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China Water Action: Charting Change: Water Reforms for Full Cost Recovery in the PRC

China Water Action: Charting Change: Water Reforms for Full Cost Recovery in the PRC

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Published by: adbwaterforall on Oct 11, 2012
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Country water actions are stories that showcase water reforms undertaken by individuals,communities, organizations, and governments in Asia-Pacific countries and elsewhere.
Country Water ActionsPeople’s Republic of China: Charting Change: Water Reforms for Full CostRecovery in the PRC
October 2005
The Government of the People'sRepublic of China (PRC) is steeringits water sector toward sustainabledevelopment, while coping with thechanges and challenges brought bythe opening of the economy.Through the efforts of PRC's NationalDevelopment Reform Commission,the National Guidelines on WaterTariffs (NGWT) for the full costrecovery of water supply companies(WSCs) was released in 1998.ADB strongly supported this new policy through twocompleted water tariff studies with the Ministry of Construction. The outcomes of these studies are:The NGWT for the improvement of WSCs' costrecovery performance, andInstitutional and methodological capacities toimplement the NGWT and set water tariffs.The guidelines called for water tariff setting based on theprinciples of Full cost recovery (i.e. full financial costs)Reasonable profit (i.e. rate of return on net assets)Water conservationUser equityNGWT also provides conditions on when to adjust watertariffs and how they should be structured and calculated.Water supply tariff increases are placed in the hands of localgovernments, removing the approval requirement of seniorgovernment. Instead, a reporting process of tariff changesto senior government and authorized supervisory auditstakes its place. NGWT also called for public input onproposed tariff adjustments.
At the time when the PRC was trying to sustain a commandeconomy, water provision was considered a basic socialneed and was heavily subsidized by the Government. Watertariffs in cities remained the same for decades resulting inthe WSCs' failure to operate and maintain existing systems;water conservation was unheard of.The PRC opened its economy in 1978, after realizing thatthe centrally planned economy was not working and wascausing the country to lag behind its newly industrializedAsian neighbors. However, it took some time for tarifreforms to be recognized as necessary to ease the impact of rapid price inflation. State owned enterprises, including the WSCs, suffered fromstrict price regulation because of the government's concernfor price stability and affordability. Water tariff increaseswere not enough to cover the also increasing operating costof WSCs. In the early 1990s, government restructuring andcontrol, and its diminishing subsidies for water supply,impaired water operations and infrastructure development.Market-based reforms in the late 1990s saved the day.These ongoing reforms, which include the NGWT and thedevelopment of institutional reform agenda, prompted allWSCs and new water supply projects to be financiallysustainable and capable of full cost recovery.Corporatization became a viable option.Between 1986 and 2001, water tariffs rose, averaging 17%to 25% every year. Despite these, however, studies indicatethat even higher water tariffs are still affordable since thereal average incomes in the PRC increased by 19% annuallyduring the 1990s.
"Since the underlying cause of poorcost recovery is fundamentallypolitical, political leadership isrequired to turn a fiscal crisis into anopportunity for change," says ADBconsultant Mike Fortin. This isprecisely the case with the PRC.Senior government mandated theNGWT for full cost recovery to setthe stage for institutional reforms.The financial crisis in WSCs forcedthe government to pass legislation that covered watersupply, and then later on, sewer services. The roles of principal agencies were also defined.WSCs, as operators of water supply services, were maderesponsible for:Primary service delivery and compliance withregulationsOperation and maintenance of facilitiesManagement of assets, andAdministration, planning and financial managementfunctions.Local governments, as owners of the utility, were maderesponsible for:Ultimate service delivery and compliance withregulationsSetting local policy within the framework of the NGWTApproving capital and operating budgetsApproving tariff adjustments 

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