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Chapter 7. Raising Water Productivity: Adopting Realistic Prices
Water pricing policies today are remnants of another age, a time when water was abundant, when there was more water than we could possibly use. During the first six decades of the last century, growth in irrigation came from surface water projects, consisting of dams and large networks of gravity-fed canals. Irrigation water from these large, publicly funded projects was often heavily subsidized, provided as a basic service. Because water was so cheap, there was no incentive to use it efficiently.
In some situations, such as in parts of East and Southeast Asia, water is abundant and there is no need to charge for it. But for most of humanity, that age of water abundance is now history. As the world moves into an era of scarcity, the challenge for governments is to take the politically unpopular step of adopting prices for water that reflect its value. Charging for water encourages greater efficiency by all users, including the adoption of more-efficient irrigation practices, the use of more water-efficient industrial processes, and the purchase of more water-efficient household appliances.
Pricing water to encourage efficiency can also be a threat to low-income users, however. In response to this, South Africa introduced lifeline rates, whereby each household receives a fixed amount of water for basic needs at a low price. When water use exceeds this level, the price escalates. This helps ensure that basic needs are met while discouraging the wasteful use of water.4
Some countries saw the value of raising water prices early on. The government of Morocco, with 30 million people living in a semiarid environment, made a huge investment in harvesting its limited rainfall, building 88 large dams, raising storage capacity from 2.3 billion cubic meters of water in 1967 to 14 billion in 1997. But even with this sixfold expansion, Morocco was still facing water shortages, so in 1980 it doubled the price of water nationwide, encouraging efficiency. The effect of price rises on water use varies widely, but as a general matter a 10-percent rise in the price of irrigation water reduces water use by 1-2 percent. For residential and industrial use, the drop is usually higher—ranging from 3 to 7 percent.5
China has moved in a similar direction in recent years. With 500 of its 700 largest cities facing water shortages, with water tables falling almost everywhere, and with rivers running dry, China decided in 2001 to raise the price of water. The goal was to have water prices more accurately reflect value. Raising water prices in a country with a history of free water was politically difficult, much like raising gasoline prices in the United States.6
Some countries facing acute water scarcity are metering groundwater use. Jordan, a country with only 285 cubic meters of water per person per year—one of the lowest in the world—has installed meters on both new and existing irrigation wells. When the amount of water pumped exceeds that specified in the well permit, owners pay a stiff penalty. Although compliance is not automatic and is often met with resistance, it is widely recognized within the community that the failure to comply will deplete aquifers and undermine local farm economies.7
Australia inherited water institutions designed by Europeans, institutions that were more suitable for water-rich countries than for arid Australia. These were replaced by a system of riparian rights with licensing systems that specified how much water could be withdrawn, introduced meters to measure withdrawals, and charged for the amount of water used.8
Unfortunately, India moved in the opposite direction in 1997, when the government of Punjab decreed that the state utility should provide free electricity to farmers for irrigation. This populist move in India's breadbasket state lasted three years. Washington Post reporter John Lancaster wrote, "With no incentive to curb power use, farmers expanded the acreage devoted to water-intensive crops, especially rice, and ran their pumps indiscriminantly, seriously depleting groundwater reserves." In late 2000, when the state electricity utility was on the brink of bankruptcy, it was instructed to start billing farmers for electricity, a move that should raise Punjab's water productivity and slow the fall of water tables.9
Other governments in South Asia, while not so flagrant as the government of Punjab, have nonetheless subsidized the use of both electricity and diesel fuel to irrigators. This, coupled with cheap credit for financing the purchase of pumps and motors, has encouraged the overpumping and wasteful use of water, creating a false sense of food security.10
Because surface water is usually available only through large government projects, it is easier to charge for it than for groundwater. But the basic principles for managing the two water sources responsibly are essentially the same: provide economic incentives to use water efficiently and involve local water users' associations in the allocation of the water. Surface water typically belongs to the state and groundwater to the person who owns the land under which it is located. Even though individual farmers drill wells on their land, the pumps can be metered and farmers can be charged for the water. Local acceptance of this approach depends on convincing farmers to work together to stabilize the aquifer for everyone's long-term benefit.
Some countries have introduced tradable water rights so that individuals who have rights to surface water or who own wells can sell their water. This practice, common in the western United States, enables water to move freely to higher value uses, which essentially means the sale of water rights by farmers or local irrigation associations to cities. In India and Pakistan, small landholders often make the large investment needed for an irrigation well and then sell water to neighboring farmers.11
4. Barbara Schereiner and Dhesigen Naidoo, Department of Water Affairs and Forestry of South Africa, Water as an Instrument for Social Development in South Africa (Pretoria, South Africa), 10 December 1999, at www.dwaf.gov.za/communications/departmentalspeeches/2002/waterasan instrumentfor social dev.doc.
5. Population from United Nations, op. cit. note 2; Mohamed Ait Kadi, "Irrigation Water Pricing Policy in Morocco's Large Scale Irrigation Projects," paper prepared for the Ajadir Conference on Irrigation Policies: Micro and Macro Economic Considerations, Ajadir, Morocco, 15-17 June 2002, pp. 6, 9; Mark W. Rosegrant, Ximing Cai, and Sarah A. Cline, World Water and Food to 2025 (Washington, DC: International Food Policy Research Institute, 2002), p. 141.
6. Water shortage in Chinese cities from R. Maria Saleth and Arial Dinar, Water Challenge and Institutional Response: A Cross-Country Perspective (Washington, DC: World Bank, 1999), p. 26; Liang Chao, "Officials: Water Price to Increase," China Daily, 21 February 2001.
7. Tom Gardner-Outlaw and Robert Engelman, Sustaining Water, Easing Scarcity: A Second Update (Washington, DC: Population Action International, 1997).
8. Saleth and Dinar, op. cit. note 6, p. 23.
9. John Lancaster, "Incomplete Reforms Hobble Economic Growth in India," Washington Post, 6 November 2002.
11. Noel Gollehon and William Quinby, "Irrigation in the American West: Area, Water and Economic Activity," Water Resources Development, vol. 16, no.2 (2000), pp. 187-95; India and Pakistan in K. William Easter and Robert R. Hearne, Decentralizing Water Resource Management: Economic Incentives, Accountability, and Assurance, Policy Research Working Paper 129 (Washington, DC: World Bank, November 1993), p. 13.
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