Part III of the Chilime Series

Mr Kul Man Ghising is hailed as the architect of the exemplary ‘Chilime’ model. The Managing Director of Chilime Hydropower Company Limited (CHCL) is held in high esteem both by his subordinates as well as the locals of the Chilime project in Rasuwa district and the general shareholders. ShareSansar caught recently up with Mr Ghising to know more about the vision and plans of CHCL.  

An excerpt:

Chilime Hydropower Company Limited is considered a model development project in the country, something which every power developer aspires to emulate. In the stock market, too, it is one of the best blue-chip scrip. How did you conceptualize and materialize such the successful model?

Chilime’s model is singular in that it is a people-to-people partnership model, and not a Public-Private Partnership (PPP) model, which most other companies have. We do not have the private party in Chilime. Altogether 49 percent of the stake in the company is held by general people, including 10 percent of the local residents in the project area. The rest is again public holding as the government institutions hold them.

Now coming to the success of the model, I attribute it to four things: The first factor is related to ownership. It has guaranteed people’s ownership and we-feeling for the project. From the very beginning we ensured that each and every local residents of the project area got the shares of the company. We even issued shares to the children born in the last day of the IPO, on the basis of their birth certificates. The children, who have now turned three years old, have around 300 shares of the company.  Hence, the local residents strongly feel that Chilime is their own project.

The second factor for the success of this people-to-people model guarantees inclusive growth. The benefit of Chilime project trickles down to the poorest of the poor. What we were clear from the day one was that a hydropower project should not only benefit the economy, but provide direct commercial benefit to the people at the grassroots level — and not just the public shareholders. That is why we massively campaigned in the villages for around one and a half months, by hiring even school teachers to sensitize the locals about the benefits of obtaining the shares of Chilime project and went on to arranged up to 80 percent of financing from the banks for the poor people of the project area so that none of them were excluded from the acquiring company’s scrip.  In fact we wanted to provide cent percent financing for them, as the banks could have recovered the money from the dividend to be issued by the company. But the bankers did not agree to go to such an extent though the company stayed as the guarantee. Due to this some people were left behind. Anyway, the poor villagers did invest more than Rs 15 crore in cash for the IPO for the locals worth Rs 27 crore. Even the poorest of the poor came forward to apply for the IPO with old, crumpled currency notes and even coins. This also reinforced our belief that fund is not a problem even if we are to build huge projects in the country with domestic investment. You must need to know how to manage fund.  If we now calculate the market value of that IPO of Rs 27 crore, it stands at more than Rs 5 arba.  Each of the household in project affected areas, the poorest of the poor, has now shares worth Rs 25 to 30 lakh.  When they had applied for the IPO there entire property would have hardly stood at Rs 1 lakh.  This way Chilime has directly contributed to the GDP growth of the country by ensuring inclusive growth.

Participation is the third factor behind the success of our model. We have ensured what we call 360 degree participation. The governmental agencies, local stakeholders and general public are all involved in the process.

Decision-making process is the fourth strong aspect of the Chilime model. We have a very efficient decision-making process. Any decision regarding the project execution is made on the spot by Chilime’s Board of Directors. In Nepal, many of the hydropower projects are delayed due to ineffective decision-making process. For instance, in the NEA itself, if there is a change in the government, the new board takes several months to hold its meeting. But when in the hydropower sector, a decision delayed by one day can affect the project by months. It will have immense bearing on the cost.

What is your plan of action for days ahead -- your long-term strategy?

We are now devising P4 model or People-Public-Private Partnership through the projects in the pipeline.  In our sister companies we have further broadened the participation of stakeholders. Even local power developers have been included in the projects in the pipeline being developed by our subsidiaries apart from the project affected people, locals of the areas.  Hence in the upcoming downstream projects, we have issued equity shares to the government agencies such NEA, local bodies such as the District Development Committee (VDC) and Village Development Committees (DDCs). We are also issuing 20 percent shares to employees of the concerned companies, including Chilime as well as all the depositors of the Employment Provident Fund, which has provided loan to all the four projects in the pipeline. This means that all the civil servants across the country are going to directly benefit from the projects. The promoters, the government agency that signs the PPA agreement, local bodies, the staff and the locals, including the local power developers as well as energy consumers are also included in the process.  

Now that we have won the trust of the people and also have the confidence to mobilize enough equity for big projects, our aim is to develop at least 500 MW by 2020. Besides these projects, we have already applied for the license a mega multi-purpose reservoir based project of 400 MW in Rasuwa district. But we cannot achieve this goal if we wait for the four projects to be completed before we move on to the next projects. If we acquire a license to develop a hydropower project today, it will take a minimum of three years to get it commissioned. Hence I have to plan today for projects to be developed three or five years down the line. And we are confident about achieving all the target as we do not have to get directly involved in any of the projects in the pipeline, which gives it gives Chilime management to plan and execute new projects. For instance, we have set up four subsidiary companies for the projects in the pipeline. Each of them has separate board of directors, management team and project officers. I don’t have to get involved in their day-to-day operation.

Hence, now our strategy is to develop more projects -- big ones up to 500 MW -- and the new projects will be run by our subsidiaries like the four projects in the pipeline. This way we will finish all the projects in time and won’t have any problem with financing the newer projects. This is how we will have this multiplier effects. Here I would like to clarify that Chilime may directly develop some of these projects.

Talking about the multiplier effects, how much will the shareholders are going to benefit from this approach?

The 22 MW Chilime has such a huge impact on the lives of the people of Rasuwa. Now the three upcoming projects -- Sajen I and II and Rasuwagadi -- alone will be issuing primary shares worth around Rs 1.5 arba to the locals, that too, at par value.  A household will get up to 3,000 units of these primary shares.  How much do they have to invest for the IPOs? Around Rs three lakhs. For that they already have Chilime’s scrip to fall back on. Only by selling bonus shares they can get Rs 3 lakh.  And then within three years of these IPOs, all of the local shareholders of Chilime will become millionaires. On top of that we are providing one employment per household there. The locals who used to go to Malaysia or the Gulf are now returning back. They are drawing salary of around Rs 25,000 in their own district, staying with their families.

I have come up with Rasuwa Vision 2025 as per which Rasuwa will be the richest district in Nepal by 2025 with the highest per capita income and other development indicators. Already Rs 1 kharba is being invested in the under construction projects in the district. We are developing projects of 500 MW. There is a total potential of generating 1,300 MW in Rasuwa, and power developers have ready to invest in more projects as they have already completed the detailed project reports. With the people making fortunes out of the shares and employment provided by these projects, it will have impact on other sectors such as tourism and business.  Rasuwa has tremendous tourism potential. We are conceiving a cable car to Langtang national park as part of the 400 MW multi-purpose hydropower project in the district. And then China is upgrading road and development infrastructure in Rasuwa. International dry port is being set up there, and such projects are based on hydropower plants.

No wonder that CHCL scrip is skyrocketing in the secondary market. What do you say?

No. I still think the scrip is largely undervalued if you take into account Chilime’s growth as well as its long-term vision and prospects. Even today where does our paid-up capital stand? At Rs 3 arba, up from Rs 96 crore initially.  Even with Rs 3 arba capital, after distributing bonus shares, the scrip is priced at around Rs 2,300. But we have more much asset than just Rs 3 arba capital. And our retail earning, too, is more than our capital.  Add to this, the projects in the pipeline. This means that there are ample opportunities to earn more bonus shares in future.  

Moreover, we have been making a net profit of Rs 1 arba every year. But we are not distributing all the net profit so that we can invest it further in projects aimed at nation building.  We are investment focused. With this our projects will continue to multiply. Returns will also multiply accordingly.

And then think about the profit Chilime will be making from the upcoming projects being developed by our sister concerns. Our equity in the subsidiary companies comes to the tune of Rs 7 arba. Once the projects get completed in three to four years, we will be getting around 1.5 arba a year in dividend only from the sister companies if they give only around 20 percent. Now don’t you think our share is undervalued?

How much stake does CHCL have in these subsidiary companies?

Chilime has 38 percent shareholding in Sanjen Jalavidhyut Company Limited (which is developing – Sanjen Hydroelectric Project (SHEP) having capacity of 42.5 MW and Sanjen (Upper) Hydroelectric Project (SUHEP) of capacity 14.8 MW.
 
In Madhya Bhotekoshi Jalavidhyut Company Limited (which is developing Middle Bhotekoshi Hydroelectric Project (MBKHEP) with an installed capacity of 102 MW), too, we have 38 percent share.

We hold 33 percent shares of Rasuwagadhi Hydropower Company Limited [developing Middle Bhotekoshi Hydroelectric Project (MBKHEP) with an installed capacity of 102 MW].

Have these companies, too, signed the PPA agreement at the same rate as Chilime?

Here I would first like to dispel some misunderstanding about the PPA of Chilime. Some people still complain that Chilime signed the PPA agreement. They tend to compare us with Khimti and Bhote Khosi. What we need to understand that Chilime and these two projects cannot be compared. Today Khimti’s weighted average rate hovers around Rs 10 or 12, but its dry-season rate is Rs 25. Similar is the case of Bhote Koshi. But Chilime’s rate is around Rs 7. But what would have happened if the rate was higher? NEA would have earned more.  But NEA still gets 51 percent dividend from the profit Chilime makes. If NEA is to sell Chilime’s share it will get around Rs 35 arba for their investment of just Rs 38 crore! And most importantly, 39 percent of the returns go to the people, including the poorest of the poor. It does not go elsewhere or to foreign lands. Moreover, whatever profit Chilime is posting will go into invest more projects. How can you compare Chilime with the rest?

Now coming to the original question, we have signed PPA for the upcoming four projects at a lower rate than that of Chilime.

There is rumor in the market that you are planning to float right shares to shore up capital to invest in new projects. But you say that funding is not a problem. Is this thing about the right shares just a rumor?

We have enough fund for all the four projects at this juncture. The rumors about the right shares are completely baseless. We don’t have any problem whatsoever when it comes to equity.

But how are you going to arrange the fund for so many big projects in the pipeline. Equity alone will not be enough to fund them, isn’t it?

Look our policy is to manage the entire fund through diversification of investment. If we stick to one project, and if that project fails then we also fail. It will also have setbacks for the country, including load-shedding.  That is why we diversified our investment by taking ahead four projects parallelly. Many of our well-wishers cautioned that we were taking a big risk.  But this is how we should have moved ahead, and we have been moving ahead smoothly.  Yes, we all know that no project can be completed only on the basis of equity. Debt part has to be managed. Insofar as equity is concerned, we do not have any problem.  Chilime has strong equity base. And I am confident that the IPOs for the new projects will be oversubscribed by around 50 times once we start floating them. The debt part is also encouraging. We have tripartite agreement between the Provident Fund, Chilime and the concerned subsidiary companies to finance all the four projects. The Provident Fund has already agreed to provide Rs 16.5 arba loan, and rest is our equity.  Though the loan was agreed on 12.5 percent interest rate, it is floating interest, which will keep on decreasing. And then we would automatically get cash flow to executive newer projects once the four projects in the pipeline come into operation in three to four years.  Hence, if the government is yet to provide license to develop more projects, we have the confidence to multiply growth and returns.

We have also proved that equity is never a problem when it comes to developing hydropower projects up to 1000 MW with domestic investment. Fund is never a problem; it’s all about managing that fund. But this does not mean that I am suggesting that we should bar foreign investment in the sector.

When can we expect the IPOs of the upcoming four projects?

The IPO of Sanjen (SJCL) will be floated first. As the promoters of Sajen have almost raised the paid-up required for the project as per the guidelines of SEBON, its IPO will be floated IPO within six months to one year. We will also issue the IPO for the rest of the companies within 1 to 1.5 years.

Are we using domestic technical expertise to develop the projects or hiring foreigners?

Almost 90 percent of the technical manpower and experts employed in the projects are Nepalis. But we had to a hire few foreign experts since it is not easy to develop four projects side by side only with Nepali experts as they aren’t enough skilled manpower in the country. We could have used cent percent local experts if we were developing only one or two projects.  Hence we have hired some foreign experts and consultants to lead the technical teams.

A very encouraging thing about the new strategy as per which the four projects are being developed is that CHCL will be producing enough manpower to easily develop 1000 MW project  solely with its own manpower by the time the four projects get completed.

One thing I would like to add here is that Chilime’s policy is to build the capacity of local manpower even if it means a little financial burden to the company. We don’t mind if the project cost slightly increases while employing several local manpower instead of hiring foreign manpower. This way, in the longer run, we would be generating more local expertise in the sector, which is really important. As I said before, there is a huge constraint of local manpower in the hydropower sector.

CHCL has been posting robust growth this fiscal year, too. What can the shareholders expect by the end of the fiscal year?

The growth has been excellent. You can expect good returns as always.  The net profit should cross Rs 1 arba.  But what the shareholders need to understand that Chilime’s revenue, and thereby returns, will not grow much for the next three to four years, until the upcoming projects come into operation. Nonetheless, as the loan interest amount will continue to fall, revenue will continue to grow.  Another source income is around Rs 25-30 crore we earn as interest from the money we invest in fixed deposits. And remember, Chilime as such does not have any debt as we do not have to worry about debt servicing.