An Overview of China’s Water and Waste Water Situation

According to ABD, China is home to about 20% of the world’s population, but endowed with only 7% of global water resources. Water resources in the PRC are remarkably unevenly distributed. Southern China encompasses 69% of the country’s available water supply and has four times the groundwater resources of northern China; whereas, the north only has one-fifth of the China’s total water resources, yet it covers roughly 60% of arable land for agriculture and is home to some of the country’s largest cities.

Both regions register seriously low per capita water availability ratios. The south, with water availability at 1,100 cubic meters (m³) per capita, is within a hairline of the international water scarcity threshold of 1,000 m3 per capita, while the north is operating at only 424 m³ per capita or nearly 50% below the threshold.

 

 According to a Goldman Sachs report in 2015, the China’s Market for environment potential is tremendous due to under-investment as a percentage of GDP and as unprecedented growth in the past has led to record levels of pollution in China’s air, water and soil. The pollution issues must be addressed as there will be growing national and social concerns on food & water safety and sufficiency.

 

Source: Goldman Sachs, July 2015

In 2016, the Chinese government announced various policies under the 13th Five-Year Plan to promote environmental protection, while tightening the laws and regulations to define more clearly the responsibilities of environmental protection bodies. According to Uob Kayhian (Jan, 2017), the 13^th Five Year Plan (FYP) from 2016-20 estimates total investment of Rmb564b, up 31% from the amount in 12^th FYP, which will mainly be used as capex for WWT facilities. For the river clean-up in main cities, the total budget is around Rmb170b in the 13^th FYP. The 13^th FYP guided that local governments are responsible for these projects by means of:

 

a) Raise funding through Waste Water Treatment (WWT) tariff to attract investment;

b) Invite more social and private capital (PPP: Public-Private-Partnership); and

c) Offer more support to less developed regions.

 

Other than driven by policies, the demand for water and water treatment is also expected to increase due to the continuing urbanization and industrialization in China.

 

Urbanization is one of the factors that contribute to the increased discharge volume of domestic sewage. According to Frost & Sullivan, China’s urban population grew from 669.8 million in 2010 to 793.0 million in 2016. In the same period, China’s urbanization rate saw an increase of 7.4% from 49.9% to 57.3%. Frost & Sullivan estimates that by 2020, and Chinese urbanization rate to reach 63%. This urbanization trend is likely to lead to an increase in demand for clean water and wastewater treatment in urban areas, which in turn would increase the growth potential of the municipal wastewater treatment industry.

 

Between 2010 and 2015, the water consumption volume in China increased from 602.2 billion ton to 634.2 billion ton. During the same period, per capita water consumption has also increased from 450.2 ton to 461.2 ton. Frost & Sullivan expects China’s water demand will keep growing and has estimated that by 2020, total and per capita water consumption will increase to 666.9 billion ton and 464.3 ton respectively.

While official industrial wastewater discharge reported a declining trend since 2008, ChinaWaterRisk points that it could be under-reported as it does not synch with the economic growth in China.
 

 

Water tariffs have experienced growth in the past decade. Wastewater treatment fee for residential users rose from RMB0.76 per m³ in 2010 to RMB0.85 per m³ in 2015 and running water tariffs increased from RMB1.84 per m3 in 2010 to RMB2.11 per m³ in 2015. Industrial water tariffs and waste water treatment fee are higher than residential users and Frost & Sullivan believes wastewater treatment tariff will continue to grow and this bodes well for the WWT operators.

 

  

Furthermore, the tariffs rate in China are still very low compared to those in developed countries. According to Goldman Sachs (2015), one key reason for China’s chronic and deteriorating environmental system is due to its low pricing of utilities & water treatment. Cleaning up pollution across the ecosystem will require a rationalization of utilities prices, meaning users and polluters will need to pay more realistic costs so that suppliers of pollution reduction services are appropriately incentivized to provide good environmental protection and improvement services.

Coupled with the continued economic growth, government measures and demographic trends, it is expected that there would be an increased demand for clean drinking water, industrial water and wastewater treatment, sludge and hazardous waste treatment services in China and these investments would be supported by the expected tariff increases.

(Source: Stock Snipers)

Wastewater Treatment Operating Modes

Wastewater treatment is usually conducted by means of either a BOO or BOT project. In addition, there is also the O&M project model, in which an enterprise is retained to operate and maintain wastewater treatment facilities in return for a fee. Generally, for BOO & BOT, the project company is exposed to financing risks as a large sum of capital is required at the start up of the project and only gets paid back after a long period of time.
 

 

BOT

Municipal projects are using build-operate-transfer (BOT) model, where local governments are responsible for tariff collection and payment. BOT projects involve the design, construction and operation of wastewater treatment plants where concession is granted (usually for 25-30 years) by the local government according to the relevant concession agreement. At end of the concession period, the plant is transferred to the local government at zero consideration.

 

BOO — A B2B business model with higher returns as well as risks

The build-operate-operation (BOO) method is widely used for developing industrial WWT projects. BOO projects are built, owned and operated by the operator. Local governments may act in an initiator/coordinator role in industrial projects. Generally, operators of industrial WWT projects need to sign contracts with customers one by one, with no guaranteed treatment volumes.

Given that BOO projects generally bear greater risk from potential uncertainty in utilization and tariff collection and the operator is able to get higher margin by directly negotiate the tariffs with the industrial users.

 

 

Coming soon... Next, we will be looking at the potential opportunities in the China's Waste Water Sector.. Click HERE To Subscribe For New Updates by Email