There are global companies in the water business so called water majors. For a long time from the 19th to the 21st century, Veolia Environment , Suez both of France, and Thames Water of the U.K. were the three companies called water majors.

Veolia had 2019 annual sales of approximately 27.1 billion euros (about 3.32 trillion yen), while Suez had approximately 18 billion euros (about 2.21 trillion yen). The two companies have managed the water business in France for over 160 years, and accumulated with their management knowhow and technology, they have dominated the global water business. Since Thames Water recently announced a policy only to focus on its U.K. domestic business, Veolia and Suez became the global water majors. This year, the two companies agreed to a merger, to become a super water major with sales of more than 5 trillion yen.      

And the world’s two giants in the water business are eyeing the water market in Japan.

 “Miyagi Method” Becomes the Foothold

From the eyes of water majors with a 160-year history of repeatedly fighting over water and wastewater markets around the world, Japan’s water business market is a treasure trove.

The reasons are: (1) the massive scale of nation-wide annual water rate income totaling 2.3 trillion yen, (2) national average of water leakage rate is less than 7% (30-40% in Southeast Asia), and less than 3% in Tokyo, and requires very little costs for measures compared to other countries, (3) reflecting the tendency of the Japanese to diligently pay the bill, water bill collection ratio is whopping 99.9%, never seen in other countries. An ideal market quite rare in the world for water utility operators.

When we look at the domestic wastewater business, the roles are rainwater exclusion (public expense funded by taxpayer’s money) and wastewater treatment (private expense).

The total wastewater bill paid annually by businesses and households is approximately 1.5 trillion yen. With a combined operation of both the water supply and wastewater businesses, the size of Japan’s waters supply and wastewater market will be approximately 3.8 trillion yen annually (over 10 billion yen/day). This is a sustainable business that will continue as long as the Japanese people exist. 

We now know Veolia’s approach for entering the Japanese market—by participating in the so-called “Miyagi-style management method.”

In the Miyagi method, Miyagi Prefecture sells its operating rights for water supply, wastewater, and industrial water as a single package to the private sector for 20 years. This is the first such attempt in Japan. With the prefecture’s approximate water served population of 1.89 million and wastewater served population of 730,000, the market size is the largest ever in Japan.

As a system, this method takes the form of a private financing initiative (PFI) concession project. In a concession, the operating rights are sold to the private sector while the ownership of the facilities remains with the public agency, which is the outsourcer. PFI is a method that uses private funds, management, and technology for construction, management, and operations of public facilities.

Currently, Miyagi Prefecture outsources water supply, wastewater treatment, and industrial water management to the private sector. There is little room for new ideas or large cost reductions. This due to “order by specifications” where the local government decides the calculation specifications and quantity. For example, each facility separately purchases equipment and chemicals, and allocates personnel wastefully.

In contrast, the Miyagi method makes good use of private sector’s ingenuity, and is a provision that keeps future water rate hike to a minimum. If you leave it to the local government, they will “order by severe specifications,” but the private sector can streamline by making bulk purchase, using centralized control for analysis and management, and can deploy efficient personnel allocation.

If Miyagi Prefecture continued operations for 20 years under the current framework, the total project cost would be 331.4 billion yen. If it sold the operating rights to the private sector, the estimated reduction amount across the same period is 24.7 billion yen, and the total project cost can be dropped to 306.7 billion yen.

Miyagi Prefecture began public offering of the operating rights in March 2020. Among the three applicant groups, Miyagi selected METAWATER Group as the most preferred bidder. METAWATER is a comprehensive engineering company in the water and environmental field and the largest company in Japan dedicated to water treatment. In the Miyagi concession, their proposal to “reduce costs by roughly 33.7 billion yen” was the determining factor for the selection. Miyagi Prefecture passed and enacted the bill on July 5 at the regular prefecture meeting.

The METAWATER Group comprises 10 companies, including Veolia Jenets (Minato-ku, Tokyo), a Japanese subsidiary of the Veolia Group. Since entering the Japanese market in 2002, Veolia has also affiliated other companies, including Nishihara Environment, Fuji Subsurface Information, Nichijo, Japan Environment Clear, Nihon Josui Kanri, and Ecos Factory by acquisition or capital participation. Please refer to their website.

Meanwhile, Suez has also made a bid for the Miyagi method by exchanging memorandums with Maeda Corporation (general contractor) in Japan. Suez became the next preferred bidder after Veolia.

Sluggish Public-Private Partnership

However, when we look at the overall situation in Japan, public-private partnerships in the field of water and wastewater projects involving transfer of operating rights are inactive.  

In concessions for wastewater projects, the one Hamamatsu City signed in 2017 with Hamamatsu Water Symphony is the only case. Hamamatsu Water Symphony comprises Veolia, JFE Engineering, ORIX, Tokyu Construction, and Suyama Construction. The amount of cost reduction proposed in this concession is 8.6 billion yen (currently under evaluation) over 20 years, and meager in comparison with the Miyagi method.  

The Ministry of Health, Labour and Welfare is urging local governments to strengthen the operation base of their water projects through area expansion and public-private partnerships. Local governments seeking regional partnerships become very attractive targets for water majors.

Currently, 45 prefectures, excluding Tokyo and Kagawa, have established councils on regional partnerships to discuss various forms of collaboration. Just as the plan takes form, it is the standard tactic of water majors to occupy the market by taking advantage of their massive capital.

If local governments and companies in Japan do nothing to streamline water projects, water majors having the edge on operation knowhow can immediately dominate the market using high efficiency and competitive costs as weapons.

Veolia and Suez: Hostile Takeover Takes Sudden Turn to Merger

In October 2020, Veolia suddenly declared a hostile takeover on Suez, taking the bold move to secure the world’s top position. The takeover proposal divided public opinion in France. The supporters led by Prime Minister Jean Castex that welcomes a French company becoming number one in the world, and the opponents led by Minister of Economy and Finance Bruno Le Maire claiming that monopoly of the domestic water business (about 70% within France with the two companies combined) by one company is likely to cause reduced service and rate hikes, engaged in a bitter confrontation, and took the case to the Paris Judicial Court. The merger, including the takeover, was expected to take at least two or three years. But this April, Suez hastily agreed to the merger. The transaction creates the world’s largest water company with a sales-size of 40-45 billion euros (about 5.2-5.85 trillion yen). The Suez Group newly established the “new” Suez, maintaining the brand and activities in the new markets.

Kazunari Yoshimura (Global Water Japan Representative, Technical advisor to the United Nations)