Water Valuation. Innovative Water Sector Financing. BY CUSH NGONZO LUWESI bfz Expert. Mombasa ,Kenya. 7-11 November 2011. Goals of this Lesson. To introduce the concepts of water value. To provide some tools to valuate water in a formal market.
Innovative Water Sector Financing
CUSH NGONZO LUWESI
7-11 November 2011
• At the end of this lesson, participants shall be able to explain the difference between water valuation and its evaluation
• They need to be keen with basic market concepts of water valuation: (i) value in use; (ii) Exchange value; (iii) value in capital; (iv) value added; and (v) Benefit.
•They are also expected to understand non-market techniques of water valuation: (i) residual imputation of shadow prices; (ii) Hedonic method; (iii) Travel cost method; (iv) Avoidance cost method; (v) Benefit transfer method; and (vi) contingent valuation method.
CONCEPTS RELATED TO WATER VALUATION
Value & Valuation
What is the difference between (i) Value and Price? (ii) Valuation and Evaluation?
E.g. A precious stones; Shakespeare ’s masterpiece; the dubious value of modern churches"
E.g. the value assigned to the time: 3600 seconds = 1 hour = 1/24 day
E.g. An estimate of the price
What does the presence of water vendors mean to you?
The natural water resource is finite and vulnerable
Only 0.4% of the world reserve is available for production and to fill the needs of the ever growing 7 billion people
There will be high sectoral competition on water resources leading to more exclusion and rivalry, especially between irrigation expansion, business and industrial production growth
Besides water withdrawals, environmental disasters may be occuring more than expected. Thus, the need for sustainable policy limitations.
Water Scarcity, Cont‘d
Three categories of water stress that
would be exacerbated by climate
(i) Too little
(I (ii) Too much
(iii) Too dirty
(Zbigniew W. Kundzewicz 2007)
Do you recall the three drivers of economic water scarcity?
Do you recall the three categories of water stress?
Why is there rivalry and exclusion?
Different Values of Freshwater
For what purposes do we need water in each of these pictures?
I’d better go to the fountain …
A rice field
Please! give me a cup
Go to stream ... There is plenty of it.
Different Values of Freshwater, Cont’d
MARKET METHODS OF WATER VALUATION
Inner Valeur (H2O)
Value in Use
Value in Capital (Present / Future)
Water Value in Use
The value of water in use is a measurement of its utility for domestic use, agriculture, livestock, industry, power generation and other uses
There is not enough water to grow crops and support livestock; the need for long, and at least daily, journey to carry water from stand- pipes, ponds or springs; having to wash in, and sometimes drink, dirty water that other have recently washed in or drunk; having dirty clothes, dirty dishes and being thirsty; and people with little money having to spend too much of there tiny income on water vendors (Clark & king 2004, p. 19)
Clark & King (2004) predicted that by 2025, water withdrawals arise by 5,270 km3 with a population growing by 4.623%/ annum and irrigation expanding by 39% while businesses will keep growing in the same speed as now without policy limitations .
Water Exchange Value
What do arbitrary prices by water vendors mean to you?
Water Value in Capital
According to Engel, why is water likely to become a “luxury” like diamond?
Water Value Added & Benefit
Why do you remember why water
price is a catalyser to its efficient use?
“Water value-added (VA) is the difference between water price and the cost of all its inputs used during the treatment and recycling process
Water value added determines its high price and contribution to the macro-economy through notably the Tax on Value Added (TVA)
Value added water resources are to climax with a “benefit” or a “profit”, meaning excess revenues over all expenses (overheads and variable costs).
This is the final result that a water service provider can expect to increase its future “value in capital”.
Cost-Benefit Analysis: How to go About It?
In the perspective of a Below Normal Rainfall Regime (BNOR) or an Above Normal Rainfall Regime (ANOR) how will you do your Cost-Benefit Analysis?
NON-MARKET METHODS OF WATER VALUATION
Often, water is not directly consumed but it enters a productive process like agriculture, industry or hydroelectric power generation, which are examples of intermediate good use.
The producers’ demand for water will be according to its Marginal Value of Product (MVP), which is here replaced by “shadow prices”, since there is no formal market of water in the nature.
The residual imputation approach derives water value from the difference between the total cost of production and the cost of all other inputs, based on estimated production data and prices of non-water inputs.
Hedonic Price Method
Hedonic Price Method is also used where no water price exists, especially in rural areas and in production sectors using water as an intermediate good
This method suggests that one’s valuation of water be based on its characteristics rather than the resource itself.
Based on the theory of consumer behaviour, it may be possible to estimate water users’ Willingness To Pay (WTP) after identification of factors that affect hedonic prices (e.g. Taste, Colour, odour, distance from house, time to fetch water...
Why is the demand curve descendant while the utility curve is ascendant?
The cost of travel takes into account the number of visits, the cost of each trip and the entrance fee paid. This indicates the extent to which this individual is willing to pay for water services.
The Avoidance Cost Method
This method is mainly used to prevent the adverse effects of water pollution or drought.
It takes into account the cost that individuals incur to prevent or avoid water polluted or water shortage, and thus measures the social cost of water stress disutility.
For instance people near a river have to walk long distances to go to fetch potable water from springs because the river nearby is polluted by industrial or human wastes. Others use purification methods to avoid water borne diseases.
At point , would you use this method to valuate water in your catchment?
Benefit Transfer Method
services and distribution of natural resources to enhance accessibility
This method consists of transferring knowledge from studies conducted in other areas to the place where decision n water value is to be made.
It is used to values preferences expressed
by other people on the effect of a certain
intervention on water resources.
E.g. if a coffee factory is planned to be
established in a certain watershed, results
of studies on water pollution by similar
industries from other locations can be
Availed to local people to assist them
Make a rational decision.
Yet, attention shall be paid on certain
aspects of the study that could not be
generalized or applied locally
Which method do you prefer to use when planning to set an irrigation scheme?
This is the most popular method applied to
estimate value both value in use and non-use
Value of new water projects or regulations.
To measure value in use, WTP is estimated along with water users’ Willingness To Accept compensation (WTA) to inquire about potential economic benefits and damages that the project is likely to bring to the people, based on their perception
But non-use value cannot be assessed using implicit prices. Thus, CVM suggests a proposed or contingent value based on : (i) option value; (ii) bequest value; and (iii) existence value
The suggested value will be evaluated by local water users based on their knowledge of the environment
THANK YOU ALL! FOR PAYING ATTENTION