The water business in Japan – part 2

Yes, another post on the water market in Japan, my current interest. You can see my previous post here.

In my previous post I outlined the limited presence of foreign companies in the Japanese market and looked briefly at where I saw the opportunities.

I have been conducting a search in the Japan market, and wanted to go into a bit more detail on the situation there. Japan introduced their own competition regulation specifically targeting the water market back in April 2002. The revised Water Works Law allows for state owned water authorities (of which there are 1,928 in Japan!) to outsource operations to private operators. This has allowed Veolia to enter the Japanese market and win a number of operations contracts with recently acquired Japanese subsidiaries.

Much of Japan’s water and wastewater infrastructure was built post-war, and many tens of billions of US dollars will have to be spent  every year to maintain and replace that infrastructure. With many local governments, and the national government, in serious debt and investment in water infrastructure currently trending downwards, there seems to be a clear need for private finance in the sector. Seems to me like a perfect scenario for PPPs.

78% of Japan’s water supply comes from rather polluted surface water, and there is a need for increasingly advanced potable water treatment. Part of the reason for this may be that only 69% of the Japanese population has access to articulated sewers. 12% of households use septic tanks, and an astounding 19% have no access to sanitation.

More on the current industry picture in the next post.

The water business in Japan

With all the excitement about the rapid growth of China, people forget that Japan is the second biggest economy in the world. It is a difficult market for foreign firms to enter, but prices are kept high by the lack of competition, meaning there is a lot of money to be made there.

The water industry is no exception. Apart from the equipment and chemical suppliers, that largely sell through local distributors, Veolia is the only firm that has managed to make an impact. After significant up-front investment and the acquisition of multiple local firms they have won a number of short operations contracts.

The rest of the water industry can benefit from this effort, as local authorities and institutions become more accepting of foreign businesses operating there. As far as I know, only one multinational design firm (Arup) has any presence in Japan whatsoever, and they do not have a water business there.

While Japan has a lot of rainfall, the density of population (everyone crammed onto the coastal river plains) and the intensity of rainfall events mean that they have plenty of water and environment issues to be addressed. Indirect potable reuse is already the norm in Japan, because many water treatment plants are drawing from rivers below wastewater treatment plants.

If I was running an engineering firm or water treamment business I would be looking very closely at potential acquisition targets in Japan right now.