Irrigation Pricing in Developing Countries
Introduction
Irrigation is crucial for improving agricultural production and productivity in developing countries, especially in South and Southeast Asia.
It was essential for the Green Revolution in Asia.
Irrigation development and management will remain important due to agriculture's role in providing employment, generating GNP, and reducing poverty and malnutrition.
Asian countries aim for food self-sufficiency, particularly in rice, a water-intensive crop, for political and food security reasons (ADB and IIMI, 1986).
Increased output from irrigated land is necessary to meet projected food needs.
Further irrigation development faces increasing capital costs as easy projects have been developed.
Limited domestic and international resources require attention to generating financial resources for operation and maintenance and recovering past capital investments.
Past investments in irrigation have not yielded good dividends due to suboptimal utilization of facilities, especially in government-owned systems.
Cost recovery from farmers has been low; revenue often doesn't cover operation and maintenance expenses.
Reasons for suboptimal utilization and lack of cost recovery include improper water pricing, inadequate attention to water charges, and poor operation and maintenance.
The Role of Government in Irrigation Development and Allocation
Government involvement in agricultural inputs varies, being significant in supplying irrigation water from medium and large surface irrigation projects.
The need for government involvement arises from socioeconomic, engineering, and institutional aspects of irrigation development.
Surface irrigation water has characteristics necessitating it being a publicly supplied intermediate input.
For free market determination of surface irrigation water development and allocation, a system of pure private property rights is needed, which is rare.
Requirements for such a system:
Certainty: Well-defined property rights in terms of quantity, quality, location, and time of use.
Transferability: Easy and low-cost transfer of water rights.
Externality: Absence of spillover effects on others' property.
Competition: Competitive forces on demand and supply sides (OECD, 1987).
Water rights systems include:
Riparian rights: Linking water use to adjacent land ownership, common in humid areas.
Public allocation: Government allocates water based on priorities.
Appropriation doctrine: Water right acquired by actual use over time.
None of these systems fully meets the requirements of pure private property rights.
Riparian rights can lead to court battles over water ownership, disadvantaging the poor (OECD, 1987).
This can lead to public or government control of water, selling rights through pricing or distributing through administrative decrees.
Redistribution of rights can be based on:
First-come/first-served system.
Estimated social worthiness.
Redistribution of income.
Improvement in economic status of backward regions or less-privileged groups.
Government-dictated cropping patterns.
Society's need to control water for changing social goals may prevent water rights transfers, hindering market forces.
Government involvement is also justified by significant economies of scale in storage, conveyance, and distribution of irrigation water.
Government management can reduce uncertainty from variable supply in time, space, and quality.
Solutions often involve non-rival consumption benefits, exhibiting public good characteristics (Young, 1986).
Effective handling of externalities, especially environmental ones, is another reason for government involvement.
Attainment of social objectives like income redistribution, food self-sufficiency, and sustainable agricultural production also justify government intervention.
Overall objectives behind government intervention in irrigation development and management include:
Economic efficiency in using scarce irrigation water resources (static and dynamic).
Attaining specific equity objectives like income redistribution.
Meeting merit wants like food production self-sufficiency and environmental stability.
The importance of these objectives varies across countries and projects.
Equity objectives are often stated for political reasons; irrigation distribution policy rarely achieves them.
The proportional equality principle in government-owned systems can perpetuate or increase inequality in agricultural income and assets (Sampath, 1988a and 1990b).
Economics of Irrigation Pricing
Prices distribute limited goods and services and determine resource allocation among competing uses.
Specific functions of irrigation water pricing:
Influence efficiency in irrigation water supply and use.
Affect equity of distribution in terms of income and cost recovery.
Efficiency
Efficiency can be discussed under four situations:
Short run with limited water availability: Maximize net benefits to society by ensuring the social marginal value of irrigation water is the same across user groups. Reallocation can increase net social benefits.
Short run deciding whether to increase supply from a given system: Increase supply if additional social benefits exceed additional social cost.
Medium term expanding the supply system by allocating capital to new projects: Additional investments are warranted if social returns exceed social costs at the margin.
Long run deciding the optimal level of investment in the irrigation sector: In deciding the optimal level consider investments complementary to or substitutes for water use such as water conservation projects.
Water pricing plays a critical role in determining demand and supply levels and resource investments.
Under perfect competition and absent externalities, market prices reflect social values, and long-run marginal cost pricing leads to optimal investment and social benefits.
This is the principle of marginal cost pricing.
Marginal cost pricing may not be optimal with externalities, increasing returns to scale, monopoly, or other market imperfections.
Departures from marginal cost pricing may be necessary for other objectives.
Marginal cost pricing can help environmental management through voluntary conservation by farmers if there are external diseconomies like waterlogging and salinization.
The pricing structure depends on the delivery system, affecting certainty, adequacy, timeliness, and quality of water.
Common delivery methods include continuous flow, rotation, demand, and closed pipe systems.
Volumetric pricing is feasible under demand and closed pipe systems but difficult under rotation and impossible under continuous flow systems.
Rotation is common in Asia (UN, 1980; Seagraves and Easter, 1983).
Closed-pipe sprinkler systems are more efficient. However, they are expensive, and their use in irrigating paddy crops is not fully known.
Equity
Two schools of thought on equity:
All equity problems should be handled through taxation and transfer schemes, not irrigation subsidies.
Equity objectives should be explicitly incorporated in irrigation development and distribution.
Different concepts of equity:
Equity in income distribution (inter-regional, interpersonal, interclass).
Equitable system of charges for services received and costs imposed on consumers and producers (Carruthers, 1986; Easter, 1990; Small et al., 1989; Small, 1987, 1989, 1990; Sampath, 1983, 1988a, 1990b; Rhodes and Sampath, 1988).
Different criteria:
Ability to pay principle (wealth or income).
Benefit principle (value of water to the consumer).
Supply cost principle (economic costs imposed on the system).
Historic cost principle (costs as they were rather than as they are) (OECD, 1987).
The used concept affects efficiency in water use.
No unique way of choosing among these concepts as objectives vary across regions, crops, users, and time.
Multiple concepts may be used simultaneously for valid reasons.
Conventional wisdom is that equity conflicts with efficiency, but efficiency promotion can improve equity.
Policies to promote equity can decrease efficiency and worsen equity.
Irrigation development based on proportional equality can decrease efficiency and worsen inequity (Sampath, 1984, 1988a, and 1990b).
Per hectare productivity is inversely related to the size of operational holdings due to intensive use of land, labor, and inputs by smallholders.
Water allocation based on efficiency criteria can help small farms more than proportional equality under certain conditions.
Current Status of Irrigation Water Pricing and Cost Recovery in Developing Countries
Water pricing methods vary across developing countries and within a country.
Pricing is often based on financial rather than economic considerations.
Pricing is often determined by the amount needed to recover maintenance and operation costs.
The focus is more on price levels to achieve this financial objective than on price structure for efficient water use.
Real costs of operation and maintenance (O & M) are often unknown.
Optimal levels of O & M expenditures are not well-documented.
Proposed O & M budgets are often inflated.
Canal water is often highly subsidized in developing countries.
A survey of 17 World Bank-financed projects (Duane, 1975) found that only 30% of total project cost was recovered.
Water charges comprised only 17% of incremental farm income.
Diversity exists in levying irrigation charges:
Demand charges based on volume or minutes of flow (Peru, Israel).
Water rate per hectare based on crop, season, etc.
Additional land tax based on increased benefit from irrigation.
Betterment levy on increased land value.
Irrigation cess (annual charges per acre, whether water is used).
Maintenance cess (annual cost of maintenance and operation).
Indirect financing (Indonesia, Thailand).
Marginal Cost Pricing of Irrigation Water
Most developing countries do not follow marginal cost pricing or formal procedures based on optimal departures from it.
Pricing systems act as disincentives to efficient water use.
Arguments for not using marginal cost pricing:
Millions of indirect beneficiaries (consumers) benefit as much as direct beneficiaries (farmers), and it's unjust to expect farmers to bear the full burden.
Irrigation development costs should be shared by consumers and producers (Sampath, 1983), and under certain conditions, it's optimal to price water below long-run marginal cost (Rhodes and Sampath, 1985).
Water value varies across seasons, crops, regions, and climates, making complex pricing systems necessary but administratively infeasible and unacceptable to farmers.
Farmers' acceptance and cooperation are crucial for efficient pricing systems.
Complex pricing systems that are not understood may result in inefficiency.
Rainfall affects water value, but it may not be feasible to vary prices.
Water value is difficult to estimate due to other factors (climate, fertilizer, pesticides, cropping pattern).
Volumetric and complex pricing systems may involve large administrative costs.
Difficult to vary the quantum of water delivered to each farm according to their demand at given prices.
Easier and less expensive to allocate water through quotas during shortages to ensure small and poor farmers get their due shares.
Projects may not be generating full benefits due to lack of water control.
Political and religious difficulties in introducing water prices in countries where water has traditionally been provided without charge.
Difficulties in estimating different marginal costs and allocating joint costs.
Low price elasticities of demand may reduce efficiency gains from volumetric pricing.
Minimizing conflicts is as important as maximizing efficiency.
Easy and straightforward pricing methods can promote confidence between irrigators and managers.
Subsidies may be necessary to increase irrigation use, agricultural production, attain self-sufficiency, keep food prices low, or compete internationally.
Irrigation potentials are frequently underutilized, and increased charges may disincentivize irrigation.
Marginal cost pricing may not help the socially underprivileged.
Deviations from marginal cost pricing may accomplish social objectives (health, ecological, environmental, recreational uses of water).
Limitations and Needs of Current Empirical Research
Current studies do not account for other objectives behind irrigation pricing and policies.
Sociopolitical objectives are involved in water markets.
Second-best theory suggests marginal cost pricing is not necessary in noncompetitive situations.
Empirical literature often implies inefficient pricing whenever the prevailing price deviates from marginal cost, which may not be true.
Research is needed to understand how far current irrigation water pricing is suboptimal.
The purpose of any study should align with the project's objectives as stated and perceived by authorities and beneficiaries.
Objectives of irrigation are not identical across projects and regions.
Projects may be designed for full irrigation, supplemental irrigation, insurance against drought, multipurpose use, storage, or diversion.
Canals may be well-lined or have conveyance losses.
Command areas may have alternate sources of irrigation or lack them.
Areas may be water surplus, adequate, or deficit.
Crops may be drought-resistant or susceptible.
Irrigation water pricing is important in all scenarios, but its role varies.
In water-scarce areas, both efficiency and equity are important.
Efficiency pricing should be followed if it results in equitable distribution across farm-size groups; if not, deviations may be warranted.
In water-abundant areas, pricing improves efficiency and recovers costs.
It is critical to understand the goals and objectives of projects and the nature of beneficiary groups.
Deviations from marginal cost may be efficient depending on project objectives, water supply, production functions, rainfall, and demand.
Suggestions for Improving Methods of Water Pricing and Cost Recovery
Marginal-cost pricing is not followed in the Third World.
No systematic rules are followed in setting prices as this differs from county to county and even differs from time to time for a given project.
Prices are determined by social, economic, and political factors.
Extreme variations exist in socioeconomic and political environments, rainfall, cropping patterns, and the roles of irrigation sources.
Inefficient pricing leads to environmental issues (excessive drawdown of aquifers and increased soil degradation).
Most systems are neither efficient nor equitable.
Inadequate capital cost recovery leads to a lack of investment funds.
Inadequate operating cost leads to dependence on government revenues or deterioration of physical structures.
Subsidization of capital implies less real participation by irrigators in planning capital investments.
Changes should be carefully considered with regard to likely socio-political and institutional impacts.
Suggestions:
Address growing demand-supply imbalances through metering, water markets, and demand management.
Consider the user-pays principle for irrigation, with marginal cost pricing or total revenue equaling total costs.
Replace flat-rate payments with volumetric pricing over time, starting with differential rates per hectare for different crops.
Install metering devices, considering economic and financial feasibility.
Apply subsidies selectively based on goals and criteria.
Separate operation and maintenance from the government's budget, and allow irrigation agencies to generate their O & M from the sale of irrigation services. Establish water users’ organizations (WUO) and require WUO to be responsible for the collection of dues, fees, etc., from the farmers for water and related services.
WUOs would be responsible for the collection of dues, fees, etc., from the farmers for water and related services delivered and for coordination and cooperation.A direct financial linkage between farmers and irrigation agencies will help in improving the accountability of irrigation managers to water users, the effective cooperation and involvement of water users in operation and maintenance. The Republic of South Korea has successfully implemented an innovative farmers’ participatory management program to operate and maintain new irrigation projects.
Allow the institutional, legal, and market mechanisms that govern the development and allocation of water should be allowed to evolve without artificial constraints imposed by govern.
Conclusion
Efficient market pricing of water is not taking place and diverse objectives, constraints, and conditions exist.
Each project needs to be managed differently and there decentralization of control is needed so that decisions are taken at the project level.
There is too much centralization in the control and management of irrigation projects which result in the use of uniform rules, regulations and policies and this results in inefficient functioning of the irrigation system.
Decentralization is needed to move to an efficient market-oriented mechanism which would be more efficient in the long run even though non uniform in the short run.