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RiskidentificationforPPPwaste-to-energyincinerationprojectsinChina

ARTICLEinENERGYPOLICY·JUNE2013

ImpactFactor:2.7·DOI:10.1016/j.enpol.2013.06.041

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JINBOSONG

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Energy Policy 61 (2013) 953–962

Contents lists available at ScienceDirect

Energy Policy

0301-42http://d

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journal homepage: www.elsevier.com/locate/enpol

Risk identification for PPP waste-to-energy incineration projectsin China

Jinbo Song a,n, Danrong Song a, Xueqing Zhang b, Yan Sun c

a Faculty of Management and Economics, Dalian University of Technology, Dalian, Chinab Department of Civil and Environmental Engineering, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kongc Faculty of Humanities and social sciences, Dalian University of Technology, Dalian, China

H I G H L I G H T S

� We analyze MSW management practices, relevant legislations and policies in China.

� Through case study on PPP WTE incineration projects, ten key risks are identified.� Response strategies for key risks are developed.

a r t i c l e i n f o

Article history:Received 3 November 2012Accepted 11 June 2013Available online 9 July 2013

Keywords:Public-private partnership (PPP)Waste-to-energy (WTE) incinerationRisk identification

15/$ - see front matter & 2013 Elsevier Ltd. Ax.doi.org/10.1016/j.enpol.2013.06.041

esponding author. Tel./fax: +86 411 84706401ail addresses: songjinbo@dlut.edu.cn (J. Song)g918@163.com (D. Song), zhangxq@ust.hk (X.dlut.edu.cn (Y. Sun).

a b s t r a c t

Municipal solid waste (MSW) is regarded as a renewable energy source. In China, the sharp increase ofMSW has precipitated the rapid growth of waste-to-energy (WTE) incineration plants. Private capital hasbeen getting into the WTE incineration industry through the public–private partnership (PPP) arrange-ment. Due to the large construction cost and the long concession period commonly associated with thisarrangement, a number of failures have emerged in PPP WTE incineration projects. The aim of this paperis to investigate the key risks of PPP WTE incineration projects in China and study the strategies formanaging these risks by drawing experience and learning lessons from these projects. First, we analyzedthe MSW management practices, relevant legislations and policies, and the development of PPP WTEincineration projects in China. Second, we identified ten key risks through interviews, surveys and visitsto some selected projects, and provided detailed analysis of these risks. Lastly, we developed responsestrategies for these risks from the perspectives of both public and private sectors.

& 2013 Elsevier Ltd. All rights reserved.

1. Introduction

There are growing support schemes worldwide to promotepower generation from renewable energy sources (Commission ofthe European Community, 2008; Martins et al., 2011) because of thediminishing conventional sources of energy, frequent energy securityissues, and increasing public environmental awareness. Municipalsolid waste (MSW) is a renewable energy source. In many citiesworldwide, there are huge amounts of MSW. The waste-to-energy(WTE) industry has developed quickly in China and many othercountries in order to produce electricity as well as deal with theserious environmental problems caused by the huge amountsof MSW.

ll rights reserved.

.,Zhang),

A number of WTE power plants have been developed in Chinathrough public–private partnership (PPP) arrangement, which isregarded as an effective means to attract funds from the privatesector to provide public works and services and to improve efficiency(example, shorter construction time, lower construction cost, andlower operation and maintenance cost) in the delivery of such worksand services. PPP projects are quite common in many developed anddeveloping countries. The PPP arrangement is particularly attractivein developing countries as it enables the earlier availability of theneeded products and services to the public by utilizing private capital(Chang et al., 2003). In China, the private sector has played asignificant role in financing and providing public works and services(Chan et al., 2010; Chen et al., 2010; Ke et al., 2010).

However, it is inherent in a variety of risks and uncertainties due tothe large construction cost and the long concession period commonlyassociated with PPP arrangement. Reliable risk identification andallocation of risks between the public and private sectors are essentialto the success of PPP projects (Jin and Doloi, 2008; Li et al., 2005;Zhang, 2005a). Some categories of risks are identified, such as

J. Song et al. / Energy Policy 61 (2013) 953–962954

(i) political risk (Wang et al., 2000b) containing government corrup-tion (Maslyukivska and Sohail, 2007), government's breach of contract(Chan et al., 2011), and poor government decision making (Li et al.,2005); (ii) financial risk containing foreign exchange fluctuation(Wang et al., 2000a), interest rate fluctuation (Kumaraswamy andZhang, 2001), and inflation (Estache et al., 2007); (iii) legal effective-ness issues (Zhang, 2005b); (iv) operation risk containing operationcost overrun (Grimsey and Lewis, 2002), tariff/toll change (Ng andLoosemore, 2007), and expense payment risk (Shen et al., 2006);(v) market demand change (Ke et al., 2010); and (vi) environment risk(Darrin and Mervyn, 2002). The process of risk allocation is complexand flexible (Xu et al., 2011), and it is necessary that the mechanism ofrisk allocation is equitable (Jin, 2010).

As to PPP WTE incineration projects, environmental problems(Chen and Lin, 2008; Mills et al., 2006) and technological short-comings (Menard et al., 2006; Belevi and Moench, 2000) are mostlyfocused on. For example, redundant coal usage for MSW incinerat-ing or lack control of emission may worsen national, regional, oreven global environment badly (Asian Development Bank, 2007),poor operational efficiency and low technological level are severeobstruction to the project (Asian Development Bank, 2009), and thecomposition of MSW in China is questionable of its appropriatenessfor incinerating (Asian Development Bank, 2010).

In this paper, we will identify key risks in the development,operation and management of PPP WTE incineration projects in Chinaand formulate corresponding strategies for each risk in order to fosterthe power generation from renewable energy sources progressively.

0

100

200

300

400

500

600

700

800

2001 2002 2003 2004 2005 2006 2007 2008 2009

landfill sites incineration plants compost sites

Num

ber o

f pla

nts

/ site

s

2. MSW management in China

2.1. The issue of MSW

The quantity of MSW has tremendously grown in the world since1980s, especially in China with the continuous economic vitality andupgrading of life quality. Statistical data shows that China recentlysurpassed the USA to be the largest MSW producer (Cointreau, 2007).More than 150 million tons MSW are produced annually in China(Asian Development Bank, 2009), with an annual increasing rate of8–10% (Asian Development Bank, 2010; Nie, 2008). It is predicted thatthe annual MSW generation will increase to at least 480 million tonsby 2030 (Dan, 2005). In contrast to the huge amount of MSWgenerated each year, the waste management facilities in China arenot sufficient and the waste collection and treatment systems in manycities are inefficient. It is reported that around 30% of the MSW is notcollected (Zhang et al., 2010) and more than 200 cities are surroundedby waste in China (Asian Development Bank, 2007).

In general, there are three main MSW treatment methods:

Year

Fig. 1. Number of MSW treatment plants/sites between 2001 and 2009.

1.

400

Landfilling: It is a traditional waste management method thatburies waste materials. Landfills occupy land. It is predictedthat there is a need of additional 1400 landfills over the next25 years in China (Dan, 2005).

landfill sites incineration plants compost sites

2.

300ent

day

)

Incineration: It is a process that combusts organic materials andconverts them into ash, flue gases, particulates and heat, whichcan in turn be used to generate electricity (Knox, 2005).

eatm

per

3.

0

100

200

2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

Cap

abilit

y of

tr(th

ousa

nd to

ns

Fig. 2. Capabilities of MSW treatment between 2001 and 2009.

Composting: It is a process in which solid organic materials arebroken down by micro-organisms in the presence of oxygenand a rich, soil-like product is generated (Australian and NewZealand Biosolids Partnership, 2010).

2.2. MSW treatment facilities in China

The three waste treatment methods have been in use in China.Fig. 1 shows the number of landfill sites, incineration plants and

compost sites in China between 2001 and 2009. Fig. 2 shows thewaste treatment capacities of these facilities in the same period.A trend can be observed from the two figures: the number ofincineration plants increases, and so do their treatment capacities;the number of compost sites decreases, and so do their treatmentcapacities; the number of landfill sites decreases, but their treat-ment capabilities increase.

3. PPP waste-to-energy incineration projects in China

3.1. Development of WTE incineration plants

WTE incineration is recognized as an effective way to treatMSW (World Bank, 2000) and has been widely applied in manycountries (Ecke et al., 2001). For example, in Japan, about 80% ofMSW is treated by incineration (Jung et al., 2004), and in Denmark,incineration becomes the officially prescribed method (Heronet al., 2007). WTE incineration plants can reduce the originalMSW volume by 90% or even 95% if modern incinerators are used(Belevi and Moench, 2000; Wikipedia, 2011), and steadily generatepower and heat.

A number of WTE incineration plants have been built in China.According to a common geographical division of China, five regionsare shown in Fig. 3. The quantity and capacity of the plants in eachregion are as follows. Upto 2010, there are four in Northwest Chinawith a treatment capacity of 3300 tons/day, six in Southwest Chinawith a treatment capacity of 6100 tons/day, seven in Northeast Chinawith a treatment capacity of 4900 tons/day, nine in Central Chinawith a treatment capacity of 7200 tons/day, and 56 in East China witha treatment capacity of 45,100 tons/day (not including Hong Kong,Macao and Taiwan). It can be seen that most of the plants are locatedin the coastal areas in East China.

Southwest East

Northwest

Center

China

Jiangsu

Shandong Henan

Chongqing

Yunnan Guangdong

Northeast East Center Northwest Southwest Hong Kong, Macao and Taiwan

Northeast

Fig. 3. Distribution of the WTE incineration plants in China.

Government Private sector

PPP contract

MSW treatment subsidy

Residents

MSW treatment fee

Investment Power purchase agreement (PPA)

J. Song et al. / Energy Policy 61 (2013) 953–962 955

3.2. Legislations and policies relevant to WTE incineration projects inChina

A series of central legislations and policies has been enacted inChina in order to effectively manage MSW, promote its utilizationas a source of energy, and protect the environment. These include:

Project company State Grid Corporation

1.

Fig. 4. Structure of a PPP WTE incineration project in China.

The technical policy on municipal solid waste managementand pollution prevention (2000).

2.

Notice on establishing the levying system for MSW fee andpromoting the industrial production of MSW management(2002).

3.

Opinion about promoting the industrial production of muni-cipal waste water and solid waste management (2002).

4.

Renewable energy act (2005). 5. Trial guidelines on renewable power generation price and

expense (2006).

6. Management guideline of renewable energy power generation

(2006).

7. Method to recognize and manage the national encouraged

resource with comprehensive use (2006).

8. Notice on enhancing environment impact assessment of

biomass-to-energy projects (2006).

9. Guide on municipal solid waste treatment technology (2010).

10.

Notice on improving the price policies of the municipal solidwaste incineration for power generation (2012).

3.3. PPP approach to the development of WTE incineration projectsin China

The development of WTE incineration projects requires largeamounts of money, including the initial construction cost and theoperation and maintenance cost. This is a big challenge to thevarious levels of governments in China. Consequently, they turn tothe private capital for the development of WTE incinerationprojects through a PPP approach. As of 2008, more than 70% ofthe WTE incineration projects have been developed through thePPP arrangement.

Fig. 4 presents the structure of a PPP WTE incineration projectin China. The main cash inflows of PPP WTE incineration projectcontain subsidy from public agency and revenue of power gener-ated and sold to the grid through the power purchase agreement(PPA). Some legislations and policies have been passed to allowlocal public agencies to charge local households for MSW treat-ment and encourage private sector to participate in WTE incinera-tion projects through providing subsidy for MSW treatment. Someothers have been passed to improve the price system of renewablepower generation projects and oblige the State Grid Corporation tobuy the grid-connected power produced with WTE incineration.For example, according to Notice on Improving the Price Policies ofthe Municipal Solid Waste Incineration for Power Generation (2012)by National Development and Reform Committee, the conversioncoefficient from MSW to grid-connected power is temporarilydetermined to be 280 kW h/ton and the price of grid-connectedpower is 0.65 RMB/kW h (it is valid for the WTE incinerationprojects approved since January 1st, 2006), which is higher thanthe average price of grid-connected power paid before in China.Moreover, in order to encourage the power generation with WTEincineration as well as limit the use of conventional energy, thegrid-connected power produced with WTE incineration is calcu-lated in such a way: first, calculating the grid-connected power(q1) through the quantity of MSW supplied to the WTE incinera-tion plant; second, comparing q1 with the real grid-connectedpower (q2), if q1 is less than 50% of q2, the WTE incineration plantis regarded as conventional power generation plant; if q1 is morethan 50% of q2 but less than q2, the WTE incineration plant isregarded as renewable power generation plant, and q1 should be

J. Song et al. / Energy Policy 61 (2013) 953–962956

regarded as the grid-connected power; if q1 is more than q2, q2should be regarded as the grid-connected power.

However, nowadays, these legislations and policies are usuallyvaried and not followed out at the local level (Wang and Tiong,2000). So, many risks occurred, such as the poor decision making(Li et al., 2005), contract change (Shen et al., 2006) and publicopposition (Chan et al., 2011).

4. Research objective and methodology

4.1. Research objective

The main objective of this research is to identify the key risks inthe development, operation and management of WTE incinerationprojects in China, analyze these risks, and provide useful strategiesfor the effective management of these risks.

4.2. Overall research framework

The flow of the overall research framework is shown in Fig. 5.Case study is adopted as the primary approach for data collection.This method is favored because more useful answers about theevents could be obtained when “how” questions are asked (Xuet al., 2011; Yin, 2009).

4.3. Case selection

4.3.1. Selection criteriaThe projects are selected according to the following criteria:

(1) there existed serious problems no matter in which stage(construction, operation, or transfer) of the project that had causedgrave consequences to the project; (2) the projects were broadly

Step 4: Risk analysis

Provide detailed analysis on key risks

Step 5: Risk response

Develop response strategies for key risks from the perspective of public sector Develop response strategies for key risks from the perspective of private sector

Step 3: Risk identification

Summarize risk events Identify key risks from the events

Step 1: Case selection Set criteria for case selection Select projects for the research

Step 2: Data collection Review documents on WTE incineration projects Carry out interviews Visit the selected projects Process and analyze the data collected

Fig. 5. Flow of the overall research framework.

distributed in different areas of China and operated under differentconditions; and (3) project participants were willing to providedetailed information relevant to this research.

4.3.2. Projects selectedInitially, more than 40 PPP WTE incineration projects were

identified by exploring the WTE incineration projects that werelisted in China's Tenth Five-Year Plan (2001–2005). Then, sixprojects were chosen according to the criteria mentioned in theabove. They are Project A in Heze, Shandong Province; Project B inWujiang, Jiangsu Province; Project C in Xingjin, Henan Province;Project D in Tongxing, Chongqing Municipality; Project E inWuhua, Yunnan Province; and Project F in Nanshan, GuangdongProvince. The locations of the selected projects are shown in Fig. 3,and other detailed information of these projects is summarized inTable 1. For the reason of confidentiality, the names of the projectsare not provided here.

4.4. Data collection

4.4.1. Review of documents on WTE incineration projectsVarious types of information on the six projects have been

collected. These included internal talks, agendas and meetingminutes of the project management, and other non-public infor-mation; news and reports from multimedia; published books,reports, and articles.

4.4.2. Interviewees from contracting and non-contracting partiesTo obtain unbiased information and opinions from multiple

perspectives, critical stakeholders from both contracting partiesand non-contracting parties of these projects were interviewedface-to-face. Interviewees from the contracting parties includedproject managers from the private sector and high or middle leveladministrators from local public agencies. For non-contractingparties, this study considered residents nearby the WTE incinera-tion plants.

4.4.3. Design of semi-structured questionnaireWe developed two semi-structured questionnaires respectively

for the interviews of contracting parties and non-contractingparties. Each questionnaire included some open-ended questionson key issues involved in PPP WTE incineration contracts andmain concerns of different parties. Based on the two question-naires, we interviewed face-to-face the major stakeholders ofthese projects. Appendixes A and B summarize the main questionsasked in the interview.

4.4.4. Interview with contracting partiesA total of 34 interviews were accomplished with the contract-

ing parties of the six projects, including six with the managersfrom the plants and 28 with the administrators from the localpublic agencies. For a majority of the interviews, it took 60–120 min while others took 30–60 min. These interviewees werevery supportive and provided us with quite detailed informationon the projects they had been involved. During interview, we tooknotes, and recorded the conversation by digital recorders. Afterinterview, we transcribed the recording into text, of which therewere a total of 256 A4 pages.

4.4.5. Interview with non-contracting partiesIn our research, residents nearby the six projects were inter-

viewed, and were asked only in a short time. Of the 60 interviews,49 with critical information were helpful to our research.

Table 1Detailed description of the six PPP WTE incineration projects.

Project Investment(million RMB)

Incineratorfrom

Treatment capability(tons/day)

Subsidy(RMB/ton)

Price of grid-connected power(RMB/kW h)

Construction start date/constructioncompletion date

Status

A 180 China 600 10 0.285 October 1999/April 2001 Opened officiallyB 320 China 700 95 0.57 May 2008/October 2009 SuspendedC 245 China 1000 20 0.56 August 2001/September 2002 Opened officiallyD 327 Germany 1200 69.9 0.365 April 2003/March 2005 Opened officiallyE 322 USA China 1000 30 0.465 January 2004/May 2006 October

2006/January 2008Terminated andrestarted

F 362 Belgium 800 148 0.68 October 2002/December 2003 Opened officially

J. Song et al. / Energy Policy 61 (2013) 953–962 957

4.4.6. Project visiting and observationWe visited four of the six projects, namely Projects A, D, E and

F. In visiting each project, we made careful observation of thelayout of the plant, the functions of the various components of theplant, management and maintenance of these components, theprocedures in the normal operation, and the processes of MSWtreatment and waste gas disposal. We also visited the surroundingareas of each project including the residential areas. We prepareddetailed notes, photos, and videos of the many aspects that we hadvisited and observed.

4.4.7. Data processing and analysisData collected in different means were thoroughly analyzed

from the perspective of how to effectively manage the key risksinvolved in PPP WTE incineration projects in China. It contains asystematic analytic process of three steps, identification of keyrisks, analysis of key risks identified, and determination of appro-priate response strategies to the key risks. The three steps areexpounded in the following sections.

5. Identification of key risks

In this step of key risks identification, risk events that had causedserious problems in the development, operation and management ofeach selected WTE incineration project were summarized. From theseevents, key risks were identified. Table 2 presents the process of keyrisks identification. For example, five risk events had occurred inProject A. The first risk event (RE-A1) was the immature technology ofthe incinerator used, which did not fit for the kinds of MSWgeneratedlocally. RE-A1 resulted in an accumulative operational loss of about 15million RMB within 4 years of operation. RE-A1 is identified astechnical risk in this research. The second risk event (RE-A2) wasthe use of coal in the plant at a level higher than that nationallyrestricted. RE-A2 led to the discharge of more greenhouse gases.RE-A2 is identified as environment risk. The third risk event (RE-A3)was the breach of contract by the local public agency which did notkeep the promise to provide the project with subsidy. RE-A3 causedthe project could not get real help from the government when it facedheavy economic burden. RE-A3 is identified as government credit risk.The fourth risk event (RE-A4) was a lack of legislations and policies todeal with the breaching behavior of government. RE-A4 is identified aslegal and policy risk. The fifth risk event (RE-A5) was the change in theproject contract that the private contractor withdrew from thisproject. RE-A5 resulted in the operation of the project broken off.RE-A5 is identified as contract change risk.

Through statistical analysis on key risks of the six projectsencountered (Table 3), in total, 10 key risks identified, including(1) government decision-making risk, (2) government credit risk,(3) legal and policy risk, (4) technical risk, (5) contract changerisk, (6) environment risk, (7) public opposition risk, (8) MSW supplyrisk, (9) payment risk, and (10) revenue risk. These risks are analyzedin the following section.

6. Analysis on the key risks

6.1. Government decision-making risk

The bureaucracy, corruption, incompetence, inadequate prepara-tion, or lack of experience of public officials often causes problems inthe decision making on some key issues of PPP WTE incinerationprojects. These problems include unreasonable project planning,improper project location, incomplete technical feasibility analysis,and unreasonable investment return rate. These problems mayconsequently cause change of contract, government credit issue, oreven termination of the project. For example, the problem ofimproper project location occurred in Projects B and C. In ProjectB, it was approved by the Provincial Development and ReformCommittee, and an environmental impact assessment report wasapproved by the National Environmental Protection Bureau. How-ever, the public had raised the issue of possible environmentpollution, which led to an investigation of the local government.The result of investigation showed that the plant was inappropri-ately located. This project was eventually suspended.

Besides, some projects were approved to be constructed in thevillages in order to protect the environment and economic growthin areas of dense populations. However, because of inefficiency orbureaucracy, it often took a long time for project approval. Withrapid urbanization, many residential areas had been under devel-opment in the period when the projects were waiting for approval.The locations of the projects would have been already surroundedby several newly built residential areas when they were eventuallyapproved. These residential areas would suffer from emissions ofthese projects and conflicts would ensue.

6.2. Government credit risk

Public agencies' failing to fulfill their obligations in the concessioncontract can negatively affect the project directly or indirectly. In PPPWTE incineration projects, good government credit is a critical factorto maintain the project in a long term operation. However, it wasreported that the probability of local public agencies to breachcontract was relatively high in China (Li, 2007). There were somecases that were not successful due to such a reason. For example,Projects A and D failed because relevant public agencies had notfully undertaken their duties of paying for MSW treatment andsupplying MSW in sufficient quantities.

6.3. Legal and policy risk

Relevant national PPP legislations and policies may not be carriedout or fully carried out. Some legislations and policies are difficult toeffectively implement due to their incompleteness. In addition, thereare changes of legislations and policies resulted from the change ofadministrators, or inconsistency between the central and localpolicies. These problems significantly affect project outcomes. Forexample, the State Development and Reform Commission, Ministry

Table 2Process of key risks identification for the six projects.

Project Number Risk events Risks identified

A RE-A1 Incinerator could not be applied for local MSW, due to the faultiness of technology and the deficiency of the projectfeasibility study. The operational loss accumulated up to 15 million RMB in 4 years.

Technical risk

RE-A2 The amount of coal as supplemental fuel exceeded the national limits and the incinerator discharged excessive greenhousegases.

Environment risk

RE-A3 Local public agency breached the contract and did not pay subsidy as promised. Government credit riskRE-A4 There are no legislations and policies to deal with the behavior of breaching promise. Legal and policy riskRE-A5 Private contractor withdrew from the participation. Contract change risk

B RE-B1 The location of the project was 100 m away from Beijing–Hangzhou Canal, 1 km away from Pingwang Town, and 15 kmaway from Taihu Lake. The environmental impact assessment report was questioned by the public.

Government decision-making risk

RE-B2 The project was suspended as soon as the construction was completed because of the opposition of local residents, though320 million RMB (including more than 200 million RMB financing from the bank) had been invested.

Public opposition risk

C RE-C1 Inadequate employees and vehicles for MSW transportation led to the short supply of MSW. MSW supply riskRE-C2 The plant was located in Xingyang City whereas MSW treated in the plant is from Zhengzhou City. Some extra and

inefficient administrative procedures were involved because of the different administrative divisions of the two cities.Government decision-making risk

RE-C3 An extra road toll station was set up later between the plant and the MSW sources, which led to increased operation cost(70–80 RMB/truck).

Revenue risk

D RE-D1 Due to the shortage of transportation facilities, the public agency had to deliver MSW by tractors or common trucks.Consequently, the MSW supply was obviously insufficient for the two incinerators in operation.

MSW supply risk

RE-D2 The operation costs (example, fuel expense and toll charge of vehicles) were increased. Revenue riskRE-D3 As promised by the public agency, MSW should be supplied from five regions in the city. However, it was mostly from one

region in practice.Government credit risk

RE-D4 There were no legislations and policies to deal with the behavior of breaching promise. Legal and policy riskRE-D5 Neighbored environment was polluted by MSW and wastewater due to insufficient treatment facilities. Environment risk

E RE-E1 Technology imported from the USA was unsuitable for dealing with local MSW. Technical riskRE-E2 It was difficult to charge fees to local residents for MSW treatment. Payment riskRE-E3 Initial investors from the USA withdrew in the construction. As a result, the investor in the contract changed into a Chinese

company. The project was rebuilt and restarted 2 years later.Contract change risk

RE-E4 There is lack of policies to motivate the paying activity of the residents and support the PPP projects. Legal and policy risk

F RE-F1 The equipment imported for treating waste gas could not run properly because the local voltage was unstable. Technical riskRE-F2 Toxic emissions were discharged directly into the air without disposal. Environment riskRE-F3 Subsidy for MSW treatment and payment for power generation were both delayed. Payment risk

Table 3Statistics on the key risks.

Project A Project B Project C Project D Project E Project F Frequency

Government decision-making risk X X 2Government credit risk X X 2Legal and policy risk X X X 3Technical risk X X X 3Contract change risk X X 2Environment risk X X X 3Public opposition risk X 1MSW supply risk X X 2Payment risk X X 2Revenue risk X X 2

J. Song et al. / Energy Policy 61 (2013) 953–962958

of Finance, Ministry of Construction, and Environmental ProtectionAdministration had promulgated legislations and policies regardingthe charge system for MSW treatment. However, these legislationsand policies were not fully followed in practice by some local publicagencies, such as the cases in Projects A, D and E. To make it worse,these legislations and policies do not have specific clauses on thepunishment for breaking them.

6.4. Technical risk

The selection of an inappropriate/immature technical scheme orthe poor design of a technical scheme for a WTE incinerationproject can cause serious operational problems or even failure ofthe project. For example, the imported incinerators may be unsui-table for the MSW generated locally in China. One main issue is the

composition of MSW. Unlike some other countries, MSW in China isusually dominated by components of high moisture and low energy.In Project A, the mismatch of the incinerating technology and thelocal MSW composition led to serious problems in the operation ofthe project, including very low MSW treatment capacity of theincinerator. Similarly, in Project E, the imported incinerators fromthe USA required sorting and separating the MSW before incinerat-ing. However, this requirement could not be met in the localresidential areas due to lack of sorting facilities and the habit ofthe local residents. This led to the operation problem of the projectand the initial investor of private capital withdrew from this project.

Furthermore, some PPP WTE incineration projects in Chinaexperienced a technical dilemma. They modified and renovatedexisting old facilities into incinerators in order to save money.However, these incinerators of low technical level could not meet

J. Song et al. / Energy Policy 61 (2013) 953–962 959

the various requirements in WTE incineration and consequentlyled to a great financial loss to the project.

6.5. Contract change risk

Some reasons may cause the change of contract, includingimperfect project plan and design, changes in technical specifica-tions, changes in stakeholders' requirements, and the change ofthe franchisee. For example, the franchisees had been changed inProjects A and E. These changes led to the delay or suspension ofservices.

6.6. Environment risk

In the MSW incinerating process, it is inevitable that various kindsof contaminating materials are produced, including SO2, NO, H2S, HCl,heavy metal ashes (example, Pb, Hg, and Cd), and chlorides (example,polychlorinated dibenzo-p-dioxins and polychlorinated dibenzo-fur-ans). Most of them are extremely poisonous and require stringentattention and prudent treatment. Excessive discharge of contaminat-ingmaterials can seriously pollute the environment. For example, suchenvironmental accidents had happened in Projects A, D and F. InProject A, the accident was due to human error, which added anexcessive amount of coal in the incineration; in Projects D and F, theaccidents were because of the mismatch of the incinerating technol-ogies and the properties of local MSW.

6.7. Public opposition risk

Failing to protect the public interests in project developmentand operation often causes public opposition. Besides, the publicopposition is resulted from a lack of environmental knowledgeand information on WTE incineration projects. Nowadays, opposi-tion from residents near the WTE incineration plants is a promi-nent problem in China. Although the local public agencies areeager to promote WTE incineration projects, pressure from thepublic is quite high. Such pressure can lead to the delay, suspen-sion or termination of a WTE incineration project. Like Project B,there were many other WTE incineration projects in China thathad encountered strong opposition from local residents. Commonways of opposition are mass disturbance or non-payment of MSWtreatment.

6.8. MSW supply risk

This risk refers to that the quantity of MSW supply is signifi-cantly below the designed MSW treatment capacity of the incin-erator and/or the quality of MSW is worse than that required for theincinerator. The worse the quality of MSW is, the lower the energygenerated per unit of MSW treated and the higher the treatmentcost per unit of MSW. Poor MSW quality may also cause variousoperational problems and even damage the incinerator. For exam-ple, when MSW is of large content of construction waste or hardmaterials such as iron and metal pieces, the incinerators would bestuck and this problem takes time and manpower to solve; whenMSW contains large content of inorganic minerals like dust andstone, the designed heat standard would not be attained. In allcases, the financial benefits of the WTE incineration projects will besacrificed. Moreover, in Project D, the designed MSW treatmentcapacity of the incinerator was 1200 tons/day. However, there wasnot sufficient supply of MSW due to lack of large capacity vehiclesand high transportation cost. The grid-connected power producedwith WTE incineration was even not enough to meet the require-ment for the normal operation of the plant itself. A similar problemexisted in Project C.

6.9. Payment risk

The delay, insufficient or non-payment of subsidies from thegovernment can cause severe financial problems to the project, andmay even cause the suspension or termination of the waste treat-ment service. Delay of payment had happened in Projects E and F.

Furthermore, the current practice in China is that power gener-ated in WTE incineration project is usually sold to the nationalpower grid. But the price of grid-connected power is different fromcity to city as these cities have different policies. In general, the priceof grid-connected power and the MSW treatment subsidy of WTEincineration projects are relatively low. In this situation, the delay orinadequate payment for MSW treatment and electricity generationwould easily cause deficit problem to the project.

6.10. Revenue risk

Several factors influence the cost and revenue of a WTEincineration project, including consumer price index, subsidy forMSW treatment, transportation cost, grid-connected power, price ofgrid-connected power, coal price, and operational standard. Forexample, in Project C, the transportation cost was a heavy burdenon the project. The reduction of the transportation cost was notsignificant even after the local government built a new road for theproject at a cost of 7 million RMB. In addition, the price of coal mayfluctuate from 170 RMB/ton to 350 RMB/tonwithin a year. However,there was often no corresponding adjustment in the price of grid-connected power and in the subsidy for waste treatment.

7. Response strategies to the key risks

There are some internal relevancy and external causes for thekey risks involved in the PPP WTE incineration projects. Firstly,despite various risks may emerge, key risks are generally concen-trated on the ten categories discussed in the above. There are somecorrelations among these risks. For example, mistakes in govern-ment decision-making may lead to improper project location, whichin turn may worsen surrounding environment and cause severeopposition from local residents. This may eventually bring contractchange risk. Besides, when MSW supply risk, payment risk ortechnical risk occurs, the revenues of the project will change. Asthere is no political or regulatory guarantee to sustain the operationof the project, the project might modify the original contract.

Secondly, the composition of MSW in China is still a criticalrestriction to the development of WTE incineration projects. Itdirectly results in technical risk, contract change risk, MSW supplyrisk and revenue risk. In China, the WTE incineration technologiesare still far from perfect. Most modern equipments and machinesare imported from abroad. Due to the Chinese life style and weakawareness of MSW household classification, the composition ofMSW is a large obstacle. For most MSW, the moisture content is50–55% and the heat value is usually 3000–5000 kJ/kg, which ismuch lower than that of the United States, the United Kingdom,Japan and Hong Kong.

Thirdly, there is a lack of professionals who have both technicalexpertise and management experience in WTE incineration pro-jects in China. Even a limited number of professionals in the WTEincineration projects are mostly from the field of thermoelectric ormanagement. This situation sometimes leads to problems such asimproper project location, incomplete legislation and policy, andenvironment pollution.

Nowadays, PPP arrangements have been widely implemented indifferent sectors in China, such as transportation, water treatment,and conventional power generation. However, PPP WTE incinerationprojects are still in the initial stage, and a number of risks have been

J. Song et al. / Energy Policy 61 (2013) 953–962960

encountered. The three causes discussed in the above deserve specialattention because they lead to significant risks and hinder thedevelopment of PPP WTE incineration projects. Table 4 providessome response strategies to the key risks.

8. Conclusion

MSW has tremendously grown in many cities in China withthe continuous economic vitality and upgrading of life quality.Incineration is one of the three major MSW treatment methods inChina. There is growing support of power generation from MSWwith increasing awareness about the adoption of renewableenergy source. A series of legislations and policies has been

Table 4Response strategies to the key risks.

Key risk Public sector P

Governmentdecision-makingrisk

� Gain WTE incineration experience and improve capacity ondecision-making for PPP WTE incineration project.

� Emphasize project feasibility study.� Establish a clear accountability system for MSW treatment.

Governmentcredit risk

� Establish public monitoring mechanisms, and improvegovernment credit and performance evaluation systems.

� Avoid pursuing political gains for individuals.

Legal and policyrisk

� Set up clear policy goals in order to avoid different publicagencies making policies from their own perspectives.

Technical risk � Upgrade incineration standards to meet the most stringentinternational standards.

� Adopt an effective bidding process to select qualified andexperienced private participant.

� Apply matured modern technologies.

Contract changerisk

� Stipulate in the contract that: (a) Public agency should be resp� (b) Any changes by private sector should seek the approval of

terminated.� (c) Deposit should be paid by the private sector to ensure that

Environmentrisk

� Oversee the whole process of emissions strictly.� Treat the MSW classification prudently.

Publicopposition risk

� Investigate and evaluate problems caused by the project.� Consult the public and hold public hearings at the proper

time.� Make appropriate compensations to residents close to

the plant.

MSW supply risk � Set up a complete MSW classification system, and establishappropriate legislations and policies to restrict MSW dump.

� Make more investment on the infrastructure to promote thequality of MSW sorting and classification.

� Strengthen publicity, education, and demonstration activities.

Payment risk � Make reasonable payment for MSW treatment to privatesector.

� Faithfully implement unified price policies of grid-connectedpower nationwide.

Revenue risk � Use a flexible concession period mechanism (i.e., on condition tonly when the actual profit arrives at the reasonable profit).

� Include the formulas and conditions for adjusting the subsidy� Include the distribution clauses of extra profit between the pu

enacted in China in order to effectively manage MSW, promoteits utilization as a source of energy, and protect the environment.Consequently, a large number of WTE power projects have beendeveloped through the PPP arrangement, which is regarded as aneffective means to attract private funds and improve efficiency inthe delivery of public works and services. However, many failureshave emerged in PPP WTE incineration projects in China due to avariety of risks and uncertainties.

Through case study, we identified 10 key risks including(1) government decision-making risk, (2) government credit risk,(3) legal and policy risk, (4) technical risk, (5) contract change risk,(6) environment risk, (7) public opposition risk, (8) MSW supplyrisk, (9) payment risk, and (10) revenue risk. Some responsestrategies were provided for each of the key risks from the

rivate sector

� Consider and evaluate carefully the results of the decisions made by publicagency.

� Plan remedial measures well beforehand, such as insurance from insurancecompany.

� Obtain credit support from the government in written form, and look forguarantee from the government by defining the obligations and rights in thecontract.

� Keep in touch with public agency to have the latest information on relevantpolicies.

� Specify influencing factors (example, replacement of the government officials,policy inconsistency between the central and local governments) of the risk inthe contract to lessen the potential loss.

� Include compensation clauses of raising concession price or extendingconcession period in contract.

� Analyze carefully the characteristics of local MSW, and adopt suitabletechnologies.

� Promote research on WTE incineration technology.� Enhance personnel technical training.� Improve experience and capacity through the cooperation with research

institutes.

onsible for the costs increased and the time delayed due to his changes.the related public agency; otherwise, the franchise of the private sector will be

the project will be completed and the service will be provided as promised.

� Control emissions according to the legislations.� Report the contaminants discharged.

� Open the operational information to local residents.� Improve the transparency and publicity of the project during operation.

� Reach an agreement of “take or pay” with public agency to ensure returns on theproject.

� Monitor and record the heat value of MSW for 24 h.

� Reach an agreement with public agency on surcharge for overdue payment.

hat a reasonable profit is set, whatever the revenue change, the franchise will expire

in the contract.blic and private sectors in the contract.

J. Song et al. / Energy Policy 61 (2013) 953–962 961

perspectives of both the public and the private sectors. It isbelieved that these strategies would facilitate both the sectors inthe development, operation and management of PPP WTE incin-eration projects in the future, with enhanced risk assessment andmanagement practices, improved public relationships, more effi-cient project operations, and better protected environment.

Acknowledgment

This work is supported by the National Natural Science Foundationof China (Grant nos. 71072109, 71272091 and 71103025) and Programfor Liaoning Excellent Talents in University.

Appendix A

Questions to contracting parties:

1.

What technologies and equipments does the WTE incinerationproject employ?

2.

Please discuss on the process of decision-making, constructionand operation of the PPP WTE incineration project. Are thereany obstructions?

3.

Does the WTE incineration project have an influence on thesurrounding environment? What are the residents' responseand attitude?

4.

What is the composition of MSW treated by the PPP WTEincineration project? Is it suitable for the technologies andequipments of the project?

5.

How much subsidy does the government pay to the privatesector? What is the subsidy composed of?

6.

What are the revenue and cost of the project? 7. Have any changes and risks happened to the PPP WTE incin-

eration project?

8. Are there any effective legislations and policies pushed PPP

WTE incineration projects forward?

9. Do you have any suggestions for improved implementation of

PPP WTE incineration projects?

Appendix B

Questions to non-contracting parties:

1.

How about environment in your living area? 2. How do you think the impact of the WTE incineration plant on

your daily life?

3. Do you support the WTE incineration plant near your commu-

nity? Please state your reasons.

4. Do you think the MSW treatment fees are appropriate? Please

state your reasons.

5. Do you receive timely and clear information about the opera-

tion of the plant?

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