Alternative Approaches to Cost Sharing for Water Service to Agriculture in Egypt


Alternative Approaches to Cost Sharing for Water Service to Agriculture in Egypt

C.J. Perry

1996

International Irrigation Management Institute

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Research Report
Alternative Approaches to
Cost Sharing for Water Service
to Agriculture in Egypt
C.J. Perry
2
2
Research Reports
IIMI’s mission is to foster and support sustainable increases in the productivity of irrigated
agriculture within the overall context of the water basin. In serving this mission,
IIMI concentrates on the integration of policies, technologies and management systems to
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problems.
While we expect that most of the papers will be published by IIMI staff and their
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by IIMI’s own staff, by IIMI’s senior research associates and by other external reviewers.
The papers are published and distributed both in hard copy and electronically. They may
be copied freely and cited with due acknowledgment.
3
Research Report 2
Alternative Approaches to
Cost Sharing for Water Service
to Agriculture in Egypt
C. J. Perry
International Irrigation Management Institute
P O Box 2075, Colombo, Sri Lanka
4
This report was made possible through the support provided by the Office of Irrigation
and Land Development, Bureau for Egypt, the U.S. Agency for International Development
(USAID), under the terms of Cooperative Agreement Number 263-0132-A-00-5036-
00. The opinions expressed herein are those of the author and do not necessarily reflect
the views of USAID.
Perry, C.J. 1996. Alternative approaches to cost sharing for water service to agriculture in Egypt.
Research Report 2. Colombo, Sri Lanka: International Irrigation Management Institute
(IIMI).
/ agricultural development / water management / water delivery / benefits / cost recovery / operating
costs / maintenance costs / policy / water allocation / user charges / water use efficiency /
water shortage / water resources development / Egypt /
ISBN: 92-9090-321-X
ISSN: 1026-0862
© IIMI, 1996. All rights reserved.
Responsibility for the contents of this publication rests with the author.
ii5i
Contents
Summary 1
Introduction 5
Cost Recovery Practices 6
Cost recovery from agriculture—background 7
Present practices 7
Allocation of Operation and Maintenance Costs 8
Impact of Water Service Charges on Agriculture 10
Impact on farm incomes 10
Impact on production of alternative charging systems 11
Impact of Water Shortage 11
The role of management 11
The role of water pricing 12
Conclusions and Implications 12
Literature Cited 14
1
Summary
Introduction
This paper combines and interprets results from a
number of studies undertaken by the International
Irrigation Management Institute (IIMI) for the United
States Agency for International Development in
Egypt during 1995. The studies were designed to help
the Egyptian government formulate a rational approach
to sharing the costs of water services among
the beneficiaries—agriculture and other users—and
government.
The major studies included (1) a detailed review
of the actual costs incurred in operating and maintaining
the infrastructure for water delivery and disposal;
(2) an assessment of the allocation of these costs
among beneficiaries, on the basis of the separable
costs, remaining benefit (SCRB) method; (3) the ability
of the accounting system currently in place to trace
the disposition of costs; and (4) an analysis of the
impact on the agriculture sector of alternative bases
for imposing charges—flat-rate, volumetric, or cropbased.
A number of other minor studies were commissioned
in the course of the work, and reference is
made to other published information and reports.
Sharing the costs for services rendered among beneficiaries
has a number of potential benefits: First,
where the alternative is a government subsidy, revenues
from charges release government funds for use
elsewhere; second, charge levels provide an indicator
to the beneficiaries of how efficiently the service
provider is operating; and third, where resource usage
underlies the rate structure, an efficiency incentive
for the user is introduced.
In Egypt, as in many countries, there are no direct
charges for water services to agriculture. Up to the
late 1980s, substantial government revenues from
agriculture were derived through implicit taxes on
production: Marketing and cropping patterns were
controlled and the government captured substantial
profits from the sale of commodities (especially cotton)
in world markets. More recently, these controls
have mostly been removed: Farm incomes have risen
by about 25 percent in real terms, and government
revenues have fallen. Although prices were adjusted
for some inputs, water has remained free. There is,
however, a limited degree of cost recovery for
infrastructural improvements (installation of drainage,
improvements to mesqas or private field channels),
and the farmers are also responsible for maintaining
the mesqas.
Cost allocation and accounting
procedures
The study of cost allocation among beneficiaries was
complex—water is used nonconsumptively to generate
power and for navigation; water is consumed
by domestic, industrial, and agricultural users. Much
of the water infrastructure—storage, barrages, canals
and drains—serves multiple purposes. The SCRB
method, which provides a standardized approach to
this type of problem, was applied here. The complexities
of Egypt’s water resource sector and the difficulties
of applying the SCRB method to a situation where
development is already virtually complete resulted
in numerous analytical and conceptual challenges.
But it was found that the level of system operational
costs attributable to agriculture was very stable across
wide ranges of assumptions, primarily because agricultural
use dominates total use. The share of costs
attributable to agriculture, amounting to US$52/ha
annually, is the dominant share of total costs.
The parallel study of current accounting procedures
showed that allocation of these expenditures
among physical locations and purpose is not possible.
This does not imply inaccuracy in the accounts; rather
2
the present accounting categories are unsuited for
providing the basis for establishing user fees in relation
to costs at any local level. This conclusion is important
to the extent that cost sharing is planned to
induce efficiency in the provision of the service. If
the relationship between local services and locally
incurred costs cannot be traced, then the appropriate
change in charges due to improved service efficiency
will also be impossible to allocate.
The third study undertaken was designed to test
the impact on crop selection and production of alternative
approaches to service charges. The assessed
charges were introduced into a proven simulation
model of Egypt’s agriculture sector to measure impacts
on farm income, crop choice, the value of production,
and the productivity of water.
Cost recovery mechanisms
Three charging mechanisms were evaluated: (1) a flat
rate, independent of crop type or cropping intensity,
(2) a crop-based charge, broadly relating the service
charge to water consumption, and (3) a volumetric
charge. The structure of the model is adequate to
make these distinctions meaningful: Crop choices are
specified in great detail with numerous options of
underirrigation, and short and long varieties and
planting dates are available. The structure of the
model was modified to more accurately reflect the
impact of unequal access to water in case of shortage.
The results showed that full recovery of allocated
costs to agriculture would reduce farm incomes by
about 4.5 percent. As expected, imposition of flat rate
charges has no impact on crop selection.
More interestingly, a crude crop-based charge (water
charges set at levels proportional to typical farm
demand, by crop) is almost exactly as efficient as full
volumetric pricing in inducing beneficial shifts in
cropping pattern toward more water-efficient crops.
This conclusion has important implications. Irrigation
deliveries in Egypt are essentially unmeasured—
historically, since the construction of the High Aswan
Dam, supplies have been plentiful and thus little attention
is paid to formal allocations. Any attempt to
introduce water measurement (which would be required
for volumetric pricing) would therefore have
enormous implications on how the system is operated,
the infrastructure needed, and the formalization
of water rights.
Impact of charges on demand
This impact of charges on demand was explored further
in an experiment with the agriculture sector
model to simulate the impact of a reduction in supplies
of 15 percent. Two issues were explored. First,
the level of volumetric charges required to induce a
fall of 15 percent in demand for water for agriculture
was explored. The resultant water service charge
would be 25 percent of farm incomes—hardly a politically
feasible option.
Alternatively, by rationing water among farmers,
efficient use can be induced. Farmers will choose
water-efficient cropping strategies to minimize the
loss in production even in the absence of water
charges. In one solution, the model simulated uniform
rationing of water, and production was predicted
to fall by 4 percent. In a second scenario, water
shortages were concentrated in tail-end reaches,
so that head-end farmers continued to grow waterintensive
crops, while tail-end farmers suffered the
full 15 percent cut. In this case, production fell more
sharply—by 7.1 percent—giving an indication of the
benefits that will accrue to better management if
shortages arise. In fact, the benefits are surprisingly
low. The infrastructure required to enforce rationed
deliveries corresponds rather closely to an ongoing
investment program—the Irrigation Improvement
Project—that allows strict allocation of water at the
farm level. The benefit accruing to better manage3
ment for an assumed irrigation deficiency of 15 percent
can be translated into a 3.5 percent return on
investment in the improved infrastructure, ignoring
all the administrative costs of such a system.
Conclusions
It is concluded that charges for water services will
not induce significant changes in cropping patterns,
or improvements in system performance, because the
cost of system operation is low in relation to the benefits
of irrigation. Further, until revised accounting
procedures are in place, there is no scope for meaningfully
linking charges to service at the local level.
Thus, reducing the financial burden on government
is the only likely impact of introducing water service
charges.
An analysis of the potential improvements in productivity,
should irrigation water become scarce, from
more equitable water distribution—forcing farmers
to select water-efficient crops—shows that the benefits
are small in relation to the likely financial costs
of infrastructure. Administrative complications and
the associated need for more clearly defined water
rights further reduce potential benefits, suggesting
that maintaining the balance between supply and
demand for water should be a high priority.
5
Alternative Approaches to Cost Sharing for Water Service
to Agriculture in Egypt
C.J. Perry1
Introduction
The International Irrigation Management
Institute (IIMI) was engaged by the U.S.
Agency for International Development
(USAID) in late 1994 to examine USAID’s
past and ongoing support to water resources
development and management in
Egypt. One component was a review of cost
recovery policies in the water sector and an
analysis of the impact of alternative approaches
to water service charges on the
agriculture sector. This paper brings together
IIMI’s work in these areas, drawing
on specific reports prepared during IIMI’s
study program (Cestti 1995; Hutchens 1995;
Lofgren 1995; Lewis and Hillal 1995) and
integrating their findings with other information
to address questions related to costrecovery
policy in Egyptian irrigated agriculture.
Service charges are potentially important
and useful because (1) recovering costs from
beneficiaries of the service relieves the government
of a financial burden and provides
revenues to support operation and maintenance
(O&M), (2) linking payment to the
service provided should encourage efficiency
in the provision of the service, as well
as (3) encourage efficiency in the use of resources
provided.
These last two issues are quite distinct.
First, a direct connection between the cost
incurred in providing irrigation services
and the charges to users should induce
them to exert pressures for increased efficiency
in the delivery agency or to suggest
rearrangements of responsibilities in exchange
for reduced fees. These pressures
work toward efficiency in the provision of
the service. Second, service charges that are
linked to the quantity of service (water)
provided should induce users to economize
in its use by choosing water-efficient crops
or water-saving irrigation technologies.
In assessing alternative approaches to
cost sharing, three separate elements should
be addressed: the financial objective—to recover
from beneficiaries the cost of providing
water-related services—and the two efficiency
objectives—to encourage efficient,
cost-effective provision of the water service
and to encourage efficient use of the resource
provided.
The analysis is ordered as follows:
1. A brief background to cost recovery in
Egypt’s agriculture sector is presented,
and present policies are summarized.
2. The procedures for allocating the costs
of O&M are reviewed, and the results of
the analysis summarized.
3. Various mechanisms for cost recovery for
irrigation services are assessed and analyzed.
4. The scope for utilizing water service
charges as a means of restricting demand
for water is explored.
5. The results are brought together and the
conclusions related to the potential impact
and usefulness of water service
charges are set out.
The options for, and impacts of, introducing
water service charges in Egypt have
been extensively studied (Young 1983;
Bowen and Young 1983, 1986; Abu Zeid
and Seckler 1992a). Consideration has been
given to flat rate charges (imposing an ad-
1The author is grateful
to reviewers of earlier
drafts of this report, particularly
Dr. Wadie
Fahim of USAID, Cairo,
and Drs. Douglas
Merrey and David
Seckler for their constructive
and insightful
comments.
6
ditional tax, similar to the existing land tax,
which is independent of the crop grown or
water consumed), to imposing taxes that are
crop specific and reflect the assumed water
consumption (thus introducing a degree
of linkage between the extent of the service
provided and the water charge), and to a
volumetric charge, directly linking the
quantity of water delivered to the charge.
Some studies have also considered combinations
of charges.
The conclusions have generally been
similar. Most studies argue that as long as
water is sufficient for agricultural needs, a
flat land tax is the simplest and most convenient
way of recovering service charges.
A crop-related charge gives farmers an incentive
to seek more water-efficient cropping
practices. Volumetric charges are most
effective in the case of scarcity, but involve
high administrative costs. Bowen and
Young (1983) also considered the option of
water rationing through fixed seasonal or
annual allocations. They argued that this
would induce an efficient response from
farmers while avoiding the administrative
costs of volumetric measurement and
charging. A question raised at the 1992
Roundtable Conference held in Alexandria
(Abu Zeid and Seckler 1992b) was whether
any useful purpose would be achieved by
the introduction of service charges. Each of
these options is considered in this paper,
based on a more complete picture of what
the actual costs should be, what information
there is on the appropriate allocation
of these costs, the responsiveness of the sector
to alternative charging mechanisms at
the rates implied by full cost recovery, and
the implications for system operation (and
infrastructure) of introducing volumetric
charges.
Cost Recovery Practices
Charging users for water and water services
is a sensitive issue in Egypt, as it is in many
countries, involving political, historical,
social, religious, and economic factors. Beneficiaries
tend to prefer low or zero charges,
and this preference is reflected by their political
representatives. This position may be
reinforced when investments have been
made in the national interest—to ensure
food security, develop new areas, or diversify
the economy—thus implying some
higher goal than the direct productive impact
on those receiving the service. In agriculture
and in a predominantly agrarian
economy, the combination of these factors
is often powerful, and the recovery of service
charges rare.
When direct revenues from a service are
low or zero, the probability that the service
will be underfunded is correspondingly
high. The agency providing the service is
seen as a consumer rather than a provider
of funds to the government, and its claim
on scarce resources is weak.2 The subsidy
required to meet the gap between revenues
and expenses will be under constant pressure,
and with staff costs essentially fixed,
funding shortfalls will tend to be absorbed
by the physical works component of the
maintenance costs so that infrastructure,
and eventually the quality of the service,
deteriorate.
Such “savings” in public funds are often
expensive. The cost of routine and preventative
maintenance is usually much lower
than the cost of major rehabilitation.3 The
lost production (when irrigation facilities
are not working properly) and damage to
land (when drainage facilities are poorly
maintained) may greatly exceed the cost of
proper O&M.
2The Government of
Egypt’s policy incorporates
this factor explicitly
by setting employee
pay rates for revenuegenerating
sectors at
higher levels than for
non-revenue-generating
sectors such as irrigation.
3In the transportation
sector, for example, a
rule of thumb is that
US$1 of delayed maintenance
results in the
need for US$3 in repairs.
7
Cost recovery from agriculture—
background
In Egypt, until the late 1980s, government
revenues from agriculture were derived
from implicit taxes on agricultural production:
Prices of farm products were low,
marketing was controlled, cropping patterns
were set to meet government priorities,
and the government captured substantial
profits from sales of commodities (especially
cotton) in world markets. These
policies, combined with increasing domestic
demands, resulted in a rapid deterioration
in the agricultural trade balance. To
restore farmers’ incentives, agricultural
policy was radically reformed in 1986 (see
Hazell et al. 1994 for a summary of the process
of liberalization). Much closer correspondence
between international and domestic
prices for major crops was allowed,
and controls on cropping patterns were for
the most part eliminated. The effect of this
policy change has been dramatic: Yields and
production of major crops are sharply
higher, and farm incomes have increased
(after allowing for the increased cost of inputs)
by 25 percent in real terms (USAID
1995).
This period of rapid adjustment, during
which government revenues from the agriculture
sector fell sharply, also provided an
opportunity to adjust other prices to more
appropriate levels. To some extent this was
done—subsidies for farm inputs were reduced.
But charges for water services (to
agriculture or to other users) were not introduced.
4
Present practices
The recovery of capital investment costs is
often treated separately from the recovery
of operating costs, and this is the case in
Egypt. This study focused on operational
costs, but a brief summary of policies for
investment cost recovery in the agriculture
sector is provided below. The approach recently
agreed upon with the World Bank
(1994)5 provides the basis for this summary.
Capital costs are recovered for mesqa6-
level investments such as the USAID-supported
Irrigation Improvement Project according
to a formula that requires repayment
of the full capital cost, excluding interest,
over a period of 10 to 20 years. Pump
costs are fully recovered during the initial
5 years. Assuming 4 percent inflation—an
average of the World Bank (1994) estimates—
and 12 percent opportunity cost of
capital, cost recovery amounts to about 30
to 50 percent, depending on the recovery
period, for costs for civil works. No costs
are recovered for improvements above the
mesqa level, which account for about 25
percent of civil works expenditures. Thus,
the subsidy on capital investments is 60 to
75 percent.
A similar approach is followed for drainage
investments, which have been made
over large areas of Egypt during the last 20
years. Recovery from these investments
currently totals about $4.5 million per year,
or about $7.50 for each hectare served.7
In the New Lands, farmers are also responsible
for investment costs for all infrastructure
including, and downstream of, the
booster pumps that draw from the distributary
canals, serving areas about 40 to 100
hectares. Such investments may either be
undertaken independently at the farmers’
expense or by the government with cost
recovery according to the rules set out
above.
Thus, government policy on capital cost
recovery is to recover no charges above the
delivery point (mesqa head in the Old
Lands, booster pump in the New Lands)
and a small proportion of investment costs
below the delivery point.
In contrast, operation and maintenance
costs below the delivery point are the responsibility
of farmers. Failure to fulfill this
obligation results in the work being undertaken
by the Ministry of Public Works and
Water Resources (MPWWR) and charged
4Water is provided free
in bulk to all users by
the Ministry of Public
Works and Water Resources.
Intermediate
services of treating water
for domestic consumption
are charged
for by the agencies concerned.
5Law 218 is the formal
definition of the points
summarized here.
6The mesqa is the tertiary
delivery channel,
which is communally
owned and operated by
the farmers.
7Throughout this report,
values are in U.S.
dollars (US$1= £E 3.4),
and area is in hectares
(1 ha = 2.5 feddans).
8
Water resource investments on the Nile constitute
a multipurpose development, serving
the needs of power, navigation, municipalities,
and industries, as well as farmers.
Some of these demands are competitive (agricultural
and industrial consumption) and
others are complementary (releases for agriculture
can be passed through turbines to
generate power and used by ships for navigation
without detriment to the other consumers).
Two common approaches for allocating
costs in cases such as this are (1) the use of
facilities method, and (2) the separable
costs, remaining benefits method (see
Hutchens 1995 for a detailed comparison).
The use of facilities approach is conceptually
simple: Costs incurred in system operation
are allocated among purposes in
proportion to the extent to which each facility
is utilized for the purpose in question.
Thus for canals that provide water to municipal
and agricultural users, associated
costs would be divided in proportion to the
water delivered to each user. The transparency
of the approach is appealing, but difficulties
arise in relating consumptive to
nonconsumptive uses (navigation and hydropower,
for example). The approach is
also highly dependent on disaggregated
data, which at present are almost completely
absent (Lewis and Hillal 1995). The
attempt to apply the use of facilities method
to the Nile system (Allam 1987) was severely
hampered by the lack of detailed information
on the actual application of
MPWWR funds by purpose and on
nonagricultural demands.
The separable costs, remaining benefits
approach (SCRB), which was applied comprehensively
in a report by the Irrigation
Support Project for Asia and the Near East
(ISPAN 1993), consists of assigning all costs
that serve a single need (i.e., a powerhouse
only serves the power sector, a lock only
serves for navigation) to the benefiting sector.
The remaining “joint” costs are assigned
in proportion to the benefit derived by each
user from that service (for example, costs
associated with a navigable canal are allocated
to both agriculture and transportation
beneficiaries).
The SCRB method, as applied here, ensures
that charges to any user must always
be less than the benefit derived. It explicitly
deals with competing and complementary
demands; and the approach is transparent,
allowing beneficiary groups to understand
the underlying assumptions and
the derivation of the assigned cost.
However, the approach is normally applied
in a planning context, where investments
are yet to take place, and options exist
to change the configuration of the investment
and hence the groups, sectors, and
areas to be benefited.
The application of SCRB to a system that
has been in place for many years introduces
a number of difficulties. First, the approach
allows no cost allocation to any user in excess
of the cost of the alternative minimum
cost solution. On that basis, no costs were
assigned to users whose needs could have
been met from direct withdrawals from the
Nile, so that for example, the city of Cairo
and the industries along the Nile would not
be charged for withdrawals. Although this
may have been true at the time of construction
of the High Aswan Dam, the logic is
far less clear now. The scale of subsequent
development in all sectors, and the size of
Cairo itself, are intrinsically linked to the
to the farmers. Examples of this were encountered
during a field survey of “other
expenses” undertaken during the study
(Khouzam 1995). On average, farmers pay
$12/ha annually for mesqa maintenance in
the Old Lands, either to the cooperative or
as a contribution of labor.
Allocation of Operation and Maintenance Costs
9
construction and effects of the High Aswan
Dam, and current water requirements could
not be reliably met by the uncontrolled
flows of the Nile and might in any case have
been captured by upstream users within
Egypt.
Second, a number of major investments
were treated as “sunk” costs and excluded
from the analysis. Capital costs, for example,
were included in the analysis for
new areas but excluded in the analysis for
old areas. (In practice, this may correctly
reflect the implicit cost recovery that went
on in the recent past, but the transparency
of the analysis is reduced.)
Third, the linkage of cost allocations to
benefits derived makes the result sensitive
to the time at which the analysis is done.
Benefits to agriculture, for example, have
increased rapidly over the last decade as a
result of changes in government policy.
Aside from these difficulties of application
to an already developed system, some
important additional shortcomings of the
SCRB approach were identified during
IIMI’s review.8 The ISPAN study (ISPAN
1993) contains a mixture of O&M and investment
activities on the cost side (including
development of New Lands and a number
of activities that resulted in service improvements
and thus constitute investments).
On the benefit side, as a basis for
projecting the sectoral benefits to agriculture,
the report assumes that benefits of the
Irrigation Improvement Project will be
achieved over a wide area. This increases
the cost allocated to agriculture on the Old
Lands through the mechanism of the higher
derived benefits.
Finally, the ISPAN study embodies some
assumptions about alternative costs that are
difficult to confirm, particularly the cost of
alternative sources of water for domestic
use. Consequently, the following changes
were made to ISPAN’s SCRB model (Cestti
1995):
€ Updated actual costs of O&M were introduced.
€ Benefits were updated.
€ Capital investment components were deleted
from the cost projections.
€ Impacts of capital investments were deleted
from the benefit projections.
€ Cost allocations for main-stem users
were determined on the basis of derived
benefits rather than on the assumed alternative
cost.
€ Revised estimates of alternative costs for
municipal and industrial supplies provided
through canals were included.
€ Revised estimates of municipal and industrial
demands based on a more comprehensive
approach to the determinants
of growth were introduced.
The revised model allowed extensive exploration
of a variety of underlying assumptions
and sensitivity tests to differing
levels of benefit in agriculture, different assumptions
about New Lands development,
and alternative estimates of benefits to other
sectors.
An important conclusion of the reexamination
of the ISPAN model was that agricultural
cost allocation is relatively insensitive
to changes in the underlying assumptions.
The ISPAN estimates of cost allocation
to agriculture in the Old Lands ranged
from 75 to 83 percent of total costs, and with
the changes mentioned above they range
from 70 to 81 percent.
Given the magnitude of the changes introduced
into the analysis, the consistency
of these results may be surprising, but it
should be noted, first, that the cost that is
being allocated is the cost of operating the
system (plus in the case of ISPAN, some limited
investment costs), so that the total
amounts being allocated are similar. Second,
irrigated agriculture is by far the most
significant user of water, accounting for
perhaps 85 to 90 percent of total use. Third,
the reevaluation of other uses increased
their share in the total, but the overall effect
was small because the actual volume
8Hussain et al. July 1994.
Strategic Research Program,
NWRC (National
Water Research Center).
10
assigned to such uses is minor. In fact, the
revised treatment of municipal and industrial
demands led to much higher cost allocations
to these sectors than in the original
analysis by ISPAN (a total of about 11%,
compared with the original 0.2%). However,
this increase was offset by declines in
the allocations to hydropower as a result of
improvements in the non-hydro generation
capacity that reduced the need for special
releases from Aswan for power and reduced
the benefits to tourism based on updated
estimates. Representative results
from the updated model are presented in
table 1.
For the agriculture sector, the stability of
these results was tested for sensitivity to the
major variables: benefits to the agriculture
sector, various scenarios of New Lands development,
rates of growth in industrial
production, and revised assumptions about
population growth rates. The variation in
the costs allocated to agriculture was in all
cases marginal. A 15 percent change in estimated
agricultural benefits, the most sensitive
variable, produced only a 3 percent
change in the computed service charge.
erage O&M costs, estimated at $52/ha annually.
Impact on farm incomes
Annual net farm income estimates based on
the IFPRI model average about $1,200/ha
(that is, income to the farm enterprise, excluding
the cost of family labor). This is
quite consistent with other estimates. The
World Bank (1994) estimated that farm incomes
range from $1,200 to $1,500. Individual
crop returns (Hussain et al. 1994)9
range from $375/ha (flax) to $1,700/ha (cotton),
with most crops in the $600 to $1,000
However, within the agriculture sector,
results are particularly sensitive to pumping
costs. Pump lifts for agriculture and
municipal and industrial uses are highest
in Upper Egypt, and specifically allocating
this cost by region results in per hectare
agricultural service costs of $95 in Upper
Egypt, $60 in Middle Egypt, and $45 in the
delta.
TABLE 1.
Representive results from the updated ISPAN
model.
Sector Cost (US$)
Municipal and Industrial (per ‘000 m3)
Canal delivery 3.63
Direct intake or groundwater 0.48
Industrial direct intake 0.69
Old Lands agriculture
Land basis (per ha/year) 52
Volume basis (per ‘000 m3) 3.44
New Lands agriculture
Land basis (per ha/year) 53
Volume basis (per ‘000 m3) 3.34
Note: Results are based on the SCRB approach, following
ISPAN methodology, updated as indicated in the text. The
cost of O&M was based on MPWWR’s 1994 budget, which is
overestimated, in that staff costs are not disaggregated between
O&M and other activities, and underestimated to the
extent that budgetary requests are less than required for adequate
O&M.
Impact of Water Service Charges on Agriculture
An analysis was undertaken using a model
of Egypt’s agriculture sector developed by
the International Food Policy Research Institute
(IFPRI), which is a modified, extended,
and more complete version of the
agro-economic model developed as part of
the Water Master Plan (UNDP 1984). The
analysis was designed to explore (1) the
actual relationship between farm incomes
and service charges, (2) the impact of alternative
charging methods on farm income
and crop production, and (3) the impact of
volumetric charges on demand for water.
In each case, the charges were set so that
total revenue remained equal to actual av- 9Adjusted for comparability
to exclude family
labor and land rent.
11
range. With a cropping intensity of about
180 percent, net farm incomes would thus
range from about $950/ha to $2,000/ha annually.
Assuming a net farm income of $1,250/
ha as representative, full cost recovery of
water services for irrigation would reduce
farm incomes by about 4.5 percent on average.
A brief field survey (Khouzam 1995)
uncovered several additional costs borne by
farmers, most of which are minor except for
land rent. Farm rents for land average $450/
ha annually. This would reduce annual farm
income to about $800/ha, and increase the
proportion of water service charge to about
6.5 percent of net income for farmers who
rent their land.
Impact on production of
alternative charging systems
To determine the impact on production of
alternative charging systems, the following
options were analyzed:
€ a fixed rate per hectare, irrespective of
crop or water use
€ crop-specific rates, charging higher rates
for more water-intensive crops
€ volumetric charges on the basis of actual
water use
The first option is a simple undifferentiated
annual tax of $52/ha, and the result
was a fall in farm income of 4.5 percent. This
solution is self-evident: a flat land tax has
no impact on the choice of crops or technology.
The second option simulates a crop-water
charge per hectare, proportional to the
calculated average water consumption.
Since the IFPRI model allows a wide range
of crop choices in terms of planting dates
and in “stressing” the crop by underirrigating,
this option gives the farmer considerable
incentive to fine-tune his cropping.
The result was greater efficiency from both
the farmer’s perspective (farm income falling
only 2.4%), as well as the national perspective
(water demand falling by 3.5%),
while returns to water increased by 2.7 percent.
The third option imposes a volumetric
charge and simulates the effect of measuring
and charging for the quantity of water
delivered. For the present situation, where
water is not a severe constraint to crop
choice and the service charges represent a
small proportion of farm income, the results
are virtually identical to those obtained
through the second option described above.
Impact of Water Shortage
The role of management
Water is at present somewhat scarce, with
a positive but small marginal value product
of $0.02/m3, compared with an average
productivity of $0.08/m3 (Lofgren 1995). In
future, significant reductions in supplies to
agriculture can be anticipated as a result of
transfers to competing demands, further
development of new lands, and full utilization
of agreed-upon upstream riparian
rights.
For purposes of analysis, a 15 percent
reduction in supply was hypothesized. The
IFPRI model was significantly revised to
simulate the following options:
€ present management, which would result
in concentration of shortages at tail
ends or otherwise disadvantaged locations
€ efficient management, which would
share shortages equitably among all
farmers
The latter modification was important
because the previous formulation presumes
efficient management and uniform distri12
bution of shortages. Under these circumstances,
every farmer seeks an efficient response
to shortage by changing cropping
patterns to make the best use of the reduced
supply. If shortages are not evenly distributed,
farmers who have better access to
water continue to seek maximum returns
to land, and farmers who have worse access
receive residual supplies and experience
a more severe shortage, often exacerbated
by unreliability. To formulate this issue
within the model, an arbitrary decision
had to be taken about the division of the
area into those with “better” and “worse”
access. Clearly, the most extreme case
would occur where the tail-end mean is
roughly equal to the shortage (that is, for a
15% shortage, the disadvantaged area is
15% of the command). Under these circumstances,
deliveries to the tails would be zero
because the full available supply is consumed
in the advantaged areas.10 As a first
approximation, the advantaged and disadvantaged
areas were assumed to be equal.
The results show that from the national
perspective, a water shortage of 15 percent,
if inefficiently managed (concentrated
among tail-end farmers), would result in a
7.1 percent fall in agricultural production,
but an efficiently managed shortage (evenly
distributed among all farmers) would limit
the fall in agricultural production to 4 percent.
It is interesting to note that because
the overall demand for agricultural commodities
is inelastic, reductions in supply
result in more than proportional increases
in price, so that farmers as a group receive
increased incomes.
The role of water pricing
Finally, the usefulness of volumetric water
pricing as a mechanism to promote more
efficient water use was explored. In the previous
section, the impact of a reduction in
supplies of 15 percent was assessed in relation
to two levels of management, each of
which was basically a rationing procedure.
Here, the approach is to use market forces
as a means of reducing demand. The analysis
shows that the volumetric charge required
to induce a 15 percent fall in demand
would equal $300/ha, or about 25 percent
of the net farm income.
Conclusions and Implications
The preceding sections have identified a
number of conclusions:
€ The average annual cost of providing
water services to agriculture is about
$52/ha, which is about 4.5 percent of net
farm income.
€ The above cost is little affected by likely
variations in underlying assumptions
governing the allocation of costs among
sectors.
€ The present system of accounting does
not allow accurate differentiation of costs
by purpose and location.
€ Under present conditions of supply,
volumetric charges for water are only
marginally more successful in encouraging
efficient water use than crop-based
charges, which in turn are somewhat
better than a flat land tax.
€ Volumetric charges are an unrealistic
means of encouraging significant reductions
in demand, because very high
charges are required to have a significant
impact.
Earlier in this report, three distinct objectives
were identified as underlying the
purpose of service charges: the financial
objective—to recover from beneficiaries the
cost of providing water-related services—
and the two efficiency objectives—to encourage
efficient use of the resource provided
and to provide the water service at a reasonable
cost.
10These relationships
are approximate because
the formulation of
the model is complex,
allowing extensive internal
optimization of
response in terms of labor
assignment and endogenous
prices.
13
The results of the analysis now allow
some further consideration of these objectives.
The first is straightforward. Any of
the service-charge schemes assessed would
meet the criterion of recovering the full financial
cost of the service.
The two efficiency objectives have been
partially addressed. The analysis indicates
that the level of service charges required to
meet the financial objective is so low (6%
of farm costs and 4.5% of farm income) that
their impact on cropping decisions by farmers
will be minimal for any system of water
charges.
The results of the study using the modified
IFPRI model clearly show that even
volumetric charges are unlikely to produce
significant efficiency gains within the politically
feasible range of charges. Furthermore,
it is interesting to evaluate the benefits
of volumetric supply in relation to possible
costs. The present delivery system for
the most part provides farmers with the
water they need—unmeasured and undifferentiated—
at the farm level. Any form of
rationing or volumetric delivery will require
quite a different infrastructure to allow
the necessary measurement of individual
supplies and the differentiation of
deliveries between farmers.11
At present levels of water availability, the
impact of volumetric delivery has been
shown to be negligible. For a shortage of 15
percent, efficient management leads to a fall
of 4 percent in sectoral production, while
the present management would result in a
fall of 7.1 percent—a benefit to the combination
of service charges and management
of 3.1 percent. The cost effectiveness of that
benefit to efficient management can be interpreted
as follows:
€ Based on present agricultural production
at $1,200/ha annually, the productive
benefit would be $1,200 × 3.1 percent, or
$37/ha.
€ Achievement of these benefits would require
the introduction of a system of water
delivery capable of providing measured
quantities of water to each farm.
The infrastructure of the Irrigation Improvement
Project would meet this need,
and it is currently estimated to cost
$1,150/ha for civil works.
€ Ignoring all other effects, the return on
this investment is 3.5 percent
($37/1,150), which would be further reduced
by the substantial organizational
costs of billing, measuring, and collecting
differentiated service charges.
This conclusion applies with equal force
to suggestions of rationing water allocations
(Bowen and Young 1983) and tradable water
rights (Lofgren 1995), because the
infrastructural and management implications
are similar in each case. This is not to
say that improved management may not
have numerous other benefits,12 but rather
to indicate that the benefits resulting from
improved allocational efficiency are small
in relation to the costs.
The question of how the introduction of
charges may influence efficiency in providing
the service has to be examined. A benefit
of service charges is to make both the
service provider and the service receiver
conscious of the costs incurred. To achieve
this linkage, service should be disaggregated
to units where the link is transparent.
For example, in the United States many
projects are provided with water by federal
agencies at agreed-upon (and often subsidized)
rates. Within the project the farmers
bear the full cost of O&M, and also set their
own charges. At this lower level, the link
between cost and service is direct and transparent;
decisions on the allocation of responsibilities
and levels of service are influenced
by impacts on cost.
In Egypt, this might correspond to supplying
water at a common rate to all directorates,
and setting charges within the directorate
to meet costs incurred at that level.
As long as a central authority has responsibility
for the delivering of water from
11This logic applies
equally whether the
system is fully operated
by the government or
by some combination of
government agency and
farmer group—whoever
allocates water at
the farm level will need
the associated infrastructure.
12With the present arrangement,
significant
supply reductions would
likely result in severe
water shortages and,
due to local concentration
or shortages, salinization
in tail-end
reaches.
14
Aswan to the mesqa as well as associated
responsibilities for water quality, maintenance
of navigation flows, and so on, it will
be difficult to establish a relationship that
the beneficiaries can identify with and, as a
group, exert pressure on to change the service
and the associated cost of providing
the service.
Three essential changes would underpin
such a situation: (1) The introduction of accounting
procedures to allow clear identification
of costs incurred, (2) the definition
of a service point above which the government
agency provides water services at an
agreed-upon cost and below which the beneficiaries
pay service-related charges, and
(3) the definition of the service to be provided
at the service point (in terms of quantity
of water, timing, rights in case of surplus
or deficit, and so forth). Providing a
defined service will involve infrastructural
changes similar to those already discussed.
Some initial comments can be offered on
future operational decisions, which are beyond
the scope of this paper. The definition
and introduction of defined services will be
time consuming and especially difficult
under Egyptian circumstances. The system
currently operates as a demand system with
enough water to meet the vast majority of
needs. If this is to continue (that is, if water
supply to existing agriculture is not going
to be significantly cut by direct withdrawals
for New Lands, by increasing demands
for water-intensive crops, and by effective
reductions in available water through high
rates of pollution), it is doubtful whether
formal water allocation would be required—
the system can simply continue to
be run as a demand system. However, if
serious shortages are anticipated, far clearer
legal definitions of water rights and water
service will be required.
Thus, the driving logic for establishing
service definitions will be future water demands
and the consequent water balance
rather than cost recovery considerations.
The present cost of providing the water service
is relatively low, and present evidence
suggests that efficiency gains in the cost of
the service would not justify the problems
that will arise in the definition (and physical
delivery) of water allocations and water
rights.
Literature Cited
Abu Zeid, M., and D. Seckler, eds. 1992a. Roundtable on Egyptian water policy: Proceedings of a seminar on Egyptian
water policy. Cairo: Water Research Center, Ministry of Public Works and Water Resources.
Abu Zeid, M., and D. Seckler. 1992b. The economics of water supply and demand. In Roundtable on Egyptian
water policy: Proceedings of a seminar on Egyptian water policy, ed. M. Abu Zeid and D. Seckler. Cairo: Water
Research Center, Ministry of Public Works and Water Resources.
Allam, Mohamed Nasr. 1987. Allocation model for irrigation water cost: A case study of the Nile Valley in
Egypt. Water Resources Bulletin 23 (2):145-151.
Bowen, Richard L., and Robert Young. 1983. Allocative efficiency and equity of alternative methods of charging for
irrigation water: A case study in Egypt. Egypt Water Use Project Technical Report No. 37. Fort Collins, Colorado,
USA: Colorado State University.
Bowen, Richard L., and Robert Young. 1986. Appraising alternatives for allocating and cost recovery for irrigation
water in Egypt. Agricultural Economics 1:35-52.
Cestti, Rita. 1995. Nonagricultural cost recovery. Cairo: International Irrigation Management Institute.
Hazell, Peter, Nicostrato Perez, Gamal Siam, and Ibrahim Soliman. 1994. Effects of deregulating the agricultural
production sector on food availability and resource use in Egypt. Washington, D.C.: International Food Policy
Research Institute.
Hussain, Zakir, David Seckler, Mona El-Kady, and Farouk Abdel-Aal. 1994. Crop substitution for more efficient
water use in Egypt. Cairo: Strategic Research Program, National Water Research Center.
Hutchens, Adrian O. 1995. Agricultural cost recovery. Cairo: International Irrigation Management Institute.
15
ISPAN (Irrigation Support Project for Asia and the Near East). 1993. Irrigation water cost recovery in Egypt:
Determination of irrigation water costs. Arlington, Virginia, USA.
Khouzam, Raouf F. 1995. Unaccounted-for farm expenses. Photocopy. Cairo.
Lewis, Charles, and Mohammed Mahmoud Hillal. 1995. Financial management systems in the MPWWR—An
analysis and recommendations for meeting current and future needs. Cairo: International Irrigation Management
Institute.
Lofgren, Hans. 1995. Water policy in Egypt—An analysis with IFPRI’s agricultural sector model. Cairo: International
Irrigation Management Institute.
UNDP (United Nations Development Programme). 1984. Water Master Plan. Cairo.
USAID (U.S. Agency for International Development). 1995. Overview of the economic impact of agricultural
policy changes in Egypt, 1981–1995. Photocopy. Cairo.
Young, Robert A. 1983. Notes on the allocation, pricing and valuation of irrigation water. Paper presented at
the seminar, Economics of Water Uses in Egypt, 6 December 1983, in Cairo, Egypt.
World Bank. 1994. Irrigation Improvement Project: Staff appraisal report. Photocopy. December 1995, Washington,
D.C.
16
Research Reports
1. The New Era of Water Resources Management: From “Dry” to “Wet” Water Savings. David
Seckler, 1996.
2. Altemative Approaches to Cost Sharing for Water Service to Agriculture in Egypt. C.J. Perry,
1996.
Forthcoming
3. Integrated Water Resource Systems: Theory and Policy Implications. Andrew Keller, Jack
Keller, and David Seckler, 1996.
4. Results of Irrigation Management Turnover in Two Irrigation Districts in Colombia. Douglas
L. Vermillion and Carlos Garces-Restrepo.
INTERNATIONAL IRRIGATION MANAGEMENT INSTITUTE
P O Box 2075 Colombo, Sri Lanka
Tel (94-1)867404 Fax (94-1) 866854 E-mail IIMI@cgnet.com
Internet Home Page http:/ /www.cgiar.org

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