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Economic and financial principles


Water has an economic value and should be recognised as an economic good

 

 

A sense of the economic value of water implies the attachment of different values to different uses of water. These values will vary from setting to setting as decided by the community, although it is invariably the case that survival and public health uses will be high-value uses; whereas recreational uses will be comparatively lower-value. Where water is becoming scarce, it is desirable to discourage low-value uses. The possibility of reallocating water to high-value purposes should be investigated as an alternative to, or in parallel with, developing new sources of supply; in this context the use of water markets can be appropriate. Some estimates of high-and low-value purposes of water may benefit from considering the importance of ‘virtual water’ (the non-evident water embedded in imported food crops: see Part III).

Allocation of values to water uses helps in the following areas: balancing scarce resources with increasing demand; the reduction of wastage and loss; conservation of the resource; and shifts in consumption towards higher value uses. (See also Part III)


Charging tariffs for water services is an important component of any strategy for sustainability

 

 

Charging for water services (water supply, irrigation and wastewater disposal) is essential in order to generate funds for operating, maintaining and investing in systems; ensure that scarce supplies are allocated to essential purposes; and signal to users the real value of the resource. As a matter of principle, a service providing water should not give its product away free even to the poorest customer. However, this principle poses a dilemma: how to provide a basic service to those who are extremely poor and yet ensure cost recovery, especially in areas where the costs of water extraction and delivery are high and/or continually mounting due to pressure on the resource.

This dilemma needs to be resolved. For household consumption, a certain minimum volume necessary for basic needs can be provided at an affordable price, with higher-level volumes subject to higher tariffs. This will ensure that higher levels of consumption are not subsidised. Public subsidies are legitimate to achieve certain benefits (for example, provision of supplies to the underprivileged and underserved). However, these subsidies need to be transparent, targeted, and budgetarily practicable and sustainable (for example, covered by surpluses generated elsewhere in the system).

The weighted average of the tariffs should be high enough to recover, at a minimum, recurrent operations and maintenance costs. Where water charges have been raised to this level, the aim should be to raise them progressively, and with due regard for continuing to meet basic needs, to the full marginal cost (equivalent to the average incremental cost of future supply) in order to generate resources for expanding or modernising the system (see Part III). Industrial water tariffs need to take account of the volume of water extracted, and the volume and quality of water returned to public water bodies.

OECD members have accepted the principle that ‘polluters pay’: those who dispose carelessly of wastewater should be charged for their actions.

If the tariff structure is progressively higher for higher consumption levels, this provides an incentive to conservation. It also generates extra resources for expanding services, although the practicalities of recovering costs for service installation and extension will depend on conditions (physical and socio-economic) operating in a given setting. The same principles apply to wastewater disposal and management.



Demand management’ should be used in conjunction with supply provision

 

 

Demand management seeks to maximise the usage of a given volume of water, by curbing inessential or low-value uses through price or non-price measures. In water-scarce areas, it is necessary to gain political support for demand management over supply-led solutions

(i.e. solutions which are based onindefinite expansion of services and supplies).

A number of demand management measures can be considered, including market-based incentives such as water tariffs, pollution charges, water markets, auctions, water banking; and non-market incentives, such as leakage control, restrictions, quotas, norms, licences and demonstration projects. All options need to be systematically identified and appraised.

In its policies towards key sectors such as industry and agriculture, a government should be discouraged from developing water-intensive industries or agriculture in regions where water is scarce and estimates of different water values (see Chapter 1) suggest that it should be applied to other uses. (See also Part III.)


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