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).
This document has been posted online by the United Nations Department of Economic and Social Affairs (DESA). Reproduction and dissemination of the document - in electronic and/or printed format - is encouraged, provided acknowledgement is made of the role of the United Nations in making it available.
Date last posted: 8 December 1999 15:15:30