Why are economic and
financial instruments
needed?
A presentation made by
Noma Neseni, IWSD
Major issues in water management
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Achieve MDGs
Clean up the environment
Anticipating climate change impacts
Pollution of water bodies
Inadequate development and distribution of water resources
Using private initiatives
Water use efficiency
Physical infrastructure not in place
Government agencies with insufficient capacity to do what
they are supposed to do
• Lack of funding
• Water rights (how are they allocated)
• The right level to deal with these issues (national, catchment,
basin, regional
Importance of economic and financial instruments for
IWRM
• IWRM seeks to improve efficiency,
sustainability and equity
• Recognizes cultural diversity, socio economic
disparities within the region and even within
the nation
• IWRM will therefore benefit from use of
financial and economic instruments to achieve
the goals in a sound decision making and
democratic manner
Economic and financials instruments
• Water is becoming scarce, value is rising –use of
economic instruments for competing needs becoming
important
• Important to consider trade offs, in terms of efficiency
and equity
• Without financial viability IWRM will not assure a
sustainable flow of benefits
• Confluence for achieving efficiency and environmental
goals (e.g. polluter pays)
• Complementarities in using sound economic and
financial instruments e.g. higher water tariffs will lead
to higher efficiency in use with more appropriate
framework or enabling environment
Economic efficiency
• Water use efficiency- is
this a necessary evil
that countries have
been asked to adopt?
• Certainly reduces water
scarcity
• Maximizes benefits
provided by existing
water infrastructure
Environmental
• Reduces environmental
degradation
• Frees up water for other
uses
• Rationalizes social economic
and environmental benefits
• Therefore directly
contributes to the Pan
African development
agenda.
economics
• Mainly refers to situations in which decisions
must be made in respect to allocation of scarce
resources and competing needs
• Pays attention to efficiency of allocation&
distribution of assets and incomes behind and
around the allocation process.
• Water prices, water tariffs, water rights and
water policies and regulations are part of
important economic instruments
Why are economic considerations important in groundwater
management and protection?
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To manage competition
To improve efficiency and sustainable use
Because groundwater is expensive to manage
Others?
Economics and competing needs
• Water is at the centre of all
development agenda and
must rationalize resources
between competing
national and regional
priorities
• Need to meet the social
justice, environmental
sustainability and economic
efficiency in balance
agriculture
sanitation
environment
water
energy
fisheries
industry
Economically efficient solution
• Marginal value of water should be the same for two
users for the last unit of water consumed by each
group and equal to the marginal cost of supplying
water
• Supply of water in this model is inelastic
• Demand determines price
• Allocation among users means that marginal value
will exceed that of the other and water can then be
reallocated from law value user to high value user.
• Perfect competition- clear assignment of rightsbuyers and sellers
finance
• Refers to specific actions taken by
organizations or firms to maximize short or
long run returns to their assets and
investments
• Firm has clear goals, role of financial tools is to
assure that resources are available in time and
space for achieving these goals
• They are measured in terms of effectiveness in
meeting the goals
Water resource
Water intake
Wastewater
treatment
Distribution
Wastewater
collection
Use and re-use
financial instruments
• At each flash, revenue can be collected and
costs are also made
• Financial instruments are then necessary for
achieving desired goals
• Allocation and investments needs to be made
on basis of some economic efficiency
financing
• In O&M or capital investments, its is
important to speak the financial language
• Financial institutions think of investment
costs, rates of return, interest and payback
periods
• If demonstrate the economic viability (users
paying fees) then attract investment
• Many sources of finance
IWRM :economic and financial instruments perspective
Components of IWRM
goal
Sustainable water use, management and development of water,land and
related resources Balance “water for livelihoods” and “water as
a resource”
Principles
Economic
Efficiency
Tools
13 Change
Areas
Enabling
Environment
Policies
Legal framework
Financing and
incentive structure
(All of which should be
are sensitive to gender
, HIV and Aids infected
and affected.)
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Social Equity
Environmental
Sustainability
Institutional
Frameworks
Management
Instruments
Organisational
Framework
Institutional
capacity building
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Water resources
assessment
Plans for IWRM
Demend
management
Social change
instruments
Conflict resolution
Regulatory
Instruments
Economic
instruments
 Economic
instruments
Economic, financial and policy instruments
• At the policy level, there is
need to create an enabling
environment supportive of
various actors to carry their
functions e.g. good water
governance, democratic
policy formulation,
appropriate legislation,
regulatory framework and
institutional reforms
• At the finance level, there is
need to ensure that
resources flow to achieve
objectives
• At the economic and
finance level there is need
to create inducements and
incentives
• Economic instruments are
seen as facilitation needed
and operational tools in the
process of implementing
IWRM and improving access
to water and sanitation for
all
• It embraces allocative and
technical efficiency.
Valuing and allocating water
Economic instruments and Water Accounting
• Economic instruments useful to value the
resource and influence choices in
allocating water efficiently
• Water accounting provides a unique tool
for IWRM, as well as any economic
analysis of water issues, because it
integrates data about both the
environmental and economic aspects of
water in a framework that supports
quantitative analysis.
Valuing and allocating water
Economic instruments
Economics is about making choices when
resources are scarce and priorities are many. This
is the case when water is polluted and needs to
be consumed, or when investments are necessary
to connect more people.
Economic instruments are seen as facilitating,
needed, and operational tools in the process of
implementing IWRM and improving access to
water and sanitation for all.
Valuing and allocating water
Economic efficiency embraces
allocative and technical efficiency
• Allocative efficiency refers to the use of inputs in a
way that maximizes total net revenues for firms or
consumer surpluses for consumers.
• Technical efficiency is related to production and
refers to firms getting a maximum output per unit
of input or use minimum input for a given output.
• Economic efficiency: technical and allocative
efficiency together are known as economic
efficiency.
Valuing and allocating water
Water Accounts
• Water accounts are linked to national income
accounts
• Can be used for more complex economic
analysis and modeling to project future
water demands and evaluate different policy
options for meeting those demands
• National water accounts can be helpful in
bringing the economic perspective to water
policy at the National level
What must we do?
• Government policy makers, development planners
and water managers need to recognize that better
water management is crucial to meeting the
development agenda
• Our work will be more effective if we manage water
in a broader context
• Adopting IWRM and linking it to national
development planning will enable full potential of
water resources to be realized
• The right policies, institutional and legal framework
needs to be in place. (champions will be needed)
Conclusion
• Economic instruments together with supportive
policies are no longer an option in Africa but a
necessity.
• Water is critical for Africa’s development agendaeradication poverty, food security, adapting to
climate change, energy supply, protecting the
environment and social equity
• Economic instruments and water accounting play a
vital role in better water management.
• We need to be responsible and account for water in
development esp. if we are to meet future needs
conclusion
• Existing legislative, and institutional frameworks have
not been entirely responsive to demands and
requirements of implementing IWRM
• Urgency in reforms but these need to be taken
incrementally (planning, capacity development,
advocacy)
• Economic and financial instruments help create the
right environment for IWRM and will contribute to
solving the water management problems