SUEZ IN THE NEWS

• From: Vol 5, Issue 6 (June 2004)
• Category: Need to know
• Region: Americas
• Country: Argentina
• Related Companies: Aguas Argentinas, Aguas de Barcelona, AquaSource, Endesa, EVN AG, Gas Natural, Prodin, Standard & Poor’s, Suez, Sumitomo, Tractebel and WTE Wassertechnik

Suez is still fighting to come to terms with political intervention in the tariff setting process in Argentina.

It lost more than €500 million when the government refused to allow it to increase tariffs according to the agreed escalator clause after the devaluation of the peso in 2002. For most of the past two years Suez has been battling to retain its concession and to increase tariffs to a sustainable level, while the government has been threatening to throw the consortium out of the concession unless it injected more investment into the company and held off tariff increases.

A temporary deal was reached between the two sides last month, which on the face of it looks very beneficial to the government. It commits the company to $80 million of additional investment in 2004, but gives no relief in terms of tariff rises. In return, Suez has agreed to suspend its claim against Argentina in the International Court for
Settlement of Investment Disputes (ICSID). In fact it may prove a master stroke of French diplomacy. The Argentine negotiating position with international investors is based on the fact that its creditors have much more to lose than its citizens in the event of a default. It has been using this to drive very hard bargains over debt relief. But President Nestor
Kirchner will not be able to rely on this bluff forever. The Argentine economy has been notching up double digit growth rates this year: it has been growing even faster than China. Suez’s threat to push on with the case with the ICSID will be so much more effective when Argentina has more to lose.

Another major story affecting the partners in Aguas Argentinas last month is currently being played out in Spain. Hitherto, Suez’s Latin American strategy has been heavily dependent on its relationship with Aguas de Barcelona (which owns a 25% interest in Aguas Argentinas vs. Suez’s 40% interest). Suez controls Agbar through a 51% interest in a holding company, Hisusa, which in turn owns a 47.1% interest in Agbar. Suez’s partner in Hisusa is local investment bank La Caixa, which also has interests in local energy companies Endesa and Gas Natural, and there are rumours in the Spanish press that the three companies may be merged (see story p13). Suez could end up one of the largest shareholders in a merged group, but control would be beyond its reach.

Whatever the outcome it is clear that Suez is motoring once again. Rating agency Standard & Poor’s recognised the progress earlier this month and upgraded the outlook on the company’s A- rating from negative to stable. Tractebel’s more aggressive showing in energy projects in the Gulf is another sign of the revival (see story p17). In Europe, the energy businesses are preparing themselves for deregulation on 1 July. At Suez Environment, the Degrémont-led resurgence continues apace. The company reported successful deals in Mexico and Moscow.

The deal in Mexico was an 18-year BOT contract for a 80,000m3/d wastewater recycling plant in San Luis Potosi. Degrémont has a 41% stake in the project company, with other partners Sumitomo and local company Prodin holding 39% and 20% stakes respectively. The deal has a cumulative value of €263 million ($318 million) and construction costs of €66 million ($80 million). The Mexican government will cover 30% of construction costs under a policy started in the early 1990s to encourage private investment and promote the development of infrastructure and capital equipment for environmental protection. The plant should enable San Luis Potosi to protect its water resources while meeting the industrial and agricultural needs of a parched area where groundwater quality has seriously deteriorated in recent years.

After primary treatment, the plant aims to channel 57% of the water to a lagoon before distributing it to farmers. The remaining 43% will run through secondary and tertiary treatment, making it fit for use as coolant fluid in the nearby thermal power station at Villa de Reyes.

The other Degrémont deal was a turnkey construction contract for one of the largest filtration plants in the world, to be built in Moscow. The 275,000m³/d ultrafiltration plant is being developed on a BOT basis for WTE Wassertechnik, a German based subsidiary of Austria’s EVN. Ten years after completion, the ownership of the plant will go gradually to Moscow’s municipal utility, Mosvodokanal. Membranes will be supplied by another Suez subsidiary, AquaSource.