X. FINANCIAL PROVISIONS

Except in cases where WUOs are responsible for water management on a very small scale, and can operate solely on the basis of contributions in kind from participants, WUOs invariably need to secure funding in order to cover their costs. Such costs will include some, or all, of the following:

• the cost of obtaining a permit to abstract and use water and/or to drain water or to dispose of wastewater together with any water use and wastewater disposal charges payable pursuant to such permit;

• charges in respect of water supplied to the WUO on a contractual basis by a state agency (such as an irrigation agency) or some other bulk water supplier;

• the WUO's own costs of operating and maintaining the infrastructure under its authority which may include staff salaries, office expenses (including the costs of rent, utilities and communication), operation costs including the costs of electricity if pumps are used, system maintenance including routine and annual maintenance, the maintenance of an emergency reserve fund, small replacement fund, transport expenses, purchase of equipment, social charges and taxes; and

• investment costs for the construction, rehabilitation or re-construction of infrastructure.

A key feature of WUOs is that they are usually self-funding, at least as far as operating costs are concerned, and this is invariably reflected in the legislation reviewed. Indeed in some cases this is stated explicitly: the WUO law of the Argentine province of Mendoza provides that WUOs are financially independent from the Provincial Government.

So what are the sources of WUO finance foreseen by the legislation? The main income is invariably from fees and charges to participants for services provided by the WUO (and which include the WUO's internal administrative costs). Other sources of finance can include borrowing, and such grants and or subsidies as may be available from time to time. Finally, a WUO may be entitled to income from assets or capital in its ownership and, in the case of California Irrigation Districts from power generation. Other possible source of income include fines from participants who have breached its operating rules (though no reasonable WUO would hope to rely on this) and in the case of membership WUOs, fees from non-members.

Finally, in some countries subsidies may be available. For example, the Colombian legislation states that apart from revenue from the collection of charges levied on participants for the services provided, WUOs may also receive government subsidies, based on the annual budget submitted by each WUO.^[118]

In Andhra Pradesh State in India the law provides that the resources of WUOs include: grants received from the Government as a share of the “water tax” collected in the area of operation of the WUO as well as funds that may be granted by the State or Central Government for the development of the area of operation, resources raised from any financing agency and income from the properties and assets attached to the irrigation system in its area of operation.

As already mentioned, whatever other sources of financing may be available, in the vast majority of cases the main part of the income of a WUO will derive from fees or charges paid by participants. What types of fee? Sometimes this is spelt out in law as in the case of the Albanian legislation, Article 19 of which provides:

The statute of each Association shall require members to promptly pay any fees levied by the Association in accordance with the statute including:

(a) irrigation water supply charges;
(b) drainage charges;
(c) an annual membership fee; and
(d) any other charges levied by the Association.

Having defined the different types of fees that are payable, the Albanian legislation leaves it entirely to individual WUOs to determine how the level of fees is determined. Elsewhere this matter is specified in the legislation. In Mendoza Province, Argentina the law provides that WUOs may set and collect 'water charges' on the basis of the following criteria: charges are to be set at a level that permits the financing of the operation and maintenance of canals as well as repayment of construction/rehabilitation and the activities of the WUO. In setting such fees, a WUO is required to balance the minimum possible charge with the most efficient possible distribution service. At the same time each WUO must ensure that water charges are fair and equitable so as to encourage the rational use of water.

The legislation of Saskatchewan Province, Canada sets out a detailed procedure for setting 'water service charges'. Every fiscal year, before a date specified by the WUO regulator, each WUO must first prepare an estimate of its total costs for the following fiscal year. These must include:

- administrative costs;

- the costs of diverting, pumping, supplying, distributing and draining water, including any charges payable by it to the bulk water supplier in respect of water supplied;

- the costs of maintaining its irrigation works, water control works and water supply works;

- any amount that the WUO requires to recover any losses in the previous fiscal year;

- any amounts that the WUO is required to collect for the purposes of its irrigation replacement fund;

- the amount of any charges the WUO is required to pay to the state 'Irrigation Crop Diversification Corporation'^[119] or 'Saskatchewan Irrigation Projects Association'^[120]; and

- any other costs that are prescribed in regulations made pursuant to the WUO law.

Having prepared such an estimate each WUO is required to establish water service charges or a tariff of water service charges 'that is sufficient to cover its total costs in the fiscal year'. The law then specifies that in establishing its water service charges or tariff of water service charges, each WUO must take account of:

(a) the costs of collecting water service charges;

(b) an allowance for potential losses in collecting water service charges;

(c) any revenues, other than water service charges, that the WUO is to receive in the fiscal year;

(d) any amounts that the WUO chooses to allocate from surpluses in previous years; and

(e) any other factors that are prescribed in the regulations made pursuant to the WUO law.

Before a water service charge, or tariff of water service charges can be applied, the law specifies that the Management Board must formally approve it. First, however, each WUO must submit to the WUO regulator: an estimate of its total costs for the fiscal year; its proposed water service charges or tariff of water service charges for the fiscal year; and any other information concerning its expenses, revenues or water service charges that the WUO regulator may require.

However, while in Saskatchewan the prior approval by the WUO regulator of the proposed charges is not necessary, in some countries, such as Mexico and Spain, the legislation requires this. And while in South Africa the law permits WUOs to assess charges on participants, these must be set in accordance with the pricing strategy for water use set by the Government.^[121]

Having determined the overall level charges to be collected, the next question is how the amounts payable by individual participants are to be assessed. Again, a number of different approaches are to be found in the legislation. In the case of WUOs that supply water for irrigation it is not uncommon to require some or all of the charges to be levied by reference to the volume of water supplied. This is, for example, the approach taken by the Romanian legislation. Assuming the amount of water delivered can be measured, this appears to be an equitable approach. A farmer pays for the water s/he receives. But what of the cases where a WUO provides a service that is less easy to measure, a common approach is to levy such charges on a uniform basis. For example in Lower-Saxony, in Germany, where WUOs may undertake a range of tasks including land drainage and flood defence, the law provides that the level of charges payable by each individual participant is to be calculated on the basis of the notional 'benefit' they receive from the services provided by the WUO. In practice this is usually assessed at a flat rate charged per hectare of land.

In some countries, however, the legislation provides that such charges are to be calculated by reference to the different individual benefit of each participant. In England and Wales, for example, drainage rates are calculated by each WUO by reference to its actual operating expenses. Individual rates for each participant are then assessed and applied by reference to the 'Assessable Value' of agricultural land. This is determined by the notional rental value of the land in accordance with specific criteria described in the law. The higher the Assessable Value of the land the greater the individual drainage rate payable by the occupier of the land will be.^[122]

This kind of differentiated approach is also applied by Irrigation Districts in California. Different 'classes' of land carry different assessment rates. The objective here is equity. Those using water on land with higher productivity can afford to pay higher charges or a flat rate for operation and maintenance and then a volumetric charge. Different categories are set by soil type (land quality) or by reference to the type of crop grown. For example, Irrigation Districts sometimes set assessed values on five different cropping situations: fruit land, potential fruit land, good agricultural land, fair agricultural land and poor agricultural land.^[123]

Other possible sources of revenue for WUOs will depend on the scope of their permitted activities. As described above, most WUOs, with the exception of those in Sri Lanka, are limited by law to undertake specific water management tasks, thus minimising the scope for raising funds from other activities.

Nevertheless, within this framework some countries' legislation leaves open sufficient legal 'space' for WUOs to earn income from additional sources. For example Nepalese WUOs are entitled by the law to earn income from revenue from the sale of trees planted along the canals and waterways that they operate and maintain. And as already mentioned, in the United States California Irrigation Districts are entitled to earn additional income from the use or management of the property they own in order to fulfil their water management activities, for example from rental income and hunting fees. A number of Irrigation Districts in California have invested in the construction and operation of micro-dams and small scale hydro-power electricity generators on their canals.

Setting charges is, of course, only part of the story: they must also be collected. The rights and powers conferred by the legislation on WUOs in this context are considered in Part 12 below. Failure to collect outstanding charges, or even a failure to collect them in a timely manner, can have a devastating financial impact. Particularly in the case of irrigation WUOs, the problem can be compounded by the fact that farmers may be unable to pay water charges until after the irrigation season is over and they have harvested their crops. What solutions does the legislation provide for this kind of problem?

One approach is to enable a WUO to require participants to pay a deposit in respect of the service to be provided. In California the law enables WUOs to specify a date by which applications for water during the following irrigation season are to be made and to require such applications to be accompanied by a cash deposit not exceeding the water charge for the water applied for.

Another solution may be for a WUO to borrow money by way of a loan or bank overdraft. The right of a WUO to borrow money will depend on the applicable legislation. In particular, if a WUO is a public law body the legislation will probably not only specify whether or not a WUO is entitled to borrow money but may even specify the purposes for which money can be borrowed, as in the case of Saskatchewan, described below.^[124] This is because the powers of public law bodies are usually carefully defined and limited.

In some countries the right of a WUO to raise funds by way of a loan or bank overdraft is expressly permitted in the legislation. Elsewhere, it is implicit by a statement that a WUO has all the powers of a natural person of full capacity. In South Africa, the Water Act specifically permits WUOs to raise loans, including bank overdrafts. The legislation provides little further detail, but specifies that the procedure for raising loans must be addressed in the governing document of WUO. The model governing document annexed to the Act sets out a safeguard procedure which is designed to prevent abuses. All decisions on taking a loan must be made by the WUO management board at a meeting in which at least two thirds of its members must be present. Furthermore, the management board must give detailed notice of the proposed loan to all WUO participants at least 21 days before the date of the management board meeting at which the issue will be determined.^[125]

In the Canadian Province of Saskatchewan, the right of WUOs to borrow money is relatively restricted. The legislation provides that a WUO may 'borrow by way of temporary loans any moneys that it considers will be required to fund its activities in a fiscal year until its approved water service charges for the fiscal year have been collected'.^[126] It goes on to state that all borrowings are to be from a specific class of lender, namely a chartered bank, a trust corporation or a credit union. Finally, it is interesting to note that the legislation specifically provides that the state (the Minister of Finance, and the Government of Saskatchewan) is not liable for the repayment of any loan raised by an irrigation district, including any outstanding interest.^[127]

In practice, the ability of a WUO to raise funds by way of a loan will depend on its ability to provide adequate security. In this connection the Saskatchewan legislation states that WUOs may provide any guarantee or security that they consider appropriate. In Germany, while the WUO legislation is silent on the issue, WUOs frequently raise money by bank loan or overdraft. What is curious is that the land that is served by the WUOs, and which belongs to individual WUO participants, is provided as collateral, even though it is not actually owned by the WUO. In other words the WUO can effectively impose a lien over the land of its participants in respect of its own borrowing. Whether or not such arrangements might be open to legal challenge is an interesting question that has never been brought before a court.^[128] By contrast, in Nepal where WUOs are also entitled to raise loans, the law requires them to actually deposit land ownership certificates by way of collateral.

In the United States, WUOs generally have the right, under state law, to raise revenue through the issue of bonds to fund new investment projects. For example WUOs in the State of Arkansas are entitled to issue tax exempt bonds (that is to say they are exempt from state, county and municipal taxes) in the form of negotiable coupon bonds which may mature at various times up to forty years from the date of issuance. The exact nature of such bonds is flexible: they may contain such terms, covenants and conditions, as the WUO management board determines. They may bear interest at rates authorized by the board, be payable where and how the board designates and be subject to a trust indenture entered with a bank or trust company. Furthermore, such bonds may be sold at a price determined by the management board.^[129]

The California legislation also permits WUOs to issue bonds that are secured against the land of their participants. A proposal to do this must be approved by a vote of the participants, and at least fifty percent of these must vote in favour because their land will be subject to the bond. A simpler and faster alternative is for a WUO to issue a 'certificate of participation' against the future income stream. These certificates bear interest and are effectively a charge on future income. However, as no burden is placed on land, a proposal to issue certificates of participation can be decided by a simple resolution of the management board and does not require the approval of the WUO participants.^[130]

Finally, in addition to raising funds through charges and borrowing another source of WUO finance may be government and other grants. For example the WUO legislation in England and Wales provides that WUOs may receive grants for specific land improvement activities. However, in England and Wales as in the other countries of the European Union there are strict limits on how such grants can be made, so as to ensure compliance with EU legislation on state aids.^[131]

Apart from describing and regulating the possible sources of WUO financing, in some countries the legislation specifies what is to happen to funds raised by a WUO. It is not uncommon for the legislation to require such money to be kept in a bank account, or - as in the case of Punjab Province, Pakistan - a 'special fund' for the use and disposition of its resources. Another variation, found in the legislation of Romania and the Kyrgyz Republic, is to require that any surplus income at the end of the financial year be invested in a special reserve fund. This is in part to ensure that WUOs are clearly shown to be 'non-profit' organizations, in that it becomes legally impossible for them to distribute any surplus income to the participants. Similarly, the Tunisian legislation requires each WUO to maintain a reserve fund as a special account into which surplus income is to be paid.

The legislation reviewed invariably requires WUOs to maintain proper accounts. For example, the legislation of Punjab Province, Pakistan requires each WUO to prepare, in accordance with the standards of the Pakistan Institute of Chartered Accountants, the following accounts:

a) profits and loss accounts;
b) the receipts and expenditure of the previous year; and
c) a summary of the property and assets and liabilities giving such particulars as will disclose the general nature of the liabilities and assets and how the value of fixed assets has been arrived at.^[132]

Such accounts must be audited by commercial auditors within four months of the end the relevant financial year and, having been approved by the general assembly, they must be submitted to the WUO regulator, the identity and role of which is considered in the next Part. Finally, the legislation also requires each WUO to display a copy of its most recent accounts at its registered office for inspection by its participants.