Between Iran and China, where’s the opportunity?
Published April 28th, 2016
Two countries made a big impression on me at last week’s Global Water Summit in Abu Dhabi: Iran and China.
Iran is in the news because – with the end of sanctions – it looks like the next big market waiting to take off, and the round table sessions hosted by the Iranian delegation were very much over-subscribed. China, on the other hand, is the next big competitor in the global water market. We ran a session showcasing five Chinese water companies looking to move into the international market, which changed everyone’s view of where China is heading in the water business. In the final session of the conference, I asked the audience to vote on the biggest change in water over the next five years. The top response was “Chinese companies will be in the top 3 in the main market sectors”, followed by “Municipal/industrial collaborations will be a major trend” and “Tariff reform will accelerate” .
There is a long way for Chinese water companies to go. As things stand, they have had very little impact on the rest of the world. There have been a handful of incidents where Chinese companies have bid crazy money for foreign water technology companies (Beijing Drainage buying Purac springs to mind), and a few successful awards of EPC contracts, but as things stand, it is difficult to see how Chinese companies might grow to rival the likes of Veolia and Suez over the next five years.
That is where Iran comes in. It is potentially the biggest new water market that we will see over the next decade – but only if the financial model can be made to work (see GWI April 2016 p32). The National Water and Wastewater Engineering Company – which is the unit of the Ministry of Energy responsible for regional utilities – has 13 BOT (build-operate-transfer) projects ready to be awarded in the short term. A further ten contracts are structured as “buy-backs”, where an industrial water user commits to a long term off-take agreement for treated sewage effluent, whereupon the NWWEC then uses this contract as the basis for financing a municipal wastewater treatment system and relevant supply lines to meet the industrial user’s needs. Many more contracts are set to come to the market in the future. To be successful, it needs investors who are happy with Iranian risk, and as things stand, few European and North American shareholders have the stomach for that. China, on the other hand – especially with the advent of the Asian Infrastructure Investment Bank, its dealing with Iran during the sanctions period, and the growing relationships between Chinese companies and the major international financial institutions active in the region – is much better placed to see a way of working successfully in the Islamic Republic.
Although Chinese private companies remain relatively timid in terms of the risks they are prepared to take on (for example BEWG and Sound Global have not been aggressive in their pursuit of Indonesian water projects), I think this will change. China still has excess capital, whereas Europe, America and Japan work in deficit. Furthermore, the Chinese currency is naturally more closely tied to emerging market currencies, whereas the US dollar and the Euro tend to move in the opposite direction to them. That is because China is the biggest buyer of raw materials, and when it is doing well, so do the economies of its main suppliers. When China does less well, its suppliers decline, and there is a capital flight to quality in the form of the US dollar. It seems to me that it is inevitable in the long run (i.e. as the renminbi floats away from the dollar peg) that Chinese companies will have a competitive advantage in their pursuit of opportunities in most primary producer economies such as Iran, Indonesia, and Nigeria.
So how do we respond to this? As GWI, we are running a workshop in Shanghai on 16 June to facilitate China’s outreach to the rest of the world. It will, however, be co-located with another workshop that we are running to help international companies get to grips with the big opportunity that exists in the Chinese market. Here I am speaking about the new generation of industrial wastewater treatment regulations which the Ministry of Environmental Protection is now enforcing. The level of technology and expertise required to meet these regulations is in many cases beyond what can be supplied locally, and industrial customers tend to take a more expansive view of lifecycle costs, rather than simply focusing on low-bid EPC (engineering, procurement and construction) costs, as is more often the case in the Chinese municipal water sector. It is the most positive market for foreign technology companies that we have seen in China in the past decade.
In short, I can see that there is a huge international market that Chinese companies can expand into, but at the same time the opportunities for foreign companies to find growth through their technological expertise remain. If you are interested in taking part in the workshops (which include the opportunity to fix pre-arranged meetings with key industrial water users), contact Alison Ireland at email@example.com.