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Dow Jones International News
The Skeptic: Suez's Water Ambitions Shrink Some More
By Matthew Curtin
January 14, 2004
PARIS (Dow Jones)--Suez (SZE) billed its $4-billion Puerto Rico contract as the biggest of its kind, but the Franco-Belgian company has now quit less than two years after the deal was signed.
Investor reaction has been less than enthusiastic, even though the move adds credibility to Suez's more disciplined approach to its investments.
The move also underscores Suez's likely increasing reallocation of resources to its energy activities - from electricity supply in Europe to delivering LNG to North America - where many expect the company's best chances of growth to come from in the years ahead.
The reason for the mixed market reaction could stem from the realization of just how hasty a retreat Suez is beating from its goal of being a global provider of water services, perhaps raising more doubts about the wisdom of its persistence with a multi-utilities approach.
Suez has implicitly acknowledged that its rush into emerging markets in the late 1990s and early 2000s was foolhardy, as it racked up debt and found itself lumbered with uneconomic contracts from Buenos Aires to Manila from which it is trying to extract itself.
But remember that Suez saw the Puerto Rico contract as part of its plan to entrench itself in the North American market, a goal that has proved short-lived with the cancellation of its contract in Atlanta, a decision to pass up the chance of a big New Orleans contract, and now Puerto Rico. Suez's withdrawal from that region parallels its exit from the U.K. water sector.
The Puerto Rico case follows the familiar pattern of other water contracts that have been torn up. The local authorities claim Suez failed to live up to all its obligations. In turn, the company says those obligations were impossible to respect because the condition of the water infrastructure was significantly poorer than it had been led to believe when the contract was signed.
Suez and the Puerto Rico authorities may be glad to be rid of each other, but for those without access to clean water in the territory or worried about the environment, there's little to shout about. Costs of upgrading the water and waste-treatment infrastructure are sure only to increase.
Of course, Suez will continue to make the most out of existing water and waste-management contracts through good cost control and push for more industrial business. But it seems to have reached an impasse on how to grow its municipal business, despite the financial and political pressure on municipalities around the globe to improve the quality and quantity of water piped to their residents.