Water Fees & Quotas: Set for Economic Growth?

By Debra Tan 4 February, 2013

Debra Tan reviews new water policies issued by the Chinese Government in Jan 2013

We (and other water industry insiders) have been saying that water prices in China are too low for there to be economically viable solutions for China’s water crisis. If you want to solve China’s water crisis, the price of water must rise.

The other main and somewhat obvious observation is that low water prices lead to more water wastage: Chinese industry uses 4-10x more water than it has to per unit of production than developed countries. Lax enforcement of water use and pollution also do not help. The environment always loses out to economic growth… maybe but not anymore because in the case of water, economic and environmental objectives are clearly aligned. Water powers the economy …. No water = no power = no economic growth = social unrest.

China’s government seems to agree, kicking off the year with three new water guidelines:

• 2 January 2013: Most Stringent Water Management System Methods (State Council)
• 14 January 2013: Water Resources Fee (National Development Resource Council (NDRC), Ministry of Finance (MoF) & Ministry of Water Resources)
• 24 January 2013: Guidance on the Development of Environmental Protection Services, a 12FYP Strategic Emerging Industry (Ministry of Environmental Protection)

Provinces Beware!

The ‘Most Stringent Water Management System Methods’ announced on 2 January sets out water usage, efficiency ratios for industry and agriculture and water quality measurements for each province. Needless to say, some will be worse off than others:

Jiangsu, Anhui, Xinjiang, Shanghai and Guangdong all have to reduce total water consumption. Not surprising since Shanghai and Jiangsu are both running a water deficit (water consumption> water resource) and the remaining three provinces are water stressed.

Note here that Guangdong has to reduce water every year from 2011-2030. These new water quotas make it difficult for economic powerhouses like Guangdong and Jiangsu to continue to be wasteful in using water. Guangdong’s water reduction target from 46.9 billion m³ in 2010 to 45.0 billion m³ in 2030 also brings in question HK’s reliance on Guangdong water from Dongjiang River. Guangdong has to save almost 2,000 million m³ of water from 2010 to 2030 whilst HK buys up to 820 million m³ of water per annum from the Guangdong on a contract that is renewable every three years. How long can this last?

Industry beware too … the old path may no longer be available!

“these policies mean that high water consuming provinces will find it difficult to walk the old path”

中國財經報網

(Ministry of Finance’s newspaper and website)

New growth industries could also be affected and it is not just in water scarce provinces. Water reduction targets for water-rich provinces like Xinjiang may hamper/kill new growth industries previously identified by the province such as the coal-to-chemicals industry. Xinjiang has to reduce the water usage from 53.5 billion m³ to 52.7 billion m³ in 2030.

The water efficiency targets for industry and agriculture by province set for 2015, also add another layer of complexity.

According to the Ministry of Finance’s newspaper and website (中國財經報網 ), “these policies mean that high water consuming provinces will find it difficult to walk the old path”. The article also pointed out that whilst the GRP contribution of Jiangsu and Shandong is similar (10.3% and 9.8% respectively), the amount of water allocated to Jiangsu in 2015 of 50.8 billion m³ is almost double that of Shandong’s quota of 25.1 billion m³, highlighting the fine balancing act between economic growth and water savings.

“industrial development can still be pursued but with implementation of improved water-saving technology, otherwise the water quotas will not be achieved”

Wang Jinxia, the China Academy of Science’s Water Resources Centre

Wang Jinxia, a water expert from the China Academy of Science’s Water Resources Centre said that given this, provincial “industrial development can still be pursued but with implementation of improved water-saving technology, otherwise the water quotas will not be achieved”

Water analysts say that the water efficiency ratios, water usage quotas and water quality measures have been set with careful consideration of the agri/industrial mix and economic growth. Similar emphasis in the Water Resources Fee announced later echoes this sentiment (see below).

It is worth noting here when we carried out the same exercise in August 2012, the provincial water quotas did not add up to the total national quota – the sum of the parts was 10% greater than the national quota in 2015. Apparently, three rounds of central government “haggling” with the provinces finally resulted in this State Council release.

Government firmly on side to raise tariffs

On 14 Jan 2013, the NDRC, MoF and Ministry of Water Resources issued a JOINT standard on Water Resources Fee (WRF) which includes:

1. a clear water resources tariff formulation system;
2. different standards for different type of water resources such as surface water & groundwater;
3. reasonable water tariff standards to promote water resources tariff reform, considering local water resources condition, local economic development and users in different industries;
4. strict control on underground water exploitation;
5. support on agricultural water consumption by exempting or lowering water tariff within a certain consumption range;
6. encouragement of water recycling;
7. reasonable water tariff standards for hydro-power industry;
8. punitive standards for excessive water consumption; and
9. management and control on excessive water tariff collection.

In short, the government will be setting water prices to encourage more efficient use and protection of already scarce water resources. This together with the “most stringent measures” at the provincial level are clear indications that water issues are not just understood but urgent.

So what does this mean?

Eureka! Water solutions (desalination water recycling & reuse, wastewater treatment et al) are finally available

The right water pricing is key to water solutions. The WRF indicates a minimum water tariff by the end of 2015 (click here for the WRF)

“water tariffs at the end-user level are poised to rise, as WRFs are being passed through…increases in WRF and overall water tariff signifies further liberation of the water industry”

Evan Li, Head of Power, Utilities and Renewable Energy Research, Standard Chartered Bank

Evan Li, the head of power, utilities and renewable energy research of Standard Chartered Bank believes that “water tariffs at the end-user level are poised to rise, as WRFs are being passed through”. He adds “increases in WRF and overall water tariff signifies further liberation of the water industry, where government could transfer cost funding for water infrastructure to the consumer level and accelerate investments. In the longer term, these could support/accelerate opportunities in water-related projects, including water diversion, tap water and wastewater treatment, desalination, etc.”

In case, there is still doubt that the government is not focused on this … the guidance on the development of Environmental Protection Services was issued the following week, setting out the formation of 50 environmental protection service companies with revenues in excess of RMB1billion. We expect the government to further strengthen market based solutions in 2013 – see our 2012 Review and 5 Trends for 2013 for more.

Perhaps it is time to start looking at investing in China’s water sector? (see Big Spender: Buying Up Water)

Double whammy for industry – higher prices & water quotas

The WRF has also indicated that it would consider “local water resources condition, local economic development and users in different industries” and we expect water scarce provinces to see a larger rise in price.

Water scarce regions like Beijing and Tianjin which are both currently running water deficits, have the 2015 targets set at the higher end for both surface and groundwater at RMB1.6/m³ and RMB4.0/m³ respectively ie. an increase of 20-60% and 30-60% over current levels. Water observers expect provincial governments to use water prices in high water usage provinces/ industries to drive water efficiency to achieve their aggressive total water usage quotas.

Water wastage punished: enter progressive tariff hikes

The WRF also clearly states “punitive standards for excessive water consumption” and “management and control on excessive water tariff collection”. Progressive hikes are already in public consultation in Guangdong and we expect to see more of this to come in 2013 for more cities.

Increased focus on groundwater + tough water use quotas = miners beware

Issues arising from groundwater over-extraction in the North are urgent. We believe that we will see increased protection of groundwater going forward. Here’s why…

Groundwater use is rising.

The government has previously admitted that there is no other alternative water source for many cities in China, other than groundwater. They also recognised the difficulty in solving groundwater pollution which has increased from 50% to 55% from 2010-2011 according the Ministry of Environmental Protection.

The best way is the restrict water use and pollutants entering the system. Unfortunately, groundwater is tapped illegally for industrial and agricultural use. We are therefore not surprised that the government is reiterating “strict control on underground water exploitation”. We expect this to come into effect as they work to implement the National Groundwater Plan introduced in 2011, which will work alongside the new heavy metals pollution targets for 2015.

Overuse of groundwater can also lead to subsidence as water tables sink. Subsidence in turn reduces the “storage space” for future groundwater collection. The Chinese Academy of Science predicts the area the size of Florida is sinking in the North. Climate change also exacerbates groundwater scarcity as this resource is not recharged due to floods and droughts. Furthermore, destruction of watersheds for collection of groundwater has also not helped.

Not surprising then that the WRF recognises the difference between ground and surface water and pricing reflects the value of groundwater. The 2015 minimum tariff charges for groundwater is double that of surface water at the low end and 2.5x at the high end:

• Surface water minimum tariff ranges from RMB0.1/m³ – RMB1.6/m³
• Groundwater minimum tariff ranges from RMB0.2/m³ – RMB4.0/m³

Water intensive and/or polluting industries in the North, reliant on groundwater such as coal/ iron mining, coal-to-chemicals and thermal power generation are the most exposed. Agriculture, also prevalent in the North appears to have had a reprieve with the WRF indicating “support on agricultural water consumption by exempting or lowering water tariff within certain consumption range”.

Water – running a new course

The clear signal from the above polices is that water is running a new course. Due to these new water parameters certain industries will find it “difficult to walk the old path”. It matters where you operate. The industry which you operate/ are invested in also matters. It’s time to assess your exposure to water and figure out which is the new path of least resistance.