ECONOMIC AND FINANCIAL INSTRUMENTS IWRM for River Basin Organisations

LEARNING OBJECTIVES  Understand the difference between financial and economic instruments.  Appreciate how to apply financial and economic instruments for improved management of water resources at river basin level e.g. Cost recovery; Behaviour change Address equity and the poor Environmental protection

Water Management Objective  Implement economic and financial instruments to improve water use efficiency.  Apply economic and financial instruments to reduce pollution.

Importance of EFI in water management.  Water is becoming scarcer and its value rising;  New emphasis on water management needs economic tools to promote efficiency and environmental goals.  More emphasis given to financial viability of water projects.  Recognition that costs should be borne by those who benefit.

What’s the difference?  Economic instruments: Used to promote the efficient allocation and use of the water resource = behaviour change.  Financial instruments: Used to raise money to finance operational and investment activities = cost recovery. The same tools may be used for both.

Water and Money  Water is an economic good: It is a resource that is sold and used to make profits; There is investment in harvesting the resource such as through Dams, wells and pumps.  Water is also a social good: The basic human right to clean and adequate water; Water as a means to fulfil equity, poverty and health social and development goals.

WRM CHANGE AREAS Environmental Sustainability EfficiencySocial Equity CHANGES ARE MADE TO SEEK TO REACH SUSTAINABILITY How can this be made meaningful to an RBO?

Efficiency and Water Resource Management  More efficient use of water leads to large economic and social benefits. Aim for: Reducing water wastage e.g from unlined canals Recycling Reduce pollution More crop per drop; Use in activities with higher economic returns What economic instruments would you use to achieve these changes?

Social Equity  Equity issues vary from country to country Equitable access, use and control over water resources; Protection from negative impacts of other water users (pollution, access etc)  Economic tools to subsidise the poor; financial tools to finance development.

Environmental sustainability.  Conflict between development objectives and the environment. Political and management decisions most important.  EFI tools Limited application. Protecting the catchment – investment and penalties Reserving water for environment – less income.

Economic and Financial Instruments and the RBO  There are two main aspects How will the RBO use financial instruments to recover costs, and How will the RBO use economic instruments to achieve water management objectives  Who pays for water resources management? Users should pay for private benefits, and Government for society benefits (e.g. prevention of water related disasters)

Some examples  All water management activities and the RBO itself has to be funded from Gvt, water users or both. Sale of raw water (water permits) include cost of management functions, monitoring, cost of infrastructure and overheads; Pollution permits include cost of monitoring, cost of clean up, and overheads; Costs can be reduced by passing responsibilities to stakeholders.

Water Allocation  Financial instruments Permit charge, Raw water volume charge (+ infrastructure O&M) Cost recovery  Economic instruments Volume / use charge. Incentives for efficiency, or equity considerations.

Pollution Control  Financial Instruments Permit charge, pollution charge. Cost recovery  Economic instruments Volume and quality related charges. Penalise for poor quality or high volume discharge

Monitoring  Financial instruments % of raw water charges and pollution charges. Cost recovery  Economic instruments Penalties for non- compliance.

Economic instruments and Water Management functions.  Some challenges RBO may not set fees (political decisions) Fees may be paid to central government – no autonomy Difficult to manage subsidies if revenue cannot be generated elsewhere The RBO may be biased due to conflicting interests

How are we doing?  Do charges and fees for water allocation cover costs and favour the poor and efficient water use?  Are all water use revenues being received?  Do pollution charges cover costs and give incentive to reduce pollution?  Are all pollution revenues being received?

Some Lessons  Economic and financial instruments are essential for good water resources management;  Cost recovery is both a component of equity and critical to ensure effective water management institutions.  Good application of financial and economic tools can assist service development.

Thank you