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People's Republic of China: Water and Sanitation
Data
Water coverage (broad definition)	77%
Sanitation coverage (broad definition)	44%
Continuity of supply (%)	Generally continuous, but seasonal shortages in some areas
Average urban water use (liter/capita/day)	204 (2005)
Average urban water and sewer bill for 20m3	US$ 3.5/month for water only
Share of household metering	90%
Share of collected wastewater treated	52%
Annual investment in WSS	about US$ 10 / capita (2006) in urban areas .
Share of self-financing by utilities	close to zero
Share of tax-financing	about 35% (from city budgets)
Share of internal debt financing	55-60%
Share of foreign financing	5-10%
Institutions
Decentralization to municipalities	Full
National water and sanitation company	No
Water and sanitation regulator	No
Responsibility for policy setting	Ministry of Construction
Sector law	No
Number of urban service providers	41,663 (including small towns)
Number of rural service providers	n/a

Water supply and sanitation in China is undergoing a massive transition while facing numerous challenges such as rapid urbanization, a widening gap between rich and poor as well as urban and rural areas. Water scarcity, contamination and pollution also pose great challenges.

Much has been achieved during the past decades in terms of increased access to services, increased municipal wastewater treatment, the creation of water and wastewater utilities that are legally and financially separated from local governments, and increasing cost recovery as part of the transformation of the Chinese economy to a more market-oriented system. The government has quadrupled investments in the sector during the current 2006–10 Five-Year Plan.

Nevertheless, much remains to be achieved. A staggering 300 million Chinese still do not have access to an improved source of water supply, and about 750 million do not have access to improved sanitation. Progress in rural areas appears to lag behind what has been achieved in urban areas. There are also operational problems. For example, many wastewater treatment plants do not operate properly, thus limiting the positive environmental impact of the major investments made.

Access

Access to improved water supply and sanitation has increased significantly in China over the past two decades in parallel with economic growth. The Joint Monitoring Program of the WHO and UNICEF estimated based on household survey data that in 2004, access to an improved source of water supply was 77% and access to improved sanitation was 44%. Nevertheless, this means that a staggering 300 million Chinese did not have access to an improved source of water supply, and about 750 million did not have access to improved sanitation. The share of population with access to water and sanitation remains significantly lower than, for example, in India.

		Urban (40% of the population)	Rural (60% of the population)	Total
Water	Broad definition	93%	67%	77%
	House connections	87%	57%	69%
Sanitation	Broad definition	69%	28%	44%
	Sewerage	50%	4%	22%

Source: WHO/UNICEF Joint Monitoring Program for Water and Sanitation JMP

Moreover, as in many other developing countries, there is a significant gap between urban and rural areas. For example, according to the WHO in urban areas of China 93% have access to improved water supply, while the share in rural areas is only 67%. Concerning improved sanitation, access in urban areas is 69%, but only 28% in rural areas. The magazine The Economist described the urban-rural gap in the following stark terms: "The reforms that Deng Xiaoping first launched in China's countryside 30 years ago have now left its peasants in the ditch." It also observed that "the income disparity between China's richtest few and poorest many would make many a modern capitalist blush."

Service quality

According to the World Bank about 13% of urban water users receive water at inadequate pressure. Furthermore, 60% of China's 661 cities face seasonal water shortage, and over 100 cities have severe water constraints.

Contamination of drinking water from feces is a critical health problem in China, as in other developing countries, that causes serious illnesses such as diarrhea and viral hepatitis. A recent survey by UNICEF in 11 provinces found that over half of all drinking water samples contained unacceptably high levels of bacteria.

It has been estimated that in 2006 there was sufficient capacity to treat 52% of municipal residential wastewater. However, it was estimated in 2002 that many wastewater treatment plants did not function properly. A more recent analysis by the Ministry of Construction in 2004 showed that, according to treatment plant records, most plants operated in compliance with discharge standards.

Linkage to water resources

Man-made pollution, natural contamination and water scarcity all affect the provision of drinking water. For more details see: Water resources of China and China water crisis

Responsibility for water supply and sanitation

Policy

The national government does not have a single policy document for water supply and sanitation. Policy thus is enshrined in a variety of policy papers by different ministries and, in the case of water resources management, in the Water Law of 2002.

Water supply and sanitation

It is the government’s policy to fully recover costs for water supply and sanitation through user fees, and that water tariffs should be volumetric. The Ministry of Construction oversees financing for urban water and sanitation infrastructure as well as policies concerning the regulation of water and sanitation utilities. Some important policy papers it has issued are “Accelerating the Marketization of Public Utilities” (No.272 Policy Paper of the MOC, 2002), the “Measure on Public Utilities Concession Management” (No.126 Policy Paper of the MOC, 2004), and the “Opinions on Strengthening Regulation of Public Utilities” (No.154 Policy Paper of the MOC, 2005). However, there is no law concerning the regulation of public utilities or private sector participation in the sector. The Ministry of Health has attributions related to the promotion of rural sanitation.

Water resources management

The responsibility for water resources management is split between a number of entities at the national and local level. At the national level

• the Ministry of Water Resources is responsible for surface water management, with a focus on quantitative aspects,
• the State Environmental Protection Agency (SEPA) has the responsibility to manage the quality of water resources, and
• groundwater falls within the realm of the Ministry of Land and Resources.

Nevertheless, the Ministry of Water Resources and its affiliated river basin commissions in all major river basins are key players in water resources management. The Water Law of 2002 emphasizes demand management and water quality protection and thus paves the way for a transition from a development phase focused almost exclusively on infrastructure development to a phase where more appropriate attention is being devoted to the management and protection of water resources.

In addition to water resources management, the Ministry of Water Resources is also in charge of the construction of some major water infrastructure such as dams, embankments, irrigation infrastructure and bulk conveyors for municipal and industrial water supply. According to its website it is also responsible for the “provision of recommendations on economic regulation of water pricing, taxation, credit and financial affairs” as well as “coordination of capital construction of (…) water supply for townships and villages”, although in practice these functions seem to be carried out by other entities.

Service provision

In order to understand the institutional responsibilities for water supply and sanitation in China, it may be helpful to provide a brief overview of the administrative divisions of China.

Administrative divisions of China

For details: Political divisions of China

China is administratively divided into:

• 33 province-level (省级 shěngjí) divisions, including 22 provinces, five autonomous regions, four municipalities(Beijing, Shanghai, Tianjin and Chongqing), and two special administrative regions.
• 333 prefecture-level divisions (地级 dìjí)
• 2872 county-level divisions (县级 xiànjí) (sometimes called “districts”)
• 41,636 township-level (乡级 xiāngjí) divisions

China also has 661 designated cities, which do not constitute separate administrative units. Each municipality, prefecture and county includes urban and rural areas. 4 cities are capitals of municipalities, 283 cities are capitals of prefectures, and 374 are capitals of counties. In 2005 340 million people, or about 25% of China's population, lived in designated cities, each of which had a population of at least 200,000. The remaining urban population of about 200 million, or about 15% of the total population, lives in smaller towns that are either among the smaller prefecture-level capitals (96 million) or townships (100 million).

In an article on rural China the magazine The Economist wrote that many Chinese experts believe that basic infrastructure should be funded by provinces or the central government: "That done, prefecture and township governments could be massively trimmed or eliminated altogether."

Urban areas

Shanghai, like many other Chinese cities, depends on surface water that is heavily polluted, such as the Huangpu River shown here whose water comes through Suzhou Creek from the heavily polluted Tai Lake.

Overview Urban water supply in China is the responsibility of "cities" under complex arrangements that differ substantially from one city to the other. The term "City" has a dual and confusing meaning in China. It is used here to refer to the main urban area of a municipality, prefecture or county. Cities are governed by a "leading group" under the leadership of a mayor, who is assisted by various "bureaus", or departments. Services are usually provided by municipally-owned water companies and wastewater companies (sometimes referred to as utilities despite the relatively limited autonomy that these companies enjoy). Water and wastewater companies are typically separate from each other. In larger cities, services are further unbundled: There may be a separate raw water company that transports water from far-away sources and sell it to the municipal water company for distribution. Likewise on the wastewater side, larger cities may have several district drainage companies in charge of parts of the city, a wastewater company in charge of the main collectors, and a third company in charge of wastewater treatment.

In some cities the various companies are under the same "parent bureau", which may be the construction bureau or a water bureau, while in other cities the water company and the wastewater company report to different bureaus. In 2006 88% of the urban population was served by "utilities", up from 50% in 1990. Especially in smaller cities the county administration provides services directly. Private sector participation in financing infrastructure and managing services is widespread, but it is usually limited to BOT contracts where the private sector is in charge of large upstream or downstream infrastructure without being directly involved in serving users. Currently there are over 50 water projects and well over 100 wastewater projects in China with private sector participation.

Examples To take an example of a very large city, in Shanghai the Water Division of the Shanghai Urban Construction Investment Development Corporation provides services. The Water Division includes a raw water company, five water companies, one sewage management company, three engineering companies and two construction companies. It serves 12 million people. In Tianjin the Tianjin Water Supply Group provides services. It recently divested itself from numerous side businesses to focus on its core business. Since 1997 it has cooperated with international companies such as Vivendi in a bulk water supply Build-Operate-Transfer(BOT) contract.

Rural areas

In rural areas village committees, which are community-based organizations, provide services. Its members operate the systems without remuneration. In terms of rural sanitation, human excreta are systematically used as manure for fertilising crops and vegetables. In many houses, the excreta of all family members are collected in buckets over the course of five to seven days, and then taken to the field and applied raw in the crops. The practice is an age old tradition and of enormous economic value in terms of agricultural production. Compared to the government’s major focus on urban wastewater treatment, rural sanitation is not very high on the government’s agenda despite the well-known negative health impacts of inadequate hygiene and sanitation practices.

NGOs

There is little information on activities by NGOs in water supply and sanitation in China. An Association for Rural Water Supply and Sanitation provides training, information exchange, technical assistance and undertakes research. In terms of foreign NGOs, the NGO Plan, for example, works in China. It is known for having introduced for the first time the concept of Community Led Total Sanitation in China in Puchang County in Shaanxi in 2005.

History and current developments

Massive investment program for wastewater treatment

Over the past 20 years China has engaged in what is possibly the largest program to build wastewater treatment plants in history. Despite the substantial achievements of this program, many challenges remain.

Achievements Until the early 1980s there was no single municipal wastewater treatment plant in China. Only then the country’s first municipal wastewater treatment plant was built in the city of Nanjing. Subsequently China engaged in what possibly is the largest wastewater treatment investment program in history. It has been estimated that in 2006 there was sufficient capacity to treat 52% of municipal residential wastewater. According to the State Environmental Protection Agency the rate of urban wastewater treatment even reached 57% in the same year. In any case, the government's goal to achieve a level of 60% for treatment of municipal wastewater by 2010 will probably be reached even earlier. Between 2001 and 2004 the number of cities that charge wastewater tariffs has increased from 300 to 475 out of 661 cities.

Remaining challenges However, in the rush to construct planning mistakes were made. Demand was overestimated, the construction of sewerage lagged behind the construction of treatment plants, designs were sometimes inappropriate, there was no requirement for pre-treatment of industrial effluents thus affecting the effectiveness of treatment processes, and the sites chosen for the first priority investments within a river basin were not always those where the highest impact could have been achieved in terms of improving river water quality. As a result, many plants are underutilized or poorly functioning. According to the Ministry of Construction, more than 50 wastewater treatment plants in more than 30 cities operated at only 30 percent of their capacity or did not even come into operation. Consequently, the impact of the investment program on the water quality in rivers and coastal waters has been limited.

During the 1990s municipal and industrial water use actually declined because of low increases of connection rates to utilities because of underestimation of the importance of small-scale water providers, increased tariffs, increased metering, industrial restructuring, measures to increase the efficiency of water use in industries, as well as due to water scarcity and drought. Many Chinese water and wastewater companies have overcapacities and are in financial difficulties because the revenues are insufficient to cover the servicing of the debt contracted to build the oversized infrastructure.

Transition to commercial utilities

In 2002 the Ministry of Construction issued a policy paper on the commercialization of public utilities. Subsequently, in October 2003 the central government decided that state-owned enterprises had to separated from Ministries and/or provincial governments and had to be commercialized.

Competitive bidding for contracts, private sector participation and commercial financing are important element in the transition to a market economy.

In the 1990s the first BOT contracts were signed for wastewater treatment plants. More than 200 wastewater treatment plants were built with some form of private sector participation in their financing and/or management, usually using the BOT formula. Early BOTs saw governments implementing the process without the benefit of financial, legal, and technical advisers, finding to their chagrin that the process becomes more complex in the absence of expert knowledge. Learning from the experience of past BOTs in the sector, local governments sought expert advice on bidding and public tender.

In about 2000 for the first time a BOT water project (Chengdu No. 6 Water Supply Plant) was awarded on the basis of transparent international competitive bidding, with support from the ADB.

Efficiency

There are many different indicators for utility efficiency. In the case of China some indicators, such as labor productivity, suggest a low level of operational efficiency, while other indicators - such as non-revenue water - suggest a high level of operational efficiency.

Labor productivity

Most water and sanitation utilities in China have a low labor productivity and are overstaffed. For example, many utilities in small towns in Henan province have more than 20 employees per 1000 connections, while international good practice is less than 4 employees per 1000 connections. In Chengdu the utility employed 34 employees per 1000 connections, while in Shanghai the ratio was less than 6 employees per 1000 connections.

Non-revenue water

Non-revenue water - consisting mainly leakage losses in the distribution network - are estimated by the Chinese Waterworks Association to be only 20% on average and less than 10% for the best utilities, which is very low by international standards. One explanation may be that most Chinese live in dense apartment complexes, which results in compact distribution systems. Another explanation may be that the definition and measurement of non-revenue water in China is not comparable to other countries.

In some smaller cities non-revenue water remains relatively high. For example, average non revenue water in small towns in Henan province is 38%.

Tariffs and cost recovery

Cost recovery for water and sanitation services paradoxically is lower in urban areas, while it is higher in rural areas, despite the lower incomes of rural residents.

Urban areas

Overview Many urban water and wastewater utilities in China experience financial stress, because user fees are set well below cost recovery levels and government subsidies are insufficient to cover the resulting gap. In 2004 60% of urban water utilities reported negative net incomes. The financial situation of wastewater utilities is expected to be even more precarious. Tariffs have increased by 50% since 1998 and now stand at 1.5 RMB/m3 or US$ 0.20/m3. These rates are insufficient to cover costs.

Until the 1980s urban water tariffs in China were very low and sewer tariffs were practically unknown. This has changed substantially since the adoption of National Guidelines on Urban Water Tariffs in 1988, which called for increased cost recovery and for the introduction of sewer tariffs. Subsequently water tariffs have been increased substantially in many Chinese cities, particularly in the north where water is scarcest. However, according to the Ministry of Construction, water tariff reforms have not been effective enough to offer the necessary incentives to save water. While many cities now have sewer tariffs, in 2005 there were more than 150 cities across the country where no wastewater treatment fee was collected.

China has a policy of universal metering, including metering of individual households in apartment complexes, where most urban residents live. Metering in urban areas is now relatively widespread with an average of 90% connections being metered. Some cities are experimenting with pre-paid debit cards that residents must put into their meters in order to receive service.

Tariff structure are complex, with different tariffs for different categories of users and higher tariffs charged to industrial and commercial users than to residential users. Most water tariffs are linear, i.e. there is a single price per unit of water, although there are some increasing-block tariffs where the unit price increases with consumption. Urban tariffs are approved by Price Bureaus of cities, after considerable prior negotiation. Tariffs do not require approval from a higher level of government.

Examples In Tianjin, where the water tariffs had not been raised once between 1949 and 1985, it has been raised eight times until 2006. As a result, cost recovery has improved significantly. For example, in the province of Henan most small town utilities recover operation and maintenance costs and report modest operating profits.

In Chengdu the average water tariff was US$ 0.14/m3 in 2001. Despite the relatively low water tariff the utility's revenues were twice as high as recurrent costs, allowing for a significant share of self-financing. In Shanghai the average water tariff was only US$ 0.10/m2 in 2001 and production costs are higher, so that the utility did not fully recover its recurrent cost and had an operating loss.

Rural areas

In rural areas, according to the World Bank users pay about 75% of investment costs and 100% of operation and maintenance costs. Rural tariffs do not need to be approved.

Investment and financing

Investment level and breakdown

Investments in the sector have than tripled over the past years. Accodring to the World Bank, in 1991–2005 a total of US$ 54bn was invested in urban water supply and sanitation, equivalent to only US$ 3.7bn per year. During the 11th Five Year Plan in 2006–10 almost almost US$ 11bn per year are expected to be invested in the sector, thus investing in five years as much as had been invested in the previous fifteen years. More than 60% of these investments are targeted at sanitation, reflecting the backlog in that sector. Figures for rural areas are not available.

Financing

Urban areas

The World Bank estimates that urban water and wastewater infrastructure in China has been financed from the following sources in 1991–2005:

	Water	Wastewater
Municipal government	20-30%	40-50%
Domestic banks	20-30%	10-20%
State bond program	10-20%	20-30%
Private sector	10-20%	10-20%
China Development Bank	10%	5%
International Financial Institutions	5%	10%

Source: World Bank 2007, p. 108

It should be noted that implicitly, according to this estimate, the level of self-financing by water and wastewater utilities is zero. Nevertheless there clearly will be an upward pressure on tariffs, since 70-80% of water infrastructure and 50-60% of wastewater infrastructure is financed either through debt or private equity that requires a remuneration. The remainder is financed through municipal equity, which typically requires no remuneration and thus helps to keep tariffs low.

The major international financial institutions engaged in the sector are the World Bank, the Asian Development Bank and the Japanese Bank for International Cooperation (JBIC). Their total share in sector financing is only 5-10%.

Direct debt financing by local government is not allowed in China. However, local-government owned companies can and do contract debt on a large scale. Another mechanism to use debt finance are BOTs which are a popular financing mechanism for water and wastewater treatment plants and bulk water supply systems in China. Under BOTs private entities undertake investments and recover their costs through fees for bulk water sale or wastewater treatment charged to the utilities. While the government is formally not indebted, the charges for the services are de facto similar to debt service charges.

Rural areas

In terms of rural and small town infrastructure, channeling funds to the final users through the various layers of local government remains a challenge. According to the magazine The Economist "some provinces are now bypassing both the prefectural- and township-level governments in order to get funds more directly to rural areas."

See also

• Water resources of China
• China water crisis
• Water supply in Hong Kong

External links

• Ministry of Water Resources
• ADB: China’s Water Challenge

Key sources and further reading

• Stepping up - Improving the performance of China's urban water utilities by Greg Browder et al., World Bank 2007
• Fu, Tao, Miao Chang and Lijin Zhong: Reform of China's Urban Water Sector, International Water Association and Water Policy Research Center of Tsinghua University 2008, ISBN 1843391430
• World Bank Country Water Resources Assistance Strategy 2002