1

SEEAW – Asset Accounts and ValuationSEEAW – Asset Accounts and Valuation Regional Workshop on Water Accounting Regional Workshop on Water Accounting

Santo Domingo, Dominican RepublicSanto Domingo, Dominican Republic

16-18 July 200716-18 July 2007

Michael VardonMichael VardonUnited Nations Statistics DivisionUnited Nations Statistics Division

OutlineOutline

• What do Asset accounts measure?What do Asset accounts measure?

• Basic definitionsBasic definitions

• Asset classificationAsset classification

• SEEAW standard tablesSEEAW standard tables

• Supplementary tables/informationSupplementary tables/information

• Breakdown of water flowsBreakdown of water flows

• Matrix of flows within the environmentMatrix of flows within the environment

What do asset accounts measure?What do asset accounts measure?

Asset Accounts describe in physical units

• The stocks of water resources

• The changes in stocks that occur during the accounting period (natural and anthropogenic changes)

They link information on abstraction and returns They link information on abstraction and returns with information on the stocks of water with information on the stocks of water resourcesresources

Hydrological cycle and water Hydrological cycle and water balancebalance

Water in the atmosphere

Water on land surface and sub-surface

Water in oceans and seas

Liquid/solid flows - precipitation

Vapour flows - evaporation, transpiration

Precipitation = Evapotranspiration + runoff +/- changes in storagePrecipitation = Evapotranspiration + runoff +/- changes in storage

Basic structureBasic structure

Closing Stocks

Opening Stocks

Increases in stocks due to human activities due to natural processes

Decreases in stocks due to human activities due to natural processes

1993 SNA Asset classification1993 SNA Asset classification

““Aquifers and other groundwater resources to the Aquifers and other groundwater resources to the extent that their scarcity leads to the extent that their scarcity leads to the enforcement of ownership and/or use of rights, enforcement of ownership and/or use of rights, market valuation and some measure of market valuation and some measure of economic control”. economic control”.

Thus only a small portion of the water resources Thus only a small portion of the water resources in a country is included in the 1993 SNA.in a country is included in the 1993 SNA.

SEEAW SEEAW

Water resources include water found in fresh and Water resources include water found in fresh and brackish surface and groundwater bodies brackish surface and groundwater bodies within the national territory that provide direct within the national territory that provide direct use benefits now or in the future (option use benefits now or in the future (option benefits) through the provision of raw material benefits) through the provision of raw material and may be subject to quantitative depletion and may be subject to quantitative depletion through human usethrough human use..

SEEAW asset classificationSEEAW asset classification

EA.13 Water Resources (measured in cubic EA.13 Water Resources (measured in cubic metres)metres)

EA.131 Surface waterEA.131 Surface waterEA.1311 Artificial ReservoirsEA.1311 Artificial ReservoirsEA.1312 LakesEA.1312 LakesEA.1313 Rivers and streamsEA.1313 Rivers and streamsEA 1314 Glaciers, Snow and IceEA 1314 Glaciers, Snow and Ice

EA 132 GroundwaterEA 132 GroundwaterEA.133 Soil Water EA.133 Soil Water

Asset accountsAsset accounts

EA.1311 Artificial

ReservoirsEA.1312

LakesEA.131

3 Rivers

EA.1314 Snow, Ice

and Glaciers

2. Returns from the economy3. Precipitation4. Inflows

4.a. from upstream territories4.b. from other resources in

5. Abstraction6. Evaporation/Actual 7. Outflows

7.a to downstream territories7.b to the sea7.c to other resources in the

EA.133 Soil

water

Millions cubic metres

8. Other changes in volume 9. Closing Stocks

Total

1. Opening Stocks

EA.131 Surface water

Decreases in stocks

EA.132 Groundwat

er

Increases in stocks

Water resources Water resources

Surface water: Surface water: water which flows over, or is stored on water which flows over, or is stored on the ground surface. the ground surface. It includes: artificial reservoirs, It includes: artificial reservoirs, lakes, rivers and streams, glaciers, snow and icelakes, rivers and streams, glaciers, snow and ice..

GroundwaterGroundwater: : water which collects in porous layers of water which collects in porous layers of underground formations known as aquifersunderground formations known as aquifers

Soil waterSoil water: : wwater suspended in the uppermost belt of soil, ater suspended in the uppermost belt of soil, or in the zone of aeration near the ground surface, that or in the zone of aeration near the ground surface, that can be discharged in to the atmosphere by can be discharged in to the atmosphere by evapotranspirationevapotranspiration

Water in oceans, seas and Water in oceans, seas and atmosphereatmosphere

……..not recorded in terms of stocks but only in ..not recorded in terms of stocks but only in terms of flows.terms of flows.

For example, abstraction from the seas, collection For example, abstraction from the seas, collection of precipitation, outflows to the seas, of precipitation, outflows to the seas, evaporation/evapotranspiration etc.evaporation/evapotranspiration etc.

Fresh and non-fresh waterFresh and non-fresh water

Water resources include fresh and brackish Water resources include fresh and brackish water.water.

Brackish water can be used with or without Brackish water can be used with or without treatment for some industrial uses or for treatment for some industrial uses or for irrigation purposes for some specific cropsirrigation purposes for some specific crops

Water resources can be further disaggregated Water resources can be further disaggregated into fresh and brackish water into fresh and brackish water

Stocks for riversStocks for rivers

It is not easy to define.It is not easy to define.The stock of a river should be measured as the The stock of a river should be measured as the

volume of the active riverbed determined on volume of the active riverbed determined on the basis of the geographic profile of the the basis of the geographic profile of the riverbed and the water level. riverbed and the water level.

This quantity is usually very small compared to This quantity is usually very small compared to the total stocks of water resources and the the total stocks of water resources and the annual flows of rivers. annual flows of rivers.

It can be avoided computing the stocks of riversIt can be avoided computing the stocks of rivers

Matrix of transfers within the Matrix of transfers within the environmentenvironment

EA.131 Surface water D e s tin a t io n :

O rig in

EA.1311 Reservoirs

EA.1312 Lakes

EA.1313 Rivers

EA.1314 Snow, Ice and Glaciers

EA.132 Groundwater

EA.133 Soil

water

Outflows to other

resources in the

territory EA.1311 Reservoirs EA.1312 Lakes EA.1313 Rivers EA.1314 Snow, Ice and Glaciers

EA.132 Groundwater EA.133 Soil water Inflows from other resources in the territory

Valuation of Environmental Valuation of Environmental AssetsAssets

• Why value environmental assets?Why value environmental assets?• Definitions of environmental assetsDefinitions of environmental assets

• Asset boundary between SNA and SEEAAsset boundary between SNA and SEEA• SNA asset classificationSNA asset classification• SEEA asset classificationSEEA asset classification

• Methods of valuationMethods of valuation• Net present valueNet present value• Other methodsOther methods

• Example: Valuing WaterExample: Valuing Water

Why value environmental Why value environmental resources?resources?

Efficient and equitable allocation of resources among Efficient and equitable allocation of resources among competing users, both competing users, both • within the present generation within the present generation • between present and future generationbetween present and future generation

Efficient and equitable infrastructure investment in the resource Efficient and equitable infrastructure investment in the resource sector (how much, where, when)sector (how much, where, when)

Design of economic instruments: pricing, property rights, taxes Design of economic instruments: pricing, property rights, taxes on depletion and degradationon depletion and degradation

Helps to ensure that the environment is included in decision-Helps to ensure that the environment is included in decision-makingmaking

Assets in the SNAAssets in the SNA

For an asset to be included in the SNA it must For an asset to be included in the SNA it must have: have:

• An identifiable owner who enforces An identifiable owner who enforces ownership rightsownership rights

• Be able to produced economic benefits for Be able to produced economic benefits for the owner by using or holding themthe owner by using or holding them

SNASNAEnvironmental Environmental AssetsAssets

AN.1 Produced assets

AN.11 Fixed assets

AN.111 Tangible fixed assets

AN.1114 Cultivated assets

AN.11141 Livestock for breeding, dairy, draught etc.

AN.11142 Vineyards, orchards and other plantations

AN.112 Intangible fixed assets

AN.1121 Mineral exploration

AN.12 Inventories

AN.122 Work in progress

AN.1221 Work in progress on cultivated assets

AN.2 Non-produced assets

AN.21 Tangible non-produced assets

AN.211 Land

AN.2111 Land underlying buildings and structures

AN.2112 Land under cultivation

AN.2113 Recreational land and associated surface water

AN.2119 Other land and associated surface water

AN.212 Subsoil assets

AN.2121 Coal, oil and natural gas reserves

AN.2122 Metallic mineral reserves

AN.2123 Non-metallic mineral reserves

AN.213 Non-cultivated biological resources

AN.214 Water resources

AN.22 Intangible non-produced assets

AN.222 Leases and other transferable contracts

Assets in SEEAAssets in SEEA

• SEEA expands the definition in the SNA to SEEA expands the definition in the SNA to cover all environmental assets used whether cover all environmental assets used whether they are owned or not providedthey are owned or not provided

SEEA SEEA Environmental Environmental AssetsAssets

EA.1 Natural resources

EA.11 Mineral and energy resources (cubic metres, tons, tons of oil equivalents, joules)

EA.12 Soil resources (cubic metres, tons)

EA.13 Water resources (cubic metres)

EA.14 Biological resources

EA.141 Timber resources (cubic metres)

EA.142 Crop and plant resources, other than timber (cubic metres, tons, number)

EA.143 Aquatic resources (tons, number)

EA.144 Animal resources, other than aquatic (number)

EA.2 Land and surface water (hectares)

EA.21 Land underlying buildings and structures

EA.22 Agricultural land and associated surface water

EA.23 Wooded land and associated surface water

EA.24 Major water bodies

EA.25 Other land

EA.3 Ecosystems

EA.31 Terrestrial ecosystems

EA.32 Aquatic ecosystems

EA.33 Atmospheric systems

Memorandum items: Intangible assets related to environmental issues (extended SNA codes)

AN.1121 Mineral exploration

AN.2221 Transferable licences and concessions for the exploitation of natural resources

AN.2222 Tradable permits allowing the emission of residuals

AN.2223 Other intangible non-produced environmental assets

How to valueHow to value

SNA is very clearSNA is very clear

• Market price should be the basis of Market price should be the basis of valuationvaluation

• Where market prices are unobservable or do Where market prices are unobservable or do not exist then economic theory may be used not exist then economic theory may be used to determine a “shadow price”to determine a “shadow price”

Shadow priceShadow price

• The true economic The true economic PRICEPRICE of an activity: the of an activity: the OPPORTUNITY COSTOPPORTUNITY COST. Shadow prices can be . Shadow prices can be calculated for those goods and calculated for those goods and SERVICESSERVICES that do that do not have a market price, perhaps because they are not have a market price, perhaps because they are set by set by GOVERNMENTGOVERNMENT. Shadow pricing is often . Shadow pricing is often used in used in COST-BENEFIT ANALYSISCOST-BENEFIT ANALYSIS, where the , where the whole purpose of the analysis is to capture all the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those variables involved in a decision, not merely those for which market prices exist.for which market prices exist.

Source: The EconomistSource: The Economistwww.economist.com/research/Economics/alphabetic.cfm?letter=S#shadowpricewww.economist.com/research/Economics/alphabetic.cfm?letter=S#shadowprice

Options for valuation – Options for valuation – SNA and SEEASNA and SEEA

SNASNA• Market priceMarket price• Net present valueNet present value• Cost of production (provides a lower bound)Cost of production (provides a lower bound)

SEEA describesSEEA describes• SNA methodsSNA methods• Revealed preferencesRevealed preferences• Stated preferencesStated preferences

Net present valueNet present value

The net present value of future expected The net present value of future expected earning can be used to determine asset earning can be used to determine asset valuesvalues

Net present value calculationNet present value calculation

• Net present value (NPV) of expected future Net present value (NPV) of expected future income streams income streams

Vt = Σ

Where V=NPV, RR = resource rent, r = discount rate, n =asset life

n RR

t=1 (1+r)n

Net present value calculations: Net present value calculations: resource rentresource rent

• Resource rent – the value of the flow of Resource rent – the value of the flow of capital services provided by a natural asset.capital services provided by a natural asset.

• RR = (p-c)*QRR = (p-c)*Q

Where RR = resource rent, p = unit price, c = unit cost Where RR = resource rent, p = unit price, c = unit cost (including wages, intermediate costs, normal return to (including wages, intermediate costs, normal return to produced capital, and taxes), Q = quantity extractedproduced capital, and taxes), Q = quantity extracted

Net present value calculations: Net present value calculations: asset lifeasset life

• This is the amount of time that the asset will This is the amount of time that the asset will continue to exist, given current rates of extractioncontinue to exist, given current rates of extraction

Volume of stock t1

Volume extracted t0 – t1

Asset life =

Net present value calculations: Net present value calculations: discount ratediscount rate

• Choosing an appropriate discount rate Choosing an appropriate discount rate is crucial to the NPV calculation. is crucial to the NPV calculation. An An area of debatearea of debate

• Rate used differs between countriesRate used differs between countries

• The higher the discount rate, the lower The higher the discount rate, the lower the NPVthe NPV

Concerns about usingConcerns about using ‘non-market ‘non-market valuation’ techniquesvaluation’ techniques

1.1. Accuracy of values and cost of Accuracy of values and cost of valuationvaluation

2.2. Consistency of value concepts with Consistency of value concepts with SNA SNA

3.3. Aggregation: scaling up site-specific Aggregation: scaling up site-specific valuesvalues

Accuracy of non-market Accuracy of non-market valuationvaluation

• Data requirements are very high, so valuation is Data requirements are very high, so valuation is costlycostly

• Value is often uncertain, very sensitive to Value is often uncertain, very sensitive to assumptions assumptions

• Results are often presented as a range of values Results are often presented as a range of values rather than a point estimate, a single valuerather than a point estimate, a single value

• Values are most reliable for water used as input toValues are most reliable for water used as input to• agriculture, agriculture, • hydroelectric power and other uses where water hydroelectric power and other uses where water

is a major component of production costsis a major component of production costs

Concepts of valueConcepts of valueConsistent with the SNA?Consistent with the SNA?

In principle, SNA measures market values, or In principle, SNA measures market values, or sometimes cost of productionsometimes cost of production

Many valuation techniques were developed for Cost-Many valuation techniques were developed for Cost-Benefit Analysis of projects (not national Benefit Analysis of projects (not national economy):economy):

• CBA often tries to measure of economic CBA often tries to measure of economic welfare (total economic value) not market pricewelfare (total economic value) not market price

• Programming models measure values in an Programming models measure values in an optimizing economy which usually differs from optimizing economy which usually differs from actual economyactual economy

Aggregation and national Aggregation and national accountsaccounts

• Some values highly site-specific, dependent Some values highly site-specific, dependent on local uses, as well as season, water quality on local uses, as well as season, water quality and reliabilityand reliability

• Values are not amenable to ‘benefits Values are not amenable to ‘benefits transfer’—using an estimate from one case transfer’—using an estimate from one case study for another areastudy for another area

• Little experience scaling up local values to the Little experience scaling up local values to the national levelnational level

Revealed PreferenceRevealed Preference(based on observed market preferences)(based on observed market preferences)

Residual valueResidual valueMarginal contribution of water to output, measured by Marginal contribution of water to output, measured by subtracting all other costs from revenuesubtracting all other costs from revenue

Production function approachProduction function approachMarginal contribution measured as the change in output from a Marginal contribution measured as the change in output from a unit increase in water input in a given sectorunit increase in water input in a given sector

Optimization models and programmingOptimization models and programmingMarginal contribution measured as the change in sectoral output Marginal contribution measured as the change in sectoral output from reallocation of water across the entire economyfrom reallocation of water across the entire economy

Hedonic pricingHedonic pricingPrice differential paid for land with water resources Price differential paid for land with water resources

Opportunity CostOpportunity CostPrice differential for alternative (example: replacing Price differential for alternative (example: replacing hydroelectric power with coal-fired electricity)hydroelectric power with coal-fired electricity)

Stated PreferenceStated Preference(based on surveys of willingness to pay)(based on surveys of willingness to pay)

Contingent Valuation Method Contingent Valuation Method • Survey of users, especially household water Survey of users, especially household water

use and recreational servicesuse and recreational services

Valuing water and treating it an Valuing water and treating it an economic good has strong supporteconomic good has strong support

• In Integrate Water Resource managementIn Integrate Water Resource management• 2002 World Summit on Sustainable 2002 World Summit on Sustainable

Development in JohannesburgDevelopment in Johannesburg• 2003 Third World Water Forum2003 Third World Water Forum• 2006 World Water Development Report2006 World Water Development Report• Human Development Report 2006 Human Development Report 2006

Beyond scarcity: power, poverty and the Beyond scarcity: power, poverty and the global water crisisglobal water crisis

SNA values water at price of SNA values water at price of transaction. There are some prices transaction. There are some prices for water, so why may it be for water, so why may it be inappropriate use these?inappropriate use these?

• Because the price charged by water suppliers—if any—is Because the price charged by water suppliers—if any—is often unrelated to value of water, and may be too lowoften unrelated to value of water, and may be too low

• ‘‘Bulky’ commodity (very high transport costs relative to Bulky’ commodity (very high transport costs relative to value inhibiting trade)value inhibiting trade)

• Water price often does not even reflect full costs of water Water price often does not even reflect full costs of water supplysupply

• Water is not supplied by competitive markets due to natural Water is not supplied by competitive markets due to natural characteristicscharacteristics• Necessary for human survival Necessary for human survival • Natural monopolyNatural monopoly• Characteristics of public goodCharacteristics of public good• Property rights not always well defined for multiple use Property rights not always well defined for multiple use

or sequential useor sequential use

Some markets for trading water Some markets for trading water rights are developingrights are developing• Australia, Australia,

• CaliforniaCalifornia

• ChileChile

• but still uncommon, localbut still uncommon, local

Price of tradable water rights does not yet provide a reliable Price of tradable water rights does not yet provide a reliable indicator of value because markets too ‘thin’ (too few indicator of value because markets too ‘thin’ (too few traders)traders)

So we must estimate or impute economic value of waterSo we must estimate or impute economic value of water

Most commonly used water Most commonly used water valuation techniquesvaluation techniques

Frequency of water valuation studies Most common methods used

Residual value (and variations)Production functionProgramming models

Manufacturing Uncommon Production function, programming

Hydroelectric power CommonProgramming models, opportunity cost

Consumer good Common CVM, programming modelsWaste assimilation services Common

Cost of prevention, Benefits from damages averted

Agriculture Most common application

Residual Value (Value Marginal Product)Residual Value (Value Marginal Product)The easiest & most commonly applied valuation The easiest & most commonly applied valuation techniquetechnique

wherewhere TVP = Total Value of the commodity Produced TVP = Total Value of the commodity Produced p piiqqii = the opportunity costs of non-water inputs to = the opportunity costs of non-water inputs to

production production p pww = value of water (its marginal product) = value of water (its marginal product)

q qww = the cubic meters of water used in production = the cubic meters of water used in production

NNon-water inputs include:on-water inputs include:intermediate inputs, labor, capital costs, landintermediate inputs, labor, capital costs, land

wwii qpqpTVP

w

iiw q

qpTVPp

Challenges to Implementing Challenges to Implementing Residual Value TechniqueResidual Value Technique

• Is the quantity of water measured accurately?Is the quantity of water measured accurately?

• Is labor cost accurate—how to value unpaid family labor?Is labor cost accurate—how to value unpaid family labor?

• Value of land—minus water rightsValue of land—minus water rights

• Capital costsCapital costs• Are all capital costs accounted for accurately?Are all capital costs accounted for accurately?• What rate of return to capital should be used?What rate of return to capital should be used?

• Are there other inputs that have not been included?Are there other inputs that have not been included?

• Do the prices of output & all inputs reflect true economic Do the prices of output & all inputs reflect true economic value, or are they distorted?value, or are they distorted?

Example: Agricultural water use in Example: Agricultural water use in Namibia (Stampriet area)Namibia (Stampriet area)

Farm revenue & costs (in 1999 Namibia $)Farm revenue & costs (in 1999 Namibia $) Data sourceData source

Gross farm incomeGross farm income $ 601,543 $ 601,543 Output x market prices from surveyOutput x market prices from survey

Inputs of goods and servicesInputs of goods and services $ 242,620 $ 242,620 Inputs x prices from surveyInputs x prices from survey

Value-added, of which:Value-added, of which: $ 358,923 $ 358,923

Compensation of employeesCompensation of employees $ 71,964 $ 71,964 Wages paid + in-kind payments from surveyWages paid + in-kind payments from survey

Gross operating surplus, of Gross operating surplus, of which:which: $ 286,959$ 286,959

Imputed value of farmers’ Imputed value of farmers’ labourlabour $ 48,000 $ 48,000

Imputed based on average salary of hired farm Imputed based on average salary of hired farm managermanager

DepreciationDepreciation $ 66,845$ 66,845Depreciation rates x Farmers’ estimated cost of Depreciation rates x Farmers’ estimated cost of

capital in surveycapital in survey

Cost of working capitalCost of working capital $ 17,059 $ 17,059 Imputed as % of the value of fixed capitalImputed as % of the value of fixed capital

Cost of fixed capital Cost of fixed capital including land, 3% -7%including land, 3% -7% $75,739 to $176,724$75,739 to $176,724

Based on farmers’ estimated cost of capital Based on farmers’ estimated cost of capital reported in surveyreported in survey

Residual value of waterResidual value of water $79,316 to -$21,669$79,316 to -$21,669

Amount of water used (m3)Amount of water used (m3) 154,869154,869 Farmers’ “best guess;” water is not meteredFarmers’ “best guess;” water is not metered

Residual value N$/m3Residual value N$/m3 $0.51 to -$0.14$0.51 to -$0.14

Net present value of hydropower Net present value of hydropower & geothermal in New Zealand& geothermal in New Zealand

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,50019

87

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Mil

lio

n N

Z$

Geothermal

Hydropower

Approach Environmental Valuation Approach Environmental Valuation CautiouslyCautiously

Value consistent with SNA: include all values Value consistent with SNA: include all values but indicate type of value and robustnessbut indicate type of value and robustness

Accuracy/uncertainty: start with major uses Accuracy/uncertainty: start with major uses that are easiest to value & indicate range of that are easiest to value & indicate range of valuesvalues

Aggregation: implement valuation at Aggregation: implement valuation at local/river basin levellocal/river basin level

Asset value: begin with resources with single Asset value: begin with resources with single or few uses that can be easily valuedor few uses that can be easily valued

AcknowledgementAcknowledgement

Many thanks to Glenn-Marie Lange for allowing me to use some material from Many thanks to Glenn-Marie Lange for allowing me to use some material from her presentationsher presentations

Glenn-Marie LangeSenior Research ScholarThe Earth Institute at Columbia UniversityCenter for Economy, Environment and Society2910 Broadway, Room 110New York, New York 10025 Cell phone: 1-718-290-0454Phone: 1-212-854-3533Fax: 1-212-854-6309http://www.earthinstitute.columbia.edu/cgsd/lange.html