China: Gaps in Rainy Day Funding

By Feng Hu 13 January, 2015

Hu highlights gaps in flood control investment & expands on how the government expects to finance rainy days ahead

Everyone knows the saying – be prepared for a rainy day. However, when it comes to managing climate change risks in general, the UNFCCC says that current levels of funding is insufficient to address the future financial needs for climate change mitigation and adaptation.

Over USD200bn is needed for mitigation & hundreds more billions required for adaptation

The aim is to by 2030 reduce CO₂ emissions 25% below the 2000 level.To do this, according to UNFCCC’s estimation, an annual investment of USD200–210 billion is needed for mitigation measures globally, let alone another hundreds of billions of USD for climate change adaptation.

Adaptation is as equally important as mitigation … but is under-funded despite increasingly frequent extreme weather events

Climate adaptation includes actions such as building floodgates and rainwater harvesting and is as equally important as mitigation.

It is evident that extreme weather is becoming more frequent and less predictable. Floods & droughts bring much more immediate damage to humankind than the rising CO2 levels (though there is a linkage) and threaten security and food production. However, important as it is, adaptation measures such as flood control, is often under-funded.

Today, most of the climate funding favors climate change mitigation (read “Climate Risks: Are We Ready?”).

Climate change mitigation funding includes investment in renewable energies and energy efficiency improvement projects where China is already taking the lead. According to the UNEP, China is currently leading in renewable energies investment with US$56 billion spent in 2013. This was 26.3% of total global investments of US$214 billion (see the right-side chart).

However, with regards to climate adaptation, like many other countries, China falls short in funding its ‘rainy days’. Further analyses show that China’s flood control investment is not sufficient to address the economic loss resulting from floods nor losses in food production. To address these gaps in funding, the government is turning to private investment.

Investment in flood control falls short

The investment in water infrastructure has risen over the last five years, especially after the announcement of RMB4 trillion plan in the 2011 No.1 Document. Investment in flood control projects also has been increasing steadily over the past few years (see the black line in the below chart) and roughly accounts for 36% of the total investment. Nevertheless, it does not match the direct economic losses due to floods (see the blue bar in the chart below), maybe with the exception of 2009.

Direct economic loss due to floods is showing an upward trend

Moreover, although the economic loss fluctuates depending on the wet/dry years, it is clearly showing an upward trend in recent years. This is partly due to increasing occurrence of severe weather events, and partly because more public and privates assets might also be exposed as the economy grows and urbanization progresses.

Flood control spending over 2005-2013: 22.5% of direct economic losses

For the entire period of 2005-2013, the total flood control investment amounts to RMB378 billion, which clearly falls short compared to the direct economic loss due to flood that is RMB1,679 billion.

Farmers and food production are the most vulnerable.

Every hectare counts: up to 28% farmland affected due to extreme weathers

Farmland affected by floods and droughts account for 13%-28% of the total farmland over the period of 2005-2013 (see chart below). Based on MWR’s definition, “being affected” means a falling of agriculture production by at least 10%. During 2005-2013, the total crop loss amounts to 222 million tonnes: to give a better idea of the size of loss, the crop production in 2013 is 602 million tonnes.

Up to 28% of China’s farmland is affected by floods & droughts between 2005-2013

If more flood defence and better irrigation infrastructure are built, we can supply “more” food without increasing a single hectare of farmland. Such saving is important given the fact that China’s food production has been suffering from serious soil pollution and farmland degradation – >40% of arable land has been degraded.

However, it is difficult for Chinese farmers themselves alone to finance these adaptation measures, especially since the average farmland plot size is merely 2.3mu (0.16ha) per rural household.

Floods & droughts in 2013 affected 142 million people in China…
This is >2x the entire population of the UK

Moreover, the number of people affected by floods & droughts is also huge: 1.55 billion over the period of 2005-2013 and 142 million in 2013 alone. This is almost 7x of the population in Beijing, or more than 2x of the population of the entire United Kingdom.

Therefore, the government first needs to prioritise financing infrastructure that can protect food production from flooding as well as droughts. Secondly, more investment is also needed from both the government and the private sector towards relevant adaptation measures.

Funding the gap: more private investment please!

Till now, the majority of the water infrastructure investment was equally shared between the central and local governments, ~44% each in 2013; and the remaining 12% was covered by private investment and domestic loans.

However, this equal split between central & local government funding does not apply for flood control. For flood control investment, the central government budget only accounts for a small portion: even if we combine the central government budget for both floods and droughts (see the blue line on the chart below), the share is only 11% of the total flood control investment over the entire period of 2005-2013. The rest of the investment was mainly funded by local governments.

Flood control is mainly funded by local government; to fill the gap, private investment is needed

To close the gap, private investment needs to be encouraged through incentive schemes. The State Council started to do this by issuing guidance to encourage private investment involvement in seven key sectors including water infrastructure projects through market mechanisms such as public-private partnerships.

On the other hand, new investment opportunities are also emerging. Flooding not only happens in rural areas but also happens in cities…

We still remember striking images of floating cars on the streets in big cities such as Beijing and Shanghai. The Chinese government wants to transform these cities to “sponge cities”, meaning to build up infrastructure to collect excess rainfall and integrate flood control in urban planning. The Ministry of Housing and Urban-Rural Development released in October 2014 a technical guidance to promote “Low Impact Development” of rainwater harvesting systems in urban areas.

China’s “sponge cities” should integrate urban flood control & reuse rainwater

A “sponge city” will not only be able to deal with “too much water”, but also reuse rain water to help with “not enough water”: for example, Beijing will be able to collect 100 million m³ rainfall annually through building rainwater harvesting systems. which equals to about 10% of the 1,050 million m³ water diverted to Beijing annually from the South-North Water Transfer Project.

Such transformation will reduce the economic losses due to urban flooding. At the same time, it will also create investment opportunities in infrastructure upgrading, engineering products and new technologies. The benefits of closing the gaps in ‘rainy day’ funding could be much greater than we thought.

• Desal: Too Much Power For Water – WRI’s Zhong, Hua & Genasci Smith share their analysis that show desalination alone cannot quench China’s thirst and investments in lower-cost less power hungry solutions such as water efficiency & wastewater reuse such be prioritized
• Can Cities Meet Increasing Water Demands – Nitin Dani and Georgina Glanfield from Green Initiatives Shanghai share their thoughts on how Chinese cities can ensure water security. Can the public play a role?
• Water: Beijing Leads The Way -Beijing takes the lead announcing a RMB500 billion Energy Savings & Environmental Protection industry days after the national plan, with more water treatment, recycling, harvesting and pipes plus stricter monitoring of pollution
• More than Pipe Dreams: Non-Revenue Water Solutions – Pure Technologies’ Jon Boon shares their experience in tackling non-revenue water in Manila and why this could be the fastest way to water efficiency