ADB backs Chinese water with $200m loan

Orix-backed CWA will use the funds to launch a series of PPPs aimed at improving infrastructure in non-metropolitan urban centres.

The Asian Development Bank has agreed to provide financing of up to $200 million to China Water Affairs, one of the first private companies in China’s water sector to develop water infrastructure in the country’s second- and third-tier cities.

The financing will support the construction and operation of a series of PPP projects focused on water treatment and distribution, wastewater treatment, and sewage and drainage pipelines. Once completed, the company is expected to supply more than 10 million cubic meters per day of tap water and treat more than 1.8 million cubic metres of wastewater daily. More than 5,000 kilometres of CWA-managed sewage and drainage pipeline networks will be constructed.

The ADB financing will comprise two loans of up to $100 million each in US dollars and yuan. The financing will be disbursed on a project-by-project basis.

“The subprojects will be selected by CWA and ADB during the loan implementation stage,” Scott Roberts, senior investment specialist in ADB’s private sector operations department, told Infrastructure Investor.

“While each subproject size will vary according to the […] capacity, location and type, perhaps 12-15 subprojects might be […] financed through the ADB facility,” he added.

ADB has been working with Hong Kong-listed CWA by providing and arranging loans with other commercial banks to support its previous projects since May 2014. The previous financings – worth a total of $300 million – have focused on projects supplying water to cities and surrounding rural areas. “In this new financing, the emphasis is on supporting CWA’s innovations to link the entire water value chain, including wastewater pipelines and treatment,” ADB said.

CWA’s founder and chairman Duan Chuan Liang owns a 29.3 percent stake in the water company, with Japan’s financial group Orix Corporation holding an 18.2 percent interest, , Norges Bank owning 1.3 percent, while the remaining 51.2 percent of the company is in public hands.

Water demand is expected to increase, given China’s increasing urbanisation and economic growth, Moody’s analysts said in a credit review of CWA in February.

China’s water market has been highly fragmented and has experienced greater private sector activity compared with other infrastructure sectors which are dominated by domestic state-owned enterprises.

The ratings agency considers industry dynamics to be positive as they are supported by government policies and reforms that seek to address water shortage and pollution control. Under the latest Five-Year Plan for the water sector, the pricing reforms, including the introduction of a three-tier tariff system, aims to encourage tariff adjustments for reasonable returns on investments. However, “the limited transparency and predictability of the implementation of the tariff mechanism in China are fundamental weaknesses,” Moody’s analysts said.

The local governments have been keen to tap private capital as an additional source of funding to alleviate the pressure on the fiscal budget, particularly through the PPP scheme for infrastructure development. As at January 2018, the China PPP Centre listed 7,446 PPP projects with total investments of more than 11.3 trillion yuan ($1.8 trillion; €1.5 trillion). There were 325 water-related construction projects in the pipeline, with investment values undisclosed.