How valuing water can help improve decisions

We know the ‘why’ and ‘what’ of better water management, but are stuck on ‘how’

Global attention to water management over past decades reflects an almost universal appreciation of the importance of water as an irreplaceable resource and the urgent need to manage and use that resource optimally. Although there is sometimes a lack of agreement on specific objectives, we increasingly know why we need to manage water effectively.

We also know what types of tools, methods, and policy instruments we can use to manage water effectively. The options are constantly expanding, technologies are improving, and the evidence base for what works is growing.

What often stands between the water sector and better outcomes from water is how: how to develop informed and robust strategies for improving water policy, management, investment, and use; how to choose the right tools to diagnose and address problems; and how to move from strategy to action.

Unravelling the ‘how’ of better water policy, management, investment, and use is one of the most important tasks the water sector has today. Given the scale of the challenge, and the investments in response, making even marginally better decisions can generate enormous benefits and avoid costly and irreversible mistakes.

As water is almost always sourced, managed, and used locally, specific challenges and opportunities differ by jurisdiction and water source. However, our many local water challenges are sufficiently common that there are ways to tackle and solve them locally that can be applied globally.

Valuing water can help us deliver better outcomes

To make better water management decisions, we should be guided by a simple but frequently elusive objective: to maximise the difference between total benefits and total costs. In other words, we need to maximise net value.

To make decisions that are informed by value is to recognise that water management frequently involves trade-offs. Too often, decisions about these trade-offs are sub-optimal and are not made transparent to all. Hard-to-quantify benefits may be neglected, diminished, or misrepresented by influential stakeholder groups. Stakeholders might not even agree on the terms or definitions being used. Often, we are good at thinking about costs, especially financial costs, but we do not fully understand the benefits of different options. Sometimes, we only appreciate the benefits of a particular approach when things go wrong.

As shown below, there are three core elements to a ‘valuing water’ approach.

Valuing water can help us to identify, prioritise and implement solutions to local water problems. By adopting a value-informed approach, we can make better decisions and realise our goals for water. For us, ‘valuing water’ is an approach to water management and service provision that can be contrasted against a ‘worst-case’ approach, as shown in the table at the end of this article.

Valuing water also equips us to better adapt to an uncertain future. If we make value-informed decisions, and improve outcomes from water policy, management, investment and use on that basis, we can identify and make the structural transformations needed in our water sector (and in water-using sectors) to respond to climate change, demographic shifts and other macro trends and drivers. We can also then make the long-term investments needed to support those transformations. These structural transformations are difficult and take time, and the resulting distributional impacts need to be managed, so it is critical that we make informed and transparent decisions from the outset.

If we do not value water, and we do not improve outcomes from water policy, management, investment and use, then water becomes part of the problem, ratcheting up the pressure that these trends and drivers put on our existing systems and approaches.

These approaches help reveal and increase the value of finite water resources

Valuing water must be more than a concept or a pithy catchphrase – we can and should do more to reveal and increase the value of our finite water resources and related services.

While context may differ, by country, basin/aquifer, or city/town, this should not prevent us from developing and deploying approaches that enable value-informed water management. There are many. However, our experience suggests there are five approaches that are the foundation stones for revealing and increasing the value of water resources and related water and wastewater services.

Cost-benefit analysis

Valuing water means moving beyond narrow considerations of financial costs and revenue to consider economic, social and environmental costs and benefits. It should incorporate non-market values, including environmental goods and services. Cost-benefit analysis is a tried and tested tool for valuing all the potential benefits of one or more water investment or management options under consideration, and for comparing benefits to costs to ensure that our decisions are maximising net value. Cost-benefit analysis is not new (in fact, it was first applied in practice to water projects in the United States nearly a century ago) and need not always be complex or expensive to do. However, done well, it provides robust outputs to support decision-making and allows for sensitivity analysis, which can reveal how the net value of different options changes in several plausible futures.

Water policy reform

Valuing water starts with revealing the value of water, but only delivers benefits when water-related decisions are informed by our understanding of value. Without a means for applying it to inform water policy reform, our knowledge of the value of water is just information. Value-informed water investment and management decision-making is likely to be greatly aided by having the building blocks of good water governance and policy in place. These include water planning processes, a system of water rights, agreed methods for water accounting, and institutions for water use monitoring and compliance, among others. Good water governance creates trust and certainty so utilities, businesses, investors, and individuals can make decisions today that maximise shared value in the future.

Sustainable funding, financing, and pricing

Ensuring that our water infrastructure assets are resilient in the face of change and uncertainty is critical to maximising the value of those assets. This demands long-term planning and investment. Funding and financing water infrastructure, including the considerable costs of operating and maintaining assets, requires a clear and strategic approach to water pricing and tariff reform. Regardless of whether utilities and assets are in private or public hands, and whether there is economic regulation or not, every utility needs to define and meet an expected level of service now and into the future. Demonstrating value for money is increasingly important; consideration should be given to who receives value and who should bear the associated costs.

Water markets

Value is not static, simply because water supply and demand and community expectations and preferences change. In some places, water demand in cities and towns may be rapidly rising. Elsewhere, governments or communities may be calling for overallocated rivers and aquifers to be managed more sustainably. These changes in long-term average water availability and demand can be reflected in individual, enterprise or organisational decision-making if secure water rights or entitlements exist and can be transferred between users. Water markets are one way for scarce water resources to be flexibly reallocated across sectors and users according to marginal value. Water markets allow individuals to make real decisions based on their own assessments of the marginal value of water. Thus, markets offer an alternative to top-down administrative water allocation. As with all markets, the design, regulation, and operation of water markets influences their effectiveness.

Strategic planning and adaptive management

The future is uncertain. Our water management institutions need to be able to adapt quickly and be resilient in the face of uncertainty. Adaptive management aims to reduce uncertainty over time by monitoring how our tools and approaches (including all of those above) are performing, and continually refining them in response. A rigorous approach to monitoring, evaluation and reporting is critical to ensure that the ways in which we manage water are constantly improving and remain fit for purpose. By describing scenarios for what the future might look like, and by learning from what works, we can continue to make the best possible water investment, management and use decisions.

Governments, utilities, businesses, investors and customers all stand to gain

By revealing and increasing the value of water, including by using the approaches above, we all stand to gain. Ultimately, it is customers that will benefit from improved approaches that are adopted by governments, utilities, business and investors.

For governments, an understanding of the value of water can inform infrastructure investments and water allocation or management decisions. Valuing water can help governments have open conversations with stakeholders about trade-offs and be transparent about how these will be managed. By incorporating environmental, cultural and other non-market values into decision-making, governments can ensure market failures do not confound progress toward desired outcomes.

For water and wastewater utilities, valuing water can lead to more informed and resilient long-term planning and investment decisions, including under uncertainty. Value can be an important part of the conversation with customers, governments and regulators regarding the benefits and costs of meeting demand for utility services into the future and how those costs will be met. Valuing water directly supports utilities to continually deliver and demonstrate customer value.

For businesses in many sectors, water risks can be existential. Understanding the value of water to a business can help its executives and board to identify and mitigate these risks, make targeted investments and divestments, and negotiate with governments and other water stakeholders. Valuing water has the potential to deliver immediate and long-term bottom-line benefits through reduced costs and/or increased revenue.

Investors seek to realise value from their investments. Valuing water can inform investment prioritisation and portfolio management decisions. When governments, utilities and businesses value water, investors in water infrastructure, services and entitlements are more likely to see the prospect of long-term returns and to be confident that risks are understood and managed.

We simply must get water right. If we do, the water sector will be a large part of the solution to numerous challenges that reach far beyond the sector itself. At its best, the water sector fuels growing economies, supports healthy communities and ecosystems, and provides reliable water and wastewater services even in times of uncertainty. By valuing water, the water sector can be an accelerator of positive change, in energy systems, food production, human health and wellbeing, and all of the other parts of our economies and societies that interact with water in some way.

This is the beginning of our ‘valuing water’ conversation with you

We will all hear much more about the idea of ‘valuing water’ in 2021. We hope this is the beginning of our conversation with you on the subject. We look forward to sharing more ideas about specific approaches for valuing water in due course. In the meantime, we welcome comments and reflections, and are available to discuss the importance of valuing water, and how to go about it, at any time.

Table 1:   Valuing water vs. a worst-case approach to water investment, management and use