Consolidated Report on Urban Water Tariff Reform in Municipality of Shijiazhuang[Ⅲ]

5. Water Tariff in Shijiazhuang
5.1 Current Tariff
5.1.1 Water

The current (1998) tariff of the Shijiazhuang Water Supply Company is shown in Table 1. It is a fixed tariff structure consisting of three components:
- the basic water tariff which contributes to the normal operating costs of the Water Supply Company;
- an additional tariff which is passed on to the Municipal Government to contribute to the cost of maintaining and constructing other urban infrastructure and facilities;
- a floating tariff which is charged in summer (June to August) to encourage water conservation.

Other charges are also collected by the Water Supply Company on behalf of other agencies. For instance:
- a water resources tariff of 0.07 yuan/m3 is charged to industrial customers to encourage efficient use of water, and is passed onto the Water Conservancy Bureau.

- in 1995 and 1996, a charge of 0.25 yuan/m3 for residential consumers, 0.30 yuan/m3 for institutional customers, 0.35 yuan/m3 for industrial customers and 0.40 yuan/m3 for hotels and catering to collect funds to contribute to the development of the surface water treatment plant and the Qiaodong wastewater treatment plant, was passed onto the Municipal Government;

5.1.2 Wastewater

Wastewater charges are levied by two agencies in Shijiazhuang:

- The Water Supply Company collects a water discharge tariff of 0.08 yuan/m3 and a wastewater treatment tariff of 0.17 yuan/m3 of water consumed and transfers them via the Municipal Finance Bureau to the responsible departments of the Public Utilities Bureau.

TABLE 1 1998 WATER TARIFF STRUCTURE FOR SHIJIAZHUANG
WATER SUPPLY COMPANY

Notes:
Transferred to Municipal Government for maintenance and construction of other urban infrastructure.
Levied in summer (June to August) to encourage water conservation.
Levied on behalf of Water Conservancy Bureau to encourage efficient water usage.

- The Environmental Protection Bureau collects and retains a discharge tariff of 0.05 yuan/m3 from industrial waste dischargers exceeding set strength limits.

5.1.3 Groundwater

Water resource tariffs are levied by the Water Saving Office on the operators of wells drawing ground water. The current (1997) levels are 0.02 yuan/m3 for residential consumers and 0.07 yuan/m3 for industrial and commercial consumers. The Water Supply Company is not charged a groundwater resource tariff.

5.2 Average Tariffs for Cost Recovery Options

Average tariff levels (in 1998 terms) which would generate sufficient revenue to meet the alternative cost recovery scenarios are set out in Table 2. The procedure used to determine the required amounts of revenue is set out in Appendix A.

Table 2 shows that:
- the current water tariff is sufficient to recover operating and maintenance costs and contribute to depreciation;
- the current wastewater tariff recovers less than 60% of O&M costs and makes no contribution to capital costs;
- for water, the full cost recovery level exceeds the existing tariff level by 1.7 times (historic cost basis) and 1.8 times (current cost basis);
- for wastewater, the full cost recovery level exceeds the existing tariff level by 4.1 times (historic cost basis) and 5.7 times (current cost basis); and
- for water and wastewater combined, the full cost recovery level exceeds the existing tariff level by 2.1 times (historic cost basis) and 2.4 times (current cost basis).

5.3 Full Cost Recovery Tariff Levels

Perhaps the most practical approach to achieving the transition to full cost recovery tariff levels is to consider recent local experience in tariff increases as a guide to consumer acceptability.

Water tariffs have increased rapidly in Shijiazhuang since 1990, averaging about 35% per year. General price inflation has averaged about 12% per year over this period, implying a real increase in water tariffs of about 20% per year. This provides reasonable opportunity for implementing a relatively small number of significant annual tariff increases to achieve the transition to full cost recovery. With general price inflation of around 7% per year anticipated over the next few years, a small number of annual increases of between 20-30% would appear to be reasonable.

Table 3 shows that the current water tariff needs to increase by about 70% to reach the full cost recovery level. After allowing for future cost increases, a phase-in period of three years would enable annual water tariff increases which fall within the range of recent past experience. The full cost recovery gap is much larger for wastewater, but it accounts for a smaller proportion of the combined tariff. A phase-in period of five years for wastewater tariff increases would result in annual combined tariff increases which still appear reasonable from the point of view of consumer acceptance.

TABLE 2 AVERAGE TARIFFS REQUIRED PER M3 OF WATER CONSUMED
FOR ALTERNATIVE COST RECOVERY LEVELS, 1998 (yuan/m3) (1)

Abbreviations:
O&M = operating and maintenance costs
dep = depreciation
int = interest
RoA = annual return on net (depreciated) value of fixed assets
Notes:
(1) Based on unaccounted for water at 10.5% of production. Assumes 76% of production from groundwater sources (or 49 mill m3 from surface water plant).
(2) Excludes costs of raw groundwater.
(3) Tariff applicable to water consumers in area served by wastewater treatment plant. Tariff shown based on charging 100% of water consumption, rather than the actual charging basis of 85% (which gives baseline tariff of 0.20 yuan/m3). Includes allowance for drainage system costs of 0.05 yuan/m3 for O&M, 0.02 yuan/m3 for depreciation and 0.03 yuan/m3 for return on net assets.
(4) Weighted average basic tariff for 1998, assuming 1997 distribution of water consumption by category. Includes floating tariff.
(5) Calculated at 4.5% average rate of depreciation.
(6) Calculated at 8% unadjusted rate of return.

Table 3 shows the water, wastewater and combined tariffs over the five-year period from 1999 to 2003, assuming the above phase-in periods to achieve full cost recovery. It also shows the annual increases in both actual (yuan/m3) and relative (percentage) terms.

TABLE 3 PROPOSED PHASING OF INCREASES IN AVERAGE TARIFFS
TO ACHIEVE FULL COST RECOVERY (1)

Notes:
(1) Based on phase-in periods of 3 years for water (ie. full cost recovery by 2001) and 5 years for wastewater (ie. full cost recovery by 2003).
(2) Excludes costs of raw groundwater.
(3) Tariff applicable to water consumers in area served by wastewater treatment plant. Tariff shown based on charging 100% of water consumption, rather than the actual charging basis of 85% (which gives baseline tariff of 0.20 yuan/m3). Includes allowance for full cost recovery of drainage system costs (0.15 yuan/m3 in 2003).
(4) Calculated from Table 3.1.
(5) Per m3 of water consumed. From Tables 3.3 & 3.4. Assumes water consumption between 1998 and 2003 remains at estimated 1998 level ( 204 mill m3), in response to the proposed tariff increases over the period. Also assumes 80% utilisation of surface water plant by 2003 (from about 45% utilisation in 1998).

5.4 Affordability and Willingness to Pay

Clearly, the setting of tariffs to achieve full cost recovery requires substantially higher water and wastewater charges. This raises concerns over affordability and willingness to pay.

Analyses of affordability in China have been carried out in recent Asian Development Bank studies. These analyses indicate that households are capable of bearing a higher share of water supply costs, particularly in view of the rapid growth in consumers‘ income in recent years (averaging about 8% per year in real terms). For instance:

- most households spend less than 1% of total household expenditure or income on water and that the proportion never exceeds 2%;
- respondents‘ water bills were on average 0.6% of income - the corresponding proportion for electricity was 2.4%, telephone 3.1% and gas 2.1%.

Concerns over affordability should be directed towards poor households, not all households the large majority of whom do not require assistance. This can be achieved much more effectively through direct assistance (lower tariff or rebate for poor households) rather than a lifeline tariff structure which gives assistance to all households.

12 Asian Development Bank, “Study on Cost Recovery in the Water Sector”, 1997 and “Water Supply Tariff Study”, October 1998.