Economic and Financial

Instruments for IWRM

Water management issues and instruments for

efficiency, equity and sustainability

Goals and objectives of the session

To make participants aware of the problems people face concerning water.

To learn to appreciate that issues have technical, social, cultural and economic aspects.

To make participants aware that this implies a different approach to water management.

To understand the difference between economic and financial instruments.

To clarify the difference between efficiency, equity and sustainability in the case of water related decisions.

Outline presentation

The issues: from achieving the MDGs to involving private initiative.

Social and economic good: a more rational use of resources.

Efficiency, equity and sustainability.

Conclusions

Introduction

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

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

Water cycle management: cost and revenues at all the points

Water resource

Water intake

Water treatment

Distribution

Use and Re -useWastewater collection

Wastewater treatment

Water cycle management

Major issues in water management (1)

1.Achieving the MDGs.

2. Anticipating consequences of climate change.

3. Pollution of resources.

4. Inadequate distribution of water resources.

5. Using all stakeholders & private initiatives.

6. Water is not sufficiently conserved.

7. The physical infrastructure is not in place or poorly maintained.

Major issues in water management (2)8. Not sufficient funds available for water management &

wash.

9. Government agencies are not doing what they are supposed to do.

10. Can role of government be limited to an enabling environment & regulating?

11. How are water rights allocated?

12. Floods and droughts.

13. What is the best level to deal with these issues.

Major forces causing the issues (1)

1. Economic growth.

2. Population growth and increased urbanization.

3. Concerns about the health of the people and about the environment.

4. Forces to increase the scale of production & modern equipment.

5. Uncoordinated management & development

Major forces causing the issues (2)

6. Government failure to deal adequately with the issues.

7. Market failure, to pick up the challenges.

8. Increasing critique on the poor management of utilities and river basin organizations.

9. Achieving economic, environmental and social sustainability.

10. Climate change.

An increasing demand for water

A more rational use of resources

Water as an economic good?

1. Cost of treatment and distribution?

2. Competing use of water: industrial/agriculture /consumers.

3. Economics as dealing with scarcity. • Creating an economic environment and using

economic instruments• Demand and supply are matched at a certain

price

The importance of institutions

Norms and traditions.

Legal frameworks and policies.

Rules and procedures.

From below institutions are more effective.

Need for social enforcement & control.

If necessary there will be a reform of the institutions or the creation of new ones.

Reform of the institutions: different types

1. Introducing new practices through legal reforms, like decentralization, stakeholder participation, more rigorous cost recovery or private sector involvement.

2. A new goal for the organization.3. Rationalizing the production process.4. Redesigning tasks and responsibilities.5. Changing different procedures.

Besides economic there are financial instruments

If Operation & Maintenance necessary.

If investments need to be made.

If different sources of finance need to be tapped.

If a financial proposal needs to be prepared.

YOU NEED BANK SPEAK! to use different financial instruments & different conditions.

Economic and financial elements of water management

Economic principles: rational use of resources, cost recovery and polluter pays.

Economic instruments: taxes &subsidies.

Fixing a tariff is based on the market price and some other (social) considerations.

Other criteria used are: efficiency, equity and sustainability

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.

Equity issues

Equity in water is about the situation of vulnerable groups of society.

Do women and children have access to safe water and sanitation?

Are the cities better off than the rural areas?

What solutions do we have?

Ways of helping the poor West Africa: Standpipes or mobile water vendors.

South Africa and Ghana: Lifeline approach.

Santiago de Chile: Municipality reimburses poorest 20 percent large part of their water bills.

Microcredit for paying connection fees for water and sanitation.

Cross-subsidies

Others?

What is meant by “sustainability”?

A service is sustainable when it

is functioning and being used; is able to deliver an appropriate level of benefits (quality,

quantity, convenience, continuity, health) to all, including the poorest women and men;

continues to function over a prolonged period of time; management is institutionalized; operation, maintenance, administrative and replacement costs

are covered at the local level; can be operated and maintained at local level with limited but

feasible external support; and does not affect the environment negatively

Towards total sustainability

Economic sustainability: benefits are bigger than the implied costs.

Financial sustainability: an activity can carry on without the need for additional outside financing.

Environmental sustainability, an activity which does not go at the expense of the environment (Brundlandt: does not affect the situation for future generations).

Social sustainability: a solution is socially acceptable in a given social and cultural context

Total sustainability

Total sustainability, the combination of economic, financial, social and environmental sustainability, or total sustainability

However, you have to give weights to the different types of sustainability!

Other indicators: operational efficiency, consumer satisfaction, etc.

Think about it

Discuss what are the most important water related issues in your country and why?

Discuss experiences in your country with a more economic approach to water, while respecting the cultural value of water and with an open eye for the social problems in your society.

End

We have learned in this chapter 5 key ideas:

1. To improve water resource management it is important to create an appropriate economic environment.

2. All kinds of economic instruments can be used to achieve the goals formulated for IWRM.

3. If investments are necessary it is important to speak the language of the financial world: investment cost, of rates of interest and pay back periods.

4. Show projects bring about cash flows because of users paying fees, then bankers can be convinced to provide money.

5. There are many sources of finance each with their own procedures and conditions.

Next chapter presents a deeper introduction to economic instruments, leading to chapters 4 and 5 which deal with the application of the instruments.