KarnatakaKarnataka Waste-to-Power

Astrid FernandezAnnie Hsieh

Daniel PedisichAkshat Sarvaria

Sue Veksler

Agenda

Background on India

Current Business Environment

The Case and Solution

Risks and Benefits

Feasibility Analysis/ Valuation

Future Prospects

Conclusion/ Q&A

No pun intended!

India: Social BackgroundPopulation (July 2002 estimate) 1,045,845,226

Age Structure

0-14 years old 32.7%

15-64 years old 62.6%

65 years and over 4.7%

Population Growth Rate (2002 estimate)

1.51%

Life Expectancy at Birth (total population)

63.23 years

Literacy (age 15+ can read and write)

Total population 52%

Male 65.5%

Female (1995 estimate) 37.7%

India: Political Background

A parliamentary federal democracy.

The Republic of India is made up of 29 states, and six union territories.

As the largest democracy in the world, India has held regular and largely free elections since 1947.

Economic liberalization through opening up to foreign participation.

The Kashmir conflict with Pakistan.

India: Economic Background

5th largest economy in the World and the 3rd largest GDP in Asia.

GDP growth averaged 5.8 percent in the 1990’s.

India’s economic growth started to decelerate after 1996 due to:

- the decline in economic reforms in the financial sector, infrastructure, trade and industrial policy, privatization, and labor laws.

- slowing of growth in real investment.

Effects of the Asian currency crisis.

The government has been supporting and encouraging greater outside participation in its private sector.

Long tradition of an established legal, accounting, and judiciary system

Higher disposable incomes of Indian citizens and growing middle class.

Large English-speaking population.

Why India?

Why Bangalore, Karnataka?

India’s technology sector presently represents 1% of its $200 Billion GDP (or $2 Billion).

Expected to be $87 Billion by 2008 (Nasscom and McKinsey and Co.).

Bangalore is the “Silicon Valley” of India.

Our Solution:

Karnataka Waste-to-Power

Too much garbage = Problem Not enough electricity = Problem Waste to Energy = Solution

Problems & Solutions

KWP offers a two-pronged solution, simultaneous waste disposal and

energy production.

How does Waste-to-Energy work?

Cities Paper%

Plastic %

Metal % Glass% Ash& Earth %

Total

Calcutta 3.18 0.65 0.66 0.38 34.00 47.00

Delhi 6.29 0.85 1.21 0.57 36.00 35.00

Nagpur 1.88 1.35 1.33 1.34 41.42 34.81

Bangalore 4.00 2.00 0 1.00 15.00 78.00

Bombay 10.00 2.00 3.6 .2 45.60 40.00

Physical Characteristics of Solid Waste from some Cities in India

Why is Karnataka the best place?

Decreasing funds for education could impede economic growth. Dispute with Pakistan leads to travel advisories and less investors. Political instability and lack of consistent government.

Risks Associated With India

Expertise lacking in regulatory bodies. Indian Governments have not come to terms with

independent regulation. Cannot trust or even speculate decisions made by

the regulatory body when in fact, an investor does not know who is calling the shots.

More Risks Associated With India

Apparent mismatch between production and population

Growth potential

Templeton Developing Markets Trust fund fact sheet, 2002

But Opportunities Remain….

In India the information technology industry currently represents just over 1% of the country’s $200 billion economy.

This reflects expectations that Internet usage in India will expand at one of the fastest rates in Asia, boosting knowledge and ultimately income.

Opportunities in India

Based on the model of Wheelabrator Technologies Inc., a U.S. based subsidiary of Waste Management, Inc.

The initial purchase of a fleet of garbage trucks is based on a fleet of 500 trucks, costing $100,000 each.

We assume that we charge the municipal government $30/ton to collect waste. This is a cost that we intend to increase 3% per year in real terms.

We intend to produce 0.5% of the energy required in the local market (approximately 100 megawatts), and increase our production by a rate of 3% annually.

The Valuation

Operating a sanitary disposal (a capped landfill) costs approximately $25/ton, increasing 3% annually.

Transportation costs are approximately $18/ton, also increasing 3% annually, and this represents the bulk of our expenses.

Plant operational costs grow at about 4.33% annually to accommodate more input and output.

Electricity is sold at the market rate, and increases at the rate of inflation each year.

The amount we need to put in a sanitary landfill for disposal actually decreases over time.

The Valuation

The Valuation

2003 2004 2005 2006 2007 2008 2009 2010 2011

Revenue from waste management  

$ 65,700,000.00

$ 71,519,578.34

$ 77,854,643.63

$ 84,750,856.69

$ 92,257,922.91

$ 100,429,950.46

$ 109,325,840.34

$ 119,009,710.86

$ 129,551,359.81

Electricity Sales  

$ 5,000,000.00

$ 5,371,450.00

$ 5,532,593.50

$ 5,698,571.31

$ 5,869,528.44

$ 6,045,614.30

$ 6,226,982.73

$ 6,413,792.21

$ 6,606,205.97

Cost of operating plant  

$ (7,620,000.00)

$ (8,291,793.68)

$ (9,022,813.96)

$ (9,818,282.39)

$ (10,683,880.82)

$ (11,625,792.05)

$ (12,650,743.96)

$ (13,766,057.59)

$ (14,979,699.38)

Sanitary Disposal of Remaining Waste Cost (approx $25/ton,inc. 3% annually)  

$ (22,452,123.70)

$ (23,629,780.01)

$ (23,353,022.52)

$ (23,054,853.15)

$ (22,734,455.19)

$ (22,390,985.12)

$ (22,023,571.74)

$ (21,631,315.36)

$ (21,213,286.87)

Waste Transportation and Collection Costs (approx $18/ton,inc. 3% annually)  

$ (39,420,000.00)

$ (42,495,128.10)

$ (43,060,313.31)

$ (43,633,015.47)

$ (44,213,334.58)

$ (44,801,371.93)

$ (45,397,230.18)

$ (46,001,013.34)

$ (46,612,826.82)

Profit/Loss

$ (146,250,000.00)

$ 1,207,876.30

$ 2,474,326.55

$ 7,951,087.34

$ 13,943,276.98

$ 20,495,780.76

$ 27,657,415.66

$ 35,481,277.19

$ 44,025,116.78

$ 53,351,752.72

The Valuation

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Revenue from waste management

$ 141,026,767.54

$ 153,518,644.60

$ 167,117,027.85

$ 181,919,929.47

$ 198,034,043.35

$ 215,575,514.13

$ 234,670,774.30

$ 255,457,455.53

$ 278,085,380.58

$ 302,717,643.28

$ 329,531,783.94

Electricity Sales

$ 6,804,392.15

$ 7,008,523.92

$ 7,060,673.92

$ 7,112,823.92

$ 7,164,973.92

$ 7,217,123.92

$ 7,269,273.92

$ 7,321,423.92

$ 7,373,573.92

$ 7,425,723.92

$ 7,477,873.92

Cost of operating plant

$ (16,300,338.14)

$ (17,737,406.92)

$ (19,301,170.41)

$ (21,002,798.27)

$ (22,854,444.87)

$ (24,869,336.15)

$ (27,061,864.08)

$ (29,447,689.44)

$ (32,043,853.69)

$ (34,868,900.71)

$ (37,943,009.25)

Sanitary Disposal of Remaining Waste Cost (approx $25/ton,inc. 2% annually)

$ (20,768,526.85)

$ (20,296,044.63)

$ (19,794,817.28)

$ (19,263,788.67)

$ (18,701,868.38)

$ (18,107,930.69)

$ (17,480,813.46)

$ (16,819,316.99)

$ (16,122,202.87)

$ (15,388,192.81)

$ (14,615,967.35)

Waste Transportation and Collection Costs (approx $18/ton,inc. 2% annually)

$ (47,232,777.41)

$ (47,860,973.35)

$ (48,497,524.30)

$ (49,142,541.37)

$ (49,796,137.17)

$ (50,458,425.80)

$ (51,129,522.86)

$ (51,809,545.51)

$ (52,498,612.47)

$ (53,196,844.01)

$ (53,904,362.04)

Profit/Loss

$ 63,529,517.29

$ 74,632,743.61

$ 86,584,189.77

$ 99,623,625.08

$ 113,846,566.84

$ 129,356,945.40

$ 146,267,847.82

$ 164,702,327.51

$ 184,794,285.47

$ 206,689,429.66

$ 230,546,319.22

Revenue & Cost of CapitalCost of Capital Calculation -

Goldman Integrated Model    

     

    India

US Risk-Free Rate A 5.00%

US Market Risk Premium B 4.51%

Comparable Beta C 1.5

Country Premium D 6.00%

Cost of Equity E=A+(B*C)+D 17.77%

NPV using Cost of Equity $43,646,893.33

Plant Start-up Cost

$ (137,500,000)

•The positive net present value of $46,646,893.33 is based on a discount rate of 17.77%, the approximate cost of equity, over the twenty-year projected life of this illiquid investment, taking a 4.3% inflation rate into account, increasing all revenues and expenses by at least this amount. We also include a thirty percent subsidy by the Indian government for the initial construction costs of the power plant, which is being provided to companies involved in renewable energy projects.

There is a strong chance that that our valuation accurately reflects the worth of this project.

Unforeseen costs, such as litigation, strikes, changes in the regulatory environment, cleanup of environmental catastrophe, or inability to collect funds due for our collection services, could severely hamper our business model.

Potential Problems?

Other risks to the valuation include, but are not limited to:

High initial capital cost,

financing issues due to lack investor confidence in a risky venture,

most of the technologies developed may not be suitable for the nature of Indian waste.

Potential Problems?

Lack of financial resources at the local and state government levels.

Lack of long term strategy and concrete policy on waste management.

Lack of awareness of environmental issues in the culture, tempering enthusiasm for environmentally beneficial projects

Potential Problems?

But…

Our model assumes that we are the sole collector of municipal solid waste in Karnataka, and we process 100% of the waste.

This is likely to occur for the foreseeable future due to the extensive start up costs to start such a business in this risky, but potentially profitable, market.

Future Prospects

The model could be implemented in other Indian cities, as well as other developing markets.

A real option to expand could increase the net present value dramatically.

The social benefits of managing waste responsibly would make the value-added nature of this project a worthwhile venture for the local and national governments to support.

Other foreign investors in the region may be willing to invest in this venture as well; everyone needs electricity and waste management!

Any Questions?