Fiscal And Strategic Issues

The magnitude of the impending changes that will be brought about by the water crisis will place unusual demands on the system of policy planning and implementation, and on the process of building a consensus with the public. Government funds will be needed to ease the transition out of agriculture for thousands of rural families, through programs like purchasing water rights, training workers for new occupations, and expanding the coverage of the social safety net, and

Table A.1 Indicative matrix of the incidence of policies for saving water

Policy instrument

Net water

Government

Urban

Rural

Rural

saving

budget

population

rainfed

pump irrigation

population

population

Subsidy: improved irrigation techniques

+

+

Eliminate credit subsidy on pumps (1)

+

+

Eliminate government import of pumps (2)

+

Higher tariffs on pumps and parts (3)

+

+

Raise diesel and electricity prices

+

+

Remove vegetable import controls

+

+

Remove qat import controls (4)

+

+

Restrictive licenses on drilling (5)

+

Raise fertilizer prices (6)

+

+

Promote market in water rights (7)

+

Purchase water rights for 'set-aside' (8)

+

+

Raise water price in urban systems (9)

+

+

Improve water distribution systems (10)

+

Wastewater treatment for irrigation

+

+

Privatize urban water supply

+

+

Improved investment rules (11)

+

+

+

+

Vocational training (11)

+

+

+

+

Industrial investment subsidies (11)

+

+

+

+

Industrial location controls

+

Subsidy on wheat (12)

+

+

Subsidy on LPG and gas stoves (13)

a

+

+

+

Reforestation programs

a

+

+

Note: a, indicates would help augment water supply.

Note: a, indicates would help augment water supply.

Notes on the mechanisms that lead to the results shown in the table

(1) In 1995, the CACB lent many millions of dollars per year for pumps, currently at nominal interest rates of 9 to 11 %, while inflation for 1995 was more than 70 %. A benefit to the government budget is shown as a consequence of abolishing this credit subsidy. A new policy for the CACB was being adopted, under which there would no longer be transfers from the Central Government.

(2) It was estimated that the government accounted for 75 % of the pumps imported each year, in large part through internationally financed projects.

(3) There are doubts as to whether higher tariffs on drilling equipment could be enforced under the existing institutional arrangements.

(4) In the past, qat was imported from Ethiopia. Knowledgeable Yemenis state that it would be a much cheaper source, even allowing for air freight costs, and it would be of better quality.

(5) There are doubts that the administrative capacity exists to enforce controls on drilling and pumping.

(6) Raising the fertilizer price would reduce agricultural water use via the indirect channel of reducing agricultural output. In 1995, the CACB was not charging farmers the full cost of handling and distributing fertilizer, and the implicit subsidy in the price to farmers was about 20 %. The benefit shown for the government budget would go to the CACB.

(7) Under market mechanisms for transferring water, farmers would receive monetary benefits for giving up their water use rights. Transferable water rights are not yet formally recognized in Yemen, but there have been instances of agreement between farmers and the government to provide the former with specified benefits in exchange for giving up part of their water to urban areas. It is anticipated that this model will be followed increasingly in the future.

(8) In addition to reallocating water to sectors where it generates higher value added per unit used, it will be necessary to retire from use considerable amounts of water in order to avoid depletion of aquifers.

(9) In Sana'a, urban households that receive water from private distribution systems pay 9 times the rate paid by households linked to public mains.

(10) For the Sana'a, it was estimated in 1995 that line losses could be as high as 50 % of the water put into the system.

(11) These measures promote increased industrial employment and thus a rural-urban population shift, resulting in a net water savings on average. The economic benefits to the urban population would take the form of more jobs and higher-paying jobs.

(12) Reducing the wheat subsidy for consumers would figure in the water picture in two important ways: (i) it would increase revenues available for financing water-saving programs and investments, and (ii) it would make rainfed agriculture more profitable. In the longer run, agriculture based on pumping groundwater will have to diminish sharply, and so rainfed agriculture will acquire increased importance for the rural population. Additionally, if rainfed agriculture is not made more profitable relative to irrigated agriculture, then the rural migrants attracted to new industries will come overwhelmingly from rainfed areas, and thus there will be little net water savings from an intersectoral reallocation of the labor force.

(13) Promoting household use of gas, a process already underway, will reduce the demand for fuelwood and thus help arrest the progressive deforestation, and that in turn would increase the capacity of watersheds. In addition to this effect, rural households would benefit directly through switching to a cheaper source of energy.

possibly for special transitional subsidies such as those for start-up investments in industry, improved irrigation systems, recycling of wastewater, repair of urban water mains, reforestation, and LPG and LPG stoves.

A substantial part of the funds needed for these kinds of transitional programs could be raised through reductions in existing subsidies in other areas. The main current subsidies include the following: petroleum products, wheat consumption, electricity, urban water, financial services, irrigation water and, to a lesser extent, fertilizer. The total value of these subsidies in 1994 was about $882 million, or YR 46 746 million. They all were implicit subsidies in the sense that they represent amounts ofpotential revenue foregone. In comparison, the official estimate for Central Government revenue in 1994 was YR 41400 million.

The implicit unit subsidy on irrigation water is the difference between the pumping costs and the willingness of society to pay for the water in other uses. According to informal information gleaned from field observations, it may be assumed that pumping costs are approximately $0.10/m3 in the highlands. The currently observed willingness to pay by urban households translates into a dollar value of $1.32/m3 at the estimated average exchange rate for 1995 (of YR 75/$). Interestingly, the cost of supplying Sana'a from its marginal (i.e. most expensive) potential sources of water gives similar numbers: Upper Wadi Surdud well field, $1.46/m3; Upper Wadi Surdud surface water, $1.42/m3; Wadi Kharid dam, $1.05/m3; Marib dam, $1.12/m3.

Estimated highlands abstractions of groundwater in 1994 were running at about 500 Mm3. To this figure should be added the abstractions in the Wadi Surdud of the Tihama, of 125 Mm3, since that resource likely will be transferred to the Sana'a Basin. Using this quantity also for 1995, the total implicit subsidy for water in the highlands areas would be about $762.5 million. A small amount should be subtracted from that total to represent private urban water, but a larger amount should be added to represent the subsidy (at a lower unit rate) for irrigation water in the rest of the Tihama. Therefore, this global figure for the highlands is conservative but yet amounts to about 18% of the GDP in 1995. (The pump irrigation water subsidy is inclusive of the parts of the subsidies on diesel and electricity that are associated with pumping.)

The significance of the irrigation subsidy is that the present structure of incentives is very heavily biased in favor of overexploitation of groundwater resources. It also serves to provide an approximate estimate of the fiscal costs involved if all ground-water rights were to be purchased from farmers in the highlands. A large part of that cost would be allocated to transport of the water to Sana'a, and the remainder would take the form of payments to farmers for their water rights.

Given that these potential fiscal costs would be large in comparison with the present government budget, it appears likely that the government would have to opt for a combination of measures, partly inducing farmers to give up irrigation by raising the cost of pumping and partly offering them compensation for their water rights. The higher the pumping costs, then the less money per unit of water would have to be offered to farmers, for their future income streams from irrigated farming decrease as pumping costs rise.

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