SEEAW – Asset Accounts and Valuation Regional Workshop on Water Accounting Santo Domingo, Dominican Republic 16-18 July

1. SEEAW – Asset Accounts and ValuationRegional Workshop on Water Accounting Santo Domingo, Dominican Republic16-18 July 2007 Michael Vardon United Nations Statistics Division

2. Outline • What do Asset accounts measure? • Basic definitions • Asset classification • SEEAW standard tables • Supplementary tables/information • Breakdown of water flows • Matrix of flows within the environment

3. What do asset accounts measure? Asset Accounts describe in physical units • The stocks of water resources • The changes in stocks that occur during the accounting period (natural and anthropogenic changes) They link information on abstraction and returns with information on the stocks of water resources

4. Hydrological cycle and water balance Precipitation = Evapotranspiration + runoff +/- changes in storage

5. Opening Stocks Increases in stocks due to human activities due to natural processes Decreases in stocks due to human activities due to natural processes Closing Stocks Basic structure

6. 1993 SNA Asset classification “Aquifers and other groundwater resources to the extent that their scarcity leads to the enforcement of ownership and/or use of rights, market valuation and some measure of economic control”. Thus only a small portion of the water resources in a country is included in the 1993 SNA.

7. SEEAW Water resources include water found in fresh and brackish surface and groundwater bodies within the national territory that provide direct use benefits now or in the future (option benefits) through the provision of raw material and may be subject to quantitative depletion through human use.

8. SEEAW asset classification EA.13 Water Resources (measured in cubic metres) EA.131 Surface water EA.1311 Artificial Reservoirs EA.1312 Lakes EA.1313 Rivers and streams EA 1314 Glaciers, Snow and Ice EA 132 Groundwater EA.133 Soil Water

9. Asset accounts

10. Water resources Surface water: water which flows over, or is stored on the ground surface. It includes: artificial reservoirs, lakes, rivers and streams, glaciers, snow and ice. Groundwater: water which collects in porous layers of underground formations known as aquifers Soil water: water suspended in the uppermost belt of soil, or in the zone of aeration near the ground surface, that can be discharged in to the atmosphere by evapotranspiration

11. Water in oceans, seas and atmosphere …..not recorded in terms of stocks but only in terms of flows. For example, abstraction from the seas, collection of precipitation, outflows to the seas, evaporation/evapotranspiration etc.

12. Fresh and non-fresh water Water resources include fresh and brackish water. Brackish water can be used with or without treatment for some industrial uses or for irrigation purposes for some specific crops Water resources can be further disaggregated into fresh and brackish water

13. Stocks for rivers It is not easy to define. The stock of a river should be measured as the volume of the active riverbed determined on the basis of the geographic profile of the riverbed and the water level. This quantity is usually very small compared to the total stocks of water resources and the annual flows of rivers. It can be avoided computing the stocks of rivers

14. Matrix of transfers within the environment

15. Valuation of Environmental Assets • Why value environmental assets? • Definitions of environmental assets • Asset boundary between SNA and SEEA • SNA asset classification • SEEA asset classification • Methods of valuation • Net present value • Other methods • Example: Valuing Water

16. Why value environmental resources? Efficient and equitable allocation of resources among competing users, both • within the present generation • between present and future generation Efficient and equitable infrastructure investment in the resource sector (how much, where, when) Design of economic instruments: pricing, property rights, taxes on depletion and degradation Helps to ensure that the environment is included in decision-making

17. Assets in the SNA For an asset to be included in the SNA it must have: • An identifiable owner who enforces ownership rights • Be able to produced economic benefits for the owner by using or holding them

18. SNAEnvironmental Assets

19. Assets in SEEA • SEEA expands the definition in the SNA to cover all environmental assets used whether they are owned or not provided

20. SEEA Environmental Assets

21. How to value SNA is very clear • Market price should be the basis of valuation • Where market prices are unobservable or do not exist then economic theory may be used to determine a “shadow price”

22. Shadow price • The true economic PRICE of an activity: the OPPORTUNITY COST. Shadow prices can be calculated for those goods and SERVICES that do not have a market price, perhaps because they are set by GOVERNMENT. Shadow pricing is often used in COST-BENEFIT ANALYSIS, where the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those for which market prices exist. Source: The Economist www.economist.com/research/Economics/alphabetic.cfm?letter=S#shadowprice

23. Options for valuation – SNA and SEEA SNA • Market price • Net present value • Cost of production (provides a lower bound) SEEA describes • SNA methods • Revealed preferences • Stated preferences

24. Net present value The net present value of future expected earning can be used to determine asset values

25. Net present value calculation • Net present value (NPV) of expected future income streams n RR Vt= Σ t=1 (1+r)n Where V=NPV, RR = resource rent, r = discount rate, n =asset life

26. Net present value calculations: resource rent • Resource rent – the value of the flow of capital services provided by a natural asset. • RR = (p-c)*Q Where RR = resource rent, p = unit price, c = unit cost (including wages, intermediate costs, normal return to produced capital, and taxes), Q = quantity extracted

27. Net present value calculations: asset life • This is the amount of time that the asset will continue to exist, given current rates of extraction Volume of stock t1 Asset life = Volume extracted t0 – t1

28. Net present value calculations: discount rate • Choosing an appropriate discount rate is crucial to the NPV calculation. An area of debate • Rate used differs between countries • The higher the discount rate, the lower the NPV

29. Concerns about using‘non-market valuation’ techniques • Accuracy of values and cost of valuation • Consistency of value concepts with SNA • Aggregation: scaling up site-specific values

30. Accuracy of non-market valuation • Data requirements are very high, so valuation is costly • Value is often uncertain, very sensitive to assumptions • Results are often presented as a range of values rather than a point estimate, a single value • Values are most reliable for water used as input to • agriculture, • hydroelectric power and other uses where water is a major component of production costs

31. Concepts of valueConsistent with the SNA? In principle, SNA measures market values, or sometimes cost of production Many valuation techniques were developed for Cost-Benefit Analysis of projects (not national economy): • CBA often tries to measure of economic welfare (total economic value) not market price • Programming models measure values in an optimizing economy which usually differs from actual economy

32. Aggregation and national accounts • Some values highly site-specific, dependent on local uses, as well as season, water quality and reliability • Values are not amenable to ‘benefits transfer’—using an estimate from one case study for another area • Little experience scaling up local values to the national level

33. Revealed Preference(based on observed market preferences) Residual value Marginal contribution of water to output, measured by subtracting all other costs from revenue Production function approach Marginal contribution measured as the change in output from a unit increase in water input in a given sector Optimization models and programming Marginal contribution measured as the change in sectoral output from reallocation of water across the entire economy Hedonic pricing Price differential paid for land with water resources Opportunity Cost Price differential for alternative (example: replacing hydroelectric power with coal-fired electricity)

34. Stated Preference(based on surveys of willingness to pay) Contingent Valuation Method • Survey of users, especially household water use and recreational services

35. Valuing water and treating it an economic good has strong support • In Integrate Water Resource management • 2002 World Summit on Sustainable Development in Johannesburg • 2003 Third World Water Forum • 2006 World Water Development Report • Human Development Report 2006 Beyond scarcity: power, poverty and the global water crisis

36. SNA values water at price of transaction. There are some prices for water, so why may it be inappropriate use these? • Because the price charged by water suppliers—if any—is often unrelated to value of water, and may be too low • ‘Bulky’ commodity (very high transport costs relative to value inhibiting trade) • Water price often does not even reflect full costs of water supply • Water is not supplied by competitive markets due to natural characteristics • Necessary for human survival • Natural monopoly • Characteristics of public good • Property rights not always well defined for multiple use or sequential use

37. Some markets for trading water rights are developing • Australia, • California • Chile • but still uncommon, local Price of tradable water rights does not yet provide a reliable indicator of value because markets too ‘thin’ (too few traders) So we must estimate or impute economic value of water

38. Most commonly used water valuation techniques

39. Residual Value (Value Marginal Product)The easiest & most commonly applied valuation techniquewhere TVP = Total Value of the commodity Produced piqi = the opportunity costs of non-water inputs to production pw = value of water (its marginal product) qw = the cubic meters of water used in productionNon-water inputs include: intermediate inputs, labor, capital costs, land

40. Challenges to Implementing Residual Value Technique • Is the quantity of water measured accurately? • Is labor cost accurate—how to value unpaid family labor? • Value of land—minus water rights • Capital costs • Are all capital costs accounted for accurately? • What rate of return to capital should be used? • Are there other inputs that have not been included? • Do the prices of output & all inputs reflect true economic value, or are they distorted?

41. Example: Agricultural water use in Namibia (Stampriet area)

42. Net present value of hydropower & geothermal in New Zealand

43. Approach Environmental Valuation Cautiously Value consistent with SNA: include all values but indicate type of value and robustness Accuracy/uncertainty: start with major uses that are easiest to value & indicate range of values Aggregation: implement valuation at local/river basin level Asset value: begin with resources with single or few uses that can be easily valued

44. Acknowledgement Many thanks to Glenn-Marie Lange for allowing me to use some material from her presentations Glenn-Marie Lange Senior Research Scholar The Earth Institute at Columbia University Center for Economy, Environment and Society 2910 Broadway, Room 110 New York, New York 10025 Cell phone: 1-718-290-0454 Phone: 1-212-854-3533 Fax: 1-212-854-6309 http://www.earthinstitute.columbia.edu/cgsd/lange.html