3.5 Lesson 3: Recognise water as a scarce resource

3.5.1 Historically, water has been viewed primarily as a social good. While this is a valid view, it has often led to water services being provided tree by governments to the people, with no acknowledgement of the cost associated with the provision of that service or the increasing scarcity of water. We have now learned from world wide experience that water services provided freely, or at very low cost, are not respected or conserved. These concerns, together with concerns over efficiency of allocation and over water's ecological importance, led the international community to recommend that water be recognised as an economic good²² - in other words, as a finite and often scarce resource, with a value in its own right.

²² Fourth Principle from the 1992 Dublin conference, echoed in Chapter 18 of Agenda 21 in the World Bank's 1993 policy paper, and in the CSD's ongoing Freshwater Initiative.

3.5.2 Ironically, many poor people in developing countries are already forced to treat water as an economic good, because they pay high prices to water vendors or incur heavy time costs to fetch water from a distance. Meanwhile, the better-off continue to enjoy water and wastewater services as socially provided, almost free, goods, supplied by a utility company In contrast, appropriate community-managed supplies can substantially reduce the cost to poor users while providing a better service. In many cases, people are willing to pay for a more reliable service, thus providing the opportunity for reducing or eliminating subsidies to existing users.

3.5.3 Considered as a scarce resource, a unit of water used in one sector has the opportunity cost of being unavailable for use in another sector, or by another producer or consumer in the same sector. Different sectors need water of different quality - potable water often has higher treatment costs than water for agriculture or industry - and different uses of water require different wastewater treatment. The costs of transporting water are significant, so the location of demand is important in addition to the seasonal variation of that demand. A starting point for the full pricing of water is to consider the long run marginal costs of supply: long run because both discounted capital and operating costs are included; marginal because they are based on the costs of expanding supply. Impacts of water use that are outside the water users' main concern (such as watershed conservation or maintaining biodiversity) need also to be factored into the economic decisions.

3.5.4 Water pricing along the above lines is already being employed in some countries, both to encourage users to conserve scarce resources and to generate the money needed to maintain the services. Prices that accurately reflect water's economic or scarcity value enable consumers' choices regarding water consumption and use to be more socially efficient, from the point of view of society as a whole. But consumption of at least a minimum quantity of safe water by all is essential for health and economic well-being (as discussed in section 2.2). Tariffs which enable access to a minimum quantity of safe water for poor people are therefore needed. Water pricing may also be designed to discriminate between different categories of users and levels of service. One practical problem is that, while water can be given a monetary value fairly easily, this is less easy for sanitation provision, and hence cost recovery is more difficult. Hygiene promotion and social marketing are essential to help people appreciate the value of sanitation services for convenience, health and quality of life.

3.5.5 However, many governments remain sensitive to the political costs involved with water pricing. There remains strong resistance from some countries to the idea that water should be regarded as an economic good. The Agenda 21 principles on water resources (presented at the post-Rio Ministerial meeting on water and sanitation held at Noordwijk in the Netherlands in 1994) did not receive universal endorsement. This disagreement reflects concern that economic considerations will be elevated over concern for water's life-support functions and its deep social, cultural and religious values. It is, therefore, important to continue to acknowledge water as a social and ecological good as well as an economic good. Indeed, the Dublin Conference also recognised that access to clean water and sanitation at an affordable price is a right for all human beings.

3.5.6 In the early 1990s, positions were polarised, with some arguing that water tariffs should be based on full cost, irrespective of social status, while others remained opposed to charging the poor at all. After intense debate, there is wide agreement on the need for equity of access to water. This means that users should pay for the level of service provided, but with scope for cross-subsidy from higher volume to very low volume consumers. This idea is compatible with the economic argument in 3.5.4 enabling access for all to a minimum quantity of safe water.

3.5.7 Increased involvement of the private sector during the 1990s has contributed to an increased understanding of the true cost of water and wastewater provision. Costs indirectly subsidised during public provision are usually passed on to producers by private operators and included in the tariff. The cost of borrowing money, and commercial and political risk, can in many situations lead to very high, and in some cases unaffordable, tariffs and this is a dilemma with which many governments and agencies are grappling.