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Post Harvest Solutions for Cambodia's Rice Farmers


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The Cambodian economy is heavily dependent on rice farming, which accounts for nearly 1/3 of its total agricultural production and utilises 80 percent of cultivated land. In 2012, only 200,000 tons of paddy, out of 9.3 million tons produced, were officially exported.

Cambodian rice was awarded Best Rice of the Year in 2012 and 2013 at the Rice Trader World Rice Conference. There is high potential for surplus paddy to be processed into quality milled rice for export which would increase the value of harvests to farmers and to contribute to the government’s target: to increase rice exports to 1 million tons by 2015.

The current fragmented rice value chain encourages informal exports of unprocessed paddy to Vietnam and Thailand and a loss of value for the economy. Traditional methods of drying and storage prevent farmers from selling their produce at a higher price during the off season when most millers have 30-40 percent idle capacity. A more consistent supply of quality paddy is needed throughout the year.

To address these issues, 25 executives from BASF and from 17 nationalities travelled to Phnom Penh and Battambang to explore the opportunities to strengthen the post-harvest value chain in the rice sector in Cambodia. After meeting key stakeholders, a compelling new social business was proposed to provide farming communities with professional post-harvest services, quality agricultural inputs and training.

This offers an attractive and timely opportunity for investors with an interest in agriculture and wishing to support financially viable businesses with far-reaching social impacts. The new business is projected to yield an attractive return on investment and benefit farming communities and the Cambodian economy.

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Post Harvest Solutions for Cambodia's Rice Farmers

  1. 1. Click to edit Master title style Post harvest solutions for Click to Cambodia’s riceedit Master title style farmers Impact investment business plan – November 2013
  2. 2. Table of Contents Introduction and Background 6 Objectives and Business Model 12 Organisational Structure and Governance 19 Operations Marketing & Sales and Strategic Partnerships 27 Finance and Investment 45 Community Benefits 55 Risks and Mitigation Measures 57 Implementation Plan 60 Conclusion and Recommendations 63 Appendix 65 38 2
  3. 3. About us 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. 3
  4. 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. 4
  5. 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 5
  6. 6. Introduction and Background 6
  7. 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. 7
  8. 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 Total paddy production** 9.3 million tons Local rice consumption 2.1 million tons Export* 205,717 tons Seeds and animal feeds Production and Consumption of Rice in Southeast Asia – Source: USDA, Spatial Production Allocation Model 3.1 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. 8
  9. 9. Players Function Rice value chain Supply / Production Input supply Seed and fertilizer supplier Production Farmer Market distribution and consumption Post-harvest Processing Collection Village collector Dehusking (milling) Polishing (milling) Wholesale & retailing Processors Processor Wholesaler Millers Millers Consumption Consumer Retailer Millers Farmer Large miller Traders Activities Miller Seed collection Growing Paddy collection Seed supply Crop Wholesale Polishing Retail Paddy selling Dehusking Rice trading Threshing Consumer Grading Drying Fertilizer supply Milling Storage Harvesting Drying Grading Selling Quality losses resulting in 10 – 30%* loss in value due to insufficient drying and storage facilities for small holder farmers Consumption 9
  10. 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 (3040%) 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. 10
  11. 11. 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. Conditions in Battambang optimal for new post-harvest solutions 11
  12. 12. Objectives and Business Model 12
  13. 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. 13
  14. 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. 14
  15. 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 15
  16. 16. Introducing ProspeRice Ltd. Creating prosperity for Cambodian rice farmers and the rural economy 16
  17. 17. A financially viable social business Investors  Holding company will be responsible for financial mgmt and establishing OpCos     Collection of paddy Drying Storage Technical support Operating Companies Millers Investment Payment Goods Dividend Option for drying/ storage Farmers Business model empowers farmers by realigning the market landscape 17
  18. 18. Scaling the business model in stages 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 Mid Term: (2 – 3 years)  Develop wholesale rice brand  Set up milling contract  Expand additional OpCo to neighboring districts / provinces 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 18
  19. 19. Organisational Structure and Governance 19
  20. 20. Key stakeholders and interests 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.         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     Investors Farmers   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 Millers Communities   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 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 20
  21. 21. Proposed shareholding structure ProspeRice Ltd. 10%  10% 80% Investors Executives Millers and Other key stakeholers Operating Company 40% 60% ProspeRice   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 ricegrowing 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 Farmers 21
  22. 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) Board of Directors Members Seat Investors 2 Managing Director 1 Managing Director Miller Association Rep. 1 Finance & Admin Manager Independent Director 1 Total 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 5 Lean organisation structure that provides equity to key stakeholders 22
  23. 23. ProspeRice management team Role Key Responsibilities  Managing Director     Finance & Admin Manager (F&A)   Est. salary (p.a, US$) 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 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 $12,000 Lean and efficient management team in start-up phase 23
  24. 24. Operating Company Proposed Ownership Structure % Shares % voting rights ProspeRice 40 100 Farming communities* 60 (minimum criteria for membership = rice grower) *Farmers’ voting rights could be a point of negotiation during the establishment of the company and if deemed necessary should be offered as a block vote rather than on an individual member basis. Operating Company Manager (1) Community Development Officer (1) Field Experts (3) Dryer and Storage operators (7) Truck Drivers (2) Org structure easily replicable for additional OpCos 24
  25. 25. OpCo management team and salaries Role Key Responsibilities Manager     Community Development Officer (CDO)    Est. salary (p.a, US$) 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 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 $12,000 OpCos will be managed by Cambodians with agriculture experience 25
  26. 26. OpCo operational team and salaries Role Headcount Est. salary (p.a, US$) 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 Total Operating Company Staff :10 full-time, 4 contract @ $35,600 p.a 26
  27. 27. Operations 27
  28. 28. Overview of ProspeRice operations Key areas of operations Service education* Drying Storage 9,000 tons / year wet paddy Quality Control Delivery to mill 7,800 tons / year dried paddy 28
  29. 29. Operational objectives Services Status Quo Objectives of OpCo Quality/yield issues due to limited technical education & access to inputs Improve yield of export-quality paddy by providing quality input and technical support. 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. 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. Farming Support Paddy collection Mill Delivery PropseRice will change the status quo on multiple fronts 29
  30. 30. Farming support (1/2) Farming support provided by OpCo will include: I. II. Commercial activity Land Planting 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 bestpractice Technical support Seeds Provision of seeds and fertilizers to farmers Nutrition 30
  31. 31. Farming support (2/2) Intended benefits Crop management Transplanting: pregerminated seedlings are transferred from a seedbed to the wet field. Nutrition management Site-specific nutrient management provides principles for optimally supplying rice. Crop protection Site-specific management provided to determine if pest management is necessary and if so to what degree. Operational Actions Drying process contributes to higher seed germination rates Source 200 tons of fertilizer from partner each year to secure timely supply. Facilitate quarterly technical advice from partners (CIRD, IRRI, etc) to farmers. 31
  32. 32. Paddy Dryer operations and options 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 1314% 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 ■ 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 ■ 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 ■ 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 32
  33. 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. *See Appendix III for more information Recirculation drying system is cost and energy efficient 33
  34. 34. Storage options ■ 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 ■ 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 34
  35. 35. Storage options – recommendation  ProspeRice will use a hermetic system such as the GrainPro SelfVerifying 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. *See Appendix IV for more information Hermetic storage is cost effective, mobile and easy to install 35
  36. 36. Quality control Farmer Dryer Monitoring by two OpCo technicians 1 1. 2. 3. 4. 2 Transportation* Storage 3 Miller 4 Wet paddy: freshness, moisture, contamination, mud, damage, etc. Drying: check the drying speed of paddy 25% ⇒ 14% Quality Checks and monitoring Dried paddy: moisture 14% Moisture done to export Just before selling: moisture 14% meter standards 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. 36
  37. 37. Mill delivery operations 8,000 6,000 4,000 Sold Stored 2,000 0 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. July. Aug. Sep. Dried Paddy (tons) 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.  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) 37
  38. 38. Marketing & Sales and Strategic Partnerships 38
  39. 39. ProspeRice pricing and sales strategy 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 J F M A Provide incentives M Year 1 J J A S Planting season O N D Harvest Buy period Price seasonality J F M Provide incentives A M Year 2 J J Planting season Sell period A S O N Harvest Buy period Selling price Dry paddy Wet paddy D Buying price ProspeRice maximises value for farmers by protecting them from seasonal price fluctuations 39
  40. 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 40
  41. 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 41
  42. 42. Communication with farmers “Lead farmer” program:  Field expert engages with lead farmer  Incentives: service education  “Seeing is believing” model Farmer Community Farmer Farmer 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) Farmer Lead Farmers – Village chiefs Key benefits to be communicated:  Farmer Field Expert Present Share holding program Technical Knowledge Training Provide Quality Seeds Operating Company Provide Fertilizer Incentivize farming communities through continuous engagement 42
  43. 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 New Company website Direct Sales Engagement Channels Brochures Agricultural Forums, i.e IRRI ProspeRice is THE reliable partner and friend of the millers 43
  44. 44. Communication with investors 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. 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. Key messages: social impact, rural development, robust business plan and long-term partnership 44
  45. 45. Finance and Investment 45
  46. 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 46
  47. 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 47
  48. 48. OpCo Cap-ex breakdown $100,000 $60,000 78% of the initial capital required for the first OpCo will be for the acquisition of storing and drying equipment $10,000 Drying equipment Storing equipment 66% Office buildings $340,000 12% 2% Trucks 20% Relatively low cap-ex required for each OpCo - US$510,000 Labor (holding and operating company) in first year – US$72,000 48
  49. 49. ProspeRice revenue projection 3 new OpCos set up 25 Million $ 20 1 new OpCo set up 15 10 5 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 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Revenue generated by selling dry paddy to millers Projected increase in revenue is driven by new OpCo(s). 49
  50. 50. ProspeRice cost breakdown 3 new OpCos set up 18 16 Million $ 14 120 100 1 new OpCo set up 80 12 10 60 Million $ 20 8 40 6 4 The procurement of paddy and provision of seeds and fertilizers make up more than 90% of total operating costs 20 2 - Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Others Seed/fertilizer Wet Paddy Accumulated cost Consistent net operating profit margin of 18% 50
  51. 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 51
  52. 52. Financing (1/2): 100% investor funding 25 Million $ 20 1 new OpCo set up 15 3 new OpCos set up 10 5 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 -5 -10 Profit after Tax and Interest Cash Flow After Tax Profit after Tax and Interest Acc Cash Flow After Tax Acc Intensive working capital requirements result in only 2% IRR over ten years Financial projections not inclusive of dividends 52
  53. 53. Financing (2/2): 50%:50%, investor:bank 20 Million $ 15 1 new OpCo set up 10 3 new OpCos set up 5 0 Yr 1 -5 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Profit after Tax Cash Flow After Tax Profit after Tax Acc Yr 10 Cash Flow After Tax Acc Leveraging bank loan results in IRR of 21% over ten years Financial projections not inclusive of dividends 53
  54. 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 54
  55. 55. Community Benefits 55
  56. 56. Community benefits      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 Option to dry & production of rice and to create greater security with less dependence on the weather for store 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. 56
  57. 57. Risks and Mitigation Measures 57
  58. 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 58
  59. 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 59
  60. 60. Implementation Plan 60
  61. 61. Implementation Plan (1/2) Q1 Short Term (0 - 2yrs) Q2 Q3 Q4 Yr 2 Mid Term (3 - 5 yrs) Long Term (> 5 yrs) Identification of investors / shareholders and establish ProspeRice Ltd. Establish governance framework for BoD, 2 shareholders agreement, etc Establish first OpCo and confirm site for 3 drying and storage facility 1 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 61
  62. 62. Implementation Plan (2/2) Short Term (0 - 2yrs) Q1 8 Q3 Q4 Yr 2 Long Term (> 5 yrs) Provide input and technical know how to the farmer 9 Q2 Mid Term (3 - 5 yrs) Replicate OpCo model with additional branches 11 Diversify into direct sales / export 12 Review following strategic options, e.g. build own mill, diversify crop 62
  63. 63. Conclusion and Recommendations 63
  64. 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 64
  65. 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 : 9,00018,000 tons Labor cost/ months : 4 head count ($400/month) Other cost : $275 Based on stakeholder meetings and discussions in Cambodia 65
  66. 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 66
  67. 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 fulltime 2 times) (volatile prices of diesel) Hermetic bags, a dryer, and trucks are the key investments, 8 permanent and 2 contract workers are required for operations 67