The Case for Reforming the Price of Water
IMF Blog, March 22, 2016
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- Authors: David Lipton
- Published: March 22, 2016
Water subsidies and the problem statement
- Water demand outpaces supply worldwide, indicating water is underpriced.
- Many governments resist pricing water like other goods, despite scarcity.
- Mispricing causes both current misallocation (thirst, low agricultural productivity, poor sanitation, disease, malnourishment) and future misallocation (inadequate investment in infrastructure and technologies for water security).
- Mispriced water contributes to macroeconomic and growth underperformance.
Illustrative country experiences
- India: Underpricing of water and inputs (lower diesel prices and free electricity for irrigation pumps) has led to widespread overuse of underground aquifers and increased salinity of soils, nearly undoing all the productivity gains from the green revolution of the 1960s.
- California: Governor Jerry Brown implemented an executive order in mid-2014 mandating a 25 percent reduction in water use over the next 12 months compared with 2013 levels; decades of mispricing also contributed to the severe shortage.
- Burkina Faso: Introduced a progressive tariff grid for drinking water based on volume; higher-tier users subsidize the lowest tier and sanitation. Results include:
- Utility recovery rates of 97 percent.
- Low debt ratios and annual profits.
- Access to drinking water doubled over the past two decades.
Scale of subsidies and equity concerns
- IMF economists estimate that in 2012 underpricing resulted in water subsidies totaling about $456 billion worldwide, or about 0.6 percent of global GDP.
- In some countries subsidies amount to as much as 5 percent of GDP.
- Estimates exclude agricultural uses of water, which in developing countries constitute the bulk of water consumption.
- Water subsidies can exceed total spending on public investment in some countries, suggesting crowding out of other expenditures.
- Equity: Subsidies are proportional to water use; because the poor often have limited or no access to water, subsidies in developing countries tend to benefit upper-income groups. In select low-income economies, the richest households get, on average, three dollars’ worth of subsidized water for every dollar’s worth provided to the poorest.
Mechanisms and economic rationale
- Mispriced common resources produce a “tragedy of the commons”: individual users acting in self-interest deplete resources, evidenced by rapid depletion of underground aquifers and deterioration in water quality.
- Price incentives play a strong role in rationalizing water use and encouraging conservation and efficient allocation.
Policy recommendations and holistic approaches
- Reform water pricing as an essential component of improved water management to:
- Rationalize demand.
- Improve delivery.
- Unlock further supply.
- Price water to achieve full cost recovery, including maintenance and investment costs.
- Design pricing to expand water access for the poor and vulnerable (for example, progressive tariffs where higher users subsidize basic access and sanitation).
- Complement pricing reform with:
- Regulations that strengthen rights to water access and promote efficient use.
- Strong and independent institutions in charge of water management.
- Public awareness campaigns to build support for reform.
- Timely action is important: postponing reforms risks future economic consequences and impeded prospects.
Source: The Case for Reforming the Price of Water — David Lipton, March 22, 2016
Content in this bundle
- 改革水价; iMFdirect博客; 2016年3月22日
- 水の値段を改革する: デビッド・リプトン; iMFdirect ブログ2016年3月22日掲載
- Staff Discussion Note
- Аргумент в пользу реформы цены на воду; Дэвид Липтон, Блог iMFdirect; 22 марта 2016 года