This year Veolia Environnement sold off its UK regulated water activities - one of its earliest international operations - for £1.2 billion. And in three years the group saw a 35% increase in industrial activity. Is this a sign that the company is favouring the industrial technology supplier to service provider model? WWi caught up with its water group CEO, Jean-Michel Herrewyn, to find out.
Veolia Water's CEO is open and honest about his company's financial situation. "Everyone knows that Veolia is under financial stress so money is a scarce resource," says Jean-Michel Herrewyn, before adding: "This is why I need to reallocate money."
He is of course talking about the group's €5 billion asset divestment program - in other words freeing up money - set to be complete by the end of 2013.
One major milestone in the company's consolidation process was the sale of its UK regulated water activities. Rift Acquisitions purchased Veolia Water UK for £1.2 billion in the summer of this year.
"The selling of the UK regulated business was a way to free financial resources that the group needs," Herrewyn says. "It's not a Veolia Water issue; it was a Veolia Environnement issue. This decision was a financial decision. It was not an easy decision for us because we have been active in the UK for many, many years. Actually it was the first venture outside of France so it had symbolic value."
Yet the UK market provided valuable lessons for the company as a service provider, with the CEO saying the "tough regulation" made sure utilities were operating efficiently and providing top service.
It's encouraging to hear that experience learned from the scrupulous UK environment could be passed on around the world in Eastern Europe, or Asia or South Africa - all of which are active markets for the company.
"If you have strict financial constraints on one side, and on the other side a global market offering with many opportunities then you are forced to allocate your money in a very strict way. You are pushed to develop a light capex offering…I believe that this doesn't impact the capabilities of the water division. This decision was not taken lightly and this decision was not pleasing in some respects. Again because of the nature of these activities and the historical factor."
A rare position in the water sector, Veolia acts as both a water supplier/private utility, Veolia Water (VW), as well as a supplier of technology, Veolia Water Solutions & Technologies (VWS). Between 2003 and 2009, Herrewyn can be credited with helping to turn around VWS - what was the loss-making technical arm of Veolia into a series of efficient, niche operating separate business units. It was in 2009 that he was appointed CEO of Veolia Water. So now he oversees both VW and its technical subsidiary VWS. Water & Wastewater International (WWi) caught up with Jean-Michel Herrewyn (J-MH). An abstract from the interview is printed below:
WWi: Was Veolia Environnement's decision to sell off it's UK water operations for £1.2 billion a move to concentrate more on the technology supplier business than water service provider?
J-MH: I would not look at it this way. In the municipal business we have two models: heavy-capex and light-capex. In the heavy-capex business line, you are the part owner of a regional, local municipal water system, most of the time in a structure with local authorities. You are in the driving seat. You are the owner of the business so you inject your expertise to make the asset perform better. Then you get a return as a shareholder.
In the light-capex model, you are not entering the shareholding structure but helping customers to do better. Take the contract in New York - it's not a privatisation process so the shareholding structure and the governance of the New York water department has not changed. For the heavy-capex municipal model that we still promote, such as in Eastern Europe and China, we need financial resources. If we participate in big tenders for large corporations in the oil and gas industry where we would need to build infrastructure, then we need money.
WWi: In 2011 Veolia Water Solutions & Technologies helped the water division generate revenue of 2.3 billion Euros. How is this revenue broken down?
J-MH: A sizeable part of the VWS business - 29% - came from Europe and a separate 20% for France. The rest came from outside this region.
To simplify it's almost equally split between North America (12%) and South American (11%) and Asia (11%) and a little bit more for Africa and the Middle East (15%).
WWi: Out of the different water sectors, which present the biggest growth opportunities in the future and why?
J-MH: Globally speaking industry should represent a significant potential for growth in technologies and in service. I'm a great believer in alternative resources, such as desalination, reuse and recycling, so I do believe that you will have more and more countries needing or willing or both. Looking at the business through a more traditional angle of Veolia Water services then I would say of course our Asian activities and China activities to continue to significantly grow. I also expect our Eastern and Central Europe activities to grow.
WWi: So there is still plenty of opportunity in China as a service provider, despite increasing local competition?
J-MH: We made the right move 10 years ago when we entered China and now mainly through the service activities we are a sizeable player in the Chinese market. We are on an equal business size with the top Chinese company. Of course I do expect the Chinese private sector in the service business also to grow at a higher base. I believe that we will still be part, even in 10 years time, in the top three to top five Chinese market players. And that was because we were able to enter the market in the early days when China needed foreign, non-Chinese actors in this market.
I can imagine and anticipate in the mid-term future that China will be an export platform. Actually it's what we've already started to do on the municipal arena for VWS, for the EPC and technology part we serve some of the Asian market out of Beijing and out of China. We have a competitive advantage from doing so. Because being part of the Chinese water world, it's also legitimate to believe that we're a world partner with Chinese companies when they come to expand outside of China. That is the natural expansion also for some Chinese companies in the mid-term future, to do more and more outside of China.
WWi: Veolia is also playing a role in the Asian power market. How much potential is there for advanced water solutions here?
J-MH: I see a clear trend in different countries towards the real promotion of efficient water usage through stricter regulation. Not only stricter regulation also stricter enforcement of those regulations. Of course this is the framework we need for the promotion of those technologies. They are expensive compared to traditional systems so nobody would like to invest into something that is perceived as not needed.
The context is drastically changing in many countries. Two worlds are combining: the process water world and the effluent world, which have been separate and foreign to each other before. In the industry, you have many players that are able to do one task but not the other. Very few are able to master both sides of the process water part and the wastewater part.
The power industry is now addressing the water part of its investment. If you build in closed loops systems then you are extremely attentive to the quality of the system because if it doesn't work then the whole system doesn't work. This is a big, big change compared to the past. The responsibility for delivering sufficient input water was left down to the plant management.
WWi: VWS is also a partner with power provide Alstom. Tell me about the Water Impact Index?
J-MH: This is an evolution of the traditional footprint. Traditionally, water usage is looked at in terms of volume. Volume doesn't tell the full story. We have had to adapt to what we believe is important, such as the stress factor and the quality of water extracted and the quality of water rejected.
The index reflects the real life situation. It's obviously not the same issue if you have the same water treatment system in an area under water stress compared to an area not under water stress. It's also different if you extract high quality water or if you extract polluted water. The same is you reject treated water or non-treated water.
This is not a proprietary tool but a tool I would like to see used as an open tool. In the power market we are working more closely with Alstom because this company is also sharing these types of views.
I'm pleased to see that when we talk more and more to corporate names about those type of ideas - the water index - combined with carbon footprint and environmental footprint, generally speaking we are able now to have discussions which are extremely interesting. It's not just corporate agenda but it's also more and more linked to the reality of the business at the site level.
The water industry is very strange because it's a very fragmented industry with a lot of different players and a lot of different local habits. It's not that easy in this industry to promote general ideas or to promote trends that could be a little bit more universal.
WWi: Veolia provided the technology for what it claims it the "largest hybrid desalination plant in the world", at the Fujairah 2 facility in the UAE. Are hybrid combinations the solution here where technology uncertainty can be common?
J-MH: I think it's a nice combination because through the membrane part you get the flexibility that is the key advantage of this solution. In the thermal part you get the robustness that customers appreciate in these technologies - it is a well known fact that thermal desalination is very robust. When you have algae bloom/red algae tide problems in those countries, it is tough for membrane systems to cope with that.
I do hope that we'll see more and more of the hybrid plants because this technological solution has a lot of potential. That is also dedicated to these regions where you need both power and water delivery systems with a combination of power and water.
Obviously if you just need water then membrane technologies have completely outpaced thermal technologies. I really do believe that contrary to what people have been saying sometimes in the past that thermal is not dead at all.
WWi: This region - Africa and Middle East - generated 15% of the group's revenue in 2011. How is the group going to increase business in this area?
I'm quite confident about Africa. I think the continent has a lot to offer for us and I can imagine our African activities growing in the near future.
So in terms of municipal infrastructure, or in terms of industrial infrastructure, Africa is a booming continent. There are a lot of things happening as we talk. If you are familiar with the south part of the continent, they face really drastic water shortages. Water issues are really getting bigger and bigger. The mining industry also faces big water shortages.
If you are talking municipal or industry, or both, the African continent should provide us with a lot of interesting options and opportunities. Also in Africa, even today on a limited scale, we are an operator. That I would like to see growing.
WWi: And finally, on the subject of money, what are your thoughts on the financial gap between how much water costs to process and how much it's sold for. Will this change in 10 years time and if so, how?
J-MH: I am absolutely convinced that there is no way around this issue. I think this question is the key question for the water world in the years to come. There is a social challenge - protecting low income families from rising tariffs but there is no other way around rising tariffs. For industry, industrial customers will have to pay for the true price of water and that will mean a significant increase in water tariffs.
The industry will have to think a lot more about water and again investment in reuse, investment in all kinds of system where you can extract value out of the water loop and effluent. All of that will gain in popularity because the present system is not a sustainable system. This is indeed the same for all the countries on earth. For some countries it is becoming a real issue.
However, I really see a lot of signs that are making me optimistic because I believe this issue is an opportunity. For too long this issue has been set aside and is not being addressed the way it should.
Industrial Boom: Between 2009 and 2011 the Veolia Water group saw a 35% increase in industrial contract bookings. Below are recent highlights of the activity
- Crystallization technology for salt recovery plant in Spain
VWS awarded contract by Iberpotash to provide HPD evaporation technology
- Technology available for treatment of high pH SAGD produced water
Contract with Tervita to treat wastewater from steam assisted gravity drainage (SAGD) operators
- South Africa upgrades sugar refinery
Reverse osmosis (RO) plant designed and installed for manufacturer to produce feed water
- Energy-efficient water treatment for desert mine
A 62.5 m3/hour Ro permeate supplied to treat brackish water in Mauritania, Northwest Africa
Jean-Michel Herrewyn – 1961 to present
- Born in 1961, a graduate from the École Polytechnique and the École Nationale d'Administration
- He became an engineer in 1986 in the Avionics division of Thomson CSF.
- In 1991 he joined the Compagnie Générale de Chauffe (now Dalkia) as technical manager then general manager of the home automation subsidiary
- In 1996 ran Dalkia's German subsidiary and later subsidiaries in Austria and Switzerland
- Four years later in 2000 he was also appointed general manager of Veolia Transport's German subsidiary
- In the same year he was appointed chairman of Valorec, a joint subsidiary of Dalkia and Veolia Environmental Services, created from the outsourcing of energy and waste management by Novartis plants in Basle (Switzerland).
- He joined Veolia Water in 2003 as Managing Director of Veolia Water Solutions & Technologies.
- Six years later in 2009 he appointed Chief Executive Officer of Veolia Water, the Water Division of Veolia Environnement