China's water supply

A modest proposal
Oct 26th 2006 | BEIJING
From The Economist print edition

China should liberalise water pricing


HOW to provide sufficient clean water to the vast and arid north of China has long been a headache for its rulers. Of late they have considered some ambitious proposals. One of the most hotly debated, to divert water hundreds of kilometres from Tibet at a cost of tens of billions of dollars, was scorned this week by the water minister. What about a more modest (and less Maoist) approach: using market-driven prices to deter waste and pollution?

Crumbling to dustMarket solutions do not come naturally to Chinese officials. For the past four years two huge diversion projects have been under way to bring water from the Yangzi River basin to northern China. Work on a more technologically challenging third route, involving blasting through mountains to link the Yangzi's upper reaches to the Yellow River, is expected to begin around 2010. The proposal castigated by the water minister, Wang Shucheng, on October 24th was even more grandiose. It would extend the link to the Yalu Zangbu river, as the upper reaches of India's Brahmaputra river are known in China. Mr Wang described this as “unnecessary, unfeasible and unscientific” (while stressing that this was his “academic” opinion). India must be relieved.

Meanwhile, China has been reluctant to impose tougher penalties on water polluters or higher tariffs on consumers. It fears that higher prices would drive industries away from the north and make it more difficult for struggling state-owned enterprises to turn a profit. It also worries about angering household consumers, particularly in the countryside. According to a government survey, water prices in 36 big cities have risen an average of 10% annually for the past three years (Beijing's have risen 30-fold in the past 14 years). But in August a government think-tank said prices remained only about a third of the world average. It called for price reforms to be speeded up. On October 20th Beijing published a five-year plan for economic and bureaucratic reforms in the capital. This called for water prices to reflect supply and the cost of delivery by 2010. The national government said earlier this year that it aimed to cut water consumption per unit of GDP by 30% in the same period.

Frank Gong, of J.P. Morgan Securities, says a resolution issued by the ruling Communist Party this month on building a “harmonious society” could help efforts to raise prices of water, as well as of heavily-subsidised electricity and fuel to market-oriented levels. The resolution mentions the need to “perfect” pricing and tax policies in order to help protect the environment. Always wary of causing social unrest, however, officials stress that any price rises will be “gradual”.

More money would help to fix leaking pipes (the Chinese media say urban pipes leak water at twice the rate of those in developed countries) and build more wastewater-treatment plants (at the end of 2005, around 40% of cities had no such facilities). Ma Jun, a water-conservation activist in Beijing, says many plants are underused or left idle because local authorities begrudge the cost of running them. Cities have been introducing sewage-treatment levies on household and industrial users in recent years, but the fees are insufficient to cover costs.

Raising prices does not mean that the water industry itself, a monopoly controlled by local governments, has more incentive to operate efficiently. Although the government often talks of making decision-making more open, very little information is provided about how water rates are fixed. Since 2001 the government has required that public hearings be held before the raising of prices for necessities such as water and electricity. But these hearings have been stage-managed affairs. Mr Ma says the public would be more willing to accept water-price increases if the industry were more accountabl.

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