Environmental Technologies Industries

Environmental Technologies Industries

Market Plans

China Environmental Export Market Plan

Chapter 4 - The Water Sector

Per capita water resources in China are equivalent to only 26 percent of the world average. The northern part of the country is plagued by severe water shortages and the widespread contamination of most surface water and groundwater. The southern part of the country, meanwhile, is subject to annual floods, in addition to its own widespread pollution. The Yangtze River clearly delineates water resource disparities between North and South China; south of the Yangtze, 81 percent of the country's total water resources face serious pollution from upstream contamination, while to the north heavy industrialization and urbanization contribute to the degradation and misuse of the remaining 19 percent.

Water supply and quality constraints have prompted the government to begin discussion of an immense South to North water diversion scheme, intended to pump water from the Yangtze to drought-afflicted cities such as Beijing and Tianjin in the North. The project may offer opportunities to foreign technology exporters. That such a major project is underway indicates the severity of water issues in the North. Over half of the Chinese population does not have access to potable water, and recently the government conceded that there are no exploitable clean water resources left anywhere in the country. Over exploitation and misuse of groundwater in the North have caused widespread declines in the water table, and pollution often renders hazardous what is available. Although data are limited, it is thought that overflowing septic tanks and leaking sewers contribute to much of the deterioration. Similarly influential is the intrusion of pesticides and heavy metals from agriculture and industry. Aquifers in coastal areas are experiencing seawater intrusion and are becoming brackish as a result.

The state intends to focus considerable public environment and resource protection spending over the next decade on water supply, water treatment, and water pollution problems. Enormous investments and changes in the enforcement of regulations can thus be expected in the next few years. As an example, a November 2000 State Council notice, the Notice on Strengthening Water Supply, Water Conservation and Water Pollution Prevention in Cities, stipulates that all cities must build sewage treatment plants during the Tenth Five Year Plan and that all cities should have at least 60 percent of their sewage undergoing treatment by 2010 (70 percent in provincial capitals and major tourist cities). Currently, according to recent statistics, urban sewage discharges equal 137 million tons per day across the country, as much as 90 percent of which goes untreated.

Water-related exports in a number of subsectors have found markets in China, despite barriers. Table 4.1 lists dollar values for these, serving as some indication of current markets and future potential. Considering heightened awareness, the growing need for suitable water resources, and the increasing propensity toward the development of market-based tools and incentives, these numbers are likely to grow and the range of market opportunities will increase.

Table 4.1 Water Treatment Products: U.S. Exports to China (FAS value in thousands of U.S. dollars)

*HTS Number*	*HTS Description*	*As of April 2001*	*2000*	*1999*
39269	Biofilm medium, woven fabric sheets	16,490	39,315	23,609
46012	Erosion control matting, ecologically safe ground covers	0	54	70
560314	Manmade-filament fabric for wastewater filtration	276	737	435
591190	Environmental protection cloth	1,104	2,551	3,198
84136	Submersible mixer pumps to circulate wastewater, sewage pumps	457	3,272	3,148
84137	Centrifugal pumps lined to prevent corrosion, centrifugal sewage pumps	1,987	11,098	5,879
841381	Wind turbine pumps	4,481	2,629	1,772
842121	Filtering or purifying machinery	26,544	35,350	25,597
842129	Filtering or purifying machinery, other	1,874	7,195	7,505
842833	Belt-type aboveground conveyors used to transfer solids or slurries between plants	8	1,737	3,285
84368	Hot-water weed-killing systems	251	1,047	260
847982	Agitators for wastewater treatment other than kneading machinery	3,813	4,250	3,471
854389	Ozone production systems	97,587	32,244	11,619

Source: U.S. International Trade Commission, USITC Trade Database.

Policy Framework

Pricing and Market-Based Tools

According to the Notice on Increasing Wastewater Treatment Fees and Establishing an Urban Wastewater Treatment System, issued in October 1999 by SDPC, the Ministry of Construction, and SEPA, wastewater treatment fees shall be based on the operation and maintenance costs of wastewater treatment plants. Effective from Nov. 1, 1999, the wastewater treatment fee "based on volume" is combined with the water supply fee and collected centrally; the actual fee is still subject to the influence of local conditions. Urban public utility bureaus are in charge of fee collection, and wastewater treatment plants receive an appropriate allocation of funds each month. Table 4.2 reflects the price changes of November 1999 in three key cities.

As these fees were still too low to establish an incentive-based environmental protection scheme, the year 2001 saw additional price hikes.

Current Concerns and Priorities

Discharge of industrial and municipal wastewater represents the top priority for the Chinese government. Non-point causes of water pollution such as the overuse of fertilizers and pesticides are increasingly pressing issues that need to be addressed.

All government officials contacted for this study stated that China is focusing the bulk of its environmental initiative over the next few years on water projects, specifically in the "three lakes, three rivers" areas (the Huaihe, Haihe, and Liaohe basins and the Taihu, Chaohu, and Dianchi Lakes). Changes in Chinese regulations include stepped-up requirements for water treatment capacity; however, few or no funds are provided to facilitate these, leaving municipalities and industries to search for creative means of financing requisite initiatives.

In 1998, wastewater treatment projects accounted for 58 percent of pollution control spending, representing the largest allocation of the environmental budget to an individual sector. In 1999, overall environmental budget spending on wastewater projects was decreased to 52 percent, with an increase in air pollution treatment. The Tenth Five Year Plan (2001-2006) places more emphasis on water conservation methods and supply infrastructure, but the government continues to emphasize cleanup and antipollution measures.

Although issues of poor enforcement remain, the power and acumen of local authorities are increasing. As an example, over 1,000 businesses in the Huai River area were forced by local governments to close for environmental non-compliance in late 2000. By some estimates, as many as 70 percent of those reopened within three to six months. However, new regulatory initiatives are increasing demand for management systems.

Water Pollution and Market Prospects

Ten years ago, central water pollution control concentrated on discharges by state-owned industrial enterprises. Now, private enterprise overshadows the state-owned sector. Industrial output has swollen, along with the wastewater output that goes largely untreated. Meanwhile, municipal wastewater, in terms of total pollution, has more than doubled. Agricultural pollution is a worrying contributor, affecting not only lakes and reservoirs but also groundwater and coastal areas. Control measures are often sporadic or ineffective. According to various sources, between 80 and 90 percent of wastewater still flows into China's rivers and lakes without any treatment at all.

State targets aim for sewage treatment rates of 40 percent by 2010, with daily treatment capacity increasing by 50 million to 60 million tons. This will require investments of as much as RMB 200 billion to 300 billion ($24.2 billion to $36.2 billion), excluding operating costs.

Table 4.2 Water Treatment Price Changes in Beijing, Guangzhou, and Shanghai

*City*	*Date of Change*	*Type*	*Price per m3 before change*	*Price per m3 after change*
Beijing	November 2000	Residents	RMB1.60 (1.30 water+0.30 pollution levy) $ 0.19 (0.16 water+0.04 pollution levy)	RMB 2.00 (1.60 water+0.40 pollution levy) $ 0.24 (0.19 water+0.05 pollution levy)
		Enterprises	RMB 2.10 (1.60water+0.50 pollution levy) $ 0.25 (0.19 water+0.06 pollution levy)	RMB 3.20 (2.40 water+0.80 pollution levy) $ 0.39 (0.29 water+0.10 pollution levy)
Guangzhou	May 2001	Residents	RMB 1.00 (0.70 water+0.30 pollution levy) $ 0.12 (0.08 water+0.04 pollution levy)	RMB 1.20 (0.90 water+0.30 pollution levy) $ 0.14 (0.11 water+0.04 pollution levy)
		Enterprises	RMB 1.23 (1.05 water+0.18 pollution levy) $ 0.15 (0.13 water+0.02 pollution levy)	RMB 1.52 (1.25 water+0.27 pollution levy) $ 0.18 (1.15 water+0.03 pollution levy)
Shanghai	December 2001	Residents	RMB 1.58 (0.88 water+0.70 pollution levy) $ 0.19 (0.11 water+0.08 pollution levy)	RMB 1.73 (1.03 water+0.70 pollution levy) $ 0.21 (0.12 water+0.08 pollution levy)
		Enterprises	RMB 1.80 (1.10 water+0.70 pollution levy) $ 0.22 (0.13 water+0.08 pollution levy)	RMB 2.00 (1.30 water+0.70 pollution levy) $ 0.24 (0.16 water+0.08 pollution levy)

Sources: Beijing Water Supply Company; Guangzhou Water Supply Company; Shanghai Water Supply Company

Industrial Discharge
According to World Bank estimates, Chinese industries discharged over 20 billion tons of wastewater in 1999. Discharge rates rose sharply between 1990 and 1995 and then declined through 1999 due to the economic slowdown, restructuring, increased regulatory effectiveness, and new measures for protection. A major incident in the Huai River in 1994 prompted a series of emergency measures and several national regulations, including the closure of 15 categories of TVIEs throughout the country.

Nevertheless, little progress in regard to more conventional approaches to industrial wastewater management was made during the 1990s. The enforcement efficacy of EPBs at the local level remains wanting, and Chinese industries continue to install treatment facilities to meet requirements and then shut them down when not monitored in order to save on operation costs.

In addition, although the proportion of treated industrial discharge rose considerably throughout the 1990s, the quality of that treatment declined, often falling below Chinese standards. This supports the conclusion that, although increasingly comprehensive regulations are in place regarding discharge treatment, facilities are often of low quality and management and operations skills are tremendously lacking.

Municipal Discharge

In 1998, officials at SDPC estimated that the urban population of China comprises about 36 percent of the nation's citizens. In an effort to manage a host of environmental and resource-related issues, the government intends to increase that number to about 45 percent. However, current and planned municipal sewage systems lack the capacity to manage the accompanying increased waste. Upgrades in both capacity and quality of treatment are required, as are vast extensions and renewals of sewer pipelines and other support systems, many of which date from the 1950s.

Interestingly, although the total sum of wastewater flows and COD loads (from industrial, municipal, and agricultural sources) increased only slightly in the past 10 years, municipal wastewater as a proportion of total discharges nearly doubled in volume and impact. In large urban centers, municipal wastewater surpassed industrial contributions for the first time in 1998.

The rate of municipal sewage treatment is estimated to be around 10 percent to 13 percent per annum, clearly an improvement over the rate of 4 percent in 1991 but still quite low. The World Bank notes that currently installed municipal treatment facilities are only used at about 70 percent of capacity, supporting the view that operators and municipalities need more training and management skills. The government plans to initiate rehabilitation programs and improve operation in many of these existing plants.

Market Opportunities. China began constructing large-scale municipal wastewater treatment plants in the 1980s. According to one industry authority, there are currently only 178 large-scale, modern municipal wastewater treatment plants in the country, with about 100 more under construction. The government hopes to increase the total number to 1,000 by 2010 and plans to invest over RMB 15 billion ($1.8 billion) in order to raise the rate of treated urban wastewater to at least 50 percent within the next decade. In key cities such as Beijing, the goal for the rate is set still higher, at 70 percent to 80 percent.

According to several sources, the Ministry of Construction is restructuring the water treatment sector. Officials indicate that the state will sell operating licenses for city sewer systems, water distribution, and water treatment. Businesses will still be state regulated and state owned, but not majority owned. This should significantly increase foreign firms' access to profitability.

Late 2000 saw the approval of China's first domestic build-operate-transfer (BOT) municipal sewage treatment project. The Beijing Sangde Environmental Protection Industry Corporation will invest in, construct, and operate two sewage treatment plants in Xiaojiahe and Tongzhou. In mid-2001, the Beijing Sound Environmental Protection Enterprise Group committed to building sewage treatment plants in a dozen Chinese cities using the BOT model. Service fees paid to companies operating the plants following construction will service the debt incurred by the Sound Group, which expects to recoup investment and begin turning profits after the first 10 years of operation.

Foreign investors with both the financial resources and the capacity to enter long-term markets may be able to devise favorable arrangements for investment. A number of foreign companies are already engaged in water management projects, which, although they are not currently generating significant profits, are allowing for market entry, pilot project development, networking, and other key preliminary steps to large-scale market entry.

Smaller-scale exporters, particularly those not looking to invest in the market long-term, might look to these investors for marketing opportunities. There is also reason to believe that domestic investors in water management (for instance, those mentioned above, or local governments in relatively affluent areas) may begin to provide increasingly viable markets for such exporters. As demand for water management increases and local budgets and central financing continually shrink, investors will seek better long-term values when making investments. According to one domestic expert in the field, some in the industry are finally waking up to the fact that an initial investment in more expensive but higher-quality equipment is more viable than purchasing poorer-quality domestic materials and then covering maintenance costs down the line.

Erosion, Agriculture, and Livestock Runoff

Non-point water pollution resulting from fertilizer and pesticide runoff, intensive livestock production, soil erosion, and other agriculture-related factors are exacting significant tolls on China's ecology and can be expected to increase in severity due to difficulties in prevention and enforcement.

Nutrient-rich runoff, low-quality fertilizers, and soil erosion are contributing to the growing eutrophication of major water bodies. Over application of pesticides and the use of hazardous pesticides are responsible for significant contamination of groundwater, the detection of pesticides in a variety of Chinese foods, and the degradation of over 13 million hectares of cropland. Untreated livestock wastes already account for a disproportionate amount of industrial COD loads in some farming regions. A World Bank study estimated that livestock production in Chengde might account for 80 percent of its current industrial COD load. Unfortunately, little data exists on the issue of non-point pollution, and few prospects for an improved situation in the near future present themselves.

Market Opportunities. The government's role in directing farming activities appears to be declining, making agricultural and livestock runoff more difficult to control. Current efforts seem to focus on identifying the sources of problems, which will involve increased water quality monitoring and more elaborate and complete analyses of data. However, the current monitoring system is in disarray, and both SEPA and the Ministry of Water Resources maintain separate monitoring systems with little coordination. Additionally, the location of stations, the frequency of sampling, and issues involving other methods and standards must be overhauled in order to generate an accurate overview of the state of water within China. The government is hoping for a complete overhaul to upgrade existing monitoring capabilities, including extensive investments in technology and equipment.

Additionally, the government is seeking innovative and large-scale solutions, such as prevention of soil loss and degradation, improved irrigation schemes, and reclamation of livestock wastes for fertilizer use.

Water Supply and Market Prospects

According to 1999 statistics, the amount of groundwater extracted in China totals more than 100 billion tons annually, accounting for more than 20 percent of total water use in the country, in comparison with the 2 to 3 billion tons extracted per year in the 1960s. Serious overextraction of groundwater is resulting in significant effects such as subsidence at rates exceeding 25 to 40 millimeters per year in some cities. The groundwater tables of more than 100 cities are declining at a rate of 2 to 3 meters per year. In coastal cities of eastern China, the continued water table decline has caused more than 1,500 square kilometers of seawater intrusion into underground reserves.

Inefficient use of the limited water supply exacerbates the country's situation. China recycles only 20-30 percent of its industrial water, and consumption per industrial product is 13 times higher than in the United States. Similarly, only 25-30 percent of irrigation water is effectively utilized due to the inadequacy of most irrigation schemes. It is estimated that 2.5 million tons of potential grain yield are lost each year due to inefficient water usage.

Box 6. PACT Case Study

PACT is an engineering company specializing in the custom design, manufacturing, and contracting of water treatment, wastewater treatment, and membrane separation equipment. PACT China acts as a WFOE that conducts design and construction activities primarily for foreign industries operating in-country.

Although the bulk of current PACT projects are for foreign multinationals, the company is moving toward the Chinese market. The management believes that economic and market factors are slowly changing, thus making such a move possible; Chinese end users are increasingly willing to purchase JV or WFOE wastewater management products because they believe the additional costs of higher-quality products are worthwhile over the long term.

Unlike Vivendi, Suez-Lyonnaise des Eaux, Thames and Bovis, and other large conglomerates, PACT pursues a smaller subset of projects, utilizing an "economies of scale" principle in order to maximize profits. The majority of its projects are completed for considerably lower fees than would normally be received for similar operations in the U.S. However, many of the materials and pieces of equipment are manufactured in China, and by increasing market size as a result of reduced retail prices, PACT has managed to increase its client base and balance its expenditures.

As one PACT representative sees it, multinationals tend to use criteria such as references, financial stability, and successful reputation when choosing a contractor. However, personal relationships are most often the deciding factor when Chinese parties are investing in water treatment projects.

All in all, the company feels strongly that, despite some difficulties, PACT has already developed a reasonably strong market presence, something widely seen as a key for success in this developing market.

Municipal End Users

Following the lead of cities such as Tianjin, Beijing introduced its first water conservation mandate, as well as a water resources committee headed by the mayor, in December 2000. Under the new regulations, retailers selling flush toilets with a volume of over nine liters are fined, as are car-washing facilities that do not install water-saving or water-reusing devices. Coupled with a water price hike, these measures have already helped boost sales of water-efficiency devices such as low-flow showerheads and taps. Nanjing, Guangdong, and a number of other municipalities announced water-saving rules in 2001.

The services and equipment most needed by local and municipal governments are both high- and low-technology products, including monitoring systems, pumps, valves, detection devices, and aerators. Guangdong Province, for example, is installing a world-class water-monitoring system over the next 10 years with an investment of over RMB 450 million (about $54 million). Throughout China, small to medium-sized cities need technologies custom-tailored for size, economic, and logistical requirements. As investment opportunities increase, the ability to provide "total water management" is also important.

Table 4.3 Total National Investment in Antipollution Projects, 1999

	Projects Under Construction	Completed Investment in Antipollution Projects	Investment in Wastewater Treatment
National Total	14,374	RMB 12,204.61 billion	RMB 7,167.94 billion

Source: Chinese Statistical Yearbook, 1999.

Industrial End Users

Increasingly, industries find the water in their areas too polluted to use in manufacturing processes or for aquaculture purposes. The pharmaceutical, food-processing, and fish-farming industries are only a few of those affected by this development. On-site water purification systems are thus sought out, and demand is increasing. As both private and state-owned enterprises are increasingly subjected to the demands of intensifying market competition, Chinese industries investing in such systems may once again find it wise to acquire more expensive, higher-quality equipment rather than cover the costs of maintaining lesser-quality equipment over the long term.

According to Tenth Five Year Plan targets, industrial water use increases will be stabilized at 1.2 percent per annum, while the volume of industrial water that is recycled and reused will increase by 60 percent, again producing demand for both equipment and management skills. The government has also announced aggressive plans in the aquaculture sector to reduce waste, resulting in the implementation of water-saving and water-reuse technologies. Hotels and housing developments also need water treatment systems to service their own needs.

Equipment suppliers should find the most receptivity to their products among multinationals, JVs, and WFOEs. While the importance of quality and the merits of foreign technology are increasingly important, cost differentials and local protectionism continue to influence a considerable percentage of Chinese end-user demand for some time to come. As stated throughout this report, there are indications that this is changing; nonetheless, the changes will be slow in coming.

Sales Prospects, Technology, and Equipment

Despite the fact that it is more expensive than that of domestic competitors, U.S. technology (along with that of Germany and France) is recognized throughout China as being high quality and state of the art. On a number of occasions, in implementing demonstrations of high-tech water treatment infrastructure and facilities, attempts have been made to secure as much U.S. or other foreign technology and equipment as possible. If this is any indication of future market trends, demand for foreign equipment may rise.

Water Monitoring Equipment

The U.S. remains strong in the field of water monitoring equipment sales and operational training. China desperately needs methods to gauge the extent of its water problems accurately and to monitor the effectiveness of treatment and projects. Monitoring equipment and management remains a key sector for U.S. manufacturers, as Chinese production in this sector is lacking.

Turnkey Solutions to Large-Scale Water Treatment Problems

Many authorities and enterprises cite the need for "turnkey" solutions. Strong competitors in the water market must provide solutions tailored to the individual needs and requirements of the client, be it a municipality, an economic zone, or an industry. The most successful foreign companies in water infrastructure have invested heavily in China, are in the market for the long term, and maintain some degree of in-country presence.

Home Water Filter Systems

A plethora of home water treatment and filter systems exists in department stores and retail shops. However, quality treatment systems are not affordable or in some cases even available; thus, most home- or apartment-owning families purchase Chinese-made filters of low quality. Research indicates that the majority of Chinese families would pay more for a unit that was known to be first-rate if it was assured to stand up to several years of use with low-quality Chinese water and if replacement or servicing of core parts was available and affordable.

U.S. Market Share in Large-Scale Investments and Foreign and Domestic Competition

There is fierce competition in the Chinese water treatment and supply market. Leading companies, such as France's Degremont, utilize worldwide subsidiary networks to obtain projects involving bilateral financing. These projects require a large initial investment, considerable time to generate returns, and significant experience in large-scale water infrastructure development. Similarly positioned operators include France's OTV, Holland's DHV, Germany's Siemens, Belgium's Seigas, and a number of other German, Austrian, and Spanish companies (see Table 4.4).

Additionally, U.S.-based ITT Industries and its Chinese JV partners announced in November 2000 two contracts in different provinces to supply water pumps at a cost of almost $1.8 million. The operations of PACT (see Box 6) are also of significance for smaller-scale operations.

Multilaterally financed projects represent the largest opportunity for U.S. firms. However, companies that want access to these opportunities must monitor developments long before project bids are announced. Most deals in the water industry, and for that matter in almost every industry in China, are the result of serious investigation and long-term pursuit.

In addition to the major multilateral institutions, such as the World Bank and the Asian Development Bank, there are a variety of domestic and internationally supported programs that focus on water treatment infrastructure in China. Of particular interest to the water industry are the Trans-century Green Project Plan (1997-2012), in which approximately 50 percent of all projects are water-related, and the Center for Environmentally Sound Technology Transfer (CESTT), sponsored by China's Ministry of Science and Technology.

Table 4.4 Examples of Large-Scale Investors in Chinese Water Management

*Country*	*Company*	*Investment Amount and Project Locations*
France	Suez-Lyonnaise des Eaux	Total investment: $120 million, including $28 million for Shanghai Huangpu River project
	CGE	Total investment: $780 million for projects in Huizhou (Guangdong Province), Xian, Shanghai, Tianjin, Chengdu, and other areas
	Degremont	Investment in 50 water treatment systems in Beijing, Guangdong, Hangzhou, and other areas
Germany	Siemens	Has invested or capitalized on aid finances in excess of $300 million
United Kingdom	Thames Water and Bovis	$68 million for Shanghai water treatment project; $25 million for Guiyang water supply system
	Anglian Water	Total investment: $16 million
United States	Nalco Chemicals	$3 million for Suzhou project
	Lemna International	$120 million for Guangzhou Xilang project

Source: Xin Kuai Bao, August 5, 2000.

Selected References and Web Sites

References

"China Will Establish Real-Time Water Monitoring System on Big Rivers." China News Service. Jan. 18, 2001.

"Environmental Pollution Costs China RMB 283 billion per Year." Huasheng Monthly. Oct. 10, 2000.

"First Water-Use Rights Deal Completed in Zhejiang." China Online, Feb. 22, 2001.

"Mainland's Largest Wastewater Treatment Plant Starts Operation." China Online. Mar. 26, 2001.

"Tapping into an Outside Source: UK to Give US $10.88M to Aid in Water Shortage." China Online. Sept. 15, 2000.

"Toxic Water Tragedy in Liaoning Province." Guangzhou Daily, Sept. 6, 1999.

"Water Damaged: Pollution Ravages China Rivers: Urban Waterways Hardest Hit." China Online, Aug. 3, 2000.

"Water Pollution Threatening Water Supplies in Cities." Beijing Youth Daily, July 3, 2000.

Web Site

www.H20-china.com (Provides information, particularly news translations, related to water projects and the water treatment industry in China.)

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