FINANCING STRATEGY OF THE URBAN WASTEWATER SECTOR IN SELECTED MUNICIPALITIES OF THE SICHUAN PROVINCE IN CHINA OECD 2004 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: − to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; − to contribute to sound economic expansion in member as well as non-member countries in the process of economic development; and − to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. 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All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France. 2 TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................................ 4 ACKNOWLEDGEMENTS.......................................................................................................................... 12 1. PROVISION AND FINANCING OF URBAN WASTERWATER COLLECTION AND TREATMENT SERVICES IN CHINA AND IN SICHUAN ............................................................................................... 13 Background ............................................................................................................................................... 13 Urban wastewater treatment in China ....................................................................................................... 14 Overview of institutional set up for managing urban wastewater............................................................. 14 2. PRESENT STATE OF WASTEWATER INFRASTRUCTURE IN THE CASE STUDY CITIES........ 17 Case study area.......................................................................................................................................... 17 Water consumption ................................................................................................................................... 18 Existing sewerage system.......................................................................................................................... 18 Existing wastewater treatment .................................................................................................................. 20 3. INFRASTRUCTURE DEVELOPMENT TARGETS.............................................................................. 22 Summary ................................................................................................................................................... 22 Construction of new sewerage system ...................................................................................................... 22 Connection rates to sewerage systems ...................................................................................................... 23 Amounts of waste water collected............................................................................................................. 24 Wastewater treatment plants ..................................................................................................................... 27 4. EXPENDITURE NECESSARY TO ACHIEVE INFRASTRUCTURE DEVELOPMENT TARGETS 29 Correction to local costs............................................................................................................................ 29 Results of expenditure needs estimates..................................................................................................... 30 5. BASELINE SUPPLY OF FINANCE....................................................................................................... 33 Key issues in financing urban wastewater collection and treatment in China and in Sichuan.................. 33 Baseline financing assumptions at a glance .............................................................................................. 34 User charges .......................................................................................................................................... 36 Local public budget expenditure in the wastewater sector.................................................................... 47 Transfers from higher levels of government.......................................................................................... 50 Other grants ........................................................................................................................................... 52 Credit financing ..................................................................................................................................... 52 Baseline summary of the supply of finance to wastewater management .............................................. 56 6. BASELINE FINANCING DEFICITS...................................................................................................... 57 7. FINANCING STRATEGIES TO ACHIEVE TARGETS OF DEVELOPMENT OF WASTEWATER INFRASTRUCTURE ................................................................................................................................... 63 Taxpayers pay strategy.............................................................................................................................. 64 Users pay strategy ..................................................................................................................................... 67 Creditors pay strategy................................................................................................................................ 69 Affordability of financing strategies ......................................................................................................... 72 CONCLUSIONS .......................................................................................................................................... 79 ANNEX - LEGAL BASIS OF CHARGING FOR WASTEWATER TREATMENT................................. 84 3 EXECUTIVE SUMMARY Notwithstanding impressive recent efforts urban wastewater infrastructure is underdeveloped 1. Until the1980s, the wastewater management infrastructure in Chinese cities was virtually neglected. In 1980s, about 20 small-scale wastewater treatment plants were constructed in China that provided low levels of treatment. Wastewater was discharged to open drainage ditches, sometimes temporarily collected in septic tanks and dumped to water bodies without treatment. Impressive investments in this sector began in the 1990s. By 2000 about 400 wastewater treatment plants had been completed and the total treatment capacity increased to almost 40 per cent of wastewater generated in 2003. 2. Despite these significant achievements, wastewater treatment in urban areas results in significant risks for human health and the environment. About two thirds of all urban effluents are still discharged into surface waters without treatment. The odour of sewage is common in Chinese cities, and most rivers and lakes are excessively polluted. This generates water borne diseases, decreases the quality of life, and undermines the attractiveness of cities to foreign investors, and the competitiveness of tourism, water intensive industries, fisheries and agriculture. Moreover, there are some indications that newly-built wastewater treatment plants are not always used efficiently, and that several of them even remain idle because of backlogs in the development of wastewater collection networks, or because of the lack of funding for regular operation and maintenance. 3. The OECD secretariat has examined the financial sustainability and affordability of developing modern, centralised wastewater management infrastructure in medium sized cities and counties in China; This has been done by analysing fourteen cities in Sichuan Province, all located in the basin of the Yangtze river, in the impact