The discussion so far in this chapter has concentrated on two main themes: (a) achieving efficient and equitable allocations of water, within and among sectors, in the face of increasing scarcity of that resource, and (b) making irrigation systems work better, and sustainably, through use of more appropriate technology, improvements in system management (including greater participation by users) and more appropriate economic and legal environments (including better incentives for more efficient use of water). Although the value of irrigation in reducing poverty has been mentioned, its role in promoting rural development has not been touched upon directly, except insofar as it is related to approaches designed to make access to irrigation more equitable. However, of all of the approaches designed to improve the lot of smallholders, irrigation undoubtedly ranks among those with the greatest potential benefits. As remarked of the Chilean experience, 'Ex-post evaluations have demonstrated that irrigation has been the investment with the greatest impact on productivity, employment and the incomes of small farmers'.206 Equally, there is little doubt that irrigating agriculture generates multiplier effects that spread broader benefits through the participating areas, especially in cases in which their infrastructure services have been weakly developed. Among other things, those multiplier effects include 'accelerating the growth of transport, commerce and storage services, of input distribution, of technical advisory services, etc., [which] are an additional contribution attributable to new irrigation'.207
Fuller consideration of the role of irrigation for promoting improvements in the welfare of smallholders and rural development in general runs squarely into the question of the ability of
203. B. Van Koppen, 'Gendered Water and Land Rights in Rice Valley Improvement, Burkina Faso', in B. R. Bruns and R. S. Meinzen-Dick (Eds), 2000, p. 105.
205. Kitty Bentvelsen, 'PIM and Gender: Examples from Macedonia', INPIM Newsletter, International Network on Participatory Irrigation Management, No. 7, April, 1998, p. 9.
206. Jorge Echenique L., 'Utilización de Subsidios para el Fomento de la Irrigación', report prepared for the Latin America and Caribbean Office of the FAO, Santiago, Chile, November 1996, p. 49 [author's translation of the quotations from this article].
the users to pay for irrigation services, which has been alluded to already. Moris and Thom state the issue clearly:
.. . smallholders cannot afford major capital improvements. .. . some element of subsidy is inevitable if a country intends to proceed in developing irrigation. The operational question is. . . not whether to subsidize, but where, when and with what consequences?208
This issue also was raised in Vermillion's summary of the IMT research findings cited above. Therefore the question of subsidies for smallholder irrigation must be addressed explicitly, especially in light of the prevailing international emphasis on cost recovery in irrigation. The FAO has summarized this emphasis succinctly in stating that, for irrigation, 'the era of large direct and indirect subsidies is nearly over'.209 On the one hand, there is the concern for the ability of users to pay, especially if they are poor farmers, which has been expressed not only by Moris and Thom but also in Rice's recommendation to 'abandon cost recovery' in situations of low returns to farmers, and in Van Koppens' recommendations in regard to poor irrigators. On the other hand, there is a legitimate concern over the inability of government budgets to continue underwriting irrigation costs. As stated by Sharma et al. for Africa, in words that apply to other continents as well:
.. . water use is highly subsidized. . .. Consequently, cost recovery remains low, increasing the burden on the central government to provide capital for maintaining existing systems and developing new infrastructure.. . . African countries should place greater emphasis on . .. cost recovery.210
How are these tensions, between the contrasting objectives of promoting smallholder irrigation and restricting fiscal outlays, to be resolved?
A first step is to examine the nature of cost recovery in irrigation. As stated in the section on irrigation pricing policies, attempts to strengthen cost recovery rarely go beyond raising the funding required for O & M expenditures. Very occasionally a part of the capital costs may be recovered, but that is unusual, and full recovery of capital costs is not expected even in instances when ownership of irrigation systems is transferred to users. Recall that, in the box in the preceding section, Meinzen-Dick et al. have said that 'Ownership is based on investment in at least part of the capital costs' [emphasis added].
Thus, it is important to distinguish between subsidies for system development and subsidies for the operating costs of the irrigation service. The principle that the user should pay clearly applies to the latter costs, and hence those subsidies should be minimized if not eliminated. The reasons why have been spelled out throughout this chapter and may be summarized in three ways: (a) user financing of O & M costs gives farmers a vested interest in seeing that O & M is properly performed and that its costs are reduced as much as possible, (b) cost recovery reduces the fiscal burden on the government, freeing up funds for other development projects, and (c) it helps guarantee the sustainability of an irrigation system, since the availability of government funding cannot be counted on in the indefinite future.
System development costs are another matter, and here there are three basic reasons why subsidies may be considered to be indispensable:
(a) As noted, smallholders simply may not be able to pay the capital cost of irrigation, much as they are not able to pay the full price of agricultural land (Chapter 5), and the equity objective would indicate assisting them in that regard.
(b) When irrigation development costs are placed in the context of overall sectoral policy, and if arguments for generalized fiscal support for
agriculture are accepted (Chapter 3, Section 3.2), then funding the construction of irrigation systems, especially for small-scale producers, may be seen as one of the most effective ways to provide that support. For example, if sector support is desired in order to offset the deleterious effects on domestic farm incomes of international agricultural subsidies, then funding irrigation development would be a non-distortive way to achieve that aim, as opposed to interventions in prices. (c) The positive economic externalities in rural areas, noted by Echenique, may justify subsidization of system development. However, care must be taken in system design and management to ensure that negative environmental externalities do not outweigh the positive externalities. (Positive externalities in the form of flood control should not be overlooked either.)
Chile and Nicaragua provide recent illustrations of the use of subsidies for supporting the development of irrigation among smallholders. In Chile, the program originally applied only to commercial-scale farmers, and then it was modified to include a separate 'window' for financing the construction of small projects. The program was designed so that project identification could be 'demand driven', in the sense that farmers propose the projects and local consulting firms assist them to formulate the proposals. A special commission reviews the proposals quarterly, and they are judged on the basis of user contribution to project costs, the area to be irrigated, and the total cost per hectare irrigated.
During the first six years of operation of the program for smallholders, 56 % of the proposals were selected, and the projects provided benefits to 43000 producers.211 The total amount of subsidy for construction costs was $134 million in that period, and the contribution of the beneficiaries to construction costs was $120 million. Echenique emphasizes that two elements con tributing to the success of the program were that 'the State provides the subsidy only when the works have been formally accepted as complete and therefore [it has been] guaranteed that the irrigation infrastructure is ready to provide services',212 and that the program provides financing for the studies conducted in order to develop the proposals. For the former element, a key provision was the creation of bankable government certificates which allow the entity carrying out the construction to raise private financing for it.
A somewhat similar experience was initiated more recently in Nicaragua by the government, with the support of the Inter-American Development Bank, in the form of a 'National Rural Development Program' which funds small-scale projects identified by rural communities, again with the intermediary services of local consulting firms (or NGOs). In such cases, where the value of public subsidies for the development of poor rural communities is widely recognized, it would be difficult to argue that irrigation construction should be excluded from such subsidies, especially since irrigation is one of the most powerful tools for rural development. As in other irrigation experiences, the principal challenge lies in appropriate design of the operational mechanisms, in this case including the mechanisms for encouraging local project identification and participation in its management, for assigning priorities to proposals, and for establishing a process of review and approval of project proposals which is appropriate to their small scale. These challenges are practical but never are simple, and the solutions always must be adapted to the local context. However, that is the nature of the development challenge itself.
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