Increasingly Privatized and Global Water Market

97.5% of the Earth's 1.4 billion km³ of water is seawater. Of the 2.5% of water that is freshwater, some 70% is found as ice at the north and south polar regions, while the remainder is mostly groundwater. Therefore, only 0.007% of the Earth's water is actually in the sphere of human habitation and accessibility. It is easy to forget about water resources for those living in places blessed with plentiful water supplies, but it is imperative to remember that water is a precious and limited resource. Today, some 1 billion people around the world do not have access to safe drinking water. There are particular concerns over increasing water shortages in the Middle East, Africa, and Asia, where populations are expected to soar. Water services that provide a safe supply of hygienic water are vital for mankind's existence and continued urban living.

Because of the public nature of water supplies, water utilities have been historically managed by governments. Since the early 1990s, however, there has been a wave of privatizations in the water industry, driven by the belief that private investment and private technologies can provide more efficient management and better quality service. Developing countries in particular have looked for injections of private capital due to the lack of necessary funds, technology, and expertise available.

Manila Water Utility Privatized in 1997

In the 1990s, the Philippines' capital, Manila, was facing a surging population as well as delayed infrastructure projects and a deteriorating environment. Operations by the state-run water utility in Manila had resulted in 63% non-revenue water* with only 26% of connected households having a 24-hour water supply. Thus, the service was extremely inefficient: only one-third of water generated made it into the home and even if households did have a water connection, there were long periods when water was not supplied. Furthermore, only 58% of Manila's population had a water connection, with over 40% of individuals unable to receive water from this public utility.

These problems remained completely unaddressed, exasperating then President Fidel Ramos who decided to privatize the water utility. In 1997, the water utility was divided into the east and west concessionaires and privatized.

* Non-revenue water: Water sent from water treatment plants that is lost en route (water leaks, stolen water, etc.).

Participating in the Privatized Business Along With Major Local Firms

When the publicly run water utility was privatized in 1997, MC invested in Manila Water Company, Inc. (MWC), which was responsible for water supplies to 5 million people in the east concessionaire, along with various local conglomerates such as the Ayala Group. MC also took on responsibility for certain aspects of management. The business covers all water and sewage services, from intake from the waterworks to fee collection and sewage drainage and treatment. However, the first priority was to improve the non-revenue water ratio and ensure that water generated was securely delivered to the end user. The biggest problem was that two thirds of the clean water generated was being lost. This was caused by aging pipelines that leaked and the large number of individuals who were taking water from these leaking pipes.

According to Hiromu Nishimura, who was involved in MWC's local management team from the start (and is currently New Business Planning Team Leader in MC's Environment & Water Business Unit): "Our first priority above all else was to ensure people were supplied with water. Without a water supply, people have to supply their own water. A 200L drum of water cost about 2 US dollars (some 20 times more than the water utility price), placing an enormous burden on the poor. The disproportional cost for water was also one of the key reasons driving water theft. For this reason ensuring a proper water supply would also act as a measure against water theft."

Non-revenue Water Ratio Falls Dramatically to 24%

The privatization coincided with various other difficulties that put water service operations under severe pressure, such as the Asian currency crisis and a drought caused by the El Niño effect. To deal with this, MWC did not borrow heavily, but used Official Development Assistance (ODA) funding from organizations like the Asian Development Bank and the Japan Bank for International Cooperation that had been agreed to prior to privatization. MWC used this funding to invest in its facilities. The company also worked to improve its management in order to increase motivation and emphasize the importance of compliance among its staff. The focus of improvement was on fair management and closing the gap between management and staff by having the two groups work more closely together. Company employees, who used to be government workers, are now proud to be part of one of the Philippines' top conglomerates, the Ayala Group.

Large-scale investment in new facilities became possible in 2003 when the economic environment picked up. The company upgraded dilapidated equipment and introduced the latest in modern facilities. It also started a program to supply water to those individuals previously unable to receive water from the public water utility.

Water sales volumes rose from 440,000 m³ per day at the time of privatization to 1.04 million m³ in 2007. Despite this increase in sales volumes, the actual total volume of clean water fell during the same period, refl ecting the improved efficiency in the non-revenue water ratio that had fallen dramatically from 63% to 24%.

In the sewage treatment business, the company increased its fl eet of septic tank trucks from 2 at the time of privatization to 100 vehicles and, in 2007, opened the Philippines' first ever full-scale sewage treatment plant. This business has made an enormous contribution to decreasing water pollution in Manila. MWC's operations and improved water services have also been of great benefit to society in general, as they have prioritized hospitals or schools for plumbing into the water system and outsourced services to local businesses in order to support local communities.

On the business front, MWC has achieved steady growth. The company began dividend payments in 2002 and listed on the Philippines' stock market in 2005.

Developing Water Services in Japan With the Goal of Becoming the Market Leader

According to Shigeo Mizutani, a General Manager of the Environment & Water Business Unit, "MWC's success has drawn attention around the world. Inquiries are coming in from Vietnam, India, and other Asian countries about working together with MWC in this business. MC is also providing collaboration with regard to these inquiries. Moving forward, we want to partner with the Ayala Group to build a strong position in the Asian water market. To achieve this, our first goal is to establish the market leader position in Japan and then to leverage this strength to develop our business overseas."

MC began providing water services in Japan with the establishment in 2000 of Japan Water Corporation as a joint venture with Nihon HELS Industry Corporation.

The 2002 Amendments to the Japan Water Supply Law have increased the need for Japanese water services to be privatized. However, there are almost no private companies providing water services in Japan. Against this backdrop, Japan Water has established a track record of providing waterworks services on contract at 20 locations throughout Japan, including the contract for operation and maintenance (O&M) services at water treatment plants in Miyoshi, Hiroshima Prefecture. The goal of the Environment & Water Business Unit is to solidify our position as a provider of water services across Asia by leveraging our success in providing comprehensive water services within Japan plus our experience accumulated at MWC.

Japan Water Business Contracts

Contract region	Year	Details
Miyoshi, Hiroshima Prefecture	2002	First-ever, comprehensive outsourcing to a third party in Japan
	2006	Management over a wide area after city merger to form new Miyoshi city/O&M*1 of membrane treatment system
Nagatogawa, Chiba Prefecture	2004	First all-inclusive outsourcing of O&M in the metropolitan area
	2005	Design and build*2 services outsourced/integrated into a single design, build and operate*3 contract
Matsuyama, Ehime Prefecture	2004	First full-scale outsourcing of water purification plant O&M in Shikoku (Habu water purification plant)
	2005	Outsourcing of O&M at the Ichinoide water purification plant' s water supply control and management center (including control of water pressure for the entire Matsuyama area)
	2007	Integration of O&M outsourcing for Habu and Ichinoide
Isahaya, Nagasaki Prefecture	2004	Broad-ranging facilities management (239 sites)
Morigasaki, Tokyo	2004	Participation in a PFI*4 power generation business
Gifu Prefecture	2006	Managing the prefectural bulk water supply facilities
Akita Prefecture	2007	First designated manager of industrial water
Nagano, Nagano Prefecture	2007	Collaborative project with the local pipe works union
Masaki, Ehime Prefecture	2007	First legal outsourcing in Shikoku
Ishikari, Hokkaido	2008	First comprehensive outsourcing to a third party in Hokkaido
Nakashibetsu, Hokkaido	2008	Legal outsourcing through joint venture with local firm

Other experience: Miyazaki, Miyazaki Prefecture (2006); Niihama, Ehime Prefecture (2006)

*1 Operation and maintenance (O&M):
Refers to operation and maintenance of water treatment plants and sewage treatment plants.

*2 Design-build (DB):
A type of contract where the same contractor handles both the design and construction.

*3 Design-build-operate (DBO):
A type of contract where the same contractor handles design, construction, operation and maintenance.

*4 Private finance initiative (PFI):
The use of private-sector funds, management capabilities and technological capabilities for constructing, operating and maintaining public facilities.