Cooperative water management in the Kura River basin 2016

Co-operative water management in the Kura River basin policy HIGHLIGHTs

in the Kura River basin

KEY MESSAGES •

Effective trans-boundary water management offers economic and environmental benefits to neighbouring countries with the framework and political will to cooperate. Georgia and Azerbaijan have taken proactive steps towards co-operation with regard to water management in the Kura river basin to realise these benefits.

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There are a number of pre-requisites to facilitate transboundary water management. Basic data in terms of water quality and quantity coupled with an inventory on water use are key to informing decision making. In addition, there must be information exchange protocols between neighbouring countries to derive maximum benefit from the data.

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This core technical data needs to be coupled with economic analysis to identify the economic opportunities and priorities for water management.

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The basic data and economic analysis must sit within an appropriate legal and institutional framework to be ultimately successful. This framework typically requires a specific intergovernmental body responsible for co-operative water management, appropriately qualified personnel within the sector and well structured economic instruments such as tariffs and charges to incentivise good water stewardship.

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Georgia and Azerbaijan have experience of addressing these issues over a number of years and this policy highlight summarises on this experience, reflecting progress to date and lessons learned.

policy HIGHLIGHTS

Co-operative water management

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OECD : Co-operative water management in the Kura River basin

Setting the scene a) The Kura river basin The basin of the river Kura is shared by Armenia, Azerbaijan, Georgia, the Islamic Republic of Iran and Turkey. The river is 1,515 km long; it originates in Turkey, on the north slope of the Allahuekber Mountains, and discharges to the Caspian Sea. The river basin is the home of 15.8 million people across the five countries. Agricultural land covers 61% of the river basin areas and forests and grassland cover 20% and 17% of the basin area respectively. At the regional level, water availability is variable. The mountainous areas of Armenia and Georgia enjoy abundant resources, while Azerbaijan is often faced with water scarcity. The agricultural sector is the largest water user in the area (UNECE, 2011).

This review focuses on co-operative water management in Georgia and Azerbaijan, which are neighboring countries hosting a significant stretch of the Kura River. The river flows across Georgia and into Azerbaijan, where it eventually flows into the Caspian Sea. The trans-boundary dimension of water management issues in the Kura-Aras river basin was investigated in 2006-071 and four high-priority issues were identified: (i) Variation and reduction in hydrological flow; (ii) Deterioration of water quality; (iii) Ecosystem degradation; and (iv) Flooding and bank erosion. The figure below illustrates in more detail some of the main water management issues affecting the main trans-boundary water bodies shared by Georgia and Tbilisi Azerbaijan (OECD, 2016).

Figure 1: Main trans-boundary water bodies shared by Georgia and Azerbaijan, and related trans-boundary water management issues (elaborated based on OECD, 2016).

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The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by the United Nations.

1 The Trans-boundary diagnostic analysis (TDA) by the UNDP/GEF funded project Reducing Trans-boundary Degradation in the Kura-Aras River basin.

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b) Co-operative water management in the Kura river basin: current gaps and challenges In the past, some regional projects tried to address the issues linked to trans-boundary water management in the Kura river basin. However, despite efforts already made, cooperative water management between Georgia and Azerbaijan (and generally in the Kura river basin) remains problematic, due to unresolved gaps and challenges summarised in the figure below.

Firstly, the type and magnitude of trans-boundary issues is still poorly understood: while it can be inferred that pollution in upstream Georgia is highly likely to affect

policy HIGHLIGHTS

OECD : Co-operative water management in the Kura River basin

Azerbaijan downstream, no actual measurement has been undertaken at the borders so far. Thus no actual data is available, for example, on the type and quantities of pollutants passing from one country to the other. Similarly, the actual contribution of erosion in Georgia to flooding events in Azerbaijan is not known. Basic data on water uses and water use inventories in the two countries is also missing.

This lack of basic data is exacerbated by the lack of common water quality and quantity standards, as well as by the lack of a protocol for information exchange between the two countries. This is a barrier to co-operative water management between the two countries.

Figure 2: Gaps and challenges of co-operative water management between Georgia and Azerbaijan

Lack of an appropriate legal framework for trans-boundary water management

Trans-boundary water management issues are still poorly understood

Lack of basic data and monitoring on water quality and quantity

Lack of economic thinking and economic information

No assessment of the economic benefits of transboundary co-operation

Absence of a specific intergovernmental body The development of energy and agricultural sectors can create conflicts among the countries Lack of common water quality and quantity standards Lack a protocol for information exchange between countries

Lack of qualified personnel

Negative effects on negotiations over trans-boundary projects and agreements

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OECD : Co-operative water management in the Kura River basin

The scarcity of primary data on water status and water uses also gives rise to a lack of good economic data on water uses and on the importance of water for national and regional economies. Ultimately, the lack of economic information results in a lack of economic thinking in water management, at the trans-boundary level and also at the national level. Nevertheless, some basic estimates of the expected benefits of trans-boundary co-operation could be carried out (sometimes quantitative, often qualitative). However, these estimates are not sufficient to provide a complete, realistic assessment of the economic benefits of water management. A comprehensive benefit assessment would be needed to be initiated and support the development of cooperative water management strategies. In the case of international shared water, the focus is on “benefit sharing� among countries, deriving from mutually beneficial co-operative action. Countries will rationally engage in trans-boundary cooperation only if they can obtain benefits which they could not obtain in the case of no co-operation. This means that cooperative action will yield specific benefits which could not be obtained otherwise (UNECE Working Group, 2013).

The lack of economic information also hampers the effectiveness of existing economic instruments for water management. As demonstrated later in this document, at present, some instruments exist at the national level, but these proved to be ineffective in achieving their declared objectives, for example: revenue generation, application of the polluter-pays principle and provision of an incentive for a more efficient water use (OECD, 2012).

The inadequacy of economic information on water management can also have consequences for negotiations over trans-boundary agreements.

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These gaps and challenges to co-operative water management are exacerbated by the lack of an appropriate legislative framework for trans-boundary water management, and by the absence of a specific intergovernmental body responsible for cooperative management. At the same time, the absence of a legal framework and a regulatory body prevents the development of shared databases on water status and uses, including the economic aspects of water management.

According to government officials responsible for water management in the two countries, the development of a bilateral agreement and of a trans-boundary intergovernmental body is in fact the first priority to be pursued in the trans-boundary co-operation in the short and medium term.

The creation of a specific intergovernmental body could also help to address an external challenge to co-operative water management. The development of the energy and agricultural sector could create conflicts between Georgia and Azerbaijan, which could hamper co-operation on water management. The existence of a bilateral agreement could counterbalance the negative effects of tensions between the two countries, and an intergovernmental water body could facilitate dialogue on water management.

Co-operative water management is also hampered by the lack of qualified personnel, which is affecting the public sector as a whole in these two countries. Good professionals can obtain higher salaries in the private sector. Addressing this issue, however, requires a crosssectoral intervention at the national level.

c) Current and future prospects for co-operative water management Georgia and Azerbaijan are taking concrete steps to address current gaps and challenges to trans-boundary co-operation.

In 2006, Azerbaijan and Georgia signed the European Neighbourhood Policy Action Plans with the European Union (EU). Under these plans, each country is committed “to identify possibilities with neighbouring countries for enhanced regional co-operation, in particular with regard to water issues�. The two countries are also committed to the implementation of the EU Water Framework Directive (WFD) and the development of River Basin Management Plans (RBMP), including for transboundary river basins.

The Caucasus countries committed to using the WFD principles as a basis for water management in the Kura river basin. National and regional roadmaps were developed (with support from the European Union)

for integrated water resources management (IWRM) in the trans-boundary Kura-Araks river basin in the three Caucasus states (including Armenia). Their aim is to strengthen the technical and legal basis for fullscale implementation of IWRM principles in the South Caucasus countries and to harmonise the preparation of RBMP in each national part of the basin, thus preparing the basis for a regional coordinated plan for the entire river basin.

So far, co-operation on water management has involved the key Ministries in the two countries (Ministry of Ecology in Azerbaijan and Ministry of Environment in Georgia), but also other ministries, such as, for example the Ministries of Agriculture, Energy and Infrastructure.

KEY POINT

Overall, the present and future prospects for trans-boundary co-operation on water management are positive: the two countries are working on a Trans-Boundary Agreement, which will provide the necessary regulatory framework for cooperation and, most importantly, will set up a Joint Commission on Sustainable Use and Protection of the Kura River Basin. The setting-up of the Commission is an important step in the co-operation process among the two countries: it will coordinate trans-boundary efforts and activities, filling an institutional gap that is currently a barrier to co-operation.

Nevertheless, some challenges to trans-boundary co-operation still need to be addressed for example the lack of qualified personnel within the responsible Ministries and Agencies.

policy HIGHLIGHTS

OECD : Co-operative water management in the Kura River basin

OECD : Co-operative water management in the Kura River basin

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The economic dimension of co-operative water management between Georgia and Azerbaijan

The economic dimension of co-operative water management, as investigated by the OECD, focuses on two main aspects: i) The role of economic thinking in informing the decisionmaking processes for co-operative management.

ii) The potential of a more co-ordinated approach to economic instruments for co-ordinated water management.

i) The role of economic thinking in informing the decision-making process for co-operative water management The lack of information on water status, water uses and, as a consequence, on the economic dimension of water management is a barrier to the development of co-operative water management. Water must be considered as both an economic and environmental good. As a consequence, targets and proposed actions must be aimed at maximising the benefits of transboundary co-operation.

So far, policy discussions, qualitative expert assessments and basic qualitative estimates suggest that a stronger co-operative water resource management in the Kura river basin could yield important benefits. The most significant potential benefits include: •

Efficient allocation of water resources among competing uses.

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Reduction of the costs of water management interventions at the river basin level and maximisation of benefits: coordinated water resource management is often more cost-effective than unco-ordinated action at the national level.

For example, joint investment in flood prevention measures in an upstream country (as it is the case of Georgia) would lead to significant cost savings in terms of avoided flood damages and avoided restoration measures after flood events downstream. In other words, this can also be defined as a more efficient allocation of water management interventions between the two countries.

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Political benefits from improved co-operation between the two countries.

However, only preliminary, often qualitative assessments of the benefits of co-operative water management could be conducted on trans-boundary

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KEY POINT

Overall, available results suggest that co-ordinated action to tackle trans-boundary water management issue can be more cost-effective than unco6ordinated action at the national level.

water bodies in Georgia and Azerbaijan: basic, quantitative data on water use (e.g. water inventories), as well as economic information and data were often missing. This highlighted the need to fill the data gap, starting from basic data, as the first step to be taken to enhance opportunities and prospects for trans-boundary co-operation.

The collection of primary data is strongly recommended as the first step towards the integration of economic thinking in the decision-making process for co-operative water management. This data collection incurs a cost, but it is a cost that can be compensated by the benefits of an effective co-operation.

Economics should inform the co-operative decisionmaking process from the very beginning, hand-in-hand with environmental data. The lack of economic thinking in water management can result in non-optimal water management choices, particularly if we think of transboundary water management as a way of addressing economic and environmental objectives at the same time.

Examples of the type of economic and quantitative information that would be required along the decisionmaking process are provided in the table below. The following box illustrates some practical lessons learnt in the case study on Jandari Lake on the potential benefits of co-operative water management.

Table 1: The importance and relevance of economic information in the decision-making process for co-operative water management

Steps of the trans-boundary decision-making process

Key questions to be answered

Quantitative/ economic information needed

1. Appraisal

Where is it worth cooperating?

Connection to the market

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OECD : Co-operative water management in the Kura River basin

Value of agricultural production And on which water management issues?

Financial change, political changes and accountability Environmental issues to be addressed

2. Setting targets

Which targets for co-operation?

The type of economic information needed depends on the main environmental issue(s) at stake.

3. Defining cooperation

Which actions?

Current water efficiency levels Measures to address inefficiencies of the system described in the previous phase

4. Implementation

What are the expected impacts?

Assessment of expected environmental, social and economic impacts

What are the expected costs?

Implementation and investment costs, operation and maintenance costs, transaction costs, social and environmental costs

What are the expected benefits?

Financial, economic, social and environmental benefits

Which mechanisms can ensure effective implementation?

The type of information depends on the type of intervention/ measures at stake.

Which accompanying measures?

5. Monitoring

Which cost-sharing mechanisms?

Share of costs and benefits by each countries

What are the observed environmental impacts?

The monitoring phase allows for collecting updated and reliable primary data on the implemented measures.

What are the actual costs?

What are the realised benefits?

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OECD : Co-operative water management in the Kura River basin

Case study: The role of economic information in the decision-making process of co-operative water management allocating water resources to conflicting uses from a trans-boundary water body Jandari lake is located across the border between Georgia and Azerbaijan, and it was selected as a case study by the OECD for the following reasons: (i) Georgia abstracts water from the channel feeding the lake, whereas Azerbaijan abstracts water from the lake – there are thus competing water uses in the two countries; (ii) the overall efficiency of water allocation needed to be investigated; and (iii) current abstraction practice poses concerns over decreasing lake levels (OECD, 2016).

The case study investigated options for implementing stricter abstraction limits on water users in the two countries, with the aim of indentifying the option in which the benefits of water use can be maximised, while minimizing the costs and impacts of reduced abstraction on users. For example, it can be expected that reducing abstraction can have less negative economic impact in the country with a less efficient irrigation system: here, irrigation efficiency can be increased, thus avoiding productivity losses for farmers.

However, the case study could not be fully developed, as basic information on water uses in the area –and thus on the economic value of water- were not available. The only benefits which could be quantitatively assessed were the expected benefits for water companies: with increased water network efficiency (and thus decreased leakages), water companies would still supply the same amount of water to farmers, but they would abstract and transport less water as compared to the current situation. This would lead to avoided operation and maintenance costs borne by the companies – these cost savings were estimated at approximately EUR 400 000 per year.

The case study also revealed that: •

From an economic perspective, agricultural activities in the Jandari area are not strategic economic activities in Georgia or Azerbaijan. Thus, investing in better water infrastructures alone might not bring significant economic returns, as it might not be the most efficient choice;

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Lack of data on crop patterns and water productivity in the area does not allow evaluation of whether the proposed abstraction reduction target are feasible and, most importantly, whether the proposed allocation is the most efficient one; and

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The lack of economic data on agricultural activities in the area, as well as their environmental impacts, does not allow a full assessment of benefit figures (e.g. no data was available on the total turnover of agriculture in the area).

As noted above, the first step is to understand where it is worth cooperating, and this can only be assessed by collecting and analysing economic information. Figure 3 below provides an example of the economic information that would be needed for this assessment: the example provided is a trans-boundary reservoir which is used as a source of irrigation water by two neighboring countries.

Figure 3: Sample economic information required to assess areas of cooperation

Connection to the market: • • •

BORDER

Existing infrastructures (e.g. roads) Existing trade flows Issues and opportunities

Value of agricultural production: •

Crop patterns and water requirements

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Which conflicts over water use?

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Crop productivity

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Which environmental issues to be addressed?

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Water productivity

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Annual GVA of production

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Share of total GDP or GDP produced by agriculture

GVA = Gross value added of water consumed in irrigated agriculture

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ii) Towards a co-ordinated approach to economic instruments for water management

Setting up effective economic instruments is crucial to ensure an effective implementation of co-operative water management.

Existing economic instruments and shortcomings

policy HIGHLIGHTS

OECD : Co-operative water management in the Kura River basin

Traditional economic instruments can be found in the two countries, and the application of these instruments is reviewed in the table below.

Table 2: Existing economic instruments in Georgia and Azerbaijan: overview of current situation and shortcomings and lessons learnt from the assessment Existing economic instruments

Overview of current situation

Policy message and lessons learnt

Abstraction and pollution charges

Existing charge levels are too low, so that the user-pays principle is poorly applied.

Charge levels are very low, so they cannot possibly reflect the environmental and resource cost of water abstraction, which are not known, and they do not provide an incentive for a more efficient water use.

Water tariffs

Tariffs and fees are generally low to very low in the two countries. The level of cost recovery proved to be partial or low, indicating that a significant share is financed by the state budget or by international donors.

There is an issue with respect to the financing of the water sector and cost recovery of water services, as they are currently not self-sustainable.

The low level of tariffs and fees also implies that the “user pays” principle is only partially or poorly applied depending in the cases, as users only contribute to a part of the costs of water services.

Fines and penalties for water users that do not comply with the existing regulation on abstraction and/or pollution discharges.

Fines and penalties also show a weak performance in terms of “polluter pays” principle: the level of existing fines, in principle, could be acceptable in most cases, but the level of enforcement was reported to be weak in both countries.

Low tariffs and fees obviously have a limited impact on users’ behavior, thus providing little incentive for a more efficient use of water resources.

Water discharging polluting substances over the legal thresholds have a low probability of paying a fine or penalty.

Thus these instruments provide very little incentive not to pollute.

KEY POINT

It was difficult to undertake a comparative assessment of existing economic instruments (and their performances) in the two countries as the information base is generally weak. With the view of developing a common approach to economic instruments at the regional scale, the improvement of the information base for the water sector is seen as a top priority.

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OECD : Co-operative water management in the Kura River basin

Towards a co-ordinated approach to reforming economic instruments

The reform of economic instruments at the national level represents a valuable opportunity towards an improved water management in the area, and in particular it can act as a fertile ground for:

Due to the complexity of the trans-boundary dimension, the creation of trans-boundary economic instruments seems unrealistic in the short and medium term. It is likely to encounter limited political acceptability and thus have low feasibility, and a significant discussion and negotiation would be required before this could happen. The Bilateral Agreement under discussion, as well as the proposed Joint Commission on Sustainable Use and Protection of the Kura river basin, is the first step to towards trans-boundary co-operation, and will provide the necessary institutional ground to co-ordinate actions in the medium term.

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The introduction of innovative economic instruments as a support to traditional ones.

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The development of national priorities for water management, which in turn could be discussed and harmonised at the river basin level.

While co-operative water management is likely to be achieved in the medium term, the review of existing economic instruments in the two countries revealed that significant improvements can already be achieved in the water sector at the national level. On-going initiatives in the two countries suggest that efforts are already being made in this direction.

Policy discussions between the two countries revealed, for example, a shared interest in improving abstraction and pollution fees, which might lead to the development of a common approach. The extension of water fees to non-consumptive uses, namely hydroelectric power production, was also identified as a regional priority, with both countries interested in this instrument. The hydroelectric sector is already strong in the region, and more power plants are planned for the future (e.g. in Georgia). The regulation of water use for energy production is thus becoming an essential component of a sound water management in the basin.

Figure 4: Proposed approach to continuing a regional dialogue on economic instruments for

water management, in light of recent institutional developments

National dialogue Establishment of nation-wide priorities Reform / Introduction of economic instruments at the national level

Provides input to

Co-ordination among the two dimensions

Establishment of common objectives at the river basin scale

Regional dialogue

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Introduction of economic instruments for transboundary water management

Actions taken at the national level, if properly co-ordinated between the two countries, therefore presents an opportunity in the short term that could lead to eventually to interventions at the trans-boundary level.

Further steps are proposed to continue a coordinated regional dialogue on economic instruments for water management between the two countries in light of recent

institutional developments, as presented in the figure below.

In the proposed iterative approach, national and regional dialogues are seen as components of the same process. They are highly interdependent, as the outcomes obtained at one level are envisaged to feed the other level, and reciprocally.

policy HIGHLIGHTS

OECD : Co-operative water management in the Kura River basin

KEY POINT

At the national level, the development and implementation of new economic instruments, as well as the reform of existing ones, can be targeted towards both national priorities and common objectives at the river basin scale.

Common water management objectives at the river basin scale can be defined in the context of the Bilateral Agreement. The Agreement will also set the legislative ground for further dialogue and action at the trans-boundary level.

At the trans-boundary level, shared objectives for water management will be the basis for the development and implementation of co-ordinated water management actions including economic instruments. The Joint Commission on Sustainable Use and Protection of the Kura river basin would then play a crucial role in: (i) facilitating the regional dialogue on economic instruments for water management; and (ii) guiding and managing the introduction of trans-boundary economic instruments.

In the co-ordinated development of economic instruments, the following must be taken into account: •

The reform of traditional economic instruments such as abstraction and pollution fees, water tariffs, fines and penalties, although necessary, is not expected to raise all the revenues needed for financing the water sector: the gap could be filled by innovative instruments (e.g. payment for ecosystem services, reducing taxes on water saving technologies, innovative pollution fund, among others), which would complement traditional instruments in raising financial revenues, in addition to providing incentives for more efficient water use. It is important to stress, that reforms of existing economic instruments, or the introduction of new instruments, will need to account for affordability concerns in particular for low income social groups.

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The design and implementation of innovative economic instruments (such as payment for ecosystem services, reducing taxes on water saving technologies, innovative pollution fund, among others) would require a thorough assessment of their feasibility in the national contexts, in particular concerning their social, political & economic acceptability. Specific attention needs to be given to legal issues and the assessment of the adequacy of the existing legal and institutional framework.

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The reform of existing economic instruments as well as the implementation of innovative ones must be accompanied by the implementation of mechanisms aimed at earmarking revenues from water management instruments, to allow reinvestment in the water sector.

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References OECD EAP Task Force (2016, forthcoming), Potential benefits of transboundary cooperation in Georgia and Azerbaijan in the Kura river basin.

OECD EAP Task Force (2012), Economic Instruments for Water Resources Management in Kura River Basin.

UNDP-GEF, 2008. “Reducing trans-boundary degradation in the KuraAras Basin” UNECE, 2011. Convention on the Protection and Use of Transboundary Watercourses and International Lakes. “Second assessment of trans-boundary rivers, lakes and groundwater”.

More information www.oecd.org/environment/outreach/partnership-eu-waterinitiative-euwi.htm EAP.Contact@oecd.org

Photo credits ©iStock.com/saiko3p ©iStock.com/Nutthavood ©iStock.com/Biskariot

This project was funded by the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety with means of the Advisory Assistance Programme for Environmental Protection in the Countries of Central and Eastern Europe, the Caucasus and Central Asia. It was supervised by the Federal Environment Agency (Umweltbundesamt, UBA).