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5.9 Water and economics
Water Policy 3 (2001) S185–S187
Conference report 5.9 Water and economics Rapporteur: Ramesh Bhatia. Participants: 120
Presentation There were two sessions on Water and Economics. In the first session on Water as a Social and Economic Good, Peter Rogers, Paul Herrington and M.V. Rao, Minister of Irrigation made three presentations from Andhra Pradesh, India. In the second session ‘Balancing Between Water for Livelihoods and Water for Ecosystems’, presentations were made by Fernando Gonzalez, Lucy Emerton, Geofrey Howard and Alex Dourojeanni. During presentations, it was pointed out that increased water prices reduce demand, increase supply, facilitate re-allocation between sectors, reduce costs of supply for the poor people, improve managerial efficiency and lead to sustainability. It is important to estimate the value of water and full costs of supply (including economic and environmental externalities). However, these should form the basis of pricing decisions and setting of prices should reflect social concerns and sustainability issues. Examples from a number of countries showed how equity considerations were incorporated into water conservation tariffs by block tariffs where basic needs were met at very low prices. For direct abstractions, pricing below cost gives wrong signals to users and value of foregone benefits can be high. An example from Andhra Pradesh (India) showed that irrigation charges were raised by 300 percent in a democratic set-up and the government got re-elected. The success of the experience was attributed to creation of water user associations, consultations with farmers, transparency in decision-making, involvement of officials and demonstration of actual improvements in service. It is important to integrate ecological values to integrated water management because ecosystems provide significant socio-economic benefits and improve supply and quality of water. Four examples from Eastern and Southern Africa illustrated the far-reaching social and economic implications of failing to integrate ecological factors into water planning and pricing. It was shown that wetland ecosystems are both economic users and economic suppliers of water. It was pointed out that real conflicts in water allocation among competing uses were emerging in many river basins and mechanisms other than government allocation (e.g. markets) had to be evaluated. Although environmental considerations are important, the needs of people for basic needs and food security cannot be ignored. It was suggested that institutional reforms are absolutely essential before any reforms in tariffs and water allocation could be undertaken. PII: S 1 3 6 6 - 7 0 1 7 ( 0 1 ) 0 0 0 6 0 - 5
S186
Conference report / Water Policy 3 (2001) S185–S187
There is urgent need to allocate funds for research and management of water resources at the river basin level. Decisions on water allocation among competing uses- for food security and ecosystems- require better information and analysis of value of water in alternative uses.
Discussion A number of points emerged during discussions Application of economic principles in water has to be considered in terms of subsidies and imperfections in other markets (e.g. government fixing output prices). Low international prices of food grains (resulting from subsidies on food production in industrialised countries) reduce the profitability of growing food grains in developing countries. As a result of low food grain prices (due to international subsidies and internal governments’ urban bias) it is hard to pursue a policy of full-cost recovery. At present recovery of O&M and only a part of the capital charges is all that can reasonably be attained in many countries without adverse income impacts on small and marginal farmers. The recommendations of the World Water Commission apply to all countries not just the developing countries. For example, in the area of full-cost pricing for irrigation in the OECD countries only rarely are capital costs fully recovered, with many recovering only 70–90% of O&M costs. This makes it imperative that the developing countries act on the recommendations of the commission as models for the rest of the world. Water tariffs for poverty alleviation require differentiation between consumer/user groups since free water or subsidised water may not be available to all consumers. However, water for basic needs for health, hygiene and livelihood should be available at low cost. Needs for males and females should be identified separately. Subsidies need to be as transparent as possible. In many places the poorest people have no cash income and mechanisms to enable payment need to be incorporated (e.g. increasing block tariffs can include a zero-price small first step). Low water tariffs (through targeted subsidies) apply not only to domestic users, but also for basic food production (subsistence farming) and household industries. Appropriate tariff collection systems should be developed which take into account income flows of the users (e.g. involving NGO’s who can collect fees on a weekly or monthly basis). It was agreed in principle that water markets help allocation of scarce water; however, the question remained as to how markets could fulfil this important function if full-cost pricing is not achieved. It was pointed out that rationalisation of water fees could sometimes (not always) act as a perverse incentive in environmental terms. However, it was pointed out that there is little danger of excessive infrastructure investments since most of the price-increases will result in just recovering the costs of provisioning. Several examples were given where proposals for water infrastructure were modified, or even thrown out, as a result of information on the economic costs of environmental degradation. It was pointed out that, as many water decisions are ultimately political, information on environmental valuation could provide a valuable tool for convincing politicians and decisionmakers. The need for considering environmental aspects in the context of natural resource accounting was also emphasised by some participants.
Conference report / Water Policy 3 (2001) S185–S187
S187
Conclusion As a result of low food grain prices (due to international subsidies and internal governments’ urban bias) it is hard to pursue a policy of full-cost recovery in irrigation. At present recovery of O&M and only a part of the capital charges is all that can reasonably be attained in many countries without adverse income impacts on small and marginal farmers. Water tariffs for poverty alleviation require differentiation between consumer groups and subsidies need to be as transparent as possible to meet water for basic needs for health, hygiene and livelihood. Low water tariffs (through targeted subsidies) apply not only to domestic users, but also for basic food production (subsistence farming) and household industries. Actions *
*
Although full-cost recovery should be achieved as far as possible, transparent and targeted subsidies should be available for basic needs of households, subsistence farmers and household industries. In all water resource development projects, explicit considerations should be given to the valuation of ecological benefits and costs (along with with other benefits and costs). Ramesh Bhatia Resources and Environment Group, SU-125 Vishakha Enclave, Delhi 110034, India
Conference report 5.9 Water and economics Rapporteur: Ramesh Bhatia. Participants: 120
Presentation There were two sessions on Water and Economics. In the first session on Water as a Social and Economic Good, Peter Rogers, Paul Herrington and M.V. Rao, Minister of Irrigation made three presentations from Andhra Pradesh, India. In the second session ‘Balancing Between Water for Livelihoods and Water for Ecosystems’, presentations were made by Fernando Gonzalez, Lucy Emerton, Geofrey Howard and Alex Dourojeanni. During presentations, it was pointed out that increased water prices reduce demand, increase supply, facilitate re-allocation between sectors, reduce costs of supply for the poor people, improve managerial efficiency and lead to sustainability. It is important to estimate the value of water and full costs of supply (including economic and environmental externalities). However, these should form the basis of pricing decisions and setting of prices should reflect social concerns and sustainability issues. Examples from a number of countries showed how equity considerations were incorporated into water conservation tariffs by block tariffs where basic needs were met at very low prices. For direct abstractions, pricing below cost gives wrong signals to users and value of foregone benefits can be high. An example from Andhra Pradesh (India) showed that irrigation charges were raised by 300 percent in a democratic set-up and the government got re-elected. The success of the experience was attributed to creation of water user associations, consultations with farmers, transparency in decision-making, involvement of officials and demonstration of actual improvements in service. It is important to integrate ecological values to integrated water management because ecosystems provide significant socio-economic benefits and improve supply and quality of water. Four examples from Eastern and Southern Africa illustrated the far-reaching social and economic implications of failing to integrate ecological factors into water planning and pricing. It was shown that wetland ecosystems are both economic users and economic suppliers of water. It was pointed out that real conflicts in water allocation among competing uses were emerging in many river basins and mechanisms other than government allocation (e.g. markets) had to be evaluated. Although environmental considerations are important, the needs of people for basic needs and food security cannot be ignored. It was suggested that institutional reforms are absolutely essential before any reforms in tariffs and water allocation could be undertaken. PII: S 1 3 6 6 - 7 0 1 7 ( 0 1 ) 0 0 0 6 0 - 5
S186
Conference report / Water Policy 3 (2001) S185–S187
There is urgent need to allocate funds for research and management of water resources at the river basin level. Decisions on water allocation among competing uses- for food security and ecosystems- require better information and analysis of value of water in alternative uses.
Discussion A number of points emerged during discussions Application of economic principles in water has to be considered in terms of subsidies and imperfections in other markets (e.g. government fixing output prices). Low international prices of food grains (resulting from subsidies on food production in industrialised countries) reduce the profitability of growing food grains in developing countries. As a result of low food grain prices (due to international subsidies and internal governments’ urban bias) it is hard to pursue a policy of full-cost recovery. At present recovery of O&M and only a part of the capital charges is all that can reasonably be attained in many countries without adverse income impacts on small and marginal farmers. The recommendations of the World Water Commission apply to all countries not just the developing countries. For example, in the area of full-cost pricing for irrigation in the OECD countries only rarely are capital costs fully recovered, with many recovering only 70–90% of O&M costs. This makes it imperative that the developing countries act on the recommendations of the commission as models for the rest of the world. Water tariffs for poverty alleviation require differentiation between consumer/user groups since free water or subsidised water may not be available to all consumers. However, water for basic needs for health, hygiene and livelihood should be available at low cost. Needs for males and females should be identified separately. Subsidies need to be as transparent as possible. In many places the poorest people have no cash income and mechanisms to enable payment need to be incorporated (e.g. increasing block tariffs can include a zero-price small first step). Low water tariffs (through targeted subsidies) apply not only to domestic users, but also for basic food production (subsistence farming) and household industries. Appropriate tariff collection systems should be developed which take into account income flows of the users (e.g. involving NGO’s who can collect fees on a weekly or monthly basis). It was agreed in principle that water markets help allocation of scarce water; however, the question remained as to how markets could fulfil this important function if full-cost pricing is not achieved. It was pointed out that rationalisation of water fees could sometimes (not always) act as a perverse incentive in environmental terms. However, it was pointed out that there is little danger of excessive infrastructure investments since most of the price-increases will result in just recovering the costs of provisioning. Several examples were given where proposals for water infrastructure were modified, or even thrown out, as a result of information on the economic costs of environmental degradation. It was pointed out that, as many water decisions are ultimately political, information on environmental valuation could provide a valuable tool for convincing politicians and decisionmakers. The need for considering environmental aspects in the context of natural resource accounting was also emphasised by some participants.
Conference report / Water Policy 3 (2001) S185–S187
S187
Conclusion As a result of low food grain prices (due to international subsidies and internal governments’ urban bias) it is hard to pursue a policy of full-cost recovery in irrigation. At present recovery of O&M and only a part of the capital charges is all that can reasonably be attained in many countries without adverse income impacts on small and marginal farmers. Water tariffs for poverty alleviation require differentiation between consumer groups and subsidies need to be as transparent as possible to meet water for basic needs for health, hygiene and livelihood. Low water tariffs (through targeted subsidies) apply not only to domestic users, but also for basic food production (subsistence farming) and household industries. Actions *
*
Although full-cost recovery should be achieved as far as possible, transparent and targeted subsidies should be available for basic needs of households, subsistence farmers and household industries. In all water resource development projects, explicit considerations should be given to the valuation of ecological benefits and costs (along with with other benefits and costs). Ramesh Bhatia Resources and Environment Group, SU-125 Vishakha Enclave, Delhi 110034, India