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Chapter 2
A framework for interdisciplinary analysis of water resources: a functional perspective

The interdisciplinary analytical framework proposed in this report examines the value of water resources based on the linkage between water resource structures and processes and the goods and services that they provide at the necessary temporal and spatial scale. After a discussion of the general nature and problem of environmental valuation, there follows a brief review of studies that have attempted to provide a valuation framework for water resources. The proposed functional perspective is then presented, followed by an overview of functions provided by water resources. This framework and perspective are in line with the general principles of sustainability discussed in Chapter 1.

The nature and problem of environmental valuation

Although water resources perform many functions and are potentially very valuable, these values have often been ignored, with the result that depletion and degradation of the resource occur. The debate over what the value of water is, or of the environment and nature more generally, has highlighted the fact that the core concept is complex and multidimensional. An economic perspective on water portrays it as a natural asset providing a flow of goods and services, physical as well as aesthetic, intrinsic and moral. The main problem when including the full range of environmental services in economic choices is that many of these water-related services are not valued on markets. There is a gap between market valuation and the economic value of many water functions. The non-marketed gaps must first be identified and then monetized where possible. In the case of many of the functions, the identification of economically relevant services is of special importance as over time those services not allocated by the market have gained continuously in importance.

In considering environmental values, economists have generally settled for a taxonomy, the components of which add up to total economic value (TEV). The key distinction made is between use values and a remainder called non-use value. The latter component reflects value in addition to that which arises from usage. Thus, individuals may have little or no use for a given environmental asset or attribute but would nevertheless feel a 'loss' if such things were to disappear. However, the boundaries of the non-use category are not clear cut and some human motivations that may underlie the position that the asset should be conserved 'in its own right', and labelled existence value, are arguably outside the scope of conventional economic thought. In practice, the issue is whether it is meaningful to say that individuals can assign a quantified value to the environmental asset, reflecting what they consider to be intrinsic value.

Economic valuation, as discussed in Chapter 4, can be combined with an ecosystem function (and related goods and service outputs) approach to water valuation. What is therefore being valued is not the water ecosystem per se, but rather independent elements of ecological services provided by water. The aggregation of the main function-based values provided by a given water ecosystem has been labelled TEV. However, the aggregate TEV of the functions of a given ecosystem, or combinations of such systems at the landscape level, may not be equivalent to the total system value. The ability to value water ecosystem services is constrained by the complexity of the water ecosystem itself. The "production function" of water ecosystems is so complex, and little understood in many instances, that reliable estimates of all services are not possible. An aspect of this complexity is that joint products are inherent in most water ecosystem processes. Accounting for value must recognize all of these joint product values.

Previous studies

Young and Gray (1972) made an early attempt to provide a framework for understanding and analysing values of water in different uses. Gibbons (1986) later extended and updated their work. These studies aimed to provide understanding of the multiple uses that constitute water demand, determinants of that demand, and methods for estimating the value of water empirically. Gibbons (1986) examined water use in a number of sectors (municipal, agricultural, industrial, waste assimilation, navigation, hydropower, recreation and aesthetics), using a variety of techniques to estimate values for water use in each sector. The results, which were inexact, were intended to illustrate use of the valuation techniques and indicate possible ranges in values. However, sector-by-sector comparison of results was not possible owing to differences in the definitions, time frames and procedures employed in the analysis. The framework did not integrate the physical and economic aspects of water use, and external impacts between sectors were not considered fully.

The hydrological, physical and economic aspects of water resources were integrated in a more recent framework developed for economic evaluations of groundwater use. This framework is detailed in Bergstrom et al. (1996) and National Research Council (1997). The framework links changes in groundwater quality and quantity to changes in the services provided and, thereby, to the value placed by society on resultant changes in groundwater use. The framework describes the value of services provided by groundwater as the outcome of three sets of functional relationships between:

The value of groundwater is given by the present value of the stream of services that it provides. The framework is interdisciplinary. It requires information on a variety of hydrological, physical, biological and economic processes, and cooperation between disciplines is needed to establish the various linkages necessary for valuation. Although interactions between groundwater and surface water are recognized, the framework focuses only on the services provided by groundwater. Therefore, it stops short of the appropriately scaled and comprehensive analysis of both surface and groundwater that is required for thorough analysis of irrigation water use.

The functional perspective at a catchment scale

As previously proposed (e.g. Young, 1996), economic valuation at the catchment scale can be used to enhance welfare through investments that capture, store, deliver and treat new water supplies, and through reallocation of water supplies among water-using sectors. However, the functional perspective enables more effective consideration of water not just in terms of water supply but also with regard to other dimensions, including water quality and supply reliability. Furthermore, the use of this approach within the context of the catchment system allows better evaluation of in-stream versus extractive uses, in particular with respect to return flows, and the implications of withdrawals or depletion in considering values of water resources.

Figure 2 depicts an overall framework for the water valuation problem. It can be used to increase transparency and hence the legitimacy in the monetary estimation of water values and their use in appraisal. Human activities exert pressure on groundwater resources, affecting the quantity and quality of the water and thereby changing the stream of services it can provide. This affects human welfare through its influence on stakeholders. Not all effects can be translated meaningfully and reliably into economic value because of limited knowledge and information. The shaded areas in Figure 2 represent this limitation, the darker shading indicates increased difficulty in application of valuation techniques.

Water resources are components of a more extensive set of interrelated systems encompassed within catchment (or wider) boundaries. More efficient management of water and related measures that protect the supporting ecosystems are all vital components of sustainable development. Given the latter generic policy goal, management agencies should seek to maintain the resilience of systems in terms of their ability to cope with stress and shock.

Maintenance and enhancement of system resilience is linked to the ecological concept of functional diversity and the social science analogue, functional value diversity. Therefore, management of water resources at the catchment scale is connected intimately with an appreciation of the full functioning of the hydrological, ecological and other systems and the total range of structures and processes and functional outputs of goods and services provided. Therefore, water management and pricing must be based on a relatively wide (at least catchment scale) appreciation of the landscape ecological processes present, together with the relevant environmental and socio-economic driving forces. Such a management strategy needs to be underpinned by a scientifically credible but also pragmatic environmental decision-support system, i.e. a toolbox of evaluation methods and techniques, which is complemented by a set of environmental change indicators and an enabling analytical framework.

The decision-support system used requires a number of steps or 'decision rules' in order to operationalize the analytical framework in a given catchment. The main steps are:

The need for analysis at the catchment scale

Groundwater and surface water systems are of major socio-economic and biophysical importance. Much of their development and management has been piecemeal, often without regard for the natural processes that occur in the system as a whole, and in ignorance of the long-term effects of human activities on the system. This situation has arisen partly as a result of the differing interests of users and local, regional and national administrative and institutional bodies.

Policy-makers have recognized the importance of and need to protect water resources and to approach human activity and water resources in an integrated manner, for example, at the European level as laid down in the recent Framework Directive in the field of water policy (Directive 2000/60/EC). The "ecological principle" articulated in the Dublin Statement (Dublin Statement, 1992) also contains a requirement for the holistic management of water. Mitchell (1990) has argued that efforts towards a more integrated water resources management regime should seek to combine three related dimensions:

A simple general framework for monetary valuation of water resources

Source: Turner, Brouwer and Georgiou (2001).

A critical requirement of integrated water catchment management is the introduction of water planning and management mechanisms that fi t the catchment scale at least. A management strategy based on the principle of sustainable water resource utilization should have at its core the objective of catchment ecosystem integrity maintenance, i.e. the maintenance of ecosystem components, interactions among them and the resultant behaviour or dynamic of the system. Integrity is best protected when efforts are made to secure a diverse range of water system functions and their asset values, i.e. functional value diversity. This encompasses the variety of spatial and temporal scales on which organisms react to each other and to the environment (Steele, 1991). The onus is on analysts and managers to take a wider perspective and examine changes in large-scale hydrological and ecological processes, together with the relevant environmental and socio-economic driving forces. Groundwater and surface water resources are viewed as integral and management is considered from a wider ecosystem perspective rather than a more narrowly focused sectoral view. Protection of as diverse a range of functions as is practicable contributes to overall system resilience and the capacity to cope with stress and shock, allowing adaptation to both physical and social vulnerability (Adger, 1999). A policy objective of maximum diversity maintenance also serves to ensure the maximum amount of functional value in terms of goods and services provision. Such a management strategy requires the practical coupling of economic, hydrological and ecological models.

In order to manage water catchments holistically, one of the primary issues is whether the scale of administrative structures and appropriately refined scientific support equate with the scale of catchment processes. Management of water systems is too often focused on a sectoral basis, and constrained by political and institutional considerations. The proprietorial interests shown by communities towards their localities in catchments are extremely powerful forces, which democratic systems often find difficult to accommodate. However, water systems are driven by hydrological and ecological processes that transcend the local scale and the short term. These linked hydrological-ecological systems provide a wide range of benefits and services that are often ignored or undervalued in water use planning, leading to their long-term loss. Under a catchmentwide perspective, interrelationships, e.g. between upstream and downstream water use, are made explicit. They then provide an important basis for decision-making involving multiple water users, including agriculture. For example, water abstraction or water pollution upstream may have severe consequences downstream. The important issue of the distribution of costs and benefits of (changes in) water use only becomes visible if considered at their appropriate scale in time and space. For water systems, this is the catchment level, without which, it will be difficult to trace the impact of any upstream user’s decision on the downstream beneficiaries of the service. Thus, it is difficult to allocate the value of the service and include it in the decision-making process. As they rely heavily for their productive capacity upon the water system (water being an essential input in agriculture), for agriculture to be sustainable from an economic, environmental and social perspective, this also has to be evaluated from a catchmentwide perspective. This is because farmers’ practices and other socio-economic water use, either in the same subcatchment or dispersed throughout the whole catchment, will eventually, directly or indirectly, affect the aggregate viability of farming businesses throughout the whole catchment in which they reside. Furthermore, many water values are only attainable if a minimum of upstream users take the catchment perspective into account in their decision. For example, in a given area, a minimum amount of land users may have to agree to maintain riparian buffer strips in order to guarantee a certain water quality for domestic use for a downstream city, which makes negotiations complex. In cases where land uses have a noticeable impact on downstream water values, it will be just as important to take the land property rights into account in valuation exercises as the water property rights. Moreover, human intervention in these complex and large-scale systems can have results that are not understood fully at present (Turner, 2000).

Ecosystem functioning and the functions of water resources

Ecologists refer to ecosystem functioning as the habitat, biological or system properties or processes of ecosystems. A variety of system processes are critical to the sustained functioning of natural ecosystems, such as the flux and transfer of water. Demand for the goods and services provided by catchments forms the link between catchment ecosystem functioning and the functional value of the catchment. This demand comprises use and non-use values for goods and services, both of which are dependent on the essential structure of the catchment ecosystems and the functions they perform. The term "function" is used, in socio-economic terms, to refer to the provision of goods and services that satisfy human needs and wants. It provides the link between water resource structures and processes and the provision of goods and services that are of value to society. Thereby, it creates an interdependent perspective of the ecological and economic systems. The economic value of water resources (regardless of the typology adopted) is contingent on the structures and processes performing functions that society perceives as valuable. Therefore, ecosystem structures and processes in themselves are not necessarily of economic value; such values derive from the satisfaction of human needs and wants by the goods and services they provide. Thus, it is important to identify the potential demand for these goods and services, rather than simply the degree to which they are provided. A number of these can be valued in economic terms, while others cannot because of uncertainty and complexity conditions.

Water resource ecosystems provide a wide range of goods and services of significant value to society, such as pollution attenuation, flood alleviation, recreation and aesthetic services. 'Valuing' the ecosystem consists of valuing the characteristics of the system, and capturing these values in an economic value framework. However, because the component parts of a system are contingent on the existence and continued proper functioning of the whole, it is quite a complicated matter to place an aggregate value on ecosystems.

The use of a functional approach has various benefits (adapted from Maltby, 1999):

Maintenance of functional diversity

In order to manage water resources in a sustainable way, management strategies should aim to maintain catchment ecosystem integrity. This is best protected when a diverse range of environmental functions and their asset values are secured. From an ecological stance, functional diversity creates variety in responses to environmental change, in particular, variety in the spatial and temporal scales over which organisms react to each other and to the environment. From a social science perspective, a policy objective of maximum diversity maintenance serves to ensure maximum functional capacity and associated functional value in terms of the provision of goods and services. Implementation of this objective requires the practical coupling of economic, hydrological and ecological models. The first step is to compile a complete list of all the relevant boundary conditions for a catchment. These are the characteristic properties that describe the area in the simplest and most objective terms possible. Examples of such characteristics include hydrological, biological, chemical and physical features that describe a catchment, e.g. size, shape, depth, climate and other natural processes. These characteristics, singly or in combination, give rise via processes to benefits, which may be realized currently or be latent.

The economic worth of catchment ecosystem structure (the plants, animals, soil, air and water stocks and flows of which it is composed) is generally appreciated more easily than that of ecosystem processes. Evaluating processes such as nitrogen fixation, nutrient retention, pollution absorption and others for any given segment of catchment pushes scientific knowledge to its limits. Therefore, a precautionary approach is required in any catchment management strategy. It is also evident that there are strong linkages between the types of benefits. For example, the sound functioning of the catchment ecosystem through efficient nutrient, sediment and contaminant removal is necessary to ensure clean water. Although each of these benefits provides a distinct positive value within the overall system, the need to avoid double counting cannot be overstated.

The diversity of the functions provided by water resources is dependent on the complexity and diversity of their structures and processes. These provide stability, resistance and recovery from disturbance and change. Functional diversity provides capacity for environmental-economic systems to maintain functions under stresses and shocks, building on concepts of ecosystem integrity and resilience. In this context, integrity can be defined as the maintenance of system components, the interactions between them, and the resultant behaviour of the system (King, 1993). Resilience is the capability of the system to maintain stability in the presence of disturbances (often human-induced), determined by its stability and adaptability. The maintenance of functional diversity secures a range of water resource structures and processes, which offers the best protection of the integrity of the water resources and is therefore consistent with sustainable management. The diversity concept also encourages analysts to adopt an extended geographical perspective in the valuation of water resources: to encompass changes in large-scale processes (hydrological processes of both surface and groundwater, ecological processes, etc.) together with the socio-economic driving forces that cause or ameliorate environmental degradation.

The use of the concept of functional diversity highlights the importance of the deterministic relationship between the structures and processes of a water resource and the functions that it provides. The structures and processes of water resources can be divided into categories to enable analysis of the functions provided. According to de Groot (1992), the following environmental characteristics are relevant:

The functions provided by water resources can also be categorized. De Groot (1992) describes them as follows:

The quantity and quality of the surface water and groundwater available affect the functions provided by water resources. The volume of available surface water and groundwater determines the quantity of water available in the short term. In the long term, it is also influenced by rates of surface and groundwater recharge and discharge and rates of abstraction. Water quality is determined in the short term by pollution with natural and artificial contaminants. In the long term, it is also influenced by environmental processes (such as the attenuation of pollutants by groundwater processes).

In determining the value of water resource functions there are several issues to consider. These include:

The valuation of the functions of water resources implies full knowledge of the goods and services provided and their worth to society. Table 1 presents a list of goods and services provided by surface and groundwater, though this is by no means comprehensive. These are divided into in situ and extractive uses of water, following the classification used by the National Research Council (1997). Some uses are attributed directly to either surface water (e.g. transport, recreation) or groundwater (e.g. attenuation of pollutants). However, many of the uses, such as irrigation and drinking-water, are common to both surface and groundwater owing to discharge/recharge interactions between the two.

As highlighted earlier, the value of water resource structures is generally appreciated more easily than that of the processes, but even the structures are incompletely known. Valuation of the species in a catchment, when many of these species have never been described taxonomically, exceeds available knowledge (Westman, 1985). The valuation of processes such as nutrient retention and pollutant attenuation pushes present scientific knowledge beyond its bounds. However, the preservation of catchment processes is as important a goal for conservation as is the preservation of catchment structure. The science of ecology has elucidated water resource processes to the extent that some management principles are evident, yet much research on water resource structures and processes is still needed.

A selection of goods and services provided by surface and groundwater

Surface water


In-situ uses:
Flood and flow control
Water quality maintenance
Water storage
Medium for wastes and other by-products of human economic activity
Non-use services (e.g. existence or bequest motivation)

On-site observation or study of wildlife and plants for leisure, educational and scientific purposes

Prevention of land subsidence

Recreational swimming, boating, canoeing, fishing, hunting, trapping, and plant gathering

Mitigation of saltwater intrusion

Informal recreation (non-contact activities along a river corridor)
Commercial fishing, hunting, trapping, and plant gathering
Habitat for plants, animals and micro-organisms (biodiversity)
Food web support
Climate stabilization/regulation through support of plants
Hydroelectric power generation,
Storm protection/windbreak
Shoreline stabilization
Extractive uses:
Agricultural: use in irrigation and for livestock

Household: drinking-water, bathing and cleaning
Industrial: use as a coolant, as steam, and
as an input to production process e.g. processing and manufacturing
Horticultural: use in irrigation of gardens and turf


Groundwater recharge

Contribution to stream flow

Improved water quality through support of living organisms

Attenuation of contaminants in surface water

Structures, processes and functions of water resources

The proposed analytical framework employs the concept of functions to link water resource structures and processes with the goods and services that they provide. Therefore, functions have environmental, ecological and economic components. The following sections (and Table 2) provide an overview of some of the more economically significant outputs provided by water resources.

Hydrological functions

Floodwater control

The floodwater control function of water resources is determined by three sets of variables: the potential for flooding downstream (which is environmental), the extent to which water resources influence flooding (also environmental), and the damage caused to resources and structures by potential flooding (economic). The potential for flooding downstream is a product of the hydrological system: the capacity of the system to transport and absorb increases in water volume, e.g. through storage in waterbodies. The likelihood of flooding is indicated by a history of flooding, evidence of past or present flood management, an absence of significant human activity (buildings and cultivation) adjacent to the river, among other factors.

A selection of catchment ecosystem functions and associated socio-economic benefits

Ecosystem structures and processes that provide the function




Socio-economic benefits of the function

Threats to the function


Short- and long-term storage of over bank floodwater and detention of surface water runoff


Floodwater retention


Natural flood protection, reduced damage to infrastructure (e.g. roads), property and crops

Conversion of land use, drainage, reduction of storage capacity, removal of vegetation

Infiltration of water into the ground followed by percolation to aquifer


Groundwater recharge


Water supply

Reduction in recharge rates, overextraction, pollution

Retention of sediment carried in suspension by water from over bank flooding or surface runoff


Sediment retention and deposition


Improved water quality downstream, increased soil fertility on site

Channellization, excess reduction of sediment throughput


Uptake of nutrients (applied as fertilizers) by plants (N and P), storage of nutrients in the soil (as organic matter and through absorption)


Nutrient retention


Improved water quality

Removal of vegetation, cultivation of soil

Flushing through water system and gaseous export of N


Nutrient export


Improved water quality, waste disposal

Removal of vegetation, flow barriers.


Provision of sites for invertebrates, fish, reptiles, birds, mammals and landscape structural diversity


Habitats for species (biodiversity)


Fishing, hunting, recreational amenities, tourism

Overexploitation, overcrowding and congestion, disturbance of wildlife pollution, inadequate management

Biomass production, biomass import and export via physical and biological processes


Food web support


Agricultural production

Conversion of land use, excessive use of inputs (pollution)

Source: Modified from Turner et al. (1997) and Burbridge (1994).

The extent to which water resources influence flooding downstream is determined by their hydrological characteristics. Key factors include available additional storage capacity, the significance of the storage capacity relative to the discharge rate, and the significance of the reduction in discharge relative to the level of flooding downstream. The storage capacity may be limited; once this threshold is exceeded, flooding occurs downstream. However, any water storage that has been provided reduces the magnitude of this flooding. The extent of flood control is also determined by sequencing with floodwaters from other tributaries. For example, delay in the discharge of floodwater may exacerbate flooding downstream owing to synchronization with other tributaries. Large-scale processes also affect flood control. Although an individual water resource may provide significant flood control, effective flood control is more commonly provided by a series of catchments (Sather and Smith, 1984).

The economic component of the flood control function concerns the extent of damage due to the potential flooding that is prevented by flood control. The flood control function is of value only if potential flooding would threaten goods and services of value to society. Therefore, the value is determined by goods and services provided by the land and river system in areas of potential flooding. For example, if flooding is likely to affect forested areas and wetlands, the damage may be minimal. However, if urban or intensive agricultural land uses are under threat, damage costs could be considerable and have longer-term implications. Consequently, the value of flood control is affected by the location, area, depth, timing and duration of any potential flooding.

The flood control function can also have benefits in terms of control of bank erosion caused by peak river discharges. This is achieved through the retention and delayed gradual release of water. Some water resources reduce the velocity of surface water flows continually, not only during high discharge episodes, further limiting erosion downstream. The value of erosion control is determined by the extent of potential erosion and its impact on social welfare. For example, were erosion of a riverbank to result in loss of marginal grazing land, the value of its control would be low, but if it were to undermine the foundations of a building, the value would be higher.

Groundwater recharge

The subterranean hydrological system determines the recharge of groundwater by surface water resources. The extent of this process depends, among other factors, on whether there is a shortage of groundwater, whether the rate of groundwater extraction exceeds the rate of recharge, and the contribution that surface water makes to the quantity and quality of groundwater. As a consequence of the complexities involved, hydrological investigation of the groundwater system may be required to determine the extent of the recharge function.

Groundwater recharge can have direct and indirect benefits to society, which determine the value of this function. Direct benefits include provision of groundwater for domestic or agricultural use. Indirect benefits include maintenance of the water table, prevention of salinization of groundwater, and attenuation of pollutants. Recharge can also have non-use value in terms of maintenance of groundwater resources for future generations.

Generation of surface water

Surface water resources provide water for on-site abstraction and sources of seasonal or continual downstream flow of water. The generation of the surface water function is determined by the hydrological system, the benefits generated on- and off-site, and the impact that these have on human welfare. On-site, surface water provides habitats that are reliant on inundation and resultant anaerobic conditions. It also provides for on-site abstraction of water for domestic, agricultural and industrial use. Sustainable abstraction requires consideration of the minimum water requirement for persistence of the water resource and associated habitats. Abstraction of water beyond this threshold has uncertain consequences and could potentially result in irreversible damage. The application of safe minimum standards and sustainability constraints can reduce the likelihood of such an outcome (see Chapter 4). Off-site benefits of surface water generation are varied. They include maintenance of downstream habitats and species, aesthetic and recreational benefits, and provision of water for abstraction.

An important aspect of the benefits of surface water abstraction is the degree to which the system is able to support this activity without suffering damage. There is a minimum requirement for water in the system if it is to retain its essential ecosystem characteristics and continue to perform a range of other functions. Economic valuation should take into account the sustainability of any such consumptive use of water resources and the likely time frame over which these resources (and possibly, as a result, other functions) might be exhausted.

Biogeochemical functions

Nutrient retention and export

The nutrient retention and export functions of water resources are determined by:

Water resources can be involved in both the retention and export of nutrients. They have a limited capacity to retain nutrients. If subsequent export of nutrients does not occur, a threshold can be reached beyond which further retention of nutrients may cease. If the capacity for retention becomes degraded, this can result in greater levels of nutrient release. Where nutrient retention dominates without subsequent export, the use of critical loads, safe minimum standards and sustainability constraints can contribute towards management of this function. In contrast to nutrient retention, export involves the permanent removal of nutrients from the ecosystem. This can create externalities for the recipient site.

The retention and export of nutrients ameliorates pollution of water with nutrients. This affects the quality of surface water, and of groundwater through any recharge. The resulting improvements in water quality can have benefits for the following (Freeman, 1982):

The divergence between perceived and measured assessments of water quality complicates valuation of the benefits of nutrient retention and export. Public perceptions of water quality are determined by more obvious aesthetic characteristics of water, such as discoloration, turbidity, floating matter, oil on the surface, and odour. These do not necessarily correspond with chemical and biological measures of water quality. House and Sangster (1991) found that public assessments of water quality in the United Kingdom were more likely to be influenced by indicators of 'bad' quality (e.g. protruding rubbish, foam on the surface, unusual smell or colour) than indicators of 'good' quality (such as the presence of many fish, or the ability to see the river bed).

Sediment retention

Surface water carries a sediment load of soil particles eroded by runoff from land and from the banks and beds of watercourses. The sediment is deposited within the surface water system at points of low flow velocity. On-site, sediment retention can impose costs on the structures and processes of water resources. Off-site, it confers benefits through reduced sediment loads in surface water downstream. In-stream, reduced sediment loads can affect the survival of habitats and species, fisheries, recreation, amenity, and the values of residential property adjacent to watercourses. It also confers benefits on the capacity of water storage facilities (e.g. reservoirs) and navigability of waterways.

For extractive water uses, sediment retention reduces the costs of water treatment for household and industrial use. In irrigated agriculture, it reduces the costs imposed by sediment load on drainage ditches (through siltation) and irrigation systems (through siltation of canals and damage to equipment). It also reduces smothering of crops by sediment and sealing of the surface of the soil by silt particles. Other off-stream benefits include the retention of capacity to mitigate downstream flooding. However, sediment retention also results in the loss of positive externalities. Examples include the gains to agricultural productivity from deposition of fertile sediment and the added cooling capacity provided by sediment load in the use of water as a coolant for thermal power generation.

Ecological functions

The function of ecosystem maintenance is composed of three processes: provision of overall habitat structural diversity; provision of microsites; and provision of plant and habitat diversity. However, it is only through contact with, or concern for, the biological organisms that make up an ecosystem that economic value is generally derived from ecological functions. Thus, biodiversity maintenance and anthropogenic export of this biodiversity form the basis for the valuation of ecological functions. Although biodiversity may derive ultimately from the processes of biomass production and food web support, and it may be dependent on overall ecosystem health and habitat structure, these processes are not in themselves of value to society.

Ecological functions relate primarily to the habitats and species that are associated with water resources. The habitats and species do not themselves have a direct impact on social welfare, but they do have an effect through the goods and services that they provide. This is usually through contact with or concern about species associated with water resources. Figure 3 illustrates typical ecological functions of water resources. Only two of the ecological functions usually have significant economic value: biomass export through anthropogenic harvesting, and biodiversity maintenance.

Ecological functions and economic value

Biomass export through anthropogenic harvesting

The export of biomass through anthropogenic harvesting includes commercial extraction of resources (e.g. fisheries), harvesting for subsistence (e.g. harvesting berries and reeds), and recreational activities (e.g. hunting). Sustainability is an important consideration in the analysis of anthropogenic harvesting. Overharvesting affects the capacity to harvest in the future and other water resource functions. It can have consequences for future generations. This can be addressed through the use of sustainability constraints and safe minimum standards.

Maintenance of biodiversity

Biodiversity maintenance has benefits in terms of consumptive and non-consumptive use and non-use. Consumptive use of biodiversity is included in export of biomass through anthropogenic harvesting, described above. Non-consumptive uses of biodiversity include aesthetic benefits such as bird watching and enjoyment of scenic beauty. In terms of non-use values, society may value the existence of a water resource, or unique habitats or endangered species that are associated with the water resource. Value may be placed on the current existence of these or their preservation for future generations. Such non-use value can be indicated by an official designation as a protected area. Similarly, evidence of current or past projects to enhance or protect ecological features can indicate use or non-use value.

The dependence of biodiversity on the water resource determines the extent to which the value of biodiversity maintenance can be attributed to a water resource. Species may be only partially reliant on the habitats provided. There is uncertainty particularly concerning the consequences of loss of biodiversity. Loss of habitats and species may be irreversible, and the consequences for ecosystem stability and provision of functions in the present and in the future unknown. Threats to biodiversity also raise moral and ethical issues relating to intergenerational equity. Therefore, management of biodiversity entails considerations of sustainability constraints, preservation of critical natural capital, and the maintenance of safe minimum standards for species and habitats.

An integrated approach to assessment

As well as economic consequences, resource allocation decisions have social, cultural and political consequences for society. Similarly, the actions of individuals are determined not only by economic factors, but also by peer expectations, social and cultural norms and political pressures. Therefore, thorough evaluation of water allocation options involves consideration of the full impacts, both non-economic and economic. This requires a multidisciplinary approach. This can be achieved through the use of a framework for integrated assessment. The framework proposed here provides assessment from multiple perspectives (e.g. environmental, economic and social) and also offers synergistic benefits from the combined efforts of experts of different disciplines, decision-makers and other stakeholders. Integrated assessment is particularly suited to complex problems that offer a number of interrelated options. Rotmans et al. (1996) describe integrated assessment as: "an interdisciplinary process of combining, interpreting and communicating knowledge from diverse scientific disciplines in such a way that the whole cause-effect chain of a problem can be evaluated from a synoptic perspective with two characteristics: (i) integrated assessment should have value added compared to single disciplinary oriented assessment; (ii) integrated assessment should provide useful information to decision makers."

There are three characteristics, highlighted above, that are essential to integrated environmental assessment (IEA). First, integrated assessment is a team-based process undertaken by experts, decision-makers, and in its most inclusionary form, other stakeholders. This adds to the demands of the assessment (Turner, 2000). Second, successful integrated assessment is reliant on effective communication. In addition to communication between experts of different disciplines, effective communication is required between experts, decision-makers and other stakeholders involved in the assessment. Decision-makers should be involved continually in this process so that any assessment is scoped appropriately. Furthermore, any assessment process involves some subjective judgements. If these judgements influence outcomes in a major way, they should be made transparent to the users of the evaluation. In addition, most complex decision contexts are beset by inevitable scientific uncertainties and risks, and the involvement of lay decision-makers in discussions about these uncertainties and risks can help in the formation of coping strategies such as the adoption of the precautionary principle approach, or use of safe minimum standards (see Chapter 4).

Adoption right from the start of an interactive, participatory and more inclusionary bottom-up approach that involves decision-makers, experts and other stakeholders is beneficial for a number of reasons:

Such a participatory approach is also in line with the requirements of the 'institutional principle' articulated in the Dublin Statement (1992). It is also a core component of the prevailing international consensus over policy for water resources management (ICWE, 1992). In summary, IEA is a continuous process that is conditioned by a policy and/or management context and characterized by its cyclical nature with multiple feedback effects and requirements. The process is enabled via team-based interdisciplinary/multidisciplinary research, utilizing a toolbox of complementary analytical methods and techniques. Evaluations are best carried out on a mixed methodological basis (Brouwer, Turner and Georgiou, 2001). Although it is important that the different contributing disciplines have some knowledge about the methodology and approaches to scientific investigation of one another, this is not a critical issue. The more significant issue is that all contributors to IEA maximize their knowledge of the policy/management context at issue (Harremoës and Turner, 2001). Each contributor should also be prepared to contribute consciously to the dialogues that must take place if IEA is to be socially relevant (Figure 4).

In order to succeed in the real world, integration needs to be less a process of comprehensively including all possible parameters and more a focused process seeking to identify, quantify, evaluate and monitor key parameters (Harremoës and Turner, 2001). It also is a process that puts a premium on the efficient collection, monitoring and analysis of relevant and appropriately scaled data (Figure 5).

IEA as a continuous process and dialogue

Towards integrated models and analysis

In order to fully achieve integrated assessment, the analyst has to undertake the following steps:

  1. On at least the catchment scale, determine the causes of water and ecosystem degradation/ loss in order to improve understanding of socio-economic impacts on ecosystem processes and attributes, e.g. with the aid of the auditing framework of drivers, pressures, states, impacts and responses (DPSIR).
  2. Assess the full ecological damage caused by water and ecosystem quality decline and/or loss.
  3. Assess the human welfare significance of such changes, via determination of changes in the composition of the water resource and ecosystem, evaluation of ecosystem functions, provision of potential benefits of these functions in terms of goods and services, and consequent impacts on the well-being of humans who derive use or non-use benefits from such a provision.
  4. Formulate practicable indicators of environmental change and sustainable utilization of water resources and associated ecosystems (within the DPSIR framework).
  5. Carry out evaluation analysis using monetary and non-monetary indicators (via a range of methods and techniques, including systems analysis) of alternative water usage and ecosystem change scenarios.
  6. Assess alternative water uses and ecosystem conversions/developments together with conservation management policies.
  7. Present resource managers and policy-makers with the relevant policy response options.

The steps presented here encompass the provision of transparent, meaningful and useful information. This system can support and link decision-making at different spatial and time scales with the objective of fostering the protection and sustainable management of natural resources.

Scoping and problem auditing

A complete appraisal of water-related projects, programmes or courses of action requires a comprehensive assessment of water resources and supporting ecosystems. The DPSIR auditing framework (see Figure 6) is recommended as the basis for any such assessment in either its full or 'reduced' form. This framework provides a conceptual connection between ecosystem change and the driving forces of such change, together with the effects of change (impacts and their distribution) on human welfare. Policy-response feedback effects can also be incorporated into the framework. The formulation of such a framework is a useful scoping procedure even where data sets are deficient.

DPSIR framework: continuous feedback process

Identification of appropriate evaluation criteria

Managed ecosystems are in an almost constant state of flux as the natural processes and systems react to human management interventions, which in turn, subject to various lags, produce more human interventions, i.e. a coevolutionary process characterized by continuous feedback effects. Therefore, it is important to be able to assess the impact of alternative sets of management actions or strategies in order to judge their social acceptability against a range of criteria such as environmental effectiveness, economic efficiency and fairness across different stakeholder interests (including different generations). Evaluation methods and techniques have to be matched with the chosen evaluation criteria. The socio-cultural and historical contexts in which environmental assets exist also provide for alternative aspects of environmental value that the market paradigm may not capture. Moreover, if the "deep ecology" worldview is adopted, nature possesses "intrinsic value", which exists regardless of human use or appreciation.

Data collection and monitoring via indicators

The data required for monitoring environmental change can be conveniently classified in terms of three dimensions of value (outlined in Chapter 4): primary/glue value possessed by ecosystems; TEV assigned to ecosystem functions; and the social-cultural, historical and symbolic value inherent in some environmental assets.

Primary value data and indicators

Primary value data collection should be based on the overall system and ecosystem integrity in terms of structure, composition and functioning. Both quantitative and qualitative descriptive indicators of ecosystem integrity are required because of the level of uncertainty that surrounds the scientific understanding of how complex systems work. This lack of knowledge also means that a precautionary approach to ecosystem conservation is recommended, with normative benchmarks to assess the sustainability of systems and management regimes.

The effect of pressures exerted by human activities on ecosystems can be measured by defining the relevant indicator spheres for ecosystem structure, composition and functioning. This breakdown, first proposed in the context of biodiversity assessment techniques, can be used to organize the indicator sets that cover three interrelated aspects of ecosystems: landscape, water regime and biodiversity. This holistic approach focuses on the interdependency and compatibility within and between indicator sets across different scales.

Total economic value data

Both the socio-economic and natural scientific aspects of ecosystem integrity are integral to the approach presented here. The environmental indicators must be analysed and evaluated vis-à-vis the social context in which they arise. This context includes the institutional, political, socio-cultural and spatial/temporal scales, as well as the economic circumstances through which environmental change occurs and is monitored.

Key issues and ecological principles relating to the functioning of ecosystems and the assignment of values to ecosystem structure and functions that must be considered include:

The essence of an overall socio-economic evaluation is to determine how society is affected by the functions that an ecosystem performs, and by changes in that ecosystem functioning. The key to valuing a change in an ecosystem function is establishing the link between that function and some service flow valued by people. Where that link can be established, then the concept of derived demand can be applied (see Chapter 4). The value of a change in an ecosystem function can be derived from the change in the value of the ecosystem service flow it supports. However, the multifunctional characteristic of ecosystems makes comprehensive estimation of every function and linkages between them difficult. For example, it will be necessary to assess features of socio-economic activities and behaviour, and how these respond to changes in ecosystem functioning.

Socio-cultural, symbolic value data

The task of sustainable management can be defined as sustainable utilization of the multiple goods and services generated by ecosystems, together with the 'socially equitable' distribution of welfare gains and losses inherent in such usage. However, the social welfare account includes not only economic welfare stocks and flows but also changes in properties, such as sense of identity, cultural and historical significance of ecosystem components and overall landscapes. Compiling data values in this context is likely to be more of a qualitative exercise, involving deliberative and inclusionary interest group approaches such as consensus conferences, citizen juries and focus group interviewing. Different cultural views on social relations are then assumed to give rise to different degrees of support for alternative decision-making procedures and the underlying valuations elicited via the social discourse process (O’Riordan and Ward, 1997; Brouwer et al., 1999).

Assessment of the options under consideration by decision-makers

A combination of quantitative and qualitative research methods is advocated in order to generate a blend of different types of policy-relevant information. This applies to both the biophysical assessment of management options and the evaluation of the welfare gains and losses people perceive to be associated with environmental changes and management responses. The main generic approaches that can form the methodological basis for strategic options appraisal are:

It is recognized that complete adoption of such a procedure requires institutional, financial and scientific capacity that may not be feasible in all countries. Therefore, the aim should be to move iteratively over time from a 'reduced form' procedure towards a comprehensive assessment. However, certain elements are fundamental, i.e. adoption of the catchment as the minimum scale for analysis; recognition of the importance of the functional approach to water resources and water uses; the need for a scoping exercise (DPSIR) which encompasses distributional impacts; and the acceptance of economic principles for water valuation, albeit constrained by cultural, political and other factors.

Box 1 presents several of the more important aspects of any integrated economic assessment of water resources and catchment ecosystems that require consideration in agricultural development project appraisal. Such assessment is suggested as a minimum requirement for enabling a credible and pragmatic decision-support tool.

Core principles for integrated assessment

The framework advocated in this report for the integrated assessment of water allocation options is based on six principles. Combined together, these principles provide the foundations for a thorough and powerful analysis of key issues related to agricultural use of water.

The first principle is that of economic efficiency and cost-benefit analysis. In an environment of increasing water scarcity, the allocation of water should be at least informed, if not guided (for political reasons) by the full economic value of water in its various uses. When determining the efficiency of water use, as many costs (e.g. destruction of wetlands through overextraction of water) and benefits (e.g. purification of water through groundwater recharge by using household wastewater for irrigation) of water use as feasible need to be considered. The value of water to a user is the cost of obtaining the water plus the opportunity cost. The latter is given by the willingness to pay for the water in the next best alternative use (in terms of social welfare). For goods and services that are marketed, economic value can be determined using market prices. Methods are available that provide proxy estimates of value for goods and services that are not marketed, although application of many of these is sometimes problematic in the context of developing countries. Water pricing remains a complex process with its own 'political economy' arising from the set of legal, institutional and cultural constraints that condition water resource allocation and management in all countries. Economic efficiency as an objective will often have to be traded off against other decision criteria, but it will gain in significance as the full social costs of water service provision escalate.


  • Problem orientation - using DPSIR auditing framework: Any analysis should take account of the prevailing political economy context, equity issues and possible 'stakeholders' (i.e. stakeholder mapping). Data inadequacies must be acknowledged and recommendations made conditional upon these limitations.
  • Typology: A useful common terminology regards 'functions' as relationships within and between natural systems; 'uses' refer to use and potential use, non-use interactions also occur between humans and natural systems; and 'values' refer to human preferences for a range of natural or non-natural objects and attributes.
  • Thresholds and scenarios of ecosystem change: Thresholds relate to the scale and frequency of impacts on ecosystems. Their occurrence can be presented in a simple three-part classification: no discernible effects; discernible effects; discernible effects that influence economic welfare.
  • Economic valuation: Three broad settings for understanding the catchment approach are: impact assessment; partial analysis; and total valuation. For each function or impact, a number of techniques exist for attributing economic value to environmental benefits. Systems analysis and multicriteria evaluation methods can be used to complement economic cost-benefit analysis.
  • Scale: The catchment should be the preferred spatial unit for assessing physical variables, with possible zoning within this. Nevertheless, catchmentwide management and appraisal is not necessary in all cases. In terms of benefit estimation, the minimum scale is determined by the relevant population affected by any impacts. The temporal scale of analysis is also fundamentally important.
  • Transferability (spatial and temporal): Transfer of previous assessment results and benefit estimates is often the most cost-effective and rapid procedure for an assessment. However, transfer of data on scientific results and economic benefits is problematic. Accuracy of benefits transfer may be improved if it is based on scientific variables divided into components according to processes, functions, and 'state variables'.
  • Integrated assessment requirement: Integrated assessment is carried out as a continuous "process", which is conditioned by a policy and/or management context and characterized by its cyclical nature with multiple feedback effects and requirements. The process is enabled via team-based interdisciplinary/multidisciplinary research, utilizing a toolbox of complementary analytical methods and techniques.

The second principle is that of integrated analysis. The allocation of water has social, cultural, political and economic impacts on society. Therefore, for it to be sufficient, assessment of water allocation options is required to assess these multiple impacts and interactions between them. This entails a shift away from a more simplistic and narrow sectoral view to a wider, more holistic perspective that encompasses relevant prevailing economic, social, cultural and political processes. Such an approach is provided by the proposed framework for integrated assessment.

The third principle is that of an extended spatial and temporal perspective. The volume and quality of water supplies and the functions that they provide are determined by the abstraction of water, recharge of water resources and processes of the hydrological system. The thorough assessment of options for water allocation entails consideration of these processes and, therefore, requires the adoption of an extended geographical perspective. Such a perspective incorporates surface water processes at the catchment scale, groundwater processes at the aquifer scale, interactions between surface water and groundwater, and socio-economic drivers in the wider environment that affect water resources. Sustainability of water resources also requires a longer, i.e. intergenerational, time scale for planning and management, with due regard for precautionary motivations.

The fourth principle is that of functional diversity maintenance. Water resources provide many environmental goods and services that are of economic benefit to society (e.g. the amenity and recreational value of wetland sites, maintenance of biodiversity in surface water systems, purification of water through aquifer recharge). Diversity in the environmental functions provided by water resources contributes to the stability of the associated ecosystems and to the capacity of the ecosystems to recover from stresses and shocks and to maintain integrity while allowing the continued provision of goods and services. Therefore, maintenance of functional diversity is key to sustainable water resource management. This is fostered through the adoption of a functional perspective in integrated assessment, which indicates to decision-makers the diversity of existing environmental water resource functions and potential impacts on these of changes in water allocation.

The fifth principle is that of long-term planning and precaution. The criterion of sustainable water use (in terms of quantity and quality) should supplant short-term expediency. In terms of quantity, sustainability requires that current water abstractions should not impose costs upon future generations. The quantity of water that is available for use in any particular period is equal to effective runoff, i.e. the difference between total precipitation and the amount lost through evapotranspiration, plus the stock of freshwater (water stored on the surface or underground). The sustainability rule (at least at the national level) is that water demand should be met out of effective runoff only (Dubourg, 1992). From the quality perspective, sustainability requires that water quality be non-declining over time. However, the concept of desirable water quality is complex, ambiguous and varies between time and place, making this rule difficult to operationalize. Hence, except in cases where effluent levels exceed critical loads, sustainability arguments cannot be used as a justification for improving water quality.

The sixth principle is that of inclusion. Interactive, participatory and inclusionary approaches involving decision-makers, experts and other stakeholders help ensure that decisions focus on real world problems, and that possible solutions are elicited using the combined knowledge and experiences of decision-makers, experts, interest groups and the lay public. They also assist in identifying distributional concerns and increase the chance of achieving consensus on proposed solutions.

Complete adoption of these principles requires resources and capacity that may not be available. However, a feasible objective is to move gradually from a narrow and reduced form of assessment towards a wider and more comprehensive form. The framework for integrated assessment presented here provides such a decision-support system, which is thorough, credible and pragmatic. Figure 7 sets out the generic stages of an IEA. Based on appropriate scales of analysis, the DPSIR auditing and scoping framework is deployed to highlight the main causal mechanisms that underlie the pressure being placed on water resources.

Scenario analysis can play a useful role in sustainability planning and recognition of policy options. Explicit focus is required on the distributional consequences of water allocations, together with "coping" strategies for greater stakeholder inclusion in the decision-making process. At the project, policy or programme level, economic appraisal, suitably modified by ecological sustainability principles, must be applied in a rigorous fashion in order to assist in the identification of the preferred policy options set. Finally, monitoring and feedback systems require adequate resources in order to guide the evolution of policy/management options.

Strategic decision-support process: an integrated assessment approach

The evaluation framework and decision-support system proposed in this document are consistent with the sustainable water resource management approach advocated by the World Bank (1993). The adoption of this framework facilitates the consideration of relationships between the ecosystem and socio-economic activities on an extended geographical scale. It takes into consideration social, environmental and economic objectives and the views of all stakeholders. The advantages of such an approach are that it:

Full deployment of such an approach has yet to be undertaken in practice. However, many of its elements (using some of the methods and techniques described in Chapters 3 and 4) have been deployed in a study on at the Maipo river basin in Chile (Rosegrant et al., 2000). The study illustrates how useful such an approach can potentially be in analysing policy and water allocation at the catchment scale, and in delivering improvements in the allocation and efficiency of water use, especially in the agriculture sector. The study introduces an integrated economic-hydrological modelling framework that accounts for the interactions between water allocation, farmer input choice, agricultural productivity, non-agricultural water demand, and resource degradation in order to estimate the social and economic gains from improvement in the allocation and efficiency of water use.

The framework is applied to the Maipo river basin, an area characterized by a very dynamic agriculture sector and rapidly growing industrial and urban sectors. Although agriculture accounts for 64 percent of total withdrawals at the offtake level in the river basin, the irrigated area has been declining gradually owing to increasing domestic and industrial demand for water and land resources. It is hoped to meet the increase in domestic water demand through improved use of existing water rights, the purchase of additional rights from irrigation districts, and additional extraction of groundwater. However, the municipal water company has been unable to purchase sufficient shares from irrigation districts, and both industry and agriculture are competing for groundwater sources at levels above the recharge capacity of local aquifers. Increasing competition for water in the basin has given rise to growing pollution problems, while at the same time room for improvement in the areas of water rights for environmental and hydropower uses has become apparent.

The river basin modelling system incorporates a node-link network, based on linkages between: source nodes, such as rivers, reservoirs, and groundwater aquifers; and demand nodes, such as irrigation fields, industrial plants, and households. The modelling framework includes the following components:

The resultant model is first used to estimate a basin-optimizing ("baseline") solution in which no water right is set up and where water withdrawals to demand sites depend on their respective demands with the objective of maximizing basin benefits. The model is then extended to allow for a realistic representation and analysis of water markets. In particular: water trading in the basin is constrained by the hydrologic balance in the river basin network; water is traded taking account of the physical and technical constraints of the various demand sites, reflecting their relative profitability in trading prices; water trades reflect the relative seasonal water scarcity in the basin that is influenced by both basin inflows and the cropping pattern in agricultural demand sites; and negative externalities, such as increased salinity in downstream reaches owing to incremental irrigation water withdrawals upstream, are endogenous to the model framework. To extend the model for water trading analysis, a shadow price-water withdrawal relationship is determined for each demand site using regression analysis on water withdrawals and shadow prices derived from the water balance equations. Water rights are allocated proportionally to total inflows based on historical withdrawals for M&I areas and on the harvested (irrigated) area for agricultural demand sites. The water right refers to surface water only. To determine the lower bound for profits from water trade by demand site, the model is solved initially for the case of water rights without trading. The regression relationships of shadow price versus water withdrawal for all agricultural and M&I demand sites, the water rights, and other water trading related constraints are then all finally added to the basin model. The trading price for each demand site is assumed equal to its shadow price for water. Solving the resultant model determines the water trading price and the volume of water bought and sold by demand site. Trades are allowed on a monthly basis and throughout the basin, while transactions costs are assumed to be incurred by both buyer and seller.

Three scenarios are analysed to assess the impacts of water trading. These include: a baseline in which an omniscient decision-maker optimizes benefits for the entire basin; water rights with no trading permitted; and water rights with trading. The model results show the benefits of water rights trading, with water moving into higher valued agricultural and M&I uses. The net profits in irrigated agriculture increase substantially compared to the case of proportional use rights for demand sites. It is found that agricultural production does not decline significantly. Indeed, net benefits for irrigation districts can be even higher than for the basin optimizing case, as farmers reap substantial benefits from selling their unused water rights to M&I areas in months with little or no crop production. Finally, it is found that reducing transaction costs increases both the amount of trading and the benefits therefrom.

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