Wall Street’s Rush for Liquid Gold: From Hedge Funds to Public-Utilities Privatization, from Owning Water-Technologies Companies to Buying Water Rights
The Major Players: Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Merrill Lynch, Barclays Bank, The Blackstone Group, Allianz, HSBC Bank, and Many Others
In a January 2009 interview, tycoon and "legendary investor" Jim Rogers told Grace Cheng ("Exclusive Interview with Jim Rogers: Inflation Is Coming") that "Agriculture, water treatment, people who build power generation, people who build infrastructure, tourism" are the sectors in China in which he is looking at as areas of potential investment.
[my emphasis on "water treatment" because it is also the sector in India and elsewhere which many multinational banks, corporations, and magnates are looking at.]
(The information in this article was last updated on October 1, 2008.)
"Water is the oil of the 21st century."
—Andrew Liveris, CEO of DOW Chemical Company (quoted in The Economist magazine, August 21, 2008).
In the past few years, international investment banks and multinational banks have aggressively entered the water sector, and they have amassed “war chests” for their water and infrastructure funds.
These banks and investment funds are aggressively entering the water sector, and they have raised billions of dollars for their water and infrastructure specialty investment funds (i.e., index funds, hedge funds)—and they can recruit more money (in euro, pound sterling, dollar, RMB/yuan, yen, Australian or Canadian dollar, and whatever currency needed) within a short period of time from anywhere in the world, transcending all boundaries (whether national, ideological, political, linguistic, religious). All this water-market reshaping is occurring in the midst of a global frenzy over privatization of public infrastructure—considered to be low-risk investments—such as roads, bridges, tunnels, ports, airports, gas, and water and sewage treatment. Water is one of the critical infrastructures, and Wall Street knows it. For Wall Street and global capital, water is also so much more—it is the new petroleum of this century, an essential commodity to be invested, owned, controlled, and speculated upon to maximize profit.
*** Goldman Sachs has called water “the petroleum for the next century” and those investors who know how to play the infrastructure boom will reap huge rewards, during its annual “Top Five Risks” conference this year. Water is a U.S.$425 billion industry, and a calamitous water shortage could be a more serious threat to humanity in the 21st century than food and energy shortages, according to Goldman Sachs’s conference panel. Goldman Sachs has convened numerous conferences and also published lengthy, insightful analyses of water and other critical sectors (food, energy).
*** UBS Investment Research, a division of Switzerland-based UBS AG, Europe’s largest bank by assets, entitled its 40-page research report, “Q-Series®:Water”—“Water scarcity: The defining crisis of the 21st century?” (October 10, 2006)
*** Credit Suisse, also a Switzerland-based bank, published its report about Credit Suisse Water Index (January 21, 2008) urged investors that “One way to take advantage of this trend is to invest in companies geared to water generation, preservation, infrastructure treatment and desalination. The Index enables investors to participate in the performance of the most attractive companies….” The trend in question, according to Credit Suisse, is the “depletion of freshwater reserves” attributable to “pollution, disappearance of glaciers (the main source of freshwater reserves), and population growth, water is likely to become a scarce resource.”
*** Merrill Lynch (before being bought by Bank of America) issued a 24-page research report titled “Water scarcity; a bigger problem than assumed” (December 6, 2007). ML said that water scarcity is “not limited to arid climates” with both “demand and supply side pressures.”
*** JPMorgan’s Global Equity Research division also published a 60-page report called “Watch water: A guide to evaluating corporate risks in a thirsty world” (April 1, 2008).
***Deutsche Bank AG published a 20-page report called “China’s water crisis” as part of its Deutsche Bank China Expert Series (March 22, 2005).
*** Allianz SE’s Dresdner Bank AG told its investors that “Investments in water offer opportunities: Rising oil prices obscure our view of an even more serious scarcity: water. The global water economy is faced with a multi-billion dollar need for capital expenditure and modernization. Dresdner Bank sees this as offering attractive opportunities for returns for investors with a long-term investment horizon.” (Frankfurt, August 14, 2008)
*** Morgan Stanley in its publication, “Emerging Markets Infrastructure: Just Getting Started” (April 2008) recommends three areas of investment opportunities in water: water utilities, global operators (such as Veolia Environment), and technology companies (such as those that manufacture membranes and chemicals used in water treatment to the water industry).
In the past few years, multinational and Wall Street investment firms and banks have launched water-targeted investment funds. Several well-known specialized water funds include Pictet Water Fund, SAM Sustainable Water Fund, Sarasin Sustainable Water Fund, Swisscanto Equity Fund Water, and Tareno Waterfund. Several structured water products offered by major investment banks include ABN Amro Water Stocks Index Certificate, BKB Water Basket, ZKB Sustainable Basket Water, Wagelin Water Shares Certificate, UBS Water Strategy Certificate, and Certificate on Vontobel Water Index. There are also several water indexes and index funds, as follows:
** Credit Suisse Water Index.
** HSBC Water, Waste, and Pollution Control Index.
** Merrill Lynch China Water Index.
** S&P Global Water Index.
** First Trust ISE Water Index Fund (FIW).
** International Securities Exchange’s ISE-B&S Water Index.
The following is a small sample of other water funds and certificates (not exhaustive of the current range of diverse water products available):
** Allianz RCM Global EcoTrends Fund.
** Allianz RCM Global Water Fund.
** UBS Water Strategy Certificate—it has a managed basket of 25 international stocks.
** Summit Water Equity Fund.
** Maxxwater Global Water Fund.
** Claymore S&P Global Water ETF (CGW).
** Barclays Global Investors’ iShares S&P Global Water.
** Barclays and PDL’s Protected Water Fund based on Barclays World Water Strategy.
** Invesco’s PowerShares Water Resources Portfolio ETF (PHO).
** Invesco’s PowerShares Global Water (PIO.
** Pictet Asset Management’s Pictet Water Fund and Pictet Water Opportunities Fund.
** Canadian Imperial Bank of Commerce’s Water Growth Deposit Notes.
** Criterion Investments Limited’s Criterion Water Infrastructure Fund.
One often-heard reason for the investment banks’ rush to control of water is that “Utilities are viewed as relatively safe assets in an economic downturn so [they] are more isolated than most from the global credit crunch, initially sparked by concerns over U.S. subprime mortgages” (Reuters, October 9, 2007). A London-based analyst at HSBC Securities told Bloomberg News that water is a good investment because “You're buying something that's inflation proof and there's no threat to earnings really. It's very stable and you can sell it any time you want'' (Bloomberg, October 8, 2007).
Multinational Consortiums Buying U.K. Water Utilities: Wall Street Partnered with Other Global Banks and Private Equity in Recent Utility Sales
In the late 1980s, the Thatcher government privatized all 10 water utilities (called unitary regional water authorities, RWAs, which provided drinking water and sewage treatment) in England and Wales. But before the water utilities were privatized, the Thatcher government wrote off these utilities’ debts of more than £5 billion, then gave them £1.6 billion, and finally sold them off at a substantial discount, at 22% off their market value (T. Jenkinson and C. Mayer, 1994). The Water Act created private monopolies by sheltering these utilities from competition via an exclusive 25-year concession for water and sanitation. In addition, utilities were exempted from paying taxes on profits, and a “generous pricing scheme” was established (T. Jenkinson and C. Mayer, 1994; Green, 2000—cited in Socialist Democracy’s publication “The battle against water privatization,” February 2005). This privatization scheme had so many blatant abuses that even the conservative newspaper The Daily Mail cried foul and denounced water privatization in this often-quoted statement: Water privatization is “the greatest act of licensed robbery in our history” (The Daily Mail, November 7, 1994).
These case studies from U.K. water utilities sales are illustrative of what’s to come for the United States and other nations when their local governments and municipalities—under increasing financial strains with shrinking tax bases in the midst of economic and financial chaos—abandon the public-ownership model and allow Wall Street and global investment banks to privatize water utilities and infrastructure.
Five examples of recent takeover by Wall Street and global investment banks partnering with various corporations and institutions across national boundaries are presented here to illustrate this complex network of interlocking global capital seen in the water markets today, as follows:
*** Southern Water sold by Royal Bank of Scotland to JPMorgan, UBS, and partners in October 2007.
*** Kelda (operator of Yorkshire Water) bought by Citigroup, HSBC Bank, Prudential, and partners in November 2007.
*** Thames Water sold by Germany’s RWE to a consortium led by Australia’s largest investment bank Macquarie Bank in October 2006.
*** Anglian Water sold to consortium of Australian and Canadian pension funds, along with U.K. private-equity firm 3i Group in October 2006.
*** South Staffordshire Water sold by Bahrain’s Arcapita Bank to U.S.-based Alinda Capital Partners in October 2007.
(1) JPMorgan Chase and UBS beat out rivals Goldman Sachs and Morgan Stanley to buy U.K.’s water utility Southern Water
One example illustrative of this global corporate stampede to buy water was seen in October 2007 when U.K.’s seventh-largest water utility, Southern Water, which provides water to 2.3 million people and treats sewage for 4.3 million people in southern England (including counties of Kent, Sussex, Hampshire, and the Isle of Wight) by operating 100 water-treatment and 370 sewage-treatment plants, was sold by its owner Royal Bank of Scotland (which acquired its controlling share in 2003 from the French corporation Veolia Environment—formerly Vivendi Environnement). Other U.S.-based hedge funds also owned stakes in this utility along with Royal Bank of Scotland.
The Southern Water sale attracted three groups of bidders: Goldman Sachs, JPMorgan Chase, and Morgan Stanley. The Goldman Sachs Group Inc.’s infrastructure branch partnered with Australia’s infrastructure investor Babcock and Brown Ltd., Germany’s Deutsche Bank’s investment fund RREEF, U.S.’s General Electric (GE), and the British insurance giant Prudential’s M&G unit. Morgan Stanely partnered with Scottish & Southern Energy. But the winning consortium was a group of investment funds led by JPMorgan Asset Management Infrastructure Investments Group which bought Southern Water for £1.13 billion (U.S.$2.26 billion) and assumed the utility’s debt of £2.8 billion.
The JPMorgan group included Sydney-based Challenger Infrastructure Fund which paid £300 million (U.S.$690 million) for a 27% stake of the utility, while a fund advised by JPMorgan took a 32% share, and a group of seven Australasian retirement funds advised by Access Capital Advisers took a 18% stake, the merchant bank UBS also have a 18% share, Hermes (an Australian pension fund) 4%, and Consensus Business Group 1%. The Challenger Infrastructure Fund was advised by Australia's largest investment bank and an infrastructure powerhouse, Macquarie Bank Ltd., the buyer of another U.K. water utility, Thames Water, which serves 8 million people, for £4.8 billion, in 2006. While it was still owned by Royal Bank of Scotland, Southern Water was advised by Deutsche Bank, whose investment fund RREEF eventually partnered with Goldman Sachs to bid unsuccessfully for the utility. According to the Guardian, one of the minor owners of Southern Water, Australia’s Hermes (owns 4%), is owned by the BT pension scheme and infrastructure investor Paceweald, which is connected to the flamboyant Iranian-born British property magnate and investor Vincent Tchenguiz's Consensus Business Group (owns 1%), which in turn has an 18.5% stake in Challenger which just bought 27% of Southern Water (The Guardian, October 10, 2007). This case is illustrative of the convoluated web of global interlocking capital interests in world’s water markets today.
(2) Citigroup and HSBC Bank targeted U.K.’s water utility Kelda for a £3 billion takeover, beating out rivals Goldman Sachs and Morgan Stanley
In November 2007, just a month after JPMorgan’s consortium bought Southern Water, U.K.’s water utility, Kelda, became the target of a takeover by a Citigroup-HSBC Bank partnership for £3.03 billion (U.S.$6.18 billion). This consortium beat out rivals Goldman Sachs and Morgan Stanley (Independent, Nov.23, 2007). Kelda provides water and wastewater services to nearly 5 million people and 130,000 businesses throughout Yorkshire under the name Yorkshire Water, which is the fifth-largest water and sanitation utility in England and Wales. Kelda had been a profitable water utility: Despite widespread damages caused by a flood in Yorkshire in earlier summer months of 2007, the water company still managed to report a gross profit of £332.7 million on sales of £741 million for the year (Banking Times and The Independent, November 23, 2007).
The consortium led by Citigroup (specifically by Citi Infrastructure Investors, a unit of Citigroup Alternative Investments) and HSBC Bank plc, partnered with Infracapital Partners LP (a division of U.K. insurance giant Prudential whose M&G unit had previously partnered with Goldman Sachs in an unsuccessful bid for Southern Water just a month earlier) and Singapore-based GIC Specialist Investments; these partners formed a new company called Saltaire Water. HSBC Bank eventually sold its 10% stake after the acquisition, leaving the three remaining partners by June 2008: Citigroup (with a 47.1% stake), GIC (Government of Singapore Investment Corporation Pte Ld, a private equity unit of the government of Singapore, owning 33.3%), and Infracapital (Prudential’s Infracapital is an infrastructure fund focused on the U.K. and Western Europe, owing 19.6%). There were also talks about these partners trying to negotiate a loan with Deutsche Bank's RREEF Infrastructure Fund. The winning consortium beat out rivals Goldman Sachs and Morgan Stanley.
During this sale, Kelda retained Greenhill and Merrill Lynch International as joint financial advisors; JPMorgan Cazenove Limited was both the corporate broker and financial advisor (The Sunday Times, November 22, 2007).
According to Bloomberg, the U.K. has been the focus in Europe for infrastructure investors during the past three years, accounting for approximately U.S.$102 billion of transactions (November 26, 2007). Bloomberg also reported that Deutsche Bank’s infrastructure division RREEF has estimated the European Union’s infrastructure assets in 2006 to be worth as much as €5 trillion (U.S.$7.4 trillion).
(3) South Staffordshire Water acquired by U.S.-Based Alinda Capital Partners LLC
In October 2007, the same month when Southern Water was sold to JPMorgan Chase, UBS, and partners, South Staffordshire Water plc was sold for £400 million by its owner Bahrain-based Arcapita Bank to the infrastructure division of Alinda Capital Partners LLC, a U.S. private investment firm (The Sunday Times, November 22, 2007; The Independent, November 23, 2007). According to its Web site, Alinda is managed by five partners with previous experiences as high-level directors in Morgan Stanley, Credit Suisse, Citigroup, and Barclays Capital, among others. Alinda specializes in infrastructure investment and manages U.S.$3 billion Alinda Infrastructure Fund, which has invested in gas and water utilities, wastewater-treatment plants, water tanks, roads, bridges, tunnels, airports, rail services, and municipal services.
Unlike previous cases of water acquisitions by Wall Street private equity, Alinda Infrastructure Fund will own 100% of this water utility. So who invests in Alinda Infrastructure Fund? According to a consulting paper by OFWAT (Water Services Regulation Authority, the economic regulator of the water and sewerage industry in England and Wales) in March 2008, the owners are predominantly European and U.S. pension funds, insurance companies, and charitable and university endowments.
Earlier this year, Alinda Capital also won a water-utility contract—this time, in California’s Central Valley. In May 2008, Alinda partnered with PERC (Pacific Environmental Resources Corp.) and won a contract to design, build, operate, and finance a new, state-of-the-art 3.4 million gallons per day water-recycling facility in Santa Paula, California (Reuters, July 24, 2008).
(4) U.K. largest water utility Thames Water acquired by Australia’s Macquarie Bank and partners
In October 2006, the world’s largest private infrastructure fund, Australia’s Macquarie Bank Limited, beat out rival Qatar Investment Authority (a state-owned private investment fund, or commonly called sovereign wealth fund run by the government of Qatar, an OPEC member) to buy U.K.’s largest water utility, Thames Water, from German utility giant RWE AG for £4.8 billion (U.S.$8.9 billion) including debt. Macquarie has bundled more than U.S.$66 billion of assets into funds it oversees for investors and the Thames Water takeover was part of a record U.S.$151 billion of purchases announced in Australia in 2006 (International Herald Tribune, October 17, 2006).
Who partnered with Macquarie to make this large buyout of U.K.’s largest water utility? According to OFWAT (a water regulatory agency in England and Wales) consultation paper (February 2007), Macquarie Bank and partners formed a new entity called Kemble Water Limited/Kemble Water Holdings, and this Kemble consortium has dozens of partners in Australia, Canada, and Europe, including many pension funds in these countries.
According to CNN (October 16, 2006), the rival bidder was Qatar Investment Authority, which partnered with the infrastructure arm of Swiss bank UBS AG. The third group of bidders included British financier Guy Hand's Terra Firma Capital Partners.
(5) Commonwealth Bank of Australia’s Osprey consortium beating out rivals Merrill Lynch and Macquarie Bank to buy Anglian Water
The fourth-largest water utility in U.K., Anglian Water (AWG Plc) was sold for £2.25 billion to a multinational consortium called Osprey Acquisitions Limited, which consisted of U.K. private equity group 3i, the Commonwealth Bank of Australia’s fund-management division called Colonial First State, and Canada Pension Investment Board (BBC, October 9, 2006; International Herald Tribune and The Guardian, October 17, 2006; The Independent, November 23, 2007; OFWAT, May 2007). Anglian Water was advised by Morgan Stanley and Dresdner Kleinwort; Lexicon Partners and Deutsche Bank advised the consortium of buyers (MarketWatch, October 2, 2006). The U.K. equity firm 3i has invested more than £530 million since 1987 in more than 30 infrastructure projects (3i company information).
The Osprey consortium competed and beat out other rivals for this sale which included U.S.’s Merrill Lynch and Australia’s Macquarie Bank. Incidentally, one of the partners in the Anglian Water deal, Australia’s Colonial First State, also partnered with JPMorgan to bid for Norweb, U.S.’s United Utilities Plc’s electricity-distribution business for £1.3 billion; they competed with Hong Kong-based tycoon Li Ka-shing’s Cheung Kong Infrastructure and Bahrain’s investment fund Arcapita which also owns Northern Ireland electricity business Viridian (The Sunday Times [U.K.], November 22, 2007).
Goldman Sachs’s Strategic Control of Water, the Petroleum of 21st Century: Play the Infrastructure Boom to Reap Huge Rewards for Water Investors
Of all investment banks, the most shrewd and aggressive one in seeing commodities’ soaring geopolitical value in the midst of climate extremes and economic volatilities is Goldman Sachs. Goldman Sachs is swiftly moving into ownership and investment of water, food, energy, and infrastructure. In water, it has two themes: (1) water is the new oil with a rapidly diminishing supply due to climate change, population increases, serious pollution problems, and rising industrial and agricultural use; and (2) water is underpriced. At Goldman Sachs’s June 2008 “Top Five Risks” conference, a panel of global experts said that “A catastrophic water shortage could prove an even bigger threat to mankind this century than soaring food prices and the relentless exhaustion of energy reserves” (The Telegraph, 2008).
Goldman Sachs has amassed a “war chest” for its Goldman Sachs Infrastructure Partners to take advantage of the coming privatization tidal wave: in the first phase, Goldman Sachs raised more than U.S.$6.5 billion for global infrastructure by December 2006; in the second phase announced in April 2008, it sought to raise U.S.$7.5 billion. The infrastructure sectors targeted are transportation (e.g., toll roads, airports, and ports), gas utilities, electrical utilities, and water utilities.
Water is not just a simple commodity, but according to Goldman Sachs water markets are “the key conduit through which climate change impacts energy and agricultural markets, reinforcing the structure of rising prices.” In its “The Top Five Risks Conference” held on June 4, 2008 in London, there was a panel discussion—the first of the top five risks—on “Resource scarcity: Competition for water, food and energy in an era of climate change.” The meeting was attended by some 200 senior Goldman Sachs clients, business leaders, policy specialists, and academics. The other four risk panels were on income inequality, financial integration, managing demographic transition, and rising protectionism. One overarching theme of the conference was on the “Growth of the global middle class and the impact on natural resource usage, especially in emerging economies.” On the risk of resource scarcity, Goldman Sachs analysts wrote about its panel discussion:
The current surge in commodity prices, ranging from food to energy, is closely linked to multi-year shortfalls in building new supplies and distribution systems. Scarcity in these markets also reflects a number of structural changes, including population growth and rising per-capita demand in several regions. As such, the panelists expected prices to continue to rise. The greatest concern centered on the availability of crucial resources, mainly food and water, for people in poorer countries. Further, the panelists agreed that the negative effects of climate change would exacerbate the shortages of potable water and affordable food, and would fall most heavily on these same populations. Approximately 800 million people are today facing food “insecurity.”
This new interest in buying up water by Goldman Sachs and other banks and investment banks is not merely a simplistic shift in investment strategy away from subprime mortgages and imploding real estate markets to stable, inflation-proof water utilities, infrastructure, and municipal services. Rather, Goldman Sachs and other banks have published in-depth, insightful analyses reflecting strategic thinking on water and emerging water markets, not short-term, make-a-quick-buck kind of speculative reports. Like the CIA which sees water and food shortages in geopolitical dimensions and as causes for political, social, economic “insecurity,” Goldman Sachs and other investment banks also see resource scarcity—intensified and worsened by climate change, competitive pressures over them from emerging economies, and rising population—to be a leading cause of insecurity. Specifically for water, Goldman Sachs analysts took a rather sophisticated look at the role of water in influencing the structure of soaring pricing in the context of climate change which affects energy and agricultural markets: “The challenges this presents are most acute in emerging economies in which agriculture contributes a large share of national GDP, average incomes are low and the ability to adapt to weather crises at the household level is limited. Water scarcity is exacerbated by suboptimal resource management in various regions.”
In the water sector, the primary interest of Goldman Sachs in buying up water technology companies, water utilities, and other related water businesses is to control water resource and water pricing. Goldman Sachs has begun to acquire many water and utility assets around the world. Its recent efforts include the following three examples:
*** In September 2003, Goldman Sachs partnered with one of the world’s largest private-equity firm Blackstone Group and Apollo Management to acquire Ondeo Nalco (a leading company in providing water-treatment and process chemicals and services, with more than 10,000 employees and operations in 130 countries) from French water corporation Suez S.A. for U.S.$4.2 billion.
*** In October 2007, Goldman Sachs teamed up with Deutsche Bank and several partners to bid, unsuccessfully, for U.K.’s Southern Water. In November 2007, Goldman Sachs was also unsuccessful in bidding for U.K. water utility Kelda. But Goldman Sachs is still looking to buy other water utilities.
*** In January 2008, Goldman Sachs led a team of funds (including Liberty Harbor Master Fund and the Pinnacle Fund) to buy U.S.$50 million of convertible notes in China Water and Drinks Inc., which supplies purified water to name-brand vendors like Coca-Cola and Taiwan’s top beverage company Uni-President. China Water and Drinks is also a leading producer and distributor of bottled water in China and also makes private-labeled bottled water (e.g., for Sands Casino, Macau). Since China has one of the worse water problems in Asia and a large emerging middle class, its bottled-water sector is the fastest-growing in the world and it’s seeing enormous profits. Additionally, China’s acute water shortages and serious pollution could “buoy demand for clean water for years to come, with China’s $14.2 billion water industry a long-term investment destination” (Reuters, January 28, 2008).
The City of Reno, Nevada, was approached by Goldman Sachs for “a long-term asset leasing that could potentially generate significant cash for the three TMWA [Truckee Meadows Water Authority] entities. The program would allow TMWA to lease its assets for 50 years and receive an up-front cash payment” (Reno News & Review, August 28, 2008). Essentially, Goldman Sachs wants to privatize Reno’s water utility for 50 years. Given Reno’s revenue shortfall, this proposal was financially attractive. But the water board eventually rejected the proposal due to strong public opposition and outcry.
Deutsche Bank’s €2 Billion Investment in European Infrastructure: “Megatrend” in Water, Climate, Infrastructure, and Agribusiness Investments
Deutsche Bank is one of the major players in the water sector worldwide. Its Deutsche Bank Advisors have identified water as a part of the climate investment strategies. In its presentation, “Global Warming: Implications for Investors,” they have identified the four following major areas for water investment:
*** Distribution and management—(1) Supply and recycling, (2) water distribution and sewage, (3) water management and engineering.
*** Water purification—(1) Sewage purification, (2) disinfection, (3) desalination, (4) monitoring.
*** Water efficiency (demand)—(1) Home installation, (2) gray-water recycling, (3) water meters.
*** Water and nutrition—(1) Irrigation, (2) bottled water.
In addition to water, the other two new resources identified were agribusiness (e.g., pesticides, genetically modified seeds, mineral fertilizers, agricultural machinery) and renewable energies (e.g., solar, wind, hydrothermal, biomass, hydroelectricity).
The Deutsche Bank has established an investment fund of up to €2 billion in European infrastructure assets using its Structured Capital Markets Group (SCM), part of the bank's Global Markets division. The bank already has several “highly attractive infrastructure assets,” including East Surrey Holdings, the owner of U.K.’s water utility Sutton & East Surrey Water (Deutsche Bank press release, September 22, 2006).
Moreover, Deutsche Bank has channeled €6 billion (U.S.$8.55 billion) into climate change funds, which will target companies with products that cut greenhouse gases or help people adapt to a warmer world, in sectors from agriculture to power and construction (Reuters, October 18, 2007).
In addition to SCM, Deutsche Bank also has the RREEF Infrastructure, part of RREEF Alternative Investments, headquartered in New York with main hubs in Sydney, Singapore, and London. RREEF Infrastructure has more than €6.7 billion in assets under management. One of its main targets is utilities, including electricity networks, water-treatment or distribution operations, and natural-gas networks. In October 2007, RREEF partnered with Goldman Sachs, GE, Prudential, and Babcok & Brown Ltd. to bid unsuccessfully for U.K.’s water utility Southern Water.
*** Crediting the boom in European infrastructure investment, the RREEF fund by August 2007 had raised €2 billion (U.S.$2.8 billion); Europe’s infrastructure market is valued at between U.S.$4 trillion to U.S.$6 trillion (DowJones Financial News Online, August 7, 2007).
*** Bulgaria—Deutsche Bank Bulgaria is planning to participate in large infrastructure projects, including public-private partnership projects in water and sewage worth up to €1 billion (Sofia Echo Media, February 26, 2008).
*** Middle East—Along with Ithmaar Bank B.S.C. (an private-equity investment bank in Bahrain), Deutsche Bank co-managed a U.S.$2 billion Shari'a-compliant Infrastructure and Growth Capital Fund and plans to target U.S.$630 billion in regional infrastructure.
Deutsche Bank AG is co-owner of Aqueduct Capital (UK) Limited which in 2006 offered to buy U.K.’s sixth-largest water utility Sutton and East Surrey Water plc from British tycoon Guy Hand. According to an OFWAT consultation paper (May 2007), Deutsche Bank formed this new entity, Aqueduct Capital (short for ACUK), in October 2005, with two public pension funds in Canada, Singapore’s life insurance giant, and a Canadian province’s investment fund, among others. This case, again, is an illustration of the complex nature of ownership of water utilities today, with various types of institutions crossing national boundaries to partner with each other to hold a stake in the water sector. With its impressive war chest dedicated to water, food, and infrastructure, Deutsche Bank is expected to become a major player in the global water sector.
Citigroup: Amassing Infrastructure War Chest for the Coming Tidal Wave of Privatization Worldwide
Citigroup is aggressively raising funds for its war chest to participate in the coming tidal wave of infrastructure privatization: in 2007 it established a new unit called Citi Infrastructure Investors through its Citi Alternative Investments unit. According to Reuters, Citigroup “assembled some of the biggest names in the infrastructure business at the same time it is building a $3 billion fund, including $500 million of its own capital. The fund, according to a person familiar with the situation, will have only a handful of outside investors and will be focused on assets in developed markets” (May 16, 2007). Citigroup initially sought only U.S.$3 billion for its first infrastructure fund but was seeking U.S.$5 billion in April 2008 (Bloomberg, April 7, 2008).
Citigroup partnered with HSBC Bank, Prudential, and other minor partners to acquire U.K.’s water utility Kelda (Yorkshire Water) in November 2007. This week, Citigroup signed a 99-year lease with the City of Chicago for Chicago’s Midway Airport (it partnered with John Hancock Life Insurance Company and a Canadian private airport operator). Insiders said that Citigroup is among those bidding for the state-owned company Letiste Praha which operates the Prague Airport in the Czech Republic (Bloomberg, February 7, 2008).
As the five U.K. water utility deals illustrate, typically no one single investment bank or private-equity fund owns the entire infrastructure project—they partner with many others. The Citigroup is now entering India’s massive infrastructure market by partnering the Blackstone Group and two Indian private finance companies; they have launched a U.S.$5 billion fund in February 2007, with three entities (Citi, Blackstone, and IDFC) jointly investing U.S.$250 million. India requires about U.S.$320 billion in infrastructure investments in the next five years (The Financial Express, February 16, 2007).
JPMorgan Chase: Infrastructure War Chests to Buy Water, Utilities, and Public Infrastructure Worldwide
One of the world’s largest banks, JPMorgan Chase has aggressively pursued water and infrastructure worldwide. In October 2007, it beat out rivals Morgan Stanley and Goldman Sachs to buy U.K.’s water utility Southern Water with partners Swiss-based UBS and Australia’s Challenger Infrastructure Fund. This banking empire is controlled by the Rockefeller family; the family patriarch David Rockefeller is a member of the elite and secretive Bilderberg Group, Council on Foreign Relations, and Trilateral Commission.
JPMorgan sees infrastructure finance as a global phenomenon, and it is joined by its global peers in investment and banking institution in their rush to cash in on water and infrastructure. JPMorgan’s own analysts estimate that the emerging markets’ infrastructure is approximately U.S.$21.7 trillion over the next decade.
*** JPMorgan created a U.S.$2 billion infrastructure fund to go after India’s infrastructure projects in October 2007. The targeted projects are transportation (roads, bridges, railroads) and utilities (gas, electricity, water). India’s finance minister has been estimated that India requires about U.S.$500 billion in infrastructure investments by 2012. In this regard, JPMorgan is joined by Citigroup, the Blackstone Group, 3i Group (Europe’s second-largest private-equity firm), and ICICI Bank (India’s second-largest bank) (International Herald Tribune, October 31, 2007).
*** Its JPMorgan Asset Management has also established an Asian Infrastructure & Related Resources Opportunity Fund which held a first close on U.S.$500 million (€333 million) and will focus on China, India, and other Southern Asian countries, with the first two investments in China and India (Private Equity Online, August 11, 2008). The fund’s target is U.S.$1.5 billion.
In April 2008, JPMorgan’s Global Equity Research published “Watching water: A guide to evaluating corporate risks in a thirsty world,” and it identified some sectors of the economy more susceptible to water-supply and water-quality problems than others: electricity generation (especially nuclear power which needs even more freshwater than gas-fire generators); mining, oil, and gas production; manufacturing; semiconductors manufacturing; food processing and beverages production; and insurance (e.g., fire and drought claims).
JPMorgan Chase is expected to become a major player in the global infrastructure scene in the next five years.
Morgan Stanley: Water and Infrastructure to be Key Investment Themes
In May 2008, Morgan Stanley raised U.S.$4 billion for its new infrastructure fund; it initially sought U.S.$2.5 billion (The Economist, June 26, 2008; The Financial Express, May 13, 2008; Reuters, May 12, 2008). DowJones’ Financial News Online (May 22, 2006) also reported that Morgan Stanley became one of the giant investment banks targeting infrastructure (along with Goldman Sachs, JPMorgan, UBS, Macquarie, and Detusche Bank).
Morgan Stanley issued public statements about its infrastructure investments: “We view this theme, the build-out of the developing world as it closes the infrastructure gap with the developed world, as one of the – if not the – most important themes in global investments, for the coming decade.”
In the past couple of years, Morgan Stanley has bid twice, unsuccessfully, for U.K.’s water utilities: Southern Water (it lost to JPMorgan-UBS) and Kelda (it lost to Citigroup-HSBC partnership). In water, Morgan Stanley sees three major opportunities: (1) water utilities; (2) global operators (such as Veolia Environment); and (3) technology companies (such as those that manufacture membranes and chemicals for water treatment).
In addition to water, other areas in emerging countries’ infrastructure targeted by Morgan Stanley include airports, ports, electricity, railways, and property (e.g., land, construction materials manufacturers, and other property-related institutions such as real estate developers and banks). For example, Morgan Stanley recently partnered with Canada’s Ontario Teachers’ Pension Plan to buy the Chilean subsidiary of Public Service Enterprise Group, an electricity utility, for U.S.$870 million (€560 million), according to the Wall Street Journal (June 17, 2008).
Credit Suisse: Water as a Global Strategic Commodity
One of the world’s largest banks, Zurich-based Credit Suisse managed more than U.S.$100 billion in assets globally as of May 2006. It has aggressively entered the infrastructure and water investments worldwide. During its Asian Investment Conference, it said that “Water is a focus for those in the know about global strategic commodities. As with oil, the supply is finite but demand is growing by leaps and unlike oil there is no alternative.” (Credit Suisse, February 4, 2008). Credit Suisse sees the global water market with U.S.$190 billion in revenue in 2005 and was expected to grow to U.S.$342 billion by 2010. It sees most significant growth opportunities in China.
Credit Suisse partnered with General Electric (GE Infrastructure) in May 2006 to establish a U.S.$1 billion joint venture to profit from privatization and investments in global infrastructure assets. Each partner will commit U.S.$500 million to target electricity generation and transmission, gas storage and pipelines, water facilities, airports, air traffic control, ports, railroads, and toll roads worldwide. This joint venture has estimated that the developed market’s infrastructure opportunities are at U.S.$500 billion, and emerging world’s infrastructure market is U.S.$1 trillion in the next five years (Credit Suisse’s press release, May 31, 2006).
In October 2007, Credit Suisse partnered with Cleantech Group (a Michigan-based market-research, consulting, media, and executive-search firm that operates cleantech forums) and Consensus Business Group (a London-based equity firm owned by U.K. billionaire Vincent Tchenguiz) to invest in clean technologies worldwide. The technologies will also clean water technologies.
It also sells a product called Credit Suisse PL100 World Water Trust, launched in June 2007, with U.S.$112.9 million.
UBS AG: Water Scarcity as “The Defining Crisis of the 21st Century,” Water Is “Liquid Gold”
Like other multinational banks, UBS sees the economic and geopolitical significance of water. UBS stated publicly that “In our view, the availability and quality of water is one of the top policy issues for governments, and is increasingly likely to be a significant driver of risks and opportunities for firms” that that “Water-stress is likely to worsen globally due to a combination of population growth, urbanisation and climate change” (USB “Outlook 2007”). It sees emerging economies—especially China and India—as having significant water risks and great growth opportunities. One UBS analyst said that “fresh water shortages have been on our radar since March 2006.”
In October 2007, UBS AG partnered with JPMorgan Chase and Challenger Infrastructure Fund to buy U.K.’s water utility Southern Water. Also in 2007, UBS started a Taiwan-based investment fund (to raise as much as NT$6.5 billion) for its Global Innovators Fund which will invest in 50 to 70 companies seeking to tap in global thirst for clean energy and water (The China Post and Bloomberg, October 30, 2007). UBS’s Socially Responsible Investment fund has about U.S.$2 billion in assets. About a quarter of the Taipei-based Global Innovators Fund will be invested in Germany’s solar-energy companies.
Allianz Group: Water Is Underpriced and Undervalued
Founded in 1890, Germany’s Allianz Group is one of the leading global services providers in insurance, banking, and asset management in about 70 countries. In April 2008, Allianz SE launched the Allianz RCM Global Water Fund which invests in equity securities of water-related companies worldwide, emphasizing long-term capital appreciation. Alliance launched its Global EcoTrends Fund in February 2007 (Business Wire, February 7, 2007).
Like Goldman Sachs, Allianz has the philosophy that water is underpriced. A co-manager of the Water Fund in Frankfurt, said, “A key issue of water is that the true value of water is not recognized. …Water tends to be undervalued around the world. …Perhaps that is one of the reasons why there are so many places with a lack of supply due to a lack of investment. With that in mind, it makes sense to invest in companies that are engaged in improving water quality and infrastructure.” Allianz sees two key investment drivers in water: (1) upgrading the aging infrastructure in the developed world; and (2) new urbanization and industrialization in developing countries such as China and India.
Australia’s Macquarie Group Limited, a Global Infrastructure Powerhouse
Macquarie Bank is Australia’s largest investment bank, often referred to as a global infrastructure powerhouse because it has numerous specialized infrastructure funds all over the world. It invested in infrastructure before other multinational investment banks and banks recognize the value of infrastructure. It has also formed a joint venture with Russia’s largest standalone investment bank, Renaissance Capital, called Macquarie Renaissance, which will exclusively work in the infrastructure sector in Russia and the former Soviet republics.
Macquarie led the consortium of owners in buying U.K.’s largest water utility, Thames Water, and it advised one of the owners of U.K.’s Southern Water, Challenger Infrastructure Fund.
The Carlyle Group: From Military-Industrial Corporations to Infrastructure and Water
The Carlyle Group is one of the elite private equity firms now entering infrastructure: as of April 2008, it raised U.S.$1.15 billion for its first infrastructure fund (April 7, 2008, TheDeal.com).
In January 2007, the Washington-based private-equity or buyout firm, The Carlyle Group, purchased a water utility Synagro Technologies for U.S.$772 million. The Houston-based Synagro Technologies operates water- and wastewater-treatment plants for some 600 municipal and industrial customers in 37 states (Washington Business Journal, January 29, 2007). Synagro is perhaps best known for recycling sewage-sludge “biosolids” and other organic residuals in the United States and is the only national company focused exclusively on the estimated U.S.$8 billion organic residuals industry, which includes water and wastewater residuals (Reuters, January 29, 2007).
\This purchase of Synagro occurred almost a year after The Carlyle Group established its Infrastructure Investment Team in March 2006 to target water utilities, airports, bridges, ports, sports stadiums, transportation, and other public infrastructure. According to its press release (March 10, 2006), this Infrastructure Investment Team consists of eight seasoned figures, headed by Robert W. Dove (a former executive Bechtel Enterprises and a vice president at UBS Securities) and Barry P. Gold (a former director at Citigroup/Salomon Smith Barney and Lehman Brothers), with six others who were former directors, vice presidents, or highly positioned staff at Bechtel, Citigroup/Salomon Smith Barney, TIAA-CREF, Federal Reserve Bank of New York, and other institutions on Wall Street.
In January 2006, The Carlyle Group partnered with Zodiac, a French manufacturer of pool equipment, to acquire Water Pik Technologies Inc. for U.S.$380 million. Water Pik not only manufactures personal-care products for the retail market, but it also makes faucet and shower-mounted water-treatment devices.
The Blackstone Group: Buying Food, Infrastructure, and Water Worldwide
The Blackstone Group is one of the private-equity firms with a huge infrastructure war chest dedicated solely to India’s infrastructure. In 2007, Blackstone partnered with Citigroup and two Indian finance companies (Infrastructure Development Finance Company Ltd. and India Infrastructure Finance Company Ltd.) to launch a U.S.$5 billion fund to finance India’s infrastructure projects such as roads, ports, and utilities. Of this fund, $2 billion will be allocated for equity capital, with $1 billion being quasi-equity, and the remaining $1 billion being pure equity, while $3 billion would be in long-term debt, financing maturities exceeding 10 years (The Financial Express, February 16, 2007; The New York Times, February 15, 2007; Investment News, February 26, 2007).
The Blackstone Group LLC, one of the world’s largest private-equity firms, partnered with Goldman Sachs and Apollo Management L.P. (another private-equity firm based in New York) to buy Ondeo Nalco from French water corporation Suez in September 2003.
The Blackstone Group is also moving into the food sector: In October 2006, it partnered with PAI (a leading European private-equity firm) to buy United Biscuits, U.K.’s largest biscuit company (with brands such as McVitie’s, go ahead!, and Jacob’s), the second-largest biscuit maker in France and Belgium, and one of the largest in the Netherlands. It is also in the nuts, bagged snacks, and cake markets in the U.K. It operates 15 manufacturing facilities and has more than 9,000 employees in the U.K. and mainland Europe (United Biscuits’ company information).
Barclays PLC: Water Index Funds and Exchange-Traded Funds
Barclays PLC is a U.K.-based major global financial services provider operating in all over the world with roots in London since 1690; it operates through its subsidiary Barclays Bank PLC and its investment bank called Barclays Capital.
Barclays Bank’s unit Barclays Global Investors manages an exchange-traded fund (ETF) called iShares S&P Global Water, which is listed on the London Stock Exchanges and can be purchased like any ordinary share through a broker. Touting the iShares S&P Global Water as offering “a broad based exposure to shares of the world’s largest water companies, including water utilities and water equipment stocks” of water companies around the world, this fund as of March 31, 2007 was valued at U.S.$33.8 million.
Barclays also have a climate index fund: launched on January 16, 2008, SAM Indexes GmbH licensed its Dow Jones Sustainability Index to Barclays Capital for investors in Germany and Switzerland. Many other banks also have a climate index or sustainability index.
In October 2007, Barclays Capital also partnered with Protected Distribution Limited (PDL) to launch a new water investment fund (with expected annual returns of 9% to 11%) called Protected Water Fund. This new fund, listed in the Isle of Man, requires a minimum of £10,000 and is structured as a 10-year investment with Barclays Bank providing 100% of capital protection until maturity on October 11, 2017. The Protected Water Fund will be invested in some of the world’s largest water companies; its investment decisions will be made based on an index created by Barclays Capital, the Barclays World Water Strategy, which charts the performance of some of the world's largest water-related stocks (Investment Week and Reuters, October 11, 2007; Business Week, October 15, 2007).
After Water-Utility Privatization: Skyrocketing Water Bills Squeezing U.K. Water Customers
Why should people care about global investment banks and multinational corporations buying up previously public water utilities or hoarding water rights? One should learn the lesson from U.K. water customers who are being squeezed by corporate-controlled water utilities. In the U.K., water utilities became privatized in 1989 and foreign corporations “have snapped up U.K. water companies [and] have received huge windfalls despite a succession of service failures” (Daily Mail, August 12, 2008). Many U.K. residents were angered by the subsequent skyrocketing water rates, which could rise to as much as £1,000 annually per household within the next five years, as they felt being held hostage and squeezed by the profiteering water corporations. Indeed, U.K. residents could live without cars, they may be able to shiver under five layers of coats in the winter by turning off heat, and they may be able to eliminate the costly meats from their daily meals, yet no one can live without water. Condemnations and outcries were heard throughout the country following the announcements of proposed water-rate hikes.
The Daily Mail published a list of proposed five-year (from 2009/10 to 2014/15) water-rate increases by several U.K. water utilities, which ranged from 17.5% to 62.2%, as follows:
■ South West Water: 62.2% ■ Anglian: 47.9%
■ Southern Water: 43.8% ■ Thames Water: 34.0%
■ United Utilities: 32.1% ■ Wessex: 27.08%
■ Northumbrian: 20.9% ■ Yorkshire Water: 20.01%
■ Severn Trent: 18.8% ■ Welsh Water: 17.5%
■ Sutton and East Surrey, Bristol Water, South East Water, Folkestone and Dover,Cambridge Water: approximately 20% above inflation
Conclusion
Unfortunately, the global infrastructure-privatization fever is unstoppable: many local and state governments are suffering from revenue shortfalls and are under financial and budgetary strains. These local and state governments can longer shoulder the responsibilities of maintaining and upgrading their own utilities. Facing offers of millions of cash from Goldman Sachs, JPMorgan Chase, Citigroup, UBS, and other elite banks for their utilities and other infrastructure and municipal services, cities and states will find it extremely difficult to refuse these privatization offers.
The elite multinational and Wall Street banks and investment banks have been preparing and waiting for this golden moment for years. Over the past few years, they have amassed war chests of infrastructure funds to privatize water, municipal services, and utilities all over the world. It will be extremely difficult to reverse this privatization trend in water.
(Author's Note: This research was done in September and last updated on October 1, 2008.)
