Demand for outsourced asset management rising

April 1, 2004
Significant growth ahead for outsourced asset management of European water and wastewater utility management.

By Kristina Menzefricke

The preference for outsourced asset management solutions is increasing steadily among water and wastewater utilities in Europe. This is evident from the growing interest of large consolidated firms, regional utilities and specialist service providers such as consultants and engineering contractors toward providing such solutions. From a simple operations and maintenance (O&M) contract to full asset management delegation, enormous opportunities exist for these participants. Suppliers to the market have little choice but to extend their product/service offerings to these ascending service requirements of water and wastewater utilities across Europe.

Outsourced solution providers, however, are confronting a vast array of challenges that range from heavy investments, long payback periods, poor asset inventories and long negotiation periods to hyper jingoism and anti-liberalisation movements. Only participants armed with aggressive strategies are likely to survive in this market.

Outsourcing of Asset Management in Water and Wastewater Utilities Market: Market Forecasts (Europe), 2000-2010
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Given the fact that many European markets are striving to replicate the success of French leasing schemes and the extreme privatisation models of England and Wales, outsourcing the management of water and wastewater assets is proving to be a viable solution in raising necessary capital while improving operational quality. This strategy can be particularly effective in the southern and eastern European water utilities that still lag behind the performance levels mandated by the various environmental legislations of the European Union.

The demand for operational support has also begun to surface from well-established and developed water utilities markets, such as northern Europe where the public sector has historically been very protective of its internal capabilities.

"The ascending willingness to utilise outside expertise is increasingly associated with the need to adopt more advanced technologies," says Mili Shah, a market analyst for Frost & Sullivan (http://www.environment. For instance, old German utilities in their quest for operational efficiency are rebuilding their ageing infrastructure for which outsourcing is emerging as the favourable solution.

Amid these growing opportunities, large new contracts for asset management are now getting fewer by the year with many utilities increasingly preferring low-risk O&M contracts. This means that private sector delegation has already peaked or slowed down in some regions. As a result, many service providers are now reviewing past successes before undertaking new ventures. Those who still pursue big contracts face tough competition and eventually get less-substantial projects as first movers have already skimmed the cream of the market.

"The demand for outsourcing solutions is neither fully exhausted nor brimming with opportunities," says Mili Shah. "Clearly, the market is highly challenging with many risk factors and concerns associated with unconventional and complex contract terms."

"Succeeding in such a demanding market requires specific characteristics on part of the participants," Saana Karki, industry analyst and co-author of the study, adds. "These include having credibility (reputation and references), capability (technical know-how and expertise), capacity (resources and capital), flexibility (understanding and customisation) and risk management skills."

Private sector delegation rate may vary from one country to another; however the challenges and strategic factors associated with outsourcing transcend rapidly across regions. This compels service providers to transfer skills and expertise across borders to counter them and drive future growth. This situation suits multinational companies offering complete outsourcing services - from planning to designing, building, operation and maintenance - involved in asset management.

The market has also seen an emerging pattern of partnerships and consortiums among regional participants, mainly formed to spread risk, extend critical resources and fight the mounting competitive pressure. Strategic alliances seem to be the chosen route for contractors who need upstream service skills; and consultants that require integration of downstream engineering capabilities. Partnerships have also helped smaller participants to overcome financial barriers and improve their infrastructure.

The expansion of outsourcing contracts and public-private partnerships in the European municipal sector has already eclipsed water treatment equipment sales, which have instead become an integral part of operating deals and contracts. For the foreseeable future, outsourcing of asset management services will continue to excite as well as challenge stakeholders in the municipal water sector and is likely to touch the US$ 30- billion mark by the end of this decade.

In a nutshell, the urge to transfer operational risks, regulatory pressures and quest for higher efficiency are likely to be the underlying growth factors for outsourced asset management solutions in the municipal sectors across Europe.

Author's Note
Kristina Menzefricke is an industry analyst based in Frost & Sullivan's office in London, England.