Why are economic and financial instruments

needed?A presentation made by

Noma Neseni, IWSD

Major issues in water management• Achieve MDGs• Clean up the environment• Anticipating climate change impacts• Pollution of water bodies• Inadequate development and distribution of water resources• Using private initiatives• Water use efficiency• Physical infrastructure not in place• Government agencies with insufficient capacity to do what

they are supposed to do• Lack of funding• Water rights (how are they allocated)• The right level to deal with these issues (national, catchment,

basin, regional

Importance of economic and financial instruments for IWRM

• IWRM seeks to improve efficiency, sustainability and equity

• Recognizes cultural diversity, socio economic disparities within the region and even within the nation

• IWRM will therefore benefit from use of financial and economic instruments to achieve the goals in a sound decision making and democratic manner

Economic and financials instruments• Water is becoming scarce, value is rising –use of

economic instruments for competing needs becoming important

• Important to consider trade offs, in terms of efficiency and equity

• Without financial viability IWRM will not assure a sustainable flow of benefits

• Confluence for achieving efficiency and environmental goals (e.g. polluter pays)

• Complementarities in using sound economic and financial instruments e.g. higher water tariffs will lead to higher efficiency in use with more appropriate framework or enabling environment

Economic efficiency

• Water use efficiency- is this a necessary evil that countries have been asked to adopt?

• Certainly reduces water scarcity

• Maximizes benefits provided by existing water infrastructure

Environmental

• Reduces environmental degradation

• Frees up water for other uses

• Rationalizes social economic and environmental benefits

• Therefore directly contributes to the Pan African development agenda.

economics• Mainly refers to situations in which decisions

must be made in respect to allocation of scarce resources and competing needs

• Pays attention to efficiency of allocation& distribution of assets and incomes behind and around the allocation process.

• Water prices, water tariffs, water rights and water policies and regulations are part of important economic instruments

Why are economic considerations important in groundwater management and protection?

• To manage competition• To improve efficiency and sustainable use• Because groundwater is expensive to manage• Others?

Economics and competing needs

• Water is at the centre of all development agenda and must rationalize resources between competing national and regional priorities

• Need to meet the social justice, environmental sustainability and economic efficiency in balance

fisheries energy

agriculture

water

industry

sanitation environment

Economically efficient solution• Marginal value of water should be the same for two

users for the last unit of water consumed by each group and equal to the marginal cost of supplying water

• Supply of water in this model is inelastic• Demand determines price• Allocation among users means that marginal value

will exceed that of the other and water can then be reallocated from law value user to high value user.

• Perfect competition- clear assignment of rights- buyers and sellers

finance• Refers to specific actions taken by

organizations or firms to maximize short or long run returns to their assets and investments

• Firm has clear goals, role of financial tools is to assure that resources are available in time and space for achieving these goals

• They are measured in terms of effectiveness in meeting the goals

Use and re-use

Distribution

Water intake

Wastewatertreatment

Water resource

Wastewater collection

financial instruments

• At each flash, revenue can be collected and costs are also made

• Financial instruments are then necessary for achieving desired goals

• Allocation and investments needs to be made on basis of some economic efficiency

financing

• In O&M or capital investments, its is important to speak the financial language

• Financial institutions think of investment costs, rates of return, interest and payback periods

• If demonstrate the economic viability (users paying fees) then attract investment

• Many sources of finance

IWRM :economic and financial instruments perspective

Components of IWRM goal

Principles Tools 13 Change

Areas

Economic Efficiency

Social Equity Environmental Sustainability

Enabling Environment

Sustainable water use, management and development of water,land and

related resources Balance “water for livelihoods” and “water as a resource”

Institutional Frameworks

Management Instruments

Policies Legal framework Financing and

incentive structure (All of which should be are sensitive to gender , HIV and Aids infected and affected.)

Organisational Framework

Institutional capacity building

Water resources assessment

Plans for IWRM Demend

management Social change

instruments Conflict resolution Regulatory

Instruments Economic

instruments Economic

instruments Information

Economic, financial and policy instruments• At the policy level, there is

need to create an enabling environment supportive of various actors to carry their functions e.g. good water governance, democratic policy formulation, appropriate legislation, regulatory framework and institutional reforms

• At the finance level, there is need to ensure that resources flow to achieve objectives

• At the economic and finance level there is need to create inducements and incentives

• Economic instruments are seen as facilitation needed and operational tools in the process of implementing IWRM and improving access to water and sanitation for all

• It embraces allocative and technical efficiency.

Valuing and allocating water Economic instruments and Water Accounting

• Economic instruments useful to value the resource and influence choices in allocating water efficiently

• Water accounting provides a unique tool for IWRM, as well as any economic analysis of water issues, because it integrates data about both the environmental and economic aspects of water in a framework that supports quantitative analysis.

Economic instruments

Economics is about making choices when resources are scarce and priorities are many. This is the case when water is polluted and needs to be consumed, or when investments are necessary to connect more people.

Economic instruments are seen as facilitating, needed, and operational tools in the process of implementing IWRM and improving access to water and sanitation for all.

Valuing and allocating water

Economic efficiency embraces allocative and technical efficiency

• Allocative efficiency refers to the use of inputs in a way that maximizes total net revenues for firms or consumer surpluses for consumers.

• Technical efficiency is related to production and refers to firms getting a maximum output per unit of input or use minimum input for a given output.

• Economic efficiency: technical and allocative efficiency together are known as economic efficiency.

Valuing and allocating water

Water Accounts

• Water accounts are linked to national income accounts

• Can be used for more complex economic analysis and modeling to project future water demands and evaluate different policy options for meeting those demands

• National water accounts can be helpful in bringing the economic perspective to water policy at the National level

Valuing and allocating water

What must we do?• Government policy makers, development planners

and water managers need to recognize that better water management is crucial to meeting the development agenda

• Our work will be more effective if we manage water in a broader context

• Adopting IWRM and linking it to national development planning will enable full potential of water resources to be realized

• The right policies, institutional and legal framework needs to be in place. (champions will be needed)

Conclusion• Economic instruments together with supportive

policies are no longer an option in Africa but a necessity.

• Water is critical for Africa’s development agenda- eradication poverty, food security, adapting to climate change, energy supply, protecting the environment and social equity

• Economic instruments and water accounting play a vital role in better water management.

• We need to be responsible and account for water in development esp. if we are to meet future needs

conclusion• Existing legislative, and institutional frameworks

have not been entirely responsive to demands and requirements of implementing IWRM

• Urgency in reforms but these need to be taken incrementally (planning, capacity development, advocacy)

• Economic and financial instruments help create the right environment for IWRM and will contribute to solving the water management problems