The Failure of the Invisible Hand in the Case of Non-Revenue Water

According to economic theory, the market mechanism or invisible hand is the most efficient way of  managing precious resources. For instance, when the benefits are higher than the costs, the market signals players (buyers, sellers, producers, investors, etc.) to take action . Is that true? No! Sometimes even if the advantages are enormous, the investment does not happen. This is the story of “non-revenue water” or NRW.

According to the International Water Association (IWA), NRW is the difference between the volume of water put into a water distribution system and the volume that is billed to customers. There are three components of NRW: physical losses, which is water leaking as a result of the transportation process, commercial losses, which is metering inaccuracies, and unbilled authorized consumption, which is unbillable water, such as water used for firefighting. Physical losses are the main cause of NRW; in Thailand, they account for 75% of total NRW.     

There are benefits to reducing NRW: to begin with, there is a financial benefit from increasing water sales or reduced water production. The research on reducing water losses in Thailand found that if NRW was 0% in 2014, the total financial benefit (only on the water producing company) was more than $174 million. I can say that if the NRW is 0% forever, the financial profit will increase perpetually.

Beside the financial benefit, reducing NRW means decreasing risk of contamination; for example, when the water leaks, the pollution comes inside the pipe, so the consumer might get contaminated water. Last but not least, reducing NRW is saving the water resources in the long term. There are many cities in the USA such as Los angeles or countries get involved in the water insufficient problem. So, we can trade water with them.

Reducing NRW is good for the water companies and societies but the statistics still indicate that the percentage of NRW is very high. On the world average, the non-revenue water is 25%; in other words, we waste 1 liter of water for every 4 liters of total water production. Moreover, this number is higher in the developing countries such as Bangkok, Thailand (34%), Bangalore, India (36%), Jakarta, Indonesia (51%). Even in a developed country like the USA, NRW in Chicago was 24% (Source: Swan-Forum 2013).

There are many questions that come to my mind: Why is the NRW still high? Why don’t the authorities attempt to reduce the NRW since there  is so much benefit as I explained before?  I tried to explain this situation to myself by using Econ 101. One reason for market inefficiency is high fixed costs. To clarify, to solve the NRW problem, companies must replace all old water pipes, which would use up a lot of the budget (you spend a lot of money at one time but receive forever a small return, so it might be risky to the company); moreover, some benefits, such as conserving natural resources, go to the people in general. So, if I were a water producing company, I might say I am OK with this situation

Because reducing NRW benefits everybody in the country and the total fixed cost is higher than the companies can pay, my suggestion would be to have the government intervene.  For example, it might provide a low interest rate loan, subsidy or replacing the water pipes themselves.

adamsmith

Photo: http://www.richardcyoung.com/wp-content/uploads/2015/12/adamsmith.jpg

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s