Analysis: Flood of money needed to fix China's water woes

China is now the world's second largest economy, but hundreds of millions of its people still rely on fouled water that will cost billions of dollars to clean.

Growing cities, overuse of fertilizers, and factories that heedlessly dump wastewater have degraded China's water supplies to the extent that half the nation's rivers and lakes are severely polluted.

China needs to spend up to $20 billion a year to bring its urban water supplies up to standard, according to the World Bank.

Larger and wealthier cities have already started investing in the sector, but water supplies in smaller cities and the countryside still fall short, leaving about 800 million people without clean drinking water.

Water infrastructure was given unusual pride of place this year in the government's first policy document of 2011, with 4 trillion yuan ($606.4 billion) allocated to water clean-up and rural water infrastructure over the next decade.

China is facing a grave challenge of water pollution, said Ma Jun, whose Institute of Public and Environmental Affairs names and shames water polluters.

If you travel along the coastal regions, which are the most populated areas in China, you can hardly find much clean water... In the northern part of China you will find many rivers have either dried up or have turned into open sewers.

While central planners worry that intense pollution could choke crop production and poison the food chain, a prosperous urban population wants clear tap water and clean showers.

Foreign firms plowed $1.7 billion into China's water sector from 2004-2009, investing over $500 million in 2009 alone. The projects include wastewater treatment, municipal water supply, industrial water supply and direct investment in Chinese water companies.

But undermining those ambitious plans is the stark fact that low Chinese water tariffs offer citizens and companies little incentive to save water.

It's still cheaper to just dump wastewater. The people whose behavior will change if tariffs rise are residential users, more than companies, said Michael Komesaroff, principal of Australia-based consultancy Urandaline Investments, who has studied Chinese industrial water use.

The industrial user knows he can probably talk his way out of any higher fees from the local government.

China's water tariffs remain strikingly low among major economies, despite the doubling in average water tariffs in recent years to 39 U.S. cents a cubic meter, according to Global Water Intelligence.

Of 19 major economies, only India charges less.

CITY WATER

Years of investment have already begun to pay off. Tap water in Beijing, Shanghai and other major cities is now drinkable, although few Chinese are willing to do so without boiling.

But even in the cities, tariffs remain an issue.

French water giants Suez Environnement and Veolia are major players in the Chinese municipal water market, with over 17 contracts apiece.

They face rising competition for contacts from China's home-grown water treatment firms like Beijing Capital Co, many of which have evolved from city water bureaus or water equipment suppliers.

But low residential water tariffs -- and the city water authorities' inability to raise them -- means thin profits are pushing Suez and Veolia to target industrial water contracts instead.

At 14 million people served, China accounts for 20 percent of Suez' water consumers but only 7 percent of its revenues.

I think find it difficult to make money in the Chinese environment, said Paul Kriss, sector coordinator for Urban Development at the World Bank in Beijing.

Prices are capped, so you need to be sure you are going to be paid. It's not a high-margin business. It's not iPads.

PRICE POINTS

Where water is expensive, companies are already moving to reduce consumption.

Water intensive industries tend to save water when it is in their benefit, said the World Bank's Kriss.

Coca-Cola, whose bottlers use 2 liters of water for every liter of Coke sold, has reduced water use at its China plants by 35 percent since 2004, employing more efficient techniques.

Certainly if there is any rise in water price that will impact our cost of production, said Brenda Lee, Coca-Cola's vice president for public affairs and communications for Greater China.

What we can try to do is try to mitigate the water rates impact by being a more efficient water user. That is one of the drivers for us to be more water efficient.

Coke draws on municipal water for most of its plants, but a 90-kilometre benzene slick that polluted the Songhua river in 2005 convinced it to source some of its supply directly from groundwater.

Many of the worst polluters have little incentive to change.

Fines for polluting are still generally lower than the costs of retrofitting a plant, and many of the biggest industrial users control their own water supply, making higher tariffs irrelevant.

Even wastewater treatment creates its own demons, in the form of 30 million tonnes of toxic sludge buried or dumped each year into rivers and the sea.

China's plans for water include limiting annual consumption to 670 billion cubic meters, although it is not clear what mechanism would be used.

Even if the cap is as crudely applied as current efforts to rein in energy usage, the end result could be greater efficiencies, Komesaroff said.

Massive investments meant to upgrade state-owned energy and metals plants and reduce their fuel usage has had a knock-on effect in raising water efficiency.

The big, fixed asset investment we've seen has resulted in new plants that are state-of-the-art in efficiency, Komesaroff said.

Shutting old or outdated plants saves water as well as fuel, because inefficient fuel burners need more water for cooling.

($1=6.596 Yuan)