Introduction 1996 1998 2006 2005 1992 1997 2002 2005 2002 2003 2004 2001 2002 2002 2002 Although private sector participation in the water sector is one of the more controversial topics in public utility management today, this wave also spread to China at the turn of the millennium, where the government started to reform public sectors (water, electricity, roads, etc.) via introducing market functions. The so-called marketization reform expected to address the increase of several water problems (water shortage, insufficient infrastructure, water pollution, etc.) to meet the requirement posed by accelerated urbanization and high economic growth. As a late comer in this field of private sector involvement in the provision of water services, China is able to learn from numerous experiences of other countries, such as the United Kingdom, France, United States, Chile, Philippines, Mexico, Argentina, and Bolivia. 2005 2006 This article reviews developments in private sector involvement in China’s water management and assesses whether expected results of marketization in the Chinese water sector have been met: raising investment for infrastructure, increasing service coverage and improved efficiency in China’s water supply and wastewater treatment. After interpreting further private sector involvement in China’s urban water management in terms of modernizing water governance, this article provides a country-wide overview of current privatization developments in the Chinese water sector, and subsequently makes an in-depth investigation in three distinct cases with respect to the new roles and functions of the governments and private parties. The final section assesses the current status of privatization programs in China’s water management and its implications of future research on water governance reform. Private Sector Participation as Part of Modernizing Urban Water Governance In the debate on private sector participation in environmental governance in general, and urban water governance in particular, we can identify three — sometimes interrelated — discourses. 1986 Staatsversagen 2000 2002 1985 1986 1999 2004 2007 2002 1998 2001 2004 2003 2004 2004 2004 2005 2005 water tariff reforms, where costs of drinking water increasingly include full costs (also of wastewater treatment), but come along with safeguards for low income households to continue access to drinking water; transparency, accountability and control of the government; 2007 decentralization of water tasks and responsibilities to the local level. Privatization Policy in China’s Water Sector Circular on Attracting Foreign Investment through BOT Approach Circular on Major Issues of Approval Administration of the Franchise Pilot Projects with Foreign Investment The earlier experiences of BOT projects brought in needed capital and investment to develop China’s urban water infrastructure. But it illustrated also many problems. The issue of the fixed investment return to investors was one of these problems. After intensifying control over foreign exchanges and loans in the late 1990s, the General Office of the State Council promulgated a specific circular in 2002 to correct foreign investment projects with fixed investment returns, by modifying the relevant contract terms, buying back all shares of foreign investors, transferring foreign investment into foreign loans, or dismantling contracts with often severe losses. Opinions on Accelerating the Marketization of Public Utilities Measures on Public Utilities Concession Management Opinions on Strengthening Regulation of Public Utilities 2005 2006 2005 2006 2005 2005 Interim Provision on Administrating Concession Right of Chengdu Measures on Public Utilities Concession Management of Shenzhen The Current Landscape of Private Sector Involvement 2006 1 3 Table 1 Different forms of private sector participation in China’s water sector Form of private sector participation Asset ownership Capital investment Operations & maintenance Contract period Commercialization of governmental enterprises/utilities Public Public Public Indefinite Management contract Public Public Private 3–5yr Lease contract Public Public Private 8–15yr Greenfield (BOT-type) Private/ public Private Private 20–30yr Concession Public Private Private 25–30yr Joint venture Shared Shared Shared Indefinite Sale or full divesture Private Private Private Indefinite 1 2006 Fig. 1 Public sector participation in water: distribution over modalities (2005)  2 3 3 Fig. 2 Distribution of private sector participation in water projects by capacities  Fig. 3 Distribution of private sector participation in water projects by provinces  3 3 Three Case Studies of Public-Private Partnerships 2006 Joint Venture: Maanshan Water Supply Maanshan City is an industrial, prefecture-level city of 1686 square kilometers, and a population of 1.24 million (2004), of whom 46.8 per cent lives in urban areas. According to the 2004 MOC statistics, 88.7 per cent of the urban population has access to water supply. Water resources are abundant in Maanshan City due to its advantageous location on the south bank of the Yangtze River and abundant annual rainfall (1062–1092 mm). Maanshan Construction Commission (MASCC) is not only the competent authority for water supply and wastewater treatment and as such, plays a leading role in the water sector reform. It is also, as a so-called “Big Construction Commission,” the main governmental agency responsible for urban planning, construction, and management (cf Wu 2003). 4 Fig. 4 Organizational structure of Maanshan water supply system  Within the new joint venture structure, the board of MAS-BCWLC (4 members from BCG and 3 from WASWSC) is the current decision-maker regarding planning (within the objectives set by the municipal master planning), investment and financing, partly replacing the tradition of government decision structures. According to the contract, the general manager of the joint venture company comes alternately from MASWSC and BCG. Taking into account the social dimensions of water provisioning, the government claimed three key conditions in the agreement with the concessionaire: first, the concessionaire (MAS-BCWLC) must ensure sufficient and safe water provision and the government can take over all facilities without any indemnity if the concessionaire fails; second, the concessionaire cannot change the public and social nature of water and should include relevant social responsibilities as governmental requirements (e.g., employing all personnel from the old water company, providing free water for firefighting, reducing/subsidizing water bills of the poor); third, the government controls the water price. In order to ensure high-quality water and service, MASCC regulates the performance of MAS-BCWLC via assessing annually the specified objectives approved by both the MAS-BCWLC board and MASCC. For instance, MAS-BCWLC was requested to achieve 12 key objectives in 2004: (1) investment of 18 million RMB (ca. 2.175 million US$ at the exchange rate of 1US$ = 8.276RMB); (2) selling 48 million cubic meter water or more and reclaiming >90% of water bills; (3) fulfilling indicators of water service quality (for instance, >99% of the control points should reach the required water quality standards; >98% control points should reach standards for water pressure; a maximum of 30% water loss; burst pipes repairs within maximum time limits); (4) fulfilling all MASCC indicators for safe work; (5) construction of the main body of the No.4 WTP and 25 kilometer new pipes; (6) fulfilling client service indicators (for instance, 100% good client service; >90% public satisfaction); (7) fulfilling the reconstruction of Xiangshan Town water supply system; (8) elaboration and submitting a water supply plan; (9) achieving the relevant objectives of National Civilized City Assessment System (which was proposed by Central Cultural and Ideological Building Commission in 2004; it includes 119 indicators); (10) submitting water supply plans to Municipal People’s Congress and Municipal People’s Political Consultative Conference; (11) responding adequately to complaints and reporting this information to the government; and (12) take anti-corruption measures. 5 2007 3 3 3 Fig. 5 Total length of pipes and annual water provision in Maanshan (1995–2004)  6 Fig. 6 Monetary flow within Maanshan water supply  However, this private sector involvement practice of Maanshan is argued to have a (potential) political risk due to the lack of a sound legal basis. In transitional China, in particular, policies are perceived to be instable and insufficiently law-based. Until now, details on measures and rules to regulate private utility companies are still missing in current national and Anhui provincial policy papers (Maanshan has no legislation right). This is a common problem in Chinese marketization practices in the water sector, as argued by many lawyers and academics. For instance, Shenyang water supply has experienced several failed marketization practices due to the constantly changing policies and decisions of the local government during 1995–2000 (field survey 2004). Concession Contract: Macau Water Supply th 2  7 Fig. 7 Organizational structure in Macau water supply  Distinct from the previous private owners, who had little experience in the field of water provision, SUEZ (France) brought in advanced water knowledge and technology. According to the concession contract, MWSL must provide high-quality water supply service, as well as bear several obligations, such as planning, investment, construction, operation, and maintenance of the infrastructure under the supervision of Macao Government. In practice, Macau Government has delegated tasks, responsibilities and obligations to a very large degree to MWSL. 8 9 Fig. 8 Annual water demand-provision and water loss in Macau (1982–2005)  Fig. 9 Water tariff rates of Macau (1982–2005)  3 10 Fig. 10 Monetary flow within Macau water supply  Macau is also an interesting case because of the unique regulatory system, which includes the water quality regulator (IACM), and a unique Government Delegate. IACM is in charge of the water quality regulation, and monitors and controls drinking water quality by random sampling and analysis of over 70 water samples around Macau everyday. The Government Delegate is not a government official, but an individual working in another public utility company and appointed by the government. Following Macau laws, Mr. Lin Runzhong, the Government Delegate for water supply, was appointed for a period of five years by the Macau Government, and is not only the regulator of MWSL, but also an important linkage between MWSL and the government. He participates at all MWSL board meetings and reports relevant information and documents to the government. The Government Delegate decides which information is considered relevant. He is also in charge of assessing the performance of MWSL, and comments on the five-year plans and tariff plans before MWSL sends these to the government for approval. The Macau government generally follows the comments and assessments of the Government Delegate. In this sense, the nongovernmental Government Delegate is defined a specified role and powerful position in governing the water sector. This institutional arrangement relates to the small size of Macau Government, where only a limited state capacity (in quantitative and qualitative terms) is available for numerous public tasks. In conclusion, it can be argued that after 1985 the Macau government has played a meager role in the drinking water management. Greenfield Contract: Shanghai Wastewater 3 2 11 Fig. 11 Private sector involvement in Shanghai wastewater treatment  5 cr 4 12 Fig. 12 Monetary flow within Zhuyuan Greenfield project  2005 2006 Conclusions With the emergence and blossoming of various forms of private sector involvement in the Chinese water sector, the traditional structure of full governmental provision of water supply and wastewater treatment has changed dramatically. The analysis in this article has provided evidence of the contribution of these new modes to increased capital investment, and especially of more efficient operations and improved service provision. In that sense, the original goals of the Chinese government to embark upon private sector involvement in water provisioning and treatment have been met. However, the early stage that most contracts are in, and the not yet crystallized forms and modes of privatization, prevents us from drawing any final conclusions on the impact of private sector involvement in the Chinese water sector. 2005 2006 Thirdly, it is crucial to accelerate the establishment of systematic and comprehensive governmental regulatory framework, as the current ad hoc, fragmented and diverse regulatory system endangers efficiency in water service development and certainty and stability for foreign investors. Experiences in many countries have proven that regulation is a key aspect in successful privatization in the water sector and a competitive benchmarking system is regarded as useful in an effective regulatory approach. In late 2006, the MOC attempted to develop a Chinese water supply benchmarking system, which is still ongoing. However, the current private sector involvements in the Chinese water sector still face many legal and regulatory uncertainties. Too often local authorities experiment with systems of governmental regulation and control, or — as in Macau — seem to become marginalized. According to interviews with local officials during our fieldwork, the importance of establishing a workable regulatory and legal system is essential. Guaranteeing sufficient and safe water service to the public is jeopardized by the fact that governments can no longer fully control the planning, operation, and management of water services as before private sector participation. This might only be signs of uneasiness with the new water institutions and division of tasks and responsibilities, but can also be the heralds of an emerging debate on privatization in the Chinese water sector. 1