Sandra Bruehlmann
Sandra Bruehlmann
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Understanding the value of water

The first discussion of this Learning Journey on Innovative Financing for Water Security through an IWRM Approach highlighted some key challenges to unlocking financing for water security. Among them is one which has also been articulated by the OECD, which namely states that the pervasive under-valuing of water resources and the associated benefits is one of the key challenges in unlocking financing water security (OECD, 2022). But what exactly makes this pervasive economic under-valuing of water resources such a challenge?

It can be argued that financiers of water-related projects and processes are often interested in the revenue streams that come with the investment made. However, those revenue streams are often undermined by the difficulty to precisely and clearly monetise the multiple benefits of water-related investments (OECD, 2017), both direct and indirect. The benefits generated by water-related investments are both for the public and the private sector. The OECD (2017) exemplifies those benefits as follows: 1) the public benefits of water supply, sanitation and wastewater treatment might be improved public health and ecosystem functioning, while 2) the private benefits of water related investment may be assigned to better incomes and livelihoods, improved educational outcomes, and increased financial returns on industrial or agricultural production. Given the difficulties in monetising the benefits of such water-related investments, their risk-return profile is inherently unpredictable, which may increase uncertainty or hesitancy of potential investors towards such investments, especially when compared to other alternative investments with a clearer and more immediate return.  

Often, economists make use of ‘shadow pricing’ to overcome the difficulty of assigning monetary value to the so-called abstract costs of, and revenues raised from, water-related investments. Tinch et al. (2019) argue that through this method, economists try to better reflect the total social, economic, and environmental costs and benefits of a water-related investment. Shadow prices are used for initiatives where the assignment of a monetary value does not reflect the expected benefits associated to delivering a particular good or service. For example, a riverbank clean-up programme involves costs that can be easily assigned to a monetary figure, though many of its benefits may not be so straightforwardly quantifiable money wise, such as community cohesion, improved human and ecosystem health, improving the landscape, enhanced air quality, and so on. In this case, analysts would assign a shadow price to these positive externalities. Through shadow pricing, the economic analysis could then internalise the wider social and ecological impacts of the project (i.e. make them economically commensurable) which, in turn, would better inform decision-makers on the true “value” of the clean-up scheme. 

As indicated in the image below, there are several methods and mechanisms to calculate or monetise the so-called value of water. Often, those fall under the umbrella of three different economic valuation approaches, (1) revealed preference; (2) cost-based; and (3) stated preference (Möller Gulland, Hohne & Pohlner, 2020). To learn more about each specific method, visit the Tool on ‘Economic value of water’ on the GWP Toolbox. 

Value water

It is vital to better understand and monetise the economic value of water in order to unlock additional and effective investment in water security, and by doing so, accelerate progress towards the achievement of the UN Sustainable Development Goals. In this second round of discussion, we ask you to share some light on the importance of valuing water better in order to progress on financing water security. Based on your experience, what are the challenges of monetising the value of water? Do you have experience with specific methodologies to monetise the value of water? Can you share case studies in which correctly monetising the value of water catalysed successful investment in a water-related project or programme? 

Please share your insights, resources and also questions in the discussion thread. This Learning Journey will be effective if we all contribute to it, so we look forward to hearing from you!  

 

Further reading 

If you are interested in more in-depth background material and resources, please find below an initial (non-exhaustive) list of resources. Please feel free to share more resources in the discussion.