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By Alya Kebiri Courtesy of World Environment Magazine
The challenges policymakers face in managing the supply and demand of water in a developing country, where water is scarce, are enormous. There are not only massive human and health costs to pay for in the mismanagement of water, but the implementation of any successful management program requires public consensus and acceptance of the inherent social and economic rights people have to water.

It is now a widely accepted view that water is an economic good and, therefore, must have a value assigned to it; while that might sound like a platitude it was not a stated view until 1992, when it was articulated in the fourth principle of the "Dublin Statement" at the United Nations Conference on Environment and Development (UNCED), in Rio de Janeiro.

But the Dublin Statement tempered this principle with a caveat about the responsibility of managing water: in order for water to be managed effectively its economic value must be treated as mutually exclusive with its non-economic human value.

Like all goods, therefore, water must have an economic price assigned to it but that price must also reflect its human value. Water pricing, the topic of this article, is the policy of assigning value to water in order to manage its demand and, by extension, its supply. This article aims at analyzing how the policy of water pricing can be effectively implemented as a solution for Egypt. Focus will be on the economic benefits of water pricing, and recent water pricing policies in Egypt and the obstacles it faces; it then presents an analysis of the Algerian experience in implementing water pricing and gleans the lessons learned for Egypt.

There are three well known economic effects of pricing policy. The first is that it reduces demand for water - when users have to pay for their consumption, they do not consume more than they need to. This initiates behavioral change that encourages conservation and changes consumption habits. The second effect, a direct result of a reduction in demand, is that it increases the supply of water - users have an economic incentive to reduce water use and water loss. The third effect is an efficient, market-driven reallocation of water across sectors - household, agricultural, and industrial; the reallocation occurs as a result of higher prices which make waste expensive and encourage more responsible distribution, thereby removing from the system any inefficiencies.

The total cost of water, for consumers or industry, is usually comprised of several elements, such as flat tariffs, block tariffs, subsidies, and volumetric pricing through metering. In their article -“Water is an economic good: How to use prices to promote equity, efficiency, and sustainability"- Rogers et al rightly argue that tariffs and prices rarely reflect the true "full-cost" of water, which they are in favor of implementing as a policy. "Full-cost" pricing includes three important concepts of water economic: cost, value, and price. Cost includes operating and management costs, capital costs, and other economic costs. Value is the benefit of the good to users, both in direct and indirect values. Price is the amount that the political and social systems assign to water to ensure equity and efficiency. Full-cost water pricing is the sum of these three concepts. These policies are discussed in further detail in the context of Egypt's recent water pricing program and the case study on Algeria which is discussed below.

Although many people at the 1992 UNCED seemed to agree that water should be treated like an economic good, it was unclear what the implications were, and as a result the Dublin statement came with a number of disclaimers, among them that water is also a "social" good and should be kept available to the poor. What this ultimately meant was that water should be supplied to the poor through government subsidies, and sold to urban households and industry at economic value, which may exceed production costs, for demand management purposes; the revenue funds the subsidies

However, while subsidies have long been used in development to promote growth, there is growing recognition among water policy scholars that subsidies and cross-subsidies (when revenues from profitable enterprises the poor) are not the best means to achieve economic or social goals. This is especially true when these support measures are used to prop-up ailing industries that invariably contribute to significant environmental damage. General reduction in water prices shields all consumers from important economic and environmental signals.

The question of what price to assign to users is particularly relevant to developing countries like Egypt, where many households, removed from centralized water distribution, are not accustomed to paying for water and could not afford sudden price hikes. These communities are also the most vulnerable to water shortages, due to droughts or sanitation.

Egypt's history with water pricing is an illustrative example of what happens when prices are assigned to water based solely on its economic cost, without also taking into account its domestic or local human cost.

The Egyptian government is in the process of liberalizing its water sector through a recent privatization program that removes government control - and operational and bureaucratic inefficiencies. In May 2004, President Mubarak announced the privatization of all the water management and purification services in each governorate. As a result, drinking water management authorities of each governorate are now part of one big enterprise centralized in Cairo: a Holding Company for water and purification.

The Holding Company is a public property with a private sector mandate: they are subject to the laws of private sector companies, do not receive any government subsidies, and must efficiently deliver their product, water, to a wide customer base. The Holding also has to cover a deficit estimated at L.E. 14 billions. Its water management mission is to purify, desalinize, transport and distribute drinking water, and to collect, treat and safely get rid of sewage.

According to the first decree declared by President Mubarak in May 2004, the Holding's capital will be determined by the sum of capitals from each of the companies formerly operating independently and now operating as one. Moreover, the General Assembly and the Board of Directors will be formed according to the private sector's rules but will have to include a representative from the Ministry of Finance. In parallel, a Regulatory Agency for Water and Waste and a Customer Protection Agency has been created in order to evaluate and determine water pricing. The agency's budget will be determined by the government.

Yet, just like a private company, the Holding's aim is to create profits. The cost of production of water is around 60-65 piasters per cubic meter. Water is currently sold at less than 23 piasters per cubic meter. According to experts and economists, this price remains too low to cover costs, maintain the integrity and quality of water infrastructure, and invest in upgrades. Still, a lot of Egyptians are opposed to the increase in water prices. In November 2004, prices were increased from 12 to 23 piasters per cubic meter; the increase saw a strong reaction from the public including riots and people not paying their bills.

Once the bills started arriving, the angry reactions intensified.... In Matariya, more than 500 people demonstrated in front of the district headquarters, refusing to pay their bills. One family was shocked at the LE100 they were being asked to cough up....In Al-Wayli and Al-Zawya Al-Hamra, angry residents chased bill collectors down the streets.

Most Egyptians have not taken a principled stance against water pricing; they simply do not have the means to get by with it as a policy. While the advantages to Egypt are great, the lower classes rightly object to financing such an overhaul.

In response to the intensity of the protests, the increase in prices was partially adjourned. In fact, the modalities of payment have been changed and lower prices were set for people living in poor areas. The government justified this increase in prices by its willingness to open the market to privatize this sector. The public justification was, unfortunately, less apparent in the short term, as people who could once afford water all of a sudden could not.

However, it is obvious that the Holding's status remains unclear in part because of the important role the government still plays in decision making. Furthermore, the companies affiliated to the Holding Company have not changed much from their previous incarnations. Also, it is surprising to see how these decrees have managed to increase the centralization of the power by concentrating it in Cairo. Indeed, before the decentralization policy, the different governorates had their own management authorities that made them partially autonomous.

There are many different ways to promote equity, efficiency and sustainability in the water sector and water pricing is probably the simplest conceptually, but maybe the most difficult to implement politically. There are two main political-economic questions governments must face when adopting water pricing policies: how to implement new prices and how high to raise them. The political risks of water policy rise in direct proportion to the level of government involvement required, which is almost universally very high.

Governments cannot introduce water pricing too quickly. It is important that the water pricing program transfers the responsibility of managing the utility over to users incrementally or gradually, thereby giving them a stake in the investment of the operation.

Algeria's experience managing their water supply in the 1970s represents a good case study and cautionary tale in implementing ambitious water schemes requiring high levels of involvement from the government and the abrupt removal of subsidies. Algeria's experience shows that neither policy works well on their own, but when coupled together they fare even worse. In the 1970s, the government of Algeria founded the National Water Distribution Company (NWDC) and gave it the responsibility of distributing the country's water. The decision to consolidate this responsibility in one company was designed to remove many of the enterprises that were controlling the water supply, from government agencies, local utilities, and private sector companies. Since many of those companies were not financially sound or did not have the knowledge to operate a water infrastructure, the NWDC was founded to replace them all.

The company was expected to operate without state subsidies and recover their costs from water users. The company operated for 13 years but did not ultimately succeed for several reasons. The first problem was that the full-cost prices remained too low for the NWDC to have any meaningful financial autonomy. As a result, localities could successfully undermine and challenge the NWDC since they were the ones who had traditionally managed the water supply anyway. As a result, responsibilities were divided into two: the localities would distribute the water and the NWDC would handle the supply. Algeria did not design and implement a more nuanced and effective water pricing policy until the early 1980s. Until then, not only did water prices not reflect the full-cost of water, they did not distinguish between the cost of production and the cost of distribution; that lack of accounting made cost recovery nearly impossible. The Algerian government applied the lessons of their past in the form of their 1985 Water Code, which distinguished between four types of users (domestic, industry, services, tourism) and sub-categorized domestic users into four separate tariff blocks based on consumption.

While these are positive steps and relatively impressive policy achievements, Algeria still faces obstacles unique to their land. Operating costs, for example, are very high since Algeria is largely dependent on surface water supply which requires high investments in infrastructure such as dams, transportation facilities, and treatment plants. The major challenge is that tariffs have not, and could not, rise as fast as operating costs. Users simply could not pay. In the 1990s, as Algeria began liberalizing its economy, the government began implementing more progressive reforms to its water pricing policies, including allowing more private sector and NGO participation, drawing finer distinction in the application of its tariffs (for example, implementing them by region based on where operating costs are more expensive), and, in 1995, reinstating the NWDC to manage Algeria's subsidy program.

The experiences of Algeria teach other developing countries several lessons: to be bold yet pragmatic in reforming stagnant water pricing policies; to account for, if not implement "full-cost" water pricing; and to remain flexible, politically and economically - the Algerians, after all, did not begin to see real reform in their water economy until the rest of their economy moved forward in tandem. For emerging markets, where certain sectors lag behind others, that lesson is especially relevant.

One of the most salient points that consistently emerged in the research is that for water pricing to be effective its implementation must be localized; there are few universal rules that dictate how much the utility should charge or to what degree subsidies should be applied.

As mentioned previously, the Egyptian water Holding is currently unable to cover its expenses due to low prices on drinking water. This is the case in many developing countries where the community relies on the municipal budget to bear the deficit of the utility. This results on one hand, in diminishing strategic financial resources (environment, health, education, for instance) needed for developmental purposes; or on the other hand results in the progressive degradation of the water system and services over time.

Some argue that public subsidies raise the cost of the service in the long term by increasing users' long term reliance on the service's low cost; when subsidies aren't targeted they provide no incentives, only "free rides." A sound tariff system in one that delivers services while improving the service's quality, and makes efficient use of scare resources. In many poor communities the best way to do this is by showing users the cost of water and the price they pay by not conserving it.

Also, the workshop revealed that misguided subsidies benefit the rich more than the poor - the exact opposite of its intentions. Tariffs are needed to promote water conservation but they also exist to promote conservation and increase the poor's supply to water. Subsidies cannot succeed in an economic or political vacuum. The role water plays in society is such that removing or limiting people's access to it, even minutely, can severely alter even the most stable civic balances; in developing countries such as Egypt and Algeria, where the balance is even more delicate, people see water as a humanitarian right and will not take gently any threats to its removal. One source of the problem is that opinion in those governments is often crystallized in a vacuum, with scant attention seeming to be paid to how inextricable the problem is - subsidies are necessary, but can also be an unnecessary crutch; people must pay for water, yet no government has the legal or moral authority to deny it to its citizens; people must reduce their demand for water, but are not incentivized to do so unless they are forced to pay for excessive use.

Though as a policy tool water pricing has several goals, -to manage water demand, conserve supply, recover operating costs- those goals reflect a singleness of purpose: to get the greatest possible value from the economic good. That is, however, an incomplete definition when the good is a vital human need such as water, and one whose supply cannot be left to market forces alone. The goal of pricing policy is to find a balance in which the true cost of water -economic, social, and humanitarian- is reflected in its price and the resource is then put to its most valuable use.

This site was published by Bankmed in collaboration with Ms. Cathy Tyan
from World Environment Magazine in an attempt to educate
the community about preserving the environment.