Water at any price? Issues and options in charging for irrigation water

IRRIGATION AND DRAINAGE

Irrig. and Drain. 50: 1–7 (2001)

WATER AT ANY PRICE? ISSUES AND OPTIONS IN CHARGING FORIRRIGATION WATER1

CHRIS PERRY*International Water Management Institute, Colombo, Sri Lanka

ABSTRACT

Shortage of water and inadequate funding for maintenance of irrigation works have focusedattention on the potential for water charges to generate financial resources, and reduce demandfor water through volume-based charges. Examples from other utilities, and from the domestic/industrial sectors of water supply, suggest the approach could be effective.

However, in many developing countries, the facilities required for measured and controlleddelivery, which are both essential for volume-related charges, are not in place and theirintroduction would require a massive investment in physical, legal and administrative infrastruc-ture.

To be effective in curtailing demand, the price of water must be significant, but the pricestructures and levels that are within the politically feasible and acceptable range are usually toolow to have a real impact on demand, much less to actually bring supply and demand intobalance. Similarly, the present cost of water is too low to induce significant technical innovationor investments that could reduce consumption.

Moreover, while water supplied is a proper measure of service in domestic and industrial uses,in irrigation, and especially as the water resource itself becomes constrained, water consumptionis the appropriate measure for water accounting, and this is exceptionally difficult to define.

An alternative approach to coping with shortage would focus on assigning volumes to specificuses – and effectively rationing water where demand exceeds supply – has a number of potentialbenefits including simplicity, transparency and the potential to tailor allocations specifically tohydrological situations. Copyright © 2001 John Wiley & Sons, Ltd.

KEY WORDS: water management; irrigation; water pricing; incentives

RESUME

La penurie d’eau et le manque de moyens consacres a l’entretien des systemes d’irrigation ontmis en evidence le role que le prix de l’eau pouvait jouer pour generer des ressources financiereset faire flechir la demande, et ce par le biais d’une tarification basee sur le volume. L’exempled’autres services publics, et des secteurs domestiques et industriels de la distribution d’eau, laissepenser que cette approche peut etre efficace.

Toutefois, dans de nombreux pays en developpement, les equipements necessaires pourassurer un approvisionnement controle et mesure – ce qui est indispensable si l’on veut appli-quer une tarification basee sur le volume– existent rarement, et leur installation necessiterait

* Correspondence to: Wyclif, Croyde, Devon EX33 1NH, UK.1 L’eau a tout prix? Problemes et options dans la tarification de l’eau d’irrigation.

Copyright © 2001 John Wiley & Sons, Ltd.

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d’enormes investissements, au niveau de l’infrastructure materielle, juridique et ad-ministrative.

Pour pouvoir avoir un impact reel sur la demande, le prix de l’eau doit etre significatif. Or,les prix politiquement applicables et acceptables sont trop bas pour avoir un reel impact sur lademande, et a fortiori pour etablir un equilibre entre l’offre et la demande.

De meme, le cout actuel de l’eau est trop faible pour generer des innovations techniques oudes investissements significatifs susceptibles de reduire la consommation. De plus, si la quantited’eau fournie est une mesure adequate du service en ce qui concerne l’usage domestique etindustriel, par contre, en matiere d’irrigation – surtout lorsque les ressources hydriquesdeviennent limitees – c’est la consommation reelle qu’il faudrait pouvoir mesurer, ce qui estextremement difficile a determiner.

Un autre moyen de gerer la penurie consisterait a affecter des volumes a des usages specifiqueset a rationner efficacement l’eau la ou la demande excede l’offre. Une telle approche offre uncertain nombre d’avantages potentiels en termes de simplicite et de transparence, et offreegalement la possibilite de moduler les volumes en fonction de la situation hydrologiquespecifique des regions concernees. Copyright © 2001 John Wiley & Sons, Ltd.

MOTS CLES: gestion de l’eau; irrigation; tarification de l’eau; moyens de motiver

INTRODUCTION

Until recently, water has generally been plentiful and the role of water pricing as a means toensure efficient allocation, and productive use has attracted little attention.

Now, water is manifestly scarce in many countries; individuals, agencies and internationaldeclarations advise that water should be treated as an ‘‘economic good’’ (Briscoe, 1996;Rosegrant and Binswanger, 1994; WMO, 1992, Dublin Statement ; Global Water Partnership,2000); in parallel with this development, the maintenance of water-related facilities is oftenobserved to be inadequate (Jones, 1995). These two issues together have provided impetus forthe introduction of various forms of pricing for water and water services. A primary target forthese interventions is irrigation, because irrigation is by far the largest consumer of water –typically 70–80% – in most countries where shortage is a problem.

In this paper some issues related to the introduction of effective water pricing for irrigationservices are set out, with particular reference to reducing demand. It is argued that implementa-tion has a number of limitations in the irrigation sector, and that the scope for realising benefitsmay be limited by physical, economic, financial and political constraints.

THE RATIONALE FOR WATER PRICING IN IRRIGATION

In some irrigation projects water is provided as a free service. In others, even the low chargesthat are supposed to be collected in fact are not (World Bank, 1986). Where charges are low, ornot collected, the beneficiaries of irrigation – who typically are a privileged group within theagrarian sector – receive their service at the expense of the economy in general.

Even where charges are in place and are collected, the charge is often fixed per hectare ofcrop, or per hectare of farm area, and does not vary with the quantity of water actually taken– the marginal price is zero. In this situation even if the full costs of the service are recovered,there is no incentive for the farmer to save water – he will either take as much as he can usewhile the (fixed) price allows a profit to be made, or not irrigate at all if he cannot make aprofit.

Copyright © 2001 John Wiley & Sons, Ltd. Irrig. and Drain. 50: 1–7 (2001)

ISSUES AND OPTIONS IN CHARGING FOR IRRIGATION WATER 3

These scenarios point to a number of reasons for levying water charges:

1. To fund operation and maintenance (O&M). In many countries, water charges are low (ornot recovered) and funds for maintenance have to be supplemented from hard-pressedcentral funds. If irrigated farmers are seen as a privileged elite, then the case for subsidisingtheir service is weak, and funding will be restricted. Poor maintenance leads to poor service;poor service leads to low productivity; low productivity leads to unwillingness to pay, furtherreduced funding, and so the vicious circle is closed.

2. To encourage productive and conservative use of water. As competition for water increases,and deficits become more frequent and widespread, the case for providing subsidised or freewater to alleviate poverty or increase food production becomes weaker in relation to theneed to ensure that a limited resource is used as productively as possible and is not wasted.

3. To recover investment costs. Investment in irrigation infrastructure is generally publiclyfunded. The benefits of this investment accrue directly to the farmers whose lands are mademore productive, and indirectly to society at large through lower food prices and moreassured availability. There is therefore a case that some proportion of the benefits should berecovered to support further investments for other farmers.

Each of these three objectives requires specific levels and structures of pricing to be effective. Inthis paper, the main focus of attention is on water pricing to provide an incentive for efficientuse – since this topic seems to be attracting the most attention at present (‘‘Efficiency in watermanagement must be improved through greater use of pricing . . . ’’ World Bank, 2000; ‘‘Werecognise that water is an economic, as well as a social, good. This recognition should be centralto decision-making, and water should be priced accordingly.’’ – Clare Short, 2000).

If pricing of irrigation water is to be effective in reducing demand, then legal and regulatorycriteria, operational criteria, and economic criteria must all be met – and then finally we haveto be sure that the measurements we have for resource use are in fact suited to the purpose, theaccounting criterion.

Legal and regulatory requirements

Before pricing can be introduced, an orderly system of distributing water must be in placethrough a respected regulatory framework for allocating water among farmers based on aspecified water right. This legal/regulatory framework must include procedures for measurementof the quantity delivered that are acceptable to both the farmer and the billing agency; andprocedures for accounting for partial deliveries, missed deliveries, excess deliveries, late deliver-ies, polluted deliveries, and so on. The service implied by the water right must be defined, andthe obligations of the agency and the farmers specified, recognised and enforced.

If this is not the case – if farmers take water at will, manipulate gate settings, toleratesignificant interference in water distribution, or do not pay assessed charges – then there is noscope for improving water distribution through pricing. Attention should first be given toclarifying and enforcing water rights and the rules of water distribution.

Operational requirements

For market incentives to work at the farm level, a differentiated service including measurementat the farm level and charging at the farm level must be in place. This in turn will require quitesophisticated delivery facilities at the farm level, and an associated administrative bureaucracyto collect and collate data on farm-level deliveries, and undertake the billing process1. This is not


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the same as relating payment ex post to whatever quantity of water was in fact delivered – itmust involve an ex ante, two-sided process of demand from the user and agreement by thesupplier if pricing is to have the desired impact on demand. Many irrigation schemes comprisehundreds, if not thousands or even millions of individual consumers. In monsoon Asia, manyfarms receive water through ‘‘field to field’’ irrigation with no formal delivery point, andcertainly no scope for measuring deliveries.

Procedures and technical approaches to resolving these problems do of course exist. Theapproach has proved feasible in countries such as Australia and the USA, but farm sizes in bothcountries are typically 10–100 times greater than farm sizes in many developing countries. Thisdirectly indicates the associated additional complexities of billing and also the far greaterhydraulic complexities of delivering (or not delivering) incremental water supplies to individualfarmers. The hydraulic complexity results from the fact that changes in flow rates at one pointin an open surface system generate impacts on all downstream flows, which can be dealt withbut requires rather different infrastructure than most systems now have.

In Israel, while farm sizes are often comparable to those in developing countries, theinfrastructure is such as to allow precise and verifiable delivery of water to individual farms –and the concept of scarcity was dominant in the original system design rather than emergingover time (as is the case in many existing systems in developing countries). Providing theinfrastructure for such service would require the reconstruction of most irrigation systems toconsiderably more stringent operational standards than they now meet.

Economic requirements

If the charging system is to have an impact on consumption, then the system of payment mustbe such as to induce the desired economic response. There are two levels of desired response; thefirst is simply to make the user aware of an incremental charge related to incremental use, andto encourage avoidance of waste. This is analogous to the small cost incurred in leaving a lighton – we are conscious of it, we will tend to avoid leaving lights on for long periods duringdaylight hours, but may leave lights on at night for the convenience of finding a stairwayalready lit, rather than having to seek the switch in the dark.

The higher objective of marginal pricing is actually to achieve a balance between supply anddemand through the pricing mechanism – in other words to find that market price which willbalance supply and demand for any given availability of water. This, of course, is a far morecomplex pricing objective because the value of water varies very sharply by crop, by stage ofgrowth, by soil type and most difficult of all, depending on whether it has rained, is raining orwill rain soon.

If the objective of marginal water pricing is to curtail demand substantially, then the pricecharged must be significant in relation to the benefits derived from using water. IWMI’sresearch (Molden et al., 1998) has shown that the value of water in agriculture is in the orderof 10¢ per cubic metre. On this basis, prices of less than a few cents per cubic metre will havelittle effect on demand. Indeed, research has shown in the case of Egypt (Perry, 1995) that theprice required to induce a 15% fall in demand for water would have reduced farm incomes by30%.

The political criterion

In most developing countries, the agricultural sector is politically sensitive, sometimes evendominant. Changes that will reduce farm incomes are viewed with great caution by politicians



in general and particularly by those who represent farming constituencies. Taking the Egyptiancase referenced above as an example of the scale of the issue, we note that the level of watercharges required to reduce demand by 15% ($300 ha−1) is six times the water charge requiredto meet fully the operation and maintenance costs of the system ($50 ha−1). The rationale forrecovering the costs of O&M is relatively clear – why should the ‘privileged’ irrigated farms besubsidised by the rest of the economy – but even this benchmark has proven politically difficultin most countries. The additional multiple of six times required (in the Egyptian case) to inducea significant reduction in demand would be, to say the least, a challenge. As Ray, Isha(forthcoming) has put it: significant price increases are politically infeasible, and feasible priceincreases are economically insignificant.

The resource accounting requirement

One final problem plagues the achievement of efficiency benefits through irrigation waterpricing, even if infrastructural, operational, political and bureaucratic hurdles can be overcome.This issue concerns the nature of ‘efficiency’ in water resource systems (Keller and Keller, 1995).

In the municipal and industrial sectors of water supply, the agency providing the serviceusually considers the volume and quality of water delivered as appropriate measures of serviceon the basis of which costs can be allocated and billing based. This is appropriate because theutility will have paid to capture the water, treat it to meet acceptable standards, and deliver thewater through its distribution network. Reductions in demand from users will save the utilitymoney on each of these activities.

But when overall resource scarcity becomes the framework for water accounting (rather thansector- or agency-specific cost accounting) the picture changes dramatically: we must focus noton water diversions, but on consumption, and recognise that where ‘‘wasted’’ water is recap-tured locally through pumping, or downstream, the resource cost of the ‘‘wastage’’ is essentiallyzero unless substantial pollution has occurred in the recycling process.

Thus while in municipal and industrial uses, the supplying agency is correctly concerned withwater diverted, in the irrigation sector the concern – especially in the context of overall watershortage – is about consumption. We have already argued that it is difficult to envisage asystem of accurate measurement of deliveries to farms in large-scale irrigation systems indeveloping countries. The measurement of consumption is inherently much more complexbecause it involves spatially distributed return flows to drains, rises and falls in local watertables, rainfall and so on.

This complex situation makes it virtually impossible to formulate a pricing structure that canserve the multiple objectives of water charges, and the various hydrological situations where itmay be desirable to decrease, stabilise or increase the water supplied to irrigation systems.Certainly charging for water can give incentives to use less or use differently, but broaderobjectives of balancing supply and demand or stabilising environmental impacts are unrealistic.Even the introduction of incentives will require massive improvement in the infrastructure,management and regulatory framework that characterises most irrigation systems, as well aspolitical commitment to some difficult initiatives.

AN ALTERNATIVE APPROACH

It is striking that many of the issues identified above must be analysed in terms of volumes ofwater. The water available is a volume, and how it is used (through crop ET, to groundwater,


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to drains) are a set of volumes, and the salt balance is based on water and salt volumes and theirspatial and temporal distribution.

It is also relati6ely easy to define sustainable irrigation in terms of the water that should beapplied, water that should (or should not) be returned to the system, and water that should goto groundwater to maintain sustainable balances in each area. It is also easiest to define thepolitical economy of water in terms of allocations of water to areas, groups or individuals.

And finally, it is important to note that the incentives to utilise water productively are madeclear to the farmer just as directly by rationing water as by trying to establish an appropriatesystem of water charges. In north-west India, the long-tested warabandi irrigation system(Malhotra, 1982) is based entirely on ensuring an equitable distribution (over the land) oflimited water resources. Water charges are not high, not volumetric, and the marginal price iszero, but because every farmer is water-short, he experiences directly the true value of his waterration, and strives to use every drop and maximise its productivity.

CONCLUSIONS

The apparent misuse and waste of irrigation water, especially in the context of low andsubsidised prices for water, suggest that market forces should have a prominent role inencouraging more efficient resource use.

However, water is a complicated natural resource:

1. It is difficult to allocate and measure, especially in large surface systems with many smallfarmers – indeed it is rare to find even simple proportional allocations being achieved, withhead-end farmers (and projects) usually getting more water than tail-enders.

2. The nature and extent of actual losses are rarely easy to assess, due to reuse and recyclinglocally and downstream, as is the extent to which ‘‘savings’’ will be achieved through watercharges or changes in technology.

3. The salt load that is found in every basin complicates the analysis of water distribution andconsumption considerably, due to conflicts between ‘on-site’ objectives of avoiding theaccumulation of salt, and downstream impacts of concentrated salt loads.

Water is also a complicated economic resource:

1. Its value varies sharply across time, space and use.2. Its value in irrigation is generally a large multiple of its cost, but the cost of ‘‘saving’’ water

as a source of extra water is very expensive.

And water is a complicated political resource:

1. Farmers are often an important political constituency, and strongly resist increases in theprice of irrigation services.

2. The level of price increases that would be required to have a significant impact on demand(for example, by a factor of 5-10) would be politically very difficult to enforce.

3. The level of water prices that would induce changes in demand would result in substantialprofits to the supplying agency, which would present a further political difficulty.

In sum, the implementation of volumetric water charges is difficult and unlikely to result inwater savings within the politically feasible range of prices; introducing charges at a lower ratewill have no impact on demand, but will significantly increase the costs of irrigation services.



The ‘‘correct’’ price structure to balance supply and demand will not be the ‘correct’ pricestructure required to meet environmental needs, and also will not be the ‘‘correct’’ price to meetsocio-political objectives.

Many of the assumed advantages of water pricing can be achieved through physical rationingof water, which is also easier to implement and administer, more transparent, and more readilyadjusted to meet local considerations such as rising or falling groundwater conditions, and saltmanagement. In many countries, defined and enforced water allocations per hectare wouldachieve some very important steps towards efficiency objectives by ensuring that individualfarmers experience and respond to general conditions of scarcity.

The separate, but still complex and sensitive issue of ensuring that irrigation charges meet theneeds of financial sustainability can then be addressed without the confusion that marginalpricing and demand management seem likely to introduce.

NOTES

1. An alternative approach would price and deliver water to an intermediate point – for example, a group of farmers – thussubstantially simplifying the operational and administrative issues. The economist would ask how the market pressure to respondto price is passed on to the individual farmer, who remains the economic ‘‘actor’’ in the decision on water use. Either the groupmust face the operational issue of delivering, measuring and billing at the farm level (in which case all we have achieved is todelegate the problem – not an uncommon step in the whole ‘‘participatory’’ movement! – or the link between service andpayment is broken, so that the economic forces are lost.

REFERENCES

Briscoe J. 1996. Water as an economic good: the idea and what it means in practice. Paper presented to World Congress of ICID,Cairo, Egypt.

Global Water Partnership. 2000. Vision and Framework for Action. Stockholm, February.Jones WI. 1995. The World Bank and Irrigation. Washington DC.Keller A, Keller J. 1995. Effecti6e Efficiency: a Water Use Efficiency Concept for Allocating Freshwater Resources. Water Resources

and Irrigation Division, Discussion Paper 22. Winrock International: Arlington, VA, USA.Malhotra SP. 1982. The Warabandhi System and its Infrastructure. Central Board of Irrigation and Power: New Delhi, India.Molden D, Sakthivadivel R, Perry CJ, de Fraiture C, Kloezen W. 1998. Indicators for Comparing Performance of Irrigated

Agricultural Systems. IWMI Research Report 20, IWMI: Colombo.Perry CJ. 1995. Alternati6e Approaches to Cost Sharing for Water Ser6ice to Agriculture in Egypt. Research Report 2, International

Irrigation Management Institute: Colombo, Sri Lanka.Ray, Isha. (Forthcoming). Farm-le6el incenti6es for irrigation efficiency : some lessons from an Indian canal. Water Resources Update,

Universities Council on Water Resources, Southern Illinois University, Carbondale, Illinois.Rosegrant M, Binswanger H. 1994. Markets in tradable water rights: potential for efficiency gains in developing country water

allocation. World De6elopment 22(22): 1613–1625.Short, Clare (Secretary of State for International Development, UK). Address to ODI-SOAS, London, 14th March 2000.WMO. 1992. The Dublin Statement and Report of the Conference, International Conference on Water and the Environment. Geneva,

Switzerland.World Bank. 1986. World Bank Lending Conditionality: a Re6iew of Cost Reco6ery in Irrigation Projects. Washington DC.World Bank. 2000. Draft water sector policy. Washington DC.


Water at any price? Issues and options in charging for irrigation water

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