Shanghai is working on a standard water price formula to enhance supervision of water company costs and ensure reasonable returns, a move analysts say will help improve profitability at waterworks.

The formula will also serve as a yardstick for the municipality to decide whether the current water rate needs to change, according to a government document.

"The formula is needed to reflect the water and sewage treatment costs and is necessary to support the water companies' sustainable development," the document stated.

To complete the formula, water companies will have to report their annual budget to governmental departments at the beginning of the year for examination of their annual expenditures, while the return rate for water companies will vary from year to year based on the previous year's 1-year benchmark lending rates set by the central bank.

A reasonable return would be about 1 or 2 percentage points higher than the benchmark rate, which is currently 6 to 8 percent, said Yao Wei, an analyst with Guotai Jun'an Securities Co, who estimated the current returns for waterworks are only 1 to 2 percent. In April, the People's Bank of China raised the benchmark 1-yearloan rate to 5.85 percent a year from 5.58 percent.

Officials from the Shanghai Water Supply Administration said all of the four major waterworks in downtown are losing money. The average cost of producing a cubic meter of tap water in 2004 was 1.23 yuan, while the average tap water price is currently 1.17 yuan per cubic meter.

In 2004, the four downtown companies took in 1.76 billion yuan (US$220 million) in revenues, but reported combined losses of 14 million yuan loss. Sewage treatment companies lost 130 million yuan on mounting salaries, and energy costs.

"Government-invested sewage facilities will simply have to make ends meet, but reasonable returns will be given to private and foreign-invested projects," said Zhang Jiayi of the Shanghai Water Authority.

(Shanghai Daily August 17, 2006)