May 15, 2008 Conference in Seoul, Korea

Sustainable Water Projects: The Task for

Economic Institutions and Supporting Institutions

byK. William Easter

Professor of Applied Economics

University of Minnesota

2

3A drip irrigation system farm May 16, 2007

4

I. Introduction

1. Key for sustainable water systems – adequate

finances

2. Historical cost recovery has been low (Table 1)

3. Resulting in poor and declining service

4. Poor operation and maintenance (O&M)

5. Growing salinity problems and declining productivity

6. Institutional arrangements are key to cost recovery

7. Show this with successful projects

5

Country/Region Collection Rate Cost Recovery Rate

Argentina 1997 70% 12% of O&M

Bangladesh 1998 3-10% low

Brazil Jaiba Project 1995 66% 52% of total costs

Columbia 1996 76% 52% of the O&M

India Maharashtra 1984 58-67% NA

Italy 1997 NA 60% of total costs

Jordan 1999 NA 50% of O&M

Macedonia 2000 42% NA

Nepal 1984 20% NA

Pakistan 2001 30-35% NA

Philippine 1995 58% 46% of O&M

Sri Lanka 1984 8% NA

Table 1: Low Costs Recovery or Collection Rates

6

II. Institutions for Water

A. Definitions:

1. Institutions are the “rules of the game” while the players are the organizations, firms, or individuals” (North)

2. Institutional arrangements for water

a. Defines who has access to waterb. Establishes the range of options for water

usersc. Determines who can claim income and

who pays for water use (Livingston)d. These may be formal or informal rules

3. Where do institutional arrangements fit into water management? (Figure 1)

7

Figure 1. Irrigation management system with inputs and outputs

8

III. Outline of Lecture

A. Framework for analyzing institutions

B. Problem of designing effective institutions

C. Why low cost recovery?

D. What costs to recover from farmers?

E. Cost allocation among users

F. Alternative charges for cost recovery

G. Key institutions for effective cost recovery

H. How reforms occur: Institutions and public policy

I. Conclusions

9

IV. Analytical Framework (Williamson, 2000)

Level One – informal institutions such as norms, customs, mores, and religion. Beliefs regardingwater as “basic right or an economic good” (Fig. 2).

Level Two – rules for making rules, property right laws, and policies.

Level Three – governance structures. For water, it ranges from spot market for water, to water contracts and allocations by water agencies (hierarchical).

Level Four – actual exchange of water.

10

Figure 2. Levels of Institutional Analysis (developed from Williamson, 2000)

11

V. Designing Institutions – What Effects Change?

A. Problem of path dependency: old institutions and organization block change. (first level)

B. Institution affected by physical environment especially the level of water scarcity.

C. Lack of second-level institutions resulting in weak third-level institutions

12

V. Designing Institutions – What Effects Change? (continued)

D. Change in government and economic policy preceded changes in Chile’s and China’s water institutions.

E. Design of water institutions is complex and each policy and governance structure will usually have some drawbacks as well as strengths.

F. If institutional change doesn’t offer positive net returns, then it may be better to wait until conditions are better-suited for change.

13

VI. Why Has Cost Recovery Been Low?

1. No linkage between fees collected and project O&M

2. Lack of user participation3. Poor communication and lack of transparency4. No penalties for management or staff for

providing poor service and water delivery5. No penalties for defaulting on payments 6. Inappropriate infrastructure design7. Corruption among irrigation officials8. Low priority given to fee collection, efficient

water use, and system O&M

14

VII. What Costs to Recovery?

A. Direct project costs

• Costs of capturing and delivering water• Fixed costs and variable costs in operations• Capital costs• Most projects focus on operation and

maintenance costs

15

VII. What Costs to Recovery? (continued)

B. Environmental costs

• Soil erosion, damage to ecosystem, salinity, etc.

C. Marginal user costs: The present value of future sacrifices caused by current resources use

• Important in use of groundwater stocks• Also important if storing surface water for long

period – offset by evaporation rate

16

VIII. Costs Allocation: Multipurpose Projects

Three common alternatives:

1. Use of facilities (UOF) (Table 2)

2. Alternative justifiable (specific) expenditure (AJE)

3. Separate costs, remaining benefits

17

Table 2. Cost Allocation for Three Consumptive Uses Based on Water Delivery

Three Indian water projects

Domestic supply

Industrial supply

Irrigation

Nagarjursagar 2% 0% 98%

Tungabhadra 1% 4% 95%

Sriram Sagar 2% 3% 95%

Source: World Bank, 2003.

18

IX. Cost Allocation: Indirect Beneficiaries

A. Sana’s Basin Water Management Project, Yemen

● Objective to reduce groundwater use with subsidies for new technology

● Has been effective in reducing water use by allocating some of cost to public

● A way to incorporate marginal user cost of groundwater

19

IX. Cost Allocation: Indirect Beneficiaries (continued)

B. Irrigation in India was to help reduce food prices and food shortages

● Should consumers be allocated some of the costs (tax payers)? (Table 3)

● What share should farmers pay?

● If indirect benefits included, maybe only 75-80%?

20

Three Indian Water Projects

Purpose or useSriram Sagar

(percent)Nagarjursagar

(percent)Tungabhadra

(percent)

Irrigation 88.1 94.3 91.3

Hydropower 3.0 4.0 4.2

Domestic 3.0 1.6 2.1

Industry 4.3 0.1 2.3

Fisheries 1.6 0.1 0.1

Table 3. Cost Allocation Among Three Projects Based on Direct Benefits

Source: World Bank, 2003.

21

X. Alternative Mechanisms for Collecting Costs

A. Area-based charges

● Varied by hectare (ha.)

● Varied by hectare and crop

● Varied by hectare and season

● Varied by hectare and technology

22

X. Alternative Mechanisms for Collecting Costs -- continued

B. Volumetric charges

● Block charges: can vary charges and quantity at

which charge will increase (Figure 3)

● Two-part charge is a fixed charge plus volumetric

charge: resolves conflict between full cost recovery

and efficient pricing

C. Water markets – sale or lease

● Improves water allocation

● May increase farmers’ ability to pay fees

23

24

XI. Key Institutional Arrangements for Cost Recovery

A. Financial autonomy of projects

1. Needed to assure that funds collected are used to operate and improve the project

2. Managers have strong incentives to provide improved service and collect fees

3. Incentives to improve infrastructure: more water to sell

● Yangtze Basin Water Resource Project

25

XI. Key Institutional Arrangements for Cost Recovery – continued

B. Improve incentives (to pay and to collect)

1. Haryana, India: defaulters can lose their land

2. Awati, China: awards and penalties to encourage staff to achieve high

collection rates

3. Bayi Irrigation District, China: awards and fines to encourage staff to collect and turn in fees by deadline (Tables 4 & 5)

26

Table 4. Factors Influencing Fee Collection Rate

N.A = Not available; 1 mu = 0.067 hectare.

CasesFinancial

AutonomyIncentivesto collect

Incentives to pay

User Participation

Systemtransparency Education

Collectionrate

(percent)

Penalty fornon

payment

Improved irrigation service

Awati, China Yes Yes N.A. N.A. Yes N.A. Yes 98

Bayi ID, China Yes Yes Yes Yes Yes Yes N.A. 100

Nanyao IDChina

Yes Yes N.A. N.A. Yes N.A. N.A. 95

ShangdongChina

N.A. N.A. Yes Yes N.A. Yes N.A. 100

Yangtze Basin, China

Yes N.A. N.A. Yes Yes N.A. Yes N.A.

Gujarat, India Yes Yes Yes Yes Yes N.A. N.A. 100

Haryana, India

Partly N.A. Yes N.A. Yes N.A. N.A. 85–95

Mexico Yes N.A. Yes Yes Yes N.A. Yes 90

Alto Rio Lerma,Mexico

Yes Yes N.A. Yes Yes Yes N.A 100

Senegal N.A. N.A. N.A. Yes Yes Yes Yes Covers 100 O&M

27

Cases

Switch to volumetric metering

Pricingstructure

Water-savingtechnology availability

Assuranceof water delivery

Education

Annual saving

Public awareness

Technicalassistance

Awati, China YesIncreasing

block N.A. N.A. Yes N.A. 50m3 /mu

Shangdong,China Yes Volumetric N.A. Yes N.A. N.A. 5 Bm3

Yangtze Basin,China Yes Volumetric N.A. Yes Yes N.A.

1.18 M m3 in WUA

Katepurna, India Yes Volumetric Yes Yes Yes Yes 7.71 M m3

TunisiaAlready

used Volumetric Yes N.A. Yes N.A. N.A.

Mula area, Spain N.A. N.A. Yes Yes N.A. Yes 101 Mm3

Table 5. Factors Influencing Water Use Efficiency

28

XI. Key Institutional Arrangements for Cost Recovery -- continued

C. Increase user participation and transparency

1. Laur Projects, Philippines: rehabilitation and system turn over to water user associations (WUA)

● Farmer involved in design of rehabilitation and decisions on expenditures

● Cut costs 60%● Collection jumped from 45 to 74%

2. Indonesia and Senegal: WUAs improved project design and cost recovery

3. WUAs in Mexico combined with water rights and payment required before receiving water increased cost recovery

4. Survey of benefits of WUAs in Maharashtra, India

● 75% of farmers in WUAs willing to pay 25% higher fees

29

XI. Key Institutional Arrangements for Costs Recovery – continued

D. Improved service and communication

1. System transparency

● Shangdong, China: IC machines

2. Assurance of water delivery

● Katepurna, India: service contracts

3. Public education

● Katepurna, India and in Mexico

30

XII. Reasons Reform Occurs: Institutions and Public Policies

A. Changes in economic policy and local organizations

• China and Chile (Table 6)

B. Poor infrastructure and water scarcity

• Mula, Spain and Katepurna, India

C. Legal/Institutional arrangement

• Mexico and Chile

31

Good practice Country conditions and policies

Pricing structure and/or technology that

encourages water savings

Assurance and transparency

in water delivery

Public education/technical

assistance Water market

Management transfer

Financial autonomy User participation

Physical conditions

Water scarcity

and droughtcommon

Awati, China; Katepurna,

India; Tunisia

Shangdong, China

Tunisia n.a. Gujarat, IndiaMexico

Gujarat, India

Infrastruc-ture in poor

condition

Mula, Spain Katepurna, India;

Mula, Spain

Katepurna, IndiaMula, Spain

n.a. Mexico Katepurna, India

Economic/political conditions and policies

Economic liberal-ization

Yangtze, China Yangtze,China

n.a. Elqui, Limari and Maipo

rivers in Chile

Awati, Bayi, Nanyao, Yangtze,

China; Mexico

Indonesia; Mexico

Decentral-ization

Shangdong, China

Shangdong,China

Yangtze, China, Alto Rio Lerma,

Mexico

Murray and Darling rivers in Australia

Awati, China; Gujarat, Indai;

Mexico; Sri Lanka

Bayi, Nanyao, Yangtze, China;

Mexico; Sri Lanka; Indonesia

Serious financial

constraints

n.a. n.a. n.a. n.a. Bayi, Nanyao, Awati, China;

Mexico

Bayi, Nanyao, Awati, China;

Mexico

Legal/institutional arrangements

Definition of water rights

n.a. Haryana, India n.a. Siurana-Riu decanyes,

Spain; Cariri, Brazil

Mexico Haryana, India

Effective local

system for enforcing water use

rules

n.a. Bayi, Nanyao, China;

Haryana, India

n.a. Siurana-Riu decanyes,

Spain

n.a. Alto Rio Lerma ID,Mexico

Rights to establish

WUAs

Awati, China Bayi, Nanyao, China;

Bayi, Nanyao, Awati, China

Northern Colorado, USA

Mexico n.a.

Table 6. Country Conditions and Irrigation Practices

32

XI. Conclusions

● There is no one means to improve cost recovery

● Successful strategies vary with different conditions in different countries

● Transparency, financial autonomy, user participation, good service, and better incentives are keys to increasing cost recovery and sustaining water services.

33

34

For irrigation the farm uses drip tape, which is a great way of reducing evaporation by getting the water to the soil surface one drip at a time. The result is a penetrating soak that uses much less water than overhead irrigation and gives a deeper watering. Usually this irrigation method is used with mulch for maximum benefit.

35

URL to access paper and presentation.

http://www.apec.umn.edu/faculty/weaster/