Application of water economic

instruments to IWRM to improve

efficiency, equity and environmental

sustainability

Economics is the study of the allocation of scarce

resources

One of economics' prime advantages is addressing trade –

offs among various factors

The role of economics will be to do optimal allocation

among competing parties

Water is an economic good

Supply and demand concepts apply

Issues to be considered

Supply can not meet demand

Population growth will increase demand

Economic advance and development will also

cause more pressure on water

Environmentally oriented demand for water have

risen

Water supply is not rising due to pollution and

ground water depletion

Issues to be considered

Global warming can increase demand for water

due to shifts in locations

The best dam sites are already occupied

Water infrastructure is depreciating

Health concerns can boost costs

Demand for hydro power will rise as a result of

increasing energy prices

Key Water Challenges

Water resources management is highly political

Solutions have to be tailored to specific, widely –

varying circumstances

Overall economic reform is important and has to

be taken into account

Financing Needs are huge, particularly in

developing countries

Supply Enhancement Strategies

Build / enlarge dams

Drill / improve wells

Build interbasin water transfer facilities

Repair leaky infrastructure

Build desalinization plants

Reprogram reservoir operations (e.g. more

storage with less flood protection)

Demand Management Strategies

Establish water-conserving plumbing codes requiring

certain fixture types (such as low-flow toilets and

showerheads)

Establish drought contingency plans

Ration water or constrain water use (e.g., alternate-

day watering schedules)

Buy / lease / sell water rights

Raise water rates

Educate water users about conservation options

Economic Instruments

The implementation of any of these strategies

involve projects

Evaluation of any project involves the application of

some kind of cost-benefit analysis and an instrument

to conclude

The best instrument for project evaluation is the Net

Present Value (NPV)

The NPV concept

The concept is simple, input required are:

The Initial Investment

The annual cash flow

A discount Rate

Timing & life time of the project

The economic values have to be used not the

financial values

Issues in Determining the Economic Values

Costs and value are two different concepts

The full value of water consists of its intrinsic value

and economic value

Value & costs will differ from one case to another

Conclusion

Full cost of water must be considered including the

opportunity cost

Value of water should reflect societal objectives,

food security, benefits from irrigation …etc

Value & cost of water should be taken into account

when setting water tariffs