By Yang Villa, Philippines Young Water Professionals
While listening to this interview, I was reminded of a feeling I get at any major water conference that there are not enough economists present. Economics, after all, is the study of maximizing and allocating welfare given scarce resources — the problem of optimization. There needs to be more discussion about optimized allocation given all the talk about water scarcity at these events.
The need for economic valuation in resource governance
The example of the National Water Resources Board (NWRB), the agency responsible for allocating water extraction and use in the Philippines, reflects the importance of economic valuation when allocating water. Guided by the Water Code of the Philippines, the NWRB implements a rigid allocation protocol governed by the type of water use. In decreasing order, the hierarchy of water use prioritizes domestic potable use before irrigation, power generation, industrial use, and then recreation and other non-essential uses. This hierarchy is strictly observed regardless of seasonal conditions, physical constraints, or user demand.
On several occasions, this rigidity has given rise to conflict among competing water users. For example, farmers in the Province of Bulacan have claimed damages against the decision of the Metropolitan Waterworks and Sewerage System to increase domestic bulk water allocations for Metropolitan Manila from the Angat Dam at the expense of irrigators.
In cases such as this, economists can contribute to policymaking by evaluating and weighing water-use values, which consider the contextual nature of water use and not merely its type of use. When resource allocation decisions consider these values, water is able to (quite literally) flow to users who place higher importance on available water resources at any given time. For example, during cropping seasons farmers place a higher value on water relative to the use-value for domestic potable water. Thus, this approach enables flexibility and compromise in order to optimize water allocation.
Why economic valuation is important
Economic valuation is the process of identifying, quantifying, and comparing values of one good to another, or the multiple uses of a single product. It is used as a tool for making decisions about resource allocation. Flexible water allocation regimes, as described above, require an economic valuation in order to optimize resources at any given time.
In his Kini interview, Huw Pohlner suggested that there is a need to inform resource governance with economic valuation. According to Huw, economic valuation provides governments with a “risk-based approach to identify…the core problems of their water management policy, so that they can identify opportunities to maximize the resources that are available to them.”
Valuation is also useful on the project level. One method employed to make decisions on the project level is economic cost-benefit analysis (CBA), which accounts and compares all economic costs and benefits to society. This whole-of-society approach lends greater weight to overall social impact than typical investment methods such as capital budgeting which uses metrics such as payback period and return on investment to measure a project’s impact only to the investor.
Economic CBA can help decision-makers — whether they are project proponents, approving bodies, regulators, or special interest groups — make more informed decisions by presenting a broad and balanced view that considers project impact to a greater number of stakeholders.
It also “gives voice” to non-human stakeholders such as animals, natural ecosystems, and biodiversity. Techniques such as shadow pricing, natural capital valuation, and willingness-to-pay can enhance the value of maintaining ecosystem services, thereby promoting protection and conservation rather than extraction or degradation. In the case of NWRB’s allocation decisions, economic CBA might actually reflect the need to allocate more volume for environmental flow relative to currently allowed extraction volumes.
Applying economic valuation in the Philippines
Through a partnership between Metro Pacific Water and Aither, foreshadowed in Huw’s Kini interview, I have been working with Huw to evaluate a water supply project in the Philippines where we employ economic valuation and CBA to aid investment decisions. We compare the baseline (business-as-usual) case with the proposed project case to determine under which scenario the beneficiary community is better or worse off.
Economic CBA is useful in this case because it identifies multiple ways that the project can benefit the community. When the project’s benefits exceed costs, the resulting “net benefits” helps justify the need for the project. Even a CBA that initially results in “net costs” is helpful because it guides the project proponent to re-calibrate the project in such a way that it results in a net benefit.
On the policy front, I am also working with Huw to introduce economic valuation to Philippine regulatory bodies, including the NWRB, using Aither’s WaterGuide. This is timely because the NWRB has recently conducted a series of national consultations which will lead to the development of a National Water Security Roadmap. We hope this will be shaped and guided by the concepts and tools of economic valuation.