The Relevance of Demographic Decline for Institutional Arrangements
and Resource Management in Supply Systems. An Economic Analysis
by the Example of the German Water Sector

Alexandra Lux

The initial question for the economic subproject in is, which relevance occurs from demographic decline for the supply with water services and the water resource management. By analysing the different influences of changes in population size and structure in water sector and resources, approaches for problem solving should be developed. Theoretical research is going to be supported by empirical examples of municipalities in Saxony-Anhalt (Germany). The objective is to find general suggestions for solving (future) problems of resource allocation in Germany and other European regions with population decline.

Up to now, the interdependencies between demographic change and network related infrastructure is hardly reflected. Yet the decline of population size and the decrease of population density are essential for the determination of needed water quantities as well as for the design of structures for freshwater supply and sewage processing. Furthermore, the societal valuation of water as a resource is more and more conducted under economic aspects; social claims and the ecological performance of the water sector seem to become less important. However, for estimating the water sector, not only the economic efficiency, but also the efficient maintenance of supply (with regard to quantity and quality of service) and the achievement of common welfare must be considered.

For supplying the population with water services, institutional structures were established in the past, which allowed the use of water resources for different purposes in several forms. These institutional structures are shaped by economic conditions (of a country, region, municipality or an utility company) as well as by demographic development. Nowadays, in industrialised countries new challenges for institutional arrangements in the water sector arise due to the demographic decline as well as the increasing economic valuation of water services: up to now, the institutional structures were geared to growth (in economies, population, consumption etc.). But under conditions of shrinkage these structures are loosing their efficiency. Modifications and enhancements seem to be necessary to ensure the sustainability of supply.

For planning processes in the water sector, the major problem is high insecure variables for predicting future water demands (e.g. per capita consumption could hardly be predicted for 50 years). Consequently, forecasts often fail. At the same time, a strategy must deal with the longevity of technical infrastructures (esp. service pipes, which have a durability of up to 40-100 years) and relies therefore on long-term predictions. This leads to the question, how planning instruments and implementation processes can cope with unpredictable developments, e.g. in consumption. A crucial point is to maintain a flexibility in the decision making process, and to maintain that flexibility even when these decisions have been made. The relevance of demographic changes for estimating future water consumption and water use patterns is to be analysed. The assumption is that changes in demand do not only cause technical but also economical problems within the infrastructure.

These problems arise within pricing water services: costs of water services are mostly fixed costs, whereas charging depends on consumption. In times of growth, the lack of congruency of cost and price structures does not lead to missing cost recovery – whereas it does, when the demand for water declines, because less consumption leads to fewer revenue. While demand is declining, a time lag occurs because price structures can only be adopted ex-ante. The challenge is to find pricing models that can handle with this transition period. Beside cost recovery, other pricing principles of the German water sector such as equivalency and equity should also be reconsidered.

The water sector could not exist without its natural foundations, the water resources. Thus, it should be evaluated to what extend new forms of demand-side oriented water management are necessary, when used patterns and structures of water demand are changing. Against this background, relationships between demographic changes, water supply, and water management must be seen as reciprocal.

Following the questions above, the economic subproject considers two central topics: on the one hand, the interdependencies of population or demographic changes within users and user groups and (economic) institutions. The assumption is that the latter are designed for times of growth, but they cannot deal with the shrinking phenomena. On the other hand, there are the indirect impacts of demographic changes on the allocation of water resources. These two topics are in most water usage contexts connected through the economy (i.e. it is assumed that the economy mediates between actors and resources).

November 2004