Water Pricing Policy in Tarim Basin of China

TSINGHUA SCIENCE AND TECHNOLOGYISSN 1007-0214 13/21 pp469 - 474Volume 6, Number 5, December 2001Water Pricing Policy in Tarim Basin of ChinaSHI Zulin (施祖麟), XU Lifen* (许丽芬)TV2] ADevelopment Research Academy for the 21st Century，Tsinghua University，Beijing 100084, China↑Policy Research Center, Ministry of Water Conservancy, Beljing 10011. ChinaAbstract: China renks the thirteenth among countries with serious water shortage problems in the world. Theaver age amount of water owned per person is only 2400 m/year, which is about 1/4 of the world average. Butunfortunately. the eficiency 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 thispaper, the Tarim Basin of southern Xinjiang is selected to study the water supply costs and farmer's toleranceof 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 pricingpatterns are presented, such as water coupons, seasonal floating prices, and water price counting in kind butpaying in currency. The conclusion is that the present water price system should be reformed and the waterprice 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 Basin1 Necessity for Study of WaterMethods are needed to improve water useefficiency, Management principles suggest thatPricingwater use efficiency can be improved byChina ranks the thirteenth among the countriesadministration, laws, and economic regulations inwith serious water shortage problems in the world.which water pricing is a key element.The average water amount owned per person isA reasonable water price should be collectedonly 2400 m'/year, which is about 1/4 of theas a return on the investment and operatingworld average. But the problem is not only theexpenses for all kinds of water conservancyshortage of water but also its uneven distributionprojects, and should be used for maintenance,between different time periods and regions ireplacement，and operating expenditures. WithChina. Serious water shortage problems occur insocial economic development, the water demandsome areas such as North China and Northwestincreases, and water resource exploration andChina (including Hebei, Inner Mongolia, Gansu,supply costs increase, so water prices need to beQinghai, Ninxia, and Xinjiang), which are arid adjusted over time. This study takes the Tarimand semiarid regions in China.Basin, the most arid area in southern Xinjiang, asThe problem is compounded by low water use .an example to answer the following questions.efficiencies especially in agriculture, only 20%-What is the current water price in the Tarim30% in sorme areas ，because irigation technologyBasin? ls it possible to adjust the water priceis very primitive ，with the flooding as the commonthere? What price should it be? What are theirrigation methodology. Most people believe thatobjectives and principles of water pricing reform?“water is given by God, so we do not have to care2 Current Water Prices in the Tarimfor it." At the same time, water conservancy isregarded as a kind of social welfare and was almostBasinfree. Therefore, water resources are wasted inAccording to data collected during the field surveythese areas.and literature investigation， the existing waterprice for agriculture in each prelecture in the TarimReceived: 2000-09 10; revised: 2000- 11-10中国煤化工MHCNMHGrsinghua Science ard Techmology, December 2001, 6(5): 469 - 474470Basin is very low, as shown in Table 1. For1) is to recover DWCs operating costs,comparison, we also calculated several kinds 0income from the water charges balances theirwater supply costs, such as: (a) Operating cost;operating costs. Another objective (Objective II(b) Full cost with straight-line depreciation (SLD)is to recover the initial investment, i.e.，includingto re-estimate the fixed value of assets of thenot only the operating costs but also theDepartments of Water Conservancy (DWCs); anddepreciation expenses, so that existing irrigation(c) Full cost with dynamic depreciation (DD, r=projects can be replaced. A third obective7%) to re- estimate the fixed value of assets ol(Objective II) is to generate a surplus for theDWCs. The results are shown in Table 1.DWCs to expand the irrigation projects. Thecurrent need for the DWCs is to reach Objective ITable 1 Water supply costs for each prefecture(unit: Cent/m*)with plans and to reach Objective II in the neafuture in the Tarim Basin.Prefecture Operating Full cost Full cost Presentcost with SLD with DD water price3.2 Falrness for farmers(1)(2)3)Water pricing decisions are not only based on theAkesu1.343. 334.68 0.60-0. 66water supply cost but also on the ability offarmers' financial ability. So the average benefitsBayin1.461. 802.14 0.60-1.30of the irrigation water ( ABIWs) for farmers isHetian1.482.513.540. 30calculated in this section.Kashi1. 263.425. 020.60According to “ the Standard for Economic(1) The fficial exchange rate is US $1- RMB 8.3Calculation of Irrigation Projects”(SD139-85) asYuan; Cent represents Chinese Cent; Yuan representswell as the actual situation in Xinjiang， two kindsChinese Yuan.of methods can be used to calculate the average(2) Operating cost calculated using the original value ofbenefits of the irrigation water.the fixed assets.(1) Benefit allocation method This method(3) The re estimated value of the fixed assets wasallocates the proportions of the value added to thecalculated using 1994 data.crop production due to the irrigation water andThe data in Table 1 shows that recent waterother agricultural inputs. In 1989, the coefficientprices in the Tarim Basin are only about 10%-of allocation for rrigation water was suggested to20% of the water supply cost, which is too low tobe 0.65 by the Bureau of Water Conservancyprovide the needed return for the water(BWC) of the Xinjiang Uygur Autonomous Regionconservancy projects. Therefore， there is nowhich will be used in our calculation.enough capital investmentreturn for the(2) Cost deduction methodThis method .maintenance and replacement of the waterdeducts the total costs of all other agriculturalconservancy projects, such as channel seepage ,inputs besides the irrigation water from the grossriver bed dredging. Even normal operations canproduction value with 7% as a rational return rate ,not be funded, so the water price in the Tarimthe remaining benefit is due to irrigation water.Basin should be adjusted as soon as possible toWheat and maize were selected as typical grainreduce water waste in irrigation and to halt thecrops with cotton, beets and oil-bearing crops asserious imbalance between water demand andtypical cash crops. The average benefits due to thewater supply.irrigation water (ABIWs) were calculated for these3 Factors to Be Considered in Waterwo kinds of crops, according to the local data foragricultural production and product prices.Pricing Reform1993 data is used in the calculation for all thedata such as the procurement prices for crops as3. 1 Ecenomic factorswell as labor costs for crop production, The resultsThe main factor in water pricing reform should beare listed in Table 2.to raise the income of the local water conservancyThe results show that the water benefitdepartments (DWCs) to ensure that they havecalculated using the cost deduction method (2) isenough capital to maintain the irrigation projectshigher than that calculated using the benefitserving the farmers.allocation method (1) for both types of crops in allSeveral different objectives can be considered:中国煤化王he data su8e3 thatin water pricing reform. One objective (Objective-ocation coefficient isYHCNMHGSHI Zulin (施祖麟> et al: Water Pricing Policy in Tarim Basin of China471high enough to consider the costs of otherand the production cost.agricultural inputs which have return rates of moreRegulations in Xinjiang and throughout thethan 7%. Therefore, the results of method (1)country state are that the proportion of expense forwill be used to estimate the farmers' financialirrigation water should not exceed 5% of theability.agricultural gross product value (12% for cashcrops) and it should not exceed 5%- 15% of theTable 2 Irrigation water benefits in each prefecture(unit: Cent/m)production cost. According to the World Bank[.s,a reasonable proportion of water expense to theAkesu Bayinguoleng KushiHetain(I) (2) (1) (2) (1) (2) (1)_ (2)added value would be between 25% to 40%.Grain crops 5.55 7.12 6.12 7.91 5.71 7.65 7.69 10. 624 Suggested Steps for Water PricingCaah crops 26.77 38.53 30.51 44. 7034.93 51.12 19.48 28. 0]ReformAverage 13.55 18.97 16.40 23.42 14.78 21.14 10.50 14.76According to the factors and objectives considered(1) and《2) represent results from the benefit allocationmethod and the cost deduction method respectively.above, the water pricing reform in the Tarim BasinIt can also be seen that the water benefit forshould follow the following three steps :(1) The first step is to realize Objective I tocash crops is 2.5- 6.1 times higher than that forrecover the operating costs.grain crops, so the water price for cash crops couldThe water price should be raised to the levelbe higher than that for grain crops.of the water supple operating costs. In addition,3.3 Other factorsthe cash crop water price should be 2. 5 times thatOther factors should beexamined whenof the grain crops to maintain the total income ofthe local departments of water conservancy. In thisconsidering the costs for farmers, such as thcase, the farmers' cost will be that listed inproportion of expense for water relative to thTable 3.agricultural gross product value, the added value ，Table 3 Water pricing to recover DWCs operating costsRegionSupplyCropWaterProp. 10Prop. toProp.10 costcostpricegross pro-addedproductcalculated by(Cent/m2)(Cent/m)duct valuevaluemethod (1)(%)Grain0.863.011.24.115.5Akesu1.34Cash2. 14.95.56.18.0Average1. 342.96.95.10.8910.44.014.5Bayin-guoleng1.462. 245.06.57.35.38.90. 863.410.915.1Kashi1.262.15.4.26.22.85.95.28.51. 093.710.114.21. 482.7310.014.010. 1(1) Beneft llocaiono method is used because it is lower than that of the cost deduction method;(2) The water expense is included in the production cost and excluded in the net product value ;(3)“Prop.”means“Proportion".中国煤化工MYHCNMHG472Tsinghua Science and Technology, December 2001, 6(5): 469- 474The result shows that all of the proportionsassets with the dynamic depreciation method.are less than the regulation standards for the waterThis level of water pricing can not be reachedprices listed in Table 3. The proportion of waterin the Tarim Basin in the near future. Therefore,expense to water benefit is only 6. 2%- 15. 5%，we will analyze how the prices of agriculturalless than 1/6. Therefore, the farmers can affordproducts should be changed so that the averagethe cost of the first step of water pricing reformproportion of water expense to gross product valueand, at the same time, the DWCs can have enoughwould be below 5%. Akesu and Kashi werfunds to recover their operating costs.selected as examples to estimate price levels fo(2) The second step is to realize Objective IIwheat and cotton that would keep the total waterto regain the initial DWCs investment.expense the same as when the water price forCompared with the first step, the re -estimatecotton is 2. 5 times that of wheat, as shown invalues of the fixed assets are used to calculate theTable 5.ull water supply cost, with straight lineThe results show that the prices for bothdepreciation，shown in column (2) in Table 1.wheat and cotton in Kashi are higher than that inThe calculational results are shown in Table 4.Akesu because theamount of water required forThe average proportion of the water expensescrops in Kashi is greater than that in Akesu due toto the gross product value for each prefecturethe different natural conditions. Therefore, the( excluding Bayinguoleng) is about 7%，and iswater pricing policy must be carefullyestablishedalmost the same for grain crops and cash crops ，by taking into account the actual conditions in eachwhich is a lttle higher than the standard of 5%.region. In 1994, the procurement price was 1. 48But the proportion of water expense to the valueYuan/kg for wheat and 14 Yuan/kg for cotton inadded and to the water benefit are between 14. 8%Xinjiang. Therefore， the crop prices must be-18. 4% and 21. 4%- 24. 6%，respectively , whichincreased if the water price is to reach the levelare both not too high compared with the Worldshown in Table 5. The amount of irrigation waterBank standard. Therefore, Objective I1 can beper hectare must be decreased and the water usereached in the near future.efficiency must be improved to maintain the(3) The third step is to achieve Objective II,farmers' financial ability. This objective is actuallywhich is to provide a surplus for the DWCs toa lttle higher than the real financial ability of theimprove irrigation facilities.farmers, but it can be reached if the agricultureThe figures from column (3) of Table 1 wereproduct prices have some changes as the economicused as the water supply costs here and thereforms occur.calculation used the re-estimate values of the fixedTable 4 Water pricing for regaining DWC investmentRegionSupplyCropWaterProp. toProp. to costcostpricegtoss prod.addedproductcalculated by(Cent/m*)valuemethod(1)(%)%)Grain .2.137.433.29.538.4Akesu .3. 33Cash5.327.214.814. 019.9Average3.33_7.319.011.824.6BayinGrain3.24.918.01.802.763.56.27.99.0-guoleng7. 76.52. 1632. 611.737.8Kashi3. 175.4111.212.715.53.177.016.212.221.42. 0320. 710.526.4Hetain2.514.057.15.12. 720.82. 5118.423.9中国煤化工MHCNMHGSHI zulin (祧袒麟) et al; Water Pricing Policy im Tarim Basin of China473Table 5_ Water prices and corresponding crop prlces to provide a surplusRegion Average Crop Water WaterWater Prop. of water GrossValueof Output of Price ofwaterpriceamountexpense expense to tolal productmain:ostusedvaluecrops(Cent/m')(Cent/m') (m*/hm2) (Yuan/hm')(%)(Yuan/hm2) (Yuan/hm2) (kg/hm2) (Yuan)Akesu 4.68 Wheat 2. 8612 735364. 272856937.3574.21.94Cotton 7. 1513 170 .941.718 83417 937.01029.0 17. 43Kashi 5.02 Wheat 3. 1919 875634.112 68112 077.14146. 02.9112 375986. 319 72518 785. 71025.9_ 18. 31(1) Main product value = Gross product value/1. 05 because it has some by-product value in it;(2) Gross product value is calculated from the water expense divided by 5%，which is not the real output value;(3) Yuan is a unit of RMB.measured by the commodities, such as wheat,5 Potential Pricing Modelmaize or cotton, but paid in currency to remove theimpact of inflation.5.1 Block rates5.3 Marginal cost and benefit as referenceAs mentioned above, water waste in irrigationis aserious problem in the Tarim Basin. Therefore,The concepts of marginal cost and water benefitthe water pricing policy should have a normal pricecan be used not to determine the market price offor the amount of water used for the farmer'swater, but as a quantitative reference for theirrigation quota, and an additional price for thedecision makers.amount of water used exceeding the quota. TheAccording to the economic definition， theirrigation quota would be determined according tomarginal cost of the water supply refers to thethe amount ofwater needed for the crops ,additional cost for producing the last unit of water,depending on the weather conditions for eachwhich is the derivative of the water supply costprefecture. The normal price would be asfunction if it is known. Unfortunately, it is verysuggested in Tables 3- 5 and the additional pricedifficult to calculate the cost functions of waterfor excessive water use could be 2- 3 times of theconservancy projects in practice. Therefore, thenormal price.concept of incremental cost of new water supplieswill be used rather than the marginal cost. The5.2 Price differentiationaverage full costs of new water supply projectsAnother problem is seasonal distribution of thecalculated by the dynamic depreciation method iswater resources in the Tarim Basin, i. e.，dry inused as the long-term marginal cost. These arethe spring (March to May) and floods in thetwo types of new water supply projects. watersummer (June to August). A seasonally adjusteddevelopment projects and water conservationprice would be one solution with higher price in theprojects. Based on the data we collected, severalspring and lower price in the summer depending onaverage incremental costs (AICs) of new waterthe actual conditions in each region.supply projects are:Each year's water use plan must be made from(1) Kezhi reservoir :additional waterthe bottom to the top with the farmers buyingreservoir supply, AIC 12. 37 Cent/m2 ;water coupons at the beginning of each year at the(2) Newly developed wells, 6. 84 Cent/m3 ;normal water supply cost announced by the local(3) Sprinkling irrigation by self pressure: newdepartment ol water conservancy. The farmerswater conservation technology, 27. 74 Cent/m2 ;then get water using the water coupons. Higher(4) Channel seepage prevention for waterprice will be charged when they want more waterconservation, 5. 46 Cent/m*.without water coupons, if enough water isThe incremental cost of the sprinklingavailable. Farmers could also sell their waterirrigation system is the highest, 27. 74 Cent/m',coupons in the water market if they do not useso this technology can not be widely used. Anotherthem.factor restraining the application of this technologyThe irrigation water expense could beis the中国煤化工in.The waterYHCNMHGTsinghua Science and Technology , December 2001, 6(5); 469 -474474supply cost of the Kezhi Reservoir is the secondso they can only be used for reference.highest, 12. 37 Cent/m*, which is only half of the6 Conclusionssprinkling irigation system cost, but is still highcompared with the agricultural productivity in theThe current water price for agriculture is very lowTarim Basin. The reservoir is not the main methodnot only in the Tarim Basin in Xinjiang but also allto increase the water supply, because of its largeover the country as other data shows. The lowcapital requirerment and long construction period.price results in huge amounts of water waste inRelatively, the incremental costs of new wells andsome places even when the water shortage problemchannel seepage prevention are low, only half ofis very serious. To improve the efficiency of waterthe second. Moreover, both of these twouse in these regions, the water price level would betechnologies will reduce the underground wateradjusted as the primary of economic incentivetable and prevent or halt secondary salinization oftaking into account the financial ability of thethe soil. So, these two technologies are practicalfarmers. The water price can be raised to2.0- 3.0and can be quickly disseminated as additional waterCent/m3 at present in the Tarim Basin and 4. 0 -supply alternatives.5.0 Cent/m3 in the future, which would greatlyThe incremental costs of new wells andchange the whole water use and distributionchannel seepage prevention will be used as thesituation. .marginal water supply costs in the Tarim Basin inAdditionally，improved water management ，this stage, i.e. ，from 5.46 Cent/m8 to 6. 84 Cent/optimum water distribution， and effective waterm'. Note that these figures are close to the water、use regulations are also key methods which mustsupply costs calculated by the method of dynamicbe used to solve the water shortage problem.depreciation (DD, r= 7%). Therefore, they willReferencesbe the possible water price ceiling for agriculture inthe future.[1] Cheng Qichou. Rational distibution of waterThe marginal benefit is the farmer's marginalresource uilization of Tarim River's main currents.utility for consuming his last unit of water.Arid Land Geography, 1988， 11(4): 11 - 16. (inChinese).Therefore, the marginal benefit will be reduced[2Wu Shenyen, Wang Butian. Water resources in thewhen the amount of water use surpasses the waterAksu River Basin. Arid Land Geography, 1985，8requirment for crop growth.(3): 1 - 8. (in Chinese).The marginal benefit for irrigation water[3] Xie Senchuan, Lin Xiangyue. Present situation an(MBIW ) for several crops， based on someoutler for agricultural water supply [ Dissertation ]，scientific experiments done b;agriculturalBeing: Tsinghua University, 1992. (in Chinese)scientists in Xinjiang are:[4] Morris R. Pricing for wates conservation. In:Wheat39.88-53.62Cent/m3Economic Association International 64th AnnualConlerence, Lake Tahoe, USA, June 21.1989.Maize59.75Cent/m2[5]Rajank Sampath. Issues in irrigation pricing inCotton158. 27developing countries. Wotld Development， 1992,But these are too high to be used for pricing,20(7): 38 - 43.中国煤化工MYHCNMHG