chapter  3
22 Pages

Public–private partnership in the urban water sector of Shanghai

BySEUNGHO LEE

The chapter analyzes the extent to which commercialization of urban infrastructure in China has brought about a new way to formulate cities, with a particular focus on the water sector in Shanghai since the late 1990s. The study focuses on the evolution and progress of Shanghai’s initiative to bring the private sector into urban infrastructure development through Public-Private Partnership (PPP). This initiative has resulted from new political and economic circumstances and has had significant impacts on the improvement of urban infrastructure. In the 1990s a number of industrial cities in China started looking at options they could adopt to renovate dilapidated urban infrastructure, including water service facilities. Shanghai became one of the pioneering cities to introduce the PPP option to improve water facilities on the basis of its economic strength as well as political willingness to rectify problems remaining in the water sector. International and local water companies quickly marched into Shanghai with a strategy to take some share of the largest water markets in China in the late 1990s (Industrial Map of China 2004-2005). It was imperative for the Shanghai government to enhance urban infrastruc-

ture including water services in the reform era, because good urban infrastructure could influence household welfare, public health and sanitation, foreign direct investment and overall socioeconomic development in the city (Wu 1999). Recent observation, and findings based on fieldwork and data from 2000 to 2004, disclose that the Shanghai government had been committed to implementing reforms to improve urban infrastructure, particularly in the water sector, including the introduction of private investment. Such governmental policy was due to major challenges in urban infrastructure provision in China: “unmet demand; deficiencies in cost recovery; and inadequate maintenance” (Wu 1999). In response, private companies have taken an active part in the process of urban infrastructure development. TransnationalCorporations (TNCs) have been spearheadingPPP, although some

Chinese companies have won a few water contracts. Such transformation of ownership structure in urban infrastructure provision is unlikely to continue on a smooth path unless the Shanghai government establishes adequate institutional

frameworks for private sector involvement. It is concluded in the study that a new way of urban infrastructure development in the Shanghai water sector has been possible through the introduction of PPP. Such new development will be an unavoidable process for the rationalization of water services stimulated by the program of economic reforms initiated in the late 1970s. However, this process has been, and will continue to be, balanced and bolstered first by the government’s role in regulating privatized water services, secondly by the contribution of private companies to service provision, and thirdly by the continuous interaction between the government and private companies to achieve provision of high quality water.

The public utility sector in Chinese cities, including Shanghai, had remained “a sacred cow” even under the rapid and wide range of economic reforms since the late 1970s (BusinessChina-EIU November 10, 1997). Themonopolyof theShanghai government in the provision of water services continued until the late 1990s. Such monopoly brought about inefficient management of facilities, out-of-date management skills and technologies, and no incentive to conduct institutional reform for cost-recovery water pricing. These problems also caused losses of more than 800 million yuan (97 million US dollars) in 1999 and caused the municipal government to run out of its public fund to keep the water service system going (China Daily May 23, 2002). Confrontedwith such challenges, from themid-1990s, theShanghai government

began to consider the option of bringing in investment from the private sector. The introduction of private investment in urban infrastructure, particularly the water sector, stemmed from not only the internal factor but also an external factor. There has been a global trend in water service privatization, advocated by international development agencies such as the World Bank and the Asian Development Bank. For instance, the World Bank has pushed forward two main policies in the global water sector, particularly to developing countries: first, reforms in infrastructure in relation to the process of deregulation andprivatization; and second, environmental concerns related to water stress (Fingers and Allouche 2002). In response to such trends, in the late 1990s a radical reform of the Shanghai water supply sector was introduced. This resulted in integrating ten waterworks companies into four limited ones, covering Minhang area, Pudong area, southern city, and northern city, respectively (see Table 3.1). The Shanghai Water Authority (SWA) was also established to operate water and sewage services in an integrated way after the conversion of various water related bureaus into one in May 2000 after following the step of Shenzhen in 1993 (China Environment News December 10, 2001; NickumandLee2006). In termsof legal instruments, there are national laws related to water services, such as the PRC Water Law (1988, revised 2002) and the PRC Water Pollution Prevention Law (1984, revised 1996), which indirectly encourage PPP by promoting the protection of water resources. In Articles 6, 7, and 8, the PRC Water Law encourages entities and individuals to develop water resources and promotes the development of a water conservation industry. Article 22 in the

PRCWater Pollution Prevention Law requires enterprises to use clean production techniques for reduction of pollutants, which indirectly attractsmoreTNCs to enter the water market, equipped with cutting-edge sewage treatment technologies. The Build-Operate-Transfer (BOT) Circular in 1995 and the Catalogue for Guiding Foreign Investment in Industry in 1997 are regarded as the regulation and guideline to be applicable to PPP projects in the water sector (see Table 3.2). Even though it was reported that the Shanghai water industry began to make

profits in 2001, the Shanghai authorities came to realize the need to enhance operational and management efficiency concerning the accumulated deficit of

water sector services over the previous two decades. Chi Jianguo of the Shanghai WaterAssets Operation and Development Corporation commented, “To break the monopoly is the first step in reform.Wehave to import foreign technology andmanagement to create more value to increase our competitiveness in the local market” (ChinaDailyMay 23, 2002). It is argued that these problems have generated favorable conditions for the launch of partnership between the public and private sector. This development illustrates the beginning of municipal governmental recognition of the need to bring in new elements (private companies with investment and technology) that can rejuvenate the existent urban infrastructure system. Increasing loans from international development agencies such as the World

Bank and private banking consortiums have continued to pressure the Shanghai government to repay its debts. The loans channeled from theWorldBank, theAsian Development Bank and other commercial banking consortiums coupled with tight public financing became a budgetary problem for the Shanghai government (China Daily July 23, 2002). Therefore financing through other channels, such as the BOT scheme and joint ventures in Shanghai, was considered (see Table 3.3). This phenomenon is also linked to the view of theWorld Bank in favor of water TNCs’ involvement in developing countries. TheWorld Bankmaintains that water TNCs’ abundant experience in different countries, advanced know-how and technical innovations have led to the nurturing of economic and political capacity that can play a part in policy making and implement the development strategies of the World Bank (Fingers and Allouche 2002).