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World Development, Vol. 20, No. 7, pp. 967-977,1992. 0305-750X/92 $5.00 + 0.00 Printed in Great Britain. 0 1992 Pergamon Press Ltd Issues in Irrigation Pricing in Developing Countries RAJAN K. SAMPATH* Colorado State University, Fort Collins Summary. - This paper surveys the current literature on irrigation pricing in developing countries and discusses the important issues involved. In particular, this paper discusses the role of government in irrigation development and allocation, economics of irrigation pricing, current status of irrigation water pricing and cost recovery in developing countries, and the reasons for the marginal cost pricing principal being not followed in developing countries. The paper also provides some suggestions for improving methods of water pricing and cost recovery. 1. INTRODUCTION Irrigation is one of the most important factors of improving agricultural production and produc- tivity in developing cotmtries, especially so in South and Southeast Asia. Irrigation is the sine qua non of the Green Revolution in Asia. Irrigation development and management will continue to be an important aspect of agricultural development in Asia because agriculture will continue to be the dominant sector in providing employment, generating GNP and alleviating poverty and malnutrition in many of the Asian countries. Further, the Asian countries have adopted food self-sufficiency, especially of rice (which is a high water-consuming crop), as one of the important goals of agricultural development for political and food security reasons (ADB and IIMI, 1986). Moreover, output from irrigated land must be increased greatly, and irrigated land must also expand, to the extent possible, just to meet projected food needs in the next two decades. The Asian countries have already invested billions of dollars of scarce domestic and inter- national aid resources in the past four decades in developing their irrigation potential. Any further irrigation development could come only by in- creasing capital costs since most of the easy and inexpensive projects have already been devel- oped. Since both domestic and international resources are becoming increasingly difficult to obtain due to limited availability and competing needs, increasing attention is also being paid not only to the generation of financial resources to meet the operation and maintenance expenses of existing projects, but also to the recovery of capital invested in the past to fund new projects. There is also growing realization among national governments and donor agencies that past investments in irrigation development have not been paying good dividends owing often to suboptimal and sometimes wasteful utilization of existing irrigation facilities, especially in the case of government-owned systems. The percentage of costs recovered from farmers has been low. In fact, in most countries the revenue collected has not been sufficient even to cover operation and maintenance expenses of the irrigation system. Some of the major reasons for suboptimal utiliza- tion of existing irrigation facilities and lack of cost recovery are the improper pricing of irriga- tion water with inadequate attention paid to the level and form of water charges, methods and modes of collection of water charges and the utilization of the collected revenues. Further poor operation and maintenance of the irrigation systems while ignoring the operational para- meters involved further accentuates the problem *The author would like to thank Colorado Agricultural Experiment Station for funding, Professor Robert Young for a useful discussion on the subject, and the two anonymous reviewers and the managing editor for many useful comments and suggestions without impli- cating them for the deficiencies in the paper. An earlier version of this paper was delivered as a keynote address on Interregional Seminar and Study Tour on Water Resources Planning and Management in Arid Areas, October 17-25, 1989, held in Tashkent, Uzbek SSR and organized by the United Nations and the Soviet Union. Final revision accepted: August 16, 1991. 967

Issues in irrigation pricing in developing countries

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World Development, Vol. 20, No. 7, pp. 967-977,1992. 0305-750X/92 $5.00 + 0.00 Printed in Great Britain. 0 1992 Pergamon Press Ltd

Issues in Irrigation Pricing in Developing Countries

RAJAN K. SAMPATH* Colorado State University, Fort Collins

Summary. - This paper surveys the current literature on irrigation pricing in developing countries and discusses the important issues involved. In particular, this paper discusses the role of government in irrigation development and allocation, economics of irrigation pricing, current status of irrigation water pricing and cost recovery in developing countries, and the reasons for the marginal cost pricing principal being not followed in developing countries. The paper also provides some suggestions for improving methods of water pricing and cost recovery.

1. INTRODUCTION

Irrigation is one of the most important factors of improving agricultural production and produc- tivity in developing cotmtries, especially so in South and Southeast Asia. Irrigation is the sine

qua non of the Green Revolution in Asia. Irrigation development and management will continue to be an important aspect of agricultural development in Asia because agriculture will continue to be the dominant sector in providing employment, generating GNP and alleviating poverty and malnutrition in many of the Asian countries. Further, the Asian countries have adopted food self-sufficiency, especially of rice (which is a high water-consuming crop), as one of the important goals of agricultural development for political and food security reasons (ADB and IIMI, 1986). Moreover, output from irrigated land must be increased greatly, and irrigated land must also expand, to the extent possible, just to meet projected food needs in the next two decades.

The Asian countries have already invested billions of dollars of scarce domestic and inter- national aid resources in the past four decades in developing their irrigation potential. Any further irrigation development could come only by in- creasing capital costs since most of the easy and inexpensive projects have already been devel- oped. Since both domestic and international resources are becoming increasingly difficult to obtain due to limited availability and competing needs, increasing attention is also being paid not only to the generation of financial resources to meet the operation and maintenance expenses of

existing projects, but also to the recovery of capital invested in the past to fund new projects.

There is also growing realization among national governments and donor agencies that past investments in irrigation development have not been paying good dividends owing often to suboptimal and sometimes wasteful utilization of existing irrigation facilities, especially in the case of government-owned systems. The percentage of costs recovered from farmers has been low. In fact, in most countries the revenue collected has not been sufficient even to cover operation and maintenance expenses of the irrigation system. Some of the major reasons for suboptimal utiliza- tion of existing irrigation facilities and lack of cost recovery are the improper pricing of irriga- tion water with inadequate attention paid to the level and form of water charges, methods and modes of collection of water charges and the utilization of the collected revenues. Further poor operation and maintenance of the irrigation systems while ignoring the operational para- meters involved further accentuates the problem

*The author would like to thank Colorado Agricultural Experiment Station for funding, Professor Robert Young for a useful discussion on the subject, and the two anonymous reviewers and the managing editor for many useful comments and suggestions without impli- cating them for the deficiencies in the paper. An earlier version of this paper was delivered as a keynote address on Interregional Seminar and Study Tour on Water Resources Planning and Management in Arid Areas, October 17-25, 1989, held in Tashkent, Uzbek SSR and organized by the United Nations and the Soviet Union. Final revision accepted: August 16, 1991.

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resulting in higher inefficiency in utilization and inequity in distribution. Thus issues related to irrigation-water pricing have received attention in recent years (Ansari, 1968; Neghassi and Seagraves, 1978; Small, 1987, 1989; ADB/IIMI, 1986; Easter, 1990; Easter and Welsch, 1983; Repetto, 1986; Seagraves and Easter, 1983; Small et al., 1986; United Nations, 1980, 1981, 1988; and OECD, 1987). Our objective in this paper is to survey the recent literature and discuss some of the important issues.

2. THE ROLE OF GOVERNMENT IN IRRIGATION DEVELOPMENT AND

ALLOCATION

The role of government in the development and allocation of different agricultural inputs varies a great deal, from virtually nothing in the case of rural labor to virtually everything in supplying irrigation water from medium and large-surface irrigation projects. This diversity raises the obvious question as to the need for major government involvement in surface irriga- tion development in market-oriented agricultural systems of Asian countries. The answer to this question lies in the socioeconomic, engineering, and institutional aspects of irrigation develop- ment. Though surface irrigation water is not strictly a pure public good in the Samuelsonian sense, it has certain socioeconomic, institutional, and engineering characteristics that necessitate it being a publically supplied intermediate input. We next discuss some of the unusual characteris- tics of surface irrigation water.

First, for the free market to determine fully the development and allocation of surface irrigation water, there would have to be a system of pure private property rights, which seldom exists in the real world. The existence of such a system is contingent on certain requirements, such as certainty (the property rights being well defined in terms of quantity, quality, location, and time of use), transferability (easy and low-cost trans- ference of water rights through purchase and sale), externality (spillover effects on other people’s property from water use would be absent or insignificant), and competition (the existence of competitive forces at both the demand and supply sides of the market), being met (OECD, 1987). In most countries, water rights are based on one of three current systems: riparian rights, public allocation, and prior allo- cation. In the first, riparian rights link ownership of or reasonable use of the water to ownership of the adjacent or overlying land. This system is used primarily in humid areas with no water

shortages. The second is based on priorities of use, in which the government allocates water. The third is based on the appropiation doctrine, under which the water right is acquired by actual use over time. None of these systems fulfills all the requirements of pure private property rights. In the riparian rights system, with no allocation priorities, there may be constant court battles over water ownership - with the poor losing out to the rich, owing to the high costs of litigation (OECD, 1987).’ This conflict then leads to the need for public or government control or owner- ship of water, which would enable the govern- ment to sell the rights through pricing mechanisms or distribute the rights through administrative decrees. Such a redistribution of rights could be based on: a first-come/first-served system; estimated social worthiness; redistribu- tion of income; or improvement in the economic status of a backward region or less-privileged group of people; or based on government- dictated cropping patterns. Further, the society’s need to retain control of water in order to achieve changing social goals and objectives over time may lead to the prohibition of most transfers of water rights, preventing market forces from operating.

The second important reason for the involve- ment of the government in the development and management of surface irrigation projects is the significant economies of scale which can be gained in the storage, conveyance, and distribu- tion of large quantities of irrigation water. Government management may therefore reduce uncertainty resulting from supply which is highly variable in time, space, and quality. These solutions usually involve benefits that are non- rival in consumption and therefore in a sense exhibit public good or collective good character (Young, 1986).

The third group of reasons include the need to effectively deal with externalities, particularly those affecting the environment which arise from the development and management of water resources.

The fourth group of reasons would include the attainment of certain social objectives, such as income redistribution, food self-sufficiency, and sustainable agricultural production.2

Thus the overall objectives behind government intervention and involvement in the development and management of irrigation in general, and of medium and large-surface irrigation projects in particular, are to achieve economic efficiency in the use of scarce irrigation water resources at both a point in time (static) and over a period of time (dynamic), and to attain specific equity objectives such as redistribution of income and

ISSUES IN IRRIGATION PRICING 969

wealth among individuals, social classes and regions and merit wants such as self-sufficiency in food grains production and stability in environ- ment and ecology. The composition and impor- tance of these objectives could vary a great deal across countries and across projects within a country. While from a purely idealistic point of view, each of these objectives has merit, often in practice in many developing countries, some of these objectives are stated for purely political rhetoric purposes. The equity objective in parti- cular is often stated as an important objective of irrigation development in general but irrigation distribution policy is rarely designed to achieve that objective. In fact, the proportional equality principle underlying the irrigation distribution policy of virtually every government-owned large and medium-surface irrigation systems and large public tubewells in the Asian countries, is de- signed so that it can lead at best to the perpetua- tion of inequality and at worst to increasing the level of inequality in the distribution of agricul- tural income and assets (Sampath, 1988a and 1990b).

3. ECONOMICS OF IRRIGATION PRICING

The fundamental role of prices is to help distribute limited goods and services to con- sumers and to determine the allocation of limited resources among competing uses and users. In the context of our discussion, the specific func- tions that irrigation water pricing perform are: first, to influence the efficiency with which irrigation water is supplied and used and, second, to affect the equity of distribution in terms of income, cost recovery, etc.

(a) Efficiency

For practical purposes, one could discuss the efficiency aspect of irrigation water pricing under four situations - the first two pertaining to the short run, the third pertaining to the medium run and the fourth pertaining to the long run (UN, 1980; Seagraves and Easter, 1983; OECD, 1987; and UN, 1988).”

In the first situation we have limited availabil- ity of irrigation water and our objective is maximize the net benefits to society. This will be accomplished if the social marginal value of irrigation water across different groups of users would be the same; if not, reallocation of water could increase net social benefits.

In the second situation, our problem is to decide whether to increase the supply from the

given physical system. The variable cost we will incur to increase the supply at the margin will not be available for use elsewhere in the economy. In this situation, we are justified in increasing the supply if the additional social benefits exceed additional social cost. In fact, it will be optimal to increase the supply up to the point at which marginal social benefit equals marginal social cost.

In the third situation pertaining to the medium term, we are concerned with the question of expanding the supply system by allocating capital resources to bring in new irrigation projects. Such additional investments are warranted if the social returns exceed the social costs of those investments at the margin.

In the fourth situation pertaining to the long run, we are concerned with the problem of deciding the optimal level of investments in the irrigation sector vis-d-vis investments comple- mentary to or substitutes for the use of water such as water conservation projects or technolo- gies.

In all the above situations, water pricing can play a critical role in determining the levels of demand and supply and the amount of resources invested. Economic theory clearly shows that if perfectly competitive conditions are satisfied and externalities are absent, then market prices will reflect social values and if long-run marginal cost pricing is followed in the pricing of irrigation water, then the corresponding levels of invest- ment in irrigation projects and the resulting social benefits will all be optimal. This is the principle of marginal cost pricing.

Marginal cost pricing would not be optimal if there are externalities or increasing returns to scale in the irrigation industry or there is mono- poly in a sector with which irrigation is closely linked, or other imperfections and distortions are present in the market. In addition, departures from marginal cost pricing may be necessary if other objectives such as the ones we discussed earlier are involved in the development and management of the irrigation systems. But to the extent there are external diseconomies or exter- nalities such as water logging, salinization. soil degradation and contamination of ground water due to excessive irrigation as a result of low irrigation pricing, marginal cost pricing may even help in better environmental management through voluntary conservation by farmers in- duced by their desire to cut down their costs of irrigation.

To some extent, the pricing structure that can be adopted depends on the nature of the delivery system since the method by which water is delivered will affect the certainty, adequacy,

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timeliness and quality of water and consequently the feasibility of different pricing systems. The four common methods of delivery are continuous flow, rotation, demand and closed pipe systems. While volumetric pricing is feasible under the demand and closed pipe systems, it is extremely difficult under a rotation system and almost impossible under the continuous flow system. Rotation system is the most common system in Asia (UN, 1980; Seagraves and Easter, 1983). In general, closed-pipe sprinkler systems are far more efficient than the continuous flow and rotation systems commonly practised in Asia in both conveyance and farm application efficien- cies. But they are more expensive and their usefulness in irrigating paddy crops is yet not fully known.

(b) Equity

With regard to the equity objective, there are two schools of thought. According to one, all equity problems should be handled through government taxation and transfer schemes and not through subsidies on irrigation. In contrast, the other school supports the incorporation of equity objectives explicitly in the development and distribution of irrigation. It is worth noting here that there are several different concepts of equity used in the literature. First, there is the equity in income distribution in terms of inter- regional, interpersonal and interclass categories, and then equity in the sense of equitable system of charges with regard to the services received and costs imposed on consumers and producers (Carruthers, 1986; Easter, 1990; Small et al., 1989; Small, 1987, 1989, 1990; Sampath, 1983, 1988a, 1990b; Rhodes and Sampath, 1988). Further, there are issues relating to using different criteria such as the ability to pay principle in terms of wealth or income basis, the benefit principle in terms of the value of water to the consumer, the supply cost principle in terms of the economic costs that their demands impose on the system and thus on the society and finally the historic cost principle based on cost as they were rather than as they are (OECD, 1987). Which of these concepts is used in any particular context will have implications for efficiency in the use of irrigation water at a point in time as well as over a period of time. In addition, there is no unique way of choosing among these concepts since objectives vary across regions, crops and users and over time. So in any country more than one concept may be used simultaneously in dif- ferent projects and regions for valid reasons.

The conventional wisdom is that the equity objective always conflicts with the efficiency objective. But there are conditions under which promotion of efficiency will in fact improve equity. Sometimes policies introduced to pro- mote equity resulted in not only decreased efficiency but also, worsening of the degree of equity. For example, recently it was argued, both conceptually and empirically, that irrigation development and distribution based on the pro- portional equality principle not only decreased efficiency but also resulted in worsening the inequity problem (Sampath, 1984, 1988a, and 1990b). In much of the empirical literature, it has been found that the overall per hectare produc- tivity of land is inversely related to the size of operational holdings because of the more inten- sive use of land, labor, and other inputs per unit of land by smallholders. In situations where smallholders do have higher productivity per unit of land, allocation of water based on efficiency criteria would help small farms to gain a greater share of water than allocation based on the proportional equality principle (under which every farmer would receive water in proportion to his or her holding size). Thus under certain conditions, there may not be any conflict be- tween efficiency and certain kinds of equity objectives.

4. CURRENT STATUS OF IRRIGATION WATER PRICING AND COST RECOVERY

IN DEVELOPING COUNTRIES

Water pricing methods vary considerably across developing countries and within a country they vary from one project to another and from one region to another. Mostly, these pricing methods are based on financial rather than economic considerations. Pricing is often deter- mined by the amount needed to recover at least the cost of maintenance and operation of irriga- tion projects. This leads the countries to be more concerned and preoccupied with setting price levels so as to achieve this financial objective rather than with the price structure that will accomplish the most efficient use of scarce irrigation water. Further, in many countries, the real costs of operation and maintenance (0 & M) of different irrigation systems are not known. In fact, there is very little economic and engineering literature that exists on the optimal levels of 0 & M expenditures to operate and maintain different irrigation systems. As one of the reviewers of this paper has pointed out, the proposed 0 & M budgets by the irrigation projects are often not believed and they are known to be inflated both

ISSUES IN IRRIGATION PRICING 971

because agencies expect them to be cut and because they provide opportunities for construc- tion. In fact, in many projects, even this limited financial objective is not realized and some might consider its achievement an advancement4

Canal water in general is highly subsidized in developing countries.’ In a survey of 17 irrigation projects financed by the World Bank (Duane, 1975), it was found that on average only 30% of the total project cost was recovered, which exceeded operation and maintenance costs but were far short of total costs. The problem is still worse in the case of projects not financed by the World Bank. It was also found in Duane’s study that water charges comprised only 17% of the incremental farm income.

There is considerable diversity among coun- tries and within countries, among regions/states and projects, in the system of levying irrigation charges. The irrigation charges used in a given country might include one or more of the following (Ansari, 1968; ADB and IIMI, 1986; Easter and Welsch, 1983; Seagraves and Easter, 1983; OECD, 1987; Small, 1987; Small et al., 1989; UN, 1980 and 1988):

(a) Demand charges based on volume; or on minutes of known flows (as from a reser- voir) or minutes of uncertain flows (pro- portions of flows of a river) as in Peru or Israel’s closed pipe systems in which a low price is charged for basic quotas and a higher price for additional water.

(b) Water rate per hectare dependent on the kind and extent of crop irrigated, the season of the year, etc. In many countries, the water rates are higher when there are storage works than for diversions directly from streams. Moreover, the rates for lift irrigation are usually higher than for gravity-type irrigation projects.

(c) Additional land tax based on increased benefit derived annually from providing irrigation facilities.

(d) Betterment levy on the increase in land value accruing from the provision of irriga- tion.

(e) Irrigation cess, being the annual charges per acre of the irrigable area, whether water was actually taken for irrigation or not.

(f) Maintenance cess being the annual cost of maintenance and operation.

(g) Indirect financing mechanisms - in In- donesia, farmers are not charged directly for the cost of irrigation service but they are fully responsible both physically and financially for the operation and main- tenance of the tertiary-level facilities. It is

carried out by water-users’ organizations or by village government. In Thailand, until recently they used rice export taxes and levies to recover part of the cost of irrigation development and management.

5. MARGINAL COST PRICING OF IRRIGATION WATER

As discussed above, most of the developing countries neither follow marginal cost pricing nor a formal pricing procedure based on optimal departures from marginal cost pricing procedures to account for other objectives. These pricing systems act mostly as disincentives to efficient water use. In this section, we discuss the reasons often cited in the literature for not using marginal cost pricing (Ansari, 1968; ADB and IIMI, 1986; Carruthers, 1986; Duane, 1975; Easter and Welsch, 1983; Neghassi and Seagraves, 1978; OECD, 1987; Prasad and Rao, 1985; Seagraves and Easter, 1983; Small et al., 1989; Small, 1987 and 1989; UN, 1980, 1981 and 1988).

One of the powerful arguments in favor of deviating from marginal cost pricing is that there are millions of indirect beneficiaries such as the consumers who benefit as much or even more than the direct beneficiaries of irrigation, namely the farmers and it is unjust to expect the farmers to bear the full burden. In fact, it has been recently shown conceptually that on equity grounds, the costs of irrigation development should be legitimately shared by both the con- sumers and producers (Sampath, 1983) and under certain second best conditions, it is optimal to price water below its long-run marginal cost (Rhodes and Sampath, 1985).

Since the value of water varies considerably across seasons, crops, regions and climates, complex pricing systems may be required to be efficient but they may neither be administratively feasible nor be acceptable to the farmers. With- out farmers acceptance and cooperation, it is difficult to implement efficient pricing systems. In addition, very complex pricing systems, if not understood by farmers, may result in inefficiency in water use.

The use of water at any point in time also depends on the rainfall, which causes the value of water to vary considerably; however, it may not be feasible either administratively or politically to vary the price of water. Further the value of water is also very difficult to estimate because it is affected by other factors such as the climate, fertilizer and pesticides use, cropping pattern, etc. Moreover, volumetric pricing and complex pricing systems may involve large administrative

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costs which may offset the gains from optimal pricing.

When a large number of farmers are involved it is more efficient to use prices to ration resources. In the case of irrigation water, how- ever, given the nature of the physical/engineering structures involved in transporting it, it is difficult to vary the quantum of water delivered to each farm according to their demand at given prices. In addition, from an equity point of view, it is easier and less expensive to allocate water through quotas or regulations during times of shortage so as to ensure that small and poor farmers are also able to obtain their due shares.

In some cases, the projects have not started generating full benefits to the farmers due to lack of water control at the farm level. In some countries water has traditionally been provided without charge and there are political and religious difficulties in introducing water prices.

There are number of difficulties involved in the estimation of different marginal costs and in determining the allocation of joint costs. Moreover, in those situations where the price elasticities of demand involved are low, the efficiency gains from volumetric pricing may not be very high.

In addition, in real life situations, minimizing conflicts is as important in fixing water prices as maximizing efficiency in water use. Further, under certain conditions easy and straight- forward pricing methods that minimize the need for revisions and minimize complaints from farmers tend to promote confidence and rapport between irrigators and managers, which could be used to improve water-use efficiency in the command area through moral suasion and educa- tion.

To the extent subsidization is necessary to increase the use of irrigation, increase agricul- tural production, attain self-sufficiency, keep the food prices low in urban areas, or compete internationally, any withdrawal of the irrigation subsidy may either conflict with the achievement of those objectives or may result in offsetting or more than offsetting subsidies elsewhere in the agricultural sector. Thus the irrigation subsidy issue cannot be decided in isolation.

Irrigation potentials are frequently underutil- ized and therefore if charges are increased, farmers will be less motivated to irrigate. Margi- nal cost pricing policies also do not take enough account of the need to help the socially under- privileged, redistribute incomes to the agricul- tural sector and promote rural development. Further, sometimes deviations from marginal cost pricing are introduced to accomplish certain

social objectives such as better health, ecological, environmental and recreational uses of water.

Before we discuss the potential ways for improving the methods of water pricing and cost of recovery, we need to discuss some of the limitations and needs of current empirical re- search. One of the problems with the currently available empirical studies on irrigation water pricing is that they do not take into account adequately the other objectives behind irrigation pricing and policies. As we mentioned earlier, often there are other sociopolitical objectives involved in the market for water supplied by the public sector. Even where the water market is completely controlled by the private sector, marginal cost pricing will be followed only in a competitive setting. In fact, we know from second-best theory (Lipsey and Lancaster, 1954; Rhodes and Sampath, 1985) that in noncompeti- tive situations, it is not necessary to follow marginal cost pricing principle. But in empirical literature relating to water pricing in developing countries, the authors of research reports and papers give the impression that whenever the prevailing price happens to deviate from mar- ginal cost, there is inefficient pricing, which may not necessarily always be so once they incor- porate fully all the second-best constraints into their analysis. One of the important current research needs is to study how far the current irrigation water pricing is suboptimal given the objectives, constraints and the circumstances under which they are decided.

The purpose of any study of the irrigation water-pricing problem of an irrigation project should be in line with the objectives and purposes of the project as stated and perceived by the authorities and the beneficiaries. There could sometimes be conflict between the two groups in terms of how they perceive the ultimate objec- tives of the project, the resolution of which might require intensive study of the project in detail. The objectives of irrigation are not at all identi- cal, sometimes not even similar, across projects and regions within a country. Some irrigation projects are established to provide full irrigation to the whole command area for the entire year or season or crop. Sometimes they are established to provide only supplemental irrigation for parti- cular times of the season, for example, for germination or flowering period of the crop. Some are purely established as an insurance against drought. Some projects are multipurpose and some are purely for irrigation. Some are storage dams having more flexibility in opera- tions and others are simply diversion schemes having not much flexibility. Some may have very well-lined canals and distributaries with few

ISSUES IN IRRIGATION PRICING 973

conveyance losses and others may not. Some may serve command areas with no other alternative source of irrigation, either farmer or government owned, and others may have alternate sources. Some projects may serve low rainfall or arid areas and others may serve higher rainfall or semi-arid or even wet areas. The crops grown may be drought resistant or extremely suscep- tible to drought. The project command area as a whole may be a water surplus or adequate or deficit area or even be water surplus in one season, water adequate in the second season and water deficit in the third, for example, summer season as do some areas in India - northeast and southwest (Sampath, 1988b).

Irrigation water pricing is an important prob- lem in all the above-mentioned scenarios; but its role in the attainment of the different goals of irrigation projects can not and will not be the same across projects and regions. For example, in an extremely water-scarce command area, growing only one crop a year nonresistant to drought, the relative importance of different objectives such as efficiency, equity, cost recov- ery and environmental stability, and the conse- quences of inefficiency and inequity in irrigation distribution will be different from that of water- abundant or water-adequate regions and conse- quently the role of irrigation water pricing could be different. In a water-scarce command area, not only the efficiency objective but also the equity objective is important. This means that efficiency pricing should be followed if that would also result in equitable distribution of water across different farm-size groups; if not, then deviations from efficiency pricing policy with or without restrictions on the maximum supply of water to farms may be warranted. In a water-abundant or water-adequate command area, the role of pricing is to improve efficiency in its use (so that adverse environmental con- sequences can be prevented) and to recover costs.

Thus it is critical to understand the goals and objectives of the projects and the nature and social structure of the beneficiary groups and their problems before embarking on a study of the problem of irrigation pricing in any particular project context. It is often wrongly assumed by researchers that every time the actual irrigation water pricing deviates from its marginal cost, it is inefficient. In fact, depending on the objectives of the project, the water supply, the crop production functions, rainfall and effective de- mand for water, it is quite legitimate and even optimal in some sense to have the market clearing price different from its marginal cost under certain conditions.

6. SUGGESTIONS FOR IMPROVING METHODS OF WATER PRICING AND

COST RECOVERY

From the above review of the empirical litera- ture on irrigation water pricing, it is evident that the marginal-cost pricing principle is not followed anywhere in the Third World; in fact, it appears that no systematic and uniform rules are followed in setting prices. It differs from county to county, region to region within a country and project to project within a region. One could even say that it even differs from time to time for a given project. Prices are determined by a mix of social, economic and political factors. There are ex- treme variations across countries in the socio- economic and political environments, rainfall and weather, cropping pattern, the relative importance and roles of different physical and ownership sources of irrigation, and equity con- siderations.

In spite of the valid reasons cited in the literature for deviating from efficient market pricing of irrigation water, to the extent ineffi- cient pricing leads to inefficient use of water, it would lead to significant environmental impacts such as excessive drawdown of the underground aquifers, construction of unnecessary storage facilities, adverse impacts on the aquatic environ- ment, overirrigation leading to increased nitrate, phosphate, and pesticide contamination of aqui- fers and increased soil degradation through compaction and salinization (OECD, 1987). From a review of the available empirical evi- dence, it appears that most irrigation-water pricing systems are neither efficient in maximiz- ing the social benefits from water use nor are they equitable either in distributing the benefits of irrigation development across different econo- mic classes or in recovering the costs of irrigation development from its beneficiaries. Inadequate recovery of capital costs leads to lack of availabil- ity of investment funds to undertake new invest- ments in irrigation projects. Inadequate recovery of operating costs leads to irrigation projects either dependent on the government’s general revenues, thereby reducing the availability of funds for new investments further or simply having inadequate funds for operation and main- tenance that over time result in the deterioration of physical structures, ultimately requiring con- siderable resources for rehabilitation of renova- tion. Further, as one of the reviewers has pointed out, more subsidization of capital costs implies less real participation by the irrigators in plan- ning capital investments and thus to some poorer investments. It is therefore critical to improve the current state of affairs quickly and significantly.

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In proposing changes, however, one should be extremely careful, since the systems for allocat- ing and pricing irrigation water that exist in most countries have developed over a long period of time as a compromise among several conflicting tendencies, interests, needs and objectives. So before adopting changes, it is desirable and even necessary to study the likely sociopolitical and institutional impacts of alternative strategies and methods. There are six suggestions worthy of consideration.

First, in the last four decades, due to exploding population growth and substantial increase in the demand for irrigation, demand-supply im- balances have grown significantly in almost every developing country especially in Asia and the need for metering and pricing of all water services, active encouragement of the develop- ment of water markets where water rights could be bought and sold, and other methods of managing demand and supply of water could hardly be overemphasized.

Second, developing countries should now con- sider the user-pays principle for the water and water-related services especially so for irrigation, which is by far the predominant part of the total demand for water. The user-pays principle could be based on a very restrictive notion that irriga- tion authorities use the marginal cost pricing principle and take into account economic effi- ciency in the formulation of pricing structures; or it could be based on a somewhat less restric- tive and possibly more practical notion that the total revenue from users equals the total costs, or that the average price equals the average total cost.

Third, the currently used flat-rate payments for irrigation are notoriously poor in promoting efficient use of water and as such they need to be replaced by volumetric pricing in order to en- courage efficiency in water use at the farm level and to recover the full costs of irrigation develop- ment. But this can be accomplished only over a period of time. Initially, irrigation authorities could introduce differential rates of irrigation per hectare for different crops directly proportional to the water requirements of crops. These rates could vary across different projects in relation to the degree of certainty with which water is delivered to farmers. In those areas where irrigation has been in existence for some time, where the value of water is high and water flow can be regulated, and where the average econo- mic status of the farming community is high, such as in Punjab and Haryana in India, volumetric pricing could be immediately introduced. In those command areas where water supply is uncertain due to variable flows, farmers could be

allocated and charged individually on the basis of shares rather than volume.

Fourth, a precondition for volumetric pricing is the installation of metering devices. Whether or not to price water volumetrically will depend on the benefits and costs of metering. There has been substantial improvement in metering tech- nology. There are several issues and aspects involved with regard to the metering decision such as the equity aspect. Metering, given everything else constant, will be more equitable in the sense that it will permit volumetric pricing which in turn means that each user will be charged for the amount of water he uses. There is also the efficiency aspect. Metering which makes possible volumetric pricing leads to improvement in water use efficiency. But the metering decision has to be looked at from two different points of view, namely, the economic feasibility in terms of social benefit-cost analysis and the financial feasibility in terms of private and irrigation agency’s cash inflows and outflows. Metering provides useful information for the water author- ity to improve its demand forecasting and waste reduction techniques and performance. Resource costs of metering will include provisions of installation, maintenance and additional reading, billing and collection costs over and above those incurred with the existing charging system. While economic feasibility is a necessary condition for introducing metering, it is not sufficient. We need to fulfill the financial feasibility condition if metering is to be successful.

Fifth, subsidies to irrigation should not be applied nationwide. They should be selective in terms of regions and crops based on clearly stated goals and criteria and not solely on political grounds.

Sixth, available evidence clearly suggests that: (a) irrigation demands respond to price

changes, (UN, 1980) (b) the farmers are willing and able to pay for

water, if water supply is dependable, timely and adequate (ADB and IIMI, 1986), and

(c) one of the reasons for inadequate perfor- mance of the subsidized irrigation systems is the lack of cooperation and coordina- tion between farmers and irrigation offi- cials (Seagraves and Easter, 1983; Small, 1987).

(d) There are capital market imperfections and strong political preferences for newer investments rather than for rehabilitation and operation and maintenance expenses. These result in a significant bias against providing projects with adequate operat- ing expenditures (Easter and Welsch,

ISSUES IN IRRIGATION PRICING 915

1983; Easter, 1990; Small et al., 1989; and Svendsen, 1986).

Because of these factors, one possible way to accomplish improved project performance along with the recovery of costs is to separate the operation and maintenance part of the irrigation projects from the fiscal budget of the government and require the irrigation agencies to generate their 0 & M budget from the sale of irrigation services. This requires the establishment of water users’ organizations (WUO). WUOs would be responsible for the collection of dues, fees, etc., from the farmers for water and related services delivered and for coordination and cooperation between the irrigation bureaucracy and farmers. Such a direct financial linkage between farmers and irrigation agencies will help in improving the accountability of irrigation managers to water users, the effective cooperation and involve- ment of water users in operation and main- tenance and the overall performance of the irrigation system. In fact, the Republic of South Korea has successfully implemented an innova- tive farmers’ participatory management program to operate and maintain new irrigation projects (Easter and Welsch, 1983; ADB and IIMI, 1986).

Finally, in moving toward a more rational water pricing, one needs to keep in mind the fact that the nature and sources of supply and demand characteristics of water vary a lot across regions, crops, seasons, and uses. This means that the institutional, legal, and market mec- hanisms that govern the development and allo- cation of water should be allowed to evolve without artificial constraints imposed by govern- ments.

7. CONCLUSION

From a selective review of recent literature on irrigation water pricing in developing countries, it is evident that efficient market pricing of water is not taking place. There is wide diversity involved in the objectives, constraints and condi- tions, socioeconomic, political, and institutional setting and other physical/engineering aspects of irrigation development across countries, across regions within a country and even across projects within a region. Each irrigation project therefore needs to be managed differently to use irrigation water efficiently and to attain the different goals and objectives. This in turn means that there must also be a decentralization of control so that irrigation managers can be efficient at the project level. But, unfortunately, in most developing countries, there is too much centralization in the control and management of irrigation projects which result in the use of uniform rules, regula- tions and policies concerning the provision and pricing of irrigation services that do not suit all the projects the same way. This state of affairs results in inefficient functioning of the irrigation system. So what is urgently needed to move faster toward an efficient market-oriented irriga- tion water allocation and pricing mechanism is the decentralization of control so that decisions are taken at the project level. Even though this process would lead in the short run to nonuni- form pricing of irrigation water across projects and regions in the long run, it would lead to a more efficient pricing structure across projects and regions and set in motion the competitive forces that will ultimately lead to optimal utiliza- tion of water resources.

NOTES

1. Though in the case of the United States, as one of the reviewers has pointed out, the poor are not necessarily disadvantaged in court.

2. Though one could consider “common or commun- ity or cooperative ownership” as an alternative to public or government ownership, it is common among resources only when they are low in value. Whenever huge resources, with economies of scale in their development and operation, and large number of beneficiaries, are involved, it is more common to find government ownership of those resources than cooper- ative ownership (UN, 1980; Seagraves and Easter, 1983; Young, 1986; and OECD, 1987).

3. UN (1980) OECD (1987), and Seagraves and Easter (1983) discuss the efficiency aspect of irrigation water pricing in terms of three situations. I find it also useful to distinguish between the two variants of the short-run situation.

4. For a recent detailed and careful study of issues in financing irrigation services in five Asian countries see Small et al. (1989).

5. This is not to deny, of course, that irrigation water is heavily subsidized in developed countries though not to the same extent.

976 WORLD DEVELOPMENT

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