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UNCTAD – AN INVESTMENT GUIDE TO NEPAL

Opportunities and Conditions
Tourism plays a very important role in the economy of Nepal. Employing some 600,000 people, it is the second largest sector of employment after agriculture. It is also a prominent foreign-exchange earner, contributing NRs 11,717 million ($156 million, at $1 = 75) or the equivalent of 21% of the total value of merchandise exports in 2000-01 (Economic Survey, 2001-02, Ministry of Finance, Nepal) or 3 % of the country’s GDP. Crowne Plaza, Hyatt, Radisson and Taj are some of the international hotels chains present in Nepal in joint ventures (financial and/or technical–managerial) with Nepali investors.

As a tourist destination, Nepal is well known, though not as well known as it ought to be. The major attractions are the Himalayan ranges: 8 of the world’s 10 highest peaks exceeding 8,000 metres including Mount Everest, the top of the world. The number of peaks above 6,000 metres exceeds 200. The cultural and biological diversity is another tourist attraction.

The country’s elevation ranges from 100 metres to 8,848 metres above sea level in an aerial distance of 50 kilometres. It has nearly 70 spoken languages within a geographical area of 147,181 sq. m. The number of bird species in Nepal is larger than in Europe and Africa combined. The Kali Gandaki gorge is the deepest gorge in the world. It is a country in which two great religions, Hinduism and Buddhism, are blended together and there has been no religious conflict in its long history.

These features suggest some of the potential in cultural tourism, nature tourism (or eco-tourism), health tourism, adventure tourism and convention tourism. Tourism products targeted at Buddhists and Hindus from around the world (including those in India, China, South-East Asia, the Republic of Korea and Japan) can be developed with a focus on Lumbini, the birthplace of the Buddha.

Investing in tourism
Dynasty Aviation Private Limited and Air Dynasty Heli Services Private Limited are two companies that offer an interesting illustration of the tortuous path FDI sometimes takes in Nepal.

Dynasty Aviation was formally registered with the Nepali authorities in February 1993 as a provider of an air-tax service by helicopter. Under its approved joint-venture agreement, the foreign investor in Dynasty Aviation is API Limited, a company registered in Vanuatu and represented by its managing director, Mr. Malcolm Roy Smith, a British businessman with interests in Australia, Indonesia and a number of Pacific islands. The agreement provided for 78% of the equity to be held by the foreign investor and 22% by domestic investors. The long-term aim was to serve the entire South Asian region with Kathmandu as the operating base. According to Mr. Navin Pokharel, Executive Director of Dynasty Aviation, what attracted the foreign investor was Nepal’s image as a peaceful country, the attractive tax holiday offered by the laws just promulgated (Foreign Investment and Technology Transfer Act, 1992 and Industrial Enterprises Act, 1992) and the lack of competition.

In 1993, while the legal documents were still in the formal approval process, Nepal experienced heavy floods and landslides, requiring rescue and evacuation service by helicopter. The foreign investor therefore dispatched two French-made Ecureuil AS350BA helicopters to Nepal without waiting for the formalities to be completed. (According to Mr. Pokharel, there had been a near-promise by the local partners that the formalities would be expedited.) Of the two helicopters, one was received as investment in kind and the other on lease.

In the ensuing period of share call, however, the local partners refused either to invest or to sign a lease agreement.
The company responded by forfeiting shares allotted to them and returned the to-be-leased helicopter to the foreign investor. The business now entered a litigation phase that meant massive losses of business opportunities – naturally grabbed by other recent entrants.

Mr. Pokharel recalls that it took 18 months to clear things with the Company Registrar, the Department of Industries and the Department of Civil Aviation. In May 1995, the company was at last allowed to pay customs duties on the helicopter that it still held, so that a Nepali Registration Number could be obtained and normal commercial operations commenced. The delay also meant the loss of the five-year tax holiday that had been an important motivation for the initial investment.

All of this meant mounting cash-flow difficulties. The expenses of a mandatory inspection also had to be met.
In the end, things became so difficult that the one helicopter remaining was returned to the foreign investor, leaving Dynasty Aviation a helicopter company without a helicopter. But the story doesn’t end here.

The foreign investor, who had “an obstinate commitment to the idea of serving the South Asia region from Nepal” to quote Mr. Pokharel, refused to quit. Instead, Mr. Smith began negotiating to buy into Air Dynasty Heli Services, a company already registered with the Company Registrar. Under the agreement approved by the Department of Industries in August 2001, 50% of the shares in the company are now held by Mr Malcolm Roy Smith and 50% by a number of domestic investors who own trekking companies and hotels.

Air Dynasty Heli Services started operating in August 2001 with two helicopters. Mr. Pokharel (the Executive Director of Air Dynasty Heli Services as well as of Dynasty Aviation) claims that within 16 months, by December 2002, the company had captured more than half the market share in Nepal. Though the company had planned also to operate heavy-lift MI-17 helicopters and a couple of fixed-wing aircraft, these plans have had to be deferred, given the global decline in the tourism industry after 11 September 2001. The company is looking instead into such areas as long-term contract jobs to help keep it going until the trend reverses.

In describing other challenges, Mr. Pokharel complains in particular of the soaring rise in costs: of aviation insurance premiums and of the landing, parking, housing and other fees and charges levied on the business by the Civil Aviation Authority of Nepal (CAAN). The average pre-September 2001 rate of 3.25% in aviation insurance premiums has gone up by a factor of almost four – to 12.5%; the fee for the Air Operating Certificate has gone up by a factor of nearly 10, from NRs 20,000 in 1993 to NRs 195,000 in 2002; and the aircraft registration fee is up a more modest double, from NRs 12,000 to NRs 23,400.

The main moral of the story, according to Mr. Pokharel, is that the selection of local partners is a critically important task. What matters is not only their ability to invest but also their commitment and candour.

Source: UNCTAD, based on information provided by Dynasty Aviation and Air Dynasty Heli Services.

Tourism in Nepal has hitherto been concentrated in the Kathmandu valley, Pokhara and Chitwan.
New areas can be developed in other parts of the country by setting up resorts that can be destinations on their own, such as the national parks and wild-life reserves.

Some entrepreneurs are also planning to develop educational tourism by setting up educational institutes targeted at international students. Yet others are thinking of health tourism, under which speciality hospitals will be set up in scenic locations with a wholesome climate and accompanying relatives or friends of patients coming to such hospitals will have holidaying opportunities.

Nearly 500,000 tourists visited Nepal in 1999 (figure III.2). This number has declined drastically in subsequent years for several reasons, including the global economic slowdown, the after effects of the events of 11 September 2001 and the publicity associated with the palace shootings of June 2001.

Most tourists visiting Nepal are young adventurers (between 25 and 44 years in age). Packages and facilities targeted at older tourists are lacking, and therefore offer an opportunity for specialized investment in this sector.

The major tourist-originating market for Nepal has traditionally been India, which accounted for some 18% of the total arrivals in 2001 and 20% in 2000. This is a foundation that can be built on, for Indian tourists are among the highest spenders in Nepal and they are especially likely to visit in the summer months when non-Indian arrivals decline.

The average spending of tourists in Nepal in 1997 was $35 per day and has now reached $38 per day according to recent studies.

The latest development in this area is the status granted to Nepal by China as one of the outbound destinations for Chinese tourists. The necessary arrangements to facilitate the flow of Chinese tourists into Nepal have been finalized by the two Governments. A total of 78 Nepali and 68 Chinese travel agencies are authorized to handle Chinese tourists and these numbers are to increase further.
The Chinese yuan has been made convertible with the Nepali rupee and a representative office of China’s tourism authority has been established in Nepal. A similar Nepali office will be opened in China in the near future. Various private and public institutions have started running language courses to meet the need for Chinese-language guides and interpreters.

Training schools for the hospitality industry, amusement parks, golf courses, cable-car complexes and resorts in non-traditional destinations such as the mid-western, far-western and eastern development regions are among the opportunities for foreign investment. The emergence of China as a source of tourists has opened up opportunities for speciality restaurants as well.

Nepal’s neutral diplomatic status in the world, particularly in relation to the countries within the region (China, India and Pakistan), may offer business opportunities in sporting complexes (sports training centres and stadiums for international events). This diplomatic neutrality also offers opportunities for convention tourism (meetings, incentive travel and exhibitions).

Similarly, an opportunity exists for setting up the international airport planned for outside the Kathmandu valley. The possible site is Bhairahawa, near Lumbini, the birthplace of the Buddha. An airport located anywhere in the Terai can serve also as a preferred alternative airport for people wishing to visit Bihar or Uttar Pradesh in India. The Government has included the airport in the list of infrastructure projects that can be licensed to the private sector under BOT and BOOT arrangements.

In this context, it needs to be noted that a number of tourism-related activities are barred to foreign investment (appendix 1). It is unclear how damaging these restrictions are to the potential of the tourism industry in Nepal. Restrictions intended to protect the livelihoods of individuals and families in the remoter regions are clearly reasonable, if they are indeed needed. Others are less so.
International tour operators, for instance, could be a substantial force for growth. The Government is aware of the issues involved and may adopt a less restrictive policy in the near future.

The Nepal Tourism Board (NTB), a public–private partnership organization set up especially for the purpose of promoting Nepal as a tourism destination, is the relevant authority for further information in this field. The Hotel Association of Nepal (HAN), the Nepal Association of Travel Agents (NATA) and the Nepal Association of Tour Operators (NATO) are private-sector associations that can also be contacted for further information (see appendix 3 for details).

AUTHOR: RRMiller

This article is quoted from the Tourism ROI Newsletter published on 2010-01.29.
Download the full report An investment guide to Nepal.

This article is uploaded by Majbritt Thomsen, administrator on ‘Views On Tourism’.

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Posted in Best practice, Development, Nepal, Performance and management, Sustainability.


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