Title: Perspectives from the

Private Financial Sector

EnvSec Advisory Board Meeting

Bratislava, September 2005

By: Kajetan Hetzer

SNS Asset Management, The Netherlands

www.snsbank/assetmanagement.nl

Contents

1. Business Environment / Playing Field

2. Investment Approach

3. Innovative Finance Mechanisms

Problem Zones for Investing in Water

water problems > available investments

Aim: > Sustainability

Problem zones - a brief selection:

– Lack of finance by +/- factor 2 to reach MDGs

– Private Investors have “cold water fear”

– Complexity of water issues

– Lack of comprehensive critical success factors

– Lack of efficiency & effectivity

– Political instead of more appropriate approach

Water sector “Playing Field” of actors and conditions

• Private Investment Conditions

• National conditions

• Local (water) conditions

• Multilateral / bilateral conditions

• Private Investment Conditions

• National conditions

• Local (water) conditions

• Multilateral / bilateral conditions

Based on:

Situation

1

NGOs Civil Society

Int. laws agreements

Development finance institutions

Insurance &

re-insurance

Export credit agencies &

warranty providers

Companies and Associations

Private investors

Banks &

investment funds

Local Conditions

of Water Projects

Local Conditions

of Water Projects

Supra Banks

Regional Banks

Situation

2

Situation

3

Int. standards

…etc.

Situation

X

Country

Y

Country

Z

Country

X

Joint Action: Joint Action: Stakeholder Stakeholder

Mgmt.Mgmt.

Financial conditionsFinancial conditionsFinancial conditionsFinancial conditions

Multilateral and Bilateral Multilateral and Bilateral

Conditions & Relations Conditions & Relations

Multilateral and Bilateral Multilateral and Bilateral

Conditions & Relations Conditions & Relations

National ConditionsNational Conditions National ConditionsNational Conditions

Business Environment / Playing Field

“Actors”

Value Drivers

SHAREHOLDERS

CUSTOMERS

SUPPLIERS

WATER USER

REGULATORS

COMMUNITY

NGOs ENVIRONMENT

PARTNERSINNOVATION

EFFICIENCY

QUALITY

CUSTOMER SERVICE

STRATEGY

MANAGEMENT

RISK MANAGEMENT

FINANCIAL PERFORMANCE

REPUTATION

GOVERNANCE & ETHICS

ORGANIZATION/MANAGEMENT

VALUECreateProtectRealize

VALUE

•Create•Protect•Realize

ACTORS & THEMES AS VALUE DRIVERS

DAMAGE REDUCTION

LIFE/ POVERTYREDUCTION

SANITATION/HEALTH

ENERGY

RELIGION

VIRTUAL MONEY CAPACITY

SERVICES

INFRASTRUCTURE

CULTURAL VALUES

RECREATION

FOOD

TRANSPORT

ECONOMICAL DEVELOPMENT

MISSION of BANKING:

AIMS & CONDITIONS OF PRIVATE FINANCIAL INSTITUTIONS

• Profit generation• Safety of investments• Continuity of investments

• Efficiency

• Reputation

• Social Responsibility / Sustainability

STRATEGIES of BANKING:

• Investment risks versus

business opportunities

• Anticipation

• Analysis skills, valuation methods

• Risk Management

AIMS & CONDITIONS OF PRIVATE FINANCIAL INSTITUTIONS

PROCEDURES of BANKING:• Compliance

• Heavily regulated framework & internal policies

• Fiduciary role• Safeguarding and prudently handle funds entrusted

• Efficiency• Decision making process• Transaction costs

• Transparency & control• Risk Management• Trust/Confidence

AIMS & CONDITIONS OF PRIVATE FINANCIAL INSTITUTIONS

ASSESSMENT METHODOLOGY:

• Commercial viability

• Feasability and market analysis• Sound investment / business plan

• Transparency & Good Governance

• Compliance with legislation

• Execution by international standards

Evaluation of projects on:

AIMS & CONDITIONS OF PRIVATE FINANCIAL INSTITUTIONS

ASSESSMENT METHODOLOGY:

• Financially healthy

• Expertise, capacity

• Proven track record

• Ethical / trustworthy management

Evaluation of project owner/sponsor on:

AIMS & CONDITIONS OF PRIVATE FINANCIAL INSTITUTIONS

Private Investment Conditions

1. Environment • adequate, transparent policies• legal instruments• standards

– current water supply systems– service levels– operator performance– (technical) incentives

2. Capable regulatory bodies contracts, quality, tariffs, corruption

3. Price mechanisms• water tariff reforms: politics vs. real value of water

• valuation of risks and benefits

Needs communication

to water users

Environmental

Human & Social

Intellectual

Reputation

Financial

Assets

Investors

Customers

Government

Communities

Business Partners(e.g. suppliers)

CurrentlyMeasured

Value

SustainableBusiness Value

Form

s of

val

ue

Stakeholders

Value measurement and effects on sustainability

NGO’s

Investors Aims:

• Safety

• Liquidity

• Profitability

• Continuity

Water user

Water Companies

• Sustainability?

Investment analysis

• Collateral needed

• (un)defined tariff increase

• balance sheet analyses

• income statement analyses

• cash flow generation capacity

• financial planning systems

• budget systems

•Etc

• Macro economic factors

• Foreign currency impact

• Political situation

• Construction

• Loan term / loan agreements

• Legal issues

• Operations

• Image / Reputation

• Quality Management

•Etc

Criteria for

OUTCOMES

• due diligences

• loan schemes

• enhancement policies

• debt recovery strategies

• cash generation policies

• improved financial planning systems

• Etc

Sustainability?

Investment Approach

Tools and Methodology

Key Words in the Methodology

Role of end user in project conceptRole of end user in project concept

Transparency in communicationTransparency in communication

Information SharingInformation Sharing

Opinion & option assessmentOpinion & option assessment

RESULTS (1)

Sustainable investment strategy

RESULTS (2)

Facilitate a process between all involved stakes including the investor in such a way that a perfect match on project concept, conditions and implementation will arise

Balance between all value drivers in project

????

Criteria Ranking TreeCriteria Ranking Tree

PEOPLE PLANETPROFIT

Life

health

sanitationBirth

Agriculture

Available water

rISKS

Continuity

Political circumstances

Local Market

Time

Pollution

Climate

Bio

Diversity

Life

Dividence

Fresh water

Reputation???

Legal

Framework

????+4

+5

+6

+7

+8

+3

+2

+1

0

% % %

Ethics

Profit

Water as Value Driver

Social dem

ands

Profitability

environment

Regions Sub-themes Sub-sectors

Network & Partners

Stakeholder Analysis

Investing in diversity of water

Armoede

Sanitation

Infrastructure

Waterkracht

Climate

Drinkwater

Health

Pollution

Country A

Country B

Country C

Country D

 

 

Allocation volume

Time

1.Start-up stagefase: inventory opportunities and risks, scouting of business cases &

1st investment targets aspilots

2.Build-up stage: Optimalisation of processes based on increasing insights, scouting of

business cases, selection of investment targets and further allocation

3.Consolidation stage: Adjustment of processes & strategy on basis of experiences in

previous years, allocation of bulk investment volume in projects, credits and/or private

equity

Find Critical Succes Factors: Step-by-step

13

1 2 3 Etc.

Fund Model

Private Bank or Fund

Saving or credit organisation

(Local) Bank, Trust Fund

Intermediary

(NGO, Supra, Government,...)

Local beneficiary:

Community

Water user

Guarantee Fund

= Money flow

The End

&

Discussion