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a manual for implementing integrated w ater management the economic perspective

A Manual for Implementing Integrated Water Management:The Economic Perspective

DR. PHOEBE KOUNDOURISenior Lecturer in Economics Co-ordinator of ARID Cluster of ProjectsSchool of Business European Commission 5th Framework ProgrammeDepartment of Economics Key Action "Sustainable Management & Quality of Water" UNIVERSITY OF READING Energy, Environment and Sustainable Development http://www.rdg.ac.uk/economics/koundouri.htmlhttp://www.arid-research.netSenior Research Fellow Member Groundwater Management Advisory Team

Department of Economics and CSERGE GW_MATE, The World Bank

UNIVERSITY COLLEGE LONDON http://www.worldbank.org/gwmate



3 step approach
3-step approach

Economic characterization

of the river basin

Step 1

The assessment of the recovery of

the costs of water services

Step 2

The economic assessment of potential

measures for balancing

water demand & supply

Step 3

step 1 e conomic characterization of the river basin identification of significant issues
Step 1:Economic characterization of the riverbasin & identification of significant issues

Step1_A. Evaluation of the economic significance of water inthe region.

Step1_B. Identification of key economic drivers influencingpressuresand water uses.

Step1_C. How will these economic drivers evolve over time & howwill they influence pressures?

Step1_D. How will water demand and supply evolve over time & which problems their paths arelikely to cause?




Time & Money Constraints Define the Detail of Step 1!

step1 a evaluate the economic significance of w ater u ses in the r egion
Step1_A. Evaluate the Economic Significance of Water Uses in the Region
  • Residential (e.g. population connected to public water supply system, population with self-supply, number of water supply companies, etc.).
  • Industrial (e.g. turnover for key sub-sectors, employment in sectors, etc.)
  • Agricultural (e.g. total cropped area, cropping pattern, livestock, gross production, income, farm population, etc.)
  • Tourism (e.g. total number of tourist days, daily expense per tourist day, employment and turnover in the tourism sector, etc.)
step1 b identify key economic drivers influencing pressures and water uses
Step1_B. Identify Key Economic DriversInfluencing Pressures and Water Uses
  • General socio-economic indicators and variables (e.g. population growth, income, employment).
  • Key sector policies that influence significant water uses (e.g. agricultural and environmental policies).
  • Production or turnover of main economic sectors/ significant water uses.
  • Implementation of planned investments linked to existing regulation, likely to affect water availability.
  • Implementation of future (environmental and other) policies likely to affect water uses.
step1 c evolution of economic drivers their influence on pressures
Step1_C. Evolution of Economic Drivers & their Influence on Pressures
  • Changes in demographic factors, e.g. population growth in specific urban areas.
  • Economic growth and changes in economic activity composition, e.g. changes in the relative importance of services/sectors.
  • Changes in land planning, e.g. new areas dedicated to specific economic activities, etc.
  • Changes in social values and policy drivers, e.g. globalization.
  • Changes in natural conditions, e.g. climate changes.
  • Changes in non-water sector policies, e.g. changes in agricultural policy or industrial policy that will affect production and consumption in economic sectors.
  • Planned investments in the water sector, e.g. for developing water services, for restoring the natural environment/mitigating for damage caused by given water uses.
  • Development of new technologies likely to impact water use for industrial production and related pressures.





Water Policy


step1 d evolution of demand and supply
Step1_D. Evolution of Demand and Supply
  • Apply appropriate methodologies to assess sector-specific water demand.
  • Derive:
  • marginal value of water in consumption and production
  • price and income elasticity of demand
  • marginal/average WTP for public goods & quality changes of common access resources
  • risk parameters (production and consumption)
  • Identifyeconomic measures/instrumentsto balance demand & supply if a ‘gap’ is identified:
  • Water supply will be allocated among competing demands
  • Aggregate demand will expand until marginal benefit is equal to marginal social cost of supply
estimating demand in step 1 an example
Estimating Demand in Step 1 – An Example

i. Identification of Sector Water Demands in the Watershed Area





ii. Valuation Techniques for Specific Types of Water Demand

Use Value


  • Input in Production:
  • Profit or Cost Function Approach
  • Mathematical Modelling
  • Residual Analysis
  • Consumption Good:
  • Econometric Demand Estimation
  • Cost Function Approach
  • Hedonic Analysis
  • Amenity/Recreation:
  • Travel Cost Method
  • Hedonic Analysis
  • Existence values:
  • Contingent Valuation Methodology
  • Choice Experiments
methodology for constructing baseline scenario using parameters from in step 1
Methodology for Constructing Baseline Scenario Using Parameters from in Step 1


  • Consider three possibilities of evolution of population.
  • Consider two possibilities of evolution of demography of other cities in the region.
  • Consider possible evolution of rural population.


Build scenarios using basic assumptions and quantify the water balance with these assumptions.


Apply step two over time.


Based on steps 1,2,3, imagine a plot that tells the story of the system from now until at least 2030, giving consistency to the assumptions and water balance curves.

how to apply the baseline scenario

Water Balance/

‘Good Water Status’


Initial status




How to apply the ‘Baseline scenario’?

Measures to close the gap are needed!

Starting from initial

status it is possible

to elaborate a

baseline scenario.

The baseline scenario

refers to the situation

without doing

anything else than

planned today.

Date at which ‘Water Balance’

should be met.

step2 assess cost recovery of water services
Step2:Assess Cost-Recovery of Water Services

Step2_A. How much do current water servicescost?

Step2_B. Who pays these costs?

Step2_C. What is the current cost-recovery level?

Step2_D. Propose cost-recovery mechanisms.


Step2_A&B. Current cost of services Who pays for these costs?

  • Estimate costs of groundwater services by sector.
  • Do users and/or institutional mechanisms recover these costs?
step2 c current cost recovery level
Step2_C. Current cost-recovery level.

Elements to be investigated:

  • Status of key water services (e.g. number of persons connected).
  • Costs of water services (financial, environmental & resource costs).
  • Institutional set-up for cost-recovery (e.g. prices and tariff structure, direct & indirect subsidies, cross-subsidies).
  • Contribution from key water uses to the recovery of costs.
  • Resulting extent of cost-recovery levels, linked with the affordability for water users.
step3 d identify potential cost recovery mechanisms
Step3_D. Identify potential cost-recovery mechanisms?

Potential cost-recovery mechanisms:

Possible subsidies/transfers involved:

  • Selling permits for water abstraction/pollution.
  • Taxes on abstraction/pollution.
  • Charges for the use of the irrigation system.
  • Charges on energy used, etc.

- Subsidies to low-income households (mainly for agricultural water use)

- Capital subsidies on investments in infrastructure, irrigation system, etc.

step 3 the economic assessment of potential measures for reaching good water status
Step3:The economic assessment of potentialmeasures for reaching good water status

Step3_A. Identify least-cost set of measures.

Step3_B. Assessment of cost of measures.

Step3_C. Assessment of the impact of measures on economicsectors/uses.

Step3_D. Are costs of measures disproportionate?

step3 a search for least cost set of measures
Step3_A. Search for Least-Cost Set of Measures
  • Economic instruments (e.g. abstraction/pollution taxes, tradable permits, subsidies).
  • Measures to increase awareness regarding water scarcity, aiming at reducing abstraction/pollution.
  • Direct controls on pollution dischargers.
  • Agri-environment programs providing financial and technical assistance for, e.g. reallocation of crop production mix over agricultural land, adoption of water-saving technologies coupled with land-allocation restrictions, etc.
step3 b assessment of cost of measures
Step3_B. Assessment of Cost of Measures

- Estimate a range of costs along with key parameters influencing costs over time (cost change with developments in sectors).

- Allocate costs of measures to water users and identify winners and losers, in order to potentially feed into the analysis of disproportionate costs to justify derogation (Step3._D).

  • Financial costs
  • capital costs
  • - operation and maintenance
  • - administrative costs

Indirect costs

- non-water related environmental charges/taxes

- changes in environmental quality

- costs of preventiveand mitigation measures

step3 c impact of measures on key economic sectors uses
Step3_C. Impact of Measures on Key Economic Sectors/Uses
  • Net impacts on public expenditures and revenues: e.g.
  • impacts on expenditures for agri-environment schemes
  • revenues of economic instruments
  • impacts of changes in the prices charged for publicly owned water services.
  • Wider economic and social impacts: e.g.
  • significant changes in patterns of employment
  • economic impacts on industries & local economic development from changes in the price of water supply, level of discharges and water quality.
  • Effects on the retail price index and inflation.
step3 d disproportionate costs derogation

Important for


developing countries!

Step3_D. Disproportionate Costs/Derogation


  • If the achievement of good water status has significant adverse effects on the wider environment & human activities.
  • If the beneficial objectives served by the artificial or modified characteristics cannot reasonably be achieved by other means.

Measures to improve water

quality are expensive

Heavily Modified Water bodies

Water bodies substantially changed in character

as a result of physical alterations by human activity.

Time derogation

Less stringent


  • !! Disproportionality is a political judgment informed by economic information !!
  • - Disproportionality does not begin when measured costs exceed quantifiable benefits.
  • - The margin of excess costs should be appreciable & have a high level of confidence.
  • Disaggregated analysis to the level of separate socio-economic groups and
  • sectors is needed, especially if the ability to pay is an issue for a particular group.

Economic analysis needs to be integrated with other field expertise (hydrology, geology, engineering, sociology, etc.) and be considered all along the management & decision-making process.

Summary of the

3-Step Methodology

1- Characterisation of the river basin

  • economic significance of water uses
  • trends in key indicators and drivers
  • dynamic path of demand and supply of water
  • gaps in water status by the agreed date of meeting ‘water balance’?

2- Assess current cost-recovery

  • how much water services cost and who pays this cost?
  • how much of this cost is recovered?
  • potential cost-recovery mechanisms

3- Identification of measures and economic impact

  • construction of a cost-effective programme of measures
  • assessment of cost-effectiveness of potential measures
  • financial & socio-economic implications of the programme of measures
  • are costs disproportionate? Derogations