Will 2015 be a defining year for the Nepali economy? The buzz in 2014 has it that it could be. If the country gets a new constitution, investors who are buoyed by the positive political environment, could open their purse like never before and pour money into Nepal.
The investment buzz is back in Nepal. This is clearly discernible when one talks to big corporate houses. While some of them have already been ploughing in investments, others are readying to put in billions.
Everyone from the Chaudhary Group, Mahato Group, MS Group, Shankar Group, and IME Group to international groups such as the Dangote Group of Nigeria and the Reliance Group of India are waiting to do so in the next few years.
But the biggest story of the Nepali economy in 2014 had to do with two landmark deals on electricity trade. The first, power trade agreement (PTA) with India, opened the door for electricity export to India while the second, the Saarc Framework Agreement on Energy Cooperation (Electricity), has now made it possible to conduct electricity trade amongst Saarc nations.
Headway in hydropower
In what is seen as a major breakthrough in hydropower cooperation between Nepal and India, the two neighbours closed the project development agreements (PDA) on the Upper Karnali and Arun III Hydropower Projects.
The breakthrough in hydropower perhaps could be termed as the ‘Modi effect’. The visit to Nepal by Indian Prime Minister Narendra Modi in August and November turned out to be game-changers for the investment climate in Nepal. After his visit, it was not only the PDAs, but also the Pancheswar Multipurpose Project, which had been stuck for two decades, that were infused with new momentum.
The PTA, in particular, has given new confidence to the international investors to invest in the Nepali hydropower sector, as the agreement will guarantee electricity export to India.
The Detailed Project Report (DPR) of Pancheswar Multipurpose Project is being worked out, the financial closure of the Upper Karnali and Arun III is getting there, and construction has already begun on the Upper Tamakoshi (456MW).
“The year 2015 is definitely going to be more exciting for Nepal,” says Khadga Bahadur Bisht, president of Independent Power Producers’ Association Nepal (IPPAN). He also thinks that the competition, especially in the energy sector, between India and China, is likely to increase in 2015, and that Nepal should get prepared to benefit from that turn of events. All the three mega projects in Nepal being commissioned soon—Pancheswar, Upper Karnali and Arun—are being developed by Indian developers. “The Chinese side might soon commit to the West Seti, which could generate more than 750 MW,” says Bisht.
Such has been investor confidence, that in the first five months of the current fiscal year, FDI worth Rs 18 billion has already been committed for the power sector.
Hope in the hospitality sector
Nepal’s hospitality industry has been busy too. At least three five-star hotels are under construction in Kathmandu, and investors are eying more luxury hotels in major tourist hotspots like Pokhara and Lumbini in 2015. Several international hotel chains like the Marriott, Sheraton, Aloft and Leela Palace are making their presence felt in Nepal.
The country’s hospitality industry is set to see dramatic growth in the next couple of years as investment in the sector has been witnessing a sudden spurt.
Four popular international hotel brands have already announced that they will enter into tie-ups with Nepali groups to build and operate five-star properties. Their entry, in fact, is likely to create fierce competition with the existing hotels.
Already, this change in the landscape has taught existing hoteliers to realign their cost structures, optimise operational efficiencies and adopt flexible business models. Most of the existing hotel operators have remodeled their existing properties with new facilities. And given the current demand-supply dynamics and stable political situation, Nepal’s hospitality sector is on the cusp of a higher growth trajectory.
It’s not just the high-end hotels who will have to roll with the changes. For decades, Nepal has been known as a paradise for backpackers. Indeed, it was the budget-minded travelers seeking no-frills accommodations who established Nepal as a destination that has always been synonymous with the word “Budget”.
“But the present scenario is not likely to be the same in the coming years,” says Binayak Shah, vice president of the Hotel Association of Nepal. “With the establishment of deluxe five-star properties, the industry is likely to see fierce competition not only regarding tariff but also the quality on offer.”
Shah says that the presence of international hotel chains like the Marriott, Sheraton, Aloft and Leela Palace will change the market dynamics. However, tariff ‘undercutting’ measures will be a big concern if the country fails to balance the supply and demand.
The investment flow shows no signs of slowing down anytime soon. More that Rs 15 billion was spent on the development of big and small hotels in the past few years, and another Rs 30 billion is projected to be spent by 2018. According to the Department of Tourism, 24 new star and tourist standard hotels are being built across the country. Two five-star hotels, the 218-room Sheraton Kathmandu Hotel on Kantipath and a 221-room five-star deluxe hotel in Nagpokhari, Naxal, under the banner of Marriott International, are expected to come into operation by 2018. A 10-storey four-star hotel with 108 rooms in Thamel, the Fairfield, to be managed by Marriott Kathmandu, is also scheduled to be completed and come online by the end of 2015. Chhaya Centre, a business conglomerate, has started constructing a five-star hotel-cum-shopping complex in the tourist hub of Thamel, with an investment of Rs 3 billion. Silver Heritage is planning to build a five-star hotel resort named Tiger Palace in Bhairahawa, which will feature 300 rooms. The construction for it is currently underway and the hotel is expected to open in 2016. Silver Heritage says it expects to open at least two more resorts in Nepal before the end of 2018.
That’s not all. One of India’s leading luxury hotel chains, Leela Palaces, Hotels and Resorts, and the Summit Group of Hotels and Resorts, Nepal, recently signed a memorandum of understanding in Kathmandu to establish four hotels across the country, including a five-star deluxe hotel in Kathmandu.
And some of the country’s well-known conglomerates, such as the Chaudhary Group, Vaidya Organization, Shanker Group, Golyan Group, TM Dugar Group and Laxmi Group are also investing billions in new hotels.
“As Nepal’s tourism has continued to gain momentum against all odds, it is projected to be a most promising industry in the future. This prospect has indeed attracted investors to pour money in the hospitality sector,” says Aditya Baral, spokesperson of the Nepal Tourism Board.
Baral says that the growth is being driven by the growing number of high-end travellers, particularly the affluent middle-class Chinese visitors.
The rising travel demand prompted tourist standard hotels and lodges across the country to add more than 5,357 new rooms in the last fiscal year alone. This means Nepal can accommodate 13.27 million tourists annually with the existing infrastructure. Room nights or bed numbers of hotels grew 17.27 percent from the previous year. Meanwhile, the number of hotels and lodges saw a significant growth of 14.50 percent in the last fiscal year.
Loosening the purse-strings
Up until the recent past, the prolonged political transition had dissuaded investors from expansion and making new investments. For almost a decade, domestic business houses remained passive when it came to new investments or expanding their existing ones.
But if 2014 is any indication, domestic business houses too will be investing huge amounts in the next year and after.
The Uprendra Mahato-led Mahato Group is investing Rs 10 billion in the health and FMCG sector. Mahato’s Rs 8 billion Ashwin Medical College & Hospital is also coming into operation in the near future.
The Chaudhary Group is pumping Rs 2 billion into its industrial estate ‘Chaudhary Udhyog Gram’ in Bardia and Sunsari. The group is also investing an additional Rs 8 billion in a cement and clinker plant in Palpa. With the government mulling over restrictions to be placed on clinker imports—to be effective from 2016—almost all the cement manufacturers are working to establish clinker plants too.
With big infrastructure projects in hydropower, road and tourism in the pipeline, the cement industry is where many investors are putting their money. While multinational companies such as the Dangote Group and Reliance Group are pouring billions in this sector, the existing Nepali cement companies are opting for capacity expansion.
With the Investment Board Nepal recently endorsing the Reliance Cement Industries’ proposal, the Indian company is all set to pour in Rs 40 billion in its cement plant. The company has proposed that it will produce 2.3 million tonnes of cement annually, a venture that will employ more than 3,000 people. The Dangote Group, for its part, is on the
verge of identifying a location for establishing a cement plant. Dangote plans to invest Rs 55 billion in the first phase of its investment plan.
As in most places around the world, the overall political situation will affect the investment climate. FNCCI Senior Vice President Pashupati Murarka says the new constitution could be the game changer for the country’s business fraternity in 2015. “The year 2014 had some positive indications. If the political parties succeed in drafting constitution on time, the next year might just be a milestone one for all the sectors,” says Murarka. “As in 2014, the energy sector will continue to rake in significant chunks of FDI coming in, followed by the tourism sector.”
But amid this investment buzz, Murarka would like to throw in a word of caution too. Referring to the row over the 45MW Bhotekoshi Hydropower Project, where the locals demanded shares 15 years after the project came into operation, Murarka says such kinds of incidents would dampen the spirits of foreign investors in particular.
“This is just one example. The government should be able to tackle such situations,” says Murarka, adding that there are a number of potential sectors that can be tapped once a favourable business environment is created.