42176 World Bank Analytical and Advisory Assistance (AAA) Program China: Addressing Water Scarcity ­ From Analysis to Action Policy Note Water Supply Pricing In China: Economic Efficiency, Environment, and Social Affordability The World Bank This policy note is one of the policy reports of the World Bank's Analytical and Advisory Assistance (AAA) Program "China: Addressing Water Scarcity ­ From Analysis to Action". It was prepared by the Rural Development, Natural Resources and Environment Unit (EASRE) of the East Asia and Pacific Region of the World Bank. Environmental and natural resources management issues are an integral part of the development challenge in the East Asia and Pacific (EAP) Region. The Environment Strategy for the World Bank in the East Asia and Pacific Region has provided the conceptual framework for setting priorities, strengthening the policy and institutional frameworks for sustainable development, and addressing key environmental and social development challenges through projects, programs, policy dialogue, non-lending services, and partnerships. This study provides a forum for discussion on good practices and policy issues within the development community and with client countries. For more information on and the reports of the AAA Program, please visit the website of the China water AAA program at http://www.worldbank.org/eapenvironment/ChinaWaterAAA. Sustainable Development Department East Asia and Pacific Region The World Bank Washington, D.C. December 2007 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e- mail pubrights@worldbank.org. 2 TABLE OF CONTENTS Abstract............................................................................................... 4 Acknowledgements............................................................................... 6 1. Introduction..................................................................................... 7 2. Policy and Practice............................................................................ 9 3. Marginal Costs, Environment, and Depletion........................................ 12 General Principles............................................................................ 12 MOC Pricing for Water Supply and Wastewater..................................... 13 4. Social Impact and Affordability.......................................................... 16 Social Impact................................................................................... 16 Affordability.................................................................................... 17 5. Protecting the Poor........................................................................... 19 Increasing Block Rates....................................................................... 19 Other Devices.................................................................................. 21 Rural and Low Income Communities.................................................... 22 6. Implementation Issues...................................................................... 23 Overcoming Resistance to Price Reform................................................ 23 Financial Implications........................................................................ 25 Metering......................................................................................... 25 Gradualism..................................................................................... 26 Marginal Costs and Planning............................................................... 27 7. Summary and Recommendations......................................................... 28 Boxes: 1. Water and Sewerage Pricing in Beijing.................................................. 10 2. Opportunity Cost of Water in the Hai River Basin................................... 14 3. Share of Water and Wastewater Services Expenses for Average and Low Income Households................................................................... 18 4. Making Price Increases Acceptable: The Case of Chongqing...................... 24 3 Abstract The overriding issue in Chinese water enshrined in Chinese national management is the increasing cost and legislation, increasing block tariffs in scarcity of water. Special mention must urban areas will typically be the route to be made of the fact that pricing policy follow in this regard. A two-part tariff has a potentially critical role to play in can be used to ensure affordable service addressing this problem. This report for basic needs to low income addresses pricing issues with respect to consumers, with the top block ideally one segment of the water sector as a reflecting true economic and whole, namely the supply of water ­ environmental costs. and the disposal of wastewater ­ relating to residential, industrial, and Volumetric pricing covering both commercial use. It therefore excludes supply and disposal costs is clearly by far the major user of water in terms required for this to be possible, although of volume, namely the agricultural metering decisions must be subjected to sector. cost-benefit analysis and introduced on a case-by-case basis. The case for Repeated studies have shown that water metering will increase as both incomes and sewerage prices in China are and water supply costs increase. Such a generally too low, and efforts must be policy may possibly be complemented made to increase them to achieve by parallel targeted and temporary operational efficiency goals, generate income support programs or vouchers adequate revenues, and encourage to be exchanged for water and efficient rates of consumption. While the sanitation service. Subsidies to poorer first step in price reform is to fully communities, in rural areas in achieve financial cost recovery, this particular, will usually be required for should be seen as an interim objective at least initial investment in only. More ambitiously, the pricing of infrastructure, but operation and water and sewerage should reflect the maintenance expenditures should be increasing long-run marginal costs of recovered from users, and always water supply and its disposal, clearly earmarked for this purpose specifically addressing the costs of whether or not volumetric pricing is environmental damage in production used. and consumption, and the opportunity costs of depletion. This is referred to as Efficient resource management for the marginal opportunity cost (MOC) water sector as a whole requires parallel pricing. reforms for competing water uses such as agricultural and direct industrial Such an approach will require price abstraction. In addition, wider increases well in excess of those used to economic development planning achieve financial cost recovery alone requires an estimate of the true and will have to be reconciled with the economic and environmental costs of need to ensure that poor people and water resources even if full-scale price communities obtain an adequate supply reform is politically not feasible in the of water for their basic needs. Already short term. For reasons of economic 4 efficiency, social equity, and magnitude of water scarcity in China, acceptability, a gradual approach to the country should aggressively price reform will typically be required. implement tariff reforms based upon the Public hearings, consumer education, MOC concept; (c) public acceptability of and transparency are necessary to price reform and affordability of water overcome resistance to price reform, by the poor are important concerns especially when the quality of the although these can be resolved by existing service is poor. appropriate water tariff structures and community outreach programs; and (d) To summarize, the key messages of this since international experience offers paper are as follows: (a) pricing policy is limited guidance in this area, China an essential tool to improve the should exercise its own leadership efficiency of water use, protect the water before the water crisis in the country environment, and address water becomes unmanageable. scarcity problems; (b) given the 5 Acknowledgments This policy note, which integrates the comments of Andres Liebenthal, Bert main findings of the water pricing Hofman, Thomas Zearley, Susanna thematic study of the World Bank's Smets, and peer reviewers Jan Bojö and Analytical and Advisory Assistance Salah Darghouth. It also benefited from (AAA): "China: Addressing Water Scarcity discussion with participants of the two - From Analysis to Action", was written technical review workshops held in by Jeremy Warford (Consultant) and Beijing and Chongqing, respectively, in Jian Xie (Senior Environmental November 2007. Specialist) of the World Bank. This policy note was prepared under the It was based on a set of case studies in general guidance of Christian Delvoie, Chongqing, Beijing, Hai River Basin, David Dollar, Rahul Raturi, Magda Shandong, and Henan as listed below. Lovei, Elaine Sun, Bert Hofman, Susan The AAA is managed by Jian Xie. The Shen, and Andres Liebenthal at the key members involved in the case World Bank. It also received valuable studies included Linjun Zhou, Qi Dong, guidance from members of the Advisory Zhi Zhang, Wenchao Jiang, Hua Wang, Group and Working Group established and Thomas Zearley for the Chongqing in China to advise the AAA, especially studies; Shiqiu Zhang, Liangchun Deng, Mr. Li Jiange, Vice Minister, the Peng Yue, and Huishan Cui for the Development Research Center of the Beijing study; Hao Wang, Liping Jiang, State Council of China. Ariel Dinar, Geoffrey Spencer, and Ximing Zhang for the Hai Basin study; The above support and guidance and Kunimasa Nishigaya and Shenhua received during the preparation of this Wang for the small towns study. policy note are highly appreciated. This policy note benefited from the 6 1. Introduction China is facing severe water problems, efficient operation of the concerned in terms of both quantity and quality. enterprises and the ability to finance Improved pricing of water supply and needed system expansion. sewerage in both urban and rural areas is one of a number of important policy The present policy note concurs with the instruments that can help ensure that general consensus on this aspect and this increasingly scarce resource is used should be seen as complementary to the both efficiently and equitably. World Bank report mentioned earlier. However, instead of addressing the Compared to many other developing issues concerning the management of countries, China has political will and the water utilities which have been dealt public support for water pricing. The with extensively in other studies, this general public is willing to pay for policy note focuses on the implications water supply services as long as the of the rapidly escalating costs of water quality of the service is good and the supply due to environmental damage, tariff level acceptable. The country is resource scarcity and its depletion, and able to collect revenue from water tariffs on the social implications of pricing to cover at least the operation and reform for residential, industrial and maintenance costs of most water supply commercial water supply. It highlights utilities, even in several rural the issue of how to ensure an adequate communities. supply of water for poorer households and communities in light of these However, water pricing in China is still increasing costs. Agricultural water use, inadequate to finance efficient utility by far the most significant in terms of management, and, more fundamentally, volume, is largely excluded in the to achieve sustainable long term report development of water resources. This problem has already been addressed in The findings and conclusions of this a number of studies; for instance, a policy note are drawn heavily from a set recent analysis of the issue is contained of background case studies which in the World Bank report: "Stepping Up: include a willingness to pay (WTP) Improving the Performance of China's survey and a water tariff reform study Urban Water Utilities" (World Bank, in Chongqing, an economic valuation of 2007, referred to subsequently as water resources in the Hai River Basin, "Stepping Up") which addressed general the impact upon real incomes of water management aspects of the urban water tariff reforms in Beijing, and small town sector. While these studies have case studies in the provinces of typically proposed price reform to Shandong, Henan and Chongqing. encourage more efficient and less wasteful use of water, their main focus The policy note is divided into seven has generally been a financial one, with sections. Section 2 presents a brief concern being expressed about the introduction to national water pricing adequacy of cost recovery to permit the policy and actual practice in China, with 7 special reference to financial including the need to overcome performance of the concerned utilities. resistance to price reform, financial Section 3 looks beyond financial aspects, and metering. It also refers to objectives, emphasizing that, in strategic issues which transcend the principle, prices should reflect true authority of water and sanitation economic, environmental, and depletion utilities, and which, in practice, will costs. Section 4 addresses the issue of require a gradual approach to price social impact and affordability and reform on both economic efficiency as Section 5 then considers ways to ensure well as equity grounds. Summary and that price reform is compatible with the recommendations are presented in need to protect the poor. Section 6 refers Section 7. to a number of implementation issues, 8 2. Policy and Practice The Administrative Regulation on Urban ensure effective operation of such Water Supply Pricing, introduced in 1998, facilities. Currently, typical large-sized provides a legal basis for water supply and megacities in China charge from pricing in China. The regulation states one to over three yuan/cubic meter of that: 1) the general principles of setting water for residential use. The water tariffs are "cost recovery, wastewater treatment fee ranges reasonable revenue, water conservation between 0.25 and 1.00 yuan/cubic and social equity"; 2) municipalities meter. are responsible for approving water tariffs; 3) tariffs should cover operation Charges for water and sewerage in and maintenance, depreciation, and China vary according to consumer interest costs; 4) tariffs should allow for category. Volumetric pricing (requiring an 8 to10 percent return on the net value metering) is used for single family, of fixed assets, depending on the commercial and industrial users, and sources of funds; 5) tariffs should be apartment buildings, but rarely for appropriate to local characteristics and individual apartments within those social affordability; 6) a two-part tariff buildings, where only bulk meters are consisting of a fixed demand charge and used. Cross-subsidization between a volumetric charge or increasing block consumer classes is common, with tariff (IBT) should be gradually adopted; industrial and commercial consumers 7) the first block of IBT should meet the typically paying 1.5 times as much per basic living need of residents; and 8) cubic meter than households. public hearings and notices should be conducted in the decision making In addition to tariffs for the water process of setting water tariffs. To meet supply and wastewater facilities, water the objective of cost recovery, regular bills typically include a water resource tariff increases may be necessary in fee and a water development fee. The many Chinese cities. water development fee is based upon the allocated cost of the raw water Prior to 1996, charges for wastewater supply infrastructure. The water discharges applied only to industrial resource fee, in principle, reflects the enterprises, but they were very low. opportunity cost and scarcity of the Typically set at 0.08 to 0.10 yuan/cubic actual raw water source, and is charged meter, they did not raise significant to all the water users. Guided by the revenues. In 1996, the Water Pollution Ordinance of Water Permits and Water Prevention Law provided a legal basis for Resource Fee Management, which charging wastewater fees to all users replaced the old water permit connected to an urban sewerage management ordinance and became network, stipulating, among other effective in April 2006, water resource things, that urban sewerage should be fees are determined by the local treated in a centralized wastewater government(s) concerned. Different treatment plant, and its usage should be areas have different levels based on the subject to a wastewater treatment fee to actual status of water resources. For 9 instance, Beijing now charges 1.10 yuan 2006, and they will continue to rise. for its water resource fee but Chongqing Although the legal basis for full cost only 0.10 yuan. In practice, this fee recovery is present, and while rarely approaches the level required to considerable progress has been made in cover true opportunity costs in their recent years in this regard, much respective cities. According to the improvement is still required, even in Ordinance, the water resource fee goes the best performing systems (see Box 1, to the local and central governments as which refers to the Beijing situation). part of general revenue. This applies in particular to wastewater financing. Charging residential Water tariffs in China have been consumers for wastewater management increasing constantly since the inception other than a purely nominal amount is of the economic reform process, for now observed in only a few cities, and example, increasing from 0.80 to 3.70 most frequently under conditions yuan (by 3.4 times in real terms) in imposed by multilateral lenders. Beijing from 1997 to 2004 and from 0.85 Subsidization from general government to 2.8 yuan in Chongqing from 1999 to revenues is thus the norm. Box 1: Water and Sewerage Pricing in Beijing Since the late 1970s, water has been priced volumetrically in Beijing. Prior to 1997, the pricing policy in Beijing did not embrace the concept of full cost recovery, i.e. recovery of capital, operations and maintenance costs (O&M), and wastewater treatment. Since 1997, however, the real price of water in Beijing has increased sharply. Furthermore, in 1998, an additional volumetric tariff for wastewater treatment was added. In addition to covering the cost of supply, the water laws, policies, and regulations are very much concerned with water saving and conservation and the protection of water resources. In this sense, pricing has also been promoted as an instrument of water demand management. The price of water in Beijing reflects a number of different cost items. For example, the tariff in 2003 was 2.9 yuan/cubic meter. This consisted of a water resource fee (for both surface and groundwater) of 0.6 yuan/cubic meter, a sewage treatment fee of 0.6 yuan/cubic meter, a tap water fee of 1.7 yuan/cubic meter to cover the fixed and variable (capital and O&M) costs of the water supply company, and a tax of 0.33 RMB/cubic meter paid to the Beijing municipality. This breakdown reflects the structure stipulated in China's Price Law and the National Guidelines on Water Tariffs. At present, the price of water in Beijing is the highest in all the cities in China and recent price adjustments for the residential sector have been focused on the sewage treatment fee and water resource charge, rather than the tap water tariff. Despite these reforms, including a further increase in the residential water tariff to 3.7 yuan/cubic meter in 2004, water and sewerage in Beijing remain subsidized even in strictly financial terms. As stated in "Stepping Up", the result of cost of service and the revenue from the above is that many urban water users. The general recommendation utilities in China experience financial therefore is that the financial and and operational stress. Since user fees operational performance of urban water are well below the full cost recovery utilities should be improved by level, utilities are forced to rely on ensuring that water and wastewater unreliable municipal capital utilities (including drainage bureaus) contributions and government can meet their financial obligations payments, and, even when provided, through user fees only, and by adjusting government payments are usually not tariff structures to ensure more reliable enough to fill the gap between the true and higher utility revenues with 10 government funding limited to capital to be supplied. In rural water supply contributions. Clearly, constraints to projects, it is common for local such a policy arise in the case of low governments to subsidize connections income communities and in rural areas through a grant to the poor who in particular where a subsidy will often otherwise cannot afford the connection. be unavoidable if adequate services are 11 3. Marginal Costs, Environment, and Depletion General Principles in excess of those required for financial cost recovery alone. Full recovery of financial costs for water supply and wastewater management is However, there are still more costs to be a critically important and undeniably considered in addition to the investment ambitious objective. Nevertheless, even and operating costs incurred by the this should be seen as a stepping stone water utility. The supply of water may to an even more ambitious goal. In involve a variety of environmental costs. order that consumers can reveal their When they involve the construction and willingness to pay for the water they operation of sewerage and sewage consume (and thus its value), it is treatment systems to handle necessary that they be charged a price wastewater, they are, to a limited extent, that reflects the real economic cost of already factored into the pricing policy, using it. This requires that the cost be but there are often other environmental defined, not simply as the average impacts which are rarely considered in historic cost of supply incurred by the the context of the pricing policy. While water utility, but as the cost of typically difficult to estimate precisely producing additional or marginal but nevertheless real, these may include supplies, which are required as demand ecological impacts due to the increases. Such a pricing policy construction of reservoirs or cross- provides a signal as to whether country transmission pipelines, and the investment in additional capacity is costs of disposing of wastewater directly justified - a critical function where the into the environment where sewerage cost of water is escalating rapidly. and treatment works do not exist. A recent World Bank study on pollution In practice, therefore, long-run marginal costs in China (World Bank 2007) cost should be used as a basis for cost estimates that water pollution damage recovery in order to avoid frequent to irrigated crops is of the order of 7 price fluctuations that would otherwise billion yuan per year and more than 4 be implied where investments in billion to fisheries, implying an average additional capacity do not follow a damage cost for these two aspects alone smooth trend over time. Long-run of about 0.24 yuan/ cubic meter of marginal cost in such cases can be wastewater. This average figure, approximated by discounting the future however, may not be very useful as a stream of unit costs (or costs per cubic guide for a specific municipality, as meter), a concept sometimes referred to costs will doubtless vary widely from as "discounted unit cost" or "average case to case. Moreover, the costs exclude incremental cost". A key implication of other ecological damage, threats to this approach is where unit costs of public health from direct exposure, and water rise rapidly, marginal costs by costs of treatment by waterworks, definition are greater than average costs, industrial, and commercial users. and so a policy based on this principle Nevertheless, the estimates provide an would require tariff levels considerably idea of the magnitude of the problem. 12 Finally, even with tariff levels based on is evident in the formal designation of long-run marginal costs of supply, this approach as marginal opportunity including environmental costs, there cost (MOC) pricing. In turn, this can be might still be absolute water shortages. formally defined as MOC = MDC+MEC In principle, efficient pricing in such +MUC, where MDC is the direct cost of cases requires tariffs to be raised to the resources used by the concerned ration existing capacity so that utility to supply additional water and consumers are required to pay a price wastewater management facilities, MEC for water equal to its value in the is the external or environmental cost, highest alternative use known as the and MUC the user or depletion cost opportunity cost. Therefore, when a (Pearce and Markandya, 1989). community runs into absolute supply constraints, economically efficient water The MOC pricing approach has been consumption requires that in addition to illustrated by a series of studies marginal production and environmental conducted under the auspices of the costs, the price of water should also China Council for International include depletion or scarcity costs. Cooperation on Environment and Conventional tariff structures in China Development (CCICED), in which the actually allow these various components rapidly escalating costs of water and its of cost to be identified: for instance, disposal are typically shown to imply production costs are contained in the the need for prices well in excess of water development fee, environmental those required to cover the purely and depletion costs in the water financial costs incurred by the utilities resource fee, and waste disposal in the concerned (Warford and Li, 2002). sewerage fee. However, this will not be equally true in all cases. Adoption of the principle It is clear that strict adherence to the would tend to highlight differences above rules is unlikely in practice. Even between cities and regions in terms of so, they offer guidance to a new strategy the real costs of water consumption and for China to adopt in its water disposal, and thus, inter alia, provide management policy. The increasingly important information for regional and well documented evidence about water economic planning decision making. scarcity, due to a combination of global climate change and resource A CCICED study conducted in the late mismanagement, means that water 1990s (Spofford, 1998), while noting pricing policies in China, as elsewhere, there were large regional variations in have a potential role by far transcending the availability and cost of water with that of achieving financial objectives of the north of China generally facing water and sewerage utilities. water shortages while the south was water-abundant, compared pricing MOC Pricing for Water Supply and policies for Beijing and Shanghai. It Wastewater found that in the case of Beijing, where water was in short supply and where The above suggests that attention to the massive investments in cross-country various components of long-run transmission of water were projected for marginal cost is required. Recognition the future, prices for non-agricultural of the importance of these components use were probably from one sixth to one 13 tenth of what they should have been A study conducted more recently for with agricultural use being almost free Beijing also proposes that a pricing of charge. It was obvious that policy be developed around the concept potentially huge savings could be of MOC. It is estimated that current achieved from price reform. In residential tariffs are about one half of Shanghai, on the other hand, where the long-run marginal cost of water supply costs were not rising rapidly, (about 7 yuan/cubic meter), and much prices roughly approximated the less if the costs of depletion and scarcity economic cost of supply. are included. These studies also emphasized that Few studies have been conducted to quite apart from avoiding wasteful use study the implications of the real cost of at the municipal level, MOC pricing also water scarcity or depletion, which has a major strategic role. Allowing should in principle be reflected in the regional variations in the real cost of water resources fee component of the water to be reflected in price policy overall price. However, it is generally would tend to encourage large water- clear that in regions facing water using industries to shift to where water scarcity, current water resource charges supplies are cheapest. Improved pricing do not come close to reflecting the would also encourage careful opportunity costs of depletion costs. consideration of the regional water This has been documented in one study demands of agriculture, and the scope that has addressed this issue, namely for meeting future food requirements by that of the opportunity cost of water in means of less water-intensive land use the Hai River Basin (Box 2). in water-scarce regions. Box 2: Opportunity Cost of Water in the Hai River Basin Environmental considerations aside, the real, or opportunity cost of water, is either the cost of producing incremental supply or the price necessary to ration existing capacity, whichever is greater. Defined this way, some evidence about the depletion cost of using water in water-scarce regions is obtained from a study of the Hai River Basin. This region has the most severe water related problem among all major water resource regions in China. However, while water production costs, at 5.08 yuan/ cubic meter, are relatively high, they are minimal in comparison with the potential costs of a water shortage in the region. The study estimates the economic value of water (EVW) - or opportunity cost - in terms of value added in alternative industrial or agricultural uses, and finds that the average EVW for economic sectors based on integrated water withdrawal in eight study areas to be 41.8 yuan/cubic meter, in which that for tertiary industry is as high as 208 yuan/cubic meter, the next highest is for construction at 180 yuan/cubic meter, the third is for mining and quarrying at 114 yuan/cubic meter and the lowest is for various agricultural uses, ranging between 3­16 yuan/cubic meter. There is considerable variation in EVW between different areas, with the average EVW in Beijing being the highest and that in Xinxiang is lowest. With regard to wastewater, the Beijing environmental costs involved. study referred to above shows that Wastewater charges are based on the charges roughly equal wastewater volume of wastewater discharged which treatment costs, but do not cover all the are in turn based on the quantity of 14 water consumed, and are about 0.9 be helpful. Reviews of water pricing in yuan/cubic meter, which covers only OECD countries show that financial cost treatment costs. The Beijing study recovery is usually achieved for water estimates that wastewater treatment will supply, but despite growing concern cost around 1.25 yuan/cubic meter by about shortages, there is little evidence 2010, and proposes that wastewater to show that prices are beginning to charges should be equal to or higher reflect real economic costs. This is even than this level. more apparent in the case of wastewater. A partial exception to this For residential consumers, whose rule can be found in the case of Israel, wastewater discharge is fairly which has made major efforts to factor homogeneous, it is convenient to charge depletion costs into pricing schedules for sewerage, sewage treatment and for irrigation water. It is frequently the disposal simply on the basis of metered case in OECD countries that private water consumption. This is in contrast abstraction of water by larger industrial to industry and certain types of and agricultural users requires payment commercial activity where it is of abstraction fees, which in principle important to distinguish between are aimed at addressing depletion costs, wastewater dischargers based on the or at least the marginal cost of quality of effluents and where a variable expanding capacity resulting from such tariff should be used based on volume use. However, such payments rarely and type of pollutant. In each case, reflect the true magnitude of the charges for emission of wastewater or marginal costs involved. In view of this pollutants should be based as best as experience, and the urgency of the water possible on the cost of the problem now facing the country, it is environmental damage that is caused. perhaps worthwhile for China to take the lead internationally on this topic. Seeking guidance on the above topics from international sources is unlikely to 15 4. Social Impact and Affordability Social Impact standards. Meanwhile only 6 percent of municipal wastewater was treated and Price reform in the water sector untreated domestic and industrial worldwide has often encountered wastewater contaminated public water strong social and political opposition, bodies and threatened human health. and China is no exception to this rule. Local governments in China and The social impact of low water pricing elsewhere around the world are often on the poor was negative and obvious. reluctant to raise water tariffs to a First, higher income consumers enjoyed sustainable level and, as a result, water better quality service and were the main subsidy is common in various forms. beneficiaries of the prevailing policy of Although often stemming from concern subsidizing water supply, since they for the well-being of poorer households, consumed the most water. The 2006 low water tariffs, which result in WTP survey shows that in Shapingba inadequate financial performance of a District, one of six survey areas within water utility, may have perverse income the vicinity of Chongqing Municipality, distributional consequences. Evidence poor households with monthly incomes from Chongqing City illustrates this below 200 yuan consumed only 0.4­8 general issue. cubic meters of water per month (2.4 on average) while those with monthly In 1999, the residential water tariff in incomes exceeding 1,500 yuan used Chongqing was around 0.85 yuan/cubic from 1.5 to 30 cubic meters (9.6 on meter. The municipal government average). A previous household survey provided free capital investment to found that a typical poor family with a water utilities, which was equivalent to monthly income of 500 yuan received a subsidy of 1.34 yuan/cubic meter. only 3.4 yuan per month from water The municipal water company needed subsidy, while a wealthy family with 500 million yuan each year for new over 10,000 yuan per month enjoyed a construction, extension, and subsidy of over 22 yuan per month. improvement of water supply service. The amount was greater than the total Second, low water quality and annual budget for all municipal inadequate service invariably have a construction activities, the result being disproportionate impact upon the poor. that neither the scope nor the quality of Such cases have been extensive and well water and sewerage services were able documented, with inadequate funding to keep up with the rapid rate of precluding extension of networks into economic growth in the city. At that underprivileged areas. Again, in time, inadequate funding meant that Chongqing, the analysis shows that the only 20 percent of municipal public spent more on bottled water and distribution pipelines met national other water-related expenses than on technical specifications, and the water metered water due partially to their available for residential consumers concerns over poor quality of tap water. barely met minimum drinking water Failure to expand and improve service 16 to low income areas gives poor people Tariffs and compliance with standard no alternative but to consume water of World Bank loan conditions for cost inferior quality often obtained from recovery, and they show that private sources at an extremely high affordability will be of growing concern cost. Moreover, as shown in the as cost recovery requirements tighten. Chongqing case, the very poor, who could not afford either of these In Chongqing there were 168,000 alternatives, also suffered more from the unemployed people in its urban districts threat to human health due to in 2004 comprising approximately 4-5 consuming low quality water. Indeed, percent of the total labor force. Local these findings prompted a major governments provide the unemployed evaluation of the relationship between as well as the retired with small financing public services and poverty pensions ranging from 155 to 210 yuan issues in the city of Chongqing, referred per month depending on which district to subsequently in this paper. they live in but these are sufficient only for basic living requirements. A survey Affordability conducted in the summer of 2006 in one urban district and five towns in Many household surveys done in China Chongqing Municipality shows that the show that residents, in both urban and low income (less than 400 yuan per rural towns, are willing to pay for water month per household) population supply to a certain extent. Their WTP comprised 5-28 percent of the total level varies by city and by income sample, indicating that the percentage of category. Nevertheless, affordability by the poor is significant and cannot be the poor is a concern in any effort at ignored. As estimated by the survey, pricing reform. The challenge is the WTP for water by the poor was therefore to reconcile the objective of generally low and barely exceeded the economically efficient water use with existing water tariff. Even then, it that of ensuring that poor people obtain already consisted of about 3 percent of adequate service for their essential household incomes. It is clear that the needs. If safeguards for the poor are poor would be reluctant to accept a new built in, price reforms aimed at price increase if no financial support is improving the quality of water services provided. The general public in the city may in fact be a win-win solution. (90 percent of those interviewed during the survey) agreed that it was necessary The issue of affordability of water for the government to provide supply by the poor is analyzed and minimum living support to this group addressed in the studies of Chongqing to compensate for further increases in and five small cities or counties located water tariffs. respectively in Shandong, Henan, and Chongqing. They provide a good Box 3 summarizes the situation in five illustration of the situation confronting small towns - Gaomi in Shandong municipal authorities in China. The Province, Bishan and Jiangjin in governments of these cities or counties Chongqing, Tongxu and Weishi - in have undertaken improvement of Henan Province. In light of the widely pricing policy in line with the accepted view that the maximum Administrative Regulation on Urban Water proportion of household income to be 17 spent on water and sanitation should be percent by the year 2020. It should also between 3­5 percent, affordability is be noted that this is required just to clearly an issue, particularly for low satisfy the relatively narrow objective of income households in each city/county, financial self-sufficiency for the even before projected increases take concerned water authorities; basing place. Among the cities or counties prices upon the real economic cost of studied, Bishan and Jiangjin present the supply and service would clearly be greatest problems taking into account much more problematic for lower that given the projected increases in income families. incomes the proportion spent on water and sanitation will be between 8­10 Box 3: Share of Water and Wastewater Services Expenses for Average and Low Income Households Affordability Analysis on Low-income Households 12% 10% Gaomi 8% Bishan 6% Jiangjin 4% Tongxu 2% Weishi 0% 2005 2008 2010 2015 2020 Affordability Analysis on Average-income Households 5.00% 4.00% Gaomi 3.00% Bishan 2.00% Jiangjin 1.00% Tongxu 0.00% Weishi 2005 2008 2010 2015 2020 Before we close the discussion on the and operating costs required for the affordability of the poor, it should be supply of an adequate level of service. noted that another important aspect of This often requires special affordability is that poor communities, governmental support, in light of spatial often villages or rural towns as a whole, disparity and social equity may be unable to afford the investment considerations. 18 5. Protecting the Poor Improving pricing policy for water higher rates of consumption. Indeed, as resources while protecting the poor has noted earlier, concern for social equity been a preoccupation with governments in water pricing is already reflected in worldwide, and a variety of measures Chinese national legislation, which have been employed. An OECD report makes specific reference to the role of (2003) grouped them into two the two-part tariff in ensuring that the categories: income support measures poor are able to obtain sufficient water and tariff-related measures. Income for their basic requirements. More support measures comprise those which generally, increasing block tariff address the individual consumer's structures can be used to reflect the true affordability problem from the income cost of water to customers using large side, such as water bill reductions or volumes of water while allowing waivers, water service vouchers from subsidized prices for essential use. the governments, capped tariff rebates Thus, the charges applied to the top and discounts, and payment assistance. block of consumption could reflect the Tariff-related measures, normally marginal cost of water. The lower blocks developed and implemented by provide an element of subsidy and governments in their financing role or hence protection for low income by the water utility itself, include households. The Beijing study also increasing block rates, capping metered concurs with this approach and tariffs, special tariffs for low income recommends that an IBT system be consumers, subsidized connections to introduced instead of a uniform tariff the network, and so on. Similarly, the for urban domestic water uses to better three general approaches are used reflect efficiency and equity China, namely, increasing block rates, considerations. income support, and price waivers for the poorest households. The Beijing study notes that although an IBT system can result in a gain in Increasing Block Tariffs welfare improvement, some problems may arise. First are the implications for A central issue to be addressed is that revenue sufficiency. Significant price raising prices of water may have elasticities estimated in the study mean significantly regressive impacts. While that the vast majority of consumers a uniform pricing scheme may attain could end up in the lowest block of the efficiency conditions at the margin, it IBT and only pay the lifeline tariff. The also gives rise to affordability problems implication of this is that most for poorer sections of the population, households will be subsidized in their with potential threats to their health and water consumption. The tariff will general well being. therefore fail to achieve cost recovery and hence the quality of the water A common way to address this dilemma supply (regularity, wastage, water is to change the prevailing flat rate tariff quality, and so on) will be hard to structure to one which charges more for sustain or improve. Altering the 19 various facets of the IBT could resolve households will lose out on a system the problem. The size of the first block based upon a four-member family. This and the size of the steps are thus critical. will be especially true where households share one metered The second issue concerns incentives for connection. the water supply enterprise itself, whose objective is full cost recovery or an Experience from Beijing and other cities adequate return on capital. The study in China suggest that there is no need to notes that when an IBT is introduced, subsidize water in excess of that the poor, who are generally subsidized required for basic household by such tariff structures, may become a requirements. Over and above this level, lower priority for the water supplier. water should be treated as any other Thus, a supplier who aims for cost consumer good, and priced at MOC. A recovery will have even greater two-step tariff is thus sufficient. incentives than normal to improve Determination of the volume of water service for the more affluent that is required for basic needs is neighborhoods and households than the therefore crucial, and may well vary poorer ones. Special problems thus according to local economic and climatic arise with regard to poorer conditions. In general, however, the communities, as illustrated in Box 3. level recommended by the World Ultimately, the tariff structure Health Organization (WHO) of 40 liters introduced specifically to provide per capita per day (about 5 cubic meters immediate relief to the poor may per month for a household of 4 persons), perversely induce a lower quality should be considered. Within the WHO service for them in the longer-term. The limits, there is of course some potential potential for such incentives, and the for wasteful use or subsidization of regulation required to remove them, consumption by those who do not need needs to be weighed against the it, but this is of academic rather than potential welfare enhancing effects quantitative significance. described above. It is important to note that the current A third issue concerns subsidization of practice of some Chinese cities is to set the rich. It should be made clear that the the first block much more than the basic IBT system subsidizes all water need for living and therefore reduce the consumers, rich and poor, for the initial effectiveness of water tariffs as an units of water consumption. incentive for water saving. For instance, Furthermore, the subsidy is only the water tariff scheme adopted in available when households consume the Lijiang City in 2005 shows that the first full first block of subsidized water. Not block is up to 25 cubic meters per all poor households will do this and household per month which is charged hence will not receive the full subsidy. at 1.40 yuan/cubic meter (excluding Moreover, poor households frequently 0.40 yuan/cubic meter for wastewater have larger families than richer treatment), the second block is from 25 households. Although family size to 35 cubic meters at the price of 2.10 appears to be relatively uniform in yuan (i.e., 50 percent increase of the base Beijing, it is likely that at the lowest price of water supply), and the third extremes of the income distribution and final block is above 35 cubic meters 20 at the price of 2.80 yuan/cubic meter poor, creates severe distortions in the (i.e., 100 percent increase of the base overall pricing system and while trading price). For a typical household of four may have some merits in terms of persons, the per capita quota is far more economic efficiency, it may clearly be at than that required to meet basic needs odds with the basic objective of a as recommended by WHO. The obvious voucher system in terms of protecting drawback of having an excessive first the most vulnerable members of the block would be to provide less incentive community. Another practical problem for saving more water within the first is that while a subsidy earmarked for a block and subsidize the rich too much. particular commodity or service, such as Strictly ensuring that the first block is water supply, may help to overcome adequate for basic health needs, and no objections to price reform in the short more, should therefore be a key aspect run, this may be of no help when future in the design of an IBT. price increases are proposed. More generally, in a time of rapid change in Other Devices China, these administrative approaches encounter a common difficulty with In addition to IBT, other measures, such large `floating' and migrant worker as provision of minimum living support populations, the most vulnerable and water service vouchers, are members of society who often do not employed in China to allow the poorest qualify for support from the local households to obtain adequate water authority in which they currently supply services. While designed to be happen to reside. temporary, and to become obsolete as incomes increase, the rapidly escalating In practice, a combination of various costs of water supply may mean that methods may be required. This is these income support measures remain implicit in the recommendations made relevant for the near future, and thus are in a recent proposal to the Chongqing worthy of serious consideration. Municipal Development Reform Indeed, it is by no means certain that, Commission (Chongqing World Bank even with continued rapid economic Project Management Office, 2007), growth, incomes will increase at a faster which refers to a `Five Orientations' rate than the costs of water. approach in which fund-raising, allocation and estimation of required These approaches, in conjunction with subsidies, the subsidization method, other efforts to reconcile economically and management are planned and efficient use of water with concern for implemented as one package, and the poor, involve a number of practical oriented toward an efficient and difficulties. Administrative problems equitable means of helping the poor. associated with the issuance of vouchers The package includes fund raising by for low income households to exchange cross-subsidy among water consumers, for water and sanitation services could rational establishment of the basic water include the printing of fake vouchers, requirement per family, use of vouchers while trading of vouchers has also been that can only be used to pay for water, observed. The provision of direct based upon volume of use, and a subsidies, which adds to a wide range of management system which ensures other subsidies aimed at benefiting the consistency and efficiency in collecting 21 and allocating the subsidies to those identified as such and earmarked for who need them most. that purpose. Populations should become used to the idea of paying for Rural and Low Income Communities water, even though they may not have household connections or access to The general recommendation that prices sewerage, paving the way for increasing should cover both water supply and financial self-sufficiency on the part of disposal costs may not be feasible in the water and sewerage authorities as short term for poorer communities or ability to pay increases. Establishing a for those whose supply costs are link between local taxation and water particularly high. This may apply in use combined with educational particular to low income rural campaigns is a necessary component of communities. In such cases, subsidy any strategy to avoid wasteful use. from general revenues transferred from Provincial or County level authorities as For deprived areas within an otherwise appropriate may be unavoidable for fiscally sound water supply jurisdiction, initial investment in infrastructure. assistance may be provided by cross Thereafter however, revenues should at subsidies from higher volume water least cover operation and maintenance consumers to facilitiate extension of costs. This should be seen as an interim distribution networks, thereby reducing measure. Revenues collected for water or eliminating connection fees. supply management should be clearly 22 6. Implementation Issues Overcoming Resistance to Price Reform accompanied by parallel investments in sewerage and sewage treatment. Whether within communities or for communities as a whole, increasing As noted earlier, a number of efforts prices to cover financial costs is difficult have been made to identify the potential enough. Covering incremental or future for price reform by estimating costs is clearly even more challenging consumers' WTP for water. A not only because the levels required will questionnaire-based survey of typically be much higher, but also households in several cities in because political and social acceptance Chongqing demonstrates the of such changes usually requires complexity of such exercises. The study evidence of actual expenditures. This shows that WTP in the considered cities can be overcome to a certain degree by is typically not much greater than the taxation collected by a public agency per subsidized prices already charged. unit of consumption rather than an However, it is unlikely that WTP increase in the revenue accruing to the surveys, using contingent valuation water company for expenses yet not approaches, will be of much practical incurred. It is clear that such problems help in implementing tariff reform. Real are compounded when existing services WTP, or value of water, is likely to be are inadequate. A chicken and egg much greater than that conveyed via situation may thus exist since questionnaires, and while some improvement in service may typically industrial and agricultural uses of water require additional revenues but prices can be estimated in terms of expected cannot be increased when service is productivity (as shown in Box 2), the poor. value of water supplied by municipal authorities is only likely to be revealed A particular example of difficulty in when consumers are actually confronted introducing economically efficient with their water bill. However, civil pricing arises in the case of wastewater. unrest has frequently resulted from There are doubtless cases in which the tariff reforms when they have been environmental or social costs of introduced without adequate attention wastewater discharge imposed by water to public concern. consumers who do not have access to sewers is greater than those who do. Overcoming resistance to price reform is Economic efficiency might dictate that a problem encountered by water the former pay more than the latter, but authorities worldwide. The Beijing clearly, the political constraints to such a study referred to above shows how this course of action will typically be issue is affected by income and price prohibitive. This is especially relevant in elasticities of demand, presenting light of the fact that increased estimates according to income group. investments in rural water supply in The combination of two features, China, resulting in additional namely: (a) generally low income wastewater discharge, are typically not elasticity; and (b) higher price 23 elasticities for lower-income groups, public hearing process must be confirms intuition that price increases transparent together with enough are a much more serious matter for the information disclosure to make the poorer, typically less well educated, process effective. Above all, price consumers. reform should be gradual, and in parallel with perceived improvement in The study therefore proposes that both the quality and extent of access to greater efforts should be made to the water supply and sanitation involve stakeholders in water pricing services. That such an approach can be policy making, including public successful is demonstrated in the case of hearings to provide opportunity for all Chongqing (see Box 4). stakeholders to state their interests. The Box 4: Making Price Increases Acceptable: The Case of Chongqing An attempt to obtain public support for price increases that were required to provide funding for improvement and expansion of facilities in Chongqing received a hostile reception at public hearings. Consequently, the Chongqing municipal government conducted a research effort to facilitate a public awareness campaign. This was aimed at educating the population about the costs of supplying water and managing wastewater generated in the city and the impact on service quality if the municipal water supply system was unable to increase revenues. It showed that the primary losers when prices are too low were the poor, whose service standards remained inadequate. Indeed, the wealthier consumers, who consumed the most water, were the biggest beneficiaries from the subsidies involved. In addition to the educational process, and in recognition of the problems the poor had in paying higher water prices, the Chongqing municipality decided to implement a number of parallel subsidies for disadvantaged groups including the unemployed which would be sufficient to maintain basic living standards which included paying the increased water bills. The study also recognized that a step-by-step approach must be used, and a schedule for gradual increases in prices over a number of years was introduced. Since the public was made aware of the findings of the study and in particular the rationale for the price increase, subsequent public hearings attended by representatives of disadvantaged groups were very constructive. The whole process was instrumental in making the required price increases socially acceptable, and the reforms have apparently been effective in reducing water consumption in the city. It is also clear that prevailing incentive of the water scarcity issue has been systems work against serious price sufficient to preclude effective action. reform in the water sector and are a However, the increasing immediacy of worldwide phenomenon. Formidable the water shortage issue will obstacles exist even for utility managers presumably be matched by an in full possession of the facts and who increasing willingness of local and wish to ensure efficient and equitable national officials to take the measures use of water resources. In China, as in urgently required if the performance the rest of the world, immense evaluation system is enhanced to difficulties arise in increasing prices of reward local officials who take the risk water and political unrest has often been of pricing reforms. the result. In the past, the combination of relatively high discount rates of public officials and the long-term nature 24 Financial Implications values as far as possible. The water resources fee (covering environmental The concern often noted about the and depletion costs) should ideally be financial implications of the IBT system regional, and estimated by appropriate may be unfounded if the tariff structure local government organizations based is carefully designed, with the top block upon water scarcity in the region. Such reflecting true economic costs. If an a device would create more incentive for MOC approach is used, where, as is utilities to protect scarce resources, normal, marginal costs are rising while at the same time facilitating a significantly, revenues will be generated regional approach to water in excess of financial requirements. It is management. Since a locally retained the case in most cities that the bulk of fee may provide an incentive for over- consumption is by a very small exploitation of water resources at the proportion of industrial, commercial, local level, it is proposed that in the long and high-income residential consumers. run, the water resource fee should be MOC pricing will therefore typically reclassified as a tax, the proceeds of provide ample scope for subsidizing which would be transferred to the low volume use as well as extension of central government to facilitate water distribution systems to low income resource development and protection on areas. a nation-wide basis. This is consistent with the method China currently uses to The question may then arise as to the tax coal production. disposal of any excessive profits that the utility might make when marginal costs Metering are rising. Precise mechanisms for dealing with this will depend upon the Volumetric pricing, which requires form of ownership of the utility meters to measure the amount of water concerned. But the general principle consumed, is necessary to achieve the should be that profits in excess of the economic and other objectives of water level mandated in national legislation supply management, but this faces should be recovered by the local major constraints in China. The vast government authority and used to majority of Chinese urban residents, augment general revenues, or to especially those in medium and larger substitute for other forms of taxation. cities, live in apartment blocks. Water supply companies typically use bulk While responsibility for estimating long- meters which measure the flow into the run marginal costs of supplying and apartment building and the building disposing of water should clearly rest management is responsible for paying with the utilities concerned, estimation the water bill. For the individual of environmental and depletion costs consumer, the link between price and should be undertaken by local consumption is blurred. governments, factored into the rate base, and, along with the costs borne directly While installation of meters in new by the utility itself, passed onto the buildings is increasingly the policy in consumer for cost recovery. Estimation Chinese cities, much effort is clearly of such costs is complex, but efforts required if universal metering is to be should be made to assign monetary achieved. However, this should be 25 addressed on a case-by-case basis. It parallel reforms are undertaken, it is will usually be the case that investment unclear what the true opportunity cost in metering, and the associated meter of water used for municipal purposes reading and billing costs, are justified really is, and the ability of municipal for industrial and commercial users. authorities to contribute to overall Nevertheless, these costs may not be efficiency in water use will remain warranted for some small consumers, severely constrained. depending in large part upon their levels of consumption and the cost of Another `second best' issue relates to water, and therefore the savings likely access to service by poor people. It is to result from the introduction of quite possible that the rate of increase in metering. the cost of water may exceed income growth rates, despite the projected Gradualism continued rapidity of the latter in China. Genuine hardship or inefficiency may The recommendation of a gradual result in some cases from water price approach to tariff increases in reform which may call for gradualism in Chongqing's study is consistent with a achieving such targets as full cost major concern that was expressed by the recovery, or certainly MOC pricing. CCICED at its inception in the early 1990s. It was that tariff reform in any As noted earlier, temporary one sector, such as water supply, was subsidization of poorer communities, hampered by the prevalence of market particularly for wastewater, may be imperfections elsewhere in the justified while the increasing block rate economy, which would mean that price tariff and the various compensatory reform in the water sector alone may at devices referred to earlier may be used once be inefficient and inequitable to effect gradual improvements in (Warford, 2002). Hence, the proposal is pricing policy. that price reform in the water sector should parallel overall trends in market Marginal Costs and Planning liberalization in the country. Even if it is not feasible or desirable to With the rapid pace of market reform in immediately charge prices equal to true the succeeding period, such `second economic costs for the reasons stated best' considerations have diminished above, the estimation of MOC should be considerably but concerns remain. In an essential element of water resource particular, parallel pricing as well as management and planning. It should other market-related and management also be a benchmark by which implicit reforms are still required for major subsidies can be estimated and should competing uses, primarily agricultural be used to assist in regional planning water use and direct industrial and locational decisions, thereby abstraction of water, both of which discouraging development from should also be priced based on MOC. inherently high-cost water areas. In Management and pricing failures in view of the rapidly increasing costs and these areas increase the scarcity and scarcity of water in China, the therefore the opportunity cost of water importance of pricing in assisting such for municipal purposes. Therefore, until strategic economic decisions can hardly 26 be overrated. However, to be effective, The approach proposed in this paper price reform cannot be restricted to must also be applied to agricultural and municipal water supply and sanitation. direct industrial water use. 27 7. Summary and Recommendations The overriding issue in Chinese water communities obtain an adequate supply management is the increasing cost and of water for basic needs. Already scarcity of water, and pricing policy has enshrined in legislation, increasing a potentially critical role to play in block tariffs in urban areas will typically addressing this problem. As repeated be the route to follow in this regard. studies have shown, water and There is no particular need to have a sewerage prices in China are generally multi-block system: a two-part tariff can too low and efforts should be made to be used to ensure affordable service for increase them to achieve operational basic needs to low income consumers, efficiency goals, generate adequate with the top block ideally reflecting true revenues, and encourage efficient rates economic and environmental costs. of consumption. Volumetric pricing covering both While the first step in price reform must supply and disposal costs is clearly be to fully achieve financial cost required for this to be possible, although recovery, this should be seen as an the metering decisions should be interim objective only. More subjected to cost-benefit analysis and ambitiously, the pricing of water and introduced on a case-by-case basis. The sewerage should reflect the increasing case for metering will increase as both MOC of water and its disposal, incomes and water supply costs specifically addressing the costs of increase. Such a policy may possibly be environmental damage in production complemented by parallel targeted and and consumption, and the opportunity temporary income support programs or costs of depletion. In keeping with this vouchers to be exchanged for water and approach, estimated environmental sanitation service. Subsidies to poorer damage costs of wastewater disposal communities, in particular in rural should be charged even to those areas, will usually be required at least households and enterprises not for initial investment in infrastructure, connected to sewerage systems. Subject but operation and maintenance to concessionary tariff structures to expenditures should be recovered from accommodate low income users, such users, and always clearly earmarked for an approach would require price this purpose whether or not volumetric increases well in excess of those used to pricing is used. achieve financial cost recovery alone. This is illustrated by rough estimates Efficient resource management for the made of the cost of water in alternative water sector as a whole requires parallel uses, and would doubtless be even reforms for competing water uses such higher if rationing by price had to be as agricultural and direct industrial used in times of severe depletion. abstraction. In addition, wider economic development planning Economically efficient pricing is requires estimation of the true economic particularly difficult to reconcile with and environmental costs of water the need to ensure that poor people and 28 resources even if full-scale price reform the components of a pricing policy is politically infeasible in the short-term. based upon MOC. For reasons of economic efficiency and · Water tariffs for commerce and social equity and acceptability, a industry should cover full MOC; for gradual approach to price reform will residential consumers, the first block typically be unavoidable. Public should be about 40 liters per capita hearings, consumer education, and per day, with the second block transparency are necessary to overcome gradually increasing to full MOC. resistance to price reform, especially when existing service quality is poor. · Utilities should be required to submit strategies to concerned local In light of the above, some specific government so they can fully actions that should be taken now are as implement MOC pricing within a follows: time frame, which will be based upon costs, incomes, and public · Utilities should be required to acceptability; the strategies should estimate the long run marginal cost involve a program of public of their own operations (investment education and stakeholder and operating costs) over say a 20- involvement. year period. Such estimates should be monitored and updated on a · A system should be devised in continuous basis, requiring an which such MOC estimates can be expanded long-term planning integrated into regional and national capability. water management and economic planning systems. · Local governments should develop the capacity to assess the · Parallel pricing reforms should be environmental consequences of carried out for other water uses, in alternative water development particular for agricultural use and programs and estimate the costs of large scale industrial abstraction. environmental damage, including the costs of environmental · Existing policy is to meter individual protection measures where industrial, commercial, and appropriate. residential consumers on a case-by- case basis, but this will need to be · Local governments should also accelerated as water supply costs develop the capacity to estimate increase. water depletion costs on a regional level. · Utilities should study demographic and income patterns in their area, · Estimated environmental and while continually updating such depletion costs should be charged to information, in order to devise the concerned utility by the local efficient and equitable cost recovery authority, and, in addition to the mechanisms using non-price long run marginal supply cost, be mechanisms if metering is not justified. 29 transfer such financial surpluses to · The water resource fee, which is the governments with jurisdiction in now largely retained by local the areas concerned. governments, provides little incentive for sustainable water Finally, it should be noted that, as resource development at the evidenced by a series of OECD regional and national level, and reports, international experience should be reclassified as a tax. This offers limited guidance in this area. will provide a legal basis for scarcity With a few notable exceptions, water and environmental costs recovered pricing policies throughout the from consumers to be transferred to world fail to address the subject of the central government, thereby water scarcity head-on, in large part facilitating more efficient water due to the political sensitivity the resource planning on a nation-wide subject. Given the urgency of the basis. problem facing the country, China should look beyond international · Since MOC pricing can be expected experience and exercise leadership to increase the revenues accruing to in this area before its water crisis utilities over and above the level becomes unmanageable. mandated in national legislation, mechanisms should be developed to 30 Background Study Papers to the Policy Paper Almec Corporation, Case Study on Water Protect the Low Income Groups During Tariff in Small Cities in China, 2007 Water Tariff Reforms in Chongqing, 2007 China Institute of Water Resources and Zhang Shiqiu, et al, Study on Water Tariff Hydropower Research, Economic Value Reform and Income Impacts in China's of Water and Policy Intervention in Hai Metropolitan Areas: the Case of Beijing, Basin, 2007 Peking University 2007 Chongqing University, A Willingness to Zhou Linjun, Reform of Water Supply Pay (WTP) Survey and Study for Water Tariffs in Chongqing, Chongqing World Tariff Reform in Western Chongqing, Bank Project Management Office, 2007 2007 Chongqing World Bank Project Management Office, Pricing for the Poor: A "Five Orientations" Approach to References OECD, Social Issues in the Provision and Li Yining and J. Warford (eds), Pricing of water services, OECD 2003 CCICED 1998 OECD, The Price of Water: Trends in Warford, Jeremy and Li Yining (eds), OECD Countries, OECD 1999 Economics of the Environment in China, Pearce, David and Markandya, Anil, CCICED 2002 "Marginal Opportunity Cost as a World Bank, Cost of Pollution in China: Planning Concept in Natural Resource Economic Estimates of Physical Damages Management", in J. Warford and G. (Conference Edition), the World Bank, Schramm (eds), Environmental 2007 Management and Economic Development, World Bank, Stepping Up: Improving the World Bank, Johns Hopkins Press, Performance of China's Urban Water 1989. Utilities, 2007 Spofford, Walter and Wu Yajun, Water World Bank, Willingness to Charge and Supply Pricing in Beijing and Willingness to Pay: The World Bank- Shanghai, in Natural Resource Pricing assisted China Rural Water Supply and in China: Water Supply, Coal and Timber, Sanitation Program, Field Note, 2002 31