Water as a limited resource

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Despite its widespread scarcity, the majority of societies do not treat water as an economic good or service. If water were treated like other goods 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.

These conditions are clearly not those in 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 is an exception rather than the rule.

In most countries, the instinctive response to water stress is to consider supply augmentation, as this has been the basis of development strategies for more than 30 years. Prices are rarely used to allocate water supplies or to actively manage demand, often because subsidized services and supply have been offered, for instance, to promote irrigation. A major problem is that farmers producing staple foods in most developing countries would go out of production if asked to pay the full price, and countries thus deprived of staple foods have no means to pay for the food imports that would then be needed. Hence few have any practicable alternative to subsidizing irrigation. Water pricing is usually seen purely as an aspect of cost recovery, and in many cases (e.g., agriculture) it does not even achieve that. The resulting paradox is that, now, an increasingly scarce resource is subsidized, discouraging conservation or waste reduction. 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.

Water may have been allocated for developmental objectives in the past, in part ignoring economic principles in its sustainable provision, but restraints on public expenditure and public sentiment adverse to subsidies, e.g., in irrigation, is already exerting considerable influence in promoting recovery of operational and sometimes capital costs.

Most authorities respond to scarcity by non-price devices, such as rationing, prohibited uses, exhortation, or 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. Consideration of water as an economic good may have benefits in sensitizing managers and users to the cost of providing a service, but treating it as an economic good, or even a commodity, is a policy decision that requires careful consideration of legal, institutional and regulatory implications.

The benefits from using water typically vary widely from one sector to another,- as well as within sectors. Variations of 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 economic benefit from water consumption by re-allocating limited supplies. However, the costs involved, such as for imports of staple foods, may be beyond the financing capacity of governments. Thus fiscal capacity may be a more decisive factor than economic efficiency.

Another sign of the under-development 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 UK, it has largely taken the form of concessions and management agreements, rather than full-blooded ownership. Arguments for valuation of water as an economic good do not necessarily imply the introduction of markets, as the varied experience in the western states of the USA testifies: the mixed administrative allocation of water in New Mexico (based on assessment of economic value) is considered to be more effective and economically efficient than the market system in Colorado, where enormously expensive litigation has, since 1985, blocked transfers to the Thornton suburban district of Denver (Livingstone, 1993).

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 physical factors hamper the development of a more integrated water market. 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 limits 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 (such as leading to a decline in communities that depend on irrigated farming).

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 register 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).

Principles for water planning and allocation

The Dublin Statement (ICWE, 1992) listed four principles to be applied in water resources management.

  1. Water must be managed in a holistic way, taking interactions among users and environmental impacts into account.
  2. Water must be valued as an economic good and managed as a resource necessary to meet basic human rights.
  3. Institutional arrangements must be reformed so that stakeholders are fully involved in all aspects of policy formulation and implementation. This means that management must be devolved to the lowest appropriate level, with enhanced roles for NGOs, community groups, and the private sector.
  4. Women must play a central part in the provision, management and safeguarding of water.

However, a number of other factors come into play in planning and managing water systems, and different countries will place varying emphases on these. These criteria include:

• effectiveness,
• efficiency,
• equity and distributional effects,
• public health,
• environmental impact,
• fiscal impact,
• political and public acceptability,
• sustainability, and
• administrative feasibility.

In particular circumstances other considerations may also be relevant, e.g., impact on food self-sufficiency, regional development, the urban-rural balance, a desire for self-sufficiency in water, etc. These factors and values 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 fulfillment 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 change 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.

Equity and distributional effects

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-scale farmers -often single females - 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.

Women and poorer groups in society, with less influence and voice, tend to get low priority in the public provision of water services. Poorer farmers, both male and female, 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. For instance, the poor might pay less for piped and metered supplies, at an economic tariff, compared with what they now pay to private vendors.

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.

Public health

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 1.7 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 that currently suffer from such diseases as diarrhoea, roundworm infection, schistosomiasis, trachoma or 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 implicit in certain water supply schemes, including the creation of malaria vector breeding habitats, the spread of bilharzia in irrigation schemes, or increased pollution from greater water use.

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.

Environmental impact

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, as can the disposal of wastewater and the contamination of freshwater bodies through agricultural runoff, industrial effluent or unprocessed sewage.

These environmental effects should be included not only in the course of project appraisal but also throughout the project cycle, beginning at sector analysis. 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 captured in numbers, and they should be rigorously tracked using recognized checklists (World Bank, 1991).

Environmental criteria apply with particular rigour to large new schemes for water supply development. In contrast, demand-management measures, such as conservation, are much more environmentally benign, avoiding the major impact of supply projects and reducing costs resulting from pollution.

Fiscal impact

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, price increase, 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.

Political and public acceptability

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 from 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.

It will be tempting for politicians 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, and in some circumstances may be the only option.


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, either because their elements reinforce each other, or because they provide incentives for continuing and cumulative effects.

Administrative feasibility

The operation of 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. if they require intensive monitoring and maintenance, supply augmentation schemes are not the easy option they may appear to be.

New policies will be worthless unless their implementation is monitored and enforced. For instance, the system of water transfer practiced in some US states 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.

Policy reform in agriculture

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 side, and the contradictory need for more ideas from below (farmer customers) on the other. 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)

Strategic choices and trade-offs

Many countries are having to 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 many areas, and some of the more important areas are considered below.

Priorities between sectors

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.

Self-sufficiency in food, or water?

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 (Allen, 1992). California obtains 73% of its daily water input by importing food, though it also 'exports' water by selling cotton, fruit and vegetables.

Domestic versus international concerns

The domestic water policies of a number of countries are steering 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.

Management mode

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 (e.g., France), while 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 (e.g., 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 between allowing private companies full ownership of assets (as in the UK) and 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 technocracies in some South Asian countries) and participatory (e.g., self-management by community organizations).

Policy mix

Doing nothing, or postponing any changes, is always an option, and may be perfectly rational in some cases, but the costs of inaction should not be ignored. 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 or instructions) rather than economic instruments relying on incentives (prices, taxes, fees or markets). In practice, the choice will be over the balance between the two types of measure, both of which are necessary. Indeed there may be good policy imperatives for continuing subsidies in the water sector, even if they change in form and value.

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