Q: Why go global? It seems that B&V was doing fine in U.S. markets?

A: For us, the writing is clearly on the wall. The U.S. environmental market is flat. The economy is growing at 2 percent, the population is growing at 1 percent, and the environmental industry is growing at 2 percent. Even if these market drivers double, you could only expect 4 percent growth in your revenues; however, in Asia, the economies are growing on average by 17 percent. There are risks, but there are also great rewards.

Q: When did B&V's Infrastructure Business really start moving into global markets?

A: In 1992 we developed our Vision 2000, which became our blueprint for becoming a global player in the infrastructure business. We said we were going to become a global player through mergers, acquisitions, and strategic alliances. Prior to that we were what I would call an international firm. We had a few project-centered offices around the world, but we didn't have a global operation. We were doing work out of Kansas City, and we had project offices in Cairo and in Turkey. We'd win the work and we'd bring it back to Kansas City to complete. We'd manage customer relations out at the particular project office. This strategy was working on a small scale but not on the larger scale we had planned for in Vision 2000. That's why we decided to change our approach.

Q: The Power Business of B&V had achieved success in Asia. Could you utilize the Power Division's strategy for Asia to fit the needs of the Environmental Infrastructure Business?

A: We couldn't directly use Power Business's strategy. Our clients were different. We realized that being local was the only way to do business development and execute projects in Asia effectively. We really started looking at the needs and the costs of a permanent business infrastructure, not just project offices that were utilized by the Power Business. But we didn't move right away. It has taken the Asian markets awhile to mature enough to warrant our investment of time and money. Some have asked if we started too late. Maybe, but in the 1980s there wasn't the kind of market that would support a significant investment it was just too early.

The current growth in Asia is what caused us to look into changing our approach. The Infrastructure Business is much more aggressive with offices throughout the world. We are one big team with each business unit supporting the other.

Q: How does the Binnie partnership fit into your Vision 2000, and has it been successful?

A: As part of our Vision 2000, we wanted to become a global organization and provide existing as well as new services to expand market share. We looked at a number of opportunities back in the early 1990s and established several joint companies, which, unfortunately never flourished. Since 1981, we had been working jointly with Binnie. As this project started winding down, we began discussion on joining forces. Approximately 18 months ago, we executed the merger of Binnie with Black and Veatch; it's been a perfect marriage since that time. It's been perfect, because we picked the right partner. Binnie has the right mental outlook, the right cultural values, the right approach to business, and the chemistry was great. We brought them in not as an acquisition but as partner, so they had the same interests in making the company go forward as we did.

Q: Can you be more specific about why Binnie was so right for B&V? Has the combined company, in fact, been successful in obtaining work?

A: If you were to say you're going to add in 1,200 people to your existing organization and become global overnight and be profitable at the same time, nobody would have thought it was possible. But all of those events have occurred. The Binnie merger itself has brought to us world-class people for projects around the world. They've got a tremendous operation in Asia, specifically in Hong Kong and Singapore, which we never had before. In Hong Kong, Singapore, Vietnam, Jakarta, and Bangkok, we probably now have around 500 staff. We had no one over there 18 months ago. It has given us what we need in the fastest growing part of the world. Not only do we now have 500 new people, but they're winning jobs. They've won two of the largest water plant projects in Southeast Asia, Tai Po and Kota Tinggi. Tai Po in Hong Kong is the largest water plant project in that part of the world; Kota Tinggi is a major water treatment project for Singapore.

Q: I understand that a strategic alliance was developed with Thames Water. What is the structure of the Thames alliance?

A: At the time of the merger, we met with Thames Water and Binnie and expressed our interest in developing a long-term strategic alliance with them. That was in May 1995. In March 1996, Thames contacted us to indicate they had an opportunity to discuss with us. Several years ago, they had purchased a C&E firm in Germany and a process constructor firm in the United Kingdom; now their board wanted them to refocus on their core business of utility operation and maintenance and sell the two companies. We were asked if we would be interested in purchasing them. We saw this as a great opportunity.

At the same time, we were interested in working with Thames to help capture global market share. We eventually acquired both their process constructor firm, called PWT (now Paterson Candy), and their German engineering consulting firm, called UTAG (now Prowa Consulting). These firms brought us a total of about 450 people and about $100 million in new revenues. These acquisitions provided a production center on the European continent, a water and waste contracting firm with experience in Europe, the Middle East, Africa, and Asia and helped B&V develop an engineering-procurement- construction (EPC) practice around the world. In addition, we entered into a strategic alliance with Thames to win major concessions projects anywhere in the world.

Q: But how do you handle the division of services in the Thames alliance? Isn't there potential for intergroup competition?

A: Yes, however, we've made a strategic decision not to get into the operation and maintenance (O&M) business. Some of our competitors have. We've elected not to, because it would become a threat to some of our clients. We don't want our clients to think we're going to come in and try to take over their operation, so we've always stayed away from O&M, especially in the United States. The decision to not go into O&M domestically is proof to international partners that we're not going to compete with them for O&M business.

Q: What did B&V bring to Thames?

A: Initially, as part of our global strategy, we wanted to have an O&M partner that we could work with around the world but not in the United States. On global concessions projects, Thames realized they were not experts in international project design and construction management. B&V brings exactly thatexpertise. The combination of the skills of the two firms allows us to be extremely competitive. B&V's commitment to foregoing an O&M arm, makes us a good partner for Thames. They don't have to share O&M revenues with us, so it's a win-win situation.

Q: I see the benefits in the Thames partnership, but what about with Binnie themselves? Binnie is a world-class engineering design firm. Your areas of expertise overlap completely. In fact, you've been competitors for years. How do you decide on who does what?

A: Very simple. That's part of the beauty of the merger. They joined us as partners and together we looked at the world and said, "Alright, where is Binnie now?" Binnie is in Europe, Africa, the Middle East, and Asia. "Where's B&V now?" We're in the United States and Latin America and doing a little work in the Middle East and Asia. We divided the world into four geographic regions: Latin America, North America, Europe, which includes Africa, and Asia. Binnie's territories are Europe and Asia, and B&V's operational markets are in Latin America and North America.

We have also integrated people across geographical territories. It works both ways some of the former Binnie people are working with us in Latin America and some B&V people are working in Asia and Europe. We've basically brought all of the resources of B&V to the whole world regardless of where they're based. We don't have any conflicts, and we show up at the same office competing for the same job. We show up as B&V.

To take things a step further, we moved my assistant and my chief financial officer over to the United Kingdom to integrate B&V business systems and practices into the former Binnie organization. We also have formed a virtual global technology department. This department brings all the global process technologies together and allows for determination of the best processes in any part of the world.

Q: Has it been a struggle to focus the efforts of the original B&V, Binnie, Prowa, and Paterson Candy?

A: I wouldn't say a struggle. I think that "exhilarating" is a better word. Instead of diffusing the focus, we've been better able to focus our business development resources. The resources of our B&V international group before the merger had to cover the globe. Now, after the merger, we can focus directly on whatever market we believe needs the most attention. The remaining Asian and European markets that we used to cover can now be covered with Binnie's and Prowa's resources respectively. It is unlikely to get that type of world coverage in that short of a time span (18 months) without acquisition.

Q: Can you talk about the risk of acquisition, especially in Asia. What were some of the riskier considerations related to the Binnie merger?

A: There was and continues to be substantial risk. Our largest exposure with the Binnie merger is in Hong Kong. We're doing great there and making money. They are one of the largest environmental firms in Hong Kong. It all can change overnight on July 1, 1997, with the Chinese takeover. We don't know what's going to happen; nobody does. The Chinese probably don't know. Obviously, things could change overnight and that 350-person organization could have its work taken away from it. It could be that no more work will be given to the Hong Kong office unless it's tied to a Chinese design institute. There are a lot of unknowns. We have put a strategy in place to make sure that regardless of the outcome we can recover from it. One element of our plan is to place more Chinese directors in the company, which we're doing now. We just added one last week. Another element of the plan is to make sure we're not totally dependent on certain projects. Yes, there's a big risk in Hong Kong and as a non-Chinese firm operating in Hong Kong, we stand the chance of having a problem. We hope it doesn't happen, but if it does, we have prepared for those risks and have a contingency plan in place.

Q: What about risks in other countries?

A: Let's go to mainland China. If we acquired a company in China, risks would certainly exist, but there are ways to reduce such risks and still have access to some rewards. We are planning on purchasing a much smaller company in China. If we did have a problem, it would be minimized because of the size of the company. The company would be large enough, however, to give us the necessary foothold from which to grow.

Q: Are there risks in Singapore?

A: Probably not too great a risk. Singapore's fairly stable. It's the new Hong Kong of Southeast Asia. The greatest risk we have in Singapore is that the cost of engineering work is becoming excessive.

The risk in Malaysia relates to the amount of equity control foreign firms can have in Malaysian firms. The Malaysian government does not allow foreign-controlled Malaysian companies. Foreign firms can only purchase a minority share. The Malaysian government goes a step further and will only award major contracts to Malaysian majority-owned firms. This in fact relegates all foreign firms to minority positions on any project. We are not comfortable in that position. Our position as a firm is to control our own destiny; to do that we have to be a majority owner. We do not feel comfortable when we don't have control of all the risks and the rewards. A local company may take on more risks or make project decisions that are not in concert with our own business practices. To minimize this type of risk, we either take a majority position or we don't invest.

Q: Earlier you spoke about adding services. What new services is B&V providing to be more competitive as a global company?

A: Our forward-looking approach to the marketplace is putting us ahead of our industry today. We're going through what we call a triple transition. We're making a transition from a domestic engineering firm to a global firm and from a traditional engineering firm to an engineering- procurement-construction (EPC) firm and expanding our focus beyond traditional engineering work to include a wide variety of other types of projects. The most substantial change is the adding of the EPC component.

Q: How is the EPC component of B&V's strategy helping?

A: Our EPC strategy is really the thing that's going to help us in the international marketplace. Internationally and domestically, C&E firms have traditionally taken only the design portions and some of the construction management. Breaking out of that traditional C&E role is the only way to compete globally. Developers want everyone on the team to have a piece of the risk and will compensate that risk sharing with reward. Developing our EPC practice includes assuming part of the project risk, which separates us from our more conservative risk-averse competitors. The fact is we are really taking the EPC risk head on because we want to be project leaders. Many of our competitors think they're doing EPC when in reality they're only subcontractors to a project developer or general contractor. Our position is to actually be the general contractor and lead the construction project. We're willing to take construction risk, and we're willing to take some equity in the projects.

In our case, we're taking on the riskier EPC work because of our global vision and successful EPC experience in the power sector. We also realized that more money can be made on EPC than on design engineering. Engineering work returns around 5 percent, whereas EPC returns upward of 15-20 percent. One can make a living doing design but to continue to grow like we want to can't be done by just selling man-hours. That's a thing of the past. Design work returns such a small margin, and our clients are demanding so much that you spend your margin just getting the job! Obviously that's no way to grow. You must change the rules of the game and come up with new mousetraps. Aggressive companies need to take advantage of windows of opportunities when they open. Now the window is EPC and it's the only way we see to obtain double-digit growth and profits.

Q: What has been the financial performance and growth of B&V EPC business practice?

A: We basically started the EPC operations in 1993, meaning we had zero sales in 1993. In 1994, EPC made up 2.2 percent of our total Infrastructure Business sales; today, we're at 28 percent. Our goal is 30 percent by the year 2000. That was part of our Vision 2000, but we're going to surpass this goal in 1997. In terms of dollars, we're probably talking about $120-$140 million worth of EPC work next year. That's quite a jump from zero in 1993.

Q: How are the EPC revenues distributed between U.S. and international?

A: The international EPC revenues are $90-$100 million, whereas domestic EPC revenues are on the order of $30-$40 million.

Q: Of the $90-$100 million international EPC revenues, what percentage was achieved through acquired companies?

A: It was all through acquisition for the EPC revenues. We've done no EPC work outside of the United States that hasn't been through acquisition.

Q: Why has B&V international EPC revenues been so dependent on acquisitions?

A: We depend on acquisitions because we didn't have the local connections and in-country experience to provide a suitable foundation for growth in the required time frame. Said in another way, we had to go to acquisitions to take advantage of the current window of opportunity effectively. The burgeoning environmental infrastructure markets in these developing countries are not going to be there forever. One could choose to start with a satellite office with several expats drumming up business. By the time you've grown and developed sufficient contacts and a reasonable reputation, which could take three to five years, the market could be long gone. Things are just moving way too fast.

Q: In your opinion, is EPC the way to go for U.S. C&E firms considering Asia?

A: Asian customers do not want paper studies. They want infrastructure built. In a typical infrastructure project, there is the up-front design and layout of the process, equipment specifications and procurement, and construction. In the United States, C&E firms typically do the design and general equipment specifications. The competing firms strive for cost-effectiveness on the project through superior up-front process design. Procurement, construction, and construction management are often performed by the utility and a general contractor. In many cases in the United States, the design engineer is not allowed to also be the constructor.

Not so in Europe. Water and wastewater utilities engineer their own project design and layout. Once the design is complete, they hire a process construction firm to procure equipment and build. Project costs savings are achieved by getting the best price for equipment for a fixed design (as opposed to the most cost-effective design with fixed equipment prices). European process construction firms typically hold patents on specialized equipment, which enable them to offer the equipment at a lower rate as part of an overall procure and construct package.

As we entered the international EPC market, we found that we couldn't achieve cost savings and couldn't be as competitive as European firms, because our strengths were in design and not in obtaining equipment at low costs. The Binnie acquisition helped us tremendously, because it brought us the opportunity to purchase Paterson Candy, the Thames Water process constructor company. Paterson Candy had the equipment patents and the construction capability to realize significant cost savings on equipment purchases. This gave B&V the opportunity to be competitive on international EPC projects.

In addition to being competitive, Paterson Candy also has roughly $90 million worth of backlog. We basically got into the construction business overnight. Had we tried to develop it from scratch, we would have had to go out and hire a process group, hire a systems person, and an estimator; it would have taken us forever. And it would have cost us more money to do it that way than acquiring it. This is why we took the big jump and the big risk. Now we have all the pieces: up-front design, construction capability, and equipment cost savings.

Q: B&V is willing to take on the necessary financial risk as well as construction risk to compete for international EPC projects. How is an engineering and consulting firm able to do that?

A: We can tolerate additional risk because of our financial foundation and structure. Our asset base gives us a billion-dollar bonding capacity, which our competitors don't have. The larger our bonding capacity (bonding is basically insurance against project failure: the larger the project, the higher the required bonding), the larger the projects we can go after. With this bonding capacity, we have the critical ability to take the lead position on many project teams. With this leadership comes greater financial rewards. In addition to our bonding capacity, we also have a credit facility of close to $300 million giving us the necessary financial strength to be a worldwide EPC contractor.

Q: Did having the Power Business side of B&V, which most companies don't have, help in making this transition?

A: Yes, having the B&V Power Business helped us make the jump. The Infrastructure Business did not have an EPC practice with a long track record. Instead, we learned from our colleagues in the Power Business. The energy industry began to shift the risk of project construction and operation from the customer onto turnkey constructors at an earlier stage than the environmental industry. Only the power design firms that took on the additional risk of construction have continued to prosper and grow. B&V Power Business accepted this new risk demanded by the market and developed an EPC practice. It had to develop this practice or face the consequences of losing market share or going out of business, which is what happened to many of their competitors from the 1970s and 1980s.

The environmental infrastructure industry has been a little slower to require risk sharing from its design engineers. This industry is more regulation based and it is more municipality based, especially in the United States. Internationally, however, project developers are looking to share the risks and are selecting environmental engineering firms willing to bring more to the table than design expertise. In response, our Infrastructure Business has been able to benefit from the experiences of our Power Business. Having this in-house experience to draw on has been invaluable.

Q: When you say standards, do you mean building construction standards?

A: Yes, plus much more. For example, basic manuals of how we do things, and how we approach EPC, how we put our bids together, how we contract, all the tax issues, the foreign exchange issues. All those things that our competitors would just be tearing their hair out over those have been solved by us. We have been able to get in the marketplace in a short time frame. The other firms could have serious financial problems if they tried to do it. One or two "learning" experiences on large infrastructure projects can be costly.

What we're doing is changing the rules of the game and we're doing it by getting into EPC before our competitors. We can do this because of our financial resources, our recent acquisitions, and our in- house experience gained by the B&V Power Business.

Q: What kind of advice would you give small U.S. firms in the $300-$400 million range, about Asian market penetration strategies?

A: I would tell them to create strategies that match their resources, both financial and human, with their ability and appetite for taking on risk. There are a diverse set of opportunities in Asia. A company approaching Asian markets with fewer resources should focus directly on a particular market and particular segment. Do not spread scarce business development resources too thin. For example, a company might have general wastewater consulting expertise but also some specialized knowledge or experience with reverse osmosis for industrial systems. Resist the temptation of going in as a generalist, if you can, and focus on the reverse osmosis specialization. You can then be known as an industrial water project specialist. Asian clients will have a clearer understanding of what your company does and are more likely to accept your help in solving their problems. The company can then establish a foothold in the niche market and expand into the more general services once client relationships are established. Starting the other way around, that is, going in as a generalist and then specializing once the market is clear, can be costly. Do your homework, find your market before investing, and then go over there focused.

Q: In terms of homework, can you be more specific?

A: Market analysis for us includes both general knowledge, such as the top revenue industries, the top growth industries, political and currency stability, income levels, state of environmental regulations, and more specialized information about regional population growth and infrastructure demand, current treatment technologies, and local willingness to pay for infrastructure services. We also analyze a particular country in terms of the flow of multilateral funds broken down by types of projects, size of projects, project financing terms, which contractors were selected and why, who were the developers and other financial partners, and, specifically, what feasibility studies have been done in that country and what studies are in the pipeline.

Q: For general environmental infrastructure, what would be your top entry markets?

You might want to start in Malaysia, Singapore, or the Philippines, where there is significant ongoing infrastructure investment and the language barriers are not so great. Singapore is becoming the hub for that region, the new "Hong Kong." But just like Hong Kong, Singaporean salaries are rising dramatically and the expenses of running a consulting or contracting operation are getting too expensive. I would not recommend China as a market entry point, even though the potential in China basically dwarfs the other countries. This is another temptation to resist. China is provincial, which means having success in one region of China does not necessarily translate into success in another region. China has plenty of manpower looking for projects, so mostly the Chinese want to learn from you. Once they learn, the Chinese can do a fairly good job with engineering projects but at a much lower cost.

Q: But isn't B&V in China? What's the B&V strategy for China?

A: Yes, we are in China, but we didn't start there. China has too great a potential to be ignored. But, you have to be careful. In China, you have to use the local Chinese design institutes for the engineering design on most infrastructure projects. Period. If your company is strictly a design firm, there may not be a lot of work for your company in China. Even though B&V is known for design, we had to come up with new services that would not directly compete with the Chinese design institutes. Instead of going after design, we positioned ourselves as program managers for USAID- funded projects. We started on small projects, helping to develop design reports, and provided key technical assistance as the projects went forward. Then, as we became recognized and respected, we used the design institutes to help parlay the successful smaller projects into much larger-scale projects.

Q: What were some of your biggest lessons learned?

A: The biggest lesson we learned is that it takes partnerships to conduct business successfully in Asia and around the word you can't do it alone. To form lasting partnerships, the biggest lesson learned is probably to realize that you're part of a global community and that everything does not emanate out of the United States. In the case of Binnie, their staff have lived and worked in the region, in many cases, all their life. We were not going to force them into our way of doing things; it would have been a failure. Instead, we had to sit down and realize each other's strengths, our weaknesses, and craft a plan to work together. Just like in any relationship, communication is key. Once an acquisition is made, the sooner you can get communications, video conferencing, e-mail, and mail and relocate key staff into the acquired office to facilitate communications, the better off you are. We established a two-year budget just for integrating the two companies. From that budget, we hired an outside consultant to ask about expectations each group had. We then met together and discussed our expectations to ferret out hidden agendas and mismatched expectations on both sides. We also invested in video conferencing equipment for our overseas offices to increase the number of face-to-face meetings. These encourage our staff to think globally, getting each person from human resources and accounting to new technology development to think and understand that the world is not centered in Kansas City. It also gives our counterparts on all levels, the feeling we're people too, not just some entity in a distant place.

Again, my advice for U.S. firms thinking about Asia is to think in terms of local partnerships and acquisitions. Try to remember that, with any local partner, you cannot change them to the U.S. way. Just because you've bought them or merged with them, you can't induce your way of living on them or even your style. In our case, we really had to let them live the way they needed to live. We created value together by adding some ideas, information technology systems, or some engineering systems they didn't already have. In return, we had to be willing to learn what they had, because, in essence, their equipment and expertise in many cases are as good as, if not better than, what we have. It's a matter, I guess, of being a better communicator and understanding the rest of the world. We Americans have a tendency to think everybody has to change to our way of doing things; it really isn't true. People will work a lot harder for you if you try to meet them part way. The biggestlesson learned and the challenge that lies in front of us is just trying to be more global by being a better global thinker.