NOTES AGRICULTURAL & RURAL DEVELOPMENT water extracted or a fixed allocation of water shares among the users on each canal. CONCLUSION COST RECOVERY AND WATER PRICING FOR IRRIGATION AND DRAINAGE: Service contracts. Formal agreement between the service No silver bullet exists to improve cost recovery or water provider and users to ensure a steady flow of water can use efficiency of irrigation systems. However, many coun- WHAT WORKS? ISSUE 2 limit hoarding by farmers who otherwise could not rely on tries provide examples of successful reforms that policy- BY: K. WILLIAM EASTER AND YANG LIU DECEMBER having water when they needed it. After such a reform, in makers and system managers can draw upon for inspira- 2005 Katepurna, India, farmers stopped flooding their fields in tion and ideas. Historically, water projects, particularly those with a significant ing principle to levy a fixed charge based on the area that is Area-based pricing.This approach uses the average cost pric- the dry season and often did not irrigate in the monsoon irrigation component, have had low levels of water fee col- season, resulting in reduced water use per hectare and sav- A successful system will have the appropriate mix of tech- lection.i This means that many irrigation projects have not supposed to be irrigated.This area can vary across years and ing 7.7 million m3 annually. Moreover, irrigated area nology, management, policy, and institutional arrangements been sustainable without large government subsidies and, seasons. For instance, more area is irrigated during the rainy expanded by 80 percent.xv that facilitate transparent and efficient service delivery and increase farmer's willingness to pay and to use limited over time, they have experienced significant declines in pro- season than the dry season. In large systems with many small rienced over-irrigation, rising water tables, and rising salinity ductivity.ii Many of these same irrigation projects have expe- farms, it may be the only economically feasible method. Education. Public education campaigns make farmers aware water resources more efficiently. Managers have developed variations on this approach to of water scarcity and often help save water. This is espe- levels.This note outlines the approaches for water pricing and account for seasonal changes, the different crops irrigated, or cially important where users have traditionally viewed This note is a product of theWater for Food team. It is based on the advances guidelines for improving cost recovery and reduc- the technology used. For instance, area-crop-based pricing water as a free good. In Katepurna, India, policymakers used larger volume entitled Cost Recovery and Water Pricing for Irrigation and Drainage Projects by K. William Easter and Yang Liu. The book ing overuse of irrigation water. may charge higher for rice because that crop requires more newspapers, radio, exhibitions, pamphlets, and posters to outlines guidelines for designing a successful system for cost recov- water.This variation can also provide an incentive for farm- inform the public about water scarcity and the need for ery and efficient water use and provides numerous case studies of A system of effective water fees is usually designed to at ers to switch to crops that save water. better water management.xvi successful implementation. You can download a copy of the full report at www.worldbank.org/rural or email ard@worldbank.org least cover the cost of operation and maintenance (O&M) and to make an irrigation project more financially sustain- able.Where water is particularly scarce, projects have been Volumetric pricing. This is an optimal-pricing approach that using water pricing to encourage water conservation. charges based on the volume of water used by the farmer. Unlike area-based pricing, this approach also encourages farmers to better control their water use.Volumetric pric- Approaches to Water Pricing ing works well in systems that are equipped to monitor and control on-farm water deliveries and the cost of imple- There are three major approaches to water pricing: area- menting such a system is high. Depending on the technol- ogy used, the water fees in some systems can be high rel- i Jones,W. I. 1995."The World Bank and Irrigation." World Bank Operations Evaluation Study.The World Bank,Washington, D.C. based, volumetric, and market-equilibrium. Each has its own ative to farm income. Managers have developed two vari- ii Easter, K.W. 1993."Economic Failure Plagues Developing Countries' Public Irrigation:An Assurance Problem." Water Resources Research trade-offs and is best suited for different physical, social, and 29(7):1913-22. economic situations. ations on volumetric pricing to address the impacts of water charges on farm income: block pricing and the two- iii Awati County Government. 2002."Report of Water Management Institutional Reform in Fengshou Irrigation District." Awati County: Xinjiang, China. http://www.xjawt.gov.cn/xianqing/jinji/fsgq.htm (in Chinese). part charges. iv Irrigation Districts in the North China Plain.The Short Report Series on Locally Managed Irrigation, Colombo, Sri Lanka: Irrigation Water Johnson III, S.H., D.Vermillion, M. Svendsen, X.Wang, X. Zhang, and X. Mao. 1996. Management Reform and Performance Changes in Two (i) Block pricing. This variation sets a price for a base amount of water to be used during a given period of Cornish, G.A. and C.J. Perry. 2003."Water Charging in Irrigated Agriculture: Lessons from the Field." Report OD 150.Wallingford, U.K.: Management Institute. v time, and charges more for any water used beyond HR Wallingford Ltd. that base amount.The first block is generally set at the vi Contijoch, personal communication amount needed to support a farm family, which ensure vii Awati County Government, 2002. equity in the system. Prices paid for the first block will viiiJohnson III. et al. 1996. most likely not cover the O&M costs, but the charges for additional blocks make up the difference.The diffi- ix Wang, X, and J. Lu. 1999."The Application of IC (Integrated Circuit) Cards in Efficient Irrigation Management System." [In Chinese]. ChinaWater Resources 436 (October): n.p. http://www.chinawater.net.cn/CWR_Journal/199910/ culty is in deciding on the size of the first block and the x Cornish and Perry, 2003 prices to be charged. xi K.W. Easter and Zekri, S. 2004."Return of Irrigation management and Investment Policy in African Development." South African Journal (ii) Two-part charges. This variation combines the volumet- Kloezen,W.H. C. Garces-Restrepo, and S.H.Johnson III. 1997."Impact Assessment of Irrigation Management Transfer in the Alto Rio of Economic and Management Science. NS 7(4): 652-63. xii ric pricing system with a fixed admission charge. Both Lerma Irrigation District, Mexico." Research Report 15. Colombo, Sri Lanka: IMWI. volumetric and block pricing present a conflict xiiiCoward, E.W. 1980. Irrigation and Agricultural Development in Asia. Ithaca, NewYork: Cornell University Press. between cost recovery and water use efficiency, which xiv the two-part charges overcomes.The volumetric part, Belsare, Er. S. 2001. "Participatory Irrigation Management in Katepurna Irrigation Project: A Success Story." ICID WatSave Young Hamdane,A. 2002."Irrigation Water Pricing Policy in Tunisia." Cairo: FAO Regional Office for the Near East. xv based on marginal costs, encourages water conserva- Professional Award Winning Paper. New Delhi, India: International Commission on Irrigation and Drainage. tion while the fixed fee can make up the deficits in O&M costs. Belsare 2001. http://www.icid.org/belsare_2001.pdf xv THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural Water Markets. This approach allows companies and indi- viduals to trade water at a market equilibrium price, which fees they collect from farmers.The collection rate reached Table 1. Key Factors Influencing Fee Collection Rates changes throughout the season. In numerous cases-includ- 98 percent after the institutional reform that established ing Chile, the United States, Spain, and Brazil-water mar- the financially autonomous management entity.iii In terms Financial Incentives Penalty for Improved and transparency participation User Collection kets have produced substantial economic gains from trade of payment, successful systems have strictly enforced Cases Autonomy to collect non-payment irrigation rate primarily through localized markets. These are complex penalties for default. Bayi Irrigation District in China cuts off service systems, however, that require clearly defined water rights, irrigation water to defaulters,iv while in Haryana, India, the Awati, Chinavii Yes Yes N.A.* N.A. Yes 98% rules for trading, an entity to deliver water, and a body for authorities can seize their land.v oversight and dispute resolution. Policymakers need to monitor against corruption. When irrigation officials extract large, unofficial "rents" from farm- Bayi ID, Chinaviii Yes Yes Yes Yes Yes 100% ers, introducing reforms, like raising fees, is difficult. Active Nanyao ID, Chinaviii Yes Yes N.A. N.A. Yes 95% Guidelines for Implementation WUAs have proven effective in increasing transparency by involving farmers in decision-making and in improving serv- Shangdong,, Chinaix N.A. N.A. Yes Yes Yes 100% Improving cost recovery hinges on appropriate pricing and ice quality; however, they should also be monitored lest Gujarat, Indiax Yes Yes Yes Yes Yes 100% effective fee-collection mechanisms, which requires deci- they pick up the same bad habits.vi One option is to estab- sions about what costs to recover (e.g. fixed, variable, envi- lish an independent oversight board to review operations Haryana, Indiax Partly N.A. Yes N.A. Yes 85-95% ronmental costs) and what users pay what share of the and finances. Mexicoxi Yes N.A. Yes Yes Yes 90% costs (e.g., irrigators, cities, households, industry). Beyond that, a system needs good management mechanisms and Alto rio Lerma, Mexicoxii Yes Yes N.A. Yes Yes 100% incentives to raise collection rates, reduce water usage, or Box1 Automated Irrigation Charge * N.A.= information not available. both. Creating a willingness to pay and achieving high col- Collection, Shandong, China lection rates may require a number of management reforms. In effective systems, farmers feel that costs are Shangdong is one of the biggest agricultur- legitimate and are not inflated with unnecessary expendi- al provinces in north China. Irrigation they can see how much water they received, how their Transparency. Farmers are more willing to pay fees when shift the demand curve. Moving up the demand curve tures or employment. water accounts for between 70 and 80 per- cent of the total water use, but water is payments are used, and how the water charges are deter- essentially means raising the unit price of water until farm- ers use less. This works in some instances, but for some Mechanisms to Improve Cost scarce. Consequently, to improve water mined. In Shangdong, China, farmers purchase prepaid crops water demand is highly inelastic. In Tunisia, for Recovery use a card automated system was adopted, integrated circuit (IC) cards to operate machines that instance, water prices for high-value crops under con- where irrigators buy prepaid integrated measure and control irrigation water releases (Box 1). trolled water conditions had to increase significantly before Financial autonomy. Transferring management to a financial- circuit (IC) cards. The card must be insert- Suppliers can also use awards and penalties to motivate water use decreased.xiv ly autonomous organization--government agency, local ed into an automated server before water their personnel to achieve high collections. water user organization, or private entity-can improve cost is released, and it stops when the card is This approach can adversely affect farmers' incomes and is recovery in a number of ways. First, system users are more Participation. Evidence has shown that user participation often politically unfeasible, unless alternative crops and/or assured that their payments go back into the project rather removed. After each irrigation, the farmer through water user association (WUAs) increases the likeli- technology are available to improve water use efficiency. than being commingled with other taxes in the state treas- receives a receipt, stating the amount of hood of prompt payment.This allows farmers to voice their Where this is a concern, policies and practices can be ury. Second, the service provider has a direct financial link water used, the price paid per unit, and the priorities for improving system design, maintenance, and introduced to shift the demand curve. to the users, who can use that link to demand quality serv- total deducted from the IC card. All operations. In Indonesia, project management found that a ice. Better service, in turn, gives farmers an incentive and servers are connected by the Internet, so joint walk-through with farmers was the single most effec- choice of alternative crops and technologies to choose Supporting institutions and services. If farmers have the increases their ability to pay their fees as their incomes they are easy to control and monitor, and tive technique for communication and eliciting cooperation. increase. Finally, autonomous organizations that have strong administrative costs have been cut. Thus, if In the Laur Project in the Philippines, for example, farmers from, policymakers can introduce a pricing policy that user participation and a transparent process for setting no one steals water, a 100 percent collec- had veto power over rehabilitation expenditures that they encourages farmers to switch.Additional mechanisms, such water charges have had the most success in collecting tion rate is assured. Each irrigation server were expected to repay.xiii as low-interest loans for purchasing new technology can be water fees (see Table 1). costs 1,000 Yuan (about US$120), roughly used to give farmers an incentive to change. Governments also need to remove subsidies that encourage lavish water Incentive systems. It is important for a system to establish the same value as the water saved annual- Mechanisms to Improve Water use and excess pumping--such as those for electricity-- incentives to prompt collection of fees by employees and ly. With more than 200,000 IC servers, the Use Efficiency that hide the real cost of pumping. prompt payment by users. Some systems encourage province saves about 5 billion m3 of Water is an increasingly scarce resource, and improving the quotas can effectively reduce water consumption. Quotas. When users do not respond to price incentives, employees to collect fees by linking pay to collection lev- groundwater annually. efficient management of that resource requires systems to els. In Awati, China, staffs' salaries depend entirely on the Source:Wang and Lu 1999. either move up the negatively sloping demand curve or Policymakers can use a fixed quota for the amount of 2 3