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Post harvest solutions for Cambodia’s rice farmers Impact investment business plan – November 2013
2
Table of Contents
Introduction and Background 6
Objectives and Business Model 12
Organisational Structure and Governance 19
Operations 27
Marketing & Sales and Strategic
Partnerships 38
Finance and Investment 45
Community Benefits 55
Risks and Mitigation Measures 57
Implementation Plan 60
Conclusion and Recommendations 63
Appendix 65
About us
3
The Global Institute For Tomorrow – GIFT – is an independent think tank providing
content-rich and intellectually challenging executive education from an Asian worldview.
GIFT engages current and future leaders through an exceptional approach to executive
education and experiential learning and offers a wide range of unique action-learning
programmes to equip participants to lead effectively and succeed in a rapidly changing
and globalised world. This is achieved in a way that is both pragmatic and ethical, whilst
being fully aware of the role of business in society.
4
Executive Summary (1/2)
The Cambodian economy is heavily dependent on agriculture and rice farming in particular. The
government aims to increase its rice exports to one million tons by 2015 as compared to 0.2 million
tons in 2012.
Cambodian jasmine rice is internationally recognized and has been awarded World’s Best Rice at the
Rice Traders World Rice Conference for two consecutive years, 2012-2013.
A fragmented value chain results in significant informal export of unprocessed paddy to Vietnam and
Thailand and loss of value for the economy, keeping local rice farmers in poverty and selling under
duress.
As part of a leadership program for BASF and developed by the Global Institute For Tomorrow
(GIFT), 25 executives from 17 countries have proposed a new company, ProspeRice, to improve the
livelihoods of rice farmers by strengthening the post-harvest value chain through professional drying
and storage services, and by providing quality agricultural inputs and training.
ProspeRice will have operating companies (OpCos) in rice growing areas and be co-owned by
member farmers. These will be subsidiaries of the holding company.
Members may receive annual dividend payments, which are discretionary and according to company
performance, thereby incentivizing the farmers and ensuring consistent supply of paddy through
enhanced income and a sense of ownership.
5
Executive Summary (2/2)
Each OpCo will be equipped with a 100-ton/day dryer and 24 hermetic storage cocoons for long-term
storage. Revenues will be generated by selling dry export-quality fragrant jasmine and long-grain paddy to
millers, and supplemented by providing professional drying and storage services.
ProspeRice will be operating within 6-12 months of securing initial investment. Key activities during this
period include setting up the holding company, establishing the first OpCo, registration of member farmers,
installing the dryers and purchasing the storage cocoons, building sales networks and establishing
community development teams.
US$600,000 investment is required to establish the holding company and first OpCo in year one. Each
additional OpCo (five are proposed over ten years) requires approx. US$540,000 start-up capital which
are proposed to be staged with one coming online in year 3 and another three to come online in year 5.
Expected sales in year 1 will be 7,800 tons (US$3.5 million), rising to 15,700 tons (US$7.3 million) by Year
3, with a consistent net profit margin of 18%. The procurement of wet paddy and provision of seed/fertilizer
constitute the main variable costs.
A 50% bank financing scenario using rice stocks as short-term collateral would see ProspeRice offering an
IRR of 21% over 10 years. In this scenario the payback period to investors is 8 years.
ProspeRice provides a compelling impact investment opportunity to
benefit rice farming communities and the Cambodian economy
6 6
Introduction and Background
7
Cambodia at a glance
Strategically located in SE Asia,
Cambodia borders Thailand, Laos and
Vietnam.
Land area: 181,035 km2
Population: 15.4 million (78% rural,
approx 2.5 million farming households)
GDP per capita ~ US$1,000
Ranked 15th in the world for GDP growth
in the period 2000 – 2010
Agriculture is the country’s leading sector
(30% of GDP), followed by construction,
tourism, garments and textiles.
8
Cambodian rice sector
Rice farming accounts for nearly 1/3 of
Cambodia’s total agricultural production and
utilizes 80% of cultivated land
The government is targeting 1 million tons of
milled rice exports by 2015
Production and Consumption of Rice in Southeast Asia – Source: USDA,
Spatial Production Allocation Model 3.1
Total paddy production** 9.3 million tons
Local rice consumption 2.1 million tons
Export* 205,717 tons
Seeds and animal feeds 1.2 million tons
Significant potential for surplus
paddy to be processed into milled
rice for export * Source: Cambodian Rice Exporters Association, 2012 figures
** The average recovery rate for mills is between 60-65% for 100% of
paddy.
9
Supply / Production
Post-harvest Processing Market
distribution and consumption
Fu
nction
Input supply Production Collection Dehusking
(milling) Polishing (milling)
Wholesale & retailing
Consumption
Pla
yers
Seed and
fertilizer
supplier
Farmer
Miller
Farmer
Village
collector
Millers
Traders
Processors
Millers
Processor
Millers
Wholesaler
Retailer
Large miller
Consumer
Activitie
s Seed
collection
Seed supply
Fertilizer
supply
Growing
Harvesting
Drying
Threshing
Paddy
collection
Paddy selling
Rice trading
Drying
Storage
Dehusking
Grading
Milling
Polishing
Grading
Selling
Wholesale
Retail
Consumer
Quality losses resulting in 10 – 30%* loss in value due to
insufficient drying and storage facilities for small holder farmers Crop Consumption
Rice value chain
10
Rice sector opportunities and challenges
Opportunities
Leverage government support as it aims
to transform Cambodia into one of the
world’s major rice exporters.
Improve farmers livelihoods by adding
value through drying and storage allowing
them to benefit from seasonal price
fluctuations.
Introduce appropriate post-harvest
solutions and benefits into rural areas,
thus stimulating the local economy.
As most millers have idle capacity (30-
40%) during “low season”, meeting their
demand for consistent paddy supply
throughout the year.
Challenges
Inadequate irrigation limits most farmers
to one harvest per year.
Lack of quality seeds adversely impacts
yields.
Insufficient drying and storage facilities
compels farmers to sell at a low price and
prevents them from selling during the dry
season when the price is higher.
Financial position of farmers leaves no
choice but to sell wet paddy to collectors
and millers within 48 hours, much of which
ends up in Thailand and Vietnam.
11
Conditions in Battambang optimal for new post-harvest solutions
Proposed location for pilot initiative
Battambang province
Highly fertile and the leading rice producing province.
A leakage point for Cambodian rice due to predatory
tactics of Thai millers and traders.
Electricity supply is competitive and province is home
to Cambodia’s largest commercial rice millers.
Large quantities of wet paddy sold to Thai purchasers
via informal channels. Majority of remaining paddy
dried under poor conditions i.e. on roadside, resulting
in losses in quantity and quality.
Most of the ~ 1,800 mills running at 25% capacity due
to inconsistent supply, especially in low season.
Further due diligence is required to identify a site, with
electricity and road networks as key concerns.
12 12
Objectives and Business Model
13
Objectives
Design a viable business model centered around
technically sound and appropriate drying and
storage solutions for Cambodian export-quality
rice.
Propose a new commercial structure that
improves livelihoods of farming communities and
positively impacts the Cambodian economy whilst
being financially viable and attractive to impact
investors.
Suggest a company structure, governance
framework and operational model that promotes
transparency and accountability to attract
investors and also enables farmers to capture
additional value for their produce.
14
Rationale for business model (1/2)
Given the Cambodian government’s commitment to increase milled rice
exports five-fold between 2012 and 2015, and millers demand for a consistent
supply of export-quality paddy, especially during the low season, there is
clearly an opportunity for investments in the post-harvest segment of the rice
value-chain.
A new commercial structure involving the creation of a holding company is
needed. It will establish operating companies (OpCos) to purchase wet paddy
from member farmers, engage in technically sound and appropriate drying and
storage activities, and sell export-quality dried paddy to mills at a premium
during low season.
Non-member farmers and paddy collectors may utilise the OpCos drying and
storage services for a fee which will generate additional revenue.
In addition, and to support its core activities, each OpCo will also provide
quality agricultural inputs and training for members to improve the quality and
quantity of their harvest.
15
Rationale for business model (2/2)
To promote loyalty and ensure a consistent supply of wet paddy, 60% of the
shares in each OpCo will be offered to member farmers in the form of “sweat
equity”.
Farmer members will share in the success of the OpCos through an annual
cash dividend, according to performance of the company and decision from the
board.
A governance framework at the holding company level will ensure that the
interests of all stakeholders are protected in a fair and transparent manner.
Key players in the business model include investors, holding and operating
company employees, member and non-member farmers, millers and
shareholders.
A growing number of investors called “Impact Investors” are interested in such
opportunities and a viable commercial plan provides a solid framework for
investors to engage with stakeholders, including the government.
A new financially viable company to fill the gap in post-harvest solutions
16
Introducing ProspeRice Ltd.
Creating prosperity for Cambodian rice farmers and the rural economy
17
A financially viable social business
Collection of paddy
Drying
Storage
Technical support
Business model empowers farmers by realigning the market landscape
Investment
Dividend
Goods
Payment
Option for
drying/ storage
Investors
Operating
Companies
Farmers
Millers
Holding company will be
responsible for financial
mgmt and establishing
OpCos
18
Scaling the business model in stages
Short Term: (1 year)
Set up first OpCo in Battambang
Alliance with bank for collateralized loan
Develop relationship / network with farmers
A phased approach to create long-term value for Cambodia’s rice sector
Mid Term: (2 – 3 years)
Develop wholesale rice brand
Set up milling contract
Expand additional OpCo to neighboring districts /
provinces
Long Term: (5 – 10 years)
Three additional OpCos to come online
Possibility to set up own milling facility
Diversify into storage / sale of different
crops
19 19
Organisational Structure and Governance
20
Key stakeholders and interests
Investors Farmers
Communities Millers
Desire to make positive impact
on Cambodian rice sector
Seeking to drive improvements
in farmer livelihoods with
strategic investments
Reasonable investment returns
Transparency & accountability
of management team
More predictable and consistent
supply of paddy year-round
Paddy dried and stored to
export-standards
Better utilisation of high-cost
milling facilities
Increased revenues & profits
Improved agricultural livelihoods
leading to less rural-to-urban
migration (social cohesion).
Additional income allows for
improvement in nutrition, health,
education and productivity.
Greater independence and
more options for community
development
Higher price for their produce
Affordable access to
drying/storage facilities
Learn crop management best
practice for improved yields
A stake in the company: 60%
as “sweat equity”
Included into the modernisation
of the rice sector
The mandate of ProspeRice is to improve the quality of post harvest processing in the rice sector and
to ensure stakeholder interests are protected, whilst driving social development and minimising
environmental impacts.
21
Proposed shareholding structure
ProspeRice will seek alignment of
interests, ensure operational excellence
and transparent decision-making by
inviting key stakeholders to become
shareholders.
“Sweat equity” to be given to
ProspeRice executives (holding
company) and member farmers in
OpCo.
“Sweat equity” for member farmers, is
relative to land ownership and total rice-
growing acreage covered by OpCo
i.e. assuming all farmers in area are
members, if total area expected to
be covered by one OpCo = 1000
hectares then 10 hectares = 0.6%
share in that OpCo
80%
10% 10%
ProspeRice Ltd.
Investors Executives Millers and Other key stakeholers
40%
60%
Operating Company
ProspeRice Farmers
22
ProspeRice Ltd. (Holding Company)
Proposed Ownership Structure
% Shares % voting rights
Investors 80 80
Managing Director 10 10
Relevant Rice Miller Association 10 10
(subject to anchor investors’ approval)
Managing Director
Finance & Admin
Manager
Lean organisation structure that provides equity to key stakeholders
Board of
Directors
Members Seat
Investors 2
Managing Director 1
Miller Association Rep. 1
Independent Director 1
Total 5
Relationship between
investors to be governed
by Shareholders
Agreement. Additional due
diligence to be done on
how many investors and
board seats to be allocated
23
Role Key Responsibilities Est. salary
(p.a, US$)
Managing
Director
Acts as the public face of ProspeRice and engages in investor
and key stakeholder relations, OpCo development and
appointment of the OpCo manager(s)
Defines the strategic direction for the company.
Gives special attention to the company’s social mandate vis a
vis positive impact on the livelihoods of farming communities
via the activities of the OpCos
OpCo managers report directly to the MD
$24,000
Finance &
Admin
Manager
(F&A)
Responsible for the budgeting, financial reporting and
forecasting
Serves as the manager for the general administration, Human
Resources, Procurement, Payroll and Legal functions of
ProspeRice.
Oversees the F&A activities at the OpCos
$12,000
ProspeRice management team
Lean and efficient management team in start-up phase
24
Operating Company
Proposed Ownership Structure
% Shares % voting rights
ProspeRice 40 100
Farming communities* 60 - (minimum criteria for membership = rice grower)
Operating Company
Manager (1)
Field
Experts (3)
Dryer and Storage
operators (7)
Truck Drivers
(2)
Community
Development
Officer (1)
Org structure easily replicable for additional OpCos
*Farmers’ voting rights could be a point of negotiation during the establishment of the company and if
deemed necessary should be offered as a block vote rather than on an individual member basis.
25
Role Key Responsibilities Est. salary
(p.a, US$)
Manager Day-to-day running of OpCo and regular reporting to MD
Plans and optimises utilisation of drying/storage capacity,
supervise operational staff and quality control
Supervises and supports the field experts in customer
Community outreach i.e. technical training and farm
management.
Manage transport and logistics.
$12,000
Community
Development
Officer (CDO)
Engages with local stakeholders, especially farming
communities to promote “sweat equity” program and
monitors impacts of membership on farming families
Develops and maintains relationships with farmers and
millers to generate supply for drying/storage and help to
secure contracts for sale of dry paddy
$12,000
OpCo management team and salaries
OpCos will be managed by Cambodians with agriculture experience
26
Role Headcount Est. salary
(p.a, US$)
Field extension 3 $1,200/employee = $3,600
Dryer & Storage
Operation 5 $1,200/employee = $6,000
Dryer & Storage
Operation 2 (contract)
$100/month x 6 months x 2 employees =
$1,200
Truck Drivers 2 (contract) $200/month x 12 months x 2 employees =
$4,800
OpCo operational team and salaries
Total Operating Company Staff :10 full-time, 4 contract @ $35,600 p.a
27 27
Operations
28
Overview of ProspeRice operations
9,000 tons / year wet paddy 7,800 tons / year dried paddy
Drying Storage Service
education* Delivery to mill Quality Control
Key areas of operations
29
Operational objectives Services Status Quo Objectives of OpCo
Farming
Support
Quality/yield issues due to limited
technical education & access to inputs
Improve yield of export-quality paddy by
providing quality input and technical support.
Paddy
collection
Different types/qualities of paddy
mixed together during collection
Quality control and agreements with members
to ensure no mix of fragrant with non-fragrant
Drying
Sun drying results in losses and
reduction in quality, many farmers
forced to sell wet paddy at lower price.
Dry 100 tons/day of wet paddy to 14% moisture
content within 48 hours at export standard.
Storage
Due to limited storage capacity most
millers cannot utilise over 30%
capacity
Store dried paddy for 3-9 months, safe from
moisture and insects to command higher
prices.
Quality Control
Majority of post-harvest solutions not
properly monitored and do not meet
export standards.
Stringent Quality control and potential for intl
certification i.e. ISO, HACCP, etc.
Mill Delivery
Millers cannot secure paddy at optimal
times, dependant on collectors and
truck availability. Farmers cannot get
delivery service in time.
Deliver dried paddy to millers within 24 hours of
removing from storage without loss of quality or
quantity.
PropseRice will change the status quo on multiple fronts
30
Farming support (1/2)
Seeds Land Planting Nutrition
Technical support
Commercial activity
Farming support provided
by OpCo will include:
I. Provision of seeds and
fertilizers to farmers
II. Education of Health &
Safety issues related
to use of fertilizer,
herbicides, etc.
III. Strategic partners to
provide technical
support to farmers:
Land preparation
and water mgmt
Workshops to share
and learn best-
practice
31
Farming support (2/2)
Crop management Nutrition management Crop protection
Transplanting: pre-
germinated seedlings are
transferred from a
seedbed to the wet field.
Site-specific nutrient
management provides
principles for optimally
supplying rice.
Site-specific management
provided to determine if pest
management is necessary
and if so to what degree.
Drying process contributes
to higher seed germination
rates
Operational Actions
Source 200 tons of fertilizer
from partner each year to
secure timely supply.
Facilitate quarterly technical
advice from partners (CIRD,
IRRI, etc) to farmers.
Intended benefits
32
■ Recirculation batch-drying
■ A mechanical device that removes
moisture from wet grains by forcing
either ambient air or heated air
through the grain bulk
■ High cost, high capacity industrial
system
■ Sun-drying
■ Traditional method for reducing the
moisture content of paddy by
spreading the paddy in the sun
■ Low cost but quality and quantity
adversely affected and dependant on
increasingly unpredictable weather
Paddy Dryer operations and options
■ Flat-bed drying
■ A drying a machine that removes the
water from wet paddy by forcing
heated air through the grain bulk
■ Reasonable cost, can be constructed
from local materials but low capacity
Why does paddy need to be
dried?
• Rice is harvested at high
moisture content >20%
• Quality deterioration starts
immediately after harvest
• Paddy must be dried before
storage/milling to around 13-
14%
• Over drying leads to
economic losses for
farmers upon sale (lower
weight) and reduced milling
yields due to cracking
• Incomplete drying leads to
losses in quantity and
quality due to fungal growth
and insect infestation
33
Dryer options – recommendation
Based on the dryer options analysis,
ProspeRice will use the recirculating
batch drying system for the following
reasons:
Produces export-quality dried paddy
Large capacity (100T/day) for paddy
drying and increased speed in
humidity reduction
Has high energy efficiency, thus
reducing operating costs
Recyclable waste heat, contributes
to lowering operating costs
All the above benefits justify the higher
capital costs.
Recirculation drying system is cost and energy efficient
*See Appendix III for more information
34
■ Hermetic system
■ Controls paddy moisture content and insect activity for grain
stored in tropical regions
■ Provides insect control without pesticides
■ Reasonable cost given lifespan, ease of installation and
impact on quality
■ Silos
■ Big capacity and can be easily sealed for fumigation and less
grain is spilt or wasted
■ Not common in Asia due to moisture migration inside the silo
resulting in hot-spots and mold
■ High capital cost and considerable construction process
■ Farm level storage
■ Storage in outside granaries or in woven baskets
■ High loss from insects, rodents, birds and moisture uptake
are common in this system
■ Low cost but highly ineffective
Storage options
35
Storage options – recommendation
ProspeRice will use a hermetic
system such as the GrainPro Self-
Verifying MegaCocoon™ storage
system.
Designed for hermetic low-cost
storage of large quantities of
bagged grain; self-verifying
oxygen and humidity displays
eliminate the need for pesticides.
Used directly on the ground.
Flexible PVC material is highly
UV-resistant, with a useful life of
over 10 years.
Hermetic storage is cost effective, mobile and easy to install
*See Appendix IV for more information
36
Quality control
1. Wet paddy: freshness, moisture, contamination, mud, damage, etc.
2. Drying: check the drying speed of paddy 25% ⇒ 14%
3. Dried paddy: moisture 14%
4. Just before selling: moisture 14%
Dryer
Quality Checks
and monitoring
done to export
standards
Miller Storage Transportation* Farmer
Moisture
meter
1 2 3 4
Mo
nito
rin
g b
y t
wo
OpC
o t
echn
icia
ns
Strict quality control ensures export-quality dried paddy to millers
*Dried paddy from storage to miller will be transported in jute bags. Any fluctuations in moisture content is expected to be insignificant.
37
Mill delivery operations
0
2,000
4,000
6,000
8,000
Oct
.
No
v.
Dec
.
Jan
.
Feb
.
Mar
.
Ap
r.
May
.
Jun
.
July
.
Au
g.
Sep
.Dri
ed
Pad
dy (
ton
s)
Sold
Stored
Oct. – Dec.: Dry and store, 2,600 tons dried rice/ month, max.7,700 tons
Jan. – Mar.: Keep in storage
Apr. – Aug.: Sale to millers, 1,800 tons dried rice/ month when the price
increases
Two 10-ton trucks will be operated (two to three deliveries / truck / day)
Stock Volumes of Dried Paddy Opcos will manage
the storage and sale
of wet/dry paddy and
leverage price
fluctuations
throughout the year to
generate revenues
and profits by
delivering product to
millers during the low
season.
38 38
Marketing & Sales and Strategic Partnerships
39
ProspeRice pricing and sales strategy
Year 1 Year 2
J F M A M J J A S O N D J F M A M J J A S O N D
Planting season Harvest
Planting season Harvest
Buy period Sell period Buy period
Price seasonality Selling price
Buying price
Provide
incentives
Dry paddy
Wet paddy
ProspeRice will buy wet paddy from farmers during the peak season when prices
are lower and sell dry paddy during the off-peak season to the millers at higher price
Provide
incentives
ProspeRice maximises value for farmers by protecting them from
seasonal price fluctuations
40
Leveraging marketing & sales partnerships
Key partnership with strategic stakeholders will allow adequate transfer of goods
and services, and leverage on existing know-how and networks and bring
additional expertise from partners to local farmers
There are several advantages by working with strategic partners, such as:
Establishing a network to access quality seeds and fertilizers
Accessing state-of-the-art technology for drying and storage facilities
Facilitating knowledge transfer and develop training and communication
concepts between expert organizations and faming communities
Bringing in expertise and know-how from other countries and regions to
Cambodia’s rice industry
ProspeRice addresses critical needs of farmers and millers through
strategic partnerships
41
Potential strategic partners Strategic
partners
Specialties Value to the
company
Benefit for the partner
Drying and storage
equipment
Provide advise and
expertise on drying
and storing solutions
Provision of airtight storage
products in Cambodia
Develop new rice varieties
and rice crop
management techniques
Research, training and
knowledge transfer
Real-time, first-hand
feedback from user (farmers)
Ensure quality and safety
of our products, processes
and systems
Increase value and
reach of our product
through certification
Build a strong foothold in a
fast-growing emerging
market
Develop improved rice
varieties and technologies
for rice cultivation
Bring in high quality
seeds
Assist the Royal Government
of Cambodia to achieve its
rural development objectives
Collaborate on
sustainable projects
between government,
business and institutions
Offers a worldwide
network and
experience in social
engagement projects
Access to an agricultural
industry network in
Cambodia
Many additional partners will be identified during implementation
42
Communication with farmers
Field Expert
Technical
Knowledge
Training
Present
Share
holding
program
Provide
Quality
Seeds
Provide
Fertilizer
“Lead farmer” program:
Field expert engages with lead farmer
Incentives: service education
“Seeing is believing” model
Key benefits to be communicated:
Drying and storing services allow sale
of paddy at favorable market prices.
Additional income potential through
share dividends
Ownership stake, long-term value
Service education and farm inputs
(quality seed, fertilizer)
Operating
Company
Lead Farmers –
Village chiefs
Farmer
Farmer Farmer
Farmer
Farmer
Community
Incentivize farming communities through continuous engagement
43
Communication with millers
Approach: OpCos will position
themselves as a high quality supplier
and long term partner and friend to
millers through:
Ensuring export-quality dried paddy during
off-peak seasons in order to increase the
utilisation of milling facilities
Improve quality and yield of supply
through farming services and education
Developing its own suppliers (farmers)
through different incentives
Channels
Direct Sales
Engagement
New
Company
website
Brochures Agricultural
Forums, i.e
IRRI
ProspeRice is THE reliable partner and friend of the millers
44
Potential investors could include impact investment funds, angel investors, local
Cambodian investors, MNCs and Commercial Banks.
Approach: emphasis on social investing to deliver sustainable financial
returns based on community and farmer engagement.
Communication with investors
Key messages: social impact, rural development, robust business plan
and long-term partnership
Key benefits to be communicated:
Fast growing sector key to country’s economy;
Positive social impact on the Cambodian society whilst
generating financial returns;
Community has majority ownership in OpCos but
ProspeRice retains voting rights;
Aligned with government initiatives to develop the
Cambodia rice industry;
Cambodia’s liberalised economy provides favorable
business operating environment.
45 45
Finance and Investment
46
ProspeRice Impact Investment opportunity
The launch of ProspeRice presents an excellent opportunity for investors who wish
to create significant impact in Cambodia’s promising rice sector.
A total investment of US$2.5 million is required over the first 5 years, with an initial
capital investment of US$600,000 to start the business.
A second capital investment of US$500,000 is proposed in Year 2 for the
installation of the second OpCo, followed by an additional US$1.5 million in Year 5
for three more OpCos, contingent on company performance and growth.
Financial projections are based on securing bank financing for working capital to
collaterise the supply of paddy from member farmers. Dividend payments will
affect returns and be thus agreed by the board.
ProspeRice is also an opportunity to shape the nascent landscape for impact
investing by providing a blended return to both investors and to farmers in
Cambodian society.
ProspeRice is a unique investment to benefit Cambodia
47
Key financial assumptions
Current market value of export-quality paddy is used in the projections
Revenue from additional storage / drying services is deemed negligible
Bank interest and micro financing rates remain at current 10% and 24%
respectively
Consumer Price Index remains at the current 4%
Depreciation 10% for machinery and 5% for building
No major changes in government policies
Discount rate of 10% for net present value (NPV) calculation
48
OpCo Cap-ex breakdown
$60,000
$340,000
$10,000
$100,000
Drying equipment
Storing equipment
Office buildings
Trucks
78% of the initial capital
required for the first OpCo will
be for the acquisition of storing
and drying equipment
12%
66%
2%
20%
Relatively low cap-ex required for each OpCo - US$510,000
Labor (holding and operating company) in first year – US$72,000
49
ProspeRice revenue projection
-
5
10
15
20
25
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Mil
lio
n $
Revenue generated by selling dry paddy to millers
A majority of the
revenue will be
generated by the
sale of quality dry
paddy to millers.
This revenue will
increase with every
new OpCo set-up
1 new OpCo
set up
3 new OpCos
set up
Projected increase in revenue is driven by new OpCo(s).
50
ProspeRice cost breakdown
-
20
40
60
80
100
120
-
2
4
6
8
10
12
14
16
18
20
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Mill
ion
$
Mil
lio
n $
Others Seed/fertilizer Wet Paddy Accumulated cost
The procurement of
paddy and provision
of seeds and
fertilizers make up
more than 90% of
total operating costs
1 new OpCo
set up
3 new OpCos
set up
Consistent net operating profit margin of 18%
51
Overview of Financing Options
Two options for financing the company’s working capital have been considered
as highlighted in the following section. These include 100% investor funding
and 50/50 investor and bank funding.
Both scenarios assume an initial investment of $600,000 to cover capex to
establish the holding company and one operating company
The recommended and most likely scenario is a shared financing model
wherein both investor funds and bank financing are utilised. A 50/50 scenario
presented below yields an attractive return and provides secure cash flow for
the business.
Bank financing is essential to create the conditions for the
transformation of Cambodia’s rice sector to benefit farmers and for
government export targets thereby to be met.
Bank financing is essential and will help to transform the rice sector
52
Financing (1/2): 100% investor funding
-10
-5
0
5
10
15
20
25
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Mil
lio
n $
Profit after Tax and Interest Cash Flow After Tax
Profit after Tax and Interest Acc Cash Flow After Tax Acc
3 new OpCos
set up
1 new OpCo
set up
Intensive working capital requirements result in only 2% IRR over ten
years Financial projections not inclusive of dividends
53
Financing (2/2): 50%:50%, investor:bank
-5
0
5
10
15
20
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Mil
lio
n $
Profit after Tax Cash Flow After Tax
Profit after Tax Acc Cash Flow After Tax Acc
3 new OpCos
set up
1 new OpCo
set up
Leveraging bank loan results in IRR of 21% over ten years
Financial projections not inclusive of dividends
54
Recommendation: Bank involvement is
essential to commercial viability
Working capital should be secured via bank loans
Currently, Cambodia does not have adequate bank facilities to use floating
assets as collateral so securing 100% bank loan is unlikely
However, a significant amount of paddy and fixed assets presents a good
opportunity to secure collateralised short-term loans from banks at a
competitive rate
Representatives of banking industry have shown a willingness to lend
against export-quality paddy stocks over a short period (<1 year)
Loans are necessary to reduce the financing burden of working capital
Banks could be offered a stake in ProspeRice, the holding company
Banks are offered the opportunity to invest in social progress
55 55
Community Benefits
56
Community benefits
Option to dry &
store
Improvements to the rice supply chain, particularly in post-harvest production where
most of the losses occur, carry benefits for various players and stakeholders, from
farmers, to the community and to the country as a whole.
Through service education, farmers will access workshops and trainings on improved
crop management and to better agricultural inputs, equipping farmers to upgrade the
production of rice and to create greater security with less dependence on the weather for
drying.
In turn, farmers will enjoy increased income due to improved quality and yield, and
potentially dividends from ProspeRice. Overall improvements of the rice value chain
through ProspeRice will be more inclusive of farmers as the sector modernises and
becomes more export-led.
Millers will also increase their total annual income by utilizing off-peak periods for better
capacity utilisation, by accessing high quality dry paddy which increase total revenues
and reduces breakage and losses during milling.
The environmental impact of PropeRice will be minimised. Drying and storage facilities
will be energy efficient and use the best technology available. Indirect impacts from
service education include a more precise application of inputs (reducing run-offs);
improved crop rotation for improved nitrogen fixation and to better resource
management.
57 57
Risks and Mitigation Measures
58
Financial and operational risks
Risk Mitigation measure
Farmers not willing to sell, e.g. due to
price competition for wet paddy from
Thai and Vietnamese traders
■ Develop loyalty through “input education”
outreach / training program
■ Farmers are shareholders in OpCos
Fluctuating availability of husks for dryer
fuel
■ Dryers can use various kinds of fuel (such as
electricity)
Low supply / overall economic or harvest
environment is bad
■ Maintain low fixed costs
■ Avoid take-or-pay contracts with miller
Low demand ■ Long term storage available
Oversupply / change of “Everything but
Arms” preferential import treatment from
EU
■ Maintain the highest export-quality standards
and explore international certification
Unusually high demand ■ Preferential treatment for loyal millers
■ Dynamic pricing
59
Social & environmental risks
Risk Mitigation measure
ProspeRice unable to fulfill pricing or
supply commitments to farmers
■ Start small and establish credibility step by step
Fraud / crime / safety / security / social
instability or conflict
■ Good corporate governance / checks and balances
■ Create good relationship with local community
Availability of skilled labor ■ Effective training program
■ Strategic partnerships with supplier companies (crop
protection, fertilizer, seed companies)
Conflict of interest between farmers,
dryers, collectors, and millers
■ Transparent and open culture; shared objectives of
ProspeRice
Crop loss due to flood or drought ■ Maintain low fixed costs
■ Avoid take-or-pay contracts with miller
■ Hygienic storage for long-term food stability
Soil erosion / soil loss / lowered soil
quality because of intensification of
agriculture (two seasons)
■ Input education / training outreach program; use best
available technologies
Emissions (husk burning) ■ Choose lower emission technology
60 60
Implementation Plan
61
Implementation Plan (1/2)
Short Term
(0 - 2yrs) Mid Term
(3 - 5 yrs)
Long
Term
(> 5 yrs) Q1 Q2 Q3 Q4 Yr 2
1 Identification of investors / shareholders
and establish ProspeRice Ltd.
2 Establish governance framework for BoD,
shareholders agreement, etc
3 Establish first OpCo and confirm site for
drying and storage facility
4 Construction and equipping of drying and
storage facility
5 Recruitment and training of staff to work in
drying and storage facility
6 Alliance with bank for collateralized loan
using stored paddy
7 Identify millers who will purchase dried
and stored paddy and set up contracts
62
Implementation Plan (2/2)
Short Term
(0 - 2yrs) Mid Term
(3 - 5 yrs)
Long
Term
(> 5 yrs) Q1 Q2 Q3 Q4 Yr 2
8 Provide input and technical know how to
the farmer
9 Replicate OpCo model with additional
branches
11 Diversify into direct sales / export
12 Review following strategic options, e.g.
build own mill, diversify crop
63 63
Conclusion and Recommendations
64
Conclusion and recommendation
• It is a crucial and opportune time to invest in Cambodia: the rice value
chain, currently fragmented and prone to losses, is ripe for integration that would
allow greater value to be retained in Cambodia.
ProspeRice will have a significant, positive impact for Cambodian farmers by
improving household income and empowerment, while also providing benefits to
rice local collectors and millers.
ProspeRice’s commercial viability hinges on leveraging short term bank loans
using stored paddy as collateral
Investors in ProspeRice will help realise economic benefit throughout the
Cambodian rice value chain, created by a financially self-sufficient business.
ProspeRice has the potential to directly and permanently improve the
livelihoods of thousands of farming families
65
Appendix I: Dryer specification & operation cost
Price per unit : $60,000
Capacity (Paddy) : 3,000 tons/
month
Dec.-Jan. for fragrant rice and
Feb.-Apr. for other varieties.
Energy consumption : husk and
electricity 60 KW
Moisture decrease : 4-15%/ day
Percentage of paddy breakage :
less than 0.5%
Size of machine : 4m high.
Operational Paddy dryer Unit :
Capacity rate : 100 tons / day /
machine.
Working days : 30 days per
month, 6 months/year
Total Dry paddy/years : 9,000-
18,000 tons
Labor cost/ months : 4 head count
($400/month)
Other cost : $275
Based on stakeholder meetings and discussions in Cambodia
66
Appendix II: GrainPro MegaCocoon™
Storage Capacity : 320 tons
Dimension: 14m x 10m x 3m
Total No. required: 24
Land space required: 10,000 m2
67
Appendix III: operational resources
Service Asset Investment Operational Cost Manpower
Farming
Support
N/A Fertilizers (200 tons at
$17/ton), seeds (140
tons at $37/ton)
1 fulltime
Drying 100 tons / day
recirculating batch dryer
7,600 m2 land
Electricity, husk /
charcoal ($1.6 / ton of
paddy)
3 fulltime
Storage 320 tons x 24 each
hermetic bags
Warehouse shelter
4,800 m2 storage area
Jute Bags (50kg x
153,000 each)
2 fulltime
2 contract
Delivery 10 ton truck x 2 each Fuel (40km x 2 each x
2 times) (volatile prices of diesel)
2 fulltime
Hermetic bags, a dryer, and trucks are the key investments, 8 permanent
and 2 contract workers are required for operations