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Throughout its history, China has had difficulty supplying water to its people. China has the second-lowest per capita water supply in the world, ahead of only India, according to the World Bank. Though water resources are unevenly distributed in many countries, China's case is extreme. Northern China, with 65 percent of the country's arable land and about 50 percent of its industry, is home to only 20 percent of the country's water resources. And southern China's rivers--the source of most of the country's water--are prone to flooding. Floods in 1994 and 1995 resulted in thousands of deaths and crop devastation.
Derived mostly from surface sources, China's water supply varies widely by season, and is vulnerable to pollution. At the same time, China's industrialization and economic development have placed unprecedented demands on the country's water resources. National water demand in China is growing roughly 5 percent annually, but in rural areas the growth rate is closer to 10 percent. The PRC Ministry of Water Resources predicts that China will face a shortfall of 30 billion cubic meters (cu m) by 2000, and of up to 50 billion cu m by 2020. At present, more than half of all Chinese cities suffer from water shortages, and 1 in 10 faces a severe water supply crisis.
To meet the demand fo r plentiful, clean water, China's water authorities have undertaken a number of projects, many with multilateral assistance, to improve supplies. Most assistance has gone into treatment of wastewater, in part because treated water costs half that of new sources, according to the World Bank, and in part because of government restrictions on foreign participation in water system supply and management. Over the past decade, the World Bank has dedicated $775 million to water supply and sanitation projects in China (see Table). Foreign, especially European, firms also have become involved in water treatment projects. The World Bank, Asian Development Bank, and other multilateral institutions account for roughly 10 percent of the total investment required to improve China's water supply system. About 20 percent of such funds go to foreign firms performing high value-added work, including design and engineering. The remaining funding for water projects is sourced within China.
At the provincial level, management is further divided. For example, according to the World Bank, water resource management responsibilities in Liaoning Province are split among five agencies: the Water Conservancy, the Construction Commission, the Environmental Protection Bureau, the Public Health Bureau, and the local geology and mining administrations. The Liaoning Water Resource Management Committee coordinates the activities of these agencies. The Liaoning Environmental Protection Bureau and local-level environmental protection bureaus (EPBs) are charged with monitoring and maintaining environmental and water quality. They set environmental and discharge standards, impose and collect pollution charges, and enforce pollution laws. Each city in Liaoning also has a wastewater unit under its local construction commission. These units run wastewater treatment facilities. Municipal sanitation bureaus handle solid waste disposal.
Local-level government water bureaus have the most say in water-sector decisionmaking, and lack of cooperation among these local groups often stalls investment plans. The fragmented division of authority also has resulted in poor management of the water sector, and has slowed the development of an adequate regulatory framework t o oversee the industry's transition to a market-driven system.
Currently, the Chinese government directly funds roughly 70 percent of water supply and treatment costs, with the remainder paid for by effluent fees from industry and the public. Municipal water companies distribute water to consumers, with prices set according to Beijing's guidelines.
The main national industry association responsible for interfacing between the government and water treatment companies is the Beijing-based China Association of Environmental Protection Industry (CAEPI). Under the umbrella of MMBI, CAEPI promotes the interests of the roughly 4,000 PRC environmental machinery companies, both domestically and abroad. Like most industry associations, it collects information and provides an international voice for the industry.
Private wastewater treatment facilities in China, for example, operate amidst numerous regulatory i nadequacies. Industries must pay local EPBs fees based on their effluent discharge levels. The EPBs use these fees to fund pollution control programs and their own administration. Private-sector wastewater service providers then find it difficult to collect additional funds from these industries for treatment services. Meanwhile, the wastewater treatment plant operators, like industrial polluters, are themselves subject to effluent discharge fees. In contrast, national laws in both the United States and the United Kingdom require industries to pay all treatment costs for their wastewater, which creates incentives to minimize the amount of wastewater they generate.
Contamination of drinking water is among the more serious of China's water pollution problems. Environmental authorities in heavily industrialized Guangzhou, for example, warn that the city may soon run out of clean drinking water. China has a five-grade system of measuring water quality. Water that is classified as grades 1-3 is potable, while Grade 4 can be used only by industry, and Grade 5 only for irrigation. Of Guangzhou's nine drinking water treatment plants, only two can supply potable (Grade 2) water.
According to the World Bank, of 600 cities in China, only 70 had set up wastewater treatment plants by 1994 (a total of 110 facilities). This number is growing rapidly, however, as a result of the 1996 amendment to the Water Pollution Control Law, which requires all Chinese cities with populations of more than 500,000 to have a centralized wastewater treatment system. In addition, the Ministry of Water Resources designated 1997 the "year of water talents," indicating that improving China's skills base is a top priority.
Beijing has tailored its approach to the country's wastewater needs based on the regional variations in levels of water contamination. Cities with seriously contaminated water, such as Qingdao, Shandong Province; and Dalian, Liaoning Province, are the focus of government efforts to develop wastewater control and recycling systems. The "Three Lakes and Three Rivers" program, which is receiving World Bank assistance, focuses on the clean-up of China's most polluted waterways--the Huai, Hai, and Liao rivers, and the Tai, Dian, and Chao lakes. The program is China's largest environmental improvement project. For the highly polluted Huai River alone, 283 wastewater projects are in the planning stages, and 64 of these projects are expected to use some foreign funding. For the water-rich southern cities, Beijing is focusing on water conservation efforts, especially in Guangdong, Jiangsu, and Zhejiang provinces.
But foreign participants in the market face competition from a rapidly developing Chinese industry, particularly firms in southern Jiangsu Province's new Yixing Environmental Technology Park. Yixing is situated in the affluent industrial zone between Shanghai and Nanjing, Jiangsu Province. Since the government designated a 38 sq km section of the city as a special industrial park in 1993, Yixing has developed into a center of wastewater treatment and environmental technology. To date, the city has attracted RMB1.5 billion ($180.7 million) in infrastructure investment, and more than 800 foreign and domestic environmental enterprises, including 50 joint ventures, have set up operations there. By 1996, the city's output in the wastewater se ctor accounted for 20 percent of China's domestic output of wastewater treatment equipment, or about RMB2.5 billion ($301.2 billion).
One leading PRC supplier specializing in wastewater treatment is the Penyao Group. Founded in 1984 by a group of engineers who identified an emerging market for wastewater treatment facilities, Penyao is now targeting the industrial sector in the wake of recent plant closures on the Huai River by the Chinese authorities. Penyao Chairman Wang Chunlin believes that the market will grow rapidly as regulators crack down on other sectors, including electronics, food processing, and leather-related industries. Penyao is actively introducing foreign water treatment products and technology into China. The company recently formed a joint venture with a US firm that will employ reverse osmosis water-treatment technology. Penyao has also purchased advanced foreign technology and products, and recently acquired filtering membranes from a Japanese firm. Penyao is currently in the market for technology to reduce organic pollutants in the effluent from pulp/paper manufacturing facilities.
Despite the rise of domestic wastewater-related companies, a number of foreign firms are looking to become long-term market players in China. Foreign investment in the water treatment sector is officially encouraged, supposedly through "fast-tracking" of new projects thr ough the PRC bureaucracy. Evidence of such facilitation is spotty, however, and no financial incentives specific to water treatment seem to be available.
The high risk of investing in China and other emerging markets means that only large multinational players tend to be able to obtain the financial backing to undertake major water sector-related projects. Observers note that reform of China's water industry to allow foreign investors to take on more risk, and potentially more return, will be necessary to drive efficiency changes and introduce new technology. The fact that a number of foreign concession projects are taking place in the PRC water sector under China's ''build, operate, transfer'' (BOT) rules, which require that concession projects be 100 percent foreign-owned (see p.20), could serve as a limited source of encouragement. European companies, in particular, have seized such concession project opportunities in China's water sector. One such company is France's Suez Lyonnaise des Eaux (SLE). Formed through the merger of French water company Lyonnaise des Eaux and financial group Indosuez in 1997, SLE has sales of over $40 billion worldwide and is one of the world's largest water treatment and service companies. Prior to its merger with Indosuez, Lyonnaise had 16,000 employees in Asia. SLE is one of the few global firms able to offer turnkey bids to Asia's emerging water supply and treatment privatization programs. SLE operates in the PRC water sector through Sino-French Holdings, a 50-50 joint venture with Hong Kong-based New World Infrastructure Ltd., a company long involved in China infrastructure projects. In addition to building and operating water-supply infrastructure, SLE owns o ne of the world's largest wastewater treatment companies, Degremont, which has supplied more than 300 plants throughout Asia in the last few decades. Since 1975, when it first supplied the PRC ministries of energy and chemicals industry with wastewater engineering services, Degremont has supplied more than 50 Chinese municipalities with wastewater systems. Degremont has a representative office in Beijing and a full-service subsidiary, Guangdong Degremont Water Engineering Co.
In 1985, the Lyonnaise group was awarded a 25-year public drinking water supply and sales concession in Macao, in which it will eventually invest $100 million. The mainland, by contrast, has been reluctant to award such full "supply and sell" concessions of the type that most international water groups would find profitable. But SLE has taken on five concessions, albeit with PRC government partners, in the PRC water treatment sector to date. The five projects have a total investment of about $120 million, and each spans 30 years. SLE's partners in the five ventures are local municipal water authorities, to which the ventures will supply water at a predetermined price. SLE's role is limited to design, construction, and assistance with operation of the water treatment plants. The number of people served by SLE in China is about 2 million, or less than 0.2 percent of China's population, leaving plenty of room for growth.
Another SLE China project be gan in 1996, when SLE (then Lyonnaise des Eaux) formed Lyonnaise Asia Water (LAW), an investment and management company, based in Paris and Singapore, to invest in water treatment and supply projects throughout Asia. A total of $230 million in capital has been raised so far from investors in the United States, Australia, and Malaysia--including Employees Provident Fund Board, Malaysia's largest pension fund. LAW is targeting projects in Australia, China, Indonesia, Malaysia, and Thailand for parent firm SLE to carry out. LAW Chief Executive and Lyonnaise veteran Jean Pierre Djian notes that the two main risk factors for foreign players in Asia's emerging water markets are government support and exchange rates. LAW is developing and using project rating methods similar to those used by credit agencies to judge risk. Djian states that Lyonnaise and its co-investors look for projects that can deliver an annual return of 20 percent over 20 years. He also notes governments' increased focus on environmental and efficiency factors in all water projects in Asia.
The OTV and Kruger groups, part of the CGE group of France--a keen rival of Degremont--have together built 50 wastewater treatment plants in China to date. OTV and Kruger together also manage a plant in Huizhou, Guangdong Province, that serves a population of 300,000, and operate facilities in Xi'an and the Shanghai region. In 1995, Kruger generated $8 million in sales of water treatment equipment in China. OTV now has a $5 million contract to build a wastewater plant in Qiqihar, Heilongjiang Province. In May 1997, CGE won a 20-year concession to operate the water supply system in the city of Tianjin, China's fourth-largest city (with a population of 9.4 million in 1996). CGE will take a 55 percent stake in a joint venture with the local government-owned Tianjin Waterworks, to supply 500,000 cu m of water per day.
Companies based in other foreign countries, including Japan, South Korea, the United Kingdom, and the United States, also have a strong presence in China's water industry. European firms, however, benefit from the willingness of European governments to offer concessionary loans that are tied to purchases of water-related equipment. The United States government does not offer tied aid, but the Export-Import Bank of the United States has established a policy to match offers made by other countries to maintain US commercial competitiveness in foreign markets.
Among the UK firms in China is Hyder, formerly Welsh Water. Hyder has a 20 percent ($11 million) stake in China Water Co. Ltd., set up with partners in Hong Kong and Singapore to target opportunities in China's wastewater and water supply markets. China Water Co. has initiated two projects, in Shenyang and Yantai, for wholesale water supply to the municipalities. Anglian Water International, another UK company, is bidding for an 18-year water concession project in Chengdu, Sichuan Province. Anglian's water treatment plant subsidiary, Sweden-based Purac, is involved in projects funded by the Swedish government, and has 20 staff in China. Last year Purac achieved a turnover of #10 million ($16.2 million). Thames Water, also of the United Kingdom, is set to begin a $68 million joint-venture project this year with the Shanghai Municipal Waterworks Co. And UK construction firm Bovis won the contract for a 20-year, BOT-type concession project that will supply 200 million cu m of drinking water to Shanghai.
ACTEW of Australia established a joint venture with the Shanghai Academy of Environmental Science and Shanghai Scientific Instrument Factory to supply a range of wastewater products and services to the Chinese market. And WABAG, a German wastewater engineering company, is pushing strongly into China. German chemical firm Hoechst Pigments awarded German environmental firm Lurgi AG a contract in July 1997 to construct a high-tech wastewater treatment plant and refurbish three existing plants at its complex in Tianjin (Lurgi is represented in China by joint-venture Beijing Lurgi Zimmer Engineering).
American firm US Filter acquired Wheelabrator in the past year and, through its acquisitions, has grown to be one of the world's largest water treatment companies. US Filter records more than $20 million in annual sales to China, primarily to multi nationals and the PRC oil and power sectors. In a first for a US company, St. Paul, Minnesota-based Lemna International signed a joint-venture agreement in June 1997 to design, construct, and operate a municipal wastewater facility in China. Lemna and its partner, Guangzhou Tunnel Development Co., will operate the $120 million Guangzhou plant, which will have a treatment capacity of 200,000 cu m per day.
Dylan Tan ner is a managing editor of China Environmental Review, a bi-monthly newsletter published by Asia Environmental Trading (AET) Ltd., based in London (http://www.asianenviro.com).
Last Updated: 7-Mar-98