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Financial tools

Financial and economic mechanisms are the most important tools for supporting the activity and development of any economic sector or enterprise. At that, the efficiency of their activity mainly depends on how these mechanisms were correctly selected and used. Undoubtedly, this refers to the water sector in the field of both operation and development including new construction, rehabilitation, nature protection and other aspects. At the same time, in the water sector these mechanisms also play an important role of regulating water demand and promoting the saving of water resources.

There is not the overall approach for setting up the payment rates for different categories of water users in the world practice. Practically everywhere, water charging is based on reimbursement of expenditures related to water withdrawal, transportation and distribution among water users, as well as is the factor facilitating the improvement of water resources management and use in the national interests. Water sectors expenditures can be reimbursed in different ways:

  • payment for volumes of consumed water;
  • payment for water use per an accounting unit (per a person, irrigated hectare etc.);
  • payment for water overuse against established limits;
  • payment for water pollution;
  • sale of water rights (payment for a license);
  • a tax that includes a fee for water and water services; and
  • a joint-stock right for water.

Practically everywhere, the highest payments for water are observed in the industrial and water supply sectors where a share of water sectors expenditures related to water services is completely paid for. Agricultural water users are in the preferred position because of the government subsidies covering expenditures of the water sector. In developing countries, where the introduction of water charging is at the initial stage, the encouraging arrangements for agricultural water users are being applied in the form of:

  • liberalization of agricultural output markets;
  • preferential crediting of farmers;
  • preferential taxation; and
  • involving water users in works that are related to maintaining water infrastructure on the paid base.

The government is completely financing (sometimes with use of local budget funds and financial input of water users) development of the water sector, large-scale construction of water infrastructure and land reclamation works. The following principle general statements can be mentioned:

  • most of countries set up a water price for industrial and municipal use taking into account the selfrepayment of the systems plus a certain profit share;
  • most of countries have introduced the block-incremental system of pricing1 when a payment is minimum for limited normative water consumption, but with the progressive growth of water prices under increasing of water consumption; and
  • rural and municipal water supply is mainly self-supporting. Only water supply through the kilometers-long water pipelines can be exception. In this case, the government subsidizes part of expenditures.

A level of subsidies mainly depends on population incomes and institutional types of organizations that supply water and maintain the irrigation systems.

Source: V.A. Dukhovny, M. Pinkhasov: Financial and Economic Instruments (2009)

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