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Valuing Water Gains in the Eastern Cape's Working for Water Programme

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Valuing Water Gains in the Eastern Cape's Working for Water Programme Valuing water gains in the Eastern Cape’s Working for Water Programme SG Hosking* and M du Preez Department of Economics and Economic History, University of Port Elizabeth, PO Box 1600, Port Elizabeth 6000, South Africa Abstract Water is one of the most important measured benefits of the Working for Water Programme (WWP). This programme entails the removal of high water-consuming alien vegetation and the restoration of low water-consuming indigenous vegetation. For this reason it is crucial that the pricing of this water be an accurate reflection of its relative scarcity. This paper sheds more light on this aspect. A procedure for pricing water is described and applied in six WWP projects in the Eastern Cape province: Tsitsikamma, Kouga, Port Elizabeth Driftsands, Albany, Balfour and Pott River. It is shown that the procedure yields very different prices at the different sites, and higher prices for projects that increase river flows feeding metropolitan demand. Introduction There is little doubt that one of the most important measured benefits of the WWP in South Africa is water. This programme Po t entails the removal of high water-consuming alien vegetation and ¤ the restoration of low water-consuming indigenous vegetation. Not only is this benefit highlighted in the name of the project but it is pre-eminent in brochures advertising it (DWAF, 1999). It is also evident that a substantial amount of research has been conducted on the quantity of water gained through the ¤ WWP (Versveld et al., 1998; Le Maitre et al., 1996). Surprisingly though, very little research has been ¤ conducted on pricing this water benefit. A number of studies have generated prices, e.g. Marais (1998); ¤Kouga Van Wilgen et al. (1997) and Hosking and Du Preez ¤ ¤ (1999), but there is a dearth of information on the procedures Po r t El i za b et h by which they were generated. This paper examines this issue. The purpose of the paper is to Figure 1 recommend a procedure for pricing water generated by WWP Location of the six Working for Water Programme projects projects. The procedure is then applied to six Eastern Cape projects - those of the Tsitsikamma, Kouga, Port Elizabeth Driftsands, Albany, Balfour and Pott River (see Fig. 1). The nature of South estimated by incorporating the costs of clearing alien plants and Africa’s water markets is taken as a given. maintaining the catchment in a cleared condition, and the benefits of increased water flow from an uninvaded catchment. Marais A procedure for pricing water generated (1998) also based his estimate of the price of water generated by the WWP on the Skuifraam Dam Scheme. Probably the most universal water pricing approach adopted in Perhaps the most curious aspect of the above studies is equating economic assessments of theWWP in South Africa is that of Van treatment of large-scale water storage projects, like dams, with Wilgen et al. (1997). This study based its price on the Skuifraam small-scale water-generating ones, like alien vegetation-clearing Dam development, the next one scheduled to be constructed for the ones. Because of this equating process, dam project prices per cubic Cape Town metropole. [The concept price of water is used in this metre of water are posited as opportunity cost prices for water paper to refer to the value of water as measured by marginal cost generated through alien vegetation-clearing projects. This practice or marginal willingness-to -pay. Some people would argue that the is peculiar because these are complementary rather than alternative term tariff or value would be more appropriate (anon. referee)]. type projects and because there are substantial project scale The development cost of this water supply scheme was estimated differences. The appropriate price is one for generating the equivalent at R400 m. and the operating costs at R2 m./a. Van Wilgen et al. amount of additional water supply. (1997) calculated two prices on the basis of this scheme: R0.59/m3 In defence of the Van Wilgen et al. (1997) calculation, in many on the basis that no control of alien plants took place and R0.57/m3 cases there clearly is a fine line between a water-generating project on the basis that it did take place. The second value of R0.57/m3 was and a storage one. When a river is dammed and that water imported into a metropolitan area, this could legitimately be interpreted as a water-generating project. However, when additional dams are * To whom all correspondence should be addressed. added to a river that already feeds a metropolitan area, these are ((041) 504-2638; fax:(041) 583-2644; e-mail: [email protected] Received 17 May 2001; accepted in revised form 29 October 2001. storage projects. The constraint in the latter case is not with the Available on website http://www.wrc.org.za ISSN 0378-4738 = Water SA Vol. 28 No. 1 January 2002 23 inflow supplied by the river, but the inadequacy of dam capacity. generated is, therefore, the excess willingness-to-pay over private If additional river flow is gained, the requirement for the dam marginal cost. remains. The private marginal cost of water in agriculture in the Eastern A second problem with the above approach to pricing is that it is Cape tends to be low compared with the marginal cost to local urban limited in its applicability. The problem is not so much with the use authorities of obtaining water. [However, this is not the case in of this price reference in other metropolitan areas (although there many other places (anon. referee). Under certain conditions (high could be problems with this too), but with its applicability to rural value agricultural uses) the value of irrigation water can be just as areas which do not feed metropolitan water systems. In the bulk of high or even higher than the value attached to urban water these cases the use of costs of water storage and transfer do not yield (Frederick et al., 1996; Louw, 2001)]. For instance, in the Gamtoos prices which reflect relative scarcity. River irrigation district (including the Kouga, Impofu and Loerie If the objective of water pricing for WWP projects is to reflect Dams) the tariff charged for water used for irrigation purposes is relative scarcity, the following procedure may be useful. based solely on the catchment management cost incurred (DWAF, 2000). It is R0.01196/m3. The estimated average water resource (a) The time horizon over which one is interested in the price needs management charges for water used for irrigation purposes in to be defined and differences in purchasing power between South Africa were between R0.0016/m3 and R0.0112/m3 (Pretorius different years should be defined. et al., 1998). (b) The bulk raw water purchasers and suppliers of the water If, as normally appears to be the case, the water supplied is not should be identified. directly charged for in water-right payments, the marginal (c) The question of how information on water pricing is revealed willingness-to-pay rate will exceed marginal cost. In this case the though the interaction of these agents should be examined. excess benefit to the buyer of the water constitutes a benefit to land Calculations of water prices should be made on this basis. ownership and can be expected to be capitalised into land values. (d) Changes in demand and supply that are expected to impact on For this reason it has become common practice to determine the future prices of water should be explicitly taken into account. willingness-to-pay prices by reference to this capitalised portion in land value (Backeberg, 1996). In efficient markets this would equal Steps (a) and (b) are intended to put the factors on the table that need the rental value of water. The rental value of water is its in-situ to be addressed in steps (c) and (d). price, i.e. its value in the river (Field, 2001). Although the new The most technical of these steps is (c). When supplying water National Water Act of 1998 abolished riparian water rights, the to urban areas demand information is not revealed, only cost-of- water entitlements generated prior to this time have largely been supply information is revealed. Local authorities run monopolies in accommodated within the new allocative system. For this reason, the end-user market and (up until recently) have set prices merely water pricing in South Africa by reference to capitalised land in order to cover costs. For this reason, if water is to be used to values remains relevant, even if undesirable (Backeberg, 1996). satisfy urban demand, the only available approach is marginal cost The idea of including procedural step (d) in the list above was pricing. The marginal cost of generating river water for urban to draw attention to the fact that prices are set in a dynamic context. demand is the unit cost of bringing additional bulk untreated river There are many factors which influence the price of water over water into urban areas. It should be distinguished from average time, both from the supply and the demand sides, and they change, cost, which is the unit cost of all water brought into urban areas. The sometimes radically (Michelsen et al., 2000). Ideally, whichever of costs being referred to are capital, operational and maintenance the above two approaches is taken to pricing water over time for costs (Sampath, 1992). The appeal of using marginal cost as a conservation projects, the outcomes should be sensitised to expected reference for pricing lies in the fact that marginal cost is an efficient changes in demand and supply.
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