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Foreign Investment in China’s Water Infrastructure Strategic water management is crucial to China’s social stability, economic prosperity, food security and long-term environmental sustainability. The need for careful planning is undeniable. Northern China, home to 538 million of China’s population, a quarter of the country’s grain production, and half of its produce, is in an especially poor position in terms of water resources. It ranks in the bottom decile of water availability in the world,[1] with water use further limited by heavy pollution of both surface and ground water. Southern China has a relatively greater and cleaner supply of water per capita, but the situation remains dire throughout the country.[2] China's response to its water crises sits at the crossroads of multiple areas of national interest. Water scarcity threatens the ability of China's farmers to irrigate their crops, impacting food security as well as social stability, especially in northern China. Water shortages cost the country an estimated 40-60 billion RMB in lost economic output per year.[3] Continued scarcity and uncertainty will affect the willingness of foreign and domestic companies to invest in China, further lowering the production of existing facilities, and ultimately affecting the job market. Urgently, low water quality and pervasive pollution also constitute a public health hazard. In 2004, it was estimated that 300 million people lacked access to safe drinking water in China.[4] The loss in biodiversity and the ecological damage that has already resulted from China’s water pollution and water use make the current situation even more grievous.[5] A comprehensive and strategic plan to combat China’s growing water scarcity and water quality problems must include commitment to a sustained surge in the development of water infrastructure. In this area, the need is particularly acute in the nuts and bolts of China’s municipal and industrial water infrastructure, where significant technological and operational advances are required in water and wastewater treatment, distribution and collection. The money and political will that China’s government has spent on this effort to date pave the way for new approaches to be effective moving forward. Ultimately, the acceleration of water infrastructure development is important not only for the effective management of water resources, but also because it provides a buttress for China's social and economic security, making it possible for China to achieve its goal of a harmonious society. High Ambitions, Slow Results China has not ignored its growing water crisis, creating the first version of its National Water Law in 1988.[6] In 2000, with the 10th Five-Year Plan, China set ambitious targets for the reduction of Chemical Oxygen Demand (COD), the most prevalent measure of water pollution in China. COD is an indirect measure of the amount of suspended organic matter in a water sample; high organic content can lead to algal blooms and often indicates the presence of water-borne pathogens. China aimed to achieve a 10 percent reduction in the COD level of municipal and industrial wastewater discharge by 2005. This goal has carried over into the 11th Five-Year Plan, which promises an additional 10 percent reduction by the end of 2010.[7] China has also greatly expanded the sheer number of regulations that govern water quality and treatment, making treatment standards more stringent for wastewater discharge into the environment. It aims to decrease the percent of wastewater that is discharged without receiving any treatment, raising the rate of municipal wastewater treatment to 70 percent by the end of 2010. To address scarcity, it has set goals for reducing water consumption per unit GDP 60 percent by 2020 and achieving 20 percent water reuse in water-scarce northern cities.[8] All of these numbers and reduction targets point toward a tremendous build-up of political momentum. Meeting these goals will require building new infrastructure, upgrading the technology in existing assets so that more stringent levels of treatment can be reached, and using new management techniques and replacing equipment to reach greater efficiency in conveyance. However, the 10th Five-Year Plan saw extremely limited progress in any of these areas. This can be seen in the introduction of the National 11th Five Year Plan for Environmental Protection, which plainly states that, “the environmental protection targets of the ‘10th Five-Year Plan’ period had not been met.” From 2000 to 2005, China achieved a 2.3 percent reduction in COD, when aiming for a 10 percent reduction. Similarly, over a quarter of monitored surface water in China was graded unfit for human contact or use, and 62 percent did not meet minimum standards for Grade III quality, a level that is recommended for use only as a “second class” drinking water source.[9] Clearly, the improvement and strategic construction of water infrastructure may not be as straightforward as simply building more infrastructure, upgrading equipment, and increasing efficiency. The 10th Five Year Plan’s failure to meet policy goals point to the existence of unsurmounted challenges that have kept China from carrying out an effective build-up of infrastructure. Yet, during the present Five-Year Plan period, the situation has slowly been changing. In the area of pollution control, China has seen significant progress, with current government figures placing COD levels 6.61 percent lower than 2005 levels.[10] Differences in policy from the 10th to the 11th five-year planning periods can shed light on why a more positive trend is emerging. An analysis of the policy impacts to date suggests ways to sustain and accelerate the growth that has led to pollution reduction and scarcity alleviation. Pricing For Stability Or Sustainability? One of the central problems facing the construction and operation of water infrastructure is the price of water that is paid by the end user. In order to make water a universally accessible good, the National Development and Reform Commission (NDRC)’s Price Bureau has traditionally heavily subsidized and regulated the price of water for all users, be they residential, industrial or agricultural. However, low water tariffs often make it impossible for utilities and water companies to recover their capital expenditures through the collection of drinking and wastewater fees. In 2004, it was estimated that only 40 percent of municipal water utilities achieved a positive net income.[11] These economics predictably discourage private sector involvement, causing the burden of investment to fall more heavily on the public sector and, ultimately, taxpayers. In order to improve this situation and, in the long-term, create incentives for water infrastructure development that are not dependent on political will, the government has recently taken great strides to increase water prices and improve the ability of utilities to achieve cost recovery. Within the sector, water tariffs differ based on use, with industrial users typically subject to higher water prices than municipal or residential users, who pay still more than agricultural users. The reasoning for these differences is largely two-fold. The first consideration is economic: industrial wastewater can be more expensive to treat than municipal wastewater, while water used for irrigation is neither treated before being added back to the environment, nor requires as much treatment prior to use. The second, and more significant reason is socioeconomic: access to water is a basic right. Therefore, controlling affordability remains central to residential prices. The problem of affordability is even more acute in the agricultural sector, when small-scale subsistence farmers require large volumes of water for irrigation. Water price reform can then have a direct and dramatic impact on livelihood and, in turn, on levels of social unrest. Within these limits, water tariffs have still seen dramatic changes in the past decade. In Tianjin, industrial tariffs have almost tripled from 2000-2004, rising from 2.0 RMB per cubic meter to 5.6 RMB per cubic meter. Beijing, which currently has the highest municipal water tariffs in China, has steadily been increasing its rate from 0.30 RMB per cubic meter in 1998 to the current 4.0 RMB per cubic meter, initiating steep increases in the last year due to water shortages. Smaller cities have been following suit; Harbin has recently moved forward with price increases that will raise residential user fees to 3.2 RMB per cubic meter.[12] Tiered price changes, in which the price the user pays is dependent on how much water they use, help to lessen the blow for the poor.[13] The private sector has responded to these policy initiatives enthusiastically, with concrete moves to capture the market in anticipation of tariffs that will allow not only cost recovery, but also a reasonable margin of profit. In 2007, Veolia Water offered 1.7 billion RMB in a bid for joint venture with the Lanzhou Water Supply Group, which represented a 1.4 billion RMB premium over the asset price. High premiums that have recently been paid by Veolia and other firms provide evidence of optimism and interest from the private sector that are a direct result of price reform.[14] The National Security Dilemma As a result of politically ambitious regulations, industrial and municipal wastewater discharge standards in China are actually extremely high, and comparable with that of developed countries.[15] Accordingly, the level of technology and the operational knowledge and management required to meet these standards is significant. By raising treatment standards and eventually requiring compliance, the government is creating demand for advanced wastewater treatment technologies that improve primary and secondary treatment steps and is setting the stage for widespread use of tertiary technologies such as denitrification and disinfection.[16] Setting and financing goals for increasing the total amount of water that receives treatment will also broaden the market for both conventional and advanced water treatment technologies. This, somewhat paradoxically, creates another challenge for China’s water sector development. The demand created by high standards will need to be met. However, low water prices and state-owned infrastructure have historically kept China from being a leader in water technology, creating a vacuum of domestic expertise. Up until the present, China has responded to this problem of domestic inexperience by intently fostering local companies and actively protecting them from foreign competition. Notably, China has not joined the World Trade Organization Agreement on Government Procurement, allowing them to bar foreign companies from bidding on government contracts. While China does not have the capacity to completely replace foreign vendors, especially in the manufacturing of advanced water treatment technology, there has been a concerted effort to set limits and encourage domestic innovation wherever possible. In 2006, the Ministry of Construction estimated foreign financing in the industry to be less than 10 percent. In contrast, foreign players constitute 40 percent of China’s automotive market.[17] This protectionist approach has its roots in the larger issue of national security. Water, because it sits at the nexus of China's social stability, economic growth, food security, public health, and other security concerns, is itself a national security issue. The natural implication of such a categorization is that China cannot be dependent on foreign entities for the operation or expansion of its water infrastructure without endangering its national security. Thus, it is of crucial importance that China foster and protect its indigenous water utilities and water technology companies. The steps taken so far to protect and encourage the development of local expertise demonstrate the consequences of this perspective. Most recently, China has strengthened its policy position through the joint announcement of the National Indigenous Innovation Product Accreditation Program by the Ministry of Science and Technology (MOST), the National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF) in November of 2009. The program gives stated preference to a specific list of accredited enterprises in government purchasing and contracting, an amount that totals 300 billion RMB for water infrastructure in the 11th Five-Year Plan.[18] In this recent initiative, accreditation requires a company to be a legal entity in China; the products it offers must also be sourced from domestically owned intellectual property rights and not be subject to any foreign restrictions. These requirements make it extremely difficult for foreign companies to reach the preferred list, dramatically reducing the already limited opportunities available. Foreign players in China participate in water infrastructure development through a complex set of joint venture requirements that are designed to limit foreign control while maximizing technology transfer to local firms. They include build-operate-transfer agreements (BOT), public-private-partnerships (PPP), and an array of joint venture structures (JV) that typically require majority ownership to be Chinese.[19] The goal of this system is both to regulate the amount of foreign competition and to force those that are playing to help their domestic competitors. The emphasis on technology transfer has been largely successful, with a joint venture between Japanese Toray and China BlueStar signed in 2009, resulting in the first membrane-manufacturer in China.[20] Membrane technology is a key component to water and wastewater treatment and seawater desalination, making this milestone especially significant. As a result of years of sustained technology transfer and preferential government policy, domestic players are becoming increasingly viable competitors to global companies that are also seeking to capture a piece of the Chinese market. A Balanced Role For Foreign Investment A dynamic balance needs to exist between national security concerns and the benefits that foreign expertise and foreign investment can bring. As the water market evolves, the optimal balance between these two competing forces will naturally shift, moving steadily away from tightly controlled protectionism and more towards a competitive market. China’s discharge standards for wastewater are on par with those of developed countries, challenging China to meet international standards within the next few years. For China’s domestic companies to meet those goals, they must rise to the level of global players, building an international reputation for high-quality, cost-competitive, and advanced technology. They simply cannot be effective international competitors if they continue to enjoy the advantages of an uneven playing field in the domestic market. In the long term, China has no choice but to become a global leader in water infrastructure and water technology. The policy imperative is very much backed up by an environmental ultimatum. China’s annual water available per capita is among the lowest in the world for a populous country.[21] Climate change threatens to further stress northern China, changing monsoon patterns to decrease precipitation in the parts of China that are already the most water-stressed. Areas of China reach a water per capita comparable to or exceeding that of Israel and Australia, countries that have, out of necessity, become global leaders in water technology. Israel has pioneered emerging technologies such as desalination and highly-efficient drip irrigation, while Australia is a leader in water re-use.[22] The scale and severity of China's problems mean that China will also have to become a leader in water resource management and water technology in order to achieve long-term sustainability. Currently, China is far from that vision. It remains largely a market for conventional water technologies, with limited demand for more emergent technology. China's small and medium-sized cities, totaling 641, struggle to reach 50 percent wastewater treatment and often have leaky distribution or collection systems.[23] Inadequate price signals and only recently-enacted tougher standards have stymied growth in more emergent fields. In such a climate, it would be difficult for the marginal benefit of advanced technologies, such as microfiltration or smart metering, to outweigh the gains from basic fixes that increase the amount of wastewater receiving any level of treatment and address gross inefficiencies. Nonetheless, the level of local innovation needs to increase for China to meet its needs for the long term. The speed at which that innovation occurs will be profoundly influenced by the role that foreign expertise plays in China's market. The goal of China’s policy toward foreign investment should be to maximize the benefit to China's social and economic security. A constructive role for foreign players allows China to capture and transfer technological, operational and management know-how, lessen the financial burden on the government to back development, and achieve its policy goals without compromising the development of its local water industry or increasing the financial burden of its citizens. In a Chinese study examining the existing instances where foreign firms are allowed to operate and own water infrastructure in China, no significant difference was found between the price that end-users pay for water from foreign utilities than from domestic utilities, suggesting that the impact of a shift in policy will be felt largely by local competitors, but not by the local populace.[24] At a basic level, the changing market warrants a re-evaluation of existing JV structures, resulting in a simplification, and perhaps an expansion of, the role that foreign partners can play. Joint ventures should very much remain a part of Chinese water policy, as their role in the transfer of knowledge and technology is crucial. Furthermore, as the World Bank recommends in Stepping Up: Improving the Performance of China’s Urban Water Utilities, foreign-domestic collaboration should be designed to maximize not simply the transfer of technology, but also maximize the transfer of the operational and managerial know-how necessary to run existing infrastructure and oversee new construction.[25] Technology is not enough. A 2004 report by the National Auditing Office stated that 60 out of 78 audited wastewater treatment plants were underutilized due to lack of operating funds or delays in construction of ancillary facilities.[26] Subpar construction, engineering, and procurement often results in facilities that are too large for their market and unreliably connected to receive wastewater from the collection system. Strong incentives that emphasize operations and management are necessary for China to achieve security through the sustainable operation and construction of water infrastructure. Another avenue for development is to move away from the traditional model of foreign firms providing technology to local firms. Instead, China should embrace opportunities for the joint design, development and deployment of new technology. Cooperation between local and international firms provides an additional avenue for the development of new technology and invites participation from foreign players who may be wary of existing levels of IP protection. Furthermore, joint innovation helps China establish a global perspective and develop stronger domestic capacity by encouraging the export of Chinese technology and goods, allowing Chinese firms to work together with foreign firms to enter markets in places such as Africa, where China is already investing in infrastructure.[27] The degree to which China employs outright limits to foreign participation and engages in explicit prioritization of domestic firms must decrease if China is to meet its water policy goals. Recent movement in the opposite direction, with the announcement of the National Indigenous Innovation Product Accreditation Program, will make its already ambitious targets even more difficult to achieve. The current situation necessitates a change in the approach China’s government is taking toward the development of water infrastructure. China needs to step away from a protectionist stance and move toward a more global perspective, understanding that increasing foreign involvement will be a necessary part of strengthening China’s national water security.
[1]. Zmarak Shalizi, “Addressing China’s Growing Water Shortages and Associated Social and Environmental Consequences,” Development and Research Group, Environment and Infrastructure, World Bank, <http://www-wds.worldbank.org/ [2]. Zmarak Shalizi, “Addressing China’s Growing Water Shortages and Associated Social and Environmental Consequences,” Development and Research Group, Environment and Infrastructure, World Bank, <http://www-wds.worldbank.org/ [3]. Charles Wolf Jr., K.C. Yeh, Benjamin Zycher, Nicholas Eberstadt, and Sungho Lee, Fault Lines in China’s Economic Terrain, (Santa Monica, CA: Rand, 2004), p. 88. [4]. Guo Zi, “Water Pollution Becomes a Matter of Life or Death,” China Daily, Dec. 24 2004, <http://www.chinadaily.com.cn/ [5]. Brian Handwerk, “A Third of Fish Species in Chinese River Extinct, Officials Say,” National Geographic News, Jan. 17, 2007, <http://news. [6]. Water Law of the People’s Republic of China, <http://www.china.org.cn/ [7]. The National 10th Five-Year Plan for Environmental Protection, State Environmental Protection Agency of P.R. China, <http://english.sepa.gov.cn/ [8]. Diane Winalski, “Cleaner Water in China? The Implications of Amendments to China’s Water Law on Prevention and Control of Water Pollution,” Journal of Environmental Law and Litigation, Vol. 24, No. 1 (Spring 2009), pp. 181-202; The National 11th Five-Year Plan for Environmental Protection, State Environmental Protection Agency of P.R. China, < http://english.sepa.gov.cn/ [9]. The National 11th Five-Year Plan for Environmental Protection, State Environmental Protection Agency of P.R. China, < http://english.sepa.gov.cn/ [10]. “2008 Nian Di Quan Guo COD Pai Fang Li Bi 2005 Nian Xia Di Le 6.61%,” March 3 2009, <http://www.chinanews.com.cn/ [11]. Ana Lin Choing et al., “Clean Water,” China Greentech Initiative, December 2009, <http://www.china-greentech. [12]. “Tianjin to Raise Water Price,” People’s Daily, Nov. 27 2005, <http://english.peopledaily. [13]. “Water Supply Pricing in China: Economic Efficiency, Environment, and Social Affordability,” World Bank, December 2007, <http://web.worldbank.org/ [14]. Ren Bo, “Stormy Seas for China’s Water Services Sector,” Caijing Magazine, Oct. 11 2007, <english.caijing.com.cn/2007- [15]. Greg Browder with Shiqing Xie, Yoonhee Im, Lixin Hu, Mingyuan Fan and David Ehrhardt, Stepping Up: Improving the Performance of China’s Urban Water Utilities, (Washington DC: The World Bank, 2007), p. 59. [16]. Discharge Standard, Ministry of Environmental Protection of the People’s Republic of China, <http://english.mep.gov.cn/ [17]. “China Water Projects Get Big Investment,” International Herald Tribune, Aug. 22 2006, <http://www.nytimes.com/2006/ [18]. “New Restrictions on Access to Chinese Government Procurement Market,” APCO Worldwide, Dec. 17 2009, <www.apcoworldwide.com/.../ [19]. “The Water Business in China: Looking Below the Surface,” KPMG, March 31 2008, <http://www.kpmg.com.cn/en/ [20]. “Toray, China BlueStar Establishes Joint Venture in China, to hold ground-breaking ceremony,” Toray, Aug. 25 2009. <http://www.toray.com/news/ [21]. Zmarak Shalizi, “Addressing China’s Growing Water Shortages and Associated Social and Environmental Consequences,” Development and Research Group, Environment and Infrastructure, World Bank, <http://www-wds.worldbank.org/ [22]. Ming Xu, Chih-Pei Chang, Congbin Fu, Ye Qi, Alan Robock, David Robinson, and Huai-min Zhang, “Steady decline of east Asian monsoon winds, 1969–2000: Evidence from direct ground measurements of wind speed,” Journal of Geophysical Research, Vol. 111 (Dec. 2006), pp. 1-8; “Earth Trends: The Environmental Information Portal,” World Resources Institute, 2007, <http://earthtrends.wri.org/ [23]. Greg Browder with Shiqing Xie, Yoonhee Im, Lixin Hu, Mingyuan Fan and David Ehrhardt, Stepping Up: Improving the Performance of China's Urban Water Utilities, (Washington DC: The World Bank, 2007), p. 31. [24]. “Fu Tao: Wai Zi Jin Ru Dui Zhong Guo Shui Wu Qi Ye Dui Shui Jia Mei You Ying Xiang,” Xinhua, Aug. 4 2009, <http://news.xinhuanet.com/ [25]. Greg Browder with Shiqing Xie, Yoonhee Im, Lixin Hu, Mingyuan Fan and David Ehrhardt, Stepping Up: Improving the Performance of China's Urban Water Utilities, (Washington DC: The World Bank, 2007), p. 86. [26]. ibid, p. 20. [27]. Vivien Foster, and William Butterfield, "Building Bridges: China's Growing Role as Infrastructure Financier for Sub-Saharan Africa," World Bank, July 2008, <siteresources.worldbank.org/ |
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