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Tapping opportunities

ENGINEERING WATER Privatisation

Privatisation of the international water market is still in the early stages, discovers Andrew Mylius.

Globally, just 5% of all water supply and sanitation is privately owned or managed, according to UK charity Water Aid. Outright privatisation has not taken place anywhere other than the UK and Chile, in fact. Brazil and India say they are keen to make the move, but have yet to take action.

'Selling off water assets to a private company is a pretty extreme move, ' says Geoff Bridges, export promoter at the government overseas trade agency, Trade Partners UK. 'And it is a very emotive move. Privatisation gets a very bad popular press: 'fat cat foreigners draining money out of the country'.'

Few of the UK water utilities active overseas, including Thames (now owned by German power and water giant RWE), Severn Trent Water International, Anglian, United Utilities, Northumbrian or Cascal (created by the merger of Biwater Capital and Dutch gas and electricity firm Nuon), see much scope for buying state-owned water treatment, distribution or sewerage systems.

But other forms of private sector involvement, through build, own, operate, transfer (BOOT), operating concession, public private partnership (PPP) or investment in new infrastructure, hold out great promise, believes Henry Perfect, senior partner at consultant Babtie and chairman of trade association British Water.

These options are also the favourites for Thames Water international director Peter Hemming. 'They transfer all responsibility for operation and revenue collection, and they offer scope for companies like ours to apply a full range of skills, ' he says.

Governments in many of the poor and intermediate level developing countries are hungry for investment and private sector involvement is frequently a condition of lending, Hemmings notes. 'Most of the big finance houses demand it. The World Bank has found that without the private sector, capital tends to dissipate within the local authority framework.' Water tends to lose out in many countries to housing, hospitals or roads, where the political stakes are higher.

Many national and regional governments are looking to private sector management expertise to help them cut operating cost and increase revenue.

Under operating/maintenance concessions or PPPs, capital works required are typically aimed at improving water quality and reducing leakage.

There is little scope under concession contracts for investment in new infrastructure, though, says Cascal communications director Simon Humphrey.

Concessions are seen by many on the international water scene as a route into new markets and firms rarely make money on them.

French competitors such as Lyonnais des Eaux are reported to take on concessions at below cost as a 'loss leader', comments Perfect. Private sector operators are unable to gain a toehold in state-controlled markets without political consent at the national and local level.

Other initiatives aimed at opening up overseas water markets to privatisation are afoot.

Mounting pressure from major lenders such as the World Bank and Asian Development Bank is forcing governments to improve revenue collection and to establish 'sustainable' tariff structures. 'Water is a heavily subsidised commodity and charges almost everywhere are very low, ' comments Bridges.

'Almost nobody pays for sanitation.'

Yet, perversely, it is the poor who pay most for water, says Hemmings. 'Water carriers charge an enormous amount for very poor service, and most people can't afford connection.'

Under a scheme known as Business Partners in Development, launched by the World Bank, Water Aid, Tear Fund and Christian Aid, private sector firms are financing and installing local standpipe water supply systems.

Pilot projects have so far been carried out by Thames Water in Dar-es-Salaam, Tanzania, and the Indonesian capital Jakarta.

The aim is to demonstrate that even standpipe connections can be commercially viable, says Water Aid advocacy manager Belinda Calaguas. Business Partners in Development also involves a public awareness campaign aimed at getting local communities to assign value to water, and take 'ownership' of the infrastructure - both vital for the long term viability of the infrastructure.

Supply offered out under the scheme is a miniscule part of Thames Water's overseas business, but if financial sustainability is achieved Hemmings believes there is scope for dramatic growth. 'Today's standpipes are tomorrow's household connections.'

Finding finance Major UK water firms are being constrained overseas by limits imposed on their domestic revenue by industry regulator Ofwat, claims Babtie senior partner and British Water chairman, Henry Perfect. UK firms are unable to generate the capital to invest in emerging markets and they are losing ground rapidly to foreign competitors, principally French, operating with larger cash reserves or governmental backing. Until the UK regulatory regime is reformed, says Perfect, firms will only be able to invest effectively overseas if they have access to alternative sources of finance.

Thames Water is able to draw on parent RWE's bank account, built on German gas and electricity supply. Cascal, a specially formed investment company is independent of parent UK consultant and utilities firm Biwater.

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