Last week, Singapore International Water Week was held together with two other high profile conferences—the World Cities Summit and the East Asia Summit Conference on Livable Cities—in Singapore. With the focus on Asia and water, China water issues naturally took center stage. The Green Leap Forward takes a look at China’s unique water challenges, and a handful of companies seeking to turn crisis into opportunity.
If you’ve read Elizabeth Economy’s The River Runs Black or The New York Times’ doom-and-gloom Choking on Growth series, you’ll probably have a rather bleak picture of China’s water problems. Here’s a run-down on the unique factors shaping China’s water situation:
1. Demographic Mismatch
There is a two-fold demographic mismatch. First, China has about 20% of the world’s population, but only 7% of its water resources to sustain it. Second, there is a stark regional north-south imbalance. According to the Asia Times,
Only 14.7% of the country’s water is distributed in the vast areas to the north of the Yangtze [River], where the amount of arable land accounts for 59.2% of the national total, and the population makes up 44.4% of the total. The per capita share of water in Tianjin municipality in northern China is only one-10,000th of that in Tibet.
There are ambitious plans to build a south-north water diversion project from the Yangtze River to Beijing. First proposed by Mao Zedong in 1952 but only approved by the State Council in 2001, the project will cost a whopping US$60 billion, twice the cost of building the Three Gorges Dam. In the meantime, Beijing is relying on stop-gap water diversion measures from neighboring Hebei province to ensure sufficient water supply for the upcoming Olympics. A newly released report by Probe International provides a blunt critique of Beijing’s water policies over the past 60 years.
2. Growing Demand
The growing demand for water is underpinned by China’s continued industrialization with per annum GDP growth of 9 to 10%. As The New York Times points out, “[i]ndustry in China uses 3 to 10 times more water, depending on the product, than industries in developed nations.” The Clean Tech Revolution cites a US EPA report that says that it takes 40,000 gallons of water to manufacture a car and 60,000 gallons to manufacture 1 ton of steel; presumably, the water requirements for such processes are even higher in China.
As global food prices soar, policies to encourage grain self-sufficiency will stimulate more grain agriculture, a very water-intensive practice. Increasing proportions of meat in Chinese diets will add additional strains on water; reportedly, some 260 gallons of water are needed to produce 2.2 pounds of wheat and 3,380 gallons of water are needed to produce 2.2 pounds of beef.
As China’s energy demands soar, the construction of new coal, and soon. nuclear plants, both of which require large sources of water, energy consumption must surely become a new performance metric in assessing viable future energy options. The Green Leap Forward will delve more into the water-energy nexus in a future post.
The concentration of heavy industry along water sources means that at least 70% of China’s rivers and lakes are polluted and half of China’s cities have contaminated groundwater. Low sewage treatment rates (STR) are largely to blame, which according to water company, New China Ventures, stand at 42% for the whole country and is as low as 20% in most third-tier cities. Low sewerage treatment fees in Southern China have been blamed for underinvestment in sewerage works in that region. Hopefully, the current five-year plan to up STR to 70% will reverse this trend. For a more detailed study on China’s water pollution woes and some policy recommendations, check out this World Bank report.
A revised water law has been passed that significantly raised penalties for pollution and civil society has ramped up its efforts to improve pollution enforcement. The Institute of Public & Environmental Affairs (IPE), an NGO directed by leading Chinese environmental crusader Ma Jun, has set up the China Water Pollution Map, a publicly-available database on water pollution information aimed at increasing transparency on pollution violators.
4. Management Challenges
There is a lack of cross-province coordination and transparent decision making, making water rights planning difficult in Northern China. Said Christine Boyle, a Beijing-based Fulbright Scholar on China water issues and a project consultant to IPE’s program on building corporate accountability for a green supply chain, in an exclusive interview with The Green Leap Forward:
Despite presence of the Yellow River Conservation Commission to integrate the Yellow River management, provinces remain highly territorial over their rights to river water. However, there is no formal property rights system for water (e.g. “prior appropriation” or “riparian rights”), so the ways water planning works is kind of a black box with no transparent-decision making and no public participation). This makes it very difficult to assess future demands, needs, and supply of water for future projects.
Furthermore, Boyle explained, there is limited oversight of small-scale upstream water withdrawals, making accounting for water volumes very difficult:
There are as many as 10,000 diversions off the Yellow River, mostly by villages and irrigation districts pulling water for irrigation. This contributed to the unexpected drying up of the Yellow River for over 100 days in 1997.
Boyle further points out that in Southern China, the high number of transboundary rivers originating on the Tibetan Plateau (Mekong (Lancang), upper Indus and Brahmaputra rivers) limits the political feasibility of water project development on these large and relatively undeveloped rivers.
A pilot project described by China Dialogue is underway in Chongqing to introduce water rights trading that will surely garner nationwide attention.
5. Complex PPP Operating Structures
Unlike its booming and well-finance renewable energy industries, China’s water infrastructure is more heavily dependent of foreign inputs of capital, technology and management. Yet, such dependence understandably stokes up fears of water privatization and water tariff increases. Water tariffs in China have traditionally been kept below cost on the principle that it is a fundamental resource that should be universally accessible. One might argue, however, that it is precisely this undervaluation of the true cost of water that has caused overdepletion of its water resources. The debate on the privatization of water may not be fully settled, but it is an unambiguous global trend that represents increasing market-orientation of water services.
However, regulatory complexities in China do not make it easy for private investment in this sector. There is a bewildering array of models that public-private partnerships (PPPs, defined as contractual arrangements between a public sector agency and private entity whereby resources and risks are shared to develop public infrastructure or deliver a public service/good) could take. Click here for a detailed primer on PPPs, courtesy of a Canadian government study. At a recent water conference in Beijing, Cleantech Group, observed that:
Speakers detailed the pros and cons of the confusing array of private/public partnership (PPP) models currently experimented with in the water industry in China, including build-own-transfer (BOT), build-own-operate (BOO), build-transfer-operate (BTO) and design-build-operate (DBO) for greenfield projects. Other models include transfer-operate-transfer (TOT) for existing treatment facilities, and a structure called foreign invested venture capital enterprises (FIVCE) when local Chinese ownership was still desired. The more popular arrangement, however, was offshore holding so as to facilitate IPOs on international exchanges.
The article goes on to suggest that experts do not foresee any PPP model standardization anytime soon.
So What Now?
The urgency of China’s water problems is not lost on the Chinese government. Water quality and quantity issues figure prominently in the Ministry of Environment’s five year plan for 2006-2010 (available here). We all hope the government is aggressive about pursuing these objectives as it is with regards to it energy efficiency targets.
On the business side, the water crisis represents a big opportuinity. According to a People’s Daily article:
In its 11th five-year plan, the Chinese government projected that the total investment in its water sector would amount to almost RMB1 trillion from 2006 to 2010. Of this, some RMB300 billion would be for investments in sewage and water reclamation projects, and RMB100 billion for rehabilitation of the water supply network and infrastructure. Projects to divert supplies to cities suffering water shortages will also attract large investments.
For another perspective:
Shen Yen, Deputy Director of the Economic Reference Development Research Center of the State Council, told two hundred delegates the Chinese government believes “trillions of RMB” is needed in water treatment, supply and wastewater infrastructure.
“Between 200 billion and 300 billion RMB will be government investment, all else will need to be private capital,” he acknowledged.
A number of foreign companies are making notable forays into China to help slake China’s thirst. And why wouldn’t they be, since some of the industries under which foreign investment is explicitly “encouraged” per the Catalogue for the Guidance of Foreign Investment Industries include water pollution control and monitoring, and wastewater and sewage treatment. The companies in question can be divided into two general categories:
A. Technological/Product-driven Solutions
Three American companies are bringing their products to China to address different aspects of China’s water woes.
GE sees large opportunities in China. It is helping steel giant Baosteel Group increase its water efficiency and will deploy its membrane bioreactor (MBR) technology at Taihu, China’s third largest lake that has received a lot of recent bad press for its massive algae-blooms.
Technology for desalination—essentially converting seawater to freshwater—will gain increased investor attention with the imminent IPO of California-based Energy Recovery,Inc. (ERI), a maker of energy recovery devices for salt water reverse osmosis (SWRO) desalination systems, which consists of pushing seawater through filtering membranes under high pressure conditions, to produce freshwater. Desalination is not a new technology, but has been slow to catch on due to high capital costs and energy requirements. Advances in cost reductions and energy efficiency is bucking this trend. For instance, the SWRO process is replacing thermal processes (the boiling of sea water and condensation and collection of the resulting steam in the form of freshwater) as a more energy efficient means of desalination. Citing Global Water Intelligence, the company says in its IPO prospectus that China’s desalination capacity is expected to grow approximately 24% per year from approximately 600,000 m3/day in 2005 to over 5.3 million m3/day by 2015. ERI’s PX line of pressure exchangers has only one moving part, a ceramic rotor, that transfers pressure energy from the high pressure concentrate/reject stream to the low pressure seawater stream — allowing it to recycle its own energy and reduce its consumption by 60 percent and achieving a 98 percent energy efficiency (click here for more details on ERI’s PX technology). The company says that over the last five years, its PX device was selected for 14 new SWRO plants in China, which it believes represent a majority of the new SWRO plants commissioned during the same period. One such plant is at the Yuhuan Power Station in Zhejiang province.
Energy Recovery’s PX Technology
Watts Water Technologies, another US company and listed on the New York Stock Exchange addresses the global water issue from different part of the value chain—the pipes and valves that make up the water distribution system. Besides locating a portion of its manufacturing operations in Tianjin, Taizhou and Ningbo, Watts also participates in the China domestic market through its 2006 acquisition of Changsha Valve Works, which at the time of acquisition sold large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water distribution projects and water works projects in China. As Watt’s management explained in a recent earnings call, they have had some setbacks in their China operations this year, not least being the ice storms that affected their Changsha facility adversely, but they remain firmly “bullish on the Chinese domestic market.”
B. Facilities Management
A different approach is more service oriented, focusing on operational and management experience rather than cutting-edge technologies or products. The following companies provide utilities services, seeking to finance, build, own and/or operate water treatment, recycling or distribution infrastructure throughout China:
Veolia is a French-based water utility and the largest in the world and is making its presence felt in China as well. In its green issue last year, Vanity Fair provided an interesting account of Veolia’s exploits in Liuzhou, Guanxi Autonomous Region, and Shanghai Pudong. Veolia also entered into a major joint venture in Tianjin last year to provide comprehensive water treatment services.
The next group of companies are from Singapore, which has very quickly established itself as an international water hub.
Sembcorp owns and operates wastewater treatment, water recycling and water treatment facilities, particularly for industrial purposes, in Singapore, China, UK and the United Arab Emirates. In China, it has recently signed agreements to develop water recycling plants and a R&D center in Zhangjiagang, Jiangsu province, expanded wastewater treatment capacity in Nanjing, Jiangsu province, and committed to develop centralized utilities projects in Qingzhou, Guangxi province.
Hyflux, has established a strong presence in China, with 44 different assets covering wastewater treatment and water recycling across the nation, in Anhui, Liaoning and Shandong among other provinces. It is also building China’s largest desalination plant in Tianjin using its proprietary ultra-filtration technology Costing about US$115 million, the plant will have a capacity of 150,000m3 per day. According to Reuters:
Sam Ong, the company’s deputy chief executive, said that he expected annual growth in China of 20 percent to 40 percent and that Hyflux was looking to fund new plants.
“We are in a sweet spot right now targeting second-tier cities in China; the global guys aren’t in this market, and the local players don’t have the technological know-how,” Ong said, referring to cities like Chengdu, Hefei, Xi’an and Xiamen.
Other Singapore based companies active in China include Dayen Environmental, Darco, Ultra-flo and Asian Environmental Holdings. But perhaps what China’s cities can best take from Singapore more than any single investment by a company or deployment of technology are the lessons taught by Singapore’s highly successful systems-level and integrated approach to urban water treatment, catchment, storage, distribution, recycling and recovery, as documented in this paper…or risk becoming another Iraq.
As a sidebar, what does everybody think of the bottled water industry?