A French Water Company's Cautionary Tale in China

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Suez has tried quietly to resolve its problems in Siping. The company's senior management gained a private audience with the provincial governor. Soon after, Siping's mayor renegotiated the contract with the French, who granted the Chinese more lenient terms. But even with the renegotiated contract, Siping has not paid. "It's the difference between can't and won't. We [had] assumed that they couldn't pay because of the financial difficulties, so we appreciated that," says Clark. "Now, I'm sure they can pay."

Asking for a Fair Price

Suez could sue or take its Chinese partners to arbitration, but the French company has 21 joint-venture water treatment facilities in China, including Siping, and is wary of how its other Chinese partners may react if lawyers get involved. "They don't want to be the pioneer to bring the government and Chinese partner either to court or to arbitration. It may have a negative image for them," says attorney Leo Zhou, who worked for Suez trying to resolve its dispute in Siping.

This is not the first time foreign investors have tried investing in China's water treatment industry and suffered. Thames Water Utilities of Britain, Hong Kong's China Water, and several financial investors have already pulled out of China's water treatment industry after going through similar experiences. In the best-case scenario, the local government will buy out the foreign partner, as the Shanghai municipal government did with Thames' water treatment project in 2004. Suez would happily sell its stake to the Siping municipal government if it could get a fair price for it.

Bad for the Region

For now, Suez is shying away from making further investments in northeastern China and other smaller, poorer Chinese cities. "Quite frankly, our experience in Siping means that we are very careful about which areas of China we go into," says Clark. He adds that Suez is making money on its other water treatment projects in China, particularly in the wealthier coastal regions. During French president Nicolas Sarkozy's state visit to China in late November, Suez signed new deals with Chongqing and Tianjin. The company's experience in Siping—which has an annual per-capita gross domestic product of $1,279—illustrates why Beijing's efforts to revive the northeast have been frustrated.

Based on Suez's original projections of Siping's demand for water, the joint venture hoped to build a second water treatment plant in the city. Now Suez won't go near Siping or anywhere in northeastern China. "This is an extremely huge loss for Siping, because if the Siping municipal government has lost its creditworthiness, not just investors in the water industry but no other investor will dare invest there now," says Chen Jining, professor at Tsinghua University's Water Policy Research Center.

Tschang is a correspondent in BusinessWeek's Beijing bureau.