Unclean Water Flushes Reputation

By+Zhou+Xiaoyan

On April 11， long lines appeared in front of every grocery store in Lanzhou， capital city of northwest Chinas Gansu Province. People loaded up on everything drinkable， leaving shelves cleared of bottled water. That day， not only was bottled water cleaned out， all of the beer and milk was also snatched up.

All this happened after local authorities announced that benzene， a cancer-inducing chemical， had been found in tap water at 20 times above national safety levels. The water supply was turned off in one district， and officials warned citizens not to drink tap water for the next 24 hours. Shock waves from the scare reverberated among the public and chaotic buying in stores continued for several days， until supply of tap water was fully resumed on April 14.

An ensuing investigation found that the benzene came from a crude oil leak from a pipeline owned by a unit of China National Petroleum Corp.， the countrys largest oil company.

It was the second water-related incident in Lanzhou this year. In March， residents reported a strange odor when they turned on their taps. An investigation found a high concentration of ammonia.

Lanzhou Veolia， the only water supply company in the city， was immediately cast in the media spotlight and widely criticized.

Lanzhou Veolia is a joint venture established in 2007， with Veolia China， a unit of French firm Veolia Environment， who owns 45 percent of its stake with the local government owning the remaining 55 percent.

Lanzhou Veolias foreign-funded background， combined with an alleged cover-up and apparent supervision flaws， has irritated many Chinese people. Some local residents have filed lawsuits against the company. Some angry netizens even demand that Veolia should be banned from the Chinese market.

Founded in 1853， Veolia entered the Chinese market in 1994. To date， the company operates projects across half of China and offers water as well as wastewater services to 43 million people in the country and hires over 13，000 employees.

According to the research institute affiliated to h2o-china.com， an industrial website， the water disposal ability of Veolia in China had reached 13.22 million tons per day as of the end of 2013， ranking second in China.

In 2002， Veolia spent 266 million euros（$368 million） to buy a 50-percent stake in the Pudong tap water company in Shanghai. Over the following five years， Veolia inked cooperation agreements with local water supply or wastewater disposal firms in Chinas first- and second-tier cities， including Beijing， Tianjin， Chengdu of Sichuan Province， Qingdao of Shandong Province， Shenzhen of Guangdong Province and Hohhot of Inner Mongolia Autonomous Region.endprint

The French water business giant adopted a unique business model when exploring the Chinese market， which combined expensive purchases with financial instruments.

For instance， Veolia spent 1.71 billion yuan（$274.1 million） to buy a 45-percent stake of Lanzhou water supply group in 2007， several times that of the bidding prices offered by its competitors. Also， the company often cooperates with firms in the financial sector， which allows it to leverage huge projects with minimum start-up capital.

The breakneck expansion ended in 2008 when the financial crisis roiled the whole world and reined in the expansion of multinationals. In 2011， Veolia pledged to increase the proportion of businesses revenue from China in its global businesses to 8 percent in the following five to 10 years. The target， however， has been reduced to 6 percent to date.

Waning reputation

The world-class water business operator has thus far failed to live up to its sterling reputation. Indeed， the increase in incidents in which the company was involved seems to have been positively correlated with its expansion.

Its growth has been marked by an array of breaches of safety regulations. Ever since July 2007， when Veolias joint venture in Qingdao was accused of transferring wastewater to drinking water， the company was allegedly responsible for 13 water supply or wastewater disposal incidents， including five in Shanghai， two in Beijing， two in Qingdao， one in Zhuhai of Guangdong， one in Haikou of Hainan Province， one in Urumqi of Xinjiang Uygur Autonomous Region and one in Lanzhou.

Du Jianguo， an independent scholar， said Veolia should be held accountable for the frequent occurrence of water contamination incidents. “It shows Veolia doesnt pay attention to water safety issues in China at all，” he said. Du is one of the most radical among the advocators that demand Veolia be banned from the Chinese market.

Furthermore， Du said public utility sectors， such as water， public transportation， hospitals， railways and electricity supply， are not suitable for market-based operation and should ban private or foreign investment.

Over 10 days after the Lanzhou pollution incident， Lanzhou Veolia apologized for the first time and promised to replace some of the pipelines. After taking over the local water supply operation in 2007， Veolia didnt revamp the overused pipelines. The vulnerable pipelines make it easy for pollutants to seep into the tap water.endprint

After expensive purchases， Veolia ruthlessly cut operation costs and continuously pressured local authorities to raise water prices instead of focusing on renewing equipment and technologies. Hefty investment didnt bring about the previously expected profits. Therefore the company has not been motivated to bring advanced management concepts or technolo- gies to China， according to a report from Beijing Youth Daily.

Wang Zhansheng， a professor from School of Environment at Tsinghua University， said he was surprised to see that Veolia didnt have a backup water source or contingency plan in the face of the crisis.

“Regulations say that tap water should have at least two sources so that when one source is contaminated， another can be used as an alternative. Even if the Yellow River is the only water source for Lanzhou， Veolia should use different reaches of the river as backup sources. Also， Veolia should have had a contingency plan. Once the water source is polluted， the plan should be immediately launched. Whats taking them so long to solve the problem？” Wang asked.

Who is to blame？

Veolia was widely held accountable， but it shouldnt be the only one blamed for the incident. A lack of more detailed daily tests in the water business industry is apparently one cause.

Veolia detected excessive levels of benzene on April 10 but reported to the Lanzhou Municipal Government one day later. When facing public questioning on the alleged late report and cover-up， Yan Xiaotao， Deputy General Manager of Lanzhou Veolia Water， said benzene was not a mandated test item for tap water in China and the company had “accidentally” discovered the problem.

China adopted compulsory drinking water criteria in July 2012 and the number of indicators increased to 106 from the previous 35. Comprehensive quality tests for tap water are required to be conducted every six months， while daily tests do not include checks for benzene.

Worse still， Chinas tap water market is regulated by many government departments， which makes the supervision process difficult. The responsibility for overseeing different links in the supply chain， such as drawing water from the river， fining water supply companies， transferring water and testing water， belong to four different departments. Once pollution incidents happen， local authorities can be very slow to react.

Lanzhou is just one case of many in Chinas troubled tap water market. Most culverts in China have been used for many decades without appropriate maintenance， sowing the seeds for hidden troubles.endprint

Du Ying， former Vice Minister of the National Development and Reform Commission， said that due to incomplete reform on water prices， 30 percent of tap water supply companies and 25 percent of sewage disposal companies in China are operating at a loss. A lack of capital makes it impossible for those companies to maintain pipelines and carry out technology innovation.

Lanzhou is a heavily industrialized city. Its tap water pipeline is surrounded by many chemical firms. In spite of this， Veolia did nothing to maintain or improve the pipeline.

Li Zhihui， a senior water business expert， said this was all caused by the previous expensive purchase. “The Lanzhou Municipal Government sold the stake by bidding. The one with the highest bid will get the stake，” Li said.“The nature of capital is pursuing profits. The higher the purchase price is， the stricter the price control will be.”

“Using public utilities as a tool to make money will inevitably lead to tragedy. Therefore， the mindset on public utility reforms should be changed. The two sides should construct， share and develop public utilities together. It cant be a once-and-for-all selling，” said Li.

When responding to public outcry for banning foreign investment in the public utility sector， Luo Jianhua， Secretary General of the China Environment Chamber of Commerce， said the market-oriented reform should not stop because of one incident. “One shouldnt stop eating only because he was choked.”

Advantages brought about by marketoriented reforms on water business industry outweigh those disadvantages. Ever since China opened up its public utility sectors in 2002， private and foreign investment have entered many areas including water supply， natural gas supply， heat， sewage disposal and waste disposal industries. It has greatly improved Chinas utility conditions and increased efficiency， he added.

“A market-based mechanism should be adopted in which the government is responsible for improving the law， strengthening supervision， encouraging competition and avoiding monopoly while companies focus on improving services. The two sides should share profits， risks and responsibilities，” Luo said.

Luo said its irrational to resist foreign investment in the public utility sector. “Whether the introduction of foreign investment will affect a citys water safety is ultimately dependent on whether domestic firms are strong enough to compete with them. More importantly， it depends on whether local governments have enough supervision.”endprint