Water is vital for all forms of life, be it human, animal, or plant. Presently, 1.2 billion people live in parts of the world experiencing physical water scarcity, whereas a further 1.6 billion people face water shortage problems. The water scarcity problem is also present in Europe. A 2007 communication from the European Commission calculated that 11 per cent of Europe’s population and 17 per cent of European territory suffers from water scarcity. Moreover, in 60 per cent of European cities with more than 100,000 inhabitants, groundwater is being utilised more quickly than it can be replenished. The impact of this could be profound, especially since aquifers, once drained, may not fill for centuries in the absence of human intervention to the contrary. Water economics aims to study and provide solutions to water-related problems. It studies, among other things, water supply, demand, and related technological, ecological, anthropogenic and environmental issues.

Water economics is an extensive field of study and incorporates diverse issues such as the technical efficiency of water supply, water law, water regulatory institutions, and national water strategies and policies. Among other issues, the field also examines water rights and pricing, supply and demand issues and the provision of upstream access to water infrastructure.

Ever since the International Conference on Water and the Environment (ICWE) in 1992 (also known as the Dublin conference on Water and the Environment), it has become largely recognised that water ought to be considered as an economic good. The notion that water should be subject to the market mechanism has been put into practice. Prices have thereafter been set for water, which was previously provided freely. Nonetheless, the prices that many water users pay for water reflect its physical supply cost, not its value on the basis of scarcity. While some countries do levy a water extraction charge, these charges tend to be akin to administration fees and are not usually based on the economic value assessment of the water being extracted. Moreover, through the twin processes of liberalisation and privatisation, private companies are managing, operating and at times owning what previously used to be publicly-owned water systems. These trends have generated a significant amount of controversy as, across the world, policy-makers tend to treat water as something more than a simple economic commodity. Governments are instead seeking to improve water’s productive and allocative efficiency through their policies and regulations.

Given the objectives of efficiency and equity for domestic water supply, the increasing block tariff system is generally accepted as the best compromise to achieve these objectives. This tariff system poses a paradox in relation to neoclassical economics. Indeed, it charges the highest value use (the most necessary requirements such as drinking and cooking) lowest, and the lowest value use (less necessary uses such as washing a car) highest.

In addition to pricing issues, another main area of water economics is the development of policy suggestions on how to tackle the difference between the supply and the demand for water. This can be done, for instance, through storage and delivery improvements,  creation of underground reservoirs and replacement of leaking pipes. Further ways include investing in desalination and water recycling technologies. Another possibility would be the use of demand management instruments such as quotas, taxes and tax allowances, licences to use, tradable water rights, user charges, subsidies, grants, soft loans and penalties. These incentives serve to divert water allocation to certain favourable water uses, and/or to make unwanted behaviour less attractive. Another important component of demand management addresses behavioural aspects and includes awareness campaigns, education, and training aimed at reducing industry and household demand by bringing about increased efficiency levels. Water demand can be reduced, for instance, through the growing of drought-resistant crops and the implementation of structural measures such as low-flush toilet cisterns, detection of leaks and control systems in distribution networks, corporate policies relating to the washing of car fleets and the use of drinking glasses and near-root drip irrigation in agriculture.

Compared to other commodities and utility services, water has various distinctive features that serve to complicate its supply and cost. It is bulky and as a result, expensive to transport when compared to its value per unit of weight. Moreover, its supply is exceptionally capital-intensive and these capital assets are generally unusable for any other purpose, cannot be moved to other locations and are endowed with a long useful economic life. The capital intensity and economies of scale associated with surface water supply have significant economic and social implications and are preconditions for a natural monopoly. Moreover, in economic parlance, water is considered both a public and a private good. In several (though not all) instances, when left in situ, it is a public good. When it is being utilised in the home or in industry, it is a private good. Lastly, keeping track of water flows is expensive and at times difficult. Therefore, it is frequently hard or impractical to enforce excludability or to establish and properly enforce property rights, though the development of technology is making this increasingly possible and feasible.

  • The sewerage system also constitutes another important building block of a nation’s water management system, contributing to sanitation, as well as contamination and disease prevention.

    Untreated sewage can be detrimental to the environment and human health alike. It thus requires infrastructure-dependent collection, transportation, treatment and disposal in order for its otherwise detrimental effect to be minimised.

    Modern sanitary standards require sewage to be collected at the point of generation, pumped through a pipeline, vacuum transported to a treatment plant or collected at appropriate cisterns and then carried to the treatment plant by bowsers. Sewage treatment plants subsequently treat the sewage to minimise water pollution before discharge to surface waters. Modern technologies also allow for biogas capture during the treatment of water, which can then be used to generate electricity. The sludge that results from the process can also be used as fertiliser or soil conditioner depending on the quality. Sewerage systems can also be used to carry shredded municipal solid waste that is organic in nature and that would subsequently need to be treated in wet aerobic or wet anaerobic conditions. With all sewer systems, inflow and infiltration of surface water and groundwater, as well as overflow and subsequent mixture with potable water sources remains an issue in many different parts of the world.

    In the context of sewerage, economics usually pitches in by identifying the best and most economic solutions for a sewerage-related problem on the basis of pre-established criteria as well as to design an incentives framework to ensure that public policy objectives in this area are met.

  • The Water Framework Directive

    The European Union (EU) Water Framework Directive (WFD) creates a framework to safeguard and restore clean water across Europe, and to guarantee its long-term and sustainable use. The directive introduces a water management approach based on river basins and natural geographical and hydrological elements. This Directive also sets deadlines for Member States to protect aquatic ecosystems. Particularly, this directive has given a main role to economic principles such as the polluter pays principle, methods such as cost-effectiveness analysis, cost-benefit analysis, and instruments such as the pricing of water, environmental taxes and charges.

Equinox Advisory provides various services in relation to the water sector. These include:

  • analysis of market prospects for investment projects and asset sales or purchases;
  • competition issues in the water and wastewater sector;
  • design of incentive mechanisms within the water and sewerage areas;
  • economic analysis (both micro-economic, taken from standpoints of private entities and also macro-economic, taken from the standpoint of society) for new water-related technologies such as photocatalysis and solar desalination;
  • efficiency measurement;
  • financial restructuring;
  • project identification and appraisal;
  • project management and financing; and
  • tariffing and pricing analyses and strategy formulation.

For more information about our Water Economics services, please contact us here.