Home 
Sectors and Themes Water Stories Country Water Actions People's Republic of China
|
|
Country Water Action: People's Republic of China
|
|||||||||||||||||||||||||||||||||||||
The Government of the People's Republic of China (PRC) is steering its water sector toward sustainable development, while coping with the changes and challenges brought by the opening of the economy. Through the efforts of PRC's National Development Reform Commission, the National Guidelines on Water Tariffs (NGWT) for the full cost recovery of water supply companies (WSCs) was released in 1998.
ADB strongly supported this new policy through two completed water tariff studies with the Ministry of Construction. The outcomes of these studies are:
The guidelines called for water tariff setting based on the principles of
NGWT also provides conditions on when to adjust water tariffs and how they should be structured and calculated. Water supply tariff increases are placed in the hands of local governments, removing the approval requirement of senior government. Instead, a reporting process of tariff changes to senior government and authorized supervisory audits takes its place. NGWT also called for public input on proposed tariff adjustments.
At the time when the PRC was trying to sustain a command economy, water provision was considered a basic social need and was heavily subsidized by the Government. Water tariffs in cities remained the same for decades resulting in the WSCs' failure to operate and maintain existing systems; water conservation was unheard of.
The PRC opened its economy in 1978, after realizing that the centrally planned economy was not working and was causing the country to lag behind its newly industrialized Asian neighbors. However, it took some time for tariff reforms to be recognized as necessary to ease the impact of rapid price inflation.
State owned enterprises, including the WSCs, suffered from strict price regulation because of the government's concern for price stability and affordability. Water tariff increases were not enough to cover the also increasing operating cost of WSCs. In the early 1990s, government restructuring and control, and its diminishing subsidies for water supply, impaired water operations and infrastructure development.
Market-based reforms in the late 1990s saved the day. These ongoing reforms, which include the NGWT and the development of institutional reform agenda, prompted all WSCs and new water supply projects to be financially sustainable and capable of full cost recovery. Corporatization became a viable option.
Between 1986 and 2001, water tariffs rose, averaging 17% to 25% every year. Despite these, however, studies indicate that even higher water tariffs are still affordable since the real average incomes in the PRC increased by 19% annually during the 1990s.
"Since the underlying cause of poor cost recovery is fundamentally political, political leadership is required to turn a fiscal crisis into an opportunity for change," says ADB consultant Mike Fortin. This is precisely the case with the PRC.
Senior government mandated the NGWT for full cost recovery to set the stage for institutional reforms. The financial crisis in WSCs forced the government to pass legislation that covered water supply, and then later on, sewer services. The roles of principal agencies were also defined.
WSCs, as operators of water supply services, were made responsible for:
Local governments, as owners of the utility, were made responsible for:
Local governments, however, were faced with conflicting political objectives, being both the owner and financial regulator of the utility. They had to precariously balance the goals of achieving financial sustainability and appeasing the public with low prices.
Their solution to this dilemma is a second level of regulation - that of monitoring financial performance and carrying out supervisory audits - provided by senior government.
PRC's experience tells us that full cost recovery is possible. It also tells us that an effective reform process takes a long time and that capacity building on all sides is a must. The first step of drafting and implementing new laws and regulations takes a few years, and institutional reforms take longer.
However, once reforms begin, "early adopters" or "innovators" are bound to arise. These are municipal operations which move to full cost recovery before the actual implementation of policies, setting examples for others to follow. In the PRC, this good performance is attributed to strong local political leadership.
Senior government can speed up financial reform by providing resources for enforcement of laws as testimony to its commitment to implementation. It is all a matter of political will to face public opposition to tariff adjustments.
Public opposition to tariff adjustments prevents the achievement of full cost recovery. The PRC Government's strategies to win public support include:
Tariff policies play a key role in managing risk when private sector participation is introduced. While preventing excessive profit taking, tariff policies minimize revenue risks, which attracts private sector partners.
The ability to attract private sector partners in the PRC water sector depends on the future prospects for cost recovery including a reasonable return of investment. The PRC Government is now considering using market instruments to improve investment and management efficiency in the public utility industries. However, it is important to note that public-private partnership should not be a substitute to tariff policies on full cost recovery.
| © 2012 Asian Development Bank Terms of Use |
 Top of page |
RSS Feeds
