Tsinghua Science and Technology Tsinghua University, China ISSN: 1007-0212 Vol. 6, Num. 5, 2001, pp. 469-474

Tsinghua Science and Technology, December 2001, 6(5), pp. 469-474

Water Pricing Policy in Tarim Basin of China

SHI Zulin , XU Lifen

Development Research Academy for the 21st Century, Tsinghua University, Beijing 100084, China
Policy Research Center, Ministry of Water Conservancy, Beijing 100011, China

Received: 2000-09-10; revised: 2000-11-10

Code Number: ts01098

Abstract:

China ranks the thirteenth among countries with serious water shortage problems in the world. The average amount of water owned per person is only 2400 m³/year, which is about 1/4 of the world average. But unfortunately, the efficiency of water use, especially in agriculture in some arid areas, is very low, only 20% - 30% in some areas. The main reason is that water prices are too low to protect the water resources. In this paper, the Tarim Basin of southern Xinjiang is selected to study the water supply costs and farmer's tolerance of water expenses based on a great amount of data collected in the four prefectures in the Tarim Basin. Then, three steps are suggested for water pricing reform in the Tarim Basin. Finally, several possible water pricing patterns are presented, such as water coupons, seasonal floating prices, and water price counting in kind but paying in currency.  The conclusion is that the present water price system should be reformed and the water price can be increased to some extent for agricultural use even in Xinjiang, a developing area in China.

Key words: water pricing; water resources; Xinjiang; Tarim Basin

1  Necessity for Study of Water Pricing

China ranks the thirteenth among the countries with serious water shortage problems in the world. The average water amount owned per person is only 2400 m³/year, which is about 1/4 of the world average. But the problem is not only the shortage of water but also its uneven distribution between different time periods and regions in China. Serious water shortage problems occur in some areas such as North China and Northwest China (including Hebei, Inner Mongolia, Gansu, Qinghai, Ninxia, and Xinjiang), which are arid and semiarid regions in China.

The problem is compounded by low water use efficiencies especially in agriculture, only 20% - 30% in some areas, because irrigation technology is very primitive, with the flooding as the common irrigation methodology. Most people believe that "water is given by God, so we do not have to care for it." At the same time, water conservancy is regarded as a kind of social welfare and was almost free. Therefore, water resources are wasted in these areas.

Methods are needed to improve water use efficiency. Management principles suggest that water use efficiency can be improved by administration, laws, and economic regulations in which water pricing is a key element.

A reasonable water price should be collected as a return on the investment and operating expenses for all kinds of water conservancy projects, and should be used for maintenance, replacement, and operating expenditures. With social economic development, the water demand increases, and water resource exploration and supply costs increase, so water prices need to be adjusted over time. This study takes the Tarim Basin, the most arid area in southern Xinjiang, as an example to answer the following questions. What is the current water price in the Tarim Basin? Is it possible to adjust the water price there? What price should it be? What are the objectives and principles of water pricing reform?

2  Current Water Prices in the Tarim Basin

According to data collected during the field survey and literature investigation, the existing water price for agriculture in each prefecture in the Tarim Basin is very low, as shown in Table 1. For comparison, we also calculated several kinds of water supply costs, such as: (a) Operating cost; (b) Full cost with straight-line depreciation (SLD) to re-estimate the fixed value of assets of the Departments of Water Conservancy (DWCs); and (c) Full cost with dynamic depreciation (DD, r=7%) to re-estimate the fixed value of assets of DWCs. The results are shown in Table 1.

The data in Table 1 shows that recent water prices in the Tarim Basin are only about 10% - 20% of the water supply cost, which is too low to provide the needed return for the water conservancy projects. Therefore, there is not enough capital investment return for the maintenance and replacement of the water conservancy projects, such as channel seepage, river bed dredging. Even normal operations can not be funded, so the water price in the Tarim Basin should be adjusted as soon as possible to reduce water waste in irrigation and to halt the serious imbalance between water demand and water supply.

3  Factors to Be Considered in Water Pricing Reform

3.1  Economic factors

The main factor in water pricing reform should be to raise the income of the local water conservancy departments (DWCs) to ensure that they have enough capital to maintain the irrigation projects serving the farmers.

Several different objectives can be considered in water pricing reform. One objective (Objective I) is to recover DWCs operating costs, i.e., the income from the water charges balances their operating costs. Another objective (Objective II) is to recover the initial investment, i.e., including not only the operating costs but also the depreciation expenses, so that existing irrigation projects can be replaced. A third objective (Objective III) is to generate a surplus for the DWCs to expand the irrigation projects. The current need for the DWCs is to reach Objective I with plans and to reach Objective II in the near future in the Tarim Basin.

3.2  Fairness for farmers

Water pricing decisions are not only based on the water supply cost but also on the ability of farmers' financial ability. So the average benefits of the irrigation water (ABIWs) for farmers is calculated in this section.

According to "the Standard for Economic Calculation of Irrigation Projects" (SD139-85) as well as the actual situation in Xinjiang, two kinds of methods can be used to calculate the average benefits of the irrigation water.

(1) Benefit allocation method This method allocates the proportions of the value added to the crop production due to the irrigation water and other agricultural inputs. In 1989, the coefficient of allocation for irrigation water was suggested to be  0.65  by the Bureau of Water Conservancy (BWC) of the Xinjiang Uygur Autonomous Region which will be used in our calculation.

(2) Cost deduction method This method deducts the total costs of all other agricultural inputs besides the irrigation water from the gross production value with 7% as a rational return rate, the remaining benefit is due to irrigation water.

Wheat and maize were selected as typical grain crops with cotton, beets and oil-bearing crops as typical cash crops. The average benefits due to the irrigation water (ABIWs) were calculated for these two kinds of crops, according to the local data for agricultural production and product prices.

1993 data is used in the calculation for all the data such as the procurement prices for crops as well as labor costs for crop production. The results are listed in Table 2.

The results show that the water benefit calculated using the cost deduction method (2) is higher than that calculated using the benefit allocation method (1) for both types of crops in all of the different prefectures. The data suggests that the figure of 0.65 for the allocation coefficient is high enough to consider the costs of other agricultural inputs which have return rates of more than 7%. Therefore, the results of method (1) will be used to estimate the farmers' financial ability.

It can also be seen that the water benefit for cash crops is 2.5 - 6.1 times higher than that for grain crops, so the water price for cash crops could be higher than that for grain crops.

3.3  Other factors

Other factors should be examined when considering the costs for farmers, such as the proportion of expense for water relative to the agricultural gross product value, the added value, and the production cost.

Regulations in Xinjiang and throughout the country state are that the proportion of expense for irrigation water should not exceed 5% of the agricultural gross product value (12% for cash crops) and it should not exceed 5%-15% of the production cost. According to the World Bank[4,5], a reasonable proportion of water expense to the added value would be between 25% to 40%.

4  Suggested Steps for Water Pricing Reform

According to the factors and objectives considered above, the water pricing reform in the Tarim Basin should follow the following three steps:

(1) The first step is to realize Objective I to recover the operating costs.

The water price should be raised to the level of the water supple operating costs. In addition, the cash crop water price should be 2.5 times that of the grain crops to maintain the total income of the local departments of water conservancy. In this case, the farmers' cost will be that listed in  Table 3.

The  result shows that all of the proportions are less than the regulation standards for the water prices listed in Table 3. The proportion of water expense to water benefit is only 6.2%-15.5%, less than 1/6. Therefore, the farmers can afford the cost of the first step of water pricing reform and, at the same time, the DWCs can have enough funds to recover their operating costs.

(2) The second step is to realize Objective II to regain the initial DWCs investment.

Compared with the first step, the re-estimate values of the fixed assets are used to calculate the full water supply cost, with straight line depreciation, shown in column (2) in Table 1. The calculational results are shown in Table 4.

The average proportion of the water expenses to the gross product value for each prefecture (excluding Bayinguoleng) is about 7%, and is almost the same for grain crops and cash crops, which is a little higher than the standard of 5%. But the proportion of water expense to the value added and to the water benefit are between 14.8%-18.4% and 21.4%-24.6%, respectively, which are both not too high compared with the World Bank standard. Therefore, Objective II can be reached in the near future.

(3) The  third step is to achieve Objective III, which is to provide a surplus for the DWCs to improve irrigation facilities.

The figures from column (3) of Table 1 were used as the water supply costs here and the calculation used the re-estimate values of the fixed assets with the dynamic depreciation method.

This level of water pricing can not be reached in the Tarim Basin in the near future. Therefore, we will analyze how the prices of agricultural products should be changed so that the average proportion of water expense to gross product value would be below 5%. Akesu and Kashi were selected as examples to estimate price levels for wheat and cotton that would keep the total water expense the same as when the water price for cotton is  2.5 times that of wheat, as shown in Table 5.

The results show that the prices for both wheat and cotton in Kashi are higher than that in Akesu because the amount of water required for crops in Kashi is greater than that in Akesu due to the different natural conditions. Therefore, the water pricing policy must be carefully established by taking into account the actual conditions in each region. In 1994, the procurement price was 1.48 Yuan/kg for wheat and 14 Yuan/kg for cotton in Xinjiang. Therefore, the crop prices must be increased if the water price is to reach the level shown in Table 5. The amount of irrigation water per hectare must be decreased and the water use efficiency must be improved to maintain the farmers' financial ability. This objective is actually a little higher than the real financial ability of the farmers, but it can be reached if the agriculture product prices have some changes as the economic reforms occur.[FL)]

5  Potential Pricing Model

5.1  Block rates

As mentioned above, water waste in irrigation is a serious problem in the Tarim Basin. Therefore, the water pricing policy should have a normal price for the amount of water used for the farmer's irrigation quota, and an additional price for the amount of water used exceeding the quota. The irrigation quota would be determined according to the amount of water needed for the crops, depending on the weather conditions for each prefecture. The normal price would be as suggested in Tables 3-5 and the additional price for excessive water use could be 2-3 times of the normal price.

5.2  Price differentiation

Another problem is seasonal distribution of the water resources in the Tarim Basin, i. e., dry in the spring (March to May) and floods in the summer (June to August). A seasonally adjusted price would be one solution with higher price in the spring and lower price in the summer depending on the actual conditions in each region.

Each year's water use plan must be made from the bottom to the top with the  farmers buying water coupons at the beginning of each year at the normal water supply cost announced by the local department of water conservancy. The farmers then get water using the water coupons. Higher price will be charged when they want more water without water coupons, if enough water is available. Farmers could also sell their water coupons in the water market if they do not use them.

The irrigation water expense could be measured by the commodities, such as wheat, maize or cotton, but paid in currency to remove the impact of inflation.

5.3  Marginal cost and benefit as reference

The concepts of marginal cost and water benefit can be used not to determine the market price of water, but as a quantitative reference for the decision makers.

According to the economic definition, the marginal cost of the water supply refers to the additional cost for producing the last unit of water, which is the derivative of the water supply cost function if it is known. Unfortunately, it is very difficult to calculate the cost functions of water conservancy projects in practice. Therefore, the concept of incremental cost of new water supplies will be used rather than the marginal cost. The average full costs of new water supply projects calculated by the dynamic depreciation method is used as the long-term marginal cost. These are two types of new water supply projects, water development projects and water conservation projects. Based on the data we collected, several average incremental costs (AICs) of new water supply projects are:

(1) Kezhi  reservoir: additional water reservoir supply, AIC 12.37 Cent/m³;
(2) Newly  developed wells, 6.84 Cent/m³;
(3) Sprinkling  irrigation by self-pressure: new  water conservation technology, 27.74 Cent/m³;
(4) Channel seepage prevention for water conservation, 5.46 Cent/m³.

The incremental cost of the sprinkling irrigation system is the highest, 27.74 Cent/m³, so this technology can not be widely used. Another factor restraining the application of this technology is the dry climate in the Tarim Basin. The water supply cost of the Kezhi Reservoir is the second highest, 12.37 Cent/m³, which is only half of the sprinkling irrigation system cost, but is still high compared with the agricultural productivity in the Tarim Basin. The reservoir is not the main method to increase the water supply, because of its large capital requirement and long construction period. Relatively, the incremental costs of new wells and channel seepage prevention are low, only half of the second. Moreover, both of these two technologies will reduce the underground water table and prevent or halt secondary salinization of the soil. So, these two technologies are practical and can be quickly disseminated as additional water supply alternatives.

The incremental costs of new wells and channel seepage prevention will be used as the marginal water supply costs in the Tarim Basin in this stage, i.e., from 5.46 Cent/m³ to 6.84 Cent/m³. Note that these figures are close to the water supply costs calculated by the method of dynamic depreciation (DD, r=7%). Therefore, they will be the possible water price ceiling for agriculture in the future.

The marginal benefit is the farmer's marginal utility for consuming his last unit of water. Therefore, the marginal benefit will be reduced when the amount of water use surpasses the water requirment for crop growth.

The marginal benefit for irrigation water (MBIW) for several crops, based on some scientific experiments done by agricultural scientists in Xinjiang are:

But these are too high to be used for pricing, so they can only be used for reference.

6  Conclusions

The current water price for agriculture is very low not only in the Tarim Basin in Xinjiang but also all over the country as other data shows. The low price results in huge amounts of water waste in some places even when the water shortage problem is very serious. To improve the efficiency of water use in these regions, the water price level would be adjusted as the primary of economic incentive taking into account the financial  ability of the farmers. The water price can be raised to 2.0 - 3.0 Cent/m³ at present in the Tarim Basin and 4.0 - 5.0  Cent/m³ in the future, which would greatly change the whole water use and distribution situation.

Additionally, improved water management, optimum water distribution, and effective water use regulations are also key methods which must be used to solve the water shortage problem.

References

1. Cheng Qichou. Rational distribution of water resource utilization of Tarim River's main currents. Arid Land Geography, 1988, 11(4): 11 - 16. (in Chinese).
2. Wu Shenyen,  Wang Butian. Water resources in the Aksu River Basin. Arid Land Geography, 1985, 8(3): 1 - 8. (in Chinese).
3. Xie Senchuan, Lin Xiangyue. Present situation and outlet for agricultural water supply [Dissertation]. Beijing: Tsinghua University, 1992. (in Chinese)
4. Morris R. Pricing for wates conservation. In: Economic Association International 64th Annual Conference, Lake Tahoe, USA, June 21, 1989.
5. Rajank Sampath. Issues in irrigation pricing in developing countries. World Development, 1992,  20(7) : 38-43.

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