Water rules swamp small suppliers

Date: 09/04/1998

By Chris Johnstone

AS EUROPE's water industry faces pressure for a clean-up, and world trade talks move towards further liberalisation, small companies and town halls are finding they cannot cope with the changes flowing through the sector.

A potent cocktail of new directives, together with European Union enlargement, are stirring up a multi-billion-ecu industry involving big actors such as France's Compagnie Générale des Eaux (CGE) - renamed Vivendi last week - and local bit-player companies run by parish-pump politicians.

The European water industry's turnover is far from a drop in the ocean.

"Up to 2005, we will spend £39 billion (60 billion ecu), about the same money being spent on the new Eurofighter plane," said a spokesman for Water UK, which groups the 29 private English and Welsh water companies.

Proposed European measures to tidy up existing water rules and set new, higher standards for drinking water in the proposed Framework Directive on Water and the Drinking Water Directive, together with existing demands for the treatment of waste water, are forcing an unprecedented consolidation.

"The smaller companies will not be able to cope with the new European directives, especially with new regulations monitoring the quality of water. You need very sophisticated equipment for that," said Francis Rillaerts, secretary-general of Eureau, the European Union of National Associations of Water Suppliers and Waste Water Services.

French water companies face a 15-billion-ecu bill to take up and replace lead pipes in order to meet European drinking water quality rules. Other countries are contemplating similar costs, with heavy investment in cleaning up waste water set to become the priority once drinking water has been purified.

Consolidation will be accompanied or quickly followed by competition, according to the Eureau boss.

He predicts that a decade or more downstream, Europe's water industry could show a new competitive face, bringing it at least partially into line with the liberalised gas and electricity sectors.

Rillaerts claims the biggest brake on that transformation is the fact that local town halls are not forced to put their water supply and cleaning services out to tender under current EU rules. He believes that will change.

"Competitive tendering is already the case in telecoms, electricity and gas. There is no reason to leave water out of the scope," he insisted.

The French giants, privatised English and Welsh companies and big German firms such as Berlin's main water provider are all in favour of any moves to broaden their scope for action.

World trade talks aimed at extending the range of services which could be bought and sold globally are also likely to force the pace of change, with water high on the list of sectors to be covered by a new agreement. Discussions on widening the GATS (General Agreement on Trade in Services) start this year.

The competitive scenario that the Eureau boss predicts for Europe is modelled on the French rather than the British version of "competition".

Water companies in England and Wales (but not Scotland) were privatised as regional monopolies in a deliberate move by the UK government to avoid paying for years of neglect and the cost of meeting tighter European rules.

The high profits made by the 29 regional firms not only reflect the government's overgenerous sell-off terms and lax regulation, but also show that water is a commodity that repays investment.

France has gone down a different route. Most large cities and groups of local authorities in France have retained ownership of the water delivery and cleaning infrastructure, but have contracted out the provision of services to private companies such as CGE and Suez-Lyonnaise Des Eaux.

Rillaerts sees French-type contract competition being adopted in Spain, Portugal, Italy and other countries where the sector is mostly in public hands.

Consolidation of the industry has already begun, according to Eureau. In the Netherlands, the government has promoted a reduction in the number of companies from around 50 to 20 and is now aiming to cut the figure to a dozen.

"There are still thousands of water supply companies in Italy, but this will not be possible for much longer. They will have to merge and become bigger," said Rillaerts, adding that a change in the law was making this possible.

Outside the water sector, industry has mixed views about the impact of the changes.

The demand in the proposed Water Framework Directive that water companies recover all costs from end-consumers will have major consequences across most of Europe, where charges often do not cover expenditure.

European employers' lobby UNICE has warned that "too simplistic an interpretation of the principle could result in an undue cost burden on European industry". It wants a clearer idea of how costs could be divided in the future between household and industrial users.

Additional demands covering water quality in the Commission's proposed directive have yet to be finalised, with negotiations likely to continue under the forthcoming Austrian EU presidency.

But environmental groups such as the Brussels-based European Environmental Bureau are already warning that rules on quality have been excessively diluted.

The European Parliament is pushing for the new regulation to cover so-called endocrine disrupters - such as high levels of oestrogen found in pesticides - which have already led to sex changes in fish and are believed by some scientists to cause breast cancer in women and falling sperm counts in men.

The water industry insists there is, as yet, no proof of any danger.

Feature on how European legislation affecting the supply of water is forcing a rationalisation of the water industry.