Karnataka Waste-to-Power

Astrid Fernandez Annie Hsieh Daniel Pedisich Akshat 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 Background
Population (July 2002 estimate) 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) Life Expectancy at Birth (total population) Literacy (age 15+ can read and write) Total population 52% Male 65.5% Female (1995 estimate) 37.7% 1.51% 63.23 years 1,045,845,226

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.

Why India?
 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 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

Problems & Solutions
 Too much garbage = Problem  Not enough electricity = Problem  Waste to Energy = Solution

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

How does Waste-to-Energy work?

Why is Karnataka the best place?
Physical Characteristics of Solid Waste from some Cities in India

Cities Calcutta Delhi Nagpur Bangalore Bombay

Paper % 3.18 6.29 1.88 4.00 10.00

Plastic % 0.65 0.85 1.35 2.00 2.00

Metal % 0.66 1.21 1.33 0 3.6

Glass% 0.38 0.57 1.34 1.00 .2

Ash& Earth % 34.00 36.00 41.42 15.00 45.60

Total 47.00 35.00 34.81 78.00 40.00

Risks Associated With India
 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.

More 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.

But Opportunities Remain….
 Apparent mismatch between production and population
Growth potential

Templeton Developing Markets Trust fund fact sheet, 2002

Opportunities in India
 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.

The Valuation
 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
2003
$ $ Revenue from waste management 65,700,000.00 71,519,57 8.34 $ $ Electricity Sales 5,000,000.00 5,371,450. 00 $ $ Cost of operating plant (7,620,000.00) (8,291,793 .68) $ $ Sanitary Disposal of Remaining Waste Cost (approx $25/ton,inc. 3% annually) (22,452,123.70) (23,629,78 0.01) $ $ Waste Transportation and Collection Costs (approx $18/ton,inc. 3% annually) (39,420,000.00) (42,495,12 8.10) $ $ Profit/Loss (146,250,000.00) $ 1,207,876.30 2,474,326. 55 7,951, 087.34 5,532, 593.50 $ (9,022, 813.96 ) $ (23,35 3,022. 52) $ (43,06 0,313. 31) $ 5,698, 571.31 $ (9,818, 282.39 ) $ (23,05 4,853. 15) $ (43,63 3,015. 47) $ 13,943 ,276.9 8

2004

2005
$ 77,854 ,643.6 3 $

2006
$ 84,750 ,856.6 9 $

2007
$ 92,257 ,922.9 1

2008
$ 100,42 9,950. 46

2009
$ 109,32 5,840. 34

2010
$ 119,00 9,710. 86

2011
$ 129,55 1,359. 81

$ 5,869, 528.44 $ (10,68 3,880. 82) $ (22,73 4,455. 19) $ (44,21 3,334. 58) $ 20,495 ,780.7 6

$ 6,045, 614.30 $ (11,62 5,792. 05) $ (22,39 0,985. 12) $ (44,80 1,371. 93) $ 27,657 ,415.6 6

$ 6,226, 982.73 $ (12,65 0,743. 96) $ (22,02 3,571. 74) $ (45,39 7,230. 18) $ 35,481 ,277.1 9

$ 6,413, 792.21 $ (13,76 6,057. 59) $ (21,63 1,315. 36) $ (46,00 1,013. 34) $ 44,025 ,116.7 8

$ 6,606, 205.97 $ (14,97 9,699. 38) $ (21,21 3,286. 87) $ (46,61 2,826. 82) $ 53,351 ,752.7 2

The Valuation
2012
$ Revenue from waste management 141,026,767.54 $ 153,518,644.60 167,117,0 27.85 $ $ Electricity Sales 6,804,392.15 $ 7,008,523.92 7,060,673 .92 $ $ Cost of operating plant (16,300,338.14) $ (17,737,406.92) (19,301,1 70.41) $ Sanitary Disposal of Remaining Waste Cost (approx $25/ton,inc. 2% annually) $ (20,768,526.85) $ (20,296,044.63) (19,794,8 17.28) $ Waste Transportation and Collection Costs (approx $18/ton,inc. 2% annually) $ (47,232,777.41) $ (47,860,973.35) (48,497,5 24.30) $ $ Profit/Loss 63,529,517.29 $ 74,632,743.61 86,584,18 9.77 7,112, 823.9 2 $ (21,00 2,798. 27) $ (19,26 3,788. 67) $ (49,14 2,541. 37) $ 99,62 3,625. 08 7,164, 973.9 2 $ (22,85 4,444. 87) $ (18,70 1,868. 38) $ (49,79 6,137. 17) $ 113,8 46,56 6.84 7,217, 123.9 2 $ (24,86 9,336. 15) $ (18,10 7,930. 69) $ (50,45 8,425. 80) $ 129,3 56,94 5.40 7,269, 273.9 2 $ (27,06 1,864. 08) $ (17,48 0,813. 46) $ (51,12 9,522. 86) $ 146,2 67,84 7.82 7,321, 423.9 2 $ (29,44 7,689. 44) $ (16,81 9,316. 99) $ (51,80 9,545. 51) $ 164,7 02,32 7.51 7,373, 573.9 2 $ (32,04 3,853. 69) $ (16,12 2,202. 87) $ (52,49 8,612. 47) $ 184,7 94,28 5.47 7,425, 723.9 2 $ (34,86 8,900. 71) $ (15,38 8,192. 81) $ (53,19 6,844. 01) $ 206,6 89,42 9.66 7,477, 873.9 2 $ (37,94 3,009. 25) $ (14,61 5,967. 35) $ (53,90 4,362. 04) $ 230,5 46,31 9.22

2013
$

2014

2015
$ 181,9 19,92 9.47 $

2016
$ 198,0 34,04 3.35 $

2017
$ 215,5 75,51 4.13 $

2018
$ 234,6 70,77 4.30 $

2019
$ 255,4 57,45 5.53 $

2020
$ 278,0 85,38 0.58 $

2021
$ 302,7 17,64 3.28 $

2022
$ 329,5 31,78 3.94 $

Revenue & Cost of Capital
Cost of Capital Calculation Goldman Integrated Model

$ Plant Start-up Cost (137,500,000) US Risk-Free Rate US Market Risk Premium Comparable Beta Country Premium Cost of Equity A B C D E=A+(B*C)+D

India 5.00% 4.51% 1.5 6.00% 17.77%

NPV using Cost of Equity

$43,646,893.33

•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.

Potential Problems?
 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

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?

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