BOT Applied in Chinese Wastewater Sector

Lijin ZHONG1,2, Tao FU1
1

Department of Environmental Science and Engineering, Tsinghua University, Beijing Environmental Policy Group, Department of Social Sciences, Wageningen University,

100084, China
2

Hollandseweg 1, 6706 KN Wageningen, the Netherlands Abstract: The build-operate-transfer (BOT) approach is getting increasingly importance in China’s wastewater sector since the Central Government called for the marketizaiton reform and private sector participation of water sector in 2002. This paper selected five BOT wastewater projects at different implementation stages from Guangdong Province, Shanghai and Beijing; analyzed the lessons and problems associated with the application of the BOT approach in China’s wastewater management. The empirical evidences indicate that the BOT and other PPP options are all conditioned reform strategies, needing a lot of requisites. Keywords: BOT, wastewater sector, China 1 Introduction In China, the development of urban wastewater infrastructure, lagged behind the one of urban water supply sector, has a very recent history since the 1980s when the first municipal wastewater treatment plant (WWTP) was built in Tianjin. By the end of 2004, China has build 708 WWTPs with a total capacity of 49 million cubic meter per day (see Figure 1), among which 598 are secondary or tertiary WWTPs; and about 45.67% of national urban municipal wastewater (yet excluding that from townships) is treated (MOC, 2005). But this treatment capacity is far from the need to control the increasing water pollution in China and about 300 cities, which are small and medium size cities(with less than one million inhabitants), have no WWTPs built till 2004. It is estimated in the specific planning of wastewater of Chinese 11th Five Year Plan that the direct investment demand of urban wastewater infrastructure (including the cost for wastewater treatment, sewers, and sludge treatment) in China is expected to be over 30 billion US dollars between 2006 and 2010.
4000000 volume of wastewater (104m3 per year) 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 wastewater produced wastewater treated percentage of the treated wastewater 50 45 40 35 30 25 20 15 10 5 0 percentage of treated wastewater (%)

Year

(Source: MOC, 2005)

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Figure 1: Annual produced and treated wastewater in China (1978-2004) In order to raise funding to meet the huge investment demand of urban infrastructures and address the shortage of governmental investment, Chinese Government attempted to introduce the build-operate-transfer (BOT) approach into the fields of urban infrastructures (thermal power, hydropower, highway, water supply, etc.) as early as in the 1990s. In 2002, the government officially kicked off the marketization reform1 of water sector and other public sectors by promulgating the Opinions on Accelerating the Marketization of Public Utilities (No.272 Policy Paper of the MOC, 2002), emphasizing the importance of market and expecting to bring in needed investment and to increase efficiency through the involvement of private sector; although the activities of private sector participation in water sector are shrinking down around the work today due to increasing failure and difficulty of empirical evidences (Izaguirre and Hunt, 2005; Prasad, 2006). Since 2004 afterwards, Chinese Government intensified the marketization reform and the development of various public-private partnership (PPP) via a series of policy paper as the Measure on Public Utilities Concession Management (No.126 Policy Paper of the MOC, 2004), the Decision on the Reform of Investment Institutions (No.20 Policy Paper of the State Council, 2004), the Opinions on Strengthening Regulation of Public Utilities (No.154 Policy Paper of the MOC, 2005). Now, China has followed various forms of PPP in the provision of water supply and wastewater services. The strategies of private sector participation are still quite active and getting increasingly importance in China’s water sector (Zhong, et al., 2007). According to the survey of the MOC in 2005, a variety of PPP constructions as management contract, BOT contract, TOT contract, concession contract, Joint Venture, and full sale (or full divesture) have been experienced upon in wastewater sector. 200 wastewater treatment projects were reported to reform or have input from the private sector in different forms2; in which the BOT/TOT contracts played a dominant role with a percentage of 59% (see Fu, et al., 2006; Zhong, et al., 2007). This might be explained due to the current low charge level of wastewater treatment in China, because the BOT/TOT contracts are paid based on the negotiated price between the government and the private sector and have a less dependence to the user fee level (Zhong, et al., 2006). In addition, that the BOT approach is a kind of contract in which the private sectors invest and build infrastructure directly is another reason why the local governments prefer to this approach rather than other PPP construction in wastewater sector (Zhong, et al., 2007). After 10 years of experimentation with the BOT approach in China’s water sector, it is time to take stock of the result though it is still premature to make a full assessment. This paper selects five good BOT wastewater projects from Guangdong, Shanghai and Beijing, focusing
1

China is moving from a centrally planned economy to a market-based economic system. This process is often referred to as “marketization”. 2 The statistics data of reformed projects in the MOC survey mainly came from the reports of provincial-level authorities, supplemented by other surveys of Tsinghua Water Policy Research Center. Due to the limitation of data collection, some wastewater projects with private sector participation are not included. 2

on the results associated with BOT options in Chinese wastewater management. It indicates that the BOT approach and other private sector participation approaches might bring in the investment needed for developing sanitation and wastewater to a greater or lesser extent. However, the empirical evidences show that the BOT approach is a conditioned program; objectives as following have to be concerned: (1) a sound legal framework for PPP development, including the specific reform policies and supporting policies as land policy, institutional reform policy of governmental undertakings, financing policies, and etc. (2) a well-established regulation framework, such as the selection of concessionaire, cost regulation, performance regulation, information regulation, and etc. (3) reasonable risk allocation between the government, the private sector and other stakeholders. 2 Situation Analyses of Case Projects In this section, we would introduce five BOT wastewater projects with different implementation phases (ref. Table 1): Guangzhou Xilang WWTP (Guangdong Province), Foshan WWTPs (Guangdong Province), Shanghai Zhuyuan No.1 and No.2 WWTPs (Shanghai), Beijing Dongba WWTP (Beijing) and Beijing Fatou WWTP (Beijing). Given a fact that the reform strategies applied in Beijing, Shanghai and Guangdong province are often become the pilot models to other cities in China, in particular the cities in developing regions, it is important to take stock of the good lessons and problems of these earlier experiences. Table 1: Situation analyses of selected BOT projects3 Guangzhou Case Project Xilang WWTP Capacity (10 m / d) Treatment level Contracting date Contract period(a)
4 3

Foshan WWTPs (16 plants) 2-10 for each Secondary treatment

Shanghai Zhuyuan No.1 WWTP 170 Advanced primary treatment 2002 20 years

Shangh ai Zhuyua n No.2 WWTP 50 Seconda ry treatmen t 2005 25 years 2004 24 years Improved SBR 2 Beijing Dongba WWTP

20

Secondary treatment

2001 17 years

2004 Public

Implementati on phases

tender In operation finished; part in building Guangzhou Foshan In operation

Public tender finished Shanghai

Public tender finished

City
3

Beijing

THWPRC (Tsinghua Water Policy Research Center) Database. 3

Estimated population (104 inhabitants in 2004) GDP per capita in 2004 (US dollar)
(b)

737

344

1742

1159

6942

4084

5190 Shanghai Eastern Coastal

3537 Beijing Northern Coastal

Province Location region Administrative level of city Note:
(c)

Guangdong Southern Coastal Sub-provinci al city, Provincial capital Prefecture -level city

Municipality, Provincial capital

Municipality, Provincial capital

a) Including the construction period. “-“ means information not available. b) Currency rate: 1 US dollar = 8.11 RMB c) In China, the administrative rank of cities is divided into four levels: a municipality directly under the Central Government; a sub-provincial city; a prefecture-level city and a county-level city. The administrative level determines the extent of legislation power of city. Guangzhou Xilang project4 is the first BOT wastewater project combining WWTP and sewers, which were planned in 1993 but lagged due to the lack of investment. In 2001, Guangzhou Government awarded a twenty-year concession contract (including a 3-year construction period) to the Consortium of American LEMNA International Ltd. (which has transferred the shares to American TYCO Asian Investment Company later) and Guangzhou Urban Tunnel Company. Differentiating from the regular BOT project, the project company, named Guangzhou LEMNA Xilang Wastewater Treatment Ltd. CO., mainly responded to finance needed investment for Xilang wastewater treatment system; but transferring the building responsibility to Hong Kong Yihui Company (HKYC) by an EPC (excogitation, purchasing and construction) contract in which HKYC took charge of the design, equipments purchase and construction of Xilang wastewater treatment system (including the WWTP and sewers), and then committing Guangzhou Jingshui Water CO. (GZJSWC, daughter company of Beijing Urban Sewerage Group) an operation service contract in which GZJSWC manages and maintenances Xilang wastewater treatment system from 2003 till the end of concession period. Up till now, the Xilang wastewater treatment has been operated with a good performance to meet the requirement of discharge standards for years. Shanghai Zhuyuan No.1 WWTP5 is the biggest BOT wastewater project with a treatment capacity of 1.7 million cubic meters per day (advanced primary treatment) in China up till now. In 2002, the Youlian Consortium of Shanghai Youlian Development Company (with 45% shares), Huajin Information Investment Ltd. Company (with 40% shares) and
4 5

See Fu, et al., 2006. Ibid. 4

Shanghai Construction Group (with 15% shares) won the tender of Zhuyuan No.1 WWTP project by the lowest bidding price and was awarded a twenty-year concession contract (including a 2-year construction period); also won the tender of Zhuyuan No.2 WWTP project 6 (with a treatment capacity of 0.5 million cubic meters per day at secondary treatment) in 2004 with a 25-year concession period. However, Youlian Development Company withdrew from the two projects, transferring the shares to InterChina Holdings CO. Ltd. in April of 2005. Then, Shanghai Government reorganized the public tender for Zhuyun No.2 WWTP project in 2005 and Shanghai Urban Construction Group won the tender by the same price of previous Youlian Consortium. Beijing Government organized a collective public bidding for 5 small-size BOT WWTPs in the end of 2004, aiming to improve the wastewater treatment capacity and control water pollution of Beijing. The Consortium of Beijing Golden State Engineering CO. Ltd. (with 40% shares), Beijing Golden Sources Environmental Development CO. Ltd. (with 25% shares), and Golden State Holdings Group (with 35% shares) won the tender of Beijing Dongba WWTP BOT project 7 with a 24-year contract period. However, the consortium has to withdraw from this project due to the untimely financing which was hampered due to the lack of proper financing policies. This exposes some weakness of current financing policies in China. In the end of 2004, Foshan Government organized the public bidding for 16 WWTPs BOT projects. Learning from the earlier empirical experiences of PPP reform of water sector in other cities of Guangdong Province, Foshan Government firstly engaged professional consultants to prepare the bidding documents and the public tender for the 16 WWTP BOT projects, argued as a key of successful bidding. 3 Key Lessons Learnt Given a fact that the BOT approach has played an important role and is getting increasingly importance in China’s wastewater sector, ranging from developed to developing regions. Learnt from the above selected projects, the major good lessons learnt are discussed as following in this section, and the key weak points and problems needed to be solved are given in next section. (1) Competition introduced by public bidding Featured with a natural monopoly, huge sunk cost of networks construction, the contracts of various PPP constructions are often awarded a long-term period with limited competitions, for instance, the BOT contract is normally given a contract period of 20-30 years. As Braadbaart (2001) said, “The idea was the PPPs would create competition for contracts, that is, competition for the market rather than in the market”. As it were, the concessionaire assessment and selection, i.e. the market access regulation has a direct and crucial impact on the contract performance. It has been argued that the public bidding is an effective way to select the appropriate investor or operator
6 7

Ibid. Ibid. 5

As a whole, the public bidding has brought in some competition into the wastewater management, reflected by the reduced cost of wastewater treatment. For instance, the final bidding cost of Shanghai Zhuyuan No.1 WWTP (advanced primary treatment for 1.7 million m3 wastewater per day) is as low as 0.222RMB/m3, which is 42% less than the former projected cost by government (0.38RMB/m3) as well as the lowest reported cost of wastewater treatment by far. The bidding cost of Shanghai Zhuyuan No.2 WWTP (secondary treatment for 0.5 million m3 wastewater per day) is also lower than other similar plants at 0.34RMB/m3. Regarding the public tender of Foshan cases, the bidding costs of 16 WWTPs range from 0.68RMB/m3 to 0.90RMB/m3, which are all less than the government projected cost of 0.95RMB/m3. In Beijing, both the contracting costs of Dongba WWTP (0.958RMB/m3) and Fatou WWTP (0.898RMB/m3) are lower than the projected ones via public bidding. In the meanwhile, the concessionaire selection and the public bidding procedure of above selected projects were canonical, which is critical to introduce competition and select appropriate concessionaire. For the above case projects, the local governments have engaged professional consultants as the lawyers, the financial advisers and technical advisers to create a scientific and equitable climate for investors. Given a fact that the reform strategies of private sector participation is not a simple process to provide the private sector access permission but a very complicated process involving numerous professional knowledge, the government can’t manage it well without professional supports. Learnt from the survey in Guangdong Province, that the earlier PPP practices of water and other public sectors in Guangdong were often implemented by the government itself without professional advisers is one of the major reasons to fail. However, it can’t be neglected that the preparation of developing a PPP project is costly but requisite, making this reform program difficult to bear for underdeveloped regions. According to the above selected case projects, the governments have paid the high cost of prophase consultation. For instance, Foshan Government cost 1 million RMB for the preparation. (2) Allocating risks to the appropriate parties PPP projects often rely on risk allocation to deliver the expected benefits in terms of improved efficiency and performance. PPPs are in theory expected to unleash the efficiencies of the private sector and deliver social and environmental benefits subject to the effective allocation of operating and political risks to the parties best placed to minimize and manage such risk (ADB, 2000). The World Bank has stressed various PPPs “perform better than full provision by state-owned enterprises depends in particular on whether performance risk is effectively shifted from taxpayers to the private shareholders of the company that enters into a concession-type arrangement” (World Bank, 2002). The case of Guangzhou Xilang wastewater BOT project is an empirical evidence of risk allocation. The project company (a Sino-America joint venture company, also the concessionaire) takes on the investment, construction and operation risk according to the

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concession contract. Then, the project company transferred the constructing risk to an experienced engineering company by an EPC contract (excogitation, purchasing and construction) in 2001 and delivered the operating risk to another experience operator by an operation service contract in 2003. Till now, Xilang wastewater treatment system is being operated well and meeting the agreed service requirements. The way of allocating risks and responsibilities of Xilang project has been argued as a good model in which various risks (financing, operating, etc.) have been allocated to the best experienced parties respectively to minimize the whole risks. However, it might be questioned here that the sub-contracting processes have added the cost and other risks (e.g. that the constructor and operator were selected by the project company might cause the risk of service quality control.). (3) Government bearing obligations and balancing interests Differentiating from the regular competitive sectors, water sector, serving the basic and public service, requires more governmental intervention to avoid the loss of public interests due to the profit-seeking nature of private operators. Although the governments can involve in the private sector to invest, construct, operate, and maintenance the wastewater infrastructures; it must be stressed that the governmental responsibilities such as providing all residents living there (both rich and poor) basic services and a good environment to live can’t be imputed to others via any model of PPP constructions. In that sense, the governments who are the dominant actor of the wastewater sector reform have to keep themselves in the core of wastewater management and balance the interests of various stakeholders. For instance, the subsidy policies of Shanghai Government, in which the government bears the necessary prophase investment (about 30 million US dollars) and provides lands to the operator of free charge, are one of the major reasons bringing out the lowest bidding cost of Shanghai Zhuyuan WWTP projects; making the local water tariff rate at a stable level. Given a fact that the current rates wastewater treatment charges (WWTC) are quite low in most Chinese cities, which is argued to have a weak incentive for attracting the participation of private sector (Zhong, et al., 2006), it is critical that the government can response to some needed investment as in the case of Shanghai, as well as to recognize the cost of involving the private sector into wastewater sector (any investment of private sector requiring a return due to the nature of profit-seeking) and to make a balanced payment planning before contracting. It is risky to establish a payment mechanism only relying on the increase of water tariff, in that sense, the payment obligation is shifted to the resident at last which may result in many social problems. 4 Key Problems Needed to Be Solved The BOT approach has been experienced upon in Chinese wastewater sector throughout the country and brought in some needed investment for cities. Although it is premature at this moment to fully assess the advantages and disadvantages of the existing BOT projects because most projects are far from the end of contracts, it is important to take shock of the exiting problems taking place in the reform process. In this section, two major problems,

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not only existing in above good projects but also appearing in other projects, are given as below: (1) Unmatched legal framework causing difficulties for project implementation Up till now, the BOT approach and other PPP reform strategies of water sector are conducted under a series of governmental policy papers, in particular three policy papers of the MOC (No.272 Policy Paper of 2002, No.126 Policy Paper of 2004, and No.154 Policy Paper of 2005). Due to the lack of specific legislation (such as the privatization reform of UK, the Philippines, etc.) and systematic legal building, much room for improvement exists within the current legal framework concerning the private sector participation of Chinese water sector, making many difficulties as well as high political risks in the PPP practices (e.g. the BOT projects). As mentioned earlier, the PPP development of water sector is a complicated process involving numerous sub-reforms, objectives such as the ways of land use, the management system of water companies, the financing and investment mechanism, the accounting system and taxation, credit policies of the development banks, and etc. become “new” problems when the governments transfer the wastewater service to a private operator. However, the existing MOC policy papers of PPP reform in water sector can’t address these problems; and other relevant policies concerning land use, accounting system, taxation, state-owned enterprise reform, etc. in current legal framework were merely made for the regular competitive sectors, unaccommodated to the field of water sector. For instance, Beijing Dongba WWTP BOT project was hampered in the financing process because the development banks couldn’t provide long-term loan as required for BOT-types projects or restrict their credit policies to private sectors. This is a common problem for small-size BOT wastewater projects. In the case of Foshan 16 WWTP projects, over 50% WWTPs could not run into action due to the conflicts of current land use policies. At this moment, some lawyers and researchers are proposing to accelerate the pace of legal building for PPP strategies in China, because a well-established legal framework is requisite of this complicated reform. (2) Nonstandard contracts and inappropriate regulation bringing out risks All the selected projects were implemented restrictedly in terms of standard bidding & contracting rules and executed based on various detailed contracts, including the joint venture contract for organizing a project company, the concession contract between the government and the project company, the service management contract etc. In general, the service regulation of BOT projects or other PPP projects is mainly relied on the contract; in this sense, the items and conditions defined in contracts are very critical for regulating the performance of private operators. However, many empirical evidences of Chinese water sector reform with private sector participation have no well-established contracts. According to the MOC survey of 2005, less than 50% of the reformed projects

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have signed the concession agreement and relevant contract. As it were, over 50% of the reformed wastewater projects without agreements or contracts might cause many hidden troubles for the succeeding management and regulation though it is inconclusive at this moment. Besides above, many “fatal” problems also happened in the practice, such as the uninstitutionalized charging mechanism, the low-level wastewater treatment charge standard and uncharged water has troubled the payment for private sector involvement projects; selecting the inexperienced investors, which just gamble to get benefit by investing, has made the cooperation stopped, such as the withdraw of Shanghai Youlian Development Company from Shanghai Zhuyuan WWTP projects; changeable policies result in huge policy risk for private sector involvement in wastewater sector. 5 Conclusions It is difficult to make an overall assessment for the practices of BOT approach and other PPP construction in China’s water sector at this moment, due to their earlier stage of development. However the empirical evidences above have indicated some positive results coming from the practices of BOT approach for wastewater management: 1) the public tender can introduce competition to a greater or lesser extent, reflected by the reduced cost of treatment; 2) an appropriate risk allocation can improve efficiency and service quality; 3) the governments can’t fully withdraw from the wastewater management although they can transfer some responsibilities as investment, construction, operation and management to private operators via various forms of PPP (e.g. BOT approach). In the meantime, we have to recognize that the PPP strategies of water sector are complicated and conditioned reform process, paying more attention on the problems carefully. In conclusion, the private sector involvement could expand the wastewater service coverage and improve efficiency to greater and lesser extent. However, the PPP strategies are restricted reform programs and need lots of requisite element for ensuring its success, such as the policy environment; economic conditions; government capacity of decision-making; awareness of all interested groups on private sector involvement for wastewater management, including all-levels governments, the private sector, the consultation organization, the bank and the public. Consequently, the governments must fix in that they have to pay for the private sector whether they apply any PPP option. References Braadbaart, O. (2001), Privatizing water: The Jakarta concession and the limits of contract. Paper presented at KITLV Jubilee Workshop on Water as a Life-giving and a Deadly Force, Leiden, the Netherlands, 14–16 June. Fu T., M. Chang, and L. Zhong (2006), Chinese Urban Water Sector Reform: Empirical Experiences and Case Studies (in Chinese), China Architecture & Building Press, Beijing. Izaguine A.K. and Hunt C. (2005), “Private Water Projects”, in Note of Public Policy for the Private Sector by the World Bank Group, No.297, July 2005. Prasad N., (2006), Privatization results: Private sector participation in water services after

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15 years, Development Policy Review, 2006, 24(6):669-692. Zhong L., A.P.J. Mol, and T. Fu, (2007), Public-private partnership in China’s water sector, manuscript. Zhong L., X. Wang, and J. Chen, (2006), The private participation in China’s wastewater service under the constraint of charge rate reform, Water Science and Technology, in process. Appendix: organizational structure of selected BOT project
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Figure 1: Guangshou Xilang WWTP BOT Project

Figure 2: Shanghai Zhuyuan No.1 WWTP BOT Project

Figure 3: Shanghai Zhuyuan No.2 WWTP BOT Project

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THWPRC Database 10

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