Sub-Surface Waste Management (SSWM) Recaps its Mexico Business Development Experience

 

Company’s Lessons in International Business Development may be Helpful to Others Considering Similar Ventures

 

Introduction

 

We believe our experience in Mexico is unique but the challenges, solutions and methodology of our business development efforts could be useful to other companies anticipating business expansion in Mexico or elsewhere.

 

This report outlines the SSWM environmental business opportunities, the financial and political risks and challenges, and other issues that we experienced and that your company needs to be fully understood before venturing into international business expansion.  While the report is specific to the operations of SSWM and its Mexico subsidiary, it is intended to serve as a case study for other small and medium-sized companies seeking opportunities in foreign markets.

 

In this report, the “company” refers to Sub-Surface Waste Management of Delaware, Inc. (SSWM, a majority owned subsidiary of the parent holding company, U.S. Microbics, Inc.), and Environmental Tec International, S.A. de C.V. (ETI, a wholly owned Mexican subsidiary of SSWM).  The Company historically was a provider of microbic remediation expertise using naturally occurring microbes for cleaning-up pollution and increasing agricultural yields.

 

In 2000, the company entered the business of being a full-service engineering and bioremediation service provider, hired talented experts who identified markets of interest, and launched engineering operations.  The U.S. market proved difficult to enter because of the entrenched market position of established non-bioremediation service providers: the firms that either study and monitor the problem, or physically contain (bury) or incinerate (burn) material from polluted sites.  Additionally, the barriers to U.S. market entry as an engineering service provider include contract bonding requirements (for small companies like SSWM, bonding is typically 25% to 100% of the award value of contracts), finding qualified local technical partners, and other factors.

 

However, with the Mexico adopting environmental mandates as part of NAFTA, that had environmental constraints similar to those in the US, the opportunities for developing an environmental remediation business in Mexico seemed compelling.  A business development program was created and the company developed business opportunities in Mexico from 2005 until 2007, at which time external circumstances forced management to rethink its strategies and turn to other approaches to increasing shareholder value.

 

This report details the company business approach from initial project analysis, to expert selection, to campaign deployment and rollout, to ultimate withdrawal.

 

Overview

 

Robert Brehm, acting CEO of SSWM states, “SSWM undertook its Mexico operations in a methodical manner, undertaking an initial successful project in Mexico and then extrapolating its experience to other opportunities which had arisen during the first project.  We had to assemble numerous managers, language translators, international bankers, foreign intermediaries, accountants and others to develop operating budgets, contact investors, create Mexico subsidiaries, hire Mexico attorneys and work with government agencies and sub-agencies as we issued business proposals and received contract budget approvals.  After contracts were awarded, we had to shift our business and investment strategy based upon political changes in the country which effected the funding and start dates for contracts.

 

Brehm continued, “We believe our technology and expertise in environmental bioremediation can save lives and create better living conditions for many people in Mexico.  Our employees, contractors and others made many personal and financial sacrifices to help bring better environmental conditions and new jobs to a country in need.  However, the Mexican business, economic and political processes are often based upon different core values and beliefs then ours.  Unlike the United States, where rule of law and business practices are well defined, we could not effectively control the timelines or outside influences on the business development and execution process.”

 

Brehm concluded, “I still believe there is a great environmental business opportunity in Mexico.  Our report was created to help others cross the bridge into Mexico using our consulting expertise, contacts and knowledge we gained over the past three years.  Our technology worked well in Mexico in the past and has the potential for future benefits with a joint venture partner or licensee who can carry it forward using the skills, knowledge and experience we gained.”

 

Recruiting and Motivating a Team with Talent and Experience

 

Before entering the Mexican market, the company recruited a team of experienced engineering/remediation service providers in 2000, with combined experience of over 40 years working for large engineering firms on remediation projects in the U.S. and internationally.  U.S. Microbics, Inc. (the parent company) licensed its bio-technology to its majority-owned subsidiary, Sub-Surface Waste Management of Delaware, Inc. and provided over $6 million in funding to SSWM to execute the bioremediation engineering service implementation plan. 

 

With extensive international project experience, SSWM operating management had the management capability to launch operations in Mexico.  However, prior to a full-scale direct launch into Mexico, the company was awarded a contract to clean-up soil and groundwater pollution beneath a manufacturing factory in Mexico owned and operated by a U.S. company.  The $1.5 million contract was conducted in accordance with the requirements of Mexico’s E.P.A., which granted a license to the company’s subcontractors to use SSWM licensed biotechnology for remediation in Mexico.  With a successful launch of the technology and satisfactory project financial results, the stage was set for expanding business development directly with governmental agencies in Mexico, which required recruiting an experienced Mexican business development facilitator with established contacts on the Federal and State level in Mexico.

 

Finding the Right Business Development Facilitator

 

When the company began developing market opportunities in Mexico, the company sought an internationally recognized facilitator of business development in Mexico.  We met with different candidates, but one stood head and shoulders above the others, based on his resume and extensive high-level contacts on both sides of the border.

 

The individual we engaged on a monthly retainer basis had previously arranged meetings between U.S. and Mexican Presidents and Governors, and had advised and introduced other U.S.-based private and governmental organizations into Mexico.

 

We believed the facilitator we hired would be both motivated and capable of delivering funded contracts in a timely manner.  What the company experienced was that the facilitator did not effectively expedite the contract proposal-award-funding-startup process, but instead slowed the process while trying to negotiate additional fees that the company deemed unacceptable.

 

The company hired a facilitator with access to the right political connections, but the company was unaware of the importance of the agendas of the politicians and facilitator in achieving the company's business objectives in Mexico.  After 18 months of paying substantial monthly retainers, and serious delays in government agency project budget approval and contract start dates, the company cut its loses and discontinued the services of the facilitator.

 

Advice: Determine specific requirements and negotiate a performance based contract with the in-country facilitator to fully benefit from their experience and contact network.  Remember that business relationships are first best created on a social level and then on a more formal business level.  A good facilitator can make the business relationship process easy and quick.

 

Avoid Monthly Burn Rates That May Become Open-Ended

 

In addition to hiring a heavy-weight business development facilitator, the company was advised to establish a subsidiary company and office facility in Mexico to do business with government agencies, engage the "right" legal counsel in Mexico, and engage the "right" public accountants.  The company followed each of these suggestions.  Having a proven team of professionals helps with credibility for a newcomer engineering contractor.

 

The Company’s monthly burn rate included the cost of establishing and maintaining an office in Mexico City for the subsidiary, travel expenses, translators, the cost of assessing environmental sites and writing proposals, meeting with Mexican officials to make presentations, and other business expenses associated with business development prior to contract award.  In addition a large expense was the retainer paid to the consultant engaged to facilitate business development in Mexico.  Dealing with government agency heads also entails significant appointment changes and rescheduling of business trips for consultants, translators, and others before the contracts are awarded.

 

The company was also subject to delays due to the election and change in political officers at the state and the federal level.  Politicians are reluctant to approve budgets or projects if they don’t think they will be around to administer them in the next term.  Likewise, legislators are reluctant to approve future budgets for environmental work which may not be a priority under a new administration.  We found all of these events to be true up to and after the new president of the country was inaugurated in 2006.

 

As a result of the political uncertainty and with revenues from awarded and anticipated contracts delayed month after month due to delays in state budget funding (for project payments) from the “new” federal government administration after the new president was elected, the "right" legal and accounting service providers, the business development facilitator and ETI overhead became a significant part of the monthly burn rate (necessary recurring expenditures).

 

Advice: The advice to be learned from this experience is to fully assess the market entry costs, the business development time frames, the relationship building expenses and the political delays incurred as multi-agency governmental contracts are approved, then budgeted, then funded and then given start dates to proceed.  The process which is often short in the US can easily take 1-2 years with funding and contract modifications and political priority changes after the contracts are awarded!  Until a contract start date is received and the federal government funds the state government’s legislature-approved budget, there is no certainty for contract payment or reimbursement of up-front mobilization expenses!

 

Establish Business Banking Relationships

 

During the pre-contract to contract commencement period, the company provided working capital for operations from the proceeds of SSWM stock sales, plus additional funding from the parent company.  Due to a longer than expected market development period in Mexico, and political priority changes and new government contract terms, SSWM needed additional funds to obtain, standby for start dates and subsequently launch projects in Mexico.

 

The company established banking relationships with lenders in response to estimated delays in state government budget funding.  An investment banker was retained to raise $7 million, (by selling equity in ETI), for working capital and large up-front multi-year project costs.  The company’s bank line of credit was also increased by $500,000 from another source to help cover the business development and contract delay costs.

 

As part of the investment banker’s due diligence and existing and pending contract review, he created an investment memorandum that gave ETI (the Mexican subsidiary of SSWM) a multi-million dollar pre-money valuation in 2006/2007.  The investment banker was also shown the business plan and proposal made to a state governor to establish a series of environmental emergency response sites with a potential award value of near $200 million and five-year operating revenues.  All parties expected the financing to be forthcoming and contract preliminary contract start dates were set by ETI contingent upon the working capital from the investment banker’s investors.

 

However, the funding by the investment banker was withdrawn because of multiple factors, including a new investment banker requirement for a substantial deposit required from the governmental agencies for all contracts (although the contracts were already awarded and awaiting state funding) and several other new political factors which were considered high risk by the investors of the investment banker.

 

Advice: Clearly understand the local political conditions and how they affect your business.  Establish backup banking and overestimate the business development costs to fully reflect the economic effects of policy and priority changes of existing and new political administrations.

 

Find Local Partners That Best-Fit a Sustainable Business Model

 

The company has extensive experience and expertise in formulating, applying, and managing the use of naturally occurring micro-organisms that are carefully and methodically added to soil, surface water, and subsurface water in order to bioremediate toxic spills.  The company's technologies also have significant potential in other markets of interest including agriculture (increasing crop production) and bio-fuel conversion and waste stream recycling.

 

The company expected ideal local partners would be universities serving the geophysical areas in which the company would be operating, especially universities with strong programs in biology, environmental science, agriculture, and bio-fuel.

 

The company found fully qualified university partners and entered key relationships.  Because the university had long-established ties with state governments in Mexico, the company could act as a sub-contractor to the university thereby minimizing the need to qualify or provide construction bonds as in the U.S., which typically require posting a bond equal to a percentage of the total contract value in order to commence work on the project per the contract.

 

In addition, the university was a training center for new engineers and technicians who were eager to learn environmental skills for future jobs which would be useful in perpetuating the use of the company’s technology.  Whenever new jobs are created and environmental problems are solved, politicians are quick to provide their support and subsequent budget funding.

 

The universities depend upon the state budgets for project funding and they experienced unacceptable delays in the funding of contracts for which ETI was the prime subcontractor.  While the university working relationship was for good purpose, the delays in state funding of the contracts resulted in frustration and disappointment between and among the local university campuses and also local subcontractors.

 

Due to potential political administration changes, the company’s original university partner changed the terms of the contract with the company such that profits to the company were minimized, the company was forced to develop a more favorable (and profitable) relationship with another university.  The cost of changing university partners required four additional months and approximately $250,000 paid to consultants, legal counsel, etc.

 

Advice: Working within the university system is an excellent alternative and provides a source of talent and direct assignment of projects with minimal bonding requirements, however the political nature of university administrations make them subject to policy, priority and financial considerations of a political nature which are often detrimental to economic driven enterprises.

 

Understand the Advantage of Using Local Contractors

 

The States in Mexico in which the company sought to develop business have ample workers available for all the tasks that are needed to complete the company's contracts.  Therefore, the company chose to engage local subcontractors to perform the onsite work under the continual supervision of the local university personnel assigned to the company's contracts and under the supervision of a company project manager.  The university and its students provide an economical source of project labor and skilled technicians and engineers for future projects.

 

Advice: The advantage of using local contractors was moot because the state-funded contracts were delayed due to political considerations.  Nonetheless, the engagement of local contractors was an important component in structuring politically supported and economically acceptable contracts in Mexico.

 

Transfer Useful Technologies to Empower Local Partners

 

The company is in a unique position for technology transfer in that the use of naturally occurring micro-organisms has many benefits for soil and water cleanup and agricultural growth enhancement and the company has the benefit of decades of experience in the proprietary and patent methodologies of their use.

 

The company sought to transfer know-how about the proprietary process to the university campuses and the next-generation of environmental scientists, engineers, and future policy makers so as to perpetuate its future use throughout Mexico and Latin America.  In addition, engineers, technicians, and field workers would be trained in new environmental jobs which could stimulate local and regional economies.

 

Advice: Empower the local economy by creating new jobs that clean up old problems thus creating political support and budget approval.

 

Understand Your Markets and the Market Dynamics

 

Mexico has great potential as an emerging market for environmental products and services.  The environmental laws on the books in Mexico are at least as protective, if not more demanding, in comparison to U.S. Federal and State laws and regulations.  The problem has been in the implementation of infrastructure enforcement (permits, discharge levels, etc), but that's changing.  NAFTA is one driver, and membership in the World Trade Organization (WTO) is another driver for aggressive enforcement of environmental laws and regulations that are in place in Mexico.  As part of this new environmental mandate, one of the company’s contracts was to implement a permitting project which would develop a self-funding state regulatory agency for permitting and discharge of toxic chemicals.  Countless people would have benefited from this project.

 

End Users: The end-users of environmental problem-solving services are the people of Mexico, and their animals and crops, and the indigenous flora and fauna.  The end-users are not the buyers of environmental services in Mexico.

 

Buyers: The buyers of environmental problem-solving services in Mexico include governments (Federal, State, municipal), domestic industries and businesses, foreign-owned businesses operating in Mexico, and major landowners.

 

The Company pursued funded contracts with the first three:

State Governments and the universities contractors signed contracts with the company but only fully funded one contact which the company completed.

Domestic Industries (including the largest industrial companies in Mexico) requested multiple proposals for contracts.  As part of the investment banker’s due diligence, the investment banker verified the market opportunities and potentially realizable value.

Foreign-owned Business engaged the company in a mutually beneficial contract that produced the stated results, on time and within budget.

As a result of the company’s efforts, ETI won government contracts with an initial award value of approximately $8 million for execution in 2007-2009 with additional annual renewals.  The contracts in hand had preliminary start dates, but the government could not guarantee when the company would be paid for work undertaken due to uncertainty of federal funding of state budgets and other factors outside the company’s control.

 

The political administration changes and several other political events caused the investment banker to withdraw project funding through ETI making it difficult for ETI to start-up projects with heavy upfront mobilization costs.

 

Advice: Understand the political and economic conditions of the business you are pursuing and involve local participation at all levels of government.  Understand the governmental project funding process and its affect on your business operations.

 

Be Prepared to Change Business Strategies in Response to Changing Market Conditions

 

In mid-2007, after waiting months for start dates and state project funding, the company received the go-ahead for several projects but needed a new investment banker which meant starting again with the several-month process of negotiating terms and facilitating working capital to start the projects.  In Mexico, as with most government contracts in the U.S., the contractor needs working capital to implement projects, and then seeks payment for services rendered on an incremental basis (based on timeframes and/or meeting milestones).  Without adequate project mobilizations and working capital, the company could not start the projects and also pay for the business expenses burn rate.

 

An alternative would have been to switch from government contracts to non-government business contracts, but that would have meant starting over in pursuing contractual opportunities in the private sector, which involves great uncertainty about the outcome, contract terms, payment schedules (planned, probable, and actual) and potential profits/losses per contact.  In addition, private sector environmental compliance is rarely enforced since pollution permitting infrastructure has not been established in many areas of the country and most companies are not willing to hire environmental contractors to clean up a problem that is not enforced.  Again, the burn-rate (monthly costs of operations) prohibited taking a measured and timely approach to developing commercial business opportunities in Mexico.

 

Advice: Factor in the cost and burn rate of expenses for significant contract delays as part of the cost of doing business in Mexico or as a business development cost which can be factored into the project profitability and can be amortized over the life of the contract(s).  Failure to recognize the political ramifications associated with business in Mexico can turn a potentially profitable business opportunity into one that may not be worth undertaking.

 

Conclusion

 

The company continues to believe there are great environmental business opportunities in Mexico.  Management’s goal is to help others cross the bridge into Mexico using the consulting services, contacts and knowledge the company gained over the past three years.  The company’s bio-technology has been proven to work well in Mexico and the company is seeking a joint venture partner or licensee to carry forward the business opportunities for microbial bio-remediation to clean-up pollution, treat groundwater and wastewater, and increase agricultural output.

 

The engineering remediation business favors large, well capitalized companies.  The ideal candidate to develop the bio-remediation market in Mexico is a large, established engineering company with sufficient assets to be able to absorb the costs of business development, provide bonds (as required), and provide operational capital to perform work and then bill as milestones are met. 

 

The SSWM technology has a successful track record for the projects undertaken and completed because it eliminates the problem rather than treating the symptom.  A potential licensee would do well to investigate the substantial business opportunity that exists using the company’s better, cheaper, faster technology to help the people of Mexico live in a healthier environment.  Personalized business consulting and licensing opportunities for the manufacture, resale and use of the technology are available worldwide – please contact the company directly.

 

The company has no obligation to update this document in the future and readers should utilize its contents as a case study of one particular company in pursuing a business opportunity in Mexico.  Risk factors to be considered include political, social, economic, environmental, technological and human risks of uncertainty.  Act accordingly, plan well and succeed with the knowledge of where others have preceded you.

 

About Sub-Surface Waste Management

 

Sub-Surface Waste Management of Delaware, Inc., a majority owned subsidiary of U.S. Microbics, Inc., provides management services for its subsidiary companies.  In the near future, SSWM will be renamed Green Mountain Development Corp.

 

Contact:

Sub-Surface Waste Management of Delaware, Inc.

Robert Brehm, 760-918-1860 x102

 

 

The information contained in this report may include forward-looking statements.  Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect" or similar expressions that involve risks and uncertainties.  These risks and uncertainties include the company's status as a startup company with uncertain profitability, need for significant capital, uncertainty concerning market acceptance of its products, competition, limited service and manufacturing facilities, dependence on technological developments and protection of its intellectual property.  The company's actual results could differ materially from those discussed herein.