United Nations
Commission on Sustainable Development

Background Paper


Commission on Sustainable Development          Background Paper No. 16
Sixth Session
20 April - 1 May 1998


     ROLE OF GOVERNMENTS IN REGULATING INDUSTRIAL WATER ACTIVITIES 1/

                             Peter Rogers
                          Harvard University


I.   INTRODUCTION

1.       Water resources have come under increasing competition
worldwide as burgeoning populations with increasing affluence demand
more water in the form of agriculture, industry, domestic and
hydropower needs.  The problem is exacerbated by decreasing supplies
of clean freshwater.  System resilience has dropped for many river
basins as the systems are less able to absorb shocks caused by natural
variability under these conditions of increased demand and decreased
supply.  Surface and groundwater reservoirs are under stress due to
the constraints placed on them that cannot be satisfied.  Increasing
competition in water use is a fact of life in many countries and is
inevitable for others in the near future.  Water has become a major
bone of contention both among different users and regions in a state
or country and also across international borders.

2.       In recent years, many international organizations have become
heavily involved in water policy (UN, World Bank, Asian Development
Bank, the Interamerican Development Bank, etc.).  Their interest has
been primarily in domestic and agricultural water supply, and  rural
and urban sanitation. Not much attention has been paid to other
aspects, such as industrial water, until now because these uses had
always been considered of minor importance and, hence, of little
concern for the governments.  But recent facts, speak otherwise.
Although it is true that agriculture accounts for most water
withdrawals (69% worldwide), industry is fast catching up, accounting
for 23% of all withdrawals (Table 1).  This varies tremendously for
different countries and regions depending upon their size, population,
stage of development, economic opportunities, and national priorities. 
For example, Pakistan, with a per capita withdrawal of 2000 m3 has a
ratio of 98:1:1 for agriculture, industry, and domestic uses, whereas
the United states, with approximately similar annual per capita
withdrawals of 1900 m3 has a ratio of 42:45:13.  Many of the developing
countries are on the path of rapid industrialization and, hence,
industrial water use will rise rapidly in the future. 

3.       Despite the overall apparent shortage of water, there are few
incentives for efficient use of water in many regions. This is because
most countries have not developed instruments (either regulations or
economic incentives) and related institutional structures for
reallocating water between sectors, or for internalizing the
externalities which arise when one user affects the quantity and
quality of water available to another group. Water tariffs are
typically based, at best, on average cost pricing (rather than
marginal cost pricing) and typically ignore the opportunity cost of
water (i.e., benefit foregone in alternative uses). Similarly, the
effects of damages caused by industries in polluting surface and
groundwater are ignored in determination of water tariffs and
typically there are no pollution taxes and/or effluent charges to be
paid by industrial polluters in developing countries. As a result,
excessive quantities of water are used, and excessive pollution is
produced.  Industrial pollutants can have major environmental and
health effects particularly in areas where pollution loads are high
compared with the low-flow in rivers.

4.       Many countries are now realizing just how much is being spent
on subsidizing irrigated agriculture.  This is leading to a rethinking
of strategies to manage water resources with such a vast differences
between the price charged and the real opportunity costs foregone. 
Allocative efficiency implies the utilization of a scarce resource
like water in sectors that generate the most value-added from the
water use.  This means that industrial and urban uses be given
priority over agriculture in water-scarce regions, although actual
shifts in allocation may be beset with political and social problems.

5.       Just as industry is catching up with agriculture as a primary
withdrawer of water, another quiet revolution is occurring.  The
concern regarding water quality in many water sources is shifting from
biological to chemical contamination.  Yet another revolution that is
occurring is in the options open to regulators to deal with the
problems caused by water use - both due to water consumption and due
to effluent discharge.  The number of options available to the
regulators has recently increased tremendously.  Traditional command
and control approaches involving quotas on water withdrawal, limits on
discharges, and mandating technologies for processes and treatment
have now been augmented with more innovative approaches involving both
quantity-based (e.g., bubbles, offsets, tradable permits) and price-
based (e.g. effluent charges, more effective water pricing, and taxes)
incentives.  This has added more instruments in the regulatoržs
arsenal in order to effect the desired changes taking into account
various technical and economic factors.  This necessarily involves a
paradigm shift in the approach to water and wastewater regulation -
from expensive standards that provide little incentives for innovation
to more comprehensive performance standards that achieve the same ends
at lower costs to society.


                        II.   INDUSTRY AS A USER OF WATER

                      A.   Demands on the Physical Resource

6.       Table 1 shows a regional and sectoral breakdown of water
withdrawal uses worldwide (Gleick, 1993).  The total amount of  3,240
km3 represents about 27% of the estimated 12,500 km3 of relatively
easily accessible runoff.  Postel et al., (1996) added another
approximately 3,000 km3 for reservoir losses and instream water uses
claiming that fully 54% of the accessible water is already fully
utilized. This wide range of estimates of the stress on the aquatic
system reflects judgments on the use of different technologies for
wastewater treatment that may, or may not, be in place now or in the
future.  The 54% from Postel et al., gives the impression that human
uses are rapidly approaching the limits, but 27% from Gleick sounds
more reasonable.  Suffice it to say, however, that even the Postel et
al., paper claimed only 18% being used consumptively.  So with good
management we still will have on average plenty of maneuvering space
between available supplies and human diversions.  This does not offer
too much solace, however, to those countries already withdrawing high
percentages (in some cases over 100%) of available water. 

     Table 1:   Sectoral Breakdown 2/  of Annual Water Withdrawals (in Km3)
                      (sectoral percentages in parentheses)

----------------------------------------------------------------------
Region                               Sector
                  ----------------------------------------------------
                     Agriculture       Industry         Domestic
                  ----------------------------------------------------
Africa              127    (88%)       7    (5%)         10    (7%) 

Asia               1317    (86%)     123    (8%)         92    (6%) 

N. & Central 
  America           912    (49%)     782   (42%)        168    (9%) 

South America        79    (59%)      31   (23%)         24   (18%) 

Europe              118    (33%)     194   (54%)         47   (13%) 

U.S.S.R. (former)   232    (65%)      97   (27%)         25    (7%) 

Oceania               7.8  (34%)       0.5  (2%)         15   (64%) 

World              2236    (69%)     745   (23%)        259    (8%) 
----------------------------------------------------------------------


B.  Why does industry need water?  What does it use it for? 

7.       If we examine the water use in a few specific industries in
the U.S. in terms of the use that the water is put to, we find that a
substantial portion of the water (from 30% in the Sugar industry to
91% in industrial organic chemical manufacture) is used not for the
actual industrial processes, but for substantially non-consumptive
uses such as non-contact cooling.  This is encouraging, because under
appropriate regulations or incentives, it is possible in many cases to
have closed-cycle systems for cooling.  The remainder of the water is
usually used for process-related items, that are very sensitive to the
process technologies employed.  The major industries that use a lot of
water in the U.S. are pulp and paper and petro-chemical industries,
and, to a lesser extent, fertilizer, sugar and the iron and steel
industries.

8.       An examination of the water use in selected industries reveals
that there are orders of magnitude variation in the amount of water
required for a unit quantity of different products.  Water consumption
varies widely within the same kind of industry. As an example water
use in the sugar beet industry shows that the specific water use in
cubic meters per ton varies from about 2 in Israel to eight times that
in the U.K. or Finland.  Thus, one cannot speak in general terms of a
change in specific water use on an average basis; many countries
report their successes either in terms of some kind of industry-wide
specific water use (cu.m. per ton of product) or in terms of cu.m. per
million $ of product.
 
9.       We note that a lot of water is recycled by U.S. industry;
however, it is still difficult to determine accurately the recycling
rate in industry (defined as a share of the gross water use
contributed by recycled water).   The actual consumptive use in
industry is small (15% overall in the U.S.).  Most of the water is
either recycled or discharged as wastewater.  Much of the water
discharged does have the potential to be recycled, and is increasingly
being used as such for additional supplies where water is scarce, as
in Israel.  However, due to the often poor water quality of the
effluent from water used in contact processes, it is easier to recycle
domestic sewage than industrial water.  If we examine the average and
maximum recycling rates, we see that there are efficient industries
such as synthetic rubber and petroleum refineries, but there are
industries such as cane sugar that show a lot of demonstrated
potential possible improvement.

C.  Demands on Economic and Financial Resources

10.   Data on the investment requirements for the water sector are very
unreliable for industry and irrigation and may be slightly better for
urban water supply.  For example, the World Bank (Jones, 1995) claims
that there are no reliable statistics on global irrigation investment
and Rogers and Harshadeep (1996) came to the same conclusion for
industrial water investments.

11.   Predictions of city growth over the next 25 years in the
developing world imply for the urban water supply and sanitation
services the financial needs will be much greater than at present. 
Currently in large urban areas 30% of the population lack access to
safe water supply and 50% lack access to adequate sanitation, and as a
result there are currently 510  million urban residents without access
to water and 850 millions without access to sanitation.  If we look to
the year 2020, then an additional 1900 millions will be in need of
water and sanitation services.  This implies a total of US$ 24 billion
per year for capital investments in water supply and, if conventional
wastewater disposal technology is to be applied to the additional
population needing services, another US$ 82.5 billion per year.  The
World Bank estimates that on average developing countries spend 0.5%
of their GDP on water and sanitation.  This implies that currently
they are spending US$ 26 billion per year.  We calculate that a
fourfold increase in annual spending would be necessary to achieve
full coverage by 2020. Multilateral lending for this area was around
US$ 1 billion per year at the beginning of the 1990s (Rogers, 1992). 
Examining these rough estimates, one can now begin to understand the
expressions of alarm emanating from the water managers and the
professional staffs of the MFIs.

12.   Given the lack of a data base estimating irrigation expenditures
is more approximate, but irrigated area is expected to grow at 1% per
annum over the next few decades.  At a capital cost of roughly $5,000
per ha, a 1% increase on a world installed capacity of 225 million ha,
would lead to annual capital expenditures of $11.25 billion.  For
industrial water investments, the capital cost of water and wastewater
disposal are typically less than 2% of the total industrial capital
investment.  For 1996 the total foreign capital flows to developing
countries was $224 billion.  Assuming that this met fully 50% of the
investment needs of those countries implies that as much as $400
billion would be invested in industry giving about $8 billion per year
as the capital expenditure on water and wastewater by industries. 
These admittedly shaky numbers, do help, however, to put the relative
expenditures for water by sector in perspective.  They confirm our
hypothesis that urban water investments will have the by far the
largest demand for capital expenditures during the coming decades
followed by a agriculture and industry both with about one tenth of
the urban water supply capital requirements. 

D.  Regulating Industrial Water and Wastewater

13.   In the U.S. only about 13 percent of  public supplies currently
goes to industrial use; 87 percent is privately supplied, hence, there
has been little incentive to regulate water supply to industry. 
Without the perceived need to regulate there has been no need for an
industrial water supply policy beyond -benign neglect.ž  This is not
true on the waste effluent side where discharge permits have been
demanded of all industrial polluters.  The same holds true for most
other countries, industrial regulations have been implemented to
address the problem of water quality, but little has been done to
regulate self-supplied sources.  Also, although most developing
countries have strong laws and regulations on industrial discharges
they are seldom effectively enforced.  There is a need for policy
reform to combat the threat of industrial pollution.

14.   Although these measures are very important in their own right to
help regulate the impacts of the industrial sector on water resources
and would remain important components in any set of policies in the
future, there is a need for a more comprehensive management of water
resources. A comprehensive approach is incomplete without recognizing
the influence of prices and other economic incentives.  Water is a
scarce resource and economics is the science of managing scarce
resources.   The most important contribution of recent approaches to
water management, articulated at the 1992 UN Dublin Conference on
Water, is that water is finally being widely recognized by governments
as an economic good.  It is often forgotten that we cannot specify
supply and demand solely in quantity terms; we also need the price at
which the particular quantity would be produced or demanded.  Except
for a tiny portion of our basic consumption, water is indeed
substitutable at high enough prices.  It is not a free good as
popularly perceived.  It is imperative that prices be high enough if
recycling and conservation are to be voluntarily encouraged. 
Inappropriate agricultural water policies lead to the inefficient
overconsumption of subsidized water in sectors which obtain little
value from the water.  The opportunity costs of the water for its
higher value-added uses are almost never considered in water projects. 
This leads to the expansion of supplies to meet "projected demands"
without considering if it is more cost- effective to encourage demand-
management measures rather than incrementally increase supply.

15.   Although the industrial sector accounts for only  10% to 15%  of
the aggregate annual water demand in developing countries, water is a
critical input for process and cooling requirements in a number of
major industries (Hettige et al., 1995). As documented in case studies
from Nigeria and India, water shortages, unreliable supplies and high
prices adversely affect the expansion of small and medium industries
resulting in loss of employment opportunities for the poor 3/.  In a
number of regions in India (Madras, Hyderabad), China (Beijing,
Tianjin), and Indonesia (Jakarta), and countries in the Middle-East,
water supply and prices are emerging as one of the major constraints
in growth of industries.

E.  Estimating Economic Incentives for Industrial Water Use

16.   Despite the overall apparent shortage of water, there are few
incentives for efficient use of water in large and medium industries
in many regions. This is because most countries have not developed
instruments (either regulations or economic incentives) and related
institutional structures for internalizing the externalities which
arise when one user affects the quantity and quality of water
available to another group. Industrial water tariffs from public
supplies are typically based at best on average cost pricing (rather
than marginal cost pricing) and ignore the opportunity cost of water
(i.e., benefit foregone in alternative use). The cost from self-supply
is largely undocumented and left entirely up to the individual
industries to determine. Similarly, the effects of damages caused by
industries in polluting surface and groundwater are ignored in
determination of water tariffs and typically there are no pollution
taxes and/or effluent charges to be paid by the industrial polluters.
As a result, from an economic viewpoint excessive quantities of water
are used, and excessive pollution is produced.

17.   For water supply in general, the magnitude of both the quantity
and quality problems lead to costs of supplies of adequate quality
that are rising rapidly with the cost of a unit of water from "the
next project" often being 2 to 3 times the cost of a unit from "the
current project" (Serageldin, 1995). Hence, in many situations, demand
management, water conservation, and recycling is likely to be more
cost-effective than investments in increasing water supply. Further,
investments in water conservation, recycling and reuse provide
environmental benefits (over and above the economic benefit of lower
costs) since these result in reduction in water pollution loads. Thus,
conservation and recycling of water in industries provide
opportunities where there is no conflict between the objectives of
economic efficiency and environmental improvement.

18.   To understand where in industrial water use system economic
instruments may be effectively applied one need the have information
of where the major savings can come from.  Figure 1 shows the current
best estimates of global water use by industrial sector.  Iron and
steel are by far the largest water user followed by petroleum
refining, textiles, and pulp and paper with much lower total use. 
Even though the developing countries use such a small portion of the
total water, they pretty much follow the same ordering of water use. 
Looking at the magnitudes of the actual quantities used, it would seem
to be a developed country problem.  However, this static picture hides
the rapid rates of industrialization in large countries like China,
India, Indonesia, and Brazil.  All of these and the other developing
countries, already have large demands placed upon their water
resources and the industrial water demand arriving last will have
difficulty in assuring supplies.

19.   Figure 1 shows how water use technology is currently employed in
some of the major industrial groupings.  From a policy perspective
this figure gives some indication of where the potential for water
savings lies.  For example, in the pulp and paper industries the bulk
of the water use is process related with only a smaller fraction going
to non-contact cooling.  The situation in the industrial organic
chemicals industry is radically different with the bulk of the water
going to non-contact cooling.  The implications of these for changing
water use are radically different.  There are many easy technical
options for non-contact cooling which are very price sensitive, hence,
pricing on the input side in these industries could lead to large
water savings at relatively low costs.  If the bulk of the water goes
for process related activities, the policy options are less clear. 
For example, it will be necessary to change the process technology to
achieve significant savings.  These are likely to be expensive and are
less input price responsive that cooling water options.  In this case,
both input and output pricing may be indicated as well as some form of
product environmental charge.


            Figure 1.  Industrial Water Use Beakdown

                       [ Not available ]


20.   Before arriving at any conclusions based upon these
considerations, it is also necessary to look at the fate of industrial
water use; this is shown in Figure 2.  Here we get a sense of how well
an industry is already doing in recycling and disposing of its wastes. 
Now the comparison of the policy instruments to be used for the two
industries above could change.  Pulp and paper industries typically
already recycle significant amounts of their waste water, the
industrial organics recycle less and discharge more.  This clearly
indicates more attention to regulating and pricing of the effluent of
this industry.


               Figure 2.  Industrial Water Use (by fate)

                          [ not available ]


E.  Case Study of Pricing Groundwater for Industrial Use in Manila

21.   A recent study (Ebarvia, 1997) on industrial water supply in
Manila, the Philippines, lays out very neatly the policy options
facing a municipal water authority in dealing with largely unregulated
groundwater development by industry.  Metro Manila covers an area of
2,125 square kilometers and has a population of 9.37 millions and
accounts for 30% of the GDP of the Philippines.  Current water supply
is 900 MCM per year from the recently privatized Metropolitan
Waterworks and Sewerage Systems (MWSS), 310 MCM from 3,000 private
wells and 14 MCM from 20,000 shallow wells.  Groundwater supplies only
3% of the MWSS supply and 82% of the industries in the area have
established deep wells.  As a result, massive overpumping of the
aquifer has taken place with the water table declining between 6 and
12 meters per year from 1990 to 1996.  In 1991 it was estimated that
waterborne diseases killed 7,610 persons, mainly children, and caused
about one million morbidity cases. 

22.   Ebarvia computed the marginal opportunity cost (MOC) of the
groundwater supplies as the sum of the marginal private costs (MPC),
the marginal user cost (MUC), and the marginal external costs (MEC). 
The MPC is defined as the marginal private or direct cost faced by the
provider of water, the MUC is the scarcity premium associated with the
direct resource use, and the MEC is defined to include the external
effects associated with the production and disposal of the resource
(interference effect and salt water intrusion for the groundwater
supplies and the environmental costs associated with the surface water
supply reservoirs for the MWSS supplies).  The MOC of the MWSS
supplies was computed and compared with the MOC of the groundwater use
to evaluate a least cost program for Manila. 

23.   The  MPC for the MWSS supplies produced is estimated as P17.07
per cubic meter without the external effects and P82.67 per cubic
meter when the external and scarcity premiums are included.  If
allowance is made for the fact that about 65% of the water produced
goes to illegal connections and 35% is lost through leakage in the
system, then the MOC rises to a huge P140 per cubic meter!  For
industries pumping groundwater the MPC is P52.67 and including MUC and
MEC raises the MOC to P178.83.  The MPC cost of water purchased from
tanker trucks is estimated at P123.28 per cubic meter, and the current
price charged is P70 per cubic meter.  The current overall average
tariff for MWSS water was set in May 1992 at P6.43 per cubic meter. 
The marginal direct cost of operation of the sewerage system is
estimated at P73.56 per cubic meter (the exchange rate for all of
these estimates was US1=P26).

24.   Ebarvia, using these estimates recommended that withdrawal from
the aquifer be regulated and that the MWSS develop alternative sources
and improve the distribution network and the water delivery services. 
The regulation of the groundwater extraction would be carried out by
having all groundwater users securing permits, installing meters, and
pay the tax making their MPC equivalent to the MOC, or about P122 per
cubic meter.  This tax, or user fee, is substantially more than the
MOC of the MWSS water produced and close to the MOC of the MWSS water
supplied.  It is hard to see how this tax will be accepted by the
industries in the region.  Adding P73.56 as an effluent charge would
be another large incentive to encourage industries to treat wastes,
recycle water, or minimize consumption.  The Manila case illustrates
how widely diverging are the estimates of the marginal opportunity
costs of water from the actual tariffs charges or the marginal private
costs for self-supply.  Due to the fact that water and wastewater have
not been historically handled in a correct economic fashion, such wide
discrepancies are to be expected in many locations around the world,
both in the developed and the developing worlds.

III. PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND SANITATION

25.   Water supply and sanitation has traditionally been owned and
managed by the public sector.  In developing countries, the problems
linked with the insufficient performance and the low productivity of
the water supply and sanitation are primarily related to the fact
water utilities are governmental institutions.  The inefficient
billing and collection practices with low pricing creates financial
and commercial losses.  Also, the technical and operating problems
caused by the lack of appropriate operation and maintenance schemes. 
All these problems are exacerbated by institutional problems such as
over-staffing, low wages and excessive political interventions.

26.   In order to increase the efficiency and the productivity of the
water sector and overcome these problems in water supply and
sanitation, there is a growing consensus among the international
communities for the need of private sector involvement.  The functions
related to the management of the water sector, at least some of them,
or in some cases all of them ought to be given to the private sector. 
The are three main objectives for the participation of the private
sector which could be summarized as:

      (a)  expand the water supply and sewerage systems in order to
increase population coverage;
      (b)  expand sewage treatment in order to reduce water pollution
and public health hazards;
      (c)  and provide better quality of services.

27.   These are not the only objectives but ensure a higher operating
efficiency and financing the system are often the rationale behind the
creation of public and private sector partnership.  In the 1980s,
privatization of government-owned enterprises began to be recognized
in some developing countries in Latin America as a tool for economic
change, and today this involvement is getting more spread.

28.   However, based on a range of study undertaken in the United
Kingdom privatization program, Rees (1997) shows that the private
sector cannot of itself and by itself remove many of the obstacles to
efficiency, which characterizes the public sector.  The performance
yielded by private sector participation partly depends upon the way
the current public sector enterprise operates.  In fact, the
involvement of the private sector does not mean only changing the
ownership, but it involves making a complex set of choices about all
the factors influencing sector performance.  Also, the government need
to ensure that private company operations do not impose unacceptable
external costs on other resource uses.

IV.  TYPES OF PRIVATE SECTOR INVOLVEMENT

29.   Private sector participation has a wide range; from the provision
of a particular technical service to a variety of contracts, and to
the total ownership of the supply system.  Private sector
participation can be grouped into two categories.  The first group
corresponds to the situation where the ownership of the asset remains
with the government or the public sector.  This group can be
summarized as four types of contracts: service contracts, management
contracts, lease arrangements and concessions.  The second group is
different in that partial or full ownership is transferred to the
private sector.  The degree of which assets, responsibilities and
functions are transferred from the government to the private sector
varies: Build-Own-Operate-Transfer (BOOT), as well as the different
version of it, BOO and BOT, Reverse BOOT, Joint ownership or mixed
companies and outright sale.


A.  Group IžAssets Remain Public

Service Contracts

30.    Contract for a specific technical service for a certain fee,
such as leakage repair or metering installment

Management Contracts

31.    Private sector is responsible only for the operation and
maintenance.  It is usually a short term contract, of around 5 years.
These are the most competitive form of privatization and impose the
least regulatory burden, due to the short period contract.  This type
of contract is very frequently seen in France and Spain, and recently
they have been used in Mexico and Guinea-Bissau.

Lease Arrangements

32.    The private sector is responsible for operations and
maintenance, and in some cases for asset renewals.  The investment is
the responsibility of the public sector and the asset remains a public
good.  The contract in this case is usually of a long term, around 10
to 20 years, or even longer.  These lease contracts have been applied
in France and Spain for sometime, and currently they are used in Cote
džIvoire, Gambia and Guinea.

Concession

33.   Although the asset remains formally a public sector property, the
government signs a long term contract, of more than 25 years, with a
private company, which becomes responsible for all capital investment,
operations and maintenance.  The concession contracts have been used
extensively in Spain and France, and for the developing countries in
Argentina, Chile and Cote džIvoire.

B.  Group IIžChange in the Asset Ownership

Build-Own-Operate-Transfer (BOOT), as well as the different version of
it, BOO and BOT, 

34.   Build, Operated and Transfer (BOT).  Build, Operated and Own
(BOO).  These represent a contract for the construction of a specific
infrastructure.  In this case, the private sector is responsible for
the capital invested, and it represents the owner of the asset until
it is transferred to the public sector.  They are mainly designed to
attract the private sector into the construction of new major items of
infrastructure: bulk supply reservoirs, water and sewage treatment
plants.

Reverse BOOT

35.   In some countries the private sector is not interested in a BOOT-
bidding process, in which case the public sector finance and build the
plant and then contract a private firm to operate the plant over a
long period of time.  This might be more attractive to the private
sector as it lower the risks for its involvement.  Example of BOTs and
BOOTs in the water sector are mostly in Mexico used for upgrading and
expanding wastewater treatment plants in various cities.  In Australia
and Malaysia, they are used to construct large water treatment plants.

Joint ownership or mixed companies

36.   The government sells a proportion of shares to the private sector
and create a partnership between the public and private sector.  The
mixed company model represents a situation when in the same city, the
water supply and sanitation system is managed by different private
enterprises.  Columbia is one model in Latin America for the mixed
company.  Also, in France the Paris water supply is managed by two
different companies one from each side of the Seine.  

Outright sale

37.   The public sector transfer the full ownership of the system to
the private sector.  The private sector become fully responsible for
all capital investment, maintenance, operations and revenue
collection.

V.  SUCCESSFUL EXPERIENCES

38.   According to the World Bank experience and studies on private
sector participation, the concession arrangements seem to be the
superior option.  Concession contracts create competitive incentives
for efficiency and reduce the regulatory task on the government.  One
of the successful experiences of private sector involvement is the
concession program of Buenos Aires.  The government of Argentina, with
the World Bankžs support and assistance, had launched a privatization
program in 1990.  A thirty-year full concession was adopted for the
operation of the water supply and sewerage system of the Buenos Aires
metropolitan area.  The government was the owner of the assets, but
the private concessionaires had the responsibility of: operating,
maintaining, and managing the system, investing in rehabilitation and
expansion works, and alleviating contamination of water resources
caused by domestic effluents.

39.   Based on the French experience, Cheret (1997) states that
delegated contracts provide the best solution for the provision of
most public infrastructure services, as they can be much better
adapted to the conditions of several cities.


VI.  SUMMARY

A.  Regulation and Economic Instruments

40.   The problems of industrial water management are often fairly
obvious ones; lack of effective regulations on the part of government
and lack of appropriate incentives on the part of industry.  The
primary problem is that few countries have any instruments
(regulations, economic incentives, and disincentives) to regulate
water use and wastewater disposal.  In addition, water has
traditionally been considered a common property good and as a result
the full price of water is seldom charged to consumers.  Even where
tariffs are charged, they are usually based upon average costs and
also ignore the opportunity costs of water or the real costs of the
externalities of wastewater disposal.  These factors have led
industries to use water inefficiently. Industries have not needed to
employ conservation and recycling measures as water has been so
inexpensive.  Recently, increasing concerns over increasing water
scarcity and environmental concerns, and the competition among the
users for the scarce resources has led to the consideration of more
rational water management strategies.  This has led to more rational
and innovative approaches being implemented.   
 
B.  Policy Options

41.   In Table 2 we give a comprehensive listing of all of the possible
instruments that may be used to influence industrial water policy.  If
implemented by how could these policy options change the water
demanded and wastewater disposed of by industries?  It is not an easy
task to determine the effect of non-economic policies on industrial
water management strategies.  This is because it is rare that only one
control policy change in isolation can be observed.  It is also
difficult to exactly determine how much a change in water prices would
affect the water demanded in industry.  Basic economics tells us that
a rise in water tariffs would lead to a drop in the water demanded -
exactly how much depends on the price elasticity of demand of
industrial water.  These elasticities are notoriously difficult to
determine empirically as it is difficult to control for other
variables even in the rare cases when industrial prices have been
raised enough to actually make an impact.  The effect of policy
options is usually obtained by the various case studies involving the
examination of the response of nations, regions, industry types and
individual firms to changes in one or a set of water policies. Such
analyses at least indicate the kinds of policies that have been
successful in the past and the industries or regions that appear to be
most responsive to policy changes.  This kind of information is
necessary before any kind of efficient water policy portfolio can be
drafted for the various industries in different spatial regions.


                                TABLE  2

       Possible Instruments to Influence Industrial Water Policy
(D means predominantly demand side and S means predominantly supply side)

-------------------------------------------------------------------------
Non-Economic Command and Control Policies
- Water use quotas (D)
- Wastewater generation quotas (D)
- Effluent standards (D)
- Mandated recycling percentage (D)
- Encouragement of research, development, production and adoption of
conservation, recycling, and wastewater treatment measures (S)
- Bubbles/Offsets/Banking (S)
- Industrial Ecology - management within industrial complexes (D)
- Licensing of water supply/wastewater disposal (D)
- Enabling conditions - coordinating institutions, legislation,
macroeconomic framework (D)
- Technology transfer of efficient equipment/processes (S)
- Information availability and exchange - on products, processes,
waste exchanges (S)
- Development of alternative supply options (e.g.: domestic
wastewater, desalination) (S)

Economic Policies
- Water supply tariffs (D)
- Effluent charges/taxes (as a function of Quality and Quantity) (D)
- Penalties for violation of quotas (D)
- Tradable permits (D)
- Subsidies on research, development, production and adoption of
conservation/recycling processes (including water saving
devices/processes) (S)
- Subsidies on research, development, production and adoption of
wastewater treatment technologies (S)
- Cross-subsidization of agricultural water conservation (D)
- Privatization of the water sector (supply, distribution, collection,
treatment and disposal) (D)
--------------------------------------------------------------------------


42.   Given that a government is facing rationally-acting, profit-
maximizing industries, how does it select policy options that will
achieve the national goals of sustainable water use?  The options are
few:  Table 2 lists all of the command and control and the economic
incentive options available to governments. This list could also be
split into the categories of demand management and supply management. 
There are economic and non-economic policy options that fit on both
sides of demand and supply breakdown.  One needs to recall that even
price policy can be viewed as a supply enhancing option because as the
prices rise supply options that were previously too expensive now
become economical.  Even though Table 2 gives a fairly comprehensive
list of policy options, we conclude with a list of comments which
highlight some of these policies for particular emphasis. 

      (a)   Industrial water use is declining in the developing
countries and increasing rapidly in the developing world.

      (b)  Government intervention is needed, particularly in
situations involving private supply of water.  It is ironic that more
government intervention is indicated in situations where the private
sector has previously flourished unhindered by regulations. 

      (c)  A combination of stringent permitting and charging of user
fees to bring self-suppliers into equivalence to the real social
marginal cost needs to be implemented. This will have the added
advantage of establishing clear property rights to the extractors.

      (d) Once a permit system has been established, the private sector
should be allowed to freely trade the permits subject only to third
part liabilities being regulated by the government.

      (e) The water use permits should form the basis of a effluent fee
mechanism for charging all emissions to the environment.

      (f) All direct, and indirect subsidies (for example via
environmental degradation), to industrial water users should be
quickly eliminated.

      (g) The permitting and enforcement branches of the government
environmental agencies need to be strengthened and given clear
mandates to pursue violators of permits.

43.   The governments should establish clearing houses to facilitate
technology transfer from abroad and between and among the industries. 

VII.  LESSONS LEARNED FOR PRIVATE SECTOR PARTNERSHIPS IN WATER SUPPLY
      AND WASTEWATER MANAGEMENT

44.   Private sector participation should be viewed as a partnership
between the public sector and private sectors.   The most appropriate
options for private sector participation should be selected for each
situation with a consensus from the stakeholders, and this should be
based on political, legal, cultural, institutional, financial and
technical characteristics of the water and sewage system.  Also,
contracts such as the concession, must be realistic and as specific as
possible to avoid disappointment and minimize conflicts and debate
between the concessionaire and the regulatory authority.  There are
several elements which have to be fulfilled in order to make
privatization successful, of which the political commitment at the
highest level of the government should be ensured as a top of the
list.  The over-riding objective of this institutional change being
the sustainable development, privatization should part of a
comprehensive program of economic reform.  In order to improve the
management of the utility, the adequacy of water rates should be
examined, and if necessary adopt a rate increase, as well as a
reduction of staffs, which could be achieved through the promotion of
early retirement packages, financed by the government, the
concessionaire or both.  Finally, it is important that the regulatory
entity is strong enough to be able to confront an experienced
international operator.

                           References

Cheret, Ivan. 1997. "Private Sector Involvement in Urban Water
Utilities," Technical Advisory Committee, Global Water Partnership.

Ebarvia, M.C.M., 1997. "Pricing for Groundwater use of Industries in
Metro Manila, Philippines," Economy and Environment Program for
Southeast Asia, Singapore, 1997.

Gleick, P. H.  1993. Water in Crisis: A Guide to the World's Fresh
Water Resources, Oxford University Press.

Hettige, H. et al.  1995. "The Industrial Pollution Projection System,
Policy Research Working Paper No. 1431, Policy Research Department,
World Bank, Washington, D.C.

Idelovitch, E. and K. Ringskog. 1995. "Private Sector Participation in
Water Supply and Sanitation in Latin America," The World Bank.
Washington, D.C.

Jones, W. I.  1995.  World Bank and Irrigation, A World Bank
Operations Evaluation Study, World Bank, Washington, D.C.

Lee, I. S. and A. Anas.  1990. "Impacts of Infrastructure Deficiencies
on Nigerian Manufacturing: Private Alternatives and Policy Options,"
World Bank Publication.

Manu, Y.  1991.  "Back-to-Office Report," World Bank Internal Paper,
Washington, D.C.

Postel, S. L. et al.  1996. "Human Appropriation of Renewable Fresh
Water," Science, Vol. 27l, 785-87.

Rees, J. 1997. "Regulation and Private Participation in the Water and
Sanitation Sector,"  Technical Advisory Committee, Global Water
Partnership.

Rivera, D. 1996. "Private Sector Participation in the Water Supply and
Wastewater Sector: Lessons from Six Developing Countries.  The World
Bank. Washington, D.C.

Rogers, P.  1992.  "Comprehensive Water Resources Management: A
Concept Paper," Policy Research Working Papers, WPS 879, The World
Bank.

Rogers, P. and N. Harshadeep.  1996. "Industry and Water: Options for
Management and Conversation," The United Nations Industrial
Development Organization, Vienna, Austria.

Serageldin, I.  1994. "Water Supply, Sanitation, and Environmental
Sustainability: The Financing Challenge," Directions in Development
Paper, The World Bank, Washington, D.C.


                                   Notes

1/  Prepared for the United Nationsž Division for Sustainable Development, for
the April 21-22 meeting of the Commission on Sustainable Development.  The
author wishes to thank, Ms. Hynd Bouhia for her help in preparing this paper.

2/  A distinction must be made between measured and derived data - many of the
data used in water resources planning are derived from an examination of
related parameters;  agricultural water use is rarely measured - it is often
estimated by assumptions about the crop types, planting patterns, water
consumption rates, regional climatology and method of irrigation (Gleick,
1993).

3/  As noted by Lee and Anas (1990), in Nigeria, actual unit cost (0.52
naira per gallon) for small firms was much higher than the actual cost (0.02
naira per gallon) for large firms which inhibited the growth and birth of new
small firms.  In a note on water use by major industries in Madras, Manu
(1991) found that due to water shortage, one unit had to cut down production
by one third while water availability was a major constraint on expansion of
capacity in the other two units (Madras Refineries and Madras Fertilizers).

 


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