metadata: authors: 0: author: Rogers, Peter
count: World
docna: 0: docna: Comprehensive water resources management : a
            concept paper
docty: Policy Research Working Paper
subtopic: Water and Human Health,Hydrology,Water Supply and Sanitation Economics,Small Private Water Supply Providers,Energy Demand,Energy and Environment,Energy and Mining,Global Environment,Town Water Supply and Sanitation
teratopic: Water Resources
abstracts: cdata!: The world is entering a period of
            intense competition for limited supplies of water for
            alternative uses - in agriculture, in urban and industrial
            supplies, for recreation, by wildlife, for human
            consumption, and to maintain environmental quality.
            Manifestations of this competition and our current ability
            to deal with it can be observed in many parts of the world.
            A large irrigation project in India does not operate because
            water has been diverted to the rapidly growing city of Pune.
            In China, industries are reducing their production because
            of water shortages.  In California, selenium salts leached
            by irrigation are killing wildlife.  Bank irrigation
            projects in Algeria are now competing with Bank urban water
            supply projects for the same water.  Many proposed
            irrigation projects and most hydro project proposals are on
            hold because of environmental concerns.  Until recently, the
            approaches taken in water planning management by planners in
            the developing countries and by analysts at the funding
            agencies were, by and large, appropriate and adequate to the
            task at hand.  The increased competition for water, however,
            makes most of the project-by-project planning methods
            inadequate.  The author discusses new approaches that are
            needed to integrate water resource use among different users
            and across different economic sectors.
repnme: repnme: Comprehensive water resources management :
            a concept paper
display_title: Comprehensive water resources
            management : a concept paper
listing_relative_url: /research/1992/03/699738/comprehensive-water-resources-management-concept-paper
topicv3: Water m1326522 137,Energy and Extractives m1326595 507,Water Supply m1326961 138,Urban Water m1327135 144,Environment, Natural Resources and Blue
            Economy m1327391 566
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
origu: Transportation, Water and Urban Development Department
no_of_pages: 23
model_extractions: <!-- Start of picture text --> Policy Research<br>_~~~~ 11 I 9 e i-<br>Wter a nd Sanitation<br><!-- End of picture text --> WPS 879 This paperjoint product of the Water and Sanitation Division, Infrastructure and Urban Development - Department, 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 are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Danielle Ranger, room SI 1-043, extension 31296 (March 1992, 18 pages).

The world is entering a period of intense competition for limited supplies of water for alternative uses - in agriculture, in urban and industrial supplies, for recreation, by wildlife, for human consumption, and to maintain environmental quality.

Manifestations of this competition and our current ability to deal with it can be observed in many parts of the world. A large irrigation project in India does not operate because water has been diverted to the rapidly growing city of Pune. In China, industries are reducing their production because of water shortages, even though they are surrounded by paddy fields. In California, selenium salts leached by irrigation are killing wildlife. Bank irrigation projects in Algeria are now competing with Bank urban water supply projects for the same water - and many proposed irrigation projects and most hydro project proposals are on hold because of environmental concems.

Until recently, the approaches taken to water planning management by planners in the developing countries and by analysts at the funding agencies were, by and large, appropriate and adequate to the task at hand. The increased competition for water, however, makes most of the project-by-project planning methods inadequate.

Rogers discusses new approaches that are needed to integrate water resource use among different users .i across different economic sectors.

The Policy Research Working Paper Series disseminates the fmdings of work under way in the Bark. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the Policy Research Dissemination Center
# **Table of Contents**

|**1. Introduction ..................................................**|**1**|
|---|---|
|1.1 The Water Sector at the World Bank .............................|1|
|1.2 The Concept Paper .........................................|2|
|**2. Fundamental Concepts for Water Management ...........................**|2|
|2.1 Water is a Unitary Resource ...................................|2|
|2.2 Scarcity of Water ..........................................|2|
|<br>2.3 Market Failure in the Economics of Water ..........................|3|
|2.4 Valuation of Water .........................................|4|
|3.**Planning for Water Resources ......................................**|5|
|3.1 Current Planning Approaches ..................................|_5_|
|<br>3.2 Where Does the Current Approach Break Down? ......................|6|
|3.3 How the Problems Can Be Resolved ..............................|7|
|3.4 Distinguishing between Generic and Region-Specific Issues ...............|8|
|**4. Generic Issues of Concern for the World Bank ...........................**|8|
|4.1 Broad Sectorwide Issues .....................................|9|
|4.1.1 International Conflicts over Water .........................|9|
|4.1.2 Linking the Water Sector to the National Economy ..............|9|
|4.1.3 Water Sector Planning Methodology and Data<br> <br>||
|Requirements ..............................<br>'|9|
|<br>4.1.4 The Political Economy of Pricing .........................|10|
|4.1.5 Environmental Impacts of Water Development ................|12|
|<br>4.1.6 Social Impacts of Water Development .....................|13|
|4.1.7 Conservation and Recycling of Water .....................|13|
|<br>4.1.8 Host Country Institutional Reforn ........................|14|
|4.1.9 Role of the Bank in Education, Training, and||
|Information Exchange ...............................|14|
|4.2 Subsector Issues ..........................................|14|
|4.2.1 Irrigation .......................................|14|
|<br>4.2.2 Water and Health ..................................|15|
|4.2.3 Urban Water Supply and Wastewater Disposal ................|16|
|4.2.4 Rural Water Supply and Sanitation .......................|17|
|4.2.5 Hydropower.................... ..........|......17|

**References ......** 17
# 1. Introduction **1. Introduction**

a major resource to electrical energy systems boQi for hydropowergenerationandforcoolingthermalgenerators. It is essential to many transportation systems. Inland and are also extensively used for the disposal of treated or tansport chemical or other wastes. Fresh water is used to ties. In many places large investments are required to fundable, by Bank resources.

agriculture, urban and industrial supply, recreation, wildmental quality. Manifestations of this competition and our to the rapidly growing city ofPune. In China industries are Bank urban water supply projects for the same water, and many proposed irrigation projects and most hydro project proposals are on hold because of environmental concerns.

The water sector is also a substantial portion of the Bank's unnual lending. For example, between 1984 and 1988, out of a total lending of $83 billion, water project and drainage accounted for $4.6 billion, hydropower for $2A billion, and water supply and wastewater _$3.5_ billion. No data are available for flood control,water transport, and Until recently the approaches taken to water plantries and by the analysts at the funding agencies were, by and large, appropriate and adequate to the task at hand. The increased competition for water has, however, made most are no longer sufficient, the Bank has initiated a Comprehensive Water Resources Management Policy Study to investigate how best to resolve them. This paper is an attempttooutline the issueswhichshouldbe included inthe Bank's Policy Paper.

Water is dealt with independently in each of the Bank's regional bureaus and in its central departnents. This situationhas sometimes ledto inconsistencies inBank policy between counMies or between water uses. Under conditions of water suipluses such inconsistencies are not necessarily bad, given the wide diversity of the countries and range of uses for water. Indeed, this is what the Bank's tion projects, for example, perfonned quite well in the and

## 1.1 The Water Sector at the World Bank

have broad impacts throughou **t** purposes. It is used extensively for irrigating crops, and is

**I**
regions in Europe, the Middle East and North Africa currently of widespread concern within the Bank and are (EMENA) and Latin America, but less well in the humid likely to be of great imporlance into the next century. tropics of South Asia, and quite poorly in sub-Sahar Africa Hlowever, the current competition for water in regions such as EMENA is becoming so severe that the 2 Fundainental Concepts historical performance may not be expected to continue * ep into the future without serious improvement of pre-plan- for Water M anagement ning, and the African projects need special care to ensure **g** adequate future performance.

There are a few fundamentat concepts that underlie the theory and practice of water management.

# 1.2 The Concept Paper

Under conditions ofwater scarcity andwith increas- 2.1 Water is a Unitary Resource ing scrutiny from environmental interest groups outside the Bank and from the Bank's own internal auditors, the Bank Rain, surface water inrivers and lakes, groundwater, staff has realized the increasing costs of the lack of a and polluted fresh water are all part of the same resource comprehensive view of the water sector ard is looking base. They are all one and the same resource, although in forwardtoaBank-widepolicywithrespecttoactionsinthis different manifestations, occurring in different parts of the sector.

Rain, surface water inrivers and lakes, groundwater, hydrologic cycle. Unused surface water can recharge the groundwater and, conversely, overpumped groundwater capacity ofthe surface and groundwater ecosystems. Thus, uses, and to indicate areas that should be emphasized inthe been to provide discussion on the most important issues so that their inclusion in the Policy Paper can be justified. It more complex ones.

Because water is a unitary resource there are often andgroundwaterusers in irrigated cated to irrigation projects at low cost to the users when nearby urban areas are suffering serious water shortages is evidentthat many ofthese institutional complexities can hinder economically efficient use of water, these controls firstarose inthe firstplacebecause ofthe genuineproblems newtechnology,anddetailedsector-by-sectorhighlih, of problems and possibilities. lo do justice to all of '. e issues abook-length treatment would be required. SL, _ it agement, and Part 3 addresses the economic issues stemin pursuing Bank water policy. The emphasis throughout Part4ofthePaperisapracticaldiscussionof issuesthatare

##

The discussion about scarcity is usually intimately
boundupwiththe concepts of wateras arenewable ornon- tion in agricultural use, changes in population policy, and renewablo resource. Ifit isrenewable, how can we ever run the reclaiming ofadditiona brackishwater. Has vaterbeen out of water? Certainly in many arid or semi-arid zones, a significant limit on economic growth in any of these people are currently experiencing shortages of water. Part countries? How wil each c-.-"try address the future ofthis of this problem has to do with the fact that under earlier resource? Has water bee. , Aced out of the reach of histcric conditions we were able to sustain the populations significant portians of the populations? What accounts for of cities and regions, even under relatively arid conditions. the fact that in many other countries with much larger per However, with the growth of population and income the capitaquantitiesofavailable watertheperc&pitawateruse demands for water seem to be overwhelming our techno- is lower? On closer inspection the "water barrier" of 500 logicalcapat!litytosupplyit.Underthese conditionswater cubicmeterspercapitaper yeardoes notappearto be areal scarcities and conflicts overwateruse beginto appear. The barrier in the Malthus-Ricardo sense. The idea that we are cost of supplying addE ional water to water-short areas is running out of water (Postel, 1990 and others) cannot be alsoincreasing.Asaresultitbecom,esincreasinglydifficul **t** rue globally, and even in specific water-short countries to supply the same amounts ofwater to users at the old low there is little doubt that water will always be available at prices. The Malthus-Ricazdo theory of resource scarcity some reasonable price, provided those countries follow seems to be working exactly as predicted: scarcity of sensible water policies. The definition of scarcity in nonresources limits economic growth, and ultimately brings it economic terms is a distraction that can lead to major to a halt. It is no surprise that this theory earned economics misaltocations of he water resource. The rapid disappearthe sobriquet of "the dismal science." ance ofthe "oil crisis"once limited marketresponses were capitaquantitiesofavailable watertheperc&pitawateruse **t** rue globally, and even in specific water-short countries sensible water policies. The definition of scarcity in nonance ofthe "oil crisis"once limited marketresponses were albwed to take place should be borne in mind by water Modem economists define water ccarcity slightly planners. differently, whichallows forawayoutofthis dilemma: the needforwaterhastobeexpressed asaquantityandaprice. This is caUed the "economic demand" for water and both quantity and price must be specified. In the current ecogive. This will be either the price or the quantity of the resourceused.However,eventhissystemnwoutdultimately be forced to ahat by population or economic growth. The magical ingredient that enables the economic system to continue to grow is the existence, at some reasonable cost, of substitutes for the scarce resource. Although there is _no_ substitute for water in sustaining human and animal life, there isanalmost infinite supplyofseawater, whichcanbe converted at a cost of energy into freshwater, then energy, or the capital to access the energy, becornes the limiting resource. Similarlypoliticalboundaries,managementskills, or human labor could limit the availability of water.

# 23 Market Failure in the Econ,omics of Water

The mostusefui economic literature onwaterisbuilt

1. Increasingreturns-to-scale ontheproductionside are prevalent in water projects. For exarnpl2, inland waterways and municipal water and wastewater services are natural monopolies because of the large economies of scale in the provision of the infrastructure. Manywater-related investments tendtobevery large inorderto take advantage of these economies of scale.

2. Externalitiesduetophysicalinterdependenceamong production processes are inherent in many water activities. The extemalities of both water quantity andwater qualityare experienced inthe spatialsense between upstream and downstream users, and in a temporal sense between different seasonal releases of stored water, common pool effects on groundwater, and the export of pollution.

Part of the problem of dealing rationaly with water scarcity is the different perceptions that various groups have abouthow close we are toreaching theresource limits. For examPple, in a study for the Bank, Falkenburg et al. (1990) claimed that some countries (Israel, Jordan, Saudi Arabia, Syria, and Yemen) were very close to being unable amount of water (500 cubic meters per capita per year). However,otherslookingatthesamedataseemanypossible adjustment mechanisms, which include recycling, reduc-

- bution in a given setting is optimal. However, in development work it is rarely accepted that the income distributioninaparticular countryis the best
one, andmany waterprojects are specifically aimed at changing a mal-distribution of income.

ence of externalities and the lack of mobility of resources make finding the market price quite difficult. Inaperfectly functioning economy envisaged by the classical economic model "price equals value," and the cost of providing a good, after allowing for payments to all of its factors of production, willpreciselyequal its market price. Asaresult ofthis elegant solution one only has to establish "cost" to establish "value." 4. When not all producers are small relative to the market, the marginality conditions for the existence of economically efficient solutions are violated. When govermnent is involved it is often as the only producerinthemarket. Inthis case thewatersupplied will make large changes in the local price of water, thus undermining the assumption of marginality inherent in benefit measurements.

Unfortunately, maay waterresources planers forget that simply equating cost with value only holds true in a perfectly functioning market economy. In all other cases (that is almost all cases) care must be taken not to coniuse cost with value. What then is the "value" of water? The answer appears to dependupon "towhom" and for "which use." Drinking water is obviously valuable and becomes increasingly so as the amount available decreases. A glass of water could be infinitely valuable to a person dying of thirst in the desert but not very valuable to a woman living alone onthe banks ofapristine river. In the second case the woman would only be willing to pay the cost of somebody going to the river and fetching the water forher. She would be unwilling to pay more because she could go and take it herself. So the value in this case is the cost ofobtaining the water. Now, if there was a farmer irrigating land alongside the river, how much would tho water be worth to him? If there is enough water in the river so that the woman can have as much as she can drinkjust at the cost of obtaining the water from the river, then obviouslythe farmer cantake as much as he wants at the cost of obtaining the water. Clearly, the farmer would also value the water at the cost of obtaning it. So far, so good; cost equals value.

_5._ The resources art not necessarilymobile. Typically, capital resources are relatively mobile but labor resources are not. Pockets of poverty and unemploymertexistandmanywaterprojects liketheTennessee ValleyProject, TVA) were originallydesigned to address this lack of resource mobility. In addition restricted water rights often impede the ease of transfer of water from one use to another.

The literature since Eckstein shows how each of these market failures can be compensated for in water resources planning. It is now the general opinion that careful application of neo-classical principles can deal with the market failures most likely to arise in water investment analysis. For example, increasing returnsto-scaleandmonopolypricingcanbedealtwithbysome form ofRamsey pricing. Externalities canbe dealt with by expanding the definition ofthe system to "intemalize the externalities." The lack ofmocility ofresources canbeaccountedforbysuitableshadowpricing,andthe income nialdistribution can be dealt with by adding constraints on the distribution of benefits. The adjustments themselve-s lead to some loss in the overall "economic efficiency" implied by the classical model, but the loss isbelieved to be small relative to the broader improvement of solutions. Brown and Sibley (1986) discuss various techniques of improving utility pricing which come close to the economically efficient solution and which, at the same time, are closer to the practical methods useable by utilities.

However, suchbucolic settings no longer exist in the modem world. Typically there are many users of the resource apart from the housewife and the farmer. At some pointintime the usebyonepersonwillstar **t** ointerferewith theusebyanother.Atthatpointthewateri-saidtohavean "opportunity cost." Since the continued abstractionby one user reduces the amount available to another there is a loss of the opportunity to use the water by one user. This lost opportunity costs the affected user the amount he values these units ofwater. At this point the "value" of the water should reflect the willingness-to-pay of the user who is losing water. If for some institutional reason the housewife from her is her willingness-to-pay for water. If the alloca-

# 2A Valuation of Water

Allocation of water among the myriad conflicting has to cut her consmnption of drinking water, then the usespresentsamajortasktogovernments,alofwhichtake opportunity cost to society ofthis allocation ofwater away responsibility in some degree for regulating access to from her is her willingness-to-pay for water. If the allocawater. It is difficult to assign unambiguous economic tion of the water shortage were tle other way around, the values to many uses, and hence these may be implicitly relevant opportunity cost would be the farmer's willingovervalued, undervalued or completely ignored in the ness-to-pay for irrigation water. decision-making process. Rogers (1986) gives many examples ofthe prote'ms that arise from undervaluing water. If the question of how to allocate the water were left Many of the problems of valuing water stem from the to an outside party, for instance, the World Bank, then that market failures mentioned above. In particular, the exist- party might ask how society would best benefit from the If the question of how to allocate the water were left 4
the logic of social choice theory embodied in modem economics, which allocates the water to the use with the highest value.

##

Waterresourcesplaninghasreceivedalargeamount of attention from economists and planning p ofessionals formany decades. BasedontheFloodControl Actof 1936, and Bower (1968) at Resources for the Future in Washing1970s, with works by Dorfman and Dorfman (1972) and Baumol and Oats (1979). In addition to these books there of this literature are Little and Mirrlees (1974) and Squire and van derTak (1975), sponsoredbythe World Bank, and Das Gupta, Marglin, and Sen (1972) and the Guide to PracticlProjectAppraisal(1978),sponsoredbytheUnited Nations Indubtral Development Organization P[NIDO). These works are the basis for the current evaluation of investments in the water sector.

dituations to establish estinmates above,iftherewere well-established **i** the marketprice would itselfreflecttL-e opportnity cost of indirect ways.

Theopportunitycostofwaterisonlyzerowhenthere are literally hundreds of other excellent texts explaining isnoshortageofwater. Inevaluatingwaterinvestmentsthe many of the practical aspects of the detailed analysis of value of watertoauseristhe costofobtainingthewatR.rplus benefits, costs, andtechnologychoice foreachpossible use the opportunity cost. Igaoring the opportunity cost part of of water. While this was taking place inthe water resources value wil undervalue water, lead to failures to invest, and field, the bank, UNDP, and many other funding agencies cause seriousmisaflocationsofthe resource betweenusers. were developing reliable methods for economic appraisal The opportunity cost concept also applies to issues ofwater of investment decisions in general. Outstanding examples and eavironmental quality. of this literature are Little and Mirrlees (1974) and Squire

# **3. Planning** w s **s^sss^ss for Water vs** v v wswt **Resources**

Themanagementimperativesofwaterareembedded The literature provides sound methods for plannig in its nature as a scarce resource that is often treated as a water resources at a river basin level and at the level of public good. External effects occasionedbywateruse also individualprojects. However, sincemostofthe methodoloinvoke important economic imperatives. Property rights giesweredevelopedinwestemindustrializednations,they and extemalities raise political and financial imperatives pay little artention to planning for water resources in a whichinfluence the choice ofwaystopricewatertopayfor macro or intersectoral way. the public supply of it. To appreciate fully water policy options and how they are evaluated, it is necessary to State-of-the-art economic project analyses are carunderstandhoweconomicsisusedandmisusedinthewater ried out routinely by the Bank staff. For example, benefitarea. Even though politics ultimately controls water re- costanalysisiscarriedoutonirrigationassessmentsandthe source planning, the discussion is usually framed in eco- project is recommended only when a suitable intemal rate nomic terms, and the ability to understand and manipulate ofretum(IRR),oranotherindexsuchasabenefit-costratio the economic analysis may significantly improve the final is achieved. Recently the choices have also been condioutcome. Hence, a significant part of this Concept Paper tioneduponnot causing "toomuch" socialorenvironmenexploresthe possibility ofimprovingthe economic aspects tal harn. For projects such as urban water supply or ofplanning.Theattentiondevotedtoeconomicsshouldnot sewerage, where benefit calculation is very difficult, the be taken to mean that the institutional and technological marginal costs of providing the services are computed and dimensionsare unimportant, but that inthejudgment ofthe comparedtootherwaysofprovidingthe same services. For author the pay-offs from improving the economic dimen- both of these types of project analysis, care is taken to sions are currently larger than those from other areas of correctly shadow-price the inputs and outputs. However, in concem.

The literature provides sound methods for plannig water resources at a river basin level and at the level of However, sincemostofthe methodoloState-of-the-art economic project analyses are carsame services. For correctly shadow-price the inputs and outputs. However, in order to decide whether to spend money on inigation _5_
instead ofon flood control,oron other investments outside sectors, such as energy, have well developed methodolothe water sector, the rules forproject analysis noted above giesto zelate sectoral and macroplans. Most ofthese were need tobe bolstered by additional assumptions and theory. developed in response to the oil crisis ofthe early 1970s. It Inthe theory, pricing ofthe resource is criticaltothe correct is now possible for energy planners to show the appraisal of the project and the correct implementation. macroeconomi **c** onsequencesoofregulationof, andinvest-andinvestPricing has a threefold role in water policy. First, the price ments in, various energy sources, and, in the other direccan be set to recover the cost of the investment from the tion, to estimate the consequences ofshifts in macro policy beneficiaries. Second, increasing prices tends to raPton ondemandsandsuppliesforenergybyvarioussectors.This water by cutting uneconomical consumption. Price in- has not been done in the water sector. creases cut the demand for water bymoving up the demand curve, which is the etTect most decision makers look for The role of water investme ts as infrastructure serwhen pricing policy is advocated. The third aspect of vices which serve as both intem. sdiate goods and final pricing, and the one most fiequently overlooked, is that of goods is also often overlooked in water planning. So for increasingthe supply. When theprice ishigher, supplies of instance, Ingram (1989) expresses concern that water water from more expensive sources become available. infrastructure may suffer under-investment as a result

**c** onsequencesoofregulationof, andinvest-andinvest-

The role of water investme ts as infrastructure serwater planning. So for infrastructure may suffer under-investment as a result of the Bank's structural adjustment programs for various Price is also ma "scarcity." The issues of pricing and cost recovery are a fundamental part of any approach to deal with the n.odern of the water issues discussed below.

A fundamental piece of information missing in most ofvalue orwillingness-to-pay, PolicyPaperto establishmethods to evaluate water investments in an intersectoral context.

# 3.2 Where Does the Current Approach **Break** Down?

_2)Incorporatingsocial and environmental concerns directly into planning._ Social and environmental impacts The Bank's Operations Evaluation Department has of water by some users and artificial shortages for others. a project. There are two major areas where the current approach seems to be in trouble: A society that allows waste dischargers to neglect off-site costs of waste disposal will not only devoteb too fewresources to the treatment of wastes but will also produce too much waste inview ofthe damages it causes. (Kneese and Bower 1968).

**_1)_** _Establishing and using the conceptofopporunity_ too fewresources to the treatment of wastes but will _cost of water in different sectors of water use._ Since the also produce too much waste inview ofthe damages methods for evwluation are applied mainly to project-byit causes. (Kneese and Bower 1968). project appraisal, consideration of the intersector-A nature of water use is neglected. Therefore, perfectly well anaAsuseincreases,thepublicgoodsnatureofwaterand lyzedBanklirrigationprojects inAlgeria, forexample, find the pervasiveness of extermalities in water use lead inevithemselves indirect conflict forthe same waterwith other, tablytoanincrease ofpollution. Inthelate 1960s and 1970s equally well prepared Bank projects for urban water sup- the pubic perception in the developed countries was that ply. In such cases the relative marginal benefits of addi- the environment was being "over-polluted." The exterdonal investments in water must be carefully compared nalities implied in water poUlution were first extensively with those of other sectoral investments. Other resource discussed by theResources forthe Future group inthe early

Asuseincreases,thepublicgoodsnatureofwaterand 6
1960s. The above-cited bookbyKneese and Bower (1968) ri .. ; ween different uses of water. For example,in is still a leading text on the economics of water qtaiity. the EMENA region the opportunity cost of water in Ihr municip al secte. is at least two to three times as high as the The concernofeconomists analyzingwaterpollution marginal val'e of irrigated agricultural proCaction per is with "market failure. " In particular the issut of how to cubic meter of water for all crops except some vegetables intemalize the e..emalities has received most ofthe atten- (tomatoes and cucumber). However, when the inigation tion. At the most obvious level it would seem that if the projects are evaluated by themselves, without considereffluent could be correctly piced, then industry and other ation of the opportunity cost of water in other sectors, they polluters could be taxed by just this amount and problem appear to have acceptable Internal Rates of Retum (IRR). would disappear - the correct amount of pollution would be obtained, and if this were cons'dered too large then the Similarly, the externalities due to envi.inmertal effluentpricecouldberaiseduntilasatisfactorylowerlevel damages are not integrated into the appraisal of projects. of pollution was achieved. The economic principles dre clear, but little attention has been devoted in the pas to evaluating the damages and Coase (1960) showed that externalities by them- therefore they tend to be overlooked in the analysis. selves do not lead to economically inefficient solutions provided that the polluters and the people being affected 2) The theory needs refining. can freely and inexpensively negotiate with each other. Coase claimed that the responsibility for damages is a No theory is perfect, and so it is with the theoretical reciprocal one, with the affected party taking steps to avoid approaches to water resources management. The relevant them as much as the perpetrator takes steps to avoid question is how the imperfections inthe theoreticalunderproducing them. Economic efficiency is achieved when pinnings lead to unacceptable outcomes from the point of extemal damages are borne by the party that can most view of the Bank, other funding agenc,es, and governcheaply repair them. ments. There are several assumptions about the theory that cause difficulty in water plannirg, but there are also Hufschmidt and Dixon (1986) have extended envi- approaches to softening or eliminating these market failronmental economics to the issues faced in developing ures from the conceptual model. Three areas stand out as countries, particularly with respect to water projects. Pa- causing more trouble than others and, hence, may need pers by Devousages and Smith (1983) and by Fisher and more refinement of the theory. Raucher (1984) show how contingent valuation methods can be used to evaluate the benefits (and damages) associA. _The difficulties associated with making_ ated with a wide range of environmental impacts that _macroeconomic allocations between investmnents inwaterallocations between investmnents inwaterinwater_ hitherto had been thought to be non-measurable. In the _resources and other economic sectors. and other economic sectors. other economic sectors._ The pervasiveness Policy Paper the Bank should pursue this line of thinking ofwaterusethroughouttheeconomymaypartiallyexplain and layoutthe appropriatetmethodologiesforassessingthe the first problem, but other sectors, including energy, economic dimensions as well as the non-economic dimen- radiate similar pervasive connectinns throughout the sions of environmental deterioration.

A. _The difficulties associated with making macroeconomic allocations between investmnents inwaterallocations between investmnents inwaterinwater resources and other economic sectors. and other economic sectors. other economic sectors._ The pervasiveness economy and society. Water plannin, zmas been an integral part of governmental planning for much longer than other resource sectors. Hence, large andpowerful interest groups are fully cognizant of their stakes in planning. In most activities;indeed,theideaofsuchbalancingisthreatening to groups with a vested interest in water investments and odology to relate water sector plans to the overall macro development ofa country is a generic problem that should guide investments and other Bank water activities.

# 3.3 How the Froblems Can Be Resolved

There are two possible, and not mutually exclusive, countries it is not of particular concern that the water explanations of why problems arise in the way water planning and investnents be balanced with other sectoral resources are planned, appraised, and implemented. activities;indeed,theideaofsuchbalancingisthreatening to groups with a vested interest in water investments and 1) The accepted economic principles are adequate management. The development ofreliable planning methbut the application is inadequate. odology to relate water sector plans to the overall macro The appraisal approaches used at the Bank and at guide investments and other Bank water activities. other funding agencies are based upon the generally accepted principles outlined voluminously in the literature B. _Dealing with externalities directly in the analysis_ referred to above. The application of the principles is (internaizing _the externatides)._ Dealing with externalities flawed because, when faced with economic scarcity, the directlyinthe appraisalmethodologyis another important water itself must be priced at its opporunity cost. This is requirement. The theory and methods for doing this have typically not done and leads to serious misallocation of been developed and many environmental consequences 7
can be adequately treated widin the existing benefit-cost Economic theory provides "second best" pricing methodology. These methods have only received sporadic algorithms for such circumitaces. However, according to applicationinactualprojectevaluation. FisherandRaucher Hanke and Davis (1973) even these lead to problems for (1984)reportonseveral suchstudiesbut additionalworkis utility managers. Tha:efore they suggested the need to needed to develop this methodology for the types of develop "third best" pricing methods, which would be projects supported by the Bank. more responsive to the political dh'.ensions of water resource pricing. In a study of water conservation in Perth, _C. The political economy of tariffse mng in the water_ Australia,HLanke (1982) outlineshowtoesti;nat **e** conond- _sector._ The political economy oftariffsetting is extremely cally efficient choices considering the resource coa to the important andhas to alarge extentbeen neglectedby water utility, the resource cost to the consumers, and the useful experts. This is particularly true in the cases often encoun- consumption foregone as a result of a particular .onservatered when there are economies ofscale associated with the tion policy. Interestingly, when he compared two pricing investments. The canon of price theory is marginal cost policies (marginal costpricing, andseasonalmargiMalcost pricing. Tn other words, set the price at that point where the pricing) with three non-price policies (leakage control, demand and the supply curves intersect. Unfortunately, metering, and mandated water restrictions) he iound that establishing the r.arginal price for many water uses is the most economically efficient was leakage control, foldifficult because of the characteristics of water that make lowedbymetering and annual marginal cost pricing. AUlof its supplya natural monopoly. The existence of economies the otherpolicies hadnegative benefits. This is an eloquent of scale ensures that those who first entered the market .vill reminder that rationing by pricing is not always the most always be able to underprice and drive out any potential efficient approach. In order to find out, however, it is newcomers. They can decide on their desired prof.. Level inperative to carry out analysis at the level of economic and set the prices accordingly. This fact has been recog- sophistication applied by Hanke. nized for a long time in the area of municipal water and wastewater treatment and the suppliers have been regu- 3A Distinguishing between Generic and lated,typicallybypublicutilitycommissions. Meier(1983) Region-Specific Tsues showed that there are at least five different ways of measuring marginal cost under these conditions, earh The Bank has operations in 152 countries, aggregatresulting in a different estimate of the marginal cost. hi ing them into fourmajarregions. To formulate Bankpolicy practice good estimates can be obtained for most water with respect to water it is essential to distinguish between investmentprojectswith either ofthe approaches currently issues that are generic to the management of water as a used in Bank appraisals: long run marginal cost (LRMC), resource, and others that are specific to individual regions. and average incremental costs (AIC). For example, the difficulty ofmaking "correct" allocation decisions between differentuses orusers is generic towater Unfortunately most regulatory commissions have around tF aglobe, but the relative importance of irigation tended to take a "backwards" accounting stance and allow varies by climatic zone and water availability. The generic pricing based only upon average costs and the revenue issues are the ones for which the Bank needs to evolve needs to meet them: The Bank has operations in 152 countries, aggregating them into fourmajarregions. To formulate Bankpolicy For example, the difficulty ofmaking "correct" allocation decisions between differentuses orusers is generic towater institution-wide policy, the remaining issues can be left to the regional departments.

Traditional rate-setting methods, employed by state regulatory commissions as well as local govemnment agencies, appear to have produced a situation of rapidly deteriorating water systems, both rural and urban, characterized by aging capital facilities and under-maintained water systems. (Mann, 1981) Fourteen generic issues are briefly described and discussed below; nine as broad sector-wide issues (section 4.1), and five as sub-sector issues.

# the 4. Generic Issues of **COnern for the World Bank** nc o e

Thisstanceisnot appropriate insituationswhere the utilities are facing increasing marginal costs (all the be **COnern for the World Bank** projects have been built and now it becomes increasingly nc o e difficult to supply the same amounts of water at the histo i l costs). Under these conditions a "forward" In the water planning community there are several lookingaccounting stance is appropriate. If thispolicywere connections of "water and. . ." which are taken by many pursued, the emphasis on revenue requirements of utilities as paramount relationships that brcok no questioning. As would be replaced by establishing adequate -;re invest- arguedbelow,theBank'sComprehensiveWaterResources met fimds.

In the water planning community there are several Managemedt Policy Paper should take a close look at such
sanctified linkages as water ane health, water<sup>and food, this. Hurst and Rogers built an economy-wide model for</sup> water and equity, water scarcity, irrigation efficiency,<sup>and Bangladeshwhichincorporazedadetailedwatprsectorand</sup> so forth, leaving no assumption unexamined. i. nmacro economic likages. Whenthe model was<sup>run, the</sup> i. nmacro economic likages. Whenthe model was<sup>run, the</sup> optimal solutiov was radically different from the<sup>optimal</sup> solution prediLted when the components were<sup>run sepa-</sup> rately. In the overall model there was a strong bias<sup>against</sup> producing an export crop because:

# 4.1 Broad Sectorwide Issues

# _4.).) International Coiflicts over Water_

The reason for this is that the growth<sup>of the non-</sup> agricultural sevtor? depend upon the import<sup>of raw</sup> materialsandiintermediate goods. if the foodrequirementsoftheranidlygrowingpopulationmustbemet withfood-grairnImports(foragivenlevelofimpoits) less **raw** materials and intermediate materials<sup>can be</sup> imported. Consequently, non-agticultural<sup>sectors</sup> must grow at a slower rate, and in order<sup>to meet a</sup> reasonable level of national growth, the<sup>agricultural</sup> sector nrust grow rapidly.

Worldwide there are hundreds of rivers<sup>shared by</sup> diffsrent nations (54 just betweer India and<sup>Bangladesh).</sup> Inmanycasesseriousbilateral ortultilateral<sup>conflictsover</sup> water have arisen. The current dispute between<sup>Turkey,</sup> Syria,andIraqovertheEuphratesisagoodexampleofsuch situations. Intemationat law on trausnational<sup>rivers is</sup> weak; it is essentially left upto the goodwili<sup>ofthe upstream</sup> riparianrto settle problems amicably. Several<sup>decr4es ago,</sup> the World Bank was a major player<sup>in one of the most</sup> successful conflict resolutions; the<sup>Indus Basin settlement</sup> between India and Pakistn.

While this particular model was never used<sup>in maldng a</sup> The Bank should naintain its rule of<sup>not making plan,itdoesindicLtethatquitedifferentpolicyimplicatimns</sup> loans for a project that is not acceptable<sup>to a country's arise when the macro linkages are explicitly considered.</sup> neighbors, but it should also consider establishing<sup>anego- Additional resa arch in this area would help improve the</sup> iatingunittoLelp countries dealwiththese issues. Inmany<sup>quality cf water investments in all sectors.</sup> cases the provision of a neutral c)rner<sup>and unbiased</sup>

# <sup>_4.1.3 WaterSectorPlanmingMethod9logy_</sup> _and Data Requirements_

nterational expertise could make it politically<sup>easier for</sup><sup>_4.1.3 WaterSectorPlanmingMethod9logy_</sup> _and Data_ countries to explore their water conflicts<sup>waneighbors in</sup> _Requirements_ a non-threatening situation, relatively free<sup>of inhibiting</sup> political limelight and implicit threats to<sup>national sover-</sup> At the next level down, within the water sector<sup>there</sup> eignty.Althoughregrettablynotfruitfil todate,theBank's<sup>are a plethora of water plaing tools. One of these has</sup> work over many years on hydro-electricity conflicts<sup>be- come to be called "multi-objective planning." Although</sup> tween Nepal and India is an example of such an<sup>approach, conceptually satisfying, planning theoreticians have made</sup> and a credit to the Bank. Easing some<sup>of these disputes the approach unnecessarily complicated with its own no-</sup> would open up many new investment<sup>possibilities for menclature and dedicated computer sofhvare. In reaFty</sup> constructive multi-purpose use of intemationally<sup>shared multi-objective planning is based upon the concept of</sup> river basins. constrained optimization. One merely<sup>optimizes one ob-</sup> jective, for example, national economic growth,<sup>while</sup> _4.1.2 Linking the Water Sector to the National_<sup>_Economy_setting other objectives, such as enviromnental quality, as</sup> constaints upon the system. The Bank<sup>itself has already</sup> It is a paradox that although water resources<sup>have been a major contributor to the development of "multi-</sup> probably received more analytic attention than<sup>any other objective planning" through its modelting work inMexico</sup> kind of public investnent, there has been<sup>little attention and Pakistan. The issues of equity, food self-sufficiency,</sup> paid to relating the water sec.,r to intersectora!<sup>or macro and health discussed below are typical of the issues whose</sup> aliocationdecisions.Thisla.kofanalysisshouldbeofgreat<sup>opportunity costs man be established by such methods.</sup> concern in countries such as Brazil where<sup>30% of public There is no doubt that *his approach should be taken in any</sup> investment is in the water sector. plnning study. Whether specialized software<sup>or more</sup> general purpose models such as linear<sup>and non-linear</sup> Other resource sectors such as energy<sup>have well programming or simulation models are used, the different</sup> developed methodologies to relate sectoral<sup>and macro versions ofthis tool yield essentially the same results, and</sup> pans. The development ofreliable planning<sup>methodology like all analytic approaches should be employed with a</sup> to relate water sector plans to the overall<sup>macro develop- great deal of caution.</sup> ment of a country is a generic problem<sup>that is of major</sup> significance to guiding investments and other<sup>Bank water</sup> The literature on water resources is<sup>also heavily</sup> activities. In a paper with Hurst (Hurst and<sup>Rogers, 1985) influenced by the ideas of comprehensive multi-purpose</sup> the author found in the literature only a few<sup>attempts to do river basin planning. This has historically been the ap-</sup> 9
proach taken in Westem Europe and the United States. systems have been devised with little orno idea about how Although intellectually satisfying, it is not clear whether it the information is to be used. Thisresults in over-collection is the best approach to practical problems. It is helpful for of some types of data and under-collectiOn of others. The the physical aspects of rainfaU and run-off but much less experiences of GIS users to date have not been uniformly helpful from the point of view of politcaljurisdictions and happy. Most systems concentrate solelyupon physical and economic markets. la the United States it has since been scientficdata,andthereislittleornocoverageofimportant abandonedbyalilmajoragenciesinvolvedinnationalwater economic facts. Although many of the economic data do planning. Today agencies allow the specific pioblem to not need to be collected according to detailed geographic dictate the unit of analysis. With innxeasing concem for distributions,theeconomicrealitiesmaybeasimportantas broader problems such as environmental quality, the idea the physical datathat do, andmaybe critical tounderstandof analyzing "problem-sheds" rather than river basins is ing the meaning of the physical givens. More attention gaining ground. A recent book by Major and Schwarz should also be paid to the statistical variability of the data. shows how river basins can be building blocks in larger Currentlyavailablemethodstoest4blishstatisticalreliabilproblem-sheds. The Bank will have to examine closely the ity should be insisted upon in all data Analyses and be types of issues faced by its clients before recommending a carried over into the analyses of particular investment particular planning approach. decisions.

At the practical level, however, little planning ofany One issue that tier the methodology and the data kind seems to have been applied consistently across water together is the issue of "uncertainty." Not only is it uses inthe economy. For example, inmanyplacesthe uses important to develop and use reliE" . data but it is also of water are still examined separately on a project by imperative that the planning methods used elucidate the projectbasis.Thus,in Algeriaitispossibleto findexamples uncertainty regarding the planning decisions. All too often ofcarefully planned irrigationprojects alongside carefully inthe water resources areathe bulk ofthe analysis is aimed pianned urban water supply projects, with no way of at the consequences of hydrological uncertainty when, as reconciling the conflicting demands that both have for the demonstrated by James, Bower, and Matalas (1969), the same water supply. In Brazil there was surprise when the largestpartoftheuncertaintyintheimplieddecisionsstems introduction of a tariff on wastewater discharges led to from the economic parameters which typically receive large dc reases in revenue to the water supply utilitv little stochastic evaluation. almost leading to its bankruptcy. In these cases the unit of analysiswasnotlargeenoughtocapturetheexternaleffects In its Policy Paper the Bank should make a serious of policies dealing with individLal components. efforttoshowwhatarerealisticexpectationsaboutthedata One issue that tier the methodology and the data imperative that the planning methods used elucidate the demonstrated by James, Bower, and Matalas (1969), the largestpartoftheuncertaintyintheimplieddecisionsstems from the economic parameters which typically receive little stochastic evaluation.

In its Policy Paper the Bank should make a serious efforttoshowwhatarerealisticexpectationsaboutthedata that may reasonably be gathered, and the levels ofreliabilThere is a need to ensure that appropriate models of the ity that can be achieved by the use of these data. water sector be included in any project appraisal. The unit ofanalysis must be large enough to ensure that most of the _4.1.4 The Political Economy of Pricing_ relevant extemalities are captured in the analysis. In irigation projects, ground and surface water as well as drainage Apart from certain aspects of religious and health must be analyzed as one unit. Urban water supply cannot significance, most people in every day use do not regard be divorced from wastewater disposal and its downstream water as an end in itself. It is a commodity like "ships and impacts. Water diversions from rivers must consider alter- shoes and sealing wax," consumed directly or used as an native in-stream uses of the same water for navigation, input to otherprocesses. Empirical observation shows that fisheries, downstreamusers, andthe maintenance ofstream in Boston as well as in Beijing, if the price of water is ecosystems.Wellestablishedmethodsusingmathematical increased, consumers will use less of it. In other words, progammingandsimulationmodelsshouldberequiredas there is a "willingness-to-pay" for water that is not an a prerequisite for project appraisal in such cases. abstwacteconomicconceptdependingonelaboratetheories Apart from certain aspects of religious and health abstwacteconomicconceptdependingonelaboratetheories of private property, but rather is a reliable behavioral trait - and is a good basis locations. The most accessible water for human use is the In any policy study the quality of the data used of consmners of the products. The same behavior can be - determines to a large extent what conclusions can be expected in Kansas and Kathmandu and is a good basis reliably reached. However, there is a mind-set, that always for assessing the economic demand for water. (Water has looks formore and more data and more and more complete adownward sloping demand curve.)We can expecthuman coverage of a region or basin. Geographical information actions to meet demand to be similar in widely different systems (GIS) are currently very popular. Some of he locations. The most accessible water for human use is the practical problems encountered in the use of such systems cheapest to develop, the next most accessible costs a little should be examined. For instance, many of the current more, the next yet a little bit more, and so forth. Very soon 10 y _,.*_ _ _ - --- ***__in* *** l N__I

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to water use than often exists. At any level, the definition of property rights to water is very difficult in the face of to invest in developing a particular water supply.

an individua **l** about future uses of water. This contradiction may be due to the common social misperception of water as a "pure time, with a right of access for all. As a result it is Waterpricing,therefore, isnotatasktobe left solely are extremely important and emphasize the need for a "political economy" of water pricing.

customary to treat water as a free good when it is in fact anything but free. People come to expect that it is their right to take (and to waste) as much water as they want. (Baumnol and Oates, 1979).

# 1. Pricing

Three important concepts tend to get confused in the discussion of water pricing. These are, 1) the opportumity similartothe costs ofpast but even then too many people using the scenic river will destroy some of its value for other participants. It has setting.

Many water planners confuse cost recovery with "goldenrule." Most leadingtounrealisticallyhightariffs.Unfortunately,economists often try to mandate strict marginal cost pricing, fact, there are many different tariff structures that would in the academic works on water and which confuse the

*

**m**
The best approach probably lies 3omewhere between the yielding wheat, and cash crops such as cotton, tobacco, and twoextremes.Thetensionbetweenregulationandefficient oilseeds. pricing will always remain a source of contention between the planners and the political process, however, as Brown Outside observers are surprised by the disparities and Sibley (1986) stated: among cost recovery rules for Bank loans in different Outside observers are surprised by the disparities among cost recovery rules for Bank loans in different sectors. Il the electric energy and telecommunications sectorsthe Bankinsists onfull costrecovery forthe capital as well as O&M expenses. The goal is to create viable publicutilities,able tosettariffsthatwillefficientlyfinance the future development of the sector. In contrast, water sector projects typically require only repayment of the O&M and of some "reasonable" part of the capital costs. Many would argue that this policy leads to sloppy performance on the part of both the suppliers and consumers of water. Since we do know that water use is directly related When regulation violates efficiency criteria seriously enough, not only economists become concemed. Peak loadpricing inelectricity. forexample, was taken seriouslyintheU.S. whenit became clear that excessive use of electricity was contributing to an energy crisis that alanned many people. Hence, normative economicsplays an important, though not preeminent, role in the regulatory process.

tempt to bring about efficient resource use. Pricing is more usage. than cost recovery; it also aims at leading societyto correct allocation decisions. Unfortunately, when many of the rational resource allocation by "correctly" pricing just a fewofthe resources. This isamajorproblem inall countries and regions. For example, it is estimated that in the EMENA region alone the subsidy to agriculture due to incorrectwaterpricing isofthe orderof$40 billionperyear.

The Bank should carefully study the implications of ments, and alternative methods of doing so.

# _4.1.5 Environmental Impacts of Water Development_

There are increasingpressures on international institutions to take the lead in responding to concerns about sources such as agricultual runoff, are now recognized as major contributors to environmental problems that canot be ignored. More importantly, at the level of questions of susainability of ecosystems as a whole, water use and as well as of those of the borrowing countries.

# 2. Cost Recovery

In the indian state ofBihar, the charges forrrigation water contamination play major roles. They cannot be Department water from river diversions and dams are so easily separated into water quality and water quantity low and the attempts to collect the fees so feeble, that in issues; both are critical. 1979 the cost incurred in collecting the fees for water was 117 percent of the actual amount collected. Owing to its From the environmental point of view much of the serious financialdifficulties,the IigationDepartmenthas concern with water projects stems from the casual way in had to defer maintenance, and the water system has dete- which environmental consequences are handled as a lst riorated. Farmers have less incentive to pay for poor minute consideration, rather than being integrated into service, and a vicious cycle has developed. Moreover, the project design from the beginning. Big offenders include low water charges have led farmers to use water ineffi- irrigationprojectsinwhichdrainageissuesareneglectedin ciently. By contrast, in both the Punjab region in India and the initial planning, navigation projects in which the disinareas oftheUnited Statesthatrelyonwater fromprivate posal ofdredged materials is haphazard, and flood control wells, fannersare farmore conservative inhowmuchwater projects which ignore flood-plain fisheries. In all of these they use since they pay higher prices. (Well water costs casesadequatepre-planningguidelinescouldsubstantially more because it is notsubsidized.) Yet these farmers' crops reduce the environmental impacts.1There areotherprojects, are not doomed to economic failure: when the cost of for example large dams, which have major environmental pumping in the Punjab increased in the 1960s, fanners impactsthatcannotbemitigated, such as loss of habitat, began growing more water-efficient crops such as high- loss of fertile bottom lands, destruction of forests, and From the environmental point of view much of the concern with water projects stems from the casual way in areotherprojects, for example large dams, which have major environmental 12
sediment trapping, in addition to the social impacts of goals.Theirrigationliteratureisrepletewithdiscussionsof moving large numbers of people from their homes and how to define equity, how to measure it and its effects on farms. These consequences can only be addressed on a productivity and other values, and howtoplan forit. Some political level by providing the right kinds of institutions options are more equitable than others and should be thatwill allowfordialogue,negotiation,andcompensation pursued in the design and implementation of water reto the affected groups. However, guidelines that force a sources works. Nevertheless, if cie were looking for thorough search for alternatives could, in the case of large investments in the economy to achieve equitable distribudams, suggest attractive alternate solutions such as modi- tions of benefits, water projects are not the most likely fications ofthe scale ofthe project or other storge options candidates. Evenwithin irrigationprojects themselves it is such as underground storage or a larger number of smaU important, forexample,thatthe economic costs ofskewing storages closer to the users. The World Bank Operational water allocations in favor of equity that are imposed upon Memorandum 4.00, Annexes A and B, could provide a societybedefinedinterms ofthenumber offarmers, rather good starting point for the development qf appropriate than farm sizes, and that they be carefuly estinated and guidelines. politically assessed as to whether they exceed the accrued societybedefinedinterms ofthenumber offarmers, rather politically assessed as to whether they exceed the accrued social benefits. In some situations farms are too small to be economically efficient and the water might be better used on slightly larger farms.

# _4.1.6 Social Impacts of Water Development_

Inaperfectworld,waterdevelopmentprojectswould have only positive impacts on societies. However, because Equity is an emotionally charged issue which the of the exteralities inherent in many water investment Bank can help borrowing governments weigh properly by projects, there are almost always some winners and some providing a dispassionate discussion of it in its Policy losers. Local people lose their lands so that urban popula- Paper. There isalarge role forthe Bank inhelping countries tionscanhaveelectricpowerandlowlandfarmerscanhave deal with these types of impacts in a straightforward way irrigation. Upstream users pollute rivers with wastes or by giving them due weight in their own indigenous planchoke them with sediment, causing severe damages to ning methods and organizations. Some of these resources downstream users. Attention must be paid in planning are already covered by the Bank's own environmental projects to minimize disruption outside ofthe project area assessment guidelines. They should be made explicit in the and to provide compensation to the affected parties. Policy Paper.

Equity is an emotionally charged issue which the Policy Paper.

Asinthe case ofenvironmentae consequences,many _4.1. 7 Conservation and Recycling of Water_ negative social impacts could be avoided by careful preplanning. Some ofthemostegregioussocialimpactsfollow One of the most obvious ways ofextending the water frominvoluntarymovementofpopuationsoutofareasthat resourcesbase is by conservingwaterorbyrecyclingit after are flooded by dans and embanlments. The move itself use. Unfortunately, by themselves these measures are not may be unavoidable, but social disintegration and destitu- the panaceas thattheyare oftenthoughttobe. Inmost cases tion are not, and the needs of the affected populations people and industries "waste" water onlybecause it is the should be integrated early into the planning process, with cheapes **t** hing to do. Unless water prices are raised signifiadequate resources and communication channels provided cantly there is no incentive to do otherwise. The experience to meet those needs. Other cases, such as equity in water in the industrialized countries is that people can be motiaccess in irrigation projects, are less obvious and are vated to conserve water on the basis of altruism only in therefore often ignored by project developers and funding times of shortage. Typically, after the stress is removed agencies. Particular impacts on women and children are consumption rises to the previous levels. also often overlooked until it is too late to mitigate their damage. Humanhealthissuesare oftenneglected in evaluThere is much discussion of the recycling of sewage ating water sector investments. For example, the introduc- for use in agriculture. Many cities have been doing this tion of schistosomiasis into a region by irrigation projects more or less successfully for some time. The practice is is a serious matter and can be avoided or controlled to a widespread in Asia, with, however, some problems in significant extent by changes in system design and opera- protecting the public from pathogens. With care such use tion.Accesstowaterforbathing, forreligiouspurposes, for can be made of sewage, and should be made wherever wateringanimals, and forrecreationare allimportant social appropriate. However, much of the discussion implies that uses of water often inadvertently left out of project plans. large amounts of irrigation can be accomplished with such There is much discussion of the recycling of sewage recycled water. One needs to be reminded of the tremen-
consumes as much water as a town of 15,000 people municipal water is a local responsibility, but many indiproduces wastewater. It takes the wastewater of 50 people viduals also sell water in small quantities to households. to irrigate the land required for growing the food for one Rural households are almost always in charge of obtaining person. Althoughwaterrecycling for industrial and domes- their own supplies. The result of such comparlmentalizatic uses appears attractive and aworthwhile investment for tion is that agriculture, industry, and municipalities use vegetable gardening, it is not likely to make a major water inefficiently. contribution to irrigating field crops.

While institutions arelikelytobehighlyregional and Direct recycling of municipal wastewater has also culturallyspecific,the needtostrengthenthemis one ofthe been practiced without the use of irrigation as an interme- major generic problems facing development activities diary. Forexample, Windhoek,Namibia,hasbeen success- around the world. The need is not for large new institutions fullyrecyclinglargequantitiesofmunicipalwaterformore but, rather, for small policy councils composed of cabinet that 20 years without apparent problems. In some parts of rankofficialswho willbe ableto coordinate the work ofthe the world suchrecycling ispracticedin anunobtrusive way. existingwaterinstitutions. Th,Bank'sPolicy Paper should For example, in Holland polluted water from the Rhine is emphasize structure, organization, management, and the filtered through the riverbanks before being abstracted for role of adequate cost recovery, to enable individual counurban water supplies. tries' institutions to carry out necessary maintenance tasks and build for future demands.

Alothasalsobeenwrittenabout conservingwaterby improving the efficiency of use in irrigation and reducing the losses in urban water systems. As discussed below, _4.1.9 Role ofthe Bank in Education, Training, and_ increasingwaterus **e** fficiencies in agriculture is a difficult _Information Exchange_ concept and the practice may not really provide great savingsofwaterinmanycases,particularlywhereconjuncAs the world's leading institution for supporting tive use of groundwater is practiced. Nor is it necessarily investments in the water sector the Bank is ideally posiwise to reduce losses inurbanwater systems, since the cost tionedto use itsprestige and influence to furthereducation, ofreducing the lossesmayexceedthe benefits asperceived training, and informationexchange.ThroughitsEconomic by the water utility. This is clearly an area where the Development Institute (EDI) the Bank is already heavily appropriate pricing and valuation of the water itself is the engaged in the formal training ofThird World govermment major issue. Conservation for its own sake is not a realistic servants. This role could be further enlarged by requiring or advisable goal; it only makes sense within a correct more on-the-job training for host government employees. pricing policy for water. The Bank's Policy Paper should As mentioned above, the appraisal process itself could be clarify the potential role of conservation and recycling. used as a useful teaching mechanism. In particular, the As the world's leading institution for supporting used as a useful teaching mechanism. In particular, the environmental and social impact assessment requirements stressed above can be used as a public education tool. If government agencies actually develop and use environ-

# _4.1.8 Host Ccuntly Institutional Reform_

In most countries there is a great need to upgrade the mental and social impact assessments, they will discover, institutions dealing with the various aspects ofwater. Most as will the impacted groups if they are integrated into the importantly, in every country there should be one institu- process,howwaterinvestmentsreallyfunctionintheirown tion with the responsibility to coordinate water policy societies. This has been one of the most important outacross uses and across government agencies. Even ad- comes in those developed countries which have implevanced industrial countries such asthe United States, suffer mented such an approach. Their citizens are now much from lack of coherence in water policy across uses. There more avware of the environmental and social consequences is often a tremendous inertial asymmetry between the of government action and have begun to make their views staffing of agencies with traditional concerns and those felt through political action. Greenparties are springing up with more modem ones. For instance, in Thailand the throughout the industrialized countries. Since funds are Iffigation Department is the single largest government limited, the Bank might considerarole for itselfineducatagency. lnlndia, the use ofsurface water is administeredby ing otherpublicandprivate financing agencies inthis field. theCentralWaterCommission,whereastheCentralGroundwater Board oversees groundwater use. There is little 4.2 Subsector Issues practical integration of these agencies' plans, despite a fonnal agreement to cooperate. Each of India's 22 states _4.2.1 Irrigation_ also has its own department of irrigation, which usually dealsonlywith surface-water supplies,while otherdepart"Water and food" caries many assumptions about ments focus on groundwater. In cities around the world, development policy which need to be carefully and sepa"Water and food" caries many assumptions about 14
ratelyexamined. Food security is amajorconcernofevery vision; itcanthrowthe largerbenefit-costpicture seriously govenmuen **t** hroughout the world but how to achieve a out of balance, and lead to misplaced investment on a satisfactory level of security is not obvious. National self- significant scale. sufficiency in food grains is not the imperative that it is oftenassumedtobe. Inthe modernworldoil is essential for In its Policy Paper the Bank will have to devote a survival, but nowhere do we find the belief that every major effort to analyzing irrigation since this is one of its country should be self-sufficient in oil. There is no reason major lending activities. However, there are many other whyeverycountryshouldgrowgrain,whichrequires2,000 issues involving choice of technology and cropping polito3,000tonsofwaterperton.1nanandcountrywatercan cies that have not been featured here, which are also of have much higher value for other uses. International trade major concern in this part ofthe water sector. Many of the canredistribute water- inthe form of grain- tonationsthat sector-wide issues applyinthe irrigationarea. For example, decide not to grow it. Israel subscribes to this practice, a recent paper by Johnson (1990) indicates that the probemphasizipgvaluablecashcropssuchasfruits,vegetables, lems with irrigation in South and Southeast Asia are and flowers for the European market. Countries that take becoming particularly acute because of the funding of the this approach could maintain stockpiles ofthe basic grains; operations and maintenance (O&M) of the systems. As even though stockpiles are costly and can deteriorate, indicated above, pricing and cost-recovery are fundamenreplacing spoilage is less expensive than growing grain. tal to achieving proper operation and maintenance of Such countries could grow a diversity of cash crops so that systems. fluctuating intemational prices could not devastate their economies. _4.2.2 Water and Health_

# _4.2.2 Water and Health_

Even the definition of self-sufficiency is not clear. address this issue head-on in its Policy Paper.

provides the water for another farmer downstream or universallytrueandshouldbe subjectedtocareful analysis.

A relationship be.tween water and health has been 1976) cautiously limited itselfto saying that "other things being equal, a safe and adequate water supply is generally supplies were provided to societies with rising income But apart from drinkdngwaterandsanitation, serious Itismoreappropriatetostartfromthelargerperspec- hunan health problems can be introduced into an area tive ofthe overallregionalefficiencyoftheuse of water for through the development of water resources. The classic irrigation. But even this is a difficult concept, and agricul- caseisthe spreadofschistosomiasisinAfricaandAsiaafter tural and irrigation professionals will be on still stronger the introduction of irrigation. Debilitating rather than fatal ground if they orient themselves to the further-reaching in most cases, schistosomiasis now infects more than 200 concept 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 (Guinea ciency" is a seductive notion because it simplifies the worm disease), and sleeping sickness can be spread by problem to water alone by focusing it on engineering and inrigation projects. Many water-soluble chemicals used in management variables. But it canbecome a form oftunnel agriculture, particularly chlorinated hydrocarbons, accu15
mulate in animalandplanttissues andthus enter orbecome ness-to-pay for these services by different socioeconomnic concentrated in the food chain. High concentrations of groups. Such studies are conceptually difficult as well as nitrogen fertilizer in water supplies cause blood diseases in time-consuming, but they should obe carried out in a suffiinfants. In many countries unregulated and indiscriminate ciently large number of cases that the basic magnitudes of productionand disposal ofchemicals and their wastes have the expected benefits canbe demonstrated. This isparticuled to serious contamination of surface and groundwaters larly important in this sector since most of the litetature by toxic and carcinogenic substances. Some of the worst focusesupon the cost ofthe services and on complaintsthat cases are observed in developing countries which have few they are becoming too expensive. "Too expensive" comresourcestodealwiththem.Acarefulreviewofallofthese pared to what? The only meaningful comparison is with components of "water and health" is in order, not just of the benefits received from consuming these goods and drinidng water and sanitation. services.

_4.2.3 Urban Water Supply and Wastewater Disposal_ For urban water and wastewater disposal, consideration of the role of industry in the management of the With continuing rapid population growth, the nuin- ambientqualityofthewaterresourcesisvital.Industryuses ber of cities of over one million people is expected to only5to 10percentofallwatersuppliedbutstillrepresents increase rapidly. It is in these burgeoning metropolises of an important segment of demand. This results in part from the Third World that the most pressing needs for water the fact that industrial processes pollute a disproportionate supply and wastewater disposal investments will be felt. In arnount of water. For exarnple, in Sao Paulo and Seoul, all cities the costs of providing new water supplies and industrialpollutionhasturnedmanystreamsandriversinto wastewater facilities are rapidly increasing. rarefulassess- open sewers. Developing countries should learn from the ment ofnew approaches to the whole problem are needed. experience of industrialized nations: it is much more Forexample, AkhterHaineed Khan, the formethead ofthe expensive to clean up polluted water than it is to avoid Comilla Academy for Rural Development, has success- polluting in the first place. Economic incentives against fully applied the approaches of rual organization to the industial pollution, such as effluent fees, should be estabdensely packed parts of the city of Karachi, mobilizing the lished so that companies will have an incentive to control localpopulationtoplan,construct,andfinanceasewerand their effluents at the source. In addition to the usual dainage system at a fraction of the cost of similar systems regulatory methods, innovative approaches such as tradeprovided by the city government. able permits and privatization of facilities should be explored. The failure of some of these approaches in the We must look harder for innovative ways of dealing industrialized world does not mean that they may not be withurbanwaterandsewerissues. Technicalandmanage- appropriate in Third World settings. rial performance needs scrutiny to ensure that excessively costly systems are not built merely to copy the industrialRegulating environmental quality by pricing the ized countries. This is particularly true now in Eastern effluents that individuals, municipalities, and corporations Europe,wherethe tendencyisto proceedirmmediatelywith emit is one of the standard recommendations of economic the same approaches as those used in Westem Europe. As theory. The economic literatre is full ofconceptual schemes is well known, the general rule is that removing the first for pricing and taxing effluents that would lead to internal50% of pollution is quite cheap, with the incremental izing the extemalities of pollution. Once this is done, improvements being increasingly costly. This consider- environmental quality can be left entirely to the usual ation oftensupportsdevelopingasysteminstages, moving market forces. The Washington-based research institute, to the expensive higher levels of performance as general Resourc:es for the Future, has led the campaign for fees on economic growth generates increased ability to pay for effluent discharge into waterways for over 20 years with them. little success; it has mainly been opposed by those who think it improperto sell the righttopollute the environment.

The costs of alternative approaches to urban water supply and waste disposal should be carefully examined. Neverthelessasubstantialamountofeffluentpricing Local agencies should be made aware of these costs and has been used in the U.S. and in Europe. Hudson (1981) encouraged to set their tariffs to reflect real costs and reportsonthe extentandmode of implementationofwater projected trends of costs. The issue of cost recovery, pollution pricing through sewer charges. He claims that by discussed in more detail above, is critical here. The Bank 1970morethan90% ofthemunicipalitieswithpopulations should also initiate studies to elucidate the economic over 50,000 levied some form of sewer charge on resibenefits of the provision of these urban services. Such dences and industry and that 40% of local expenditure on studies should be based upon assessments of the willing- sewage was derived from these charges. Industry can Neverthelessasubstantialamountofeffluentpricing 16
choose to pretreat its waste, decrease its water use, improve intersectoral nature of electricity and the conflicts over the housekeeping, change either the production process or potential uses of the water between users. In addition, the products, or it can choose to pay the effluent fee. The pricing of the output from multipurpose water resources industrial charges are typicaUy related to the quantity of projectsthatincludehydropowerneedscarefulreappraisal. water used and the "strength" of the effluent measured in The temptation is to load adisproportionate amount of the terms ofthe oxygen-demanding organic waste load (BOD) cost recovery on the electricity consuners and not on the and total suspended solids. These charges can give an agriculturalandotherusersofthejointoutputoftheproject. incentive to industries to change the amounts and strength oftheirsewage effluents.Hudson'sstudyoffivelarge cities The Bank's Policy Paper should help develop ex(Atlanta, Chicago, Dallas, Salem (Oregon),and South San plicit guidelines for dealing with these issues, particularly Francisco) and 101 industries found that effluent charges the environmental and social impacts discussed above, in were overwhelmingly preferred by the industrialists to its own operations and to encourage the governments dischargehimitations.Therewasauniversalattemptbythe receiving funds to recognize them as potential problems. industries in the sample to respond to the effluent fees despite theirrelatively small costs to the industries. Hudson concluded that; "...we are confident that economic incentivesworkwell and canbe effectively administered." In its Policy Paper the Bank should stress the application of well REFERENCES established economic principles and innovative technical approaches in this area. Baumol,W.J. andW. E. _Oates.Economics,Environmental_

- Baumol,W.J. andW. E. _Oates.Economics,Environmental Policy, and the Quality ofLife._ Prentice-Hall, 1979.

# _4.2.4 Rural Water Supply and Sanitation_

- Brown, S. 3. and D. S. Sibley. _The Theory ofPublic Utility Pricing._ Cambridge University Press, 1986.

This one problem area could easily consume the entire Bank lending portfolio and still not be completely Sanitation Decade, but in percentage terms the population covered remains similar to that at the beginning of the Decade. More effort is needed on the social and economic

- _Guidelines for_

- _ProjectEvaluation._ United Nations Industial Development Organization, 1972.

side of this issue, and Bank-sponsored research on **assess-** Desvouges, W. H. and V. Kerry Smith. _Benefit-Cost As-_ ing willingness-to-pay for rual water supply should be _sessmentfor Water Programs,_ Volume I. Prepared for extended to sanitation. As in the issue discussed in section the U.S. Environmental Protection Agency, Research 4.2.3., too much of the discussion focuses upon the costs Triangle Institute, North Carolina, 1983. and too little on the benefits. In addition, there is aneed for research on appropriate incentive schemes to encourage Dorfman, R., and N. Dorfinan. _Economics of the Environ-_ individual or private sector undertakings to provide goods _ment._ W.W. Norton, 1972. and services in rural water supply and sanitation.

- _sessmentfor Water Programs,_ Volume I. Prepared for the U.S. Environmental Protection Agency, Research Triangle Institute, North Carolina, 1983.

- _Economics of the Environ-_

- _ment._ W.W. Norton, 1972.

- Coase, R. "The Problem of Social Cost." _The Journal of Law and Economics,_ October, 1960.

The Bank has played a major role in the Water and SanitationDecade and itwould be appropriate to include in its Policy Paper a critical review of the accomplishments Eckstein, 0. and problems with respect to this entire set of activities.

- _Water Resource Development and the Eco-_

- _nomicsofProjectEvaluation._ HarvardUniversity, 1958.

# _4.2.5 Hydropower_

HydropowerisamnajorareaofBank fundingandone that until recently was considered well defined and not ceived a lot of criticism based upon their environmental impacts. The Bank's environental guidelines have already begun to address these issues and should make sure that govenmnentsreceiving the fumds are equally as carefil issues that need clarification in the hydro area relate to the

- Falkenburg, M., M. Gam, and R Cestti. "Water Resources: A Call for New Ways of Thinking." World Bank, INUWS Working Paper, March, 1990.

- WaterQuality," inV. KerrySmith, _editor,Advancesin Applied Micro-Economics,_ Volume 3. JAI Press Inc., 1984.

- Some Reflections on Water Conservation Possibili-

1
ties."InternationalInstituteforAppliedSystemsAnaly- Kneese, A. V. and B. T. Bower. _Managing_ Water _Quality:_ sis, Laxenburg, Austria, December, 1982. Mimeo.

- Hanke, S. H and R Davis. "Potential for Marginal Cost Pricing in Water Resources Management," _Water Resources Research_ 9, 4, August 1973.

- _Economics, Technology, Institutions._ Johns Hopkins Press, 1968.

- Little, I. M. D. and J. A. Mirrlees. _Project Appr * ,al and PlanningforDevelopingCountries.BasicBoo1_ ;, 1974.

- Hirschleifer, J., J. W. Milliman, and J. C. De Haven. _Water Szupply: Economics and Policy._ University of Chicago Press, 1960.

- Hudson, _3._ F. Pollution Pricing: _Industrial Responses to Wastewater Charges._ Lexington Books, 1981.

- Maass, A. et al. _DesignofWaterResourceSystems.Harvard_ University Press, 1962.

- Major, D. C. and H. E. Schwarz. _Large-Scale Regional WaterResources Planning._ Kluwer Academic Publishers, 1990.

- Hufschmidt,M. M. andJ. A. _Dixon.EconomicEvaluation_ Mann, P. C. _Water 3?rvice: Regulation and Rate Reform. Techniquesfor the Environment._ Johns Hopkins Press, NationalRegulatoryResearchInstitute,Columbus,Ohio, 1986. 1981.

- NationalRegulatoryResearchInstitute,Columbus,Ohio, 1981.

- Integrating Water Sector Planning into Economy Wide Planing Models." Paper presentedat the l2thInterna- ' tional SymposiumonMathematicalProgramming,Massachusetts Institute of Technology, August 1985.

- _Pricing Policy for Development_

- _Management._ EDI Series in Economic Dew -ment, Johns Hopkins Press, 1983.

- Postel, S. "Saving Water for Agriculture," in L. R Brown et al. _State of the World: 1990._ W.W. Norton, 1990.

- Ingramn, 0. K. "Note on the Macroeconomic Linkages of

- _Tech-_

- _nology Review_ 89, 8, Nov/Dec 1986.

- James, I. C., B. T. Bower, and N. C. Matalas. "Relative ning." _Water Resources Research. 5,_ 6, December 1969.

- _Economic Analysis of_

- _Projects._ Johns Hopkins Press, 1975.

- UnitedNationslndustrialT)evelopmentOrganization. _Guide to Practical Project Appraisal._ UNIDO, 1978.

- Johnson,S. H. "ProgressandProblemsofIrrigationInvestmentin South and SoutheastAsia." _WaterInternational_ 15(1990): 15-26.

World Bank. _Village Water Supply._ World Bank, 1976.

18
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