A relatively new player in Nepal, Commonwealth Development Corporation (CDC) Group has been quite active in Nepal this year. In 2019 alone, the group has invested USD 47 million in three projects comprising both equity and debts.
CDC, which is a development financial institution (DFI) owned by the British government, made its formal entry into Nepal when it announced a three-year loan of USD 15 million to NMB Bank. In October, CDC announced its first equity investment of USD 12 million, when it acquired a 10 percent stake in WorldLink Communications, Nepal's leading internet service provider. This was followed by a USD 21.9 million loan investment to Upper Trishuli-1 Hydroelectric Project.
NewBiz Editor Mukul Humagain exclusively talked with Srini Nagarajan, the group’s managing director and head of Asia, about its commitment to invest in many more local businesses and FDI in Nepal. Nagarajan, who has a Master’s degree in Economics and a post-graduate qualification in Business Administration from Warwick School of Business, joined the CDC in 2013 to lead the Asia team under CDC’s new investment strategy. Excerpts:
The CDC group is a relatively new player in Nepal. How does it operate and how is it different from the UK’s Department for International Development (DFID) which has been one of Nepal's trusted development partners?
CDC is the UK’s development finance institution, backed by the UK government. Our mission is to invest in the private sector in Africa and Asia with the aim of creating jobs and accelerating economic prosperity. Our capital is channeled into developing countries like Nepal. CDC Group has also invested in countries like Myanmar, Pakistan, Bangladesh, Sri Lanka, and India.
We invest our capital and seek to make commercial and development impact returns. Our commercial returns are reinvested into partnerships with new businesses. We support the growth of businesses that will create impact as they grow, through the jobs, products and services they provide. Coupled with our pioneering developmental strategies, we provide long term capital for companies in the form of debt or equity. We won’t put our commercial objectives ahead of development goals.
Take our investment in WorldLink, for instance. This type of investment is one of the most important developmental goals and mission for CDC is to create jobs. When WorldLink expands further in remote territories, it will connect hundreds of thousands of households and small enterprises to the internet.
Getting access to a reliable internet source today is very important, connecting locals to ecommerce and trade on the global stage.
DFID is CDC’s only stakeholder and in Nepal we draw on their experience and knowledge of sectors and sponsors as we make investments in the country.
2019 has been quite a year for your group in Nepal. What led the CDC Group to come to Nepal?
Ultimately, we recognised that we could support Nepal in three ways. First, it requires long-term capital from a patient investor such as the CDC Group. Short term money is not beneficial for the people and does not stimulate economic growth. Second, to fuel the growth of local enterprises Nepal needs more equity investors, in addition to the large number of debt providers in the country. Our investment in WorldLink is an equity investment. When you put in equity, you work closely with an ambitious management team to help grow the business and ultimately benefit the country.
Third, CDC can value add to Nepal’s growth through the investments and partnerships with local businesses; we are active investors and support sustainable growth by strengthening talent and organisation effectiveness; enhancing corporate governance and board teams, building compliance and risk management as well as environmental and social (E&S) strategies.
CDC’s specialist E&S and Development Impact teams also work closely with our portfolio companies and identify key value drivers that are aligned with the business to help strengthen its core offering and expand sustainable strategies.
We can bring our global knowledge of other markets into Nepal. We invest across seven sectors – financial services, infrastructure, construction and real estate, health care and education, food and agriculture, and manufacture. We will invest in these sectors in Nepal. More specifically, tourism and hospitality, financial services, manufacturing industry, and service sectors can create employment opportunities in Nepal. We need to increase the talent base in the country, and new investments will help train and attract skilled individuals. Hence investments from CDC are channeled into emerging markets like Nepal and we do not provide capital to more developed markets. As we are a development finance institution, we invest in regions where we can help improves people’s lives with our capital.
Can you tell us something more about CDC Group? What kinds of instruments does it have?
CDC has got three main investment products – fund of funds, direct investing, and debts. Fund of funds supports fund managers, both on the venture capital side, and also on the private equity side. As yet, we haven’t committed capital or anchored a fund in Nepal, but it’s an area we are looking at very closely. Direct equity investment is how we partnered with WorldLink. We have supported NMB Bank with debt investment.
I think as the country grows further, the opportunities to invest also increase. But what is different about CDC as opposed to private investors is that we commit through a country’s economic cycles, we are patient enough to understand this and stay with businesses throughout. As Nepal experiences fluctuations in economic cycles it’s very important to be patient and work with the various entrepreneurs that we have backed.
Nepal has improved in the ‘Ease of Doing Business’ index, jumping to 94th spot from 110. How important is this improvement for the CDC as it is now increasingly looking to scale up investment in Nepal?
When you look at doing business in countries like Nepal and some of the markets where we operate, we look at three aspects. The first important thing is a good regulatory environment. It is important because when you invest money, you want to know how you are investing, in what instrument are you investing and if you exit, you need to know whether you can get your money back. Regulatory stability is also important. If a country has an unstable regulatory environment, it is hard to invest and know that our capital will really make a difference.
Second, governance and the business integrity standards are also paramount. Governance includes having a strong board and management team with no influence in decision making by promoters, so the board works independently.
We want to work closely with the management team to help professionalise their operations and, where possible, incentivise them to reach their companies goals. Using our experience and ESG team, we are in a position to help businesses move to global standards of governance. That’s just one of the ways we are helping the country to prosper.
The third aspect of investing in any country is the ease of doing business and the pace at which we get permission from the respective regulatory authorities. Nepal is on the path to continue moving up the Ease of Doing Business index.
You were in Nepal during the Nepal Investment Summit 2019 organised by the government. A few legislative reforms took place just before the summit, and the government had promised to reform the remaining ones in quick time. How do you review these legislative reforms when it comes to attracting foreign direct investments (FDIs)?
The government is making positive and necessary steps, which we welcome at CDC. It is not easy to shift policies; the bureaucracy needs to reduce to attract more investors. In my view, the government is working hard moving towards global standards. What is critical here is that there is a synchronisation amongst the various ministries.
I think the government is on a good path, with some way to go. As I said earlier, the journey takes time; you can’t change things overnight.
CDC has worked in other emerging markets like Nepal. How is the market of Nepal in comparison to other emerging economies? Is Nepal ready for big investments?
Yes, Nepal is ready. The Nepali government could do more to promote the message that it is open for business and investments. They could do more roadshows to meet international investors and better understand what they are looking for and how they want to deploy their capital. There is a lot of natural infrastructures in Nepal, and can be showcased to the world. When Nepal can better market itself, then there is scope to do more with appetite from global investors.
The deal with WorldLink is the second investment for CDC in Nepal, first being the loan investment in NMB Bank. How will the involvement of CDC evolve in the coming years?
Our total investments and commitments are around USD 47 million. It is a combination of debt and equity. In the medium-term, we want to invest around USD 150 million and more in Nepal if the opportunities are right. In addition, we are planning to appoint a local representative here and establish an office in Nepal.
It is another big step that shows our commitment to the country and that we are serious about responsibly investing our capital here. Developing countries like Nepal and creating a more vibrant private sector environment can be further accelerated when we work with other DFIS and investors. So, like-minded institutions such as ours should join forces further.
No institution in isolation can do what the country wants to achieve. Several institutions could come together and help progress Nepal’s investment landscape and its economic prosperity.
What are the potential investment areas for CDC Group?
Banking and financial institutions are our top priority, and second would be healthcare. Investment in healthcare is important because a lot of Nepalis travel overseas for basic services. The third important area is tourism and hospitality, as it can create a lot of jobs. Fourth would be logistics.
There are two aspects to it - one is the farm to fork, and the other is the creation of logistics infrastructures like warehousing to reduce wastage and increase shelf life. Healthcare and education are essential pillars of the country, and we could do more on healthcare and education in the country. We have vast experience in all these sectors across Asia. We would apply this to the investments we make in Nepal.
How do you compare the flow of FDI in Nepal with other emerging economies? Do you think there are enough incentives for investors to come to Nepal?
Nepal could streamline its process for FDI. For example, SME’s face challenges to attract capital in every country, including Nepal. Investors often refrain from supporting SMEs because they can be high risk. If you want to support SMEs in providing them with cash-flow support, then you need a reliable Credit Bureau. Second, you need a registry if you are holding security, and the third thing that is required is an enforcement mechanism. It would be hugely beneficial if Nepal worked to refine and improve in those areas.
The other one is the exchange control regulations on externalising shares sales. It would be helpful to have a mechanism and process to externalise the cash if appropriate.
FDI in various sectors can be relaxed over a period of time, but that will happen in stages so that you allow foreign investors to hold larger stakes. Nepal could start liberalising the sectors; otherwise, it will be difficult to attract international investors. Regionally, a lot of investors could be interested in coming here. There is a lot of potential in Nepal and a lot of entrepreneurial capability. It’s just important to keep creating a fantastic enabling environment that attracts their interest and capital.