Financing Water: Challenges and Opportunities

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Financing Water: Challenges and Opportunities

International Water Week

Amsterdam, November 2013

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Water – a Crisis on a Global Scale

• Water scarcity is one of the most pressing global issues today:

– Less than 1% of Earth’s water is available as fresh water to meet all the demands of agriculture, industry and household needs

– More than 97% of water is salty/brackish, and 2% is locked up in snow/ice

• The magnitude of the water scarcity problem:

– 2.5 billion people have no access to sanitation

– Nearly 50% of people do not have water piped to their homes

– Women in developing countries walk an average of 6 km to get water

• Asia suffers from acute water scarcity and pollution.

• Strong link between lack of water access, and ill health:

– Diarrheal and water borne disease results in 5 million deaths p.a., mostly children

– Disease-carrying organisms (eg mosquitoes) that breed in water

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Economic Development and Water

• Economic development alleviates poverty; however, it also exacerbates the water crisis:

– Growing demand for water as incomes increase

– Industrialization

– Greater food production and use by agriculture to meet changing consumption patterns

• Huge and growing investment needs across the entire water industry value-chain, including water treatment, wastewater treatment and distribution.

AgricultureAgriculture

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Water and Clean Energy

• The nexus between water and energy will be a key theme in coming years.

• Clean energy (e.g. solar) and energy efficiency may offer an opportunity to improve sustainable management of water resources.

• “Business-as-usual” approaches will not be able to mobilize required investments to address the water and energy/climate change challenges.

• Innovative demand and supply-side measures and technologies are required, which will minimize the combined footprint of the water and energy sectors.

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Water Investment Needs in Asia: >USD200 billion in Next 5 Years*

China- USD150billion (12th Five Year Plan) - Municipal and Industrial BOTs, and EPC- Industrial recycling and sludge treatment

India- USD20-25 billion (12th FYP) - Industrial BOT and EPC- Emerging Municipal BOT

Indonesia- USD10-15 billion- Industrial BOT and EPC- Emerging Municipal BOT (local PDAM)

Others- Thailand, Vietnam, Philippines, Bangladesh, others

- Industrial/Agribusiness BOT, and EPC.

- Emerging Municipal BOT

* Estimated municipal & industrial water/wastewater capex in developing countries in Asia. Source: Global Water Intelligence, ADB, other sources

USD billion(unless otherwise stated)

China Indonesia India Thailand Vietnam Bangladesh

Population (m) 1,354 244 1,223 64 90 160

GDP (current) 8,230 878 1,825 366 138 123

2-Yr Projected GDP Growth (%) 8.1% 6.4% 5.9% 5.1% 5.2% 6.2%

Source: WEO IMF Database July 2013

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PPPs Required to Meet Huge Investment Needs

• Industrialization

• Urbanization

+ Private

Investment

Opportunities

DemandDrivers

Environmental Drivers

Technological Drivers

• Supportive policies

• Increasing tariffs

Enabling Environment

• Public private partnerships (PPPs) are required to help governments meet the investment needs required to address the water crisis.

• Government policies to support private investments.

• Innovative solutions and structures needed to access private capital.

• Examples of successful PPPs:

– Manila Water – water distribution

– Hyflux Water Trust (HWT) – bulk water and wastewater treatment (both industries and municpalities)

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Challenges for SMEs

• SMEs are the engines of private sector development, and account for the majority of private water projects in Asia today.

• However, SMEs face a myriad of challenges.

• The key constraint for SMEs is access to finance:

– Limited bank liquidity for SMEs

– Over-stringent collateral requirements

– Weak credit culture/skills and practices of financial intermediaries

• Besides access to capital, SMEs face numerous challenges in financial management, project structuring, human capital and skill development, organizational structure, etc.

• Capacity building support for SMEs is required.

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HWT Case Study: What is a Business Trust?

BackgroundHyflux is a leading water company in Asia.

Hyflux was developing numerous greenfield water projects in China on a PPP basis, for which it required financing.

The concept of the Hyflux Water BusinessTrust (HWT) was developed, which allowed Hyflux to recycle capital, and earn attractive capital gains.

What is a Business TrustBusiness trusts are an emerging listed asset class in Asia

Business trusts offer investors direct exposure to cash-generating assets which provide predictable cash flows; and stable growth

Types of assets held by business trusts include power, water, ports, gas distribution, and other infrastructure, as well as aircraft leases, shipping, and other assets

Unlike companies, a business trust is not restricted to paying dividends out of accounting profit, but can pay distributions out of operating cash flow (avoid cash trap)

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HWT Case Study: Water Assets – Suitability for Business Trust

Stable long-term cashflows underpinned by long-term contracts

Growth – trends of rising tariffs and capacity expansions

Relatively high barrier of entry – exclusivity of concession

Assets that provide basic services – industries and municipalities

Relatively low operating risk and construction risk

Fixed cost structure and low maintenance capex

Depreciating assets

Key is long term, predictable cashflow with growth

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Taizhou WWTP

Tiantai WWTP

Wuxi WWTP

Langfang WWTP and WRP

Yangzhou WWTP

Zunhua WTP

HWT Case Study: Diversified Portfolio of Water PPPs/BOTs

Initial Portfolio of HWTInitial Portfolio of HWT

Tiantai WWTP

Zhejiang

Taizhou WWTP Dafeng WTP Yangzhou WWTP Wuxi WWTP Yangkou WTP Changshu WWTP

Jiangsu

Beichen WWTP Beichen WRP

Tianjin

Liaoyang WWTP

Liaoning

Zunhua WTP Langfang WWTP Langfang WRP

Hebei

  Plant Capacity (m3/d)

1Changshu WWTP 30,000

2 Taizhou WWTP 20,000

3 Wuxi WWTP 20,000

4 Tiantai WWTP 20,000

5Langfang WWTP 80,000

6 Yangkou WTP 20,000

7Liaoyang WWTP 55,000

8 Langfang WRP 40,000

9Yangzhou WWTP 20,000

10 Dafeng WTP 20,000

11 Beichen WWTP 50,000

12 Zunhua WTP 40,000

13 Beichen WRP 30,000

  TOTAL 445,000

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HWT Case Study: Development Goals Achieved

HWT was successfully listed on the Main

Board of the Singapore Stock Exchange.

HWT raised proceeds from private capital,

includnig Fidelity, Capital, Schroders, etc.

Development goals achieved, ie

1. Achieves government objectives to meet

water treatment and discharge standards for

industries and municipalities at an equitable

cost

2. Allows water developers to access lower

cost capital to develop new projects.

3. Demonstrate to private sector that well

structured water PPPs provide for

predictable and attractive returns.

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Odyssey Capital is currently establishing Tigris Asia Water Fund (TAWF), a PE fund to invest in water companies across Asia, with a particular focus on SMEs.

In addition to providing growth capital, TAWF also provides capacity building to SMEs.

•Only PE fund in Asia today with pure-play focus on water sector.

• Focused strategy targeted at high-growth, mid-market water companies, which require growth capital (they are currently underserved by existing financial players) and operational intervention to drive value creation.

• The unique combination of the Team’s water operational capabilities and extensive investing experience is a key differentiator. The Fund can help Portfolio Companies with operating, strategic and capital decisions, which will maximize value-creation, and deliver superior risk-adjusted returns to investors.

• Strategic partnership formed with world’s leading water research institute (NEWRI).

•Clearance-in-principle approval from FMO (Dutch Development Bank) and SKion (BMW family office) as cornerstone investors validates the distinctiveness of the Fund.

TAWF Case Study: Tigris Asia Water Fund

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TAWF Case Study: Innovative Financing and Capacity Building for SMEs

Mature and Steady GrowthStart-up Early Growth High Growth and Expansion

PRO

FILE

ASSE

T AN

D T

URN

OVE

R

Establish capabilities, capital light

Develop track record

Expansion phase; asset growth, moves into capital intensive project

development and/or rapid growth in EPC order-book; M&A opportunities

Consolidation phase; continues to grow BOT/BOO portfolio; capital

management and focus on profitability; M&A opportunities

Invest

ExitFund investment holding period

(e.g. IPO or sell to other PE)

Growth capital + operational and strategic intervention

2. Help with technological interventions e.g. adopt energy efficient water technologies to reduce energy usage and enhance profitability; or use more advanced technologies to open up niche market segments.

1. Help companies access long-term debt financing to support BOT/TOT water projects.

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Contact Information

Saud Siddique

Executive Chairman

Email: [email protected]

Telephone: +65 9839 9921

www.odysseycapital.com.sg