1. 21/01/99 21:13 Page 1 Southern European Water Summit John Raspin European Research Manager Status of the Water Sectors in Southern European Countries 12th March 2001

2. 21/01/99 21:13 Page 2 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

3. 21/01/99 21:13 Page 3 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

4. 21/01/99 21:13 Page 4 Drivers of Market Change 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?

5. 21/01/99 21:13 Page 5 Drivers of Market Change 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 …...

6. 21/01/99 21:13 Page 6 Drivers of Market Change 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):

7. 21/01/99 21:13 Page 7 Drivers of Market Change 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)

8. 21/01/99 21:13 Page 8 Drivers of Market Change 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

9. 21/01/99 21:13 Page 9 Drivers of Market Change Privatisation theory for the water industry: Efficient Management Modern Technology PSP contract with experienced operator Raise capital through share sale Sale of Assets? CAPEX funded through savings OPEX cuts Level of Service (LoS) Improvements Bills stable or down

10. 21/01/99 21:13 Page 10 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

11. 21/01/99 21:13 Page 11 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!

12. 21/01/99 21:13 Page 12 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 unique Must adapt to local characteristics

13. 21/01/99 21:13 Page 13 … and Compared to the Rest of the World Service Contract Management Contract Lease Contract Concession Contract Full/Partial Divestiture Austria Canada Chile Mexico Russia USA Chile Germany Thailand UK Canada France Greece Jordan Turkey USA Venezuela Colombia Czech Rep. France Hungary Poland Portugal Spain USA Argentina Bulgaria China Egypt France Germany Greece Italy Philippines Portugal Romania Spain USA

14. 21/01/99 21:13 Page 14 … and Compared to the Rest of the World Service Contract Management Contract Lease Contract Concession Contract Full/Partial Divestiture Austria Canada Chile Mexico Russia USA Chile Germany Thailand UK Canada France Greece Jordan Turkey USA Venezuela Colombia Czech Rep. France Hungary Poland Portugal Spain USA Argentina Bulgaria China Egypt France Germany Greece Italy Philippines Portugal Romania Spain USA

15. 21/01/99 21:13 Page 15 PSP Models Private sector equity in concessionaires/operators: PRIVATISATION PSP contract with experienced private operator Raise capital through share sale Sale of Assets? Concessions EYDAP (Greece) ACEA (Italy) AMGA (Italy) ASCM (Italy) FCC (Spain) Agbar (Spain) Lusagua (Portugal) Camuzzi (Italy) CI II (Spain) LowHigh

16. 21/01/99 21:13 Page 16 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

17. 21/01/99 21:13 Page 17 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!

18. 21/01/99 21:13 Page 18 PSP Models Regulatory Approaches 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

19. 21/01/99 21:13 Page 19 PSP Models Regulatory Approaches 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)

20. 21/01/99 21:13 Page 20 PSP Models Models of Regulation in Southern Europe LocalNational Regulation Contracts Portugal Spain Greece Italy

21. 21/01/99 21:13 Page 21 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

22. 21/01/99 21:13 Page 22 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

23. 21/01/99 21:13 Page 23 Portugal

24. 21/01/99 21:13 Page 24 Spain Population = 39.6 million % With Mains water = 75% % Connected to STP = 52% Private sector water supply = 48% Private sector sewerage = 54% Value of Industry = €7.3 billion

25. 21/01/99 21:13 Page 25 Spain

26. 21/01/99 21:13 Page 26 Italy Population = 57.4 million % With Mains water = 75% % Connected to STP = 69% Private sector water supply = 29% Private sector sewerage = 14% Value of Industry = €4.38 billion

27. 21/01/99 21:13 Page 27 Italy

28. 21/01/99 21:13 Page 28 Greece Population = 10.6 million % With Mains water = 80% % Connected to STP = 45% Private sector water supply = 35% Private sector sewerage = 35% Value of Industry = €2.45 billion

29. 21/01/99 21:13 Page 29 Greece

30. 21/01/99 21:13 Page 30 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!

31. 21/01/99 21:13 Page 31 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!

32. 21/01/99 21:13 Page 32 Final Thoughts Thank-you very much.