1. Valuation of Water Resources
Glenn-Marie Lange
Center for Economy, Environment and Society
The Earth Institute at Columbia University

2. Water Policy: Treat water as an economic good
Dublin Principles and IWRM—approach recommended for MDGs
2002 World Summit on Sustainable Development in Johannesburg
2003 Third World Water Forum
2006 World Water Development Report
Human Development Report 2006
Beyond scarcity: power, poverty and the global water crisis

3. What do we mean by ‘economic value?’
A commodity has an economic value when people are willing to pay for it, rather than go without
Water is an essential commodity, so the value of a small/basic amount for survival is infinite—people would pay any price.
This is not useful information for policymakers.
But after basic needs are met, people buy water based on its price compared to other goods they might buy.
Water’s value is the willingness to pay for water
It is observed when people make a choice between different products
How much will a household pay for drinking water?
How much will a farmer pay for irrigation water?
How much will a factory pay for clean water?

4. Why value water? Water as an Economic Good: After basic needs are met, water should be allocated to the highest value uses.
Water value provides critical information for decisions about
Efficient and equitable allocation of water among competing users, both
within the present generation
between present and future generation
Efficient and equitable infrastructure investment in the water sector (how much, where, when)
Efficient degree of treatment of wastewater
Design of economic instruments: water pricing, property rights, tradable water rights’ markets, taxes on water depletion and pollution, etc.

5. Water tariffs and water value
SNA values water at price of transaction. Why can’t we just use this value?
Because the price charged by water suppliers—if any—often unrelated to value of water, too low
Water price often does not even reflect full costs of water supply!
Water is not supplied by competitive markets due to natural characteristics
Necessary for human survival
Natural monopoly
Characteristics of public good
Property rights not always well defined for multiple use or sequential use
‘Bulky’ commodity (very high transport costs relative to value inhibiting trade)

6. Water tariffs and water value
Some markets for trading water rights are developing
Australia,
California,
Chile
but still uncommon, local
Price of tradable water rights does not yet provide a reliable indicator of value because markets too ‘thin’ (too few traders)
So we must estimate or impute economic value of water

7. Can we apply economists’ techniques for valuing water to the Water Accounts?
There are several concerns about using economists’ ‘non-market valuation’ techniques
Accuracy of water values and cost of valuation
Consistency of value concepts with SNA
Aggregation: scaling up site-specific values

8. 1. Accuracy of non-market valuation
Data requirements are very high, so valuation is costly
Value is often uncertain, very sensitive to assumptions
Results are often presented as a range of values rather than a point estimate, a single value
Values are most reliable for water used as input to
agriculture,
hydroelectric power
other uses where water is a major component of production costs

9. 2. Concepts of value Consistent with the SNA?
In principle, SNA measures market values, or sometimes cost of production
Water valuation techniques were developed for Cost-Benefit Analysis of projects (not national economy):
CBA often tries to measure of economic welfare (total economic value) not market price
Programming models measure values in an optimizing economy which usually differs from actual economy

10. 3. Aggregation and national water accounts
Water values highly site-specific, dependent on local uses, as well as season, water quality and reliability
Values are not amenable to ‘benefits transfer’—using an estimate from one case study for another area
Little experience scaling up local values to the national level

11. Major Imputed Water Valuation Techniques
1. REVEALED PREFERENCE TECHNIQUES
(based on observed market values)
Residual value
Marginal contribution of water to output, measured by subtracting all other costs from revenue
Production function approach
Marginal contribution measured as the change in output from a unit increase in water input in a given sector
Optimization models and programming
Marginal contribution measured as the change in sectoral output from reallocation of water across the entire economy
Hedonic pricing
Price differential paid for land with water resources
Opportunity Cost
Price differential for alternative (example: replacing hydroelectric power with coal-fired electricity)
2. STATED PREFERENCE
(based on surveys of willingness to pay)
Contingent Valuation Method
Survey of users, especially household water use and recreational services

12. Methods for Valuing Water’s Waste Assimilation Services
Waste assimilation services can be valued in 2 ways
Pollution damages avoided
This approach asks, ‘What would be the cost of damages ( to health, production activities) that would occur if we didn’t have this waste assimilation service?’
Costs of preventing damage
Value is measured as the costs of measures to prevent pollution: water treatment technologies, pollution abatement technologies, purchase of alternative goods (bottled water)

13. Most commonly used water valuation techniques

14. Residual Value (Value Marginal Product) The easiest & most commonly applied valuation technique where TVP = Total Value of the commodity Produced piqi = the opportunity costs of non-water inputs to production pw = value of water (its marginal product) qw = the cubic meters of water used in production Non-water inputs include: intermediate inputs, labor, capital costs, land

15. Challenges to Implementing Residual Value Technique
Is the quantity of water measured accurately?
Is labor cost accurate—how to value unpaid family labor?
Value of land—minus water rights
Capital costs
Are all capital costs accounted for accurately?
What rate of return to capital should be used?
Are there other inputs that have not been included?
Do the prices of output & all inputs reflect true economic value, or are they distorted?

16. Example: Agricultural water use in Namibia (Stampriet area)
Farm revenue & costs (in 1999 Namibia $)
Data source
Gross farm income
$ 601,543
Output x market prices from survey
Inputs of goods and services
$ 242,620
Inputs x prices from survey
Value-added, of which:
$ 358,923
Compensation of employees
$ 71,964
Wages paid + in-kind payments from survey
Gross operating surplus, of which:
$ 286,959
Imputed value of farmers’ labour
$ 48,000
Imputed based on average salary of hired farm manager
Depreciation
$ 66,845
Depreciation rates x Farmers’ estimated cost of capital in survey
Cost of working capital
$ 17,059
Imputed as % of the value of fixed capital
Cost of fixed capital including land, 3% -7%
$75,739 to $176,724
Based on farmers’ estimated cost of capital reported in survey
Residual value of water
$79,316 to -$21,669
Amount of water used (m3)
154,869
Farmers’ “best guess;” water is not metered
Residual value N$/m3
$0.51 to -$0.14

17. Optimization models: Valuing multiple uses of water
Residual value and related techniques are good to estimate the value of water in a single use, or several closely related uses
To estimate the value of all uses of water in an economy, then modeling is needed
Linear programming
Computable General Equilibrium (CGE) modeling
Econometric modeling
But these approaches are better used for evaluating changes in water allocation among users, rather than values in current allocation.

18. Water Asset Valuation
Asset value = Net Present Value of all future benefits (value of water services), the case of 2 uses or
When RR is constant for all uses in all years, this formula becomes:
Where
V = Asset value of water
RR = value of water for 2 different uses
in a given year, pw x qw
r = discount rate

19. Water Asset Valuation New Zealand & Canada (under development):
Water resources with a single use of water: hydropower only
Annual water service (hydropower) assumed constant in all future years
Valuation method used:
New Zealand: Residual Valuation Method
Rent = Net operating surplus – return on fixed capital
Canada: Opportunity Cost, difference between production cost of hydropower & cost of next alternative, thermal/coal power
Rent = (CT – CH)QEH Where
CT = cost of production per unit of electricity for Thermal power plants
CH = cost of production per unit of electricity for hydropower plants
QEH = quantity of electricity produced by hydropower plants
Asset Value:

20. Hydropower & Geothermal Power Asset Value in New Zealand

21. Which Method is Better for Valuing Water for Hydropower?
Residual value (New Zealand)
Does the price charged for electricity reflect the market value of electricity, or is it regulated?
If regulated, the electricity price will not reflect the value of water (rent) and Residual Value Method is not a good technique
Opportunity cost (Canada)
Based on difference in costs of production, so it is a good technique to estimate value of water even if electricity price is regulated

22. Can Water Asset Valuation be done in other countries?
Yes, but….
Data requirements are considerable:
measure of water asset volume & flows over time
measure of the annual values of all uses of water over time
Water assets in most countries serve multiple purposes:
Agriculture
Livestock watering
Irrigation of different crops
Hydropower--Drinking water--Fisheries habitat
Sink for waste water
Will the combination of uses change in future?
Will the economic value of each use change?

23. Approach Water Valuation Cautiously!
Value consistent with SNA: include all values but indicate type of value and robustness
Accuracy/uncertainty: start with major uses that are easiest to value (agriculture) & indicate range of values
Aggregation: implement valuation at local/river basin level
Asset value: begin with water bodies with single or few uses that can be easily valued