Urban Water and Wastewater Privatization in China

Title: Urban Water and Wastewater Privatization in China
Authors: Yang, YIng
Date: 2016-12
Abstract: In 1949, the People’s Republic of China was founded. The founding of the People’s Republic of China also established China as a command economy, which is a system in which the State, not the market, decides what goods are to be produced, how much of each good is produced, and the prices at which the goods are sold. Since the founding of the PRC and for thirty years, the State was in charge of the investment, construction, and operation of public utilities, such as roads, electricity, telecommunications, water, and wastewater. These public utilities were run by State-Owned-Enterprises (SOE’s), which received financial support exclusively from the central government. In 1979, the Chinese economic system underwent a seismic change when the government introduced its policy of “Separation of Government and Enterprises.” Following the introduction of this policy, public utilities – although they remained as SOE’s – were handed down to local governments. The responsibility and the operation of these public utilities now belonged to local governments. This paper presents the reform experience of China’s urban water and wastewater sector, and proposes a theoretical model for deciding whether a mater project should be privatized under a BOT (Build-Operate-Transfer) concession. Using a set of cross section data on China’s major cities, a demand curve for water is estimated. From this market demand curve for a city and using the data on construction costs, operating, and maintenance costs as well as revenues for a water firm in Shenzhen, we calibrate the demand curve for water faced by this firm and its marginal cost. The calibrated model is then used to compute the social welfare obtained when the government chooses to privatize the water project under the form of a BOT (Build-Operate-Transfer) concession for a period of 20 years during which the private water firm is granted monopoly power over a water market and the social welfare obtained when the government chooses to carry out the water project itself. The analysis does not favor privatization.
URL: http://hdl.handle.net/10393/35795
CollectionÉconomie - Mémoires // Economics - Research Papers