Hosting one-fifth of the world’s population yet with just five percent of global renewable fresh water supplies, China is facing shortages and pollution of its water supply exacerbated by economic growth, urbanisation and industrialisation, according to Moody’s.
In a new report, the rating agency suggests that conventional water supply infrastructure and waste treatment processes are insufficient to meet the new, higher environmental standards.
In April 2015, the State Council issued an action plan for the prevention and control of water pollution, known as the Water 10 Provisions. The plan includes measures to enhance scientific and technological support, accelerate market-oriented reforms, and promote diversified investment, including public capital and increased government funding.
“To achieve policy goals, outdated production capacity will be phased out and new pollution control equipment will be introduced into water-related industries,” said Ivan Chung, Moody’s senior vice president, in the report.
On top of the current policies, Moody’s analysts expected the government to launch further policy reforms to encourage private capital investment.
“As for the tariff increases and reforms in the industry [are implemented], these changes will attract private companies to invest in the sector,” commented Amanda Du, Moody’s vice president and senior analyst. “In addition, the higher tariffs will not face much resistance from consumers, given the prevailing low tariffs in China.”
Macquarie Infrastructure and Real Assets (MIRA) has been investing in China’s water sector since 2012. MIRA-invested water companies currently operate more than two million tons per day of water and wastewater treatment capacity, according to the Australian firm.
Steve Gross, MIRA’s senior managing director, views China as the single largest opportunity for private water developers and operators in Asia.
“Rapid urbanisation, increasing political support for environmental protection, rising water tariffs and favourable regulatory developments have all contributed to create a significant opportunity for the private sector,” he said during an interview with Infrastructure Investor.
He pointed out that recent regulations including the Water 10 Provisions and the Public-Private Partnership (PPP) framework have laid the foundations for future development and the role of private capital.
Of the 30 pilot PPP projects with a total investment value of CNY180 billion (€25 billion; $28 billion) launched last December, 12 were water related, he added.
An estimated CNY4 trillion to CNY5 trillion in joint investments from the government and private sector are expected to be rolled out under the Water 10 Provisions.
“MIRA is excited about the opportunities outlined by the Water 10 Provisions and we expect that the water sector will be one of MIRA’s most active sectors for investment in China over the next 5 to 10 years,” said Gross.
Moody’s described China’s water sector as “highly fragmented” and expected that growth opportunities would result in intensifying competition and industry consolidation.
According to the report, the country’s water sector comprised 1,346 players at the end of 2014, with the top 10 players accounting for an estimated 15.1 percent of the market only.
He noted that as the competition for projects increases, the ability to leverage local teams with a proven track record in the industry was increasingly important to win projects. “It is likely to become harder for new foreign entrants to come into the market over time,” he added.
“Given the long-term nature of the investment class, the most important factor to facilitate private sector investment is the transparency and reliability of the regulatory framework. Specifically, in the context of China, investors focus on the timely payment of water fees and performance of key concession agreement mechanisms such as the ability to pass cost inflation through to water tariffs.”
He warned that operators faced several risks like volume risk and exposure to potential changes in regulations.
“Generally China’s regulatory framework for private concessions is well established; however minor revisions can have a long-term impact on operators. For example, the 100 percent [value-added tax] rebate for waste water treatment operators was reduced down to 70 percent in July this year.”
“Although water concessions are structured so that changes in operating costs can be passed through to water tariffs, the impact of the revised VAT policy on the industry is not yet clear and this poses a risk for operators.”
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