Public Disclosure Authorized

wps o 1
PolicyResearch

WORKING PAPERS
WaterandSanitation

Infrastructureand UrbanDevelopment
Department
The WorldBank
March1992
WPS879
Public Disclosure Authorized

Comprehensive
Water Resources
Management
Public Disclosure Authorized

A Concept Paper

Peter Rogers
Public Disclosure Authorized

Issues that should be covered in the formulation of

comprehensivewater resourcesmanagementpolicies.

Policy Research Working Papers disseminate the findings of work in progress and encourapet he exchange of ideas among Bank staff and
al others interested in development issues. These papers carry the names of thc authors, renect only their views, and should be used and
cited accordingly. The findings, interpretations, and conclusions are the authors' osn. They should not be atiibuted to the World Bank,
its Board of Directors, its management, or any of its member countries.
 Policy Research

_~~~~ 11 I 9 e i-

Wterand Sanitation

WPS 879

This paper- joint 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 compe-
tition 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 devel-
oping 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 inad-
equate.
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. FundamentalConcepts for Water Management ........................... 2

2.1 Water is a Unitary Resource ................................... 2

2.2 Scarcity of Water .......................................... 2
2.3 Market Failure in the Economicsof Water .......................... 3
2.4 Valuation of Water ......................................... 4
3. Planning for Water Resources ...................................... 5

3.1 Current Planning Approaches .................................. 5

3.2 Where Does the Current Approach Break Down? ...................... 6
3.3 How the Problems Can Be Resolved .............................. 7
3.4 Distinguishingbetween Generic and Region-SpecificIssues ............... 8
4. Generic Issues of Concern for the World Bank ........................... 8
4.1 Broad SectorwideIssues ..................................... 9
4.1.1 InternationalConflictsover Water ......................... 9
4.1.2 Linking the Water Sector to the National Economy .............. 9
4.1.3 Water Sector Planning Methodologyand Data
Requirements.............................. ' 9
4.1.4 The Political Economy of Pricing ......................... 10
4.1.5 EnvironmentalImpacts of Water Development ................ 12
4.1.6 Social Impacts of Water Development ..................... 13
4.1.7 Conservationand Recyclingof Water ..................... 13
4.1.8 Host Country InstitutionalReforn ........................ 14
4.1.9 Role of the Bank in Education,Training, and
InformationExchange ............................... 14

4.2 Subsector Issues .......................................... 14

4.2.1 Irrigation ....................................... 14
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.
1.Introduction
Introduction ahydropowergenerationandforcoolingthermalgenerators.
major resource to electrical energy systemsboQi for
It is essentialto many transportationsystems.Inlandand
Theworldisenteringaperiodofintensecompetition estuarinefisheriesdepend upon adequate flows of high
o zer limited supplies of water for alternative uses in qualitywaterin the rivers.Rivers,lakes,and groundwater
agriculture,urban and industrialsupply,recreation,wild- are also extensivelyused for the disposalof treated or
life, human consumption,and maintenanceof environ- untreatedwastewater,that itselfhas servedto removeand
mentalquality.Manifestationsof thiscompetitionandour tansport chemicalor other wastes.Fresh water is used to
currentinabilityto deal with it can be observedin many stopthe penetrationofsalinityintosurfaceor groundwater
partsof the world.For example,a large irrigationproject sourcesofsupply.Increasinglywateraccessis becominga
in Indiadoes not operatebecausewater has beendiverted majorcomponentof both urbanandruralrecreativnfacili-
to the rapidlygrowingcityofPune.In Chinaindustriesare ties. In many places large investmentsare required to
reducing their production due to water shortages even minimizethe consequencesof naturallyoccurringfloods
thoughtheyare surroundedby paddyfields.In California and droughts.The maintenaaceof a locality's fauna and
seleniumsalts leached by irrigationare killing wildlife. flora is criticallydependentupon access to water.All of
BankirrigationprojectsinAlgeriaarenowcompetingwith these uses have either been funded, or are potentially
Bankurbanwater supplyprojectsforthe same water,and fundable,by Bankresources.
manyproposedirrigationprojectsandmost hydroproject
proposalsare on hold becauseof environmentalconcerns. The water sectoris also a substantialportionof the
Bank's unnuallending.For example,between 1984 and
Until recently the approachestaken to water plan- 1988,out of a total lendingof $83 billion, water project
ningandmanagementbyplannersinthedevelopingcoun- constituted$10.6billion,or 12.8%of the total. Irrigation
tries and by the analystsat the fundingagencieswere, by and drainageaccountedfor $4.6 billion,hydropowerfor
andlarge,appropriateandadequateto thetaskathand.The $2Abillion,andwatersupplyandwastewater$3.5billion.
increasedcompetitionforwaterhas, however,mademost Nodataare availableforfloodcontrol,watertransport,and
of the project-by-projectplanning methods inadequate. riverand estuarinefisheries.A sumequivalentto 55% of
New approaches are needed that will integrate water the total expendituresfor agriculturaland rural develop-
resourceuse among differentusers and across different ment was spenton waterprojects.In many countries(for
economicsectors.Realizingthatthe presentapproachesto exampleBrazil)water sector expendituresare as high as
dealingwiththeseenormouslycomplex anddifficultissues 30%of totalpublic expenditures.
are no longersufficient,the Bank has initiateda Compre-
hensive Water ResourcesManagementPolicy Studyto Water is dealt with independentlyin each of the
investigatehow best to resolve them. This paper is an Bank's regional bureausand in its central departnents.
attempttooutlinethe issueswhichshouldbeincludedinthe Thissituationhassometimesledto inconsistenciesinBank
Bank's PolicyPaper. policy between counMiesor betweenwater uses. Under
conditionsof watersuiplusessuch inconsistenciesare not
1.1The Water Sector at the World Bank necessarilybad, giventhe wide diversityof the countries
andrangeofusesfor water.Indeed,this is whatthe Bank's
The World Bank helps to fund water projects that ownOperationsEvaluationDepartmenthas found on the
havebroadimpactsthroughoutthe economiesof develop- manyprojectsforwhichit has cartiedoutpost-completion
ing countries.Water is used for domesticand industrial audits(morethan 140irrigationprojectsby 1989).Irriga-
purposes.It is used extensivelyfor irrigatingcrops,and is tionprojects,forexample,perfonnedquitewellin the and

I
regions in Europe, the Middle East and North Africa currentlyof widespreadconcernwithin the Bank and are
(EMENA)and LatinAmerica,but less well in the humid likely to be of greatimporlanceinto the next century.
tropics of South Asia, and quite poorly in sub-Sahar
Africa Hlowever,the current competitionfor water in
regions such as EMENAis becomingso severethat the 2 Fundainental Concepts
historicalperformancemay not be expectedto continue * ep
into the futurewithout seriousimprovementof pre-plan- for Water M anagement
ning, and the Africanprojectsneed specialcare to ensure g
adequatefutureperformance.
There are a few fundamentatconceptsthat underlie
1.2 The Concept Paper the theoryand practiceof water management.

Underconditionsofwater scarcityandwith increas- 2.1 Water is a Unitary Resource

ingscrutinyfromenvironmentalinterestgroupsoutsidethe
Bankand fromthe Bank's owninternalauditors,the Bank Rain, surfacewaterinrivers andlakes,groundwater,
staff has realized the increasing costs of the lack of a and pollutedfreshwaterare all part of the same resource
comprehensiveview of the water sector ard is looking base. They are all oneand the same resource,althoughin
forwardtoaBank-widepolicywithrespecttoactionsinthis differentmanifestations,occurringin differentpartsof the
sector. hydrologiccycle.Unusedsurfacewater can rechargethe
groundwaterand, conversely,overpumpedgroundwater
This Concept Paper is an attempt by an outside can reducethe flowsin the surfacestreams.Contaminated
observerto take a synopticview of the waterproblemsin watercanbepurifiedbyconstructingwastewatertreatinent
abroadperspectiveencompassingwaterinallits important processesorit canbe recoveredbythe naturalassimilative
uses,andto indicateareas thatshouldbe emphasizedinthe capacityofthe surfaceandgroundwaterecosystems.Thus,
Bank's Policy Paper. This paper has tried to achieve a the entirehydrologicbalancemustbe considered,notjust
balancebetweiendiscussingbroad conceptualissues and partsofit.Actionstakeninonepartofthesystemoftenhave
specificsectoral issues.Water resourcesis a very broad significantimpactsupon other parts of the system;these
subject,hence it is not possible,nor advisable,to attempt linkages must be taken into account when alzessingthe
to covereverythingwithinsucha shortpaper.Thegoalhas costs andbenefitsof specificactions.
beento providediscussionon the most importantissuesso
that their inclusionin the PolicyPaper can be justified.It Becausewater is a unitaryresourcethere are often
is the author'sopinionthatthereare a few simpleconcepts conflictsamongusers.The most commonexampleis the
and methodologicalapproachesthat could, if understood conffictbetweensurface andgroundwaterusersin irrigated
and adopted,significantlyinfluencethe successfuldevel- agriculture.Improvementof the efficiencyof application
opmentof waterresourcesaroundthe world.Thisattempt of the surfacewaterresultsin an immediatedeclinein the
at simplificationshouldbe takenin the spirit of Occam's availabilityof groundwater.Allocationdecisionsare also
Razor exhaustthe simplestexplanationsbeforerequiring frequentlyambiguous.For instance,water is often allo-
more complexones. catedto irrigationprojectsat low cost to the users when
nearbyurban areas are sufferingserious water shortages
Issuesthatare not discussedat lengthin thisConcept and are willingto payhigh pricesfor water. As a resultof
Paperare the legal issuesof waterrights,developmentof these types of problems water use in all countries is
water markets,privatizationof facilities,developrmentof proscribedbylegalandinstitutionalcomplexities.Whileit
newtechnology,anddetailedsector-by-sectorhighlih, is evidentthatmanyoftheseinstitutionalcomplexitiescan
of problemsand possibilities.lo do justiceto all of '. e hindereconomicallyefficientuse of water,these controls
issuesabook-lengthtreatmentwouldbe required.SL, _ it firstaroseinthe firstplacebecauseofthe genuineproblems
is the author's contentionthat the major problemswith that waterraisesforanypolitico-economicsystem.As the
successfuldevelopmentofwaterresourceslie intherefine- costsof ignoringtheunitarynatureofthe resourceriseone
mentofeconomicanalysis,theotherissuesare notamajor would expect to see the gradual easing of institutional
focusof thispaper. Part 2 of the ConceptPaperdiscusses constraint.on developmentin the directionof more ratio-
some ofthe fundamentalconceptsunderlyingwaterman- nal integrateduse of the resource.
agement,and Part3 addressesthe economicissuesstem-
ming from the fundamentalconceptsthat causeproblems 2.2 Scarcity of Water
in pursuingBankwater policy.The emphasisthroughout
Part4ofthePaperisapracticaldiscussionofissuesthatare The discussionabout scarcityis usuallyintimately
 boundupwiththe conceptsof wateras arenewableornon- tion in agriculturaluse, changesin populationpolicy,and
renewabloresource.Ifit isrenewable,howcanweeverrun thereclaimingofadditiona brackishwater.Hasvaterbeen
out of water? Certainlyin many arid or semi-aridzones, a significantlimit on economicgrowth in any of these
people are currentlyexperiencingshortagesof water.Part countries?Howwil each c-.-"try addressthe futureofthis
of this problemhas to do with the fact that under earlier resource? Has water bee. , Aced out of the reach of
histcric conditionswe wereable to sustainthe populations significantportiansof the populations?Whataccountsfor
of citiesandregions,evenunder relativelyaridconditions. the fact that in many other countrieswith much larger per
However,with the growthof populationand incomethe capitaquantitiesofavailablewatertheperc&pitawateruse
demandsfor water seem to be overwhelmingour techno- is lower?On closerinspectionthe "water barrier" of 500
logicalcapat!litytosupplyit.Undertheseconditionswater cubicmeterspercapitaperyeardoesnotappeartobe areal
scarcitiesandconflictsoverwaterusebegintoappear.The barrierin the Malthus-Ricardosense.The idea that we are
costof supplyingaddEionalwater to water-shortareas is runningout of water (Postel, 1990and others) cannotbe
alsoincreasing.Asaresultitbecom,esincreasinglydifficulttrue globally,and even in specific water-shortcountries
to supplythe sameamountsofwaterto usersat the oldlow there is little doubt that water will alwaysbe availableat
prices.The Malthus-Ricazdotheory of resourcescarcity some reasonableprice, providedthose countries follow
seems to be working exactly as predicted: scarcity of sensiblewaterpolicies.The definitionof scarcityin non-
resourceslimitseconomicgrowth,andultimatelybringsit economicterms is a distractionthat can lead to major
to a halt. It is no surprisethat thistheoryearnedeconomics misaltocationsof he waterresource.The rapid disappear-
the sobriquetof "the dismal science." anceofthe "oil crisis"oncelimitedmarketresponseswere
albwed to take place shouldbe borne in mind by water
Modem economistsdefine water ccarcity slightly planners.
differently,whichallowsforawayoutofthis dilemma:the
needforwaterhastobeexpressedasaquantityandaprice. 23 Market Failure in the Econ,omicsof Water
This is caUedthe "economicdemand" forwaterandboth
quantityand price must be specified.In the currenteco- Themostusefuieconomicliteratureonwaterisbuilt
nomicmodelsresourcesdo not "run out." As the quantity on neo-classicaleconomics.Much of it explains which
uemandedincreasesnew sources will be tapped, at the assumptionsand theoreticalconsructs deal best with as-
sameor highercosts,and/orthe pricewill rise, restraining pectsof"market failure,"that is,whenthe classicalmodel
what eachuser will desireto purchase.This is essentially does not strictly apply. Eckstein (1958) mentions the
a selflimitingprocess.Clearly,if a resourcebase is fixed followingsources of market failure inherent in water
andthe consumingpcpulationincreases,somethinghas to resourcesas the most important:
give. This will be either the price or the quantity of the
resourceused.However,eventhissystemnwoutdultimately 1. Increasingreturns-to-scaleontheproductionsideare
be forcedto ahat by populationor economicgrowth.The prevalent in water projects. For exarnpl2, inland
magicalingredient that enables the economicsystem to waterways and municipal water and wastewater
continueto growis the existence,at somereasonablecost, servicesare naturalmonopoliesbecauseof the large
of substitutesfor the scarce resource.Althoughthereis no economiesof scalein theprovisionof the infrastruc-
substitutefor water in sustaininghumanand animallife, ture.Manywater-relatedinvestmentstendtobevery
thereisanalmostinfinitesupplyofseawater,whichcanbe largeinorderto take advantageof these economies
convertedat a costof energyinto freshwater,thenenergy, of scale.
or the capital to accessthe energy,becornesthe limiting
resource.Similarlypoliticalboundaries,managementskills, 2. Externalitiesduetophysicalinterdependenceamong
or humanlabor couldlimit the availabilityof water. production processesare inherent in many water
activities.The extemalitiesof both water quantity
Part of the problemof dealingrationaly with water andwaterqualityareexperiencedinthe spatialsense
scarcity is the differentperceptionsthat various groups betweenupstreamand downstreamusers, and in a
haveabouthowcloseweare toreachingtheresourcelimits. temporalsensebetween differentseasonalreleases
For examPple, in a study for the Bank, Falkenburget al. of storedwater,commonpool effectson groundwa-
(1990)claimedthat some countries(Israel,Jordan,Saudi ter, andthe exportof pollution.
Arabia,Syria,andYemen)were verycloseto beingunable
to supply their populationswith the minimum needed 3. The classicalmodel assumesthat the incomedistri-
amountof water (500 cubicmeters per capitaper year). bution in a given setting is optimal. However,in
However,otherslookingatthesamedataseemanypossible developmentwork it is rarely accepted that the
adjustmentmechanisms,whichincluderecycling,reduc- incomedistributioninaparticularcountryisthe best
 one, andmany waterprojectsare specificallyaimed
at changinga mal-distributionof income.
4. When not all producers are small relative to the
market,the marginalityconditionsforthe existence
of economicallyefficient solutions are violated.
Whengovermnentis involvedit is often as the only
producerinthemarket.Inthis casethewatersupplied
will make large changesin the localprice of water,
thus undermining the assumption of marginality
inherentin benefitmeasurements.
5. Theresourcesart not necessarilymobile.Typically,
capital resources are relatively mobile but labor
resourcesare not.Pocketsof povertyandunemploy-
mertexistandmanywaterprojectsliketheTennes-
seeValleyProject,TVA)wereoriginallydesigned to
addressthis lack of resource mobility.In addition
restricted water rights often impede the ease of
transferof water from one use to another.
The literaturesince Ecksteinshowshow each of
these market failurescan be compensatedforin water
resourcesplanning.It is now the general opinionthat
carefulapplicationof neo-classicalprinciplescan deal
with the market failuresmost likely to arise in water
investmentanalysis.For example,increasingreturns-
to-scaleandmonopolypricingcanbedealtwithbysome
formofRamseypricing.Externalitiescanbe dealt with
by expandingthe definitionofthe systemto "intemal-
izethe externalities."Thelack ofmocilityofresources
canbeaccountedforbysuitableshadowpricing,andthe
income nialdistributioncan be dealt with by adding
constraintson the distributionof benefits.The adjust-
ments themselve-slead to some loss in the overall
"economicefficiency" impliedby the classicalmodel,
butthe lossisbelievedto be smallrelativeto the broader
improvementof solutions.Brown and Sibley (1986)
discussvarioustechniquesof improvingutilitypricing
whichcomecloseto the economicallyefficientsolution
and which,at the same time, are closerto the practical
methodsuseableby utilities.
2A Valuation of Water
Allocationof water among the myriad conflicting
usespresentsamajortasktogovernments,alofwhichtake
responsibilityin some degree for regulating access to
water. It is difficult to assign unambiguouseconomic
values to many uses, and hence these may be implicitly
overvalued,undervalued or completely ignored in the
decision-makingprocess.Rogers (1986)gives many ex-
amplesofthe prote'ms thatarisefromundervaluingwater.
Many of the problemsof valuing water stem from the to an outsideparty,for instance,the WorldBank,thenthat
marketfailuresmentionedabove. In particular,the exist- party mightask howsocietywould best benefit fromthe
4
ence of externalitiesandthe lack of mobilityof resources
makefindingthe marketpricequitedifficult.Inaperfectly
functioningeconomyenvisagedby the classicaleconomic
model "price equalsvalue," and the costof providinga
good,after allowing for paymentsto all of its factorsof
production,willpreciselyequalits marketprice.Asaresult
ofthis elegantsolutiononeonly has to establish"cost" to
establish"value."
Unfortunately,maaywaterresourcesplaners forget
that simplyequatingcostwith value only holdstrue in a
perfectlyfunctioningmarket economy.In all other cases
(thatis almostall cases)caremust be takennot to coniuse
costwith value.What then is the "value" of water? The
answerappearsto dependupon"towhom" andfor"which
use." Drinkingwater is obviouslyvaluableand becomes
increasinglyso as the amountavailabledecreases.A glass
of water couldbe infinitelyvaluableto a persondyingof
thirst in the desertbutnot very valuableto a womanliving
aloneonthe banksofapristine river.In the secondcasethe
womanwouldonlybe willingto paythe costof somebody
goingto the riverandfetchingthe water forher. Shewould
be unwillingto pay morebecauseshe could go and takeit
herself.Sothe valuein thiscaseis the costofobtainingthe
water.Now,iftherewasa farmerirrigatingland alongside
the river, how muchwould tho water be worth to him? If
there is enoughwater in the river so that the woman can
haveas muchas she can drinkjust at the costof obtaining
the waterfromthe river,thenobviouslythefarmercantake
as much as he wants at the cost of obtainingthe water.
Clearly,the farmerwouldalso valuethe water at the cost
of obtaning it. So far, so good; cost equalsvalue.
However,suchbucolicsettingsno longerexistin the
modem world. Typically there are many users of the
resourceapartfromthe housewifeand the farmer.At some
pointintimetheusebyonepersonwillstarttointerferewith
theusebyanother.Atthatpointthewateri-saidtohavean
"opportunitycost." Sincethe continuedabstractionbyone
userreducestheamountavailableto anotherthereis a loss
of the opportunityto use the water by one user. This lost
opportunitycoststhe affecteduser the amounthe values
theseunitsofwater. At thispoint the "value" of the water
should reflect the willingness-to-payof the user who is
losingwater.If forsomeinstitutionalreasonthe housewife
has to cut her consmnptionof drinkingwater, then the
opportunitycostto societyofthis allocationofwater away
fromher is her willingness-to-pay for water.If the alloca-
tion of the watershortagewere tle other way around,the
relevantopportunitycost would be the farmer's willing-
ness-to-payforirrigationwater.
If the questionof howto allocatethe waterwere left
allocation.One way of answeringthisquestionis to apply 3.1 Current Planning Approaches
the logic of social choice theory embodied in modem
economics,which allocatesthe water to the use with the Waterresourcesplaninghasreceivedalargeamount
highestvalue. of attention from economistsand planningp ofessionals
formanydecades.BasedontheFloodControlActof 1936,
Establishingthe willingness-to-pay for variouscon- federalagenciesin the United States,for example,were
sumersof wateris a fairlywelldevelopedfieldin econom- chargedwithdevisingeconomiccditeriatoensurethat only
ics and can be easily adapted in many water conflict waterprojectsforwhichthe "benefitsexceededthe costs"
dituationsto establish estinmates
of the opportunitycostof would be implementedby the federal government.This
water.Unfortunately,manyeconomicstudiesof wateruse policyledtomajorresearchthatculminatedinthe 1960sin
ignore the opportunitycostof water and only reflect the fundamentalworks by Eckstein(1958)and Maass et al.
actual costs of obtaining the water i'selK.As mentioned (1962) at HarvardUniversity,Hirshieifer,Millimanand
above,iftherewerewell-establishediiarketsforwaterthen DeHaven(1960)at theUniversityof Chicago;and Kneese
the marketpricewoulditselfreflecttL-eopportnity costof andBower(1968)at Resourcesforthe Futurein Washing-
water. However, in most countriessuch markets do not ton,D.C.Thefinishingtoucheswithregardtodealingwith
exist and one is left to estimate the opporunity cost in environmentalquality were in place by the end of the
indirectways. 1970s,with worksby Dorfmanand Dorfman(1972)and
BaumolandOats (1979).In additionto these booksthere
Theopportunitycostofwaterisonlyzerowhenthere are literallyhundredsof other excellenttexts explaining
isnoshortageofwater.Inevaluatingwaterinvestmentsthe many of the practicalaspectsof the detailedanalysis of
valueof watertoauseristhe costofobtainingthewatR.rplusbenefits,costs,andtechnologychoiceforeachpossibleuse
the opportunitycost. Igaoringthe opportunitycostpart of of water.Whilethiswastakingplaceinthewaterresources
valuewil undervaluewater,leadto failuresto invest,and field,the bank, UNDP,andmany other fundingagencies
causeseriousmisaflocationsofthe resourcebetweenusers. weredevelopingreliablemethodsfor economicappraisal
Theopportunitycostconceptalsoappliesto issuesofwater of investmentdecisionsin general.Outstandingexamples
and eavironmentalquality. of this literatureare Little andMirrlees(1974)and Squire
andvanderTak(1975),sponsoredbytheWorldBank,and
Das Gupta, Marglin, and Sen (1972) and the Guide to
3. Planning for
svs Water
w s s^sss^ss v v wswt
PracticlProjectAppraisal(1978),sponsoredbytheUnited
NationsIndubtral DevelopmentOrganizationP[NIDO).
Resources These works are the basis for the current evaluationof
investmentsin the water sector.

Themanagementimperativesofwaterareembedded The literatureprovidessoundmethodsforplannig

in its nature as a scarce resourcethat is often treatedas a water resourcesat a river basin level and at the level of
publicgood.Externaleffectsoccasionedbywaterusealso individualprojects. However,sincemostofthemethodolo-
invoke importanteconomicimperatives.Propertyrights giesweredevelopedinwestemindustrializednations,they
and extemalitiesraise politicaland financialimperatives pay little artentionto planning for water resources in a
whichinfluencethe choiceofwaystopricewatertopayfor macro or intersectoralway.
the public supply of it. To appreciatefully water policy
options and how they are evaluated,it is necessaryto State-of-the-arteconomicprojectanalyses are car-
understandhoweconomicsisusedandmisusedinthewater ried outroutinelyby the Bankstaff.For example,benefit-
area. Even though politics ultimately controls water re- costanalysisiscarriedoutonirrigationassessmentsandthe
sourceplanning,the discussionis usuallyframedin eco- projectis recommendedonly whena suitableintemalrate
nomicterms, andthe abilityto understandandmanipulate ofretum(IRR),oranotherindexsuchasabenefit-costratio
the economicanalysismaysignificantlyimprovethe final is achieved.Recentlythe choiceshave also been condi-
outcome.Hence, a significantpart of this ConceptPaper tioneduponnotcausing"toomuch" socialorenvironmen-
exploresthepossibilityofimprovingtheeconomicaspects tal harn. For projects such as urban water supply or
ofplanning.Theattentiondevotedtoeconomicsshouldnot sewerage,wherebenefit calculationis very difficult,the
be taken to mean that the institutionaland technological marginalcostsofprovidingthe servicesare computedand
dimensionsareunimportant,butthat inthejudgmentofthe comparedtootherwaysofprovidingthe sameservices.For
authorthe pay-offs fromimprovingthe economicdimen- both of these types of project analysis, care is taken to
sions are currentlylarger than those from other areas of correctlyshadow-pricethe inputsandoutputs.However,in
concem. order to decide whether to spend money on inigation

5
 insteadofon floodcontrol,oronotherinvestmentsoutside sectors,such as energy,have well developedmethodolo-
the water sector,the rules forprojectanalysisnotedabove giestozelate sectoralandmacroplans. Mostofthese were
need tobe bolsteredby additionalassumptionsandtheory. developedin responseto the oil crisisofthe early 1970s.It
Inthe theory,pricingofthe resourceiscriticaltothecorrect is now possible for energy planners to show the
appraisalof the project and the correct implementation. macroeconomicconsequencesoofregulationof, andinvest-
Pricinghas a threefoldrole in waterpolicy.First,the price ments in, variousenergysources,and, in the other direc-
can be set to recover the cost of the investmentfrom the tion,to estimatethe consequencesofshifts inmacropolicy
beneficiaries.Second, increasingprices tends to raPton ondemandsandsuppliesforenergybyvarioussectors.This
water by cutting uneconomicalconsumption.Price in- has not beendone in the water sector.
creasescut thedemandforwaterbymovingup thedemand
curve, whichis the etTectmost decisionmakerslook for The role of water investme ts as infrastructureser-
when pricing policy is advocated. The third aspect of vices which serve as both intem.sdiate goods and final
pricing,andthe onemost fiequentlyoverlooked,is that of goods is alsooften overlookedin water planning.So for
increasingthesupply.Whentheprice ishigher,suppliesof instance, Ingram (1989) expresses concern that water
water frommore expensivesourcesbecomeavailable. infrastructuremay suffer under-investmentas a result
of the Bank's structuraladjustmentprogramsfor various
Price is also ma integral part of the definitionof countries.
"scarcity." The issues of pricing and costrecoveryare a
fundamentalpart of any approachto dealwith the n.odern A fundamentalpieceof informationmissingin most
realitiesof water planning.The fact that pricinghas not water plans is the opportunitycost of water. Addingthe
been rigorouslyapplied in the past, and that the cuirent upporunity costofwater to itsmarginalcostofsupplyand
pricesofwater are still generallyquitelow, is an indication comparingthiswithitscurrentpriceindicateshowefficient
that scarcityis a relathvelynew phenomenon.It alsogives currentwater use is and howefficientit couldbe. In order
confidencethat,at leastforthenextdecade,moderateprice to estimatethesenumbersit is necessarytohavesomeform
increaseswillsolvethewaterscarcityproblem.Pricingand ofintersectoralcomnparison of valueorwillingness-to-pay,
costrecoveryare an integralpart ofthe resolutionto many hence the need for a strongpolicydirectivein the Bank's
of the water issuesdiscussedbelow. PolicyPapertoestablishmethodsto evaluatewaterinvest-
mentsin an intersectoralcontext.
3.2 Where Does the Current Approach BreakDown?
2)Incorporatingsocialandenvironmentalconcerns
The Bank's OperationsEvaluationDepartmenthas directlyintoplanning.Socialand environmentalimpacts
shownthat cufrentplanningapproachesworkedfairlywell of Bank projectsare increasinglya sourceof contention
whenthe competitionforwater was less acute. The same between the Bank and environmentalinterest groupsin
methodsshouldalsowork underthe new conditions.That developedcountries.It wouldbe possibleforthe Bank to
theyare not workingis causedby a lack of attentionto the undertake economicanalyses of the environmentalim-
correctimplementationofthe methods.Forexample,even pacts of waterprojectsmorediligentlythanhas beendone
ifcorrectpricesarecomputedintheappraisals, theyarenot in the past There is no doubtthat this is a difficulttask;
used by the borrowinggovernmentsin implementingthe ne-rtheless, thereisnowalarge literaturedealingwiththe
projectsonce funded.This fact leadsto overconsumption economicimpactsas lowerboundson the total impactsof
of waterby someusers and artificialshortagesfor others. a project.
There are two major areas where the current approach
seemsto be in trouble: A society that allowswaste dischargersto neglect
off-sitecostsof wastedisposalwill not only devoteb
1)Establishingand usingthe conceptofopporunity too fewresourcesto the treatmentof wastesbut will
cost of waterin different sectorsof water use. Since the alsoproducetoo muchwasteinview ofthe damages
methodsfor evwluationare appliedmainly to project-by- it causes.(Kneeseand Bower 1968).
projectappraisal,considerationof the intersector-A nature
of water use is neglected.Therefore,perfectlywell ana- Asuseincreases,thepublicgoodsnatureofwaterand
lyzedBanklirrigationprojects inAlgeria,forexample,find the pervasivenessof extermalitiesin water use lead inevi-
themselvesindirect conflictforthe samewaterwithother, tablytoanincreaseofpollution.Inthelate 1960sand 1970s
equallywell preparedBankprojectsfor urbanwatersup- the pubic perceptionin the developedcountrieswas that
ply. In such cases the relativemarginalbenefitsof addi- the environmentwas being "over-polluted." The exter-
donal investmentsin water must be carefullycompared nalitiesimplied in water poUlutionwere first extensively
with those of other sectoral investments.Otherresource discussedby theResourcesfortheFuturegroupinthe early

6
 1960s.The above-citedbookbyKneeseandBower(1968) ri ..; weendifferentusesof water.Forexample,in
is still a leadingtext on the economicsof waterqtaiity. the EMENAregion the opportunitycost of water in Ihr
municipal secte.is at leasttwo to threetimesas high as the
Theconcernofeconomistsanalyzingwaterpollution marginal val'e of irrigated agriculturalproCactionper
is with "market failure." In particularthe issut of howto cubicmeterof water for all cropsexceptsomevegetables
intemalizethe e..emalities has receivedmostofthe atten- (tomatoesand cucumber).However,when the inigation
tion. At the most obviouslevel it would seem that if the projectsare evaluatedby themselves,without consider-
effluentcould be correctlypiced, then industryandother ationof theopportunitycostof waterin othersectors,they
polluterscouldbe taxedby just this amountand problem appearto haveacceptableInternalRatesof Retum (IRR).
woulddisappear- the correctamountof pollutionwould
be obtained,andif thiswere cons'deredtoo large thenthe Similarly,the externalitiesdue to envi.inmertal
effluentpricecouldberaiseduntilasatisfactorylowerlevel damagesare not integratedinto the appraisalof projects.
of pollutionwas achieved. The economicprinciplesdre clear, but little attentionhas
been devotedin the pas to evaluatingthe damages and
Coase (1960) showed that externalitiesby them- thereforethey tend to be overlookedin the analysis.
selves do not lead to economicallyinefficientsolutions
providedthat the pollutersand the peoplebeing affected 2) The theoryneedsrefining.
can freely and inexpensivelynegotiatewith each other.
Coase claimed that the responsibilityfor damages is a No theoryis perfect,and so it is with the theoretical
reciprocalone,with the affectedpartytakingstepsto avoid approachesto waterresourcesmanagement.The relevant
them as much as the perpetrator takes steps to avoid questionis howthe imperfectionsinthe theoreticalunder-
producingthem. Economic efficiencyis achievedwhen pinningsleadto unacceptableoutcomesfromthe point of
extemal damages are borne by the party that can most view of the Bank, other funding agenc,es, and govern-
cheaplyrepair them. ments.Thereare severalassumptionsaboutthe theorythat
cause difficulty in water plannirg, but there are also
Hufschmidtand Dixon (1986)have extendedenvi- approachesto softeningor eliminatingthese market fail-
ronmentaleconomicsto the issues faced in developing ures from the conceptualmodel. Threeareas standout as
countries,particularlywith respectto water projects.Pa- causingmore trouble than others and, hence, may need
pers by Devousagesand Smith (1983)and by Fisher and morerefinementof the theory.
Raucher(1984) show how contingentvaluationmethods
canbeused to evaluatethe benefits(and damages) associ- A. The difficulties associated with making
ated with a wide range of environmentalimpactsthat macroeconomic allocationsbetweeninvestmnents in water
hithertohad been thought to be non-measurable.In the resourcesandothereconomicsectors.The pervasiveness
PolicyPaperthe Bank shouldpursuethisline of thinking ofwaterusethroughouttheeconomymaypartiallyexplain
andlayouttheappropriatetmethodologiesforassessingthethe first problem, but other sectors, including energy,
economicdimensionsas wellas thenon-economicdimen- radiate similar pervasive connectinns throughout the
sions of environmentaldeterioration. economyand society.Waterplannin, zmas beenan integral
part of governmentalplanningformuch longerthanother
3.3 How the Froblems Can Be Resolved resourcesectors.Hence,largeandpowerfulinterestgroups
are fully cognizantof their stakes in planning. In most
There are two possible,and notmutuallyexclusive, countriesit is not of particular concern that the water
explanationsof why problemsarise in the way water planningand investnentsbe balancedwith other sectoral
resourcesare planned,appraised,and implemented. activities;indeed,theideaofsuchbalancingisthreatening
to groupswith a vestedinterestin water investmentsand
1)The acceptedeconomicprinciplesare adequate management.The developmentofreliableplanningmeth-
but the applicationis inadequate. odologyto relate water sectorplans to the overall macro
developmentofa countryis a genericproblemthat should
The appraisalapproachesused at the Bank and at guideinvestmentsand other Bankwater activities.
other fundingagenciesare based upon the generallyac-
ceptedprinciplesoutlinedvoluminouslyin the literature B. Dealingwithexternalitiesdirectlyin the analysis
referred to above. The applicationof the principles is (internaizingtheexternatides).Dealingwith externalities
flawedbecause,when faced with economicscarcity,the directlyinthe appraisalmethodologyisanotherimportant
water itselfmust be priced at its opporunity cost. This is requirement.The theoryand methodsfordoing this have
typicallynot done and leads to seriousmisallocationof been developedand many environmentalconsequences

7
can be adequatelytreatedwidin the existingbenefit-cost Economictheory provides "second best" pricing
methodology.Thesemethodshaveonlyreceivedsporadic algorithmsforsuchcircumitaces. However,accordingto
applicationinactualprojectevaluation.
FisherandRaucher Hankeand Davis (1973)eventhese lead to problemsfor
(1984)reportonseveralsuchstudiesbutadditionalworkis utility managers.Tha:eforethey suggestedthe need to
needed to develop this methodology for the types of develop "third best" pricing methods,which would be
projectssupportedby the Bank. more responsiveto the political dh'.ensions of water
resourcepricing.In a studyof waterconservationin Perth,
C. Thepoliticaleconomyof tariffsemng in thewater Australia,HLanke (1982)outlineshowtoesti;nateeconond-
sector.Thepoliticaleconomyoftariffsetting is extremely callyefficientchoicesconsideringthe resourcecoa to the
importantandhas to alargeextentbeenneglectedbywater utility, the resourcecostto the consumers,and the useful
experts.This is particularlytruein the casesoftenencoun- consumptionforegoneas a resultof a particular .onserva-
teredwhenthereare economiesofscaleassociatedwiththe tion policy. Interestingly,whenhe comparedtwo pricing
investments.The canon of price theory is marginalcost policies(marginalcostpricing,andseasonalmargiMalcost
pricing.Tnotherwords,setthe priceat that pointwherethe pricing) with three non-pricepolicies (leakage control,
demand and the supply curves intersect.Unfortunately, metering,and mandatedwater restrictions)he ioundthat
establishing the r.arginal price for many water uses is the most economicallyefficientwas leakage control,fol-
difficultbecauseof the characteristicsof water that make lowedbymeteringandannualmarginalcostpricing.AUlof
itssupplya naturalmonopoly.Theexistenceofeconomies the otherpolicieshadnegativebenefits.This is an eloquent
of scaleensuresthat thosewhofirstenteredthe market .vill reminderthat rationingby pricingis not alwaysthe most
always be able to underpriceand drive out any potential efficient approach.In order to find out, however, it is
newcomers.They can decideon their desiredprof.. Level inperative to carry out analysisat the level of economic
and set the prices accordingly.This fact has been recog- sophisticationappliedby Hanke.
nized for a long time in the area of municipalwater and
wastewatertreatment and the suppliershave been regu- 3A Distinguishingbetween Generic and
lated,typicallybypublicutilitycommissions. Meier(1983) Region-SpecificTsues
showed that there are at least five different ways of
measuring marginal cost under these conditions,earh TheBankhas operationsin 152countries,aggregat-
resulting in a differentestimate of the marginalcost. hi
ingthemintofourmajarregions.To formulateBankpolicy
practice good estimatescan be obtainedfor most water withrespectto water it is essentialto distinguishbetween
investmentprojectswitheitherofthe approachescurrently issues that are generic to the managementof water as a
used in Bank appraisals:longrun marginalcost(LRMC), resource,andothersthatare specificto individualregions.
and averageincrementalcosts(AIC). Forexample,the difficultyofmaking"correct" allocation
decisionsbetweendifferentusesorusersis generictowater
Unfortunatelymost regulatory commissionshave aroundtFaglobe,but the relativeimportanceof irigation
tendedto takea "backwards"accountingstanceandallow variesby climaticzoneandwateravailability.Thegeneric
pricing based only upon average costs and the revenue issues are the ones for which the Bank needs to evolve
needs to meet them: institution-wide policy,the remainingissuescan be left to
the regionaldepartments.
Traditionalrate-settingmethods,employedby state
regulatorycommissionsas wellas localgovemnment Fourteen generic issues are briefly describedand
agencies, appear to have produced a situationof discussedbelow;nineas broadsector-wideissues(section
rapidly deterioratingwater systems,both rural and 4.1), and five as sub-sectorissues.
urban, characterizedby aging capital facilitiesand
under-maintainedwater systems.(Mann,1981)

Thisstanceisnotappropriate
insituationswhere
the
utilities are facing increasingmarginalcosts (all the be
projectshavebeen builtand now it becomesincreasingly
difficult to supply the same amounts of water at the
histo il costs). Under these conditionsa "forward"
lookingaccountingstanceis appropriate.Ifthispolicywere
pursued,the emphasisonrevenuerequirementsof utilities
would be replacedby establishingadequate -;re invest-
met fimds.
4. Generic Issues of
COnern fortheWorldBank
nc o e
In the waterplanningcommunitythere are several
connectionsof "water and. . ." whichare takenby many
as paramountrelationshipsthat brcok no questioning.As
arguedbelow,theBank'sComprehensiveWaterResources
ManagemedtPolicyPapershouldtakea closelook at such
sanctifiedlinkages as water ane health, water and food, this. Hurst and Rogersbuilt an economy-widemodel for
water andequity,water scarcity,irrigationefficiency,and Bangladeshwhichincorporazedadetailedwatprsectorand
so forth,leavingno assumptionunexamined. i. nmacro economiclikages. Whenthemodelwasrun, the
optimalsolutiovwas radicallydifferentfrom the optimal
4.1 Broad Sectorwide Issues solutionprediLtedwhen the componentswere run sepa-
rately.In the overallmodel therewas a strongbiasagainst
4.).) InternationalCoiflicts over Water producingan exportcrop because:

Worldwidethere are hundredsof rivers sharedby The reason for this is that the growthof the non-
diffsrentnations(54 just betweer India and Bangladesh). agriculturalsevtor?dependuponthe importof raw
Inmanycasesseriousbilateral ortultilateral conflictsover materialsandiintermediate goods.ifthe foodrequire-
water have arisen. The currentdispute betweenTurkey, mentsoftheranidlygrowingpopulationmustbemet
Syria,andIraqovertheEuphratesisagoodexampleofsuch withfood-grairnImports(foragivenlevelofimpoits)
situations. Intemationat law on trausnationalrivers is lessraw materialsandintermediatematerialscanbe
weak;it is essentiallyleftupto the goodwilioftheupstream imported. Consequently,non-agticulturalsectors
riparianrtosettleproblemsamicably.Severaldecr4esago, must grow at a slower rate, and in order to meet a
the World Bank was a major player in one of the most reasonablelevel of nationalgrowth,the agricultural
successfulconflictresolutions;the IndusBasinsettlement sectornrustgrow rapidly.
betweenIndia and Pakistn.
Whilethis particularmodel was never used in maldnga
The Bank should naintain its rule of not making plan,itdoesindicLtethatquitedifferentpolicyimplicatimns
loans for a project that is not acceptableto a country's arisewhen the macro linkages are explicitlyconsidered.
neighbors,but it shouldalso considerestablishinganego- Additionalresaarch in this area wouldhelp improve the
iatingunittoLelpcountriesdealwiththeseissues.Inmany qualitycf water investmentsin all sectors.
cases the provision of a neutral c)rner and unbiased
nterational expertisecouldmakeit politicallyeasier for and Data
4.1.3 WaterSectorPlanmingMethod9logy
countriesto exploretheir waterconflictsw a neighborsin Requirements
a non-threateningsituation,relatively free of inhibiting
politicallimelightand implicitthreats to national sover- At thenextlevel down,withinthe water sectorthere
eignty.Althoughregrettablynotfruitfiltodate,theBank's are a plethora of water plaing tools. One of these has
work over many years on hydro-electricityconflictsbe- cometo be called "multi-objectiveplanning." Although
tweenNepalandIndia is an exampleof suchan approach, conceptuallysatisfying,planningtheoreticianshavemade
and a credit to the Bank.Easing some of these disputes the approachunnecessarilycomplicatedwith its ownno-
would open up many new investment possibilitiesfor menclatureand dedicatedcomputersofhvare. In reaFty
constructivemulti-purposeuse of intemationallyshared multi-objectiveplanning is based upon the concept of
riverbasins. constrainedoptimization.One merely optimizesone ob-
jective, for example, national economicgrowth, while
4.1.2 Linking the WaterSectorto the NationalEconomy settingotherobjectives,suchas enviromnentalquality,as
constaintsupon the system.The Bank itselfhas already
It is a paradox that although water resourceshave been a major contributorto the developmentof "multi-
probablyreceivedmore analyticattentionthan any other objectiveplanning"throughitsmodeltingworkinMexico
kind of public investnent, there has been little attention and Pakistan.The issuesof equity,food self-sufficiency,
paid to relating the water sec.,r to intersectora!or macro andhealthdiscussedbeloware typicalof the issueswhose
aliocationdecisions.Thisla.kofanalysisshouldbeofgreat opportunitycosts manbe establishedby such methods.
concernin countriessuch as Brazil where30% of public There is nodoubtthat*hisapproachshouldbe takenin any
investmentis in the water sector. plnning study. Whether specialized softwareor more
general purpose models such as linear and non-linear
Other resource sectors such as energy have well programmingor simulationmodelsare used,the different
developedmethodologiesto relate sectoral and macro versionsofthis tool yieldessentiallythe sameresults,and
pans. The developmentofreliableplanningmethodology like all analyticapproachesshould be employedwith a
to relate water sectorplans to the overallmacro develop- greatdeal of caution.
ment of a country is a generic problem that is of major
significanceto guidinginvestmentsandother Bankwater The literature on water resources is also heavily
activities.In a paper with Hurst (Hurst and Rogers, 1985) influenced by the ideas of comprehensivemulti-purpose
the authorfoundin the literature only a few attempts to do river basin planning. This has historically been the ap-

9
 proach taken in Westem Europe and the United States. systemshavebeendevisedwith littleorno idea abouthow
Althoughintellectuallysatisfying,it is not clearwhetherit the informationis to be used.Thisresultsin over-collection
is the bestapproachto practicalproblems.It is helpfulfor of sometypesof data andunder-collectiOnof others.The
the physicalaspectsof rainfaUand run-offbut much less experiencesof GISusers to date have not beenuniformly
helpfulfromthepoint of viewof politcaljurisdictionsand happy.Most systemsconcentratesolelyuponphysicaland
economicmarkets.la the United States it has since been scientficdata,andthereislittleornocoverageofimportant
abandonedbyalilmajoragenciesinvolvedinnationalwatereconomicfacts. Althoughmany of the economicdata do
planning.Today agenciesallow the specificpioblem to not needto be collectedaccordingto detailedgeographic
dictate the unit of analysis.With innxeasingconcem for distributions,theeconomicrealitiesmaybeasimportantas
broaderproblemssuchas environmentalquality,the idea the physicaldatathatdo,andmaybe criticaltounderstand-
of analyzing"problem-sheds"rather than river basinsis ing the meaningof the physical givens. More attention
gaining ground. A recent book by Major and Schwarz shouldalsobe paidto the statisticalvariabilityof the data.
shows how river basins can be buildingblocksin larger Currentlyavailablemethodstoest4blishstatisticalreliabil-
problem-sheds.The Bankwillhaveto examinecloselythe ity shouldbe insisted upon in all data Analysesand be
typesof issuesfacedby its clientsbeforerecommendinga carried over into the analyses of particular investment
particularplanningapproach. decisions.

Atthe practicallevel,however,littleplanningofany One issue that tier the methodologyand the data
kind seemsto have beenapplied consistentlyacrosswater together is the issue of "uncertainty." Not only is it
usesinthe economy.For example,inmanyplacestheuses importantto developand use reliE" . data but it is also
of water are still examined separately on a project by imperativethat the planningmethods used elucidatethe
projectbasis.Thus,inAlgeriaitispossibletofindexamples uncertaintyregardingthe planningdecisions.Alltoooften
ofcarefullyplannedirrigationprojectsalongsidecarefully inthe waterresourcesareathebulk ofthe analysisis aimed
pianned urban water supply projects, with no way of at the consequencesof hydrologicaluncertaintywhen,as
reconcilingthe conflictingdemandsthat both haveforthe demonstratedby James, Bower,and Matalas (1969),the
same water supply.In Brazil there was surprisewhenthe largestpartoftheuncertaintyintheimplieddecisionsstems
introductionof a tariff on wastewaterdischargesled to from the economicparameterswhich typically receive
large dc reases in revenue to the water supply utilitv little stochasticevaluation.
almostleadingto its bankruptcy.In these casesthe unit of
analysiswasnotlargeenoughtocapturetheexternaleffects In its Policy Paperthe Bank shouldmake a serious
of policiesdealingwith individLalcomponents. efforttoshowwhatarerealisticexpectationsaboutthedata
thatmayreasonablybe gathered,and the levelsofreliabil-
There is a needto ensurethat appropriatemodelsof the ity that can be achievedby the use of these data.
water sectorbe includedin any projectappraisal.The unit
ofanalysismustbe largeenoughto ensurethatmostof the 4.1.4 ThePoliticalEconomyof Pricing
relevantextemalitiesarecapturedin the analysis.Iniriga-
tionprojects,groundandsurfacewateras wellas drainage Apart from certainaspects of religious and health
must be analyzedas oneunit. Urban water supplycannot significance,most people in every day use do not regard
be divorcedfromwastewaterdisposaland its downstream wateras an end in itself.It is a commoditylike "ships and
impacts.Waterdiversionsfromriversmust consideralter- shoesand sealingwax," consumeddirectly or used as an
native in-streamuses of the same water for navigation, inputto otherprocesses.Empiricalobservationshowsthat
fisheries,downstreamusers,andthe maintenanceofstream in Boston as well as in Beijing, if the price of water is
ecosystems.Wellestablishedmethodsusingmathematicalincreased,consumerswill use less of it. In other words,
progammingandsimulationmodelsshouldberequiredas there is a "willingness-to-pay"for water that is not an
a prerequisiteforproject appraisalin such cases. abstwacteconomicconceptdependingonelaboratetheories
of privateproperty,but rather is a reliablebehavioraltrait
In any policy study the quality of the data used of consmnersof the products.The same behaviorcan be
determines to a large extent what conclusionscan be expectedin Kansasand Kathmandu- and is a goodbasis
reliablyreached.However,there is a mind-set,that always forassessingthe economicdemandfor water. (Waterhas
looksformoreandmoredataandmore andmorecomplete adownwardslopingdemandcurve.)Wecanexpecthuman
coverageof a regionor basin. Geographicalinformation actionsto meet demandto be similar in widelydifferent
systems (GIS) are currentlyvery popular. Some of he locations.The most accessiblewater for humanuse is the
practicalproblemsencounteredin the use of suchsystems cheapestto develop,the nextmost accessiblecosts a little
should be examined.For instance, many of the current more,the nextyet a little bit more, andso forth.Verysoon

10

- _I y ,.* _ _ - --- *__in* * l N_-

 one observesan upwardlysloping"marginal cost" curve sometimeseven within countriesand between different
that dependsunon nature, not upon theory.Based upon wateruses.It ishard to draw fromthe gamutof individual
these two obst. i d phenomenaof willingness-to-pay and casestoprovideagei'eraltheory,otherthanto say that,for
increasingmarginal cost curves, a good set of practical manymodem market-incentivesystemsto work, there is
rules can be derivedforhelpingto decideuponhow much the needfora much clearerdemarcationof propertyrights
to investin developinga particularwater supply. to wateruse than often exists.At any level,the definition
of propertyrights to water is very difficultin the face of
Althoughmost peopleperceivewater in this way at water'ssacralquality in many societies,its essentialityto
an individuallevel,the sameindividualstreat waterdiffer- life,anditspervasiveextemalities.As aresult,a largebody
ently when they gather collectivelyto make decisions oflawhasgrownuparoundwater in almostevery country.
aboutfutureusesof water.This contradictionmay be due
to the commonsocial misperceptionof water as a "pure Waterpricing,therefore,isnotatasktobe left solely
public good" which belongsto "everyone" at the same to economists.The,political,legal, andsocial dimensions
time, with a right of accessfor all. As a result it is are extremelyimportant and emphasizethe need for a
"political economy" of waterpricing.
customaryto treat water as a free goodwhenit is in
fact anythingbut free.Peoplecometo expectthat it 1. Pricing
is their rightto take (and to waste)as muchwater as
theywant. (Baumnol and Oates, 1979). Threeimportantconceptstendto get confusedin the
discussionof waterpricing.Theseare, 1) the opportumity
Thereisclearlyaparadoxhere,sinceitisobviousthat costof waterdiscussedat length above,2) marginalcost
for many uses (for example, irrigationand municipal pricing,and3) costreoovery.Marginalcostpricing is the
supply)water has all the propertiesof an exclusiveeco- pricingof water at the cost of supplyingan additionalunit
nomic 2ood-just the oppositeof a "public good." Adam of water.In a perfectly fimctioningmarket economythe
Smithwas oneof the firstto definea "pure public good": mostefficientsolutionoccurswhencommoditiesarepriced
once the good is provided,it is not possibleto exclude at theirmarginalcost.The marketis saidto clear whenthe
anyonewhowantsto take advantageof apublic goodfrom marginalcostisequaltothemarginalbenefit.Themarginal
usingit, andthe consumptionofthepublicgoodbyanyone costmust includethe opportunitycostof the water. Cost
consumerdoes not impedethe consumptiorby any other recoveryrefers to pricingof watc to recoverthe costsof
potentialconsumer.At the otherextreme,a pure private providingit. Typically, costrecovery is based upon ac-
good", such as foodpurchasedfroma market,can be and countingproceduresthat are basedupon historicalcosts.
usualy is the exclusivepropertyof the owningindividual; Costrecoverypricingcanbe closeto marginalcostpricing
his or her consumptionof the food absolutelyprevents whenthecostsofnewprojectsaw; similartothecostsofpast
anyoneelse fiom consumingit. Water, like many other projects.Unfortunately,in water resourcesdevelopment
goods,fallssomewherebetweenthesetwo extremes.It has historicalcostsare typicallymuch lowerthan currentor
"pure publicgood" aspectswhenit is left in a scenicriver, projectedcosts of projects.
but eventhen too many peopleusingthe scenicriverwill
destroy some of its value for other participants.It has Many water planners confuse cost recovery with
"exclusiveeconomicgood"featureswhenitisevaporated marginalcostpricing,theeconomist's "goldenrule." Most
by farmers inigating their crops for profit in a market water utility officials considermarginal cost pricing as
setting. leadingtounrealisticallyhightariffs.Unfortunately,econo-
mists often try to mandate strict marginalcost pricing,
It is the in-betweencaseswhichtendtopredominate ignoringpracticalproblemsfacedby util!tymanagers:In
in the academic works on water and which confusethe fact, thereare many differenttariff structuresthat would
issue.Thequestionas to whohas accessto waterbecomes allow full cost recovery without marginal cost pricing.
very importantin determininghow water is defined,and Brownand Sibley(1986)showedforthe selecommunica-
this definitionin tum hingesupon the differentdoctrines tions industrythat the Ramseyprices necessaryto cover
governiingwater rights. In order to use water mare effi- costsandprofitwereonlyintherange of3%more efficient
cientlyit may be necessaryto codifythe water rights. !hantaiiffs basedupontraditionalcostrecovery methods.
Marketsarebaseduponasystemofpropertyrightstoscarce (Rememberthat telecommunicationsindustry,however,
goodsand the rightto excludeother usersof the resource. has decliningcosts not increasingcosts like the water
A privatewatermarket canonlyexistifpropertyrightsare industry.)While tariffs have financial, economic, and
secure and can be transferred.However,water law and politicaldimensions,it shouldbe rememberedthat mar-
waterrights differ radicallyfrom countryto country,and ginalcostpricingreliesonly on the economicdimension.

- m *
 The best approachprobablylies 3omewherebetweenthe yieldingwheat,andcashcropssuchas cotton,tobacco,and
twoextremes.Thetensionbetweenregulationandefficientoilseeds.
pricingwillalwaysremaina sourceof contentionbetween
the plannersandthe politicalprocess,however,as Brown Outside observersare surprisedby the disparities
and Sibley(1986)stated: among cost recovery rules for Bank loans in different
sectors. Il the electric energy and telecommunications
When regulation violates efficiency criteria seri- sectorstheBankinsistsonfull costrecoveryforthe capital
ously enough, not only economists become con- as well as O&M expenses.The goal is to create viable
cemed.Peak loadpricinginelectricity.forexample, publicutilities,abletosettariffsthatwillefficientlyfinance
was takenseriouslyintheU.S.whenit becameclear the future developmentof the sector. In contrast,water
that excessiveuse of electricitywas contributingto sector projects typically require only repaymentof the
an energy crisisthat alanned many people. Hence, O&Mand of some "reasonable"part of the capitalcosts.
normativeeconomicsplaysan important,thoughnot Manywould argue that thispolicyleads to sloppyperfor-
preeminent,role in the regulatoryprocess. manceon the part of both the suppliersand consumersof
water. Sincewe do knowthat wateruse is directlyrelated
Pricingis the major tool by which economistsat- to the prices charged;the higherthe prices,the lowerthe
temptto bringaboutefficientresourceuse. Pricingis more usage.
thancostrecovery;it alsoaimsat leadingsocietytocorrect
allocationdecisions. Unfortunately,when many of the The Bankshouldcarefullystudythe implicationsof
pricesin an economyare artificiallyset,it is hardto induce movingtoward full costrecoveryfor water sectorinvest-
rational resourceallocationby "correctly" pricingjust a ments,and alternativemethodsof doingso.
fewoftheresources.This isamajorprobleminall countries
and regions. For example, it is estimated that in the 4.1.5 EnvironmentalImpactsof WaterDevelopment
EMENAregion alone the subsidy to agriculturedue to
incorrectwaterpricingisofthe orderof$40billionperyear. There are increasingpressuresoninternationalinsti-
tutions to take the lead in respondingto concernsabout
The Bank must developstrategiesthat will enable environmentaldeterioration.The Bank should take the
countries to bring their resource pricing progressively initiative in dealing with these problems,instead of its
closer to market pricing,economywide,than is currently beingseenasmerelyreactingtospecificchallengesasthey
the case.TheBank's PolicyPaperwillhave to lay out the arise. Asthe industrializednationshavediscovered,assur-
issuesandconsequencesofpricepolicysothatpricepolicy ing water quality entails more than the regulation of
wil becomean integralpart of the Bank's ownoperations industial andmunicipalwastewaterdischarges.Nonpoint
as well as of those of the borrowingcountries. sourcessuchas agricultual runoff,are now recognizedas
major contributorsto environmentalproblemsthat canot
2. Cost Recovery be ignored.Moreimportantly,at the level of questionsof
susainability of ecosystemsas a whole, water use and
Inthe indianstateofBihar,the chargesforrrigation water contaminationplay major roles. They cannot be
Departmentwater from river diversionsand dams are so easily separated into water quality and water quantity
low and the attemptsto collect the feesso feeble,that in issues;both are critical.
1979the costincurredin collectingthe fees forwaterwas
117percent of the actual amountcollected.Owingto its From the environmentalpoint of view much of the
seriousfinancialdifficulties,theIigationDepartmenthas concernwith water projectsstemsfrom the casualway in
had to defer maintenance,and the water systemhas dete- which environmentalconsequencesare handledas a lst
riorated. Farmers have less incentive to pay for poor minute consideration,rather than being integratedinto
service,and a viciouscyclehas developed.Moreover,the project designfromthe beginning.Big offendersinclude
low water chargeshave led farmers to use water ineffi- irrigationprojectsinwhichdrainageissuesareneglectedin
ciently.Bycontrast,in boththe Punjabregionin Indiaand the initialplanning,navigationprojectsin whichthe dis-
inareas oftheUnited Statesthatrelyonwaterfromprivate posalofdredged materialsis haphazard,and floodcontrol
wells,fannersarefarmoreconservativeinhowmuchwater projectswhich ignoreflood-plainfisheries.In all of these
they use since they pay higher prices. (Well water costs casesadequatepre-planningguidelinescouldsubstantially
morebecauseit is notsubsidized.)Yetthesefarmers'crops reducetheenvironmentalimpacts.1There areotherprojects,
are not doomed to economic failure: when the cost of forexamplelargedams,whichhave majorenvironmental
pumping in the Punjab increased in the 1960s,fanners impactsthatcannotbemitigated, such as loss of habitat,
began growing more water-efficientcropssuch as high- loss of fertile bottom lands, destructionof forests,and

12
sedimenttrapping, in addition to the social impacts of goals.Theirrigationliteratureisrepletewithdiscussionsof
moving large numbers of people from their homes and howto defineequity,how to measureit and its effectson
farms. These consequencescan only be addressedon a productivityandothervalues,andhowtoplan forit. Some
politicallevel by providingthe rightkinds of institutions options are more equitable than others and should be
thatwill allowfordialogue,negotiation,andcompensationpursuedin the design and implementationof water re-
to the affectedgroups.However,guidelinesthat force a sources works. Nevertheless, if cie were looking for
thoroughsearchfor alternativescould,in the caseof large investmentsin the economyto achieveequitabledistribu-
dams,suggestattractivealternatesolutionssuchas modi- tions of benefits,water projects are not the most likely
ficationsofthe scale ofthe projector otherstorge options candidates.Evenwithinirrigationprojectsthemselvesit is
such as undergroundstorageor a largernumber of smaU important,forexample,thattheeconomiccostsofskewing
storagescloserto the users. The WorldBankOperational water allocationsin favor of equitythat are imposedupon
Memorandum4.00, Annexes A and B, could provide a societybedefinedintermsofthenumberoffarmers,rather
good startingpoint for the developmentqf appropriate than farmsizes, and that they be carefuly estinated and
guidelines. politicallyassessedas to whetherthey exceedthe accrued
socialbenefits.In somesituationsfarmsare toosmallto be
4.1.6 Social Impactsof WaterDevelopment economicallyefficientand the watermightbe betterused
on slightlylarger farms.
Inaperfectworld,waterdevelopmentprojectswould
haveonlypositiveimpactson societies.However,because Equity is an emotionallycharged issuewhich the
of the exteralities inherent in many water investment Bankcan helpborrowinggovernmentsweighproperlyby
projects,thereare almostalways somewinnersand some providinga dispassionatediscussionof it in its Policy
losers.Localpeople losetheir landsso that urbanpopula- Paper.Thereisalarge rolefortheBankinhelpingcountries
tionscanhaveelectricpowerandlowlandfarmerscanhave deal with these types of impactsin a straightforwardway
irrigation.Upstreamusers pollute rivers with wastes or by givingthem due weightin their own indigenousplan-
choke them with sediment, causing severe damages to ningmethodsandorganizations.Someof these resources
downstreamusers. Attention must be paid in planning are already covered by the Bank's own environmental
projectsto minimizedisruptionoutsideofthe projectarea assessmentguidelines.They shouldbe madeexplicitin the
and to provide compensationto the affectedparties. PolicyPaper.

Asinthe caseofenvironmentaeconsequences,many 4.1.7 Conservationand Recyclingof Water

negativesocial impactscould be avoidedby carefulpre-
planning.Someofthemostegregioussocialimpactsfollow Oneof themostobviouswaysofextendingthewater
frominvoluntarymovementofpopuationsoutofareasthat resourcesbaseis byconservingwaterorbyrecyclingit after
are floodedby dans and embanlments.The move itself use.Unfortunately,by themselvesthesemeasuresare not
maybe unavoidable,but social disintegrationand destitu- thepanaceasthattheyareoftenthoughttobe.Inmost cases
tion are not, and the needs of the affected populations peopleandindustries"waste" wateronlybecauseit is the
shouldbe integratedearly into the planningprocess,with cheapestthingto do.Unlesswaterpricesare raisedsignifi-
adequateresourcesandcommunicationchannelsprovided cantlythereisno incentiveto do otherwise.Theexperience
to meet thoseneeds. Other cases,suchas equityin water in the industrializedcountriesis that people can be moti-
access in irrigation projects, are less obvious and are vatedto conservewater on the basis of altruismonly in
thereforeoften ignoredby projectdevelopersand funding timesof shortage.Typically,after the stress is removed
agencies.Particularimpacts on women and childrenare consumptionrises to the previouslevels.
also often overlookeduntil it is too late to mitigatetheir
damage.Humanhealthissuesareoftenneglectedin evalu- Thereis much discussionof the recyclingof sewage
atingwater sectorinvestments.For example,the introduc- for use in agriculture.Many cities have been doing this
tionof schistosomiasisinto a regionby irrigationprojects more or less successfullyfor some time. The practice is
is a seriousmatterand can be avoidedor controlledto a widespreadin Asia, with, however, some problems in
significantextentby changesin systemdesignand opera- protectingthe public frompathogens.With care such use
tion.Accesstowaterforbathing,forreligiouspurposes,for can be made of sewage, and should be made wherever
wateringanimals,andforrecreationareallimportantsocial appropriate.However,much of thediscussionimpliesthat
uses of water often inadvertentlyleft out of project plans. largeamountsof irrigationcan be accomplishedwith such
recycledwater.One needs to be remindedof the tremen-
There is also the option of actively using water dousasymmetryin volumebetweenagriculturaland do-
investmentsto achievepoverty reductionor other equity mestic water uses: one large irrigated farm in the U.S.
 consumes as much water as a town of 15,000 people municipalwater is a local responsibility,but many indi-
produceswastewater.It takesthe wastewaterof 50 people vidualsalso sell water in smallquantitiesto households.
to irrigatethe land required for growingthe food for one Ruralhouseholdsare almostalwaysin chargeof obtaining
person.Althoughwaterrecyclingforindustrialanddomes- their own supplies.The result of such comparlmentaliza-
tic usesappearsattractiveandaworthwhileinvestmentfor tion is that agriculture,industry,and municipalitiesuse
vegetable gardening,it is not likely to make a major water inefficiently.
contributionto irrigatingfield crops.
Whileinstitutionsarelikelytobehighlyregionaland
Direct recyclingof municipal wastewaterhas also culturallyspecific,theneedtostrengthenthemisoneofthe
beenpracticedwithoutthe use of irrigationas an interme- major generic problems facing developmentactivities
diary.Forexample,Windhoek,Namibia,hasbeensuccess- aroundthe world.Theneedis notforlargenew institutions
fullyrecyclinglargequantitiesofmunicipalwaterformore but, rather, forsmallpolicy councilscomposedof cabinet
that 20 yearswithoutapparentproblems.In somepartsof rankofficialswhowillbe ableto coordinatetheworkofthe
the worldsuchrecyclingispracticedinanunobtrusiveway. existingwaterinstitutions. Th,Bank'sPolicy Papershould
For example,in Hollandpollutedwater fromthe Rhineis emphasizestructure,organization,management,and the
filteredthroughthe riverbanksbeforebeingabstractedfor role of adequatecost recovery,to enableindividualcoun-
urbanwater supplies. tries' institutionsto carryout necessarymaintenancetasks
and build for futuredemands.
Alothasalsobeenwrittenaboutconservingwaterby
improvingthe efficiencyof use in irrigationandreducing
the losses in urban water systems. As discussedbelow, 4.1.9 Role ofthe Bank in Education,Training,and
increasingwateruseefficienciesin agricultureis a difficult InformationExchange
concept and the practice may not really provide great
savingsofwaterinmanycases,particularlywhereconjunc- As the world's leading institution for supporting
tive use of groundwateris practiced.Nor is it necessarily investmentsin the water sectorthe Bank is ideallyposi-
wiseto reducelossesinurbanwatersystems,sincethe cost tionedtouse itsprestigeandinfluenceto furthereducation,
ofreducingthelossesmayexceedthebenefitsasperceived training,andinformationexchange.ThroughitsEconomic
by the water utility. This is clearly an area where the DevelopmentInstitute(EDI)the Bank is alreadyheavily
appropriatepricingand valuationof the water itselfis the engagedin the formaltrainingofThirdWorldgovermment
major issue.Conservationforits ownsake is not a realistic servants.This role couldbe furtherenlargedby requiring
or advisablegoal; it only makes sense within a correct more on-the-jobtrainingforhost governmentemployees.
pricingpolicy forwater.The Bank's Policy Papershould As mentionedabove,the appraisalprocessitself couldbe
clarifythe potentialrole of conservationandrecycling. used as a useful teachingmechanism.In particular,the
environmentalandsocialimpactassessmentrequirements
4.1.8 Host CcuntlyInstitutionalReform stressedabove can be used as a public educationtool. If
governmentagenciesactuallydevelop and use environ-
In most countriesthereis a greatneedto upgradethe mentaland socialimpactassessments,they will discover,
institutionsdealingwith the variousaspectsofwater.Most as willthe impactedgroupsif they are integratedinto the
importantly,in every countrythere shouldbe one institu- process,howwaterinvestmentsreallyfunctionintheirown
tion with the responsibilityto coordinatewater policy societies.This has been one of the most importantout-
across uses and across governmentagencies. Even ad- comes in those developedcountrieswhich have imple-
vancedindustrialcountriessuchastheUnitedStates,suffer mented such an approach.Their citizens are now much
fromlack of coherencein water policy acrossuses.There more avware of the environmentaland socialconsequences
is often a tremendous inertial asymmetrybetween the of governmentactionandhave begunto maketheirviews
staffing of agencieswith traditional concernsand those feltthroughpoliticalaction.Greenpartiesare springingup
with more modem ones. For instance, in Thailandthe throughoutthe industrializedcountries. Since funds are
Iffigation Departmentis the single largest government limited,the Bankmightconsideraroleforitselfineducat-
agency.lnlndia,the useofsurfacewateris administeredby ingotherpublicandprivatefinancingagenciesinthis field.
theCentralWaterCommission,whereastheCentralGround-
water Board oversees groundwateruse. There is little 4.2 Subsector Issues
practical integrationof these agencies' plans, despite a
fonnal agreementto cooperate.Each of India's 22 states 4.2.1 Irrigation
also has its own departmentof irrigation,whichusually
dealsonlywithsurface-watersupplies,whileotherdepart- "Water and food" caries many assumptionsabout
ments focuson groundwater.In cities around the world, developmentpolicywhichneedto be carefullyand sepa-

14
ratelyexamined.Food securityis amajorconcernofevery vision;itcanthrowthe largerbenefit-costpictureseriously
govenmuentthroughoutthe world but how to achieve a out of balance, and lead to misplaced investmenton a
satisfactorylevel of securityis not obvious.Nationalself- significantscale.
sufficiencyin food grains is not the imperativethat it is
oftenassumedtobe.Inthe modernworldoilis essentialfor In its PolicyPaper the Bank will have to devote a
survival, but nowhere do we find the belief that every major effortto analyzingirrigationsince this is one of its
countryshouldbe self-sufficientin oil. There is no reason major lendingactivities.However,there are many other
whyeverycountryshouldgrowgrain,whichrequires2,000issuesinvolvingchoiceof technologyand croppingpoli-
to3,000tonsofwaterperton.1nanandcountrywatercan cies that have not been featuredhere, which are also of
havemuch highervalue forotheruses.Internationaltrade major concernin this partofthe watersector.Many of the
canredistributewater- inthe formofgrain- tonationsthat sector-wideissuesapplyintheirrigationarea.Forexample,
decide not to grow it. Israel subscribesto this practice, a recentpaper by Johnson(1990)indicatesthat the prob-
emphasizipgvaluablecashcropssuchasfruits,vegetables,lems with irrigation in South and Southeast Asia are
and flowersfor the Europeanmarket.Countriesthat take becomingparticularlyacutebecauseof the fundingof the
thisapproachcouldmaintainstockpilesofthe basicgrains; operationsand maintenance(O&M) of the systems. As
even though stockpilesare costly and can deteriorate, indicatedabove,pricingand cost-recoveryare fundamen-
replacingspoilage is less expensivethan growing grain. tal to achievingproper operation and maintenance of
Suchcountriescouldgrowa diversityof cashcropssothat systems.
fluctuatingintemationalprices could not devastatetheir
economies. 4.2.2 Waterand Health

Even the definitionof self-sufficiencyis not clear.
Doesit meanthat acountry shouldbe self-sufficienton the
average,orfordroughtyears,oronly75%ofthe time?The
choiceof the definitionhas a large impacton planningfor
water use in agriculture.It is imperativethat the Bank
addressthis issuehead-on in its PolicyPaper.
Increasing"wateruse efficiencies"inagricultureis
a widelysuggestedsolutionto water shortages.However,
in many parts of the world one farmer's inefficientuse
provides the water for another farmer downstreamor
rechargesthe groundwaterfor many other farmers.It has
been argued that the irrigationefficiencyin California's
SanJoaquinBasinapproaches100%despitethe factthaton
any one fa&mthe efficiencymay only be 60-70%.Indi-
vidual casesmust be closelyconsideredbeforemuch can
be made of the advisability of improving "irrigation
efficiency." Many commentatorslooking only at farm
level efficiencieshave advocatedimprovementof effi-
ciencyof water applicationas the best way to conserve
water. Althoughthis may be true in some cases, it is not
universallytrueandshouldbesubjectedtocarefulanalysis.
Itismoreappropriatetostartfromthelargerperspec-
tive ofthe overallregionalefficiencyoftheuseof waterfor
irrigation.But eventhis is a difficultconcept,and agricul-
tural and irrigationprofessionalswill be on still stronger
ground if they orient themselvesto the further-reaching
concept of the "economic efficiency" of aU water use
rather than of "irrigation efficiency." "Irrigation effi-
ciency" is a seductive notion because it simplifiesthe
problemto wateralone by focusingit on engineeringand
managementvariables.Butit canbecomea formoftunnel
A relationshipbe.tweenwater and health has been
acceptedsince at least the time of Frontinus,the Water
Commissionerof Romein 97 A.D.,but the exactrelation-
ship is not well understoodeven now. A World Bank
position paper on domesticwater supply (WorldBank,
1976)cautiouslylimiteditselfto sayingthat "other things
being equal,a safeandadequatewatersupplyis generally
associated with a healthier population." Many of the
benefitsobservedduringthe "sanitary revolution" in the
industrializedworld wereachievedwhenprotectedwater
supplieswere provided to societieswith rising income
levels,whichinducedotherpositivebehaviorswithrespect
to personalhygieneandnutrition.At low levelsof devel-
opment,investmentsin improveddomesticwater supplies
are often necessarybut generallynot sufficientto realize
the potentialhealthbenefits.Formiddle-leveldeveloping
countries,where the populationis generallybetter edu-
cated, the health benefitsof investmentsin water supply
andsanitationaregenerallysubstantial.Athigherlevelsof
developmentonetypicallyobservessmalladditionalhealth
benefitsfrom furtherinvestmentsin such facilities.
But apartfromdrinkdngwaterandsanitation, serious
hunan health problemscan be introducedinto an area
throughthe developmentof water resources.The classic
caseisthespreadofschistosomiasisinAfricaandAsiaafter
the introductionof irrigation.Debilitatingratherthan fatal
in most cases,schistosomiasisnow infectsmore than 200
million people. Malaria, filariasis, yellow fever,
onchocerciasis(river blindness),dracunculiasis(Guinea
worm disease),and sleepingsickness can be spreadby
inrigationprojects.Manywater-solublechemicalsused in
agriculture,particularlychlorinatedhydrocarbons,accu-

15
 mulatein animalandplanttissuesandthusenterorbecome
concentratedin the food chain. High concentrationsof
nitrogenfertilizerin water suppliescauseblooddiseasesin
infants.In manycountriesunregulatedandindiscriminate
productionanddisposalofchemicalsandtheirwasteshave
led to seriouscontaminationof surfaceandgroundwaters
by toxic and carcinogenicsubstances.Someof the worst
casesare observedin developingcountrieswhichhavefew
resourcestodealwiththem.Acarefulreviewofallofthese
componentsof "water and health" is in order,notjust of
drinidngwater and sanitation.
ness-to-payforthese servicesby differentsocioeconomnic
groups.Suchstudies are conceptuallydifficultas well as
time-consuming,but they should obecarriedout in a suffi-
cientlylargenumberof casesthat the basicmagnitudesof
the expectedbenefitscanbe demonstrated.This isparticu-
larly importantin this sector since most of the litetature
focusesuponthecostofthe servicesand oncomplaintsthat
theyare becomingtoo expensive."Too expensive" com-
pared to what? The only meaningfulcomparisonis with
the benefits received from consumingthese goods and
services.

4.2.3 UrbanWaterSupply and WastewaterDisposal For urbanwater and wastewaterdisposal,consider-

ation of the role of industryin the managementof the
With continuingrapid populationgrowth,the nuin- ambientqualityofthewaterresourcesisvital.Industryuses
ber of cities of over one million people is expected to only5to 10percentofallwatersuppliedbutstillrepresents
increaserapidly.It is in these burgeoningmetropolisesof an importantsegmentof demand.This resultsin part from
the Third World that the most pressing needs for water the fact thatindustrialprocessespollute a disproportionate
supplyandwastewaterdisposalinvestmentswillbe felt.In arnountof water. For exarnple,in Sao Paulo and Seoul,
all cities the costs of providingnew water suppliesand industrialpollutionhasturnedmanystreamsandriversinto
wastewaterfacilitiesarerapidlyincreasing.rarefulassess- open sewers.Developingcountriesshouldlearn from the
mentofnew approachesto the wholeproblemare needed. experienceof industrializednations: it is much more
Forexample,AkhterHaineedKhan,the formetheadofthe expensiveto clean up pollutedwater than it is to avoid
Comilla Academy for Rural Development,has success- pollutingin the firstplace. Economicincentivesagainst
fullyapplied the approachesof rual organizationto the industial pollution,suchas effluentfees, shouldbe estab-
denselypackedparts of the city of Karachi,mobilizingthe lishedso that companieswill have an incentiveto control
localpopulationtoplan,construct,andfinanceasewerand their effluents at the source. In addition to the usual
dainage systemat a fractionof the costof similarsystems regulatorymethods,innovativeapproachessuch as trade-
providedby the city government. able permits and privatizationof facilitiesshouldbe ex-
plored. The failureof some of these approachesin the
Wemust lookharder forinnovativeways of dealing industrializedworld does not mean that they may not be
withurbanwaterandsewerissues.Technicalandmanage- appropriatein Third Worldsettings.
rial performanceneedsscrutinyto ensurethat excessively
costlysystemsare not builtmerely to copythe industrial- Regulating environmentalquality by pricing the
ized countries.This is particularlytrue now in Eastern effluentsthat individuals,municipalities,andcorporations
Europe,wherethetendencyistoproceedirmmediatelywith emit is oneof the standardrecommendationsof economic
the sameapproachesas thoseused in WestemEurope.As theory.Theeconomicliteratre is fullofconceptualschemes
is well known,the general rule is that removingthe first forpricingand taxingeffluentsthat wouldlead to internal-
50% of pollution is quite cheap, with the incremental izing the extemalities of pollution. Once this is done,
improvementsbeing increasinglycostly. This consider- environmentalquality can be left entirely to the usual
ationoftensupportsdevelopingasysteminstages, moving market forces. The Washington-basedresearch institute,
to the expensivehigher levels of performanceas general Resourc:esforthe Future,has led the campaignfor feeson
economicgrowthgenerates increasedability to pay for effluentdischargeinto waterwaysfor over 20 yearswith
them. little success;it has mainly been opposedby those who
thinkit impropertoselltherighttopollutethe environment.
The costsof alternativeapproachesto urban water
supplyand wastedisposalshouldbe carefullyexamined. Neverthelessasubstantialamountofeffluentpricing
Local agenciesshouldbe made aware of these costs and has been used in the U.S. and in Europe.Hudson (1981)
encouragedto set their tariffs to reflect real costs and reportsontheextentandmodeof implementationofwater
projected trends of costs. The issue of cost recovery, pollutionpricingthroughsewercharges.Heclaimsthat by
discussedin moredetail above,is criticalhere.The Bank 1970morethan90%ofthemunicipalitieswithpopulations
should also initiate studies to elucidate the economic over 50,000 levied some form of sewer charge on resi-
benefitsof the provision of these urban services. Such dencesandindustryand that 40% of local expenditureon
studiesshouldbe based upon assessmentsof the willing- sewage was derived from these charges. Industry can

16
 chooseto pretreatitswaste,decreaseitswateruse,improve intersectoralnatureof electricityand theconflictsoverthe
housekeeping,change either the productionprocess or potentialusesof the water betweenusers.In addition,the
products, or it can choose to pay the effluent fee. The pricing of the output from multipurposewater resources
industrialchargesare typicaUyrelated to the quantityof projectsthatincludehydropowerneedscarefulreappraisal.
waterusedand the "strength" of the effluentmeasuredin The temptationis to loadadisproportionateamountof the
termsofthe oxygen-demanding organicwasteload(BOD) costrecoveryon the electricityconsuners and not on the
and total suspendedsolids. These charges can give an agriculturalandotherusersofthejointoutputoftheproject.
incentiveto industriesto changethe amountsandstrength
oftheirsewageeffluents.Hudson'sstudyoffivelarge cities The Bank's Policy Paper should help developex-
(Atlanta,Chicago,Dallas,Salem(Oregon),andSouthSan plicit guidelinesfordealingwith theseissues,particularly
Francisco)and 101 industriesfoundthat effluentcharges the environmentaland social impactsdiscussedabove,in
were overwhelminglypreferred by the industrialiststo its own operationsand to encourage the governments
dischargehimitations.Therewasauniversalattemptbythereceivingfundsto recognizethemas potentialproblems.
industriesin the sample to respondto the effluent fees
despitetheirrelativelysmallcoststo the industries.Hudson
concludedthat; "...we are confidentthat economicincen-
tivesworkwellandcanbe effectivelyadministered." In its
PolicyPaperthe Bankshouldstressthe applicationof well REFERENCES
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18
 Policy Research Working Paper Series

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Explainingthe Levelsof Nutritionin MaritoGarcia 30464
Pakistan

WPS866 Regulatoryand InstitutionalImpacts RobertPardy February1992 Z. Seguis

of SecuritiesMarketComputerization 37665

WPS867 The Rationaleand Performanceof DimitriVittas February1992 W. Pitayatonakarn

PersonalPensionPlansin Chile Augusto Iglesias 37664

WPS868 MortalityReductionsfrom Measles MichaelKoenig March1992 0. Nadora

and TetanusImmunization:A Review 31091
of the Evidence

WPS869 FinancingLocalGovernmentin RichardBird March1992 A. Bhalia

Hungary ChristineWallich 37699

WPS870 EconomicShocksand the Global F. DesmondMcCarthy March1992 M. Divino

Environment AshokDhareshwar 33739
 Policy Research Working Paper Series

Contact
Title Authovr Date for paper

WPS871 The Distributionof the Benef::sfrom Dominiquevande Walle March1992 A. Bhalla

Social Servicesin Indonesia,1978-87 37699

WPS872 Romania'sEvolvingLegalFramework CherylW. Gray March1992 CECSE

for PrivateSector Development RebeccaJ. Hanson 37188
PeterG. Ianachkov

WPS873 Measureand Interpretationof FrancoisM. Ettori March1992 F. Ettori

EffectiveProtectionin the Presence 32340
of High CapitalCosts:Evidencefrom India

WPS874 The Trade RestrictivenessIndex:An James E. Anderson March1992 G. llogon

Applicationto MexicanAgriculture Geoffrey Bannister 33732

WPS875 RuralFinancein Developing Jacob Yaron March1992 C. Spooner

Countries 30464

WPS876 Old Debtsand NewBeginnings: RossLevine March1992 W. Pitayatonakarn

A Policy Choicein Transitional David Scott 37664

WPS877 AssessingGains in Efficient Gary H. Jefferson March1992 CECSE

ProductionAmong China'sIndustrial WenyiXu 37188

WPS878 Adjustmentand PrivateInvestment KaziM. Matin March1992 D. Ballantyne

in Kenya BernardWasow 37947

WPS879 ComprehensiveWater Resources PeterRogers March1992 D. Ranger

Management:A ConceptPaper 31296