Europe: Outsourcing potential in the municipal water and wastewater sector

By Cecilia Cabodi, Sector Development Analyst, Europe

Nov. 14, 2002 -- Outsourcing: Direction still uncertain.

Environmental and social concerns about water quality and affordability have very often resulted in private sector involvement traditionally being less encouraged in the municipal water and wastewater (W&WW) sector than in other utility sectors such as telecommunications, gas and electricity.

However, the increasing need for investment in water and wastewater infrastructure and technology, as well as the need to replace inefficient systems, has resulted in the private sector becoming more involved in the provision of W&WW services in a great variety of approaches.

These range from the provision of discrete services to the complete ownership and operation of entire W&WW treatment and distribution networks.

One of these approaches is the consolidation of system management services through municipal outsourcing contracts. Companies capable of offering services to take advantage of this usually fall into specific categories such as utility companies, OEMs and Engineering companies. Current trends seem to differ greatly across Europe and this is due to diverging historical government approaches, legislation and national interests.

So, based on the emerging trends, what is the potential for this market?

European Overview
Although over the last decade there has been a steady move towards private sector participation in the water sector, the percentage of privately managed systems still remains quite low. This gives rise to great potential for outsourcing municipal water services as one of the ways to encourage cooperation between the public and the private sectors.

In Europe, private sector participation is at its highest in France and the UK, although the participation models are very different in each country. The French model is already based on service outsourcing, where utilities such as Vivendi Water, Ondeo and SAUR are dominating the market for water and wastewater services.

Due to poor market growth prospects and modest profit margins, there has been a tendency for the largest French operators to expand their foreign activities, thus emphasising their development efforts abroad. Vivendi and Ondeo now dominate the global market for municipal outsourcing, having picked up many large concession contracts in regions such as Asia, South America and Eastern Europe.

However, in Western Europe, the market is more variable and the market is not dominated by large concession contracts, but a whole range of contractual models. Although the same companies are emerging as market leaders, they are being forced to be more flexible and creative in order to operate in markets previously closed to private sector penetration. For instance, Vivendi Water was awarded the first contract for outsourcing service in municipal water and wastewater services in Sweden.

In the UK, full-scale privatisation in 1989 was carried out through divestiture of all assets to a number of newly formed private companies with little apparent scope for outsourcing. However, the industry is showing signs of looking to restructure and there is still room for improvement.

Ongoing drives for cost saving and efficiency improvement suggest great potential for municipal outsourcing for a services ranging from customer service management to engineering services to asset management and infrastructure operation. Several UK water companies see this market as a crucial area for business development over the next 5-10 years.

The Italian and Spanish markets are still characterised by a high level of fragmentation; municipal outsourcing contracts are expected to increase in both countries as larger investments and higher efficiency are required, also driven by EU legislation.

In the Scandinavian countries, meanwhile, the water industry is still quite fragmented and the high quality of water combined with high compliance with EU environmental requirements have generally left the water sector to be managed publicly.

Future converging legislation across Europe however, should encourage change for many countries, with outsourcing opportunities arising at all levels from single plants to complete cities or networks.

Broad Market Segmentation
At a service level, the general emergence of externalisation has seen municipal customers outsourcing services ranging from customer billing to complete network management. In general, amongst the services included in municipal outsourcing we find contracts for:

* Provision of essential equipment and engineering services (under contract) for facility operators, including design and build of plants, possibly refurbishment or upgrading
* Wastewater treatment infrastructure management
* Sludge treatment infrastructure management
* Production and distribution of drinking water
* Operation and maintenance of infrastructure
* Customer-related services (billing, customer services, meter reading etc.)

Benefits to Public and Private Sector
* Some of the potential benefits to the public sector of outsourcing include:
* Reduction and/or stabilisation of operating and maintenance costs
* Removal of conflicting interest for the public sector
* Full of partial transfer of risk to the private sector
* Improved regulatory compliance

On the other hand, companies will usually seek some of the following if they are to participate in municipal outsourcing:
* Minimisation of compliance to regulation costs
* Minimal political risk
* Appropriate return on capital

In Conclusion
Current trends show that a lot of companies and municipalities view outsourcing for the water and wastewater industry as a key business development factor over the next 5-10 years. Many of them across Europe however are still assessing benefits and disadvantages of such an approach and will probably have to adapt when European legislation finally converges in all countries. In some nations, specific issues such as political sensitivity to raising prices in a public sector can sometimes hinder the development of this market.

Many countries have chosen or are considering expanding their services abroad and this is why convergence of European legislation is considered by many to be the next step required for this market to grow.

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