Even if the water utilities market in Italy appears chaotic, in the attempt to combine economic success and respect for the common good, we can identify the trajectory of the sector over the last 50 years. During this time of technology evolution, a number of water utilities trends have emerged:
- Adoption of a fully entrepreneurial logic
- Attention to environmental sustainability
- Recognition of the importance of the end consumer
- Intensive use of the new tools made available by digitalization in the dimensions of asset management and service and around the themes of personalization, dematerialization, and the centrality of the customer experience
In this post, the first in a series that focuses on the use of innovative technologies in the water sector, we will try to provide some coordinates to define the context of the water utilities trends companies are facing, how they impact on the system, and look at the business results of the main companies in the sector.
The context: Water sector legislation in Italy
In Italy, the management of water utilities has experienced a very turbulent history, especially in the last 50 years, which is reflected in a changing regulatory framework, and one that is still evolving.
From the Royal Decree of 1933 to the integrated water service of the Galli Law
The ownership of water by the Italian State was officially established with the Royal Decree of 1933. However, to be able to address the issue of water management from a more modern point of view, in terms of an integrated water service – meaning the entire water cycle as a system – we must wait for the so-called Galli Law (Law n.36 of January 5, 1994), which states in Article 4:
“(the integrated water service) is constituted by the set of public services of capture, adduction, and distribution of water for civil uses, sewage, and wastewater treatment”.
In other words, the integrated water service includes transportation, which takes place through the network of aqueducts (the pipes through which the water flows, which are usually made of cast iron, steel, or cement); distribution, when the water reaches homes for various daily uses; sewage through pipes designed to collect waste water produced by humans or business activities to deliver them to purification plants; purification, which has the function of returning water to the environment in good condition, so that it can be reused.
The Galli Law also lays the foundation for developing more sophisticated ecological, economic, and organizational considerations. For example, it introduces the concept of safeguarding water, a public resource to be managed according to criteria of solidarity for the benefit of future generations, and provides for the creation of the Authorities of Optimal Territorial Ambit (AATO), which are bodies for control and protection defined by the regions. This last point is important for our current discussion: The possibility of contracting out to public or private companies, which are responsible for covering costs through tariffs, translates into an attempt to make the service more efficient, so much so that for the first time the management of the sector is clearly based on a typically entrepreneurial logic.
The contestability of the service: The Ronchi Decree of 2009 and the 2011 referendum
In 2009, the Ronchi Decree required municipalities and provinces that manage water through public companies to put the service out to tender, and it required mixed public-private companies to reduce the share of public capital to 30% by 2015. Both provisions were abolished by the subsequent referendum of June 2011, which generated some regulatory confusion; even now, several parties continue to call for a precise and comprehensive definition of governance.
In general, as far as the operational management plan is concerned, the situation is currently regulated by regional laws that refer to the individual AATOs, concessions, and tariff composition. The bodies identified by the Regions for each Ambito Territoriale Ottimale (Optimal Territorial Ambit) transfer municipal responsibilities for the management of water resources, including the planning of water infrastructures to the Enti di Governo dell’Ambito (EGA). The governing body of the area, in compliance with the area plan and the principle of single management, chooses the form of management among those provided for by European law, consequently providing for the assignment of the integrated water service. European Union law has outlined three organizational and management paradigms: Entrusting by tender, public-private partnership with tender for the choice of the private partner (PPP), or using an in-house provider (source: arera.it).
The circular economy package: Europe calls for greater attention to the environment
Europe has also intervened with various directives, expressing itself mainly on environmental issues. Among the many pronouncements, there are several that focus on obligations for monitoring the minimum quantity of chemical agents present in water, for example.
The publication of the “package” on the circular economy by the European Parliament (dated March 14, 2018) has added to the commitment on environmental issues from an industrial and business perspective. Focusing on each of the three pillar sectors of multi-utility companies — waste recycling, energy production and distribution, and, the water cycle — the European provisions in the package have indicated a specific business model, which is ecological, sustainable, and profitable from the point of view of economic results that can only be built by employing enabling technology solutions. In other words, the direction in which the European Parliament is moving reflects a global water utilities trend: Technology is increasingly conceived as a privileged tool that can be used to promote sustainable development, increase performance, and improve the experience of citizens. The new tools can help companies operating in the water sector to optimize their processes in terms of infrastructure and hardware and in the case of services to the end customer.
Even if investments by companies and institutions continue to revolve around infrastructure, on the services side, things have begun to move at a dizzying speed. The complication of the purchase funnel, following the exponential increase in the amount of information available and the proliferation of digital touchpoints, makes it increasingly necessary to have greater flexibility in order to precisely differentiate consumption, to accurately profile the user, in other words, to personalize the service. This is one of the most important water utilities trends: Placing the end customer at the center of the system of values and business production practices as part of an industry-wide revolution.
The role of water in the economic cycle: The main water utilities trends
The manager. According to Utilitalia (an organization that associates entities and structures involved in the planning and design of water systems on a local scale), the distribution of the national population by type of manager clearly highlights a water utilities sector trend where the management is public (which is present to some extent, in 98% of the entities surveyed):
- Public company (100%) 53%
- Mixed company with public majority/control 32%
- Direct management by the local authority 12%
- Mixed company with private majority/control 1%
- Private company 2%
(Source: Utilitalia processing of Blue Book 2017 data – most recent data).
Type of consumption and criticality. The recent ISPRA report n. 323/2000, “Water resources in the geological context of the Italian territory. Availability, large dams, geological risks, opportunities”, points out that:
“the agricultural sector uses 60% of the overall water demand; the energy and industrial sector uses 25%; the civil sector uses 15%. The per capita consumption of water sees Italy in first place in Europe and third on a global scale after the United States and Canada, but with extremely variable values, ranging from 150 to 400 liters per day. The most worrying data concerns the loss of distribution networks, which unfortunately shows a rate of about 40 percent, both for drinking and irrigation use.”
The water divide in Italy does not show signs of shrinking. Excluding the top 10-20 operators, the average size of water service managers is small. More than 50% of companies have a turnover of less than €10 million. This percentage rises dramatically in the South (up to almost 80%) where, instead, it would be more necessary than ever to modernize, although this would be impossible with the limited resources currently available.
This is the Italian panorama. But now, let’s look at the water utilities trends that characterize the economic and industrial sectors in the new normal imposed by the COVID-19 pandemic. What we discover is actually a rich, open, and developing context.
The water sector: A resistant, reactive, resilient supply chain
A map drawn up by The European House – Ambrosetti shows how the water supply chain is currently the second largest in Italy in terms of added value and has withstood the emergency produced by the spread of COVID-19 much better than other sectors. The water sector is now worth, directly or indirectly, a little less than one-fifth of the country’s GDP (310.4 billion), meaning that that money could not be generated without water. To put this in perspective, this amount is nearly equal to that of the entire GDP of South Africa, and exceeds that of Finland (240 billion), Portugal (212 billion), and Greece (187 billion).
The mapping by The European House – Ambrosetti shows a vital sector, with almost 1.8 million companies involved in the water supply chain in Italy, of which:
- 1.5 million are agricultural companies, for which water is the primary production input
- 350,452 are manufacturing companies defined as “water-intensive” (i.e., characterized by above-average for the manufacturing sector)
- 8,181 companies in the energy sector
- 3,533 companies operating in at least one of the seven phases of the integrated water cycle (from capture to reuse) and suppliers of inputs for the same primary supply chain (technology and software providers, machinery and plant suppliers)
All of these businesses together have a turnover of more than 1,020 billion euros (60.5 billion euros for agricultural companies, 902 billion euros for water-based manufacturing companies, 237 billion euros for energy companies and 21.4 billion euros for companies involved in various phases of the production chain, the so-called “extended water cycle”) and employ a total of 4.6 million workers.
According to the Ambrosetti study, “if the extended water cycle were a single sector, it would rank second in Italy in terms of added value growth in the period 2013-2019,” placing itself behind only the pharmaceutical sector (Source: firstonline.info).
Digitization as the main water utility trend in Italy today
We can say that the water market, even if fragmented at a structural level and with some serious criticalities still to be resolved, represents a huge, fundamental, and strategic sector. The water business, in the wake of technological innovation and within an increasingly smart approach, has seen changes in recent years in its methods and organization.
As we mentioned in a previous post, the brand identity of sector giants has been impacted inevitably by the concepts of environmental sustainability, energy efficiency, and transparency. However, the trend that has dictated new points of reference, renewed corporate philosophies, and imposed alternative business models has perhaps been the profound redefinition of the role of the user, who has become a real asset and added value for companies in the sector. This assumption of centrality by the consumer is a direct consequence of a series of processes. Among these processes– technological, industrial, economic, cultural — that of digitalization is unquestionably of enormous importance.
In order to manage change and enhance consumer services, water companies – as well as energy and utilities companies – had to quickly learn how to use the extraordinary capabilities of digital resources. At the same time, they were also called upon to reorganize their marketing and customer care departments, which had to carry out a task that had become essential: Establishing a one-to-one, tailor-made dialog with customers.
This required them to open a channel, maintain contact, and to provide a satisfactory customer experience. To achieve these objectives, the customer service departments of water companies can now count on a wide range of solutions, for example, it can:
- Leverage the potential of smart content marketing, the digital technology that makes it possible for companies to build strong relationships at every touchpoint. Thanks to the experience of personalized micro-sites, customers get the answers they are looking by navigating paths built from their specific consumption profiles
- Employ the engaging storytelling of video marketing, which opens up vast possibilities of customer participation, providing alerts, information on the water supply chain, and indications on procedures and payment methods
- Enjoy the benefits of dematerialization, moving from paper to digital and thus enjoy numerous advantages that translate into economic savings, time savings, and greater efficiency.
Beyond the news, an important confirmation
In Italy, the organizations involved in managing water – an essential resource resource that must be administered with infinite care – must find solutions with the least environmental impact and must learn to move with extreme intelligence in a context characterized by regulatory and administrative confusion and by an unequal distribution of investments that is still burdened by the effects of the COVID-19 emergency.
In spite of these undeniable difficulties, some linked to current events and others to more chronic and structural issues, the Italian water sector is showing encouraging signs. In recent years it has achieved important results in terms of research and innovation and offers, as we have seen, great margins for economic growth. What seems to contribute most to the vitality of the sector is the increasingly indispensable use of the tools made available by digitalization.
In fact, digitalization has been confirmed as the water utilities trend to keep an eye on and the one that can encompass other trends we identified in this post: The adoption of a fully entrepreneurial logic, attention to environmental sustainability and, above all, recognition of the importance of the end consumer.
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