Post on 19-Aug-2015
Business Plan: Imact Investment Opportunity in Cambodia’s Water Sector
Produced by the participants of the Global Young Leaders Programme February 2012
Business Plan: Impact Investment Opportunity in Cambodia’s Water Sector
Table of Contents
Table of Contents
Executive Summary 3
Background and Objectives 8
Business Model 16
Social Impact 25
Sales & Marketing 33
Governance 45
Operations 55
Financials 74
Implementation Plan and Recommendations 90
Appendix 94
Executive Summary• Approximately 95% of rural households in Cambodia do not have access to
clean drinking water and sanitation• There is an opportunity to create a company which will enhance efficiency and
improve water quality for rural households through economies of scale and setting best practices
• The social impact of this project includes long-term health improvements due to improved access to clean drinking water and sanitation
Provision of clean drinking water and sanitation is crucial in Cambodia
4
Executive SummaryProblem Cycle Business Summary
• Creation of a sustainable business model which meets both financial goals and social impact objectives through greater access to clean water and sanitation
• To invest in existing Water Service Providers (WSPs) and expand the pipe network to supply more than 40,000 households over 5 years
• A stable cash flow will lead to high performance in investment with expected IRR of 15% p.a.
Lack of financing options for existing operators due to size
of individual operations
Villagers’ lack of understanding of
the benefits of clean water
Poor technical expertise at the operator level
Lack of reliable distribution of quality water in rural areas
Poor financial recording
Subdued demand for clean water due
to high upfront connection costs
5
Executive SummaryEfficient & Socially Conscious Business Operations • The creation of a holding company will be
at the heart of the business model driving efficiencies and effectiveness in operating a financially and socially sustainable business venture
• Current Water Service Provider (WSP) operational processes will be streamlined to realise the efficiencies and will include activities such as purchasing, meter reading and billing management
• Delivering a “Village Equity Model” whereby the WSP and villages could share the costs of pipe installation in return for rebates, tariffs and potential equity stakes in the WSP or holding company
6
Executive SummaryAn Attractive InvestmentIn 000’s 5 Year Projection (5 WSPs)
• The efficiencies and projected growth through the acquisition of Water Service Providers (WSP) is expected to deliver within a 5 year horizon:– Strong Compounded Annual
Growth Rate (CAGR) of 35% – Healthy profitability of circa
40%
• Assuming exit is achieved in 2016, the investor could enjoy an IRR of at least 15% per annum
7
2012 2013 2014 2015 2016
(500)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Revenue
EBITDA
Net Profit
All figures are in USD unless otherwise stated.
Background and Objectives
i. Who We Areii. Global Water Supplyiii. Cambodia: Current Water
Situationiv. Cambodia: Impact
Investment Opportunitiesv. Investment Plan Objectives
Who We AreEntity Function
Global Young Leaders Programme (YLP)
• An executive leadership development programme involving international executives from many parts of the world, diverse in culture and industry backgrounds
• Participants examined the landscape for rural water treatment and distribution and recommended a business plan to drive real world benefits
Global Institute For Tomorrow (GIFT)
• A pan-Asian ‘’think and do tank’’ • Enabling social investment through output-driven
experiential executive education in Asia
DEVENCO • A venture capital and investing consulting company • Potential equity investor in WSP projects• Investment criteria: Profitability, Market Potential and
Social Impact
9
Global Water Supply • 884 million people in the world do not have access to clean drinking water• 2.6 billion people in the world do not have access to adequate sanitation• 1.4 million children die every year from diarrhoea caused by unclean water and
poor sanitation• The Millennium Development Goals (MDGs) promote full access to water and
sanitation globally by 2015
Source: World Health Organisation; www.who.org
10
Cambodia: Current Water SituationChallenges1. Accessibility of piped water:• Access to piped water: 55% of urban populations and 5% of rural populations• Most rural households depend on ponds, rivers or streams
1.6m out of 2.9m urban householdsdo not have access to clean drinking water
10.3m out of 10.9m rural households do not have access to clean drinking water
Source: World Bank Water and Sanitation Program (WSP)
Rural Urban
Access to clean drinking water
Rural Population
Urban Population
Access to water is critical for many rural households
11
Pie = Cambodia population split between Rural and Urban population, showing the contrast between those who have access and those who don’t
Cambodia: Current Water Situation2. Integrating sanitation:• Waste generated by households tends to contaminate water sources• Stagnant wastewater around households is a health hazard and allows for the
breeding of disease vectors• Presence of microbes and contaminants cause diseases ranging from diarrhea,
Cholera to Hepatitis A
Source: National Census 2008 (NIS.2009c), Ministry of Planning
Rural areas lack sanitation facilities12
Percentage Water & Sanitation Coverage
Cambodia: Current Water SituationProgress to date:1. Government• Modern public sector water supply exists in Phnom Penh as the Phnom Penh Water
Supply Authority (PPWSA) is a success story in the developing world• Regulatory bodies such as Ministry of Industry, Mines and Energy (MIME) monitors
the water quality and provides technical assistance to WSPs
2. Water Service Providers (WSPs)• Providing piped water to rural areas but with a high network connection fee• WSPs developed to service a need but have limited cash flow/access to finance• WSPs have basic technical skills but lack advanced technical know-how and
management skills• Some rural communities understand the need to move away from traditional
sources of drinking water but there still needs to be more willingness to pay for clean water
Existing providers are faced with limitations to financing
13
Water Sector: Impact Investment Opportunities
Social Factors
Growing population: Low labour costs, human capital, unmet demand
Over 400 NGOs with local knowledge networks putting grants and funding into
the sector
Rising disposable incomes in some rural areas indicates a willingness to pay for
affordable services
Support from government which provides freedom for social innovation
and scaling of value chains
Ability to shape investment scope in a newly emerging market
Political & Economic Factors
A diverse range of banks can be made aware of this business opportunity which is different from traditional
business lines
A high-potential sector within a strong emerging market
14
Investment Plan Objectives • To provide access to clean, drinking water and affordable sanitation services through a profitable social venture in Cambodia • To establish a holding company to invest in and acquire existing WSPs in order to
achieve economies of scale, by expanding the piped network to 40,000 households over a period of 5 years
• To maximise social impact while realising a reasonable IRR through a triple bottom-line approach: financial, social, environmental returns
15
Business Model: Objectives• Outline an inclusive business strategy which meets the needs of rural
communities• Increase the number of households connected to clean water through
affordable pricing and incentives• Extend the WSP proposition to include a bundled water and sanitation
service• Create, deliver and capture value through economies of scale and
improved efficiency of billing and fee collection • Provide enhanced governance and financial reporting • Provide a platform for future growth which can be funded through access
to debt markets
Provide sustainable financial returns for investors
17
Business Model: IssuesIssues Current Situation
1 Piped drinking water Not all operators supply drinking water; water quality can vary during the year and between operators
2 Meter cost for household Many low income rural communities are not able to afford upfront connection fees
3 Transmission pipe and capacity expansion
WSPs lack access to capital and therefore cannot fund expansion
4 Factories versus village consumption & tariff structure
No standard tariff policy; extent of cross subsidies can vary; often factory and village tariffs are the same
5 Lack of sanitation in rural areas Poor sanitation leads to water contamination and diseases
6 WSP Entrepreneur Investing in WSPs requires also retaining the skills and relationships of the entrepreneur
7 DEVENCO services Potential conflict if DEVENCO will be the sole provider of management services
8 3-year license period Time period is too short and will be a concern for any potential investors, particularly foreign investors
9 Connecting remote villages Costly to expand pipeline networks to remote areas
18
The Business Model: Proposed
Debt Investors
Holding Co.
WSP WSP
Village Community
Village Community
Village Community
WSP
DEVENCO
Water SupplySanitation Services
Water SupplySanitation Services
Management skills
Entrepreneur Engagement:Earn-out modelMinority stake
Remarks:Connection fee shall be up front or in installments
Tariff Structure : 1. Connection2. Maintainance3. Consumption
Minority share
Bank lending
19
Majority share
Business Model: Key FeaturesIssues Impact of Proposed Model
1 Piped drinking water Improved water quality through access to technical expertise from the holding company who will hire a full-time engineer
2 Meter cost prohibitive for households
Lowest cost (no margin) connection fee able to be paid on an installment basis
3 Transmission pipe and capacity expansion
Appropriate governance and financial statements to enable access to bank lending to fund growth
4 Factories versus village consumption & tariff structure
Constitutional requirements of holding company balance factory and village connection rates; tariff structure is to subsidise villages
5 Lack of sanitation in rural areas
Bundle water connection and septic tank installation to deliver significant social impact whilst not compromising financial returns
20
Business Model: Key FeaturesIssues Impact of Proposed Model
6 Role of WSP Entrepreneur
Entrepreneurs are to retain a minority stake (with potential to buy-back shares in the future) or receive an earn-out payment over at least three years (to cover one license renewal)
7 DEVENCO services DEVENCO to invest equity for at least a 10% stake in the company to align interests with investors
8 3-year license period Retain entrepreneur’s involvement in the WSP to ensure consistency in local relationships and service delivery
9 Connecting remote villages
Potential Village Equity Model - offers villages a 50/50 ownership in the transmission pipeline; village to fund their share and in return receive either annual rebate/discount or equity in WSP
21
Proposed Village Equity Model
WSP
Village Chief
For villages located considerably far from the WSP network, the village may consider sharing the cost of the transmission pipe with the WSP.
ParentMeter
A cost-sharing model enables WSPs to serve the village community
Remote Village
WSP existing network
Transmission pipe cost shared 50/50 with village. In return for sharing the cost of the pipe, the village could receive:• annual rebates• discounted tariffs• equity in WSP
22
Proposed Operational ModelHolding Co. GM
Sales & Marketing Engineering Purchasing Account
Purchasing
Sales & Marketing
VillageChief & certified
worker (paid employee of WSP)
Meter reading, distribution of the invoice,
collect money (pay to Holding Co.)
WSPsOps
Manager
Customer ServiceFee collection, meter data input,
sales/marketing billing
OperationsTreatment process , testing new,
maintenance, securityplant safety
23
Value proposition: efficiencies
WSP
WSP
WSP
Centralisation
Key functions: Sales & Marketing Purchasing Engineering Accounting
Village engagementKey functions: Meter reading Invoice distribution Fee collection
Health education
Bundled: water and sanitation
Economies of scale, purchasing power and improved technical expertise, standard compliance and training
Innovative and efficient billing management and fee collection
Significant social value through delivery of bundled water and sanitation service
24
Social Impact
i. Community Overviewii. Primary & Secondary Goalsiii. Household Income & Expensesiv. Projected Trends
Community Overview• Traditional methods of household water collection prevail in rural
households, including dug wells, hand pumps and rainwater harvesting structures
• Surface contamination occurs frequently and water related health illnesses are widespread
• Connection fees are managed by WSPs and although there are 140 WSPs in Cambodia, the majority service less than 30% of the households in the licensed area
26
Primary GoalsHealth
• Lower household expenditure on medication and clinics
• Higher labour productivity due to improved well-being
• Less contamination in immediate environment with sanitation facility
Quality of Life
• Ease of accessibility to drinking water and sanitation facilities; time-saving costs
• Village communities build sustainable knowledge transfer around the benefits of piped water and sanitation
Value-Add Services
• Financial training services for villagers in managing household budgets and expenditures
• Stakeholder dialogue with international organisations such as the Red Cross to foster long-term community well-being
The goal is to build a healthy & value-driven community
27
Secondary GoalsJob Creation
• Greater demand for contract rural workforce for pipe and meter installation
• Greater number of village entrepreneurs in the WSP system
• Increased number of permanent employment opportunities in administration and treatment facility maintenance
Environment
• Reduction of greenhouse gas emissions through lowering the amount of water being boiled
• Lower deforestation rates by decreasing the firewood burnt for boiling water
• To preserve soil and surface water sources from contamination of waste
Goals that support sustainable future benefits
28
Household Budgets• Field observations have shown the average monthly incomes of farmers
with piped water are higher than those of farmers without piped water• Households with access to piped water have lower medical, electricity and
bottled water costs
Higher income and lower costs for the average household with access to drinking water
29
106.2521%
212.542%
187.537%
116.87523%
212.541%
187.536%
Farmer /Dry Season/
Farmer /Rainy Season/
Works in city /Salary/
Household IncomeVillagers without pipe connections
Villagers with pipe connections
• During the dry season, households without piped water cannot use river or well-water for irrigation purposes. This lowers farmer income from harvesting.
• Households which have connected to piped water are able to increase their income by 10% during the dry season for saving additional water rain and well-water/ for irrigation purposes.
• Households with piped water tend to have higher earnings and disposable income.
Source: Field Data
30
Household ExpensesHouseholds with piped water save 25% of medical cost, 70% of bottled water costs.. If households save 15% of their electric expenses by not boiling rain or well-water, or 60% wood and gas. This will increase the household’s disposable income by $13.58 per month.
77.561%
129%
2.468752%
97%
4.914%
4.54% 9
7%1.601664932362121%
75%
77.561%
129%
2.3752%
13.611%
1.9642% 4
3% 8.57% 0.5
0%
75%
Food
Health/Medical
Petrolium
Electrocity 60kw
Wood/Gas
Cell Phone
Education
Water/pipe connec-ted
Other expense
Source: Field Data
Food
Health/Medical
Petroleum
Electricity 60kw
Wood/Gas
Cell Phone
Education
Water/pipe connectedOther expense
31
Household without piped waterHouseholds with piped water
Having piped water will actually SAVE money
Projected trends Projected Social Impact Projected Environmental Impact
Year 1 Year 2 Year 3 Year 4 Year 50
10
20
30
40
50
60
Number of Jobs CreatedNumber of Households Served in Value-Add ServicesNumber of Water-Related Illnesses per Month
Positive future outlook on social and environment impact
32
Sales & Marketing
i. Setting up a new Companyii. Background & Purposeiii. CadEAU: Products & Servicesiv. Marketing Strategyv. Branding Strategy
Setting up a new Company
A sustainable approach to tackling social challenges in the water sector
• Establish a new company in the water sector with the focus on social impact whilst providing financial returns
• To scale up water distribution and sanitation facilities in rural areas
• Value proposition: combined approach to the rural market with drinking water and sanitation through professional management services
34
Background and Purpose
The focus is on affordability of drinking water and sanitation through awareness raising
• The demand in the rural areas is strong but the operators do not have the financial resources to expand their coverage
• Schools are willing to support increasing the awareness for clean water but they lack the resources to do so
• The Cambodian government has limited resources to finance water programs
• NGOs provide subsidies for water connections to select rural areas which tends to create market distortion
Sales & Marketing needs to address the water related challenges in rural areas
35
CadEAU : Products and ServicesDrinking Water• Available from the tap• Pure clean and treated water• Eliminate boiling of water for
consumption
Sanitation• Toilets in every house• Septic system serving up to 2 houses
using 1 tank to reduce cost.• Reduce incidents of water-borne
diseases
CadEAU targets the social benefits of clean water and sanitation
Services from CadEAU• Technical consulting to WSPs includes training (technology, management,
community engagement and financial literacy)
36
Marketing Strategy1 2
• Make drinking water accessible
• Expand connections to maximum number of villages
• Provide flexible options for initial investment in households connection
• Maintain distribution to current customers and work with the community to move away from unnecessary water boiling habits
• Increase the water consumption and the awareness that clean drinking water is essential for good health
• Establish WSP as key provider for Water & Sanitation in the rural areas
• Leverage the overall offering of the WSP (e.g. engineering know-how, management expertise)
• Incentivise the Village Chief to help install and promote sanitation facilities
• “2 in 1”: Bundle pricing for drinking water and sanitation
Increase the number of water connections while ensuring a
sustainable profit
Provide sanitation to ensure a healthy community and happy
environment
37
A sustainable water business with social impact
Market Development Key Market Figures
The WSP operates in an attractive emerging market with need for expansion
2008 2015 2025CMDG plan (% of access to drinking water)
41% 50% 100%
Rural population with access to potable water
4,363,660
5,387,235
10,774,470
Rural Household with access to potable water
623,380
769,605
1,539,210
Rural Household potential for CadEAU
-
24,000
150,000
Estimated market coverage of CadEAU
- 3% 10%
• CMDG: Cambodian Millennium Development Goals
• Assumption of 6 persons/ households
• With the initial start of 3 WSPs, we aim to connect 80% of
households by 2015, which represent 3.1% of the national
market
• Based on 20% annual growth, by 2025 CadEAU shall reach 10% national coverage of the market
Source: World Bank Statistics
38
CadEAU: Promote drinking water• Promote the importance of accessible
drinking water through all levels of the education hierarchy
• Use the existing programs conducted by government and non-government organisations (e.g. Red Cross) to deliver education
• Leverage existing community structures for promotion:– Community gatherings– Use the influence of the village chief
and the elderly population
Education is key to driving demand and sustaining a healthy future
Source: Cambodian Red Cross
39
Link Drinking Water with Sanitation• Use visual aids to target a larger group
of villagers and drive the water and sanitation awareness amongst low literacy populations
• Collaboration with NGOs and the private sector to deliver health benefits and drive demand in rural areas
• Provide free water connection and sanitation to schools
• Maintain consistent school curricular involvement
Connect drinking water and sanitation for social impact
Source: Cambodian Red Cross
40
Tariff Structure “2 in 1” Package
Make water and sanitation affordable for low income households
Package 2Connection fee only (including the piping to the house and the meter)
Package 1Connection fee (including the piping within 20 meters to the house and the meter) and sanitation facilities
$92
Households who can afford Households who can not afford
Package 3Installment (12 months 10% interest) for the connection fee (including piping + meter) and sanitation facilities
$8.5 / month$70
The tariff structure supports the business model to bundle drinking water and sanitation
41
Tariff Structure
Tariff structure to support corporate social responsibility
• Higher connection fee for factories (larger pipes )
• Increasing consumption fee for industries
• Increase awareness to optimise the consumption for factories
• Free connection fee and sanitation for school to foster
education in village
• Only factories are charged for the maintenance fee
Monthly fee (USD/ m3) Household School Factories
Connection fee 70 0 800
Additional costs for a second tap 10
Sanitation 22 0
Consumption fee household (per m3) 0.50 0.50
Consumption fee factories (per m3)
0-100 - - 0.60100-300 - - 0.65>300 - - 0.70
Maintenance fee (per m3) - - 0.25
42
Brand Name and Rationale
CadEAU symbolises the gift of water
• The word “CadEAU” is the French word for gift and EAU means water in French
• Social value: the hand is a symbol of giving
• Water droplet is a precious resource
• The Khmer words in the water droplet also means gift
43
Branding Strategy
• Bringing clean drinking water to your home
• The brand can be used as a factor of differentiation from the other WSP
• The brand creates a sense of cleanliness and comfort
• Affordable water for all• Factories & households
have to recognise the value and price of water
Product Place
PricePromotion
44
Prosperity through the 4 P’s
Governance
i. Purposeii. Key Playersiii. Principlesiv. Organisational Structurev. Human Capital Requirements
Purpose • To create a model of governance for CadEAU which allows for
investment opportunities in the water sector
• To ensure that the company framework guarantees competitive returns to all stakeholders
• To build a structure which can be replicated in other areas of the impact investing space across market sectors
Create a sustainable model of governance to guarantee competitive return
46
Key Private Sector Players
INVESTOR
•Anchor investor or investors
•Aligned with social objective of the opportunity
•Maximum 90% holding, to be the majority shareholder
DEVENCO
•Shareholder which oversees the management and provides consultancy services
•Minimum 10% holding, to be the minority shareholder
WSP
•3 operators with 3-year licensing (expected to expand to more WSPs in the future)
•Providing drinking water to the community as a priority, provide water for commercial and industrial use as secondary
Technical specialist
•Technical advisor
•Best practices and standard in scaling up the production of capacity and pipeline network
47
Key Public Sector Players
MIME
•Ministry of Industry, Mines and Energy•Water service licenser/regulator/laws
USAID
•USAID: Installation of meters and pipes and monitoring quality of water
•Technical expertise
FINANCIA
L INSTITUTION
•Financing package eg. loan schemes
•Interest rate: 12%
LOCAL
AUTHORI
TY
•Coordination: Meter reading, billing, collecting fee, pipe installation and connection
•Village Chief
48
Governance PrinciplesPrinciple Enablers
Safe water to rural households Constitution of CadEAU ensures a balanced ratio of rural households to factory connections
Financial viability and profitability of CadEAU
Robust business model, accounting, strong sales & marketing
Alignment of stakeholders Work with value driven entrepreneurs and investors, engage with local authorities and seek support of villagers by outreach and education
Protect social mission of CadEAU Triple bottom-line reporting, conduct social audit, strict compliance and regulatory controls
Ensure financial return and social impact is achieved
49
A Phased Approach
50
Phase 2 – Growing by investing in 5 WSPs
Develop Technical Consulting Business Unit
Recruit additional 3 engineersand 1 accountant
Phase 1 – Establishing corporate identity and business
Invest and manage 3 WSPs, standardise, streamline and
stabilise operations
Core team of 3 staff headed by General Manager (GM)
Governance Framework
51
• Relationship between Investors and DEVENCO is governed by Shareholders Agreement which sets out parameters of the relationship
Investors
• In Phase 1, to provide management advisory services to CadEAU, perform daily operational oversight, and report to Board of Directors
• Transfer knowledge and skills to GM and local team to enable them to manage independently in Phase 2
DEVENCO
• Constitution of CadEAU protects social mission to maintain balanced ratio of rural households served to factories
CadEAU
Board of DirectorsRepresented by Investors and DEVENCO and provides strategic direction to CadEAU
Organisation Structure
52
DEVENCOInvestor(s)
CadEAU GM
AccountantCFO
Engineering Mgr IT Technician
WSP Operation Mgr 1
WSP Operation Mgr 2
WSP Operation Mgr 3
Board
Organisation Structure
53
GM – Daily operations, ensures compliance to standard industrial regulations and manages industry relations (MIME). Engineering Mgr- Improve and set up treatment plant, and pipe network. To study the base line of all technical aspects.Accountant- recording and reporting accounting transactions. Set up policies and procedures to control revenue, cash on hand, and performing internal control. IT Technician – develop software and training
GM – role remains the same as in Phase 1Engineering Mgr – remains the same and hire 2 additional engineers to form a Technical Consulting Business Unit (to consult within CadEAU and for external WSPs).Accountant – to be the same person as in Phase 1 and will grow to become the CFO of CadEAU. Hire an assistant.IT Technician – role remains the same as in Phase 1
Phase 1 Phase 2
54
Employee Title Personality/qualification Education Experience
General Manager Candidate of 30-45 years of age, Cambodian, honest, willing to travel to rural area through out the country. Candidate is committed to work in the rural community and is willing to take challenges in promoting the development of the rural community.
Bachelor Degree, preferably in the field of Management and Marketing
Minimum 5 years work experience in Sales and Marketing. Community Development field is an added advantage.
Accountant-CFO Candidate of 25-45 years of age, Cambodian, honest, willing to travel to the rural area through out the country. Candidate is to implement reporting processes and conduct internal control checks as well as to perform financial reporting for the CadEAU. Also perform loan and credit control function.
Bachelor Degree, preferably in the field of Accounting and Finance
Use to work as a full time accountant in similar field for minimum 3 years.
IT Technician Candidate of 24-35 years of age, Cambodian, honest, willing to travel to the rural areas. Candidate is to work with related employees to develop software application for customer information and billing system.
ITC Bachelor degree (software development)
At least 2 years work experience as software developer
Engineering Manager
Candidate of 25-50 years of age, Cambodian, honest, willing to travel to the rural areas of the country, and work closely with other employees to set up/install and inspect the treatment plant as well as the pipe network .
Water treatment engineer
Civil engineer
At least 3 years experience in water treatment plant experience in setting up of water treatment plant and water distribution network.
Human Capital Requirement
Operational PrioritiesOperational Priority Areas Description
1 Water & Sanitation Provide both clean drinking water and sanitation services, contribitute to clean surface water in the future and health standards of the community
2 Water Quality Improve treated water quality standards, ensuring testing and supervision
3 Operators Optimise current pipe network, refine water treatment plants, maintain integrity system
4 Billing System & Fee Collection Revise current billing system, engage the local community
56
Operational FocusCurrent:
Focus on operations and maintenance by WSP
Focus on water only and ensure reliable
supply as well as consistent quality
Future:Focus on growth
Maintain Drinking Water Quality
Expand number of connected households
Integrate Sanitation Services
57
Current Focus of WSP• WSPs operate in a fragmented industry without adhering to standards
or technical know-how skills. No profit and loss statements or accounting systems are in place
• Although they enter the market with great entrepreneurial vigour, their main aim is to maximise profits
• Operational standards are low and water quality is questionable
• Operators in general may lack desire to expand their businesses
• Due to the lack of consensus in best practices, the local community is vulnerable to fluctuations in water quality and therefore may lack conficence in the operators
WSPs operate in a fragmented industry with low operating standards
58
Future: Focus on Growth• Improve drinking water quality, to ensure health and labour
productivity
• Expand the water network to increase the access of rural communities to drinking water and generate more customers
• Improve engineering best practices, technical capability and skill-set of WSP operators
• Install sanitation services to protect surrounding water wells and improve hygiene standards of the population
Improve quality of service and best practice in water provision
59
Integration of Sanitation• Poor sanitation causes health problems, hazards for the
environment with the effect of local water source contamination
• Cost savings for WSP when combining water connection with septic tank installation for new customers
• Technical knowledge of instalment will be provided by CadEAU engineer. Septic tank system is simple, cheap, user-friendly and reliable
• Integrated training of the septic tank instalment team and the WSP team
Integrate water provision and sanitation facilities to achieve long-term well-being in a cost-effective manner
60
Water and Sanitation
Reduced Health Risk: Enhanced Quality of Life
Drinkable water
1 septic tank for 2 households to reduce costs.
WS
• Efficient installation of both services providing maximum social impact• Controlling run-off, reducing pollution of lakes, ponds and rivers.
WSP
61
Standards
International Organisation of
Standardisation
Ministry of Industry Mines &
Energy
INFLUENCERS
ENGINEERS
NGOs
WSP
• Standards are not
complete and currently under review
• Interested parties include NGOs, government and private sector
• WSP: challenge to implement standards
World Health Organisation
Priority: Maintaining Water Quality Standards
62
Operational ChallengesChallenges Solutions
Over or under-use of water treatment chemicals; Poor or infrequent testing
Improve knowledge and skills of plant operator; provide testing kits; adopt regular testing practices
Elevated arsenic pollution of surface water in some regions which exceed WHO standards
Increased testing, site specific; if necessary use improved filtration systems
Pollutant infiltration through pipeline network; old or leaking pipes (non-revenue water)
Identify problem areas; regular maintenance and improvement program
Poor plant design and bad installation of pipeline network
Adopt engineering best practice for plant design and laying the network pipes
Poor sanitation leading to contamination of surrounding water sources
Roll-out a sanitation plan together with water supply, eg. install septic tank systems
63
Improving Water Quality
Parameter Frequency
Colour, pH, residual chlorine, turbidity, total dissolved solids*
Daily
Arsenic, iron, manganese, nitrates, chloride, sulfate, hardness, aluminium
Quarterly
Inorganic constituents (eg. fluoride, lead) Yearly
Organic constituents and pesticides Every three years
Significant improvements in water quality can result from increased sampling frequency
Source: Drinking Water Quality Standards, MIME 2004
Frequent sampling helps to improve water quality
64
Improving Plant OperationsTreatment Plant• Review design and construction
of plant (standardise)
• Optimise chemical usage to reduce costs
• Implement maintenance schedule
• Consider capacity of treatment and storage and ability to expand as connections grow
• Implement regular water quality testing process and procedures
• Seek to reduce non-revenue water through active maintenance
• Map existing network
• Plan optimal route and pipeline capacity for expansion
• Establish appropriate procedures for installation of sanitation services
• Establish procedures for laying of water pipes
Pipeline Network
65
Billing ManagementCurrent Issues FindingsInefficient billing, metering & fee collection procedures
Significant staff requirements and time taken to issue invoice
Human resource issues in WSP
Sales & Marketing staff are not able to focus on business development activities as time primarily focused on meter reading and delivery invoicing (around 300 households per employee)
Fee collection process can be onerous on village community
Some WSPs require customers to pay at their premises which can be a far away from the villages and inconvenient for them to walk/bike to the WSPs
Doubt of accuracy for proper collection/payment
Lack of appropriate controls and checks in relation to meter reading
66
Current Billing ManagementCurrent Situation
Inefficient process leads to inability to focus on business development
Several WSP staff members need to go to the village and spend time and resources on reading the meters and distributing the invoice
WSP
Meter reading
Village A Village B
Payment
Invoicing
Meter reading
Invoicing
PaymentPayment PaymentPaymentPayment
Meter reading
InvoicingInvoicing
Meter reading
Every household has to go to WSP for payment
67
Proposed Billing Management
CadEAU
WSP will provide training and certificates to the village staff to issue invoices and collect money
CadEAU will provide training, certification, and billing system to WSP
New Model
Village A
Trained & CertifiedVillage Staff
-Meter reading-Invoice delivery-Collecting bills-Pay to WSP
Village B
Trained & CertifiedVillage staff
-Meter reading-Invoice delivery-Collecting bills-Pay to WSP
WSP
With the cooperation of the village chiefs, WSPs will hire trained & certified villagers as staff members for: - meter reading - invoice distribution - collection - payment to the WSP
Simplified process allows increased efficiency and better controls
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Meter reading: New Model
Village A
CadEAU
Check discrepancy
WSP
Trained & CertifiedVillage Expert
Install a Parent Meter at the entrance of the village and check the discrepancy with the sum up of each household meters.
500100
10010050
50 ParentMeter
Meter Recording Sheet
Parent Meter 500House A 100 House B 100 House C 100 House D 50 House E 50Total 400Discrepancy 100
?
New Model
Parent Meter identifies any leakages in the village
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Billing and Fee Collection System
WSP
Village Chief
Mobile bankingPrepaid water meter
Mobile meter reader
Payment via SMS and 24 hours
banking facilities
Mobile device to record meter
reading - bill will be issued instantly
Phase 1 Proposed
model
Phase 2Proposed Model
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Cost Savings by Centralised Purchasing OperationTotal of US$126K may be saved in 5 years through “Centralised Purchasing Function” with bargaining power of 5% in the New operating model -> Pipes, Meters, Chemicals, Electricity and others
2012 2013 2014 2015 20160
50001000015000200002500030000350004000045000
Number of households
2012 2013 2014 2015 20160
200000
400000
600000
800000
1000000
1200000
1400000
Usage of water (M3)
2012 2013 2014 2015 20160
50100150200250300350400450500
Length of Pipe (Km)
Projection of the growth from 2012 to 2016
New connections drives uptake in meters
Water consumption drives usage of chemicals and electricity
New connections drive up pipe and labour costs
71
Build Technical Skills]
Hire an Engineer. Why? To do the following:
• Engage an engineer on a full-time basis to provide technical expertise to all employees; can provide consultancy services to other WSPs
• Self-management approach – empower Operations Manager to direct daily operations of treatment plant
• Technical consultants offer an integrated collective learning process aimed at improving the professionalism of existing operators in the sector
• Training program to address existing deficiencies should cover:• Water quality and testing• Treatment plant design• Health and safety• Network mapping
• New connections – procedures for appropriate design and roll-out of new network pipe
• Administration training – ensure that back-office procedures (billing, metering, fee collection, accounting) are standardised
A technical engineer will provide full-time training to WSPs
72
Ongoing TrainingOngoing training program should contain the following steps:
1. Training program – 10-15hrs of training over a 12 month period to cover technical and management skills as well as review regulatory standards
2. Mandatory annual examinations for all operational staff with a required pass rate
3. Forum – monthly sharing of knowledge and best practices across WSP operators
4. External associations / advisors – engagement with other providers to share their expertise: Water Association, MIME, PPWSA
Ongoing training program will facilitate long-term productivity
73
i. Financial Structure ii. Valuation Strategiesiii. Financing Planiv. Major Financial Assumptionsv. Risk Assessments & Mitigation
Financials
Financing Structure of CadEAU
75
Investor(s) DEVENCO
CadEAU
90% 10%
Bank
WSP1 WSP2 WSP3 WSP4 WSP5
Total Fundraising: $2.5 M70% EQUITY30% DEBT
The usage of capital:Acquisition (65%)Cap. Ex. (25%)Working Capital (10%)
Investor is to be the majority stakeholder: 90%: 10% split is recommended between investor and DEVENCO
CadEAU: Valuation of WSPs
Assets
• Net Tangible Asset
• Price to Book Multiple
Cashflow
• Price Earnings Multiple
• Discounted Cash Flow Model (DCF)
Others
• Average monthly revenue per household
The Proposed Investment(s) by CadEAU would require the valuation of the identified WSPs which could be based on the following valuation methodologies :
Historical cost model
Future earnings model
Market penetration model
In view that the WSP(s) have an existing water concessionaire, it is recommended that the DCF model is adopted based on the future income stream of the WSPs over the concession period.
76
CadEAU: WSPs Selection Criteria
Minimise water supply disruption
and allow for expansion
Ensure good leadership and
smooth acquisition procedure
Strong income contribution
Ensure smooth transition in social
and business practices after
acquisition
Secure water source
Potential for growth
Quality of entrepreneur
and the willingness to
sell
Track record in ethical
practices and transparent
business
77
CadEAU: Investment Evaluation of WSPsBased on the Proposed Business Model and the projected cash flows of 5 potential WSP(s) under consideration by DEVENCO on behalf of CadEAU, it is estimated that the Proposed Investments in the identified WSP(s) would generate a positive Internal Rate of Return (IRR) of not less than 15% according to the following assumptions:
Positive IRR of >
15%
Initial Investment
Cost of approx $1.9M
Loan financing of
approx $0.3M
Investment tenure of 5-7
yearsPhased
Investment of 3 WSPs in
2012 and 2 WSPs in 2013
Note : No dividend to be distributed by WSP if not profitable
78
Initial Financing Plan
Step 1• Incorporation of
CadEAU as a Private Limited Co
• Issuance of 190,000 shares at $10 per share
Step 2• Acquisition of the
Identified WSPs by CadEAU for approx $1.9M to be paid from internal funds
Step 3• $0.3M Term Loan
Facility to finance Capex and Working Capital of WSPs
• The initial investment costs for the 5 WSPs by CadEAU is estimated to be $2.2M, of which $1.9M to be financed from the proceeds of the new issuance of shares to DEVENCO and the investor based on the shareholding structure of 10% and 90% respectively
• Subsequently, CadEAU is to obtain financing from a Commercial Bank for the expansion of the water network to rural areas and other working capital requirements
• 15:85 Debt to Equity ratio• Tenure of 5 years• 1 year grace period• Interest rate of circa 12% p.a• Monthly repayment• Fully secured against shares of
WSP + land + current assets79
Options for Subsequent Financing Plan
Operating Cashflows/Div from WSPs
Issue of new Equity or Preference Shares
• Moving forward, it is expected that CadEAU will need to expand its portfolio of investments in other WSPs and/or finance the expansion/diversification into new business sectors of water sanitation, bottled mineral water or sewage treatment etc.
• Since CadEAU has exhausted its Capital Funds and has leveraged its Balance Sheet for the Term Loan Facility, CadEAU is encouraged to explore other various forms of raising capital assuming that the existing shareholders would not increase their equity investments, in the following order :
80
Target Client Projection
(No. of household)
(No. of factory)
0
20
40
60
80
100
120
140
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Household served Factory served
When 80% of households achieve access to water
The increasing number of households served will be the major growth driver of CadEAU before 2016. Roughly 40,000 households will be served by the 5 WSPs managed by CadEAU
81
Revenue Breakdown
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
Sanitation fee
Connection Fee
Factory sales
Household sales
• Upon acquisition of the identified WSPs in 2012 and 2013, coupled with sanitation fee and higher connection fee will be significant portions of revenue to CadEAU
• By 2015, CadEAU can consider acquiring other WSPs to fuel growth by using their accumulated retained earnings(USD)
82
Income Statement
(USD)
• Revenue and profit will peak in year 2015 at $3.0m and $0.5m respectively when the largest number of households get access to water
• Profit margin will increase to roughly 18% in Year 2017 and will later decline to 10% in 2020, due to the affordable fee charged to customers and increasing costs caused by inflation
(500,000)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue Expenses Profit before tax Profit after tax
83
Financial Summary of an Average WSP
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020
No. of household 2,167 4,500 6,833 8,000 8,000 8,000 8,000 8,000 8,000
No. of factory 18 24 24 24 24 24 24 24 24
Total sales 202,783 485,883 595,883 619,800 472,800 472,800 472,800 472,800 472,800
Total expenses 180,733 353,034 407,492 367,191 280,213 286,886 293,893 301,250 308,975
Cap. Ex. 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Profit before tax and dividend 22,050 132,849 188,392 252,609 192,587 185,914 178,907 171,550 163,825
Net profit 22,050 106,279 150,713 202,088 154,070 148,731 143,126 137,240 131,060
Profit margin 10.9% 21.9% 25.3% 32.6% 32.6% 31.5% 30.3% 29.0% 27.7%
(in USD, unless otherwise mentioned)
The identified WSPs can enjoy significant improvement in accessibility to villagers as well as profit growth
84
85
LOW MEDIUM HIGH
HIG
HM
EDIU
M
Likelihood
Impa
ct
1 Costly pipe extension to remote villages
2 Non extension of license
3 Limited local specialists
4 Economies of scale
5 Unaffordable meter cost
6 Legal & Regulatory systems
7 Lack of supply of capital
8 Limited exit strategy
9 Inefficient billing system
Inconsistent water quality
Risk Assessment Matrix
10
11 Potential competitors in the market
The Risk Assessment will enable CadEAU to address the critical risk factors and successfully implement the necessary mitigations in a timely manner
LOW
12
3
4 567
8
9
10
11
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Risk Assessment & MitigationNo Risk Functional
AreaLikelihood Impact Risk Mitigation
1 Pipe extension to remote village is costly and capital intensive to CadEAU
Expansion & Growth
High High Cross subsidies from factories for consumption fee to villagersPotential for community equity ownership of pipeline in return for rebate/discount or equity in WSP
2 License with only 3 years of operation poses renewal risk to investors
Legal &Regulations
Medium High Look into political risk insurance (for example MIGA) Up until today no record of revocationMIME is reviewing the duration of licenses and will potentially extend the duration
87
Risk Assessment & MitigationNo. Risk Functional
AreaLikelihood Impact Risk Mitigation
3. Limited local specialists for the further expansion of company
Structure Low Medium Already interviewed and short listed candidatesIn the event outsource technical expertise to foreigners on contract basis
4. Achieving Economies of Scale
Operation Low Medium CadEAU responsible to assist for procurement (chemicals/pipes)Each WSP shares costs on marketing manager (for instance)
5. Meter cost is unaffordable to villagers
Marketing High Medium Propose to offer payment in installments to reduce financial burden of villagers
88
Risk Assessment & MitigationNo. Risk Functional
AreaLikelihood Impact Risk Mitigation
6. Limited transparency in current legal and regulatory systems and hidden costs
Legal & Regulations
High Medium The Cambodian Prime Minister has emphasised the importance of global investment for sustainable growth in coming years. DEVENCO has previously invested in Cambodia. They have a good track record. Management consists of Cambodian/French
7. Difficulty to obtain continuous supply of capital
Finance Medium Medium DEVENCO has obtained bank loans for previous investments so they have a good relationship with banks
8. Limited exit strategy Finance Medium Medium Buy back by WSP ownerPut and call options
89
Risk Assessment & MitigationNo. Risk Functional
AreaLikelihood Impac
tRisk Mitigation
9. Inefficient fee & billing collection in traditional model
Operations Low Medium Training provided to village chief to perform meter reading, distribution of invoices and collection of payment
10. Inconsistent water quality
Marketing Medium High Random testing and clear guidelinesPart of the capital used for investment in upgrade and new technologies
11. Potential competitors in the market
Marketing Low Low Provide high quality service so MIME allows more permits for expansion based on trust and track record
Implementation Plan Phase 1 (1-4 yrs) Phase 2 (5yrs-)Set up (-1yr)
Conduct feasibility study and due diligence of potential WSPs to be acquired
Hiring of General Manager, Accountant, Engineer and IT Technician
Execute transaction to acquire WSP 1-3
Higher number of household connected thereby increasing quality of life
Full automated computerised billingPrepaid water meter and mobile banking
Software for meter reading
Establishment of governance surrounding BOD set-up, Shareholders agreement, Management Agreement etc
Conduct market survey, prioritise villages within license area, determine tariff zones
Conducting sales village by villagePromotional campaign, awareness created through school curricular
Job creation eg village heads appointed as bills collectors
Rolling out financial training programme to local villagers via CadEAU staff
Provision of good sanitation thereby reducing greenhouse emission
Key
Activ
ities
91
Execute transaction to acquire WSP 4-5
Short-Term Recommendations
Invest in CadEAU today because tomorrow matters
1 •Work with values driven entrepreneurs and investors, engage with local authorities and seek support of villagers by outreach and education
2 •Centralise certain functions in CadEAU e.g procurement, finance
3 •Hire full-time engineer to monitor water quality and training
4 •Support the village chief to become an entrepreneur (perform meter reading, bill distribution and fee collection)
5 •Bundle drinking water and sanitation access
6 •Initiate stakeholders dialogue with international organisations and NGOs to foster long term community welfare
92
Medium-Term Recommendations 1 •Replicate the model and expand geographically to cover 15% of the national demand based on an annual growth of 20%
2 •Provide community with equity stake (rebate, early discount on the fee, after-tax dividends)
3 •Provide value-added financial training services to village households
4 •Evaluate options of partnership with mobile phone company: the aim is to allocate funds to scale up the connection of drinking water and sanitation at rural areas
5 •Adapt a multi-sector approach and search for synergies in other sectors e.g. waste water treatment and waste collection
6 •De-emphasise promotion of reverse osmosis process for drinking water
Based on the evaluation on our proposed investment in the identified WSP, we would project a positive IRR of at least 15%, therefore we recommend the investment.
93
Major Financial Assumptions 1 of 2• Operating assumption for 1 WSP covering commune(s) of 10,000 household and
30 factories Revenue Household
– Customers: 1,000 households grow to 8,000 households in 3 years– Selling price: 0.5 per m3 – Average consumption – dry season - $10/household/month – rainy season - $5.5/household/month– Connection fee: $70/ meter– Sanitation fee: $22/ householdFactory– Customers: 15 factories grow to 24 factories in 3 years– Selling price: 0.7 per m3 – Average consumption –$500/factory/month– Connection fee: $800/ meter
95
Major Financial Assumptions 2 of 2• Operating assumption for 1 WSP covering commune(s) of 10,000 household and
30 factories Cost
– Installation expense: $4,000 /km– New pipe to be installed: 10km / 1,000 household– Maintenance fee: $50 /km/ month– Land lease: $50 /km/ month– Household connection meter: $40/meter– Factory connection meter: $400/meter– Sales and marketing expense: $5,000 per year
• Financing assumption– Cost of acquisition for each WSP: ~$342,000– Extra capital for facilities upgrade and improvement: ~$171,000– Financing: Equity v.s. Loan = 70% to 30%
96
First-Hand Research
Assumptions are made based on the 32 households from 3 villages
• Kor Rokar• Chambak Meas • Kraing Makak
• Each households disposable income will increase from $37.58 to $51.12 due to higher saving on medical and electricity cost.
• Each households revenue will increase by 10% due to allocation of well and river water for irrigations.
• Households are able to pay the water connection fee within 3 months.
98
ReferencesAssumptions are made based on the 32 households from 3 villages
• Bek Chan WS– Kraing Makak (both accessed
and not accessed)• 1002 households
• Muk Kompul WS– Chambak Meas (accessed)
• 379 households– Kor Rokar (not accessed)
• 262 households
• Each households disposable income will increase from $32.62 to $44.35 due to higher saving on medical, gas and water cost.
• Each households revenue will increase by 10% due to allocation of well and river water for irrigations.
• Households are able to pay the water connection fee within 6 months savings.
99