ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Why Everyone Should Pay to Use Water, and How This Could (and Probably Will) Be Done in Georgia

“At least we have a lot of water - why should I pay for it?” One can frequently hear this phrase in Georgia. This popular saying is based on the relative abundance of water resources the country has: roughly 15,597 cubic meters of renewable freshwater resources per capita a year, well above the 2,961 cubic meters per capita in the European Union (World Bank 2014). However, having a resource does not mean being able to use it, nor being able to do so in a sustainable manner. Georgia lacks infrastructure both for water supply and sanitation, providing drinking water supply services to only 66% and sanitation services to only 49% of households in the country (Geostat, 2017). In addition, a significant fraction of the existing infrastructure is in poor condition, leading large amounts of water being wasted. In this context, the badly needed expansion of water infrastructure over the past years has created additional pressure on water resources and highlighted the need for their proper management.

At this stage, however, the country barely manages to monitor this precious resource and gather the data needed for an objective assessment of the condition of water resources. For instance, Georgia currently monitors only 68 out of its more than 300 large rivers, and has just 51 out of more than 400 possible monitoring points for underground water sources (ISET-PI 2017). Furthermore, Georgia’s water management system lacks the proper legislative framework and means to manage this resource. As the United Nations Economic Commission for Europe (UNECE) puts it, the current legislation is an “unworkable and fragmented system” (UNECE 2016). In the scope of Georgia’s Association Agreement with the European Union (EU), the country must adopt water resource legislation in compliance with the EU Water Framework Directive (EU WFD), which should have been finished by the end of 2018. However, the country has not yet passed a new law on water resource management.

The EU WFD aims to create a decentralized system of managing water resources on a basin basis1. To improve the ecological conditions of water sources within basins, the EU WFD promotes incentive-based tools, or economic instruments. The idea of incentive-based tools is to put a price on the resource that will incentivize self-interested water users towards a sustainable level of consumption or pollution. Normally, such tools are more efficient than command and control policies, which do not allow economic agents the flexibility to choose the most cost-effective actions, and might have flaws in their implementation, and/or be hard to monitor. According to European legislation, all these tools must comply with the “user pays principle” (the opportunity cost of the water consumed must be paid for by the consumer) and/or with the “polluter pays principle” (the cost of the pollution generated must be paid for by the polluter). Besides the advantage of their greater efficiency, these tools also allow for the collection of revenues that can be used to develop new water infrastructure, and to properly maintain and update the existing infrastructure. The drafted Georgian legislation (to be enacted in the near future) is based on similar principles and approaches. However, the implementation of appropriate water management tools in Georgia faces some challenges.

Setting the correct price for water, which will ensure incentives for its sustainable use, is a complicated task. It envisages understanding thousands of characteristics and patterns of use of this resource. Alternatively, one can create a market to allocate water resources among users and a limited number of permits to pollute the body of water. In a market-based model, the price resulting from market transactions will better reflect the value of water resources and/or the cost of pollution. However, to implement a market-based approach, the legal and institutional framework should clearly define the property rights of different users. There should also be a large number of users to ensure sufficient competition for the resource, and/or for the right to pollute it. Setting up such a system also requires a great deal of data and analysis to assess the readiness for implementation, or to ensure a trade-enabling environment.

This is why most countries in the world use charges to ensure a sustainable level of extraction or pollution of bodies of water. This instrument is simple to implement, as measuring the amount of water used is easy with water meters, and pollution levels can be measured with a functioning monitoring system. Considering the current state of Georgia’s water sector, this is probably also the most sensible choice for our country.

The use of abstraction charges (charges on the water extracted from water sources) is also facilitated by the fact that Georgia already has provisions in its legislation (“Law on Charges for Natural Resource Use) about charges for the extraction of water from surface and underground water bodies, although currently abstraction charges are collected only for extraction from underground water bodies. Unlike for water extraction, charges for pollution have never been implemented in Georgia. Therefore, the system for pollution charges will have to be designed from scratch.

The table below summarizes these active and inactive water abstraction fees.

Bodies of Water and Their Use Categories Free rates (GEL/m3)
Bodies of Surface Water  
The Caspian Sea Basin rivers, lakes, and other reservoirs 0.01
The Black Sea Basin rivers, lakes, and other reservoirs 0.005
Black Sea water 0.003
Use Categories  
Surface water abstraction for municipal and rural water supply 0.01
Water abstraction for thermal power production 1% of the base fee
Water abstraction for hydropower 0.01% of the base fee
Water abstraction for irrigation 1 % of the base fee
Bodies of Groundwater  
Freshwater for bottling 4
Freshwater for other commercial/industrial uses 0.005
Freshwater for municipal and rural drinking water supply 0.01
“Borjomi” Mineral Water Abstraction 30
“Nabeghlavi” Mineral Water Abstraction 18
“Sairme” Mineral Water Abstraction 6
“Utsera” Mineral Water for Bottling 4
“Utsera” Mineral Water for Spa use 0.04

Source: Law on Fees for Use of Natural Resources (2004)

Probably the most complicated task in implementing charges is calculating their correct level. Incorrectly defined charges can lead to either an excess of extraction or pollution, or to an unnecessarily high burden on the economy. Moreover, it is necessary to make sure abstraction charges do not generate distortions to economic agents’ incentives and lead to the disruption of valuable natural resources. For example, the current charge for underground water abstraction for commercial use in the Black Sea Basin is the same as that for surface water. This creates an incentive to extract from underground bodies of water that potentially give much better quality of water for nearly the same price. However, the opportunity cost of that type of water is significantly higher. Failure to remove such a distortion will cause society to lose a valuable resource to the benefit of the commercial entities who exploit it first.

Consequently, if abstraction and pollution charges are indeed chosen as the most feasible instruments, it will be important to conduct a comprehensive review to ensure that the structure of charges is consistent with the optimal use of water resources.


CONCLUSION

The proper implementation of charges for water abstraction and pollution is not going to be an easy task. First, charges will need transparent methodologies for calculation and implementation so that it is easy for water users to comply. Second, the valuation methodologies will have to reflect the true value of water use and/or costs imposed by pollution. Third, charges will have to be reviewed regularly, to reflect the changing circumstances in the basin. Ideally, charges will be calculated separately for each river basin, as a by-product of the basin management plan.

In the long term, if abstraction charges are volumetric, we can expect an increase in the efficiency of the overall water system – as water supply companies try to minimize losses – putting a downward pressure on the final price paid by customers. We can also expect an improvement in the ecological quality of water bodies, creating additional benefits from ecosystem services for all members of society. And in the short term? Although abstraction charges enter the tariffs for the final customers of the water supply systems, abstraction charges will constitute a relatively minor share of the overall tariff. Therefore, it is expected that their change will not influence the overall price of water substantially. Overall, this looks like a good idea.


1 This implies managing tributaries - all underground and surface water resources - of the same basin together. 


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Friday, 13 December 2019

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