McKinsey & Company: Charting our water Future: Economic frameworks to inform decision-making

McKinsey and Company wrote this report in collaboration with the 2030 Water Resources Group, of which it was a member. Formed in 2008, the group had the mission "to contribute new insights to the increasingly critical issue of water resource scarcity . . . aimed to create an integrated fact base on the potential technical levers and cost for reducing water scarcity, with the ultimate goal of advancing solutions-driven dialogue among stakeholders" (p. 1). The International Finance Corporation, a subsidiary of the World Bank, worked with McKinsey and various corporations, experts, non-governmental organizations (NGOs), and nations to produce the report.

In the forward, the report projected water demand: "in just 20 years . . . demand for water will be 40 percent higher than it is today, and more than 50 percent higher in the most rapidly developing countries. It anticipated results from the shortage--hungry villages and degraded environments--and economic development itself will be put at risk in many countries" (p. iv).
The article identified five global themes, "competition for scare water from multiple uses within a river basin, the role of agriculture for food, feed, fiber and bioenergy as a key demand driver for water, the nexus between water and energy, the role of urbanization in water resource management, sustainable growth in arid and semi-arid regions" (p. 9).

The first chapter, Shining a light on water resource economics, begins with a pessimistic diagnosis of the current situation but asserts that sufficient monetary resources exist to solve water shortages. Water policy lacks, according to the authors, strategies to "increase productivity of demand and augment supply" (p. 4), to confirm adequate upstream water quantities, to demonstrate transparency in applying the economics of water resources, and to connect critical stakeholders. Basic economics address the questions of the quantities of supply and demand and the discrepancy, the gap, between the two. More in depth questions explore the following issues: "What technical options for supply and water productivity exist to close the 'water gap'? What resources are needed to implement them? Do users have the right incentives to change their behaviors and invest in water saving? What part of the investment backlog must be closed by private sector efforts, and what part does the public sector play in ensuring that water scarcity does not derail either economic or environmental health?" (p. 4).

The report quantified current water consumption at 4.5 thousand cubic kilometers and future consumption at 6.9 thousand cubic kilometers, a 40 percent increase. Of that amount, agriculture accounts for 71 percent of current usage, industry 16 percent, and 14 percent for domestic users. By 2030 these percentages will increase for industry to 22 percent--especially in China, but decrease for agriculture to 65 percent and domestic users to 12 percent. To emphasize the need for an aggressive policy change, the article documented the annual rate of increase in agricultural and industrial water efficiencies between 1990 and 2004 as 1 percent for each category, resulting in a 20 percent reduction in the 2030 gap. Users supplement current water supply with 'borrowed' water, water from depletable aquifers or from environmentally strapped rivers and wetlands.

The economics of increasing water supply, the cost of desalination, groundwater extraction, and agricultural and industrial efficiencies, show that desalination costs from .70 to .90/m3, groundwater, from .04 to .21/m3, agriculture, a savings of .12 to .02/m3 and industrial measures (paste tailings in mining), a savings of .60 to .30/m3. With this data, the authors estimated an "additional annual investment in upstream water infrastructure of up to $200 billion over and above current levels--more than four times current expenditure" (p. 8).

Offering three solutions to meeting the water gap, the authors suggest two technical--"increasing supply and improving productivity" (p. 11) -- and one economic, changing economic behavior. Improving agricultural efficiency, the crop per drop, remained a constant technical objective within any geography considered, either by water application or increased crop yield. Known technologies include: "drip and sprinkler irrigation, no-till farming and improved drainage, utilization of the best available germplasm or other seed development, optimizing fertilizer use, and application of crop stress management . . . pest management . . and innovative crop technologies protection" (p. 12).

In the municipal and industrial sectors, users can realize water and cost savings. Industrial entities can establish "aggressive, water-conscious, 'new-build' programs and enacting water-saving regulatory reforms" (p. 13). Such industries as the "thermal power, wastewater reuse, pulp and paper, textile, and steel industries in China and other rapidly developing countries could experience these benefits" (p. 13).

The contributors to this article employed tools, the cost curve and gap models. They applied these tools to various scenarios, potential realities facing the futures of the their representative areas under examination, South Africa, China, Sao Paulo, and India. By linking economic information to water resources to create a water vision, decision makers have the data to make informed decisions within their unique geographical, political, financial, and cultural context.
Sensitive to the manner in which over regulation can stifle economic growth, the writers urged a balance between conservation incentives and water productivity, "through clearer ownership rights, appropriate tariffs, quotas, pricing, and standards" (p. 21).