The introductory chapter to this book described the major problems in water pricing policy in much of the world: prevailing low water prices and high subsidies for capital investment and O&M costs threaten the financial viability of irrigation and urban water supplies, creating a particularly serious problem given the huge financial resources that these sectors will require in the future. Low water prices and poor cost recovery compromise the efficient maintenance of existing water infrastructure as well as the additional investments necessary to develop future water projects. Perhaps even more fundamentally, low water prices encourage misallocation and wasteful water use in all sectors. A key motive for reforming water pricing policies is the growing competition between domestic, industrial, irrigation and environmental uses, especially in arid or semi-arid regions. If higher water prices could substantially reduce the withdrawal of water in other sectors, the savings would be available for environmental uses.
Despite the potential benefits of higher water prices, policymakers have found it difficult to raise them, especially in the agricultural sector, because of concerns over impacts on food production and farmer and poor household incomes, and about the associated political risk of increasing water charges. Adding to the difficulty of pricing reform, both long-standing practice and cultural and religious beliefs have treated water as a free resource, and entrenched interests benefit from the existing system of subsidies and administered allocations of water. Equity concerns are intensified by evidence that the responsiveness of agricultural water demand to changes in water prices is generally very low, and that price increases sufficient to reduce demand significantly could greatly depress farm incomes.
The purpose of this chapter is to explore the potential of higher water prices in achieving water conservation and balancing direct human consumptive water uses with environmental water uses globally.
