Water buyback in Spain: what can we expect? AARES 60 th Annual Conference 2-5 February 2016, Canberra,…

Water buyback in Spain:

what can we expect?

AARES 60th Annual Conference2-5 February 2016, Canberra, Australia

C. D. Pérez-Blanco, FEEM & CMCC

Water buyback in Spain: what can we expect?

WHERE. WHERE. The Segura River Basin in SE SpainThe Segura River Basin in SE Spain

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> Area: 18 870 km² (MDB = 1 061 469 km², about 60 times larger)> Population ≃ 2.1 million (similar to MDB)


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> Semi-arid basin > Rainfall is uneven and unequally distributed> Non-perennial rivers> 1950s irrigation expansion (↑ productivity)> Agriculture: 89% of total water use> Supply: 760 M m3; Demand: 1,900 M m3; WEI: 2.5 (1.15 including TSWT & desalination)> Water is gold

WHERE. WHERE. The Segura River Basin in SE SpainThe Segura River Basin in SE Spain


Water in SE Spain: Giving gold for freeWater in SE Spain: Giving gold for free

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> Average water charge: 0.09 EUR/m3


WHY WHY wwater buybackater buyback

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> De iure, RBAs are entitled to limit/revoke water concessions that harm the environment, without compensation > De facto, concessions are renewed automatically

> Transaction costs > Negative economic impact on rural areas

> Water buyback aims at:> restoring environmental flows; > compensating farmers (& overcome resistance); and> compensating other possible negative feedbacks

> Since 2006 government agencies can use exchange centers to buy water concessions > This paper offers a benchmark to inform and assess water purchase tenders


HOW. HOW. Compensating variationCompensating variation

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> Water buyback aims at reducing withdrawals and restoring environmental flows> Problem: rent extraction> Challenge: place bids consistent with the shadow price of the would-be seller > Shadow price:

> foregone income resulting from strengthening the water constraint> foregone utility (compensating variation)

> Benchmark: capitalized value of the shadow price


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> Preferences are revealed in two stages (Agricultural Water Demand Units):

> First, relevant attributes are obtained > Second, the utility function is calibrated

THE MODELTHE MODEL


Revealing the attributesRevealing the attributes

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Revealing the attributesRevealing the attributes

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Key concept: Possibility frontier – built based on feasible decisions using GAMS

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Profit (Π)

Max feasible Π

Observed Π

Five (m=5) attributes explored:> Expected gross variable margin (z1) > risk avoidance (z2)> Total labor avoidance (z3)> hired labor avoidance (z4)> Variable costs avoidance (z5)All attributes are normalized

> Not consistent with a rational agent. Something is missing here> Risk aversion (σ)?

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Observed Π, σObserved Π, σ

Minl 1t!2!ሺt− 2ሻ! ቂτzp,zkl ൫xf൯− τzp,zkl ሺxoሻቃp,k ;p ≠ k; ∀zp,zk ∈l Where: xf = ArgMinXf ቂτzp,zkl ൫Xf൯− τzp,zkl ሺxoሻ; 0 ≤ xi ≤ 1; σ xini=1 = 1; x ∈Fሺxሻቃ

Π

σ


Calibrating the Utility functionCalibrating the Utility function

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0 Π

σ

> In equilibrium the MTR equals the MSR

> Taking a CRE Utility Function (Cobb-Douglas)


Calibration resultsCalibration results

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SimulationSimulation

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> Water constraint strengthened from 0 to 50% of the concession > Gross variable margin and utility are estimated > Foregone income and foregone utility obtained> Capitalized using the 3-year average interest rate of the 30-year Spanish Treasury Bond, 3.7% as of January 2016


Simulation results: buyback priceSimulation results: buyback price

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Target (ML)% of total withdrawals Balance (ML)

Marginal buyback price (foregone utility) (EUR/ML)

Average price (foregone utility) (EUR/ML)

Total investment (foregone utility) (M EUR)

Marginal buyback price (foregone income) (EUR/ML)

Average price (foregone income) (EUR/ML)

Total investment (foregone income) (M EUR)

50,000 2.7% - 194,000 1141.7 577.1 28.9 2943.1 1329.2 66.5 100,000 5.5% - 144,000 3296.8 1371.7 137.2 4507.5 2652.0 265.2 150,000 8.2% - 94,000 4415.7 2219.6 332.9 6912.4 3672.4 550.9 200,000 10.9% - 44,000 6026.5 2894.4 578.9 9931.9 4727.1 945.4 250,000 13.7% 6,000 8814.8 3811.2 952.8 13897.4 6216.8 1554.2 300,000 16.4% 56,000 11628.2 4913.8 1474.1 16557.4 7777.4 2333.2 400,000 21.9% 156,000 21185.6 7866.3 3146.5 32719.1 11020.3 4408.1 500,000 27.3% 256,000 38394.2 11563.0 5781.5 52772.2 18082.8 9041.4 600,000 32.8% 356,000 118780.8 19933.9 11960.3 325584.8 30691.1 18414.7

Simulation results: buyback priceSimulation results: buyback price

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NSW - Murray (Below Choke): $2,072

RtB in the MDB; $3.1 billion


ConclusionsConclusions

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> Water buyback can help restore the balance> Average price about 3800 EUR/ML

> A few caveats:

> Informal abstractions: track and ban, do not empower (not again!)> Use water bought for environmental purposes

> not to maintain allotments during droughts (define environmental flows)

> Define priority areas for buyback (downstream vs upstream)> This is but a policy option –others may exist

> Charges> Insurance> etc.

> Explore complementarities, sequencing> Transaction costs are the key

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Thanks for your attention

This research is part of a project that has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No 660608.

http://wateragora.eu/

http://wateragora.eu/

Annex

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Error termsError terms

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The first metric for performance evaluation is based on the distance between the observed and calibrated portfolios:

ex = ඨ1n σ ቆxio −xi∗xio ቇ

2ni=1

The second metric for performance evaluation assesses the distance between the observed attributes and the calibrated ones:

eτ =ඨ1m σ ൬zro −zr∗zr0 ൰2mr=1

An average error is estimated as the ordinary arithmetic mean of the two metrics above:

e = ex +eτ2

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Water buyback in Spain: what can we expect? AARES 60 th Annual Conference 2-5 February 2016, Canberra,…