Case Study 01 Water Trade In China
Water trade in China
Overall context
Acqua International (AQ) is a Europe-based multinational company that has interests in water and other environment-related businesses.
In China, the company has joint ventures with medium-size and large municipalities to produce potable water. To increase its investments in China, the AQ Group arranged, through its local subsidiary Pacific Acqua International (PAQ), to enter into a strategic alliance with Tak Foy and Co., a Chinese conglomerate with strong roots in China and
Hong Kong in the service industry (mainly leisure-related). The venture is called Haoyu
China Limited (HCL).
Inside
These negotiations concerned an urban water supply system providing potable water to around one million people. Through an agent in the province, the China subsidiary PAQ had secured a contract to construct a water treatment plant for the system.
Some time after the completion and commissioning of the plant, PAQ learned from the same agent that the municipality was short of funds for some urgent development projects. One of its options was to privatize the municipality’s water supply facilities.
The sale value of the facilities was set by the municipality, and bidders were sought from within its jurisdiction; there would be no recourse to the central government for approval.
HCL, located in the municipality, submitted a purchasing proposal to buy the facilities, to set up a joint venture with the municipality’s water company on a 3:1 ratio, and to operate the facilities on a twenty five-year contract.
The unresolved issues when bids were called for were:
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•
•
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Initial water charges. The only things that had been agreed on up to this date were how much would be invested in the facilities and spent on improvements.
The demand for water. To make the business financially viable, a take-or-pay mechanism would have to be introduced, and local wells would have to be closed.
The formula to calculate annual water tariff revisions. Devaluation of the
Overall context
Acqua International (AQ) is a Europe-based multinational company that has interests in water and other environment-related businesses.
In China, the company has joint ventures with medium-size and large municipalities to produce potable water. To increase its investments in China, the AQ Group arranged, through its local subsidiary Pacific Acqua International (PAQ), to enter into a strategic alliance with Tak Foy and Co., a Chinese conglomerate with strong roots in China and
Hong Kong in the service industry (mainly leisure-related). The venture is called Haoyu
China Limited (HCL).
Inside
These negotiations concerned an urban water supply system providing potable water to around one million people. Through an agent in the province, the China subsidiary PAQ had secured a contract to construct a water treatment plant for the system.
Some time after the completion and commissioning of the plant, PAQ learned from the same agent that the municipality was short of funds for some urgent development projects. One of its options was to privatize the municipality’s water supply facilities.
The sale value of the facilities was set by the municipality, and bidders were sought from within its jurisdiction; there would be no recourse to the central government for approval.
HCL, located in the municipality, submitted a purchasing proposal to buy the facilities, to set up a joint venture with the municipality’s water company on a 3:1 ratio, and to operate the facilities on a twenty five-year contract.
The unresolved issues when bids were called for were:
•
•
•
•
Initial water charges. The only things that had been agreed on up to this date were how much would be invested in the facilities and spent on improvements.
The demand for water. To make the business financially viable, a take-or-pay mechanism would have to be introduced, and local wells would have to be closed.
The formula to calculate annual water tariff revisions. Devaluation of the