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Unclassified ENV/EPOC/EAP(2012)5 Unclassified ENV/EPOC/EAP(2012)5 Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 19-Sep-2012 ___________________________________________________________________________________________ _____________ English - Or. English ENVIRONMENT DIRECTORATE ENVIRONMENT POLICY COMMITTEE Unclassified ENV/EPOC/EAP(2012)5 TASK FORCE FOR THE IMPLEMENTATION OF THE ENVIRONMENTAL ACTION PROGRAMME FOR CENTRAL AND EASTERN EUROPE, CAUCASUS AND CENTRAL ASIA IMPROVING THE USE OF ECONOMIC INSTRUMENTS FOR WATER RESOURCE MANAGEMENT IN KYRGYZSTAN: the Case of Lake Issyk-Kul Basin FINAL DRAFT Annual Meeting of the EAP Task Force, 24-25 September 2012 Oslo, Norway Agenda item: 5 ACTION REQUIRED: For information and discussion. For additional information, please contact: Mr. Alexander Martoussevitch, Environmental Performance Information Division, Environment Directorate, tel: +33 1 45 24 13 84, fax: + 33 1 44 30 61 83, e- mail: [email protected] English JT03326512 Complete document available on OLIS in its original format - This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of Or. English international frontiers and boundaries and to the name of any territory, city or area. ENV/EPOC/EAP(2012)5 2 ENV/EPOC/EAP(2012)5 EXECUTIVE SUMMARY Introduction and Purpose This report presents the findings of a study into the use of existing economic instruments for water resource management in the Kyrgyz Republic, with a focus on the pilot basin of Lake Issyk-Kul. A wide range of instruments were studied, and available financial data for 2007 to 2010 has been presented. The report also presents existing water resource management & environmental challenges faced by the country, and ties the economic instruments to the problem(s) that the instruments are supposed to, or could be used to address. Context The report has been produced in the context of the National Policy Dialogue on water policy in Kyrgyzstan, including strategic financial planning for water resources management (WRM) - a process managed by what was previously the State Committee on Water Economy and Melioration (SCWEM) of the Kyrgyz Republic (now Department of Water Management and Melioration (DWMM) under the Ministry of Agriculture and Melioration (MoA)), in the framework of the European Union Water Initiative (EUWI) with support from the UNDP, UNECE, OECD and bilateral donors. This particular report was co- funded by the Governments of Switzerland and Norway, the EC and the OECD and implemented by consultants WS Atkins International Ltd with support from local experts and other partners participating in the National Policy Dialogue. A number of other studies in the water, sanitation and irrigation sector in the Kyrgyz Republic have pointed to a lack of policy direction, engagement and institutional disorganisation and incoherence within the Government regarding these sectors. This report focuses on existing and potential economic instruments and their application to water resource management challenges, and is not supposed to address the wider institutional reform necessities, which have been adequately addressed by these other studies. However, we will take the opportunity of this report to lend our support to the recommendations and conclusions made in the other reports, e.g. by the ADB, DFID and the World Bank, regarding the necessity for: Development of a National Water Strategy and water policy; Implementation of the Water Code, 2004; Adaptation of sector standards to fit the fiscal reality of the Kyrgyz Republic and a better balance between the population‟s ability to pay and level of service required; Clarification of institutional responsibilities; Promotion of meaningful transparency and accountability. 3 ENV/EPOC/EAP(2012)5 Main findings The management of water resources in the Kyrgyz republic faces a number of challenges which have not been adequately addressed by current institutions, existing economic instruments or revenues available to the sector. Some of the key challenges are: Insufficient water for some users, on the one hand, and inefficient use and/or under-utilization of water resources, on the other hand (e.g. under-utilization of water for hydropower generation and thermal water); Uncertainty about the availability of water resources in the future, associated with the impacts of climate change (glacial retreat, changes in precipitation and run-off patterns, etc.); Low water quality in some water bodies (for example, due to discharges of untreated wastewater and diffuse pollution from agriculture and other sources); Low quality water services provided by existing infrastructure including low coverage and/or inefficient operation of existing water systems; Lack of monitoring of water resources (lack of gauging stations „hydroposts‟, especially automatic ones, as well as monitoring of groundwater levels and quality; lack of water quality analysis); High risks for population, property and water infrastructure (e.g. irrigation and drinking water mains) associated with water-related natural hazards (mudflows and land-slides, collapse of alpine lakes, groundwater flooding) and other natural phenomenon (extreme temperatures and earthquakes); Subjective factors: poor financial status of the water sector: e.g. in the irrigation sector, up to 90% of the operating and maintenance (O&M) costs has been subsidized from the national budget (in 2010, the subsidy amounted to 613 million Kyrgyz som; almost 10 million EUR), lack of maintenance and repairs; many water utilities (vodokanals) are effectively bankrupt; Low salaries and lack of qualified staff in the water sector. Failure to address these challenges is economically inefficient and will result in a degradation of the country‟s water resource “capital” stock. The inefficient use of existing resources represents a large missed opportunity for the economy and hinders the economic growth that is required for both long-term protection of these resources and improvements in living standards. A wide range of economic instruments exist, and are provided for in the Water Code of 2004. These instruments provide ample opportunity to improve water resource management without major legislative change. However, in their existing form or state of implementation, these existing economic instruments neither create the right incentives (for pollution prevention, for the efficient use of water resources and for efficient operation and maintenance of water systems); nor do they generate sufficient revenues for the financial viability of the water sector. Revenues raised by the economic instruments, where these exist, such as user charges, are significantly below even the operating and maintenance costs for infrastructure that they are supposed to support. The result is a combination of infrastructure and service decline and the requirement for central 4 ENV/EPOC/EAP(2012)5 subsidies. In addition to a general inadequacy of revenues, the existing instruments do not provide real incentives for the protection and efficient use of water resources. For example, some of the country‟s major polluters (wastewater treatment plants and by inference, everyone who discharges into the sewer system) are exempt from pollution charges. Revenues from charging for pollution, which prevents or impedes downstream economic use of water, are insignificant and well below the cost of abatement - the minimum price at which they need to be set in order to prevent pollution. The charges do not provide any incentive for abatement and represent only a token revenue item, for example, total pollution licence revenues collected for the Issyk Kul basin were 900,000 KGS in 2010 (14,000 EUR: equivalent to 2% of the three vodokanals‟ O&M costs, 0.1% of electricity revenues, or one third of mineral water royalties in the basin). Water abstraction charges, provided for in the Water Code, do not exist in practice. Irrigation tariffs form a low part of total farm expenditure and are insufficient to cover infrastructure maintenance or power costs. Hydropower stations do not pay for their non-consumptive use of water, which may impact upon the timing and/or availability of downstream river flows for other economic purposes (domestic, agricultural, industrial). Conclusions and Recommendations This report presents an evaluation of the existing economic instruments, proposed reforms to them, and some additional economic instruments which are proposed with the ultimate objective of improving water resource management and mobilising sufficient financial resources for water sector priorities. Existing laws and instruments do provide a starting point from which immediate action can be taken to improve water resource management and incentivise economically efficient behaviour and use of resources. In particular, the 2004 Water Code has yet to be implemented and the Government of the Kyrgyz Republic should proceed with its implementation. Several new or reformed instruments emerge from the evaluation, which offer a potentially significant contribution to improved water resources management in terms of environmental effectiveness and revenue generation. They are relatively easy to administer and are more likely to be politically &socially acceptable. These are: Reform of user charges for urban water supply and sanitation – the focus should be on a drastic improvement of collection efficiency and gradual increase to the level
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