6 Aug 2013

So how do you grow?

AM writes:
I've recently had a chance to read your joint piece with Christopher Gasson entitled "A global survey of urban water tariffs: are they sustainable, ef´Čücient and fair?" [pdf] and it prompted me to seek your thoughts (from the perspective of a policy analyst) on phase development.

If (hypothetically speaking) you had complete autonomy in designing the managing the development of water and wastewater management services for a city in a developing country, how would you go about phasing the construction and financing of those systems in consideration of government subsidies and ensuring quality control by balancing the benefits that come with public and private involvement in the process?

Do you believe there might be a "formula" for phasing development of a community's water service needs that takes into account current population, per capita wealth, land area of the community in question, and density? Furthermore, can (or rather should) that development be broken into bins in a continuum within which we place a particular community in order to gauge demand and the appropriate level of financing/investment structure necessary to achieve a comprehensive and sustainable utility network?

I might sound a little naive since there are broader factors that must be taken into account (i.e. the regional/national economy, the cost of materials, the role of government, the role of international organizations such as the World Bank and IMF), but I am of the belief that there might be a recipe with which to guide governments and communities to a state of readily available service.
This is a great question and very relevant in cities that are growing and/or suffer currently from a lack of water/sewerage.* The main problem involves money, i.e., who should pay for what?

In my dissertation, I discussed how Southern California grew unsustainably based on cross-subsidies, such that it was first too cheap to move to a new place and then how too many people strained water supplies (this paper summarizes that dynamic).

The problem is the same in developing countries from a water perspective. It's also -- I'd argue -- the same from a financial perspective, since water and sewer service are actually quite cheap, even relative to poor people's incomes. The main difference will be corruption, which can destroy ANY good idea. So, I'll have to make that note ("deal with corruption" -- usually via transparency and community oversight/control) and move to financing.

There are three sources of money: tariffs, taxes and transfers. In water abundant areas, tariffs do not need to be volumetric; they should be where water is scarce. Tariffs should be charged to users from day one. Taxes on property can pay for sewerage services; in the Netherlands, they are charged for the number of people at an address. Transfers are a form of subsidy. In rich countries, they can go to the poor via the tax system (a negative tax), but that's harder in poorer countries. In those places, they can be allocated to the poorer neighborhoods (e.g., favelas) in proportion to the number of people, from the central government. (Chile "charges" poor people for water services but then forgives the cost of service for a small initial volume of water use).

I recommend that mix of sources (more reliance on user pay than subsidy) because I prefer that water companies work for people instead of politicians.

The other issue is the mismatch between spending and revenues. It's expensive to build a water/sewer system, but that system will last for decades. That implies that the system be financed with debt at first, which will be repaid by users over the following decades. Such a system can work everywhere, but it needs to be guaranteed and managed separately from other debt streams. That's why I prefer "corporate" water utilities (either private or public). Recall that the State of California just "borrowed" $billions derived from carbon permits to pay general expenses. Like I said, corruption can screw up everything.

Bottom Line: Water and sewer services should be phased in as cities grow, with debt for expansion being repaid by user fees.
* Watch/listen to this great TED talk on "crap," i.e., the importance of sewerage services.


Alexander McClean said...

Thanks for the post Dr. Zetland. I appreciate the honesty. Unfortunately, it appears that regardless of whatever structure is in place to create a sustainable financial situation it will all be for naught if the rule of law is not vigorously upheld.

JB said...

In your discussion of conservation you are missing something--the game of water. Water in the western US was known to be a finite resource, certainly since John Wesley Powell. If you were among the city fathers of the great cities in the semi-arid West, you knew that you would always need water in order to have future growth. So you created the impression of water shortages/crises in order to convince the local population to invest in water for the future--you see this with the Denver Water Board (Denver has lots of surface water today, while Douglas County, a suburb which depends upon groundwater, is water short.) Los Angles (Mulholland and his buddies bought the Owens Valley for the water, and turned around and irrigated the San Fernando Valley, and made millions on real estate), etc. Las Vegas is playing this game today, but they are late in the game--$0.30/cubic meter is part of the game. These are rational decisions looking to a water short future--not, present day economics. (Think about a negative discount rate for money for water projects.)

David Zetland said...

@Alex -- Sometimes it's worse than that -- the law is changed to promote growth over sustainability.

@JB -- I agree with that perverse logic, but it assumes that "growth is good" and that the existing population is happy to bear its cost (but not its benefits). Those people are screwed by the iron triangle of developer-politician-manager short term expansionist interests.

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