Financing Water: Challenges and Opportunities

1. Financing Water: Challenges and Opportunities International Water Week Amsterdam, November 2013

2. 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

3. 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. Agriculture

4. 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.

5. 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 Indonesia- USD10-15 billion - Industrial BOT and EPC - Emerging Municipal BOT (local PDAM) India- USD20-25 billion (12th FYP) - Industrial BOT and EPC - Emerging Municipal BOT Others- Thailand, Vietnam, Philippines, Bangladesh, others - Industrial/Agribusiness BOT, and EPC. - Emerging Municipal BOT Source: WEO IMF Database July 2013 * Estimated municipal & industrial water/wastewater capex in developing countries in Asia. Source: Global Water Intelligence, ADB, other sources

6. PPPs Required to Meet Huge Investment Needs • 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)

7. 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.

8. HWT Case Study: What is a Business Trust? • Background • Hyflux 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 Trust • Business 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)

9. 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 HWT Case Study: Water Assets – Suitability for Business Trust Key is long term, predictable cashflowwith growth

10. Zhejiang • Tiantai WWTP Liaoning Tianjin • Liaoyang WWTP • Beichen WWTP • Beichen WRP Hebei • Zunhua WTP • Langfang WWTP • Langfang WRP Jiangsu Zunhua WTP • Taizhou WWTP • Dafeng WTP • Yangzhou WWTP • Wuxi WWTP • Yangkou WTP • Changshu WWTP Langfang WWTP and WRP Taizhou WWTP Yangzhou WWTP Wuxi WWTP Tiantai WWTP HWT Case Study: Diversified Portfolio of Water PPPs/BOTs Initial Portfolio of HWT

11. 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.

12. TAWF Case Study: Tigris Asia Water Fund • 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.

13. TAWF Case Study: Innovative Financing and Capacity Building for SMEs Start-up Early Growth High Growth and Expansion Mature and Steady Growth 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 PROFILE Establish capabilities, capital light Develop track record Fund investment holding period Exit Growth capital + operational and strategic intervention (e.g. IPO or sell to other PE) ASSET AND TURNOVER Invest 1. Help companies access long-term debt financing to support BOT/TOT water projects. 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.

14. Contact Information Saud Siddique Executive Chairman Email: saud.siddique@odysseycapital.com.sg Telephone: +65 9839 9921 www.odysseycapital.com.sg