Manila Water buys into Ho Chi Minh City
- From: Vol 13, Issue 5 (May 2012)
- Category: General
- Region: Asia
- Country: Philippines
- Related Companies: Kenh Dong, Manila Water Company, SAWACO and Thu Duc Water BOO Corporation
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The Philippines concessionaire has deepened its commitment to the Vietnamese water sector. It continues to be selective about which business opportunities to pursue.
Manila Water has bolstered its presence in the Vietnamese bulk water supply market by agreeing to acquire 49% of Ho Chi Minh City bulk water supply company Kenh Dong from local infrastructure company CII and other investors. At the same time, its parent company Ayala Corporation will purchase a 10% stake in CII, worth $14 million at current market cap.
Kenh Dong Water Supply is a buildown- operate project for a 200,000m3/d water treatment plant. The plant is currently under construction and is due to go into operation in the second half of this year. Ronnie Lim, head of international business development at Manila Water, explained that while details of the contract are still under discussion with offtaker Sawaco, the bulk water price is likely to be higher than that for the Thu Duc BOO. Sawaco is committed to purchasing 150,000m3/d from the Kenh Dong plant.
The latest deal comes hot on the heels of Manila Water’s purchase of 49% of the Thu Duc Water BOO Corporation for PHP1.8 billion ($42.6 million) in November 2011. Thu Duc BOO Corp also has a bulk water offtake guarantee from Sawaco for 300,000m3/d, but in 2011 supply from the plant stood well above the minimum, at 345,000m3/d. The company generated total revenues of $15 million in 2011 and net income of $3.9 million.
These acquisitions mark the deepening of Manila Water and the Ayala Group’s relationship with HCMC. Manila Water has been working in the city since 2008, when it won a performance-based NRW reduction management contract with Sawaco covering Zone 1, the city’s central area.
According to Lim, Manila Water has now reduced leakage by 65,000m3/d, beating the minimum set out in the contract of 37,500m3/d by August 2012. It aims to achieve a reduction of 75,000m3/d by the end of the six-year term.
The contract got off to a slow start, particularly with regard to the establishment of district metering areas (DMA). Blueprints of the network were incomplete, and getting excavation permits to carry out repair works was also difficult, according to Lim.
Despite this, the contract has given Manila Water a taste for more NRW reduction work. In October 2011, it submitted an investment proposal to Sawaco, along with Mitsubishi and locally listed REE Corporation, for a further project in three other service zones (4, 5 and 6). This time, the contract would involve significant investment from the consortium, says Lim. Manila Water hopes that discussions with Sawaco about the proposal will be concluded soon, after which the contract will have to go through a government approval process.
When Sawaco opened a tender for a new DMA establishment contract covering Zone 2 of the city last year, however, Manila Water declined to bid. Given its experience in Zone 1, it is little surprise that the company prefers a model in which it has more management responsibility.
Manila Water’s multiple contracts in HCMC add a further dimension to the city’s already complicated organisational structure for water supply (see chart).
At the centre is Sawaco, the publicly owned corporatised utility, which buys bulk water from three private suppliers, in addition to sourcing water from its own plants.
Beneath Sawaco, six distribution companies deliver water to customers. These were originally branches of the utility, but in 2004-2007 they were hived off and established as ‘joint stock’ companies listed on the Vietnamese stock exchange. Although Sawaco retains a 51% ownership in each, other investors have proved more focused on maximising profits than rolling out coverage or plugging leaks, with the result that relations among Sawaco, the companies and Manila Water have not always been perfectly smooth.
Yet more players may enter the sector if Sawaco’s master plan, prepared in 2011 but not yet officially approved, goes ahead. Under the plan, supply volume will be increased by 2.3 million m3/d by 2025. The first three projects are slated for development under a public-private joint venture arrangement. All three are 300,000m3/d WTPs.
There have been hints that Sawaco may seek to buy back equity in the distribution companies to help it regain control over the current unwieldy arrangements. However, neither Sawaco nor the HCMC People’s Committee (the local government) have pushed this forward. Their reluctance may stem from a fear that announcing the intention to purchase shares would drive up stock prices, making the acquisition more expensive.
The next step for Manila Water and other international companies seeking to build a presence in HCMC might be to take a stake in one of the distribution companies, although Lim says there are no serious plans yet for further acquisitions. However, like any foreign investor, Manila Water would face considerable administrative hurdles and would likely need to secure approval from national ministries and the local People’s Committee before going ahead.