Water fights

"I prefer Evian"

Legend has it that the founder of the Xia Dynasty – some 4,200 years ago – rose to power through an ability to “master the waters”. For 13 years Emperor Yu built waterworks to irrigate fields and prevent flooding. And as the historian Arthur Cotterell points out, a winning way with water has long been of political significance in Chinese history.

No less so today. Which perhaps explains why investment in China’s water utilities is proving so troublesome for foreign companies.

Foreign water groups such as Veolia and Suez Lyonnais des Eaux have made a big push into China. Veolia has 21 joint-ventures in China, serving water in 19 cities to 30 million. Suez has 22, supplying a population numbering 14 million.

But domestic critics are keen to prevent foreign utilities expanding further into a market that is forecast to have Rmb1 trillion ($146 billion) of sales in 2010. A high profile success saw Veolia suspend its planned acquisition of Xi’an Water Company.

Xi’an – one of the largest water companies in China’s west – was thought to be a highly strategic acquisition; serving 3.6 million. Liu Junguang of the Shanghai Xincheng Law Firm highlights that the French firm has made acquisitions in Lanzhou, Kunming, Chengdu and Baoji. “If Veolia owned Xi’an,” Liu told China Business, “it would control the western water market.”

Another of those intent on scuppering the Xi’an acquisition was Li Zhendong. But he is now concerned Veolia may be trying to resuscitate the deal. Li – a former vice minister of construction – carries clout as the chairman of the Water Association. The 72 year-old has written to the State Council warning of the dangers of letting foreign utilities dominate China’s water supply.

His main concern: they will force up prices to make more profits. According to the National Development and Reform Commission China’s urban water prices are increasing at an annual rate of 10%. In Kunming there have been three price hikes since Veolia’s JV took control in 2005 – the most recent came into effect in June, seeing residential prices go up from Rmb2.65 per cubic metre to Rmb3.45.

But it is not quite that simple. Around 60% of China’s water utilities lose money, precisely because water is priced too cheaply.

There are also massive investment requirements – since the sector’s infrastructure has been neglected for decades. For example, the pipes used in the Northeast were laid by the Japanese in the 1930s. The government admits that Rmb400 billion needs to be spent on new sewage treatment facilities too.

Local governments are more than happy to sell their lossmaking water companies – particularly as the foreign firms are willing to pay consierably more than rival Chinese acquirers. Here again the dissenters find ammunition: complaining that local bidders cannot compete with cash-rich multinationals.

Then again, water company employees seem to prefer their foreign managements. China Business notes that in cities like Kunming, where foreigners have acquired water plants, monthly wages are up as much as 25%.

Yao Yuan, based in Beijing with Suez, says the situation is being misrepresented. He calculates that China has more than 2,000 water plants and less than 2.5% have received foreign-investment. “There is no reason for alarm about foreign investment in the water supply system,” he cautions. “Foreign firms bring improved efficiency, better management, better technology and play a positive role in bringing China’s water sector up to international standards.”

Far from being latter-day imperialists, he praises the foreign firms for their “exemplary role”.

The government would seem to agree. Last month Earth Tech inked a deal to build and operate a Rmb216 million plant in Tianjin – the city from which China’s premier, Wen Jiabao hails. The US-based firm says the plant will be built with the world’s most advanced technology which means water can be delivered at reduced cost.

Keeping Trak: In WiC25 we reported on the activities of foreign water firms in China. And in a recent interview with China Daily, Jorge Mora, the CEO of Veolia Environnement Asia, said China would be the French firm’s second largest market – ousting the US – within 10 years. A part from water distribution, treating waste water is a major growth area. “When I first came here in 1994, it was like the dark of night. Nobody was concerned about the
environment,” says Mora. “But now it’s like a sunny day. Everyone is talking about the green economy.”(31 July 2009)

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