Keeping our Cities Livable: The head of the world’s biggest water and waste management company says private sector involvement is crucial.

Commentary, Municipal Government, Frontier Centre

"All the great cities of the United States make me dream," says Antoine Frérot wistfully. But it isn’t the traditional fascination of European intellectuals for America’s urban landscapes that interests the chairman and chief executive of Veolia Environnement SA, the world’s biggest waste and water utility by revenue. What engages Mr. Frérot is the more prosaic, but perhaps more important question of where Americans get their water.

Currently Mr. Frérot is particularly interested in California, as the state faces a possible fourth year of drought, with some local agencies already issuing mandatory rationing. "We are certain we could help them do better. We hope to convince them," he said, in the comfort of his Paris office, few steps from the Arc de Triomphe. 

The group already handles Milwaukee’s water network.

Veolia, unlike most Western industrial groups these days, is not so focused on emerging markets to become new drivers of growth. As human beings pile into ever growing urban clusters, issues such as waste management, water and energy supply and transportation, become more important. And the more sophisticated the city, the greater the problems and the bigger both the need and desire to find a more comprehensive solution. Veolia’s business is therefore a long way away from traditional garbage dumps and simple water-treatment plants. The company sells sophisticated solutions, such as energy-generating waste incinerators.

Waste and water management needs will soon pose a crucial test to our civilization, says Mr. Frérot, and the involvement of the private sector, of companies like Veolia, will be crucial to being able to make our cities continue to be livable.

Today about 9% of the world’s population has its water handled by a private utility. Ten years ago, the rate stood at 5%, 20 years ago only 2%. Elsewhere, local authorities handle water and waste themselves. The problem is that they don’t invest in research and development, often try to skimp on capital investment, and don’t know how to handle such issues as implementing higher environmental standards, Mr. Frérot says.

Against this background of unsophisticated municipal provision, Veolia has a vital role to play, and as well as water and waste has developed public transport and energy divisions. For those who fail to see a rationale in combining the four activities, Mr. Frérot has a straight answer: "The aim is to make our urban civilizations more bearable, even agreeable. The activities represent the encounter of politics and economics and environmental concerns. The more we evolve, the more we need to innovate and find better solutions for our water, our waste, our energy and our transport," he says.

It’s no longer about managing a water well or to filter the liquid: water utilities have to be able to manage entire water loops, face erratic flows in and out which increase the need for a robust yet flexible pipe techniques, extract sewage water… "It’s complex, there’s no room for mistakes, issues must be non-existent when it’s about supplying drinkable water to households."

But the idea of private provision takes time to catch on. "It’s an important decision for local authorities, to outsource its water network to a private company," he says, noting that, in India, where the group is in talks with an important city, the different layers of authorities most of the time don’t share the same political color, making the decision process all the more complex.

Currently the group services towns such as Berlin, Prague, Bucharest and Shanghai. One recent success story has been Riyadh, the Saudi Arabian capital. Three years ago, before Veolia landed the contract, the city’s 4 million inhabitants had running water only four hours a day. Now it is available round the clock. Local competitors have emerged in certain parts of the world but at the international level, most of the time Veolia competes with its arch-rival peer Suez Environnement SA, another French utility which ranks second globally.

That two French utilities are the biggest of their kind in the world is no coincidence. Water and waste concessions are a very French invention with local authorities there granting the first contract to private companies at the end of the 19th century, Mr. Frérot explained. Veolia itself was born from Compagnie Generale des Eaux, created by an imperial decree issued by Napoleon III in 1853. By 1998, when the company renamed itself Vivendi Universal, it had become a huge and diversified conglomerate. In 2000 the water and waste business was spun off into Veolia. Ever since, however, the company has been plagued by debt, a problem which has not been relieved by a company policy of pursuing growth through investment rather than reducing its debt.

Mr. Frérot says debt is less of an issue now Veolia has managed to stabilize it at €15.5 billion ($21.1 billion). More than 70% of this is at fixed rates, he says, while the company sits on €5 billion of cash. The next big repayment is not until 2014.

When Mr. Frérot took over as chief executive officer a year ago—from Henri Proglio, who had led the company since its spin-off—and as chairman a month ago, he said the idea of pursuing growth over paying down debt was still valid. But now he admits cash flows are "insufficient." As a result, the group has decided to divest parts of its business seen as non-core, or which don’t deliver enough cash flow. While Mr. Frérot declined to name them, he said they had been identified and represent around 15% of Veolia’s total capital employed. Since this stands at €25 billion, the possible sell-offs would be worth around €4 billion, he said.

The divestment process will start this year and allow the group to increase investment in the more sophisticated businesses that are likely to prove more profitable. The divestiture program overlaps another in place to divest around €3 billion of assets over the 2009-2011 period which Mr. Frérot says is already being implemented. Total divestment is expected to be around €6 billion.

Meanwhile, the company relentlessly seeks opportunities. For example, industries are now seeking solutions to treat their own water supplies. Veolia recently set up a plant within steel giant ArcelorMittal’s compound in Sao Francisco do Sul, in Brazil, to treat highly polluted waters on the spot.

As for waste, landfill—digging holes and burying garbage—is about to become a thing of the past, Mr. Frérot says, citing the example of the U.K. which has banned such dumps from 2020. Already, big cities have no room, so waste is now burnt, the heat used either to produce energy for local use or to heat housing projects while fumes are strictly filtered so that no particles are released in the air, making the process complex and costly. Then there is recycling which is booming, but has yet to become profitable—recycled materials are still more expensive than raw materials, thus limiting their market, Mr. Frérot says.

"These new needs require complex processes and Veolia Environnement has developed them," Mr. Frérot said.

An engineer at heart, Mr. Frérot attended France’s top engineering school Polytechnique, completing his education at the Ponts et Chaussées engineer school. Most of his professional life has been spent at Veolia but his guiding principles date to his youth, when his father, a general practitioner, insisted that only tap water would be drunk at home. Nowadays, even in the poshest Parisian restaurants, Mr. Frérot orders a carafe of water alongside the finest bottles of wine.