Analysis On Comparison Of The Capital Structure Of Water Companies In China, UK And USA

It is a common challenge for all countries that how to provide safe, stable and general water services under the condition of water resources shortage and deterioration of aquatic environment. Almost all of the developing countries and most developed ones are still exploring, and China is no exception. China is carrying out the market-oriented reform of the urban water industry, searching for investment modes fit for China's urban water industry, with the intention to eliminate the abuse power formed in the long process of the planned economy, ensure the sustainable operation of water enterprises, improve water resources and aquatic environment.Capital structure, as one of the crucial factors to influence enterprise value, may affect the enterprise value via capital costs, arrangements of risks and profits, power and profits distribution to each shareholder and so forth, which may further affect the survival and development of enterprise. In terms of the water industry, a network utilities marked by feature of natural monopoly, as water services has the characteristics of quasi-public product, low replaceability, large amount of investment and cash flow stability, and should be provided generally, stably and safely, therefore the industry has unique capital structure and its formation reasons. More importantly, the capital structure of the urban water industry plays two significant roles in the whole industry from two aspects, which are price setting and maintaining financing capability, formulated the basis of the water enterprises' sustainable development. Therefore, the writer hopes to interpret the formation reasons and their possible influences of different capital structures from the perspective of international comparison, and find out a model for China's water industry reform.We choose capital structure of water companies in UK and USA as the analytic objects to compare the differences of capital structure and its influence factors. UK is the sole country in which privatization is successful and effective regulation system has been set up. Water industry of USA has many common features with that in China, such as nature environment, ownership of water utilities, scales of the utilities, operation management, etc. However the public utilities in USA operate much better than that in China. Therefore, we should pay more attention on the measures USA government takes in the water industry. In Chapter 3, we explain in details the development courses of the water industry and the capital structure of the water companies in China, UK and USA. There are 4 types of water companies in China: traditional state-owned water companies, foreign water companies, domestic private companies and listed companies. Traditional companies take the leading position in China but is not suitable for the nowadays situation. The government's control on the investment, operation and management makes the state-owned companies keep high gearing and stand in loss. Therefore traditional state-owned companies need completely transformation. With the gradual opening up of urban water industry to domestic and foreign capitals, some large-scale international water enterprises and domestic water engineering enterprises and water investment enterprises enter into China's urban water industry market in succession. To some extent, these new comers may vitalize the domestic urban water industry market, but they are not able to become the dominant powers because of their respective limitations-foreign-funded enterprises.Privatization obtained successes in UK after the process of"municipal operation-nationalization-privatization"as the result of the termination of building water infrastructures and the government's willingness of transferring the obligation of infrastructure maintenance and renewing. During the course of privatization, the Government remitted $7.6 billion outstanding debts, provided $2.3 billion"Green Dowry"and exempted $12 billion capital taxes. These measures afforded the water and sewage companies keeping low gearing as 20%-30% for a long time. Though recent years, the gearing increased shapely beyond 60% because of the profit decrease, the severe regulation system, steady cash flow and developed capital market guarantee the sustainable operation of the water companies in UK.Water companies in USA can be divided into 2 categories, public utilities and private companies. Public utilities are predominant in water market in the aspects of revenues, scales, service population, etc. Private companies are ideal candidates for the supplement of public utilities. The gearing of public utilities is between 30% and 60% with good financial flexibilities, which profits from powerful fiscal assistances of US government, including federal grants, state revolving funds, municipal bonds and leverage bonds. In order to improve the efficiency and performance of the public utilities, US government implement PPP model extensively to combine the advantages of the government and private companies.In Chapter 4, we find out the differences of the capital structure of water companies in China, UK and USA by comparison. Furthermore, in consideration of the comprehensive influence of the politics, economy, nature and history of different countries, we summarize in Country Norms the factors which cause the differences as follow: investment requirements, laws and policies, water industry regulation, fiscal assistance, the degree of capital market development and operation and pricing mode.In Chapter 5, we analyze the defects of the unreasonable capital structure and provide following suggestion on the improvement: (1) splitting the investment and operation function of the government in the water industry and strengthen its financing and investment obligation; (2) implementing PPP model in operation of water companies and introduce more severe competition in water industry; (3) establishing law frameworks and setting up regulation system for water industry.We hope that this paper can analyze the capital of water companies in a different aspect and attract more concern into water industry, so that there would be more good suggestion and advices put forward for our water industry reform.