Experiences with Water Charges

The most active experience with economic instrument initiatives in environmental management in Latin America is water charges. Legally these charges are set to accomplish both financing and ecological aims. Their success is still unclear. Careful analysis of these systems shows that the definition of the pricing criteria and institutional capacity are fundamental factors for their effective implementation.

Before presenting a review of some Latin American experiences, let us look briefly at the experiences in the OECD countries.

OECD Experiences on Water Pricing

The systems of water charges implemented to date in several OECD countries have not been concerned with the externality criteria. In general they have been geared to the generation of revenue, to cover some of the cost of providing or expanding water services.¹⁰

Table 3 summarizes water charges in a few OECD countries. Water pricing in OECD countries is mostly geared to revenue generation and to the achievement of specific environmental goals.

No pure externality pricing is adopted: such sophistication is rejected because of the administration costs that would result from a system of charges to achieve an explicit objective of social maximization or minimization of environmental control costs, as social optimum pricing would suggest. However, a relation is almost always maintained between control and supply costs and the respective price elasticity of users according to the rule of public prices, just as consideration is made to quality and availability of water resources.

The most relevant factor for a system of water resource management is institutional capacity to enforce realistic charges, fully monitored, and whose revenues are channeled to necessary investments. Thus, whether water basins were in state or federal hands would no longer be important. In the absence of committees, the federal charge would be applied by public entities.