Monday, July 26, 2010

Discussing Public Private Partnership in Irrigation

Two weeks ago we did hold the eConference on Public Private Partnerships in Irrigation on the Global PPP Network, which was following the WBI organized eCourse on Irrigation PPPs. I would like to share with you couple of comments made by different discussantsw on this subject as I find it quite interesting.

“The International Food Policy Research Institute estimates that “the food gap” (the difference between consumption and production) in developing countries will grow from about 90 million tons in 1993 to about 230 million tons in 2020. The FAO estimates that 60% of future gains in food production will have to come from irrigation. Modernized, efficient, intensive irrigated agriculture, rather than an expansion of irrigated area (i.e. not in Africa – Africa’s must expand and there is huge potential for the “right irrigation”), will have to play a central role.” Commented Abdulhamid Azad (World Bank)

So it seems we do have a problem here to solve, and privately financed and operated Irrigation can be very important solution provider, or not? This was extensively discussed and especially did discussants look at cost recovery, demand side and government subsidies.

Abdulhamid Azad (World Bank) also said, that “It should not be concluded from the dismal perspective on cost recovery in irrigation financing that the huge public investments in irrigation have been a waste or that the era of irrigation is over. On the contrary, irrigation project have made a great contribution to welfare, food security, poverty alleviation and the economy. As documented in a number of World Bank review, the benefits of most irrigation investment have also directly reached the large numbers of poor farmers and poor famers or landless (such as in India: Sodic Land reclamation project) have benefited directly. Also, since irrigation increases farming intensity, it increases labor demand.

A typical example of the aggregate impact on poverty comes from India: districts with little irrigation had an incidence of poverty 2.5 times greater than in districts which had substantial irrigation. And irrigation projects -- at least those financed by the World Bank -- have substantial economic returns -- the average rate of return of World Bank-financed irrigation projects is 15%.Farmers are responsible for the costs of operating and maintaining their systems (tertiary/on-farm); in many instances they are responsible for meeting the full costs of replacement, rehabilitation and new investments. Where these changes have taken place, there have not only been sharp swings in the relative proportion of private and public spending, but there have been dramatic improvements in the efficiency of investment and operation and, in most cases, major positive environmental impacts.”

Melissa Rekas (Castalia), who did facilitate the eCourse on PPPs in irrigation did observe that ” The topics that have been discussed most are subsidies and farmers’ willingness to pay for irrigation. Participants in the course state that one of the obstacles in an irrigation PPP is the required subsidy. However participants understand that PPPs in irrigation can bring many benefits – mostly stemming from improved planning and design, operations, maintenance and management of irrigation systems. PPPs can overcome many of the weaknesses of government-provided irrigation, in which poor maintenance and unreliable service are common.”

“The major constraints in the sector are related to knowledge, governments’ interests and farmers’ willingness to pay. The concept of PPPs for irrigation is not widely known. Where it is known, there may be misconceptions. Central government ministries may not be interested in PPPs because they wish to retain control over investment decisions, and they don’t see that the private sector is not a welcome partner in agriculture. Besides the constraint of farmers’ willingness to pay, in the absence of secure land rights they may also fear losing land to the private party. Farmers opposed implementing an irrigation project in Swaziland as a PPP because farmers perceived it to be a ploy to have the private operator take over their land after they fail to pay for the water.”

The very same concern has been shared by Kristen Rautela (India) “in my opinion in infrastructure like water, there is hardly a demand risk (specially in developing world). Important point is the real demand backed up with willingness and capacity to pay. when that is factored in we would know the gap which government may have to find ways to fund.The other issue is to provide a better value for money solution when compared with micro solutions deployed by small farmers, like in case of some parts in India where bore wells are easy solutions. Any collective solution has to make the availability of water and cost of delivery of water attractive enough for these farmers. “
Issac Averbuch did comment on the willingness of farmers to pay “The price of the water and the willingness to pay for it depend on the price of the products which are grown by the small farmers. In developing world, normally the small farmers has a low educational level and limited skills to cultivate more sophisticated products and is not possible to pay an irrigation project with cultures like lettuce or onions or using scale of production like subsistence agriculture. Is absolutely essential to grow products with higher added value (like cotton, fruits which has international market or energy plantations). These cultures will allow the small farmers recover their money, pay for the water and have a sustainable development for their families and properties. So, provide the water is basic, but not enough. Technical and financial assistance at some level are essential. But to get the money of those more valuable products the small farmers has to be integrated in an agribusiness scheme or at least organized in cooperatives which will trade their products. I think I can summarize that a successful irrigation project is based in a tripod: water, education and high scale business.”

Alfonso Guzman (Castalia) explained demand risk in a great detail “One of the key issues with irrigation systems is demand risk - that is, the risk that not enough farmers will be willing to pay the price that is needed to cover the full cost of building and operating the irrigation system. This risk is particularly important in irrigation systems because small farmers that are used to growing subsistence crops find it very hard to reliably quantify the financial benefit that irrigation water brings to their farming business, and therefore to commit to pay a price for that irrigation water. Farmers find it particularly difficult because with irrigation they would be able to grow higher value crops which they do not know how to grow, or where to sell or what prices to expect. This issue of demand risk is of particular importance in greenfield irrigation systems - that is, where farmers are not yet consistently using irrigation. For example, this was a particularly difficult issue in Ethiopia where the Government , with the our help, was considering a PPP for a greenfield irrigation system. When we surveyed farmer willigness to pay we found that farmers were essentially not willing to pay for irrigation because they could not quantify the benefit of irrigation.There are at least three options for managing demand risk.First, is to have the the private investors bear the full demand risk. This would create strong incentives for the private investor to build the system to fit the demand and willingness to pay, or to find options for minimizing demand risk (for example, by helping farmers to learn how to grow new high value crops and providing them with access to markets). This was trialed in the proposed West Delta PPP irrigation system, but limited interest from private investors signalled that transfering all the demand risk to the private party might not be viable.Second, having the government bear all the demand risk. There are several ways in which the government can do this. One way is for the government to pay the private party for making the irrigation system available, regardless of how much water farmers use and how much they pay for this water. This method is commonly used in PPPs for hospitals, prisons, schools. This essentially means that the government is providing farmers with a subsidy to make irrigation water available to them. Providing this subsidy would only make sense if the net economic benefits that the irrigation system brings to the country are greater than the subsidy.Third, is to have the government and private party share demand risk. There are several ways in which this can be done. One way is for the government to offer a minimum demand guarantee (as well as share on the demand upside), another way is to have a PPP contract with a variable term (for example, if the demand is lower than expected the term of the contract would be extended to ensure the private party that it will receive the same present value of the revenue). This is a common demand sharing arrangement in tolls roads in Chile.”



Aldo Baietti (World Bank) did also comment extensively on this issues following” I think it is important to differentiate the "cost of water" and the "cost of the service". From my experience very few countries actually charge a water resource price. So when we are talking about cost recovery in irrigation we really mean the cost of bringing the water to the farmer (although there is no particular reason for not including a water resource fee given the effects of climate change and increasing water scarcity). But in terms of the cost of service, this would involve the cost of the infrastructure plus O&M, including a reasonable return on investment, whether it be a public or private entity. But rarely we have seen where most of these costs are factored into an irrigation service tariff that farmers would pay. This is particularly true for irrigation services that are conducted on a "utility model" whereby there is one service provider with many consumers. Certainly on private systems where the farms have developed their own water source and irrigation infrastructure, they do wind up paying for most of these costs as they are unavoidable.But going back to a utility system that serves many, it becomes more difficult to pass on all the costs to the farmers, for a number of reasons including political ones. For this reason, it is essential to carry out willingness to connect an pay studies prior to designing and building the system. what you don't want to do is to overbuild a system without fully understanding the financial commitments that must be made to support it if the farmers cant or won't pay. If you are catering to commercial farms that produce high value crops it is probably easier to pass on the full costs of service. More difficult will be to pass on these costs to subsistence farmers. So this is where you need to develop a coherent subsidy policy, where the Government may assume initially a good share of the capital as well as some of the operating costs. But ultimately and as we have seen, there is at least the need to fully cover O&M, otherwise we would jeopardize the sustainability of the system. Since subsidy programs do have a significant opportunity costs, Governments must factor these financial commitments against competing demands and if resources are scare as they are in most developing countries, they must make a careful assessment on which investments subsidized over others. “

It is clear that many do recognize PPPs in Irrigation to be an important option with demand risk/willingness of farmers to pay being absolutely key success factor. And with public sector understanding the benefits this can certainly be done in form of public support mechanisms with great benefit of major impact on productivity of farm land and reduction of hunger in regions dependent on agriculture.