Scaling up water treatment and distribution in Cambodia

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GIFT ran its first YLP of 2012 in Hong Kong and Cambodia. 21 executives of 11 nationalities representing 13 organisations designed a business plan focused on the creation of a significant investment opportunity in water treatment and distribution in rural Cambodia. This diverse group was comprised of emerging leaders from countries including Japan, Australia, and Malaysia who were nominated by organisations such as BASF, NEC, ORIX, Origin Energy, SOMA group and others. The programme was conducted in close partnership with DEVENCO, one of Cambodia's first venture capital and investment firms who take a socially-oriented approach to investing.

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  • Provides drinkable water and toilets to schools in order to initially develop awareness of the social impact associated to these product.
  • Scaling up water treatment and distribution in Cambodia

    1. 1. Business Plan: Imact InvestmentOpportunity in Cambodia’s WaterSectorProduced by the participants of the Global Young Leaders ProgrammeFebruary 2012Business Plan: Impact Investment Opportunity inCambodia’s Water Sector
    2. 2. Table of ContentsTable of ContentsExecutive Summary 3Background and Objectives 8Business Model 16Social Impact 25Sales & Marketing 33Governance 45Operations 55Financials 74Implementation Plan and Recommendations 90Appendix 94
    3. 3. Executive Summary
    4. 4. Executive Summary• Approximately 95% of rural households in Cambodia do not have access toclean drinking water and sanitation• There is an opportunity to create a company which will enhance efficiency andimprove water quality for rural households through economies of scale andsetting best practices• The social impact of this project includes long-term health improvements dueto improved access to clean drinking water and sanitationProvision of clean drinking water and sanitation is crucial in Cambodia4
    5. 5. Executive SummaryProblem Cycle Business Summary• Creation of a sustainable businessmodel which meets both financialgoals and social impact objectivesthrough greater access to cleanwater and sanitation• To invest in existing Water ServiceProviders (WSPs) and expand thepipe network to supply more than40,000 households over 5 years• A stable cash flow will lead to highperformance in investment withexpected IRR of 15% p.a.Lack of financing optionsfor existing operators dueto size of individualoperationsVillagers’ lack ofunderstanding ofthe benefits ofclean waterPoor technicalexpertise at theoperator levelLack of reliabledistribution of qualitywater in rural areasPoor financialrecordingSubdued demandfor clean water dueto high upfrontconnection costs5
    6. 6. Executive SummaryEfficient & Socially ConsciousBusiness Operations • The creation of a holding company will beat the heart of the business model drivingefficiencies and effectiveness in operatinga financially and socially sustainablebusiness venture• Current Water Service Provider (WSP)operational processes will be streamlinedto realise the efficiencies and will includeactivities such as purchasing, meterreading and billing management• Delivering a “Village Equity Model”whereby the WSP and villages could sharethe costs of pipe installation in return forrebates, tariffs and potential equity stakesin the WSP or holding company6
    7. 7. Executive SummaryAn Attractive InvestmentIn 000’s 5 Year Projection (5 WSPs)• The efficiencies and projectedgrowth through the acquisitionof Water Service Providers (WSP)is expected to deliver within a 5year horizon:– Strong Compounded AnnualGrowth Rate (CAGR) of 35%– Healthy profitability of circa40%• Assuming exit is achieved in2016, the investor could enjoy anIRR of at least 15% per annum7(500)05001,0001,5002,0002,5003,0003,5002012 2013 2014 2015 2016RevenueEBITDANet ProfitAll figures are in USD unless otherwise stated.
    8. 8. Background and Objectivesi. Who We Areii. Global Water Supplyiii. Cambodia: Current WaterSituationiv. Cambodia: ImpactInvestment Opportunitiesv. Investment Plan Objectives
    9. 9. Who We AreEntity FunctionGlobal Young LeadersProgramme (YLP)• An executive leadership development programmeinvolving international executives from many parts ofthe world, diverse in culture and industry backgrounds• Participants examined the landscape for rural watertreatment and distribution and recommended abusiness plan to drive real world benefitsGlobal Institute ForTomorrow (GIFT)• A pan-Asian ‘’think and do tank’’• Enabling social investment through output-drivenexperiential executive education in AsiaDEVENCO • A venture capital and investing consulting company• Potential equity investor in WSP projects• Investment criteria: Profitability, Market Potential andSocial Impact9
    10. 10. 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 andpoor sanitation• The Millennium Development Goals (MDGs) promote full access to water andsanitation globally by 2015Source: World Health Organisation; www.who.org10
    11. 11. 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 streams1.6m out of 2.9m urban householdsdo not have access to cleandrinking water10.3m out of 10.9m ruralhouseholds do not have accessto clean drinking waterSource: World Bank Water and SanitationProgram (WSP)RuralUrbanAccess to cleandrinking waterRural PopulationUrban PopulationAccess to water is critical for many rural households11Pie = Cambodia population splitbetween Rural and Urbanpopulation, showing the contrastbetween those who have access andthose who don’t
    12. 12. 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 thebreeding of disease vectors• Presence of microbes and contaminants cause diseases ranging from diarrhea,Cholera to Hepatitis ASource: National Census 2008 (NIS.2009c), Ministry of PlanningRural areas lack sanitation facilities12Percentage Water & Sanitation Coverage
    13. 13. Cambodia: Current Water SituationProgress to date:1. Government• Modern public sector water supply exists in Phnom Penh as the Phnom Penh WaterSupply Authority (PPWSA) is a success story in the developing world• Regulatory bodies such as Ministry of Industry, Mines and Energy (MIME) monitorsthe water quality and provides technical assistance to WSPs2. 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 andmanagement skills• Some rural communities understand the need to move away from traditionalsources of drinking water but there still needs to be more willingness to pay forclean waterExisting providers are faced with limitations to financing13
    14. 14. Water Sector: Impact Investment OpportunitiesSocial FactorsGrowing population: Low labourcosts, human capital, unmet demandOver 400 NGOs with local knowledgenetworks putting grants and funding intothe sectorRising disposable incomes in some ruralareas indicates a willingness to pay foraffordable servicesSupport from government whichprovides freedom for social innovationand scaling of value chainsAbility to shape investment scope in anewly emerging marketPolitical & Economic FactorsA diverse range of banks can be madeaware of this business opportunitywhich is different from traditionalbusiness linesA high-potential sector within a strong emerging market14
    15. 15. Investment Plan Objectives• To provide access to clean, drinking water and affordable sanitation servicesthrough a profitable social venture in Cambodia• To establish a holding company to invest in and acquire existing WSPs in order toachieve economies of scale, by expanding the piped network to 40,000households over a period of 5 years• To maximise social impact while realising a reasonable IRR through a triplebottom-line approach: financial, social, environmental returns15
    16. 16. Business Modeli. Business Modelii. Value Proposition
    17. 17. Business Model: Objectives• Outline an inclusive business strategy which meets the needs of ruralcommunities• Increase the number of households connected to clean water throughaffordable pricing and incentives• Extend the WSP proposition to include a bundled water and sanitationservice• Create, deliver and capture value through economies of scale andimproved efficiency of billing and fee collection• Provide enhanced governance and financial reporting• Provide a platform for future growth which can be funded through accessto debt marketsProvide sustainable financial returns for investors17
    18. 18. Business Model: IssuesIssues Current Situation1 Piped drinking water Not all operators supply drinking water; water quality can vary duringthe year and between operators2 Meter cost for household Many low income rural communities are not able to afford upfrontconnection fees3 Transmission pipe and capacityexpansionWSPs lack access to capital and therefore cannot fund expansion4 Factories versus villageconsumption & tariff structureNo standard tariff policy; extent of cross subsidies can vary; oftenfactory and village tariffs are the same5 Lack of sanitation in rural areas Poor sanitation leads to water contamination and diseases6 WSP Entrepreneur Investing in WSPs requires also retaining the skills and relationships ofthe entrepreneur7 DEVENCO services Potential conflict if DEVENCO will be the sole provider of managementservices8 3-year license period Time period is too short and will be a concern for any potentialinvestors, particularly foreign investors9 Connecting remote villages Costly to expand pipeline networks to remote areas18
    19. 19. The Business Model: ProposedDebt InvestorsHolding Co.WSP WSPVillageCommunityVillageCommunityVillageCommunityWSPDEVENCOWater SupplySanitation ServicesWater SupplySanitation ServicesManagementskillsEntrepreneurEngagement:Earn-out modelMinority stakeRemarks:Connection fee shallbe up front or ininstallmentsTariff Structure :1. Connection2. Maintainance3. ConsumptionMinority shareBank lending19Majority share
    20. 20. Business Model: Key FeaturesIssues Impact of Proposed Model1 Piped drinking water Improved water quality through access to technical expertise from the holdingcompany who will hire a full-time engineer2 Meter cost prohibitivefor householdsLowest cost (no margin) connection fee able to be paid on an installment basis3 Transmission pipe andcapacity expansionAppropriate governance and financial statements to enable access to banklending to fund growth4 Factories versus villageconsumption & tariffstructureConstitutional requirements of holding company balance factory and villageconnection rates; tariff structure is to subsidise villages5 Lack of sanitation inrural areasBundle water connection and septic tank installation to deliver significant socialimpact whilst not compromising financial returns20
    21. 21. Business Model: Key FeaturesIssues Impact of Proposed Model6 Role of WSPEntrepreneurEntrepreneurs are to retain a minority stake (with potential to buy-backshares in the future) or receive an earn-out payment over at least threeyears (to cover one license renewal)7 DEVENCO services DEVENCO to invest equity for at least a 10% stake in the company to aligninterests with investors8 3-year license period Retain entrepreneur’s involvement in the WSP to ensure consistency inlocal relationships and service delivery9 Connecting remotevillagesPotential Village Equity Model - offers villages a 50/50 ownership in thetransmission pipeline; village to fund their share and in return receiveeither annual rebate/discount or equity in WSP21
    22. 22. Proposed Village Equity ModelWSPVillage ChiefFor villages located considerably far from the WSP network, the village mayconsider sharing the cost of the transmission pipe with the WSP.ParentMeterA cost-sharing model enables WSPs to serve the village communityRemote VillageWSP existingnetworkTransmission pipe cost shared50/50 with village. In return forsharing the cost of the pipe, thevillage could receive:• annual rebates• discounted tariffs• equity in WSP22
    23. 23. Proposed Operational ModelHolding Co. GMSales &MarketingEngineering Purchasing AccountPurchasingSales &MarketingVillageChief & certifiedworker (paidemployee of WSP)Meter reading,distribution of the invoice,collect money (pay toHolding Co.)WSPsOpsManagerCustomer ServiceFee collection, meter datainput, sales/marketing billingOperationsTreatment process , testing new,maintenance, securityplant safety23
    24. 24. Value proposition: efficienciesWSPWSPWSPCentralisationKey functions: Sales & MarketingPurchasingEngineeringAccountingVillage engagementKey functions: Meter readingInvoice distributionFee collectionHealth educationBundled: water and sanitationEconomies ofscale, purchasing power andimproved technicalexpertise, standardcompliance and trainingInnovative and efficientbilling management andfee collectionSignificant social valuethrough delivery ofbundled water andsanitation service24
    25. 25. Social Impacti. Community Overviewii. Primary & Secondary Goalsiii. Household Income & Expensesiv. Projected Trends
    26. 26. Community Overview• Traditional methods of household water collection prevail in ruralhouseholds, including dug wells, hand pumps and rainwater harvestingstructures• Surface contamination occurs frequently and water related healthillnesses are widespread• Connection fees are managed by WSPs and although there are 140 WSPsin Cambodia, the majority service less than 30% of the households in thelicensed area26
    27. 27. Primary GoalsHealth•Lower householdexpenditure on medicationand clinics•Higher labour productivitydue to improved well-being•Less contamination inimmediate environmentwith sanitation facilityQuality of Life•Ease of accessibility todrinking water andsanitation facilities; time-saving costs•Village communities buildsustainable knowledgetransfer around thebenefits of piped water andsanitationValue-Add Services•Financial training servicesfor villagers in managinghousehold budgets andexpenditures•Stakeholder dialogue withinternational organisationssuch as the Red Cross tofoster long-termcommunity well-beingThe goal is to build a healthy & value-driven community27
    28. 28. Secondary GoalsJob Creation•Greater demand for contract rural workforcefor pipe and meter installation•Greater number of village entrepreneurs inthe WSP system•Increased number of permanentemployment opportunities in administrationand treatment facility maintenanceEnvironment•Reduction of greenhouse gas emissionsthrough lowering the amount of waterbeing boiled•Lower deforestation rates by decreasing thefirewood burnt for boiling water•To preserve soil and surface water sourcesfrom contamination of wasteGoals that support sustainable future benefits28
    29. 29. Household Budgets• Field observations have shown the average monthly incomes of farmerswith piped water are higher than those of farmers without piped water• Households with access to piped water have lower medical, electricity andbottled water costsHigher income and lower costs for the average householdwith access to drinking water29
    30. 30. $10621%$21342%$18837%$11723%$21341%$18836%Farmer /Dry Season/Farmer /Rainy Season/Works in city /Salary/Household IncomeVillagers without pipe connectionsVillagers with pipe connections• During the dry season, householdswithout piped water cannot useriver or well-water for irrigationpurposes. This lowers farmerincome from harvesting.• Households which have connectedto piped water are able toincrease their income by 10%during the dry season for savingadditional water rain and well-water/ for irrigation purposes.• Households with piped water tendto have higher earnings anddisposable income.Source: Field Data30
    31. 31. 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, or60% wood and gas. This will increase the household’s disposable income by $13.58per month.$7861%$129%$22%$97%$54%$54% $97%$21%$75%$7861%$129%$22%$1411%$22%$43% $97% $10%$75%FoodHealth/MedicalPetroliumElectrocity 60kwWood/GasCell PhoneEducationWater/pipeconnectedSource: Field DataFoodHealth/MedicalPetroleumElectricity 60kwWood/GasCell PhoneEducationWater/pipeconnectedOther expense31Household without piped waterHouseholds with piped waterHaving piped water will actually SAVE money
    32. 32. Projected trendsProjected Social Impact Projected Environmental Impact0102030405060Year 1 Year 2 Year 3 Year 4 Year 5Number of JobsCreatedNumber ofHouseholds Served inValue-Add ServicesNumber of Water-Related Illnesses perMonthPositive future outlook on social and environment impact32
    33. 33. Sales & Marketingi. Setting up a new Companyii. Background & Purposeiii. CadEAU: Products & Servicesiv. Marketing Strategyv. Branding Strategy
    34. 34. Setting up a new CompanyA sustainable approach to tackling social challenges in the water sector• Establish a new company in the watersector with the focus on social impactwhilst providing financial returns• To scale up water distribution andsanitation facilities in rural areas• Value proposition: combinedapproach to the rural market withdrinking water and sanitationthrough professional managementservices34
    35. 35. Background and PurposeThe focus is on affordability of drinking water and sanitation throughawareness raising• The demand in the rural areas is strong but the operators do not havethe financial resources to expand their coverage• Schools are willing to support increasing the awareness for cleanwater but they lack the resources to do so• The Cambodian government has limited resources to finance waterprograms• NGOs provide subsidies for water connections to select rural areaswhich tends to create market distortionSales & Marketing needs to address the water relatedchallenges in rural areas35
    36. 36. CadEAU : Products and ServicesDrinking Water• Available from the tap• Pure clean and treated water• Eliminate boiling of water forconsumptionSanitation• Toilets in every house• Septic system serving up to 2 housesusing 1 tank to reduce cost.• Reduce incidents of water-bornediseasesCadEAU targets the social benefits of clean water and sanitationServices from CadEAU• Technical consulting to WSPs includes training(technology, management, community engagement and financial literacy)36
    37. 37. Marketing Strategy1 2• Make drinking water accessible• Expand connections to maximum numberof villages• Provide flexible options for initialinvestment in households connection• Maintain distribution to currentcustomers and work with the communityto move away from unnecessary waterboiling habits• Increase the water consumption and theawareness that clean drinking water isessential for good health• Establish WSP as key provider forWater & Sanitation in the rural areas• Leverage the overall offering of theWSP (e.g. engineering know-how, management expertise)• Incentivise the Village Chief to helpinstall and promote sanitation facilities• “2 in 1”: Bundle pricing for drinkingwater and sanitationIncrease the number of waterconnections while ensuring asustainable profitProvide sanitation to ensure ahealthy community and happyenvironment37A sustainable water business with social impact
    38. 38. Market DevelopmentKey Market FiguresThe WSP operates in an attractive emerging market with need for expansion2008 2015 2025CMDG plan (% ofaccess to drinkingwater)41% 50% 100%Rural population withaccess to potablewater4,363,660 5,387,235 10,774,470Rural Household withaccess to potablewater623,380 769,605 1,539,210Rural Householdpotential for CadEAU - 24,000 150,000Estimated marketcoverage of CadEAU -3% 10%• CMDG: Cambodian MillenniumDevelopment Goals• Assumption of 6 persons/households• With the initial start of 3 WSPs,we aim to connect 80% ofhouseholds by 2015, whichrepresent 3.1% of the nationalmarket• Based on 20% annual growth,by 2025 CadEAU shall reach10% national coverage of themarketSource: World Bank Statistics38
    39. 39. CadEAU: Promote drinking water• Promote the importance of accessibledrinking water through all levels of theeducation hierarchy• Use the existing programs conducted bygovernment and non-governmentorganisations (e.g. Red Cross) to delivereducation• Leverage existing community structuresfor promotion:– Community gatherings– Use the influence of the village chiefand the elderly populationEducation is key to driving demand and sustaining a healthy futureSource: Cambodian Red Cross39
    40. 40. Link Drinking Water with Sanitation• Use visual aids to target a larger groupof villagers and drive the water andsanitation awareness amongst lowliteracy populations• Collaboration with NGOs and theprivate sector to deliver healthbenefits and drive demand in ruralareas• Provide free water connection andsanitation to schools• Maintain consistent school curricularinvolvementConnect drinking water and sanitation for social impactSource: Cambodian Red Cross40
    41. 41. Tariff Structure “2 in 1” PackageMake water and sanitation affordable for low income householdsPackage 2Connection fee only(including the piping tothe house and themeter)Package 1Connection fee(including the pipingwithin 20 meters to thehouse and the meter)and sanitation facilities$92Households who can affordHouseholdswho can not affordPackage 3Installment (12 months10% interest) for theconnection fee (includingpiping + meter) andsanitation facilities$8.5 / month$70The tariff structure supports the business model to bundle drinking waterand sanitation41
    42. 42. Tariff StructureTariff structure to support corporate social responsibility• Higher connection fee forfactories (larger pipes )• Increasing consumption fee forindustries• Increase awareness to optimisethe consumption for factories• Free connection fee andsanitation for school to fostereducation in village• Only factories are charged forthe maintenance feeMonthly fee (USD/ m3) Household School FactoriesConnection fee 70 0 800Additional costs for asecond tap10Sanitation 22 0Consumption feehousehold (per m3)0.50 0.50Consumption feefactories (per m3)0-100 - - 0.60100-300 - - 0.65>300 - - 0.70Maintenance fee(per m3)- - 0.2542
    43. 43. Brand Name and RationaleCadEAU symbolises the gift of water• The word “CadEAU” is the French word for giftand 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 alsomeans gift43
    44. 44. Branding Strategy• Bringing clean drinkingwater to your home• The brand can be used asa factor of differentiationfrom the other WSP• The brand creates asense of cleanliness andcomfort• Affordable water for all• Factories & householdshave to recognise thevalue and price of waterProduct PlacePricePromotion44Prosperity through the 4 P’s
    45. 45. Governancei. Purposeii. Key Playersiii. Principlesiv. Organisational Structurev. Human Capital Requirements
    46. 46. Purpose• To create a model of governance for CadEAU which allows forinvestment opportunities in the water sector• To ensure that the company framework guarantees competitivereturns to all stakeholders• To build a structure which can be replicated in other areas of theimpact investing space across market sectorsCreate a sustainable model of governance to guaranteecompetitive return46
    47. 47. Key Private Sector PlayersINVESTOR•Anchor investor or investors•Aligned with social objective of the opportunity•Maximum 90% holding, to be the majority shareholderDEVENCO•Shareholder which oversees the management and provides consultancy services•Minimum 10% holding, to be the minority shareholderWSP•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 commercialand industrial use as secondaryTechnicalspecialist•Technical advisor•Best practices and standard in scaling up the production of capacity and pipelinenetwork47
    48. 48. Key Public Sector PlayersMIME•Ministry of Industry, Mines and Energy•Water service licenser/regulator/lawsUSAID• USAID: Installation of meters and pipes and monitoring quality of water• Technical expertiseFINANCIALINSTITUTION• Financing package eg. loan schemes• Interest rate: 12%LOCALAUTHORITY• Coordination: Meter reading, billing, collecting fee, pipe installation and connection• Village Chief48
    49. 49. Governance PrinciplesPrinciple EnablersSafe water to rural households Constitution of CadEAU ensures abalanced ratio of rural households tofactory connectionsFinancial viability and profitability ofCadEAURobust business model, accounting,strong sales & marketingAlignment of stakeholders Work with value driven entrepreneursand investors, engage with localauthorities and seek support ofvillagers by outreach and educationProtect social mission of CadEAU Triple bottom-line reporting, conductsocial audit, strict compliance andregulatory controlsEnsure financial return and social impact is achieved49
    50. 50. A Phased Approach50Phase 2 – Growing by investing in 5 WSPsDevelop Technical ConsultingBusiness UnitRecruit additional 3 engineersand 1 accountantPhase 1 – Establishing corporate identity and businessInvest and manage 3 WSPs,standardise, streamline andstabilise operationsCore team of 3 staff headed byGeneral Manager (GM)
    51. 51. Governance Framework51•Relationship between Investors and DEVENCO is governed byShareholders Agreement which sets out parameters of therelationshipInvestors•In Phase 1, to provide management advisory services toCadEAU, perform daily operational oversight, and report to Board ofDirectors•Transfer knowledge and skills to GM and local team to enable them tomanage independently in Phase 2DEVENCO•Constitution of CadEAU protects social mission to maintain balancedratio of rural households served to factoriesCadEAUBoard of DirectorsRepresented by Investors and DEVENCO and provides strategic direction to CadEAU
    52. 52. Organisation Structure52DEVENCOInvestor(s)CadEAU GMAccountantCFOEngineeringMgrIT TechnicianWSP OperationMgr 1WSP OperationMgr 2WSP OperationMgr 3Board
    53. 53. Organisation Structure53GM – Daily operations, ensurescompliance to standard industrialregulations and manages industryrelations (MIME).Engineering Mgr- Improve and setup treatment plant, and pipenetwork. To study the base line ofall technical aspects.Accountant- recording andreporting accounting transactions.Set up policies and procedures tocontrol revenue, cash onhand, and performing internalcontrol.IT Technician – develop softwareand trainingGM – role remains the same as inPhase 1Engineering Mgr – remains thesame and hire 2 additionalengineers to form a TechnicalConsulting Business Unit (toconsult within CadEAU and forexternal WSPs).Accountant – to be the sameperson as in Phase 1 and will growto become the CFO of CadEAU.Hire an assistant.IT Technician – role remains thesame as in Phase 1Phase 1 Phase 2
    54. 54. 54Employee Title Personality/qualification Education ExperienceGeneral Manager Candidate of 30-45 years of age, Cambodian,honest, willing to travel to rural area throughout the country. Candidate is committed towork in the rural community and is willing totake challenges in promoting the developmentof the rural community.Bachelor Degree,preferably in thefield ofManagement andMarketingMinimum 5 years workexperience in Sales andMarketing. CommunityDevelopment field is anadded advantage.Accountant-CFO Candidate of 25-45 years of age, Cambodian,honest, willing to travel to the rural areathrough out the country. Candidate is toimplement reporting processes and conductinternal control checks as well as to performfinancial reporting for the CadEAU. Alsoperform loan and credit control function.Bachelor Degree,preferably in thefield of Accountingand FinanceUse to work as a full timeaccountant in similar fieldfor 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 todevelop software application for customerinformation and billing system.ITC Bachelordegree (softwaredevelopment)At least 2 years workexperience as softwaredeveloperEngineeringManagerCandidate of 25-50 years of age, Cambodian,honest, willing to travel to the rural areas of thecountry, and work closely with other employeesto set up/install and inspect the treatment plantas well as the pipe network .Water treatmentengineerCivil engineerAt least 3 years experiencein water treatment plantexperience in setting up ofwater treatment plant andwater distribution network.Human Capital Requirement
    55. 55. Operationsi. Operational Prioritiesii. Sanitisation, Water qualityand Billing Systemiii. Training
    56. 56. Operational PrioritiesOperational Priority Areas Description1 Water & Sanitation Provide both clean drinking water andsanitation services, contribitute to cleansurface water in the future and healthstandards of the community2 Water Quality Improve treated water quality standards,ensuring testing and supervision3 Operators Optimise current pipe network, refine watertreatment plants, maintain integrity system4 Billing System & Fee Collection Revise current billing system, engage thelocal community56
    57. 57. Operational FocusCurrent:Focus on operations andmaintenance by WSPFocus on water onlyand ensure reliablesupply as well asconsistent qualityFuture:Focus on growthMaintain DrinkingWater QualityExpand number ofconnected householdsIntegrate SanitationServices57
    58. 58. Current Focus of WSP• WSPs operate in a fragmented industry without adhering to standardsor technical know-how skills. No profit and loss statements oraccounting systems are in place• Although they enter the market with great entrepreneurial vigour, theirmain 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 isvulnerable to fluctuations in water quality and therefore may lackconficence in the operatorsWSPs operate in a fragmented industry with low operatingstandards58
    59. 59. Future: Focus on Growth• Improve drinking water quality, to ensure health and labourproductivity• Expand the water network to increase the access of ruralcommunities to drinking water and generate more customers• Improve engineering best practices, technical capability and skill-setof WSP operators• Install sanitation services to protect surrounding water wells andimprove hygiene standards of the populationImprove quality of service and best practice in water provision59
    60. 60. Integration of Sanitation• Poor sanitation causes health problems, hazards for theenvironment with the effect of local water source contamination• Cost savings for WSP when combining water connection with septictank installation for new customers• Technical knowledge of instalment will be provided by CadEAUengineer. Septic tank system is simple, cheap, user-friendly andreliable• Integrated training of the septic tank instalment team and the WSPteamIntegrate water provision and sanitation facilities to achievelong-term well-being in a cost-effective manner60
    61. 61. Water and SanitationReduced Health Risk: Enhanced Quality of LifeDrinkablewater1 septic tank for2 households toreduce costs.WS• Efficient installation of both services providing maximum social impact• Controlling run-off, reducing pollution of lakes, ponds and rivers.WSP61
    62. 62. StandardsInternationalOrganisation ofStandardisationMinistry ofIndustry Mines &EnergyINFLUENCERSENGINEERSNGOsWSP• Standards are notcomplete and currentlyunder review• Interested parties includeNGOs, government andprivate sector• WSP: challenge toimplement standardsWorld HealthOrganisationPriority: Maintaining Water Quality Standards62
    63. 63. Operational ChallengesChallenges SolutionsOver or under-use of water treatmentchemicals; Poor or infrequent testingImprove knowledge and skills of plantoperator; provide testing kits; adoptregular testing practicesElevated arsenic pollution of surface waterin some regions which exceed WHOstandardsIncreased testing, site specific; ifnecessary use improved filtration systemsPollutant infiltration through pipelinenetwork; old or leaking pipes (non-revenue water)Identify problem areas; regularmaintenance and improvement programPoor plant design and bad installation ofpipeline networkAdopt engineering best practice for plantdesign and laying the network pipesPoor sanitation leading to contaminationof surrounding water sourcesRoll-out a sanitation plan together withwater supply, eg. install septic tanksystems63
    64. 64. Improving Water QualityParameter FrequencyColour, pH, residual chlorine, turbidity,total dissolved solids*DailyArsenic, iron, manganese, nitrates,chloride, sulfate, hardness, aluminiumQuarterlyInorganic constituents (eg. fluoride, lead) YearlyOrganic constituents and pesticides Every three yearsSignificant improvements in water quality can result from increasedsampling frequencySource: Drinking Water Quality Standards, MIME 2004Frequent sampling helps to improve water quality64
    65. 65. Improving Plant OperationsTreatment Plant• Review design and constructionof plant (standardise)• Optimise chemical usage toreduce costs• Implement maintenanceschedule• Consider capacity of treatmentand storage and ability toexpand as connections grow• Implement regular waterquality testing process andprocedures• Seek to reduce non-revenuewater through activemaintenance• Map existing network• Plan optimal route andpipeline capacity for expansion• Establish appropriateprocedures for installation ofsanitation services• Establish procedures for layingof water pipesPipeline Network65
    66. 66. Billing ManagementCurrent Issues FindingsInefficient billing, metering& fee collectionproceduresSignificant staff requirements and time taken to issueinvoiceHuman resource issues inWSPSales & Marketing staff are not able to focus onbusiness development activities as time primarilyfocused on meter reading and delivery invoicing(around 300 households per employee)Fee collection process canbe onerous on villagecommunitySome WSPs require customers to pay at their premiseswhich can be a far away from the villages andinconvenient for them to walk/bike to the WSPsDoubt of accuracy forproper collection/paymentLack of appropriate controls and checks in relation tometer reading66
    67. 67. Current Billing ManagementCurrent SituationInefficient process leads to inability to focus on business developmentSeveral WSP staff members need to go to the village andspend time and resources on reading the meters anddistributing the invoiceWSPMeterreadingVillage A Village BPaymentInvoicingMeterreadingInvoicingPaymentPayment PaymentPaymentPaymentMeterreadingInvoicingInvoicingMeterreadingEvery household has to go to WSP for payment67
    68. 68. Proposed Billing ManagementCadEAUWSP will provide trainingand certificates to the villagestaff to issue invoices and collect moneyCadEAU will provide training,certification, and billing systemto WSPNew ModelVillage ATrained & CertifiedVillage Staff-Meter reading-Invoice delivery-Collecting bills-Pay to WSPVillage BTrained & CertifiedVillage staff-Meter reading-Invoice delivery-Collecting bills-Pay to WSPWSPWith the cooperation of thevillage chiefs, WSPs will hiretrained & certified villagersas staff members for:- meter reading- invoice distribution- collection- payment to the WSPSimplified process allows increased efficiency and better controls68
    69. 69. Meter reading: New ModelVillage ACadEAUCheckdiscrepancyWSPTrained & CertifiedVillage ExpertInstall a Parent Meter at the entrance of the village and check thediscrepancy with the sum up of each household meters.5001001001005050 ParentMeterMeter Recording SheetParent Meter 500House A 100House B 100House C 100House D 50House E 50Total 400Discrepancy 100?New ModelParent Meter identifies any leakages in the village69
    70. 70. Billing and Fee Collection SystemWSPVillage ChiefMobile bankingPrepaid water meterMobile meter readerPayment via SMSand 24 hoursbanking facilitiesMobile device torecord meterreading - bill will beissued instantlyPhase 1ProposedmodelPhase 2Proposed Model70
    71. 71. Cost Savings by Centralised Purchasing OperationTotal of US$126K may be saved in 5 years through “Centralised PurchasingFunction” with bargaining power of 5% in the New operating model ->Pipes, Meters, Chemicals, Electricity and others010000200003000040000500002012 2013 2014 2015 2016Number of households02000004000006000008000001000000120000014000002012 2013 2014 2015 2016Usage of water (M3)01002003004005002012 2013 2014 2015 2016Length of Pipe (Km)Projection of the growth from 2012 to 2016New connections drivesuptake in metersWater consumptiondrives usage of chemicalsand electricityNew connections drive uppipe and labour costs71
    72. 72. Build Technical Skills]Hire an Engineer. Why? To do the following:• Engage an engineer on a full-timebasis to provide technical expertise toall employees; can provideconsultancy services to other WSPs• Self-management approach –empower Operations Manager todirect daily operations of treatmentplant• Technical consultants offer anintegrated collective learning processaimed at improving theprofessionalism of existing operatorsin the sector• Training program to address existingdeficiencies should cover:• Water quality and testing• Treatment plant design• Health and safety• Network mapping• New connections – procedures forappropriate design and roll-out of newnetwork pipe• Administration training – ensure thatback-office procedures(billing, metering, feecollection, accounting) are standardisedA technical engineer will provide full-time training to WSPs72
    73. 73. Ongoing TrainingOngoing training program should contain the following steps:1. Training program – 10-15hrs of training over a 12 month period tocover technical and management skills as well as review regulatorystandards2. Mandatory annual examinations for all operational staff with arequired pass rate3. Forum – monthly sharing of knowledge and best practices acrossWSP operators4. External associations / advisors – engagement with other providersto share their expertise: Water Association, MIME, PPWSAOngoing training program will facilitate long-term productivity73
    74. 74. i. Financial Structureii. Valuation Strategiesiii. Financing Planiv. Major Financial Assumptionsv. Risk Assessments & MitigationFinancials
    75. 75. Financing Structure of CadEAU75Investor(s) DEVENCOCadEAU90% 10%BankWSP1 WSP2 WSP3 WSP4 WSP5Total Fundraising:$2.5 M70% EQUITY30% DEBTThe usage of capital:Acquisition (65%)Cap. Ex. (25%)Working Capital (10%)Investor is to be the majoritystakeholder: 90%: 10% splitis recommended betweeninvestor and DEVENCO
    76. 76. CadEAU: Valuation of WSPsAssets• Net TangibleAsset• Price to BookMultipleCashflow• Price EarningsMultiple• Discounted CashFlow Model (DCF)Others• Averagemonthlyrevenue perhouseholdThe Proposed Investment(s) by CadEAU would require the valuation of the identifiedWSPs which could be based on the following valuation methodologies :Historical costmodelFuture earningsmodelMarket penetrationmodelIn view that the WSP(s) have an existing water concessionaire, it is recommended thatthe DCF model is adopted based on the future income stream of the WSPs over theconcession period.76
    77. 77. CadEAU: WSPs Selection CriteriaMinimise watersupply disruptionand allow forexpansionEnsure goodleadership andsmooth acquisitionprocedureStrong incomecontributionEnsure smoothtransition in socialand businesspractices afteracquisitionSecure watersourcePotential forgrowthQuality ofentrepreneurand thewillingnessto sellTrack recordin ethicalpractices andtransparentbusiness77
    78. 78. CadEAU: Investment Evaluation of WSPsBased on the Proposed Business Model and the projected cash flows of 5 potentialWSP(s) under consideration by DEVENCO on behalf of CadEAU, it is estimated that theProposed Investments in the identified WSP(s) would generate a positive Internal Rateof Return (IRR) of not less than 15% according to the following assumptions:Positive IRR of> 15%InitialInvestment Costof approx$1.9MLoan financingof approx$0.3MInvestmenttenure of 5-7yearsPhasedInvestment of 3WSPs in 2012and 2 WSPs in2013Note : No dividend to be distributed byWSP if not profitable78
    79. 79. Initial Financing PlanStep 1• Incorporation ofCadEAU as a PrivateLimited Co• Issuance of 190,000shares at $10 pershareStep 2• Acquisition of theIdentified WSPs byCadEAU for approx$1.9M to be paidfrom internal fundsStep 3• $0.3M Term Loan Facility tofinance Capex and WorkingCapital 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 ofshares 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 theexpansion of the water network to rural areas and other working capitalrequirements• 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 ofWSP + land + current assets79
    80. 80. Options for Subsequent Financing PlanOperatingCashflows/Divfrom WSPsIssue of new Equity orPreference SharesShare Swap forFutureAcquisitionsExit StrategyLoan Financing subject tohigher ShareholdersFunds• Moving forward, it is expected that CadEAU will need to expand its portfolio ofinvestments in other WSPs and/or finance the expansion/diversification into newbusiness sectors of water sanitation, bottled mineral water or sewage treatmentetc.• Since CadEAU has exhausted its Capital Funds and has leveraged its BalanceSheet for the Term Loan Facility, CadEAU is encouraged to explore other variousforms of raising capital assuming that the existing shareholders would notincrease their equity investments, in the following order :80
    81. 81. Target Client Projection(No. ofhousehold)(No. offactory)02040608010012014005,00010,00015,00020,00025,00030,00035,00040,00045,0002012 2013 2014 2015 2016 2017 2018 2019 2020 2021Household served Factory servedWhen 80% of householdsachieve access to waterThe increasing number of households served will be the major growth driver ofCadEAU before 2016. Roughly 40,000 households will be served by the 5 WSPsmanaged by CadEAU81
    82. 82. Revenue Breakdown0500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0002012 2013 2014 2015 2016 2017 2018 2019 2020Sanitation feeConnection FeeFactory salesHousehold sales• Upon acquisition of the identified WSPs in 2012 and 2013, coupled withsanitation fee and higher connection fee will be significant portions of revenueto CadEAU• By 2015, CadEAU can consider acquiring other WSPs to fuel growth by usingtheir accumulated retained earnings(USD)82
    83. 83. Income Statement(USD)• Revenue and profit will peak in year 2015 at $3.0m and $0.5m respectivelywhen the largest number of households get access to water• Profit margin will increase to roughly 18% in Year 2017 and will later decline to10% in 2020, due to the affordable fee charged to customers and increasingcosts caused by inflation(500,000)0500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0002012 2013 2014 2015 2016 2017 2018 2019 2020Revenue Expenses Profit before tax Profit after tax83
    84. 84. Financial Summary of an Average WSPYear 2012 2013 2014 2015 2016 2017 2018 2019 2020No. of household 2,167 4,500 6,833 8,000 8,000 8,000 8,000 8,000 8,000No. of factory 18 24 24 24 24 24 24 24 24Total sales 202,783 485,883 595,883 619,800 472,800 472,800 472,800 472,800 472,800Total expenses 180,733 353,034 407,492 367,191 280,213 286,886 293,893 301,250 308,975Cap. Ex. 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000Profit before taxand dividend 22,050 132,849 188,392 252,609 192,587 185,914 178,907 171,550 163,825Net profit 22,050 106,279 150,713 202,088 154,070 148,731 143,126 137,240 131,060Profit 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 tovillagers as well as profit growth84
    85. 85. 85LOW MEDIUM HIGHHIGHMEDIUMLikelihoodImpact1 Costly pipe extension to remotevillages2 Non extension of license3 Limited local specialists4 Economies of scale5 Unaffordable meter cost6 Legal & Regulatory systems7 Lack of supply of capital8 Limited exit strategy9 Inefficient billing systemInconsistent water qualityRisk Assessment Matrix1011 Potential competitors in the marketThe Risk Assessment will enable CadEAU to address the critical risk factors andsuccessfully implement the necessary mitigations in a timely mannerLOW1234567891011
    86. 86. 86Risk Assessment & MitigationNo Risk FunctionalAreaLikelihood Impact Risk Mitigation1 Pipe extension toremote village iscostly and capitalintensive to CadEAUExpansion& GrowthHigh High Cross subsidies from factories forconsumption fee to villagersPotential for community equityownership of pipeline in return forrebate/discount or equity in WSP2 License with only 3years of operationposes renewal riskto investorsLegal &RegulationsMedium High Look into political risk insurance(for example MIGA)Up until today no record ofrevocationMIME is reviewing the duration oflicenses and will potentially extendthe duration
    87. 87. 87Risk Assessment & MitigationNo. Risk FunctionalAreaLikelihood Impact Risk Mitigation3. Limited local specialists forthe further expansion ofcompanyStructure Low Medium Already interviewed andshort listed candidatesIn the event outsourcetechnical expertise toforeigners on contractbasis4. Achieving Economies ofScaleOperation Low Medium CadEAU responsible toassist for procurement(chemicals/pipes)Each WSP shares costson marketing manager(for instance)5. Meter cost is unaffordableto villagersMarketing High Medium Propose to offerpayment in installmentsto reduce financialburden of villagers
    88. 88. 88Risk Assessment & MitigationNo. Risk FunctionalAreaLikelihood Impact Risk Mitigation6. Limited transparencyin current legal andregulatory systems andhidden costsLegal &RegulationsHigh Medium The Cambodian PrimeMinister has emphasisedthe importance of globalinvestment for sustainablegrowth in coming years.DEVENCO has previouslyinvested in Cambodia. Theyhave a good track record.Management consists ofCambodian/French7. Difficulty to obtaincontinuous supply ofcapitalFinance Medium Medium DEVENCO has obtainedbank loans for previousinvestments so they have agood relationship withbanks8. Limited exit strategy Finance Medium Medium Buy back by WSP ownerPut and call options
    89. 89. 89Risk Assessment & MitigationNo. Risk FunctionalAreaLikelihood ImpactRisk Mitigation9. Inefficient fee & billingcollection in traditionalmodelOperations Low Medium Training provided to villagechief to perform meter reading,distribution of invoices andcollection of payment10. Inconsistent waterqualityMarketing Medium High Random testing and clearguidelinesPart of the capital used forinvestment in upgrade and newtechnologies11. Potential competitorsin the marketMarketing Low Low Provide high quality service soMIME allows more permits forexpansion based on trust andtrack record
    90. 90. Implementation Plan andRecommendations
    91. 91. Implementation PlanPhase 1 (1-4 yrs) Phase 2 (5yrs-)Set up (-1yr)Conduct feasibility study and due diligence of potential WSPs to be acquiredHiring of General Manager, Accountant, Engineer and IT TechnicianExecute transaction to acquire WSP 1-3Higher number of household connected thereby increasing quality of lifeFull automated computerised billingPrepaid water meter and mobile bankingSoftware for meter readingEstablishment of governance surrounding BOD set-up, Shareholders agreement, Management Agreement etcConduct market survey, prioritise villages within license area, determine tariff zonesConducting sales village by villagePromotional campaign, awareness created through school curricularJob creation eg village heads appointed as bills collectorsRolling out financial training programme to local villagers via CadEAU staffProvision of good sanitation thereby reducing greenhouse emissionKeyActivities91Execute transaction to acquire WSP 4-5
    92. 92. Short-Term RecommendationsInvest in CadEAU today because tomorrow matters1•Work with values driven entrepreneurs and investors, engage with local authorities and seeksupport of villagers by outreach and education2•Centralise certain functions in CadEAU e.g procurement, finance3•Hire full-time engineer to monitor water quality and training4•Support the village chief to become an entrepreneur (perform meter reading, bill distributionand fee collection)5•Bundle drinking water and sanitation access6•Initiate stakeholders dialogue with international organisations and NGOs to foster long termcommunity welfare92
    93. 93. Medium-Term Recommendations1•Replicate the model and expand geographically to cover 15% of the national demand basedon 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 households4•Evaluate options of partnership with mobile phone company: the aim is to allocate funds toscale up the connection of drinking water and sanitation at rural areas5•Adapt a multi-sector approach and search for synergies in other sectors e.g. waste watertreatment and waste collection6•De-emphasise promotion of reverse osmosis process for drinking waterBased on the evaluation on our proposed investment in the identified WSP, wewould project a positive IRR of at least 15%, therefore we recommend theinvestment.93
    94. 94. Appendix
    95. 95. Major Financial Assumptions 1 of 2• Operating assumption for 1 WSP covering commune(s) of 10,000 household and30 factoriesRevenueHousehold– 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/ meter95
    96. 96. Major Financial Assumptions 2 of 2• Operating assumption for 1 WSP covering commune(s) of 10,000 household and30 factoriesCost– 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
    97. 97. WSP Market DevelopmentWSP operates in an attractive emerging market with need for expansion97
    98. 98. First-Hand ResearchAssumptions are made based on the 32 households from 3villages• Kor Rokar• Chambak Meas• Kraing Makak• Each households disposable income willincrease from $37.58 to $51.12 due to highersaving on medical and electricity cost.• Each households revenue will increase by 10%due to allocation of well and river water forirrigations.• Households are able to pay the waterconnection fee within 3 months.98
    99. 99. ReferencesAssumptions are made based on the 32 households from3 villages• Bek Chan WS– Kraing Makak (both accessedand not accessed)• 1002 households• Muk Kompul WS– Chambak Meas (accessed)• 379 households– Kor Rokar (not accessed)• 262 households• Each households disposable incomewill increase from $32.62 to $44.35due to higher saving on medical, gasand water cost.• Each households revenue willincrease by 10% due to allocation ofwell and river water for irrigations.• Households are able to pay thewater connection fee within 6months savings.99

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