C 2003/18

Conference

Table of Contents

I. Introduction

II. Investment in Water

III. Investment in Infrastructure

IV. Strategic issues for discussion

A. Making investment in rural water and infrastructure more attractive

B. Enhancing the sustainability of rural water and infrastructure investments

I. Introduction

1. The World Food Summit Plan of Action and the Millennium Development Goals commit governments to reduce hunger by half by 2015. FAO reports slow progress in achieving this goal, and further estimates that global food production will need to increase by 60% to close the gap in meeting nutrition requirements, cope with population growth and accommodate changes in diets over the next three decades.

2. Rural people depend on agriculture for their food and livelihoods. Food security now and in the future depends on access to and productive use of resources as well as access to markets. Sustainable and intensified agriculture can improve the productive use of limited resources, especially water. Infrastructure and utilities, including communications, facilitate access to markets, value-added processing and lower transaction costs.

3. In the latter half of the twentieth century, significant public and private investment in agriculture - including water - has resulted in productivity gains that have contributed to reduced food insecurity. Further productivity gains need to be better linked to market and value-added opportunities if returns to investments in agriculture are to be comparable with competing sectors.

4. With rapidly urbanising economies in the developing world, the opportunity costs of investing in agriculture have never been higher. Agriculture is hard-pressed to justify itself in economic terms, particularly when competition for land and water intensifies in urban hinterlands. The public and private sectors need clear signals that investment in water and infrastructure for agriculture, especially in rural areas of developing countries, is rewarding and will have a sustainable impact on food security.

5. The aim of this document is to elaborate on how investment in water and infrastructure can contribute to food security and to pose a fundamental question for debate: how can such investment - both public and private - be made attractive and sustainable?

II. Investment in Water

6. The increase in agricultural water productivity has been the result of strategic investment in the development of irrigation and in water management, as well as in more productive crops and livestock, improved agricultural practices and capacity building. However, during the past two decades, the international pattern of investment in the agricultural sector has changed. While overall investment has sharply declined, including for water management, increased resources have been devoted to users’ participation and support for indigenous techniques and traditional knowledge on water use. The result has been more effective land development schemes, with a shift from large-scale irrigation development to smaller scale initiatives adapted to local conditions and targeted at poor communities. In any case, it is the quality of the investment, not just the quantity, that is instrumental in addressing water productivity constraints and spreading the benefits of investment in irrigated agriculture amongst those in need.

7. To effectively address water productivity constraints, three levels of policy and investment intervention can be identified.

• At farm level, individuals and households need to be assured of stable engagement with land and water resources. Flexible systems of land tenure and water use rights will leverage comparative advantages in producing food staples and cash crops. Such initiatives should be complemented by the dissemination of technology and good practice in water control and productivity gains. Small-scale irrigation has shown a positive impact on local development and poverty reduction. In arid and semi-arid areas, local water harvesting techniques play an important role in stabilising and sustaining agricultural production.
• At the level of the irrigation scheme, modernization, including rehabilitation and transfer of management responsibilities to the communities, offers tangible scope for extracting the full value out of sunk costs and reducing pressure on public funds. Investments in upgrading and modernisation of large-scale irrigation schemes can play a significant role in increased food production and poverty alleviation for a rapidly growing population. In some cases, increasing population pressure and the need to address food security requirements call for the development of new sources of water in agriculture.
• At national level, government policy and investments need to be aimed at enabling agricultural producers to access local market demand, providing an outlet for increased production obtained through investment in water. Linkages between agriculture and water development policies are crucial, buttressed by investment in the key public goods such as roads and storage, with a lead role given to large-scale private investment. There are major synergies between investments in water and in other infrastructure that call for a coordinated approach to investment in rural areas.

8. It is important to address all three areas in parallel and phase investments, both public and private, as demands grow and the existing asset base is expanded. Not only will public finance be needed to target poorer rural communities but also the enabling functions of governments will be crucial in maintaining flows of private finance from individual farmers, communities and commercial investors.

9. Preliminary estimates indicate that the annual level of investments required in the irrigation and drainage sector in developing countries until 2015 is about US$ 21 billion. Additional annual investment of US$ 17 billion is required to satisfy the needs for water supply and sanitation in rural areas.

III. Investment in Infrastructure

10. Although there have been substantial investments in infrastructure by many developing countries during the last decade, for the most part the rural population remains poorly served. In particular, a significant number of countries have not succeeded in providing the infrastructure necessary for the development of private, efficient and competitive supply chains for food and agricultural products. As a result, transaction costs and risks remain high and policies designed to improve incentives for increased agricultural production have often had little positive impact. In addition, water and sanitation services also impact positively on rural household income though improved health and reduced illnesses such that worker productivity and earning potential are increased.

11. Three major elements can influence and contribute to the effective operation of markets for food and agricultural products: appropriate legal frameworks and efficient institutions to support market conduct, enforcement of contracts, and property rights; institutional frameworks to monitor and support the emergence of markets through activities such as the provision of market information and marketing extension; and, well operated and maintained infrastructure to provide transport and communication networks, post-harvest handling and storage, and physical markets.

12. Concerning infrastructure, three levels of complementary intervention can be identified:

• At the macro level, efforts should be made to ensure basic transport and communication infrastructure. Improved access and density of roads can reduce transaction costs for both inputs and outputs. When this is coupled with rural electrification, there is often an associated increase in the cultivation of improved varieties of plants, increased fertilizer use, and extension of the areas under irrigation and water management. Transport and telecommunication services enable communication and information flow between rural and urban centres. This not only links farmers to markets, but also facilitates the flow of information to and from extension agents.
• At the meso level, development of safe and well-organized physical markets, both wholesale and retail, are important to facilitate national and export trade. In rural areas markets not only provide a convenient location for farmers to meet with traders and consumers, but are also focal points for community activities. But attempts to improve market infrastructure have often disappointed due to a failure to adequately consult the users.
• At micro level, investment in post harvest handling, storage and processing infrastructure can also stimulate the non-farm sector and support emergence of small businesses. This can be a significant source of employment and hence income for poor people in rural areas.

13. The additional investments in improved infrastructure services required to meet the WFS target amount to an annual US$7.8 billion at 2002 prices. This amount includes new construction of rural roads (US$5.2 billion) and of market infrastructure (US$850 million) as well as maintenance and rehabilitation of both (US$1.3 billion and US$31 million respectively). Another US$200 million would cover the cost of capacity building, support for policy assistance, institution strengthening and measures to improve plant and animal health.

IV. Strategic issues for discussion

A. MAKING INVESTMENT IN RURAL WATER AND INFRASTRUCTURE MORE ATTRACTIVE

14. Competition for scarce public investment resources between rural areas with their enormous need for services, and the demands of urban areas and the industrial sector, often leave agriculture and the rural sector with shrinking investment and inadequate funding for operation and maintenance of water management schemes and infrastructure. Although the decline in the contribution of agriculture to GDP is an inevitable part of the development process, it is critical that the pace of economic and social development of the rural sector matches that of the rest of the economy. The multiplier effects and social benefits need to be captured as a positive return on rural investment.

15. The investment process is further complicated by the need to address water and infrastructure at several levels.

• At the micro level the search for locally adapted solutions to irrigation, water harvesting, rural roads, enterprises and other infrastructure development, suggest giving priority to small-scale, labour-based technologies wherever possible.
• At the meso level, public investment should build on modernisation of existing infrastructure, enhancing water service delivery, prioritising roads and communications that will improve linkages to markets, and creating an enabling environment within which private sector investment can expand.
• At the macro level, countries should ensure an enabling environment for the best return from the investments that are needed in agriculture. This means seeking partnerships with the private sector and providing a favourable economic policy environment that will optimise returns on needed investments. Policies (including water pricing) that promote technical and economic efficiency in water use are especially important in countries where competition for scarce water resources is greatest.

16. Issues for discussion include:

• Policies and incentives to promote and attract investment for water and infrastructure in rural areas.
• Assessing and making explicit the wider benefits that can be derived from such investment.

B. ENHANCING THE SUSTAINABILITY OF RURAL WATER AND INFRASTRUCTURE INVESTMENTS

17. The sustainability of investment in infrastructure can be examined from three points of view. From an economic perspective, profitability should ensure that productive assets would be operated and maintained. From a social point of view, it must be clear that the anticipated benefits will contribute to the creation of a desirable living environment. The design of the investment should also consider the sustainable use of natural resources and the mitigation of negative impacts on the environment.

18. In those parts of the world with buoyant market economies, there is scope for various forms of public-private partnerships in infrastructure investment, which brings with it the mechanisms for capital cost recovery and revenue generation to finance maintenance. Fiscal incentives and a stable political and policy environment will attract domestic and foreign private investment. However, in many other parts of the developing world, especially Africa, the provision of basic infrastructure at all levels is likely to remain a public investment. In this case, sustainability can be enhanced not only by ensuring the cost-effectiveness of the investment, but also by creating partnerships with, and ownership on the part of, the beneficiary rural population, such that management and maintenance of the infrastructure is devolved.

19. Governments can no longer make investments in irrigation or infrastructure in the hope that smallholders will respond by increasing production, unless it is reasonably certain that the resulting production can be marketed. In recent years there has been a trend towards increased concentration and vertical integration in the food sector, the growing importance of supermarkets in the fresh and processed agricultural product sectors in many areas, and increasing interest in food safety and quality. Small farmers in developing countries, on their own, are ill-equipped to adjust to this new trading environment.

20. The whole question of supply chain management will need to be addressed and future public investments may well need to be made to support parallel private investments in, for example, contract farming which links farmers with the range of services necessary to supply modern markets. However, social sustainability means there must be associated investments in education, health, and other social services.

21. In many cases, systems of land tenure and water use rights have become dysfunctional, do not make economic sense and limit investment. Both land tenure and water rights issues must be addressed in a co-ordinated fashion if there is to be an optimal return from irrigation investment and adequate investment at farmer level. Furthermore, the environmental sustainability of rural investment is inextricably linked to the economic and social development of the recipient communities. Genuine ownership on the part of communities is the most effective path to environmental sustainability. Without these, the overall economic, social and environmental sustainability of the water infrastructure investment is at risk.

22. Issues for discussion include:

• Factoring economic, social and environmental benefits into investment decisions to ensure sustainable impact.
• Defining the scope of public investment and linking to public-private partnerships
• The evolving role of farming in the production chain and implications for infrastructure investments.