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

African Water Development Report 2006ceived, even if the last units delivered cost aboutthe same as the price received. The total value receivedby purchasers above the total amount theypay is called “consumer surplus (CS).” Similarly,the value received by a service provider is the differencebetween total revenue and the (presumablylower) total cost of service. Economists callthis producer surplus (PS). The sum of consumerand producer surplus in each market is the valuein that market (ibid).Non-market values are like the entire iceberg,while market values are like the part of the icebergthat is visible above water level. Non-marketvalues are a category within what economists referto as preferences (or tastes). But unlike commonpreferences or tastes, non-market values ofwater can be of “deep” preferences due to its intrinsicand cultural values. Much of the tensionaround the value of water is due to this deeperlevel of values, and to the fact that people holdvery dearly to the non-market values that theyfear will get lost if water systems are managedthrough market approaches (ibid).Borgoyary M. (2002) makes an analysis thatoffers a useful framework of the economic rationalefor implementing water pricing (or watervaluation) reforms, as follows:Relative value of water: Like other goods, wateralso has a value that any consumer will be willingto pay as long as the marginal benefit of consumptionexceeds the costs. Water must not beassumed to have zero value, an idea that persists,particularly in Africa.Cost of water: While the value of water dependson its use, the cost of water is usually associatedwith the infrastructure of storing and deliveringit; the user cost. However, one important costcomponent that is often ignored due to the difficultyof measuring it is the “opportunity cost”of having the water in its present use. As waterbecomes scarce (both in terms of quantity andquality), its opportunity cost increases and becomesmore important to consider.Balancing water values and costs: All over theworld, users pay only a part of the full economiccost of water. For example, in most industrializedcountries and in some developing countries,only the full average financial costs are recoveredfrom urban water users, while for the majority ofurban water users in developing countries, costrecovery is even lower.In a nutshell, treating water as an economic goodor ensuring proper valuation of it will providepowerful decision and management tools. At amacro level it will ensure efficient use of water atboth the user and project levels, thereby allowingfor sustainable water resources management.In specific terms, treating water as an economicgood will help:(a) Measure the costs and benefits from waterand sanitation investments and policies;(b) Assess the demand for water and wastewaterservices and evaluate their relationshipto price, income, and other variables;(c) Inform decisions regarding the use and targetingof public subsidies, and how to reformtariffs and improve utility finances;(d) Evaluate sanitation alternatives and theirtradeoffs;(e) Assess the costs and benefits of water demandmanagement options, including pricing,leakage reduction, and metering;(f ) Evaluate the desirability and feasibility ofintra- and inter-sectoral water reallocation;(g) Assess the efficiency of various modes ofservice provision (for example, public versusprivate, centralized versus decentralized);(h) Design regulatory and legal frameworks forpublic sector participation; and(i) Evaluate the impacts of projects or reformon the different sectors and stakeholders,and devise ways to strengthen institutionalframeworks (ibid).The total economic value of water can be consideredto be the maximum amount the user wouldbe willing to pay for the use of water. People ob-280