The Shareholder Model of Benefit Sharing: Financial Equity & Local Investment

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1 The Shareholder Model of Benefit Sharing: Financial Equity & Local Investment Austin Lord Doctoral Student, Anthropology, Cornell University Independent Research Consultant, International Center for Integrated Mountain Development (ICIMOD) Master of Environmental Science, Yale University Workshop on Benefit Sharing in Hydropower Development ICIMOD, Kathmandu June 27-28, 2016

2 Introducing the Concept of Equity Investment & the Shareholder Model How can benefits derived from hydropower projects be shared with local communities in a fair and equitable manner? Offering a financial equity stake as a model for sharing of costs and benefits direct financial investment; value linked to project performance & market value Offers an investment opportunity to a variety of differently positioned shareholders (i.e. local & non-local; individual & institutional) Fairness determined by specific modality using preferential rates or allocations, different eligibility criteria fueling a politics of affectedness (Lord 2016) New Dynamics of Corporate Social Responsibility emerging as locals are also shareholders with certain claims to rights

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4 Evolving Discourse: Promoting a Public- Private-Person Partnership Promotes local participation in hydropower investment including different kinds of project-affected populations Mobilizing domestic or indigenous capital The idea of energy sovereignty or energy independence, at the national and local scale) Sub-narrative of moving away from dependence on international donors Harnessing new sources of investment, like remittance? Understood as a method for the alignment of incentives, a way of mitigating operational risks Different views on manufacturing consent Recent mobilizations referred to as shares virus

5 On Creating Citizen Shareholders Not one drop should flow beyond our borders without creating wealth - Power Summit 2013 These days, anyone and everyone on the streets and on social networks seems to be talking about local shares from village folks directly hit by such dams and their neighbors to city dwellers looking for lucrative profit-making ventures, from businessmen and politicians to our migrant brothers and sisters toiling in distant lands. - Sophia Tamot of Investment Board of Nepal, Kantipur 2014 Every house to get electricity and every Nepali to be a shareholder. - National Energy Crisis Management Plan of 2016

6 Genesis of the Shareholder Model in Nepal Early Models of Co-Investment: Concept of local contribution in micro-hydropower Local Electricity Cooperatives and User Groups as original model for local investors sharing in wealth creation (Dr. Dipak Gyawali/ Dr. Prakash Lahoni) Butwal Power Company: Pioneering Nepal s Hydropower Development Capacity Incorporated in 1966 as private company; converted into public limited company in 1993; transition from Government of Nepal to public-private partnership model in 2003 Early Corporate Commitments to Local Shares : From Chilime and Upper Tamakoshi Hydropower Ltd. to offer local shares during early project development (c. 2006/2007) First local offering executed by the Chilime Hydropower Company Ltd. in 2010 with a 10% stake allocated to project-affected people living in the district of Rasuwa Following local strikes and a Supreme Court Case, established precedent for SEBON but no formal law or government policy Chilime viewed as major success; became understood as the shareholder model

7 Source: Chilime Hydropower Company Ltd.

8 Example of Equity Ownership Structure: Rasuwagadhi Hydropower Company Ltd. Next iteration of the Chilime Hydropower Company s shareholder model via a subsidiary (offering timing estimated for ) 51% of company ownership by Developer and Nepal Electricity Authority; vs. 49% publicly traded equity 24% to institutional investors and institutional employees 10% local shares for project-affected local people as per SEBON rules

9 Precedent Share Offerings Chilime Hydropower Company Ltd 22.1 MW 2008/ IPO was completed seven years after project completion (post-profitability) enabled immediate dividends; highly profitable for locals due to trading patterns (over 20x initial investment, plus bonus shares) - Shares offered to locals at a discounted/back-dated price due to court case - 31,123 different investors from Rasuwa as a result of significant local outreach program; very positive local investment climate for future offerings Mai Hydropower Company 22 MW 2013/ Offering conducted during the construction phase prior to the completion of the project in 2015 (ahead of future problems with grid connection) - The project initially planned to allocate 60% of local shares to people from project-affected VDCs, but due to insufficient local demand the project allocated the remaining local shares to other residents of Ilam District; - General IPO was oversubscribed by 29 times; demand for future offerings Ridi Hydropower Company Ltd 2.4 MW 2013/ % to local affected and 39% to general public, plus 50% promoter shares - Offering conducted after project completion in 2009; local share offering to affected VDCs was done first in October Out of 300 promoter shares, about 50% are from local affected VDCs, and have voting rights *Siuri Khola (Ngadi Power Group) also completed its local offer and IPO in 2015/2016

10 The Next Generation of Share Offerings Upper Bhotekoshi (45 MW) In Process: Agreement Reached but Private Offering Pending Shares were demanded 14 years into commercial operations, as a result of local protests following a landslide-triggered disruption in August 2014 Project developers committed to provide 6% of private-market shares to locals following negotiations, but the exact distribution modality is TBD Upper Tamakoshi (456 MW) Pending 2017? (Project Construction & Share Offerings Delayed by 2015 Earthquakes) The General IPO and Local Share Offering was initiated in early 2015, after roughly 70% of the construction works had been completed. Protests occurred in early 2015 due to concerns about eligibility criteria and uneven allocations to different affected areas of Dolakha district; plus Nepali employees of project contractor SinoHydro also organized a labor strike, demanding rights to shares in the project. Hydropower Investment Development Company Ltd. (HIDCL) Offering Completed in 2016, representing ~$20 million (USD $350mm in capital pledged (17.5x oversubscribed; 210,000 applicants) An investment in a portfolio of projects via an institution supported by the Government of Nepal, rather than investment in a specific project HIDCL has licenses and project plans, but no current generation assets Other innovations :Ability to invest in transmission and distribution; advent of Remit Hydro

11 Pending Offerings / Future Projects As of June 2016, shares from eight hydropower companies are publicly traded on NEPSE (at 1.8 to 17 times their base value) Currently 37 companies from the Hydropower Sector have filed for public listing on NEPSE (Source: ShareSansar, June 2016) Some recent offerings have been completed prior to construction (i.e. Barun Khola, 2015 and Api Khola, 2015) with significant demand (~70x oversubscribed) Within our study, four IPOs/offerings complete; three pending Bhotekoshi (Pending Agreement); Upper Tamakoshi (Planned 2017); Puwa Khola 1 (Planned 2017); Rasuwaghadi (Planned 2018) Megaprojects in the pipeline include planned shares offerings Upper Trishuli 1 (216 MW): 10% local shares (TBD) Arun 3 (900 MW) and Upper Karnali (900 MW): Recent agreements for local shares representing a total value of 160 crores (~$16 million) for each project, to be privately listed (potentially via a special purpose vehicle (Source: IBN)

12 Expanding the Shareholder Model?

13 Structural Offering Considerations Project/Offering Scale: Different Models for Small vs. Large Projects Percentage of Local Shares : Defining Local Areas Eligibility Criteria: Defining Affected Populations Offering Timing: Relative to Project Timeline, Mitigating Operational Risk Publicly-Traded vs. Private Shares: Different Modalities & Issues of Liquidity for Different Kinds of Offerings Ownership Structure: Institutional and Preferred Shares Pricing & Allocation Methodology: How to Distribute Long-Term Ownership: Methods for Promoting Sustained Investment

14 Additional Social Dimensions: Different Conceptions of Equity Clarity & Communication: Stakeholder Engagement & Social Awareness is Critical throughout Process Programs for Social Inclusion: Including Marginalized Groups (which may include financial assistance) Mitigating Social-Political Issues: Minimizing Risk of Protests Financial Education: Promoting Informed Choice; Opportunity for Financial Education Local aspirations for becoming an agent of bikas [development] rather than one of its targets (Pigg 1992: 511)

15 Future Concerns? Investor Demand & Confidence: Will Current Trends Last? Shares don t always go up (i.e. Chilime vs. National Hydropower Company) Lack of Formal Policies: Currently no policy from Government of Nepal (revised Electricity Act and possible Shares Policy pending) Pending Transfer of Ownership to the Government of Nepal: What will happen to share values after the BOOT/license period concludes? Financial Accessibility: Locals taking out loans or being cheated by illegitimate brokers; investments in financial education programs? Activism vs. Shareholder Activism: shareholder model not a panacea for all local conflicts ; new forms of mobilization emerging Risk-Sharing: Local protests are not the only risk to shareholder value; how to manage environmental, hydrological, and seismic risks? Replicability vs. Alternative Modalities

16 Thank You Thank You Further Information: Contact : al947@cornell.edu