SEEAW

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SEEAW Asset Accounts and Valuation Regional
Workshop on Water Accounting Santo Domingo,
Dominican Republic16-18 July 2007

• Michael Vardon
• United Nations Statistics Division

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Outline

• What do Asset accounts measure?
• Basic definitions
• Asset classification
• SEEAW standard tables
• Supplementary tables/information
• Breakdown of water flows
• Matrix of flows within the environment

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What do asset accounts measure?

• Asset Accounts describe in physical units
• The stocks of water resources
• The changes in stocks that occur during the
  accounting period (natural and anthropogenic
  changes)
• They link information on abstraction and returns
  with information on the stocks of water resources

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Hydrological cycle and water balance
Precipitation Evapotranspiration runoff /-
changes in storage
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Basic structure
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1993 SNA Asset classification

• Aquifers and other groundwater resources to the
  extent that their scarcity leads to the
  enforcement of ownership and/or use of rights,
  market valuation and some measure of economic
  control.
• Thus only a small portion of the water resources
  in a country is included in the 1993 SNA.

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SEEAW

• Water resources include water found in fresh and
  brackish surface and groundwater bodies within
  the national territory that provide direct use
  benefits now or in the future (option benefits)
  through the provision of raw material and may be
  subject to quantitative depletion through human
  use.

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SEEAW asset classification

• EA.13 Water Resources (measured in cubic metres)
• EA.131 Surface water
• EA.1311 Artificial Reservoirs
• EA.1312 Lakes
• EA.1313 Rivers and streams
• EA 1314 Glaciers, Snow and Ice
• EA 132 Groundwater
• EA.133 Soil Water

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Asset accounts
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Water resources

• Surface water water which flows over, or is
  stored on the ground surface. It includes
  artificial reservoirs, lakes, rivers and streams,
  glaciers, snow and ice.
• Groundwater water which collects in porous
  layers of underground formations known as
  aquifers
• Soil water water suspended in the uppermost belt
  of soil, or in the zone of aeration near the
  ground surface, that can be discharged in to the
  atmosphere by evapotranspiration

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Water in oceans, seas and atmosphere

• ..not recorded in terms of stocks but only in
  terms of flows.
• For example, abstraction from the seas,
  collection of precipitation, outflows to the
  seas, evaporation/evapotranspiration etc.

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Fresh and non-fresh water

• Water resources include fresh and brackish water.
• Brackish water can be used with or without
  treatment for some industrial uses or for
  irrigation purposes for some specific crops
• Water resources can be further disaggregated into
  fresh and brackish water

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Stocks for rivers

• It is not easy to define.
• The stock of a river should be measured as the
  volume of the active riverbed determined on the
  basis of the geographic profile of the riverbed
  and the water level.
• This quantity is usually very small compared to
  the total stocks of water resources and the
  annual flows of rivers.
• It can be avoided computing the stocks of rivers

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Matrix of transfers within the environment
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Valuation of Environmental Assets

• Why value environmental assets?
• Definitions of environmental assets
• Asset boundary between SNA and SEEA
• SNA asset classification
• SEEA asset classification
• Methods of valuation
• Net present value
• Other methods
• Example Valuing Water

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Why value environmental resources?

• Efficient and equitable allocation of resources
  among competing users, both
• within the present generation
• between present and future generation
• Efficient and equitable infrastructure investment
  in the resource sector (how much, where, when)
• Design of economic instruments pricing,
  property rights, taxes on depletion and
  degradation
• Helps to ensure that the environment is included
  in decision-making

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Assets in the SNA

• For an asset to be included in the SNA it must
  have
• An identifiable owner who enforces ownership
  rights
• Be able to produced economic benefits for the
  owner by using or holding them

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SNAEnvironmental Assets
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Assets in SEEA

• SEEA expands the definition in the SNA to cover
  all environmental assets used whether they are
  owned or not provided

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SEEA Environmental Assets
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How to value

• SNA is very clear
• Market price should be the basis of valuation
• Where market prices are unobservable or do not
  exist then economic theory may be used to
  determine a shadow price

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Shadow price

• The true economic PRICE of an activity the
  OPPORTUNITY COST. Shadow prices can be calculated
  for those goods and SERVICES that do not have a
  market price, perhaps because they are set by
  GOVERNMENT. Shadow pricing is often used in
  COST-BENEFIT ANALYSIS, where the whole purpose of
  the analysis is to capture all the variables
  involved in a decision, not merely those for
  which market prices exist.

Source The Economist www.economist.com/research/E
conomics/alphabetic.cfm?letterSshadowprice
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Options for valuation SNA and SEEA

• SNA
• Market price
• Net present value
• Cost of production (provides a lower bound)
• SEEA describes
• SNA methods
• Revealed preferences
• Stated preferences

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Net present value

• The net present value of future expected earning
  can be used to determine asset values

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Net present value calculation

• Net present value (NPV) of expected future income
  streams

n RR
Vt S
t1 (1r)n
Where VNPV, RR resource rent, r discount
rate, n asset life
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Net present value calculations resource rent

• Resource rent the value of the flow of capital
  services provided by a natural asset.
• RR (p-c)Q
• Where RR resource rent, p unit price, c
  unit cost (including wages, intermediate costs,
  normal return to produced capital, and taxes), Q
  quantity extracted

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Net present value calculations asset life

• This is the amount of time that the asset will
  continue to exist, given current rates of
  extraction

Volume of stock t1
Asset life
Volume extracted t0 t1
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Net present value calculations discount rate

• Choosing an appropriate discount rate is crucial
  to the NPV calculation. An area of debate
• Rate used differs between countries
• The higher the discount rate, the lower the NPV

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Concerns about using non-market valuation
techniques

• Accuracy of values and cost of valuation
• Consistency of value concepts with SNA
• Aggregation scaling up site-specific values

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Accuracy of non-market valuation

• Data requirements are very high, so valuation is
  costly
• Value is often uncertain, very sensitive to
  assumptions
• Results are often presented as a range of values
  rather than a point estimate, a single value
• Values are most reliable for water used as input
  to
• agriculture,
• hydroelectric power and other uses where water
  is a major component of production costs

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Concepts of valueConsistent with the SNA?

• In principle, SNA measures market values, or
  sometimes cost of production
• Many valuation techniques were developed for
  Cost-Benefit Analysis of projects (not national
  economy)
• CBA often tries to measure of economic welfare
  (total economic value) not market price
• Programming models measure values in an
  optimizing economy which usually differs from
  actual economy

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Aggregation and national accounts

• Some values highly site-specific, dependent on
  local uses, as well as season, water quality and
  reliability
• Values are not amenable to benefits
  transferusing an estimate from one case study
  for another area
• Little experience scaling up local values to the
  national level

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Revealed Preference(based on observed market
preferences)

• Residual value
• Marginal contribution of water to output,
  measured by subtracting all other costs from
  revenue
• Production function approach
• Marginal contribution measured as the change in
  output from a unit increase in water input in a
  given sector
• Optimization models and programming
• Marginal contribution measured as the change in
  sectoral output from reallocation of water across
  the entire economy
• Hedonic pricing
• Price differential paid for land with water
  resources
• Opportunity Cost
• Price differential for alternative (example
  replacing hydroelectric power with coal-fired
  electricity)

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Stated Preference(based on surveys of
willingness to pay)

• Contingent Valuation Method
• Survey of users, especially household water use
  and recreational services

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Valuing water and treating it an economic good
has strong support

• In Integrate Water Resource management
• 2002 World Summit on Sustainable Development in
  Johannesburg
• 2003 Third World Water Forum
• 2006 World Water Development Report
• Human Development Report 2006
• Beyond scarcity power, poverty and the global
  water crisis

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SNA values water at price of transaction. There
are some prices for water, so why may it be
inappropriate use these?

• Because the price charged by water suppliersif
  anyis often unrelated to value of water, and may
  be too low
• Bulky commodity (very high transport costs
  relative to value inhibiting trade)
• Water price often does not even reflect full
  costs of water supply
• Water is not supplied by competitive markets due
  to natural characteristics
• Necessary for human survival
• Natural monopoly
• Characteristics of public good
• Property rights not always well defined for
  multiple use or sequential use

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Some markets for trading water rights are
developing

• Australia,
• California
• Chile
• but still uncommon, local
• Price of tradable water rights does not yet
  provide a reliable indicator of value because
  markets too thin (too few traders)
• So we must estimate or impute economic value of
  water

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Most commonly used water valuation techniques
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Residual Value (Value Marginal Product)The
easiest most commonly applied valuation
techniquewhere TVP Total Value of the
commodity Produced piqi the opportunity costs
of non-water inputs to production pw value
of water (its marginal product) qw the cubic
meters of water used in productionNon-water
inputs include intermediate inputs, labor,
capital costs, land
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Challenges to Implementing Residual Value
Technique

• Is the quantity of water measured accurately?
• Is labor cost accuratehow to value unpaid family
  labor?
• Value of landminus water rights
• Capital costs
• Are all capital costs accounted for accurately?
• What rate of return to capital should be used?
• Are there other inputs that have not been
  included?
• Do the prices of output all inputs reflect true
  economic value, or are they distorted?

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Example Agricultural water use in Namibia
(Stampriet area)
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Net present value of hydropower geothermal in
New Zealand
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Approach Environmental Valuation Cautiously

• Value consistent with SNA include all values but
  indicate type of value and robustness
• Accuracy/uncertainty start with major uses that
  are easiest to value indicate range of values
• Aggregation implement valuation at local/river
  basin level
• Asset value begin with resources with single or
  few uses that can be easily valued

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Acknowledgement

• Many thanks to Glenn-Marie Lange for allowing me
  to use some material from her presentations
• Glenn-Marie Lange
• Senior Research Scholar
• The Earth Institute at Columbia University
• Center for Economy, Environment and Society
• 2910 Broadway, Room 110
• New York, New York 10025
• Cell phone [phone]
• Phone [phone]
• Fax [phone]
• http//www.earthinstitute.columbia.edu/cgsd/lange.
  html