Why are economic and financial instruments needed?

1. Why are economic and financial instruments needed? A presentation made by Noma Neseni, IWSD

2. Major issues in water management • Achieve MDGs • Clean up the environment • Anticipating climate change impacts • Pollution of water bodies • Inadequate development and distribution of water resources • Using private initiatives • Water use efficiency • Physical infrastructure not in place • Government agencies with insufficient capacity to do what they are supposed to do • Lack of funding • Water rights (how are they allocated) • The right level to deal with these issues (national, catchment, basin, regional

3. Importance of economic and financial instruments for IWRM • IWRM seeks to improve efficiency, sustainability and equity • Recognizes cultural diversity, socio economic disparities within the region and even within the nation • IWRM will therefore benefit from use of financial and economic instruments to achieve the goals in a sound decision making and democratic manner

4. Economic and financials instruments • Water is becoming scarce, value is rising –use of economic instruments for competing needs becoming important • Important to consider trade offs, in terms of efficiency and equity • Without financial viability IWRM will not assure a sustainable flow of benefits • Confluence for achieving efficiency and environmental goals (e.g. polluter pays) • Complementarities in using sound economic and financial instruments e.g. higher water tariffs will lead to higher efficiency in use with more appropriate framework or enabling environment

5. Economic efficiency • Water use efficiency- is this a necessary evil that countries have been asked to adopt? • Certainly reduces water scarcity • Maximizes benefits provided by existing water infrastructure

6. Environmental • Reduces environmental degradation • Frees up water for other uses • Rationalizes social economic and environmental benefits • Therefore directly contributes to the Pan African development agenda.

7. economics • Mainly refers to situations in which decisions must be made in respect to allocation of scarce resources and competing needs • Pays attention to efficiency of allocation& distribution of assets and incomes behind and around the allocation process. • Water prices, water tariffs, water rights and water policies and regulations are part of important economic instruments

8. Why are economic considerations important in groundwater management and protection? To manage competition To improve efficiency and sustainable use Because groundwater is expensive to manage Others?

9. Economics and competing needs • Water is at the centre of all development agenda and must rationalize resources between competing national and regional priorities • Need to meet the social justice, environmental sustainability and economic efficiency in balance sanitation environment industry

10. Economically efficient solution • Marginal value of water should be the same for two users for the last unit of water consumed by each group and equal to the marginal cost of supplying water • Supply of water in this model is inelastic • Demand determines price • Allocation among users means that marginal value will exceed that of the other and water can then be reallocated from law value user to high value user. • Perfect competition- clear assignment of rights- buyers and sellers

11. finance • Refers to specific actions taken by organizations or firms to maximize short or long run returns to their assets and investments • Firm has clear goals, role of financial tools is to assure that resources are available in time and space for achieving these goals • They are measured in terms of effectiveness in meeting the goals

13. financial instruments • At each flash, revenue can be collected and costs are also made • Financial instruments are then necessary for achieving desired goals • Allocation and investments needs to be made on basis of some economic efficiency

14. financing • In O&M or capital investments, its is important to speak the financial language • Financial institutions think of investment costs, rates of return, interest and payback periods • If demonstrate the economic viability (users paying fees) then attract investment • Many sources of finance

15. IWRM :economic and financial instruments perspective

16. Economic, financial and policy instruments • At the policy level, there is need to create an enabling environment supportive of various actors to carry their functions e.g. good water governance, democratic policy formulation, appropriate legislation, regulatory framework and institutional reforms • At the finance level, there is need to ensure that resources flow to achieve objectives • At the economic and finance level there is need to create inducements and incentives • Economic instruments are seen as facilitation needed and operational tools in the process of implementing IWRM and improving access to water and sanitation for all • It embraces allocative and technical efficiency.

17. Valuing and allocating waterEconomic instruments and Water Accounting • Economic instruments useful to value the resource and influence choices in allocating water efficiently • Wateraccounting provides a unique tool for IWRM, as well as any economic analysis of water issues, because it integrates data about both the environmental and economic aspects of water in a framework that supports quantitative analysis.

18. Economic instruments Valuing and allocating water Economics is about making choices when resources are scarce and priorities are many. This is the case when water is polluted and needs to be consumed, or when investments are necessary to connect more people. Economic instruments are seen as facilitating, needed, and operational tools in the process of implementing IWRM and improving access to water and sanitation for all.

19. Valuing and allocating water Economic efficiency embraces allocative and technical efficiency • Allocative efficiency refers to the use of inputs in a way that maximizes total net revenues for firms or consumer surpluses for consumers. • Technical efficiency is related to production and refers to firms getting a maximum output per unit of input or use minimum input for a given output. • Economic efficiency: technical and allocative efficiency together are known as economic efficiency.

20. Valuing and allocating water Water Accounts • Water accounts are linked to national income accounts • Can be used for more complex economic analysis and modeling to project future water demands and evaluate different policy options for meeting those demands • National water accounts can be helpful in bringing the economic perspective to water policy at the National level

21. What must we do? • Government policy makers, development planners and water managers need to recognize that better water management is crucial to meeting the development agenda • Our work will be more effective if we manage water in a broader context • Adopting IWRM and linking it to national development planning will enable full potential of water resources to be realized • The right policies, institutional and legal framework needs to be in place. (champions will be needed)

22. Conclusion • Economic instruments together with supportive policies are no longer an option in Africa but a necessity. • Water is critical for Africa’s development agenda- eradication poverty, food security, adapting to climate change, energy supply, protecting the environment and social equity • Economic instruments and water accounting play a vital role in better water management. • We need to be responsible and account for water in development esp. if we are to meet future needs

23. conclusion • Existing legislative, and institutional frameworks have not been entirely responsive to demands and requirements of implementing IWRM • Urgency in reforms but these need to be taken incrementally (planning, capacity development, advocacy) • Economic and financial instruments help create the right environment for IWRM and will contribute to solving the water management problems