South Energy Equity Africa Environment Ami Diner Rina Nazarov Jay Segal Daniel Serrano
Macro & Micro Analysis Electricity Service OUTLINE Sanitation Service Water Service Strategic Solution
Macroeconomic Trends Analyzing Africa South Africa is the most advanced and wealthy economy in Africa Source: Water Utilities is South Africa - Datamonitor Source: HBR May 2011
Macroeconomic Trends Economic Prospects *#$,&!"#$%&#%'%()#*+$&',-* ',,& *+$,& *!$,& 0789:;<761&./0&;6K&./0&8AB& L;8?D;&;BA&;::&AM8ACDAK&D7&GB7H& 7NAB&DIA&6AMD&)&OA;BP& #+!$*& "++$*& ",,& #,,& *,$,& '$,& +'($'& ))+$(& ),,& #$,& +!"$'& +,,& +$,&!$,&!"#$%&!'%$(& ()%$*& (,,&!,,&,$,& -!$,& *,,& -+$,& +'$"& +%$!& +%$"& ),$!& ),$"& )*$!& )*$"& )!$!&!,,'&!,,%&!,*,&!,**&!,*!&!,*(&!,*+&!,*)&,&./01&23456& 0789:;<76&=>?::?76@&./0&8AB&C;8?D;1&=E*,,,234@& FA;:&./0&GB7HDI1&J& Source: South Africa Power Report- Q1 2011- Business Monitor International. Team 3 Analysis
Microeconomic Trends Identifying opportunities. Market segment: $5K~$20K annual household income segment 11 Figure 13 - framework for identifying high potential markets in the $5k - $20k annual household income segment 90% 50% of HH are poor Just covering basic needs Saturated 80% Egypt Mature but still growing Key No. of households in the market segment rate of HH in market segment 70% 60% 50% 40% 30% 20% 10% 0% Mauritius Seychelles Chad Guinea-Bassau Eritrea Tunisa Evolved but stagnating/ regressing Zimbabwe Underdeveloped and stagnating / regressing North Africa Morocco South Africa Swaziland Congo Lesotho Burundi Senegal Cameroon Sierra Leone Gabon Kenya Comoros GILA Urban Corridor Algeria Cape Verde Mauritania Democratic Republic of Congo Sudan Equatorial Guinea Gambia Nigeria Benin Sao Tome & Principe Namibia East Africa Ghana Togo Burkina Faso Zambia Libya Mali Madagascar French speaking nations Central African Republic Niger Somalia Land locked countries Malawi Evolved and still growing Underdeveloped but growing Tanzania -10% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% Rwanda Evolved and growing fast Uganda Angola Ethiopia Portuguese speaking nations Underdeveloped but growing fast 15m 3m 0.5m Ease of doing business ranking 1-39 40-140 141-183 x axis - growth rate of market segment from 1995-2010 y axis - households in market segment as % of all households in the whole market Liberia Growth rate of market segment from 1995-2010 Source: C-GIDD; World Bank; EY analysis
Microeconomic Trends Identifying opportunities. Market segment: $20K~$45K annual household income segment rate of HH in market segment How to write yourself into the African growth story 12 Figure 14 - framework for identifying high potential markets in the $20k - $45k annual household income segment 60% 15% of HH are low middle class 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Growth Saturated not affecting them Libya Mature but still growing -5% -5.00% Evolved but stagnating/ regressing Congo Algeria Guinea-Bissau Eritrea Burundi Gabon Underdeveloped and stagnating/regressing Seychelles North Africa Namibia Coté d Ivoire SADC Swaziland Lesotho South Africa Mauritius Evolved and still growing Islamic nations GILA Tunisia Morocco Underdeveloped but growing Egypt Land locked countries East Africa Portuguese -3.00% -1.00% 1.00% 3.00% 5.00% 7.00% 9.00% 11.00% 13.00% 15.00% 17.00% Cameroon Djibouti Senegal Botswana Cameroon Sierra Leone Kenya Comoros Guinea Nigeria French Zimbabwe Madagascar Central African Republic Mali Benin Zambia Somalia Togo Niger Democratic Republic of Congo Gambia Mauritania Cape Verde Burkina Faso Tanzania Sudan Uganda Malawi Growth rate of market segment from 1995-2010 Equatorial Guinea Ghana Key No. of households in the market segment 15m 3m 0.5m Ease of doing business ranking 1-39 40-140 141-183 x axis - growth rate of market segment from 1995-2010 y axis - households in market segment as % of all households in the whole market Underdeveloped but growing fast Angola Mozambique Rwanda Ethiopia Source: C-GIDD; World Bank; EY analysis 101011 African Growth Story BR v2:layout 1 12/1/10 2:44 PM Page 14
Growth Impediments Infrastructure Diamond National Total, 2009 Infrastructure Access Service access poverty Sanitation Basic services are not provided Formal Housing Water Electricity: 20% Sanitation: 35% 25% Water: 20% 50% Refuse Removal 75% 100% Electricity Percentage population without access to at Percentage of households with access to a infrastructure service Source: IHS Global Insight Regional explorer version 524 1996 2009 least one of the basics services = 60%
Electricity Infrastructure South Africaʼs Energy Mix -2011 Eskom current capacity: 38.8GW Total Energy Supply by Type 10.2% 2.8% 2.2% Medupi Plant COAL 4.8GW $ 15.4bn Kusile Plant COAL 4.8GW $15.4bn Ingula Dam HYDRO 1.35GW $ 2.15bn 72.1% 12.6% Goal: +25% Capacity 0.1% Eskom 5yr. investment plan: R385bn ($48.5bn) Coal/Peat CRSW Gas Nuclear Oil Hydro Source: EIA Intl. Investors: $ 5.53bn World Bank: $ 3.75bn? $ 39.18bn
Electricity Infrastructure 340! COAL = CO2 Electricity Shortfall! Electricity Shortfall 320! 300! World Bank: $ 3.75bn TeraWatt Hour! 280! 260! 240! Delta needed due to system losses and to maintain a 3% surplus to avoid blackouts Proposed power plants on hold due to a lack of funding 220! 200! 2008! 2009! 2010! 2011! 2012! 2013! 2014! 2015! Power Generation, TWh Needed! Power Generation, TWh Actual! Power Consumption, TWh! Source: South Africa Infrastructure Report - Energy & Utilities - Q2 2011 - Business Monitor International. Team 3 Analysis
Sanitation Infrastructure Healthcare Landscape Lack of sanitation costs countries 1-7% of their GDP. Prevalent Infectious Diseases Tuberculosis is prevalent but under control Tuberculosis 17% contract disease annually HIV/AIDS 12% of population Intestinal Infectious Disease Malaria Hepatitis A Typhoid Fever -!"!#$,!"!#$ +!"!#$ *!"!#$ )!"!#$ (!"!#$ '!"!#$ &!"!#$ %!"!#$!"!#$!"#$%&"'()*)+&,)$)+ %--($ %--)$ %--*$ %--+$ %--,$ %---$ &!!!$ &!!%$ &!!&$ &!!'$ &!!($ &!!)$ &!!*$ &!!+$./0/1234$560/$ 7811/9$560/$:;/<=90/;/>$169/9?$ Source: World Databank. Team 3 Analysis
Sanitation Infrastructure HIV - AIDS HIV Facts 5.7 million are infected with HIV/AIDS 12% of population affected 18% of the workforce HIV Economic Effects HIV/AIDS reducing S. Africa GDP by % of population ages 15-49 Forces driving competition in the Water Utilities Industry in South Africa -2009 20.0% 19.0% 18.0% 17.0% 16.0% Total Prevalence of HIV 2000-2008 15.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 17% by 2010 0.3~0.4% of GDP per year Professional sectors affected: Mining Transportation Financing 62%! 60%! 58%! 56%! 54%! 52%! 50%! 48%! 46%! Life expectancy at birth! 1994!1995!1996!1997!1998!1999!2000!2001!2002!2003!2004!2005!2006!2007!2008! Source: World Databank. Team 3 Analysis
Sanitation Infrastructure Health & Water Intestinal Infectious Diseases (IID) Impact of Intestinal Infectious Diseases (IID) in South Africa 1997-2006 In 10 yrs cause of death due to IID 40% 40K increased sixfold from 6.5K to 40K people. 30% 30K 94% of IID (Diarrhea) preventable by availability to clean water and improved sanitation. 20% 10% 20K 10K 84% of IID in S. Africa attributed to water and sanitation. 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % Growth Deaths 0K Source: World Heath Organization Improving sanitation, hygienic practices, and water quality reduces IIDs by 65% 240-4 Globalization & Multinational Strategies
Water Infrastructure Industry Landscape SA Water Utilities Revenueʼs Forecast Water Utilities Industry in South Africa Rand Water: R10.5b SA Water Utilities Industry Revenues Johannesburg Water: R1.6b 9.0% 14.0 Umgeni Water R1.5b 6.8% 10.5 4.5% 7.0 2.3% 3.5 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Growth (y-o-y %) Revenues (ZAR bn) 0 2.5% CARG in the next 5 yr. Rand Water Johannesburg Water Rand Water Source: Water Utilities in South Africa - Datamonitor
Water Infrastructure Industry Landscape Water Supply: Interruptions to water provided Interruption dates are highlighted in green Wastewater facility Northern Bushcopie Driefontain Goudkoppie Olifantsvel Ennerdale Total Capacity (ML/d) Utilization (ML/d) Available capacity 410 360 7.69% 200 197 1.50% 25 26-4.00% 130 127 2.31% 200 192 4.00% 8 6 25.00% 973 908 6.68% SA is facing a water crisis which will only get worse as the population increases 50.0% 37.5% 25.0% 12.5% AVG = 28.1% 0% Jan Feb Mar Apr Sevice Interruption days Source: Johannesburg Water website - april 2011. Team 3 Analysis 240-4 Globalization & Multinational Strategies
Water Infrastructure Planned Projects Water Projects Value (US$ mn) Companies Timeframe Status Upgrade Mimar Waterworks plant Berg River Dam, Franschhoek 25.1 Umgeni Water -2011 Plans announced 150 Aveng 2006-2009 Completed Dam maintenance programme 158 Department of Water Affairs and Forestry 2008- Project announced Construction of seawater desalinisation plant in Port Elizabeth Spring Grove Dam 15 water resource infrastructure projects Water treatment plant near Sundumbili 220 GE Water and Process Technologies na Construction to be completed in end of 2009 261 na na Project delayed, costs increased 3,900 na 2009-2017 Plans announced na Umgeni Water na Plans announced Source: South Africa Infrastructure Report - Energy & Utilities - Q2 2011 - Business Monitor International
Water Infrastructure Supporting Infrastructure Water Treatment Infrastructure Capacity (ML/d) Energy Used (TWh) Power Used (GW) Emissions (MT CO2/yr.) Actual 44,000 10 2.8 59 Planned 22,500 5 1.4 29.5 Needs: 2 New mid size coal plants Transmission Infrastructure ~ US$ 4 Billion Source: Water Utilities is South Africa - Datamonitor 2010 & PG&E (2002) Energy Benchmarking Project-Secondary Wastewater Treatment and UV Disinfection. Team 3 Analysis 240-4 Globalization & Multinational Strategies
Energy Water Sanitation Wealth
How do you treat WATER, ENERGY? SANITATION improving without using 240-4 Globalization & Multinational Strategies
Strategic Solution ORGANICA TECHNOLOGY VS. ALTERNATIVE WATER TREATMENT TECHNOLOGIES ORGANICA Constructed Wetlands(CW) Moving Bed Bioreactor (MBBR) Membrane Bioreactor (MBR) Sequenced Batch Reactor (SBR) Conventional Activated Sludge (AS) Capital Expense Operating Expense Energy Efficiency Effluent Quality Footprint Aesthetics
Strategic Solution Potential Benefits Energy: ~ 5 TWh Equity: ~ US$ 5.9 B US$ 3.75B World Bank grant US$ 2.15B Infrastructure Environment: Emission avoided:~ 25 MT CO2 per year 5 ~ 30% reduction in infectious diseases Sanitation savings: ~ 9x investment Achievement of UN Millennium Development Goals Improved Biodiverstity Source: Water Utilities is South Africa - Datamonitor 2010 & PG&E (2002) Energy Benchmarking Project-Secondary Wastewater Treatment and UV Disinfection. Team 3 Analysis
Strategic Solution Industry Analysis Business Atractiveness US$ 3.9 Billion Opportunity Gross Margins ~ 50% Net Margins ~ 25% Higher value retention than utilities (CARG = 7.03% vs 2.5%) Low risks Customers in every income bracket Governmental Benefits CIP Grants: 30% of development costs Financing Tax Breaks Double tax treaty with Hungary: Royalties are exempt from the tax. From :The economist intelligence reports, SA Country Commerce, ITZAL20100.pdf Water Infrastructure Industry in South Africa- Growth Forecast 2012-2020 10% 8% 6% 4% 2% 0% Water Insfrastructure Industry - Growth Forecast 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f Water Infrastructure Industry - Revenues Real Growth (%) 7.03% CAGR in the next 9 years Source: South Africa Infrastructure Report - Energy & Utilities - Q2 2011 - Business Monitor International 240-4 Globalization & Multinational Strategies
Strategic Solution ilities market will be analyzed taking water retailers as players. The key buyers will be taken al and industrial end-users, and construction, engineering, laboratory services and e functions companies as the key suppliers. FIVE FORCES ANALYSIS New entrants Figure 7: Forces driving competition in the Water Utilities Industry in South Africa, 2009 orces driving competition in the South water Africa utilities industry in South Africa, 2009 Industry Analysis Factors influencing the likelihood of new entrants in the water utilities indu Likelihood of new entrants in the Water Utilities Industry in South Africa amonitor Source: D Datamonitor A T A M O N I T O R Difficult to enter market Market Growth Distribution accessibility D A T A M tilities industry is characterized by a lack of choice for consumers Constant as demand the utilities and are an undifferentiated often product provide incentives to entry into the indust nal monopolies. not incur large costs to switch between industry players and welcome movement from a Scale industry to one of choice where prices can be driven by competition. However, significant ba ilities industry comprises a vast array of companies providing products and services relating come in the form of the extensive infrastructure required, including high fixed costs of service tion, conveyance, Source: treatment Water and Utilities monitoring is South Africa of water - Datamonitor and wastewater for multiple purposes Source: Water Utilities is South Africa - Datamonitor with running pump stations, treatment facilities, reservoirs, pipelines, maintenance and wells rs. Water is the single most important economic input to the global economy and more costs occur whether or not any water is used. Due to the nature of the product being supplie o individual enterprises. A wide variety of business activities are outsourced by water utilities the industry is highly regulated and the need to meet stringent hygiene standards can act a ncluding construction, civil engineering, laboratory services and administrative functions. for prospective new entrants. Significant capital is also required to enter the industry thro 240-4 Globalization & Multinational Strategies
Strategic Solution SA Entry Strategy Create Joint Venture with Johannesburg Water or Umgeni Water Build relationships in highly bureaucratic business Access skilled workforce Build Partnership Networks Move US headquarters to NYC Networking UN Networking World Bank Open Branch in South Africa Organica SA headquarter in Pretoria: to influence Department of Water Affairs JV headquarters in Johannesburg
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