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Incentive, sustainable and fair pricing, a trilogy out of reach?

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  • Maria Salvetti

Abstract

The Water Framework Directive requires Member-States to implement by 2010 an incentive tariffication policy in order to ensure efficient use of water resources and compliance with environmental goals (good ecological status). But working out an incentive pricing system, that is both sustainable and fair, is not an easy task. 1) Can an incentive pricing be a sustainable pricing? a) Water & wastewater services are very capitalistic: fixed costs can represent up to 2/3 or 3/4 of the service costs. Therefore the tarification structure should include a rental part (fixed part dedicated to cover fixed costs). Example of rental part importance in the water invoice in Seine-Normandy Water basin. The existence of such a rental part in the water invoice does minimise the possibility to have a very incentive pricing structure. But in the mean time, this rental part ensures the water service economic sustainability. b) To some extent, incentive pricing aims at reducing water consumption. More & more municipalities communicate on the need to fight water wasting. But saving water, reducing water consumption can have dramatic consequences on the water service balance when water consumption drops within a very short period of time (Example: change in air conditioning systems in Paris). Although water price elasticity is rather low, price increase is one of the reason for water consumption reduction in France during the second part of the 90’s (Example through the article & study of Montginoul & Alexandre on drinking water price in France). This drop in consumption can jeopardize the financial balance of the water service and therefore jeopardize the sustainability of the service. In order to achieve both ecological and economic sustainability, it is necessary to implement changes progressively. Drastic and sudden modifications can only bring dysfunction and imbalance. 2) Can an incentive pricing be a fair pricing? Water is very specific good. It is a necessity for each human being to have access to water. Therefore, water tarification has a clear social and political dimension. a) How can water price remain at once incentive and social? Example of Flanders (through the article & study of Peter Van Humbeeck, SERV, on water pricing in Flanders) and Brussels (work of Henri Smets, French Water Academy). An incentive water price that takes into account social concerns does not seem easy to reach. Moreover, a social water price that abide by the “polluter pays” principle and the WFD environmental objectives seems very far from reach and maybe even utopian. Here lies a real issue because water pricing is a social matter and remains a political decision in all European countries. b) Water price is both the result of a political decision and the solution of an economic calculation. How to conciliate political and economic concerns, political and economic cycles? Can fairness pricing resist economic reality and requirements? In order to implement a fair pricing (both a fair political & economic pricing), it is necessary to reinforce water services management: improve amortization policy, implement analytical accountancy, define investment programs, ensure high quality infrastructure current maintenance, promote closer working relationships between financial and technical experts and representatives, improve technical & economic knowledge of representatives, develop public participation to share knowledge & information. In such conditions, fair pricing might be compatible with incentive pricing. Conclusion: Pricing is part of an overall water services sustainable management. The aim of any tarification policy should be comprehensive sustainability: service quality sustainability both towards the customer and the environment, equipment quality maintenance and duration; The right price is a price that allows sustainable water service management. Social and incentive tarification are only tools to achieve sustainability.

Suggested Citation

  • Maria Salvetti, 2005. "Incentive, sustainable and fair pricing, a trilogy out of reach?," ERSA conference papers ersa05p454, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa05p454
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