Fu Tao 2015: Top 10 Predictions for the Environmental Industry

Big Time

In the words of General Secretary Xi, China's ecological environment has reached or is approaching its ecological carrying limit. This external environment has actually prompted us to transform environmental protection from a "fake national policy" to a real national policy. In the past 30 years, we did not actually pay much attention to environmental protection, but now environmental protection is becoming a real need.

China's economic development model is releasing more and more vitality through adjustment and transformation. The main direction of economic system reform is to better play the role of the market, rule the country by law and put more power of local governments into the cage of the rule of law. Local governments are also the first party of environmental services. This change has a huge impact on our environmental industry. China's administrative power reform has changed the transaction structure of the environmental industry, and the economic system has changed many external environments of the environmental industry, whether it is the investment and financing model or the activation of a large number of stock assets. The expectations of the environmental protection industry in the capital market have increased, and more and more foreign companies, including some central enterprises, have begun to pay attention to environmental protection. With the adjustment of China's international status and the rapid growth of overseas markets, the Chinese government has been selling our high-speed rail overseas. One day, will it be able to sell our environmental protection? Maybe environmental protection can better reflect our responsibility as a major country. The development of our environmental industry has entered a great era, and the development of China's environmental industry is bound to face changes.

Big changes

The environmental industry was created because of the externalization of environmental services. There are two major parties in the environmental industry. One is the polluting enterprises. They are unwilling to treat pollution. If the government does not meet the regulatory standards and the supervision is not strict, the demand for the environmental industry will inevitably be intermittent and irrational, which results in the failure of environmental protection enterprises in the field of industrial governance to achieve scale. The other party is the local government. Since the 1990s, the demand for environmental protection has been released one after another. After four upgrades in equipment, engineering, investment services, and comprehensive services, the government has gradually given up the market. When the power of local governments is really put into a cage and all marginal public services are provided by the market, the market space given up will be very large.

Big Market

In the process of environmental industry transformation, four documents are particularly important.

The first document is Document No. 96 of 2013, in which the General Office of the State Council issued a guideline on purchasing public services from social forces to constrain the power of local governments in public services. The starting point is administrative system reform, reducing the functions of local governments, and allowing the market to do things that can be done by the market.

The second document is Document No. 43, which is aimed at the reform of investment and financing platforms. It involves more than 10 trillion yuan of assets of local governments in China. By cleaning up local government financing platforms, it will drive the asset reconstruction of local urban investment companies. Local urban investment companies have begun to consider their own future. I believe that mixed-ownership companies will play an important role in asset reconfiguration.

The third document is Document No. 60, Opinions on the Reform of Investment and Financing Systems in Key Fields, which is based on the introduction of social capital. This document answers the question of the incremental growth of our environmental infrastructure. Local government finances are not the dominant direct investment subject in the environmental field, but they can enter the equity of enterprises in the form of equity funds, which also gives the green light to project financing. It clearly states that the right to charge for projects can be mortgaged, which is also a breakthrough in the field of project financing that has troubled the environmental industry for a long time. At present, there are thousands of BOTs in the environmental field in China, but no more than 20 of them have truly achieved non-recourse project financing, and the rest are guaranteed by the parent company. Document No. 60 will have a profound impact on the way the market generates incremental growth.

The fourth document, Document No. 69, talks about third-party governance of environmental pollution. The document broadens the scope of third-party governance in the general sense and brings in municipalities. In the traditional sense, third-party governance refers to industrial wastewater treatment. This document actually answers the fate of the environmental industry. Many people talk about the PPP policies issued by the Ministry of Finance and the National Development and Reform Commission. The current hot topic of local governments is PPP, which is the reason for the entry of big capital.
I think the above four documents from the State Council are the core. 90% of the above overall policies are beneficial. They are getting better and better for market-oriented entities and are institutional dividends.

Big Capital

In 2004, we talked about the era of capital dominance in China's environmental industry. That refers to project investment. Sewage treatment plants, garbage incineration plants, water plants, etc. are all centered on project investment. Since 2007, we have focused on the service era and technology. We say that technology has entered the industrial era. Around 2010, the investment peaked. This time, there were basically investment and mergers and acquisitions of enterprises, and there were many mergers and acquisitions between industrial capitals. We believe that the investment and financial services in the era of big capital are now entering a period with the city as a whole as a unit. Who are the leading enterprises in the era of big capital? Are you ready? Are you the future of the industry?

Big Dreams

The top ten predictions for the environmental industry in 2015 are also our big dream. There are 10 directions in 2015 that deserve your attention.

First, the interface is clarified. Our new environmental protection law came into effect on January 1, 2015. The long-awaited "Water Ten Articles" are expected to be released after the two sessions, together with the "Air Ten Articles" released in 2013. These policies and regulations are different from the original policies. There are no words about trillions of yuan. They talk about the responsibility and effect of environmental governance. The future environmental industry will enter an era of effect-oriented, not an era of projects with hundreds of billions of yuan in investment and construction of many projects. Lifelong accountability for environmental pollution is the same for both state-owned enterprises and private enterprises. When the responsibility is infinitely traced back to administrative responsibility, the government must draw a clear line with the company. Local governments will not only draw a clear line with polluting enterprises, but also with environmental enterprises. Third-party governance and a clearer government-enterprise cooperation model are all answering the new relationship between government and enterprises. This is a major trend.

Second, the demand is becoming more widespread. Current environmental companies provide very clear single services. When environmental laws, supervision and public participation are in place, many previously ignored environmental demands will become prominent and the demand will be wider. Current environmental companies only focus on one-third to one-quarter of environmental demands. Greater demands are being released, including in the field of restoration and rural areas.

The third is to deepen the service. The Ministry of Environmental Protection is revising the new sewage discharge standards. In fact, not only sewage treatment discharge standards, but almost all discharge standards are in the process of improvement. The success of OriginWater is the high standard of technology, which reflects the deepening of service. High standards were not economical in the past because others just met the standards. However, the guidance of deepening service promoted by the standard increase will gradually promote industrial development and technical and economic comparison.

Fourth, the derivative benefits. Currently, environmental enterprises are basically providing unit environmental services for the government or polluting entities, and they are strictly based on demand, with one cent for one job. The environmental industry has been fleeced by others for 30 years. Our industry is doing governance, but the fees cannot be collected. If a river becomes clear, the benefits may come from real estate. In the current context, the environmental industry should seriously consider how to get more subsidies from other industries and how to fleece others. In fact, if the service is done to the extreme, derivative benefits will be generated. The income of the subway comes from real estate, the income of the high-speed rail comes from the international concept of the Belt and Road Initiative, and the income of highways and airports comes from the growth of the regional economy. The better the company, the more it will get extra benefits if it reaches the extreme. Last year, we planned and launched several activities, including direct drinking from the tap and blue incineration. Beyond the cost factor, if a city is the first to make the tap drinkable like in Europe and the United States, there will be political and health benefits. Of course, the business model needs further design. Blue incineration is to take waste incineration to the extreme. When the incineration plant is turned into a park, amusement park, or a playground, the public will no longer be a NIMBY but a "neighbor", and the income will not only come from sewage charges and power generation subsidies, but also other income will be added.

Fifth, service integration. There are several concepts involved here. Government procurement of environmental public services is a Party A behavior, third-party environmental governance services are a service form, environmental performance contract services are a business model, environmental primary developers are the positioning of enterprises, comprehensive environmental services are a general term for industries, and PPP is a form of capital and capital investment. These concepts have gradually taken shape in the past few years, outlining many elements of comprehensive environmental services for effect services. From the current perspective, environmental enterprises that provide unit services can be classified as secondary developers of the environmental industry. When environmental services are oriented towards environmental effects, they will become the focus of new demands. When the right of local governments to implement pollution control services is put into a cage, the big government becomes a small government. At this time, the government uses money rationally, and the front is scarce and cannot be willful. The overall environmental service work will be given to the market, forming an environmental primary developer. With the de-administration of environmental governance behaviors in the environmental field, there will be larger-scale, more powerful, and cross-regional primary environmental developers that are truly trusted by the government. The asset scale of these mainstream enterprises is 50 billion or even more than 100 billion. We proposed the concept of environmental hospital in 2010. To use a figurative metaphor, our environmental enterprises were barefoot doctors, looking for patients everywhere, curing all kinds of diseases, and using the same few prescriptions for all diseases. Nowadays, the diseases of our environmental patients are getting more and more serious and complicated, and they need consultation to give better treatment plans. Environmental hospitals provide environmental patients with a comprehensive consultation interface and better environmental governance solutions. The main environmental enterprise of each comprehensive environmental hospital is positioned as a first-level environmental developer, and of course there must be many skilled specialists and surgeons (EPC) and pharmacies (equipment).

Sixth, capital leverage is increasing. Currently, there are more than a thousand private equity funds focusing on the environmental industry. There is no shortage of money for equity investment, but there is a lack of professionalism. Our E20 environmental platform is also promoting financial services, hoping to become the decoding, endorsement and bridge between industrial entities and financial entities. Where does the capital needed by the environmental industry come from? Will the funds that can really be deposited in the field of environmental protection be the impetuous capital in society? We began to call for the establishment of a real industrial investment fund in 2007, not private equity, but to provide capital for industrial investment, using social security and pension funds, or at least insurance funds with relatively low return requirements. At present, some environmental listed companies have established industrial funds to support their project investments. The country currently allows and encourages social security and pension funds to enter environmental protection projects. The era of big capital and big money in the environmental industry has arrived. We are also organizing a group of environmental listed companies to jointly launch industrial funds to achieve the connection of big capital through financial leverage and risk control systems. I believe that the driving force of the big capital era must be funds, and this structural system will undergo major changes in 2015.

Seventh, cross-border entry is increasing. Currently, mature cross-border entrants may be large central enterprises and powerful large private enterprises. At least a dozen well-known central enterprises are considering whether to enter our environmental protection industry, and several have already entered. Cross-border entry through mergers and acquisitions is the simplest way for large capital groups, but they must cross the threshold of billions of funds to enter. In the era of big capital, with the help of the PPP boom, a city's overall entry also provides a channel for big capital to cross-border enter. These cross-border entries occur every year, and the industrial structure may be adjusted in three to five years.

Eighth, capital is accelerating the transformation of the industry. We expect that in 2015, at least 30 environmental companies will enter different capital markets, including the New Third Board. We, E20, also plan to be listed on the New Third Board this year. Regardless of which capital market, the environmental industry has been given a very high valuation, and the high valuation makes environmental companies more willing to achieve capital expansion and mergers and acquisitions through the capital market. We divide environmental companies into four industrial squares, ABCD, through the strategic map. Different squares are suitable for different capital markets. Capital leverage will become larger and larger, and the involvement of off-balance sheet funds such as industrial funds will promote further changes in the environmental industry. At the same time, capital risks are increasing, fluctuations are increasing, and the requirements for capital operation level are also getting higher and higher.

Nine is the beginning of the reconstruction of the value chain. The environmental industry is an industry driven by environmental policies, and the ultimate relationship between environmental enterprises is the government-enterprise relationship. Two major changes are happening now; first, in the next two or three years, local governments will no longer be the original local governments. Their power, financial power and asset power will be subject to greater legal constraints, and the transaction methods between environmental companies serving the government and local governments need to be rebuilt; second, social participation, public participation is getting higher and higher. Chapter 5 of the new Environmental Protection Law requires that public services should be open to the society, and the people are increasingly empowered and able to speak at the public level of the environment. This has a great impact on the transformation of the environmental industry, and the development of mobile Internet has made everyone a reporter. The development of the two major changes will eventually put local governments in a cage, forming public constraints on the government and supervision of polluting enterprises. We predict that the environmental industry will eventually change from the current B2G or B2B to B2C. Mobile Internet is not just a tool, but more of a way of thinking. Will Internet thinking subvert the environmental industry? When the environmental industry becomes B2C, the Internet will definitely subvert the environmental protection industry. The impact of mobile Internet thinking on the industry may affect the reconstruction of the value chain. When the time for reconstruction comes, it may be faster than we think. This subversion will come faster once the energy of capital is added.

Tenth, deepening of industrial synergy and cooperation. The core of our E20 circle service activities is not to provide activities to connect market supply and demand, but to promote industrial collaboration. In the past, most environmental companies provided services on a point-by-point basis. Figuratively speaking, enterprises worked on the government's fields. The interfaces around the enterprise services were basically the government's, and were created by the government digging out a piece from its own service system. At first, we provided water supply services. In the early days, we only provided water plants, because water supply plants were the clearest and easy to dig out. Later, sewage treatment plants and garbage incineration plants had clear service boundaries, and the operation of the government-enterprise relationship was simple. The interfaces around the enterprise were all the government, so it was called a franchise. Municipal franchise must be a government-enterprise relationship, and it is not a franchise between two enterprises. When the water company was transformed into a corporatized system, the franchise of the water supply plant originally set up had no basis for existence. At present, local governments have accelerated the pace of withdrawal from specific public service areas. If the government is really put in a cage, as a franchised unit-type environmental enterprise, the service interfaces around you will also become enterprises, no longer the government. All enterprises must cooperate to achieve environmental effects. At this time, environmental enterprises cannot distinguish who is upstream and downstream. In fact, they are all constraints and symbiotic relationships. At this time, enterprises have two choices: one is that you do everything, but you may not be professional in anything, and you may not be able to meet the increasingly stringent environmental requirements. The government's board will be taken at any time. Of course, if it is a company with absolute control by the local government, although it is unprofessional, it is the government's own son., supervision may make some mistakes; but the best way out should be the second one, that is, professional division of labor and cooperation, with multiple professional environmental companies providing environmental services. This kind of interrelationship requires coordination. We believe that this kind of cooperation is equal cooperation regardless of upstream and downstream. If each company does not have its own core value, it will be overflowed. In collaborative cooperation, we must have our own core interests, and at the same time, we must create incremental value for cooperation and form a friendly interface. Future industrial cooperation must be dominated by symbiotic cooperation.

The great future

In the next five years, there are several possibilities that can be predicted, which will not be elaborated here. However, the pattern of the environmental industry will definitely change greatly after 2015. We use the industry strategic map for the next five years to try to predict the future in the unknown, hoping to welcome the change together with excellent industry players and lead the change. Finally, the E20 Environmental Platform hopes to work with you to achieve excellence and build a dream environment.

Source: E20 Environmental Platform