Green means clean: Investing in China s Municipal Solid Waste Industry

Transcription

1 Antwerp Management School China Consulting Projects (CCP) Green means clean: Investing in China s Municipal Solid Waste Industry Zhi Yang Haiyan Zhang Daniël Van Den Bulcke

2 Green means clean: Investing in China s Municipal Solid Waste Industry

3 Green means clean: Investing in China s Municipal Solid Waste Industry 2011 Euro-China Centre at the Antwerp Management School, Antwerp, 2011 Corresponding author [email protected] Authors Zhi Yang, Haiyan Zhang and Daniël Van Den Bulcke China Consulting Projects (CCP) China Consulting Projects (CCP) program offers participating companies the opportunity to have well-trained master students working on their China related projects under the supervision of Antwerp Management School faculty. For the past four years, Master of Global Management students of Antwerp Management School have successfully developed a number of consulting projects for organizations such as POM (Provinciale Ontwikkeling Maatschapij), Comdiam CVBA (a subsidiary of HRD), Sancta BVBA, Competence@ (Chinese subsidiary of CPM), A-Law, Antwerp Business Centre, Atlas Copco, bpost, Dynaco and so on. Euro-China Centre (ECC) The Euro-China Centre (ECC) is an expertise centre at the Antwerp Management School that provides knowledge learning and knowledge sharing as well as an exchange platform about China's economy, its business environment and Chinese management issues. The ECC brings together the vast experience about China of its academic staff with the extensive expertise in business and management education of the Antwerp Management School. The EEC offers education and training services, carries out research projects and engages in management consulting in the context of the Antwerp Management School.

4 Acknowledgements This report was initiated as a China Consulting Project at Antwerp Management School for The Antwerp Forum. Two master students, Nesa Deskandini and Yemin Chen, are acknowledged for their efforts in carrying out interviews and field visits. The following companies and organizations provided useful information, suggestions and insights about their experiences in the municipal solid waste industry. A number of local governments of the People s Republic of China (PRC) also took part in the interviews. China Environmental News: Shanghai Branch Harbin Eastern Environmental Solution Corporation Shanghai Chengtou Corporation Chang Ning Sewage Plant / Pudong Sewage Pumping Plant Jingdezhen Bureau of Land and Resources Jingdezhen Civil Affairs Bureau Jingdezhen Environmental Protection Bureau Flemish Environment Agency (VMM) INDAVER KEPPEL SEGHERS UMICORE VYNCKE Clean Energy Technology OVAM Flanders China Chamber of Commerce Jingdezhen Environmental Protection Office: Zhong, Shan District Jingdezhen Xiguazhou Sewage Treatment Plant Harbin Environmental Protection Bureau Harbin Civil Affair Bureau Harbin Solid Waste Management Bureau

5 Contents Executive Summary... 1 Chapter 1 Introduction... 1 Chapter 2 Importance of Municipal Solid Waste Generation and Treatment in China Current and projected Municipal Solid Waste (MSW) generation in China Treatment capacity of Municipal Solid Waste in China... 6 Chapter 3 Solid Waste Management in China MSW management hierarchy in China Cooperative potential between China and Belgium on waste management Chapter 4 Foreign Companies in China s Incineration Market Chapter 5 The Role of the Government in MSW Management in China Government structure in MSW management in China Legislation and policies toward MSW management Chapter 6 Entry Modes in China s Waste Management Sector Entry barriers in waste management sector Entry modes in waste management sector in China Common entry modes to China Public-Private-Partnership in waste management sector of China Conclusion Annex 1 Technical standards for MSW landfills Annex 2 Laws and regulations regarding MSW management in China Bibliography... 49

6 Executive Summary China in the last decade experienced a surge in municipal solid waste generation. In 2004, the MSW generated in China surpassed the United States and ranked 1 st in the world. With the rapid economic growth of China, the MSW generation will keep increasing with a considerable growth rate. The huge amount of MSW generated in China stimulates significant demand for efficient and effective waste management. Among all provinces in China, coast line regions including Pearl River Delta and Yangtze River Delta generate the most MSW. The three provinces in Northeastern China are also among the biggest MSW generators. Centrally-located provinces next to coast line regions generate moderate level of MSW, while western China regions produce least MSWs. Taking treatment facilities and capacities into consideration, centrally-located provinces which left largest amount of MSWs untreated can be the potential target for new investment in MSW sector in China for European or Belgian investors. Factors contributing to the ineffectiveness of the waste management system in China include poor infrastructure, unqualified labors, lack of managerial and technological expertise, insufficient local finance, low level of resident awareness and participation, etc. These leave space for potential cooperation between Belgium and China at different levels. European investors in China s incineration market are competing with players from Japan, North America, and Chinese indigenous manufacturers. When most MNCs agglomerate in Guangdong, Zhejiang, and Jiangsu Provinces, Chinese indigenous manufacturers dominate inland provinces such as Henan, Hebei, Sichuan, etc.. European investors need to be aware of the first-mover advantage of Japanese counterparts and the fast catching-up pressure of Chinese indigenous manufacturers who enjoy protective policies and technology development with government support. Chinese government structure and policies regarding MSW management are adapted toward green economy and environmental friendly orientation. There are several points in policies need to be noticed. First, technical policies have been getting more stringent in the past decade, and are more internationally comparable. Second, new laws and regulations were intensively enacted in the past decades and indicated a shifted emphasis to the development of green industries. Third, Foreign investment is still encouraged in the green industry. The amended Foreign Investment Catalogue pushed several additional green industries into the encouraged category. Public-private partnership is an alternative option for foreign investors to enter into China s MSW industry. There are several modes available in PPP for consideration: service contracts, management contracts, BOT, BOO, etc. Each presents different characteristics to be assessed.

7 Chapter 1 Introduction So far, the Chinese green sector appears to be a magnet for new capital investment unscathed from the financial crisis all over the world. According to the 2011 new energy finance report by Bloomberg New Energy Finance (BNEF) 1, China proved a dominant force in attracting new capital for clean power projects. In 2009, no less than 14 gw of new wind capacity was added in China, shattering the annual record for any country (USA recorded with 10 gw added). In 2010, BNEF recorded 19 of the IPOs were by China-based entities, while there were seven IPOs recorded in Europe. When no one doubts that China will be a leading force in green market and technology development in the coming years, and extensive discussion in China s green sector focus on solar power 2 or wind power 3 development, little attention has been paid on another green industry-municipal solid waste industry. Green industry consists of activities which produce goods and services to measure, prevent, limit, minimize or correct environmental damage to water, air, and soil, as well as problems related to waste, noise and eco-system (OECD, 1999). Municipal solid waste industry is one of the most important subsectors in green industry. Municipal solid waste (MSW) by definition is the nonhazardous waste generated in households, commercial establishments, institutions, and non-process-related industrial wastes (Agardy, etc, 2009). In 2004, China generated 190 million tons MSWs that made China the world s largest waste generator surpassing the United States for the first time (World Bank, 2005). China thus is facing substantial pressure on the waste problems. With the new Foreign Investment Catalogue pushing several additional waste management industries into the encouraged category and the 12th Five Year Plan ( ) declared the cleanest in history, municipal solid waste industry became under the spotlights of investors. But investing in China s MSW industry still faces a daunting array of challenges. This report is therefore prepared for the purpose of better understanding the opportunities and challenges in investing in China s municipal solid waste industry in particular. There are several obstacles that prevent investors from closer examination on the opportunities and challenges in investing in MSW industry in China. First, consistent and reliable data on MSW activities sometimes are not available. The lack of data makes it difficult to examine the market situation and the competitive position of the company. Second, waste management system in China is different from that of Europe. The differences may bias the understanding of business practice which achieved success in Europe but may fail in China. Third, the government role and legislation system in China which regulates the industry can be confusing for western investors. China is in the transition to a more environmentally friendly economy. Many relevant laws and regulations are newly enacted or amended in recent years, many government departments are re-structured with emphasis on MSW management as well. It can be difficult for investor to evaluate the effects of the laws, regulation, and the government responsibilities over MSW management. This report relying on reliable data and first-hand interviews will address the above problems and the following questions: What are the facts of China s MSW generation and treatment? What is the current waste management system in China? 1 The Green Investing 2011: Reducing the Cost of Financing is published by the World Economic Forum. 2 China has over 400 photovoltaic (PV) companies and produces approximately 23% of the photovoltaic products worldwide(dorn, 2008) 3 In 2010, China became the largest wind energy provider worldwide, with the installed wind power capacity reaching 41.8 GW at the end of

8 What about the existing foreign investment in MSW market of China? What role does the government play in the MSW industry of China? What are the relevant policies regulating MSW industry of China? How to enter the MSW industry? There are also some limitations for this report. First, our data comes majorly from China statistical yearbooks, first-hand interviews, and information collected by ourselves. There could be missing or contradictions in some numbers because of different measuring scales. But this does not weaken the validity of our analysis. Second, this report majorly focuses the analysis on China instead of on European countries because we assume that European investors know well the MSW system in Europe. But based on the detailed information on China s MSW industry, European investors can make the comparison by themselves using the data and information from this report to draw some conclusion on the difference between Europe and China in MSW management. The following chapter 2 will describe the facts of MSW generation and treatment not only in quantity but also in geographical distribution in China. Chapter 3 will discuss the MSW management system in China and propose some potential cooperation options between China and Belgium on MSW management. Chapter 4 following chapter 3 will illustrate the participation of foreign technology and equipment suppliers in China incineration market. Chapter 5 will discuss the role of Chinese government in MSW management, including the government structure in waste management and relevant legislation and policies as well. We conclude in chapter 6 with suggestion on entry modes of foreign investors into the MSW market. 2

9 Chapter 2 Importance of Municipal Solid Waste Generation and Treatment in China 2.1 Current and projected Municipal Solid Waste (MSW) generation in China China, with an average eight per cent annual growth rate of its economy, is experiencing an even higher expansion in municipal solid wastes. In 2004, China generated 150 million tons MSW in the urban areas and another 40 million tons in the rural parts of the country. The national total of 190 million tons of MSW made that China became the world s largest waste generator surpassing the United States for the first time. The most recent data from China and the United Nations reconfirms China s leading position in MSW generation ( Figure 1). In 2009, China collected 157 million tons of MSW in urban areas which was much more than the amount generated in most European countries. The level reached by China in MSW generation was 30 times higher than in Belgium, 15 times than in the Netherlands, and respectively five and three times for France and Germany. Figure 1 Municipal waste generated in selected countries (2009) Sources: China Statistic Yearbook 2010; UNSD/UNEP Questionnaires on Environment Statistics, Waste section; OECD Environmental Data Compendium, Waste section. Note: Data of China refers to the amount of municipal waste collected in urban areas, while data of other countries show the total generated MSW. Based on its large population and its relatively low GDP per capita compared to the developed countries, it is expected that China will continue to produce more MSW in the coming years, which may cause serious environmental, social, and financial problems. According to the latest China Statistic Yearbook, 3

10 China currently produces 253 kg MSW per person a year in urban areas 4.However, this is much less than that of the OECD countries, as Belgium produces 489 MSW kg/person/year, the Netherlands 611 kg/person/year, France 535 kg/person/year, Germany 587 kg/person/year, and United Kingdom, and the United States respectively 526 and 760 kg/person/year. Every Chinese urban resident produces only half of the amount of MSW for the average Belgian inhabitant people, and less than one third of MSW left by an American. Taking the GDP per capita into account, the estimation function in Figure 2 indicates a significantly positive relationship between MSW generation and GDP per capita. One unit increase in GDP per capita will induce a unit of MSW generation per person per year. If China would had a GDP per capita as high as in the United States, China would generate 8 times more MSW than what it produces today given the same size of its population. While China is gradually catching up with the level of development of the developed countries, it is at the same time creating new challenges such as the significant increase in MSW. It has been estimated that the amount of waste generated by China will grow to at least 480 million tons in 2030, which is more than twice the amount that will be generated in the US (World Bank, 2005). Figure 2 The relation between GDP per capita and municipal waste generation per capita per year for selected countries (2009). When one looks at the MSW generation within China across regions, the Pearl River Delta (mainly in the Guangdong Province) and the Yangtz River Delta (including Shanghai, and the provinces Zhejiang and Jiangsu) generated most MSW in China, i.e million tons MSW, taking up 29 per cent of total MSW in China. Guangdong Province alone produced 19.6 million tons MSW in 2009, and ranked first among all provinces in China with a level of production that was nearly double the amount of MSW in the Shandong province. The Shandong and Jiangsu provinces respectively generated 9.6 million tons MSW in 2009, ranking second and third of the largest MSW generators in China. Zhejiang province followed Jiangsu and produced 9.3 million tons MSW, ranking fourth on the list. Shanghai and Beijing generated 7.1 and 6.6 million tons MSW, and were ranked seventh and eleventh largest MSW generator in China. 4 Since the total MSW data released from China Statistic Yearbook refers to the solid wastes collected in urban areas, the urban population is used as the denominator to calculate the annual MSW generation per person. If the total population is used as the indicator, it would be even smaller. 4

11 Heilongjiang, Liaoning and Jilin, the three provinces in Northeastern China are also among the largest MSW generators in China, and were respectively responsible for 9.1, 8.1 and 5.2 million tons MSW in 2009, ranking 5th, 6th, and 13th on the list. Together these three provinces generated 22.5 million tons MSW, amounting to 14.3% of total MSW in China. On the contrary, the West and Central provinces produced less MSW in China. For instance, Qinghai, Ningxia and Tibet achieved very low levels, i.e 0.9, 0.7 and 0.2 million tons MSW in 2009, and are ranked at the bottom of the provincial list of waste producers. Jiangxi, Chongqing, Guizhou produced 2.8, 2.2 and 2.1 million tons MSW in If these latter three provinces are taken together, the amount of generated MSW equals the total for Shanghai, but falls short of the level for Guangdong province. It can be concluded that in general the Northern part of China produces more MSW than the Southern regions, while the coastal provinces produce more MSW than the inland regions, and developed regions generates more MSW than developing regions in China. Of course these findings are determined by the concentration of the population, the economic activity and the type of industries located in these parts of China. Figure 3 shows the regional distribution of MSW generation in China in There are three-tier belts of MSW generation in China. The first tier belt regions, which produce most MSW cover most coastal provinces from North to South, including the three provinces in Northeastern China, Shandong, Jiangsu, Shanghai, Zhejiang and Guangdong (the darkest blue regions in Figure 3); The second tier regions which generate moderate levels of MSW consist of the centrally located provinces next to the coast line, and include Beijing, Hebei, Henan, Hubei, and Sichuan. Other regions producing least MSW constitute the third tier region, including Guizhou, Yunnan, Guangxi, Shaanxi, Gansu, etc. Most of the third tier provinces are located in the Western t part of China or are under-developed regions. Figure 3 MSW generation in the Chinese provinces in 2009 Source: China Statistical Yearbook

12 2.2 Treatment capacity of Municipal Solid Waste in China Although China has taken efforts to expand its MSW treatment capacity especially since the beginning of the 21 st century, there still was a significant gap between the amounts of MSW generated and those that were treated (Figure 4). In 2003, there were million tons MSW left untreated (about 200 thousand tons per day). In 2006, these non-treated amount declined to million tons (about 191 thousand tons per day). And in 2009, the gap shrunk to million tons (123 thousand tons per day) or two thirds of the level in In figure 4, the dark blue area in the background shows the MSW generation over the years 1990 to 2008, while the light blue area indicates the change in the treated MSW in China between 2003and 2008 according to available data. The light blue line shows the change of MSW treatment facilities from 2003 to Though the number of MSW treatment facilities experienced a sharp fall between 2003 and 2006, the treated MSW did not drop so much and kept moving upwards during the years. In fact, the newly built facilities which replaced the older ones have a higher treatment capacity. From 2006 onwards, a new wave of expansion in both the number of facilities and the treatment volume was stimulated via the government s eleventh 5-year plan for economic and social development. The 11 th 5-year plan was a blueprint for the period 2006 to 2010 development and put a great deal of emphasis on the renewable energy and environmental friendly industries. Figure 4 A comparison of MSW generation and treatment in China Source: China Statistical Yearbook from 1990 to 2010 So far, there are 567 waste treatment facilities in China in They have a total MSW treatment capacity of112 million tons (China Statistical Yearbook 2010). Most of those facilities are located in the developed provinces, such as Shandong, Zhejiang and Jiangsu. The three provinces host respectively 54, 52, and 41 treatment facilities, and represent one quarter of China s total capacity. Guangdong has 31 treatment facilities, ranking the fifth among the provinces. Figure 5 shows the distribution of those facilities across provinces. Large scale waste treatment facilities, in most cases, require large amounts of investment funds that underdeveloped regions can rarely afford. Therefore, most capital-intensive waste treatment facilities, like incineration plants, have been established in developed provinces. Consequently the distributioin of these facilities is imbalanced in China and results in sometimes huge differences in the treatment ratios among the provinces ( Figure 6). 6

13 As mentioned before, in the first tier belt along the coastal line of China are the provinces producing most MSW, while the second tier belt in the central provinces next to coastal regions register more moderate MSW, and the other provinces composing in third tier belt generate least MSW. However, the situation changes when the treatment capacity is taken into account. the first tier belt regions, Shandong, Jiangsu, Zhejiang, Shanghai, due to their economic strength and large treatment capacity, leave fewer untreated MSW as most surpass the 90% treatment ratio (the treatment ratio of Shandong, Zhejiang and Jiangsu are 90.5%, 97.6% and 91%). Yet, Guangdong province and the three provinces in Northeast China are exceptions in the first tier belt. They not only produce most MSW, but also leave most MSW untreated. Guangdong province did not treat 6.8 million tons MSW in 2009, which identified that province as first on the list for untreated MSW and representing 15 per cent of the national total untreated MSW. The provinces Heilongjiang, Liaoning, and Jilin, come immediately behind Guangdong ranking 2nd, 3rd, and 4th with respectively 6.4, 3.3, and 3.2 million tons of untreated MSW. These three provinces together generated 12.9 million tons untreated MSW in 2009, or 29 per cent of the total untreated MSW in China. All of the four mentioned provinces register a below average treatment ratio of MSW compared to the national average of 71 per cent. Guangdong has a treatment ratio of 65.5 per cent, while for Heilongjiang, Liaoning, Jilin this ratio is even lower with percentages of only 29.9, 59.9, and Figure 5 MSW treatment facilities across regions Source: China Statistical Yearbook 2010 The centrally located provinces which produce moderate MSW, have above-average degrees of untreated MSW because of the limited availability of treatment capacity. From Hebei, Henan to Hubei and Hunan, on average 2.1 million tons untreated MSW are left in these provinces. Hubei comes immediately after Jilin, and produced 3 million tons untreated MSW which resulted in a below-average treatment ratio of 55.7 per cent. Though provinces in this central belt produce moderate MSW, they still lack sufficient facilities to treat those MSW. The shortage of treatment facilities makes them a 7

14 potential market for MSW industry development. The Western provinces in the third tier belt though generate less MSW per year, they also have fewer facilities to treat the MSW. For example, in Tibet, there are no treating facilities for MSW according to the China Statistical Yearbooks. Though these regions have only moderate untreated MSW, they may not be able to afford the economic, environmental and social costs of establishing new facilities there. Figure 6 Gap between MSW generated and treated across regions Source: China Statistical Yearbook

15 Chapter 3 Solid Waste Management in China 3.1 MSW management hierarchy in China The ideal model of integrated sustainable waste management strategies are usually based on the waste management hierarchy which advocates the best approach to first and foremost try to prevent and minimize waste generation, and separate potential recyclables at source to improve the quality of materials for reuse (World Bank, 2005).The hierarchy follows that what cannot be reduced should be reused if possible, and what cannot be reused should be recycled, what cannot be recycled should be recovered through decomposition technology. The least favored option is considered to be waste disposal. The aim of waste management hierarchy is to reduce the amount of waste produced and to recover a maximum value from the recycling of the wastes. These waste management options are often represented in a reversed pyramid with a broad foundation in waste prevention and minimization leading to a decreasing amount of waste to be dealt with through disposal (see Table 1 for more details). It is based on this fundamental approach that the European Union released The Waste Framework Directive in 2008 to regulate waste management in European countries. Table 1 Aspects of waste management Aspect Content Advantage Waste Prevention and Minimization Waste Recycling Waste Processing Waste Disposal - Waste avoidance by individuals - Waste minimization in industry - Waste minimization by local governments - Aggregates and concrete: to be collected from demolition sites and put through a crushing machine along with asphalt, bricks, dirt, and rocks - Batteries - Biodegradable waste - Electronics disassembly and reclamation - Printer ink cartridges and toners - Ferrous metals - Non-ferrous metals - Glass/Paper/Plastics/Textile - Anaerobic digestion - Biomass technique - Composting - incineration - Dumping - Ocean dumping - Landfill Managing waste from the original sources and focusing on a sustainable solution to the waste problems. The benefits of recycling do not lie solely in a diversion of waste from disposal but consists of the reduction of the amount of natural resources that need to be harvested and processed for the manufacture of new products. More effective use of resources; employment opportunities in the waste to energy industries; better protection of products as durable and robust packaging ;changes in attitudes towards disposable products; and energy generation source alternatives. The advantage of waste disposal is minimal because this is the least interesting option for treating waste. 9

16 Contrary to the above sketched approach for MSW, the practice in China looks more like a regular pyramid. In China insufficient efforts have been made to control the waste generation and recycling, as too many resources are used in waste disposal programs. Box 1. Waste collection and recycle in China Estimates show that there are around 1.3 million people formally employed in the urban waste collection system in China, while there are 2.5 million people working in the informal sector. When the formal sector of waste collection is designed to provide stable supply for waste recycling utilities, the informal sector competes with the formal sector and collects comparable volume of waste for informal recycling business in China. Participants in the informal sector of waste collection majorly consist of waste pickers who make a living by selling the collected wastes in secondary material markets. The informal waste pickers are usually the poorest group of people from neighboring country-sides who are loosely organized and lack legal standing in those cities. They are sensitive but also vulnerable to the prices of secondary material market. The prices of secondary material market significantly affect the flow of recyclable wastes. Small-scale workshops which can pay waste pickers in more flexible way and at higher prices distorted the secondary material market and collect large portion of recyclable wastes. They recycle or re-sell the wastes with preliminary treatment which cannot fully recycle the wastes. The distortion makes the formal sector a shortage in waste collection and insufficient supply to formal high-tech recycling utilities. Many formal recycling utilities find it difficult to survive with the insufficient waste supply and under-development of the recycling market. The waste recycling market in China has not yet developed a well-organized, regulated and sustainable system, and has a recycling rate lower than most other countries. For instance, China s waste paper recovery rate is around 30% and much lower than other Asian countries, e.g. Korea is 66% (World Bank, 2005). Without waste re-use and recycle, most of MSW in China are directly treated or disposed. According to the latest statistics, there are 567 waste treatment facilities in operation in Among them, 447 landfill sites treated 89 million tons MSW, which represented 80 per cent of the total treated MSW. The incineration and composting take up only 20 per cent % of the treated MSW. Clearly there exists a sharp contrast between European and Chinese approaches. Most Preferred Europe China Least Preferred Figure 7 MSW management hierarchy 10

17 There are several factors that contribute to the practices applied in China (Shukor,e.a. 2011): Table 2 Factors contributing to China s inefficient waste management practices Factors Contents Poor management factors Poor management of the local authorities handling the wastes Financial constraints Insufficient monitoring and supervision of thel activities related to waste management Inexperienced managers Lack of skills, knowledge and equipment Poor infrastructure Low skilled workers Absence of reasonable systems and applied methods Lack of waste management education, knowledge and experience Inadequate law enforcement No specific laws enacted specifically for waste management Lack of community participation Bad littering habits and attitude of the population Lack of awareness about waste issues among communities Insufficient support and public interest in waste management Other factors Fast growing urban population Rapid economic growth Lack of expertise for infrastructure development, Scarcity of land for waste disposal Increasing migration to large cities In general, the economically most developed provinces rely on better waste management system and treatment facilities. For instance, of the 93 incineration plants in China in 2009, 21 are located in Zhajiang province, while 14 are found in Jiangsu, and 3 in Shanghai. The Yangtz River Delta region alone has 40 incineration plants on its territory and takes up half of the total incineration capacity of the country. In Guangdong 17 incineration plants are established which represent 18 per cent of the incineration capacity of China. Since the investment expenditures for incineration plants are high and their operation requires efficient waste classification and management systems, only those more advanced regions can afford this. The least interesting disposal method of landfill is still much in use.. Figure 8 compares MSW treatment between China and a number of selected countries. In 2009, 56.6 per cent of MSW is disposed of via landfill in China. Only 13 per cent of MSW is incinerated to recover energy. Only a negligible percentage is recycled in China. By contrast, countries with a sound waste management system have a low landfill ratio and much higher incineration and compost ratios. For example, Belgium brings only 5 per cent of MSW to landfills, while 34 per cent is incinerated, 24 per cent is composted and 36 per cent is recycled. 11

18 The Netherlands do even better with MSW proportions for landfill, incineration, composting and recycling, of respectively only 0.7, 33, 23 and 27 per cent. Figure 8 Comparison of MSW treatment facilities between China and selected countries Sources: China Statistic Yearbook 2010; UNSD/UNEP Questionnaires on Environment Statistics, Waste section; OECD Environmental Data Compendium, Waste section. Besides, most landfill sites face serious problems. First, they most often do not satisfy the national pollution standards (Huang, Wang, e.a., 2006). According to the standards for pollution control on landfill sites for MSW, the chemical oxygen demand (COD), biologic oxygen demand (BOD) and NH4+-N level should be respectively lower than 1000mg/l, 600mg/l and 25 mg/l. Most MSW landfill sites in China do not meet these requirements. Secondly, there are very few landfill sites equipped with gas collection facilities which are required by the new standard. The new standard stipulates that landfill sites with a capacity higher than 2.5 million tons should be equipped with a gas recovery system. The absence of gas recovery system causes problems in emission control and inefficiency in energy recovery. Thirdly, it is becoming difficult and expensive to find new landfill sites when the older ones are approaching their capacity limits. The rising costs and constraints of land in urban area in China makes it difficult to develop new landfill sites in or around cities. Realizing the adverse impacts of landfilling, the government is becoming more cautious to approve new waste landfilling projects, and is applying stricter requirements for the newly established landfill sites. As a result, the Chinese government is turning to alternative ways of waste disposal. For example, between 2003 and 2006 (China Statistical Yearbooks, ), there was a sharp drop in landfill establishments, compared to a steady expansion in incineration plants. From 2003 to 2009, the number of incineration plants nearly doubled from 47 to 93 during this period. (Figure 9). The newly-built waste treatment facilities typically have more capacity than before to handle MSW. Because of the higher capacity of the new installations, the total number of facilities in 2009 did not exceed the number in 2003 (China Statistical Yearbook, ), but still 36 million tons more waste was treated in 2009 than in 2003, which was nearly twice as high as in

19 Figure 9 The evolution of MSW treatment facilities in China ( ) 3.2 Cooperative potential between China and Belgium on waste management Having experience in waste management under the stringent EU waste control requirements, Belgium develops extensive managerial and technological expertise in waste management. Flanders as one of the good example has considerable potential to cooperate with China on waste management. There are several aspects that both China and Belgium governments and related stakeholders can contribute to the cooperation. First, at government level, Belgium can help China establish a more integrated sustainable waste management system with focus on introducing managerial expertise in waste prevention and minimization. For example, the OVAM, the Public Waste Agency of Flanders (Belgium), has developed an effective and well-organized waste management system from policy perspective to promote sustainable management of waste and material. OVAM can cooperate with China s counterparts providing consultancy on: mapping and analyzing material cycles; policies and measures to prevent leakage of materials from these cycles; policies of encouraging material saving and waste-use; campaigns to encourage sustainable consumption patterns; The cooperation can be carried out though conference, seminar, workshop, and project-based campaigns. For instant, the pay-per-bag scheme in Belgium which effectively reduces waste generation and helps sort waste at household s source can be introduced to Chinese municipal government who may learn and adapt it to Chinese local situation. Meanwhile, project-based campaigns may directly illustrate the economic or environmental effects and push the development of an effective waste management system. OVAM has the experience of such cooperation with developing countries, such as South Africa where the Flemish government helped build Buy-Back Center in Peri-Urban Duran, Integrated Waste Management in Jozini, etc. The cooperative projects in the effort of waste 13

20 minimization and recycle set up a good example and passed on the Belgium successful experience to local community and government effectively. Second, from technological perspective, governments between China and Belgium may want to build up a platform for technology exchange in waste management. On the one hand, attracting scientists globally to develop solutions to waste problems is essential for the success of achieving a green world globally. For instance, the Flemish Institute for Technological Research (VITO) counts approximately 600 highly qualified scientists all over the world including China to develop innovative products and process in the fields of energy, environmental protection, etc. for both public and private entities. For a knowledge center as VITO, internationalization is not an option, but the only path to follow. On the other hand, governments can make bilateral agreement to break down the barriers that prevent the transfer of technology and expertise between countries. Tariff cutting, intellectual property right protection or investment rules can be mutually established to allow both China and Belgium to benefit from the on-going research into things like clean technology. Third, financial cooperation between China and Belgium may also be on the agenda to promote the development in MSW industry. Waste management projects require huge amount of initial capital investment which may not be affordable for some Chinese municipal governments at current stage. However, the public attributes of waste management sector in China provide a kind of collateral for stable cash flow for financing the projects. China s strong desire for clean technologies and equipment in waste treatment or new energy generation, and the China s commitment to developing green industry as indicated in its 12 th 5-year development plan (2011 to 2015)) provides an opportunity for financial sector to tap the green land which may pay back enormously in the future. It is beneficial for both China and Belgium to actively participate into the waste management projects. Finally, bilateral culture and business programs can be launched by both governments to promote understandings on the host business and culture context. Though there are many Belgian companies have developed high-tech equipment in niche markets for material recycling or waste treatments, they may fail to understand the business in China, therefore are intimidated by the culture and business distance between Belgium and China. The bilateral programs can provide those companies with a common platform to understand each other and ease the difficulties of entry into the new market. 14

21 Chapter 4 Foreign Companies in China s Incineration Market With regard to the three major waste treatment options,, the incineration technology is the most sophisticated. This is also the case because incineration projects are always related to waste-to-energy solutions which are encouraged by the Chinese central and local governments. As a result equipment and technology suppliers from all over the world are attracted to the Chinese incineration market. The following comments will therefore focus on the incineration technology suppliers in the Chinese MSW market. Only recently did China start to develop waste-to-energy technology. Unlike EU countries and Japan which apply strict environmental controls and sound recycling systems, China relied too long on lowtech solutions for waste. In the late 1980s, China introduced technology or equipment from Japan and Belgium to build waste incineration plants on a trial basis. Because of the highly specialized technology and sophisticated equipment, at that time Chinese companies were not able to afford and apply this technology. Therefore international MSW technology suppliers started to tap China in this sector since the early 1990s. After nearly 20 years, there are now four major nationalities of players currently operating in China s incineration equipment market: i.e. companies from Japan, Europe, North America and Chinese indigenous firms. Table 3 lists the major incineration equipment or technology suppliers in China and their established capability for daily waste disposal. Table 3 also indicates the suppliers project sites and illustrates their geographical locations in this market. Table 3 Major incineration equipment or technology suppliers in China (2007) Company/Institution Country Daily Type of cooperation Projects sites Disposal Capability Foreign Mitsubishi Japan 5215 Equipment Export Guangzhou firms Construction-Service Zhongshan Technology transfer Hanzhou Takuma Japan 4400 Distributorship Equipment Export Ebara Japan 2500 Equipment Export Distributorship Hitach Zosen Corp. Keppel Seghers Corp. 5 Tianjin Beijing Angaotun Zhangjiagang Taiyuan Dalian Japan - Distributorship Nanchong Dalian Shanghai Tianjin Belgium 5150 Equipment Export Distributorship Joint venture Technology transfer Shenzhen Suzhou Changzhou Jingjia Changshu Tianjin Guanzhuang Noell-KRC Germany 1050 Equipment Export Ningbo 5 Seghers was a Belgium-based company providing environmental technology and services. It was acquired in 2002 by Singapore Keppel Integrated Engineering (KIE) group, and became Keppel Seghers as a subsidiary of KIE group. 15

22 Chinese firms Steinmuller Germany 1500 Equipment Export Shanghai Alstom France 2295 Equipment Export Shanghai Distributorship Chongqing VonRoll Switzerland 675 Equipment Export Xiamen Richway Canada 1750 Technology transfer Shenyang Huizhou BISIC USA 1950 Technology transfer Foshan Tsinghua China 1000 Partnership Puyang, Henan Technology Transfer Xuchang, Henan Weiming China 3025 Partnership Wenzhou Built Operate Transfer Suzhou Zhejinag Uni. China 3000 Partnership Hangzhou Technology transfer Zhenzhou Cooperation Hezhe Wuhu Zhongke China 4205 Partnership Technology transfer Cooperation Source: Author collect the data based on various information in 2007 Dongwan Ningbo Jiaxing Wuxi According to the available information about the disposal capacity in China, the Belgian-Singaporean company, Keppel Seghers, and the Japanese group Mitsubishi, have the largest market shares. Keppel Seghers takes about 10 per cent of the market while Mitsubishi only scores slightly higher with 11 per cent. These two companies were early birds in China s incineration market and consequently benefited from the so-called first mover advantage. Mitsubishi equipped the first incineration plant in Shenzhen in 1988, while Seghers which at that time was still Belgian owned - in 2000 helped Shenzhen Energy Group build the first incineration plant that met the EU environmental standard the largest plant at that time. Both firms enjoy an excellent reputation for their high-tech equipment and their highly efficient incineration systems. In 2010, Keppel Seghers secured two contracts from repeat customers to supply waste-to-energy (WTE) solutions, totaling US$53 million in China. One has been attributed by the Shenzhen Energy Environmental Engineering Company Ltd, and is intended to expand an existing incineration furnace in Shenzhen, Guangdong, while the other is from China Energy Conservation Investment Corporation (CECIC), for the supply of technology for the furnace, boiler and flue gas cleaning components for a Waste-To-Energy plant in Chengdu. However, Seghers is the only Belgian legacy in the market, while there are three more Japanese equipment providers competing together in China market. Takuma Corporation and Ebara Corporation from Japan are also active players in the incineration equipment supplier market in China. With 9 per cent of the market, Takuma closely follows Keppel Seghers as the third largest equipment supplier in this market in China. Ebara acquired 5 percent market share which is equal to the French supplier Alstom. Two German companies, i.e. Steinmuller. and Noell-KRC, have only lower market shares in the incineration equipment market, i.e. respectively 3 and 2 per cent but present a strong potential of growth. 16

23 Figure 10 Major players in China incineration market Next to their global competitors, the China indigenous manufacturers are growing up fast. You can never stop Chinese counterparts to learn, imitate, and manufacture the equipment themselves, remarked the CEO of Mitsubishi in an interview, therefore, market share is important for us because after-sale maintenance can earn us sustainable profits through selling the components and technology services which Chinese competitors cannot replicate. Yet, there are several Chinese institutions that developed up-to-date incineration equipment. Tshinghua University, Zhejing University and the China Academy of Science are involved in developing incineration technology and equipment. Apart from these institutions there are also indigenous equipment suppliers, such as Zhejinag Weiming Corporation. Because the government s procurement policies require propriety to domestic suppliers, Chinese manufacturers grow fast and hold a favorable position against foreign competitors. Incineration plants that are equipped with domestic installations take up 23 per cent of the market and their share is still growing. With respect to the choice of location, Keppel Seghers is strongly concentrated in Shenzhen where four out of the seven incineration furnaces use Seghers equipment. Shenzhen is the first city that introduced foreign incineration technology and equipment in China. In 1988, Shenzhen set up the first incineration plant by importing equipment from Japanese Mitsubishi. With its seven incineration plants Shenshen has currently more incineration furnaces than any other city in China. Besides Seghers, there is one incineration plants in Shenzhen that has been equipped by Mitsubishi, while two other furnaces were provided by domestic suppliers. Not far from Shenzhen, another seven incineration furnaces are established around Guangzhou, Foshan, Huizhou, Zhongshan, Dongwan, all in Guangdong province. Yet, none of these seven incineration plant in these cities are based on technology from Seghers. Two of these rely on technology transferred by BISIC (USA), while Mitsubishi and a Canadian firm (Richway) provided each one of such installations. The rest comes from domestic suppliers. 17

24 Figure 11 Incinerators with technology from different country origins Keppel Seghers has two other incineration plants in Changshu and Suzhou in Jiangsu province which is one of the richest regions where many incineration projects have been carried out. However, in the Jiangsu and Zhejiang provinces, Seghers does not dominate its rivals. Takuma, another Japanese company is present in three of the eight incineration plants, while Keppel Seghers, equipped two plants. All other plants in Jiangsu province were set up by domestic suppliers. This domestic-made ratio is higher in Zhejiang province than in the other provinces because of the impact of the local major Chinese equipment supplier Weiming Corporation, founded in Zhejiang province. In addition, Zhejiang University as the major Chinese incineration technology developer is also located in this province. Consequently, of the 9 incineration plants in Zhejiang, only two plants are equipped by foreign suppliers (one from Mitsubish, the other from Noell-KRC Germany). The other seven plants were installed by domestic suppliers, in particular, Weiming Corporation. In the inner land provinces and cities, domestic suppliers dominate the market. On the one hand, they offer relatively lower prices for the equipment. On the other hand, they are better able to deal with government-business relations in those markets where most of the incineration projects belong to the public utility sector and are highly regulated by government policies. Box 2. Keppel Seghers in Guangdong Keppel Seghers has extensive cooperation with China s provincial and local governments, and actively participated in in public tenders in waste management projects. Keppel Seghers firstly opened a small office in Shanghai with sales team, project execution team, site management, and administration staff. In 2004 Keppel Seghers entered into a strategic alliance with China Everbright International (CEI) which was a public company listed on the Main Board of Hong Kong Stock Exchange. With this strategic alliance, Keppel Seghers continued to penetrate into China market by forming partnership 18

25 with China state-owned companies in many cities and keeping good networking with local governments. For instance, Keppel Seghers entered the contract with Shenzhen Energy Environmental Engineering Company Ltd for the expansion of a waste-to-energy plant in Guangdong. Keppel Seghers technology for the furnace, boiler and flue gas cleaning components will enable the facility to treat an additional 3,000 tons to the existing 1,200 tons of municipal waste per day. The existing WTE plant s key components were also provided by Keppel Seghers in 1999.Besides the contract, a Memorandum of Understanding (MOU) was signed between Keppel Corporation Limited and Shenzhen Energy Group Co., Ltd to explore areas of strategic partnerships related to environmental protection. Both the contract and the MOU were signed in the presence of Mr Wang Rong, Standing Committee Member of Communist Party of China (CPC) Guangdong Provincial Committee, Deputy Secretary of CPC Shenzhen Municipal Committee and Acting Mayor of Shenzhen. However, Keppel Seghers also has difficulties in China market. The public procurement tender is hard. China s public procurement system is different than European countries. Since in most cases waste-toenergy projects are public utilities and financed or owned by the government, the tender is regulated by the government procurement law which gives more priority to domestic goods, project and services. In practice, this has led to a three tier system of market access (in decreasing order of ease): domestic products made in China by Chinese-owned firms; domestic products made by FIEs; and imported products. Keppel Seghers stated that a European company that runs in public procurement of China have common obstacles, such as difficulty in obtaining timely, accurate information about upcoming projects, lack of communication of detailed evaluation criteria for projects,, less transparency, unfair implementation of public procurement awards and unsatisfactory appeals procedures 19

26 Chapter 5 The Role of the Government in MSW Management in China 5.1 Government structure in MSW management in China Government structure in MSW management is complicated in China. One reason is that it is until recent decade that China began to take the waste management seriously. For a long time, MSWs were not formally managed. Realizing the sharp increase in MSW and facing the increasing pressure of environment pollution and resource constraints, government started to formally regulate the operation of MSW management ever since the new millennium and seriously blueprinted the development of MSW industry in the past 11th 5-year Development Plan. The other reason is that the government itself underwent several structural reforms that some departments were merged into one while some others disappear. In addition, some overlapping responsibilities in different government departments complicate the situation. Therefore, Chinese government structure in waste management is somewhat far from consistent and clearly defined framework. The complexities in administrative structure cause troubles for foreign investors to understand the administrative framework in the market. Figure 12 Government structure in MSW management in China Generally speaking, government in MSW management can be classified into three levels, central government, provincial government, and local municipal government. The central and provincial governments are at large responsible for enacting laws and regulations while local municipal governments are in charge of implementing those regulations. There are three major departments that are directly relevant concerning with the MSW management. The first one is the Ministry of Housing and Urban-Rural Development (MOHURD) and its subsidiaries in provinces and cities. According to the Ordinance of Municipal solid waste management which was enacted in 2007 and the recent Comments on promoting municipal solid waste treatment that was released in 2011 by the State Council, the Ministry of Housing and Urban-Rural Development is the major responsible department in government for MSW industry management. It will lead the coordination between ministries at central 20

27 government level regarding MSW management issues, and push performance-evaluation system on MSW management. The second relevant government department is the State Environmental Protection Administration (SEPA) and its provincial subsidiaries. It will be responsible for environmental evaluation on MSW treatment facilities, formulating technical policies and standards, and monitoring pollutant emission control. The third government department is the National Development and Reform Commission and its subsidiaries. It is majorly in charge of national or regional planning in MSW construction projects, and adjusting policies in cooperation with the former two departments. Every new project proposal cannot be proceed to next step unless it is approved by the Development & Reform Commission at municipal, provincial or state level according its scale and investment category. Other supporting departments include, but not limited to, Ministry of Science and Technology and its subsidiaries that are responsible for related technology and innovation issues, Ministry of Industry and Information Technology who are relevant for domestic-made equipment issues in MSW industry, Ministry of Finance and its subsidiaries who are responsible for relevant tax incentives and other fiscal policies towards MSW management, etc. Table 4 Government level and functions Government Central government (State Council) Provincial government Municipal government Function Enacting relevant laws and regulations Approving new projects regarding MSW treatment Supervision and coordination of MSW management Evaluation on provincial MSW management Promote international corporations Drafting local environmental protection regulations Implementing national policy, regulations, and laws Approving new projects regarding MSW treatment Supervision and coordination of MSW management at municipal level Evaluation on city level MSW management Promote international corporations Implementing relevant laws and regulations Evaluating new and established projects MSW management, including road cleaning, collecting household wastes, waste transfer, waste treatment, and waste monitoring Executing penalties to those whose behaviors are against the regulation 21

28 Figure 13 shows briefly the government departments that may be involved in different stages of the development of a newly established MSW treatment project. At the establishing stage, an investor has to go through the following steps: Prepare feasibility report together with some design & planning institute with at least B-level qualification. Submit the feasibility report to and be approved by the Development & Reform Commission The Bureau of Urban-Rural Construction commission checks the proposal and provides comments on the location choice of the project. The Bureau of city planning& land utilization approve the land usage by the project Bureau of Environmental Protection evaluates and approve the Figure 13 The role of government in MSW project from environmental perspective management in China Banking commitment for project finance Registering at Bureau of industry and business administration At the stage of MSW collection and transportation, the Bureau of municipal administration & enforcement (BMAE) is involved. All MSW collection and transportation activities are under the supervision of this department. In some cities, the function of MSW management in the BMAE is assigned to the department of environmental protection at district level. These charging departments will regulate the MSW collection sites, transportation route, or sometimes the price for the collection and transportation services, etc. In the everyday operation, a number of government departments are also involved in a MSW treatment project. For instance, a waste-to-energy incineration project has to obtain approval from the Development and Reform Commission and the Bureau of commodity price to sell their electricity at a favorable price. This price can differ from province to province, for example, the waste-to-energy electricity selling price in Zhejiang is RMB 0.666/kwh, while it is RMB 0.689/kwh in Guangdong. They are about 20% higher than the coal-to-energy projects where the electricity price is RMB 0.416/kwh in Zhejiang and RMB0.439/kwh in Guangdong, respectively. And of course, the Bureau of municipal administration and enforcement, bureau of environmental protection, and Monitoring and management center of solid waste are all involved in the supervision of the MSW treatment project. 5.2 Legislation and policies toward MSW management 22

29 Whether the MSW project in China is worth investing depends much on the impacts of national and local policies which regulate the industry. The sources of project income majorly comprise government subsidies and the revenue from waste-transferred energy or services. In the past decade, China launched numbers of Acts and regulations which provides kinds of incentives, including tax refunding or exemption, direct subsidies for waste treatment, or favorable financial incentives, such as higher selling price of electricity from waste-to-energy projects, etc. to encourage investment in waste management industries. However, stringent technical requirements and protective policies for domestic manufacturers, on the other hand, may also induce increasing potential costs in every stage of MSW management projects invested by foreign investors. To illustrate the important policies and regulations regarding to the MSW management enacted in China, we break them down into four categories: that is technical policies, industrialization policies, new energy policies, and policies for foreign investment in municipal solid waste management industry. Technical Policies Technical policies for MSW industry is primarily based on a series of technical standards and requirements from environmental protection perspective. The most important laws include Environmental Protection Law of PRC which was enacted in 1989, and China Environmental Impact Assessment Law which was be in effective in These environmental protection laws forms the foundation for EIA and construction standards for waste disposal projects. Among others, in 2000, the Ministry of construction, the State Environmental Protection Administration, and the Ministry of Science and Technology jointly issued the The Technical Policy on MSW Management and Pollution Prevention. This document was the first comprehensive technical policy guidance for MSW management from waste collection to waste treatment and plants maintenance. It incorporated several technical standards in respective domains, such as Standard for Pollution Control on the Landfill Site of Municipal Solid Waste (GB16889) which was first released in 1997 and then amended in 2008, standard for pollution control on the municipal solid waste incineration (GB18485) which was be effective in 2001 and amended in 2010, Technical specification for operation, maintenance and safety of municipal solid waste composting plant (CJJ/T ) for MSW composting, etc. The above three state standards (referred as GB or CJJ series) constitute the foundations for technical requirements on any existing and newly established MSW projects. Most of the standards have amended recently to be more specific and more stringent in technical requirements. For example, the recent version of Standard for Pollution Control on the Landfill Site of Municipal Solid Waste (GB ) more specifically stipulates the requirements on the siting, design and construction, conditions for wastes eligible for landfill and the pollution control and monitoring during the operation, closedown and post maintenance of landfill sites of municipal solid wastes. Table 5 illustrates some basic requirements for bottom liners in MSW landfills as an example. According the Standard (GB ), new landfill sites with filling capacity over 2.5 million ton MSW and body depth more than 20 meters are required to install landfill gas recovery facilities. The new requirements reflect the cautious attitude of government in developing MSW projects and also show preference to more environment friendly and energy recovery projects in waste recycling. As a result, to meet the new version standard, more initial 23

30 investment and more maintenance costs in the operation may occur in new landfill projects. More technical standards for the landfill are listed in Annex. Table 5 Basic requirements for bottom liners in MSW sanitary landfills Liner System Requirements Chinese Standard (CJJ /GB ) Leachate Drainage Layer K>= m/s Thickness: 0.3m Geomembrane liner Thickness >= 1.5mm HDPE Compacted Clay Layer K<=1 10-9m/s Thckness: 75cm Similar to the Standards for landfill projects, MSW incineration projects are also regulated by a series of technical controls. With the increasing awareness of the harmful effects to public health and environment, pollutant emission from incineration projects became a sensitive topic in waste thermal projects. The SEPA therefore is amending the 2001 version of Standard for pollution control on the municipal solid waste incineration (GB18485) to a more demanding version in which some of the pollutant emission limits are even lower than the counterparts in USA or equivalent to the standards in EU. Table 6 shows the comparison in pollutant emission limits between China, USA and EU according to the trial version of Standard for pollution control on the municipal solid waste incineration proposed in The trial version stipulates that particulates in pollutant emission of newly established incinerator should be less than 20 mg/m 3 while the limit in USA is between mg/m 3 in USA, Cd and Ti in the incinerator emission should be less than 0.05 mg/m 3 which is 29% less than the 0.07 mg/m 3 limit in USA and is equal to that of EU. Moreover, the pollutant emission limits applied to newly established incinerators are much stricter than the limits applied to existing ones. Existing incinerators can have particulates less than 80 mg/m 3 while newly established ones can only emit less than 20 mg/m 3, about 1/4 of that in the 2001 version standard. The new version of pollution control for incineration projects is more in concordance with international standards, in particular, between USA and EU. The stringent standard on the one hand may cause extra costs in new incinerator investment; it may also give rise to advanced incineration technologies that foreign partners possess and set up higher entry barriers to protect the profit margin in the market on the other hand. Table 6 Pollutant emission limit comparison between China, USA and EU Item China Newly Established Existing USA EU Particulate 20 mg/m 3 80mg/m mg/m 3 10 mg/m 3 Hg 0.05mg/m 3 0.2mg/m mg/m mg/m 3 Cd+Ti 0.05mg/m 3 0.1mg/m mg/m mg/m 3 Pb 1.0mg/m 3 1.6mg/m mg/m 3 0.5mg/m 3 HCI 50mg/m 3 (Ave. per day) 60mg/m 3 (Ave. per day) 30 mg/m 3 (Ave. per day) SO 2 80mg/m 3 (Ave. per day) 200mg/m 3 (Ave. per day) NO x 200mg/m 3 (Ave. per day) 300mg/m 3 (Ave. per day) 60 mg/m 3 (Ave. per day) mg/m 3 (Ave. per day) 10 mg/m 3 (Ave. per day) 50 mg/m 3 (Ave. per day) mg/m 3 (Ave. per day) Dioxins ngteq/m ngteq/m ngteq/m 3 Source: Notes for trial version of standard for pollution control on the municipal solid waste incineration Industrialization Policies 24

31 As with industrialization policies, in 2002, National Development and Reform Commission (NDRC), Ministry of Finance (MOF), Ministry of Construction (MOC) and State Environmental Protection Administration (SEPA) jointly issued a series of notices and policies, including Notice: Establish the MSW Fee Levying system and Promote the Industrial Production of MSW Management and Opinion about promoting the Industrial Production of municipal waste water and solid waste management etc. The notice of establishing the MSW fee levying system is the first official document issued by the state government endowing the MSW service companies or government agents the rights to charge for MSW collection and disposal. The purpose of this notice is to minimize MSW generation, subsidize MSW disposal, and promote the development of MSW industry. However, this notice does not clearly define the charging body who is responsible for the levying practice and the pricing criteria that is applied to different waste and communities. Therefore, it can be applied quite differently in different regions according the local understanding by local governments. Since there was no waste levying practice applied before in China, the objection by local residents in the initial stage was rather strong, and the levying rates across regions vary significantly. Table 7 shows the charging rate among some cities as an example. Table 7 charging rate for waste tipping fee in selected cities in China City Charging rate(rmb/month) Category of the city Region Family (local resident) Individual (temp. resident) Beijing 3 2 municipality directly under the Central Government East China Chongqing 8 2 municipality directly under the Central Government West China Guangzhou 5 1 Capital city of Guangdong Province South China Nanjing 5 1 Capital city of Jiangsu Province East China Hefei 1.5 Capital city of Anhui Province Central China Yinchuan 4 1 Capital city of Ningxia Province West China Nanpin, Fujian 4 prefecture-level city South China Kaili,Guizhou 1 County-level city West China Source: Wang, BY, DJ Niu, YC Zhao, 2011, Analysis on municipal solid waste fee levying system in China, The levying system can be more challenging that the effective levying rate can be rather low which means insufficient return from the levying system for MSW project may need to be seriously taken into consideration for MSW investment. Box shows the case in Taiyuan, the capital city of Shanxi Province. Box 3. The payment in arrears of waste-fee levying system in Taiyuan On August 31,2009, the Taiyuan Bureau of Environmental Protection published a fact book of payment in arrears of MSW disposal fee. According to the fact book, Taiyuan municipal government should have received 78 million yuan of MSW disposal fee based on its population in the past year. However, the government only received 45 million yuan. The payment in arrears amounts to 42% of the total fees. Taiyuan kicked off the waste-fee levying system from the December of According to the regulation, any government department, institute, business association, business unit, and resident living in the municipal region are required to pay for the waste collection and disposal services. Government and business units, school and institutes are charged at RMB 105 /ton, while municipal residents are charged at RMB 5 /Family per month. But many business units have default the payment ever since the first day of the waste-fee 25

32 levying regulation launched. In 2008, there were about 40% business and resident units, including shops and individual residents, failed to pay for their waste disposal fees. Even after the publication of the fact book and the efforts of recovery, there were still 800 more business units having payments in arrears, amounting to 10 million Yuan of payment receivable. However, at the state level, the central government has strong commitment for the development of the industry. In 2010, the state council released the Decision on Accelerating the Development of New Strategic Industries. According to the State Council s Decision, emphasis at the current stage will be placed on developing seven emerging industries in the fields of energy saving and environmental protection, bio-tech, advanced equipment manufacturing, new energy, new materials, etc. Efforts will be made to raise the share of these industries in GDP to about 15% by Based on this decision, the government will take great efforts to build a sound fiscal and financial policy support system in a bid to support, guide and encourage the input of social capital, including private and foreign capital, to invest in these focal industries. Also in the newly issued The 12th 5-year Plan for State Economic and Social Development in 2011, the government is committed to develop new recycling energy projects, promote sustainable pattern of economic development and restructuring, and take more efforts on environment protection. The proportion of non-fossil fuels in primary energy consumption should reach 11.4 percent; energy consumption and CO2 emissions per unit of GDP should be reduced by 16 percent and 17 percent, respectively; the release of major pollutants should be reduced by 8 percent to 10 percent. Accordingly, local governments also formulate their regional strategic plans similar to the state 12th 5-year plan. Both local and state plans for the next 5 years simultaneously emphasize the expectation for burgeoning investments and strong government support in new energy, new material, and environmental protection projects among which waste management sector is just at the nexus in the focal industries. Energy Policies Besides the state 12 th 5-year plan and the state council decision on accelerating the development of new strategic industries which show strong preference to new energy industries, there are several major Acts and regulations consist of the body of energy policies towards MSW energy projects Renewable Energy Act Trial Guidelines on renewable Power Generation Price and expense Management Guideline of Renewable Energy Electricity Generation Method to Recognize National Encouraged Resource Comprehensive Using Implementing Regulations for the PRC Enterprise Income Tax Law Amendment to the Renewable Energy Act On February 28,2005, China passed the Renewable Energy Act. It is one of the largest statesponsored commitments toward renewable energy made by Chinese government. The state government imposed a national renewable energy requirement that is expected to boost the use of renewable energy capacity up to 10 percent by the year The renewable energy law stipulates requirements in industry development and technology support, renewable energy promotion and 26

33 application, price management and cost sharing, economic incentive and supervisory measurement, etc. According to this law: - Chinese government encourages economic entities of all ownerships to participate in the development and utilization of renewable energy and protects legal rights and interests of the developers and users of renewable energy (Article 4). - The government encourages and supports various types of grid-connected renewable power generation (Article 13). - Grid enterprises shall enter into grid connection agreement with renewable power generation enterprises that have legally obtained administrative license or for which filing has been made, and buy the grid-connected power produced with renewable energy within the coverage of their power grid, and provide grid-connection service for the generation of power with renewable energy (Article 14). - The price authorities of the State Council will determine the grid power price of renewable energy generation in favor of development and utilization of renewable energy (Article 19). The excess expenses between the purchase of renewable power and conventional energy shall be shared in the selling price (Article 20). - Grid connection expenses paid by grid enterprises for the purchase of renewable power and other reasonable expenses may be included into the grid enterprise power transmission cost and retrieved from the selling price (Article 21). - The Government budget for renewable energy development will support: (1)Scientific and technological research, standard establishment and pilot project for the development and utilization of renewable energy; (2) Construction of renewable energy projects for domestic use in rural and pasturing areas; (3) Construction of independent renewable power systems in remote areas and islands; (4) Surveys, assessments of renewable energy resources, and the construction of relevant information systems; (5)Localized production of the equipment for the development and utilization of renewable energy (Article 24). - Financial institutions may offer preferential loan with financial interest subsidy to renewable energy development and utilization projects that are listed in the national renewable energy industrial development guidance catalogue (Article 25), and the Government grants tax benefits to projects listed in the renewable energy industrial development guidance catalogue (Article 26). On December 26, 2009, China made some minor changes to this law and put it into effect on April 1, The changes include somewhat more national oversight of the preparation of sub-national renewable energy development and utilization plans, and a more explicit recitation of what should be considered in the preparation of such plans (Articles 8 & 9). Perhaps the most significant change is in the penalty section. In the original law, electric grid companies, natural gas and heat pipeline companies, and gas-selling enterprises that fail to purchase or accommodate renewable sources of power or fuel are liable for compensation. The energy authorities of the State Council or local people s government at the provincial level shall order them to correct the situation within a stipulated period of time; if they refuse to correct the situation, a fine of up to double the amount of economic loss shall be imposed against them (Articles 29 to 31). The original law limited the maximum fine to no more than the actual amount of the economic loss. In general, the amendment is quite minor and keeps most part of the previous version unchanged. In particular, it still emphasizes the fact that the state grid companies shall 27

34 purchase all power generated by renewable energy sources. But be aware that the law indicates the usage of government budget for renewable energy projects which is more preferential for domestic equipment manufacturers (Article 24, 5). Since most MSW projects are public financed and government sponsored, the domestic purchase policy for equipment manufacturers may be a challenge for foreign partners. In2006, the National Development and Reform Commission intensively issued three regulations after the renewable energy law: Trial Guidelines on renewable Power Generation Price and expense, Management Guideline of Renewable Energy Electricity Generation, Method to Recognize National Encouraged Resource Comprehensive Using. They more specifically stipulate who are eligible for the policy, how to implement the renewable energy pricing and expense sharing plan, etc. In 2008, the Implementing Regulations for the PRC Enterprise Income Tax Law clearly put waste disposal enterprises into the favorable categories in which the enterprises can enjoy an income tax exemptions in the first three years from the year they generate profit, and enjoy a half income tax induction in the consequent three years. All these policies require that the electricity generated by the energy source will not enjoy the favorable policies if the conventional energy source takes more than 20% in the mix. This means that incineration plants or other waste-energy power generation projects cannot count much on conventional inputs even when they are sometimes necessary. In particular, for waste incineration plants, they are not allowed to add more than 20% conventional combustion adjuvant when the waste heat value is not sufficient high. Based on the policies, every province determines its own electricity price for renewable energy generator. Table 8 shows the electricity purchasing prices by the state grid for waste incineration and conventional power in different regions in China. The Pearl River Delta region and Yangtze River Delta region have the highest purchasing price by the state grid for the electricity from incineration. Guangdong, Shanghai, Zhejiang, and Jiangsu have an average RMB 0.66 Yuan/kwh for electricity from incineration energy plants, while inland provinces, like Sichuan, Guizhou,Yunnan, have lower prices as 0.58, 0.51, 0.50 Yuan/kwh. Table 8 Electricity prices for waste incineration and conventional power in different regions Region Incineration Power ( RMB/kwh) Conventional Power (RMB/kwh) Shanghai Zhejiang Jiangsu Sichuan Hebei Henan Anhui Hubei Hunan Jiangxi Guizhou Yunnan Qinghai Guangdong Guangxi Fujian

35 Hainan Chongqing Ningxia Shaanxi Shanxi Shangdong Source: Collected by the Authors Notes: Data in this table are compiled by the author based on available information in 2007.Some provinces are missing in this table. Foreign Investment Policies In this part, we discuss foreign investment policies that may be relevant for new projects in MSW management sector. These policies are not formulated particularly for foreign investment in waste management sector, but they can be involved if the investor or the project satisfies certain requirements. In general, foreign investment policies will regulate two major aspects: market access and policy incentives. Though foreign invested companies will not be able to enjoy the tax incentives as they would have before December 1 st, 2010, they are still encouraged to invest in green industry in general and waste treatment industries in particular. One of the most important policy is the Foreign Investment Industrial Guidance Catalogue (2007 version) jointly issued by the National Development and Reform Commission and Ministry of Commerce on October and being effective as of December This catalogue guidance has redefined industries into which foreign investments are encouraged, restricted or prohibited. That is, the catalogue defines a definitive list of industry sectors or technologies that are welcome, unwelcome or even closed to foreign investments. Those not appearing in any of the three categories are considered permitted and are neutral to foreign investments. While investing in an encouraged industry/technology does not necessarily mean the end of all the hurdles and concerns for a foreign investor, it does have some notable benefits. With current regulatory regime, Encouraged foreign investment projects may enjoy certain tax incentives and be subject to less onerous approval requirements. The tax incentives may include: Equipment imported for own use within the total investment amount of the project will be exempt from tariffs and import-stage value-added tax Foreign investors may claim a refund of value-added tax for purchasing domestically-made equipment within the total investment For the approval requirement, Encouraged foreign investment projects are more likely to be approved by local governments. Only projects with investment amount over USD $100 million are required to be approved by the central government if the project falls into encouraged category, while the threshold will lower down to USD $50 million when the project is restrict. Approval at a lower-level government is at large preferred, since it normally entails simplified and more flexible procedures which is less timeconsuming and costly, and more easier access to approving officials than would be the case in a national approval process. There are several waste management related industries falling into the Encouraged category in the 2007 version. They are: Special Equipment Manufacturing - Development and Manufacturing of Pollution control equipments 29

36 - Manufacturing of City Waste disposal equipments for Comprehensive Utilization of Rural organic waste - Manufacturing of waste plastics, electronics, rubber, battery recycling equipments Electric Machinery and Equipment Industries - Manufacture of the equipment of New energy electricity-power (limited to joint ventures and cooperative joint ventures: waste-to-energy generation, etc. - Manufacture of biomass drying pyrolysis system, biomass, gasification unit Machinery industries for Instrument and Meter, Culture and Office - Manufacture of new-tech equipment of environmental-protection testing instrument. On April 1, 2011, the PRC National Development and Reform Commission (NDRC) released an amendment to the Foreign Investment Industrial Guidance Catalogue (Draft Catalogue) for public comment. Retaining the above industries in waste management in encouraged category, several new waste-disposal related industries are added into the Encouraged catalogue. They are: - Recycling of construction waste materials, industry by-products and non-metallurgical mining byproducts and restoration of the environment - Air pollution control, industrial waste, and gas and diesel engine emission treatment equipment - Waste water treatment equipment - Solid waste treatment equipment - Recycling of used fabrics, electronic and machinery products, tires, plastics, batteries and scrap steel Pursuant to a State Council issued Opinion on Perfecting Work in Utilizing Foreign Capitals (GUOFA *2010+ No. 9) issued on April 13, 2010, the following new policies are provided for projects listed in the encouraged category. Land use price can be reduced to aslow as 70% of the local benchmark price. Simplified high and new technology enterprise reorganization proceedures. Expand local governments authority to approve investments in encouraged or permitted industries from below US$100 million to below US$300 million in total investments or newly added capital. The Annex 2 lists all the recent relevant policies associated with waste management sector. 30

37 Chapter 6 Entry Modes in China s Waste Management Sector 6.1 Entry barriers in waste management sector Establishing new operation in waste management sector in China may have daunting entry barriers out of expectations. On the one hand, these barriers protect potential profit margin from dilution by new entrants, on the other hand, they do make the investment bear higher risk of failure in the emerging sector. Barriers of entry into the waste management sector can come from technology, finance, policy, institution, and culture. Technology barriers Technology barriers stem from the increasing concern on environmental protection and energy efficiency, and are set up by the technical standards and requirements for waste treatment facilities. As we elaborated in previous section that Chinese government has issued and amended a series technical standards or ordinances which are stringent and comparable to international standards, suppliers from EU countries may enjoy a considerable profit margin through their technology advantages developed under those more stringent systems. However, EU suppliers have to be aware that the technology barriers may not be lasting due to the catch-up efforts in technology of their Chinese indigenous counterparts. Chinese domestic suppliers grow up rather quickly in the past 10 years. Many of them have set up joint labs with universities and research institute to develop technologies. With the strong support by the government in relevant technology development, Chinese suppliers quickly stride the technology barriers and enter the market. Currently one out of three incineration projects is equipped with furnace made by Chinese domestic company for instance. Box 4. GEE s control over dioxins with new technology outperforms the standards of China and EU Beijing China Sciences General Energy & Environment Co, Ltd. (GEE) is one of the leading Chinese domestic manufacturers of waste-to-energy equipment. It was founded in 1987 and was originally fully owned by the Institute of Engineering Thermo Physics of Chinese Academy of science. In July, 2001, the company became one of the holding subsidiaries of China Sciences Group (Holding) Ltd. through the organizational restructuring of China Academy of Science. By the strong technical support 31

38 of China Academy of Science, GEE have developed fast in the waste-to-energy market with strong capabilities of R&D in relevant technology, engineering design, and project operation, etc. The company has successively obtained 35 patents in the fields of circular fluidized bed (CFB) combustion technology, comprehensive incineration treatment technology of solid waste, technology of flue gas de-dust, de-so2 and de-nox, etc. In 2010, GEE jointly developed a dioxins block technology for MSW incineration with RCES(Research Center for Eco-Environmental Sciences, Chinese Academy of Sciences) and Zhejiang University. Examinations of the flue gas sample by the new tech shows that the dioxins in flue gas content was in the range between 0.007ng-TEQ/Nm3 to 0.06 ng-teq/nm3, with an average ng-teq/nm3. Dioxin content in all samples substantially outperformed the national standard (1 ng-teq/nm3) and the European Union standard (0.1 ng-teq/nm3). This indicates the significant technology progress made by GEE dioxins emission control in circulating fluidized bed waste incinerators. Financial barriers Waste management project in general requires a large amount of initial investment. Small scale companies may be involved in some parts of the investment, but they are not able to afford the whole project and take the responsibility of building and operation in a rather long period of time. MNCs with strong financial resources have the advantage over financially constrained company in the waste management sector. Since waste management sector is regarded as a public service by the government and is firmly regulated by the state and local governments, the governments are not allowed to have those projects with a higher internal rate of return(irr) (Macomber, etc, 2011). For example, the wasteto-energy businesses in China had their rates of return capped at 8% as many of those in other public service sectors. This means the average payback period for the project could be longer than many other business projects in sectors not regulated as the waste management sector. The prolonged payback period can be a heavy burden and potential risk for financially constrained companies, undermining investors confidence in investing in the sector and intimidating potential entrants. However, with Chinese government s strong commitment of developing green industries, many venture capitals rushed into China and provided easier access to financial capital for Chinese companies in this sector. In 2009, Chinese companies raised USD$331 million in venture capital investment in eight sectors: energy generation, materials, transportation, recycling, agriculture, energy efficiency, energy storage and wastewater. Nearly half (47%) of all the cleantech companies that went public worldwide in 2009 were in China. Report by CleanTech. Group shows that the rise of funds formed onshore in China is significant in recent years. Denominated in RMB, industry sources indicate: National Development and Reform Commission (NDRC) counterparts have approved 90 RMB funds since In 2009, RMB funds raised RMB128 billion to invest in China, up 227% from Average fund size RMB1.65 billion ($240 million). In 2009, RMB funds constituted 89% of all VC funds raised for China. a number of foreign VC funds that are active in China have already set up RMB funds. Major PE funds including Blackstone and Carlyle have announced plans to establish domestic fund operations in China. The participation of venture capital and funding organizations will lower down the financial barriers for new entrants to enter the market. Policy barriers 32

39 Policy barriers for foreign investor concentrate on the market access and exit issues. The Foreign Investment Industry Catalogue sets forth permitted ownership levels and forms of foreign investment in China (see foreign policies in previous part). FDI in several industries, such as pollution control, waste disposal, recycling and environmental protection equipment, are in the "encouraged" category, which generally means that FDI in such areas may be offered simpler and quicker investment approvals by local or provincial authorities. Biofuel production, in contrast, is a category restricted to FDI and thus requires provincial or central government level approvals, depending on the size of the investment. In addition, there are restrictions on the level of foreign ownership that may impact investment in certain sectors. A clean development mechanism (CDM) project, for example, may only have a maximum of 49% foreign ownership, unless the foreign party is a Hong Kong company. FDI in new energy power generation equipment or key related equipment manufacturing may only be undertaken as a Sino-joint venture: photovoltaic, geothermal, tidal, garbage and biogas power generation, and wind power generators of 1.5 MW or more are all falling into this category. Other sectors for example, water, environment and public facility management - require that the Chinese party in a joint venture hold the majority of the shares. This means partnership or cooperative joint ventures are preferred entry modes for foreign investors over wholly-owned subsidies. Meanwhile, with the effect of the Principles on the Merger and Acquisition of Domestic Enterprises by Foreign Investors ( M&A Rules ) and related rules promulgated by the State Administration for Foreign Exchange (SAFE) of PRC, Foreign direct investment instead of offshore controlling is in many cases the only available structure for investing in a Chinese business. It is not allowed by the M&A Rules to make round-tripping investments as it was used to restructure China domestically-owned companies into offshore holding companies controlling domestic operating subsidiaries. Institutional barriers Lack of transparency and weak contract enforcement are the most blamed points in China s business institution that foreign investor need to be aware of. Lack of transparency will deter potential entrants by making them unable to predicate the costs and risks that may happen in the investment. This is particularly true in those tendering projects. According to the Comments on promoting municipal solid waste treatment that was issued in 2011 by the State Council, new waste management projects should have public tenders for equipment or service suppliers. But foreign investors at times find it difficult to get the public information on the tender itself. And even when joining the tender, they find the selection and decision process is sometimes quite vague. New entrants have to learn and adapt to the practice and pay extra costs for the adaption. Weak contract enforcement can also be a problem for new entrants. This can happen when foreign investor is trying to protect themselves from being held-up by partners, suppliers, or customers according to contracts. Even after the investors win the tender and enter into the contract, they are still exposed to the risk of being held up by components suppliers, customers or sometimes even government agents or state-owned companies. Some recommendations for overcome the institutional barriers include: Founding some cooperative partnership with local companies who are more capable of dealing with problems stemmed from the institutional problems; Making clear and detailed contracts with your partner, suppliers, and customers, etc.; Registering and protecting your appropriable asset through patents or trademark; 33

40 Learning and adapting to the institution. Culture barriers Foreign investors when entering the waste management sector in China are going to face the culture barriers which severely intensify their liabilities of foreignness in China investment. The culture barriers can reflects in the different understanding on waste management, different attitude and behavior on waste disposal, different knowledge on pollution control and waste recycling, etc. These differences have explicit and implicit influences on all aspects in the operation of waste management project. For instance, the resident s different attitude towards waste sorting and minimization will cause significant different composition of MSW in China and in EU countries. Also the different knowledge on pollution control and waste recycling may cause misunderstanding and objections by the local residents and seriously affect the site decision or maintenance costs of the project. Box 5. Recycling Industry Entry Barriers Umicore Precious Metal Refinery Attempts to Enter China Umicore is a leading global company with strong material technology. The Chinese name of Umicore is 优 美 科. 优 (U) means excellence or best quality as the principle ; 美 (Mei) stands for to beautify life, as materials for a better life ; 科 (Ke) means technological innovation. Umicore has a long presence in China ever since Umicore Precious Metals Refining (UPMR) based in Hoboken is one of the business units of Umicore, and is one of the world s largest precious metals recycling facilities. It operates as the leader in the business of recycling complex waste streams containing precious and other non-ferrous metals. However, UPMR is lagged behind in cooperation with China comparing to other business units in the group. UPMR had tried to tap China by looking for local partners, contacting local governments, and even discussed with China ambassador in Brussels. UPMR once made significant progress in the contract with Huawei, but unfortunately the contract was cancelled in the end. UPMR is still handicapped by some barriers. UPMR s difficulties center on the metal waste supply. UPMR has the design capacity of processing around tons of solid metal wastes such as e-scrap, catalysts, tankhouse slimes, and can refine them into more than 200 kinds of precious metals in their Hoboken based plant. Sufficient and qualified waste is critical for UPMR s operation because UPMR needs to model the content of feed materials with accuracy to optimize the metal outputs and handling costs. However, in China, UPMR can hardly find a suitable waste supplier who can provide appropriate feed materials. MSW in China are largely collected by individual waste pickers or small-scaled recyclers who exchange the waste for a living. UPMR cannot pay them without arraying the content of the waste. Both the quantity and quality of the waste cannot meet the requirement for sampling and assaying in China. In addition, it is not allowed for UPMR in China to collect and export the waste by itself so that UPMR can have sufficient supplies from China. The two main hurdles that UPMR faced to enter the Chinese market are: 1. The poor quality of waste supply due to the unorganized waste management system slow down UPMR s progress in setting up projects in China 2. It s hard for UMPR to get permission from the Chinese government to collect waste and 34

41 export to Europe. However, UPMR does not give up the efforts of cooperation with China. They have already formulate several strategies in the near future: 1. UPMR will try to formalized the waste collection business and integrate it with UPMR business. The difficulty is that they couldn t pay the individual or recyclers in advance for the metal waste because UPMR have to assay the sample to know the content first. This is based on the UPMR business model. UPMR s challenge is to adapt their business models to China situation. 2. UPMR will try to find the suitable partner that has connection with the local government. This is important to have a permit of the operation and to secure the sustainability of the company in China. Once UPMR have partnership with local company, it is easier to get permission from local government. The challenge for UPMR is to select the right partner. World Bank (1999) suggested a typical implementation plan for developing new waste management project in developing countries to mitigate the risks and costs. The project implementation cycle involves three major phases: feasibility assessment, project preparation, and project implementation. Involvement of the public is crucial throughout the project cycle. The public participation may be useful in dissolving public resistance to the project. Reevaluation for feasibility is also required at the end of each phase. Figure 14 gives the chart flow of the implementation process. Feasibility study should be conducted in two stages: preliminary and comprehensive. The preliminary assessment can be based on existing information, for instance the relevant data from public statistics or literature. The comprehensive assessment will involve the collection of local data, a detailed study of project finance, environmental impact assessment, etc. All aspects of the entry barriers should be taken into consideration in feasibility study. In project preparation phase, an appropriate organizational form must be established. Also, the institutional framework of the facility must be clarified early on. The project organization will develop appropriate agreements with potential partners regarding financing, intermediate input, customers, environmental impact assessments. Also, as the legal entity, the organization starts to prepare documents for tendering. The role of the project organization during implementation stage will depend largely on the affiliation of the facility. If the facility is fully-owned by the foreign investor, the project organization must monitor project progress and control the fulfillment of all obligations. For a joint venture or publicly owned facility, the project organization will have to not only monitor and control the progress of implementation, but also establish a management team and train the staff ahead of commissioning the facility. 35

42 Figure 14 Typical implementation plan Source: World Bank (1999) 6.2 Entry modes in waste management sector in China There are two types of entry modes for entering a foreign market as suggested by literature (Shapiro, 2007): equity entry and non-equity entry. Non-equity entry involves export, distributorship, licensing, franchising, etc., and is without equity investment in the operation in host country. In contrast, equity entry includes equity joint ventures, wholly owned subsidies, etc. in which the investors have equity 36

43 ownership in host countries. The choice of entry modes depend largely on investor s previous experience and knowledge on the host market, and the policies that regulate foreign investment into the market as well. As with waste management sector, foreign investments are encouraged by the national and local government on the one hand, they are highly regulated in some industries on the other hand. In the regulated industries, such as waste-to-energy projects, wholly-owned private investment is not allowed by Chinese government. The entry modes by foreign investors are limited to joint ventures, cooperative joint ventures, public-private partnership etc. This is also the case in many other sectors due to the government role in the public service, such as sewage treatment project, landfill project, incineration project, etc. Therefore, in this section, we first discuss some common entry modes into foreign market, then focus on the public-private-partnership mode of entry into the waste management sector in China Common entry modes to China Distributorship Distributorship is the entry mode that foreign investor use Chinese local distributor to sell their equipment and services. Distributorship is preferred when foreign investors who are willing to sell their products or services to Chinese customers have less knowledge and experience in Chinese business or have potentially higher entry costs and risks in direct investment. The distributorship has following advantages Limited investment that investors do not have to invest in fixed assets in China; Easy access to the market where distributor provides market coverage at low costs and low risks; Better local warehousing, transportation, distribution, and after-sale services; Flexible strategies in which distributor bears most of the risks; It also has the disadvantages: Higher unit costs (transportation costs, duties, insurance, etc) Less brand awareness in Chinese local market; Limited knowledge on China context Insufficient after sale support due to insufficient training for distributors Box 6. Hitach earns new project in China Hitach Zosen Group is one of leading manufacture of incineration technology in Japan, and has been exploring China market since very recent year of In early 2011, it engaged in building a stoker type waste incinerator facility with capacity of 800 tons per day on behalf of CAGT Engineering (Beijing) Co. Ltd. CAGT Engineering (Beijing) Co. Ltd. won the tender of incineration project of Nanchong government in Sichuan Province. Hitachi Zosen will provide design services and key equipment such as fire grates, as well as technical services including on-site engineers to supervise the installation process. Joint Venture Joint venture is the most regular entry mode taken by foreign investor when entering Chinese market. Binding together with local partner, a foreign investor can leverage its expertise through local resources of the Chinese counterpart party. It is also applicable for waste management sector. 37

44 There are two kinds of joint ventures: equity joint venture and cooperative joint venture. The difference is that equity joint venture is an independent company whose shares are clearly defined and owned by foreign investors and the Chinese partners, while cooperative joint venture is a joint activities between Chinese and Foreign partners companies without the necessary creation of separate legal entity, and the profits or losses will be shared among partners according to some agreement instead of stakes that each party owns. Although the cooperative joint venture can be registered as a limited liability company similar to an equity joint venture, the cooperative joint venture is often established because of the incentive of using the business license of the Chinese partner to enter the market. And the participation of each party is arranged by contracts (Shapiro, 2007) where there is no minimum foreign share requirement in this mode, and the contribution of each party may or may not be monetary. The advantages of joint ventures are: Benefit from local partner s knowledge; Shared costs/risks with partner; Reduced political risk; Quick access to the local market The disadvantages of joint venture are: Lack of control (conflict in interest with partners); It may help potential competitors; Long-term validity is of question; Hard to integrate knowledge and culture from both sides. Wholly Owned Foreign Enterprise If policy permits, wholly owned enterprise is preferred by foreign investor when they have enough knowledge and resources in operation in Chinese market. Though it is the most expensive way of entry, WOE enjoys the full control over the management and culture consistency with headquarter in home country. The WOE in home country can be a greenfield investment or through merger and acquisition. The advantages of WOE are: No risk of losing technical competence to a competitors Tight control over operations Consistency with headquarter in quality and standard Realize learning curve and location economies. The disadvantage of WOE are: Very expensive; Bear full cost and risk. Box 7. Vyncke s Wholly-Owned Enterprise in Suzhou Vyncke is a 4 generation global family business with its roots in Belgium. It designs and builds energy plants that produce green and clean energy burning biomass and solid recovered fuel to produce thermal energy. Early in 1995, Vyncke has found a big market in China. According to Ivo Lavens, the General Manager of the company s Suzhou plant, every year, 600 million tons of agricultural waste 38

45 are disposed of when they could be turned into a source of clean and reliable energy, provided the right technology is used. Vyncke s vast experience in combustion technology, boiler construction, related automation and control systems, enables it to convert waste into clean energy solutions. Vyncke started discovering China in 1995 by delivering installations through big German contractors who were building turnkey factories in China, including energy generation facilities. Soon after that, Vyncke began attacking the Chinese market directly. The company settled for China because of the huge market potential there after holding a brainstorming session on how to expand production outside the euro zone, though the company s management also considered countries like Mexico and Thailand. In 2000, Vyncke set up a sales office in Beijing. At one point between 2000 and 2004, 50% of Vyncke s worldwide turnover was being generated in China, due to surging investments in woodbased panel factories. We expect another peak period very soon, though this time in the utility industry, using agro-waste as an energy source, said Ivo Lavens. In 2004, the Beijing office moved to Shanghai to bring it closer to its customer base. In the meantime, Beijing is once more gaining in importance, as Vyncke is now targeting institutions and administrations that will decide whether or not to build dozens of biomass energy plants in the coming years. Local governments have started issuing licenses for such plants, in line with the recently adopted Renewable Energy Law. Although Vyncke is primarily an engineering company, it produces about 20% of its energy plants by itself, outsourcing the rest. The company now has production facilities in three countries: Belgium, the Czech Republic and China. In 2006, it decided to build a plant in Suzhou. Construction was completed within a year under the supervision of Dieter Vyncke, and Vyncke (Suzhou) Clean Energy Technology was officially inaugurated on June 5, 2007, the exact date of Dirk Vyncke s 60th birthday. The quality of the facilities built in Suzhou is the same as those in Harelbeke. The core competencies of Vyncke (Suzhou) are manufacturing and sourcing for the global market, but also covering sales within China. Our current priority is to further develop the Chinese market, said Ivo Lavens. Sourcing is also part of engineering, because you need to know what skills are available locally to guarantee a cost-effective engineering process. Vyncke (Suzhou) is a wholly-owned foreign enterprise in which Ivo Lavens is the only expatriate. An expat manager s job is to ensure that daily operations are in line with the company s global policies and Vyncke s core values, he went on. Expats need to play a sustaining role, leading from below, not from above, he stressed. Source: FCCC Member Portrait in China (2009) Public-Private-Partnership in waste management sector of China Public-private-partnership (PPP) is an entry mode that private investor establishes a partnership with government or public entity to jointly develop a project, and sometimes is the only available entry mode in specific industry. In waste management sector, government tenders at times stipulate that private bidders should provide equipment or services on the basis of BOT or BOO mode to join the PPP with local government. The motivation of government to join PPP can be: Government may be short of financing, and is willing to attract private capital into the project with the compensation from service fee for that private entities render; Private sector is more efficient in build and operate the infrastructure than government agencies; 39

46 PPP can be a catalyst for sector reform. There are several options available in PPP for consideration. Each presents different characteristics to be assessed. The basic PPP contract types are: Service contracts; Management contracts; Build-operate-transfer (BOT) and similar arrangements Joint ventures Each PPP option implies different levels of responsibility and risk to be assumed by the private or foreign operators, together with differences in structures and contract forms. Table 9 summarizes some PPP modes. Table 9 Summary of major PPP modes Attributes Service contract Management contract BOT BOO scope Multiple contracts Management of entire Investment in Investment in and for a variety of operation or a major and operation of operation of a support services component a specific major specific major component, or component, or the the entire project entire project Asset Owership Public Public Public/Private Private Duration 1-3 years 2-5 years Varies Varies O&M Public Private Private Private responsibility Capital Public Public Private Private investment Commercial Risk Public Public Private Private Overall level of Minimal Minimal/Moderate High High risk assumed by private partner Competition Intense and ongoing One time only; contracts One time only; One time only; not usually renewed often negotiated often negotiated without direct without direct competition competition Special Features Usefull as part of Interim solution during Mobilizes Ownership not strategy for preparation for more investment transfer to public; improving efficiency intense private finance; Develops Mobilizes of public company; participation local staff investment finance; Promotes local Develops local private sector staff; relative development autonomy; Problems and Requires ability to Management may not Does not Bear more risk than Challenges administer multiple have adequate control necessarily BOT; less contracts and strong over key elements, such as improve commitment for enforcement of budgetary resources, staff efficiency of the public company contract laws policies, etc. ongoing to stick to the operations; may contract. require guarantees Source: Amended from Asia Development Bank (2008) 40

47 Service contracts Under a service contract, the government hires a private company to carry out one or more specified tasks or services for a period, typically one to three years. The government owns the infrastructure and remain the major responsibility of providing services, but outsources part of the service to private entity. Private company joining the partnership is obliged to provide certain services at the agree cost or prices in line with the performance standard set by the government. Normally, the service contract should go through the bidding procedure and be awarded to the most competitive private bidder, and is subject to renewable condition. Service contract provides a vehicle for technology transfer and managerial capability development. Government prefers service contract at preparation stage or initial stage of operation of the infrastructure. And on the private side, private company also bears a relatively low risk because the demand is reasonably certain and no large amount of investment is required. Service contracts also have risks. They are usually short term, and allow for renewable contract which introduces repeated competition. The entry barriers are also low so that the private company has to be constantly improving its efficiency on a low-cost basis or unique competence. Management contracts Under a management contract, the government remains the ownership of the project, but outsources some or all management or operation to private companies. In most cases, the private partner provides working capital but no financing for investment. The private contractor is paid at a predetermined rate for the management and other operating costs. Sometimes, private contractor can share part of the profits according to the agreement with the government. Figure 15 illustrates the structure of a management contract. Regulation: Tariff setting Service standards Environmental Monitoring Investment&subsidy Government Reporting Public service provider Approvals Tariff Management Private Operator Figure 15 The structure of a management contract Source: Asian Development Bank Management contracts usually have longer duration than service contracts, higher level of autonomy, and are not subjected to repeated competition. The private party can have its gain from operation and management without asset transfer. Also the contracts are relatively low cost as fewer staffs are dispatched to the utility from the private operator. When more comprehensive contracts and structures are necessary for the utility, management contracts can easily adapt to new arrangements. 41

48 However, the split between the ownership and the obligation for service and management can be a potential risk. Private operator when manage the utility may have conflicts with the government owner on decisions on budgetary or staff policies which make it difficult for the operation by private partner. BOT (Build operation transfer) and BOO (Build-Own-Operation) BOT and BOO are the kind of arrangement that a private entity or consortium finances and develops a new project according to the requirements by the government. The private partner provides the capital investment to build the new facility, owns and operates the assets for a period of time in which BOT transfers the ownership in the end of the operation while BOO retains the ownership. Under BOT mode, the private investors are responsible for the construction, operation, maintenance in the period of operation during which the private investors have access to the equipment and are permitted to recover the investment from the operation. When the term in the contract expires, this program will be transferred to the local government. Similar to BOT mode, private investors under BOO mode are also responsible for the building, operation, maintenance of the project, and will recover their investment from the fees collected from customer or paid by the government. The difference is that BOO mode will charge the government for the service they provide at an agreed tariff during the operation, and allows private investors own the project after the termination of the contract. In both modes, private partners will bear the cost and risk of capital investment, and take the full responsibility of design, build, operation and maintenance during the contract period. The selling price of the output from the project is set by the agreement with government. Private partners may enjoy the natural dominance in the market with constant or increasing demand, or suffer from overestimated demand proposed by the government. Figure 16 illustrates the BOT contract structure Government/Public Utility Eventual Return of Investment Private Developer Capital Investment Revenues BOT Services Tariffs Consumers Figure 16 The structure of a BOT contract structure. Source: Asian Development Bank,

49 Box 8. PPP model in Wenzhou Wenzhou, renowned for its strong position in private sector in China, hosts a local-born headquarter of Weiming Environmental Protection Engineering Corp. which is one of the leading Chinese incinerator manufacturer in waste-to-energy sector. Wenzhou city, located in the southeast region of Zhejiang province, generates 400 thousand tons MSW per year, and has an annual growth rate of MSW between 8% and 10%. Most of the MSW are disposed into two landfills which were approaching their capacity limits. In 2002, the local government decided to take a PPP with the local private contractor, Weiming Corp, through the BOT model to build and operate a new MSW-to-energy incinerator plant. Weiming Corp. would invest a total of RMB 90 million in phases to build and operate the plant, and would take the responsibility of management, operation, maintenance of the plant for 25 years (excluding a 2-year construction period). At the end of the period, the plant would transfer to the local government without any additional compensation to the company. The incinerator plant has a design capacity of 320 tons MSW per day, and electricity generation of up to 25 million KWH annually. In the first phase, the plant would be able to treat 160 tons MSW per day, and generate 9 million kwh a year of which 7 million kwh would be available for sale. According to the new renewable energy law, the electricity from the incineration project could enjoy a favorable price at RMB 0.66 yuan/per KWH while conventional power electricity could only sell at 0.54 yuan/kwh. The BOT project built by Weiming would also receive a service fee from Wenzhou municipal government for the disposal of MSW at a rate of RMB 73.8 Yuan/ton. The revenues from selling the electricity and subsidies from waste disposal fee would make the BOT project to break even after 12 years. Figure 17 shows the contract structure of the Wenzhou Dong Zhuang BOT incineration project. BOT Contract (25 years) Wenzhou Government Wei Ming Corp. Waste disposal fee RMB73.8 Yuan/ton BOT Wenzhou incineration Plant Electricity State Grid Investment RMB 90 million 0.66 yuan/kwh Revenues from electricity selling and waste disposal fee Figure 17 BOT Contract arrangement of Wenzhou Dong Zhuan incineration project 43

50 Conclusion China in the last decade experienced a surge in municipal solid waste generation. In 2004, the MSW generated in China surpassed the United States and ranked 1st in the world. With the rapid economic growth of China, the MSW generation will keep increasing with considerable growth rate. The huge amount of MSW generated in China stimulates significant demand for efficient and effective waste management. According to available data, China has made great efforts to enlarge its treatment capacity for MSW. However, there are still considerable gaps between the MSW generation and treatment. Among all provinces in China, coast line regions including Pearl River Delta and Yangtze River Delta generate the most MSW. The three provinces in Northeastern China are also among the biggest MSW generators. Central provinces next to coast line regions generate moderate level of MSW, while western China regions produce least MSWs. Meanwhile, The treatment facilities in China unequally distributed across regions. When coast line regions generate most MSWs, they also have the largest capacity of MSW treatment. Central provinces which produce moderate amount of MSWs have but limited treatment facilities, and left largest amount of MSWs untreated. Western China, though have least treatment facilities, also produce least MSWs, leading to moderate untreated MSWs. The significant pressure and problems on waste treatment and disposalcan be attributed to some inefficiency of the waste management system in China. When Europe and many other countries follow a waste management strategy with broader foundation and significant efforts in waste prevention and minimization, and try all the best to maximize the waste re-use or recycle so as to minimize the amount of waste for treatment and disposal, China has the reversal emphasis in the hierarchy that a large proportion of efforts and resources are taken for the waste treatment and disposal while insufficient measures have been taken to prevent waste generation and maximize waste re-use or recycling. Factors contributing to the ineffectiveness of the waste management system in China include poor infrastructure, unqualified labors, lack of managerial and technological expertise, insufficient local finance, low level of resident awareness and participation, etc. These leave space for potential cooperation between Belgium and China at different levels. Regarding the foreign investment in incineration industry, a subsector of MSW industry, there are four major groups of players in the market: MNCs from Japan, MNCs from Europe, MNCs from North America, and Chinese indigenous manufacturers. According to the information in 2007 collected by the authors, JapaneseMNCs take about 25-30% market share; EU MNCs take around 20%, MNCs from North American occupy 10% market share, and indigenous Chinese manufacturers take the 15%. When most MNCs cluster in Guangdong, Zhejiang, and Jiangsu Provinces which are provinces of Pearl River Delta and Yangtze River Delta, respectively, Chinese indigenous manufacturers dominate inland provinces such as Henan, Hebei, Sichuan, etc. Moreover, local based manufacturers, such as Weiming Corp. which is a Zhejiang based incinerator manufacturer, enjoyed favorable local market access and achieved rather high percentage of market share in home provinces. One challenge for potential entrants into the MSW industry is the complexity of Chinese state and local governments who regulate the industry. In general, central and provincial governments are responsible for policy formulation and project approval while municipal and local governments are in charge of 44

51 implementation. There are three major departments that are directly relevant concerning with the MSW management. The first one is the Ministry of Housing and Urban-Rural Development (MOHURD) and its subsidiaries in provinces and cities. The MOHURD is the major responsible department in government who is in charge of MSW industry management. It will lead the coordination between ministries at central government level regarding MSW management issues, and push performance-evaluation system on MSW management. The second relevant government department is the State Environmental Protection Administration (SEPA) and its provincial subsidiaries. It will be responsible for environmental evaluation on MSW treatment facilities, formulating technical policies and standards, and monitoring pollutant emission control. The third government department is the National Development and Reform Commission and its subsidiaries. It is majorly in charge of national or regional planning in MSW construction projects, and adjusting policies in cooperation with the former two departments. Every new project proposal cannot be proceed to next step unless it is approved by the Development & Reform Commission at municipal, provincial or state level according its scale and investment category. Whether the MSW project in China is worth investing depends much on the impacts of national and local policies which regulate the industry. Five categories of policies are relevant, that is, technical policies, industrialization policies, new energy policies, and policies for foreign investment in municipal solid waste management industry. There are several trends need to be noticed. First, technical policies have been getting more stringent in the past decade. China has launched or amended many technical standards for MSW industry which are more internationally comparable to the standards of USA and EU. Second, China shifted more emphasis on development of new energy and green industry through the enactment of laws and regulations, such as Renewable Energy Act, China Environmental Impact Assessment Law, etc. And the new 12th 5-year development plan ( ) reiterated the focus of development of green industry in a sustainable way. Third, though foreign invested companies will not be able to enjoy the favorable tax reduction or exemption program as it would have before December 1st, 2010, they are still encouraged to invest in green industry in general and waste treatment industries in particular. Tax refund or exemption for domestic purchase is available for encouraged foreign invested companies. And simplified approval procedure will be applied to encouraged foreign invested companies as well. As with waste management sector, many sub-industries are highly regulated by the government that foreign wholly owned enterprises are not allowed, such as waste-to-energy projects. Therefore, besides those common entry modes which include distributorship, joint venture, and wholly-owned enterprise, public-private partnership is the alternative option for foreign investment. There are several modes available in PPP for consideration: service contracts, management contracts, BOT, BOO, etc. Each presents different characteristics to be assessed. Foreign investors have to carefully examine the attributes of the project and local partner to choose appropriate entry mode for their investment in the MSW sector in China. 45

52 Annex 1 Technical standards for MSW landfills Name of the Standards CODE Standard for Pollution Control on the Landfill Site GB of Municipal Solid Waste Technical specifications for operation and CJJ maintenance of municipal domestic refuse sanitary landfill Technical code for municipal solid waste sanitary CJJ landfill closure Technical code for liner system of municipal solid CJJ waste landfill Technical code for sanitary landfill of municipal CJJ domestic refues Technical standard of environmental monitoring of CJJ/T solid waste landfill sites Technical requirements of environmental GB/T monitoring of solid waste landfill sites Standard of assessment on non-hazardous disposal CJJ/T of municipal solid waste landfill Geomembrane liner for municipal solid waste CJ/T sanitary landfill Disk tube reverse osmosis membrane facility for CJ/T the leachate The construction standard of environmental MOC/NCEC 2001 monitoring of solid waste landfill engineering Source: Xu Haiyun, China Urban Construction Design & Research Institute 46

53 Annex 2 Laws and regulations regarding MSW management in China Category Laws & Regulations Issuer Issue Year Standing Committee of Environmental Protection Law of PRC the National People s 1989 Congress Standing Committee of China Environmental Impact the National People s Assessment Law Congress 2002 Technical Policies Industrialization Policies The Technical Policy on MSW Management and Pollution Prevention 2000 Standard for Pollution Control on the Landfill Site of Municipal Solid Waste (GB ) Standard for Pollution Control on the Municipal Solid Waste incineration (GB ) Technical specification for operation, maintenance and safety of municipal solid waste composting plant (CJJ/T ) Emission Standard of Coalbed Methane/Coal Mine Gas (on trial) Notice: Establish the MSW Fee Levying system and Promote the Industrial Production of MSW Management Opinion about promoting the Industrial Production of municipal waste water and solid waste management The State Council s Decision on Accelerating the Development of New Strategic Industries - MOC - SEPA - MOST SEPA SEPA 2011(To be announced) - MOC SEPA NDRC - MOF - MOC - SEPA - NDRC - MOF - MOC - SEPA State Council 2010 Energy Policies The 12th Five-Year Plan for National Economic and Social Development Renewable Energy Act Trial Guidelines on renewable Power Generation Price and expense - State Council 2011 Standing Committee of the National People s Congress NDRC

54 Foreign Investment Policies Management Guideline of Renewable Energy Electricity Generation Method to Recognize National Encouraged Resource Comprehensive Using Implementing Regulations for the PRC Enterprise Income Tax Law Amendment to the Renewable Energy Act Foreign Investment Industrial Guidance Catalogue (2007) Foreign Investment Industrial Guidance Catalogue (Draft) - NDRC - NDRC MOF 2008 Standing Committee of the National People s Congress - MOFCOM - NDRC - MOFCOM - NDRC

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