May 2005

The French Water Services: The French Water Services:

Main present challengesMain present challenges

Page 2 May 2005

Table of contents: main present challengesTable of contents: main present challenges

Introduction: Veolia Environment and Veolia Water.

Part I: Based on principles of the Delegation of Public Services (DSP) and on hydrographic division of the French territory…

Part II: … the French Water services face 2 main water challenges:

1rst challenge: to cope with huge investment requirements during the next 10 years imposed, for a large part, by new environmental regulations but also by maintenance obligations, …

2nd challenge: …without being obliged to increase too dramatically the tariff levels.

Part III: China, an application in relation with the local constraints.

Page 3 May 2005

Introduction ( 1 ) Veolia Environment Introduction ( 1 ) Veolia Environment

Veolia Environnement, the n°1 provider of environmental services to municipal and industrial clients in the world

Veolia Environment is the only company to operate in all environmental services: water, waste management, energy services and passenger transportation

(Water)(Power, Facilities

management) (Solid Waste)(Public

Transport)

N° 1 in the world

N° 1 in Europe for energy services

N° 2 in the world

Private operator N° 1 in Europe

Page 4 May 2005

Introduction ( 1 ) Veolia Environment Introduction ( 1 ) Veolia Environment

Placed 128th among Global 500 companies in 2004

Operator in over 75 countries on the 5 continents

Revenue of € 24.7 Billion (€ 22.3 Billion excluding third party revenue)

270,000 employees

Veolia Environment Main Figures

Dalkia : 27%

Connex : 9%

Onyx 24%

Veolia Water 40%

Page 5 May 2005

Introduction ( 2 ) Veolia Water Introduction ( 2 ) Veolia Water

More than 110 Million people served

Operator in over 55 countries

Revenue of € 9.8 Billion (€ 7.6 Billion excluding third party revenue)

67,800 employees

Veolia Water Main Figures

Municipal: 77 %

Industrial: 4 %Technical solutions and

construction: 19 %

Page 6 May 2005

Part I

The principles of Public Service Delegation and of the decentralised hydrographic regional organisation

Page 7 May 2005

Equality of access

Continuity, mutability and sustainability of Public Services

Transparency of relations between the actors

A – The Delegation of Public Services (1): 3 mains principlesA – The Delegation of Public Services (1): 3 mains principles

Page 8 May 2005

A – The Delegation of Public Services (1): the contractA – The Delegation of Public Services (1): the contract

Responsibilities:

Institutional responsibilities Tariff to end users Ownership of assets

Municipality

Water assets Private operators

Consumers: tariff x volume

Municipal budget

Subsidies

Long term borrowing

Sources of financing:

Revenues

Responsibilities:

Technical

Financial

Services

Scope of the agreement: Global or partial management

Lease payment

“DSP” Contract

Page 9 May 2005

In France: 90% of the PPPs are “lease contracts”

VEOLIA Water manages around 4 000 contracts with more than 8 000 Municipalities. In 2004, VEOLIA Water contract renewal rate was 86%.

PRIVATE SECTOR

PUBLIC SECTOR

Veolia Water 38%

Ondeo (Suez) 21%

Saur 10%

Other private 1%

Local Authorities

70%

30%

(26 million customers)

18%

14%

7%

1%

WATER WASTE WATER

(17 million customers)

40%

60%

A – The Delegation of Public Services (1):A – The Delegation of Public Services (1): VEOLIA Environnement extensive lease contract experienceVEOLIA Environnement extensive lease contract experience

Page 10 May 2005

B – An investment decision process based B – An investment decision process based on 6 decentralised hydrographic agencieson 6 decentralised hydrographic agencies

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B – An organisation based on 6 natural hydrographic B – An organisation based on 6 natural hydrographic regions regions (“Agences de l’Eau”)(“Agences de l’Eau”)

The 1964 Law has divided France into 6 hydrographic administrative Regions, based on the 6 main rivers (Seine, Loire, Rhône, Garonne, Rhine and the Northern area)

Each of this Region is managed by a Committee with representatives from: The different municipalities The end users Different public organisations designated by the State

The hydrographic Regions responsibilities are threefold: Design the investments program according to the needs

defined by the municipalities, end users, and various professionals (among which private operators)

Define the amount of taxes which should be paid by the end users (through the tariff) in order to finance (or to contribute to finance) the part of the investments program

Control the execution of the program

Page 12 May 2005

Part II

1rst challenge: the investment requirements and its global

financing structure

Page 13 May 2005

A – Structures of the investments requirements (1)A – Structures of the investments requirements (1)

Ex Year 2000: Global water financial needs Euro 17.8 billions

Out of which: Operational costs needs: Euro 11.7 billionsInvestments financing: Euro 6.1 billions

Out of which Drinking water: Euro 2.7 billions

(Network: 1.8 billion – Treatment: 0.9 billion)

Sanitation: Euro 3.4 billions(Network: 2.4 billion – Treatment: 1 billion)

Source: National Audit Court December 2003

Page 14 May 2005

A – Structures of the investments requirements (2)A – Structures of the investments requirements (2)

Source: National Audit Court December 2003

Financial needs for the next 10 years

New mandatory investments imposed by environmental regulations over 10 years- Drinking water: Euro 12.1 billions

Out of which Treatment: Euro 4.5 billions Network: Euro 7.6 billions

- Sanitation: Euro 9.15 billions(Mainly networks – Cities over 2,000 inhabitants)

Regular maintenance investments: total Euro 3 billion a year (on average)- Drinking water: Euro 1.5 billion a year (mainly network)

- Sanitation: Euro 1.5 billion a year (mainly network)

Operational costs: between Euro 10 and 12 billions a year

Page 15 May 2005

B – Structures of the financing sourcesB – Structures of the financing sources

• Operational needs: Euro 11.7 bilions

• Investments: Euro 6.1 billions

Total: Euro 17.8 billions

GLOBAL NEEDS (Ex: year 2000) THE MAIN SOURCES

• Department: 3 %• Region: 1 %• Municipal budget: 1 %

80 %END USERS:

(Tariff x Volume)

SUBSIDIES FROM PUBLIC AUTHORITIES: 5 %

• Subsidies (Infrastructures funds): 2 %• Long term loans from Hydrographic Regions: 13 %

SUBSIDIES OR SUBSIDISED LONG TERM LOANS: 15 %

Source: BIPE - December 2003 (one of the leading European providers of forward-looking economic analyses and consulting services)

Page 16 May 2005

Part II

2nd challenge: how to cope with the investments and cost challenges without being obliged to increase dramatically the tariffs levels ?

Page 17 May 2005

Water bill – What costs are covered ? How are they evaluated ? Water bill – What costs are covered ? How are they evaluated ?

What costs are covered by the tariff structure ? (Based on year 2000)

42 % Treatment and distribution of drinking water

31 % Sanitation costs

17 % Hydrographical Agencies

10 % VAT + Tax

Tariff structure

2 principles: - 1 water tariff by municipality or group of municipalities

- Full cost recovery

2 methods:- Tariff directly linked with the volumes (with differences by levels of the volumes used)

- Tariff calculated in 2 parts: a fixed part (17%)+ a proportional part linked to the volumes used (83%)

Drinking water: 90 % of municipalities are using the 2nd tariff structureWastewater: 38 % of municipalities are using the 2nd tariff structure

Page 18 May 2005

Factors which impacts the tariff level of each Factors which impacts the tariff level of each municipalities ? municipalities ?

• Treatment process• Network: unique or separate• Network length• Wastewater collection efficiency • % of wastewater collected

• Origin of the resources• Treatment process before distribution• Network length• Rate of network maintenance• Nature of the end users:

corporates, industrials, etc impact of the tourist season

SANITATIONDRINKING WATER

Page 19 May 2005

Evolution of the water tariff, all factors being Evolution of the water tariff, all factors being consideredconsidered

From 1995 to 2004: The global costs of the water services has increased by 16 % Compared to a price index which has only increased from 6 % during the same

period But yearly tariff increase has been decreasing:

1990 – 1994: + 15% 1994 – 1995: + 6.5% 1995 – 2004: + 1.7%

Presently, the tariff levels allow to cope with the investments and operational cost requirements.

Page 20 May 2005

Water Tariff in 5 French cities / areasWater Tariff in 5 French cities / areas

AVERAGE WATER TARIFF in 2003 (in Euro per m3)

　 　 　 　Local currency

city 1:PARIS

city 2:Syndicat d'Ile de France

city 3:Bordeaux (Syndicat )

city 4:Lille

(communauté urbaine )

city 5:Lyon

(communauté urbaine )

Service charge or fixed bill component (not related to consumption)

　 0.08 0.11 0.26 0.14 0.26

Variable component, based on water consumption

Based on 200m3/year 0.85 1.28 0.91 0.92 1.19

Other charges on drinking water 　 　 　 　 　 　

　 　 　 　 　 　 　 　 　 　

CHARGE FOR DRINKING WATER Based on 200m3/year 0.93 1.39 1.17 1.05 1.46

Sewerage 　 　 　 　 　 　 　 　

　 　 　 　 　 　 　 　 　 　

Waste water treatment 　 　 　 　 　 　 　

　 　 　 　 　 0.73 0.98 1.17 1.14 0.67

Other charges 　 　 　 　 　 　 　 　

　 　 　 　 　 0.55 0.56 0.37 0.54 0.40

VAT and/or other taxes 　 　 　 　 　 　 　

　 　 　 　 　 0.12 0.16 0.15 0.15 0.14

TOTAL ANNUAL BILLED WATER CHARGES

　 2.33 3.09 2.86 2.88 2.66

Page 21 May 2005

Part III : China, an application in relation with the local constraints

May 2005

Thank you for your attentionThank you for your attention