Willingness to charge and willingness to pay : the World Bank-assisted China rural water supply and sanitation program

 Field Note 71795 Water and Sanitation Willingness to Charge Program An international and Willingness to Pay: partnership to help The World Bank-assisted China Rural the poor gain sustained access to improved Water Supply and Sanitation Program water supply and sanitation services Introduction A decade after the international Dublin and Rio conferences of the early 1990s, where the economic Project Provinces value of water gained greater recognition, many developing countries have been struggling to implement higher cost recovery policies in rural water supply (RWS) programs. Even though many countries accepted the principle that the poor were willing to pay for good quality services and therefore should be charged for them, a long history of RWS subsidization posed significant challenges in imple- menting this policy. In China, however, during the same period and away from the fanfare of international declarations, partial user-financing in RWS had already BEIJING been implemented for many years by the government. The World Bank-assisted rural water supply and sanitation lending program, which started in 1985, built on this approach and developed a very effective cost recovery policy where the users finance up to 75% of the capital investment as well as the full operation and maintenance (O&M) cost. Clearly, if cost recovery was the mantra of the 1990s, the Chinese were well ahead of the curve. Project II Project I Project III Projects II & III Project IV A Supportive repayment of the Bank credit is the responsibility of the provincial/central over the last 17 years. The total Bank investment in these four projects Context for government. In the China RWS projects, however, the end-users are is $628 million, aimed at serving about 23 million people in Cost Recovery themselves responsible for servicing 18 provinces. The projects have the Bank debt. On top of this they pay continuously improved in design and the full cost of O&M. policy content, based on lessons China differs significantly from most learned, both within China and developing countries in that there is little history of the central government Government internationally. The first project was not specifically targeted at the poor or providing large subsidies for the financing of rural water supply. and Bank based completely in rural areas, but both these policies changed in Instead, there is greater emphasis on RWS Programs succeeding projects. Sanitation and cost sharing by provincial, county and hygiene were also introduced in the community institutions. This proved to later projects. One design principle, be the ideal context for the Bank to Despite significant gains in coverage however, was consistent in all four develop a significant cost recovery over the last 15 years, about 50% of projects: the water supply service model in its RWS lending program, the rural Chinese population still level provided to users in the Bank- where the IDA credit/IBRD loan is does not have access to safe drinking assisted projects was significantly ultimately repaid by the end-user, the water. In the Ninth Five-Year Plan, higher than that provided in most rural beneficiary. This is rare in Bank the Government announced its government-funded RWS programs. lending, in particular for its ‘soft’ IDA target of providing safe water for While the latter provided a ‘basic’ level credits. In most Bank-assisted RWS 65% of those residing in China’s of service, typically through hand projects, the credit to the central poorest areas. In the Tenth Plan, pumps, rainwater collection systems government is ‘on-lent’ to provincial currently under implementation, the and tube wells, the former offered a governments and then passed on objective is to extend that coverage higher level of service through to local governments or rural further. RWS is high priority for piped water supply to individual communities as grants. At best there the Government, which has received households. It logically followed that is a nominal capital cost contribution Bank assistance for four successive the users had to pay more for these by the users (typically 10% to 15%) and rural water and sanitation projects improved services. Table 1 Bank RWS Lending Program in China Year Bank Type of Size of Target Provinces included assistance lending project beneficiaries (in million instrument (in million (in millions) US$) US$) 1985-90 80 IDA 210.2 6.0 Lianoning, Shaanxi, Sichuan, Zheijiang and the municipality of Beijing 1992-97 110 IDA 189.1 9.0 Guangxi, Yunnan, Hunan, Gansu, Inner Mongolia and Xinjiang 1997-2005 70 IDA 136.7 4.6 Yunnan, Jiangxi, Gansu, Hubei, Hebei and Inner Mongolia 1999-2005 46 IDA (30 m) 92.0 3.1 Anhui, Fujian, Guizhou and IBRD and Hainan (16 m) 2 Financing Arrangement Typically, the Bank finances about half of the capital cost of piped water supply systems installed through the project. For the remaining upfront costs, the provincial and county governments jointly finance 25% and the users contribute 25%, usually in the form of a cash and labor combination. Since the users also service the Bank debt through payment of water tariffs, they effectively finance 75% of the overall investment cost. Community labor contribution: digging of trench for laying pipeline Institutional the Ministry of Health plays the role of County level: Each county, which is the Arrangement monitoring, coordinating, training, setting technical standards and equivalent of the local government, has a County Project Office (CPO) under and Fund Flow managing centralized procurement. the Bureau of Health. The CPO Provincial level: Each province has a coordinates, monitors and provides Provincial Project Office (PPO), usually management support to the township Institutional arrangement under the Bureau of Health, performing water supply plant. National level: The Beijing-based essentially a coordinating and Township water supply plant level: National Project Office (NPO) under monitoring role at the provincial level. The functional level of project Figure 1 Project Model Institutions Fund Flow Central Government Central Government (Ministry of Health) (Ministry of Finance) Provincial Government Provincial Finance Bureau County Government County Finance Bureau Township/Plant Village 3  (habitations), with headmen and village committees, who mobilize communities at the planning stage of the project. Fund flow The fund flow channel is independent of the administrative structure down to the township water plant level, with the credit/loan flowing from the World Bank to the Ministry of Finance at the national level, to the Finance Bureau at the provincial level and down to the Finance Bureau at the county level. The counterpart funds from the provinces and counties also flow through the respective Finance Bureaus. It is at the township water plant level that administrative and financial management merge. The village households’ contributions come Water meter for household connection up to the township plant, which maintains a project account. The management is the township water accounts and balance sheets. The township plant then sends the money supply plant. This is headed by a full- plant management operates the water collected to the County Finance time plant manager, who is assisted by supply scheme, which provides piped Bureau. Figure 1 (on the previous page) other staff members. Many plants are water supply to individual households illustrates the institutional and fund registered as ‘enterprises’ under the in a number of villages. flow arrangements. Enterprise Law: they pay tax to the Village level: There are both government and prepare annual administrative and ’natural’ villages Tariff Setting Table 2 Water Tariff Calculation for Beiwan Water Plant (year 2000) The cost of running the water plant as Design population: 40,520 (3,000 HH connections) well as the debt servicing cost is met Per capita daily consumption: 28 liters from user collections. The water plant • Annual water produced: 28*40,520*365 = 414,114 cu meters employs bill collectors, typically one Annual cost per village, and they directly collect • Electricity: 184,781 Y water fees from households, each of • Water source fee: 4,141 Y which has a metered connection. • Maintenance: 79,449 Y Water tariffs are set by the plant • Depreciation: 185,381 Y (3.5% of total investment of 5,296,600 Y) management/County Price Bureau • Chemicals: 4,141 Y and raised when necessary to cover • Loan repayment amount: 326,992 Y increased operating costs. The tariff • Salaries and Welfare: 360*18*12 = 77,760 Y • Interest: (5,296,600*67.91*4%): 143,876 Y calculation is comprehensive and Overheads (i) office, heating, travel, training: 14,400 Y; includes the cost of electricity, salaries, (ii) water quality monitoring and lab testing: 1,800 Y water source fee, depreciation, debt Total annual cost: 1,022,721 Y servicing, interest on debt, overheads Tariff = 1,022,721/414,114 x 108%** = 2.67 Y per cubic meter and tax. An example of the tariff Y = Chinese Yuan; 1 US$ = 8.3 Y setting calculation from Beiwan water **the additional 8% is due to adding 2% water loss and 6% income tax plant in Jinyang county in Gansu province is given in Table 2. 4 Cascade of Table 3 Gansu Province: Second Rural Water Supply Project Accountability Name of Initial tariff Year tariff Increased Percentage Water Plant (Yuan per was tariff increase cu m) increased in tariff The Bank credit/loan made to the central government for a period Linxia 1.3 2000 1.8 38% of 35/20 years is ‘on-lent’ to the Peiyun provincial government by adding an additional interest of 3-4% but, Lintao 1.3 2000 1.5* 15% interestingly, the repayment period for Taoyan the province is reduced to 15 years. If Wuwei 1.9 - - - the latter falls behind on its repayment Shuang to the central government, the Ministry Cheng of Finance automatically deducts the debt service amount from routine Wuwei 1.5 2000 1.9 27% central government transfers to the Liujiaci Hue province. This pressure to service the debt, to use the words of a World Bank Ping Lian 1.6 2000 2.0 25% China specialist, “has created a Pai Shui cascade of accountability and responsibility for results, from project Gin Yuan 2.3 2000 2.7 17% managers, who have to collect the Beiwan levies, down to beneficiaries, who have to pay them