Water Market Asia “In shallow waters, shrimps make fools of dragons.” Chinese Proverb (C) GWI 2006 - Reproduction Prohibited i Water Market Asia This report was researched, written and edited by Jensen & Blanc-Brude, Ltd. for Global Water Intelligence Jensen & Blanc-Brude, Ltd. Global Water Intelligence 22 Leathermarket Street, Unit 6 Published by Media Analytics, Ltd. London SE1 3HP The Jam Factory, 27 Park End Street United Kingdom Oxford OX1 1HU [email protected] United Kingdom www.jensenblancbrude.com [email protected] www.globalwaterintel.com While every effort has been made to ensure the accuracy of the information in this report, neither Global Water Intelligence, Jensen & Blanc-Brude Ltd or Media Analytics Ltd, nor any of the contributors accept liability for any errors or oversights. Unauthorised distribution or reproduction of the contents of this publication is strictly prohibited without the written permission of the publisher and authors. Contact Media Analytics Ltd or Jensen & Blanc-Brude Ltd for permission. Opportunities in the Water & Wastewater Sectors in Asia & the Pacifi c ii Water Market Asia Acknowledgements The authors would like to thank the following contributors to this report: Seungho Lee researched and wrote the South Korea profi le Michiko Iwanami researched and wrote the Japan profi le Marie Hélène Zerah researched and contributed to the India profi le Kathy Liu contributed to the China profi le The GWI team provided helpful comments and support. The authors also wish to thank the following practitioners for their valuable insights and support: David Chen Country Director Earth Tech China Patrice Fonlladosa Executive Vice President, US & AIM Region Veolia Water Martin Lane Regional Managing Director Biwater Man Lee Teffrey Leung Head of China Division Biwater Man Lee Hans Werner Linne Director Siemens I&S China Tromod Mitroo Country Director Veolia Water India Barry Norman Managing Director Earth Tech Asia-Pacifi c Sheshabri Prakash Director, Operations Tamnilnadu Water Investment Co Faizal Othman General Manager, Business Development Ranhill Utilities Colin Sangster CFO Sino-French Water Company Representatives of the following companies also kindly contributed information to this report: Beijing Capital Com- pany, Bio-Treat, Degremont (India), Earth Tech (Thailand), Hyfl ux, Puncak Niaga Holdings, Suez (Hong Kong), Shanghai Industrial Holdings, Tata Steel, United Utilities Australia, Veolia (Hong Kong) (C) GWI 2006 - Reproduction Prohibited iii Water Market Asia Executive Summary I. Markets Review Local Financial Markets I.1 Market trends The development of local fi nancial markets is making it easier for both local and international utility companies to access long-term fi nance at Private investment reasonable rates. For foreign investors who have seen projects dealt The number of signed DBFO projects has been steadily increasing ev- a death blow by exchange rate risk, this development contributes to ery year since 1990. The number of projects in the wastewater sector reigniting their interest in developing markets, especially China. has known a remarkable growth since 2000. Our database tracks 336 awarded projects in the region. Only 23 of these have been offi cially I.2 Actors terminated, a reasonable fi gure of less than 7% of the total. While not The rise of local investors always offi cially ‘terminated’, some of the largest projects have been Regional companies are increasingly active, whether competing with the object of well publicised re-negotiations and can be considered as the big international players in public tenders or puttin forward their stalled, especially the twin concessions of Jakarta and Manila. The own unsolicited proposals. In the top 20 companies in Asia, listed by largest number of terminated deals is in China (10) but represents a number of active projects, 13 come from the region. Five of the 20 are total portfolio value of US$300m, which is marginal when compared mainland Chinese companies listed either in Beijing or Hong Kong. with the US$8bn of project investment committed by the private sector to the Chinese market alone over the past decade. Many Singapore-listed companies are proving to be dynamic players in the Chinese markets, mostly at the more technologically sophisti- By number of projects and by value, China and Australia have seen cated end of the project spectrum. the greatest amount of private sector interest and fi nance. Overall, about US$25bn have been committed by private investors to wa- Success and failures of international utilities ter and wastewater projects in the region between 1985 and 2005. International investors have a mixed attitude towards the Asia Pacifi c. Wastewater emerges as a key component of the market after 2000 Most are focusing on China in their growth strategies, keeping their by this measure as well. But the trend reveals a much greater vari- options open in Australia and reducing their activities everywhere ability: three of the largest deals to date are the concessions in Manila else. China’s biggest cheerleaders are Veolia and Suez. (Philippines) and Jakarta (Indonesia), both awarded in 1997 and the privatisation of Malaysia’s sewerage network, signed in 1995. Correct- Some investors see the Asian market very differently. They have with- ing for such large signatures, the trend remains upward but is really drawn as quickly and as far as possible, even from China – Anglian driven by China. Overall, private investors, both local and internation- and Thames are the main names here. al, have been building an impressive but fl uctuating portfolio of water and wastewater assets throughout Asia. The role of IFIs Investment in the poorer countries is driven by bilateral and multilat- Trends in public investment eral funding. The big recipients are all very populous countries, and Across the region, governments are acutely aware of how infrastruc- with the exception of China, fall into the low income group of coun- ture shortages act as a constraint on growth, yet public budgets have tries. The focus on China, however, refl ects a partial misdirection of themselves been constrained by growth setbacks in recent years. At development assistance because the projects are located mostly in the same time, and rather belatedly, Asian governments are fi nally the richer coastal regions of the country, at the request of the Chinese starting to take notice of the looming environmental crisis in the re- government. gion. Broadly, this combination of forces will support the market for DBFO projects in countries where private investors are still willing to I.3 Policies go, particularly in the areas of wastewater treatment and recycling. A lost decade? In other countries where the risk-return ratio cannot support private fi nance, water companies will have to rely on the variable fl ows of Getting the private sector involved in the water sector not just as a donor fi nance for project opportunities. contractor but as fi nancier and operator has undeniably been the big policy idea of the decade but it has not proved to be the miracle solu- The World Bank estimates that US$3 per head a year would be enough tion to Asia’s water problems, contrary to what many, especially the to allow Asian developing countries to reach the Millennium Develop- World Bank, still advocated a few years ago. ment Goals. By this criterion, our estimates are grounds for optimism: the average expenditure for the low and middle income countries on In many of Asia’s developing countries, experiments with private sec- water and sanitation comes in above that line, as US$3.39. However, tor participation have come full circle, yet improvements in water and averages disguise important underlying disparities. sanitation services have been limited. In countries where public utili- ties were functioning relatively well, like Hong Kong or Thailand, PSP A further and major concern is that governments tend to invest much has been confi ned to a few BOT and technical assistance contracts less than they initially intend or announce. Historically, the average and the government continues to dominate the sector. In countries has been 50% less. that experimented more whole-heartedly with PSP, like the Philip- pines, through major concession contracts, both governments and The push towards wastewater treatment investors have been disappointed with the results. The number of new wastewater projects, both publicly and privately fi nanced that has been announced since 2002-2003 is impressive and At the other end of the spectrum, is the dramatic, all-important excep- can seem on the verge of over-taking the water sector both by number tion of China, which has gradually but convincingly opened up to PSP of deals and by value. Major investment programmes are now in the in all parts of the market. Yet there is a great deal of uncertainty about pipeline or already underway everywhere in the region. But the real Chinese government policy in the medium-term. The government has wastewater El Dorado could turn out to be China. shown itself capable of reversing a policy with no warning, as it did when it enforced a ban on guaranteed rates of return in foreign in- There, new wastewater projects go to tender almost every day and vested projects in 2001. wastewater treatment equipment is rapidly becoming big business. Assembly lines are already being built in China by foreign investors Tariffs and it is only a matter of time before China becomes a net exporter of Tariffs for water are on an upward trend throughout the region. In all treatment technology. countries, with the exception of Malaysia where tariffs will be harmon- ised nationally, tariffs are set at the local level. Decentralisation has re- Desalination or recycling? inforced the powers of local governments to approve tariffs. Charging Desalination is being tried in places (Singapore, Tianjin, Chennai) but for wastewater has not yet been well accepted.