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A stronger U.S. economic rebound will fuel a worldwide recovery: What is needed to make it happen?

Gerard Mestrallet, chairman & CEO of Suez, a $42 billion-a-year worldwide conglomerate with 190,000 employees in 130 countries--including its Ondeo division that will now manage Puerto Rico’s water system--shares his viewpoint.


July 25, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Ondeo/Prasa contract among 'toughest': "We feel committed to make the contract a success…. Puerto Rico’s size and visibility will make the contract a reference all over the world," says Mestrallet

Suez chairman & CEO Gerard Mestrallet is generally confident about the U.S. economy.

When the market reopened after the weeklong shut down following 9/11, his company was the first new listing on the New York Stock Exchange.

"We had prepared for a Sept. 18 listing," Mestrallet recalls. "When the tragic event happened, we decided to postpone everything. When Wall Street reopened on Monday Sept. 17, the market was down 7% or 8%. So [NYSE chairman] Victor Grasso called me to ask if I would agree to go ahead and be listed the following day, Tuesday, Sept. 18, as originally scheduled.

‘For us, it would send a powerful message of confidence’ he told me. I said immediately ‘yes, of course,’" recalled Mestrallet.

Now, 10 months later, the top boss at Suez–the $42 billion-a-year Paris-based water, energy, and waste services conglomerate owner of Ondeo, the new operator of Puerto Rico’s water system–says the world economic outlook is somewhat cloudy. But one thing he and his international blue-chip board of directors at Suez are certain of is that only a strong U.S.-led economic rebound can propel the other economies of the world to their own recoveries.

In an exclusive CARIBBEAN BUSINESS interview during his recent whirlwind two-day visit to the island as Ondeo begins its 10-year contract to manage and operate the Puerto Rico Aqueduct & Sewer Authority (Prasa), Mestrallet explained why.

"The recession in the U.S. is over, clearly. The economy is definitely in a stage of recovery. But it’s not a strong recovery. Without the ongoing stock market crisis in this second part of 2002 and the beginning of 2003 we could have seen a stronger recovery in the U.S. and, therefore, the recovery expanding to Europe and to the rest of the world later on," said Mestrallet. "Right now, Japan remains in a very lagging situation. In southeast Asia the rebound is very small today. The only exception is the Chinese economy which is booming and remains very strong."

"I’m not an economist, I’m an industrialist," he underscored modestly. "But we know our markets. And what we have seen in the U.S., up to now, has been a small recovery. But no one can know if this will continue, because no one knows exactly what will be the impact of the stock market crisis.

"That’s why the possible landscape that we saw three months ago doesn’t apply anymore. And frankly I think that no one knows what will be the consequences of the crisis in the stock market. Because investor confidence in the stock market has been reduced drastically this can have an effect on the demand [consumption] and even on industrial investment," said Mestrallet, who last month was chosen by "Business Week" magazine as one of Europe’s 50 top business leaders on the vanguard of change.

According to Mestrallet, other elements that complicate the scenario and further erode investment confidence are the higher cost of capital and the tougher access to the loan market. "I’m a member of Morgan Stanley’s International Advisory Board, and have been presented with the outlook of that investment firm’s top economists. In their view, the rebound was supposed to come from industrial investment. But today, I don’t see how the investment-heavy industries could really attract the investment, given the cost of capital, because the stock markets are down and the debt market is also very tough, very difficult now. It’s not that there’s a credit crunch today, rather a difficulty in accessing the loan market."

Mestrallet acknowledged that lower interest rates mean the cost of money today is cheaper, but borrowers face more stringent criteria from lenders. "You’ve seen credit rating agencies downgrading lots of big companies. And therefore the movement today among companies is to reduce debt, rather than getting further into debt, in order to avoid downgrading. That means it’s not the best situation to facilitate investment and therefore to fuel the economic recovery," concluded Mestrallet.

A man in Mestrallet’s position has more than just the benefit of top U.S. economists’ advice. Suez’s board of directors is a who’s who of corporate Europe and America. Among the company’s high profile board members are Felix G. Rohatyn, the respected New York financier who also served as U.S. ambassador to France; Jacques Lagarde, executive vice president of The Gillette Co.; chairman of the powerful ThyssenKrupp conglomerate, Claudio L. Graf Zichy-Thyssen, and the chairman of the European Round Table of Industrialists, Gerhard Cromme.

Fresh from his board of directors meeting in Paris the previous day, Mestrallet confided European business leaders are not optimistic about the world economic outlook. "We have a very international board and we’re not so optimistic about the world economy. Many things will depend on the U.S. economy. The rebound, the recovery will come from the U.S. economy. There will be no recovery of the world economy without a definite sign of a rebound of the U.S. economy.

"Of course, this is a very general opinion of the state of the world economy," Mestrallet said, emphasizing that Suez and its various companies are less affected than others by the ongoing economic uncertainty. "By the very nature of our businesses, we have long-term contracts to provide and distribute services that are essential for life, essential for people."

Suez, the Paris-based conglomerate which last year had $2.1 billion in net income on $42.4 billion in sales, is the world leader in water services, among the top 10 worldwide in energy, and among the top four in waste services. As far as revenue is concerned, its No.1 moneymaker is energy followed by water. The company has 190,000 employees in more than 130 countries.

A new way to account for business

Mestrallet said that the recent rash of accounting scandals in publicly held U.S. companies has been a detrimental factor which has further eroded investors confidence in the capital markets. "It is a very difficult situation. It is very important to restore the confidence of the market and of individual investors in the accounting methods used as well as in the honesty of CEOs and board members," Mestrallet said. He stressed that most CEOs and board members are honest people.

"I’m absolutely convinced that most, the very vast majority of the chief executives in the U.S. are honest. But confidence is being undermined," he said, adding that Europe has not experienced any problems in the accounting audits of its publicly held companies and therefore has not experienced investors’ mistrust.

Mestrallet said that after President George W. Bush’s speech on Wall Street two weeks ago, and with the ensuing public discussion of the accounting scandals, there is no doubt there will be more rules from the Securities & Exchange Commission and generally more government regulations and transparency in accounting.

But there’s still one difficult item to deal with, in Mestrallet’s opinion. And it’s the question of different prevailing accounting standards. "How will it be possible to restore confidence in corporate accounting," he asked, "if there are two standards, one in the U.S. [Generally Accepted Accounting Principles] and one in Europe [International Accounting Standards]? It will be impossible to recover confidence if the same company has two sets of financial records in two different accounting standards–sometimes showing very different results, very different balance sheets. Well, which one is the good one?," he asked rhetorically.

In Mestrallet’s opinion, the governments of the U.S. and of the European Commission must get together to create one single accounting standard. "I think they’ll have to merge. Simply. And they both will have to make movement in the direction of the other. It will be crazy of either one to stick to their principles and to say ‘my principles are better and, therefore, I’m not changing.’ We need one set of accounting standards in the world," he concluded.

Mestrallet admitted that being a CEO is more difficult today than a year or two ago. For him, the key is to establish a strategy that is easy to explain to the team, the clients, and the market and to implement it. That’s what he does at Suez.

"Focus on the best possible team and develop a good, simple strategy with strong values," Mestrallet said. If values such as ethics, team spirit, sustainable development, social corporate responsibility, attention to client and a partnership philosophy are adopted, combined with financial solidity, they will ensure long-term commitments.

"Europe may represent lots of opportunities for U.S. corporations," Mestrallet said. "They are welcome, anywhere, specially in France. Our people like Americans."

Talking about the future of the European economic integration process, Mestrallet, who sits on the board of many important companies and institutions in Europe, said the region made an important step at the beginning of this year with the adoption of the single currency, the Euro. Now Europe has to move in two directions, he said. One is to improve the way European government institutions are working--by adopting, for example, a majority vote rule instead of the unanimity now required. The other is to expand the geographic reach of the Euro from the current 15 countries to 25, mainly in Central and Eastern Europe.

The largest operation & maintenance contract is Puerto Rico

The 10-year, $4 billion contract signed by the government of Puerto Rico with Ondeo is the largest operation & maintenance (O&M) contract ever signed in the world. This fact alone ensures, not only that Ondeo de Puerto Rico will do its utmost to comply with the contract, but that it will have the full backing of its conglomerate, including Suez Chairman Mestrallet, who plans to visit the island regularly.

"We feel committed to make the contract a success for that reason. Puerto Rico’s size and visibility will make the contract a reference all over the world," Mestrallet said, adding that North America is a priority for Suez, where it has invested considerably during recent years.

Although the company has larger water management contracts in terms of the people served, the fact that the Puerto Rico contract is for 10 years and that the management covers both drinking and waste water, adds to its importance. "We prefer to have full responsibiliy for both water production and waste water because this permits us to create synergies among our different companies,"Mestrallet said.

The company’s concession contract for Buenos Aires serves a larger population. It had been serving a quarter of Mexico City’s population, and this past week took over another quarter from Enron, for a total of half of the Mexican nation’s capital. However that contract is more for technical assistance, so it does not have the magnitude or complexity of managing Prasa.

Mestrallet said Puerto Rico’s contract is also among the toughest in the world. "If we don’t meet the targets we’ll have to pay stiff penalties," he said.

The fact that the contract can be extended for another 10 years, for a total of 20, also adds to its attractiveness, Mestrallet said. The fact that the government can take over the agency in five years, without giving any explanation, is not a deterrent for the French company.

"We will do our best to satisfy the government and our customers. Everywhere we operate, we have in mind the satisfaction of the people," said Mestrallet, adding that ultimately, if the clients are happy, the governments will be also. Currently, the company has 40 people working in Puerto Rico, most of whom speak Spanish and come from Argentina, Morroco, France, and Mexico. The company intends to transfer technology to the island, including training, which will ultimately allow locals to be offered career opportunities outside the country. "We want to be one single family," Mestrallet said.

The fact that it serves from the smallest communities to the largest global capitals, gives the company an edge. The company culture--from its inception when it obtained a contract from the Egyptian government to build and manage the Suez Canal in 1858--is ingrained with the concept of sharing control with governments in managing public property, mostly utilities.

This Caribbean Business article appears courtesy of Casiano Communications.
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