Investing the Money to Clean China's Water

12/29/2009 -  Daniel Spitzer, Executive Chairman of International Water Technologies, has been involved in project finance for China's infrastrucure since the 1980's. He talks about the importance of industrial wasterwater treatment in China, and the intersection of clean water with efficient cost structure.




TCBN: Greetings Everyone, I’m Michael McCune and this is The China Business Network.

Since the mid-1980s, Daniel Spitzer has participated in many aspects of China’s corporate finance industry – even pioneering new structures as regulations evolved. But despite his fluency in money, he chooses to apply his expertise towards the establishment of operational companies in the green and clean technology sectors. 

His most recent venture is International Water Technologies Group which provides turnkey solutions for industrial wastewater treatment. We caught up with Daniel on Skype to discuss this newest venture and how it is building on his past work.

Daniel, I know you’ve enjoyed a long career in finance and private equity as well as direct operational ventures of various types in China. As before we talk about the details of your involvement in water treatment in China I was hoping you could give us a little bit of perspective how you’ve seen project finance develop in the PRC over course of your career.

SPITZER: Okay I started off with project finance in China in the mid 80s. I was working for a large trading and financial conglomerate Metallgesellschaft at that time 7th biggest in Germany and biggest metals trader in world. With extensive of operations in China, we did countertrade as a form of project finance and worked with some of the large tower companies, for example Huaneng, financing major new power plants, buying back products that were specified by the Chinese government to balance foreign exchange at that time which was very scarce in China. So that was in the mid 80’s and at that point foreign banks had a limited range of activities in China. But as a trading company were able to provide financing and were able to do that with, I guess I would say medium-sized projects $75-200 million projects. At that time they seemed large but in modern context they seem medium-sized at best.

We project financed our first industrial installation in Sichuan in a 1993 project start. That was a $50 million project. As we started the company and we got limited recourse – nine-year project finance for $30 million of the $50 million project, which was I think first true limited recourse financing done in China. It was done really on the strength of the IFC syndication and their view of the project. The project was aimed at substituting imported plywood from Indonesia/Malaysia with fiberboard, which we manufactured from sustainably grown tree plantations in Leshan in Sichuan south of Chengdu. So that was considered a ground-breaking financing at the time. When we did it there was really limited legal infrastructure for some of the structures that we used. 

But that set the precedent and the form that the IFC was able to use subsequently for many other financings including three which they did with our company, but projects where there really wasn’t previously any experience or legal infrastructure for this.

TCBN: And as you look at going into your new ventures in China, and seeing project financing playing field, if you will, mature, you find that better and better environment, have any new forms come into the regulatory process to enable even different more unique types of financing for projects these days?

SPITZER: Yeah. At that time the whole idea of project finance was such a new concept with domestic bankers that the IFC and we jointly put on seminars in Beijing, in Chengdu, in Shanghai, different places –象木公司– explaining to people how it worked, and so forth. By the late 90’s, a couple of the Chinese banks started to get interested in this. In fact they helped us structure take-out financing for the IFC which was good for us. It allowed us to take advantage of very low interest rates that Chinese banks were able to provide because of low funding costs. Those low funding costs both for Chinese banks and for Chinese insurance companies have led to a lot of different kinds of financial availability, some of which has been quasi equity and some of which has been actual straight debt. 

TCBN: I want to get into how project finance might be, or the nature or environment for project finance might be abetting or hindering your current undertaking with water treatment. But I wanted to step back a step and have you share with us a little bit of perspective about challenges of water treatment faced by China. I think we sort of think about it mostly in terms quality of water treatment in terms of an urban setting. There certainly lot of challenges there. Your new venture is focused on industrial water treatment. Can you share perspectives on these two areas of need in China?

SPITZER: Yeah. To my mind the most significant challenge facing China’s environment over the medium term is going to be water - the limitation on water resources. You’ve got a shrinking source. The Himalayan glacial cap has been shrinking, and it’s pretty well documented. And that’s the source of the major rivers in Asia, particularly in China.

While we in China control, to some extent, the flow of that water it’s certainly less than it used to be. Population requirements, living requirements are significant, and industrial requirements are huge. Fortunately Chinese leadership is very clear on what the needs of the population are as far as water and they recognize their responsibility of ensuring drinking water and safe drinking water is provided to the population. So the cities now are developing good municipal water treatment and distribution.

My concern with China’s water is more with the industrial side. Historically there was inconsistent enforcement of regulations for industrial wastewater treatment and frequently dumping the wastewater into rivers and lakes. And it’s caused health problems and environmental issues in cities –really throughout the country. Bigger challenge of course in the north where there’s less water available there’s a lot of older industrial facilities. 

Again the Chinese government is really focused on this issue in the last few years and has implemented much stricter enforcement and regulations, and that pressure has been passed down to local administration so that the administrators who face the challenge of raising tax revenue are also having to consider their responsibilities of not enforcing and what could happen to them. The consequences are really significant and, let’s say, career threatening if they fail to enforce because some of the wastewater effluencies are actually toxic and probably hundreds of thousands of cases of cancer have been caused from this. 

Specifically what we do is build from small to very large size wastewater treatment facilities that are added to or built in conjunction with new industrial plants. So these are wastewater facilities where the water treatment portion ranges from say the smallest size is 10 million RMB to maybe 700-800 million RMB in total project size for the wastewater. So you have major industrial facilities for example a coal to gas facility and that kind of technology has become very important Inner Mongolia or major petrochemical or forest product facility. They need to spend a great deal of money sometimes 5-10% total project cost on water treatment. And at this point that can be the limiting factor in industrial projects moving forward: can they meet the industrial parameters and requirements?

China has huge requirement for power and a lot of the power which is done, which is generated currently is pretty dirty. A lot of it’s coal based. Some of it is actually direct burning coal and some of it is coal to gas. Coal to gas is a sophisticated but relatively dirty conversion process which generates lots of wastewater. It’s not simple wastewater and the solutions need to be customized for each different installation and they need to be monitored and modified on an ongoing basis. It’s pretty complex biochemistry. We use bacteria which is suited each individual instance of effluence and usually done in sequence. We might have half a dozen or more different kinds of bacteria operating in these kinds of facilities. 

TCBN: To tie this back to issue of finance and affordability, are there aspects of your background and fluency in project finance that facilitates winning deals or helping companies that actual acquires the technology find ways to pay some of these costs that maybe weren’t in their original plans?

SPITZER: Generally abatement of pollution is an expense. There are some exceptions where you can actually get a recovery of valuable effluence and that’s something that we focus on with wastewater. For example, with petrochemical plants you can often get residual value which can pay for much of capital costs and certainly the operating costs of the facility. Generally speaking it’s the cost. And so one really needs to focus very keenly on viability and also on minimizing capital costs and operating costs and integrating the operation with the overall industrial project. Many of the scientists and technologists who are engaged in the field don’t have real operating company backgrounds - there’s a disconnect between what they do simply in trying to control pollution and what the owners of the industry are trying to achieve. So fundamentally it’s about economics. People make decisions about how to operate based on how they’re going to make the most money and do so at the least amount investment. 

TCBN: I’ve been speaking today with Daniel Spitzer who is executive chairman of International Water Technologies Group, a company focused on implementing industrial water treatment solutions across China. Daniel, than you very much for sharing your background and insights into your new venture and we wish you best of luck

SPITZER: Thank you Michael, I appreciate it.