Water as a scarce resource
Principles for water planning and allocation
Equity and distributional effects
Public health and nutrition
Political and public acceptability
Policy reform in agriculture
Strategic choices and trade-offs
The chapter begins by expounding the concept of water as a scarce (i.e., economic) good, together with some of the reasons why it is not treated as such. The economically efficient use of water is one of the basic principles recommended for policy review, together with the criteria of efficacy, distributional impact, environmental impact, fiscal implications, acceptability, sustainability and feasibility.
Some implications of these criteria for policy reform are discussed, both generally and for the agricultural sector. The thrust of policy reforms is in line with existing trends in agricultural policy. Some strategic choices and trade-offs are then described, such as inter-sectorial priorities, food self-sufficiency, international diplomatic issues, the choice between centralized and de-centralized, and public and private management styles, and between supply-oriented and demand management policies.
Despite its widespread scarcity, the majority of societies do not treat water as an economic good or service. If water were treated like other commodities it would be priced to at least cover its cost of supply, including storage, treatment and distribution, so as to ensure its continuing availability. The price should also be sufficient to reflect the strength of demand, to encourage its consumption to gravitate towards those placing the highest value on it, provided essential supplies were assured to all. It should not exceed the payment ability of those needing water, including the poor.
Commodities are bought and sold in markets. Private agents are active in their supply and distribution. In a well-functioning market, the benefit attached to the use of the marginal unit of the commodity (the last one to be sold) is the same for all consumers, so that general welfare cannot be increased by a re-allocation.
These conditions are evidently not those under which water is supplied and used in most cases. The water sector is typified by supply-oriented provision, reluctance to make active use of pricing, allocation by non-economic means, and the persistence of low-value usage in important sectors. Although farmers and industrial firms frequently develop their own water supplies, individually and cooperatively, and private vendors are active in many cities, private enterprise in the supply of urban and rural drinking water systems and large irrigation schemes is the exception rather than the rule.
In most countries, the instinctive response to water stress is to consider supply augmentation. Prices are rarely used to allocate water supplies or to actively manage demand. Water pricing is usually seen purely as an aspect of cost recovery, and in many cases, not only in agriculture, but also in urban supplies and sanitation, does not even achieve that. The resulting paradox is that an increasingly scarce resource is subsidized, discouraging conservation or the reduction of waste. The average tariff in World Bank-financed water projects - probably a better-than-average sample - is only about one-third the average incremental cost of supply.
Most authorities respond to scarcity by non-price devices, such as rationing, prohibited uses, exhortation, or the cutting-off of supplies. Although these can be effective, they can also be costly and inconvenient to users, and do not take account of the relative value of water in different applications.
The benefits from using water typically vary widely from one sector to another, as well as within sectors. Variations up to a factor of 10 or more are common in comparing the value of water for different uses within the industrial and agricultural sectors, and similar differentials apply in comparing municipal and agricultural use values (Bhatia and Falkenmark, 1992). In general, the highest-value water uses are found in speciality crop production, industrial process use, in-house domestic consumption and some recreational uses. The lowest-value consumption tends to be found in low-value farm crops, industrial cooling, and waste assimilation (Gibbons, 1986). This indicates the scope for increasing the total benefit from water consumption by re-allocating scarce supplies.
Another sign of the underdevelopment of markets is the minor role played by private enterprise in bulk supply and distribution. It is no accident that privatization has made least headway in the water sector, and, except in the United Kingdom, it has largely taken the form of concessions and management agreements, rather than full-blooded ownership.
Strong vested interests dependent on cheap water conspire to preserve the status quo. Irrigated agriculture, and industries reliant on large volumes of water or cheap hydropower, can exercise great political influence.
Sometimes the development of a more integrated water market is hampered by physical factors. There may be no practical method of transferring water which is surplus to one sector - or used wastefully - to another which could make more economic use of it. In the neighbourhood of Beijing, surplus agricultural water would need to be collected from groundwater wells and pumped uphill to the city. This sets a limit on how much could be transferred.
Physical barriers to the development of water markets are often underscored by legal obstacles, arising from the prevailing set of property rights. Specific users may have legally-defined rights over the use of water, which lapse if they do not use it for the specified purpose. In other cases, ambiguity over the ownership of water prevents its transfer from one customary user to another. The rights of third parties (including the public interest) in water transfer cases is another consideration, and, indeed, is a necessary part of 'internalizing' environmental concerns into the transaction.
Shifting water onto a more market-oriented basis entails transitional costs, which can be heavy. Metering involves a sizeable resource cost, which has to be weighed against expected water savings. Industries may need to spend sizeable amounts on recycling equipment, or even introducing an entirely new, water-efficient process. In households, campaigns to promote water-efficient devices are costly and time consuming. Socially, ensuring the transfer of water from one sector to another may be disruptive (e.g., may lead to a decline in irrigated farm communities).
There is also a lack of faith in the efficacy of economic instruments. It is widely believed that the price elasticity of demand is simply too low for water pricing to do an effective job in restraining demand and re-allocating supplies. This view is based on an era when water prices were too low to be registered as significant by the majority of consumers. A growing body of evidence from both developed and developing countries, principally in the urban and industrial sectors, shows that consumers do respond to water prices where they are set realistically. Where pricing is used actively in agriculture - e.g., for groundwater sales and in water transfers - there is evidence that farmers respond as economists would predict (Winpenny, 1994).
Economic treatment of water, especially pricing, should be in balance with water as a social good, considering the basic needs of the poor and their limited ability to pay for it. In this context - and far from simple provision of clean water for households - a major role in some countries is provision of water for irrigation to fulfil the basic need for food.
In the previous section it was argued that recognizing the growing scarcity of water should be an underlying principle in all attempts at reforming this sector. In other words, water should be treated as an economic resource.
However, a number of other criteria - which are often inter-related - come into play in planning and managing water systems, and different countries will place varying emphases on these. They include:
· equity and distributional effects,
· public health and nutrition,
· environmental impact,
· fiscal impact,
· political and public acceptability,
· sustainability, and
· administrative feasibility.
Other criteria may also be relevant in particular circumstances, e.g., impact on food self-sufficiency, regional development, the urban-rural balance, a desire for self-sufficiency in water, etc.
These criteria are briefly discussed below.
Water is a sensitive topic in most societies. Reforming public behaviour towards water is an invidious and difficult task, with substantial political and administrative costs. It is therefore important that policies should have a commensurate 'pay-off in the effective fulfilment of their goals. Efficacy is thus related to the criterion of acceptability, discussed below.
In the case of increases in the price of water, the clearest measure of response is the elasticity of demand in respect of changes in its price. There is growing evidence that certain categories of demand are elastic enough, in this sense, for price changes to induce demand responses. Even where demand is price-inelastic (where the amount consumed changes less than proportionately to the price increase), prices can still be successful in reducing consumption, compared to other options for balancing supply and demand.
In many instances, a combination of measures might be most effective. Higher charges for water use might be accompanied by a campaign of public information and education, subsidies for the installation of water-efficient facilities, and free advice on reducing consumption and waste. The effective control of water pollution could entail the combination of regulations ('command and control' devices) - properly enforced - with 'polluter pays' taxes and charges.
The efficiency criterion requires that the economic benefits of policies exceed their costs. For instance, in the case of the development of new water supplies, the value of the water produced should exceed the costs of production, to which should be added environmental costs. For conservation measures, the reduction in consumption is worthwhile so long as the unit value of the water saved exceeds the cost of providing it. Beyond that point, conservation has too high a cost in terms of benefits foregone (Winpenny, 1994).
Efficiency also applies to policies involving the re-allocation of water between different users, e.g. within the agricultural sector, or from agriculture to municipal or environmental use. Re-allocation to higher-value uses produces net social benefits corresponding to the difference between the value of water in its old and new uses.
In the implementation of policies, attention must be paid to the perceived need of community members that have generally been in tune with the natural limits of scarce resources. There is a risk that cultural considerations are eroded by economic and engineering concepts.
Policies should be seen to be 'fair' in their respective impact on the various socio-economic groups. Deserving groups, who may be mothers of young children, poor households or small farmers, previously receiving supplies considered to be inadequate or obtained at high personal or social cost, should benefit from policy reforms, and should certainly not find themselves worse off. It is important that the consumption of such target groups should not be reduced to below socially desirable levels.
Poorer groups in society, with less influence and voice, tend to get low priority in the public provision of water services. Poorer farmers are often at the tail end of irrigation systems, where supplies are unreliable. Poorer urban consumers tend to be last in the queue for getting piped supplies and sewerage. Where conventional policies for water supplies often fail the poor, demand management measures may be helpful in comparison. For instance, the poor may pay less for piped and metered supplies, at an economic tariff, compared to what they now pay to private vendors.
The effects of a huge financial gap in the water supply subsector and the call for continued subsidies for poor areas makes equity closely related to the criteria of public health and fiscal impacts.
A related concern is that more affluent consumers should not receive disproportionate benefits from any policy measures, and that extreme inequalities in water consumption should be reduced.
Despite the achievements of the International Drinking Water Supply and Sanitation Decade (1981-90), over one thousand million people lack access to safe water, and 1.8 thousand million do not have proper sanitation (World Bank, 1992). The backlog is rising in absolute terms.
It has been authoritatively asserted that inadequate sanitation and clean water provision remain the most serious of all environmental problems, in terms of the scale of human suffering (World Bank, 1992). Universal adequate water supply and sanitation would benefit hundreds of millions of present sufferers from such diseases as diarrhoea, roundworm infection, schistosomiasis, trachoma and guinea worm (World Bank, 1992).
These estimates indicate the importance of public health benefits in planning water systems to provide adequate universal coverage of water supply, sanitation and safe disposal. However, there are also public health risks entailed in certain water supply schemes - e.g., the creation of malaria-breeding habitats, the spread of bilharzia in irrigation schemes, increased pollution from greater water use, etc.
In applying the public health criterion to water supply, there should be adequate recognition of the benefits to national nutritional levels from having adequate food security based on local irrigated farming.
The environmental impacts of schemes to supply, use and dispose of water are potentially very large. Dams and reservoirs, aqueducts, river diversions, major irrigation schemes, industrial and municipal offtake, groundwater pumping, etc. can have a massive hydrological impact affecting other users, future generations, amenity and wildlife. Likewise the disposal of wastewater and the contamination of freshwater bodies through agricultural runoff, industrial effluent and unprocessed sewage.
Where possible, these environmental effects should be included in the course of project appraisal. Environmental effects should be factored into the economic appraisal, either as costs or credits, using recognized techniques (Dixon et al., 1988; Winpenny, 1991). In practice, only certain effects can be quantified, and even those only partially and imperfectly. The environmental effects of policies may also be difficult to capture in numbers, though they should be rigorously tracked using recognized checklists, such as the Environmental Assessment Sourcebook (World Bank, 1991).
Environmental criteria apply with particular severity to large new schemes for water supply development. Less obviously, non-physical projects, such as new policies and programmes, including structural adjustment and sectorial reform, also may have significant impact on the environment. Demand-management measures, such as conservation, are much more environmentally benign, avoiding the major impact of supply projects and reducing costs resulting from pollution.
Many countries with serious water problems also have weak public finances. The fiscal impact of water policies is an important criterion, both for general macro-economic management and for the proper funding of water and sanitation provision. A sustainable policy would be one having a positive impact on the finances of central or local government, e.g., from a tax, a price increase, a charge, a reduction in subsidies, or the avoidance of major capital spending. It should likewise benefit the financial position of the water utility, irrigation agency, etc.
The strict application of economic water pricing, based on the 'marginal cost' principle, could even generate 'excessive' revenue for the water utility compared to the alternative of average cost pricing. These revenues could breach allowable rates of return established by regulatory bodies, and could arouse antagonism amongst the general public. In such cases, total revenue could be adjusted by lowering consumer charges unrelated to consumption, e.g., the fixed part of a two-part tariff, or by reducing the price of the first 'blocks' in an 'increasing block' tariff structure.
The fiscal yield of a specific price adjustment depends on the price elasticity of demand. Although elasticities vary greatly for different categories of consumption, most aggregate estimates have values less than 1.0. Where this is the case, tariff increases will increase total revenue.
It is desirable that policy changes should be acceptable to the parties affected and should not encounter serious resistance in the political process. However, this is a counsel of perfection and there would normally be gainers and losers in any policy change. Nevertheless, the ground needs to be carefully prepared. There should normally be some proportionality between the effort that goes into introducing a policy measure (the sacrifice of political goodwill, expenditure of political credit, the resources involved in steering legislation through, overcoming public resistance and lobbying, etc.) and the pay-off from that policy. A policy that achieves little, but at great political cost and arousing much public antagonism, is clearly undesirable.
A policy is more likely to be acceptable if it is seen to be tackling a severe problem, if its costs and benefits are apparently equitably distributed, if there is a strong lead from prominent political and community figures, if it is accompanied by adequate publicity, and if the population is well informed and public-spirited.
There may also be concern regarding unintended negative impacts from the conflicts of policies at cross-purposes, as well as from direct water policy action.
It will therefore be tempting for politicians to support policy for a preventive rather than a mitigative approach, and to steer clear of a policy that relies on major behavioural changes (e.g., introduction of pricing or conservation measures), compared to one consisting of a technological 'fix' (e.g., the development of new supplies). However, the former may be preferable in the longer term.
Certain policies have a once-and-for-all impact, while others have a continuing or even a growing effect. Short-term measures introduced in response to an emergency, such as a drought, may have a strong immediate impact, but one which tails off sharply when the worst of the emergency is over. Policies which make a long-term impression on water use, such as technological adaptations and changes in user habits, are more sustainable.
Best of all are measures whose impact increases over time, because their elements reinforce each other, or because they provide incentives for continuing and cumulative effects.
Operating a policy must be within the administrative capability of the department or agency involved. For instance, metering supplies requires a certain level of household visits, and billing staff. A drive for conservation needs to be backed up by qualified staff to advise households, industries or farmers on technology and improved water management and use. By the same token, supply augmentation schemes are not the easy option they may appear if they require intensive monitoring and maintenance.
New policies will be worthless unless their implementation is monitored and enforced. For instance, the system of water transfer practised in some states of the USA requires official approval for each transaction. The control of water pollution implies regular monitoring and inspection, and a willingness to penalize the offenders. Water pricing requires regular collection of revenue and a willingness to prosecute non-payers, coupled with appropriate administrative arrangements for funds collected to be channelled back to the water system.
Sustainable agricultural development depends on sustainable water use. Governments today recognize that the search for sustainable economic growth requires, in part, both economy-wide and sector-specific policy reforms. Economy-wide policies attempt to create a favourable macro-economic environment, while water sector policies, for example, seek to encourage resource efficiency among water users.
The current emphasis on macro-economic policy reforms and economic liberalization has several important implications for irrigation. Recognition of the value of water (and the high cost of turning a water source into a service delivered to a farm) makes the water sector a prime target for further policy reforms. Nonetheless, irrigation remains a resource-hungry sector in this transitional period. Even successful irrigation consumes large quantities of capital and foreign exchange and ties up scarce skilled personnel.
Like many public sector personnel, irrigation managers must walk a fine line between a tighter control of finance, the need for more positive active leadership and better planning of resource allocations, on the one hand, and the contradictory need for more ideas from below (farmer customers) on the other hand. Financial pressures are likely to be the dominant influence. Irrigation as a public-sector agency still relies on budget allocations to obtain financing. Many argue that this gives little incentive to save money and may, in fact, have the reverse effect.
As private-sector disciplines are applied in irrigation, and more user participation occurs, policy-makers are finding that:
· agencies become more supportive of farmers' own efforts and less inclined to make all key decisions before informing farmers accordingly;
· management seeks more consensus on priorities, more information about the basis of decisions, and a common view of external factors affecting management;
· irrigation schemes seek and receive more autonomy;
· the financial responsibilities and accountability of managers increases; and
· managers shift focus from their ministries and governments, depending on the amount of finance generated by service fees. (FAO, 1993a)
Priorities between sectors
Water or food import?
Domestic versus international concerns
Many countries confront the prospect of emerging water scarcity in the long term, and for some that spectre is already upon them. Difficult choices have to be made in such areas as the following:
Against the background of increasing population, growing food requirements, industrialization and urbanization, the competing claims of agriculture, industry and household water consumption need to be mediated. Other important claimants are hydropower, navigation, flood control, fisheries, recreation and the environment.
A water-scarce country pursuing food self-sufficiency may be forced to import water at some point. If water becomes the scarce factor, it may be more sensible to 'import' it embodied in food, especially if food is available on favourable trade terms. Egypt, a water-scarce country, regularly imports food (Allan, 1992). California obtains 73 percent of its daily water input by importing food, though it also 'exports' water by selling cotton, fruit and vegetables (Comeau, 1993).
The domestic water policies of a number of countries are placing them on a collision course with their neighbours. This applies both to the use of a common river or lake, and to the pollution of a shared water body. Upstream users are in a naturally stronger position, and could even use their water policies to exact concessions in other spheres. However, if they press their advantage too far, they face potential international financial and diplomatic sanctions, and ultimately armed force. Downstream users can, by their own water policies, increase their dependence on their upstream neighbours, to their eventual cost.
There are many ways of managing national water resources, but one basic choice is between centralized and de-centralized management and control. The former could take the shape of river basin authorities, as in France; the latter could take the form of power vested in a number of regional, urban or functional agencies and utilities doing deals with each other, as in California. Political traditions and power structures, and the balance between the centre and the regions, will influence which model is preferred.
Another strategic choice is over the relative roles of the public and private sectors in operating the water industry. Although operation by public departments or utilities is still the norm, an increasing number of countries are privatizing operations. There is the further choice of allowing private companies full ownership of assets, as in the UK, or admitting them as concessionaires, with assets remaining in public ownership, as in France.
A further decision has to be made over management style, which polarizes between authoritarian (e.g., irrigation authorities in some South Asian countries) and participatory (e.g., water users' associations).
Doing nothing, or postponing any changes, is always an option, and may be perfectly rational in some cases. However, while the costs of inaction should not be ignored, it offers a useful reference against which to judge the impacts of proposed policy actions. If action is to be taken, a basic choice is between supply-oriented policies and those focusing on demand management.
A further option is the use of 'command and control' measures (regulations, quotas, instructions) rather than economic instruments relying on incentives (prices, taxes, fees, markets). In practice, the choice will be over the balance between the two types of measure, both of which are necessary.