Due to water scarcity and the deterioration of the water quality, as well as the higher demand of sanitation and health, people are now paying for the drinking water provided by water utilities. This makes water a good with economic value which is traded in the water market. In 1992 the Dublin Water Principles claimed “water as an economic good” for the first time in a UN setting. If water is an economic good, the water market should follow the general market principles. The market regulation, i.e. the interaction between demand side and supply side in the market decides the price of water and thus adjusts the allocation of the resources. However, in the real case, the water market is never a free market with perfect competition and the formation of water price is much more complicated.
Water Products and Services
In the water market, there are mainly two types of water products and services, namely water supply and sewage disposal. Water supply refers to the improved water provided by water utilities. The quality of the water is improved to meet certain standard. Therefore it is priced differently according to different purposes of use: human use such as drinking and washing or industrial use. The water supplied for human use is generally called drinking water, although in some countries or regions, the water supplied for drinking or cooking is separate from the water for washing and charged different prices. The following graphic shows the function system of water supply.
Water resources exist in nature, however, usually could not be directly used by household or organizations because the water resources and human population is geographically unevenly distributed. There is in most cases a long distance between households and water sources. Moreover, due to health considerations, most surface water could not be drunk directly without depuration and disinfection. Therefore water utilities are needed to improve the water quality to meet required standards and then delivered to consumers. Many different ways of water delivery, e.g. pipes, vendors, water trucks or water carriers, could be identified in different regions worldwide, among which water pipes is the most common one. Water supply service, namely water quality improvement and delivery, has costs, which makes water not free, but has a price.
The Costs of Water Supply
Water supply involves costs and the recovery of these costs is important for the provision of adequate services and the sustainability of water supply systems. User fees through tariffs constitute an important source of cost recovery, thus the pricing of water services is a key issue in the provision of drinking water. Other sources of government revenue are taxes, i.e. government subsidies, and transfers, i.e. official development assistance which does not play a role in OECD countries.
Full Cost of Water Supply
The full cost of drinking water supply includes four types of costs.
- Investment costs or capital expenditure includes all capital costs related to the purchase of land, the design and construction of the utility and infrastructures such as storage tanks, vehicles, pumping stations, distribution mains and pipes.
- Operation and maintenance costs are the recurrent costs incurred in the daily operations of the utility. These costs, together with the investment costs, are the largest and most tangible share of the full cost.
- Administrative costs typically include all charges and expenses incurred by a water supply utility through the servicing of capital such as interest on loans and the preparation of tenders and contracts, as well as expenses on litigations and compensations.
- Environmental costs refer to the negative externality caused in the water supply process, especially by over-abstraction and contamination of water sources.
Cost Recovery and Water Pricing
Since water supply has costs, water utilities must be able to pay for these expenses, at least operation and maintenance costs, in order to ensure the adequate functioning of the utility and to keep the production and distribution of drinking water. This requires the recovery of costs. Cost recovery in water supply and sanitation services means that the total revenue to the service provider equals (or exceeds) the cost of supply.
The most straightforward way of cost recovery is to charge from water consumers, directly by pricing. Pricing water is of critical importance because it ensures the sustainability of the water supply system, facilitates resource allocation optimization and environment protection.
Why are the water prices lower than the full cost of supply? An obvious reason is that it is hard to account the full cost because some parts of the full cost such as environmental costs are intangible. So water price normally reflects only operation and maintenance costs. Another more underlying reason is that, the water pricing system involves not only the economic factors, but also the complexities of social and political reasons. Water is both an economic good and a public good.
Water as a Public Good
It is an obvious fact that everybody needs safe drinking water and there is no substitute for water. As a result, water has been seen as a public good and a human right. The UN claimed that “The water supply for each person must be sufficient and continuous to cover personal and domestic uses, which comprise water for drinking, washing clothes, food preparation and personal and household hygiene.” The ideal situation is that any person in the planet, despite her/his social, economic, cultural situations, should have access to enough clean water, i.e. the equality to water use. This requires that the water should be also affordable for the poor. This goal is contrary to the pursuit of maximal profit of the market mechanism, and therefore the government should take the responsibility. Most governments play the role of either provider or regulator, or both. In this sense, there is no water market, rather, water is considered to be natural monopolies by the state.
Public Water Utilities
The public good nature of water could be understood by the fact that, from 19th century until now, drinking water has been supplied by public utilities in most countries. Although water supply providers can be public, private, mixed or cooperative, most urban water supply services around the world are provided by public entities in both developing and developed countries. They are owned by the state or local authorities, or also by collectives or cooperatives. In rural areas, where about half the world population lives, water services are often not provided by utilities, but by community-based organizations which usually cover one or sometimes several villages.
Policy and Regulation
Except for the public utilities which provide water services, there are other institutions which are important for water supply, namely responsible for water policy and regulation. Water supply policies and regulation are usually defined by one or several ministries, in consultation with the legislative branch. Policy and regulatory functions include the setting of tariff rules and the approval of tariff increases; setting, monitoring and enforcing norms for quality of service and environmental protection; benchmarking the performance of service providers; and reforms in the structure of institutions responsible for service provision. Water policy-makers and regulators, who are responsible for the setting of tariff rules and the approval of tariff increases, tend to prefer low water price to sustain the stability of a society and in some case their own political status.
The result of seeing water as a public good is a very low water price. On the one hand, the public utilities run without an aim for profit but are based on the ethos of providing a common good considered to be of public interest. On the other hand, cost recovery is critical to sustainable water service. Thus a well-designed water tariff is critical. Water tariffs serve to
- raise revenues to cover all or part of costs;
- ensure access across socioeconomic groups;
- send price signals to users about the relationship between water use and water scarcity;
- ensure fairness in water service delivery.
Due to different geographical, social and economic context, there are diverse water pricing system and thus different water tariffs across countries and regions. The dominant water tariffs are volumetric tariffs, in which water is metered. Volumetric tariffs include three major types of structures.
- With single volumetric tariffs, a single rate per cubic meter is applied regardless of volume consumed.
- Increasing block tariff (IBTs) are widely used in the developing world. The volumetric charge changes in steps with increasing volumes consumed (ibid.).
- With decreasing block tariffs (DBTs), the rate per unit of water is high for the initial (lower) block of consumption and decreases as the volume of consumption increases
- ↑ Rogers, P., Silvab, R. and Bhatiac, R. (2002). Water is an economic good: How to use prices to promote equity, efficiency, and sustainability. Water Policy 4 (2002) 1–17.
- ↑ WHO/UNICEF (2012). Estimates for the use of Improved Drinking-Water Sources: Cape Verde.Retrieved from http://www.wssinfo.org/fileadmin/user_upload/resources/CPV_wat.pdf on 01.02.2013.
- ↑ Folifac, F., and Gaskin, S.(2011). Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis. Journal of Ecology and the Natural Environment Vol. 3 (13), pp. 400-40.
- ↑ Winpenny, J. (2003). Financing Water For All. Report of the World Panel on Financing Water Infrastructure. Retrieved from http://www.worldwatercouncil.org/fileadmin/wwc/Library/Publications_and_reports/CamdessusSummary.pdf on 28.01.2013.
- ↑ Folifac, F., and Gaskin, S.(2011). Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis. Journal of Ecology and the Natural Environment Vol. 3(13), pp. 400-40.
- ↑ WSP (2011). Cost recovery in Urban Water Services: Selected Experiences in Indian Cities. Re-trieved from: http://www.wsp.org/sites/wsp.org/files/publications/WSP-Cost-Recovery-Urban-Water-Services.pdf on 01.02.2013.
- ↑ UN (2010): Factsheet on Goal 7: Ensure Environmental Sustainability. Retrieved from http://www.un.org/millenniumgoals/pdf/MDG_FS_7_EN.pdf on 28.01.2013.
- ↑ Jooste, F. S. (2008). Comparing Institutional Forms for Urban Water Supply. Collaboratory for Research on Global Projects. Working Paper #38
- ↑ IWA(2013). Water wiki, Retrieved from:http://www.iwawaterwiki.org/xwiki/bin/view/Articles/Institutionalresponsibilityandgovernance
- ↑ Banerjee, S., Foster, V., Ying, Y., Skilling, H. and Wodon, Q. (2010). Cost recovery, equity and efficiency in water tariffs. Evidence from water utilities. Policy Research Working Paper 5384, The World Bank, Washington, D.C.
Irmler, I., Li, L. (2012): Water Pricing in Cape Verde.
Water Prices in Arid Countries