African Water Development Report 2006 - United Nations Economic ...

hand, where an economic interest has a directability to pay (e.g., industry, urban householdsand trade), water should preferably be priced atits economic value, which may exceed the productioncost of the water, for demand managementpurposes. The revenue thus generated canbe used to subsidize interests, which have lessability to pay.Charging the economic value of water is, however,a complex issue. In the case of urban watersupply, the corporation supplying the water isnormally a monopolist. The role of governmentshould thus be to check the levies, and to ensurethat water is supplied to the poorer neighbourhoods.In the case of irrigation, chargingeconomic prices presupposes the possibility forsome irrigators to refrain from using “their” waterand “sell” it to a fellow farmer instead, butwater laws frequently disallow such a transaction,especially those water laws that are basedon the principle of “beneficial use”. Water userswill only be willing to pay more for water and investin water-saving technologies if they perceivetheir rights to water as sufficiently secure, and ifsupplies are sufficiently reliable. Concepts such as“cost recovery,” “user pays,” “asset transfer,” thushave their limitations, despite their popularityamong many donors. Some questions that ariseabout these concepts are “Would it work in situationswhere the physical infrastructure is dilapidated,user ability to pay is severely constrainedby macro-economic factors, market concepts andinstitutions are absent or in their infancy, waterlaw and property rights are inadequately defined,capability in both management and regulation islimited and the social and environmental risks ofgetting it wrong are considerable?”The Ministerial Declaration of the 2nd WorldWater Summit at The Hague (2000)“Valuing water: To manage water in a way that reflectsits economic, social, environmental and cultural valuesfor all its uses, and to move towards pricing waterservices to reflect the cost of their provision. This approachshould take account of the need for equityand the basic needs of the poor and the vulnerable.”Valuation and Price of WaterTo argue for water to be treated as an economicgood does not necessarily imply that a marketprice must be paid for it. What it means is thatwater is a scarce and valuable resource that shouldnot be wasted, and that proper pricing (valuation)will ensure efficient utilization (ibid). Butthe terms ‘value’ and ‘values’ can be confusing.In economics, there are two levels of value whichare ‘market’ values and ‘non-market’ values. Inmany water decisions and discussions, non-marketvalues often play a much bigger role thanpeople really recognize. The difference betweenmarket values and non-market values is extremelyimportant for practical reasons. Market valuesare revealed in exchanges of goods and servicesand can influence people’s values to some extentin their market behaviour. Willingness to pay agreat amount for something indicates that it isvaluable. Unwillingness to part with somethingeven when offered a substantial sum of moneyfor it also indicates that it is valuable. Marketvalue should not be confused with ‘price’. Pricerepresents the marginal value or exchanges in aparticular market – the value at which the last (ornext) exchange occurs. In contrast, market valuerefers to the total value of goods and services exchangedin each market ( Jack Moss et al., 2003).For example, the first units of water a personpurchases may be of much greater value thanthe price they pay, even if the value of the lastunits purchased is just equal to the price they pay.Similarly, the first units of water a supplier sellsmay cost much less to deliver than the price re-VALUING WATER279