1. Economic Dimensions of Integrated Water Resources Management Training of Trainers Integrated Water Resources Management

2. 2  Water is necessary for all human activities, and finite  Its allocation and management will therefore have impacts on:  levels of growth  patterns of growth and  distributions of wealth  It is important that water resource professionals understand the economic (not just financial) implications of their policy decisions  Economics can help inform and implement better projects and policies Why must we be subjected to a discussion of economics?

3. 3 Focus on four themes for discussion: 1. Water resources and the economy 2. The value of water 3. Economic tools for water resources management 4. Managing water resources across boundaries

4. 4 Water affects economies via: basic needs environment productive input opportunities expectations Theme 1. Water resources and the economy

5. 5  Incentives and efficiency – rates of growth  Inter-sectoral allocation - structure of the economy  Spatial allocation - patterns of growth  Water resource policies Support or subvert economic development goals? Support or subvert conservation and environmental sustainability? Achieve equity goals? Promote economic resilience or vulnerability to water shocks? Water resource policies affect the economy via: Theme 1. Water resources and the economy

6. 6 Water as an Economic Good “Water has an economic value in all its competing uses and should be recognized as an economic good.” (Dublin Principles) Theme 2. The Value of Water What does this mean?  Water is a finite and valuable resource that must be allocated with regard for efficiency as well as equity  In different uses, water will have different values What does this not mean?  It does not change the fact that water is also a social and environmental good  Does not necessarily require full-cost pricing – just full cost mgmt by government

7. 7  Opportunity Costs are the value of foregone opportunities for alternative water uses  Externalities occur when the actions of one water user affect the interests or well-being of another user, they are the consequences of the actions of specific water users on “external” parties  Positive or negative  Multi-directional  Diminishing marginal returns Some important concepts: Theme 2. The Value of Water

8. 8 “ User value” is the value that can be derived from a single, specific use of water “Systems value” is the aggregate value that a unit of water can generate as it moves through the river system before it is consumed or lost. Integrated water resource management shifts focus from user to system values, accounting for opportunity costs and internalizing externalities Theme 2. The Value of Water Calculating water values from alternative perspectives

9. 9 Two-User System with Irrigation and Hydropower Potential Water Source Dam “A” $0.01/m 3 Dam “B” $0.02/m 3 Irrigation Area “C” returns $0.04/m 3 Irrigation Area “D” returns $0.05/m 3 5% evaporation losses 10% evaporation losses Ocean Theme 2. The Value of Water

10. 10 Development Path 1: Upstream agriculture Source Dam “A” $0.01/m 3 Dam “B” $0.02/m 3 Irrigation Area “C” returns $0.04/m 3 Irrigation Area “D” returns $0.05/m 3 5% evaporation losses 10% evaporation losses Ocean Abstract at “C” Provides irrigation upstream System Value: (1-0.05)*($0.04) =$0.038 /m 3 User Value: $0.04 /m 3 Theme 2. The Value of Water

11. 11 Development Path 2: Upstream power & downstream agriculture Source Dam “A” $0.01/m 3 Dam “B” $0.02/m 3 Irrigation Area “C” returns $0.04/m 3 Irrigation Area “D” returns $0.05/m 3 5% evaporation losses 10% evaporation losses Ocean Abstract at “D” Provides power upstream at “A” Provides irrigation downstream at “D” System Value: [(1-.05)*$0.01/m 3 ]+ [(1-.05)(1-0.1) ($.05/m 3 ) ] = $0.061 User Values: $0.01 /m 3 & $0.05/m 3 Theme 2. The Value of Water

12. 12  Development Path 1 yields lower System Value ($0.038/m 3 ), with all benefits accruing to upstream user.  Development Path 2 yields higher System Value ($0.061 /m 3 ), with benefits to both users.  The downstream user will prefer Path 2, where he benefits.  The upstream user will prefer Path 1, where system-wide benefits are smaller, but upstream riparian reaps higher gains.  Some form of mandate or benefit sharing/redistribution will be required to motivate Development Path 2. Results Theme 2. The Value of Water

13. 13  System values of water will be driven by the range of potential user values in the system  Some user values may be higher than system values (because they don’t recognize systems losses such as evaporation)  Economic optimization does not necessarily exclude low value uses of water  Development paths that combine both consumptive and non- consumptive uses of water will increase systems values  Integrated management of a river system will virtually always enable greater total productivity - but distributional issues may well arise Lessons of alternative valuation exercise Theme 2. The Value of Water

14. 14 Theme 3. Economic tools for water resources management Economic tools can be used to support and implement water resource management policies: To allocate To protect quality To conserve quantity

15. 15 Multi-purpose market-based tools: – Pricing – Licenses and permits – Fees and fines – Water Markets ………. institutions and participation are important non-market tools for implementation Theme 3. Economic tools for water resources management

16. 16 Why is pricing so important?  Revenue sufficiency; revenues adequate to operate & maintain the system, & extend service new customers  Resource allocation; signal socially appropriate water resource allocation, ensuring that values to society outweigh their costs  Resource conservation; signal the value of water, encourage efficient use and conservation  Getting prices “right”: recognizing the incentives resulting from price structures, and ensuring they align with social objectives Theme 3. Economic tools for water resources management

17. 17 Types of water pricing  Bulk water pricing  Sectoral and regional impacts  Blend prices, inherent cross-subsidies  Retail tariff structures  volumetric pricing  2-part tariffs  drought schedules  ceiling at 2-5% of income Theme 3. Economic tools for water resources management

18. 18 Pricing as a tool – Complex – Costly to administer, particularly volumetric pricing – Can easily be targeted to encourage specific behavioral changes – Can generate significant revenue – Can be socially complex Theme 3. Economic tools for water resources management

19. 19 Licenses and permits as tools – Simple instruments – Relatively low costs of administration – Often very challenging to monitor and enforce – Often ineffective in encouraging specific behavior – Generally do not generate significant revenue Theme 3. Economic tools for water resources management

20. 20 Fees and fines as tools – Simple – More costly to administer – Can easily be targeted to encourage specific behavioral changes – Challenging to monitor and enforce – Generally do not generate significant revenue Theme 3. Economic tools for water resources management

21. 21  Optimal management requires basin-wide IWRM cooperation  Riparian relations within a broader regional context  History  Catalyst for regional cooperation and integration  No clear legal framework for cooperation  Political decisions  Cooperation must benefit all parties  Cooperation must be perceived as fair by all parties Riparian Dynamics Theme 4. Managing water resources across borders

22. 22  Sharing water – sharing benefits  Expanding the range of benefits  Expanding the sum of benefits  Identifying & quantifying (user values)  Optimizing (system values)  Sharing benefits (redistribution) Economic dimensions of transboundary cooperation Theme 4. Managing water resources across borders

23. 23  Optimal river development may give rise to an unacceptable distribution of benefits  Mechanisms for redistribution  Water sharing  Payments for water  Payments for benefits  Purchase agreements  Financing, ownership and operational arrangements  Bundling broader benefits Sharing Benefits Theme 4. Managing water resources across borders

24. 24 Summary  Water resources management policies have profound effects on economies  As water becomes increasingly scarce relative to demand, the economic impacts and equity implications of water resources management decisions will become more striking  Economic analysis is essential to inform water resource management policies  Economic tools can be highly effective in implementing water resources management

25. 25 Thank you.