As a tiny island nation, Singapore is surrounded by water, but until recently there was barely a drop to drink. With no rivers or lakes and a scant supply of groundwater, the country was forced to import 80% of its freshwater from Malaysia, a country that it broke away from – not without unpleasantness – in 1965.
But Singapore has managed to make both a virtue and a substantial profit out of necessity.
"Historically, Singapore simply wanted to protect herself from the vulnerability of not having sufficient fresh water. However, it has gone way beyond that point," said Dr K.E. Seetharam, founding director of the Water Policy Institute at the Lee Kuan Yew School of Public Policy and board director at the Asia Infrastructure Project Development Company (AIPD).
Today, Singapore has cut its dependence on its neighbor by half. It has done this by maximizing use of the little water it does have. Rainwater catchments dot the island nation, emptying into reservoirs where the water is purified by cutting-edge treatment plants. Singapore also recovers sewage into drinking water and desalinates seawater.
What began as a system built out of necessity has become a model lauded around the world – and the firms behind it are ready to export their expertise.
An obvious need
China, with a water industry valued around US$250 billion, is a natural target. According to the Ministry of Housing and Urban-Rural Development, China’s wastewater treatment infrastructure alone will require US$55 billion in investment between 2006 and 2010.
While Singaporean firms have not managed to dominate China’s water industry, they have established a niche. Seetharam at the Water Policy Institute estimates that Singaporean companies are in some way involved in about 10% of all water projects in China.
The largest foreign players here are Veolia Environment and Suez SA, both French, which focus on operating municipal water supply systems. In targeting large-scale facilities, these firms leave room for Singaporean players to work on smaller projects in industrial wastewater treatment, membrane technology and desalination. Veolia has about 25 major water projects in China; Singaporean leader Hyflux operates 40 smaller ones.
"The French companies specialize in huge water infrastructure projects and often have to source products from Singaporean companies," said Vivian Chen, environment practice research manager with Frost & Sullivan China. Chen believes that Singaporean operators are well-positioned to build on their niche coverage in China, leveraging their greater familiarity with the Asian business model and ability to work effectively with Chinese officials.
While this may be overstated – Veolia and Suez have strong track records in China – there is no denying that good government relationships are a key ingredient to success in the water industry. Water has a direct connection with the public welfare and is therefore subject to much more stringent levels of local political control. On a global level, governments are involved, directly or indirectly, in 80% of water management systems.
BOT business
Beijing is no exception and plans to keep firm control over the country’s water infrastructure. Domestic contracts reflect this. Most wastewater treatment facilities are build-operate-transfer (BOT) projects. A foreign company will usually build the facility on land provided by the government. The private firm then operates the facility for a fixed period, usually 20-50 years, after which the project reverts to full government ownership.
Veolia and Suez, as a rule, disdain BOT contract structures. At a large scale, they are quite risky given that the government also controls water prices and therefore has the ability to alter the return on investment at whim. Singaporean companies, however, have been actively seeking out such projects. For example, Dayen Environmental recently built a facility in Beijing, with a capacity of 20,000 cubic meters per day, on a 50-year concession.
Furthermore, Beijing’s policy of water treatment decentralization – building more small plants throughout the country, as opposed to larger municipal plants – has led to an increase in the number of smaller-size contracts that underpin the Singaporean players’ business strategy.
"For a large country like China, it may be more effective and cost-efficient to build compact and decentralized plants to meet the fundamental needs of water-scarce areas," said Sam Ong, group deputy CEO and CFO at Hyflux.
Altogether around 20 Singaporean water treatment companies operate in China and nearly all are growing rapidly.
Hyflux, which specializes in desalination and membrane technology, has the highest profile. The firm gets 80% of its revenue from mainland-based operations and in 2008 posted a net profit of US$40 million, up 79% year-on-year. Its stock has risen twenty-fold since listing in 2001.
The business is likely to grow even further as northern China increasingly turns toward desalination as a solution to its water problems. Hyflux already runs China’s largest desalination plant and is actively seeking other projects in coastal provinces. Its efforts are supported by China’s 11th Five-Year Plan, which includes a goal for 3 million tons of seawater to be desalinated per day by 2020, This would address 25-30% of northern China’s water shortage.
Another Singaporean firm to watch is Sembcorp, a huge utilities conglomerate with assets of about US$6.5 billion that has aggressively pursued wastewater treatment contracts in industrial parks around China. The company has already invested more than US$250 million here, recently building large facilities in Nanjing, Tianjin and Zhangjiagang, near Suzhou.
Asia Environmental, meanwhile, is one of several players that focus on China exclusively. The firm has 13 BOT projects throughout the country and CEO Wang Hong Chun says business is booming thanks to Beijing’s stimulus package.
"Projects which were held back due to lack of funds were kick started as government funding was made available," he said. "This resulted in an increase in projects and also equipment purchases."
State-driven
The Singapore government has played a role in this growth story, actively promoting the success of its water management systems in China. In 2007, the two nations signed an agreement allowing for the sharing of water management research and the joint development of training programs for Chinese officials.
"The private sector may be involved, but the responsibility for water management still remains with the government," said Seetharam of AIPD. "When Singaporean companies go to China, our government plays the role of industry ambassador. They explain the Singaporean experience and are willing to help transfer knowledge and experience."
AIPD, which is a partnership between the Asian Development Bank, the Singaporean government, and three private companies, conducts feasibility studies, planning, and preliminary design for water projects in Chinese municipalities that cannot afford to construct facilities without garnering private investment. Due diligence on targets is provided to reassure wary Singaporean investors.
In addition, Singapore hosts an annual "Water Week," inviting international water experts and government officials to the city for seminars and lectures. In 2008, US$270 million in contracts for water supply and wastewater treatment were signed during Water Week.
Still, Singaporean firms cannot remain complacent. While the growth prospects for the industry remain high, Chinese companies are quickly gaining the high ground. Chen of Frost & Sullivan China said that in the microfiltration sector, which uses a lower level of technology, domestic firms are already winning the majority of contract bids.
"The main difficulty Singaporean companies will face is that Chinese companies are increasing their technological proficiency. The technology gap is closing and they should take advantage of the gap while it exists," explained Mark Ray, an analyst at JLJ Group.
At the same time, many other foreign firms have complained that local governments are reserving contracts for domestic firms, even when their technology is demonstrably inferior. In China, the government takes turns playing provider, regulator and customer, with all the conflicts of interest that implies.
It seems inevitable that every area of the industry will end up dominated by domestic firms. Wang at Asia Environmental believes that improved tariff rates for water treatment, combined with governmental incentives, will attract even more local participants. At present, water treatment firms receive income tax exemptions of up to 50% of chargeable income for the first three years of operation.
Enduring advantage
Singapore’s ability to shape industry trends through its cutting-edge domestic water management systems might allow it to stay relevant for longer than its rivals. And there’s still plenty of room. Currently only 46% of municipal wastewater is being treated, but according to the 11th Five-Year Plan, this should rise to 70% by the end of 2010.
Ray of JLJ Group notes that most developed countries have wastewater treatment percentages of over 90%, so China’s current target is a stepping stone, not a final destination. "Even if China’s achieves its goal for 70%, there is still a huge room for growth in the industry," he explained.
Indeed, Frost & Sullivan’s Chen estimates that the industry will grow about 15% every year for at least the next four years.
Even without a commercial incentive, Singapore will likely continue to provide training and other forms of technical support, at the very least to continue to strengthen diplomatic ties between the two countries.
"Water is an intergenerational business. It is not like a road, where you build it and then it is up and running," said Seetharam of AIPD. "The water sector needs a constant flow of good leaders. Singapore will play an important role in developing those leaders in China."