* Paris's move to take back water supplies inspires others
* Veolia, Suez margins fall as towns negotiate discounts
* EU anti-privatisation trend pushes water firms abroad
* Private water firms grow quickly in developing countries
By Geert De Clercq
PARIS, July 8 Nearly five years after Paris took
the management of its water supply back into its own hands, the
move is inspiring other cities at home and abroad and hurting
profits at private water firms Veolia and Suez Environnement.
In 2008, socialist mayor Bertrand Delanoe ended the
contracts with the two firms that had operated Paris water
distribution systems since 1985 - Veolia on the right
bank of the city and Suez on the left bank.
Publicly owned Eau de Paris, which took over from 2010, has
since become a model for a string of French and foreign cities
and a threat civic leaders now use to force down prices.
That is posing a big challenge to Suez and Veolia. While
they have responded by focusing more on their waste and energy
activities and looking for industrial clients, they still rely
heavily on water. In 2013, water accounted for about 45 percent
of Veolia's 22 billion euros ($30 billion) of revenue.
"The success of the Paris remunicipalisation, our ability to
make profits and lower prices, has convinced many other cities,
whatever their political colour, that public water is an
option," Celia Blauel, new head of Eau de Paris, told Reuters.
Since the move by Paris, with its population of more than 2
million, other French towns with a combined population of about
1.4 million people - including Rouen, Saint Malo, Brest and Nice
- have also decided to go back to public water management,
according to EU public water lobby Aqua Publica Europea.
The group expects more authorities representing a combined
population of 1.9 million - including Bordeaux, Rennes and
Montpellier - will follow suit between 2015 and 2018.
Data from public services group FNCCR show that in 2011,
public operators' share of drinking water management in France
rose to 39 percent from just under 30 percent in 2004, and their
share of water purification to 58 percent from about 45 percent.
The move coincided with a string of socialist victories in
local elections. That trend turned in March, when the Socialists
won just 38 percent in municipal elections and more than 140
towns swung to the right.
Jean-Raphael Bert, a consultant who helps towns switch from
private to public suppliers, said it was too soon to say whether
the new political climate would affect water policy.
"The new mayors have not thought this through yet," he said.
But an October 2013 study of French water prices by consumer
group UFC Que Choisir suggests local leaders may find it hard to
resist more public ownership of water supplies. It found that
for French cities of more than 100,000 people, those with the
cheapest water rates were nearly all run by public bodies, while
those with the most expensive were mainly run by Veolia or Suez.
While Veolia, Suez and smaller peers such as Saur still
control some 60 percent of France's water market, the trend for
cities to retake control has eaten into their margins and pushed
them into looking for new water markets abroad and selling waste
services for industrial clients.
"The Paris remunicipalisation decision has done a lot of
damage to our profession," Veolia chief executive Antoine Frerot
told Reuters at a conference last week.
He said that while the number of cities that had moved to
public water suppliers had been relatively limited, mayors had
used the threat of it to negotiate lower prices and shorten
Frerot said profit margins in the French water business had
fallen some 20 percent, but added new contracts - while shorter
at around 10 years from 25 years or more before - were still
enough for firms to cut costs and gradually restore margins.
Private water firms have had a dominant role in France for
more than a century and in England and Wales since the 1989
Thatcher privatisations. Private utilities also have significant
market shares in Spain, Italy and Denmark, but attempts to
privatise water elsewhere have met major resistance and support
for public ownership appears to be growing across Europe.
Italians rejected further water privatisation in a 2011
referendum, while Berlin retook public control of its water late
2013, buying back stakes in Berlinwasser from Veolia and utility
RWE. In May, a court blocked plans to privatise Athens
Water on health grounds.
And in a campaign that made the first successful use of the
European Citizens' Initiative - a 2012 addition to EU treaties
aimed at boosting direct democracy - the Right2Water petition
organised by public water unions gathered 1.9 million signatures
against water privatisation.
As a result, the European Commission said in March it would
remain neutral on national decisions about ownership of water.
"Private firms cannot manage a common good like water in the
public interest," said Eau de Paris chief Blauel.
Stymied in Europe and with only about 10 percent of the U.S.
water market open to private utilities, Veolia and Suez have
turned to emerging markets such as China, India, Latin America
and the Middle East.
Veolia and Suez have become the world's largest private
international water and wastewater firms, serving populations of
124 million and 118 million respectively, of which 80 to 90
percent are abroad, according to Global Water Intelligence.
Their competitors are smaller and less international:
Spain's FCC Aqualia serves 23 million people, of which
44 percent are abroad; Italy's ACEA 18 million with 35 percent
abroad. RWE, Britain's Severn Trent and Saur also serve
more than 10 million people, with about 40 percent abroad.
However, they worry that even cities in emerging markets
might start to question private ownership of water supplies.
Several non-governmental organisations (NGOs) such as
Corporate Accountability International campaign against water
privatisation in developing countries, and particularly target
the Public-Private Partnerships that the World Bank promotes to
increase access to clean drinking water.
NGO Transnational Institute's remunicipalisation tracker
(www.remunicipalisation.org) lists several developing countries
where water has been brought back into public hands or where
such campaigns are ongoing, and cites Ghana as an example of
where a privatisation failed and water is back in state control.
Last month, local authorities in Morocco blocked a deal by
Veolia to sell its local water, wastewater and electricity
businesses due to a dispute over investment, and said one option
was for them to take back control of the unit.
While NGOs and some political opposition have done little to
slow the fast growth of private water firms in developing
countries, Paris's shift back to public water ownership has
caused a lasting image problem, according to Veolia's Frerot.
"Whenever I visited a prospect around the world, and it must
be the same for our peer (Suez), they would ask me why they
would do business with me if even the French capital has no
confidence in the French water firms," he said.
($1 = 0.7331 Euros)
(Editing by Andrew Callus and Mark Potter)