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Economic Dimensions of
Integrated Water Resources Management
Training of Trainers
Integrated Water Resources Management
Why must we be subjected to a discussion of
economics?
Water
Its
is necessary for all human activities, and finite
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
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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
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Theme 1.
Water resources and the economy
Water affects economies via:





basic needs
environment
productive input
opportunities
expectations
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Theme 1.
Water resources and the economy
Water resource policies affect the economy via:

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?
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Theme 2.
The Value of Water
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)
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
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Theme 2.
The Value of Water
Some important concepts:

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
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Theme 2.
The Value of Water
Calculating water values from alternative perspectives

“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
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Theme 2.
The Value of Water
Two-User System with Irrigation and Hydropower Potential
Water Source
Irrigation Area “C”
returns $0.04/m3
5%
evaporation
losses
Dam “A”
$0.01/m3
Irrigation Area “D”
returns $0.05/m3
10%
evaporation
losses
Dam “B”
$0.02/m3
Ocean
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Theme 2.
The Value of Water
Development Path 1: Upstream agriculture
Source
5%
evaporation
losses
•Abstract at “C”
Irrigation Area “C”
returns $0.04/m3
•Provides irrigation
upstream
Dam “A”
$0.01/m3
Irrigation Area “D”
returns $0.05/m3
10%
evaporation
losses
Dam “B”
$0.02/m3
•System Value:
(1-0.05)*($0.04)
=$0.038 /m3
•User Value:
$0.04 /m3
Ocean
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Theme 2.
The Value of Water
Development Path 2: Upstream power & downstream agriculture
Source
5%
evaporation
losses
•Abstract at “D”
Irrigation Area “C”
returns $0.04/m3
Dam “A”
$0.01/m3
•Provides power
upstream at “A”
Irrigation Area “D”
•Provides irrigation
returns $0.05/m3
downstream at “D”
10%
evaporation
losses
Dam “B”
$0.02/m3
Ocean
•System Value:
[(1-.05)*$0.01/m3 ]+
[(1-.05)(1-0.1)
($.05/m3) ] = $0.061
•User Values:
$0.01 /m3 & $0.05/m3
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Theme 2.
The Value of Water
Results





Development Path 1 yields lower System Value ($0.038/m3), with all
benefits accruing to upstream user.
Development Path 2 yields higher System Value ($0.061 /m3), 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.
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Theme 2.
The Value of Water
Lessons of alternative valuation exercise





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 nonconsumptive 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
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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
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Theme 3.
Economic tools for water resources management
Multi-purpose market-based tools:
–
Pricing
–
Licenses and permits
–
Fees and fines
–
Water Markets
………. institutions and participation are important
non-market tools for implementation
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Theme 3.
Economic tools for water resources management
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
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Theme 3.
Economic tools for water resources management
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
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Theme 3.
Economic tools for water resources management
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
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Theme 3.
Economic tools for water resources management
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
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Theme 3.
Economic tools for water resources management
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
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Theme 4.
Managing water resources across borders
Riparian Dynamics






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
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Theme 4.
Managing water resources across borders
Economic dimensions of transboundary cooperation

Sharing water – sharing benefits

Expanding the range of benefits

Expanding the sum of benefits
 Identifying & quantifying (user values)
 Optimizing (system values)

Sharing benefits (redistribution)
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Theme 4.
Managing water resources across borders
Sharing Benefits

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
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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

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Thank you.
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