The backbone of large-scale water conservancy projects is firmly rooted in sound financial backingThis year, China's water infrastructure initiatives have gained remarkable momentum, with investments soaring above a whopping one trillion yuanThe water resources department has implemented a dual approach, utilizing both governmental and market forces to amass funding through various channelsBy tapping into local government special bonds, bank loans, and social capital, a total of 296.1 billion yuan has been mobilized, providing robust financial support for water-related development.
Why is there a growing interest from social capital in water infrastructure development? In light of new challenges and opportunities, what strategies can be employed to tackle the financing dilemma in water conservancy? Future pathways to broaden the funding avenues for water projects are essential considerationsAddressing these critical issues, our team conducted interviews with experts in the field.
Breaking New Ground with Water Infrastructure REITs
Real Estate Investment Trusts, or REITs, were first piloted in China in 2020, focusing on real estate that can generate stable cash flowsBy operating and managing these properties, returns can be generated and distributed to investors, effectively turning real estate assets into securities.
The listing of the Yin Hua Shao Xing Water REITs on the Shenzhen Stock Exchange on November 8 marked a significant milestone — it was the first national-level water infrastructure REITs to debutThis development opens up fresh financing avenues for investments in water infrastructure, paving the way for a new era in the sector.
As Shengrui Linbing, chairman of the Shaoxing Yuan Water Group in Zhejiang Province, asserts, the water sector exhibits a strong operational stability, making it less susceptible to short-term economic fluctuationsHistorically, the proportion of social capital invested in water projects was relatively low due to several factors, such as the high initial costs of water projects, low direct yields, and difficulties in capital withdrawal
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However, the introduction of REITs offers the possibility for flexible exits, thus encouraging more social capital involvement in water infrastructure development.
The Tangpu Reservoir serves as a pivotal water source in the Cao’e River Basin, essential for supplying water to both Shaoxing and certain areas of NingboThe impending completion of the Jingling Reservoir is expected to enhance regional flood control and water supply systems, further bolstering high-quality economic development across the eastern Zhejiang area.
By revitalizing existing water infrastructure assets, funds can be directed straight into new development projectsThis forms a self-sustaining cycle between the existing value and new water infrastructure investments. “Transforming the operational income generated by the Tangpu Reservoir over the next three decades into a REITs issuance allowed us to raise 1.6968 billion yuan, with the initial 338 million yuan already allocated to build the Jingling Reservoir,” says Shengrui Linbing.
Nonetheless, protecting state asset interests while ensuring flood control benefits remains a top priorityShaoxing has innovatively established a mechanism to safeguard the rights of the Tangpu Reservoir, distinguishing ownership from operationThe local government granted a 30-year operational license to the project company, which can trade operational returns on the marketAfter this term, the original rights holders can reclaim control of the Tangpu Reservoir without any costFurthermore, they have agreed to a joint action protocol ensuring they collectively acquire 51% of the fund’s shares, maintaining a grip on the REITs fund and its underlying assets, safeguarding the operational safety of the infrastructure.
Capital Flooding into Water Infrastructure
Over the years, significant quality infrastructure assets have built up in the water sectorHowever, this accumulation has rendered the assets stagnant or “asleep.”
The launch and listing of the Shaoxing Yuan Water REITs marks a significant milestone in the reform of water investment and financing and introduces a new approach to unlock existing water assets while contributing to the nation’s water network development. “This initiative is a major step forward in water finance reform,” notes Zhang Dong, director of the Reform Division at the Ministry of Water Resources
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The innovative approaches developed in Zhejiang province bear potential for wider applicability and replication across the country.
In recent years, the water resources sector has aggressively pursued the reform of financing mechanisms, continuously refining the policy frameworkLocal governments have adapted strategies reflective of their circumstances, launching initiatives that inject new momentum into the financing reform effortsInnovations in diversified financing models have emerged, unleashing new opportunities in utilizing financial instruments and market tactics.
In the Xinjiang region, crucial water projects such as the Dashixia and Yulongkashi hydraulic hubs have successfully attracted social capital through a model that integrates recruitment, investment, construction, and managementThis has effectively addressed prominent issues like funding shortages and the inefficiencies in construction managementMeanwhile, carbon credit trading from soil conservation efforts across provinces like Fujian, Shaanxi, and Yunnan has surpassed 620,000 tons, motivating local governments to enhance their environmental remediation and ecological development efforts.
The reform of water finance has notably intensified the momentum for water sector developmentIt has led to a new financing landscape where government fiscal funding, financial credit, and social capital collaborate seamlessly to propel infrastructural investments forwardBetween the 13th Five-Year Plan and 2023, non-fiscal funding sources from local government bonds, credit financing, and social capital surged from an annual average of 210.55 billion yuan to 545.06 billion yuan — catapulting the proportion from 28.4% to 44.5% of total annual investments.
Expanding Financing Channels Continually
Effectively revitalizing water assets through REITs and similar mechanisms not only broadens financing channels but also injects vitality into a plethora of high-quality water assets—all while securing ample funding for future development needs
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For instance, the initiation of the Tangpu Reservoir REITs in Shaoxing has led to a more robust verification and certificate issuance process, further advancing the reform of water project managementTo date, over 465 reservoir property registration certificates have been issued, accounting for over 80% of the total reservoirs in Shaoxing, laying a strong foundation for asset revitalization.
By 2035, the goal is to establish a cohesive national water network framework, with the main arteries and backbone structures gradually in place at the provincial and local levelsPreliminary estimates indicate that an annual investment scale of around 1.2 trillion yuan will be critical to reach this goal.
“Deepening reform in water investment and financing represents a significant transformation and an extraordinary opportunity for the sector,” states Li Guoying, Minister of Water ResourcesSince implementing systematic initiatives aimed at improving joint governmental and market efforts, a new financing paradigm has emerged that leverages fiscal funding, credit financing, and social capitalMoving forward, provincial and local water resources departments must expedite the establishment of a varied, multi-layered financing ecosystem, particularly harnessing the potential of water REITs to create a sustainable investment model, turning infrastructure into valuable assets that generate capital.
On one hand, it’s crucial to grasp the distinctive economic traits and developmental laws inherent in both monopolistic and competitive sectors of water management to build a reasonable return mechanism that maximizes the effects of fiscal fundingThis encourages increased social capital participation through integrated recruitment, investment, construction, and managementOn the other hand, there needs to be a robust interplay of financial support for water resource advancements, which includes fostering innovative green finance products and services in the water sector
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