Informing water policies with a residential water demand function: the case of Serbia.

AuthorReynaud, Arnaud
  1. Introduction

    Serbia is considered as a moderately water-poor country (Todic and Vukasovic, 2009). This has led the European Environmental Agency to qualify water resources in Serbia as being insufficient. (5) The water availability issue is worsened by an unequal distribution of resources over space, as well as by differences in water quality across the Serbian territory. The most populated lowland regions have limited water resources (6), while high quality water resources are mostly located along the country's perimeter. As a result, 84% of available water in Serbia originates outside the territory (Kastelan-Macan et al., 2007).

    These considerations on low water availability call for an efficient management of water resources in Serbia. As a result, substantial legislative efforts have been undertaken by Serbia for securing water resources and developing water protection in the last decade. The Law on Environment Protection passed in 2004 (7) and the Law on Waters adopted in 2010 (8) constitute two examples of legal frameworks passed in this field. Despite these noticeable efforts, Serbia still faces some difficulties to achieve compliance with the main pollution control requirements specified in European Directives (Republic of Serbia, 2011). This noncompliance also results in failures to achieve the environmental objectives of the Water Framework Directive. (9) The same document recognizes nevertheless a reasonable level of compliance with the requirements of the Drinking Water Directive in most areas, although some serious problems of arsenic contamination have been noticed in some parts of Vojvodina.

    An efficient management of water resources requires a good understanding of water demands for all users (Renzetti, 2002). Demand-side water management has become now a crucial activity of water sector regulation in most of the countries. (10) More generally, water demand modelling has been shown to be a valid approach to examine the sensitivity of water consumption to weather and climate (Balling and Cubaque, 2009), or to understand how consumers may react, in the short-term or in the long-run, to changes in water pricing (Martinez-Espineira, 2007). It has also been used to compute consumer's welfare changes for different types of water management policies (Garcia and Reynaud, 2004).

    Surprisingly, and to our best knowledge, no estimate of the residential water demand function in Serbia has been published. (11) Our current work aims at filling this gap by providing the first estimate of the residential water demand function in Serbia. Providing some estimates of the price elasticity for the residential water demand in Serbia is relevant for a policy perspective. Indeed, one may expect in the future an increase in water prices in Serbia for several reasons. First, compared to similar countries, water prices in Serbia are quite low. (12) Second, according to the National Environmental Approximation Strategy for the Republic of Serbia, massive investments are expected to be realized by water utilities since much of the water supply and wastewater infrastructures have not been well maintained over the last decades (Topalovic et al., 2012). Third, still according to the same report, many public utility companies do not achieve cost recovery for the water services they provide, partly as a result of the relatively low tariffs they charge and partly because of lower than optimal scales of operation. (13) Our estimates of the Serbian residential water demand may then be used to assess how households will adjust their water consumption following the expected water price increases. Welfare implications could also be derived and used by public authorities in a cost/benefit perspective.

    The remainder of this article is organized as follows. Section 2 exposes the material and the methods, and we provide an estimate of the Serbian residential water demand in Section 3. Policy implications are discussed in Section 4.

  2. Material and methods

    2.1. The water demand function approach

    The water demand function approach relies on standard neoclassical economic assumptions. The utility of a representative consumer is maximised under a budget constraint and given prices of commodities. Thus the demand for a commodity depends on consumer's income, on price of all commodities, as well as on consumer preferences. Assuming weak separability of water with respect to other goods, the Marshallian demand in water can be written as:

    y = [y.sup.*] (p, I, Z) (1)

    where y is the water consumption either per capita or per household, p and I denote the unit water price (representing both water supply and the sewage treatment services) and the representative household income, respectively. Z is a vector of exogenous variables assumed to influence water consumption (i.e climate, household characteristics).

    Here, we are especially interested in providing empirical evidence on the relationship between water price and household water consumption, as well as the relationship between household income and household water consumption.

    A simple way to measure these relationships is to compute the price elasticity of the water demand:

    [[epsilon].sub.p] = [partial derivative][y.sup.*](*)/[partial derivative]p x p/[y.sup.*] (2)

    which measures the percentage change in household water use in response to a 1% change in price (all other things being equal, i.e. holding all the other determinants of demand, such as income, constant) and the income elasticity of the water demand:

    [[epsilon].sub.I] = [partial derivative][y.sup.*](*)/[partial derivative]I x I/[y.sup.*] (2)

    which gives the percentage change in household water use in response to a 1% change in household income.

    2.2. Data

    In Serbia, local governments are responsible for water and wastewater service provision through 152 public utility companies (World Bank, 2015). These utility companies are founded by municipalities but remain state-owned. Water prices are proposed by public utility companies but they must be approved by the municipal assembly. Water tariffs are typically revised yearly. At national level, the Ministry of Finance is responsible for final control of tariff revision (in accordance with the general price policy). Most of the utility companies charge water with two-part tariffs (one fixed charge and one marginal price). Tariff setting in Serbia has often been dominated by political and social considerations rather than public utility company operation, maintenance, and investment needs (UTVSI, 2007). As a result the price of water barely covers operating and maintenance costs (World Bank, 2015).

    The water sector is concentrated with 7 regional public utilities (including Belgrade waterworks) providing services to 31% of the population. Since there exists no consolidated database on household water use and price at the municipality-level for Serbia, we have worked at a more aggregated level. Our estimation of the residential water demand in Serbia is based on data at the district-level (oblast). For the 25 districts in Serbia, we have then collected data allowing to compute the average household annual water consumption per capita, the average unit water price paid by households and some average characteristics of households and districts supposed to be potential determinants of the residential water consumption. (14) These data have been collected on an annual basis from year 2009 to 2012.

    Our main source of information on household water consumption is the reports Eco Bulletins published each year by the Statistical Office of the Republic of Serbia. This publication provides each year at the district level the volume of water distributed by the public water network to residential water users. By personal communication with the Statistical Office of the Republic of Serbia we have also been able to get, per district and per year, the number of persons connected to the public water supply. This has allowed us to compute for each year and each district the water consumption per connected capita, see Table 1.

    Substantial variations in water consumption per capita across districts can be observed, for instance from 28.18 m3 per capita in the Toplicka district to 91.50 m3 in the Nisavska district, in 2012. Some differentiated temporal patterns emerge. Over the period 2009-2012, residential water consumption per capita has decreased by 3.9% in Serbia (unweighted average). The decrease is very substantial in the Zlatiborska or Pirotska districts (-20.4% and -17.2%, respectively). On the contrary, the Toplicka and the Pcinjska districts have experienced a high increase of the water consumption per capita (+28.1% and +20.1%, respectively).

    Finding reliable data on residential water prices at the most disaggregated level is a challenging task in any country. For Serbia, we rely on the publication Municipalities and Regions of the Republic of Serbia edited from 2010 to 2013 by the Statistical Office of the Republic of Serbia. We use the price paid by households for the water service (in euros per m3) provided for 15 Serbian municipalities from 2009 to 2012. The following table gives some basic statistics related to the residential water price for the 15 municipalities we have considered.

    As it can be seen in Table 2, the unit water price significantly varies across municipalities, for instance from 0.297 [euro] per m3 in Sabac to 0.589 [euro] per m3 in Novi Sad in 2012. In 2012, the price of drinking water and wastewater remains very low at 0.419 [euro] per cubic metre, representing approximately 1% of the average household budget. The temporal evolution also differs across municipalities. Whereas the water price has increased only...

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