Market Failure or Governmental Failure: a Study of China’s
Water Abstraction Policies
1. Introduction
The understanding of water abstraction policies in China is worthwhile, both as an
illustrative application of market-based instruments in a developing country, and as a
case which sheds light on improving China’s water management system. China’s
attempt to use market-based instruments (such as water abstraction charges) to
ease water demand and supply tensions has been fairly unsuccessful. Through
licensing water usage rights and levying charges for possessing the rights, the aim of
central government was to allocate water resources efficiently and cut back water
use, especially industrial water use. However, in reality the implementation results
vary considerably across regions. Areas where water is not abundant continue in
overdraft conditions, even though efforts have been made to allocate water user
rights and to levy charges. Under increasing signs of water shortages and depletion,
fundamental questions need to be asked about why these market-based instruments
that help some countries solve water over-exploitation problems did not work as
effectively at the local level in China. Answers to these questions are crucial for the
analysis of water resources management in China.
Current studies on applying market-based instruments in China mainly explain their
ineffectiveness by market failure, referring to the market’s inability to assess the
precise scarcity value of water resources. Due to this market failure, abstraction
charges are often set too low and provide insufficient economic incentives for users
to save water. Analysis by Wu (Wu 2003), for example, argues that the main problem
with China’s abstraction policies lies in low abstraction charges and thus the
government should increase them. On the other hand, Wang (Wang 2007) suggests
that to avoid a direct valuation of water resources, the government should build a
water right transfer market and thus the ‘price’ of water will simply vary according to
market conditions. These policy suggestions reflect the limitations of market-based
instruments generally faced by regulators around the world: the difficulties in setting
a correct level of charges. But while there is considerably success in some countries,
1
the question of why these instruments fail at the local level in China remains
unresolved.
This paper takes a distinct institutionalist approach to study China’s market-based
instruments towards water abstraction. Besides looking at the economic rationale of
the instrument itself, it focuses more on the role of governments in establishing and
maintaining a robust institutional framework which is a requisite for effective marketbased instruments. It suggests that due to underlying deficiencies in China’s existing
water management system, including a lack of a clear definition of the targets for
abstraction policies, a dual-responsibility system, and a lack of effective institutional
processes for river basin management, local governments have been influenced to
act differently from the regulatory expectation. In particular, this paper concludes that
institutional deficiencies could impede efficient water management and cause local
governmental failure in several ways: (1) a low level of water abstraction charges, (2)
the lack of necessary monitoring and sanctions, (3) low incentives to collect charges
diligently, and (4) failing to provide accessible information for the public. Due to this
governmental failure, water users in China lack sufficient economic or political
incentives to reduce water usage.
The focus of the paper is on how to manage the lack of water quantity through using
market-based instruments. While a huge amount of research has been concentrated
on China’s water quality problems, water depletion is not attracting as much attention
as it should. However, failures to take water depletion seriously or delaying action
could result in enormous economic, environmental and social costs for both current
and future generations.
The remainder of the paper is organized into 3 sections: section 2 starts with a brief
outline of the economic rationale for water abstraction policies. It also identifies
limitations of the instrument. Section 3 first reviews the development of water
abstraction policies in China and then focuses on the institutional deficiencies that
can potentially lead to governmental failure and eventually the ineffectiveness of
water abstraction policies. Finally, section 4 concludes the paper with some
implications for China’s future water resources management.
2
2. Water abstraction charges (WACs) as a market-based
instrument
Levying charges (WACs) for taking water from various sources is considered as a
cost-effective way to correct allocative distortions in the market system (Hahn 1989;
Hearne and Easter 1997; Cowan 1998). Besides, WACs are often used to serve
other objectives in practice, including as a revenue tool to recover administrative
costs (in the UK) or to recover average total costs of water projects (in Australia),
and as an incentive tool to shift consumption behaviour from groundwater to surface
water (in the Netherlands). As we discuss below, the various combinations of
objectives chosen by governments stem from the limitations in the market-based
instrument itself and the various dimensions involved in a sustainable abstraction
target. As a consequence, rather than seeking to employ quantification of
externalities as a basis for design of policy instruments, a subjective evaluation of
what is an acceptable and safe level of abstraction from the governments is a more
pragmatic approach to applying market-based instruments in reality.
The basic idea of WACs is that governments assess a charge on the amount of
water that a user directly withdraws from surface (rivers and lakes) or ground
(aquifers) sources. As profit-maximizing units, water users will respond by reducing
abstraction to a point where their marginal abatement costs equal charge rates. The
benefit of using WACs is that they allow the desired amount of abstraction reduction
to be realized at the lowest overall cost to the society, as those who can achieve
reductions most cheaply will make the greatest reductions (Stavins 2003). In theory,
when properly designed and implemented, WACs encourage users to adopt cheaper
and better water saving technologies, if a sufficiently low-cost method is available
and adopted (Downing and White 1986; Malueg 1989; Milliman and Prince 1989;
Jaffe and Stavins 1995; Jung, Krutilla et al. 1996).
Despite the soundness of the theories, it is important to note the instrument’s
drawbacks before applying it in the real world. One drawback lies in the uncertainties
with regard to users’ reactions to incentive signals. This happens particularly when
the abatement costs are uncertain, or the risks of adopting new water saving
technologies are high (Smith 1995). Furthermore, water users’ decisions are also
influenced by political or even cultural factors. Applying cultural theory, Hoekstra
3
(Hoekstra 1998) illustrates that different groups and societies have very different
perspectives on water and thus different ways of managing it. For example, in the
fatalist view, people believe that they are unable to control the future, thus the
introduction of charges for water would not make sense (Hoekstra 1998). Under the
charging system, it is therefore unrealistic for governments to guarantee a precise
quantitative abstraction reduction.
Another challenge of applying WACs is to identify the appropriate charge rates
(Schiffler 1998; Stavins 2003). The ideal abstraction charges are often known as
Pigouvian taxes, which were initially suggested by Pigou to reduce the disparity
between what he called social and private net product (Pigou 1932). In the case of
abstraction charges, Pigouvian taxes should be levied at a level that is equal in value
to the negative externality costs of abstraction. This idea of Pigouvian taxes is
prominent in the literature, but not undisputed (Schiffler 1998). For example, Coase
(Coase 1960) notes that when transaction costs are low, it is more profitable for
agents to make a bargain than having governments impose taxes. In addition, the
application of Pigouvian taxes requires full identification of the negative externality
costs and their value. This is extremely hard because of the lack of information.
Although economists have devised indirect methods, such as hedonic pricing and
contingent valuation methods, to measure externality costs, these methods all have
shortcomings (Pearce and Turner 1990; Hanley, Shogren et al. 1997; Field 2000).1
Giving the difficulties in measurement, most economists agree that identifying the
correct level of Pigouvian tax is nearly impossible (Baumol and Oates 1971; Pearce
and Turner 1990; Schiffler 1998).
In response, Baumol and Oates (Baumol and Oates 1971; Baumol and Oates 1988)
have suggested an alternative approach, known as the standards and prices
approach. In particular, they proposed that as the actual value of externality costs is
unknown, setting a charge system should begin with establishing an arbitrary target
of environmental quality. Baumol and Oates demonstrated that once a target of
environmental quality was set, the use of charges to achieve specific targets does
possess a least-cost optimality quality (Baumol and Oates 1971). As to the selection
of appropriate targets, they described it as a process of collective and political
1
Take the Hedonic pricing approach for an example. As it uses variations in housing prices to reflect
the value of local environmental attributes, the method only captures people’s willingness to pay for
perceived differences in environmental attributes. In other words, if people are unaware of the
linkages between environmental attributes of their properties, the value will not be reflected in house
prices.
4
decision-making, which involves decision-makers’ subjective evaluation of what is an
acceptable environment. In the case of water abstraction, decision-makers should
identify a desired target of abstraction level before using it to set the corresponding
WACs. Although Baumol and Oates’ approach did not provide a fundamental
solution to the information and measurement problems of charge-setting, it does shift
decision-makers’ focus to more pragmatic issues: developing an appropriate target
as well as tailoring the rules to achieve the target.
To define an appropriate abstraction target, decision-makers should take into
account the needs of both the ecosystems and the social economic system. An
abstraction target that is sustainable involves several dimensions, ranging from
ecological protection, economic efficiency, ethical equity, to financial viability of the
policies (Massarutto 2007). These dimensions of a sustainable abstraction target
have very distinct focuses and should be addressed separately in the process of
target development. In particular, ecological protection means that water use in a
river system should be below its carrying capacity and maintains water-associated
ecosystem services. Economic efficiency refers to water allocation to regions and
industries which have the highest value output. Since access to water resources is a
basic human right, ethical equity requires satisfying the water needs of everyone in
the society (intra-generational equity), and ensuring that the rights of future
generations to enjoy water resources is not infringed (inter-generational equity).
Finally, financial viability of the policies looks at whether sufficient revenue is
available to recover administrative costs and support research and development of
new water-saving technologies. Although there are conflicts among these
dimensions and sometimes trade-offs are necessary, decision-makers should always
avoid emphasizing one dimension too much and jeopardizing others, because the
consequent costs could be enormous. For example, abstraction targets solely based
on equity concern would lead to setting a much lower level of abstraction charge, or
completely exempting low income-groups or industries from paying any charges.
This will easily induce over-consumption, thus reducing economic efficiency and
causing permanent damage to the ecosystem in the long term.
In sum, abstraction charges can be useful tools to correct allocative distortions in a
market system, under the assumption that the correct level of charges can be set.
But as calculating the ideal abstraction charges known as Pigouvian taxes is nearly
impossible, government setting of a subjective definition of an appropriate
5
abstraction target becomes necessary. In order to develop the target, decisionmakers should consider both the ecosystems and the socio-economic system based
on water resources, and keep a balanced view on the distinctive dimensions of
sustainable abstraction.
3. China’s water abstraction policies
3.1 Background
China’s demand for water resources has continued to increase over the last decade
(Zhang 2001). Industrial demand for water nearly tripled between 1980 and 2007
(Department of Water Resources Management 2003). In some coastal provinces
where there are more manufacturing factories, industrial water use has increased by
more than 300 percent and its annual growth rate over 5 percent. Figure 1 shows
that from 1997 to 2007, national industrial water use has increased by nearly 30
billion m3. Ironically, from the year 2002 when China’s new Water Law was
promulgated, industrial water use began to jump sharply, due to the industrial boom
in several provinces such as Jiangsu and Hunan. Moreover, total household water
use has also gone up steadily, increasing by 37 percent, due to population growth
and urbanization. In contrary to the increase of demand, the supply of water
resources in China is relevantly unstable. Annual rainfalls are distributed unevenly
across regions and seasons. And the situation can be worse due to the global
climate change, which often manifests itself through the lack of rain water. As a
result, around 400 of the 600 largest cities in China suffer from water shortages to
various degrees (OECD 2007). According to official statistics, China’s estimated
annual water deficiency is around 20 to 40 billion cubic meters, which is equivalent to
the total amount of water usage in Guangdong Province in 2007, and it causes
losses to industrial production reaching 230 billion RMB per year (Zhang and Zhou
2006). The shortage of water has resulted in conflicts between industry and
agriculture, between urban and rural areas, and between regions (WET 2006).
6
Figure 1 China's industrial water and household water use changes
water use (billion cubic meter)
industrial use
household use
140.00
120.00
100.00
80.00
60.00
40.00
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: China Water Resource Bulletin 1997-2007
Note: Ministry of Water Resources publishes the water usage statistics based on the supply data from
hydraulic projects. However, water withdrawn directly from sources is not included in the figure.
Two signs of overdraft have also appeared which indicate that water overexploitation is worsening. First, increasing pumping costs, ground subsidence, soil
salinity and saltwater intrusion caused by groundwater over-exploitation have been
seen in more areas in China. 2 From 1997 to 2007, actual storage of shallow
groundwater in the Northern plain has reduced by over 70 billion cubic meters and
the average buried depth of deep groundwater also increased in most of China’s
cities (China Ministry of Water Resources 2008). This continued over-extraction is a
huge threat to the groundwater basins themselves, because eventually the gravel
and sand in the water-bearing layer will compact so that it cannot hold as much
water as it previously did. Getting groundwater in rural areas is reported to be more
difficult and costly (China Ministry of Water Resources and Nanjin Hydraulic
Research Institute 2004). In a recent survey of 73 villages from five provinces in
China, over 60 percent of the interviewees believe that groundwater depletions have
become a severe problem and have threatened their livelihoods3. This is because
2
Evidence on groundwater depletion and its impacts in China are contained in Ministry of Water
Resources and Nanjing Hydraulic Research Institute (2004) pages 24 – 40.
3
See Li, Q., Y. Shen et al. (2005), page 96. These villages are in five provinces: Beijing, Henan,
Ningxia, Inner Mongolia, and Shandong. A total of 547 questionnaires are collected. The five
provinces chosen are known for their serious water shortage problems. The water availability per
capita in these five provinces is even less than 1000 cubic meters. Yet, it is still shocking to find the
serious impacts of water depletion on rural people’s livelihood. Another finding from the survey is that,
7
while using surface water for irrigation or watering stock animals, people in the
villages generally relies on well water for drinking as it is less polluted. The second
sign of overdraft is the serious drying-up of several rivers and the disappearance of
lakes. In 2002, for example, the Hai River, the Liao River and the Yellow River, three
of the main rivers in Northern China all suffered serious cut-off problems. And the
mainstream of the Liao experienced cut-offs for as long as 158 days (China Ministry
of Water Resources 2003). Nansi Lake, the biggest freshwater lake in northern
China, was close to being completely dry (China Ministry of Water Resources 2003).
Even officials from the Ministry of Water Resources have admitted that as water
shortage problems worsen, it is urgent to re-examine the application of China’s
fundamental water management policies: abstraction licence and abstraction
charges policies (Huang and Gao 2002). As the tension grows, central government
has to revert to planned engineering interventions such as building reservoirs and
water transfer projects. As Table 1 shows, investments in water resource projects,
which mainly include water supply projects and agricultural irrigational projects,
jumped from 16.22 billion yuan in 2001 to 40.51 billion yuan in 2007 and became the
largest part of the government investments in water conservancy projects.
Table 1 China’s investments in water conservancy projects
2001
2007
56.07
94.49
% flood control projects
54.98
33.71
% water resource projects
28.93
42.87
Total investments(billion yuan, current prices):
% soil, water conservation, and ecology protection 3.15
6.38
% hydropower project
5.37
7.04
% industry capacity building
5.01
0.94
% others
2.56
9.06
85136
85412
number of water reservoirs
Source: Ministry of Water Resources (eds.), Statistic Bulletin on China Water Activities 2001,
2007, Beijing, China WaterPower Press
due to the lack of surface water quality and quantity, over 42.7 percent of the villages depended on
groundwater as a main source for irrigation in 2000 (page 74).
8
3.2 A brief review of the development of China’s water abstraction
policies
No instrument can be effective without the underlying institutions to support it.
Institutions are important because they determine the process that defines a
balanced abstraction target, the means by which the target is transformed into a
concrete regulatory regime, and the mechanisms through which the regulations are
enforced. In the context of China, although there were local attempts to use marketbased instruments towards water abstraction since the economic reform in 1978,
their impacts varied considerably from area to area, indicating the important role of
local institutions on water resource protection. In addition, while the central
government had shown motivation to adjust water management institutions, the
move was welcomed neither by departments that represented the interest of big
industrial companies nor by protective local governments. In order to fully appreciate
the nature of water abstraction policies in China, we should first understand these
institutions in the historical context.
Water abstraction licences and abstraction charges policies were first introduced by
a few local governments in the late 1970s, purposely to curb groundwater depletions.
This early implementation experience showed that abstraction policies tend to be
more successful in cities than geographically larger areas such as provinces. Both
Shanghai city and Shanxi Province, for instance, enacted regulations on
groundwater abstraction policies in the early 1980s. While the amount of
groundwater use in Shanghai city remained stable during the 1980s, Shanxi
Province’s groundwater abstraction increased rapidly, causing several cities to
experience serious land subsidence (China Ministry of Water Resources and Nanjin
Hydraulic Research Institute 2004).
The different implementation results could indicate the importance of institutional
capacity on applying water abstraction policies (WAPs) effectively. WAPs in China
were based on a self-reporting system and local authorities verified data reported by
water users through checking internal data consistency and conducting surprise
inspections. In cities like Shanghai, abstraction activities were more concentrated,
thus applying abstraction policies there required less institutional capacity in terms of
government’s ability to enforce, monitor, as well as sanction non-compliance
activities. Compared with Shanghai city, the administrative area of Shanxi Province
9
was 25 times larger, and water users in Shanxi Province were smaller in scale as
well as dispersed across the whole province. It would require a much stronger
institutional capacity to achieve the same rate of compliance, which Shanxi Province
did not have. Thus, the implementation results of the same instruments were poor.
In 1988, water abstraction policies were introduced on a national scale, as the
fundamental water management policies in China’s first Water Law (1988 Water Law,
article 32, article 34). Despite previous mixed implementation results at the local
level, abstraction policies were chosen probably because they were easier to fit into
the existing institutional framework and thus countered less resistance. It was stated
that individuals or companies that withdraw water directly from surface or ground
sources over a certain limit should apply for a licence and pay the corresponding
charges. The main targets of abstraction policies were industrial firms and water
supply companies, as irrigation was exempted from paying abstraction charges.
Provincial governments were given responsibility to design and implement
regulations with local characteristics. Moreover, to justify local governments’
authority to approve abstraction licences, the Water Law asserted state ownership of
water resources, subject to management by China’s governments (1988 Water Law,
article 3). Thus the ‘water rights’ which could be obtained by industries referred only
to user rights. Most of these provisions remained unchanged for the next 20 years
and formed the basic framework for China’s abstraction policies.
One positive in the 1988 Water Law was that it showed recognition of the need to
manage water as a state-owned resource rather than as an open access resource.
Water, as a resource, was no longer free to access or free of value. As a result,
WAPs were introduced and the Ministry of Water Resources (MWR) was reorganized to take charge of China’s national water resource management together
with its local water resources bureaus (WRBs). Moreover, seven river basin
management committees were set up underneath MWR, one for each of China’s
major basins, to coordinate water allocation across provinces. The institutional
obstacle in this period, however, mainly lay in bureaucratic frictions. Although MWR
and its WRBs were given responsibility to implement WAPs, authority was not fully
removed from other sectors. At the local level, for example, there were at least two
other bureaus, together with WRBs, involved in urban groundwater management.
Conflicts arose in decision making because each bureau had its own interests and
priority lists (Ke 1998; Liu, Wang et al. 2003). These conflicts eventually curbed
10
information sharing and hugely increased bureaucracy. In addition, bureaucratic
frictions also extended to the central level. The inconsistency of the rules towards
hydroelectric and thermal power plants belonging to central departments was a good
example of this, indicating the discrepancy in interests between the MWR and the
Ministry of Electricity and Industry.4
In 2002, two events marked China’s water history. First, as water shortages became
more acute, especially in Northern China, the central government began the most
controversial South-North Water transfer project, which aimed at diverting water from
the Yangtze River to the Yellow River and the Hai River. Second, the State council
promulgated a new national Water Law. These two events reflected the increasing
urgency felt by the central government to take whatever steps possible to tackle
water shortage problems. Developments have been made in strengthening the
institutions concerned with WAPs since the 2002 Water Law. One significant step
forward is the restructuring of China’s water administration system from a multisector administration into a more unified one (2002 Water Law, article 12). As a
result, approvals of abstraction licences are now solely administered by the MWR
and its WRBs. This has ended the long-term bureaucratic conflicts and has improved
efficiency in decision-making. In addition, seven river basin management committees
(RBMCs) have been given more administrative authorities (2002 Water Law, article
48). At the time of writing, all provinces, autonomous regions, and municipalities in
China have enacted regulations with respect to abstraction policies (Hong Kong and
Macao are excluded from this study).
4. The real issue: governmental failure
Since local authorities are the main designers and managers of the water abstraction
system, they should meet with new institutional requirements. Studies on water
resource management find that an efficient institutional environment pools resources
4
In 1993, the Ministry of Electricity and Industry issued a circular to provincial governments stating
that hydroelectric and thermal power plants must be exempted from abstraction licence and
abstraction charge policies since the power production process did not actually consume water
(Circular on Problems Concerning Levying Abstraction Charges and Reservoir Development Fees for
Hydroelectric Power Plants, 1993). However, the Ministry of Water Resources immediately issued a
circular in the same year to provincial governments renouncing the exemption of hydroelectric and
thermal power plants (Circular on Collecting Abstraction Charges, 1993), stating that abstraction
charge is a user fee applied to whoever uses the resources. It is not difficult to imagine the difficulties
faced by provincial governments in designing these policies during this period.
11
and reduces risks. The same studies, however, show that inefficient institutional
environments continue to be a constraint in developing countries (Russell and Powell
1996; O'Connor 1998). In China, despite the central government’s efforts in
developing a regulatory system, there are still at least three evident and peculiar
features in the present water management institutions which inevitably influence the
effectiveness of WAPs:
First, the absence of a clear definition of the targets for WAPs is an evident feature of
China’s water management system. As discussed before, a subjective definition of
an appropriate target that balances the distinctive dimensions of sustainable
abstraction is necessary for setting abstraction charges. However, in reality the
system and principles to identify abstraction targets in China require significant
improvements. Particularly, the process through which local governments identify the
maximum amount of abstraction licences allowable within their administrative areas
is complex and inflexible, as well as making performance review difficult. Following
the 2002 Water Law, the system of total abstraction quantity control (zong liang kong
zhi) was introduced, which required that the amount of abstraction licences approved
in a river basin or an administrative area not exceed the amount allowed by upper
level authorities. In particular, basin-level water allocation plans are approved by the
State Council first, in which the desired aggregate level of water abstraction for
provincial governments is determined. Then on this basis, provincial governments fix
systems of total abstraction quantity control for prefectures, based on provincial
abstraction targets minus the quantity of abstraction licences issued directly by
provincial WRBs. In the same way, prefectural governments fix systems of total
abstraction quantity control for counties. It is not surprising that success of the
system depends largely on the perfect cooperation among all levels of WRBs and
the availability of reliable monitoring data, neither of which is common in China’s
current case.
In addition, the current system of total abstraction quantity control requires that
central government is capable of identifying a clear and balanced abstraction target
right from the beginning. However, targets fixed by the central government in the
river basin-level water allocation plans are often unidentified and non-comprehensive.
Take targets fixed in the 1987 Yellow River Water Allocation Plan as an example.
Rather than giving a proportion of available flow, the plan used a fixed volume of
water for each province as the abstraction targets for over 10 years, by assuming
12
that the river’s natural flows were constant every year (Table 2). The problem is
obvious: it did little to respond to the climate variability along the Yellow River, let
alone paying balanced attention to the various dimensions of sustainable water
abstraction. Since in reality water flows fluctuated every year, it was impossible for
provincial governments to identify proper abstraction targets from the allocation plan.
Consequently, authorities gave out abstraction licences to anyone who applied. And
actual water withdrawn in most of the provinces exceeded the targets set in the
allocation plan (Zhang and Pan 2006). Unsurprisingly, these unidentified and noncomprehensive targets contributed to the more frequent and longer periods of river
cut-offs along the Yellow River basin (Peng and Hu 2006; Zhang and Pan 2006).
Table 2 water distribution in the 1987 Yellow River water allocation plan
Province
Amount
(billion m3)
Qinghai Sichuan Gansu Ningxia
1.41
0.04
3.04
4
InnerMongolia
5.86
Shaanxi Shanxi Henan Shandong Total
3.8
4.31
5.54
7
37
Another feature in China’s current water management institutions is the lack of an
effective institutional process within the river basin management committees. The
main issue with abstraction in river basins is that although abstractions are local
activities, their effects entail both local water shortages and externality costs on other
jurisdictions (Dinar, Rosegrant et al. 1997). Decentralized local governments have
little control over the amount of water available within their own boundaries, as water
availability depends on aggregate level of abstraction in other jurisdictions. Therefore,
as long as political priorities and efforts to enforce water protection policies differ
between regions, the effects of any individual policy on the river basin are bound to
be limited. In order to achieve river-basin level optimality, there is consequently a
need for an effective basin-based institutional process to facilitate the design and
enforcement of abstraction policies. Through a basin-based institutional process,
governments can co-operate and address abstraction at the basin level, including
collecting hydrological data, researching interactions among various sources of water,
forecasting meteorological events, evaluating monetary impacts of abstraction,
proposing overall planning of water allocation, and fixing standards for abstraction
charges.
13
In China’s current case, however, legislation does not provide a legal basis for the
seven river basin management committees (RBMCs) to integrate an effective
institutional process. This can be seen from several aspects: (1) RMBCs’
administrative rights are rigorously restricted to those prescribed by legislation. The
2002 Water Law stated that China’s water resources management is a combination
of jurisdictional management and river basin management. In other words, RBMCs
have to share river basin management authority and responsibilities with provincial
governments. Fundamental authorities such as fixing levels of abstraction charges
and collecting them, distributing funds to protect water resources, supervising or
penalizing negative abstraction activities are not given to RBMCs. (2) RBMCs can
only approve or reject plans of abstraction from main streams of the rivers, but have
no authority over abstraction from tributaries or ground sources (Lohmar, Wang et al.
2003). Such an approach does little to facilitate integrated river basin management,
because it runs counter to the principle that main streams, tributaries and
groundwater sources in a river basin are closely interrelated. (3) RBMCs lack an
inherent system to share and discuss critical information on abstraction with
provincial governments, such as the annual amount of abstraction licences given by
local authorities. As a result, it is nearly impossible for RMBCs to enforce systems of
total abstraction quantity control. (4) Current legislation does not enable RBMCs to
establish a commission of stakeholders from provincial, prefectural and county levels,
or have consultative mechanisms to bring in voices of communities and non
governmental organizations (NGOs) (Turner 2005). This greatly reduces the benefits
of public supervision and participation in river basin management.
Finally but not least, the dual-responsibility system in water administration remains a
potential constraint to water management in China. The dual-responsibility system
refers to the fact that provincial/prefectural (county-level) water resources bureaus
(WRBs)
are
led
by
and
responsible
to
both
upper
level
WRBs
and
provincial/prefectural (or county-level) people’s governments. In other words, while
receiving technical assistance and infrastructure investments from upper-level WRBs,
local WRBs also depend on people’s governments for more funding to build and
maintain water projects (Lohmar, Wang et al. 2003). Especially in recent years,
dependence on local revenue has increased rapidly due to the worsened financial
capacity of the central government (Hu, Wang et al. 1995; Wang 1997; China
Ministry of Water Resources 2003; China Ministry of Water Resources 2008). As
Table 3 shows, local revenue has overtaken central revenue, becoming the biggest
14
source of investments in fixed assets for water conservancy. In 2007, local
investments account for over half of the total investments.
5
In fact, local
governments tend to have far more authority over WRBs than their upper-level
WRBs do, because they play a decisive role in appointments of senior officials at
WRBs. Some research has shown that support from local governments has a pivotal
role in the enforcement of environmental regulations in China (Lo and Fryxell 2005).
Table 3 Investments in fixed assets for water conservancy 2005-2007
2005
2006
2007
Total investments (billion yuan, current prices)
82.74
93.27
102.65
% central
32.83
33.07
33.29
% local
48.14
47.34
52.08
% foreign
2.22
1.24
0.85
% domestic loans
9.85
12.01
8.40
% industries and private
5.20
3.10
3.03
% others
1.76
3.25
2.36
Source: Ministry of Water Resources (eds.), Statistic Bulletin on China Water Activities 2005,
2006, 2007, Beijing, China WaterPower Press
The main problem with the dual-responsibility system lies in the fact that it separates
WRBs’ responsibilities from their sector interests, making WRBs less independent
and failing to have water resources protection as their sole purpose. As WRBs are
directly led by local governments, their initiatives to protect water resources greatly
depend on the “attitude” of local governments. Since the economic reform in 1978,
however, local governments often have more incentive to prioritize economic growth
above anything else. This is because, firstly, the central government evaluates the
performance of local governments according to local output level (Yang 1990; Zhu
1992); secondly, as the decentralization of power is not fully guaranteed or stipulated
by law, local protectionism emerges and local authorities tend to maximize their own
short-term benefits (Long and Ng 2001). Most importantly, fiscal developments since
the 1978 economic reform have gradually brought about local government’s growing
pursuance of their own interests by asserting their own economic identity, as
5
Take the 2008 fourth quarter’s water conservancy investments as an example. According to data
from the Ministry of Water Resources, the central government increased its water conservancy
investments to 18 billion RMB in the quarter. Yet WRBs still need 16.8 billion RMB from local
governments as supporting investments to implement the projects. Source: Ministry of Water
Resources, 2008 fourth quarter increased investments from central government,
http://www.mwr.gov.cn/ztpd/2009ztbd/jksljs/jztb/2009040716384448066a.aspx
15
provinces are cut off from central support and become economically self-reliant
(Hendrischke and Feng 1999). Therefore, when abstraction policies contradict local
governments’ pervasive “pro-growth” priorities, WRBs are required to make
decisions that “take into account the overall economic situation” (Liu, Wang et al.
2003; Cao, Fang et al. 2008). It is not rare to read that local governments use
exemption from abstraction charges as a preferential policy to promote trade and
attract investments (Feng 2007; Wu 2007). If local WRBs insist upon exercising their
responsibilities to protect water resources, they could be in opposition to the local
governments, eventually affecting their own sectoral interests. Thus, this dualresponsibility system leaves WRBs in a relatively passive position. The lack of
government support would easily force officials to seek refuge in a bureaucratic style,
manifested in a strict adherence to the book or in the generation of meaningless
paperwork in the course of regulatory enforcement (Braithwaite 1993).
The implications of the above deficiencies are significant. They have given local
governments more independence to deal with water abstraction activities from a
local perspective. Amid the pervasive ‘pro-growth’ priorities at the local level, this
independence could increase the possibility of governmental failure in formulating
and maintaining the institutions to carry out abstraction policies effectively. In
particular, this governmental failure is manifested in several ways in the local areas:
•
A low level of water abstraction charges;
•
The lack of necessary monitoring and sanctions;
•
Low incentives to collect charges diligently;
•
Failure to provide accessible information for the public.
In the following sections, analysis will be focused on each of these aspects of local
governmental failure.
(1) A low level of water abstraction charges (WACs)
As the central government did not provide a clear target of abstraction, it is therefore
impossible for local government to design a levy system and set WACs based on
any specific abstraction target. Instead, provincial governments are given the
freedom to design the levy system and set WACs standards with local features. A
common practice among provinces is to assess charges based on the actual
16
abstraction volume and a unit charge rate, which is determined by the types of users
and abstraction sources. In general, levies for abstractions are calculated as follows:
Vij × Rij
Vij < Pij
Pij × Rij + (Vij − Pij ) × E ij
Vij > Pij
Lij =
where, for type of users i that withdraw water from source j , Lij is the total levies,
Vij is the actual volume of water withdrawn, Rij is the unit charge rate, Pij is the
volume of water permitted on the abstraction licence. If the actual abstraction
exceeds the permitted abstraction, a progressively higher charge rate E ij is levied on
the excess volume. Both R and E are set by provincial governments and vary by
type of user and source of abstraction.
Much more detailed guidelines on designing the levy system and setting WACs
should be given to the provincial governments. At present, the only charge-setting
principle given by central government to local governments is that both scarcity and
ability to pay should be considered while fixing the abstraction charges (The 2006
Regulation on Management of Water Abstraction Licences and Water Resource
Charge, article 29). Although the principle sounds equitable, it has limited
applicability in provinces where an undeveloped economy coincides with water
shortage. In fact, a large number of China’s provinces are in this position. Figure 2
illustrates the level of per capita surface water availability and GDP per capita by
province in 2007. As we can see, provinces in the bottom left part of the graph suffer
from both a low GDP per capita and low surface water availability per capita. On one
hand, the lack of ability to pay requires provincial governments to fix a low level of
abstraction charges; but on the other hand, the scarcity of water requires them to
promptly increase the level of charges to curb depletion. In this context, the
excessively general principle does not provide much guidance for provincial
governments in setting charges, but creates the risk of governmental failure in favour
of the local protectionism.
17
Figure 2 Surface water per capita and GDP per capita in 2007
Source: China Statistics Yearbook 2008, and 2007 China Water Resources Bulletin
There are several studies indicating that some provincial governments have set
WACs standards too low, and the WACs have lost their function as an economic
lever (Liu, Wang et al. 2003; Cao, Fang et al. 2008). For example, being one of the
most arid provinces in Northern China, Ningxia Province levied a charge rate at only
0.07 RMB per m3 for industrial abstraction from surface sources in 2006, which is
lower than most of the other provinces in China. Without an efficient charge setting,
the licence scheme provides companies little economic incentive to reduce water use.
Instead, the bureaucratic application process for abstraction licences reduces the
competitiveness of small privately owned enterprises and increases the possibility of
rent seeking.
(2) The lack of necessary monitoring and sanctions
To ensure that water users would comply with the regulations, WAPs requires an
accurate method for measuring water volumes as well as the regulators’ capacity to
exercise sanctions. Water users’ compliance decision depends on a comparison of
18
the cost of compliance (abatement costs) with the possibility of getting caught as well
as the expected penalty for non-compliance (Becker 1968). However, local WRBs
often lack incentives to enforce compliance. One official from the Ministry of Water
Resources, for example, admitted that the incentives for local WRBs to strengthen
monitoring and exercise sanctions rely entirely on administrative decrees from upperlevel WRBs.6 Under the dual-responsibility system, however, upper-level WRBs face
the principal-agent problem of how to ensure that local WRBs do their own job. Not
surprisingly, while industrial development remains the top priority of local
governments, there is an inhibiting effect on WRBs’ enforcement of monitoring and
sanction.
Table 4 Staff establishment in central and local water conservancy authorities
2001
Total number of staff (thousand people)
Number of staff in MWR and its subordinated
agencies (thousand people)
Number of staff in local WRBs (thousand people)
2004
2007
1314
1182
1067.6
66
64
71.5
1249
1118
996.1
Source: Ministry of Water Resources (eds.), Statistic Bulletin on China Water Activities 2001,
2004, 2007, Beijing, China WaterPower Press
In addition, monitoring and sanctions activities of the local WRBs may also be
hindered by their limited capacities in terms of personnel and funding. Since China’s
administration reform, there has been a continuing reduction in local WRBs’
personnel. Table 4 shows that while the number of staff in central water conservancy
authorities increased, the WRB staff at the local level was reduced by one fifth
between 2001 and 2007. One concern is with the insufficient personnel to enforce
monitoring and sanctions at the street level. An officer from Shihezi city WRB in
Xinjiang Province complained that there was only 1 staff member in charge of
approving water abstraction licences and another 2 in charge of collecting
abstraction charges for the entire region (Yang and Wang 2008). Another concern is
the unavailability of sufficient funding to help small industries to install and maintain
water meters. The current abstraction policies give no financial incentives or
penalties to ensure that monitoring equipment is operating accurately. Companies
are responsible for installing and maintaining monitoring equipment at their own cost.
6
Interview, 27 May 2009.
19
However, small-scale industries especially those managed by township and village
governments tend to lack the support to invest, and most of them have been outside
the control of WRBs and are hardly monitored at all. Lack of reliable monitoring data
inevitably leads to serious accountability problems, which increases local WRBs
officials’ discretionary power in identifying non-compliant water users, and raises the
possibility of unlawful acts and other governmental failure.
(3) Low incentives to collect charges diligently
China’s current institutions do not adequately emphasize the supervision of its own
governmental authorities. Under the dual-responsibility system, one consequence is
the insufficient charge collection. In the 2002 Water Law, central government stated
that revenues from abstraction charges should be delivered directly to treasuries,
under administration by financial bureaus. At the same time, local WRBs receive
funds separately from financial bureaus to cover administrative costs. This move to
separate revenue from expenditure can reduce the initiative of local WRBs to collect
charges diligently. Insufficient charge collection is a common phenomenon in many
areas, particularly in remote and rural places (Wu 2003; Jin and Miao 2005; Cao,
Fang et al. 2008). Kaifeng city in Henan Province, for example, reported to have
collected in total 138.5 million RMB from abstraction charges in 2007 (Kaifeng
Statistical Yearbook, 2008), However, according to published data, Kaifeng city
should have collected at least 167.8 million RMB in abstraction charges from its
water supply companies alone, which does not even include revenue from other
direct withdrawing activities.7 In an interview, one local WRB staff said: “collecting
more charges or less makes no difference for us.” Furthermore, as the ability of local
WRBs to get administrative funds now depends more on the bargaining power of
officials or their relationships with local governments, enforcement of WAPs become
less independent.
(4) Failure to provide accessible information for the public
Public participation based on adequate information can increase the possibility for
abstraction policies to achieve efficient outcomes. This is because local users tend to
identify issues relating to local natural resources clearly and have relatively accurate
7
In 2005, Kaifeng people’s government adjusted its level of abstraction charge. In particular, public water
supply for household usage was charged at 0.15 RMB/m3, and for other usage at 0.25 RMB/m3. According to
Kaifeng Statistical Yearbook 2007, Kaifeng city’s total water public supply is 753.5 million tons, of which 205.5
million tons is for household usage and 548 million tons is for other usage. Therefore, abstraction charge
revenue from public water supply companies alone should reach 167.8 million RMB.
20
information on local carrying capacity (Ostrom 1990; Dinar, Rosegrant et al. 1997). In
addition, effective participation also leads to an adjustment of existing power
relationships and reduces the possibility of governmental failures such as rentseeking behaviours (Ayres and Braithwaite 1992; Shen 2004). Research finds that
when there is a deficiency of organized social forces, officials may adopt a much
more flexible approach to enforcement (Sabatier and Mazmanian 1983; Scholz,
Twombly et al. 1991; Lo and Fryxell 2005). One prerequisite for public participation,
however, is to have a transparent institutional structure and accessible information
(Dinar, Rosegrant et al. 1997). As to tackling the problems of water shortage, this is
particularly important, as unlike other environmental problems that are immediately
observable, water shortages are hard for the general public to sense.
Currently, China’s legislation specifies neither the kind of information needed to be
published nor the frequency of its publication. Indeed, most of the information is kept
as internal resources by local authorities. Accessible information is either incomplete,
brief, or uses inconsistent statistical standards. Very few enforcement results have
been disclosed. For example, the amount of approved abstraction licences and
abstraction charges revenues are often not made public in the annual reports. In the
lack of information and thus the lack of public participation, accountability in the
implementation process is almost non-existent. In addition, at the local level, the levy
systems are designed in very different ways and their standards vary. When there is
no system of accessible information, it is difficult for researchers to evaluate the
impacts of WAPs. Consequently little advice could be given to improve the policies.
4. Implications
This paper aims to shed light on reasons for the ineffectiveness of China’s WAPs.
Striking evidence of water shortage indicates the urgent need for a review of WAPs’
design and enforcement in China. The paper argues that besides the limitations lying
in designing water abstraction charges, three main deficiencies in China’s water
management institutions work against the effective implementation of WAPs at the
local level, creating a context where local governments deal with water abstraction
activities from both a local and a short-term perspective. The implications are huge:
although initially it was market that failed in allocating water resources efficiently,
local governmental failure in the process of solving market failure becomes the main
challenge for China’s governments now. As commitment from local governments to
21
WAPs enforcement remains weak, WRBs lack major contributing elements for
implementation, increasing the possibility of governmental failure in formulating and
maintaining the institutions to carry out WAPs effectively.
While these results are not particularly surprising, this study goes some way towards
revealing the manifestations of local governmental failure. It is observed that the
level of water abstraction charges has been set too low to send enough economic
incentives for industries to save water. It is also found that under the dualresponsibility system, local WRBs appears to lack political incentives to enforce
compliance because they are under substantial pressure to ensure enforcement will
not contradict the development strategy of local government. With limited personnel
and budget, monitoring and sanctions activities are seen to be hindered. In addition,
local WRBs’ initiative to collect charges diligently is reduced significantly because of
the central government’s move to separate revenues from expenditures. Most critical
of all, China’s current legislation has discouraged public participation, because the
lack of accessible information. In summary, there is a need for more institutional
changes in the way water is managed in China, from jurisdictional management to
integrated river basin management, from emphasizing short-term output to focusing
on long-term benefits of a stable water ecosystem, from government-based water
allocation to government-led community-based water allocation.
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