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Managing Water in a Sustainable Manner

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1994
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AS WATER becomes an increasingly scarce resource, countries and development agencies are rethinking the best way to manage this vital resource. The World Bank’s new approach centers less on generating new supplies and more on the “demand” side—economic behavior, policies to overcome market and government failures, and more efficient water use.

Water is critical for human survival, economic development, and the environment. Indeed, few other resources affect so many areas of the economy or of human and environmental health.

  • Unsafe water can be fatal. Waterborne diseases are implicated in the deaths of 3 million people annually—mostly children—and cause over a billion episodes of illness a year. Yet insufficient progress has been made in supplying adequate water and sanitation, especially to the poor. Over 1 billion of the world’s 5.4 billion people lack access to safe drinking water, and 1.7 billion lack access to adequate sanitation. These problems are not limited to developing countries.

  • Water plays a vital role in the economy, through its use in agriculture and industry, as well as supplying energy through hydropower. A third of the world’s harvested crops are produced by irrigated agriculture.

  • Much of the natural environment—from coastal ecosystems to wetlands—depends on water. Degrading the quality or supply of that water can have disastrous effects on the environment and on biodiversity.

Clearly, the availability of good-quality water is central to economic progress and to maintaining a natural environment that can help to sustain such progress; yet in most countries, water resources are not being managed in an efficient and sustainable manner—a situation that cannot continue.

To begin with, the world’s population is growing rapidly, especially in urban areas (from 5.3 billion in 1990 to at least 8 billion by 2025). This implies a greater demand for food and hence for irrigation. At the same time, the demand for water by households and industries, further stimulated by economic growth, is rising. These factors imply escalating competition for irrigated agriculture, which already takes a hefty share of available water (Chart 1).

Chart 1.Who uses the water?

Source World Resources Institute 1992. World Resources 1992/93. Washington. DC.

Second, the supply of good-quality water is being contaminated through pollution originating from domestic wastes, industry, agricultural chemicals, and misguided land use—effectively decreasing the amount of water available.

Third, the engineering and environmental costs of developing new water sources are much higher than those of sources already tapped. For many cities, the cost of water provided by “the next project” can be two to three times the cost of current supplies, even before environmental costs are factored in. In Amman, Jordan, for example, when the water supply system was based on groundwater, the average incremental cost was $0.41 per cubic meter. But this rose to $1.33 per cubic meter when chronic shortages of groundwater led to the use of surface water.

As the increasing scarcity of water threatens to worsen the quality of life, impair the potential for economic development, and endanger vital ecosystems (Chart 2), a number of countries and development agencies, including the World Bank, have begun to rethink their approaches. This is particularly important for the Bank, which since 1950 has lent over $36 billion for water projects—one of the most important areas of Bank lending during the past four decades. While significant achievements have been made, investments have often encountered implementation, operational, and social problems, most of which stem from the weaknesses in current water resources management. In recent years, a consensus has begun to emerge on what needs to be done to correct the problems. This article describes these ideas, which are embodied in the Bank’s new water resources policy guidelines.

Chart 2.How scarce is water?

Estimated water availability, selected countries

The availability of water is already a major problem for many countries, and water will be critically scarce in some countries by the year 2025 unless overall demand is reduced. Indeed, as this chart shows, countries that not too long ago had no water problems, or faced relatively minor problems, are already experiencing stress, or will encounter scarcity within the foreseeable future.

A noted Swedish hydrologist, Malin Falkenmark, has calculated that 100 liters per day (36.5 cubic meters per year) is a rough minimum per capita requirement needed to maintain good health, while 5 to 20 times that amount tends to be needed to satisfy the requirements of agriculture, industry, and energy production.

Falkenmark has suggested that when annual renewable freshwater availability falls below 1,700 cubic meters per person, a country will experience periodic water stress; below 1,000 cubic meters, a country will experience chronic scarcity. These benchmarks are rough; factors such as climate and level of economic development influence water stress and chronic scarcity. Using medium-range UN population projections, some 34 countries will have less than 1,000 cubic meters of annual renewable water per capita in 2025.

Source: Robert Engleman and Pamela LeRoy, Sustaining Water, Population Services International, Washington, DC, 1993.

Current weaknesses

Why have governments typically assumed responsibility for the overall management of water? Water’s special characteristics make it difficult to use unregulated markets to deliver water efficiently or to allocate it equitably. The large capital requirements and economies of scale in water infrastructure tend to create monopolies, warranting regulation to prevent overpricing. Public investments in water infrastructure are often necessary given the large size and long time horizon of projects; underdeveloped capital markets in many lower-income countries and the potential for political interference reduce incentives for private investments. Water’s natural supply is subject to extreme variability over time and space. Certain aspects of water-related activities, such as flood control, are public goods, which cannot easily be charged for on the basis of use. Finally, water moves through an intricate cycle within the ecosystem that makes water activities highly interdependent and results in numerous spillover effects, many of which affect the environment. These effects cannot be reflected in market prices.

Yet there are many weaknesses in the ways governments manage water, in developed and developing countries alike.

Fragmented management of water resources. Many governments face growing problems because they have failed to address water resources management in a comprehensive manner. Government activities are generally organized so that each type of water use is managed by a separate and independent department or agency—for example, irrigation, municipal water supply, power, and transportation. This fragmentation has often resulted in a failure to consider the cross-sectoral effects of water activities, leading to waste and suboptimal allocation.

Overextended government agencies. When water is scarce, governments tend to base allocations on political and social considerations rather than on purely economic criteria. Moreover, they have an understandable concern that relying exclusively on unregulated markets would not generate the best allocation. In many countries, the result has been a tradition of heavy dependence on government agencies for developing, operating, and maintaining water systems—with the noticeable absence of incentives for profitability and efficiency that typically motivate market participants. In addition, in most cases, users have not been consulted or otherwise involved in planning and managing water resources. This has often led to a vicious cycle of unreliable projects that produce services that do not meet consumers’ needs and for which they are unwilling to pay, thus further worsening the quality of service.

Underpricing of water and lack of cost recovery. Pricing water well below its economic value is prevalent throughout the world, sometimes for cultural and religious reasons. Underpricing often results in misallocation and inefficient use. In many countries, expanding the supply is politically more expedient than raising fees; therefore, pricing and demand management have received much less attention. Farmers in both industrial and developing countries often pay little for their publicly supplied irrigation water and so have few incentives to refrain from growing water-intensive crops or to conserve water. This can lead to gross misallocations, whereby agriculture, which absorbs the lion’s share, often includes low-value uses compared with higher-value domestic and industrial uses. For example, in Arizona, several agricultural water uses yield values in the range of $19-$48 per 1,000 cubic meters, while in cities of the same state, water values range between $262 and $302. Charges for water used by urban households are often low as well. A recent review of Bank-financed municipal water supply projects found that the price charged for water covered only about 35 percent of the cost of supply.

Neglect of public health, water quality, and the environment. Countries have generally paid too little attention to water quality and pollution control. Besides contributing to severe public health problems, poor water resources management causes widespread degradation of land and water. Many countries do not have standards to control water pollution adequately or the capacity to enforce existing legislation. Furthermore, new types of pollution—often stemming from public investment projects—have arisen involving small quantities of non-degradable chemicals that are invisible, toxic, persistent, and costly to treat.

Piecemeal evaluations of water resource projects have often overlooked the cumulative environmental degradation caused by several projects, and interactions within the ecosystem have not been adequately considered. Because many irrigation projects lack drainage components, they have caused serious waterlogging and salination problems. Moreover, when water is diverted upstream, downstream areas that support sensitive water-dependent ecosystems (e.g., wetlands) become less able to fulfill valuable functions such as filtering pollutants and supporting biodiversity.

Inadequate service delivery to the poor. The weaknesses highlighted above have a particularly adverse effect on the poor (see “Poverty and Water Supply: How to Move Forward,” by John Briscoe, Finance & Development, December 1992). Because public services are overextended and underfunded, the inadequate supply is pre-empted by wealthier and more influential groups. Paradoxically, large numbers of poor people in urban areas depend on water vendors, paying a much higher price than a middle-class person pays. A study of water vending in 16 cities shows that the cost of water sold by vendors is from 4 to 100 times higher than piped city water.

New approaches

How to overcome the weaknesses in water resources management has been the subject of much international discussion. At the June 1992 United Nations Conference on Environment and Development in Rio de Janeiro, member countries endorsed policies that stress integrated water resources management “based on the perception of water as an integral part of the ecosystem, a natural resource and social and economic good.” They also stressed “the implementation of allocation decisions through demand management, pricing mechanisms, and regulatory measures.”

France’s “model” system

The French system of water resources management, adopted after many years of study and debate, could well serve as a model for developed and developing countries, as they look for the best way to put the new “demand”-focused approach into action. Key elements are:

Well-defined laws and regulations. The Water Acts of 1964 and 1992 are the foundation of the French system. The earlier law established specific quality objectives and regulations for pollution control, while the later act is designed in part to meet stricter European directives on water management.

Hydrographic basin management. The system is organized around six major hydrographic basins, with appropriate national policy oversight. These correspond to the country’s four main catchment areas and to two areas of dense population and intense industrial activity.

Comprehensive management, decentralization, and participation. Each of the six basins has a basin committee and a corresponding executing agency, a water board. The basin committee, also known as a “water parliament” because of its representation and powers, reflects regional—rather than central—government control and is designed to promote the role and responsibility of different interest groups in the basin. The water boards, while executing the committee’s directives, are also responsible to the central government for certain technical matters (e.g., upholding national standards). Water and sewerage services are provided by either public or private firms (increasingly through competitive bidding) and are chosen by communities.

Cost recovery and incentives. The companies and entities operating water services deliver a portion of the charges they collect to the basin agencies. In addition, a “pollution fee” (i.e., a penalty) is collected by the basin agency. Most of these revenues are reinjected to provide technical assistance and help the public or private sector ensure safe, purified water.

Supporting research. About 14 percent of the water boards’ expenditures in 1992-96 are budgeted for research and development.

These policies reflect the current worldwide consensus on moving away from past approaches that tended to center on developing new sources of water—a “supply” focus. The new emphasis is on economic behavior, policies to overcome market and government failures, and technologies for increasing the efficiency of water use—a “demand” focus (see “Water Management in the Maghreb” in this issue). This approach underlies the Bank’s new policy for managing water resources. Among the measures countries are increasingly adopting:

Applying a comprehensive analytical framework, incorporating cross-sectoral and environmental considerations. Water resources should be managed in the context of a national water strategy that reflects the nation’s social, economic, and environmental objectives and is based on an assessment of its water resources. Such a framework ensures that cross-sectoral and environmental implications of water investments and use are taken into account and can overcome the problems caused by fragmented management through appropriate coordination mechanisms. Often, the most appropriate management unit under a comprehensive framework is a river basin, as it is a reasonably self-contained hydrological system.

Placing greater emphasis on incentives for efficiency and financial accountability. Establishment of proper incentives induces better performance by providers of water services and efficient use by consumers, leading ultimately to a better allocation of water among different uses. A key component of an appropriate incentive system is the pricing of water. For example, when the city of Bogor (Indonesia) increased fees by 30 percent, the consumption of water declined by a similar rate, and expensive investments in new supply sources were postponed.

While ideally the price should reflect the opportunity cost of water (i.e., its value in the best alternative use), in many countries political obstacles allow only gradual moves toward this objective. In these cases, charges covering the cost of water service entities would be a good starting point. Such charges ensure the sustainability of financially autonomous entities, where incentives for efficient operations are closer to those of businesses. Indeed, privatization of water services and transfer of ownership or operational responsibility to the community are reforms that improve incentives. Guinea provides a striking example: some 18 months after responsibility for supplying urban areas with water was turned over to a private supplier, the fee collection rate had increased from 15 percent to 70 percent, and services had improved markedly. Another arrangement with the potential to increase efficiency is the facilitation of water trades (see “Are Water Markets’ a Viable Option?” in this issue).

Establishing strong laws and regulations. Laws and regulations covering monopoly organizations, environmental protection, and other aspects of water management that are not adequately handled by unregulated market forces can be a foundation for effective water resources management. Several countries (e.g., Mexico and Peru) are examining their legal and regulatory structures with special attention to water ownership and rights.

Decentralizing water service delivery. With a foundation of appropriate legal and regulatory procedures and given an overall coordinating framework, the management and delivery of water services can be decentralized, increasing local and community control and improving efficiency. Many countries are encouraging users’ associations to take more control of water management. In an effort to both decentralize and involve beneficiaries, Mexico is transferring management of 78 irrigation districts (covering more than 1.8 million hectares) to water users’ associations, which will be responsible for operating and maintaining all canals and water distribution.

Prescribing and encouraging the participation of stakeholders. Experience has shown that the participation of “stakeholders”—individuals and institutions that would be affected by decisions about water resources management—in formulating strategies, planning, designing, implementing, and managing water activities is not only good management practice but also helps to build necessary political and social consensus. Water users are willing to pay for services that are designed to cater to their needs, which improves the ability to financially sustain water service activities. In projects in Bangladesh and Kenya, water users not only participate in establishing rural water and sanitation systems but also manage them.

Protecting, enhancing, and restoring water quality and water-dependent ecosystems. Protecting existing ecosystems is typically less costly than attempting to restore water quality or restore valuable ecosystems once damage has been done. For example, until the 1960s, the Aral Sea was environmentally stable and had a thriving commercial fishing industry. The massive diversion of the lake’s water sources to expand irrigated cotton production eventually shrank the lake by 66 percent, with disastrous ecological, economic, and health consequences. Had authorities considered the consequences to the Aral Sea of the effects of diverting water, a different scale of diversion would have resulted, and costly efforts to save part of the lake and surrounding areas would not have been necessary.

Assigning greater priority to the provision of adequate services for the poor. This will help to stop the spread of disease in crowded low-income areas. Besides building water delivery infrastructure, fee schedules can be structured so that consumers receive a limited amount of water at a low cost and pay a higher fee for additional water. For example, the Istanbul Water and Sewerage Authority has instituted block volumetric water charges to meet the dual objectives of raising funding while assuring that the basic water needs of the population are met, including, in particular, those of lower-income households. Water charges up to a minimum to meet basic health requirements are kept particularly modest. This system requires that individual consumers be metered. In areas where metering is not possible, connections to sewage and sanitation may need to be subsidized for the poor. However, it is important that water entities not be driven to financial unsustainability by being charged with social objectives. Social objectives should be funded directly from the public budget.

Supporting research, development, and adoption of low-cost technologies to conserve water and enhance its quality. Much can be done and is being done in this area. Simple measures can often have dramatic effects. In its efforts to cut water use per capita, Mexico City has replaced 350,000 toilets with smaller, more efficient models, thereby saving enough water to meet the household needs of 250,000 residents. The use of water-saving devices, leak detection and repair, and more efficient irrigation in its parks helped Jerusalem reduce its use of water per capita by 14 percent from 1989 to 1991.

Putting ideas into practice

Each of the measures illustrated above is worthwhile in itself, but their full potential will be realized only if they are all integrated in a country’s water resources management practices. Many countries have already put some of these elements into place, while others are just beginning. France is certainly ahead in this regard—its water resources management system incorporates many of the proposed elements (see box). In fact, the French system has served as a model for Poland, which has also adopted river basin-based management, and is being considered by others.

Of course, every country will have to tailor the new approach to its own situation. Many of the countries with limited renewable water resources are in the Middle East, North Africa, central Asia, and Sub-Saharan Africa, where populations are growing fastest. Elsewhere, water scarcity may be less of a problem at the national level but is nevertheless severe in specific regions (e.g., northern China, western and southern India, western South America, and large parts of Mexico and Pakistan). For some countries, such as those in Eastern Europe, pollution is the biggest problem affecting water resources. In much of Africa, implementation capacity is a critical issue exacerbated by the frequency of droughts.

The challenge of meeting the water requirements of the planet is enormous—for developing countries alone, an estimated $600-700 billion over the next decade is needed for investments in irrigation, hydropower, water supply, and sanitation. World Bank lending will provide a small part of this amount, roughly $18 billion over the next five years. Most will have to come from domestic resources. An important way in which countries can help is by following policies that encourage cost recovery, provide economic incentives to manage water efficiently, and induce private sector investment. In the long run, the comprehensive framework for water resources management and the attendant policies outlined above will be crucial for countries to sustain this vital resource for economic growth.

For more information, see (1) the World Bank’s policy paper Water Resources Management, prepared by K. William Easter, Gershon Feder, Guy Le Moigne, and Alfred M. Duda, with significant contributions from others inside and outside the Bank; and (2) “When the Cup Is Half Full: Improving Water and Sanitation Services in the Developing World,” by John Briscoe, Environment, May 1993, Vol. 35, No. 4.

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