Hong Kong needs a fairer deal on Guangdong water amid rising costs

Law Cheung-kwok and Ip Ka-chai say the government must negotiate flexible and cost-effective terms when the Dongjiang water supply agreement expires in 2017

PUBLISHED : Tuesday, 08 November, 2016, 3:17pm
UPDATED : Tuesday, 08 November, 2016, 8:07pm

The Dongjiang in Guangdong province accounts for 75 per cent of Hong Kong’s water supply. As our economy and population develop, the cost of Dongjiang water is expected to escalate further. Thus, it is important for Hong Kong to improve the cost-effectiveness of its water agreement with Guangdong Investment Limited, which is 54 per cent owned by the Guangdong government.

Since 2006, a “lump sum package deal” approach has been adopted in the supply agreement for Dongjiang water. Under this, even if Hong Kong consumes less in a certain year, we are still obliged to pay the corresponding lump sum according to the agreed supply ceiling. However, sources and statistics reveal that Shenzhen and Dongguan, covered by the same water supply project, might have already adopted a more flexible approach of paying for the actual amount supplied.

Even if Hong Kong consumes less in a certain year, we are still obliged to pay the corresponding lump sum

Over the past 10 years, Hong Kong has spent 15 per cent more on Dongjiang water than if it had only been billed for the actual amount supplied. That equates to HK$4.5 billion.

The Hong Kong project accounts for over 70 per cent of Guangdong Investment’s income from water supply. It enjoys considerably higher profits from us than elsewhere. We estimate that even if the cost of supplying to Hong Kong is assumed to be 2.5 times that of Shenzhen and Dongguan, the corresponding profit margin from the Hong Kong operation is still three times higher than from those two cities.

The water agreement is mainly about risk sharing; our government has not signed a fair deal for Hong Kong in recent years.

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The current water supply agreement is due to expire at the end of next year. It is necessary for our government to negotiate better terms for the next three years to protect Hong Kong‘s interests.

Our government has not signed a fair deal for Hong Kong in recent years

First, it should seek a new agreement so that charges reflect actual water usage and a fair share of the demand risk.

Second, a price adjustment mechanism similar to that of the MTR, in which a stipulated fare adjustment formula could replace uncertainties and controversies, should be adopted. After applying the corresponding figures in 2014 into the suggested formula, the unit price for 2015 would drop by 1.4 per cent.

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Finally, to fully implement the Hong Kong government’s “total water management” strategy, we should strengthen the supply capacity of local reservoirs, and expand desalination and recycled water into the water supply chain. We need to ensure high-quality fresh water can be sustained in case of fluctuations in the Dongjiang supply in the future.

Law Cheung-kwok is an honorary senior research fellow at the Hong Kong Vision Project, where Ip Ka-chai is a research assistant