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Valuing water can help us better decide and communicate how we make the most of water.

This can guide decision making for governments, utilities, businesses and investors and lead to better economic, social, environmental and cultural outcomes.

Focusing on five areas of valuing water enables decision makers to better understand, build and manage in response to current and future challenges.

In brief

We all gain from valuing water

  • By better valuing water, we can accelerate positive change in agricultural systems, urban development, human health and wellbeing, and many other parts of our societies and environments.
  • Valuing water supports how governments, utilities, businesses and investors respond to water scarcity and other challenges, make better decisions and generate greater returns.

There is huge scope for improvement

  • We need better strategies for improving water policy, management, investment and use – and for moving from strategy to action.
  • The challenges, and the investments this involves, are huge. But even marginally better decisions can generate enormous benefits and prevent costly mistakes.
  • Our many local water challenges are sufficiently common that there are ways to tackle and solve them locally that result in global solutions.

Valuing water supports better outcomes

  • By considering the broader value of water the water sector can maximise the net value of water resources and water services.
  • The value of water is the overall benefit people receive from water – not simply the cost or price. A focus on value allows us to better identify, articulate and prioritise decisions – with better results.

We can improve how we understand, build and manage in response to challenges

  • Valuing water requires us to understand the benefits we receive from water in all its uses and for different users, now and in the future.
  • We can use this knowledge to build resilient water infrastructure that reflects and protects different values of water, manage water resources to maximise their net value, and make informed, transparent and consultative decisions about trade-offs.

We work with clients on five areas to increase the value of water

  • Our experience shows we can increase the value of water resources and services through cost-benefit analysis; water policy reform; sustainable funding, financing and pricing; water markets; and strategic planning and adaptive management.

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

The most important task the water sector faces is navigating the how of better water policy, management, investment and use.

We now have a near universal appreciation of water as a scarce resource that must be managed and used optimally over the long term. While we may not agree on specific objectives, we increasingly know why we need to manage water effectively.

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

But the how still needs to be tackled to achieve better outcomes: how to develop robust strategies for improving water policy, management, investment and use; how to choose the right tools; and how to move from strategy to action.

These challenges, and the investments they involve, are huge. But making even marginally better decisions can generate enormous benefits and help prevent 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 lead to better outcomes

Valuing water can help us identify, prioritise and implement solutions.

Water management decisions should be guided by the simple but often elusive objective to maximise net value – the difference between total benefits and total costs.

But water management too often involves making decisions that are sub-optimal and lacking in transparency. Hard-to-quantify benefits may be neglected, diminished, or misrepresented by influential stakeholder groups. Stakeholders may not even agree on the terms or definitions being used.

The ‘value’ of water relates to the benefits we all receive

The value of water relates to the benefits everyone receives from that resource now – and in the future. This includes all people and all alternative uses. It includes commercial benefits along with many other factors. It reflects the benefits people receive today and in the future, even those who are yet to be born.

Value is not the same as cost or price. Let’s take an example of a new water treatment plant. The cost is the money needed to build and operate the plant. The price is how much users pay for it through their water bills (less any subsidies). And the value is the total benefit of the new plant (including reduced environmental or health risks).

The aim in the water sector should be to enhance benefits whilst minimising or containing costs. It’s the difference between benefits and costs that we should be focused on.

We are good at thinking about costs, especially financial costs, but often we do not fully understand the benefits of different options. Sometimes we only appreciate the benefits of a particular approach when things go wrong.

For us, ‘valuing water’ is an approach to water management and service provision that helps address these issues. We’ve contrasted this with a ‘worst-case’ approach in the table at the end of this article.

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

By revealing and increasing the value of water, including by using the approaches below, we all stand to gain.

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 on the benefits and costs of meeting future demand for utility services and how those costs will be met. Valuing water directly supports utilities to continually provide 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 provide 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 priorities 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.

Ultimately, customers will benefit from improved approaches that are adopted by governments, utilities, business and investors.

Five areas we can focus on to increase the value of scarce water resources

Valuing water is 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 the context may differ by country, city, basin or aquifer, it should not prevent value-informed water management.

Our experience suggests there are five areas where we can use this approach to reveal and increase the value of water resources and related water and wastewater services.

1. Cost-benefit analysis

Economic cost-benefit analysis is a tried and tested tool for valuing water investment or management options to maximise the net value of any decisions.

Bringing a valuing water approach to a cost-benefit analysis means moving beyond narrow considerations of financial costs and revenue. It means considering non-market values, including broader economic, social and environmental costs and benefits.

Cost-benefit analysis is well grounded in the theory of welfare economics and it is not new – in fact, it was first applied to water projects in the United States nearly a century ago. And it doesn’t need to be complex or expensive. But done well, it provides robust outputs to support decision-making. It also allows for sensitivity analysis, which can reveal how the net value of different options changes in several plausible futures.

2. Water policy reform

Understanding the value of water can only take us so far. Valuing water starts to bring benefits when it informs water-related policy and management decision making.

This process is likely to be greatly aided when the building blocks of good water governance and policy are 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. It allows utilities, businesses, investors, and individuals to make decisions that reflect and maximise shared value.

3. Sustainable funding, financing, and pricing

Ensuring 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 financing, water pricing and tariffs.

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 outcomes is increasingly important and best practice water pricing means aligning consideration of who receives value with who should bear the associated costs.

4. Water markets

The value of water is never static –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.

Having secure water rights or entitlements that can be transferred between users makes it easier for individuals and organisations to respond to changes in both short and long-term water availability and demand.

Water markets are one way to flexibly reallocate scarce water resources across sectors and users according to marginal value.

These markets offer a much more flexible and user-centric alternative to top-down administrative water allocation. They allow individuals to make real decisions based on their own assessments of the marginal value of water.

As with all markets, the design, regulation, and operation of water markets influences their effectiveness and the potential for unintended consequences.

5. 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 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.

A shared and value-based approach to water supports wider human, environmental and economic outcomes

At its best, the water sector can fuel growing economies, support healthy communities and ecosystems, and provide reliable water and wastewater services even in times of uncertainty.

We can accelerate positive change by committing to a shared and value-based approach to water.

This will support better decision making, monitoring and reporting and ensure we make the most of this finite resource. It will also help guide governments, utilities, businesses and investors to better economic, social, environmental and cultural outcomes.

 

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

We will all hear much more about the idea of valuing water as part of World Water Day 2021.

We hope this is the beginning of our conversation with you on the subject. We look forward to sharing more ideas with you about specific approaches for valuing water.

In the meantime, we welcome comments and reflections. We are here to discuss the importance of valuing water, and how to go about it, at any time.

How valuing water makes a difference in water investment, management and use

Worst-case                     →

Valuing water
Understand
  • Risks to water supply and demand are poorly understood
  • Risks to water supply and demand are understood and quantified
  • Hard-to-quantify values of water are neglected or diminished
  • Everyone’s demand for water is considered and valued
  • Water information is outdated and inaccessible
  • Useful water information is collected and reported publicly at appropriate time intervals
  • Water information is not well understood by the community
  • Broadly understood factual water narratives encourage reasoned debate
  • Forecasts and plans neglect uncertainty
  • Models and systems are adaptive to change and used to test different interventions
Build
  • Some water infrastructure investments are inefficient
  • Water infrastructure investments provide value for money and are resilient to uncertainty
  • Social and environmental costs and benefits are not considered
  • Economic cost-benefit analysis is used to inform investment decisions reflecting the full range of costs and benefits
  • Underfunding of water utilities (including through cost recovery from tariffs) contributes to risk of asset failures and unreliable services
  • Water tariffs (where relevant) are widely supported because they fund the services demanded and reflect the efficient costs of service delivery
  • Water infrastructure fails to attract enough capital (from governments, donors or users)
  • Water infrastructure capital and operating expenses are fully met, and subsidies revealed
Manage
  • There are no or few incentives for more efficient or higher-value use of water
  • Incentives encourage more efficient or higher-value use of water
  • Long-term water strategy and planning is derailed by conflict and mistrust, which in turn promotes poor planning and decisions
  • Transparent trade-off decisions based on an understanding of costs and benefits sustain water resources and services
  • Ineffective regulators struggle to ensure the benefits of water management are shared
  • Economic, health and environmental regulation fosters trust in the system
  • Water governance institutions have overlapping or disjointed mandates
  • Water governance is effective, adaptive and coordinated
  • Businesses fail to see and mitigate water risks
  • Businesses develop water strategies and are rewarded by investors and customers
  • Inflexible rules and customs prevent adaptive management
  • Water is flexibly re-allocated between sectors and users according to its marginal value