4. An approach for how MENA could lead the world in building new institutions to manage water scarcity

illegal wells. Even if governments can enforce compliance by using the coercive power of the state, widespread lack of legitimacy is a threat to stability and can inhibit government policymakers from taking necessary, but difficult (because they imply loss of livelihoods for farmers, for example), decisions over the management of water.

Trust consists of beliefs or expectations among people about whether others are behaving in cooperative ways for mutually beneficially outcomes, versus the opposite—non-cooperative ways where each person’s actions results in losses on all sides. For example, corruption is one manifestation of lack of trust. If people believe that others are likely to be extracting rents in the public sector (low trust that others are behaving honestly), they are likely to behave in the same way, even though everyone realizes that corruption is bad for the economy. Trust can be examined in the water sector as the core of why utility reforms are so difficult—whether it is tariff reforms to cover utility operating costs; or reducing water leakages and wastage (non-revenue water); or attracting long-term financing to build infrastructure. If utility staff do not trust that their peers are performing their tasks professionally, such as by holding-up decisions, or not completing their assigned tasks on time or effectively, then they are likely to behave the same way, yielding outcomes of poor utility performance. If citizens believe that utilities are not pricing water services fairly, and cannot be trusted to use revenues to improve service delivery, then they are likely to protest tariff increases, contributing to a vicious cycle of low performing, bankrupt utilities.

These seemingly abstract concepts of legitimacy and trust have real implications for the most pressing economic questions facing not only MENA’s leaders but global financial markets. For example, why is global capital “frozen” and not flowing to finance much-needed, long-lived infrastructure for water in MENA? Global capital is not flowing sufficiently to finance water infrastructure in MENA because investors are not assured of recouping steady returns. Returns to capital are risky because available evidence suggests that the infrastructure that would be financed is not well managed for cost efficiency and revenue raising potential. “Privatization” is neither easy nor a panacea (nor proven to improve outcomes). Attracting private investment, while representing citizens’ interests in the face of monopoly power, requires a legitimate or credible policy environment, trusted and trustworthy state agencies. Legitimacy of the policy environment, and citizen trust in the state are low.

4. An approach for how MENA could lead the world in building new institutions to manage water scarcity

The problems of legitimacy and trust can be understood using an economic framework of interaction between thousands and millions of actors, from citizens and society, to political and national leaders, to senior managers of public utilities, to frontline staff engaged in managing water resources and water service delivery.11 Insights emerge from structuring the behavior and actions of these different types of actors into interdependent “principal-agent” problems in which one type of actor, the agent, takes actions on behalf of, or at the behest of another, the principal. Public policies, including for water, are selected and implemented by the state within the following principal-agent relationships illustrated in Figure 8: (i) between citizens, or society, or the sovereign in a MENA context, and political leaders, (ii) between political leaders and public officials who lead government agencies, and (iii) between public officials and frontline providers. These principal-agent relationships are a formal way of thinking about the social contract.12

11 The framework draws upon recent advances in the economics of institution (reviewed in World Bank, 2016; World Bank, 2017, Khemani, 2019, Dal Bo and Finan, 2020), and its application to infrastructure and environment (Estache, 2020; Somanathan, 2020). 12 This figure also shows citizen engagement, to monitor frontline providers and participate in service delivery. Public officials in leadership positions can engage the help of citizens to pressure service delivery cadres to perform better.

A powerful insight emerging from this framework is Figure 8. Principal-Agent relationships of government the fundamental role of political contestation, and the communication that happens in society among citizens, and between citizens and leaders, in shaping beliefs about how others are behaving towards the state. Politics Citizens casts a long shadow on each of the principal-agent relationships—clearly, on what citizens expect from the state (legitimacy of tariffs and water regulations); and, on the incentives of managers and frontline officials in state Political agencies (such as, whether their appointments and careers leaders are derived from patronage or wasta, or whether they are held accountable by political leaders for performance). Even reform-oriented and well-intentioned leaders, who are authorized by the ultimate sources of political power to improve performance, will struggle with prevailing low levels of legitimacy and trust.

Political leaders Public officials

Public officials

Principal

Agent Frontline providers

Sovereign

Citizens monitoring and feedback

New ideas emerging from economic research, on how changes come about from low to higher levels of legitimacy and trust, can be applied to the context of MENA. Specifically, existing forces of local political contestation—at subnational levels such as districts, municipalities or communes—can be used to change beliefs and expectations about how others are behaving. Decentralization of certain tasks of water services, management and allocations to locally elected government agencies, and communication campaigns about how local leaders can improve outcomes, could work within a national policy framework to change how people behave throughout the chain of principal-agent relationships.

Local government agencies contain the potential for building legitimacy through local political processes. This potential could be harnessed through a national water strategy, including strategically designed local communication campaigns around current water allocations and water balance, and complementary policies of social protection for distressed farmers. A large body of evidence has shown that communication can work to nourish forces of local political contestation to strengthen incentives and norms in government for public good policies (World Bank, 2016). Communication is a key complement to enable existing forms of local political contestation to move away from patronage, tribalism or vote buying, to issues of the public good.

Communication to nourish local political contestation can enable good quality local-level leaders to emerge who help with utility-level outreach to citizens. Such outreach can be combined with tariff structure reforms that attend to equity and justice considerations, such as block tariffs where the first block of minimum water quantity to sustain basic living conditions is ensured at low tariff and can be financed through generalized taxation. This is simply an example of a variety of tariff options, and how utilities can be financed through a combination of tariffs, fiscal transfers and debt, that could help overcome the problems of legitimacy and trust (World Bank, 2022).

In addition to the insight about the fundamental, cross-cutting role of political contestation for winning legitimacy and trust across a swathe of policies, in water and beyond, institutional reforms in water can be approached by thinking about the “tasks” assigned to different government agents within the interdependent principal-agent framework of Figure 8. The key idea is to assign the responsibility and authority over these tasks based on variation in informational advantages across agents. Table 1 lays out this task-based approach to institutional reforms, and the role of decentralization to locally elected governments.

With regard to tasks of managing the allocation of water as a resource, the basic principle is the same as the one being used in carbon emission abatement policies of “cap and trade”: that is, to enable those agents who have more information and expertise on how to reduce carbon emissions to do it in least cost ways. However, the execution of the principle—of giving decision-making power to agents according to their information advantage—would be substantially different in the case of the water sector. In water, and especially in the institutional context of MENA, the proposed policy relies on agents within government as representatives of the people to both devise the caps using climate and water science, and to decide whether and where to engage in trade/exchange of water.

Local governments, as representatives of the communities they serve, would employ decentralized information about the relative value of water to farmers and urban residents within their jurisdiction to identify potential gains from trade, while national government agencies would set the “caps” to which each local government would need to adhere. Aggregate “macro” calculations about the status of water resources in a country, and the science of its sustainability into the future, can be used to set limits, or caps, on the amounts of water that can be consumed, abstracted, and polluted by different local jurisdictions. These caps would be enshrined in a national water strategy, through which national ministries would hold local government authorities accountable for adhering to national regulations over water use. Local government authorities, in turn, would be empowered to enter into trades with each other, using their water entitlement under the national strategy as a starting point. Local governments would be held accountable by their constituents over their performance in managing these water entitlements, including for identifying any opportunities for gains from trade in water between and within local government areas.

As with the principle of “cap and trade” that is applied in practice of carbon abatement policies, the idea proposed above is rooted in economic logic. Just as the application of cap and trade in energy markets has resulted in both successes and failures, and depends upon a variety of conditions in energy markets, so too is variation to be expected in the application of the logic to water. Outcomes of water management under a local government cap and trade framework proposed here would depend upon the actual behavior and performance of local government agents. The key to whether good outcomes are obtained depends upon the capacity of local government officials, and the functioning of the local political market. If local political contestation yields leaders who protest the caps imposed, or who capture the water entitlements to benefit local elites while leaving their constituents impoverished and insecure, the state would remain in its existing predicament. Even with well-intentioned local leaders, local governments can lack the basic capacity to undertake new tasks assigned to them. The idea is that focused policy attention can go towards harnessing the potential of local political markets, where forces of contestation are already at play, to yield high quality local leaders who can employ local information to win legitimacy and economic efficiency. Focused policy attention would also be needed to build capacity of local government organizations.

For the tasks of water service delivery, trusted and trustworthy WSS and irrigation utilities may be built through complementary reforms in wage contracts, career paths, and management. Growing evidence suggests that giving greater autonomy to staff managing complex organizations can improve outcomes, consistent with economic research on the productivity and performance of complex organizations (Khemani, 2019 provides a review). Communication is, once again, a key complement to strengthen professional norms and peer pressure for better performance within organizations.

While the ideas presented above are new in the sense that they are drawn specifically from recent research advances on how government institutions function, and on a constructive role for politics, many aspects of these ideas have been

debated and experimented with in the policy corridors of MENA. Iraq, for example, has been debating decentralization for decades, and has engaged provincial and local governments in different ways to manage water resources (Fleet, 2019; World Bank, 2020). Morocco, too, has been considering and actively moving towards greater empowerment of elected bodies at both regional and municipal levels (Ben-Meir, 2021). Apart from decentralization, reforms of utilities to improve their performance and enable them to access external financing, are being tried out in the UAE (Dubai Electricity and Water Authority 2019).

Table 1. Assigning tasks of water allocation according to informational advantage of different types of government agencies

Task

Understanding the “water balance”, and what overall restrictions on water consumption are needed to sustain the resource into the future.

Information needed to perform task Highly specialized scientific information about climate, temperature, precipitation patterns, and other external conditions that shape the availability of water.

Type of government agency with informational advantage Autonomous national technical agency.

Output expected

Credible information about the state of water resources. Credibility would be derived from the extent to which the agency functions according to technical expertise, and is not tasked with allocation decisions (which is inherently political).

Task of developing a national water strategy— how much the country would invest in water infrastructure, how it would finance the infrastructure, where the infrastructure would be located, how the country would negotiate transboundary water treaties. National information about internal budgets, ability to borrow in international markets, attract foreign assistance, geo-politics of transboundary negotiations. National water ministry, drawing authority from the highest source of political power. Caps—water entitlement—available to each local government area within a country. Selection of level of local government to be specific to country context. Selection on the principle of the lowest level existing local government jurisdiction which encompasses at least one city and at least some agricultural areas. Selection matches local government with the infrastructure nodes through which water can reach the places and people they represent. Caps assigned in the context of those nodes. That is, national ministries can design the water “market” tailored to their institutional context of where local governments exist, and where water infrastructure exists for local government caps to be established and monitored, and any trade between local governments to be effected. Delegation to technical agency (described above) of the task of monitoring and measuring local government compliance with caps. Delegation to local governments of the tasks of managing the allocation of water within their caps. Communication of the strategy to the people through media and local government townhall meetings.