The New Silk Road

• By Daniel Burgard
• Apr 01, 2002

China has been dubbed "the polluting superpower" by some. This is true in part due to the 1.3 billion people who live in China. This equates to more than a fifth of the world's population concentrated in an area about the same size as the United States with only eight percent of the world's fresh water supply. Add to this China's average annual rate of industrial development of about 10 percent per year and you get a polluting superpower that, according to the World Bank, is home to at least half of the world's most polluted cities.

Those who have visited China during the summer months have most likely experienced the foul odors of untreated sewage from a nearby waterway. This is true for some of China's most touted tourist cities, such as Hangzhou. Of the 60 billion tons of wastewater and 50 billion tons of sewage discharged every year in China, only a fraction of it receives treatment. According to the State Environmental Protection Agency (SEPA), nearly half of China's river systems are polluted. In most Chinese industrial cities, the airborne concentration of dust and suspended particulate matter frequently exceed environmental standards by several hundred percent.

Environmental problems associated mainly with China's industrialization are costing China close to three percent of its gross domestic product (GDP), or approximately US$60 billion a year. Only now has China begun to address the tremendous amount of pressure that is being exerted on its natural resources.

Within the last five years, the Chinese government and the country's citizens have come to realize that without sustainable development, they will not be able to improve the overall quality of their lives. According to China's Tenth Five-Year Plan, over the next five years, China is projected to spend more than US$84.3 billion, or about 1.3 percent of its GDP, to reduce pollution levels.

The government also declares in this plan that the development of the environmental industry is to be a top priority, and that it forecasts an ambitious 15 percent per-year growth rate. By 2005, the Chinese government estimates that the environmental industry will be a US$24 billion undertaking.

A recent public poll on environmental issues indicates that 68 percent of those Chinese citizens surveyed were willing to pay an additional tax for government subsidized environmental protection projects, and 65 percent were willing to pay an extra 20 percent for environment-friendly goods. Within the past couple of years, the state-controlled Chinese media has been allowed to publicly expose environmental problems and to openly criticize local officials for not enforcing regulations. Each year, more and more environmental coalitions and ad-hoc groups are establishing themselves in China.

Environmental regulations in China are not surprisingly in a state of flux. Still, these regulations are becoming more important, especially for foreign companies with manufacturing operations in China. Air, water and noise pollution, soil contamination, solid and hazardous wastes are all currently regulated under Chinese law. The most recent regulations focus on sustainable development, such as "The Law on Solid Waste Pollution, Prevention and Control" which emphasizes "preventing now rather than paying later at the end-of-pipe stage."

Still, a major problem is the number of Chinese companies that routinely disregard environmental regulations. Their non-compliance is mainly due to a lack of enforcement and the negligible fines for violators who are caught. The low fines act less as a deterrent and more as a cost-effective solution as most domestic enterprises opt to pay the fines rather than investing in treatment technology. But China's Tenth Fifth-Year plan, its entry into the World Trade Organization (WTO), public pressure, more transparent laws and other incentives, such as increasing manufacturing efficiencies, could help to make these polluting practices the exception rather than the rule over the course of a few years.

Foreign companies with operations in China, otherwise known as multinational companies (MNCs) are encouraged to use their own country's environmental regulations as the benchmark for their operations in China. Despite this, MNCs often face a higher level of scrutiny from the Environmental Enforcement Agencies than domestic facilities, since most officials view them as having the best access and resources to use state-of-the-art control technology. Foreign companies with or planning to start manufacturing operations in China provide some of the best opportunities for U.S. environmental firms.

The Chinese government has mandated all cities to build sewage treatment plants by 2005. Cities with populations greater than 500,000 are expected to treat 60 percent of their sewage by the 2005. By 2010, all Chinese cities are expected to treat at least 60 percent of their sewage except for those provincial capitals and major tourist centers, which will be held to a more stringent treatment standard of 70 percent.

In order to comply with these mandates, it is estimated that the construction of new facilities with daily treatment capacities of 50 to 60 million tons will be required. The considerable investment required for this is likely to be between US$24.15 to US$36.23 billion, with yearly operation costs estimated at US$1.21 billion. Additionally, $12.2 billion has been earmarked to combat air pollution in major cities.

Another high profile project, China's Three Gorges Dam, the world's biggest hydroelectric project, has plans to spend nearly $US4.8 billion over the next 10 years to reduce water pollution in the reservoir above the dam. More than six million tons of garbage and nearly 10 million tons of solid industrial waste are annually dumped into upper reaches of the Yangtze River and its three gorges, Qutang, Wu and Xiling. It is estimated that more than 260 wastewater treatment plants and some 200 garbage facilities will be built towards this end.

China's entry into the WTO in 2001 will push domestic enterprises to compete with their foreign counterparts on an equal footing, thus compelling Chinese companies to upgrade their manufacturing technology, which includes environmental control technology. Companies failing to upgrade their environmental control technology may be exposed to non-tariff barriers by manufactures from developed countries. Since U.S. environmental technology is one of the most highly-rated in the world, clear and numerous opportunities exist for U.S. companies to sell their technology to Chinese companies, most of which will be required to search abroad for effective treatment technologies.

Responding to Beijing's successful bid for the 2008 Olympics Games, the Chinese government has allocated over US$21.8 billion dollars for new infrastructure and major environmental projects for the 2008 Olympic Games. An analysis of the projects indicates that approximately $5.7 billion dollars are earmarked for environmental protection and pollution control projects. Efforts are being made to make all projects available in an open bidding process that is to provide equal footing for both domestic and foreign companies.

One the major obstacles for large scale environmental projects in China is finding the proper funding or financing terms. Although Build-Operate-Transfer (BOT) is common in other parts of the world, it is still a relatively new concept in China. Under the BOT model, the government grants investors the rights to build and operate large-scale projects for a set period of time. The investors retain ownership and the right to operate the plant and profit from it, usually through treatment fees paid by local manufacturing and other operations. Once the time period expires the owners must unconditionally transfer all rights of the business to the government.

BOT methods for financing environmental projects are being implemented in order to move projects into the private sector. The private atmosphere will allow them to act as a market-oriented entity rather than as one relying on public subsidies and government management. The Chinese government ultimately hopes that BOT projects will help raise urban sewage treatment rates from its current and dismal 10 percent (or even less) to more than 50 percent over the course of five years.

An increasing number of foreign companies are looking into using the BOT model to finance environmental projects in China. Still, many foreign companies find it hard to evaluate the profits of the environmental projects in China due to the typically long investment and recovery period. Companies are also rightly cautious about the lack of clear rules stipulating fee-charging standards. The Chinese government still needs to promulgate better laws that clearly address the needs and issues of BOT projects in China to make this type of financing a more profitable and thus attractive option.

China today is one of most dynamic economies in the world. Knowing the proper business protocol in China can at times be a frustrating endeavor, given China's many dialects and renewed sense of cultural pride. While daunting, those U.S. firms that prepare themselves properly can tap into the country's enormous environmental market. To do so, one must be prepared to invest time and money from the start.

Still, the much-vaunted relationships (guanxi) are overrated in China. Claims to having important connections are often used as a means for misleading the unwary. Relationships are important in any business endeavor, and they take time to establish. What is more important in China is to know who the key players are in the decision making processes. This is not as simple as it sounds.

Too many U.S. companies have spent months and hundreds of thousands of dollars negotiating a contract with their Chinese counterpart only to find out right before signing off on an agreement that the Chinese party does not have the authority to enter into a binding contract. Therefore in China, it is imperative that U.S. companies perform their due diligence not once, but twice. One needs to know as much as one can about potential partners and what their connections are. Failure to do so may unwittingly put you and your firm in breach of the U.S. Foreign Corruption Practice Act (USFCPA).

Protecting your intellectual property rights or ensuring that you are not infringing on someone else's rights are important legal and business matters that need to be considered. Additionally, having a focused business plan on current and future goals in China may help businesses decide what type of company, if any, they should set up in China. Typically, U.S. environmental firms in China set up a representative office which, under Chinese law, are not permitted to engage in actual business activities, but are only allowed to make contacts and perform marketing functions.

In China, what is done in practice often differs from what is written as law. U.S. companies need to be aware of these business practices and informal policies to be able to work within China's grey areas, or they will not be able to operate competitively in China.

Using a qualified consultant who is based in China, who knows your technology, the local market, Chinese law, business customs, key players/projects and who is sensitive to cultural issues and speaks Chinese, is an advisable investment. To effectively pursue business opportunities in China, it is necessary to follow up on the ground, in person -- not over the Internet or through a fax machine.

The Chinese government has continually increased its budget for environmental projects to keep up with its face-paced development. This scenario is likely to continue for some time. Chinese companies who opted in the past to pay environmental fines rather then investing in treatment technology are decreasing given the recent policy changes, public awareness, hosting of 2008 Olympics and WTO accession.

U.S. companies will have to do some research to determine which technologies are suitable for China, as China's solid municipal waste differs greatly from North America's and so should the treatment technology. For U.S. environmental firms providing technology, equipment and services, there exist numerous project opportunities in China. Those U.S. companies that diligently do their homework before attempting to enter China's environmental markets are likely to succeed. They will need to be patient and work with U.S. financial institutions to devise economically competitive terms when loans are necessary. Other nuisances associated with doing business China are sometimes best left to a qualified in-country consultant.

Government Support for U.S. Firms

Several U.S. government agencies have programs to assist U.S. companies to do business in China. The U.S. Trade and Development Agency (TDA) have recently re-opened their program to China which focuses on environment, safety, energy and aviation sectors. TDA's programs help fund feasibility studies, orientation visits, specialized training, business workshops and technical training between U.S. companies and the Chinese sponsor, who can be either a government agency or a private company. These grants help to open the door for U.S. Environmental companies, especially small to mid-sized, to show case their environmental technologies in China.

As for financing assistance, the Multilateral Development Bank Operations (MDBO) provides counseling to U.S. firms regarding funding opportunities with international development banks like the World Bank and the Asian Developmental Bank that frequently fund environmental and other projects in China. While, both the Overseas Private Investment Corporations (OPIC) and the Export-Import Bank (Ex-Im Bank) have various finance programs and additional services to help US companies sell and export their products to clients in China. Since both these financing institutions provide more flexibility than conventional lending institutions which is often necessary when doing business in countries like China.

This article originally appeared in the 04/01/2002 issue of Environmental Protection.