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The following article was published in The Marker By Avi Bar-Eli in Hebrew

Veolia Israel's CEO: This is how environmental businesses will become the fastest developing businesses in Israel.

Veolia's CEO finally speaks: What is the political price of the Light Train Project? Which parts of the energy generation field are most profitable? How profitable is waste recycling? Why should water corporations be privatized?

16.01.2012  08:22  By Avi Bar-Eli

The Israeli business sector came across a warning sign last month, when Veolia announced its re-organization plan, which includes withdrawing from 40 of the 77 countries in which it operates, focusing on its core operation, and implementing its 5 million Euro global program.

The rumors about the first wave of the financial crisis which is on its way to flood Israel have become more severe after discovering that Veolia's local branch - Veolia Israel - intends to sell its electricity contracting projects to Electra group. This happened after Veolia had already decided to put expanding its operation in public transport on hold and to sell its share in the Light Train project in Jerusalem.

However, Veolia rushed to deny its intention to leave Israel after 20 years of operating there. "Not only does Veolia not intend on leaving Israel - but is also planning to stay here for many more years, it will invest billions of Shekels and focus on its core operations, just as every other company in the world does at times of financial crisis," said Arnon Fishbein, CEO of Veolia Israel, in an interview with TheMarker. "At the moment, we are promoting 20-30 entrepreneurial projects, therefore our future activity will be fun. Veolia is simply a very fast group when it comes to making decisions."

What decisions has Veolia made due to the gloomy forecast?

"To do what we do best, and profit at what we do best. Therefore, the instruction is to focus on the core operation: energy, water, and the environment - and not to waste money."

Does this mean you will abandon the public transportation sector?

"There has always been an argument in Veolia as to whether public transportation should be included in the core operations, two years ago we merged our public transportation projects with those of the French group Ttansdev, and now Veolia holds a 50% share of the merged company. The plan was to implement stock issue, however it turns out there is only a slim chance of that taking place in 2012-2013. Therefore, we are debating whether or not to sell some of our holdings to public government bodies in order to decrease our holdings to 25%."

"The new management will be the one to plan the future strategy; I assume this will take a year or two. It is true that the public transport sector in Israel is facing some major changes, therefore if we see that the market is competitive and profitable, I do not think they will stop us from taking part in the bids."

What about decreasing the number of countries Veolia operates in?

"Veolia Israel is the most profitable of all the Veolia branches in the world. We operate in fields in Israel which will surely develop thanks to the natural gas revolution and increasing environmental regulations. It is important to understand that Veolia Israel is a pilot project of the international Veolia. We operate as one division, while every division in the world operates separately. Veolia's largest desalination plants and RDF (producing fuel by recycling solid waste) are in Israel. Israel is not one of the countries Veolia intends to withdraw from, and we are far from that."

"Our advantage in quality does not translate into profit"

The uncertainty about Veolia's future in the public transport sector in Israel is worrying, if not surprising, taking in consideration that Veolia is one of the best and most dominant of the private operators in that sector. It employs 300 drivers and operates about 300 buses in the Lod-Modiin branch - which it will lose in the next few months when the contract comes to an end. Its contract in Ashdod and Tiberias will come to an end in 2013, leaving the bus lines from Bnei-Brak to Jerusalem which it will be operating for the next 12 years. This constitutes about 15% of the group's turnover in Israel.

"The results in this sector are not impressive," Fishbein admits. "The bids are very competitive and there is not much room there for quality. I conduct a quality control analysis which includes, for example, tens of top quality employees, but our advantage in quality does not translate into an advantage in profit. If we think of these bids as a way to quench our thirst and become healthy, then we will have to move on to the next bids."

Is there a point in selling shares of Egged and Dan in open bids?

"Of course. It is apparent that services have improved and prices went down - even though services have not been completely privatized yet. When we started operating in Bnei-Brak alongside of Egged, for example, the service immediately improved. The conclusion is that competition always wins."

What should be done in order to make this sector more profitable?

"Our interest is to improve the quality, whereas the government should find the golden path between prices and quality. If quality took up 40% of their priority, then I would profit."

With all due respect to Veolia's operation in public buses, the reason for its appearance in the headlines this year was due to its holding of the Light Train Project in Jerusalem, where it holds 5% of Citypass's share, and 80% of the share of the project operator (Connex Jerusalem). As project operator, Veolia has to operate part of the trains (10 instead of 23), and also has to be the one handling the still frequent problems. "The labor pains of the project have not dissolved yet, they are in the process of being solved," Fishbein admits. "There are a million reasons for that - Veolia currently works as an arbitrator. The government, the contractor, and the operator are all responsible, and each one of them has to contribute to the process."

When asked what Citypass could have done differently in order to avoid the dilemma the project fell into, Fishbein reveals the tensions between the different parties. "The contracts between Citypass and the government were arranged in a way that causes responsibility to fall onto the contractor, the operator, or the government - while the project owner does not have to take any responsibility," Fishbein notes. "The arrangement of the contracts does not allow the owners of the project to say anything to the contractor or to the operator, therefore the owners always hold other people responsible for any mistakes. This is the first time I encounter such a thing. Still, I think this is a great project - it changes the face of the city, I am honored to be a part of it."

However, half a year ago, after the launching of the project, Veolia sold its holdings to Egged. It is assumed that the deal was a result of political pressure on Veolia from Europe due to its involvement in Jerusalem - especially from pro-Palestinian organizations, which even took legal steps against Veolia.

It is reported that this caused Veolia to lose some contracts in other countries in Scandinavia and the Middle East. When asked about the effect of regional politics on the decision to withdraw from the project, Fishbein does not deny it: "There was pressure in the company because there are many people in the group who think that the company lost many contracts because of this project," he admits. "However, we would never leave a contract before its end, selling bring us good profit."

The deal is, however, still restrained because of the government's request that the operator be an experience foreign party, and also because the loan banks handed the project to the inexperienced Egged. "We are not running away from any contract," Fishbein says. "We have done an economic business deal, if it works, we would be glad to continue. And if not - we would not stop the train."

Fishbein assures that, either way, Veolia will take part in the operation bid which will be publicized by N.T.A company for operating the light train in Gush-Dan.

Five years ago, Veolia lost the bid for that project to MTS group after competing with Shikun&Binui and others from Metro Rail group, which came second.

"All along, we thought that the MTS's proposal for the bid was technologically problematic and unimplementable - but the government decided otherwise," Fishbein brings up Metro Rail's petition against MTS's winning, which was denied, and the warnings it sent to the government.

Did the government say it regrets this?

"Have you ever heard of a self-critical government? Quality is forgotten in the government bids, the focus is more on prices than on criteria of quality and professionalism. There will always be a trade-off between quality and pricing."

"It does not matter what the law is - just do not change it"

While Veolia's public transport projects have been dimming, projects in energy and water have been radiating, as Veolia is counting on their development in the coming years. This year, Veolia will guide its joint project with the Israel Corporation (20%-80% respectively) to construct the first power station in Mishor Rotem (O.P.C Project). At the same time, Veolia is promoting a project for constructing a similar power station with RAPAC near Kiryat-Gat. In addition, in the past year Veolia has processed a license to build six medium solar plants, and it sold 80% the shares to the French electricity company EDF.

"Uri Starkman, chairman of Veolia Israel, once told me that the only things that are certain in life are death and taxes" [Originally a quote by Benjamin Franklin - note by the translator] Fishbein answered when asked about his level of certainty regarding future projects of electricity generation, "we push the projects, but there is a problem with regulation, which is up the air, and its uncertainty affects the business prospect."

How do the deep macro-economic changes which Israel has (and still is) promoting really look in foreign eyes?

"We will cope with any new law or change of regulation; it is part of the game. Our problem is with retroactive changes. As an international company, we recruit funds abroad, and when we were facing investment committees we always said that Israel is a stable law-abiding country. Retroactive changes make it very difficult to recruit funds, they have caused fears of laws changing post factum, like what happened with the landfill tax and the incentives for mobile phone manufacturing. What can I say to our investors? That the government suddenly changed the law? I do not care what the law is - just stop changing it."

According to Fishbein, Veolia has lately been the niche of electricity cogeneration as a driving force for its future development in Israel - especially in the industrial field. This decision has been made despite the unclear regulations in this field. "The fields of minor energy systems, energy saving and cooling centres are the future, we will take them up with all our might," Fishbein reveals. "Low pressure gas streaming to small clients opens up a huge market in Israel - I myself also do not think Israel needs additional large power plants. The world is going in the direction of saving and centralizing energy systems. The international Veolia operates around 800 power stations in 7000 mega-watt - which mean less than a 10 mega-watt average per station."

Veolia also sees water resources as a field for developing, although the group thinks that this field will not develop in Israel in the next few years. About a decade ago, the company won a bid with IDE (50%) to build the first water desalination facility in Israel in Ashkelon, but since then it has lost the other large desalination bids published by the government, which means that its hope has not come true because incorporation reform of the municipal water and sewage units will eventually cause their privatization.

"Veolia Water is the largest water company in the world, circulating about 10 billion Euros a year, most of them come from managing urban water resources, including conduction, sewage, and tax collection," Fishbein says, and then deduces from the global to the Israeli water resources: "Israel is going towards privatization, after all this was the idea behind establishing the water and sewage corporations. Every day, Veolia proves that it is doing a better job than the municipalities did, and it looks forward to the growth of the water market, while in the mean time we invest millions in developing industrial sewage facilities."

Realistically, under the current situation, do you think there is a possibility of privatization?

"I remain skeptical regarding the water corporation, although I do think that they will be privatized eventually. The public water system is not run by municipalities in the rest of the world, all water corporations are being privatized - because it works. If my company is valued according to the rate of leaks in a pipeline, i.e. charging by meter reading multiplied by 0.9, while each additional leak is on my own expense - then what would I to in order to make profit?"

In the meantime, Fishbein announced that Veolia will compete in every water desalination bid offered by the government. Regarding the question as to how can it avoid another win of IDE (desalination engineering) in the upcoming bid (as has happened in the bids for Hadera and Sorek), Fishbein's answer is that Veolia has learned its lesson from the past losses: "IDE offered a very low price for the bid for constructing a desalination facility in Sorek, after having done some technological improvements which everyone today knows of. I do not think will stand still in the future bids, we will also know how to improve the system."

Was the reason for our loss a technological upgrade, or the fact that IDE can enjoy cheap electricity thanks to its cross-ownership of one of the mother-companies (Delek) of a gas supplier and an entrepreneurial power station (Delek Tashtiyot)?

"According to what I've learned, if they do not majorly improve the desalination system, then they will lose money."

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Do you think the government should allow IDE to compete in the next bid?

"If IDE desalinates water for 2 shekels per cubic meter, while others do it for 2.3 shekels, then it seems they are better. If not, then Israel has a supervisor who is supposed to protect me. The government is a big girl now, and knows how to maintain a low price and free market."

Last summer it became clear that the government did not know how to do those things, after IDE and you both refused to expand the desalination facilities despite the water crisis.

"We agreed to expand the facility in Ashkelon, but we did not agree to the low price offered by the government for the expansion. The investment required from me in order to increase the output of the facility was not justified in the low price offered for water."

"The environmental law enforcement is not strict enough"

Next Thursday, TheMarker will hold the first convention for business and environment in association with Veolia. The convention will try to stress the importance of the environmental aspect in risks management in modern economy; and alternatively, the potential profit which lies in the green business entrepreneurship.

"Environmental issues in Israel are going through major changes," says Fishbein, who was appointed two years ago as CEO if Veolia Israel, after having served as deputy for the former CEO of the group and CEO of subsidiary companies Connex and Dalkia-Israel. Fishbein claims that the revolution happened thanks for the minister of environment protection, Gilad Ardan, who managed to accomplish the legislation of the Packaging Law, doubling the Waste Tax, and to incite sorting waste (dry and moist).

"These laws push the country towards recycling," says Fishbein. "If getting rid of waste cost 200-300 Shekels per ton so far, the implementation of the law will add another 100-150 Shekels for each ton, which will be used for billion Shekels investments for developing this field."

Is it possible that a strict implementation of these laws might make it more difficult for the industry to comprehend the change?

"I actually think that the implementation is not strict enough, but the real problem is that the implementation is not homogeneous.  There are fields in which the implementation is more strict, such as household waste and pollution emission; whereas in other fields it is scandalous, such as construction work waste or wheel recycling. In general, I think the manufacturers' claims are not legitimate. The fact is that wherever the law has been implemented, they had to set up new facilities which they have not initiated in years. If you give them freedom of action - they will pollute."

Still, Fishbein claims that the environmental law also poses a problem for the government: "When they thought about a way to move from a situation of zero recycling to the Western world, they decided to do that first of all by legislation. This created a situation where they push, for example, the local authorities to encourage sorting waste, they establish a non-profit corporation (TMIR) in order to watch manufacturers' recycling, but they have not yet assured building facilities for sorting and recycling to take care of the sorted waste - thus the whole country is actually breaking the law. A garbage truck in Beir-Sheba collects sorted waste, but then drops it all in one place - this is because there is not yet the facility for handing sorted waste."

However, business opportunities rise from crisis, and the urgent need for such facilities poses Veolia at an advantage in the field. "When landfill prices rise, recycling becomes worthwhile - therefore we are facing a huge wave of demand for sorting and recycling facilities, with a great drive which will only grow more and more in the coming years," he says.

"The greatest development in our business is in the environmental sector, which is rising at a double-digit rate each year - and is still expected to double itself in the coming years," he explains. "The water division still depends on regulations. As for public transport, I do not know yet where we will be, in energy we are going back to the core business, and in waste we are sure that our activity will only grow."