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China: World Bank Suggests Concessionary Financing for Improving Water and Sanitation Sector

August 11, 2010

BEIJING, August 11, 2010 — Targeted concessionary financing schemes can help improve the quality of water and sanitation services in China, said a new World Bank policy note on China’s water and sanitation sector.

Good water and sanitation services are essential for economic growth, public health, and environmental protection. However, these services can be difficult to finance. When utilities do not have enough capital, they under-invest and this will adversely affect the quality of their services. The World Bank policy note entitled Concessionary Financing Programs for the Water and Sanitation Sector in China suggests that concessionary financing could provide a solution.

“Many governments run targeted concessionary financing programs as a way to help utilities raise the capital that they need. International experience shows that well-designed concessionary financing programs can be employed as incentives to successfully improve the efficiency of utilities, sector and environmental management, or both,” said Mingyuan Fan, World Bank’s Senior Sanitary Engineer.

China’s water and sanitation sector faces important challenges from rapid urbanization and industrialization, large investment needs, water scarcity, water pollution, and ecological degradation. This policy note is intended to present lessons of international experience for the Chinese policymakers. The policy note discusses various policy options, how to choose among them, and where and how those options have been used in practice.

The policy note draws on successful case studies from concessionary finance programs in other countries and highlights three with particular relevance to the Chinese context, including:

The State Revolving Fund Programs in the United States. These revolving funds provide concessionary financing directly for the construction or improvement of infrastructure in areas that suffer from under-investment, thus encouraging the construction of drinking water and wastewater treatment infrastructure in small and low-income communities.

Brazil’s Catchments Restoration Program. This program was designed to address poor sector management, utility inefficiency, and under-investment in infrastructure. It requires the establishment of river basin committees, which have the responsibility to specify discharge requirements.

Colombia’s Specialized Operators Initiative. This initiative successfully encourages municipalities to engage private sector utility operators. Specific efficiency requirements are included in the operator’s contract with the municipality. Costs are kept to a minimum through a bidding process in which the bidder requiring the least subsidies is awarded the concession.

The policy note also analyses China’s water and sanitation sector and identifies areas which may have room for improvement. Existing financing programs, such as the China Development Bank, State Bonds programs and the current fiscal stimulus program provide concessionary financing for water and sanitation infrastructure. These programs have been instrumental in increasing water supply and wastewater coverage. However, these programs could be made even more targeted to stimulate better outcomes in the water sector’s overall performance.

Some of the key policy options presented for consideration include: (i) concessionary finance to improve sector governance; (ii) incentive-based models to improve utility performance; (iii) concessionary finance as a means to improve access to reliable data; and (iv) development of a provincial pilot incentive-based concessionary finance program. 

“China could consider developing a pilot program of incentive-based concessionary finance in one province first to gain experience, and then roll out in other provinces or at the national level,” said Ede Ijjasz, World Bank’s Sector Manager for Sustainable Development in China.

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