Fixing the Price of Water
By Shahid Javed Burki
For some time now economists as well as water management experts have believed that they had fairly definitive answers to the questions I posed above. For instance, in 1995, Ismail Seragelddin, then my colleague at the World Bank and then considered to be one of the most informed authorities on the subject of water, worked strenuously to get the institution both of us worked for to focus on water. He wanted some of the World Bank’s formidable financial and analytical resources to be committed to developing water resources and to increasing the understanding about its efficient use.
In order to draw the attention of the Bank’s senior management towards the issue of water, he made a dour prediction that “the wars of the next century will be about water”.
That prediction mercifully did not come true. Research shows that most conflicts about water happened within countries, not between them. The World Business Council for Sustainable Development in its recently released report, ‘Business in the World of Water,’ says that in the past half century only 37 disputes concerning water involved violence. Of these 30 were between Israel and one of its several Arab neighbours. However, there were several serious disputes within countries. Among these the disputes involving Pakistan’s provinces figure prominently.
Inter-provincial quarrels about the distribution of water have kept serious state investments from taking place in Pakistan. They have also made it difficult for the country’s political masters to make provinces somewhat more autonomous in the areas that are their responsibility under the Constitution. Water disputes, in other words, have not only prevented the policymakers from addressing the problem with the analytical clarity it deserves, they have affected the quality of relations among governments at different levels.
Most experts agree that Pakistan needs a well thought-out strategy to save itself from a serious water crisis. This strategy must have several elements that nicely complement one another. It should deal not only with the important question of storing water that currently runs into the sea unused. It must also devise policies aimed at the better utilisation of water that is available from the current storage. Such a comprehensive approach has been endorsed by a number of multinational agencies now occupied with the question of water.
In its second ‘Water Development Report,’ the United Nations says that insufficiency in the availability of water is primarily caused by inefficient supply – mismanagement, prevalence of corruption, lack of institutions, bureaucratic inertia, inappropriate pricing policies or low investment – rather than actual shortages. The problem would not be solved by simply making large investments in dealing with the issue of supply.
For a decade or so – from the mid-eighties to the late nineties – the favoured approach towards managing the water crisis in developing countries was to place trust in private institutions. This approach was tried extensively in Latin America when, following the decision to privatise the assets owned by the state, a number of water utilities were acquired by European companies.
I visited one of these companies in the Spanish city of Barcelona in 1996 where I saw an impressive display of management tools that could be used to cut down on waste and thus increase the amount of water available in large municipal systems. The company had developed a business model that relied more on management than on new investments to make it possible for even the poorest segments of the population to gain access to good quality water. I saw a computer programme that could detect leakages in any part of the system thus preventing a great deal of waste.
The company believed that it could save the Latin American cities a great deal of financial burden that would result from large investments in increasing supply by introducing such modern management practices. The company put this belief into practice by successfully bidding for some public utilities when they became available under the various programmes of privatisation launched in the continent in the 1980s.
It soon discovered that what worked in the cities of the developed world could not be easily implemented in developing nations. This was mostly because of the unwillingness on the part of political authorities to put appropriate pricing policies in place. As a recent review of this experience puts it, “faced with significant political and economic risks, multinationals such as Suez, Thames Water and Veolia pulled back from big investments in Asia, Africa and Latin America in recent years.”
If the expertise needed for better management of water supplies cannot be imported through privatisation, what other options are available to policymakers in the developing world? I don’t believe developing countries’ societies are quite ready to entrust the supply of water to private companies who have to keep the bottom line in front of them in managing any part of their business.
In the case of water, as the experience in Latin America shows, making water a profitable business for the private sector means increasing tariffs to the point where it becomes a serious public issue.
If the full price of water cannot be charged then there must be some element of subsidy included in the structure of tariffs. However, that imposes a burden on cash-strapped governments such as those in Pakistan. To keep subsidies within limits, it is important to first educate the public about the important issue of pricing of water. Water is seldom priced as a scarce resource; it is usually treated as an infinitely available commodity. Like all free or cheap commodities, it is used mercilessly and wastefully. For a long time people thought that this resource could not possibly get exhausted. But then the evidence of misuse began to become visible.
As one observer puts it: “But the paradox is that poor people in slums pay much more for their water than the rich in the spacious air-conditioned villas of the same cities. The water sellers of Nairobi can charge between two and 20 Kenyan shillings for up to 20 litres of water. Rich people in developing countries, by contrast, have water services subsidised by the government.”
Nairobi is not unique in this respect. Exactly the same situation exists in Karachi where the poor pay multiple times more for water purchased from vendors compared to what is charged from the rich by the public utility company. The most effective way of dealing with this situation is to entrust the accountability of public utility to the people’s elected representatives. This should be done by the local governments who should then let the question of prices and subsidies be decided by commissions set up for this purpose that have citizens represented on them.
The question of pricing of water and appropriate subsidies extends beyond the urban areas and should include the countryside. It should also take into consideration the use of water that goes beyond drinking to other uses. Water scarcity also results in increasing social costs, paid by the most vulnerable segments of the population. In most rural societies, women are responsible for fetching water; as it becomes scarce, the distance they must cover and the time they must spend increase.
This has an effect on their health and the well-being of their families. In more difficult situations, women fetching water take their daughters with them thus keeping them out of school. Bringing the supply of water closer to the points of consumption saves women time they can spend on improving the welfare of their families.
“Water accounting” for deciding on the pattern of agricultural production as well as the products produced by the manufacturing sector is a relatively new undertaking. It reveals some surprising findings. For instance, some analysts argue that the pattern of exports from many developing to developed countries is, in effect, the export of water from water-short countries to those that have an abundant supply of water.
A few examples will help to underscore this important point. About 13 litres of water go into the production of a tomato, 70 litres into the growing of an apple. Cotton requires vast amounts of water – according to one estimate “about 11,000 litres of water go into making a single pair of jeans”. This kind of analysis leads to some obvious questions for a water-stressed country such as Pakistan. What should it produce and what should it export in order not to strain the situation of water?
That state should not mandate. It should leave the choices of production to individual producers after correcting the price of water. With the farmers and manufacturers charged appropriately to reflect the scarcity value of water – not the full price, perhaps, but one that is sufficiently high to make the producers think seriously about water as an input and not as a free good – we will see a dramatic change in the pattern of production in both agriculture and industry. The shift by the producers towards less water-intensive lines of production will help enormously in saving a great deal of investment that must otherwise be made.
As with so many other areas of public policy, the record of performance by the Pakistan government – not just by the one that is currently in office but also those that preceded it – shows that it is not well equipped to handle the water problem in a comprehensive way. One possible solution may be to appoint a “blue ribbon” commission that has the representatives of the people from the four provinces as well as experts to come up with a long-term strategy for the country to follow to save it from a serious water crisis.
http://www.dawn.com/2007/04/17/op.htm#1