In September 2014 Félix Parra was interviewed for the cover interview of the 4th issue of iAgua Magazine. The state of affairs at the time was quite different from the current one: of Aqualia, of its parent company FCC, and of Spain. Four years later, everything seems to go a lot better for everyone. And Félix Parra is once again our key interviewee, now more experienced in the position he took on in 2013.
At that time, we compared the role of Jack Aubrey, the character played by Russell Crowe in Master and Commander, to Parra's leadership at Aqualia. In 2018, we can say that this geologist by training has endured several storms and a few tsunamis, and the Aqualia ship, with the wind in its sails, is reaching cruising speed. After enduring several years of political and social instability without any major concerns for its national business, the involvement of IFM investors as the reference shareholder is the last piece of good news for Aqualia, a company that looks at Europe, the Middle East and Latin America, with the objective of becoming established in the select group of world leaders in the water sector. In spite of the unbeatable results under his management, Parra still uses his favourite sentence to refer to his leadership role within the team at Aqualia: 'I am just a primus inter pares'.
Question - Mr Parra, let us take stock of the activity of Aqualia in the past few years. Is it a well-liked company in the water sector?
Answer - Possibly, yes, it is. In 2013, Aqualia became separate from the Services Area within FCC. This decision was a major boost for us in terms of the visibility of our brand, and meant more autonomy with regards to management. Few people thought at the time that we would play such an important role in solving the group's problems.
The evolution over these years has been positive. In 2012 our EBITDA was about 180 million euros, in a difficult setting, and we have reached almost 250 million euros in 2017. We are talking about a year-over-year improvement in gross results that exceeds 5%. This means that, despite the general crisis context, and given the difficult situation for FCC in particular, Aqualia has managed to move ahead with sustained and constant growth. We have done great team work, and we should all be proud of it.
Q - In 2014 we could see a glimpse of a future leaving the crisis behind, but we were still in a very difficult situation, in every respect. Consumption had dropped, tariffs were at a standstill... In 2018 the outlook is very different. The macroeconomic situation has improved a lot and I understand this has affected the water business, your urban services, your concession contracts. How was that journey from the worst of the crisis to the recovery we now feel?
A - Yes, you are right. 2014 was a turning point in the trend towards decreasing consumption which started in 2008. Our current setting is quite different, and that clearly shows in the activity of sectors such as tourism and industry, which have contributed significantly to recovering our margins.
However, these more favourable conditions are not reflected in public investments yet.
Q - We are coming out of a decade where the national government's investment decreased to less than half of what it used to be. Are there any signs of improvement? Any political momentum that will eventually allow us to address these issues? Or will infrastructure continue to deteriorate due to lack of maintenance, with the consequences this entails?
A - We are already seeing the consequences. In Spain, the weight of operating costs in water tariffs is a lot heftier than in the countries that surround us, whereas when it comes to depreciation costs, the opposite happens. This situation stems from an important investment deficit; as a result, ultimately and unavoidably, infrastructure becomes obsolete, leading to decreased efficiency. On the other hand, the new European directives, which require greater control of water treatment, will force us to either change these policies or face the risks of a critical situation.
For decades, municipal governments were used to receiving subsidies from regional, national or European authorities, but that eventually came to an end. We see some signs of hope; municipal tenders include fewer general fees and more investments, mechanisms which, the same as regional fees, show a bit more of an investment culture; however, there is still a lot to be done before everyone realises that every year there are important needs to cover. Making people understand this is a big challenge.
Q - Let us address the debate about the management of public services. In the past decade the public opinion has debated whether services such as water should be managed by private companies. Accordingly, the term remunicipalisation has found a place in the platforms of political parties, unions, or civil society organisations. The municipal and regional elections held in 2015 and the advent of the self-designated 'governments of change' was perhaps the critical point when this idea was defended most strongly. A few years later, how do you think this debate has evolved? Do you think there is not such an intense debate nowadays?
A - Yes, definitely, this is not such a big issue any more. In 2015 some people were predicting pretty much the end of a business model. The reality has been quite different. We have seen some cases that affected other water services providers, in Tarrasa or Valladolid, where once the concession contracts came to an end, the responsible authorities chose a different management model. In any event, they were isolated cases. Almost all of the concession contracts Aqualia had which ended in the past few years have been renewed.
Something needs to be clear, and I have had to explain this to many foreign investors and media, and it is that in Spain there has never been a process whereby concessions have been terminated during their term.
In any event, the debate should focus on whether management is efficient or not. And this is where having a regulatory authority could help us, establishing criteria to compare the quality of services.
Q - The difference in the narrative told by Suez and Aqualia on this issue, and on the situation in Spain, is quite obvious. Last January Suez issued a profit warning regarding its results and blamed it on two issues: the situation in Catalonia and the debate over remunicipalisation in Spain. Do you not share their concerns?
A - We do not. I believe the Spanish constitutional and regulatory system is a solid system that has allowed us to have quality services which are very much comparable to those in surrounding countries.
True enough, we have lived some intense years in this sector. But we have also had very positive signs. And I would like to highlight in this regard the stance of the unions; they have understood very well certain things, such as the fact that often a company with a concession can guarantee the quality of employment better than a public company can. Remunicipalisations came with a lot of uncertainty, and it was necessary to lay out some arguments and figures. The motto 'everything public is just better' does not always hold true.
On the other hand, a concession does not entail exclusively private management, it is a public-private collaboration where the public authority is always the title holder. And we have to follow a series of rules, which are very strict, by the way.
Q - What are the priority issues that the government of Pedro Sánchez should address in terms of water policy?
A - The same as with any new government, we should give him at least some time to see which policies he develops and how they are implemented. Having said that, certain matters should be addressed promptly. One of them, as I said earlier, is facilitating and fostering water related investments, especially the renovation of infrastructure, and in particular those with the greatest environmental impact such as the expansion or renovation of obsolete or inefficient infrastructure.
From a sector based perspective, we would like water management to be high up in the agenda of this government, and, from this perspective, having a Ministry of Water would be ideal. The news of integrating energy and environment into the same ministry is a positive and important step, in line with the new needs we are facing.
Q - Let us now consider the global setting. What is the geographical scope of Aqualia's business?
A - If we talk about sales, 75% of the business is in Spain. A big challenge for us is, without a doubt, increasing our presence internationally.
Q - And in which regions are you prioritising your efforts nowadays?
A - We have a very clear action plan, which was recently endorsed by the new investors. The priority areas are Europe, the Middle East and North Africa (MENA), and Latin America; we are not ruling out focusing on other regions, such as the Far East or sub-Saharan Africa, later on.
At the country level, I would highlight Mexico, Colombia, Peru, and Panama. And, of course, the very important project package that Saudi Arabia has embarked on. The European market is a more mature market, so there are not quite so many opportunities. But we do think there is a potential for acquisitions which we will try to explore.
Q - Which public-private collaboration approaches are you focusing on?
A - In our business, municipal services concessions are very significant. Among other reasons, because most build-operate-transfers (BOTs) have a 50% participation and do not allow consolidation of accounts, they are co-management arrangements. Therefore, in terms of consolidated figures, they are under-represented.
In my opinion, at the international level, the future is moving towards PPP (BOT) type contracts, rather than municipal concessions. There are many reasons for this, including the controversy around the latter.
We are interested in investment activity. Unlike other companies, which opted for a different path, we still think we have the know-how not only concerning the design and operation of plants, but also the capacity to structure long term investment contracts efficiently. We always consider purely engineering, procurement and construction (EPC) contracts or operating contracts as an activity that is complementary to the concession business.
Q - The Australian Fund IFM Investors bought recently 49% of Aqualia. How did this operation come into being?
A - If you allow me, first I would like to note the breakthrough that meant, for Aqualia and for the entire sector, the successful issue of a 1350 million euros bond. Entering the market and obtaining an 'investment grade' rating is a recognition, because it is not easy for a wholly owned subsidiary to obtain it when its parent company does not have it. It entailed a very important introspection exercise, to get to know ourselves better and be able to communicate the way we are. We like to provide water services and serve our final customers, that is our passion. But it is true that, in the past few years, and while taking care of this business, we have also worked on other things.
Soon after the opportunity with IFM came up. And it came up because Aqualia has always been a focus of interest for many investor groups. IFM contacted our reference shareholder and communicated its interest, which was taken more seriously than other proposals received.
Q - IFM's long term strategy fits with Aqualia's priorities
A - Absolutely. We are talking about a fund with a long term vision that they apply to all of their projects. In addition, they have other investments in the water sector, such as Anglian Water in the United Kingdom and Wyuna Water in Australia, so it is not a new business for them. And the price they have paid shows that their goal is for Aqualia to become a platform that allows them to grow. It is not a fund expecting to obtain a result in the short term.
Because of all those reasons, we are in sync and soon we will have two shareholders that identify with and are aligned with our growth policy. Both my team and myself are very comfortable with this approach.
Q - What is the status of the operation? When will any outstanding issues be resolved?
A - Indeed, the closure of the operation is subject to standard competition rules and the authorisation of financial entities. We have given ourselves until September 30th as a deadline, but it could be closed before that.
Q - And from then on, what will the new Aqualia look like?
A - Our first objective is to preserve everything good that we have. From that point on, the main change will be that Aqualia will have further capacity to grow. In the past few years, given the situation of the FCC group, we had to be very selective with the opportunities that came up. In the future, maintaining the same cost-effectiveness criteria we have always applied, we will be able to take on more and more ambitious projects.
On the other hand, the investor has confirmed their trust in the continuity of the management team I am part of. Our work over the past few years has been very positively valued and this recognition is encouraging for us.
Q - Will we be seeing any meaningful changes in terms of the priority markets? For example, there is talk about an interest in the French market.
A - The French market would not be something new for us, it has always been in our prospects, the same as Italy, Portugal, or the Czech Republic. In France there are some specific processes under way, such as the sale of the SAUR Group, which we are analysing closely.
Q - What new research areas is Aqualia focusing its efforts on nowadays?
A - The innovation capacity of Aqualia has definitely been a highly valued aspect by the new investor, and it is something I take pride on because we have always thought that leadership means innovation. We have three areas: water quality, energy efficiency, and smart cities. Regarding specific projects, I would point out All-gas, which is implemented in the El Torno waste water treatment plant, in Chiclana, and is the largest initiative in the world to obtain biofuels from the culture of micro algae in waste water. With IMDEA Agua we research the potential of new microbial electrochemical technology to treat waste water at the same time as we generate electricity and value added products such as hydrogen or desalinated water at a zero cost.
Q - Let us talk about Smart Water, a set of new technologies which are changing business models in many sectors, including the water sector. Big Data, Augmented Reality, Internet of Things... How is Aqualia dealing with this disruption?
A - I would talk about making services more efficient, and, specially, contributing to making people's lives easier. The proliferation of data is not useful at all if we do not focus on extracting the information needed to achieve this.
We are talking for example about having an application where users can see their consumption or the consumption in their neighbourhood, or we can see if there is a breakdown and fix it immediately. We were the first to focus our management on satisfying the final user and I think this should be the philosophy of smart cities.
Q - I would not want to miss talking about two subjects that I think you have historically emphasised: gender equality policies and work-life balance.
A - We were pioneers obtaining the Gender Equality Certification in 2010, and since then, we have expanded on these policies. I would highlight the training programmes for female senior managers and the mentoring programmes for middle managers. With these initiatives we move forward towards equality in our company. On the other hand, we also have a Family Responsible Company Certification, meaning we work to make personal life and work life more compatible.
The future is 'Be Aqualia', our own project where all those aspects are involved: equality, work-life balance, diversity, etc. It is a necessity, not only to retain talent, but to attract talent. An 'emotional salary' is essential to make our company more attractive.
Q - Do you think that the water sector, as currently set up, with the future outlook it has, is able to attract the best talent, or is it going into other areas?
A - I believe it is. Every day we see highly qualified young people coming on board, in companies like ours and in other entities such as research centres, etc. But we should be clear that, although it is a very important sector, it is small in size and may be unfamiliar to a large portion of the population. These attributes make it more difficult to compete to attract talent.
Q - I feel that a phase is coming to an end, which has definitely been positive for Aqualia, but where the need to stand shoulder to shoulder with FCC in a complicated situation was evident, and maybe that prevented Aqualia from accessing some growth opportunities. Now a new shareholder is in, a strong one, who intends to support you in the long term. Is this the moment for Aqualia to grow strongly all over the world?
A - Yes, you are right. We have finished a consolidation process, which started in 2014 with the arrival of a new investor, the Carso Group, and a new management team. During this phase our company has greatly improved in terms of efficiency. We are now facing a new phase where our goal is to grow. It is a huge challenge, but I am sure we will make it.