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BR Research

Creating efficiencies through water trading

Water pricing is neither as contentious nor as novel a concept as it may appear on surface. Water – whether in raw o

Updated 10 Dec 2019

Water pricing is neither as contentious nor as novel a concept as it may appear on surface. Water – whether in raw or filtered form – represents a finite resource with extrinsic costs of extraction, storage, and transportation – much like any other.

Yet, attaching the ‘price’ suffix inadvertently turns the subject into an emotive controversy as water is equated with the fundamental right to life; and universal human values dictate that fundamental rights should not come with a price tag attached to them.

And they don’t. The premise for creating a market for water is in fact much more nuanced than is generally made to believe. For example, it is universally acknowledged that each household be entitled to a minimum quantity of water free-of-charge, beyond which the service delivery should be based on principles of supply and demand.

How? The first principle is true cost recovery. This is based on the grounds that public sector water supply cannot sustain on unfunded subsidies forever. Thus, fair cost of water related infrastructure, operating and maintenance costs, distribution network, and management should be recovered from consuming sectors – revenue as well as non-revenue based, with subsidies extended to the indigent funded through imposition of a water tariff, modelled in the same fashion as the stepped-up tariff on electricity.

Beyond non-revenue generating use of water in households and publicly governed institutions such as hospitals and schools come the commercial sectors, which is where the concept of water markets become central.

Because agriculture consumes 92 percent of water, the sector also stands to gain the most from opening itself up to water trading. Access to one of the world’s largest irrigation network and groundwater aquifers means that farmers with abstraction rights can easily sell their supply - partially or fully – to the highest bidder, whether within the farming community or to other commercial users.

If “commodization” of water is regularised – after all, water trade within the private sector is a norm even now – market mechanism may help ensure that the resource is allocated to its highest productive use, in the process earning hard cash to those with a title to water supply.

The obvious follow-up question is what this may entail for supply of agricultural goods – beyond of course giving farmers with access to irrigation water an opportunity to earn rents? The spill overs for the sector should be positive, and two-fold.

First, as the currently abundant water supply becomes constrained, higher market-driven pricing will ensure that the remainder supply is allocated efficiently towards crops with lower water delta and higher value.

Evidence from research suggests that current efforts to increase efficiency in water use by traditional crops has failed to create an impetus for diversification in cropping pattern. Instead, where water efficiency has been encouraged, it has inadvertently been followed by increase in cropping intensity of traditional crops, increasing yield of high delta low value grains and staples.

This in turn also rebuts the possible criticism that supply of staple grains may become constrained, as higher pricing has already been shown to drive increased productivity through greater cropping intensity.

The much more systemic problem – however – is one of governance and externalities. First, in absence of fair and trustworthy enforcement of regulation, commoditization of water will be just as prone to exploitation by those with power and access to resource. And second, if water markets are in fact allowed to function freely, the trading should nevertheless be in a controlled fashion. That is, the cost of transaction should reflect the true externalities caused by end-user consumption. For example, in case of purchase of water by industrial users, environmental considerations of any pollution caused should be reflected in transaction charges, to be deposited in public coffers responsible for resource maintenance and management. And second, deviation of water from its natural course should be regulated and be deemed impermissible where the potential damage is irreversible.

Of course, Pakistan has a long way to go before (regulated) water markets and trading between private sector entities can become a reality. But the discussion should be welcomed and critically reviewed on its merits and demerits, and not simply dismissed as another attempt by creeping capture of nature and its resources by capitalism.