(FORTUNE Magazine) – It was a classic early '90s sound of summer in sweltering Buenos Aires, that tinny "thunk" when the air conditioning died, victim of a disastrous water system that tortured Latin America's richest city. In the towering infernos of the financial district, bankers sweated and mopped like stevedores. When the bourgeoisie in the flower-filled neighborhood of Palermo aimed garden hoses, a few sad drops oozed forth. Even the ornate fountains framing the Teatro Colon opera house stood parched as cacti. In fact, few of Buenos Aires' magnificent fountains worked; the city shut the spigots years ago.

But the wealthy quarters were paradise compared with the villas miserias, outlying shantytowns of corrugated metal shacks crammed together along wandering lanes of packed dirt. Night after night, TV newscasts featured rowdy crowds circling the single metal faucet that serves an entire neighborhood, yelling that they hadn't seen enough city agua to boil a beet in days. Women lugging buckets and jugs queued up behind trucks owned by street vendors, who ladled clear liquid--at exorbitant prices. The poor often spent ten times as much on water for drinking and cooking as the wealthy of Palermo.

Buenos Aires simply didn't have the money to fix its antiquated pipes and pumps. So the city did something radical: It turned to a private company, Suez Lyonnaise des Eaux of France. Since Suez took charge in 1993, the A/C hums all summer long, sans thunks, and the majestic fountains are spouting anew. Believe it or not, prices have dropped for everybody. But the biggest beneficiaries are multitudes of poor people; Suez now pipes clean, cheap water straight into their homes.

From Buenos Aires to Atlanta to Jakarta, the liquid everybody needs--and will need a lot more of in the future--is going private, creating one of the world's great business opportunities. The dollars at stake are huge. Supplying water to people and companies is a $400-billion-a-year industry. That's 40% of the size of the oil sector and one-third larger than global pharmaceuticals. And this is just the beginning. The World Bank estimates that one billion people, one-sixth of humanity, have poor access to clean drinking water, and three billion lack sanitary sewage facilities. Unless governments begin spending much more, the number of people without clean water will rise to 2.5 billion, about one person in three, by the year 2025.

The problem is most pressing in big cities. Says John Briscoe of the World Bank: "In developing countries most cities' water systems are in terrible physical and financial shape." Places like Bombay, Rio, and Bangkok are already facing a water crisis. They are being overwhelmed by hordes who leave their farms to seek work. Most end up crowding into shantytowns encircling a city. To avoid death and disease, these cities must bring the lifeline of water and sewer to the spreading slums.

Rich countries like the U.S. have a different reason for investing in water. Here the driver is legislation. Cities, racing to comply with tough federal and state pollution laws, are upgrading their water- and waste-treatment systems. Water is now a $100 billion industry in America and growing fast.

Public health, however, isn't the only issue. Water promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations. How a country handles its water problem could spell the difference between greatness and decline. Those nations that keep their waterworks in superb working order and still operate them at the lowest cost will have a competitive edge. Those that fail will risk riling voters with huge tax increases or be forced to divert precious funds from fixing potholes, hiring teachers, and building up high-tech infrastructure. With the world thirsting for huge improvements in this vast frontier, it's no wonder that Elizabeth Mackay, chief investment strategist at New York investment house Bear Stearns, calls water "the best sector for the next century."

What exactly is the water industry? Unlike oil, water isn't mainly about finding new supplies. But it is about infrastructure. The object is purifying the huge quantities collected from wells, rivers, and rain, and distributing it, with total reliability, to absolutely everyone. That epic job doesn't stop with drinking water. It also encompasses treating "wastewater," or sewage, an area that's just as big and just as complex. Doing it right requires keeping a huge, modern, multibillion-dollar network of pipes and pumps and plants in excellent shape and operating the sprawling network efficiently.

But the entities running the world's water systems--city governments--are failing miserably. From Atlanta to New Delhi, they've allowed their hulking waterworks to decay. Now many cities are questioning whether they should even be in the water business. The new credo is privatization. Operators like Suez can provide what budget-strapped cities can't: the cash to upgrade that rusting infrastructure. They get it by running the systems far more cheaply than governments can, then recycling the savings to upgrade the physical plant. The potential for growth is huge. Today, only 5% of the globe's population get their supplies from corporations. And of the 55,000 water companies in the U.S., only about 6,000 are privately owned.

As city after city chooses private management, the water industry should be able to keep generating growth in sales and profits of at least 10% a year. And the cash flows are stable; they're locked in with long-term contracts. In a world that's fleeing the vagaries of tech stocks, steady double-digit growth looks pretty darn good.

Making a buck in the water business sounds easy but really isn't. It is a tough, slippery game. To succeed, you need vast reservoirs of expertise. A handful of giant, specialized players dominate the global water industry. The leaders include Thames of Britain and newcomer Azurix of the U.S. This spinoff from the Houston energy trading titan Enron has had some problems and is a good example of how difficult this business really is (see box).

The real wizards of water are, of all people, the French. Vivendi and Suez, both headquartered in Paris, are the world's biggest players by far. The two companies learned the trade, and grew immense, in their home markets. Historically, most countries have entrusted their water to their governments. The result: Their private water industry is small or nonexistent. But in France profit-making operators, mainly Suez and Vivendi, have been furnishing its eau municipale since the mid-19th century, when Emperor Napoleon III enshrined private management. Today Vivendi posts bigger sales than Suez because it has a larger equipment business and more customers in France. But Suez serves far more people around the world: 100 million. It's also the pioneer in privatization. "On balance, Suez is the global leader," says analyst Andrew Shepherd-Barron of the Dutch bank ABN AMRO.

The proof: Of the 30 biggest cities to award contracts since the mid-1990s, 20 chose Suez, including Manila, Jakarta, Casablanca, Santiago de Chile, and Atlanta. Vivendi picked up Berlin and the Atlanta suburbs. And the march continues. Chicago, Rio, and Hong Kong are currently auditioning private operators.

So far Suez has had a leg up on its rivals because it understands what's really needed to turn plain water into big money. First, this isn't bottling Perrier; foreign contracts are fraught with political and currency risks. Suez is expert at pricing deals to reflect that risk and at protecting its future profits--more on that later. Second, it's a powerhouse in every aspect of water. And in water, the more businesses you're in, the more business you get. With the $1 billion purchase of United Water Resources last year, Suez became the second largest manager of municipal systems in America, just behind American Water Works. It also devoured Nalco and Calgon of the U.S. for $4.5 billion. Overnight, those deals made Suez the biggest provider of water treatment chemicals for both industry and cities.

Suez isn't just running waterworks; its construction arm Degremont builds and repairs them. All its businesses work together. Nalco, the water chemical company, steers its industrial clients to Degremont. But richest synergies come in a fast-growing new field, industrial outsourcing. Whether they make paper, microchips, or drugs, more and more companies don't just want to buy Nalco's chemicals; these customers want Suez to manage their entire water systems, from running the plants to hiring engineers.

But Suez (with 1999 profits of $1.5 billion on sales of $32 billion) is more than a water company. It's a fresh invention, a diversified utility that offers cities a full range of infrastructure services, from water and sewer to trash collection, cable TV, and electric power, with water accounting for $8.3 billion in revenues, about one-third of the utility business. In fact, Suez is now weighing a merger of equals with two power companies that are combining themselves: Viag and Veba of Germany. If Suez joins them, the $80 billion megadeal would create the world's largest private utility.

Investors like the sound of that and have awarded Suez stock a market cap of $35 billion. It's hard to believe that just four years ago Suez was a faded, near-bankrupt banking company. Enter CEO Gerard Mestrallet, a virtual unknown who hatched the idea of reinventing Suez as the first universal utility and built his vision around a product most people found hopelessly unsexy: water. Mestrallet recognized early that aqua isn't dull; it's destiny. Perhaps he appreciates water because it's like him: steady, seemingly ordinary, and easy to underestimate.

Though Mestrallet's resume is gilded with an Ecole Polytechnique diploma and top government jobs, it's his middle-class roots that show. His father, trained as a pastry chef, ran a stationery store. Mestrallet and his family live in the modest house where he grew up, in a declasse Paris suburb. He exudes no sense of self-importance; he seems a friendly, even-tempered fellow who happens to be a CEO. In Suez's sumptuous offices beside the marble busts of its former leaders, Mestrallet sports saddle shoes and wields a battered briefcase. He prefers strong beer to fine wine. His idea of a lark is cheering aging rock star Johnny Hallyday with old college buddies, brew in hand. Wiry and bespectacled, Mestrallet is a strong cyclist who's scaled the Pyrenees, the toughest part of the Tour de France. "At the top, I felt like a little tin Greg LeMonde!" crows Mestrallet. Pause. "Of course, it took me six times longer."

An early contest with--guess who?--the Walt Disney Co. shows just how tough a man lives behind Mestrallet's smiling, courtly facade. Soon after joining Suez in 1984, Mestrallet was asked to represent the French government in its negotiations for the Euro Disney theme park. The talks were tense: Disney, for example, kept pushing for cash subsidies, something the French had called a deal breaker from the start. But Mestrallet got the last guffaw. With ten big points unresolved, someone from Disney's law firm made a gaffe, letting slip to Mestrallet that CEO Michael Eisner had just arrived in Paris. To Mestrallet, that meant that Eisner planned to sign the contract the next day, no matter what. During an all-night session Mestrallet turned from charmer to bulldog, refusing to budge a millimeter on any of the state's positions, demanding that Disney pay stiff interest rates on its loans from the government. By dawn, Disney caved in on every point. That afternoon, Eisner signed.

What really made Mestrallet's career, however, was his rescue of one of the great names in French business from almost certain demise. In 1858, Ferdinand de Lesseps founded Suez to build and manage the Suez Canal. But after Egypt nationalized the canal in 1956, Suez found a new identity in banking. By 1995, its crown jewel, Banque Indosuez, was sustaining heavy real estate losses. So Mestrallet sold the bank and unveiled a daring plan to rebuild Suez around gritty industry. In one sense, Mestrallet was simply following his instincts: He just loves heavy industry. "He's even happier when he's wearing boots and a hardhat than watching Johnny Hallyday," says Christian Maurin, a longtime lieutenant who runs Nalco.

Looking into his grab bag of businesses, Mestrallet saw a common theme in infrastructure. Suez owned part of Lyonnaise des Eaux, a troubled water company. As a board member, Mestrallet saw enormous potential in water. "Where else can you find a business that's totally international, where the prices and volumes, unlike steel, rarely go down?" he argues. He figured that Suez could use Lyonnaise to greatly increase its foreign contracts.

In mid-1997, Mestrallet persuaded Lyonnaise CEO Jerome Monod to merge with Suez. He now serves as chairman, forming an unlikely pair with Mestrallet. Lean and compact at age 68, the talkative Monod sports loud striped suits and puffs Marlboros. Shaking his hand is like clasping an electrode. But he appreciates Mestrallet's restrained style: "Mestrallet says what he thinks, and thinks more than he says."

Mestrallet is now pursuing business aggressively in both the developing world and in the U.S. Overall, Mestrallet wants to expand the water business a solid 10% a year, to $13 billion by 2004. Growth is strong in both worlds. But they're different: In developing countries the risks and potential profits are higher. In the U.S., business is a bit less lucrative but as steady as Old Faithful.

Here's how deals work in the developing world. A Buenos Aires or Manila grants Suez a "concession" to run its water system, usually for 30 years, after a bidding process in which it competes with the likes of Vivendi and Thames. Suez then forms a joint venture that includes local partners. The joint venture is an independent company that handles the entire service, from river to tap. It collects the bills and shifts the city's water work force onto its payroll. The company's on its own. To turn a profit, it must collect far more in water charges than it pays out in salaries, equipment, and interest.

The rub is that because water is so political, the ventures aren't nearly as free to act as most private companies. They operate under tight restrictions imposed by their contracts with the city. Take prices. Governments tightly restrict how much the operator can raise them. The contracts also spell out a series of investments. They come in two categories. First, the operator must repair pipes and refurbish plants serving people who already have taps and toilets. Second, it pledges universal service, bringing clean water to the multitudes who now use backyard wells or buy their supplies from street vendors at outlandish prices.

The water company had better make sure it can pay for these outlays without a big price increase. If it tries to raise prices too much, the customers, and the city government, may become enraged, leading to canceled contracts, big losses, and worse. For instance, Cochabamba, Bolivia's third-biggest city, decided to privatize and hired a private consortium that included Bechtel of the U.S. to improve its water system. The city then raised water rates to pay for the project. Water turned to flame, as waves of protesters attacked soldiers and blocked roads. Cochabamba was forced to cancel the project.

But as Suez has shown, it is possible to log big profits without raising prices. When Suez arrived in Buenos Aires in 1993, the contract it negotiated required an immediate 27% drop in price. Suez also pledged to invest $3 billion over 30 years to bring water to more than five million new customers, mainly the poor. Suez's joint venture, Aguas Argentinas, pared the patronage-stuffed staff of the local waterworks from 8,000 to 4,000. About half the city's water was lost as it seeped out of 15,000 miles of rusting pipes. Suez replaced ancient mains and plugged leaks. Both moves created huge savings.

In Buenos Aires, customers pay charges based on the size of their houses or apartments. But for decades the city hadn't updated its real estate maps. Some hotels masqueraded as studio apartments and were billed accordingly. Suez took aerial photographs of the city's housing and began charging the correct amounts. The nonpayment rate fell from over 20% to 2%. But its biggest success was adding 1.6 million new consumers, mostly poor people. On each block a neighbor, who gets a cut of the money he collects, passes from house to house every two months, asking people to pay their bills. New customers, delighted with clean water at $35 a year, have turned out to be reliable payers.

With the new customers, more accurate billing, and modest, inflation-based price increases, Suez has doubled revenues in Buenos Aires, to $550 million, while costs have tumbled. Even after paying interest on all its investments, its joint venture Aguas Argentinas pocketed $62 million in net profits in 1999, posting a healthy, double-digit return on capital.

In the U.S. the water business is quite different. Developing countries like Argentina require water companies to fund big investments in infrastructure. This makes concessions tricky. If the operator miscalculates the costs, it can get stuck taking losses, with no relief from raising prices. In America, however, it's the city, not the operator, that pays to rebuild the plants. Here Suez makes its money by managing a city's water system and by helping rebuild leaky waterworks.

For the past two decades U.S. cities have scrimped on investment. "They neglect the water systems, the stuff nobody sees, to pay for schools and roads," observes Donald Correll, CEO of Suez's newly acquired United Water Resources. Across the nation, the biggest problem is sewers. Antique plants are dumping effluent that flunks EPA standards. The EPA and states are raising the heat with lawsuits and fines.

The crackdown is a boon for Suez. Since the mid-1990s, United Water has captured contracts in Indianapolis and Gary, Ind., Milwaukee, and the San Antonio suburbs. But the biggest coup is Atlanta. In 1996 the state started fining Atlanta $10,000 a day for delaying construction of a sewage plant meant to protect the Chattahoochie River. At first the city pondered raising water-and-sewer rates 80% to fund modernizing the treatment plants. The voters howled. But Atlanta found an ingenious solution: outsourcing drinking-water management--state laws discouraged sewer privatization--and recycling the savings to refurbish the wastewater plants.

So how does Suez make money and still keep Atlanta happy? Before Suez's arrival, Atlanta spent $42 million a year on drinking water. Now it's paying Suez a flat annual fee of around $21.4 million to run the entire operation, a 50% savings for the city. The deal's a lot less risky for Suez than Buenos Aires. Atlanta, not Suez, makes the big capital investments, though Suez is spending $8 million on automation and information technology. From the start, Suez reckoned that if it could run the system for $18 million--in other words, earn $3 million a year, before paying for investments--it would make a solid 10% average return on capital over a 20-year contract. By mobilizing a far smaller work force far more efficiently, Suez is already nearing its $18 million target. As it amortizes the $8 million outlays over the next three or four years, profits will blossom.

Still, Gerard Mestrallet didn't get here thinking small. His ambitions rival those of Suez Canal builder de Lesseps, whose stately, mustached portrait hangs in the company's boardroom. Mestrallet's dream, his Suez Canal, is a vision for the city of Barcelona, a metropolis that faces a withering shortage of water. Mestrallet wants to build a giant 160-mile aqueduct to transport water from the Rhone River to the Catalonian capital. That the Rhone runs in France and the aqueduct would span the two countries only excites Mestrallet. "We must rise above national egotism!" he exclaims. Spoken like a true global CEO.