Water PPPs To Lead In China

By Yuanchao Xu 16 November, 2016

Chinese policies are strongly promoting the PPP model, especially for water. CWR's Xu takes a closer look

On 11 October 2016, the Ministry of Finance (MoF) released the “Notice on the Promotion of Public-Private-Partnership in Public Services”, stating that in new waste & wastewater treatment projects, the Public-Private-Partnership (PPP) model must be applied. In fact, PPP has already been widely applied in waste & wastewater treatment projects, and in turn, this notice shows the governments’ promotion of this.

PPP model has become mandatory for new waste & wastewater treatment projects

PPP is a long-term cooperation between governments and private capital over infrastructure and public services. Usually, private capital is in charge of design, construction, operation and maintenance, whilst governments are in charge of supervising the pricing and quality of the projects.

Water plays an important role in infrastructure and public service, and therefore has a close relationship with PPP. On top of wastewater treatment, water supply, water pollution control and hydro-power, sponge cities and drainage networks are also potential PPP projects. Recently-issued PPP promotion policies are listed below:

PPP management framework already established

The China Public Private Partnerships Center (CPPPC) was established by the MoF at the end of 2014 as a platform for policy research, information and communication. It has two broad functions:

• Management platform: where financial administrations of the Chinese government are able to apply, review and analyse PPP projects; and
• Information platform: where PPP policies, related information and case studies are published.

A total 10,471 PPP projects are in CPPPC library, with an investment of RMB12.5 trn

Recently, the CPPPC just released the fourth quarter report for 2016. It shows that the number of projects included in the PPP library has reached 10,471, with a total investment of RMB12.5 trillion. The landing rate for all projects is 26% as of the end of September 2016. The landing rate is an index to evaluate the implementation of PPP projects, click here to see how it is calculated.  Municipal Engineering, transportation and area development are the top 3 sectors, accounting for over half of all the projects and investment.

Looking at water-related PPP projects

Out of all the PPP projects, around 33.5% are water-related. These have a total investment of RMB2.9 trillion, accounting for 23.2% of the total investment (see chart below).

~33.5% of projects are water-related, with a total investment of RMB2.9 trn

As shown in the chart below, for all water-related PPP projects, wastewater treatment projects, supply projects and pipeline network are the top 3 sectors in terms of number, respectively accounting for 25%, 14.3% and 12.2%.

While for investment, pipeline network attracts the most investment, followed by environmental protection and wastewater treatment, respectively accounting for 22.5%, 14.4%, and 8.3% of the total investment in water-related projects.

Top 3 sectors across total number of water projects are: wastewater treatment, supply & pipeline network
(click chart to enlarge)

Growth of water-related PPP projects from 2002 to 2016

Water-related projects started to appear in 2002 but boomed in 2015. The number of projects initiated by the governments in 2015 was about 5 times higher than the total number in the last 10 years, while investment was about 6 times higher. Since there are only 31 projects in total from 2002 to 2011, the following analysis starts from 2012 to 30 September 2016.

Below are some key findings from our analysis:

• Both number and investment of network construction and environmental protection kept increasing since 2012;
• PPP projects on sponge cities started to appear in 2015 and increased a little in 2016 (until September 2016);
• In contrast, both the number and investment of wastewater projects have declined in 2015 and 2016; and
• Other projects include flood control, drainage, hydraulic engineering, irrigation and others.

It should be noted however that the analysed projects are only those initialed by the government. There are 5 phases to each project : recognition, preparation, purchasing, execution and transfer. Actually, more than 60% of water-related projects are still in recognition phase.

China’s 3 project payment schemes

There are 3 payment schemes for PPP projects in China:

• Government payment: governments pay for the service;
• User charge: customers pay for the service; and
• Viability gap funding: government subsidies for projects where user charges cannot fully cover the costs and fair return.

Government payment and user charges are two traditional schemes in PPP. Currently, 40% of all the water-related PPP projects adopt user charges, while it drops to 28% in terms of investment.

Most common payment scheme is User charge

The payment scheme depends on the project type. Usually, projects which directly face customers and have a steady cash flow adopt a user charges scheme e.g. water supply. As shown below, among water supply projects, 62.4% adopt user charges, representing 55% of total investment for water-related PPP projects.

Challenges remain but there is great potential

Despite the large number of PPP projects, most of the projects are still only in the recognition phase with only 946 projects are in execution phase. Xiaoxia Sun, a director of the MoF, pointed out 4 challenges in the promotion of PPP:

• Some local governments disguise its inappropriate financing in the name of PPP;
• Related policies and regulations need to be perfected;
• Current exit scheme for private capital needs to be improved; and
• Lack of professionals and experience.

Most projects are still in the planning stage, plus concerns from private capital remain

Moreover, People’s Daily Online voiced concerns from the private capital perspective. For some PPP projects like hydraulic engineering and water supply, low profitability, mid-term and long-term risks may hold back the participation of private capital. E.g., some water supply projects need 10 years to recover costs while others may face regulation/policy change in future.

However, there are successful projects and they have provided experiences and approaches to handle the challenges in profitability and risk sharing. The National Development and Reform Commission provides case studies on PPP in different sectors, which are useful learning materials for potential participants.
With China’s rapid urbanisation and its deteriorating environment, there will be a larger market for public services and environmental projects. On top of limited current investment approaches in China, well-designed and executed PPP projects can provide an alternative with returns.

Further Reading

• Financing Water Resilience: Climate Bonds for China – Green or “climate” bonds is a rapidly growing market but there are verification concerns plus gaps for water-related investments. AGWA’s John Matthews & Climate Bond Initiative’s Anna Creed & Lily Dai introduce the new water climate bond standard that addresses these issues
• Treating Landfill Black Water – Landfill leachate, a highly polluting effluent, is now under new China EPA standards. Regular treatment has limitations but EWS:AOx™ by OriginClear is versatile alternative as its Jean-Loui Kindler, Nicholas Eckelberry and Stephen Jan show
• Fashion to Solve China’s Plastic Problem – With most PET made for fibres and not bottles, fashion is a big contributor to the plastic problem but it can also be part of the solution as Sondra Kim from Waste2Wear tells us. The company turns plastic waste into sustainable & high quality clothes
• Corporate Disclosure: Can We See Clearly Now? – Global climate targets are connected to day-to-day operations of companies and with COP 22 underway China Water Risk’s Dawn McGregor reflects on how clearly we are seeing corporate disclosure, the obstacles in our way & if there will be a sunny day

• 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
• 8 Things To Know About Recycling Water – Recycling water could alleviate some of China’s water challenges. Yet, only 10% of its treated wastewater is recycled. Not sure what reclaimed water is? Check out China Water Risk’s 8 things you should know
• 8 Game-Changing Policy Paths – There has been a fundamental shift in planning China’s future growth with changes in regulatory landscape due to multiple polices set & changes in law. Many come into full effect in 2015. Get on top of these