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Sectors and Themes Water Stories Country Water Actions People's Republic of China
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Country Water Action: People's Republic of China
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It wasn’t long ago that Chinese wastewater infrastructure was almost non-existent. In fact, it was only in the 1980s that the first municipal wastewater treatment plant (WWTP) was built in Tianjin, one of the country’s four municipalities. But by the end of 2004, China has built over 700 treatment plants, with a total capacity of 49 million m3 per day.
Far from being enough, this number barely keeps China’s water pollution in check. The 700 WWTPs treat only 46% of urban municipal wastewater. Some 300 small and medium sized cities (with population of less than a million) did not have treatment plants until 2004. “We will need some US$30 billion investments in the wastewater sector from 2006-2010 to achieve the targets of the 11th Five-Year Plan,” says Qin Hong, Vice Director of Policy Research Centre, Ministry of Construction (MOC), referring to the recent national goal to build WWTPs throughout the country.
To meet this huge investment gap, the Chinese government has been opening the doors to private sector involvement. “Marketization” or China’s move from a centrally planned economy to a market-based economy has been hugging the limelight in the global economic stage in recent years. Part of this process is the opening of the wastewater sector for various forms of public-private partnerships (PPPs).By 2005, the Chinese wastewater sector has already experienced the whole gamut of PPP modalities—from management contracts to joint ventures to full divestiture. Some 200 WWTPs have already received an infusion of private capital and technology. But of the different PPP modalities, Build-Operate-Transfer or BOT dominates the field.
“It could be that BOTs appeal to local governments because the private sector invests and builds the infrastructure directly,” says Lijin Zhong, PhD candidate and researcher at Tsinghua University’s Department of Environmental Science and Engineering. She added that another possible appeal of BOTs is their ability to keep charges for wastewater treatment low, given that BOT contracts are paid on a negotiated price and aren’t dependent on user fee levels.
Ten years of experimentation with the wastewater BOT schemes is not enough to determine the success or failure of such projects, particularly since many of them have more than a decade still to go before completion. However, past experiences have already yielded some strong lessons that should be considered for future BOT schemes in the wastewater sector. |
While giving one company the monopoly of a town’s wastewater business for 20-30 years seem to counter market-based economic principles, it makes perfect sense when one understands that BOTs foster competition for the contracts. As quoted in the paper “Privatizing Water,1” the idea is to "create competition for the market rather than in the market." China’s experience, so far, has supported the idea that public bidding is an effective way of selecting the right investor or operator.
The Shanghai Zhuyan No. 1 WWTP is China’s biggest BOT wastewater project to date, with a treatment capacity of 1.7 million cubic meters per day. In 2002, the Youlian Consortium of Shanghai Youlian Development Company, Huajin Information Investment Ltd. Company, and Shanghai Construction Group got the 20-year concession for the project. Their winning bid was RMB 0.22/m3, a remarkable 42% less than the government projected cost of RMB0.38/m3. This is also the lowest reported cost of wastewater treatment by far.
Towards the end of 2004, the Foshan Government also organized the public bidding for 16 BOT WWTP projects. The winning bids for the 16 WWTPs range from RMB 0.66/m3 to RMB 0.99/m3, all of which were less than the government projected cost of RMB 0.95/m3.But while the competition has brought down the cost of wastewater treatment, China’s experience also revealed some of the pitfalls of the bidding and contracting process. For instance, early BOTs saw governments implementing the process without the benefit of financial, legal, and technical advisers, finding to their chagrin that the process becomes more complex in the absence of expert knowledge. Learning from the experience of past BOTs in the sector, the Foshan government sought expert advice on bidding and public tender. It added a cool RMB 1 million to the project cost, but it was money well spent.
BOT schemes, or other PPPs for that matter, often rely on risk allocation to deliver service improvements. In theory, service or performance efficiencies are unleashed when the right partner bears the right financial, political, social, or environmental risks.
Guangdong province’s Guangzhou Xilang project seems to live up to this expectation.
The Guangzhou Xilang project is the first BOT wastewater project that combined WWTP and sewers. In 2001, the Guangzhou Government awarded a 20-year concession contract to the consortium of American LEMNA International Ltd. and Guangzhou Urban Tunnel Company. They formed the project company Guangzhou LEMNA Xilang Wastewater Treatment Ltd. Co.
Unlike regular BOT projects, the project company provided capital but transferred to Hong Kong Yihui Company the responsibility and risks for designing and constructing the facility. Two years later, the project company again shared the operating risk with another experienced operator, this time through a service contract. It engaged the Guangzhou Jingshui Water Co. to operate the facility until the end of the concession period.
To date, the Guangzhou Xilang WWTP’s performance meets all the agreed service requirements. The project itself serves as a good model for allocating risks to the parties best suited to meet them. One potential downside, though, is that this sub-contracting practice adds costs and other operational risks.
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If there is one thing needed to make the BOT process less complex, it would be an established legal framework. As yet, the country doesn’t have an overarching legislation similar to the United Kingdom’s law on privatization. Instead, China’s BOT schemes and other PPP reform strategies are governed by a series of government policy papers.2 But these aren’t enough.
Developing a BOT scheme in the water sector in general and wastewater sector in particular is already a well of complications—from land use considerations to the management of water companies, from investment mechanisms to taxation, accounting systems to credit policies of development banks. And the fact that existing policies on land use, taxation, and such considerations are not geared for the sector makes things more difficult.
Take the case of Beijing’s Dongba WWTP. In 2004, the Beijing Government organized a collective public bidding for 5 small BOT WWTPs. The consortium of Beijing Golden State Engineering CO. Ltd., Beijing Golden Sources Environmental Development CO. Ltd., and Golden State Holdings Group won the 24-year concession. However, the project was hampered by the financing process; development banks couldn’t provide the long-term loans required by the BOT project. In the end, the consortium withdrew due to financing constraints.
Similarly, in the case of the 16 Foshan WWTPs, over 50% of the projects could not be implemented because they conflict with current land use policies.
Clearly, there is a need to accelerate the process for formulating the needed legislation.
Since the Chinese Government called for marketization, BOTs have become a solid strategy for fighting the growing problem of water pollution in the country. Despite the complications inherent in the process, the gains on the customers, operators, and local governments in terms of service coverage and performance efficiencies have been apparent.
With the right legal framework, risk sharing allocation, transparent and competitive bidding process, and other requisites, BOTs and other PPP modalities can bring in the investments needed to improve China’s wastewater sector.
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