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Public Spending and Water Allocation in Brazil

This article discusses the importance of public spending decisions in managing and allocating water resources in Brazil. It examines the challenges of minimizing conflicts between different user groups and the role of government agencies in promoting fair allocation mechanisms. The text also explores principles of allocation, valuing the benefits of water use, cost-benefit analysis of water projects, and the charging for bulk water. Additionally, it addresses issues related to water supply, sewers, and sewage treatment.

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Public Spending and Water Allocation in Brazil

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  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!

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