Putting a price on water in the sense of providing social, economic, and environmental benefits is desired. There is a cost in making water available for people to use. That price, however, can’t be fixed and must rather be based on the given context, as water quantity and quality is bound to change spatiotemporally. Water pricing can be considered at two different levels; firstly, charges for the water resources, and secondly charges for the water services.
Charges for water resources
Abstraction charges signal the scarcity value of water, reflecting its potential benefits to different users and for different purposes, and the opportunity cost entailed in using it for one purpose (e.g. agriculture) rather than for something else (e.g. urban or hydropower generation). Ideally, the abstraction charge should apply to both surface and ground waters since these two resources are inter-dependent and should be managed in a unified way. The charge rates could be different between surface and ground water users (e.g. if local rivers were very low, or aquifers falling rapidly). The charge could also vary by season, depending on the availability of water.
It is difficult to prescribe the correct level of abstraction charges in each situation, since they vary according to hydrological estimates, demand projections, alternative uses, the cost of developing alternative water sources, etc. The important principle is to confront abstractors with a cost associated with their water use, which is large enough to figure in their calculations, and which is a factor in their decisions.
Abstraction charge should be volumetric, though this is not easy to police – a more common practice is to levy a fixed charge in proportion to the maximum permitted extraction, which is then monitored from time to time. Ground water extraction, e.g. by farmers, is also difficult to monitor. An option is to use the cost of electricity used in pumping as the economic instrument to manage abstraction, though this is not ideal and is more often used to subsidise than to penalise water use.
Charges for water services
The supply of raw or bulk water needs major infrastructure and other works in catchment management, afforestation, dams, reservoirs, pipelines, etc. The cost of these works is partly borne by the state (as a public good, justified by strategic considerations, drought prevention, flood control, environmental protection, etc.) and partly imposed on the main beneficiaries – urban users, farmers, hydropower companies, mines, industries, etc. as a raw/bulk water infrastructure charge (e.g. the South African Raw Water Infrastructure Charge).
Non-consumptive water charges are applied to hydropower companies or for thermal power and industrial cooling applications. These charges are normally at a lower rate than for consumptive use, although non-consumptive use does entail some opportunity cost, where water is stored, released into a different part of the catchment, or with its quality or temperature altered.
Household and industrial water tariffs signal the economic value of water to consumers. Volumetric tariffs (the amount of water used), are more versatile than fixed charges and can provide an incentive for careful use. Linear Tariffs, Increasing Block Tariffs (IBT), and Decreasing Block Tariffs (DBT) are different systems of volumetric charges for water. They all need proper meters and appropriate rates to be fair and effective. Tariffs typically combine a fixed and variable element to cover overhead and operating costs respectively.
The treatment of urban wastewater is a public good whose cost is either subsidized by the state or recovered from a surcharge on household water tariffs. The latter signals to households the cost imposed on society from treating the water that they consume. Industrial effluent charges are normally levied on the company discharging the wastewater, based on the estimated presence of specific constituents in the effluent. The effluent charge can play an economic role if it is set at a level that reflects the social cost of treatment – the discharger can then decide if it is cheaper to pre-treat, or avoid the discharge in some other way.
Irrigation water charges tend to be subsidised. Volumetric pricing through metering is rarely feasible, and consumption proxies tend to be used, such as acreage, type of crop, and size of harvest. To encourage efficiency of water use in agriculture accurate volumetric charges for water would be ideal, however this is very difficult politically and can risk imposing unreasonable coats on poor farmers if implemented badly.
There are a number of preconditions for successful water pricing:
- Public acceptance; people may need a public information campaign to persuade them, if they are used to regarding water as a gift of nature. Also, a thorough demand survey and consultations with consumers are required for consumers’ acceptance.
- Associated improvements in the quality of service; this makes tariff increases more acceptable.
- Strong political backing; this includes the avoidance of extravagant and unaffordable promises before elections.
- Targeted provision for poor or disadvantaged consumers (see Tool C7.04). When using tariff schemes as such provisions, it is important to make sure (by monitoring and evaluation, e.g.) that the tariffs are working as intended and don’t end up costing disadvantaged users disproportionately more.
- Financial transparency including independent auditing and regular and automatic price adjustments taking account of inflation.
- Firm and clear public regulation of tariffs set by the private sector (see Tools A2) so that transparency is guaranteed.
Other conclusions to be drawn are:
- The structure of tariffs is just as important as the level of charges in achieving equity and cost recovery.
- Improvements in billing and in the rate of collection can have the same effect as tariff increases, without attracting as much opposition.
- Private companies are better at levying and raising charges than their public counterparts and politicians are often happy for them to do so.
- Pricing of water alone will not have its desired effect towards better conservation efforts if it is weakened by policies elsewhere that pull in the opposite direction. This lesson has been clearly learned from attempts to reduce water use in agriculture and reduce the waste of water and pollution in highly protected industries.