The objective of this study is to support the reform of economic instruments for water resources management in Georgia. The study was implemented as part of the National Policy Dialogue (NPD) on water policy in Georgia conducted in co-operation by the OECD and supported by the EU-funded project “Environmental Protection of International River Basins (EPIRB)” under the pilot projects measures for Georgia. The work was financially supported by the European Union.

Georgia is well endowed with water resources and has no overall water scarcity. However, there is unsustainable abstraction of groundwater and surface water in a number of localities. Water variability, in the form of flooding and the occurrence of local and seasonal shortages, is a serious problem in many regions. There is an urgent need of better water resources management. This will require better and more systematic funding of these activities.

This chapter presents the key recommendations of the study and a shortlist of economic instruments identified following the assessment of the various options. The chapter describes the priorities in implementation of economic instruments reform and timetable. The draft Water Law is central to implementation of economic instruments for water management, hence top priority should go to completing its passage through parliament, leading to its eventual enactment. While this is on the critical path, a number of other actions need to be carried out in preparation for use of the economic instruments, each with its own timetable and duration, and involving different institutions and players. It also discusses some measures for serious further study and possible piloting within a longer time horizon, e.g. payments for ecosystem services, sharing costs and benefits in transboundary basins.

This chapter presents the context of Georgia’s commitments taken in the framework of the signed Association Agreement with the European Union in 2014. More specifically, the chapter analyses the set of EU Water Directive and some key provisions of the Water Framework Directive. It also considers the role of waterpricing policies to ensure adequate incentives for efficient water resources use, and thereby contribute to the environmental objectives. The chapter describes the current state of water problems and priorities in Georgia. It considers the issues like water quality which is an overriding concern, with widespread water pollution causing outbreaks of water-related diseases and harm to aquatic ecosystems, and water variability in the form of flooding and the occurrence of local and seasonal shortages. The chapter also discusses the need for water policy development in Georgia and the shortcomings of the current legal and institutional frameworks.

This chapter presents the purpose of economic instruments for water resources management and describes the main types of economic instruments, i.e. user charges, abstraction and pollution taxes, subsidies and penalties. The chapter also describes four broad principles used to justify the use of economic instruments for water management. The chapter discusses the current status of economic instruments in Georgia. At present, the country applies four categories of economic instruments for managing its water resources: fees for water abstraction, user charges for water supply and sanitation, irrigation water supply tariffs and fines for non-compliance with regulations concerning water resources. The chapter also discusses water pollution charges which were introduced in 1993 and then abolished in 2005.

This chapter analyses the options for reform of existing and introduction of new economic instruments for water management in Georgia. The analysis is organised according to whether the economic instruments are justified by the User Pays, Polluter Pays, Beneficiary Pays Principles, or as the creation of Pro-Environmental Incentives. The chapter discusses transboundary water issues which have major impacts on the political and economic relations between Georgia and its neighbouring states, specifically Azerbaijan and Armenia. This is due to their upstream/downstream geographical status, and their sharing of river basins and water bodies with common problems. Using economic instruments for water management in a transboundary context has specific challenges, additional to those arising in the national realm.

This chapter presents the evaluation and ranking of options for economic instruments reform in Georgia. A number of criteria were used to assess the final list of options: environmental, economic, social and fiscal impacts, cost-effectiveness, political acceptability, and their administrative and practical feasibility. The chapter discussed the options which are expected to have major benefits for water management and/or the natural environment. Whether a tougher licensing and higher charges for water abstraction and pollution would have economic impacts mainly on water- and pollution-intensive undertakings or not? Would the most serious social impacts arise from increases in water and sanitation tariffs and increased irrigation fees? Could social impacts be mitigated and compensated in various ways?

Armenia offers a natural comparator for Georgia. Its population is c. 3 mln (Georgia’s 4.3 mln), its area 30 000 sq.km. (Georgia 11 000 sq km) and GDP per head in PPP terms USD 7 780 (Georgia USD 7 160) (The Economist, 2015). 1 In addition, the climate, relief and other key geographical and environmental features of the two countries are not dissimilar (ADB, 2016).

Many countries use one or both of these charges as a means of managing their water resources and exhibit great variety in the scope, method and level of charges.