This article examines the emergence of new actors within the water supply sector, namely the case of banks. The British water market appears in this context as some sort of experimental laboratory. Therefore the focus of the current debate section lays on the recent events occurred in this market, and on how they could affect in the near future the water supply sector in general.
Last September, the media announced the acquisition of the South East Water operator by the Macquarie Bank Group for £386 million. The Bank had already offered bids for the Northumbrian Water in the past.
Macquarie called the purchase of South East Water « a stable investment with high quality, regulated cash flows ». This acquisition is interesting in many regards. Besides the fact that it shows the recent changes in the strategic development of French operators that are currently turning back to their internal market (South East Water was a subsidiary of the French multinational Bouygues), this example shows the growing interest banks have in the water sector. It is also interesting in that the bank is not only the lender but also the owner of the assets. Indeed, the Macquarie Bank did not in this specific case lend money to a traditional water operator but rather bought it directly. This acquisition raises many questions regarding the evolution of the water supply market in the forthcoming years. Firstly, does this example constitute an exception or does it really show a new turning point in the institutional structure of this market? In fact, the South East Water acquisition is not unique and, for example, a consortium led by Deutsche Bank acquired a few months before part of the shares of Northumbrian Water, which was previously majority-owned by the French Multinational Suez-Ondeo. The second main question is to see whether these cases are limited to the UK or whether they might reach the world market.
Even if currently these changes only take place in the UK, there is no reason to believe why banks should not invest in other countries having the same model (i.e. Chile, Australia). Firstly, most of these investment banks are international. Secondly, other investment banks are surely examining these recent acquisitions and the possibility to follow the trend. This is likely to occur with the current instability of the financial market and the pressure for banks to go for long-term investments. Furthermore, the water sector in industrialised countries is considered as a relatively low risk investment. A recent survey by the UK water operators' association (Water UK, 2003) on investments in the water sector showed that in comparison to the UK market as a whole, water is considered as a relatively low risk investment. Indeed, the monopolistic character of the sector ensures in these countries a regular and high quality rate of return on the investments. The Pictet Bank, which has already created the Water Pictet Global Sector Fund, could actually appear as a potential new actor in this type of acquisition. To conclude, the entry of banks as potential owners of water operators will probably have an impact on the different forms of management in the sector. Indeed, it was not by chance that these acquisitions started in the UK. The British model of water management is seen as an interesting model for investment banks when compared for example to the French model of delegated management, since it is seen as more secure. In the British model, operators are owner of the assets and not just contract holder. For example, political risks are perceived as lower in the British model compared to the French one. One of the reasons is that it is more complicated to re-nationalise an operator than to terminate a contract.
One can imagine that the investment banks have followed the recent news in the water sector and realized how politically sensitive the issue of private sector participation is. The termination of the 30-year water contract by the city of Atlanta was certainly an example that pushed the banks to go for the British model. Moreover, and probably most importantly, the British model enable banks just to own the assets rather than managing directly the operations. Considering the growing financial needs in the water supply sector, this hypothetical strategic orientation could have an important impact on the way water is managed in the near future, namely through the influence on third countries to go for the British model.
References: - « UK - South East Water sold », European Water Management News, Wednesday 8 October 2003. - Water UK, (2003), « Water UK Investor Survey: key Findings », by Angela Whelan, 7 April. - "Northumbrian Water sold for $3.6 billion", WaterTech-online, 20/05/03.
Note: * WIMCC is the Water Institutions and Management Competence Centre at EPFL. (Home) http://www.epfl.ch/mir/euromarket
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This extract highlights the inequity of allowing private banks to create money, especially when they are so ‘deregulated’ that they can use this ability to buy ownership of companies, etc., — including ones already sold-off from public ownership! — but this is not observed in the Newsletter. — BL