The interest of private equity (PE) funds and other investors has continuously been on the rise in the water sector over the past few years, though, it still can’t be said that the flood gates have been opened up in the sector. Earlier, for many years it was only the Government which was ‘investing’ in the sector in its sovereign capacity.
It’s been a slower process and the amounts invested by PEs are not as large when compared to other sectors like power, IT & ITES or education, but there have been constant investments in recent times which have gone a long way in bolstering the faith of investors in this sector.
The core difference in the investment philosophy, and hence how these investments have been handled so far, could be said to be the focus of PE funds primarily on an exit horizon of 4-7 years and a definite IRR goal as opposed to the Government, which acts merely in its sovereign capacity and does not focus on profits.
Here it may be ideal to mention that the Public Private Partnership (PPP) model, where private investments have started flowing into services which were earlier the sole domain of the state, has been trudging along well, though again not a runaway success in this sector yet.
A few examples are (i) Jindal Water Infrastructure Limited working on a project relating to setting up, maintaining a sewage treatment plant and supply of treated water to industries in Bhavnagar, Gujarat costing approximately $18.8 million on a BOOT basis for a period of 25 years, and (ii) Konark Water Infra Projects Private Limited (which is a joint venture of VA Tech Wabag Limited, which has recently attracted PE investment, and Konark Infrastructure Limited) being commissioned a BOOT project for planning, construction, and operational management of the Ulhasnagar drinking water treatment plant of a value of approximately Euros 50 million by Ulhasnagar Municipal Corporation.
Within the water sector, which comprises of mass water supply/distribution, water and wastewater treatment, desalination, etc., PE and other investors have been known to ideally invest in segments where private players have already entered and have gained some traction over a period of time and more specifically in companies in the EPC (engineering, procurement and construction services) space.
Companies in the water sector are also keen on raising funds from PE and other investors to meet their capital requirements and are seeing this as a viable alternative to other avenues of raising funds in the recent years. The following examples would provide some sense of PE investments and exits in this sector in recent past:
● In 2011, Aditya Birla Capital Advisors invested about $9 million for a minority stake in New Delhi-based SMS Paryavaran Ltd. involved in undertaking turnkey projects in water transmission, treatment, storage, distribution, sewerage, and effluent collection,
● In the same year, Saisudhir Infrastructures, an EPC player, raised over $23 million in its second round of funding from US based Global Environment Fund, a fund dedicated to clean technology, emerging markets, health care services and sustainable forestry,
● During 2011, Olympus Capital Holdings Asia, a leading venture fund which also focuses on companies involved in environmental services, acquired a minority stake in Vishwa Infrastructures and Services, a company providing water management infrastructure in urban as well as rural areas, from Axis Infrastructure Fund 1 for a consideration of $50 million.
● Axis had invested $15 million in 2008 and hence got a more than three times return to its investment. Vishwa had also received funding of about $22 million earlier from a PE fund, New Enterprise Associates in 2011.
● Last year, the Capital Group, one of the leading global privately-owned investment management companies, acquired about 10 per cent stake in VA Tech Wabag, a leading engineering services company focusing on water and wastewater treatment in a secondary transaction wherein it bought-out ICICI Ventures’ stake for about $35 million.
● This, together with earlier exits gave ICICI Ventures approximately 7-8 times return on their investment in about 5 years. In the same year itself, ICICI Ventures completely exited VA Tech Wabag by selling its remaining 4.65 per cent stake to Japan’s Sumitomo Corporation for about $15.8 million, giving it a 10 times return on its investment.
But, at the same time, there are a few factors that make investing in the water sector not so palatable, or rather a daunting exercise for many PE players.
The first is the clear absence of a good business model, wherein the capital cost and the recurring operating costs are recovered within a reasonable time-frame. Then, there is the requirement of huge capital investments in infrastructure.
Thirdly, there is excessive political interference, especially in the areas of tariff regulation – which in itself is quite labyrinthine in terms of factors affecting its determination, leading to uncertainty and low margins.
Fourthly, excessive presence of non-revenue water, which is the water that is produced but ‘lost’ before reaching the consumer due to reasons like metering fault or poor infrastructure leading to leakages and non-detection of the same.
Fifthly, the inability of local bodies to generate a sturdy internal revenue base due to disassociation between the method of functioning of their officials and the mode of execution favoured by PE funds.
And, lastly, the main aim of a PE fund being to garner profits as opposed to a local body, whose primary aim and ethos are to provide a public service leading to misunderstandings, among others.
However, despite the issues and problems plaguing this sector, the recent investments and good returns that PE funds have received should be a good indicator about the massive potential in the sector.
The overarching focus of the Government on development of infrastructure, a robust economy fuelled by internal consumption rather than being dependent on an export oriented model and the fact that investments in other ‘sought after’ sectors may reach a saturation point at some point in time leading to fewer opportunities, are a couple of factors which go on to showcase the glimmer and bright future of this sector further.