BREATHING LIFE INTO BUSINESS

Text: Sujan Tiwari | Photos : Indepth Photography

Siddhant Raj Pandey is the Chairman and CEO of Business Oxygen Pvt Ltd, Nepal’s first private-equity fund which is part of IFC’s Global SME ventures Initiative. A prominent banker, Pandey has been in banking and finance for more than 25 years, and is an expert in financial management. He chairs White Lotus Centre, a development consultancy that attempts to bridge the world of finance and investment and the world of development. Raised in a family with diplomatic background, Pandey says he grew up with the privilege of travelling. His childhood was spent in England, USA and Iran. He earned his Bachelor’s degree in Business Administration and History from Virginia Polytechnic Institute and State University in 1989. He then worked for a few years with Bloomberg Financial Markets. He later did his Masters in Development Economics from the University of Bristol in 1995. When he returned to Nepal, he joined the management team of then Ace Finance Company. Three years later, he went back to England and started working with Merrill Lynch International Bank as Vice President for four years. While in England, he also worked as Director for Riggs Bank. In 2004, he again returned to Nepal and rejoined Ace Finance as its CEO in 2005. In this term, he converted Ace Finance into Ace Development Bank in 2007. He worked with the bank until 2013. After that, he has been associated with White Lotus. Pandey has also served as Board Member of the Investment Committee of Central Renewable Energy Fund of the government. He is presently Board Member of Industry Promotion Board under the Ministry of Industries. In an interview with Business 360, Pandey shared his views on the economic situation of Nepal, on the banking sector, and his latest venture Business Oxygen. Excerpts:

Tell us about Business Oxygen

Business Oxygen is Nepal’s first on shore FDI private equity impact fund, and is a part of IFC’s Global SME ventures Initiative. It started two years ago. Business Oxygen invests in SMEs where we not only inject capital but also help in the growth of entrepreneurs and up-scaling of companies. The idea is that capital in itself is not enough; we really need to groom the company as well. We have to help it along the lines of international best practices, help it be more transparent and follow good governance methodology and provide financial framework. Lot of SMEs in Nepal have low capital base and are characterised by traditional management processes and primitive manufacturing productivity. We try to help them to scale up their operations. We do not provide a grant or aid; we just invest in a company that has potential to make more money. We have a multi-pronged approach, we ensure that there is growth in the balance sheet, and as we are an impact fund, make sure it impacts the economy. We ensure these companies generate more employment opportunities and pay more taxes to help the government. Also, there has to be a social impact where more women are employed, there is inclusivity in the number of people involved in the work force, and finally there is the environmental impact. We help companies that we have intervened in to be less carbon reliant, creating less carbon footprints and using less non-renewable resources among other eco-friendly practices.

Why is there a need for a private equity fund like Business Oxygen in Nepal?

If you really want to see the development of a nation, SME is the backbone of the economy. SMEs contribute to 20% of the GDP in Nepal, with two million involved and there is a credit gap of 2.5 billion dollars, but the irony is this is the most neglected sector in Nepal. It is neglected by the government, the private sector and the entire economy. This is because of a few reasons. Banks do not have risk capital to invest in these sectors, and again, investment alone can’t help SMEs grow. It’s just not about the capital; we need to have a different approach to it. Even with the capital, there could be so many reasons why the company is not sustainable and scalable. With FDI, especially like private equity fund like ours, we handle the company and try to formulate systems and processes in the company and we see that they get good mentorship so that they can grow.

How do private equity investments contribute to the economy?

Private equity investments make a huge contribution to the economy. We are not competing with the banks; we are going where the banks are not willing to provide credit. We are making investments in companies that do not have security or collateral. Banks normally don’t invest in companies that don’t have fixed assets, so we are filling a gap in the market. Also, conventional investing methods like credits and financing from the bank does not provide any technical assistance to the companies, but we do. We go there and we make sure that accounting systems are in place, and the marketing and financial framework is there. They are encouraged to be transparent and practice good governance. We literally provide the sort of transparency that the government expects from a public limited company in a private limited company.

SMEs cover a lot of different sectors in Nepal. Are there any specific sectors that business ventures looks after?

We are a sector-agnostic fund, we have invested in a few different areas so far, but we are open to any area. Under the hospitality sector, we have invested in two restaurants in Kathmandu, which are Dalle and Le Sherpa. Another is a chhurpi manufacturing company in Godawari that exports doggy-chews. We have also invested in a metal fabrication company in Pokhara among a few others.

What are the criteria for SMEs to receive investment from Business Oxygen?

One of the main things of running an international private equity company in Nepal is that there has to be transparency, and that is what a lot of SMEs lack in Nepal. They have multiple books of accounts and they don’t pay their taxes. One of the first questions we ask when anyone comes to apply for our investment is “Are you willing to be transparent?” Out of the investments that we have made in a year, SMEs have contributed 100% more in the VAT. They didn’t use to pay VAT before, but now they do. It is because of our requirement for transparency. And also, they see the larger picture that when you are transparent and compliant, your profitability rises as well. You may make more money out of non-compliance in the short term, but that’s not sustainable. In India, there are SMEs that have been purchased by giants like Yahoo and Google. We can help Nepali SMEs to scale up to a level where international companies come and say we want a stake in it. That is how we want to position us in the future.

What is your management style?

Nepal is going through the worst crisis in human resource across the economic spectrum. From labourers to college graduates, all want to leave the country for better prospects abroad.  Finding talented staff, training them and retaining them is an enormous challenge.  I have always believed that staff should be trained and re-trained, they should be given opportunities to deliver, the ones who shine make it to the management ladder. Once they are trained, they need to be accountable and responsible for their output. It is a sink or swim position. As we work in a team, it is imperative that all contribute equally to the equation. Even when I was in the banking sector there was a problem of human resource in the banking fraternity and it is more pronounced now.  Due to lack of eligible human resource, I see the problem of operational risk arising in the banking system of Nepal. There is a concept in management theory called Peter Principle, whereby “managers rise to the level of their incompetence”. Poaching people from other banks based on positions bargained and elevating staffs not equipped to handle the position are all serious concerns that can lead to operation risk.

What is your assessment of the banking sector of Nepal?

As compared to other sectors in Nepal, the banking sector has evolved and is by far the most transparent and most supervised. But with this, risks have come. In a global digitised world where the risks are not only from within from Nepal, our banks are not ready to face these risks technology-wise. And neither is our regulator ready to take a role to provide the mentorship to the banks. The Central Bank hasn’t evolved to the level of where it should be considering where the world is moving. Technology is constantly evolving, and digitisation is something that you cannot escape from. If the banks are not allowed to pass on the cost of that innovation to their customers, they will never be able to evolve. The Central Bank doesn’t allow the banks to do that. When you start cutting costs in the areas where you actually need to be investing more, there are going to be problems. This is one of the biggest challenges that I see the industry is facing. Another problem that I see is with the mergers that are taking place. Not all the banks that are merged are strong parties; there is chance that the balance sheet just goes south. Moreover, the pressure on the management to deliver is going to be tremendous, so the supervision has to be strengthened. There has to be a carrot and stick approach, if some of the banks are not following rules and regulations, then they should be reprimanded for that.

Where do you see Nepal going with the recent political developments?

I am very hopeful about the future now that we have a devolved political system in the provinces, provided everything goes as planned. There will be pressure on the provinces to perform and there will be competition among the provinces. I hope that it will be a healthy competition. The centre has proven to be a failure time and time again throughout history, and now we have alternative system that is coming to place. I am optimistic that this will bring about new development in Nepal. For the private sector, there is lot of opportunity going into these provinces. Hopefully the decisions will be expedited by the provincial governments as investments are important for them. The centre has been very slow in approving investments. It is yet to be seen how much control the central government is willing to give to the provinces.

What should be the priority of the state now?

The government should focus on employment creation. Once you have employed people in the country, everything will gradually come into place. It’s really ironic that we lack labour, and they are all outside the country. There are a lot of non-Nepali workers in many factories. This could be avoided; this is the responsibility the government has to take. Then the state should focus on SMEs and attract more FDI. I think the job of the state is to be a facilitator for the private sector to do business. The state should simplify the tax laws, expedite the investment process. The government hasn’t considered the contribution of the private sector to be substantial to the economy. It is the private sector that has set up numerous infrastructures for development. Look at all the airlines, factories, the hotels, banks, restaurants for tourists to go to; everywhere you see you can see the contribution of the private sector. The government has to take the private sector as a partner, which it hasn’t been doing effectively. The government must simplify its existing laws to bring in more FDI. No matter what anyone says, we do not have enough resources in our country for huge projects. Last year, India received 62 billion dollars worth of FDI out of which 50% came from the private equity route. If others are doing it why can’t we? Why do we have one excuse or the other? The new government should change its ways of the past and move forward and follow what the world is doing. We are not asking the government to do something entirely new, it just have to follow what the neighbours are doing.

How do you define entrepreneurship?

I believe entrepreneurship is something that cannot be taught, it’s innate.  You either have it or you don’t. You can teach an entrepreneur how to run a business, you can teach him branding and marketing and financial management and other things, but you can’t teach entrepreneurship. Entrepreneurship is based on passion and ambition, but many entrepreneurs forget that financial management is equally important. No matter how passionate you are, if a project is not financially viable, then it is useless.