Chapter 5
Institutional and organizational issues affecting water charging

A large number of institutional and organizational issues can affect the implementation of a charging policy. The OECD (1999) highlights the fact that agricultural water pricing policies do not occur in a vacuum but are often driven by factors outside the irrigation and agriculture sectors. Molle (2001) emphasizes that institutional and technical reform of the water sector is imperative and must often precede water pricing. Efficient, and in general, radically improved, control of water is basic to the success of water charging systems

Water and land rights

Perry (2001a) emphasizes that “...an orderly system of distributing water must be in place through some existing and respected regulatory framework for allocating water among farmers...If this is not the case - or if regulations are not observed...then there is no immediate scope for improving water distribution through pricing, and attention should first be given to clarifying and enforcing water rights and the rules of water distribution.” In the developing world, water rights are insecure and often ineffective - tail-end farmers often have insufficient water, while farmers at the head take too much.

Substantial costs and effort are required to establish and protect water rights. However, until users have rights over water, they cannot make any long-term decisions regarding its use. Focus on water pricing may be premature and ineffective without prior establishment of a well-understood and legally-supported system of water rights for users. The formalization of water rights needs to be handled with great care as the rich and powerful can 'capture' traditional or customary rights from the poor. Water rights are a more contentious issue than water pricing. Therefore, governments may seek to implement pricing while avoiding the larger task of codifying water rights.

Calculating O&M costs

A systematic description should be drawn up of key maintenance processes, including a breakdown of the resources required - labour, material and equipment. For these components, unit costs are determined and adjusted annually for increases in labour, material or equipment costs. The maintenance requirements for a coming year are assessed on the basis of a status survey, which involves an inventory of damage to the system. The status survey may be carried out at local level in a joint walk-through with water users or by field engineers of the water agency. Cornish (1998) describes a method to assist annual maintenance planning and costing based on condition-assessment procedures linked to structural function and stability. However, there are some limitations to this process. First, many irrigation systems are “living infrastructure”, which changes over time. New structures and canals are added, while other areas are neglected selectively - because they are no longer needed or are too difficult to maintain. Second, it is necessary to select suitable norms for adequate maintenance and define what maintenance is to achieve. Restoring assets to their original state may not be possible, or in many cases, useful. In practice, trade-offs will have to be made. A third point concerns unit costs. In Thailand, GITEC/PANYA (1998) found that different regions have very different cost structures and there is considerable sensitivity in approving and adjusting unit costs. If farmers are to pay higher water prices to meet actual O&M costs (and possibly capital costs), transparent, quantitative planning procedures will be required so that users can understand the basis for the charges.

Skutsch (1998) presents a review of the factors that contribute to ineffective maintenance regimes in irrigation systems and makes the case for higher expenditure on maintenance to avoid premature expenditure on costly rehabilitation.

Operational or service costs need to be added to the maintenance costs. Field and office management costs will be involved, including those systems where water charges are based on land area. At present, the service costs of irrigation agencies may be higher than strictly necessary for the tasks involved, owing to high levels of staffing. One way of estimating field staff needs is to factor the scheme size by the average areal responsibility of an individual. Turnover processes, under which farmers become responsible for parts, and sometimes the whole, of formerly government-managed systems, give the opportunity to examine the level of service which is to be provided in future. Often, when Water User Associations contract to a set of commitments, the irrigation agency itself does not commit to any performance standards. By contrast, in Mexico, systems were re-engineered at the time of turnover, whilst engineers and managers received training in improved operation and water management so as to improve levels of service.

Under turnover in a number of countries in Asia, total system O&M costs are shared, with government funding and managing the upper levels of the system, whilst farmers fund and manage secondary and/or tertiary canals.

Upgrading costs need to be considered separately. It is rare that WUAs are able to save sufficient funds to make a significant contribution to the costs of upgrading their schemes. Government will therefore continue to have an important role to play over the long term.

Who should pay, when, and for what

In many cases, the issue of who should be responsible for the costs of irrigation development is not clear-cut. In FYR Macedonia, private landholdings are small and dispersed; owners often farm part-time or are absent. Therefore, according to Hatzius (2000), it is difficult to assign to farmers the responsibility for the O&M of the system. In practice, responsibility may be assigned but the work will have to be done by others on behalf of the owners. In Indonesia, users in one area complained that farmers outside the irrigation system were using water from the main canals but not paying an ISF (Gerards, Tambunan and Harun, 1991). In the Jordan Valley, sharecroppers pay part or all of the water charge, while the landowners generally pay the infrastructure costs.

It is often asserted that irrigators should bear the full supply costs, including capital investment, depreciation and annual O&M. However, Bakker (1999) argues that this is unreasonable as consumers have benefited by irrigation development in terms of lower cereal prices. Especially in developing countries, there are millions of indirect beneficiaries who benefit at least as much as farmers. Food prices are usually kept artificially low and urban consumers should be willing to subsidize irrigation development through taxation. On the same basis, it can be argued that those who benefit from the products of industry using electricity should contribute to the power supply bill above and beyond the costs of the products they buy. This may seem a difficult position to defend, but few governments will promote increases in the price of food to reflect its true local cost of production. Subsidy, through taxation, may well be the more attractive option.

There is also the problem that water may be used many times over. For example, in Egypt, water has a number of uses, some competing and some complementary, potentially making the pricing of water more complex. In addition to farmers, beneficiaries may include villages which receive domestic water supplies, those who benefit by flood control, and hydropower. The costs of supplying the water, as well as drainage, should perhaps be shared between them. Bakker (1999) questions whether 'users' should not include livestock owners, anglers, domestic users and brick makers. The issue becomes more complicated when one considers that farmers themselves are multiple users of water.

The simplest method of collecting payment from farmers is to do so before each irrigation delivery, thereby avoiding the need to chase for payment after each season. In Mexico, all fees are collected by the end of the season. In Shanxi Province, China, townships, as the intermediary suppliers to farmers, pay in advance for water delivery. However, in the Philippines and in the Niger Valley (where the time limit for payment can be extended to six months after the end of the season), fees are often still outstanding at the end of the season. This means that even although actual fee collection rates are high (90-100 percent), co-operatives are always operating at a loss. In some cases, this loss amounts to the fees for two seasons. The co-operatives come under increasing pressure, meaning that the element of the fee intended for savings may well be used for day-to-day running costs.

With volumetric charging, that component of the fee that is determined by the volume delivered must be billed after the event. In the Jordan Valley, bills are issued on a monthly basis and reflect the volume delivered in the previous month.

A recurring question is whether revenues should be used in the system where they were collected, flow back to the government for use in the irrigation sector, or be retained by government as tax income. It is logical to assume that farmers will be most likely to pay for irrigation if the money is used to provide services on their local scheme. However, this rarely happens in practice. The issue is of great significance to the sustainability of systems but receives no priority with governments and is merely flagged here.

Government, enforcement and regulatory bodies

Political realities and vested interests affect the functioning of charging systems. For example, wealthy landowners can use political influence to avoid prosecution for obtaining water when it is not their official turn. Problems of corruption or mismanagement can face any institution handling financial resources. Financial mismanagement led to the downfall of many co-operatives in the 1960s and 1970s. The practice of paying bribes to secure irrigation supplies or to have a water bill reduced are well documented (Repetto, 1986), and the flow of bribes may create a shadow institution exerting more influence than the formal institution.

Water pricing is a politically and socially sensitive issue, in particular where economies are dependent on irrigation. Vested interest groups within government may use their power to slow the progress of institutional reforms. In addition, lack of cooperation between different government departments can create delays in implementing policies. Farmers as a group often have political weight, resisting increases in the price of irrigation services. If farm subsidies were withdrawn completely in Thailand, there would be “political and economic chaos”, as farmers constitute the largest part of the population (Molle, 2001). In FYR Macedonia, “client and service orientation of water related services, transparency of water pricing and accountability of WMO [Water Management Organizations] to user organizations seem to be theoretical concepts far removed from the reality of Macedonia, where informal institutions...prevail” (Hatzius, 2000). In the Niger Valley, the government has yet to acknowledge the complexity of the farming systems where reform is being implemented and allow for this in their policies. For most farmers in the Niger Valley irrigation forms just one of many economic activities, so “their irrigation activities cannot be separated from their rain-fed and other activities, because these constrain what they can and cannot do” (Abernethy et al. 2000). Better focus on institutional and social issues is needed, in particular on ways to bring informal institutions into legal compliance.

There are many reasons why irrigation charges are not paid, some of which are not the fault of water users. Non-payment may be the result of poor methods of collection, incorrect billing, non-delivery of bills or other mistakes in the revenue administration. However, in most cases, non-payment stems from the absence of effective sanctions. There are three categories of sanctions: penalties, legal action, and suspension of water deliveries. In a recent global survey conducted by the International Commission on Irrigation and Drainage (ICID), 45 out of 51 irrigation providers had used at least one of these categories of sanction (Lee, 2000).

Suspension of water deliveries is the most powerful sanction. For example, Bos and Walters (1990) describe how fee collection by water users associations (WUAs) in Argentina only became effective after the associations were allowed to stop the delivery of water to defaulters. However, this sanction is not technically feasible in many types of system. Furthermore, withdrawal of water may be a politically or culturally sensitive issue in some countries.

The increasing involvement of the private sector in utilities such as water, telecommunications and power supply has prompted emphasis on regulatory mechanisms. Regulatory mechanisms are seen as key to managing private or public supply of a monopoly good, but there are very few examples of regulatory bodies in irrigation supply. Moreover, experience of regulatory functions in the water supply and sanitation sector indicates that it is institutionally complex and very costly to achieve effective regulation. Under turnover processes, there is an opportunity to increase oversight of institutional performance.

Financially unsustainable systems

Contrary to some perceptions, irrigation investment has been economically beneficial. World Bank post-evaluation studies indicate average rates of return of 20 percent, which are higher than for many other agricultural investments (Jones, 1995). Nevertheless, there are constraints to achieving financial sustainability in some irrigation systems. First, the price of basic agricultural commodities has fallen dramatically over the last 50 years. Thus, investments that were viable at the time of their inception may no longer be so. Irrigated agriculture has thus become a victim of its own success. Second, irrigation schemes are not built solely to benefit farmers, but to provide affordable and secure food supplies to the country concerned. While direct benefits of increased productivity may reasonably be charged to farmers, the substantial, indirect benefits of low-cost, secure food supplies may legitimately be assigned to society more generally. This may be a legitimate policy for a government placing a high value on improving the level of food security by developing production systems that are only financially viable with subsidies. Third, some systems may be needed to stabilize and benefit poor rural farmers, who would otherwise be exposed to regular drought and food insecurity (so reinforcing a trend to move to overcrowded urban areas). In this case, social benefits are critical determinants of policy. A change of government policy, away from the continuing subsidy of such schemes towards more market-driven policies - a common phenomenon in the countries of Eastern Europe and the former Soviet Union - means schemes become financially unsustainable.

Governments argue that abandoning unsustainable systems would have disastrous social and environmental consequences. However, in the present circumstances, they are finding it increasingly difficult to maintain a high level of subsidy. It is also a challenging problem to determine when a system is no longer viable. When Slovakia formed part of Czechoslovakia, irrigation systems were built to ensure food self-sufficiency rather than for economic benefit. It is particularly difficult for farmers to establish which irrigation systems are no longer sustainable as all agriculture is in decline (Cisty, 2001).

Pumped irrigation systems in Bulgaria are a further example of schemes that are no longer viable. The political and economic changes of the 1990s made pumping stations unprofitable and the area served by them has fallen by 300 000 ha, a reduction of more than 50 percent.

Svendsen (2001b) suggests that a “triage system” is needed, where irrigation systems that have potential in financial and economic terms can be separated from those which do not. Where systems fall between the two categories, governments may intervene to provide subsidies. In certain cases, the expansion of large-scale irrigation infrastructure may not be compatible with full cost recovery (OECD, 1999). It is unlikely that the eventual users of large-scale systems under construction in Portugal and Turkey will be capable of repaying all the capital costs. One of the projects, the Alqueva project in Portugal, is to be financed mainly by the EU, although the European Commission’s Water Framework Directive requires full cost recovery (European Union, 2000).

Tardieu and Prefol (2002) discuss the French response to the Water Framework Directive’s insistence on full cost recovery. They argue that prices that included the past financial costs of major infrastructural investment would be socially unacceptable. Instead, they argue for an intermediate or “sustainable” cost, one that covers all O&M costs but excludes the cost of past investment.

Making payment

Fundamental differences between irrigation systems of different sizes are reflected in the form of payment (Johnson, 2001). In small irrigation systems of 100-300 ha, such as those in Indonesia, Thailand and the Philippines, payment is often in kind and farmers carry out maintenance. Many small-scale systems cannot hire professional staff to improve the management of the system as water fees are paid in kind and no funds are generated. Larger systems of 3 000-20 000 ha. require more management, and they can collect sufficient funds to pay for professional staff and carry out adequate maintenance.

Faced with a cash economy, farmers in many small systems are making greater contributions in cash rather than in kind, e.g. in the Niger Valley, Nepal and Bangladesh. Payment in kind continues in Eastern Europe, the former Soviet Union, and Viet Nam (Nguyen, 1999). Such payment systems are either the equivalent of a fixed charge (if the crop contribution is fixed) or benefit-related (if the crop contribution is a proportion of production). Such systems do not lend themselves to any form of volumetric charging. However, under VWRAP, a current World Bank project, it is aimed to introduce in Vietnam new forms of service agreement between irrigation companies and WUAs, which will specify volumes to be delivered at defined points, though charging will not be volumetric at the outset.

It can be argued that farmers subsisting below a certain income level should not have to pay fees. However, it is necessary to define unambiguously who should be exempt from paying. Svendsen (2001 a) believes that it is preferable to use a combination of food subsidies and full cost charging for irrigation. However, del Castillo (1997) cites a World Bank Project in Peru where the irrigation infrastructure is to be handed over to users. Users will repay loans to banks and will be responsible for rehabilitation, operation and maintenance costs. If small farmers are unable to repay rehabilitation costs, they will, in effect, be subsidized by wealthier farmers. It is not clear how farmers were or will be tested for their ability to pay. Such a system will fail where the majority of farmers are unable to pay, or where wealthier farmers are unwilling to pay.

Ability to pay is not the only factor determining willingness to pay. Users must have confidence in the service delivered and in financial management. In many settings, a vicious circle exists of poor service delivery, low cost recovery, minor corruption and inadequate maintenance, leading to further decline of services and decreasing willingness to pay. There needs to be “mutual accountability” between the institutions, irrigators and service providers in order for a system to operate effectively.

Del Castillo (1997) gives a concise account of the relationship between fee collection and willingness to pay: “The record of non-payment and non-collection of fees for water is long and well-documented. It reflects two problems: weak incentives to collect fees and limited willingness to pay because services are poor. In many cases the record of poor collection can be attributed to lack of political determination to enforce collection and limited motivation of agencies to collect, since they are not required to cover their costs.” In order to make the exercise worthwhile, the fees collected must be substantially greater than the administrative cost of collection.

Water pricing and improved irrigation technologies

Where water pricing is promoted as a tool to bring about reduced water demand, it may be promoted in isolation without adequate consideration of other complementary means of achieving demand reduction at the farm level.

In Yemen, Ward (2000) believes that an increase in water prices combined with the introduction of irrigation efficiency measures is a viable option. Ward argues that if water pricing encourages farmers to use water more efficiently, they will be more likely to adopt water-saving technologies. Investment and research into water conservation techniques would complement a water pricing strategy, with support from government and donors. Ward comments that “more efficient irrigation could help relieve pressure on groundwater resources and restore, or even increase, farm incomes”. However, the experience of Jordan invites caution as investment by farmers in water efficient technology has not led to any measurable improvement in water use efficiency (Box 9) at that level. System-wide improvements may be needed to get the best out of such innovations.

The Zayandeh Rud Basin in Esfahan Province, the Islamic Republic of Iran, faces problems typical of arid areas: irrigation is a prerequisite for agriculture and downstream users face deteriorating water supplies, both in quantity and quality. Potentially, increased water prices could deter farmers from purchasing additional canal water and would encourage them to invest in more efficient irrigation technology. However, water prices in the Islamic Republic of Iran would have to increase as much as twenty-fold before farmers invested in field technologies to improve water use efficiency (Perry, 2001a). At this level, water charges would be equivalent to two-thirds of gross revenues for basic field crops. Investing in improved technology could result in higher yields and a move to higher value crops. This would lead to an increase in land productivity and water consumption at the farm level (more productive crops would actually consume more water), and a decrease in return flows to drains and aquifers. Where downstream users depend on return flows, this could be detrimental.

The adoption of improved irrigation technologies in Spain does not depend significantly on water price level but on structural factors, agronomic conditions and financial constraints (Varela-Ortega et al., 1998). Green and Sunding (1997) endorse this finding with empirical evidence from California, the United States of America. They conclude that technology choice may be driven by water price in some locations, but mostly it critically depends on land quality and crop type. Caswell and Zilberman (1990), in their studies in California, the United States of America, demonstrate that the probability of adopting drip irrigation technologies increases with higher water prices, although land quality and environmental considerations seem to play a more important role in technology choice. Burt, Howes and Mutziger (2001) argue that adoption of drip irrigation does not necessarily lead to “water savings”. They emphasize the importance of distinguishing between water diverted and water transpired by plants or evaporated from bare soil. Furthermore, effective use of drip requires a highly reliable and flexible water supply to the farm. Huppert and Urban (1999) report that the adoption of drip irrigation by many farmers in the Jordan Valley has not led to significant reductions in water diversion as farmers are aware of the unreliability of supply. They tend to over-apply water through their drip systems on the occasions when water is available, eliminating any potential water saving.

Resource needs

Some countries may have insufficient economic and technological resources to deal with serious water management problems. Political and institutional reform, related to water pricing, requires significant investment of time and money, as Kemper and Olson (2000) demonstrate for Mexico and Brazil. WUAs require training in financial management, budgeting and bookkeeping to manage their own finances. Although the need is clear, it is not always apparent who would provide and pay for such training and support.

In the Niger Valley, co-operatives that are responsible for entire irrigation systems, require training in management skills, particularly communication and record keeping, to collect fees, keep track of bills, arrears and individual accounts for members. The complexity of the fee system has increased the need for training in a country where levels of education and literacy are low. The introduction of ISFs in Indonesia was dependent on a complex database (Gerards, Tambunan and Harun, 1991), to be supported with data from the field about all water users and their landholdings. In the event, the tasks proved too onerous.

Hatzius (2000) examines the potential of a new water fee system in Former Yugoslav Republic of Macedonia, where a number of factors are delaying the elaboration of a water master plan and data collection (relating to WUAs). These include institutional deficiencies and a lack of resources, staff, professional and managerial expertise, political will and participation among sectors. Either a decentralized or a centralized system of water management would require support from donor institutions, including technical assistance, training, computer hardware and software.

Terms of trade

As the pace of globalization increases, it is essential to recognize that policies outside a country can have a stronger influence than those within, and may trigger unanticipated results. For example, Nepal is reducing subsidies in agriculture gradually by various means, including the Nepal Irrigation Sector Project (NISP), supported by the Asian Development Bank and World Bank. Subsidies have been reduced on fertilizers, shallow tubewells, and electricity for pumping. However, agriculture in neighbouring India is highly subsidized, producing a direct, negative, impact on markets in Nepal, which has an open border with India. Production costs are higher in Nepal and as farmers cannot gain a good price for their crops - owing to cheap imports from India - there is no incentive for them to extend production. Farmers are deterred from producing more for sale by cheap prices that benefit the urban population. It becomes impractical to increase water fees as any increase in production costs would increase out-migration from rural areas. Similar distortions are seen in many other parts of the world, including the effects of the agricultural subsidies provided by the European Union and the United States of America on cotton and sugar growers in the developing world.

Preconditions for achieving effective irrigation charging

Whatever the objective of a water pricing policy, important preconditions must be satisfied before it can be implemented effectively. These preconditions include: an adequate political and legal framework; institutional and administrative resources capable of implementing and enforcing the policy; and water distribution infrastructure providing the level of control/measurement required. In addition, farmers must be ready to comply with the rules for water allocation. Institutions must measure and record effectively the parameters on which charges are based, and collect the charges. In states lacking an effective legal code or enforcing body, there must be questions about the practicality of water charging mechanisms. Table 5 provides a summary of the legal, administrative and technical preconditions for effective irrigation charging.

TABLE 5

Preconditions for effective irrigation charging

Source: Modified from Burt (2002).

Many political, legal, institutional and administrative preconditions, such as the need for enforcement mechanisms, clear methods of complaint/dispute resolution and administrative transparency, are common to any pricing tool. However, volume-based, demand management tools require infrastructure capable of volumetric measurement.

Sampath (1992) observes that pricing is dependent on type of physical delivery system suggesting that volumetric pricing is only possible under demand and closed pipe systems as opposed to rotation and continuous flow systems. However Malano and van Hofwegen (1999) take a broader view and describe the classes of service delivery including all the on-request (or arranged) types of delivery. In practice there is a wide range and mix of delivery services and service standard negotiation. The extent to which different service modalities are arranged in such projects as VWRAP, cited above, indicate the complexity of the issue. However. even though there may well be potential for changed patterns of water delivery, volumetric pricing to farmers does not appear suitable on the vast majority of surface irrigation systems in developing countries - including all those where rice is grown. In the case of VWRAP, it is anticipated that at the level of the water user associations, there will be contracts specifying volumetric deliveries, but no volumetric pricing a such. The primary emphasis is on delivering an agreed level of service and building the capacity of the service provider to do so by modernizing management and infrastructure.

Summary

Many social, political, economic, cultural and geographical factors affect pricing and production, highlighting the diversity of irrigation systems in general. Thus, various commentators emphasize the need to take diversity into account when implementing water pricing. Molle (2001) points out that economists could come to face similar criticism to engineers for being too discipline-oriented and unrealistic. Ahmad (2000) emphasizes: ‘There is not a general strategy or model to adopt for a specific water pricing policy of a country. Every country has to develop its own strategy.’ There is a danger of pursuing a ‘one-model-fits-all approach’ because administrators find such an approach easier to implement. Therefore, there needs to be a change of attitude within agencies implementing reforms.