Field Note 71795 Water and Sanitation Willingness to Charge Program An international and Willingness to Pay: partnership to help The World Bank-assisted China Rural the poor gain sustained access to improved Water Supply and Sanitation Program water supply and sanitation services Introduction A decade after the international Dublin and Rio conferences of the early 1990s, where the economic Project Provinces value of water gained greater recognition, many developing countries have been struggling to implement higher cost recovery policies in rural water supply (RWS) programs. Even though many countries accepted the principle that the poor were willing to pay for good quality services and therefore should be charged for them, a long history of RWS subsidization posed significant challenges in imple- menting this policy. In China, however, during the same period and away from the fanfare of international declarations, partial user-financing in RWS had already BEIJING been implemented for many years by the government. The World Bank-assisted rural water supply and sanitation lending program, which started in 1985, built on this approach and developed a very effective cost recovery policy where the users finance up to 75% of the capital investment as well as the full operation and maintenance (O&M) cost. Clearly, if cost recovery was the mantra of the 1990s, the Chinese were well ahead of the curve. Project II Project I Project III Projects II & III Project IV A Supportive repayment of the Bank credit is the responsibility of the provincial/central over the last 17 years. The total Bank investment in these four projects Context for government. In the China RWS projects, however, the end-users are is $628 million, aimed at serving about 23 million people in Cost Recovery themselves responsible for servicing 18 provinces. The projects have the Bank debt. On top of this they pay continuously improved in design and the full cost of O&M. policy content, based on lessons China differs significantly from most learned, both within China and developing countries in that there is little history of the central government Government internationally. The first project was not specifically targeted at the poor or providing large subsidies for the financing of rural water supply. and Bank based completely in rural areas, but both these policies changed in Instead, there is greater emphasis on RWS Programs succeeding projects. Sanitation and cost sharing by provincial, county and hygiene were also introduced in the community institutions. This proved to later projects. One design principle, be the ideal context for the Bank to Despite significant gains in coverage however, was consistent in all four develop a significant cost recovery over the last 15 years, about 50% of projects: the water supply service model in its RWS lending program, the rural Chinese population still level provided to users in the Bank- where the IDA credit/IBRD loan is does not have access to safe drinking assisted projects was significantly ultimately repaid by the end-user, the water. In the Ninth Five-Year Plan, higher than that provided in most rural beneficiary. This is rare in Bank the Government announced its government-funded RWS programs. lending, in particular for its ‘soft’ IDA target of providing safe water for While the latter provided a ‘basic’ level credits. In most Bank-assisted RWS 65% of those residing in China’s of service, typically through hand projects, the credit to the central poorest areas. In the Tenth Plan, pumps, rainwater collection systems government is ‘on-lent’ to provincial currently under implementation, the and tube wells, the former offered a governments and then passed on objective is to extend that coverage higher level of service through to local governments or rural further. RWS is high priority for piped water supply to individual communities as grants. At best there the Government, which has received households. It logically followed that is a nominal capital cost contribution Bank assistance for four successive the users had to pay more for these by the users (typically 10% to 15%) and rural water and sanitation projects improved services. Table 1 Bank RWS Lending Program in China Year Bank Type of Size of Target Provinces included assistance lending project beneficiaries (in million instrument (in million (in millions) US$) US$) 1985-90 80 IDA 210.2 6.0 Lianoning, Shaanxi, Sichuan, Zheijiang and the municipality of Beijing 1992-97 110 IDA 189.1 9.0 Guangxi, Yunnan, Hunan, Gansu, Inner Mongolia and Xinjiang 1997-2005 70 IDA 136.7 4.6 Yunnan, Jiangxi, Gansu, Hubei, Hebei and Inner Mongolia 1999-2005 46 IDA (30 m) 92.0 3.1 Anhui, Fujian, Guizhou and IBRD and Hainan (16 m) 2 Financing Arrangement Typically, the Bank finances about half of the capital cost of piped water supply systems installed through the project. For the remaining upfront costs, the provincial and county governments jointly finance 25% and the users contribute 25%, usually in the form of a cash and labor combination. Since the users also service the Bank debt through payment of water tariffs, they effectively finance 75% of the overall investment cost. Community labor contribution: digging of trench for laying pipeline Institutional the Ministry of Health plays the role of County level: Each county, which is the Arrangement monitoring, coordinating, training, setting technical standards and equivalent of the local government, has a County Project Office (CPO) under and Fund Flow managing centralized procurement. the Bureau of Health. The CPO Provincial level: Each province has a coordinates, monitors and provides Provincial Project Office (PPO), usually management support to the township Institutional arrangement under the Bureau of Health, performing water supply plant. National level: The Beijing-based essentially a coordinating and Township water supply plant level: National Project Office (NPO) under monitoring role at the provincial level. The functional level of project Figure 1 Project Model Institutions Fund Flow Central Government Central Government (Ministry of Health) (Ministry of Finance) Provincial Government Provincial Finance Bureau County Government County Finance Bureau Township/Plant Village 3 (habitations), with headmen and village committees, who mobilize communities at the planning stage of the project. Fund flow The fund flow channel is independent of the administrative structure down to the township water plant level, with the credit/loan flowing from the World Bank to the Ministry of Finance at the national level, to the Finance Bureau at the provincial level and down to the Finance Bureau at the county level. The counterpart funds from the provinces and counties also flow through the respective Finance Bureaus. It is at the township water plant level that administrative and financial management merge. The village households’ contributions come Water meter for household connection up to the township plant, which maintains a project account. The management is the township water accounts and balance sheets. The township plant then sends the money supply plant. This is headed by a full- plant management operates the water collected to the County Finance time plant manager, who is assisted by supply scheme, which provides piped Bureau. Figure 1 (on the previous page) other staff members. Many plants are water supply to individual households illustrates the institutional and fund registered as ‘enterprises’ under the in a number of villages. flow arrangements. Enterprise Law: they pay tax to the Village level: There are both government and prepare annual administrative and ’natural’ villages Tariff Setting Table 2 Water Tariff Calculation for Beiwan Water Plant (year 2000) The cost of running the water plant as Design population: 40,520 (3,000 HH connections) well as the debt servicing cost is met Per capita daily consumption: 28 liters from user collections. The water plant • Annual water produced: 28*40,520*365 = 414,114 cu meters employs bill collectors, typically one Annual cost per village, and they directly collect • Electricity: 184,781 Y water fees from households, each of • Water source fee: 4,141 Y which has a metered connection. • Maintenance: 79,449 Y Water tariffs are set by the plant • Depreciation: 185,381 Y (3.5% of total investment of 5,296,600 Y) management/County Price Bureau • Chemicals: 4,141 Y and raised when necessary to cover • Loan repayment amount: 326,992 Y increased operating costs. The tariff • Salaries and Welfare: 360*18*12 = 77,760 Y • Interest: (5,296,600*67.91*4%): 143,876 Y calculation is comprehensive and Overheads (i) office, heating, travel, training: 14,400 Y; includes the cost of electricity, salaries, (ii) water quality monitoring and lab testing: 1,800 Y water source fee, depreciation, debt Total annual cost: 1,022,721 Y servicing, interest on debt, overheads Tariff = 1,022,721/414,114 x 108%** = 2.67 Y per cubic meter and tax. An example of the tariff Y = Chinese Yuan; 1 US$ = 8.3 Y setting calculation from Beiwan water **the additional 8% is due to adding 2% water loss and 6% income tax plant in Jinyang county in Gansu province is given in Table 2. 4 Cascade of Table 3 Gansu Province: Second Rural Water Supply Project Accountability Name of Initial tariff Year tariff Increased Percentage Water Plant (Yuan per was tariff increase cu m) increased in tariff The Bank credit/loan made to the central government for a period Linxia 1.3 2000 1.8 38% of 35/20 years is ‘on-lent’ to the Peiyun provincial government by adding an additional interest of 3-4% but, Lintao 1.3 2000 1.5* 15% interestingly, the repayment period for Taoyan the province is reduced to 15 years. If Wuwei 1.9 - - - the latter falls behind on its repayment Shuang to the central government, the Ministry Cheng of Finance automatically deducts the debt service amount from routine Wuwei 1.5 2000 1.9 27% central government transfers to the Liujiaci Hue province. This pressure to service the debt, to use the words of a World Bank Ping Lian 1.6 2000 2.0 25% China specialist, “has created a Pai Shui cascade of accountability and responsibility for results, from project Gin Yuan 2.3 2000 2.7 17% managers, who have to collect the Beiwan levies, down to beneficiaries, who have to pay them�. *The tariff was again increased in 2002 to 1.8 Y per cubic meter At the township water plant level, collection of tariffs is taken very seriously indeed. A strong incentive are paid if targets are reached within raised. Table 3 shows how tariffs system exists by which the salaries of established time frames. Compliance were raised in the six largest water the plant manager and his staff are of payment is usually over 90% and in plants in the second RWS project in tied to their success in collecting the rare cases of non-payment, Gansu province. monthly payments from users. Salary household taps are disconnected. deductions are made if collections are short of established targets; bonuses When existing tariffs are not sufficient to cover operating costs, they are Ability to Pay Cost-sharing by users promotes financial sustainability of water supply systems, but many observers worry that poor households may not be able to afford cost-recovering tariffs. In most cases, the costs appear to be affordable. Households supplied with water from the project water plants typically consume 3 cubic meters a month. At a tariff of 2 Y per cubic meter, the annual water bill comes to 72 Y. Assuming an annual per capita income of about 2,000 Y in rural China, this works out to 3.6% of annual income. To take the specific Householder’s water tariff receipt example of Jinyuang County in Gansu 5 not passed on to the consumers of the County Price Bureau is satisfied these lower-service-level schemes. with the proposed tariff level, it However, they still have to contribute recommends it for approval to the the full cost of labor (typically 30 to County ’s Standing Committee, 40% of the investment cost) and headed by the County Magistrate, operate and maintain the schemes on which takes the final decision. The their own. water plant then proceeds to enforce the new tariff system. It usually The Regulatory takes about three months to get tariff approval from the County System Price Bureau. From the water plant manager’s point Compatibility of view, the tariff setting exercise is of the Cost done comprehensively. But how are the consumer’s interests protected? To Recovery Policy address this issue, China has Water tariff approval by County Price developed an effective price regulatory with the Bureau, Jingyuan County, Gansu Province system at the county level. Once the proposed tariff has been calculated at Government province, the consumers are paying a the water plant level, it is sent through the CPO to the County Price Bureau RWS Program monthly tariff of 2.1 Y in the year 2002 and consuming 3 cubic meters per for approval. The County Price Bureau month. This works out to an annual reviews the calculation, holds In many developing countries, expenditure of 75.6 Y. According to the discussions at the water plant and externally funded RWS programs have Jinyang County Statistics Bureau, the CPO level, then visits the concerned more stringent cost recovery policies annual per capita income in the year villages and holds public hearings with than do RWS programs funded by the 2001 was 2,056 Y. Paying 75.6 Y per the consumers to determine the government. In the case of China, year is equivalent to 3.7% of a affordability of the new tariff. In some however, there is little difference householder’s annual income. cases, the Price Bureau asks the between the cost recovery policy of the A second question often asked is water plant to revise its tariff. When Bank-assisted projects and that of the whether the consumers served by the water plants are among the poorer sections of the community. This is the case in most of the counties in the second, third and fourth projects. Poverty was a major criterion used to select provinces and counties for these projects. Within selected counties, denser areas were chosen to make the cost of supplying piped water economically viable, and within the selected villages, the network usually covers all economic sections of the community. For the more remote and less densely populated areas of the project provinces, however, the approach has been to provide hand pumps, rainwater collection systems Waiting for water in Gansu province: poor existing systems stimulate demand for and small tube wells. Debt servicing is higher level of service 6 regular government-funded RWS programs. Essentially, the national policy is to use government funds for increasing coverage through providing basic levels of service with smaller systems like hand pumps, rainwater collection systems and tube wells. With external funding, such as from the Bank, the policy is to provide, where demand exists, a higher level of service through piped water supply systems. Within the Bank-assisted projects, however, the more remote and scattered areas are provided water supply systems similar to the ones covered under the government programs. The cost recovery policy for the basic level of schemes in both Bank-assisted and Government Consumer holding a Water User’s Passbook programs is the same: full labor contribution and full responsibility existing laws, the consumer’s voice can of reducing costs. There is little doubt for O&M. be heard with regard to scheme that many of the water plant schemes design, construction and management. are over-designed both in terms of construction standards as well as Lessons Over-design of having surplus capacity. Added to this Learned and water supply schemes While most consumers can probably is the fact that many of the water plants have excess staff. These factors Emerging Issues afford to pay the present level of water tariffs, as operating costs go up, significantly add to both the investment as well as operating cost, there is the possibility of increases which, in turn, adversely impacts on Consumer voice over the years. This could lead to the users, the main financiers of the Despite the fact that users are problems in terms of affordability. system. Since construction design financing as much as 75% of capital Along with raising tariffs, therefore, standards are set at the national level, and 100% of O&M costs, their there is a need to look for other ways this issue needs to be addressed there. involvement in project activities is somewhat limited. This involvement is during the early stages of the project cycle, when the project villages, through their committees, have to confirm in writing to the CPO that the users have been consulted regarding the proposed water supply scheme and are willing to contribute their share. Each village committee also includes a member of the Chinese Women’s Federation, a national NGO. On the other hand, the users have no real say in the design and management of the asset they are financing. It therefore makes sense to explore how, within the context of Large water supply plant in Gansu province 7 New Management Models areas, is generally one of compliance In order to reduce costs and increase with the law and, as long as the tariff accountability to the consumers, it levels are perceived to be appropriate may be useful to experiment with and affordable, the cost recovery Water and Sanitation Program different management models. For policy is unlikely to be challenged. example, it could be interesting to 1818 H Street, N.W. examine, within the existing legal Project-specific reasons Washington, D.C. 20433 framework, whether the water supply • Triggered by the central government USA plant can become a cooperatively demanding and enforcing repayment owned enterprise, where the users are Phone: (202) 473-9785 of the loan, there is a built-in incentive main shareholders of the plant. This Fax: (202) 522-3313, 522-3228 to recover costs, all the way down to has been successfully done in the well E-mail: info@wsp.org the end users. known milk cooperative institutional Website: www.wsp.org • The higher level of RWS service model of AMUL, Gujarat, India. The offered through the Bank projects is user-stakeholders could then try priced using cost-reflective tariffs. contracting out the management of Households that receive individual the water supply scheme, or both piped water connections are construction and management, to a expected – and are willing – to pay third party from the open market. more than households receiving lower levels of service. What Makes the • Legitimate regulation is practiced, where the County Price Bureaus play Cost Recovery the watchdog role and protect the interests of both consumer and provider. System Work From one perspective, the high cost Can the recovery system in the Bank-assisted RWS projects is rational and logical, Financing but the reality is that nothing even resembling it has been implemented Policy be at scale in most developing countries. Clearly, this is not easy to do. So why Replicated? For further information, please contact: Parameswaran Iyer, Water and Sanitation is it happening in rural China? A Program, Washington, DC at combination of general background This is a question which many have piyer@worldbank.org or factors and specific project related asked about the Bank-assisted China Mats Andersson, World Bank, Beijing at Mandersson@worldbank.org reasons is offered to explain this. RWS program. Is the financing policy unique to the Chinese context or can August 2002 Background factors it be applied in other countries? There • Unlike many other developing are no easy answers to this question. The Water and Sanitation Program is an countries, China has historically not Clearly the key to this success story is international partnership to help the significantly subsidized rural water the government’s willingness to price poor gain sustained access to improved supply services. Politicians are willing rural water supply services at water supply and sanitation services. to charge for water and, having never The Program’s funding partners are the financially sustainable levels, a Governments of Australia, Belgium, been ’spoiled’ by large subsidies in the condition that is not met in many other Canada, Denmark, Germany, Italy, past, rural communities are willing countries. Perhaps this case can help Japan, Luxembourg, the Netherlands, to finance most of the investment demonstrate to decision-makers in Norway, Sweden, Switzerland, and the and the full O&M cost by paying other countries that cost recovery in United Kingdom; the United Nations appropriate tariffs. RWS can be realized, even in low Development Programme, and • The Chinese culture, more so in rural income countries. The World Bank. Created by Write Media Printed at Thomson Press