Water Charges for Environmental Management in Latin America: From Theory to Practice

1. Water Charge Instruments for Environmental Management in Latin America: from Theoretical to Practical Issues Conclusions and Recommendations Ronaldo Seroa da Motta, IPEA seroa@ipea.gov.br January 2003 INTER-AMERICAN DEVELOPMENT BANK REGIONAL POLICY DIALOGUE

2. Conclusions - Policy Phase Water charges (WC) have been introduced within a policy framework: • New approach to plan and decentralize water management to accommodate multiple conflicting uses and excess use of water above assimilative and carrying capacities • The French 1964 Water Act as a reference system based on two general principles: decentralization and planning

3. Mexico: Started in late eigthies, and involves a more centralized system under the National Water Commission (CNA). In 1989 CNA assumed responsibility for the promotion and execution of federal infrastructure, as well as for regulating water quality. • Brazil: Very recent system and highly decentralized; delegation of authority to autonomous river basin committees.

4. Water charges are introduced to complement existing CAC: • WCs have been created to assign an economic value to water, but they are in place to help enforce CAC instruments and assure compliance with standards • River Basin and National Water Management Plans are the main instrument where WCs would work to achieve planned targets, particularly for funding

5. Revenue transfer and exemptions play a key instrumental role: • Highest share of WC revenues go to infrastructure investments and direct transfer for users to finance pollution abatement activities. • Transfers are the basis for political acceptance and commitment by users. • Attempts in France to use revenues from general budget have failed

6. Decentralization is carried out through river basin agencies: • In France, decentralization is carried out through River Basin Committees (RBCs), which define management targets to be pursued by Water Agencies (WAs). • In Mexico, the decentralization process is less emphasized under the Federal Water Agency – CAN • Brazil has gone further, with no compulsory creation of river basin authorities and no WC pricing criteria adopted by states

7. Design Phase Water charges are designed as financing mechanisms: • Pricing criteria of WCs account for assimilative and carrying capacities of river basins • They also differentiate among users on sectoral and equity grounds. • However, WCs work as financing mechanisms to generate investment in water management, including pollution control.

8. Revenue transfers and exemptions play a key instrumental role: • Brazil’s first experience in the Paraíba do Sul River Basin has set charge levels according to financing needs required to leverage federal funds for river clean-up programmes. • Mexico’s CNA is explicitly committed to using revenues to fund water-related investments. • In all cases, agriculture is either exempted or paying very low charges.

9. Implementation Phase Unsolved sectoral conflicts reduce system efficacy: • Sectoral conflicts are the main barrier in the application of full charges. • In France, the charge system was implemented gradually, starting with pollutants that are more easily monitored (industrial and residential organic matter and suspended solids, for example) and sectors with lesser political opposition and higher ability to pay (industrial and residential users).

10. Mexico, even while adopting the same gradual approach, has failed to fully implement its charge system, mostly due to political opposition. • In Brazil, the state-owned hydroelectric companies and the agricultural sector have adopted a favourable charge system. • The lack of a national grid of RBCs in Brazil favors state’s institutional capacities but creates greater inter-basin externalities

11. Participatory processes may preclude price incentives: • Participatory processes help accommodate users’ preferences, resolve conflicts and increase acceptance • BUT they cannot be perceived as a sufficient condition for deriving benefits from a water charge system.

12. It is recognized that low charge levels in France may create incentives for installing and operating abatement facilities, but not for abating investments. • In the Brazilian experience of the Paraíba do Sul River Basin, charge levels were set too low to reduce economic impact, overlooking environmental targets • Adjustments of sectoral and economic policies cannot be pursued through RBCs

13. Environmental and water management frameworks have to work together: • In France and Mexico, where WC systems are already in place, efforts have been made to reconcile water pollution CAC instruments with WC systems • Nevertheless, joint monitoring and information sharing activities need to be improved. • The lack of continuous evaluation has delayed improvements in the system and in allocation of the WC revenues.

14. Recommendations 1 –A policy framework must be in place before charges are designed; charges must be consistent with policy goals. If raising revenues is the only politically viable goal, this should be explicitly acknowledged. The reinforcement of CAC instruments has to be planned.

15. 2 – Autonomy of river basin authorities must be tailored according to the dimension and complexity of the hydrological system, in order to maximise institutional capacity. This will facilitate political support and reduce asymmetry of information and administrative costs.

16. 3 – River basin committees have a key role in launching the system, but they can also promote rent seeking behaviour. That prevents the implementation of charges and the achievement of environmental targets.

17. 4 – The water management framework must be integrated into other sectoral policy frameworks, in order to increase monitoring and enforcement capacities. The same applies for integration with environmental agencies. This integration requires federal involvement in inter-sectoral negotiations, therefore a federal water agency needs to lead this process, and not a river basin authority.

18. 5 – While keeping an emphasis on revenue generation, the discussion should include issues related to environmental consequences of charge application, thus allowing a gradual incorporation of environmental criteria in the charge system. Continuous environmental evaluation of river basins should be undertaken, incorporating economic models that identify changes in water use due to the application of charges.

19. 6- Explicit criteria on for favourable charge levels must be drafted based on either economic or equity grounds, taking into account, from the beginning, all users in the charge system, thus strengthening their commitment and compliance.

20. 7 – Cost-benefit analytical tools must be used to evaluate and guide the use of charge revenues as financial mechanism of projects in order to maximise social welfare.

21. 8 – Public opinion should be brought into the debate, presenting the necessary data and technical arguments concerning the role of water charges in river basin management.