WATER RESOURCE ECONOMICS
WATER RESOURCE ECONOMICS AGEC 606
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Date Created: 10/21/15
WATER SUPPLY AND POOR COMMUNITIES What s Price Got by Sheila M Olmsleml t the turn of the twenty first century several prominent international institutions have intensified their focus on the adequa cy of local and global water supplies for human consumption and other uses The United Nations tUNi declared 2003 the u Interi iational Year of Freshwater and the World Water Forum first held in 2000 has become an annual event indeed the cover article of Environment s September 2003 issue asked quotWill the World Run Dry The ongoing global discussion of the sufficiency of freshwater supplies is multidimensional focusing on everything from irrigation of world food crops to demand for water intensive industrial processes Many discus sions have centered on one particular aspect of global water securitythat of access Lack of access to clean water and adequate sanitation services is a global problem The vast majority of those a ected such as this boy washing clothes near PortauPrince Haiti live in developing countries but many rural areas regardless of nationJack access among the world s poor to adequate sup plies of clean drinking water Inadequate Drinking Water and Health Consequences To put this issue into perspective it is helpful to list some statistics on where we stand as a global community in terms of the adequacy of water supplies for human con sumption The UN and the World Health Organization WHO report that 11 billion people around the globe lack access to clean drinkingwater sources and 24 billion lack adequate sanitation services with the most serious gaps in service coverage occurring in Asia and Africa2 Rural areas lag substantial ly behind cities in both low income and mid dleincome countries Among lowincome countries 18 percent of the urban population and 30 percent of the rural population lack access to improved water sources Among middle income countries 7 percent of urban residents and 30 percent of rural residents lack access to improved water sources3 24 ENVIRONMENT The environmental health consequences of inadequate water and sanitation are devas tating The UN attributes 22 million deaths annually to poor water and sanitation4 Speci c effects on human health are broad 4 billion cases of diarrhea annually causing 15 percent of all child mortality under age ve in developing countries a 10 percent rate of infection by intestinal worms in developing countries 6 million people blind from trachoma 200 million infected with schistosomiasis and heightened incidence of diseases including cholera typhoid and viral hepatitis A just to name a few5 It is hard to imagine a more pressing environmental health problem or one that more strongly diminishes the length and quality of life and human productivity in the developing world The Role of Water Shortage Why does this problem persist In some cases inadequate access to drinking water supplies may result from actual water shortage Few countries in the world have annual freshwater withdrawals that even approach the sum of their annual surface water in ows and groundwater recharge Global freshwater supplies are plentiful relative to present consumption patterns see Table l on page 25 However global and regional averages mask considerable variation in water supply over time and space Measures of hydrologic water avail ability taken alone provide an inadequate basis on which to judge how much water is accessible and usable to particular popula tions in the same way that estimates of regional food supplies explain little about the number of calories available for con sumption by individual communities Moreover actual water shortage cannot fully explain the problem of drinking water access In some countries like Saudi Arabia and Kuwait longterm shortage of natural water supplies does not translate into substantial shortfalls in drinking water supplies Many countries are able to mitigate natural shortfalls in supply and other countries are able to DECEMBER 2003 mitigate the universal variation in supplies over time through capital investments reservoirs are the simplest example and desalination plants one of the more recent and most expensive examples On the other hand there are also examples of countries in which natural freshwater sup plies are plentiful yet large populations lack access to safe drinking water6 Environmental economic political and social factors are all important contribu tors to drinkingwater shortfalls The Role of Prices In countries that face both longterm shortage of natural supplies and an extreme shortage of capital for invest ments in water supply and treatment infra structure solutions to the problems described above have been and may con tinue to be long in coming Where sup plies are generally adequate however increasing ef ciency in the pricing and allocation of water can increase the amount of clean water available for human consumption and as a result mit igate some of the devastating environmen tal health consequences of inadequate drinkingwater supplies described above In the September 2003 issue of Environment authors Mark Rosegrant Ximing Cai and Sarah Cline of the International Food Policy Research Institute describe three very different sce narios for the future of global water sup plies7 The most striking difference among the three scenarios is the structure of incentives for consuming and conserv ing these precious resources water prices within and between various mar kets including agriculture industry and municipal use In their sustainable water scenarioquot and indeed any sustainable scenario imaginable to an economist getting water prices right will mean rais ing prices in all of these sectors there are few places in the world in which this will not be true VOLUME 45 NUMBER 10 Ef ciency and Equity Competing Goals Herein lies a fundamental problem Sustainable use of water resources requires substantial price increases yet the most pressing problems of inadequate drinking water access press hardest on the poor If We are concerned with equitable access to improved drinkingwater sources as well as ef ciency does one important solution raising prices to the problem of inef cient use raise the specter of worsening an already abysmal distributional problem inadequate access to drinking water among the world s poor A closer look at three key questions reveals that we are not necessarily forced into such a Faustian bargain First what has been the result of the traditional approach to ensuring access to drinking water by poor communities keeping water prices arti cially low Evidence sug gests that this approach has been wholly inadequate and may in fact have created barriers to expanding water service cover age Second does the question of water pricing and the poor really pose the clear e icicncyequity tradeoff that it appears to on the surface To answer this question it is necessary to explore whether and how water prices can be used to achieve distrib trialized utional goals Third what is the possible role of the private sector in expanding drinkingwater service coverage to the world s poor The nature of the ongoing debate over this question may be misguid ed if the ultimate goal is expansion of serv ice coverage Inadequacy of the Traditional Approach Subsidizing public services like water supply and electricity has been a long standing practice by governments in indus and developing countries Frequently offered in support of this prac tice is the argument that subsidizing such services is the equitable thing to do enSur ing that these vital services are available to all households regardless of income In some cases including public drinking water supply subsidies also are supported in the name of the positive external bene ts that may result For example many dis eases attributable to inadequate water and sanitation are communicable and thus governments have some interest in ensur ing the health of lowincome citizens who may attend schools ride buses prepare food in restaurants and otherwise serve as unwitting vectors of disease which affects all people regardless of class Fable 3 Regional water withdrawals as a percentage of renewable water resonates Annual withdrawals as a percentage Region of internal renewable resources Africa 5 Asia 1 6 Europe 1 8 Central AmericaCaribbean 10 North America 8 Oceania 1 South America 1 2002 SOURCE World Resources Institute World Resources 2000 2001 Peope and Ecosystems The Fraying Web of Life Washington DC World Resources Institute ENVIRONMENT 25 Pria39ng Below Cost to Help the Poor By the mid1980s however interna tional nancial institutions and others Were realizing that govornments failure to recover the full costs of operating and maintaining water supply and sanitation infrastructure was imposing serious con straints on the potential to expand such services8 Holding prices below cost can only help poor households if two condi tions are met First poor households must actually bene t from the subsidy in terms of a connection to the piped water system that is being subsidiZed In addition the perhousehold cost of the subsidy itself must not be greater than the bene ts poor households receive In many cases subsi dies resulted in the free or cheap supply of drinking water to wealthier residents of cities in deVeloping countries who had already acquired connections to drinking Water systems9 Where subsidies are sup ported by taxes that fall relatively more heavily on lowincome households than on highincome ones distributional impacts can actually be the opposite of what is intended Willingness to Pay for Water Service in Poor Communities In addition two closer linked arguments on this issue have not stood the test of time that poor households remain unconnected to central drinking water systems because they cannot afford to pay for such services or that belowcost prices are necessary so that such households can afford to pay their bills In fact poor households that are out side central drinking water service net works typically pay more than their wealth ier counterparts who are connected to such systems This is true for a number of rea sons First they often pay higher volumet ric rates for water than the rates they would pay for piped water service10 Many poor urban households in developing countries obtain drinking water from informal ven dors including water truckers standpipe operators and households with connections 26 ENVIRONMENT to piped water who resell to unconnected households One study of water prices in 17 cities in developing countries indicates that the ratio of water prices charged by infor mal water vendors to prices charged by public utilities ranges from 51 in Abidjan C te d Ivoire to 28 831 in Karachi Pakistanquot Second poor households willingness to pay for water services comprises not only the high volumetric rate they may cunently be paying but also the opportunity cost of time spent gathering water and the lost wages and quality of life attributable to the environmental health consequences of inadequate drinking water Thus it is not at all surprising that economic studies of poor households willingness to pay for water service connections in developing countries frequently estimate fees that would support something closer to full cost recovery than what is achievable through the existing heavily subsidized rate structures character istic of public water supply systems12 Thus there is evidence that the poor can and do pay more than would be necessary to support partial or total cost recovery for the establishment of piped water service In addition because belowcost pricing does not allow water systems to recover such costs they cannot expand to incorporate new users Thus it is often the very people governments sought to help through subsi dies poor households who continue to suffer the conSequences of inadequate water supplies Rate Regulation and Water Service Acquisition among Texas Colonias There is signi cant additional evidence that arti cially low water prices may actu ally prevent or delay service expansion to poor households and this is a problem not necessarily limited to developing countries It is true that the vast majority of households suffering the environmental health consequences of insufficient water supplies are in developing countries and the fraction of households in highincome countries facing this problem is negligi ble especially in urban areas Nonetheless it is useful to examine one related water supply problem in the United States Empirical ndings with respect to poor communities in the Texas Mexico border region support the argu ments made above regarding poor com munities in developing countries13 Characteristics of Colonias in Texas Fifteen to twenty percent of residents in the Texas counties that border Mexico live in communities called colonias The word means residential areaquot or settlement in Spanish but is commonly used to refer to unincorporated rural and urban subdivi sions in Texas and the US Southwest that lack basic infrastructure such as paved roads and public utility connections In 1995 about 20 percent of Texas39s 357000 colonia residents were unconnected to cen tral drinkingwater systemsl4 Analysts attribute inadequate water service coverage among these communities to high infra structure cost low income and weak polit ical in uence lCoIonias are poorer more rural and are pdpulated by a slightly greater percentage of Hispanic residents than the border coun ties in general and the State of Texas as a whole Colonic per capita income in Cameron El Paso IIidalgo and Webb counties in 1990 was about 40 percent of the state average and between 35 and 40 percent of the US national average16 The communities range greatly in size in the study described here sample colonias range from 4 to 5200 residents with a mean population of 264 The absence of basic water and sanita tion services among colonias is wide spread see Table 2 on page 3927 Waste that is not pumped directly into the Rio Grande the river that marks Texas s bor der with Mexico is disposed of in out houses pit privies and inadequate septic systems In the Lower Rio Grande Valley the wastewater ow seeps into the high DECEMBER 2003 0 quot r b i fr ht x E s6 1 1 anges 4 39 3quot a Humor 3 we I 1 3w mmhgoo We 1 3 a A r I v if 27 r 445 Many poor households buy water from informal water vendors such as this man selling water in Chennai India Such vendors may charge prices that can range from 5 to as much as 83 times higher than water supplied by utilities water table contaminating ground water and threatening public health after heavy rainfalls As in developing countries the combined water and sanitation problems among colonias leads to high rates of environmental health problems 7 Refuting the Conventional Wisdom As is typical in the situations described for other parts of the globe the conven tional wisdom is that poor communities in the Texas border region cannot pay water service rates that would support the cost of piped water systems But the rates they do pay to obtain service from alternative providers typically are higher than public rates Colonias without water service often purchase drinking water for example from tanker trucks and store it in plastic or metal tanks A representative charge for such services to Texas colonias in 1988 was 22 per 1000 gallons18 As a point of compari son residents connected to the City of VOLUME 45 NUMBER 10 El Paso s public water supply in 2000 paid approximately 107 per 1000 gal lons of city water19 Here again low ability to pay is clearly not in itself enough to explain existing gaps in serv ice among poor communities Anolysis of Factors Contributing to Water Service Acquisition Unlike most places in the United States when a water supplier in Texas obtains a permit to become the sole provider of table 2 Water and Wastewater service coverage among colonias in iour taxes counties y p 3 Colonla Percent without Percent without County population water service wastewater service Cameron 41832 203 941 El Paso 74642 361 998 Hidalgo 135770 119 999 Webb 15140 860 991 Total 267384 189 991 NOTE Together the four counties listed aboVe contain 73percent of colonias and 75 percent of thecolonia population in l39exas 39 SOURCE Texas water Development Board ColoniasDatabase 1996 See 3 Cavanagh Thirsty Colonies Determinants of Water Service Coverage in South Texasquot Working paper 200141439Environment and Natural Resources Program John F Kennedy School of Government Harvard university October 2001 ENVIRONMENT 27 ANNIE 53 Many of the environmental health problems associated with poor water quality and sanitation services in developing countries also affect the communities in the TexasMexico border region particularly rural communities such as the colonies water services within a geographically de ned tem39tory it is not generally obligat ed by the state to provide universal service coverage within that territory Thus it is possible to statistically examine patterns of service coverage and gain some under standing of the factors that in uence the likelihood that any particular community will obtain piped water service The analy sis is relevant to other areas of the world in which universal service is not mandated or in which universal service is mandated in name but not enforced An econometric analysis of the factors contributing to lack of drinkingwater service reveals some interesting points While low income and high potential cost of service do reduce individual colanias likelihood of obtaining piped water serv ice institutional factors are much more important determinants of service acquisi tion or lack thereof For example for every 1000 increase in houschold income the likelihood that a colonia had 28 ENVIRONMENT received water service by 1996 increased by 2 percent But reliance on a price regulated water supplier reduced a colo nia s likelihood of obtaining service through 1996 by more than 27 percentquot0 In general water suppliers that are not subject to price regulation by municipali ties or Texas s state environmental regula tory agency appear to have been more proactive in providing water service to calom39as within reach of their monopoly service areas than have municipalities counties and other public water suppliers that are subject to rate regulation Rate Regulation A Potential Bam39er to Service Expansion This highlights an important and ironic point While it is true that poor communi ties are less likely to obtain water service than their wealthier counterparts due to low ability to pay and geographic remoteness or other costincreasing characteristics rate regulation may do them more harm than good in the absence of an enforced univer sal service mandate Assuming that colonia households seek to minimize the costs of obtaining drink ing water rates paid by colonia residents for piped service are less than or equal to their next best option which may entail hauling water from distant sources or con suming water from unregulated sources with its associated environmental health risks If unsubsidized rates are affordable to these households given their income constraints then pricing exibility allowing water suppliers to charge rates that cover costs may be a key component of service expansion In fact the results of this study suggest that pricing exibility is more important than generous public infrastructure subsi dies for expanding Service to the poor A water supplier s access to one source of very lowcost federal nancing the US Department of Agriculture39s Rural Devel opment program makes no signi cant dif DECEMBER 2003 ference in the likelihood that a colonia within that supplier s territory will obtain water service However further study is needed to deter mine whether poor households in Texas may be paying more than their wealthier counterparts to receive piped water service The existence of pricing exibility does not prove that suppliers are exercising that ex ibility as they connect poor households they may be charging highercost or higherrisk customers higher rates or they may simply be covering any additional cost or risk through crosssubsidies by increasing water rates for all customers Water Pricing and the Poor From the perspective of economic ef ciency it would be preferable for suppliers to charge water users the full cost of pro viding that service but water prices are set with many goals in mind of which ef ciency is only one The very existence of subsidies for water service across the globe suggests that many societies consider uni versal access to improved drinking water to be an important distributional goal Subsidies re Promise and the Perils Of course from the perspective of poor households and any society concerned with their plight the best possible scenario would be to have safe drinking water piped into poor homes and have those with better nancial resources pay for it This sce nario or something like it has undoubted 1y been part of the motivation for the preva lent practice of subsidizing water service We may be willing as a society to bear the e iciency losses of subsidies to achieve some worthy distributional goal However in reality subsidies may not actually make such stories come true and their effect on the allocation of scarce water resources over the long run may not work to the bene t of poor households The simplest case what can be called the extemality subsidyquot describes a subsidy VOLUME 45 NUMBER to that enables the extension of piped water Service that may result in positive extemal ities These potential bene ts would partic ularly help in urban areas where people are living in cramped quarters and as men tioned earlier opportunities abound through public transportation schooling and other pathways for the spread of com municable disease In such cases where piped water service may be underprovided by the private market which does not rec ognize the side bene ts of reduced disease transmission and where governments are able to identify the ef cient quantity of piped water service subsidizing such serv ice may actually correct a market failure Subsidies in these cases will increase ef ciency in the market for water rather than cause ef ciency losses Where subsidies are simply blunt instru ments with which governments attempt to etfect income redistribution the story is less rosy First the true cost of subsidized water service includes not only the cost of the serv ice itself but also the cost of the subsidy If the subsidy is supported through tax rev enues the distributional effects of the source tax matter greatly to the eventual impact of the subsidy on poor households For exam ple if the subsidy is nanced through a pro gressive income tax perhaps on balance poor households will be better off If the sub sidy is nanced through a regressive sales tax however poor households may actually be worse off They may be as mentioned earlier helping to subsidize water service for wealthier households who are already con nected to piped water systems and at the same time helping to bankrupt a public water supplier and prevent the accumulation of capital necessary for infrastructure invest ments toward service expansion21 The distributional impact of a subsidy may be very dif cult to tease out particu larly in developing countries where the administration and enforcement of tax col lection may be imperfect at best In addi tion there is always the possibility that water supply subsidies are nanced intertemporally through debt issued by multilateral nancial institutions and oth ers It suf ces to say that poor households are unlikely to escape the heavy burden that such longterm debts can impose on future generations in developing countries In addition subsidizing water consump tion distorts the signals of resource valuer prices that water consumers receive in the market In general keeping prices arti cial ly low increases the amount of water con sumed Again if the subsidy is meant to correct an existing extemality and house holds use this extra water to increase the frequency of hand washing and other socially desirable practices this may be exactly what was intended Unfortunately once water ows through a distribution system there is no way to control the individual uses to which it will be put In agricultural Settings much of a cheap water supply may be lost through technologically ine cient irrigation prac tices In household settings water priced below cost provides little incentive to x leaky taps or install low ow xtures or even to decide where and how to build new homes so as to minimize strain on water resources Over time the market distortions introduced by interventions like subsidies can worsen problems of resource scarcity Countries that are poor and dry may be especially vulnerable to this downside of subsidies Subsidies meant to increase water availability to poor households in the short run may actually diminish resources available to all households in the long run Thus the most ef cient way to achieve distributional goals like making sure poor households have enough money to pur chase drinking water is not to subsidize drinking water but to directly increase poor households incomes through transfers However governments and taxpayers are often uncomfortable with this option For example the US food stamp program has proven more politically acceptable if there is some leVel of control over what the poor are able to purchase with this public assis Envmonurm 29 tance This has resulted in an elaborate pro gram that distorts prices and supports a healthy black market Distributional Impacts of Water Price Structures Assuming that replacing water price sub sidies with income transfers is out of the question how might water prices be struc tured to achieve distributional goals A variety of water price structures have been tried and proposed as potential income redistribution tools Economic theory prescribes some variant of longrun marginal cost pricing to signal the value of water as a scarce resource and to foster ef cient allocation of water among competing demands both within and among users Pricing water at its longrun marginal cost involves charging each enduser the full cost of delivering a unit of water including treatment transmission and distribution costs some fraction of the capital costs of the existing water system and some fraction of the potential future costs of water system expansion The longrun marginal cost of water supply is not easily calculated howev er Utilities frequently have multiple sources of supply with new supplies coming online at greater expense than old sources meaning that long run marginal cost is increasing The marginal cost of each source however is often at or decreasing in the short run because the incremental cost of adding sup ply from a given source declines as reservoir size or the total quantity of water obtained from one source increases Most public water supply systems are classic natural monopolies In the short run marginal cost lies below average cost Economies of scale lead to decreasing costs over the relevant range of capacity increases Utilities have historically implemented either averagecost pricing or some form of marginal cost pricing plus xed charges Pricing is typically driven by the accounting 30 Envmoummr necessity to maintain total revenues greater than total costs and the legal necessity to avoid earning a pro t The longrun picture can be quite differ ent however While the shortrun marginal cost is typically less than short run average cost longrun marginal cost can be greater than longrun aVerage cost because long run marginal cost includes the cost of new supply acquisition And new supplies are typically more costly to develop than cur rent supplies For example new supplies may be more distant geographically or of poorer quality Thus while longrun mar ginal cost pricing is preferable from the standpoint of ef ciency setting prices in this way is both di cult due to the complexity of calculating longrun marginal cost and politically taboo due to the undesirability of utilities earning pro ts Increasingblock rate structures have long been suggested as mechanisms for getting around this problem Under these rate structures higher unit prices are charged for higher quantities consumed which creates a water supply function that resembles a staircase ascending from left to right This allows utilities to charge something approaching longrun marginal cost in the highest price blocks and to maintain a revenue stream that covers expenses but does not create unacceptable pro t margins Presumably it may also make prices more equitablequot assuming that lowincome households water con sumption will fall within the cheapest lower blocks Figure l on page 33 offers a hypothetical increasingblock structure How Do IncreasingBlack Prices Affect Paar Households Unfortunately the problem of creating an equitable water price structure is not so simple In some cases increasingblock prices may be progressive policy tools For example one study of block pricing of 39mne offre Irtrust r39mmmm ties in Argentinir left were helped by a private water supplier but a supplier in Coclmlmmhu Bolivia iwurked rims electricity in Medellin Colombia found that the rate structure does redistribute income in favor of the poor In general the very poorest households do not have suf cient incomes to consume enough electric ity to place them in the higher marginal price brackets and so they bene t on net from the tiered prices22 In other cases however economists have shown that poor households are actually hurt by these price structures because such structures raise the average cost of water paid by households living in highdensity areas in which a single water connection may be shared by many families Shared connections or even very large families drive perconnection consumption into the higherpriced upper blocks of the tiered system so that even some of the water con sumed for basic needs like drinking cook ing and washing may be charged at the highest prices In addition where connect ed households make a business of reselling piped water to unconnected households they pass on the higher uppertier prices they experience to their endusers who are often among the poorest of the poor Thus increasirrgblock prices recommended by the majority of World Banksponsored water tariff studies between 1970 and 1992 may not be the redistributive policy tools they once seemed Can We Get Prices Right and Help the Poor However it is not impossible to imagine global water prices that improve ef ciency and meet equity goals as well A water price structure that may be more ef cient and more equitable than the increasing block tariff is a uniform tariff with a rebate25 By charging the longrun margin al cost of water supply for every unit sold and redistributing any excess pro ts earned in the form of rebates to customers utilities can send the right price signal to all DECEMBER 2003 users resulting in ef cient use within and among sectors and meet the policy objec tive of nonpro t water supply In addition rebates under such a pricing regime can be targeted disproportionately to poor house holds to meet distributional goals Role of Private Providers One frequently debated issue in the dis cussion about water supply and poor com munities is the possible role to be played by private providers The typical argu ments in support of public private partner ships or privatization of water supply include the ideas that private providers will operate more ef ciently than large pub lic monopolies for instance reducing unaccountedfor water that may be leaking or stolen from distribution systems and reducing the percentage of payments that go uncollected and that private providers are important potential sources of the capi tal badly needed to expand water supply system infrastructure in developing coun tries There have been equally loud protests on the con side some voicing concern that private providers will seek to maxi mize pro ts rather than the public welfare or raise water rates precipitously without improving services This debate has been misguided In fact the best approach to take in this discussion is an agnostic one for three reasons First the history of stewardship toward the poor in developing countries has been disap pointing where water service has been the responsibility of public utilities as demon strated earlier with the statistics regarding service gaps in low and middleincome countries Few of those systems have his torically been managed by private entities and it is dif cult to nd examples of ef cient largescale public monopolies serv ing the poor26 National water companies in African nations for example rarely supply water to small urban and rural poor communities27 In most cities in develop ing nations more than onehalf the popu lation obtains basic water service from suppliers other than the omcial utility the percentage is even higher in rural areas28 If the true concern in this debate is expanding the percentage of the world s population that has access to piped water supply history tells us that relying exclu sively on public systems to do so may not be very productive The second justi cation for agnosticism in the public versus privatequot debate has to do with the fact that the nature of water supply institutions is really quite similar regardless of the locus of ownership Because of the cost structure of water sup ply the most ef cient way to supply water to a community is to have a single treat ment and distribution system a39monop oly So the choice is really between regu lated public monopolies and regulated pri vate monopolies not between upstanding public service institutions and pro teering capitalists The key lies in the word reg ulated In practice provided that a strong and effective regulatory system is in place a wellmanaged and well regulated public water supplier should look very much like a wellmanaged and wellregulated pri vate water supplier The concern for the fate of water systems in developing coun tries that may be run by private organiza tions would be better directed at improv ing existing systems for regulation and enforcement of contracts Third there is some evidence that con straints on public institutions may be disad vantageous in terms of their will and ability to connect poor households Such con straints include rate regulation that may have little to do with the cost of providing service and the existence of multiple respon sibilities beyond the provision of water serv ice as in the case of municipal utilities which can make the incorporation of poor households into existing systems an unnec essarily political process The work cited earlier on Texas calom39as is a good example Examples abound of water supply priva tization perceived to have hurt poor house holds like the experience of Cochabamba Bolivia and privatization perceived to have helped poor households like the experience of Buenos Aires Argentina During the rst 7 years of private water provision in Buenos Aires 1993 2000 controversial price increases were imple mented and water services were extended to 12 million newly connected poor house holds In Cochabamba after a new private water concessionaire increased prices in 2000 protests by poor farmers and others were so severe that they resulted in military intervention and eventual abandonment of the enterprise by the private investor29 Ifthe goal is expansion of service among the poor we would do well to focus on the characteristics of water supply systems and water price structures that forward that goal rather than on the locus of ownership of treatment and distribution systems Conclusion The global problem of inadequate supply of treated drinking water among poor households is both longstanding and severe in terms of enviromnental health conse quences The technologies suitable to solv VOLUME 45 NUMBER 10 ing this problem are longstanding and rela tively cheap especially compared to the technologies needed to address other envi ronmental problems such as global climate change The political desire to address the problem ebbs and ows but it appears to be gaining speed Progress requires solid analysis of the kinds of incentives necessary for public and private water management institutions to expand Service coverage to poor houSe holds Decades of research have produced mounting evidence that crosssubsidies as originally imagined and structured may have done more harm than good that the assumption that poor households are not willing or able to pay for water service is often erroneous and that rate regulation meant to ensure access to water service may in fact erect barriers to service exten sion The potential environmental and eco nomic impact of improving access of the world s poor to adequate water supply are enormous Participants in the current debate should heed these important lessons in the effort to move forward Sheila M Olmstead is assistant professor of environmen tal economics at Yale University39s School of Forestry and Environmental Studies Olmstead39s general rescarch and it Slkgal Figure I increasingblock price structure for water teaching interests are in the area of environmental and nat ural resource econorrrics and policy including both natural resource management and pollution control Her primary research addresses the economics of water supply and demand with a focus on urban settings In particular she is interested in measuring the effectiveness of various policy instruments such as increasingblock pricing and nonprice demand management programs in dealing with urban water scarcity Her longterm research interests include the determinants of access to clean drinking water among lowincome populations in the United States and developing countries ef ciency losses due to economic underpricing of public water supply and current and potential applications of water marketing and water quali ty trading She holds a PhD in public policy from Harvard University Olmstead can be contacted via email at sheilaolmsteadyaleedu or by mail at 230 Prospect Street New Haven Cl 065 NOTES l M W Rosegrant X Cai and S Cline Will the World Run Dryquot Environment September 2003 26 36 2 WHOUNICEF World Health OrganizationUnited Nations Children39s Fund Joint Monitoring Programme for Water Supply and Sanitation WHOUNICEF Global Water Supply and Sanitation Assessment 2000 Report accessible via httplwwwwhointdocstorewater sanitationhealtitGlobassessmenthlobalTOChtm 3 World Bank World Development Indicators Washington DC World Bank 2002 152 53 The World Bank defines access to an improved water source as access to at least 20 liters per person per day of safe drink ing water within one kilometer of a dwelling 4 United Nations Water A Matter of Life and Death 2002 accessible via httplwwwfreshwate12003govau publicationsunfactsheethtrnl W1 SOURCE S M Olmstead NOTE Above W1 is the quantity of water in thousands of gallons at which the marginal price increase occurs p1 is the unit price for the rst W1 units consumed and p2 is the unit price for water consumed above W1 units wkgal 7 ENVIRONMENT 33 5 WHOUNICEF Joint Monitoring Programme for Water Supply and Sanitation note 2 above 6 One example is the Sudan where average per capi ta water supplies are abundant but where an intemation a treaty requires the country to allow much of tire water it receives in the Nile to ow on to Egypt See P H Gleicli The World39s Water 20002001 The Biennial Report on Freshwater Resources Washington DC Island Press 2000 26 7 Rosegrant Cai and Cline note 1 above 8 The decade 19801990 was the International Drinking Water Supply and Sanitation Decade By 1985 WHO identi ed inadequate cost recoveryquot as the secondmost important constraint in achieving the globlt a1 goal of service expansion SeeY F Lee Urban Water Supply and Sanitation in Developing Countries in J E Nickum and K W Easter eds Metropolitan Water Use Con icts in Asia and the Pacific Boulder Colo Westview Press 1994 28 9 Lee ibid page 28 M W Rosegrant and S Cline The Politics and Economics of Water Pricing in Developing Countriesquot Water Resources IMPACT 4 no 1 2002 68 and G McGranahan and J Songsore Wealth Health and the Urban Household Weighing Environmental Burdens in Jakarta Accra and 550 Pauloquot Environment JulyAugust 1994 411 40 41 10 See Lee note 8 above 2829 T M Solo Small Scale Entrepreneurs in the Urban Water and Sanitation Marketquot Environment and Urbanization 11 no1 1999 1 17 32 and B Collignon The Potential and the Limits of Private Water Providers Independent Sellers in Francophone Africa Washington DC United Nations Development Programme UNDPWorld Bank Water and Sanitation Program 1999 accessible via httpIlwwwwsporglpdfslworkinglimitspdf 11 R Bhatia and M Falkenmark Water Resource Policies and the Urban Poor Innovative Approaches and Policy Imperativesquot Water and Sanitation Current Washington DC UNDPWorld Bank Water and Sanitation Program 1993 12 One study of households in Onitsha Nigeria indi cated that poor households willingness to pay for water service would support more than twice the operating and maintenance costs of a proposed piped distribution sys tem and 70 percent of total annual costs D Whittington D T Lauria and X Mu A Study of Water Vending and Willingness to Pay for Water in Onitsha Nigeriaquot World Development 19 no 23 1991 179 98 See also sum maries of studies in Dehradun Baroda rural Kerala and Delhi India in UNDP World Bank Water and Sanitation Program South Asia Field Note Willing to Pay But Unwilling to Charge Washington DC UNDPWorld Bank Water and Sanitation Program South Asia 1999 accessible via httpwwwwsporgpdfssa willingpdf 13 The empirical findings sununarized in this section are from S M Olmstead Thirsty Colonias Rate Regulation and Water Service Acquisitionquot Land Economics 80 no 1 forthcoming February 2004 14 Texas Water Development Board Water and Wastewater Needs of Texas Colonias 1995 Update Austin Tex Texas Water Development Board 1996 About 99 percent of colonies Were unconnected to cen tral wastewater treatment systems in 1996 as well Texas colonias comprise the largest concentration of people liv ing without basic sanitation in the United States 15 See Lyndon B Johnson School of Public Affairs Colonia Housing and Infrastructure Volume 1 Current Characteristics and Future Needs Austin Tex University of Texas 1997 P M Ward Colonias and Public Policy in Texas and Mexico Urbanization by Stealth Austin Tex University of Texas Press 1999 and R H Wilson and P Menzies The Colonias Water Bill Communities Demanding Changequot in Public Policy and Community R H Wilson ed Austin Tex University of Texas Press 1997 16 Otlice of the Attorney General of Texas Litigation Technical Support Division Border Database 1996 accessible via httpwwwoagstatetxuslresourcesl websitetempfl39EXMEXC OLONIASb order2htm These four counties are the only border caunties for which 1990 US Census data has been aggregated at the level of individual colonias which in almost all cases were too small to have been considered censusdesig nated placesquot at that time 17 For example the rate of Hepatitis A in Texas s 32 border counties is 35 per 100000 compared with a statewide rate of 15 per 100000 See US Federal Reserve Bank of Dallas Texas Colortias A Thumbnail Sketch of the Conditions Issues Challenges and Opportunities Dallas US Federal Reserve Bank of Dallas 1996 US General Accounting Office LSMexico Border Despite Some Progress Environmental Infrastructure Challenges Remain Washington DC US General Accounting Of ce 2000 and D C Warner Health Issues at the USMexico Borderquot Journal of the American Medical Association 265 no 2 1991 24247 18 Adjusting for in ation the equivalent charge in 2000 would have been about 32 per 1000 gallons 19 This was the volumetric charge for amounts up to 150 percent of average winter consumption in 2000 Because US public water prices are subsidized for example through state revolving loan funds for treatment works some additional cost of service is paid through other taxes Still the perunit difference is quite large Total water service expenses for households that haul water may be lower than the perunit price indicates how ever since those without piped water use it in much small er quantities than those with inhome connections and they do not pay the monthly xed charges typical for those connected to central systems 20 Political factors appear to be important as well including those characteristics that represent a commu nity39s willingness to address the problem of incomplete water service coverage For example colonias within Hidalgo county were almost 70 percent less likely to have received service through 1996 than were colonias in other counties This was also the only county in the study to ltave been cited by the Of ce of the Attorney General of Texas for inadequate enforcement of new housing regulations intended to stem colonia develop ment See Olmstead note 13 above 21 In McGranahan and Songsore note 9 above it is noted that the phenomenon of water subsidies benefiting primarily wealthier households has been documented in several cities in the developing world 22 See R Maddoek and E Castaiio The Welfare lmpact of Rising Block Pricing Electricity in Colombiaquot The EnergyJaumal 12 no 4 1991 65 77 23 See D Whittington Possible Adverse Effects of Increasing Block Water Tariffs in Developing Countriesquot Economic Development and Cultural Change 41 no 1 1992 75 87 and P Pashardes and H Soteroula Consumer Demand and Welfare under Increasing Block Pricingquot Discussion Paper 200207 Department of Economics University of Cyprus Nicosia Cyprus 2002 24 See Whittington ibid page 75 25 See J J Boland and D Whittington quotthe Political Economy of Water Tariff Design in Developing Countries Increasing Block Tariffs versus Uniform Price with Rebatequot in Ariel Dinar ed The Political Economy of Water Pricing Reforms New York Oxford University Press 2000 21535 26 Solo note 10 above 27 See Collignon note 10 above E Idelovitch and K Ringskog Private Sector Participation in Water Supply and Sanitation in Latin America Washington DC World Bank 1995 and V Swaroop The Public Finance of Infrastructure Issues and Optionsquot World Development 22 no12 1994 1901 19 28 See S Snell Water and Sanitation Services for the Urban Poor SmallScale Providers Typology and Profiles Washington DC UNDPWorld Bank Water and Sanitation Program 1998 accessible via httpwwwwsporgpdfslglobaltypologypdf 29 On Cochabamba see W Finnegan Leasing the Rainquot The New Yorker 8 Apti12002 43 53 On Buenos Aires see A Hartley and R Schustennan New Models for the Privatization of Water and Sanitation for the Urban Poorquot Environment and Urbanization 12 no 2 2000 63 75 On the impact of privatization on poor households in general see A Estache A GomezLobo and D Leipziger Utilities Privatization and the Poor Lessons and Evidence from Latin Americaquot World Development 29 no 7 2001 1179 98 CHAP l CONCEPTS the prospects of economics demand management V supply enhancement future forces anthropocentric ecocentric AgEc 606 day 2 1222009 ECON S POTENTIAL 1 How should limited water be allocated across sectors regions basins individual rms and people within a given business or household POTENTIAL CONTINUED 2 There s a lot of interest in water supply development a big ticket items interbasin transfers dams b less so new wells urban infrastructure c recently canal lining with impervious membranes desalinization plants Which should be undertaken Scale When Who should pay I coNTlN UED AgEc606day2 1222009 3 Policies age sometimes to the point of total failure Policies 3 rules regs property systems In other cases old policies just want to be retired And it would be nice if policies supported good allocation and water development POTENTIAL CONTINUED What newer policy options are available How can we assess and compare alternative policies How should new policies be scaled how intensive or restrictive and when should policy changes occur POTENTIAL CONTINUED That s a lot of important stuff to which economics applies well perhaps much better than other sciences SUPPLYENHANCEMENT V DEMAND MANAGEMENT 1 build dams 1 require water conserving equipment 2 drill wells 2 establish drought 3 build interbasin contingency plans pipelines 3 ration water 4 repair leaks 4 buy water rights 5 build RO plants 5 raise water rates FUTURE FORCES a Populationdriven rising water demand by all sectors a Af uencedriven income effect rising water demand by all sectors environmental water demands too in situ uses FUTURE FORCES a Physical supply Can be claimed to be increasing only in the sense that precipitation is increasing globally physical supply tends to decline due to pollution and gw depletion AgEc 606 day 2 1222009 FUTURE FORCES a Global warming39s in uences 3 more evaporation transpiration a more precipitation a less snow accumulation faster spring melt w T J water demand location dependent m T ood control demand T storage demand AgEc 606 day 2 1222009 xvii 43 munENunnN mum r r 2 g Rd r KW 9quot Q FQi Euuiui E P0l nlun w ilmnmnnn saw1m 341nm Gmundwuler Flnw Suml and Imwl Dundb Condensation Precipitation Transpiration Surface runofi Spnng Evaporation T Tiiii River 1 Ground water flow Water table 13 AgEc 606 day 2 1222009 FUTURE FORCES a Poor costly dam sites a Depreciating infrastructure costly to replace sedimentation is depreciation too a I demand for safe secure drinking water 14 FUTURE FORCES a Rising energy prices hydropower demand water is heavy pumping costs water is sometimes deep 39 infrastructure is energy intensive too 15 IMPLYINC THAT Prior tools such as dams and even prior thinking supply focused are weakened Water scarcity is not con ned to arid regions Water costs are outpacing in ation A social challenge is rising in signi cance AgEc 606 day 2 1222009
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