eckstein, o. water resource development and the economics of project evaluation

8/7/2019 Eckstein, O. Water Resource Development and the Economics of Project Evaluation

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wps o 1PolicyResearchWORKING PAPERS

WaterandSanitationInfrastructureandUrbanDevelopmentDepartmentTheWorldBankMarch1992WPS879

ComprehensiveWaterResourcesManagement

A Concept Paper

PeterRogers

Issues that should be covered in the formulationofcomprehensivewaterresourcesmanagementpolicies.

Policy Research Working Papersdisseminate thefindings of workinprogress and encourapet he exchange of ideasamong Bank staff andal others interested in development issues. These paperscarry thenames of thc authors, renect only their views, and should be used andcited accordingly. The findings, interpretations, and conclusions are the authors' osn. They should not be atiibuted to the World Bank,its Board of Directors, its management, or any of its member countries.


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Policy Research_~~~~ 11 I 9 e i-

Wterand SanitationWPS 879

This paper- joint productof the Water and Sanitation Division, Infrastructureand Urban DevelopmentDepartment, and the Agricultural Policies Division, Agriculture and Rural Development Department -is part of a larger effort to define a Bank water resources management policy. Copies of the paper areavailable free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact DanielleRanger, room SI 1-043, extension 31296 (March 1992, 18 pages).The world is entering a period of intense compe- water supply projects for the same water - andtition for limited supplies of water for alternative many proposed irrigation projects and mostuses - in agriculture, in urban and industrial hydro project proposals are on hold because ofsupplies, for recreation, by wildlife, for human environmental concems.consumption, and to maintain environmentalquality. Until recently, the approaches taken to waterplanning management by planners in the devel-Manifestations of this competition and our oping countries and by analysts at the fundingcurrent ability to deal with it can be observed in agencies were, by and large, appropriate andmany parts of the world. A large irrigation adequate to the task at hand. The increasedproject in India does not operate because water competition for water, however, makes most ofhas been diverted to the rapidly growing city of the project-by-project planning methods inad-Pune. In China, industries are reducing their equate.production because of water shortages, eventhough they are surrounded by paddy fields. In Rogers discusses new approaches that areCalifornia, selenium salts leached by irrigation needed to integrate water resource use amongare killing wildlife. Bank irrigation projects in different users .i across different economicAlgeria are now competing with Bank urban sectors.

The Policy Research WorkingPaper Series disseminates the fmdings of work under way in the Bark. Anobjective of the seriesis to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, andconclusions in these papers do not necessarily represent official Bank policy.

Produced by the Policy Research Dissemination Center


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Table of Contents1. Introduction .................................................. 1

1.1 The Water Sector at the World Bank ............................. 11.2 The Concept Paper ......................................... 22. FundamentalConcepts for Water Management ........................... 2

2.1 Water is a Unitary Resource ................................... 22.2 Scarcity of Water .......................................... 22.3 Market Failure in the Economicsof Water .......................... 32.4 Valuation of Water ......................................... 43. Planning for Water Resources ...................................... 5

3.1 Current Planning Approaches .................................. 53.2 Where Does the Current Approach Break Down? ...................... 63.3 How the Problems Can Be Resolved .............................. 73.4 Distinguishingbetween Generic and Region-SpecificIssues ............... 84. Generic Issues of Concern for the World Bank ........................... 8

4.1 Broad SectorwideIssues ..................................... 94.1.1 InternationalConflictsover Water ......................... 94.1.2 Linking the Water Sector to the National Economy .............. 94.1.3 Water Sector Planning Methodologyand DataRequirements.............................. ' 94.1.4 The Political Economy of Pricing ......................... 104.1.5 EnvironmentalImpacts of Water Development ................ 124.1.6 Social Impacts of Water Development ..................... 134.1.7 Conservationand Recycling of Water ..................... 134.1.8 Host Country InstitutionalReforn ........................ 144.1.9 Role of the Bank in Education,Training, andInformationExchange ............................... 14

4.2 Subsector Issues .......................................... 144.2.1 Irrigation ....................................... 144.2.2 Water and Health .................................. 154.2.3 Urban Water Supply and Wastewater Disposal ................ 164.2.4 Rural Water Supply and Sanitation ....................... 174.2.5 Hydropower.................... ................ 17

References ...... 17


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1.Introduction a major resource to electrical energy systems boQi for1. Introduction hydropowergenerationandforcoolingthermalgenerators.It is essentialto manytransportationsystems.InlandandTheworldisenteringaperiodofintensecompetition estuarinefisheriesdepend upon adequateflows of higho zer limited supplies of water for alternative uses in qualitywaterin the rivers.Rivers,lakes,and groundwateragriculture,urban and industrialsupply,recreation,wild- are alsoextensivelyused for the disposalof treated orlife, human consumption,and maintenanceof environ- untreatedwastewater,that itselfhas servedto removeand

mentalquality.Manifestationsof thiscompetitionand our tansport chemicalor other wastes.Fresh water is used tocurrentinabilityto deal with it can be observedin many stopthe penetrationofsalinityintosurfaceor groundwaterpartsof the world.For example,a large irrigationproject sourcesofsupply.Increasinglywateraccessis becomingain Indiadoes not operatebecausewater hasbeen diverted majorcomponentof both urbanand rural recreativnfacili-to therapidlygrowingcityofPune.In Chinaindustriesare ties. In many places large investmentsare required toreducing their productiondue to water shortageseven minimizethe consequencesof naturallyoccurringfloodsthoughtheyare surroundedby paddyfields.In California anddroughts.The maintenaaceof a locality's fauna andselenium salts leached by irrigationare killing wildlife. flora is criticallydependentupon access to water.All ofBankirrigationprojectsinAlgeriaarenowcompetingwiththese uses have either been funded, or are potentiallyBankurbanwatersupplyprojectsfor the samewater,and fundable,by Bankresources.manyproposedirrigationprojectsand most hydroprojectproposalsare on holdbecauseof environmentalconcerns. The watersectoris also a substantialportion of theBank's unnuallending.For example,between1984 andUntil recently the approachestaken to water plan- 1988,out of a total lendingof $83 billion, water projectningandmanagementbyplannersinthedevelopingcoun- constituted$10.6 billion,or 12.8%of the total.Irrigationtries and by the analystsat the fundingagencieswere, by and drainageaccountedfor $4.6billion,hydropowerforand large,appropriateand adequateto thetask at hand.The $2Abillion,and watersupplyand wastewater$3.5billion.increasedcompetitionfor waterhas, however,mademost Nodataare availableforfloodcontrol,watertransport,andof the project-by-projectplanning methods inadequate. river and estuarinefisheries.A sumequivalentto 55% ofNew approaches are needed that will integrate water the total expendituresfor agriculturaland rural develop-resourceuse among differentusers and across different ment was spenton waterprojects.In manycountries(foreconomicsectors.Realizingthatthe presentapproachesto exampleBrazil)water sector expendituresare as high asdealingwiththeseenormouslycomplexanddifficultissues 30%of totalpublic expenditures.are no longersufficient,the Bank has initiateda Compre-hensive Water ResourcesManagementPolicy Study to Water is dealt with independentlyin each of theinvestigatehow best to resolve them. This paper is an Bank's regional bureausand in its central departnents.attempttooutlinethe issueswhichshouldbeincludedinthe Thissituationhassometimesledto inconsistenciesinBankBank's PolicyPaper. policy between counMiesor betweenwater uses. Underconditionsof watersuiplusessuch inconsistenciesare not1.1 The Water Sector at the World Bank necessarilybad, giventhe wide diversityof the countriesand rangeofusesfor water.Indeed,this is whatthe Bank'sThe WorldBank helps to fund water projects that own OperationsEvaluationDepartmenthas foundon thehave broadimpactsthroughoutthe economiesof develop- manyprojectsfor whichit has cartiedoutpost-completioning countries.Water is used for domestic and industrial audits(morethan 140irrigationprojectsby 1989).Irriga-purposes.It is used extensivelyfor irrigatingcrops,and is tionprojects,for example,perfonnedquitewellin the and

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regions in Europe, the Middle East and North Africa currentlyof widespreadconcernwithin the Bank and are(EMENA)and LatinAmerica,but less wellin the humid likely to be of greatimporlanceinto the next century.tropics of South Asia, and quitepoorly in sub-SaharAfrica Hlowever,the current competitionfor water inregions such as EMENAis becomingso severethat the 2 Fundainental Conceptshistoricalperformancemay not be expectedto continue * epinto thefuturewithout seriousimprovementof pre-plan- for Water M anagementning, and the Africanprojectsneedspecialcare to ensure gadequatefutureperformance. There are a few fundamentatconceptsthatunderlie1.2 The Concept Paper the theoryand practiceof water management.

Underconditionsofwaterscarcityandwith increas- 2.1 Water is a Unitary ResourceingscrutinyfromenvironmentalinterestgroupsoutsidetheBankand fromthe Bank's owninternalauditors,the Bank Rain, surfacewaterinrivers and lakes,groundwater,staff has realized the increasing costs of the lack of a and pollutedfreshwaterare all part of the same resourcecomprehensiveview of the water sector ard is looking base. They are all one and the same resource,althoughinforwardtoaBank-widepolicywithrespecttoactionsinthis differentmanifestations,occurringin differentpartsof thesector. hydrologiccycle.Unusedsurfacewater canrecharge thegroundwaterand, conversely,overpumpedgroundwaterThis Concept Paper is an attempt by an outside can reducethe flowsin the surfacestreams.Contaminatedobserverto take a synopticview of the waterproblemsin watercanbepurifiedbyconstructingwastewatertreatinentabroadperspectiveencompassingwaterinallits important processesorit canbe recoveredbythe naturalassimilativeuses,and to indicateareas thatshouldbe emphasizedinthe capacityofthe surfaceand groundwaterecosystems.Thus,Bank's PolicyPaper. This paper has tried to achieve a the entirehydrologicbalancemustbe considered,notjustbalancebetweiendiscussingbroad conceptualissues and partsofit.Actionstakeninonepartofthesystemoftenhavespecificsectoral issues.Water resourcesis a very broad significantimpactsupon other parts of the system;thesesubject,hence it is not possible,nor advisable,to attempt linkages must be taken into account when alzessingtheto covereverythingwithinsucha shortpaper.Thegoalhas costs and benefitsof specificactions.been to providediscussionon the most importantissuessothat their inclusionin the PolicyPaper canbe justified. It Becausewater is a unitaryresourcethere are oftenis the author'sopinionthatthereare a few simpleconcepts conflictsamongusers.The most commonexampleis theand methodologicalapproachesthatcould, if understood conffictbetweensurfaceandgroundwaterusersin irrigated

and adopted,significantlyinfluencethe successfuldevel- agriculture.Improvementof the efficiencyof applicationopmentof waterresourcesaroundthe world.Thisattempt of the surfacewaterresultsin an immediatedeclinein theat simplificationshouldbe taken in the spirit of Occam's availabilityof groundwater.Allocationdecisionsare alsoRazor exhaustthe simplestexplanationsbeforerequiring frequentlyambiguous.For instance,water is often allo-morecomplexones. catedto irrigationprojects at low cost to the users whennearbyurban areas are sufferingserious water shortagesIssuesthatare not discussedat lengthin this Concept and are willingto pay high pricesfor water. As a resultofPaperare the legal issuesof waterrights, developmentof these types of problems water use in all countries iswater markets,privatizationof facilities,developrmentof proscribedbylegalandinstitutionalcomplexities.While itnewtechnology,anddetailedsector-by-sectorhighlih, is evidentthatmanyofthese institutionalcomplexitiescanof problemsand possibilities.lo do justice to all of '. e hindereconomicallyefficientuse of water,these controlsissuesabook-lengthtreatmentwouldbe required.SL, _ it firstaroseinthe firstplacebecauseofthe genuineproblemsis the author's contentionthat the major problemswith thatwaterraisesfor any politico-economicsystem.Asthesuccessfuldevelopmentofwaterresourceslie intherefine- costsof ignoringtheunitarynatureofthe resourcerise onementofeconomicanalysis,theotherissuesare notamajor would expect to see the gradual easing of institutionalfocus of thispaper. Part 2 of the ConceptPaperdiscusses constraint.on developmentin the directionof more ratio-some ofthe fundamentalconceptsunderlyingwaterman- nal integrateduse of the resource.agement,and Part 3 addressesthe economicissuesstem-ming from the fundamentalconceptsthat causeproblems 2.2 Scarcity of Waterin pursuingBankwater policy.The emphasisthroughoutPart4ofthePaperisapracticaldiscussionofissuesthatare The discussionabout scarcityis usually intimately


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boundupwiththe conceptsof waterasarenewableornon- tion in agriculturaluse, changesin populationpolicy,andrenewabloresource.Ifit isrenewable,howcanwe everrun thereclaimingofadditiona brackishwater.Hasvaterbeenout of water? Certainlyin many arid or semi-aridzones, a significantlimit on economic growth in any of thesepeople are currentlyexperiencingshortagesof water.Part countries?Howwil each c-.-"try addressthe futureofthisof this problemhas to do with the fact that under earlier resource? Has water bee. , Aced out of the reach ofhistcricconditionswe wereable to sustainthepopulations significantportiansofthe populations?What accountsforof citiesandregions,evenunder relativelyaridconditions. the fact that in many other countrieswith much larger perHowever,with the growthof populationand incomethe capitaquantitiesofavailablewatertheperc&pitawaterusedemandsfor water seem to be overwhelmingour techno- is lower?On closerinspectionthe "water barrier" of 500logicalcapat!litytosupplyit.Undertheseconditionswater cubicmeterspercapitaperyeardoesnotappearto be arealscarcitiesand conflictsoverwaterusebegintoappear.The barrierin the Malthus-Ricardosense.The idea that we arecost of supplyingaddEionalwater to water-shortareas is runningout of water (Postel, 1990and others) cannotbealsoincreasing.Asaresultitbecom,esincreasinglydifficulttrue globally, and even in specificwater-shortcountriesto supplythe sameamountsofwaterto usersat the oldlow thereis little doubt that water will alwaysbe availableatprices.The Malthus-Ricazdotheory of resourcescarcity some reasonableprice, providedthose countries followseems to be working exactly as predicted: scarcity of sensiblewaterpolicies.The definitionof scarcityin non-resourceslimitseconomicgrowth,and ultimatelybringsit economic terms is a distractionthat can lead to majorto a halt. It is no surprisethat this theoryearnedeconomics misaltocationsof he waterresource.The rapid disappear-the sobriquetof "the dismal science." anceofthe "oil crisis"oncelimitedmarketresponseswere

albwed to take place shouldbe borne in mind by waterModem economistsdefinewater ccarcity slightly planners.differently,whichallowsforawayoutofthis dilemma:theneedforwaterhastobeexpressedasaquantityandaprice. 23 Market Failure in the Econ,omicsof WaterThisis caUedthe "economicdemand" for waterand bothquantityand price must be specified.In the currenteco- Themostusefuieconomicliteratureonwaterisbuiltnomicmodels resourcesdo not "run out." As the quantity on neo-classicaleconomics.Much of it explains whichuemandedincreasesnew sources will be tapped, at the assumptionsand theoreticalconsructs deal best with as-sameor highercosts,and/orthe pricewill rise, restraining pectsof"market failure,"that is,whenthe classicalmodelwhat eachuser will desireto purchase.This is essentially does not strictly apply. Eckstein (1958)mentions thea self limitingprocess. Clearly,if a resourcebase is fixed following sources of market failure inherent in waterand the consumingpcpulationincreases,somethinghas to resourcesas the most important:give. This will be either the price or the quantity of theresourceused.However,eventhissystemnwoutdultimately1. Increasingreturns-to-scaleontheproductionsidearebe forcedto ahat by populationor economicgrowth.The prevalent in water projects.For exarnpl2, inlandmagical ingredient that enables the economicsystem to waterwaysand municipal water and wastewatercontinueto growis the existence,at somereasonablecost, servicesare naturalmonopoliesbecauseof the largeof substitutesfor the scarceresource.Althoughthereis no economiesof scalein theprovisionof the infrastruc-substitutefor water in sustaininghuman and animallife, ture.Manywater-relatedinvestmentstendtobeverythereisanalmostinfinitesupplyofseawater,whichcanbe largeinorderto take advantageof these economiesconvertedat a costof energyinto freshwater,then energy, of scale.or the capital to accessthe energy, becornesthe limitingresource.Similarlypoliticalboundaries,managementskills,2. Externalitiesduetophysicalinterdependenceamongor human labor couldlimit the availabilityof water. production processesare inherent in many wateractivities.The extemalitiesof both water quantityPart of the problemof dealingrationaly with water andwaterqualityareexperiencedinthe spatialsensescarcity is the different perceptionsthat various groups betweenupstreamand downstreamusers, and in ahaveabouthowclosewe are toreachingtheresourcelimits. temporalsensebetween differentseasonalreleasesFor examPple,in a study for the Bank, Falkenburget al. of storedwater,commonpool effectson groundwa-(1990)claimedthat some countries(Israel, Jordan,Saudi ter, andthe exportof pollution.Arabia,Syria,and Yemen)were verycloseto beingunableto supply their populationswith the minimum needed 3. The classicalmodel assumesthat the incomedistri-amountof water (500 cubic meters per capitaper year). bution in a given setting is optimal. However,inHowever,otherslookingatthesamedataseemanypossible developmentwork it is rarely accepted that theadjustmentmechanisms,which includerecycling,reduc- incomedistributioninaparticularcountryisthe best


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one, andmany waterprojectsare specificallyaimed ence of externalitiesand the lack of mobilityof resourcesat changinga mal-distributionof income. makefindingthe marketpricequitedifficult.Inaperfectlyfunctioningeconomyenvisagedby the classicaleconomic4. When not all producers are small relative to the model "price equalsvalue," and the cost of providing amarket,the marginalityconditionsfor the existence good, after allowing for paymentsto all of its factors ofof economicallyefficient solutions are violated. production,willpreciselyequalits marketprice.AsaresultWhengovermnentis involvedit is often as the only ofthis elegantsolutionone only has to establish"cost" toproducerinthemarket.Inthis casethewatersupplied establish"value."will make large changesin the localprice of water,thus undermining the assumption of marginality Unfortunately,maay waterresourcesplaners forgetinherentin benefitmeasurements. that simply equatingcost with value only holds true in aperfectlyfunctioningmarketeconomy.In all other cases5. Theresourcesart not necessarilymobile.Typically, (thatis almostall cases)caremust be takennot to coniusecapital resources are relatively mobile but labor cost with value.What then is the "value" of water? Theresourcesare not. Pocketsof povertyandunemploy- answerappearsto dependupon"towhom" and for "whichmertexistandmanywaterprojectsliketheTennes- use." Drinkingwater is obviouslyvaluableand becomesseeValleyProject,TVA)wereoriginallydesignedto increasinglyso as the amountavailabledecreases.A glassaddressthis lack of resource mobility.In addition of water couldbe infinitelyvaluableto a persondyingofrestricted water rights often impede the ease of thirst in the desertbutnot very valuableto a womanlivingtransferof water from one use to another. aloneonthe banksofapristine river.In the secondcasethe

womanwouldonlybe willingto pay the cost of somebodyThe literaturesince Eckstein showshow each of goingto the riverandfetchingthe water forher. Shewouldthese marketfailurescan be compensatedfor in water be unwillingto pay morebecause she could go and takeitresourcesplanning.It is now the general opinionthat herself.Sothe value in this case is the cost ofobtainingthecarefulapplicationof neo-classicalprinciplescan deal water.Now,if therewasa farmerirrigatingland alongsidewith the market failuresmost likely to arise in water the river, how muchwould tho water be worth to him? Ifinvestmentanalysis.For example,increasingreturns- there is enoughwater in the river so that the woman canto-scaleandmonopolypricingcanbedealtwithbysome have as muchas she can drinkjust at the cost of obtainingformofRamseypricing.Externalitiescanbe dealt with the waterfromthe river,thenobviouslythefarmercantakeby expandingthe definitionofthe systemto "intemal- as much as he wants at the cost of obtainingthe water.ize the externalities."Thelack ofmocility ofresources Clearly,the farmerwouldalso value the water at the costcanbeaccountedforbysuitableshadowpricing,andthe of obtaning it. So far, so good; cost equalsvalue.income nialdistributioncan be dealt with by addingconstraintson the distributionof benefits.The adjust- However,suchbucolicsettingsno longerexistin thements themselve-slead to some loss in the overall modem world. Typically there are many users of the"economicefficiency" impliedby the classicalmodel, resourceapartfromthe housewifeand the farmer.At somebutthe lossisbelievedto be smallrelativeto the broader pointintimetheusebyonepersonwillstarttointerferewithimprovementof solutions.Brown and Sibley (1986) theusebyanother.Atthatpointthewateri-saidtohaveandiscussvarioustechniquesof improvingutilitypricing "opportunitycost." Sincethe continuedabstractionbyonewhich comecloseto the economicallyefficientsolution userreducestheamountavailableto anotherthereis a lossand which,at the same time, are closerto the practical of the opportunityto use the water by one user. This lostmethodsuseableby utilities. opportunitycoststhe affecteduser the amounthe valuestheseunitsofwater. At thispoint the "value" of the water2A Valuation of Water should reflect the willingness-to-payof the user who islosingwater.If for someinstitutionalreasonthe housewife

Allocationof water among the myriad conflicting has to cut her consmnptionof drinkingwater, then theusespresentsamajortasktogovernments,alofwhichtake opportunitycostto societyofthis allocationofwater awayresponsibilityin some degree for regulating access to fromher is her willingness-to-payfor water.If the alloca-water. It is difficult to assign unambiguouseconomic tion of the watershortagewere tle other way around,thevalues to many uses, and hence these may be implicitly relevantopportunitycost would be the farmer's willing-overvalued,undervalued or completely ignored in the ness-to-payfor irrigationwater.decision-makingprocess. Rogers (1986)gives many ex-amplesofthe prote'ms thatarise fromundervaluingwater. If the questionof howto allocatethe waterwere leftMany of the problemsof valuing water stem from the to an outsideparty,for instance,the WorldBank,thenthatmarketfailuresmentionedabove. In particular,the exist- party might ask howsocietywould best benefit fromthe4


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allocation.One way of answeringthis questionis to apply 3.1 Current Planning Approachesthe logic of social choice theory embodied in modemeconomics,which allocatesthe water to the use with the Waterresourcesplaninghasreceivedalargeamounthighest value. of attention from economistsand planningp ofessionalsformanydecades.BasedontheFloodControlActof 1936,Establishingthe willingness-to-payfor variouscon- federalagencies in the United States,for example,weresumersof wateris a fairlywelldevelopedfieldin econom- chargedwithdevisingeconomiccditeriatoensurethat onlyics and can be easily adapted in many water conflict waterprojectsfor whichthe "benefitsexceededthe costs"dituationsto establish estinmatesof the opportunitycost of would be implementedby the federal government.Thiswater.Unfortunately,manyeconomicstudiesof wateruse policyledtomajorresearchthatculminatedinthe 1960sinignore the opportunitycost of water and only reflect the fundamentalworks by Eckstein (1958)and Maass et al.actual costs of obtaining the water i'selK.As mentioned (1962) at HarvardUniversity,Hirshieifer,Millimanandabove,iftherewerewell-establishediiarketsforwaterthen DeHaven(1960)at theUniversityof Chicago;and Kneesethe marketpricewoulditselfreflecttL-eopportnity costof and Bower(1968)at Resourcesfor the Futurein Washing-water. However, in most countriessuch markets do not ton,D.C.Thefinishingtoucheswithregardtodealingwithexist and one is left to estimate the opporunity cost in environmentalquality were in place by the end of theindirectways. 1970s,with works by Dorfmanand Dorfman(1972)andBaumoland Oats (1979).In additionto these booksthereTheopportunitycostofwaterisonlyzerowhenthere are literallyhundredsof other excellenttexts explainingisnoshortageofwater.Inevaluatingwaterinvestmentsthe many of the practical aspects of the detailed analysis ofvalueof watertoauseristhe costofobtainingthewatR.rplus benefits,costs,andtechnologychoiceforeachpossibleusethe opportunitycost. Igaoringthe opportunitycost part of of water.Whilethis wastakingplaceinthewaterresourcesvaluewil undervaluewater,leadto failuresto invest,and field, the bank, UNDP, and many other fundingagenciescauseseriousmisaflocationsoftheresourcebetweenusers. weredevelopingreliablemethodsfor economicappraisalTheopportunitycost conceptalsoappliesto issuesofwater of investmentdecisionsin general.Outstandingexamplesand eavironmentalquality. of this literatureare Little and Mirrlees(1974)and Squireand van derTak(1975),sponsoredbytheWorldBank,andDas Gupta, Marglin, and Sen (1972) and the Guide to3. Planning for Water PracticlProjectAppraisal(1978),sponsoredbytheUnitedw s s^sss^sssvs v v wswt NationsIndubtral DevelopmentOrganizationP[NIDO).Resources These works are the basis for the current evaluation ofinvestmentsin the water sector.

Themanagementimperativesofwaterareembedded The literatureprovidessoundmethodsfor plannigin its nature as a scarce resourcethat is often treatedas a water resourcesat a river basin level and at the level ofpublicgood.Externaleffectsoccasionedbywaterusealso individualprojects.However,sincemostofthemethodolo-invoke importanteconomicimperatives.Property rights giesweredevelopedinwestemindustrializednations,theyand extemalitiesraise politicaland financialimperatives pay little artentionto planning for water resources in awhichinfluencethe choiceofwaystopricewatertopayfor macro or intersectoralway.the public supply of it. To appreciatefully water policyoptions and how they are evaluated, it is necessary to State-of-the-arteconomicprojectanalyses are car-understandhoweconomicsisusedandmisusedinthewater ried outroutinelyby the Bankstaff.For example,benefit-area. Even though politics ultimately controls water re- costanalysisiscarriedoutonirrigationassessmentsandthesourceplanning,the discussionis usually framedin eco- projectis recommendedonly whena suitableintemalratenomicterms, and the abilityto understandandmanipulate ofretum(IRR),oranotherindexsuchasabenefit-costratiothe economicanalysismaysignificantlyimprovethe final is achieved.Recentlythe choiceshave also been condi-outcome.Hence, a significantpart of this ConceptPaper tioneduponnotcausing"toomuch" socialorenvironmen-exploresthepossibilityofimprovingtheeconomicaspects tal harn. For projects such as urban water supply orofplanning.Theattentiondevotedtoeconomicsshouldnot sewerage,where benefit calculationis very difficult,thebe taken to mean that the institutionaland technological marginalcostsofprovidingthe servicesare computedanddimensionsareunimportant,butthat inthejudgmentofthe comparedtootherwaysofprovidingthesameservices.Forauthorthe pay-offs fromimprovingthe economicdimen- both of these types of project analysis, care is taken tosions are currently larger than those from other areas of correctlyshadow-pricethe inputsandoutputs.However,inconcem. order to decide whether to spend money on inigation

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insteadofon floodcontrol,oronotherinvestmentsoutside sectors,such as energy,have well developedmethodolo-the water sector,the rules forprojectanalysisnotedabove giestozelatesectoralandmacroplans.Mostofthese wereneed tobe bolsteredby additionalassumptionsandtheory. developedin responseto the oil crisisoftheearly 1970s.ItInthe theory,pricingofthe resourceiscriticaltothecorrect is now possible for energy planners to show theappraisal of the project and the correct implementation. macroeconomicconsequencesoofregulationof,andinvest-Pricinghas a threefoldrole in waterpolicy.First,the price ments in, variousenergysources,and, in the other direc-can be set to recover the cost of the investmentfrom the tion, to estimatethe consequencesofshifts inmacropolicybeneficiaries.Second, increasingprices tends to raPton ondemandsandsuppliesforenergybyvarioussectors.Thiswater by cutting uneconomical consumption.Price in- has not been done in thewater sector.creasescut thedemandfor waterbymovingup thedemandcurve, whichis the etTectmost decisionmakerslook for The role of water investmets as infrastructureser-when pricing policy is advocated. The third aspect of vices which serve as both intem.sdiate goods and finalpricing, and the one most fiequentlyoverlooked,is that of goods is also often overlookedin water planning.So forincreasingthesupply.Whentheprice ishigher,suppliesof instance, Ingram (1989) expresses concern that waterwater frommore expensivesourcesbecomeavailable. infrastructuremay suffer under-investmentas a resultof the Bank's structuraladjustmentprogramsfor variousPrice is also maintegral part of the definition of countries."scarcity." The issues of pricing and cost recoveryare afundamentalpart of any approachto dealwith the n.odern A fundamentalpieceof informationmissingin mostrealities of water planning.The fact that pricinghas not water plans is the opportunitycost of water. Addingthebeen rigorouslyapplied in the past, and that the cuirent upporunity costofwater to itsmarginalcost ofsupplyandpricesofwaterare still generallyquitelow, is an indication comparingthiswithitscurrentpriceindicateshowefficientthat scarcityis a relathvelynew phenomenon.It also gives currentwater use is and howefficientit couldbe. In orderconfidencethat,at leastforthenextdecade,moderateprice to estimatethesenumbersit is necessarytohavesomeformincreaseswillsolvethewaterscarcityproblem.Pricingand ofintersectoralcomnparisonof valueorwillingness-to-pay,costrecoveryare anintegralpart ofthe resolutionto many hence the need for a strongpolicydirectivein the Bank'sof the waterissuesdiscussedbelow. PolicyPapertoestablishmethodsto evaluatewaterinvest-mentsin an intersectoralcontext.3.2 Where Does the Current Approach BreakDown? 2)IncorporatingsocialandenvironmentalconcernsThe Bank's OperationsEvaluationDepartmenthas directlyintoplanning.Socialand environmentalimpactsshownthat cufrentplanningapproachesworkedfairlywell of Bank projects are increasinglya source of contentionwhen the competitionfor water was less acute. The same between the Bank and environmentalinterest groups inmethodsshouldalso work underthe new conditions.That developedcountries.It wouldbe possiblefor the Bank tothey are notworkingis causedby a lack of attentionto the undertakeeconomic analysesof the environmentalim-correctimplementationofthe methods.Forexample,even pacts of waterprojectsmorediligentlythan has been doneifcorrectpricesarecomputedintheappraisals, theyarenot in the past There is no doubtthat this is a difficulttask;used by the borrowinggovernmentsin implementingthe ne-rtheless, thereisnowalarge literaturedealingwiththeprojectsonce funded.This fact leadsto overconsumption economicimpactsas lowerboundson the total impactsofof waterby someusers and artificialshortagesfor others. a project.There are two major areas where the current approachseems to be in trouble: A society that allows waste dischargersto neglectoff-sitecostsof wastedisposalwill not only devoteb1)Establishingand usingthe conceptofopporunity too fewresourcesto the treatmentof wastesbut willcost of waterin different sectorsof water use. Since the alsoproducetoo muchwasteinview ofthe damagesmethodsfor evwluationare appliedmainly to project-by- it causes.(Kneeseand Bower 1968).projectappraisal,considerationof the intersector-Anatureof water use is neglected.Therefore,perfectlywell ana- Asuseincreases,thepublicgoodsnatureofwaterandlyzedBanklirrigationprojectsinAlgeria,forexample,find the pervasivenessof extermalitiesin water use lead inevi-themselvesindirect conflictforthe samewaterwithother, tablytoanincreaseofpollution.Inthelate 1960sand 1970sequallywell preparedBankprojects for urbanwatersup- the pubic perceptionin the developedcountrieswas thatply. In such cases the relativemarginalbenefits of addi- the environmentwas being "over-polluted." The exter-donal investmentsin water must be carefullycompared nalities implied in water poUlutionwere first extensivelywith those of other sectoral investments.Otherresource discussedby theResourcesfortheFuturegroupinthe early

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1960s.The above-citedbookbyKneeseand Bower(1968) ri .. ; weendifferentusesof water.Forexample,inis still a leadingtext on the economicsof waterqtaiity. the EMENAregion the opportunitycostof water in Ihrmunicipal secte.is at leasttwo to threetimesas high as theTheconcernofeconomistsanalyzingwaterpollution marginal val'e of irrigated agriculturalproCactionperis with "market failure." In particularthe issut of how to cubic meterof water for all crops except somevegetablesintemalizethe e..emalities has receivedmostofthe atten- (tomatoesand cucumber).However,when the inigationtion. At the most obvious level it would seem that if the projects are evaluatedby themselves,without consider-effluentcould be correctlypiced, then industryandother ationof theopportunitycost of waterin othersectors,theypolluterscouldbe taxed by just this amountand problem appearto have acceptableInternalRatesof Retum (IRR).woulddisappear- the correctamountof pollutionwouldbe obtained,andif this were cons'deredtoo large thenthe Similarly, the externalities due to envi.inmertaleffluentpricecouldberaiseduntilasatisfactorylowerlevel damagesare not integratedinto the appraisalof projects.of pollutionwas achieved. The economicprinciplesdre clear,but little attentionhasbeen devoted in the pas to evaluatingthe damages andCoase (1960) showed that externalitiesby them- thereforethey tend to be overlookedin theanalysis.selves do not lead to economicallyinefficientsolutionsprovidedthat the pollutersand the peoplebeing affected 2) The theoryneedsrefining.can freely and inexpensivelynegotiatewith each other.Coase claimed that the responsibilityfor damages is a No theoryis perfect,and so it is with the theoreticalreciprocalone,with the affectedpartytakingstepsto avoid approachesto waterresourcesmanagement.The relevantthem as much as the perpetratortakes steps to avoid questionis how the imperfectionsinthe theoreticalunder-producingthem. Economicefficiencyis achievedwhen pinningsleadto unacceptableoutcomesfromthe point ofextemal damages are borne by the party that can most view of the Bank, other funding agenc,es, and govern-cheaplyrepair them. ments.Thereare severalassumptionsaboutthe theorythatcause difficulty in water plannirg, but there are alsoHufschmidtand Dixon (1986)have extendedenvi- approachesto softeningor eliminatingthese market fail-ronmentaleconomicsto the issues faced in developing ures from the conceptualmodel. Threeareas standout ascountries,particularlywith respectto water projects.Pa- causingmore trouble than others and, hence, may needpers by Devousagesand Smith (1983)and by Fisher and morerefinementof the theory.Raucher(1984) show how contingentvaluationmethodscanbeusedto evaluatethe benefits(anddamages)associ- A. The difficulties associated with makingated with a wide range of environmentalimpactsthat macroeconomicallocationsbetweeninvestmnentsin waterhithertohad been thought to be non-measurable.In the resourcesandothereconomicsectors.The pervasivenessPolicyPaperthe Bank shouldpursuethis line of thinking ofwaterusethroughouttheeconomymaypartiallyexplainand layoutthe appropriatetmethodologiesforassessingthethe first problem, but other sectors, including energy,economicdimensionsas well as thenon-economicdimen- radiate similar pervasiveconnectinns throughout thesions of environmentaldeterioration. economyand society.Waterplannin, zmasbeen an integralpart of governmentalplanningfor much longerthanother3.3 How the Froblems Can Be Resolved resourcesectors.Hence,largeandpowerfulinterestgroupsare fully cognizantof their stakes in planning. In mostThere are two possible,and notmutuallyexclusive, countriesit is not of particular concern that the waterexplanationsof why problems arise in the way water planningand investnentsbe balancedwith other sectoralresourcesare planned,appraised,and implemented. activities;indeed,theideaofsuchbalancingisthreateningto groupswith a vestedinterestin water investmentsand1)The acceptedeconomicprinciplesare adequate management.The developmentofreliableplanningmeth-but the applicationis inadequate. odologyto relate water sectorplans to the overall macrodevelopmentofa countryis a genericproblemthat shouldThe appraisal approachesused at the Bank and at guideinvestmentsand other Bankwater activities.other fundingagencies are basedupon the generallyac-cepted principlesoutlinedvoluminouslyin the literature B.Dealingwithexternalitiesdirectlyin the analysisreferred to above. The application of the principles is (internaizingtheexternatides).Dealingwith externalitiesflawedbecause,when faced with economicscarcity, the directlyinthe appraisalmethodologyisanotherimportantwater itselfmust be priced at its opporunity cost. This is requirement.The theoryand methodsfor doing this havetypicallynot done and leads to seriousmisallocationof been developedand many environmentalconsequences

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canbe adequatelytreated widin the existingbenefit-cost Economictheory provides "second best" pricingmethodology.Thesemethodshave onlyreceivedsporadic algorithmsfor suchcircumitaces. However,accordingtoapplicationinactualprojectevaluation.FisherandRaucher Hankeand Davis (1973)even these lead to problems for(1984)reportonseveralsuchstudiesbutadditionalworkis utility managers.Tha:eforethey suggestedthe need toneeded to develop this methodologyfor the types of develop "third best" pricing methods,which wouldbeprojects supportedby theBank. more responsiveto the political dh'.ensions of waterresourcepricing.In a study of waterconservationin Perth,C. Thepoliticaleconomyof tariffsemng in thewater Australia,HLanke(1982)outlineshowtoesti;nateeconond-sector.Thepoliticaleconomyoftariffsettingis extremely callyefficientchoicesconsideringthe resourcecoa to theimportantandhas to alarge extentbeenneglectedbywater utility, the resourcecost to the consumers,and the usefulexperts.Thisis particularlytruein the casesoftenencoun- consumptionforegoneas a resultof a particular .onserva-teredwhenthereare economiesofscaleassociatedwiththe tion policy. Interestingly,whenhe comparedtwo pricinginvestments.The canon of price theoryis marginalcost policies(marginalcostpricing,andseasonalmargiMalcostpricing.Tnotherwords,setthe priceat that pointwherethe pricing) with three non-pricepolicies (leakage control,demand and the supplycurves intersect.Unfortunately, metering,and mandatedwaterrestrictions)he ioundthatestablishing the r.arginal price for many water uses is the most economicallyefficientwasleakage control,fol-difficultbecauseof the characteristicsof water thatmake lowedbymeteringandannualmarginalcostpricing.AUlofitssupplyanaturalmonopoly.Theexistenceofeconomies the otherpolicieshadnegativebenefits.This is aneloquentof scaleensuresthatthosewho firstenteredthe market.vill reminder that rationingby pricingis not alwaysthe mostalwaysbe able to underpriceand drive out any potential efficientapproach.In order to find out, however, it isnewcomers.They can decideon their desiredprof.. Level inperative to carry out analysisat the level of economicand set the prices accordingly.This fact has been recog- sophisticationappliedby Hanke.nized for a long time in the area ofmunicipalwater andwastewatertreatment and the suppliershave been regu- 3A DistinguishingbetweenGeneric andlated,typicallybypublicutilitycommissions.Meier(1983) Region-SpecificTsuesshowed that there are at least five differentways ofmeasuringmarginal cost under these conditions,earh TheBankhas operationsin 152countries,aggregat-resulting in a differentestimate of the marginalcost.hi ingthemintofourmajarregions.To formulateBankpolicypractice good estimatescan be obtainedfor mostwater withrespectto waterit is essentialto distinguishbetweeninvestmentprojectswitheitherofthe approachescurrently issuesthat are generic to the managementof water as aused in Bank appraisals:longrun marginalcost (LRMC), resource,and othersthatare specificto individualregions.and averageincrementalcosts(AIC). Forexample,the difficultyofmaking"correct" allocationdecisionsbetweendifferentusesorusersis generictowaterUnfortunatelymost regulatory commissionshave aroundtFaglobe,but the relativeimportanceof irigationtendedto takea "backwards"accountingstanceandallow variesby climaticzoneand wateravailability.Thegenericpricing based only uponaverage costs andthe revenue issuesare the ones for which the Bank needs to evolveneeds to meet them: institution-widepolicy,the remainingissuescan be left tothe regionaldepartments.Traditionalrate-settingmethods,employedby stateregulatorycommissionsas wellas localgovemnment Fourteen genericissues are briefly describedandagencies,appear to have produced a situation of discussedbelow;nineas broadsector-wideissues(sectionrapidly deterioratingwater systems,both rural and 4.1),and five as sub-sectorissues.urban, characterizedby aging capital facilitiesandunder-maintainedwater systems.(Mann,1981)

Thisstanceisnotappropriateinsituationswherethe 4. Generic Issuesofutilities are facing increasingmarginalcosts (all the be COnern for theWorldBankprojects have been builtand now it becomesincreasingly nc o edifficult to supply the same amounts of water at thehisto il costs). Under these conditionsa "forward" In the waterplanningcommunitythere are severallookingaccountingstanceis appropriate.Ifthispolicywere connectionsof "water and. . ." whichare taken by manypursued,the emphasisonrevenuerequirementsof utilities as paramountrelationshipsthatbrcok no questioning.Aswouldbe replacedby establishingadequate -;re invest- arguedbelow,theBank'sComprehensiveWaterResourcesmet fimds. ManagemedtPolicyPapershouldtakea closelook at such


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sanctifiedlinkagesas waterane health,water and food, this. Hurstand Rogersbuilt an economy-widemodelforwaterandequity,waterscarcity,irrigationefficiency,and Bangladeshwhichincorporazedadetailedwatprsectorandso forth,leavingno assumptionunexamined. i. nmacroeconomiclikages. Whenthemodelwasrun,theoptimalsolutiovwasradicallydifferentfrom the optimal4.1Broad SectorwideIssues solutionprediLtedwhenthe componentswere run sepa-rately.Inthe overallmodel therewasa strongbiasagainst4.).) InternationalCoiflictsover Water producingan exportcrop because:Worldwidethere are hundredsof riverssharedby The reason for this is that the growthof the non-diffsrentnations(54justbetweerIndiaandBangladesh). agriculturalsevtor?dependuponthe importof rawInmanycasesseriousbilateralortultilateral conflictsover materialsandiintermediategoods.ifthe foodrequire-waterhavearisen. The currentdisputebetweenTurkey, mentsoftheranidlygrowingpopulationmustbemetSyria,andIraqovertheEuphratesisagoodexampleofsuch withfood-grairnImports(foragivenlevelofimpoits)situations.Intemationatlaw on trausnationalrivers is lessrawmaterialsandintermediatematerialscanbeweak;itisessentiallyleftuptothe goodwilioftheupstream imported.Consequently,non-agticulturalsectorsriparianrtosettleproblemsamicably.Severaldecr4esago, mustgrowat a slowerrate, andin orderto meet athe WorldBank was a majorplayer in one of the most reasonablelevelofnationalgrowth,the agriculturalsuccessfulconflictresolutions;theIndusBasinsettlement sectornrustgrowrapidly.betweenIndiaand Pakistn. Whilethisparticularmodelwas never usedin maldngaThe Bank should naintain its rule of not making plan,itdoesindicLtethatquitedifferentpolicyimplicatimnsloans for a project that is not acceptableto a country's arisewhen the macrolinkagesare explicitlyconsidered.neighbors,butit shouldalsoconsiderestablishinganego- Additionalresaarchin this area wouldhelp improvetheiatingunittoLelpcountriesdealwiththeseissues.Inmany qualitycf waterinvestmentsin all sectors.cases the provision of a neutral c)rner and unbiasednterational expertisecouldmakeit politicallyeasierfor 4.1.3 WaterSectorPlanmingMethod9logyandDatacountriesto exploretheirwaterconflictsw a neighborsin Requirementsa non-threateningsituation,relativelyfree of inhibitingpoliticallimelightand implicitthreatsto nationalsover- Atthenextleveldown,withinthe watersectorthereeignty.Althoughregrettablynotfruitfiltodate,theBank's are a plethoraof waterplaing tools. One of these haswork over many years on hydro-electricityconflictsbe- cometo be called "multi-objectiveplanning."AlthoughtweenNepalandIndia is an exampleofsuchan approach, conceptuallysatisfying,planningtheoreticianshavemadeand a credit to the Bank.Easingsome of thesedisputes the approachunnecessarilycomplicatedwithits ownno-would open up many new investmentpossibilitiesfor menclatureand dedicatedcomputersofhvare.In reaFtyconstructivemulti-purposeuse of intemationallyshared multi-objectiveplanning is based upon the concept ofriverbasins. constrainedoptimization.One merelyoptimizesone ob-jective, for example,nationaleconomicgrowth,while4.1.2Linkingthe WaterSectorto the NationalEconomy settingotherobjectives,suchas enviromnentalquality,asconstaintsuponthe system.TheBank itselfhas alreadyIt is a paradoxthatalthoughwaterresourceshave beena majorcontributorto the developmentof "multi-probablyreceivedmoreanalyticattentionthananyother objectiveplanning"throughitsmodeltingworkinMexicokindof public investnent,therehas beenlittleattention and Pakistan.The issuesof equity,foodself-sufficiency,paidto relatingthe watersec.,r to intersectora!or macro andhealthdiscussedbeloware typicalof the issueswhosealiocationdecisions.Thisla.kofanalysisshouldbeofgreatopportunitycosts manbe establishedby such methods.concernin countriessuchas Brazilwhere30% of public Thereis nodoubtthat*hisapproachshouldbe takenin anyinvestmentis in the watersector. plnning study.Whetherspecializedsoftwareor moregeneralpurposemodels such as linear and non-linearOther resourcesectorssuch as energyhave well programmingor simulationmodelsareused,the differentdevelopedmethodologiesto relate sectoraland macro versionsofthis tool yieldessentiallythe sameresults,andpans. Thedevelopmentofreliableplanningmethodology like all analyticapproachesshouldbe employedwith ato relatewater sectorplansto the overallmacrodevelop- greatdealof caution.mentof a countryis a genericproblemthat is of majorsignificanceto guidinginvestmentsandotherBankwater The literatureon water resourcesis also heavilyactivities.In apaper withHurst(HurstandRogers,1985) influencedby the ideasof comprehensivemulti-purposetheauthorfoundin the literatureonly a fewattemptsto do river basinplanning.This hashistoricallybeenthe ap-

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proachtaken in WestemEurope and the United States. systemshave been devisedwith littleorno ideaabouthowAlthoughintellectuallysatisfying,it is not clearwhetherit the informationis to be used.Thisresultsin over-collectionis the best approachto practicalproblems.It is helpfulfor of sometypesof data andunder-collectiOnof others.Thethe physicalaspectsof rainfaUand run-offbut much less experiencesof GIS users to datehave not been uniformlyhelpfulfromthepoint of viewof politcaljurisdictionsand happy.Most systemsconcentratesolelyuponphysicalandeconomicmarkets.la the United States it has since been scientficdata,andthereislittleornocoverageofimportantabandonedbyalilmajoragenciesinvolvedinnationalwatereconomicfacts. Althoughmany of the economicdata doplanning.Today agenciesallow the specificpioblem to not needto be collectedaccordingto detailedgeographicdictate the unit of analysis.With innxeasingconcem for distributions,theeconomicrealitiesmaybeasimportantasbroaderproblemssuchas environmentalquality,the idea the physicaldatathatdo, andmaybe criticaltounderstand-of analyzing "problem-sheds"rather than river basinsis ing the meaning of the physical givens. More attentiongaining ground. A recent book by Major and Schwarz shouldalsobe paidto the statisticalvariabilityof the data.shows how river basins can be building blocks in larger Currentlyavailablemethodstoest4blishstatisticalreliabil-problem-sheds.The Bankwillhave to examinecloselythe ity shouldbe insisted upon in all data Analysesand betypesof issuesfaced by its clientsbeforerecommendinga carried over into the analyses of particular investmentparticularplanningapproach. decisions.

Atthe practicallevel,however,littleplanningofany One issue that tier the methodologyand the datakind seems to have beenapplied consistentlyacrosswater together is the issue of "uncertainty." Not only is itusesinthe economy.For example,inmanyplacestheuses importantto develop and use reliE" . data but it is alsoof water are still examined separately on a project by imperativethat the planningmethods used elucidate theprojectbasis.Thus,inAlgeriaitispossibletofindexamples uncertaintyregardingthe planningdecisions.Alltoooftenofcarefullyplannedirrigationprojectsalongsidecarefully inthe waterresourcesareathe bulk ofthe analysisisaimedpianned urban water supply projects, with no way of at the consequencesof hydrologicaluncertaintywhen,asreconcilingthe conflictingdemandsthat both have for the demonstratedby James, Bower,and Matalas (1969),thesame water supply.In Brazil there was surprisewhen the largestpartoftheuncertaintyintheimplieddecisionsstemsintroductionof a tariff on wastewaterdischargesled to from the economicparameterswhich typically receivelarge dc reases in revenue to the water supply utilitv little stochasticevaluation.almostleadingto its bankruptcy.In these casesthe unitofanalysiswasnotlargeenoughtocapturetheexternaleffects In its Policy Paperthe Bank shouldmake a seriousof policiesdealingwith individLalcomponents. efforttoshowwhatarerealisticexpectationsaboutthedatathatmay reasonablybe gathered,andthe levelsofreliabil-There is a need to ensurethat appropriatemodelsof the ity that can be achievedby the use of these data.water sectorbe includedin any projectappraisal.The unitofanalysismustbe largeenoughto ensurethatmostof the 4.1.4 ThePoliticalEconomyof Pricingrelevantextemalitiesarecapturedin the analysis.Iniriga-tionprojects,groundandsurface wateras wellas drainage Apart from certain aspects of religiousand healthmust be analyzedas oneunit. Urban water supplycannot significance,most people in every day use do not regardbe divorcedfromwastewaterdisposaland its downstream wateras an end in itself.It is a commoditylike "ships andimpacts.Water diversionsfromriversmust consideralter- shoesand sealingwax," consumeddirectly or used as annative in-streamuses of the same water for navigation, inputto otherprocesses.Empiricalobservationshowsthatfisheries,downstreamusers,andthe maintenanceofstream in Boston as well as in Beijing, if the price of water isecosystems.Wellestablishedmethodsusingmathematicalincreased,consumerswill use less of it. In other words,progammingandsimulationmodelsshouldberequiredas there is a "willingness-to-pay"for water that is not ana prerequisitefor project appraisalin such cases. abstwacteconomicconceptdependingonelaboratetheoriesof privateproperty,but ratheris a reliablebehavioraltraitIn any policystudy the quality of the data used of consmnersof the products.The same behaviorcanbedetermines to a large extent what conclusionscan be expectedin Kansasand Kathmandu- and is a goodbasisreliablyreached.However,there is a mind-set,that always for assessingthe economicdemand for water. (Waterhaslooks formoreand moredataand more and morecomplete adownwardslopingdemandcurve.)Wecanexpecthumancoverageof a regionor basin. Geographicalinformation actionsto meet demandto be similar in widelydifferentsystems (GIS) are currently very popular. Some of he locations.The most accessiblewater for human use is thepracticalproblemsencounteredin the use of suchsystems cheapestto develop,the next most accessiblecosts a littleshould be examined.For instance, many of the current more,the nextyet a little bit more, and so forth.Verysoon

10

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one observesan upwardlysloping"marginal cost" curve sometimeseven within countriesand between differentthat dependsunon nature, not upontheory. Based upon wateruses.It ishard to draw fromthe gamutof individualthese two obst. i d phenomenaof willingness-to-payand casestoprovideagei'eral theory,otherthanto say that,forincreasingmarginalcost curves, a good set of practical manymodem market-incentivesystemsto work, there isrules can be derivedfor helpingto decideuponhow much the need for a much clearerdemarcationof propertyrightsto investin developinga particularwater supply. to wateruse than oftenexists. At any level,the definitionof propertyrights to water is very difficultin the face ofAlthoughmost peopleperceivewater in this way at water's sacralquality in many societies,its essentialitytoan individuallevel,the sameindividualstreat waterdiffer- life,and itspervasiveextemalities.As a result,a largebodyently when they gather collectivelyto make decisions oflawhas grownuparoundwater in almostevery country.aboutfutureuses of water.This contradictionmay be dueto the commonsocialmisperceptionof water as a "pure Waterpricing,therefore,isnotatasktobe left solelypublic good" which belongsto "everyone" at the same to economists.The,political, legal, and social dimensionstime, with a right of accessfor all. As a result it is are extremelyimportant and emphasizethe need for a"political economy" of waterpricing.customaryto treat water as a free goodwhen it is infact anythingbut free. Peoplecometo expectthat it 1. Pricingis their right to take (and towaste)as muchwater astheywant. (Baumnoland Oates, 1979). Threeimportantconceptstend to get confusedin thediscussionof waterpricing. Theseare, 1) the opportumityThereisclearlyaparadoxhere,sinceitisobviousthat cost of waterdiscussedat length above,2) marginalcostfor many uses (for example, irrigation and municipal pricing,and 3) cost reoovery.Marginalcostpricing is thesupply)water has all the propertiesof an exclusiveeco- pricingof water at the cost of supplyingan additionalunitnomic 2ood-just the oppositeof a "public good." Adam of water.In a perfectly fimctioningmarketeconomytheSmithwas one of the firstto definea "pure public good": mostefficientsolutionoccurswhencommoditiesarepricedonce the good is provided, it is not possibleto exclude at theirmarginalcost.The marketis saidto clear whentheanyonewhowantsto take advantageof apublic goodfrom marginalcostisequaltothemarginalbenefit.Themarginalusingit, andthe consumptionofthepublicgoodbyanyone cost must includethe opportunitycostof the water. Costconsumerdoes not impedethe consumptiorby any other recoveryrefers to pricingof watc to recover the costsofpotentialconsumer.At the otherextreme,a pure private providingit. Typically,cost recovery is based upon ac-good", such as foodpurchasedfroma market,can be and countingproceduresthat are basedupon historical costs.

usualy is the exclusivepropertyof the owningindividual; Costrecoverypricingcanbe closeto marginalcostpricinghis or her consumptionof the food absolutelyprevents whenthecostsofnewprojectsaw;similartothecostsofpastanyone else fiom consumingit. Water, like many other projects.Unfortunately,in water resourcesdevelopmentgoods,falls somewherebetweenthesetwo extremes.It has historicalcostsare typicallymuch lowerthan currentor"pure publicgood" aspectswhenit is left in a scenicriver, projectedcosts of projects.but even then too many peopleusing the scenicriver willdestroy some of its valuefor other participants.It has Many water planners confuse cost recovery with"exclusiveeconomicgood"featureswhenitisevaporated marginalcostpricing,theeconomist's"goldenrule." Mostby farmers inigating their crops for profit in a market water utility officials considermarginal cost pricing assetting. leadingtounrealisticallyhightariffs.Unfortunately,econo-mists often try to mandate strict marginalcost pricing,It is the in-betweencaseswhichtendtopredominate ignoringpracticalproblemsfaced by util!tymanagers:Inin the academic works on water and which confusethe fact, thereare many different tariff structuresthat wouldissue.Thequestionas to who has accessto waterbecomes allow full cost recovery without marginal cost pricing.very importantin determininghow water is defined,and Brownand Sibley(1986)showedfor the selecommunica-thisdefinitionin tum hinges upon the differentdoctrines tions industrythat the Ramseyprices necessaryto covergoverniingwater rights. In order to use water mare effi- costsandprofitwereonlyintherange of3% more efficientciently it may be necessaryto codifythe water rights. !hantaiiffsbasedupontraditionalcostrecovery methods.Marketsarebaseduponasystemofpropertyrightstoscarce (Rememberthat telecommunicationsindustry,however,goodsand the right to excludeother usersof the resource. has declining costs not increasingcosts like the waterA privatewatermarket canonlyexist ifpropertyrightsare industry.)While tariffs have financial, economic, andsecure and can be transferred.However,water law and politicaldimensions,it shouldbe rememberedthat mar-waterrights differ radicallyfrom countryto country,and ginalcost pricingreliesonly on the economicdimension.

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The best approachprobablylies 3omewherebetweenthe yieldingwheat,and cashcropssuchas cotton,tobacco,andtwoextremes.Thetensionbetweenregulationandefficientoilseeds.pricingwillalwaysremaina sourceof contentionbetweenthe plannersand the politicalprocess,however,as Brown Outside observersare surprisedby the disparitiesand Sibley(1986)stated: among cost recovery rules for Bank loans in differentsectors.Il the electric energy and telecommunicationsWhen regulation violatesefficiency criteriaseri- sectorstheBankinsistsonfull costrecoveryforthe capitalously enough, not only economists become con- as well as O&M expenses.The goal is to create viablecemed.Peak loadpricinginelectricity.forexample, publicutilities,abletosettariffsthatwillefficientlyfinancewas taken seriouslyintheU.S.whenit becameclear the future developmentof the sector. In contrast,waterthat excessiveuse of electricitywas contributingto sector projectstypically require only repaymentof thean energy crisisthat alanned many people. Hence, O&Mand of some "reasonable"part of the capitalcosts.normativeeconomicsplaysan important,thoughnot Manywould argue that thispolicyleads to sloppyperfor-preeminent,role in the regulatoryprocess. mance on the part of both the suppliersand consumersofwater. Sincewe doknowthat wateruse is directlyrelatedPricing is the major tool by which economistsat- to the prices charged;the higherthe prices,the lowerthetemptto bringaboutefficientresourceuse. Pricingis more usage.thancostrecovery;it also aimsat leadingsocietytocorrectallocationdecisions. Unfortunately,when many of the The Bankshouldcarefullystudy the implicationsofpricesin an economyare artificiallyset,it is hardto induce movingtoward full cost recoveryfor water sectorinvest-rational resourceallocationby "correctly" pricingjust a ments,and alternativemethodsof doingso.fewoftheresources.This isamajorprobleminall countriesand regions. For example, it is estimated that in the 4.1.5EnvironmentalImpactsof WaterDevelopmentEMENAregion alone the subsidy to agriculturedue toincorrectwaterpricingisoftheorderof$40billionperyear. There are increasingpressuresoninternationalinsti-tutions to take the lead in respondingto concernsaboutThe Bank must developstrategiesthat will enable environmentaldeterioration.The Bank should take thecountries to bring their resource pricing progressively initiative in dealing with these problems, instead of itscloser to market pricing,economywide,than is currently beingseenasmerelyreactingtospecificchallengesastheythe case. TheBank's PolicyPaperwillhave to lay out the arise. Asthe industrializednationshave discovered,assur-issuesandconsequencesofpricepolicysothatpricepolicy ing water quality entails more than the regulation ofwil becomean integralpart of the Bank's own operations industial and municipalwastewaterdischarges.Nonpointas well as of those of the borrowingcountries. sourcessuchas agricultual runoff,are now recognizedasmajor contributorsto environmentalproblemsthat canot2. Cost Recovery be ignored.Moreimportantly,at the level of questionsofsusainability of ecosystemsas a whole, water use andInthe indianstateofBihar,the chargesforrrigation water contaminationplay major roles. They cannot beDepartmentwater from river diversionsand dams are so easily separated into water quality and water quantitylow and the attemptsto collect the fees so feeble,that in issues;both are critical.1979the costincurredin collectingthe fees for waterwas117percent of the actual amountcollected.Owingto its Fromthe environmentalpoint of view much of theseriousfinancialdifficulties,theIigationDepartmenthas concernwith water projectsstemsfrom the casualway inhad to defer maintenance,and the water systemhas dete- which environmentalconsequencesare handled as a lstriorated. Farmers have less incentive to pay for poor minute consideration,rather than being integratedintoservice,anda vicious cyclehas developed.Moreover,the project design fromthe beginning.Big offendersincludelow water chargeshave led farmers to use water ineffi- irrigationprojectsinwhichdrainageissuesareneglectedinciently.By contrast,in boththe Punjabregionin Indiaand the initial planning,navigationprojects in which the dis-inareasoftheUnited Statesthatrelyonwaterfromprivate posalofdredgedmaterialsis haphazard,and floodcontrolwells, fannersarefarmoreconservativeinhowmuchwater projectswhich ignoreflood-plainfisheries.In allof thesethey use since they pay higher prices. (Well water costs casesadequatepre-planningguidelinescouldsubstantiallymorebecauseit is notsubsidized.)Yet thesefarmers'crops reducetheenvironmentalimpacts.1Thereareotherprojects,are not doomed to economic failure: when the cost of for examplelargedams,whichhave majorenvironmentalpumping in the Punjabincreased in the 1960s,fanners impactsthatcannotbemitigated, such as loss of habitat,began growing more water-efficientcrops suchas high- loss of fertile bottom lands, destructionof forests,and

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sediment trapping, in addition to the social impacts of goals.Theirrigationliteratureisrepletewithdiscussionsofmoving large numbers of people from their homesand howto defineequity,how to measureit and its effectsonfarms. These consequencescan only be addressedon a productivityandothervalues,and howtoplan forit.Somepoliticallevel by providingthe rightkinds of institutions options are more equitable than others and should bethatwillallowfordialogue,negotiation,andcompensationpursuedin the design and implementationof water re-to the affectedgroups. However,guidelinesthat force a sources works.Nevertheless, if cie were looking forthoroughsearchfor alternativescould,in the caseof large investmentsin the economyto achieveequitabledistribu-dams,suggestattractivealternatesolutionssuchas modi- tions of benefits,water projects are not the most likelyficationsofthe scale ofthe projector otherstorge options candidates.Evenwithinirrigationprojectsthemselvesit issuch as undergroundstorage or a largernumber of smaU important,forexample,thattheeconomiccostsofskewingstoragescloserto the users. The WorldBankOperational water allocationsin favor of equitythat are imposeduponMemorandum4.00, Annexes A and B, could provide a societybedefinedintermsofthenumberoffarmers,rathergood startingpoint for the developmentqf appropriate than farm sizes, and that they be carefuly estinated andguidelines. politicallyassessedas to whetherthey exceedthe accruedsocialbenefits.In somesituationsfarmsare toosmallto be4.1.6 Social Impactsof WaterDevelopment economicallyefficientand the watermight be betterusedon slightlylarger farms.Inaperfectworld,waterdevelopmentprojectswouldhaveonlypositiveimpactson societies.However,because Equity is an emotionallycharged issuewhich theof the exteralities inherent in many water investment Bankcan help borrowinggovernmentsweigh properlybyprojects,thereare almostalways somewinnersand some providinga dispassionatediscussionof it in its Policylosers.Localpeople lose theirlandsso that urbanpopula- Paper.Thereisalarge rolefortheBankinhelpingcountriestionscanhaveelectricpowerandlowlandfarmerscanhave deal with these types ofimpactsin a straightforwardwayirrigation.Upstream users pollute rivers with wastes or by givingthem due weight in their own indigenousplan-choke them with sediment, causing severe damages to ningmethodsand organizations.Someof these resourcesdownstreamusers. Attention must be paid in planning are already covered by the Bank's own environmentalprojectsto minimizedisruptionoutsideofthe projectarea assessmentguidelines.Theyshouldbe madeexplicitin theand to provide compensationto the affectedparties. PolicyPaper.

Asinthe case ofenvironmentaeconsequences,many 4.1.7 Conservationand Recyclingof Waternegativesocial impactscould be avoided by carefulpre-planning.Someofthemostegregioussocialimpactsfollow Oneof themostobviouswaysofextendingthewaterfrominvoluntarymovementofpopuationsoutofareasthatresourcesbaseis byconservingwaterorbyrecyclingitafterare floodedby dans and embanlments.The move itself use.Unfortunately,by themselvesthesemeasuresare notmay be unavoidable,but social disintegrationand destitu- thepanaceasthattheyare oftenthoughttobe.Inmost casestion are not, and the needs of the affected populations peopleand industries"waste" wateronlybecauseit is theshouldbe integratedearly into the planningprocess,with cheapestthingto do. Unlesswaterpricesare raisedsignifi-adequateresourcesand communicationchannelsprovided cantlythereisno incentiveto do otherwise.Theexperienceto meet thoseneeds.Other cases,suchas equityin water in the industrializedcountriesis that people can be moti-access in irrigation projects, are less obvious and are vated to conservewater on the basis of altruismonly inthereforeoften ignoredby projectdevelopersand funding times of shortage.Typically, after the stress is removedagencies.Particularimpacts on women and childrenare consumptionrises to the previouslevels.also oftenoverlookeduntil it is too late to mitigatetheirdamage.Humanhealthissuesareoftenneglectedin evalu- Thereis much discussionof the recyclingof sewageatingwater sectorinvestments.For example,the introduc- for use in agriculture.Many cities have been doing thistionof schistosomiasisinto a regionby irrigationprojects more or less successfullyfor some time. The practice isis a seriousmatterand can be avoidedor controlledto a widespreadin Asia, with, however, some problems insignificantextent by changesin systemdesignand opera- protectingthe public frompathogens.With care such usetion.Accesstowaterforbathing,forreligiouspurposes,for can be made of sewage, and should be made whereverwateringanimals,andforrecreationareallimportantsocial appropriate.However,much of thediscussionimpliesthatuses of water often inadvertentlyleft out of project plans. largeamountsof irrigationcan be accomplishedwith suchrecycledwater.One needs to be remindedof the tremen-There is also the option of actively using water dousasymmetryin volumebetweenagriculturaland do-investmentsto achievepoverty reductionor other equity mestic water uses: one large irrigated farm in the U.S.


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consumes as much water as a town of 15,000 people municipalwater is a local responsibility,but many indi-produceswastewater.It takesthe wastewaterof 50 people vidualsalso sell water in small quantities to households.to irrigatethe land required for growingthe food for one Ruralhouseholdsare almostalwaysinchargeof obtainingperson.Althoughwaterrecyclingfor industrialanddomes- their own supplies.The result of such comparlmentaliza-tic usesappearsattractiveand aworthwhileinvestmentfor tion is that agriculture,industry, and municipalitiesusevegetable gardening, it is not likely to make a major water inefficiently.contributionto irrigatingfield crops.WhileinstitutionsarelikelytobehighlyregionalandDirect recyclingof municipal wastewaterhas also culturallyspecific,theneedtostrengthenthemisoneofthebeen practicedwithoutthe use of irrigationas an interme- major generic problems facing development activitiesdiary.Forexample,Windhoek,Namibia,hasbeensuccess- aroundthe world.Theneed is notfor largenew institutionsfullyrecyclinglargequantitiesofmunicipalwaterformore but, rather, for smallpolicy councilscomposedof cabinetthat 20 yearswithoutapparentproblems.In somepartsof rankofficialswhowillbe ableto coordinatetheworkofthethe worldsuchrecyclingispracticedinanunobtrusiveway. existingwaterinstitutions.Th,Bank'sPolicy PapershouldFor example,in Hollandpollutedwater fromthe Rhineis emphasizestructure,organization,management,and thefilteredthroughthe riverbanksbeforebeingabstractedfor role of adequatecost recovery,to enable individualcoun-urbanwater supplies. tries' institutionsto carryout necessarymaintenancetasksand build for futuredemands.Alothasalsobeenwrittenaboutconservingwaterbyimprovingthe efficiencyof use in irrigationand reducingthe losses in urban water systems. As discussedbelow, 4.1.9 Role ofthe Bank in Education,Training,andincreasingwateruseefficienciesin agricultureis a difficult InformationExchangeconcept and the practice may not really provide greatsavingsofwaterinmanycases,particularlywhereconjunc- As the world's leading institution for supportingtive use of groundwateris practiced.Nor is it necessarily investmentsin the water sectorthe Bank is ideallyposi-wiseto reducelossesinurbanwatersystems,sincethe cost tionedtouse itsprestigeand influenceto furthereducation,ofreducingthelossesmayexceedthebenefitsasperceived training,andinformationexchange.ThroughitsEconomicby the water utility. This is clearly an area where the DevelopmentInstitute(EDI)the Bank is alreadyheavilyappropriatepricingand valuationof the water itselfis the engagedin the formaltrainingofThirdWorldgovermmentmajor issue.Conservationfor its ownsake is not a realistic servants.This role couldbe furtherenlarged by requiringor advisablegoal; it only makes sense within a correct more on-the-jobtrainingfor host governmentemployees.pricingpolicy for water.The Bank's Policy Papershould As mentionedabove,the appraisalprocess itself couldbe

clarify the potentialrole of conservationand recycling. used as a useful teachingmechanism.In particular, theenvironmentaland socialimpactassessmentrequirements4.1.8 Host CcuntlyInstitutionalReform stressedabove can be used as a public educationtool. Ifgovernmentagencies actually develop and use environ-In most countriesthereis a greatneedto upgradethe mentaland socialimpactassessments,they will discover,institutionsdealingwith the variousaspectsofwater.Most as willthe impactedgroupsif they are integratedinto theimportantly,in every countrythere shouldbe one institu- process,howwaterinvestmentsreallyfunctionintheirowntion with the responsibilityto coordinatewater policy societies.This has been one of the most important out-across uses and across governmentagencies. Even ad- comes in those developedcountrieswhich have imple-vancedindustrialcountriessuchastheUnitedStates,suffer mented such an approach.Their citizens are now muchfromlack of coherencein water policy acrossuses. There more avwareof the environmentaland socialconsequencesis often a tremendous inertial asymmetrybetween the of governmentactionandhave begun to make theirviewsstaffing of agencies with traditional concernsand those feltthroughpoliticalaction.Greenpartiesare springingupwith more modem ones. For instance, in Thailandthe throughoutthe industrializedcountries. Since funds areIffigation Departmentis the single largest government limited,the Bankmightconsiderarolefor itselfineducat-agency.lnlndia,theuseofsurfacewateris administeredby ingotherpublicandprivatefinancingagenciesinthis field.theCentralWaterCommission,whereastheCentralGround-water Board oversees groundwateruse. There is little 4.2 Subsector Issuespractical integrationof these agencies' plans, despite afonnal agreementto cooperate.Each of India's 22 states 4.2.1 Irrigationalso has its own departmentof irrigation,which usuallydealsonlywithsurface-watersupplies,whileotherdepart- "Water and food" caries many assumptionsaboutments focus on groundwater.In cities around the world, developmentpolicywhich need to be carefullyand sepa-

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ratelyexamined.Food securityis amajorconcernofevery vision;itcanthrowthe largerbenefit-costpictureseriouslygovenmuentthroughoutthe world but how to achieve a out of balance, and lead to misplaced investmenton asatisfactorylevelof securityis not obvious.National self- significantscale.sufficiencyin food grains is not the imperativethat it isoftenassumedtobe.Inthe modernworldoilis essentialfor In its PolicyPaper the Bank will have to devote asurvival, but nowhere do we find the belief that every major effortto analyzingirrigationsince this is one of itscountryshouldbe self-sufficientin oil. There is no reason major lendingactivities.However,there are many otherwhyeverycountryshouldgrowgrain,whichrequires2,000issuesinvolvingchoiceof technologyand croppingpoli-to3,000tonsofwaterperton.1nanandcountrywatercan cies that have not been featuredhere, which are also ofhavemuch highervalue for otheruses. Internationaltrade major concernin this partofthe watersector.Many of thecanredistributewater- inthe formofgrain- tonationsthat sector-wideissuesapplyintheirrigationarea.Forexample,decide not to grow it. Israel subscribesto this practice, a recent paper by Johnson(1990)indicatesthat the prob-emphasizipgvaluablecashcropssuchasfruits,vegetables,lems with irrigation in South and Southeast Asia areand flowersfor the Europeanmarket.Countriesthat take becomingparticularlyacutebecauseof the fundingof thethis approachcouldmaintainstockpilesofthe basicgrains; operationsand maintenance(O&M) of the systems. Aseven though stockpilesare costly and can deteriorate, indicatedabove,pricingand cost-recoveryare fundamen-replacing spoilage is less expensivethan growing grain. tal to achieving proper operation and maintenance ofSuchcountriescouldgrowa diversityof cashcrops so that systems.fluctuatingintemationalprices could not devastate theireconomies. 4.2.2 Waterand Health

Even the definitionof self-sufficiencyis not clear. A relationshipbe.tweenwater and health has beenDoesit meanthat acountry shouldbe self-sufficienton the acceptedsince at least the time of Frontinus,the Wateraverage,orfordroughtyears,oronly75%ofthe time?The Commissionerof Romein 97 A.D.,but the exactrelation-choiceof the definitionhas a large impacton planningfor ship is not well understood even now. A World Bankwater use in agriculture.It is imperativethat the Bank position paper on domesticwater supply (World Bank,addressthis issuehead-on in its PolicyPaper. 1976)cautiouslylimiteditselfto sayingthat "other thingsbeing equal,a safe and adequatewatersupplyis generallyIncreasing"wateruse efficiencies"inagricultureis associated with a healthier population." Many of thea widely suggestedsolutionto water shortages.However, benefitsobservedduringthe "sanitary revolution" in thein many parts of the world one farmer's inefficientuse industrializedworld wereachievedwhen protectedwaterprovides the water for another farmer downstreamor supplieswere provided to societies with rising incomerechargesthe groundwaterfor many other farmers.It has levels,whichinducedotherpositivebehaviorswithrespectbeen argued that the irrigationefficiencyin California's to personalhygieneand nutrition.At low levelsof devel-SanJoaquinBasinapproaches100%despitethe factthaton opment,investmentsin improveddomesticwater suppliesany one fa&mthe efficiencymay only be 60-70%.Indi- are often necessarybut generallynot sufficientto realizevidual casesmust be closelyconsideredbeforemuch can the potentialhealth benefits.Formiddle-leveldevelopingbe made of the advisability of improving "irrigation countries,where the populationis generally better edu-efficiency." Many commentatorslooking only at farm cated, the health benefitsof investmentsin water supplylevel efficiencieshave advocatedimprovementof effi- and sanitationaregenerallysubstantial.Athigherlevelsofciency of water applicationas the best way to conserve developmentonetypicallyobservessmalladditionalhealthwater. Althoughthis may be true in some cases, it is not benefitsfrom furtherinvestmentsin such facilities.universallytrueandshouldbesubjectedtocarefulanalysis. But apartfromdrinkdngwaterandsanitation,seriousItismoreappropriatetostartfromthelargerperspec- hunan health problems can be introducedinto an areative ofthe overallregionalefficiencyoftheuseof waterfor throughthe developmentof water resources.The classicirrigation.But eventhis is a difficultconcept,and agricul- caseisthespreadofschistosomiasisinAfricaandAsiaaftertural and irrigationprofessionalswill be on still stronger the introductionof irrigation.Debilitatingratherthan fatalground if they orient themselvesto the further-reaching in most cases,schistosomiasisnow infectsmore than 200concept of the "economic efficiency" of aU water use million people. Malaria, filariasis, yellow fever,rather than of "irrigation efficiency." "Irrigation effi- onchocerciasis(river blindness),dracunculiasis(Guineaciency" is a seductivenotion because it simplifiesthe worm disease),and sleepingsickness can be spread byproblemto wateralone by focusingit on engineeringand inrigationprojects.Manywater-solublechemicalsused inmanagementvariables.But it canbecomea formoftunnel agriculture,particularlychlorinatedhydrocarbons,accu-

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mulatein animalandplanttissuesandthusenterorbecome ness-to-payfor these servicesby differentsocioeconomnicconcentratedin the food chain. High concentrationsof groups.Suchstudies are conceptuallydifficultas well asnitrogenfertilizerin water suppliescauseblooddiseasesin time-consuming,but they should obecarriedout in a suffi-infants.In manycountriesunregulatedand indiscriminate cientlylargenumberof casesthat the basicmagnitudesofproductionanddisposalofchemicalsand theirwasteshave the expectedbenefitscanbe demonstrated.This isparticu-led to seriouscontaminationof surface and groundwaters larly important in this sector since most of the litetatureby toxic and carcinogenicsubstances.Someof the worst focusesuponthecost ofthe servicesand oncomplaintsthatcasesare observedin developingcountrieswhichhave few theyare becomingtoo expensive."Too expensive" com-resourcestodealwiththem.Acarefulreviewofallofthese pared to what? The only meaningfulcomparisonis withcomponentsof "water and health" is in order,notjust of the benefits received from consumingthese goods anddrinidngwater and sanitation. services.4.2.3 Urban WaterSupply and WastewaterDisposal Forurbanwater and wastewaterdisposal,consider-ation of the role of industryin the managementof theWith continuingrapid populationgrowth,the nuin- ambientqualityofthewaterresourcesisvital.Industryusesber of cities of over one million people is expected to only5to 10percentofallwatersuppliedbutstillrepresentsincreaserapidly.It is in these burgeoningmetropolisesof an importantsegmentof demand.This resultsin part fromthe Third World that the most pressing needs for water the fact thatindustrialprocessespollute a disproportionatesupplyand wastewaterdisposalinvestmentswillbe felt.In arnountof water. For exarnple,in Sao Paulo and Seoul,all cities the costs of providing new water suppliesand industrialpollutionhasturnedmanystreamsandriversintowastewaterfacilitiesarerapidlyincreasing.rarefulassess- open sewers.Developingcountriesshouldlearn from thementofnew approachesto the whole problemare needed. experienceof industrialized nations: it is much moreForexample,AkhterHaineedKhan,the formetheadofthe expensiveto clean up pollutedwater than it is to avoidComilla Academy for Rural Development,has success- polluting in the first place. Economicincentivesagainstfully applied the approachesof rual organizationto the industial pollution,suchas effluentfees, shouldbe estab-denselypackedparts of the city of Karachi,mobilizingthe lishedso that companieswill have an incentiveto controllocalpopulationtoplan,construct,andfinanceasewerand their effluents at the source. In addition to the usualdainage systemat a fractionof the cost of similarsystems regulatorymethods,innovativeapproachessuch as trade-providedby the city government. able permits and privatizationof facilities shouldbe ex-plored. The failure of some of these approachesin theWemust lookharder forinnovativeways of dealing industrializedworld does not mean that they may not bewithurbanwaterandsewerissues.Technicalandmanage- appropriatein Third Worldsettings.rial performanceneedsscrutinyto ensurethat excessivelycostlysystemsare not builtmerely to copythe industrial- Regulating environmentalquality by pricing theized countries.This is particularly true now in Eastern effluentsthat individuals,municipalities,and corporationsEurope,wherethetendencyistoproceedirmmediatelywith emit is one of the standardrecommendationsof economicthe sameapproachesas thoseused in WestemEurope.As theory.Theeconomicliteratre is fullofconceptualschemesis well known,the general rule is that removingthe first for pricingand taxingeffluentsthat wouldlead to internal-50% of pollution is quite cheap, with the incremental izing the extemalities of pollution. Once this is done,improvementsbeing increasinglycostly. This consider- environmentalquality can be left entirely to the usualationoftensupportsdevelopingasysteminstages,moving market forces. The Washington-basedresearch institute,to the expensivehigher levels of performanceas general Resourc:esfor the Future,has led the campaignfor feesoneconomic growthgenerates increasedability to pay for effluentdischargeinto waterwaysfor over 20 yearswiththem. little success;it has mainly been opposedby those whothinkit impropertoselltherighttopollutethe environment.

The costsof alternativeapproachesto urban watersupplyand wastedisposalshouldbe carefullyexamined. NeverthelessasubstantialamountofeffluentpricingLocal agencies shouldbe made aware of these costs and has been used in the U.S. and in Europe.Hudson (1981)encouragedto set their tariffs to reflect real costs and reportsontheextentandmodeof implementationofwaterprojected trends of costs. The issue of cost recovery, pollutionpricingthroughsewercharges.He claimsthat bydiscussedin moredetail above,is criticalhere. The Bank 1970morethan90%ofthemunicipalitieswithpopulationsshould also initiate studies to elucidate the economic over 50,000 levied some form of sewer charge on resi-benefits of the provision of these urban services. Such dences and industryand that 40% of local expenditureonstudiesshouldbe based upon assessmentsof the willing- sewage was derived from these charges. Industry can

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chooseto pretreatitswaste,decreaseitswateruse,improve intersectoralnatureof electricityand theconflictsoverthehousekeeping,change either the productionprocess or potentialuses of the water betweenusers.In addition,theproducts, or it can choose to pay the effluent fee. The pricingof the output from multipurposewater resourcesindustrialchargesare typicaUyrelated to the quantityof projectsthatincludehydropowerneedscarefulreappraisal.waterusedand the "strength" of the effluentmeasuredin The temptationis to loadadisproportionateamountof thetermsofthe oxygen-demandingorganicwasteload (BOD) cost recoveryon the electricityconsuners and not on theand total suspendedsolids. These charges can give an agriculturalandotherusersofthejointoutputoftheproject.incentiveto industriesto changethe amountsand strengthoftheirsewageeffluents.Hudson'sstudyoffivelargecities The Bank's Policy Paper should help developex-(Atlanta,Chicago,Dallas, Salem(Oregon),andSouthSan plicit guidelinesfor dealingwiththeseissues,particularlyFrancisco)and 101 industriesfoundthat effluentcharges the environmentaland social impactsdiscussedabove,inwere overwhelminglypreferred by the industrialiststo its own operationsand to encourage the governmentsdischargehimitations.Therewasauniversalattemptbythereceiving fundsto recognizethemas potentialproblems.industriesin the sample to respond to the effluentfeesdespitetheirrelativelysmallcoststo the industries.Hudsonconcludedthat; "...we are confidentthat economicincen-tivesworkwelland canbe effectivelyadministered."In itsPolicyPaperthe Bankshouldstressthe applicationof well REFERENCESestablishedeconomicprinciplesand innovativetechnicalapproachesin this area. Baumol,W.J.andW.E.Oates.Economics,EnvironmentalPolicy,and the QualityofLife. Prentice-Hall,1979.4.2.4 Rural WaterSupply and Sanitation Brown,S. 3. and D. S. Sibley.The TheoryofPublic UtilityThis one problem area could easily consume the Pricing.CambridgeUniversityPress, 1986.entireBank lendingportfolio and still not be completelyresolved.1990isthe endofthe UnitedNationsWaterand Dasgupta,P., S. A. Marglin,and A. Sen. GuidelinesforSanitationDecade,but in percentagetermsthe population ProjectEvaluation.UnitedNationsIndustial Develop-coveredremains similar to that at the beginningof the ment Organization,1972.Decade.Moreeffortis neededon the socialand economicside of this issue,and Bank-sponsoredresearchonassess- Desvouges,W. H. and V. Kerry Smith.Benefit-CostAs-ing willingness-to-payfor rual water supply shouldbe sessmentfor WaterPrograms,VolumeI. Preparedforextendedto sanitation.As in the issuediscussedin section the U.S. EnvironmentalProtectionAgency,Research4.2.3.,too much of the discussionfocusesupon the costs TriangleInstitute,North Carolina, 1983.and toolittleon the benefits.In addition,thereis aneed forresearchon appropriateincentive schemesto encourage Dorfman,R.,and N. Dorfinan.Economicsof the Environ-individualor privatesectorundertakingst

eckstein, o. water resource development and the economics of project evaluation

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