40964 IMPROVING THE PERFORMANCE OF China's URBAN WATER UTILITIES IMPROVING THE PERFORMANCE OF China's URBAN WATER UTILITIES IMPROVING THE PERFORMANCE OF China's URBAN WATER UTILITIES Greg J. Browder with Shiqing Xie, Yoonhee Kim, Lixin Gu, Mingyuan Fan, and David Ehrhardt ©2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 09 08 07 06 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 volume 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. 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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. ISBN: 978-0-8213-7331-6 eISBN: 978-0-8213-7332-3 DOI: 10.1596/978-0-8213-7331-6 Library of Congress Cataloging-in-Publication Data Browder, Greg, 1961- Improving the performance of ChinaÕ s urban water utilities / authored by Greg Browder. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-7331-6 -- ISBN 978-0-8213-7332-3 (electronic) 1. Water utilities-- China. 2. Urban policy--China. I. Title. HD4465.C5B76 2007 363.6'10951--dc22 2007034616 Photographs courtesy of Michael Page and Mei Xie Contents Foreword xi Acknowledgments xiii List of Acronyms xv Executive Summary xvii 1 Introduction:ObjectivesandScope 1 Conceptual Framework 2 Key Policy Themes and Strategic Directions 4 Urban Water Market Segments 7 Report Organization 8 Data Sources 9 2 SectorAchievementandPerformance 11 Sector Achievements 11 Water Supply Utility Performance 16 Wastewater Utility Performance 19 Chapter Summary 22 3 SectorChallenges 25 Responding to Rapid Urbanization 26 Dealing with Urban Diversity 29 Confronting Water Scarcity and Degradation 31 Meeting Infrastructure Investment Needs 33 Improving Utility Financial Sustainability 34 Chapter Summary 36 v S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 4 2020SectorVisionandPathForward 37 Sector Vision in 2020 37 Benefits of Achieving the Sector Vision 40 Strategic Directions and the Way Forward 42 5 GoalBasedSectorGovernance 45 Overview of Sector Governance Structure 46 Improving National Policy Coordination 50 Shifting from Physical Targets to Policy Goals 52 Strengthening Provincial Government Oversight 53 Setting Appropriate Water and Wastewater Standards 58 Summary of Strategic Directions 65 6 ImprovingMunicipalUtilityGovernanceandStructure 69 Overview of Municipal Sector Structure 70 Facilitating Cost Recovery 73 Fostering Efficient Urban Water Utilities 80 Managing Wastewater as a Network Utility Business 83 Exploiting Opportunities for Service Aggregation 88 Summary of Strategic Directions 90 7 MovingUptheUtilityFinancialSustainabilityLadder 93 Achieving Utility Cost Recovery 94 Accessing Domestic Credit Markets 104 Improving Concessionary Finance Programs 110 Summary of Strategic Directions 115 8 UsingthePrivateSectortoHelpImproveMunicipalUtilityPerformance 117 Private Participation Trends in China 117 Engaging with the Private Sector as Part of the Reform Process 123 BOT Treatment Plants as Part of a Network Business 124 Utilizing Non-Investment Private Participation Arrangements 127 Summary of Strategic Directions 130 9 ImprovingCapitalPlanningtoReduceCosts 133 Capital Planning for Water Utilities 133 Using Modern Water Supply Planning Processes 135 Asset Management Planning: Optimizing Network Investments 137 Strategic Planning and Management of Drainage Networks 140 Integrating Industrial Pollution Control into a Wastewater Management System 143 Managing Sludge as an Environmental and Financial Priority 146 Summary of Strategic Directions 148 vi C o n t e n t s 10 Strategic Action Plan 151 APPENDIXES A OverviewofWorldBank'sUrbanWaterPrograminChina 155 B SummaryofWaterandWastewaterStandards 157 C TechnicalNotes 163 Glossary 171 References 175 List of Boxes 2.1 International Performance Comparisons 12 2.2 Wastewater Technical Terms 19 2.3 MOC's Analysis of Wastewater Treatment Operational Performance 20 2.4 Overview of Tianjin Drainage System in 2005 21 2.5 Brazil National Sanitation Information System (SNIS) 23 3.1 China's Administrative System and Definition of Cities and Towns 26 3.2 China's Water Resources 32 3.3 Financial Sustainability Ladder 35 4.1 South Korea: Wastewater Treatment Coverage vs. Economic Development 38 4.2 Ecosystem Restoration in the Chesapeake Bay, United States 41 5.1 Agencies Involved in the Urban Water Sector 47 5.2 Role of National Government Agencies in Colombia 54 5.3 Water Utility Performance Benchmarking 57 5.4 Application of Discharge Standards in China 59 5.5 Full Cost Wastewater Pricing for Different Treatment Levels in U.S. and Europe 60 5.6 World Health Organization Framework for Safe Drinking Water 64 5.7 Grading the Safety of Water Supply Systems in New Zealand 66 6.1 General Functions of Key Municipal Agencies 71 6.2 Municipal Governance Models in California 78 6.3 Singapore Public Utilities Board 80 6.4 Challenges Faced by Water Supply and Wastewater Companies in Chongqing, China 82 6.5 Drainage Collection Systems in U.S. and U.K. 85 vii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 6.6 Municipal and Regional Water Services in Latin America 90 6.7 Case Study of Ningbo, China 91 7.1 Concept of Utility Cost Recovery 95 7.2 International Comparison of Cost Recovery Ranges for Water Supply 98 7.3 Social Acceptability of Water Tariffs in OECD Countries 100 7.4 Special Purpose Municipal Investment Vehicles in Shanghai and New York 107 7.5 Financing Wastewater and Water Supply Infrastructure in the United States 113 7.6 Brazil's River Basin Restoration Program 115 8.1 Definition of Key Private Participation Terms 118 8.2 Integrated Water Projects with Private Partners 122 8.3 World Bank Toolkit on Private Participation 124 8.4 High Profile BOT Projects in China 126 8.5 Mixed Capital Company in Cartagena, Colombia 129 9.1 Capital Costs in the Water Industry: England and Wales 134 9.2 Water Supply Planning in State Council Decree No. 36 (2000) 136 9.3 Integrated Resource Planning (IRP) Concepts 138 9.4 Asset Management Planning (AMP) 139 9.5 Comparison of Separate and Combined Drainage Collection Systems 141 9.6 Drainage Collection Systems and Water Pollution Control 142 9.7 Applying the Polluter Pays Principle 145 List of Tables 1.1 Urban Water Market Segments 8 2.1 Utility Service Area with Low Water Pressure 16 2.2 Non-Revenue Water for Chinese Utilities 17 2.3 Net Income to Revenue Ratio in 1997 and 2004 18 3.1 Urban Water Market Segments 31 3.2 Approximate Urban Water Sector Investments 33 4.1 Chinese Urban Water Utilities in 2020 39 5.1 Examples of Broad Policy Goals 53 5.2 General Supervision Responsibilities of Provincial Agencies 55 5.3 Summary of China's Municipal Wastewater Discharge Standards 58 viii C o n t e n t s 6.1 Water Supply Utility Models 73 6.2 Common Wastewater Utility Models 73 6.3 Options for Integrating Wastewater Services 87 6.4 Options for Aggregation 89 7.1 Summary of Urban Water Utility Financial Status in China 96 7.2 Weighted Average Water Supply Tariffs by City Category, 1998 and 2004 97 7.3 Water and Wastewater Tariff History in Tianjin 103 7.4 Suggested Municipal Government Capital Contribution Policy 104 7.5 Urban Infrastructure Fund in 2004 106 7.6 Per-Capita Urban Infrastructure Fund by City Type 108 7.7 Indicative Ranges of Urban Water Sector Financing Sources, 1991­2005 108 8.1 Investment by Project Type 119 8.2 Private Participation in the Water Supply Sector 120 8.3 Private Participation in the Wastewater Sector 120 8.4 Types of Entities in Private Arrangements 121 8.5 Distribution of Private Participation Activity by City Type 122 8.6 Wastewater Treatment Fee and BOT Price 127 8.7 Responsibility Allocation for Common Arrangements 128 10.1 Summary Strategic Action Plan 152 List of Figures 1.1 Overview of the Conceptual Framework 2 1.2 Key Policy Themes 5 1.3 Strategic Directions for Key Policy Themes 6 1.4 Structure of Report 9 2.1 Annual Investment in Urban Water and Wastewater Infrastructure 13 2.2 Urban Water Supply Coverage 13 2.3 Urban Water Supply 14 2.4 Wastewater Treatment Capacity 14 2.5 Trends in Industrial and Urban Wastewater Discharge Flows and Loads 15 2.6 Actual Water Supply and Installed Treatment Capacity 17 3.1 China's Economic Transformation and Urbanization 27 3.2 Urbanization Trends and Projections 28 3.3 Average Water Quality in Chinese Rivers from 1991­2002 33 3.4 Estimated Wastewater Investments in the 11th Five-Year Plan Period 34 ix S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 4.1 Strategic Directions for Key Policy Themes 43 5.1 Overview of Chapter Five 46 5.2 Overview of Government Administration 46 5.3 Overlapping Functions among Agencies 50 6.1 General Municipal Structure 70 6.2 Typical Parent Bureau Models 72 6.3 Balancing Service Standards, Tariffs, and Subsidies 75 6.4 Example of a Municipal Drainage System 83 7.1 Water Supply Tariffs 97 7.2 Wastewater Tariffs 97 7.3 Combined Tariff as Percentage of Household Income in 2004 101 7.4 Total Annual Expenditure for Urban Construction and Maintenance 105 7.5 State Bond Program Funding for Wastewater 111 7.6 China State Bond Program in Water Supply Sector 112 7.7 China State Bond Program in Water Supply and Wastewater by City Size 112 8.1 Private Participation Investment Trends 120 x Foreword Providing high quality urban services is fundamental to sustaining China's growth. As China transitions to a market economy, municipal utilities--including those providing water and wastewater services, are evolving into commercially viable companies under government over- sight. Great challenges confront the reform process for China's water utilities, including rapid urbanization and emerging inequality coupled with severe water scarcity and degradation. Cities and their water util- ities must provide services within a complex mosaic of policies and reg- ulations provided by national and provincial governments. In China, as throughout the world, water is also a sensitive political issue. Gov- ernments are keen to provide good water service, but also attuned to the need to ensure that tariffs are socially acceptable. This report pres- ents a strategic framework and set of recommendations for addressing these challenges and accelerating improvements in China's urban water utilities. Since 1990, China has had remarkable success in increasing the stock of water infrastructure, expanding water supply coverage, and increasing the percentage of wastewater that is treated. The World Bank is proud to have contributed to these accomplishments by pro- viding around $5 billion in financing (disbursed or committed) to sup- port thirty-four urban water projects throughout China. In addition to financing, the Bank aims to provide value by improving planning, pro- moting financial sustainability, supporting institutional reforms, and undertaking analytical studies. Drawing upon the World Bank's experience in China, as well as the Bank's global knowledge, this report paints an attainable vision for the urban water sector in the year 2020. This vision entails the provision of safe and reliable drinking water for all, comprehensive stormwater drainage, and the collection and treatment of all municipal wastewater-- provided by efficient and financially sustainable water utilities. The stra- tegic framework and set of recommendations presented in this report xi S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s provide a starting point for achieving the 2020 sector vision. The devel- opment of specific policies and programs within this strategic frame- work will naturally need further research and testing, but the direction is clear and requires coordinated action from national, provincial, and municipal governments, as well as water utilities. The World Bank stands ready to deepen our partnership with China through continued financing of urban water projects, as well as con- ducting additional research, sharing international experience, and engaging in policy dialogue at all levels of government. We trust that this report will serve as the foundation for a new generation of World Bank support for China's urban water sector. David Dollar China Country Director, World Bank Jamal Saghir Director, Energy, Transport and Water Department, World Bank Christian Delvoie Director, East Asia and Pacific Sustainable Development Department, World Bank Keshav Varma Sector Director, East Asia and Pacific Urban Development, World Bank xii Acknowledgments This study has been undertaken by a core World Bank team led by Greg Browder and comprising Lixin Gu, Mingyuan Fan, Yoonhee Kim, Shiqing Xie, John Smithson, Da Zhu, and Guoqian Wang.The Bank team was supported by the Tsinghua University Water Policy Research Center, in particular Dr. Fu Tao and Dr. Chiang Miao. The Tsinghua Center prepared background research papers, provided data, organized stakeholder workshops in China, and reviewed and translated the report. David Ehrhardt, from the Castalia consulting firm, provided advice on the strategic framework for the study and the incorporation of international experience into the analysis. The prin- ciple author of the report is Greg Browder, and the co-authors are Shiqing Xie, Yoonhee Kim, Mingyuan Fan, and David Ehrhardt. The study benefited greatly from extensive consultations with Chinese stakeholders. Five consultations were held in China, including (a) an initial consultation in Beijing to define the scope of the study (October 2005); (b) mid-term consultations to provide feedback on the preliminary recommendations (March 2006, in Beijing, Tianjin, and Ningbo); and (c) final consultation in Beijing (September 2006). The final version of this report was discussed with the Ministry of Construction in May 2007. Key national government agencies that participated in the consulta- tions include the Ministry of Construction, the State Environmental Protection Agency, Ministry of Water Resources, Ministry of Finance, and the National Development and Reform Commission. The China National Water and Wastewater Association also participated in the consultations. In addition, representatives from water utilities, consulting firms, and municipal governments provided feedback during the consultations. The study team is grateful to the Tianjin and Ningbo municipal governments for organizing and paying for the consultations in their cities. Valuable comments on a draft of this report were provided by staff of the World Bank, including Michel Kerf, Bert Hoffman, Jonathan xiii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Halpern, Menahem Libhaber, Aldo Baietti, William Kingdom, Axel Baeumler, Mats Anderson, Raja Iyer, Thomas Zearley, Takuya Kamata, Genevieve Connors, Alexander Danilenko, and Songsu Choi. Useful comments were also received from international consultants with long experience in the Bank's China program, including Dan O'Hearn, Peter Jacques, George Taylor, and Hew McConnel. Editing and document preparation services were provided by Robert Livernash. Desktopping services were provided by Circle Graphics. World Bank management provided valuable support and guidance for the study, including David Dollar, Christian Delvoie, Keshav Varma, Hsiao-Yun Elaine Sun and Jamal Saghir. The study team would like to express its appreciation to Jamal Saghir, who participated in the final round of consultations in September 2006 in Beijing, and helped pre- sent the study's findings and recommendations. xiv List of Acronyms ADB Asian Development Bank NDRC National Development Reform AMP Asset Management Planning Commission BOD Biochemical Oxygen Demand NTU Nephelometric Turbidity Units BOT Build Own Transfer OECD Organisation for Economic CDB China Development Bank Co-Operation and Development COD Chemical Oxygen Demand O&M Operations and Maintenance CSO Combined Sewer Overflows P Phosphorous CWWA China Water Works Association PB Price Bureau DBO Design Build Operate PHB Public Health Bureau DDD District Drainage Department PPP Purchasing Power Parity DRC Development Reform Commission PRC People's Republic of China EPB Environnent Protection Bureau PSP Private Sector Participation GDP Gross Domestic Product RMB China Yuan Renminbi GDPST Gross Domestic Product SEPA State Environmental Protection Secondary and Tertiary Agency IRP Integrated Resource Planning SOE State Owned Enterprise JBIC Japan Bank for International SS Suspended Solids Cooperation TOT Transfer Own Transfer JV Joint Venture UDIC Urban Development Investment MFB Municipal Finance Bureau Company MDD Municipal Drainage Department UNEP United Nations Environment MOC Ministry of Construction Programme MOF Ministry of Finance VAT Value Added Tax MOPH Ministry of Public Health WHO World Health Organisation MOU Memorandum of Understanding WRB Water Resources Bureau MWR Ministry of Water Resources WS Water Supply MWWC Municipal Wastewater Company WW Wastewater N Nitrogen WWTP Wastewater Treatment Plant xv Executive Summary China has made remarkable progress in ex- This study reviews China's accomplish- panding its urban water supply and waste- ments in providing urban water services, water infrastructure since 1990. Driven by identifies the major challenges, and recom- about RMB 438 billion ($54 billion) in spend- mends directions for the future. It aims to ing, water supply and wastewater coverage in provide an assessment of where the sector China's 661 designated cities has increased stands today and to create a strategic frame- dramatically. The share of the urban popula- work for policy discussions, project design, tion served by municipal water supply utilities and reform efforts. The scope of the study is increased from 50 percent in 1990 to 88 per- limited to urban water supply and waste- cent by 2005. Over the same period, waste- water (including stormwater) management. water treatment capacity has tripled. As of It only touches upon the important associ- 2006, municipal plants had the capacity to ated issues of water resources and water treat 52 percent of the wastewater generated quality management. The World Bank is in urban areas. Industrial water use has de- assisting China in other endeavors to creased, and the growth in domestic water use address these issues. has slowed due to increases in water tariffs China's government has embarked on sec- and conservation measures. Municipal pollu- tor reforms to achieve the nation's environ- tion discharges into the environment, al- mental and public health objectives. The though still high, have decreased. Addressing State Council, National Development and future challenges, however, will require not Reform Commission (NDRC), Ministry of only more investment, but new approaches to: Construction (MOC), State Environmental Protection Agency (SEPA), and other Enhance governance and regulation at national government agencies have issued a the national, provincial, and municipal variety of directives on water pricing, utility levels regulation, wastewater treatment, private Boost utility operational and financial sector participation, and other reform prior- performance ities. A vision of the sector is emerging where Increase user fees water supply and wastewater services are Ensure adequate fiscal support provided by utility companies operating Explicitly recognize the constraints under an effective regulatory system. These facing lower capacity cities and towns companies are generating revenues through xvii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s user fees set at cost recovery levels, accessing As of 2005, there were approximately capital markets for finance, and performing 150 such cities with a total population at high levels. The vision entails the provision of 200 million--about one-third of the of safe and reliable drinking water to all resi- urban population. dents, economically efficient stormwater Low-capacity cities. This includes all drainage, and the collection and treatment of other cities and towns in China, includ- all municipal wastewater. This vision is ing around 500 designated cities, and attainable for all cities by 2020, although the 1,635 county capital towns, with a large and prosperous cities may achieve these total population of around 400 million. goals faster than China's thousands of smaller and less affluent cities and large towns. The concept of "high" and "low" capacity cities, and the criteria used to classify them, has been constructed to facilitate policy dis- Sector Challenges cussion. The intention is to underscore that In its quest to achieve this sector vision, some cities--that is, "high-capacity" cities-- China will confront the following challenges: can aspire now to standards of urban water Responding to rapid urbanization. China is services enjoyed by high-income countries, experiencing the greatest wave of urbaniza- such as those belonging to the Organisation tion in history. The official urban population of Economic Co-operation and Development is expected to increase from about 550 mil- (OECD). In contrast, "low-capacity" cities lion in 2005 to about 900 million in 2020. face constraints typical of lower-middle Providing urban water services to new resi- income countries around the world, and it dents and dealing with new spatial patterns of will take time and government support to urban development, particularly in booming transition to higher service standards. metropolitan areas, will be a demanding task. Meeting investment demands. The growth Dealing with urban diversity. China in- in urban population, combined with aspira- cludes a wide spectrum of cities and towns, tions to improve the quality of water ser- from large and rich super cities such as Bei- vices, will require an accelerated capital jing and Shanghai to thousands of smaller works program. As shown in Table 1, the and poorer cities and towns. China's poli- estimated investment needs for 2006­10 cies, standards, and approaches for urban alone are expected to be approximately water services will need to be tailored to meet the economic and environmental real- TABLE 1. Approximate Sector Investments ity of different types of cities. To deal with this issue, this study has classified Chinese Total Estimated cities into two groups: Investment Investment 1991­2005 2006­10 High-capacity cities. This includes all Sector US$ RMB US$ RMB cities with a per-capita GDP greater Investment billion billion billion billion than RMB 24,000 ($3,000) regardless Water Supply 25 200 20 160 of population, or any city with a popu- Wastewater 29 230 34 270 lation greater than 500,000 and per Total 54 430 54 430 capita GDP of RMB 12,000 ($1,500.) xviii E x e c u t i v e S u m m a r y equal to investments over the last 15 years. wastewater) provides a focal point for evalu- Financing these investments, and ensuring ating urban water services. Figure 1 illus- investment efficiency, is a major challenge. trates at a conceptual level where China's Confronting water scarcity and degrada- utilities stand now, and where they could be tion. China is characterized by water scarcity by 2020. The key findings related to utility in the northern regions of the country and by performance are summarized below. severely degraded water quality throughout Wide spectrum of utility performance. the country. Per-capita water availability in Many Chinese utilities operate at levels sim- the 3-H basins of north China (Hai, Huai, ilar to most middle-income countries, but and Huang) is around 500 m3/year, which is below the average for advanced industrial well below the 1,000 m3/yr standard for countries (e.g. OECD countries) However, water stress. In 2003, over 40 percent of there is a very wide distribution of perform- China's river stretches were classified as ance: some utilities perform well, while severely polluted. China's coastal waters suf- many others operate well below their poten- fer from widespread eutrophication, includ- tial. Although there is some correlation ing large-scale, toxic red tide of algae. In between city size and utility performance, spite of extensive efforts to improve water and city wealth and utility performance, the quality and ensure reliable water supplies, relationship is not particularly strong. Table seasonal shortages and polluted water 2 provides an example based on percentage resources will continue to pose problems. of water service area with low water pres- sure. This observation highlights the poten- Water Utility tial for quickly improving performance if the Performance practices of the well-performing utilities are adopted by other cities. The financial and operational performance Financial performance. In 2004, 60 per- of water utilities (both water supply and cent of water supply utilities in China FIGURE 1. Illustrative Evolution of China's Water Utilities Year 2005 Year 2020 utilities utilities Chinese Chinese of of ibutionr ibutionr Dist Dist Bad Below Average Above Good Bad Below Average Above Good average average average average Performance relative to OECD utilities Performance relative to OCED utilities xix S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s TABLE 2. Percentage of Utility Service Area with Low Water Pressure Large and Rich Cities Medium Cities Small and Poor Cities City Type (%) (%) (%) Average 12 10 16 Best 25% of Utilities 0 0 0 Worst 25% of Utilities 45 33 46 reported negative net incomes, indicating leakage rate appears good by international that most of the companies were experienc- standards, this is largely because of China's ing financial stress. Although there is no compact, high-density distribution net- comprehensive data for the wastewater sec- works. When the leakage rate is calculated in tor, the financial state of wastewater entities terms of water loss per kilometer of pipeline, is certainly more precarious than that of Chinese utilities have exceptionally high water supply utilities. The national weighted rates of water loss. Many cities have sig- average water supply tariff has increased nificant excess water treatment capacity, more than 50 percent since 1998, and now reflecting poor water supply planning prac- stands at around 1.5 RMB/m3 ($0.20). Start- tices. On a national scale, there is at least ing in the late 1990s, most cities began 50 percent excess treatment capacity. charging wastewater tariffs, and the 2005 China is rapidly constructing wastewater national average is 0.75 RMB ($0.10). These treatment plants; as of 2005, 364 out of rates, particularly for wastewater, are still 661 cities had plants, with a national ca- insufficient to cover the full operating, main- pacity to treat around 45 percent of all tenance, and capital costs. In addition, the wastewater. The average plant hydraulic uti- collection of wastewater fees is a problem in lization rate, however, was only 65 percent. many cities, particularly from industries. The relatively low utilization rates stem from Most utilities still rely on municipal govern- a variety of problems, including inadequate ment equity contributions to finance a sig- wastewater collection, poor planning, and a nificant part of their investments. shortage of operating funds. Wastewater Operational performance. China's water influent concentration is also often signifi- supply utilities generally provide 24-hour cantly lower than the design value, further service, but the quality of the service is vari- contributing to the underutilization. Expan- able. As shown in Table 2, one-quarter of the sion and renovation of wastewater collection water utilities are unable to provide ade- networks has lagged behind treatment plant quate water pressure to more than 40 per- construction. Inadequate collection systems cent of their service area. Around 60 percent in many cities result in excessive stormwater of China's 661 cities face seasonal water inflow and groundwater infiltration into the shortages, and over 100 cities have severe drainage pipes, stormwater drainage prob- water constraints. On average, around lems, and overflows of untreated wastewater 20 percent of the water produced at the into receiving water bodies. water treatment plant is lost through leaky Information gaps. Analysis of China's distribution pipes. Although a 20 percent water utilities is complicated by the lack of xx E x e c u t i v e S u m m a r y information on utility performance. The receiving water quality will improve after China Water Works Association and occa- controlling municipal and industrial pollu- sional surveys by the Ministry of Construc- tion, but sustaining a healthy ecosystem is a tion provide some information, but utility more complex endeavor that involves man- performance assessments are still inadequate aging urban and agricultural runoff, as well and incomplete. The problem is particularly as toxic chemicals. acute for wastewater, where many waste- Protection of public health. Water pollu- water utilities are either government depart- tion endangers public health through a vari- ments or operate on a quasi-department basis ety of mechanisms, including (a) polluting with significant municipal government bud- drinking water sources; (b) contaminating get support. This study relies on a myriad of seafood, particularly in the extensive coastal different--and often incomplete--sources of aquaculture zones as well as capture fish- information. Although the general picture eries; and (c) transmitting diseases through that emerges is clear, the resolution of some contact in rivers, lakes, and coastal waters. specific features may be blurry. Quantifying the linkage between water pol- lution and public health is complex and beyond the scope of this study, but the Benefits of Improving health impacts of water pollution are clearly Water Utility Performance a major issue in China. The unreliable and As shown in Figure 1, with the right govern- low-quality water service in many cities ment policies and programs, Chinese water increases the risk of exposure to pathogens utilities could perform at a level equal to or and toxic chemicals, and is a significant higher than utilities in OECD countries. The public health risk. Unreliable water supplies distribution of utility performance could can also impact public health by hindering also be much smaller. Water utilities should basic washing and sanitation. Improving improve as China's economy grows and drinking water quality will certainly reduce becomes more sophisticated and more the rates of illness and morbidity, although closely resembles OECD countries. More- more research is needed to quantify the over, China's water utilities must dramati- impacts. cally improve if China is to meet future Economic benefits. Providing urban water challenges. The benefits of achieving the services is an important part of the national 2020 vision are considerable and include: economy. In 2005, annual capital invest- Environmental improvements. Restoring ments in the sector accounted for about China's heavily polluted waters will take 0.4 percent of GDP, and operating costs for decades and will require continuous efforts at least another 0.6 percent of GDP. If utili- to control municipal, industrial, and agricul- ties can improve the efficiency of their capi- tural pollution. Pollutant loads from indus- tal investments by one-quarter--a target this trial and domestic sources have decreased study finds very plausible--economic sav- from around 22 million tons of COD in 1995 ings to the country would be on the order of to 13 million tons in 2004. By 2020, total RMB 100 billion ($12.5 billion). Most impor- industrial and domestic pollution loads tantly, economic activity, particularly for could be reduced to 3 million tons of COD or industries and commerce, depends vitally on lower. Based on other countries' experience, an adequate water supply. Environmental xxi S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s improvements and protection of public such as separate stormwater and wastewater health also generate direct and indirect eco- collection systems; the level of water supply nomic benefits. reliability; and water supply and wastewater Enhance equity. Inequality is a serious coverage targets. The higher the service and growing problem in China along three standards--all other things being equal--the dimensions: (1) between rural and urban higher the utility's costs. In most countries, residents; (2) among cities, particularly be- there is a strong correlation between the tween those in coastal provinces and other level of economic development and the ser- parts of China; and (3) among residents vice levels that can be sustained. For ex- within cities. Adopting specific policy meas- ample, Korea did not start its national ures for urban water services that take into wastewater management program until the account and help compensate for these dif- mid-1980s when it had reached a GDP per ferences will help to alleviate some of the capita of $7,500. social tensions associated with inequality. Utility operational efficiency. The more efficient a utility, the lower the overall costs for a given service level. Efficiency is needed Achieving a across all business areas, including capital Sustainable Balance planning decisions, staffing levels, quality of operations and maintenance, and commer- A water utility's performance depends on a cial practices such as billing and collection. number of factors that must be bundled Until the 1980s, most water utilities in together in a balanced manner to ensure OECD countries were government monopo- sustainability and efficiency. The key com- lies that had little incentive to improve effi- ponents of the bundle are conceptually pre- ciency. Since then, however, the cost of sented in Figure 2. The next few paragraphs providing water services has increased sig- discuss the components in general, followed nificantly due to requirements for environ- by a summary of the situation in China. mental improvements, high-quality water Service standards. A water utility's service supplies, and constraints on water resources. level depends partly on the applicable na- Many utilities have come under pressure to tional standards, such as drinking water or continuously reduce costs and provide better municipal wastewater effluent. Municipal service. The response in many countries has governments also have a large influence on been to make utilities more autonomous and service targets by specifying requirements commercial (corporatization), or to bring in private firms to provide some or all of the service. FIGURE 2. A Sustainable Utility Balance User fees. Water users, and wastewater dischargers, are required to make at least Service standards User fees and and partial payments for the services provided by utility efficiency fiscal transfers a utility. Revenues from users depend not only on the tariff levels, but also on the abil- Costs Cost ity to bill and collect what is due. The tariff recovery structure is also important in providing the right economic signals and ensuring equity, xxii E x e c u t i v e S u m m a r y while at the same time generating sufficient ment transfers, whether through capital or revenue for the utility. This study estimates operating contributions, are typically not that, in OECD countries, at least half of the enough to cover the shortfall in user fees. water utilities receive sufficient user rev- Utilities cope by deferring asset renewal and enues to cover all operation and mainte- expansion, not servicing their debts, or cut- nance costs and partial capital costs. ting back in maintenance and operations. Fiscal transfers. Many water utilities To solve these problems, confront future throughout the world, and most wastewater challenges, and achieve China's vision for utilities, rely to some measure on govern- the sector, the following sections layout a ment transfers. These transfers can take var- strategic framework centered on five inter- ious forms, such as grants or concessionary related themes presented as presented in finance by national governments, municipal Figure 3. government equity contributions, operating budget, etc. In the United States, for exam- ple, the federal government has provided Adopting Goal-based over $75 billion (RMB 600 billion) in grant Sector Goverance funds since 1972 to support wastewater In the past, under China's planned economy, treatment plant construction. performance was measured in terms of achievement of physical targets, such as China's Water Utilities Have Not Yet kilometers of pipeline or treatment plant Reached a Sustainable Balance capacity. The focus for the future should be The fundamental finding of this study is that on utility performance to achieve China's most of China's water utilities are confront- goals, including improving the environment, ing a combination of factors that have not protecting public health, and providing good allowed them to achieve a sustainable bal- quality service to all at reasonable cost. This ance. Service standards, particularly national study recommends the following approaches standards, are set at levels equal to or above OECD countries and may be beyond the capacity of many of China's cities to attain. FIGURE 3. Sector Policy Star Many utilities, particularly for wastewater, operate at low levels of efficiency under the supervision of municipal governments with a lack of accountability, transparency, and cus- tomer orientation. These factors drive up the Sector governance cost of providing the service. Utility governance Financial Many utilities are unable to cover their and structure sustainability 2020 costs. This renders them incapable of achiev- Sector ing service targets, and constrains them Vision from investing in the human resources or Private Capital infrastructure necessary to meet those tar- participation planning gets in the future. User fees, while gradually increasing, are still below the cost-recovery level, particularly for wastewater. Govern- xxiii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s to move toward goal-based governance for cerns on whether high levels of wastewater the sector: treatment are technically and financially viable for many cities. Many cities have estab- Improve National Policy Coordination lished "Water Affair Authorities" that report There are four main sector agencies at the to MWR and are mandated to provide inte- national level that guide the urban water sec- grated water management and supervise tor: the Ministry of Construction (MOC), urban water utilities, yet MOC still issues State Environmental Protection Agency most of the policy guidance related to urban (SEPA), Ministry of Water Resources (MWR), water utilities. MOPH, in conjunction with and Ministry of Public Health (MOPH). The China's National Standardization Admin- National Development and Reform Commis- istration, issued new drinking water stan- sion (NDRC) and Ministry of Finance (MOF) dards in 2007 that will require water supply provide overall development policy and finan- utilities to take actions to upgrade their cial supervision to the sector. While the State systems. In 2005, MOC also issued "sector Council issues key national policy statements recommended" water supply standards. (such as the historic 2000 Circular on Moreover, each sector agency produces a "Strengthening Urban Water Supply, Water variety of sector reports, but often from a lim- Saving, and Water Pollution Prevention ited perspective. MOC may report on infra- and Control"), the various specialized sector structure construction progress, for example, agencies each issue a multitude of opinions, while SEPA focuses primarily on pollution notices, circulars, etc. These are not always control. A national-level "status report" of consistent, provide ambiguous guidance to where the sector stands in terms of providing cities, and may even be contested by other adequate urban (and rural) water supplies sector agencies. Figure 4 illustrates conceptu- would be great help for policy makers. ally the overlapping areas of responsibility. Differences of opinion and perspective Prominent examples of areas of policy among different sector agencies--and other incoherence include the disconnect between stakeholder groups--are natural and neces- SEPA guidance on the application of waste- sary for good governance in the water sector. water discharge standards and MOC con- There must also be forums for open debate, mechanisms for policy research, and proce- dures for coordination and reconciliation of FIGURE 4. Overlapping Areas of Responsibility competing views. This study recommends that the State Council establish a National Water supply Wastewater quality standards standards Water and Sanitation Committee under a Deputy Prime Minister, with one ministry serving as the Secretariat. The committee MoPH MOC SEPA would not be a new agency, but rather be composed of representatives from the rele- vant national agencies, as well as other stakeholder groups. The committee could MWR Urban water meet on a monthly or quarterly basis, with Water quality resource management management specialized ad hoc working groups. It could coordinate national policy formulation, inte- xxiv E x e c u t i v e S u m m a r y grate decision-making among the different Committees" or create new "Provincial Water sector agencies, and monitor sector per- Offices" that would consolidate urban water formance and development. In order to be regulatory and oversight functions into one focused and effective, the committee's man- office. date should be limited to water supply and sanitation, in both urban and rural areas. Set Appropriate Water and Wastewater Standards Strengthen Provincial China should aim to have standards that are: Government Oversight Although urban water services are the Affordable to ensure the service is responsibility of the municipal government, financially sustainable it is important to have an effective oversight Enforceable to allow regulators to com- and monitoring mechanism to ensure that pel compliance cities and their utilities meet their obliga- Efficient to enable policy objectives to tions. China is too large for the national gov- be met in a least-cost manner ernment to oversee thousands of utilities, and provincial governments are best placed The way China applies standards now to provide utility oversight and regulation. does not fully meet these criteria, particu- Provincial agencies already have many key larly for low-capacity cities. For example, mandates for utility oversight, including (a) SEPA's Circular No. 110 issued in 2005 utility supervision (construction depart- requires all municipal wastewater treatment ments); (b) approval of municipal tariffs plants that discharge into key water resource (price department or DRC); (c) channeling protection areas and enclosed water bodies national concessionary finance (DRC); (d) to meet Class 1A standards. This standard overseeing environmental compliance (EPB); requires expensive tertiary treatment for the (e) overseeing drinking water compliance reduction of two nutrients, nitrogen and (public health department); and (f) approval phosphorous. The standard also mandates of large construction projects (DRC). The extremely low levels for biological oxygen efforts of provincial agencies, however, are demand and suspended solids (10 mg/l). often hampered by lack of funds and real Although such high standards may be war- authority over municipal governments, as ranted on environmental grounds given well as lack of coordination among provin- China's highly degraded waters, it does not cial agencies. meet the requirements of affordability and This study recommends that provincial efficiency. The standard effectively requires governments increase the budget and capacity many cities to go from no wastewater treat- of their provincial agencies and more vigor- ment to technologically advanced and ously exercise their oversight role for urban expensive plants. This will help reduce water water services. Similar to the national gov- pollution, but may not be economically effi- ernment, provincial governments also need cient. Much of China's water pollution to improve policy coordination among the comes from runoff of fertilizer applied to different sector agencies. This study also agricultural land, large-scale livestock oper- recommends that provincial governments ations, and urban stormwater runoff. Pol- establish "Provincial Water and Sanitation lution control measures for these sources are xxv S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s just beginning in China, and putting more that it distinguishes between higher and resources into these activities would yield lower capacity cities, and provides discretion greater marginal returns than tightening to the provincial government regarding how municipal treatment standards. to apply the standard (42 regular or 106 This study recommends that China use regular and non-regular parameters). The transitional wastewater standards for low- standard also requires all cities to provide capacity cities and manage water quality from reasonable minimum water quality by com- a watershed perspective. Cities and towns plying with all regular parameters, which that cannot afford Class I or Class II stan- addresses the core issues. Finally, the stan- dards could start by ensuring full collection dard uses a transitional approach, which of wastewater and low-cost, simple waste- allows cities to gradually upgrade their facil- water treatment. As their level of economic ities by 2012. development improves, these cities could The new drinking water standard has ele- upgrade their treatment facilities and transi- ments of flexibility, transition, and dis- tion into compliance with national stan- cretion that are a great step forward from dards. Provincial governments could be in previous approaches. However, this study charge of determining which cities and recommends a more realistic time frame for towns should be subject to transitional stan- compliance with the new standard. High- dards. Provincial governments, and their capacity cities could be required to meet the specialized agencies, should also be respon- full standard (106 items) by 2012 at a mini- sible for developing economically efficient mum. Meanwhile, provincial governments water quality improvement plans and en- should ensure that all cities comply with the suring that adequate administrative and regular parameters (42) as soon as possible. financial mechanisms exist to implement The timing for lower capacity cities to meet high-priority pollution control activities. the full standard should be realistic and China's updated drinking water standards, could be left to the discretion of provincial promulgated in 2007 (GB5749-2006), have governments. This study also recommends features that this study recommends for that provincial agencies undertake compre- wastewater management. The standard con- hensive and systematic evaluations of the tains 42 items that are classified as "regular safety of municipal drinking water systems parameters" and apply to the whole country. and grade their performance. The informa- The remaining 64 "non-regular parameters" tion should be made public, and municipal- will only apply to cities that meet certain cri- ities should be encouraged to improve their teria. The non-regular parameters include water safety grade. less common microbiological and toxicolog- ical compounds, particularly pesticides and synthetic organic compounds. As of 2007, the Improving Municipal criteria for cities that must meet all require- Utility Governance ments have not been specified, but presum- and Structure ably these will be larger and more affluent cities. By 2012 all cities must meet the stan- Municipal governments and their utilities dards for both regular (42) and non-regular operate within the framework provided by (64) parameters. The standard is flexible in national and provincial policies. Different xxvi E x e c u t i v e S u m m a r y models of structuring the urban water sector Empower Municipal Utilities have emerged throughout China, some of and Hold Them Accountable which function better than others. In gen- Although most water utilities are becoming eral, however, there is still huge potential for more autonomous and commercialized, improving the efficiency of urban water util- many still tend to function as implementing ities by modifying utility governance and agents of government bureaus and respond to structure. We have three recommendations: political directives. Moreover, water utilities, like many other state-owned-enterprises, Streamline and Coordinate have a culture of complacency and do not Municipal Utility Governance strive for excellence. This study recommends Municipal governments will need to improve that municipal governments empower utilities their capacity to govern and regulate public to take more responsibility for key corporate utilities, while at the same time empowering functions such as strategic master planning, the utilities to play the leading planning, capital improvement plans, developing fi- financing, and operating role in the sector. nancing strategies, formulating cost-recovery In many cities, multiple city agencies make strategies, human resource development, fundamental decisions and provide advice to monitoring and regulatory compliance, etc. the mayor and his vice mayors--on infra- Some water utilities in China, particularly in structure targets, financing, tariffs, and larger and richer cities, are already close to budget transfers--without having a holistic becoming international standard water com- view of the sector. Creating more integrated, panies; the majority, however, are still under- accountable, and transparent city gover- performing. A culture of continuous utility nance structures for the sector would help improvement should be encouraged by na- utilities achieve a more sustainable balance. tional, provincial, and city governments. This It would also provide them with the institu- can be realized through a commitment to tional space to become modern organiza- transparency, customer orientation, monitor- tions responsible for their own destiny, but ing and evaluating performance against other under the leadership of the government. In utilities and improvements over time, and the some countries, cities have created "Water judicious use of the private sector. Profes- Boards" to help overcome coordination sional organizations and research institutes problems. These boards are typically ap- have an important role to play in fostering a pointed by the municipal government and new culture of excellence. empowered to make decisions (or recom- mendations) on key utility proposals, such Manage Wastewater as a as tariffs, budget transfers, capital pro- Network Utility Business grams, etc. This study recommends that Many cities in China have the view that high-capacity cities experiment with stream- drainage is a public good that should be lined utility governance structures, such as a financed and managed by a government Water Board or a multi-sector Public Utilities department, whereas wastewater treatment Commission. Lower capacity cities should is a commercial activity and should be paid make a concerted effort to coordinate the dif- for by user charges and managed by a com- ferent government agencies overseeing water pany. This view is contrary to international utilities. practice. Approximately two-thirds of invest- xxvii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s ment costs and about half of the operating One utility company owns and costs of a typical wastewater system are manages all drainage network and related to the complex pipe networks and treatment plant assets. pumping stations scattered throughout the The treatment company enters into a city. Collecting and conveying wastewater to lease contract for the drainage network. the treatment plant is a prerequisite for suc- The treatment company enters into cessful wastewater management. Moreover, management contracts with the gov- wastewater utilities have no control over ernment drainage bureaus. industrial pollution discharges into the mu- A "Wastewater Group" is formed that nicipal system. The industrial dischargers puts all organizations under a single can adversely affect the drainage network as management team. well as interfere with the treatment process, potentially resulting in noncompliance with Pursue Opportunities for wastewater discharge standards and con- Aggregating Urban Water Services taminated sludge (i.e. residual solids) from Water utilities are typically organized along wastewater treatment plants. administrative boundaries. Aggregating ser- The typical institutional arrangement for vices across administrative jurisdictions or wastewater in China is fragmented. Frag- functions can potentially generate benefits mentation of the service usually takes two from economies of scale, more professional forms: (1) separation of drainage collection management, and improved access to fi- and treatment; and (2) in large cities, drain- nance. Many Chinese cities and towns, how- age collection is split between district and ever, are trying to independently address municipal drainage bureaus. This fragmen- their urban water problems, rather than tation often leaves the city without an entity cooperating with their neighbors. Potential with overall responsibility for the planning, approaches for aggregating service include: i) financing, and operating of the wastewater creating water and wastewater utilities with regional infrastructure in metropolitan system, including front-line responsibility areas; ii) creating multi-city water conces- for industrial dischargers. Moreover, these sions where one utility serves a number of institutional arrangements hide the true small cities or towns with separate infra- overall cost of wastewater service, which can structure; and iii) combining water and be significantly more expensive than water wastewater utilities in the same city. The supply. Obscuring the costs inhibits cost Study recommends that provincial and recovery. In OECD countries, integrated municipal governments explore options for wastewater utilities, often combined with extending urban water infrastructure to subur- the water company and considered part of ban towns, as well creating regional water util- the same service, are the norm. Integrated ities which service multiple towns and cities. wastewater utilities should be the target in China as well. This study recommends that municipal Moving Up the Financial governments explore options for integrating Sustainability Ladder wastewater service and recovering collection system costs from users. Some options for Financial sustainability can be conceptual- integrating the service include: ized as a ladder. As utilities take over more xxviii E x e c u t i v e S u m m a r y financing responsibility and rely more on growth in tariffs. Under this scenario, user fees rather than government transfers, the combined (water supply and waste- they move up the ladder. Moving toward water) weighted average tariff would cost-recovery tariffs and greater reliance on need to more than double by 2010 capital markets for investment generates from the 2005 national average of strong incentives for utility efficiency. It also around 2.5 RMB/m3 ($0.30) to over enhances accountability to users who must 6 RMB/m3 ($0.75). pay for the service and to lenders who re- Low-capacity cities. Water supply utili- quire repayment. Cost-recovery tariffs also ties, and especially integrated waste- allow the utility to operate in a more com- water utilities, will continue to need mercial manner and reduce its dependence equity contributions, grants, and con- on government transfers. The pace and cessionary finance to keep tariffs at extent to which utilities can move up the socially acceptable levels. Moreover, ladder depend in part on the city's level of low-capacity cities should be subject to economic development. less stringent transitional water and wastewater quality standards to reduce Ensure Utility Cost Recovery costs. Under this scenario the com- from User Fees bined (water supply and wastewater) This means that a utility can generate suffi- weighted average tariff would need cient revenues from user fees to cover its to at least double by 2010--from a operating and maintenance costs and debt 2005 national average of around service. Revenue from user fees should also 2.0 RMB/m3 to around 4.0 RMB/m3. be adequate to fund a percentage of the util- ity's capital needs, preferably enough to at Raising tariffs is one method of increasing least systematically renew its existing asset revenues. Of equal importance is improving base. A utility's debt service costs can be fee collection and utilizing efficient rate struc- reduced by government equity contribu- tures. Although Chinese cities are rapidly tions, grants, and concessionary finance. installing water meters at the household level, This study recommends that all cities have smaller cities are lagging in this respect. Col- user fees that cover the utility's costs and lection of wastewater fees is a common prob- adopt financing strategies along the following lem. In China, wastewater tariffs are included lines: on the water bill and collected by the water supply company. In some cases, the water High-capacity cities. Water supply and company does not diligently collect the integrated wastewater utilities (i.e. wastewater tariffs nor pass the funds on to drainage and treatment utilities) the wastewater utility. Collecting wastewater should finance all capital investments tariffs from large industries with their own through capital markets, private in- water source is also difficult. Municipal gov- vestment, and internally generated ernments should work to ensure these short- cash with full cost recovery tariffs. The comings are resolved and the wastewater one exception is that municipal gov- company receives its entitled revenue. ernments may wish to continue financ- Designing appropriate tariff structures is ing drainage investments to control the an important element in helping utilities xxix S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s increase revenues, protect the poor, and send TABLE 3. Indicative Ranges of Urban Water the correct economic signals. The pace at Sector Financing Sources: 1991­2005 which tariffs can be increased is inhibited by the potential impact on the lower income Water Waste- segment of the population. There is consider- Supply water able international experience with designing Financing Source (%) (%) low-income support programs that could be Municipal Government 20­30 40­50 applied in Chinese cities to allow an acceler- Domestic Banks 20­30 10­20 ation of tariff increases while protecting the State Bond Program 10­20 20­30 Private Sector 10­20 10­20 poor. Tariff structures, which are predomi- China Development Bank 10 5 nately volumetric-based, could also be ad- International Financial 5 10 justed to send better economic signals, Institutions (WB, ADB, improve the reliability of utility revenues, JBIC) and potentially increase overall utility rev- enues. These measures include increasing block tariffs, fixed and variable tariff compo- utility debt service is paid by user fees, debt nents, and load-based wastewater tariffs. financing is more economically efficient as the users pay directly for the service, Make More Use of Debt Financing whereas municipal government funds come China's strong economy has created a high through general taxation. level of liquidity in the domestic banking sys- Many Chinese banks, however, are hes- tem, and Chinese banks are encouraged to itant to lend directly to utility companies lend to creditworthy municipal utility com- because of concerns about repayment capac- panies. This has created a golden opportu- ity. This study therefore recommends that nity for water utilities to tap into domestic Chinese cities should transform their finan- credit markets to finance investments. cially stressed utilities into creditworthy enter- Utility companies in many economically prises that can fund an appropriate share of advanced countries take on high levels of their capital program through commercial debt, often over 50 percent of total assets, debt. As China's financial markets evolve and because they operate in a low-risk environ- become market-oriented and sophisticated, ment. Chinese utilities, in contrast, typically improving the credit status of municipal util- have much lower debt-to-asset ratios, and ities will become even more important. The rely more heavily on municipal governments national government can also facilitate for finance. Because aggregate information better access to debt financing by allowing on water utility capital financing is lacking longer maturity bank loans and providing in China, this study produced its own gen- greater latitude to water utilities to issue eral estimate of financing sources in Table 3. enterprise bonds. Because municipal governments in China can not borrow directly and there are many Create Incentive-Based competing uses for governments funds, fi- Concessionary Finance Programs nancing capital works through utility debt is China's national government provides signif- generally more attractive than government icant levels of finance to the urban water sec- contributions. Moreover, to the extent that tor. The two main instruments are the China xxx E x e c u t i v e S u m m a r y Development Bank (CDB), which offers long- grants, revolving loan programs, credit term loans, and the NDRC-administered enhancements, output-based aid, etc. state bond program, which offers long-term, low interest loans and grants. These two sources account for around 25 percent of all Use the Private Sector sector financing. These financing mech- to Help Improve anisms, however, could be further refined Municipal Utilities through structured programs similar to other countries that promote policy objec- Cities throughout China have turned to the pri- tives by adopting clear priorities, eligibility vate sector to finance, construct and operate criteria, appraisal standards, legal cov- water supply and wastewater treatment plants. enants, project monitoring, reporting, and There are over 50 water supply projects, and program evaluation. Creating incentive- well over 100 wastewater projects in China based grants and loans can be a strong driver with private sector participation. (the exact for reform. Concessionary finance is also an number is not known). Some municipal water important tool for ensuring equity, particu- supply companies are also forming joint ven- larly for smaller cities and towns with more tures with private companies. This flurry of limited financing alternatives. Currently, private participation brings new stakeholders, most of the CDB and state bond funds go to capital, and expertise into the sector, but it also larger prefecture level cities. needs to be managed properly to ensure sus- This study recommends that the national tainable arrangements. government restructure existing concession- This study has two general recommenda- ary finance programs (or develop new ones) tions on private participation. First, municipal for the urban water sector. There are many governments and their utilities should engage different options that need to be studied and with the private companies as part of an over- pursued, but the following principles should all reform process to ensure a sustainable util- guide the reforms: ity balance. Most importantly, if user fees and fiscal transfers are inadequate, then regardless National government funding for the of whether ownership and/or operation is pub- urban water sector should be signifi- lic or private, the service will not be sustain- cantly increased. able. BOT arrangements need to be handled More funding should be channeled to with special care to ensure that overall sector low-capacity cities and towns. funding is adequate to meet the obligations of Provincial governments should take the BOT contract and the requirements of the the lead in designing and administer- water supply and drainage networks. ing concessionary finance program(s). Second, the general approach in China is The program(s) should be structured that private companies must "pay to play," to provide the right incentives, with meaning they must invest their own funds if carefully designed eligibility criteria, they are to participate in the sector. There appraisal procedures, and monitoring are, however, many non-investment models and evaluation activities. that could beneficially be employed in China, A range of financing instruments including management, affermage, lease, and should be considered, including loans, design-build-operate arrangements. These non- xxxi S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s investment private arrangements are particu- to be driven by physical planning approaches larly attractive for cities that (a) do not have or are policy-driven. financing constraints, but want to improve the Investments in water supply and drainage performance of their utility; or (b) cities where networks. Investments in water supply and the investment risks are large, particularly in drainage networks need to be better planned. low-capacity cities. Upgrading and expanding water supply and wastewater pipes and pumping stations will constitute around 70 percent of future in- Improve Utility Capital vestments. The proper planning of these in- Planning to Lower Costs vestments holds huge potential for savings. Developing asset management programs The urban water business is capital intensive, (AMP)--which collect information on existing so good decisions on infrastructure invest- assets (particularly buried pipes), use sophis- ment can lower costs and improve service. ticated methodologies for analyzing the data, Many cities and utilities in China have defi- and link investments to overall service goals-- ciencies in planning, often rooted in inappro- are becoming standard practice for utilities priate policies, institutions, and incentives. around the world. This approach should be Another contributing factor is that utilities are used in China too. Utilities should also care- still building up their expertise and learning fully consider the costs and benefits of two from international and domestic experiences. different types of drainage systems: (1) com- This study identifies two important areas for bined systems, which convey both wastewater capital planning. and stormwater; and (2) separate drainage Water supply planning. Water supply plan- systems. Separate drainage systems, which ning needs to become more sophisticated and are increasingly popular in China, can cost up participatory to meet complex challenges. to double combined systems, and the environ- New and innovative options are being pursed mental benefits may not in some cases be to address water shortages, such as develop- justified. Low-capacity cities should avoid ing new water sources, long-distance water separate collection systems. transfers, reallocation from agricultural to municipal use, water reuse, demand manage- ment through tariffs, reducing water leakage, A Strategic Action Plan encouraging water conservation, etc. While these actions have a potential role to play in Table 4 provides a summary of the key meeting urban water needs, most cities still strategic recommendations. Designing poli- do not employ sophisticated water planning cies and programs to implement these methodologies that explicitly consider multi- strategies requires sustained attention and ple objectives, uncertainty, and risk in order commitment by all levels of government, to determine the optimal resource mix for utilities, professional organizations, advo- meeting their urban water demand. In partic- cacy groups, businesses, and citizens. To this ular, economic, financial, and environmental end, the World Bank stands ready to assist objectives are often not fully factored into China with financing, project and program water supply planning exercises, which tend design, studies, and policy dialogue. xxxii E x e c u t i v e S u m m a r y TABLE 4. Strategic Action Plan Strategic Recommendation Responsible Parties Time Adopting Goal-Based Sector Governance Improve National Policy Coordination: State Council and National Agencies 2008­10 · National Water and Sanitation Committee Strengthen Provincial Oversight: Provincial Government and Agencies 2008­12 · Increase Agency Funding and Capacity · Provincial Water Committee or Office Set Appropriate Water and Wastewater Standards National and Provincial Agencies 2008­12 · Low Capacity Cities Use Transitional Standards Improving Municipal Governance and Sector Structure Streamline Municipal Utility Governance: Municipal Governments and Agencies 2008­12 · Water Boards or Multi-Sector Commissions Empower Municipal Utilities · Utilities Take Over Core Corporate Functions · Increase Accountability and Transparency Manage Wastewater as a Network Utility Business · Integrated Drainage and Treatment Management · Charge Users for Drainage Service Exploit Opportunities for Aggregation of Services · Metropolitan Utilities with Regional Infrastructure · Utilities Serving Multiple Cities Moving Up the Financial Sustainability Ladder Ensure Utility Cost Recovery from User Fees Municipal Governments and Utilities 2008­10 · Tariffs Cover O&M, Debt, and Asset Renewal · Governments Partially Finance Drainage Works · Concessionary Finance for Low-Capacity Cities Make More Use of Debt Financing · Enhance Utility Credit Status through Cost Recovery Improve Concessionary Finance Programs State Council, NDRC, and National 2008­10 · Increase National Government Funding Agencies · Develop Incentive-Based Programs · Target Low-Capacity Cities (Continued) xxxiii S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s TABLE 4. Strategic Action Plan (Continued) Strategic Recommendation Responsible Parties Time Private Participation to Improve Municipal Utilities Private Participation to Improve Municipal Utilities Municipal Governments and their Water 2008­on · Private Participation As Part of Sector Reform Utilities · Utilize More Non-Investment Arrangements Improve Capital Planning to Reduce Costs Improve Capital Planning Water Utilities 2008­on · Improve Water Supply Planning · Develop Asset Management Planning (AMP) · Strategic Selection of Drainage System xxxiv 1 Introduction Objectives and Scope How can China sustain and improve urban almost complete absence of municipal water services as it makes the transition to a wastewater treatment. Water prices were market economy, undergoes rapid urbaniza- unsustainably low and public utilities ineffi- tion, and confronts extreme water resource cient. Since then, the situation has improved degradation? This study provides a pano- significantly. Large investments have been ramic view of the sector, identifies key chal- made in upgrading water supply and waste- lenges and strategic approaches for the water infrastructure, and water and waste- future, and aims to assist Chinese policy water tariffs have increased. Domestic and makers in formulating a reform agenda for international private companies are now the next decade. It also seeks to establish a actively involved in the sector. There are still, framework for World Bank policy discus- however, many large and complex financial, sions with China's government, thereby institutional, and technical challenges ahead. enhancing the effectiveness of Bank support. Given China's size and diversity, the study China is experiencing the greatest wave identifies strategic directions to pursue of urbanization in history. The urban pop- rather than specific solutions. It provides ulation has increased from 300 million in illustrative examples from Chinese and inter- 1990 to around 550 million in 2005, and is national experiences. Clearly, Chinese mu- expected to grow to as much as 900 million nicipalities, provinces, and the national by 2020.1 In addition to limited water sup- government will need to develop their own plies across much of the country, China also tailor-made solutions. has some of the most polluted rivers in the The scope of the study is limited to urban world and its coastal waters are on the brink water services. As used here, urban areas of ecological collapse. Urbanization and its mean China's 661 designated cities, all intersection with water resources and water of which have populations greater than quality--one of China's great development 200,000 people. This analysis can also be challenges--is the subject of this report. extended to large towns and towns sur- A decade ago, the World Bank's China rounding large cities. Urban water services Urban Environmental Service Management mean the provision of water supply, storm- report provided an overview of the chal- water drainage, and wastewater manage- lenges. This 1995 report highlighted the poor ment. Since stormwater and wastewater are state of water supply infrastructure and the closely linked through combined drainage 1 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s systems in most Chinese cities, the term The key elements in the conceptual frame- "wastewater" refers to both services unless work are the following: otherwise noted. The study focuses prima- rily on the issues of utility performance, not Current Performance. We first examine water resources and the environment. The the current performance of urban utilities. World Bank is working with China in other Chinese urban utilities currently perform, on endeavors to help address critical water average, in a manner consistent with other resource and environmental issues. middle-income countries such as Brazil or Russia. Water supply coverage is generally Conceptual Framework good, although the quality and reliability of the service is highly variable among cities. Figure 1.1 provides an overview of the con- Most cities have well-developed sanitary ceptual framework. drainage systems. The overall wastewater FIGURE 1.1 Overview of the Conceptual Framework Improved Performance of Urban Water Utilities: 2020 Vision Benefits: 1) Improve public health and environment 2) Reduce costs 3) Enhance equity for poor cities 4) Relieve financial burden on municipal governments 5) Promote economic development Current Performance Challenges Policies for Better Performance · WS coverage = 90% · Rapid urbanization · Goal-based sector governance · WW treatment capacity = 52% · Urban diversity · Municipal utility · High variation in WS utility · Efficiently meeting governance and structure performance investment needs · Financial sustainability · WW not managed as utility · Water scarcity and business degradation · Efficient utilities · Underinvestments in WS and · Achieving financial WW networks sustainability China's Unique Context Rapid economic growth: planned to Achievements over Last Decade market economy Significant infrastructure investment Three levels of government: Tariff increasing toward cost National Provincial Local, highly decentralized recovery Local and international PSP Unitary political system: policy compliance promoted by party Stabilization in water demand Under-developed legal system and capital Reduction in water pollution markets 2 I n t r o d u c t i o n treatment rate, while still low, is rapidly ex- least 900 million in 2020, fueling the panding. However, most urban wastewater demand for more infrastructure management systems are not operated as investments. utility businesses. Many such systems per- Urban Diversity. China is a large and form poorly, both financially and opera- diverse country, with a wide spectrum tionally. The combination of tariffs and of wealth among its cities. Cities such government subsidies is generally adequate as Shanghai strive to become economi- to sustain operations, but there is systemic cally dynamic global centers of excel- underinvestment in water distribution and lence, while smaller and poorer cities, wastewater collection networks. mainly in the west and northeast of the county, confront economic stagnation, Achievements. The achievements in unemployment, and deteriorating China's urban water sector over the last infrastructure. Crafting realistic sector decade have been remarkable. China's urban policies to meet the wide variety of water industry--in parallel with the coun- urban situations in China is a complex try's overall rapid development--has been but necessary endeavor. transformed through investments equal to Water Scarcity and Degradation. Much around 0.4 percent of annual GDP.2 Water of China is arid, and water pollution is services are no longer perceived as being a problem throughout China. Securing primarily a public good to be provided by the reliable high-quality water supplies, government, but rather as a quasi-private and improving water quality in rivers, good provided in a commercial manner with lakes, and costal waters, will require a users bearing most of the costs. Domestic sustained national effort. and international companies are keenly Investment Needs. Overall investment interested in China's urban water market needs are large and growing, due to and private investment is flowing into the increases in urban populations and sector. Finally, China has made significant national aspirations to address water progress in stabilizing overall water demand pollution and scarcity issues by adopt- as industry has become more efficient, and ing higher service standards. consumers are reacting to higher prices and Utility Financial Sustainability. The water conservation efforts. Significant large investment needs, combined strides have been made in controlling overall with higher operating costs, will put municipal and industrial pollution. Receiv- pressure on cities and their utilities to ing water quality, while still bad, does not become more efficient and financially appear to have deteriorated over the last ten sustainable. years. China's Specific Context. Meeting future Challenges. In spite of China's achieve- challenges will require policy approaches ments, the challenges are daunting: that fit the country's political and economic context. Four broad factors dominate China's Urbanization. The country's urban development and influence the overall evolu- population is expected to increase tion of the urban water sector. First, China is from around 550 million in 2005 to at transitioning from a planned economy to a 3 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s market economy. This transition has fueled water to an intermediate level. Utilities an unprecedented spurt in economic are financially sustainable and rely on growth, with annual GDP growth averaging user fees for their revenues, but also close to 10 percent per year over the last receive municipal equity contributions decade.3 The transition has also left a legacy and national concessionary finance to of government institutions and policies that maintain acceptable tariff levels. originated during the planned economy era struggling to define their role in a more mar- The benefits of adopting the strategic recom- ket-based economy. Second, China has a mendations and achieving the sector vision unified political system headed by the Com- are significant and warrant attention from munist Party that has evolved in a specific national, provincial, and municipal govern- historical context. Government policy is ments. Improved utility performance, in made and implemented through a com- terms of increasing the amount of waste- bination of legal mechanisms and party water collected and treated, and improved influence. Third, China has a complex multi- water supply quality and reliability would tiered government administrative system result in environmental and public health that is highly decentralized. Local govern- benefits. Improved efficiency would lower ments play a dominant role in infrastructure costs for a given level of service and help service provision and financing, while relieve the financial strain on cities and national and provincial governments focus their citizens. The study recommends spe- primarily on policy and regulatory matters. cific policies for addressing the disparities Finally, given the size and sophistication of among cities in China, such as conces- China's economy, it has a relatively under- sionary finance programs and appropriate developed legal system and capital market service standards. Finally, improving invest- structure, though they appear to be evolving ment and operational efficiency in a sector quickly. that accounts for around 1.0 percent of China's annual GDP will help promote over- 2020 Sector Vision. A vision of what the all economic development.4 sector could look like in 2020, if appropriate policies and programs are pursued, is pre- Key Policy Themes and sented in this study and includes: Strategic Directions Large and rich cities provide high- The key elements of the urban water sector, quality water and wastewater services, as presented in Figure 1.2, are interrelated and establish stormwater quality man- and must be in balance for urban water util- agement programs. Utilities operate at ities to perform efficiently. Definitions of key international standards and rely on terms are presented in the glossary. capital markets and user fees, but wastewater utilities still receive some Goal-Based Sector Governance. In the municipal past, under China's planned economy, per- government capital contributions. formance was measured in terms of achieve- Smaller and poorer cities provide reli- ment of physical targets, such as kilometers able water supply and treat all waste- of pipeline or wastewater treatment plant 4 I n t r o d u c t i o n municipal government set many of the FIGURE 1.2 Key Policy Themes parameters in which the utility operates, including tariff and subsidy policy, appoint- ing utility management, determining the extent of utility transparency and account- ability, and defining the scale, scope, and Sector governance authority of urban water utilities. Many Utility governance Financial urban water utilities are not able to perform and structure sustainability 2020 efficiently because municipal governments Sector do not provide a suitable framework of poli- Vision cies, practices, and organizations. Private Capital participation planning Financial Sustainability. Two financial parameters dominate in the urban water industry: cost recovery levels and access to financing. A significant problem confronting many urban water utilities is the lack of bal- capacity. The focus of the future should be on ance between standards, such as drinking efficient urban water utility performance as water supply and wastewater treatment stan- a means to achieving the nation's goals, dards, and the utility's ability to recover its including improving the environment, pro- costs. High standards result in expensive tecting public health, and providing good investments that utilities are not able to quality service to all at reasonable prices. finance or sustain due to low levels of cost New targets--such as improvements in recovery. Although there is scope for increas- ambient water quality, safe drinking water ing user fees, there are limits to the rate of and reliable service, and cost-efficient increase that would be socially acceptable. service delivery--should take the place of The study suggests that a utility's costs--and physical targets. This requires developing thus required cost recovery levels--can be consistent policies, setting appropriate managed through a combination of appropri- wastewater discharge and water supply qual- ate standards, improved utility efficiency, ity standards, and ensuring effective regula- municipal government equity contribu- tory systems at the national and provincial tions, and more effective national conces- levels. Because standards in China may be sionary programs. Even with lower utility unattainable for many cities and regulatory costs for a given level of service, there is systems are weak, municipal governments a clear need to increase revenues in most and their utilities do not have strong incen- Chinese cities, particularly for wastewater tives to provide high quality and efficient services. Provided there are adequate cost services. recovery levels, Chinese utilities also should be able to take greater advantage of China's Municipal Utility Governance and Struc- large and liquid capital markets. ture. Provision of urban water services is the responsibility of local governments in Private Participation. The potential for China. The policies and practices of the water utilities to perform well is deter- 5 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s mined largely by three factors: (a) sector gov- have a profound effect on overall water and ernance; (b) municipal utility governance wastewater costs. There is considerable po- and structure; and (c) level of financial sus- tential for lowering costs through improved tainability. These factors provide the in- capital planning, particularly for water supply centives that ultimately determine water planning, water distribution and wastewater utility performance. Rather than address collection network renovation, selection of these fundamental issues, many munici- combined versus separate drainage collection pal governments--encouraged by national systems, and indus-trial wastewater treat- policy--turn to the private sector to help pro- ment plant sludge management. vide better service. The study suggests that For each of the five general policy themes, municipalities should first understand the the study develops strategic directions (see root causes of municipal utility under- Figure 1.3) for consideration by national, performance and then select, design, and provincial, and municipal governments, as implement the appropriate private sector well as utility managers. These recommenda- arrangement as part of an overall reform tions need to be further developed and refined program. before their actual application, but they pro- vide a set of interconnected policy enhance- Capital Planning. More than any other ments to help improve the performance of utility business, capital investment decisions urban water utilities. FIGURE 1.3 Strategic Directions for Key Policy Themes Policy Themes Strategic Directions Goal Based Sector Governance · Improve National Policy Coordination · Shift from Physical Targets to Policy Goals · Set Appropriate Water Supply and Wastewater Standards · Enhance Provincial Government Oversight Municipal Utility Governance and Structure · Streamline Municipal Utility Governance · Foster Efficient Utilities · Manage Wastewater as a Network Utility Business · Exploit Opportunities for Service Aggregation Financial Sustainability · Achieve Utility Cost Recovery · Make More Use of Debt Financing · Improve National Concessionary Finance Programs Private Participation · Ensure Private Arrangement Fits Into Sector Reform Plan · BOT Treatment Plants Fit Into Utility Network Business · Make More Use of Non-Investment Arrangements Capital Planning · Utilize Integrated Water Planning Methodologies · Develop Asset Management Planning (AMP) · Strategically Plan and Manage Drainage Systems · Manage Sludge as Environmental and Financial Priority 6 I n t r o d u c t i o n Urban Water percentage is relatively weak; cities in the Market Segments water-rich south of China are as likely as cities in the water-poor north to have waste- To facilitate policy analysis and international water treatment. Based on this analysis, we comparisons, we developed definitions of dif- developed the following typology to help ferent urban water market segments in structure the discussion about different water China. China's national policies in the urban market segments. water sector tend to be general in nature. They are often directed at the highest capac- Category I: Large and Developed Cities: ity cities, which then serve as models for (a) population greater than 2 million; other cities. China's statistics generally organ- and (b) GDP per capita greater than ize data by city population size and geograph- $3,000. Category II: Medium Cities: All cities ical region, which is a useful first step, but do that are not Category I or Category III not explicitly consider the level of economic cities--these generally (although not development. exclusively) fall between the income Three Categories Used for Empirical Anal- and size boundaries of Category I and ysis. Chinese cities vary widely in terms of III cities. population, wealth, and climatic conditions. Category III: Small and Developing Cities: (a) population less than 0.5 million; We examined the variables that influence a and (b) GDP per capita less than city's capability to provide good water and $1,500. wastewater service. We assumed that the per- centage of installed wastewater treatment These categories are different than those capacity (i.e., capacity of treatment plant used by the Ministry of Construction (MOC). (m3/day) as a percentage of municipal waste- The MOC only considers a city's popula- water) in 2005 is a good proxy for the city's tion, and not its level of economic develop- technical and financial capacity. The percent- ment. In 2005, China had 661 officially age of wastewater treatment was used as a designated cities. In addition, there were dependent variable, and correlated with the 1,636 county-level towns--with 96 million following independent variables: population, urban residents--that serve as the seat of GDP per capita, and climate. The statistical county governments.5 The Ministry of Con- analysis revealed good correlation between struction (MOC) has collected summary the level of economic development (GDP per data on water supply and wastewater ser- capita) and the percentage of wastewater vices for these "county towns;" most of them treatment, and also between population and share similar characteristics with Category wastewater treatment percentage. The weak III cities. All are under 500,000 in population correlation between city size and per-capita and generally have GDP per capita less than GDP indicates that there are many relatively $1,500. Unless otherwise noted, data on Cat- affluent smaller cities. Hence, both city size egory III cities does not include the county and level of economic development need to be towns (disaggregated information was not taken into account when considering capac- available). For policy-related issues, how- ity to deliver water services. The correlation ever, county towns and Category III cities between climate and wastewater treatment can be considered as a group. 7 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s TABLE 1.1 Urban Water Market Segments Average Average Wastewater Water Number Total Per Capita Treatment Supply of Population GDP Coverage Coverage Market Segments Cities (million) (RMB) (%) (%) Category I: Large and 21 90 35,900 61 93 Developed Cities Category II: Medium Cities 331 201 19,100 38 91 Category III: Small and 310 58 7,300 21 86 Developing Cities County Towns 1,636 96 NA 11 82 Source: MOC, China Urban Construction Statistics Yearbook (2005). Table 1.1 presents the China urban water total population of 200 million--about market segments used in the study, and one-third of the urban population. summarizes population and urban water Low-Capacity Cities. This incorpo- service coverage for each segment. rates all other cities and towns in China--including around 500 desig- High- and Low-Capacity Cities. The clas- nated cities and the 1,636 county capi- sification of cities into three categories is use- tal towns--with a total population of ful for empirical analysis, but unwieldy for around 400 million. general policy discussions. Moreover, there are some Category II and III cities with per- The concept of "high-" and "low-" capacity capita GDP above $3,000 that bear more cities, and the criteria used to classify them, resemblance to Category I cities. Likewise, is intended to facilitate the policy discussion. there are some Category I and II cities with The intention is to underscore that some per capita GDPs below $1,500. Rather than cities--"high-capacity" cities--can aspire to create multiple city categories, we used the OECD standards of urban water services. In following classification when discussing pol- contrast, "low-capacity" cities face many of icy recommendations: the constraints typical of lower-middle income countries around the world. The High-Capacity Cities. This includes all study explores the policies and approaches cities with a per-capita GDP greater for these two different types of city. than $3,000 regardless of population, as well as cities with a population greater Report Organization than 500,000 and per capita GDP of at least $1,500. As of 2005, there were The study organization is illustrated in Fig- approximately 150 such cities with a ure 1.4. Chapter 2 provides an analysis of 8 I n t r o d u c t i o n Data Sources FIGURE 1.4 Structure of Report Information on sector financial and opera- Chapter 1: Introduction tional performance in China is difficult to · Study Objectives obtain or nonexistent. The decentralized · Conceptual Framework nature of municipal infrastructure service, and the nontransparent sector management combined with relatively weak regulatory systems, has resulted in a shortage of reli- Chapter 2: Sector Achievement and Performance Chapter 3: Sector Challenges able data. We relied on a myriad of differ- Chapter 4: Sector Vision and the Path Forward ent--and often incomplete--sources of data. Although the general picture that emerges is clear, the resolution of some of the specific features is not. Key sources of information Chapter 5: Goal-Based Sector Governance Chapter 6: Municipal Utility Governance and Structure include: (a) annual statistical yearbooks and Chapter 7: Moving Up the Financial Sustainability reports by the MOC and State Environ- Ladder Chapter 8: Using the Private Sector to Improve mental Protection Agency (SEPA); (b) China Municipal Utilities Chapter 9: Improving Capital Planning to Reduce Costs Water Works Association yearbooks; (c) the 2005 North China Water Study jointly spon- sored by the World Bank and the MoC; and (d) studies produced by the Asian Develop- Chapter 10: Strategic Sector Action Plan ment Bank on China's urban water sector. · Action at the National, Provincial, Municipal, and Utility Levels The research benefited from extensive · Approaches for Different City Categories consultations with Chinese stakeholders, · Time Frame for Implementation which partly compensated for the patchy data. Five consultations were held in China, including: (a) an initial consultation to define the achievements and current performance the scope of the study in Beijing (October of China's urban water utilities. Chapter 3 dis- 2005); (b) mid-term workshops to provide cusses the challenges ahead, while Chapter 4 feedback on the preliminary recommenda- describes a vision of what the sector could tions in Beijing, Tianjin, and Ningbo (March look like in 2020 and the benefits of achiev- 2006); and (c) final consultation in Beijing ing the vision. (September 2006). During the consultations, Chapters 5­9 are the key policy chapters the Chinese stakeholders were allowed to and are organized around the four key policy quantitatively and qualitatively evaluate the themes. Each chapter generates a set of strate- relevance of the strategic issues and the ap- gic directions that China should pursue for propriateness of the approaches. enhancing the performance of its urban water The study also utilizes the World Bank's utilities. Chapters 5­8 deal primarily with pol- extensive project experience over the past two icy-related issues. Chapter 9 discusses some decades. As shown in Annex 1, the World Bank technical issues related to capital planning. has played an active role in the sector and Chapter 10 summarizes the recommended accumulated extensive experience in a variety strategic directions. of settings. In total, the Bank has financed over 9 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 25 projects with urban water components in book (2005) and GDP figures from the World China since 1987. We also used general (i.e. Development Indicators (2006). 3. World Bank Development Indicators (2006), on- non-China) World Bank reports on water sup- line version. ply and sanitation to identify key concepts and 4. Based on note 2 above, the sector investments useful international experience. accounted for around 0.4 percent of GDP in 2004. Revenues from water and wastewater tariffs are Notes estimated to account for around 0.5 percent. For estimating sector revenues, an average water sup- 1. The estimated urban population of 550 million ply tariff of RMB1.4 and wastewater tariff of RMB includes 340 million people living in 661 desig- 0.5 were used. The water supply amounts are nated cities, about 110 million living in 1,464 taken from the China Urban Construction Statis- county towns, and another 100 million in 18,428 tics Yearbook (2005), and the wastewater water towns. The figure does not include floating pop- amounts were estimated at 45 percent of water ulation in urban areas. The floating population supply. Information on government transfers for means non-registered urban residents; estimates operating expenses (as opposed to tariffs) is not typically range from 50­100 million people. The available, but should account for at least 20% of 2020 estimate is based on an annual growth rate revenue from tariffs (0.1 percent of GDP), thus the of 1.25 percent and a target of around 55 percent total minimum percent of GDP is 0.4 percent urbanization rate. (investments) + 0.5 percent (tariff revenue) + 2. Sector investment figures were derived from 0.1 percent (government transfer) = 1.0 percent. the China Urban Construction Statistics Year- 5. MOC, County Towns Statistical Brief (2004). 10 2 Sector Achievement and Performance Chinese cities have made remarkable prog- Chinese cities have well-established ress in building infrastructure and expand- water utility companies, but many utili- ing water supply and wastewater services. ties have excess treatment capacity, But many of China's water and wastewater need to renovate their distribution net- utilities can significantly improve their works, and are struggling financially. performance with respect to operational Urban wastewater treatment capacity efficiency, financial sustainability, and cost- has increased to 52 percent by 2005, but effective investments. overall municipal pollutant loadings As shown in Box 2.1, on average, the per- have only decreased slightly since 2000 formance of Chinese utilities is comparable due to rapid urbanization. to other middle-income countries such as In 2005, 60 percent of China's cities Brazil or Russia, but still far below OECD had wastewater utility companies. countries such as the United Kingdom. Most companies are relatively new. Moreover, there is a wide variation in per- They are responsible for wastewater formance among utilities, both between and treatment, while government bureaus within the urban water market segments-- provide drainage services. In many indicating that the potential exists for cities, treatment plants are underuti- rapidly increasing performance within the lized, drainage networks need to be existing institutional and policy context. As expanded and renovated, and waste- China's economy grows and becomes more water services are underfunded. sophisticated, China should also ensure that Lack of information and transparency its utilities' performance improves over time. on sector and utility performance com- Briefly, China's urban water situation has plicates the identification of problems and reduces accountability, particu- the following characteristics: larly for wastewater. Urban water supply coverage has in- creased from 50 percent in 1990 to Sector Achievements 90 percent by 2005, and overall munic- ipal water use has remained stable. As described below, the sector has been Many Chinese cities still suffer from characterized by large increases in urban seasonal water shortages. water infrastructure, increased water supply 11 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 2.1 International Performance Comparisons The table below shows how China's urban water utilities compare with other middle-income countries such as Brazil and Russia, as well as the United Kingdom. Chinese cities have some characteristics that impact utility performance. First, China has much more compact systems with an average of 1,100 people per kilometer of distribution network, which is almost triple the rate of Russia and Brazil. This helps explain why non-revenue water percentage is low, even though leak- age per kilometer is high. Second, the percentage of domestic customers in China is much lower than in the other countries, indicating that Chinese utilities have a large industrial customer base. Similar to utilities in Brazil and Russia, many Chinese water supply utilities cover their operating costs, but only barely. Comparisons between China and other countries (2004) Key Indicators China Brazil Russia UK Water coverage in urban areas (%) 86 81 99 100 Wastewater coverage in urban areas (%) 43 38 90 100 Population per km of distribution network 1100 357 400 >200 Water metering (% of connected 90 88 <30 <50 population metered) Domestic water tariff ($/m3) $0.15­$0.30 $0.65­$0.80 $0.35­0.45 $2.20­2.70 Water production (liters per capita/day) 303 274 450 300 Domestic water consumption supplied by 46 71 68 80 municipal utilities (%) Total average non-revenue water (%) 18 46 40 15 Total average non-revenue water (m3/km 54 42.3 20 5 network a day) Operating cost coverage ratio 1.0 1.0 1.0 1.2 Payment collection rate (%) 85 94 90 99.5 Sources: Prepared by Alexander Danilenko (2006), World Bank. Chinese data based on Chinese Water Works Association Yearbook (2005); UK data on OFWAT annual performance report (2005); Brazil data on SNIS (2006); Russian data on Goskomstat (2006); and World Bank estimates. coverage, stabilized urban water use, in- investment over the period 1990­2005 is creased wastewater treatment capacity, and estimated to be around RMB 438 billion stabilized pollutant loads. ($54 billion), split about evenly between water supply and wastewater.1 Investment in Large Increases in Urban China's urban water infrastructure has aver- Water Infrastructure aged around 0.4 percent of GDP over this pe- Investments in water supply and wastewater riod. In 2004, annual revenues from water infrastructure have increased dramatically and wastewater fees consisted of about 0.5 since 1990 (see Figure 2.1). The total sector percent of GDP.2 During the 1990s, spending 12 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e A recognition by China's municipal FIGURE 2.1 Annual Investment in leaders that infrastructure provides a Urban Water and Wastewater Infrastructure necessary foundation for economic development 40 Increase in Water Supply Coverage 35 35 Wastewater 30 As shown in Figure 2.2, piped water supply 25 by municipal water utilities has increased RMB 23 20 over the past 15 years in terms of both the Billion15 Water supply number of urban population served and 10 water supply coverage rate. China's urban 5 water supply coverage has increased from 0 1991 1996 2001 2004 less than 50 percent in 1990 to about 90 per- cent in 2004. Category I and II cities have cov- Source: MOC, China Urban Construction Statistics Yearbook (2005). erage rates over 90 percent, while Category III cities have 86 percent coverage on aver- age.5 The coverage for county towns is esti- mated at 82 percent, although this may be on water supply outpaced wastewater, but highly variable. since 2000 investments in wastewater have increased dramatically. Stabilized Urban Water Use The rapid increase in urban water infra- Figure 2.3 shows the total amount of water structure reflects the general municipal in- used in urban areas from 1991 to 2004. frastructure trend. Since 1995, China's Industrial water use has decreased signifi- GDP has almost tripled while overall annual cantly, while domestic water use has in- municipal infrastructure spending, including creased in line with population growth, roads, has increased six-fold.3 Water supply resulting in an overall stable water demand and wastewater account for only 10 percent in spite of rapid economic growth. Control- of total municipal infrastructure spending.4 ling urban water demand has been achieved There are a number of driving forces account- ing for the explosion of municipal infrastruc- ture construction: FIGURE 2.2 Urban Water Supply Coverage A rapid increase in urban population 100 350 and economic development 90 Water supply coverage cent)r 300 80 Population access to water supply (million) supplyr A backlog of deferred infrastructure (pe 70 250 tea ge w investments before China's economy ra 60 200 to 50 experienced its current high growth cove 40 150 ccessa (million) stage 30 100 supplyr 20 The government's expansionary fiscal tiona tea 50 10 policy as a method of stimulating do- W 0 0 Popul 1990 1995 2000 2004 mestic demand and reducing depend- Source: MOC, China Urban Construction Statistics Yearbook (2005). ency on export-led growth 13 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Domestic water use has approximately FIGURE 2.3 Urban Water Supply doubled over the last 15 years. At present, it is approximately equal to industrial water use 60 at the aggregate national level (see Figure ) 50 Total water supply 3 2.3). The urban population has increased by m 40 1.8 times over the same time period, indicat- (billion ing that per capita domestic water use has 30 Industry and others only slightly increased, in spite of higher supplyr 20 tea household incomes. When income rises, par- Residential W 10 ticularly when starting from a low level such 0 as in China, the income elasticity effect usu- 1991 1993 1995 1997 1999 2001 2003 ally results in higher water use. In Chinese Source: MOC, China Urban Construction Statistics Yearbook cities, however, water prices have also been (2005). rising, thus eliciting a price elasticity effect and dampening demand. Meanwhile, munic- through a combination of increases in water ipal governments have actively promoted tariffs, water conservation measures, and in- water conservation. In sum, the overall trend dustrial restructuring over the last 15 years. for urban water use appears to be gradually Industrial water demand has decreased by increasing, in line with the urbanization level. about 30 percent since 1995. The decrease in The demand-dampening factors--such as in- demand has been caused by several factors, creasing prices, including the associated cost including the following: of wastewater, along with conservation ef- forts--should continue to hold in the future. Industrial restructuring caused many Increase in Wastewater unprofitable and inefficient state- Treatment Capacity owned enterprises to be replaced by more modern and efficient export- As shown in Figure 2.4, the ratio of munici- oriented enterprises. pal wastewater treatment plant (WWTP) ca- The government empha- sized industrial water re- cycling and cleaner pro- FIGURE 2.4 Municipal Wastewater Treatment Capacity duction for all industries.6 80 70 Increased municipal water Wastewater treatment 70 60 cent)r tariffs triggered a price cityapac capacity (million m3/day) 60 (pe elasticity effect, driving y) 50 te da/ 50 ra Waterwater treatment rate (%) down overall industrial 3 40 m 40 demand. tmentaertr 30 30 tmentaertr Many water-consuming in- tea (million 20 20 tea dustries were relocated stewa 10 10 W stewa outside of the core city 0 0 W 1991 1996 2000 2004 2010 area and may no longer be (target) served by municipal water Source: MOC, China Urban Construction Statistics Yearbook (2005). utilities. 14 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e pacity to overall wastewater volume in urban water treatment plant construction. The areas has increased from 15 percent in 1990 treatment capacity rates in Category II and to about 52 percent in 2005. However, the in- III cities are 38 percent and 21 percent re- stalled capacity is not always fully utilized so spectively, while the treatment capacity rate that the percentage of pollution collected in county towns is only 11 percent. and treated may be significantly lower. Figure 2.4 shows that the total installed Stabilized Pollutant Loads capacity of municipal wastewater treatment Figure 2.5 shows total pollutant loads from plants has doubled over the last decade, industrial and urban domestic sources. reaching approximately 52 percent of treat- Industrial pollution loads have decreased ment capacity for total municipal waste- significantly since 1995 due to industrial re- water (that is, from both domestic and in- structuring, a focus on clean production, and dustrial sources). By the end of 2004, 364 out construction of industrial wastewater treat- of the total 661 cities in China had built ment facilities backed by strong environmen- 708 WWT plants with a total treatment tal enforcement. Urban domestic pollution capacity of 49 million m3 per day. In 2000, loads appear to have slightly increased since China's State Council set a target of 60 per- 1995. Although Chinese cities are rapidly cent urban wastewater treatment by 2010. increasing wastewater treatment coverage, The 11th Five Year plan (2006­2010) has the urban population is also expanding rap- proposed a more ambitious goal of 65 per- idly. The urban population increased from cent by 2010.7 352 million in 1995 to 564 million in 2005. Category I cities have made the most Taking into account increases in both popula- progress, with an average treatment capacity tion and treatment coverage, the number of of 61 percent in 2004. Some Category I urban residents without wastewater treat- cities--such as Beijing, Shanghai, and ment stayed approximately the same from Tianjin--have nearly completed their waste- 1995 to 2005. FIGURE 2.5 Trends in Industrial and Urban Wastewater Discharge Flows and Loads Volume Load 60 25 ) Urban domestic ar 50 ) 20 Industry /ye ar 3 m 40 ye/ 15 (billion 30 tonnes ge ar 10 20 (million ischd 5 10 COD WW 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: OECD Environmental Performance Review of China (2005). 15 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Water Supply water pressure. On average, Category III cites Utility Performance perform the worst, with 16 percent of the service area suffering from low pressure This section describes some of the key perfor- problems. What is most striking about Table mance issues confronting water supply utili- 2.1 is that the lowest performing quarter of ties, including: utilities have on average low water pressure in around 40 percent of their service area-- Water supply reliability and quality regardless of city category. Water is gener- Overcapacity in treatment facilities ally supplied 24 hours a day in Category 1 and high leakage rates in distribution cities. However, the reliability of service is systems often much lower in Category II and III. The Financial sustainability benchmarking study indicated that water Most cities have well-established munici- supply service was continuous in all cities pally owned water supply companies, many except two, both of which were Category III of which belong to the China Water Works cities. One of the cities provided water sup- Association (CWWA). The association pro- ply service 18 hours per day, and the other duces annual yearbooks that compile self-re- city provided only 12 hours per day due to a ported information on a number of key per- combination of a shortage of water re- formance indicators. In addition, the World sources and lack of funds.8 Bank and the Ministry of Construction jointly China suffers from scarcity and uneven managed a pilot benchmarking study in 2004 distribution of water resources. Many cities that investigated the performance of twelve are forced to suffer seasonal droughts or in- water supply utilities located in representa- vest in expensive long-distance water sources tive cities. The MOC also undertakes a peri- to secure a reliable and high-quality water odic survey of water utility performance, source. In 2004, MOC reported that seasonal some of which is publicly available. To the ex- water shortages affected more than 400 of tent possible, the data are analyzed across the China's 669 cities; about 110 cities were fac- three different urban water market segments. ing serious shortages requiring drastic water-use restrictions.9 Water pollution in Water Supply Service China's surface water is severe, particularly Table 2.1 indicates that many water utilities in the northern part of the country. Due to a suffer from widespread problems with low lack of alternatives, however, many Chi- nese water utilities are forced to abstract TABLE 2.1 Utility Service Area with Low Water Pressure water from polluted rivers and lakes, resulting in higher operation costs and lower water Category I Category II Category III quality. Many cities, particularly in the north Cities (%) Cities (%) Cities (%) of China, also rely on unsustainable extraction Average 12 10 16 of groundwater as an important raw water supply source. Best 25% of Utilities 0 0 0 The quality of water provided by Chinese Worst 25% of Utilities 45 33 46 municipal water utilities is difficult to ascer- Source: China Water Works Association Yearbook (2005). tain due to the weak regulatory and public reporting systems. The CWAA Yearbook re- 16 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e ports close to 100 percent compliance with the overall reduction in demand that oc- drinking water quality standards, includ- curred during the 1990s due to the dampen- ing total coliforms, chlorine residual, and tur- ing factors discussed above. While many bidity. The benchmarking study reported that cities have overinvested in water supply five of the twelve plants in the surveyed cities treatment facilities, there is significant un- produced turbidity levels above 1.0 NTU, derinvestment in water distribution net- which creates concerns for human consump- works, with consequent service delivery and tion. Poor water quality is generally due to sustainability problems. outdated water treatment technology and Chinese cities have high population den- high levels of pollution in the raw water. sities, with most residents living in multi- Water quality monitoring is generally poor story apartment blocks. This results in and the data is consequently unreliable.10 compact distribution systems, with an ex- traordinarily large number of customers per Investment Efficiency, Treatment kilometer. Table 2.2 shows that the average Plants, and Distribution Systems non-revenue water rate is around 20 percent There is significant overcapacity of water for most cities. Chinese cities report high supply treatment facilities in many cities billing and collection rates, so most of the (see Figure 2.6). At the national level, the non-revenue water comes from physical ratio of installed treatment capacity over leakages. At first glance, the percent of non- water consumption at peak time reached revenue water appears to be exceptionally about 1.5 in 2004, which means that water good by international standards. There is treatment capacity is 50 percent more than considerable variation within city cate- needed at peak consumption. The primary gories, however, and the lowest performing reason for this overinvestment is that munic- quarter of utilities in Category II and III ipal water utilities did not take into account cities average around 35­40 percent leakage. If the actual volume of losses per km of distribution pipeline is accounted, Chinese FIGURE 2.6 Water Supply and Production utilities do not perform well, with an average Capacity (Municipal and of around 50­75 m3/km per day, twice the Self-Supply) leakage rate in Brazil and Russia and more than 10 times the rate in the U.K. The lowest 300 250 TABLE 2.2 Non-Revenue Water For Chinese Utilities Total WS capacity y dar 200 Percent of water produced and lost (m3/km-day) pe 3 150 m Category I Category II Category III Total daily water supply 100 Cities Cities Cities million Average 17 (68) 22 (75) 24 (53) 50 Best 25% of Utilities 11 (32) 10 (18) 9 (11) 0 1991 1993 1995 1997 1999 2001 2003 Worst 25% of Utilities 23 (120) 36 (178) 39 (121) Source: MOC, China Urban Construction Statistics Yearbook (2005). Source: China Water Works Association Yearbook (2005). 17 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s performing utilities average around 150 m3/ appears to be deteriorating. According to km-day. The generally poor distribution per- the CWWA data, over 60 percent of 531 water formance is further confirmed by the high utilities in 1997 experienced positive net in- pipe breaks per year. For instance, the aver- come. In 2004, however, the number of age breakage rate in the pilot benchmarking water utilities with positive net income had cities was around 2 breaks/km/year (4 cities declined to 40 percent. Table 2.2 also shows with 4 breaks/km-year), compared to 0.2, 0.5, that the range between cities within the same and 3.5 breakage rates in the U.K., Russia, category is actually higher than between the and Ukraine respectively.11 different city categories. This indicates that There are a number of reasons why the per- the financial status of a water utility company formance of distribution networks is so poor is only loosely correlated with city size and in many cities. Many pipelines are old and wealth, and that even small and poor cities need rehabilitation, plus many newer pipe- can have financially sustainable water util- lines built prior to 1990 were constructed with ities if they are well-governed and managed. poor quality materials and substandard con- Some common reasons for the high per- struction methods. There has been limited centage of unprofitable water supply utilities funding to support the maintenance and reha- include: bilitation of these pipelines, and until very re- Water tariffs, though increasing cently private firms were not allowed to invest rapidly, are generally still below cost- in distribution networks. Finally, the asset recovery levels management systems of most water utilities Large investments programs have are rudimentary and many utilities do not resulted in high debt service costs have the expertise to cost-effectively prioritize Water demand has experienced slower distribution system renovations. than expected growth Water Utility Financial Performance Some utilities may have an accounting loss but have a reasonable cash flow to Table 2.3 shows that the financial situation maintain operations of most water utilities is not good, and even The financial status of a water utility is TABLE 2.3 Net Income to Revenue Ratio in 1997 and 2004 fundamentally affected by its billing and col- lection performance. The CWWA Yearbook 1997 reports high rates of collection, but it is not (531 cities) 2004 (661 cities) clear what percentage of customers are actu- Profits/Sales Average Category I Category II Category III ally metered and billed. The benchmarking study attempted to determine the level of >10% 10 0 7 4 metering in the 12 surveyed cities, but en- 10% to 0% 48 38 41 32 countered difficulties in data reliability and 0% to -10% 16 33 18 26 definitions. Metering coverage is defined as >-10% the percentage of "connections" with meters. 23 29 33 38 Although six cities report 100 percent meter- Total 100 100 100 100 ing, the benchmarking study noted that the Source: China Water Works Association Yearbook (2005). average population per metered connection is 25, indicating that either (a) one meter 18 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e often serves more than one household, and/ supplied users because they cannot be or (b) some households are not metered. charged through the normal route of the mu- Overall, Chinese utilities have made impres- nicipal water supply bill. sive efforts to meter their customers and the metering level undoubtedly increased signif- icantly over the last decade, albeit starting Wastewater Utility from a very low level. Performance Self-Supply Water Users China has embarked on a national program to treat urban wastewater and the rapid in- Although located within the service areas of crease in treatment capacity is impressive. municipal water utilities, many large indus- This section describes some of the key per- tries and their residential compounds have an formance issues confronting urban waste- independent water supply. Self-supplied mu- water management, including: nicipal and industrial water use is estimated at around 12 percent of total urban use.12 Wastewater treatment plant This percentage can be much larger in north- performance ern cities with groundwater supplies. Self- Inadequate drainage collection supplied users are generally required to pay a networks nominal water resource fee, but can generally Underfunding of wastewater services produce their water at much lower cost than the municipal utility. Industrial self-supply Wastewater companies have only been es- within the service area of a municipal water tablished in most Chinese cities since 2000. utility can cause problems, including (a) water Their scope of service is generally limited supply company revenues are reduced and the to wastewater conveyance and treatment. per-unit cost of municipal water supply in- Drainage collection, whether through com- creases; (b) industries often overexploit bined or separate stormwater and sanitary groundwater due to its low price; and (c) it is drains, is usually provided by the municipal difficult to collect wastewater fees from self- (or district) drainage bureau. Box 2.2 pro- BOX 2.2 Wastewater Technical Terms Drains/Sewers. There are four types of drains: (a) stormwater drains, which carry stormwater only; (b) sanitary drains, which carry wastewater only; (c) combined drains, which carry stormwater and wastewater; and (d) interceptors, which connect with combined drains and convey the wastewater to the treatment plant during dry periods. Pumping Stations and Overflows. Drains may require pumping stations in the networks to make them hydraulically stable. Overflows are incorporated into a combined drain to spill excess water from an overloaded pipeline (during and following heavy rain) into a convenient watercourse. Drainage Networks. A drainage network is divided into a hierarchical system of drains commonly called tertiary drains (at the building level), which connect to secondary drains (typically along smaller roads) and then to primary drains (typically along larger roads). The classification is usually somewhat arbitrary. Wastewater Treatment Plants. The treatment plants treat wastewater conveyed through an interceptor or a sanitary drain. During rain events, the interceptor typically contains a mixture of stormwater and wastewater. 19 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s vides a definition of wastewater technical hydraulic utilization rate appears reason- terms. The fragmentation of wastewater able, but there is a large variation among the services, and its relative immaturity, has re- plants. Around one-third of the plants oper- sulted in an almost complete lack of utility ated at a hydraulic capacity utilization rate financial and operational information to of less than 50 percent and another third evaluate the sector. Until 2005, the China were near 100 percent utilization. One- National Wastewater Association served as third of the plants had influent biochemical the professional association for the sector, oxygen demand (BOD) and suspended solids but it did not produce annual yearbooks of (SS) concentrations well below design key information similar to the China Water standards, indicating significant underuti- Works Association Yearbook. In 2006, the lization of load capacity. The treatment two organizations joined to form the China plant records showed that they operated National Water and Wastewater Association. mostly in compliance with discharge stan- The joint World Bank-MOC benchmarking dards. In 2004, the China National Auditing study in 2004 and a similar World Bank Office issued a report stating that 60 out of study in 2001 looked at a number of waste- 78 audited wastewater treatment plants water utilities, but due to the lack of infor- were underutilized due to the lack of oper- mation and transparency, the data collected ating funds or delays in construction of was often unreliable and of low quality. auxiliary facilities.13 Wastewater Treatment Drainage Collection Networks Plant Performance There is very limited information on collec- Box 2.3 shows the MOC's assessment of tion system performance in China. MOC wastewater treatment plant performance. records indicate that the total length of col- The benchmarking study indicated that the lection system pipelines has increased signif- treatment plants operate, on average, at icantly, from a national total of 139,000 ki- 60 percent of their hydraulic design capacity. lometers in 1995 to 358,000 kilometers in Since most treatment plants are in the early 2005.14 The MOC figures do not make a dis- stages of their operational life, the average tinction between separate or combined (san- BOX 2.3 MOC's Analysis of Wastewater Treatment Operational Performance By the end of 2004, the national urban wastewater treatment plant operation rate averaged 65 percent, five per- centage points higher than in 2001, but some completed plants have not fully displayed their benefits. By the end of June 2005, out of 364 cities with plants, 38 cities' plant operation rate was lower than 30 percent, including 17 cities with plants that were not yet commissioned. Of this total, seventeen were prefecture level cities, two were large cities with a population over 500,000, and six were in cities within key river basins. An analysis showed that the reasons for the failure of the completed plants to function properly were primarily the following: (a) in some cities, management systems were still not in place; (b) wastewater fees were too low to ensure operation; (c) collection networks were incomplete; (d) treatment plants were oversized, and (e) waste- water treatment plants were complex and difficult to operate. Source: MOC, Circular on Treatment of Urban Wastewater (2005). 20 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e itary and stormwater) drainage pipelines. wastewater conveyance and treatment ser- Many cities are clearly struggling with the de- vices. Most wastewater companies are still in velopment and operation of their collection their infancy, but undoubtedly face many fu- networks. Box 2.4 provides information on ture financial challenges. The China Drainage Tianjin's drainage collection system and Association, unlike the China Water Works demonstrates some of the challenges. Since Association, does not collect financial infor- Tianjin is a Category I city, the problems mation from its members, and thus there is no faced by Category II and III cities may be national database on the financial status of even more severe. wastewater companies--which would in any case only be a partial perspective, as drainage Wastewater Financial Performance services would not be included in most cases. The wastewater sector in a typical city is often According to the above MOC analysis and the fragmented among different service pro- analysis presented in Chapter 7 (Financial viders, including public departments provid- Sustainability), wastewater tariffs are very ing local drainage services and more com- low, and the wastewater sector is struggling mercially oriented companies providing with financial sustainability issues. BOX 2.4 Overview of Tianjin Drainage System in 2005 A comprehensive assessment of the drainage collection system was conducted in Tianjin as part of a World Bank- financed project. The assessment revealed that although Tianjin is moving relatively quickly in constructing the necessary wastewater treatment plants, there is a need to improve the drainage collection system, as the follow- ing data show: Extent of Drainage System: The total length of drainage pipelines is 4,753 km, of which: Stormwater: 1,982 kms; Sanitary: 1,928 km; and Combined: 1,042 kms. Drainage Coverage: Fifty-nine percent of the city area is covered by stormwater drainage and 69 percent by sanitary drainage. Asset Condition: Twenty-five percent of pipelines have exceeded their service life. There are 186 pump stations, of which 94 (50 percent) have equipment that exceeded service life. Flooding: There are 36 key floodprone street intersections. Among them, 9 have adequate stormwater drainage, 12 have been partially improved, and 15 suffer frequent flooding. All 33 large underpasses in Tianjin are subject to flooding. Wastewater Collection: The separation of stormwater and wastewater drains is incomplete at the lateral level, resulting in stormwater going into wastewater drains and wastewater going into stormwater drains The low construction standards lead to frequent breaks and blockages. Wastewater Treatment: The installed wastewater treatment capacity is 930,000 m3/day, a 59 percent coverage. The goal by 2010 is to collect and treat at least 90 percent of the wastewater. Source: Tianjin Drainage Study, Tianjin International Engineering Consulting Corporation (2005). 21 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s The Challenge of Industrial Wastewater. rapidly expanded water supply and Industries account for about half of the wastewater treatment coverage 50 billion m3/year of urban water use,15 and through large-scale infrastructure China aggressively pursues industrial pollu- construction programs. tion control. By 2001, over 61,220 industrial There is a wide variation in utility wastewater treatment plants had been con- performance, both between and within structed; official data indicate an 86 percent different city categories. Some cities compliance rate with the 2001 standards.16 are able to provide high-quality ser- Since most of the plants had been con- vice, while other cities struggle. This structed before municipal wastewater man- indicates that underperformance stems agement systems were in place, the relevant partly from poor sector governance and effluent standard is to discharge directly into regulation, which allows some cities the receiving water body. For industries with- and their utilities to provide substan- out their own treatment plants, they should dard service. naturally discharge into the municipal collec- There is a lack of data and transpar- tion system. Industries with their own waste- ency to evaluate utility performance, water treatment systems need to decide particularly for wastewater. The situa- whether to discharge into the municipal sys- tion undermines efforts to identify tem (with lower BOD and SS discharge stan- problems and ensure accountability, dards) or continue to treat for discharge di- thereby restricting the scope for im- rectly into the environment. Any industry that proving utility performance. Box 2.5 discharges to the municipal system must shows how Brazil has addressed the meet pretreatment requirements in order to issue of utility performance informa- minimize impacts on the municipal waste- tion, which could serve as an inspira- water collection and treatment systems. Most tion for a similar program in China. cities have not yet developed integrated strategies to deal with the following issues: (a) ensuring adequate pretreatment prior to dis- Notes charge into the municipal system; (b) deter- 1. China Urban Construction Statistics Yearbook (2005) mining which industries should convert from 2. See Chapter 1, Footnote 4. self-treatment to discharge into the municipal 3. China Urban Construction Statistics Yearbook system; and (c) treating complex wastewater (2005) with a high percentage of industrial waste. 4. ibid 5. See Technical Notes, Chapter 1. 6. For example, the national "Cleaner Production Chapter Summary Promotion Law" was passed in 2002. 7. The "11th Five-Year Plan on Urban Wastewater This chapter has identified a number of Treatment and Reuse Infrastructure Construc- issues regarding the achievement and per- tion" set a national target of 65% wastewater treatment rate, including: 80% for provincial formance of China's urban water utilities, capitals; 60% for prefecture level cities; 50% for including: county-level cities; and 30% for county capital towns. Source: CIECC (2006). Starting from a low base in 1990, 8. World Bank (2005). North China Water Quality Chinese cities and their utilities have Study Report Component A: "Water Utility Case 22 S e c t o r A c h i e v e m e n t a n d P e r f o r m a n c e BOX 2.5 Brazil National Sanitation Information System (SNIS) Brazil's National Information System for Water Supply and Sanitation (SNIS) was created in the mid-1990s under the Water Sector Modernization Project (PMSS), a federal program financed by the World Bank. SNIS is a federal database maintained by the Ministry of Cities. It aims to promote (a) planning and implementation of public poli- cies; (b) guidance in the allocation of financial resources; (c) assessment of utility performance; (d) management improvement through increased efficiency and effectiveness; (e) guidance on regulatory activities; (f) benchmark- ing and yardstick comparison; and (g) dissemination of sector data to the public domain. The SNIS database covers information on 279 regional and municipal utilities, consisting of water supply data for 4,186 municipalities (95 percent of the population) and sewerage data for 968 municipalities (71 percent of the population). SNIS reports have been compiled and published annually covering the period 1995 to 2005. Utilities provide data on their water supply and sanitation services, including operational, managerial, financial and service quality information through a tailored software package. SNIS products include databases; software for data collection; diagnoses of service provision coverage and performance; an annual performance national sector overview; a glossary of technical terms and indicators; and an internet site with over 4,000 visitors per month. The database is used by a wide variety of institutions, including governments, utilities, regulatory enti- ties, research and financial institutions, and international development agencies. SNIS provides a tool to monitor and supervise utility performance. For utilities, the database provides per- formance benchmarking and comparison with other utilities. It allows state and municipal governments to press utilities to enhance their performance. In addition, SNIS contributes to enhancing transparency by inviting the general public, media, politicians, NGOs, and others to participate in discussions on the sector generally and on service provision more specifically. Finally, the federal government has recently started to use SNIS in order to help prioritize sector financing demands. Lessons learned from SNIS include the following: a) establishing a national information database takes time and perseverance; b) it requires leadership and coordination even though it is undertaken collectively; c) incentives and obligations to improve responsiveness and accuracy of data are important, although voluntary mechanisms have worked relatively well (a degree of "peer pressure" to be included in the database now exists among service providers and local governments); d) the system has become the yardstick of the Brazilian water industry; e) SNIS allows Brazil to take its benchmarking to a regional and international level; and f) once such a system is established, it becomes self-perpetuating. Source: Presentation by ANA (Miranda and Marinho) at World Bank Water Week (2003) Study," pg. 21. The two cities were Yuncheng in 10. World Bank (2005). North China Water Quality Shanxi Province and Bozhou in Anhui Province. Study Report Component A: "Water Utility Case 9. See Xinhua News Agency September 28, 2003, Study." "Water from Shanxi to Ease Shortage in Bei-jing" 11. Alexander Danilenko (2006) "Background at: http://www.china.org.cn/english/2003/Sep/762 Paper on North China Water Quality Study." 27.htm. The article reports that: "Beijing is one of 12. China Urban Construction Statistics Yearbook the many cities on the Chinese mainland with (2005) water shortage problems. About 420 of 600 cities 13. General Office of China National Audit Office on the Chinese mainland suffer water shortages, (2004) according the Ministry of Water Resources. A 14. China Urban Construction Statistics Yearbook total of 110 cities are in acute shortage, resulting (2005) in 200 billion yuan (US$24 billion) to 300 billion 15. See Figure 2.3 yuan (US$36 billion) in lost industrial output each 16. OECD (2005), Environmental Performance Re- year, figures provided by the ministry show." view of China. 23 3 Sector Challenges China not only needs to improve the perfor- water quality and ensure reliable mance of its urban water utilities, but it water supplies, seasonal shortages must also prepare for the pressing challenges and polluted water supplies will con- of the future, including: tinue to pose problems. Meeting investment demands. The Responding to rapid urbanization. China growth in urban population, combined is experiencing the greatest wave of ur- with aspirations to improve the quality banization in history; the official urban of water services, will require an accel- population is expected to increase from erated capital works program. The about 550 million in 2005 to about estimated investment needs for 2006­ 900 million in 2020.1 Providing urban 10 alone are expected to be around water services to new residents and RMB 400 billion ($50 billion)-- dealing with new spatial patterns of approximately equal to investments urban development will be a demand- over the last 15 years. Financing these ing task. investments, and ensuring investment Dealing with urban diversity. China has efficiency, is a major challenge for the a wide spectrum of cities and towns, sector. from large and rich super cities such as Improving utility financial sustainabil- Beijing and Shanghai to hundreds of ity. Some water supply utilities, and smaller and poor cities. China's poli- most wastewater utilities, rely heavily cies, standards, and approaches for on municipal government funding. urban water services will need to be Utilities that rely more on user fees tailored to meet the economic and en- generally increase transparency and vironmental reality of different types of accountability, become better able to cities. access capital markets, and operate at Confronting water scarcity and degra- a higher level of efficiency. dation. Water is scarce in the north of China and water quality throughout This chapter examines these challenges the country is severely degraded. In and their implications for the urban water spite of extensive efforts to improve sector. 25 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Responding to Economic growth will help cities Rapid Urbanization both to expand service and upgrade standards. China's rapid urbanization has been accom- New patterns of spatial growth will panied by economic growth and transforma- provide opportunities to aggregate tion. Much of this urbanization is centered service provision and lower costs, pro- on large metropolitan areas, with rapid de- vided local governments can cooperate. velopment of towns and peri-urban areas. These trends have the following implications: To understand these issues, Box 3.1 describes Water services will need to be provided China's different government levels and how to a large influx of urban residents. "cities" and "towns" are administered. BOX 3.1 China's Administrative System and Definition of Cities and Towns In China, the governance structure is a hierarchical and decentralized system in which functional responsibili- ties are delegated through a four-tiered system: (1) central level; (2) provincial level; (3) prefecture level; and (4) county level. The county level is the basic building block of the decentralized administrative and fiscal system. A prefecture- level entity is composed of a number of county-level entities; similarly, a provincial-level entity is composed of a number of prefecture entities. There are 32 provincial-level entities in China, including 23 formal provinces, 5 autonomous regions where ethnic minorities dominate, and 4 "municipalities:" Beijing, Shanghai, Tianjin, and Chongqing. This does not include Hong Kong, Macau, and Taiwan. There are no prefectures in a municipality. In actual practice, the administrative relationships are more complex, but the four-tiered explanation provides the basic framework. The term "city" has a dual--and often confusing--meaning in China. In the Chinese system, a "city" can refer to an administrative jurisdiction, which can cover both rural and urban areas. For example, a prefecture-level city in the administrative sense is composed primarily of rural areas with a number of urban centers. On the other hand, a "city" can also refer to a specific urban area. This study uses the latter definition of city and only considers urban areas. As of December 31, 2004, China has 661 "designated" cities (i.e. major urban areas): 4 municipalities, 283 cities that are the capitals of prefecture-level entities, and 374 cities that are the capitals of county-level entities. Administration of the cities is carried out by city governments (sometimes referred to as municipal governments). The city is further divided into urban districts, which provide more local administration and public service func- tions. Reflecting the dual definition of cities in China, the mayor of a city that is the capital of a prefecture entity has two functions: (1) direct responsibility for the city government; and (2) oversight responsibility for the county- level entity within the prefecture. In 2005, approximately 340 million people lived in designated cities. In total, there are around 2,010 county-level entities in China. As noted in the proceeding paragraph, 374 of these county-level entities have large urban areas that are designated as "cities." The remaining 1,636 county-level enti- ties each have an urban area, which is the seat of government; in this study, they are called "county-towns." In 2005, approximately 96 million people lived in county-towns, resulting in an average population of around 60,000. Towns are another type of urban area in China. In total, there are 18,256 towns in China--including the 1,636 towns referred to as "county-towns." Towns are administratively and fiscally subservient to county-level governments. In 2005, approximately 100 million people lived in towns (excluding county towns), resulting in an average population of around 6,000. Source: Adapted from Wikipedia (http://en.wikipedia.org/wiki/Political_divisions_of_China) 26 S e c t o r C h a l l e n g e s Rapid Urbanization Accompanied by FIGURE 3.1 China's Economic Transformation and Urbanization Economic Growth and Transformation Around 1980, China started a transformation 45 90 from a planned economy to a market econ- omy. The country's real GDP then grew an av- cent)r 40 (pe Urban as % of total population 85 erage 9.6 percent a year in the period from 35 tiona GDP 1979 to 2005.2 The evolutionary trend from a 30 80 of rural agricultural society to an industrialized populla % 25 75 and urban country is reflected in Figure 3.1. tot of %sa 20 GDPST Secondary + tertiary GDP as % of GDP The increase in China's urbanization level is 70 roughly consistent with the change in the country's macroeconomic structure, where nabrU 15 10 65 1980 1985 1990 1995 2000 2004 the secondary and tertiary sectors now ac- count for 85 percent of China's GDP, com- Source: Chreod, "Metropolitan Regions: New Challenges for an Urbanizing China" (2005). pared with about 65 percent in the early 1980s. The urbanization rate has more than doubled over the last 25 years, and reached 43 percent in 2005. In 2005, the total official this natural economic attraction has been urban population was around 550 million, dampened by government efforts to control including 340 million in 661 cities, 96 million rural-urban migration by denying unautho- in county-towns, and around 100 million in rized rural migrants legal status, thus com- towns. This does not take into consideration plicating access to basic services in the city an additional "floating" population of 80 to such as housing, schools, and health care. 120 million people. This rapid increase in the The system of control is slowly being re- urban population has strained urban water laxed, which is resulting in widening dispar- and wastewater infrastructure, and created a ities of urban income as poor rural migrants large demand for upgrading and expansion of come to urban areas. services. Fueled by the country's rapid industrial- Urban residents have become signifi- ization, the migration of farmers from cantly richer over time. With their increased rural to urban areas, and sustained eco- ability to pay, they have demanded better nomic high growth, current urbanization is water services. The average urban income per expected to continue over the next few capita rose from 1,500 RMB ($187) in 1990 decades. Assuming an urbanization rate of to RMB 10,493 ($1,300) in 2006. In contrast, 1.5 percent, which is not particularly high rural per capita income in 2006 was only when compared with the historical experi- RMB 3,255 ($406). Moreover, unlike urban ence of other countries at similar stages of residents, most rural residents do not receive economic development, this could result in subsidized health care or education, and over 900 million urban residents by 2020 only a small percentage participate in pen- (see Figure 3.2). Under any scenario, the ab- sion systems.3 Given the disparities in solute increase in urban residents in the next wealth between rural and urban house- 15 years will be immense and will create holds, there is a strong incentive for rural huge demands for urban infrastructure, in- residents to migrate to the cities. In the past, cluding water, wastewater, and stormwater 27 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s drops again beyond 100 kilometers. Be- FIGURE 3.2 Urbanization Trends and Projections yond 100 kilometers, it remains relatively stable no matter how far out from the 60 centers.4 55 Scenario 3 (1.5%) China's metropolitan regions can be bro- 923M 50 ken into four tiers by the relative size of the 857M non-farming population. The first tier of three 45 Scenario 2 (1%) 796M Scenario 1 (0.5%) metropolitan regions in China includes centr 40 564M Pe Shanghai (17 million non-farming popula- 35 459M tion), Beijing (14.5 million), and Guangzhou 30 (13.7 million). The second tier consists of 352M 11 metropolitan regions with urban popula- 25 302M tions ranging from 5 million to 10 million. 20 1990 1995 2000 2004 2005 2010 2015 2020 The third tier, with populations ranging from 2 to 5 million, consists of 20 regions. The re- Source: China Statistical Yearbook (2005). maining 19 regions belong to the fourth tier. While first- and second-tier metropolitan regions are located along the coast, many of facilities. Rapid economic development China's medium and small metropolitan also provides municipal governments with regions are located inland. available financing sources to tackle these The spatial urban expansion pattern in huge investment challenges for the water China differs considerably from that in North sector. America and many European countries. Rural populations and immigrants, unfet- Urbanization Taking Place tered by mobility restrictions, poured into in Metropolitan Areas the cities in these countries. Urban devel- China has over 50 metropolitan regions in opment then grew outwards into the sub- total, which are anchored by cities with over urbs as residents sought cheaper and better 1 million non-farming residents and en- housing and companies attempted to lower compass adjacent counties and districts. business costs and avoid congestion. These metropolitan regions are the eco- In China, urban households and state- nomic development powerhouses of the owned enterprises (SOEs) faced strict con- country. Although the metropolitan re- straints on labor and capital mobility and gions hold only 29 percent of the country's had much more limited relocation choices. total population (370 million), they con- Urban households were tied to the city tribute to 53 percent of China's GDP and through the household registration system 62 percent of all non-farming GDP from (hukou). The vertically integrated state- manufacturing, construction, and services. owned-enterprises (SOEs) maintained local- GDP per capita within 50 kilometers of the ized supply chains in order to promote local metropolitan centers is 160 percent higher economic development. Moreover, heavy than the national average. This rate falls subsidies as well as the allocation of free or dramatically at a distance of 50 to 100 kilo- cheap urban land to SOEs gave them little meters from the metropolitan core and incentive to relocate to lower-cost suburban 28 S e c t o r C h a l l e n g e s areas. Nevertheless, with rapid economic are integral parts of the booming metropoli- development, pressures started to build in tan areas. As a whole, towns now hold 52 many regions, partially due to industrial re- percent of China's metropolitan population, location from the central cores to new sub- and are playing an increasingly important urban industrial parks, and partially due to economic and social role. In many metropol- government efforts to promote relocation to itan areas, land-intensive and pollution- improve housing conditions and reduce in- generating industries are being relocated ner city residential density. As a result, many from inner urban areas to towns due to metropolitan regions in China have recently lower land cost and labor availability. Unlike experienced a complex mix of both centrifu- cities, which control migration, towns in gal and centripetal growth patterns. Their metropolitan areas generally welcome rural spatial pattern is a combination of high migrants as a source of cheap labor. Second, density in central areas, which can create the central government has new develop- problems such as traffic congestion and air ment policies to encourage rural residents to pollution if not properly managed, and dis- move to towns located in the countryside in persed suburban areas, which increase the order to improve their quality of life with cost of infrastructure provision. better services. China's 10th Five-Year Plan The characteristics of China's metropoli- (2001­05) called for the rapid development tan development have important implica- of small towns as the main focus of the ur- tions for the urban water sector. Much of the banization strategy. water infrastructure in the core urban areas, The fast development of towns through- particularly water and drainage pipelines, out China has two major consequences for the needs to be renovated. Given the heavy traf- urban water sector. First, towns located on fic congestion, this will be a complex task. the fringe areas of metropolitan regions are The suburban areas are expanding outward economically and environmentally linked to quickly and require new infrastructure, the core urban areas. Their urban water which will be expensive given the relatively services will need to be at a level consistent low population densities. Finally, China's with the core urban area. In many instances, administrative and fiscal system is decen- this is most economically achieved through tralized, and the suburban districts and the provision of regional infrastructure. counties surrounding the core urban areas Second, towns located in rural areas will tend to independently develop their water in- need to develop low-cost and sustainable frastructure without taking advantage of the approaches to their urban water services, benefits that might accrue from aggregation particularly for wastewater management. of water services at the regional level. Towns Expanding Rapidly in the Dealing with Countryside and Peri-Urban Areas Urban Diversity Towns have grown rapidly in China, with the total number increasing from fewer than Not only are China's cities rapidly growing, 3,000 in 1980 to over 18,000 in 2005.5 Towns but inequality is increasing both between play two important roles in China's urban- cities and within cities. These trends have ization process. First, in some instances they the following implications: 29 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s China's policies, standards, and Within-City Disparity. In the past, income approaches for urban water services gaps in China were mainly between city and will need to be tailored to meet the countryside residents. Since 2000, however, economic and environmental reality the income gap among urban residents has of different types of cities. risen quickly; the urban Gini coefficient in As users pay more for urban water 2005 was estimated at 0.4.8 Given China's services, more attention will need to rapid industrialization and urbanization, at be paid to protecting the urban poor least a short-term increase in the Gini coeffi- through special programs. cient could be expected. Moreover, the high levels of economic growth indicate that Growing Inequality urban residents in general are becoming The Gini coefficient is a parameter used by wealthier, although the income gap may be economists to measure income inequality: the widening. higher the Gini value, the more unequal the income distribution. The overall Gini coef- Urban Water Market Segments ficient in China has increased from below The disparities between different types of 0.3 in the early 1980s to 0.45 in 2005.6 For cities were discussed in Chapter 1 in the con- comparison, the Gini coefficient of Japan, text of "urban water market segments." The which is one of the egalitarian countries, is summary table from Chapter 1 is presented 0.25 while Brazil, which is considered one the below in Table 3.1. world's more unequal countries, has a coeffi- Table 3.1 shows that generally, the smaller cient of 0.59. A major driver of income in- and less affluent the city, the lower the levels equality is the urban-rural income gap. The of wastewater treatment and water supply ratio of urban to rural per capita income in coverage. Moreover, Chapter 2 indicated that, 2005 stood at around 3.0.7 There are, how- on average, Category III city water utilities ever, increasingly important urban income performed poorly along most key variables, disparities along two dimensions: including water supply reliability, water qual- Coastal vs. Inland Disparity. The proc- ity, and financial performance. ess of reform and opening was spearheaded Implications of Urban Diversity on the coast with preferential treatment for the Urban Water Sector granted to engage in trade, host foreign in- vestment, and generally develop a market The wide range of urban situations in China economy. Inland regions and the northeast calls for adjusting national policies, stan- were hindered in their transition not only by dards, and concessionary finance programs delayed policy relaxation but by a legacy of to meet the economic realities of the smaller bigger and more entrenched state enterprises and poorer cities. China's current national that remained shielded from market disci- policies, such as drinking water quality and pline to protect vested interests. The coast also wastewater discharge standards, are often has a natural geographic advantage in confer- directed at the highest capacity cities and ring ready transportation links to the outside only loosely enforced. Similarly, most of the world and ready economic links to Hong national concessionary finance funds go the Kong and Taiwan. larger prefecture-level cities. Low-cost, easy- 30 S e c t o r C h a l l e n g e s TABLE 3.1 Urban Water Market Segments Average Wastewater Average Water Total Per Capita Treatment Supply Number Population GDP Coverage Coverage Market Segments of Cities (million) (RMB) (%) (%) Category I Cities: Population > 2 million 21 90 35,900 61 93 GDP-capita > $3,000 Category II Cities --In Between Category I 331 201 19,100 38 91 and Category III Cities-- Category III Cities Population < 0.5 million 310 58 7,300 21 86 GDP-capita < $1,500 County Towns 1,636 96 NA 11 82 Sources: MOC, China Urban Statistics Yearbook (2005); and MOC, County Towns Brief (2004). to-operate water supply and wastewater sys- Confronting Water tems in smaller and poorer cities--where Scarcity and Degradation reasonable standards are enforced--are more realistic than universally high stan- The combination of high population density, dards requiring expensive technology in rapid economic growth, and accelerating many of China's cities. urbanization has created a water resource The widening income disparities within crisis in China. Although this study does many Chinese cities also complicate tariff in- not focus on water resources, this broader creases. Urban households in China must topic has important impacts on urban water now pay for services once provided by the services: state, or state-owned enterprises, such as housing, health care, education, and public Water resource constraints and water utilities. Lower- and middle-income house- quality degradation will require cities holds are struggling to meet these new ex- and their utilities to adopt more penses. Growing income disparities are sophisticated and non-traditional feeding discontent--making increases in approaches to ensuring reliable and water tariffs politically complicated. Finding cost effective ways of meeting the ways to increase utility revenues, while still growing urban water demand. protecting the poor and avoiding discontent The extreme degradation of water qual- among middle-income families, is a di- ity in China's rivers, lakes, and coastal lemma facing most Chinese cities. areas is caused by a combination of 31 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s sources, including municipal, indus- others, are potentially viable, cities and their trial, urban and agricultural runoff, as utilities will need to improve their overall well as livestock operations. China's water supply planning approaches to ensure environmental regulators will need to the optimal combination of alternatives to strike a cost-effective balance between reduce overall costs and ensure good service. municipal and industrial pollution control, and managing agricultural Water Quality Degradation and nonpoint sources of pollution. In spite of improved municipal and indus- trial water pollution control (see Figure 2.5), Water Scarcity China's surface water quality does not ap- China suffers from an uneven temporal and pear to have improved over the last decade. spatial distribution of water resources (see Figure 3.3 shows that the percentage of sur- Box 3.2). Many cities are forced to suffer face water rated higher than Category V (i.e. seasonal droughts or invest in expensive the most heavily polluted water bodies) has long-distance water sources to secure a re- hovered around 35 percent. liable and high-quality water source. Chi- Moreover, water quality in China's coastal nese cities are also experimenting with areas and key lakes appears to be declining, nontraditional water sources such as waste- due in part to higher levels of nutrient load- water reclamation, desalinization, brackish ing, resulting in algae blooms and eutrophi- water use, etc. Demand management tools-- cation. Water quality is affected by a number including water conservation and water of other activities other than municipal pol- pricing--are also being increasingly used. lution, such as discharges from over 18,000 Although all these approaches, as well as towns, polluted agricultural runoff, live- BOX 3.2 China's Water Resources Water resources are scarce in China. Per capita freshwater availability in China was only 2,210 m3 in 2004, about one-quarter of the world's average. The per-capita water availability in the highly populated 3-H basins in the north of China (Huai, Huang, and Hai) is only 500 m3/person--below the internationally accepted threshold of 1,000 m3/person for severe water stress. Groundwater overdraft is a major problem in many places in China; many cities and the surrounding agricultural communities are relying on unsustainable groundwater resources. Although municipal and industrial water demands have priority over agricultural water use, many cities still experience frequent water shortages. According to the China Economic and Social Development Report (2004), more than 400 cities in China face water shortages; in 110 cities, these shortages are severe. Water resource distribution in China is extremely unbalanced among regions and seasons. Water shortage prob- lems are most acute in dry seasons in the northern and western regions. South China has about 80 percent of the total water resources, while the North has only 20 percent. In comparison, the North has about 47 percent of the total population and produces 45 percent of the GDP. In addition, 60­80 percent of annual precipitation occurs in the four summer months, which contributes to flooding in the summer in the South, while the North has an ex- tremely dry winter. China has an extensive and almost fully developed reservoir system operated by local, provin- cial, or national water resource agencies to help maintain water availability, but the fundamental constraint is the lack of sufficient runoff water in the North. Water resource agencies have responded to this situation by develop- ing long-distance water transfer schemes, the most prominent of which is the South-North water diversion project. Drought emergency measures are also frequently applied in Chinese cities to deal with short-term water shortages. 32 S e c t o r C h a l l e n g e s implement national programs for waste- FIGURE 3.3 Average Water Quality in Chinese water treatment and drinking water safety. Rivers from 1991­2002 This will generate pressure to: 100 Finance new investments, particularly 90 All China through debt and equity markets 80 V ­ V* rather than the municipal government 70 budget 60 Ensure that service standards are cost- 50 effective and affordable All China Make good capital planning decisions 40 III ­ IV that minimize costs while meeting 30 service standards and regulations 20 All China 10 I ­ II Huge Future Sector 0 Investment Requirements 1991 1993 1995 1997 1999 2001 Table 3.2 summarizes total investments over Source: World Bank, Water Quality Management Policy (2006). the period 1991­2005, and estimated invest- ment over the period 2006­2010. From 1991 to 2005, around RMB 430 billion ($54 billion) stock waste, and industries discharging was spent in urban water infrastructure. wastewater outside of municipal bound- This study estimates that around the aries. China's water pollution problems are same amount, RMB 430 billion ($54 billion) serious and will remain so in the future. will be spent during the 11th Five-Year-Plan period (2006­2010), indicating that the rapid Meeting Infrastructure acceleration of infrastructure spending that Investment Needs begin in the early 1990s will continue into the future. China will need to significantly expand its stock of infrastructure to respond to rapid Wastewater Investments. Investment in urbanization, rehabilitate existing assets, and wastewater started slowly, but surpassed TABLE 3.2 Approximate Urban Water Sector Investments Total Investment 1991­2005 Estimated Investment 2006­2010 Sector Investment US$ Billion RMB Billion US$ Billion RMB Billion Water Supply 25 200 20 160 Wastewater 29 230 34 270 Total 54 430 54 430 Source: MOC, Urban Construction Yearbook (2005); projections based on World Bank estimates. 33 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s water supply by 2000, and the growth rate is not be supported by the government. Many accelerating. The 11th Five-Year Wastewater water supply companies, however, are still Sector Plan (2006­2010) prepared under the provided with significant capital subsidies in auspices of the MOC estimates the total in- the form of equity contributions to overcome vestment requirements necessary to meet financing constraints and keep tariffs lows. the 11th Five-Year-Plan target of 70 percent We estimate that water supply investments urban wastewater treatment is around RMB will continue to increase gradually over the 300 billion ($38 billion). Given financing and next five years, driven primarily by the grow- implementation constraints, this study esti- ing urban population, the need to rehabili- mates the actual amount will be lower. Fig- tate distribution networks, and the need to ure 3.4 shows the estimated breakdown in upgrade treatment plants in large cities to ac- costs for different types of wastewater in- commodate higher drinking water quality vestments. In comparison with past capital standards. works programs, more emphasis is being put on drainage networks (63 percent of costs) and sludge management facilities (14 per- Improving Utility cent). Wastewater treatment plants only Financial Sustainability account for around 16 percent of total costs. Improving utility financial sustainability will Water Supply Investments. The 11th Five- help utilities finance future investments and Year Plan, for the first time, did not analyze improve performance. The concept used in the water supply sector. The national govern- this study is presented in Box 3.3, and uses ment now considers water supply to be a the imagery of "climbing up the ladder" of fi- commercial activity and theoretically should nancial sustainability. Improving financial sustainability for an urban water utility de- pends on many factors that are often be- FIGURE 3.4 Estimated Wastewater yond the control of the utility, including Investments in the 11th (a) tariff setting; (b) subsidies; (c) environ- Five-Year Plan Period mental and service standards; and (d) fi- nancing options. A financially strong utility Rehablitation (11 generally is a result of good sector and util- Bil RMB), 4% Water reuse ity governance, coupled with sound utility (9 Bil RMB), 3% WWTP (49 Bil management. RMB), 16% Sludge (43 Bil RMB), 14% Status of China's Water Utilities Chapter 2 provided a general overview of the financial status of urban water utilities; Chapter 7 will provide a more in-depth anal- ysis. Most of China's water supply utility Network (188 Bil companies fall in the middle or lower end of RMB), 63% the financial sustainability ladder. Although Source: China International Engineering Consulting Company, 11th some richer cities have water supply com- Five-Year Sector Plan (2006). panies that are marginally creditworthy, 34 S e c t o r C h a l l e n g e s BOX 3.3 Financial Sustainability Ladder Financial sustainability reflects a utility's capacity to meet its financial needs. There are several different levels of financial sustainability. Figure 5.1 presents a "financial sustainability ladder" and defines the following rungs: (a) unviable loss-making utilities, which meet the minimum financial sustainability threshold through both cap- ital and operational subsidies; (b) pay-as-you-go recovery of cash needs, in which only capital financing needs subsidies; (c) cost recovery, in which utilities are profitable in any given year, but profitability is not sustainable in the long term, for example from insufficient renewal of assets; (d) sustainable cost recovery, in which utilities sustain the impact of long-term costs, including asset renewal; (e) marginally creditworthy, which requires util- ities to have reliable refinancing sources and secure access to loans; and (f) creditworthy, the top level, which requires utilities to become creditworthy and the country's banking system and capital markets to function well. Creditworthy Marginally creditworthy Sustainable cost recovery Cost recovery Pay-as-you-go recovery of cash needs Unviable loss-making utilties All the utilities in the ladder are viewed as potentially financially sustainable. But their levels of financial sustain- ability are quite different. In general, the higher the financial sustainability level, the better the utility's capacity to meet ongoing cash needs, to cushion unanticipated cost increases and sudden financial shocks, and to fulfill capital financing requirements for further business expansion. A utility can move upward in the sustainability levels by fundamentally reducing risks or unpredictability of funding sources at each stage. Source: World Bank Water and Sanitation Working Note 7 (2005), "Financing Water Supply and Wastewater Investments: Estimating Revenue Requirements" by Aldo Baietti and Paolo Curiel. most cities still subsidize their companies. drainage department that relies solely on Fund shortages often prevent utilities from government budget transfers. undertaking necessary asset renewal activi- ties. Wastewater companies are generally fi- Benefits of Moving Up the Ladder. Less nancially weaker than water supply com- reliance on government funding, and more panies. Many wastewater companies are not on user fees and capital markets can generate responsible for wastewater collection, which strong forces for improving efficiency. A pre- in many cases is operated by a municipal dictable and adequate source of revenues 35 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s from user fees is usually more secure than re- Responding to rapid urbanization. lying on government transfers. Reliance on Providing urban water services to new user fees is also more likely to increase ac- residents and dealing with new spatial countability as customers will demand better patterns of urban development will be service. If tariffs are low and the utility re- a demanding task. ceives its budget directly from the govern- Dealing with urban diversity. China's ment, it is less likely to be responsive to policies, standards, and approaches the needs of water users. Accessing financing for urban water services will need to through capital markets, as opposed to be tailored to meet the economic and government equity contributions, requires environmental reality of different types utilities to demonstrate a greater degree of of cities. financial discipline, transparency, and ac- Confronting water scarcity and degrada- countability. Finally, governments are less tion. In spite of extensive efforts to im- able to politically manipulate utilities for prove water quality and ensure reliable their short-term interests, such as keeping water supplies, seasonal shortages and tariffs artificially low or using utility employ- polluted water supplies will continue ment as a source of patronage. to pose problems. Meeting investment demands. Financ- Limits to Moving Up the Financial Lad- ing these investments, and ensuring der. Although this study promotes the objec- investment efficiency, is a major chal- tive of urban water utilities moving up the lenge for the sector. financial sustainability ladder, there are ob- Improving utility financial sustainabil- vious constraints to the pace at which this ity. Relying more on user fees, and less can occur. The lack of social acceptance by on government transfers, will help users may limit the pace and extent of tariff utilities increase transparency and ac- increases, particularly if the utilities are countability, improve access to capital seen as being unaccountable and inefficient. markets, and operate at a higher level In China, capital markets are still not fully of efficiency. developed and politically directed lending can undermine capital market discipline. Notes Finally, municipal leaders may reap sig- 1. See Chapter 1, Endnote 1. 2. World Development Indicators (2006) nificant benefits from their control of the 3. The 2006 figures are based on a 2006 article from utility and be reluctant to allow the utility to the U.S. China Business Council website, "China's quickly move up the financial sustainability Economy" at http://www.uschina.org/info/chops/ ladder. 2006/economy.html. The 1990 data is from an ar- ticle "How to Make China Even Richer" in the Economist (March 23, 2006). 4. Chreod (2005) Chapter Summary 5. China Statistical Yearbook (2005) 6. Mai and Weimer (2005). The five key challenges facing China and its 7. ibid. urban water utilities in their efforts to im- 8. Xinhua News Agency. "Urban Income Gap Widens prove performance are: to Alarming Level." February 7, 2006. 36 4 2020 Sector Vision and Path Forward If China is successful in improving the per- Protecting public health by providing formance of its urban water utilities and safer water and improving raw water meeting future challenges, there will be sig- quality nificant environmental, public health, and Economic benefits by operating more economic benefits. This chapter presents a efficiently and reducing costs for a sector vision for the year 2020 whereby: given service level Promoting economic development and High-capacity cities provide high- equity quality water and wastewater services, and establish stormwater quality man- The level of economic development in a city agement programs. Utilities operate at will have a profound effect on the evolution of international standards and rely on its water utilities. Thus, the sector vision will capital markets and user fees, but need to take into account the different types wastewater utilities still receive of cities in China. The role of the government some municipal government capital is to design and implement policies and pro- contributions. grams that enable cities to improve the per- Low-capacity cities provide reliable formance of their urban water utilities as water supply and treat all wastewater quickly as possible--and in particular sup- to an intermediate level. Utilities are fi- port the smaller and poorer cities. By com- nancially sustainable and rely on user parison, Box 4.1 provides an example of fees for their revenues, but also receive the evolutionary track of Korea's wastewater municipal equity contributions and na- sector. tional concessionary finance to main- tain acceptable tariff levels. Sector Vision in 2020 The benefits of realizing this 2020 vision are significant and include: If China's urban water sector continues to evolve, improving service, increasing invest- Water quality improvements in China's ment, and meeting the challenges outlined heavily degraded rivers, lakes, and earlier, by 2020 the sector might look as coastal areas follows. 37 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 4.1 South Korea: Wastewater Treatment Coverage vs. Economic Development From 1980­2000, South Korea experienced a period of rapid urbanization and economic growth that bears some similarity to China's current development path. The figure below shows that South Korea's urban wastewater treatment coverage increased over time and with economic development. The figure expresses GDP per capita in terms of constant year 2000 U.S. dollars (adjusted for purchasing power parity to help take into account currency fluctuations and distortions). Several points are noteworthy: South Korea embarked on a national wastewater management program in the mid-1980s when adjusted GDP per capita was around $7,000. South Korea then took around 20 years to achieve wastewater treat- ment coverage of 80 percent. China embarked on its municipal wastewater program around 2000 when its adjusted GDP per capita was $4,000, and it may also take around 20 years to reach its national objectives. Category I cities in China had almost reached Korean levels of adjusted GDP per capita and wastewater treat- ment by 2005. Category III cities, however, have much lower adjusted GDP per capita ($3000), but are driven by national policy to start their wastewater management programs at a much lower level of economic devel- opment than Korea's cities or the Category I cities. One of the challenges facing the Chinese government is how to expedite the transition of cities to higher service levels within their economic development constraints and priorities. 1980 1985 1990 1995 2000 90 80 China's Category I cities 70 cent)r 60 (pe tio ra 50 ge China's Category III cities ra 40 cove 30 WWT20 10 0 5,000 7,000 9,000 13,000 15,000 19,000 GDP per capita, PPP (constant, 2000 int'l$) Source: World Development Indicators and South Korea Ministry of Environment Statistical Yearbook All of China's 661 cities and over 2,000 nerships with the private sector. Some cities large towns have urban water systems that have combined their water and wastewater protect public health, contribute to the im- utilities into single organizations, and ex- provement of water quality, and provide ef- panded service into the surrounding towns ficient stormwater drainage. Services are and counties. Municipal governments have provided through municipal utility compa- streamlined their governance system to en- nies, many of which have established part- sure that key decisions such as tariff levels, 38 2 0 2 0 S e c t o r V i s i o n a n d P a t h F o r w a r d budget transfers, investment approval, and cities have high-quality water supplies that financing strategy are taken in a coordinated meet international drinking water stan- manner. Special programs have been estab- dards. They have comprehensive waste- lished to ensure that water is affordable for water systems that collect and treat all of the the urban poor. Information on utilities is wastewater at the secondary level or higher. publicly and easily available and citizens Sanitary sewer overflows are minimized and and government use the information to stormwater pollution control programs are monitor their utilities. Table 4.1 provides a beingestablished. The utilities finance all of summary of how urban water utilities their investments through capital markets, would be performing in 2020. except for stormwater drainage, which is still paid for by the municipal government. The Vision for High-Capacity Cities utilities have adequate revenues from users to As discussed in Chapter 1, high-capacity meet their operational, debt service, and asset cities include all Category I cities (popula- renewal costs. In some cases, municipal gov- tion greater than 2 million and GDP per ernments have established "Water Boards" capita greater than $3,000) and the affluent that are responsible for tariff regulation; Category II medium-sized cities. These some of these boards even regulate other TABLE 4.1 Chinese Urban Water Utilities in 2020 High-Capacity Cities Service Levels Financing Sources Revenue Sources Water Supply · Full coverage, continuous supply, adequate · Capital markets · Water users with low pressure · Internal Cash income help · Low level of non-revenue water · Municipal equity for · Compliance with all 2007 drinking water standard drainage parameters Wastewater · Full separate/combined collection coverage · Water users with low · Wastewater treatment at Class 1B or income help 1A standards · Industries according to · Storm water quality management programs pollution loads. Low-Capacity Cities Water Supply · Full coverage, continuous supply, adequate · Capital markets · Water users with low pressure · Internal cash income help · Reduced level of non-revenue water · Municipal equity · Compliance with all primary 2007 drinking · National conces- water parameters sionary finance Wastewater · Full combined collection coverage · Water users with low · Low-cost wastewater treatment (Class 2 or 3) income help · Industries according to pollution loads. 39 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s municipal utilities such as gas, district heat- Benefits of Achieving ing, power distribution, etc. the Sector Vision Vision for Low-Capacity Cities As outlined in the 2020 sector vision, im- All Category III cities (population less than proving the performance of China's utilities 500,000 and GDP per capita less than $1,500), would generate the following benefits: less affluent medium-sized Category II cities, and all large towns are considered "low- Environmental Improvements capacity" cities. These cities and large towns It will take decades to restore China's heav- have made tremendous strides in improv- ily polluted waters, but there can be contin- ing water services. Water is provided with ued improvement over the next 15 years. adequate pressure throughout the day. Al- According to Figure 2.5, the total COD load though drinking from the tap will not result from domestic and industrial sources in in illness, most residents still purchase bot- 2004 was approximately 13 million tons. If tled water or boil the water first. All of the the sector vision is achieved, this pollution wastewater is collected and treated, al- can be reduced by at least 75 percent over though many cities have low-cost treatment the next decade, which will have a signifi- systems that do not fully meet the highest cant impact on water quality in China's national standards. The water utility is gen- aquifers, rivers, lakes, and coastal waters, erally self-financing--with occasional assis- and allow aquatic ecosystems to begin a tance from the municipal government, but process of renewal. Based on other coun- the wastewater sector receives significant tries' experience, receiving water quality will financial assistance from municipal gov- improve after controlling municipal and in- ernment funding and national concession- dustrial pollution, but sustaining a healthy ary finance programs. Revenues from users ecosystem is a more complex endeavor that are sufficient to cover all the costs of utili- ties, including asset renewal. involves managing urban and agricultural runoff, as well as toxic chemicals. Box 4.2 Effective Sector Governance provides an example from the Chesapeake The leadership, oversight, and financial as- Bay in the United States. Correcting decades sistance of the national and provincial govern- of pollution in China will take an equally ments have been crucial for realizing these long time, but controlling municipal and in- achievements. The national government has dustrial pollution is a critical step in a long made the provinces responsible for ensuring journey. municipal governments provide adequate water services. The national government has Improvements in Public Health also significantly increased the level of con- Water pollution endangers public health cessionary finance, and channels the funds through a variety of mechanisms, includ- through the provinces. Provincial govern- ing (a) polluting drinking water sources; ments have responded by establishing solid (b) contaminating seafood, particularly in the oversight programs that assist and monitor extensive coastal aquaculture zones as well municipal utilities, and ensured that funds as capture fisheries; and (c) transmitting from the national government are used ef- diseases through contact in rivers, lakes, ficiently to meet the nation's objectives. and coastal waters. Quantifying the linkage 40 2 0 2 0 S e c t o r V i s i o n a n d P a t h F o r w a r d BOX 4.2 Ecosystem Restoration in the Chesapeake Bay, United States The Chesapeake Bay is one of the ecological treasures of the United States but has been under severe stress over the last century due to pollution, overexploitation of fisheries, and shoreline development. The Chesapeake watershed contains 16 million people and covers parts of six states in the mid-Atlantic region. The first Chesapeake Bay Agreement was signed in 1983 and the Chesapeake Bay Program evolved as one of the nation's top ecosystem restoration priorities. Since 1983, all cities in the watershed have constructed wastewater treatment plants, some of which remove the two major nutrients, nitrogen and phosphorous. In spite of spending billions of dollars to control municipal water pollution, the Bay's ecosystem is still close to collapse due to urban and agricultural runoff, lack of nutrient removal in some wastewater treatment plants, shoreline development, and atmospheric deposition of nutrients. The Chesapeake Bay Foundation, a nongovernmental organization, produces annual "State of the Bay Reports" that grade overall ecosystem health based on a scale of 1 to 100. By this measure, the overall ecosystem status of the Chesapeake Bay has only improved marginally since the 1970s. The complexity, cost, time, and political commitment necessary to restore the Chesapeake Bay underscores that improving degraded water bodies (such as the Bohai Sea in China) can take many decades, and success is still uncertain. Specific Scores 100 Pristine Scale: 1 (worst) ­ 100 (best) 90 Pollution 80 Nitrogen = 14 Phosphorus = 29 70 Saved 70 Dissolved oxygen = 16 60 Water clarity = 15 Toxics = 27 50 Stable 50 Habitat 40 40 Improving 40 by 2010 Forest buffers = 56 29 Wetlands = 42 30 Dangerously Underwater grasses = 18 27 20 out of balance 23 Fisheries Rockfish = 71 10 Oysters = 4 0 Crabs = 38 1600 1940 1960 1980 2020 2050 2060 Shad = 10 1983 2003 20062010 Source: Chesapeake Bay Foundation (2006). between water pollution and public health Unreliable water supplies can also impact is complex and beyond the scope of this public health by hindering basic washing study, but is a major issue in China. The un- and sanitation. Although China does not ap- reliable and low quality water service in pear to have a serious water supply quality many cities is a public health concern. problem--except in cases of emergencies Although Chinese custom is to drink boiled such as industrial pollution accidents--the water, typically as tea, exposure to bio- impact of water services on public health is logically unsafe water and toxic contami- not well understood. Achieving the sector nants is a significant public health risk. vision will undoubtedly improve public 41 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s health by reducing water pollution and im- toward utilities that rely on user fees as a rev- proving the quality of water supplied by enue base. water utilities. Cost Reductions for a Promote Economic Development Given Level of Service All of the benefits identified above have di- The cost of providing urban water services is rect and indirect economic benefits that driven mainly by service standards and the ef- would help promote overall economic de- ficiency of the utility. The sector vision calls velopment in China. Improvements in pub- for service standards to be calibrated to the lic health would reduce medical costs and economic and financial capacity of the cities. improve worker productivity. Environmen- Once appropriate standards are set and imple- tal improvements would directly improve mented, then the economic cost of the some economic sectors such as aquaculture service is very much dependent on the effi- and fishery yields. Most fundamentally, im- ciency of the utility in making investment proving investment efficiency would allow decisions and operating its facilities. There scare capital to be employed in other, more is huge scope for reducing costs of urban productive uses. water services in China. Improving the effi- ciency of capital planning could conserva- Enhance Equity tively reduce overall investment requirements Inequality is a serious and growing issue in by one-quarter, or RMB 100 billion ($16 bil- China along three dimensions: (1) between lion), over the period 2006­10.1 rural and urban areas; (2) among cities, par- ticularly between the coast and other areas; Relieve Financial Burden on and (3) within cities. The key policies and Municipal Governments programs embedded in the sector vision will The sector vision calls for shifting more of the help overcome these inequalities. Appro- financing burden to the utility companies and priate wastewater discharge and water qual- away from municipal governments. It esti- ity standards will help reduce costs for mates that approximately 30 percent of all smaller and poorer cities. National conces- funding for water and wastewater infrastruc- sionary finance programs that target poorer ture over the last decade has been provided by cities and ensure efficient utilities will re- municipal governments.2 If this trend were to duce costs. Although user fees will need to hold in the future, municipal governments be increased, special programs will be for- would have to fund around RMB 130 billion mulated to protect the urban poor. ($16 billion) over the period 2007­10 alone. Municipal governments have limited financial resources, which are generally more effi- Strategic Directions ciently spent on providing public goods that and the Way Forward promote economic development and im- prove the quality of life, such as roads, parks, Achieving the sector vision presented in this education, and public safety. Achieving the chapter will require enhanced policies and sector vision would move the financing bur- programs to improve utility performance. den away from the municipal government and These enhancements are illustrated in Fig- 42 2 0 2 0 S e c t o r V i s i o n a n d P a t h F o r w a r d FIGURE 4.1 Strategic Directions for Key Policy Themes Policy Themes Strategic Directions Chapter 5: · Improve National Policy Coordination Goal Based Sector Governance · Shift from Physical Targets to Policy Goals · Set Appropriate Water Supply and Wastewater Standards · Enhance Provincial Government Oversight Chapter 6: · Streamline Municipal Utility Governance Municipal Utility Governance and Structure · Foster Efficient Utilities · Manage Wastewater as a Network Utility Business · Exploit Opportunities for Service Aggregation Chapter 7: · Achieve Utility Cost Recovery Financial Sustainability · Make More Use of Debt Financing · Improve National Concessionary Finance Programs Chapter 8: · Ensure Private Arrangement Fits Into Sector Reform Plan Private Participation · BOT Treatment Plants Fit Into Utility Network Business · Make More Use of Non-Investment Arrangements Chapter 9: · Utilize Integrated Water Planning Methodologies Capital Planning · Develop Asset Management Planning (AMP) · Strategically Plan and Manage Drainage Systems · Manage Sludge as Environmental and Financial Priority ure 4.1 and discussed in the following chap- the same planning inefficiencies hold for water ters. The themes are interrelated and must be supply and drainage networks due to the absence in balance for urban water utilities to per- of asset management planning, current sector in- vestment inefficiency is conservatively estimated form efficiently. at 25 percent. Between 2006­10, the estimated sector investment is RMB 430 billion; 25 per- Notes cent of this amount is RMB 107 billion. 1. Water treatment and wastewater treatment 2. See Table 7.7 for sector financing information. plants currently have around 30 to 50 percent ex- The 2006­10 sector investments are estimated at cess capacity, as shown in Chapter 2. Assuming RMB 430 billion. 43 5 Goal-Based Sector Governance China can get better performance from its tional Water and Sanitation Committee" to water utilities by improving the rules, poli- help resolve policy coordination problems. cies, and effectiveness of national and pro- Better coordination among national agen- vincial government organizations. Areas for cies would help to define and monitor policy improvement include: goals that go beyond the construction of in- frastructure. We suggest some higher level Increasing policy coordination and policy objectives and monitoring indicators, agency effectiveness at the national including: and provincial levels Moving from physical targets--such Restoring ecosystem functions in as pipelines and treatment plants--to rivers, lakes, and coastal waters policy goals, including ecosystem Protecting public health by providing restoration, safe drinking water, and safe drinking water efficient utilities Delivering more efficient provision of Setting realistic standards that are af- utility services fordable, enforceable, and that create incentives for utilities to advance the Setting and enforcing realistic standards that policy goals take into account the wide variety of eco- nomic development and environmental set- Figure 5.1 provides a schematic of the key tings is central to achieving policy objectives. themes in this chapter This chapter points out that China's water The chapter describes the national insti- supply and wastewater standards meet or ex- tutions and outlines the key laws, policies, ceed the highest international standards, and and directives governing urban water utili- proposes more explicit use of less stringent ties. Like most large countries, China has a "transitional standards" that allow low-ca- complex and decentralized system for the pacity cities to meet national standards over governance of urban water services; dif- time. The chapter concludes by recommend- ferent agencies at different levels of gov- ing that provincial governments improve pol- ernment have overlapping functions and icy coordination, increase funding, and build different perspectives. In the following sec- capacity for the provincial agencies that over- tion, we recommend establishing a "Na- see urban water utilities. 45 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s FIGURE 5.1 Overview of Chapter Five Sector Structure Laws, Policies, and Directives Appropriate water and wastewater standards Provincial government oversight Agency coordination Shift from physical targets to policy goals Overview of Sector (see Figure 5.2).1 National governments over- Governance Structure see provinces, and provincial governments oversee prefectures. The prefecture govern- China has four basic levels of administration: ment and its agencies have two functions: (1) national, provincial, prefecture, and county they directly govern the prefecture-level city FIGURE 5.2 Overview of Government Administration National level Provincial-level National ministries government Prefecture-level Provincial departments government District & county-level Prefecture bureaus government District & county Line accountability bureaus Functional supervision and reporting Source: ADB, National Guidelines on Wastewater Tariffs and Management (2003). 46 G o a l - B a s e d S e c t o r G o v e r n a n c e and provide public services; and (2) they Chapter 6 deals with municipal-level agen- oversee county-level governments within cies and urban water utilities. The term their jurisdiction. Each province, prefecture, "agency" is used in the general sense to mean and county has an urban area which serves a government organization, whether it is a as the center of administration, and is re- national ministry, state-level agency, provin- ferred to in this study as a "city" or a "munic- cial department, or municipal bureau in the ipality." The actual provision of municipal Chinese context. The description of key na- services is the responsibility of the city and is tional government agencies, and their func- discussed in Chapter 6. As shown in Figure tions with respect to the urban water sector, 5.2, each agency has two lines of reporting: is presented in Box 5.1. Important attributes (1) line accountability to the responsible gov- of Chinese government administration are ernment entity (prime minister, governor, or discussed below. mayor); and (2) functional supervision and reporting to the agency above it. Fiscal Decentralization This chapter focuses on national and The fiscal system in China is highly decen- provincial organizations and policies, while tralized. Municipal governments are respon- BOX 5.1 Agencies Involved in the Urban Water Sector Government. The State Council of the People's Republic of China is the highest body of state administration. The State Council is composed of the premier (also known as prime minister), vice-premiers (or Vice-Ministers), state councilors, ministers in charge of ministries and commissions, and the auditor-general. China's government is headed by the premier and his group of vice premiers, each of whom are responsible for specific ministries. The provincial government is headed by a governor, who also has a group of vice governors responsible for specific provincial departments. The national and provincial governments have the same set of agencies. All of the national agencies described below are of equal administrative rank, but NDRC and MOF have broad and influential mandates. National Development and Reform Commission (NDRC). NDRC provides overall economic development policy, utility price policies, and guides China in the transition to a market economy. NDRC also administers the "State Bond" program, which is the most important national concessionary finance program for the urban water sector. Ministry of Finance (MOF). MOF manages national government financial resources, budget allocations, and supervision of the country's financial system. Ministry of Construction (MOC). MOC is responsible for establishing policies, issuing directives, and super- vising the management of municipal public utilities, including urban water utilities. State Environmental Protection Agency (SEPA). SEPA is responsible for managing the environmental quality of air, land, and water. It oversees environmental impact assessments; develops and monitors water quality improvement plans; and proposes and enforces municipal and industrial wastewater discharge standards. Ministry of Water Resources (MWR). MWR is responsible for establishing policies, issuing directives and supervising the management of water resources, as well as overseeing the provision of flood control and irrigation services. It is in charge of integrated water resource management, including water use and (in conjunction with SEPA) water quality management. Ministry of Public Health (MOPH). MOPH is responsible for ensuring the safety of municipal water supply services in conjunction with MOC and SEPA. 47 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s sible for ensuring adequate funding for their formance evaluation and future promotion public utilities by setting adequate tariffs, potential would be based partly on success transferring funds from the municipal bud- in infrastructure construction. One of the get, and directing commercial bank loans to challenges for China is to develop a similar utility companies. Municipal agencies are incentive system for ensuring sustainable funded by their municipal governments and and efficient delivery of municipal services. often administer large budgets. Although Key Laws, Policies, and Directives they take policy guidance from provincial and national agencies, the municipal agency The legal and policy context for China's urban directors are heavily influenced by the mu- water sector has changed dramatically over nicipal governments' priorities and direc- the last decade, and the national government tives. Municipal construction agencies, for is actively promoting reforms to meet future example, often administer large budgets on challenges. The general legal framework at behalf of the municipal government. In con- the national level is in place, complemented trast, provincial and national government by policies issued by the State Council and di- agencies play primarily an advisory and rectives issued by national and provincial monitoring role in the provision of urban agencies. The key elements are as follows: public utility services. National and provin- cial agencies have the power to set policies, National Laws. The "Law on the Pre- guidelines, and standards for municipal util- vention and Control of Water Pollution" was ities, but their ability to actually enforce promulgated in 1984 and provides the legal these directives through legal or fiscal con- foundation for water pollution control. The trols is limited. law was amended in 1996 to include (a) a re- quirement for cities to provide centralized Developing Legal System treatment for both municipal and industrial China's legal system is developing along with wastewater; and (b) improved industrial its market economy, but the political culture water pollution control, including adopting does not lend itself well to strict legalistic clean technologies and controlling the mass enforcement of standards and regulations. of pollutants discharged (as opposed to only China does have, however, a unified political effluent concentrations). system led by the Communist Party, and the The 1988 Water Resource Law was funda- evaluation of government officials is based mentally amended in 2002 to focus on com- primarily on their accomplishments and prehensive water resource management. compliance with government policies. For The law stresses the importance of the "user- example, China established a national policy pays" principle, and the need to conserve of urban wastewater treatment through a water by promoting water-saving technol- State Council Directive in 2000.2 This helped ogies and controlling demand. The 2002 to mobilize cities throughout China to start amendments call for integrating water qual- the construction of wastewater treatment ity considerations into water resource man- plants at an exceptionally rapid pace. agement, and empowers the Ministry of Mayors and their municipal agencies were Water Resources and its line agencies to play motivated by the urgency of the wastewater a more proactive role in water quality man- problem, but they also knew that their per- agement alongside SEPA. 48 G o a l - B a s e d S e c t o r G o v e r n a n c e State Council Policies. As noted in Box 5.1, Establishment of Wastewater Com- the State Council is the highest administra- panies. In 1999 NDRC,3 MOC, and tive body in China. Policy statements by the SEPA issued a notice to "Improve State Council represent official government Wastewater Collection Capability policy and set national priorities and objec- and Establish Sound Collection and tives. The key policies related to water are: Treatment Practices" (Notice 1992). The notice called on cities to establish "Circular on Strengthening Urban Water wastewater companies, collect waste- Supply, Water Saving, and Water Pollu- water fees as part of the water supply tion Prevention and Control (2000)." bill, and start constructing wastewater This historic circular has set the treatment plants. agenda for the period 2000­10 and Market Reform Policies. The "Circular calls for China to (a) improve water on Accelerating the Marketization of supply planning and promote water Urban Utilities" (MOC, December conservation; (b) enforce the existing 2002) encourages domestic and foreign "Law on Water Pollution Prevention investment in urban public utilities and Control" and aim to achieve at through a variety of ownership ar- least a 60 percent urban wastewater rangements such as sole ownership, treatment rate by 2010; (c) promote joint venture, or partnerships. The market-oriented tariff reforms to help "Circular on Accelerating the Com- attract private capital; and (d) improve mercialization of Urban Wastewater sector governance and regulation. and Solid Waste Treatment" (MOC, "Decision on Reforming the Investment NDRC, and SEPA, September 2002) System (2004)." This decision allows provides specific references to waste- and promotes nongovernment entities water treatment plants and promotes to invest in new areas of the economy, arrangements such as build-operate- including municipal public utilities. It transfer (BOT), joint ventures with also provides more flexibility and en- municipal utilities, and transfer-own- courages enterprises to raise capital transfer (TOT). through debt and equity markets. It Regulatory Reform Policies. With the also relaxes the government's review deepening of market reforms in the process for new investments. sector, the government recognized the need to strengthen monitoring, regula- Ministerial Directives. The ministries pro- tion, and oversight of the sector. In vide directives that advise and guide lower 2004, the MOC issued Decree 126 re- level agencies on how to implement national garding "Management Measures for level laws and policies. Although the direc- Concession of Public Utilities," which tives are not legally binding in a strict sense, laid the basic ground rules for compet- the lower-level agencies are expected to itive and transparent awards of public study, adapt, and apply the directives to spe- utility concessions. This was followed cific situations. Some of the key directives, by another MOC Opinion in 2005 on which indicate how the sector is evolving, "Strengthening Monitoring on Munic- are presented below: ipal Public Utilities," which empha- 49 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s sized the supervisory role of the mu- FIGURE 5.3 Overlapping Functions nicipal and provincial governments, among Agencies the need to improve laws and regula- tions, and capacity building for utility Water supply Wastewater regulation. The opinion also noted the quality standards standards need to moderate the reform pace in order to balance efficiency and equity. MoPH MOC SEPA Improving National Policy Coordination MWR Urban water The provision of urban water services in- Water quality resource management volves many different issues that, similar to management other countries, are the domain of different government agencies in China. Coordination involves ensuring the policies, plans, and ance. As discussed in the next section, the regulations are consistent, and managing application of stringent wastewater dis- input from the various government agencies charge standards puts significant pressure involved in urban water services. This study on smaller and low-income cities, which recommends that coordination be improved may actually undermine efforts to improve in China, and suggests the establishment of wastewater management. Reconciling the a "National Water and Sanitation Com- need for environmental protection with en- mittee" under the leadership of a vice prime suring the performance and sustainability of minister. utilities is critically needed. Need for Improved Coordination SEPA-MWR Coordination on Water Qual- Differences of opinion and perspective ity Management. The 2002 Water Law pro- among different sector agencies--and other vided MWR with a mandate for integrated stakeholder groups--are natural and neces- water resources management, including sary for good governance in the urban water water quality. SEPA has historically been re- sector. The following paragraphs review sponsible for ambient water quality stan- some of the key tensions that currently exist dards, water quality monitoring, and devel- among national agencies, which are shown oping water quality improvement plans. schematically in Figure 5.3. SEPA still has the sole responsibility for in- dustrial pollution control and monitoring MOC-SEPA Coordination on Wastewater and enforcing wastewater discharge stan- Standards. SEPA is responsible for setting dards. Both agencies have legitimate and municipal and industrial effluent standards. important roles to play in water quality man- As an environmental agency, its perspective agement. Water resources cannot be man- is focused on improving environmental qual- aged without considering water quality, and ity. MOC is responsible for supervising water quality management cannot take place urban water utilities; it places a high priority without considering pollution control. Find- on utility financial and operational perform- ing ways in which MWR, SEPA, and MOC 50 G o a l - B a s e d S e c t o r G o v e r n a n c e can work together in planning the best way vided to cities for infrastructure develop- to protect China's water environment will be ment, including water infrastructure. The key to meeting policy objectives. state bond program is administered by NDRC. MOC, SEPA, and MWR and their af- MWR-MOC Coordination on Urban Water filiated agencies at the provincial level also Resources Management.The 2002 Water Law have legitimate interests in the financing of also prompted the establishment of "Urban urban water infrastructure. Combining the Water Affairs Bureaus," which are responsi- sectoral expertise of the line agencies with ble for supervising all water-related activities NDRC's administration of the state bond within a city, including water supply, waste- program is necessary to ensure that con- water, flood control, and drainage. Some cessionary finance is effective in promoting large cities such as Beijing, Shanghai, and policy objectives. Shenzhen have created such bureaus under the leadership of the local water resources Improving Coordination Mechanisms bureau. As shown in Figure 5.2, agencies typ- National-level policies are formulated by the ically have one line of functional reporting State Council. Since the Council includes and supervision to a higher level agency. members from all key ministries, each Water affairs bureaus need to report to both agency involved in the urban water sector is MWR- and MOC-affiliated agencies, with the provided an opportunity to provide input on most direct line to the MWR. Creating water national policies. The administrative system affairs bureaus allows water to be managed in makes it challenging, however, for different an integrated manner, but there still need to agencies to work together to craft integrated be strong linkages with the MOC on issues policies for consideration by the State Coun- related to utility management. cil. Moreover, each agency is allowed to issue directives within the scope of its per- MOC-MOPH Coordination on Water ceived mandate without necessarily inform- Supply Quality Standards. MOPH proposed ing or obtaining the approval of other related new draft water quality standards in 2001, agencies. We identified three broad options and MOC issued draft water quality stan- for improving coordination within the na- dards in 2005. As discussed in the next sec- tional government: tion, the National Standards Commission and MOPH have prepared draft standards Establish a New Agency. A new agency that are expected to be approved in 2007.4 could be established with most of the im- Monitoring drinking water quality falls un- portant functions related to urban water der the jurisdiction of both sector agencies. services such as setting and monitoring Coordination between MOC and MOPH in wastewater and water supply standards, set- setting, monitoring, and enforcing drinking ting ambient water quality objectives, ad- water quality standards is important for the ministering national concessionary finance sector. programs, and providing technical leader- ship. In the 1970s, when efforts to improve Coordination with NDRC on use of State the environment in the United States were Bond Funds. As discussed in Chapter 7, state stalling, the government established the bonds are grants or low-interest loans pro- Environmental Protection Agency, which 51 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s became the leading national agency for specialized ad hoc working groups, and water and wastewater. Based on feedback would have the general functions of policy during study consultations, however, creat- coordination and monitoring of sector per- ing a new agency in China does not appear formance and development. Of particular practical due to efforts to control the size of importance would the compilation, analysis, the national government and the complexity and synthesis of information across different of realigning agency responsibilities. sector agencies, ideally resulting in annual reports on water supply and sanitation. Reallocate Responsibility Among Exist- ing Government Agencies. There are various scenarios for changing the mandates of the Shifting from Physical key agencies to consolidate more functions Targets to Policy Goals in fewer agencies. Although this would po- tentially reduce the need for coordination, it China's policy environment in the sector is may be politically difficult as agencies are evolving quickly, but is still heavily focused reluctant to cede their authority. Vesting an on the rapid construction of infrastructure. agency with new authority without explicitly Although increases in the stock of infrastruc- redefining the role of the agency that was ture are required, the physical works are formerly responsible can also create confu- only a tool to achieve broader policy goals. sion. This study does not recommend any Prior to the 1980s, China had a planned specific reallocation of responsibilities. If economy where governments and state- improved policy coordination cannot be owned enterprises were provided with phys- achieved in the future, then consideration ical production targets and their perform- should be given to reallocating functions to ance was evaluated based on production reduce the number of agencies involved in quotas; economic efficiency was not neces- the sector. sarily a priority. The legacy of the planned economy still has Establish a National Water and San- a profound impact in today's China. National, itation Committee. This study recommends provincial, and municipal governments often that the State Council establish a National focus on constructing infrastructure rather Water and Sanitation Committee under a than efficiently providing good service to deputy prime minister. The main role of the meet China's broader policy goals. For exam- committee would be to provide coordination ple, MOC's annual yearbook records informa- among the sector agencies. The committee tion related to physical infrastructure (e.g. would not be a new agency, but rather a for- kilometers of pipelines or treatment plant ca- mal committee composed of representatives pacity) and sources of financing, but does not from relevant government agencies, as well provide indicators on utility financial per- as other stakeholder groups, with one min- formance, compliance with standards, or op- istry appointed as the secretariat. Its man- erational efficiency. Provincial governments date would be limited to water supply and apply pressure on cities to construct waste- sanitation (including wastewater) in both water treatment plants, but there is only lim- rural and urban areas. The committee could ited effort to ensure comprehensive collection meet on a monthly or quarterly basis, with and adequate wastewater treatment. 52 G o a l - B a s e d S e c t o r G o v e r n a n c e These deficiencies are recognized within TABLE 5.1 Examples of Broad Policy Goals the government. Developing the necessary institutional arrangements to shift the focus Policy Goal Parameter from construction to efficiently setting and meeting policy goals, however, is a complex Restoring Ecosystems in Rivers, · Meeting time-bound water quality endeavor. A useful starting point is a clearer Lakes, and Coastal Areas and ecosystem improvement targets articulation of the policy goals and the spe- Protecting Public Health · Improvements in water safety as cific parameters by which these goals would by Providing Safe Water demonstrated in holistic be monitored. Table 5.1 provides some ex- assessments amples for consideration. Efficiently Providing · Continuous improvements in key Utility Services utility operational and financial parameters Strengthening Provincial Government Oversight Provincial government agencies have impor- historically played an advisory and oversight tant roles to play in overseeing municipal role to the municipalities, maintaining con- utilities, including: trol through the selection and approval of municipal leaders. This approach was for- Approval of municipal tariff mulated after the founding of the People's adjustments Republic of China in 1949 to enhance central Approving large investment projects government authority in a large and region- Overseeing compliance with water ally diverse country, while at the same time supply and wastewater standards allowing municipal governments to cre- Helping to channel concessionary fi- atively respond to local issues. The Chinese nance through the state bond program fiscal and administrative system is relatively decentralized, with most of the tax revenues Improving the capacity and funding of pro- collected and spent at the local government vincial agencies to better execute their exist- level. The central government provides over- ing mandates is important to achieving all policy direction in the infrastructure sec- China's objectives. Similar to the national tor, but allows considerable discretion to government, it is also important to improve local governments in the pace and extent in coordination among provincial agencies. We which they implement general policies. suggest new institutional arrangements at The prefecture government is under the the provincial level, including either: supervision of the provincial government, but Creating a "Provincial Water and also administers its own prefecture-level city Sanitation Committee" to improve and oversees counties within its jurisdiction. coordination Each county-level city or county-town (i.e. the Establishing a "Provincial Water capital of the county) reports to the mayor of Office" to consolidate functions in one the prefecture--who is also simultaneously agency the mayor of the prefecture-level city. In turn, the mayor of the prefecture reports to the Role of the Provincial and Prefecture Gov- provincial governor. There are 287 prefec- ernments. The provincial government has ture-level cities,5 374 county-level cities, and 53 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 1,636 county capital towns. Hence, a signifi- level is complicated by the large number of cant part of the oversight activity actually prefectures (287) and the limited amount of takes place at the prefecture level. utility regulatory and oversight expertise in China. In addition, the 287 prefecture-level Need for Provincial-Level Oversight. Cities cities cannot provide oversight of their own and their utilities need to be supervised by a utilities, which defaults to the provinces. The higher level of government to ensure compli- provinces in China are equivalent in size and ance with national and provincial policies population to many countries around the and standards. The provincial government is world. In most countries, the national gov- generally the best place for comprehensive ernment agencies play the key regulatory utility oversight for the following reasons: and oversight roles for the urban water sec- tor. The MOC has also emphasized that the Provinces are the Right Size. Given China's provincial construction agencies should "be size, comprehensive utility oversight at the responsible for guiding and supervising national level is impossible. Conversely, municipal public utility monitoring within municipal utility oversight at the prefecture their jurisdictional regions."6 Box 5.2 pro- BOX 5.2 Role of National Government Agencies in Colombia In Colombia, urban water services are provided by more than 1,700 decentralized and diverse municipal utili- ties. Although the majority of these water utilities are government-owned, private sector participation has been introduced in 14 of the largest cities and several medium and small municipalities. Monitoring and controlling such a large number of suppliers in the water sector calls for rigorous organization. Colombia has opted for a largely centralized approach, which is briefly summarized below: Water standards: The Ministry of Social Protection (MPS) sets potable water standards on a national basis National wastewater effluent standards are set by the Ministry of Environment, Housing and Urban Development (MAVDT) Tariffs and service standards: Service standards such as coverage, continuity, and customer services are defined by the local govern- ment or by providers themselves Since 1991, the Water and Sanitation Regulatory Commission (CRA) has been responsible for developing tariff rules, efficiency indicators, and coordinating the service quality standards. Monitoring and Enforcing: The Domestic Utility Services Superintendency (SSPD) is responsible for monitoring and enforcing com- pliance with water, tariff, and service standards. Alongside its role of monitoring and enforcing compliance, the SSPD uses benchmarking to assess the perform- ance of water utilities in Colombia. For example, reports on water quality are released annually by the SSPD and made available to the general public. This benchmarking information assists policy makers when designing reg- ulation and national standards. The benchmarking is also used by the general population, visitors, and non- governmental organizations to understand and improve water services in Colombia. Source: Prepared by Castalia for this study. 54 G o a l - B a s e d S e c t o r G o v e r n a n c e vides information on the role of national Bureau; (b) approving large investment pro- agencies in Colombia, which is equivalent in grams through the DRC; (c) reviewing and ap- population to many provinces in China. proving water and wastewater tariffs through the Price Bureau or DRC; and (d) formulating Conflicts of Interest for Municipal Agen- regional water pollution control and water re- cies. As shown in Figure 5.2, municipal agen- source management plans through the Water cies report to both the municipal govern- Resource Bureau and/or EPB. Hence, the pro- ment and their parent agency at the next vincial government already has significant highest level of government. For example, in oversight responsibilities for prefecture-level a prefecture-level city, the municipal envi- cities. The provincial government also moni- ronment bureau reports to the mayor and tors the prefecture government's oversight of the provincial environment bureau. In the county-level cities and towns. event of environmental noncompliance of a wastewater treatment plant, the municipal Constraints on Provincial Agencies. Pro- environment bureau is often hesitant to in- vincial government agencies already have form the provincial environment bureau, as some important oversight responsibilities, it may negatively affect the position of the as summarized in Table 5.2, but the agencies mayor or their colleagues in the construc- face constraints in exercising their man- tion bureau. These conflicting roles often in- dates, including: hibit the flow of information upwards. Since provincial agencies do not report to munici- Weak Incentive and Enforcement Mecha- pal governments, they should tend to be nisms. In many countries, legal and financial more objective in their monitoring and en- penalties are often used by higher levels forcement activities. of government to drive the behavior of The oversight responsibility of the pro- municipalities. China, however, has a non- vincial governments includes (a) municipal legalistic oversight system that evaluates mu- utility supervision through the Construction nicipal leaders based on their overall compli- TABLE 5.2 General Supervision Responsibilities of Provincial Agencies Provincial Agency General Supervision Responsibility Provincial Construction Department Supervise municipal utilities Provincial DRC Approve large investment projects Provincial Price Department Approve municipal tariff adjustments Provincial EPB Approve environmental impact assessments Monitor and enforce discharge standards Develop water quality improvement plants Provincial Water Resources Department Manage regional water resource infrastructure Allocate water resources within province Provincial Public Health Department Monitor and enforce drinking water quality 55 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s ance with national policies and achievement active and effective role. The appropri- of planning targets. Threatening a municipal ate level of funding would vary based government withfinancial or legal sanctions on the particular province and agency, will typically only occur in the most egre- but would be a small fraction of the gious of situations. One of the challenges for money that is invested in urban water China is to develop an incentive system for infrastructure. Funding could come ensuring sustainable and efficient delivery of from a combination of general provin- municipal services. Evaluating the opera- cial budget and/or charges on munici- tional and financial performance of utilities pal utilities. National agencies could is much more complex than simply verifying take a lead role in helping to develop infrastructure construction. Programs for programs to build the capacity of their evaluating and benchmarking urban water counterpart provincial agencies. utility performance are generally weak at all Establish Provincial Utility Bench- levels of government in China. marking Programs. Public utility Low Supervision Budgets. Many of the key management and regulation at both provincial agencies, including construction the municipal and provincial levels is and environmental agencies, do not have hindered by the absence of systematic large budgets and have limited staff and ex- and reliable data to evaluate utility per- pertise. Their municipal-level counterparts formance. Over the past decade, inter- in the large cities, who implement projects national experience in the use of water or actually monitor and enforce regulations, and wastewater utility benchmarking generally have access to more on-budget and has grown and there are now accepted off-budget financial resources. For example, methodologies for evaluating utility fi- municipal construction bureaus have large nancial and operational performance capital projects and are actively involved in (see Box 5.3). Provincial government real estate development. Provincial authori- agencies could take the lead in ensur- ties, in contrast, rely primarily on a limited ing comprehensive utility benchmark- provincial government budget to undertake ing programs. In most cases, it would their activities. The shortage of funds can in- probably be more effective to subcon- hibit comprehensive regulatory oversight, tract or enter into partnerships with staff development, and attracting top-level professional organizations to actually professionals. undertake the benchmarking. Improve Oversight of Municipal Tariff Strengthening Provincial Government Regulation. The provincial price bu- Oversight Capacity. Provincial governments, reau, often under the provincial DRC, with the support and encouragement of the typically has the authority to review national government, could take the follow- and endorse tariff adjustments ap- ing steps: proved by municipal governments. The review process, however, is often per- Increase Agency Funding and Capacity. functory and undertaken with the view In most cases, provincial agencies of the impact oninflation and how the would need to bolster capacity and re- tariff compares with other cities. The ceive funding before assuming a more review process can be expanded to 56 G o a l - B a s e d S e c t o r G o v e r n a n c e BOX 5.3 Water Utility Performance Benchmarking Water sector performance assessment and benchmarking helps a regulator to quantify the relative performance of water utilities. Using well-established empirical procedures, the regulator can measure performance, identify performance gaps, suggest actions, and provide resources to overcome such gaps. The performance data col- lection is needed not only for the current operations, but also for documenting past performance, establishing a baseline for productivity improvements, and making comparisons across water and wastewater utilities. Rankings on the basis of performance indicators can inform (a) utility managers of their performance vs. other utilities; (b) policy makers; (c) fund investment providers (multilateral organizations and private investors); and (d) customers regarding the cost-effectiveness of different water utilities. The International Benchmarking Network for Water and Sanitation (IBNET) and other similar performance assessment tools are used by many national, regional, and municipal water regulators around the world. Source: Prepared by Alexander Danilenko (2006), World Bank. evaluate the pro-cess and analytical how best to structure and monitor the rigor by which municipalities set tar- contract. The authority of the provin- iffs, and ensure that the best practice cial government regarding municipal for economic regulation is utilized. arrangements with private companies Proactively Manage National Conces- is ambiguous. To protect the interest of sionary Finance Programs. Provincial the public and the municipality, how- governments could develop mecha- ever, we suggest that provincial gov- nisms tosupervise and guide national ernment agencies, either through concessionary finance programs the DRC or construction department, within their provinces. As discussed in establish clear procedures and rules Chapter 7, the NDRC-administered for provincial review of public-private state bond program and China Devel- partnerships. opment Bank (CDB) provide conces- Improve Provincial Policy Coordination. sionary finance to the water and waste- Similar to the national government, water sectors. These two programs provinces should establish a "Provin- should be significantly promoted or cial Water and Sanitation Committee" scaled up. However, provincial author- composed of relevant government ities should develop mechanisms to agencies and headed by a vice gover- ensure that the funding is channeled nor. We suggest that some provinces to municipalities that can effectively establish a "Provincial Water Office," utilize the funds and meet well-defined which would take over functions re- performance criteria. lated to utility regulation and oversight Oversee Private Sector Participation that are currently scattered across dif- (PSP). As discussed in Chapter 8, ferent agencies. The office would have many cities and their municipalities in the mandate and funding to improve China are struggling with the decision municipal and provincial regulation by whether to enter into a partnership developing enhanced procedures and with a private water company, and regulatory tools, and leading reforms 57 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s in the sector. The office could also sup- water safety assessments and water- port large-scale training and capacity- shed management building programs related to utility management and regulation at the Municipal Wastewater municipal level. Discharge Standards Existing Standards. China has well- developed environmental quality standards Setting Appropriate for surface waters, as shown in Annex 2. Water and Both SEPA and MWR have extensively sur- Wastewater Standards veyed the receiving water bodies and classi- fied the quality of different river stretches Standards are a key tool in converting policy (see Figure 3.3). The wastewater discharge goals into action. China should aim to have standards for industries and municipal standards that are: wastewater treatment plants are also pro- vided in Annex 2. Table 5.3 provides a sum- Affordable to ensue the service is finan- mary of the standards. cially sustainable The provincial EPB is responsible for Enforceable to allow regulators to com- determining which standard to apply for a pel compliance with unambiguous municipal wastewater treatment plant. Sec- requirements ondary treatment (i.e. involving biological Efficient to meet policy objectives in a treatment) is a minimum requirement for all least-cost manner cities. Class 1A standards are required for plants discharging into sensitive receiving China's water supply and wastewater dis- water bodies. Meeting Class 1A requires ad- charge standards do not fully meet these cri- ditional treatment to reduce nutrients and teria. Every society aspires to have a perfect suspended solids. Box 5.4 discusses a recent environment with high public health stan- SEPA guidance note that requires all cities in dards and unpolluted water resources. key water resource protection areas to meet However, unrealistic standards and nonen- Class 1A standards. forceable regulations can be harmful if they create an attitude of indifference among util- Analysis of Existing Standards. Three ities, industries, and regulators. Standards issues--affordability, enforceability, and ef- and regulations should be tailored to match ficiency--affect the application of waste- the environmental requirements, as well as water standards. the level of economic and administrative ca- pacity. This section proposes the following TABLE 5.3 Summary of China's Municipal approaches to standards: Wastewater Discharge Standards Use transitional standards for low ca- Class 1A Class 1B Class 2 pacity cities to allow them to improve BOD (mg/l) 10 20 30 service as they develop economically SS (mg/l) 10 20 30 Improve water safety and ambient Total-P (mg/l) 0.5 1.0 3.0 water quality through more compre- Total-N (mg/l) 15 20 30 (NH-3N only) hensive approaches, such as holistic 58 G o a l - B a s e d S e c t o r G o v e r n a n c e BOX 5.4 Application of Discharge Standards in China In 2005 SEPA issued Circular No. 110, which provides guidance on the application of discharge standards for municipal wastewater treatment plants. Key points include: 1. All plants that discharge into important river basins and enclosed water bodies such as lakes or the Bohai Sea shall be required to meet Class 1A standards. Important river basins include, among others, the Hai, Huai, Huang, and Liao basins; these basins include most of the cities in North China. 2. Plants that discharge into Class III water bodies or Class II sea areas are required to meet Class 1B standards. (See Annex 2 for information on water quality classes). 3. Other areas may meet Class 2 standards, and gradually increase control requirements based on local conditions. An analysis done by the World Bank for a 100,000 m3/d wastewater treatment plant in a poor city in the Liao River Basin indicated that a shift from Class 1B to Class 1A standards would result in a 15 percent increase in total life cycle costs. The reduction in BOD is insignificant, but the percentage of nitrogen and phosphorus removed would increased from around 75 percent to 90 percent. Nutrient pollution from agricultural runoff in the Liao River Basin is a major problem yet still largely uncontrolled. Reducing pollution from agricultural sources would potentially be much more cost-effective than upgrading to Class 1A standards. Moreover, like many cities in China, this particular city has no existing wastewater treatment plant, but is expected to immediately construct a complex and expensive facility and achieve discharge standards that most cities in Europe and North America are not required to meet. Source: Adapted from SEPA, "Discharge standards for municipal wastewater treatment plants" Circular 110 (2006). Affordability. Many of the smaller and treatment. They are not directly comparable lower income cities (including larger towns) to China due to the difference in purchasing may not be able to afford secondary waste- power parity. Box 5.5 shows diminishing water treatment, let alone Class 1A stan- marginal returns in terms of pollution re- dards requiring tertiary treatment. In addi- duction as the level of treatment increases. tion to the investment costs, sustaining Enforceability. The procedures for deter- operations is a major challenge for these mining which wastewater standard to apply cities. The larger and richer cities can afford in China are relatively clear, and summarized to, and should be required to, comply with in Box 5.4. All cities must meet a minimum of the national discharge standards; it may take Class 2 discharge standards; Class 1A or Class the low-capacity cities in China a decade or 1B standards may be required based on the more to achieve comprehensive wastewater well-defined surface water quality class of the management. Two ways to help overcome fi- receiving water body (see Annex 2). Each mu- nancial constraints for low-capacity cities nicipality thus has well-defined obligations are(1) provide the cities with subsidies, and that it must fulfill. This is similar to the United (2) use transitional standards to lower costs. States or European Union, where all cities Box 5.5 shows the difference in costs be- must have a minimum of secondary treat- tween different levels of wastewater treat- ment or higher based on the receiving water ment in the United States and Europe. The body. However, the level of economic devel- costs in Box 5.5 represent the full capital and opment in the U.S. and E.U. is much higher operating costs of wastewater collection and than in China, and many cities have received 59 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 5.5 Full Cost Wastewater Pricing For Different Treatment Levels in U.S. and Europe (Includes collection and treatment costs) Total unit cost (US$ m­3) 2.5 Tertiary Treatment 2.0 Secondary Treatment 1.5 Enhanced Primary 1.0 Primary Treatment Treatment 0.5 0.0 % Remove BOD 30 50-70 90-95 >95 TSS 60 80-90 90-95 >95 TN 15 25 40 >80 TP 15 75 90 >90 Source: UNEP, Water Pollution Control-A Guide to Water Quality Management Principles (1997). significant subsidies from national govern- treatment, but is surrounded by smaller cities ments to help construct wastewater facilities. and towns that may not be able to afford High levels of wastewater treatment may not expensive plants or construct drainage net- be affordable for many low-capacity cities. works. Second, little attention is paid to con- This complicates enforcement; environmen- trolling nonpoint sources of water pollution. tal regulators may be hesitant to issue sanc- These are major sources of water pollution tions or compel cities to construct facilities and include agricultural runoff loaded with that are clearly beyond their technical and fertilizers and pesticides; livestock opera- financial capacity to sustain. tions, in particular pig farms; urban runoff; Efficiency. Two issues undermine the effi- and industries outside of municipal bound- ciency of the existing water pollution control aries. Focusing on obtaining uniformly high regime in China. First, some cities invest in levels of wastewater treatment in cities may high levels of wastewater treatment that are be administratively easy, but it is not eco- expensive to construct and operate, while nomically efficient to ignore other sources of other lower income and smaller cities post- pollution. Larger pollution reductions for pone construction of treatment plants or do the same cost could potentially be achieved not fully operate them. As shown in Box 5.5, by controlling nonpoint sources. there are decreasing returns in terms of pollution reduction per unit investment as New Approaches for Wastewater Stan- higher levels of wastewater treatment are dards. Some new approaches for balancing utilized. There are many cases in China affordability, enforceability, and efficiency where a large city has expensive tertiary are suggested below: 60 G o a l - B a s e d S e c t o r G o v e r n a n c e Use Transitional Standards. Cities and Drinking Water Quality Standards towns that are not able to afford Class The raw water sources for many of China's 1 or 2 discharge standards could start cities are heavily polluted. Much of the water by ensuring full collection of waste- treatment technology is rudimentary, and water and low-cost treatment. As the there are deficiencies with many of the water level of economic development im- supply distribution systems. Although Chi- proved, these cities could upgrade nese urban residents are fortunate that the their treatment facilities and transition reliability and coverage rate of water supply into compliance with national stan- is quite high, the quality of the water is dards. There are a wide variety of low- sometimes questionable. As noted in Chap- cost treatment methods that come ter 2, there is limited public information close to meeting Class 2 standards and available to judge the quality of the tap water could be utilized on an interim basis. in Chinese cities. The majority of urban This study suggests that provincial gov- residents--even in the Category 1 cities-- ernment agencies work with cities to do not drink water directly. Rather, the develop appropriate wastewater treat- water is used for cooking, cleaning, and ment approaches on a case-by-case washing. If it is used for drinking, it is almost basis to treat 100 percent of the city's always first boiled. Drinking boiled water is wastewater as soon as possible at an both a cultural tradition and a response to affordable level. The result would be the uncertain quality of the water from the an overall reduction in urban water tap. pollution and lower costs. Manage Water Quality on a Watershed/ Drinking Water Standards. Standards for River Basin Basis. Environmental drinking water (GB5749-85) were first prom- protection bureaus in most provinces ulgated in 1985. The 1985 standard covered 35 conventional indicators, including: have prepared master plans for water pollution control for important basins. Microbiological, in particular coliform For example, with the financial assis- bacteria tance of the European Union, a com- Toxicological, such as heavy metals prehensive plan was prepared for the like arsenic and chromium Liao River Basin in Liaoning Province. General chemical parameters, such as What is lacking, however, are man- iron and hardness agement systems that include admin- Physical parameters, such as color, istrative and financial mechanisms to turbidity, and taste ensure that priority pollution activities within a basin are implemented. Mu- The 1985 standard focused primarily on en- nicipal governments that can afford to, suring that drinking water quality does not or have progressive political leader- produce immediate and obvious public ship, will respond to these plans. How- health problems, particularly gastrointesti- ever, many important pollution control nal diseases. The 1985 standards were equiv- activities are underfunded and thus alent to U.S. or E.U. standards that were in not fully implemented. effect during that period. Since 1985, both 61 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s the U.S. and E.U. have revised their drinking sector. The standard is flexible in that it dis- water standards to take into account other tinguishes between higher and lower capac- contaminants, many of which increase the ity cities, and provides discretion to the risk of cancer. New emphasis has been provincial government regarding how to placed on synthetic organic compounds, apply the standard (42 or 106 parameters). such as pesticides and solvents. New biolog- The standard also requires all cities to pro- ical pathogens have also been identified as vide a reasonable minimum quality of water priorities, such as giardia and cryptosporid- by complying with all regular parameters, ium. Both MOC and MOPH have responded which addresses the core issues. Finally, to this trend and proposed new standards. In the standard uses a transitional approach, 2001, the MOPH issued a proposed new which allows a city to gradually upgrade standard with 96 contaminants. MOC fol- their facilities by 2012. Although the new lowed in 2005 with a new recommended standards are an innovative policy tool, the standard that includes 101 contaminants.7 following analysis identifies important The agency ultimately responsible for set- issues that will still need to be taken into ting national standards in China is the account. "Standardization Administration," which in conjunction with the MOPF issued a new Affordability. The China Water Works drinking water standard (GB5749-2006) that Association estimates that in order to takes effect on July 1, 2007.8 The new stan- upgrade treatment facilities to meet the dard increases the total number of con- proposed new standards for approximately trolled items from 35 to 106. The standard 20 percent of water supply systems (100 mil- contains 42 items that are classified as "reg- lion m3/year), at least 50 billion RMB ular parameters;" applies to the whole coun- ($6.25 billion) will be required.9 New sophis- try; and represents minor upgrades from the ticated treatment technology will be needed, 1985 standard (GB5749-85). The remaining including activated carbon filtration and 64 "nonregular parameters" will only apply ozone disinfection. Some large cities such to cities that meet certain criteria. The non- as Chongqing, Guangzhou, Shanghai, and regular parameters include less common mi- Hangzhou have already started to upgrade crobiological and toxicological compounds, their treatment plants. The cost of improving particularly pesticides and synthetic organic distribution systems or protecting and up- compounds. As of early 2007, the criteria for grading raw water sources is not included in cities that must meet all requirements have this estimate. not been specified, but will presumably Although some high-capacity cities may apply to larger and more affluent cities. be able to meet the new standard by 2012, By 2012, all cities must meet the standards compliance will be out of reach for most of for both "regular (42) and nonregular (64)" China's lower capacity cities. The costs for parameters. upgrading just the treatment plants for the large cities will be large. Many lower capac- Analysis of Drinking Water Standards. ity cities will struggle financially and techni- The approach taken by the new standard cally to fully comply with the 42 "regular" (GB5749-2006) contains some elements that parameters by 2012. The extent to which ad- this study recommends for the wastewater ditional costs can be recovered through user 62 G o a l - B a s e d S e c t o r G o v e r n a n c e tariffs may be limited. In China, water sup- pare the benefits with the costs in terms of ply and wastewater tariffs are included on additional capital and operating costs. the same water bill. As cities expand their Rather, the standards are based on general wastewater infrastructure and recover more WHO guidelines and examples from other costs from users, the water bill will increase. countries. As noted in Chapter 7, the rate at which the Most utilities in China will respond to water bill can increase is limited by concerns more stringent water standards by using about social acceptability. more advanced and expensive treatment processes. Although upgrading treatment Enforceability. It will be a challenge to plants may be necessary in some cases, there monitor and enforce compliance with the also are many other ways of improving water 2007 drinking water standard. The large safety, including protecting the source of the number of parameters and advanced labora- raw water supply; improving transmission tory analy-sis required will make monitoring and distribution systems to minimize infil- difficult. As noted in Chapter 2, the current tration; expanding operational monitoring; drinking water quality monitoring system is and improving emergency management pro- relatively weak, and increasing the number cedures. The WHO guidelines note that since of parameters will make monitoring more incremental improvements and prioritizing complex. Countries that have adopted simi- action in areas that pose the greatest overall lar standards, such as the United States, risk to public health are important, there are have found that compliance monitoring and advantages to adopting a "holistic" grading enforcement is very challenging. scheme for the relative safety of drinking Similar to wastewater, if achieving the water supplies. drinking water standards is financially unvi- able then enforcement becomes more diffi- New Approaches to Water Supply Stan- cult. Public health regulators may be hesi- dards. Some new ideas for balancing afford- tant to issue sanctions or compel cities to ability, enforceability, and efficiency are meet standards that are beyond their techni- suggested below: cal and financial capacity to achieve. Hence, even if the monitoring data exists to show Adjust the Transitional Period. The new noncompliance, the standards may not en- drinking water standard has elements forceable for lower capacity cities. of flexibility, transition, and discretion that can be used to make it more effec- Efficiency. Water standards are one ele- tive. This study suggests that a realistic ment that determines overall water safety. time frame for compliance with the The World Health Organization (WHO) has full standard (106 items) for high- developed a framework for safe drinking capacity cities would be 2012 at a min- water that is presented in Box 5.6. A compre- imum. In the meantime, provincial hensive economic cost-benefit analysis for governments should strengthen their the new Chinese standard was not under- monitoring capacity to ensure that all taken. An economic cost-benefit analysis cities comply with the 42 "regular would examine the health and economic im- parameters" as soon as possible. The pacts associated with the standard, and com- dates at which lower capacity cities 63 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 5.6 World Health Organization Framework for Safe Drinking Water Health based targets Health outcomes Water safety plans System Management and assessment Monitoring communication Surveillance Health-Based Targets. These should be established by a high-level authority responsible for health in consultation with others, including water suppliers and affected communities. As part of an overall water and health policy, they should take into account the overall public health situation and contribution of drinking water quality to dis- ease due to waterborne microbes and chemicals. They must also take into account the importance of ensuring access to water, especially among those who are not served. System Assessment. The final water quality delivered to the consumer will be based on a number of factors, including raw water sources and activities in the watershed, transmission infrastructure, treatment plants, stor- age reservoirs, and distribution systems. Understanding the changes in water quality throughout the system is a complex but essential task. Operational Monitoring. This type of monitoring focuses on frequent and scheduled monitoring to ensure that the water supply system is operating properly, and to take immediate corrective actions if needed. Operational monitoring should be based on simple and rapid observations such as turbidity, coliform counts, chlorine residual, etc. More complex tests are generally taken as part of the surveillance monitoring. Management and Communication. A management plan details system assessment and operational monitoring and monitoring plans. The plan describes actions in both normal operation and during "incidents" that pose a public health threat. Surveillance. The surveillance agency is responsible for an independent and periodic review of all aspects of safety, whereas the water supplier is responsible at all times for regular quality control. Surveillance con- tributes to the protection of public health by assessing compliance with water supply plans and promoting improvements in the quality, quantity, accessibility, coverage, affordability, and continuity of drinking water supplies. WHO notes that national drinking water standards should be based on a variety of environmental, social, cultural, and economic conditions affecting potential exposure, and that this may lead to national standards that differ con- siderably from WHO's own guidelines. A program based on modest but realistic goals--including fewer water quality parameters of priority health concerns--may achieve more than an overambitious one, especially if the targets are upgraded periodically. Source: World Health Organization, Guidelines for Drinking Water Quality (2004). 64 G o a l - B a s e d S e c t o r G o v e r n a n c e would be required to meet the full goals that reflect higher level objectives standard should be realistic and could and identify parameters for measuring be left to the discretion of provincial progress. The objectives should be re- governments. lated to (a) ensuring efficient delivery Establish a System for Grading Drink- of urban water services; (b) improving ing Water Safety. We suggest that the quality and ecosystem functions provincial agencies undertake com- of China's rivers, lakes, and coastal prehensive and systematic evaluations waters; and of the safety of municipal drinking (c) protecting public health and sus- water systems and grade their per- taining economic growth through formance. The information should be water supply services. Government made public, and municipalities are policies and programs should be encouraged over time to improve their structured to achieve these higher performance. Box 5.7 shows how this level objectives rather than physical approach is used in New Zealand. targets related to infrastructure construction. Summary of Enhancing Provincial Government Oversight. Provincial governments Strategic Directions have an important, but often neglected, The strategic directions for national and role in sector governance. Provincial provincial government identified in this governments should increase the au- chapter are summarized below: thority, budget, and capacity of provin- cial government agencies to oversee the Improving National Policy Coordina- sector, including (a) monitoring utility tion. Key policy functions related performance; (b) supervising municipal to public utility management (MOC), tariff regulation; (c) managing national environmental management (SEPA), concessionary finance programs; and concessionary finance (NDRC), public (d) overseeing private sector participa- health protection (MOPH), and water tion. Provincial governments could im- resources management (MWR) need to prove policy coordination by establish- be better integrated to improve policy ing a "Provincial Water and Sanitation coherence. Rather than creating a new Commission," or creating a new "Pro- agency, we recommend that a "Na- vincial Water Office" that would con- tional Water and Sanitation Com- solidate all key urban water regulatory mittee" be established under the functions into one office. leadership of a deputy prime minister Setting Appropriate Water and Waste- to improve policy coordination and water Standards. Setting standards that serve as a focal point for matters re- are affordable, economically efficient, lated to urban and rural water supply and enforceable is fundamental to and sanitation issues. achieving national policy objectives. For Shifting from Physical Targets to wastewater discharge standards, transi- Policy Goals. National and provincial tional standards should be used for low governments should set policy-based capacity cities that require full waste- 65 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 5.7 Grading the Safety of Water Supply Systems in New Zealand The Ministry of Health (MoH) is the regulatory body responsible for the regulation of public health in New Zealand under the Health Act 1956. Following problems with drinking water supplies, in 1992 it began a strategy to improve the quality of drinking water and the management and monitor- ing of quality standards. The strategy, which follows the World Health Organization guidelines for safe drinking water, allocates the following responsibilities to the MoH: Setting safety standards for drinking water Providing a management plan and guidelines for meeting the standards Ensuring that adequate barriers to potential contamination are in place to minimize risk to public health Grading water supplies of all communities of over 500 people (smaller supplies may be graded in the future) The grading provides a measure of the extent to which a community drinking water supply achieves and ensures a consistently safe and wholesome product. The grading is simple and easy to under- stand since it consists of two letters: The first letter (a capital letter from A down to E, with the exception of the highest grade, which is A1) represents the source and treatment grading. The second letter (which is lower case) represents the grading of the water in the distribution zone. Systems that incorporate a bulk water distribution zone have two separate distribution grades: one for the bulk water distribution zone, and one for the community reticulation zone. Each community has a minimum grading requirement that depends on its size. The grading assessment is based on the following categories: Water source Treatment Distribution Risk of contamination Final drinking water quality After an examination is carried out by drinking water assessors (designated by the Ministry of Health), grading questionnaires are completed in conjunction with the drinking water supplier. Compliance with the standards is assessed on a running annual basis. The Ministry of Health is also responsible for publicly communicating the grading results by issuing press releases and annual reports, such as the "Microbiological Quality of Drinking Water." In addition, the MoH manages a national database of all community drinking water sup- plies, which contains a record of the details of each water system and monitoring data, as well as a Register of Community Drinking Water Supplies, which is available in all public libraries. The implementation of the water quality grading system has led to significant improvements in the quality of the water supply in New Zealand. Its simplicity and availability have made it a useful tool for public information, so that when communities were awarded a low grade, public pressure resulted in efforts and political commitments to increase the quality of water supply. While only 50 percent of the communities had water supply systems that complied with the standards in the late 1990s, by 2007 about 75 percent of the communities were in compliance. Source: Prepared by Castalia for this study. 66 G o a l - B a s e d S e c t o r G o v e r n a n c e water collection but allow for low-cost 2. State Council "Circular on Strengthening Urban treatment. Water quality management Water Supply, Water Saving, and Water Pollu- tion Prevention and Control" Issued November 7, efforts should be focused on prioritizing 2000. and implementing pollution control ef- 3. In a move symbolic of China's transition to a forts from a river basin perspective. The market economy, the SPDC name was changed to new drinking water standards allow National Development and Reform Commission cities to transition to full compliance by (NDRC) in 2003. 4. See the article "China Revises National Drinking 2012, but this date should be flexibly Water Standard" in the on-line magazine China. applied for lower capacity cities. Water org: http://french.china.org.cn/english/government/ safety grading schemes, which include 196216.htm. but go beyond water quality compliance 5. This includes the four municipalities of Beijing, monitoring, should be used to evaluate Tianjin, Shanghai, and Chongqing. 6. See MOC's (2005) "Opinion on Strengthening municipal water systems. Monitoring on Municipal Public Utilities" (Jiancheng No. 154), which states: "Construction Notes administrative authorities of all provinces and 1. The four-level hierarchy is the common simplifi- autonomous regions shall be responsible for cation of a more complex system. For example guiding and monitoring the municipal public Beijing, Shanghai, Tianjin, and Chongqing are utility monitoring within their jurisdictional referred to as "municipalities," but have similar regions." status to a province. There are around 23 sub- 7. See Footnote 4 above. provincial municipalities such as Dalian, Shen- 8. Ibid. zhen, Ningbo, etc., which have a higher status 9. See the article "China's new standard for drink- than a prefecture. There are also county-level ing water creates billion-dollar market" in the "cities," which have a higher status than regular Peoples Daily On-Line at http://english.people. counties. com.cn/200511/07/eng20051107_219462.html. 67 6 Improving Utility Governance and Structure Municipal governments and their utilities China still function as government depart- operate within the framework provided by ments rather than modern commercial util- national and provincial policies. Within this ities. The chapter's third section discusses framework, municipal governments can im- how municipal governments can instill a cul- prove the performance of urban water utili- ture of "competitive utility management" by ties by: first empowering utilities, and then insisting on accountability through monitoring, trans- Ensuring that service standards, tariffs, parency, customer orientation, and involv- and fiscal support are properly balanced ing the private sector. to allow utilities to recover their costs Urban water is both a "network industry" Putting pressure on utilities to consis- and a "natural monopoly." As a "network in- tently lower costs and improve service dustry," the quality and cost of service de- Adjusting the geographical scope and pends heavily on the complex system of functions of utilities to improve effi- pipes and pumping stations. Many Chinese ciency, particularly for wastewater cities have fragmented the responsibility for wastewater between government drainage China's vast size, combined with decentral- departments and wastewater treatment ization, has resulted in a rich diversity of companies. The chapter's fourth section en- arrangements for providing municipal ser- courages Chinese cities to consolidate drain- vices. This section explores and describes age collection and treatment functions, and that diversity, and recommends ways to im- operate the service as a network utility busi- prove the structure and governance of mu- ness similar to water supply. As a "natural nicipal utilities. As background, it presents monopoly," there tends to be increasing generic models for understanding the exist- economies of scale--up to a point, for urban ing municipal sector structure. Balancing water services. Most Chinese cities, however, service standards, tariffs, and fiscal transfers independently provide water services within is a difficult process, particularly in large their boundaries regardless of their size. The cities. The chapter analyzes how this is done final section encourages municipal govern- in China and suggests new approaches, in- ments to exploit opportunities for aggre- cluding quasi-autonomous public utility gating urban water services and achieving boards or commissions. Many utilities in greater efficiency. 69 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Overview of Municipal the typical models presented in this report Sector Structure are necessarily generic. The descriptions are intended to provide a basis for analysis and Under the former planned economy in general strategic recommendations. Annex 3 China, the municipal government was re- provides some diagrams on how specific sponsible for all economic activity within its cities organize their urban water services, jurisdiction. Government agencies with spe- and reflects the actual complexity and diver- cific mandates evolved to manage the sity at the municipal level. planned economy, including industrial de- velopment, housing, pricing of goods and A Typical Hierarchy services, and allocation of resources. With This section explains the typical hierarchy in the rapid development of the market econ- municipal government. Typically, the hierar- omy in China, municipal governments now chy includes a "leading group" under the focus on providing essential public services, leadership of the mayor, a parent bureau re- supervising public utilities, and promoting sponsible for overseeing the utility; a water the local market economy. In the public util- resources bureau or a separate raw water ity field, municipal governments are in the supply company with the water resources process of transition from being less of a bureau as the parent bureau; wastewater service provider and more of a service regu- utilities, usually provided either by a munic- lator, but the legacy of the planned economy ipal wastewater company, a private com- era still remains, and in some cases hinders pany, or a joint venture between a private the development of modern water and company and a municipal wastewater com- wastewater utilities. pany; a price bureau that administers the Figure 6.1 presents the administrative tariff adjustment process for urban water structure of a typical Chinese city. Box 6.1 utilities; an environmental protection bu- provides a brief description of the functions reau, which monitors wastewater discharges; of the different municipal agencies. Given and a public health bureau, which monitors the diversity and number of cities in China, water supply quality. FIGURE 6.1 General Municipal Structure Party Mayor and Municipal Secretary Vice Mayors People's Congress Water Public Environment Development Price Financial Resource Health Protection Reform Construction Bureau Bureau Bureau Bureau Bureau Commission Bureau (PB) (FB) (WRB) (PHB) (EPB) (DRC) Water Drinking Wastewater Investment Tariff Budget abstraction water quality discharge approval Public works administration allocation regulator regulator regulation 70 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e BOX 6.1 General Functions of Key Municipal Agencies Construction Bureau. The construction bureau is responsible for overseeing the provision of basic infrastructure for a city, including roads, parks, water, wastewater, solid waste, gas, heating, etc. It also often plays an important role in guiding real estate development. There are usually departments for public works such as roads, parks, drains, solid waste, and utility companies for water, wastewater treatment, and heating. There is a wide variety in the ways cities are organized to provide infrastructure services. In large cities, a construction commission may be responsible only for policy and planning, while a construction bureau (the terms urban management bureau or municipal engineering bureau are also used) is responsible for construction and management. Development and Reform Commission (DRC). The DRC evolved from the former planning commission, and is responsible for approving all municipal government investment proposals and leading the reform from a planned economy to a market economy. All major infrastructure investments must be reviewed and approved by the DRC. The DRC also takes a leading role in allocating and managing investment funds for government-sponsored investment projects, including foreign-funded projects. Municipal Finance Bureau (MFB). The finance bureau is responsible for overseeing the financial affairs of the city, including taxation, budget allocation and control, and disbursement of foreign funds. It provides equity con- tributions for water and wastewater investments, as approved by the DRC, and in some cases allocates operat- ing budget support for urban water utilities. Price Bureau. In the past, the price bureau administered the pricing system for all goods and services. Its role has been gradually transformed to administering public utility prices and managing local inflation. In many cities, the price bureau has been incorporated into the DRC, ackowledging that economic reform requires market forces to determine prices. Environmental Protection Bureau (EPB). The EPB is responsible for overall environmental management in the municipality, including approving environmental assessment reports, monitoring and controlling industrial discharges into both the environment and municipal drainage system, and monitoring municipal wastewater treatment plants. Water Resources Bureau (WRB). The WRB is responsible for flood control, riverbank works, irrigation, and de- velopment of raw water supplies. Since water resource infrastructure tends to be large scale, the provincial WRBs are generally large and well-funded. Municipal WRBs focus more on local flood control, irrigation, and intercity canals. In some cities, the municipal WRB has been transformed into a "water affairs bureau" responsible for water and wastewater services. Mayor's Leading Group. All significant Parent Bureau. All urban water utilities government decisions ultimately fall under the have a "parent bureau" that is responsible jurisdiction of the mayor and the set of vice for overseeing the utility. The parent bureau mayors, collectively referred to as the "leading appoints and monitors the senior manage- group." There are typically three to five vice ment of the utility and provides service reg- mayors, including an executive vice mayor. ulation. All issues requiring a decision from Each vice mayor is responsible for specific the leading group or other municipal gov- government agencies. Policy coordination be- ernment agencies are typically done through tween the different government agencies is ex- the parent bureau, including (a) budget allo- pected to take place within the leading group cations from the MFB, (b) investment ap- under the leadership of the mayor. proval by the DRC, and (c) tariff adjustments 71 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s by the price bureau. Decisions by these gov- water management, including water, ernment agencies are usually discussed and wastewater, flood control, water reuse, approved by the vice mayor and if necessary and raw water supply. the leading group. There are three common Model 3: Water and Wastewater arrangements for parent bureaus (see Fig- Report to Different Parent Bureaus. ure 6.2). Some large cities have separated the policy and implementation functions Model 1: Water and Wastewater Have for urban construction and manage- the Same Construction Parent Bureau. ment into two bodies. A "construction This is the most common arrangement commission" provides policy and plan- for smaller cities. The wastewater and ning, and sometimes directly oversees water supply utilities report to same municipal utility companies. An bureau. The bureau oversees all of the "urban management bureau" super- public works and utility companies in vises public works departments such the city. as roads and parks, and in some cases Model 2: Water and Wastewater Have may also supervise water and waste- the Same Water Affairs Parent Bureau. water utility companies. Some large cities--such as Beijing, Shanghai, and Shenzhen--have cre- Organization of Water Supply Utilities. ated "water affairs bureaus" that are Raw water supply is usually provided by the responsible for all aspects of urban water resources bureau or a separate raw FIGURE 6.2 Typical Parent Bureau Models Parent Bureau Model 1 Parent Bureau Model 2 Construction or Water Affairs Urban Management Bureau Bureau Public utilities Public works Wastewater, Water supply, Irrigation and roads, parks, Water supply Wastewater bus, heating, gas flood control solid wastes Parent Bureau Model 3 Construction Urban Commission Management Bureau Wastewater, Water supply, roads, parks, bus, heating, gas solid wastes 72 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e water supply company with the water re- wastewater services are organized. In most sources bureau as the parent bureau. Table large cities, each district has its own drainage 6.1 shows the common methods of organiz- department. Wastewater treatment is usually ing water supply service. The most common provided either by a municipal wastewater model involves a municipal water supply company, a private company, or a joint ven- company providing both treatment and dis- ture between a private company and a munic- tribution services. Many cities are turning to ipal wastewater company. In some cases, the private sector to help with water supply mainly in small cities, one municipal waste- treatment, either through a BOT (build- water company may provide both collection operate-transfer), TOT (transfer-operate- and treatment. Wastewater reuse companies, transfer), or joint venture with the municipal when they exist, are usually subsidiaries of the water supply company. In a few cases, there company providing wastewater treatment. are joint ventures with municipal water sup- ply companies for the complete service. Tariff Regulation. This includes the rules and organizations that set, monitor, enforce, Organization of Wastewater Utilities. The and adjust tariffs for urban water utilities. organizational structure of wastewater utili- For water and wastewater tariffs, the utility ties is more complicated than water supply, company submits the tariff application to and is discussed in detail in a later section. the parent bureau, which reviews and ad- Table 6.2 provides a general overview of how justs as necessary, and then forwards the TABLE 6.1 Water Supply Utility Models Frequency Treatment Plant Distribution Network Most Common Municipal Water Supply Company (MWSC) Common Private Company or JV with MWSC MWSC Less Common Joint Venture Between MWSC and Private Company TABLE 6.2 Common Wastewater Utility Models City Size Local Drains Main Drains Wastewater Treatment Larger Cities District Drainage Municipal Wastewater Company Department (DDD) (MWWC) Larger Cities DDD MWWC Private BOT or JV with MWWC Larger Cities DDD Municipal Drainage Department (MDD) Private BOT Smaller Cities MDD Private BOT Smaller Cities MWWC 73 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s application to the price bureau. The price tives. Municipal government funding of bureau does not actually make decisions on water and wastewater utilities is important tariffs but rather administers the tariff ad- for two reasons: justment process. For the tariff adjustment process, an expert advisory group composed Capital Funding: Cities typically make of officials from key agencies is established, equity contributions to water and often under the direction of the DRC, to pro- wastewater companies and provide cap- vide an opinion on the proposed tariff ad- ital funding for drainage departments. justments. Public hearings are held, and the Operating Budget: Cities provide op- price bureau forwards a tariff recommen- erating budgets for drainage depart- dation to the mayor's leading group for ments, and occasionally provide a decision. The final tariff adjustment is ap- funding support for water supply proved by the provincial price bureau (for a and wastewater companies in financial prefecture-level city) or the prefecture price distress. bureau (for a county-level city). In addition to the utility's revenue requirements, other The parent bureau requests budget support important factors in the tariff-setting proc- to the MFB on behalf of the company or de- ess are the level of local inflation and public partment during the annual budget planning acceptability. process. As discussed in Chapter 7, there is Service, Environmental, and Public Health an "urban construction and maintenance Regulation. This includes ensuring that the tax" in Chinese cities that automatically goes utility meets the defined service standards for urban infrastructure. In addition, the and complies with applicable environmental municipal government can transfer general or public health regulations, such as waste- budget funds to the parent bureau. The allo- water discharge standards and water supply cation of government funds is determined by quality standards. The parent bureau is re- the leading group and implemented by the sponsible for defining and monitoring ser- MFB. In most cases, the budget is trans- vice standards, and is also the front line ferred from the MFB through the parent bu- agency for monitoring compliance with reg- reau to the company or department. ulations. The EPB undertakes monitoring of wastewater discharges and the municipal public health bureau (PHB) monitors water Facilitating supply quality. When a utility breaches a Cost Recovery standard, the conflict between the parent bu- reau and the regulatory agency is often re- Municipal governments in China can ensure ferred to the leading group for resolution. that their utilities recover costs and provide sustainable service by improving mecha- Municipal Utility Fiscal Policy nisms for setting service standards, tariffs, This includes the fiscal principles and prac- and fiscal transfers. In this study, utility cost tices of the municipal government with recovery means that a utility has sufficient respect to utilities, including capital contri- revenues to meet its obligations and needs, butions, operating subsidies, and tax incen- such as O&M, debt service, and making a 74 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e contribution to finance capital works. Chap- spending programs and financing strat- ter 7 discusses how most urban water util- egies, and oversee utility management ities in China are struggling with cost Municipal utility advisory groups with recovery, particularly for wastewater. the mandate to advise the municipal Inadequate coordination among multiple government on key utility management municipal government agencies is one rea- issues son why many Chinese cities struggle with utility cost recovery. Some cities are able to The board or advisory group concept could coordinate the decisions of multiple agen- potentially be extended to other municipal cies to achieve a sustainable balance, but utilities such as gas, district heating, and many are not. Cities throughout the world public transport. face similar problems. This section recom- mends that China start experimenting with Getting Services, Tariffs, new approaches for improving municipal and Fiscal Support Right utility governance, including: Figure 6.3 sets out a process that shows how governments can achieve a sustainable bal- Municipal public utility boards with ance between services to be provided, tariffs, the power to set tariffs, approve capital and fiscal support. The diagram shows that FIGURE 6.3 Balancing Service Standards, Tariffs, and Subsidies Utility efficiencies Cost recovery tariffs Capital Operating Social and Willingness to pay Coverage and Subsidies environmental Affordability service standards consideration Equity Reconsider No Satisfied with Customer service, tariff tariffs subsidy bundle? Final service/tariff/subsidy bundle Source: Castalia, Sector Note on Water Supply and Sanitation for East Asia (2004). 75 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s once service standards are set, with a given The lack of coordination and capacity level of efficiency the cost of providing ser- among government agencies is a key reason vices is essentially determined. The cost of why cities in China have problems getting service must be met from tariffs, unless gov- the bundle of services, tariffs, and fiscal sup- ernments are willing to either provide cap- port right. There are number of agencies, op- ital or use fiscal transfers to keep tariffs at erating under the leading group, with each socially acceptable levels. The approach out- influencing a utility's ability to recover costs. lined in Figure 6.3 is straightforward, but The level of coordination between these there are many factors that may lead the agencies and within the leading group is not process to establish an inconsistent mix of sufficient in many cases to ensure sustain- service objectives, tariffs, and fiscal support. able urban water services. Moreover, many It is common for tariffs or fiscal transfers to urban water utilities are subservient to the be inadequate to cover the costs of service at parent bureau and do not take an active and the level set by the standards. The two major independent role in facilitating coordina- constraints stem from political commitment tion. Following the steps presented in Figure 6.3, typical agency coordination and capac- and institutional coordination, each of ity problems include the following: which is discussed below. Setting Appropriate Service Standards. As Political and Institutional Constraints to discussed in Chapter 5, the application of Recovering Costs. Some municipal leaders China's wastewater discharge standards and may not want the utility to have an adequate proposed new water supply quality stan- combination of tariffs and fiscal support for dards may need to be adjusted to provide af- the following reasons: fordable and enforceable transitional stan- dards for low-capacity cities. Even within Short-term political considerations the current standards, however, municipal may outweigh the need to raise tariffs governments and their utilities have flexibil- or allocate more fiscal resources. The ity to make important decisions regarding costs of raising tariffs or allocating service levels, such as combined or sepa- more fiscal resources will be felt imme- rated stormwater and wastewater drains, diately, while the benefits of maintain- level of flood protection, reliability of the ing and renewing utility assets take water supply, etc. The utility parent bureau, some time to materialize. with approval from the DRC, typically Some municipal governments may ac- makes these decisions. The utility is then re- tually want a lower-cost, lower-quality quired to make the infrastructure invest- service package rather than pay a high ments, but the municipal government often cost to achieve compliance with inap- does not have a clear idea of the associated propriate national standards. costs or how they will be recovered. Some municipal governments may not Maximizing Efficiency. Many Chinese want to subsidize inefficiency, with the urban water utilities do not have strong in- intention of driving down costs by re- centives to operate efficiently. The third sec- ducing the amount of cash available to tion in this chapter discusses how to make the utility. Chinese utilities more efficient by empower- 76 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e ing them to take control of core corporate jectives. The challenge in most Chinese functions, while simultaneously increasing cities, however, is that the level of fiscal sup- their accountability, transparency, and cus- port is not always clear or dependable. In ad- tomer orientation. Managing wastewater as dition, the tariff setting process managed by a network utility business (section four), ex- the price bureau (or DRC) considers other ploiting opportunities for service aggrega- factors such as local inflation and social ac- tion and economies of scale (section five), ceptability. The tariff ultimately is decided and appropriate private sector participation by the mayor and his leading group, which (Chapter 8) are also methods for improving may have political reasons for limiting tar- efficiency and lowering costs. iffs. Often, the result is tariffs that--given ac- Full Cost Recovery Tariffs. Based on the tual fiscal transfers--may be inadequate for targeted service levels, and the investment the utility to recover its costs. and operational efficiency of the utility, the full cost recovery tariffs can be calculated. Approaches to Improving Municipal This requires the utility (or its consultant) to Utility Governance. A government may em- undertake comprehensive technical and fi- bark on serious water sector reforms, setting nancial modeling, but these skills are often service standards, tariffs, and fiscal transfers lacking in Chinese utilities or their parent that are appropriate and consistent. It may bureaus. The tariff calculations are often demand efficiency from its urban water ser- done after the investments are made, and vice providers. But the real challenge is mak- based on standard formulas rather than ing these reforms last. There are strong in- comprehensive financial modeling. centives and plausible justifications for The cost recovery tariff can be assessed governments to change policy or fail to exe- against social and environmental considera- cute its functions properly over the long run. tions. If the government considers the result- An essential part of locking in good reforms ing tariff to be too high, then it can provide often involves governments choosing to limit capital or operating fiscal support to lower their own flexibility by designing institu- the tariff. Setting the type and level of fiscal tional arrangements that protect reforms support involves trading off the social desir- and limit direct political involvement in util- ability of restraining tariffs against other fis- ity management and regulation. cal priorities. Programming fiscal support to Cities throughout the world face munici- utilities in Chinese cities is typically done as pal utility governance challenges similar to part of the overall budgeting process by the China, and some have devised institutional municipal finance bureau, under the direc- arrangements to help overcome these prob- tion of the leading group. Although the utility lems. Box 6.2 shows that even within one parent bureau can make a request to the mu- state in the United States, California, there nicipal government, the budgeting is usually are many ways of organizing the governance done as part of a more comprehensive budget of a utility. The following approaches could process and often without explicit considera- be considered for cities in China with munic- tion of the funding needs of the utility. ipally owned public utilities, and apply not For a given level of fiscal support, the gov- only to urban water but potentially to other ernment can then design a tariff that allows utility services, such as gas, district hearting, for cost recovery while achieving social ob- and public transportation. 77 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 6.2 Municipal Governance Models in California Provision of urban water services in California is the responsibility of the local government. The ser- vices must meet the minimum requirements of the federal government as stated in the Clean Water Act and Safe Drinking Water Act. State agencies are responsible for ensuring municipalities com- ply with national standards and have the authority to promulgate more stringent standards as ap- propriate. Local governments have different approaches to providing urban water services, as demonstrated below for the four largest water utilities in the state: Municipal Utility Commission: Los Angeles. The Los Angeles Department of Water and Power (LADWP), the largest municipal utility in the nation, was established more than 100 years ago to de- liver reliable, safe water and electricity supplies to some 3.8 million residents and businesses in Los Angeles. As a revenue-producing proprietary department, LADWP transfers about 7 percent of its annual estimated electric revenues and 5 percent of its water revenues to the city of Los Angeles general fund. LADWP's operations are financed solely by the sale of water and electric serv- ices. Capital funds are raised through the sale of bonds. No tax support is received. A five-member Board of Water and Power Commissioners establishes policy for LADWP. The board members are appointed by the mayor and confirmed by the City Council for five-year terms. Municipal Utility Advisory Board: San Diego. The San Diego Water Department provides water to over 1.2 million customers, as well as selling bulk treated water to neighboring cities. The Metropolitan Wastewater Department provides collection and treatment services for the City of San Diego, as well as treatment services for 15 other cities. The San Diego City Council is responsible for economic regulation of both departments and authorizes tariff adjustments. San Diego also has a "Public Utilities Advisory Commission" appointed by the mayor and confirmed by the City Council. The commission advises the city government on water and wastewater issues. Both the Water Department and Wastewater Department operate on funds from tariffs and service charges; its funds are administered in an enterprise account separate from the City of San Diego's General Fund. The city issues both separate water supply and wastewater revenue bonds. Municipal Utility Board-East Bay Municipal Utility District (EBMUD). The utility provides water to 29 cities with over 1.3 million, and 640,000 people in 8 cities, in the eastern part of the San Francisco Bay Area. EBMUD is a special utility district separate from any city government. It is gov- erned by a seven-member Board of Directors. The directors are elected for four-year terms. The board has the power to set tariffs and provides economic regulation and management oversight. EBMUD relies primarily on user fees, although it does have the authority to issue a surcharge on property taxes to provide for drainage services and issues its own bonds. Private Company: San Jose Water Company. The San Jose Water Company is a privately owned utility listed on the New York Stock exchange serving over 1 million people, as well as providing services to other cities such as billing or distribution system monitoring. The City of San Jose has entered into a contract with San Jose Water to provide water supply services, but economic regu- lation is provided by the California Public Utilities Commission (see below). California State Public Utilities Commission (PUC). The Commission regulates privately owned telecommunications, electric, natural gas, water, railroad, and passenger transportation compa- nies. It is responsible for ensuring that customers have safe, reliable utility services at reasonable rates and are protected against fraud. Over six million Californians receive water and wastewater services from private companies. The PUC monitors their operations, sets water rates, and ensures compliance with water quality standards. 78 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e Municipal Utility Board. Many large level of fiscal and tariff support. Box 6.3 ex- cities throughout the world have plains how Singapore has adopted this ap- elected to establish quasi-independent proach with the Public Utility Board (PUB) boards appointed by the municipal government and responsible for the Municipal Utility Advisory Group. In governance of their city's water and cities where the formal establishment wastewater utilities. Typical functions of a water board would not be politi- include setting tariffs, approving capi- cally possible, an alternative approach tal investment programs and financing is to create a formal "advisory group." strategies, appointing management, This would a formal group with a clear and monitoring compliance with regu- charter. The same options for selecting latory and service standards. This board members also apply to advisory model is often used in large cities with group members. The group would pro- government-owned utility companies vide formal recommendations to the or departments. The approach allows mayor's leading group on the similar a reasonable level of expertise and issues as a board. Typical functions in- accountability to develop among board clude setting tariffs, approving capital members. There are various ways of investment programs and financing selecting board members, for example: strategies, appointing management, Nongovernment specialists ap- and monitoring compliance with regu- pointed by the mayor based on pro- latory and service standards. It is inter- fessional expertise, such as legal, fi- esting to note that the Singapore PUB nancial, engineering, business, etc. has mainly advisory powers, but is ex- Government officials appointed by tremely influential given the expertise the mayor or based upon their posi- of its members and the government's tion in the government commitment to provide high quality, Elected or nominated members from sustainable water services. different jurisdictions or interest groups A combination of the above Private Participation and Municipal Utility Governance Because board members typically do not have to satisfy interest groups on issues The majority of urban water services in China other than water, and are generally ap- are provided by either government depart- pointed, they have more freedom to take at ments or municipal utility companies that op- least a medium-term perspective toward the erate as public service corporations. Chapter utility business. The expertise of the board 8 describes how private participation is ex- can contribute to improved utility efficiency panding rapidly in China. Most private partic- in operations and capital planning. The ef- ipation in China has been in the form of BOT fectiveness of a municipal board, however, contracts for water supply or wastewater ultimately depends on the selection of qual- treatment plants with municipal utilities or ified board members, and the government's the city. There are also an increasing number willingness to allow the board a sufficient of joint ventures between private companies level of autonomy and provide the necessary and municipal water supply utilities. 79 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 6.3 Singapore Public Utilities Board The Public Utilities Board (PUB) was established in 1963 and was originally responsible for providing the country's utility services, including water, power, and gas. In 2001, the board's regulatory authority for electricity and piped gas industries was transferred to the Energy Market Authority of Singapore. At the same time, the water and drainage functions of the Ministry of the Environment (now called the Ministry of the Environment and Water Resources) were transferred to the board. PUB is a statutory board under the Ministry of the Environment and Water Resources (MEWR). It is the water agency that manages Singapore's water supply, water catchment, and sewerage in an integrated way. Statutory boards of the Singapore government are organizations that have been given autonomy to perform an opera- tional function. They usually report to one specific ministry. PUB is governed by an 11-member board of directors and is chaired by a permanent secretary of the MEWR. The other board members include the PUB chief executive, and nine members appointed by the MEWR and drawn from business, academic, and engineering fields. The PUB has full corporate autonomy, but relies heavily on the government for financial support. The government funds the capital development and operating expendi- tures for drainage and wastewater treatment. In 2004, 23 percent of the PUB's operating expenses were provided by a government operating grant, and 85 percent of its capital expenditures were funded by the government. PUB makes recommendations regarding tariffs and budget transfers to the MEWR. The government is responsible for budget allocations and tariff setting based on the recommendations of MEWR and the PUB. PUB was named "Water Agency of the Year" at the Global Water Awards 2006, and is considered one of the most technologically advanced water utilities in the world, with low rates of non-revenue water, desalinization projects, watershed management, and advanced wastewater reuse programs. However, it is under pressure to improve its financial sustainability and control costs. In 2004, PUB was reorganized to improve efficiency and adopted a new approach termed "price minus." The price minus philosophy aims to inspire PUB employees to be cost-conscious and adopt a value-creation approach in decision making. PUB seeks to bring maximum value to customers at a minimum cost by doing more with less. Price minus is not a cost-cutting exercise; rather, it seeks increased value to partners and customers while driving down costs at the same time. Source: From PUB Website: http://www.pub.gov.sg The emerging partnership between pri-vate ernments are not prepared to ensure this, then companies and municipal water utilities the joint venture will not be sustainable. throughout China makes the need for improv- ing municipal utility governance even more urgent. Private companies with contracts for Fostering Efficient BOT plants will demand payment for services, Urban Water Utilities regardless of the financial health of the munic- ipal utility. If the government does not adjust Many of China's urban water utilities per- overall sector funding levels, through tariffs or form below their potential because of a lack fiscal transfers, then the financial situation of of pressure to improve performance. Al- the municipal utility may deteriorate. Like- though the water supply and wastewater wise, companies involved in joint ventures business is typically classified as a "natural with municipal utilities will require adequate monopoly," there are ways that municipal returns on their investment. If municipal gov- governments can help ensure that utilities 80 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e strive to consistently lower costs and im- typical situation in Chongqing between the prove performance, including: parent bureau and urban water utilities. Empowering utilities with more au- Monitoring Performance thority so they can be held accountable Good information on operational and finan- Closely monitoring performance cial performance is necessary to place com- Promoting transparency and customer petitive pressure on utilities. This informa- orientation tion can be used to compare performance Judicious use of private sector with other similar utilities and to track im- participation provements over time for a single utility. As Adjusting utility scope and scale to discussed in Chapter 2, information on util- take advantage of economies of scale ity performance is very limited in China. Many utilities do not collect adequate infor- Empowering Municipal Utilities mation, nor are they required to do so by the Many utility companies are under the direct municipal governments. Moreover, even control of their parent bureau, and operate when information exists it is often not more as a government department then a shared with the public, provincial agencies, company. While this may be appropriate for or even within the municipal government. smaller cities, larger cities generally need Chapter 5 called for the provincial govern- more professional and specialized manage- ment to initiate province-wide utility bench- ment. Moreover, since parent bureaus are marking programs. Municipal governments, part of the municipal government, they are in parallel, should insist on enhancing utility more likely to respond to short-term politi- performance monitoring programs. cal pressures than autonomous and com- mercialized utility companies. Some urban Transparency and water utilities in China, particularly in larger Customer Orientation and richer cities, are already close to being Although public hearings for tariff adjust- international standard water companies. ments are organized by the price bureau, Most companies, however, still operate public involvement and knowledge of key under the direct control of the parent bu- utility planning and management issues is reau. These utility companies should be em- typically limited. To generate competitive powered to take over core corporate func- pressure, the information must be easily tions such as strategic master planning, available to the public. Urban water utilities capital improvement programs, developing should be required to have open and trans- financing and cost recovery plans, human parent decision-making processes on key is- resource development, and crafting appro- sues. This would involve opening up parent priate private sector arrangements. The bureau or utility board meetings, making managers of a utility have to be held ac- meeting minutes available to the public, and countable for continuous improvements in developing stakeholder and customer out- performance. For this, they must be given reach programs to solicit opinions on key the authority to propose strategic initiatives issues. Many urban water utilities could im- and manage the utility under the guidance of prove their customer support functions and the municipal government. Box 6.4 shows a better monitor overall customer satisfaction 81 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 6.4 Challenges Faced by Water Supply and Wastewater Companies in Chongqing, China Under a World Bank-financed project, consultants were contracted to provide institutional strengthening ser- vices to two water companies and three wastewater companies in Chongqing. Overall, the companies were found to be functioning well within the existing regulatory framework. They pos- sessed many positive attributes. The two water companies were providing water 24 hours per day, and the three new wastewater companies (treatment plus main conveyance) were actively engaged in constructing needed assets. The companies had existing policies, practices, and procedures in place to support operation, and all were adhering to enterprise accounting systems. The companies' leaders were talented and dedicated, and the staff highly motivated. Initial assessments found, however, that none of the companies had sufficient authority to manage them- selves autonomously, although the water company enjoyed somewhat more autonomy. All were constrained by local government influences that limit the companies' practical control over key management functions. The operational companies were overstaffed and underskilled, and their planning processes were largely "reac- tive;" planning was mainly geared chiefly to responding to government-driven operating goals, guidelines, and priorities. The organizational structure of the companies did not confer business planning, budgeting, and tar- iff responsibility on these units. The operating utilities operated largely as cost centers with parent bureaus doing the planning and tariff analysis for them. The consultants assisted the companies in five key areas: business planning, financial management, tariff fore- casting, water and wastewater operations, and human resources management. The consultants concluded that although technical assistance can support companies in overcoming technology and management constraints, the application of additional technical assistance will produce diminishing results unless policy constraints to the companies achieving full autonomy are not released. Source: MWH consulting firm, Institutional Strengthening and Training Report for World Bank-fianced Chongqing Project (2005). levels. The results of performance bench- to a private company to provide some ser- marking programs should be available to the vices, e.g. outsourcing tasks such as meter public and the press. Annual reports, finan- reading, drain cleaning, or hiring manage- cial statements, and capital improvement ment consultants to stay competitive. plans should also be made publicly available through Internet websites. Adjusting Utility Scope and Scale Adjusting the types of services and the ser- Private Sector Involvement vice area of a water utility can often provide Chapter 8 discusses in detail how the private quick gains in efficiency. The next section sector can help improve the competitiveness discusses how integration of wastewater col- of municipal urban water utilities. The lection and treatment can improve trans- threat of private sector involvement can parency and efficiency of the overall service, often make municipal utility management and the following section discusses how cre- and workers act in a more competitive fash- ating larger urban water utilities that cover ion just to keep their jobs and positions. multiple jurisdictions can generate econo- Alternatively, when a municipal utility is mies of scale that drive down costs. Another striving to improve performance, it may turn variation on this theme is that large cities 82 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e may wish to create medium-sized utility sponsible for wastewater treatment. This ap- companies, which would allow the munici- proach is contrary to typical international pal government to easily compare the per- practice, where wastewater is managed as formance of the companies and generate network utility business, including collection, competitive pressures for improvement. conveyance, and treatment; and there is par- tial or full cost recovery for the full service. Ideally, wastewater management should Managing Wastewater be the responsibility of only one utility. as a Network Since cities in China may have institutional constraints to quickly merging departments Utility Business and companies, interim approaches are sug- The prevailing view in China is that drainage gested at the end of this section. is a public good and wastewater treatment is a commercial activity. Consequently, drain- Fragmented Service Delivery age services are typically provided by a gov- Figure 6.4 shows the typical layout of an urban ernment department and a company is re- drainage system in a Chinese city. (Box 2.3 de- FIGURE 6.4 Example of a Municipal Drainage System Rive Dist ict District I District III Dist ict III r District IIII Dist ict Dist ict IV District IV Urban roads WWTP Municipal drains (combined or separate) District drains (combined or separate) Municipal interceptors Flow direction Wet-weather overflow 83 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s fines wastewater terms used in this study.) overall drainage system. In the past, Chinese There are currently many ways of organizing cities were not required to treat their waste- wastewater services in a city (See Table 6.2). In water and all cities used combined drains. The general, the larger the city, the more districts combined stormwater and sanitary drainage and the more fragmented the drainage collec- was collected and disposed into the nearest tion. The service fragmentation seen in many water body, such as a canal, river, lake, or cities--based on an historical evolution of a ocean. With the advent of wastewater treat- complex system--is as follows: ment, MDDs were often charged with convey- ing the wastewater to the treatment plant. The District Drainage Departments (DDD). A MDDs constructed "wastewater interceptors," Chinese city is composed of multiple dis- which intercepted dry weather flows (i.e. no tricts, typically ranging from two to six dis- stormwater) from combined drains and con- tricts based on the size of the city. Each dis- veyed the wastewater to the plant. trict government has its own drainage Wastewater Companies. According to na- bureau that is responsible for drainage along tional policy, cities are required to establish its streets. The district road department is wastewater companies that receive revenue typically responsible for the construction of from wastewater tariffs, and operate on a roads and drains, and then turns over the op- commercial basis.1 Cities have responded to eration of the drains to the drainage bureau. At the district level, there may be combined this policy in different ways. Three common drains, separate sanitary and stormwater arrangements include: drains, or a combination of both. The MDD is turned into a company DDDs are generally overstaffed and have and made responsible for wastewater low professional capacity. These depart- treatment. ments, however, have an important role to A new municipal company is estab- play in managing wastewater. Most of the lished that is responsible for waste- drains in a city, in terms of length, are man- water treatment and interceptors. aged at the district level. The departments There is a BOT arrangement with a pri- are responsible for ensuring that the drains vate company for wastewater treatment. flow freely and drainage pump stations op- erate properly. In addition, the departments Sources of Inefficiency ensure proper connections to the combined, Organizational arrangements that reduce effi- sanitary, or stormwater drainage systems. ciency and increase cost include fragmented responsibility, underperforming drainage de- Municipal Drainage Departments (MDD). partments, and inadequate funds for drainage. Large roads and drains that pass through multiple districts are typically the responsibil- Fragmented Responsibility. Most cities ity of the municipal government. MDDs tend have a vast network of combined drains, to be overstaffed and inefficient, but have the stormwater drains, sanitary drains, and in- important role of maintaining the main terceptors that are managed by different en- drains and pumping stations in the city. tities. The city of Tianjin, for example has MDDs also oversee the district drainage bu- around 5,000 kilometers of drainage pipe- reaus to make sure the city has an effective lines. This poses numerous problems. First, 84 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e different flows are often confused, with Underperforming Drainage Departments. wastewater going into the stormwater drains, Drainage departments are often overstaffed, and stormwater going into the sanitary underfunded, and lack professional manage- drains, thus undermining efforts to collect ment and technical staff. They were created and treat the wastewater. Second, local in a different era when the government bu- drainage networks at the district level are reaus were utilized as sources of social often incomplete, resulting in inadequate welfare and support. Drainage departments collection of wastewater and localized flood- understandably have problems attracting ing. District drainage departments often lack capable management and technical experts. the funds and expertise to manage the assets Yet drainage is fundamental to good waste- in a modern and comprehensive manner. water management. Third, the operation, maintenance, and asset management of the collection network is not Inadequate Funds for Drainage. Approxi- conducted on a systemwide basis. These mately two-thirds of investment costs and problems significantly reduce the efficiency around half of the operating and mainte- and effectiveness of the overall wastewater nance costs of a typical wastewater system management program. come from the complex system of drainage Integrated wastewater utilities (combing pipelines and pumping stations scattered collection and treatment) are the norm in throughout a city. In almost all cities, the most countries. Many cities have combined wastewater tariff is used primarily or exclu- their water and wastewater utilities to pro- sively for wastewater treatment and funding vide full water cycle service. Box 6.5 provides for drainage services are provided by the an overview of how the United States and municipal government. When municipal United Kingdom organize their drainage col- governments face fiscal constraints, many lection systems. chose not to fully fund the operation, main- BOX 6.5 Drainage Collection Systems in the U.S. and U.K. United States. Of the more than 19,000 collection systems in the United States, the U.S. Environmental Protection Agency estimates that about 4,800 are satellite collection systems. Satellite collection refers to a situation where the municipality (or a private developer) that owns the collector sewers may not provide treatment of wastewater, but only conveys its wastewater to a collection system that is owned and operated by a different municipal entity. Municipal drainage systems are coming under regulatory control in the U.S., including satellite systems, and are being monitored for overflows that discharge into the environment. As stormwater management for water quality purposes is becoming increasingly important in the U.S., there is a growing trend to establishing single-purpose "stormwater utilities," which charge users based on the estimated amount of runoff from their property. There are over 400 stormwater utilities in the U.S. that charge based on the quantity of land and impervious surface. United Kingdom. Water companies in England and Wales are responsible for both wastewater and stormwater collection. These private companies recover their costs for stormwater management through user fees. The economic regulator, OFWAT, does not require the companies to utilize any particular approach for charging cus- tomers, but encourages the use of site-area based charges. Source: EPA and OFWAT websites. 85 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s tenance, and timely renewal of the drainage lenges lie in collecting and conveying waste- networks. water; reducing sanitary and combined sewer overflows; accessing financing; and Forces Driving Service Fragmentation recovering costs for the entire system, not The factors driving most cities to have mul- just wastewater treatment. Maintaining tiple organizations providing different parts fragmented responsibility for wastewater of the wastewater service include: service reduces accountability and affects operational and investment efficiency. As Incorporating district drainage depart- noted above, there may be institutional con- ments into a municipal company is straints in some Chinese cities to shifting problematic, as they operate under quickly to a single integrated wastewater different administration systems. utility. There are, however, a range of op- Transforming municipal or district tions to encourage a more integrated ap- drainage departments into modern, proach, some of which could be used on an efficient integrated wastewater utilities interim basis. Some of these potential op- would be challenging on many fronts, tions are summarized in Table 6.3 and dis- including culture, overstaffing, and cussed below. pension obligations. The common perception in China is Company Ownership. Wastewater is that drainage is a public good while managed in a manner similar to water wastewater treatment is a commercial supply, with one utility company pro- activity and thus the two services viding wastewater (and stormwater) should be managed separately. collection and treatment. Integrating the various entities into Company Lease. The ownership of one company would reveal the true drainage collection assets would re- cost of wastewater and stormwater management, which is likely to be main with the municipal or district more expensive than water supply. governments. The wastewater com- Carving out wastewater treatment as a pany, however, would be responsible separate commercial activity may help for operating and maintaining the net- to facilitate private financing for treat- work through a lease contract. The ment plants. municipal or district governments Finally, national government policies would be responsible for financing have evolved to support separating capital works associated with the net- wastewater treatment as a commercial work, but the company would play the activity to attract private financing and lead role in planning and constructing technical expertise.2 the facilities. District Management Contract. The Options for Creating More wastewater company would enter Integrated Wastewater Utilities into a management contract with the Although some cities may be successful in drainage department(s) for the opera- creating modern and efficient wastewater tion of the drainage system. The owner- treatment companies, some of the key chal- ship of drainage collection assets would 86 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e TABLE 6.3 Options for Integrating Wastewater Service Option Drainage Network Treatment Plant Company Ownership Company invests, owns and operates Company owns and operates Company Lease Company leases and operates Government invests and owns (No drainage departments) Department Drainage department management contract with company Management Government invests and owns Contract Municipal Drainage departments report to group management Company reports to group Wastewater Group management remain with the municipal or district ducing costs by (a) merging water supply governments. The municipal or district and wastewater companies; (b) creating re- governments would be responsible for gional urban water utilities that service met- financing capital works associated with ropolitan areas; and (c) creating multi-city the network, but the company would urban water utilities. play the lead role in planning and con- The potential efficiencies stem mainly structing the facilities. from achieving economies of scale in the Municipal Wastewater Group. All of the construction, financing, and management of existing organizations--wastewater urban water infrastructure. The transaction treatment companies, municipal costs in aggregating services are often high, drainage departments, district and the approach may be difficult in many drainage departments, etc.--remain cities. The potential benefits, however, are intact but are put under an umbrella large in some cases. Municipal governments "Municipal Wastewater Group." The should aggressively exploit opportunities for group's management responsibility in- aggregation where they exist. cludes planning, financing, construct- Existing Situation ing, and recovering costs, as well as ensuring overall service efficiency and As noted in Box 3.1 there are 661 "designated quality. cities" and 1,636 county-level towns with an average population of 60,000. Moreover, Exploiting Opportunities there are 18,256 towns in China that fall under the jurisdiction of the county govern- for Service Aggregation ment. China's counties and cities have con- Almost every city in China provides its own siderable fiscal and administrative author- water and wastewater services independ- ity, with the provincial or prefecture ently, regardless of size. There is significant government generally only providing an potential for improving efficiency and re- oversight role. The tendency for the majority 87 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s of cities, county-towns and small towns is to limited resources and expertise to develop develop their own water supply and waste- adequate urban water systems. water utilities. Local leaders generally prefer to own and manage their own infrastructure Potential Benefits of Aggregation services, and inter-jurisdictional coopera- As shown in Table 6.4, there are several op- tion in China is difficult due to the high de- tions for aggregating urban water services. gree of decentralization. Two challenges The potential benefits of aggregation include emerge from this decentralized approach: the following:3 (1) servicing metropolitan areas, and (2) servicing small towns. Increased efficiency through economies of scale Servicing Metropolitan Areas. Metropol- Enhanced professional capacity in a itan areas are growing quickly and have larger scale operation become the economic powerhouses of the Improved access to finance and/or country. China has at least 53 metropolitan private sector participation regions anchored on cities with over 1 mil- Improved access to water resources lion people. Towns on the fringes of these and integrated water resources management metropolitan areas contain around 50 per- cent of the metropolitan population and play Options for Aggregating Services an important social and economic role in the in China region. Pollution-generating industries are being relocated from inner urban areas to Even when the aggregation of urban water services may provide economic benefits, the surrounding areas. The surrounding there are often institutional constraints that counties, and their towns, often lack finan- hinder efforts to examine and pursue prom- cial and technical capacity, and cannot take ising options. Box 6.6 shows that many advantage of economies of scale in the pro- countries in Latin America are also dealing vision of urban water infrastructure. Tack- with similar issues. ling the water pollution and water supply From an international perspective, China challenges in the wider metropolitan region has a high level of fiscal and administrative is critical in meeting China's economic de- decentralization. This potentially hinders velopment and environmental goals. policy measures to encourage aggregation of services. The following options, however, Servicing Small Towns. The majority of could be examined by municipal leaders. the over 18,000 towns do not lie within the economically dynamic metropolitan areas. Combining Water and Wastewater Yet these urban areas are significant sources Utilities. The provision of water and of pollution and many lack a reliable high- wastewater services are closely related, quality water supply. The Chinese govern- and involve the same core set of techni- ment has placed a high priority on improv- cal, management, and financial skills. ing the quality of life in these towns to Most cities in China have shied away balance the rapidly growing urban-rural dis- from combining the two services, as parities. These towns, however, often have water supply has long been organized 88 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e TABLE 6.4 Options for Aggregation Key Characteristic Range of Possibilities with Increasing Aggregation Scale What can be the scale of aggregation? · Metropolitan area including core city and surrounding towns · All cities or towns in a county or prefecture Scope What services can be aggregated? · Raw water supply · Water supply service · Water supply and wastewater · Water supply, wastewater, and energy or others (solid waste) What operating functions can be aggregated? · Management · Planning and construction · Operations · Financing · All functions with merging of assets and staff Process What process can be followed? · Voluntary · With incentives (financial, political, and so forth) · Mandatory Source: Adapted from World Bank. 2005. "Models of Aggregation for Water and Sanitation Provision." World Bank Water and Sanitation Working Note 1. Washington, DC: World Bank. as a commercial activity while waste- There are many international examples water is still considered a semi-public to draw upon. Box 6.7 shows how good that needs to be subsidized. Cities Ningbo is extending its water supply should consider combining the two service to surrounding towns and services, particularly if they commit to cities. managing wastewater as a commercial Creating Multi-City Water Utilities. business. There will be transition costs, Smaller cities and towns outside the including shedding of staff and man- vicinity of metropolitan areas can also agement, but there is significant poten- benefit from a partnership with larger tial for increased efficiencies. and more experienced utilities. As Creating Water Utilities in Metropolitan shown in the Brazil example (Box 6.6), Areas. The potential for expanding cities can often be induced to form water supply and wastewater services partnership arrangements with outside from the core urban area of large cities utilities to provide a variety of services, into the surrounding towns is enor- such as concession contracts, leases, mous. Expanding the service area cre- or management contracts. These ser- ates many administrative, financial, vices could potentially be provided by and governance questions, although either the private sector or the munic- with proper government leadership ipal utilities, which want to expand these problems can be overcome. their business. 89 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 6.6 Municipal and Regional Water Services in Latin America Prior to 1990, many Latin American countries--including Argentina, Chile, Colombia, Panama, and Peru--organized their water industries as national monopolies under the direct control of the central government. Growing dis- satisfaction with the performance of the national monopolies, combined with wider pressure for devolution across all areas of government, created the conditions for a move toward more decentralized control in the 1980s and 1990s. On the whole, decentralization was not a studied response to the specific problems of the water sector, but rather the byproduct of wider state reform. In countries such as Argentina, Colombia, and Peru, this has entailed a sudden fragmentation of the industry into literally hundreds of small municipal providers. A number of problems have since arisen. The first of these is the loss of economies of scale. Aside from the investment economies, the scarcity of resources may also make it undesirable to dilute technical capacity across a large number of service providers. The questionable commercial viability of many of the business units is closely related, which leads to difficulties in attracting private sector investment. Finally, municipal control of the sector has made it difficult to drive regulation and PSP from the center. Brazil, however, offers an interesting contrast. Water supply in Brazil is the constitutional responsibility of the municipal government. However state-level (i.e. provincial level) water companies service around 80 percent of the urban population. These companies were created as a result of voluntary agreements with municipalities that gave the companies the right of service pro- vision. The agreements were facilitated by the national government, which offered an attractive investment financing package for municipalities through a national program named "PLANSA." The recent expiration of the PLANSA agreements has left a great deal of legal ambiguity regarding state vs. municipal responsibility for water service. Source: World Bank. 2005. "Ten Years of Water Service Reform in Latin America." World Bank Paper No. 3. Washington, DC: World Bank. Summary of strategic functions, which in many Strategic Directions cases are currently the responsibility of the parent bureau. With increased au- The strategic directions identified in this thority, the government should also chapter are summarized below. hold utilities more accountable through improving performance mon- Streamline Utility Governance to itoring, insisting on transparency and Facilitate Cost Recovery. Chinese cities customer orientation, and where ap- should experiment with new models of propriate using the private sector to utility governance that can better bal- enhance utility efficiency. ance service standards, tariffs, and Manage Wastewater as a Network where necessary fiscal transfers. Some Utility Business. Many cities have frag- options are (a) municipal utility mented the responsibility for waste- boards; and (b) municipal utility advi- water collection and treatment. To sory groups. improve efficiency, municipal govern- Foster Efficient Water Utilities. Munic- ments should consider consolidating ipal utilities, particularly in large cities, the service. Some options include (a) should be empowered to take over core an integrated wastewater company; 90 I m p r o v i n g U t i l i t y G o v e r n a n c e a n d S t r u c t u r e BOX 6.7 Case Study of Ningbo, China The Ningbo Water Supply Company (NWSC) currently serves 1.3 million people in the four core urban districts with a treatment capacity of 820,000 m3/day. In the surrounding suburban districts, 1.3 million people obtain water from 29 small town water supply systems with an estimated capacity of 610,000 m3/day, or through self- supply with an estimated capacity of 460,000 m3/day. Due to poor groundwater quality, all of the small town and self-supplied water systems draw upon local surface water sources, which are heavily polluted and subject to salinity intrusion. The Ningbo municipal government has decided to tackle the problem from a regional perspective and has developed a long-distance water transfer scheme to bring water to the city and its surrounding areas. The municipal government has also directed NWSC to incorporate the small town water supply systems, supply water to all industries, and improve service quality. The incorporation of the small towns and self-supplied users should benefit them through higher water quality and service, tapping into economies of scale in invest- ment and management expertise, and overcoming financing constraints. The municipality is still working through the terms of the incorporation with the small towns, and is considering three options: (1) transfer of assets and service responsibility; (2) management of the small town system while ownership of assets remains with the suburban district government; and (3) sale of treated water to the small towns. With the assistance of a World Bank loan, Ningbo is developing a 50-kilometer ring main for the treated water, with the core urban area inside the ring main, and the surrounding small towns provided through outward radiating spokes from the ring main. Source: World Bank, Ningbo Water and Environment Project Appraisal Document (2005). (b) a wastewater company with a lease gation is appropriate or advisable, contract for drainage; (c) management and pursue opportunities where they contracts between drainage depart- exist. ments and wastewater company; and (d) a consolidated "Wastewater Notes Group," where all organizations report 1. See the "Notice to Improve Wastewater Co- to the same management. llection and Establish Sound Collection and Exploit Opportunities for Service Treatment Practices" issued in September 1999 by NDRC/MOC/SEPA (Notice 1992). Aggregation. Economies of scale and 2. See the 2002 MOC/NDRC/SEPA "Circular on greater efficiency can potentially be Accelerating the Commercialization of Urban achieved through (a) combining water Wastewater and Solid Waste Treatment" which and wastewater utilities; (b) forming discusses the commercialization of wastewater metropolitan urban water utilities; and treatment, but not collection. 3. Excerpted from World Bank. 2005. "Models of (c) creating multi-city urban water Aggregation for Water and Sanitation Provision." utilities. Municipal governments World Bank Water and Sanitation Working should consider whether such aggre- Note 1. Washington, DC: World Bank. 91 7 Moving Up the Utility Financial Sustainability Ladder Most Chinese urban water utilities receive and finance investments through capital significant financial support from the mu- markets are at the top. This chapter provides nicipal government. While it might seem the following strategic guidance on how that this support would strengthen the water China's urban water utilities can move up sector, this chapter suggests that in fact the financial ladder. In essence: greater utility self-reliance would be a better strategy. Less reliance on government funds Municipal governments should always and more on user fees and capital markets ensure that utilities recover their costs can generate strong forces for improving ef- through user fees. However, by provid- ficiency and ensuring sustainability because: ing capital contributions, governments can limit a utility's costs, and so limit User fees are generally more reliable the required tariff levels. than government transfers. Over time, user fees should increase, Utilities will be more accountable to municipal capital contributions de- users. crease, and utilities should rely more Governments are less able to direct on domestic debt markets. self-reliant utilities to pursue short- National concessionary financing pro- term interests at the expense of longer grams should be expanded and restruc- term objectives. tured to provide incentives for cities to Capital markets--a vital source of comply with policy objectives. investment capital for the sector-- require financial discipline, trans- Government must ensure the right bundle parency, and accountability. of service levels, utility efficiency, tariffs, and fiscal transfers to have sustainable urban Box 3.3 in Chapter 3 presents the concept water services. Chapters 5 and 6 examined of a "financial sustainability ladder." Util- the policies and institutional arrangements ities that rely exclusively on government at the national, provincial, and municipal funding for capital and operating expenses level that are necessary for "getting the are at the bottom of the ladder; utilities that bundle right." This chapter focuses on tariff generate sufficient revenues from user fees levels and fiscal transfers. 93 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Achieving Utility fees and government transfers. Cash costs Cost Recovery typically include operation and mainte- nance, debt service, and asset renewal. A re- Many urban water utilities in China experi- turn on equity is also required if there is a ence financial and operational stress because: private equity investment. Box 7.1 explains the financial terms and concepts used in this User fees are well below the full cost report in more detail. The general status of recovery level, forcing utilities to rely Chinese water utilities is described below. on unreliable municipal capital contri- butions and government payments. Water Supply Utilities. The figure in Box Even when provided, government pay- 7.1 shows the financial status of typical ments are not enough to fill the gap be- water supply utilities in China. The utilities tween the true cost of service and the receive capital contributions from the mu- revenue from users. nicipal government and borrow from do- Concerns about affordability for the mestic banks, and thus have a moderate level lowest income groups, and social of financing autonomy. They also rely acceptability, limit the extent and rate mainly on user tariffs, and thus have a high at which tariffs can be increased. level of revenue autonomy. Water supply Tariff structures are not optimized to utilities generally have a moderate cost re- provide the correct economic signals covery ratio, as the combination of user fees and increase utility revenues. and government payments (when they oc- cur) typically result in inadequate revenue to The financial and operational perform- cover costs. This is reflected in Table 2.3, ance of urban water utilities can be im- which shows that two-thirds of water supply proved by: utilities did not make an accounting profit in 2004. The water supply utilities generally Ensuring that water and wastewater cope by foregoing asset renewal invest- utilities (including drainage bureaus) ments. can meet their financial obligations through user fees only, with govern- Wastewater Utilities. Wastewater service ment funding limited to capital in most cities is fragmented between drain- contributions. age departments and wastewater com- Adjusting tariff structures to ensure panies. Drainage departments rely exclu- more reliable and higher utility sively on government payments and capital revenues. contributions, and thus have no revenue or Developing better low-income support financing autonomy. Drainage departments programs, which allow tariffs to be also have a low cost recovery ratio, as gov- increased at a faster pace. ernment payments are typically inadequate to cover maintenance and asset renewal Inadequate Utility Cost Recovery1 needs. The term "utility cost recovery" as used in Wastewater companies generally have this study means that a utility can meet its moderate levels of financing because they re- revenue needs from a combination of user ceive some capital contributions from the 94 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r BOX 7.1 Concept of Utility Cost Recovery Using a cash-needs approach, the following figure schematically represents a utility's annual rev- enue requirements. Annual utility cash revenue requirement Debt service costs WS GOV Partial capital cost WW GOV WS tariff O&M costs WW tariff 0% Financing 100% autonomy Revenue Autonomy: Tariff/(Tariffs + Government payments) Financing autonomy: Debt/(Debt + Government contribution) O&M Costs. Represent the minimum amount of cash necessary to maintain operations at a rea- sonable level over a short-term perspective. Partial Capital Costs. Utilities generally try to have enough cash from revenues to finance minor capital works. Major capital projects are typically financed through a combination of cash from rev- enues, debt, and/or municipal government contributions. Debt Service. Debt service refers to the cash necessary to make principle and interest payments on debt obligations. As the amount of utility debt financing increases, debt service increases. Some lenders also require utilities to establish "reserves" in the event of an unexpected business shock. If the municipal government provides contributions for capital works, then debt service is reduced. Financing Autonomy. This concept reflects the percentage of investment financing that comes from loans or internal cash versus government contributions. Sixty percent financing autonomy means that 60% of the funds come from loans or utility cash reserves, and 40% from government equity contributions. Revenue Autonomy. This shows the percentage of annual revenue that comes from user fees ver- sus government payments. A ratio of 60% percent means that 60% of the revenue comes from users and 40% from government payments. Utility Cost Recovery Requirement. This is the amount of cash necessary to meet O&M, defined partial capital costs, and debt service requirements. The higher the level of financing autonomy, the greater the debt service, and the higher the required utility cost recovery level. Utility Cost Recovery Ratio. This is the ratio of actual utility revenues from user fees and govern- ment payments divided by the utility's cost recovery requirement. A ratio of 60 % means that the utility's revenues (from user fees and government payments) only meets 60% of its requirements. Full Cost Recovery. This is the amount of cash necessary to meet all of a utility's needs, assum- ing no government financial support; that is, no government payments or capital contributions to the utility. 95 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s government and also borrow from commer- company's income statement, where depreci- cial banks. The wastewater companies typi- ation is typically taken as a proxy for the cap- cally have moderate levels of revenue auton- ital costs. Depreciation, however, is based on omy and rely on a combination of user fees historical costs and many of the assets are so and government payments. The combina- old that the accounting valuation is of little tion of wastewater tariffs and government use. Developing asset management plans that payments typically result in moderate cost accurately assess the renewal costs are essen- recovery ratios. Wastewater companies cope tial to a utility's long-term sustainability. by foregoing asset renewal, maintenance, and in some cases just not operating the Low User Fees. Since 1998, waster supply treatment plant. and wastewater tariffs have increased The figure in Box 7.1 shows the financial throughout China. The weighted average status of a typical wastewater sector, includ- water supply tariff has risen from 0.93 ing both drainage departments and waste- RMB/m3 in 1998 to 1.36 RMB/m3 in 2004 (see water companies, in a Chinese city. The Table 7.2). The rate of tariff increase is approx- overall level of cost recovery, financing, and imately equal to China's overall growth in revenue autonomy is low. This precarious fi- GDP over the same period. Although the in- nancial situation can potentially undermine crease in tariffs may have increased water util- China's national wastewater management ity revenues, the overall financial position of program. Table 7.1 summarizes the general water utilities appears to have deteriorated financial status of urban water utilities in over the period 1998 to 2004 (see Table 2.3). China. This may be attributable to higher O&M and debt service costs associated with the water Asset Renewal. Many of the water supply supply investment boom during the 1990s. distribution and wastewater drainage net- Wastewater tariffs have also risen significantly works in Chinese cities need to be renovated. since 1998 when few cities had wastewater As discussed in Chapter 9, utilities need to es- tariffs. By 2005, 475 of the 661 designated tablish modern asset management programs cities have wastewater tariffs, but many of the to ensure that asset renewal is done in a sys- cities have very low rates, with close to 25 per- tematic and cost-effective manner. The cur- cent having tariffs less than 0.3 RMB/m3. rent system of tariff setting in China is based Figures 7.1 and 7.2 show the weighted av- on the objective of having the utility make a erage water supply and wastewater tariffs small accounting profit as reflected in the based upon a selection of 128 cities in 2005. TABLE 7.1 Summary of Urban Water Utility Financial Status in China Utility Type Utility Cost Recovery Revenue Autonomy Financing Autonomy Water Supply Company Medium High Moderate Wastewater Company (Mainly Treatment) Medium Medium Medium Drainage Department Low Low Low 96 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r are used to finance capital works, and user TABLE 7.2 Weighted Average Water Supply fees are adequate to cover O&M, debt service, Tariffs by City Category and annual asset renewal requirements. The (Unit: RMB/m3) estimate for water supply excludes the cost for developing the raw water supply (i.e. Average Water Tariff 1998 2004 % Increase water resource engineering fee), which can Category I: Super Cities 1.00 1.72 72 vary significantly depending on a specific Category II: Medium Cities 0.93 1.33 43 city's circumstances. The cost of raw water Category III: Developing Cities 0.85 1.24 46 supply development is typically heavily subsi- National Average 0.93 1.36 47 dized through a local or provincial water re- sources bureau. The estimate for wastewater Source: China Water Works Association Yearbooks (1999) and (2005). includes both collection and treatment. The two figures indicate that water supply Based on a review of World Bank-financed tariffs are generally below full cost-recovery projects, this study estimates that the indica- levels. Wastewater tariffs are generally not tive full cost recovery weight-average tariff for adequate to even meet wastewater treatment water supply should be a minimum of costs, which are estimated to range from 2.0 RMB/m3, and 3.0 RMB/m3 for wastewater. 1.0 to 1.5 RMB/m3. A utility can derive rev- These estimates assume commercial loans enues from other sources besides a volumet- FIGURE 7.1 Water Supply Tariffs FIGURE 7.2 Wastewater Tariffs (RMB/m3) (RMB/m3) 30 30 25 25 WS full cost 20 recovery >2.0 20 city city Full cost treatment ofr and collection >3.0 RMB 15 ofr 15 Full cost of Numbe10 Numbe10 treatment 5 5 0 0 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6More 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 RMB RMB Category Category Category Category Category Category I II III I II III Average 1.72 1.33 1.24 Average 0.65 0.40 0.32 Stnd. dev. 0.57 0.38 0.36 Stnd. dev. 0.22 0.19 0.14 Minimum 0.88 0.70 0.60 Minimum 0.22 0.08 0.10 Maximum 2.80 2.50 2.20 Maximum 1.05 1.17 0.65 Based upon 128 sample cities, as of July 2005. See Annex 3 Based upon 128 sample cities, as of July 2005. See Annex 3 Technical Notes for Analysis. Technical Notes for Analysis. 97 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s ric tariff, including fixed fees, developer covery levels. China's water supply average contributions, bulk water sales, etc. From a tariff is RMB1.36/m3 ($0.17). Taking into ac- utility perspective, the important parameter count purchasing power parity, the adjusted is total revenues. Nevertheless, the weighted price is $0.68, which is below the full cost re- average tariff provides a good general indi- covery tariff level for a typical OECD coun- cator of the level of cost recovery from users. try. Box 7.2 also indicates the likely range for Box 7.2 provides an international com- cost recovery in developing and industrial- parison of water supply tariffs and cost re- ized countries. Cost estimates are lower for BOX 7.2 International Comparison of Cost Recovery Ranges for Water Supply Indicative Tariff Levels. The following table indicates the ranges for probable degree of cost recovery in the de- veloping and industrialized countries. Cost estimates are lower for developing countries, reflecting lower labor costs. The estimates are for water supply only, and do not include wastewater. Tariff Levels Developing Countries Industrialized Countries <$0.2/m3 Tariff insufficient to cover basic O&M costs Tariff insufficient to cover basic O&M costs <$0.2­$0.4/m3 Tariff sufficient to cover operation and some maintenance costs Tariff insufficient to cover basic O&M costs <$0.4­$1.0/m3 Tariff sufficient to cover O&M and most investment costs Tariff sufficient to cover basic O&M costs >$1.0/m3 Tariff sufficient to cover O&M and investment needs in the face Tariff sufficient to cover full cost of modern water of extreme shortages. systems in most high-income cities. Probable Degree of Cost Recovery. The following table provides information on the extent to which tariffs meet cost recovery objectives by income level. Percentage of Utilities Whose Average Tariffs are: Groups of Water Utilities Too Low to Cover O&M Enough to Cover O&M Enough for O&M and Partial Capital Global 39 30 30 High Income 8 42 50 Upper Middle Income 39 22 39 Lower Middle Income 37 41 22 Lower Income 89 9 3 Source: World Bank, "Water Electricity, and the Poor," Komives et al. (2005) 98 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r developing countries, reflecting lower labor Another perspective is that the municipal costs. The estimates are for water supply government can pay the utility for the ser- only, and do not include wastewater. vice provided. User Cost Recovery for Wastewater Ser- Social Acceptance vices. Approximately two-thirds of invest- The extent and pace to which water and ment costs and around half of the operating wastewater tariffs can be raised is based pri- and maintenance costs of a typical waste- marily on social acceptance. Social accept- water system come from the complex system ance depends on a number of political, cul- of pipelines and pumping stations scattered tural, and economic factors, including the throughout a city. The common perception overall percentage of household income in China is that drainage (i.e. collection of used to pay for water services. Box 7.3 pro- stormwater and wastewater) is a pure public vides an overview of water tariff levels in good, and the funding and operation of the OECD countries as they relate to household drainage facilities should be provided by the income levels. government through a traditional public de- partment approach. Wastewater treatment, Household Incomes. The general range of however, is viewed as a commercial activity what is often considered "affordable" for by which payment can be made for the treat- water services is 3 to 5 percent of household ment services rendered and should be pro- income.2 Figure 7.3 shows the financial im- vided by a commercial company. In almost pact of different tariff levels based upon the all cities, the wastewater tariff is used for annual household income in China. The av- wastewater treatment, and funding for erage 2004 urban household disposable in- drainage services is provided by the munici- come in China was approximately 28,000 pal government. Since many municipal gov- RMB. With an estimated 2004 average com- ernments face severe fiscal constraints, bined tariff of about 2 RMB/m3 (1.36 many chose not to fully fund the operation, RMB/m3 for water supply and 0.64 RMB/m3 maintenance, and timely renewal of the for wastewater), the percentage of water drainage networks. charges to the annual household income is The classification of drainage as a public only around 1 percent.3 good can be contested. Drainage of waste- If the tariff increases to 3.5 RMB/m3-- water can be considered as an extension of which is this study's minimum estimated the water supply service and subject to a cost recovery tariff for water supply and user-pays principle. It is more difficult to wastewater treatment, water charges will apply a strict "user-pays" principle to represent 1.7 percent of the average house- stormwater drainage. In many countries, hold income. However, at that level, two stormwater services are paid for by a prop- low-income groups--about 20 percent of erty tax based on the size of the property, as- total urban residents--will pay more than suming that the amount of stormwater 3 percent of their household income (that is, runoff is related to property size. This ap- above the dashed line in Figure 7.3). The full proach would not work well in China, as cost recovery tariff for water and wastewater most people live in apartments and munici- services is probably closer to 5 RMB/m3 or pal governments do not levy property taxes. higher. The full cost recovery level would 99 BOX 7.3 Social Acceptability of Water Tariffs in OECD Countries Many OECD countries have seen a real increase in household water charges in recent years. The factors behind this trend include continued pollution of water resources (necessitating more expensive treatment), combined with additional national legislation and EU directives that require higher standards of wastewater treatment. This trend toward higher prices is likely to continue and will therefore continue to generate pressure on the perceived affordability issue of water services in OECD countries. There are several methods available for measuring the affordability of water services. "Macro-affordability" indicators are developed by relating national average household water charges to either average household income (disposable or gross) or average household aggregate expenditure. "Micro-affordability" indicators dis- aggregate the former by income groups. Available evidence of affordability indicators suggest that, in about half of the OECD countries (15 out of 30), affordability of water charges for low-income households is either a significant issue now or might become one in the future, if appropriate policy measures are not put in place. Macro and Micro Affordability Indicators, Selected OECD Countries Macro Indicator: Percentage Micro Indicator: Burden of lowest Countries Year of Household Income Income (%)1 England & Wales 99­00 1.2 3.75 Mexico 2000 n.a. 3.84 Hungary 1999 2.1 2.53 Scotland 99­00 0.7 2.24 France 1995 0.9 2.18 Netherlands 1999 1.4 2.38 Denmark 1998 1.1 1.9 Italy 1995 0.7 0.9 USA 2000 0.5 2.18 Note: Representing 10 percent or less than 10 percent lowest income group. The trade-offs between efficiency and equity objectives of water services usually occur when moving from an unmeasured to metered charging structure, when rebalancing tariffs away from fixed charges toward volumet- ric charges, and when increasing fees and tariffs toward full-cost pricing. There is considerable experience in OECD countries with policy measures to address water affordability for vulnerable groups, while attempting to make water pricing reveal the full economic and environmental costs of water services. Social measures to address affordability issue can be categorized into two groups: (1) income support measures and (2) tariff-related measures. The income support measures tackle individual customer's ability to pay from the income side through income assistance, water services vouchers, tariff rebates and discounts, bill re-phasing and easier payment plans, arrears forgiveness, etc. Tariff-related measures keep the size of water bills low for certain groups (e.g. refinement of increasing-blocking tariffs, tariff choice, tariff capping). A common approach, called a "life-line tariff," is to provide qualified low-income households with low rates up to a certain quantity (for example, 10 m3 per month per household). Source: OECD, "Social Issues in the Provision of Water Services," (2003). 100 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r still be affordable to 60 percent of total FIGURE 7.3 Combined Tariff as Percentage of Household urban residents (i.e., under the dashed line). Income in 2004 Based on this analysis, there appears to be considerable potential for increasing tariffs in 12 Chinese cities from the 2004 average of Average Lowest income (10%) 2.0 RMB/m3. The lowest 10 percent income 10 Low income (10%) income group, however, had an average disposable d Lower middle income (20%) 8 Middle income (20%) income of only 8,500 RMB. If the tariff househol reaches 5 RMB/m3, water charges would con- 6 sume about 8 percent of annual income. annual Affordability 4 Moreover, Figure 7.3 is for the average house- of Threshold (3%) hold across China, but there are significant centager 2 differences among cities in China. For exam- Pe ple, the average household income in a rich 0 2 3 4 5 6 city could be above 40,000 RMB, while for a Combined tariff level (RMB/m3) poor city it might be closer to 20,000 RMB. See Annex 3, Technical Notes, for Analysis. Most Chinese cities have programs for low-income households where the cost of basic services, such as water and electricity, are explicitly considered in a monthly sti- vices. Although Chinese household incomes pend for eligible households. Increases in are rising rapidly, so are basic expenses; water tariffs could potentially be accom- many urban families feel beleaguered with modated through this instrument. One their new financial obligations. Second, as drawback, however, is that that are many discussed in Chapter 3, there is growing migrants who may not have official status in urban inequality in China as migrants flood the city and thus are not eligible for low-in- into cities and a new class of rich urbanites come assistance. Moreover, the income sup- develops. Increasing prices for utility ser- plement approach requires the household to vices, without putting in place effective exercise budget discipline--which may or programs to help low-income residents, may not occur, and could still result in financial reinforce concerns about inequality and fair- difficulties paying the water bill. As shown in ness. Third, given the low levels of trans- Box 7.3, there are other programs that can parency and perception of inefficiency as- help low-income groups. sociated with municipal utility companies, the public may be reluctant to pay for ser- Social Acceptability. Even if a tariff is "af- vices unless they are confident their money is fordable," it may not be socially acceptable. used in an efficient and accountable manner. There are a number of social concerns in These three factors may cumulatively work Chinese cities that may limit the rate and ex- to dampen the pace at which water and tent of tariff increases. First, as China moves wastewater tariffs can be increased. toward a market economy, families are ex- pected to pay for many essential services that Tariff Structures were once free. These include housing, med- The tariff structure is important in allocat- ical care, education, and basic utility ser- ing the cost of service, as well as sending eco- 101 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s nomic signals about the resource value of Volume-Based Charges. Both water and the water. The establishment of a tariff level wastewater tariffs are based on the actual and structure typically has the following quantity of water delivered, with the waste- objectives: (1) cost recovery, (2) economic water tariff included on the water supply efficiency, (3) equity, and (4) affordability. bill. The water supply company typically re- Chinese cities, with the encouragement of mits the wastewater tariff to the local fi- the national government, are experimenting nance bureau, which then passes it on to the with new types of tariff structures to address wastewater company, often through the par- its severe water problems. The multiple ob- ent agency such as the construction bureau. jectives in setting water tariffs, however, are A notable exception is self-supplied indus- often in conflict, and Chinese cities are tries, where it is not possible to collect waste- struggling with striking an appropriate bal- water fees directly from the water supply ance among the different criteria. Table 7.3 company. Self-supplied water accounts for provides an illustrative example of the tariff around 12 percent of total urban water sup- structure for Tianjin. Water tariffs in China ply on a national level, and in some cities in typically have the following attributes: the north of China it can account for up to TABLE 7.3 Water and Wastewater Tariff History in Tianjin (Unit: RMB/m3) Tariff Users 2000 Jan 01­Aug 01 Sept 01­Sept 02 Oct 02­Dec 03 2004 Water Supply Residential 1.4 1.8 2.2 2.6 2.9 Administrative 1.8 2.2 3.0 3.6 4.4 Industry 1.8 2.2 3.0 3.8 4.6 Commercial 2.2 2.6 3.0 3.8 4.6 Financial & Construction 2.2 2.6 3.4 3.8 4.6 Hotel & Recreation 2.4 3.5 5.0 5.0 5.6 Special Sector 2.4 3.5 6.0 9.0 18 Wastewater Residential 0.2 0.4 0.4 0.5 0.6 Administrative 0.4 0.6 0.6 0.8 1.0 Industry 0.2 0.4 0.4 0.8 1.0 Commercial 0.4 0.6 0.6 0.8 1.0 Financial & Construction 0.4 0.6 0.6 0.8 1.0 Hotel & Recreation 0.4 0.6 0.6 0.8 1.0 Special Sector 0.4 0.6 0.6 0.8 1.0 Source: Tianjin Construction Administration Commission (2006). 102 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r 30 percent. Collection of wastewater fees tariff is doubled. Wastewater fees, however, from self-supplied industries can be prob- do not have an increasing block rate. The ob- lematic, as the wastewater companies typi- jective of the increasing block tariff is to cally do not have the authority to collect the send economic signals reflecting the scarcity tariffs directly. In some cases, the environ- value of water, while ensuring that water to mental protection bureau, which regulates meet basic needs remains affordable. industries, or the water resources bureau collects the wastewater fees on behalf of the Cross Subsidies. There are significant wastewater company. cross-subsidies in Chinese water tariffs. In- dustrial and commercial users subsidize res- Metering. The majority of Chinese urban idential users. In a survey of cities across residents live in apartment blocks. In the China, the average ratio of the non-domestic past, water companies used "bulk meters" tariff to the domestic tariff was approxi- that measured the flow into the apartment mately 1.5. Cross-subsidies are partly a building, and the building management was vestige of the planned economy, when state- responsible for paying the water bill. China owned-enterprises subsidized basic domes- now has a policy of universal household me- tic services. Cross-subsidies are also used to tering, and water companies are rapidly in- help with social affordability, as raising tar- stalling meters. Some cities are experiment- iffs for industrial and commercial users may ing with pre-paid debit cards that residents be politically easier than residential users in must put into their meters in order to con- many cities. tinue to receive service. Water Resource and Water Development Movement toward a Two-Part Water Tariffs. In addition to tariffs for the water Supply Tariff. There is a move to a two-part supply and wastewater utilities, the water tariff for water supply, which includes: (1) a bill also typically includes a water resource fixed capacity charge based on the size of the fee and a water development fee. The water connection to cover fixed costs and a certain resource fee goes to the local water resources degree of cost recovery for investments; and bureau, which has overall responsibility for (2) a variable charge based on the volume of water resources management. The water de- water used. Since 1999, at least fourteen velopment fee is based upon the allocated pilot cities have adopted a two-part tariff for cost of the raw water supply infrastructure. water supply.4 Often, the raw water supply infrastructure-- such as reservoirs and conveyance facil- Increasing Block Tariffs as a Demand ities--is heavily subsidized by the govern- Management Tool. A number of pilot cities ment at either the municipal or provincial have also adopted increasing block tariffs for level. In a few cases, however, the water de- domestic users to promote water conserva- velopment fee can be quite high; for exam- tion. For example, each household is allo- ple, in Tianjin the fee is RMB 1.5/m3 ($0.18). cated 10 m3 per month and all water deliv- ered within this amount is charged the Polluter-Pays Principle. Wastewater tar- standard domestic rate. For the next incre- iffs in China are based on volume of waste- ment of water from 10­20 m3/ month, the water discharged, typically measured on 103 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s the quantity of water supplied. An Asian extent of tariff increases, through their Development Bank study on wastewater tar- capital contribution policy. The follow- iffs recommended that in the future, Chinese ing guidelines are presented: cities transition to a two-part tariff for indus- Wastewater Tariffs Should Pay for try and certain types of commercial estab- Drainage. Cities should increase the lishments.5 The two-part tariff would be wastewater tariffs so that it covers composed of (1) volume charges and (2) pol- the utility's cost for drainage services. lutant loading charges. The pollutant load- Even though stormwater and sanitary ing charges, which are used in many OECD drainage are two different services, they countries, could be either (a) set on the clas- are provided by the same utility (and in sification of the industry/commercial estab- the case of combined drains, through lishment with an appropriate adjustment the same pipeline network). The munici- factor for the volume of the wastewater; or pal government will probably need to (b) the actual measure or estimated mass of still provide equity contributions to fund pollution discharged on a case-by-case basis. major drainage capital works, but at least all O&M and minor capital works Achieving Utility Cost Recovery should be covered through user fees. In order to improve the performance and sus- Tariff Structures Should Be Optimized. tainability of urban water utilities, this study Tariff reforms should be accelerated recommends the following approaches: with more usage made of two-part tar- iffs (fixed and variable), and wastewater Utilities Should Recover Their Costs charges based on both volume and pol- Through User Fees. Many urban water lutant loading. Two-part tariffs would utilities still rely on municipal govern- allow cities to more vigorously pursue ment payments to partially cover their demand management efforts without costs. Water supply and wastewater undermining a utility's revenue base. tariffs should be increased, and tariff Wastewater charges based on flow and structures adjusted to ensure utility pollutant loading would increase waste- cost recovery. Municipal governments water revenue and provide better eco- can adjust a utility's costs, and thus the nomic signals to dischargers. Develop New Low-Income Assistance Programs. To address affordability and TABLE 7.4 Suggested Municipal Government Capital social acceptance issues, cities should Contribution Policy experiment with new support prog- Type of City Water Supply Wastewater rams such as vouchers, rebates, life- line tariffs, etc. High Capacity No Capital Contributions Limited Capital Contributions for Drainage Low Capacity Limited Capital Capital Contributions Accessing Domestic Contributions for Drainage Credit Markets National Concessionary National Concessionary Finance Finance This section first reviews municipal infra- structure spending and financing in general, 104 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r followed by a focus on urban water, and sug- FIGURE 7.4 Total Annul Expenditure gests that urban water utilities should be em- for Urban Construction powered to make more use of domestic debt and Maintenance markets. The key points are: Billions (RMB) Chinese cities are experiencing a boom 500 in infrastructure construction that is expected to continue, particularly for 400 urban water. Financing infrastructure 300 is a major concern for municipal governments due to their limited fis- 200 cal resources and inability to borrow directly. 100 The urban water sector relies on a mix 0 of financing sources, including the 1995 2000 2004 municipal government, domestic Source: MOC, Urban Construction Statistics Yearbook (2005). banks, national and international concessionary finance, and the private sector. China's booming economy has created China's economy reached the current high the potential for urban water utilities growth stage; (c) the government's expan- to rely more on domestic debt markets sionary fiscal policy as a method of stim- and less on government. Greater use of ulating domestic demand and reducing credit markets would improve utility dependency on export-led growth; and financial discipline, transparency, and (d) recognition by China's leaders that infra- accountability. Increasing cost recov- structure provides a necessary foundation ery, mainly from users, to improve for economic development. revenue reliability and debt service capacity is the key to accessing debt Municipal Financing Sources markets. Table 7.5 provides a breakdown of sources for urban infrastructure funding for Cate- Municipal Infrastructure Spending gory I and III cities. Around 90 percent of the Annual municipal infrastructure spending funds are used for construction, with the bal- has increased dramatically over the last ance going toward maintenance. Since ur- decade, as shown in Figure 7.4. Water and ban water utilities are part of the overall wastewater accounted for only 11 percent of municipal infrastructure sector, and the total spending in 2004. The largest sector was construction bureau often serves as the par- roads and bridges at 44 percent. Many fac- ent bureau (see Chapter 6), the following tors account for the explosion of infrastruc- paragraphs look at municipal infrastructure ture construction, including the (a) rapid in- funding sources in general. crease in urban population and economic development; (b) backlog of deferred in- Land Transfer Fees. Category I cities rely frastructure investments incurred before on land transfers to finance around 30 per- 105 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s to borrow. Domestic bank lending accounts TABLE 7.5 Urban Infrastructure Fund in 2004 (US$: million) for approximately 25 percent of all munici- pal infrastructure funds. Category I cities Category I Cities Category III Cities Fund Sources % of total % of total make greater use of domestic loans than Category III cities, indicating their generally Urban Maintenance and higher level of creditworthiness. Construction Tax 6 9 Chinese banks have a high degree of li- Municipal Financial Allocation 8 13 quidity and are anxious to lend to credit- Domestic Loan 26 18 worthy borrowers. Many banks, however, do not have high modern credit analysis expert- Land Transfer Fee 30 22 ise; loans to the public utility sector are often Self-raised 20 17 made at the request and with the implicit Others* 10 20 guarantee of the municipal government. The People's Bank of China typically limits loan Source: MOC, Urban Construction Statistics Yearbook (2005) maturity to eight years for capital invest- ments, and three years for working capital.7 Utility companies often struggle to repay the short-term debt, and it is quite common for cent of their urban infrastructure needs, tak- the utilities to make interest payments only ing advantage of their booming property and periodically roll over the principle. The markets and the government's control of principle rollover effectively turns short- land. Category III cities have less property term debt into longer-term debt, but also in- development potential, and thus the poten- creases the interest rate risk, as well as the tial for land sales is more limited and ac- risk that the bank may call in the principle counts for 22 percent of total funds. The payment at an inopportune time. long-term prospect for financing infrastruc- ture development through land sales is un- Urban Development Investment Com- clear but will probably be constrained by panies (UDIC). Since municipal govern- two factors. First, the national government is ments are not allowed to borrow directly in exercising stricter control over local land de- China, many cities have established UDICs, velopment to preserve agricultural land and which invest in infrastructure on behalf of minimize social unrest due to dislocation. the municipal government. These compa- Second, much of the prime real estate has al- nies receive preferential access to property ready been developed, and as the real estate development rights, and thus are able to se- market evolves over time the quality and cure loans from domestic banks. At least in value of the land available may decrease. the short term, this model works well in Category I cities with booming property Domestic Loans. Governments in China markets such as Shanghai, but it may not be are not allowed to borrow directly, either viable for most cities in China. The Shanghai through commercial banks or municipal UDIC model has some similarities with spe- bonds.6 Municipally owned utility compa- cial purpose investment vehicles in other nies, or special purpose urban infrastructure counties. Box 7.4 compares arrangements in investment companies (UDICs), are allowed New York and Shanghai, with the funda- 106 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r BOX 7.4 Special Purpose Municipal Investment Vehicles in Shanghai and New York The Shanghai UDIC was established in 1992 as a municipal investment and stock-holding company to raise funds on behalf of the Shanghai Municipal Government. The company has invested in over 40 large infrastructure projects (mostly for water and wastewater), and at present has total assets of more than 240 billion RMB ($30 billion). In the core urban areas of Shanghai, there are four water supply companies. The Shanghai Municipal Sewerage Company (SMSC) is responsible for major drainage works and wastewater treatment plants, and is the holding company for three operating companies. The assets and shares of the water supply and sewerage companies are consolidated on the balance sheet of the Shanghai Water Assets Operation and Development Company (SWAOD), which is the water/wastewater sub- sidiary of the Shanghai UDIC. SWAOD is responsible for raising funds for the investment programs of these companies, and shoulders part of the debt service burden. SWAOD receives its funding from a variety of sources, including some funds transferred from its owner, UDIC. The World Bank has been actively involved in the Shanghai urban water sector since the late 1980s. As part of an adaptable program loan approved in 2003, the World Bank has been support- ing SWAOD to develop the first corporate bond issue in the wastewater sector in China. This bond issue of 1.5 billion RMB was issued in mid-2006. The World Bank has also supported the Shanghai UDIC in its development of a "district financing vehicle" (DFV) to mobilize financing and provide proj- ect management support to the surrounding districts in Shanghai for their urban environmental in- frastructure. A new DFV subsidiary of the UDIC was established in 2005 with this special purpose objective. The New York City Municipal Water Authority was created in 1984 as a public benefit corporation for the purpose of issuing debt through revenue bonds to finance capital improvements for the water and sewer system. A second public benefit corporation, the New York City Water Board was also formed to lease the water system from New York and to maintain the system for a term of 40 years or for the life of the outstanding revenue debt. The Board was also granted the authority to set rates and charges as necessary to meet its operating, maintenance, and debt service requirements. The actual service delivery is provided through the New York City Department of Environment. The arrangements were developed with a view to isolating the credit of the water and sewer sys- tem from that of the city (which at the time was rated Baa) by providing bankruptcy protection and automatic rate setting. To protect it from bankruptcy, (a) the Board and Authority did not have the ability to file for bankruptcy; (b) the lease agreement established the Board's ownership of the rev- enues; (c) the city's annual lease payment was subordinated; (d) financing agreements provided for an operating reserve fund and debt service fund; and (e) the systems revenues could not be combined with the city's should the city declare bankruptcy. With regard to tariff setting, the legal structure provided for independent third parties, the rate consultant and consulting engineer, to ensure that the rates were not subject to political manipu- lation. Additional protection measures included the following: (a) if the Board did not set adequate rates, the Authority could petition for the appointment of a receiver on behalf of the Board; (b) cash flow requirements were monitored on a monthly basis and rate adjustments made as necessary over the course of the year; (c) rate setting was formula driven, with rates and charges equal to 115% of projected debt service plus 100 % of operating expenses, and required reserves; and (d) in order to take on additional debt, revenues for the last two years and for the next five years, as projected by the rate consultant, had to pass the previous test. Sources: World Bank, Shanghai Urban Environment Management Project (APL-2)Project Appraisal Document (2005); and World Bank, "Private Participation in Infrastructure in China." Bellier et al. (2003). 107 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s mental difference that the New York City TABLE 7.6 Per-Capita Urban Infrastructure Water Authority repays its debt through user Fund by City Type fees that are closely monitored and con- trolled by lenders. City Type Average (RMB) Category I 2,428 Municipal Financial Allocations. Munic- ipal governments provide funding for infra- Category II Cities 1,107 structure through their general budget. In Category III Cities 672 2004, this accounted for 13 percent of total funding for infrastructure in Category III Source: MOC, Urban Construction Statistics Yearbook (2005). cities, but only 8 percent in Category I cities. Category I cities have more access to other sources of funding, and thus rely less on frastructure spending of RMB 2,500, ap- scarce municipal financial resources. proximately four times higher than the Category III cities, and double the Category Urban Construction and Maintenance II cities. This wide variance in infrastructure Tax. The urban construction and mainte- funding underscores the difficulties that nance tax is a local tax levied on the VAT, low-capacity cities have in financing and af- consumption tax, and business tax, and is as- fording municipal infrastructure. sessed at 7 percent of each respective tax in urban areas. The tax revenue is typically re- Financing Urban Water Infrastructure served for maintenance purposes only, such Financial information for urban water can- as for road or drains. The tax typically ac- not be easily disaggregated from the infra- counts for 6­9 percent of total funds. structure statistics. Table 7.7 lists the key financing sources and their approximate Self-Raised and Other Funds. Self-raised and other funds refer to revenue that is not included in the official municipal budget TABLE 7.7 Indicative Ranges of Urban Water and includes "self-owned" funds by local Financing Sources, 1991­2005 governments, enterprises, and institutions. Private sector investment falls under this Water Wastewater category. The category "others" includes for- Financing Source Supply (%) (%) eign direct investment, utility fees, water re- Municipal Government 20­30 40­50 source fee, etc. These two categories account Domestic Banks 20­30 10­20 for 30 to 40 percent of all infrastructure funding, yet are not well-defined or under- State Bond Program 10­20 20­30 stood. This highlights the fact that infor- Private Sector 10­20 10­20 mation on municipal finance in China is China Development Bank 10 5 typically not very transparent. International Financial 5 10 Wide Variance in Infrastructure Per- Institutions (WB, ADB, JBIC) Capita Spending. Table 7.6 shows that See Annex 3, Technical Notes, for Analysis. Category I cities have annual per-capita in- 108 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r financing percentages. The table was assem- in the sector over the last 10 years have been bled from sources of variable reliability, and the World Bank, Asian Development Bank thus indicative ranges are provided. The ac- (ADB), and the Japan Bank for International tual mix of financing sources will vary from Cooperation (JBIC). Over this period, World city to city. Bank loans have totaled around $1.8 billion, with $1.5 billion for the wastewater sector Municipal Government. For water sup- and $300 million for water supply. The ADB ply, this study estimates that around 20 to has committed around $1.0 billion in financ- 30 percent of total funding comes from the ing for the sector, approximately split be- municipal government (or a UDIC) in the tween wastewater and water supply.8 JBIC form of an equity contribution. For waste- also has a large water sector program in water, almost all drainage infrastructure is China. In total, however, the international fi- funded through the municipal government nancial institutions have probably only fi- (or a UDIC). Wastewater treatment is con- nanced between 5 and 10 percent of overall sidered more of a commercial good and the urban water infrastructure costs since 1991. municipal government typically provides less financial support. Overall municipal State Bond Program and China Develop- government financing for wastewater could ment Bank (CDB). The state bond program be as high as 50 percent. is administered by NDRC, and provides con- cessionary finance to support around one- Domestic Banks. State-owned commer- quarter of all investments in the urban water cial banks are estimated to provide around sector. The CDB is the national development 20 to 30 percent of the financing for water bank and has also been very active in the sec- supply, but less for wastewater. The water tor. Chapter 6 discusses these important supply companies, and the wastewater treat- funding sources in more detail. ment companies, are commercial entities and have the potential capacity for repay- Increasing Debt Financing ment. Since many of the drainage collection China's strong economy has created a high works are managed by public bureaus, they level of liquidity in the domestic banking sys- do not have the ability to borrow directly tem, and Chinese banks are encouraged to from commercial banks. lend to creditworthy municipal utility com- panies. This has created a golden opportu- Private Sector. The role of the private sec- nity for water utilities to tap into domestic tor is discussed in Chapter 8. We estimate credit markets to finance investments. Util- that around 10 to 20 percent of water supply ity companies in many economically ad- and wastewater financing has been provided vanced countries take on high levels of debt, by private companies. Most of the private often 60 to 70 percent of total assets, because sector investment in wastewater has been for they operate in a low-risk environment. BOT treatment plants. Chinese utilities, in contrast, typically have much lower debt to asset ratios, and rely International Financial Institutions. The heavily on the municipal governments for fi- major international financial institutions nance. Chinese urban water utilities should 109 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s also strive to make more use of domestic debt. As China's financial markets debt markets, particularly the banking sys- evolve and become market-oriented tem, but also potentially corporate bonds or and sophisticated, improving the credit borrowing from pension or insurance funds. status of municipal utilities will be- Because municipal governments in China come even more important. cannot borrow directly and there are many competing uses for governments funds, fi- nancing capital works through debt is gener- Improving Concessionary ally more attractive than government contri- Finance Programs butions. Moreover, to the extent that utility This section reviews financing support pro- debt service is paid by user fees, debt financ- vided by the national government for the ing is more economically efficient as the sector, and discusses ways in which that sup- users pay directly for the service, whereas port could be improved. The national gov- municipal government funds come through ernment has two primary instruments: the general taxation. Many cities are also turn- China Development Bank (CDB), and the ing to equity investors, through stock mar- state bond program. Each program plays an kets or private deals, to fund investment important role in the urban water sector but programs. Equity financing is generally each also has its limitations. For example, more expensive than debt financing, because CDB provides long-maturity commercial- equity investors need to take into account based loans, but can only be accessed by higher risks. Companies are legally obligated creditworthy cities or utility companies. to service their debt obligations before they State bond funding provides low-interest issue dividends, and thus equity investors loans or grants, but the program is not well- face higher risks. Greater use of credit mar- structured to meet policy objectives. kets would improve utility financial disci- In order to meet sector financing needs, pline, transparency, and accountability as particularly for low-capacity cities, the lenders would take an interest in the finan- national concessionary finance programs cial health of a utility. Municipal govern- should be expanded and restructured to pro- ments and their utilities should therefore: vide incentives for good utility performance. Improve Access to Debt Markets By Increasing Cost Recovery. Most The China Development Chinese banks are hesitant to lend di- Bank Program rectly to utility companies because of The market for long-term infrastructure concerns about repayment capacity. debt financing in China is dominated at the Increasing cost recovery, mainly from national level by the China Development users, would increase a utility's capac- Bank (CDB). CDB is a "policy bank" that acts ity to service debt, as well as improve as an intermediary for the central govern- revenue reliability. Chinese cities ment. At the end of 2004, CDB's total loan should transform their financially portfolio was valued at RMB 1,409 billion stressed utilities into creditworthy en- ($175 billion), of which 22 percent is for terprises that can fund most of their water resources, environment, and public capital program through commercial utilities. CDB's water supply and wastewater 110 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r loans, reported at RMB 13.5 billion ($1.7 bil- ment in less economically developed regions. lion) and RMB 5.3 billion ($0.66 billion) re- The bonds are issued by the Ministry of spectively, constitute only 1.5 percent of Finance, and then distributed by the Na- CDB's 2004 total portfolio.9 CDB has pro- tional Devel-opment and Reform Commis- vided around 10 percent of water supply and sion (NDRC) as long maturity, low-interest 5 percent of wastewater sector funding. loans, which in some cases may be converted CDB is pursuing an aggressive growth to grants. Between 1998 and 2004, around policy and plans to significantly expand its RMB 900 billion ($115 billion) was disbursed loan portfolio over the next decade.10 As part through the state bond program. The future of this expansion, it is targeting the urban in- of the program is unclear; increasing finan- frastructure sector, and has recently signed cial deficits at the central government level two separate Memorandums of Understand- have started to raise concerns about the risks ing (MOUs) with the Ministry of Construc- associated with the program. The issuance of tion and the State Environmental Protection state bonds declined from RMB150 billion Agency, each with indicative financing ($18.8 billion) in 2002 to RMB110 billion amounts of RMB 50 billion ($6.2 billion). ($13.8 billion) in 2004. Although the overall The memorandum with the MOC focuses on program may decrease in the future, NDRC urban resource conservation and town de- has indicated that urban water and envi- velopment. The memorandum with SEPA is ronmental protection will continue to remain focused primarily on environmental priori- a priority. ties under the 11th Five Year Plan. Figures 7.5 and 7.6 show the evolution of In the absence of municipal bonds, CDB the state bond program's financing for operates as a financial bridge between the wastewater and wastewater infrastructure. municipal government and the capital mar- Around RMB 61 billion ($7.5 billion) of state ket. Local governments have not established bond funding has been directed to the waste- a standardized credit system and effective water sector, accounting for around one- risk prevention mechanisms: they lack the creditworthiness, conditions, and relevant policies necessary for bond issuance. CDB FIGURE 7.5 State Bond Program Funding for Wastewater raises funds by means of financial bonds. 14 400 These are issued in the name of the projects State bond involved to promote institutional improve- 12 Project number 350 ment, cultivate the concept of creditworthi- 300 10 r ness in local finance, and thus create the nec- RMB) 250 8 essary conditions to issue municipal bonds numbe (billion 200 in the future. The bonds are guaranteed by 6 150 ojectrP the central government and are typically 4 100 oversubscribed.11 Investment 2 50 The State Bond Program 0 0 1998 1999 2000 2001 2002 2003 2004 2005 The state bond program was initiated in 1998 Source: Study Research Brief, "Analysis of State Bond Program for Urban Water" by with the objectives of stimulating domestic Tsinghua (2006). demand and promoting economic develop- 111 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Program Limitations FIGURE 7.6 China State Bond Program in Water Supply Sector Both CDB and the state bond program have 8 800 been important sources of finance for the State bond urban water sector, but also have some lim- 7 700 itations in their use as policy instruments, as 6 600 Project number r described below: RMB) 5 500 numbe (billion 4 400 CDB Only Finances Creditworthy Proj- 3 300 ojectrP ects. CDB is the only commercial bank with 200 the mandate to provide long-maturity loans Investment 2 that are essential for infrastructure finance. 1 100 Although CDB is a "policy bank," it is ex- 0 0 1998 1999 2000 2001 2002 2003 2004 2005 pected to operate in a commercial manner Source: Study Research Brief, "Analysis of State Bond Program for Urban Water" by and only extends loans to borrowers it con- Tsinghua (2006). siders creditworthy. Consequently, CDB has lent more for water supply than wastewater, as water supply companies are generally on a stronger financial footing than wastewater quarter of total investments. The original companies. In addition, CDB also tends to NDRC policy was to focus state bond funds lend more to high capacity cities, which have on wastewater treatment, while municipal more credit capacity than low capacity governments were responsible for the net- cities. CDB is a useful policy tool for bring- works. In addition, cities were required to ing financial market discipline to utilities, start collecting wastewater tariffs. After a and thus promoting transparency, account- few years, NDRC realized that cities were not investing enough in networks, and ad- justed the state bond program to focus on FIGURE 7.7 China State Bond Program in networks on the assumption that the private Water Supply and Wastewater sector or the city could finance treatment by City Size plants based upon future tariff revenues. State bond funding for water supply infra- 50 45 Water Supply structure, which totals around RMB 34 bil- Wastewater 40 lion ($4 billion), accounts for around 10­ RMB) 35 20 percent of total water supply investments. 30 As of 2005, the state bond program had (billion 25 financed over 2,200 water supply projects 20 with an average investment of 15 million 15 Investment10 RMB ($2 million), and close to 2,000 waste- 5 water projects with an average investment of 0 31 million RMB ($4 million). Figure 7.7 Prefecture cities County County Towns and above level cities and below shows that over two-thirds of total financing Source: Study Research Brief, "Analysis of State Bond Program in both water supply and wastewater were for Urban Water" by Tsinghua (2006). directed at prefecture (or higher level) cities. 112 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r ability, and efficiency. It is not, however, in International Examples of a good position to help low-capacity cities fi- Concessionary Finance nance their infrastructure needs, particu- Most OECD countries have structured con- larly for wastewater. cessionary finance programs to support the urban water sector, particularly for waste- State Bond Funds Do Not Target Low- water, which is considered more of a "public Capacity Cities. The state bond program, in good" than water supply. Box 7.5 provides a contrast to CDB, is designed to provide con- summary of the U.S. program, which origi- cessionary finance to lower capacity cities nally relied on "construction grants" and and less creditworthy projects. More state then shifted to state-administered revolving bond funds have gone to wastewater than funds. Box 7.6 presents a summary of the water supply. Most of the state bond funding Brazilian financing program for reducing has been directed toward prefecture-level pollution in river basins, which relies on an cities. Due to constraints on funding, and the "output-based aid" approach. Rather than needs of prefecture-level cities, the program providing construction grants, the Brazilian has provided only limited support to county- government pays cities for actual pollution level cities and towns. However, the lower reduction. In most cases, national govern- capacity cities and towns have the greatest ments attempt to structure concessionary need for concessionary finance, particularly finance programs to try to create the right if they are expected to comply with high incentives for cities to respond to national standards for drinking water quality and policies. municipal wastewater treatment. Improving China's Concessionary Lack of Incentives for Good Performance. Finance Programs The state bond program does not provide significant policy leverage in the urban The financing needs in the urban water sector water sector. The program distributes na- are large and growing, and lower capacity tional government funding, but with mini- cities in particular need the assistance of the mal impact on creating proper incentives to national government. In many countries-- improve sector performance. Although the most of them considerably richer than provincial government assists in the alloca- China--the national government provides tion of state bond funds, project implemen- significant financial support to cities for tation is left to the municipal government. water and wastewater investments. The pro- The program lacks clear eligibility criteria, vision of concessionary finance provides an rigorous appraisal procedures, strict compli- opportunity for the government to provide ance monitoring, and effective evaluation the right incentives for good performance. techniques. The large number of projects, This study recommends that China: over 4,200 since 1998, and relatively small financing amount for each project provide Develop Dedicated, Structured little leverage over the city. Moreover, ad- Concessionary Finance Programs. ministration at the national and provincial There are many options for improving levels is very streamlined and covers multi- the efficiency (or restructuring) the ple sectors, not just urban water. state bond and CDB programs. The 113 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 7.5 Financing Wastewater and Water Supply Infrastructure in the United States Construction Grant Program. In the United States, the Water Pollution Control Act of 1948 first established a grant program to assist localities with planning and design work, and authorized loans for treatment plant con- struction. In 1956, a construction grant program replaced the loan program. Progress in the construction of wastewater treatment plants was slow, and water quality continued to deteriorate. In the Federal Water Pollution Control Act Amendments of 1972, Congress totally revised the existing clean water law and established national standards for treatment, mandating that all publicly owned treatment works achieve a minimum of secondary treatment or more stringent treatment by July 1, 1977. Grants were administered by the federal Environmental Protection Agency (EPA) and were provided through states to local municipalities in a complex three-step process (feasibility, design, and construction). In the mid-1980s, grants for wastewater treatment plant construc- tion were a target of government budget cutters, and Congress authorized a shift to state revolving funds start- ing in 1991. One of the perverse incentives under the construction grant program was that many municipalities overinvested in treatment plant facilities as they received matching grants from the federal government ranging from 50 to 75 percent of total project costs. State Water Pollution Control Revolving Funds (SRF). Under the SRF program, federal capitalization grants are provided annually to all 50 states. These grants are used as seed money for state-administered loans for water quality projects. States provide matching funds equal to 20 percent of the federal capitalization grant and use the SRF to provide a range of loan assistance to communities, including construction loans made at or below market rates (interest-free loans are permitted), refinancing of local debt obligations, and loan guarantees or purchasing of insurance. Loans are typically to be repaid to the SRF within 20 years, beginning one year after project com- pletion, and the locality must dedicate a revenue stream (from user fees or other sources) to repay the loan to the state. States may use 4 percent of their capitalization grants for administrative expenses. States manage SRFs using EPA guidance and regulations, assisting construction of municipal water pollution control facilities (as under the previous grant program) and implementation of programs to reduce nonpoint source pollution and clean up degraded estuaries. Like the grant program, states decide which projects will receive assistance, using a priority ranking system that considers water quality conditions and other factors reflecting a state's policies and now also includes financial elements such as interest rates and the recipient's dedicated source of repayment. Communities of all size are eligible to seek SRF assistance, and small communities have no special priority. Nonetheless, since 1989, 63 percent of all loans and other SRF assistance (23 percent of total funds loaned) have gone to small com- munities. Cities have made substantial progress toward meeting the goals and requirements of the law, and more than 90 percent of community wastewater treatment plants provide secondary treatment or better. Yet, water quality reports continue to indicate that wastewater treatment plant discharges are a significant source of water quality impairment. The SRF authorizations provided in 1987 expired in 1994, but pressure to extend federal funding has continued, in part because estimated investment needs remain high (more than $180 billion). Congress has continued to appropriate funds, and the anticipated shift to full state responsibility has not yet occurred. From 1972 through 2005, Congress appropriated more than $75 billion in assistance for wastewater treatment plant construction, including $24 billion in SRF capitalization grants since 1989. States and localities have invested approximately the same in non-federal resources. The success and popularity of the wastewater SRF program led Congress to use it as the model for establishing a drinking water SRF program in 1996; it has provided $8.6 billion in project aid. Source: Claudia Copeland, U.S. Congressional Research Office with authors' elaboration. 114 M o v i n g U p t h e U t i l i t y F i n a n c i a l S u s t a i n a b i l i t y L a d d e r BOX 7.6 Brazil's River Basin Restoration Program In 2001, the Brazilian Government through the National Water Agency (Agencia Nacional De Aguas- ANA) established a program to promote the restoration of water quality in key river basins. The pro- gram is called PRODES (Programa Nacional De Despoluicao de Bacias Hidrograficas). It provides payments to wastewater plant owners--either public of private--that demonstrate effective waste- water treatment. Rather than provide grant money to finance the construction of the facilities, PRODES spreads the payments out over a 5-to-7-year period contingent on effective operation of the wastewater treatment plant, which is certified by an independent third party. The program is sometimes referred to the "treated sewage purchase program." It rewards efficiency and results. To be eligible for PRODES financial support, the wastewater treatment plant must be located in a river basin where there is a legally established and operational "Basin Committee." The plant must be part of the investment program approved by the Basin Committee and it must meet the discharge re- quirements specified by the committee. The National Water Agency, utilizing national government funds, will pay up to 50 percent of the total estimated cost of the wastewater treatment plant, based on a predetermined formula set to reflect actual pollution reduction levels. In 2002, PRODES was pre- sented with 148 proposals with an estimated cost of R$1 billion, with 40 percent from ANA's budget. The PRODES program is one variant of a type of support referred to as "output-based aid," where payment is made for services rendered and not to finance the construction of infrastruc- ture. This puts the burden on the investor and operator to meet the standards and provides a strong incentive for performance. Source: ANA Presentation at World Bank Water Week Conference, 2003. study recommends that the following Summary of principles guide the reforms: Strategic Directions National government funding for the urban water sector should be signifi- The strategic directions for enabling urban cantly increased. water utilities to move up the financial sus- More funding should be channeled to tainability ladder identified in this chapter low capacity cities and towns. are summarized below: Provincial governments should take the lead in designing and administer- Achieve Utility Cost Recovery. Urban ing concessionary finance program(s). water utilities should be allowed to re- The program(s) should be structured cover their costs through user fees. to provide the right incentives, with Municipal governments can adjust a carefully designed eligibility criteria, utility's cost, and thus the extent of tar- appraisal procedures, and monitor- iff increases, through capital contribu- ing and evaluation activities. tions. Wastewater fees should cover at A range of financing instruments least the O&M and asset renewal costs should be considered, including of drainage services. Water supply and loans, grants, revolving loan pro- wastewater tariffs will need to be sig- gram, credit enhancements, and nificantly increased in most cities, but output-based aid. the impact on users can be managed 115 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s by optimizing tariff structures to in- incentives through program design, crease economic efficiency and utility and using a broad range of financial revenues, and designing low-income instruments. assistance programs. Improve Access to Debt Markets By Notes Increasing Cost Recovery. Debt is the 1. Since financial information on water and waste- preferred form of financing for urban water utilities is not readily available in China, water utilities. Most Chinese utilities, much of the general analysis in this section is however, have low credit capacity. based on general experience of the World Bank in conducting financial appraisals for Bank- Chinese cities should transform their financed project. See Annex 1 for a list of World financially stressed utilities into credit- Bank-financed projects. worthy enterprises that can fund most 2. See the World Bank publication "Water, Elec- of their capital program through com- tricity, and the Poor" by Komives et al. (2005), mercial debt. As China'sfinancial mar- p. 41. 3. See Annex 3 Technical Notes, Figure 7.3 for kets evolve and become market-oriented more information. and sophisticated, improving the credit 4. See the World Bank-MOC Report "North China status of municipal utilities will become Water Quality Management Study. Component even more important. E: Regulatory and Institutional Study" (2006). 5. See the ADB report on "Final Report on Na- Develop Dedicated, Structured Con- tional Guidelines in Urban Wastewater Tariffs cessionary Finance Programs. The and Management Study" (2003). level of national government funding 6. See the ADB report on "Managing Urban for the urban water sector should be Change: Strategic Options for Municipal Gov- increased. The existing state bond and ernance and Finance in China" (2000). 7. See the 2003 report by Bellier et al. "Private Par- CDB programs should be restructured ticipation in Infrastructure in China" (2003). into sector-specific programs to pro- 8. See the 2005 ADB report on "PRC Water Sup- vide better incentives for improving ply, Sanitation, and Waste Management Port- utility performance and meeting na- folio Rivew." tional goals. The principles that should 9. From the 2006 Tsinghua University Brief on the CDB/state bond program. (Internal Document) guide reforms include a focus on low- 10. Based on the Bank's interview with CDB on May capacity cities and towns, provincial 17, 2006. government leadership, creating good 11. From CDB webpage at www.cdb.com.cn 116 8 Using the Private Sector to Help Improve Municipal Utility Performance Private participation can potentially help Box 8.1 provides definitions for the terms municipal urban water utilities improve per- used in this chapter. The first section looks at formance, accountability, transparency, and trends in China, and shows that the private reinforce the municipal government's com- sector is primarily involved in BOT treatment mitment to cost recovery. Private participa- plants, although joint ventures between pri- tion in China's urban water sector has grown vate companies and municipal utilities are rapidly over the last 10 years. Private partici- becoming more common. The second section pation has generally involved (a) investments underscores the need for cities to understand in water supply and wastewater treatment that engaging the private sector is not a plants; (b) joint ventures between a private panacea for resolving more fundamental util- company and the municipal utility company; ity governance problems, but an appropriate and (c) a focus on high-capacity cities. private participation option can potentially China's cities and municipal utilities can help expedite and lock in reforms. The third better utilize private participation to help section stresses the need for BOT treatment improve efficiency and performance in the plant arrangements to fit into an overall net- following ways: work business plan. The final section identi- fies the potential for using non-investment Select a private participation option that forms of private participation, such as affer- complements an overall reform process mage, leases, and management contracts to Ensure BOT treatment plant contracts help improve utility efficiency without neces- allocate risks properly and do not sarily requiring the private company to take undermine the financial viability of the investment risk. the network business Commit to achieving utility cost recovery--with or without private Private Participation participation Trends in China Utilize a wider variety of private par- ticipation models, particularly non- Data on private participation is difficult to ob- investment approaches such as tain in China since there is no authoritative affermage, leases, and management national database. This study draws upon two contracts that increase efficiency and major sources: (1) a market survey in 2004 lower costs conducted by Global Water Intelligence (GWI) 117 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 8.1 Definition of Key Private Participation Terms Water Services. Water services include any aspects of providing water supply, wastewater management, or reclaimed water use. Arrangement. Rules and institutions establishing and enforcing the rights and obligations of the operator, cus- tomers, the contracting authority, and other government authorities with respect to water services. The rules are set out in contracts, laws, regulations, licenses, and related documents. Examples include management contracts, affermage, leases, concessions, divestiture, and build-own-transfer (BOT). Operator. A private domestic or foreign company or government-owned company operating outside of its jurisdiction and providing services under an arrangement. In this study, municipal water utilities operating outside of their city and seeking to maximize their profits are considered an operator. Joint Venture or Mixed Capital Company. An arrangement under which the operator is partly owned by the con- tracting authority, and in which the two parties jointly share most of the risks. Management Contract. An arrangement under which the operator provides management services to the utility in return for a fee. Affermage Contract. The operator operates and maintains water assets at its own expense but does not finance investment in infrastructure assets. The government delegates the management of the water service to the operator in return for a specified fee, often based on the volume of water sold. The private company's profit is equal to revenue from the fee, less operating and maintenance costs. Lease Contract. Similar to an affermage contract, the operator operates and maintains water assets at its own expense but does not finance investment in infrastructure assets. The operator retains revenue from the customer tariff and pays the contracting authority a specified lease payment. Concession Contract. An arrangement in which the contracting authority is the legal owner of the infrastructure assets (at least after the contract ends), but the operator is responsible for financing and managing investment, as well as operating and maintaining the business. Divestiture. An arrangement in which the operator is the legal owner of the infrastructure assets for an indefinite term and is responsible for financing and managing investment, as well as operating and maintaining the business. Build-Own-Transfer (BOT) Contract. Typically used for water supply or wastewater treatment plants. An operator finances, builds, owns, and operates the facilities for a specific period of time, after which ownership is transferred back to the contracting authority. BOT payments are typically based on the volume of water treated at the plant. Design-Build-Operate (DBO) Contract. Similar to a BOT, but the contracting authority provides financing and retains ownership of the facilities during the contract period. Transfer-Own-Transfer (TOT). Similar to a BOT, but the contracting authority sells an existing facility to the operator for a specified period of time (transfers). When the contract period ends, ownership reverts back to the contracting party. Source: Adapted from the World Bank Toolkit on Private Participation in Water Services (2006). that identified 126 projects; and (2) a survey pation is still lacking. Both the GWI and reported in a Tsinghua University report that Tsinghua reports are incomplete surveys, and identified around 300 projects. The two thus the extent of private participation in sources collected and presented information China is probably higher than indicated in the in different ways. Although both sources are tables below. This chapter therefore focuses valuable, a detailed picture of private partici- primarily on general trends. 118 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e Rapid Private Participation Growth supply takes the form of water supply treat- Table 8.1 summarizes the extent of private ment projects. The data from the Tsinghua participation in China as of 2004 based on study, as shown in Table 8.2, presents pri- the GWI report. Using the GWI report, vate participation from the perspective of Figure 8.1 shows the evolution of private who owns the assets. Around half of the pri- participation, which started in the early vate participation projects involved stock 1990s and has experienced rapid growth transfers from the municipal utility com- over the last five years. International com- pany to private investors, with the utility panies were the first to enter the market, but maintaining management control. The domestic companies have become more ac- motivation for stock transfer is apparently tive since around 2000. Although the data in to raise funds and also develop a broader Figure 8.1 are somewhat erratic, the general constituency for ensuring the sustainability trend is increasing participation by domestic of the utility. Joint ventures, divestitures, firms. The GWI data clearly missed many of and BOT/TOT are also common arrange- the smaller domestic transactions. Many ments. The Tsinghua data do not clearly international companies have established distinguish where the private participation Chinese subsidiaries or joint ventures with activity involves water treatment only, or domestic companies, so the distinction be- both treatment and distribution. Based on tween international and domestic com- Table 8.1, however, it appears that most pri- panies is increasingly becoming blurred. vate participation involves water treatment Private investment accounts for around 10 plants only. to 20 percent of all water supply and waste- water investments over the last decade. Private Participation in Wastewater Private participation has been mainly limited Private Participation in Water Supply to wastewater treatment. Table 8.3 shows Table 8.1 from the GWI survey indicates that that BOTs are the most common arrange- most of the private participation for water ment, but joint ventures, stock transfers, and TABLE 8.1 Investment by Project Type % of Total Private Number of Participation Project Costs % of Project Type Project Projects (RMB million) Total Costs Water Supply Treatment 61 48 16,152 45 Wastewater Treatment 44 35 8,560 24 Water Supply and Distribution 11 9 5,160 14 Others 10 8 5,704 16 Total 126 100 35,586 100 Source: Global Water Intelligence, "Water Market China" (2005). 119 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s FIGURE 8.1 Private Participation Investment Trends TABLE 8.3 Private Participation in the Wastewater Sector 1,400 20 $ for domestic 18 Number of 1,200 $ for foreign 16 Type of Private Participation Projects Percent 1,000 14 BOT or TOT for treatment facilities 119 72% r US$) 800 12 Joint Venture between municipal 17 10% # for domestic 10 numbe utility and private company for (million 600 8 ojectrP wastewater treatment 400 6 Amount Stock Transfer: Partial sale of 15 9% # for foreign 4 200 wastewater treatment company 2 shares 0 0 1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Divestiture: Sale of municipal 15 9% wastewater treatment facilities to Source: Global Water Intelligence, "Water Market China" (2005). private company Total 166 100% divestiture of treatment facilities also occur. Source: Study Research Brief, "Progress on China's Urban Water Marketization Reform, Tsinghua (2006). The number of reported wastewater treat- ment projects in Table 8.3 (166 projects) is much higher than in Table 8.1 (44 projects) for two reasons. First, wastewater treatment was based on a 2006 survey. Second, the plant construction is proceeding rapidly. The Tsinghua survey was much more likely to GWI results were based on a survey con- capture smaller domestic private participa- ducted in 2004, whereas the Tsinghua data tion than the GWI report, which was pre- pared for an international audience. TABLE 8.2 Private Participation in the Water Supply Sector Water Supply and Wastewater Treatment Plants Predominate Number of The tables above show that the market is Type of Private Participation Projects Percent dominated by water supply and wastewater Stock Transfer: Partial sale of municipal 66 51% treatment projects. Prior to 2002, foreign utility shares companies were only allowed to invest in raw Joint Venture between municipal utility 41 32% water supply, water treatment, and waste- and private company: treatment and water treatment.1 Private sector involvement (sometimes) distribution in a treatment plant is a logical choice for Divestiture: Sale of municipal utility 15 12% many companies in China. Treatment ser- facilities to private company. vices are well-defined and the conditions BOT or TOT for treatment facilities 7 5% and terms of payment, including price, can Total 129 100% be determined up-front to assess whether a project is feasible. The private company does Source: Study Research Brief, "Progress on China's Urban Water Marketization Reform, not have to take the commercial risk involved Tsinghua (2006). with low tariffs, but rather will be paid by the 120 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e municipal utility for services the company joint ventures between the municipal utility provides. The attractions to the public au- and a private company. thority are also clear. The municipal utility or Joint venture arrangements help to reduce government does not have to finance the risk for the private company because it shares construction of the treatment plant. In addi- the same financial risk as the municipality it- tion, utilizing a private participation arrange- self. Contract adjustments are generally eas- ment insulates wastewater treatment from ier when both sides are suffering financially, wastewater collection, which is often still rather than when one party is benefiting. A managed mainly as a public works program municipal joint-venture may, however, take rather than a utility service. Many municipal away some of the incentives for efficiency and cost reductions as the municipal utility is es- governments also feel that it is preferable to sentially entering into a contract with itself. have a private company responsible for Such arrangements can work, and may be ap- wastewater treatment rather than try to uti- propriate in some cases, but they require a lize an often inefficient and technically weak good regulatory system to ensure they func- drainage department. tion properly. Joint Ventures with Municipal Water Supply Distribution Utilities are Common Market Opening Up Table 8.4 from the GWI survey indicates that In 2002, the national laws were modified to the most common entity is a "municipal allow foreign companies to invest in the con- joint venture," which is a combination of a struction and management of urban water local municipal utility and a private com- distribution and wastewater collection sys- pany. The Tsinghua data indicates that tems, but they must do so through a joint joint ventures are prevalent for water sup- venture with a Chinese partner holding a ma- ply (Table 8.2). The Tsinghua data indicates jority share.2 Large international companies that BOTs are the most common arrange- quickly took advantage of this opening, with ment for wastewater treatment (Table 8.3). Suez investing in Chongqing, and Veolia en- However, many of these BOTs may also be tering into joint ventures in Shenzhen and the Pudong District of Shanghai. Box 8.2 pro- vides a summary of illustrative and high- TABLE 8.4 Types of Entities in Private profile water supply joint ventures in China. Arrangements As of 2004, at least 20 companies have in- vested in water distribution projects. The po- Entity Type Number of Projects tential for investment in the water supply Municipal Joint Venture 76 business is large, since it provides private de- velopers with the opportunity to apply their Foreign Company 12 expertise in distribution system operations Domestic Company 12 and commercial practices to extract efficien- Unknown 26 cies and ultimately profits. For the waste- water business, including both collection and Total 126 treatment, private companies are still reluc- Source: Global Water Intelligence, "Water Market China" (2005). tant to enter into the market due to the severe shortage of sector funding. 121 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 8.2 Integrated Water Projects with Private Partners Investment in concessions combining production and distribution networks first started in the 1990s. The mar- ket for these types of projects took off in 2002 when the government issued revised foreign investment guide- lines that took utility networks off the "prohibited list" of sectors. Earlier projects were able to work around the restrictions, as they were considered to be small-scale experiments. Two recent projects in Shanghai Pudong and Shenzhen, undertaken as joint ventures with Veolia Joint Ventures, are on a much larger scale. Shanghai Pudong. In 2001, the Shanghai Water Bureau invited foreign companies to acquire a stake in the Shanghai Pudong Water Company (SPWC), one of four water supply companies serving Shanghai. Pudong, Shanghai's economic center, has 1.7 million people and a daily water demand of 1.2 million m3/day. The distri- bution network covers 319 km2. The Shanghai Municipal Government sought a single foreign company as a part- ner to acquire a 50 percent stake in SPWC for a 50-year period. Veolia, the winning bidder, will undertake water supply, distribution, and commercial services through the new joint venture company. The bidding was based on the amount offered for the existing assets, although consideration was also given to the ability of the com- pany to improve management and extend capacity. Veolia offered a price of $240 million, considerably higher than the other bidders and three times the estimated net asset value of SPWC. The contract contains no spe- cial provisions relating to tariffs, and the joint venture company will use the city-wide tariffs determined by the Shanghai Municipal Government. Shenzhen. In late 2003, Beijing Capital and Veolia acquired a 45 percent stake in Shenzhen Water Group (SWG) for 50 years at a price of $400 million. The JV company provides water supply and distribution services, management and customer services, and collection and treatment of wastewater to Shenzhen's Economic Zone. SWG currently has a water supply capacity of 1.7 million m3/day and wastewater treatment capacity of 1.1 million m3/day. The contract was awarded through a competitive bidding process. Source: Global Water Intelligence, "Water Market China" (2005). Private Participation Concentrated been concentrated in Category I cities. There in High-Capacity Cities are a number of private participation projects Table 8.5 shows the distribution of private in Category II cities, which can also include participation by city category, and indicates affluent medium-sized cities. The level of pri- that private participation investments have vate participation activity in Category III cities is limited both in terms of number of projects and investments. The GWI market TABLE 8.5 DistributionofPrivateParticipationActivitybyCityType survey utilized as the source of data for this analysis, however, may not have included % of Projects % of some of the private participation projects in # of Total Costs Project the smaller cities. Private companies may be City Type Projects Projects ($ million) Costs hesitant to engage in low-capacity cities due Category I 54 43 23,576 66 to the low level of economic development, Category II 54 43 10,440 29 constraints on sector funding, and the associ- Category III 18 14 1,560 4 ated investment risk. Total 126 35,576 To date, most private participation in Source: Global Water Intelligence, "Water Market China" (2005). China has included equity investments, and has naturally flowed to Category I cities and 122 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e affluent Category II cities. Investments have should first commit to an overall reform also tended to focus on activities where com- plan, and then determine if, and how, to uti- mercial risk can be minimized, such as BOT lize the private sector to facilitate the reform arrangements for water and wastewater agenda. treatment plants. Other options for exploit- The World Bank has prepared a "toolkit" ing private sector involvement that does not on private participation in the water sector require investment--such as lease contracts that distills experience from around the or management contracts--have not been world. Some summary highlights from the fully explored. These options may be espe- tool kit that are relevant to China are pre- cially appropriate for low-capacity cities, or sented in Box 8.3. The key message is that wastewater services, which carry a high de- private participation should be an instru- gree of financial risk for investors. ment to achieve reform goals, and the pri- vate participation arrangement should be carefully selected and designed to achieve Engaging with the Private those goals. Sector as Part of the Engaging with the private sector can either Reform Process be part of the solution or part of the problem in helping to improve urban water services. The government needs to ensure the correct Private participation, particularly if it in- bundle of service standards, utility effi- volves financing, quickly brings out the true ciency, tariffs, and government transfers in cost of the service as private companies re- order to have sustainable urban water ser- quire a return on investment commensurate vices. This holds true whether the service is with the risk. Municipal governments, in con- provided by a government department, mu- trast, typically do not require a return on nicipal utility company, a joint venture, or investment and thus provide an implicit sub- a private company. In China, most of the sidy. Private participation often involves an private participation arrangements do not dis- upgrading of the service that may entail place the municipal utility, but rather the pri- greater overall costs, even if that service can vate company becomes a partner with the be provided at a lower cost by a private oper- municipal utility, either through a contractual ator. Municipal governments must make a arrangement for a treatment plant or through commitment to ensure the right bundle of a joint venture in the business. services, efficiency, tariffs, and fiscal support Engaging in a partnership with a private when they engage the private sector. In some company can potentially bring benefits, in- Chinese cities where municipal governments cluding financing, expertise, and improved are not making adequate commitments to efficiency. As importantly, including a private reform, the following scenarios may arise: partner can bring another party into the policy discussion that has a vested interest in BOT contracts require payments for utility financial sustainability and perform- water supply or wastewater treatment, ance. Engaging with the private sector alone, which in the absence of increased sec- however, will not resolve the more funda- tor funding can reduce funds available mental problems associated with municipal to improve water supply or drainage utility governance. Municipal governments networks. 123 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 8.3 World Bank Toolkit on Private Participation The World Bank has prepared a toolkit on "Approaches to Private participation in Water Services" that distills international experience and provides guidelines for approaching private participation. Some key points related to the Chinese situation include: Understand Municipal Utility Limitations. When utilities are not performing well, either financially or operationally, the root causes are often in the system of rules and incentives, which can cause decision makers to act against the public interest. For example, municipal leaders may know that higher tariffs are necessary for good service, but refuse to allow the increase, because the political and social pain of the increase will be felt immediately, whereas it may be years before the higher revenues translate into better service. Private Participation Potential. Often reform fails because governments have not been able to change the system of government regulation and control, which is the heart of the problem. By engaging a private firm and giving it defined responsibilities for the provision of water services, governments widen their reform options. A private firm can potentially help in transforming decision making and accountability by better aligning the interests of all parties, government and private, with the public interest. Engaging a private firm can potentially (a) create a focus on service and commercial performance; (b) make it easier to access finance; and (c) boost policy clarity and sustainability. Selecting a Private Participation Option. There are a wide variety of private sector participation options, with different allocations of responsibility and risk between the public and private parties. Designing the arrange- ment is not just a matter of choosing between pre-specified options. A good process will (a) identify the key risks involved in providing the service; (b) determine which party is best placed to bear each risk; and (c) design an arrangement that allocates the risk accordingly. Source: World Bank, Approaches to Private Participation in Water Services (2006) Joint ventures between municipal util- framework, this can potentially bring bene- ities and private companies share the fits, including financing, expertise, and lower same financial fate. If revenues are not costs. This section highlights two issues that adequate to generate sufficient returns are critical to effective arrangements: to the shareholders of the private com- pany, then the long-term viability of The risks associated with treatment the venture is at risk. plant performance and costs should be fully understood and allocated to the party best able to manage the risks. BOT Treatment Plants Municipal governments should ensure as Part of a funding is sufficient to cover both Network Business treatment costs and network costs. BOT arrangements for water supply and Need Proper Risk Allocation wastewater treatment plants in China are ex- A challenge for any BOT contract is under- tensive and growing. If properly structured, standing and allocating risk between the mu- and undertaken within a sound overall sector nicipality and the operator. If the risks are 124 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e high or poorly understood and allocated to 70 percent of design capacity, only to find that the operator, then sophisticated operators actual flows are less than predicted due to in- will increase the price. If during operations adequate collection systems and/or poor flow either the municipal government/utility or estimates. Pollutant concentrations are also the private company reaps a disproportion- an important risk. If the pollutant loadings ate share of the benefits or costs, the con- are higher or lower than expected, actual op- tract is unlikely to be honored and will erational costs are affected. For example, probably require a renegotiation or collapse. high BOD concentrations will increase the Many of the risks can be addressed aeration costs and high suspended solid con- through good planning to quantify the issues centrations will increase sludge handling and sophisticated contracts to allocate the costs. In 2006, the Ministry of Construction risk. This is not always done in China, partly issued a "Model Concession Agreement for due to the lack of experience, as well as lack Urban Wastewater Treatment" that deals of incentives to ensure efficient private par- with some of these risks, but the use of the ticipation arrangements. Many of the BOT model agreement is voluntary.4 contracts have not been competitively bid, nor open to public scrutiny. The national Ensure Sector Cost Recovery government has recognized these problems, A BOT contract locks the municipal gov- and MOC has prepared guidelines for issuing ernment or utility into making set payments contracts, prepared model contracts, and to the operator. The treatment plant, how- called for strengthening government super- ever, is just one part of a much larger net- vision of private participation arrange- work business that includes water supply ments.3 Adoption of these guidelines by local distribution or wastewater collection. Unless governments, however, is still incomplete. overall funding to the overall business in- Box 8.4 provides a summary of illustrative and high-profile water supply BOT projects. creases--through user fees or government The Chengdu and Beijing cases described in transfers--the quality and sustainability of the Box 8.4 reflect the dilemma many cities face service may be undermined. in determining how to structure an appro- As shown in Table 8.6, the wastewater priate off-take agreement for water supply treatment fee throughout China is insuf- plants. The higher the minimum guaran- ficient to cover the actual BOT contract teed purchase quantity (e.g., m3/day), the price. In some cases, the revenue from the less risk the operator takes; conversely, the fee may cover the contractual obligations lower the guaranteed purchase quantity, as all water users in the city must pay the the more favorable for the municipal utility. wastewater treatment fee, even if their Poor raw water quality and droughts are also wastewater is not treated. For example, a important risks that are often not taken into BOT treatment plant may only cover half account in contracts. the city, but all of the city residents pay Cities awarding BOT wastewater treat- the fee. ment projects have struggled with under- Table 8.6 indicates that wastewater fees standing and allocating risks associated with are being channeled to the BOT operator, low flows and pollutant loading. In some and in many cases the municipal govern- cases, cities have guaranteed a high aver- ment must also subsidize the operator. The age daily minimum inflow--for example, result is that investment and operation of 125 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 8.4 High-Profile BOT Projects in China Shanghai. In 1996, the contract for the Da Chang water treatment plant was awarded to a consortium of Bovis Construction and Thames Water Overseas Ltd. It was the first wholly owned BOT project in the water sector in China and the first to secure limited recourse financing. The project was signed before many governing regulations became effective and broke new ground politically and institu- tionally. Subsequent projects have built upon the experience gained by both sides with Da Chang. The contract was signed with the Shanghai Municipal Waterworks Company (SMWC) and in- cluded a 400,000 m3/day treatment plant and pumping station. The deal was negotiated directly with the Shanghai Municipal Government and did not undergo a competitive bidding process. A municipal circular specified the supply and off-take responsibilities of the related utility companies, and the municipal government provided the concessionaire with a Letter of Support to confirm its commitment and facilitate debt financing. The project was structured to cover the BOT consor- tium's interest and principle on bank loans, and repayment of investors' equity with a fixed return of 15 percent. The tariff that the Thames consortium charged SMWC was higher than the retail water tariff for domestic consumers at the time (RMB 1.03). The central government authority--the State Development Planning Commission--did not review and approve the contract at the time. In 2002, the Chinese State Council declared that guaranteed rates of return were illegal for pri- vate utility contracts. The commitment to a 15 percent rate of return specified in the Thames con- tract was withdrawn and the two sides entered into renegotiation. These ended with Thames de- cision to sell its stake back to the local water company in 2004. The Chengdu No. 6 water treatment plant BOT (400,000 m3/d with a 27 km long transmission main) was approved in 1998 and was the first "official" BOT project implemented under the na- tional BOT circular--and still the only BOT project to be recognized by the central government in the water sector. The project was awarded through competitive bidding to a Vivendi-Marubeni consortium. The Asian Development Bank played an important role in both formulating the struc- ture of the project and in providing financing. Project revenues were backed by a take-or-pay guarantee from the municipal water company, Chengdu Water Company. The concession agreement was signed by the consortium and the Chengdu Municipal Government. One problem encountered has been the gap between estimated and the much lower actual demand for water. The city does not need the entire contracted vol- ume of water, but is abiding by the contract and looking for ways to increase demand, including extending the distribution system to satellite cities and encouraging industries to switch from the unsustainable use of groundwater to the municipal supply. The Beijing No. 10 Water Plant project was awarded through competitive bidding to the Anglian- Mitsubishi Consortium in 2002, and includes the construction of a water treatment plant with a ca- pacity of 500,000 m3/a day, and construction of 76-km raw water pipeline. The bids were awarded on the basis of lowest tariffs, with a guaranteed minimum level of water supply to the Beijing Municipal Waterworks Company. Above this amount, the water company would not be obliged to use the water supplied by the plant, and the consortium would therefore bear the market risk. The bidding for the project was very competitive, and the winning bid had an unexpectedly low price (1.4 RMB/m3). The central government was not involved in the project, and the Beijing Municipal Government was not a direct signatory to any of the project contracts. The project ran into problems securing financing with local and international banks, due mainly to the low tariffs and the high level of market risk, and appears unlikely to proceed. Source: Global Water Intelligence, "Water Market China" (2005). 126 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e drainage or water utilities that are not TABLE 8.6 Wastewater Treatment Fee and financially viable. BOT Price (RMB/m3) Private firms are reluctant to invest in Average Average Ratio low-capacity cities. BOT Wastewater Region Price Fee (%) There are a number of arrangements for tapping into the benefits of private participa- Municipalities under 0.99 0.75 76 tion without requiring private investment, Central Government such as lease, affermage, management, and Coastal Areas 0.80 0.55 68 design-build-operate contracts. Northeast 0.55 0.46 83 Middle and West 0.50 0.33 66 Limitations on Source: Study Research Brief, "Progress on China's Urban Water Private Sector Investments Marketization Reform, Tsinghua (2006). The prevailing view in China is that private companies need to "pay-to-play" if they wish to be active in the urban water market. Most the important drainage network depends on private participation takes the form of pri- often unreliable and insufficient municipal vate financing and operation of water supply government transfers. The situation for or wastewater treatment plants; in cases water supply treatment plants is similar, al- where the private sector is involved in joint though perhaps not as dramatic, as water water supply business ventures, the private supply companies and municipal gov- partner usually brings significant capital ernments have stronger incentives for into the joint venture (see Box 8.2). Notwith- maintaining the distribution networks that standing the potential benefits of equity deliver water to the customer. investments, there are limitations or draw- backs that should also be taken into account, including the following: Utilizing Non-Investment Private Participation Equity Costs. In well-functioning finan- cial markets, equity is always more expen- Arrangements sive than debt. This is because companies With or without private financing, munici- are required to meet their obligations to pal governments and their utilities can tap lenders before paying dividends to share- into private sector expertise to improve effi- holders. Shareholders, who provide the ciency, service quality, and lower costs. equity, take higher risks than lenders and Primarily to mobilize financing, Chinese therefore demand higher returns. policy encourages private participation. This approach has the following constraints: Transaction Costs. Utilizing private in- vestment also entails considerable transac- Improving utility performance, not fi- tion costs. The investor needs to be carefully, nancing, is the challenge in some cities. and preferably competitively, selected and Private firms will not invest in un- the process can be controversial. If in the profitable areas, such as wastewater future, the operator decides to withdraw, 127 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s then there are inevitable legal and financial cities. Higher risk levels in low-capacity cities complications that must be dealt with. In the will make the cost of private sector investment end, the municipal government and utility even higher, and therefore less likely. must decide whether the operator can bring sufficient cost reductions and service im- Developing Non-Investment provements to justify the higher financing Arrangements costs, transaction costs, and risk. In many Fortunately, the limitations to private sector cities, this threshold may not be met. investment do not necessarily exclude cities from using private expertise to enhance effi- Unprofitable Businesses. Private invest- ciency, lower costs, and improve service. ors will not invest in non-commercial ven- Table 8.7 shows some common private par- tures. Wastewater drainage in most cities is ticipation arrangements. The table demon- operated as a non-commercial activity, and strates that there are a wide variety of private neither wastewater tariffs nor government participation options--many of which do not payments are adequate to generate accept- require investment--that can be used to in- able returns on investment in drainage crease efficiency and potentially reduce costs, networks. As shown in Table 2.3, around such as management contracts, design-build- 60 percent of the water supply companies in operate (DBO) contracts, leases, etc. The ac- China recorded net losses in 2004, indicating tual range of options is much broader than in- that many cities may not offer the prospect dicated in Table 8.7, as tailored private for good returns on investment. participation arrangements can be made for each situation. Box 8.5 presents an interest- Low-Capacity Cities. Table 8.5 shows that ing example of a mixed public and private relatively small amounts of private investment capital for a water utility in Colombia. have gone into Category III cities. Lower ca- Non-investment arrangements have sig- pacity cities are naturally less attractive to pri- nificant potential in China, particularly for vate sector investors than larger, more affluent low-capacity cities or in cases where improv- TABLE 8.7 Responsibility Allocation for Common Arrangements Asset Capital Commercial Contract Arrangement Ownership Investment O&M Costs Risk Duration Arrangements Not Requiring Private Investment Management Public Public Public Public Short Affermage Public Mainly Public Private Mainly Public Medium-Long Lease Public Mainly Public Private Mainly Private Medium-Long DBO Treatment Plant Public Public Private Mainly Public Medium Arrangements Requiring Private Investment Concession Public Private Private Private Long Divestiture Private Private Private Indefinite BOT Treatment Plant Public Private Private Mainly Public Long 128 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e BOX 8.5 Mixed Capital Company in Cartagena, Colombia Cartagena, located on the Caribbean coast, is one of Colombia's larger cities with a population of around one million inhabitants. In 1993, the Mayor decided to liquidate the municipal utility, which was providing low levels of service, was over-staffed and inefficient, and was unable to finance an estimated $230 million worth of new investments necessary to improve service and expand coverage. The Cartagena District Council decided to create a "mixed-capital," or joint venture, company for the operation and management of the water system. A private operator from Barcelona Spain (AGBAR) was chosen as the operator owning 46 percent of the shares, with Cartagena District owning 50 percent, and private shareholders the remaining 4 percent. This privately managed joint venture company was named Aguas Cartagena (ACUACAR). Although this model is commonly used in Spain, this was the first time such an arrangement had been tried in Latin America. ACUACAR's Board of Directors is composed of five members, two nominated by Cartagena District, two nom- inated by AGBAR, and one nominated by the private shareholders. Decisions in the Board have to be approved by at least four members, effectively meaning that the District and AGBAR must reach consensus. The General Manager of ACUACAR is nominated by AGBAR and needs to be approved by the Board. Originally, ACUACAR had an operations and management contract for a period of 26 years. The contract included various performance targets that required ACUACAR to improve the quality of service and mainte- nance, reduce unaccounted-for-water, and improve the collection rate. It stipulated that 50 percent of net income would be declared as dividend to shareholders. In addition, AGBAR would receive a management fee calculated as a percentage of revenues and set to decrease over time. The District retained the responsi- bility for financing future capital investment needed to expand water and wastewater coverage, while ACUACAR was responsible for implementing capital expenditures. The 1995 arrangement between ACUACAR and the District evolved over time and now takes the form of a partial concession contract, known as an "operation with investment" contract, under which significant investments are undertaken by ACUACAR to expand coverage and improve the operating efficiency of the networks. A major part of the investments are provided by the municipality (with financial support from the national government) with the balance by ACUACAR. The operator, bolstered by improved cash generation, mutually agreed annual tariff increases, and growing consumer confidence has taken a pragmatic, step-wise approach to investment. Over a six year period, more than $47 million (or 35 percent of total investments) has been invested by ACUACAR without contractual mandates. Under this new arrangement, the operator invests up to a level that can be recovered from tariffs, with the rest of the investments coming from local and national governments. The ACUACAR arrangement has produced significant improvements, including: Physical: water coverage increased from 68 percent to 99 percent, and sewerage from 56 percent to 85 percent; drinking water quality standards are consistently met; and 24 hour service coverage increased from 65 percent to 100 percent. Commercial: Modern commercial and management information services were introduced; all customers are metered; and staffing has been reduced from 1300 employees to around 270. Customer Service: ACUACAR now has three offices within reach of all customers; customers can pay their bills in banks and supermarkets; and attention to customer concerns and complaints has increased. Source: Libhaber et al (2003). "A Public-Private Partnership for the Provision of Water and Sewerage Services in Cartagena, Colombia: Looking Back at the First Seven Years," Internal Report, The World Bank. 129 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s ing utility performance--and not financing-- gether a private participation arrangement, is the main problem. Some underutilized but with varying degrees of private investment promising arrangements and where they and operational involvement. Box 8.5 pro- would be applicable are discussed below. vides an interesting example of a mixed cap- Box 8.1 provides more detailed descriptions ital arrangement in Cartagena, Colombia. of each arrangement. Summary of Management Contracts. Where the pri- mary objective of the city or the utility Strategic Directions is to improve utility performance. The The strategic directions for private participa- operator is typically paid for time in- tion identified in this chapter are: puts only, with incentive features, such as bonuses if targets are met or penal- Use private participation as an instru- ties in the case of poor performance. ment of reform. Private participation Affermage Contracts. Where there is arrangements in the urban water sec- considerable investment risk, and tar- tor can either be part of the problem, iffs are not sufficient to cover the O&M or part of the solution. Municipal gov- costs. The operator is paid a fee for ernments should commit to an overall service delivery (such as cubic meters reform plan, and then determine if, of water), which is de-linked from and how, to utilize the private sector to tariff revenues. facilitate the reform agenda. The pri- Lease Contracts. Where there is consid- vate participation arrangement should erable investment risk, but tariffs are be carefully selected and designed to at least sufficient to cover O&M costs. achieve the reform objectives. The operator is allowed to keep the Ensure BOT Arrangements Fit Into a tariff revenue but then pays the con- Network Business. BOT arrangements tracting authority for the right to use for water supply and wastewater treat- the infrastructure assets. ment plants in China are extensive and DBO Treatment Plant Contract. Where growing. Two factors are critical to the utility has attractive financing for success: (1) cities should ensure fund- construction, but looks to the operator ing is sufficient to cover both treat- to minimize cost and operate effi- ment and network costs; and (2) risks ciently. Potential attractions include associated with treatment plant per- (a) costs may be lower than a BOT due formance and costs should be fully to better financing terms; or (b) costs understood and allocated to the party may be lower because of operator effi- best able to manage the risk. ciency and expertise in considering all Use More Non-Investment Arrange- aspects of design, construction, and ments. Private companies currently operation together. need to "pay-to-play" in China. Re- quiring private companies to invest in The list above is just the commonly used infrastructure may not be necessary or options for non-investment arrangements. feasible in some cities. Alternative There are many different ways of putting to- arrangements that do not require 130 U s i n g t h e P r i v a t e S e c t o r t o H e l p I m p r o v e M u n i c i p a l U t i l i t y P e r f o r m a n c e investment but can improve per- the Process of General Adoption of Market Prin- formance and lower costs should be ciples for the Municipal Public Utilities Sector; (2) MOC Decree No. 126 (2004): Management explored, including management, af- Measures for Concession of Urban Public Utilities; fermage, lease, and DBO contracts. and (3) MOC Opinion 154 (2005): Strengthening the Monitoring of Municipal Public Utilities. They Notes address the general principles of granting and 1. "Water Market China" by Global Water Intelli- structuring private participation arrangements, gence (2004). private participation management guidelines, 2. "Water Market China" by Global Water Intelli- and the need for municipal monitoring of private gence (2004). participation agreements. 3. Three major circulars from the Ministry of 4. See the following brief from Pinsent Masons law Construction (MOC) have defined the overall pol- firm for information on the model agreement: icy: (1) MOC Circular No. 272 (2002): Quickening www.pinsentmasons.com/media/7288360 48.pdf 131 9 Improving Capital Planning to Reduce Costs The urban water business is capital-intensive, Managing Sludge as an Environmental so good decisions on infrastructure invest- and Financial Priority to ensure the en- ment can lower costs and improve service. vironmental benefits from wastewater Many cities and utilities in China do not plan treatment are not dissipated through their capital investments well. This poor plan- inappropriate sludge management ning is often rooted in inappropriate policies, Integrating Industrial Pollution Control institutions, and incentives. Another factor is into a Municipal Wastewater that China's urban water business is develop- Management System to achieve the ing quickly, and utilities are still building up overall least-cost solution to water their expertise and learning lessons from pollution control and to improve international and domestic experiences. This wastewater utilities' compliance with chapter starts by describing the importance effluent and sludge standards of capital investment efficiency, and then highlights how Chinese utilities can reduce costs and improve performance by applying Capital Planning the following modern planning approaches: for Water Utilities Integrated Resource Planning to select Capital planning decisions in the urban the best package of supply and demand water sector are exceptionally important. management options to meet a city's The water sector is the most capital-intensive water needs utility in the economy. Even in countries Asset Management Planning to system- with developed urban water systems, annual atically and cost-effectively renovate investments average around 40 percent of water distribution and wastewater revenues, whereas the next most capital- collection networks intensive utility sectors--electric services Strategic Planning and Management and communications--only average around of Drainage Networks to achieve the 15 percent.1 Moreover, most of the assets in most cost-effective manner of reduc- the water sector have a very long life, with ing pollution and ensuring financial facilities such as pipelines typically lasting sustainability 50 years or longer. Making well-informed 133 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s capital investment decisions has a profound network planning in China is low. Water effect on service quality, cost, and affordabil- supply and wastewater treatment plants ac- ity. Box 9.1 provides a discussion of capital count for the remaining 30 percent of the costs for water services in England and sector's capital program. Choices about Wales. wastewater treatment technology are influ- As Chinese cities accelerate capital enced by relatively high national discharge spending on urban water infrastructure-- standards, which increases costs. Many estimated to exceed over RMB 400 billion cities are also upgrading their water treat- ($50 billion) during the 11th Five-Year-Plan ment plants with advanced and expensive period--it is imperative to improve the qual- technology to respond to new drinking water ity of capital planning. Around 70 percent of quality standards. the investments will be for water supply dis- Capital planning requires long-term fore- tribution and drainage networks, yet the casts of population and economic growth. level of attention and expertise applied to These forecasts, coupled with government BOX 9.1 Capital Costs in the Water Industry: England and Wales A significant portion of a water service provider's costs are accounted for by capital costs. To estimate the true economic cost, it is necessary to know the value of the infrastructure assets, the rate at which the assets need to be replaced, and the required rate of return on assets. Most utilities have poor information on their asset values, because the assets are long-lived, and episodes of inflation and technological change often mean that the recorded book value bears little relationship to the real asset value. Depreciation rates may be a poor estimate of the rate at which assets actually need to be replaced, and there is often ambiguity about the appropriate rate of return. In England and Wales, water utilities were required to calculate Modern Equivalent Asset (MEA) values, and use techniques designed to estimate the real cost of renewing and replacing assets over time. There has also been empirical work on estimating the cost of capital, which has resulted in a regulatory determination of the rate of return to be used in tariff setting. Since water technologies do not differ greatly around the world, it is probably reasonable to use England and Wales data as a basis for estimating the real economic cost structure of water service provision. Capital costs amount to 80 percent of the total cost of water provision. Almost all of this cost is sunk in infra- structure assets, which helps explain why the water sector is such a strong natural monopoly. It also means that to achieve full cost recovery through tariffs, a provider could be expected to need a working ratio of 0.20. In other words, if total costs are 100, then capital costs will be 80 and operating and maintenance costs will be 20. If a tariff is to cover total costs, it will be 100 also. The water industry in England and Wales achieves full cost recovery through a tariff that produces a working ratio of 0.5. The explanation for this apparent contradiction is that when the British government privatized the water industry in 1989, it realized that to set tariffs at a level that would allow utilities to earn a return on capital on the full depreciated MEA value would result in tariffs more than doubling. This would have been politically unacceptable, so the government decided to set tariffs to allow a return on only a fraction of the assets that existed at privatiza- tion. In 2004, the depreciated MEA value was GBP 204 billion, compared to the regulatory value for tariff setting of GBP 32 billion. The result was that the government sold the water companies for a small fraction of MEA book value, effectively locking in the pre-existing implicit subsidy policy by not requiring a return on existing assets. Source: Castalia, "Sector Note on Water Supply and Sanitation for East Asia" (2004) 134 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s policies, affect water demand and waste- production, indicating that on a national water generation. The evolution of demand level treatment plants are about twice as for these services influences the sizing and large as necessary. This nonessential invest- phasing of capital works projects. Long-term ment in treatment plant capacity raises over- forecasts in China are difficult due to rapid all service cost without generating benefits. population and economic growth in most Although China has been able to control the Chinese cities. Most cities and their utilities growth in water demand over the past dec- in China do not pay enough attention to ac- ade, the overinvestment in water treatment curate demand forecasts, but rather rely on plants also reflects a deficiency in water sup- standard values, such as per capita water ply planning. use, and short-term city master plans. The The water resource and construction bu- result is often facilities that are either over- reau planners of the 1990s used a traditional sized or undersized, and a lack of apprecia- supply planning approach that emphasized tion of risks for future service provision. maintaining system reliability, while assum- ing that water demand is a "given" and can- not be altered. This approach assumes a Using Modern high level of system reliability and risk (i.e., Water Supply avoidance of water shortages at all costs). Planning Processes2 The final plan typically recommends con- struction of large-scale water development Water supply planning in China and else- schemes and construction of new water sup- where has evolved over time and is becom- ply infrastructure by the water utility. Be- ing more sophisticated. Past planning efforts cause such planning is conducted internally, focused on constructing infrastructure to the public, outside experts, and other gov- supply water. Current Chinese policies advo- ernment agencies typically have little or no cate using a variety of options to meet water involvement in the planning process. needs such as demand management, con- servation, water reuse, reallocation between New Water Policies and Programs agricultural and urban uses, etc. This section China's cities, particularly in the arid north suggests that new methodologies should be and west, are running short of water re- used to select the best combination of op- sources. In 2004, the MWR reported that sea- tions to meet a city's water needs, taking into sonal water shortages affect more than 400 of account economic, financial, environmental, China's 669 cities, and around 110 cities are and political factors. facing serious water shortages requiring drastic water use restrictions.3 The national Historical Approach to government has responded to this challenge Water Planning with new policies, with the clearest policy During the 1990s, many Chinese cities dra- statement set out in the historic 2000 State matically overestimated future water de- Council Circular on "Strengthening Urban mand and constructed water treatment Water Supply, Water Saving and Water plants with excess capacity. Figure 2.6 shows Pollution Prevention and Control." Box 9.2 that the installed treatment plant capacity is presents the key points related to urban equivalent to 250 percent of total daily water water supply planning and management in 135 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 9.2 Water Supply Planning in State Council Decree No. 36 (2000) The key points are: Section 2: Comprehensive planning to optimize and guarantee urban water supply In the formulation of regional water resource plans, urban water use shall have first priority. Urban water plans shall include medium and long-term perspectives, considering water demand and sup- ply, water resources, water conservation, protection of water resources, water reuse, and where necessary large-scale inter-basin water diversions. Improve groundwater management, control groundwater overabstraction, and conjunctively manage surface water and groundwater. Encourage the use of non-traditional waster resources such as wastewater reuse, rainwater harvesting, use of saline water, and desalinization. Section 3: Encourage water conservation and build water efficient cities Optimize the economic structure and city plan to match local water resource and environmental conditions. Promote and enforce urban water savings, with clear targets for water use and savings. Water-short cities shall close and move water-intensive industries, and enforce industrial water-use efficiency Promote domestic and commercial water conservation through design of buildings and water-saving equipment. Reduce leakage in urban water supply distribution networks. Source: State Council Circular on Strengthening Urban Water Supply, Water Saving and Water Pollution Prevention and Control (2000). the circular. Government agencies at the na- MOC encourages cities in the arid tional, provincial, and municipal levels have north and west to reuse at least 20 per- responded and the following new policies cent of treated wastewater within and actions are being pursued: urban areas. Local and provincial governments are National and provincial water resource closing or moving inefficient and bureaus are constructing large inter- water-intensive industries; new indus- basin projects, the most notable of trial developments must demonstrate which is the south-north water diver- that they are "water-friendly." sion project--potentially the most ex- Some large cities are experimenting pensive water project in history. with increasing water supply block Cities throughout China have estab- tariffs to dampen demand. lished "water conservation offices," with the mandate to set and enforce Limitations on Policy Implementation plans for domestic, commercial, and Although government agencies are vigor- industrial water use. Water conserva- ously pursuing China's national water poli- tion statistics are now published in the cies, a number of challenges are emerging, MOC's Construction Yearbook. such as: 136 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s Inter-basin diversion projects are not able options for meeting urban water needs always planned in the most economi- in the right context. The challenge Chinese cally efficient manner. Cost recovery cities and agencies have is in developing a levels are low and financial sustainabil- process for selecting the right combination of ity is often problematic, and environ- options so that the integrated package best mental and social impacts may not be meets the city's, or region's, economic, finan- fully factored into the planning proc- cial, environmental, and social objectives. ess. Large water resource development During the 1980s, many electricity and natu- schemes are typically heavily subsi- ral gas utilities faced similar challenges and dized. Recovering even partial costs responded by developing a process know as from users is difficult due to the limi- "integrated resource planning." This ap- tation on the extent and rate at which proach has been adopted by sophisticated urban water supply tariffs can increase. water utilities around the world, and should Many urban wastewater reuse projects be pursued by Chinese cites as well. The are not well-planned. Common prob- major attributes of integrated planning are lems include (a) supply exceeding de- presented in Box 9.3. mand, particularly during the rainy season when the demand for landscape irrigation is low; (b) wastewater reuse Asset Management plants frequently not meeting the qual- Planning: Optimizing ity requirements of industrial cus- Network Investments tomers; and (c) wastewater reuse com- panies requiring large subsidies and Planning, operating, and maintaining ade- struggling financially due to low re- quate water supply distribution and drain- claimed water tariffs and demand.4 age collection networks are fundamental to Increasing block tariffs may dampen the cost and quality of urban water services. water demand, but they potentially In China and elsewhere, the networks are also reduce water utility revenues, thus often neglected because they are buried un- putting financial stress on the utilities. derground. This section suggests that Chi- Groundwater management efforts are nese utilities move quickly to adopt modern complicated by the reluctance of large asset management techniques to guide the industries to switch from low-cost rehabilitation of their vast pipeline networks groundwater to higher cost municipal and other infrastructure. water supplies, as well as the lack of effective controls on agricultural Importance of Networks groundwater use in many areas. Networks are critical but often neglected elements in the delivery of urban water ser- Developing an Integrated Approach vices. Inadequate water distribution net- to Urban Water Supply Planning works can result in water loses and lower The initiatives identified above--water trans- pressure, contamination of water supply, and fers, wastewater reuse, demand management higher operating costs. Reducing water losses through pricing, groundwater management, in the distribution network can often forestall water conservation, and others--are all vi- or eliminate the need to develop new and ex- 137 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s BOX 9.3 Integrated Resource Planning (IRP) Concepts Water agencies in China and throughout the world are facing supply issues that are very different from the past. Plentiful supplies of water are no longer available, even in "water-rich" regions. Environmental constraints, political realities, financial constraints, and public desires have all changed the traditional supply-side planning scenarios. IRP is not a well-defined procedure for developing optimal water management plans. Instead, it is a conceptual approach that must be developed further into a planning process specific to the context. The key attributes of the process include the following: It is conducted in an open and participatory manner, with an emphasis on the cooperation of the many institutions and stakeholder groups involved in water resource policy and planning. It identifies a broad range of traditional and innovative supply-side and demand-side alternatives for meeting a city's water needs, such as water transfers, water reclamation, water trading, groundwater storage, desalin- ization, demand management through pricing, industrial and domestic water conservation techniques, desalinization, etc. It establishes multiple criteria for evaluating options, including economic, financial, social, and political, and explicitly recognizes uncertainty and risks. It considers multiple long-term and short-term scenarios, includes drought management as part of the plan, and accepts that 100 percent reliability of water supply may not be economically efficient. It evaluates the different combinations of options, or the "resource mix," against multiple criteria in a systematic and transparent manner. IRP develops the best "integration of options" to allow the city to meet its water supply needs, while creating a flexible plan that allows for changing economic conditions. The IRP process is typically conducted every five years or as necessary. Source: "Urban Water Demand and Management Planning" by Duane Baume, et. al. (1998). pensive raw water supply and treatment facil- ing asset renewal needs. In contrast, when a ities. Inadequate drainage networks can re- utility in a less capital-intensive industry sult in increased flooding, infiltration of such as electric power falls short of revenue, drains by groundwater or stormwater (in the it cannot purchase fuel, production is cur- case of sanitary drains), and discharge of un- tailed, and a crisis is created. Deferred asset treated wastewater into the environment. renewal and maintenance in the water sec- tor, however, inevitably catches up with the Why Networks are Allowed to Decay. utility in lower service levels and even larger Water and drainage networks tend to be neg- and more expensive capital programs. lected because most of the pipelines are buried, and can continue to function in the Large Network Investment Requirements. short term even if they are in desperate need The 11th Five-Year-Plan estimates necessary of renovation. As a capital-intensive industry investments in drainage networks alone at with low operating and high capital costs, around RMB 190 billion ($24 billion). water utilities can continue to function Investment needs for water supply distribu- even when revenues are only sufficient to tion networks are also large. Investment cover operating costs by temporarily ignor- needs take different forms, including (a) ex- 138 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s panding network coverage to outlying areas; over decades. Many of the pipes may be of (b) upgrading and renovating networks unknown age, material, and condition; within established areas; and (c) for drain- moreover, the importance of any specific age works, separating combined drains pipe or asset on overall service performance and/or constructing wastewater inceptors. is often only dimly perceived. Water utilities Careful planning and optimization of net- have responded to this challenge by utilizing work investments will have an important im- an approach known as "Asset Management pact on service quality and affordability. Planning" (AMP), which is described in Box 9.4. AMP is also utilized in other infra- The Concept of Asset structure sectors, particularly in transport. Management Planning AMP is applicable to all of the utility's assets, Upgrading water and drainage networks in and not limited to the networks. Water utili- an efficient manner is a formidable chal- ties face a special challenge, however, in that lenge. A utility may have thousands of kilo- the basic information on the network is meters of buried pipes that were installed often lacking. BOX 9.4 Asset Management Planning (AMP) By utilizing AMP methods, utilities can minimize the total cost of acquiring, operating, maintaining, and replac- ing their capital assets, while achieving desired service levels. Basic elements include: Collecting and Organizing Information. An inventory of assets typically include (a) descriptive information, including age, size, material, and location; (b) assessment of asset condition, along with information on oper- ating, maintenance, and repair history, and the assets' expected and remaining useful life; and (c) asset value, including historical cost, depreciated value, and replacement cost. Analyzing Data to Set Priorities. Utilities use analytical techniques to identify trends, help assess risks and set pri- orities, and optimize decisions on maintenance, repair, and replacement. For example, managers use life-cost analysis to decide which assets to buy considering total costs over the life of the assets, not just the initial purchase price. Life-cost analysis takes into account factors such as installation costs, operating efficiency, maintenance needs, etc. to get a cradle-to-grave picture of asset costs. Managers also use risk assessment to determine how critical the assets are to their operations, considering both the likelihood that an asset will fail and the consequences in terms of costs and impact on the utilities desired level of service if the asset does fail. Based on this analysis, managers set priorities and target resources accordingly. Integrating Data and Decision-Making Across the Organization. For example, financial and engineering data should be compatible and each asset should have a unique identifier that is used throughout the utility. All appro- priate units within an organization should participate in key decisions, which ensure that relevant information is considered and encourages managers to take an organization-wide view when setting goals and priorities. Linking Strategy for Addressing Infrastructure Needs to Service Goals, Operating Budgets and Capital Budgets. The utility's goals for its desired level of service--such as product quality standards, frequency of service disrup- tions, customer response time, etc.--are the driving consideration in its strategy for managing its assets. Decisions on asset maintenance, rehabilitation, and replacement are, in turn, linked to the utility's short-term and long-term financial needs and reflected in the operating budget and capital improvement plan. Source: U.S. General Accounting Office, "Water Infrastructure: Comprehensive Asset Management Has Potential to Help Utilities Identify Needs and Plan Future Investments," (2004). 139 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s The importance of comprehensive asset In order to reduce overall service costs, management for water utilities has only re- Chinese cities and their water utilities cently gained prominence in OECD coun- should develop modern asset management tries, and is still not fully appreciated in programs before major rehabilitation works China. If successfully applied in China, AMP are undertaken. Since AMP is a relatively would reap enormous benefits, including: new concept, high-capacity cities should work with experienced consulting firms to Higher Levels of Capital Efficiency. develop modern AMPs as examples for other Collecting, sharing, and analyzing data on cities in China. capital assets has allowed utilities to make more informed decisions on how best to manage the assets. In particular, utilities are Strategic Planning using AMP to allocate their maintenance and Management of resources more effectively and make better Drainage Networks decisions about when to rehabilitate or re- place existing assets. This is of particular im- Drainage networks have an important role to portance in China, as water and wastewater play in urban wastewater management, both utilities throughout China embark on mas- in terms of overall cost and water pollution sive renovation of their networks. control. This section suggests that Chinese cities should carefully consider whether Stronger Basis for Tariff Increases. AMP separate drainage collection systems can be provides the foundation for justifying tariff justified, both from a financial and water pol- increases to help pay for needed improve- lution control perspective. In support of pol- ments. Asset renewal should represent a sig- lution control, many cities need to pay closer nificant part of a utility's annual revenue attention to the performance of the drainage needs. The current system of tariff setting in system and stormwater quality management. China is based on the objective of having the Existing Situation utility make a small accounting profit as re- Older urban areas in China use a combined flected in the company's income statement, drainage system, but many cities now favor where depreciation is typically taken as a constructing separate stormwater and sani- proxy for the capital renewal costs. Depre- tary drainage systems (see Box 2.2 for a de- ciation, however, is based on historical scription of wastewater terminology). A costs, and many of the assets are so old that MOC/SEPA 2000 "Circular on Urban Sewage the accounting valuation is of little use. In Treatment and Pollution Control" suggests: fact, the lower the asset value, the lower the depreciation cost, and typically the lower ". . . for new urban areas, separate storm- revenue a Chinese utility is entitled to. water and sanitary systems shall be Developing AMPs that accurately assess the considered. In older urban areas where asset renewal costs will assist the utility in renovation is difficult, combined drains securing an adequate revenue stream to shall be maintained with reasonable in- ensure sustainability--and benefit the con- terception rates (i.e., percentage of wet sumer and the city in the long run. weather flow conveyed to treatment 140 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s plant). Combined systems should be veyed to the wastewater treatment plant and adopted in cities with little precipitation. the remainder discharged into a nearby re- For sensitive receiving water bodies, cities ceiving water body. The general view in should consider collection and treatment China is that separate stormwater and of the initial stormwater flush." wastewater drainage results in less pollution because, theoretically, there are no com- This guidance is generally sound. How- bined sewer overflows (CSO) when it rains. ever, it does not elaborate on what factors The view that separate networks are superior should be taken into consideration for "sep- was widely held throughout the world until arating" drains or "treating" stormwater recently. For example, the 1972 United flush. Due to the paucity of information on States Clean Water Act recommended sepa- drainage networks at the national level, it is rate drainage networks. Over the last decade, not possible to estimate the percent of com- however, the impact of urban stormwater bined or separated networks, nor their geo- runoff in contributing to pollution loads has graphical distribution in China. Based on become clear, and there has been a reevalu- World Bank project experience, most drain- ation of the relative benefits of the two sys- age systems appear to be a mixture of sepa- tems. The emerging scientific consensus is rate and combined areas, and the general presented in Box 9.5. tendency is for cities to construct separate systems in new development areas (see Drainage and Water Pollution Control Box 2.4 on Tianjin's drainage system). In China, wastewater sector performance is generally evaluated on the quantity of waste- Combined vs. Separate water treated. Information on the reduction Drainage Systems in pollutant loading (e.g., tons of BOD) is Combined sewers overflow during heavy usually not highlighted in performance as- rain, with only part of the wastewater con- sessments. The performance of the drainage BOX 9.5 Comparison of Separate and Combined Drainage Collection Systems Based on an extensive literature review, a recent study concluded that: A separate system does not necessarily result in less pollution to the environment than a com- bined system. Separate systems appear to be better at removing BOD and nutrients, but com- bined systems are superior in reducing heavy metals and settleable solids. Increasing the capacity and performance of the wastewater treatment plants shifts the balance of the benefits toward the combined system. Stormwater treatment (efficient overflows, retention reservoirs, constructed wetlands, etc.) are applicable in both systems. Separate systems require two networks, which makes it inherently more expensive to con- struct and maintain, even with the costs of interceptors and CSOs in the combined system. An effective combined system typically requires higher treatment plant capacity. Source: Brombach et al, "A New Database on Urban Runoff Pollution: Comparison of Separate and Combined Sewer Systems, in Water Science and Technology (2002). 141 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s system is hardly monitored or considered in Lower capacity cities should utilize the evaluation of an urban wastewater man- combined drainage systems to reduce agement system in China. The performance overall costs. Higher capacity cities of the drainage system, however, is a critical should carefully analyze whether a sep- part of the water pollution control infra- arate, combined, or hybrid drainage structure. Box 9.6 shows some of the main system provides the best combination drainage collection parameters that are of cost and pollution reduction, and in monitored in other countries, and should be- parallel develop a long-term strategy come part of China's water pollution control for stormwater quality management. regulatory system as well. Performance measures on drainage sys- tems should be collected, analyzed, and Improving Drainage made available to the public. MOC Networks in China should prepare guidelines on how to China could improve the efficiency and help cities analyze and upgrade the per- sustainability of water pollution control as formance of their drainage collection follows: systems in a cost-efficient manner. BOX 9.6 Drainage Collection Systems and Water Pollution Control Many OECD countries have come to the realization that wastewater treatment plants are only one dimension of urban water pollution control. To achieve their water quality objectives, they also need to focus on the following issues: Stormwater Quality Management. Stormwater contains pollutants from urban runoff such as oil and grease from streets, fertilizers and pesticides, and with combined drains waste- water from combined sewer overflows (CSOs). For separate systems, cross-connections be- tween stormwater and sanitary drains are widespread, and there are many instances of indi- viduals or business negligently or accidentally pouring pollutants into a stormwater drain. Typical approaches include constructing stormwater retention areas where the stormwater can be treated by a treatment plant or natural wetlands; strict drain connection regulations and enforcement; and public education. Combined Sewer Overflows (CSOs). During rain events, combined drains overflow, sending pollution into the environment. Regulatory agencies in some countries are now requiring utilities to monitor and report the frequency and magnitude of CSOs, and where necessary to develop CSO reduction programs. Sanitary Sewer Overflows (SSOs). Even when drainage systems are separated, sanitary sewers are prone to overflow due to blockage, pumps not operating properly, undercapac- ity, etc. Regulatory agencies in some countries are now requiring utilities to monitor and re- port the frequency and magnitude of SSOs, and where necessary to develop SSO reduction programs. Infiltration and Inflow (I&I). Infiltration of groundwater or inflow of stormwater into sanitary drains can undermine the performance of a wastewater management system by (a) increas- ing costs of wastewater treatment; (b) increasing the frequency of SSOs; and (c) increasing the required capacity of pipes and wastewater treatment plants. 142 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s Integrating Industrial vent of centralized municipal wastewater Pollution Control treatment plants after 2000, two issues have emerged: (1) how to find the least-cost Into a Wastewater combination of industrial and municipal Management System5 wastewater treatment; and (2) how best to monitor and regulate industries. These two China's national pollution control efforts issues are discussed below. focused first on industry, and then later on municipalities. Grafting the existing indus- Overall Cost Minimization trial pollution control regime onto the new Annex 2 presents the industrial pollution reality of municipal wastewater manage- standards (GB8978-1996), which can be ment poses many challenges. This section grouped into two categories: (1) discharge suggests that wastewater utilities should be into the environment or a municipal drain- more active in managing industrial dis- age system without a municipal wastewater chargers, including utilizing pollution-based treatment plant (Levels 1 and 2); and (2) dis- charges. charge into a drainage system with a munic- Industrial Water Pollution ipal wastewater treatment plant (Level 3). In Control in China addition to the general industrial pollution control standards, there are also some spe- During the 1990s, one of China's environ- cific industry standards.6 mental priorities was controlling industrial The challenge for many cities is to inte- water pollution, Since then, dramatic prog- grate the existing industrial pollution con- ress has been made. Figure 2.7 shows that trol approach into a broader municipal total pollutant discharge by industries has wastewater management system, which decreased from around 16 million tons of includes both domestic and industrial waste- COD in 1995 to around 5 million tons in water. Most large industries within munici- 2004. Industrial wastewater still accounts, pal systems built their own wastewater treat- however, for around half of all wastewater ment facilities before centralized municipal flows and one-third of COD discharges in plants were constructed. Industries can also China. This remarkable achievement is in elect to pre-treat (if necessary) to meet Class response to a national government policy 3 standards for discharge to a municipal requiring all large industries to have waste- wastewater treatment plant. The Class 3 water treatment by 2000, as well as economic standards also have COD (300 mg/l) and sus- restructuring and use of clean technology, pended solid limits (400 mg/l). Large munic- SEPA and EPBs at lower levels of govern- ipal wastewater treatment plants, however, ment have had a strong regulatory and mon- can generally treat standard pollutants such itoring role in the control of industrial as BOD or suspended solids at lower costs wastewater, but have had less influence in and more reliability than smaller industrial the control of municipal domestic waste- treatment plants. water, which is typically the responsibility of Currently, wastewater utilities have lim- the local construction bureau and its associ- ited incentives to encourage more pollutant ated utilities. This division of responsibility loading from industries. In most cities, the functioned during the 1990s. With the ad- wastewater tariff is based only on flow, and 143 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s receiving higher levels of pollution would in- tiate prices and service conditions with crease operating costs without boosting rev- industries, and to grant waivers to the enues. In Chapter 7, we encouraged cities to existing limits on parameters such as establish wastewater tariffs based on both BOD and SS. flow and pollutant loading, as well as fixed A higher level of trust and adherence and variable costs. In most countries, pollu- to the terms of contract agreements is tant loading (or trade effluent) charges are also required. For example, the indus- applied to industrial customers and to se- try's own effluent monitoring reports lected commercial customers discharging (hourly or daily) should be accepted trade effluent, especially, restaurants, laun- as a basis for municipal wastewater dries, etc.; that is, the volume charge is not charges, while the infrequent (monthly simply water volume discharged, but instead or quarterly) EPB or wastewater utility a measure of pollution volume (load). The sampling results should be considered industrial classification reflects the type of as an audit rather than as the basis for industry and therefore the characteristics of charging. the trade effluent discharged by individual Highly toxic substances, such as heavy customers in that group or "band." This metals or dangerous synthetic organic avoids the need for sampling of individual compounds (e.g., PCP), should con- companies effluent and makes the charges tinue to be managed at the industry easier to administer and more predictable through pretreatment and industrial from the customer perspective. process control. For larger industrial customers, a more sophisticated approach should be used. A Monitoring and Regulation suitable tariff structure for the municipal If the industrial tariff is based on discharge wastewater treatment plant that reflects the quality as well as discharge volume, then dis- relevant prices by unit volume and by unit of charge permitting systems become essential. pollutant load can guide each industry in Even in the absence of such a charging sys- minimizing its total costs (for both pretreat- tem, the discharge permit is a very valuable ment and municipal treatment), and lead tool in the wastewater management system, toward a global least-cost solution for the particularly for control of heavy metals or service area as a whole. In addition, it can other toxic substances. This would require a help the wastewater utility recover more of new allocation of responsibilities between its costs by using excess capacity at the treat- the EPB and the wastewater utility. ment plant. Box 9.7 illustrates how, in prin- EPB is responsible for setting standards ciple, the wastewater fee could be set for for the discharge of effluent to both sewers large industries. With this approach, indus- and watercourses. From the historical con- tries would then be allowed to make the fi- text, this responsibility is fully understand- nancial decision as to whether they should able, since without wastewater treatment, continue to treat onsite or discharge to a the sewers simply acted as conduits to con- wastewater treatment plant. Several issues arise under this approach: vey all effluent to the nearest suitable water- course. However, as wastewater treatment The municipal wastewater utility must plants are added, the situation changes and be allowed the flexibility to set or nego- it becomes important for the managers of 144 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s BOX 9.7 Applying the Polluter Pays Principle The polluter pays principle (PPP) states that "the polluter should bear the expenses of carrying out the pollution prevention and control measures decided by public authorities to ensure that the environment is in an accept- able state." This is a general reformulation of the price equity principle that people should pay the costs at the wastewater treatment plant (WWTP) to treat their effluent discharge. The Mogden Formula, as applied by Thames Water in the UK, can be simplified and expressed as a charge that is the sum of a uniform flow cost and pollutant treat- ment costs. The pollution element varies based on the level of COD and SS in the specific discharge, relative to domestic strength effluent characteristics: Charge = V + B × Or + S × Sr Where: V = Yuan/m3 charge for collection and flow element B = Yuan/m3 charge for secondary treatment S = Yuan/m3 charge for sludge processing and disposal Or = Ratio of an industry's COD concentration to the average COD domestic Sr = Ratio of an industry's SS concentration to the average SS domestic Suspended solids (SS) are included to cover those instances where it may be the determining factor, otherwise the formula (B × Or) covers the secondary treatment of COD and the cost of sludge treatment, incorporating both COD and SS removal and disposal. The calculations, sampling, and analysis required are relatively complicated and in practice are applied to only the largest industrial polluters in a service area, and only after the wastewater utility has gained considerable experience and knowledge about industrial dischargers. The introduction of such a formula would allow industry to make their choice between two options: (1) on-site pretreatment (to remove heavy metals, toxins, etc) followed by centralized municipal treatment; or (2) advanced on-site treatment, conveyance, and disposal to the environment. Source: ADB, "National Guidelines in Urban Wastewater Tariffs and Management" (2003). the treatment plants to control discharges to well as for discharges from municipal waste- sewers in a manner conducive to the capabil- water treatment plants. EPB should monitor ity of the plant to treat waste. Over-strength the compliance of the wastewater utility in effluent must be prevented from entering the this respect, taking enforcement action as drainage system if it is likely to damage the necessary in just the same way as other en- treatment process or the fabric of sewers, or terprises causing pollution are dealt with. create undue hazards for staff working on The wastewater utility, however, should be the drainage system. This suggests that the the primary party setting and monitoring the wastewater utility should be actively in- permit conditions that optimize treatment volved in the licensing and monitoring of in- between industrial on-site treatment and dustrial wastes discharged to the municipal that provided by the municipal treatment system. plant Since the wastewater utility may not The EPB should continue to set and en- have full legal authority to sanction indus- force standards for industries discharging tries not meeting their discharge permit waste that go directly into watercourses, as requirements, the support of EPB or the par- 145 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s ent bureau may remain necessary in enforc- and often demanding operational require- ing permit compliance. ments of sludge-handling facilities may equal or exceed those of the preceding (liq- A New Approach to Municipal uid) wastewater treatment facilities. Sludge- Industrial Pollution Control management facilities are expected to ac- The overall cost of industrial and municipal count for around 11 percent of total capital wastewater treatment could be reduced, and costs for the wastewater sector during the effectiveness improved by: 11th Five-Year-Plan period--as opposed to 13 percent for wastewater treatment plants. Charging industrial and commercial Sludge management is an important envi- customers for both wastewater flow ronmental and financial issue that many and pollutant quantity, and for large cities and their wastewater utilities are just industrial dischargers, allowing the starting to address. wastewater utility to directly negotiate the terms and conditions of the waste- China's General Policy water discharge permit. on Sludge Management Empowering the wastewater utility to The 2000 MOC/SEPA Circular entitled be the lead organization for permitting "Policy on Technology of Urban Sewage and and monitoring industrial discharges Treatment Pollution Control" provides gen- to the utility's collection system, while eral guidelines for sludge management. The the EPB monitors all discharges to the policy calls for wastewater utilities to treat environment, including those of the sludge as a resource. Treatment plants with wastewater utility. capacity greater than 100,000 m3/day are en- couraged to use anaerobic digestion to gen- erate biogas, as well as reduce the volume Managing Sludge as and weight of the sludge. Cities should also an Environmental explore opportunities for aerobic compost- and Financial Priority ing, where the compost can be beneficially reused as soil conditioner. Utilities can dis- The many new wastewater treatment plants pose of sludge residuals through either throughout China have helped to reduce disposal in a modern sanitary landfill or water pollution, but have also created a through application on agricultural land-- widespread problem of sludge management. provided the sludge meets the required stan- A wastewater treatment plant treats waste- dards. Although this guidance is generally water and discharges clean water, but there sound, there are a number of challenges: are also residual solids from the treatment process that are called "sludge" that need to Challenge of Anaerobic Digestion. Most be properly disposed. large wastewater utilities around the world The best way to treat and dispose of stabilize their sludge through a process of sludge depends on the raw wastewater char- anaerobic digestion. This process produces acteristics, wastewater treatment process, biogas (mainly methane), which can be used local regulations, and numerous site-specific to provide supplemental power to operate conditions. Furthermore, the capital costs the wastewater treatment plants. The proc- 146 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s ess also helps to reduce the sludge volume the option of disposing sludge in a landfill or and weight, which reduces final disposal applying the sludge onto agricultural land. costs. Many wastewater utilities in China Many smaller Chinese cities do not have struggle with the operation of their digestion modern sanitary landfills, so the sludge is facilities. Many installed sludge digesters do often disposed in open dumps. In cases not operate because of inadequate quantities where a modern sanitary landfill exists, the of sludge due to low BOD/SS concentrations sludge is often not adequately dewatered, in influent; poor quality sludge due to toxic causing excessive leachate production at the compounds in industrial discharges; and landfill. Land application is an option if the lack of maintenance due to insufficient sludge meets the standards for agricultural funds. Although the larger and more sophis- land, but the costs of conveying the sludge to ticated utilities can, and do, operate their fa- the agricultural land, and proper application cilities efficiently, many utilities struggle can be prohibitive in many cases. with their sludge digesters. Sludge digestion facilities are capital-intensive and opera- Suggestions for Sludge Management tionally complex. Proper planning and management of sludge from wastewater treatment plants is critical Challenge of Composting. Some cities for ensuring environmental objectives and have turned to aerobic composting as an al- controlling costs. The following general ap- ternative to anaerobic digestion, often in proaches are recommended: conjunction with solid waste composting fa- cilities. Composting generally has lower Improve Regulation of Sludge Manage- capital costs than digestion, but has higher ment. EPB and utility parent bureaus operating costs. If the compost can be sold should ensure that every wastewater as soil conditioner, then part or all of the op- utility properly treats and disposes of erating costs can be recovered. In areas its sludge in an environmentally safe where there are significant industrial dis- manner. chargers, the sludge may contain toxic Manage Sludge as a Resource in High- chemicals and may not be suitable for com- Capacity Cities. High-capacity cities posting. Moreover, finding reliable markets should develop and implement sludge for the composted sludge is often difficult. management plans that make benefi- cial use of the sludge, such as through Challenge of Sludge Disposal. Before anaerobic digestion to produce biogas sludge can be disposed, it needs to be stabi- or disposal through land application. lized and dewatered. Stabilization is pro- Composting is an attractive option for vided to eliminate odor and reduce the smaller high-capacity cities. Managing threat to human health, and can be accom- sludge as a resource may increase over- plished through either chemical, anaerobic, all operating costs for the utility, but or aerobic processes. Dewatering is needed can result in a net benefit to society. to reduce the weight and volume of the Safe Disposal of Sludge in Low-Capacity sludge and is usually provided by machines Cities. Most low-capacity cities do not (centrifuges, pressure filters, etc.) or in dry- have the financial or technical capacity ing beds. Wastewater utilities usually have to manage sludge as a resource. The 147 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s transitional objective for these cities Chapter 6 called for cities to manage should be to minimize the cost of envi- wastewater as an integrated network utility ronmentally safe sludge disposal. Low- business. This chapter highlights a number cost chemical stabilization and sludge of areas where integration of key functions is dewatering methods should be em- critical to meeting pollution control objec- ployed, with disposal at a modern sani- tives, including: tary landfill. If a city does not have a sanitary landfill, it should be required Strategically plan and manage to construct one in conjunction with drainage networks to control water the wastewater treatment project, pollution. Low-capacity cities should either as a standalone facility or as utilize combined stormwater and part of a municipal landfill. wastewater drains to control costs and help reduce stormwater pollution. High-capacity cities should carefully Summary of consider whether separate, combined, Strategic Directions or hybrid collection networks provide the best combination of cost and pollu- The following approaches to improving cap- tion reduction, particularly in the con- ital planning have been highlighted in this text of establishing storm-water quality chapter: management programs. The perform- ance of drainage systems should be High-capacity cities and their utilities better monitored and regulated, in- should develop new water supply plan- cluding combined sewer overflows, ning approaches, drawing upon inte- sanitary sewer overflows, and infiltra- grated resource planning techniques. tion and inflow. This includes evaluating a wide range Incorporate industries into the munic- of traditional and innovative options ipal wastewater management system. and selecting the best "set of options" Industries should be charged for both as evaluated against economic, finan- the flow and amount of pollution cial, environmental, and social criteria. discharged into municipal drains. In Integrated resource planning requires high-capacity cities, utilities should an open and participatory process with be allowed to negotiate the terms and all institutions and stakeholders in- conditions of industrial discharge per- volved, and explicit recognition of un- mits, and monitor and enforce compli- certainty and risk. ance in coordination with EPB. EPB High-capacity cities and their utilities should focus on ensuring that the should establish modern asset man- wastewater utility meets the applicable agement planning programs. Asset effluent and sludge standards. management planning will help ensure Manage sludge as an environmental that the renovation of water supply and financial priority. The regulation and wastewater collections--the of sludge management by EPB should largest investment challenge ahead-- be improved. High-capacity cities is done in a cost-effective manner. should strive to manage sludge as an 148 I m p r o v i n g C a p i t a l P l a n n i n g t o R e d u c e C o s t s energy and organic resource by utiliz- 3. See Chapter 2, Endnote 9. ing digesters and land disposal where 4. Based on World Bank-MOC "North China Water Quality Study Report: Component C Urban appropriate. Low-capacity cities Water Reuse Study" (2005). should utilize low-cost sludge treat- 5. This section draws heavily on the ADB report " ment processes and dispose into a National Guidelines in Urban Wastewater Tariffs modern sanitary landfill; sludge dis- and Management" (2003). posal should be considered as part of 6. Specific standards are also enforced for several industrial sectors, for example: pulp and paper an overall solid waste management (GB3544-92), shipbuilding (GB 3552-83, GB4286- program. 84), offshore petroleum development (GB4914- 85), dyeing and finishing of textiles (GB4287-92), Notes meat packing (GB13457-92), ammonia produc- 1. Baumann, Duane, et. al., "Urban Water Demand tion (GB13458-92), iron and steel (GB13456-92), Management and Planning" (1998) ordnance manufacture (GB14470-93), phosphate 2. Baumann, Duane, et. al., "Urban Water Demand fertilizer (GB15580-95), and caustic alkali and Management and Planning" (1998) polyvinyl chloride (GB15581-95). 149 10 Strategic Action Plan China needs to improve the performance of need to take bold and proactive measures to its urban water utilities to confront the chal- establish a better sector governance frame- lenges of: work that focuses on achieving policy objec- tives. City governments need to promote Rapid urbanization sound governance and sensible structures Urban diversity for their municipal water utilities. In the Water scarcity and degradation proper institutional setting, China's urban Large capital investment demands water utilities can flourish and improve their Improving the operational and financial financial sustainability, better engage with performance of urban water utilities will the private sector, and make smart capital bring significant economic, environmental, planning decisions. and public health benefits. This study pres- Table 10.1 provides a summary of the ents a vision whereby in 2020 utilities in themes and key strategic directions pre- high-capacity cities are efficiently providing sented in this study. To implement a strat- water and wastewater service that ranks egy, responsibilities need to be assigned and among the best in the world. Utilities in low- deadlines set. Table 10.1 suggests who capacity cities and towns are also efficiently should do what and by when. Designing poli- providing reliable and safe water supply and cies, programs, and specific actions to im- collecting and treating all municipal waste- plement the recommended strategies will re- water. Lower capacity cities are complying quire sustained attention and commitment with transitional water and wastewater ser- by all levels of government, utilities, profes- vice standards that offer significant im- sional organizations, advocacy groups, busi- provements from current levels, while taking nesses, and citizens. The Bank can assist the into account these cities' level of economic government in addressing the strategic is- development. sues identified in this study through Bank-fi- To achieve this vision by 2020, govern- nanced projects, analytical and advisory ments at the national and provincial levels services, and policy dialogue. 151 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Frame 2008 2008­10 2008­10 2008­10 2008­12 2008­12 2008­15 2008­15 Time MOF, MoPH and water municipal NDRC, Actors SEPA, MOC urban governors agencies and Key leading Council, MWR, MoPH, State MOC, SEPA, Provincial provincial Mayors, agencies, utilities mayor Structure the bureau authority to recovery, and and parent cost directly the of Governance orientation autonomy improve Governance reports more influence Sector Utility utility customer system, parameters or the with agencies and utility Improving cities Committee" 1: Municipal reducing Approaches monitoring Board/Group by functions management provincial coordination provides with for one utilities utilities Theme Utility transparency, utility Sanitation low-capacity Improving agency corporate bureau utilities under water water and papers for funding offices 2: services and Municipal Better monitoring, Empower over Parent urban Water policy water Theme take regional treatment wastewater standards Cities: Cities: Cities: to Cities: and drainage and Plan for "National goal-based coordination provincial utility performance metropolitan multi-city, water Action transitional allow collection charge Establish Prepare Use Increase Establish High-Capacity Low-Capacity Improve High-Capacity and Low-Capacity Put and Consider Consider Merge Strategic Service and Utility as for Summary Government Goals Coordination Water Utilities Business Standards 10.1 Direction Physical Policy Municipal Policy to Provincial Wastewater Utility Efficient Opportunities From Appropriate TABLE Strategic Improve Shift Targets Set Wastewater Enhance Oversight Streamline Governance Foster Manage Network Exploit Aggregation 152 S t r a t e g i c A c t i o n P l a n 2008­15 2010­15 and water municipal NDRC, urban utilities provincial governments governor, and and leading water Council, Municipal urban State provincial national agencies Mayors, agencies, utilities more or finance percentage capital compo- with loans Ladder and contributions borrow loans incentives tariff affermage/lease, provide can better service, capital maturity concessionary low-interest variable plan utilities requirements, long debt provide Sustainability necessary, Partial and and so to Participation reform plants management, As (b) fixed O&M, grants administering business for guidelines: recovery in Sector overall Financial tariffs, low-interest, program) an treatment including the renewal). contributions national cost role (i.e. new into network and Up following contributions; of block of a Private asset 4: fits with leading requirements to the capital use levels a Move capital account tariffs create networks 3: with arrangements, equal (or take Theme revenue drainage Greater into higher concessionary to compatible both least (c) arrangement Drainage be for private Theme service utility (at Partial (a) taking wastewater through program policies debt should meet government bond available Cities: Cities: status national governments wastewater; participation fees reduce structures state investments to load-based and with credit national funding non-investment user tariff and provincial private arrangements contracts capital water more comply Ensure of subsidies High-Capacity Low-Capacity for Revise nents, Enhance Increase grants. Restructure to Allow programs Ensure BOT adequate Use DBO Improve Recovery Debt to of Concessionary Performance Cost Use Sector Utility Utility National Programs More Private Achieve Make Financing Improve Finance Use Municipal 153 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Frame e Tim Actors Key and of and planning distribu- or through objectives, water separate combined combination social (a) control transparent best Planning and and reducing the rehabilitating account (c) pollution landfill on in Capital into and application identify participatory focus a industrial land that environmental, taking in priority charges disposal Improving with explore and 5: management; Approaches financial, Encourage networks financial and approaches (AMP), participate load-based and Theme risk. quality stabilization ) and drainage supply economic, planning actively digestion to charging water and manage storm-water environmental Sludge Low-cost Continued( account uncertainty networks and (b) utilities an into management overflows as Cities: Cities: Plan advanced plan monitoring, taking consider drains; asset drainage sewer sludge Action more wastewater and Adopt options, explicitly Develop tion Strategically combined sanitary Allow permitting, Manage High-Capacity Low-Capacity Strategic Planning Summary Capital 10.1 Direction Utility TABLE Strategic Improve 154 APPENDIX A The World Bank's Water and Wastewater Lending Program in China (in US$ Millions) World Bank Financing W&S Components2 Total Water Other Start Closing Project Name Cost1 IBRD IDA Total Wastewater3 Supply Water4 Date Date Beijing Environmental Project 298 45 80 125 31 1992 1999 Changchun Water Supply and Env Project 251 120 120 46 189 1992 1999 Tianjin Urban Development and Env Project 195 100 100 33 1992 2000 Southern Jiangsu Env Protection Project 588 250 250 76 1993 2001 Zhejiang Multicities Development Project 231 110 110 125 1993 2003 Liaoning Environment Project 338 110 110 204 24 1994 2003 Hubei Urban Environment Project 370 125 25 150 191 1995 2005 Yunnan Environment Project 308 92 25 117 137 61 1996 2004 Second Shanghai Sewerage Project 633 250 250 615 1996 2004 Third National Rural Water Supply Project 134 70 70 2 115 1997 2006 Shandong Environment Project 202 95 95 36 64 1998 2005 Guangxi Urban Envmt Project 168 72 20 92 114 22 1998 2007 Fourth Rural Water Supply and 86 16 30 46 74 1999 2006 Sanitation Project Sichuan Urban Envmt Project 325 150 2 152 179 117 1999 2007 Hebei Urban Environment Project 270 150 150 179 86 2000 2007 Second Beijing Environment Project 1,252 349 349 392 2000 2009 Chongqing Urban Environment Project 507 200 200 397 25 2000 2007 Liao River Basin Project 189 100 100 110 40 2001 2007 Huai River Pollution Control Project 207 106 106 195 2001 2007 155 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s World Bank Financing W&S Components2 Total Water Other Start Closing Project Name Cost1 IBRD IDA Total Wastewater3 Supply Water4 Date Date Second Tianjin Urban Dev and Envmt Project 334 150 150 176 17 55 2003 2010 Shanghai Urban Envmt Project 494 200 200 345 2003 2009 Zhejiang Urban Envmt Project 333 133 133 151 10 2004 2010 Guangdong Pearl River Delta Urban 432 128 128 390 2004 2009 Envmt Project Hunan Urban Dev Project 373 172 172 102 254 2004 2010 Tai Basin Urban Envmt Project 174 61 61 117 55 2004 2009 Ningbo Water and Envmt Project 291 130 130 128 158 2005 2010 Liuzhou Envmt Management Project 189 100 100 175 2005 2011 Chongqing Small Cities Infra Improvement 265 180 180 98 58 2005 2012 Second Phase Shanghai Urban Envmt Project 423 180 180 290 58 2005 2011 Sichuan Urban Development Project 373 180 180 28 36 2006 2013 Henan Towns Water Supply and 303 150 150 44 204 2006 2013 Sanitation Project Second Guangdong Pearl River Delta 188 96 96 89 93 2007 2012 Urban Project Second Shangdong Envmt Project 270 147 147 206 34 2007 2013 Second Liaoning Medium Cities Project 325 173 173 130 132 56 2007 2013 Total (in millions) 11,319 4,400 472 4,872 5,308 1,621 639 Notes: 1. Includes price & physical contingencies, but excludes interest during construction and front-end fee. 2. Includes proportional share of contingencies. 3. Usually excludes industrial pollution control but includes most sanitation. 4. Includes investments in canal extensions, river embankments, canal sediment dredging, flood protection etc. 156 APPENDIX B Wastewater and Drinking Water Standards in China 1. Municipal Wastewater Discharge Standards (GB18918-2002) Highest Allowable Discharge Concentration of Water Pollutants from Sewage Treatment Plants (Daily Average) Unit: mg/l Grade I Standard Grade II Grade III No. Basic Parameter Standard A Standard B Standard Standard 1 COD 50 60 100 1201 2 BOD5 10 20 30 601 3 Suspended solid (SS) 10 20 30 50 4 Animal & plant oil 1 3 5 20 5 Petroleum 1 3 5 15 6 Negative ion surface active agent 0.5 1 2 5 7 Total nitrogen (as N) 15 20 -- -- 8 NH3-N (as N) 5 (8) 8 (15) 25 (30) -- 9 Total P Built before Dec., 2005 1 1.5 3 5 (as P) Built before Jan. 1, 2006 0.5 1 3 5 10 Color (dilution magnitude) 30 30 40 50 11 pH 6~9 12 Bacillus coli (count/l) 103 104 104 -- Notes: · Prior to 2002, Grade 1B standards applied to discharges into Class I, II, or III receiving waters, and Grade 2 standards applied to discharges into Class IV or Class V receiving waters. Lower interim standards (Grade 3) could apply for primary treatment where secondary treatment facilities are to built in the future. · In 2002, SEPA mandated that all cities and towns shall meet Grade 1B standards. · In 2006, SEPA Circular 110 [2005] No. 110 states: The effluent from a municipal WWTP which is discharged into important river basins which are decided by the State and provincial government and into closed or half closed water basins such as lakes, reservoirs shall meet Class 1A discharge standard. The effluent discharged into GB3838 surface water Class III function water basins (excluding appointed drinking water sources and swimming areas) and GB3097 sea water Class II function water areas shall meet the Class 1B discharge standards. 157 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 2. Industrial Wastewater Discharge Standards (GB8978-1996) Industrial Wastewater treatment plant effluents must conform to the National Comprehensive Emission Standards of Wastewater as presented below. Class One shall apply to any effluent dis- charged into natural water bodies, and Class Three to those discharged to a municipal wastewater treatment plant. Comprehensive Wastewater Discharge Standards (Unit mg/L except pH) Ref. Pollutant Class One Class Three 1 PH 6 to 9 6 to 9 2 SS 70 400 3 CODCr 100 500 4 BOD5 20 300 5 Oil 5 20 6 P 0.1 0.3 7 N-NH3 15 -- 8 Volatile hydroxybenzene 0.5 2.0 9 Sulfide 1.0 1.0 10 Fluoride 10 20 11 Total Cu 0.5 2.0 12 Total Zn 2.0 5.0 13 Total Mn 2.0 5.0 14 Total Hg* 0.05 0.05 15 Total Cd* 0.1 0.1 16 Total Cr* 1.5 1.5 17 Cr6+* 0.5 0.5 18 Total As* 0.5 0.5 Note: Specific standards are also enforced for several industrial sectors: pulp and paper (GB3544-92), shipbuilding (GB 3552-83,GB4286-84), off- shore petroleum development (GB4914-85), dyeing and finishing of textiles (GB4287-92), meat packing (GB13457-92), ammonia production (GB13458-92), iron and steel (GB13456-92), ordnance manufacture (GB14470-93), phosphate fertilizer (GB15580-95), and caustic alkali and polyvinyl chloride (GB15581-95). 3. Surface Water Quality Standards (GB3838-2002) Surface water is categorized according to six classes as described below. The table of parameters is on the following page. Class I--Mainly applicable to the source of water bodies and national nature preserves. Class II--Mainly applicable to class A water source protection area for centralized drinking water supply, sanctuaries for rare species of fish, and spawning grounds for fish and shrimps. Class III--Mainly applicable to class B water source protection area for centralized drinking water supply, sanctuaries for common species of fish, and swimming zones. Class IV--Mainly applicable to water bodies for general industrial water supply and recre- ational waters in which there is not direct human contact with the water. 158 W a s t e w a t e r a n d D r i n k i n g W a t e r S t a n d a r d s i n C h i n a Class V--Mainly applicable to water bodies for agricultural water supply and for general land- scape requirements. Class V+--Not to be used Environmental Quality Standards of Surface Water (GB3838-2002) Unit: mg/l (excluding pH) Ref. Parameter Class I Class II Class III Class IV Class V 1 pH 6 to 9 6 to 9 6 to 9 6 to 9 6 to 9 2 DO 7.5 6 5 3 2 (or 90% sat) 3 COD Mn 2 4 6 10 15 4 CODCr 15 15 20 30 40 5 BOD5 3 3 4 6 10 6 N-NH3 0.015 0.5 1.0 1.5 2.0 7 Total Phosphorus (P) 0.02 (0.01)* 0.1 (0.025)* 0.2 (0.05)* 0.3 (0.1)* 0.4 (0.2)* 8 Total Nitrogen (N) 0.2 0.5 1.0 1.5 2.0 9 Copper (Cu) 0.01 1.0 1.0 1.0 1.0 10 Zinc (Zn) 0.05 1.0 1.0 2.0 2.0 11 Fluoride (F) 1.0 1.0 1.0 1.5 1.5 12 Selenium (Se) 0.01 0.01 0.01 0.02 0.02 13 Arsenic (As) 0.05 0.05 0.05 0.1 0.1 14 Mercury (Hg) 0.00005 0.00005 0.0001 0.001 0.001 15 Cadmium (Cd) 0.001 0.005 0.005 0.005 0.01 16 Chromium (Cr6+) 0.01 0.05 0.05 0.05 0.1 17 Total lead (Pb) 0.01 0.01 0.05 0.05 0.1 18 Total cyanide (CN-) 0.005 0.05 0.2 0.2 0.2 19 Volatile phenol 0.002 0.002 0.005 0.01 0.1 20 Oil 0.05 0.05 0.05 0.5 1.0 21 Anionic detergent 0.2 0.2 0.2 0.3 0.3 22 Sulphide 0.05 0.1 0.2 0.5 1.0 23 Coli forms (number/L) 200 2000 10,000 20,000 40,000 4. Standards for Drinking Water Quality (Draft GB 5749--2006) The Standards will replace the Standard of GB 5749-85 "Sanitary Standards of Drinking Water" on the date of enforcement. The main changes are increases in the number of parameters from 35 items of the Standard of GB5749-85 to 106 items, adding 71 items and revising 8 items, including. The number of microorganism indices increases from 2 items to 6 items, The number of drinking water disinfectants increases from 1 item to 4 items; The number of inorganic chemicals in the toxicological indices increases from 10 items to 21 items, The number of organic chemicals in the toxicological indices increases from 5 items to 53 items The number of sensory character and general physical-chemical indices increases from 15 items to 20 items. The standard for turbidity is revised. 159 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 4.1 Regular Parameters Item Limit Item Limit 1. Microorganism indices 3. Sensory character and general chemical indices Total Coliform Bacteria Shall not be Color (Pt-Co Color Unit) 15 (MPN/100mL or CFU/100mL) detected Thermotolerant Coliform Bacteria Shall not be Turbidity (NTU- Nephelometric 1 or 3 (MPN/100mL or CFU/100mL) detected Turbidity Units) Escherichia Coli(MPN/100mL or Shall not be Odor and Taste No strange odor and pecu- CFU/100mL) detected liar taste Total number of bacteria colony Shall not be Visible matter None (CFU/mL) detected 2. Toxicological indices pH (pH unit) No less than 6.5 and no greater than 8.5 Arsenic (mg/L) 0.01 Aluminum (mg/L) 0.2 Cadmium (mg/L) 0.005 Iron (mg/L) 0.3 Chromium (six, mg/L) 0.05 Manganese (mg/L) 0.1 Lead (mg/L) 0.01 Copper (mg/L) 1.0 Mercury (mg/L) 0.001 Zinc (mg/L) 1.0 Selenium (mg/L) 0.01 Chloride (mg/L) 250 Cyanide (mg/L) 0.05 Sulfate (mg/L) 250 Fluoride (mg/L) 1.0 Total Dissolved Solid (mg/L) 1000 Nitrate (measured as N, mg/L) 10 or 20 Total Hardness (measured as 450 (ground CaCO3, mg/L) water limited) Chloroform (mg/L) 0.06 Oxygen Demand (CODMn Method, 3 or 5 when oxygen demand measured as O2, mg/L) of raw water is greater Carbon Tetrachloride ( mg/L) 0.002 Volatile phenol (measured as 0.002 phenol, mg/L) Bromate (When use Ozone, mg/L) 0.01 Anion Synthetical Detergent (mg/L) 0.3 Formaldehyde (When use Ozone, 0.9 4. Radioactive Indices? Value for guidance mg/L) Chlorite (When use Chlorine 0.7 Total Radioactivity (Bq/L) 0.5 Dioxide as disinfectant, mg/L) Chlorate (When use com- 0.7 Total Radioactivity (Bq/L) 1 pounded Chlorine Dioxide as dis- infectant, mg/L) · MPN means most possible number; CFU means colony forming unit. Escherichia Coli and Thermotolerant Coliform Bacteria shall be further tested when total Coliform Bacteria is detected in water sample. It is not necessary to test Escherichia Coli and Thermotolerant Coliform Bacteria when total Coliform Bacteria is not detected in water sample. · Higher Turbidity standard used when conditions of water source and purification technologies are limited. 160 W a s t e w a t e r a n d D r i n k i n g W a t e r S t a n d a r d s i n C h i n a 4.2 Regular Indices and Requirements of Disinfectants in Drinking Water Limit Value of Finished Residual Concentration Residual Concentration Contact Period Water from of Finished Water at the End Name of Disinfectant with Water Plant from Plant of Network Chlorine gas and free chlorine At least 30 min 4 0.3 0.05 preparation (free Chlorine, mg/L) Monochloramine At least 120 min 3 0.5 0.05 (Total Chlorine, mg/L) Ozone (O3, mg/L) At le ast 12min 0.3 0.02 If add Chlorine, total chlorine 0.05 4.3 Table 3 Non-regular Indices and Limit Values of Water Quality Item Limit Value Item Limit Value 1. Microorganism indices Chlorothalonil (mg/L) 0.01 Giardia (unit/10L) <1 Furadan (mg/L) 0.007 Cryptosporidium (unit/10L <1 Lindane (mg/L) 0.002 2. Toxicological indices Chlorpyrifos (mg/L) 0.03 Stibium (mg/L) 0.005 Dichlorfos (mg/L) 0.001 Barium (mg/L) 0.7 Atrazine (mg/L) 0.002 Beryllium (mg/L) 0.002 Deltamethrin (mg/L) 0.02 Boron (mg/L) 0.5 2,4- Dicholrophenoxyacetic acid (mg/L) 0.03 Molybdenum (mg/L) 0.07 Dichlorodiphenyltrichoroethane (mg/L) 0.001 Nickel (mg/L) 0.02 Ethylbenzene (mg/L) 0.3 Silver (mg/L) 0.05 Dimethylbenzene (mg/L) 0.5 Thallium (mg/L) 0.0001 1,1-Dichloroethylene (mg/L) 0.03 Cyanogen Chloride (measured as CN-, mg/L) 0.07 1,2-Dichloroethylene (mg/L) 0.05 Monochloro-Dibromo- Methane (mg/L) 0.1 1,2-Dichlorobenzene (mg/L) 1 Dichloro-Monobromo-Methane (mg/L) 0.06 1,4-Dichlorobenzene (mg/L) 0.3 Dichloroacetic acid (mg/L) 0.05 Trichloroethylene (mg/L) 0.07 1,2-Dichloride Ethane (mg/L) 0.03 Trichlorobenzene (Total amount, mg/L) 0.02 Dichloromethane (mg/L) 0.02 Hexachlorobutadiene (mg/L) 0.0006 Trihalomethane See Note 1. Acrylamide (mg/L) 0.0005 1,1,1-Trichloride Ethane(mg/L) 2 Tetrachloroethylene (mg/L) 0.04 Trichloroacetic acid (mg/L) 0.1 Toluene (mg/L) 0.7 Chloral (mg/L) 0.01 Di(2-ethylhexyl) phthalate (mg/L) 0.008 2,4,6-Trichlorophenol (mg/L) 0.2 Epichlorohydrin (mg/L) 0.0004 Tribromomethane (mg/L) 0.1 Benzene (mg/L) 0.01 Heptachlor (mg/L) 0.0004 Styrene (mg/L) 0.02 (Continued) 161 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 4.3 Table 3 Non-regular Indices and Limit Values of Water Quality (Continued) Item Limit Value Item Limit Value Malathion (mg/L) 0.25 Benzo(a)pyrene (mg/L) 0.00001 Pentachlorophenol (mg/L) 0.009 Chloroethylene (mg/L) 0.005 Benzene Hexachloride (Total amount, mg/L) 0.005 Chlorobenzene (mg/L) 0.3 Hexachlorobenzene (mg/L) 0.001 Microcystin-LR (mg/L) 0.001 Dimethoate (mg/L) 0.08 3. Sensory character and general chemical indices Parathion (mg/L) 0.003 Ammonia Nitrogen (measured as N, 0.5 mg/L) Bentazone (mg/L) 0.3 Sulphide (mg/L) 0.02 Methyl-Parathion (mg/L) 0.02 Sodium (mg/L) 200 1. For Trihalomethane (sum of Chloroform, Monochloro-Dibromo- Methane, Dichloro-Monobromo-Methane, and Tribromomethane). The sum of the ratios, which are between actual concentrations of each compound under this category and its limit values, shall not be greater than 1. 162 APPENDIX C Technical Notes Chapter 1 Average wastewater treatment coverage ratio is the ratio of the volume of wastewater treated over Table 1.1: Urban Water Market Segments the total wastewater generated in the urban area. The table represents urban water market seg- It is not always clear if the "volume" of waste- ments based on a city typology developed by the water reported is the actual flow into the plant or Study. Total urban population refers to tempo- the installed capacity of the plant (which may be rary and permanent residents in urban areas, underutilized). The volume of treated wastewater and excluding counties under the jurisdiction of refers to wastewater treated by both municipal prefecture level cities. Temporary residents in- treatment plants and industrial treatment plants. clude immigrants who have lived for over one Water supply coverage ratio includes both year in the city, excluding soldiers in service and water coverage by public water utilities and self- armed policemen. GDP per capita refers to the supplied coverage. It is calculated as population GDP figure for urban population. Data on total served divided by total population. Municipal urban population is from MoC's China Urban water supply serves 88% of total population Construction Statistics Yearbook (2005), while with an access to water supply, while the actual GDP per capita of 2004 is from The Yearbook of volume of self-supplied water reaches 29% of China's Cities (2005). total volume as is shown below. Production Capacity Length of WS Total WS Population (10,000 m3/day) Pipelines (km) (10,000 m3) Served (10,000) Municipal WS 16,792 299,926 3,422,718 26,616 88% Self-Supplied 7,961 58,484 1,480,037 3,724 12% Total 24,753 358,410 4,902,755 30,340 Coverage ratio for wastewater and water supply officially designated cities, cities were further comes from MoC's China Urban Construction divided by GDP per capita threshold of Statistics Yearbook (2005). Information on US$3,000 and US$1,500 and the following county capital towns is from MoC's Statistical table shows the number of cities per income Yearbook for County Towns (2004). Out of 661 category. 163 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Income Category Number Average of Cities Income Category WWT Rate Rich 81 Rich 57% GDP per capita > $3000 GDP per capita > $3000 Middle 224 Middle 35% GDP per capita: $1500~$3000 GDP per capita: $2000~$3000 Poor 22% Poor 356 GDP per capita < $2000 GDP per capita < $1500 Result: Strong Correlation Between City Income and WW Total 661 treatment rate. Similarly, cities were grouped by population category of 2 million and 0.5 million and the Population Category Average WWT Rate following summarizes the number of cities per Large 54% population category. Population > 2 million Medium Large Population Category Number of Cities Population: 1~2 million 51% Large 28 Medium Population: 0.5~1 million 40% Population > 2 million Small 26% Medium 134 Population < 0.5 million Population: 0.5~2 million Result: Moderate Correlation Between Size and WW treatment rate. Small 499 Population < 0.5 million The tables show that wastewater treatment rate Total 661 is positively correlated with income level: the higher the income level is, the higher the treat- Using the same income and population category ment rate is. Similarly, it is positively correlated above, correlation between GDP per capita with population category. Following the analy- and wastewater treatment ratio, urban popu- sis above, the table below summarizes city lation and wastewater treatment ratio were typology based on the income level and popula- further examined and are summarized in the tion and corresponding number of cities, total following tables. population and wastewater treatment ratio. Large Population > Medium Population: Small Population < 2 million 0.5~2 million 0.5 million Rich 21 30 30 # of Cities GDP per capita > $3000 90 31 0.6 # of pop (million) 61% 55% 57% % of WWT Middle 5 60 159 # of Cities GDP per capita: $1500~$3000 15 57 36 # of pop (million) 38% 47% 31% % of WWT Poor 2 44 310 # of Cities GDP per capita < $1500 12 35 58 # of pop (million) 23% 31% 21% % of WWT 164 W a s t e w a t e r a n d D r i n k i n g W a t e r S t a n d a r d s i n C h i n a Chapter 2: Sector Figure 2.6: Water Supply and Treatment Achievement and Performance Capacity: Municipal and Self-Supply This figure combines data from both municipal Table 2.1: Percentage of Utility Service water supply utilities and private self-supply. In Area with Low Water Pressure 2004, for example, the national water treatment The data is provided in the China Water Works capacity for municipal utilities was 167 million Association 2005 Yearbook, encompassing most m3/day; the national total for self-suppliers was of the 661 Chinese cities. Study City typology 79 million m3/day. Actual water supplied by was applied in the data and the average of each municipal utilities was 93 million m3/day, and category was calculated. Ave. of Hi 25% and Ave. 40 million m3/day for self-supply. of Lw 25% represent the average of highest and lowest quartile. Chapter 3: Sector Table 2.3: Net Income to Revenue Ratio Achievement and Performance in 1997 to 2004 The figures for net profits and total revenue Figure 3.1: China's Economic come from the China Water Works Association Transformation and Urbanization Yearbook in 1998 and 2005. The Yearbook does Urban as % of total population is the ratio of not describe exactly how net revenues are urban population over the total population. determined, or if depreciation is explicitly con- Urbanization data drives from population divi- sidered as a cost. This ratio is often referred to sion of the Department of Economic and Social as "return on sales (or revenues). Affairs of the United Nations Secretariat, World Population Prospects: The 2002 Revision and Figure 2.4: Municipal Wastewater World Population Prospects and the 2003 Revi- Treatment Capacity sion. GDPST % of GDP is the ratio of secondary The 2005 MOC Yearbook makes a distinction and tertiary GDP as % of total GDP. Both GDP between "municipal wastewater treatment and base population data is from the China plants" and "other wastewater treatment plants" Statistical Yearbook 2004. (presumably industrial WWTPs). The waste- water treatment capacity bar charts in Figure Figure 3.2: Urbanization Trends 2.6 show the municipal WWTP capacity, i.e. and Projections 49 million m3/day in 2004. The "other WWTP" Urbanization rate is the ratio of population liv- capacity was 24 million m3/day in 2004. ing in the urbanized areas over the total popula- The 2005 MOC Yearbook provides informa- tion. The data source on urbanization rate and tion on "total wastewater discharge" (35,564 base population (total and urban population) is million m3/year). The MOC Yearbook also pro- China Statistical Yearbook (2005). China's total vides information on "actual municipal waste- urban population in 2005 is estimated to be water treated" (11,602 million m3/year, or 65% around 550 million, according to China Statis- of installed capacity) and "actual other waste- tical Yearbook. The urban population of 550 mil- water treated" (4,677 million m3/year, or 50% lion is also often cited by Chinese government in of installed capacity) various public documents. It includes not only The wastewater treatment rate in Figure 2.4 urban population in 661 cities but also that in is therefore calculated as follows: lower administrative levels such as county- Total Annual Wastewater Discharged/ towns and towns, which are not captured in the (Actual Municipal Wastewater Treated statistical data of 661 cities. In fact, according to +Actual Other Wastewater Treated). the Ministry of Construction (MoC)'s China In 2005: (35,646 million m3)/(11,602 mil- Urban Construction Statistical Yearbook, total lion + 4,677 million) = 45% urban population in 661 cities is around 165 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s 341 million. Thus, over 200 million people are the technical complexity and data collection re- estimated to be living in urbanized county quirements. In order to approximate China's towns or towns. constant GDP per capita PPP in international Urbanization projection assumes that the US$, purchasing power parity conversion factor rate of urbanization over the next 15 years is (LCU per international $) was used from the approximately 1% per annum, which has been DDP dataset. It was applied to GDP per capita urbanization target set by the Chinese govern- in local currency unit, resulting in GDP per ment, 0.5 % (lower case scenario) and 1.5% capita PPP in current international US$. By ap- (upper case scenario) per annum. With 1% of plying deflator, the GDP per capita figure then increase per annum, urban population increase turned into real international US$ for compar- from 550 million in 2005 to around 850 million ison with the Korea's GDP per capita data. in 2020. Scenario 1 in the Figure shows the However, converted constant GDP per urbanization rate of 0.5%, Scenario 2 and capita PPP in international US$ has some lim- Scenario 3 are based on the urbanization rate its: since the same conversion factor was ap- of 1% and 1.5% respectively. plied to all Chinese cities with different levels of economic development, the figure can distort Table 3.2: Approximate Urban the GDP per capita to some degrees, misrepre- Water Sector Investments senting the standards of living in some cities. Ex-post investment figure from 1996 to 2004 for For instance, for China's developed cities, GDP water supply and wastewater is derived from per capita PPP tends to be overestimated, as the the MoC's China Urban Construction Statistics conversion factor of China's average was ap- Yearbook (2005) and GDP data from World plied to high capacity cities, while figures for Development Indicator. The estimated invest- China's developing cities are underestimated. ment figure for 2006-2010 is derived from the assumption that the annual investment in water supply will increase by 10% and the investment Chapter 7: Moving up the in wastewater sector will increase by 15%. Utility Financial Sustainability Ladder Chapter 4: Sector Vision Table 7.2: Weighted Average Water and Path Forward Supply Tariffs by City Category Water supply tariff analysis covers 128 cities Box 4.1: The Case of South Korea: across China, the 1998 tariff is based on the Wastewater Treatment Capacity China Water Works Association 1999 Yearbook vs. Economic Development and the 2005 data is from the H2O's report on Wastewater coverage ratio for Korea is from the China's water sector published in 2005 (http:// Ministry of Environment of Korea's Statistics of www.h2o-china.com). The 128 cities belong to Sewerage (2005). Constant GDP per capita was each city category as follows: calculated on the purchasing power parity basis, in order to minimize distortion from the ex- change rate and to reflect the real standard of liv- # of Cities ing among countries. Constant GDP per capita in Each Category % PPP, denominated in international US$, for Korea is was taken from the World Bank's Devel- Category 1 17 13.3% opment Data Platform (DDP) from 1975 onwards. Category 2 85 66.4% PPP data for China is not yet available, al- Category 3 26 20.3% though some efforts have been made to measure Grand Total 128 PPP in selected cities of China, mostly due to 166 W a s t e w a t e r a n d D r i n k i n g W a t e r S t a n d a r d s i n C h i n a The weighted average water supply takes into (5-8 years) is typically much shorter than depre- account different sectors (residential, commer- ciation maturities, financing costs would drive cial, industrial and special use), the amount of the full cost recovery levels above 1.0 RMB/m3. water use of each sector and differing tariffs Wastewater collection costs typically make up applied to those sectors. The tariff excludes at least two-thirds of capital costs, and half of other cost, such as water resources fee. operating costs. The full cost recovery tariff level for wastewater collection and treatment is Figure 7.1: Water Supply Tariffs therefore at least 3.0 RMB/m3 or greater (1 RMB The data is from 128 cities reported in the for treatment and 2 RMB for collection). H2O's report on China's water sector published in 2005 (http://www.h2o-china.com). The full Figure 7.3: Combined Tariff as cost water supply estimate is based on a review Percentage of Household Income in 2004 of World Bank-financed projects where finan- Urban households in China are categorized into cial analysis showed that water supply tariffs is seven different income groups: (1) lowest generally 2.0 RMB/m3, or above in order to meet income (10 percent); (2) low income (10 per- utility costs, including World Bank loan. Since cent); (3) lower middle income (20 percent); many water companies require equity contribu- (4) middle income (20 percent); (5) upper tions from the municipal government, use full middle income (20 percent); (6) high income cost recovery (i.e. no government capital subsi- (10 percent), and finally the (7) highest income dies) should be greater than 2.0 RMB/m3. (10 percent). Data for average income, income for highest and lowest quartile as well as highest Figure 7.2: Wastewater Tariffs and lowest 10% are provided in the World The data is from 128 cities reported in the Development Indicator. Three assumptions H2O's report on China's water sector published were made in the tariff side: a) each person con- in 2005 (http://www.h2o-china.com). The waste- sumes 125 liters per day and tariff which in- water treatment cost of 1.0­1.5 RMB/m3 is cludes both water and wastewater charge; based on World Bank-financed projects and an b) tariff is on average 2 yuan per cubic meter; analysis done by the China International Engi- and c) there are 3 people in each household. neering Consulting Company (CIECC) and pre- sented in the 11th Five Year Plan study. The de- Figure 7.4: Annual Expenditure for tails are provided below. Note that the CIECC Urban Construction and Maintenance estimate considers depreciation but not financ- Total annual expenditure for urban construction ing charges. Since the maturity of bank loans and maintenance is the sum of investment of fixed assets, maintenance, debt payment, tax and fees and other expenditures. The data is de- Indicative Cost for Typical Wastewater Treatment Plan rived from the MoC's China Urban Construction in China Statistics Yearbook (2005), covering officially designated 661 cities. Investment of fixed assets Item RMB/m3 accounts for 79.2% of total expenditure in 2004, followed by maintenance (10%) and debt pay- Energy 0.16 ment (7.2%). Exchange rate was set at Chemicals 0.10 1USD=8.06RMB. Salary 0.08 Maintenance 0.15 Table 7.5: Urban Construction and Depreciation 0.40 Maintenance Fund in 2004 Administration 0.09 The table presents a list of fund sources for Total 0.98 urban construction and maintenance, consisting Source: CIECC, 11th Five Year Plan (2006). of urban maintenance and construction tax, municipal financial allocation, domestic loan, 167 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s land transfer fee, self-raised and others. Urban maintenance and construction tax is one of local Sector US$ millions taxes imposed according to Temporary Reg- ulations of People's Republic of China on Urban Roads 24,643 Maintenance and Construction Tax. It is levied Non-utility 21,681 based on actual value­added tax, consumption Utility 10,112 tax and business tax paid by taxpayer. Different · Water supply 2,498 rates apply different places. The rate comes to · Gas 1,535 7% in urban areas, 5% in counties and towns · Sewerage 4,171 and 1% beyond these places. Others category in- · Heating 1,909 cludes foreign direct investment, various fees such as fee for expansion of municipal utilities company, tariff, and water resources fee. In order to analyze the sources of fund by city cate- Table 7.6: Per-Capita Urban Maintenance gory, 15 cities in Category 1 and 20 in Category and Construction Fund by City Type 3 were randomly selected as a sample base and To analyze per capita urban M&C fund by city the sources of fund of each city were further an- type, sampling was done for each city category: alyzed and the average of each source was cal- For category II and III, 30 cities were randomly culated. The data is from the MoC's China selected in each category and average per-capita Urban Construction Statistics Yearbook (2005). urban maintenance and construction was calcu- On the expenditure side, sectoral break- lated. For category I, all 21 cities were included down of urban construction and maintenance in the calculation. expenditure consists of: 1) non-utility (38%); 2) utility (18%); and 3) roads (44%). Non-utility Table 7.7: Indicative Ranges of Urban includes expenditures on public traffic, flood Water Sector Financing Source: control, landscaping, environmental sanitation 1991­2005 and others. Utility consists of water supply, gas, No official data on sector financing is know to the sewerage and heating as indicated in the chart. Study team. An estimate was made as follows: Water Supply Wastewater (RMB Billion) Percent (RMB Billion) Percent Total 202 236 State Bond 34 17% 61 26% CDB 14 7% 5 2% Private Sector 36 18% 24 10% International Development Banks 12 6% 24 10% Municipal Governments 53 26% 91 39% Domestic Banks 53 26% 30 13% 202 100% 236 100% i) Total investment for each sector is known from the MOC 2005 Yearbook. ii) Estimates exist for: a) State Bond-from Tsinghua Research Brief (2006) b) CDB funding from Tsinghua Research Brief (2006) c) Private Sector from Global Water Intelligence Report (2004) d) International Development Banks: World Bank (Annex 1); ADB (2005); JBIC iii) Municipal Government and Domestic Bank funding information were not available. The following assumptions were therefore made: a) For WS: Municipal Governments Finance 50% and Domestic Banks Finance 50% b) For WW: Municipal Governments Finance 75% and Domestic Banks Finance 25% 168 W a s t e w a t e r a n d D r i n k i n g W a t e r S t a n d a r d s i n C h i n a Chapter 8: Using the Figure 8.1: PSP Investment Trends Private Sector to Help The private participation data in the GWI report Municipal Utility Performance was further analyzed to look at trends over time and international/domestic investors. As is Table 8.1: Investment by Project Type noted earlier, the 2004 figure includes only the first half of the year. In addition, there are six The Global Water Intelligence Report (GWI) domestic projects and three foreign projects on the China Water Market (2004) provided which detailed information is missing and thus information on 126 projects with private are omitted in the figure. participation. These projects were then analyzed and classified into the following Chapter 10: Strategic categories: WT (water treatment), WWT (wastewater treatment), WT+DN (water Action Plan treatment and distribution networks) and Table 10.1: Summary Strategic others. Action Plan 169 Glossary Affermage: A contract under which the government capita greater than $3,000 (RMB 24,0000). Defined delegates the management of the water service to a for this Study only. private company in return for a specified fee, often based on the volume of water sold. The company's Category II Cities: Medium-sized cities that are not profit is equal to revenue from the fee, less operat- in Category I or III, usually with a population in the ing and maintenance costs. The company operates range of 0.5 million to 2 million and a GDP per and maintains water assets at its own expense but capita in the range of $1,500 (RMB 12,000) to does not finance investment in infrastructure assets. $3,000 (RMB 24,000). Defined for this Study only. Arrangement: Rules and institutions establishing Category III Cities: Small and developing cities and enforcing the rights and obligations of an oper- with a population less than 0.5 million and a GDP ator, customers, a contracting authority, or other per capita less than $1,500 (RMB 12,000). Defined government authorities, with respect to water ser- for this Study only. vices. These rules are set out in contracts, laws, reg- ulations, licenses, and related documents. For an Concession Contract: An Arrangement in which a example, see Management Contract or Build-Own- contracting authority is the legal owner of the infra- Transfer. structure assets (at least after the contract ends), but the operator is responsible for financing and manag- Asset Management Planning: The active man- ing investment, as well as operating and maintaining agement of capital assets in order to minimize the the business. total cost of acquiring, operating, maintaining, and replacing them. This is usually achieved through the Concessionary Finance: Grants or preferential collection and organization of asset information, loans offered by a national or provincial gov- the analysis of asset data to set priorities, and the in- ernment to municipal urban utilities, usually as an tegration of data across the organization. incentive to comply with government policy. Con- cessionary finance can also be offered to local gov- Build-Own-Transfer: Typically used for water sup- ernments in support of services with public goods ply or wastewater treatment plants. An Operator aspects. finances, builds, owns, and operates the facilities for a specific period of time, after which ownership is Coordination: Ensuring the policy decisions and transferred back to the contracting authority. BOT implementation plans are consistent, and managing payments are typically based on the volume of water input from the various bodies involved in water sec- treated at plant. tor activities. Category I Cities: Large and developed cities with Utility Cost Recovery: The point at which a utility a population greater than two million and a GDP per is able to cover its cash costs of service through a 171 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s combination of user fees and government transfers. (3) combined drains which carry stormwater and A utility's cash costs of service typically include wastewater; and (4) interceptors which connect operation and maintenance, debt service, and a with combined drains and convey the wastewater to percentage of capital expenditures. A return on the treatment plant during dry periods. equity is also required if there is a private equity investment. Financing: Funding provided to meet expenditure requirements and to be returned to the fund- Cost Recovery Ratio: This is the ratio of actual util- provider in the future. Funding provided as loans or ity revenues from user fees and government equity must be repaid with interest or profit. Fund- payment, divided by the utility's cost recovery ing provided as grants or municipal government requirement. A ratio of 50 percent means that the equity contributions does not need to be repaid. utility's revenues only meet half of its requirements. Financing Autonomy: The extent to which a utility Debt Service: The cash necessary to make principle is able to finance investments from loans or internal and interest payments on debt obligations. As the cash generation as opposed to from government amount of utility debt financing increases, the debt contributions. Sixty percent financing autonomy service increases. Some lenders also require utilities means that sixty percent of the funds come from to establish "reserves" in the event of an unexpected loans or utility cash reserves, and forty percent from business shock. If the municipal government government equity contributions. provides contributions for capital works, then debt service is reduced. Full Cost Recovery: Revenues from user fees suf- ficient to meet all of a utility's needs revenues re- Design-Build-Operate: Similar to a Build-Own- quirements assuming no financial support from Transfer, but the contracting authority provides government, i.e. no payments or capital contribu- financing and retains ownership of the facilities tions made by a government agency to the utility. during the contract period. Government Bureaus: Municipal agencies charged Designated Cities: Major urban areas in China with functional responsibilities such as financial such as municipalities, capitals of prefectures, and affairs, construction, and water resources. capitals of counties. As of 2005, China had 661 des- ignated cities. High Capacity Cities: All cities with a GDP per capita greater than $3,000 (RMB 24,000) regardless Divestiture: An Arrangement in which the operator of population size, as well as all cities with a popu- is the legal owner of the infrastructure assets for an lation greater than 500,000 and a per capita GDP of indefinite term and is responsible for financing and at least $1,500 (RMB 12,000). Defined for this Study managing investment, as well as operating and only. maintaining the business. Joint Venture Company: An Arrangement under Drainage Networks: A drainage network is divided which an operator is partly owned by a contracting into a hierarchical system of drains. Tertiary drains authority, and in which the two parties jointly share (at the building level) connect to secondary drains most of the risks. (typically along smaller roads), which connect to primary drains (typically along larger roads)--but Lease Contract: Similar to an Affermage contract, the classification is usually somewhat arbitrary. an operator operates and maintains water assets at its own expense but does not finance investment in Drains/Sewers: There are four types of drains: infrastructure assets. The Operator maintains re- (1) stormwater drains which carry stormwater only; tains revenue from a customer tariff and pays the (2) sanitary drains which carry wastewater only; contracting authority a specified lease payment. 172 G L O S S A R Y Low Capacity Cities: All cities that are not high ca- government has decided the sector should follow to pacity cities as defined above. Defined for this Study achieve these goals. only. Pumping Stations/Overflows: Drains may require Management Contract: An Arrangement under pumping stations in the networks to make them hy- which the Operator provides management services draulically stable. Overflows are incorporated into a to the utility in return for a fee. combined drain to spill excess water from an over- loaded pipeline (during and following heavy rain) Mixed Capital Company: A Joint Venture between into a convenient watercourse. the government, which provides public capital, and a private company, which provides private capital. Sector Governance: The national and provincial government organizations that control and manage Municipal Fiscal Policy: The financial principles the sector, together with the rules and policies those and practices by the municipal government in rela- organizations develop. tion to urban water utilities, including capital con- tributions, operating subsidies, and tax incentives. Service Aggregation: The grouping of municipali- ties or operators into a single entity for the provision Municipal Utility Governance: The exercise of a of some type of urban service, such as water supply municipal government's ownership interest in a util- or wastewater collection and treatment. ity, including determination of the scale and scope of utility service, appointment of management, the State Bond Program: A key national concessionary setting of service standards and the monitoring of finance program in China, run by the National De- performance. velopment Reform Commission. Municipal Wastewater: Refers to wastewater pro- Tariff Regulation: The controls on urban water duced by domestic, commercial, and industrial utilities intended to overcome the problem that sources (and stormwater) within the administrative water is an essential monopoly service. Tariff regu- boundaries of a city. lation is the rules and organizations that set, mon- itor, enforce, and change allowed tariffs for urban Non-Revenue Water: Water produced and lost water utilities. without revenue. Losses can be physical (for exam- ple, through leakage) or commercial (for example, Transfer-Own-Transfer: Similar to a BOT, but the through non-payment of bills). Non-Revenue water Contracting Authority sells an existing facility to the can also refer to unbilled but authorized consump- Operator for a specified period of time (transfers). tion (for example, through free public taps). When the contract period ends, ownership reverts back to the Contracting Party. O&M Costs: The amount of cash necessary to main- tain operations at a reasonable level over a short- Urban Water Utility: A company or government de- term perspective. partment that provides any of the following services: water supply, wastewater collection and treatment, Operator: A private domestic or foreign company, water reuse, and stormwater drainage. A waste- or government-owned company operating outside water utility in China typically provides both of its jurisdiction and providing services under an stormwater and wastewater services. Arrangement. Municipal water utilities operating outside of their city in China seeking to maximize Utility Management: Serving customers by operat- their profits are considered Operators. ing existing utility systems, maintaining assets, planning and implementing new investments, and Policy: The government's goals for the sector, to- making sure that operations, maintenance, and new gether with the principles and general practices the investment can be financed. 173 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s Revenue Autonomy: The extent to which overall two are closely linked since many Chinese cities have cash comes from user fees as opposed to govern- either fully or partially combined drainage systems. ment payments. A ratio of sixty percent means that 60% of the cash comes from users and 40% from Water Services: Includes any aspects of providing government payments. water supply, wastewater management, or re- claimed water use. Wastewater: Refers to both stormwater and waste- water, including domestic and industrial waste. The 174 Selected References ADB (Asian Development Bank) and Ministry of Fi- Chesapeake Bay Foundation. 2006. The State of the nance (China). 2000. Managing Urban Change: Chesapeake Bay: A Report to the Citizens of the Bay Strategic Options for Municipal Governance and Region. Finance in China. PRC:TA 2924-Study of Munic- Chreod 2005. Metropolitan Regions: New Challenges ipal Public Finance. Available on ADB website. for an Urbanizing China. ------. 2001. Water Tariff Study II. TA No. 3250- China International Engineering Consulting Corpo- PRC. Available on ADB website. ration (CIECC), 2006. 11th Five-Year Sector Plan. ------. 2003. Final Report on National Guidelines in (2006) Urban Wastewater Tariffs and Management Study. China Water and Wastewater Association (CWWA) TA 3749 ­ PRC. Available on ADB website. Yearbook (2005). ------. 2005a. Final Report on Major Issues and General Office of China National Audit Office. 2004. Recommendations of PPP in the Water Sector "Audit Report on Construction Outcomes of in China. TA-4095:PRC/Policy Reform Support. Bond Supported Urban Infrastructure Projects, Available on ADB website. Beijing." ------. 2005b. PRC Water Supply, Sanitation, and Global Water Intelligence. 2004. Water Market Waste Management Portfolio Review. Available on China: Projects & Opportunities in the Water & ADB website. Wastewater Sectors. Baietti, Aldo and Paolo Curiel. 2005. "Financing Harris, Clive. 2003. "Private Participation in Infra- Water Supply and Sanitation Investments: Esti- structure in Developing Countries." World Bank mating Revenue Requirements and Financial Working Paper No.5. Washington, DC: World Sustainability." World Bank Water and Sanita- Bank. tion Working Note 7. Washington, DC: World Kessides, Ioannis. 2004. Reforming Infrastructure: Bank. Privatization, Regulation, and Competition. Wash- Baumann, Duane, et al. 1997. Urban Water Demand ington, DC: World Bank; New York: Oxford Uni- Management and Planning. New York, McGraw- versity Press. Hill. Kingdom, William. 2005. "Models of Aggregation Bellier, Michel and Yue Maggie Zhou. 2003. "Private for Water and Sanitation Provision." World Bank Participation in Infrastructure in China: Issues Water and Sanitation Working Note 1. Washing- and Recommendations for the Road, Water, and ton, DC: World Bank. Power Sectors." World Bank Working Paper Komives, Kristian, et al.2005. Water, Electricity and No.2. Washington, DC: World Bank. the Poor. Washington, DC: World Bank. Brombach, et al. 2002. "A new database on urban Mai, Weimer. 2005. "Social Equity in China: Build- runoff pollution: comparison of separate and ing a Xiokang society in an all-round way."Devel- combined sewer systems." Water Science & Tech- opment Outreach Series. Washington, DC: World nology 51 (2): 119­128. Bank. Castalia, 2004. "Sector Note on Water Supply and MOC (Ministry of Construction). 2005 China Urban Sanitation for East Asia." Background paper for Construction Statistical Yearbook. East Asia Pacific Infrastructure Flagship Study. ------. 2004. County Towns Statistical Brief. 175 S T E P P I N G U P I m p r o v i n g t h e P e r f o r m a n c e o f C h i n a ' s U r b a n W a t e r U t i l i t i e s New Zealand Ministry of Health. 2003. Public Health Key Government Laws, Circulars, Grading of Community Drinking-Water Supplies and Decrees 2003: Explanatory Notes and Grading Flows. (Available in Chinese on Ministry Websites) Organisation for Economic Co-operation and Devel- opment (OECD) 2003. Social Issues in the Provi- Water Resources Law (1988), amended in 2002. sion and Pricing of Water Services. Paris. Law on Prevention and Control of Water Pollution ------. 2005. Environmental Performance Review of (1984), amended in 1996. China. Paris: OECD. State Council Circular on Strengthening Urban UNEP (United Nations Environment Programme). Water Supply, Water Saving, and Water Preven- tion Pollution and Control. Issued November 7, 1997. Water Pollution Control--A Guide to the Use 2000. of Water Quality Management Principles. State Council Notice on Promoting Water Tariff Re- U.S. General Accounting Office. 2004. "Water Infra- form, Promoting Water Saving, and Protecting structure: Comprehensive Asset Management Water Resource. Issued April 19, 2004. Has Potential to Help Utilities Better Identify State Council Decision on Reforming Investment Needs and Plan Future Investments." System. Issued July 16, 2004. U.S. Department of Commerce. 2005. Water Supply SDPC/MOC/SEPA. Notice to Improve Wastewater and Wastewater Treatment Market in China. Collection Capability and Establish Sound World Bank. 1994. China Urban Environmental Ser- Collection and Treatment Practices, Document vice Management. Report No. 13073-CHA. Wash- No. 1992. Issued September 1999. ington, DC: World Bank. MOC/SEPA. Circular on Policy of Urban Sewage ------. 2004a. World Development Report 2004: Treatment and Pollution Control. Issued May 29, Making Services Work for Poor People. Washing- 2000. ton, DC: World Bank; New York: Oxford Univer- SPDC /MOC/SEPA. Circular Recommendations to sity Press. Commercialize Urban Wastwater Treatment and ------. 2004b. The Little Green Data Book. Washing- Garbage Treatment: Circular 1592. Issued Sep- ton, DC: World Bank. tember 10, 2002. ------. 2005b. Models of Aggregation for Water and MOC. Management Measures for Concession of Pub- Sanitation Provision. Washington, DC: World lic Utilities Decree 126. Issued March 19, 2004. Bank. MOC. 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Study Research Prepared by Tsinghua University North China Water Quality Study Program Water Policy Center (2006) Reports--MOC and World Bank (2005) (Internal Documents) Component A: Water Utility Performance Study, Eleventh Five Year Plan Estimates for Prepared by Shenzhen Liyuan Water Design & Water Supply and Wastewater Consultation Co., LTD Analysis of Urban Water Affair Bureaus Ex- Component B: Wastewater Utility Performance perience in China Study, Various Contributors Analysis of China Development Bank's Component C: Urban Water Reuse Study, Prepared Lending Program for Urban Water by CDM International and National Engineering Analysis of China State Bond Program for Research Center Urban Water Component D: Town and Townships Water Man- Note on China's Drinking Water Standards agement Study, Prepared by Nanjing University Note on China's Water Pollution Control Law Component E: Water Sector Regulatory and Institu- Progress on China's Urban Water tional Study, Prepared by Tsinghua Water Policy Marketization Reform, Tsinghua Center 176 Stepping Up: Improving the Performance of China's Urban Water Utilities As China transitions to a market economy, municipal utili- ties are evolving into commercially viable companies under government oversight. Great challenges confront the reform process for China's water utilities, including rapid urbaniza- tion and emerging inequality, coupled with severe water scarcity and degradation. Cities and their water utilities must provide services within a complex mosaic of policies and regulations provided by national and provincial governments. In China, as through- out the world, water is also a sensitive political issue. Governments are keen to provide good water service, but also attuned to the need to ensure that tariffs are socially acceptable. This report presents a strategic framework and set of recommendations for addressing these challenges and accelerating improvements in ChinaÕs urban water utilities. Drawing upon the World Bank's experience in China, as well as the Bank's global knowledge, the report provides a com- prehensive assessment of urban water services, including policy, regulatory, institutional, financial, and technical issues. The report will prove a valuable resource for policy makers, utility companies, and anyone interested in the development of the world's largest water market. ISBN XXX-X-XXXX-XXXX-X SKU XXXXX