Matthew Magenheim ’11Journal #1
I arrived back in Phnom Penh on Friday, and, after a weekend of catching up with old friends and visiting the orphanages where I used to volunteer, I officially started my summer fellowship at Insitor this morning. Insitor is a social venture capital fund that focuses on supporting entrepreneurs who develop market solutions to important development issues. To date, the fund has made a debt investment in a Cambodian microfinance organization that focuses on home improvement and home acquisition for the poor, and an equity investment in a Laotian bakery/coffee shop with a social mission to employ trafficking survivors and at-risk youth. Insitor also provided a revolver to a Cambodian company that provides outsourced digitization services and trains disadvantaged youth.
Although I have been working from New York with the team over the last several months, it was great to finally get to the office and meet everyone personally. My project is focused on developing a financing tool for small-scale (< 1,000 households), rural, water-supply enterprises. It will likely be a combination of microfinance, social impact investing, and aid (primarily technical assistance, etc.) funds, with multiple tranches and returns. It is estimated that 35 percent of Cambodians live on less than one dollar per day and that 60 percent of rural Cambodians lack access to clean water.
Contaminated drinking water is the most important health-related concern in Cambodia, and health issues relating to the poor quality of the water supply include diarrhea, dysentery, typhoid, cholera, hepatitis, parasites, arsenic poisoning, and malnutrition. Since low income Cambodians often cannot afford the healthcare required to address these illnesses, the cycle of poverty is exacerbated and will be perpetuated without access to clean water.
We are working with a technical partner who has experience in implementing small-scale, water-supply enterprises. Over the next several weeks, I plan to refine the financial model that we have developed for the water entrepreneurs and to then meet with several banks and microfinance institutions to discuss financing structures and their potential involvement in such a project.
Journal #2
Cambodia has one of the lowest rates of access to potable water in Asia. This is primarily attributed to the destruction of the country’s infrastructure during the Khmer Rouge regime and the lack of reinvestment in the subsequent years. It was previously estimated that Cambodia would need to invest $300–600 million between 2005 and 2015 in order to meet its millennium development goal of cutting by half the number of inhabitants with no access to potable water.
Today, I met with the technical partner for the project. The partner previously implemented approximately 20 rural, water-supply enterprises in Cambodia. Outside of Phnom Penh and a few other metropolitan centers, expansion of water access has primarily been driven by the private sector through the implementation of small-piped water systems. The technical partner works closely with existing entrepreneurs to improve the water quality and expand their enterprises, and with new entrepreneurs to identify markets and implement new water-service enterprises. It is estimated that there are 200–400 suitable sites in Cambodia.
After several Skype calls from New York to Phnom Penh, it was great to finally meet the partner. We discussed several outstanding issues and new considerations including the need for varying loan repayment schedules since water demand is meaningfully higher in the dry season than the rainy season. I was surprised to learn that, for the most part, the Mekong River has high quality water — since there is limited industry along much of the river in the Cambodia. One of the major issues is that many water entrepreneurs use too little chlorine during the purification process in response to complaints from customers that they do not like the taste of chlorinated water.
We have been refining the model to determine the proper balance between manageable interest expense and suitable payback periods for the water entrepreneurs, and attractive economics for the banks and/or microfinance institutions that will administer the loans. Since many existing water entrepreneurs are currently financing their systems by borrowing from family members or village lenders, our goal is to develop a product that will offer more attractive terms and be capable of scaling nationally. We are still waiting to receive some additional water-demand forecast information, but it appears that we are getting closer to a desirable structure.
Journal #3
This is my last week at Insitor. It has been a tremendous experience to work with the team in developing the financing model for the water entrepreneurs, and, over the last week, the financial model for the microfinance institutions (MFIs) that will be administering the loans. Last week, I had a follow-up meeting with the chairman of one of the top-ten largest MFIs in Cambodia to discuss more specifics about our project, and its attractiveness to the microfinance industry.
Given the fact that many MFIs are beginning to target small- and medium-sized-enterprise loan products, in addition to their traditional group lending, it seems as if our timing might be very good to introduce a loan product targeting water entrepreneurs. We also anticipate that many MFIs, and the international lenders that the MFIs rely on for capital, will be attracted to the social impact that the loans will create.
One of the challenges for our model is that operating expenses, as a percent of the portfolio of outstanding loans for Cambodian MFIs, are greater than 10 percent. In order for the model to work, this will have to be significantly reduced. I believe this is very possible because the water loans will be significantly larger in duration and dollar amount, so there will be economies of scale. In addition, many of the MFIs already have branch offices in all or most of the areas that will be best suited for the technology, so minimum overhead expenses will be required. It seems that the greater challenge for the MFIs will be to secure longer-term debt from international lenders to match the duration of the loans to the water entrepreneurs.
Today, I presented my model — for the MFIs administering the loans — to the Insitor management team. Following my presentation, we had a productive conversation regarding some of the assumptions that I made, and how the returns will compare to those the MFIs receive from existing loan products. Despite returning to the United States early next week, I will continue to remain involved with tweaking the model to incorporate new information. Once we find the optimal structure that best meets the interest of the entrepreneurs and the MFIs, the next step will be to start contacting potential financing partners.
