Water Charge Instruments for Environmental Management in Latin America: from Theoretical to Practical Issues Brazil Country Case Ronaldo SEROA DA MOTTA and Jose Gustavo FERES January 2003 INTER-AMERICAN DEVELOPMENT BANK REGIONAL POLICY DIALOGUE

Legal Framework 1934 – Water Code  Priority to quantitative aspects of water management  Energy-oriented structure  Centralized institutional arrangement, with predominance of National Department of Water and Eletric Energy (DNAEE)  Distinction between federal and state waters  Water permits National Environmental Council (CONAMA) Resolution no.20/1986 –Water bodies classification

The Old Paradigm Absence of connection between the quantitative and qualitative aspects of water management. No integration between surface and groundwater. Sector-oriented policy, with priority given to the energy sector. Centralized and non-participative: decision-making process controlled by federal and state agencies, excluding municipal governments, private users and civil society from the debate. Inefficient CAC policy instruments. –Mechanisms were rarely implemented –Insuficcient financial resources preventing adequate monitoring and control activities –Resulting in insufficient incentives for efficient use

The New Water Policy 1997 Water Law –Principles River basin as the basic management unit Decentralized and participative approach Recognition of the economic value of water resources Rational use to attend multiple ends –Institutional arrangements National Water Resources Council (CNRH): responsible for planning and regulation of the National Water Resources Management System Water Resources Secretariat (SRH): in charge of elaborating the National Water Policy

National Water Agency(ANA): executive body in charge of implement and enforce the Water Resources Management System State Water Resources Councils and Secretariats River Basin institutions –River Basin Committees: political entity with decision- making and regulatory powers; non-compulsory creation –River Basin Agencies: executive branches –Instruments River Basin Management Plans Issuance of water use permits Classification of water bodies Water charges

Water Charges –Although some states have approved new water laws, the definition of the pricing criteria has been an obstacle to their implementation –Objectives Revenue generation to finance basin investments Improve envrionmental quality

States(issuance year) Revenue-generation to finance basin’s investments Improve environmenta l quality Type of use Socioeconomic conditions of the user Regional economic objectives Inter-basin revenue application Modify space occupation Alagoas (1997)XXXXX Bahia (1995)XXXXXX Ceará (1992)XXX X Distrito Federal (1993) XXX Espírito Santo (1998)XXXX Goiás (1997)XXX X Maranhão (1997)XXXXX Mato Grosso (1997)XXXXXXX Minas Gerais (1999)XXX Pará (2001)XXX X Paraíba (1996)XXX X Paraná (1999)XXX Pernambuco (1997)XXX X Piauí (2000)XXX X Rio de Janeiro (1999)XXX Rio Grande do Norte (1996) XXXX X Rio Grande do Sul (2000) XXX X Santa Catarina (1994)XXX X São Paulo (2000)XXX Sergipe (1998)XXX X National (1997)XXX X

The State of Ceará Since early 90’s Revenue-raising goals for reservoir and channel management for water distribution in semi-arid region Charge levels (US$/1000 m 3 ) in 2001 Industrial = 327; Domestic = Irrigation and aquaculture = achievements over previous levels: 99% level of supply assurance for the industrial sector, 95% for urban consumers and 90% for the agriculture

The State of São Paulo 1992 state water law following the French system Pricing criteria for charges not approved yet Charges may vary according to the water source (superficial or underground); type, location and effective volume of use; conditions of water quality, availability and regularization in the basin; seasonal effects; and conservation measures.

Federal River Basin of Paraíba do Sul First federal experience to efffectivelly start in March 2003 Creation of a river basin committee - CEIVAP - with assistance of the National Water Agency Basin area across the states of Minas Gerais, Rio de Janeiro and São Paulo with about 5.6 million people living in the basin

Main sources of pollution is domestic with BOD discharge of 240 t/day 69% connected to urban sewage network but only 12.3% treated Industrial BOD 40 t/day with quite high level of non- compliance to standards Main water supply of the City of Rio de Janeiro and existence of small hydropower plants

Adopted Principles Simplicity: based on directly measurable parameters in order to allow easy monitoring and clear understanding by the users; Acceptability: participatory approach in the CEIVAP Signaling: signals about the economic value and sustainable uses of water Minimization of economic impacts: signals, however, must not be so strong as to jeopardize acceptability

Contradictory nature of principles: acceptability and minimization of economic impacts are at odds with the signaling role of water charges Result: too much emphasis on revenue-raising and cost sharing mechanisms Annual revenue target of US$ 5.45 million to leverage national funds

Criteria Charges applied to withdrawal volume and volume needed to dilute pollution of each user level according to environmental standards Hydroelectric plants pay an additional percentage of their water royalties in place since the early 90’s

Formulae Total monthly water charge is then given by: TWC = Q W x [ K 0 + K 1 + (1-K 1 ) x (1-K 2 K 3 )] x PUP where Q W =monthly withdrawal (m 3 /month); K 0 = withdrawal use unit price multiplier defined by CEIVAP (less than 1.0); K 1 = consumptive use coefficient (i.e., proportion of withdrawn water that is not returned to water bodies), which varies according to the user’s sector of activity. K 2 = percentage coverage of effluent treatment by the user K 3 = efficiency level in terms of BOD reduction, which varies according to the pollution abatement process adopted by the user PUP = public unit price (R$/m 3 ) corresponding to charges related to withdrawal, consumption and effluent dilution, defined by CEIVAP.

Application Simplicity Only BOD will be charged at the initial phase Acceptability CEIVAP defining the values for the public unit price PUP and the withdrawal unit price multiplier K 0. All other coefficients (K 1, K 2 and K 3 ) are given by technically defined relations and user-reported information.

Signaling All users must pay: whatever the value of the charge Minimization of impacts Charge levels defined according to simulation studies of charge cost on sectoral production costs Domestic and industrial users:PUP = US$ 7.78 /10 3 m 3 and K 0 = 0.4 to all permit-holders with generous reduction incentives for those paying in time in the first month

Farmers paying only 98% of the domestic and industrial PUP and exempt of paying pollution at the initial phase. Revenue allocation Revenue is fully returned to the basin Expenditures are initially concentrated in monitoring and investments in sanitation works

Conclusions Brazil has followed a gradual approach to fit into existing monitoring capacity to evolve with the system performance Participatory approach has been crucial and significant to assure political support

Although all pay, price incentives are minimal with differentiated sectoral treatment Crucial questions remains: how to increase the relevance of signaling principle in later phases?