3rd Wicked Debate: For What it’s Worth – Subjective vs Objective Perspectives on Valuing Water

In a global context of continuing population and economic growth that pressures the water system, the importance of correctly valuing water is growing as well. Can water prices be aligned with the value of the varied benefits, some of them intangible, water confers to its users, while maintaining an equitable access to all users and a sustainable use, or should water prices be constrained to the costs of its supply? How to better approach the dilemma of valuing water when social, economic, cultural, spiritual and even political spheres value water differently, and with different tools? Valuing water is an essential debate we must have at a global and regional scale, as the value of water is at the core of water security.

Valuing water in a financial and investment perspective

The debate kicked off in lively fashion, with Piet Klop of PGGM, a Dutch pension fund talking about ‘valuing water in a financial and investment perspective’. He explained that funds such as theirs are often keen to invest in water projects, as they recognize the enormous need for improving water supply and provision. Piet Klop estimates that some 216 million euros are needed globally for such improvements. Yet, investment decisions of pension funds such as PGGM are not just based on social needs, but also on an assessment of expected profits. This is where the problem lies: it is very difficult to convincingly show that investments in water projects will yield profits as the long term investment horizon of large water projects is difficult to align with the expected short term profits demanded by shareholders and pensioners. The under-pricing of water, according to Piet Klop, largely explains this: “Water is under-priced existentially, economically, financially and in terms of supply costs”. It is telling in this regard that water is most expensive where it is least scarce (an example is Denmark), and vice versa: prices are low particularly in countries suffering water scarcity. Farmers outside Barcelona, for instance, pay less than 1% of the cost required to supply the water; likewise in Saudi Arabia, water was, until recently, subsidised to the tune of 99%. Piet Klop emphasized that pricing only happens when water is well regulated: it therefore requires effective governance. His argument for pricing water is therefore not necessarily an argument for the privatization of water, but a call for more attention to the question of finance in water. This requires challenging the over-confidence and dominance of engineers in determining water projects, as well as a better understanding and assessment of the risks involved. The question is where the funds needed both to invest in new infrastructures as for regular operation and maintenance will come from? Creative experiments such as Blue Bonds deserve to be taken seriously, here. Piet’s last slide displayed Warren Buffett’s quote “Price is what you pay. Value is what you get”. No one could argue with that.

Valuing water as an economic, environmental and social good

David Zetland was asked to challenge Piet Klop’s ideas. He did this with his presentation ”valuing water as an economic, environmental and social good’. While agreeing that there is an investment gap in water, he challenged Piet Klop’s analysis that this is mainly a supply gap problem. The value of water, according to David Zetland, is subjective: it depends on the use, time and place (during a drought it is different than during flooding). Water has an economic value, but also a social and political value. Different values of water can be reconciled, but doing this requires effective governance processes. This is why water problems, according to David Zetland, are foremost problems of governance, and of effective regulation. He used the experience of the Netherlands and Denmark to explain this. As a starting point, he emphasized that what is priced when water is priced is, in most cases, not water itself but the costs of supplying it. In the Netherlands and Denmark, the costs of providing water services are fully recovered through prices. Yet, in both countries water utilities are not private companies, but (semi-)public organizations. Their performance is established and monitored through carefully designed processes of public decision making and regulation, processes that are embedded in existing institutional cultures and that have evolved historically. David Zetland emphasized the difference between water contained in pipes and what he called ‘environmental’ water. Governing the latter is a different ballgame: ‘environmental water’ is a global common good, in the sense that all benefit from it. It can, however, not be priced, as it is close to impossible to exclude non-payers from using it. Hence, the governance of ‘environmental water’ requires sound political processes of consultation, decision-making and agreement. Referring to the subsidiarity principle, David Zetland argued that these should happen at the lowest possible level, involving local communities.

Lively debate

The presentations were followed by a lively debate, prompted by questions from the audience. Questions for instance challenged the somewhat economistic framing of water problems in the two presentations. By emphasizing proper pricing as a tool for improving the performance of water utilities, both presenters created the suggestion that human behaviour can be explained by individual profit maximization. In reaction, Piet Klop explained that he indeed thinks that “prices are the only thing that make humans behave well in water”. He strongly feels that water prices should better reflect the value of water for improvements to happen. David Zetland, while not necessarily disagreeing, accepted that there may be other motivations for human behaviour. Another member of the audience expressed her discomfort with the confidence expressed by both presenters in private companies and markets as an important part of the solution to water problems. Are they not also a part of the problem? Someone else shared this concern, adding that effective water provision in for instance the Netherlands is partly made possible through profits achieved by destroying or depleting waters or the environment more broadly elsewhere. This also makes it dangerous to use the Netherlands or Denmark as the examples or models to follow for the rest of the world.