What is an economic analysis of water use?

Economic analysis of water use is a requirement of the Water Framework Directive(WFD). This obligation, imposed on all member countries, is cyclical, with a testing interval of 5 years. The regulations stipulate that the analysis be conducted on a basin-by-basin basis. A very formal approach therefore requires the preparation of similar documents for the Vistula and Oder rivers (which is understandable and obvious), but also for the other eight river basins, with a combined population of 2 percent. Poland’s population. Leaving aside the overinterpretation of the duties described, it is worth posing two questions: what is actually at stake and why should it be done?

Economic analysis of water use – levels of implementation

The essence of economic analysis is the verification of the user pays principle. The calculations should be made in several cross sections: disaggregated by river basins, sectors of economic activity and forms of water use.

Economic analysis of water use should be conducted at the level:

• financial (from the point of view of a single entity, such as a water supply operator);
• economic, that is, including all entities (including households) affected by some effect of the activity.

Problems posed by economic analysis of water use

Preparing analyses by river basin is quite natural from the point of view of water management, but it poses a lot of difficulties in collecting statistical data. This is because the vast majority of the latter are collected by administrative division, not by hydrology. Conversion algorithms are feasible for data collection at the level of individual municipalities. When the CSO or another institution collects information only for more aggregated units (counties, provinces), the estimates realized are already estimates.

Minimal sector disaggregation includes: the municipal sector (water supply and wastewater collection and treatment separately), industry and agriculture.

Results of economic analysis of water use

The economic analysis of water use at the financial level provides an answer as to whether revenues from the activity cover its costs. In the case of water supply (also collection and treatment of wastewater), it allows us to answer whether the mechanisms for determining the prices of these services are correct, and the tariffs used allow the collection of revenues that cover costs and prevent depreciation of assets. Of course, raising additional funds for the development of infrastructure, or adapting it to tightening environmental regulations (e.g., the amendment of the directive on municipal wastewater treatment plants) is necessary, so a financial rate of return of more than 100 percent. is the most expected value. Determining the distance between the actual state and the optimal level is a clear added value of the whole analysis.

Previous research cycles operated for municipal operators on samples close to full samples (min 85 percent of water captured), which allowed for a more accurate analysis taking into account the size of companies (it’s all about economies of scale), forms of ownership (and their impact on the bottom line), type of water captured, etc. The role of local government subsidies to the activities of such institutions was also determined, examining their impact on prices and the legitimacy of providing them. The accumulation of a large database describing the entities involved in water supply and wastewater collection/treatment enabled further sub-analyses.

It was investigated whether water abstraction fees (one of the environmental fees), or more specifically, unit rate differentials, have an impact on the price of water for end users, i.e. whether abstraction fees have any consumption-reducing effect. It also checked whether the financial rate of return, after eliminating the subsidies provided by TSU for water and wastewater prices, is higher than 100 percent. Various tariff solutions related to combinations of fixed and volumetric charges, as well as sectoral price discrimination of different customer groups (different prices for households, td. services at one operator) were also analyzed, along with the analysis of cross-subsidies between the distinguished customer groups.

The volume of water losses and consumption for technical purposes were studied, as well as their impact on service costs and prices. Such information, at least in theory, made it possible to rationally shape tariff policies for water and sewer services at the macro level.

Economic level of financial analysis

Extending the analysis to the economic level required the inclusion of resource costs (related to the loss of benefits due to the scarcity of water resources) and environmental costs (related to the reduction in environmental quality). The two types of costs are not the same as charges for water abstraction and discharge of pollutant loads. The latter only partially internalize (i.e., charge the perpetrator) resource and environmental costs. Determining resource costs, based on quantifying deficits in water treated as a resource, has been and continues to be one of the major methodological challenges facing economic analysis of water use.

Economic analysis of water use in industry, agriculture and other areas

Another sector included in the analyses is industry – with the term being somewhat conventional. Indeed, some industrial entities use (in terms of water intake and wastewater discharge) municipal infrastructure. This subpopulation is included in the municipal sector. Thus, the separated “industry” category includes only entities that carry out water abstraction and wastewater discharge on their own.

The next sector that the economic analysis of water use applies is agriculture, where the activity of detailed drainage is analyzed and the degree to which this activity is supported by public funds. These estimates were based on the reports on the quantitative status and maintenance of water and water reclamation facilities published by the Central Statistical Office (form RRW-10), which have been extinguished for 2018.

The biggest challenge has been trying to analyze the use of water in the so-called “water of the future. other areas, namely hydropower, flood risk management and water transportation. The problem stems from several phenomena:

1. Water has a myriad of diverse utilities (for example: a resource, a site for deposition of pollutants, a means of transportation, a place for recreation, etc.).
2. Flood risk management – a classic service requiring enormous resources; in most developed countries it is classified as a public good (i.e., one against which there is no exclusion of consumption and exclusion of property rights); the obligation to provide it (at a zero price) is placed on the public authority.
3. There are facilities (e.g., dams) that allow simultaneous use of multiple water utilities.

The latter phenomenon does not coincide in practice with adequate pricing mechanisms charged to individual beneficiaries of infrastructure operation. For example, damming water is likely to improve navigation conditions, generate hydropower, improve recreational values, and increase land irrigation opportunities.

So far, the economic analysis of water use, conducted repeatedly at different times, has not led to a resolution, but has identified an area of sizable legislative gaps, the filling of which could enable a more complete implementation of the “user pays” principle.

The author is a graduate of the Cracow University of Technology (Faculty of Environmental Engineering). Degrees of Dr. and Ph. In the field of economic sciences, he obtained his degree from the Cracow University of Economics. He is currently working as a professor at Jagiellonian University. Its activities are related to the issues of financing conservation investments and the financial aspects of implementing environmental programs and policies. He is also involved in modeling the economic consequences of implementing EU environmental directives in Central and Eastern European countries. During the EU accession process, he worked on estimating the costs of implementing and enforcing directives on air protection, waste management and water protection for the Ministry of Environment, UKIE, the World Bank and the European Commission. Later, he managed many projects, regionally and nationally, related to economic analyses of water management.