Jörg Frieden has a long-standing connection with Nepal. He initially served as the Resident Director of the Swiss Agency for Development and Cooperation (SDC) in Nepal from 2003 to 2007. Later, from 2016 to 2018, he returned to Nepal as the Ambassador of Switzerland. Recently, Frieden visited Nepal as the Chairperson of the Swiss Investment Fund for Emerging Markets (SIFEM) with the Second DFI Mission which comprised 14 DFIs and Invest for Impact Nepal from the US, Europe, the United Kingdom, and various multilateral agencies. Mukul Humagain of the New Business Age caught up with Frieden to delve into the mission's objectives, the exploration of investment opportunities in Nepal by DFIs, and the evolution of their role. Excerpts:
What is the role of the Swiss Investment Fund for Emerging Markets (SIFEM)? As the chairman of SIFEM, what specific engagements are you seeking in Nepal?
The Swiss Investment Fund for Emerging Markets (SIFEM) is wholly owned by the Swiss government, operating as a public entity with a capital base of around 700 million Swiss Francs. Annually, we allocate approximately 100-120 million Swiss Francs for investments worldwide, with a distribution of two-thirds in equities and one-third in lending. About eighteen months ago, we embarked on our inaugural lending endeavour in Nepal, extending 10 million Swiss Francs to a commercial bank. Presently, we are in the concluding stages of securing our second lending agreement with another commercial bank in Nepal.
Switzerland has maintained a longstanding relationship with Nepal, prompting our collaboration with larger investment funds. Specifically, about five years ago, we began partnering with prominent institutions such as the British International Investment (BII) and the Dutch FMO.
Two years ago, we established Invest for Impact Nepal, a platform open to all Development Finance Institutions (DFIs) and other interested organisations. This platform serves as an information hub regarding conditions, roles, laws, and more. Through this initiative, we aim to convene discussions on how we can collectively enhance our contribution to private investment in the country.
We engaged with microfinance institutions and development banks to grasp their concerns and explore potential investment opportunities. Additionally, we held discussions with the central bank to explore avenues for enhancing the regulatory framework, thus facilitating increased investment in microfinance institutions and development banks. As public investors, we embrace risk and are dedicated to fostering private investment within this country.
How different will the investments of the DFIs be from the development partners who have been providing ODA to Nepal? How will the investments of DFIs unfold in Nepal?
We complement the work of donors. Development Finance Institutions (DFIs) excel in providing funding for commercial operations, a task that traditional agencies may not perform as effectively. Development agencies, being non-profit organisations, typically refrain from undertaking the kinds of risks associated with commercial operations that DFIs are equipped to manage. We provide funding for commercial operations and seek returns on our investments which positions us squarely within the realm of real-world business.
Development agencies, being non-profit organisations, typically refrain from undertaking the kinds of risks associated with commercial operations that DFIs are equipped to manage.
Economic development hinges on the private sector. DFIs stand ahead of development agencies, collaborating with them while assuming risks alongside Nepali investors. Our investments span Nepali enterprises, whether commercial, financial, startup, or tech-oriented. The essence lies in our commitment to sharing risks with Nepali entrepreneurs.
How receptive are Nepali enterprises to engaging with and securing funding from these DFIs?
Over the past year, DFIs have collectively injected around $630 million into financial institutions. The bulk of these investments has been channelled into the financial sector, with a primary focus on lending activities. Our involvement in these financial institutions introduces expectations regarding governance, lending standards and impact assessment that these banks may not have embraced otherwise, or at least not as promptly. This represents a tangible contribution on our part. However, our collective challenge lies in investing in equities, committing to long-term risks spanning 7 to 10 years - a necessity for a country at this stage of development. Additionally, we must navigate both macroeconomic and microeconomic risks associated with investments beyond the hydropower sector. Historically, DFIs have predominantly offered equity investments in hydropower projects.
What we have yet to witness in Nepal, although it is commonplace in other countries, is DFIs investing in a fund of funds for equity or directly acquiring shares in enterprises, thereby becoming shareholders and partaking in the risks and returns. One of our discussions during this mission with the government was about the need for flexibility in the preconditions for equity participation, both upon entry and exit. This flexibility is crucial for enabling us to deepen our involvement and undertake greater risks alongside Nepali entrepreneurs. It represents the next step forward, one that we aspire to pursue collectively.
During this mission, we held a meeting with the Finance Minister, Finance Secretary, and the Governor. The ongoing dialogue with the authorities demonstrates their recognition of us as partners, acknowledging our experience both in Nepal and in other countries. With these discussions, we are advancing steadily, and we hold confidence in witnessing continued progress.
Why was the theme of further advancing investment in Nepal's financial sector chosen as the main objective of the 2nd DFI mission?
While our perspective encompasses a broader scope, the reality is that our investments thus far have predominantly been through lending. Therefore, financial institutions have emerged as our primary partners. Last year, we engaged extensively with commercial banks which constituted the large majority of our lending activities in the financial sector. During this mission, we extended our interactions to include development banks, microfinance institutions and fintech companies. We acknowledge the importance of these diverse actors, particularly those outside Kathmandu, and we believe they play a pivotal role in the country's development.
So far, with perhaps a few exceptions involving the IFC in specific cases, DFIs have not engaged extensively with those financial institutions due to a perceived imbalance between risk and return. The perceived risk often outweighs the potential returns, particularly considering the regulatory environment in Nepal, which poses more challenges compared to investing in microfinance in countries like Bangladesh or India. Similarly, investing in development banks in Nepal presents more challenges compared to India or certain African countries. Therefore, these meetings serve as a platform to address the specific issues that act as stumbling blocks for us to enter new sectors, reach potential clients and contribute to Nepal's development.
As someone who has served Nepal as the Swiss Ambassador, you're familiar with how Nepal operates. What assurances are DFIs seeking from the government to expedite their investments?
The frequent changes in political leadership and administration pose challenges, particularly concerning shifts in key ministry secretaries. These transitions invariably disrupt progress, leading to the necessity of restarting initiatives from scratch. Agreements that were either pending or near completion often falter during these transitions which necessitates a fresh start and incurs costs in terms of time, resources and effort.
There is a shared belief that we should create more opportunities to channel a portion of remittances into endeavours that enhance productivity and growth.
While I do hope for a more stable system, I also recognise and appreciate the role played by the central bank in preserving a degree of continuity amidst this landscape of change. Despite the fluctuations, we have remained steadfast in our efforts to constructively engage with the authorities, fostering trust along the way. One aspect we have not fully capitalised on is the decentralisation within Nepal's federal structure. While our focus understandably lies on the Ministry of Finance and the central bank, my understanding of Nepal's recent changes suggests that for effective engagement with microfinance and Class ‘B’ banks, local authorities should play a role in the decision-making process. This dimension is crucial and should be incorporated into our strategic considerations.
We are aware that a portion of remittances coming into Nepal are not utilised productively and are often directed towards real estate with limited impact. Consequently, there is a shared belief that we should create more opportunities to channel a portion of remittances into endeavours that enhance productivity and growth. Exploring the connection between DFIs and the diaspora represents an area we should delve into in our next steps.
Impact investment is a priority for DFIs. What impact have the investments of DFIs made in Nepal thus far?
It would indeed be valuable to conduct an assessment of the impact of the investment of DFIs in Nepal. Thus far, the primary vehicle has been through lending. We can differentiate between investments in hydropower, where the impact is evident through increased production and the export of clean energy, and other sectors. Additionally, it is crucial to evaluate the number of additional jobs created as a result of these investments. Furthermore, assessing the presence of DFIs in banks and their impact on the quality of lending, government transparency and the level of beneficiaries is essential. Currently, there hasn't been a comprehensive evaluation of this impact, but it is certainly worth considering for the future to ensure that investments yield the desired outcomes.
The DFIs have already invested $1.1 billion in Nepal thus far. Are there any projections regarding how much DFIs will continue to invest here in the future?
I see no reason why reaching the benchmark of collectively $300 million in 2024 should not remain a target. Despite recent changes that might slow down operations, the government has hosted the investment summit and shown positive signals. My suggestion is that we continue to aim for the $300 million mark as a potential for collective investment from DFIs. The government should sustain this level through ongoing dialogue and adjustments to rules that may impede investment.
