Singapore's first desalination plant opened in 2003. It was located on a piece of land in the island-state's west that had itself been reclaimed from the sea some years before. The plant is now contracted to turn seawater into 136,000 cubic meters of drinking water a day for the resource-strapped island-state.
The plant is surprisingly quiet. It operates with hardly any noise and is run by just 10 workers. Add a perpetual sea breeze and, as one staff member at the plant noted, it's practically like being at a holiday resort.
Now, Hyflux, the company behind the Singapore plant, is building a similar facility in China's coastal city of Tianjin to service a refinery owned by oil and gas giant Sinopec. It will be China's largest seawater desalination plant, with an output of 100,000 cubic meters, when it is completed in 2009.
"The problems in China, especially environmental ones, are an opportunity for us," said Sam Ong, Hyflux's chief investment officer.
Indeed, desalination represents the high end of what could be cleantech's next big growth sector in China - water treatment.
FEELING THE PRESSUREClean water is scarce in China. Economic expansion has led to water sources being squeezed at both ends: Not only is demand rocketing from agriculture, industry, and an increasingly wealthy population, but supplies are shrinking because of unchecked pollution.
A study by the Asian Development Bank found that 60% of China's 669 cities suffer water shortages, and nearly half of the country's 800 million farmers have no access to safe drinking water.
"Water is going to be a major problem for China in the coming years," David Arthur, Shanghai regional manager of environmental consultancy ERM, told China Economic Review in October.
As if on cue, massive outbreaks of algae erupted across China's major freshwater lakes this summer. Lake Tai, which borders the city of Wuxi near Shanghai, was covered in bright green algae sludge that thrived on the pollutants being dumped into the water by chemicals factories. The situation got so bad that the city had to cut off water supplies for days.
The government has long realized the scale of the problem. It started a major policy push, under the 11th Five-Year Plan, released in 2005, to increase the country's supply of clean water. This includes boosting efficiency and raising wastewater treatment standards.
OPENING UPInefficient state-owned enterprises are also being asked to buck up. China's water industry has been liberalizing since 2002, when new rules separated the ownership of a utility from its operation for the first time. At the same time, the large conglomerates, like France's Veolia began to enter the municipal wastewater treatment business in earnest.
Five years on, smaller players like Hyflux, and a coterie of Chinese firms like Epure and Sino-Environment listed on the Singapore Stock Exchange, are becoming forces in the industry. These mid-weight companies are trying to grab a share of a municipal water-treatment market in which current foreign investment in is still under 10%, according to a Credit Suisse report.
"We took advantage of this opening up two, three years ago," said Ong. "We have gone from zero to 25 plants in about two years, and our pipeline in China will continue to grow."
It's no accident that Singapore has become a hub for water businesses. The island-state has long been dependent on imported water supplies from neighboring Malaysia. But government initiatives to create new water sources have helped focus capital and science on the problem.
In China, the biggest opportunity is likely to come from municipal wastewater treatment. Nearly half of China's cities lacked wastewater treatment facilities in 2005, according to official statistics.
However, the field is quickly becoming crowded. Foreign giants like Veolia and General Electric comprise one end of market, and a fragmented bunch of small local players form the other.
According to Mike Richardson, an analyst at research firm Freedonia Group, the conglomerates tend to be integrated service providers, who supply everything from water treatment chemicals to filters and operational knowhow. The small local players, who together make up about two-thirds of the market, supply commodity chemicals like chlorine, lime and salt for low-tech wastewater treatment.
Straddling the two groups are the Singapore water firms, who usually combine higher end technology with an element of service. The international spotlight is quickly focusing on these firms.
Two major investment banks, Citi and Credit Suisse, have begun coverage of the Singapore water companies in the last six months. In October, Credit Suisse gave Asia Environment, Epure and Hyflux an "outperform" rating, its highest recommendation.
EPC V. BOTCompanies operate on two major business models in municipal wastewater treatment. They can be engineering, procurement and construction companies (EPCs) or they can perform a build, operate and transfer (BOT) function.
Financial analysts tend to favor EPC firms as risk is more easily calculated for what is essentially a technology company. A firm like Epure, one of the most lauded Singapore water stocks, provides turnkey water treatment solutions to clients, often large-scale municipal plants.
By contrast, BOT projects are riskier. Contracts can be difficult to value, and they vary from municipality to municipality as different tax rates and tariff regimes come into the picture. This is compounded by long leasing periods - Hyflux's desalination contract in Tianjin, for example, is a BOT deal that runs for 30 years.
"With BOT projects there is an element of execution risk," said Jong Siu Ming, an analyst at private equity firm AR Capital in Singapore. "When a company does engineering only, you can easily forecast their earnings and the value of their contracts."
But foreign water firms will find plenty of room for growth beyond municipal plants. There is still demand for foreign technology to treat harsher industrial effluents and to supply pure water for an array of industries including pharmaceuticals and electronics manufacturing. Residential drinking water is another area ripe for expansion: It was reported in September that the government has earmarked at least US$130 billion for securing drinking water sources.
It's no wonder market participants are bullish about the industry's prospects. Hyflux's Ong talks, with a grin, about a meeting with the mayor of Tangshan, who he says wants to build the world's largest desalination plant.
"The opportunities in China are there," he said. "It's like the tallest building in the world. Every year you have a new tallest building."