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Post harvest solutions for Cambodia’s rice farmers Impact investment business plan – November 2013

2

Table of Contents

Introduction and Background 6

Objectives and Business Model 12

Organisational Structure and Governance 19

Operations 27

Marketing & Sales and Strategic

Partnerships 38

Finance and Investment 45

Community Benefits 55

Risks and Mitigation Measures 57

Implementation Plan 60

Conclusion and Recommendations 63

Appendix 65

About us

3

The Global Institute For Tomorrow – GIFT – is an independent think tank providing

content-rich and intellectually challenging executive education from an Asian worldview.

GIFT engages current and future leaders through an exceptional approach to executive

education and experiential learning and offers a wide range of unique action-learning

programmes to equip participants to lead effectively and succeed in a rapidly changing

and globalised world. This is achieved in a way that is both pragmatic and ethical, whilst

being fully aware of the role of business in society.

4

Executive Summary (1/2)

The Cambodian economy is heavily dependent on agriculture and rice farming in particular. The

government aims to increase its rice exports to one million tons by 2015 as compared to 0.2 million

tons in 2012.

Cambodian jasmine rice is internationally recognized and has been awarded World’s Best Rice at the

Rice Traders World Rice Conference for two consecutive years, 2012-2013.

A fragmented value chain results in significant informal export of unprocessed paddy to Vietnam and

Thailand and loss of value for the economy, keeping local rice farmers in poverty and selling under

duress.

As part of a leadership program for BASF and developed by the Global Institute For Tomorrow

(GIFT), 25 executives from 17 countries have proposed a new company, ProspeRice, to improve the

livelihoods of rice farmers by strengthening the post-harvest value chain through professional drying

and storage services, and by providing quality agricultural inputs and training.

ProspeRice will have operating companies (OpCos) in rice growing areas and be co-owned by

member farmers. These will be subsidiaries of the holding company.

Members may receive annual dividend payments, which are discretionary and according to company

performance, thereby incentivizing the farmers and ensuring consistent supply of paddy through

enhanced income and a sense of ownership.

5

Executive Summary (2/2)

Each OpCo will be equipped with a 100-ton/day dryer and 24 hermetic storage cocoons for long-term

storage. Revenues will be generated by selling dry export-quality fragrant jasmine and long-grain paddy to

millers, and supplemented by providing professional drying and storage services.

ProspeRice will be operating within 6-12 months of securing initial investment. Key activities during this

period include setting up the holding company, establishing the first OpCo, registration of member farmers,

installing the dryers and purchasing the storage cocoons, building sales networks and establishing

community development teams.

US$600,000 investment is required to establish the holding company and first OpCo in year one. Each

additional OpCo (five are proposed over ten years) requires approx. US$540,000 start-up capital which

are proposed to be staged with one coming online in year 3 and another three to come online in year 5.

Expected sales in year 1 will be 7,800 tons (US$3.5 million), rising to 15,700 tons (US$7.3 million) by Year

3, with a consistent net profit margin of 18%. The procurement of wet paddy and provision of seed/fertilizer

constitute the main variable costs.

A 50% bank financing scenario using rice stocks as short-term collateral would see ProspeRice offering an

IRR of 21% over 10 years. In this scenario the payback period to investors is 8 years.

ProspeRice provides a compelling impact investment opportunity to

benefit rice farming communities and the Cambodian economy

6 6

Introduction and Background

7

Cambodia at a glance

Strategically located in SE Asia,

Cambodia borders Thailand, Laos and

Vietnam.

Land area: 181,035 km2

Population: 15.4 million (78% rural,

approx 2.5 million farming households)

GDP per capita ~ US$1,000

Ranked 15th in the world for GDP growth

in the period 2000 – 2010

Agriculture is the country’s leading sector

(30% of GDP), followed by construction,

tourism, garments and textiles.

8

Cambodian rice sector

Rice farming accounts for nearly 1/3 of

Cambodia’s total agricultural production and

utilizes 80% of cultivated land

The government is targeting 1 million tons of

milled rice exports by 2015

Production and Consumption of Rice in Southeast Asia – Source: USDA,

Spatial Production Allocation Model 3.1

Total paddy production** 9.3 million tons

Local rice consumption 2.1 million tons

Export* 205,717 tons

Seeds and animal feeds 1.2 million tons

Significant potential for surplus

paddy to be processed into milled

rice for export * Source: Cambodian Rice Exporters Association, 2012 figures

** The average recovery rate for mills is between 60-65% for 100% of

paddy.

9

Supply / Production

Post-harvest Processing Market

distribution and consumption

Fu

nction

Input supply Production Collection Dehusking

(milling) Polishing (milling)

Wholesale & retailing

Consumption

Pla

yers

Seed and

fertilizer

supplier

Farmer

Miller

Farmer

Village

collector

Millers

Traders

Processors

Millers

Processor

Millers

Wholesaler

Retailer

Large miller

Consumer

Activitie

s Seed

collection

Seed supply

Fertilizer

supply

Growing

Harvesting

Drying

Threshing

Paddy

collection

Paddy selling

Rice trading

Drying

Storage

Dehusking

Grading

Milling

Polishing

Grading

Selling

Wholesale

Retail

Consumer

Quality losses resulting in 10 – 30%* loss in value due to

insufficient drying and storage facilities for small holder farmers Crop Consumption

Rice value chain

10

Rice sector opportunities and challenges

Opportunities

Leverage government support as it aims

to transform Cambodia into one of the

world’s major rice exporters.

Improve farmers livelihoods by adding

value through drying and storage allowing

them to benefit from seasonal price

fluctuations.

Introduce appropriate post-harvest

solutions and benefits into rural areas,

thus stimulating the local economy.

As most millers have idle capacity (30-

40%) during “low season”, meeting their

demand for consistent paddy supply

throughout the year.

Challenges

Inadequate irrigation limits most farmers

to one harvest per year.

Lack of quality seeds adversely impacts

yields.

Insufficient drying and storage facilities

compels farmers to sell at a low price and

prevents them from selling during the dry

season when the price is higher.

Financial position of farmers leaves no

choice but to sell wet paddy to collectors

and millers within 48 hours, much of which

ends up in Thailand and Vietnam.

11

Conditions in Battambang optimal for new post-harvest solutions

Proposed location for pilot initiative

Battambang province

Highly fertile and the leading rice producing province.

A leakage point for Cambodian rice due to predatory

tactics of Thai millers and traders.

Electricity supply is competitive and province is home

to Cambodia’s largest commercial rice millers.

Large quantities of wet paddy sold to Thai purchasers

via informal channels. Majority of remaining paddy

dried under poor conditions i.e. on roadside, resulting

in losses in quantity and quality.

Most of the ~ 1,800 mills running at 25% capacity due

to inconsistent supply, especially in low season.

Further due diligence is required to identify a site, with

electricity and road networks as key concerns.

12 12

Objectives and Business Model

13

Objectives

Design a viable business model centered around

technically sound and appropriate drying and

storage solutions for Cambodian export-quality

rice.

Propose a new commercial structure that

improves livelihoods of farming communities and

positively impacts the Cambodian economy whilst

being financially viable and attractive to impact

investors.

Suggest a company structure, governance

framework and operational model that promotes

transparency and accountability to attract

investors and also enables farmers to capture

additional value for their produce.

14

Rationale for business model (1/2)

Given the Cambodian government’s commitment to increase milled rice

exports five-fold between 2012 and 2015, and millers demand for a consistent

supply of export-quality paddy, especially during the low season, there is

clearly an opportunity for investments in the post-harvest segment of the rice

value-chain.

A new commercial structure involving the creation of a holding company is

needed. It will establish operating companies (OpCos) to purchase wet paddy

from member farmers, engage in technically sound and appropriate drying and

storage activities, and sell export-quality dried paddy to mills at a premium

during low season.

Non-member farmers and paddy collectors may utilise the OpCos drying and

storage services for a fee which will generate additional revenue.

In addition, and to support its core activities, each OpCo will also provide

quality agricultural inputs and training for members to improve the quality and

quantity of their harvest.

15

Rationale for business model (2/2)

To promote loyalty and ensure a consistent supply of wet paddy, 60% of the

shares in each OpCo will be offered to member farmers in the form of “sweat

equity”.

Farmer members will share in the success of the OpCos through an annual

cash dividend, according to performance of the company and decision from the

board.

A governance framework at the holding company level will ensure that the

interests of all stakeholders are protected in a fair and transparent manner.

Key players in the business model include investors, holding and operating

company employees, member and non-member farmers, millers and

shareholders.

A growing number of investors called “Impact Investors” are interested in such

opportunities and a viable commercial plan provides a solid framework for

investors to engage with stakeholders, including the government.

A new financially viable company to fill the gap in post-harvest solutions

16

Introducing ProspeRice Ltd.

Creating prosperity for Cambodian rice farmers and the rural economy

17

A financially viable social business

Collection of paddy

Drying

Storage

Technical support

Business model empowers farmers by realigning the market landscape

Investment

Dividend

Goods

Payment

Option for

drying/ storage

Investors

Operating

Companies

Farmers

Millers

Holding company will be

responsible for financial

mgmt and establishing

OpCos

18

Scaling the business model in stages

Short Term: (1 year)

Set up first OpCo in Battambang

Alliance with bank for collateralized loan

Develop relationship / network with farmers

A phased approach to create long-term value for Cambodia’s rice sector

Mid Term: (2 – 3 years)

Develop wholesale rice brand

Set up milling contract

Expand additional OpCo to neighboring districts /

provinces

Long Term: (5 – 10 years)

Three additional OpCos to come online

Possibility to set up own milling facility

Diversify into storage / sale of different

crops

19 19

Organisational Structure and Governance

20

Key stakeholders and interests

Investors Farmers

Communities Millers

Desire to make positive impact

on Cambodian rice sector

Seeking to drive improvements

in farmer livelihoods with

strategic investments

Reasonable investment returns

Transparency & accountability

of management team

More predictable and consistent

supply of paddy year-round

Paddy dried and stored to

export-standards

Better utilisation of high-cost

milling facilities

Increased revenues & profits

Improved agricultural livelihoods

leading to less rural-to-urban

migration (social cohesion).

Additional income allows for

improvement in nutrition, health,

education and productivity.

Greater independence and

more options for community

development

Higher price for their produce

Affordable access to

drying/storage facilities

Learn crop management best

practice for improved yields

A stake in the company: 60%

as “sweat equity”

Included into the modernisation

of the rice sector

The mandate of ProspeRice is to improve the quality of post harvest processing in the rice sector and

to ensure stakeholder interests are protected, whilst driving social development and minimising

environmental impacts.

21

Proposed shareholding structure

ProspeRice will seek alignment of

interests, ensure operational excellence

and transparent decision-making by

inviting key stakeholders to become

shareholders.

“Sweat equity” to be given to

ProspeRice executives (holding

company) and member farmers in

OpCo.

“Sweat equity” for member farmers, is

relative to land ownership and total rice-

growing acreage covered by OpCo

i.e. assuming all farmers in area are

members, if total area expected to

be covered by one OpCo = 1000

hectares then 10 hectares = 0.6%

share in that OpCo

80%

10% 10%

ProspeRice Ltd.

Investors Executives Millers and Other key stakeholers

40%

60%

Operating Company

ProspeRice Farmers

22

ProspeRice Ltd. (Holding Company)

Proposed Ownership Structure

% Shares % voting rights

Investors 80 80

Managing Director 10 10

Relevant Rice Miller Association 10 10

(subject to anchor investors’ approval)

Managing Director

Finance & Admin

Manager

Lean organisation structure that provides equity to key stakeholders

Board of

Directors

Members Seat

Investors 2

Managing Director 1

Miller Association Rep. 1

Independent Director 1

Total 5

Relationship between

investors to be governed

by Shareholders

Agreement. Additional due

diligence to be done on

how many investors and

board seats to be allocated

23

Role Key Responsibilities Est. salary

(p.a, US$)

Managing

Director

Acts as the public face of ProspeRice and engages in investor

and key stakeholder relations, OpCo development and

appointment of the OpCo manager(s)

Defines the strategic direction for the company.

Gives special attention to the company’s social mandate vis a

vis positive impact on the livelihoods of farming communities

via the activities of the OpCos

OpCo managers report directly to the MD

$24,000

Finance &

Admin

Manager

(F&A)

Responsible for the budgeting, financial reporting and

forecasting

Serves as the manager for the general administration, Human

Resources, Procurement, Payroll and Legal functions of

ProspeRice.

Oversees the F&A activities at the OpCos

$12,000

ProspeRice management team

Lean and efficient management team in start-up phase

24

Operating Company

Proposed Ownership Structure

% Shares % voting rights

ProspeRice 40 100

Farming communities* 60 - (minimum criteria for membership = rice grower)

Operating Company

Manager (1)

Field

Experts (3)

Dryer and Storage

operators (7)

Truck Drivers

(2)

Community

Development

Officer (1)

Org structure easily replicable for additional OpCos

*Farmers’ voting rights could be a point of negotiation during the establishment of the company and if

deemed necessary should be offered as a block vote rather than on an individual member basis.

25

Role Key Responsibilities Est. salary

(p.a, US$)

Manager Day-to-day running of OpCo and regular reporting to MD

Plans and optimises utilisation of drying/storage capacity,

supervise operational staff and quality control

Supervises and supports the field experts in customer

Community outreach i.e. technical training and farm

management.

Manage transport and logistics.

$12,000

Community

Development

Officer (CDO)

Engages with local stakeholders, especially farming

communities to promote “sweat equity” program and

monitors impacts of membership on farming families

Develops and maintains relationships with farmers and

millers to generate supply for drying/storage and help to

secure contracts for sale of dry paddy

$12,000

OpCo management team and salaries

OpCos will be managed by Cambodians with agriculture experience

26

Role Headcount Est. salary

(p.a, US$)

Field extension 3 $1,200/employee = $3,600

Dryer & Storage

Operation 5 $1,200/employee = $6,000

Dryer & Storage

Operation 2 (contract)

$100/month x 6 months x 2 employees =

$1,200

Truck Drivers 2 (contract) $200/month x 12 months x 2 employees =

$4,800

OpCo operational team and salaries

Total Operating Company Staff :10 full-time, 4 contract @ $35,600 p.a

27 27

Operations

28

Overview of ProspeRice operations

9,000 tons / year wet paddy 7,800 tons / year dried paddy

Drying Storage Service

education* Delivery to mill Quality Control

Key areas of operations

29

Operational objectives Services Status Quo Objectives of OpCo

Farming

Support

Quality/yield issues due to limited

technical education & access to inputs

Improve yield of export-quality paddy by

providing quality input and technical support.

Paddy

collection

Different types/qualities of paddy

mixed together during collection

Quality control and agreements with members

to ensure no mix of fragrant with non-fragrant

Drying

Sun drying results in losses and

reduction in quality, many farmers

forced to sell wet paddy at lower price.

Dry 100 tons/day of wet paddy to 14% moisture

content within 48 hours at export standard.

Storage

Due to limited storage capacity most

millers cannot utilise over 30%

capacity

Store dried paddy for 3-9 months, safe from

moisture and insects to command higher

prices.

Quality Control

Majority of post-harvest solutions not

properly monitored and do not meet

export standards.

Stringent Quality control and potential for intl

certification i.e. ISO, HACCP, etc.

Mill Delivery

Millers cannot secure paddy at optimal

times, dependant on collectors and

truck availability. Farmers cannot get

delivery service in time.

Deliver dried paddy to millers within 24 hours of

removing from storage without loss of quality or

quantity.

PropseRice will change the status quo on multiple fronts

30

Farming support (1/2)

Seeds Land Planting Nutrition

Technical support

Commercial activity

Farming support provided

by OpCo will include:

I. Provision of seeds and

fertilizers to farmers

II. Education of Health &

Safety issues related

to use of fertilizer,

herbicides, etc.

III. Strategic partners to

provide technical

support to farmers:

Land preparation

and water mgmt

Workshops to share

and learn best-

practice

31

Farming support (2/2)

Crop management Nutrition management Crop protection

Transplanting: pre-

germinated seedlings are

transferred from a

seedbed to the wet field.

Site-specific nutrient

management provides

principles for optimally

supplying rice.

Site-specific management

provided to determine if pest

management is necessary

and if so to what degree.

Drying process contributes

to higher seed germination

rates

Operational Actions

Source 200 tons of fertilizer

from partner each year to

secure timely supply.

Facilitate quarterly technical

advice from partners (CIRD,

IRRI, etc) to farmers.

Intended benefits

32

■ Recirculation batch-drying

■ A mechanical device that removes

moisture from wet grains by forcing

either ambient air or heated air

through the grain bulk

■ High cost, high capacity industrial

system

■ Sun-drying

■ Traditional method for reducing the

moisture content of paddy by

spreading the paddy in the sun

■ Low cost but quality and quantity

adversely affected and dependant on

increasingly unpredictable weather

Paddy Dryer operations and options

■ Flat-bed drying

■ A drying a machine that removes the

water from wet paddy by forcing

heated air through the grain bulk

■ Reasonable cost, can be constructed

from local materials but low capacity

Why does paddy need to be

dried?

• Rice is harvested at high

moisture content >20%

• Quality deterioration starts

immediately after harvest

• Paddy must be dried before

storage/milling to around 13-

14%

• Over drying leads to

economic losses for

farmers upon sale (lower

weight) and reduced milling

yields due to cracking

• Incomplete drying leads to

losses in quantity and

quality due to fungal growth

and insect infestation

33

Dryer options – recommendation

Based on the dryer options analysis,

ProspeRice will use the recirculating

batch drying system for the following

reasons:

Produces export-quality dried paddy

Large capacity (100T/day) for paddy

drying and increased speed in

humidity reduction

Has high energy efficiency, thus

reducing operating costs

Recyclable waste heat, contributes

to lowering operating costs

All the above benefits justify the higher

capital costs.

Recirculation drying system is cost and energy efficient

*See Appendix III for more information

34

■ Hermetic system

■ Controls paddy moisture content and insect activity for grain

stored in tropical regions

■ Provides insect control without pesticides

■ Reasonable cost given lifespan, ease of installation and

impact on quality

■ Silos

■ Big capacity and can be easily sealed for fumigation and less

grain is spilt or wasted

■ Not common in Asia due to moisture migration inside the silo

resulting in hot-spots and mold

■ High capital cost and considerable construction process

■ Farm level storage

■ Storage in outside granaries or in woven baskets

■ High loss from insects, rodents, birds and moisture uptake

are common in this system

■ Low cost but highly ineffective

Storage options

35

Storage options – recommendation

ProspeRice will use a hermetic

system such as the GrainPro Self-

Verifying MegaCocoon™ storage

system.

Designed for hermetic low-cost

storage of large quantities of

bagged grain; self-verifying

oxygen and humidity displays

eliminate the need for pesticides.

Used directly on the ground.

Flexible PVC material is highly

UV-resistant, with a useful life of

over 10 years.

Hermetic storage is cost effective, mobile and easy to install

*See Appendix IV for more information

36

Quality control

1. Wet paddy: freshness, moisture, contamination, mud, damage, etc.

2. Drying: check the drying speed of paddy 25% ⇒ 14%

3. Dried paddy: moisture 14%

4. Just before selling: moisture 14%

Dryer

Quality Checks

and monitoring

done to export

standards

Miller Storage Transportation* Farmer

Moisture

meter

1 2 3 4

Mo

nito

rin

g b

y t

wo

OpC

o t

echn

icia

ns

Strict quality control ensures export-quality dried paddy to millers

*Dried paddy from storage to miller will be transported in jute bags. Any fluctuations in moisture content is expected to be insignificant.

37

Mill delivery operations

0

2,000

4,000

6,000

8,000

Oct

.

No

v.

Dec

.

Jan

.

Feb

.

Mar

.

Ap

r.

May

.

Jun

.

July

.

Au

g.

Sep

.Dri

ed

Pad

dy (

ton

s)

Sold

Stored

Oct. – Dec.: Dry and store, 2,600 tons dried rice/ month, max.7,700 tons

Jan. – Mar.: Keep in storage

Apr. – Aug.: Sale to millers, 1,800 tons dried rice/ month when the price

increases

Two 10-ton trucks will be operated (two to three deliveries / truck / day)

Stock Volumes of Dried Paddy Opcos will manage

the storage and sale

of wet/dry paddy and

leverage price

fluctuations

throughout the year to

generate revenues

and profits by

delivering product to

millers during the low

season.

38 38

Marketing & Sales and Strategic Partnerships

39

ProspeRice pricing and sales strategy

Year 1 Year 2

J F M A M J J A S O N D J F M A M J J A S O N D

Planting season Harvest

Planting season Harvest

Buy period Sell period Buy period

Price seasonality Selling price

Buying price

Provide

incentives

Dry paddy

Wet paddy

ProspeRice will buy wet paddy from farmers during the peak season when prices

are lower and sell dry paddy during the off-peak season to the millers at higher price

Provide

incentives

ProspeRice maximises value for farmers by protecting them from

seasonal price fluctuations

40

Leveraging marketing & sales partnerships

Key partnership with strategic stakeholders will allow adequate transfer of goods

and services, and leverage on existing know-how and networks and bring

additional expertise from partners to local farmers

There are several advantages by working with strategic partners, such as:

Establishing a network to access quality seeds and fertilizers

Accessing state-of-the-art technology for drying and storage facilities

Facilitating knowledge transfer and develop training and communication

concepts between expert organizations and faming communities

Bringing in expertise and know-how from other countries and regions to

Cambodia’s rice industry

ProspeRice addresses critical needs of farmers and millers through

strategic partnerships

41

Potential strategic partners Strategic

partners

Specialties Value to the

company

Benefit for the partner

Drying and storage

equipment

Provide advise and

expertise on drying

and storing solutions

Provision of airtight storage

products in Cambodia

Develop new rice varieties

and rice crop

management techniques

Research, training and

knowledge transfer

Real-time, first-hand

feedback from user (farmers)

Ensure quality and safety

of our products, processes

and systems

Increase value and

reach of our product

through certification

Build a strong foothold in a

fast-growing emerging

market

Develop improved rice

varieties and technologies

for rice cultivation

Bring in high quality

seeds

Assist the Royal Government

of Cambodia to achieve its

rural development objectives

Collaborate on

sustainable projects

between government,

business and institutions

Offers a worldwide

network and

experience in social

engagement projects

Access to an agricultural

industry network in

Cambodia

Many additional partners will be identified during implementation

42

Communication with farmers

Field Expert

Technical

Knowledge

Training

Present

Share

holding

program

Provide

Quality

Seeds

Provide

Fertilizer

“Lead farmer” program:

Field expert engages with lead farmer

Incentives: service education

“Seeing is believing” model

Key benefits to be communicated:

Drying and storing services allow sale

of paddy at favorable market prices.

Additional income potential through

share dividends

Ownership stake, long-term value

Service education and farm inputs

(quality seed, fertilizer)

Operating

Company

Lead Farmers –

Village chiefs

Farmer

Farmer Farmer

Farmer

Farmer

Community

Incentivize farming communities through continuous engagement

43

Communication with millers

Approach: OpCos will position

themselves as a high quality supplier

and long term partner and friend to

millers through:

Ensuring export-quality dried paddy during

off-peak seasons in order to increase the

utilisation of milling facilities

Improve quality and yield of supply

through farming services and education

Developing its own suppliers (farmers)

through different incentives

Channels

Direct Sales

Engagement

New

Company

website

Brochures Agricultural

Forums, i.e

IRRI

ProspeRice is THE reliable partner and friend of the millers

44

Potential investors could include impact investment funds, angel investors, local

Cambodian investors, MNCs and Commercial Banks.

Approach: emphasis on social investing to deliver sustainable financial

returns based on community and farmer engagement.

Communication with investors

Key messages: social impact, rural development, robust business plan

and long-term partnership

Key benefits to be communicated:

Fast growing sector key to country’s economy;

Positive social impact on the Cambodian society whilst

generating financial returns;

Community has majority ownership in OpCos but

ProspeRice retains voting rights;

Aligned with government initiatives to develop the

Cambodia rice industry;

Cambodia’s liberalised economy provides favorable

business operating environment.

45 45

Finance and Investment

46

ProspeRice Impact Investment opportunity

The launch of ProspeRice presents an excellent opportunity for investors who wish

to create significant impact in Cambodia’s promising rice sector.

A total investment of US$2.5 million is required over the first 5 years, with an initial

capital investment of US$600,000 to start the business.

A second capital investment of US$500,000 is proposed in Year 2 for the

installation of the second OpCo, followed by an additional US$1.5 million in Year 5

for three more OpCos, contingent on company performance and growth.

Financial projections are based on securing bank financing for working capital to

collaterise the supply of paddy from member farmers. Dividend payments will

affect returns and be thus agreed by the board.

ProspeRice is also an opportunity to shape the nascent landscape for impact

investing by providing a blended return to both investors and to farmers in

Cambodian society.

ProspeRice is a unique investment to benefit Cambodia

47

Key financial assumptions

Current market value of export-quality paddy is used in the projections

Revenue from additional storage / drying services is deemed negligible

Bank interest and micro financing rates remain at current 10% and 24%

respectively

Consumer Price Index remains at the current 4%

Depreciation 10% for machinery and 5% for building

No major changes in government policies

Discount rate of 10% for net present value (NPV) calculation

48

OpCo Cap-ex breakdown

$60,000

$340,000

$10,000

$100,000

Drying equipment

Storing equipment

Office buildings

Trucks

78% of the initial capital

required for the first OpCo will

be for the acquisition of storing

and drying equipment

12%

66%

2%

20%

Relatively low cap-ex required for each OpCo - US$510,000

Labor (holding and operating company) in first year – US$72,000

49

ProspeRice revenue projection

-

5

10

15

20

25

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Mil

lio

n $

Revenue generated by selling dry paddy to millers

A majority of the

revenue will be

generated by the

sale of quality dry

paddy to millers.

This revenue will

increase with every

new OpCo set-up

1 new OpCo

set up

3 new OpCos

set up

Projected increase in revenue is driven by new OpCo(s).

50

ProspeRice cost breakdown

-

20

40

60

80

100

120

-

2

4

6

8

10

12

14

16

18

20

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Mill

ion

$

Mil

lio

n $

Others Seed/fertilizer Wet Paddy Accumulated cost

The procurement of

paddy and provision

of seeds and

fertilizers make up

more than 90% of

total operating costs

1 new OpCo

set up

3 new OpCos

set up

Consistent net operating profit margin of 18%

51

Overview of Financing Options

Two options for financing the company’s working capital have been considered

as highlighted in the following section. These include 100% investor funding

and 50/50 investor and bank funding.

Both scenarios assume an initial investment of $600,000 to cover capex to

establish the holding company and one operating company

The recommended and most likely scenario is a shared financing model

wherein both investor funds and bank financing are utilised. A 50/50 scenario

presented below yields an attractive return and provides secure cash flow for

the business.

Bank financing is essential to create the conditions for the

transformation of Cambodia’s rice sector to benefit farmers and for

government export targets thereby to be met.

Bank financing is essential and will help to transform the rice sector

52

Financing (1/2): 100% investor funding

-10

-5

0

5

10

15

20

25

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Mil

lio

n $

Profit after Tax and Interest Cash Flow After Tax

Profit after Tax and Interest Acc Cash Flow After Tax Acc

3 new OpCos

set up

1 new OpCo

set up

Intensive working capital requirements result in only 2% IRR over ten

years Financial projections not inclusive of dividends

53

Financing (2/2): 50%:50%, investor:bank

-5

0

5

10

15

20

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Mil

lio

n $

Profit after Tax Cash Flow After Tax

Profit after Tax Acc Cash Flow After Tax Acc

3 new OpCos

set up

1 new OpCo

set up

Leveraging bank loan results in IRR of 21% over ten years

Financial projections not inclusive of dividends

54

Recommendation: Bank involvement is

essential to commercial viability

Working capital should be secured via bank loans

Currently, Cambodia does not have adequate bank facilities to use floating

assets as collateral so securing 100% bank loan is unlikely

However, a significant amount of paddy and fixed assets presents a good

opportunity to secure collateralised short-term loans from banks at a

competitive rate

Representatives of banking industry have shown a willingness to lend

against export-quality paddy stocks over a short period (<1 year)

Loans are necessary to reduce the financing burden of working capital

Banks could be offered a stake in ProspeRice, the holding company

Banks are offered the opportunity to invest in social progress

55 55

Community Benefits

56

Community benefits

Option to dry &

store

Improvements to the rice supply chain, particularly in post-harvest production where

most of the losses occur, carry benefits for various players and stakeholders, from

farmers, to the community and to the country as a whole.

Through service education, farmers will access workshops and trainings on improved

crop management and to better agricultural inputs, equipping farmers to upgrade the

production of rice and to create greater security with less dependence on the weather for

drying.

In turn, farmers will enjoy increased income due to improved quality and yield, and

potentially dividends from ProspeRice. Overall improvements of the rice value chain

through ProspeRice will be more inclusive of farmers as the sector modernises and

becomes more export-led.

Millers will also increase their total annual income by utilizing off-peak periods for better

capacity utilisation, by accessing high quality dry paddy which increase total revenues

and reduces breakage and losses during milling.

The environmental impact of PropeRice will be minimised. Drying and storage facilities

will be energy efficient and use the best technology available. Indirect impacts from

service education include a more precise application of inputs (reducing run-offs);

improved crop rotation for improved nitrogen fixation and to better resource

management.

57 57

Risks and Mitigation Measures

58

Financial and operational risks

Risk Mitigation measure

Farmers not willing to sell, e.g. due to

price competition for wet paddy from

Thai and Vietnamese traders

■ Develop loyalty through “input education”

outreach / training program

■ Farmers are shareholders in OpCos

Fluctuating availability of husks for dryer

fuel

■ Dryers can use various kinds of fuel (such as

electricity)

Low supply / overall economic or harvest

environment is bad

■ Maintain low fixed costs

■ Avoid take-or-pay contracts with miller

Low demand ■ Long term storage available

Oversupply / change of “Everything but

Arms” preferential import treatment from

EU

■ Maintain the highest export-quality standards

and explore international certification

Unusually high demand ■ Preferential treatment for loyal millers

■ Dynamic pricing

59

Social & environmental risks

Risk Mitigation measure

ProspeRice unable to fulfill pricing or

supply commitments to farmers

■ Start small and establish credibility step by step

Fraud / crime / safety / security / social

instability or conflict

■ Good corporate governance / checks and balances

■ Create good relationship with local community

Availability of skilled labor ■ Effective training program

■ Strategic partnerships with supplier companies (crop

protection, fertilizer, seed companies)

Conflict of interest between farmers,

dryers, collectors, and millers

■ Transparent and open culture; shared objectives of

ProspeRice

Crop loss due to flood or drought ■ Maintain low fixed costs

■ Avoid take-or-pay contracts with miller

■ Hygienic storage for long-term food stability

Soil erosion / soil loss / lowered soil

quality because of intensification of

agriculture (two seasons)

■ Input education / training outreach program; use best

available technologies

Emissions (husk burning) ■ Choose lower emission technology

60 60

Implementation Plan

61

Implementation Plan (1/2)

Short Term

(0 - 2yrs) Mid Term

(3 - 5 yrs)

Long

Term

(> 5 yrs) Q1 Q2 Q3 Q4 Yr 2

1 Identification of investors / shareholders

and establish ProspeRice Ltd.

2 Establish governance framework for BoD,

shareholders agreement, etc

3 Establish first OpCo and confirm site for

drying and storage facility

4 Construction and equipping of drying and

storage facility

5 Recruitment and training of staff to work in

drying and storage facility

6 Alliance with bank for collateralized loan

using stored paddy

7 Identify millers who will purchase dried

and stored paddy and set up contracts

62

Implementation Plan (2/2)

Short Term

(0 - 2yrs) Mid Term

(3 - 5 yrs)

Long

Term

(> 5 yrs) Q1 Q2 Q3 Q4 Yr 2

8 Provide input and technical know how to

the farmer

9 Replicate OpCo model with additional

branches

11 Diversify into direct sales / export

12 Review following strategic options, e.g.

build own mill, diversify crop

63 63

Conclusion and Recommendations

64

Conclusion and recommendation

• It is a crucial and opportune time to invest in Cambodia: the rice value

chain, currently fragmented and prone to losses, is ripe for integration that would

allow greater value to be retained in Cambodia.

ProspeRice will have a significant, positive impact for Cambodian farmers by

improving household income and empowerment, while also providing benefits to

rice local collectors and millers.

ProspeRice’s commercial viability hinges on leveraging short term bank loans

using stored paddy as collateral

Investors in ProspeRice will help realise economic benefit throughout the

Cambodian rice value chain, created by a financially self-sufficient business.

ProspeRice has the potential to directly and permanently improve the

livelihoods of thousands of farming families

65

Appendix I: Dryer specification & operation cost

Price per unit : $60,000

Capacity (Paddy) : 3,000 tons/

month

Dec.-Jan. for fragrant rice and

Feb.-Apr. for other varieties.

Energy consumption : husk and

electricity 60 KW

Moisture decrease : 4-15%/ day

Percentage of paddy breakage :

less than 0.5%

Size of machine : 4m high.

Operational Paddy dryer Unit :

Capacity rate : 100 tons / day /

machine.

Working days : 30 days per

month, 6 months/year

Total Dry paddy/years : 9,000-

18,000 tons

Labor cost/ months : 4 head count

($400/month)

Other cost : $275

Based on stakeholder meetings and discussions in Cambodia

66

Appendix II: GrainPro MegaCocoon™

Storage Capacity : 320 tons

Dimension: 14m x 10m x 3m

Total No. required: 24

Land space required: 10,000 m2

67

Appendix III: operational resources

Service Asset Investment Operational Cost Manpower

Farming

Support

N/A Fertilizers (200 tons at

$17/ton), seeds (140

tons at $37/ton)

1 fulltime

Drying 100 tons / day

recirculating batch dryer

7,600 m2 land

Electricity, husk /

charcoal ($1.6 / ton of

paddy)

3 fulltime

Storage 320 tons x 24 each

hermetic bags

Warehouse shelter

4,800 m2 storage area

Jute Bags (50kg x

153,000 each)

2 fulltime

2 contract

Delivery 10 ton truck x 2 each Fuel (40km x 2 each x

2 times) (volatile prices of diesel)

2 fulltime

Hermetic bags, a dryer, and trucks are the key investments, 8 permanent

and 2 contract workers are required for operations