Infrastructure has opened the door to socio-economic development in China. Economic growth—facilitated in part by roads, water, and power investments— has helped pull roughly 700 million people above the poverty line in the last 20 years. China’s extraordinary economic achievements have been made possible by a range of factors including export-friendly trade and investment policy, sound macro-economic management and political stability. The timely delivery of urban infrastructure has also been an essential driver of economic growth, underpinning the rapid development of industry and breakneck growth of cities in eastern China.

While the socioeconomic results are indisputable, China’s performance in the area of environmentally sustainable development leaves room for improvement. According to the PRC Ministry of Environmental Protection, two-thirds of China’s lakes have chemical deficiencies caused by pollution. As a result of pollution and increasing consumption, two-thirds of China’s cities are short of potable water. Air is heavily polluted across the northern heavy industry belt from Shanxi to Liaoning provinces and along the heavily industrialized east coast. Many polluted industrial sites will require extensive soil remediation before they will again be fit for human use.

Development on a scale such as China’s will entail some environmental cost. The objective of environmentally sustainable development is not to eliminate all damage to the environment, but rather to keep the damage at a level that is consistent with environmental carrying capacity—the ability of an eco-system to support and sustain life. The main tools here are demand management and environmental management, including infrastructure delivery. But in three key sectors—energy, water, and transport—the track record in China is decidedly mixed. There is a lot more that city leaders, infrastructure professionals, and local residents can do to bring environmental conservation into a more reasonable balance with urban and economic growth.

ENERGY

The government’s 12th Five-Year Plan (FYP, 2011-15) set aggressive sustainability targets in the energy sector: reducing the energy intensity of economic output by 16 percent over five years and increasing non-fossil fuel use to roughly 11 percent of primary energy consumption. Now more than a year into the 12th FYP, China seems to be on track to meet these targets. Energy intensity per unit of gross domestic product (GDP) in 2011 dropped by 2 percent compared to 2010, according to a February 2012 announcement by the PRC National Bureau of Statistics. At the same time, however, electrical power intensity is on the rise. China’s National Energy Board reported that electricity consumption in China grew by 11.7 percent in 2011, significantly faster than GDP growth. This suggests that industry, which accounts for most non-electrical energy consumption, has made efficiency gains while domestic, commercial, and other users of electrical power are becoming less efficient. This trend will have major implications, as electricity production in China now doubles nearly every 10 years. China now generates 18 percent of all electricity globally, only slightly less power than the United States.

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China’s non-fossil fuel electrical power sources are still overwhelmingly nuclear and hydro (96 percent combined), according to the World Bank. Ongoing investments in these sources will ensure that China will hit its 11 percent non-fossil fuel power target during the period.

The more difficult target to achieve will be 20 percent renewable power production by 2020. Despite rapid growth, wind and solar energy sources still make up less than one percentage point of total electricity production in China. Since solar power is still more expensive to produce than electricity from coal-fired turbines, the government offers subsidies either for capital investment or operations, but neither subsidy is sufficient to break-even under current conditions. To achieve financial viability and promote investment, Zhejiang and Jiangsu provinces, among others, have introduced additional subsidized “feed-in tariffs” to supplement the national incentives. (A feed-in tariff is a special, higher price at which an electricity distributor will buy power from a renewable energy generator to reflect the additional cost of generating certain types of renewable energy. Feed-in tariffs can be phased out as the cost of electricity production drops.) There is also a challenge related to bringing renewables on-line. According to statistics from the China Electricity Council and China Wind Energy Association, only 68 percent of installed wind capacity was connected to the grid at the end of 2009. The growth and ultimate impact of wind and solar power will depend on decreases in the cost of the technology as well as the interim subsidy measures the government introduces. Increasing the cost of coal-fired electricity to account for the environmental costs would speed up the development of renewable sources such as wind and solar.

In addition to renewable power generation, there is a growing market for energy service company (ESCO) projects, which can help to reduce energy consumption and greenhouse gas emissions. ESCO projects typically finance the purchase of new energy-efficient equipment through projected savings on future fuel bills in comparison with old or energy-hungry machinery. While the World Bank and many smaller “green funds” have already entered this market, many local investors are hesitant, since they find the five-to-10 year payback period too long. This is one factor contributing to opportunities for foreign energy savings companies with local partners.

WATER AND WASTEWATER

The 12th FYP set a target of reducing water use per unit of industrial output by 30 percent. The same target was achieved during the 11th FYP (2006-10), and it is expected that China will repeat that success during the current planning period. But as in the energy sector, domestic users are not keeping pace with industrial ones. Water consumption per capita and per unit of GDP is rising in many cities across China, despite dwindling supplies in the northern third of the country. Water use is expected to rise from 599 billion cubic meters in 2010 to 670 billion cubic meters by 2020. Meeting this demand is driving water providers farther afield, pumping more water over longer distances to users, and towards more sophisticated and energy-intensive water treatment technology.

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Wastewater treatment is one of China’s modern urban infrastructure success stories. From 2000 to 2010, the number of wastewater treatment plants in China quadrupled (to about 1,700), while total treatment capacity increased five-fold (to 10,670 cubic meters per day), according to the PRC Ministry of Housing and Urban-Rural Development. This reflects the central government’s strong commitment to preserve surface water quality. This major effort has not yet been enough: China’s rivers and lakes—unable to absorb the pollution load discharged into them daily—are increasingly polluted. The environmental disruption caused by water transfer schemes, increasing energy intensity of water treatment, and steadily declining water reserves will continue to undermine the sustainability of China’s water systems.

Future efforts to increase water sector performance should adopt a more integrated approach. The different components of urban water systems—water, wastewater, and stormwater—are often handled by different government organizations with different, sometimes competing agendas. Integrated water resource management can be used to match water quality to water uses, improve treatment cost-effectiveness, and raise the quality of discharged water to environmentally safe levels.

China’s water industry will open up for reverse osmosis, membranes, and other advanced treatment technologies that minimize energy inputs and simplify operations. As local governments are expected to finance larger portions of their water infrastructure, foreign firms that are willing to invest debt and equity in treatment plants will become more welcome.

TRANSPORTATION

Perhaps the most complex sustainability challenge for infrastructure development in China is in the transportation sector. The PRC government is moving to expand public transport, tighten fuel efficiency standards, and improve fuel quality. However, ever-expanding road networks and rising living standards are pulling people to live farther from work, ride bicycles less, and drive their cars more. China’s road network has more than tripled in length in the last two decades; it is now half as long as that of the United States. In 2011, GDP growth was far outstripped by vehicle ownership rates, which rose 16.4 percent for all vehicles and 25.5 percent for compact private cars versus 2010, according to the PRC government.

Current urban planning and design practices are also contributing to the increase in private vehicle use in China. Residential areas are being built far from employment centers. The large city blocks and wide streets popular with city planners and real estate developers make it more difficult to walk rather than drive. While it is difficult to determine the extent to which road construction has fueled private vehicle use, the layout of urban road networks clearly does not support China’s efforts to stem climate change. Compact, mixed-use developments that provide safe and convenient access to jobs and services by non-motorized or public transport would go a long way to reducing air pollution and carbon emissions per capita in China.

Transit-oriented development (TOD) is a bright spot in the development of Chinese cities. While the consideration of land use and density implications during rapid transit design is not systematic, many cities retrofit their zoning codes after subway construction to allow development to cluster around transit stops. With the right land use mix, this offers the possibility of higher use of non-motorized transport. At least 13 Chinese cities currently have one or more subway lines under operation, 54 lines covering 1,700 km. Another 76 lines, or an additional 1,600 km, are under construction. The target is 40 subways systems by 2020 covering about 7,000 km. At this pace and scale, TOD is poised to make a big difference in the long-term sustainability of urban living.

THE WAY FORWARD

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China now has the opportunity to raise the bar of urban infrastructure delivery to safeguard the natural environment and open the door to the next phase of socioeconomic development. As China climbs the industrial value ladder and expands its service sector to cater to growing domestic demand, environmental quality will become central to achieving sustainable economic growth. Urban residents in the more sophisticated markets are already putting a substantial price premium on high-quality urban environment. To attract the right labor pool, Chinese cities will need to raise their game further.

The backbone of the next phase of infrastructure development should be the “one-system” approach. Infrastructure planners need to consider the development of the entire city-wide infrastructure system, including its energy, transport, land, and water subsystems. Realizing the potential synergies between subsystems will require technology for real-time information, conservation pricing, and demand management. Foreign infrastructure providers and experts with strong track records in these areas should be poised to make a major contribution to achieving higher infrastructure performance standards in the coming years.

Government stimulus and financing will also be critical. The central government can redouble its commitment to environmental sustainability by continuing to pursue aggressive resource conservation and economic productivity targets, and by backing those efforts up with funding for investment in infrastructure. Given the high price tag for the sophisticated projects that cities will have to build and local governments’ over-leveraged financial condition, foreign companies that can bring technology, high-level expertise, and financing will be increasingly attractive in coming years.

Posted by US-China

The China Business Review (CBR), published since 1974 by the US-China Business Council, and online since 1997, is the leading voice on commercial relations with China.