A sizeable shift in the number of locally-based companies emerging in the water sector in developing economies are taking away the global share of the five largest water companies, according to the Pinsent Masons Water Yearbook 2006-2007.
Pamela Wolfe, Managing Editor
Reading through the eighth edition of Pinsent Masons Water Yearbook one cannot help but agree with co-author Mark Lane’s description of the global water situation as “increasingly complex and urgent.” Worldwide, more companies are actively competing for contracts to provide water and wastewater services than only a few years ago, yet not enough financial resources are being invested by the private and public sectors in many countries to meet the Millennium Development Goals by 2015.
The Yearbook is the result of a collaborative effort between Pinsent Masons, a UK-based infrastructure law firm, and Dr. David Lloyd Owen, director of Envisager, a strategic management consultancy, to provide a comprehensive overview of developments in the water sector that affect companies and the investment climate. This Yearbook focuses on current issues in 36 countries and 99 companies in North America, South America, and the Far East.
The urgency of the global water crisis was clearly stated in even more detail by the United Nations Development Program’s (UNDP) 2006 Human Development Report (HDR), released four days before the launch of the 2006-2007 Yearbook. The UNDP report called attention to the urgent need for a Global Action Plan under G8 leadership “to resolve a growing water and sanitation crisis that causes nearly two million child deaths every year.” The report states: “...unclean water is an immeasurably greater threat to human security than violent conflict,” yet military spending dwarfs public funding on water and sanitation. In addition, some 50 percent of people in developing nations suffer from a health problem caused by insufficient water and sanitation.
Less than a decade remains before the Millennium Development Goals’ deadline of 2015. The goals are to reduce by half the number of people without access to safe drinking water and sanitation by 2015. Population growth, migration to urban areas, rising energy costs, and the lack of political will and financial resources are obstacles that are making it difficult, if not, impossible, for many countries to meet the goals.
According to Dr. Owen, recent changes in the global water industry could affect the ability to mobilize new sources of funding for water projects. To explain, the five largest water companies in the world - Suez, Veolia, RWE, SAUR and Agbar - dominated the global water industry, according to Dr. Owen, until this year when locally based, relatively smaller companies began taking a far greater share of water and wastewater contracts.
The five largest operators accounted for 75 percent of the people served in 2002, according to the Yearbook. This sizable majority plummeted to 47 percent in 2006, while the share of locally based and expatriate companies acquiring water business increased significantly. Owen explained this shift resulted partly from the negative experiences of multinational corporations since the mid-1990s in regards to political and foreign exchange risk. Large water companies simply stopped bidding on large concessions, such as in Argentina and Bolivia, which proved costly.
More competitors bidding on water contracts is typically a healthy sign for local and regional economies. After all, an industry dominated by five European water companies is probably not a preferred state of affairs from the viewpoint of executives in successful, growing Asian companies with plans to expand into China or India.
In terms of financial resources, however, Dr. Owen cautioned: “While local or expatriate funding obviates exchange risk, it plays a limited role in mobilizing new sources of funding needed to attain Millennium Development Goals.”
The Yearbook highlights many other sector trends. In 2005, water business surged in Europe and Asia, but operating climate became more difficult in Latin America and Sub-Saharan Africa. In 2006, activity continued to grow in Brazil and China.
In China, the government plans to spend US$ 125 billion on new water and wastewater projects between 2006 and 2010, while private investment is being allowed for services in 100 cities.
Merger and acquisition activity has been remarkably intense in the past decade, Owen reported. He estimated that the private sector spent US$ 9 to 10 billion in acquiring equity stakes from governments and municipalities in the past nine years. Private companies bought, not the assets, but equity in an operating company to manage assets.
More mergers and acquisitions are anticipated in Chile, Philippines, and perhaps the UK, in the next year.
Finally, corporate changes in the sector are underway for 2007, Owen reported, with speculations about La Lyonnaise, which just might re-emerge on its own again.
Visit the website: http://www.pinsentmasons.com/wateryearbook.aspx to download the report.
