Transcript Question - SWAP-bfz

Innovative Water Sector Financing
BY
CUSH NGONZO LUWESI
bfz Expert
Mombasa ,Kenya
7-11 November 2011
Goals of this Lesson
•To introduce economic concepts applied in Integrated Water
Resources Management (IWRM)
•To provide some economic tools used to implement the “User
pays” and “Polluter pays” principles in the water and
sanitation sector
•To explore different ways of achieving performance in the
water sector through application of economic instruments
Learning objectives
• At the end of this lesson, participants shall be able to explain
the difference between water as a social /public good and
water as an economic good; public water management and
private water provision related services
• They need to be keen with basic concepts of water services
provision: consumer and producer behaviours; demand and
supply curves; water market equilibrium (value and price)
•They are also expected to understand how to recover the full
cost in water and sanitation services provision as well as in
watershed management to ensure efficiency
They shall finally grasp key water pricing instruments and
marketing strategies
THE NATURE OF WATER IN
ECONOMICS
A SOCIAL, PUBLIC AND ECONOMIC GOOD
Question
The Nature of Water in Economics
What do you this about water
in each of these pictures?
I’d better go to the fountain …
A rice field
Please! give me a cup
A dam
Go to stream ... There is plenty
of it.
Question
The Nature of Water in Economics
What do EAU PURE, H2O, the
Nile and Ganges waters, the
cities of Amsterdam and
Rotterdam… mean to you?
•Water as a res communes is a fruitage of the nature and a
product of ancient civilizations for sustaining life.
•Water as an necessity commodity for health and environment
is an inferior good
•Water as a raw material is used as a dissolving agent
•Water as an industrial output is a scarce resource and can be
a normal as well as a luxury good
•Water as express demand and supply is a local, national,
regional and international market essential for poverty
alleviation and development.
Environmental Scarcity of Water
2.1
2.1
0.92 0.01
0.41
0.001
0
97.489
96.969
Oceans
Glaciers + Snow
Rivers + Lakes
Biosphere
% Salty
WATER water
Oceans
Glaciers
+ Snow
Rivers +
Lakes
Biospher
e
Atmosph
ere
Total
percent
Atmosphere
%
locked
up
freshwat
er
% Salty water
% locked up freshwater
% Available freshwater
% water vapour
%
Availabl
e
freshwat
er
% water
vapour
percenta
ge
96.969
2.1
96.969
2.1
0.52
97.489
2.1
Total
0.4
0.92
0.01
0.01
0.41
0.001
0.001
0.001
100
Environmental Scarcity... Cont‘d
that
Question
1. High water demand for irrigation and food Three categories of water stress
would be exacerbated by climate
Do you recall the three
production,
hydropower
generation
and
change:
categories of
Question and economic
industrial uses due to population
environmental water
(i) Too little
scarcity (stress) ?
growth
Do you recall the three
(I
(ii) Too much
categories of water stress?
2. High variability of the available water resource
due to the impact of pollution, environmental
degradation and climate change
3. Lack of adequate infrastructure and technologies
to, maintain and conserve water
4. Increasing risk of failure of socio-economic
activities in the course of climate change
5. Insufficient funds available for cleaning and
channeling water for domestic and industrial
consumption as well as sanitation purpose.
6. Insufficient
competence
efficiency
technical
and
technological
from water users to ensure
7. Lack of water use efficiency metrics (thresholds)
8. Lack of coordination of water abstraction among
private users, especially in rural areas
(iii) Too dirty
(Zbigniew W. Kundzewicz 2007)
Rivalry and Exclusion in Water use
E
HIGH
LOW
Private aesthetic
Recreational uses
(Club goods)
MEDIUM
HIGH
Drinking,
Cooking,
Sanitation
X
C
L
U
S
Fishing
Hydroelectric
Transportation
MEDIUM
I
O
Public aesthetic
Recreational uses
N
HIGH
Question
Is the practice of rationning an
exclusion or a rivalry?
Industrial
Crop Irrigation
Livestock
Ecological Base Flow
LOW
Avoidance or control
of water-related risks
Waste Assimilation
Water Value in Use / Human benefits
Protected areas
Environmental services
RIVALRY
Box 3.1: Definitions of rivalry and exclusion
Rivalry: A good or service is said to be rival in consumption, if one person’s use thereof in some sense
precludes or prevents uses thereof by other individuals or businesses. It refers to the nature of the
consumption process. Food, for example, is a typical rival good, as consuming one unit of bread implies
that one fewer unit of bread is available for the rest of potential consumers. Light from the sun (to
some extent) has low or no rivalry, as consumption by one does not necessarily reduce availability for
others.
Exclusion: refers to the possibility of excluding persons who are not entitled from using the good or
service. A good is excludable if there is some mechanism (physical or institutional) that restricts
Dublin Principle 4
Question
Why do you remember why water
price is a catalyser to its efficient use?
“Water has an economic value in all its competing
uses and should be recognised as an economic good
as well as a social good” (Dublin Conference, 1992).
Ignoring the full value of water
results in the failure of IWRM
If misperceptions about the value
of water persist the maximum
benefits from water resources
cannot be derived.
Valorizing water resources does not
mean backsetting the fundamental
human right of water access to all,
but enabling access to potable water
and sanitation to all at an affordable
price
Why To Be Treated as a Social Good?
In many countries, water is a public and social good due to the facts that:
• Its unrivalled utilisation preserves life and promotes culture and
development (i.e. It is vital commodity)
•It is particularly important to view water allocation as a means of meeting
social goals of equity, poverty alleviation and safeguarding health where
there is no competition in its use (i.e. its consumption by some does not
reduce the potential consumption of others) as well as exclusion (i.e. it is
difficult or very expensive to exclude a potential water user to benefit from
the resource use)
• water is finally a social good for the purpose of environmental security
and protection
Good?
Water as environmental scarce resource deserves to be a necessity
economic good; It becomes necessary when extending supply is no
longer a feasible option.
As an input and output of any production process, it has a Value-Added
and can be considered a normal as well as a luxury good
Being considered as economic good is imperative for logical decision
making on water allocation between competing sectoral alternative uses
In IWRM, the economic value of alternative water uses helps in
guiding decision makers to prioritise it as a prior investment option
Why…an Economic Good, Cont’d
In countries where there is
plenty of water resources,
water is less likely to be
treated as an economic good
since the need to ration water
usage is not so urgent.
Yet, in IWRM encourages
stakeholders to consider the
economic value of alternative
water uses so as to guide
decision makers to prioritise
water resource development
as a priority in investments
Question
In the real world, in a situation of water scarcity, should water be
provided to a steel-manufacturing plant because the manufacturer has
the ability to pay more for water than thousands of poor people who have
no access to safe water? Can you find any similar examples from the
ground level in your country? How was such a situation solved?
The Paradox of Water & Diamond Value
 Necessary commodities such as water have ever had lower prices
compared to prices of luxury commodities such as diamond
 Yet, it is not “necessity” or “luxury” that determines the price in
the market but demand and supply
 To answer this question, we must go
Question
behind the market demand curve.
So, what’s the problem? Water has high demand
than diamond , and its price shall be higher than
that of diamond! Does it not seem odd to you?
Your opinion, please!
PRIVATE WATER PROVISION
SERVICES
Demand Curve
 Consumers express their needs to the
market in terms of “ demand”
 This demand is an aggregate of all
households’ desired purchases at each
possible price
 The motivation of each demander to
purchase such an item is based on its
“marginal utility”
 The satisfaction someone receives
from consuming commodities is
called his/ her “utility”
 The utility obtained from
consuming one unit more or one
unit less of the total basket is the
consumer’s “marginal utility”
Question
Why is the demand
curve descendant while
the utility curve is
ascendant?
Supply Curve
 Producers express their prices according to their
marginal variable costs, which obey to the law of
diminishing returns and diminishing marginal
product of the capital
The law of diminishing returns states that as one
type of production input is added, with all other
types of input remaining the same, at some point
production will increase at a diminishing rate
This is mainly explained by the variations of the
short-run marginal cost (MC) curve, which at first
decline and then go up at some point, and will
intersect the average total cost and average variable
cost curves at their minimum points.
Question
Why is it that the supply curve is
ascendant while the marginal product of
capital is likely to be descendant?
Water Pricing Negociations
One (1)
Supplier
One (1) water Duopoly/
user
Duopsony
Some few
providers
Many
Suppliers
Oligopsony
Monopsony
Some few
users
Oligopoly
Oligopoly/
Oligopsony
Oligopsony
Many water
users
Monopoly
Oligopoly
Pure and
Perfect
Competition
Question
What is the difference?
Monopoly
Monopsony
Pure and Perfect Competition
Case: Monopsony of Water Service (Labour)
Question
At this point , what do economic instruments
of water mean to the private water developer?
What Economic Instruments Entail
 Rational
rules
(«
economic
principles ») and incentives that
influence the behaviour of both
consumers and producers to allocate
optimally their resources for demand
and supply
.
Need of a Scarce Ressource
Rational choice
Expression of the demand in a competitive market
Market Negociations
(Demand-Supply Game)
Market Equilibrium Price
Payment & Product Delivery
Rational Use/
Consumption
Question
Is there a need for economic
instruments in managing
water resources in Kenya?
PUBLIC WATER
MANAGEMENT SERVICES
Nature of Public Water Management
Public services are designed to be State
monopolies by the rule of the law
They are designed to satisfy the needs of
a whole decentralized administrative
entities; but not of a specified individual
person or community
Public administration subjects pay taxes and other administrative
charges without oftenly not knowing their actual utility
They can only appreciate their satisfaction level through
improvement of their welfare and environment.
Question
Why are stakeholders in your
watershed unable to measure
their consumption of public
service?
Economic Instruments for Public Water Management
• Policies that create a conducive environment for provision of water
services and distribution of natural resources to enhance accessibility
and equity
• Regulations for a competitive water market economy, where fairness,
transparency, accountability and oversight by public administrations
Question
are enhanced
What the difference between the
instruments in (c) ?
• Actions intended to solve grievances and market failures created by
high external costs from its environment to restore the efficiency of
private water projects. E.g. Inflation, Forex, natural disasters, etc.
• Major tools used encompass: (a) rule making; (b) legal empowerment
of private parties; (c) structuring of private incentives by permitting
fees, charges, tariffs, taxes, subsidies, and penalties; (d) provision of
public utilities (e.g. delivery of watershed infrastructure and services)
Economic Instruments…, Cont’d
The Government also intervenes in the water market to fix or
adjust the price to the benefit of both water users and providers.
It is not usually left to the market, especially when poor people
cannot bear the load of inflated prices
Besides “rational use of water” and “the user pays”/ “the polluter pays”
principles, the government also takes into account economic principle of
“cost recovery” to determine water use and effluent discharge charges
and fees.
MAINSTREAMING
SUSTAINABLE COST
RECOVERY
Why Sustainable Cost Recovery?
Private water users and providers seldom interact competitive markets to
form an equilibrium price for the firms to recover their production costs
This type of competitive market is seldom feasible for the operation of
water service providers, owing to the fact that water is a public and a
social good
Even where competitive markets can be organised (e.g. potable water),
water development projects tend to follow the monopolistic behaviour
that features public water management services, and public water
provision utilities, which operate large water treatment plants
Potable water provision being often supplied directly or regulated by the
State, the price formation will not be the result of supply–demand market
interactions to an automatic cost recovery. Thus the need for efficient
methods of water services provision that mainstream full cost recovery.
Full Water Cost Recovery
Mainstreaming sustainable cost recovery in IWRM requires:
that: (i) Service providers should aim for revenues sufficient to cover
recurrent costs, and should develop sustainable long-term cost recovery
policies; (ii) should Water users’ associations as a group cover service
provision revenues from charges
• Water providers need to act rationally by:
(i) purchasing skilfully inputs and materials at a low cost
(ii) Using efficiently these inputs and materials in production to avoid
wastage or loss, with respect to the production process thresholds
(iii) Employing a production-mix that yields high utilities and outputs,
and maximizes the total benefit.
•Water Use Efficiency (WUE) is mainly assessed by the relation
between the total output (Y) and the total cost (TC):
Y
WUE 
TC
Question
Do you recall the expression of
agricultural water use efficiency?
Full Water Cost Recovery, Cont’d
Under assumption of water resource fluctuation, water providers shall
periodically re-evaluate their demands to meet the economic efficiency
of their production (water for trade).
Question
THERE ARE THREE POSSIBLE SCENARIOS:
What do these 3 scenarios entail?
In a Higher Economic Conjuncture (HEC) or Above Normal Rainfall
Regime (ANOR), the marginal water cost ratio is significantly below the
profitability rate; an “Economic Order Quantity” (EOQ) can be achieved.
In a Normal Economic Conjuncture (NEC) or Normal Rainfall Regime
(NOR), the marginal water cost ratio being slightly below/ above or
equal to the profitability rate, a Limit Average Cost (LAC) is the
threshold
In a Lower Economic Conjuncture (LEC) or Below Normal Rainfall
Regime (BNOR), the marginal water cost ratio is significantly above the
profitability rate, and thus a “Minimum Efficient Scale” (MES) shall be
Full Water Costof
Recovery,
Optimization
WUE, Cont’d
Cont’d
• To achieve the EOQ under the ANOR scenario, the total water cost
(TC) shall not exceed the cost of transaction (CT) with a Cost of Saving
(CS):
TCAN = CT + CS
(Luwesi, 2010)
• To achieve the LAC under the NOR scenario, the total water cost (TC)
shall not exceed the cost of transaction (CT) with an opportunity cost
(OC):
TCNO = CT + CS
(Luwesi, 2010)
• To achieve the MES under the BNOR scenario, the Total water Cost
(TC) shall not exceed the cost of transaction (CT) with a Shortage Cost
(SC), that is an opportunity cost (OC) and a loss of profitability due to
water shortage (LP):
TCBN = CT + CS
Where
CS = OC + LP
(Luwesi, 2010)
Cost of Water Transaction
 The cost of transaction encompasses
all direct and indirect costs of inputs
and capital goods involved in the
process of production of the water
service.
 These include part of permit charge,
raw water volume charge,
administrative cost, monitoring and
evaluation cost, watershed
management cost, amortization of
the investment cost … and the
unaccounted for water.
 These require a full accounting of
both operating and structural costs.
Box 3.8: Demand functions from water utilities sales data
“A frequently observable transaction concerning water is that occurring wh
publicly owned or regulated water authority supplies water to numerous
individual water users. The conditions for a free market are not met, beca
buyer is faced with a take-it or leave-it price schedule from a single monop
supplier. But because the buyer can usually take all the quantity desired at
price schedule, inferences on willingness to pay and demand can be derive
sufficient number of observations on transactions are available, and the
transactions exhibit variation in real price.
“Household water demand, as with all water demand, tends to be very site
specific, influenced by a range of natural and socioeconomic factors. The d
relationship is represented graphically by the familiar demand curve, or
algebraically as:
Qw = Qw(Pw,Pa,P;Y;Z)
where Qw refers to the individual’s level of consumption of water in a spec
time period; Pw refers to the price of water; Pa denotes the price of an
alternative water source; P refers to an average price index representing a
other goods and services; Y is the consumer’s income, and Z is a vector
representing other factors, such as climate and consumer preferences.”
Source: Young (1996)
Opportunity Cost of Water
 An opportunity cost occurs due to failure of not adopting the best
available alternative of using water or owing to unfavourable
combination of circumstances. E.g. inflation, Forex, distance, etc.
 It is expressed as the “regret benefit” or the loss of projected
profitability from the best next sale through the formula:
OC = r * Y
(Luwesi, 2010)
Where r = the water service provider opportunity loss rate
 Though not usually included in the full cost recovery for fairness,
it has proven to be can be useful to guide water authorities in
looking for better water allocations and prioritizing future
investments in the water sector
Cost of Saving Water
The cost of saving water is a cost incurred by accumulation of
exceeding water storage, notably for opportunity lost and
amortization of operating and structural costs
This generally occurs especially in irrigation during the above
normal rainfall regime, when farmers receive more than enough
rainfall to water their crops
Any demand of water shortly after that period will be charged with
a cost of water saving
 Algebraically it is expressed as:
CS = r*Y+l*∏
(Luwesi, 2010)
Where
∏ is the water provider profit, computed in absolute values
l is the loss of profitability under ANOR calculated as “r-1”
Water Shortage Cost
Water shortage cost is incurred by accumulation of acute
insufficient storages, eventually due to deficient rainfall regimes.
It is generally computed as an opportunity cost and the loss of
actual profitability due to shortage:
SC = r*Y+l*∏
(Luwesi, 2010)
Where,
∏ is the water provider profit, computed in absolute values
l is the loss of profitability under BNOR calculated as “1-r”
Any demand of water during the period of drought is actually overcharged due to the shortage cost and the high demand expressed by
the market.
The shortage cost is generally referred to as an “arbitrary fee”
and results in rationing when the government intervenes.
The Optimal Water Provison
Total Cost of Water
Rainfall Regime
Normal (NOR)
Above Normal (ANOR)
Below Normal (BNOR)
Cost of water demand
Cost of
Transaction
Cost of
Transaction
Cost of
Transaction
External Costs
Opportunity
Cost
Opportunity
Cost
Opportunity
Cost
Optimum
(First Order
Conditions)
Limit Average Cost
(LAC)

r no
Cost of
Saving
=
2q / Q
Economic Order Quantity
(EOQ)

ran
=2q/(2Qq)

r an
= 2q /( 2Q  q)
Minimum Efficient Scale
(MES)
Shortage
Cost

r bn
Source: Luwesi (2010)
= 2
Water Market Negociations
LOW
HIGH
W
I
L
L
I
WATER PRICE = COST OF TRANSACTION
+ OPPORTUNITY COST
N
WATER PRICE = COST OF TRANSACTION
+ SHORTAGE COST
(OR ARBITRARY FEE)
HIGH
G
N
E
S
S
T
O
WATER PRICE = DUMPING FEE
PRICE = COST OF TRANSACTION
P
A
Y
BARGAINING POWER/ INFLUENCE ON PEOPLE
NOTE:
In the water sector, fees are generally leveled based on political
motivations and the service provider’s bargaining power may not
prevail to allow income meet expenditure. Thus, an agreement
with the government is needed to subsidize the cost difference
for the development of water services or the watershed.
Nevertheless, the Water Services Regulatory Board shall take into
consideration all the running costs of the service provider prior to
setting tariffs. This will enable the latter to justify its price.
LOW
The Role of Marketing Management in IWRM
Modern frameworks on water services supply and management promote
a fair price to tackle the unpredictable environmental trends
In most rural communities, water users still believe that they are orphans
of public governance and development since they have no easy access to
clean water and safe sanitation.
A SWOT Analysis reveals customers' needs and requirements, fears and
expectations as well as the firm’s position in the market for a MarketingMix that will enable water users’ behaviour change and accrue revenues
Any suspicion and criticism on the service accessibility and
performance, charges and fees, taxes and tariffs shall be systematically
examined prior to any communication or information to the public
Awareness on suspicions and criticisms about their services shall clearly
be stated through mass-media advertising, physical availability and
personal interaction between civil servants and taxpayers, and other
Question
What is: (i) SWOT; (ii) marketing-mix
promotional efforts.
What role do they play in your business?
The SWOT Matrix
EXOGENOUS Factors
OPPORTUNITIES (O)
THREATS (T)
O1 O2 O3
T1 T2 T3 T4 T5 T6 T7 T8
O4 O5 O6 O7
ENDOGENOUS Factors
O8 O9 O10 O11 O12
STRENGTHS (S)
S1
S2
S3 S4
S7 S8 S9
S5 S6
S10 S11
WEAKNESSES (W)
Maximize your water supply
management strengths (S8, S9, S10,
S11) to exploit opportunities from
environment to manage well
water supply infrastructures for
high levels of access of potable
water (O3 O4 O5 O8 O10 O11)
Maximize organisational
competences (S2 S3 S4 S6 S7) to
adapt the water supply
management to environmental
threats (T10 T11 T12 T13 T15).
Minimize existing weaknesses
Foster strategic actions for
effective management of water
supply infrastructures so as to
minimize weaknesses and
mitigate threats carried by
different environments of naturals
resources.
(W1, W2, W3, W4, W5 , W6 W7) to
W1 W2 W3 W4 W5 W6
W7 W8 W9 W10
T9 T10 T11 T12 T13 T14 T15
seize environmental opportunities
(O1, O2, O3, O4, O5)
The Marketing-Mix: McCarthy “4Ps”
Question
What are the so-called “4 Ps” ?
P = PRODUCT (GOODS & SERVICES QUALITY)
PRODUCT
LINE
P
=
P
R
O
PRODUCT
SRVICES
BRAND
PACKAGE
P
=
PUBLIC
RELATIONS
BASIC
PRICE
SPECIAL
PROMO
TIONS
PRICE
ALTERATIONS
M
O
T
I
O
(
I
C
E
PERSONAL
TARGETING
CREDIT
PROMO-
SEGMENTING
TERMS
TIONS
POSITIONING
TRANSPORT
AND
HANDLING
TERMS
ADVERTISEMENTS
)
CHANNEL
NETWORK
STORAGE
FACILITIES
INVENTORY
CONTROL
P = PLACE (DISTRIBUTION Component)
Source: Adapted after Baker (1992)
SHIPPING
FACILITIES
T
E
R
M
S
O
F
S
A
L
E
S
)
C
O
M
M
U
N
I
C
A
T
I
O
N
R
(
N
P
Communication and Promotion Strategy
Message format
1. Dogmatic
2. Emotional
3. Reason-giving
4. Factual/
pragmatic
Goal
Conversion or
Increase of adopters
Attraction
User image
Maintenance
Reinforcement of
loyalty or Attraction
of new users
Source: Adapted after Baker (1992)
Scheduling
Media & Vehicle Mix
Target
Direct ad., TV, Radio
Magazines, Newspaper
Internet, SMS Forums,
campaigns
Customers
Continuous
TV, Radio Internet,
SMS Forums,
campaigns
Gatekeepers
Intermittent
Direct ad., TV, Radio
Magazines,
Newspaper, Internet,
SMS, Forums,
campaigns
Intermittent
In situ demo , Internet,
SMS, Forums,
campaigns
Concentrated
opinion leaders &
others
Any client
Question
At what stage of business development
can you convey messages 1, 2, 3 and 4?
Total Water Services Provision Management (TWSQM)
Water services providers shall always provide advices free of
charge to their customers. These shall include their
responsibility vis-à-vis the state and private water services
Question
How often do you conduct TWSQM in
your firm? And why?
These advices and support services should result from a “Total
water service quality management” that addresses the
following concerns: (i) What do our customers want? (ii)
What service do we provide? (iii) To what extent customers
satisfied? (iv) How can we improve what we offer? (v) What
will this cost us and what benefits can we anticipate?
These activities are likely to increase the strength of the bond
between the Government, private water services providers and
the water resource users’ associations.
Advocating for a Societal Marketing Culture in IWRM
All “stake-holders” in the watershed have competitive powers; the
government can only get better at doing things that matter the majority
Public services are required to develop a Taxpayer-driven administrative
culture to enable behaviour change toward implementation of IWRM
Service delivery should be based on actual needs expressed by the public
during participatory watershed planning, monitoring and evaluation
Strategic organisational change shall follow what people want and are
determined to make it happen rather than creating barriers and obstacles
Question
to the people's will
How do you use SWOT Analysis and 4Ps
in public watershed management?
Effective marketing and communication shall avail easy, quick and
accurate information on IWRM policies, procedures and practices
Shall civil servants listen and implement what people express during opinion polls, this
will help stakeholders keep a good image of public watershed services in their mind.
Innovative Market schemes for WRM
Kenya’s ecological and human systems are highly vulnerable to the
Question
What innovative scheme do
negative impacts of climate change
you know and have applied?
The rehabilitation of a watershed ecosystem is likely to improve water quality
and provide sufficient water for a variety of uses and to different users. The
implementation of novel schemes such as Payment for Watershed Services
(PWS), Green Water Credits (GWC), Clean Development Mechanisms (CDM),
and Reducing Emissions from Deforestation and Degradation (REDD) have
recently been developed based on the premise that there are cause-effect
relationships between land use and watershed functions
These schemes enable water services providers and development
partners to pay for watershed services that are provided by local
stakeholders, in a well-defined and voluntary transaction, to secure the
sustainability of their services, if and only if the stakeholders continue to
supply
these services
(conditionality)
These schemes
actually
results in benefits that would not otherwise have
been provided without payment of local stakeholders’ environmental
services made in cash or kind.
THANK YOU ALL!
FOR PAYING
ATTENTION
ASANTENI
SANA!