Editor's Note:

Private capital has been invested in public utilities in China since the 1990s, and the market-oriented reform of public utilities received official policy support in 2002. However, when people should have cheered the diversification of market players, the constantly rising price of public utility products and the unsatisfying quality and services of those products has led the reforms in private enterprises to be questioned. What are the reasons behind this and how to resolve it? The following is an interview by Global Times (GT) reporter Wang Yuan with Sheng Hong, head of Beijing-based think tank Unirule Institute of Economics.

Sheng Hong

GT: The price of public utilities products in China are rising at the moment. The most recent controversy is the high water price in many cities. Some blame private enterprises’ profit-seeking for this. What do you think is the fundamental cause?

Sheng: Before the market-oriented reform of public utilities, the government did not see public utilities as profitable. The relevant State-owned institutions did not have a commercial management model, including managing pricing and costs.

Out of a variety of political considerations or because the government thought the products should not be charged at all, cost was considered as government expenditure and seldom taken into account when pricing utilities, so the prices were always very low at that time. The result is these State-owned institutions often made only small profits or lost money.

Then China began to speed up the process of urbanization, and these State-owned institutions have no incentive or capacity to provide services for the new cities, while private enterprises operated instead, seeing public utilities as profitable. Under their market-oriented operation, all the cost should be offset by charges, and they need to make a profit. This is market discipline and is reasonable.

Consumers having to pay for all the costs is a very important reason for rising prices, especially at the early stage of reform. Another reason is the rising price of relevant resources. Before market-oriented reform, prices did not reflect costs, and when the government raised prices, people would hold them to blame. But now it is the market that determines the price. Resources like water and gas are growing scarcer, and as the scarcity increases the price rises. This is the main cause for current price increases.

Of course, there are also some unreasonable factors; in some areas privatization did not resolve the issue of competition and monopolies more or less still exist. But this is not the main cause of rising prices.

GT: Consumers do not want a price increase. If the increases are reasonable, then how can we persuade the consumers to accept the changes rather than question if the private enterprises are using public utility products to make a profit?

Sheng: The consumers are justified in hoping that prices can be as low as possible. However, the public should accept that every product has a cost, and some are expensive because the raw materials are scarce.