Water is the New Oil – Price it Carefully

Water is indeed the new oil, with one exception – you need water to live.  A very timely report released just this week by the International Monetary Fund on the need for countries to be more thoughtful and strategic in how they manage and marshal their water resources.  Bottom line, improve governance and get the incentives right.  Government subsidies are often at the root of so many problems, sending the wrong price signals and creating perverse incentives that actually worsen those big hairy problems that people are trying to solve. Here are a few excerpts from IMF’s report, titled “Is the Glass Half Empty or Half Full?  Issues in Managing Water Challenges and Policy Instruments.”

Water challenges are a growing global concern that could hinder countries’ economic prospects. Rising water stress, large supply variability, lack of access to safe drinking water and sanitation, and water pollution are already afflicting many parts of the world. Emerging market and developing countries generally face greater challenges because of their larger populations, lower income levels, inadequate infrastructure, and less developed policy and institutional capacity. But advanced countries are not spared either. Looking ahead, water use is expected to continue to rise with population and income growth, but freshwater resources cannot easily be increased. Climate change is likely to exacerbate water demand-supply imbalances.

Building on extensive literature, this paper examines the role of economic policy instruments and institutions in managing water challenges. It provides three key policy-relevant findings, drawing on cross-country analysis and case studies. Notably, some naturally water-deficient countries have been able to overcome water challenges, thanks to sound policies and institutions.

         Getting incentives right, notably by reforming water pricing, can help rationalize water use, promote needed investment, and protect the poor. Water subsidies provided through public utilities are estimated at about $456 billion or 0.6 percent of global GDP in 2012. They are also inequitable, disproportionately benefiting upper-income groups.

         The most desirable approach to reform water pricing will vary by country, depending on access of the poor to the existing water network and administrative capacity. Effective and autonomous institutions in charge of water management can also provide credibility and synergize popular support for reforms. In developing countries, reforms should strengthen the finances of public water utilities to promote investment and expand access to water and sanitation for the poor. Ensuring adequate maintenance spending is a priority for all countries. Under the right circumstances, establishing markets for water rights can help allocate limited water to highest-valued uses.

         Achieving sound water management requires an integrated and holistic approach going beyond the water sector itself. Water pricing reforms should be complemented by policies that rationalize water use in areas such as agriculture, trade, and energy, while redirecting achieved gains toward protecting the poor. For example, excessive pumping of groundwater can be discouraged by improving regulations and replacing energy subsidies with targeted social assistance.

WHY CARE?  This is an issue of U.S. national security (ICA_Global Water Security report), particularly as it relates to relationships with our partners around the globe and the economic and social stability of regions which could be undone by civil unrest over water scarcity.  Plus, if multinational companies wish to continue doing business around the globe, this is an issue they must be willing to help tackle.  Opportunity knocks – either the U.S. can sit on the sidelines or show some leadership here at home and on the world stage on an issue of critical import to sustainable development.   As the IMF report notes,

Rising water demand as a result of urbanization and growth in income and population puts increasing strain on the availability, sustainability, and quality of water. At the same time, millions of people still lack access to safe drinking water and sanitation (water access). The water demand-supply imbalance and its consequences, which could be further exacerbated by climate change, are already evident in some regions. For example, Yemen—among the world’s most water-deficient countries—has been in a near-crisis situation for a decade, with growing local conflicts over water rights. And some parts of the United States use as much as 80 percent of their available freshwater resources, meaning that even relatively minor droughts can trigger water shortages. Policies are usually inadequate to address growing water challenges, a situation that contributes to inefficient water use and inadequate investment in water infrastructure. Looking ahead, without an improvement in water demand management, even substantial technological advances and investment are unlikely to close the growing water demand-supply gaps.