Synthesis Note for Theme 6: Financing Irrigation

Theme Co-ordinator: Mark Svendsen, Water Resources Consultant and IWMI Fellow.

This synthesis incorporates many ideas drawn from the rich set of submissions to the EMC on this theme. Because the EMC process does not lead naturally to consensus, judgments and conclusions contained in these comments are those of the coordinator. I hope that many participants will recognize their ideas herein and that most will not find the summary out of step with the discussion.

The discussion note for the theme laid out four issue areas.

1. Who should pay for irrigation services
2. How can charging systems create positive incentives for (a) providers, (b) users, and (c) investors
3. How can fees be assessed and collected
4. How to insure competent and honest handling of WUA finances

Thinking clearly diverges on the role that subsidies have to play in financing locally-managed irrigation. One school argues that all subsidies create dependence and are inherently unsustainable. Another argues that continuing subsidies are essential to sustain systems, especially in small plot subsistence situations. There is probably wider agreement on the importance of self-financing O&M and on the inability of many schemes to pay or repay capital costs for either initial construction or classical rehabilitation (including betterment). Given that subsidies will continue to be present in many situations, it is important to understand that HOW subsidies are provided does matter. Worst are substantial operating subsidies that go directly to the service provider (e.g. the WUA), especially if they are sized to make up budget shortfalls. These clearly sap incentives for efficiency and create dependency on government. Better are matching funds, fixed-sum grants, or indirect subsidies to farmers who can then use the additional resources to pay irrigation fees (or whatever else they choose). Most often IMT increases the cost of water to farmers, though it may reduce the total cost of service provision.

There are interesting cases of private capital being invested in irrigation rehabilitation. These come from Shaanxi Province, China, where private investment of an estimated $150 to 200 million is expected, and Uttar Pradesh in India. In both cases, investors expect to recover their investment and earn a profit through fees paid by water users under service agreements. The other side of that coin is attempts by some governments to transfer "uneconomical" systems to users. Often, but not always, these are schemes constructed in the former Soviet Union with no consideration for operating costs or production economics. These schemes should be subjected to a triage process, deciding which ones can be made economic, with assistance and improvements, and which are never going to be so under reasonable assumptions. The only long-term solution for the latter is to find alternative water sources or alternative employment opportunities for those dependent on them, or the government's continued willingness to continue to subsidize the systems.

Financial self-reliance creates the basic incentive climate for effective and efficient management of WUA-run schemes. It does not guarantee it. Good governance, process transparency, and knowledge are critical to realizing this potential.

The gold standard incentive for efficient use of water is volumetric provision and pricing. However outside successful cases in China and some higher-income countries, many real and potential problems with volumetric pricing and delivery are cited. Most of these relate to the high cost of measurement and billing. An alternative is volumetric wholesaling of water to service providers (e.g. WUAs) and non-volumetric or quasi-volumetric distribution within WUAs. Means for doing this include charging per turn or per hour, charging on a crop-area basis (with fees accurately reflecting relative crop water demand), restricting water-intensive crops, and regulating drainage outflows (requiring reuse). In small schemes, wide dissemination of real-time information on system water use, and the collective charges being incurred from the supplier, may cause farmers who jointly bear the cost to irrigate more efficiently. In larger schemes, free-riding will probably overwhelm this effect.

Incentives for efficient investment certainly include the profit calculus of private investors mentioned above. Token cost sharing on the part of the user group can also be effective in prioritizing sound investments. (Token here means costs that are significant to the users, but not necessarily so relative to the total cost of the project.) Incremental rehabilitation is an attractive approach to bringing local-level rehabilitation under the control of WUAs and making it affordable. This approach has long been practiced in systems as different from each other as the farmer-managed schemes in the hills of Nepal and irrigation districts in the American west. A form of this approach which has given indication of strong returns through growth in productivity is providing small per-hectare rehabilitation grants to WUAs. Grants are managed by the state irrigation agency but controlled by the WUA. Technical assistance is also provided by the state agency. This approach has been employed effectively under the IMT program in Andhra Pradesh.

Often transferred schemes exhibit markedly better fee collection performance than did the public agency which had operated the scheme. This is, in part, because farmers now see a link between their payments and the operation and maintenance activities they see in the field. Other factors may include the new operator providing better or more responsive irrigation service, bureaucratic bloat having been visibly squeezed out of the system, and more dedicated collection efforts. In some cases, pay-before-delivery schemes have also been effective.

For smaller schemes, an alternative to increased revenue generation is for farmers to perform O&M functions themselves, avoiding the expense of hired staff. For very small schemes, on the order of a few hundred hectares this is usually the case. And for schemes larger than about 10,000 hectares, hired professional staff are almost always employed. In between there is a transition range where both modes are feasible. Factors influencing the mode employed include scheme size and complexity, holding size, commercial/subsistence orientation, availability of skilled professional labor, and, especially, opportunity cost of farmers' time. An important influence on the latter is the growing importance of off-farm employment. In many parts of Asia, particularly near urban concentrations, this is an increasingly important contributor to family income and tends to drive up opportunity costs, tilting the balance toward professional managers. And because it is often men who seek out the off-farm employment, it tends to shift women into more prominent roles in farm management and makes it still more important that they play active parts in WUA governance.

The topic of competence and honesty in handling WUA finances received relatively little discussion. Perhaps this is because these are not problems in most WUAs; or that these are not issues that conference participants are familiar with; or that they were discussed sufficiently under other themes. We know, though, that financial mismanagement caused the demise of a great many cooperatives of various kinds during the boom years of the 1960s and 1970s, and ignoring the risk they pose to WUAs is unwise. Our primary weapons against financial malfeasance are training in financial management for a broad spectrum of WUA staff, directors, and members and a robust transparency that opens financial dealings to general examination by WUA members and clients on a regular basis.

Contact: imt-moderator@fao.org