Japan: flirting with PSP

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Japan is not likely to feature on most private water companies’ radar screens based on its past experience of PSP. But that could change if more greenfield projects come on stream. Thames Water and Veolia seem to think they will.

To date, private sector participation (PSP) in the Japanese water market has been negligible. Save for a 51/2-year management contract for a small city in Hiroshima prefecture, PSP has been limited to the operation of small STPs and the outsourcing of specialist utility functions such as metering and billing.

Slowly but surely
As far as water services contracts go, there have been only two of significance awarded to the private sector. Geihoku, a small town of 3,000 inhabitants near Hiroshima, awarded the first in April 2002.

The town’s nine water supply systems are now operated by J-Team, a venture between Ebara, Japan’s largest water engineering company, and Nippon Jogesuiodo Sekkei (NJS), one of the major water consultants.

The contract covers the O&M of nine treatment works, measurement and control of water quality as well as associated metering, billing and accounting functions. The contractdoes not cover network management.

In November 2002, Japan Water, a 50:50 joint venture between Mitsubishi and Nihon HELS, Japan’s largest sewage treatment operations company, won the first comprehensive O&M contract for water services (see GWI, Vol. 3, Issue 12, p.18).

The contract was awarded by the city of Miyoshi (population 40,000), also near Hiroshima, where Japan Water will operate two WTPs and 16 pumping stations, control water quality and monitor the entire network operation from a remote control centre for 51/2 years.

Outsourcing opportunities
Outside the WTP and network operations business, opportunities for the private sector have been in other areas of the industry such as metering and tariff collection, as revealed in a recent survey undertaken by Japan’s Water Industry Journal.

The survey covered all municipal water systems supplying more than 100,000 inhabitants, as well as Japan’s regional bulk water suppliers (244 undertakers of which 141, or 57.8%, responded).

Chart 1 shows the level of PSP in the WTP operations market. Given that most of the large water systems serving more than one million people have retained full control of plant operation, PSP in this sector remains modest.

However, breaking the water services market up by function shows a different picture (see Chart 2). The area in which the private sector is most active is metering, with more than 80% of Japan’s water systems
opting to contract this function out. Even the country’s largest municipality, the Tokyo Metropolitan Government, has contracted out its metering since the 1980s.

There are several specialist contractors working in this field, including Dai-Ichi Kankyo, Jenets and Takuhai. The market leader is Dai-Ichi Kankyo, which has annual sales of ¥7.3 billion ($62 million) and
contracts with 58 municipal water utilities. With its advanced automatic metering systems and data processing capabilities, Dai-Ichi is poised to expand its existing contracts into more comprehensive
O&M-type arrangements.

Forthcoming deals in this field include the city of Yokohama (three million inhabitants), which is currently prequalifying contractors for the outsourcing of its metering from 2004. The bidding process is due to start this month. Tokyo Gas, one of the largest utility companies in Japan, is expected to be among the contenders through its TG Customer Service unit.

New build
However, it is in the area of new infrastructure that there has been significantly more progress in developing PSP schemes. Following a trial by Tokyo Metropolitan Government at four of its existing
treatment works, a further three projects are now under preparation.

The first one is a recycling plant for the ash from sewage sludge incineration in the city of Yokohama. A 10-year BOT-type contract was recently awarded to a consortium led by a subsidiary of JFE, Japan’s second largest steel-maker. The consortium will build the recycling plant, buy sludge ash from the city, operate the facility and sell the final product.

In July last year, Kanagawa prefecture opted to engage the private sector to replace an old sludge treatment facility at its 315,000m3/d Samukawa WwTP. Three contenders have since prequalified for the scheme including Ebara, Taisei Construction and a consortium of TSK, Fuji Electric, J-Power and Hitachi Zosen.

The contract is due to be awarded by the end of 2003; the winner will build a new plant over a period of two years and then operate it, recycle 100% of the dewatered cake and control the quality of supernatant returned to the wastewater treatment line. The contract duration is 20 years.

What would be Japan’s most comprehensive PSP scheme to date is now under consideration. The city of Wakayama to the south of Osaka has commissioned a feasibility study to replace three old sand filtration plants with a new 92,000m3/d plant; the estimated capital investment is ¥24 billion ($205 million). If the scheme is approved, the plant could be operational by 2007.

Other projects
In Saitama prefecture to the north of Tokyo, the local government currently supplies 2.5Mm3/d of treated bulk water and some industrial water. However, owing to its perilous financial situation, the prefecture chose to contract out the operation of a new 150,000m3/d WTP due to be commissioned in 2005.

The operation of an existing industrial water treatment facility has already been contracted out to Hitachi Plant Construction Service. In addition, the renewal of a sludge treatment line at the Okubo WwTP will be implemented in the form of a 20-year BOT contract and the bid process is expected to commence in February 2004.

Industrial outsourcing
In parallel to potable water supply, there are 150 municipal water systems in Japan supplying lesser quality water for industrial use. There is much greater private sector involvement in these types of projects.

Sumitomo Metal has been operating a 155,000m3/d industrial WTP at Wakayama since 2002 and in March this year, the city of Fukuokai contracted out the entire operation, maintenance, water analysis, procurement of chemicals and spare parts for its 15,000m3/d industrial WTP supplying over 30 companies.

New entrants to the market
Despite the relatively slow move to PSP in Japan, a mix of local and international companies have shown strong interest in the market and established JVs to pursue new opportunities.

Nippon Steel, Japan’s largest steelmaker, has been operating its own WTPs for over a century. The sheer quantity of water it uses makes it the largest private water services operator in the country. In October 2002, it created Nittetsu Water, a JV between its water engineering division and water operations subsidiary to enlarge the scope of services it offers for municipal outsourcing.

Veolia Environnement had been prospecting privatisation opportunities in the water and wastewater business since November 1999 in a JV with Marubeni. It enlarged the alliance in November 2001 to include Taisei Engineering, a private sewage and waste treatment company, and established a new company called Nihon Utilities Management. In parallel, Veolia Water set up its own Japanese subsidiary in late 2002 to coordinate and accelerate its water-related business in Japan.

J-Team, the partnership between Ebara and NJS (see above), recently expanded its business to include Kurimoto Steel and Sekisui Chemical to bolster its competence in network management, and transformed itself into a JV in November 2002.