Application of water economic instruments to IWRM to improve efficiency, equity and environmental sustainability

1. Application of water economic instruments to IWRM to improve efficiency, equity and environmental sustainability

2. Economics is the study of the allocation of scarce resources • One of economics' prime advantages is addressing trade – offs among various factors • The role of economics will be to do optimal allocation among competing parties • Water is an economic good • Supply and demand concepts apply

3. Issues to be considered • Supply can not meet demand • Population growth will increase demand • Economic advance and development will also cause more pressure on water • Environmentally oriented demand for water have risen • Water supply is not rising due to pollution and ground water depletion

4. Issues to be considered • Global warming can increase demand for water due to shifts in locations • The best dam sites are already occupied • Water infrastructure is depreciating • Health concerns can boost costs • Demand for hydro power will rise as a result of increasing energy prices

5. Key Water Challenges • Water resources management is highly political • Solutions have to be tailored to specific, widely – varying circumstances • Overall economic reform is important and has to be taken into account • Financing Needs are huge, particularly in developing countries

6. Supply Enhancement Strategies • Build / enlarge dams • Drill / improve wells • Build interbasin water transfer facilities • Repair leaky infrastructure • Build desalinization plants • Reprogram reservoir operations (e.g. more storage with less flood protection)

7. Demand Management Strategies • Establish water-conserving plumbing codes requiring certain fixture types (such as low-flow toilets and showerheads) • Establish drought contingency plans • Ration water or constrain water use (e.g., alternate-day watering schedules) • Buy / lease / sell water rights • Raise water rates • Educate water users about conservation options

8. Economic Instruments • The implementation of any of these strategies involve projects • Evaluation of any project involves the application of some kind of cost-benefit analysis and an instrument to conclude • The best instrument for project evaluation is the Net Present Value (NPV)

9. The NPV concept • The concept is simple, input required are: • The Initial Investment • The annual cash flow • A discount Rate • Timing & life time of the project • The economic values have to be used not the financial values

10. Issues in Determining the Economic Values • Costs and value are two different concepts • The full value of water consists of its intrinsic value and economic value • Value & costs will differ from one case to another

11. Conclusion • Full cost of water must be considered including the opportunity cost • Value of water should reflect societal objectives, food security, benefits from irrigation …etc • Value & cost of water should be taken into account when setting water tariffs