Opportunities to flow from China's water-saving plan

PUBLISHED : Monday, 03 April, 2006, 12:00am
UPDATED : Monday, 03 April, 2006, 12:00am

Five-year plans are one of the few remnants of Stalinist state planning still embraced in China. But while they no longer micro-mandate production levels, there is no small irony in the fact that these central growth goals are increasingly important to cutting-edge capitalists looking for the next big China play.

One such investment theme emerged from last month's political conclave in Beijing: water. Specifically, China aims to reduce nationwide water consumption per unit of industrial value by 30 per cent over the next five years.

The need for such a move is dire. The mainland is one of the world's biggest water wastrels and some 17 provinces have been forced to start rationing supply in recent years. About 400 of 660 mainland cities surveyed are suffering water shortages and the situation is severe in 136.

Achieving this highly ambitious reduction target will increase the strain on several water-intensive industries and open up new opportunities to business in the resources management sector.

'In the coming months and years, water prices will increase significantly and heavy industry will have to pay more for water,' said Jing Ulrich, managing director at JP Morgan and head of China equities. She lists textile dyeing, coal washing and petrochemicals as several industries likely to face higher costs as a result.

However, the push for more efficient consumption is likely to create more opportunities for firms that have the technical and operational knowledge to improve management of key utilities.

'The issue of more efficient water consumption has always been a key priority for the cities whose facilities we operate,' a Hong Kong-based spokesperson for French firm Veolia Water said. Veolia has more than US$1 billion invested in projects on the mainland, mainly involving the provision of water services on the municipal level. Other firms with a foothold in the China market include Berlin Water, Thames Water, Suez and Hong Kong and China Gas.

Municipal water supplies are only one facet. Only about 30 per cent to 40 per cent of industrial water is recycled, compared with an average of 80 per cent in the developed world. The help of foreign market leaders will be required to bring these industries into line with global standards.

However, much needs to change before multinational firms can reap the benefits of this demand. The main obstacle to profitability for would-be investors is the stringent price controls the state imposes on end-user water tariffs.

The average water tariff stands at about two yuan per cubic metre. This represents about 20 per cent of the mean tariff among leading industrialised nations and fails to take into consideration China's widespread supply shortages.

'If water rates are too low, there may be no incentive [for companies] to invest,' Ms Ulrich said.

Beijing is well aware of the need to tread cautiously on tariff reform. Agriculture accounts for about 80 per cent of China's water consumption, so the issue is how to raise water prices without adding to tension in the countryside.

'It's a delicate balance,' said Ms Ulrich, who expects officials will use a combination of higher tariffs for industrial users and some form of subsidies for farmers to raise rates and curb consumption.

More efficient water consumption also featured in the previous five-year plan, but the results were mixed. A government survey last year of 36 medium-sized to large cities found the average water tariff was 2.09 yuan per cubic metre, including waste-water treatment fees of 54 fen per cubic metre. That represented a 10 per cent rise from the previous year. But nationwide, more than 100 cities still did not charge wastewater treatment fees. In some regions, basic water tariffs remained almost negligible, as low as 10 fen per cubic metre.

For state planners and foreign investors alike, that is too much water under the bridge.