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Pricing an Economic Good Called Water

The World Bank’s Junaid Ahmad is trying to convince the world of the economic value of that ever more precious commodity — water.

The world’s water crisis is heating up. Record-breaking droughts have been recorded around the world in recent months, and California recently imposed its first-ever mandatory water restrictions. The problem isn’t just the climate, however. As the populations of developing countries grow, they are struggling to meet water service and delivery demands. And countries at all development levels are facing the question of water security: Where will future generations’ water come from, and how will it be protected from threats both natural and man-made? In January the World Economic Forum in Davos, Switzerland, named water a top global business risk.

Junaid Kamal Ahmad, the World Bank’s global practice head for water, is a Bangladeshi national who studied at Brown, Harvard and Stanford universities before returning to his home city of Dhaka, the capital, where he worked briefly as a newscaster. Ahmad is an economist who joined the World Bank in 1991 and became head of the global water practice when it was created in 2014. Ahmad ticks off a number of concerns beyond the availability of clean water, from a lack of access to the delivery of water to a lack of education about sanitation practices. Still, he says, a common thread is increasingly important: How water is valued. Policymakers and politicians have yet to settle on the best way to determine water’s economic worth and, as a result, tend to focus on its importance as a social good. Changing this thinking and viewing water more as a valuable commodity can improve water safety and delivery by encouraging the private sector to become more involved, says Ahmad, who recently spoke to Institutional Investor Associate Editor Kaitlin Ugolik.

Institutional Investor: Water challenges certainly differ between countries and regions, depending on demand, weather and geopolitics. Looking at the big picture, what would you say are the greatest issues when it comes to water?

Ahmad: Ten to 12 years ago, I would have said access to water and sanitation. Today, especially in the context of climate change, I see a three-pronged challenge: ensuring access to water and sanitation services, achieving water security and building resilience. Demand is growing. With population growth, plus energy, plus industry, plus agriculture, the perfect storm is coming. Add to that the growing impact of floods and droughts and, unfortunately, global health shocks — Ebola being the latest example — which require an understanding of how to anticipate and prepare the water sector to help nations adjust and absorb such shocks. If you look at [the issue] globally, more than 700 million people lack access to safe drinking water, and 2.5 billion lack access to improved sanitation, such as a toilet or latrine. I call this a sign of service failure, because I do not believe lack of access to service is caused by poverty or low income. In South Asia there is not one city where clean drinking water is available 24/7. In today’s world anything less than universal access to services is a failure.

On the other side, there’s also the failure to secure water. Countries are beginning to face water stress. The whole of the Middle East and southern Africa is a setting where the level of demand is outpacing the level of supply. Countries have got to look at how to manage storage of water, aquifers, rivers. Developing countries are facing huge problems of access to money to build hydraulic infrastructure. In this context, the management of water storage, groundwater sources and rivers — across national and international boundaries — has become critical to the future of economic growth. Instead of saying, “We’ve got to build dams with appropriate social and environmental care,” people assume the cost of building hydraulic infrastructure completely outweighs the benefits.

The underlying challenge — especially in developing countries where the market is growing — is the debate as to whether water is an economic good or a social or political good. The assumption is that if it’s an economic good, poor people won’t have access. As a result, the tendency is for public policy to consider water as a social good and for governments to underprice it. While an important social goal, this approach inevitably places water squarely within the political domain, and those who control politics — usually the middle class and those who have a disproportionate influence on policies — get the water. This is a policy discussion that we must engage in at a global level, with all stakeholders, if delivering on sustainable development goals is to be a reality.

Is there a role for the investment community in that process?

The challenge is trying to bring the private sector into the political economy, and it’s not yet ready for it. Making water an economic good is different from privatizing water; an economic good can be delivered publicly or privately. Making water an economic good helps create institutions that can run like businesses and access capital markets. It does not exclude public investment, but there would be a separate policy, a safety net, for those in need.

But crowding in private investment and [financial] resources at scale will require governments to protect water from the uncertainty of politics and political control and place the sector under more transparent political oversight. In the ’90s there was an assumption — overoptimistic in hindsight — that private management of water and sanitation services would be central to solving the service delivery challenge. The problem was that often countries did not have the capacity to manage the private sector entry point. Often in developing countries, governments had not spent the time to explain to citizens that bringing in a private company to manage water through concession or some other form of long-term contract did not mean privatizing water. What we saw in New Delhi [in 2005] was a political movement that stopped any kind of shift toward using the private sector in the delivery of water. That doesn’t mean that it did not work in other countries; Africa has some of the longest-running public-private partnerships for managing urban water in the world. But over the years we have recognized that private participation has an important role in service delivery. It is not a panacea, and its application has to be managed in partnership with the public sector. More importantly, reforms in the governance of the water sector that bring service delivery under the accountability of citizens are needed.

One way to involve the investment community would be through public-private partnerships. A lot of people say if you do that, you can begin to give water economic value, but others say you can’t do a public-private partnership without existing political readiness. It’s a chicken-and-egg problem. But in U.S. cities like Detroit, there is a scope for public-private partnerships to grow efficiency and accountability while investing in infrastructure.

There need to be institutional investments in the way water is delivered and protected, and private capital will follow that. But don’t create a financial institution that bypasses creditworthiness, like Fannie Mae or an infrastructure bank. The biggest infrastructure bank out there is the capital markets. Private sector partnership can be an effective instrument for policymakers to ensure universal access and water security, but in a context where the governance and regulatory reforms in the sector are putting the spotlight of accountability on providers — public or private.

What can the U.S. — both the public sector and private investors — learn from emerging markets on how to address water issues?

This underlines an important shift in our understanding of how knowledge flows between nations and how countries learn. The paradigm that knowledge flows in one direction — from developed to developing countries — no longer applies and, indeed, may never have been a correct approach to begin with. Australia has created a framework for trading water, as have the Netherlands and Switzerland. In Israel water is scarce but efficient — the most cost-effective desalination is done by Israel, and Palestine is beginning to lay the groundwork for good local governance too. The people who run the water system in Sanaa in Yemen came to Tucson, Arizona, late last year, and they had a lot to talk about. Their systems are run similarly. They really don’t have access to too much water, and groundwater is major source. New Orleans learns a lot from Dhaka about flood management — Dhaka gets flooded every year, and the leadership of New Orleans has a lot to learn from the leadership of Dhaka.

What is the World Bank focusing on at the moment to help facilitate the valuation of water and investment in infrastructure?

Our focus is to help countries build institutions that can deliver on the promise of universal access, water security and resilience for their citizens — and, where possible, water institutions that are creditworthy. We are building infrastructure funds that can support governments to build the pipeline of projects that can attract private investment. We also have instruments that offer political risk insurance, which is very important for the future, to bring in private money. It allows businesses to manage risks from the decisions and actions of governments. Finally, we have direct lending for infrastructure that creates a basic platform and capacity for service delivery so countries can leverage private investment where appropriate and feasible.

The arrival of institutional-quality money [in the water industry] will require a better understanding of how to price water and how countries are dealing with getting it. Private investors are also interested in equality; otherwise they can’t secure their money. They want to be sure they know how the poor will get access to the projects they are funding. If those questions can be answered, there’s no reason private money won’t come in.

What are the benefits and challenges of addressing water needs with water trading or water markets?

We think creating water markets is one solution for ensuring that we get universal access to water and water security ... but that’s only one solution, and many countries’ constitutions even forbid it. It requires creating markets, the pricing of water, investment in infrastructure and ensuring a safety net for the poor. California is looking at it, as are Australia and China. But if you pause for a second, you realize that already around the world a lot of informal water markets exist where vendors sell water to poor people because they don’t have access to the main system of delivery, or farmers sell water to cities nearby. Water markets exist all over the world; the challenge is whether we can make them more formal.

To create water markets, certain conditions are needed: Property rights above water have to be carefully managed; there has to be a regulatory capacity in the government to make sure these kind of sales are well managed, and no one is abusing the system; and there needs to be infrastructure to store and transfer. Today São Paulo [the Brazilian state’s water and waste management utility, Sabesp], the world’s largest water utility, has reached the point where it has to invest in infrastructure to bring in water that belongs to energy producers. Those using hydropower need to make the decision whether it’s worthwhile. Similarly, farmers and agriculture around world use about 80 percent of the water. They really have to ask, Can we create greater efficiency in water use and agriculture and release safe water so it can go to a much higher-value use, like municipal services? For that to happen, farmers have to have rights.

Creating water markets is not instantaneous, but people forget that we have had them for centuries. They will continue to exist; the question is whether they can be formal for the service of citizens.

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