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CHAPTER 5: ECONOMIC ASPECTS OF EUTROPHICATION

5.2. Allocation of Water Resources and Eutrophication

5.2.2. Water Scarcity and Institutional Constraints

The water economy of many countries is entering a mature phase characterised by inelastic supply of water and increased interdependencies among water uses and users (Table 5.1.). As the water economy matures, attention of participants in the policy process is gradually shifting from concern on the expansion and subsidy of water sector development to revenue generation, demand management, and reallocation.

In the past, new users could obtain water through appropriating water rights to which no previous claims had been established. At present, in countries of Latin America and the Caribbean, although overall supply is plentiful, in many areas with concentrated economic development, all surface water, and much of groundwater, is appropriated. New water supplies have been obtained through the construction of storage and conveyance facilities, projects usually undertaken with the help of substantial public subsidies. It is now widely recognized that this policy has led to investment projects whose real economic viability is doubtful, and to a wasteful use of water with negative effects on the environment.

Table 5.1. Characteristics of mature water resource systems.

Source: Randall, 1991, adapted by Lee and Jouralev, 1998

Moreover, in many areas, as the best and the least expensive water sources have been developed and attention increasingly turns to the more expensive and disadvantageous sources, the costs of new projects has begun to escalate. Successive increases in reservoir storage capacity produce diminishing returns in the safe yield. Consequently, as the options for increasing water supplies through the manipulation of surface flows diminishes and the subsequent increases in storage require larger and larger investments, the costs of new projects begin to rise dramatically. This has been occurring as public subsidies have been significantly curtailed. It has even disappeared in many countries as a result of limited public budgets, changing social priorities, lack of political support for traditional methods of financing water development, and growing concerns about the environmental costs of new projects.

On the other hand, due to population growth, urbanisation and economic development, per capita water availability is decreasing.

At the same time that demand for both instream and withdrawal uses of water expand with economic development and population growth, water pollution diminishes the available quantities of good water and increases the costs of treatment. It can be expected that there will be increasing demands to reallocate supplies among uses.

The driving force underlying the interest in the use of prices and markets, and on indirect regulatory instruments (i.e., economic instruments), is the perception that, apart of water being an economic good, there are substantial gains to be realized. These gains represent the opportunity cost of failing to modify existing water institutions in ways that will promote more economically efficient use of available water supplies. Moreover, there is an additional perception that other allocation mechanisms will not achieve the desired increases in efficiency in water use.

It should be highlighted that the institutional fragility of developing countries and the new emerging economies of the East is now under higher pressure from lower budget allocation and facing an increasing demand for environmental regulation. Experiences on the introduction of economic instruments in this context have been characterized as initiatives beyond institutional capacity that has resulted in weak governmental integration and social participation. The consequent lack of careful analysis and discussion of potential economic and social impacts arising from these proposals have not allowed consensus building, which could avoid legal and institutional barriers. Weak social participation, general public sector crisis and social inequities are very difficult barriers to overcome and to be framed into sound and enforceable policies. It is a task to be carried out with great deal of effort and persistence.

Information building and sharing is key issues to promote intra- and inter-governmental integration and social participation, which helps to remove legal and political barriers and merge institutional strengths. Leadership and expertise of environmental management systems have to be exercised without insulation. Market-reliance policies are a favouring factor to market-based initiatives. Therefore it has to be emphasised and captured in the design of any economic instrument programme.

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