Operating model of ULI shows that the company is spending as much as 43 percent of cash collected from the people for assurance (or banking) plan and free health service to meet its marketing cost, comply with VAT and manage overhead expenses. [break]
"Like every other company, we spend Rs 3,000 of the collected Rs 15,000 to redistribute commission and other promotional activities," says Bishnu Chhetri, its managing director, acknowledging that the company is expending 20 percent of its capital as soon as it comes in.
The company also says it pays 13 percent VAT on assurance business and 5 percent hospital service charge every time a client comes in for the medical service. On top of these costs, Unity will also have to foot in wage bills of more than 2,300 staff both in Nepal and overseas and overhead costs for running its offices.
Financial experts keeping track of the companies´ efficiency and overhead costs in the country said the company has overhead costs of at least 5 percent.
It further needs to provide interest return of 10 percent to 335,000 assurance plan holders and return their original Rs 13,000 in five years (although the collected money is 15,000, the company says Rs 2,000 goes for VAT payment). In case the client dies, it will add further financial liability to the company.
- Clearly the company will have to earn well over 50 percent profit every year to meet the liabilities. ULI´s venture is clearly unsustainable.
-- Prakash Khanal, former chief, Insurance Companies Supervision Department, Insurance Board - Unity´s claim of completely replacing diesel [with Jatropha oil] is nothing more than a hoax.
-- Sushil Bhattarai, engineer, Nepal Oil Corporation
After meeting all these costs, the company is left with a shrunken pie to invest in and generate profit. "Clearly the company will have to earn well over 50 percent profit every year to meet these liabilities," says Prakash Khanal, who previously headed Insurance Companies Supervision Department at the Insurance Board (IB). "ULI´s venture is clearly unsustainable," he told myrepublica.com.
When asked to explain how his company was financially sustainable and if it was operating under a prudent business model, ULI´s Managing Director Chhetri came up with flimsy arguments.
According to Chhetri, ULI will be sustainable because of two reasons: i) Unity has invested in high-return sectors, and ii) Unity will soon start biodiesel production and carbon trading through Jatropha project, which will generate enough long-term returns.
"We invested Rs 200 million in real estate and in six months that became Rs 470 million," said Chhetri. He claimed that his company´s investment plan will provide a return of over Rs 10 million in the next 21 years for an investment of just 13,000 rupees!
Understandably, real estate is a volatile sector from the point of view of a long-term investment. It´s for this reason the Insurance Board does not allow insurance companies, shouldering long-term financial liability, to invest in the real estate.
Company´s plan to make it financially sustainable through Jatropha income sounds no less flimsy.
"By 2011, we plan to grow Jatropha trees in 250,000 hectares. This will enable us produce one billion liters of biofuel, which will make us self-sufficient in diesel 2017. This will generate monopoly business and handsome profit for us," said Chhetri, adding, "Through carbon trade we will earn 800 million euros (about Rs 80 billion) in exchange for Jatropha plantation."
However, energy experts term this claim as a mere ´hoax´.
"Even the advanced researches across the globe have not yet proven that Jatropha oil can replace diesel," said Amrit Nakarmi, Coordinator of Energy Planning and Policy Analysis at Center for Energy Studies.
Because of high viscosity, he said, Jatropha oil cannot even be blended more than 10 percent in diesel.
Sushil Bhattarai, engineer at Nepal Oil Corporation, too said India has just recently started pilot projects and is undertaking researches in Jatropha. "The Indian government´s long-term plan is to blend abut 5 percent Jatropha oil in diesel," he said.
"Unity´s claim of completely replacing diesel [with Jatropha oil] is nothing more than a hoax," he concluded.
milan@myrepublica.com
Related story
Business ideas matter
