WFD – Economic Analysis

1.   Introduction

The Water Framework Directive (WFD) 2000/60/EC requires Member States to carry out the environmental and economic characterisation of all water catchments. The 2004 Water Policy Framework Regulations transposed under LN194/2004 on the 23rdApril 2003, requires the Malta Resources Authority and the Malta Environment and Planning Authority to undertake the economic study of the water catchment district as prescribed by the Directive

2.   The Different Functions of the Economic Analysis in the Water Framework Directive

The economic issues of the WFD are mainly dealt with in Article 5 (Economic analysis of water use), Annex III (Economic analysis) and in Article 9 (Recovery of costs for water services) of the Directive. However, economic elements are found in other parts of the Directive’s text. Overall, the main functions of the economic analysis include:

  • To carry out an economic analysis of water uses in the water catchment district;
  • To assess trends in water supply, water demand and investments;
  • To help the designation of protected areas by identifying economically significant aquatic species;
  • To designate heavily modified water bodies based on assessment of impact (including economic impact) on existing uses and costs of alternatives for providing the same beneficial objective;
  • To assess current levels of cost-recovery;
  • To support selection of programme of measures on the basis of cost-effectiveness criteria;
  • To assess the potential role of pricing in programmes of measures – implications on cost-recovery;
  • To estimate the need for potential (time and objective) derogation from the Directive’s environmental objectives based on assessment of costs and benefits and of costs of alternatives for providing the same beneficial objective;
  • To assess possible derogation resulting from new activities/modifications, based on assessment of costs and benefits and costs of alternatives for providing the same beneficial objective;
  • To evaluate costs of measures to identify cost-effective way to control priority substances.

3.   Economic Elements of the Water Framework Directive

Recover of costs of water services

Article 9 requires member states to ensure that by 2010 that water pricing policies act as an incentive for more efficient water use and thereby contribute to the environmental objective of the Directive. It also requires Member states to secure adequate contributions of different water uses (disaggregated into at least industry, households and agriculture) to the recovery of costs of water services. Article 9 permits also the continuation of established practices that are not in line with these two provisions, providing it does not compromise the achievement of the environmental objectives of the Directive.

Characteristics of the water catchment district, review of the environmental impact of human activity and economic analysis of water use

Article 5 of the Water Framework Directive requires an economic analyses of water use to be undertaken for the water catchment district by 2004, according to the technical specifications of Annex III of the Directive. The analysis should provide sufficient information to make necessary calculations in relation to Article 9, and to underpin an assessment of the cost effectiveness of different combinations of measures for achieving the environmental objectives of the Directive.

4.   The three-stepped approach

The guidance document on the economic elements of the Water Framework Directive sets out a three stepped approach to carry out the economic analysis in a logical way. The document, as endorsed by the EU Water Directors in June 2002, contains three key elements of guidance, commonly referred to by the acronym WATECO and listed below:

Step 1

Characterising in terms of water uses looking at both the economic importance of water uses and the dynamics of the water catchment in terms of expected changes in key economic drivers and driving forces.

Step 2

Identifying water bodies or groups of water bodies at risk of not achieving the environmental objectives of the Directive by 2015 – this step integrates the assessment of today’s pressures and impacts with the analysis of trends in key economic drivers and driving forces.

Step 3

Supporting the development of the programme of measures to be integrated into the river basin management plans through cost effective analysis and justifying from an economic point of view (cost and benefit assessment) possible  (time and objective) derogation.

Table 1 of the guidance document shows the key inputs required from the economic analysis and other disciplines throughout the three phases.

Key Inputs from the Economic Analysis Steps Key Inputs from other Disciplines
• Economic analysis of water uses;
• Assess trends and baseline scenario;
• Assess cost-recovery levels.
Step 1:
Characterising River Basins
• Assess key pressures and impacts (Annex II);
• Analyse point source and diffuse pollutions;
• Investigate future trends in key pressures.
• If no gap, estimate total costs of basic measures of baseline. Step 2:
Identifying Significant Water Management Issues
• Assess the impact of trends in pressures on water status;
• Assess environmental objectives and physicochemical, hydromorphological and biological indicators;
• Assess gap in water status;
• Identifying key pressures causing this gap
• Identify potential measures and assess their costs;
• Cost-effectiveness analysis;
• Economic input into the justification of derogation;
• Assess cost-recovery levels;
• Economic/financial impact of proposed programme of measures
Step 3:
Identifying Measures and Economic Impact
• Identify potential measures and assess their technical feasibility;
• Assess the effectiveness of individual measures/combined measures;
• Assess the remaining environmental impact.


5.   Terms of Reference for the 2004 Economic Characterisation (STEP 1)

As referred to in Article 5, of the WFD, December 2004 is the first milestone i.e Step 1 in the implementation process of the economic analysis. The analysis for 2004 will also identify activities for enhancing the economic-related information and knowledge base. This will ensure the economic characterisation can be improved and the follow up cost-effectiveness analysis can be adequately and timely performed by the publication of the draft water catchment management plan in 2008.

5.1   Objectives

The objectives of the first step of the Economic Characterisation is:

To prepare an economic analysis of water use in order to analyse:

  1. Current water uses and their economic importance;
  2. Future trends in key economic drivers up to 2015;
  3. Current cost-recovery levels of water services.

This step requires a high level of coordination with other disciplines and stakeholders to build a common knowledge and representation of the water catchment district.

5.2   Implementation details and proces

The methodological process that needs to be followed by the consultant and the tasks required are shown in the table below:

Stage/Process Tasks Information base
1. Undertake the economic analysis of water uses.

Assess how important water is for the economy and for the socio-economic development of the water catchment district.

Identify human pressures on water bodies;

1. Localise water uses in the river basin district;

2. Identify water uses and services by socio-economic sector (agriculture, industry, households and recreation);

3. Assess the relative socio-economic importance of water uses;

4. Identify areas designated for the protection of economically significant aquatic species.

1. Water abstractions and discharges by socio-economic categories and localisation;

2. Economic importance of main water uses: turnover, employment, income, number of beneficiaries;

3. Information (for example, quantity, prices or turnover depending on availability) for characterising economically significant aquatic species.

2. Investigate the dynamics of the water catchment. Projecting trends in key indicators up to 2015

Provide economic input into the development of the baseline scenario and the water-body risk assessment.

1. Assess trends of key hydrological and socio-economic factors/drivers that are likely to affect pressures (demography, climate, sector policies, e.g. common agricultural policy, technological development);

2. Identify proposed measures and planned investments for implementing existing water legislation;

3. Forecast changes in pressures based on changes in economic and physical drivers and proposed water-related measures;

4. Construct a Business As Usual scenario for pressures;

5. Conduct a sensitivity analysis on the baseline scenario and identify optimistic and pessimistic scenarios.

(NB Ensure coherence with projections and trends used for other river basins for national and EU policies and climate change.

The business as usual scenario may first build on certain changes and thus need to be updated beyond 2004 in order to integrate changes in uncertain parameters)

1.Prospective analyses of likely development of key economic sectors/economic drivers influencing significant pressures;

2.General information on population growth, economic growth, sector growth patterns, future policies and forecasts of the impact of climate change;

3.Inventory of existing measures (and costs) for complying with existing water legislation;

4. Identification of technological developments in the water sector.

3. Asses current levels of recovery of costs in accordance to Article 9 of the Water Framework Directive

Definition of cost-benefit by sector.

1. Estimates costs of water services, including financial, environmental and resource costs;

2. Estimate the price/tariff currently paid by the users;

3. Assess the extent of cost recovery by water service and sector;

4. Assess the contribution to cost recovery from key water uses;

5. If felt necessary, initiate review of incentive pricing properties of existing tariffs.

After December 2004, further refinement of cost-recovery and pricing assessment undertaken by December 2004, by developing studies on financial cost recovery and incentive pricing.

1. Estimation of financial costs (broken down in operating maintenance and capital costs);

2. Tax transfers, administrative costs and any other costs. (to be evaluated);

3. Environmental and resource costs as required. (to be evaluated);

4. Extent of financial and environmental cost-recovery;

5. If activities initiated for reviewing incentive pricing: current pricing structure and price elasticity, affordability criteria