| Related Symbols: |  |
|
* Waste control, sewage sector to grow 14 pct on incentives
* Waste, water management companies to benefit
* Opportunities for water treatment and recycling firms
By Leonora Walet
HONG KONG, May 12 (Reuters) - As China spends tens of billions to clean up after years of environmentally destructive growth, companies big and small are scrabbling for contracts to restore polluted waterways and landfills.
But while tougher environmental rules and increased incentives are driving investment, the carrots and rebates are not expected to last forever and companies that sign on to long-term projects are vulnerable to policy change.
Tight credit and strained budgets at the municipal level could also limit the flow of funds to some projects.
"The bigger projects like the BOT (build-operate-transfer) are usually long-term contracts, and changes in policy or a change in standards could affect the project," said Vincent Wan, CFO of Pan Asia Environmental Protection Group <0556.HK>, an engineering firm for industrial waste projects in China.
Beijing has earmarked 350 billion yuan ($51 billion) this year for clean water and waste management on top of a 1 trillion yuan allocated under its 11th 5-year plan, which runs to 2010.
For the moment, Beijing can afford to offer generous subsidies to anyone willing to take part in the clean-up.
"There's a lot of demand for environmental projects because, frankly, there has been a lot of neglect in the past," said Philip Fan, general manager of China Everbright International <0257.HK>, a sewage treatment and waste-to-energy company.
China Everbright is in tie-up talks with waste-to-energy company Covanta Holdings <CVA.N>, while Waste Management Inc <WMI.N>, the largest trash hauler in the United States, announced plans to bid for refuse-fired power plants in the mainland.
With water unfit to drink in many parts of China, the mainland is also a key growth market for Singapore water treatment firm Hyflux <HYFL.SI> and French utility giants Suez Environnement SA <SEVI.PA> and Veolia Environnement <VIE.PA>.
The world's largest polluter has been struggling to change its priorities from growth-at-all-costs to more sustainable development, driven in part by worries that environmental degradation could compromise economic growth.
China expects government and private spending on the environment to reach 500 billion yuan by 2010, or about 1.35 percent of gross domestic product.
Green experts say protecting China's land and water resources demands annual investment equivalent to 2 percent of GDP -- the same share channelled by the United States.
In 2004, China surpassed the United States as the world's largest producer of municipal solid waste at about 190 million tonnes a year. By 2030, the World Bank estimates that will have more than doubled to at least 480 million tonnes.
Only 16 percent of the rubbish China collects is crushed to burn at incinerators, with the rest ending up in landfills. By contrast, developed countries incinerate up to 30 percent of their trash, while Japan burns 70 percent.
DRY AND DIRTY
Waste water presents an even tougher challenge given China's limited water resources.
State media have cited official statistics showing China on average lacks 40 billion cubic metres of water each year, leaving over 200 million farmers short of drinking water and large swathes of farmland too dry for growing crops.
Drought and floods are perennial problems in China, which has per capita water resources of 2,125 cubic metres -- well below the global average of 8,310 cubic metres. Outright shortages of water are exacerbated by water pollution, which leaves many rivers unfit for irrigation.
"We are bullish on opportunities within China's overall environmental value chain," said Credit Suisse analyst Clarice Khoo, citing a solid waste segment still in its infancy and leaky water pipes that are a worry for the country.
Khoo forecasts that China's environmental protection industry will grow by 14 percent next year due to government support.
The government-guided return on net assets for urban water suppliers is around 8 percent, and higher if foreign investment is involved, said Credit Suisse's Khoo. For waste-to-energy projects the return is 15-20 percent, she said.
The government also pays 0.25 yuan more of tariff for every kilowatt of electricity generated from burning trash.
China is looking to massive water diversion projects to ease chronic shortages in Beijing and other parts of northern China, including the South-to-North Water Diversion Project.
The 500 billion yuan project will channel 44.8 billion cubic metres of water yearly to northern China from its largest river, the Yangtze, when completed decades from now.
CHALLENGES AHEAD
As the government spreads development to more provinces and cities in China, companies like solid waste recycling firm Lo's Enviro-Pro Holdings Ltd <0309.HK> hope to benefit.
"We were shocked that it took government just days to approve our project," said Yany Lo-Quiroz, director of corporate affairs for Lo's Enviro-Pro, which invested 130 million yuan in a recycling plant in Jiangsu's Shuyang City this year after years of knocking on government doors to present its waste technology.
But analysts warn of challenges ahead, given intense competition due to low entry barriers to the sector. Small firms are up against bigger and better-funded rivals.
"Winning government projects is not easy as there are bigger players out there competing for contracts," said Pan Asia's Wan.
The sector also relies heavily on state incentives and a change in policy could dampen investment and weaken growth.
"Key risks (include) policy change to withdraw preferential treatment in the long-term," said Morgan Stanely analyst Helen Wen. (Editing by Ian Geoghegan)
