Efthimios Zagorianakos

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					Economic Considerations in River Base
           The European Experience
    “Seminar on the Assessment of the Environmental Cycle in the Lower Rio of San Francisco”
             EC funded technical assistance project: “Apoio aos Diαlogos Sectoriais EU-Brasil”
                                                                  Brazil, Salvador, 28/9/2009

                                                             Dr. Efthimios Zagorianakos
                                                             European Union Expert Consultant
A BIG thank you to…

                    Mrs Bianca Chaim Mattos
                       Analista Ambiental
    Secretaria de Recursos Hídricos e Ambiente Urbano -MMA

                                “Seminar on the Assessment of the Environmental
                                        Cycle in the Lower Rio of San Francisco”
                                          EC funded technical assistance project:
                                              “Apoio aos Diαlogos Sectoriais EU-
                                                      Brazil” Salvador, 29/9/2009
This presentation is about ...

    … my experience with river base management in
   Focus on:
      ecosystems approach,
      integrated water management,
      economic valuation,
      3 European case studies
      lessons learned
   Adaptation to international and Brazilian context of
    water management



              Figures …

„When the well is dry,

we know the value of the water‟

                         Benjamin Franklin
How dry is the well?
 In 2008, 1.4 billion people lived in "closed
   basins" (Stockholm International Water Institute)

 In 2007, 1.2 billion people lived in countries
   and regions that are water-scarce.

 By 2025 they will rise to 1.8 million     (Food and
  Agriculture Organization).

Causes of water scarcity in the

         ◦ population growth,

         ◦ climate change,

         ◦ pollution,

         ◦ lack of investment, and

         ◦ management failures

Water Import Dependence * 1997-2001

    Country                 Water Import                                  Country                 Water Import
                           Dependence (%)                                                        Dependence (%)

  Netherlands                          82                                   Egypt                      19

     Jordan                            73                             United States                    19

 United Kingdom               70 (62, WWF)                                Australia                    18

      Japan                            64                                   Russia                     16

    Germany                            53                                   Brazil                     8

       Italy                           51                                 Thailand                     8

     France                            37                                   China                      7

  South Africa                         22                                    India                     2

  * Water import dependence is the ratio of a country's external water footprint to its total water footprint.
                              Source: Chapagain and Hoekstra, Water International, March 2008.               8
Transboundary River

 Worldwide, there are 261 major river basins shared
  by two or more sovereign states, and even more
  river basins that cross local, state, or provincial
  boundaries within individual countries.

 … this poses administrative and management
  difficulties which make it a case for integrated
  river basin management
Seventy-nine of major transboundary river
basins in the world

              Source: World Resources 2002-2004 (Adapted from Box 7.2, pp. 158-159)

Growing Environmental Mandate

 Traditionally the focus of international river governance
   has been on:

    fair water allocation, often aimed at preventing upstream
     states from taking more than their share

    Maintenance of navigation rights and coordination of
     hydropower development.

 As the environment has become more of a concern,
  balancing interests has become even more challenging.

 Modern freshwater governance has begun to shift toward
  “integrated river basin management”
Environmental flows:
International policy framework
   Agenda 21 of the 1992 Rio Earth Summit

   Ramsar Convention

   UN Convention on the Law of Non-navigational Uses
    of International Watercourses: the only global treaty
    that addresses rivers for purposes other than
    navigation, and it applies to transboundary
    freshwater systems.

   Goal 7 of the Millennium Development Goals
    commits nations to ensure “environmental
    sustainability” and includes three global targets and
    eight official global indicators

   national water laws only in few countries

   Mechanisms to ensure implementation is the issue        13
National environmental flow
     South Africa: National Water Act (1998)

     Mexico: Water Law of 2004

     Brazil: National Water Policy (1997)

     Chilean Environmental Law and the Water Law
      (amended on June 16, 2005)

     United States: Maine, Michigan and Florida
      have environmental flow standards in place
      Water Framework Directive (WFD)
   "good water status" in all waters of the European Union,

   characterisation of river basin districts, including an

    economic analysis.

   Covers both surface waters and groundwaters,

   environmental objectives are defined

   river basin management plan (RBMP) for each district

   programme including the actions needed to protect or

    restore the aquatic ecosystems.
      Water Framework Directive (WFD)

   … does not explicitly mention environmental

But …

      it is generally accepted that ecologically
    appropriate hydrological regimes are important
    to meet this status, and implementing
    environmental flows will be a key measure for
    restoring and managing river ecosystems.
      Theory …

Environmental flows are …

    The quantity, quality and timing of water flows
     required to sustain ecosystems and the valuable
     services they provide.

    For river and wetland ecosystems, the flow
     regime is the most important determinant of
     ecosystem function and services provided by
     these functions.

    Flow features are determined
     ◦   by river size,
     ◦   geology,
     ◦   climate variation,
     ◦   topography and
     ◦   vegetation cover.                         18
Environmental flows and
climate change
Environmental flows management as part of a broader
  climate change adaptation strategy can help mitigate
  some of the negative impacts.

Examples of adaptation measures include:
 recharging of aquifers,
 Refilling of wetlands, and
 reconnecting floodplains to buffer against the damage of

Flow management would also help reserve ecological
  refugia and spawning waters for fisheries during periodical
  flooding. As such, Environmental Flow Assessments
  become an opportunity for reducing vulnerabilities among
  people directly dependent on freshwater resources.

Integrated Water Resources
Management (IWRM)

IWRM is:

    “a process, which promotes the co-
         ordinated development and
  management of water, land and related
     resources, in order to maximise the
  resultant economic and social welfare in
        an equitable manner without
   compromising the sustainability of vital
                         (quoted in Swedish Water House Report 24, SIWI, 2009).

IWRM‟s objectives

   Economic efficiency in water use
   Equity
   Environmental sustainability

Addressing environmental flows is indispensable to
 achieving all three IWRM objectives.

Ecosystem approach to river
base management
    The prerequisites:

         Policies and politics

         Legislation

         Local Participation and Involvement

         Economics and Finance

         Communication of Information
How to establish environmental lows ?

   Define water requirements (defining objectives,
    selecting trade offs, scenarios, and EF methods)
   Modify water infrastructure
   Finance
   Create a policy and legal framework
   Generate political momentum
   Build capacity for design and implementation

Case studies


Economic value of ecosystems:
the rationale for the case studies

    What are the economic drives for the
     promotion of water quality initiatives?

    What are the benefits and costs of an
     intervention that alters the ecosystem?

    How to make conservation financially

   Case Study I

Danube River Basin

Economic valuation in Danube
        River Basin
     EU funded project AquaMoney (2006-2009)

     Assessment of Environmental and Resource
      Costs and Benefits (ERCB) of water services
      across 10 + 7 European river basins.

     Economic aspects WFD (full cost recovery - WFD
      art. 9)

     Working groups covered different economic

                Danube River
   among the longest in the world (ranked 21) and
    Europe's second largest river basin
   watershed coverage: 817,000 km2 (it represents 8% of
   total length: 2,857 km
   average annual precipitation: 3,000 mm (mountains) -
    400 mm (delta)
   Mean annual evaporation: 450 mm - 650 mm (lower
   80 million people live in the basin / stretches along 18

Catchment area of Danube river

The contribution made to the total flow
   of the Danube river by tributaries

   Ecological problems

◦ Excessive nutrient loads and eutrophication

◦ Contamination with hazardous substances including
  oil and heavy metals

◦ Microbiological contamination

◦ Competition for available water

◦ Degradation and loss of wetlands

Uses of Danube river

   drinking water,
   fisheries,
   industry,
   irrigation and
   recreation.

             ERCB in Vienna
   What are the costs and benefits of using the latest
    state-of-the-art in abatement technology by the
    centralised waste water treatment of Vienna?

   Valuation tool: replacement and abatement cost

   Calculation of utility fees according to polluter
    pays principle (1,3 euros/m3 drinking water + 1.69 euros/m3 water
    treatment = 150 euros/annum in 2007)

   Calculation of investment and maintenance
    costs for different types and stages of cleaning
        Danube river basin:
      Austrian catchment area

   heavily modified water body (hydro power
    station, channelling for protection from flood)

   Municipal and industrial waste discharges

   Good Ecological Status

   Important protected areas along the river
    (National park and 9,700 hectares wetlands)

            ERCB in Vienna
Valuation methodologies:

   Choice Experiment survey on the
    Viennese households‟ willingness to pay
    (WTP) for different water qualities of the
    River (comparable to study areas of other
    Aquamoney case studies);

   Contingent Valuation survey on the
    Viennese households‟ WTP for river
    restoration projects.

               ERCB in Vienna
Environmental values

   Direct use values:
    ◦ reduction of pollutants in the downstream water
      agricultural use
      consumptive use values (drinking water);
      recreational values (fishing, boating).
   Option (existence) values: the potential for
    using the river for future purposes that depend on
    the water quality.

         Economic value of ecosystems (I)
                                Use                                                Non use

    Direct values          Indirect values               Option values             Existence values
 Outputs that can be     Ecological services,       The premium placed on         The intrinsic value of
  consumed directly,      such as catchment          maintaining resources    resources and landscapes,
     such as fish,     protection, flood control,     and landscapes for      irrespective of its use such
   medicines, wild      carbon sequestration,        future possible direct       as cultural, aesthetic,
foods, recreation, etc. climatic control, etc.      and indirect uses, some    bequest significance, etc.
                                                      of which may not be
                                                          known now.

Economic value of ecosystems (II)

                   ERCB in Vienna
Valuation process:
   valuation scenarios: costs of waste treatment technologies

   emphasis on definition of (Good Ecological Status) and setting
    benchmarks for monetary use of costs and benefits

   remaining loads of pollutants after sewage cleaning will also be
    studied in order to derive reliable estimates of the environmental

   discussion of the spatial distribution of environmental impacts
    (tributaries, benefits for downstream countries Hungary and

   problems with acquisition of data (transference from other sites)

ERCB in Vienna: Summary
The waste water collection and treatment
  system of the City of Vienna was presented in

 - Pricing of water services;

 - valuation of ERCB in the context of water
   services and water uses (the Danube River
   as receiving water body)

 ◦ applying abatement cost (defensive cost)
   valuation methods (investment and
   maintenance cost)

 ◦ WTP valuation surveys
   Case Study

Danube River Basin

Danube river basin:
Romanian catchment area

      ERCB in Romania
Environmental impacts:

   discharges of municipal waste water

   emission of chemical substances from industry

   P and N emissions from agriculture.

Three protected areas (article 6 - Water
  Framework Directive - one Natura 2000

Typical case of conflict between economy and
  environmental protection
             ERCB in Romania

The water pricing system:

   centralised monopolistic regime of water
    management (Waters National Authority)

   environmental externalities reflected in taxes and
    penalties (government ordinance 1001/90)

   user/polluter pays principle (such as households,
    industry, farmers)

             ERCB in Romania

The water pricing system:

   water quality thresholds have been established
    by law by the National Authority

   „permission to discharge is bought or penalised

   penalties: discharge concentration level and
    volume of discharges.

       ERCB in Romania (taxes and tariffs)
Tax or Tariff          Framework of taxation                                taxation
                                                                           (euro/m3, 2003
Water abstraction      Household water use from national waters            0,0076
Water abstraction      Animal husbandry water use from aquivifer           0,0084

Effluents discharges   Phosphorus                                          34,8
Effluents discharges   BOD                                                 8,68

Effluents discharges   Solid suspensions                                   2,12

Water abstraction      Household water use from aquivifer                  0,0083
Water abstraction      Industrial water use from Danube                    0,009
Water abstraction      Agricultural water use from national waters         0,0076

Water abstraction      Irrigation and fishery water use from all sources
ERCB in Romania

    uniformity in enforcement based on a clear
     and straight forward pricing system.

    allows access to all users

    allows sharing of management risks between
     different administrative bodies

                  ERCB in Romania

   Option and non-use values not represented (human-

   rigorous monitoring, control and enforcement system in

   Transference of liability from down to top (users →
    national authorities)

   Encourages a „tragedy of the commons‟ mentality since
    (if the charges are low) it encourages use regardless of
    resource availability.

   amenable to political pressures
             ERCB in Romania

Implications to Sustainable Water

Taking into account :
 ◦   resource distribution and scarcity,
 ◦   the pollution problems,
 ◦   the increasing demand for water,
 ◦   the shift from a centralized national economy system to
     one based on autonomy

 … it can be concluded that uniform price cannot be an
  instrument for rational water use and sustainable
  management (Vadineanu et al, 2007)
           Case Study III

 The rare case of the private
sector financing water-related
     (PES = Payment for Environmental Services)

A PES scheme is:
1.   A voluntary transaction where:

2. A well-defined environmental service (here
    water quality)

3. Is being “bought” by at least one buyer

4. From a (minimum of one) environmental service

5. If, and only if, the environmental service provider
      secures environmental service provision
                                             (Wunder, 2005)

Case study profile

   A mineral water company

   The location: ‘Grant
    Source’ aquifers at the
    foot of Vosges mountains
    in northeastern France

   Duration: started 1989; by
    2004 all 26 farms

   Investment of US $24.5
    million over a seven year

                   The challenge

   nitrates and pesticides entering the company‟s springs

   Traditional hay-based cattle ranching cause leaching
    of fertilisers

   Poor management of animal waste

   French law: mineral water: French law <4,5 ml/l of
    nitrates + no treatment to stabilise nitrate levels

   Solutions required heavy investment in capital, land,
                      The alternatives
Options                       Feasibility
Do nothing                    Would imply closing down the business

Relocate to new catchment     Loose the competitive advantage of the brand
where risks are lower         name

Purchase all lands in the     Not allowed by French legislation + increased
spring catchment              land management costs + conflict (social protests)

Use legal action to ensure     Considered but … weak legal case (nitrate levels
farmers change their practices were still within acceptable levels + technically
                               difficult to demonstrate the responsibility of
                               individual farmers.
Provide incentives to         Preferred alternative (win-win). The challenge
farmers to voluntarily        was to make the company’s and farmers’ interests
change their practices        coincide so that it is in farmers’ interest to
             The methodology
1.   Understand the farming systems and why farmers
     do what they do

2.   Analyse the conditions under which farmers would
     consider changing farming behaviour

3.   Identify, test, and validate in farmers‟ fields the
     management practices necessary to reduce the
     nitrate threat

4.   Provide financial and technical support to farmers
     willing to enter the programme.

  Understanding farmers (I)

Understanding the history, the geography,
 and the sociology of the area and its
 people through:

 ◦ dialogue between parties demonstrating

 ◦ compatibility of objectives and

 ◦ idea of a mutually beneficial partnership

     Understanding farmers (II)

   Agrivair establishment in 1992:

    ◦ an intermediary responsible for negotiating
      and implementing the programme

    ◦ strategically located close to farmers and

    ◦ The Director of was of mutual trust andwell
      known to the farmers and stakeholders in the
           Understanding farmers (III)
           The farm typology (in 1988)
   Group A: 4 small farms, ~ 19 hectares. cattle-raising for meat
    production, and hay cultivation, female-headed, men hold outside
    employment. Farmers‟ age: over 50 years old, end of farming after

   Group B: 8 farms < 50 ha, milk production, with hay and maize
    cultivation. Uncertainty on farming after retirement.

Group C: 12 farms, < less than 135 ha, producing milk,
meat, hay and maize, good level of productivity, age: ~ 40 years.
 Farming will continue after retirement.

   Group D: 13 farms, same products as in Group C, high productivity,
    technical practices, age: ~ 40 , their children will take over after

   Also, groups C and D share a high level of debt
Understanding the science (I)

In 1989 a four-year multidisciplinary action
  research programme was launched with
  the objectives:

 ◦ link farming practices and nitrate levels in the

 ◦ come up with recommendations to reduce
   contamination to desired level; and

 ◦ identify incentives necessary for farmers to
   change their practices

    Understanding the science (II)

   hydro-geological modelling in the perimeter
    ◦ ensuring a nitrate rate of 4.5mg/l in Grande Source
      required maintaining nitrate levels at the root zone
      (up to 1.5 meters below the surface) at 10mg/l.

   The sub-catchment was modelled at farm,
    and plot level to test the technical and
    economic feasibility of the proposed

     Understanding the science (III)

 ◦ Give up maize cultivation for animal feed (in root zone of
   land under maize nitrate levels: 200mg/l ).

 ◦ extensive cattle ranching (hay and alfalfa rotation so that
   farms produce all animal feeds themselves).

 ◦ Reduce carrying capacity: < one cattle head per hectare.

 ◦ Compost animal waste and apply optimally in the fields +
   give up chemical feltilisers.

Understanding the science (IV)

 ◦ replace chemical fertilizer with composted manure, no

 ◦ Balance animal rations to reach optimal milk
   productivity and farm profitability.

 ◦ Modernise farm buildings for optimal waste
   management and storing.

      Financial Incentives (I)

Adoption of a:

   land-and-

   labour intensive system and

   heavy investment (capital)

         Financial Incentives (II)


   Young farmers work for the most part alone and
    have mechanised accordingly.

   The extra labour required to compost manure and
    apply it had to be provided by the company

     Financial Incentives (III)

Farmers had high levels of debt:

 ◦ short-term debts linked to the prior purchase of
   farm equipment necessary for the intensive farming
   system now being promoted by the Common
   Agricultural Policy (with subsidies from the
   European Union – every year, farmers receive 1,000
   euros per hectare of irrigated maize from the
   European Union)

     Financial Incentives (IV)

Land acquisition long-term debts:

 ◦ inheritance laws stipulate that lands must be
   divided between all siblings, whether they farm it or
 ◦ sibling taking over the family farm purchase the
   land of the other siblings unless the latter agree to
   leave their land in free usufruct.
 ◦ high unemployment rate people tend to sell it
   rather than leaving it in usufruct.
 ◦ Buy through bank loans (generally for 15 years)

     Financial Incentives (V)
Valuation process:

 ◦ main issue of contention in the valuation
   process was the choice of the basis to
   evaluate the level of compensation to farmers

 ◦ Should the baseline be based on farmer‟s costs
   or on the company‟s benefits?

 ◦ If based on the opportunity cost to the farmer,
   how could calculations reflect the
   heterogeneity of the farms?

      Financial Incentives (VI)
Valuation process:

Option A:
The level of compensation to be negotiated could
  not be lower than the opportunity cost of
  change for the farmers plus a little extra – to be
  negotiated – to provide an incentive for
  modifying practices.

This cost included the loss in agricultural output
  incurred by changes in farming systems plus the
  investment and learning costs linked to adopting
  new practices.

        Financial Incentives (VII)

Valuation process:
Option B:
The upper limit was the opportunity cost to the company
  or the increased value of the company‟s water
  because of maintenance of water quality (or avoided
  market losses).

Great uncertainty attached to the benefits for the
       Financial Incentives (VIII)

Valuation process:

 Predictably, farmers wanted to use the benefit to the


 and ...

 the company wanted to use the opportunity cost to the


          Financial Incentives (IX):
          The bargaining process
   Farmers‟ negotiation cards:

    ◦ they knew the potential of their farms and the costs and
      impacts of changes, and they challenged the estimated
    ◦ they had a monopoly power because each individual plot
      could NOT be substituted with others
    ◦ strategic location of farms meant each farmer could
      individually influence the nitrate rate
    ◦ Farmers‟ unions and other agricultural organisations
      influenced farmers

            Financial Incentives (X):
            The bargaining process
Company‟s negotiation cards:

    the company is a major employer in the basin:
    ◦ (1,800 jobs for a population of around 10,000)
    ◦ Many farmers had their own family members employed by
       the company
    ◦ Unemployment in the region had been rampant for

   Political support from local and central authorities

         Financial Incentives (XI):
                The „deal‟

1. Long term security through 18- or 30-year contracts.
2. Abolition of debt linked to land acquisition, and land
  acquired by the company left in usufruct for up to 30 years.
3. Subsidy: ~ 200 euros/ha/year over five years.
4. Up to 150,000 euros per farm to cover the cost of all new
  farm equipment and building modernisation.
5. Free labour to apply compost in farmers‟ fields.
6. Free technical assistance including:
  ◦ annual individual farm plans and
  ◦ introduction to new social and professional networks

                 A win-win situation?
   By 2004, all 26 farms in the area had adopted the new farming
   1,700 ha of maize had been eliminated;
   92% of the sub-basin was protected.
   The programme speeded up the retirement of the marginal
    farmers (groups A and B) who sold their land to the company.
   The number of farms in the sub-basin declined from 37 to 26
    while average size farm increased to 150 ha as the extensive
    production required additional land.
   A clear indicator of success has been the request from young
    farmers who have taken over the family farm to enter into 30-
    year contracts.

              Costs and benefits
          COSTS                                 BENEFITS
Farmers   No direct financial cost but high     Secured long term farming
          transaction costs:                    (30 years).
          cost of learning new practices and    Cancelling of short-term
          participating in identification and   and long-term debt.
          testing of practices and incentive    Additional land.
          system, and negotiations.

Company   First seven years:                Eliminated business risk
          Land acquisition: 1.14 million    (business of one billion
          euros                             bottles a year).
          Farm equipment: 3,81 million
          Farm financial compensation: 11.3                       75
            Lessons learned (I)
   Establishing PES programmes is a very complex

   Primary reasons for success are not necessarily

   The experience could be replicated

   PES alone may not be sufficient to guarantee
    environmental services are provided

   There is a business case for private sector
    participation in PES.

                  Lessons learned (II):
• Social complexity: interactions between technical, economic,
  social, legal and political aspects in PES
• Economic ambiguity (no data available):
   – no way to estimate the total transaction costs associated with the
     programme or to
   – separate out the expenditures associated with interventions in the
     farming sector from other types of interventions
   – No cost-benefit analysis proper (ideally comparing this programme
     with other public programmes also addressing similar water quality
   – cost-effectiveness? : depends on profitability linked to market forces

• Ecological complexity: unclear link to individual farm contribution
  to contamination

                Lessons learned (III):
• Success is brought not only through money and expertise

• Understanding the local reality and life choices of farmers

• Building trust through intermediary institutions

• Link company‟s future with that of farmers‟

• Not afraid to go against established practice and establish new

• Imperfect knowledge does not limit the effectiveness of action