investing in nepal...nepal was in a decade -long armed conflict that concluded with the signing of...
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Invest in NepalRadhesh PantInvestment Board Nepal
May 16th, 2014
Area 147,181 sq. km.
Population 27 Million (Est.)GDP USD 19.41 BillionGeographicalLocation
- Landlocked Country situated between India andChina
Average Age ofthe Population 21 Years
Sectors Opento ForeignInvestment
- Most of the sectors now open to foreign investment, with the exception of national security/defense and small-scale/cottage industries
Key Attractions
i) Hydro potential: Only 1.65%of the financially feasible potential being realizedii) 8 of the world’s 10 tallest peaks in Nepal: Opportunities for adventure tourismiii) Birthplace of Lord Buddha: Opportunities for religious tourismiv) Growing demand and rising living standards in northern Indiav) Opportunities in Infrastructure building
Recent Developments
i) Successful completion of elections; Constituent Assembly to promulgate the Constitution within 1 Year
ii) Focus on FDI reflected in the Election Manifesto of all major political parties
Nepal: Snapshot of the Economy
Road Length 24,583 km. 0.91 Km per 1,000population
Secondary Schools 8,2330.304 SecondarySchools per 1,000population
Mobile Phone Penetration 74.97% 2 big players in themarket
Internet Penetration 28.63%
Health Institutions 4,3930.16 Health Institutions per 1,000 population
Energy Demand andSupply (2012-13)
5,446.29 GWh and 4,218.14 GWh respectively
An excess demand of 1228 GWh (0.045 GWh per 1,000 Population
Trade Channels Airways and Roadways Landlocked
Airports 8 1 International
Railways 59 Km 0.002 Km per 1,000 population
Total Export Volume (2012-13) USD 660 million Major country: India
Export to India (2012-13) USD 480 million (approx.) 72.7% of the total exports to India
Total Deposits in commercial banks (2012-13)
USD 9.11 Billion USD 0.337 Million per 1,000 people
Total loans and advances of commercial banks(2012-13)
USD 8.99 Billion USD 0.332 Million per 1,000 people
Statistics: Economic Figures
EconomicGrowth Rate 3.6% (2012/13)
Inflation 9.9% (2012/13)Total Budget USD 5.2 Billion (2013/14)
BudgetAllocated forCAPEX
USD 0.85 Billion
FDI and PrivateInvestment Ensures accountability and efficiency
Why Nepal needs FDI
Government of Nepal’s realization that attracting big FDI volume
would allow government spending to focus on health and
education
Nepal in Dire Need of Physical Infrastructure Investments
5
0
50
100
150
200
250
300
350
400
Projected Infrastructure Spending and Required Spending(NPR in Billions)
Infrastructure SpendingWB Requirements
InvestmentGap
SectorRequired Investment
(NPR in Billions)
Transport 460
Electricity 615
Water Supply and Sanitation 215
Solid Waste Management 45
Telecom 50
Irrigation 195
World Bank and Ministry of Finance, GoN
1
Exchange Rate: 1 USD = NPR 100
2
Nepal was in a decade-long armed conflict that concluded with the signing of the Comprehensive Peace Agreement in 2006
Economic fundamentals were weak and there was not satisfactory level of investment during the conflict period
Liberalization of the Economy
− Simplification of regulations and licensing
− Reform of laws to allow private operations in sectors that were previously govt. monopolies: telecommunication & civil aviation
− 100% foreign ownership now allowed in: travel & tourism, and in the production of cigarettes/alcohol
− Up to 51% foreign ownership allowed in legal & engineering services, and management consulting
− In 2010, per its accession commitments to the WTO, Nepal opened the domestic banking sector to foreign banks (allowed to engage in wholesale banking)
History of Conflict
1
Liberalization and Opening New Sectors
to Foreign Investment
2
Road to Accelerated
Growth
3 Elections completed recently, paving hope for political stability and growing investor confidence
Growing political consensus on the need to attract foreign investment; Investment Board (high-level Board chaired by the Prime Minister) providing ‘one-window solution’ to foreign investors in order to accelerate growth
Nepal: From Conflict to Liberalization to Accelerated Growth
“…we stand by our promises and will take all necessary measures to ensure that investors will be able to operate businesses in a safe and favorable condition in this country ... Drawing from the successes of the emerging Asian economies, we will work to reposition Nepal as an emerging market. This requires economic synergies with other economies and countries.” – PRIME MINISTER’S ADDRESS, NEPAL BUSINESS CONCLAVE (March 2014)
PRIME MINISTER’S COMMITMENT
1
Demonstrated Commitment from the New Government
… Commitment from the stable government to attract investments:
Concrete decisions made in favor of private, foreign, investors at the Meeting held in April 2014:
Income tax holiday for large-scale hydropower investments
Harmonious interpretation of seemingly conflicting Acts/Regulations to remove legal ambiguities
Various fiscal and non-fiscal incentives
13th Investment Board Meeting Decisions (Board
Chaired by the Prime Minister)
2
Strengths of Nepal as an Investment Destination
Cheap and Skilled Labor
Trade Treaty with India
Ease of Doing
Business
Favorable Regulatory Structure
Products manufactured in Nepal can enter custom-free to the vibrant
Indian market
Laws preventing expropriation, laws requiring equal treatment to foreign investment industries; ‘one window
service’ to foreign investors
Major driver for multinationals going offshore to China is cheap labor – a characteristic of the Nepalese economy
Furthermore, abundance of skilled labor (a characteristic attracting investors to India) in Nepal
Nepal a strategic production location to tap into the growing Indian market, given the Trade Treaty with India
Easy Repatriation Procedure -Profits, dividends, payments received as principal or interest, and other forms of earnings can be easily repatriated by the foreign investors
FITTA requires equal treatment to foreign investment industries
Industrial Enterprise Act 1992 prevents industries from being nationalized
Investment Board Act 2011 providing ‘one window service’ to foreign investors
Nepal has a rare combination of the competitive labor characteristics of
two popular investment destinations: India and China
Nepal ranked above many popular investment destinations in World
Bank’s EODB Index
DR
IVE
RS
Developing economies with improving fundamentals provide more upside potential than developed economies
Huge Upside Potential for
Growth
The concentration of producers (of goods & services) of the same category is inversely proportional to the profit opportunity
Few Competitors/Mini
mal Business Threat
Abundance of young, energetic, population ensures the abundance of a robust labor base –an important factor of production
Availability of Young, Energetic,
Population
Location of investment destination and the accessible markets around the destination country is crucial in terms of determining the investment’s fruits
Strategic Geo-Political Location
2 3 41
Key Drivers of Success in Foreign Investment… Nepal holds the characteristics you are looking for:
Nep
al
Strategically located between
two emerging giants (India &
China), the products would have access to vibrant export
markets
Average age of the population in Nepal is 21 years
(lowest in the South Asian
region)
Growth rate of 3.7% in 2013,
Nepal is expected to grow at a
much higher rate in the coming
decade
Since large-scale foreign
investment have only started
entering Nepal, less competition
and minimal threat from
other producers
A B C D
Upward trend in FDI in Nepal over the last decade despite political instability…
10
116
188
213231
171
209227
317
0
50
100
150
200
250
300
350
Approved Number of Projects
ApprovedNumber ofProjects
-7
6
1
39
87
85
92
-20
0
20
40
60
80
100
2006 2007 2008 2009 2010 2011 2012
FDI Inflow (Million USD)
FDI Inflow(Million USD)
UNCTAD World
Investment Report
1
Cyclical Nature of FDI inflow in South Asia
14411
27919
34545
56608
42438
28726
44231
33511
0
10000
20000
30000
40000
50000
60000
2005 2006 2007 2008 2009 2010 2011 2012
Total FDI Inflow in South Asia (including Iran) (million USD)
Total FDI Inflow in South Asia (includingIran)
UNCTAD World
Investment Report
1
FDI In the South Asian Region (UNCTAD World Investment Report) (Million USD)
Region/Country 2006 2007 2008 2009 2010 2011 2012
Afghanistan 271 189 94 76 211 83 94
Bangladesh 845 666 1,086 700 913 1,136 990
Bhutan 6 3 7 18 26 10 16
India 20,328 25,350 47,139 35,657 21,125 36,190 25,543
Maldives 64 132 181 158 216 256 284
Nepal -7 6 1 39 87 95 92
Pakistan 2,201 5,590 5,438 2,338 2,022 1,327 847
Sri Lanka 272 503 752 404 478 981 776
13
Number and FDI vs Country
566 575222 194 179 120
796
2652
376106 55 67 15 17
314
951
0
500
1000
1500
2000
2500
3000
INDIA
CHINA
USA
S. KOREA
JAPAN UK
others Tota
l
Country
Num
ber
Number FDI (RS.100 million)
Country breakdown of foreign investment in Nepal (Till the end of FY 012/13)
Exchange Rate:1 USD = NPR 100
1
14
Sectorial breakdown of foreign investment in Nepal
Low concentration of foreign investment in many sectors shows opportunities for foreign investors
entering in multiple sectors…
118 43 57
827
48
845 714
2652
0
500
1000
1500
2000
2500
3000
Total Number of Approved FDI Projects
Total Number of Approved FDIProjects
South Korea in the 1970s and current Nepal: A Comparison
EconomicGrowth Rate Average of Approx. 10% per annum (1970-80)
Population 35 Million (mid-1970)
GDP USD 19.29 Billion (mid-1970)
Republic of Korea in 1970s
EconomicGrowth Rate 3.6%
Population 30 Million
GDP USD 18.41 Billion
Nepal’s current situation
Trading Economics
1
Nepal’s current situation similar to that of RoK in terms of GDP and Population.
However difference in growth rates suggest that there is much to learn from Korean policymakers and businesses.
SOUTH KOREA-NEPAL PARTNERSHIP: A SNAPSHOT
Korea-Nepal
Partnership
Development Cooperation
Investments
Technical Assistance
(Scholarships, Trainings,
Study Tours, etc.)
Opening Doors for
Employment Opportunities
Approved Korean Investment in Nepal’s history (Till the end FY 012/13)
Categories Number Korean Investment
Other Investment Total Project Cost
Agriculture 9 67 4 71
Construction 4 196 47 243
Energy Based 3 4278 3110 7388
Manufacturing 38 1165 828 1993
Mineral 1 10 10 20
Service 82 2424 101 2525
Tourism 71 346 82 428
Korea Total 208 8486 4182 12668
NPR In million
Exchange Rate: 1 USD = NPR 100
1
Korean Investments in the South Asian Region
South Korea’s Investment in
the South Asian Region
Pakistan:FDI from RoK: $61.24 M. in
the last four years. 20 Major Korean
Companies have established their permanent presence.Investors also interested in
the Energy Sector Bangladesh:Investments in textile,
power generation, development of energy and natural resources, ICT, and shipbuilding.
Private investments worth $658 M. (2010)
India$2.67 B. investments (as
of 2012)Top sectors that attract
investments: metallurgical industries, prime movers, machine tools, automobiles and
electronics
Myanmar:79 Projects with
investments of $3.01 B (July ‘13)
Key Sectors: Mining, Energy, Processing,
Manufacturing
Vietnam: 3400 projects with total
registered capital of $25.73 B. (2013)
Majority of investments in real estate, finance,
and textile
Laos:256 South Korean Projects with approx. $889 M. investments (2013)Majority of investments in hydropower and mining
No. of ProjectsreceivingKorean Aid
8 (FY 2012/13)
No. ofcounterpartministries
5 (FY 2012/13)
HerfindahlIndex
0.25 (Index measuring aid fragmentation; if thenumber is close to 1 it means the portfolio is highlyconcentrated, and if the number is close to 0, itmeans the portfolio is very fragmented)
Involvement inHydropower
Economic Development Cooperation Fund Korea –largest disbursing partner in Chameliya Hydro Project (USD 6 Million disbursed in FY 2012/13, out of total commitment of USD 45 Million)
Korean AidDisbursement USD 14 Million (FY 2012/13)
New Commitment Signed with MoF
USD 4 Million (FY 2012/13)
Development Cooperation: Korea-Nepal Partnership
Korean development cooperation centered around: Energy, Information Technology, Education sectors, among
others
Regulatory Reforms and Support to attract FDI
Regulatory Support for
FDI
Bureaucratic Reforms
Nepal Business Forum
Investment Board Nepal
2011
Tax Concessions
and other Incentives
Department of Industry (DoI) has successfully reduced 8 steps in FDI Approval processSignificantly reduced time taken to get Departmental
ApprovalSignificantly reduced time to get Non-Tourist VisaApprovals now, on average, take 10 days as opposed to
one full month
Future initiatives: Further simplification of FDI approval process Possibility of online FDI application
Bureaucratic Reforms to attract FDI
A dialogue platform to create an alliance between the public and private sectorRaised 120 issues/recommendations and implemented
60+ of them
Some significant achievements:Establishment of first Public -Private Dialogue forum headed
by the Prime MinisterIntroduction of E-bidding for procurement with Public
Procurement Monitoring OfficeReduced industrial strikes resulting the reduction of “Bandh”
(strike) were from 163 days to 23 days in FY 2010/11
Nepal Business Forum: Building Public-Private Alliance
Regulatory support to attract FDI
Key Incentives and Facilitation Measures:S.No Act/Policy Regulatory Support
1. Industrial Enterprise Act 1992
25-30% rebate on income tax depending on the type and location of the enterprise
2. Industrial Policy 2010
From 5 percentage point rebate on corporate rate of income tax to 90% tax rebate for up to 10 years
3. Foreign Investment and Technology Transfer Act
i) Equal treatment to the foreign investment industries
i) Repatriation guaranteed in foreign currency
4. Investment Board Act 2011
i) Providing ‘one window solution’ to foreign investors, removing the bureaucratic hurdles
ii) Giving directions to govt. agencies for the issuance of approvals/licenses
Sector-specific fiscal incentives to attract FDIS.No Sector Fiscal Incentives
1. Energy 100% exemption of Income Tax up to 7 years and 50% exemption for subsequent 3 years
2. Tourism 90% of applicable Income Tax rate
3. Special Economic Zone
100% exemption of Income Tax for 7 years and 50% exemption for subsequent 3 years
4. Road and Highways 60% of applicable Income Tax rate
5. Software Technology Park
i) 50% of applicable Income Tax rateii) 1% Customs Duty on hardware,
software and all kinds of computer spare parts imported by IT Training Institutions
The Investment Board was established by the Parliament per the “Investment Board Act, 2011” to Encourage an orderly and rapid industrialization process in Nepal Create meaningful employment opportunities Contribute to poverty alleviation
The Investment Board has been given the authority to achieve its mandate by Creating an investment-friendly environment Mobilizing and managing PPPs, Co-operatives, Domestic and Foreign
Investments Developing critical Infrastructure Assets
Investment Board Act, 2011
Duties and Responsibilities of the Board Providing ‘one window’ solution to foreign investors Formulating policies to create investor-friendly climate Monitoring, executing, and implementing approved investments Providing appropriate incentives to investors to encourage investments Giving directions to government agencies for the issuance of licenses
Honorable Prime Minister -Chairman
Vice Chairman (Minister
appointed by PM)
Minister of
Industry -
Member
Minister of
Forests -Member
Vice Chairman National Planning Commissi
on -Member
Governor Nepal RastraBank -
Member
Chief Secretary
GoN -Member
Private Sector4 members
Chief Executive
of the Board –Member Secretary
Office of the Investment
Board
High-level Board chaired by the Prime Minister
Minister of
Finance -Member
IBN 14: Projects under the IBN’s Mandate
S.No. Project Sector
1 Arun III Hydropower Project Hydropower
2 Chemical Fertilizer Plant Agriculture
3 Five-Star Hotels Tourism
4 Infrastructure Development Bank Infrastructure/Finance
5 Kathmandu Metro Railway Infrastructure/Transportation
6 Kathmandu Solid Waste Management Infrastructure
7 Kathmandu-Terai Fast Track Infrastructure/Transportation
8 Nijgadh Airport Infrastructure/Airport
9 North-South Corridoor Infrastructure/Transportation
10 Tamakoshi III Hydropower Project Hydropower
11 TIA Upgrade Infrastructure/Airport
12 Upper Karnali Hydropower Project Hydropower
13 Upper Marshyangdi Hydropower Project Hydropower
14 West Seti Hydropower Project Hydropower
IBN Act mandated projects
Fast track road, Tunnel, Railway line, Rope-way, Trolleybus as prescribed by Government of
Nepal
Chemical Fertilizer production industries
Establishing Medical Colleges and state-of-the-art Hospitals or
Nursing Homes that will have three hundred beds or more
Major bridges as prescribed by Government of Nepal
Development of Special Economic Zones (SEZs), Export Promotion
or Export Refinement Zones, Special Industrial Zones or IT
Parks
Solid Waste Management and Treatment in urban areas
Investment required for construction of International and
Regional Airports as well as modernization and management
of existing airports
Establishing Insurance and Re-Insurance Companies Petroleum Refinery Plants
Hydropower projects of 500 megawatt (MW) or more capacity
Banks and financial institutions whose fifty-one percent or more investment is borne by foreign
investors
Clause 9 of IBN Act mandates following projects for IBN:
As well as:▫ Any infrastructure or service industry that has a paid-up capital of Rs. 10 billion or a project cost exceeding that
amount.▫ Support any foreign investment in a productive industry that has a paid-up capital of Rs. 10 billion or a project
cost exceeding that amount,▫ Any project prescribed by Government of Nepal that fall into the categories above.
GoN is engaged in the negotiation process of PDA for 5 large-scale hydropower projects: Upper Karnali, Arun-III, Upper Marsyangdi-II, Tamakoshi-III, and Upper Trishuli
The cumulative installed capacity of these 5 projects is over 3,200 MWs
Contractually obligates both the government and the investor to fulfill their duties
− A legal document that outlines the roles & responsibilities of both the parties during the concession period (typically 30 years)
− Consistent with international best practices; has precise language without ambiguities that gives confidence to financiers
− Ensures accountability from both the parties (Government of Nepal and the developer)
Status
1
Key Features of the PDA
2
Significance of the PDA
3 Overcoming the hurdles that had historically prevented large-scale foreign investment in Nepal
− The PDA to be signed allocates the risk to the party best able to manage that risk
− Government of Nepal will absorb political and country risks so that the investors feel secure
− Through proper risk allocation in the PDA, the document will become “bankable” from a financing standpoint
− Sets a framework for large-scale infrastructure projects in general
Project Development Agreement: Concession Agreement between the investor and the resource owner (government)
Issue of Approval by Foreign Investment
Section, DoI
Company Registration and Tax Registration at
Company Registrar’s Office
(within 35 days of getting the approval
from DOI in the case of industry)
Is EIA/IEE Report
Required?
Documents Required for Company Registration:• Copy of the permission of foreign investment issued by
DOI • Copy of citizenship certificate of Nepalese promoters• Copy of passport of foreign promoters• If the foreign party is a company, copy of minutes of Board
of Directors• Two copies of company’s proposed Articles and
Memorandum of Association in Nepali language• A copy of Certificate of Incorporation, Memorandum of
Association and Article of Association of the company (for Industry registration)
• Registration Fee
Approval of IEE/EIA Report as per EPR 1997 License and
Technology & Environment Section
at DoI
Process Complete
Company Registration
Yes
No
MINING
HEALTH
ENERGY
Priority Sectors for Investment
AGRICULTURE
Hydropower: Key Opportunity
Priority Rationale
• The most untapped sector – only 1.65% of Nepal’s economically feasible potential has been realized
• Holds the key to economic transformation
Opportunities
• Filling the peak shortage of over 500MW (not including the latent demand) domestically
• Export Potential to India–• India’s power deficit is close to 75 million units per year.
• Dhalkebar-Muzaffarpur 400 kV cross-border transmission line being built (others in pipeline)
• Power Trade Agreement moving forward • 66% of the installed capacity in India is thermal(mostly coal)
and shortages in domestic coal is expected to exacerbate the build out of new coal plants
Priority Rationale
• Naturally endowed resources, rich cultural heritage (12 World Heritage Sites and 8 out of the highest peaks) are comparative advantages
• Primary contributor of foreign exchange, one of the largest employer in service sector
• Development of the sector has the potential to uplift rural populations and create linkages with other industries like agriculture, indigenous crafts amongst others
Opportunities
• Huge Market - Total outbound tourists last year from India and China last year around 110 million – Capturing even 2% of that figure would mean an annual inflow of 2.2 million into Nepal, which is 2.75 times higher than Nepal’s total annual inbound tourists
• Steady increase in tourist arrivals after the end of the civil conflict leading to shortage of facilities
• 10% of visitors to Nepal were for religious purposes – Developing related infrastructure around Lumbini, Janakpur and other religious sites could be advantageous
• Less than 25% of identified peaks are open for climbing• Planned Lumbini International Airport provides scope for
religious tourism
Tourism
Priority Rationale
• Contributes 1/3rd to GDP and almost 2/3rd of the labor force is involved
• Majority of people engaged in agriculture live below poverty• Developing the sector a key tool for poverty alleviation and
development
Opportunities
• Commercial Dairy Operations & Livestock – Nepal imports over half of its current meat and milk requirements
• Infrastructure -Slaughter houses, logistics, Fertilizer factory, irrigation projects
• Storage and cold storage facilities – Post harvest loss for offseason vegetable is 25-50%
• Numerous crops for domestic consumption and export – tea, coffee, cardamom, turmeric, fresh vegetables, exotic flowers, chili, mushroom
• Processing and R&D units to Value add businesses based on agricultural products
• Medicinal Herbs – Nepal’s unique topography and climate ideally suited
Agriculture
Priority Rationale
• Poor infrastructure constrains growth in other sectors like Tourism, Agribusiness, …
• Improving connectivity is key to development • Large infrastructure projects generate employment• Specialized zones required to boost exports
Opportunities
• Second International Airport (SIA – Nizgadh) ($0.6 Billion first phase)
• Improving/upgrading airports to international airports – TIA, Pokhara, Lumbini
• Kathmandu Metro Transit System ($5.5 Billion) – Will be country’s first railway transit system
• Kathmandu-Terai Fast Track ($1.0 Billion) - Will provide considerable savings in time and cost, complements the proposed SIA at Nizgadh
• North South Birjgunj-Rasuawagadi Corridoor ($1.7 Billion) - Road project capitalizes on the burgeoning trade between India and China, complements Kathmandu-Terai Fast Track
Infrastructure
Priority Rationale
• Extraction of Nepal’s minerals holds the key to rural development
• Nepal’s mineral reserves are largely unexplored and the industry is largely undeveloped and not mechanized
Opportunities
• Limestone – Known reserves of 1.25 billion MT of cement grade
• Dolomite – Over 5 billion tons of known reserves• Decorative Stones – Marble, granite, quartzite & slate • Gemstones – Tourmaline, aquamarine, ruby, sapphire are
some known precious/semi-precious reserves• Fuel Minerals – No known reserves of Natural gas and
petroleum but international conglomerates continue to explore for them.
Mining & Minerals
Priority Rationale
• Emerging, young, educated and employable labor available at comparatively lower costs
• Capitalize on spillover benefits from India’s IT boom• Generation of high volume and/or high paying employment
opportunities to stem the brain drain
Opportunities
• Over 10M population b/w age 15-30 of which 70% is educated.
• Cheap human resources available for Midsize companies, 500-1000 employees catering to specialized software sectors like banking services, data mining & software design
• Untapped e-governance market for investors to incorporate IT into government services such as MRP passports, computerized citizenship cards, digitized land records
• Scope of internet services - Internet penetration still very low• Low labor cost compared to India and other SA
countries - Comparative Advantage
Information, Communication, and Technology
Priority Rationale
• Health & Education are the most fundamental building blocks for human development and poverty alleviation
• Investments by private sector can ease the burden on GoN, thus allowing it to allocate resources to the most needy
Opportunities
• Institutions of higher learning – In the fiscal year 2012-13, more than 16 thousand students went abroad for higher education
• State of the art medical schools and hospitals – such institutions attract students and patients from South Asia
• Vocational training schools• Largely untapped market for institutions with foreign
affiliations
Health and Education
BiharArea 94,163 sq. km.Population 104.11 Million (2011)GDP USD 27.24 Billion (at constant prices 2012, approx.)GDP GrowthRate 13.13%
Manufacturing opportunities: access to vibrant Indian markets near the Nepal-India border
Uttar PradeshArea 243,286 sq. km.
Population 199.58 Million (2011)
GDP USD 69.84 Billion (at constant prices 2012, approx.)GDP GrowthRate 6.23%
Opportunities to manufacture products in Nepal to meet the growing demand of areas in the south -
Bihar and Uttar Pradesh (growing population base and rapid economic growth)
Investment Climate Going Forward:
-A stable government in place and higher political commitment (FDI a top priority of all major parties) leading to higher investor confidence
-Regulatory efforts to continue; new investment laws to be passed by the new parliament
Nepal is open for business