PRICING THE PRICELESS Valuing water for policy

1. PRICING THE PRICELESSValuing water for policy A J (Viju) James, PhD Visiting Professor Institute of Development Studies, Jaipur, India 25 November 2015 Dialogue for Water Governance, Fortaleza, Brazil

2. Perspectives on pricing: irrigation • ‘Hydraulic societies’ (Marx), based on surface water irrigation systems in 19th century India. Patronage politics. Systems built (and repaired) by kings, temples; maintenance organized by local community – who considered these systems ‘community owned’ • Government ownership: Since 1873, flat-rate cesses and taxes introduced by the British to recover water infrastructure (dams, canals) investment costs – a tradition continued by Indian government • Participatory Irrigation Management: Water User Associations levy agreed charges on water-using members, either using hourly rates or area-based rates; pay part to Irrigation Departments. But unpopular with Irrigation Departments – because it means handing over control over infrastructure and, more importantly, budgets! • Volumetric measures: Being proposed, not implemented fully. Danger – it will increase transparency! • Pricing as a policy instrument: Progressive rates, based on metering, can reduce water use – but studies show that these rates have to be unrealistically high to ‘bite’ – and reduce consumption (as water is not the constraining factor in agricultural production)

3. Perspectives on Pricing : Domestic Water • Idealistic: ‘Water is priceless, do not put a price on it’so don’t charge for it • Practical: Providing water of adequate quality & quantity costs utilities money. So utilities need to cover costs to be financially viable • Political: Citizens do not like to pay for water, so give it free • Political + practical: Must charge citizens ‘something’ so that they don’t waste water – but not the full cost, hence subsidize utilities • Reality check: Low costs keeps utilities in a ‘low equilibrium trap’: low charges + poor cost recovery  not enough money for maintenance  poor supply  low willingness to pay (WTP) for poor quality of service  poor cost recovery … • Revisionist: Calculate all costs necessary to provide sustainable and good-quality water supply in a financially viable manner (www.washcost.org) • Capital expenses (CapEx) • Operational Expenses (OpEx) • Direct support costs • Indirect support costs • Capital Maintenance Expenses (CapManEx) • Demand reducing: Flat rates vs metered with progressive ‘slabs’, to reduce waste

4. Reality in pricing: Domestic Water Supply Citizens are willing to pay for better quality services • WTC greater constraint than WTP • TN RWSP -voluntary payment for public stand posts used by poor Citizens want meters and transparency • Kerala Jal Nidhi: community wanted meters for greater transparency & equity • But utilities prefer flat rate for household piped supply (e.g., Rs. 30/household/month) due to ‘utility convenience’ (less hassle, more budgets) Alternatives are growing, but slowly • PPP:Not popular after Cochabamba & Bangalore – invariably raise prices • Community decides: Gujarat WASMO: in 15,000 villages! Yet little replication Demand management impossible through pricing • Prices would have to rise 8 times to ‘bite’ enough to reduce demand – but ‘floor’ Utilities have vested interests? • UFW is a cover: Usually put at ‘50%’ without analysis – for ‘buffers’ to cater to sudden political demands Hence engineers and staff ‘have’ to fudge data • Low CapManEx is deliberate? Shorter life spans of systems mean faster replacements & more frequent kick-backs: ‘Build-neglect-Rebuild’ (WB, 2005)

5. Valuing water • Why? When markets do not represent the ‘true value’ of a good or service – as in the case of environmental goods and services – need to do a valuation exercise • Benefit valuation methods: Many available in environmental economics: • Costs of alternate provision e.g., the benefit or value of 1 extra KL of drinking water is the cost of alternative supply: • Households buying it from private vendors • Government supplying water through tanker trucks and water trains • Installing new water supply systems (check dams, bore wells, pipelines, …) • Augmenting existing water supply systems (new tanks, more powerful pumps, new bore wells, deepening bores and wells …) • Avoided costs of BAU i.e., costs of not providing the 1 KL of drinking water: • Costs of women to walk long distances to find and carry home water • Costs of treating water (boiling, filtering, purifying … ) • Costs of medical treatment in case of water-quality related illnesses • Costs of income forgone due to such illnesses • Willingness to pay for that extra 1 KL of drinking water (contingent valuation)

6. The broader context of valuation • Valuation is not definitive • There can be as many values as there are economists! • Exxon-Valdez oil spill near Alaska – economists for defence AND prosecution • Ultimately based on ‘assumptions’ – and these can always be challenged • Conversely, acceptance only means agreement on assumptions! • Results of pricing methods or benefit valuationonly one of many inputs into policy decisions • Actual results can be counter-intuitive – e.g. Madras City Water Supply Project (WB) • But prices can be powerful change agents in the right context • Rajasthan drip irrigation – initially uneconomical, now with 80% subsidy! • Cropping pattern shifts – sugarcane to vegetables (Mah); cotton to others (AP)

7. The broader context of pricing • Smart pricing policies – for water, cropping, irrigation equipment, etc - can help change water use but has to be done carefully and may not be easy • Changing allocations involves costs: Current water allocation patterns benefit some stakeholders – who will fight directly or indirectly to preserve status quo – or postpone change • Agriculture is often the largest user of water – and large commercial farmers usually stand to benefit the most from current water allocations – and they are often politically well-connected! • Opposition usually by • Political means: lobbying/paying off political patrons - hence, delays in enacting laws or framing policies; referring to ‘parliamentary committees’, getting legal opinions, filing in court, reducing funding, weakening institutions, … • Bureaucratic means: arbitrary orders, suppressing data, discrediting NGOs • Paid media: carrying false reports, suppressing information …

8. In conclusion • Pricing can be very effective for change, e.g., • Price guarantees (floor prices) to farmers for less water-using crops • Subsidized prices for water efficient technologies (drips, sprinklers, …) • Price incentives to farmers growing less-water intensive crops (e.g., SRI) • But pricing is not simple or standard or universally effective – these have to be done carefully and for specific contexts and times • Non-price interventions can sometimes work well, e.g., • Social controls on groundwater extraction (e.g., northern AP) • Water permits (even to non land owners) and trading (e.g., Sukhomajiri) • Water agreements, even within a Water User Group (e.g., Aquifer Management Group) • Using prices (and other means) to change water use regimes will engender opposition – but have to know and anticipate the other side, to win!