The budget of Rs. 1647.57 billion recently unveiled by the government for this fiscal year has significant provisions for startups, small and medium enterprises (SMEs) and Foreign Direct Investment (FDI). Government’s commitment towards small businesses hints that it realizes the importance of contribution of small business to the economy.
Point 68 and point 483 of the budget talk about startups. Point 68 mentions that a challenge fund of Rs. 1 billion will be created to provide seed capital of Rs. 2.5 million to startups under project financing to attract youth entrepreneurs towards startup business. However, this is not the first time the budget has mentioned of startups and tried to provide stimulus. Earlier budget also made a provision of Rs. 500 million but there was no deployment. This time it has been said that registration, renewal and other services to startups will be provided free of cost through one window policy. The same thing was said in the past too. The red tape hurdles may continue. Though the submission of files/documents are done in one window, file will have to travel same or even more distance to multiple departments. Authorized one widow center and streamlined process is the need of time for real output. ‘One window’ is losing its essence and it is not exciting any more.
The FDI policy
The budget promises to simplify policy to attract Foreign Direct Investment (FDI) into startup. As a person associated with Business Oxygen (BO2), the first international private equity fund based in Nepal, I have been more interested toward FDI and scale up financing in Small and Medium Enterprise (SME) space. This particular point caught my special attention.
Minimum FDI threshold at the moment is Rs. 50 million. At BO2, we don’t do start up financing. We consider companies that have proven track record, are in profitable operation for at least past two years and are now looking for expansion as scale up business. As the minimum FDI threshold was raised from Rs. 5 million to Rs. 50 million, we had to drop many pipeline companies in scale up stage.
FDI has always been a hot topic. Apparently, the government is doing its best to create enabling environment to attract FDI into Nepal. But increased FDI threshold, multi layered of FDI approval without defined timeline and lack of co-ordination between different government entities, have created exactly opposite vibes in practice. In general, the mentality has been that FDI means truckload of dollars for huge infrastructure projects and not petty investments, probably because of Switzerland dream we all have been fooled with.
During a discussion, when asked about the logic of FDI threshold, it was said that Nepal doesn’t need small investments, small FDIs are misused for FDI benefits such as visa and when number of small investments increase, it is difficult to monitor and regulate. What a logic!
Why don’t we allow our local companies go global and bring back foreign currencies? If Nepali Wai Wai reached to 32 countries, why can’t Nepali momos?
Point 184 mentions FDI repatriation process will be simplified—too vague to even comment. Services of one point service center will provide its services via electronic medium. I hope it doesn’t mean uploading document in the system and again submitting hard copy.
In our experience of investing in a restaurant specializing in momos, there was a backlash from the people at concerned authorities that Nepal doesn’t need FDI in momos. We need it in the areas where Nepali won’t be able to invest. The restaurant was a popular name in Kathmandu and is now making its name outside the valley too with FDI. It doesn’t sell just momos, now it also sells franchise. FDI is not just about capital but also about technology, international best practices, technical support and other growth drivers. Nepal doesn’t allow its company to go global. Is FDI only solution to our problems or targeted growth? Why don’t we allow our local companies go global and bring back foreign currencies? If Nepali Wai Wai reached to 32 countries, why can’t Nepali momos? Pizzahut and KFC entered Nepal but we are restricting our native products and businesses within the national boundary.
We are proud that Santosh Shah took nepali cuisine to an international platform. IT sector is doing great. Why can’t a local IT company be allowed to establish its own branch or customer relations office abroad where their major/target clients are?
Benefits for startups
Point number 483 mentions of two other benefits for startups. A startup will get 100 percent income tax waiver for five years from the date of start of transaction. Though most of the businesses have losses in their initial years, this is a welcome move. However, there is confusion as to whether the provision is targeted for new startups or even the existing ones can get this benefit. Another benefit under this point 483 is that a private sector industrial enterprise can provide seed capital of up to hundred thousand rupees to maximum five startups and deduct it from its taxable income. If an employee comes up with some unique business idea, employer may be more willing to provide seed capital to the staff under this scheme. Alumni of Flipkart created eight unicorns, alumni of Nepali company may follow suit. This is a unique incentive to create ripple effects though amount is very nominal and nothing is mentioned about the repayment of seed capital back to investing entity and the return on it.
But what is startup? Startup has not been defined yet and we can’t just pull up an English definition here. Will there be sector restrictions to it? Will a newly started trading business also be considered as startup for this purpose? Regulators treated e-commerce as trading till few years back. Government has to define its target beneficiaries and hopefully directives or clarification on this will come soon.
Benefits for SMEs and Covid-19 affected industries in the budget are mostly continuation from earlier budget. SME and industrial sectors have been defined by the Industrial Enterprise Act 2076 in section 17. SMEs are defined based on fixed capital amount irrespective of industry type. Therefore, SMEs can avail sector specific benefit and SMEs specific benefits. During this pandemic, overheads (salary, rent, interest) have been major issues for small business. Business Continuity Fund for salary and working capital which was rolled out last year is continued. Similarly, loan limit and sector for refinancing loan at five percent has been expanded. Businesses took benefit of these facilities last year. In fact, these facilities would not only benefit borrowers but also the banks by reducing their exposure and default risks. Still, there are complaints that banks are reluctant to process concessional loans and refinancing facility. I don’t understand why.
The government is doing its best to create enabling environment to attract FDI into Nepal. But increased FDI threshold, multi-layered FDI approval without defined timeline and lack of co-ordination between different government entities, have created exactly opposite vibes.
Other facilities include tax waivers, waiver of electricity demand charges and renewal fees for specific industry and incentives to move out of valley/industrial zone. It will be interesting to see how the “Made in Nepal” and “Make in Nepal” campaign will be programmed and how SMEs can take benefit from it.
What’s the message?
The budget has tried to give positive message to private sector and has addressed multiple issues. Programs for startup are focused to create more businesses but we need to focus on the quality of the businesses and sustainability too, not just number. Departments and officials need to be held accountable with timeline in their duties. For example, if FDI approval process is taking year/s, the concerned officer shall provide plausible explanation. Instead of creating new one windows or one point service center, usefulness of the existing ones needs to be assessed. Has it shortened the time needed for service delivery or layers in the process? If not why create another functionless or redundant unit? Everything cannot be covered in budget but directives/procedures will definitely clarify unclear issues. One standard refrain comment on budget in Nepal has always been ‘overall good but challenge is in implementation.’ Same goes for this year too.
The response of Finance Minister Bishnu Pauduel to the concerns on implementation challenge was that budget is not just to read but to implement and it will be implemented. Hope his words will come true.
Deepak Sharma is Investment and Finance Manager at Business Oxygen (BO2).