Based on recent literature and case studies, this document has reviewed the range of theoretical and observed objectives and impacts of irrigation water charging. Much of the literature focuses on theoretical aspects of water charging - especially the objectives and details of pricing policies. A smaller part of the literature presents information on water charging as applied in the field, often snapshot data on water charges or prices, levels of fee recovery and the extent to which O&M and capital costs are recovered. Little guidance is available on the practical aspects of designing and implementing an irrigation water charging policy. Issues of interest would include: methods for calculating appropriate current and future costs and thus determining charges; managing different agencies’ responsibilities for levying and collecting fees; calculating the costs of fee collection; establishing the frequency and timing of billing; and enforcement and sanctions.
This chapter presents a summary analysis of the issues arising from the review and case studies.
Four key factors have led to the recent focus on water charging in irrigated agriculture:
general trends towards management turnover and private sector involvement in previously public services - with consequent attention to revenues and financial viability
signs of water shortage in many countries, and the need for demand management in situations where supply augmentation is no longer feasible
current high levels of subsidy to irrigation, in parallel with under-funding of maintenance and deterioration of infrastructure.
the Dublin declaration that water should be treated as an economic good, and subsequent policy statements at the Second World Water Forum and the Bonn International Conference on Freshwater
Taken together, these factors have driven the debate on water charging policies, first in the water supply and sanitation sector and more recently in the irrigation sector. However, while there are apparently compelling reasons why water charging and pricing should be used as economic and management tools in the irrigation sector, there are numerous theoretical and practical constraints that arise when the issues are examined in more detail.
Literature on irrigation charging includes a number of theoretical objectives for levying charges on irrigation water, such as taxing benefits to improve equity in society, imposing restraints on pollution, and creating incentives to help direct water to its highest economic use. In practice, there are three common concerns, of which two are dominant:
recovery of costs;
management of demand for water
reallocation of water from lower to higher priority uses.
It is commonly found that commentators and irrigation authorities expect a single system of charging to meet all these objectives. However, it is clear that it is essential to match the charging tool with the objective - one size does not fit all.
In order to design an effective charging system, it is imperative to define and prioritise objectives.
Recovery of O&M costs is widely agreed to be a basic objective essential to the sustainability of system functioning. This should generally not prove onerous to farmers, except for the poorest individuals and the poorest countries, where special policies may be needed. Nevertheless, farmers’ dissatisfaction with levels of service and weak procedures for assessment, billing and enforcement commonly result in low levels of fee recovery which often leads to the vicious circle of under-funded infrastructure performing poorly and leaving irrigators more dissatisfied.
The use of charging to try to impel farmers to use less water is a quite distinct and more controversial objective. Without exception, systems that commentators have considered to demonstrate price-limited demand are actually limited by quotas on total water use - with an incentive to avoid waste within the quota through water pricing. Pricing then usually serves to affect farmers’ decisions about issues such as which crop to plant and whether to invest in improved technology - which paradoxically may not assist the problem of water scarcity if water consumption rather than diversion is the problem.
Macroeconomic problems of resource allocation between sectors are a growing concern, but these are seldom addressed through pricing. Rather, volumetric entitlements and, in some cases, the possibility of trading those entitlements, are used to achieve such inter-sectoral allocation.
Where the objective of pricing is to reflect the cost of a service, it is necessary to define the service in sufficient detail to decide on the scale of costs and which elements should be included. A broad range includes:
capital infrastructure - at either current or historical cost;
routine O&M;
rehabilitation;
system improvements;
planned replacement of major facilities;
unplanned expenditures caused by extreme events.
Beyond these costs, a range of less tangible costs have sometimes been put forward:
impacts on affected downstream users (irrigators, households, fishing communities and ferries);
environmental impacts;
social impacts;
impacts on food security and prices;
opportunity cost - the economic value of water in its highest value alternative use.
Where the objective is to recover a specific level of the service cost, 'simple' non-volumetric pricing mechanisms can be used, typically a charge per hectare of land owned or irrigated. Non-volumetric methods are simpler to administer than volumetric methods as extensive measurement infrastructure and continuous field recording are not needed. However, cost recovery may not be easy merely because it is based on simply-assessed parameters. Political, economic and institutional factors can lead to very low levels of fee collection and cost recovery.
Where the objective is to limit demand, there are two distinct approaches: volumetric water pricing, and defined water allocations or quotas. In practice, volumetric charging is often applied in conjunction with an allocation. In such cases, the volumetric charge is designed to meet the cost recovery objective, while the allocation is used to limit demand to the supply that is available. Nowhere is volumetric charging used directly as the means to bring supply and demand into balance. Thus, in Jordan, Israel and Morocco, all countries facing extreme water shortage, water pricing is used to recover service delivery costs. Volumetric water allocations rather than water price are used to ensure that M&I sector needs are met. In all of these countries, water is priced on a volumetric or quasi-volumetric basis to indicate its value to users and discourage profligate use. However, there is no attempt to use pricing to achieve the balance between supply and demand from competing sectors. This distinction between signalling the value of water - and therefore discouraging wasteful use by farmers - and the goal of allocating water between sectors, based on free-market prices, is very important. The first appears logical, but it should not be assumed that simply because farmers place a value on water they will reduce their consumption to the extent that resource planners may wish. It is telling that even the most water-short nations of the Near East, many with advanced conveyance and distribution infrastructure, have not sought to direct either intra- or inter-sectoral allocation of scarce water resources by means of pricing. In such cases, defined water rights (allocations) appear a more practical option.
Markets in tradable water rights are more practicable than water pricing as a means of achieving allocation efficiency. Where poor farmers are allocated a tradable water right, its sale may provide them with an income comparable to that obtained through farming. Formal markets for large transactions between sectors require a well-defined legal and regulatory framework. In such cases the rule of law has to be respected and all stakeholders need to accept the impartiality of those defining allocations. Australia, the United States of America and Spain are commonly cited as countries that are using tradable water rights to manage the use of an increasingly scarce supply.
In many countries, the price of water charged to farmers is well below the level required to recover system O&M costs, let alone that needed to exert a material influence on demand for water.
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 additionally for 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 in order to have a significant impact on water use.
Even if it were feasible to supply water volumetrically to large numbers of individual 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, which is what would be required in order for the charge to have any significant impact on demand.
The agriculture sector is seen as a profligate user of water because 75 percent of the water diverted to a surface scheme may not reach the crop. However, a high proportion of the immediate loss often returns to an aquifer or surface water body, and is therefore available to downstream users or groundwater users. There may be penalties involved in reuse in terms of a reduction in water quality or energy costs in recovery of supply from groundwater but, the overall water balance is not affected as severely as the scheme efficiency figures may imply.
It is also particularly relevant that pricing deterrents cannot reduce the high proportion of scheme water losses that occurs in canals outside the control of farmers (50 percent or more).
Even the straightforward objective of recovering all annual O&M costs has been difficult to achieve in practice. Annex 1 shows that a few of the wealthier member countries of the OECD, including Japan, France, Australia, Spain and the Netherlands, achieve full recovery of annual O&M costs plus some recovery of capital costs in certain schemes. However, in the overwhelming number of cases, water charging does not cover even annual O&M costs. Among the nations of the OECD, subsidy of irrigated agriculture by governments is still widespread.
The institutional and political factors that can hamper full supply cost recovery include:
lack of political will to impose higher costs on farmers;
unwillingness to reduce costs by slimming down overstaffed government agencies;
lack of motivation on the part of agencies charged with fee collection, as fees return to the treasury and recovery is not linked to funding;
a vicious circle of low O&M expenditure leading to poor performance and increasing reluctance on the part of farmers to pay when they see no benefit;
insufficient resources (time, money and training) for planning and implementing effective charging mechanisms;
failure to enforce pricing policies;
failure to improve infrastructure, operation and service delivery;
failure to promote more profitable agriculture.
The widespread policy of irrigation management transfer does not necessarily ensure full recovery of supply costs. While turnover can lead to an immediate increase in levels of cost recovery, revenues are still generally insufficient to cover full supply costs, as tariffs are set too low and higher prices may be politically unacceptable. Where systems then deteriorate under poor maintenance regimes, collections invariably fall.
If volumetric charging is to be applied to limit consumption, delivery must be measured and controlled. The nature of most irrigation systems in developing countries, often serving thousands of small farmers, means that measured supplies can only be delivered to a body, on behalf of farmers (the townships in China or WUAs in various parts of the world). Below that point, supply to individual farmers has to be made on the basis of area and crop.
Despite these serious obstacles to greater use of economic instruments, important changes are occurring. Many governments are actively considering the issues of increased cost recovery, reduction of hidden subsidies, and the potential of pricing as a tool for demand management. It is increasingly recognized that irrigation infrastructure and service provision must be paid for either through charges levied on users or through a transparent government subsidy that is quantified and publicly justified. An OECD report on agricultural water pricing (OECD, 1999) recognizes that the goal may not always be to eliminate subsidy but to achieve reform and greater transparency.
It is important to separate cost recovery and water demand management as two distinct objectives that require different types of intervention. Whatever the objective in view, the introduction of a water charging policy should not be viewed as a universal remedy. Rather, water charging should be seen as part of a larger package of measures. Allocation through legally recognized rights in water use and the use of tradable water rights are other potential elements in such a package.
Mexico is frequently cited as an example of a country that has achieved a substantial reduction in the levels of subsidy going to the irrigated agriculture sector, where many irrigation districts now achieve financial self-sufficiency. However, this position was reached only after wide-scale reform of the agriculture sector (Kloezen, 2002), including:
privatization of state-owned agricultural input supply services.
major reform of land tenure law.
a new water law, which defined rights and allocation mechanisms.
transfer of responsibilities for system O&M to newly formed WUAs together with transfer of plant and equipment.
restructuring of the line agencies overseeing irrigation with major reductions in staff numbers.
Modernization of the irrigation systems.
Retraining of engineers and managers in service delivery.
These far-reaching measures were appropriate to the situation in Mexico, but other countries will require different actions. What is clear is that water charging measures must be designed according to the particular situation and desired outcome in any given country.
Much material has been published on water pricing theory but there is little to guide practical implementation of effective assessment and collection mechanisms. In many countries, the issue is not principally how to determine the level of water charges, but how to enforce the charging policy. Without action to improve revenue collection and enforcement systems, policies may remain theoretically sound but unmanageable and ineffective in practice. These issues need wider investigation and honest reporting.
