LGI Studies - Policy Documentation Center

Intorduction

Description of the Water Sector in Armenia

Background

The GoA's budget subsidy to utilities has increased significantly in the last few years, reaching two percent of GDP. Unlike the energy sector, where reforms had a significant impact in the mid-1990s, major reforms in the water sector started much later, towards the end of the decade.

Description of the Sectors

• Municipal Water Sector
• Irrigation Water Sector

Electricity's share of the total costs for irrigation is around 70%, which without government subsidies becomes unprofitable. The lack of energy and sharp price increases have created serious difficulties in using mechanical irrigation, which makes about 10%-15% of the total area economical. Most of the cropped area depends on water from irrigation schemes, and almost 80% of total crop production is produced by irrigation.

There are significant benefits of irrigation in Armenia, which are clearly observed in the financial performance of farms. The crop mix in the main irrigated areas changes rapidly, affecting the overall demand for water and the yield per m3 of water. The high rate of water loss is usually the result of the deterioration of water transport infrastructure.).

Reforms in the Water Sector: An Overview of Main Components

• Regulatory Reform
• Institutional Reforms in the Municipal Water Sector
• Institutional Reforms in Irrigation
• Financial Reform
• Private Sector Participation in WRM
• Water Rights, Water Markets and Water Planning
• Next Key Steps in GoA Reform Agenda

A Water Resource Management Board, established by GoA Decree No. under the auspices of the Ministry of Nature Conservation. Nor Akunq JSC is a shareholder with a share distribution in the following structure: Government (34%); For multi-apartment buildings, meters will be installed by the operator of the main line supplying the building.

Pipelines inside buildings, according to the Civil Code of 1999, are jointly owned by families. The Government of Albania plans to help water user groups to gain the capacity (technical and human) to take full responsibility for O&M beyond tertiary canals and to participate more effectively in the management of the irrigation and drainage system. The Government of Albania plans to establish Local Water Authorities under the authority of the WRM Board, charged with the operational management of primary water bodies.

The Need for Pro-Poor Policies in Water Sector Reforms

Questions remain relevant to designing a complete picture of future regulatory regimes for the water sector. What is more reasonable: a national regulator for the water sector, or a multi-sectoral regulator, covering energy, water and telecommunications. Should the regulation be implemented by a central government agency, a national economic regulatory agency or local governments.

Local authority regulation has the advantage of taking into account local knowledge and interests, but does not allow for a systematic set of national standards or pricing methods. Splitting the AWSC would allow the use of comparative competitive methods, but this is only valuable if there is enough room to use these methods or if the advantages of subsidizing costs across regions within one company do not outweigh the disadvantages. The Court of Auditors proposes a mixed strategy:43. establish an independent regulatory agency;. enable the existence of local and multi-regional water companies; allow local governments to enter into contracts with local water operators specifying one of the following:. a) no role of national regulatory agency; (b) full regulation of prices and service standards;.

Water as an Economic Good: Theoretical Perspective

In turn, WRM reform (like any other reform program) should be designed in a way that is sensitive to the needs and capabilities of the poor. In part, this perception affects the low compliance with payment discipline in all segments of water consumption, which will be described later in the text. Since rate setting is a challenging task, it is useful to look at water pricing theory and what it implies in relation to water rates.

Economic efficiency: (a) marginal cost should be more than zero to reflect resource scarcity; (b) prices must reflect marginal costs; (c) tariffs must include economic rent,48 which implies that: tariffs based on uniform fixed payments are not acceptable and water bills must be based on the water actually consumed;. Social justice: while prices should be based on actual consumption levels, sufficient water should be available at very low prices (or subsidized), by (a) adopting increasing block tariffs; or (b) assisting the poor with cash transfers in case of uniform prices;. Resource fee: to reflect the alternative value of water or economic rent, which implies that it must be used for each m3 of water received by the consumer or each m3 of water extracted;49 and.

Policy Options in Water Tariff and Billing Reform

Theoretical Rationale

To ensure that tariffs are politically acceptable, citizens must participate in the tariff setting process and authorities and utility companies must fully disclose financial information to the public. It can be concluded that the tariff structure for both municipal and irrigation water is far from an instrument to influence demand and achieve efficiency. A more immediate task concerns the design of rates and an invoicing/collection system in a way that achieves cost recovery.

This includes gradual improvement of the tariff structure in line with the Water Tariff Policy outlined in GoA Ordinance no. 440 to fully cover the following costs: operational exploitation and conservation; depreciation; loan servicing; insurance; ecological standards; unavoidable losses due to technical and commercial reasons; and minimum profit. GoA tariff policy proposes full cost recovery by 2005; in our opinion, this seems too drastic, so a more gradual process and a longer time frame are recommended (as described in the following sections).

Municipal Water Tariff and Billing Reform

• Current Municipal Water Tariff
• Affordability for Higher Tariffs
• GoA Plans for Municipal Water Tariffs
• Impact of Planned Tariff and Billing Reforms
• Municipal Water Tariff and Billing Reform: Conclusions

Since the subsidy amount represents only four percent of the overdue debts of the population and legal entities to the system (without Yerevan), and if the latter (again, without Yerevan) were to pay their debts, this amount could be reduced by more than a large amount. 60% (indeed, these are very rough calculations and very conditional). These estimates, as well as the fact that almost 51% of the population lives below the poverty line60, indicate that households must pay for water. It takes into account the needs of the poor more effectively than a contrived 'poverty' list (which always risks excluding people and missing those on the margins).

Perhaps the benefits in the first phase of the implementation of the program will only include water supply and housing maintenance, i.e. basic needs accessible to all citizens. This exceeds the value of the minimum consumer and food basket by 1.5 times and 2.4 times respectively and suggests that the GoA proposal is quite a heavy burden not only on the poor but also on average households. This appears to be a viable option for the Armenian context as it brings together the interests of the government, utility managers and local communities.

Irrigation Water Tariff and Billing Reform

• Theoretical Rationale
• Current Irrigation Water Tariffs
• GoA Plans for Irrigation Water Tariff Reform
• Assessing the Potential Negative Impact of GOA Plan
• GoA Vision for the Ways to Mitigate the Negative Impact
• Irrigation Water Tariff Reform

A recent pilot study by the Economic Research Institute81 (with funding from DFID) on Poverty and Social Impact Assessment (PSIA) of water sector reform in Armenia provided a preliminary estimate of the potential impact on agricultural farms. The extent to which irrigation would decrease; the impact of the prices of imported goods, the impact of the emerging zoning of tariffs (although in our opinion the introduction of zone tariffs will only partially mitigate the negative impacts), and the. Assuming that the prices of the most important agricultural commodities will rise seems plausible, especially for those crops that require more water.

If the purchasing power of the population increases substantially, price increases will be feasible, allowing farmers to operate within a reasonable profit margin, even if this entails the costs of reducing production levels. This would ultimately result in the closure of small farms and the relocation of the population from the affected areas. To answer this, we first examine the poverty picture in the country's rural areas.

Summary of Main Conclusions and Policy Recommendations

Current Institutional Makeup

Water Management at the Local Level

This will ultimately make the water supply of the Makhtaaral district less dependent on the upstream allocations in Uzbekistan. A number of experts suggested changing the status of the Committee for Water Resources from a sub-. The severe economic crisis after the collapse of the Soviet Union affected the water sector explicitly.

Currently, market reforms conflict with the inherited state-dependent structure of the agricultural sector. Creating an adequate legal framework is essential for the development of the water sector. Elaboration of management, infrastructure and investments in the water sector of the Kazakh economy” in V.A.

Water User Organizations

Weaknesses of Current Water Management Arrangements

The situation is further aggravated by the duplication of functions between the BWA and the republic's state enterprises. As such, at the provincial level, the republic's state enterprises are not accountable to the water users themselves, who provide most of their funding. Filling the gap created by BWA's financial shortcomings, the republic's state-owned enterprises gained regulatory authority over water users.

Typically, they do not perform this function due to a lack of technical, financial and management support. They are further weakened by the cautious cooperation of farmers and the lack of trust between them.

Policy Options

• Challenges in Policy Formulation
• Better Technology?
• New Legislation
• Government Reform
• Economic Incentives
• Education, Information and Transparency

The Asian Development Bank prepared a draft law in 2000 as part of its Water Resources Management and Land Reclamation project; however, the adoption of the law coincides with the new Water Code. Moreover, its elevated status can foster productive water management negotiations among ICWC member countries. Within the Water Resources Committee, one of the most pressing challenges is the differentiation of the aforementioned functions between territorial units and basins at the provincial level.

Any reform should clearly establish the rights and responsibilities of district-level territorial water management units and water user associations with regard to maintenance functions. Meanwhile, persistent disagreements among irrigation structure owners further hinder the introduction of market economic relations. The State Agriculture and Food Program (adopted in June 2002) outlines the development of the agro-industrial complex in Kazakhstan from 2003 to 2005.

Conclusions and Recommendations

As Muhametjanov et al. 2002) offer: “The main barrier to competition (market relations) in the water sector is the contradiction between the owners of the irrigation structure, who want to charge maximum compensation for their services, and the water network users who are interested in the minimization of their costs.” The basin councils provided for in the draft Water Code could in principle take on this role, but their functions are not clearly defined. Over the past year, agriculture has been allocated some of the remaining funding, reflecting the rigors of post-Soviet change.

However, government support must be carefully leveraged against market demands to prepare farmers for financial independence in the future. Provision of information is another key element of the irrigation management transfer strategy. Kazakhstan Government Draft Water Law of the Republic of Kazakhstan, retrieved February 8, 2003 from www.zakon.kz.