Managing Water Challenges, Presentation by David Lipton, First Deputy Managing Director, IMF

IMF News, June 11, 2015

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Published: June 11, 2015

Overview

Presentation by David Lipton, First Deputy Managing Director, IMF, Launch of IMF Study on Managing Water Challenges and Policy Instruments, World Resources Institute, Washington, D.C., June 8, 2015.
Objective: raise awareness of growing water challenges and emphasize the need for proper water pricing and complementary policy instruments and institutions.

Why focus on water pricing?

Water should have a positive price where there is competing demand for finite supply.
Common government reluctance to price water:
- Water viewed as a right or presumed not to be priced.
- Belief that not charging helps poor people (described as well-intentioned but ultimately misguided).
Consequences of not “getting prices right”:
- Misallocation today: thirst, low agricultural productivity, poor sanitation, disease, malnourishment.
- Misallocation tomorrow: inadequate investment in infrastructure and technologies, undermining future water security.
Country experiences motivate pricing reforms (examples discussed below).

Water challenges: supply, distribution, variability, and scarcity

Physical facts and distribution:
- Water covers approximately 70 percent of the Earth’s surface, but only a small fraction is available for human use.
- Over 60 percent of the usable freshwater supply is found in just 10 countries.
- Per capita freshwater in the Middle East and North Africa is only a tiny fraction of that in Latin America.
Technology and cost:
- Technology gains in some advanced countries ease freshwater constraints, but these technologies remain expensive.
Variability:
- Four supply variability indexes used: interannual, seasonal, flood occurrence, and drought severity (source: WRI Aqueduct database).
- Out of 179 countries and territories, 119 have at least one aspect of high variability.
- All but one (South Korea) of the 34 countries vulnerable to high variability in at least two aspects are developing countries.
- Many countries with high variability have low storage capacity; low-income countries such as Eritrea and Niger are particularly affected.
Scarcity dimensions:
- Water stress: water supply insufficient relative to demand (physical water scarcity).
- Economic water scarcity: limited access to safe drinking water and sanitation due to poor infrastructure or weak institutions.
- Sixteen countries, all emerging market or developing countries, face the dual challenge of improving access while managing high water stress.
- Advanced countries can have pockets of high regional stress despite low national stress (U.S. as an example).
Water use versus endowment:
- Some water-stressed countries in the Middle East and Central Asia have among the highest water use per unit of GDP, suggesting inefficient management and poor pricing.
Projected demand pressures:
- Water use expected to grow with population and income, especially in developing countries, while supply may be hard to increase.
- Example projection noted: per capita water use in Burkina Faso could outstrip supply in roughly 10 years.

Fiscal and distributional impacts of water under-pricing and subsidies

Global estimate of public water utility subsidies in 2012:
- About US$456 billion or about 0.6 percent of global GDP, in 2012.
Regional and country-level burdens:
- In countries of the Middle East and North Africa, Developing Asia and Commonwealth of Independent States, subsidies amounted to 1½ percent of GDP in 2012 overall.
- In some countries, subsidies are as high as 5 percent of GDP.
Fiscal and investment consequences:
- Water subsidies can be a substantial fiscal burden, crowd out other needed spending, are often not transparently reported or appropriately funded, leading to lack of maintenance and underinvestment.
- In some countries, water subsidies exceed total public investment spending, signaling crowding out of priority expenditures.
Distributional inequities:
- In selected low-income economies, the poorest 20 percent of the population received on average less than 12 percent of subsidies, while the richest received almost 30 percent of the benefits.
- Emerging market averages mask cross-country differences: the poorest receive about 11 percent of subsidies in India, while in Chile they receive 36 percent.

Country cases and policy lessons

India
- Green Revolution boosted productivity but was followed by policy mistakes including extensive input subsidies.
- Water-related subsidies (lower diesel prices and free electricity for irrigation pumps) led to widespread overuse of underground aquifers, increased soil salinity, and fiscal burdens on electricity utilities.
- Punjab and Haryana are experiencing groundwater use well in excess of net availability, severely depleting the water table and risking reversal of productivity gains.
Burkina Faso
- Introduced a progressive tariff grid for drinking water based on volume; higher-tier users subsidize the lowest tier and part of sanitation.
- Public water utility: recovery rates of 97 percent, low debt ratios, and annual profits.
- Access to drinking water doubled over two decades; since the mid-2000s the country invested extensively in water collection and storage.
- Example of supply-side innovation: Bagré “growth pole” — reservoir from dam on the Nakanabe River enabled diversified economic activities including agriculture, fish hatchery, eco-tourism, and electricity generation.
Singapore
- High water stress managed through diversification of supply, demand management tools, R&D, and public support.
- Strong emphasis on water-related R&D: over 70 local and international water companies and more than 20 R&D centers.
- Pricing policy discourages excessive use and aims at full cost recovery:
- Domestic and non-domestic users face same base tariff (no cross-subsidization by industrial/commercial users).
- Additional surcharge beyond a certain consumption level.
- No subsidized “basic” consumption; targeted help provided for low-income families.
- Consumers charged a flat water-borne fee (for treating used water and maintaining public sewage system; doubles for non-domestic users); a flat sanitary appliance fee (per sanitary fitting); and a progressive water conservation tax (reflecting marginal cost of alternative water sources and R&D costs).

Policy instruments and institutional reforms

Pricing reforms
- Objective: rationalize demand, improve delivery of services, unlock further water supply, and achieve cost-recovery that includes delivery, maintenance, and infrastructure investment costs.
- Design must ensure access for the poor and vulnerable.
- Three options highlighted:
- Dual tariff structure: provide a subsidized quantity to everyone, charge a higher tariff beyond that level; requires high access to public network by the poor.
- Subsidize water at public pumps: self-targeted if pumps are located in low-income neighborhoods.
- Subsidize water connections for the poor: improves access at prices below private vendor levels.
Regulatory and property-rights reforms
- Strengthening property rights and regulations to promote efficient use, especially where water is extracted directly by users from the ground.
Cross-sector policy reforms
- Reforms in sectors like energy and agriculture are required to reduce incentives for excessive water use.
- Example: subsidized energy prices (e.g., low diesel prices) create disincentives for efficient water use in agriculture, which accounts for 70 percent of all water withdrawn.
Institutions and public awareness
- Reforms more likely to succeed with greater public awareness and when water management is assigned to strong and independent institutions.
Public investment and fiscal policy
- IMF can advise on designing macroeconomic policies that create fiscal space or catalyze financing for water-related investment.
- Strengthening public investment management systems is important to ensure adequate maintenance spending and better prioritization.

Role of the IMF

Ensure countries’ macroeconomic policies are conducive to sound water management.
Collaborate with other institutions (e.g., World Bank) to assess the impact of water challenges on growth and macro-stability.
Encourage macroeconomic policies to “get incentives right,” including replacing perverse energy and water subsidies with targeted social support.
Help countries increase water-related investment by creating fiscal space or catalyzing financing.
Advise on strengthening public investment management systems for better maintenance and prioritization.

Key messages and conclusions

Three main findings reiterated:
- First: Get incentives right, notably by reforming water pricing, to rationalize water use, promote needed investment, and protect the poor.
- Second: The most desirable approach to reform water pricing varies country by country depending on poor households’ access to the water network and administrative capacity.
- Third: Sound water management requires a holistic approach beyond the water sector (for example, discourage excessive groundwater pumping by improving regulations and replacing energy subsidies with targeted social assistance).

Source: Presentation by David Lipton, First Deputy Managing Director, IMF, "Managing Water Challenges," Launch of IMF Study on Managing Water Challenges and Policy Instruments, World Resources Institute, Washington, D.C., June 8, 2015.