Metito bets big on emerging markets

| 07/02/2012 | 0 Comments

Rami Ghandour, Executive Director, Metito Utilities on expanding the scope of the company’s concession business in China, tapping into opportunities in Africa and India (with South America in sights)

 Last October, Metito announced the strategic buy-out of Berlinwasser International’s 49% minority stake in Berlinwasser China Holdings (BCH). BCH, a Hong Kong-based company, was formed in 2008 as a joint venture between Metito Utilities Ltd (MUL) and Berlinwasser to expand on the successful operations of two wastewater concessions already held and operated by the latter in China since 1999. Metito Berlinwasser, a 60:40 JV established in the same year to focus on the concessions in Middle East and North Africa (MENA) water sector will continue as before, with its scope expanded to include India. Currently, this JV’s portfolio comprises of an O&M and two consultancy contracts.

Commenting on the BCH buy-out, Rami Ghandour, Executive Director, Metito Utilities, said: “As a global emerging markets company, it is important for us to diversify and grow our exposure to fast growing markets like China. In the past 20 years, China’s lowest quarter on quarter growth rate was 6.5%. Even in a worst-case scenario, the economy is expected to grow by seven per cent.” BCH currently owns and/or operates five wastewater concession agreements and one O&M contract China. Together with expansions to existing plants, the concessions have a current treatment capacity over 1.2 million m3/day and provide services to over 5.3 million people, a significant increase compared to the 2008 figures of 630,000 m3/day and 2.3 million people. The duration of the concessions, largely concentrated in the municipal sector, ranges between 25-30 years.

MUL intends to accelerate its growth in the country by actively pursuing more wastewater projects and expanding BCH’s scope to include industrial water, desalination, sludge and solid waste. MUL has advanced plans to develop three new projects. Additionally, it is also looking at acquisitions to grow its wastewater concession portfolio, and is already in the process of doing due diligence on two concession companies. The news of the buy-out comes one year on from the issue of preference shares in MUL which was structured by International Finance Corporation (IFC) and NBK Capital Mezzanine Fund to support MUL’s activities in the MENA and China. The funds remaining from this investment, plus additional debt finance from HSBC, were used to conclude the strategic buy-out.

Commenting on China’s wastewater market, Ghandour said that a significant amount of the country’s wastewater is discharged into waterways without treatment. He continued, “With pollution of the country’s water resources becoming a major issue, Beijing has issued a directive to clean up the rivers. As the economy continues to grow and living standards improve, people are also becoming less accepting of an environment where such things are not taken care of.”

There is a very strong push to increase the quantity of sewage treated as well as the quality of treatment, which has led to a growing demand for more sophisticated treatment processes. “Here we are building with an eye on future demand, but in China, existing demand itself is very high,” said Ghandour.

China is also predicted to become the third largest desalination market in the world. “The Greater Beijing Region in the North is among the most densely populated areas in China, but the water-rich areas are in the south,” said Ghandour. “They have only two options – first, bring water from the south to the north via huge canals, which will take time due to the scale and second, set up desalination plants, where we can contribute based on our expertise and experience in the Middle East.”

Ghandour attributes the success of Public Private Partnership (PPP) model in China’s wastewater sector to the sheer pace of decision-making. He said: “There is already a need, it is immediate and big; so they cannot afford to sit and deliberate for long. They have developed a very efficient system which has served them well for the past 12 years.” In China, wastewater projects come to market with one month to six week bidding period. Within 48 hours of the tenders being opened, the names of the preferred bidders are made public, and within one to two weeks, the initial concession agreement is signed. In contrast, for the Muharraq project in Bahrain, from initial concept to signing of the concession agreement took three years. “The process for getting a project financed is much simpler in China,” said Ghandour. “Here, you easily spend a million dollars on the financing documentation alone.” He feels that in the Middle East, the system is mostly structured for large scale water and power projects that cost billions. “When you try to apply the same system to a $30 million project, you will effectively cripple that project. Costs of one or two million dollars for a two billion dollar project is not a big deal but could seal the fate of a $30 million project.”

Post-acquisition, Berlinwasser will continue to provide technical support and services to BCH and all the direct staff will be retained. The majority of the management team – comprising of Chinese who are German citizens or German educated – have been with BCH from the start. Ghandour said: “They are top notch professionals who have come through the Berlinwasser system. It is extremely difficult to find people in China who can work to very professional international standards, yet blend in with the local culture and ways of doing things. We consider ourselves very lucky in that regard.”

Emerging market play

He is also optimistic about taking the China story to other emerging markets, pointing out that while the company’s roots, history and home market is the Middle East, it has been operating in 22 countries. Metito is looking to boost its presence in India and SE Asia. The Libya team, which re-located to a bigger office in Algeria following the break out of hostilities, is addressing the French speaking markets in North Africa, and has bagged projects in Mauritania and Mali. The plan is to expand further into North and South Africa, and eventually, move into South America as well. Ghandour believes that Metito is the only company in the industry with such a global emerging market spread. “You have companies who are strong in one area or region; but in terms of global play, it is still very limited,” he claimed.

Central to the strategy is combining global expertise with local experience, which Ghandour feels is a strong differentiator for his company. He reeled off a few statistics: “In Indonesia, we have 200 people and they are all Indonesians; we have 200 in China and they are all Chinese; In Egypt, our 700-strong workforce is Egyptian. We prefer to recruit, train and develop people locally.”

Such an approach is also effective in communicating the message of long-term commitment to the market. For example, MUL entered Indonesia in the early 90s before the Asian crisis. When the crisis started in the late ‘90s, others left, but MUL stayed. As a result, the company was able to establish itself and grow as the market responded positively to its commitment. He is also proud of the fact that Metito has always empowered its local management. “We are in markets that move quickly. So a local team capable of taking action and moving quickly is a must. I believe that flexibility and risk mitigation must go hand in hand.” Ghandour believes that geographical diversification helps Metito to maintain overall growth even for a company of its size. “Markets go up and down. We had significant business in Iraq before the war and in Libya before the uprising. The earliest hit we took was in the 1970s when the war in Beirut forced us to close our operations, forcing us to start from scratch. We took these hits, survived and continued to grow.”

In the Middle East, Ghandour is hopeful that Iraq’s water sector is getting to a stage where it will take off again. The company had been serving Iraq on a limited scale so far due to the security situation. In Saudi Arabia, which he describes as the most competitive market in the region today, the company is focussing on niche areas like industrial water where quality is paramount over price. MUL continues to tap into opportunities in Qatar and the UAE. In Egypt, where MUL very is active, it is business as usual. “In Egypt, we continue to get small projects. However, decisions on large PPP projects may happen only after a stable government is formed,” he said.

India in sight

Metito currently has three sets of operations in India – an engineering and design centre in Pune with 100 engineers, a finance support group in Chennai and the global centre for its chlorination business in Mumbai. Barring the chlorination business, the company has historically never served the domestic Indian market, something that Ghandour hopes to change. He said, “While we have a huge Indian talent pool, their orientation has always been international, which isn’t going to be competitive locally. We plan to build up a separate team in with the same set up to serve the Indian market.”

Metito plans to leverage the penetration and branding achieved by its chlorination business in India’s municipal water sector. And in a break with convention, Ghandour doesn’t rule out taking the Engineering, Procurement & Construction (EPC) route to serve the concession business. “There aren’t too many concession companies In India as EPC was the norm in the water sector. But in China, the acquisitions we are looking at will be concession-based, not EPC,” he clarified.

Ghandour observed that decision making in India is decidedly slower as the process is decentralised at each state levels, while from a regulatory point of view, India is behind China by 8-10 years. “However, the first few projects have been awarded, and there is lot of ‘lessons learned’ taking place. It is important for us to be in the market now rather than 5-10 years later,” he said. While the company doesn’t have a pan-India partner yet, it is scouting for “right opportunities and also acquisitions.”

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Category: Business & Finance, Features, Interview

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