Opportunity Costs of Ensuring Sustainability in Urban Water Services

Abstract

This paper assesses technical performance in the water industry in the Southern European region of Andalusia, while accounting for sustainability in the management of water. This allows the opportunity cost of producing sustainability to be evaluated. Given the low cost of raw water in Spain in relation to the estimated opportunity cost of saving this natural resource, wasting water becomes a profitable strategy for utility managers from a private perspective. However, this managerial strategy has a huge social cost in an area of Europe where the sustainable management of water is a pressing need. The conclusion is that environmental policy aimed at discouraging this wasteful behaviour is urgently needed. For this reason, a suitable mix of environmental taxes on water abstraction and institutional reforms is proposed.

Acknowledgements

The authors gratefully acknowledge the comments from a referee and the Editor, which have contributed significantly to improving this paper. Financial support from the Spanish Ministerio de Ciencia e Innovación and FEDER (Project Nos ECO2009-08824/ECON, ECO2008-05908-C02-02 and AGL2009-12553-C02), as well as from the Generalitat Valenciana (Programme No. PROMETEO/2009/098) is also acknowledged. The usual disclaimer applies.

Notes

1. Several papers in this field of research have considered in some way a variable representing unaccounted-for water (Garcia & Thomas, 2001; Lin, 2005; Picazo-Tadeo et al., 2008; Kumar & Managi, 2010).

2. In Spain, city councils are responsible for providing urban water cycle services, although, according to current legislation, they can be delegated to private firms, which supply around 40% of the population in Andalusia. The remaining 60% is supplied by public utilities.

3. Considering further scenarios in which sustainability is determined by the levels of unaccounted-for water observed in other developed countries or to the 15% recommended by the European Union would have been really interesting. However, tighter restrictions led to an important increase in problems with no solution due to an insufficient number of productive units to shape the technological frontier.

4. In fact, in the sample a negative correlation of around 15% between the cost of raw water and the observed percentage of unaccounted-for water is found.

5. The city of Phnom Penh in Cambodia, where leakages were reduced from 72% to 6% during the 15-year timeframe between 1993 and 2008, is an example of good governance of water resources (Biswas & Tortajada, 2010).