Financing Urban Environmental Infrastructure in China: Current Situation and Challenges

Abstract

Since the mid 1990s, the Chinese government has attached increasing importance to urban environmental infrastructure (UEI) development, primarily in sewerage treatment and garbage disposal facilities, to overcome serious water pollution and solid waste pollution in urban areas. Financing methods have become central issues, as UEI requires large-scale initial investments. Other developing countries in Asia are also facing this problem.

This paper examines the challenges of UEI investment in China, including government financial limitations in financing UEI, and the expansion of possible roles for private finance initiatives (PFI) in UEI construction and operation. Through case studies of Beijing, Shenzhen, Shanghai, Guangzhou, and Chongqing, possible roles and concrete model cases for PFI in UEI in China can be studied. Build-operate-transfer (BOT) contracts for new treatment plants, concessions, and joint ventures are the three major types used to provide urban water and waste services in there.

This paper argues that the most beneficial method is to diversify financing sources for UEI investment through the development of Public-Private Partnership (PPP) and presents legislation, preferential policies, and administrative and financial institutional support for PFI projects. Effective financial mechanisms using financial and tax measures, user charges, ODA and soft loans by multilateral financial agencies, foreign direct investment, and stocks, funds, and bonds to augment local financial capacities are also presented. The promotion of PFI in UEI construction and management is an important strategy for sustainable development in China to overcome the shortage of investment demand for UEI and improve the efficiency of investment, as well as develop the environmental industry, which in turn can contribute to the development of the economy.