New analysis shows Russia's water sector badly affected by economic downturn
LONDON, UK, June 24, 2009 -- According to new analysis from Frost & Sullivan, the global economic crisis is having an impact on the already poor performances of the water sector in Russia...
LONDON, UK, June 24, 2009 -- The global economic crisis is having an impact on the already poor performances of the water sector in Russia. The existing infrastructure is largely outdated resulting in frequent breakdowns and also relatively inefficient with high energy consumption and substantial water losses. It has been estimated that a staggering sum of $459 billion (15 trillion Rubles) is needed to complete the necessary upgrade, refurbishment and new build for water and sanitation infrastructure in Russia by 2020. With the downturn affecting the market the massive capital requirement for the implementation of the "Clean Water" program is going to be a big challenge.
Frost & Sullivan Research Analyst, Tomasz Zagdan, who has been conducting extensive research of the water sector in Russia to gain a full understanding of the market and what the future is holding, explains: "The plunge in manufacturing output translates into a decrease in consumption of water by the industrial sector, which accounts for over 60% of water use in Russia. The crisis also hit average Russian households by influencing their income level and stretched their ability to pay for the water bill. Also, the slowdown of the residential construction impacts water utilities as some of the previously planned investments have been cancelled and initiated projects were put on hold."
The turmoil in the banking sector has stamped its influence on the availability of financing for water companies. Difficulties with access to financing also encompass loans for key investment programs.
"The poor condition of the Russian water sector is less of a surprise," comments Zagdan. "Neither is the magnitude of investments that are required to address the essential needs and improve the water & wastewater infrastructure up to the required standards. Russian authorities will have a tough nut to crack trying to find the money to finance the 'Clean Water' program. It is evident that the $459 million (15 trillion Rubles) mentioned by the Duma Chairman Gryzlov is a sum that will stretch the Russian government, particularly given the current economic conditions."
The involvement of the private sector is not an option to consider but rather a necessity to ensure even a partial realization of the program. "Structural changes need to be initiated at the federal level to provide a framework endorsing public-private cooperation," continues Frost & Sullivan analyst. "Plans to amend the concession law are the first, but a very important step towards achieving the goal. Last but not least, the water tariff policy in Russia will require revision. The current level of tariffs is insufficient to cover the necessary capital costs associated to the implementation of the program."
Russian authorities have demonstrated an increasing understanding of this challenge and aim to encourage more private sector involvement into the water business. Talking to Frost & Sullivan, Mikhail Nikolskiy the Executive Director of the Rosvodokanal Group, one of the leading Russian utilities, confirms: "Right now local authorities will be interested in finding a good partner for these difficult years. With economic growth it was easy to solve problems in the water sector. Right now it is necessary to work on a different level -- the anti crisis level. This first of all means the managerial level and in this situation we [privately managed operators] are more effective than municipal companies."
With a higher involvement of the private sector, the perspectives for the Russian water sector for the coming years are promising in the long term. Water utilities already demonstrate increasing interest in managerial privatization. Construction and rehabilitation of infrastructure in 2010-2017 will create new opportunities for equipment suppliers, engineering firms as well as for construction companies. Even with all the gloom and doom around the economic climate for Russia, the water sector has the potential to be better off within the incoming decade than it had in the past decade.
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