Business Weekly - Cambridge, UK

In the space of two months, the company has announced its arrival in the global elite, winning the biggest water contract in the world this year - to supply water for China’s capital Beijing - and perhaps more surprisingly, announced its bid for a London Underground management contract.

As chief executive Chris Mellor explains, the announcements merely bring into focus an on-going process of modernisation, expansion and diversification that can be traced back to privatisation in 1989.

He said: “Anglian Water was one of the 10 water and waste water companies to be privatised in 1989 - the biggest geographically, covering a fifth of the area of England and Wales, but on most other parameters the fourth biggest company.

“Our first priority, from the very beginning was to make the water business as good as it could possibly be. In the East Anglian region over the last 10 years we’ve invested about £3 billion pounds in infrastructure. The current programme is huge - we invest about £300 million pounds a year, including £6m in R & D.”

This level of investment is key to Anglian Water’s ascent to the top of OFWAT’s service performance and efficiency tables, with the lowest leakage, the best bathing water compliance record, and an outstanding record in customer service.

Recent history shows that it does not take long for an uncompetitive or poorly adapted English water company to become a focused and forward-looking foreign-owned water company. Of the 10 companies originally privatised in 1989, five are now owned by larger French, German or American companies.

Government monopoly laws mean that while a regional water company has little to fear from domestic competitors, it is not possible to increase home market share or reap the benefits of economies of scale, so a foreign takeover is always a real possibility.

Mellor believes these forces have been instrumental in shaping Anglian Water’s international growth and ‘re-invention’ strategy. With the threat of foreign takeover ever present, and pressure to show returns for shareholders, it was seen as imperative to explore every avenue of expansion.

Mellor said: “From a shareholder’s perspective, the returns available from a water company are very low, so all companies are seeking to find ways to increase those returns in some other way. There are many equity investors who would like to get out of owning water shares.”

If a need for ‘insulation’ against foreign takeover provided the impetus for foreign expansion, Mellor believes that the quality of its domestic product provided Anglian Water with the springboard to take its expertise abroad.

He said: “We see our East Anglian water operation as very important. We view it as a shop window for our operation, and also a platform for growth overseas. For the first six or seven years we were a water company in East Anglia, as our name suggests, but since then we have strived to grow our business overseas.

“Last year was a watershed for us - for the first time we supplied more customers outside the UK than we did inside it. We supply roughly 2.1 million households, which is some 5 million people in East Anglia, but we now supply 6 million people overseas - about 1.5m in Chile, about 1.2m in the Czech Republic and the others mainly in countries like China, Thailand, Ireland, Norway and New Zealand.

All that has been achieved in about five years.”

Mellor said research was essential when moving into any new market. “We always have partners in overseas markets. You need someone that understands local politics, regulation and the law. The biggest problem is that the water industry varies so much from market to market. In Chile for example, the water industry was privatised along the same lines as the UK industry, which meant that we were able to buy assets.

“Whereas in China, the privatisation process is still in its infancy. Most of the water and waste water infrastructure is run very inefficiently by local authorities. But they are not yet ready for privatisation. You tend to get BOOT schemes (build own operate transfer).

“In the case of Beijing, a $200m scheme, we will build it, finance it operate it and all the Beijing municipality does is pay a tarrif to us per cubic metre of water. We make our profit from financing, building and operating it within that tarrif that we have specified.#

“There are parts of the world we just won’t go to, simply because we don’t want to put our people at risk. You must have a system that is not corrupt, and you must be able to enforce your property rights. That rules out most of Africa and India.

“We have ruled out North America because its just too fragmented and expensive, so we concentrate on South America. North-Eastern Europe, including the Czech Republic, and parts of Asia are also big growth markets for us. You have to focus - you can’t be everywhere at once. Crucially though, you must have good partners, and you have to understand the politics, the regulation, the legal system and sometimes the military system.”

For Mellor, though, the key development over recent years has been its branching out into infrastructure management. While it could be viewed as a move away from its core competencies of water and waste water management, he stresses that it is a logical step in the company’s quest to increase shareholder value.

Anglian Water is still a crucial part of the company, but it is now one of the many divisions of Anglian Water Group. Mellor said:“Obviously people see Anglian Water as purely a water company, and might think what do a water company know about running a railway for example? But actually people who understand what it takes to run a set of assets realise that a network is a network is a network.

“It doesn’t matter if its a network of pipes, roads, telecoms cables, gas mains, the same sort of engineering and sophisticated IT skills are transferable across industries. We’ve no interest in trying to run trains or sell telephones or retail electricity or gas, we don’t know anything about that. But for the people that do, increasingly they outsource the operation to somebody else and increasingly AWG will be that somebody else.”

The acquisition of Morrison last September was proof that AWG’s move into network management was more than an amusing sideline. Mellor believes the move underpinned the company’s activities in this area. He said: “Morrison are an Edinburgh-based construction and asset management company, running a lot of facilities for water companies and telecoms companies and has all sorts of involvement in PFI (private finance initiative) projects.

“Our vision for bringing this business together is to create a whole life infrastructure management company. It doesn’t matter if you’re a water company, an electricity company, London Underground, Railtrack, a hospital trust or a school: if you’re looking to build an asset and have someone operate it for you, AWG can do that.

“That allows the rail company to concentrate on running the trains, while AWG maintains and runs the network, and also finances it - the whole shooting match.”

Employee numbers in Anglian Water have gone down from around 5500 to 4000 in the past 10 years, but the total number of people employed in the group has risen to about 11,500.

Group turnover is about £1.5 billion, rising from £300m in 1990. AWG’s infrastructure management businesses generated £10m profit on a turnover of £100m in the last year, having been grown from scratch four years ago.