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Resources 22
'Look before you leap'
(extract from article in Utility Week, 15 May 1998)


The article is a summary of a speech by Adrian White, owner and chairman of Biwater. Biwater, owns Bournemouth and West Hampshire Water Company in the UK, and also is active in overseas water markets . White was speaking to the conference of the UK's Institution of Water Officers', about how to win international water contracts.

...While profit is the main objective of a contractor, says White, a safe return with a sovereign guarantee is the prime concern of the investor. An up-front fee, success fee and commitment fee is the main objective of a financial backer. And a steady, long term cost-plus return is the main objective of an operator

There are six types of water contract to which these criteria apply. They are:

  • Build, own, operate, transfer (BOOT).
  • Bulk water only.
  • Distribution and billing only.
  • Corporatisation with outside management.
  • Operating concession/lease contract.
  • Full privatisation

'BOOT contracts are not good for the client,' says White. 'They are, however, superb for the contractor. The contractor gets four sources of profit: construction, financial engineering, equity dividend and management contract.

'By contrast, with a bulk water-only contract the contractor receives 100 per cent payment for 100 per cent water produced but the municipality only receives 50 per cent recovery though its billing system due to leaks, bad debt and inefficiencies.

'Distribution and billing-only contracts give revenue to municipalities and encourage distributors to be efficient.

'Corporatisation is where the municipality converts its water department into a business and brings in expertise, leaving funding and responsibility with the municipality.

'And an operating concession can be a managing contract, one that provides finance and equity, contracting, supplies and operation.'

Perhaps because of political problems, full privatisation is a relatively rare thing in world water markets. But nonetheless, White believes privatisation is the best solution for the client.

He thinks the recent crisis in the Far East will force governments previously looking at other options to privatise infrastructure. This presents a great opportunity, he says.

Despite its questionable record so far, White still believes Britain's water industry 'is on the brink of taking the world by storm'. But he warns: 'While they're trying to think big and spend small, too many are diving into the capital cities of countries like Indonesia and the Philippines.

'These are unstable - they're better off in stable markets like Australia.

'And they are not using World Bank, EBRD IEuropean Bank of Reconstruction and Development] or European Investment Banks Funds when they should.'

Here are some guidelines about what to look out for and what to be wary of.

Selling British water expertise overseas should incorporate The following:

· Investment and loan finance.

· Management control with shareholders' agreement.

· Meaningful shareholding.

· Construction contracts.

· Equipment supply contracts.

· BOOT contracts.

· Full concession contracts.

· Privatisation ownership and management.

· Markets to look at are in eastern Europe, South America and South Africa.

Don't take the plunge unless:

· There is a government guarantee of payment.

· There is protection against inflation, devaluation and foreign exchange fluctuation.

· There is a guaranteed return on investment.

· An automatic tariff increase formula.

· No real competition.

· No joint venture unless you have control.

· No up-front payments.

· Markets to avoid are North America and the Middle East.