1. 1 A Manual for Implementing Integrated Water Management: The Economic Perspective DR. PHOEBE KOUNDOURI Senior Lecturer in EconomicsCo-ordinator of ARID Cluster of Projects School of BusinessEuropean Commission 5th Framework Programme Department of EconomicsKey Action "Sustainable Management & Quality of Water" UNIVERSITY OF READINGEnergy, Environment and Sustainable Development http://www.rdg.ac.uk/economics/koundouri.htmlhttp://www.arid-research.net Senior Research FellowMember Groundwater Management Advisory Team Department of Economics and CSERGE GW_MATE, The World Bank UNIVERSITY COLLEGE LONDON http://www.worldbank.org/gwmate http://www.econ.ucl.ac.uk/index.phn http://www.cserge.ucl.ac.uk/Koundouris_Cvweb.pdf

2. 2 3-step approach Economic characterization of the river basin The economic assessment of potential measures for balancing water demand & supply The assessment of the recovery of the costs of water services Step 1 Step 3 Step 2

3. 3 Step 1: Economic characterization of the river basin & identification of significant issues Step1_A.Evaluation of the economic significance of water in the region. Step1_B.Identification of key economic drivers influencing pressures and water uses. Step1_C.How will these economic drivers evolve over time & how will they influence pressures? Step1_D.How will water demand and supply evolve over time & which problems their paths are likely to cause? Construct Baseline Scenario Time & Money Constraints Define the Detail of Step 1!

4. 4 Step1_A. Evaluate the Economic Significance of Water Uses in the Region Residential (e.g. population connected to public water supply system, population with self-supply, number of water supply companies, etc.). Industrial (e.g. turnover for key sub-sectors, employment in sectors, etc.) Agricultural (e.g. total cropped area, cropping pattern, livestock, gross production, income, farm population, etc.) Tourism (e.g. total number of tourist days, daily expense per tourist day, employment and turnover in the tourism sector, etc.)

5. 5 Step1_B. Identify Key Economic Drivers Influencing Pressures and Water Uses General socio-economic indicators and variables (e.g. population growth, income, employment). Key sector policies that influence significant water uses (e.g. agricultural and environmental policies). Production or turnover of main economic sectors / significant water uses. Implementation of planned investments linked to existing regulation, likely to affect water availability. Implementation of future (environmental and other) policies likely to affect water uses.

6. 6 Step1_C. Evolution of Economic Drivers & their Influence on Pressures Changes in demographic factors, e.g. population growth in specific urban areas. Economic growth and changes in economic activity composition, e.g. changes in the relative importance of services/sectors. Changes in land planning, e.g. new areas dedicated to specific economic activities, etc. Changes in social values and policy drivers, e.g. globalization. Changes in natural conditions, e.g. climate changes. Changes in non-water sector policies, e.g. changes in agricultural policy or industrial policy that will affect production and consumption in economic sectors. Planned investments in the water sector, e.g. for developing water services, for restoring the natural environment/mitigating for damage caused by given water uses. Development of new technologies likely to impact water use for industrial production and related pressures. Trend variables Critical Uncertainties Water Policy Variables

7. 7 Step1_D. Evolution of Demand and Supply Apply appropriate methodologies to assess sector-specific water demand. Derive: - marginal value of water in consumption and production - price and income elasticity of demand - marginal/average WTP for public goods & quality changes of common access resources - risk parameters (production and consumption) Identify economic measures/instruments to balance demand & supply if a ‘gap’ is identified: - Water supply will be allocated among competing demands - Aggregate demand will expand until marginal benefit is equal to marginal social cost of supply

8. 8 Estimating Demand in Step 1 – An Example i. Identification of Sector Water Demands in the Watershed Area HouseholdsAgricultureIndustryEnvironmen t Input in Production: Profit or Cost Function Approach Mathematical Modelling Residual Analysis Consumption Good: Econometric Demand Estimation Cost Function Approach Hedonic Analysis Amenity/Recreation: Travel Cost Method Hedonic Analysis Existence values: Contingent Valuation Methodology Choice Experiments Use ValueNon-use ii. Valuation Techniques for Specific Types of Water Demand

9. 9 Methodology for Constructing Baseline Scenario Using Parameters from in Step 1 1  Consider three possibilities of evolution of population.  Consider two possibilities of evolution of demography of other cities in the region.  Consider possible evolution of rural population. 2 Build scenarios using basic assumptions and quantify the water balance with these assumptions. 3 Apply step two over time. 4 Based on steps 1,2,3, imagine a plot that tells the story of the system from now until at least 2030, giving consistency to the assumptions and water balance curves.

10. 10 How to apply the ‘Baseline scenario’? 2003 20152021 Water Balance/ ‘Good Water Status’ Initial status gap Starting from initial status it is possible to elaborate a baseline scenario. The baseline scenario refers to the situation without doing anything else than planned today. Date at which ‘Water Balance’ should be met. Measures to close the gap are needed!

11. 11 Step2: Assess Cost-Recovery of Water Services Step2_A. How much do current water services cost? Step2_B. Who pays these costs? Step2_C. What is the current cost-recovery level? Step2_D. Propose cost-recovery mechanisms.

12. 12 Step2_A&B. Current cost of services Who pays for these costs? Estimate costs of groundwater services by sector. Do users and/or institutional mechanisms recover these costs?

13. 13 Step2_C. Current cost-recovery level. Elements to be investigated: Status of key water services (e.g. number of persons connected). Costs of water services (financial, environmental & resource costs). Institutional set-up for cost-recovery (e.g. prices and tariff structure, direct & indirect subsidies, cross-subsidies). Contribution from key water uses to the recovery of costs. Resulting extent of cost-recovery levels, linked with the affordability for water users.

14. 14 Step3_D. Identify potential cost-recovery mechanisms? Potential cost-recovery mechanisms: Possible subsidies/transfers involved: - Selling permits for water abstraction/pollution. - Taxes on abstraction/pollution. - Charges for the use of the irrigation system. - Charges on energy used, etc. - Subsidies to low-income households (mainly for agricultural water use) - Capital subsidies on investments in infrastructure, irrigation system, etc.

15. 15 Step3: The economic assessment of potential measures for reaching good water status Step3_A. Identify least-cost set of measures. Step3_B. Assessment of cost of measures. Step3_C. Assessment of the impact of measures on economic sectors/uses. Step3_D. Are costs of measures disproportionate?

16. 16 Step3_A. Search for Least-Cost Set of Measures Economic instruments (e.g. abstraction/pollution taxes, tradable permits, subsidies). Measures to increase awareness regarding water scarcity, aiming at reducing abstraction/pollution. Direct controls on pollution dischargers. Agri-environment programs providing financial and technical assistance for, e.g. reallocation of crop production mix over agricultural land, adoption of water-saving technologies coupled with land-allocation restrictions, etc.

17. 17 Step3_B. Assessment of Cost of Measures - Estimate a range of costs along with key parameters influencing costs over time (cost change with developments in sectors). - Allocate costs of measures to water users and identify winners and losers, in order to potentially feed into the analysis of disproportionate costs to justify derogation (Step3._D). Financial costs - capital costs - operation and maintenance - administrative costs Indirect costs - non-water related environmental charges/taxes - changes in environmental quality - costs of preventive and mitigation measures

18. 18 Step3_C. Impact of Measures on Key Economic Sectors/Uses Net impacts on public expenditures and revenues: e.g. - impacts on expenditures for agri-environment schemes - revenues of economic instruments - impacts of changes in the prices charged for publicly owned water services. Wider economic and social impacts: e.g. - significant changes in patterns of employment - economic impacts on industries & local economic development from changes in the price of water supply, level of discharges and water quality. Effects on the retail price index and inflation.

19. 19 Step3_D. Disproportionate Costs/Derogation Disproportionality  If the achievement of good water status has significant adverse effects on the wider environment & human activities.  If the beneficial objectives served by the artificial or modified characteristics cannot reasonably be achieved by other means. Measures to improve water quality are expensive Heavily Modified Water bodies Water bodies substantially changed in character as a result of physical alterations by human activity. Less stringent objectives Time derogation !! Disproportionality is a political judgment informed by economic information !! - Disproportionality does not begin when measured costs exceed quantifiable benefits. - The margin of excess costs should be appreciable & have a high level of confidence. - Disaggregated analysis to the level of separate socio-economic groups and sectors is needed, especially if the ability to pay is an issue for a particular group. Important for budget-constrained developing countries!

20. 20 1- Characterisation of the river basin economic significance of water uses trends in key indicators and drivers dynamic path of demand and supply of water gaps in water status by the agreed date of meeting ‘water balance’? 2- Assess current cost-recovery how much water services cost and who pays this cost? how much of this cost is recovered? potential cost-recovery mechanisms 3- Identification of measures and economic impact construction of a cost-effective programme of measures assessment of cost-effectiveness of potential measures financial & socio-economic implications of the programme of measures are costs disproportionate? Derogations Summary of the 3-Step Methodology Economic analysis needs to be integrated with other field expertise (hydrology, geology, engineering, sociology, etc.) and be considered all along the management & decision- making process.