Exploring the challenge of valuing water

Student rapporteurs provide a thematic breakdown of Valuing Water for Sustainable Development.

On 7 November 2017, Oxford’s Smith School for Enterprise and the Environment and the Environmental Change Institute, in collaboration with the Oxford Water Network, hosted a high-level forum, bringing together academics and representatives from a variety of international organisations, including the OECD and the World Bank, to explore how valuing water can contribute to sustainable development. This forum built on related discussions within the United Nations/World Bank High-Level Panel on Water and its Valuing Water Initiative, and the OECD Roundtable on Financing Water.

Students from the Oxford MSc in Water Science, Policy and Management participated throughout the Forum and its side events. Here they capture some of the major themes from the Forum.

What were the key themes?

Theme 1: Water is often undervalued. But the solution is not simply to increase the price of water for end-users.

As the title of the conference suggests, the overall theme reflected a concern that society struggles to value water across its diverse social, environmental and that this impedes achievement of the SDGs. Dr Tushaar Shah from the International Water Management Institute shared an example from India that succinctly and creatively illustrates this problem and the diversity of solutions available. He explained that in various regions of India the government has heavily subsidized solar irrigation pumps for farmers, incentivising farmers to pump large quantities of groundwater. This is, in turn, depleted groundwater. So, what to do? Dr Shah has suggested an innovative solution: the government should buy back the energy captured by the farmer’s solar panels, so that in effect, energy now becomes the farmers’ cash crop.

James Dalton, Director of the IUCN Global Water Programme brought a reminder that undervaluing water leads to the overall failure to value ecosystems and the benefits they provide to society. He shared an example from Fiji, where water quality degradation in coastal regions destroyed the coral reef ecosystems. Only after this loss did society recognize the value of the coral ecosystem and the community suffered economic consequences. IUCN has produced guidelines that assist in valuing ecosystems before any intervention takes place in order to help guide proactive valuation of water flows for ecosystems benefits.

There is also a gap in the global financial system’s capacity to value water. Ambika Jindal, Vice President of Sustainable Finance at ING shared that traditional banks currently do not know how much of their portfolio is exposed to water risk. Valuing water from a financial perspective would mean translating water risk into credit risk, and this would trigger the analysis of banks’ portfolios from a water risk point of view. This is changing. In the World Economic Forum’s 2017 Global Risks Landscape report, water crises are prominently featured in its Global Risk Interconnections Map. In turn, as banks increase their understanding of the value of water to sectors of the economy that are capable of generating significant revenues, this will unlock financing.

Theme 2: The SDGs have created a sense of urgency to increase investment in water infrastructure.

Summarizing the urgency, Sophie Trémolet from the World Bank shared that the investment needed to reach the SDG’s target for the water sector is estimated at $114 billion on an annual basis, which is roughly triple the current level of investment, citing the work of Dr Guy Hutton presented earlier in the Forum. With that in mind, she suggested that the World Bank and development sector, more broadly, need to be more strategic about the use of “concessional finance.” In other words, loans and grants from donors need to be more catalytic, and could be used to secure private finance.

Dr Alex Money from the from Oxford’s Smith School for Enterprise and the Environment went on to share a framework for “blended finance” that matches public and private financial instruments with “baskets” of water infrastructure projects that have diverse financial and social returns. This model has the potential to mitigate risk and increase investment in projects that have greater social impact. However, as he put it, “stuff conceptualized is never the same as stuff done.”

In response, Dr Rob Hope also from Oxford’s Smith School, shared cases from Bangladesh and Kenya. In these country contexts, research conducted as part of the REACH Programme has focused on identifying the local financing available for water infrastructure and operations and maintenance costs. In Kenya, his research team consistently finds the need for subsidy, and so they created of an innovative water services trust fund. This fund provides financing for service providers on a performance basis. As he succinctly put it, “It’s as much about investing in institutions as it is about infrastructure”.

Theme 3: Water scarcity and shocks are creating pressure for reallocation and markets.

Water markets were a major topic at this forum to facilitate decentralized and voluntary water-use trade-offs, especially in times of drought. Dr Dustin Garrick from Oxford Smith School made the case that water markets should not be confused with a “free market” approach to water resources, since “the solution to market failure is not going to be free markets, but well-governed and regulated markets.” Although the global experiences with formal water markets are still limited, informal reallocation and markets are more prevalent than currently recognised and evidence is patchy.

Dr Garrick and colleagues from the World Bank and Water for Food Institute of University of Nebrasak launched a Water Markets Partnership to measure, map and compare global experiences with formal and informal water markets. A first step will involve a global synthesis report and continued development of an Oxford-led water reallocation database to track the extent, design and performance of water reallocation and markets globally. The water markets partnership aims to take an interdisciplinary approach, leveraging the understanding of hydrology and climate science to improve water allocation in river basins.

One of the objectives of the Water Markets Partnership is to understand the objectives, governance structures and institutions that work well in markets, and those which do not work as well. Several presenters noted the need for this analysis since there are significant challenges of ensuring compliance and creating transparency in water markets Dr Nicholas Brozović from the University of Nebraska-Lincoln highlighted the way that these issues are more pronounced in markets for groundwater allocation. Often, the infrastructure is geographically diffuse, privately owned, and abstractions are difficult to verify. He proposed that one way to do address these issues would be to separate the market’s regulatory function (compliance) from the financial function (negotiations, price and transfer of funds). These two functions can be separated, for instance, through the creation of a clearinghouse for water transactions.

When well-functioning, water reallocation and markets have the potential to play a significant role in managing water risks, a capacity that has broader implications than just the allocation of water uses at the basin level. Kathleen Dominique from the OECD asked the question, can better water allocation systems enable innovations in financing for water, and vice versa? She explained that water reallocation and markets create a whole system of rules, rights, entitlements, regulations that help decide when and how access to water is allocated, mitigating risks among different water users. In this way, improved allocation regimes could help make the risks of water-related investments more explicit and better monitored, changing the investment climate for water resources.

In essence, the presenters identified ways that water markets can improve the local valuation of water, but also reduce the risk for investment in water resources. This brings the role of markets back to the overarching theme of the forum, valuing water for sustainable development.

This post was written by Adrienne Lane, with contributions from Silvia Cardascia, Sagar Dhakal, and Esteban Boj Garcia: current students of Oxford University’s Water Science, Policy and Management MSc programme.