Rural sewage treatment market: "blue ocean" or "red ocean"?

As a sub-sector of the environmental protection industry and a key link in the water industry, the wastewater treatment industry is a fundamental component of building a "harmonious society and a better life." It is characterized by its public welfare nature, policy-driven nature, capital intensity, diverse entities, and regional exclusivity. Rural wastewater treatment is an important part of China's wastewater treatment industry. Unlike urban areas, which only treat wastewater generated during production and daily life, rural wastewater treatment also involves the protection of rural drinking water sources, rural garbage disposal, and the resource utilization and pollution control of livestock and poultry waste, as well as environmental remediation and protection. However, for a long time, affected by various factors such as economy, policies, and living habits, the development of rural wastewater treatment in China has been slow. By the end of the Twelfth Five-Year Plan (2015), the urban wastewater treatment rate in China reached 91.9% ，the county-level wastewater treatment rate reached 85.2% ，while the rural wastewater treatment rate was only 11% ，see Figure 1。

With the release of the No. 1 Central Document in 2018 and the "Three-Year Action Plan for Rural Human Settlements Environment Improvement," rural wastewater treatment has become an important part of rural human settlements environment improvement and the implementation of China's "Rural Revitalization" strategy, bringing about an explosive growth in the market. In particular, the 2019 No. 1 Central Document, "Several Opinions of the Central Committee of the Communist Party of China and the State Council on Adhering to the Priority Development of Agriculture and Rural Areas and Doing a Good Job in "Three Rural" Work," clearly proposed "fully promoting rural human settlements environment improvement focusing on rural garbage and wastewater treatment, toilet revolution, and improvement of village appearance, ensuring that by 2020 a significant improvement in the rural human settlements environment will be achieved." This once again established the important position of rural wastewater treatment in rural human settlements environment improvement. As a result, the discourse on the "new blue ocean" of rural wastewater treatment has been rising, attracting a large number of enterprises and capital to actively participate. However, after more than a year of practice, many entrants have deeply felt that the "water is too deep." So, is China's rural wastewater treatment market a "blue ocean" or a "red ocean"? My personal conclusion is: "blue ocean" is relative, "red ocean" is absolute.

I. "Blue Ocean" is Relative

That is, for new entrants in the water and environmental protection fields, the rural wastewater treatment industry is a "blue ocean."

1. Market space of hundreds of billions in the near term and trillions in the long term

According to the "Action Plan for Water Pollution Control" ("Water Ten Measures"), the "Thirteenth Five-Year Plan for Comprehensive Rural Environmental Improvement," etc., it is estimated that the remaining market space for rural water environment governance during the Thirteenth Five-Year Plan (until 2020 ) is 1300 hundreds of millions, and the long-term market space (until 2040 ) exceeds trillions, see Table 1。

2. Lack of strong competitors in the market

Although there is a potential market space of trillions, the rural wastewater treatment market lacks attractiveness to large enterprises with technological and financial advantages and advanced management experience. The main reasons are:

The sewage collection area in rural areas is small, the amount of sewage is small, and the variation coefficient is large, with large fluctuations and instability in water quality and quantity;

Rural sewage is rarely single, mixed with drinking water source protection, garbage disposal, and resource utilization and pollution control of livestock and poultry waste;

Rural sewage is mainly domestic sewage, originating from toilets, bathing, and washing, and mostly uses ecological treatment methods with low technical requirements;

Most rural households lack basic living facilities, so wastewater treatment projects are not simply pipeline laying and wastewater treatment plants, sometimes requiring in-depth household kitchen and toilet renovation and pipeline laying;

The general cultural level in rural areas is not high, and there is a serious shortage of talents for intelligent management models. Traditional "person-to-person" operation and management models require a large amount of manpower in the case of scattered villages;

Rural financial resources are weak, farmers' economic capacity is generally low, and their concepts are relatively backward, unwilling to pay for public services;

Finally, the most crucial reason is that the market space for rural wastewater treatment is smaller compared to other water and environmental protection fields. According to industry data, the market size of China's water industry during the Thirteenth Five-Year Plan is 2.8 trillions, and the market size of rural water environment governance (including wastewater treatment) is 1800 billion (only 6.73% ), of which the largest proportion is in water production and supply (about 55.49% ), see Figure 2 . According to relevant plans in the environmental protection field, among the 3.5 trillion investment in China's environmental protection field during the Thirteenth Five-Year Plan, the investment in water pollution control only accounts for 11.21% ，the largest being investment in air pollution control (accounting for 65.48% ), see Figure 3。

3. Low entry barriers

(1) Low technical barriers

On the one hand, due to the characteristics of scattered distribution, relatively high pollutant concentration, small and unstable water volume of rural sewage; on the other hand, the overall rural economy is weak, farmers lack awareness of paying for public services, and phenomena such as "not being full" and "sunbathing" have appeared in many places in recent years. The newly released "Guiding Opinions on Promoting Rural Domestic Sewage Treatment" requires "actively promoting low-cost, low-energy consumption, easy-to-maintain, and high-efficiency wastewater treatment technologies." Therefore, the traditional activated sludge process (including A/O、A2/O ) is the most suitable treatment technology, and the remaining sludge after treatment can be used for agricultural purposes on-site, which is environmentally friendly, economical, and recyclable. ( 2 ) Low investment barriers Compared with the currently commonly used SBR 、 MBR etc., in urban wastewater treatment, the traditional activated sludge process (including A/O、A2/O ) has lower investment, see Table 2。

3) Low qualification barriers

The qualification requirements for rural wastewater treatment projects are much lower than those in urban areas, see Figure 4.

II. "Red Ocean" is Absolute

The decentralized nature of rural wastewater treatment makes it difficult to attract large enterprises with financial, technological, and managerial advantages. To address this issue, in recent years, many local governments have begun to adopt a "bundling" approach, using PPP models to promote rural wastewater treatment. Therefore, the risks associated with urban wastewater treatment also exist in rural wastewater treatment, along with some unique risks and difficulties.

(I) Common Risks in Urban Wastewater Treatment

Urban wastewater treatment in China started relatively early, but due to limited government funding, its development has been slow. In 2002, the Ministry of Construction issued 272 Document No. [Document Number] "Opinions on Accelerating the Marketization Process of Municipal Public Utilities," marking a shift in China's wastewater treatment industry from government-funded, constructed, and operated to leveraging social capital through BOT/BT/TOT etc., models. Especially after 2014 [Year] 43 National Development and Reform Commission Document No. [Document Number] "Opinions on Strengthening the Management of Local Government Debt" and a series of other documents were issued, PPP models have been widely used in the construction of a large number of infrastructure and municipal projects, including urban wastewater treatment. PPP While the model has driven rapid development of China's infrastructure and municipal projects, it has also brought significant risks.

1. Financial Risks

Under the PPP model, the financial risks of wastewater treatment enterprises are reflected in the following aspects:

(1) High Debt and Tight Cash Flow. The author conducted research on the debt and cash flow of several water companies with wastewater treatment businesses and found that 30 during 2015-2017 the debt ratio increased year by year, and the net cash flow remained negative, see Figures 5 [Figure Number] and [Figure Number]. 6。

(2) Serious Advance Funding, Difficult Collection, and Numerous Bad and Doubtful Accounts. Like many PPP projects, advance funding is also very serious in the water industry. Through financial analysis of some listed water companies, 2017 [Year] 10% the scale of advance funding by water companies accounted for more than 2017 [Percentage]% of the total value of construction contracts. Collection difficulties exist, including arrears in water fees, which are relatively stable in the water industry. In 38% [Year] 60% the water fee collection rate of Zhongyuan Environmental Protection was only 79% [Percentage]%, Wuhan Holdings was 90% [Percentage]%, and Shanghai Environmental Protection was 10% [Percentage]%, with most other water companies having water fee collection rates below 2017 [Percentage]%. In addition, statistics show that the bad debt rate of many water companies has exceeded 23%。

[Percentage]%, including state-owned enterprises such as Chongqing Water, Qianjiang Water Conservancy, and Hongcheng Water. In 2017 [Year] PPP Xingrong Environment's bad debt rate was as high as 2018 [Percentage]%. 2018 (3) Significant Decline in Corporate Performance and Substantial Increase in Financial Expenses. With the tightening of [Year] national policies on 2015 [Project Type] 16.2 projects, the operating performance of most water companies declined significantly and financial expenses increased substantially in 2015 [Year] 5000 . Taking BWS as an example, in 7 [Year] 6。

its operating income experienced negative growth for the first time, and its net profit was only 11.75% compared to

[Year]

a decrease of PPP [Percentage]% percentage points. Financial expenses increased from less than

[Amount] 2017 in 92 [Year] to nearly [Amount] PPP billion, see Figure PPP [Figure Number]. 1% Figure 6 2015-2018 2 Statistics on some financial data of BWS. Reference: Annual reports of listed companies. PPP 2. Other Risks Under the PPP model, changes in the economy, finance, and national policies also pose significant operational risks to enterprises. Enterprises that have participated in projects in recent years have a deep understanding of this. (1) Policy Factors. The Ministry of Finance Document No. [Document Number] "Notice on Standardizing the Management of the Project Library of the Comprehensive Information Platform for Public-Private Partnerships (PPP) PPP has raised the capital threshold for enterprises to enter. 3 Among them, the "three red lines" strictly regulate government funding; PPP the actual equity ratio of projects has increased from PPP [Percentage]% to Reduction will affect the company's valuation and performance in the capital market.

(II) Specific Risks of Rural Wastewater Treatment

The long-term urban-rural dual structure system in China means that the risks associated with infrastructure construction in rural areas are far higher than those in urban areas. The most prominent of these is the "payment" risk. This risk differs between the "construction phase" and the "operation phase," with the latter having a more fundamental impact.

1. The "payment" risk during the construction phase is affected by factors such as ownership and taxation. Funding for rural infrastructure in China has always been primarily based on local self-financing and rural residents' "labor-for-construction" contributions, supplemented by subsidies and transferred funds from the state and higher-level governments. However, township and village-level units have limited funds available, and farmers' ideas and actions are not very supportive or cooperative. Therefore, compared to urban infrastructure construction, there is a greater risk of payment for the portion of funds belonging to the "government". 2 In the operation phase, urban wastewater treatment fees in China are combined with water supply fees, resulting in lower collection risks. However, in rural areas, due to low incomes and consumption habits, farmers often refuse to pay wastewater treatment fees, and some rural areas lack public water supply systems, making it impossible to collect fees in the same way as cities. After tax reforms, township revenue sources are limited, and local government subsidies are difficult to realize. Therefore, compared to urban wastewater treatment, the risk of timely payment of wastewater treatment fees in the operation phase is greater, which is one of the reasons why rural wastewater treatment facilities in some parts of China have been left unused for a long time.

III. Conclusion

Against the backdrop of a "relative blue ocean" and an "absolute red ocean," especially when the state has not fundamentally addressed the "payment" issue of rural wastewater treatment through mechanisms and policies, neither water companies with technological and management advantages nor potential entrants with financial advantages will find this the optimal time.