Title: Perspectives from the Private Financial Sector EnvSec Advisory Board Meeting Bratislava, September 2005 By: Kajetan Hetzer SNS Asset Management, The Netherlands

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: Stakeholder Mgmt. Financial conditions Multilateral and Bilateral Conditions & Relations Multilateral and Bilateral Conditions & Relations National Conditions National Conditions Business Environment / Playing Field

“Actors” Value Drivers SHAREHOLDERS CUSTOMERS SUPPLIERS WATER USER REGULATORS COMMUNITY NGOsENVIRONMENT PARTNERS INNOVATION EFFICIENCY QUALITY CUSTOMER SERVICE STRATEGY MANAGEMENT RISK MANAGEMENT FINANCIAL PERFORMANCE REPUTATION GOVERNANCE & ETHICS ORGANIZATION/MANAGEMENT VALUE Create Protect Realize VALUE Create Protect Realize ACTORS & THEMES AS VALUE DRIVERS DAMAGE REDUCTION LIFE/ POVERTY REDUCTION 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) Currently Measured Value Sustainable Business Value Forms of value 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 concept Transparency in communication Information Sharing Opinion & 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 Tree PEOPLE PLANETPROFIT Life health sanitation Birth Agriculture Available water rISKS Continuity Political circumstances Local Market Time Pollution Climate Bio Diversity Life Dividence Fresh water Reputation ??? Legal Framework ???? % % Ethics Profit Water as Value Driver Social demands Profitability environment

RegionsSub-themesSub-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 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