No. 100: Water business in Japan and the world (19) (October 18, 2011)

Strategy of the world leader Veolia

The privatized water business is supposed to cover about 800 million people worldwide on the water supply base, and the two French majors, Veolia and Suez Environment, cover 160 million people combined. Established in 1853, Veolia is the world’s oldest and largest water service company with sales of 12.5 billion euro, almost two times more sales achieved by Suez Environment, and nearly 100,000 people are working for this company.

Veolia dates back to a company established by the Napoleon III in 1853 to manage waterworks in Paris. Since 1884, the company has actively been expanding the business worldwide, and it covers about 140 people in 64 countries at present. It conducts a wide range of business including designing, procurement of materials, construction of facilities, and operation and management of the business. Especially, it excels at the operation and management that is the largest market in the water business. In addition to providing water treatment from water intake to water discharge, it offers a wide spectrum service that includes preservation of water resources, seawater desalination, and collection of charges.

It has competitive advantage in estimating precisely the needs of a customer and draws a proposal most suitable to the customer. For example, it made a successful bid in the tender for the management of a sewage treatment plant in Chiba Prefecture in 2009, though it outbid the competitors. This is because its proposal contained the plan to automate the measurement of water quality and introduce photovoltaic generation. It dispatches its staffs to public agencies of the target country and makes them involved in the project planning from the initial stage, while building close relations with international agencies. It procures a large sum of capital for investment from investment funds, and the country backs it up as the sales activities of the French president show.

In fact, Veolia has the following six advantages: (1) a big company size, (2) a wide range of business scope, (3) accumulated results, (4) the ability to draw an attractive proposal, (5) national support, and (6) excellent financial power. It is not too much to say that the ability to promote a project in an integrated manner is vital to the expansion of the water business to a foreign country. (To be continued)

No. 99: Water business in Japan and the world (18) (October 17, 2011)

The Manila’s case

A state-run public corporation managed the waterworks in Manila, the capital of the Philippines, up to 1997. Back then, the spread rate of the water service was 67%, and leakage and steal reached 60% of the water supply. The Philippine government decided to privatize the water business to increase the spread rate and realize efficient renovation of the existing facilities. It adopted the concession system that gives a private company an integrated business right. A subcontracting private company can handle the whole business from the operation to capital investment.

The government divided the city into the western part and eastern part to diversify risk and avoid monopoly, and advertised an international tender. The western part with a population of 5.2 million went to a private company in which Suez Environment of France invested, and the eastern part with a population of 3.4 million went to a private company in which Mitsubishi Corp. of Japan invested. Five years later, the former went bankrupt with a large sum of deficit, while the latter got listed in 2005. The failure of the former company can be attributable to many factors including inadequate assessment of the assets and liabilities and incorrect estimates of profitability of the business. It drew a business plan only on the basis of the available materials without conducting detailed survey on the aging of the existing facilities.

The successful company, Manila WaterCompany., Inc. (MWCI), reduced the water charge by making multiple households share a water pipe. This measure enabled poor households to pay the water charge and reduced the amount of stolen water. The company made efforts to locate leakage as soon as possible and renovated the facilities without the least delay. These efforts combined reduced the ratio of leakage and steal from 60% to 20% in 2008. In addition, it divided the western part into 43 areas and entrusted the regional manager with the business of each area. And it enforced the system that pays the manager in accordance with results. This measure to increase the motivation helped improve the service level.

The Manila’s case indicates how important it is to conduct detailed survey on the assets and liabilities, elaborate the management method, and devise a system to motivate local staffs to promote privatization of the water business abroad. (To be continued)

No. 98: Water business in Japan and the world (17) (October 16, 2011)

Privatization trend in foreign countries

Privatization of the waterworks business by the public-private partnership started to increase present in the 1990s. In Europe, various kinds of partnerships between the pubic and private sectors developed in the waterworks business. In Great Britain, the Thatcher Administration drove the privatization policy strongly and fully privatized the waterworks business in the England and Wales districts. At present, a total of 24 companies including Thames Water manage the waterworks business in Great Britain. The Waterworks Bureau of the British government that supervises them has the power to impose a fine on a company that fails to satisfy the contract and even terminate the contract to keep providing high quality water service at reasonable cost.

In France, a company (currently Veolia) was established by the Napoleon III in 1853. That is, France has a history of more than 150 years in the public-private partnership in the waterworks business. Although local governments take charge of the operation, they are free to entrust private companies with the entire business including capital investment. At present, private companies manage 70% of the water supply and 60% of sewerage in terms of population using such approaches as the concession system that is a comprehensive approach to transfer the whole business including capital investment to a private company. In Germany, privatization is not as advanced as in Great Britain and France. Local governments virtually manage the waterworks business, but many of them separate the management of organization and accounting from the operation for efficient management of the entire waterworks business.

In Spain, local governments manage the waterworks business, but they are allowed to take various measures at their discretion. They can collaborate with the local government of the neighboring regions to build an extensive network and entrust private companies with the business operation. Private companies got involved in the water business in the 19th century. At present, private companies and the public-private partnerships account for 44% of the waterworks business in Spain. All the companies established on the public-private partnership are independent to pursue operational efficiency and public interest simultaneously.

The above measures in Europe are very instructive and informative for Japan facing austerity. Private companies to get involved in the waterworks business need the integrated ability to manage all phases including capital procurement effectively and efficiently for a long period. (To be continued)

No. 97: Water business in Japan and the world (16) (October 15, 2011)

Growing markets in the water business

According to the estimates by the Ministry of Economy, Trade and Industry, East Asia and Oceania are the two leading markets in the water business at present, and they are expected to maintain the current growth rate for the next 20 years. In terms of growth rate, the Middle East, North Africa, and South Asia will maintain a growth rate of more than 10%. China, India, and Saudi Arabia are noteworthy in terms of market size and growth rate.

China has a population of 1.3 billion that is about 20% of the world population, but it has only about 6% of water resources on the earth. Because of the growing population and increasing living standard, the depletion of water resources and pollution of water quality are developing rapidly China. Water shortage is rather serious in the northern part of the country, and the Chinese government is promoting a national project to draw water from the southern part to the northern part through a waterway. It is also actively addressing the water-related issues including reuse of sewage and desalination of seawater. It is making lots of efforts to foster domestic companies in the water business, while promoting collaborations between Chinese companies and foreign companies. The Chinese market is expected to grow to be the world’s largest market in water business in 2025, accounting for 15% of the world market.

The same story can be applied to India. India’s population accounts for 16% of the world population, but it has only about 4% of water resources on the earth. The water business is expected to grow with the economic growth in India. However, it still has lots of entry barriers including complicated regulations and disputes between regions over the distribution of water resources.

The Middle East and North Africa have the lowest per-capita water resources in the world because of low rainfall and scarce rivers. Actually, salination of seawater mostly satisfies water demand in these regions, and the needs for salination of seawater will grow further. In addition, large-scale desalination plants built after the 1980s will need renovation shortly, and demand for sewage treatment will grow bigger there. Companies planning to expand business in them are required to develop a packaged service that can satisfy various needs. (To be continued)

No. 96: Water business in Japan and the world (15) (October 14, 2011)

The world water market

Demand for water increases not only with population growth but also with improved living standard due to economic growth. As water demand increases, the water business grows. The research team of the global development of the water business affiliated with the Ministry of Economy, Tradeand Industry estimated that the world water market will grow from about 25 trillion yen in 2007 to about 87 trillion yen in 2025. Of the 87 trillion yen, waterworks and sewage have a combined market of 74 trillion yen, and the remaining 13 trillion yen goes to highly promising business fields, such as desalination of seawater, cyclic use of industrial water, treatment of industrial sewer, and reuse of sewage. In terms of operation, construction and supply of materials has a market of 49 trillion yen, while management and maintenance has a market of 38 trillion yen.

Because the water and sewerage business is mostly managed by the central government and local governments worldwide, the privatized water market was 7.5 trillion yen in 2007. However, with an expected increase of the infrastructure business under the public-private partnership, private companies will increase presence in the water business. The research team predicted that the infrastructure-related business will increase to 31 trillion yen in 2025 with an annual growth rate of 8.4%, 3.7% higher than the growth rate of 4.7% estimated for the total market.

Water is indispensable to all human activities, and no products can replace it. In addition, the water market is stable because demand and price do not fluctuate as much as other resources including oil. Contracts on the water business usually extend as long as 30 years, during which the water charge can be collected to cover the investment. However, projects in developing countries cannot be free from the risk of exchange fluctuations because water charge is paid in the local currency, while loans should be repaid in dollars. Despite this risk, the water business is rather promising, and an increasing number of companies are expected to enter into the water business. (To be continued)   

No. 95: Water business in Japan and the world (14) (October 13, 2011)

Global business development of local governments

Local governments have traditionally tried to expand global business in alliance with  Japan International CooperationAgency (JICA) through JICA’s technical cooperation programs for foreign countries. Today, however, several local governments started to take the initiative in expanding global business. For example, the Tokyo Metropolitan Government announced three business models to be developed in alliance with a third sector company Tokyo Suido Services: (1) Independent business, (2) Joint business with private companies, and (3) Acquisition jointly with private companies. The government officials already started discussions with private companies in various industrial fields. Tokyo will get involved in the management of United Utilities Australia, an Australian water service company acquired by Mitsubishi Corp. and Innovation Network Corporation of Japan, under a consulting agreement.

Osaka City Waterworks Bureau is conducting a feasibility study on the construction of a waterworks system in Ho Chi Minh of Vietnam with Kansai Economic Federation as a project support by New Energy andIndustrial Technology Development Organization. Yokohama is scheduled to establish a company intended for the contribution to the development of the water business both at home and abroad utilizing the know-how it has accumulated. Kawasaki and Kitakyushu are also considering expanding the water-related business to foreign countries.

In the days of decreasing population, it is quite natural that local government gets interested in the water business abroad. The same is true of the central government. The Japanese government established a special task force team to assist local governments with their efforts to expand business globally. The close collaboration between private companies and the governments, both the central and local, will be inevitable to the global development of the water business. (To be continued)

No. 94: Water business in Japan and the world (13) (October 11, 2011)

Utilizing groundwater for drinking water

In the water business, various new services are emerging to satisfy the needs of the age. An example of these new services is a system to utilize groundwater to supply drinking water. This system not only reduces water charge but also realizes stable water service even in times of drought and earthquake. Wellthy, a medium-sized water treatment company in Tokyo, developed the “groundwater membrane filtration” system in 1997. Wellthy is coined from welfare and healthy, and it contained the word of well. The company has already shipped this system to more than 800 institutions, and it enjoys a share of 60% currently. This is a two-way water supply system made up of purified groundwater and tap water in the ratio 80% to 20%. The well used by this system is 100 m deep to avoid influence of soil contamination. The automatic monitoring system observes the water quality and the operational status around the clock. The supply of groundwater immediately stops should some irregularity arise, and only tap water will be supplied.  

In the purification process, the system uses membrane filtration besides sand filtration to eliminate impurities like pathogenic organisms. Because wells have a vertical structure, they are earthquake-proof and available for water supply even in times of disaster when such lifelines as water and electricity are unworkable. Taking advantage of this strength, the company proclaims the catch-phrase “Safe water within the travel distance by a bicycle.” Their customers are mostly institutions required to contribute to the local residents. Actually, hospitals and nursing-care facilities account for about 40% of their customers. In addition, the system is being used in schools and station-related facilities.

Other two-way supply systems that use rivers and other types of water resources are being developed with a view to exporting them to China and Africa where water shortage and deterioration of water quality are growing serious. Toho in Yamagata Prefecture and Yanmar in Hyogo Prefecture are the pioneers in this business fields. The above three companies are creating new markets making the best use of the integrated state-of-the-art technology available in Japan. (To be continued)