Pricing Irrigation Water: A Literature Survey


Pricing Irrigation Water: A Literature Survey

Robert C. Johansson

2000

The World Bank

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POLICY RESEARCH WORKING PAPER 2449
Pricing Irrigation Water Getting prices right and
allocating water efficiently will
become increasingly
A Literature Survey important as demand for
food and water increases and
Robert C. Johansson as water scarcityb ecomes
more of a problem. Pricing
water efficiently will help
meet the increasing demand,
but what is the best way to
make pricing more efficient?
The World Bank
Rural Development Department
September 2000
IPo I Icy RESEARC-WHO RKING PAPER2 449
Summary findings
As wvater scarcitx and population pressures increase, input pricing, per area pricing, tiered pricing, two-part
more countries are adopting water pricing meclhanisms as tariffs, and water niarkets.
their priimarv means of regulating the consumption of Theoretical and practical issues will become
irrigation water. increasingly important as demand for food and water
The way to allocate water efficiently is to “get the increases. Pricing water efficiently will help meet that
prices right,” but how to accomplish this is open to demand, but what is the best way to make pricing more
debate. Water pricing methods are sensitive to the social, efficient?
plhysical, institutional, and political setting. To assess the Many argue that water markets offer a solution, but
costs and benefits of a particular irrigation project, the under what circumstances are water markets viable?
pricing method must be tailored to local circumstances. What effect will decentralization have on farm
johansson’s survey of the resource economics production and the rest of the economy? What forces are
literature on irrigation services and pricing will be useful moving toward decentralization or (re)centralization?
for developing comprehensive guidelines for water policy The answers to these questions are complex and often
practitioners. He synithesizes accumulated knowledge site-specific. To help compare them, Johansson lists case
about the implementation and performance of various studies, data sources, and relevant methodologies in the
water pricing methods used over the past two decades: appendixes.
volumetric pricing (marginal cost pricing), output and
This paper-a product of the Rural Development Department-is part of a larger effort in the Bank to improve the efficiency
of water use. The study was funded by Rural Development, Development Research Group, and the Bank’s Research Support
Budget under the research project ‘Guidelines for Pricing Irrigation Water Based on Efficiency, Implementation, and Equity
Concerns.” Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please
contact Melissa Williams, room MC5-724, telephone 202-458-7297. fax 202-522-3308, email address
mwilliams4(@worldbank.org. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/
research/workingpapers. The author may be contacted at johaO081C@tc.umn.edu. September 2000. (80 pages)
The Policy Research Working Paper Series disseminates the findings of wovrk in progress to encourage the exchange of ideas about
developmnent issues. An objective of the series is to get thefindingsout quickly, even if the presentations are less than fully polished. The
papers carr’ the namies of the authors antd should be cited accordingly. The findings, interpretations, and conclusions expressed in this
paper are entirely those of the authors. They do not necessarily represent the view of the ‘World Bank, its Exectutive Directors, or the
cozPntiseths ev represeatn
Produced bv the Policv Research Dissemination Center
PRICING IRRIGATION WATER:
A LITERATUR]E SURVEY
Robert C. Johansson
The World Bank
Washington, D.C

CONTENTS
ABSTRACT v
ACKNOWLEDGEMENTS vi
EXECUTIVE SUMMARY vii
1. INTRODUCTION 1
1.1 Water Resources
1.2 Food Demand and Water
1.3 Future Needs
2. IRRIGATION WATER PRICING IN PRACTICE 4
2.1 Volumetric Methods
2.2 Non-volumetric Methods
2.3 Market-based Methods
3. NORMATIVE THEORIES OF IRRIGATION WATER PRICING 6
3.1 Partial Equilibrium
3.1.1 First Best
3. 1. 1. 1 Marginal Cost Pricing
3.1.1.2 Water Markets
3.1.2 Second Best
3.1.2.1 Public Goods
3.1.2.2 Implementation Costs
3.1.2.3 Incomplete Information
3.1.2.4 Externalities
3. 1.2.5 Scarcity
3.1.2.6 Returns to Scale
3.1.3 Equity Concerns
3.2 General Equilibrium
3.2.1 First Best
3.2.2 Second Best
3.2.2.1 Externaliti -s
3.2.2.2 Trade
3.2.2.3 Endogenouis Growth
3.2.2.4 Scarcity
3.2.3 Equity Concerns
3.3 Water Quality Management
3.3.1 Pollution
3.3.2 Conservation
4. WATER INSTITUTIONS 21
4.1 Legal Institutions
4.1. 1 Water Law
4.1.2 Water Rights
4.2 Water Administration
.i.
4.2.1 Government Institutions
4.2.2 Water Supply Organizations
4.2.3 Water User Organizations
4.3 Water Policy
4.3.1 Centralized Policies
4.3.2 Transition Policies
4.3.3 Market-Based Policies
4.3.3.1 Water Permits and Trades
4.3.3.2 Water Banks
4.3.3.3 Market Extensions
5. THE POLITICAL ECONOMIES OF WATER PRICING 32
5.1 Theory
5.2 Applications
5.2.1 Reasonsfor Reform
5.2.2 Institutions and Reform
5.2.3 Support and Opposition
5.2.4 Compensation Mechanisms
5.2.5 International Influence
6. CONCLUDING COMMENTS 37
REFERENCES 45
APPENDIX A: CASE STUDIES 64
APPENDIX B: METHODOLOGIES AND DATABASES 77
iii
ABSTRACT
In addressing water scarcity and increased population pressures many countries are adopting
water-pricing mechanisms as their primary means to regulate irrigation water consumption.
“Getting prices right” is seen as a desirable way to allocate water efficiently, but how to
accomplish this remains a debatable issue. Water pricing methods are sensitive to the physical,
social, institutional and political setting in each location. It is therefore necessary, when
assessing the costs and benefits of a particular irrigation project, to cater the pricing method
accordingly.
This paper surveys current and past views on the many aspects of irrigation services and pricing.
The result will be useful in developing a comprehensive guideline for water policy practitioners
as they address the growing demand f,or these services and need to allocate scarce water
resources efficiently. This survey is organized to illustrate efficient pricing methods followed by
alternatives to market failure and considerations of income distribution, water institutions and
political economies of irrigation water pricing. Existing irrigation case studies, data sources, and
methodologies are compared and referenced.
iv
ACKNOWLEDGEMENTS
This literature review was commissioned as a part of a wider research project, entitled
“Guidelines for Pricing Irrigation Water Based on Efficiency, Implementation and Equity
Concerns,” funded by the research committee of the World Bank. This project headed by Ariel
Dinar, Yacov Tsur, and Terry Roe will include this survey as a chapter in their final manuscript
for this research project. I have gratefully incorporated many of their comments, observations,
and work on irrigation water pricing into this literature review.
The goal of this survey was to provide an exhaustive literature review of relevant articles
surrounding irrigation and its pricing over the last two decades. In doing so, I hoped to have
included salient discussion of the major contributors to this large body of literature, but
acknowledge that valuable works may have been overlooked or omitted due to constraints on
time and access. Lastly I would once again like to acknowledge the extensive comments and
editorial suggestions provided by Geoffrey Spencer, Shobha Shetty, Alex Norsworthy, R. Maria
Saleth, Yacov Tsur, Terry Roe, and Ariel Dinar.
v
EXECIJTIVE SUMMARY
As a result of the Bank’s implementation of the 1993 Water Resource Policy, loans for
investment in water projects often include a component requiring the implementation of some
form of water pricing. If this conditiort is to serve a useful purpose, water pricing should be
implemented appropriately. Yet, the notion of desirable (or optimal) water pricing does not at all
command consensus among economists, let alone policy makers. Despite the pervasiveness of
water pricing in developed countries, there is still disagreement regarding the appropriate means
by which to price water and the levels ol water charges. This is partly due to confusion of basic
fundamentals, and also because the performance of a water pricing method is quite sensitive to
the prevailing conditions. Moreover, many countries lack the tradition, experience, and
appropriate institutions to price irrigation water. This enhances the need for a comprehensive
study that will (a) resolve common mis-onceptions and myths associated with irrigation water
pricing, (b) define precisely the notion of efficient water pricing, account for implementation
costs, (c) define and incorporate equity criteria, and (d) put together a guideline for water pricing
in a wide variety of circumstances. The project, “Guidelines for Pricing Irrigation Water Based
on Efficiency, Implementation and Equity Concerns,” funded by the research committee of the
World Bank will address this issue.
This literature review then serves to provide the necessary foundation of existing nornative and
positive studies relevant to pricing irrigation water as related to this project and will be included
as a chapteri n the aforementionedp roject.I n addition,i t is hoped that the included literaturea nd
discussion will provide a useful reference and foundation of relevant pricing issues for irrigation
practitioners.
Tsur and Dinar (1995, 1997) analyzed different pricing practices vis-a-vis their efficiency
performance, cost of implementation, and equity effects. Along these lines, this literature survey
seeks to review and synthesize the most relevant and current research available pertaining to the
many aspects of irrigation water pricing. The body of literature examining these movements is
vast and diverse. Most works are normative in nature, dealing with how water should be priced,
with some description of actual practicalities and applications. A few are purely description
(e.g., Dinar and Subramanian, 1997). There are many compilations, which include the literature
of a particular aspect of water pricing and irrigation:
* Conflict and Cooperation on Trans-Boundary Water Resources, edited by Richard Just
and Sinaia Netanyahu.
* Markets for Water: Potential and Performance, edited by K. William Easter, Mark W.
Rosegrant, and Ariel Dinar.
* Decentralization and Coordination of Water Resource Management, edited by Douglas
D. Parker and Yacov Tsur.
* Economics of Water Resources. From Regulation to Privatization, edited by Nicolas
Spulber and Asghar Sabbaghi.
* The Economics and Management of Water and Drainage in Agriculture, edited by Ariel
Dinar and David Zilberman.
vi
However, a comprehensive review is lacking. This survey seeks to addresses this issue by
summarizing the accumulated knowledge regarding the implementation and performance of
existing water pricing methods over the last two decades. This is confined to the resource
economics literature pertaining to irrigation water, including external material only when
particularly pertinent.
These indicate that the methods surrounding irrigation water pricing have many dimensions, both
theoretical and practical. That these issues will become increasingly important, as future water
and food demands increase, is not in question. Efficiently pricing water will help meet these
increasing demand, but what is the best way to increase pricing efficiency? Many argue that
water markets offer one solution, however, under which circumstances are water markets viable?
What effect will decentralization have on farm production and the rest of the economy? What
are the forces that are moving towards decentralization or (re)centralization? The answers to
these questions and related methodologies are complex and often site specific. To help contrast
these, a list of case studies and relevant methodologies are included in the appendices.
vii
1. INTRODUCTION
World water demand is increasing in all areas of the world. In many areas it is becoming
difficult to meet those demands due to scarce water resources. It is evident that these pressures
will require more effective allocations anl use of existing resources. Many approaches exist that
policymakers use to allocate water, some more efficient than others. Water pricing, whether by
administrative mandate or by market forces, is an important way to improve water allocations
and to encourage conservation. There have been significant movements in recent years towards
decentralized methods of water pricing. The body of literature examining these movements is
vast and diverse. There have been quite a few works including literature of particular aspects of
water pricing and irrigation, but a comprehensive review is lacking. This survey addresses this
issue by summarizing the accumulat:ed knowledge regarding the implementation and
performance of existing water pricing methods over the last two decades’. Due to the volumes of
related material, I have confined my rzview primarily to the resource economics literature
pertaining to irrigation water, including mxtemrnaatel rial only when particularly pertinent. The
goal of this survey is twofold. The first is to provide a comprehensive literature review for the
parent project, “Guidelines for Irrigation Water Pricing.” Secondly, it is hoped that the included
literature and discussion will provide a useful reference and foundation of relevant pricing issues
for irrigation practitioners.
The survey is organized as follows. A. brief discussion of water scarcity and irrigation and
related literature is outlined in section 1. Section 2 describes the prevalent pricing methods in
common use for irrigation projects in the world today. Section 3 lays out normative theories of
water pricing. In section 4, recent literature surrounding water institutions is reviewed. This
includes sections on the current views cn water laws and property rights as they pertain to the
provision of irrigation water supply, waler administration (government management, water user
associations, and water supplier associations), and various water policies ranging from
centralized regulation to decentralized rnarkets. Section 5 delves into the important literature
dealing with political economy concerns with water allocation. A summary overview is
presented in Section 6. With the parent project on water pricing guidelines in mind, the appendix
contains a survey of current irrigation case studies and a reference section on relevant
methodologies and data sources for calcuLlatingc rop-water requirements.
1.1 Water Resources
The Earth’s renewable fresh water resources are derived from the excess evaporation from
oceans over and above precipitation to oceans. Calculations reveal this to be approximately
47,000 km3 /yr. Of this about 41000 km ‘ are potentially exploitable2 . Of the fresh water available
‘ It shouldb e notedt hat an exhaustivel iteraturer eviewo f all the relevanta rticles surroundingir rigationa nd its
pricingi s an arduousu ndertaking.I n doings o il is hoped that salientd iscussiono f the major contributorsto this
large body of literaturea re included,b ut I acknowledgeth at valuablew orksm ay have been overlookedo r omitted
due to constraintso n time and access.
2 See Secklere t al. (1998)f or a diagrammaticd isplayo f water balancef lowsi ncludingg lobala gricultural,d omestic,
industrial,a nd environmentacl onsumption.
1
for human consumption, we are now using between 38% and 64% (Rogers, 1993). In the long
run the amount of freshwater available to any country is nearly constant, although technological
advances can increase the percentage of the water that is economically extractable. Recycling
and reuse are two examples of technology that can increase total supplies (Asano, 1997;
Willardson, et al., 1997; Yaron, 1997b). Of course, the supply of water per capita is decreasing.
The world’s population is estimated to be 5.930 billion in 1998 and projected to reach 8.039
billion and 9.367 billion by the years 2025 and 2050, respectively (World Resources, 1998).
Correspondingly, fresh water availability for 1998, 2025, and 2050 are estimated to be 6918,
5103 and 4380 m3 per person per year. These figures indicate that there is no foreseeable
shortage in per capita availability.
Unfortunately, this fresh water is distributed very unevenly in space and time. In 1994, twentysix
countries had insufficient renewable water supplies within their own territories to meet most
needs of their current population. Population growth rates are relatively high in some of these
countries, particularly in Africa and the Middle East (Gleick, 1993; Postel, 1994). If we examine
some spatial water distributions in different regions we can see the disparity in per capita fresh
water distribution by continent. Asia enjoys abundant annual fresh water per capita on averages
(above 2400 m3 per person in 2050). However, India seats at the lower end of the Asian water
distribution with 1207 m 3 per person in 2050 and, within India, the state of Tamil Nadu will have
only 490 m3 per person in 2050, a sever water shortage by any standard. Some suggest that 1000
m3 year-l per capita is an approximate minimum necessary level for an adequate quality of life in
a moderately developed country or that 500 m3 year 1 per capita is sufficient in semi-arid regions
with extremely sophisticated water management (e.g., Israel – Gleick, 1993). At levels below
500 m3 year- per capita water availability becomes the primary constraint to life. This is
therefore commonly used as the standard indicator of water scarcity (Seckler et al., 1998). If we
examine the water situation in the Jordan River Basin we can see that for the region renewable
fresh water per capita will be halved by 2050 given current population and consumption growth
rates. A closer look reveals critical levels of water availability occurring within the next two
decades for all countries, but Lebanon. Similar patterns can be seen in Africa’s Maghreb and
Northeastern sub-regions.
1.2 Food Demand and Water
In addition to increasing levels of per capita demand for water consumption are water needs for
agricultural purposes. Irrigated agriculture is practiced on 18% of the total arable land in the
“wrld (approximately 237 million HA) and produces more than 33% of the total agricultural
production. Of these irrigated areas, 71% are found in LDCs (60% in Asia alone). For most of
human history irrigated lands expanded at a faster rate than did populations. However, irrigated
land coverage peaked in 1978 and has fallen off nearly 6% since then (Postel, 1994). One reason
for this trend is a decline in public irrigation investments as a result of debt loads, political
resistance, rising real costs of irrigation development, and declining real prices for food
(Rosegrant and Svendsen, 1993). As an illustration, World Bank lending for irrigation projects
has fallen 50% between 1978 and 1992 (Wichelns, 1998). In addition, it has become increasingly
expensive to supply irrigated water. Some examples of increasing costs of irrigation
development can be found in Rosegrant and Svendsen (1993) and Sampath (1992). In India and
2
Indonesia real costs of irrigation water provision have doubled since 1970’s; in the Philippines
costs have increased by more than 50%; in Sri Lanka real costs have tripled; and in Thailand
irrigated water costs have increased by 40%. The shockingly high cost (and subsidization) of
irrigation water under the many projects found in the American West is detailed in Reisner’s
Cadillac Dessert (1993).
Other reasons that may explain the decline in irrigation coverage are a 2% loss of irrigated land
each year to salinization (e.g., Israel – Yaron, 1997b), to urban sprawl, and to growing sectoral3
competition for scarce water. In Asia irrigation necessary for Green Revolution crops will
continue to be an important component of agricultural development. There agriculture is
expected to remain the dominant sector in providing employment, contributing to GNP, and
alleviating poverty and malnutrition. Similarly for Africa, agriculture is the biggest water user.
However, only about one-third of potentially irrigated lands are under irrigation (Rosegrant and
Perez, 1997). Populous agrarian countrtes such as India and China still use 85% of their water
supply for agricultural uses, but this can only be expected to decline as their economies shift to
industrial output. Industrial water-use yields a much higher value-added factor than does
agriculture. Few governments have specified how agricultural water supplies will be protected
or even legally defined (Johnson, 1997).
1.3 Future Needs
Projected global water withdrawals are expected to increase by 35% by 2020 this will equal
5,060 km3 water (Rosegrant, Ringler, and Gerpacio, 1997). Of these developed countries will
increase usage by 22%, of which approximately 80% will be for industrial usage. More serious
withdrawal increases will be in developing countries where withdrawals are estimated to increase
by 43%. The likelihood of new irrigation projects sufficient to overcome increasing population,
mounting concerns over the adverse environmental-social effects of large dam projects, and
losses to salinization4 is quaestionable (Postel, 1994; Rosegrant and Svendsen, 1993; Sampath,
1992). More likely is the modernization of existing systems to cater to the new institutional
structures, technology, and cropping demnands( e.g., in Pakistan – Bandaragoda, 1998).
To meet growing food and population demands it will be necessary to maintain crop yields and
output growth, to increase the efficil ncy of agricultural water use (including reallocation
between different agricultural sectors), and to accommodate increasing urban and industrial use.
A logical starting place is through waler savings, improving use efficiency, and boosting crop
output per unit of water via the reform in existing water use policies. Seckler et al. (1998)
estimate that 50% of future demand increases (through 2025) can be met by increasing irrigation
efficiency. Institutional and legal reforms must empower water users to make their own
decisions regarding resource use, and provide a structure that reveals the real scarcity value of
3 In 1900 agriculturea ccountedf or nearly9 0% of all wateru sed, by 2000 it is expectedt hat this declinet o about
62% (Biswas, 1997). When examining world w ater use trends over the past century, it is important to realize that
significanti ndustriald emandf or water in manyp arts of the globed id not begin to becomer ealizedu ntil after 1940.
The percentages hareo f total water use for indtustryin this centuryi s projectedt o increasef rom6 % to 24% (Biswas,
1997).
4 A discussiono f saline affectso n croppingp attemsa nd irrigationa nd relatedl iteraturec an be found in Plessnera nd
Feinerman (1995).
3
water. In the following sections I survey the existing methods of irrigation water pricing and
summarize their main properties vis-a-vis achieving an efficient water allocation. Existing water
pricingm ethodsd iffer in their implementationt,h e institutionst hey require,a nd the information
on which they are based. They also differ with regard to the efficiency and equity performance
of their outcomes and cost of implementation.
2. IRRIGATION WATER PRICING IN PRACTICE
The fundamental role of prices is to help allocate scarce resources among competing uses and
users. One way to achieve an efficient allocation of water is to price its consumption correctly.
Pricing of water affects allocationc onsiderationsb y various users. Consequently,a variety of
methods for pricing water have arisen, depending on natural and economic conditions. In this
section the prevailing pricing methods for irrigation water are described. These include
volumetric pricing, non-volumetric pricing methods, and market-based methods. Volumetric
pricing mechanisms charge for irrigation water based on consumption of actual quantities of
water. Non-volumetric methods charge for irrigation water bases on a per output basis, a per
input basis, a per area basis, or based on land values. These methods often result from
inadequate information concerning actual consumption quantities. Market-based mechanisms
have recently arisen as a need to address water-pricing inefficiencies inherent in existing
irrigation institutions. These rely on market pressures and well-defined water rights to determine
the irrigation water price.
2.1 VolumetricM ethods
Volumetric pricing methods charge for water using a measurement of the volume of water
consumed. This requires information on the volume of water used by each user or some other
way to infer a measurement of water consumption. Implementation costs associated with
volumetric pricing are relatively high and require the central water authority (CWA) or water
user association to set the price, monitor use, and collect fees.
Water meters make volumetric pricing straightforward, involving routine maintenance and
periodic meter readings. When water flow is reasonably constant, implicit volumetric pricing is
possible by charging for time of delivery. This requires much less information and can be found
in small irrigation projects with few users per day (Easter and Welsch, 1986; Small and
Carruthers, 1991; Bandaragoda, 1998). If volume of water delivered by the water source per
hour were to decrease throughout the cropping season, then the effective price per water unit
would be expected to rise proportionally. An example of this termporal block pricing method is
found in the varying surface irrigation charges in Maharashtra, India, where the water charge
varies by crop and by season (Easter et al., 1997).
For regions with sophisticated monitoring technology, tiered pricing (multi-rate volumetric
method) and two-part tariff pricing (volumetric marginal cost pricing plus a fixed admission
4
charge) are found. Tiered pricing for irrigation water is common in the state of California (Rao,
1988) and Israel (Yaron, 1997b). BolarLd and Wittington (2000) review the recent movement
towards increasing block tariffs in developing countries.
2.2 Non-volumetric Methods
In many cases, volumetric pricing is not feasible or desirable. In which case, non-volumetric
pricing is utilized. There are several such pricing methods found in common practice for
irrigation service: output pricing, input pricing, area pricing, and betterment levy pricing. Output
pricing methods charge a water fee for each unit of output produced by the user. This requires
knowledge of user outputs, but obviates the need for water use measurement (prohibitively
expensive in many cases). In the case vwhereo utput is readily observable this method will save
in transaction costs. Input pricing methcds charge users for water consumption through a tax on
inputs. An example of this might be a pe r unit charge for each kilogram of fertilizer purchased.
Area pricing is the most common method of irrigation water pricing found. Bos and Walters
(1990) in their survey of farmers on 12.2 million HA globally, found that in more than 60% of
the cases water is charged on a per unit area basis. Under this pricing mechanism users are
charged for water used per irrigated area, often depending on crop choice, extent of crop
irrigated, irrigation method, and season. Rates are typically greater for pumped water from
storage than for gravity flow from stream diversion. This method is easy to implement and
administer and are best suited to continuous flow irrigation, which may explain its prevalence in
the irrigated world (Easter and Welsch. 1986; Easter and Tsur, 1995). Area pricing does not
necessarily imply lack of sophistication however. For exarnple the warabandi system in Punjab,
Pakistan and Haryana, India is a relatively complex system that combines elements of volumetric
pricing with area pricing. This rotational method for equitable allocation of irrigation water fixes
flows by day, time, and duration of supply proportional to irrigated area (Bandaragoda, 1998;
Perry and Narayanamurthy, 1998).
Betternent levy pricing is used to captur e the implicit value of irrigation water by charging water
fees per unit area, based on increases in land values. This is essentially a hedonic approach to
the valuation of crop irrigation services (Young, 1996). Theoretically irrigation services should
increase economic activity in a region benefiting all those living there. Levy charges are used to
share these benefits (costs) amongst all direct beneficiaries in the service area (Easter, 1980;
Easter and Welsch, 1986b).
2.3 Market-based Methods
There are significant water resources available from water conservation and reallocation in areas
with irrigation and scarce water supply (Hearne and Easter, 1995; Vaux and Howitt, 1984; Tsur,
1997; Easter and Feder, 1998). To accomplish this it has been argued that water utilities should
charge higher prices from water (Rogers, 1992). The problem often is that users have been able
to use political power to prevent major increases in water prices, especially irrigation water
(Easter, Dinar, and Rosegrant, 1998; T hobani, 1998). Water rates that may have been at one
5
time accurate may be inappropriate 10 years later if they have not been adjusted for inflation
(Easter, Becker, Tsur, 1997). One way to circumvent this drawback is to provide the correct
incentive structure to lead to efficient water markets (Rosegrant and Binswanger, 1994).
It has long been recognized that markets provide a means to allocate water accordingly to is real
value, which should then lead to efficiency gains and conservation (Hearne and Easter, 1995).
Furthermore, markets provide a more flexible mechanism to allocate water then are
administrative means (Marino and Kemper, 1999). It should be noted that water markets are
distrusted by traditional water authorities and consequently are underutilized in many areas
where they are appropriate (Wilson, 1997). The general applicability of formal water markets in
LDCs has been questioned (Pigram, 1999). There are a number of characteristics associated with
water production and delivery that make competitive markets difficult to realize. These market
failures include substantial externalities, recharge considerations, imprecise information, large
fixed investment costs, and declining average costs of delivery5.
Water markets can be distinguished on the spectrum from informal to formal. At times both exist
simultaneously (Pakistan – Rinaudo et al., 1997). Water markets are often established informally
when scarcity occurs (Renfro and Sparling, 1986; Shah, 1993; Anderson and Snyder, 1997) and
when governments have failed to respond to rapidly changing water demands (Thobani, 1998).
Examples of such informal markets include: South Asia (Shah, 1991; Saleth, 1996), Pakistan
(Bandaragoda, 1998) and Mexico (Thobani, 1998). Typically such informnal trades consist of
farmers selling surplus ground or surface water for a period of time (crop season) to a
neighboring farrn or town.
For formal water markets to work there needs to be buyable and sellable water rights. A
transferable water permit or right is a permission to use a previously specified amount of water
and the right to sell it at a price which is determined by the market. This is difficult if public
water agencies are unwilling to relinquish their control of the water rights (Howitt, 1998).
Several governments, however, have recently passed legislation to establish tradable property
rights for water so that the efficiency gains from informal markets can be extended while
regulating their unrestricted nature (Marino and Kemper, 1999; Thobani, 1998; Saleth, 1998).
3. WATER PRICING THEORY
An efficient allocation of water resources is that which maximizes the total net benefit able to be
generated under the existing technologies and available quantities of that resource (Easter,
Becker, and Tsur 1998). In other words the efficiency of water allocation can be regarded as the
equalization of marginal benefits from the use of the resource across sectors to maximize social
welfare (Dinar, Rosegrant, Meinzen-Dick, 1997). In the absence of taxes or other distortionary
constraints, an allocation that maximizes total net benefits is calledfirst-best or Pareto efficient.
If the maximization problem involves variable (short-run) costs only the resulting allocations can
These factors are discussed in Section 4 to a larger extent, but are also summarized in Easter and Feder (1998).
6
be regarded as short-run efficient. When long-run fixed costs are included in the maximization
problem Pareto efficient allocations are achievable. When maximization occurs under
distortionary constraints (e.g., informational, institutional, or political) the allocation is termed
second-best efficient (Mas-Colell, Whinsion and Green, 1995; Tsur and Dinar, 1997).
Equity of water allocation is concerned with the “fairness” of allocation across economically
disparate groups in a society or across time and may not be compatible with efficiency objectives
(Seagraves and Easter, 1983; Dinar, Rosegrant, and Meinzen-Dick, 1997). The concept of
“fairness in allocation” is vague and can either be descriptive or normative in nature (Sen, 1973;
Tsur and Dinar, 1995). These refer to which yardstick ones uses to measure inequality. For
example, Sampath (1991) uses a Rawlsian concept of fairness to investigate equity in India’s
irrigation systems. This concept seeks 1o maximize the welfare of the least well off in society
and allows one to evaluate reform strateg ies in these terms.
However, water pricing mechanism in general are not very effective in redistributing income
(Tsur and Dinar, 1995), but it may be in a government’s national interest to increase water
available for certain sectors or citizens. To meet this goal it is often necessary to provide
subsidized water provision or adopt differing pricing mechanisms that account for disparate
income levels (Dinar, Rosegrant, and Meinzen-Dick, 1997). Seckler, Sampath and Raheja (1988)
admirably separate efficiency and equity into two distinct problems when evaluating an irrigation
system: a managerial problem and a policy problem. They note that the performance of a
system should be judged according to the managerial problem, i.e., does the system meet the
policy objectives. Discussion of the appropriateness of the policy objectives is separate and
removed, held in the context of the broader societal environment. In this section, a similar
division has been incorporated allowing for both partial and general equilibrium discussions.
Furthermore, an outline of the water quiality management literature on has been included as a
separate a section. Although, the stuclies found here can be regarded in terms of partial or
general equilibrium, they represent a significant and growing strand of irrigation water theory.
3.1 Partial Equilibrium (PE) Analysis
PE analysis refers to analysis focusing solely on the principle agents affected by the policy under
question. For example, when examiningJ a new irrigation project, PE would include such aspects
as the effects on farm outputs, water prices, and possible environmental effects. It would ignore
the impacts of this project on prices of other crops, movements of productive resources in and
out of the agricultural sector related to these changes, and possible affects on domestic and
industrial water consumption. The follciwing discussion concerning efficiency and equity will be
based on partial equilibrium.
3.1.1 First Best
The economically efficient allocation of water is one that results in the highest return for the
given water resource. To achieve thlis efficiency the price of water should be equal to the
marginal cost of supplying an additioral unit of water plus the scarcity value of the resource.
7
An important facet of the economically efficient price is that all users face the same price (Easter
et al., 1997; Howe et al., 1986)6.
There are several ways to determine this efficient price. One is to derive the water demand and
supply curves and thereby determine the optimal allocation and price (Easter, Becker, and Tsur,
1997; Spulber and Sabbaghi, 1998). Differing methods for estimating water demand are: price
and quantity data estimation (Griffen and Perry, 1985) valuation methods (Gibbons, 1986;
Colby, 1989; Dudley and Scott, 1998), and farmland sales estimation (Colby, 1989). Next water
supply curves reflecting increasing available supply with increasing costs need to be estimated.
These include the marginal cost of delivering and processing the water and depend on the source
from which the water is derived. The cost of water that draws down an existing stock includes
an intertemporal scarcity rent’. Once supply and demand curves have been estimated the
optimum water allocation can be deternined. The optimal price in this generalized enviromnent
will be that which equates aggregate supply with aggregate demand. More applied approaches to
the valuation of irrigation water can be found in Young (1996). These include the “Change in
Net Income” (CINI) method, the most commonly used method to determine to determine the
shadow price of irrigation water. This entails calculating farm income in several scenarios: a
“with irrigation water” and a “without irrigation water”.
Marginal Cost Pricing
One way to equate marginal benefits of an additional unit of irrigation water to its additional
supply cost is via marginal cost pricing (a special case of volumetric pricing). Marginal cost
pricing (MCP) equates price with the marginal cost of supplying the last unit of water. In the
absence of implementation costs, the marginal cost of supply includes only delivery costs. In
this case the allocation resulting from MCP is Pareto efficient. However, water supply costs
include such things as the collection of water and fees (Small and Carruthers, 1991),
maintenance (Easter, 1987), infrastructure, scarcity, extraction cost externalities, and social
costs/benefits. If supplying different users results in differentiated marginal costs, this should be
reflected in the prices8 (Tietenberg 1988; Spulber and Sabbaghi, 1994). Similarly, if water
supplied is of different quality the marginal value of supply should be reflected in the price (e.g.,
Israel – Yaron, 1997). If this is accomplished the water price will now equal the sum of marginal
delivery costs and marginal implementation costs (Tsur and Dinar, 1996). For this reason,
marginal cost pricing has also been called opportunity cost pricing (Thobani, 1998), implying
that the price of water should be set equal to the opportunity cost of providing it.
The main benefit of MCP is that it is capable of achieving an efficient allocation. The main
drawback of MCP is the difficulty in including all the marginal costs and benefits when
determining the correct price to charge. For example, the marginal cost of water provision will
vary over months and over years. This intertemporal aspect of water supply is particularly
cumbersome (Tsur and Tomasi, 1991; Sampath, 1992). In addition, MCP ignores equity
concerns (Seagraves and Easter, 1983; Dinar, Rosegrant, and Meinzen-Dick, 1997). In periods
of scarcity the marginal cost (price) of providing water will increase, which may adversely affect
6This holds when the cost of supplying water to users is equal across the system. When the marginal cost of supply
is different across users, the price they will face will differ.
7 See Easter,B ecker, and Tsur (1997)f or a discussiono f future demanda nd uncertaintye ffects on scarcityv alues.
s An example of this is found in Mendoza, Argentina (Marre et al., 1998).
8
lower income groups. The implicit need tc) volumetrically measure water use in order to employ
MCP necessitates higher implementation costs than do some other pricing mechanisms. For this
reason and the difficulties mentioned earlier the effective and accurate implementation of
opportunity cost pricing has not been observed, and suggest that such pricing in practice could be
disruptive socially and politically (Thobani, 1998).
Once implementation costs are incorporated into volumetric pricing methods we enter the world
of second-best (Tsur and Dinar, 1997). tUnder second-best conditions it can be optimal to price
water below its long-run marginal cost (Riodes and Sampath, 1985). Consequently, there may be
other methods of pricing water that yield higher net social benefits. Sampath (1992) summarizes
the literature dealing with why many LDC’s depart from marginal cost pricing.
* There are millions benefiting from irrigation services apart from the farmers and
so the farmers should not bear the entire cost of delivery9 .
* Pricing is dependent also on method of delivery'”. The main types of irrigation
water delivery systems include continuous flow, rotation”, demand and closed
pipe systems. Volumetric: pricing is feasible under the demand and closed pipe
systems, but is extremely (lifficult under the rotation system and nearly impossible
under the continuous flow system.
* In general the closed-pipe sprinkler system are more efficient than the continuous
flow and rotation system:,, but are more expensive and usefulness in irrigating
paddy crops are not yet fully known.
Water Markets
Under certain conditions (no externlities, full inforrnation, complete certainty, perfect
competition, and non-increasing returns to scale) markets will achieve first-best allocations.
When trades are free from government constraints and high transaction costs the resulting water
allocation will be Pareto efficient and th.e resulting price will be equal to that determined under
MCP methods. However, the question cf what to include in water transactions is a difficult one.
Such things as monitoring, return flowvs, third-party effects, and instream uses have to be
considered. Easter, Becker and Tsur (1997) list six essential arrangements for an efficient,
equitable and sustainable water market.
* Institutional arrangements that establish water rights that are separable from land
rights.
* A management organization is needed to implement water trades.
* A flexible infrastructure is needed to transfer quantities of water.
* Third party effects (externalities) must be internalized by the system.
* Water conflicts require e5fective resolution mechanisms.
9 See also Sampath( 1983)f or welfare analysiso n the returnst o public irrigationd evelopmentc oncerningt he issue
of who should pay for this development.
10 For a discussion and examples of irrigation systems commonly found in many areas of the world see the book
collection on this issue edited by Easter (1986). Efficiency comparisons of these systems for a number of case
studies can be found in Molden et al. (1998).
” In Asia the rotation system is the most prevalent method of irrigation water delivery (UN, 1980; Seagraves and
Easter, 1983).
9
* Equity concerns, such as future and social goals, need to be addressed.
When these arrangements are distorted or there exist significant implementation costs market
allocations are unlikely to attain first-best allocations. For example, water is expensive to
transport and therefore the development of water markets is generally localized. Due to the
localized nature of many water markets the number of users and suppliers is limited. Such
situations may lead to noncompetitive markets, and preclude first-best allocations. However,
even when distorted, second-best market allocations may surpass volumetric pricing in
efficiency”2. How equitable market-based allocations are is still an open question (Bjornlund
and McKay, 1999).
3.1.2 Second Best
The pricing of water is made difficult considering the many peculiarities associated with the
provision of water services’3 . For example, Kirda and Kanber (1999) estimate that losses for
conveyance systems alone can be as high as 30% in some cases. When including application
practices, water losses can reach 55-60% in some developing countries. Generally, due to these
and other particularities associated with the provision of water the management of irrigation
water systems is characterized by public intervention of some sort. Easter, Becker, and Tsur
(1997) summarize some of the characteristics of water-resource development that lead to public
intervention.
* Many water investments include large capital investments and long periods before
payoff making it difficult to attract private investors.
Often water supply exhibits increasing returns to scale and is prone to
underinvestment and monopoly pricing’4 .
Many water projects incorporate aspects such as recreation, electric power and
irrigation, which complicate the decision-making environment.
T he Central Water Authority (CWA) often lacks complete information on water
supply, demand, and consumption, all of which can vary widely between years.
Some water services are of public good nature and provide benefits up to
congestion or degradation.
These main departures into the literature of second-best theories of water allocation are now
discussed beginning with the public good nature of water provision.
Public Goods
Easter, Becker, and Tsui (1997) classify the provision of services using the following categories:
public goods (low excludability and subtractability), price goods (high excludability and
subtractability), toll goods (low subtractability and high excludability), and open-access goods
(high subtractability and low excludability). It is useful to use these categories to describe the
12 Water marketst ypicallyi nternalizet he cost of collectingi nformation. This eliminatesa major sourceo f
implementationc osts. In addition,t he corruptioni ncentivesa ssociatedw ith centralizeda llocationm echanismsa re
often eliminated with water markets.
” Spulbera nd Sabbaghi( 1998)p rovidea good discussiono f the historicald evelopmento f second-bestp ricinga nd
theoretical illustrations.
14 See Spulber and Sabbaghi (1998) for discussion of natural monopolies and related literature.
10
type of irrigation service. Goods may migrate from group to group depending upon the
evolution of technology or institutions. For example, tube-well technology has reduced the
economies of scale for tube-well irrigation such that it can be now viewed as a private good
category, even for relatively small-scale farmers (Vermillion, 1997).
For large-scale irrigation projects water services have low excludability because of the large
number of farm plots and monitoring difficulties. In such a situation it will be difficult to
involve private firms and market forces will not provide the optimal level of investment.
Similarly the provision of goods in large portions (e.g., flood control or large dam projects) that
is not readily divisible for private purchase also manifest low excludability. Unregulated
markets may therefore be sub-optimal in terms of a country’s social or developmental goals in
terms of poverty alleviation, food security, equity, and public health.
Water from both underground and surface sources often is an open-access good. As has been
mentioned before, there are finite amounts of water that must be shared in common between
various sectors, regions, and their users (see also Section 3.1.2.5 Scarcity). Over-exploitation of
these resources is commonly referred to as the “tragedy of the commons” (Hardin, 1968). This
occurs when users ignore the effects of their actions on the resource and other users when
pursuing their own self-interests. To address this problem economists often advocate the
definition of private water rights and frmation of water markets (see also Section 4). The
uncertain nature of water supply its political nuances can make privatization difficult, especially
if the resource is exhaustible, nonrenewable (Disgupta and Heal, 1979) or uncertain (Provencher,
1995).
Implementation Costs
Implementing a pricing method requires appropriate institutions, such as a central water agency
(CWA), and entails costs. The physical, institutional, and political environment is manifested in
the form of implementation costs. Irmplementation, or transaction, costs may render some
pricing methods impractical and narrow the list of methods from which to choose. The effects of
these costs on welfare are both direct and indirect. They generally make first-best allocation
pricing methods impossible by modifying optimal prices from their efficient level. Valuing these
constraints under various pricing methods is not a trivial task and there appears to be no general
rule that one can apply in any given circumstance. Roumasset (1987) extends a public economics
approach to the examination of management costs associated with irrigation services. This
extension advocates an integrated bottom-up and top-down approach to minimize such costs.
Systems that include water permit trades should be tailored to their specific natural and economic
environrnent (Roumasset, 1987).
Beyond administrative costs, relatively easy to value, implementation costs include such things
as compliance costs, which can be quite substantial. Due to the nature of farming systems in
many areas of the world (i.e., variance across seasons, crops, regions, and climates) complex
pricing systems that are efficient may be constrained by the informational and administrative
costs needed for implementation (Sampath, 1992; Rosegrant and Binswanger, 1994; Barrett and
Sinclair, 1999). Tsur and Dinar (1997) found that effects of implementation costs on the
performance of different pricing methods are significant in the sense that small changes in costs
can change the order of optimality of ihose methods. It is therefore possible that a simple and
11
inefficient pricing method such as per area pricing, which is relatively inexpensive to implement,
yields a higher social welfare than that obtained with the potentially efficient volumetric pricing
method (Tsur and Dinar, 1995, 1997). While these observations may be straightforward, very
little empirical evidence or methodology exists for evaluating the practical limitations of various
implementation costs
Incomplete Information
One such implementation cost is incomplete information. Whenever irrigation water is priced by
some public agency, problems related to incomplete information arise. The user has complete
information on his/her marginal water value. Some of this information is private and unavailable
to the CWA. For this reason we often see literature referring to this situation as asymmetric
information. This is so because rational individuals will use private information to advance their
own interests (moral hazard) or the CWA may have to spend considerable effort (in the form of
increased implementation costs) at society’s expense. Zusman (1997) uses the Ramsey-Boiteux
formula to assess the total social costs of imperfect information. A comprehensive account, as
well as an exhaustive literature survey of regulation with asymmetric information can be found
in Laffont and Tirole (1993). Applications to agricultural production are mainly in the context of
environmental pollution (e.g., Segerson, 1988; Russel and Shogren, 1993).
Under various conditions, regulators can circumvent the problems associated with certain types
of mechanism design. For example, if the CWA charges for irrigation water using per area
pricing, it is not necessary to know users’ marginal value for water. It is, however, possible to
infer the users’ marginal value of water through various revelation mechanisms. This
burgeoning strand of economic literature (direct revelation mechanisms) springs from the
pioneering work on informationally decentralized systems (Hurwicz, 1972) and on mechanism
design and principal-agent theory (Hurwicz, 1973; Groves, 1973; Laffont and Tirole, 1987).
There are few examples directly related to water pricing; initial efforts include the works of
Loehman and Dinar (1994) and Smith and Tsur (1997).
The pervasive case of unmetered water well illustrates one aspect of incomplete information.
Because the CWA does not have complete information on the value of the water to heterogenous
fanners (adverse selection) there is the incentive for the farmer to under report actual usage
(moral hazard) if water is priced volumetrically. Due to the high costs of implementing a meter
system often times the CWA will use per unit area pricing in these cases. Smith and Tsur (1997)
use mechanism design theory to propose a water-pricing scheme, which depends only on
observable outputs. They find in the absence of implementation (transaction) costs that this
mechanism will achieve first-best allocations. If transaction costs are included, first-best
allocations are not possible, but second-best allocations are. It is assumed that the CWA does
have complete information on farmer (i)’s technology. However, by introducing a series of
nonlinear taxes on ouputs, this technology can be deduced, hence revealing directly farmer (i)’s
marginal water values. The use of this mechanism may involve prohibitive monitoring costs, i.e.,
the CWA needs to observe farm output for each farmer. Monitoring may be relatively simple, as
12
in the case of Egyptian wheat marketed thiough a government marketing board, or very difficult
as in the case of a large irrigation project suipplying many small subsistence farmers”.
Externalities
There are externalities associated with water provision to the environment (pollution) or to other
interest groups (third party effects), that is. when one person’s decisions do not take into account
the negative effects on others. Economists have advocated the use of pollution taxes as a means
to address environmental externalities (EUaumala nd Oates, 1989). When implementing water
irrigation systems and the marketing of thLose services often there are conflicts that arise out of
such things as return flows (third party externalities). The potential for these depends on the
nature of the irrigation system. One example concerns recent reluctance to engage riew large
dam projects both in LDCs and in the MI)Cs (e.g., Sardar Sarovar Dam, India – Postel, 1999).
Third party effects of return-flow from large irrigation darn projects recently have accounted for
environmental degradation in Colorado. The irrigation and hydroelectric projects along the
Snake and Columbia Rivers have signiicantly altered flow quantity and timing, which has
adversely affected salmon populations (NVillis et al., 1998). MacDonnell et al. (1994) discuss the
third party effects of American West damns and water banking. They investigate three types of
third party effects: impacts on other wati-.r users, local economic impacts on parties other than
water users, and impacts on environmental values. rhe difficulty in managing these effects is
measurability of the impacts. A variety of water conditions, irrigation systems, and their
potential stock externalities are summarized in Easter (1999).
Scarcity
There are many ways that pricing mechanisms can be used to address scarce water supplies.
During seasonal shortages, higher marginal cost prices should be used to ration all of the water
and to recover fixed costs during peak demand (Seagraves and Easter, 1983). Many informal
allocation systems have developed in the absence of prices or formal markets to address scarcity.
These traditional, communal arrangemerts have often operated successfully for many years, but
may not be efficient or equitable: warabandi system in Pakistani (Easter and Welsch, 1986) and
India (Perry and Narayanamurthy, 1998), subaki system in Bali (Sutawan, 1989), and the
entornador-entornador system in Cape Verde (Langworthy and Finan, 1996). When flows are
uncertain, shares rather than volumes of water can be allocated to individual farms. When these
shares are tradable, efficient allocations can be achieved by equating marginal values across
users (Seagraves and Easter, 1983).
Another mechanism to cover scarcity ccosts is the introduction of a fixed charge to balance the
budget of the CWA. In this manner the short-run efficiency of marginal cost pricing can be
extended (using a two-part tariff method) to account for long-run fixed cost considerations.
Similarly an annual Pigouvian tax can be used to manage scarcity. This avoids distortionary
affects of other taxing forms and is therefore capable of achieving long-run efficiency (Laffont
and Tirole, 1993; Tsur and Dinar, 1995). Examples of endogenously determined water prices
under uncertain supply can be found in rsur (1990, 1997), Tsur and Graham-Tomasi (1991), and
15 Interestingt o note are the advancesi n satelliti,r emotes ensing methodst o collect irrigationd ata in a cost effective
manner. An examplef or India can be found in Thiruvengadacharain d Sakthivadive(l 1997). These may further
reduce costs associated with asymmetric infonriation.
13
Moreno et al. (1999). Intertemporal allocations under scarcity and uncertain supply are
investigated in Easter, Becker, and Tsur (1997).
Uncertain supply also is related to the choice of water source and irrigation system, which will
affect the eventual water price. Small and Rimal (1996) using efficiency and equity criteria
evaluated water scarcity effects on irrigation system performance in Asia. They note that
optimal conveyance strategies to account for scarcity may reduce economic efficiency and equity
marginally. Along these lines, Zilberman (1997) develops an optimal water pricing, allocation,
and conveyance system over space to capture different upstream and downstream incentives.
Returns to Scale
Another type of market failure exhibited by water provision is increasing returns to water
production technology. The costs for water treatment and delivery per unit declines as the
number of users increase. In such cases, marginal cost pricing will not cover full costs because
the marginal cost will always be lower than the average cost. That large irrigation projects
exhibit increasing returns to scale is well documented (Easter and Welsch, 1986a; Dinar,
Rosegrant, and Meinzen-Dick, 1997; Easter, Becker and Tsur, 1998). Because of these
increasing returns to scaic, water supply can be viewed as a natural monopoly. The literature
regarding the regulation of natural monopolies is well developed (Spulber and Spagghati, 1998).
3.1.3 Equity Concerns
Equity concerns include such things as the recovery of costs from users, subsidized food
production, and income redistribution (Seagraves and Easter, 1983). Considering effects on
income distribution of water pricing has merit of its own when justified on ethical grounds
(Rhodes and Sampath, 1988; Sampath, 1991, 1992). Moreover, such considerations often appeal
to efficiency criteria since they tend to reduce implementation costs (i.e., it is easier to gain
cooperation for a policy that is fair and just). Easter (1993) illustrates the effect of “fairness” on
efficient management of four irrigation systems (Philippines, Sri Lanka, Nepal, and Maharashtra,
India). Tsur and Dinar (1995) remark that the majority of pricing mechanisms have little
potential effect on income distribution (when farmers are homogenous), as equity effects of
pricing are primarily dependent on land endowments. Gill and Sampath (1992) argue with an
application to Pakistan, that despite inequality in land distribution, equality in irrigation supply
can be improved using a lexicographic distribution favoring small farmers. These trade-offs
between equity and efficiency are well illustrated in Small and Rimal (1996). They simulate
various distribution rules on efficiency and equity for typical Asian irrigation systems.
Considerations of income distribution are occasionally used to justify departure from efficient
allocations and it is important to understand their effects. Proponents use arguments of fairness
or social awareness to use redistributive pricing policies. They often argue that consumers
benefit from agricultural investments through lower food prices and so should be expected to
share in covering the costs (Sampath, 1983). In addition equity concerns pertaining to irrigated
agriculture are important when addressing international aid and development issues. Many argue
against water charges of any kind in LDCs, as the higher income farmers are often exempt from
paying (Easter and Welsch, 1986b). Opponents, on the other hand, may argue that subsidized
inputs/outputs (e.g., water) distorts production decisions, inflicts domestic social (deadweight)
14
costs and adversely affects international trade (Kruger, et al., 1991). They argue that if
governments were to support farmers, they should find non-distortionary ways to do so.
When examining equity concerns between hetrogenous water users and sectors, pricing policies
may provide the most effective means to redistribute income. Sampath (1990) notes equity
concerns surrounding income redistribution via irrigation distribution have become one of the
most important objectives across disciplines’6. Water pricing may have a role in policies aimed at
affecting income distribution between farming and non-farming sectors (Diao and Roe, 1998) as
well as between irrigation districts (Brill, Hochman and Zilberman. 1997). In addition, equity
considerations may coincide with political interests. Just, Netanyahu, and Horowitz (1997) note
that in arid countries where water may be a limiting resource, an increasing block-rate structure
may be a valid means of trading efficiency for equity in the distribution of a scarce resource.
These considerations suggest that effects of a pricing scheme on income distribution should not
be overlooked.
The formation and functioning of water rriarkets has associated equity concerns. These concerns
and water market development in the American Southwest are described in Saliba and Bush
(1987). They note that higher costs associated with the purchase of water rights or distribution
based on seniority may force redistribution of water rights to different sectors or users leaving
others out of the market for water. Some consequences of water trading and its potential for
equitable reallocation of water resources have been examined for Victoria, Australia (Bjornlund
and McKay, 1999). Similarly Meinzen-Dick and Bakker (1999) evaluate water rights and
methods for allocating water between sectors. Therefore, it is necessary to take the other users
into account when allocating rights for irrigation water supplies.
Carruthers (1996) in his review of the economic aspects of irrigation highlights reasons for
further investment in irri yated agriculture. One main reason was irrigation projects are at least as
successful as are other development assistance projects and that aid for irrigation must be
maintained at least at present levels. His rationale behind this view holds for domestic irrigation
projects as well: job creation to reduce migration in rural areas, development flows to
impoverished regions, and the need to focus on the dominance of agriculture in many LDC
countries. In this vein, Carruthers et al. (1997) make a strong case for increasing irrigation
investments on food security grounds. A Zimbabwean application can be found in Shumba and
Maposa (1996).
3.2 General Equilibrium (GE) Anailysis
GE analysis includes other regions or sectors (sometimes across time), where as partial
equilibrium analysis can be viewed as effects to a specific sector (irrigation / agricultural). GE
analysis often refers to such things as steady-state paths, or economy-wide effects and is viewed
as being macro-level in approach. However, to gain the big picture of economy-wide effects it
is often necessary with GE analysis to make sweeping, often unrealistic assumptions about the
prevailing economic conditions, which may in real life vary quite substantially from region to
16 In his examination of Indian farms, irrigatior, and inequality, Sampath (1990) concedes that to address inequality
it is often necessary to redistribute land.
15
region. Such assumption include those of voluntary transactions in a level playing field of
differentially endowed households in a risky world, where all agents have identical, complete
information (Binswanger et al., 1993). The results derived from this analysis must be viewed
with these underlying assumptions in mind and the knowledge that often the theoretical results
obtained are generalizations of the entire economy and not specific micro-level occurrences.
In the context of water pricing, the difference between these two concepts is illustrated using a
simple example. A partial equilibrium analysis of the provision of irrigation services would try
to set the price such that the marginal cost of supplying the water equaled the marginal benefit to
the farmer of receiving that water. A general equilibrium analysis of the same provision of
irrigation services would examine the effects of setting this price on other sectors such as the
urban sector or industrial sector. Meinzen-Dick and Bakker (1999) illustrate the need to
incorporate other sectors in analysis when defining rights to water and choosing appropriate
irrigation systems. Modeling (theoretically or empirically) additional sectors or regions is by
necessity a difficult undertaking, which requires modeling sophistication and/or large data sets.
As a result there is not as much literature regarding irrigation pricing issues.
One GE methodology revolves around computable general equilibrium models that calibrate
equilibrium conditions using existing empirical data. Berck, Robinson and Goldman (1991)
describe how computable general equilibrium (CGE) models can be used to evaluate policies.
They summarize the contributions of general equilibrium analysis over partial equilibrium
analysis. In the calculations of a project’s direct impact they conclude that CGE models suffer
from the same limitations (i.e., definitions of costs and benefits), as does standard cost-benefit
analysis. However, for large irrigation projects (e.g., Aswan high dam and California Central
Valley Project) where it is conceivable that impacts of the project will have sequential effects on
commodity prices, CGE will allow estimates of those endogenously determined variables. In
addition evaluations of project alternatives (e.g., fallowing of land or trade alternatives) is
facilitated under CGE modeling. Similarly alternative policies outside of water policy can be
evaluated for its contribution to the impact of a project (e.g., optimal commodity taxes). In the
LDC environment, prices for missing and distorted markets (e.g., labor) can be evaluated in the
CGE format, which yields shadow values for those prices. Lastly, the CGE format is useful for
generating the potential secondary benefits (costs) for the other sectors in the economy.
3.2.1 First-Best
The definition of first-best allocations and Pareto optimality are as they were for partial
equilibrium. It should be noted, however, that general equilibrium expressly incorporates prices
for other goods and sectors and therefore the focus is not necessarily on determining the Pareto
optimal water price/allocation. For environmental policy, Hurwicz (1998) derives the optimality
conditions for general equilibrium treatments of market failure and second best policies.
3.2.2 Second-Best
Literature concerning second-best GE can be categorized similarly as was partial equilibrium
analysis. Binswanger et al. (1993) discuss how GE analysis begins with perfect markets and
perfect information (or first best), and as assumptions are relaxed enters the world of second-best
(e.g., credit market imperfections, asymmetric information, moral hazard, income risks, and rentseeking
distortions). There are few empirical GE studies examining the environment (Robinson
16
et al., 1993; Roe and Diao, 1995, 1997; Coulder et al., 1999) or water (Diao and Roe, 1998) in
all sectors of the economy due to the scarcity of accurate data. One recent GE examination of
water pricing was conducted for industrial, domestic, and agricultural consumption in Canada
(Renzetti and Dupont, 1999). Their simulations evaluate potential benefits and costs of a twopart
pricing policy (permits and volumetric charges) on many sectors.
Externalities
Trade in the presence of externalities has been used to evaluate the optimal choice of
environmental protection. A recent exanmple (Kohn, 1998) illustrates that under a simple Nashgame
scenario using the traditional Hecksher-Ohlin-Sarnuelson model both countries will opt for
environmental taxes. Similarly, the eff-ct of regulating shared water aquifers between two
countries has been modeled using GE theory (Roe and Diao, 1995, 1997). This later study
endeavors to describe a situation found where two countries share water resources and thus the
water-use decisions of each country will affect the water availability of the other country (e.g.,
Israel, Jordan, Gaza, and the West Bank). With the introduction of the externality (country A (B)
affects the amount of water availability to country B (A) depending on its water generation
amount) they view the competitive equilibrium as Nash equilibrium. Contrary to standard
Hecksher-Ohlin factor price equalization, the resulting differences in water supply and demand
between the two countries will generate different prices for water, labor and capital in countries
A and B. The effects of various unilateral and bilateral water policies are then simulated.
Trade
Diao and Roe (1995) examine the we’,fare effects from liberalizing trade in a North-South
framework. They focus on the environmental effects of changing trading patterns when
pollution enters into health consumption via a modified Stone-Geary form of utility. This model
can be modified to expressly examine water pollution. This model is developed in Diao and Roe
(1998), where they examine the effects of trade and water market reform in Morocco. The crux
of this study is to determine the optimal sequence of reforms in the Moroccan economy keeping
pragmatic political economy consideration in mind”7. Reform, as such, implies that the
efficiency of the existing system will be improved, however, reform is not static and must be
viewed as a process. Diao and Roe (1998) do a very compelling job of showing how such
reform might be sequenced to allow for the losers in the reform process to be partially
compensated, and thereby made to be nmore willing to engage in the reforms. By doing so, the
authors have made a strong empirical a]rgument in favor of using GE analysis to examine water
pricing issues.
Vaux and Howitt (1984) developed a G3E approach for inter-regional water trade. They use a
spatial equilibrium approach derived from a quadratic programming model. The Vaux and
Howitt model examines the interregibnal equilibrium supply and demand relationship for
California (five demand sectors and eight supply sectors). They estimate that if trade is not
allowed and the development of new water sources is exclusively used to meet increasing
demand the resulting prices for all regions are dramatically higher. By allowing a market-based
17 Despite a clear comparative advantage in the production of irrigated exportables (fruits and vegetables) Morocco
continues to protect the wheat and industrial crop sectors to its collective disadvantage. Any water development
strategyo ccurringi n this biased agriculturals ystemm ay lead to further inefficienciesin water allocationa nd be
actually welfare decreasing.
17
interregional trade of water supplies, the increasing demand can be met at much lower social
costs. Smith and Roumasset( 1998) provide an extension of the spatial/intertemporaml odel for
water management with multiple sources and transport technologies to the Waihole-Waikane
aqueduct in Hawaii.
Endogenous Growth
Recent endogenous growth literature should be mentioned here. These models are related to
general equilibrium approaches in that they examine several sectors of the economy
simultaneousl8y.” There have been several recent articles examining optimal growth strategies
for countries accounting for environmental quality. These can be adapted for specific water
sectors if need be. Elbasha and Roe (1995a) incorporate pollution and abatement efforts into an
R&D endogenous growth model. They determine that the effect of the environment on growth
depends on the intertemporal substitution of consumption elasticity. Elbasha and Roe (1995b)
further develop three types of endogenous growth models (convex models, human capital
models, and innovation models) to include environmental consumption and pollution
externalities. Mohtadi (1 996) and Bovenberg and de Mooij (1997) show how the optimal growth
path for a country depends upon the type and extent of environmental regulation. Aghion and
Howitt (1998) in their comprehensive text on endogenous growth theory include several relevant
sections to our survey: steady-state existence with environmental pollution and with
nonrenewable natural resources.
Scarcity
Rausser and Zusman (1991) explore the affects of water scarcity on the political power balance
in a general equilibrium format. Sectors included in the analysis consist of n districts, a CWA
and a government, yielding an n+2 game determining water allocations. Alternative supply
reduction strategies for environmental improvement are examined in a multi-dimensional format
in Sunding et al. (1994). This paper incorporates 3 specific models for Central Valley
agriculture to provide a holistic view of environmental protection policies affecting California’s
Bay/Delta region. These models’ 9 reveal that increasing water costs (reduction in irrigation
diversions)a nd labor distortions due to environmental egislationc an be mitigatedt hrough water
trading.
Equity Concerns
Nearly any general equilibrium analysis will revolve around equity issues, including such things
as income distributions. The basis of GE analysis is to discover the repercussions of an action in
one sector in one country in other sectors of that economy or other countries. Estimating who
wins and who loses and by how much is the typical output from GE analysis. For this reason
many of the aforementioned literature will also appear in section 8, dealing with the political
economy of water allocation. For examnpleJ,u st, Netanyahu,a nd Horowitz (1997) examine the
equity considerationso f water pricing in a quasi-generale quilibriumf ashion.
The use of the IMPACT model for IFPRI’s 2020 Vision research program enables researchers to
generate various scenarios regarding equity concerns as a function of global food supply and
‘8 Diao et al. (1996) link endogenous growth models and the general equilibrium literature.
‘9 Thesea re: CaliforniaA gricultureR esourcesM anagement( CARM)m odel,a nd an agronomicm odel with
technicals ubstitution,a nd a water-rationingm odel.
18
demand linked by trade in a general equilibrium framework (Carruthers et al., 1997). As one of
the underlying parameters for IMPACT is irrigation investment, the effects on food security of
changing investment levels can be evaluat-d for a variety of regions and periods (Rosegrant et
al., 1995).
3.3 Water Quality Management
The question of environmental regulation and degradation has received enormous attention
recently. Biswas (1997) provides a review of water development and effects on the environment.
These effects include erosion, sedimentation, waterlogging, salinity, eutrophication, and various
mechanisms to deal with these problems (Dinar and Zilberman, 1991; Biswas, 1997). Similarly,
Gleick (1993) reviews current water uses amd environmental consequences for the future. Some
pertinent issues included are: water quality problems, water quality management, irrigation’s
environmental price, scarcity and competilion, etc. To address the literature concerning all these
issues would be prohibitive. Instead several areas concerning water pricing for agriculture will
be reviewed.
3.3.1 Pollution
There are two issues that are particularly important to consider when considering permits or
prices (taxes) to deal with water-quality problems. These are: (1) the nonunifornity in the
impacts of water use, and (2) nonpoint-source pollution (Easter et al., 1997). Nonuniformity
refers to spatial and temporal variation in impact that different emitters of pollution will have on
the water resource. Nonpoint-source pollution is that where the source of the pollution is
typically unknown. Anderson and Snyder (1997b) trace the developments in water pollution
regulation in the US from a command-and-control (CAC) framework to recent developments in
market approaches. The latter include systems of taxes and tradable permits to provide the
correct incentive structure so that polluters incorporate the net social damages into their decision
function.
To achieve an efficient system of taxes or permits to address the problem of nonuniformity, it is
necessary to account for the varying impacts of the emitters on the water resource. The
optimality of determining these impacts umder asymmetric information versus flat rate taxes is a
frequently examined question. Goulder et al. (1999) evaluate cost-effectiveness of alternative
environmental regulation using general equilibrium simulation models. Kim et al. (1999) find
that regulatory instruments chosen endogenously show greater gains to constant-rate taxes than
to targeted pollution taxes. Similarly wilh nonpoint-source pollution there is again a problem of
not having the necessary information to correctly price water resources or penalize polluters of
that resource. Segerson (1988) examines regulation of nonpoint polluters in a small watershed.
She addresses the issue using a commar d-and-control penalty that provides the incentive for all
farmers in the watershed to self-regulate their outputs. Extensions to this are recent game theory
studies of environmental regulation (e.g. nonpoint nitrate leaching – Bhat, et al., 1998). The
development of tradable pollution righis is traced in Maloney and Yandle (1983) and is well
documented for point source pollution (Montgomery, 1972; Baumol and Oates, 1989).
19
Trading systems for these rights have been adapted for rivers (O’Neil et al., 1983), for sulfurdioxide
emissions (as in the Clean Air Act of 1990), for greenhouse gas emissions (Leiby and
Rubin, 1998), and for futures markets (Laffont and Tirole, 1996a). Recent attempts at regulating
nonpoint sources using permit trading and optimal taxes include a theoretical model accounting
for both spatial and temporal variance of pollution impacts (Kim et al., 1997; Goetz and
Zilberman, 1998) and empirically for nutrient reductions in agriculture: for nitrate leeching
(Fleming and Adams, 1997; Morgan, 1999) and for eutrophication (Heidiger, 1999; Johansson,
1999; Westra, 1999). Market extensions for tradable pollution permits include futures and
options markets. Laffont and Tirole (1996a) examine such markets under asymmetric
information and deternine optimal abatement and compliance strategies. They note that standalone
spot markets will induce excessive abatement.
3.3.2 Conservation
It is fairly obvious that in dry regions with scarce water resources, the competition for water
between different sectors will intensify. It will become even more important to enforce effective
use and water conservation. Due to increases in non-agricultural demand, it is estimated that by
2025 the supply-demand gap in Tamil Nadu (a water-poor state in India) will be approximately
44.72% (Palanisami, 1999). Examples of conservation and water management techniques to
increase potential water are numerous. They include: adoption of alternative cropping systems
with less dependence on irrigation, improvement of existing irrigation systems (e.g.,
participatory including water users), salt water utilization for growing crops, waste water
utilization for agriculture, and adoption of new irrigation technologies (Kirda and Kanber, 1999;
Palanisami, 1999).
There have been several recent economic reviews of the management for groundwater systems
(Gisser, 1983; Tsur and Zemel, 1995; Zilberman, 1997) and for conjunctive management with
surface water (Tsur, 1990; Boggess et al., 1993; Zilbernan, 1997). These indicate a variety of
pumping and storage strategies to stabilize supply. For example, Gisser (1983) introduces a
system of transferable permits for pumping rights to prevent over-pumping of groundwater
aquifers. However, increasing use and stochastic weather shocks will continue to demand
conservation efforts. As water becomes more expensive, water conservation will be encouraged.
In addition water markets are increasingly being used for environmental restoration (Willis et al.,
1998). Water trading between regions can mitigate these increased water costs due to
environmental protection efforts (Sunding et al., 1994). For example, Central Valley Project
farmers in California now pay restoration surcharges to fund environmental restoration (Green
and Sunding, 1997). It should be noted that not all water trades from agriculture to the
environment might be efficient as many assume (Ise and Sunding, 1997) due to market failure
(such as imperfect credit markets).
The effects of pricing policies on water quality often manifest through choice of farming
(irrigation) technology. When pricing reflects increased scarcity of water resources over time
resource-augmenting irrigation technology should result. At times the government may
explicitly encourage water-saving technology adoption (Wichelns et al, 1996) to improve water
quality. Zilberman et al. (1992) confirm that farmers’ response to irrigation supply reductions
can be predicted by economic theory (i.e. increasing groundwater pumping, adopting
conservation technologies, and fallowing land), but that the timing of the responses are difficult
20
to estimate. Varela-Ortega et al. (1998) also show that farmer responses are strongly dependent
on the institutional framework (e.g., credit system) involved, which may mitigate the adoption of
conservation technology attributed to pricirLg.
The adoption of and economics of conservation-technology in irrigation has been reviewed and
developed for water price and land quality (Caswell and Zilberman, 1985, 1986); for asset
quality (Caswell, Lichtenberg, and Zilberraan, 1990); for variable resource qualities (Dinar and
Yaron, 1990); Dinar and Zilberman, 1991; Caswell, Zilberman, and Casterline, 1993); for land
allocation (Green and Sunding, 1997); and for underinvestment due to subsidized water
(Zilberman et al, 1997) or due to asymmetric information and tradable permit markets (Laffont
and Tirole, 1996b). For example, Caswell et al. (1990) discuss the effects of envirommental
regulation (such as a drainage effluent fee’, on the adoption of irrigation technologies. They find
that such economic considerations may encourage the adoption of water-conserving
technologies. Shah et al. (1995) find that it: may be optimal to increase water prices to encourage
more quickly the adoption of water conserving technologies such as drip-irrigation used with
ground water (i.e. exhaustible resource). This will also retard excessive resource depletion
caused by open access, market failure.
4. WATER INSTITUTIONS
There is a renewed interest regarding the evolution of economic institutions for managing natural
resources (Ostrom, 1990; Easter and Tsvr, 1993; Ostrom, Gardner and Walker, 1994; Merrey,
1996; and Saleth and Dinar, 1998). The term “water institution” broadly refers to the legal
institutions of water distribution (water law and water rights systems), to water management and
allocation institutions or water administration (as defined by water laws and water rights), and
water policies (the practical implementation of water laws by water administration). These
interrelated dimensions of water institutions characterize the water sector. Along these lines this
section will discuss the various water inslitutions in turn. Important considerations derived from
the inherent water institutions in place or from the changes occurring in these institutions (as in
the case with the movement to decensralized water policies) are regarded as the political
economy of water institutions and are dismussed in Section 5.
4.1 Legal Institutions
The laws and rules that define water distribution will naturally affect the performance of the
system (e.g., Asia – Small and Rimal, 1996; Spain – Garrido, 1997; Tamil Nadu – Brewer et al.,
1997). The evolution of water law and property rights is intrinsically linked to political
economies and changing climate of water regulation. It is therefore, difficult to separate out
specific water laws that are applicabl: to the variety of global irrigation systems. I have
provided several references that review water law and continue with a discussion of water rights.
How well water rights are defined in a country will reflect its degree of decentralization in water
regulation and the appropriateness of water markets to price irrigation water.
21
4.1.1 Water Law
It is important to integrate conscience design of institutional rules and economic incentives (e.g.,
water laws and property rights) to address social concerns of efficiency, equity and externalities.
Anderson (1983) provides an extensive discussion of the roots and developments in water law
and property rights for the American West. Several specific cases from the 19* Century and
their importance in determining current practices can be found in Kanawa (2000). A similar
discussion of international water law and literature can be found in McCaffrey (1993). Dinar and
Loehman (1993) address the use of water law to resolve water provision problems (quality and
quantity). Included are case studies and applications to current water issues (e.g., Colorado,
California, Taiwan, India, Ontario, and Australia).
Unclear definitions and uncertainties in water laws are cited as the limiting factor regarding the
sustainability and efficiency of irrigation system management. Brewer et al. (1997) review
studies linking system performance to water rules. They separate these studies into four areas:
those that use simulation models to investigate optimal distribution rules (e.g., Anderson and
Maass, 1987; Chaudhry and Young, 1990; Howe, 1990; Kelley and Johnson, 1990; Small and
Rimal, 1996); those that evaluate distribution performance for particular irrigation systems (e.g.,
the warabandi system in Haryana – Malhotra, 1982; Bandaragoda, 1998); those that discuss
whether distribution rules are followed (e.g., Wade, 1988; Vermillion, 1991); and those that treat
irrigation management as an open-access resource (e.g., Ostrom, 1992). They detail these effects
for the Tambraparani Irrigation System (India) and note resulting inefficient performance and
inequitable water distributions. Similar deficiencies have been noted in recent legislation
accompanying the movement towards decentralized water regulation in Mexico (Johnson, 1997).
Spulber and Sabbaghi (1998) review water regulations and compatibility with recent
privatization efforts.
4.1.2 Water Rights
For the free market to determine fully the development and allocation of irrigation water, there
would have to be a system of pure private property rights. Property rights based on long-term
contracts may also be sufficient for efficient markets. Anderson, Burt and Tractor (1983)
contend that the key to market allocation of groundwater is a well-defined, enforceable system of
transferable property rights. The existence of this type of system necessitates: (1) certainty
(specific definition of th* right including such aspects as quantity, quality, location, and time of
use); (2) transferability (ease of right transference via purchase and sale); (3) absence of
externalities; and (4) existence of market competition in both the demand and supply sides of the
market. In the absence of such rights, government intervention will be required to enforce
private rights or to allocate scarce water resources using another mechanism20 .
Once markets begin to informally facilitate the transfer of water among users it is necessary to
determine how water rights will be defined. Rights for water use have evolved through custom
or bodies of law and regulation in most countries. Zilberman et al. (1997) trace the transition
from water rights to water markets. The Western notion of privately defined property rights has
20 Several authors have addressed the effects of ill-defined or enforced property rights (Hunt, 1990; Ghosh and
Lahiri, 1992; Tang, 1994; Anderson and Synder, 1997), of uncertain property rights (Feder and Noronha, 1987;
Federa nd Feeny, 1991),a nd of open-accessw ater resourcem anagemen(t Easter, Becker,a nd Tsur, 1997).
22
evolved over the centuries combining eccnomic, and political changes (North, 1981). Water
rights specify how water will be divided between sectors (industrial, domestic, and agricultural
consumption) and also within sectors, as nmight be the case between individual farmers (Holden
and Thobani, 1996). In most countries water rights are based on one of three current systems
(Sampath, 1992; Holden and Thobani, 1996): riparian rights link ownership to adjacent land
ownership21 , public allocation based on piorities of use determined by government, and prior
allocation determined by actual historical l.se.
The limitations of prior allocation and riparian rights and the movement towards state
administration of water rights are descriled in Anderson and Snyder (1997b). Rights can be
defined in terms of a share of streamflow, aquifer, or reservoir. These can be in actual quantity
terms or for given time periods. When rights are defined by quantity there are two methods
typically used to address scarcity: by priority basis (e.g., senior water-rights holders in
California) or a proportional division based on expected shortages (Easter, Becker, and Tsur,
1997). Anderson, Burt, and Fractor (1983) trace the evolution of groundwater rights and
describe the similarities to surface water r ights. As noted in Kanawa (2000), by clearly defining
water property rights in the courts, legal uncertainty for market applications will result also
reducing the amount of litigation.
Studies that examine water rights generally extend their analysis to the corresponding water
markets associated with those systems. The movement from water rights to water markets is not
always optimal, but depends on the asseciated political and economic costs (Saliba and Bush,
1987; Shah and Zilberman, 1995). As in the case of Mexico, there is often considerable tension
between market transferability and highly regulated trading. Rosegrant and Schleyer (1996) note
several trends that will continue to encourage the transition from water law and rights to market
trades in Mexico, which are also applicable to other countries: continuing macroeconomic
reform will require further market development at the micro level, growing nonagricultural
demand will push for increasingly open water markets, farmers will continue to lobby for easily
transferable water rights, and as mentioned the general climate of decentralization favors
continued development of water markets,
Many of the same market and regulatory failures that are found with water provision in general
are also relevant when defining water tights. Gisser and Johnson (1983) develop a model to
explain water rights and externalities. Ihey conclude that efficiency requires the transferability
of these rights when well defined to account for third-party effects. Empirical extensions are
provided for the Middle Rio Grande Conservancy District. The open-access problem with
respect to instream water rights is examined for several western states in Huffman (1983).
Tregarthen (1983) discusses how the informational and transaction costs associated with water
right transfers in Colorado can generate perverse conservancy incentives. These incentives are
difficult to legislate against due to public distrust of purely private markets. Anderson, Burt, and
Fractor (1983) discuss groundwater rights and apply their model of optimal groundwater
extraction to privatization efforts in the Tehachapi Basin, California.
21 This system is generally found with abundant water (e.g., France and Eastern, USA).
23
4.2 Water Administration
The primary role of a water administration is to facilitate irrigation water management by
reducing implementation costs and to promote an efficient, equitable, and sustainable allocation
of water resources. The type of administration ranges from governmental water agencies to
water user and supplier associations. This component of the water sector includes the following
administration-related institutional aspects: spatial organization, organization features,
functional capacity, pricing and finance, regulatory and accountability mechanisms, and
information, research and technological capabilities (Saleth and Dinar, 1999). Roumasset (1988)
outlines necessary incentive-compatible relationships between the different units in an irrigation
system (manager, supplier, and user) to insure sustainable irrigation service provision.
The prevailing water administration and the performance of the different pricing methods are
intrinsically related. What ties these two together is the task of implementation. Hurwicz (1998)
examines institutional arrangements and the theory of implementation as applied to correcting
market failure. Differeni institutional arrangements are more conducive to certain pricing
methods and less so to others2′ . For example, volumetric pricing is inappropriate in a riparian
system requiring metered water facilities. The existence or lack of water user associations of
different forms bears important implications for information asymmetries and for the cost of
extracting water fees. Where water rights (permits or entitlements) exist, the feasibility of
trading them requires well-defined trading rules and appropriate institutions to enforce these
rules and resolve conflicts as they arise. Moreover, as a society matures its socio-economic
objectives and its institutional framework is subject to pressures. A nation’s ability to cope with
these pressures directly affects the management of its natural resources. This ability to cope
gains increased importance as the quantity of uncommitted resources diminishes (Frederiksen,
1997). This section will provide a summary background of the evolution of water institutions in
the context of irrigation beginning with centralized government control and following with
decentralized supplier and user organizations.
4.2.1 Government Institutions
Livingstone (1998) notes that water organizations have had a pervasive role in the allocation of
water. Historically, governments have provided defacto subsidies to the agricultural sector by not
fully recovering capital costs and achieving partial recovery of O&M costs (Wichelns, 1998).
Anderson and Snyder (1 997b) trace the evolution of water administration in the US from the 17k”
Century to modem timesF. They note that well-defined, exclusive land and water rights provided
the necessary tenure security to stimulate private irrigation investments. For a background on the
evolution of government control of water resources see Fredriksen (1997) and Spulber and
Sabbaghi (1998).
Reform efforts targeted at the government provision of irrigation water services have been hinted
at in earlier sections, are largely due to the realization of government failures. Easter and Feder
(1998) note that these failures are more pronounced in LDCs, but are also apparent in developed
economies. These include, misallocated project investments, overextended government agencies,
22 See Water Policy Section: .
24
inadequate service delivery to the poor, neglect of water quality and environmental concerns, and
the underpricing of water resources.
That is not to say there are not examples of relatively efficient government water organizations
that have adequately addressed the market failures associated with irrigation water provision.
These include the management of the Mahaweli in Sri Lanka and the Bhakhra Beas Management
Board, India (Livingstone, 1998). Both include basin-wide management strategies to evaluate
the impacts of policies on most users. Characteristics distinguishing water organizations that
encourage efficient water use are: unbiased allocation, providing water brokerage to lower trade
transaction costs, floating water price, and enforcement of third party rights. Livingstone (1998)
provides a good discussion of these requirements. Easter (1993) illustrates how four essential
characteristicso f governmentm anagemen t can affect the efficiencyo f irrigations ervices. These
include assurances that water fees will be used for O&M (both of other farmers and of
government agencies), commitment to l fficient water allocation, and fairness of setting water
fees.
Government involvement in the allocation of water resources has increasingly become
decentralized in recent years (Parker and Tsur, 1997; Spulber and Sabbaghi, 1998). For
example, recent reform in Pakistan aimed at increasing irrigation water use efficiency is based on
shifting strategicd ecision-makingr esponsibilitiesto decentralizedp ublic utilities and water user
associations (WUAs). These reforms would facilitate greater use of market mechanisms and
greater role for the private sector in fann capital investments. However, in the development of
water markets, the government is responsible for creating a supportive institutional environment.
As mentioned earlier, water markets canl achieve first-best allocations, but to be successful they
require several components from the local, regional, or national government. Government
intervention is often necessary to define and enforce water rights in order for the successful
functioningo f water markets. GovernmLenatss ist in monitoring and regulatinge xternalitiesa nd
third-party effects of irrigation (Meinzen-Dick, 1997).
4.2.2 Water Supply Organizations
Although faced with limited physical, financial, and ecological resources to potential water
supplies, countries try their best to sel; the right institutional foundation of their water sector.
These efforts are reflected in terms of legal and policy reforms and administrative reorientation.
Water supply reform is mainly due to three reasons (Vermillion, 1997): (1) CWAs lack
incentives and responsiveness to optimize management performance – farmers have direct
interests in enhancing system quality, efficiency, and sustainability; (2) management transfers
coupled with supportive social and technical support will result in improved system quality and
efficiency; and (3) management transfer will save the government money in terms of reduced
O&M responsibilities.
While reform efforts differ across countries in terms of actual coverage and effectiveness, the
currently observed water sector institulional changes at the international level are remarkable for
their commonality of focus and dire’:tion. These include a shift from source development
(supply management) to allocation (demand management), wide acceptance of privatization and
the decentralization of control, adoptiDn of integrated approaches to sector-wide management,
and an increased focus on economic viability and physical sustainability. The first of these, the
25
paradigmatic shift from water development to water allocation, cannot be affected overnight
(e.g., in Turkey – Bilen, 1995; Svendsen and Nott, 1997). Fundamental changes are needed to
reorient all the water institution components. While it is easier to have allocation-oriented water
laws and policies, it is difficult to build an allocation-oriented organizational structure needed to
translate the legislative provisions out of an organization with an entrenched experience and
tradition in water development. Realignment of existing water administration with new skills
and information along with the creation of additional inter-sectoral and inter-regional
organizations are critical to face the challenges of an allocation paradigm. Unlike the
development era characterized by bureaucracy and dominated by political and engineering
considerations, the allocation era requires open and participatory decision processes with the
primacy of economic and ecological information.
Countries have begun to recognize the functional distinction between centralized mechanisms
needed for coordination and enforcement and decentralized mechanisms needed for user
participation and decision-making (Winchelns, 1998; Vermillion, 1997). Often these reforms
face much bureaucratic resistance (Wilson, 1997). Some examples of recent reform include:
Uzbekistan (Djalalov, 1998); Turkey (Bilen, 1995; Sevendsen and Nott, 1997); Mexico
(Rosegrant and Schleyer, 1996; Johnson, 1997); New Zealand (Farley and Simon, 1996);
Vietnam (Small, 1996); and Australia (Pigram, 1999).
The key features of this ongoing decentralization are river basin organizations, privatization
programs in the irrigation sub-sector, and utility agencies in the urban water sub-sector. Many
countries have realized the importance of basin level organizations both as a planning and
operational mechanism. Although they are called differently in different countries with
considerable variation in their organizational structures, they have a common conceptual basis.
Such organizations, designed primarily on hydro-geological rather than administrative
boundaries, could provide the basis for pursuing an integrated approach to water management
and for resolving regional and sectoral conflicts. Recent reviews of the basin-wide approach to
reform with case studies can be found in Vermillion (1997) and Easter (1999).
4.2.3 Water User Organizations
These farmer-managed associations, better known as Water User Associations (WUAs), are
examples of organizations that allocate the water shared by a group of farmers. These
organizations are responsible for a wide range of management activities. Some have more
responsibilities than others (Martin and Yoder, 1987). For example, Meinzen-Dick (1997)
identifies two broad categories of WUAs: the Asian model and the Americas Model. The Asian
model incorporates farmers in smaller organization units allowing direct participation of all
farmers based on social boundaries. The American model relies on specialized, formal irrigation
organizations based on hydraulic boundaries. The Americas model contains specific provisions
regarding farmers’ water rights (e.g., Columbia Basin and Mexico), whereas the Asian model
focuses do a greater degree on the formation of social capital.
Since WUAs are managed by and operated with the interests of water users in mind, they tend to
substantially reduce the costs of implementing water pricing, such as monitoring and
enforcement costs (Easter and Welsch, 1986b; Wade, 1987; Zilberman, 1997). For example,
volumetric wholesaling is the practice by which the CWA sells water to a WUA at some point in
26
the delivery system where volumetric measurement is possible. This practice can achieve a high
degree of efficiency in the collection of water costs by the WUA (Small, 1989; Meinzen-Dick
and Rosegrant, 1997). This type of distritution would require strong leadership and organization
of the WUA to be responsible for delivering water in the branch canal(s) and collecting fees from
each user (Easter and Welsch, 1986b). WUAs can also provide important brokering services for
water trades as found in water transfers in the western U.S. (Cummings and Nercissiantz, 1989).
Many factors affect the viability of WUA’; property rights are a crucial factor93 . The creation and
ownership of irrigation property (water, conveyance structures, and pumping equipment) form
the basis for relationships among the irri.gators, which form the, “… social basis for collective
action by irrigators in performing various irrigation tasks,” (Coward, 1986). Well-defined water
rights give farmers incentives to participate in the operation and maintenance of their water
supply system. These rights can be assigned to individuals or to groups of farmers, such as
WUAs (Wade, 1987; Feder and Noronha, 1987). The individuals or associations will have
economic incentives to maximize net benefits generated by their activities (Winchelns, 1998),
which include both increasing supply efficiency and rroduction efficiency (Kloezen et al., 1997).
For example, public irrigation in Mexico has undergone substantial decentralization. The
resulting transfer of control to WlAs has resulted in increased O&M fee collection and
provision of irrigation services (Mexico – Johnson, 1997; Pakistan – Svendsen and Nott, 1997).
This property-induced cohesion is important in many aspects of water management, but it is
especially critical for water allocation. Another example concerns small-scale irrigation and its
link to land tenure in Niger (Norman, 1998). Niger law requires that irrigated land within
“state-developed” systems belong to the state. However official policy requires all systems to be
organized as cooperatives with autonomy as the goal. This has encouraged a gradual reduction
in state management and correspondingly complex rules regulating system operation. As a result
farmers can now pass parcel titles on to family members and subdivide individual parcels
increasing user efficiency. Obviously, user groups cannot make decisions regarding water if they
have no rights over that water (Meinzen-Dick and Mendoza, 1996; Johnson, 1997).
In addition user-based allocation requires collective action institutions with the authority to
influence water rights. While empirical studies of water resource management have shown that
such institutions can be developed spontaneously or through an external catalyst, institutions are
not always in place or strong enough to make an impact (Meinzen-Dick et al., 1997). Easter and
Welsch (1986b) note that the strength of these collective action institutions is directly related to
water scarcity. Water must be sufficierLtly scarce as to provide the incentive to organize. Also
affecting the viability of WUAs are the size and location of irrigation system (smaller systems
within bounded areas lend themselxes to farmer cooperation), relatively equal income
distributions (wide economic disparities may lead to conflicting interests), and freely available
infornation on irrigation technology (Easter and Welsch, 1986b).
The effect of user-based allocation on Nater conservation depends on the content of local norms
and strength of local institutions (Easter, 1999). It is easier for users to organize collectively for
increasing water supply (a positive-sunt activity for membership) than for water distribution (at
best a zero-sum activity). If the WJUA does not actively promote efficient use, this allocation
23 Feder and Noronha (1987) provide a discussion of the positive effects of secure, legal ownership of property
(water rights).
27
mechanism will have little effect in demand management. However, social norms can provide a
strong incentive for conservation, particularly if they are backed by rules against excessive
consumption, monitoring of compliance, and sanctions against water waste. Where members of
WUAs are conscious of the need to conserve, monitor, and trust other members to do the same
such that all are contributing to the common good, WUAs can achieve high efficiency in water
use (Feder and Noronha, 1987).
The practical functioning of WUAs is not without problems. In many cases the WUA
organization replaces former state-controlled water agencies and adopts many of their
inefficiencies. Marre et al. (1998) examines the case of low farmer participation in Mendoza,
Argentina. They describe the problematic issue of low collection levels for irrigation services
(average 64%) and consequent degrading of irrigation infrastructure, which leads to increased
levels of farmer dissatisfaction with the system. As a result most fees are used to pay for
recurrent costs (such as salaries) and a vicious circle in management results. Marre et al. (1998)
advocate improvement of irrigation services and simultaneously discontinuing flows to nonpayers.
Similarly, Easter (1999) reviews the successes (failures) of WlAs in several Asian
countries. As a percent of cost-recovery WUAs collect 65% of fees in the Philippine, 70 % in
Andra Pradesh (India), 50% in Nepal, 79% in Indonesia, and 68% – 100% in Pakistan (Easter,
1999). There are several indicators used to compare irrigation system efficiencies. These are
divided into crop output based measures and system. These indicators are described and
illustrated in Molden et al. (1998) and Kloezen and Garces-Restrepo (1998).
4.3 Water Policy
The water policy component of water institution includes the following policy-related
institutional aspects: project selection criteria, pricing and cost recovery, inter-regional!sectoral
water transfer, private sector participation, user participation, and linkages with other economic
policies (Saleth and Dinar, 1999). Water provision and management policy can be characterized
mainly according to levels of (de)centralization. On the one extreme lie command and control
methods, in which quantities and prices are determined at the outset by some CWA (e.g.,
Wanjiazhai Water Transfer Project, China – Qingtao et al., 1999). The opposite extreme consists
of decentralized methods based solely on market mechanisms (e.g., spot and options markets in
California – Howitt, 1998). In between lies an entire policy spectrum, however, as more
irrigation systems adopt market mechanisms, water policy is increasingly being driven by the
necessity to define water rights and establish water markets to facilitate inter-regional and
sectoral water transfers.
4.3.1 Centralized Policies
It is desirable to base prices on the marginal cost of acquiring more water or on its opportunity
cost. However, prices based on marginal costs often are too high for low farm incomes. For
example, farmers in India and Pakistan paid full costs of irrigation supply prior to WWII. The
financial burdens incurred building huge irrigation projects during the 1950’s were too large for
farmers to cover. However, national policies of food security resulted in large subsidy schemes
for the irrigated water systems. These trends have reversed in recent years, and users are being
asked to once again fully cover costs (Dinar and Subramanian, 1997). This movement in India is
28
not consistent and irrigation pricing varies substantially from state to state as determined by the
provincial water authority: in West Bengal water rates vary by season, in Kerala rates are bases
solely on area cropped, in other states water prices vary by crop, season, and irrigation project,
irrigation type, category of water user, etc. (Saleth, 1997).
Several pricing alternatives have arisen to cater to farmers’ ability to pay and to promote
efficiency. One alternative system of dual fees would use a low initial fee for quotas plus higher
marginal charges for water consumed in excess of the quota. If these quotas were traded
between users, economic efficiency wou.d be enhanced. The basic idea is that marginal prices
need to be flexible enough to ration available water supplies (Seagraves and Easter, 1983).
There are a variety of pricing policies that attempt to approach marginal cost pricitig while
balancing other considerations (such as r.nformational, structural, and environmental concerns).
Several empirical examinations of these policies are noted below.
Renzetti and Dupont (1999) evaluate a two-part water use charge. The first is annual permit fee;
the second is a volumetric charge based on consumption. The use of a permit fee will enhance
efficiency, improve water quality, increase government revenue, and improve the government’s
knowledge base regarding water use. Algeria has recently adopted a two-part tariff similar to this
in order to reflect the full cost of service. However, many costs (e.g., capital equipment)
continue to be subsidized by the government (Salem, 1997). Wichelns et al. (1996) evaluate a
California incentive program to improvre on farm management efficiencies via farn-specific
water allotments, tiered water pricing, and low-interest loans for irrigation equipment. Results
confirm that economic incentives can be effective in generating improvements in water quality.
Recent reforms of water institutions are often coupled with new infrastructure investment. In
Morocco, new infrastructure investments for the irrigated agriculture sector will be accompanied
by institutional reforms aimed at improving water use efficiency. One such reform is water
pricing that covers true O&M costs ar.d that reflects the scarcity value of water in Morocco
(Dinar et al., 1998).
4.3.2 Transition Policies
The transition to market-based irrigatior pricing as mentioned earlier depends on the sets of rules
and institutions surrounding the agricultural systems already in place. This inertia is difficult to
overcome due to a variety of constraints: transaction costs (see Section 3.1.2.2), technological
constraints (see Section 3.3.2), and political constraints (see Section 5). Zilberman et al. (1992)
posit that the availability of new techno ogy or institutional design may not suffice and that these
obstacles may require large random shocks to overcome (e.g., the California drought of the late
1980’s). Roumasset (1997) provides an overview of the literature and theory concerning the
institutional aspects of water pricing and derives optimal decentralization rules depending on the
policy environment. Dinar and Subranranian (1997) identify several factors that encourage and
hinder policy reform: level of development (GDP per capita), per capita water availability, and
the size of the budget deficit to GDP. An example lying between central regulation and market
systems is Israeli differential pricing, which varies by sector and type of use (Just, Netanyahu,
and Horowitz, 1997). The Israeli goveinment sets water prices for users according to increasing
block-rate structure where different users face different marginal prices. The block rate facing
agriculture is not the sarne for all users, but is determined by farm-specific quotas.
29
4.3.3 Market-Based Policies
As mentioned, attributes such as external effects across users, temporal interdependencies, large
fixed investments costs, and uncertain supplies, all tend to hamper the operation of water
markets, hence the prospect to attain efficient allocations via markets alone (e.g., tubewell
market monopolies in Bangladesh – Ahmed and Sampath, 1988). Yet this is a weak argument
against water markets and in favor of centralized regulation, as the latter has its own
shortcomings, including information asymmetries, large implementation costs, and susceptibility
to the influence of pressure group and corruption.
The scope for water markets in allocating irrigation water is, therefore, far from negligible, and
the desired level of decentralization in any allocation mechanism is of prime importance. For
example, Brill, Hockman, and Zilberman (1997) compare the efficiency gains under several
water policies to allocate water under reduced supply. They show that the aforementioned, tiered
pricing schemes (e.g., Israel and California) result in second-best allocations. Pareto efficient
allocations can be obtained via transferable water rights. They argue that even when there does
not exist well-defined property rights, it is possible to avoid prohibitive transactions costs
involved with trades via a “passive trading” policy, which allows a Pareto efficient allocation.
Observations such as these have lead to increased interest in the use of water markets for
allocating irrigation water (Dinar and Loehman, 1993; Brill, Hochman and Zilbernan, 1997;
Parker and Tsur, 1997; Spulber and Sabbaghi, 1998; Easter et al., 1998).
Saliba and Bush (1987) and more recently Anderson and Snyder (1997) describe the trend
towards water markets in the American Southwest and West. Examples include: intra-farm
trading of annual federal water entitlements (Fort Collins, CO); water banks (Idaho and
California); between agriculture and urban users (Utah, Arizona, Colorado, and Nevada);
between agriculture and environmental concerns (Oregon); interbasin transfers (Southwestern,
USA; Australia, North America). Wilson (1997) notes reluctance to move from centralized
water pricing in Arizona to water market pricing.
Water Permits and Trades
Roumasset (1997) examines water trading schemes and their dependence on top-down or
bottom-up regulation. The optimal approach (whether top-down or bottom-up) is shown to
depend on such variables as transaction costs, asymmetric information, intertemporal and spatial
water supply. Becker et al. (1997) discuss the potential for tradable water claims in the Middle
East. Empirical analysis suggests that all parties benefit from either buying or selling water.
However, farmers may be reluctant to trade their water entitlements (or rights) in the short-run if
they fear that they may lose them in the future. Water trading also requires a well-developed
conveyance system (Zilberman et al., 1997) and the existence of appropriate institutions to
overlook transactions and resolve conflicts that may arise. When these do not exist the existence
of tradable water rights may lead to further inefficiencies (Rosegrant and Schleyer, 1996).
Anderson and Snyder (1997b) note three arguments against market-based allocations: monopoly
power, imperfect capital markets, and externalities.
Benefits of transferable water entitlements and the establishment of formal water markets have
been noted in Australia (Musgrave, 1997), Chile (Hearne and Easter, 1998), Mexico (Hearne,
30
1998), Pakistan (Meinzen-Dick, 1998), India (Saleth, 1998), Spain (Garrido, 1998), and Canda
(Horbulyk and Lo, 1998). Due to legal and institutional restrictions entitlement trading has not
been as active as expected. However, increased acceptance of trades to improve delivery
certainty and efficiency should lead to increased trading and diversification of available market
contracts (e.g., entitlements to storage space, groundwater, and pollution dilution capacity of
streams). Dudley and Scott (1998) simLilate the potential of water markets using dynamic
optimization. These simulations are used to derive short-run demand functions for reservoir
water and marginal opportunity costs for a variety of decisions. Once these opportunity costs are
determined, it is possible to derive optimal short-run water allocations.
Recently transfers of water rights have occurred for environmental amelioration (Anderson and
Snyder, 1997). Huffman (1983) details how the Nature Conservancy has purchased private
rights to instream flows in Colorado and private individuals have purchased instream rights in
Montana in order to charge for fishing access. Similar arrangements can be found in Oregon and
Arizona. Willis et al. (1998) discuss farmer costs of contingent water contracts requiring the
agricultural release of stored irrigation supplies during low flow years during critical flow
periods to improve salmon migratiorn conditions. Sunding et al. (1994) illustrate that
environmental legislation in California aimed at reducing agricultural irrigation diversions will
lead to dramatic revenue and labor losses in the Central Valley. Using a combination of models
(see Section 3.2.2.4) it is shown that water trading can reduce these losses substantially. Ise and
Sunding (1997) examine the reallocation of agricultural water to provide for environmental
restoration in Nevada’s Lahontan Valley.
International trading agreements, few in number, have recently gained exposure. The treatments
of cross-border water trading in North America are reviewed in Anderson (1994). Frisvold and
Caswell (1997) note the beneficial role aid agencies may have when negotiating international
water agreements. A recent example of this is the Mekong River agreement and international
water allocation agreements (Browder and Ortolano, 1999). An important caveat of this
agreement was that international donors agreed to subsidize the Mekong operations and water
negotiations.
Water Banks
Water banks are a special case of water trading and have been promoted as a means to allocate
water in a more flexible manner, subject to the limitation of large quantity transfers.
Comprehensive discussion of arrangements for these specialized water rights for several states
and in general framework for setting up a water bank can be found in MacDonnell et al. (1994).
These are described as “institutionaliz-,d mechanism[s] specifically designed to facilitate the
transfer of water use entitlements”. They review the water recharge programs in 19 states and
examine 5 actual banking programs in terms of legislation, logistics, and effects.
Archibald and Renwick (1998) model gains from water trades and look at the transaction costs
and incentives inherent in the California State Water Bank. They find that despite significant
welfare gains possible from increased tiaffic in water trades, there are policy-induced transaction
costs that retard the California system.
31
Market Extensions
The need to stabilize stochastic supply may require the development of spot and options markets,
whereas the permanent shifts in demand may be best realized via a system of tradable water
rights. Spot and option prices are examined for new emerging markets in California (Howitt,
1998). He notes that the evolution from spot to options markets may mitigate the costs of
developing alternative trading systems for permanent water rights in LDCs. These market
developments are simulated using experimental economics for the San Joaquin Valley and then
extended to other countries (Dinar, Howitt, Rassenti, and Smith, 1998). They show that
experimental simulations based on a sample Central Valley scenario can generate competitive
outcomes.
5. THE POLITICAL ECONOMIES OF WATER PRICING
The role of politics in reformn, setting utility charges, tariffs and other prices that are subject to
policy influence has long .ttracted the attention of economists. In some places the provision of
free irrigation water is viewed as a human rights issue and pricing water is considered politically
unacceptable. In such cases, indirect pricing (via output/input or per area pricing) might be
considered. The observation that agricultural sectors in developed economies tend to be highly
subsidized in contrast to those in LDCs is often attributed to political forces (de Gorter and Tsur,
1991). For example, land cultivation may serve the purpose of self-sustained food production,
even though it is more economical to import some of the food. In places where water is scarce,
this subsidy often includes water directly.
These issues have been discussed in Section 3, yet there remains to be a more detailed
examination of the issue of political economies in water allocation and its literature. Increased
water scarcity and quality concerns have generated new approaches to water management and
reform. Water pricing reform among them, has been noted recently in quite a few countries’.
However, pricing reform in practice often does not adhere to first-best allocations as prescribed
by the classical economic framework. Second-best or third-best outcomes often result from
special interest group pressures, or political economies. For example, when examining the
provision of water, political constraints can be interpreted as part of implementation costs (e.g.,
San Joaquin Valley – Shah and Zilberman, 1995). In this section I will review the literature
surrounding the theory of political economy of water pricing and reform.
5.1 Theory
Rent seeking occurs when decision-makers use the government to increase their personal wealth
at the expense of others. Roumasset (1987) states, “… heavily subsidized irrigation design,
construction, operation and maintenance invites pork-barrel politics and rent-seeking motives,
that overcome the incentives for efficient provision of irrigation services.” Anderson and Snyder
(1997b) posit that government regulation is inherently inefficient due to public choice for the
24 Seef or recentO ECDw aterp ricingr eformsO, ECD( 1999)a ndJ ones( 1999);s eef or theN earE ast,A hmed
(1999),a ndf or ana dditiona2l 2 selectc ountriesD, inara ndS ubramania(n1 997).
32
following reasons: voters have imperfect information, special interest groups will lobby for those
interests, politicians are short-sighted with respect to policy, and there are few incentives for
candidates to account for individual pref rences. Similarly, reform efforts, which result in a
redistribution of economic benefits, will generate significant political opposition. Interest groups
will form to impact the reform process so i:hat the end results best serve their constituents. These
political groups may slow, divert, or stop desirable reforms (e.g., Morocco – Dinar et al., 1998).
In his book, Cadillac Dessert, Marc Reisner aptly describes the result of rent-seeking in
irrigation projects. He details the history of “pork-barrel politics and rent-seeking motives” in
the American West from the time of early Mormon settlers in Utah to current intrigues with the
water lobbyists.
The literature in this vein is quite dispersed, but it is possible to identify three main approaches.
The first is the interest group approach (Backer, 1983). Here political decisions are viewed as
the outcome of a struggle between pressure groups (also Panagariya and Rodrik, 1993). Second
is the politician-voter interaction approach where the interaction between voters and supportmaximizing
politicians result in policy (Peltzman, 1976; Hillman, 1989; de Gortner and Tsur,
1991). Lastly are the bargaining process models (Zusman, 1976), where policies are determined
via a bargaining process with players of different power (also Scarpa, 1994; Jordon, 1995,
Finkelshtein and Kislev, 1997; Zusman, 1997, Ruasser and Zusman, 1991, 1998).
Grossman and Helpman (1994) offer a synthesis approach that incorporates principal-agent
theory with pressure group activity. In addition there have been recent extensions to these
approaches incorporating environmental aspects of water management. These include
cooperative game studies looking at incentives for individuals to participate in group
management schemes (Bardhan, 1993; HIurwicz, 1998); in the exploitation of common property
resources (Ligon and Narain, 1997; Becker and Easter, 1998); and the literature surrounding
environmental regulation (Laffont and T role, 1996; Chen et al., 1998; Loehman, 1998).
5.2 Applications to Irrigation Water
Recent studies looking at irrigation water reform often will employ one or more of these
approaches to model the political economy involved. For example, lobbying efforts for
irrigation in the American West have possibly provided the greatest source of material for
political economy water studies. Already mentioned, Reisner (1993) traces the history of U.S.
land reclamation in the West, taking rains to highlight the highly subsidized, inefficient, and
inequitable nature of the irrigation water provided by Congress to western states. He
hypothesizes that a significant reason behind President Carter’s resounding election defeat in
1980 was due to his opposition to iunding “a couple dozen” extremely questionable and
expensive irrigation projects. Rucker and Fishback (1983) examine the early activities of the
Bureau of Reclamation following the Reclamation Act of 1902 using a simple rent-seeking
model. Gardner (1983) discusses how in the irrigation economy of California, water is a
constraining input and is often priced below the value of its use. Both of these studies use the
difference between optimal prices and actual prices as evidence of rent seeking and describe how
these rents eventually dissipate with Ainrther ent-seeking behavior. Another early California
33
study illustrates how the interest group model, the politician-voter model, and the bargaining
approach can all be found in water pricing (Cuzan, 1983).
However, as a framework for describing this literature, it is useful to understand the reasons for
reform, the institutions undergoing reform, who is supporting/opposing the reform and
compensation mechanisms, and possible international influences on the reform process (Dinar,
2000). This framework traces reform efforts from its initial stages to post-reform effects, and
resembles similar examinations of reform found in White (1990), Krueger (1991), Williamson
(1994) and Haggard and Webb (1996).
5.2.1 Reasons for Reform
In many cases reform efforts directed at water pricing are simply the results of financial crisis,
low cost recovery percentages, deteriorating facilities, and increasing water demand (e.g., for
Asia – Easter, 1987; for Egypt – Wichelns, 1998; for Pakistan – Wambia, 2000). However, there
are often other motives such as linking water sector reform to other macroeconomic reforms that
are indirectly related (e.g., for Morocco – Diao and Roe, 2000; for Yemen – Ward, 2000). Just et
al. (1997) observe that standard economic analyses contend that economic efficiency is improved
by equating prices and that current deviations are the result of political power. A different
interpretation for Israel and Jordan are concerns for food security, infant-industry motivations,
settlement policies (national security), and equity issues. It may be more efficient to partially
equalize water prices when new water supplies are developed. Such political power framework
incorporating lobbying has been used to evaluate optimal environmental regulation mechanisms.
The mechanism of environmental regulation will depend on the weights society places on
laborers and capitalists (Chen et al. 1998).
5.2.2 Institutions and Reform
As previously mentioned, the institutional framework and its changing nature are intrinsically
lined to political economy considerations. These considerations include existing institutions, the
power system, and the electoral system.
Existing Institutions
Decentralization of existing water institutions often comes with some reluctance (Wilson, 1997),
which may impair the effectiveness of reform. It is often necessary to actively engage existing
bureaucracies in the reform process (de Azevedo and Asad, 2000) or to induce farmers to view
water management as a ,ublic good (Bromley, 2000) in order to overcome political transaction
costs in reform. Garrido (1998) compares allocations between conventional profit maximization
for an individual farm, an intra-community water market, and to an inter-community water
market. Empirical estimates were generated using EPIC (see appendix) as well as on site
experimental research. The resulting allocations were shown to be sensitive to transaction costs,
but that decentralization generates a range of short-run probable gains.
Rausser and Zusman (1991) examine the political history of collective action in Western US
water resource systems. Their model includes a (n+2) player game: the CWA seeks to maximize
cost efficiencies and political recognition, n-districts seek to maximize profit, and the
government pursues both selfish and unselfish “public interest” goals. The resulting model
determines water prices in what Rausser and Zusman term as the “Hydrological-Political-
34
Economic Equilibrium. They note that for equilibrium prices to be efficient two conditions must
be met: a uniform distribution of power and that all districts account for ground-water level
effects. Building on this model, Zusmank (1997) incorporates asymmetric information into the
optimal regulation regime. The optimal regulator size should be controlled to minimize the
political power distortions caused by rent seeking. This will also minimize operating and
transaction costs in the system.
The Political Establishment
The political establishment includes political parties, electoral systems, and interest groups.
These groups form a dynamic atmosphere in which the reform process occurs. Rausser (2000)
provides a game theoretic and a bargaining approach to evaluating this dynamic interaction for
water policy reform. The strengths of the various groups depend on such things as informational
power, which can lead to second-best Ellocations, and are thus important when planning and
implementing water pricing reform. Tsur (2000) illustrates how asymmetric information can
lead to second-best allocations in pricing reform. Cueva and Lauria (2000) and Renzetti (2000)
illustrate how such second-best allocations can arise from ignoring the power system and how to
incorporate them into third-best reform efforts.
The electoral system that determnines how laws are changed and what direction reform efforts
will take are encompassed in the political establishment. McCann and Zilberman (2000)
examine the results of water district voting in California. They note that resulting allocation
depend on the electoral rules. In some instances (property-weighted voting) district managers
will not seek to maximize consumer welfare. In Dinar, Balakrishnan, and Wambia (1998) the
actions of politicians in the water sector are endogenized to estimate the political risks associated
with reform. They develop a two-tiered approach to first assess power distribution among
groups interested in reform effects, and then to incorporate a Delphi process (summary of expert
opinions) to determine the risks associated with reform. This approach is used to examine the
National Drainage Program Project in Pakistan. An extension of the politician-voter literature to
include the trade-offs between environmental policy and rent producing firms that pollute can be
found in Boyer and Laffont (1996). They show that the thinner the majority of environmentally
conscious voters and the larger the informational rents, the more the politician’s objectives are
biased away from social welfare. These incentives are subject to change when reelection
considerations affect reputation and social control.
5.2.3 Support and Opposition
As touched on earlier, water pricing anld reform creates a dynamic interaction between existing
institutions and the political establishment. Dinar (2000) contains reviews of reform efforts in 5
countries (see appendix), which documnent the supporting and opposing groups in these case
studies. In most cases (Musgrave, 200 ; de Azevedo and Asad, 2000; Kemper and Olson, 2000;
Ward, 2000) the reform efforts stemmed from existing inefficiencies in pricing policy (i.e.,
subsidized irrigation water). However, environmental quality can also be a motivating factor
(waterlogging and salinity – Wambia, 2 000).
5.2.4 Compensation Mfechanisms
Opposition to water sector reform is often subverted via payoff mechanisms that reimburse
negatively affected parties. For exanmple, the optimal regulation model developed in Zusman
35
(1997) seeks to maximize the sum of utilities of all water users in a system subject to the
constraint that system costs should be fully covered by system revenues. In addition, I have
mentioned earlier the need to include affected interest groups in the reform process (de Azevedo
and Asad, 2000). In addition to including existing institutions, it is also necessary to weigh
equity and environmental concerns when planning- and implementing water pricing reform.
Boland and Whittington (2000) conclude that often reform in LDC water pricing policy comes
with unaccounted adverse effects on poor households. It may be necessary to balance the need
to increase efficiency with that of enhancing equity.
Other payoff mechanisms include sharing of reform benefits or compensation of reform costs.
For example, Diao and Roe (1999, 2000) show how water reform can be coupled with trade
reform to generate a win-win situation for Moroccan agriculture. They employ a general
equilibrium treatment of trade and water reform in the Moroccan agricultural sector to estimate
investment and economic growth responses. They note that there will most likely be
reallocations of resources from import competing crops to the production of fruits and
vegetables. The resulting change in return to sector-specific assets will likely cause interest
group conflict opposing the trade reforms. This tension may provide an opening to reform the
irrigation pricing policies, and reimburse the import competing agricultural sector with
consequential efficiency gains.
5.2.5 International Influence
Barrett (1994) includes a discussion of the management of conflict with international water
resources. He examines previous water laws and treaties in the simple Nash-game viewpoint.
Cases include the Columbia River Treaty (Canada and the US) and the Indus River Treaty (India
and Pakistan). He then goes on to describe Coase’s Theorm and its implications for a Nashgame
type of scenario. This ignores the equity aspect of water resource issues as between two
countries and possible externalities imposed (Diao and Roe, 1995). Hurwicz (1998) extends a
Coasian economy I Nash equilibrium to include market mechanisms to achieve the optimal
allocations.
Howitt and Vaux (1995) describe the formation of water coalitions in California as a cooperative
game driven by rents accruing to economies of scale in sharing costs. A similar cooperative
outcome for international water resource exploitation is modeled in Becker and Easter (1998)
depending on the number of participants and the degree of cooperation induced by economic
incentives. Frisvold and Caswell (1997) develop a game-theoretic approach to describe the
Nash-like scenario facing countries involved in transboundary water transfers and pollution
abatement agreements. They conclude that international development assistance can encourage
joint water quality projects. This carrot-approach to encouraging international water agreements
may be an effective way for the international donor community to deal with water conflicts (e.g.,
Mekong River agreement – Browder and Ortolano, 1999). The opposite (stick) approach to
encourage cooperative bargaining agreements for environmental regulation is described in
Loehman (1998). Here cost sharing among polluters and sufferers is required for Pareto
improvements via cooperative bargaining.
Roe and Diao (1997) use a general equilibrium treatment of a shared water aquifer to evaluate
one country’s water policy on another country. Various water tax, subsidy, and technology
36
structures are simulated to estimate effects on GDP. An externality is introduced into the basic
Heckscher-Olin framework to represent extraction effects of one country on another country’s
water endowment. Results imply each country has an incentive to subsidize water use and, thus,
lessen water availability to the other courntry. The optimal solution is for a cooperative tax on
water use in each country. This simple m:del (similar to a Nash-game) can be used to represent
in a stylized manner the case of Israel and Jordan. Other international influences on water
reform include loan conditionalities (Krueger et al., 1991) and trade agreements (Dinar, 2000).
6. CONCLUDING COMMENTS
As indicated in the executive summary, there is quite a range of issues the touch directly and
indirectly on irrigation water pricing. [ have attempted to include and synthesize the most
relevant literature under the seven broad section headings. Rather than provide a summary and
reference list at the end of each of those sections I do so here. However, for those that do not
have unfettered access to these studies, i t is hoped that the discussion provided under the broad
section headings will prove useful and relevant to current pricing policy questions.
I would like to first focus on several literature sources essential for this review. Above all, the
Natural Resource Management and Policy Series published by Kluwer Academic Publishers25 as
edited by Ariel Dinar and David Zilberman is an excellent source of informnation for irrigation
practitioners and policy makers. They review a vast array of recent research and often contain
empirical applications and case studies. In this series I have drawn heavily from:
* Conflict and Cooperation on Trans-Boundary Water Resources, edited by Richard Just
and Sinaia Netanyahu.
* Markets for Water: Potential and Performance, edited by K. William Easter, Mark W.
Rosegrant, and Ariel Dinar.
* Decentralization and Coordinaton of Water Resource Management, edited by Douglas
D. Parker and Yacov Tsur.
* Economics of Water Resources. From Regulation to Privatization, edited by Nicolas
Spulber and Asghar Sabbaghi.
* The Economics and Management of Water and Drainage in Agriculture, edited by Ariel
Dinar and David Zilberman.
In addition to these, the IIMI6 research report series and the review by Dinar and Subramanian
(1997) provide a current overview of th1e prevailing irrigation systems found around the world.
Other reviews used extensively in this survey are:
* Designing Institutions for Env,ronmental and Resource Management, edited by Edna
Tusak Loehman and D. Marc Kilgour.
25 Kluwer Academic Publishers: 101 Philip Drive / Assinippi Park / Norwell, MA 02061 / USA or Distribution
Centre / Post Office Box 322 / 3300 AH Dordrecht / The Netherlands.
26 InternationaIl rrigationM anagementI nstitute/ P.O. Box 2075 / Colombo,S ri Lanka.
37
* Water Quantity/Quality Management and Conflict Resolution, edited by Ariel Dinar and
Edna Tusak Loehman.
* Sustainability, Growth, and Poverty Alleviation, edited by Stephen A. Vosti and Thomas
Reardon.
* The Political Economy of Water Pricing Reforms, edited by Ariel Dinar.
These and the many other studies, case studies, and research articles that I have outlined in the
survey indicate that the methods surrounding irrigation water pricing have many dimensions,
both theoretical and practical. That these issues will become increasingly important, as future
water and food demands increase, is not in question. Efficiently pricing water will help meet
these increasing demand, but what is the best way to increase pricing efficiency? Many argue
that water markets offer one solution, however, under which circumstances are water markets
viable? What effect will decentralization have on farm production and the rest of the economy?
What are the forces that are moving towards decentralization or (re)centralization? The answers
to these questions are complex and often site specific, which is why the list of case studies in the
appendix may assist in locating useful comparisons to other sites. In the following section I will
summarize the main points found earlier in the survey.
Water Pricing Methods
A variety of pricing methods and various studies aimed at determining the efficiency and equity
of those methods have been outlined. A brief summary of these methods is found below (see
also Tsur and Dinar 1995, 1997). To reflect the different means of evaluating pricing efficiency
and equity, these methods have been compared across several broad categories: difficulty of
implementation, potential efficiency, time horizon of efficiency, ability to control demand, affect
on income distribution and on water quality (see Table 2).
Volumetric Pricing (Marginal Cost Pricing)
A volumetric pricing policy in which the price of water is equal to the marginal cost of supply
achieves first-best efficiency. A departure from marginal cost pricing may be required if the
pricing mechanism seeks to recover capital depreciation and other fixed costs. In this situation,
volumetric pricing can achieve a second-best efficient allocation. As (homogenous) farmers will
face the same price, income inequality is due solely to land endowments and is not affected by
pricing27. Marginal costs of supply will increase as water quality erodes and therefore
volumetrically charged prices will increase as well to reveal the real value of water. Countries
employing volumetric pricing include28: India (OM-CD), Jordan (OM), Mexico OM), Morocco
(OM), England OM-CD), France (OM-CD), Australia (OM), U.S.A. (OM-CD), and Israel (OMCD).
Output and Input Pricing
Because output taxes and zero price of water may distort input/output decisions the equilibrium
allocation is second best. Any measure of income equality will likewise be affected by land
endowments and not by the pricing mechanism. As output taxes are not assessed until the crop is
27 Rhodes and Sampath( 1987) illustrateh ow the optimalp ricingm echanismd ependsh eavily on the relative capital
intensities between small and large farmers.
28 OM = seeks to at least partly recover operation and management costs; CD = seeks to at least partly recovery
capital depreciation (Tsur and Dinar, 1995).
38
marketed this method of pricing does not allow flexibility of water quality conditions. Similarly,
input taxes will be assessed at the begiraing of the growing season and are not flexible to
changing water quality conditions in the short-run.
Per Area Pricing
Demand under this pricing mechanism is larger than that under marginal cost pricing rule, hence
the resulting allocations will be inefficient.. It is possible to influence water demand directly via
differential fee schemes. As before, income inequality is linked to land endowments and is
unchanged by the pricing scheme. Similarly to output pricing, per area pricing is not flexible to
changing water quality conditions in tke short-run. Countries employing per area pricing
include2 9: China (OM), India (groundwater), Iraq, Mexico (OM), Nigeria (OM), Pakistan (OM),
Peru (OM-CD), Philippines (OM), and Zimbabwe (OM).
Tiered Pricing
This pricing method is common when water demand has period variations: during low demand
periods (supply > demand) marginal cost pricing achieves (short-run) efficiency; during peak
demand periods (demand 2 supply) pricIng accounts for the scarcity value of water (marginal
supply costs plus shadow price of water availability). This method does not affect the income
inequality of homogenous farmers and Ellows some flexibility in dealing with changing water
quality. Another tiered pricing method (increasing blocks) discounts prices in favor of irrigators
(relative to domestic or industry), whkh may in the long run negatively affect measures of
efficiency, equity, and water quality. If this second tiered method is coupled with water quotas
allocated on an equal basis between farms (independent of size) the resulting allocations will
redistribute rent from larger farms to smaller farms. Tiered pricing systems can be found in
Israel (coupled with a multi-rate volumetric method) and in California (also coupled with a
multi-rate volumetric method).
Two-part Tariff
By introducing the admission fixed charge to balance the budget of the CWA, the short-run
efficiency of marginal cost pricing is extended to account for long-run fixed cost considerations.
An annual Pigouvian tax avoids distortionary affects of other taxing forms and is therefore
capable of achieving long-run efficiency. Two-part water tariffs used to recover total operating
costs may discriminate against farmers as many argue social benefits of irrigation accrue not
only to farmers, but also to consumers of farm products. As with volumetric pricing, this pricing
mechanism will reflect increasing marginal costs of supply and is flexible to water quality
changes.
Water Markets
Water markets will achiev.- first-best allocations under specialized conditions. Water markets
rarely exhibit all these conditions, but the resulting second-best allocations may be more efficient
than those achieved under the preceding methods. This is due to the internalization of
information collection and absence of strong CWA to administer water allocations. Water
markets in noncompetitive environments can lead to monopoly pressures on water prices, which
29 As above.
39
are likely to adversely affect income distributions. They do allow the greatest flexibility in
responding to changing water quality and will reflect the real value of water.
40
Table 1: Comparison of Pricing Methods with Efficiency / Equity I Water Quality Management
Potential *Affect on Adaptability to
Pricing Implementation Efficiency Time Horizon Ability to Intra-Sectoral Water Quality
Scheme Achieved of Efficiency Control Demand Income Conditions
Distribution
Single-rate
Volumetric Complicated First-best Short-run Easy Small / None Easy
Output / Input Less Complicated Second- Short-run Relatively Easy Small / None Difficult
best Through Variable
Per Area Easy None N/A Cropping Small / None Difficult
Restrictions/ Fees
Relatively Relatively
Tiered Complicated First-best Short-run Easy Moderate Easy
Relatively Relatively Relatively
Two-Part Complicated First-best Long-run Easy Moderate Easy
Depends on Depends on
Water Difficult First-best Short-run / Type of Type of Market Easy
Markets Long-run Market
Source: Adapted from Tsur and Dinar (1995).
* The potential for redistribution depends on the assumption of homogenous farmers. In cases where farmers are employing
different technologies and are growing different crops, pricing mechanisms can target certain agricultural sectors to pay more
or less than other sectors.
41
Pricing Theory
There are various means by which one could outline and summarize the broad swath of literature
surrounding the theory of irrigation water pricing. I have separated these articles into three broad
headings: partial equilibrium, general equilibrium, and water quality management. The majority
of studies on irrigation water pricing are partial equilibrium in nature and attempt to explain
deviations from first-best allocations. Examples are: Vermillion (1997) and Easter, Becker, and
Tsur (1997) regarding the public good nature of irrigation services; Rosegrant and Binswanger
(1994) Tsur and Dinar (1997), and Barrett and Sinclair (1999) regarding implementation costs;
Loehman and Dinar (1994) and Smith and Tsur (1997) concerning asymmetric information;
MacDonnell et al. (1994) and Willis et al. (1998) on third party effects; Tsur (1990, 1997), Tsur
and Graham-Tomasi (1991), and Moreno et al. (1999) on supply scarcity; and Spulber and
Spagghati (1998) on returns-to-scale. There is a significant literature concerning the equity of
irrigation pricing. The main works include Rhodes and Sampath (1988), Sampath (1991, 1992),
and Tsur and Dinar (1995).
Smaller in size, but not in importance, are the general equilibrium and water quality management
studies. These studies investigate not necessarily deviations from first-best equilibrium, but the
effects of implementing pricing or environmental policies on the agricultural sector and the
economy as a whole. Key among the general equilibrium studies are Robinson et al. (1993), Roe
and Diao (1995, 1997), Goulder et al. (1999), and Diao and Roe (1998). The water quality
literature can be divided into those studies examining water pollution and that examining water
conservation. Key pollution studies include the review by Dinar and Zilberman (1991), Biswas
(1997), Segerson (1988), Kim et al. (1997), and Goetz and Zilberman (1998). Notable in the
conservation literature are several recent economic reviews of the management for groundwater
systems (Gisser, 1983; Tsur and Zemel, 1995; Zilberman, 1997) and for conjunctive
management with surface water (Tsur, 1990; Boggess et al., 1993; Zilberrnan, 1997).
Water Law and Property Rights
Water law and property rights highlight the effects of already linked legal aspects of conflict
resolution and accountability. It influences water policy via effects on water pricing, cost
recovery, management decentralization, and private sector participation. Water law and rights
effect water administration because of implementation mechanisms, user participation, and
management decentralization. Saleth and Dinar (1999) have determined that there are four
critical variables that effect performnance of water law: integrated treatment of water sources,
effectiveness of conflict resolution, degree of integration within water law, and legal scope for
private sector participation. As mentioned the water law component of water institutions
incorporates other factors as well. These include the following law-related institutional aspects:
provisions for conflict resolution (Dinar and Loehman, 1995), provisions for accountability,
scope for private sector participation, centralization tendency, and degree of legal integration
within water law (Saleth and Dinar, 1999).
Water Administration
Reform efforts targeted at government provision of irrigation water services hinted at in earlier
sections, are largely due to the realization of government failures. These failures include:
misallocated project investments, overextended government agencies, inadequate service
delivery to the poor, neglect of water quality and environmental concerns, and the underpricing
of water resources.
Consequently, reform efforts targeted at water supply have been increasing. This reform is linked
to the aforementioned government failure, but is mainly due to three reasons: lack incentives
and responsiveness to optimize management performance, management transfers coupled with
supportive social and technical support wil. result in improved system quality and efficiency, and
management transfers will save the government money in terms of reduced O&M
responsibilities.
To address other market failures associated with the provision of irrigation water, other reform
efforts have been targeted at the implementation of Water User Associations. It has been shown
that WUAs tend to substantially reduce the costs of implementing water pricing (Easter and
Welsch, 1986b; Wade, 1987). The associations have economic incentives to maximize net
benefits generated by their activities (Winichelns, 1998), which include both increasing supply
efficiency and production efficiency (Kloezen et al., 1997). However, the impact of WUAs on
irrigation performance requires evaluation to determine whether these new the gains from farmer
participation are not outweighed by increased costs in other areas. For example, an important
indicator measuring the successes of new management regimes are levels of transaction costs
(Feeny, 1998).
Note that this process of decentralization of O&M and of farmer participation is far from
complete. Ruttan (1998) notes that instituitional design remains problematic and those capable of
balancing efficiency and equity must “… proceed on an ad hoc, trial-and-error basis, and errors
continue to be expensive.” Meinzen-Dick (1997) points out that long-run farmer participation in
the system may be the most important performance indicator of WUAs, which has yet to be
measured for most countries.
Water Policies
The movement from centralized water pricing to decentralized market-based mechanisms is
occurring globally. Recent examples frcm a variety of countries (Dinar and Subramanian, 1997)
confirm that, even in countries with centralized water structures, there is an increasing realization
that water subsidies to the agricultural sector and government inefficiencies require higher water
prices and better marketing institutions to meet increasing scarcity. To meet this need, a large
interdisciplinary body of literature lhas emerged to address different aspects of water
management under various conditions. The wide range of policies currently being promoted to
price and market irrigation water c;n be loosely grouped from centralized policies to
decentralized, market-based policies. Some of these have been described above (see also
appendix). Easter et al. (1998) discuss the potential future of water markets. They note the
potential economic benefits from water markets are likely to be very large in the future subject to
transaction costs. To keep these costs low requires appropriate institutional and organizational
structures as well as flexible infrastruc:;ure and management. Spot markets for water combined
with options markets may provide sufficient security to farmers for these efficiency gains and
low transaction costs, even if legally enforceable water rights are difficult to establish.
An alternative categorization of policies addressing water scarcity is supply management vs.
demand management. Supply management seeks to increase the available water supply. Some
examples are extracting from local aquifers, bringing in more water from water-abundant
regions, or decreasing water outflow (by a system of dams). Exploitation of ground water
sources is one potential area of increased supply (Rosegrant and Perez, 1997). The future of
supply management policies is beconming limited, as most of the diversion projects, dams, and
43
aquifers that pass a cost-benefit test have already been exploited and the remaining sites are
either too costly or involve international disagreements. Technological advances may increase
the feasibility of future irrigation projects, but as mentioned most recent efforts are directed
towards existing system modernization. As a consequence nontraditional sources are likely to be
a major component of new water supplies: desalinization, recycling, water catchment systems
(Rosegrant, 1997; Rosegrant and Meinzen-Dick, 1996).
Demand management seeks to encourage more efficient use of available water. These have
historically been ignored for the most part, and hence convey a large potential for managing
scarcity. A demand management policy of irrigation water consists of a combination of quotas,
and prices. It may be centralized, operating in a command-and-control fashion, or decentralized
to various degrees, allowirng certain market mechanisms in which water users are free to decide
on their water intake. Potential efficiencies in water use resulting from demand strategies will
serve to extend scarce water resources (e.g., the development and adoption of resourceaugmenting
techniques had been well documented: Caswell et al., 1993; Shah et al, 1995).
Policies that rely on quotas are typically more centralized, while pricing policies can be either
centralized or decentralized. These policies have been already touched on earlier, but also are
evident in the case studies mentioned in the appendix.
Political Economies of Pricing Irrigation Water
Merrey (1997) at IIMI comments, “Everyone involved in irrigation and water resource issues
claims to recognize that institutional, policy, and political issues are central causes of poor
performance. But it has proven difficult to focus governments’ and donors’ attention on these
matters, and develop long-term solutions that can be implemented” However, compared to
other aspect of irrigation water pricing, studies both theoretic and empirical of the political
economies of pricing are relatively unexplored. These concerns are extremely important when
trying to balance optimal allocations and pricing policies with equity concerns.
Several promising avenues for this research include extensions of rent-seeking models to water
management case studies, game theory extensions to dynamic and non-cooperative games in
water pricing, and further use of computable general equilibrium models to explore the effects
macroeconomic policies oii the irrigated agricultural sector. Examples of these include Zusman
(1997), Frisvold and Caswell (1997), and Diao and Roe (1999) respectively.
Another channel for productive analysis in this area is the application of endogenous growth
theory to decentralization in irrigation management, to technology adoption and innovation, and
to growth effects of income distribution. Aghion and Howitt (1998) discuss these issues in their
comprehensive text, Endogenous Growth Theory. They note that redistributive policies in the
form of transferred resources may enhance aggregate incentives. This has important
implications for the projected impacts of pricing reform in terms of agriculture sector growth.
Vosti and Reardon (1997) address these concerns in their review: Sustainability, Growth and
Poverty Alleviation. They focus on the links between the adverse affects of rural poverty on
development, political stability, and the environment.
It should be noted that water scarcity has often led to a history of disputes and conflicts. These
have generated enormous costs and adversely affected populations of people. One example is
the displaced population problem associated with large dam projects (e.g., Shuikou, China –
Thayer, 1997). Postel (1999) reviews the history of irrigation-based societies and argues that
44
disruptions in the orderly working of irrigation water supplies were main reasons for the
downfall of many ancient societies (Sumeria, Babylon, and Assyria). Recent conflicts over
water are detailed for the Middle East and Asian subcontinent (Gleick, 1993, 1997; McCaffrey,
1993; Postel, 1999) and for the American West (Colby, 1997; Gleick, 1997). The resolution of
these conflicts often follows strictly political lines. Dinar and Loehman (1993) review case
studies in water conflicts and theoretical approaches to their resolution.
Summary
Water scarcity is an ever-growing global problem. Increased population pressures, improved
living standards and growing demands for environmental quality, have all prompted
governments to find better ways to manage their available water resources. Most ecQnomists
agree that if water users pay the marginal, cost of supplying that water, significant movements
towards increasing our water management efficiency would be made. Section 3 discusses the
many peculiarities associated with irrigation systems make it difficult to quantify and charge via
marginal cost pricing. This would increase the cost of irrigation water for most farmers globally.
The equity of marginal cost pricing is also in question as many small farmers would not be able
to continue farming under such a pricing rnechanism. There is continued debate as to the role of
irrigation and farming as a developmenl. tool and as a means to redistribute wealth to both
producers and consumers via cheaper staple food prices. As the general equilibrium section
illustrates, one means to enhance water management efficiency is to allow inter-regional or
international trading of water. The caveat to this argument as with marginal cost pricing, is
whether these trades or pricing mechamisms are long-run solutions, when environmental
concerns are incorporatedi.
Necessary for implementing any pricing policies are the various water institutions discussed in
Section 4. These are also undergoing significant changes stemming from increased water
demand. There are quite a number of case studies mentioned that trace the movement in
countries’ irrigation management from centralized water authorities to decentralized water
supplier and water user organizations. The policies associated with these changes reflect the
aforementioned movement towards market-based means to price water. The reason for these
changes is not only increased water scarcity, but also political pressures. These pressures can be
traced historically (as in the aforementioned case studies) and can also be understood in a
fundamental sense via various political economy mechanisms. This last section of the survey is
a logical place to end (excepting annotation of case studies). With any change in environment,
whether it is physical in the case of increasing water scarcity or whether it is political in the case
of changing water institutions, there are groups who will be better off and those who will be
worse off. When examining the potential of an irrigation pricing mechanisms to better manage
existing water supplies, it is essential to evaluate these groups in order to successfully implement
the pricing policy.
45
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64
APPENDIX A: CASE STUDIES
It is the intention of this survey to categorize recent case studies on irrigation systems, building
on the work by Dinar and Subramanian (1997). Due to the vast number of case studies
concerning relevant aspects of irrigation, I have kept this summary to a brief description: author,
country, year, subject, etc. The full reference for the studies will be found in the reference
section under the first author’s last name.
65
Table 2: Case Studies
Study and Country Subject / Year Pricing Policy(s) I Key Findings
Allocation Method
LDCs
De Azevedo and Asad Political process behind CWA Full economic cost recovery via bulk water pricing is not
(2000) – Brazil water pricing reform and practical due to information costs and hence water markets may
initiation of bulk water be more sensible.
pricing
Kemper and Olson Institutional change in CWA Development projects that incorporate institutional reform (e.g.,
(2000) – Mexico and water pricing. water right definition and decentralized management) and
Ceara, Brazil supply/demand side management have to increase the timeframe
for project evaluation.
Wambia (2000) – Political economy of CWA Evaluating reform success is difficult for policy makers as
Pakistan water institution reform. political parameter information is often missing. To minimize
social implementation costs, it is necessary to choose reform
______________________ sequences correctly.
Ward (2000) – Yemen Political economy of CWA Increasing irrigation water prices encourage use efficiency, but
irrigation water pricing. have often come with political and social unrest. The most
benign government option lies in promoting irrigation efficiency
via research, extension, and investment.
Qingtao et al. (1999) – Description of Chinese CWA Environmental protection measures must be taken as part of an
China water transfer project: irrigation system. Inattention to these measures could lead to
water price structure, serious adverse effects in the Wanjiazhai Transfer Project.
clean technologies,
improved waste
treatment.
Palanisami (1999) – Irrigation strategies to CWA To increase water-use efficiency the following short term
Tamil Nadu meet increasing water measures are advisable: better management strategies with
demand. WUAs, irrigation technology adoption, and use of waste and salt
water for irrigation. Long-term measures include identification
of appropriate investments and diversion of water from west
flowing rivers.
Johnson, Svendsen, and System performance Decentralize Incentive management systems and financial autonomy for
Zhang (1998) – China changes in response to d CWA public irrigation districts have led to increases in irrigation fee
organizational reform. collection rates and more efficient multi-part fee structures.
Perry and Fanner response to Warabandi Farmers aim to maximize returns to the scarce resource, but
Narayanamurthy (1998) uncertain supplies. guard against risk by reducing areas planted when season water
– Haryana, India allocations are uncertain.
Wichelns (1998) – Economic issues CWA/WUA Public agencies have an important role in enforcing property
Egypt regarding tertiary canal rights and designating uses of water funds. Cost recovery can be
improvements. implemented in cooperation with WUAs and enhanced by
___________________a__l_l owing __________________________ _____ _ trades to occur.
Diao and Roe (1998) – Sequencing of trade and CWA Welfare decreasing effects of water market reform on certain
Morocco walter m reform: agricultural sectors can be ameliorated by reforming trade
practices prior to tne watterr cCff .
Marre et al. (1998) – Differential charges and WUAs Due to low collection levels, much of WUA income is spent on
Mendoza, Argentina participation rates fixed costs (e.g., salaries) and little on O&M. This causes
further dissatisfaction with paying users.
Kloezen and Garces- Assessing irrigation WUAs Comparative indicators used in Mexico’s Lerna District for
Restrepo (1998) – performance. irrigation management show conditions of abundant water
Mexico availability, irrigation depths that are high relative to crop
requirements, economic outputs per unit of water and land that
are favorable to other districts, full recovery of O&M, and
____________________ _____________________ overexploitation of the aquifers.
Bandaragoda (1998) – Water allocation rules. Warabandi Increasing inequity in water distribution indicates that the
Pakistan balance between infrastructure, water rights, and organizational
responsibilities is failing. Adaptability of rules to changing
conditions is therefore necessary.
Rosegrant and Perez Water resources CWA Water reform is needed in Africa to meet growing demands.
(1997) – Select African development. The most important reforms require establishment of secure
Countries water rights, decentralization and privatization of water
management, the use of market for trading water rights, pricing
reforms and reductions in subsidies, and pollution charges.
67
Svendsen and Nott Management transfers. WUAs Falling public O&M costs, rising private costs, improved cost
(1997) – Turkey recovery, falling bureaucratic staff numbers, and improved
system performance have been linked to rapid irrigation
management decentralization in Turkey.
Brewer et al. (1997) – Water distribution rules. WUAs Inconsistent water rules cause operational problems that may
Tambraparani, India lead to poor efficiency and equity in water distribution.
Therefore, water law needs to be flexible to adapt to new
problems or demand changes.
Hearne and Easter Economic and financial Water Market transfer of water-use rights does produce substantial
(1997) – Chile gains from water Trades economics gains-from-trade. Lack of trading in some regions
markets. reflects the costs of modifying fixed infrastructure to facilitate
trades.
Johnson (1997) – Decentralization o f WUAs WUAs have proven capable of operating and maintaining
Mexico public irrigation. irrigation systems in Mexico. They have established an
investment fund to cover emergencies and future investments. It
is necessary, however, to insure long-run sustainability of the
program to clarify water laws in order to protect agricultural
water rights.
Kloezen, Restrepo, and Management transfers WUAs Comparative indicators for system performance were developed
Johnson (1997) – and performance to assess management decentralization strategies.
Mexico indicators.
Rinaudo et al. (1997) – Private tubewells, surface Informal Groundwater sales form the bulk of total irrigation water
Pakistan water markets, and water transaction, although canal rights are also traded. Water markets
inadequate canal water market are localized and so the spatial structure of the markets within a
supply. trades. watercourse command area requires further examination.
Shumba and Mposa Performance of 6 CWA Crop yields under small-scale farmnsa re so low as to make
(1996) – Zimbabwe smallholder Schemes irrigation investment questionable. Increased efficiencies can be
evaluated in yields of achieved if farmers form coalitions.
maize and beans.
Johnson (1997) – Decentralization of WUAs Efficiency increases have been realized in fee collection and
Mexico public irrigation and O&M, however more funds for future investment needs to be put
management transfers. aside. Water law clarifications are necessary as well.
68
Plusquellec (1996) – Technology in small Advanced water control technologies are appropriate for small-
Iran farm irrigation. scale farm projects.
Small (1996) – O&M under economic Supply Financial autonomy of irrigation systems is enhanced by supply
Vietnam reform Co-ops cooperatives that act as an intermediary between farmers and the
central water authority.
Shumba and Maposa Performance of small- CWA There are tremendous potential increases in small-scale farm
(1996) – Zimbabwe scale irrigation schemes. yields possible by increasing irrigation water certainty and by
fixing the road infrastructure.
Rosegrant and Schleyer Mexican water law Water Tradable water rights raised cost of supplying water via
(1996) – Mexico reform Trading inflexible conv;eyance system.
Bilen (1995) – Turkey Water management plan CWA Inter-sectoral planning of several aspects of water resource
for a basin should be fit management can augment system efficiency. Recommends a
into national plans and movement from project-oriented water resource planning toward
policies, broader national perspectives.
Marikar, Wilkin-Wells, Measures to evaluate WUAs Using performance iieasuircs adapted from Thiel’s mean-square
Smolnik and Sampath system performance and forecast error concept, it was shown that fertilizer, labor and
(1992) – Sri Lanka crop productivity. concentration of power positively affects yields, while poor
________ _______ management adversely affects yields.
Sampath (1991) – India Evaluation of irrigation CWA There is considerable inequality in irrigation distribution in
distribution and equity in India’s states. Changing the current policy to a Rawlsian
India’s states. distribution policy would reduce this inequity in general and
specifically in the canal irrigation areas.
Seckler, Sampath and Measuring the Warabandi Farmers irrigate the designed amount of land, but show
Raheja (1988) – India performance of irrigation System significant inter-farm irrigation levels. The operating efficiency
management systems. of this system was found to be 80%.
Dhawan (1988) – India Productivity, stability, CWA Factors such as credit availability for the purchase of fertilizer at
and equity in India’s low rates of interest adversely affect the chances of small
agricultural development. farmers in India to fully realize benefits of irrigation. This
compounds inequality problems inherent in this system. Land
redistribution is cited as one possible solution.
69
Martin and Yoder Institutional structures / WUAs Water allocation by purchasing shares in a continuous flow
(1987) – Nepal 1982 – 1983. rotation provides efficient development of resources, while
proportional irrigated area allocation does not.
Merrey and Wolf O&M Finance / 1983 – Irrigation planners must focus on the development of appropriate
(1986) – Pakistan 1984. organizational capacities so that users can best make use of the
system.
MDCs
Musgrave (2000) – Political economy of CWA Decentralization and water price reforms are advanced in the
Australia water price reform. urban sector, but there are many groups opposed to reform in the
rural agricultural sector.
Pigram (1999) – Applicability of
Australia Australian water reforms
to general conditions.
Bjornlund and McKay Impact of Trade (water Tradable Water Entitlements (TWE) are a tool to alleviate the
(1999) – Victoria, markets) on socially influence of raising water prices and to facilitate a re-allocation
Australia equitable water of water resources to more efficient and sustainable uses from an
allocation. economic, social and environmental perspective. Within the
present legislative framework this does however not always
direct water to the most sustainable users in an equitable manner.
Varela-Ortega et al. Farmer response to CWA Policies are strongly dependent on the distinct regional
(1998) – Spain alternative water pricing institutions. Equivalent water charges would then create
policies. widespread effects on water savings, farn income, and
government collections across regions.
Willis et al. (1998) – Effects of water rights CWA I Contract costs are lower under an excess stored water contract
Snake River Basin and irrigation technology Water Bank than a total stored water contract, however there is less water for
on streamflow environmental protection.
augmentation
Ise and Sunding (1997) Trades to the Water Personal characteristics such as short-term financial constraints,
– Nevada environment. Markets significantly affect trading decisions. This suggests that
environmental agencies may wish to target marginal farners to
attain more efficient outcomes.
70
MacDonnell et al. . Kern Water Bank, Water A comprehensive guide to issues surrounding the development
(1994) – American CA Banks of and movement towards water banking in the American West.
West * Arvin Edison / Metro, These allow greater flexibility in marketing of water and reduce
LA transactions costs.
* Orange County, CA
* Las Vegas Valley,
NV
* Arizona-California
Colorado River
Chang and Griffen Water markets as a Water For transactions involving representative cities, the estimated
(1992) – Texas means to reallocate Markets benefits from water marketing far exceed the agricultural cost of
water. the transfer.
Cummings and Water pricing to enhance Water The equity concerns related to third parties and water markets
N ercissianiz 1978097-) c;ficincy= in iritinn Markets have been addressed in the western U.S., which may be
U.S. and Mexico j j applicable to recent Mexican reforms.
Reviews Included Studies/Countries Subject Key Findings
Dinar (2000) * Musgrave (2000) – Australia Political economy of water Documents key reform efforts
* De Azevedo and Asad (2000) – Brazil pricing reforrn. in these countries, noting the
. Wambia (2000) – Pakistan effects of political economies
* Kemper and Olson (2000) – Mexico on success or failure.
and Brazil
* Ward (2000) – Yemen ___
Saleth and Dinar (1999) * Australia Evaluation of water With an overall pro-reform
World Bank * Brazil institutions and water sector climate, it is possible to
* Chile performance. minimize transaction costs and
* India achieve more than
* Israel proportionate improvement in
Mexi.co water sector performance.
71
* S. Africa Results indicate that a
* Spain sequential strategy for
* Sri Lanka institutional reform in general
* USA and water institutions in
particular.
Marino and Kemper * Brazil Institutional frameworks in When theoretical models for
(1999) * Spain successful water markets. water markets are being
World Bank * Colorado derived from industrialized
countries for application to
LDCs, it is essential to review
the institutional frameworks
that have contributed to
successful water markets.
International Water * Matsuno (1999) – Sri Lanka Nonagricultural uses of Due to increasing water
Management Institute * Scott, Zarazua, and Levine (1999) – irrigation water. scarcity, nonagricultural uses
(1999) Mexico of irrigation water have
* Jensen (1999) – Pakistan significant environmental,
health, and other domestic
consequences that need to be
examined.
Easter et al. (1998) * Griffin (1998) – Texas Water Markets Water markets have worked
Kluwer Academic * Howe (1998) – Colorado and can be used efficiently to
Publishers * Colby (1998) – U.S. West allocate water. Where water is
* Howitt (1998) – California scarce and large amounts of
* Hearne (1998) – Chile available water have already
* Hearne and Easter (1998) – Chile been committed to users, the
* Hearne (1998) – Mexico economic benefits from water
* Sealet (1 998)- Mexico markets are likely to be the
* Salethi(1998) n- a largest. For these markets to
* Meinzen-Dick( 1998)P -a istan be effective, it is necessary to
* Garrido (1998) – Spain keep transaction costs low and
* Horbulyk and Lo (1998) – Canada to develop appropriate
institutional and organizational
72
arrangements.
Dinar and Subranian * Salem (197) – Algeria Pricing Policies Most countries surveyed are
(1997) World Bank * Musgrave (1997) – Australia decentralizing water
* Thema (1997) – Botswana management. Some are
* de Azevedo (1997) – Brazil developing legal frameworks
* Horbulyk (1997) – Canada to decentralize and to
* Montginoul (1997) – France encourage private investment
* Saleth (1997) – India through incentives. Many
* Yaron (1997) – Israel countries are implementing
* Dest(rIo9 97) – Italy prices to recover a portion of
* Rabemanar bola (I997) – Madagascar O&M costs from users. This
entails a movement away from
* Heyns (1997) -Namibia uniform tariffs and minimum
* Scrimgeour (1997) – New Zealand prices towards higher
* Mohtadullah (1997) – Pakistan -ol tric prices The
* Maestu (1997) – Spain development of transferable
* Adam (1997) – Sudan water rights and water markets
. Hsiao and Luo (1997) – China is crucial to consider for future
* Mujwahuzi (1997) – Tanzania water management.
* Slim et al. (1997) – Tunisia
* Onek (1997) – Uganda
* Rees (1997) – United Kingdom
* Wahl (1997) – United States
Vermillion (1997) * Oorthuizen and Kloezen (1995) – Decentralization and The impacts of management
IIMI Philippines Management Transfer transfer are for the most part
* Wijayarantna and Vermillion (1994) – positive. These include
Philippines reduction in the cost of
* Badadion (1994) – Philippines irrigation to farmers and
* Svendsen (1992) – Philippines government, enhanced self-
* Johnson and Reiss (1993) – Indonesia reliance of irrigation schemes,
* Nguyen and Luong (1994) – Vietnam expansion of service areas,
* Johnson et al. (1995) – China reduction in the amount of
water delivered on a per
73
* IIMI and BAU (1996) – Bangladesh hectare basis, and increases in
* Rana et al. (1994) – Nepal cropping yields. Negative
. Olin (1994) – Nepal impacts reported include
* Mishra and Molden (1996) – Nepal increased costs of irrigation
* Kloezen (1996) – Sri Lanka services, failing financial
* Uphoff (1992) – Sri Lanka viability, and deteriorating
* Pant (1994) – India infrastructure.
* Srivastava and Brewer (1994) – India
* Rao (1994) – India
* Shah et al. (1994) – India
* Kalro and Naik (1995) – India
* Azziz (1994) – Egypt
* Samad and Dingle (1995) – Sudan
* DSI, EDI, and IIMI (1996) – Turkey
* Maurya and Musa (1993, 1994) –
Nigeria
* Wester et al. (1995) – Senegal
* Yap-Salinas (1994)- Dominican
Republic
* Vermillion and Garces-Restrepo
(1996) – Colombia
* Garces-Restrepo and Vermillion
(1994) – Colombia
* Johnson (1996) – Mexico
* Svednsen and Vermillion (1994) –
Washington State, USA
. Farley (1994) – New Zealand
Merrey (1997) – * Indonesia O&M Design of Irrigation Documents using case studies
Summary of IIMI * Pakistan Systems, Irrigation the actual performance of
R&D: 1984-1995 * Sudan Management Transfers, irrigation systems and potential
* West Africa Health and Environmental efficiency gains. Documents
. Malaysia Aspects of Irrigation the high degree of unreliability
74
* Bihar, India Systems, Institutional and inequity of surface water
* Gujarat, India Capacity Building,. deliveries and its relationship
* Sri Lanka to salinity. IIMIs research
* Egypt illustrates that negative trends
* USA in irrigation, such as soil
* Colombia degradation and erosion, are
* Niger due primarily to institutional
* Nigeria and political concerns.
N..iger Financial viability of LDC
* China irrigation systems is
NeChnal questionable and is also linked
. Nepal to institutional and political
concerns. WUAs have poor
organization and political
enforceable water rights, and
therefore suffer from
inefficiencies. Increasing
water competition from other
sectors is leading to a decline
in importance of irrigation
agencies.
Johnson (1997) – Irrigation management transfers and CWA/WUA To insure the stability of
Mexico Districts decentralization in Mexican irrigation. WUAs and the sustainable
IIMI management of Mexican
irrigation, it will be necessary
to establish an investment fund
and to clarify water laws to
protect agricultural rights.
Parker and Tsur (1997) * Yaron (1997) – Israel Decentralization and As water becomes scarcer it
Kluwer Academic * Kindler (1997) – Jordan River Basin Coordination becomes more expensive via
Publishers * Cakmak (1997) – Turkey increasing scarcity prices.
* Parker (1997) – California Hence, misuse is becoming
75
* Boggess (1997) – Florida more costly and the need for
* Pigram (1997) – Australia more efficient use management
. Just, Netanyahu, and Horowitz (1997) has increased. As a result
– Israel and Jordan there has been a global
* Zusman (1997) – Israel movement away from
* Becker, Zeitouni, and Shechter (1997) centralized water management
– Middle East towards decentralized
* Tsur (1997) – California mechanisms to increase
* Just, Horowitz, and Netanyahu (1997) distributional efficiency.
– Jordan-Yarmouk River Basin
* Sunding, Zilberman, MacDougall,
Howitt, and Dinar (1997) – California
Bay/Delta
. Gleick (1997) – Middle East and
California
* Musgrave (1997) – Australia
Miranda (1989) * Indonesia Irrigation Management for
IIMI . Philippines Crop Diversification
* Sri Lanka
Rydzewski and Ward * Sampath (1989) – India Performance Evaluation of Text Book.
(1989) . Ramnamurthy (1989) – S. India Existing Irrigation Projects.
Institute of Irrigation * Farbrother (1989) – Sudan
Studies * Smith and Carruthers (1989) – Inus
Valley
* Chohan (1989) – Pakistan
* Bybordi (1989) – Iran
* Zhaoyi (1989) – China
* Biswas (1989) – Sri Lanka
* Tekinel et al. (1989) – Turkey
* Satyanarayana et al. (1989) – India
* Portch et al. (1989) – Sub-Saharan
Africa
76
* Stoutjesdijk (1989) – Southern Africa
* McAnderson et al. (1989) – Ethiopia
* Hewett et al. (1989) – Sudan
* Van Bentam and Smout (1989) –
Bhutan
Easter (1987) * Philippines Inadequate management and Pricing policies in many Asian
University of * Maharashtra, India declining infrastructure. countries and/or the ability to
Minnesota / USAID * Nepal collect fees is inadequate.
* SriLanka There are 4 conditions
necessary for increased
collection rates: volumetric or
yield-acreage data, dependable
delivery systems, sufficiently
staffed collection service,
rea;;uuatioonf :uncr,acs .ed
collections to infrastructure
improvement.
77
APPENDIX B: METHODOLOGIES AND DATABASES
Methodologies
There are several good sources describing generalized methodologies for estimating crop-water
response functions (Heady and Hexem, 1978; Vaux and Pruitt, 1983; Letey, Knapp and
Solomon, 1990; and Liewelyn and Fetherstone, 1997). These address economic, engineering,
and biological aspects of the production process. They conclude that crop-water production
relationships are very complicated and must include various management issues to adequately
cater to specific situations. Consequently, these methodologies have been developed to
incorporate salinity (Feinerman et al., 1984; Plessner and Feinerman, 1995; Kirda et al., 1999)
and evapotranspiration3 0 (Letey, Dinar, and Knapp, 1985), and deficit irrigation (Small and
Rimal, 1996; Kirda, et al., 1999). Empirical verifications of this theory for several crops can be
found in Letey and Dinar (1986) and Kirda et al. (1999)3’. The use of production function
technology to reduce drainage and salinity problems are developed in Dinar et al. (1989); Letey,
Knapp, and Solomon (1990); Knapp et al, (1990); and Dinar and Letey (1996). Intertemporal
aspects of crop-water production functions have been developed in Plessner and Feinerman
(1995), Scheierling et al. (1997), and Kirda et al. (1999).
Comparative analysis of crop water requirements conducted for Zimbabwe, Egypt, Turkey,
Scotland, Tamil Nadu, Indonesia, and New Zealand can be found in Rydzewski and Ward
(1989). Perry and Narayanamurthy (1998) review theoretical responses of farmers to uncertain
irrigation supplies and provide an empirical illustration for warabandi irrigation in Haryana
State, India.
Programs to Calculate Crop-water Requirements”2
o FA Methodologies (see http://fao.org, 1999)
Since the early 1970’s FAO has been using CROPWAT3 3 for calculating crop water
requirements. This has been a widely accepted standard for irrigation studies over the past
two decades. CROPWAT is intended as a practical tool for practitioners when calculating
standard evapotranspiration and crop water uses. It is adapted for development or
improvement of the management and design of irrigation schemes under varying water
conditions: rainfed or deficit irrigation. CROPWAT calculations of crop water requirements
utilize the CLIMWAT climatic and crop data (see below).
30 Evapotranspiration is the amount of water actually used by the soil-plant system.
31 Included in Kirda et al, (1999) are response functions for a variety of crops: cotton, maize, soybean, sugar beet,
sunflower, wheat, winter wheat, common bean, groundnuts, sugarcane, and irish potato.
32 A review of the evapotranspiration equations used in most computable crop-water programs recently appeared in
Irrigation Science (Ventura et al., 1999).
33 CROPWAT version 5.7 issued in 1992 is freely available from the FAO web site in English, French, and Spanish.
It can also be found as a publication (FAO: Drainage and Irrigation Paper No. 46, 1992. Included is a manual and
guidelines).
78
In 1990 a panel of experts recommended the adoption of the Penman-Monteith
methodology34 for evapotranspiration and parameter calculations necessary to determine crop
water requirements around the g lobe. The FAO minutes from their discussion of
methodology and current revisions cm be found in Smith (1999)35.
* ILRI Methodology
Another program for calculating crop irrigation requirements in CRIWAR, which was
developed jointly between the Wageningen University of Agriculture (WUA), the Winand
Staring Centre for Integrated Research on Rural Areas SC-DLO), and the International
Institute for Land Reclamation and Improvement (ILRI). A copy of this program and
operating manual can be found in the public domain (ILRI Publication 46). CRIWAR
calculates the irrigation water requirements of cropping patterns in an irrigated area for
various stages during the growing :season. The irrigated water requirement is simply the
difference between the potential evapotranspiration and the effective precipitation.
Evapotranspiration values can be calculated using either the modified Penman Method or the
Penman-Monteith Method. The effective precipitation values are estimated using the method
developed by the U.S. Soil Conservation Service.
* Other Commonly Encountered Programs
There are many modeling prograrms available that predict evapotranspiration and crop
responses to water availability, i ncluding irrigation water. Some of these include:
GLEAMS, Opus, PRZM-2, RZMWQM, PRMS, EPIC, SIRS (rice) and CERES (maize). It is
obviously beyond the scope of thi:s work to review the literature surrounding the many
simulation programs available. Several recent sources comparing the accuracy of forecasts
for various crop conditions are: Small and Rimal (1996), Llewelyn and Featherstone (1997),
Evers et al. (1998), and Ma et al. (1999). Dinar and Letey (1996) draw a distinction between
holistic and specific simulation models. Holistic models simulate the production process of
only one crop in a detailed manner, including several state and decision variables. Examples
include COTMOD, GOSSYM, ARID CROP, and EPIC. Specific models focus on a single
production input, such as yield responses to changes in soil moisture. Examples for soil
moisture and salinity can be found in Yaron et al. (1972) and in Dinar and Letey (1996).
Databases
* The FAO maintains and extensive climate database, which includes standard crop
information plus daily soil and water balances for 144 countries (CLIMWAT). This data
can be accessed via the internet (as above) or as a publication (FAO: Irrigation and
Drainage Paper No. 49,1993).
* There are several downloadable USDA databases available on the internet via Cornell
University (see http://www.usda.mannlib.cornell.edu/). These include:
34 FAO current guidelines for calculating crop water requirements can be found in FAO: Irrigation and Drainage
Paper No. 56 (1998).
35 See http://www.fao.org/WAICENT/FAOINFCO/AGRICULT/AGL/aglw/Wcrop.html).
79
(1) Bureau of Reclamation Data – Agricultural Water Use [ERS]
Contains data on agricultural use of federally supplied irrigation water for bureau of
reclamation lands receiving full and supplemental water service. This includes net water
supply, water deliveries, and acres irrigated by drip, sprinkler, and gravity systems.
(2) Farm and Ranch Irrigation [ERS]
This includes the data from the 1984 Farm and Ranch Irrigation Survey, which
supplements the basic irrigation data collected from all farm operators in the 1982 Census
of Agriculture. The methodology is similar to those used in the 1979 Farm and Ranch
Irrigation Survey.
(3) Irrigation Production Data System [ERS]
(4) World Food Aid Needs and Availability [ERS]
This is a full-text report that studies the world food aid needs, defined as the amount of
grain needed to fill the gap between what a country can produce and its financial capacity
to import, and a targeted consumption level including emergency needs. This factors in
such a comprehensive set of considerations that include: supply and demand, prices and
trade, food production, yields, fertilizer use, land constraints, water and irrigation,
population growth, food consumption and nutrition, domestic policies and foreign
exchange availabilities.
Through the International Food Policy Research Institute (IFPRI) and associate
organizations several irrigation resources can be accessed (see http://www.cgiar.org/).
These include:
(1) IMPACT
This is a multi-sector model to examine global food security. One of the parameters is
irrigation water supply and investment.
(2) IIMI Spreadsheet: World Water and Climate Atlas
This is a simulation model to simulate water supply and demand for major countries (by
sector) in the world between 1990 and 2025.
80
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