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1 SEEAW – Asset Accounts and Valuation Regional Workshop on Water Accounting Santo Domingo, Dominican Republic 16-18 July 2007 Michael Vardon United Nations.

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Presentation on theme: "1 SEEAW – Asset Accounts and Valuation Regional Workshop on Water Accounting Santo Domingo, Dominican Republic 16-18 July 2007 Michael Vardon United Nations."— Presentation transcript:

1 1 SEEAW – Asset Accounts and Valuation Regional Workshop on Water Accounting Santo Domingo, Dominican Republic July 2007 Michael Vardon United Nations Statistics Division

2 Outline What do Asset accounts measure?What do Asset accounts measure? Basic definitionsBasic definitions Asset classificationAsset classification SEEAW standard tablesSEEAW standard tables Supplementary tables/informationSupplementary tables/information Breakdown of water flowsBreakdown of water flows Matrix of flows within the environmentMatrix of flows within the environment

3 What do asset accounts measure? Asset Accounts describe in physical units The stocks of water resources The changes in stocks that occur during the accounting period (natural and anthropogenic changes) They link information on abstraction and returns with information on the stocks of water resources

4 Hydrological cycle and water balance Precipitation = Evapotranspiration + runoff +/- changes in storage

5 Basic structure Closing Stocks Opening Stocks Increases in stocks due to human activities due to natural processes Decreases in stocks due to human activities due to natural processes

6 1993 SNA Asset classification Aquifers and other groundwater resources to the extent that their scarcity leads to the enforcement of ownership and/or use of rights, market valuation and some measure of economic control. Thus only a small portion of the water resources in a country is included in the 1993 SNA.

7 SEEAW Water resources include water found in fresh and brackish surface and groundwater bodies within the national territory that provide direct use benefits now or in the future (option benefits) through the provision of raw material and may be subject to quantitative depletion through human use.

8 SEEAW asset classification EA.13 Water Resources (measured in cubic metres) EA.131 Surface water EA.1311 Artificial Reservoirs EA.1312 Lakes EA.1313 Rivers and streams EA 1314 Glaciers, Snow and Ice EA 132 Groundwater EA.133 Soil Water

9 Asset accounts

10 Water resources Surface water: water which flows over, or is stored on the ground surface. It includes: artificial reservoirs, lakes, rivers and streams, glaciers, snow and ice. Groundwater: water which collects in porous layers of underground formations known as aquifers Soil water: water suspended in the uppermost belt of soil, or in the zone of aeration near the ground surface, that can be discharged in to the atmosphere by evapotranspiration

11 Water in oceans, seas and atmosphere …..not recorded in terms of stocks but only in terms of flows. For example, abstraction from the seas, collection of precipitation, outflows to the seas, evaporation/evapotranspiration etc.

12 Fresh and non-fresh water Water resources include fresh and brackish water. Brackish water can be used with or without treatment for some industrial uses or for irrigation purposes for some specific crops Water resources can be further disaggregated into fresh and brackish water

13 Stocks for rivers It is not easy to define. The stock of a river should be measured as the volume of the active riverbed determined on the basis of the geographic profile of the riverbed and the water level. This quantity is usually very small compared to the total stocks of water resources and the annual flows of rivers. It can be avoided computing the stocks of rivers

14 Matrix of transfers within the environment

15 Valuation of Environmental Assets Why value environmental assets?Why value environmental assets? Definitions of environmental assetsDefinitions of environmental assets Asset boundary between SNA and SEEAAsset boundary between SNA and SEEA SNA asset classificationSNA asset classification SEEA asset classificationSEEA asset classification Methods of valuationMethods of valuation Net present valueNet present value Other methodsOther methods Example: Valuing WaterExample: Valuing Water

16 Why value environmental resources? Efficient and equitable allocation of resources among competing users, both within the present generationwithin the present generation between present and future generationbetween present and future generation Efficient and equitable infrastructure investment in the resource sector (how much, where, when) Design of economic instruments: pricing, property rights, taxes on depletion and degradation Helps to ensure that the environment is included in decision-making

17 Assets in the SNA For an asset to be included in the SNA it must have: An identifiable owner who enforces ownership rightsAn identifiable owner who enforces ownership rights Be able to produced economic benefits for the owner by using or holding themBe able to produced economic benefits for the owner by using or holding them

18 SNA Environmental Assets AN.1Produced assets AN.11Fixed assets AN.111Tangible fixed assets AN.1114 Cultivated assets AN.11141Livestock for breeding, dairy, draught etc. AN.11142Vineyards, orchards and other plantations AN.112Intangible fixed assets AN.1121 Mineral exploration AN.12Inventories AN.122Work in progress AN.1221Work in progress on cultivated assets AN.2Non-produced assets AN.21Tangible non-produced assets AN.211Land AN.2111Land underlying buildings and structures AN.2112Land under cultivation AN.2113Recreational land and associated surface water AN.2119Other land and associated surface water AN.212Subsoil assets AN.2121Coal, oil and natural gas reserves AN.2122Metallic mineral reserves AN.2123Non-metallic mineral reserves AN.213Non-cultivated biological resources AN.214 Water resources AN.22Intangible non-produced assets AN.222Leases and other transferable contracts

19 Assets in SEEA SEEA expands the definition in the SNA to cover all environmental assets used whether they are owned or not providedSEEA expands the definition in the SNA to cover all environmental assets used whether they are owned or not provided

20 SEEA Environmental Assets EA.1 Natural resources EA.11 Mineral and energy resources (cubic metres, tons, tons of oil equivalents, joules) EA.12 Soil resources (cubic metres, tons) EA.13 Water resources (cubic metres) EA.14 Biological resources EA.141 Timber resources (cubic metres) EA.142 Crop and plant resources, other than timber (cubic metres, tons, number) EA.143 Aquatic resources (tons, number) EA.144 Animal resources, other than aquatic (number) EA.2 Land and surface water (hectares) EA.21 Land underlying buildings and structures EA.22 Agricultural land and associated surface water EA.23 Wooded land and associated surface water EA.24 Major water bodies EA.25 Other land EA.3 Ecosystems EA.31 Terrestrial ecosystems EA.32 Aquatic ecosystems EA.33 Atmospheric systems Memorandum items: Intangible assets related to environmental issues (extended SNA codes) AN.1121 Mineral exploration AN.2221 Transferable licences and concessions for the exploitation of natural resources AN.2222 Tradable permits allowing the emission of residuals AN.2223 Other intangible non-produced environmental assets

21 How to value SNA is very clear Market price should be the basis of valuationMarket price should be the basis of valuation Where market prices are unobservable or do not exist then economic theory may be used to determine a shadow priceWhere market prices are unobservable or do not exist then economic theory may be used to determine a shadow price

22 Shadow price The true economic PRICE of an activity: the OPPORTUNITY COST. Shadow prices can be calculated for those goods and SERVICES that do not have a market price, perhaps because they are set by GOVERNMENT. Shadow pricing is often used in COST-BENEFIT ANALYSIS, where the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those for which market prices exist.The true economic PRICE of an activity: the OPPORTUNITY COST. Shadow prices can be calculated for those goods and SERVICES that do not have a market price, perhaps because they are set by GOVERNMENT. Shadow pricing is often used in COST-BENEFIT ANALYSIS, where the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those for which market prices exist.PRICE OPPORTUNITY COSTSERVICESGOVERNMENTCOST-BENEFIT ANALYSISPRICE OPPORTUNITY COSTSERVICESGOVERNMENTCOST-BENEFIT ANALYSIS Source: The Economist

23 Options for valuation – SNA and SEEA SNA Market priceMarket price Net present valueNet present value Cost of production (provides a lower bound)Cost of production (provides a lower bound) SEEA describes SNA methodsSNA methods Revealed preferencesRevealed preferences Stated preferencesStated preferences

24 Net present value The net present value of future expected earning can be used to determine asset values

25 Net present value calculation Net present value (NPV) of expected future income streamsNet present value (NPV) of expected future income streams V t = Σ Where V=NPV, RR = resource rent, r = discount rate, n =asset life n RR t=1 (1+r) n

26 Net present value calculations: resource rent Resource rent – the value of the flow of capital services provided by a natural asset.Resource rent – the value of the flow of capital services provided by a natural asset. RR = (p-c)*QRR = (p-c)*Q Where RR = resource rent, p = unit price, c = unit cost (including wages, intermediate costs, normal return to produced capital, and taxes), Q = quantity extracted Where RR = resource rent, p = unit price, c = unit cost (including wages, intermediate costs, normal return to produced capital, and taxes), Q = quantity extracted

27 Net present value calculations: asset life This is the amount of time that the asset will continue to exist, given current rates of extractionThis is the amount of time that the asset will continue to exist, given current rates of extraction Volume of stock t 1 Volume extracted t 0 – t 1 Asset life =

28 Net present value calculations: discount rate Choosing an appropriate discount rate is crucial to the NPV calculation. An area of debateChoosing an appropriate discount rate is crucial to the NPV calculation. An area of debate Rate used differs between countriesRate used differs between countries The higher the discount rate, the lower the NPVThe higher the discount rate, the lower the NPV

29 Concerns about using non-market valuation techniques 1.Accuracy of values and cost of valuation 2.Consistency of value concepts with SNA 3.Aggregation: scaling up site-specific values

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

31 Concepts of value Consistent with the SNA? In principle, SNA measures market values, or sometimes cost of production Many 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 priceCBA 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 economyProgramming models measure values in an optimizing economy which usually differs from actual economy

32 Aggregation and national accounts Some values highly site-specific, dependent on local uses, as well as season, water quality and reliabilitySome values highly site-specific, dependent on local uses, as well as season, water quality and reliability Values are not amenable to benefits transferusing an estimate from one case study for another areaValues are not amenable to benefits transferusing an estimate from one case study for another area Little experience scaling up local values to the national levelLittle experience scaling up local values to the national level

33 Revealed Preference (based on observed market preferences) 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)

34 Stated Preference (based on surveys of willingness to pay) Contingent Valuation Method Survey of users, especially household water use and recreational servicesSurvey of users, especially household water use and recreational services

35 Valuing water and treating it an economic good has strong support In Integrate Water Resource managementIn Integrate Water Resource management 2002 World Summit on Sustainable Development in Johannesburg2002 World Summit on Sustainable Development in Johannesburg 2003 Third World Water Forum2003 Third World Water Forum 2006 World Water Development Report2006 World Water Development Report Human Development Report 2006Human Development Report 2006 Beyond scarcity: power, poverty and the global water crisis

36 SNA values water at price of transaction. There are some prices for water, so why may it be inappropriate use these? Because the price charged by water suppliersif anyis often unrelated to value of water, and may be too lowBecause the price charged by water suppliersif anyis often unrelated to value of water, and may be too low Bulky commodity (very high transport costs relative to value inhibiting trade)Bulky commodity (very high transport costs relative to value inhibiting trade) Water price often does not even reflect full costs of water supplyWater price often does not even reflect full costs of water supply Water is not supplied by competitive markets due to natural characteristicsWater is not supplied by competitive markets due to natural characteristics Necessary for human survivalNecessary for human survival Natural monopolyNatural monopoly Characteristics of public goodCharacteristics of public good Property rights not always well defined for multiple use or sequential useProperty rights not always well defined for multiple use or sequential use

37 Some markets for trading water rights are developing Australia,Australia, CaliforniaCalifornia ChileChile but still uncommon, localbut 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

38 Most commonly used water valuation techniques

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

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

41 Example: Agricultural water use in Namibia (Stampriet area) Farm revenue & costs (in 1999 Namibia $) Data source Gross farm income $ 601,543 $ 601,543 Output x market prices from survey Inputs of goods and services $ 242,620 $ 242,620 Inputs x prices from survey Value-added, of which: $ 358,923 $ 358,923 Compensation of employees $ 71,964 $ 71,964 Wages paid + in-kind payments from survey Gross operating surplus, of which: $ 286,959 $ 286,959 Imputed value of farmers labour $ 48,000 $ 48,000 Imputed based on average salary of hired farm manager Depreciation $ 66,845 $ 66,845 Depreciation rates x Farmers estimated cost of capital in survey Cost of working capital $ 17,059 $ 17,059 Imputed as % of the value of fixed capital Cost of fixed capital including land, 3% -7% $75,739 to $176,724 $75,739 to $176,724 Based on farmers estimated cost of capital reported in survey Residual value of water $79,316 to -$21,669 $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

42 Net present value of hydropower & geothermal in New Zealand

43 Approach Environmental 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 & indicate range of values Aggregation: implement valuation at local/river basin level Asset value: begin with resources with single or few uses that can be easily valued

44 Acknowledgement Many thanks to Glenn-Marie Lange for allowing me to use some material from her presentations Glenn-Marie Lange Senior Research Scholar The Earth Institute at Columbia University Center for Economy, Environment and Society 2910 Broadway, Room 110 New York, New York Cell phone: Phone: Fax:


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