Water Pricing systems and Institutional Change

Because irrigation is expensive, it is agreed upon, then, that farmers should be charged for their participation in irrigation systems. The problem is to what extent and in which form?

Should the farmers be required to repay the capital cost or part of it?, or only cover the recurrent O & M costs?, or whether the fees should be based on the benefits received. Even many who view water pricing and water law as the means for creating an environment to induce the system to evolve in a desirable direction are cautious about the answer.

Increasing the price of water could not be an effective means for inducing optimum irrigation water use efficiency. On the contrary, high-priced water may actually hinder on-farm development because it captures resources needed for other activities. Consequently, high prices may actually create a disincentive for optimum water use in the long run (KELLER 1986:346)¹¹⁰.

3.2.2.1 Bases for Setting Water Rates

There are several bases for determining the amount to be paid as water fee. In some countries, it can be based on theoretical calculation, but in many others the water rates paid bear little or no relation to the calculated fees. To a large extent this is due to the fact that rate setting is seldom a purely economic activity, and non-economic factors often impinge upon the decision-making process (SMALL and CARRUTHERS 1991:34). These ‘non-economic’ factors are more defined by SAGARDOY, BOTTRALL, and UITTENBOGAARD (1986:127):“...water rates are often a political issue rather than a technical one”.

SMALL and CARRUTHERS (1991:170-81) examine in this connection three issues that often arise and pose the policy question that must be answered in any given situation. They stressed, however, that there is no a single ‘correct’ answer exists for all situations:

• Should fees be project specific or uniform across projects? To some extent, the nature of the fee structure depends on the financial and organizational structure that exists for the delivery of irrigation services. In decentralized financially autonomous irrigation associations, as is found in South Korea, it must be possible for fees to be set independently by each association. A single national structure for fees (Sudan) would not be compatible with the autonomy of the individual associations. It is sometimes alleged that uniform fees are better than project-specific fees because they are ‘fairer’. From another perspective, in terms of location with respect to the water supply, the force of gravity makes the farms unequal. That is why charging the farmers at the high and lower elevation the same amount would be inequitable.

Anyhow, the uniform and project specific fee can practiced in one country.

110 On the ground that; for farmers to increase their water-use efficiency, they must usually increase the labor, capital, and management inputs to their own farm irrigation practices. Thus it costs them considerably more to use water efficiently than to misuse it. However, increasing the price of water actually allows them less leeway for providing the additional on-farm cost of using it well. Conversely, according to other hypothesis, it is assumed that, by means of an excessive increase in duties, the farmers can be forced to increase their productivity since, otherwise, their income will be reduced (MANIG 1984).

• Should rates differ among water users within a single irrigation project? If the cost of serving some users is greater than the most of providing irrigation to others, then this economic logic dictates that higher fees should be charged to those for whom the cost of providing irrigation is greater. But it must be kept in mind that as the number of distinctions increases, the administrative costs also increase. A balance needs to be struck between the differentiation of the fees in accordance with differences in costs, and the administrative ease of assessment and collection under a less differentiated fee structure.

• How can the real value of irrigation fees be maintained in the face of inflation? If, as is frequently the case, the rate of inflation is quite high, the real value of the fees established under the fee structure will soon become seriously eroded, so that the amount of funds collected will no longer be reasonable in relation either to the agency’s needs or to the amounts that the users can afford. At the same time, political difficulties can hinder raising the nominal fees¹¹¹. Tying the nominal irrigation fees to some general price index is one possible way to deal with this problem. In the case of a centralized irrigation agency, the advantage of establishing the level of fees in kind is particularly pronounced. On the other hand, in institutions where decentralized autonomous irrigation agencies exist, the problems of raising fees may be less severe because the decisions of individual irrigation agencies to rise rates have only local, rather than national, impact.

3.2.2.2 Methods of Setting Water Rates

Economists often suggest pricing water at its marginal cost- the cost of supplying the next increment from the best available source (POSTEL 1984:47-8). Consumers would thus pay more as supplies become scarcer. With other words, the greater the depletion, the greater the allowance-hardly an incentive to converse. However, conflicting revenue and income redistribution objectives often dictate alternative solutions (YOUNG 1986:158). In practice, farmers are seldom asked to pay fees that cover the total costs of irrigation. Furthermore, water, is rarely priced at marginal cost; charges often bear little relation to the real cost and quantity of water supplied. The governments in the developing countries pay all or most of the capital costs for major large-scale irrigation schemes and seek to recoup only a small fraction of these costs. The focus is then more likely to be on the costs of O&M. In this view, it would make sense to discuss some of the water rate setting principles or methods.

I. The marginal cost pricing principle. This rate-setting rule is applied where allocative efficiency (maximizing net social product) is the primary objective. When rates are set according to the schedule of marginal cost of supplying water, then the user will demand the commodity as long as marginal willingness to pay exceeds incremental cost, and the optimal level of usage will result. On the other side, the variety of definitions of the appropriate marginal cost concept for pricing policy makes its application difficult. An example concerns the transactions costs

111 Philippine is a good example for such case. Irrigation fees, that have been levied since at least 1946, were originally established in monetary terms. But over time, inflation severely eroded the real value of these fees, which, for political reasons, were difficult to raise. Since 1975, the irrigation fees paid by farmers have been denominated in terms of paddy. The farmers may pay either in kind or in an equivalent amount of cash. The cash value of the fee is based on the government’s support price of paddy, and therefore increases with any increase in the support price (SMALL/CARRUTHERS 1991.180).

associated with measuring, allocating, and monitoring a water pricing system¹¹². In addition, multi-part pricing systems (where marginal price is set equal to marginal cost with no relation to output) often fail to account for the economically correct concept of opportunity costs, focusing rather on historical or embedded costs.

Furthermore, opportunity costs should be determined by a market mechanism rather than by administrative procedures (YOUNG 1986:158-9).

II. The ability-to-pay principle. This principle rests heavily on the equity criterion.

Commonly, the rate here recoveries fully only operating costs, plus a small fraction of the initial investment¹¹³. The concept, argued YOUNG, is inherently subjective and political pressures arise to set the formula in ways which redistribute income from taxpayers to water users.

III. Payment per unit of water (volumetric method). Through this method, an economical water use is directly achieved. It encourage efficient water use by maintaining a constant relation between the amount of water used and the payment to be made. Water use reaches its limit wherever the price corresponds to the marginal yield. In spite of the desirability of this method, its introduction often meets resistance and difficulties. Volumetric method, called as potential price, has the disadvantage of requiring high administrative expenditure for measuring and controlling water use and the collection of charges – especially for projects serving numerous small farmers under demand systems. Farmers find ways and means to block the devices, especially in open canal systems. On the other hand, the cost of each device, its installation and subsequent monitoring may not compote advantageously with a less efficient system (payment per unit of land) (MANIG 1984:1105; KELLER 1986:347; SAGARDOY, BOTTRALL, and UITTENBOGAARD 1986:127).

IV. Water charges related to land (flat rate per area unit). This principle is seen as the simplest regulation for levying water charges and easy to administer. It can also be regarded as a kind of land tax. In this connection argues ELLIS (1992:270) that the most practicable and equitable method of fixing the water fee can be then to apply a uniform repayment levy per hectare of cultivated land irrigated by the scheme.¹¹⁴ However, investigations carried out in several countries (Pakistan, Mexico) indicate that more than 50 of the farmers deviate by more than 10 percent of the average

112 For example, in an irrigation system with plentiful water supplies and numerous small field units, the transactions costs of a volumetric pricing system may exceed the value of water saved (YOUNG 1986:159).

113 This because shadow prices, not market prices, are used in the calculation of the economic return. Where the two prices differ sharply, it is possible that the water users could not afford to pay for the total cost of irrigation, even though the investment shows a favorable economic return to the nation. SMALL and CARRUTHERS (1991:163) refer to one significant administrative complication that may make it difficult for a public agency to collect the cost of irrigation services from the water users, even if they can afford to pay for it. This is the difficulty in estimating what benefits each individual farmer receive, and accordingly adjusting the irrigation charges.

114 Some variation in the rate, argued ELLIS (1992:271), may be desirable to reflect visible differences in water access by farmers at differing distances from outlets. The disadvantage here is that some farmers would then feel entitled to receive more water than other farmers, and cooperation between farmers as a group becomes more difficult.

depth of water applied in the scheme (SAGARDOY, BOTTRALL, and UITTENBOGAARD 1986:129). Such a method of payment is accordingly not equitable for many of the farmers. Furthermore, argue the authors, this principle disassociates the commodity (water) from the rate paid which does not encourage the efficient use of water. It has, in addition, the disadvantage of producing a regressive effect (MANIG 1984).

The last two methods have been evaluated in a study in Egypt (1986). The optimal pricing instrument judged by the efficiency criterion, according to the study, was the instrument that maximizes returns to land and water in the study area and net of social costs incurred in providing and charging for the irrigation water. At that time, aggregate irrigation water supply in Egypt was generally adequate to meet demand in the agricultural sector. It is not surprising, then, that the results of this study have shown pricing systems with a zero marginal charge to be most efficient under nonscare supply. With other words, the study has shown area-based water charges (in particular flat rate) to be more efficient and just as equitable as volumetric charges under the plentiful water supply conditions (YOUNG 1986:174).

Finally, it is worth noting that for already existing schemes, the issue of capital repayment is academic since the capital is a sunk cost. The issue here is then how to encourage the schemes to cover their current costs and to ‘pay their own way.’ This policy; self-sufficiency of irrigation systems, has been declared in Sudan in December 1992 and through which user contributions should cover O&M costs.

3.2.2.3 Institutional Factors and Strategies Related to Collection of Water Fees

Even the best designed system of irrigation fees can be destroyed by low rates of collection of the fees assessed. To deal with this issue, argue SMALL and CARRUTHERS (1991:202), we need to be concerned with all conditions, not only the enforcement, which create a willingness to pay on the part of the water users. They occlude the following factors:

- giving the water users a perception that they own the irrigation facilities;

- making the personnel of the irrigation agency accountable to the water users for the performance of the irrigation systems;

- earmarking fees collected in a particular project for use in the operation and maintenance of that project;

- paying water users’ organizations a commission to collect the fees from its members;

- providing positive financial incentives, such as discounts for prompt payment;

- providing positive social incentives for payments;

- providing enforceable penalties for non-payment, such as termination of water deliveries or other financial, legal, and social sanctions;

- making direct contact with the water users, rather than waiting for the water users to come to pay their fees;

- giving responsibility for collection to intermediaries who are in more direct contact with the water users; and

- allowing the users to pay their fees in kind rather than in cash.

Part II: Irrigation Scheme Management Organizations in The Sudan: The Empirical Part

Sudan is the largest country in Africa covering a total area of about 2.5 million sq. km. with population estimated of about twenty-eight million in 1995¹¹⁵. The last census indicates that about 69% of the population is rural while about 20% live in urban and semi-urban areas.

The remaining 11% constitute a nomadic population. According to the World Bank estimates Sudan is one of the 48 world’s poorest countries¹¹⁶. The north third of the Sudan is almost a desert with an annual average rainfall of about 20 millimeters. Due to the absence of rain in the northern Sudan, the population depends completely on the Nile River - the sole traditional source of water – for irrigation. The rainfall increases steadily from north to south until it reaches isohytes 400mm. to 800mm. Therefore, the water problem in the Sudan range from desert conditions to those of the huge swamps.

According to the Food and Agricultural Organization of the United Nations (FAO) estimate of 1985 there were 33.6 million ha.¹¹⁷ (hectares) of irrigable land in Sub-Saharan Africa. Out of 5.6 million ha. under irrigation only 2.7 million ha. consisted of modern farms, and of this, 1.7 million ha. were found in Sudan alone and the other nine countries had 50 000 ha.

of modern irrigation¹¹⁸. Therefore, Sudan has about 63% of the modern irrigation in Sub-Saharan Africa (AHMED ed. 1989:5). This indicate that Sudan has one of the greatest potentialities for the world’s food production. A fact that has been firmly recognized in Room’s International Conference on Food Problems. This recognition has put on the Sudan, among other few countries, the responsibility of increasing their agricultural yields.

In recent years, to sustain food security for increased population, coupled with the desire of improvement in living standards, there is a fundamental need to look for additional possibilities of increasing agricultural production. Theoretically, this is possible because of the existing large area suitable for agriculture. Considering the worldwide tightening of funds and the availability of (fewer) good sites for new irrigation development in Sudan, the goal of sustaining system performance become more serious. As stated by FAO (1986:105), a major step toward improved land-use in the Sudan “would be achieved by putting already available land resource information to work at all levels of decision-making from national to project and farm level”.

115 The third national population census was conducted in 1983 and estimated population at 21.6 million.

116 According to the cross-country study of DASGUPTA (1993:112), based on the strengths and limitations of the BORDA Index, Sudan is the 21 of the lowest-ranked countries in 1980.

117 1.0 ha. (hectare) = 2.381 feddans. Feddans will be used more often as a mass in this and the next Chapters.

118 For a more detailed discussion of the social conditions in Sub-saharan African, see CARR-HILL (1990).

4. Agriculture and The National Economy¹¹⁹

Agriculture, as is so often the case in developing countries, is the dominant sector of the Sudan economy, accounting for over the third of the county’s GDP throughout the 1980s (38% in 1993), and about 97% of its exports. Eighty per cent of the labor force is engaged in agriculturally related activities, and agriculturally based industries represent 80% of the total manufacturing sector. It has, in addition a significant impact on other sectors of the economy. Component of the sector include crop and livestock production, forestry, fishing, and hunting.

Sudanese government budget and foreign currency availability are based on cotton. The distorting effects of this monocultural production with its roots in empirical economic history, does not need underlining. Cotton production is, however, limited by water resources and crop rotation. Moreover, production of wheat and other staples are important aims of government to improve domestic food supplies and slow down increasing dependency on food imports.