Valuing the difficult to value – Integrated water management and externalities

Integrated Water Management (IWM) has been central to a number of public policy approaches across Australia aiming to enhance community benefit from water cycle management.

IWM is a central pillar of Water for Victoria, and the Integrated Water Management Framework for Victoria outlines a practical approach to urban water planning and shared decision making. However, IWM remains to be a challenging policy area across Australia due to the number and diversity of stakeholders, the often broad distribution of costs and benefits, the challenges in valuing externalities, and the real or perceived divergence from traditional water sector roles, responsibilities and funding mechanisms.

Robust economic assessment is a key element in meeting some of these challenges and helping to ensure good IWM projects are implemented and sustainably funded.

Robust economic assessment requires an appreciation of all costs and benefits associated with an investment. Many IWM actions lead to externalities, or benefits that are not priced in markets. These can include an increased security of supply of water available for beneficial uses; reduced pollutant loads of stormwater run-off; reductions in flood impacts; or downstream ecological impacts on the health of waterways and the bays.

In 2015 Aither developed technical guidance for DELWP on valuing externalities for IWM. This report provides a review of the economic literature on externalities relevant to IWM planning, along with some guidance on how this information could be applied. We also identify key uncertainties and gaps in the economic literature and provide recommendations for further work. While we hope this is a helpful guide for the industry, we also note that the practice of Benefit Transfer (i.e. relying on previous studies of community willingness to pay) can be problematic and needs to be approached with caution. As DELWP states in the IWM Framework for Victoria:

“Although guidance on the use of externality data is provided in this document, it should be recognised that appropriate economics expertise is important when applying it”.

In Aither’s experience, getting economists involved in project appraisals from the early stages (instead of at the end) can be helpful in ensuring that the business case for IWM is thoroughly assessed, and that technical work is scoped appropriately to provide necessary inputs for a robust and holistic economic appraisal.