As a soldier, Napoleon III, the nephew of Napoleon Bonaparte, was pretty much a dud. He started the Franco-Prussian War and was captured in the Battle of Sedan in 1870, a catastrophe that brought his long reign as France's emperor to a swift and inglorious end. But as a social engineer, Napoleon III was something of a whiz. His civic planner, Baron Haussmann, rebuilt Paris. The medieval slums were cleared and replaced with grand boulevards. Parks and sewage systems were created. The rail network was vastly expanded.
Biographies rarely mention Napoleon III's other accomplishment in social engineering: He is the father of privatized water.
In 1853, Compagnie Générale des Eaux was founded by imperial decree. Its first contract was to supply water to the city of Lyons. In 1860, it was awarded a 50-year contract to supply water to Paris.
Today, it is called Veolia Eau, a division of Veolia Environnement (known as Vivendi Environnement until 2003, when saner heads prevailed and hived it off from Vivendi Universal, the Hollywood studio and sewage conglomerate). Veolia is the biggest privatized water company in the world. Its chief rival is Suez, the Franco-Belgian industrial giant whose most famous project was the epic construction of the Suez Canal in the 1860s, and which counts Montreal's Desmarais family among its biggest shareholders.
(Massimo Bortolamiol)
Privatized water has been an on-again, off-again trend in parts of the world for a century or more. In the United States, private water companies were common in the last half of the 1800s. They disappeared when allegations of unfair profiteering gave municipalities the consumer-sanctioned opportunity to take them over.
Privatization has always been contentious because water is an essential good socially as well as economically. The anti-privatization crowd, which holds that access to safe water should be declared a human right, argues that transferring water into private hands means the public—particularly the poor—cannot be protected.
But it can be done. Napoleon III found the right formula to protect the seller and the buyer. More than a century later, Margaret Thatcher, who delivered England's water utilities to the stock market, did not. In the early years of England's privatized water history, regulatory oversight was low, complaints high. After years of shoddy service, the regulations had to be tightened up. Customer whining has diminished somewhat, but arguing whether privatization was a good or bad thing is still a hot debate among older Brits.
The genius of Napoleon III's water strategy was its fine political and economic balancing act, says Philippe Rohner, the manager of the Swiss Pictet Group's ¤3.5-billion PF Water Fund, the biggest of its kind. At the time, France was urbanizing quickly but couldn't afford the infrastructure to deliver reliable, safe water to the masses and to industry. Since water had been a free and essential good since the beginning of time, the challenge was to devise a water-delivery system that could attract capital but whose pricing would not trigger riots. "Water is a commodity—yes—but one that is also a basic service that comes with a health-warning label on it," Rohner says.
The solution was water concessions—in effect, local water monopolies. Only the service itself would be privatized; the water and the pipes would remain under public ownership (Thatcher's model differed in that the pipes were privatized too). Since the concessions came with stewardship responsibilities, France's new water managers had to keep the infrastructure in good nick. The tariffs were linked to the cost of the service, which included maintenance and capital improvements.
France's privatized water system has worked fairly well—strict government regulation has been an essential ingredient of the success story—and the French have earned a reputation for fine water (and waste water) engineering and innovation. As the biggest players, Veolia and Suez generally have the first call on the industry's best engineers.
Customer satisfaction rates are fairly high, thanks in part to robust delivery networks. One important performance measure is leakage rates. In Paris, some 20% of the water disappears from the web of pipes and pumps between the water source and the house tap. It sounds high, but in London, the figure is almost double.
Privatized water took off globally in the 1990s and the early part of this decade. In 1999, only 5% of the world's population had some sort of private water service. The figure is now a bit more than 10%. Oddly, communist and formerly communist countries, including Russia and China, have been among privatization's most enthusiastic supporters.
Veolia has led the pack. At the end of the past decade, it had 75 million customers; today the figure is about 117 million, and annual water-services revenue is more than ¤10 billion. Growth is fairly strong, if not spectacular. In the half-year to June 30, 2007, Veolia's water business reported an 8.8% rise in revenues, to ¤5.2 billion, while operating income was up 9.4% to ¤576.1 million. The good news is that almost all the growth was organic—it was not dependent on acquisitions. The company has supply contracts from China to Saudi Arabia, where it is building one of the world's biggest desalination plants.
Not surprisingly, the few water investment funds that exist typically make Veolia and Suez their top holdings. The Pictet Water Fund also includes water-technology companies such as ITT, a maker of membrane-filters and pumps, and companies with big bottled water operations, like Nestlé and Danone. The universe of potential investments is fairly small but should expand, Rohner says, as institutional investors take a greater interest in water and environmental plays and their offer of growth and earnings stability. Indeed, the Pictet Water Fund was launched in 2000 largely as a retail product. Institutional investors are now climbing aboard, Rohner says. Canada has one water fund, the Criterion Water Infrastructure Fund (managed by Pictet), and the Claymore S&P Global Water ETF, which tracks the S&P's water index.
Peter Gleick, a scientist and president of the Pacific Institute, a California think tank whose specialty is development and environmental issues, says the high growth rates were fuelled by the Thatcher water privatizations, the World Bank's keenness to fund private water, the French companies' highly aggressive efforts to take over the management of public water systems, and the general American appetite for privatization and deregulation.
The pace of growth has slowed considerably in the past few years. A few high-profile privatization failures can take some of the blame. Suez snagged the water contract for Atlanta in 1999. It was to be its showcase American water deal. Four years later, after endless complaints of bad service and high prices, the city killed the contract. Last summer, Stockton, California, unwound a 20-year, $600-million (U.S.) water and waste-water contract with OMI-Thames Water because of concerns about infrastructure and environmental degradation. Street protests erupted in developing countries when the prices for newly privatized water shot up. In Bolivia, six people were killed in anti-private-water riots.
The arguments against privatized water are simple. Companies like Veolia and Suez have to make a profit. That profit is reflected in the service price. Opponents say private water companies have no incentive to encourage conservation, because less water used by customers translates into less revenue. Proponents say private companies are more economically efficient, can use high pay packages to attract the best bosses and engineers, and have easier access to capital to improve infrastructure (not true in all cases, because American municipalities can use tax-free bonds to fund capital expenditures). They point to Veolia's happy experience in Indianapolis, which has been cited as a model of private-public partnership.
Veolia and Suez know they are fighting municipalities that think privatization is either a bad idea or will lead to, at best, marginal improvements, so why bother? Higher growth rates, however, are bound to return at some point as urban densities increase and private engineering talent is needed to solve water-shortage problems. Water companies can do themselves a favour, too, by accepting, even encouraging, the strictest public oversight and regulations. Veolia and Suez did in France, to great success for both sides. If the formula were applied outside France, Napoleon III's model might have superb export potential.
