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Chapter 5

This last chapter revisits briefly some of the key issues examined in previous chapters. It examines their practical implications and consequences for water policy and management in agriculture. The key issues are highlighted in the context of the new integrated catchmentwide approach to water policy and management in place in North America and evolving in Europe. Although the socio-cultural, institutional and economic setting of water policy and management is very different in developing countries, the essentials of the more integrated management approach will eventually also need to be incorporated in their water policy and management as water (and especially water of good quality) becomes scarcer and its value increases. The core concern is that demand for water is increasing both in agriculture and in other areas, such as the municipal sector. Scarcity of future freshwater generation capacity and escalating costs of exploitation are formidable challenges. The problem is exacerbated by worries over the environmental impact of agricultural water use, in particular water quality degradation effects. Thus, the fundamental policy and management question is quite simple: how can the available water resources be managed more sustainably to enhance the efficiency of food production and to safeguard environmental systems and their provision of goods and services?

Values and services

The values of the extractive and in-situ services provided by water resources in their naturally occurring settings have proved difficult to capture. The thrust of economic valuation of "water" has concentrated on the 'pricing' and 'efficiency' of water supply services with a view to full cost recovery for the service provided. Such analyses rarely consider the extractive and in-situ values of the resource base itself and the complications contingent upon its common pool/property character, e.g. lack of clear boundaries linking the physical flow domain and socio-economic/public domain.

However, the competition for raw water is intensifying and agriculture is often cited as the principal 'user' of raw water. The fact that agricultural use involves returns of significant (although often degraded) volumes of water is sometimes ignored. Nevertheless, national agriculture policies in developing countries continue to promote irrigated agriculture to minimize perceived risks in food supply and distribution. In addition, the promotion of agricultural activity is considered strategic in fixing and developing rural economies. In many cases the existing systems of water use rights have reinforced the seniority of agriculture user rights. Nevertheless, relative to water use in industry and municipal sectors, agricultural water supplies are very sensitive to supply shocks (Rosegrant et al. 2000).

These circumstances are being questioned continually as intersectoral competition for raw water between agriculture, domestic, municipal and industrial uses intensifies at national level and at international level where economic asymmetry between riparian countries drives competition over shared water resources. In addition, public interest in the maintenance of in-situ environmental services (for amenity, recreation, biodiversity, conservation and ecology) is pressuring the large sectoral users of water into accommodations and trade-offs. Therefore, the agriculture sector needs a transparent system of resource evaluation with which to negotiate and regulate allocation of the resource, both at the national level and at the international level in the case of shared river basins, aquifers and catchments.

Integrated approaches to water policy and water management has recently been institutionalized in Europe through the adopted Water Framework Directive (2000/60/EC). The Water Framework Directive is one of the first European Directives to recognize explicitly the role of economics in reaching environmental and ecological objectives. The Water Framework Directive calls for the application of economic principles (e.g. polluter pays), economic methods (e.g. cost-effectiveness analysis) and economic instruments (e.g. water pricing methods) for achieving good water status for all waters in the most effective manner. Furthermore, the Water Framework Directive has specific characteristics that have their roots in a systems approach to environmental management in general. It is the striking of a balance between the complementarity and the trade-off that exists between economic growth and water resource degradation and depletion that defines the context underlying the question of how to decide on economic and environmental policies and investments for water resources.

Thus, it is possible to summarize the sustainable water resource use problem as comprising the following features (Turner and Dubourg, 1993):

Notions of efficiency

In the face of the growing scarcity of water resources and the need for better management, much of the discussion has focused on increasing current water use efficiency and the promotion of efficient allocation of water resources among different users.

Traditionally, economic efficiency of irrigation water use has been measured in terms of crop output per unit of water applied or the overall financial returns in terms of net benefits from the project. This concept has been used widely in investment decision-making, where the desire is to maximize returns from irrigation over the life of a project. However, there is a need to recognize fully that the aim of water resource management is not simply to provide water of sufficient quality and quantity. Water resources have additional value, e.g. in terms of their recreational and ecological services. As such, the concept of economic efficiency can be defined more generally in terms of the Pareto optimality condition, where it is not only private costs and benefits that are considered, but also the non-financial social costs and benefits. Economic efficiency also refers to the maximization of the overall socio-economic net benefits from the different water sectors, with the aim of minimizing the intersectoral and intrasectoral socio-economic opportunity costs.

In addition, considering economic efficiency from a sustainability point of view as 'critical natural capital' implies that water must be managed in such a way as not to reduce the opportunities for potential use by future generations. In this respect, water withdrawal and use for irrigation purposes can have negative impacts on wetlands, aquatic ecosystems and corresponding ecological functions, which the usual view of water use efficiency does not take into consideration. Negative impacts also include external costs, such as those from waterlogging, salinization and soil erosion, which are also not usually incorporated into the economic price of irrigation water. There may also be ecological limits to water use such that even though water is being used more efficiently, the total amount being withdrawn still exceeds the sustainable supply.

Valuations and pricing

Because water resources and effects are often non-marketed, it is extremely important to ensure that the 'true' economic value of such resources are accounted for where possible when making decisions on capital investment and linked water and environmental policy. As such, there is a fundamental connection between the issue of economic valuation of water resources and the pricing of water resources. Efficient allocation and sustainable use of water require the setting of the "correct" price for water, namely that corresponding to its marginal economic value. Nevertheless, how to arrive at this "correct" price remains open to debate.

Many countries and water management agencies are turning increasingly to water pricing mechanisms in order to regulate irrigation water consumption. 'Pricing' can mean that actual prices are introduced (amended), where goods were previously free (underpriced). It can also mean that actual prices are not introduced (amended), but that the marginal economic value of the resource is entered into an appraisal and accounting procedure, such as cost-benefit analysis. Both forms of 'pricing' result in the internalization of environmental damage costs. Unless water resources are priced correctly, and those prices are internalized in actual decisions, there will be distortions in the economy. These distortions can have the effect of biasing investment and policy decisions against water resource degradation concerns, such that there is a misallocation of resources and social welfare is not maximized. Methods of water pricing and their performance will be dependent on the physical, social, institutional and political context. Several water pricing methods have developed in practice, depending on the nature of the economic and natural conditions in existence. In particular, these include, volumetric pricing, non-volumetric pricing and market-based methods. It has long been recognized that markets are a mechanism to allocate water according to its real value, thus leading to efficiency gains. While markets are considered to be more flexible than administrative means for allocating water, their use has often been questioned, especially because there are certain characteristics associated with water production and delivery that give rise to market failure. Such failures include externalities, recharge constraint, imprecise information, large fixed investment costs, and declining average costs of delivery.

This report has extended its focus to a wider concept of efficiency and water resource management than that considered by the traditional water pricing literature. It has incorporated environmental, ecological and other social spheres of concern, which need to be reflected in any pricing system. This is especially important where water allocation is being considered within a region or river catchment, or irrigation projects are to be considered at this appropriate scale. Focusing on the local-level scale is not sufficient to ensure efficiency gains in terms of a wider efficiency concept. The report has also taken a wider perspective in terms of the scope/scale of water resource allocation being considered, with the catchment as its minimum basis. A more integrated approach to water management is required to deal with the policy challenges at this broader scale.

An integrated framework to water resource valuation, appraisal and management

Given the generic goal of sustainable water resource management, this report has taken an approach based on an integrated framework in which water is an integral component of a catchmentwide ecosystem, a natural resource, and a social and economic good, whose quantity and quality determines the nature of its use. At this scale, coupled hydrological economic models and information must underpin water management (Rosegrant et al. 2000). While still rudimentary, this form of analysis is evolving quickly.

At the heart of this approach are a number of generic principles that together form a powerful and comprehensive case for the wider adoption of a decision-support system based around economic analysis:

Such a management strategy requires efforts to combine three related dimensions:

The evaluation framework and decision-support system proposed in this document are in line with the sustainable water resource management approach advocated by the World Bank (1993), which has at its core the adoption of a comprehensive policy framework and the treatment of water as an economic good, combined with decentralized management and delivery structures, greater reliance on pricing, environmental protection and fuller participation by stakeholders. It is recognized that the adoption of such a comprehensive framework facilitates the consideration of relationships between the ecosystem and socio-economic activities in river basins. Such a management approach requires analysis to: take into account social, environmental and economic objectives; evaluate the status of water resources within each basin; assess the level and composition of projected demand; and take into consideration the views of all stakeholders.

In order to deliver the sustainable utilization and management of water resources, it is necessary to underpin management actions by a scientifically credible and pragmatic environmental decision-support system, which, while having the objective of economic efficiency at its heart, nevertheless recognizes other dimensions of water resource value and decision-making criteria. The decision-support system incorporates a toolbox of evaluation methods and techniques, complemented by a set of environmental change indicators and an enabling analytical framework, thus allowing managers to identify operational decision steps. Individual projects or schemes can be appraised in their own right and clearly cost-ineffective options can be discarded. However, individual schemes and more extensive programmes must be further placed in a wider analytical context encompassing spatial scales up to the level of the catchment and temporal scales beyond the short run. Only in this way is it possible to gain a full appreciation of their effect on overall economic allocative efficiency and parallel sustainability objectives.

In summary, the 'proper' appraisal of water-related projects, programmes or courses of action require a comprehensive assessment of water resources and supporting ecosystems. The DPSIR auditing framework is recommended as the basis for any such assessment in 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.

A combination of quantitative and qualitative research methods has been 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 the environmental changes and management responses. The main generic approaches that can form the methodological basis for appraising strategic options are:

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

The implications for sustainability of productivity

The more sustainable future water allocation and management approach advocated here will probably be implemented incrementally over time. For some, this will be too little, too slowly (Postel, 2003). This polar ecocentric position would hold that the human water economy is a subset of nature’s water economy and intimately dependent on it. From this perspective, water allocation priorities need reversing so that basic human needs and ecosystem health requirements are met first and only then should water flow to uses such as irrigation, hydropower, etc. There is a growing consensus that the technocentric view of water systems as resources to be exploited fully for human development needs modification and urgent reform in some developing countries. However, the sustainable way forward is not clear-cut. The safeguarding of the life-support and other services provided by water resources needs a scientific knowledge base. However, this knowledge base is currently deficient when it comes to quantifying what ecosystem resilience and integrity needs really are. The use of water for purposes such as irrigation is just as much a component as is the provision of safe drinking-water supplies in any rural poverty alleviation strategy.

However, water productivity will have to be enhanced significantly in the coming decades via efficiency gains enabled through economic measures such as valuation, pricing and trading, as well as through technological innovation and the application of appropriately 'scaled' technical fixes. Community-based watershed restoration and rainwater harvesting projects, low-cost drip irrigation for smallholders and rural credit provision, for example, will be just as much part of the sustainability strategy as will large-scale water resource augmentation projects. In all this striving for sustainable production based on water, the valuation of the resource needs to be the first step in laying out policy and management options.

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