APAC: News analysis: Why China's EfW giants are flocking to Southeast Asia 

The rapid urbanisation of Southeast Asian countries is driving an increasing need for energy from waste projects. That has led to an influx of Chinese environment groups, such Everbright and Jinjiang, which posses the cutting edge technology to exploit these opportunities. Celine Ge reports.

One Belt and One Road is not only about building railways and roads. A growing number of Chinese energy-from-waste(EfW) companies are also looking overseas, particularly into emerging markets, for project opportunities. 

This is partly driven by intense competition in China’s domestic EfW market which is pushing down project returns. According to an 2018 report by China Environment Chamber of Commerce, the average IRRs for domestic EfW projects have fallen from 12% to 5-8% due to intense competition. Market sources say that by comparison contacts, IRRs in many Southeast Asian markets have kept at double digit.

The advanced technology of players such as China Everbright and China Jinjiang, respectively China's first and second EfW groups by total EfW project waste processing capacity in 2017, has also given them an edge over local firms in securing projects in emerging economies whose market is still nascent. 

One of the most active players is Everbright International, the environment unit of state-owned conglomerate China Everbright. It operates Vietnam’s first EfW project in Can Tho (USD 47m) which processes 400 tonnes of waste per day with a 7.5MW capacity under a BOO model. 

In February, the Asian Development Bank (ADB) agreed to provide a USD 100m loan facility to the Chinese group to back a series of municipal EfW PPPs in primary and secondary cities in the Mekong Delta.The development bank expected the deal to bring a “new model” to improve solid waste management in cities and increase energy generation from renewable sources.

Other Chinese players, particularly private-sector players such as Jinjiang and Tian Ying, have also been taking on EfW projects in India, Thailand, Indonesia and Brazil over the last two years. 

That trend is gaining momentum as the Chinese giants continue to consolidate their footprint in the markets. The local governments are also building their expertise in how such projects can be better implemented, experts say.  

“The domestic Chinese EfW market is fragmented and the competition is getting intense,”said Ralf Ng, assistant vice president with Moody’s. “Some countries in the Southeast Asian market offer growth opportunities but at the same time they also need to face regulatory and policy risks as the markets there are not well-developed.” 

Seeking growth
Following the last three decades’ of development, China has managed to grow its EfW market capacity to 62m tonnes in 2015 from 7.9m tonnes in 2005 at a compound growth rate of 22.81%, according to a report by consultancy Qianzhan Industry Research Institute.

By the end of 2016, China had 273 EfW projects in operation with a combined 5.43GW installed capacity. That has made the country the world’s biggest EfW market in its annual processing capacity, according to China Biomass Alliance, an industry body.  

But as the market becomes increasingly saturated with each major player holding a 10-20% of market share and dominating a part of China, the overall market growth has slowed down to single digit. industry insiders. Industry insiders say the overall IRR is also predicted to slide to single digits in the coming years.

“What is driving Chinese players to look overseas is that they want to be the first mover and try to seek higher project returns,”said Ng. 

 

What is driving Chinese players to look overseas is that they want to seek higher project returns,” Ralf Ng, Moody's. 

 

Frost & Sullivan predicts Southeast Asia’s EfW market is poised for robust growth as urbanisation accelerates. The consultancy predicts  EfW will generate a revenue of USD 1.85bn in 2019, up 65% from the level recorded in 2014.

"Strong financial support from the government in the form of feed-in tariffs for renewable energy is fueling the biomass and waste to power market in Southeast Asia," said Frost & Sullivan senior research analyst Adwaith Visveswaran. 

Vietnam, for instance, generates over 28m tonnes of waste annually, with 76% of it being disposed in landfills. The country’s government has vowed to collect and treat 90% of urban solid waste, with 85% of it being recycled and reused by 2020. 

 

Overseas foray


Following its first Can Tho project, Everbright has been studying EfW opportunities in the Southeast Asia including the Philippines as part of its globalisation strategy, said chief executive Wang Tianyi. The Hong Kong-based environment giant also plans to team up with its biomass offshoot Everbright Greentech in securing EfW projects overseas, he adds. 

Tian Ying is the second Chinese company to be awarded an EfW project in Vietnam. In January it won a bid to develop a VND 7.17trn (USD 320m) plant in Nam Son Waste Treatment Complex in Hanoi

The USD 1.39bn market capitalisation company in October agreed to launch a JV with a local partner to DBFOM an EfW project in Singapore that is capable of processing 300 tonnes of waste per day under a 25-year concession. The treatment fee should be no lower than SGD 55 (USD 40)/tonne with a minimum power tariff of SGD 0.09/kwh. 

Apart from Vietnam and Singapore, Tian Ying is also keen to explore Thailand in its globalisation push, a spokesperson says. “By entering into Vietnam’s waste-to-energy market, we want to enjoy the first mover advantage because there are currently not many participants there,” he explains. 

Beijing Water Business Doctor, another Shanghai-listed firm, in October signed deals to set up JVs for five EfW projects across Thailand’s Nakhon Si Thammarat, Chiang Mai, Lamphun, Nakhon Pathom provinces. The Chinese firm agreed to provide the technological, management and financial support while its Thai partners will be in charge of site selection and liaisons with local governments. 

In June, Singapore-listed China Jinjiang said it executed a concession agreement through unit PT Jinjiang Environment Indonesia for the 20MW Palembang EfW project(USD 120m) under BOO model in Indonesia. 

The Chinese firm, which is the first privately-owned EfW giant in the country, entered Latin America in April with a USD 11.2m investment for a 51% stake in the project company of the 18MW URE Barueri EfW plant in Brazil. Its first overseas EfW project is located in Lucknow in northern India, is designed to have a daily capacity of 1,500 tonnes/year. The unit,  Ecogreen Energy, will build and operate a waste pre-treatment facility with a designed waste pre-treatment capacity of 1,500 tonnes per day, a waste-to-energy facility as well as a landfill. The BOT project (USD 43m) is to be carried out under a 30-year concession and Ecogreen will have exclusive right to provide waste treatment services in Lucknow city. In the same year, the group  secured three other projects in India. 

 

PPP model 


Hisaka Kimura, head of private sector finance for East Asia at the ADB, tells Inframation the lender’s move in February to grant the loan to Everbright International is partly due to the Chinese PPP model which the ADB deems suitable for the market in Vietnam. 

 

We hope other major Vietnamese cities like Da Nang and Hanoi will also be able to adopt the PPP model for their environment projects. We are seeing PPA regulations  in Vietnam get close to that of China," Hisaka Kimura, ADB

 

So far, the majority of PPPs in Vietnam were launched by the central government for large scale energy projects, she says. The fact that fiscal conditions in many city governments are distressed makes PPP a viable option to better develop urban infrastructure. 

“The institutional setting in the Chinese PPP model is preferred for Vietnam,”says Kimura, highlighting the so-called “decentralised approach” where the city government should take the lead to promote PPP. 

The bank picked Everbright also based on its China success, she adds. The Hong Kong-based environment firm had 43 EfW projects in operation in China at the end of 2017 with a combined processing capacity of 39,100 tonnes/day. 

“We hope other major Vietnamese cities like Da Nang and Hanoi will also be able to adopt the PPP model for their environment projects,”says Kimura. “We are seeing PPA regulations in Vietnam get close to that of China". 

 

Treatment technology


Everbright operates two EfW plants in Hainan province with a total processing capacity of 1050 tonnes per day. Waste produced from the southern Chinese island bears resemblance to that in Vietnam, which was cited by Kimura as a reason behind the ADB’s decision.  

Jinjiang, which is trying to secure a project pipeline in Vietnam, Malaysia and Indonesia, has identified these countries as the “populous emerging markets” where the municipal solid waste has a similar composition to China’s, with a relatively high proportion of water. “By focusing on these countries, we could make better use of our EfW technologies from home,” said the spokesperson.

Chaojun Fang, a technology engineer with Jinjiang who does projects in Thailand, Vietnam, Indonesia and Singapore, observes another similarity between China and Southeast Asian markets is that there is little waste sorting during the collection process. 

“In addition, they have similar dieting habits, and they produce more kitchen waste and therefore more moisture content in the waste,”Fang tells this news service. 

Moreover, the fact that Chinese firms such as Jinjiang operate projects across regions with various climates and levels of economic development also makes them more favourable against Japanese rivals, which are more specialised in treating waste from developed markets, Fang notes. 

In the meantime, the Chinese companies are acquiring technology know-how from European countries mostly from brownfield deals. Tian Ying has been pushing ahead with its USD 1.33bn buyout of Spanish waste treatment giant Urbaser, while Everbright expanded into Europe in 2016 with its EUR 123m acquisition of Polish waste management firm Novago

In January, Jinjiang launched waste treatment technology-focused Waste Tec GmbH in Germany, which will look to secure possible waste projects in Europe.

Kimura says that with advanced technology Everbright managed to maintain emission standards that are up to the EU standards. 

 

Risk and rewards


But market insiders observe say the lack of a mature regulatory framework in Southeast Asia’s EfW market is the biggest challenge facing foreign investors. “They are still in their trials and errors in figuring out better industry guidelines with a market still in its infancy and few previous cases to refer to,” Fang says.

Industry experts say the current emission standards in most parts of the region are based on that of the EU while design standards normally trace their roots back to China. 

It also takes a long time for the local governments to approve the land use rights and on-grid tariffs, Fang notes, adding that a legal framework is needed to assure foreign investors that their rights are well protected. 

“One challenge is there is a lack of templates for contracts, and some project operators may face delays in payment,”says ADB’s Kimura.  

In addition, political uncertainties prevailing in Southeast Asian countries also raise concerns among Chinese investors. “The companies should also take note of the political risks in their target markets in their Southeast Asian push,” Moody’s Ng says. 

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