Who pays the piper? Who calls the tune? - What Price Water? - includes related article on Turia River, Valencia, Spain - privatization of water supply services - Cover Story - Interview

By putting a price tag on water, we may be able to save this vital resource from waste. But can privatization schemes ensure that everyone is served? John Briscoe of the World Bank argues for a greater role for the market. But French academic Bernard Barraque sees danger in treating water like private property. Colin Green, self-described iconoclast and economist, asks the questions.

Colin Green: "Water as an economic resource" is generating tremendous controversy and discussion.

What does this mean in practical terms?

John Briscoe: Two things. First, there is a cost associated with providing services like water supply or irrigation. As with other services, users should pay for the cost of those services to ensure among other things accountability to users and financial sustainability. In developing countries, it is often claimed that services must be subsidized to protect the poor. Yet in virtually every case, the influential or powerful people benefit from the subsidy, while the poor don't receive formal services and end up paying water vendors about ten times more than the cost of the service. There is broad agreement on this.

The second point is more subtle and contested - what economists call the "opportunity cost of water". Imagine a basin where all the water is already used. By using one cubic metre of water (even if it is free), I impose a cost on everyone else who is denied the opportunity to use that water. In technical terms, the highest value of the use denied is called "the opportunity cost". The controversy stems from how to deal with this cost. In the past, the general solution has been that "government will allocate water." But it has become painfully clear that governments are not very good at this task. There are several alternatives: one is to charge users a price and thus ration a scarce resource. This is strongly resisted by current users, with good reason, since it is really an abrogation of an existing formal or informal property right. A more creative approach has been to assign property rights to users and then allow them to trade those rights. This is not a "free market". Indeed, it requires a great deal of regulation. Informal markets have long existed wherever there has been water scarcity. But in recent decades, there has been enormous progress in establishing formal markets in places like California in the United States, Chile, Australia and Mexico.

Bernard Barraque: Water is first a natural resource, and in some cases it becomes both a social and economic good. In Europe, we tend to think that a price should not be attached to water in its natural environment. Conversely, the cost of installing technology to make this water useful should be at least partly covered by users.

Under European water laws, people can take small amounts of water directly from the source for free. The general trend in the public water system is for consumers to pay a small flat fee for the connection or for a basic allowance of water. Beyond that, they pay for what they use.

In the case of non-domestic users fully or over-exploiting a basin, I think that there should be abstraction levies, particularly for irrigation. A very small levy on irrigators can liberate a lot of water for other users. However, it is important to understand that these economic incentives (levies) are more efficient when they are set up by "users' boards" than by central regulators.

Colin Green: Is the water crisis really a food crisis? Is the problem the availability of water for irrigation?

John Briscoe offers a similar response to that of Bernard Barraque: Irrigation is the world's biggest user (of water) because water is not only abstracted but also evaporates, meaning it does not return to the river basin. The problem is not making water available for irrigation, but ensuring that it is efficiently used. However, the crisis is very complicated. There is, for example, the growing problem of pollution.

Colin Green: Economists have developed a variety of ways to assess the value of natural resources. But for some people, a resource like wetland has an intrinsic value which cannot be measured in dollars. How do we include these moral concerns in economic analyses?

John Briscoe: I would not call a wetland a "moral concern". It is something people value or want because it provides a variety of very important services, including aesthetic ones and even just so that it will exist. The logical approach is to find ways of getting stake-holders to manage comprehensively the wetland and the entire aquatic ecosystem.

Bernard Barraque: Some suggest that by pricing the "services" flowing from that wetland, we can ensure that people value and respect that resource. I don't agree with this. Economists have not yet found a way of truly evaluating all of the assets of a resource like a wetland.

Colin Green: Many economists believe that all uses of water should be charged at the price equal to the costs of making that water available. Are prices really effective in reducing the use and waste of water?

John Briscoe: Water pricing and metering are certainly effective in reducing demand. It isn't hard to see why this should be the case, since it is true for everything else we consume.

Bernard Barraque: Water supply systems are cheap to run but expensive to build. This is basically why developing countries installing a water supply scheme must rely on heavy subsidies and cheap loans, just as developed countries did in the past. Once the initial systems have been completed, then it becomes possible to raise the prices to cover long-term maintenance of the systems, as is the case in northern Europe.

Water meters don't necessarily lead to reduced consumption. Most European studies have shown that consumption of water for indoor purposes - drinking, cooking, and bathing - does not vary according to the price charged. Conversely, outdoor uses - like filling swimming pools, washing cars and watering gardens - are more sensitive to prices. So we have to be careful about making blanket statements concerning metering. There is another point to be made. While there is a lot of talk about domestic metering, little attention has gone to the savings that could result from metering large irrigation schemes.

Colin Green: Some economists argue that rights to abstract water should be made tradable. This requires that individuals have a legal right to abstract water, which implies a sense of ownership. Should existing laws be changed to create that right?

John Briscoe: Where there is water, there are implicit rights to that water and conflicts over those rights. By formally defining these rights, we can establish clearer and more efficient ways of dealing with a problem that is intrinsic to human existence. The "trading system" in question has proven to be a success in places like California, where laws were passed authorizing farmers to sell their water rights to cities during a drought. The economic and social benefits of this system are clear.

Bernard Barraque: In Europe, "private" waters are declining in importance, but this does not mean that they have become "government-owned". Europeans generally consider water to be a common property, which can be used but not owned. In most cases, the state does not assume the role of direct manager of the resources but acts as a kind of guarantor that different kinds of users share the resources according to equity, equality and ethical principles. This balanced system allows more flexibility than privatization of resources, and what's more it can be accompanied by monetary compensation.

Colin Green: Is the argument for privatization a practical one or is it essentially ideological?

John Briscoe: Both. This is a big subject, with many red herrings! No one has truly "privatized" water services except England and Wales. We more commonly find what French colleagues call "delegated management", in which ownership remains public while private operators are responsible for a variety of tasks which they do better than public operators. There is no magic regulatory solution to the monopoly problem in which water is either a public or a private domain. I strongly believe that a mixed system in which public operators look over their shoulders at private competitors, and vice-versa, offers the best hope for getting people good services at a reasonable cost.

Bernard Barraque: I agree with John that mixed systems are in fact superior. There is a wide array of partial privatization schemes across Western Europe. In practice, "privatization" occurs when the public system fails. There is a general feeling that privatization is the only choice. But there are alternatives. For example, some countries might find it advantageous to tie together different kinds of services like gas, electricity and water in a more efficient system of financing and billing.

Colin Green: Public participation is considered a critical ingredient to sustainable development. How can we combine increased public participation with privatization?

John Briscoe: Astute observers have argued that the greatest benefit of getting the private sector involved is precisely that it brings greater public scrutiny, openness and accountability. In England and Wales (considered by some to be a model of water privatization, but a model I am personally not a fan of), the local community, press, and public at large are much more involved than they were before privatization.

When people are faced with unresponsive and unaccountable bureaucracies, they tend to resign themselves to inefficient services. They don't voice their demands. With privatization, people are paying for a service, have a clear view of the obligations of the provider and will not accept poor services. In many countries which have experienced privatization, we find people beginning to make the same demands of publicly provided services. This may prove to be the greatest benefit associated with private water management.

Bernard Barraque: I disagree with John concerning public participation in England and Wales. Privatization led to an adversarial form of participation. In France also, people tend to have less confidence in private management. This might be a good reason to keep some role for local government.

Privatization is ideologically based on "consumerizing" a service. In the process, people assume the role of a customer, not a citizen. As a citizen, an individual might feel a civic responsibility to cut down on water use especially during a drought. A customer, on the other hand, expects the service paid for, no matter what.

It takes a lot of information about how water is used, for example, to run an efficient system. Public participation offers this information and so ultimately lowers the system's running costs. At the same time, a more informed consumer may also be a more demanding citizen. For example, in France people complain about high water prices. They insist on having individual meters even when those meters aren't really efficient. Sure, the meters will tell them how much water they used. But those people still aren't going to see that their water bills are covering costs to clean up industrial pollution connected to public sewers, for example, or to clean up nitrates from agriculture. With more information, those same people might start demanding a more sustainable water policy.

RELATED ARTICLE: Valencia: a thousand years of calm waters

The farmers of Valencia, on the river Turia on Spain's east coast, take their rights to water very seriously. For over a thousand years, they have relied on their city's Water Tribunal to guarantee that water drawn from the Turia is distributed fairly. Although they are not lawyers and do not keep a written record of the verdicts they reach, and although there is no prison for offenders, eight Sindicos or magistrates meet under the Porch of the Apostles of the Cathedral of Valencia and settle verbally the disputes arising between farmers over the right to use water from the channels irrigating the 17,000 hectares of what is known as the "Orchard of Valencia".

This scene, which has been re-enacted every Thursday at midday since the middle of the tenth century, when Abd-ar-Rahman III was the caliph of Cordoba, makes the "Tribunal de las Aguas de la Vega de Valencia" the oldest law court in Europe.

The eight magistrates, who are dressed in black and are accompanied by a bailiff bearing the tribunal's emblem, represent each of the "mother channels" which are used for irrigation and for distribution of the water from the Turia. The roughly 1,500 farmers from each of these channel systems elect their own magistrate, who is required to be someone who actually farms the land and is not simply a landowner. The task of these "people's judges" is to ensure that all the farmers of Valencia are supplied with the water they need through application of the provisions of a decree promulgated by King James I of Aragon in 1238, which is still in force and provides that "Everybody shall be entitled to a share of the water in proportion to the amount of land owned".

The most common complaints with which the Court has to deal are concerned with the squandering or theft of water at times of drought, the disruption of channels, damage to crops as a result of water overflowing onto adjoining land, and failure to comply with irrigation schedules and to keep the channels clean so that the water can flow along them freely.

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