OECD Water Programme

Pillar 1, Output 1“Pricing Water Resources and Water & Sanitation Services”

World Water WeekStockholm, 16-22 August 2008

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Overview

1. Objectives and scope of the Report

2. Expert Meeting of 14-15 Nov. 2007

3. Progress to date

4. Draft outline of the Report

5. Conceptual framework

6. Data: The WATSAN pricing survey

7. Next Steps

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Objectives and Scope of the ReportQuestions addressed are related to HWP policy questions•How to improve the use of water pricing for water service provision to ensure financial sustainability of providers and access by all to affordable services

•How to improve the use of water pricing and other economic incentives to encourage management of water resources (and associated watersheds) that is both economically efficient and environmentally effective

Scope was defined based on feedback by experts•Provide updated survey of current state of the art in pricing literature

•Identify key challenges and role of pricing in addressing them

•Identify obstacles faced by policy-makers in designing pricing strategies

•Develop conceptual framework to help policy-makers address trade-offs

•Collect and analyse reliable data and case studies (OECD and non-OECD)

•Provide guidance to improve the effectiveness of water pricing strategies

Expert Meeting of 14-15 Nov. 2007Around 50 participants. Geographic & background

diversity.

Expert recommendations regarding the Report:• Take this opportunity to clarify key concepts

• Focus on multiple policy objectives and trade-offs between them

• Look beyond the pricing of water services

• Look beyond prices. Focus on their determinants, e.g. costs

• Address the political economy of reform

• Contextualise results and policy guidance

In addition, the experts suggested the following:• OECD as a “Water Observatory”

• Broad consultation strategy on the Report4

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Progress to Date

Since the Expert Meeting of Nov.2007, the Secretariat:

1. Defined a conceptual framework and draft outline

2. Collected data on water and wastewater tariffs for domestic and industrial users

3. Identified information gaps

4. Launched consulting contracts for studies (more needed)

5. Ensured coordination within the HWP

6. Carried out extensive external coordination and consultation, aimed at validating & disseminating results

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Draft Outline of the Report1. The policy context

• Key threats and challenges• Where des the policy debate stand?

2. The conceptual framework • Multiple policy objectives and the trade-offs between them

3. Experiences from OECD & non-OECD countries• Investment needs and costs of operation, maintenance, replacement• Pricing policies and trends

4. Policy analysis• Performance of pricing strategies to address policy objectives,

tradeoffs

5. From theory to practice: The political economy of reform• Institutional, political and implementation issues• Implementing pricing policy reforms: towards the virtuous circle

6. Policy conclusions

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Conceptual Framework1. Water as a multi-faceted commodity: Need to tailor pricing

• Natural vs. man-made capital

• Different types of WATSAN services

2. Key policy challenges• Water resources availability and quality

• Sustainable and affordable access to adequate WATSAN services for all

3. Conflicting policy objectives: 4 sustainability dimensions• Ecological, economic, financial and social sustainability

• Understanding the trade-offs

4. Implications for the design of water pricing policies• Different conceptions of “pricing” in relation with the four sustainabilities

• Understanding the water value chain

This framework also informs the scoping paper for the Pricing Strategies topic of the Finance Theme for the 2009 World Water Forum

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Data: The WATSAN Pricing Survey1. A survey of 171 OECD and 85 non-OECD utilities was carried out

in collaboration with Global Water Intelligence (GWI)

2. A consultant, working within the Secretariat, collected publicly available data on pricing for domestic and industrial users

3. Information gaps were identified on, among other issues:• Costs: levels, components, efficiency, cost recovery levels

• Institutional framework aspects

4. Ongoing work aimed at minimizing work for country experts and maximising utility of collected information for use in the Report

5. Main challenges:• Closing the information gaps, especially on costs/efficiency

• Relevant geographic level of data collection and analysis, aggregation

6. Experts’ recommendation: OECD as a “Water Observatory”? Possible synergies with existing OECD databases

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Thank you!!

www.oecd.org/water/

Linkages between pricing, financing and the role of stakeholders

Resource use fee Environmental taxes Subsidies

Bulk price Market prices Contributions Subsidies

Product prices Taxes Retail price

Direct costs

Owner of the natural resource

Resource management

system

OPERATOR

FINAL USER

Industrial system STATE

Suppliers of inputs

Suppliers of inputs

Transactions along the value chain of the water sector

The service provider and the 4 markets

Economic and financial flows in WS&S Public budget

Taxation

Operator

Private partner

Consumers

Responsible entity

Market for goods, services,

labour & capital

Tariffs

Industrial costsFinancial costs

Industrial costsFinancial costs

Lease canons

DividendsCapital gain

Royalties

Dividends

Transfer prices

Transfers

Industrial costsFinancial costs

AssetownershipInvestment

MaintenanceRenewal

Extension

Owner ofproperty rights on

water resourcesWater taxes

Ear-markedsubsidies

Fiscal

Direct cost of self-supply

II market

III market

IV market

I market

Bulk supply operators

Environmental sustainability Discourage depletion of critical natural capital

Equity Guarantee that “merit uses” have due access to water

resources under fair and equitable conditions

Guarantee ecological functions of water natural capital

Minimize the recourse to “supply side” Minimize the alteration of natural outflow

patterns

Identify “water needs” ( basic environmental functions) Keep level and dynamics of prices below the threshold that

makes it unaffordable for some users Achieve an equitable and democratically accepted way to

share the cost of managing water resources Guarantee financial stability of water

systems Compensate adequately economic resources

that are used as inputs Cash flows should guarantee the

conservation of value of physical assets Each new infrastructure binds the next

generation to cover its cost in the future minimize the creation of artificial capital

Allocative efficiency: available water should be allocated in order to privilege uses with the highest social value

Allocative efficiency: the cost of provision of water services (to non-merit uses) should be confronted to their value

X-efficiency: costs should be as close as possibile to the minimum (intended in dynamic terms)

Not encourage over-capacity, over-staffing, gold-plating etc Cost coverage should be intended as for efficient costs only Regulation should ensure an optimal allocation of risks

among shareholders, users and taxpayers Financial sustainability Guarantee long term reproduction of physical assets

Efficiency

Guarantee that water is allocated to its most beneficial uses and economic resources are not wasted

Sustainability in 4 objectives

Taxes / subsidies

Governance Issues

Ecological constraints

Water Management Infrastructure

Available Environmental

Functions

Desired Environmental functions

Stakeholder 3 ...

… Stakeholder n

Stakeholder 2

Stakeholder 1

Environmental and Economic Sustainability Indicators

Stakeholders satisfaction Indicators

Price / cost

Institutional constraints

The conceptual framework for Carrying Capacity

WMS1 WMS2 WMSn

Public budget

…

Water users

WMS1 WMS2 WMSn

Public budget

…

Water users

Taxes

Subsidies

Water charges

WMS1 WMS2 WMSn

Bulk suppliers

…

Water users

Bulk prices (equal)

Water charges

WMS1 WMS2 WMSn

Regional water agencies

…

Water users

Water charges

Ear-marked taxes

Ear-marked subsidies (contribution to investment)