800m now served by private sector

David Lloyd Owen reviews the progress of the Pinsent Masons Water Yearbook’s first eleven, and recommends some holiday reading.

Even though 2009 was relatively quiet in terms of new contracts gained during the year, 126 contracts were either awarded or identified for the first time. This compares with 117 for the previous edition and represents a rise from 548 contracts in 2006 to 1,060 this year.

A plethora of companies are out there, quietly building their presence and coming to the market with a low-key bang. A year ago, Beijing Enterprises Water was on the lookout for business. By this July, it had 34 separate water or wastewater concessions under its belt.

While mainstream companies such as Veolia Environnement and Aqua America are keen to tell us about contract gains and tuck-in acquisitions as soon as the ink has dried, in Shenzhen and Hong Kong it is the annual (and sometimes semi-annual) reports where the information lies.

So, 97 ‘old’ contracts were found, in one case having in fact been awarded back in 2004. Being an optimist, I see this as part of the process of hunting down the shy and the sly, rather than bemoaning what has slipped by.

A vintage year for holiday reading
While the intensity of contract awards has (outside China at least) been somewhat affected by the 2008-09 financial crisis (or Temporary Bonus Blip as it is known in the City), it has been a vintage year for research and policy development. The following should adorn every beach bag and Tuscan terrace next year:

Marin, P. – Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries World Bank, Washington DC

Service extension at 36 concessions and leases were examined. Between them, they extended access to water to 24.7 million people during the study. PSP is best seen as a catalyst for finance and investment.

Kauffmann, C. – Private Participation in Water Infrastructure: OECD Checklist for Public Action, OECD, Paris

A broad set of 24 actions for improving the operation of PSP contracts. Some of them may be stating the obvious, but that reflects the need to learn from mistakes. Water conservation should be seen as an integral part of securing a contract’s financial stability, while transparency has been integral to a contract’s subsequent success. OECD – Managing Water for All: An OECD Perspective on Pricing and Financing, Paris Common sense is needed. Providing intermediate services rather than none does make sense. Tariffs are moving towards cost recovery, along with tariff structures that encourage efficient water use. South Korea raised 53% of its sewerage project capex between 1997-2004 via a liquor tax. Tremolet. S. et al. – Innovative Financing Mechanisms for the Water Sector, OECD, Paris Methods of improving sub-sovereign debt ratings are discussed in the wake of the downgrading of the monoline insurers. The EBRD has been one of the most innovative and active players here.

Gassner, K., Popov, A. & Pushak, N. – Does Private Sector Participation Improve Performance in Electricity and Water Distribution? Trends and policy options No. 6, The World Bank, Washington DC Service efficiency increases both for water and sewerage when PSP takes place, and also with the degree of PSP employed. No causal link between PSP and investment in water assets could be demonstrated.

IFC – Safe Water for All: Harnessing the private sector to reach the unserved, International Finance Corporation, Washington, DC

About 704 million people depend on various point-of-use approaches to treat unsafe water supplies. The private sector is the main provider of these goods and services, which will remain essential until universal access to safe water and sanitation is achieved.

2009’s legacy
In addition, the 5th World Water Forum in March was by some way the most constructive yet, with the ‘F-word’ (finance) being openly used in a number of sessions and a considerable number of case studies. These also complemented a remarkably productive conference organised by the World Bank in February. Perhaps the market will remember 2009 as the year in which the theoretical basis for taking water and wastewater management seriously was assembled in an assessable manner.

Contract losses dwindle away to nothing
2008-09 has been notably quiet, with two contracts ending in 2008 and none in 2009. The secondary cities project for 750,000 people in Mozambique by Aguas de Portugal/Mazi was meant to expire in 2004, when it was given a three-year extension to 2007 and a further one-year extension after that, while the Albanian contract (Kavaja, run by Amiantit; 77,000 people) ran its full course. In the medium term, a steady stream of contracts will reach their maturity and from then, interest will focus on how these are followed up.

In population terms, a fall in the share of contracts that have been cancelled from 11% in 2006 to 8% in 2009 is progress, but it demonstrates that the sector remains difficult. The reversion of the Paris water services contract to municipal control next month will have a major impact on next year’s figures.

The World Bank notes that 9% of the 662 contracts it logged between 1990 and 2008 are either cancelled or in distress, representing 34% of total funds invested, against 29% in 2007. This level compares poorly with electricity (8%), telecoms (4%) and transport (8%), reflecting the sector’s higher risk profile and its ‘political’ nature, especially when it comes to cost recovery.

How many people are served by the private sector?
There were six markets with an extensive private sector presence at the start of 1987: the USA (mainly regulated activities, rather than the non-regulated O&M outsourcing contracts which emerged in the 1990s); France (the private sector share has advanced from 72% in 1987 to 80% in 2009); Italy (11% of the market was served by the private sector and semiprivate companies in 1987); Spain (the private sector share has advanced from 35% in 1987 to nearly 50% in 2009); Germany (Gelsenwasser and certain local companies held approximately 8% of the market through long-term contracts); and England & Wales (there were 29 statutory water companies serving 13.8 million people when privatisation occurred in 1989).

To count as private sector participation, contracts have to be of at least five years’ duration and be a formally established O&M/lease contract, a concessional contract or an outright asset privatisation. In this context, private water service companies are defined as legally established commercial entities that have signed a formal contract with the relevant municipal or state authorities for the provision of water or wastewater services.

In order to distinguish between such contracts and formal or quasi-legal contracts drawn up with small local entities, these contracts must also cover at least 10,000 people. Contracts for industrial water services or for developing industrial zones are excluded until they meet the population criteria.

The contract service extension figure reflects a 2009 study by the World Bank. Some service extension has already been factored into the data used and this is taken into account, as are contracts that have already ended (e.g. La Paz & El Alto). Population growth and urbanisation data is very hard to qualify (it is steady or even falling in parts of Europe, and rising rapidly in many developing economies), and the figures may represent an understatement of between 10 and 25 million.

The final figure compares with, for example, 563 million people identified as being served by the private sector in 2005. The rise reflects both improved data as well as contract awards in recent years.

M&A – time for the smelling salts?
Apart from the odd case of eminent domain in the US, 2009 has been a year when water companies digested their acquisitions and, more to the point, private equity funds pondered how to regurgitate theirs.

The level of merger and acquisition activity in the sector was remarkably intense between 1997 and 2008. More than 90 corporate transactions (primarily in the water management sector and involving at least $10 million being paid) have been noted since 1997, with a total value of $42.6 billion. The tightening of the financial markets from 2007 meant that the acquisition of Kelda early last year marked the end of an acquisitive era, rather than heralding a new one in the UK. The final determination of price limits for the 2010-2015 asset management period in England and Wales at the end of this month will undoubtedly influence the level of M&A activity in the UK regulated water sector in 2010.

Since 1996, 12 companies have changed hands twice, ranging from Thames Water and American Water Works at one extreme, to Cambridge Water and Mid Kent Water at the other. Southern Water leads the pack, and is now on its third new owner since 1996. Further south, Suez Environnement’s move to buy a 75% majority stake in Agbar should be completed by mid-2010. The resulting consolidation will inevitably have a profound effect on next year’s numbers.

IPOs try to combine spin with substance
IPOs have remained on hold since the appearance of the last Yearbook, although RWE has succeeded in deconsolidating American Water Works through a series of secondary offerings. Global Water Resources Inc. registered for an IPO on the Nasdaq in 2008, but has been put off by market conditions, as has been the case yet again for Thailand’s Metropolitan Waterworks Authority (MWA) and Provincial Waterworks Authority (PWA), along with Maynilad Water of the Philippines, Rio de Janeiro’s Nova Cedae, and Sedapal of Peru.

More intriguing will be the fate of the various utilities in the UK, US and Chile snapped up by private equity houses in 2006-08 at optimistic valuations. How will these investors realise their investments, and when? Financial engineering may be the smart way to go in a bubble economy, but things can start to hurt when the bubble is cruelly pricked.

Anybody can be a financial genius in a bull market – and while investors have money to burn. It takes more skill to do good business in a financial world halfappalled yet half-seduced by its own hubris. 55% of all private equity funds have an asset-holding horizon of less than three years, and the sale of Gatwick Airport by BAA this October was effected at a discount to its regulatory asset value, rather than the anticipated premium.

Company numbers are relatively stable
This year’s plusses and minuses are smaller than seen in recent years. Comparative data continues to improve for estimating populations served by water and sewerage contracts where only volumetric data is provided. Companies tend to make their acquisitions and contract gains well known, but can be remarkably reticent about contract endings and divestments, especially when under new ownership. Thames and Anglian Water have been good cases in the last year or so, with their departures from Jakarta, Beijing and Brazil. All of these contracts were sold onto third parties.

Local players continue to pop up
Eight new company entries have been made in this edition: five in China, two in Brazil and one in Indonesia. American Water Works has now been fully deconsolidated from RWE after its partial IPO last year. A2A takes the place of ASM Brescia following the merger with AEM Milano, and Edison leaves, having sold its water interests in Ecuador to Proactiva (Veolia/ FCC).

Some of the ‘Big Five’ step aside
The ‘Big Five’ are due for a reshuffle as we enter an era of national companies becoming as big as the global players of yore. Sabesp and FCC are due for promotion, although it still remains to be seen if the major Chinese players can make the jump to rival Sabesp in size.

The fall in numbers served by Veolia and Suez Environnement mainly reflects a continued weeding out of old contracts by the author and the elimination of doublecounted contracts wherever possible. Agbar, meanwhile, has made significant progress in the last couple of years by entering new markets.

These are net of cross-holdings, so Suez Environnement does not include Agbar’s primary holdings in Spain, Chile and the UK (accounting for 22.7 million people), and RWE does not include Berlinwasser International. The splitting up of Saur and the divestment of Thames Water and AWW from RWE has also accelerated these changes.

China still dominates the global market
In 1989, China accounted for 8% of the people served by the private sector worldwide. In 2009, that figure is 38%. This is perhaps most usefully illustrated by the growth in contracts awarded in China as a percentage of the global total in population terms.

The Envisager database has identified 426 contracts in China covering 258 million people, against 105 million people back in 2005. During the current decade, China has accounted for at least 50% of contract awards in population terms in every year so far. As the most populous country in the world, it has become the powerhouse of the global market, and that picture does not look like changing in the immediate future.

The importance of China in driving the development of PSP globally is underscored by the shift in PSP contract awards from OECD countries towards the rest of the world.

Local players – tiddlers, sprats and the occasional pike
There are 107 smaller companies identified in the Yearbook this year, compared with 97 two years ago (these have to serve at least 10,000 people, while at the same time being too small, or the data too incomplete, to qualify for a full entry). Some, including the smaller US contract operators and the domestic Russian private water operators, remain somewhat enigmatic. We know they exist, we know they matter, but beyond this, there lies a great silence.

The impact of these companies ought to be put into a global context. The 881 contracts covered in the Envisager database that relate to companies with full entries in the Yearbook this year cover 632.5 million people, with an average of 718,000 people per contract. This compares to 42.5 million people covered by the smaller companies. These 188 contracts cover an average of 226,000 people. 94% of people served by the PSP contract awards identified here are served by the 157 companies with full entries in the Yearbook, with 6% served by the remaining 111 companies. Given that the number of people identified as being covered by smaller companies rose by 10 million during the year, their contribution looks set to increase with time.

Where can I get the full picture?
An online version of the 11th Pinsent Masons Water Yearbook will be available on the Global Water Intelligence website very soon. See www.globalwaterintel.com for details.