This FAO Water Report presents a review of international knowledge and experience in charging for irrigation services, drawing from published literature and six commissioned case studies in five countries. Together, these sources provide a broad spectrum of theory and practice, from less-developed to more-developed countries. The purpose of the report is to make available the results of a Department for International Development (DFID) (United Kingdom of Great Britain and Northern Ireland)-funded project to a wider audience in the hope of stimulating thinking about the practicalities of charging for irrigation water and, to an extent, explode a few popularly held myths about water pricing in agriculture.
The full data and material which form the basis of this document are to be found in two reports which are outputs from the DFID-funded project “Irrigation Charging, Water Saving and Sustainable Livelihoods”. In analysing this material, the focus has been to identify the objectives that agencies set for their charging regime and to examine the extent to which different charging mechanisms have led to the realization of those objectives. While the introductory chapter provides a summary of terminology and basic theory, the work focuses on the application of charging tools and the practical lessons that can be drawn from documented experience, given an understanding of basic economic principles. The report therefore has a different focus and audience from other recent reports that give greater emphasis to economic modelling and applied theory. The findings should be of value to national policy-makers, donor agencies and researchers who formulate or advise on irrigation policy.
Policies of water pricing are affected by, and in turn affect, a large number of other important issues in the irrigated agriculture sector, for example, operation and maintenance; turnover and water user associations; rehabilitation and modernization of systems; increasing competition for available water with other sectors/users; international trade and commodity pricing. Much attention has been devoted elsewhere to these matters. In contrast, although much theoretical work has been done on the economics of irrigation water pricing, there is still a considerable lack of understanding of what impacts can be realistically expected from water pricing policies in practice, despite early publications such as FAO (1986). In order to focus attention on such a fundamentally important point, it was decided to confine the scope of this document to charging for defined objectives in irrigation, principally, for cost recovery and for limiting demand for water. Associated issues, including the ones set out above, are identified in the text but are generally not dealt with in detail. An extensive bibliography is provided to help the reader interested in the broader background to the subject.
The purpose of undertaking new case studies, outcomes from which are summarized in the text and Annex 2, was to identify the realities of charging in practice, to obtain more secure basic data and to detect social, financial, institutional and technical factors which may constrain the effective implementation of pricing policies.
The main conclusions of the review are summarized here:
i. Terminology: The terms price, charge, value, cost, fee and revenue are widely and often interchangeably used in the literature. Often such terms are imprecise or open to more than one legitimate interpretation. In this review, ‘price’ generally carries the implication of unit price - the actual or implied cost per cubic metre of water. Irrigation charges or fees relate to the overall payment that a beneficiary pays for the service - whether based on areas, volumes, crops or whatever. Costs are always complex - ‘full’ cost may imply some or all of: ongoing operation and maintenance; amortization or recovery of capital costs; opportunity costs; social costs and environmental costs.
ii. The wide range of charges: There are frequently large differences in charges and charging mechanisms within a single country reflecting different objectives, different water sources, different degrees of water scarcity and irrigation schemes with different technologies, farm types or socio-economic objectives. Statements describing irrigation water charging at a national level must be regarded as indicative.
Price per cubic metre: There is a very large range in the reported volumetric price of water for irrigation. Prices as high as 18 to 29 US cents / m3, applied as a rising block tariff, are reported in Israel. Spain reports prices of 16 US cents/m3 on schemes drawing from deep aquifers. In the market garden sector of Holland, where growers irrigate greenhouse crops from a municipal supply, the price per cubic metre may be as high US$ 1.30, but this is an extreme case. At the lowest end of the range Canada and Romania report prices below 0.1 cent/m3. A price of about 2 US cents/m3 (US$ 20/1 000m3) is a common ‘average’ volumetric price charged for irrigation water, but these other values show the extent of the range
Charge per hectare: Where irrigated area is used as the charging basis, comparison is made more difficult as it is not always clear in the literature whether figures quoted are seasonal or annual. Japan reports a figure of US$246/ha; China and Greece report ranges of US$ 92-210 and 50-150 respectively. US$ 40-50 /ha/year is a more representative ‘average’ charge in more developed countries. In India many states charge no more that US$ 10 /ha/year. Figures 3 and 4 in the text present the range of charges reported. Moreover, there is often considerable variation between theoretical or target rates and those actually charged in the field.
Collection efficiency: (Percentage of the billed amount that is collected.) Where information is provided, it indicates huge variation both within and between countries. For example, on the surface irrigation schemes of Bangladesh, collection rates are no more than 10 percent of the billed revenue, but on deep tubewells there is “almost full collection of revenues due”. Of the countries where information on collection efficiency is reported, Mexico achieves the highest level with a national figure of 92 percent.
Proportion of costs recovered: There is more information available on this than on collection efficiency. The wealthier members of the OECD stand out as the few countries in the literature where there is full recovery of annual O&M costs and some recovery of capital costs. They include Japan, France, Australia, Spain and the Netherlands. However, in the overwhelming number of cases, water charging does not cover the annual O&M costs of irrigation schemes
iii. Designing a charging system: The objectives of a charging programme need to be articulated clearly in any discussion. The most widely pursued policy objectives are cost recovery and demand management. Macroeconomic concerns of resource allocation between sectors, pollution charging and benefit taxation are recorded in the theoretical literature but they are seldom the drivers of national policies. Cost recovery and water demand management are two distinct objectives which require different types of intervention. However, it is surprisingly common to find substantial documents where these different objectives are apparently interchanged at random. This confusion, or blurring, of objective must be avoided so that policy makers, and those who advise them, have a clear understanding of what they are seeking to achieve and the tools that are relevant to that objective.
Where the objective is cost recovery, the range of costs that may be factored into the calculation is large. In practice, most agencies seek only to recover annual operation and maintenance costs. Non-volumetric water charges are simpler to administer than volumetric pricing as there is no requirement for extensive measurement infrastructure and continuous field recording. Volumetric water pricing or tradable water allocations (quotas) are used where the objective is to reduce or limit water use in the agriculture sector. However, there is little practical evidence from the field to support the view that volumetric pricing has a significant effect on farmers’ water consumption patterns. Even in Jordan, Israel and Morocco, countries facing extreme water scarcity, the aim of water pricing is to recover service delivery costs. Volumetric water allocations, rather than water price, are used to ensure that demand is limited and other sectors’ needs are met. In all of these countries water is priced on a volumetric or approximate volumetric basis to indicate its value to users and discourage profligate use, but there is no attempt to use water pricing to achieve the balance between supply and the demand of competing sectors.
The most widely used charging structure, which is adequate where the sole objective is cost recovery, is a fixed cost per hectare. In some cases, this may vary according to crop type, with higher charges for more water demanding crops. Any price structure that contains a volumetric element is impractical where there is no infrastructure to routinely measure the volume used. Where this infrastructure does exist, a two-part tariff (with a fixed element to cover O&M costs and a variable element to reflect consumption) offers the benefit of assuring a more predictable basic income stream.
Water markets and tradable water rights could theoretically be more effective than water pricing as a means of achieving allocative efficiency. However, formal water markets may lead to inequitable access to water resources and disadvantage poor farmers, unless safeguards are provided to counter the tendency for water to flow according to purchasing power. Formal markets for large transactions between sectors require a well-defined legal and regulatory framework, as well as the infrastructure needed to move water from seller to buyer. They are found mainly in developed countries with Australia and Spain being widely cited examples.
It is concluded that recovery of O&M costs should generally not prove onerous to farmers, except for the poorest individuals and the poorest countries where special provisions/policies will need to be made. Nevertheless, farmers’ dissatisfaction with levels of service and weak procedures for assessment, billing and enforcement commonly result in low levels of fee recovery. The principal constraint therefore appears to be in the management of systems and the administration of charging procedures in practice, rather than farmers’ ability to pay.
iv. The effects of charging on water saving: The response in demand to volumetric water pricing is widely shown to be minimal. Current prices are well below the range where water saving is a significant financial consideration for the farmer. Volumetric prices may need to be 10-20 times the price needed for full supply cost recovery in order to affect demand. It is also apparent that, while a number of countries use pricing to influence farmers’ use of water below a defined ceiling, the ultimate control mechanism is by management of allocations, or quotas. Despite widespread use of price to control demand in the water supply sector, practical constraints have meant there are very few places in the world where price is the primary method of control in irrigation.
It is logical to suppose that farmers’ responses are influenced by the relative magnitudes of the cost of water and its value to them. In some of the case study countries, the current cost of water is equivalent to a small percentage of their net crop income. However, in the Tadla scheme, Morocco, fees for surface water are some 15 percent of average net income, yet farmers will sometimes pay for additional and more expensive groundwater to supplement their quota. Therefore, it appears that water prices may need to be of the order of at least 20 percent of net income to begin to have significant impact on water use. In many countries, the rates currently paid are only a few percent of net income.
Even if it were feasible to supply water volumetrically, and to charge on an individual basis large numbers of small farmers growing cereals on Asian canal systems, there would remain the serious political and social difficulties of raising charges by something like an order of magnitude in order to begin to exert some measure of control.
As water becomes increasingly scarce, competition for water between the agriculture, municipal and industrial sectors will inevitably increase. Although the agriculture sector is seen as wasteful in its use of water, three important points must be made concerning these losses: (i) ‘lost’ water often returns to an aquifer or river and can be accessed by other users. It is only ‘lost’ if it deteriorates in quality or drains to a sink from which it cannot be economically recovered. Thus switching to ‘high efficiency’ irrigation methods such as drip or sprinkler may not result in significant overall savings of water if the previous losses were recaptured by others. (ii) Where excess withdrawals return to a river or an aquifer, the cost of service delivery is increased but overall levels of water scarcity may not be affected. (iii) The farmers’ in-field management of water usually accounts for less than half of the ‘losses’. As individual farmers have no control of the conveyance and distribution canals, pricing incentives do not affect these losses.
iv. Implementing charging polices: Charging policies need to be formulated in full recognition of the various institutional and political factors can limit cost recovery, including:
The lack of political will to raise costs to farmers and slim down government agencies.
The lack of motivation on the part of collection agencies, as fees return to the treasury and recovery is not linked to future funding.
A vicious cycle of low O&M expenditure leading to poor performance and increasing reluctance by farmers to pay.
Insufficient resources for planning and implementing cost-effective charging mechanisms.
Practical and political difficulties associated with enforcement of pricing policies.
The widely advocated policy of irrigation management transfer does not necessarily ensure recovery of full supply costs. The literature indicates that whilst turnover often leads to an increase in levels of cost recovery, revenues are still generally insufficient to cover full supply costs, as tariffs are set too low.
Where volumetric pricing is proposed to limit consumption, delivery must be measured and controlled to the individual user. In many developing countries, the service is provided to an aggregated group of farmers. Massive investments in re-engineering would be required to provide, even potentially, for ‘volumetric’ delivery and pricing to each farmer. The challenge to administration and management would be unrealistic in the short to medium term.
The introduction of a water charging policy is therefore likely to be part of a larger package of measures designed to move to a virtuous circle where farmers are willing to pay for a good service, with the revenue being invested in sustained and improved service delivery. In the case of demand management, the literature again indicates that pricing is only a minor element. Allocation through legally recognized rights in water use and the use of tradable water rights are other elements that can emerge in such a package, but usually when infrastructure and governance conditions are sufficiently mature.
