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Aqua America in Brazil
Foreign direct investment project focused on water
infrastructure in Brazil
PREPARED BY:
Eric Bell, Keith Boom, Valerie Cupp, Bill Panagis, and Kim Rieck
Foreign Direct Investment
Why Invest in Water?
Growing global demand and decreasing supply of potable water in emerging markets
•In the last century water usage has grown at
more than 2x the rate of the population
•Water use increases with a rise in living
standards- implications for emerging markets
•Industrial processes are water-intensive
•Brazil: 14% of Earth’s freshwater supply but
Northeast does not have access to adequate
supply of potable water
•Brazilian Government investing in water
•2.5% of Earth’s water supply is freshwater
infrastructure to prepare for 2014 World Cup & •70% of freshwater is frozen
2016 Olympics
•39% of global population without adequate
sanitation
Source: Food and Agriculture Organization of the United Nations (FAO) and UN-Water
WATER
BRAZIL
INVESTMENT
DECISION
Foreign Direct Investment
Why Invest in Brazil?
Strong macroeconomic fundamentals
•PROS: Strong economic fundamentals
Economic powerhouse: 10th largest economy in the world; GDP ≈ USD$1.55 trillion; vast
natural resources; large labor pool
Robust Growth: Economy expected to grow faster than those of the G6 in next 50 years
Regulatory Environment: Floating exchange rate, free capital flow, limited barriers to
FDI, open capital markets
•CONS: Rising inflationary pressure
Monetary Tightening: COPOM raises SELIC rate 75bps in April to 9.5%, 12.5% by 2011
Expansionary Fiscal Policy: Increased Government spending to cause additional
pressure to curb inflation
Declining Trade Balance: Current account deterioration likely in 2010; could be offset by
rising commodity prices and increase in exports
Source: World bank
WATER
BRAZIL
INVESTMENT
DECISION
Foreign Direct Investment
Investment Strategy
Enter into joint venture with Miya Group to form Agua Brazil (AB) - owner and operator of a
water treatment facility supplying the city of Mossoró
Project
Profile
Value
Proposition
Financial
Strategy
•
•
•
•
STRUCTURE: Joint Venture; Aqua America (90%) and Miya Group (10%)
TERM: 10 Years
LOCATION: Mossoró, in the state of Rio Grande do Norte, in Northeast Brazil
TARGET: Existing water supply infrastructure facilities currently owned and
operated by state utility company—Caern
• AQUA AMERICA: A+ Credit Rating, most efficient US water utility company,
growth through acquisition strategy
• Miya Group: Leader in engineering and water optimization solutions
• INVESTMENT AMOUNT: USD$15MM (BRL$26.1) – 100% cash transaction
• TERMS: 51% ownership of facility; 51% of future profits as owner and operator
• STRATEGY: Reduce NRW loss rates, increase revenue by expanding customer base
and gradual rate increases, lower costs through improved efficiency
WATER
BRAZIL
INVESTMENT
DECISION
Foreign Direct Investment
Should we invest? NO
Despite economic growth, improvements in efficiency and increased profitability,
risks outweigh return potential
FDI Climate
Risk
Competition
Low
-Partnership with Caern to access water utility monopoly
-High demand
-Large customer base
Financials
High
-Rate of return < risk free rate (opportunity cost)
-Exchange rate could negatively affect exit strategy
-Cash flow dependent on ability of low per capita income
customers to pay
Regulatory
Low
-Low barriers to entry
Political
Low
-Current administration pro-social reform
Social/Culture
Med. -World Cup/Olympics; promotes social infrastructure projects
- Corruption prevalent
- Sanitation program inefficient
WATER
BRAZIL
INVESTMENT
DECISION