Foreign water firms make a splash
By Zhang Jin (China Daily)
Updated: 2004-11-23 09:44

International water companies are working hard to gain access to the Chinese market as the nation's water sector increases the pace of its liberalization and opening.

This comes as these foreign giants have basically become accustomed to the Chinese market after arriving here as strangers several years ago.

France-based Veolia Water, one of the world's leading water firms, has invested nearly 10 billion yuan (US$1.21 billion) most of this over the past two years in the Chinese mainland's water market, said Sophie Lamacq, managing director of Veolia Water South China Ltd.

The huge firm became the first foreign company to invest in Beijing's sewage treatment sector when it successfully bid for a waste disposal project in the capital last September.

Last December, the company spent US$400 million on a 45 per cent stake in the Shenzhen Water Group, the largest sum spent so far on a water project in China.

Earlier this year, Veolia Water bought the operating rights of two waterworks in Zunyi, a city of Guizhou Province, for 152 million yuan (US$18.3 million).

Since its first co-operative project in China's waterworks in Tianjin in 1997, the French company has successfully won bids for 13 water projects across the nation, according to Lamacq.

Although Germany's Berlin Water, the nation's leading waterworks operator, was not an early bird in the Chinese market, it has turned out to be one of the most active foreign players.

It invested 290 million yuan (US$35 million) along with a Chinese partner in 2002 in a sewage treatment facility in Nanchang, the capital of eastern China's Jiangxi Province.

It also signed a strategic co-operative framework agreement last September with the Jinan municipal government in eastern China's Shandong Province.

Along with a Chinese partner, Berlin Water won the bid for a sewage treatment project in Hefei, the capital of eastern China's Anhui Province, with a combined offer of 480 million yuan (US$58 million), in return for operating rights lasting for 23 years.

Other leading water companies such as Thames Water and SUEZ have stepped up the pace of their entry to the Chinese market.

According to a rough survey, more than 20 foreign water companies have invested US$60 billion in over 50 projects in China.

"Overseas water companies' spending spree in the Chinese market began in 2002, when the Chinese Government allowed foreign investors to enter the public sector across the nation," said Zou Shunhua, an analyst at Dayue Consulting.

Dayue, which was established in 1996, specializes in public-sector consultancy, and has served several domestic and foreign water firms.

"Foreign players feel they cannot afford to lose the Chinese market, especially after the State-owned sector is opening up to them," Zou said.

The potential of the US$24 billion Chinese water market to these foreign firms is considerable.

According to the 10th Five-Year Plan (2001-05), the water-supplying sector's annual output will be between 150 billion yuan (US$18 billion) and 200 billion yuan (US$24 billion).

The sewage treatment rate in urban areas should be raised to 45 per cent from 22.3 per cent, offering a wealth of business opportunities.

It is also predicted that industrial water consumption will increase from 37 billion cubic metres in 1999 to 66 billion in 2030. Civil consumption will also reach the same level in 2030 from 26 billion cubic metres in 1999.

The water sector is expected to grow at an annual rate of 15 per cent in coming decades.

Analyst say the sector's profit rate is higher than the average in other sectors, with some saying that the rate was more than 20 per cent.

And the sectoral chain does not stop at waste disposal and the construction of waterworks. It also extends to areas such as equipment manufacturing, water distribution and logistics, and water-saving solutions.

"Nobody can ignore such a big cash cow," said Zou.

And the central government's market-oriented water pricing reform, carried out in recent years, has made the sector increasingly attractive.

Although the government still has the final say on water prices, it has promised to mainly let the market decide and set prices at "a reasonable level."

That means water prices are expected to rise to reflect the supply-demand relationship rather than being fixed at a low level as they were during the planned economy era.

"The higher the price is, the more profit can water companies earn," Zou said.

Major price rises have already swept the nation since 2000.

Residential water rates increased in Beijing from 2.9 yuan (36 US cents) per cubic metre to 3.7 yuan (45 US cents) in August, the ninth rise since 1991.

Water prices for some industries surged by 50 per cent to stand at 41.5 yuan (US$5.02).

Apart from attraction of the market, the spending spree also came as these foreign giants have become familiar with the Chinese market and decided clearer tactics, said Zou.

"It turned to be a different scenario when the market was opened to them on a trial basis around 2002," he said.

Some of them retreated from the Chinese market years ago as a result of unhappy experiences with local governments or companies.

At that time, the two parties based their co-operation on fixed return rates local governments sought foreign investment by promising a fixed annual rate of return.

The central government cracked down on this in 2002 after some local governments found the actual profit rate was much lower than the fixed rate. Some joint projects broke down, and the foreign firms withdrew.

"Now, Chinese players are mature, and foreign investors also have a better knowledge of the changing Chinese market," Zou said.

Most of the foreign investors have gone through the trial period and drafted clear strategies in China, he added.

For example, Veolia Water has decided to focus its efforts on the operation of projects, he said.

The French company now focuses on winning operating rights rather than simply pursuing large investments or controlling stakes during the construction phase.

Foreign investors now tend to team up with local players, who are growing stronger and are familiar with the local market.

"The tactical changes reduce the investment risks for these foreign giants and have increased their enthusiasm about launching bolder moves in China," Zou said.

In addition, local governments' attempts to attract foreign firms have also caught their attention.

Xiamen Water Group, the city's major water supplier and processor, is seeking non-State partners by offering a 45 per cent stake in its water plants and a 55 per cent stake in its sewage treatment plants and tailored facilities.

"The move is aimed at enhancing the management and professionalism of our public sector players," Huang Ling, deputy mayor of the southeastern port city, told reporters.

Nanjing Tap Water Co is also putting a 40 per cent stake up for sales, having attracted the attention of a number of overseas companies such as Hong Kong China Gas, Berlin Water and China Water Company.

The Jiangsu-based company is capable of producing 1.79 million cubic metres of water daily and currently has a monopoly of the city's water supply.

Similar invitations have been issued across China, including from towns and counties, said Zou.

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