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An application and assessment of the marginal productivity approach
Expanded Title:This study applies and assesses the marginal productivity approach to estimate the marginal value of industrial water use in South Africa, and the associated price elasticity of demand. Primary data was obtained from South African companies in the industrial sector by means of a structured questionnaire, which was distributed to a large number of companies in various ways. Fifty-six responses were received, of which 28 had to be omitted for various reasons (questions left blank, etc.), leaving 28 valid responses. In order to increase the sample size, this primary data was supplemented with secondary data from the annual reports and sustainability reports (or integrated annual reports) of a further 30 companies, giving rise to a sample of 58 companies in total. This study applied and tested the marginal productivity approach to estimate the marginal value of water to industrial users in South Africa, as well as the associated price elasticity of demand, based on a sample of 58 companies. The results indicate that the method is vulnerable to statistical issues such as multicollinearity, particularly in the presence of a relatively small sample size, which leads to unexpected results regarding the marginal value of water use. On the other hand, the estimated price elasticities of demand (in the range of -0.66 to -0.78) are in line with theoretical expectations and comparable to estimates for the industrial sector in other countries, and for other sectors in South Africa, and are fairly robust to changes in the specification of the model. The estimated elasticities suggest that, as expected, an increase in water prices would lead to a reduction in water use, all else being equal; although the percentage reduction in water use is comparatively lower than the percentage increase in price. This provides some evidence to suggest that an increase in water tariffs would lead to a reduction in water use among industrial users, although this reduction in water use would be outweighed by the increase in tariffs, such that total expenditure on water by industrial users (or total revenues received by the water services provider) would increase. However, water pricing is a sensitive issue, affecting various stakeholders. As such, policy recommendations cannot be made on the basis of this analysis alone; particularly given the limitations of the method (e.g. the possibility of multicollinearity), and of this study in particular (e.g. the relatively small sample size). Further research is therefore warranted. In particular, future research should be aimed at improving the method (e.g. by making adjustments to overcome the statistical issues, or making use of a larger sample size), or at identifying alternative methods. Furthermore, in addition to this purely micro-economic analysis, stakeholder consultation is essential, while the wider socio-economic and macroeconomic impacts of an increase in water prices need to be assessed. In summary, the information generated by this study should be seen as just one necessary, but certainly not sufficient, piece of information to be taken into account in formulating water pricing strategies. There is therefore a need to supplement and verify the preliminary findings of this study by means of further research, including industry-specific studies, making use of wider-ranging surveys of a much larger sample of companies; as well as meetings with various stakeholders in national government, local government and business. Finally, there is a need to model the wider socio-economic and macroeconomic impacts of an increase in water prices across different user groups, in order to assess whether the benefits of increasing water prices justify the costs.
Date Published:01/07/2013
Document Type:Research Report
Document Keywords:Policy and regulation
Document Format:Report
Document File Type:pdf
Research Report Type:Standard
WRC Report No:2103/1/13
ISBN No:978-1-4312-0456-6
Authors:Nahman A; de Lange W
Project No:K5/2103
Originator:WRC
Document Size:699 KB
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