Consumers pay the price for scarce water

PUBLISHED : Wednesday, 15 September, 2010, 12:00am
UPDATED : Wednesday, 15 September, 2010, 12:00am

Later this week, residents of Zhongshan will be called to a public hearing to discuss how much city authorities intend to charge them for water. They are bracing for a big increase, on top of the 20 per cent rise imposed on them in November.

With the looming increase thought to be another 17 per cent, some residents of the southern city have been venting their feelings on websites such as Jin Yang Wang or Golden Sheep Web. 'Every time when there's a public hearing, it must be about price increases,' Liang, a retired teacher, said in a recent post. 'And we don't have a big say in it.'

The price of water is central to Beijing's twin goals of providing the mainland's 1.3 billion citizens with clean water, while at the same time encouraging conservation. Beijing thinks the answer to the country's water scarcity lies in a more market- oriented approach, and that poses a dilemma: whether to retain control of the water supply or hand over more of it to private companies.

The mainland has already taken big steps to modernise its water industry. Historically, water was transported to various communities and users paid a fixed amount regardless of actual consumption. The cost was heavily subsidised by local governments.

These days, households and businesses are charged according to the amount of water used. Bringing a more systematic water-supply mechanism to the mainland's 661 cities and more than 2,000 towns is complicated.

But the World Bank suggests Beijing should find a way by 2020, given the nation's rapidly urbanising population. By then, the World Bank says, the urban population is expected to grow to 900 million from an estimated 550 million in 2005.

'There are more than 2,500 water companies in China, of which 1,400 are relatively large, city-level plants,' Alison Simpson, a partner of global consulting firm KPMG, said.

Most of those companies and plants are owned by municipal governments and state-owned enterprises. Others are controlled by privately held mainland companies.

Beijing opened the water supply industry to foreign investors in 2002, but requires an overseas company to have a local partner and limit its stake to below 49 per cent. Several global water concerns did just that. France's Veolia soon signed a 50-year contract with Shanghai Chengtou, the Shanghai government's public utility to manage the water supply in the Pudong area, and Paris-based Suez Environnement partnered with Hong Kong's New World Services in 2008 to acquire 15 per cent of local government-backed Chongqing Water Group.

Private local and foreign investors now control about 10 per cent of China's water supply.

To attract overseas investors and their technology, Beijing offered foreigners a minimum guaranteed return on their equity of 8 to 12 per cent. That followed a similar incentive that was offered to local private investors from the 1990s. According to the policy directive, it is up to local governments to manage demand for water in their respective communities so that investors get the minimum return.

Still, the process of water pricing is cumbersome, and local governments do not always ensure that investors get the returns promised. What's more, it often takes two or three years to get all the relevant authorities to sign off on a price increase for any city or community.

The water price consists of a basic tariff and some government surcharges. Typically, local water suppliers ask municipal governments for adjustments in the price but several branches of the central government get involved, including the Ministry of Finance, the Ministry of Water Resources, the National Development and Reform Commission and the Ministry of Construction.

Each of them has a different agenda, and that clouds the decision- making. For instance, the water ministry might see the need to raise tariffs to fund infrastructure such as a waste-water treatment plant, while the reform commission might worry that higher prices could fuel inflation.

Despite efforts to raise user charges, some investors say costs are still out of kilter. 'The water price in China is about 10 times lower than Europe's, but China's living standard is not 10 times lower than in Europe,' Antonine Frerot, chief executive of Veolia, said.

According to a 2007 World Bank report on the mainland's water-supply management, municipal governments should take a more co-ordinated approach regarding tariff levels, investment approval, financing strategy and transfers of budgeted central-government funds to local governments.

KPMG estimates that 400 million people living in rural areas do not have access to clean drinking water. The government aims to provide safe tap water to rural households by 2020.

Separately, the central government plans to invest another 1 trillion yuan (HK$1.15 trillion) on waste-water treatment in the 12th five-year plan (2011-15) after the Ministry of Construction budgeted 143 billion yuan for urban water supply during the 11th five-year plan, which ends this year.

To be sure, putting an asset as vital as water in private hands, especially foreign ones, is controversial in any country. Beijing's preferred route to improving water management is through gradual consolidation led by Chinese companies.

'The water market seems to be entering [the] early stages of consolidation,' KPMG's Simpson said, as Chinese companies expand outside their home territories and buy water suppliers elsewhere.

Whatever consumers have to pay for water, they want more accountability from the local governments who are key players on the water scene.

Making consumers pay more for water can foster conservation, Beijing resident Zhong Yu said. 'But the most important is the local government should disclose price-related information such as total revenue from water per year and how the increased income is going to be used.'