Irrigation Pricing Systems

The effectiveness of irrigation pricing in achieving the objectives listed above, particularly (i) through (iii), depends not only on the level of the price but also to some extent on the kind of pricing system employed. Yacov Tsur and Ariel Dinar describe eight methods of pricing irrigation water: volumetric pricing, output pricing, input pricing, area pricing, tiered pricing, two-part tariff pricing, betterment levy pricing and water markets.96 Volumetric pricing charges per unit of water used, output pricing per unit of output produced with the water, input pricing per unit of a complementary input used (such as fertilizer), and area pricing per hectare irrigated. Tiered pricing is volume-based pricing in which the rate increases as a threshold volume is exceeded. Two-part tariffs include volumetric pricing plus a fixed fee for access to irrigation.

Some methods are basically variants of others, for example, tiered pricing and two-part tariff pricing are forms of volumetric pricing. There are yet other variations in practice. In India, area charges can vary by crop or across seasons, according to the method of irrigation (flood, ridges or furrows), and charges that are paid whether or not water is used.97

In the early 1970s and again in 1980, the International Commission on Drainage and Irrigation (ICID) administered a worldwide questionnaire concerning use of irrigation water and pricing practices. The sample area covered by the questionnaires was 8.9 million hectares, with conditions representative of 12.2 million hectares. This latter amount is equivalent to about 5% of the world's total irrigated area. M. G. Bos and W Wolters analyzed those data and found that area pricing, which is the easiest pricing method to administer, was used in more than 60% of the projects sampled. In another 25% of the projects, volumetric pricing was used, and in most of the remainder, a combination of area and volumetric

Y Tsur and A. Dinar have conducted a conceptual analysis of the optional pricing systems from a viewpoint of promoting economic efficiency. They hypothesize that efficiency is achieved when the price of water equals the marginal cost of supplying it, in spite of Sampath's reminder (mentioned above) that, given the actual conditions of irrigation systems, the general theory of second-best asserts that achieving this equality condition does not guarantee economic efficiency. They conclude that volumetric pricing is the most efficient in the absence of implementation costs, but that if such costs (mainly the

95. Ashok Subramanian, N. Vijay Jagannathan and Ruth Meinzen-Dick, 'User Organizations in Water Services', in A. Subramanian, N. V. Jagannathan and R. Meinzen-Dick (Eds), User Organizations for Sustainable Water Services, World Bank Technical Paper No. 354, The World Bank, Washington, DC, USA, 1997, p. 6.

96. Y. Tsur and A. Dinar, 'The relative efficiency and implementation costs of alternative methods of pricing irrigation water', The World Bank Economic Review, 11(2), May 1997, pp. 243-262.

98. M. G. Bos and W. Wolters, 'Water charges and irrigation efficiencies', Irrigation and Drainage Systems, 4(3), August 1990, pp. 267-278.

costs of collecting information on amounts of water used) amount to 10% or more of water proceeds, then area pricing becomes more efficient.99 They point out that water markets can be efficient in their sense, especially as the costs of gathering information are internalized by users, provided that the costs of the institutions and physical infrastructure necessary for such markets have already been incurred.

In another theoretical study, G. Rhodes and R. Sampath also found that volumetric pricing leads to greater efficiency than area pricing does, and that the latter is superior to attaching the water price to proxies represented by crop outputs or complementary inputs.100

Bos and Wolters did not find an empirical relation between the kind of irrigation charges and efficiency, probably because in the sample in general the level of charges was low in relation to net farm income. However, they found that, independently of the type of pricing, there was an increase in efficiency as the charges increased. In particular, it was found that water charges have the greatest impact on tertiary unit efficiency, and not so much by changing farmer behavior as making more funds available for operation and maintenance of the tertiary units.101

The FAO suggests that, as water scarcities increase, volumetric pricing schemes will be increasingly adopted, because they encourage savings of water, which area pricing does not. It also recommends consideration of two-part pricing, in which a fixed levy represents investment cost recovery and a variable levy (approximating the short-run marginal cost of supplying water) is attached to the volumes of water used, and that the water rights market constitutes the most appropriate scheme of all.102

Volumetric pricing may not be difficult to apply if the engineering design of the system is appro priate for that purpose. In Morocco and Tunisia, water deliveries are made to smallholders in the amounts desired, under a system of volumetric water charges. This has been possible by the construction of reliable and easily operated systems and also by programs of consolidating dispersed smaller holdings.103

The administration of volumetric charges can be simplified considerably by the procedure of selling water in bulk to groups of farmers, in prearranged amounts and timing. The farmers are responsible for allocating it among themselves and for levying upon themselves the requisite fees in order to pay for the deliveries. Usually, such groups of farmers are those occupying the tertiary commands of an irrigation system. An example of an irrigation system that has adopted this practice is the Majalgaon Irrigation Project in Maharashtra State in India:

Under the new concept water will be sold in bulk to water user associations, each serving about 300 to 400ha. The WUAs will get annual quotas and are responsible for the distribution of water and the maintenance of the water courses and field channels. They order the volume of water required for each irrigation turn. The internal water distribution will be essentially on rotation and proportional to the size of the holding, but other arrangements such as buying and selling of water are possible.104

Other examples have been cited to the same effect:

wholesaling of water volumetrically from agencies to WUAs, who then collect charges from their members (with a portion of the fees going to support the organization) has shown

100. G. F. Rhodes, Jr and R. K. Sampath, 1988, p. 116.

103. H. Plusquellec, C. Burt and H. W Wolter, 1994, p. 81.

[Area] rates are criticized because they do not include incentives for rationing water in line with willingness to pay [and to alter irrigation behavior accordingly]. Such schemes are, however, simple to administer and assure the supplier of adequate revenue. The high cost of installing and monitoring meters is suggested as being the main reason for continuing the [area] rate approach. This argument is convincing in cases where water is plentiful, supply costs are low and managers doubt the rationing effects of volumetric pricing. In other cases, water managers are turning to volumetric pricing to address water scarcity problems and the high costs of developing new supplies (FAO, 1993, p. 272).

promise in pilot projects, for example, Mohini and Mula in India. .. .105

From these experiences, it appears probable that the future directions of irrigation prices can be characterized by higher levels, applications in volumetric form, administration through bulk sales to WUAs and, for a small but increasing number of systems, determination by markets for water. Changes in pricing practices may be slow, but are likely to accelerate in those localities where water is becoming more scarce.

There are three important caveats to the forecast of an upward trend in (real) irrigation prices. First, whatever the type of water pricing system, it needs to be borne in mind at all times that reliable delivery of water is an essential condition in order to be able to raise its price. If reliability cannot be guaranteed under an existing system design and/or administration, then those factors need to be modified before irrigation rates are raised.

The reliability factor has been mentioned before, but it is so important that its absence can even affect farmers' willingness to dedicate their labor to O & M tasks:

farmer follow-through on O & M below the tertiary turnout is highly dependent on the quality of the service the agency provides at the turnout, that is, whether farmers can rely on it to provide the allocated water supplies. . .. Agency inefficiency reflected in a variable water supply destroys farmers' confidence and weakens their commitment to O & M.106

Almost invariably, a necessary condition for improved reliability of irrigation supplies is local management of the revenues that result from water tariffs. One of the principal shortcomings of centralized systems of irrigation management is that irrigation fees are deposited in the National Treasury and O & M activities remain underfunded.

Therefore, strategies for cost recovery, whether through pricing irrigation or through user contributions of labor, are inexorably linked to issues of system effectiveness, both in terms of management and the quality of system design, and they are assisted by decentralization of financial management.

Secondly, while under appropriate circumstances it may be possible to set administered prices at a level high enough to fulfill the fiscal objectives of cost recovery, it is not realistic to expect such prices to be raised to the yet higher levels that correspond to water's opportunity costs. The reasons why this would be difficult are explained by Mateen Thobani:

By raising the user price of water to reflect its true scarcity, or opportunity cost (that is, the price the marginal user is willing to pay), authorities hope to induce users to conserve water, making it possible to divert supplies to higher value uses. ... In principle, if irrigation water near a city could be priced at what a

105. Ruth Meinzen-Dick, Meyra Mendoza, Loic Sadoulet, Ghada Abiad-Shields and Ashok Subramanian, 'Sustainable Water User Associations: Lessons from a Literature Review', in A. Subramanian, N. V. Jagannathan and R. Meinzen-Dick (Eds), 1997, p. 49.

water company would be willing to pay for the crude water (adjusting for conveyance costs), some farmers would give up farming, and others would switch to more efficient irrigation or grow less water-intensive crops. The higher charges would free up water that could be transferred to the water company for treatment and subsequent sale. They would also generate fiscal resources that could be used to improve the performance and maintenance of the existing infrastructure or to invest in new infrastructure.

Serious practical and political problems, however, have prevented any government from pricing water at its opportunity cost. Even if governments could find an inexpensive way to measure and monitor water flow, measuring the opportunity cost of water is difficult because it varies according to location, reliability, season, use, and water quality.. . .

The political problems are even more intractable. It is politically difficult to charge a farmer for water from a river that serves a town (and therefore has a high opportunity cost) a higher price than a farmer using water from a river that is not near a town. Similarly, it is difficult to charge profitable hydropower companies less than poor farmers [even though the former may return almost all the water to the river]. Strong farmer lobbies typically pressure politicians to keep water charges well below their opportunity cost.

Another problem in pricing irrigation water at its opportunity cost is that the price of land already embodies the price of water rights. In areas of low rainfall, irrigated land may sell for ten times the price of unirrigated land, reflecting the expectation that the owner of irrigated land will receive water at a low charge. If charges are later raised to reflect the opportunity cost of water, this land will be valued the same as unirrigated land, resulting in an effective expropriation of the farmer's assets. Although government actions frequently alter the value of private assets, the sheer magnitude of asset expropriation implied, the numbers of people affected, and the socially disruptive aspects (in agricultural unemployment) of such a policy make it highly unlikely that opportunity cost pricing can be introduced within a reasonable time frame.

A unique problem affecting water pricing involves 'return flows'. When a farmer waters crops, only part of the water is absorbed by the plant. Depending on the efficiency of irrigation, a significant share of the water - the return flow - will seep underground. This water may enter an underground aquifer and be pumped up by another user, or it may even rejoin the river and be diverted into a canal. If water were priced volumetrically, according to what was received rather than what was actually consumed, farmers using inefficient irrigation (thereby inadvertently helping out downstream users) would pay too high a

price.10'

In principle, the issue of return flows can be handled by pricing water according to its consumptive [net] use (see Section 6.5.6 below), but the other objections would make it difficult, in most circumstances, to set administered prices at levels that approximate opportunity costs. To put such a policy into effect, it is necessary to have recourse to water markets. The practical upward limit to administered prices is likely to be the level which corresponds to recovery of O & M costs plus, in some cases, part of the investment costs. This conclusion confirms the appropriateness of the goal of water pricing posited by Daniel Bromley, i.e. that of improving water management, or improving the collective management of a public good.

Thirdly, gender considerations may put a brake on increases in irrigation water rates since rural women usually are less able to make cash outlays than men. This is a variant of the equity concern mentioned above in regard to irrigation pricing.

107. M. Thobani, 'Formal water markets: why, when and how to introduce tradable water rights', The World Bank Research Observer, 12(2), August 1997, pp. 163-165.

In the words of Chancellor et al., drawing on experiences in Zambia, Zimbabwe and South Africa:

Despite the advantages that are expected, the current climate of 'user pays' has potential for increasing the disparity between men and women irrigators.. . . women have difficulty in asserting and retaining control over cash. Payment for water is therefore likely to be problematic for female-headed households, especially the de facto heads [who have] least control of the household funds. Withholding water from such households may start a rapid downward spiral in their ability to sustain livelihoods.108

The fourth caveat to raising water prices in agriculture is that irrigation pricing policy must also be established in the context of overall pricing policy for the sector, which is effected mainly through macroeconomic policy, as described in Chapter 4. Inadequate incentives on the side of output prices will place an insuperable barrier on the road to raising irrigation prices. This issue was so dominant for the projects in South East Asia studied by Rice that he recommended:

Abandon cost recovery. The farmers who agreed to the terms of these schemes at startup are now paying substantial penalties because of the collapse of international and local rice prices. Their losses are reflected in consumer surpluses far larger than even full recovery of capital, as well as O & M costs, would provide. Imposing cost recovery on these paddy farmers is more likely to drive them out of farming than into diversification. . . .109

In brief, irrigation pricing policy, as well as long-term strategies for water development, has to be drawn up in a holistic context.

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