Andrew Lawrie

g12l0934
J.Polak
Period 4

Water Allocation
Economics 317
12 May 2014
Abstract













I understand that plagiarism is a serious offence and confirm that unless otherwise
acknowledged the content of this essay is my own.

Word count: 1657. (excluding quotations and in text referencing)
This paper seeks to explore: the challenges of efficiently allocating water,
pricing policies for water, the advantages and disadvantages of privatising
water in developing countries and ultimately whether or not privatization
of the water supply in Grahamstown could be use as a potential policy
remedy. This issue bears great importance because it could have a large
and positive impact on the allocation of water to citizens in Grahamstown
and South Africa alike. However, if considered erroneously the costs of
allocating water incorrectly could be devastating. The issue was addressed
by systematically considering each of the above issues, exploring the
current allocation system and finally considering whether or not
privatization of the water industry in Grahamstown would be beneficial. It
was concluded that such a venture would do more harm than good.

Table of contents:
- Introduction
- Current Water Allocation System
- Challenges Associated With Efficient Water Allocation
- Pricing Policies For Water Allocation
- For Privatization Of The Water Supply
- Against Privatization Of The Water Supply
- Privatization As A Policy Instrument in Grahamstown
- Conclusion
- List of References:















Introduction
The importance of access to water cannot be understated. Water is need by human beings in
order to compensate for their continual loss of body fluids thus allowing for their survival.
(Tietenberg and Lewis, 2009: 174). Human beings undeniable dependence on water for their
own survival qualifies it as one of the most essential, basic, economic needs. Grahamstown
has however, had a history of having inadequate service delivery when it comes to water and
its quality (Carte Blanche, 2013). Hence, with water in Grahamstown currently being
supplied by the Makana municipality as a public resource, the question arises of whether or
not the privatisation of Grhamstowns water supply would lead to more efficient supply while
allowing for other benefits that stem naturally from private business activity (Tietenberg and
Lewis, 2009:210).
This paper accordingly seeks to explore: the challenges of efficiently allocating water, pricing
policies for water, the advantages and disadvantages of privatising water in developing
countries and ultimately whether or not privatization of the water supply in Grahamstown
could be use as a potential policy remedy. A brief observation of South Africas current water
allocation system and how it developed is also supplied.

Current Water Allocation System
The current system of water allocation evolved from the implementation of two prior
systems. The first of these was the Riparian system which made use of riparion rights. These
rights gave control of the water to the owner of the land adjacent to the source of the water.
However, this system was shown to be wasteful and it lacked an efficient framework for the
transferability of the aforementioned rights (Tietenberg and Lewis, 2009: 180). Hence, it was
these issues that lead to the establishment of the prior appropriation doctrine. Under this
doctrine, users received usufructory rights as opposed to ownership rights. Ownership was
held by the state. From this point onwards the state played an active role in transferring water
rights between different uses which resulted in the state controlling and allocating most of the
water resources today (Tietenberg and Lewis, 2009: 181).

The water sector framework in South Africa has demonstrated a notable shift in its goals
relating to its management of water and its availability. Such a shift is becomes apparent
when considering the importance afforded to water in both the Bill of Rights and the National
Water Act (Bachurova, 2013). Following these pieces of legislation, the Department of Water
Affairs is mandated to further equal water distribution in South Africa (Department of Water
Affairs, 2013:29). However, such goals are progressive and have not been realized as yet.


Challenges Associated With Efficient Water Allocation
Challenges regarding efficient allocation of water hinge on whether the source of water in
question is surface water of groundwater. Surface water accumulates on the Earths surface.
When considering surface water, the challenges are as follows: the allocation of supply
among competing users, striking a balance between competing uses and determining a way to
manage and allocate variable flows of surface water (Tietenberg and Lewis, 2009: 178).

The first challenge relates to the increasing demand and scarcity situation that exists
worldwide while the second denotes the issue of allocating water fairly between its various
consumptive or non consumptive uses. The final challenge with regard to surface water
occurs because of factors such as precipitation, run-off and evaporation changes lead to
different amount of surface water being available each year (Tietenberg and Lewis, 2009:
179).

Groundwater constitutes water that collects in subterranean aquifers. Challenges regarding
groundwater include the fact that it can be contaminated and exhausted, its non-renewable
nature means that current use of groundwater will diminish future stock and issues will arise
if withdrawals outweigh recharges. The latter challenge means that these sources of water
will be used up if they are not recharged. However, they are often used until they are depleted
or until it costs too much to extract more water from them (Tietenberg and Lewis, 2009: 179).

Two further challenges facing todays water allocation system would be poverty (Schreiner,
1999:5) and ironically, economic growth (Department of Water Affairs, 2013:29). Many of
South Africas poorest citizens cannot afford to pay the basic rates for water no matter how
small (Schreiner, 1999:2). However, simultaneously, the growth of South Africas economy,
which it so desperately needs, is also a challenge to water distribution. The necessary growth
in the economy places further demands on the already stressed supply of water in the country
(Department of Water Affairs, 2013:29).

Lastly, efficient water allocation in South Africa further suffers from a lack of water recycling
(Department of Water Affairs, 2013:29). Too much water ends up as unused wastewater as
opposed to it being treated and re-used for beneficial activities such as irrigation.


Pricing Policies For Water Allocation
Price levels and the rate structures with respect to water in South Africa are inefficient.
Seeing as water is a basic need, municipalities attempt to supply it at the lowest possible rates
(Tietenberg and Lewis, 2009: 183). The structures needed to distribute water are capital
intensive. Such utilities require large short run costs. Thus, in their attempt to provide water
cheaply, municipalities only charge people for the average variable costs of daily distribution
while the average fixed costs such as maintenance are not covered. This means that charging
a price at which marginal costs are equal to marginal revenues would yield a turnover that
falls below average total costs thus leading to an economic loss. Consequently, in the long
run, South African municipalities fall into debt which leads to further problems with water
provision (Tietenberg and Lewis, 2009: 184).

Various pricing policies exist with two-part charges, volumetric pricing, water market pricing
and tiered pricing being the most efficient, followed by input and output pricing being the
second most efficient and per-area pricing being completely inefficient (Tietenberg and
Lewis, 2009: 190). While these are still useful policies, water utilities should adopt a system
that features both increasing marginal cost and a scarcity value for groundwater (Tietenberg
and Lewis, 2009: 191). Such a pricing system would create a larger incentive for consumers
to limit to their water usage while ensuring a supply of water for future generations.

For Privatization Of The Water Supply
A more efficient pricing system could be achieved in the event of privatization of the water
industry. Privatization of the water supply would occur when publically owned water
distribution assets and rights are sold to a private company for their continued use.
Privatization offers many advantages to the supply of water. Incentive based operation is the
core of privatization (Tan, 2012:1) and in the presence of well-defined property rights, the
private owner bears the consequences of his actions. Such a condition also means that the
private owner would reap the profits of his efforts thus creating an incentive to supply water
more efficiently in order to meet demand. Such increased efficiency would counteract the
above mentioned inefficiency of the price levels of water and lead to more secure service
delivery (Tan, 2012:2552). Competition between private firms would also be introduced into
the water sector thus providing a further incentive to improve efficiency and quality (Miller,
2013:14). Private investment in the water industry would also incentivize the birth of new
innovations and technologies that would further aid the distribution and purification of water
(Miller, 2013:14). Furthermore, privatization has been shown to help mobilize financing,
implementation and investment programs, and improve performance of service delivery
(Miller, 2013:14). Lastly, limited public funds would not need to be further stretched to deal
with water distribution.

Against Privatization Of The Water Supply
However, privatization of course gives rise to certain drawbacks. Firms will charge a more
efficient price for water. This price will take all of their costs into account, plus a reasonable
rate of return, thus making it higher than when it was supplied publically (Miller, 2013:15). If
people were to withhold payment following this increased price, firms would have to cut their
water supply off. Such a practice would be unacceptable as the right to water is protected in
the South African constitution (Miller, 2013:15). Developing infrastructure for water
sanitation is also associated with high risks and uncertainty. At the same time, these projects
require massive funding, tax breaks and in many cases, subsidies from the local governments.
This makes poorer, which need water most, countries even less attractive to potential private
investors because their governments are unable to provide such financial incentives (Tan,
2012: 2555). Lastly, Water supply and sanitation has naturally monopolistic as the process of
isolating a water supply and setting up infrastructure to distribute and sanitize it does not
allow room for many firms to operate concurrently. A monopoly on water would lead to
higher prices and halt innovation thus devastating the many settlements and households that
can barely afford water as a public good (Tan, 2012:2554).

Privatization As A Policy Instrument in Grahamstown
Grahamstowns ongoing issues with water distribution can be attributed to various
phenomena such as aged and worn out infrastructure, unpredictable rainfall and drought
cycles and consistent operational issues regarding water supply (Ansie, 2013:1). As
previously stated, the Makana District municipality regulates water supply and distribution in
Grahamstown and their multiple shortcomings along with their apparent lack of expertise
(Carte Blanche, 2013:1) have brought questions of privatisation to light. In previous years,
Rhodes University, has demonstrated its stance on the matter of water shortages by releasing
a document on its website which considered the construction of its own reservoir at massive
costs after nearly closing down to allow students their right to hygiene and water. (Rumney,
2013:1). Furthermore, massive sums of money will be needed by the municipality in order to
upgrade their outdated system (Haith, 2014:1). On top of the above reasoning, the levels of
arsenic and aluminium present in Grahamstowns water (Ansie, 2013:1) build a strong case
for privatization of water in Grahamstown.

However, the drawback of higher water prices which appears to be unavoidable would leave
too many Grahamstown occupants without water. While the wealthy would be able to pay,
the poor majority of the city would be devastated and their problem of lacking access to water
would be replaced by the problem of not being able to afford water (Nodada, 2013:1). This
issue cannot be circumvented. Regulation of the private water scheme could assist the poor.
However, especially in country such as South Africa, corruption and political agendas appear
to make their way into important regulatory schemes (Tan, 2010:2555). Something
Grahamstowns people, schools and university can ill afford.

Conclusion
In conclusion, it can be seen that the many challenges associated with water distribution and
supply need to be carefully considered when deciding how water should be allocated. Once a
method of allocation has been decided upon, bearing in mind the challenges of such an
endeavour, a suitable pricing policy needs to be established. While there are many pre-
existing policies that can be applied, a policy that more fully captures the costs of water
allocation should be adopted to achieve maximum efficiency. While privatisation of the water
industry may offer such efficiency and further security of service delivery, it also has
potential drawbacks that may result in more harm than good to a society. In the context of
Grahamstown, privatization could provide the city with much needed improvements in
service delivery. However, it can be seen that the inevitable increases in the price of water
along with water services monopolistic nature would indeed do more harm than good to
Grahamstowns citizens. The solution therefore lies within improving government allocation
mechanisms to better suit Grahamstown.


List of References:

ANSIE, 2013. Is Grahamstown water safe yet? [Online]. Available:
http://www.watersafe.co.za/2010/03/31/is-grahamstowns-water-safe-yet/
[Accessed 12 May 2014].

BACHUROVA, A, 2013. Water Allocation. [Online]. Available:
http://www.iwawaterwiki.org/xwiki/bin/view/Articles/WaterAllocation
[Accessed 12 May 2014].

CARTE BLANCHE, 2013. Grahamstown Water. Carte Blanche. 23 September 19:00.
Carte Blanche [Online] Available: http://carteblanche.dstv.com/story/Grahamstown-Water-
2013-09-29 [Accessed 12 May 2014].

DEPARTMENT OF WATER AFFAIRS, 2013. Overview of The South African Water Sector.
[Online]. Available:
http://www.dwa.gov.za/io/Docs/CMA/CMA%20GB%20Training%20Manuals/gbtrainingman
ualchapter1.pdf [Accessed 12 May 2014].

HAITH, C, 2014. Grahamstown Not Clear of Water Worries Yet. [Online]. Available:
http://oppidanpress.com/grahamstown-not-clear-of-water-worries-yet [Accessed 12 May
2014].

MILLER, M, 2013. The impact of privatisation on the sustainability of water resources.
[Online]. Available:
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THESUSTAINABILITYOFWATERRESOURCES#HPositiveExperiencesfromselectedcountr
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NODADA, L, 2013. Water debate raises moral hackles. [Online]. Available:
http://www.grocotts.co.za/content/water-debate-raises-moral-hackles-07-03-2013 [Accessed
12 May 2014].

RUMNEY, R, 2013. Water Crisis: Social Cohesion At Stake. [Online]. Available:
http://www.grocotts.co.za/content/social-cohesion-stake-24-03-2013 [Accessed 12 May
2014].

SCHREINER, B, 1999. The Challenges Of Water Resource Management In South Africa.
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TAN, J. The Pitfalls of Water Privatization: Failure and Reform in Malaysia World
Development 40, 12: 2552-2563

TIETENBERG, T. and LEWIS, L., 2009. Environmental Economics and Policy (6
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