Euro-Mediterranean Water Conference

Cairo Preparatory Meeting

21-22 October, 1996

Workshop No. 1: Agricultural Water Use

Contribution by Germany

Economic Aspects of Intersectoral Water Management

presented by Manuel Schiffler, German Development Institute and BMZ advisor

The contribution is about water management in Southern Mediterranean countries, with particular emphasis on economic aspects of intersectoral water management. It refers to the experience of German development cooperation in the water sector with these countries.

The water sector is a priority area in Germany's bilateral cooperation with these countries. Projects are implemented or under preparation in Morocco, Algeria, Tunisia, Egypt, the areas under Palestinian Authority, Jordan, Lebanon and Turkey. The focus is on drinking water supply and sanitation. In the past, Germany contributed as well to finance the expansion of irrigated agriculture in the region. Today, Germany emphasizes rehabilitation and more efficient water use in existing irrigation systems. The German Ministry of Economic Cooperation and Development (BMZ) has recently adopted a new sector concept on drinking water supply and sanitation. One important principle of that concept is that in the case of conflicts between agricultural and urban water use the latter should be given priority.

Germany fully agrees that water has to be considered an economic good with an opportunity cost, which is consistent with the declarations of Dublin, Rio de Janeiro and Rome. On this basis, integrated management of water resources across sectors should be pursued, if possible on a basin-wide scale.

The practical implications of considering water an economic good are complex. Water tariffs are levied for the service of transporting and treating water. This is different from the value of water at the source. Water tariffs are nowadays widely accepted as necessary, although they are subsidized in practically all developing countries to different degrees. A price for the commodity water as such, however, exists only in rare instances and remains controversial.

The ownership of water resources within a country remains an unresolved issue. Formal legal ownership is usually vested in the state, while the customary right to use water is vested in private individuals or communities. A clear definition of property rights to water is a precondition for the application of economic instruments to water management.

Water markets based on traditional water rights have existed in many, though not in all countries of the Mediterranean region for many centuries (e.g. in Spain and in the Maghreb). These traditional water markets are usually limited to agriculture and to a specific location (e.g. an oasis or a small seasonal river [wadi]). Contrary to a widespread belief, Islam is not opposed to trading water, if certain conditions are respected. For example, the Civil Code of the former Ottoman Empire, the " Mejelle ", large parts of which are based on Sharia (Islamic Law), did allow trade in water rights.

KAIRO.DOC, 18.10.1996

Intersectoral water markets, as they function for example in the dry Southwest of the United States and in the semi-arid North of Chile, do not yet exist in the Mediterranean region. But they may offer a potential for win-win-situations: Cities can buy water rights, often at a cost lower than seawater desalination or new, larger and longer pipelines. Water markets thus can limit the necessity of subsidies for urban water. Farmers can sell parts of their water rights. With the capital thus acquired, farmers have two options: they can either invest in high-value crops and water-saving irrigation equipment, or they can switch to a non-agricultural activity in an urban or a rural area. This is the pattern which has resulted from intersectoral water markets in Chile and the USA. But even in water markets governments have an important role to play. Public regulation of water markets is both necessary and possible, as a means of avoiding the depletion of groundwater, controlling water quality and to guaranteeing a minimum ecological flow in rivers.

Full cost recovery for water services in irrigation is often recommended. There is, however, hardly any place in the world, developing and developed countries alike, where the authorities charge fully cost-covering tariffs for water in public irrigation schemes. In many cases, tariffs do not even cover operation and maintenance costs, in spite of efforts by some countries to raise water tariffs. Recovery of operation and maintenance costs in irrigation projects is a goal of German development cooperation, knowing that the achievement of this goal is already difficult. In view of historically low or non-existent tariffs, cost recovery is politically difficult to implement. Instead, many countries have handed over the responsibility for parts of irrigation systems to water user associations, which assume some of the former responsibilities of public irrigation authorities. Such an increased participation of water users may improve the often deficient management of irrigation systems and may increase yields, which have often remained below expectations.

Middle Eastern and North African countries are greatly concerned about the negative indirect effects of a reduction in agricultural water use, such as unemployment in rural areas, migration to urban areas and the loss of rural livelihoods and food self-sufficiency. These concerns are not sufficiently addressed by the traditional emphasis on raising agricultural water tariffs to a cost-covering level, including capital costs. Charges for the direct abstraction from wells or rivers, in addition to tariffs for the service of transporting water, address these concerns even to a lesser degree.

Water markets provide an incentive to reduce agricultural water use, juge as higher water tariffs and charges do, but with a more favorable distributional outcome for the rural population. An important precondition for water markets is to grant well-defined transferable private property rights to water. These property rights can take the form of licenses to use groundwater from private wells or to use surface water supplied through public irrigation systems. The quantity specified in the water right can be determined according to historical use, perhaps somewhat reduced in the case of groundwater overpumping. Whether such water rights will be traded in a market or not depends mainly on three factors: the buyer's willingness to pay, the seller's water productivity and transport costs. Urban willingness to pay for water is typically many times higher than agricultural water productivity. Transport costs for water are high relative to the value of water per se. Particularly large irrigated areas close to cities are therefore likely to sell water to cities in a market setting.

reallocation of water resources seems inevitable for Southern Mediterranean countries. Faced with the challenge to supply sufficient amounts of water to rapidly growing cities, and lacking the financial means to build large seawater desalination plants, they have hardly any other option. There are two ways how to reallocate water from rural areas to the cities: through administrative decision or through the market. If water is administratively reallocated to cities, income and employment losses in urban areas remain uncompensated and the incentives to save water in municipal and industrial uses is low. A market approach to intersectoral reallocation can help to alleviate these concerns and to minimize the costs of urban-rural water transfers.

Intersectoral water transfers have far-reaching implications for irrigated agriculture and for the economies of the Mediterranean region, especially for the Southern countries faced with high population growth. A vision of irrigated agriculture and agricultural trade in the Mediterranean in one or two decades ahead from now may look as follows: In rural areas reached by pipelines supplying cities (which will be several 100 km long), the cropping pattern is likely to change even faster than it is already changing. Crops with a low value per unit of water (such as cereals) will be cultivated legs, while crops with a high value per unit of water (such as vegetables and fruits) will be cultivated more. The share of crops irrigated with treated urban wastewater will drastically increase.

The change in the cropping pattern-towards high-value crops will increase the agricultural interdependence of the Southern and Northern shore of the Mediterranean. Cereals may increasingly come from the rain-fed parts of Europe, while (winter) vegetables and fruit may increasingly be cultivated in the Middle East and in North Africa. A phased reciprocal import liberalization under the terms of WTO and the envisaged Mediterranean Free-Trade Area will complement such a process based on the comparative advantage of nations in agricultural production.

Intersectoral water allocation has the potential to release sufficient water even for rapidly growing cities. There is enough water in the Mediterranean region to cover municipal and industrial water needs, even if they are assumed to be as high as 100 cum/capita and year. If intersectoral water markets are allowed to function, they will lead to the import of even larger amounts of " virtual water " in the form of cereals into the region. The notion of self-sufficiency in cereals, which most states of the region had de facto to abandon during the past decades, will have to be renounced by even more states. Food security and the entitlement to food by the poor, however, can be achieved by importing cereals and generating the necessary foreign exchange by other more profitable agricultural, industrial and services exports. Trade can alleviate environmental mental pressure on water resources, increase incomes, but at the price of increased interdependence and a renunciation of the goal of food self-sufficiency.

German development cooperation will increasingly focus on urban water supply, while insisting on sufficiently high urban tariffs to recover costs and to provide incentives for water savings. Sewerage and wastewater treatment is another priority area, with emphasis on the reuse of adequately treated wastewater in agriculture. Rural drinking water supply will remain an issue of high concern. System expansion in irrigated agriculture, however, will no longer be financed.

Integrated water resources management is an important future field for German Development Cooperation. Water resources inventories on a regional or nation-wide basis, frequently followed by a comprehensive Water Master Plan allowing for a sound intersectoral allocation of resources, will be supported. The setting up and support of effective water management authorities with public and private participation, preferably at the level of the river or groundwater basin, is another important area for German development cooperation. If intersectoral water markets are allowed to function, river basin authorities can play an important role in setting their conditions and regulating them. German development cooperation will thus somewhat change its focus, but the water sector will remain one of the most important areas of cooperation with the Southern Mediterranean countries.

Bibliography:

Allan, J.A.: Overall Perspectives on Countries and Regions, in: Rogers, P. and P. Lydon: Water in the Arab World. Perspectives and Prognoses,Harvard 1994

BMZ (Ministry of Economic Cooperation and Development): Sector Concept Paper Drinking Water Supply and Sanitation, Bonn 1996

BMZ: Regional Concept Paper Middle East and North Africa, Bonn 1993

Deutsche Stiftung für internationale Entwicklungs (DSEyArbeitsgemeinschaft Tropische und Subtropische Agrarforschung (ATSAF): Strategies for Intersectoral Water Management in Developing Countries - Challenges and Consequences for Agriculture, Proceedings of a Workshop held in Berlin, 6 -10 May 1996

Caponera, D.: Water Rights in Moslem Countries, FAO Irrigation and Drainage Paer No. 20, Rome 1973

International Conference on Water and the Environment: The Dublin Statement, January 1992

Le Moigne, G. et al.: Water Policy and Water Markets, World Bank Technical Paper 249, Washington D.C. 1994

Mediterranean Water Conference: Mediterranean Charter for Water, Rom, Oktober 1992

OECD: Pricing of Water Services, Paris 1987

OECD: Water Resource Management - integrated policies, Paris 1989

Postel, S.: Last Oasis Ä Facing Water Scarcity, Worldwatch Environmental Alert Series, New York and London 1992

Schiffler, M. et al.: Water Demand Management in an Arid Country - The Case of Jordan with special Reference to Industry, German Development Institute, Berlin 1994

Schiffler, M.: The Economics of Groundwater Management and Water Markets (under preparation), German Development Institute

United Nations Conference on the Environment and Development (UNCED): Agenda 21, Rio de Janeiro 1992 (published in: Bundesumweltministerium: Umweltpolitik, Bonn 1994)

Winpenny, J.: Managing Water as an Economic Resource, Overseas Development Institute, London and New York 1994

World Bank: A Strategy for Managing Water in the Middle East and North Africa, Washington D.C. 1993

1 BMZ (1993)

2 BMZ (1996)

Principle No. 4 of the Dublin conference: "Water has an economic value in all ist competing uses and should be recognized as am economic good"; Chapter 18.8 of Agenda 21: "Integrated water resources management is based on the perception of water an an integral part of the ecosystem, a natllral resource and a social and economic good"; Mediterranean Water Charter: "...fully aware of the fact that water... represent(s) an economic good".

4 OECD (1987), Postel (1992), Winpenny (1994)

5 Caponera (1973)

6 Le Moigne et al. (1994)

7 Schiffler et al. (1994)+