Water, Business and Sustainability

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This article is part of our special report Water Policy.

With water supplies under growing strain due to intensive use and climate change, the EU has introduced pricing policies to persuade users – farmers, industries and households – to save the precious resource. Meanwhile, pressure is growing to recognise access to safe drinking water and sanitation as a basic human right.

Background

Increased water demand, fuelled by population growth and economic development, is putting pressure on prices across the globe.

According to the Earth Policy Institute, municipal water rates have increased dramatically over the past five years, by as much as 27% in the United States, 32% in the United Kingdom, 45% in Australia, 50% in South Africa and 58% in Canada. In Tunisia, the price of irrigation water increased fourfold over a decade.

In terms of business, water can also be a huge source of revenue. A recent report by Transparency International estimates at $210 billion annually the total value of contracts and infrastructure projects in Western Europe, North America and Japan put together.

Water services companies are sensing an opportunity in the growing demand for water. With economic development increasing and cities expanding fast in Asian countries, demand for water facilities is growing too, bringing with it the prospect of big contracts. 

But the demand growth also implies increased responsibility for businesses, whether they provide water supply services or use the resource in their daily activities. "With population growth and economic development accelerating demand for everything, freshwater is becoming scarcer, and the full value of water is becoming increasingly apparent," states the World Business Council for Sustainable Development (WBCSD).

Issues

Stop wasting: Farmers under the spotlight

In Europe, irrigation, urban areas and manufacturing industries are the main areas driving the demand for water. According to the European Commission, water consumption at EU level is divided among the following sectors:

  • Agriculture: 69%
  • Public water supply: 13%
  • Industry: 10%
  • Energy (cooling in power plants): 8%

In Southern European countries, irrigation in the agriculture sector is the single biggest consumer of water, accounting for more than two-thirds of total use, according to the European Environment Agency (EEA). In Nordic and Central European countries, water is predominantly used for cooling in energy production, industrial production and public water supply.

But it is agriculture which sucks up the largest amount of water and in some countries, the official figures are in fact clouded by illegal withdrawals, says the global conservation organisation WWF.

"Illegal, unregulated and unmetered water abstraction is rife. For example, in Spain up to 45% of all groundwater pumped to irrigate crops, golf courses and urban developments is taken illegally," the WWF said in a joint statement with the European Environmental Bureau (EEB).

"Agricultural water-users are rarely charged the full cost of their water. There are also various explicit and implicit subsidies which privilege agriculture over industrial and domestic users. Today there are few incentives to make farmers use water efficiently," the NGO claims.

According to the Organisation for Economic Cooperation and Development (OECD), farmers are even encouraged to waste water due to subsidies which make prices "significantly lower for agriculture" than for other sectors. "While pricing structures for municipal and industrial water services increasingly reflect the full costs of providing the services, agricultural water use – primarily for irrigation – remains heavily subsidised, which encourages inefficient use of often scarce resources," writes Tom Jones, an OECD official, in a 2003 article for the OECD observer.

However, Jones admits that comparisons between sectors are not entirely fair because quality standards for water used in agriculture are lower than those applicable to drinking water.

Setting water efficiency targets?

But agriculture is not the only sector causing headaches for policymakers. In cities, poor or outdated infrastructure is also responsible for significant water losses. "In London, leakage and loss is estimated at 300 Olympic-size swimming pools daily due to ageing water mains," the WWF pointed out in a report, entitled 'Rich countries, poor water' and published in 2006.

The problem led Ofwat, the water and sewage regulator, to propose setting targets requiring water companies to reduce individual water usage to 130 litres per person per day, down from around 150 litres currently. The targets would run initially for five years, starting in 2010.

The proposal, put forward in June 2008, is still at the consultation stage but reflects growing concern about the issue. Companies, Ofwat said, will be expected to deliver real savings by providing household and business customers with information on how to use water sensibly and promote the use of water-saving devices.

"The new approach to water efficiency targets that we are proposing will be challenging for companies but will help to reduce wasteful use of water," said George Day, Ofwat's director of network regulation. "This should mean lower costs, lower customer bills and good news for the environment."

Water pricing: Making users pay

At EU level, the Water Framework Directive, adopted in 2000, requires EU countries to impose pricing policies by 2010 in order to encourage users to consumer water more efficiently.

While pricing policies have already been introduced in many EU states, others have no tradition of it. This is particularly the case in the former communist countries of Central and Eastern Europe, where water used to be subsidised and came entirely free of charge.

The price of water reflects services provided by water companies, including:

  • Infrastructure investment and maintenance;
  • Transportation from the source to the user (a process which can consume huge amounts of energy, especially if the water needs to be pumped up to cities at a high altitude – e.g.: Mexico), and;
  • Collection and treatment (including sewage, waste water treatment or desalination).

Prices are also a reflection of other factors, such as:

  • The integration of environmental costs such as reduced water levels and pollution discharges into rivers and lakes which may harm ecosystems and affect human health (polluter pays principle), and;
  • Subsidies that make water more affordable to some sectors of the populations or industry (e.g.: farming).

In order to recover those costs, the EU Water Framework Directive requires national authorities to conduct an economic analysis of water use, including its environmental and resource costs, stating that this must be done "in accordance with the polluter pays principle" (Article 9). 

But EU countries are slow to implement the rules, with only a handful of them having incorporated economic analyses in their water management plans. By mid-2007, only 14 member states had provided information on the recovery of water costs for households. The picture is worse for industry and agriculture, with as many as 17 EU countries not providing any information on the level of cost recovery of water services in agriculture (see implementation report on the WFD, p.34).

Water 'not a commercial product'

However, putting a price on water does not mean considering it like any other commodity. This is the chief principle referred to in the Water Framework Directive. In its first paragraph, it says: "Water is not a commercial product like any other but, rather, a heritage which must be protected, defended and treated as such."

This is particularly true when it comes to ensuring water is delivered to all, irrespective of their income levels. "Private households," the Commission said in a recent communication on water scarcity and drought, "should, irrespective of their available financial resources, have access to adequate water provision".

In legal terms, this means that the supply of water services is treated under EU law as "a service of general economic interest," defined in a specific Commission communication. According to the text, this means that "public authorities can decide to carry out the services themselves or they can decide to entrust them to other entities, which can be public or private, and can act either for-profit or not for-profit."

Access to safe drinking water: A basic human right?

But the Human Rights Council of the United Nations went further than this. In March 2008, it set up an independent expert group to explore the feasibility of making access to safe drinking water and sanitation a basic human right. 

The expert group will have three years to hand over its report. It will compile best practices and carry out an assessment of human rights obligations related to non-discrimination in access to safe drinking water and sanitation.

The resolution to launch the UN expert group was sponsored by Spain and Germany and is part of a trend that appears to be picking up steam in Europe. Shortly before the group was set up, Dutch Minister of Foreign Affairs Maxime Verhagen announced that the Netherlands would recognise water as a human right. 

The UK had already shown the way in November 2006 by announcing its decision to recognise the human right to water. The announcement came in response to a UN report entitled 'Beyond scarcity: power, poverty and the global water crisis,' and was accompanied with a proposed Global Action Plan on water, which called for more investment in water and sanitation in developing countries.

International Development Secretary Hilary Benn stated: "In many developing countries, water companies supply the rich with subsidised water but often don’t reach poor people at all. Recognising the right to water will help change this and allow all citizens to demand more of their governments."

Financing water: Public vs. private?

In this context, the devolution of water distribution services to private companies in Europe and across the world has raised much controversy. "Privatised water services have been heavily promoted by international agencies, including the World Bank, IMF and even the European Union, as a solution to increased investment needs in water services," say the Corporate Europe Observatory and the Transnational Institute in a joint campaign.

But "the tide now seems to be turning," according to the two NGOs. "Increased tariffs and a failure to deliver promised improvements have left water multinationals facing increasing opposition," they write on a website tracking the 'remunicipalisation' of water services across the globe.

According to their findings, around 40 municipalities in France alone have taken water services back into public hands over the last ten years. In Paris, water services will return to public management at the end of 2009 when current contracts expire. "Even France, once known as the heartland of water privatisation, is embracing a return to public management," the two NGOs write.

However, local governments, especially in the developing world, are not always in a position to finance expensive water and sanitation infrastructure. Often, they will need other means, including private sector funding and expertise. 

In 2003, former IMF chief Michel Camdessus chaired an international panel which explored options to finance water infrastructure. The 'Financing Water For All' report, published in March, stated that investments in the water sector needed to roughly double if countries were to halve the proportion of people without access to safe drinking water and sanitation by 2015, one of the key UN Millennium Development Goals.

However, it said "no single source will be large enough to fill this gap alone". The money, it said, would need to come from a variety of sources: financial markets, water authorities through tariffs, multilateral financial institutions (MFIs) and governments.

On the private versus public controversy, the panel’s judgement was reserved. "Many [private] projects in the water sector, though initially successful, have been beset by difficulties," it said, pointing to currency crises in countries such as Indonesia, the Philippines and Argentina, which have brought some companies financial distress.

But the panel also said it was generally "convinced of the vital importance of private sector disciplines, know-how and management skills" in reforming the water sector. "Most private operations have achieved real progress in efficiency and, when required by the authorities and as part of their contracts, affordably served poor suburbs."

In the end, the panel concluded that opting for private or public financing "takes a pragmatic view of the costs and benefits" in each case and noted that there are "many different kinds of private involvement". 

Indeed, full privatisation in Europe has only happened in the UK, where the government handed the water infrastructure to the private sector in 1989. In contrast, France has opted for a system whereby the state and local town halls remain in charge of setting tariffs and defining public service obligations of water services which may be delegated to private operators.

Corruption 'at the root' of the problem

Other governance issues have been singled out in a recent report by Transparency International, published in June 2008. The report, compiled by over twenty experts, found that corruption in the water sector is the "root cause" of water shortages, particularly in developing countries.

As an example, the report estimates that corruption adds 25% to the cost of irrigation contracts in India, meaning higher water prices and lower yields for farmers, which in turn further exacerbates the global food crisis. In China, the NGO estimates that bribery is responsible for pollution in some 90% of aquifers in cities and 75% of urban rivers.

Transparency International says the phenomenon affects both public and private water services and is apparent in both rich and poor countries. To limit corruption, it suggests a number of basic principles for good water governance: 

  • Strengthening independent regulatory oversight;
  • Ensuring fair competition for water contracts, and;
  • Promoting transparency and participation in water policies.

Climate change: Further motivation to save water

In a July 2007 communication, the Commission sought to open the debate on how to deal with water scarcity and drought, which are becoming ever more frequent due to climate change (EURACTIV 16/07/07). 

Although it believes "a combination of options" is likely to deliver better results, the Commission said water pricing should be "at the heart" of policy measures to deal with the issue. To that end, it proposes introducing compulsory metering programmes to "put an end to needless losses or waste" of water.  

Water saving is in fact identified as the main area where a lot of improvement can be achieved in the EU. "While it is estimated that approximately 20% of the water available is wasted, recent data indicate that it could go up as high as 40%," the Commission said.

Furthermore, it suggested introducing a clear "water hierarchy" to allocate water use between different economic sectors. Along this principle, building additional infrastructure to bring more water to dried-up areas should be considered only after other options have been exhausted, including water pricing and metering, the Commission said. 

"It is clear that public water supply should always be the overriding priority to ensure access to adequate water provision," the EU executive said.

Further measures are expected as part of the Commission’s strategy on adaptation to climate change.

Positions

UN Secretary-General Ban Ki-Moon warns that "time is running out" on water as estimates suggest that almost a third of the world’s population will be living in regions facing severe water scarcity by 2025. Speaking at the World Economic Forum in January 2008, Ki-Moon said "this is not an issue of rich or poor, or South or North," pointing out for example that water stress affects one third of the United States and a fifth of Spain. 

Businesses, Ki-Moon added, are now increasingly becoming "part of the solution, not the problem" to the looming water crisis by providing innovative solutions to conserve water or purify it. 

However, he deplored that only a handful of companies had so far signed up to a UN-led mandate on water for business leaders. Launched in July 2007, the CEO Water Mandate encourages businesses to make a number of pledges on how they use water, including: 

  • Own activities: Setting targets related to water conservation and waste-water treatment that are framed in a cleaner production and water consumption strategy.
  • Supply chain: Encouraging suppliers to improve water conservation, including reporting on progress towards achieving the goals.
  • Governance: Supporting local water governance structures and engaging with local civil society organisations and UN agencies.
  • Transparency: Publishing and sharing business water strategies, including in dealings with governments.

Some 29 companies have so far signed up to the mandate, "a drop in the bucket," Ki-Moon deplored (see full list here).

The Organisation for Economic Cooperation and Development (OECD) broadly supports the European Commission’s push for water pricing policies. "Water pricing systems provide incentives for efficient water use and for water quality protection," says the OECD’s Tom Jones in a March 2003 article. In that sense, he insists that "the metering of water consumption is a prerequisite for the application of efficient water pricing policies".

However, it also recognises that pricing policies "may face social resistance," highlighting access and affordability as key issues. According to the Earth Policy Institute, water pricing policies may indeed often imply some short term political trade-offs but "can lead to substantial efficiencies in the longer run and eliminate a perverse drain on government budgets."

Veolia Environnement, the French global leader in water services, agrees. While it describes as "essential" the move towards a system where water prices reflect the environmental impact of abstraction and other externalities, it also warns this "could result in significant increases in charges for customers" which may in turn "cause affordability issues".

Eureau, a trade association representing European water supply and waste water services companies, believes the saving benefits of metering to help control water demand are "limited" in households. In a position paper, it cites two reasons for this: 

  • The cost of metering individual dwellings compared to that of metering blocks of flats "may be too high compared to the value of the resulting reduction in water consumption".
  • Tariff structures have a high fixed component, which limits the incentive effects of metering to a small fraction of the customer bill.

"For a pricing mechanism to function well, customers need to be able to control their consumption and reap the financial benefits of this control in the form of reduced bills. But, with current metering practices, the reduction in bill may be too small to create effective incentives." As a result, Eureau believes it should be up to individual operators to determine "whether, to what extent and in what way metering is justified as a demand management tool".

Copa-Cogeca, the EU trade association representing the agriculture sector, warns of the ever-increasing demands being placed on farmers at a time when high food prices dominate the political agenda.

"Food, much like drinking water, is a basic human need and as such agricultural production must be given priority," the association said in a position paper on water scarcity and drought.

Copa-Cogeca recognises that agriculture is a big user of water, especially in Southern Europe, but says "the upward trend for use of water for irrigation has slowed down in several countries during recent years." It also points out that irrigation in southern regions gives farmers the possibility of growing other crops and thus avoid monoculture practices.

Copa-Cogeca defends the progress made by farmers in saving water, saying "in fact, water use efficiency in agriculture is improving every year" due to the modernisation of irrigation systems. It says new technologies such as soil moisture sensors which help better match irrigation with plant needs are now becoming more widespread. It also cites "good agricultural practices such as scheduling irrigation during the night to reduce evaporation".

To conclude, Copa-Cogeca says "it is a tall order to meet the ever-increasing list of demands from society, in particular in the context of the huge pressure on the farming sector from ongoing WTO negotiations and potential cuts in EU funding". The association therefore urges policymakers "to take caution in their actions not to create the straw that breaks the camel’s back".

A report by the WWF, entitled ‘Rich countries, poor water’, underlines that water crises are increasingly affecting wealthy nations, due to climate change, drought and water resource "mismanagement". "In Europe, countries on the Atlantic are suffering recurring droughts," the report notes, "while water-intensive tourism and irrigated agriculture are endangering water resources in the Mediterranean".

Aquafed, the international federation of private water companies, says governments should make greater efforts to respect "their duty" to provide access to drinking water and sanitation to their populations and meet UN Millennium Development Goals. "It is urgent to extend drinking water and sanitation networks in all urbanised areas in order to turn the human right to water into a reality for all (at an affordable price)," Aquafed said recently at the UN Commission on Sustainable Development.

It says efforts to provide water in rural areas should be stepped up in order to "cut down the distances that people, often women or girls, have to carry water every day." "The number of drinking water and sanitation projects worldwide is totally insufficient to meet the needs. A renewed effort is needed urgently," it added, probably hoping that some of its member companies could land a few contracts along the way.

Against the background of poverty reduction goals, Gérard Payen, the president of Aquafed, says the arguments over the merits of public versus private water companies are "meaningless". "There is an emergency on, and the status quo is unacceptable. Those who are waiting for access to water need all the stakeholders to become involved, both public and private," Payen wrote in the OECD Observer, dated March 2006.

In Europe, a group comprising businessesNGOs and institutions, including national ministriesregions and the Commission’s environment directorate, have signed up to a long-term vision for water, the European Water Vision for 2030.

The document comes in the form of a ten-point pledge and recognises access to basic water supply and sanitation as a human right (point 2). It also includes an aim to reach a true "water democracy" driven by principles such as transparency and solidarity and where people "use their opportunity to participate actively in the governance of water management and services". Water pricing is mentioned as a tool to achieve sustainable water use, "guided by transparency, sustainability, efficiency as well as a social and environmental approach".

The vision aims to foster a discussion about water, especially at the regional level, via workshops and internet consultations. A final version of the vision will be presented at the World Water Forum in March 2009 in Istanbul.

Timeline

  • 5 Sept. 2008: European day on water scarcity and drought. Commission to present Communication at the International water expo in Zaragoza, Spain.
  • Dec. 2008: Commission to present White Paper on adaptation to climate change.
  • 12-13 Feb. 2009: "Peace with Water" international meeting in the European Parliament.
  • March 2009World Water Forum in Istanbul.
  • 2-3 April 2009: 2nd European Water Conference. Focus: River basin management planning and public participation.
  • 16-22 Aug. 2009World Water Week in Stockholm. 
  • By Jan. 2010: EU member states expected to introduce water pricing policies.
  • 5-11 Sept. 2010World Water Week in Stockholm
  • Feb. 2011: Water Footprint Network publishes a water footprint standard.
  • March 2011: UN expert group to submit report on human rights obligations related to access to safe drinking water and sanitation.

Further Reading

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