China is stepping up liberalisation of its gigantic utility sector by enticing private investment as the Ministry of Construction, in a rare announcement, called for the franchising of water, gas and heat supply as well as public transport and sewage and refuse treatment. The liberalisation underlines a sweeping overhaul in a number of industries before the country opens its doors to foreign competition as required by its World Trade Organisation commitments. Industries such as power, telecommunications, banking and insurance are at the heart of the overhaul, with a common goal of spurring competition, boosting efficiency and hence benefiting consumers. 'Opening the utility markets and establishing a franchise mechanism is a new system with an aim to spur the development of local utilities and operating efficiency,' the ministry said on its Web site. A key feature of the liberalisation is that domestic and foreign investors are allowed to invest alone, or co-operate with local authorities or enterprises. Investors are also allowed to invest in different utility sectors in different geographical areas. The Ministry of Construction empowered local governments to award franchises but recommended a tender process to ensure a level playing field. The local governments will also play a regulatory role in utility charges and services. Characterised by chronic shortages and pollution, China's water market was worth an estimated US$120 billion, according to government statistics last year. The Asia-Pacific Water Council, a non-profit taking organisation set up last November to expand Asia's water markets, reckoned two-thirds of China's cities faced severe water shortages. By 2030, the demand for water would grow 66 per cent, the council said. Demand growth is expected to stem largely from residential and industrial usage with the population estimated to surge to 1.5 billion in 27 years, from the existing 1.2 billion, the council added. The liberalisation of sewage and refuse treatment is urgent because of rapid industrialisation and urbanisation. Piped gas has a low market penetration, reaching about 10 per cent of China's population, and the liberalisation has prompted a rash of investment in the gas sector recently. Just two weeks after blue chip gas utility Hong Kong and China Gas (Towngas) secured a 50-year contract to supply gas in Changzhou, Jiangsu, a smaller gas operator Xinao Gas Holdings is expected to announce today that it has established a gas franchise in Shijiazhuang, Hebei. It will be Xinao's 14th new project in the past 12 months. Analysts said the gas market was booming but risks were high. HSBC Securities analyst Ivan Lee pointed out that the fledgling sector had a low entry barrier, which meant keen competition. Other risks included the lack of a clearly defined legal framework on regulations, policy and pricing and the possible scrapping of lucrative service subscription fees, or connection fees, analysts said. Connection fee income is a key profit contributor for smaller suppliers such as Xinao, Wah Sang Gas Holdings and Panva Gas Holdings. Connection fees, with a 78 per cent margin, helped increase Wah Sang's interim profit by 92.4 per cent to HK$131.4 million for the six months to September 31 last year.