the money that I feared the company would go bust. I had to go and meet the NRB Governor and deputy governors. I told them ‘this company is going bust, can I please get that last signature?’. It is an honour to have the kind of access and flexibility to go and meet the governor. That wouldn't happen in India, and it wouldn't happen in London. Unfortunately, when you look at foreign direct investment numbers, we see that about 50% of money that seek approval to enter do not come in the end. In other words, they give up. It is such a problem that I think a lot of people give up.
How is the performance of ventures where you have invested? What is the exit plan for all these investments? 
We invested in two hydro companies quite early on in the fund. They are listed on the stock exchange. In just a few months, we will be allowed to start selling our shares. Our profits depend on the market. 
We need to give credit to Nepal that it has created a whole industry ecosystem which is trusted. If the NEA signs a PPA, it stands behind that PPA. The banks understand how to finance hydro projects. The engineering skills and the contracting skills exist here, with some expertise from abroad, to build those hydro plants. The stock exchange and the investment banks understand how to make those public and how to fairly share some of those returns and the allocations of shares with the locally affected community. The last thing we have to do is, sell some shares and prove that we can get the money out of the country. I think this is a real success story of Nepal. We are really excited because those two investments were the first FDI hydro investments that got listed on the stock exchange. If we can, in the coming months, prove that we can exit and repatriate and make a profit. That is the kind of signal to those big investors that IBN is working on.
With healthcare, we had Nidan Hospital in our first fund and Chirayu Hospital in our second fund. Another one is Rhododendron Biotech which is the largest manufacturer of hemodialysis fluid for kidney patients. There was a period of time when nobody wanted to go to hospital, because nobody wanted to catch COVID. We are only now just seeing those numbers return. I think in the long run, our hospital assets will be back to normal in terms of performance. But it has been a very difficult couple of years because of  COVID. In terms of the manufacturing of medicine, it's been a consistent performer. Unfortunately, that's partly because of Type 2 diabetes which causes a lot of these kidney illnesses to rise. But it is good to see the company taking market share out of imports from India. It may not be possible to make 100% of the medicine required in Nepal.
I think the most likely exit path for our tech and healthcare companies - Foodmandu, Upaya, WorldLink and SastoDeal - are with local investors. If you have seen, SastoDeal has  an exclusive partnership with Flipkart. That doesn't mean that Flipkart is going to buy SastoDeal. But it is an indication of what could happen. India has seen a lot of development in these platforms, whether it's third party logistics, e-commerce or food delivery. The future may be in selling our shares to them or other developing countries where the scale is greater. It is similar in healthcare, at least with hospitals. For example, Apollo Hospitals has branched out to Bangladesh and Uzbekistan. It is interesting for them to increase the quality in these countries to act as a feeder for more serious operations which might happen in India. So we are seeing that business model. Worldlink might have a future on the stock exchange. But software-based companies are not going to list on the stock exchange as things stand. 
How have you assessed the government policies toward startups?
Other than FinTech, a general software company is not very regulated. Regulation has neither helped nor hurt a company like CloudFactory. I think it's important to split up the type of companies we invest in two types of software businesses - one that exports its services abroad, and one which performs a service to the domestic market. But in the pure software space, there has not been much regulation. I will comment on the export businesses. Cloud Factory has customers in the US. It needs to pay consultants, it needs to pay for software licences, it needs to have salespeople there. Every time they need to make a payment, they will need to queue up at the NRB. They are often late in making payments. The existing rules prevent the company from having a subsidiary, or any sort of bank account or share ownership abroad. The founder, who is a Canadian, has now set up a holding company in the UK. Now, the majority of the profits are booked abroad. There is a huge growth in the export of services. But you can not grow those services without setting up sales companies in the US, Europe or other destinations. I think there needs to be some allowance to have limited capital in a subsidiary vehicle. That is very important for the economy.
What reforms do you think are necessary?
The first one will be to have an automatic route for capital from abroad. If you look at India, or any other destination, when you sign a deal and send your money, the receiving bank will check that money to make sure it's not dirty money, and get the money in. Similar is the process for money going out. As long as you have conformed with all of your paperwork and you are compliant, you are allowed to repatriate. I think having that many stages of checking and signature, which other countries don't have, simply puts Nepal at a disadvantage. Nepal can relax rules for priority sectors where it really needs the capital. That would be the most important thing for Nepal. If you look at this year's FDI numbers, the total is $34 million. The FDI targets for SDGs needs to be something like $3 billion. Dolma alone is responsible for 60% of Nepal's FDI this year. With some simple reforms, like copying other countries like India, it could be a lot higher. Especially when you have got a downturn, and there is less money around, and investors are looking for excuses to pull out to not take risk, this kind of thing would really help.
Securities Board of Nepal (Sebon), for example, shortened the locking period for foreign private equity to a year. That gives investors a lot more confidence in investing. Because if we list those companies, we can sell them within a reasonable period. If our shares are locked for three years, it will be very hard for us to invest in the first place. 

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