Full-cost pricing was the most controversial of the World Water Commission's recommendations, for a least three reasons. First, until water began to become scarce in the 1990s it was looked on by many as a free good - a gift from God. Second, governments had long been subsidising the supply of water on the grounds that the poor could not afford it. Third, irrigation water was subsidised to generate employment and keep down the cost of food- again for low-income families, especially in cities.
The reality, of course, is that water is a renewable resource freely available to those on whose land it falls. But in most cases it must be collected, treated, transported, cleaned after use, and returned to watercourses. This requires infrastructure and services that cost something to provide. In addition, when water is scarce, tradeoffs are involved in deciding where it adds the most value, bringing in opportunity costs.
In the world of 2000, with water rapidly becoming more scarce, the Commission agreed with the Dublin principle that to create proper incentives for the management of water, water should be treated as an economic good. But the Commission recognised that full implementation of marginal cost pricing was too big a step to make at that time. Thus it recommended a first step: that the full cost of water services be recovered from users.
This recommendation, including its corollary "the polluter pays", was fairly acceptable to industrial consumers, who could recover the costs as part of the selling price of their products and services. It was also acceptable to communities seeking drinking water services, as they could see that it provided a source of new investments for system extensions to unserved customers. By 2010 public and private utilities were generally applying full cost recovery in these situations. Because some low-income households could not afford water, measures were introduced to subsidise these households so that they could pay for water to meet their basic needs. These households also contributed to the cost of their services in kind through their labour for installation and operation.
It was difficult to sell the concept that customers should pay the full cost of urban sewerage, because it was often perceived that the beneficiaries included others beyond those connected to the system. Sanitation was seen to have some public good characteristics, along with such water-related services as flood management- and both continued to require public financing.
It was much more difficult to sell the concept of paying the full cost of irrigation water. Yet it was critical that this water be valued, because it represented the bulk of water diverted for human needs. In 2000 suppliers of irrigation water (generally government agencies) were not even recovering most operation and maintenance costs. As a first step governments had begun decentralising responsibility for operation and maintenance to cooperatives or to private owners - a trend accelerated in the first years of the new century. Because farmers depended on the proper functioning of these systems for their livelihoods, they ensured operation and maintenance. Again, many farmers and especially lower-income users contributed their services as in-kind contributions to the costs. Appropriate low-cost technology such as treadle pumping of shallow groundwater was widely adopted for holders of small plots. All operation and maintenance subsidies were eliminated.
Indirect subsidies to operating costs, such as energy, were also eliminated. This had a major impact on water management in India, which in 2005-15 discouraged groundwater overpumping by gradually eliminating subsidies for the energy to pump water from wells.
New water storage facilities were built in the first 25 years of the century for irrigated agriculture and industrial water, as well as for recharging groundwater aquifers. Governments awarded more contracts to private operators to build, own, and operate these facilities, with awards going to those requiring the lowest transportation government subsidies.
A new round of negotiations of the World Trade Organisation in 2010 agreed to add water subsidies to the list of unacceptable subsidies to inputs for agriculture. As this policy was implemented in the years that followed, food prices from exporting countries rose slightly, improving farm incomes in developing countries. Prices eventually stabilised around their previous level, but low-income urban dwellers felt the pinch of higher food prices while they lasted.
The move to full-cost pricing was coupled with a continuing strong government presence in establishing and managing frameworks of regulatory policies and laws that provided long-term stability. This attracted badly needed infrastructure investments by local and international private businesses. At the same time, investments in public goods and subsidies targeted to low-income water users added to public budget expenditures. Government budgets related to water remained more or less at the levels of 2000 throughout the first quarter of the century. Costs now carried by consumers and private sector were replaced by investments in public goods, subsidies to low-income women and men, and publicly funded research and development.
For full report see " www.watervision.org "
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