Public Spending and Water Allocation in Brazil

1. QUALIDADE DO GASTO PÚBLICO NO BRASIL Recursos hidricos e saneamento Gordon Hughes Gordon.Hughes@nera.com

2. Public spending and water • Water is a key resource for Brazil • public spending decisions critical to the management and allocation of this resource • highly ‘political’ because these decisions affect the distribution of income & wealth • how far is it possible to minimise conflicts between different groups of users - e.g. hydro-power vs irrigation vs urban consumption • Geographical dimension - river basins not States • fundamental role of ANA to promote fair allocation mechanisms • spending should follow allocation, not drive it

3. The key players • Federal ministries, etc • Agriculture, Minas e Energia, Saude, Transportes, Communicacoes, Meio Ambiente, Desenvolvimento Agrario, Integracao Nacional, Cidades + ... • ANA, ANEEL, CONAMA/IBAMA • State goverments & municipalities • Public & private entities • hydro-power companies, water companies, infrastructure managers, … • financial institutions - CEF, BNDES

4. Principles of allocation • Traditional approach • first come, first served (prior appropriation) • no charges but no property rights • hence no mechanism for re-allocating water to more valuable uses • problems in managing variability (drought protection) • The economic approach • allocate water to purposes/sectors where its value is highest, net of infrastructure & operating costs • valuing the benefits of water in competing uses • directly leads to the principle of cost recovery for infrastructure and other services of water management

5. Valuing the benefits of water use • Hydro-power • time dimension & value of storage • Irrigation • income generation and poverty alleviation • distribution : subsistence vs cash crops, size of farm • capital investment to use water efficiently • Urban & industrial uses • typically high willingness to pay, but tendency to treat these uses as cash cows (eg Ceara) • Environmental quality • amenity benefits - recreation, protection of aquatic eco-systems

6. Cost-benefit & water projects • Development of cost-benefit analysis linked to evaluation of water projects in the USA • unfortunately, all too often the results are ignored! • trade-offs between competing uses of water involves same issues as environmental valuation • Example : CB analysis of Sao Francisco transfer • basic goals are distributional but the major benefits come from urban/industrial uses • how should the contribution to poverty alleviation be assessed and valued? • difficulties of evaluating reductions in risk : alternative approaches to drought relief and rural water supply

7. Charging for bulk water 1 • Basic principles • charges should at least cover administration, operating and maintenance costs (A, O & M) • investments only justified if the discounted sum of the rents generated by project water exceeds the capital costs of the infrastructure and the net value of water in competing uses • where possible, award concessions or establish public companies to finance and operate infrastructure - e.g.CHESF or COGERH • role of public expenditure - targeted capital grants or loan finance for specific social/economic objectives

8. Charging for bulk water 2 • Subsidies for bulk water are not an efficient mechanism for income transfers • promote excessive use of a scarce resource • most of the benefits go to large farmers, etc • Specific external benefits - perhaps flood control, drought protection - may justify foregoing a return on past investments • However, geographical bundles of water infrastructure (eg in a river basin) should be self-financing so that there is no need for continuing budgetary transfers

9. Water supply • Social objective to serve the 5% of urban households with no piped water of any kind • these tend to be among the poorest households • cost could easily be financed by efficient water utilities • average WTP for water supply easily exceeds the marginal cost of providing services • problem is largely one of mismanagement rather than public expenditure • Water supply in rural & peri-urban areas • network extension may be efficient • real issue for public expenditure is organisation rather than cost (incl role of Min of Health / FNS)

10. Sewers & sewage treatment 1 • The expensive item in the urban agenda • important to think carefully about the justification for investments in sanitation • many people have reasonable arrangements without sewers - hence unwilling to pay extra cost • If the justification for sanitation is health or environmental benefits, then where should public expenditure be allocated? • link to incidence of water-borne diseases • protection of important recreational facilities such as beaches or specific rivers

11. Sewers & sewage treatment 2 • Much expenditure driven by environmental standards which create peverse incentives • are households willing to pay for collection and treatment of sewage? • if not, are the amenity benefits of investments large enough to justify their cost? • Focus on output-based assistance • example : ANA’s Compra dos Esgotos grants • limited rather than full funding • promote competition among alternative solutions • clearly identify and monitor the health, environmental or other goals for assistance is given

12. Lessons : USA & Europe • Coverage of sewers & sewage treatment has taken over 100 years • many targets for Brazil are much too ambitious • in practice, priority was given to places where the return on investment was greatest • Recent expenditures have been driven by Federal or EU standards • no proper consideration of the costs & benefits • extremely expensive and wasteful investments • large transfers of Federal/EU funds to finance investments - often poorly managed and inefficient

13. Conclusions • Consider how the benefits of water as a valuable resource are distributed • inefficient incentives, unequal distribution • Cost recovery for the sector as a whole should be the basic principle • Use cost-benefit analysis for investments • identify what are the goals and who will benefit • are the intended beneficiaries willing to pay for the service and how will they pay? • Target public subsidies for identifiable social or environmental objectives - then monitor the results!