Industry looks East

The White Water Paper sets out plans to stimulate further investment in the UK water industry. British contractors should not be surprised to find themselves competing against Asian companies, says Dean Stiles

Industry looks East

The White Water Paper sets out plans to stimulate further investment in the UK water industry. British contractors should not be surprised to find themselves competing against Asian companies, says Dean Stiles

The water industry is a global business and British water industry contractors should not be surprised to find themselves bidding against Asian companies for future contracts. With a large part of Thames Water now in Asian ownership, it is no surprise that the company should actively try to gain the benefits of the knowledge and skill of Asian contractors for its massive tunnelling programme to build its super sewer in London.

Thames is under pressure over the rising cost of the project now estimated at £4.1B following the consultation and review process. Funding this under Ofwat’s standard industry practice, which allows companies to recover eligible capital expenditure from customers over five-yearly review periods, is politically problematic given the rise in domestic water bills. Thames is considering alternative funding mechanisms that would spread the cost recovery over a longer period.

In Thames Water’s favour is the release of the Government’s Water White Paper in December that set out plans to stimulate investment in the industry. The Chinese state-run Investment Corporation has purchased 8.7% of the holding company that owns Thames Water, Kemble Water, itself owned by a consortium of investors led by Australian bank Macquarie. In December, another sovereign wealth fund, the Abu Dhabi Investment Authority, bought 9.9% of Kemble.

Clive Mottram, head of water regulation at law firm Eversheds, says the news can be seen as “yet more evidence of the attractiveness of the UK water sector to investors”. It demonstrates how the Water for Life white paper has “successfully calmed water investors’ fears that regulatory change might reduce the sector’s attractiveness as a safe long-term return based on asset-intensive operations”, he says.

“Indeed, the timing of this acquisition perhaps suggests that the white paper has provided a stimulus for investment, ahead of possible relaxation of merger controls which might allow greater consolidation of water businesses,” says Mottram.

Global contractors follow the money and the work so can we expect more of them to seek work in the UK? Asian contractors were quick to move into the Middle East that has proved to be one of the most attractive construction and engineering markets in the world for international contractors despite the present global economic climate.

Major Japanese and South Korean construction firms are among the most prominent construction contractors headquartered in the Asia Pacific area.

Thames Water clearly sees advantages in tapping into this expertise. Nearly a third of the top 25 construction contractors came from Asia according to Engineering News Record’s listing of top global contractors.

Asian contractors have been active in markets outside the Asia-Pacific region for many years while the 1997 Asian economic crisis caused some of the larger Asian contractors to look more closely at entering overseas markets through exploiting their traditional strengths in resourcing and procuring large-scale construction projects.

Facing dwindling government, domestic and corporate spending at home, Japanese and Korean contractors in particular have increasingly looked towards generating a greater proportion of their revenue from overseas. The Asian economic crisis speeded up the process. The Middle East was an obvious target, given its appetite for infrastructure development and expansion of the petrochemical sector and its financial ability to support the high-value construction development across the region, says Mark Raymont, partner at Pinsent Masons, based in Dubai.

But the potential lure of the UK for Asian contractors must be set against the attractions of operating closer to home. Asian markets are growing and demand for water and wastewater infrastructure is large. “It’s growing around 8% annually, and that makes it one of the faster-growing water markets in the world,” says Charles Gordon, head of Asian operations for Siemens Water Technologies.

Black & Veatch has won US$34M in water projects in Asia, tripling its revenues from the region to US$170M last year, says Len Rodman, its chief executive.

The main drivers of Asia’s growing water business are population growth, urbanisation and industrialisation. China, which saw double-digit growth over the past few years, has rapidly growing cities and a growing number of industrial hubs, increasing its need for more and better water management.

Hyflux, a Singapore water firm, is a big player in China’s water industry with 44 Chinese water assets worth US$441M. The company expects annual growth in China of 20% to 40% and is looking to fund new plants says Sam Ong, deputy chief executive.

“We are in a sweet spot right now targeting second-tier cities in China; the global guys aren’t in this market, and the local players don’t have the technological know-how,” Ong says, referring to cities like Chengdu, Hefei, Xi’an and Xiamen. Vietnam also has high growth rates with expanding cities and Veolia Water is to open its first office in the country within a few weeks while GE Infrastructure is in talks with Vietnamese companies about setting up a water filtering technology plant.

Water firms are also focusing on Australia, where the combination of the worst drought in 100 years and a booming mining industry – a water-intensive industry because of the need to purify ore – are driving investment in infrastructure projects.The continued demand for water investment and availability of projects for contractors depends on Asian countries sustaining the predicted growth rates. There is also the challenge of finding skilled labourers and specialist staff such as engineers in a region where competition for such talent is very tough. But any fall in demand is likely to see Asian contractors take a renewed interest in the UK.

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