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

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

i. Business Modelii. Value Proposition

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

Operations

i. Operational Prioritiesii. Sanitisation, Water quality

and Billing Systemiii. Training

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

68

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

69

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

70

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

86

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 and Recommendations

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

Appendix

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

WSP Market Development

WSP operates in an attractive emerging market with need for expansion

97

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