Consultants clean up in severely polluted China

The flood of foreign investment into China is fuelling significant growth for environmental consultants such as ERM and WSP. But China’s failure to effectively enforce regulations puts little incentive on Chinese firms to invest in pollution control. James Richens reports

China has experienced unprecedented economic growth since its communist leadership introduced market-based economic reforms in the late 1970s. Over the past 15 years, its economy has expanded by about 10% per year and become the world’s fourth largest.

This is partly due to foreign investment flooding into the People’s Republic – some $60 billion in 2005 – with almost three quarters in manufacturing, drawn by China’s vast emerging markets and lower costs.

But this near-miraculous growth has had severe environmental consequences. Images of smog-choked Chinese cities and polluted rivers full of dead fish are commonplace in the media. A report on the state of China’s environment published by the Organisation for Economic Co-operation and Development (OECD) in July confirms the grim picture (see box  ).

China has also overtaken the US as the world’s largest carbon dioxide emitter, according to a recent study by the Netherlands Environmental Assessment Agency.

There are signs that the state of the country’s environment is an embarrassment to its government, which is staring to crack down, especially in the run up to the 2008 Olympic games in Beijing.

In 2005, the director of the State Environmental Protection Administration of China (SEPA) was forced to resign after an explosion at a PetroChina chemical site in Jilin polluted the Songhua river with carcinogenic benzene.

In July, the head of China’s food and drug administration was executed for taking bribes and approving fake medicines – just one in a series of product safety scandals.

Also this month, SEPA sent a ‘blacklist’ of 30 polluting companies to Chinese banks, aimed at stopping them receiving finance.

Business booms for consultants
ERM was one of the first UK environmental consultancies to begin operating in China. It started as a joint venture with a local environmental institute in 1994, before setting up a wholly owned company in 2002. ERM now has 90 staff in four offices in China. Dr Wang Yong, managing director of ERM China, said the business was growing by 20-30% each year.

ERM was also the first – and is still one of the only – foreign consultants licensed to carry out regulatory environmental impact assessments (EIAs), which are required for all large new projects.

ERM did the EIA for Shell’s 4,000-kilometre west-east China gas pipeline and for BP’s liquefied natural gas terminal in Guangdong. The consultancy also does EIAs for SEPA, including one for the Shanghai chemical industry park.

But the bread and butter work for ERM and other consultants, is due diligence for large multinationals acquiring sites in China and periodic compliance audits for operations they already own there.

Philip Stewart, WSP Environmental’s director of global operations, says his consultancy works “almost exclusively” for UK and US multinationals.

WSP Group has been active in China since 2006 and has two offices and 12 environmental and energy specialists. Growth is strong and Mr Stewart predicts a turnover of some £600,000 by the end of 2007.

“The main driver is investment by foreign companies in China, not tighter environmental legislation,” Mr Stewart says. “These companies want to use an international-standard consultancy... local consultants cannot provide the same level of quality and service.”

Risk management – avoiding damage to the company’s image or ‘brand’ – is another main driver. Mr Stewart says most require compliance to their own set of global corporate environment, health and safety standards, with local legislative requirements as a minimum.

Much of WSP’s work involves auditing sites to check compliance. Site performance can be “very variable”, Mr Stewart says, with some older, recently acquired sites having low standards. Even sites with international standard ISO14001 have “numerous issues” of non-compliance, he says. China has some 8,000-9,000 sites registered under ISO14001.

Multinational companies are also increasingly concerned about supply-chain risks, especially in the electronics sector.

Greenpeace recently criticised companies such as IBM and Hewlett Packard for failing to ensure suppliers had adequate pollution control systems, after investigating sites in Asia, including China (ENDS Report 386, p 11 ).

WSP is an auditor for the Electronics Industry Code of Conduct, adopted by 26 firms, which sets pollution control requirements for suppliers.

Due diligence work may include a phased site assessment involving a review of its history and compliance record, followed by soil and groundwater sampling.

Remediation of some heavily contaminated industry sites is taking place, driven by the increasing price of property. Blight would not be tolerated by buyers while developers could afford to clean up sites. But remediation remains largely ‘dig and dump’ – excavation and landfilling of polluted soil.

In contrast, international consultants do little or no work for Chinese firms.

“Environmental awareness among Chinese companies is still at a very early stage,” Dr Wang says. “Enforcement of regulations is also very poor, especially in less developed parts of China, where local politicians are more concerned about economic growth.”

Indeed, enforcement action is sometimes unfairly focused on international companies rather than local Chinese firms, according to Dr Stewart.

Brendan Gillespie, OECD head of globalisation and development and co-author of the report on China agrees: “Chinese enterprises have very few incentives to improve their performance.”

However, it is “not all doom and gloom”, he adds. The Chinese government is putting considerable effort into improving the implementation of environmental policy. Multinational companies can play a role through requiring good performance through their supply chains.

Property development is another growth area for consultancies. In 2005, the Shanghai Industrial Investment Corporation contracted engineering consultancy Arup to design one of the world’s first eco-cities, called Dongtan. The city will be on Chongming Island, just off the coast near Shanghai. Building was due to start in 2007, although final planning permission has been delayed.

The first phase of the development is due to be completed by 2010 – in time for the World Expo in Shanghai – and will accommodate 10,000 people on a 100-hectare site. The plan is for the city to grow to 3,000 hectares with a population of about half a million by 2050.

Arup’s design is aimed at creating a more sustainable city. The development will be a mix of housing and workplaces to reduce the need for commuting. Dongtan will generate all its own heat and power from renewable sources, primarily from rice-husk biomass and organic waste from the city. No conventional, fossil-fuelled vehicles will be allowed in the city, which will be well-served by public transport. The design will also protect the island’s wetland habitat, which is covered by the Ramsar Convention.

Gary Lawrence, Arup’s urban strategy leader, says “Dongtan will inform developments elsewhere in the region and the rest of the world.” The company is designing two further eco-cities in China.

Pollution control market remains small
China is also seen as a “priority market” for UK pollution control technology, according to Thomas Huang from UK Trade and Investment, the government body providing advice on exporting. However, he struggles to name more than one or two companies active in China.

The fact is that, while China’s consultancy market is going from strength to strength, the market for pollution abatement equipment is small. What business there is – for instance, in ambient air quality monitoring and flue-gas desulphurisation – appears to be dominated by US and German companies.

The main problem is poor enforcement of environmental protection legislation by SEPA (see box  ). Another is price, with Chinese firms unwilling to pay for comparatively expensive UK products.

Craig Sillars, managing director of remediation firm Churngold, says the lack of protection for intellectual property is also a barrier to doing business in China. This does not affect consultancy services but it is a problem for equipment manufacturers.

Nevertheless, a few companies are working in China and appear quite optimistic about future prospects.

William Averdieck, managing director of PCME, which specialises in particulate matter monitoring equipment, says China has become one of the company’s top five markets based on sheer volume of growth. Although currently a small part of the company’s business, turnover in China increased by 50% last year. In contrast, PCME’s other main markets in the US, Germany and Japan are driven by “very demanding” environmental standards.

The Chinese market has been very price competitive, Mr Averdieck says, but there are signs that companies are prepared to pay for quality. There is increasing interest is monitoring equipment certified to regulatory performance standards such as the UK’s MCERTS scheme and its equivalent in Germany.

PCME has a sales office in Shanghai and is to expand the operation into servicing through a joint venture with a local entrepreneur. The company supplies all of Lafarge’s European plants with particulate monitoring equipment, and recently its new gypsum plant in Shanghai. It has also supplied Chalco, a Chinese aluminium manufacturer, and another company which operates an incinerator in Shanghai.

Paul Rubens, managing director of Casella, which makes health, safety and monitoring equipment, says his company recently entered the Chinese market after being bought by a US firm already operating there. He predicts growth in the next five years as legislation becomes better enforced and more stringent.

However, Johnson Matthey’s automotive catalysts business is already a success. Its production site, which opened in Shanghai in 2001, has expanded several times to cope with demand. Car production in China rose by 21% in 2006/07, compared with 10% across Asia. Johnson Matthey supplies about a third of the global market.

The main driver is the Euro exhaust emissions standard, adopted by China in 2000, which is being tightened much more quickly than it was in the EU. In 2006, all new vehicles were required to meet Euro III requirements. Euro IV is being phased in this year and will be required on all vehicles by 2010. Given the country’s grim air quality and soaring traffic, that is not before time.