China Water Investments: 3 Thoughts
By Debra Tan 10 December, 2014
Tan shares her thoughts on China's water market, changing public views & where the opportunities lie, Tan shares her thoughts on China's water market, changing public views & where the opportunities lie, Tan shares her thoughts on China's water market, changing public views & where the opportunities lie
Some good news: 75% of urban Chinese consumers and 88% of the urban educated public are willing to invest more money to ensure access to safe, clean water. This is according to Xylem’s latest China survey of 2,360 urban consumers across six cities (Beijing, Shanghai, Guangdong, Taiyuan, Changsha & Hefei). This is surprisingly similar to the 87% of the public who are ‘highly concerned’ about drinking water safety in MEP’s first-ever National Ecological Civilisation Awareness Survey published at the start of this year.
“So it appears the water industry, government and consumers are finally all on the same page – they all want a water tariff hike”
So it appears the water industry, government and consumers are finally all on the same page – they all want a water tariff hike. This puts China well on the path towards economically viable desalination and water reuse.
Meanwhile, wastewater treatment has also received favourable ratings in the Xylem survey: 59% of the urban Chinese consumers and 64% of water industry experts thought “serious surface & ground water pollution due to industrial discharge is the most serious water issue in China.”
So with consumers willing to pay more and central government refining the ‘stick & carrot’ approach to water investments are the water supply and wastewater treatment markets set to take off?
Here are some views from the ground distilled from the various conversations, conferences and forums attended in the last two months:
1. Water supply vs wastewater treatment – which is the bigger market?
I had the opportunity to pose this question to the CEO of China Everbright International and the Chairman of Sound Global at IFC’s Climate Change & Business Forum in late October. Both foresee exponential growth in industrial wastewater treatment and resource recycling.
market leaders foresee exponential growth in industrial wastewater treatment …
…. illegal discharge means the wastewater market could in reality be much larger.
Like the urban consumers in the Xylem survey, they viewed wastewater treatment as an area that needed urgent resolution whereas the water supply market provided less upside.
This does not mean the water supply market is small. China set aside RMB4 trillion in 2011 for water infrastructure to ensure water supply can meet rising water demand by 2020. In May 2014, State Council accelerated the construction of 172 water projects in the central and western regions. These included water transfer, reservoirs and irrigation schemes which are expected to be completed before 2020, with the aim to increase water supply by 80 billion m3 per year.
As for wastewater, China’s official wastewater discharge volume is equivalent to the annual flow of the Yellow River.
However, due to illegal discharge and the fact that not 100% of all enterprises in each sector are monitored by the MEP (see chart), the wastewater market could in reality, be much larger.
In addition, the war on pollution, ‘more stringent’ industrial standards and new environmental laws only point to a more lucrative municipal and industrial wastewater market.
Of course the question of enforcement lingers, but it certainly does look like doesn’t pay to pollute in 2015… more on this here.
2. Government look to private partnerships for funding – local & foreign
Supplying & treating water, wastewater treatment, water and wastewater pipes all cost money. Earlier this year, State Council announced that it had set aside RMB2 trillion to tackle water pollution as part of the Water Pollution & Prevention Control Action Plan (yet to be unveiled at the time of writing but hotly anticipated to be announced “soon”).
Government’s RMB 2 trillion to tackle water pollution is not enough…
China is turning to private capital to supplement this & lower provincial debt burdens
Yet RMB2 trillion to tackle pollution may not be enough. Earlier conversation with Renmin University’s Professor Ma Zhong (who also sits on the Science & Technology Committee of the MEP) revealed that “investing RMB1 trillion may help Beijing bring back blue skies, but perhaps even RMB5 trillion will not necessarily deliver the promise of cleaning up China’s water resources.” Given this, can the Chinese government fund the entire clean-up?
China is turning to private capital. On 26 November 2014, in a bid to lower provincial debt burdens, State Council released an investment and financing guideline emphasizing public-private partnerships (PPPs) in infrastructure investments and public services where significant upfront capital expenditure is required.
Not surprisingly, sectors specified included ecological & environmental protection, agriculture, water, municipal infrastructure, transport, energy infrastructure & grid construction, telecommunications, as well as public services such as elder care, sports and cultural facilities. The government also aims to set up a RMB50 billion National Environmental Fund to jump start the clean up sector – see list of water investment policy stimuli here.
“The message is clear – there is a war on pollution; there is much to do and China needs all the help it can get. There is plenty of room for both foreign and domestic players”
The message is clear – there is a war on pollution; there is much to do and China needs all the help it can get. There is plenty of room for both foreign and domestic players. This stance was echoed by both the CEO of China Everbright International and the Chairman of Sound Global.
Word of caution on the supply side. Foreign participation still appears to face some resistance in the production of membranes and desalination – check out China’s Membrane Rush – Foreign vs Local and Desalination: Proceed with Caution.
But perhaps in the race to deliver municipal & water infrastructure given rising urbanization, the barriers to enter into these markets may be also soon lowered.
3. Rural market – larger than you think
Lastly, let’s not forget China’s rural water market, often overlooked by foreign investors due to difficulty in participation and its fragmented nature.
Rural treatment rates can be as low as 6% whereas urban rates are closer to 80% … clearly there is a long way to go
Local water companies view this as an exciting space with much potential. Firstly, rural wastewater infrastructure is even more underdeveloped than their urban counterparts and access to centralized wastewater treatment is mostly unavailable. We highlighted in our earlier review that rural treatment rates can be as low as 6% whereas in urban areas, treatment rates are closer to 80%.
The 12FYP target wastewater treatment rate is 85% for cities, 70% for counties and 30% for townships. Clearly there is a long way to go in rural markets.
Moreover, Premier Li Keqiang also promised in March this year that the government will also “solve the safe drinking water issue for more than 63 million people in rural areas”. This may be a fraction of the 300 million rural Chinese who still do not have access to safe drinking water but 63 million people is three million shy of the entire population of France. You get the picture.
- Consumers Willing To Pay More for Water – Lu Shuping, President of Xylem China, shares the findings of a survey of six Tier 1 & Tier 2 cities in China which show that consumers understand the seriousness of water issues & are willing to pay more for safe drinking water
- 2014 Investments in Chinese Waters – With the government encouraging public & private sector water spend, check out investments in 2014 from agriculture, wastewater, water infrastructure, drinking water to Israeli cleantech
- Christmas Came Early – Xi’s carbon emission promise, increased regulatory risk are a few reasons why Debra Tan thinks Christmas came early for China’s waters. Industry beware; as China is expected to aggressively enforce some of these new polices
- Pollution: It Doesn’t Pay to be Naughty – State Council wants to use the enforcement of law & regulation “to force the economy to transform and upgrade”. See how violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
- Fundamental Issues in Industrial Water – Professor Ma Zhong, dean of the School of Environment of Renmin University gives his in-depth views on the industrial wastewater standards & pricing. Is it cheaper to pollute than to treat?
- 8 Facts on China’s Wastewater – Don’t know anything about wastewater in China? Is it on the rise? Is industrial wastewater under-reported? Is it worse for rural areas? Check out our 8 facts from tech, key pollutants to standards
- What is “Treated” Water – BASF’s Magali Simon APAC Head Water Solutions, walks us step by step through the process of wastewater treatment
- Pricing Water – With the NDRC’s recent announcement of tiered tariff hikes across China’s cities to rein in top end water users, Tan mulls over the proposed tiered water tariffs hikes and whether price points and switchpoints between tiers are properly set
- Water Fees & Quotas: Set for Economic Growth? – Debra Tan reviews the new joint standard on water pricing and new provincial quotas on water use, water efficiency and water quality released in January 2013
Read more from Debra Tan →