Water conservation dilemma-I

In these columns last year, I had discussed the problem of overconsumption and underinvestment in the critical areas of water, air and forest management. On the lines of research by Elinor Ostrom, the Nobel prize winner of economics in 2009, I had suggested that common property management may be a good alternative to public or private management of public resources. This may also prevent the 'tragedy of the commons' from playing itself out in various public resources arenas. I had also suggested that social capital would be an important factor in overcoming collective action dilemmas in the supply of public goods. In this two-part article, I will dig deeper into these problems in the water sector and analyse the issues from the NIE+ perspective, which I have proposed in earlier articles. In Part I, I will discuss where we stand now and look at the policy trends in developing and developed countries. In Part II, I will outline policy guidelines that the NIE+ analysis offers.

The current situation

Just 2.5 per cent of the water on the Earth is freshwater, and more than 66 per cent of this is frozen in glaciers and polar ice tops. Water demand exceeds supply in most parts of the world. Further, the quality of water continues to deteriorate with sewage flowing directly to water sources in many parts of the world. Hence, water conservation continues to be a focus area in the policy matrix of most countries. Every country is confronted with either quantity or quality issues in respect of water supply (both surface water and groundwater). It is also true that in either case, efficient use and better management of available water resources can ameliorate the conditions appreciably. A number of studies at the World Bank (Saleth and Dinar, 2004) have also argued as much and this gives us hope.

Given that most of the water demand comes from the irrigation/agriculture, urban sector and human consumption, this has implications for the various policies in these areas. For example, given that any new irrigation project involves huge costs and an unfavourable environmental impact (relocation of populations, land acquisition etc.), it is better to improve water availability through more efficient use, better conservation techniques (like drip irrigation, sprinklers, behavioural change) and management. The same argument applies to the urban sector water supply. With growing urbanisation, about 60 per cent of the world's population is likely to reside in cities by 2025, which will lead to a rise in demand for urban water. Further, in developing countries, poor quality of water also means poor sanitation, which in turn leads to serious public health issues such as frequent outbreaks of malaria and gastrointestinal diseases. Again, new projects of urban water supply are capital intensive and more efficient management of existing water resources may be a better solution. Not only that, but desalination technologies to reclaim sea and ocean water also are way too costly and have been deployed in very few countries where there are no other alternatives.

However, as we will see, there is no single solution or 'one size fits all' approach that works. Problems in developing countries are different from those in developed countries. Again, within developing countries and developed countries, what works in one country may not work in another.

The right incentive structure can resolve inefficiencies in water use in irrigation, urban sector and human consumption. But, for this to happen, we have to get the 'water' institutions right. We will discuss this further in the next section. Regardless of their diverse disciplinary backgrounds and ideological orientations, water experts and policy-makers around the globe evince a remarkable level of consensus on the diagnosis that water crisis is a direct outcome of "governance crisis". The focus on governance underlines the central role of water institutions.

Water institutions are structures defined interactively by both formal elements (laws, policies, and organisations) and by informal elements (customs, norms, and conventions). It is these structures that create the incentive environment and operational framework for managing water demand across uses and developing water supply across sources. Appropriate water institutions are, therefore, indispensable to promote sustainable use, allocation, and management of water at various regional and sectoral scales. To perform such a role, water institutions, which are structured and embedded within the larger physical, social, economic, and political setting of a country or a region, have to adaptively evolve and constantly improve their performance to fit with the changing conditions. Although a variety of forces — both economic and non-economic — are at work within this process of institutional change and performance, they operate largely through an economic calculus. The task of the institutional economics of water is, therefore, to unravel these forces, their underlying rationale, and their implications for the process of water economics and policy.

Developing countries' TRENDS

As noted earlier, the water sector in developing countries tends to be largely informal. However, there are variations within countries and across countries. For example, Israel has one of the best water management policies in the world and is an exception among developing countries. There is a Water Commission, which implements the water law through Mekorot, a state-owned water company handling 70 per cent of Israel's water supply. Urban water prices cover the full supply cost, but irrigation water is subsidised. On the other hand, Bangladesh has challenges not only of frequent floods, low lying areas, presence of arsenic in groundwater and poor drainage, but also poverty-related challenges. Most of the laws (Environmental Conservation Act 1995 and Environmental Pollution Control Ordnance of 1997) are therefore targeted more at ensuring water quality and controlling floods and less at water management and allocation. In addition, there are also policy challenges of international cooperation since Bangladesh shares many of its rivers with its neighbours.

In Africa, most developing countries are either dependent on rains or the river systems. For example, the Nile is the major source of water for its riparian countries: Egypt, Ethiopia and Sudan. Irrigation is the main user of the river water in these countries. In other countries too, there is dependence on rains and the rivers. Given the challenges of poverty alleviation and development in most African countries, water policy is more focused on overall development targets such as improving sanitation and ensuring a minimum per capita availability of water. These are driven mainly by the State and hence the role of private players in the water sector is limited (in the sense that it operates with user charges etc., in Europe and developed countries). To be sure, there are some exceptions such as South Africa and Morocco where decentralisation of water management, market-based water allocation, modern water conservation techniques, recovery of user charges and private sector participation has been tried.

In Latin America, Chile, Brazil and Mexico have undertaken many policy reforms in the water sector. There has been a trend to move to decentralisation and privatisation in both urban drinking water and irrigation sectors. The importance of river basin management in irrigation has also been recognised and implemented. The three countries have enacted water-specific laws, which emphasise conservation and greater autonomy to the local and provincial governments in water supply and management.

Variations within a country are best illustrated by India's example. While many cities have a high share of treated piped water supply (mostly managed by the municipal corporations), the rural areas are served by a variety of sources ranging from wells to handpumps to open water bodies. In fact, NSSO surveys (1999 and 2003) showed that about 80 per cent of rural households are self-served for their domestic water needs. This could be either through wells or handpumps or open water bodies. Only a small proportion was connected to a public water supply system. The same surveys also showed that in urban areas, the position was just the reverse: about 75 per cent of urban households were connected to a public water supply system. Further, the surveys also showed that the proportion of villages with public water supply system increased rapidly as we move from poor states like Bihar, MP and Orissa to rich states like Haryana, Goa and others. The irrigation sector is also largely informal and served mainly by wells, deep tubewells, tanks and streams. The recently launched Pradhan Mantri Krishi Sinchai Yojana (PMKSY) is therefore appropriate and timely. The scheme is mainly focussed on expanding the area under irrigation, reducing the dependence of agriculture on monsoons and using water more efficiently. As currently designed, PMKSY has four components: Accelerated Irrigation Benefits Programme, 'per drop, more crop' component to support micro-irrigation, watershed program and a new component called 'Har Khet Ko Pani' to construct one water harvesting structure per village by 2020. In respect of the institutional environment in India, water and sanitation come under the jurisdiction of the state governments as per the division of work under the Constitution of India. However, the Union Government can legislate on matters of inter-state issues on river water etc. In respect of privatisation of water supply, some cities in Maharashtra (Nagpur, Latur, Aurangabad), MP (Khandwa, Dewas) and Karnataka (Belgaum, Hubli-Dharwad) have experimented with public-private partnerships. Some areas in Delhi have also experimented with PPP models (areas in Nangloi, Malviya Nagar and Mehrauli). However, there have been mixed results with many of the projects scrapped (like the one in Aurangabad) and others facing criticism of favouring the private party by completely derisking the project for them (for example, the France Veolia and Vishwakarma Infrastructure PPP in Nagpur were criticised for passing on huge revenues to the private party, disproportionate to the investment put in by them).

Water policy in developed countries

A quick review of the existing literature on the institutional economics of water reveals the way in which the institutional issues in the water sector are approached and evaluated. The change and performance of water institutions can be evaluated with different analytical perspectives and functional levels. The focus can be on the feature and performance of either individual institutional elements (e.g., norms/customs, property rights, pricing, and water markets) or structural components (e.g., water laws, water policies, and water organisations). The evaluation can also focus either on the operation of water institutions at regional and sectoral scales or on the structure, reform, and performance of water institutions, taken as a whole, from national or macro perspectives.

From a methodological perspective, depending on the focus of evaluation, the analysis can be based on descriptive, conceptual, analytical, or empirical approaches. This special issue on the institutional economics of water aims to showcase some illustrative examples of the kind of studies that are ongoing in the area of water institutions in recent years.

In contrast with the developing countries, water markets tend to be highly formal in developed countries. For example, in Switzerland, almost the whole of the country is covered by public water supply (comprising a mix of the municipal, private sector and cooperative suppliers) and wastewater treatment facilities. The water tariff is also high and recovers the cost of the water supply. There are also stringent laws and regulations governing the suppliers as well as water usage, which leads to low transaction costs.

Similarly, the EU issues directives on water policy from time to time, which are taken seriously since many of the rivers involve more than one European country. In addition, most countries including UK, France and Germany have many similarities in their water policies such as laws that define property rights over water, basin authorities which monitor water extraction from the rivers, many private players across the country and empowered urban local bodies which are responsible for water supply and recovery of water fees in their jurisdictions. To be sure, there are differences across countries, which is because of the path dependence of the existing institutions and legacy issues. Other differences arise because of the geographical uniqueness of a country.

In Australia reforms in the water sector in the 1980s and 1990s have led to a mature institutional environment. The reforms centred around water quality, water rights and water allocation, and pricing. Private sector participation in both the urban water and irrigation sectors has been encouraged. There was also a general consensus at all levels: national state and regional levels on the reforms. This has led to low transaction costs in the supervision and monitoring of water supply and ensured a basic level of quality and quantity of water for both the urban and irrigation sectors.

The US has a mature and formal water market with multiple agencies handling different aspects. While the Environmental Protection Agency handles the water quality aspect, the water supply is done by agencies at the national, state and municipal levels. The Federal Government-owned and operated Centralised Drinking Water System, which includes large dams, pumping stations and cross-country pipelines is an important source of drinking water supply. Similarly, the Centralised Sanitation System operates and maintains sewers and treatment plants across the country. The US Geological Survey maps various water resources of the country; both surface water and groundwater. The 'Safe Drinking Water Act' (SDWA), of 1974 requires that the water provided is free of contaminants. The EPA specifies the level of contaminants. The US depends largely on surface water (almost 70 per cent), rather than groundwater for water needs of various sectors. Irrigation, thermal

power and urban water use form the bulk users. Even though about 75 per cent of the municipalities/local bodies have public water supply, there is bipartisan support for the private sector supply of water. Similarly, most of the water supply for irrigation comes from the public water supply.

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal