A J (Viju) James, PhDVisiting Professor

Institute of Development Studies, Jaipur, India

25 November 2015Dialogue for Water Governance,

Fortaleza, Brazil

PRICING THE PRICELESSValuing water for policy

Perspectives on pricing: irrigation ‘Hydraulic societies’ (Marx), based on surface water

irrigation systems in 19th century India. Patronage politics. Systems built (and repaired) by kings, temples; maintenance organized by local community – who considered these systems ‘community owned’

Government ownership: Since 1873, flat-rate cesses and taxes introduced by the British to recover water infrastructure (dams, canals) investment costs – a tradition continued by Indian government

Participatory Irrigation Management: Water User Associations levy agreed charges on water-using members, either using hourly rates or area-based rates; pay part to Irrigation Departments. But unpopular with Irrigation Departments – because it means handing over control over infrastructure and, more importantly, budgets!

Volumetric measures: Being proposed, not implemented fully. Danger – it will increase transparency!

Pricing as a policy instrument: Progressive rates, based on metering, can reduce water use – but studies show that these rates have to be unrealistically high to ‘bite’ – and reduce consumption (as water is not the constraining factor in agricultural production)

Perspectives on Pricing : Domestic Water

Idealistic: ‘Water is priceless, do not put a price on it’ so don’t charge for it

Practical: Providing water of adequate quality & quantity costs utilities money. So utilities need to cover costs to be financially viable

Political: Citizens do not like to pay for water, so give it freePolitical + practical: Must charge citizens ‘something’ so that they

don’t waste water – but not the full cost, hence subsidize utilitiesReality check: Low costs keeps utilities in a ‘low equilibrium trap’: low

charges + poor cost recovery not enough money for maintenance poor supply low willingness to pay (WTP) for poor quality of service poor cost recovery …

Revisionist: Calculate all costs necessary to provide sustainable and good-quality water supply in a financially viable manner (www.washcost.org)Capital expenses (CapEx)Operational Expenses (OpEx)Direct support costs Indirect support costsCapital Maintenance Expenses (CapManEx)

Demand reducing: Flat rates vs metered with progressive ‘slabs’, to reduce waste

Reality in pricing: Domestic Water SupplyCitizens are willing to pay for better quality services

WTC greater constraint than WTP TN RWSP -voluntary payment for public stand posts used by poor

Citizens want meters and transparencyKerala Jal Nidhi: community wanted meters for greater transparency &

equityBut utilities prefer flat rate for household piped supply (e.g., Rs.

30/household/month) due to ‘utility convenience’ (less hassle, more budgets)

Alternatives are growing, but slowly PPP: Not popular after Cochabamba & Bangalore – invariably raise pricesCommunity decides: Gujarat WASMO: in 15,000 villages! Yet little

replicationDemand management impossible through pricing

Prices would have to rise 8 times to ‘bite’ enough to reduce demand – but ‘floor’Utilities have vested interests?

UFW is a cover: Usually put at ‘50%’ without analysis – for ‘buffers’ to cater to sudden political demands Hence engineers and staff ‘have’ to fudge data

Low CapManEx is deliberate? Shorter life spans of systems mean faster replacements & more frequent kick-backs: ‘Build-neglect-Rebuild’ (WB, 2005)

Valuing waterWhy? When markets do not represent the ‘true value’ of a good or service

– as in the case of environmental goods and services – need to do a valuation exercise

Benefit valuation methods: Many available in environmental economics: Costs of alternate provision e.g., the benefit or value of 1 extra KL of

drinking water is the cost of alternative supply: Households buying it from private vendorsGovernment supplying water through tanker trucks and water trainsInstalling new water supply systems (check dams, bore wells,

pipelines, …)Augmenting existing water supply systems (new tanks, more powerful

pumps, new bore wells, deepening bores and wells …) Avoided costs of BAU i.e., costs of not providing the 1 KL of drinking

water: Costs of women to walk long distances to find and carry home waterCosts of treating water (boiling, filtering, purifying … )Costs of medical treatment in case of water-quality related illnessesCosts of income forgone due to such illnesses

Willingness to pay for that extra 1 KL of drinking water (contingent valuation)

The broader context of valuation

Valuation is not definitiveThere can be as many values as there are economists! Exxon-Valdez oil spill near Alaska – economists for defence AND

prosecution Ultimately based on ‘assumptions’ – and these can always be

challengedConversely, acceptance only means agreement on assumptions!

Results of pricing methods or benefit valuation only one of many inputs into policy decisions Actual results can be counter-intuitive – e.g. Madras City Water

Supply Project (WB)But prices can be powerful change agents in the right

context Rajasthan drip irrigation – initially uneconomical, now with 80%

subsidy!Cropping pattern shifts – sugarcane to vegetables (Mah); cotton to

others (AP)

The broader context of pricingSmart pricing policies – for water, cropping, irrigation

equipment, etc - can help change water use but has to be done carefully and may not be easy

Changing allocations involves costs: Current water allocation patterns benefit some stakeholders – who will fight directly or indirectly to preserve status quo – or postpone changeAgriculture is often the largest user of water – and large

commercial farmers usually stand to benefit the most from current water allocations – and they are often politically well-connected!

Opposition usually by Political means: lobbying/paying off political patrons - hence,

delays in enacting laws or framing policies; referring to ‘parliamentary committees’, getting legal opinions, filing in court, reducing funding, weakening institutions, …

Bureaucratic means: arbitrary orders, suppressing data, discrediting NGOs

Paid media: carrying false reports, suppressing information …

In conclusion

Pricing can be very effective for change, e.g., Price guarantees (floor prices) to farmers for less water-using cropsSubsidized prices for water efficient technologies (drips, sprinklers,

…) Price incentives to farmers growing less-water intensive crops (e.g.,

SRI)But pricing is not simple or standard or universally effective –

these have to be done carefully and for specific contexts and timesNon-price interventions can sometimes work well, e.g.,

Social controls on groundwater extraction (e.g., northern AP)Water permits (even to non land owners) and trading (e.g.,

Sukhomajiri)Water agreements, even within a Water User Group (e.g., Aquifer

Management Group)Using prices (and other means) to change water use regimes

will engender opposition – but have to know and anticipate the other side, to win!