southern european water summit

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Southern European Water Summit

John Raspin

European Research Manager

Status of the Water Sectors in

Southern European Countries

12th March 2001

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The Agenda

The drivers of market change

PSP models in Southern Europe

The degree of privatisation

Market value of PSPs

Market Prospects and Timeframes

Conclusions and Ongoing Thoughts

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Drivers of Market Change

Capital Investment Requirements

• Regionally low connection rates• Variable water quality• Wastewater treatment and sludge disposal• New water resources - Desalination?

• Regional backlog of public works• Scarcity of municipal capital• Pressure to reduce public sector debt

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Widespread need for:

• Technological development Expertise required for advanced technologies

• Operational efficiency gains OPEX cuts required

• Released municipal management time New management practices?

• Funds Private sector capital?

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Some Specific Details:

• EU legislative targets• Urban Wastewater Treatment Directive

(91/271/EEC)• New Drinking Water Directive (98/83/EC)• Water Framework Directive

• Slowdown in EU funding to Southern Europe• Shift in Cohesion and structural funds to CEE

• Pressure on water resources• Already high exploitation rates …...

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Southern Europe

• Spain - 36.8 %• Italy - 32.2 %• Greece - 12.1 %• Portugal - 11.9 %

Other EU Countries

• Austria - 2.7 %• Netherlands - 4.9 %• UK - 14.6 %• Denmark - 15.7 %

Water withdrawals (% of gross annual availability):

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Specific Challenges to Southern Europe:

• Leakage loss issues, at least:• Spain - 24%• Greece - 31%• Italy - 22%• Portugal - 27%

• Seasonal fluctuations in demand• Tourism• Agriculture (high reliance on irrigation)

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The Capital Demands (For EU Compliance):

From 2000 to 2005

• Spain: € 20 to 28 billion

• Portugal:€ 2 to 5 billion

• Italy: € 15 to 20 billion

• Greece: € 5 to 10 billion

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Drivers of Market ChangePrivatisation theory for the water industry:

Efficient ManagementModern Technology

PSP contractwith experienced

operator

Raise capitalthrough

share sale

Sale ofAssets?

CAPEX fundedthrough savings

OPEXcuts

Level of Service(LoS)

Improvements

Bills stableor down

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However ……..

Some Restraints on Private Involvement:

• Slow timetable• Hard to attract venture capital?

• Small number of large projects• Restricted to large towns and cities?

• High transaction costs• May eliminate smaller municipalities from PSPs

• Capital intensive industry• Restricts market entry to small no. of global players

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However ……..

Some Restraints on Private Involvement:

• Uncertainties• Legislative changes (environmental)?

• Future water quality/health requirements

• Demand risk - Changing demand levels?

• State of underground assets?

• Condition of assets after 25 years?

• Future regulatory changes (contract .v. regulation)

• Situations change over 25 year contract periods!

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PSP Models

With a note of caution:

• Markets have traditionally been very fragmented• Diverse reasons for wanting privatisation• Successful examples cannot always be transposed• Not all PSPs follow models

Each PSP contract is completely uniqueMust adapt to local characteristics

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… and Compared to the Rest of the World

ServiceContract

ManagementContract

LeaseContract

ConcessionContract

Full/PartialDivestiture

AustriaCanadaChileMexicoRussiaUSA

ChileGermanyThailandUK

CanadaFranceGreeceJordanTurkeyUSAVenezuela

ColombiaCzech Rep.FranceHungaryPolandPortugalSpainUSA

ArgentinaBulgariaChinaEgyptFranceGermanyGreeceItalyPhilippinesPortugalRomaniaSpainUSA

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PSP ModelsPrivate sector equity in concessionaires/operators:

PRIVATISATION

PSP contractwith experiencedprivate operator

Raise capitalthrough

share sale

Sale ofAssets?

Concessions

EYDAP (Greece)ACEA (Italy)AMGA (Italy)ASCM (Italy)

FCC (Spain)Agbar (Spain)

Lusagua (Portugal)Camuzzi (Italy)

CI II (Spain)

LowHigh

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PSP Models

Why dominance of concessions contracts?

• Benefits of attracting a third party• Delegates responsibility for CAPEX• Municipality usually maintains asset

ownership• Possible to split operation from ownership of

assets• Can combine with BOOT and BOT contracts

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PSP Models

Regulatory Approaches

• Regulation model = critical component of PSP model• Regulator or Contract?

• Three interrelated aspects of regulation• Economic - Environmental - Health (water quality)

• Defines ability of industry to react to unanticipated events• Economic changes; demographic changes; natural disasters; axiom

shifts

Regulatory/Contractural transparency imperative for PSP!

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PSP Models


Contracts .v. Regulation

• Regulation model must maintain level playing field for current and future competition

• Renegotiation costs to be minimised

• Dedicated water regulator requires specialised skills

• There is no ‘correct’ approach, only an ‘appropriate’ one

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PSP Models


• The optimal regulation model depends on:

• The chosen privatisation model• The aims and objectives of the privatisation• The operating economies• The historical approach in the country/region• The size of the city/region• The timeframe of the concession (longer contracts

broaden the scope for unexpected evens)

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PSP Models

Models of Regulation in Southern Europe

Local National

Regulation

Contracts

PortugalSpain

Greece

Italy

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The Degree of Privatisation

Considered in terms of:

• % of population with a PSP supplier (served either by private sector or PPP)

• % of market revenues collected by PSP suppliers

• Historic/recent patterns of privatisation

• Future projections:

• Projects in pipeline

• Market expectations

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Portugal

• Population = 9.9 million• % With Mains water = 84%• % Connected to STP = 35 to 40%

• Private sector water supply = 11%• Private sector sewerage = 9%

• Value of Industry = €2.1 billion

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Portugal

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

0.5

1

1.5

2

2.5

Mark

et

Siz

e (

€ B

illi

on

)

Rate of Private Sector Penetration (Portugal), 1995 to 2005

PSP Revenue Value

Total Market Revenue Value Note: All figures are rounded. Source: Frost & Sullivan

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Spain

• Population = 39.6 million• % With Mains water = 75%• % Connected to STP = 52%



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Spain

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

1

2

3

4

5

6

7

8

9

Mark

et

Siz

e (

€ B

illi

on

)

Rate of Private Sector Penetration (Spain), 1995 to 2005

PSP Revenue Value

Total Market Revenue Value Note: All figures are rounded. Source: Frost & Sullivan

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Italy




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Italy

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

1

2

3

4

5

6

Mark

et

Siz

e (

€ B

illi

on

)

Rate of Private Sector Penetration (Italy), 1995 to 2005

PSP Revenue Value

Total Market Revenue ValueNote: All figures are rounded. Source: Frost & Sullivan

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Greece




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Greece

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

0.5

1

1.5

2

2.5

3

Mark

et

Siz

e (

€ B

illi

on

)

Rate of Private Sector Penetration (Greece), 1995 to 2005

PSP Revenue Value

Total Market Revenue ValueNote: All figures are rounded. Source: Frost & Sullivan

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Conclusions

• PSP opportunities will continue• Concessions to dominate in foreseeable future• Customers want products, services and

investment

But:• Synergies do not always exist between cases• Optimal concentration is very difficult to define• PSP must optimise the unit costs of water supply and

wastewater treatment• This industry in not straightforward!

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Final Thoughts

Final Thoughts and Questions

• Must safeguard public interest• What is ideal asset ownership structure?• Financial risks with concessions?• Can the industry concentration be optimised?• Where must regulatory accountability lie?• Can national and local regulators co-exist?• Privatisation is a technical and political

challenge!

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Final Thoughts

Thank-you very much.

southern european water summit

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