Sewage is treated in a plant in Wudalianchi, Northeast China's Heilongjiang province. Qiu Qilong / for China Daily

BEIJING - When Wang Liu first came to Beijing for college nine years ago, she thought she could drink the tap water. After all, it is the Chinese capital. Wang is a native of Fushun, a city of Liaoning province in Northeast China where people have to boil the tap water before drinking it. But like tens of millions of residents in Beijing, Wang soon discovered the tap water was not safe to drink and a possible health threat.

"The water from my tap has a very noticeable odor, and it seems to have lots of chemicals in it," said the 28-year-old, who works at an investment bank. "I called the water company several times to file a complaint, but the problem never got solved.

"So when I found a convenient place to buy bottled water, I never looked back, even if it's a lot more expensive than tap water."

To address the water issues in the country, China has declared sustainable use of water resources and safe drinking water to be major policy goals. This has opened the doors to foreign companies eager to grab a piece of the fast-growing water market.

In China, it is mainly State-owned companies that run the water industry with government funding as the major source of investment.

Analysts say that many State-owned water companies lack the incentives to improve technology, because government favoritism has left little competition among the companies.

Jin Yongxiang is the general manager of Dayue Consulting Co Ltd and specializes in public-sector consultancy. He has worked for many international water companies with projects in China and said many State-owned water enterprises remain encumbered by legacy assets. This includes obsolete water treatment equipment and technology, as well as broad social obligations such as healthcare and pensions.

He said another hindrance is the job situation at State-owned companies. They are regarded as "iron rice bowl"; once employees are recruited, it is almost impossible for them to be fired.

"Besides, most of the managers in State-owned companies are former government officials with little experience in the water industry," Jin said. "This makes the water companies very inefficient in providing water services and improving transparency."

According to a recent report by the World Bank, one-fourth of water enterprises in China are unable to provide sufficient water pressure and some companies have very serious problems of water leakage in pipelines.

Chen Lei, the minister of water resources, attended a roundtable meeting last month in Beijing on the effects of climate change on water resources.

He said about two-thirds of 600 cities in China have trouble accessing water.

China is now one of Asia's most promising investment destinations for water treatment and distribution, drawing major players such as Veolia Water, Suez Environnement and Thames Water.

Local rivals, such as China Water Industry Group, China Railway and Guangdong Investment, are also interested.

"Foreign investment and private sector participation in China's water industry began in the early 1990s, but the opportunities are great," Jin said.

"As a result, many international players that have water exposure in Asia are focused on the Chinese market."

The central government has earmarked 4 trillion yuan ($617.2 billion) to be spent over the next 10 years on water projects.

Foreign firms are upbeat that this will translate into great growth prospects and are keen to get a foothold.

Data from Frost & Sullivan, a global business market research and consulting firm, show that in 2010 there were 1,741 tap water companies in China. The value of the urban water supply totaled 68.34 billion yuan in 2008, an increase of 8.5 percent year-on-year.

Foreign firms invested 11 billion yuan in China's water sector from 2004 to 2009, spending 3.2 billion yuan in 2009 alone.

The projects include waste water treatment, municipal water supply, industrial water supply and direct investment in Chinese water companies.

Suez Environnement, one of the world's leading water firms, took in 1 billion euros last year in China, an increase of more than 10 percent year-on-year.

The French company, which now owns 32 joint ventures in China, aims to keep a double-digit growth this year in China and plans to invest about 1.3 billion euros to 1.4 billion euros in global projects.

"China has always been an important part of our global business strategy as water shortage is becoming a major issue in the country," said Jean-Louis Chaussade, chief executive officer of the group.

China, which represents 21 percent of the world's population, has access to only 7 percent of the world's water resources. The water shortage in China is likely to worsen due to the growing population in the bigger cities, Chaussade said.

According to the latest census, 50 percent of the Chinese population in 2010 was urban, compared with 35.7 percent 10 years ago.

Chaussade estimates cities and large towns will contain two-thirds of the total population in the near future.

"At that time there will be more need for clean water, and water management is going to be a key issue in China if the government wants to keep the economic growth," Chaussade said.

Sino-French Water Development, a venture between Hong Kong's NWS Holdings and Suez, invested 250 million yuan to provide water services and waste water treatment services to an industrial park in Chongqing, a southwestern municipality in China.

Charles Chaumin, president and CEO of Suez Environnement Asia, is planning to invest in China over the long term.

"We will further boost our earnings by new projects and new contracts with local water companies," he said.

Other investors are also very optimistic. Veolia Water, another major foreign player in China, expects its business to grow five times in the next 10 years.

"We saw China as a very potential market," said Jorge Mora, CEO of Veolia Environmental Services. "The per capita water volume in China is very low, just one-quarter of the world average. But in Europe, we have needs of about 200 liters of water per person a day. You can imagine how big the market is if each person in China needs 200 liters of water.

"It's a great opportunity, but a challenge as well."

Veolia Water is one of the first foreign companies to invest in Beijing's sewage treatment sector after it successfully won a bid for a waste disposal project in the capital in 2007.

Years of investment have paid off. Tap water in Beijing, Shanghai and other major cities is much better than it was years ago. But with so many players piling into China's water market, industry watchers say fierce competition for water projects mean profit margins may be squeezed out.

"International water giants face rising competition for contacts from China's homegrown water treatment firms such as Beijing Capital Co and China Railway, many of which have evolved from water equipment suppliers or city construction contractors," said Zhao Li, the director of the Water Policy Research Center at the Chinese Academy of Social Sciences.

But rising water prices, particularly in major cities where it has doubled in the past four years, is the main reason that foreign companies are counting on significant future returns, he said.

Analysts say that tap water prices vary from 2 yuan per ton to 5 yuan per ton throughout China, and will continue to rise at a rate of 10 percent a year for the next 10 years.

China's water prices are still low by global standards, even with the average residential water fee in major cities now up 3 percent since the end of 2008, to 2.44 yuan per ton. Average water prices in Europe range from four to 10 times higher, according to Deutsche Bank.

"The government is spending billions of dollars to ensure drinking water supply and to divert water from the flood-prone south to the dry north," Zhao said. "I think the changes reflect a growing official consensus that low prices are part of China's water shortage problem, since they give companies and households little incentive to save the water.

"But price increases are not everything," he said. "The market should also look to improve efficiency and infrastructure that cause problems such as leakage."

China Daily