Name: Nijat Talibzade
Professor: Ike Ndu
Module: International Investment analyses
Word Count: 2,100 words
Contents
Relevant theories and their application. 6
Intro
The country that is to be analyzed for investment opportunities in this report is Bhutan. It is a landlocked country in south East Asia that is bordered by China and India. A country that is practically unknown internationally and is basically closed for foreigners and investors. The macroeconomic indicators show that the GDP is only 2$billion with a PPP of 6,800$ that is because of the very small population of Bhutan which is about 700,000 people (International Monetary Fund, 2014). The most dreading information is that the total FDI inflow in Bhutan in 2013 was 21$ million dollars, which is basically negligible. This is a clear indicator of how closed the country is. Bhutan is low on natural resources and financial opportunities (CIA, 2014), but Bhutan has a very rich nature and heritage than can be invested in. The targeted sector is the tourism sector, more specifically eco-tourism. Bhutan has a preserved nature, with attractions such as safaris, biking, trekking, and spiritual wellness. The microeconomic indicators supports investment in this sector, the market structure is attractive for this sector where government is supporting initiatives in tourism and a recorded increase in growth and revenues from tourism in Bhutan (Bhutanese Constitution as cited in UNCTAD, 2013). Investment in developing the tourism infrastructure of Bhutan is a good opportunity to turn good profits.
Opportunities
There are several opportunities for a tourism investment in Bhutan. Firstly, there is a clear tax exemption for any efforts done towards amelioration in the tourism sector. The government is supporting a zero tax fee on companies that are interested in constructing hotels and spa and developing the activities available for tourists (IMF Country Report, 2014). This is a very good indicator that can help an investment at least cover costs in the beginning phase of the project and even in the best scenario to start turning in profits off the bat.
Rare attractions is another opportunity that exists in Bhutan. Eco-tourism is based on the natural habitat that exists in a country, and this cannot really be developed, it either exists or it doesn’t. The preserved nature in Bhutan is a very strong attraction for tourists. Nature in Bhutan is not in any way altered or interfered in, it is truly virgin nature that takes visitors away from the busy life to a calmer one. On the other hand, other rare attractions also include flora and fauna that cannot be seen anywhere in the world such as rare tigers and birds (Drukasia, 2015).
In addition, there is recorded increase in demand in the tourism sector in Bhutan. In the early 1990’s Bhutan revenue only 2$ million from tourists, in 2011 the revenue was approximately 250$ million. The revenue increased a hundred fold, this is a clear indicator of an increase in demand. The amount of tourists climbed from several hundreds to 64,000 tourists in 2011 (UNCTAD, 2013). Tourists mainly come from Europe and North America, they are more interested in this kind of tourism and have the purchasing power that enable them to pay the fixed daily rate of 250$ which includes accommodation, food and activities.
Lastly, in a governmental initiative, tourism projects are given a fast track treatment that enables them to get construction permits very quickly and they are given governmental aid in all sections of their project. This is because the government is interested in developing this sector therefore they are giving a hand for foreign investors that are interested in developing the tourism sector. This is particularly beneficial for the proposed investment opportunity because it will help the company get the legal documentation quickly and without any obstacles.
Risks
Though there are clear opportunities when it comes to investing in the tourism sector in Bhutan, there are many risks associated with this country. Risk assessment profiles are widely absent for Bhutan, there is a lot of missing necessary information to conduct proper risk assessment on Bhutan. Therefore, risk rating for Bhutan is unavailable, but a quick analysis can be made (UNISDR, 2015). Though Bhutan is far away from political conflict and civil strife, there are particularly no risks in that area. Bhutan is an isolated country and does not have any registered war or a struggle in this century. Risk can be possible only internally, that is because the government of Bhutan has its hand on practically everything and Bhutan is far away from the international arena were contracts and any kind of international law can be enforced. So the risk is basically in the government publicly declaring everything on its land as its property causing losses in assets. “The legal system is well respected but it is not comprehensive nor compliant with international standards” (AMB, 2014)
Individual research companies has performed risk assessment on Bhutan and came up with the following results (AMB, 2014):
- Economic Risk: High
- Political Risk: High
- Financial System risk: Very High
A very troubling risk for the proposed tourism project is that due to the very small population in Bhutan (700,000 people) internal tourism can be excluded, that is due to the purchasing ability and the absent interest locally. Therefore, the dependence will be on foreign tourists, but the problem is that there are very few airlines that travel to Bhutan. In a quick search only two airlines can be found that travel to Bhutan on a weekly basis, Bhutan Airlines and DrukAsia. This is basically bad news for a tourism investment plan. In addition, this means that there will be no possibility to bring in large revenues and profits in comparison to the investment that would be made. Therefore, this project must only be seen from a long term point of view.
In addition, Bhutan is ranked 125 in the world for the ease of doing business, which shows that it is clearly very difficult to do business in Bhutan (Doing business, 2015). Which means that conducting business is risky in Bhutan as a general rule of thumb.
Moreover, the local workforce can only be used for hand works, there is a huge gap in the availability of skilled labor. Engineers and managers in particular are basically absent which means that all the workforce for the project must be brought in from abroad, which means increased costs and increased fees. Though there is difficulty in bringing in foreign workers into the country said some investors in Bhutan (UNCTAD, 2013: 22) tourism projects might be an exception.
Tools to minimize risks
Generally, speaking it is hard to implement any kind of tool to protect an investment in Bhutan that is because Bhutan is an isolated country and the theoretical framework does not actually function at all in Bhutan. In addition, other tools such as insurance and expert management plans might also seem ineffective. But one of the main tools that can be used to minimize risk are SWOT analysis, Porters forces analysis and the PESTEL environment analysis. The most adequate for the proposed tourism project is the PESTEL analysis:
- Political: in the sense of wars and civil strife, this risk is absent, while there are other political risk such as extreme governmental interference and the absence of international law.
- Economic: the economic environment is partially favorable, which means resources for the tourism project exists, and the investment money exists.
- Social: there are many social difficulties that can be faced in Bhutan, most importantly the ones regarding construction. Bhutanese take their nature very seriously therefore care should be taken in construction.
- Technological: the technological environment is basically absent.
- Environmental: As mentioned before the environmental issues must be taken very seriously in preserving the nature
- Legal: a legal framework is basically absent and Bhutan is not a part of any of the international law agencies which means contractual enforcement might be difficult
The above analysis itself is a tool to minimize risk because it offers insight to the overall environment of Bhutan.
The first tool to minimize risk in such a project in Bhutan is to involve the government in it. That would minimize the financial risks of course but might also increase the political risks. The government has shown interest in investing its own money with foreign partners to develop the tourism sector in Bhutan. This initiative was also seen in the development of an educational city to be built in Bhutan (UNCTAD, 2013: 28). The same method can be used in the project the proposed company wants to implement. The government can be approached and a Joint Venture can be created. Creating a Joint Venture can also help decrease any legal obstructions and difficulty in bringing in foreign employees.
Another method could be buying political risk insurance. But this option is very expensive and is actually rare to find in the case of Bhutan. Insurance companies are reluctant to offer insurance policies in Bhutan which makes it difficult to buy such policies. There are some companies that might offer insurance policies for Bhutan but consider Bhutan as an extreme risk country (Marsh solutions, 2014).
Moreover, another tool that can be used to lower the risk of financial exposure is using local banks for debt financiering of the project as a scheme for the capital structure. This would force local authorities to cooperate with the company more seriously because the money used is partially internal with the promise to be paid back. This acts as a leverage (or a collateral) in the hands of the investors.
Relevant theories and their application
As mentioned before, Bhutan is far away from being a part of a theoretical framework that can be studies. Corporate governance, which is the framework in which companies work under a legal system is not found. Moreover, there is no stock market were the company can be publicly traded, therefore the possibility to consider equity financing is impossible. Only a new platform for trading has been launched lately in Bhutan which is governed and controlled by the Royal Monetary Bank of Bhutan which is called Royal Securities Exchange (Royal Securities Exchange). Though this might give rise to the possibility of entering this market, trusting this platform itself is a risk.
Moreover, WACC which is the weighted average cost of capital, which is an important tool for investment decision making is also unavailable for Bhutan. WACC is a theoretical percentage calculated based on the free risk rate, risk premium, weight of debt and cost of debt, it is difficult to calculate and generally theoretic in nature but aids investors to know how difficult is it to raise capital in the specific country and specific sector. It also serves as an indicator of how much value can be earned from each dollar invested (Value Based Management, 2015). The WACC cannot be practically applied to the Bhutanese tourism sector because there is no information to the percentages found in Bhutan. But it is expected to be very high.
Another relevant concept is profitability which is the “state or condition of yielding profits” (Business Dictionary, 2015) is also an important percentage that gives insight on how much is a particular sector considered profitable therefore showing how attractive this sector is. Also profitability rates are absent in Bhutan for the tourism sector. Therefore, there is a difficulty in applying this theory on the prospects of the tourism company that will operate in Bhutan. Considering the political and economic risk available in Bhutan, profitability can be expected to be high based on several capital structure theories such as the Modigliani and Miller theorem which proposes that when risk increases profitability increases (Capital structure and profitability, n.d).
Summary
Bringing the whole investment opportunity in the tourism sector in Bhutan to a summary, it can be concluded that this investment is moderately attractive. That is because there are many associated risks in operating in Bhutan, and what makes this country riskier is the absence of ratio, indexes and information. Bhutan is also inactive on the international arena and is far from being a member of any organization which makes contractual enforcement difficult. Bhutan has a very rich nature and attractions that makes is a heaven for eco-tourism, with a thriving demand for entering and exploring this country in the past years makes the country look like an attractive place to make business. Building a hotel or a spa and developing the local activities into a professional business that turns serious profits is a good opportunity in Bhutan. Caution should be taken though due to governmental interference and the lack of effectives of risk minimizing tools. Moreover, theories and concepts cannot help in creating a theoretical decision for entering the Bhutanese market. Overall, a viable project with the possibility of very high returns but also a risky investment.
References
AMB, (2014) Bhutan: Country risk report. Available online at http://www3.ambest.com/ratings/cr/reports/Bhutan.pdf [Accessed on 5th April 2015]
Business Dictionary, (2015) Profitability. Available online at http://www.businessdictionary.com/definition/profitability.html [Accessed on 5th April 2015]
CIA, (2015) World Fact book. Available online at https://www.cia.gov/library/publications/the-world-factbook/geos/mu.html [Accessed on 5th April 2015]
Capital structure and profitability, (n.d) CONCEPTS AND THEORIES OF CAPITAL STRUCTURE AND PROFITABILITY: A REVIEW. Available online at http://shodhganga.inflibnet.ac.in/bitstream/10603/5253/10/11_chapter%203.pdf [Accessed on 5th April 2015]
Drukasia, (2015) Top 5 tourist attractions in Bhutan. Available online at http://www.drukasia.com/bhutan-travel/tips/5-top-bhutan-attractions-for-tourists/ [Accessed on 5th April 2015]
Doing Business, (2015) Ease of doing business in Bhutan. Available online at http://www.doingbusiness.org/data/exploreeconomies/bhutan/ [Accessed on 5th April 2015]
International Monetary Fund. (2014) World Economic Outlook. Available online at http://www.imf.org/external/Pubs/ft/weo/2014/01/pdf/text.pdf [Accessed on 5th April 2015]
IMF Country Report, (2014) Bhutan: a country report. Available online at http://www.imf.org/external/pubs/ft/scr/2014/cr14179.pdf
Marsh Solutions, (2014) Political risk world map. Available online at http://usa.marsh.com/Portals/9/Documents/MRMR_Marsh-Maplecroft%20Political%20Risk_FINAL.pdf [Accessed on 5th April 2015]
Royal Securities Exchange, (2015) Website information. Available online at http://www.rsebl.org.bt/ [Accessed on 5th April 2015]
UNCTAD, (2013) An investment guide to Bhutan opportunities and conditions 2013. Available online at http://www.theiguides.org/guides/bhutan.pdf [Accessed on 5th April 2015]
UNISDR, (2015) Bhutan. Available online at http://www.unisdr.org/partners/countries/btn [Accessed on 5th April 2015]
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