Report No. 28785-BR Report No. 28785- BR Brazil Irrigated Agriculture in the Brazilian Semi-Arid Public Disclosure Authorized Disclosure Public Region: Social Impacts and Externalities (In Two Volumes) Volume I: Main Report April 26, 2004

Brazil Country Management Unit Economic Sector Work (ESW) Latin America and the Caribbean Region

rzlIrrigated Agriculture in the Brazilian Semi-Arid Region Brazil Public Disclosure Authorized Disclosure Public Public Disclosure Authorized Disclosure Public

Public Disclosure Authorized Disclosure Public Document of the World Bank CURRENCY Currency Unit Real (R$) and US D6lar (US$)

December 1994 US$ 1 = R$O.85 December 1996 US$ 1 = R$ 1.04 December 1998 US$ 1 = R$l.21 December 2000 US$ 1 = R$ 1.95 December 2003 US$ 1 = R$2.90

WEIGHTS AND MEASURES The metric System is used throughout the Report.

FISCAL YEAR January 1 to December 31

ACRONYMS

AW Annual Work Plan BA State of Bahia BN Northeast Bank BSA Brazilian Semi- Arid Region CE State of Ceara CHESF Siio Francisco Valley Hydroelectric Company CODEVASF Siio Francisco Valley Development Company COFINS Social Security Contributions CPMF Tax on Financial Transactions CVSF Siio Francisco Valley Commission DNOCS National Department for Works against Droughts DSG Geographic Service Division EFU Entrepreneurial Farm Unit EMBRAPA Brazilian Agricultural Research Company ERR Economic Rate of Return ESW Economic Study Work FA0 United Nations Food and Agriculture Organization FARMOD Farm Production Modeling developed by the IBRD/FAO GDP Gross Domestic Product GEIDA Executive Group for Irrigation and Agricultural Development GOB Government of Brazil HDI Human Development Index IBGE Brazilian Institute for Geography and Statistics ICMS State Value Added Tax on Goods and Services ID Irrigation District IDP Integrated Development Pole EM Impact Evaluation Method IFOCS Federal Inspectorate for Works against Droughts

2 IOCS Inspectorate for Works against Droughts IPEA Institute for Applied Economic Research IPI Industrialized Products Tax ITM Indifference Tradeoff Method LAC Latin American Countries M&E Monitoring and Evaluation MCDM Multi-Criterion Decision Analysis Method MG State of Minas Gerais MI Ministry ofNational Integration MwI Municipality with Irrigation MwoI Municipality without Irrigation NDP National Development Plan NPV Net Present Value O&M Operation and Management PAV Photosynthetically Active Vegetation PE State of Pernambuco PHA Post-Harvest Activities PIP Pluriannual Irrigation Program PIS Social Integration Program PLANIRD National Irrigation and Drainage Plan POLONORDESTE Northeast Development Plan PROFIR Irrigation Financing Program PROINE Program for Irrigation in the Northeast PROVARZEAS Lowland Development Program RN State of Rio Grande do Norte SEAIN Secretariat for International Affairs I Ministry of Planning SFU Small Family Unit SRHIMMA Water Resource Secretariat of the Ministry of the Environment SUDENE Superintendency for the Development of the Northeast (liquidated) SUVALE Superintendency for the SZio Francisco Valley TARE Technical Assistance and Rural Extension UNDP United Nations Development Program WAM Weighted Average Method WB World Bank WA Water User Associations

Vice President: David de Ferrantj Country Director: Vinod Thomas Sector Director: Jonh Redwood I11 Rural Management Team: Mark Cackler Environme ntal Management Team: Abel Mejia Luiz Gabriel Azevedo Task Team Leader: JosC Simas

3

The World Bank Regional Vice-Presidency for Latin America and the Caribbean Brazil Country Management Unit Water Resources Group

Vice President: David De Ferranti Brazil Country Director: Vinod Thomas Sector Director ESSD: John Redwood Rural Management Team: Mark Cackler Env~r~nmen~alManagement Team: Abel Mejia Luiz Gabriel Azevedo

Task Team Leader: Jose Simas Team Member: Albert0 Valdhs

Other members, Consultants and Reviewers International: Juan B. Morelli Regina Martinez Jaime Artigas Gustavo Diaz

Main National Consultants: Elmar Wagner Ivo Marzall Regis Bonelli Jose Luiz de Carvalho Guilherme Soria Bastos Filho Francisco J.Lobato

Other National Collaborators: Betina Ferraz Osmar Abilio de Carvalho Junior Renato Fontes Guimarles Juliana Frota Matos Eldan Veloso

External Reviewers: Juan Antonio Zapata Ernest0 Fontaine Gustavo Diaz Selim Mohor Larry Simpson Fernando Gonzhlez Villarreal

Internal Reviewers: AntBnio Rocha Magalhges Malcom Bale Salah Dargouth Abel Mejia Robert Schneider Karin Erika Kemper Ariel Dinar

Internal Collaborators: Janice M. Molina Lilian Pena Pereira

Translations: Portuguese and Spanish into English: Elizabeth Moor Wagner Henry C. Curley Judy Wolf

4 The present sector study was requested by the Management Unit of the World Bank - Brazil, with the aim of identifying impacts and social externalities resulting from investments and actions in irrigated agriculture in the Brazilian Semi-Arid Region, with an emphasis on the effects of improved social conditions and poverty reduction. At the same time, the study looks at the main related issues, identifying positive results, failures and lessons learned, while suggesting improvements for future action. The study was prepared by a team led by Jose Simas. Sector professionals and specialists in Brazil and representatives from federal and state institutions, farmer associations and irrigation users from five states also took part by means of an initial seminar, interviews, consultations and intermediate seminars. A partial list of these specialists is presented in Attachments I and 11. However, the conclusions and recommendations are the exclusive responsibility of the study leader and each national and international consultant in terms of their respective contributions.

The views and findings expressed in this report are exclusively those ofthe World Bank.

5 IRRIGATED AGRICULTURE IN THE BRAZILIAN SEMI-AFUD REGION: SOCIAL IMPACTS AND EXTERNALITIES

TABLE OF CONTENTS: VOLUME I

Main Report

Executive Summary 8 1. Introduction and Objectives of the Study ...... 20 2 .Background .Irrigation in Brazil and in the Semi-Arid Region...... 23 3 .The Basic Methodology - Concepts and Data ...... 27 3.1. A Conceptual Note on the Approach to the Social Cost Benefit Analysis Used 28 3.2. Deciding on the Evaluation Rule: Present Value Criteria Versus Internal Rate of Return ...... 33 3.3. Identifying and Measuring the Social Costs ofIrrigation Investments ...... 34 3.4. Geoprocessing, Videography and Radiometry ...... 35 3 .5.Comparison Between Municipalities with and without Irrigation Projects: A Complementary Approach to Examine Externalities ...... 36 3.6. Possible Follow-up Work and Dissemination ...... 37 4 . Economic and Financial Analyses and Evaluation...... 38 4.1. Economic Analysis and Evaluation ...... 39 4.2. Financial Analyses and Evaluation: Private Rates of Return ...... 43 4.3. Fiscal Analysis ...... 44 4.4. Employment Generation ...... 45 4.5. Final Remarks on the Ejc Post Economic and Financial Analysis ...... 45 5 . A Comparison Between Municipalities With and Without Irrigation Projects: A Complementary Approach to Examine Externalities ...... 49 5.1. Introduction and Methodology ...... 49 5.2. Main Conclusions ...... 50 5.3. Population Growth ...... 50 5.4. Urbanization ...... 51 5.5. Poverty Reduction ...... 53 5.6. Economic Impact ...... 55 5.7. Social Indicators ...... 56 5.8. Retention ofMigrants ...... 57 5.9. Employment ...... 58 6. Main Conclusions and Lessons Learned...... 60 6.1. Background...... 60 6.2. Main Factors Affecting Project Performance ...... 60 6.3. Summary of Conclusions ...... 68 6.4. Lessons Learned ...... 69 7 .Lessons Learned and Multi-Criteria Analysis: Strategic and Policy Options ...... 71 7.1. Multi-criteria Evaluation ...... 71 7.2. Deficiencies and Problems to be Solved ...... 76 7.3. Areas for Government Intervention ...... 76 7.4. Recommendations for a Sector Strategy ...... 79 7.5. Possible Strategic Options ...... 82

6 7.6. Open Issues ...... 85 7.7. Common Problems and Constraints ...... 85 7.8. Main Challenges ...... 85 7.9. Possible Agenda for the Future ...... 86 7.10. Recommended Dissemination ...... 88 8. Bibliography ...... 91 9 .List of Tables ...... 95 10. List of Figures ...... 96 11. List of Boxes ...... 97 Annexes ...I . Brief description ofthe samples (1 1 schemes ofpublic irrigation and private imgabon...... 98 I1. Jaiba Economic Evaluation: A case study ...... 126 I11. Collaborators from partner institutions ...... 138 IV. Contacts and consultations ...... 139 V . SEAINAD’ Seminar participants ...... 147 VI. MI Seminar participants ...... 148 VI1. Table ofcontents: Volume 11 ...... 149 VI11 . Table of contents: Volume I11 ...... 151

7 EXECUTIVE SUMMARY

Introduction and summary conclusions

1. This ESW was carried out by the World Bank, in cooperation with the Ministry for National Integration (MIN), Banco do Nordeste do Brasil (BN), CODEVASF, DNOCS and the Interamerican Development Bank (IDB).

2. The key motivation for this study was to assess the impact ofirrigation activities in the Brazilian SemI- Arid Region @SA)’ and to analyze to what extent irrigated agriculture in this region has contributed to the reduction ofpoverty levels and regional inequalities, income growth and distribution, and the creation of quality jobs, with the aim of contributing to the establishment of guidelines for a regional development strategy. Eleven irrigation schemes were selected for this ESW, embracing five development poles in five states, representing 20% of all public projects, about 45% oftheir irrigated area and approximately 50% of public investments.

3. The study indicates that, overall, public investment in irrigated agriculture could be an effective strategy for boosting regional development, increasing exports and alleviating poverty in the BSA. The necessary dynamics for this are mainly: an abundant and reliable water supply, well-designed projects, competent project management, strong political support, timely financing and implementation, titled land parcels, practical urban support, adequate transport infrastructure, industrious farmers, participation of entrepreneurial producers, effective technological support and skilled marketing. The analysis also showed that: (i)It takes about 10 to 15 years from start-up for public schemes to show positive results in a well- planned project and (ii)The engineering component is the easiest part ofa project: the most difficult part is ensuring the farmers’ successful participation in a sound, sustainable production and marketing scheme.

4. Projects that had most ofthese factors were extremely successful, such as those ofthe Petrolina and Juazeiro pole, despite initial difficulties due to the country’s previous lack of experience in irrigated agriculture. Conversely, projects that lacked these factors failed to achieve their goals satisfactorily. The extreme examples of economical failures were the Jaiba and Morada Nova projects, in Northern Minas Gerais and Cearh states, respectively. Jaiba was an oversized scheme, located in a remote, isolated region, and lacked the necessary urban support. Huge up-front infrastructure investments compounded by a delayed settlement and only partial exploitation of the area, resulting in a reduced output, produced a negative Net Present Value (NPV). Morada Nova suffered from a flawed project concept. Based on high water-demanding paddy rice monoculture in a context of water scarcity, the scheme experienced constant water shortages and had to eventually be suspended altogether, due to competitive water demands from the urban sector. Moreover, the producers, who consisted exclusively ofpoorly trained traditional smallholder farmers, were unable to convert the original scheme into a more competitive, sustainable production system.

5. Some key recommendations that are being proposed to the Government based on the lessons learned are: (i)Include the promotion ofirrigated agriculture as a key strategy for regional development and poverty alleviation in the BSA; (ii)Complete and upgrade the ongoing and initiated schemes before embarking on new public irrigation projects; (iii)Invite the private sector to participate in the development ofirrigation in the BSA; and (iv) Adjust and upgrade the legaginstitutional framework. It is also recommended that the expansion ofboth public and private schemes should be based on sound market

According to SUDENE, the Semi-Arid region includes the north of Minas Gerais State, covers an area of 1.04 millionknl, and has a population of 24.6 million inhabitants.

8 studies, to avoid overproduction. A benchmarking plan should be prepared based on the findings ofthis ESW, aimed at orienting the government’s actions towards the sustainable expansion ofirrigated agriculture in the BSA, together with a timetable for its implementation.

Irrigation in the Brazilian Semi-Arid Region

6. Contrary to other Latin American countries with vast arid regions, such as Mexico, Peru, Chile and Argentina, all ofwhich have approximately a century of experience in irrigation, public investment in irrigated agriculture in the Brazilian Semi-Arid Region is very recent. The first projects date back to the early 1970s.

7. It is estimated that Brazil currently has 3.5 million irrigated hectares, just over 500,000 of which are located in the BSA (140,000 in settled public areas and 360,000 on private lands). As these are recent investments, most ofthem made within the last 15 years, the settlements are still being consolidated or implemented. Consequently, their results are not yet concrete and vary depending on their implementation period, development ofproductive chains, adoption ofnew technologies, presence ofmore competent farmers, and their attraction for private stakeholders and entrepreneurs.

8. More than US$2 billion of public bdswere invested in irrigation works over the past three decades, serving 200,000 ha in the Brazilian Semi-Arid Region, 140,000 ha of which are under production. This resulted in a cumulative public investment of about US$lO,OOO per hectare. With additional funds invested by the private sector in public schemes and private developments, the annual value ofproduction in the BSA irrigated agriculture sector reached around US$2 billion in 2002. This figure included US$170 million of fiesh hitexports. Most ofthe additional 350 to 400,000 ha ofprivately developed irrigated areas were motivated by the new cropping alternatives, technologies and productive processes validated in the pioneering public schemes. Another 70,000 ha ofadditional public irrigation schemes have been initiated, although most of them are paralyzed due to funding constraints.

Scope of the study

9. The study was based on the analysis of five sample poles in five states. This includes 11 public irrigation schemes and adjacent private irrigation areas, comprising a total irrigated area of 85,300 ha, 63,800 ha of which were declared by the farmers to be under production in 2002, plus 21,500 ha to be incorporated under the ongoing bidding processes2. The selected pole s/schemes were: Northern Minas (MG): Gorutuba and Jaiba projects; Juazeiro (BA): Mandacaru, Tourgo, Maniqoba and Curaqa projects; Petrolina (PE): Bebedouro and Nilo Coelho projects; Lower Jaguaribe (CE): Morada Nova and Jaguaribe-Apodi projects; and AsswMossor6 (RN): Lower Assu project.

10. The study consisted ofan economic evaluation, a socio-economic impact analysis, and an institutionak legal assessment.

Results of the economic analysis

1 1. The Economic Rates ofReturn (ERRS) and Net Present Values (NPVs) of the 11 irrigation settlement schemes showed significant differences among them. This is also valid for public investments, which were between US$4,700 and US$15,580 per hectare, averaging US$10,531 per hectare.

Areas under bidding include 16,000 additional hectares in Jaiba, 3,000 ha in Lower Assu and 2,500 ha in the Jaguaribe-Apodi schemes.

9 12. As shown in Table 4.1, based on the estimated social discount rates3 (ranging between 19.1% and 16.8%), only four ofthe 11 schemes of the sample were highly successful projects, showing a positive ex post return bositive present value). They were: Bebedouro in Petrolina, and Tourgo, Curaqa, and Mandacaru, in Juazeiro. Two ofthe projects with positive NPVs - Bebedouro (PE) and Mandacaru (BA) - were pilot projects started under an agreement with FAO. 13. As an ensemble, the four Petrolina-Juazeiro schemes with a positive NPV showed an aggregate NPV ofUS$57 million and an average ERR of 22.8%. The ERR was 18.9% and the NPV US$49 million4 at pole level (considering all six public irrigation settlements of Petrolina-Juazeiro together, comprising 66% ofthe total study area). In contrast, the other three poles/groups ofprojects analyzed, including the Lower Jaguaribe, Lower Assu and Northern Minas Gerais regions, representing 34% ofthe area evaluated, showed negative NPVs. 14. The Jaiba Project is an example ofa poorly planned and executed project. Designed to incorporate 100,000 ha for irrigation (including 67,000 ha as public scheme areas) over the past 28 years, US$268 million’ were invested in works that remain under-utilized6. The implementation process was extremely slow. Fifteen years passed between construction start-up and the settlement ofthe first smallholder farmers. An additional 13 years have elapsed since then, but still only about 8,500 ha have become operational (10% ofthe potential perimeter). Meanwhile, the over-designed infrastructure remains under- utilized and is having a negative impact on the overall cost ofO&M, affecting the project’s financial and economic viability. Even assuming an optimistic scenario in which the additional Jaiba Iarea of 16,000 ha would be completely under production by 2008, the result would still be highly unsatisfactory, with an ERR of 7.7% and a negative NPV ofUS$92 million. 15. The pioneer Morada Nova project (CE), which was designed in the 1960s with a clearly social objective (3-4 ha family farms), suffered from a paternalistic approach. Participants lacked adequate training and technical assistance. Although only 30% ofthe area was suitable for rice, it was reoriented from start-up towards flooded rice production. When rice prices collapsed in the mid-80s, users were unable to convert their production systems into more profitable activities, even after 30 years of public assistance and subsidized utilities. Even though it was impossible to foresee this price decline during the planning phase, a more diversified production matrix would have contributed to a fast reconversion. The ’ ERR ofthis scheme was estimated at 11.1%, and the NPV was negative by US$7.7 million. If the benefits from private irrigation in the Lower Jaguaribe area are considered -where private irrigation developed using groundwater made available by the Banabuiu DamoradaNova scheme - the ERR is 15%. 16. The Jaguaribe-Apodi and Lower Assu projects had an extremely long construction period due to the lack oftimely and adequate funding for both completing the infrastructure and settling the farmers. In 2002, only about half ofthe 11,500 ha imgable area ofthese two schemes had been occupied. Even if fkll utilization is achieved before 2008, which is realistically expected now that all the infrastructure is in place, their ERRSwould still only increase to about 8.5% and 12% respectively. Water is very scarce and has high opportunity costs in all three schemes ofthe region (Morada Nova, Jaguaribe-Apodi and Lower

3The social discount rates applied in this study (varying from 19.1 to 16.8%) were calculated by Jod Luis de Cawalho, Guilherme Sbria Bastos, Jaime Artigas and Albert0 Valdks in December 2002. (For more details see Annex E of Volume 111 ofthis report.) These results were calculated based on an estimated production of 61,500 ha, out of the 91,000 ha implemented, according to official data. However, satellite image data show that in 2001, 85,000 ha were in production in the sample’s 11 irrigation schemes, an area 39% greater than that declared. This number was confiied by CODEVASF. The analyses made with smaller areas tended to be on the conservative side. Calculations can be readjusted in the near future. In addition to the US268 million investments in head works and in finishing Jaiba’s first phase, the State of Minas Gerais invested more than US$120 million in the 2”d phase (20,000 ha) with the support of a Japanese loan. The second phase is nearly ready for new settlements. The Jaiba Imgation Project (Loan 3013BR), designed to make better use of the existing infrastructure, helped the completion of Phase I between 1989 and 2000. Given that the infrastructure investments considered by this project were largely owfarm investments, prior off-farm general infrastructureinvestments were considered sunk costs. The outcome ofthe project in terms of its contribution to the GOB’S goals to increase production in drought-prone areas, and institutional strengthening and beneficiaries’ participation, was rated satisfactory. Implementation Completion Report (CPL3013). Report No. 22435. June 29,2001.

10 Assu), but charges do not reflect the cost ofits supply. Consequently, farmers tend to use irrigation water on traditional crops with low water-use efficiency rates and negative social costs. 17. Overall, the economic evaluation results for the Petrolina-Juazeiro projects are largely conservative. The returns in most of the schemes analyzed have been clearly underestimated, as the official estimates of irrigated areas on which the analysis was based were a total of only about 75% of the actual area under irrigation identified by satellite images. Moreover, benefits from highly productive neighboring private areas, which profited from the technology generated by the public schemes, were not accounted for, while most of the investment costs in research and extension to validate these technologies were included in the analysis.

18. In addition, the substantial drop in the domestic and border prices for traditional commodities over the past two decades significantly reduced the returns to these investments. It was difficult to anticipate these downward trends when the projects were designed. These factors contributed to the farmers shifting to higher value crops. With the dissemination ofthe knowledge and skills now available, only marginal investments are needed to complete the unfinished schemes and achieve full utilization ofthe irrigable areas in the Petrolina-Juazeiro pole in a very short time. There are strong indications that the Jaguaribe- Apodi and Lower Assu poles could also be quickly iettled and become fully operational by 2008. However, it might be overly optimistic to assume that the Jaiba project could be completed in the short run, due to its size and location, unless complementary and relatively low-cost public investments are made to provide necessary “public goods” and speed up the project maturation process. These investments would significantly improve the environment for attracting private investors from other parts ofthe country, and reducing the already excessively long implementation period.

Results of thefinancial evaluation (Private rates of return)

19. Small farms (1 1 SFU models) and farming businesses (four EFU and eight post-harvest activities) in all irrigation schemes showed positive financial results, which are in many cases even highly encouraging, as shown in Table 4.2. The annual net income in 2002, after all relevant costs are considered (excluding family labor), ranged from US$3,200 to US$20,600 with an average of US$16,000 for small farms in Petrolina and Juazeiro, and US$4,800 for the other three regions (poles/states).’ Differences were due mainly to production pattems and productivity levels. Small family units (SFUs) in Petrolina and Juazeiro have already upgraded their production systems to high-value fruit trees. This process is just beginning in other areas where traditional crops are still the norm due to low water charges and market constraints. As a result, the returns per family day of labor vary significantly, ranging from about US$20.00 to US$8.00, respectively.

Conclusions from the economic and financial analysis

20. The evaluation confirmed that the irrigation schemes were highly effective in creating jobs, although the economic performance was unsatisfactory in a number ofprojects. By requiring less investments per job created, irrigated agriculture showed that it can play a key role in reducing poverty in the BSA region. On average, each job created in the irrigation subsector costs about US$5,000 to $6,000. In contrast, these costs are an average of about US$44,OOO/job in the other sectors. Job-creation costs in sectors such as tourism, the automobile industry, and the metallurgical and chemical sectors are from 18 to 44 times those ofirrigated agriculture.

21. The fiscal analysis ofthe projects confirmed that the cost recovery tariff (Kl) collected from the farmers was insufficient even to cover O&M costs for the head irrigation structure in some schemes. However, since the economic activities resulting from irrigated agriculture are subject to various taxes,

11 fiscal revenues from incremental production are an indirect means of cost recovery. See details in Section 4.3.

22. The removal of some key obstacles to project development could significantly improve their economic performance. On the other hand, if the current situation persists, so will the unsatisfactory results. Management can be significantly improved in most irrigation schemes, thereby having more impact. Targeted interventions, reinforcing strategic alliances to support production, enhancing the social capital of smallholder farmers and strengthening their organizations and ties with existing public and private services, are some low-cost activities that could have positive effects. Results may also be improved by facilitating the currently limited access to land titles, water rights, and formal sources of credit, information and technical assistance. Ensured land titles and water rights would enable producers to have easier access to credit, and are essential for creating a land market in the schemes, attracting investors and increasing project efficiency.

23. The seven cases with negative NPVs provide valuable lessons to learn from for the improvement of public interventions in the future. The principal ones are: (i)Over-designed projects and delays in project implementation may jeopardize economic viability; (ii)Irrigation tends to be used for traditional low- value crops, with positive financial results but negative economic results when water charges are set below the cost ofmaking it available; (iii)The development of an irrigation infrastructure should not be the only goal ofirrigation projects; more attention should be paid to the quality and efficiency oftechnical assistance; (iv) Training and the appropriate selection of beneficiaries are crucial for long-tenn sustainability; (v) With the focus on poverty alleviation, the need for a well-balanced mix of small scale beneficiaries and entrepreneurial producers should not be neglected in order to maximize the development impact of investments; and (vi) The Petrolina and Juazeiro experience suggests that when a government agency closely monitors the process and controls the characteristics ofthe new settlers in public districts, turnover may work as a “natural selection” process that pushes incompetent producers out of land settlements. Incoming producers managed their farms more effectively than the original settlers, thereby improving conditions for the success ofall the scheme^.^

24. It is is difficult to transform the results of some irrigation schemes into positive results, as in the case ofJaiba, for example. However, the adoption ofa new system that prioritizes investments, considering existing infrastructure as sunk costs, and carrying out additional works with an increased marginal social return, would greatly maximize the impact of future investments. Instead ofwasting scarce resources with the implementation ofnew irrigation schemes, priority should be given to completing the Jaiba and Jaguaribe-Apodi schemes, taking into account their high margin ofprofitability. In the case of Jaiba, it was estimated that strategic complementary investments ofless than 10% ofthe cost ofwhat has already been invested could have an ERR of47%, only by accelerating the utilization ofthe existing irrigation capacity.

Externalities and indirect benefits

25. In addition to its direct economic impact in terms of value added in production, irrigated agriculture created externalities and indirect socioeconomic benefits in the region that could not be measured by the analysis. These are sometimes referred to as “intangible” benefits. It could be argued that even for those

CODEVASF allowed and even encouraged turnover in Petrolina-Juazeiro both among colonos and entrepreneurs-a practice that contradicted what the agency was doing in other regions. For this reason, agencies managing land settlements in Brazil and elsewhere often forbid selling lana and implement complementary measures to prevent turnover. Results in Petrolina and Juazeiro show that turnover in land settlement projects should not be considered negative. It became an unplanned process to improve the performance of irrigation projects, as those who entered often had more experience and capital than the ones who left the projects. These new arrivals usually had marketing connections, showed commitment to their farms and the development of the region, and often created morejobs and provided higher wages and better working conditions for their rural worked.

12 seven, irrigation projects with unsatisfactory returns might have generated some intangible net benefits. The word “net” is key here. There are benefits and costs associated with the generation ofintangibles, and the presumption to reclassify those projects with a negative NPV as satisfactory would be that the net benefits are positive. Such an analysis was beyond the scope ofthis study. However, an attempt was made to identify and measure some variables that were considered to be significant benefits associated with public irrigation in the relevant regions.

26. These benefits were measured through an evaluation of selected indicators derived from the analysis of statistical series at the municipal level. Since irrigated agriculture is the major differentiating economic activity in the region, the hypothesis was that any possible socioeconomic impact resulting fiom it would be reflected in the indicators for municipalities with irrigation schemes. Using these indicators, a sample of 32 municipalities with irrigation was compared with the same number ofneighboring municipalities without irrigation.

27. An important potential benefit of irrigation is its contribution to reducing out-migration to large cities. There are both costs and benefits from out-migration. On the benefits side, in addition to offering a wider pool ofemployment opportunities, cities usually provide social services at a lower unit cost. This is the case with education, health and nutrition and social assistance, among others, largely due to the economics ofagglomeration. On the cost side, excessive urbanization can generate considerable negative externalities associated with violence, pollution, increase in travel time, and others. This study did not attempt to do a social cost-benefit analysis ofmigration. It documents the impact ofthese irrigation projects on local employment generation and demographic growth, which are used as two proxies of potential benefits.

28. The main findings are summarized as follows:

(a) The strongest impact resulting fiom the introduction ofirrigated agriculture was seen in the demographic growth ofmunicipalities with irrigation (MwI) compared to municipalities without irrigation (MwoI). In fact, three of the cities in the Semi-Arid Region - Petrolina, Juazeiro and Mossoro - grew over the past three decades to such an extent that they are now among the 4% of Brazilian municipalities with over 100,000 inhabitants. In 30 years, Petrolina (PE), now the largest irrigated agricultural pole in the Northeast, grew fiom 61,000 inhabitants in 1970 to 219,000 in 2000, at a rate of 4.4% per annum. In comparison, Serra Talhada, an important agricultural pole in the same region, grew only 27%, from 56,000 to 71,000 inhabitants during the same period. Overall, the MwI grew 92% over the 30-year period, compared to a national average of 82%, while the MwoI grew only 15%. This indicates that while the MwoIlost a parcel ofits inhabitants through migration, the MwI not only maintained their population, they also attracted migrants from other areas.

(b) One ofthe consequences was the increased urbanization ofMwI. In 2000, the average urbanization ratio ofMwI was 73%, which is above average for the Northeast (69%) and about 38% higher than that of MwoI (53%). Contrary to the rest ofthe country, where urbanization was the result of a rural exodus, the rural population ofMwI grew about 2% during this 30-year period.

(c) Irrigated agriculture contributed to poverty reduction, as reflected by the poverty index and per capita income growth. The average poverty index’ ofMwI (40% in 2000), while still extremely high compared to the national average of24%, was 42% less than that observed in MwoI (57%) and about 9% lower than the Northeast average (45%). From 1991 to 2000, in the MwI, average monthly per capita income rose from R$99.00 to B140.00, while in the MwoI it rose from B70.00 to R$99.50.

’ Shows the population whose heads of households have incomes of less than one minimum salary.

13 (d) The analysis indicates that irrigation investments in the BSA contributed greatly to strengthening the rural GDP and encouraged the development ofthe urban sector, including peripheral municipalities. Indeed, the economy ofMwI grew at a rate 2.5 times higher than that ofthe MwoI: an average of6.43% versus 2.53% per annum between 1975 and 2000. In the MwI, each increment of 1% to rural GDP corresponded to a 1% increase in urban GDP, showing that each monetary unit invested in irrigated agriculture generated an average ofone monetary unit in the other sectors. In the MwoI, rural GDP growth was insignificant and urban GDP performance was probably a result ofthe growth ofneighboring MwI.

(e) While the impact ofirrigation on the economic indicators is clear, their influence on the social indicators was not decisive. The changes in education, health and municipal revenue indicators over the past three decades were mainly the result of federal government programs and financial transfers to municipalities. The Human Development Index - HDI - for the above sectors grew, both in MwI and MwoI, from a low level ofdevelopment in 1970 to a medium to high level in 2000, with a slight advantage in favor ofthe MwI group, indicating that irrigation could have had a positive impact. The average Municipal HDI rose from 0.274 to 0.687 in the MwI and from 0.259 to 0.644 in the MwoI.

(f) About half a million people are forced to migrate every year from the interior ofthe Northeast generally to the cities ofthe Center-South and the Northeast itself, due to the lack ofemployment opportunities in the region. This creates a number ofsocial problems that translate into additional costs to society. However, irrigation contributes to reducing the number ofpotential migrants by creating direct and indirect employment opportunities. The study carried out with 14 MwI to evaluate the demographic dynamics of each municipality indicates that instead of losing inhabitants, these municipalities attracted another 126,000 people from other municipalities between 1970 and 2000. This resulted in savings of about US$500,000 per year for these 14 municipalities alone, which make up about a third ofthe irrigated area in the Northeast. However, as population dynamics vary significantly from one municipality to another, these benefits do not necessarily apply for the other twethirds ofirrigated areas.

(g) The aforementioned benefits are a direct result ofthe jobs and income generated by irrigation schemes. On the basis of one job per hectare, the five study poles created over 200,000 jobs in the primary sector alone over the past 30 years. If indirect jobs related to activities along the production chain are added, the total number ofjobs created jumps to 500,000, or nearly 20,000 per annum.

Main deficiencies andproblems to be solved

29. There are clearly three groups ofproblems that require special attention.

(a) Legal, regulatory and administrative deficiencies. These include those public sector issues that impede land titling and the resolution of problems related to the allocation and registration (granting) of water-use rights. It is absolutely essential to solve these problems to attract private investments and business partners.

(b) Agro-technology and services, which are in essence also public sector matters. These issues include: (i)the need to improve strategic and adaptive agricultural research for vegetable and tropical fruit production; (ii)the implementation ofplant health control systems, including barriers and prevention and control schemes; and (iii)the implementation ofa technical assistance and management scheme for smallholder farmers.

14 (c) Completion of hydraulic and other infrastructure works for irrigation that were suspended due to a lack ofpriority or funding. If completed, large-scale irrigation schemes would become operational. Deficiencies related to transportation infrastructure and logistics are also included in this category.

Lessons learned

30. The main lessons learned from the projects studied were divided into the following categories:

(a) Type of farmers: (i)The adequate selection ofbeneficiaries is essential for satisfactory development., Success was jeopardized wherever this was neglected due to production deficiencies, and the non-payment and abandonment of lots; (ii)The presence ofentrepreneurial farmers was a key factor for success. They contributed to defining commodities, production chains, markets and logistics, making projects sustainable, helping smallholders to become viable producers, boosting regional development and creating quality jobs.

(b) Location: The proximity of sizeable urban centers is fundamental for attracting entrepreneurial producers and accelerating development. In addition to being direct markets that absorb the farmers’output, cities are important for providing the required support services that are related to production activities and health, education and living conditions.

(c) Planning: (i)It takes 10 to 15 years for an irrigation project to produce sustainable results; (ii) Although the engineering phase is the easiest part of an irrigation project, the development ofthe human resources, the required technologies and new markets are the most critical elements for successful implementation; (ii)Large-scale schemes should be planned to allow each implementation module/phase to be a self-contained subproject, not overloaded with huge up-front investments, while still maintaining the overall unity ofthe project; (iii)Purely private schemes will only develop under low infrastructure- investment conditions. Should considerable investments be required, the schemes need to be cohanced by the public sector.

(d) Markets: (i)Defining and increasing markets are critical factors for the growth ofthe irrigated sector in the BSA; (ii)A good road network, as well as proximity to commercial airports and maritime ports are important conditions for easy access to domestic and foreign markets as well as for project development.

(e) Land titles: The lack ofland titles and registered water rights has been an inhibiting factor, hindering smallholder farmers’ access to credit, obstructing land transfer to more competent farmers, and discouraging the participation ofentrepreneurial producers.

(f) Technological support and plant protection: (i)Reliable technological support, including a strong research scheme and effective technical assistance played a major role in the success ofthe Petrolina- Juazeiro pole; (ii)The overall lack ofan effective plant protection system may jeopardize the sustainable development ofirrigation schemes, as shown by the Jaiba experience, where abandoned banana plantations have become sources for the spread ofthe Panama and Sigatoka diseases.

(g) Natural resources management: (i)Uncontrolled groundwater overexploitation in the Jaguaribe- Apodi and Gorutuba schemes has led to the exhaustion ofthe aquifers, thus threatening sustainability; (ii) Poor use ofagro-chemicals has been contaminating surface and possibly also groundwater in some schemes.

15 Recommendationsfor strategic options

3 1. Based on the lessons learned and findings from the economic, institutional and social evaluations, an overall performance analysis of the projects was carried out, using the Multi- Criteria Decision Analysis Method (MCDM). The objective was to establish a strategy for government interventions aimed at addressing the deficiencies detected, and improving the future performance of the BSA irrigation sector. Three types of strategic options emerge from the analysis: (a) the optimization of existing infrastructure; (b) the need for reforms to improve the institutional framework; and (c) attracting private entrepreneurs as partners in the development of the region’s agribusiness. The main features of these strategic options are:

(a) Optimize existing infrastructure. This should be a priority, and any investment in new projects should be deferred. The prime objective is to maximize the effectiveness ofpublic investments already made that are not generating the benefits originally foreseen. According to recent estimates made by PLANIRD (National Irrigation and Drainage Plan), there are about 70,000 hectares ofunfinished public irrigation schemes that could be completed with relatively marginal investments, most ofthem in the Jaiba project. These generally include investments in small hydraulic works, complementary infrastructure, or components related to deficiencies in local transportation links and logistics that are present in many public and private irrigation schemes.

(b) Improve the institutional framework of federal and state-level government operations, as well as their processes and procedures. This would include: the modification oflegal and regulatory issues; the improvement of inter-sectoral coordination, the strengthening ofinvestment-related management and budget control, the improvement ofproducers’ organizations to enable them to oversee local decision- making and manage irrigation schemes and the improvement of local capacity in conflict resolution. Intemational experience should also be integrated, as should howledge on the best procedures for transferring public irrigation scheme management to users’ organizations.

(c) Encourage and attract private entrepreneurial partners for irrigation agribusiness. The area under private irrigation in the Semi-Arid Region is currently three times larger than the total area ofpublic irrigation schemes. Contrary to the Center and Center-West ofthe country, in the BSA little attention has been paid to regulatory aspects, infrastructure requirements, and water management and institutional actions, which both promote private irrigation and make it more attractive. Although no specific analytzal exercise comparing the social externalities ofprivate and public irrigation was done in the study, it appears that there are no major differences in terms of social results. The most important complementary actions normally needed are: (i)the regulation and guarantee ofthe concession of (tradablehegotiable) water-use rights; (ii)the improvement of instruments for land titling and the expansion of the land market; (iii)the development ofstrategic planning and greater availability of technological data; (iv) the encouragement and strengthening ofexport organizations; (v) the reduction of plant health risks; (vi) the strengthening ofagricultural research with a focus on irrigated agriculture, particularly vegetables and tropical fruit; and (vii) the acceleration of processes to settle new, more capable farmers (colonists) in public irrigation schemes.

32. Consistent with the foregoing options, a Matrix of Policy Options, Instruments and Strategies is presented in Table 7.4 of this study.

16 Overall complementary recommendations for subsector improvement

33. In addition to the strategic options recommended, and based on the main findings and lessons leamed from the projects studied, some general proposals aimed at improving the performance ofthe irrigation subsector in the BSA were made and grouped as follows:

(a) Government responsibilitiesinclude actions to facilitate the rehabilitation and expansion ofirrigated agriculture, eliminating the principal obstacles to its development, with an emphasis on: (i)the expansion ofprivate irrigation, which depends largely on the costs of the necessary basic infrastructure. Private irrigation often depends on the support ofthe public sector wherever these costs are high, due to the need for storage dams and distribution networks. Where subsidies are economically justified by extemal benefits, infrastructure could therefore be cofinanced by the public and private sectors, with subsidy levels being transparently fixed in accordance with economic principles; (ii)legal, normative and managerial proposals; and (iii)implementation ofa regional system ofbarriers and plant health controls to minimize the risk ofeconomic loss.

(b) Legal and normative conditions include legal aspects related to the efficient development of components within the irrigation subsector, such as: (i)introducing an effective land-titling scheme to facilitate an active land market as a development factor; (ii)establishing a guaranteed entitlement to water use rights in regions with an obvious shortage; and (iii)setting up legal references to support the effective establishment ofuser, water and land associations, and their relationship with the government. The legal setup should include farmers from both public and private irrigation schemes, taking into account the great economic and managerial differences between small and large-scale farming.

(c) Requirements for success in agribusiness are those necessary for developing and optimizing investments. The most important are: (i)the definition of criteria for a satisfactory selection of beneficiaries; (ii)the establishment of effective extension systems to ensure the development ofhuman capital and the transfer ofrequired technology; (iii)the definition and expansion of sustainable markets, which are essential for the development ofirrigated agriculture. The public sector should participate in market studies and development due to the limitations offarmers, particularly smallholders; (iv) suitable engineering designs, compatible with the size ofthe agribusiness; and (v) inclusion of entrepreneurs among the beneficiaries. They played a major role in the projects’ success, as their economic and business acumen and leadership capacity help identify markets, choose crops, organize production and work out the logistics of getting the produce to market.

(d) Planning aspects cover several issues that are especially important when preparing new irrigation projects, and for improving the performance ofirrigation schemes and ensuring their success. The main recommendations are: (i)Set realistic goals and development projections, since it takes up to 15 years for irrigation schemes to reach maturity, thereby overlapping with different government administrations; (ii) Prioritize projects located near urban centers to ensure the necessary urban support; (iii)Define the size of irrigation schemes, infrastructure works and their modular expansion to ensure sustainable development; (iv) Consider the social cost ofmaking water available for irrigation in most ofthe BSA, and the risks related to competitive demands and year-to-year supply variability, adjusting water fees accordingly to discourage waste .

(e) Managerial issues refer to non-structural actions and measures to be adopted by the government and private sector in support ofwater resource management and by linking the irrigation subsector to other service sectors. (i)Special attention should be paid to transportation logistics, the costs of which are critical for the feasibility of irrigated agriculture in the region. Poorly maintained roads and the lack of adequate access routes to consumer centers and ports increase costs and reduce producers’ net margins.

17 (ii)The creation of User Associations that are responsible for the O&M of water supply infrastructure is recommended for water resource management; (iii)A system ofuser rights for surface and groundwater that is compatible with available sources should be implemented to ensure sustainability. Norms and restrictions should be introduced to regulate water usage to ensure its conservation; (iv) Actions should be taken to deter the proliferation, and order the demolition if necessary, of construction work carried out by private individuals that has not been authorized by the water authorities and threatens the system’s security.

(f) Technological support includes actions aimed at improving the quality and yields ofthe products cultivated, making them more competitive and ensuring the sustainability ofproduction activities, especially for small family farmers. The main actions include increased investments in: (i)strategic and adaptive research for irrigated agriculture, and seeking economic alternatives through the introduction of new products, more resistant and competitive crop varieties, together with improved soil, water and crop management; and (ii)the development, adaptation and improvement ofmachinery for more efficient crop implementation, management and harvesting in more effective irrigation systems;

(g) Natural resources management focuses specifically on the rational, clean use of soil and water resources, to achieve a balance in the agroecological system, preserve the environment and protect human and animal health. Special attention should be paid to: (i)correct the progressive reduction in hydrological yields of surface water in BSA watersheds due to uncontrolled, unregulated and unsustainable proliferation ofsmall dams located upstream from major storage reservoirs, leading to losses from excessive evaporation; (ii)conduct hydregeological studies to determine the underground water potential of the BSA region and establish guidelines for its sustainable use; (iii)introduce measures to neutralize chemical contamination caused by the inappropriate management ofagrochemicals and the dumping of solid waste in irrigation canals and drains; and (iv) introduce sustainable soil management practices to avoid an irreversible process oferosion and ensure its continued use for agriculture.

Open issues

34. Various questions related to the broader issue ofthe social externalities ofirrigation in the BSA region remain open. Of these, five major issues emerge, which could not be properly analyzed within the framework of this study due to time, scope and budget constraints. The list includes:

e The dimension of the BSA’s national and international market share for tropical fruits and vegetables; The analysis of the institutional capacity of public agencies and institutions related to the irrigation sector at federal and state levels; e The situation of other uncompleted public irrigation schemes not included in the five sample areas; e The general agro-technological and plant disease aspects related to tropical fruit and vegetable production in the BSA region; and e A comprehensive “benchmarking survey” of the 11 schemes included in the study sample, consisting of five poles, aimed at establishing planning procedures and carrying out further surveys in other poles.

Possible agendafor thefuture

35. This document should be considered an instrument for facilitating the start-up ofdialogue. It is up to the Government to promote this dialogue and initiate an action agenda. The next stage would consist of

18 consolidating consensus on the agenda, aimed at improving irrigation management in the BSA while the preparation of State Action Plans begins.

36. The agenda should primarily include short and medium-term actions. Long-term actions, which are absolutely essential for this type of undertaking are also elements of strategic planning, for which short- and medium-term schedules are inputs.

(a) Short-term actions would include such issues as benchmarking for the relevant irrigation schemes and the analysis ofthe institutional capacity of federa&, state- and municipaklevel public agencies and institutions working in the irrigation sector;

(b) Medium-term actions would include: (i)institutional adjustments; (ii)maximization ofthe efficiency and effectiveness ofthe use ofan already-existing infrastructure; (iii)promotion, bolstering and expansion ofthe private sector in irrigated agriculture in the BSA region; (iv) improvement of the effectiveness of agribusiness in irrigated agriculture; (v) and improvement of the sustainable use ofbase resources;

(c) Long-term strategic actions are those resulting from the systematic review ofshort- and medium- term actions, according to classic strategic planning principles.

37. These actions should be consolidated into an Activity Plan, which would then be broken down into Annual Work Plans (AWPs). They would include the strategic actions proposed, consistent with the operational policy options and the instruments and proposals identified. Table 7.4 contains alternative suggestions for the preparation ofthis strategic planning.

38. The actions identified should be turned into projects, at farm, commodity and integrated regional development levels, respectively. Agribusiness is considered to work in product, logistics, custody and value chains at all three levels. A Monitoring and Evaluation (M&E) system should be set up as a necessary project-management tool to prevent future difficulties in obtaining data and information needed for mid-term and final project evaluations.

39, This is a clearly multi-agency agenda and thus requires considerable coordination capacity. It is expected that the policy options, together with the five regional matrixes presented in this study, will help Government improve the future development conditions ofthe BSA irrigation sector.

40. The proposed policy options do not involve major government allocations , as they are essentially focused on optimizing the use ofexisting or nearly completed infrastructure, and on a public -private sector cost-sharing implementation. This would require the community’s increased participation, substantially improved planning mechanisms and processes, and the adoption ofa sustainable land and water-management strategy.

41. Short-term actions should focus on promoting willingness to take action, and on creating andor strengthening participation mechanisms, accompanied by proper dissemination. After that, emphasis should be placed on implementation and monitoring followed by evaluation. This is summarized in Table 6.4.

19 1. Introduction and Objectives of the Study

Introduction

In the past, water policy for farming in Northeastern Brazil has suffered from a disregard for the discipline ofeconomics, especially with regard to water pricing and social project evaluation analysis. It was unlikely that supplying irrigation water to fmers at a fraction ofwhat its costs would be, in the absence ofwater trading, would encourage the use ofwater for the production ofhigh-value crops. Without rigorous evaluations ofthe costs and benefits ofpublic investment in irrigation, the government lacked the information necessary to screen public investments to select those with the highest potential social payoff. This study of a social project evaluation ofpast irrigation projects was conducted to help remedy this project evaluation gap. In the context ofdiscussing the government’s future role in the development of irrigation in the Northeast, the decision was made to initiate an expost evaluation ofthe costs and benefits ofpublic sector investment in irrigation in the Northeast. The suggestion came from a workshop held in Fortale za with the participation ofthe Northeast Bank (BNB), the Ministry ofIntegration, the Company for the Development ofthe Siio Francisco Valley (CODEVASF) and the World Bank. An agreement was reachedg among the participants to share information and assume responsibilities. However, some infrastructure investment projects might require a subsidy when the expected social returns exceed the expected private returns. It is essential to conduct a thorough evaluation for such projects, making adjustments for the possible differences between private and social costs and benefits. The Bank agreed to make a socioeconomic assessment ofpast irrigation programs in Northeastern (NE) Brazil, where the focus was on measuring the differences between social and private benefits and costs. It also agreed to complement the findings and recommendations ofthe aforementioned study with those from another study on public investment in irrigation to be commissioned by the Ministry ofIntegration.

Objectives

The ESW study has two main objectives. The first is to identify and measure the private and social costs and benefits ofpast public investment in irrigation farming and in ancillary activities related to agriculture in the Brazilian Semi-Arid Region (BSA). This should be done in the context ofan expost analysis applied to five irrigation areas. The study will address the following issues: What were the social and private net returns (costs and benefits) from such an investment? Who were the main beneficiaries in terms ofthe personal and the hctional distribution of income? What is the nature and magnitude ofthe indirect effects and social externalities linked to irrigation investments in NE Brazil in general, and in public irrigation systems ofNE Brazil in particular? Based on the main findings of the study, were the large subsidies that the government provided to the agriculture-irrigation subsector truly justified ? The second objective ofthe study is to talk about lessons learned and make clear recommendations to the Brazilian Government (GOB) as to the role ofirrigation in regional development and poverty reduction policies. As part ofthis objective, the study will try to identify key institutional restrictions and policies that are currently limiting the potential impact ofpublic investment in irrigated agriculture in the BSA and will propose a draft Policy Matrix. A fundamental premise in support ofa subsidy for irrigation is that, in the case ofthe BSA, irrigation could contribute to the development of labor- intensive agriculture, primarily oriented towards the production ofhigh-value products such as tropical fruits and vegetables. Experience with the fi-uit sector in several other countries shows that on-farm and particularly post-harvest (o#$arm) activities are labor-

See Vol. 111, attached Aide-MCmoir, Annex A.

20 intensive and could presumably contribute to a significant boost in rural employment, wage increases, and consequently poverty alleviation. Furthermore, it is important to note that the actual impact ofpast irrigation investments could have been hindered by inefficiencies in the operation of domestic factor and product markets associated with the production and marketing system of the goods under consideration. Specifically with respect to factor markets, the rate ofrehabilitation and expansion of irrigation in NE Brazil could be influenced by the conditions under which farmland and water are made available to the beneficiaries of the irrigation projects, by charges for electricity and diesel oil, and by market conditions for credit and labor. On the output side, the cost and availability oftransport services, marketing margins and trade policy all affect the final outcome. The study aims at identifying the most relevant constraints in the factor and product markets, suggesting policy changes for their elimination. The study’s findings should assist the government and multilateral agencies to develop strategies and programs for the expansion ofirrigated agriculture in the BSA, including the preparation ofirrigation modernization projects” to promote (a) increased private sector participation in the development of agriculture under irrigation, (b) the modernization ofinfrastructure, (c) the transfer of greater responsibility to beneficiaries in the operation ofirrigation schemes (mainly O&M), and (d) expansion of new irrigated areas aimed at agricultural growth, poverty alleviation and creating employment.

Audience

The study targets several audiences. First, it will be useful for the staff ofthe executive branches of government, and for national and state legislators who participate in the decision-making and implementation ofprograms related to the development, decentralization and administration ofirrigation infrastructure and policy in the BSA. Second, it would be of interest to users and private sector organizations that either require services and/or play a role in their provision. Finally, the study will serve Bank staff and administrators who contribute to the dialogue and design of sectoral policies and support investments in Brazil’s rural sector in general, and the BSA in particular.

Partnership approach and the sequence followed

This study was conducted on a partnership basis with GOB, specifically BNB, MI and CODEVASF, and analyzed the BSA’s irrigation subsector according to its regional relevance. Following the initial consultations, available data was analyzed for each ofthe key thematic issues at the regional level, including cross-cutting issues related to irrigation, covering: (i)the institutional, legal and regulatory framework; (ii)mechanisms for financing and budget-sharing for the provision of funds used for O&M; and (iii)the projects’ possible implications for rural poverty alleviation. Complementing the project evaluation per se, the study used remote sensing techniques to interpret satellite imagery to track the history ofland use and cropping patterns in the projects’ areas of influence. The main findings from the preliminary analysis were presented in a series of systematic consultations through interviews with 153 government staff members and private sector stakeholders from five states (see Annex IV). The interviews yielded an assessment ofthe preliminary findings, and also provided an opportunity to discuss the implications of these findings for a hture strategy involving the government, civil society and private sector stakeholders concemed with the use, provision, operation and maintenance of irrigation infrastructure.

loEven if the main findings of the study conclude that irrigation should not be one of GOB’s priorities for regional development and poverty reduction in the Northeast, improved management of existing public inigation systems could resultin substantial savings of fiscal resources and would help increase the efficiency ofexisting systems.

21 The findings were validated during a workshop held in Brasilia Cjune/2003) with SEAIN. Public sector authorities and individuals with proven experience in the issues addressed in the study attended the workshop (see Annex V). Another seminar was held at the request of the MI, with nearly 40 participants (see Annex VI). The dynamic analytical exercise and the iterative, participatory process ofthis study made it possible to identify problems that need further analysis, and to present the most important challenges faced by the provision of irrigation in the BSA region, particularly where the role of the public sector is concerned.

Structure of the report

The report is divided into three volumes. Volume I,the Main Report, presents a summary ofall study results. Volume 11' ' is a working paper that brings together the study's main questions, results and conclusions, covering all technical, institutional, legal and financial issues. Volume III'*presents in detail the thematic studies that served as the basis (stocktaking) for identifying the key problems related to irrigation management in the BSA, including satellite imagery analysis, reports from field reconnaissance trips, social price factors, methodologies used and other information. The three ESW versions (Reports I, I1and 111) were prepared in Portuguese, since the study's principal audience is the Brazilian Government and stakeholders. Volumes 11 and III are included in a CD-ROM.

l1Volume I1 is a working paper and was not translated into English. '' Volume 111 includes all field mission reports and thematic support studies, Annexes A to L.

22 2. Background - Irrigation in Brazil and in the Semi-Arid Region

It is estimated that Brazil currently has 3.5 million irrigated hectares, just over 500,000 ofwhich are located in the Northeast (140,000 in public areas and 360,000 on private lands). As these are recent investments, with most ofthem having been made over the past 15 years, the irrigation schemes are still in the consolidation or implementation phases. Consequently, their results vary according to maturity, the development ofproductive chains, the incorporation ofnew technologies, the competence of the fanners, and their attraction for private stakeholders and entrepreneurs. This study makes an expost assessment ofthese public investments in the BSA, taking into account their economic and social effects with regard to poverty alleviation and the promotion of sustainable economic growth. An assessment ofsuccesses and failures is now required, to learn from experience and then offer sector policy options that provide answers and help define new public policies. Contrary to other Latin American countries with vast arid regions such as Mexico, Peru, Chile and Argentina, all ofwhich have about a century of experience in irrigation, in the case ofthe BSA, public investment in this field is very recent. The first projects date back to the early 1970s. Irrigation in Brazil also has different characteristics than other Latin American countries (LAC) from the institutional, financial and technological points of view. At the institutional level, irrigation systems are overwhelmingly private (go%), invariably drawing water directly from rivers and lakes/lagoons, except where surface conveyance systems meet local pressurized irrigation systems. Since the very beginning, projects were developed by private stakeholders, and included planning, construction and hydraulic works, maintenance and operation, and public and/or private properties. However, approximately 50% ofthe area ofthese private systems is fed by electrical installations (sub-transmission and distribution) built by government rural electrification programs. Financing for these irrigation schemes and equipment, about 50% ofwhich was subsidized, was offered to farmers during the 1970s and 80s by government programs such as PROVhLRZEAS and PROFIR. Water sources and soil characteristics in relation to these sources are generally strategically important factors in Brazil. This is due first of all to the limited supply ofgroundwater in these areas (95% of irrigated land uses surface water). Secondly, arable and irrigable soils are normally located in gee morphological conditions and at altitudes that require long pipelines and pumping stations, unlike lowland areas where water can be obtained by gravity. Water transfer in Brazilian irrigation projects consequently requires power (diesel or electric), leading to the adoption ofwater and energy-saving technologies, affecting crop models and primary production. These in turn need to be efficient, in order to economize on other inputs and services.

BOX 1- Positive Parameters

Eight months of annual drought, combined with 3000 hours of sunlight in some parts of the BSA may represent production and agribusiness opportunities that are hard to find in other regions. These parameters - a dry period with water, heat and solar radiation year round - are essential for the development of highly competitive tropical farming.

Irrigation methods used in Brazil may be considered modem and are a logical answer to the high costs of pumping. From the perspective ofintensive energy use, even rice grown in paddies employs a number of technologies in order to save water, energy and inputs. Most of Brazilian irrigation (52%) is pumped from the draw-off to distribution in the fields. Brazilian irrigation is diversified from an agricultural technology standpoint. An acceptable classification could include: (i)rice irrigation (paddies); (ii)supplementary irrigation (other crops); (iii)tropical fruit

23 irrigation; (iv) biomass irrigation (sugar cane and grasslanddforage); (v) public irrigation in settlements (various crops), and (vi) vegetable crop irrigation. Even though irrigation methods in Brazil can be considered modern compared to other LAC, gravity irrigation is used in 48% ofthe irrigated agriculture area, with 42% in rice and 6% in furrows and other gravity methods. Of the remaining 52%, 22% use mobile sprinkler irrigation systems, 23% use fixed central pivots, 1% use perforated tubes and 6% use drip irrigation and/or micresprinkler irrigation systems (PCD, 2002). The end ofthe nineteenth and the beginning ofthe twentieth century were marked by the creation of a number ofinstitutions that would work with climate, water availability and control and sanitation works. A Drought Prevention Works Inspectorate (IOCS) was created in 1909 in the Northeast. In 1919 it was turned into a Federal Inspectorate (IFOCS), and later into the National Department for Works against Drought (DNOCS). In 1948, the Hydroelectric Company ofthe S5o Francisco River (CHESF) and the Sgo Francisco Valley Commission (CVSF) were created simultaneously, the latter becoming a Superintendency (SWALE) in 1967. In 1975 it became the SbFrancisco Valley Development Company (CODEVASF). CODEVASF received a mandate over the Parnaiba River basin in 2002. The CVSF started to work with agricultural production and rural extension for cattle and cotton farmers in the mid- 1950s. Some farms that were located on flood plains beside rivers and lakes produced onions, corn and beans. Small irrigation kits and technical assistance for the cultivation ofonions and watermelons were then introduced. By the end ofthe 1950s, Petrolina and Juazeiro had become the main onion-producing municipalities in the Northeast. In 1952, the Northeast Bank (BN) was created with the aim ofproviding agricultural credit for this and other farming activities in low-rainfall areas that needed support, strengthening and development. After working this way for over 10 years, the CVSF began investing in larger-scale irrigation projects @ublic irrigation schemes), a result ofthe creation ofthe Superintendency for the Development ofthe Northeast (SUDENE) in December 1959. DNOCS continued with its strategy of constructing dams to increase water availability, reacting to periodic crises caused by floods, water supply, unemployment, poverty and migration. It focused on rural development even when it did not follow SUDENE guidelines. These works promoted the region’s industrialization. The original proposal for irrigation projects in the BSA included land expropriation for the implementation of large irrigation and land settlement projects. SUDENE requested that the Food and Agriculture Organization (FAO) ofthe United Nations evaluate the feasibility of large projects based on experiences with small irrigation schemes along the edges ofrivers and lakes. This type ofproject was already being implemented in Mexico, Peru and Egypt. It consisted of collective government-funded construction, bringing water to farmers and offering them advice on irrigated farming. SUDENE also saw the possibility of resettling families living in the BSA with no viable irrigation potential. This introduced a social aspect to irrigation projects. Around 1965, FA0 recommended two pilot projects: Bebedouro/PE and MandacdBA. In 1968, the Federal Government created the Executive Group for Inigation and Agricultural Development (GEIDA), which published guidelines for an irrigation policy for Brazil through the Pluri- annual Irrigation Program (PIP) in 1970. Most ofthe investments for the PIP were destined for the Northeast region, as irrigation was considered to be an instrument for promoting economic growth, with DNOCS and SWALE (later CODEVASF) as implementing agencies. Another pilot project was the 330 ha Jaguaruana Project (CE), in the municipality ofthe same name, which was receiving French cooperation at the time. The Northeast clearly benefited &om the technological advances made in terms ofhydrological models, participating in the various development stages ofwater resource management in three phases: (i)before 1940, when the water storage capacity surpassed demand and actions were concentrated on controlling floods and maintaining river courses, in the production of energy and in drawing water for public supply; (ii)between 1940 and 1970, especially after 1950, when accelerated industrial and agricultural development together with urban expansion and housing activities began to create conflicts between

24 supply and demand for water, and (iii)fiom 1970 until today, when water is perceived to be a natural and finite resource, and in many cases, scarce or unsuitable for consumption. In 1970, the National Integration Program (NIP) included financing for the first phase ofthe National Irrigation Plan. The first National Development Plan (NDP) was launched in 1972, incorporating the NIP, with the objective of irrigating 40,000 ha in the NE by 1974. The second NDP set a goal ofirrigating 270,000 ha by 1979. The Northeast Development Plan (POLONORDESTE) was created in October 1974. None ofthese initiatives managed to achieve anything close to the ambitious goals set. In 1986, the Northeast Irrigation Program (PROINE) was created with the aim ofirrigating 1,000,000 ha, and to attract private stakeholders. PROINE had the advantage ofbringing about institutional changes in the states, since by then all ofthem had infrastructure, technical teams, and farmers already familiar with irrigation techniques. Data fiom the Water Resources Secretariat of the Ministry ofEnvironment (SRHIMMA) indicate that the area irrigated increased from 236,000 ha in 1985 to 452,000 ha in 1991. In 1996 the Irrigated Fruit Production Support Program for the NE was created by the Ministry of Agriculture with the goal of irrigating another 1,000,000 ha within 10 years. More recently, the BN prepared the Integrated Development Poles Program, many ofwhich are built around irrigation schemes. This brief history shows that a great many public irrigation projects were initiated in a number of states in the Brazilian SemhArid Region during the late 1970s.

BOX 2 - Aridity and Irrigated Farming Development Poles

It is no coincidence that: (i)SUDENE has marked the three areas as having a high level ofaridity; (ii)the private sector has concentrated its efforts in these same areas; (iii)the GOB has invested in infrastructure and other forms of credit and settlementlassistance; (iv) the BN and respective states decided to delimit them as Integrated Development Poles (IDPs) of interest; and (v) EMBRAPA qualifies them as geo-environmental landscapes (F & J) with ago-socioeconomic potential.

The three areas that are the subject of this study are located in these regions. They include the Jaguaribe WatershedlApodi Plateau WatershedlAssu Watershed (CE & RN), PetrolinalJuazeirolIrecg Plateau (PE and Be> and JaibalJanahba (MG), which are highly representative ofareas with limited water resources.

Estimates show that little more than 500,000 ha are irrigated in the Northeast, 140,000 ha through public investments and 360,000 ha by the private sector. Geo-processing results (Annex G of Volume III) show that just the area under study (1 1 public projects and adjacent private areas) adds up to only 200,000 ha, 105,000 ha ofwhich are under private irrigation and around 95,000 ha are public projects. The main differences are in the Petrolina-Juazeiro PerimeterlScheme (PJP), with more than 66,000 ha under public irrigation and 29,000 ha under private irrigation, whereas in the Jaguaribe-Assu PerimeterlScheme (JAP), 14,000 ha are under public inigation and 64,000 ha are in private projects. In the Northern Minas PerimeterlScheme(”), the 28,000 ha are divided almost equally between the public and private sectors. There are three types ofagriculture and farmers in the BSA and Northeast region There is the traditional rainfedupland agriculture, practiced by subsistence farmers. There is an intermediate type ofagriculture, partially incorporating the use of technology, where the majority of irrigated lots are included. This is practiced by transitional farmers who are moving away fkom subsistence farming and are dependent on policies, orientation and assistance. Finally, there are large irrigated agricultural operations, run by computer-wise entrepreneurs, using recent technology and in direct contact with internal and external markets as well as all other stakeholders in the agribusiness chains. While the type of climate favors irrigation, the low incidence ofrainfall aggravates farming, as well as the recharge ofreservoirs and water supplies in the region. Over the 152 years that data has been collected, low precipitatioddrought (including green drought) has been the norm approximately one third ofthe

25 time. Drought has been twice as frequent as low precipitation. Each period of drought in the BSA continues to result in millions of migrants, which caused the public sector (according to extra-official calculations) to spend nearly S4.0 billion in temporary measures to fight the effects ofmigration during the two-year period from 1998 to 1999.

26 3. The Basic Methodology - Concepts and Data

The study has two main objectives. The first is to identify and measure private and social costs and benefits related to past public investments in the irrigated agriculture sector ofthe Brazilian Semi-Arid Region. The study examines farming and ancillary activities in 11 irrigation districts in five states, but does not attempt to measure the social value of dam construction. It also relates lessons learned and makes recommendations to the GOB with respect to its future role in the development ofirrigation in the BSA and NE. As part of the analysis, the study attempts to identify key institutional and policy constraints that might have limited the impact of irrigated agriculture in the region. The methodological approach is emphasized both to help the reader understand a practical application ofa social evaluation, and to make results more transparent and credible. A fundamental premise in support of subsidies for irrigation is that, for society as a whole, in the absence of some level ofsubsidies, the private sector would under-invest in the development of irrigation. The reason is simple: there are potential net benefits for society that would not be captured by private investors. Private net returns would therefore be lower than social returns. The source of the possible difference between social and private costs and benefits is at the heart of the economic analysis. The essence ofthe social project evaluation followed in this study is the identification and measurement of the social opportunity cost of labor, capital (public funds), material inputs (energy), and foreign exchange. When the shadow prices of these factors are not equal to the observed prices, social and private valuations diverge. These principles are not specific to irrigation in the BSA; they apply to infrastructure investment in general, such as in irrigation, electricity, roads and other large projects. They are drawn from a rich source ofliterature and experiences in what has been called the “new welfare economics” applied to social project evaluation. This approach has been influenced by conceptual and empirical analysis since around the early 1960s, particularly in the United States, Great Britain and France. As a hypothesis, the actual impact ofpast irrigation investments was likek constrained by the influence of rural factors and output markets associated with the production and marketing system. Specifically, the rate ofgrowth ofirrigation in the study areas was probably influenced by the land, labor, water, credit, and energy markets in the different regions (input side), as well as by transportation, trade barriers and marketing channels (output side). Although the study should ideally assess the nature and magnitude of these restrictions, a thorough empirical evaluation ofthese constraints throughout the entire period of analysis, starting in the early 1970s, is beyond the scope of this report. The “Methodological Flow Chart’’ presented in Figure 3.1 illustrates the sequence ofthe various steps and components throughout the analysis. The chart shows the coordinated actions to be taken by the GOB and the World Bank, as well as those tasks that are exclusively the Banks’s responsibility. The study’s design covers the following main tasks: (i)defining the methodology for identifying and measuring private and social costs and benefits throughout the life of the projects; (ii)identifying projects to be analyzed and arranging a reconnaissance field mission to the corresponding regions to gather information and insights on the actual operation ofthe irrigated areas; (iii)interpreting digital satellite images; and (iv) computing the flow of investments, costs and benefits associated with the projects. It was decided to work on 11 public projects in irrigation settlements that represent around 20% ofthe total number, about 45% ofthe irrigated area and approximately 50% oftotal investments (see Annex I- ItoV - Brief description ofthe samples offive poles, 11 irrigation schemes and private irrigation). In accordance with the study’s first objective, which is to identify and measure social costs and benefits of public investments (expost analysis), the sample is sufficiently large to apply the proposed methodology. Considering that the proposal encompasses areas ofprivate irrigation projects (in addition to those under public initiative), it was considered necessary to include satellite image interpretation as well as radiometric and videographic studies in order to generate the relevant data for the privately developed areas. (For more details, see Volume III,Annexes G and H).

27 FARMOD -A modeling tool

A software package called FARMOD, which was developed by FA0 and WB, was used as a modeling tool for computing the flows ofcosts and benefits. FARMOD calculates crop models, area and farm production models, input and labor use, and measures ofrevenues, investment and operating costs and farm returns. It converts financial costs to economic costs and calculates rates ofreturn and net present values. The computations using the FARMOD model benefited from satellite image interpretations by identifying both public irrigated areas and privately developed irrigation that were outside the scheme ofpublic projects but associated with them. Videography and radiometry at the property/lot and commodity/product levels complemented the methodological approach in a pilot study ofthe Gorutuba scheme. The FARMOD sohare was used to: (i)simulate individual activities with partial budgets for annual and/or pluri-annual crops and post-harvest activities; (ii)simulate primary crop units (small, medium and large) including different combinations ofcrops and activities; (iii)generate a model ofirrigation schemes, which includes a set offarm units with irrigated agriculture and upstream and downstream activities; (iv) model a set of irrigation schemes, allowing all investments in a district and even certain externalities to be evaluated; and (v) simulate the availability and use ofboth family and contracted labor. FARMOD simulations quanti~the impact of irrigation investments at three levels: (i)fadlot projects; (ii)projects by products/commodities, and (iii)regional development projects. Interviews and field surveys provided information that complemented the numerical analysis as part ofthe socioeconomic evaluation. A multi-criteria decision analysis method (MCDM) helped identify and define factors associated with the successes and failures of some irrigation projects. As part ofthe MCDM approach, eight criteria and 38 attributes were defined, varying between four and six attributes per criterion, except for legal issues with only two. A discussion of the criteria and attributes applied in the MCDM is presented in Chapter 7, item 7.1 ofthis report, and in Volume 11.

3.1. A Conceptual Note on the Approach to the Social Cost Benefit Analysis Used

A fundamental premise in support ofan irrigation subsidy was that, in the case of the BSA, irrigation could contribute to the development of labor-intensive agriculture and basically the production of high- value products such as tropical hitsand vegetables. This labor intensity could presumably contribute significantly to rural poverty reduction. The social benefits ofemployment would go uncaptured by the private sector, which, in the absence of government subsidies, would have under-invested in irrigation in the region.

28 Figure 3.1 Methodological Flow Chart

GOB and WB WB only

Source: Project Concept Document

Identifiing the nature of social benefits

A distinction should be made between secalled direct and indirect benefits. “Direct” refers to the increase in the net value of production resulting from irrigation throughout the evaluation period (covering both agriculture and related production in ago-processing). “Increase” here refers to the difference between scenarios with and without investments in irrigation. There are two types ofindirect effects. One is those effects that apply to the project’s impacts on related product markets, specifically on activities that are complementary and substitutes for activities directly linked to a project. In this particular study, the “horizontal” indirect effects were not examined since they were ofminor significance given the size of the relevant output markets (i.e., there is an infinitely elastic demand and thus no effect on price). In other words, the regions affected are price takers: the overall impact ofthese projects was not large enough to influence either border prices or the domestic prices of tradables. The analysis ofthe so-called “vertical”re1ated activities is more subtle. These activities include post- harvest production (such as processing and packing) and are most relevant for fruits and vegetables. As a result of the project-related increase in the local production ofraw material (hits), firms would invest in post-harvest activities in the locality. They would pay a lower buyer’s price compared to other producing

29 regions, although the price of the final product at destination (e.g., Sgo Paul0 or Europe) would not be affected by the new production resulting from the projects. Those who invest in local processing “gain” from the savings in raw materials and transport costs compared to processing elsewhere. The new yield from the orchards and vegetables makes these local post-harvest industries economically feasible. The other indirect effect is related to positive externalities. After an extensive analysis, it was decided to focus on (i)reduction of out-migration, a result ofthe “without project” scenario; (ii)the net effect on poverty reduction; and (iii)the cluster effect that occurs when private irrigation is stimulated outside the irrigation project’s direct area ofinfluence. Attempting to measure the positive externalities is less important if the observed social net present value CNpVS) is positive. On the other hand, if the social net present value is negative, the analysis should try to measure these extemal effects. Furthermore, attempts could be made to define and measure what could be considered the social impact of theproject. This means: (i)the net effect ofemployment generation (both direct and indirect) compared to the “without project” scenario, (ii)the impact on rural viability, or the development of services and other economic activities in the nearby region, and (iii)the distributive impact, which influences both the distribution ofincome across households (eg, a lower Gini coefficient), as well as the functional distribution ofincome towards unskilled labor. There is no clear logic in favor ofmeasuring the fiscal impacts resulting from the project’s actual operation, largely because they represent transfers, and because other government investments would also generate positive fiscal revenues. After examining various options and the relevant data, the study team decided to focus the analysis on two externalities, namely poverty reduction and impact on out-migration, and on one sociakype impact, specifically the direct and indirect creation ofemp10yment.l~ Once the direct benefits and externalities are measured at market prices, the analysis adjusts these prices for a corresponding “correction factor” to express them in terms of shadow prices to be used in the computation ofthe NPV. When prevailing prices in an economy do not reflect the true scarcity value of goods and services, it should replace them with “shadow prices.’’ For example, for labor, when there is a substantial pool of openly or partially unemployed labor, it is likely that the shadow price ofthat factor will be below the market price. Discrepancies between the shadow and market wages will probably vary according to skill, region and industrial sector, among other factors. Shadow price analysis will favor projects that actually draw workers into employment whose opportunity cost is less than the wages paid them. A shadow wage below the market wage has a direct implication with respect to the rate ofreturn of capital. An eventual elimination ofthe discrepancy between shadow and actual wages will gradually bring down the shadow rate of return to capital to correspond to the market rate ofreturn.

Identijjing the nature of social costs

In principle, the main items to consider are initial investment costs and operation and maintenance costs. The cost ofdam building is excluded. The relevant costs to bear in mind are the actual costs at the time they were incurred, and not current cost estimates. Negative externalities (such as possible environmental externalities) were not considered on the premise that they were not truly significant. It should be noted that dams were built before the initiation ofthese irrigation projects and therefore were not deemed an

l3 The study initially aimed at analyzing distributive effects as well, but data were not available. For the future, VANS analysis could disaggregate net benefits accruing to various economic agents: consumers, producers (farmers), the agro-processing industry and the government. A more sophisticated analysis could expand to consider the effect by household income among consumers and producers. Another less data-intensive approach would be to focus on the so-called functional distribution, namely the share ofthe net benefits accruing for skilled and unskilled labor, retums to capital, profits and tax revenues. Although the project did not have the time to implement the work, an attractive feature ofFARMOD is the possibility ofgenerating the relevant data at a level sufficiently disaggregated to compute the distributive effects using the functional distribution data.

30 integral part ofthe impact and thus ofthe evaluation. Irrigation projects were also accompanied by subsidized technical and financial assistance. The true cost to the govemment ofproviding such assistance (net ofrepayment) should therefore be added to cost estimates.

Shadow prices

Estimating the correction factors is a major task in this analysis. The shadow prices ofthe following items were considered and expressed as a corresponding correction factor to market prices: (i)exchange rate; (ii) choice ofdiscount rates for use in the present value estimates; (iii)unskilled labor; (iv) skilled labor; (v) energy (electricity and fuel); and (vi) water source. A critical aspect of this study is that the shadow price oflabor, foreign exchange and the discount rate are not constant throughout the period of analysis. Their expected prices changed over time, relative to the general price level of the economy. A time series ofthe corresponding shadow prices (or correction factors) was created for the entire period ofanalysis. Considering the timeframe and the resources available for this task, the team had practically no choice but to rely on available research done on the topic in Brazil,14 selecting the “best” estimates available and extending the analysis to include the entire period covered for the various sub-periods. It is important to consider the difference between an ex ante and an expost analysis. With ex ante, the analyst has very little specific information from which to judge the future evolution ofthe discount rate, the equilibrium exchange rate and real wages. One can anticipate that there will be cycles and short-term variations in these prices, but it is not known when they will occur. The same applies to the projection of border prices for tradables. Forecasting is an imperfect science. Thus in an ex ante cost-benefit analysis, it is reasonable to project a constant correction factor. The situation is clearly different in the case ofan ex post evaluation. The analyst has the benefit ofdata on the historical evolution ofthese parameters, and, with the benefit ofhindsight, can ask “Were these projects socially profitable?” That is the question that the present study attempts to answer. The domestic prices oftradable products during a specific year were expressed as a border price equivalent, adjusted for any exchange rate misalignment at the time. Border prices (c.i.f. for import- competing and f.0.b. for exportables) were converted into a corresponding regional farm-gate price, adjusted for transport and marketing costs and for possible quality differences. The prevailing nominal exchange rate was adjusted based on the “equilibrium” exchange rate, after removing the effect oftrade barriers (taxes and subsidies). In the case ofhousehold goods other than water sources and energy, adjustments were made only when the team detected significant distortions, such as subsidies. Prices used in the analysis were always net of taxes. With regard to investments, the approach required dividing the cost structure into skilled and unskilled labor, importables, exportables, household goods, water sources, electricity and fuel. Appropriate correction factors were then applied to the disaggregated elements ofcosts and added to obtain social costs. Details on the computation ofthe shadow prices are presented in Volume 11, Annex E. To summarize, two steps are involved in computing the present values and rates of return estimates:

1. Adjusting for inflation and changes in the nominal exchange rate. All prices are expressed in US. dollars ofJune 2002. Output and input prices were adjusted for the General Price Index (Indice Geral de Preqos) as reported by the Gehilio Vargas Foundation in Rio de Janeiro. Values in domestic currency

l4Conceptually, the approach adopted follows the methodology usually associated with Prof A. Harberger, although some of the studies available in Brazil on shadow pricing followed variants of Harberger, or in some cases, different approaches (such as Bacha and Taylor on the exchange rate).

31 were expressed in US. dollars using the prevailing nominal exchange rate for commercial transactions (average ofthe buying and selling rate) as published by the Central Bank of Brazil.

2. Shadow price calculations

(a) Domestic prices for tradables: Product by product for every year between 1980 and 2001, domestic prices for tradable inputs and final products were adjusted to the border price equivalent (c.i.f. for import-competing and f.0.b. for exportables), and for domestic transport costs, quality differences and other factors influencing marketing margins. Thus, the computation ofthe flow ofcosts and retums for the period 1981-2000 was expressed in real domestic prices (in US$ as of 2002).

(b) The shadow price of foreign e~ehange'~: The conversion factor used for the period 196@1983 is based on the time series of the equilibrium exchange rate developed in the study by Brand50 and Carvalho (1989), which adopted the methodology used in the Krueger, Schiff and Valdks World Bank study on The Political Economy of Agricultural Pricing Policies (Johns Hopkins University Press, 1992). The extension ofthis series for the period between 1984 and 2001 adopted the methodology developed by Pechman (1983), which is based on the price ratio between the world and domestic prices ofgold. l6This represents a close approximation between the price premium between the official and the parallel market for foreign exchange in Brazil during the late 1980s and early 1990s. The correction factor values ranged between 1.05 and 1.25, except for 1965 when the value was 0.95.

(c) The discount rate used for the period between 1970 and 1986 corresponds to the estimates made by Lima Net0 (1989) based on the incremental value ofthe stock ofcapital in the economy over time, expressed in real terms. The extension ofthis series for the period after 1986 was based on a regression between the ratio ofthe capital stock to GDP as a dependent variable and the social rate of return estimated by Lima Neto. The evolution ofthe discount rate shows a decline from relatively high values in the 1970s and early 1980s (between 17 and 20%) towards lower rates of about 16-17% after 1986.

(d) The shadow price of labor: The adjustment factor applies to unskilled labor only. Ideally the analysts would try to estimate the reservation wage net of the social security contribution for unskilled rural workers in the various regions. However, such a methodology could not be applied due to a lack of information on these parameters. Based on various estimates by Motta (1985) and other research on the shadow price of unskilled labor, this study adopted a conversion factor of 0.89 constant throughout the period.

(e) Electricity charges: Its shadow price should be adjusted for taxes that affect prices charged through the chain between electricity generation, transmission and distribution. However, no studies were available using these adjustments. This study used the estimates by the Getblio Vargas Foundation, which indicate the existence ofa range ofelectricity charges across sectors. According to these estimates, agricultural and rural activities generally paid higher unit prices than other sectors (manufacturing and household use).

The use of differential gold prices to measure equilibrium exchange rates was suggested by Jose Luis Carvalho of the University ofSanta Ursula, Rio de Janeiro. Given that gold is highly tradable and convertible to other commodities in Brazil, the domestic-international gold price differential should reflect the tendency ofreal exchange rates.

32 Diesel fuel: Market prices for fuel include various taxes, which should be removed to estimate the shadow price for fuel. Based on a review ofthe relevant literature, this study used estimates from several sources. These were: a study by Carvalho (1978) and Oliveira (1987) for the period from 1973 to 1984, a study by the Gethlio Vargas Foundation for 1996-97, and a time series prepared by the Superintendency of Strategic Studies ofthe A" for the period between 1992 and 2001. The annual value of the correcting factor varied between 0.63 and 0.90.

Water charges: The shadow price ofwater used in irrigation should measure the opportunity cost in alternative uses (Le., its value to another party) in a situation where there is trading ofwater rights. This policy would encourage the shift ofwater use to crops with higher added value, and in some cases to alternative non-agricultural use. But this is not the case in Brazil, and in fact water charges have been low, if not free. It is only recently that some states in Brazil started a policy ofcharging for water use (Ceara). There is thus no market-determined reference price for water, which would capture both the cost of supply and the opportunity cost ofalternative uses. It should be noted that the opportunity cost of water is probably far greater than the actual cost ofproviding a given water flow. In the absence of a reference price that captures the interaction ofthe cost ofsupplying water and the demand for water, this study adopted a recovery cost ofproduction approach (cost per cubic meter), including system operation and maintenance costs, plus some allowance for the initial infrastructure investment.

3.2. Deciding on the Evaluation Rule: Present Value Criteria Versus Internal Rate of Return

The Internal Rate ofReturn (IRR) is a popular economic criterion for evaluating a single investment projecd7. It is simple to understand, can be easily compared with prevailing interest rates, and may be calculated on the basis ofproject data alone. Its calculation does not require data on the opportunity cost of capital, which is critical to the present value technique and can often be difficult to estimate. However, the internal rate ofreturn has significant disadvantages, and should be used with great caution. The main problems are:

(a) The IRR remains constant throughout the period ofa project's life, a highly unrealistic assumption considering that the relative scarcity ofcapital varies over time. For example, relatively low interest rates during the initial phase of a project could lead to the selection of projects with a long gestation period, which would have been unprofitable if the evaluation had considered the higher interest rates prevailing during subsequent phases ofthe project.

(b) There are some projects that will yield multiple solutions for the IRR (there is no unique IRR) if the time profile ofnet benefits crosses zero more than once. This can happen as result of equipment replacement, for example. (There is no problem if net benefits are all negative during the initial phase and all positive later).

(c) Perhaps most relevant for this study, a positive value obtained for the IRR does not indicate that a project is socially profitable if the rate is lower than the relevant discount rate. For example, consider a project with an IRR ofa positive 10 or 12%, but with a negative present value. That is the case for several projects in this study. Such a project should be viewed as being expost not socially profitable, because the opportunity cost ofcapital was higher than 10-12%. From today's perspective, a rate of return of 10-12% does not appear to be very low, but the evaluation in question was initiated when the opportunity cost ofcapital was considerably higher.

l7The internal rate ofreturn represents the rate of discount that results in a zero net present value.

33 (d) The IRR can be misleading for a comparison of returns among projects. Some projects with lower IRR can yield a higher net present value than another project with a higher IRR.

The problems ofthe IRR rule do not apply to the present value rule, which allows for changes in the discount rate over the project’s relevant time period. It is not affected by a sequence ofpositive and negative values. The discount rate used for each year should represent the true scarcity ofcapital in the economy that year.18

3.3. Identifying and Measuring the Social Costs of Irrigation Investments

The main expenses considered for the analysis are irrigation infrastructure investments.’ Relevant costs were associated with start-up and operation and maintenance (O&M). As mentioned earlier, multi- purpose dams (operating for water supply, flood control and hydropower) built years before the irrigation projects were initiated were not considered an integral part of the evaluation. Instead, the cost ofthe water supply from dams was assumed equal to the cost of transporting and distributing the water (using regional prices), disregarding any storage capacity-related cost. Subsidized technical and financial assistance associated with irrigation were added to the estimated costs. Negative externalities such as possible environmental impacts were not included.

Effect on the price of farmland

As a proxy to assess the value ofthe direct benefits discussed in the foregoing, the evolution in the price of farmland in the project areas compared to land prices of similar farmland in areas that did not receive irrigation (the “without project’’ scenario), should be considered. In a competitive farmland market, the differential value in the price ofland (with and without irrigation) would capture the increase in the expected private returns that can be attributed to irrigation. Unfortunately, it was difficult to apply this approach in the Northeast due to the lack of reliable information on the evolution offarmland prices in the different areas covered by the irrigation projects.

Projects selected for evaluation

The 11 projects selected are dispersed throughout five states in an Integrated Development Center (IDC), implemented and coordinated by the BN. These IDCs are: Lower Jaguaribe, Assu-Mossoro; Petrolina; Juazeiro and Northem Minas, all ofthem located in the most critical areas ofthe Drought Polygon (Poligono das Secas). The performance ofthe 11 projects was examined, focusing on costs that consider: (i)investment in productive infrastructure; (ii)on-farm and off-farm investments (cost ofthe production chain); (iii) technical assistance and other services provided to farmers and agreindustry; (iv) investments and costs ofinduced agreindustrial activities (value added via processing and marketing chains).

A different point is that the expostcalculation, even with the same methodology, could give a lower present value than the aunte calculation. An ex ante analysis deals with (social) price forecasting, but the expost analysis has the advantage of observing actual social opportunity costs. l9Conceptually, the approach adopted follows the methodology usually associated with Prof. A. Harberger, although some ofthe studies available in Brazil on shadow pricing followed variants of Harberger or in some cases different approaches (such as Bacha and Taylor on the exchange rate).

34 3.4. Geoprocessing, Videography and Radiometry

A substantial part of the methodology used is related to satellite image interpretation and geo-processing during the ex post evaluation of investments in irrigation projects, to identify irrigated areas and crop types in both public and private irrigation schemes. Multi-spectral satellite images - Landsat Thematic Mapper - were geo-referenced and studied, although it would be advisable to conduct field surveys supported by GPS and spectral radiometry. Topographic scale maps (1:lOO.OOO) from IBGE, DSG and SUDENE were digitalized by CODEVASF and used in the study as a cartographic base and support for geo-referencing the satellite images obtained for 1973, 1985, 1990, 1995 and 2000/01. All available bands were purchased, the most important being TM3 - red, and TM4 and 5 - infrared. The red band is sensitive to chlorophyll, and red light is highly absorbed by photosynthetically active vegetation (PAV). The TM4 band is sensitive to the active vegetation biomass, while the TM5 is sensitive to the presence ofwater in foliage. Using these three bands, it was possible to geereference information regarding agricultural production. (Further details can be found in Volume In, Annex G). The methodology, however, is more ambitious. It seeks to identify and characterize which crops are being irrigated and their growth phase in each pole and irrigated farm. Differences between phases should consider the diverse parameters that describe them such as their spectral behavior, the spatial pattern ofthe crops and their periodicity. The Gorutuba Project was used as a reference model. Five schemes were chosen, spread out over the year 2001, and an IDL language program was developed together with an algorithm to distinguish spectral curves and make the adjustments between the different dates. Finally, a digitalized map ofall the properties or irrigated areas within the irrigated scheme was prepared, with links between the thematic map and the database.

35 BOX 3 - The importance of Clusters in Agribusiness Chains Institutions and farmeB in the Northeast ofBrazil pay special attention to the cluster concept. For the Executive Group of the Northeast Initiative Project, more important than knowing the etymological meaning of the term cluster is understanding the sense of the emblematic mssage sent by the uniting of efforts among govemments, businessmen, financial agents and other representative segments of society with the intention of increasing the competitiveness of economic activities that are relevant to the Northeast. According to the World Bank’s C&S Group, clusters include a system of market and non-market relationships among firms concentrated geographically and institutions involved in inter-related economic activities. Most authors refer to industrial clusters as competing companies and firms headquartered in the same place, with inter-related activities within an industrial chain. For some economists, clusters are “economic agglomerations”. Clusters are recognized as being a grouping of activities made up of firms located along the production line, together with support companies, for example within the financial sector: infrastructure, consulting firms, and research and development, among others. The pilot demonstration of the Northeast Initiative, considering and examining the grape, mango, melon and papaya clusters, in terms of markets and handling technology, includes what are called “providers of basic economic foundations,” represented by human resources, technologies, financing, physical infrastructure and business environment. The concept is tied to the agro-industrial phase (B2B) and to post-harvest processing. Associating it with the agribusiness concept (Davis and Goldberg, 1957), it is therefore adjusted to primary post- production, assuming its existence and that of some type of pre-existing organization, not necessarily involving or considering social and environmental dimensions. For agribusiness chains, however, the holistic approach is important (social, productive, environmental and managerial dimensions) as i differentiation in: (i)product/commodity cycles, from biodiversity to the final consumer (improvement of processes); (ii) logistics chain involving procedures and processes of circulatioddistributioddelivery; (iii)custody chain, with contract registers, conformity certification (processes), origin certification (product), quality certification (effectiveness), and of guaranteeslinsurance; until reaching (iv) the value chain, normally referring to costs, prices and participation of agentdlinks that operate agribusiness chains. The cluster represents an important tool in the case of ID projects and individual projects on irrigated lots/properties. However, it is in the commodity project (of each product, with a certain standard and destination) that the cluster is a truly integral part ofthe agribusiness chain.

3.5. Comparison Between Municipalities with and without Irrigation Projects: A Complementary Approach to Examine Externalities

In addition to the project evaluation approach, the study included a comparison ofvarious socioeconomic indicators between regions with and without irrigation projects. This was also undertaken by a different team of specialists. Based on the premise that municipalities with irrigation should present better socioeconomic indicators than those without, all else being equal, the difference in performance between the two groups of municipalities could be interpreted as a proxy for the impact of irrigated agriculture on the surrounding rural economy. Other externalities created by the projects were analyzed using statistical data fi-om IBGE, IPEA and the National Treasury, consolidated at the municipal level, as well as information obtained through questionnaires and interviews with qualified parties. The externalities and their indirect impacts were evaluated to verify whether irrigated agriculture effectively contributed to socioeconomic development and poverty reduction. The methodology compares the performance ofa selected group ofmunicipalities with irrigation projects versus another group of municipalities without irrigation projects, to arrive at a comparative analysis ofthe development ofvarious socioeconomic indicators. The analysis covered the

36 period from 1970 (one year prior to project implementation) to 2000. The performance comparison was carried out based on the hypothesis (confirmed by the study) that municipalities with irrigation should perform better than those without irrigation and that the difference between the two groups would quanti@ the impact resulting from irrigated farming. The study analyzed the impact ofirrigated agriculture on rural GDP and its influence on urban GDP, to then evaluate the eventual contribution of irrigation to poverty reduction. Apart from this, it also examined the Human Development Indices (HDI) and the components of education, health and income. The sampling used consisted ofan average of32 municipalities per state with irrigation and 32 without, addressing only municipalities with similar GDPs per capita in 1970. The Demographic and Fiscal Dynamics analysis was carried out based on a simplified sampling, comparing one municipality with irrigation to another without irrigation in each state. For the group of municipalities with irrigation, those that showed higher outputs in the poles with irrigated agriculture in each state were selected. Control municipalities were chosen, which in 1970 presented a demographic density and a GDP per capita comparable to those of their respective counterparts with irrigation. For the Migrant Retention analysis, the methodology used was based on the estimate ofthe total number ofdirect jobs created in public and private schemes within the study poles, as well as the indirect jobs created along the respective production chains. The hypothesis was that the jobs created represented potential migrants, who, with the perspective of employment in the region, no longer moved to the Center- South, thus characterizing benefits for the region.

3.6. Possible Followup Work and Dissemination

A suggested possible extension of this study would be an analysis ofthe agribusiness chains in tropical hit(production, logistics, custody and value chains), which are all closely related to the cluster concept. Such a study would provide a better understanding ofthe role that irrigation is playing in the BSA, with a particular focus on production technology and marketing. A future analysis should also include an assessment ofmarket conditions and prospects for tropical hit produced in the different areas ofthe BSA region. Finally, the ESW will be submitted to the widest possible audience (including workshop sessions, seminars and written reports), to validate the diagnosis and recommended policy actions. Once this ESW is approved, its main findings should be disseminated widely through seminars and reports. Such a process ofdissemination would also provide the opportunity to collect feedback for future analyses.

37 4. Economic and Financial Analyses and Evaluation

As mentioned in Chapter 3, the basic methodology of the study, FARMOD software, was used for calculating the flows of costs and benefits, in terms of crop models, area and farm models ofproduction (small, medium and large), irrigation scheme models, a set or group of irrigation schemes and for simulating some input and labor use. The software converts financial costs into economic costs and calculates economic and financial rates ofreturn and net present values for all these models and aggregation levels. FARMOD was applied, with the aim ofanswering the ESW's two main questions: (i) Was public investment in irrigation in the BSA a cost-effective strategy for rural development and poverty reduction? and (ii)Were the main findings and lessons learned sufficient to make clear recommendations to the GOB with respect to the role of irrigation for regional development and poverty reduction ? Based on the results ofthe economic analysis carried out at social and financial levels, it may be concluded that public investments aimed at irrigated agricultural development can be an efficient and effective strategy for reducing poverty in the BSA region. Investments may generate positive impacts, provided they are backed by complementary actions that facilitate dynamic private sector management and an innovative capacity to respond to market requirements and production scenarios. Such is the case for two ofthe five poles covering 66% ofthe sampled areas. However, in the absence ofa proper policy framework and support activities previously agreed upon between the public and private sectors, results tend to be unsatisfactory. This is the case ofthe other three poles covering 34% ofthe areas analyzed. More than US$2 billion ofpublic funds were invested in irrigation works over the past three decades, serving 200,000 ha in the BSA, 140,000 ha of which are under production. This represents an average public investment of over US$lO,OOO per hectare. With additional funds invested by the private sector in public schemes and private developments, the annualvalue ofproduction in the BSA irrigated agricultural sector reached close to US$2 billion in 2002. This included US$170 million in fresh hitexports. Most of the additional 350 to 400,000 ha ofprivately developed irrigated areas were motivated by the new cropping altematives, technologies and productive processes validated in the pioneering public schemes. In 2002, 1.3 millionjobs (direct and indirect) were required by the BSA irrigation sector, contributing substantially to poverty reduction and to reducing rural migration towards overpopulated cities in the NE and other parts ofBrazil. From the economic and financial side, there is clear evidence that agricultural activities are best adapted to irrigation practices that were not known from the traditional cropping patterns used in the region 20 years ago. Both producers and the agreprocessing industry are in a better position today to benefit from the lessons learned and the experience gained in the development of irrigated agriculture in the region. Better results could be achieved in the future2' with the consolidation ofthe ongoing reconversion process to higher value crops. The analysis shows that the greatest benefits from irrigation were associated with changing cropping pattems towards fitproduction, as is the case ofthe Petrolina and Juazeiro poles. Farmers who could not reconvert their production systems in a timely manner to higher-value crops using improved technologies are obtaining positive financial returns but do not generate sufficient economic benefits to justify the considerable fiscal cost ofthe irrigation infrastructure. This is clearly the case in the three poles where traditional crops such as rice, maize and beans predominate (Northern MG, Lower Jaguaribe and Lower Assu). Although the reconversion process is still evolving, there are already several mature commodity clusters constituting a strong economic base, which did not exist 10 or 20 years ago. The analysis proved the potential benefits of developing a strong knowledge base to assist farmers with the introduction ofnew crops, the adoption ofnew technologies and market-oriented processes and the

*' Inthe Petrolina and Juazeiro regions, 10,000 ha of privately irrigated fruit orchards were developed, most of which would not exist if the public districts did not demonstrate the technical feasibility offiuit production and attainable results. The ERR ofthese private investments (not included in this evaluation exercise) was estimated at 70% and the NPV was US28 million.

38 development of farmers’ associations and services. It also showed the benefits resulting from investing in proper agricultural and market research and marketing structures to penetrate highly competitive world markets, to exploit and optimize the comparative advantages ofthe BSA region.

4.1. Economic Analysis and Evaluation

In terms ofthe Economic Rates ofReturn (ERRS) and Net Present Values (NPVs), the evaluation shows significant performance differences among the 11 schemes analyzed. This also applies to the public investments in these schemes, which vary from US$4,700 to US$15,580 per hectare, an average of US$10,531 per hectare. (See Table 4.1) The evaluation is based on the actual evolution of production until 2003, and on the tendencies for each scheme thereafier until 2020. In the case of the three schemes where newly developed areas are in the process ofbeing allocated (Jaiba Iwith 16,000 ha; Lower Jaguaribe (2,500 ha) and Lower Assu (3,000 ha), it was assumed that those areas would be under production by 2008. This might be an optimistic assumption in the case ofJaiba, due to its isolation fiom markets and considerable technical and marketing problems, but not for the other two poles. In fact, in the RN poles, entrepreneurial farmers, currently constrained by limited and overexploited water sources, are demanding additional irrigable land with a dependable water supply to expand their flourishing export-oriented production schemes based on melon, banana, pineapple and mango production.

39 Table 4.1 Summary of Economic Results

IL

7-- , I I I/ Total BA (23,162 ha) I 21,206 (92%) [ 30,023 (130%) I 7,700 I 19.9 I 53.1 /I Northern Minas Gerais Jaiba I(24,081 ha) 8,158(33%)’/ 10,629 (44%) 10,315 7.7 - 92.0 GorutubaLagoa Gde. (6,400 ha) 4,900 (76%) 4,191 (65%) 13,980 14.1 - 8.6 Total MG (30,481 ha 14,365 (47%) 14,820 (49%) 11,000 8.9 - 100.6. Lower Jaguaribe (CE) Morada Nova (3,450 ha) 1,680 (50%) 7,302 (21 1%) 14,300 11.1 - 7.7 Jaguaribe Apodi (5,933 ha) 3,500 (59%)” 3,185 (53%) 15,580 8.5 - 29.2 Total (CE) (9,383 ha) 5,180 (55%) 10,487 (112%) 14,460 15.0 ‘‘ - 36.9 Lower Assti (RN) Lower Ass6 (5,629 ha) 2,480 (44%)3’ 3,052 (54%) 6,105 12.1 - 11.5 Total (RN) (5,629 ha) 2,480 (44%) 3,052 (54%) 6,105 12.1 - 11.5 Total 11 Districts (91,504 ha) 63,811 (70%) 85,536 (94%) 10,531

li Jaiba: Considering that investments for Jaiba’s first phase are already finished, it was assumed that in addition to the 2002 cropped area (33%), the other 67% would be incorporated between 2003 and 2008. 2’ Jaguaribe Apodi: Considering that investments for the first phase are finished, it was assumed that in addition to the 2002 cropped area (58% of the 1‘ phase), the other 42% would be incorporated over the next four years. 3i Lower Assd: Considering that investments are already finished, it was assumed that in addition to the 2002 cropped area (44%), the other 56% would be incorporated between 2003 and 2008. 4’ Lower Jaguaribe Pole: Besides the two irrigation districts in the area, the public investments enabled the development of 22,000 privately irrigated ha that would not exist without the project. The ERR for this private area is 27%.

The results of the economic analyses are shown for the individual irrigation projectshchemes and groups of projects within each ofthe five poles. The NPV is the appropriate measure for assessing the economic performance of public investments. As shown in Table 4.1, based on the estimated social discount rates” (ranging from 19.1% to 16.8%), only four of the 11 sample schemes showed positive expost returns (positive present values). The seven remaining schemes presented negative present values. The most successful projects were Touriio, Curaga, Bebedouro and Mandacaru, three ofthem located in the Juazeiro pole. Two ofthe projects with positive present values - Bebedouro (PE) and Mandacaru (BA) - are pilot projects begun under an agreement with FAO, and Mandacaru is being used as an occasional case study by the Ministry ofNational Integration (MI).

21 The social discount rates applied in this study (varying fiom 19.1 to 16.8%) were calculated by Jose Luis de Carvalho, Guilherme %ria Bastos, Jaime Artigas and Alberto Valdks in December 2002. (For more details, see Annex E of Volume 111 of this report.)

40 The analysis at pole level (or group ofprojects) and of various related activities shows that the overall impact is highly satisfactory in the case ofthe four irrigation schemes of the Petrolina and Juazeiro poles with a positive NPV, with an aggregate NPV ofUS$57 million and an average ERR of22.8%. At the regional level, including the six public irrigation settlements of the Petrolina and Juazeiro poles, the overall impact is rated as satisfactory, with an ERR of 18.9% and an NPV ofUS$49.0 million22. In contrast, for the three other groups ofprojects analyzed (in the Lower Jaguaribe, Lower Assu and Northern Minas Gerais poles), the ERRSwere only 15.0%, 12.1% and 8.9%, respectively, and the NPVs were negative. The seven cases with negative present values provide valuable lessons for an improved strategy for future public interventions. The major reasons for the unsatisfactory results were : (i)over-designed projects and delays in their implementation; (ii)underpriced water charges; (iii)emphasis on infiastructure to the detriment ofproduction efficiency, beneficiary selection, and training and technical assistance; (iv) a focus on paternalistic poverty alleviation, neglecting the need for a well- balanced mix ofsmall and medium- scale beneficiaries to maximize the impact ofinvestments on development; (v) lack of adequate political support; and (vi) no efficient land-titling scheme to support a dynamic land market and, through it, a positive natural selection ofproducers.23 As summarized in Table 4.1, the ERRS ranged from 14.1% (GarutubaLagoa Grande) to 25.4% (Touriio). In between are Maniqoba (16.7%), Nilo Coelho (16.8%), Curaqh (19.9%), Bebedouro (21.9%), and Mandacaru (24.1%). The four remaining projects could be divided into two groups: (i)Lower Assu (12.1%) and MoradaNova (11.1%) with low ERRS, and Jaguaribe-Apodi (8.5%) and Jaiba (7.7%) with extremely low ERRs. Positive ERRs below the corresponding discount rate would indicate that there were alternative investments yielding higher social returns, i.e, the opportunity cost ofcapital was higher than 10-12%. The ERR approach assumes a constant rate over time, while the NPV measures the relevant discount rate at each point in time, which is likely to vary. This analysis shows how much the final evaluation ofthese public investments depends on the actual discount rate estimate. There are unfortunately very few independent empirical studies on the subject for Brazil that would allow a comparison of estimates. It is possible that the returns in most ofthe projects analyzed were underestimated. The official estimates of irrigated areas on which the analysis is based is equivalent to 75% ofthe actual area under irrigation in the public districts, according to the satellite images interpreted by CODEVASF. In addition, benefits from neighboring private areas were not accounted for, with the exception of the Lower Jaguaribe area. Moreover, the significant drop in the domestic and border prices ofagricultural products over the past two decades decreased the returns to these investments. These downward trends were impossible to anticipate when the projects were designed. The Jaiba Project is an example ofa poorly designed and executed project. Planned to incorporate over 80,000 ha for irrigation (including 67,000 ha as public schemes areas), about US$268 million24were

22 These results were calculated based onan estimatedproduction of61,500 ha, out of the 91,000 ha implemented, accordmg to official data. However, satellite image data show that in 2001,85,000 ha were in production in the sample’s 11 irrigation schemes, an area 39% greater than that declared. This number was confirmed by CODEVASF. However, the analyses were made with smaller areas to be on the conservative side. Adjusted calculations can be redone in the near future. 23 CODEVASF allowed and even encouraged turnover in Petrolina-Juazeiro both among colonos and entrepreneursa practice that contradicted what the agency was doing in other regions. For this reason, agencies managing land settlements in Brazil and elsewhere often forbid selling land, and implement complemenw measures to prevent turnover. Results in Petrolina and Juazeiro show turnover in land settlement projects should not be considered negative. It became an unplanned process to improve the performance of irrigation projects, as those who entered often had more experience and capital than the ones who left the projects. Newly arrived farmers usually had marketing connections, showed commitment to their farms and the development ofthe region, and often created more jobs and provided higher wages and better working conditions to their rural workers. 24 In addition to the US268 million investments in head works and in completing the first phase of Jaiba, the State ofMinas Gerais mvestedmore than US$120 millionin the second phase (20,000 ha) with the support of a Japanese loan. The second phase is nearly ready for new settlements.

41 invested over the past 28 years in works that remain unfinished25to this day. Fifteen years passed between construction start-up and the first settlements. Another 13 years went by and still only 10,500 ha are operational today (about 10% of the total area). Meanwhile, the over-designed infiastructure is under- utilized and is having a negative impact on the general cost ofO&M, affecting the project’s financial and economic viability. The pioneering Morada Nova project, which was designed in the 1960s with a neat social criteria (3-4 ha family farms), suffered fiom a paternalistic approach and lacked adequate management, training and technical assistance. Although only 30% of the area was suitable for rice, it was allowed to be reoriented towards flooded rice production. When rice prices collapsed, users were unable to reconvert their production systems into more profitable activities, despite public assistance and subsidies. The Jaguaribe-Apodi and Lower Assu projects had an extremely long construction period due to the lack oftimely and adequate funding for completion and for settling farmers. Water is very scarce and has high opportunity costs in the three schemes (Morada Nova, Jaguaribe-Apodi and Lower Assu), but charges do not reflect the supply costs. Consequently, farmers tend to continue using irrigation water on traditional crops with reduced water-use efficiency rates, even at lower prices. The results given here are conservative estimates because they also include all the initial investment costs for some innovative production activities but not all the benefits. With the dissemination of the knowledge and skills now available, only marginal contributions are needed, and the new investments should be concentrated on the most profitable support activities.

BOX 4 - Comparative and Competitive Advantages of the Semi-Arid Region

In rainfed cashew-production areas, traditional cashew trees have a mean productivity of 300 kgiha. With the dwarf cashew, this increases to 1,500 kgka. Under irrigation, dwarf cashew trees produce up to 5,000 kgka. Other crops react the same way. Most fruit trees planted under highly and very highly arid conditions produce between two and two-and-a-half harvests per year. The practice and calendar of irrigation do best when it does not rain at all or very little. With 3,000 hours of sunlight and heat all year round , the BSA has excellent natural production conditions.

The evaluation confirmed that a proper strategy may be highly effective in creating jobs and reducing the high levels of poverty that are characteristic of the BSA region, even in less-favored areas with regard to natural resources and geographical location. It was also found that that management can be significantly improved in most irrigation schemes. Establishing targeted interventions, reinforcing strategic partnerships to support production, enhancing the social capital of small-scale farmers and strengthening their organizations and ties with existing public and private services are several low-cost activities that could have a positive impact. Results may also be improved by easier access to land titles, water rights and formal sources ofcredit, information and technical assistance.

25 The Jaiba irrigation Project (Loan 3013-BR), designed to make better use of the existing infrasmcture, helped the completion of Phase I between 1989 and 2000. Given that the infrastructureinvestments considered by this project were largely orrfarm investments, prior off-farm general infrastructureinvestments were considered sunk costs. The project’s outcome in terms of its contribution to the GOB’S goals to increase production in drought -prone areas, and institutional strengthening and beneficiaries’ participation, was rated SatisfactoIy. Implementation Completion Report (CPL3013). Report No: 22435. June 29,2001.

42 BOX 5 - The BSA is Not Only Irrigated Fruit Production. Although the BSA has great potential for fruit production, it is also suitable for other high-value products and protected cultivation techniques, particularly for vegetables, flowers, condiments and spices, which require special conditions such as optimal day and night-time temperatures, favorable intensity of lightlsolar radiation and day length. The BSA Region has these ideal conditions. The equipment and supply industry is currently undergoing a major development process to supply the increasing demand from this specialized irrigation sector for plastic films, screens and micro-sprinkling and drip irrigation materials, as well as for water filtering and recycling, and ferti-irrigation. Irrigation is also about to be used for medicinallpharmaceutical plants. However, investments are necessary for research, to accelerate diversification and to intensify the development of this potential. The flower cluster in Holland, for example, has the support of five or six research centers.

4.2. Financial Analyses and Evaluation: Private Rates of Return

Several simulation models at the farm level and in post-harvest enterprises were developed to analyze financial results by applying the FARMOD software. Some ofthe indicators obtained from 11 small family unit (SFU) models, four entrepreneurial farm units (EFU), and eight post-harvest activities (PHA) are shown in Table 4.2. The estimates represent private returns for prototype cases based on a set of representative technical coefficients and economical parameters for each ofthe three aforementioned categories. High financial returns at the farm level are not surprising, even when economic results are not very good, considering that the ofyarm infi-astructure was developed through public investments, and in some ofthe projects water charges are subsidized and/or not even paid. Moreover, these private returns do not include the opportunity cost of self-employed (family) labor as a cost item, so one should be careful when interpreting these results. However, the returns per family day oflabor shown in the last column are a good indicator for comparing returns obtained with the opportunity cost of family labor in all the analyzed schemes.

Table 4.2 Financial Results in Farm and Post-Harvest Activity Models

Nilo Coelho SFU 6 9.0 26.5 27.1 23.3 18.2 19.5 16.5 122.5 20 Bebedouro SFU 8.5 15.0 26.6 23.8 20.8 16.7 16.5 15.0 103.4 15 Tourh SFU 5.7 6.7 9.3 17.9 19.6 4.7 10.5 12.3 53.8 20 Curach SFU 7.3 8.8 19.6 25.0 30.3 13.5 16.2 19.9 97.0 20 Maniqoba SFU 7.8 9.7 19.6 28.9 30.8 13.5 19.4 20.6 112.3 28 Mmdacani SFU 6.2 7.4 20.5 30.7 20.0 12.2 19.6 11.5 101.8 14 Jaiba SFU 5 3.5 4.5 10.0 0.9 5.0 7.1 11 Gorutuba SFU 6.5 3.2 17.3 10.5 10.3 9.2 5.5 6.1 44.0 10 Morada Nova SFU 4 7.5 13.8 8.4 7.6 8.9 4.0 4.0 46.6 8 ------7.8 4.9 8.8 9.0 3.9 4.9 10.9 7 Lower Assu SFU 8.16 5,300 8.0 8.5 7.2 4.5 4.3 3.2 8,867 5 FRR Entrepreneurial Farm Units (YO) Nllo Coelho EFU 50 58 0 1527 1398 2780 890 884 1207 5800 416 Mmqoba EFU 30 3s 0 784 660 1147 536 416 659 4102 406 Jaiba EFU 2s 17 5 43 1 604 - 24 1 225 53 0 239 Jaguanbe Apodi EFU 20 44 0 1-111 6 505 - 202 11 1 38 Lower Ass6 EFU 100 3000 I - I 61 6 3551 - -518 125 1 37,009 27

43 Sugar-alcohol 38,533 44,664 46,878 47,680 29,184 33,609 35,370 173,533 53 Pepper Concentrates - 3,700 - 3,900 7,800 - 1,277 2,968 2,828 58 Mango Packing 1,600 - 7,050 16,710 - -529 1,129 3,062 28 Grape Packing 105 - 5,650 - - 473 478 74 MelonPacking 50 350 36 31 42 Onion Packing 50 428 20 41 183 Banana Marketing 151 900 139 124 47 Tomato Pub 15.000 - 2.250 6.750 - 998 3.100 855 16

Both SFU and EFU in all public schemes are having positive financial results at fm level and in many cases show even highly positive results. The SFU 2002 annual net income after all relevant expenses (excluding family labor), ranges from US$3,200 to US$20,600 with an average ofUS$16,000 for Petrolina and Juazeiro SFU and US$4,800 for the other three poles. Accordingly, the returns per family day of labor are about US$20 and US$8, respectively. Differences in results are mainly due to the production patterns and productivity levels in the different regions. Petrolina and Juazeiro SFUs have already been converted into high-value hitorchards, but the process isjust beginning in other areas where farmers are not motivated to reconvert, since the water charges are below the social cost for providing it. The predominance oftraditional crops with positive financial returns but huge social costs is the main consequence ofunderpriced water charges. Table 4.2 also shows the results of entrepreneurial activities. Both EFU and the post-harvest enterprises in all regions are obtaining adequate and in some cases extraordinarily high financial results. This is the case ofthe EFUs in Petrolina, Juazeiro and Jaiba, where financial rates ofreturn are higher than 400% in the first two regions and 239% in Jaiba. These results are due to the fact that most irrigation investment costs (over US$lO,OOO per ha on average) were covered with public funds, while users are paying only the on- farm investments and a small K1annuity (US$25 per ha). The NPV ofthe K1payment is equivalent to only 1.3% ofthe average public investment in irrigation infrastructure. Details are discussed in Volumes I1and 111.

4.3. Fiscal Analysis

In most evaluations, a fiscal analysis per se is not a component ofthe social project evaluation because the fiscal impact of the project’s actual operation represents an economic transfer between beneficiaries and the government rather than a true benefit to the economy. Moreover, alternative government investments would also generate a flow of fiscal revenues and hence the money collected should not be attributed as a net benefit ofthese projects. Nevertheless, it was considered to be useful to present a narrative on the revenue collected through various taxes and charges.

BOX 6 - Grape and Wine Production in the Semi-Arid Region One of the ago-industries with the greatest capacity to generate revenue is grape and wine production. According to the sector’s business sources, it would be unthinkable to produce good quality grapes and wine in the Lower-Middle S5o Francisco without the investments made in public irrigation schemes. There are currently 600 ha of wine grapes and eight grape and wine enterprises producing young wines and spumanti in the only region ofthe world where two and a half harvests can be obtained per year. One hectare of wine grapes produces 22 tons of grapes, resulting in 22,000 bottles of wine, with a value estimated at US$66,000. Of this amount, 50% is accumulated taxes.

About US$1 billion ofpublic funds were used for the development of 91,500 irrigated ha in the sample public schemes. Some cost recovery ofirrigation infrastructure from beneficiaries is supposed to come from an annual payment (the K1tariff) established by law, to be paid for a period of 50 years.

44 CODEVASF, the agency responsible for the public districts in Petrolina, Juazeiro and Northem Minas Gerais, set the Kl tariff at B66.77 per ha (about US$25 per hectare). The NPV of 50-year annual payments ofUS$25 is US$137.00, which represents 1.3% of the public investment cost per hectare. As a result, there is only a very small recovery ofgovernment investments. In fact, the money recovered through the K1 tariff is less than the schemes’ head works O&M costs in the CODEVASF projects. In the DNOCS projects in CE and RN, users are not even paying the K1fees, nor are actions being taken to enforce payment. However, fiscal revenues from the incremental activities are an indirect means ofcost recovery, since the economic activities stemming from irrigated agriculture are subject to several taxes. The principal taxes are: (i)Industrialized Products Tax (PI),mainly for sugar and alcohol; (ii)Tax on Merchandise Circulation and Services (ICMS), paid for most agricultural products; (iii)Social Security Contributions (COFINS); (iv) Social Integration Program (PIS); and (v) Contributions over Financial Transactions (CPMF). The ICMS alone taxes the value ofproducts and services an average of 15.3%, 20.5%, 1l,l%, 73% and 7,9% in CE, RN, MG, PE and BA, respectively26. The ICMS has a higher incidence in those states where poverty is most widespread. Tax collection in Brazil is highly concentrated on regressive indirect taxes (the poor pay proportionally more). It has cascading effects and is accumulated in the production and trade processes of goods and services. There is no net value added principle in the tax structure. Considering that on average, products go through three steps before reaching the consumer, the PIS-COFINS accumulates 8.8% over the ICMS. In addition, the structure ofthe sales tax on agricultural inputs is estimated at 4 to 5% ofthe value of the resulting agricultural production.

4.4. Employment Generation

The analysis confirmed that irrigated agriculture could continue to play a key role in poverty reduction in the BSA region, as it requires lower investments per job generated. This is difficult for other sectors to match. Public interventions seeking the mobilization ofprivate investments were an effective way to step up the local and regional development process. On average, each irrigated hectare provides one 111-time on-farm job and between one and two additional jobs in ancillary backward or forward activities. The cost ofjob generation was an average of US$5,000 to $6,000 compared to other sectors such as consumer goods (US$44,000 per job). In the tourism, automotive, metallurgical and chemical sectors, these costs are between 18 and 44 times those ofirrigated agriculture in the NE and the BSA. In addition to creating jobs, the sector also contributes to increasing the food supply on the local and national markets at lower prices through increased food production and productivity, generating consumer surplus. These benefits are especially felt by the poor as food expenses make up a higher percentage of their income, thereby increasing their purchasing power.

4.5 Final Remarks on the Ex Post Economic and Financial Analysis

The principal social returns indicator applied and measured in this expost evaluation was the Net Present Value rule, and the analysis shows mixed results. Four projects had a positive Net Present Value and were thus successful: Bebedouro in Pemambuco, and Mandacaru, Touriio and Curaqa in Bahia. The other seven projects performed below the average investments in the Brazilian economy (estimated between 19.1 and 16.8). They all have negative Net Present Values. On an aggregate basis (pole), the Juazeiro and Petrolina schemes show a positive present value.

26 G & S Assessoria e Adlise Econhica. Incidkncia Tributaria na Agricultura e nos Produtos Alimentares: Impactos de Desoneraqb sobre Preqos ao Consumidor e na sua Renda. Sumhrio Executivo.

45 The ex post analysis ofthe successful and unsuccessful projects can provide useful information that may help identify the types and characteristics ofproject and/or development poles that should be pursued. It can also indicate what to avoid in the future. Public irrigation schemes act as catalysts for a region's development. In the case ofthe projects considered here, the catalysts were oriented towards diversified tropical hitproduction for both domestic and export markets. However, this evolution of product mix was not anticipated. Until the mid-l970s, there was no experience, tradition or information on the products that could be cultivated in the region using irrigation. The parameters ofwater consumption and the risks ofpests and diseases that could affect production were also unknown. Public irrigation schemes contributed to the trials with various production patterns and technical packages. An important result was that labor-intensive tropical fruit production was found to be technically and economically feasible in the regions in question. Given access to water sources, private irrigation grew quickly during the 1990s in the Petrolina and Juazeiro regions. This is illustrated in Figure 4.1 for the Nil0 Coelho project.

Figure 4.1 Growth in Value of Production in the Nil0 Coelho Irrigation Scheme

1,800,000,000 1,600,000,000 1,4OO,OUU,UOO 2 1,200,000,000 4 3 1,000,000,000 $ 80,000,000 GO,OOD,ODO 4O,o 00,0 00

20 ~ 00 0,0 00

YEARS

a ANN'JAL COSTS FRUIT GROWING

The increased responsibilities ofusers in the administration, and the O&M ofthe irrigation districts during the 9Os, was a radical departure from previous paternalistic practices, where public agencies used to plan, build and operate the projects, providing all required services including TARE - Technical Assistance and Rural Extension. The new water-user associations are now better managed and operated, with improved performance and sustainability. The trend is to become self-sufficient and achieve full autonomy. However a number ofunfavorable developments have led to poor results in many irrigation schemes and investments in these areas have failed to realize their full potential. The small farm family units tend to be slow in achieving adequate levels of efficiency and in responding to changing market signals. This is the case ofMorada Nova, where none ofthe entrepreneurial lots are being used for carrying out new activities in the region. Moreover, the public institutional system tends to be excessively slow and rigid when it comes to providing timely funding, completing infrastructure and settling suitable farmers. The resistance to turnover in irrigation projects, and the delays in reassigning areas already allocated and aband~ne&~, have a direct effect on the results ofmost districts and prevent better ones from being achieved. In addition, problems ofland titling and the lack oftransparent markets for irrigable land, as well as other

27 In the 11 irrigation schemes analyzed (a total of 91,500 ha), only 61,000 ha are officially considered under production. It should be noted that the analysis of satellite imaging data (2001) made by the study reveals that the area under production is actually greater (SS,OOO ha).

46 deficiencies in the allocation and registration of water rights attract fewer private investors due to a lack of minimum guarantees. Regularization and land titling are essential for providing security oftenure to encourage investments and replace inefficient producers. The analysis ofsuccesses and failures indicates that the government should adjust its priorities in the future, focusing on completing unfinished infrastructures, fully recovering costs and improving the provision of essential public services, such as an adequate legal framework for land titling and unambiguous water rights. It should also concentrate on agricultural research and extension for smallholder farmers and the development ofnew products, processes and markets. It is not feasible now to reverse the situation for projects whose performance was negative, since many of them have already failed. However, the managing agencies could at least adopt a strategy to minimize the likelihood of future losses. Ifprevious investments are considered sunk costs, the future plans for these schemes should target maximizing the net returns ofthe additional investments and operational costs required. For example, the Jaiba and the Jaguaribe-Apodi schemes could be socially profitable (at the margin), considering the relatively high returns expected. Adequately phasing implementation and providing investment funds in a timely way have a major effect on the performance of irrigation projects in BSA. As previously stated, Jaiba is probably the best example ofan inadequate strategy that led to a huge social and economic failure, which is impossible to reverse after three decades of construction. However, since most ofthe investments for installing the irrigation facility have already been made, its completion should result in high rates ofreturn for the marginal investments required. Civil works for the first two phases have been completed and are now ready to provide irrigation water and electricity for 46,000 ha. However only 8,500 ha are being cropped. Ifleft alone, it will probably take about 15 years to have around 30,000 ha under irrigated production. On the other hand, if strategic investments are adequately proposed and implemented to accelerate the process, it is highly likely that all 46,000 ha could be under production in 15 years. By comparing the costs and benefits resulting from both scenarios, it is possible to calculate the marginal returns from alternative investments and identify those with the highest impact. With the additional investment ofUS$32 millon to speed up the devebpment process required for full production in Jaiba, an ERR of47% could be achieved with an NPV ofUS$98.6 million. The required complementary investments, mostly for the development of“public goods” (i.e. for adapting technologies to the region; technkal assistance for smallholders; the implementation ofplant-protection programs; assistance for the development ofmarketing channels and agro-industries, etc.) would help create a more attractive environment for private investors. In the futuse, the government should focus primarily on completing investments for construction projects that are ongoing andor need to be complemented to reduce risks, improve competitiveness and efficiency, diversify production and expand agribusiness, while facilitating the full use ofthe existing infrastructure. Many ofthe investments already made should be considered sunk costs in the present situation. In addition to Jaiba, there are a number of other unfinished schemes involving the expenditure ofseveral hundred million dollars. They are on a long waiting list for budget allocations to complete their construction or implement the complementary investments needed for start-up and to realize their potential to generate employment and income. A further analysis is needed to make a final assessment. However, it should be emphasized that past losses should not be the predominant criteria when deciding whether or not to support the completion ofthese schemes with public funds.

47 SOX 7- Economic and Financial Evaluation: Main Findings

9 Investing in irrigation development can be an efficient and effective strategy to ensure economic growth and poverty reduction in the BSA, provided it is accompanied by complementary actions with a dynamic innovation capacity to respond to changing markets and production scenarios. 9 More than US$2 billion ofpublic funds were invested in irrigation works over the past three decades, serving 200,000 ha, 140,000 ha of which are under production (an average govemment investment of US$lO,OOO/ha). With additional funds invested by the private sector, the annual value ofproduction in the NE irrigated agricultural sector reached US2billion (US$170 million of exports), generating 1.3 million jobs and reducing rural migration towards overpopulated cities in the NE and other parts ofBrazil. 9 The overall impact is satisfactory in Petrolina and Juazeiro, with an ERR of 18.9% and a Net Present Value (NPV) ofUS$49.0 million. In the other regions in Northem MG, CE and RN, where there were inconsistencies in govemment actions, the ERRSwere only 15.0%, 12.1% and 8.9%, respectively, and the NPVs were negative. 9 There are four projects for which the net social returns to public investments were positive, in terms ofNet Present Value. Using estimates of true opportunity costs, investments in these projects generated an increase in economic wealth over and above the average returns on investments in Brazil. All four projects were located in Petrolina and Juazeiro: Bebedouro, Mandacaru, TourPo and CuraqB. The Net Present Values ofthe other projects were negative, although in some cases ERRSwere relatively high, such as 16.8% in the case ofNil0 Coelho and 16.7% in Maniqoba. 9 Benefits may have been underestimated. Satellite imagery shows that the total irrigated area is greater than the official estimates upon which Net Present Value calculations were based. Benefits from private areas were not considered except for CE. Moreover, only a few post-harvest activities were quantified. 9 The declining trend in intemational and domestic prices for several crops produced in the irrigation schemes may be one variable that could have contributed to reducing the ex post benefits relative to the expected benefits. Prices decreased as much as 40 to 60% according to some estimates. 9 The Jaiba Project (NPV of negative US$92 million) is an example of poor project management. Designed to incorporate up to 100,000 ha (with 67,000 ha ofpublic schemes for settlements) for irrigation, US$268 million werc invested over the past 28 years in works that remain unfinished. Today only about 10,500 ha are being cropped in about 10% ofthe project area foreseen. 9 The Morada Nova Project (NPV of negative US$7.7 million) suffered from a patemalistic approach and farmer5 lacked adequate training and technical assistance. When rice prices collapsed, users were unable to reconvert theiI production systems into more profitable activities in a timely manner, even after 30 years of assistance. 9 The Jaguaribe-Apodi and Lower Ass6 projects (NPVs of negative US$29 million and negative US$11.5 million: underwent a lengthy construction period due to the lack of timely and adequate funding, and this delayed the settling offarmers. 9 In the three CE and RN schemes, water has a high opportunity cost, which is not reflected by charges, and there art restrictions to trading water. As a consequence, some farmers misallocate water to traditional crops with low water use efficiency. 9 When subsidies are required to make socially desired activities viable, their magitude, target and timeliness must be clearly defined in order to maximize their positive impact. Cost-benefit analyses and simulations using financial and shadow prices are valuable tools for targeting incentives and help identify winners and losers ofp ublic investment decisions. 9 The Petrolina and Juazeiro experience suggests that farmer turnover may work as a “natural selection” process anc could improve the impact of irrigation schemes. > The results provide valuable lessons leamed (i)Over-designed projects and delays in project implementation ma! jeopardize economic viability; (ii)If water charges underprice its costs, it tends to be used for low-value crops wit1 negative economic results; (iii)More attention should be paid to the quality and efficiency of technical assistanci for investments; (iv) The appropriate selection of beneficiaries is crucial for sustainability; (v) a well-balanced mi: of small and medium-scale beneficiaries helps maximize the development impact of investments; and (vi) When th government agency closely monitors the process and controls the characteristics of the new settlers in public districts, turnover may work as a “natural selection” process that pushes incompetent producers out. Incoming producers tend to be more successful than those who quit, thereby improving the overall impact ofthe schemes.

48 5. A Comparison Between Municipalities With and Without Irrigation Projects: A Complementary Approach to Examine Externalities

5.1 Introduction and Methodology

Irrigated agriculture in the Semi-Arid Region created a series ofexternalities together with social and economic benefits. These benefits were measured at the municipal level using selected indicators taken from statistics available from IBGE, IPEA and UNDP. As irrigated agriculture is the major economic activity in the region, the hypothesis was that any subsequent impact would be reflected by the indicators for the municipalities with irrigation schemes. However, the results obtained by the analysis must be considered merely indicative, since it is difficult to isolate the impact of irrigated agriculture from the other factors. The municipalities’great heterogeneity also affects their comparability.

Some ofthe indicators used in the analysis were: (i)demographk growth - to measure the impact of irrigation activities on population dynamics; (ii)urbanization rates - to assess the influence ofthe irrigation economy on urban growth; (iii)per capita income; (iv) poverty rates - to verify the impact of irrigated agriculture on poverty alleviation; (v) municipal GDP growth - to analyze the effect of investments in irrigation on the rural and urban sectors ofthe economy; (vi) literacy rates; (vii) life expectancy; (viii) human development indices - to see whether the investments led to improved social conditions; and (ix) migrant retention - to analyze possible impacts on retaining potential migrants. The methodology compares the performance of 32 municipalities/groups ofmunicipalities in the five-pole sample, each ofwhich had at least 1,000 ha ofirrigated farmland including public and private schemes, with the same number ofmunicipalities without irrigation. Some municipalities with fewer than 1,000 irrigated hectares were included when the irrigated areas found were the extension of larger irrigation schemes in adjacent municipalities. The municipalities were grouped by development pole. The group of municipalities without irrigation (MwoI) was selected at random in the surrounding areas of municipalities with irrigation schemes (MwI) in each pole. Although the soil and climate conditions as well as the agricultural production model ofboth MwI and MwoIwere similar within the same pole in the pre-irrigation period (1970), their territorial size, demography, urbanization and economic performance differed significantly. However, the results obtained are considered to be representative due to the average size of the sample. The subdivision ofa great number ofmunicipalities after 1980 complicated the analysis. As the municipality is the reference unit for statistical data, some ofthem had to be “rebuilt” to allow a statistical comparison from the beginning ofthe study period to be made. The case ofJaiba, the most important MwI in the MG pole, is a case in point. Jaiba was a district of Manga when irrigation began. When it was created in 1993, it incorporated part of Manga (a MwI) and part of Monte Azul (a MwoI). In addition to Jaiba, four other municipalities, all MwoI, resulted from the dismantling ofManga in the 1990s. Therefore, to analyze the evolution ofthe chosen indicators in relation to Jaiba’s, both Manga and Monte Azul had to be “rebuilt” and included the other dismantled municipalities together with Jaiba in the data analysis for 2000. This exercise was carried out in a number of other cases. As the majority of“attached” municipalities are MwoI, the resulting benefits ended up being underestimated, Le., quite conservative. To refine the analysis, the MwI group was divided into two subgroups, according to the overall performance of the public irrigation schemes in the poles. They were evaluated through the assessment of a number of attributes. Subgroup 1 included the municipalities of the Ceara and Northern Minas Gerais poles, where the performance ofthe public irrigation schemes was rated lower. Subgroup 2 included the poles ofRio Grande do Norte, Pernambuco and Bahia, which had much better performances. The total irrigated area ofthe 32 sample MwI was estimated to be 194,000 ha, including 95,000 ha ofpublic schemes and 99,000 ha ofprivate schemes (see Volume 111, Annex I-A, Table 1).

49 The analysis ofthe impact of irrigation investments on the performance ofmunicipal GDP was carried out using a smaller sample of municipalities (14 MwI and 16 MwoI) by Regis Bonelli (see Anex I-B) in 2002, when the satellite imagery analysis was still underway and the overall picture ofthe irrigation poles was as yet incomplete. The same sample base as that used by Bonelli was used to estimate the number ofmigrants retained. The study compared population growth by municipality, according to the 1970-2000 censuses, with a growth scenario estimated based on pre-irrigation period growth rates and corrected by national inter-census deflation factors (see Volume III,Annex I-C, Tables 1 and 2). The difference between the population established by the censuses and the population estimated using the aforementioned methodology during each inter-census period was considered a proxy of the number ofpeople who did not migrate because of job positions created directly or indirectly by irrigated agriculture. As municipal demographics differ considerably, the results obtained are specific to each municipality and cannot be extrapolated. The benefits ofmigrant retention in each MwIwere calculated by multiplying the estimated population retained per year by the difference between the annual social expenditures incurred per inhabitant in each municipality ofthe sample, and the same expenses in the main urban centers. They included governmental expenditures for education, housing and urbanism, health and sanitation, and transport and public security (Volume 111, Annex I-C, Table 4.1). It was considered in the study that had they not been retained, they would have migrated to the main urban centers according to historical migration rates for the state in which the municipality is located (Volume 111, Annex I-C, Table 4). The average cost per migrant was then established using the percentages ofretained migrants per urban center (Volume 111, Annex I-C, Table 5).

5.2. Main Conclusions

Overall, the municipalities with irrigation performed better than those without, indicating the positive influence of irrigated agriculture on the region’s social and economic development. While the soil-climate characteristics of the MwI and MwoIwere relatively similar, the socioeconomic indicators for the pre- irrigation phase were generally better for the MwI, denoting the existence ofa more favorable “predisposition” towards development in these municipalities. The best indirect impacts were noted in the MwIof the Group 2 poles, where the MwoIalso performed better than the MwoI ofthe Group 1 area, indicating a more constructive environment for development in the Rio Grande do Norte, Pemambuco and Bahia poles compared to Ceara and Northern Minas Gerais. It appears that the better infrastructure, more effective urban support and proximity to markets in the Group 2 area helped attract the entrepreneurial farmers, who ended up making the difference. A caveat on the interpretation ofthese results: The comparison between public irrigation municipalities with and without irrigation is based on weighted arithmetic averages. The arithmetic mean is sensitive to extreme values and thus the analyst is left with the problem ofinterpreting the differences between municipalities without information on the variation within municipalities, which would be required to test the true statistical significance of the observed differences between municipalities. A more detailed analysis is described in the following sections.

5.3. Population Growth

The accelerated demographic growth of the MwI over the past three decades, as opposed to the MwoI, is a strong indicator ofthe positive impact of irrigated agriculture on regional development. While the population ofthe MwoIcontinued to migrate due to the lack ofpossibilities, the MwI not only retained their population, they also attracted people from other areas. The demographic growth rate ofthe MwI group during the 197G2000 period was markedly higher than the average for the Northeast and for Brazil as a whole, and almost six times higher than that ofthe mirror municipalities, whose population practically stagnated, as shown in Figure 5.2.

50 Three of the five municipalities with irrigation were transformed from towns into cities in 30 years, joining the 4% ofBrazilian cities with populations of over 100,000. These are: Petrolina (PE) which grew from 61,000 inhabitants in 1970 to 219,000 in 2000; Juazeiro (BA) which grew from 62,000 inhabitants to 175,000; and Mossoro (RN) which grew from 97,000 to 214,000 inhabitants. Serra Talhada (PE) - the mirror municipality of Petrolina - grew only 27% between 1970 and 2000, i.e., from 60,000 to 71,000 inhabitants, while Petrolina grew 257%. Similarly, the population of Juazeiro (BA) grew 183%, while that of Jacobina (its mirror municipality) fell 0.04%. Likewise, Mossorb (RN) grew 120%, while Acari grew only 3% during the same period. In general terms, the population of the MwIgrew 91.8% from 1970 to 2000, while that of the MwoI increased by only 15.6%. This rate was 30% higher than for the Northeast (69.8%), indicating that irrigated agriculture played an important role in attracting manpower and, as such, not only retained potential migrants, but attracted those from neighboring municipalities and possibly from other parts of the Northeast. Table 5.1 illustrates this conclusion (for further details, see Volume 111, Table 2 of Annex I-

A) *

Table 5.1 Population Growth, Period 1970-2000 (in YO)

Annual rate 1970-1980 2.81 1.14 2.15 2.47 Annual rate 1980-1991 2.12 0.12 1.82 1.52 Annual rate 1991-2000 1.60 0.20 1.29 1.62 Annual rate 1970-2000 2.19 0.48 1.84 2.09

Source: IBGE, 1970 and 2000 Censuses

Mean annual growth rates during the 1970-2000 period were 2.19% for the MwIand only 0.48% for the MwoI. These rates were 1.3% for MwIGroup 1 (Ceara and Northern Minas) and 2.91% for Group 2 (Rio Grande do Norte, Pemambuco and Bahia). The growth rates also varied in the MwoI (0.29% for Group 1 and 0.70% for Group 2). Growth was more accelerated during the 1970s, gradually slowing down during the following inter-census years. However, as shown in Table 5.1, the MwI always maintained significantly higher annual growth rates than those of the MwoI, the Northeast and Brazil as a whole. The higher averages were those of Petrolina (4.43% per year) and Juazeiro (3.65% per year), where irrigation expanded faster based on the production of exportable hitsand vegetables. This helped boost the local economy and attract people from other municipalities. Conversely, the growth rate was either negative or close to zero in most of the MwoI, suggesting a possible population transfer from these municipalities to the MwI. While migration from the MwoI increased, municipalities with irrigation started to receive migrants (Volume 111, Annex I-A, Table 2).

5.4. Urbanization

One of the most visible aspects of Brazilian demographics is the process of urbanization that began in the 1960s. This was greatly influenced by industrial growth and became an important indicator of economic dynamics. The population ofboth the MwIand MwoI was still predominantly rural in 1970, before the implementation of the irrigation schemes. As shown in Table 5.2, in 1970 the urban population of the MwI group was 37.8% of the total and that of the MwoI, 24.6%, while the Brazilian average was already 56% and the Northeast average 413%.

51 Table 5.2 Urban Population in 1970 and 2000 (in % of total population)

Year l RlwI MwoI R’ortheast Brazil 1970 1 37.8 24.6 41.8 55.9

Source: IBGE, 1970 and 2000 Censuses

Figure 5.1 Urban and rural population growth, 1970-2000

Source: IBGE, 2000 Census

In the more developed MwI Group 2, the average urbanization rate in 1970 was already 52.0%, as opposed to 23.7% in the MwI ofGroup 1,20.6% in the MwoI ofGroup 1, and 29.5% in the MwoI ofGroup 2. It is more than likely that the existing solid urban structure was one ofthe factors that contributed to the rapid expansion ofirrigated agriculture in some ofthe MwI of Group p8. Coincidentally, the most successful municipalities were those with significant urbanization rates in 1970, such as Mossorb (81.55%), Petrolina (62.35%) and Juazeiro (63.4%) (see Volume ID, Annex LA, Table 3). The MwI with less developed urban bases at that time, such as Janahba (3 1.63%) and Limoeiro do Norte (24.84%), which were still essentially rural in 1970, had greater difficulties in getting their irrigation schemes off the ground. By the year 2000, the average urbanization rate ofthe MwI had increased to 67%, which was similar to the Northeast average (69%), but lower than the national rate (81%), while the MwoIremained at 53%, with almost half the population still making their living from the land. The MwI ofGroup 2, at 73%, was much higher than the MwoI of Group 2 (57%), and the MwI of Group 1 (58%) was higher than the MwoI of Group 1 (50%), indicating the positive influence ofirrigation on urban development in the poles. The analysis shows that the socioeconomic context in the Group 2 geographical area was more favorable to urban development than that of Group 1. Despite the considerable urban population growth in the MwI during the 30-year period (240% against 165% for Brazil as a whole), the rural population in the municipalities with irrigation did not decrease. On the contrary, there was a slight increase ofabout 2% between 1970 and 2000. This contrasts with the urbanization process in the MwoIand in Brazil in general, where urban development occurred at the expense ofa rural exodus, as shown in Figure 5.2, and reflects the strength ofthe rural sector ofthe

~~ ’*See paragraph 6.2, Lessons Learned.

52 MwI. It is also a clear indication that irrigated agriculture contributes to the joint development offield and town at both regional and state levels.

Figure 5.2 Urban and rural population growth, 1970-2000

1

Source: IBGE/1970 and 2000 Censuses

5.5. Poverty Reduction

Statistical indicators comparing MwI with MwoI suggest that irrigated agriculture has contributed significantly to poverty reduction in the Semi-Arid Region. The three indicators used to estimate this impact were: (a) Poverty Rate; (b) Per Capita Income; and (c) the Municipal Revenue Index.

Poverty rate

The poverty rate, calculated by IBGE and based on head-of-household income statements, is detailed in Volume 111, Tables 4 and 5 ofAnnex I-A. Table 5.3 shows the percentages for two population groups during the year 2000, which fell below the poverty and indigence lines, respectively. Unfortunately, the lack ofdata at the municipal level for the year 1970 makes it impossible to compare the poverty rates of the two groups ofmunicipalities during the study period.

Table 5.3 Poverty Rates in 2000 (YO)

MwI hlwol Northeast Brazil Indigence 4.5 11.5 7.8 2.9 Povertv 35.9 45.2 36.8 21.5 ~ I Indigence + 40.4 56.7 44.6 24.4 Poverty

Source: IBGE, 2000 Census

Table 5.3 shows a considerable difference between municipalities with and without irrigation. Both groups have very large percentages ofpoor families2’. However, the poor segment is 16 percentage points lower

’’ Families are considered poor when the head of household emsless than one minimum salary.

53 in the MwI, where the poor make up 40% of the total population. In the MwoI, about half (49.6%) are classified as poor. Moreover, the percentage offamilies classified as indigent (income below 50% ofa minimum salary) in the MwoI is 2.5 times greater than in MwI. Given the fact that a significant portion of the population ofthe MwI come from the MwoI group, this indicator shows the possible influence of irrigated agriculture on wealth distribution and poverty reduction also in neighboring municipalities. Examined on their own (see Volume 111, Annex LA, Table 4), the leading MwIof Group 2 (Mossor6, Petrolina and Juazeiro) whose irrigation schemes were initiated in the 1970s, show poverty levels ranging from 28% to 34% (above the national average of24%), while those for the MwoI group were between 43% and 75% (above the average for the Northeast at 44.6%). In two ofthese MwI (Mossorb and Petrolina), the indigence rate came out below the Brazilian average of2.9%. For the MwI Group 1, poverty rates are comparable to those for MwoI of Group 2 and the Northeast averages, but are below those ofMwoI of Group 1 (see Volume 111, Annex I-A, Table 4), indicating that irrigation contributed to poverty reduction in all poles at both municipal and micreregional levels.

Per capita income

As expected, the performance of the poverty rate is closely related to the trend ofpopulation income. Substantial per capita income increases are observed from 1991 to 2000 (no data available for 1970), both in MwI and MwoI. In the latter case, where the number of elderly is more significant, the increase was partially due to the relative weight ofpensions in the composition ofmunicipal income. Although oflittle relevance in 1970, this became the main source of income for poor families in many municipalities ofthe Northeast in the 1980s (see Chapter II,Volume II).In the MwI group, per capita income increases were mainly a result ofeconomic activity, due to their younger population. The average per capita income was very low in 1991 in both groups ofmunicipalities. While this indicator continues to be low, there was a real gain of36% in the MwI and 42% in the MwoIover a nine- year period, from 1991 to 2000 (see Figure 5.3). The relatively faster growth in the MwoI is due mainly to the increase in the pensions paid to the elderly population, whose share in the social structure is numerically more important in these municipalities. However, in absolute terms, average income increased R$36.97 in the MwI and only W29.86 in the MwoI. Similar to the findings with the other indicators, the per capita income analysis indicates a significant difference between the Group 1 area (CE and MG) and the Group 2 area (RN, PE and BA) for both the MwI and the MwoI, indicating more dynamic economic development in the MwI. While the overall average income in 2000 was W140.48 for the MwI and W99.50 for the MwoI, the MwI income was R$161.04 in the Group 2 area and only R$107.84 in the Group 1 area. Similarly, per capita income in the MwoIwas R$107.94 in the Group 2 area compared to W92.04 in the Group 1 area. The highest income increases were observed in Petrolina (from W151.00 in 1991 to R$201.00 in 2000), Mossor6 (W132.00 to R$180.00) and Juazeiro (R$110.00 to R$175.00). (See Volume 111, Annex I-A, Table 5).

54 Figure 5.3 Monthly Income Per Capita in 1991 and 2000 (in R%of 2000)

WI-I WL2 Total WoI-I Wok2 Total

W mrriptim Wonrrigatim

Municipal Revenue Index

The Municipal Revenue Index - one ofthe three components of the Human Development Index (HDI) calculated by UNDP- also increased significantly during the 1970-2000 period as shown m Table 5.4.

Table 5.4 Municipal Revenue Index, in 1970 and 2000 (HDI-Income)

2000 I 0.590 0.537 ? Yo I 344% 426%

Source: UNDP/IPEA/FJP, Human Development Atlas in Brazil

Rates: 0.0.5 = low; 0.5 - 0.8 = medium, and above 0.8 =high development

Similar to the per capita income, even with the MwI’s improved performance, the MwoI also presented a noticeable increase. Both groups ofmunicipalities went from a low to a medium development situation. Again, Petrolina, Mossor6 and Juazeiro achieved the best rates (see Volume III, Annex I-A, Table 6). The similarity in the performance curves for both groups of municipalities indicates that the influence of irrigation on municipal revenue growth was not the determining factor. It is rather the result of the transfer offunds from federal and state governments, which tend to favor poorer municipalities (often representing over 90% oftotal revenues), with the aim of improving national income distribution and municipal administration, and ensuring basic social services. However, statistics show that the MwI did better than the MwoIbecause ofthe increased tax base.

5.6. Economic Impact

This section analyzes the impact made by irrigated agriculture on other rural and urban sectors ofthe economy, measured in terms of Municipal GDP. (See Volume 111, Annex I-B.)

55 Although there has been substantial variation within each group, on average, the economy ofthe MwI group grew 2.5 times faster than the MwoI group (6.43% against 2.53% per year) over a 25-year period (1975-2000). The growth rate was 5.3 times higher for the rural sector. For the MwI group, every 1% increase in rural GDP corresponded to an increment of 1% in urban GDP growth (6.53% and 6.55%, respectively), confirming Bonelli’~~~findings that each monetary unit invested in agriculture generates an average ofone monetary unit in the other sectors. The increase in agricultural GDP was not very significant for the Mwol group (1.24%), while urban GDP showed a more dynamic, independent performance, with an annual growth rate of 3.4%, possibly motivated by the development of irrigated agriculture in neighboring municipalities. Table 5.5 summarizes the performance ofthe Municipal GDP in both the MwI and MwoIgroups.

Table 5.5 Municipal Urban and Rural GDP Growth Rates

1975-2000 (average percentage per year)

Municipalities Total GDP Rural GDP Urban GDP MwI (YOper year) 6.43 6.52 6.55 MwoI (YOper year) 2.53 1.24 3.40

Source: Research database, set text Volume II, Annex I-B

The data shown in Table 5.5 strengthen the argument that investments in irrigation infrastructure in the Semi-Arid Region of the country increase rural GDP and boost urban development, even promoting growth in nearby municipalities. The significant flow ofmigrants &om MwoIto MwI contributed to the fact that per capita GDP did not grow as much as municipal GDP in the MwI, as shown in Table 5.6. In other words, most ofthe migrants who came to share the GDP generated in the MwI came from the neighboring municipalities. All things considered, investment in irrigation infrastructure increases welfare and reduces poverty in the region.

Table 5.6 GDP per capita. 1975-2000 (R$ of year 2000)

MwI 1,648 2,801 1.021 MwoI 1,012 1,584 1.018

Source: Research database; see text Volume III, Annex I-B

5.7. Social Indicators

The main social indicators, expressed by the UNDP’s Human Development Indices, rating the development ofeducation, longevity and municipal revenue, improved considerably over the past three decades, rising from low to medium levels ofdevelopment by the year 2000, and in some cases to a high level ofdevelopment. However, the similarity ofthe HDI growth curve in both MwI and MwoI indicates that the determining factor was most likely the various federal education and health services programs and the resources sent through the Municipal Participation Fund, rather than irrigation. Nevertheless, the

30 Regis Bonelli: LongTerm Economic and Social Impacts of Agricultural Expansion in Brazil: Invisible Revolution and Social Inclusion. Rio& Janeiro, 2001.

56 slightly superior performance ofthe MwI shows that irrigation did have a beneficial effect on their HDI indices, as shown in Table 5.7. (See Volume 111, Annex I-A, Table 6). Petrolina (0.748) and Mossoro (0.735) had the best scores in the MwI group. The municipalities with the lowest scores were Choro (0.570) and Acopiara (0.593), both fkom the MwoI group in Ceara.

Table 5.7 Municipal Human Development Index (HDI-M), 1970 and 2000

2000 0.687 0.644

Training includes two months of refresher courses on basic subjects. Of the 360 candidates, CENTEC chooses the 180 best qualified, dividing them up among four courses. The others take new entrance exams at CENTEC or at other courses. CENTEC's future will be in the training ofCearh's entrepreneurs and business people. CENTEC also trains irrigation technicians, many of whom currently hold important technical and administrative positions in irrigation schemes in CE and RN. This is a good example to be followed by other states.

I' I1

5.8. Retention of Migrants

About half a million people are forced to migrate every year fiom the rural zones ofthe Northeast to the cities ofthe Center-South and the Northeast, mainly due to a lack ofjob opportunities in the region. This causes a number ofsocial problems, which translate into additional costs that must be borne by society. Irrigation activities contributed to the retention ofa number ofpotential migrants by creating direct and indirect employment opportunities. The analysis carried out using the methodology described in section 5.1 provided an estimate of the number ofpotential migrants who were retained in a sample of 14 municipalities/groups of municipalities with irrigation schemes between 1970-2000. The result is summarized in Table 5.8. (See details in Volume 111, Annex I-C.)

Table 5.8 Estimated Potential Migrants Retained by Irrigation Projects Period 1970-2000

Polelstate I 1970 1980 1991 2000 Jaguaribe-Apodi I 0 0 -1,215 1,014 Baixo Assu 0 0 0 4,067 Petrolina 8,924 19,744 53,515 74,712 Juazeiro 3,242 12,944 23,293 37,064 North ofMinas -213 1,470 10,996 9,596 Total 11,953 34,158 86,589 126,453

Source: IBGE, 1960,1970,1980, 1991 and 2000 Censuses

57 The total number ofpotential migrants possibly retained in these 14 MwI as a result of irrigation activities was estimated to be 126,000 over a 30-year period. The bulk ofthis number contributed to the population increase of the Petrolina and Juazeiro Poles in Pernambuco and Bahia. The poor performances of the Cearii, Rio Grande do Norte and Minas Gerais MwI are partially due to the generally less dynamic local economies, as already shown in the previous sections. The benefits resulting from the non-migration of the aforementioned population are estimated at about US$500,000/year, as shown in Table 5.9. (Details in Volume 111, Annex I-C.)

Table 5.9 Direct and Indirect Benefits per year from Reduced Migration (in US$)

Juazeiro/B A

Total 257,698 535,504 497,374 497,374

Source: Research data. Volume III. Annex I-C

The total irrigated area in these 14 municipalities, including public and private schemes, is estimated at about 160,000 ha (about one third ofthe total irrigated area in the Northeast). However, the above benefits cannot be applied to the other two-thirds ofthe irrigated area, as demographics vary significantly from one municipality to another.

5.9. Employment

The most obvious indicator of poverty reduction is the number ofjobs created. By creating about one direct job per hectare3’, irrigated agriculture was responsible for around 226,000 new jobs in the primary sector alone over the past 30 years, spread among the five poles. Considering that each direct job in irrigated agriculture creates an average of 1.6 indirect jobs (Ca~alcanti~’),the total number ofjobs created in the same period and throughout the production chain was more than 570,000 for the five poles, or 19,000 jobs per year. Figure 5.4 illustrates the time progression ofjob opportunities in the study areas during the 1973-2001 period.

* Labor demand varies from 0.2iha for rice crops to 0.7h for banana crops and 2.5ha for grape growing. As there are variations among the districts, the weighted average in the five study centers was estimated at 0.9Sha. 32 J.E.A.Cavalcanti: “Impactos socioecon6mkos da irrigaqb na regia0 mineka da SUDENE”. Viqosa, 1998

58 Figure 5.4 Job generation in the five poles (1973-2001)

1933 1118318’7 1354142 19% 19w 2001 Source: Research data

BOX 9 - Irrigated Agriculture Helps Raise Salaries

After establishing itself in the Chapada do Apodi (RN) for melon production, Del Monte (a multinational fruit company) recruited 2,000 workers in 1999 within a radius covering various municipalities in Ceara and Rio Grande do Norte. In the company’s first year of operation, the competition for labor resulted in 30% increase in the region’s average salary, with another 25% being added the second year. On average, the region’s salary level jumped from R$6.OO/day in 1999 to R$lO.OO/day in 2001, representing a 67% increase in only two years.

This effect on salaries illustrates the positive nfluence of irrigated agriculture on the process of increasing income and reducing regional poverty. Moreover, the impact of Del Monte and that of the region’s other fruit production and export companies has not only been quantitative; there was also a considerable qualitative gain for workers. Employment, which had previously been mostly informal and seasonal, became much more formal, with signed work contracts and ensured year-round income. Furthermore, the more structured firms provide their employees with medical and dental care, thus also contributing to the improvement of the region’s health indicators.

II Source: Northeast Bank

59 6. Main Conclusions and Lessons Learned

6.1. Background

The study was developed using a sample ofpublic irrigation schemes under two different water supply conditions: (a) abundant surface water, which is the case ofthe SbFrancisco Valley, with the exception of the Gorutuba project; and (b) scarce surface and groundwater conditions, which are representative of irrigatbn systems in part ofthe State of Piaui, all ofCeara, Rio Grande do Norte, Paraiba and a major portion ofPemambuco. Using a comprehensive methodological approach, the conclusion was drawn that public investments in irrigation constitute an effective strategy for sustainable development at the regional level, and for economic growth and poverty reduction in the BSA region. They must however be accompanied by complementary actions to respond dynamically to changes in market and production systems. The analysis shows the combination offactors that were prevalent in the eighties. Most ofthe irrigation schemes started then or just before, when there was a general decline in the prices ofbasic food crops. Earlier projects, such as Morada Nova, Bebedouro and Mandacuru, had benefited from the high prices of basic grains. In the 1990s, with the exception of Morada Nova, which continued to produce paddy rice, both the older and newer projects shifted rather quickly into fruit crop production. Touriio is another exception, since it was planned and implementedjointly with the private sector for sugar cane production, and remains as such. That also coincided with the time when new public irrigation projects were no longer approved, mainly because adjustments needed to be made aiming at higher efficiency, as required by the shift from traditional crops to higher value crops using an agribusiness approach. Investments continued to be made in the ongoing projects, although at a slower pace, and many projects were never finished. It became clear that it was necessary to consolidate and optimize the existing projects, increasing the outputs and outcomes ofpast investments, since traditional crops were no longer profitable.

6.2. Major Factors Affecting Project Performance

The major factors that affected project impacts and outcomes have been divided into two main groups: those that contributed to a project’s success, mainly in the Petrolina and Juazeiro Poles, and those that inhibited the development ofmost ofthe other projects. The aim is to recommend measures that may improve the performance ofthe problematic projects, while establishing key guidelines for the completion ofthe unfinished ones.

6.2.1. Factors that Contributed to the Successful Development of the PetrolindJuazeiro Poles

The most important factors were:

(a) Favorable natural conditions, namely: (i)abundant, cheap and accessible irrigation water from the S5o Francisco River; (ii)reduced rainfall, allowing an optimized water supply scheme to be adopted and adjusted according to crop needs, and (iii)well-drained soils and a flat landscape, facilitating the cultivation ofa wide selection ofirrigable crops; (b) Proximity of sizeable urban centers, ensuring the required urban support, such as technical assistance, rural credit, supply ofagricultural and irrigation equipment, vehicle and machinery maintenance services, adequate living conditions for the farmers and their families, with the necessary social services, particularly education, health care and le isure activities;

60 (c) Proximity of accessible markets and maritime ports, which, together with an adequate transportation system (good road network and a local international airport) facilitates the marketing of the produce; (d) Competent project management teams, who very creatively transformed the originally paternalistic, social development-oriented projects into agribusiness-focused ventures: CODEVASF played a relevant role in these poles by screening new applicants and establishing criteria for the creation, use and involvement ofproducers’ associations, public -private partnerships, etc.; (e) Inclusion of a significant number of entrepreneurial producers in the public perimeters, who managed to develop economically sustainable production chains linked to both domestic and international markets, set up efficient marketing systems, integrated the smallholder farmers who constituted the bulk ofthe producers and generated a considerable number of steady jobs, thus turning the formerly low profile activities into a successful enterprise. All this served to motivate other farmers to develop their own private irrigation schemes in the pole. VALEXPORT, a successful association offruit and vegetable producers in the pole, which was created in 1988 and has over 1,500 members today, synthesizes the dynamism introduced by the entrepreneurial farmers in the Petrolina-Juazeiro Pole; (f) Early definition and promotion of comparatively competitive crops and products , as well as the corresponding production chains; (g) Promotion and adoption of a diversified crop menu, to reduce the risks inherent to monoculture cropping models; (h) Adequate technological support through CPATSA, the Embrapa research center for the Semi- Arid region, located inside the irrigation pole, together with efficient technical assistance schemes; (i)Flexibility to allow settler turnover and early distribution of land titles, facilitating a free land market, thus contributing to a positive selection ofproducers in the long run; (j) Establishing step-by-step project implementation, avoiding heavy, not immediately productive, up-front investments; and (k) Strong, effective regional and local political support , which was essential for the improvement and development ofthe urban, transport and communication infrastructure, for ensuring the necessary rural credit support, upgrading the local structure of social services and encouraging entrepreneurial farmers from all over the country to invest their own capital in the pole.

CODEVASF’s strong leadership, as the project irrigation agency, and the participation ofprivate entrepreneurial farmers, many ofwhom are developing their projects on the riverain plains of the SZo Francisco River at their own risk, contributed greatly to the pole’s success. Unfortunately, the lack of more ofthese plains limits the expansion ofpurely private irrigation in the pole, particularly on the Pernambuco side. Although a number ofproblems still remain, the Petrolina and Juazeiro Poles have generally been both economically and socially successful, as a result ofthe combination ofsome positive factors, as shown in Figure 6.1 and Table 6.1.

61 Figure 6.1 Positive Factors and Economic Results in Public Irrigation Schemes

30 30

25 25

20 e 20 0 U 0 m LL 15 15 al> .-r u) 0 10 10 *n 5 5

0 0

62

6.2.2. Main Factors that Inhibited Successful Project and Pole Development

The projects and poles generally failed to develop satisfactorily wherever the positive factors mentioned earlier were lacking. As shown in Table 7.1 ,many ofthese features were absent in most ofthe poles/projects that developed more slowly than expected. Cost overruns and the economic disasters that plagued such projects as Jaiba, Jaguaribe Apodi and Lower ASSU,among others, were due mainly to the failure ofthe government to adequately finance project implementation and to the political interference that slowed down implementation. Several years are required to complete the physical structures for irrigation projects. Competent follow-up and effective technical assistance are also essential. Many projects were never completed due to frequent government and policy changes. Interruptions during the construction phase resulted in large payouts to contractors for damages, additiona 1 costs for starting up work and the inefficiencies inherent to partially completed projects. The main reasons for the failures of the different poles analyzed are described in the following paragraphs. The most extreme cases - Jaiba and Morada Nova - are examined in greater detail.

A. North of Minas Pole

While supplied by abundant surface water, this pole, consisting of the Gorutuba and Jaiba projects, is in a very isolated region, with a poor road network that has been only partially improved by the project. Remoteness and the consequent high transport costs are some of the main development constraints. Cultural barriers related to the beneficiaries, and particularly the lack of strong political support, were also important issues. The development of this pole is still considered highly problematic, although it has become the most important national producer of ‘silver’ bananas (bananaprata), the most popular variety on the domestic market, and the recent arrival of entrepreneurial farmers has brought both dynamism and crop diversification. However, the Jaiba Project, which has achieved only about 10% ofthe proposed target 15 years after start-up, demonstrates the implementation difficulties ofthis highly problematic region.

Jai’ba Project

A number offactors contributed to the failure of this project, in addition to those already mentioned, namely:

(a) Inadequate planning. The project was undoubtedly oversized. This reflected the strategy ofthe military government in the 1970s: for big problems, big solutions. With its foreseen 100,000 ha irrigation perimeter, the project was meant to reverse the entire region’s state of underdevelopment and integrate it with the rest ofthe country. However, the planners failed to foresee the difficulties inherent to developing such a remote area. In retrospect, the project should have been planned on a much more modest scale to minimize implementation difficulties;

(b) Oversized up-front infrastructure. The hasty implementation ofthe huge water-pumping and distribution system, which was calculated for the entire perimeter, was an obvious mistake. In addition to the high initial investment costs, which could have been phased up according to implementation requirements, it generated expensive ongoing equipment-related’ maintenance costs. Twenty-eight years after construction began and 15 years after settlement start-up, only about 10% ofthese are being used effectively;

(a) Slow pace of implementation. Farmer settlement and the corresponding pace ofcrop establishment was very slow. Only 40% ofthe project’s first phase, or about 10% ofthe total area, is currently under production. Urgently needed public support goods and services are still lacking, particularly agricultural research, plant protection barriers and control, TA for smallholder farmers and titling of irrigated plots;

(b) Poor beneficiary selection. Consistent with its objectives, the project tried to benefit mainly the local population through the settlement oftraditional smallholder farmers who practice rainfed agriculture and goat raisers established in the region. Their lack ofcapital was a major limiting factor, despite the favorable subsidized credit line given to the beneficiaries. This, in addition to the difficulties ofgetting familiarized with the new intensive crops, the discipline required by irrigated agriculture, dealing with bank credit, and marketing their production, contributed to the insolvency of most beneficiaries, with over 400 of them abandoning their plots. Entrepreneurial farmers have only been involved with the project since 1998-99. They are introducing a new dynamic, helping to increase production, establishing new production chains, integrating the smallholder farmers and generating jobs;

(c) Lack of land titles. While the plots sold to entrepreneurial farmers were regularly titled, smallholders have not received their land titles to date. This hindered the formation ofan active land market and prevented the transfer ofabandoned and under-utilized plots to more competent, capitalized farmers;

Lack of effective urban support. Given the lack ofa larger city in the region, equipment supply and maintenance had to be sought in Montes Claros and Belo Horizonte, some hundred kilometers away. This has been a major obstacle in attracting entrepreneurial producers to the area. Moreover, Montes Claros, a traditional and rich cattle -ranching center that is expected to become an industrial pole in the region, exerted some negative political influence against the Jaiba project. This was most likely due to Jaiba’s obvious development potential, which could eventually displace Montes Claros as the “capital” ofNorthern Minas. Despite this fact, the cities of Janauba and Jaiba have been expanding over the last decade, thus slowly correcting the problem of urban support and creating better conditions for future development;

(e) Technological constraints. When the project first started, the region was devoid of adequate technologies for the range ofpossible crops to be introduced. Moreover, the agricultural research scheme established by the state to ensure the necessary technological support during project implementation was inadequate. The lack of dynamic technological support for the producers played a major role in slowing down project development. This has also become a limiting factor for project sustainability, as no disease-resistant banana varieties have been found as yet to replace the existing plantations largely infected by the Sigatoka and Panama diseases;

(f) Lack of a plant protection system fhe hundreds of abandoned banana plots have become a focal point for pests and diseases (particularly Black Sigatoka and Panama diseases). No phytosanitary scheme has been established to compel farmers to destroy them. Although these problems might have had a limited impact in the past and cannot be considered among the causes of slow development, they are a serious threat to the project’s sustainability in the near future;

(g) Insufficient crop diversification. In the early 1990s, the project’s production scheme was focused on a banana monoculture, motivated by a favorable market and the Gorutuba experience. However, declining prices in the late nineties due to overproduction, resulting in significant losses to the producers, led to crop diversification. Market risks were thus more evenly distributed, ensuring a better performance;

65 (h) Inadequate technical assistance. The project’s technical assistance scheme was set up on a demand-based model, according to which the farmers were assisted only with existing technical problems that they detected. This model does not contribute to innovations, and extension agents are not prepared to help the producers improve their marketing schemes. Small-scale farmers therefore depend on knowledge transfer from entrepreneurial farmers to improve the management oftheir own production chains;

(i)Marketing constraints. The produce is sold only on the domestic market, mainly in the large urban centers ofCentral and Southeast Brazil. No market study was done to orient the production scheme. Export possibilities are still remote due to a lack ofboth an adequate infrastructure and an aggressive export policy. The produce is usually sold to traditional distributors or occasional clients identified by individual producers. Profits are reduced due to the great distance to the markets. Any production surplus is usually lost, as there are no local industries to absorb it;

(i) Lack of political support. The project lacked adequate political support. This is gradually being corrected by the present state administration, which made Jaiba one ofits top priorities. Its aim is to make the project the most important export pole of Minas Gerais.

B. AssuMossorb Pole

Public initiative in the SbFrancisco poles (PetrolindJuazeiro and Northem Minas) ledthe irrigation development process and influenced private irrigation. Conversely, in the Assu/Mossorb Pole, private irrigation developed autonomously, based mainly on groundwater supply. Public schemes went beyond the private areas, diversifying production, introducing innovations and improving production efficiency. However, the private irrigation sector’s growing dependence on the groundwater supply created a serious problem with water over-pumping, a limiting factor for further expansion. The most critical problems faced by the Lower Assu irrigation scheme included: (a) serious financing discontinuity and the consequent delay in dam reconstruction; (b) inadequate farmer selection; (c) lack of technical assistance; and (d) poor selection of crops and farming systems based on subsistence farming. Moreover, the inability to recover the social cost ofmaking water available resulted in the continuity of traditional crops, generating higher costs than benefits. At the root ofthese problems was a lack of leadership fiom both DNOCS (the agency in charge ofthe schemes) and the state government, which only recently assumed full command and is trying to attract entrepreneurial farmers to help improve overall efficiency.

C. Lower Jaguaribe Pole

The lack of satisfactory political support prevented the timely solution oftwo water-related problems that decisively affected the performance ofthis pole: water scarcity, which requires the administration of competitive demands, mainly for human and animal use; and occasional devastating floods. To offset both problems, the establishment ofa flow-regulating system of storage reservoirs was foreseen, consisting of the construction ofthe huge Castanhb Dam in the upper valley, and a number ofcomplementary downstream small dams along the Jaguaribe river. However, the works were executed very slowly due to critical financing gaps. This was compounded by institutional discontinuity as a result of the eradication of the managing agency, DNOS, and the delayed transfer ofthe management responsibilities to DNOCS in the early nineties. The engineering works have now finally been completed, but the system will only become fully operational once the Castanhiio Dam has been filled. This has been prevented by the inexpensive delayed transfer ofa road section crossing the area to be flooded.

66 The most critical part of this pole is the Morada Nova Project. The factors hindering its development are described in the following section.

Morada Nova Project

The first sizeable public irrigation project in the BSA region, it is located in the Banabuih valley, a tributary ofthe Jaguaribe River. Prior to project implementation, individual, small-scale irrigation was practiced with traditional crops. This project’s problematic development was mainly caused by:

(a) Inadequate beneficiary selection criteria. Designed to benefit exclusively poor, landless small- scale farmers, the criteria used to select the beneficiaries did not take their development potential into account. Consequently, production was below expectations, leading to the farmers’ widespread insolvency. Their lack ofambition, motivation and managerial capacity also contributed to the project’s poor development;

(b) The adoption of a paternalistic approach, which characterized the secalled social projects until the 1970s. Land and houses were distributed to the beneficiaries for free, but property titles were not given. This strategy was used to prevent them from selling their plots and to encourage their sustainable attachment to the land. A highly subsidized credit scheme to finance production was set up. Paternalism contributed to immobility, as it discouraged the farmers’ creativity and inhibited their efforts. The land market restrictions prevented land transference to more competent producers;

(c) To benefit primarily landless farmers, the project provoked the displacement of existing land owners, many ofthem smallholder farmers themselves who were already practicing small-scale lowland irrigation, pumping water from the shallow water table during the rainy season. This created a social problem and reduced the area’s development potential;

(d) It was envisaged that only 30% ofthe area would be under rice production, based on the soil type and land suitability zoning. However, given the favorable rice market that was prevalent during the 70s and early 80s, the project’s production scheme ended up being based entirely on an inundated rice monoculture. The cultivation ofpaddy rice on sandy soils resulted in an excessive demand for irrigation water far beyond the dam’s replenishment capacity. Although initially profitable, the scheme became unsustainable with the decline ofrice prices that had begun in the late 1980s. This contributed to an increase in the farmers’ financial problems, and the production scheme’s rigidity prevented it from being promptly reconverted into more profitable crops;

The high waterconsuming technology adopted by the project was incompatible with the scarcity ofwater in the region. As a result, the project was affected by constant water shortages. The misguided strategy finally became apparent during the drought of 2000, when the government suspended the water supply to the project altogether in order to alleviate the urban water shortage ofFortaleza. The farmers were granted a compensatory subsidy for not producing. This situation, which persists to this day, led to the insolvency ofthe cooperative. Its rice mill, financed with BNB credit, is no longer being used, leaving the farmers without any tangible development perspective.

67 6.3. Summary of Conclusions

6.3.1. General

The study indicates that public investment in irrigated agriculture could be an effective strategy for boosting regional development, increasing exports and alleviating poverty in the BSA. To ensure this, one needs (a) favorable natural conditions, particularly suitable soils and abundant water; (b) an adequate regional infrastructure, such as a good transport network and the proximity of sizeable urban centers; (c) a propitious institutional framework, including strong political support, effective land titling, policies and mechanisms for water rights licensing, and a competent project management unit; and (d) suitable conditions for project implementation, namely: well-designed projects, timely financing and implementation, industrious farmers, effective technological support and competent marketing. Projects that had most of these characteristics were highly successfid, such as those ofthe Petrolina and Juazeiro pole, despite the initial problems due to the country’s lack ofprevious experience with irrigated agriculture. On the other hand, the projects that lacked these features failed to achieve their goals satisfactorily. The Jaiba and Morada Nova projects, in Northern Minas Gerais and Cearh, respectively, were extreme examples of economical failures. Jaiba was an oversized scheme located in a remote, isolated region, lacking the necessary urban support. Huge up-front infrastructure investments, compounded by a delayed settlement and only partial exploitation ofthe area, and the subsequent reduced output, resulted in a negative Net Present Value (NPV). Although the project in Morada Nova was originally intended to produce rice onjust 30% ofthe area consisting of heavy soils, it was redesigned before start-up to produce only paddy rice on the whole area. The scheme, which was based on a water-demanding monoculture in an environment where water is scarce, suffered from constant water shortages. It eventually had to be discontinued altogether due to competitive demands for water from the urban sector. In the absence ofcompetent guidance, the producers, who were mainly poorly trained traditional small-scale farmers, were unable to reconvert the adopted scheme into a more competitive, sustainable production system. Delayed implementation and the non-completion ofprojects were among the main reasons for the failure ofsome schemes. Most of the unfinished public irrigation schemes require only a minimum marginal investment to be completed. Ifthe initialinvestments are considered sunk costs, additional investments would have the highest economic and social returns. Some low-cost activities that could improve performance are: targeting interventions in the ongoing schemes, reinforcing strategic alliances to support production, increasing the social capital of small-scale farmers and their organizations and strengthening ties with existing public and private services. Results may also be improved by easier access to land titles, water rights, and formal sources of credit, information and technical assistance. The most cost-effective medium-term investment for expanding irrigated agriculture in the BSA would be the completion ofprojects that have already begun and the elimination of obstacles that are inhibiting the performance ofongoing schemes. It is therefore recommended not to start any new irrigation projects in the region before the existing ones have been satisfactorily completed.

6.3.2. Distribution of Benefits

As mentioned earlier, one ofthe main impacts ofirrigated agriculture for fruit and vegetable production is its relatively low-cost contribution to job generation. Since increasing labor income is one ofthe most effective ways to alleviate poverty, the irrigation activities in both public and private schemes have been decisively contributing to poverty reduction in the BSA region by creating over one million direct and indirect jobs over the past 25 years.

68 This high degree of social returns from irrigation is largely due to the involvement of entrepreneurial farmers in the projects since about 1990. They have helped change the crop mixture to more labor- intensive high-value export crops, as opposed to traditional crops as it had been previously. While irrigated rice generates about 30 day-jobdyear per ha, onions and tomatoes generate 140, mangoes 180 and grapes 600. Experience has thus shown that capitakintensive cropping systems on larger plots have been considerably more effective in reducing poverty than the small-farm traditional schemes. With regard to income distribution, it should be noted that: (i)Subsidies are an income transfer, absorbed to a great extent by large-scale farmers. It was found that the subsidies could have been lower, although further studies are needed to determine how much; and (ii)An important issue was not so much whether small-scale farmers received a plot of land, but the on-farm and post-harvest effects on employment and income levels generated by the projects. However, the effects on employment are related to the output mix, which is in turn related to the land occupied by entrepreneurs - who benefited from subsidized land and water.

6.4. Lessons Learned

The principal findings and lessons learned from the projects studied based on analyses, interviews, interpretations of satellite images, bibliographic reviews, field observations and the help of specialists who worked on this study, were divided as follows:

(a) Type of farmers: (i)The adequate selection ofthe beneficiaries is essential for satisfactory development. Success was jeopardized through production deficiencies and the non-payment and abandonment oflots wherever this aspect was neglected; (ii)The presence ofentrepreneurial farmers was a key factor for success. They helped define the commodities, production chains, markets and logistics that made the projects sustainable, helping small-scale farmers to become viable producers, boosting regional development and creating quality jobs.

(b) Location: The proximity ofsizeable urban centers is crucil for attracting entrepreneurial producers and for accelerating development. In addition to being immediate markets for the farmers’output, cities are important for ensuring the required production-related support services, as well as an adequate level of health, education, and living conditions.

(c) Planning: (i)It takes 10 to 15 years for an irrigation project to produce sustainable results; (ii)The engineering phase is the easiest part, while developing the human resources, the required technologies and the new markets are some of the most critical elements for successful implementation; (ii)Large- scale projects should be planned so as to allow each implementation module/phase to be a self- contained sub-project, without being overloaded with huge up-front investments. At the same time, the project’s overall unity must be preserved; (iii)Private schemes will only develop under low infrastructure-investment conditions. The schemes need to be cofinanced by the public sector wherever major investments are required.

(d) Markets: (i)Markets must be defined and developed to ensure the growth of the irrigated sector in the BSA; (ii)A good road network, as well as the proximity to commercial airports and maritime ports are important conditions for easy access to the domestic and foreign markets and consequently for project development.

69 (e) Land titles: The lack ofland titles and registered water rights has prevented small-scale farmers’ from gaining access to credit, obstructed land transfer to more competent fanners, and discouraged the participation ofentrepreneurial producers.

(f) Technological support and plant protection: (i)Reliable technological support, including a strong research scheme and effective technical assistance, played a major role in the success ofthe Petrolina- Juazeiro pole; (ii)The lack ofan effective plant protection system may jeopardize the sustainable development ofirrigation schemes, as shown by the Jaiba experience, where abandoned banana plantations have become sources for the spread ofthe Panama and Sigatoka diseases.

(g) Natural resources management: (i)Uncontrolled groundwater overexploitation in the Jaguaribe- Apodi and Gorutuba schemes has led to the exhaustion ofthe aquifers, thus threatening sustainability; (ii)Poor management ofagrechemicals has caused the contamination of surface and possibly also groundwater in some schemes.

70 7. Lessons Learned and Multi-CriteriaAnalysis: Strategic and Policy Options

7.1. Multi-criteria Evaluation

A summary of the lessons learned and findings, including main deficiencies and problems, suggests that a working method should be adopted that would allow a policy matrix to be drafted containing strategic actions, policies and mechanisms. In multi-purpose financing programs, as is the case with irrigated agriculture projects, where there are strong and weak points, and opportunities and threats, an expost evaluation should be conducted that would bring together social, economic, technological, environmental and managerial objectives in a strategic planning process to aid decision-making. The traditional method ofproject analysis and evaluation, based on a cost-benefit analysis, should be complemented with multi- objective analysis techniques, also called multi-criteria. The multi-criteria decision analysis method - MCDM- was used to ensure that priority criteria, and their respective attributes, guide possible strategic options and action mechanisms. Goicochea et al. (1982) and Flug and Ahmed (1990) describe the analytical process used to solve water supply planning problems with multiple objectives in four stages. The first consists ofindividualizing and enumerating the objectives or general objectives; the second, establishing a finite number of altemative solutions; the third, establishing common criteria to be used in evaluating the altematives. The information dealt with in these three steps is then organized in a table format, called an impact evaluation matrix (IEM), with the aim ofselecting the projects or altematives that offer the best investment opportunities. The weighted average method (WAM) was also used. This is a systematic procedure that calculates the “value” ofeach irrigation scheme, considering all criteria and their relative importance. The WAM is possibly the altemative comparison method most commonly utilized by analysts, as it is both easy to use and flexible. The Development Poles containing the 11 irrigation schemedpublic settlement projects have a series of implicit and explicit objectives that translate into evaluation criteria. The resulting criteria are: (i)legal aspects; (ii)economic aspects; (iii)social aspects; (iv) public management; (v) private management; (vi) productive - technological context; (vii) natural resources and environment; and (viii) productive infrastructure. Each one is given a relative weighted value according to the importance attributed to it in terms ofthe state ofthe art or the current situation. Thirty-eight attributes and their respective weights were defined as a subclass ofthe criteria.

Legal and regulatory aspects

This criterion deals with two very important attributes for developing and improving public irrigation schemes and even private irrigation. It seeks to estimate the way projects can be and are affected by legal and regulatory issues. Even while making a special effort to regularize lands in settlements, there is still a big gap between completely managing property, and uses and customs that arise. Similarly, and in some cases even more serious, there is the issue ofwater use rights, which are normally being given to irrigation districts without the necessary guarantee that they will in fact be supplied to farmers. Altematives/probabilities could be ascribed for each ofthe attributes, with corresponding values for impact levels. To simplify the analysis, it was decided to assign equal valuedweights to each attribute, as follows: (a) degree ofprecariousness ofland ownership - 0.5; and (b) degree ofprecariousness of water-use rights adjudication - 0.5.

Economic aspects

Following financial, economic and fiscal analysis standards, this criterion seeks to estimate attributes and their relative importance for each irrigation project in the sample, and key elements that are the basis of

71 risks and failures for some projects, compared to other reasonably successful ones. This includes costs of finished and unfinished works, the opportunity cost ofwater, logistics, and project scale in terms of growth parameters for production, effic iency and effectiveness. Because it is one ofthe two focal points ofthe study, this criterion should have a higher grading (double) and each attribute should have the following values: (a) cost ofirrigation infrastructure and missing complementary works - 0.2; (b) gross value ofscheme’s agricultural production - 0.2; (c) distance of scheme from markets - 0.1; (d) opportunity cost ofirrigation water - 0.2; (e) production response to public investment (% ofland use) - 0.2; and (f) dimension of agricultural project in relation to agribusiness perspectives - 0.1.

Social aspects

This essential criterion seeks to estimate the impact ofselected and related attributes on poverty reduction. Evaluated in terms of the number ofjobs created by each scheme and the resulting psychosocial attitude in relation to the working environment, the relative capacity ofeach projectlscheme for retaining and/or absorbing migrants, and the availability and access to essential services such as health, education and leisure, it should also have a higher value (0.2) in relation to the others, making it equal to economic aspects. The following values are suggested for the attributes: (a) number ofjobs demanded by the scheme - 0.3; (b) aptitude/attitude ofresidents in the settlement regarding work - 0.2; (c) proximity of settlement to areas with social services - 0.2; (d) capacity ofproject to stop/reverse the migratory process - 0.3.

Public management

This criterion, in line with the concept of public projects such as irrigation for settlements, becomes important as the institutional environment becomes ever more dependent on it, on the resulting processes and on the reorientation ofthe government’s role or functions in this type of activity. The criterion seeks to estimate the value ofthe attributes that comprise it, in accordance with the weight oftheir presence in functions that may determine the causes ofthe project’s success or failure. Some of the attributes that are considered essential are presented with the respective weightdgrades oftheir supposed incidence: (a) availability ofbasic natural resource studies - 0.1; integrated management ofwater resources in the state - 0.2; (b) existence of irrigated agriculture promotion policies - 0.2; (c) access to training and technology transfer programs - 0.2; (d) implementation ofplant health protection training programs - 0.2; (e) leadership oflocal politicians in support of irrigated agriculture - 0.1.

Private management

This criterion reflects the intended emphasis on attracting private investors to participate through the expansion ofprivate irrigated agriculture in the BSA. The importance of ensuring stable conditions and policies is recognized so that the private sector may cofinance studies and projects and, above all, invest in production in an organized manner. The attributes of this criterion seek to estimate the way they affect the success ofthe undertaking, using the following values: (a) existence of farmer associations, aimed at improving the agribusiness chain of management - 0.2; (b) existence ofuser organizations for operating, maintaining and administering water infrastructure - 0.2; (c) definition ofthe private sector in cofinancing the collective infrastructure - 0.2; (d) effective participation offarmers with entrepreneurial capacity - 0.4.

72 Productive - technological context

This criterion seeks to identify reasons and their conditions and how systems may improve processes, product and sub-product effectiveness, for greater client and user satisfaction. The attributes selected were given the following values: (a) employment rate per hectare in view ofcurrent production plan - 0.2; (b) capacity for generating off-farm jobs - 0.2; (c) development of strategic and adaptive research for irrigation - 0.2; (d) production ofcommodities with high weighted value - 0.2; and (e) existence of assured markets (internal and external) - 0.2.

Natural resources and environment

Rainwater, surface water and groundwater are consumed by irrigation at the same time as it should be “producing” water through the adequate management ofvegetative cover, thus avoiding damage resulting from soil erosion and stimulating the recharge ofwater tables and aquifers. This criterion seeks to estimate ways ofimproving the rational and sustainable use ofbasic resources in public irrigation schemes in adjacent areas and in areas ofprivate irrigation. The attributes selected refer to the quality of water resources as inputs for management and for the treatment of effluents, including chemicals: (a) quality of water affected by chemical contamination - 0.1; (b) level ofgroundwater exploitation - 0.2; (c) experience in surface water management (accumulation, conveyance and distribution) - 0.4; (d) presence of soils affected by drainage problems - 0.2; and (e) treatment ofchemical residues (toxic chemical packaging - 0.1.

Productive infrastructure

This criterion seeks to estimate the conditions ofthe infrastructure in the 11 projects, which could be the cause of success or failure in agribusiness management. The attributes for this criterion refer to implemented infrastructure both off and on-farm by encouraging the complete use ofinvestments made in public infrastructure and of filly equipped production lots/properties. The purpose is to evaluate the maximization of efficiency in the use ofexisting infrastructure. The selected attributes and their values are: (a) service level ofavailable water infrastructure and degree ofmodernity - 0.1; (b) capability of irrigation scheme being expanded modularly - 0.1; (c) proximity ofirrigation scheme to centers with production support services - 0.1 ; (d) post-harvest processing capacity oflocal industry - 0.2; (e) capacity ofcommunications and transport routes (rural level) - 0.4; and (f) availability and cost of electricity - 0.1. Despite the great diversity of objectives, a quantitative and standardized procedure can be established to evaluate the positive and negative impacts created by the operation ofthe irrigation schemes.

Impact evaluation

The importance ofeach attribute is numerically evaluated using the “rating” method. The following categories were adopted for impact levels ofattributes:

73 Table 7.1 Impact Evaluation

Criterion and attribute reasonably met, Totally satisfactory 4 indicating possible success (strong point - OPPOMtY). Satisfactory 3 Only met Criterion and attribute deficient indicating Unsatisfactory 2 failure (weak point - threat) Totallv unsatisfactorv 1 Not met or error made

Weighted attributes and criteria

The simplest way for weighted attributes is to prioritize them in decreasing order of importance. The best way to quantify weighted criteria is by the indifference trade-off method (ITM). Weights are normalized and the IEM includes them in the first two columns of the matrix. (For more details, see Volume 11.)

Calculation of the impact matrix

According to Goicochea et al. (1982) and Flug and Ahmed (1990), the value of alternativej (irrigation scheme in this case), Uj is expressed mathematically by using:

m u = wirij , and the preferred alternative is: U* = max U,, for all thej, where i i=l represents (i = 1, 2, 3...... m); j identifies the alternatives (i= I,2, 3.. ..A), rgrepresents the numerical value that qualifies the impact (rating), and wi represents the weighted factor attributed to the criterion i. (More details in Volume 11.)

Table 7.2 Criteria Ranking

Ranking Criteria I ~~ 1 I Natural resources and environment 2 I Legal and regulatory aspects 3 I Social aspects 4 i ProductiGe infrastructure 5 I Productive technological context 6 I Public management 7 Private management 8 Economic aspects

Results of the analysis

The multkriteria analysis identifies which ofthe 11 public settlement schemes (poles) are best able to absorb financial assistance in terms of their capacity to attain the greatest number ofdesirable values, expressed by their criteria and attributes. Using the criteria ranking method, the “value” of the multk

74 criteria function for each ofthe schemes (algorithm programmed in MS Excel), the results are shown in the following table according to value and order.

Table 7.3 - Results of the Multi-Criteria Analysis

The IEM calculation shows Towiio (P6) to be the best project, followed by Nilo Coelho (PI), Maniqoba (P5), Curaqa (P3), Mandacaru (P4) and Bebedouro (P2). The MCDM analysis actually distinguishes two groups ofclearly differentiated schemes. In the above group, P1 to P6 score higher than the group of the Lower Assu schemes (P1l), Jaguaribe-Apodi (PlO), Gorutuba (P8), Jaiba (P7) and Morada Nova (P9), in that order.

Figure 7.1 Results of the multi-criteria analysis shown in graphic form P 1 - Nil0 Coelho; P2 - Bebedouro; P3 - Curaqh; P4 - Mandacaru; P5 - Maniqoba; P6 - Tourgo; P7 - Jaiba; P8 - Gorutuba; P9 - Morada Nova; PI0 - Jaguaribe-Apodi; P11 - Lower Assu

3.66 3.59 3K’

A “sensitivity analysis” should be carried out to minimize uncertainties, which always arise when giving weight to criteria and attributes. This analysis would evaluate a project’s strength and support decision- making with regard to physical infrastructure (completion of small hydraulic and other complementary works), social and economic aspects (land and water markets, poverty alleviation, increases in income and in forms ofrestriction), and agribusiness (agrological problems, production chainsklusters and national and foreign markets), which should be improved to increase the project’s acceptability. However, even without a sensitivity analysis, a comparison ofthe above results with those obtained by an independent analysis using a different methodology, presented in Chapter 6 (compare Fig. 6.1 with Fig 7. l),and the similarity ofthe projects’ performance indicators in both analyses with the correspondent projects’ ERRS, seems to indicate that the punctuation used was judiciously weighed and that the results reflect reality with reasonable accuracy.

75 7.2. Deficiencies and Problems to Be Solved

Various deficiencies were identified during the preparation ofthis ESW that limit and/or delay progress in the irrigation agenda. The three distinct groups ofproblems that require special attention are: (i)legal, regulatory and administrative deficiencies; (ii)agretechnology and service deficiencies; and (iii) completion ofsmall-scale infrastructure works. In the first group, emphasis is placed on the development ofland markels and the managerial and administrative restrictions that hinder the emission of title deeds for land, followed by the solving of problems related to the allocation and registration (granting) of water-use rights. This is essential if the required conditions for attracting private investments and entrepreneurial partners are to be created. Although these matters are the responsibility of the public authorities, if given the urgent attention they require, they may provide the right incentives for the expansion of investments in the rural sector. The design ofnew projects should include an appropriate mix of small and entrepreneurial lots, aimed at accelerating settlements in public irrigation schemes, as well as promoting the development ofprivate irrigation where conditions allow. The second group relates to agro-technological deficiencies, which are also essentially the responsibility ofthe public authorities. The list includes: (i)the need to improve strategic and adaptive agricultural research related to vegetable and tropical hitproduction; (ii)the implementation ofplant health control systems, including the use ofbarriers and prevention and control programs; (iii)the implementation of technical assistance programs to transfer managerial skills to small-scale farmers, and (iv) greater focus on environmental issues. The third group of issues refers to small hydraulic works for irrigation and other infrastructure, the construction ofwhich has been suspended due to changes in priorities or lack of funds. Large-scale irrigation schemes could be established once construction is completed. Infrastructure, transportation and logistics-related problems are part ofthis group.

7.3. Areas for Government Intervention

Based on the findings and lessons learned, the main areas of possible government intervention were organized as follows: (1) responsibilities ofpublic authorities; (2) legal and normative conditions; (3) conditions for the success ofagribusiness; (4) support for smallholder farmers; (5) planning aspects; (6) managerial issues; (7) ago-technological aspects; and (8) the sustainable management ofnatural resources.

(1) Responsibilities of public authorities include actions to facilitate the expansion of irrigated agriculture and remove the principal obstacles that stand in the way ofits development, particularly with regard to: (i) The expansion ofprivate irrigation, which often depends on the costs ofbasic infrastructure. It is difficult for private irrigation to move forward without public sector participation wherever these costs are high because of dam storage and distribution works. Where subsidies are economically justified by external benefits, a solution would be the cofinancing of infrastructure by public and private sectors with subsidy levels being transparently fvred in accordance with economic principles; (ii)The implementation ofthe proposed judicial, normative and managerial changes; (iii)The implementation of a plant health barrier control system to avoid the risk of imminent disasters that could cause immeasurable economic damage to the region.

76 (2) Legal and normative conditions involve judicial aspects related to the efficient development of irrigation subsector components, with an emphasis on the following:

(i) Free land market, which wouu help optimize the irrigation schemes, thus the importance of land titling as a development factor; (ii)Guaranteed and documented water-use rights in regions with an obvious water shortage; (iii)Judicial definitions ofa legal fiamework for the efficient development ofwater and land-user associations and their relationship with the government. The legal framework should include farmers from public and private settlement projects, taking into consideration the economic and managerial differences between those with fewer resources and entrepreneurial farmers.

(3) Conditions for the success ofagribusiness are related to the development and optimization of investments. The most important are:

(i)Careful selection ofsettlerdfarmers. This is an important condition for success. Where this was neglected, development was jeopardized by inefficient farming, non-payments and abandonment of plots; (ii)The most critical aspects ofagribusiness are the development ofhuman capital and technology transfer. These are frequently neglected, being the most arduous part of the process; (iii)The definition and expansion of sustainable markets are fundamental for the development of irrigated agriculture. The public sector should participate in studies to identify and develop markets, due to the farmers’ limitations, particularly small-scale farmers; (iv) Projects are important for ensuring the sustainable development ofirrigation schemes. Project size should be proportionate to the scale ofthe agribusiness; (v) The presence ofentrepreneurial farmers is a key factor for a project’s success because oftheir economic, business-oriented and leadership capacity, and their ability to id en ti^ markets and crops, and organize production and marketing logistics.

(4) Support for small-scale farmers involves taking the actions necessary to bring less-favored groups into the production system:

(i) The lack ofappropriate information programs and technology transfer to small-scale farmers in public projects led to production problems. Some farmers were unable to participate llly in the production process. Government support in the design and implementation oftechnical and managerial assistance programs for smallholder farmers is essential; (ii)Public settlement projects should begin settling entrepreneurial farmers and smallholder farmers only once the stronger groups have defined and implemented the products/clusters and technological standards and markets.

(5) Planning aspects include issues that should be considered during the preparation ofnew irrigation projects to improve the performance of irrigation schemes and ensure success. The main ones are:

(i)Where there is no prior experience with irrigated agriculture, an investment in irrigation matures over a 10- 15 year period, thus covering different government administrations;

77 (ii)Proximity to urban centers is essential for attracting entrepreneurial producers and for developing irrigation schemes rapidly. Besides serving as an immediate market for the distribution ofthe farmers’ produce, cities provide agricultural support services such as health, schools, leisure activities and housing; (iii)The reasonable scale of irrigation schemes and infrastructure works, and their modular expansion, play a major role in ensuring their sustainability; (iv) The cost ofwater in the five selected poles varies greatly, depending upon the supply available, with subsequent economic and technological implications. There are clearly no water restrictions for the poles located along the banks of the Sgo Francisco River (Jaiba, Petrolina and Juazeiro). Under these conditions, the marginal cost of water may be considered almost zero. On the contrary, in Lower Jag~aribe~~,Assu-Mossor6 and Gorutuba, the social cost of making water available for irrigation is significantly higher. In these cases, shortages result from competition for its use (urban and industrial) and from year-to-year variations in water availability, with higher risks during drought years.

(6) Managerial issues are non-structural actions to be carried out by the public and private sectors to support water-resource management by linking the irrigation subsector to other service sectors. These include:

(i)Transportation logistics should be prioritized. This is critical for the viability of irrigated agriculture in the region. Poorly maintained roads, and the lack ofadequate access routes to markets and ports, raise costs and reduce producers’ net margins; (ii)With regard to water resource management, User Associations should be created with O&M responsibilities for water infrastructure; (iii)A system ofgrants for surface and groundwater, depending upon availability, should be established to ensure sustainable forms ofexploitation. Standards and restrictions on water usage should be introduced to protect this resource; (iv) The proliferation of structures that are unauthorized by water authorities and threaten the security ofthe water systems should be stopped. Existing structures should be torn down if necessary.

(7) Technological aspects include actions aimed at improving the quality and yield ofcrops, making them more competitive and ensuring the sustainability ofproduction, especially for small family farmers, including:

(i)Increasing investments in strategic and adaptive research for irrigated agriculture, seeking economic alternatives with new products to facilitate the export ofproducts with market potential (for example, the Brazilian banana variety known as bananaprata); creating more resistant and competitive varieties through improved soil, water and crop management; (ii)Directing investments towards the development, adaptation and improvement ofmachinery for the efficient implementation, management and harvesting ofagricultural products, as well as water systems for irrigation.

33 . . Bibliography used: “Shtese dos estudos de custos de disponibilizaGb da kgua bruta nos vales perenkidas dos nos Jaguaribe e Banabuiu”. Jose Carlos de Araijo, COGERH - Fortaleza, May 2002.

78 (8) The sustainable management of natural resources focuses especially on their rational and clean use (soil and water), to ensure the system’s agreecological balance and protect the environment and human and animal health. Special care should be taken to:

(i) Avoid/correct overexploitation and the reduction ofthe levels ofdifferent aquifers. Overexploitation ofgroundwater in the Assu-Mossor6 poles and in areas ofthe Jaguaribe- Apodi and Gorutuba projects indicates the urgent need for hydrogeological studies to determine groundwater potential in the region and establish rules for its sustainable use; (ii)Introduce measures to neutralize the damage caused by chemical contamination due to the improper management ofagrochemicals and from solid waste dumped in irrigation canals and drains; (iii)Practice sustainable soil management to avoid irreversible erosion processes and ensure continued agricultural practices; (iv) Correct the progressive reduction ofthe hydrological yields of surface water systems in the BSA watersheds due to the uncontrolled, unregulated and unsustainable proliferation of small lake dams, located upstream from major reservoirs, which cause excessive evaporation losses.

7.4. Recommendations for a Sector Strategy

Having analyzed the main factors that contributed to the relative success ofthe Petrolina and Juazeiro Poles, as well as the causes for the unsatisfactory development ofother irrigation schemes and poles, the recommendations are divided into: (i)measures to improve the performance ofthe problematic projects, and (ii)establishing key rules for completing unfinished projects before planning future ones in the SA region. Future interventions should be based upon a concept oftop-down decentralized project management, providing more stable financing to enable efficient construction, and establishing realistic timetables for construction and for follow-up technical assistance and market development. The Petrolina and Juazeiro model shows that this is an evolutionary process and continuous follow-up efforts are required. Government interventions and incentive packages should be adjusted to help ensure that private investments achieve the levels of success observed in the Petrolina and Juazeiro Poles. They proved that irrigation could be an efficient and effective strategy for creating low investment cost employment opportunities while alleviating poverty in the BSA.

7.4.1. Rectifying Failures and Improving the Performance of Existing ProjectsLnvestments

One ofthe main conclusions ofthis ESW is that the recovery, re-dynamization and/or completion of existing projects using an integrated and sustainable development approach should be given priority before embarking on new irrigation ventures. However, the relevant in-depth sector study that is to be prepared by the “MinistCrio de Integraqgo Nacional”(MIN), following the 2002 Fortaleza agreement must first be completed. The study should also include a market assessment, aimed at orienting the sustainable expansion ofirrigated agriculture in the BSA and preventing possible overproduction, which could have a devastating effect on existing and new projects. To this end, it would be advisable for institutions to:

(a) Develop a benchmark model to address the aforementioned deficiencies, based on further studies ofthe 11 projects ofthe sample;

79 (b) Apply the benchmark approach to the completion and improvement ofthe other (close to 100) public irrigation settlement schemes (CODEVASF, CHESF, DNOCS and States), with the aim of inserting them into a sustainable development poles approach; (c) Review andor formulate development projects/subprojects at: (i)farm level; (ii)municipality level; (iii)commodity (product) level, with a strong input fiom relevant market studies; (iv) irrigation scheme and regional watershed level, addressing natural resources management (permanent and legal reserves), irrigated agriculture, rainfed agriculture, and aquiculture and protected cultivation; and (v) pole level.

These steps should be complemented by three main activities or inputs, which are also developed as projects/subprojects, and are essential for the success ofany program:

(a) Strengthening agricultural/economic research; (b) Training all agribusiness ceworkers; and (c) Organizing information systems, knowledge dissemination and technology transfer schemes, developing market opportunities and establishing effective monitoring and evaluation systems.

7.4.2. Recommended Approach for Possible New Projects (Programs)

The implementation ofnew irrigation projects in the BSA should be considered only once the 323,000 ha ofcurrently non-completed projects have become operational. As indicated under section 4.1, any such expansion ofthe irrigated area should be guided by reliable market studies to avoid overproduction. It should be stressed that the viable, sustainable expansion of the existing irrigated area in the BSA presupposes a significant increase in current market demands for additional hitsand vegetables, particularly on the international market. A dynamic marketing campaign should accompany these efforts, although this field is relatively new to Brazil and adequate knowledge has yet to be developed. Public investments in market studies and marketing campaigns are some ofthe most important contributions the govemment could make to the development of irrigated agriculture in the BSA. The existing irrigation projects and poles generally included a number of off-farm investments aimed at both increasing the schemes’ efficiency and promoting economic and social development, thus reducing poverty in the BSA. However, despite producing some very good results, this approach is not quite sufficient. Although the impact ofthe irrigation schemes reached far beyond the irrigated perimeters, creating jobs and contributing to urban development, they usually had almost no effect on the surrounding rainfed areas. It is therefore recommended that any new irrigation project in the BSA should be planned as part ofa broader, integrated regional or sub-regional development program. In addition to developing the irrigated area, the project should include investments aimed at integrating the neighboring areas in the development process, ensuring a minimum water supply, an adequate road network, technical assistance and credit to upgrade their cropping systems and livestock production. Sustainable land-management practices should also be introduced, thereby increasing income and improving the living conditions of the local rural families. Moreover, the new projects should incorporate the lessons learned from past experiences. These have been thoroughly analyzed in this ESW. One of the frst concerns should be the project’s location, to ensure the necessary urban support. If a project must be developed in a remote area for geopolitic a1 reasons, far from a sizeable urban center, the necessary infrastructure investments must be made to facilitate easy access to

80 the nearest major city. Its size should be limited to match the slow pace of development when opening up ofnew areas. Irrigationprojects should be part ofa framework of well-prepared pole or regional strategic plans, with a focus on water catchment. The municipalities concerned should be closely involved and commited from the very beginning, to help define the scope of such plans and projects. Their effective participation in the development process is essential for its success. Vicinal roads, storage facilities, goods, services, health and education are examples ofmunicipal participation in these programs. Often a development project involves more than one municipality, requiring a consortium organization, through which the participation ofeach municipality is defined based on an analysis ofthe corresponding comparative advantages. Water basin committees should also be involved. The irrigation schemes should be prepared based on comprehensive soil suitability and hydrology studies that define which crops can be successfully cultivated, and at ensuring a reliable, sustainable water supply. A multi-purpose use ofthe accumulated water should be considered when dams are being constructed. The crops and production chains to be introduced should be selected based on sound market studies that should be continuously updated during implementation. Incentives for the establishment of agro- industries should be foreseen, aimed at promoting local value added, optimizing the appropriate use ofthe outputs, reducing waste from production excess and generating additional job and income opportunities. The irrigation methods to be adopted should take into consideration the existing water constraints. Water licenses and fees should be imposed to encourage saving water and discourage waste. Effective measuring devices and control systems should be set up to minimize water extraction abuses. Technological support must be ensured from the very beginning through objective agricultural research and reliable technical assistance schemes. Operational plant protection systems should be established to ensure standardized quality and sustainable farming. A substantial part ofthe area should be consigned to entrepreneurial producers, who should be the first to be settled. They should help define the commodities, production chains, markets and marketing schemes best suited for the local context. Small-scale farmers should be settled only once all this has been done. Farmers’ organizations should be promoted around commodities, with an agribusiness focus on production, logistical, custody and value chains. Farmers’ marketing organizations should be structured preferably around commodities or groups ofCommodities. The projects should be managed by competent, well-trained and creative teams, providing the producers with the required backstopping, and motivating sustainable political support for the projects from municipal and state governments. The responsibility for water distribution management should be transferred to the irrigators at an early stage. It is very difficult to envisage sustainable development in the BSA without irrigated agriculture. Ifbased only on rainfed agriculture, the regional poverty conditions and migration to large, overpopulated cities would continue to increase. Public investments in irrigation, together with the use oftargeted incentives, focused on development poles, seem to be an effective strategy for creating opportunities for complex regional development centers, capable ofeffectively contributing to poverty reduction in the region. A recommended set of possible projects/subprojects aimed at promoting integrated regional development prompted by irrigated agriculture schemes, would include:

0 Agricultural production engineering projects; 0 Municipal strengthening and community organization projects; 0 Entrepreneurial developmenthusiness plan and marketing projects; 0 Commodity (product and by-products) projects; 0 Agro-industry projects;

81 0 Off-farm engineering works projects; 0 Environmental and natural resources management projects; e Social mobilization, training ofhuman resources, institutional development; and 0 Monitoring and evaluation projects.

7.5. Possible Strategic Options

The results ofthis study have been drawn from prior analyses. Considering that the sample used is quite representative ofconditions in the Semi-Arid Region, it allows several strategic options to be proposed to improve government policies and actions in the irrigation sector. Together with the results of financial analyses (at productive lotlproperty and product levels), economic analyses (irrigated schemes and poles), social analyses (at municipal level) and multi-criteria analyses (which, along with economic and social aspects, also include legal, environmental, managerial, productive/technologicalcontext and productive infrastructure aspects) different goals are defined that can be the object of strategies and policy options. The four types of strategic options that follow are a result of these analyses: (i)the optimization of existing infrastructure, deferring any new investment projects; (ii)the implementation ofreforms to improve the institutional framework; (iii)the promotion of irrigation in the Semi-Arid Region, attracting private entrepreneurs as partners in the development ofthe region's agribusiness, and (iv) the development ofmechanisms to deal with base natural resources. The first type of strategic option, the optimization of existing infrastructure, implies prioritizing this type ofinvestment and deferring, in principle, any new investment projects. The key objective is to maximize the effectiveness ofpublic investments already made that are not generating the benefits originally estimated. The recent study carried out as part ofthe preparation ofthe National Irrigation and Drainage Plan (PLANIRD), coordinated by the Ministry ofNational Integration, found that there are several public irrigation schemes in a total area of 70,000 ha, which are at an advanced stage of investment and implementation and could be completed with only marginal inputs. These basically include small hydraulic works, general complementary infrastructure, components related to deficiencies in the electrical grid, and local transportation links and logistics, which are present in many public and private irrigation schemes. The second type of strategic option is not directly investment-related. It focuses on reforms aimed at improving the institutional framework ofthe government at federal and state levels, and their processes and procedures. This would include: (i)the adjustment oflegal and regulatory issues; (ii)the improvement of intersectoral coordination; (iii)the strengthening ofinvestment-related management and budget control; (iv) the improvement ofproducer organizations to administer local decision-making and manage irrigation schemes; and (v) the improvement of local capacity for conflict resolution. International experience, and the knowledge acquired on the best procedures for transferring public irrigation scheme management functions to user organizations, should also be incorporated. Public and private managerial issues are related to this second type of strategic option and are equally essential. The third type of strategic option involves actions aimed at promoting the interest of, and attracting private entrepreneurial partners to irrigation agribusiness. The area ofprivate irrigation in the Semi- Arid Region is three times larger than that ofpublicly irrigated schemes. Contrary to the Center and Center-West ofthe country, in the Semi-Arid Region little attention was paid to regulatory aspects, infrastructure requirements, water management and institutional actions, which facilitate the promotion of private irrigation. Although no specific analytical exercise was done in the study to compare the social externalities ofprivate irrigation with those ofpublic irrigation, there is evidence that there are no major differences in terms ofsocial results. Seven of the most important complementaq options that are normally needed are: (i)the regulation and guarantee ofthe concession of(tradable) water-use rights; (ii)

82 the improvement ofinstruments for land titling and the development ofthe land market; (iii)the development ofstrategic planning and making technological data available; (iv) the promotion and strengthening of export organizations; (v) the reduction ofplant health risks; (vi) the strengthening of agricultural research aimed at irrigated agriculture, particularly vegetables and tropical fruit; and (vii) the improvement and acceleration ofthe process to settle new and more capable farmers in public irrigation schemes. The fourth and last type ofstrategic option involves actions aimed at promoting greater interest in and commitment to environmental aspects related to the aredregions within the sustainable development program, and to develop mechanisms for dealing with base natural resources, namely water, soils, climate, flora and fauna. Based on analytical reviews and field observations, supported by a historical series ofsatellite images, the study indicates that irrigated agriculture in private areas is also of great importance to the region. Currently spanning nearly two thirds of the total irrigated area in the BSA, private irrigation should be supported due to its volume and in order to spread the positive effects ofirrigation, facilitate the sharing of public investments and streamline the local and regional development process. However, a number of institutional, legal, regulatory and administrative restrictions hinder the private sector’s more effective participation in this process. The elimination ofsuch limitations would be an important part of a package of“soft” actions that require almost no investments but are essential for creating incentives to attract private contributions. Based on’the evaluation results, a preliminary analysis was carried out for each ofthe five regions or poles surveyed to identifl, in each pole: (i)relevant strategic themes; (ii)main problems and restrictions; (iii) possible policy options or actions to overcome restrictions; and (iv) the relevant instruments for the implementation of corrective actions.34 The 11 sample schemes are divided into two groups: (i)six schemes with satisfactory performance, and (ii)five schemes with unsatisfactory to critical performances. Even using different parameters, the results ofthe economic analyses (calculated at variable social discount rates between 19.1 and 16.8%) coincide with the results ofthe multi-objective or multi-criteria evaluation, showing the consistency of the methodology used. In line with the options described above, a Matrix of Policy Options, Instruments and Strategies is presented in Table 7.4.

83 Table 7.4 - Overall Strategy, Possible Policy Options and Instruments STRATEGIES POLICY OPTIONS INSTRUMENTS Encourage adjustments to legal and Legal and regulatory adjustments regulatory restrictions State Water Resources Councils Encourage greater delegation in the Watershed Committees QDJUSTMENTOF THE management of irrigation poles [NSTITUTIONAL Irrigation scheme users’ organizations Improve intersectoral coordination and ENVIRONMENT AND ITS strengthen control ofmanagement and Monitoring and benchmarking PROCESSES, AND OF budget GOVERNMENT FUNCTIONS Promote participatory management and award concessions for public irrigation schemes to users’ organizations Improve conflict resolution skills

Encourage efficient and sustainable O&M ,Updating of registry of users in each rrigation scheme, and titling oflots Complete priority investments .GPSsupported, digital, updated rural cadastre Encourage full use of equipped lots MAXIMIZATION OF .Fixing of sustainable fees EFFICIENCY AND Improve selection criteria for users of EFFECTIVENESS IN THE USE public irrigation schemes .Modernization of irrigation schemes, aimed a1 OF ALREADY BUILT PUBLIC reducing A, O&M costs Facilitate land market in irrigation schemes INFRASTRUCTURE -Codiscation and rebidding ofunder-utilized lots

Regulate, grant and ensure reliable water -Registration ofwater use rights rights PROMOTION, INVIGORATION -Modem, rural, multhse cadastres Facilitatemodem means for land market s AND EXPANSION OF THE -Improve dissemination, communication and PRIVATE SECTOR IN Make strategic and technological invitations to private investors IRRIGATEDAGRICULTURE information available -Strategic investment plan IN THE SEMI-ARID REGION Complete priority and strategic public infrastructure for agribusinesses Using cofmcing and shared risks, supporl pioneering initiatives of new export businesses Strengthen and promote organizations that -Creation ofplant health barriers and plan to support exports eradicate focus of infection Decrease plant health risks and poor use of -Plan for agrochemical, solid and toxic waste IMPROVEMENTS IN THE agrochemicals management EFFICIENCY AND Encourage agricultural research aimed at -Expand lines of export credit EFFECTIVENESS OF irrigated fhit and vegetable production IRRIGATED AGRIBUSINESSES -Training programs Improve and expand national and export -Improve mechanisms and conditions for market data credit, guarantees and special guarantee funds Improve the capacity offarmers and their organizations

Ensure the productive, sustainable use of -Regulation, monitoring and control of small soil resources in irrigated areas, stimulating dams actions against soil erosion, salinity and -Training waterlogged soils -Programs to monitor and control erosion, Protect or recover river margin forest drainage and salinity vegetation along perennial rivers and in the beds of streams that drain irrigation -Management plan for agrochemicals, solid schemes and toxic waste

84 IMPROVEMENTS IN THE Encourage rational use of agrochemicals and toxic waste RATIONAL AND and management of solid and toxic waste -Hydrogeological studies and mapping SUSTAINABLE USE OF BASIC RESOURCES Encourage the efficient, economic -Updating of well cadastres management of surface water to maintain perennial rivers, to meet demand - Aquifer legislation, guidelines and regulations

management ofgroundwater -Registration of water rights and uses

-Rational operation of inter-annual reservoirs, integrated with overflow dams based on demand fluctuations in real time.

7.6. Open Issues

Various issues related to the social externalities of irrigation in the Semi-Arid Region remain open. Of these, five clearly emerge that could not be properly analyzed due to time, scope and budget restrictions, including:

a The dimension ofthe national and international BSA market share for tropical fruit and vegetables; a The analysis ofthe institutional capacity ofpublic agencies and institutions related to the irrigation sector at federal and state levels; a The situation of other uncompleted public irrigation schemes not included in the five sample areas; a The agretechnological and plant disease aspects generally related to tropical hitand vegetable I production in the Semi-Arid Region; and, a A comprehensive “benchmarking survey” ofthe 11 districts included in the study sample, for possible use as a reference for studies and analyses of other projects.

7.7. Common Problems and Constraints

The main common problems restricting the development of irrigation schemes, which need to be considered in the development ofa sector strategy for the BSA, can be summarized as follows:

Lack ofpropensity/sensibility to innovative schemes; Lack ofwater rights (licenses, grantlcharter, collection, payment etc); Lack ofland markets, titling and territorial planning; Poor organization and management ofirrigation schemes (Irrigation Districts); Inadequate farmers’ organizations; Deficient agribusiness organizations (business planning, marketing, trading etc); Deficient credit systems/financing; and, Lack ofadequate involvementlcommitment ofmunic ipalities and communities.

7.8. Main Challenges

Based on these general conclusions, the main challenges that lie ahead to overcome the existing constraints and limitations are:

a How to achieve greater awareness and environmental involvement;

85 How to change the approach from engineering works into agribusiness; How to change the focus from irrigated activities into production chains; How to move from irrigation settlement schemes into an integrated development pole approach; How to ensure greater involvement and commitment from the private sector; How to follow and adopt the multipurpose concept; and, e How to involve and commit local communities.

7.9. Possible Agenda for the Future

It is up to the GOB to initiate actions to implement an agenda that has a clear multi-agency character. The first step would be to examine this ESW and consider it an instrument for facilitating the start-up of dialogue. The next would consist ofconsolidating consensus on the action agenda, aimed at improving irrigation management in the BSA, while the preparation of State Action Plans begins. The agenda should include short and medium-term actions. The long-term actions necessary for this type of projecthdertaking are elements of strategic planning, and short and medium-term schedules are inputs.

Short-term actions, include open topics and issues such as benchmarking the relevant irrigation schemes and analyzing the institutional capacity ofpublic agencies and institutions related to the irrigation sector at federal and state (municipal) levels; Medium-term actions, including (i)improving the institutional environment, (ii)maximizing the efficiency and effectiveness ofthe already existing infrastructure, (iii)promoting, strengthening and expanding the private sector in irrigated agriculture in the BSA, (iv) improving the efficiency and effectiveness ofagribusiness in irrigated agriculture, and (v) improving the rational and sustainable use of base resources; and Long-term strategic actions, which are absolutely necessary for this type ofundertaking, include the systematic review ofshort- and medium-term actions, according to classic strategic planning principles.

An Activity Plan should be drawn up and broken down into Annual Work Plans (AWPs), to include the five strategic actions proposed, and make operational policy options in accordance with the instruments and proposals identified. Table 7.4 shows possible alternatives for the preparation ofthis strategic planning. These actions should be tumed into projects as follows: farm lots or establishment/property projects; product or commodity projects, and integral regional development projects. For these different project levels, agribusiness is considered to work in product, logistical, custodial and value chains. Finally, due to the difficulty in obtaining data and information and in carrying out mid-term and final project evaluations, a Monitoring and Evaluation (M&E) system, which could possibly be part ofa benchmarking system, should be established. The implementation ofthis multgagency agenda requires considerable coordination capacity. Using the strategic basis presented in the previous chapters, in the general matrix (Table 7.4) and in the five regional matrixes (Annex I- Brief description ofthe five poles and 11 scheme samples), policy options have been identified that are considered more relevant for the future irrigation development conditions of the BSA irrigation sector and its corresponding stages ofaction. They are summarized in Table 7.5. The tentative policy options identified are not dependent on large allocations from the federal government; they are essentially based on the use ofexisting or barely completed infrastructure and cost-sharing

86 between the public and private sectors35.This of course requires the community’s greater participation, together with more efficient user participation mechanisms. Major improvements in planning mechanisms and processes and in provincial land management are also essential, not only to ensure user participation and increase income levels, but also for the conservation, protection and in some cases recovery ofnatural resources (land and water), which provide the productive base for the rural sector. The government’s future role in irrigation should be focused primarily on completing unfinished investments and complementing those aimed at lowering risks, improving competitiveness and efficiency, diversifjring production, expanding agribusiness and promoting full use ofthe existing infrastructure. Most ofthe existing investments should be considered sunk costs. In addition to the Jaiba case, a number ofother unfinished schemes, where several hundred million dollars have already been spent, are awaiting budget allocations to complete their infrastructure or implement the complementary investments needed for start-up, to generate employment and income and perform at full capacity and potential.

35 It is estimated that an additional investment ofUS32 million to speed up the development process and attain full production in Jaiba would generate an ERR of47% and an NPV ofUSS98.6 million. This complementary investment, mostly for the development of “public goods” such as adaptive research, technical assistance to small-scale farmers, establishment ofa plant protection program, development ofmarketing channels and ago-industries, would help make the environment more attractive for private investments.

87 Table 7.5 Tentative Action Stages for Implementation of Policy Options

FIRST (up to 3 years) SECOND (up to 5 years) - Improve: Intersectoral - Implement the necessary legal and - Legal and regulatory adjustments; coordination among agencies and regulatory adjustments; political willingness for joint - Irrigation scheme users’ IMPROVEMENT OF action by federal and state level - Design financial mechanisms; organizations; INSTITUTIONAL agencies; Promote participatory Monitoring and benchmarking. ENVIRONMENT AND - - management award concessions for ITS PROCESSES, AND - Promote adjustments to legal public irrigation schemes to users’ OF GOVERNMENT and regulatory restrictions; organizations. FUNCTIONS - Promote greater decentralizationin the management of irrigation centers. - Improve the planning capacity - Promote full use of equipped - Modernization of irrigation of state and federal irrigation lots; codiscation and rebidding of schemes, aimed at reducing A, O&M agencies; under-utilized lots; costs; - Prepare a bnchmarking - Facilitate land market in irrigation - Monitoring and Evaluation of MAXIMIZATION OF study covering all the relevant schemes; Associations; EFFICIENCY AND public irrigation systems; EFFECTIVENESS IN - Improve select ion criteria for users - Confiscation and rebidding of THE FULL USE OF - Complete priority investments; ofpublic irrigation schemes; under-utilized lots. EXISTING PUBLIC Prepare state action plans and - Promote efficient and sustainable INFRASTRUCTURE - prospective targets for the next 5 A, O&M and cost recovery. and 10 years; - Prepare state databases on irrigation issues. - Promote and encourage - Develop institutional capacity at - Monitoring, supervision, annual PROMOTIONy participatory management; provincial and local levels; evaluation and reprogramming. BOLSTERING AND EXPANSIONOF THE - Train sector management - Promote cost sharing. PRIVATE SECTOR IN agencies; IRRIGATED - Ensure subsidies to the poor and AGRICULTURE AND - Use lessons ofbest practices; avoid free riders; IMPROVEMENT OF - Create mechanisms to reduce - Negotiate action plans for users. EFFICIENCY, EFFICACY transaction costs and promote AND EFFECTIVENESS transparency in the application of IN AGRIBUSINESS public resources. - Promote political willingness to - Improve the analytical base on - Ensure sustainable financial Iact together with states; groundwater, surface water mechanisms; IMPROVE I DEVELOP management, and land MECHANISMS FOR -Create communication management; - Monitoring and Evaluation. MONITORINGy mechanisms to promote the issue; - Develop institutional capacity at CONSERVATION, Adjust legislation and PROTECTIONAND - provincial and local levels; regulations. RECOVERY OF BASE - Set monitoring mechanisms for NATURAL RESOURCES quality and quantity on both surface and groundwater.

7.10. Recommended Dissemination

The purpose ofthis ESW is to contribute to setting up and implementing a BSA development strategy based on an agribusiness-centered irrigated agriculture. To ensure that the fmdings and conclusions ofthe study come to the attention of the strategic planners, decision-makers and executing agencies, and that its recommendations are eventually adopted, the document must be adequately disseminated and discussed with all stakeholders. To facilitate this, the ESW should first be translated into Portuguese. This would be the first stage ofthe future agenda. An effective dissemination plan and agenda involve more than simply communicating the findings, lessons learned and issues raised by the study to interested partners, institutions and individuals. Its purpose is to

88 promote the discussion ofthe ESW and bring about a positive change in the mental model that has govemed the implementation ofirrigation projects in the past. This will require a set ofconditions capable of guaranteeing the sustainability of the dissemination process. The concept of dissemination should ideally be supported by research guidelines to capture, structure, dispose ofand develop knowledge on the subject (“know-why”), and become operational through the implementation ofthe recommended actions (“know-how”). The proposed dissemination should make good use ofall the instruments available for mobilizing professionals and institutions, such as workshops, interviews, lectures and the Internet. Efforts should be made to ensure the appropriate definition ofconcepts, goals and work programs. Emphasis should be placed on motivating the agents ofchange to develop the ability to think critically and creatively. It is, therefore, fundamentally a task ofreworking the mental models of individuals and institutions. The agenda suggested for dissemination as a means to ensure the continuity and sustainability ofthe process ofchanging paradigms, would consist of

First Stage - Dissemination activities

A complete dissemination work plan should be in place during a three-month period in 2004, with a professional team working closely with federal, state and municipal level government agents. The following agenda is proposed

(a) Organize and implement a series of seminars (workshops) - one in Brasilia, one in Fortaleza and one in Petrolina - aiming at generally informing people about the study’s findings, issues and recommendations, and collecting reactions and suggestions to improve the benchmarking preparation, as a validation process; (b) Organize and implement a series of interviews and meetings with the aim of informing and preparing the basis for a process of changing mental models at all levels - producers, technicians, professionals, entrepreneurs, publicity/media people, dealers, politicians and other actors/stakeholders; (c) Prepare and implement an intemet site (andor feeding existing specialized sites) on the subject, using it as a permanent channel to feed the system with new positions and relevant subject matter; (d) Prepare press release articles and papers in Portuguese for newspapers, specialized magazines and bulletins, radio and TV broadcasts and publications.

Second stage - Training activities

Immediately after the dissemination phase, an eight-month training program should be implemented to train people who are involved with the related agribusiness production chains, commodity logistic chains and custody chains, as well as professionals and managers ofirrigation projects and support activities. The training activities should coordinate with ongoing training programs (Universities, SEBRAE, etc.) and the Global Development Learning Network (GDLN), at least for video conferences, under the sponsorship and with the facilities ofa Distance Learning Center (DLC), in order to establish a permanent and dynamic mechanism for discussing the subject.

89 Third stage - Institutional strengthening and development

The irrigation projects started as a public initiative for settling farmers within this new approach of integral and sustainable development at the regional (pole) level, and many institutions from both public and private sectors have always been involved. In order for them to remain completely involved and committed to the project objectives, they must be given specific roles within the institutional framework. According to the samples used in this study, the institutions and organizations normally involved could be divided into five groups:

(a) Public services derived from secretariats, departments, agencies, autarchies and public companies at municipal, state and federal levels; (b) Farmers and farmers’ organizations such as production cooperatives, credit cooperatives, farmers associations and irrigation districts; (c) Related ago-industries, trading firms, consulting firms and supply companies; (d) Non-governmental organizations such as those dealing with environmental issues, human rights, health, education, etc.; and, (e) International and inter-governmental organizations involved with financing, technical cooperatiodassistance, research and other areas related to irrigation projects in the BSA.

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93 99. CCPE: Comitd Coordinador de Planejamento da Expansgo dos Sistemas Elttricos, Comitb Ttcnico para Estudos de Mercado, ELETROBRAS. Tarifas Mtdias do Mercado de Energia Elttrica, Sintese IT08/01. 100. Fiorabanco, J. C. e Caleffi Paiva, M. Competitividade e Fruticultura Brasileira, Informaqdes EconBmicas, SP, v.32, n.7, Jul. 2002. 101. Fundaqgo de Cibncia, Aplicaqdes e Tecnologia Espaciais (FUNCATE), MPO, SEPRE, INPE. Anllise Prospectiva da IrrigaqPo. Projeto de TransposiqBo de Aguas do Rio S5o Francisco para o Nordeste Setentrional, 1998. 102. G & S Assesoria e Anilise EconBmica. Inciddncia Tributria na Agricultura e nos Produtos Alimentares: Impactos de Desoneraq5o sobre Preqos ao Consumidor e na sua Renda. Sumirio Executivo. 103. Mellor, John W. Abt Associates, Inc. Agricultural Growth, Rural Employment and Poverty Reduction, Non- Tradables, Public Expenditure and Balance Growth. 104. Molina, A.; Bianchi, A. M.; Aguirre, B. M. B. Projetos de Irrigapiio: 0 Custo de Transformaqzo Social. SZo Paulo: FIPE, 1988. 105. Affonso, Rui de Britto Alvares et al. Federalism0 no Brasil. Desigualdades Regionais e Desenvolvimento. - Sgo Paulo: FUNDAP: Editora da Universidade Estadual Paulista, 1995 106. Albuquerque, Roberto Cavalcanti de. Nordeste. Sugestdes para uma estrattgia de desenvolvimento. - Fortaleza: Banco do Nordeste, 2002 107. Araitjo, Tibia Bacelar de. Ensaios sobre o desenvolvimento brasileiro: heranqas e urgbncias. - Rio de Janeiro: Revan: Fase, 2000; 108. Coutinho, Edna Maria B. Gama et al. A Oferta de Energia Elttrica no Brasil. - em Informe Infra-Estrutura. Area de Projetos de Infra-Estrutura - Agosto/99. N.37. Rio de Janeiro: BNDES, 1999; 109. Gomes, Gustavo Maia et al. Desenvolvimento sustentivel no Nordeste. - Brasilia: IPEA, 1995; 110. Gomes, Gustavo Maia. Velhas secas e novos sertdes. - Brasilia: IPEA, 2001. 111. BARRAGENS NO NORDESTE DO BRASIL - DNOCS - 2" EdiqBo -1990. 112. LARGE BRAZILIAN SPILLWAYS - CIGB/ICOLD/CBDB - 2002 113. Projeto de TransposiqPo de Aguas do Rio SZo Francisco -FUNCATE - Fundaqb de Cibncia, Aplicaqdes e Tecnologias Espaciais (Anexo V) - 1999. 114. Relatbrios e Boletins Ttcnicos do DNOCS. 115. Relatbrio de Auditoria Operacional (TC - 007.977/2000.7) do Tribunal de Contas da Unib sobre o Perimetro de Irrigaqb Jaguaribe/Apodi - Julho/2000. 116. Araitjo, J.C.: Sintese dos estudos de custos de disponibilizaqiio da Bgua bruta nos vales perenizados dos rios Jaguaribe e Banabui6. COGERH. Fortaleza, maio de 2002. 117. Cavalcanti, J.E.A: Impactos socioecon6micos da irrigaqzo na regizo mineira da SUDENE. Viqosa, 1998. 118. Goicoechea ", Hansen D.H. and Duckstein L. (1982) Multiobjective decision analysis with engineering and business applications. John Wiley and Sons, Inc.; New York, N.Y. 119. Flug M. and Ahmed J. (1990). Prioritizing Flow Alternatives for Social Objectives. Journal of Water Resources Planning and Management. Vol. 116, No. 5. 120. Rodrigues, L.: Potencial da Agricultura Irrigada como Indutora do Desenvolvimento Regional. 0 cas0 do Projeto Jaiba no Norte de Minas Gerais. Revista EconBmica do Nodeste. Fortaleza. Vol. 32. Abr-Jun. 2001. 121. Damiani, 0. DiversificaqHo Agricola e ReduqPo da Pobreza: A introduqBo no Nordeste Brasileiro de Produtos Agricolas Nlo-Tradicionais de Alto Valor e seus Efeitos sobre Pequenos Produtores e Trabalhadores Rurais Assalariados. Revista EconBmica do NE. Vol. 34, No 1. Jan-Mar 2003. BN. Fortaleza

94 9. List of Tables

4.1 Summary of Economic Results 4.2 Financial Results in Farm and Post-Harvest Activities Models 5.1 Population Growth, Period 1970-2000 5.2 Urban Population in 1970-2000 5.3 Poverty Rates in 2000 5.4 Municipal Revenue Index in 1970 and 2000 (HDI-Income) 5.5 Municipal Urban and Rural GDP Growth Rates 5.6 GDP per capita - 1975-2000 5.7 Municipality Human Development Index - 1970-2000 (HDI-M) 5.8 Estimated Potential Migrants Retained by Irrigation Projects 5.9 Direct and Indirect Benefits, per year, from Reduced Migration 6.1 Factors of Project Success 7.1 Impact Evaluation 7.2 Criteria Ranking 7.3 Results of the Multi-Criteria Analysis 7.4 Overall Strategy, Possible Policy Options and Instruments 7.5 Tentative Action Stages for Implementation of Policy Options AI.l Areas of Family Farm and Entrepreneurial Units in Schemes in PE AI.2 Area of Public Schemes in PE, Registered and Real Use AI.3 Changes in Irrigated Areas in the Petrolina Development Pole AI.4 Priorities, Options and Instruments for the Petrolina Development Pole AI.5 Family and Entrepreneurial Farm Units in Schemes in BA AI.6 Area of Public Schemes in BA, Registered and Real AI.7 Changes in Irrigated Areas in the Juazeiro Development Pole AI.8 Priorities, Options and Instruments for the Juazeiro Development Pole (BA) AI.9 Changes in Irrigated Areas in the Northern Minas Development Pole AI. 10 Priorities, Options and Instruments for the Northern Minas Development Pole AI. 11 Changes in Irrigated Areas in the Lower Jaguaribe Development Pole AI. 12 Priorities, Options and Instruments for the Lower Jaguaribe/Apodi Plateau AI. 13 Priorities, Options and Instruments for the Lower AssBMossor6 Development Pole AII.l Structure of Lot Sizes in Jaiba Iand I1 AII.2 Areas Currently Cultivated and Expected Scenarios AII.3 Jaiba Iand 11. Required Complementary Investments AII.4 Summary of expected results with and without complementary investments AII.5 Evaluation of the Jaiba Irrigation District AII.6 Evaluation of the Jaiba Irrigation District

95 10. List of Figures

3.1 Methodological Flow Chart 4.1 Growth in Value of Production in the Nil0 Coelho Irrigation Scheme Urban and rural growth - 1970-2000 5.1 Urban and rural population growth, 1970-2000 5.2 Urban and rural population growth, 1970-2000 5.3 Monthly Income Per Capita in 1991 and 2000 (in R$ of 2000) 5.4 Job generation in the five poles (1973-2001) 6.1 Positive Factors and Economic Results in Public Irrigation Schemes 7.1 Results of the multi-criteria analysis shown in graphic form AI. 1 Map of the public and private irrigated areas in 2001, in the Petrolina (PE and BA) and Juazeiro (BA) Development Poles AI.2 Public and private irrigation in the Petrolina-Juazeiro Development Pole (BA), 1973 to 2001 per hectare AI.3 Map of public and private irrigated areas in 2001 in the Northern Minas Development Pole AI.4 Changes in public and private irrigation in the NorthernMinas Development Pole - 1973 to 2001 AI.5 Map of public and private irrigated areas in 2001, in the Lower Jaguaribe (CE) and Assw Mossor6 (RN) Development Poles AI.6 Changes in Public and Private Irrigation in the Lower Jaguaribe Development Pole - 1973 to 2001 AI.7 Changes in public and private irrigation in the AsswMossor6 Development Pole - 1973 to 200 1

96 11. List of Boxes

1. Positive Parameters 2. High Aridity and Development Poles in Irrigated Agriculture 3. The Importance of Clusters in Agribusiness Chains 4. Comparative and Competitive Advantages of the Semi- Arid Region 5. The Semi-Arid Region is Not Only Irrigated Fruit Production 6. Grape and Wine Growing in the Semi- Arid Region 7. Main Conclusions of the Economic and Financial Evaluation 8. Interesting Educational Experience 9. Irrigated Agriculture Helps Raise Salaries 10. Petrolina: Beyond Irrigation 11. Tabuleiro do Norte Illustrates the Impact of Irrigated Agriculture on Other Sectors 12. Groundwater Protection

97 ANNEXES

ANNEX I Brief Description of the Samples: Five Poles with Eleven Public Irrigation Schemes and Private Irrigated Areas

The analyses and evaluations ofthe ESW - Irrigated Agriculture in the Brazilian Semi-Arid Region: Social Impacts and Externalities follow a sequence that begins with (i)the irrigated lot or farm at property level; (ii)municipalities with and without irrigation projects; (iii)the main commodities; (iv) irrigated schemes (perimeters); and ends with (v) the poles or group of schemes and correlated activities. Examining the first level in all public irrigation schemes (private rates ofreturn at farm level and post- harvest enterprises), both SFU and EFU show positive financial results and in many cases, highly positive results. It could be argued that farmers are non-compliant although this is due to the flawed financing system and loan contracts. The BN is changing to group negotiations for a certain commodity, and individual contracts with each farmer. Even so, it is advisable to formulate projects at UPA level. At the second -municipal - level of analysis, it is absolutely clear that on the whole, those municipalities with irrigation performed better than those without. This indicates that irrigated agriculture undoubtedly has a positive influence on the region’s social and economic development in all aspects except for health and education, whose positive performance seems to be mainly the result of federal government programs. At the third level ofanalysis and evaluation, for products or commodities, and the simulation ofproduction models for any product or group of products and for different products during a project’s lifespan, results are equally satisfactory, even though there is room for improvement regarding the process. In-depth studies on agribusiness aspects are sorely needed, where process/product chains, logistical chains, custody chains, and value chains (including market studies) are emphasized. The adoption ofthe product/commodity project model is envisaged, integrating various farmers and municipalities. At the fourth level of evaluation (expost economic evaluation), there are significant differences in the performance ofthe 11 irrigation projects, as was expected when selecting the sample. This diversity was very helphl for identifying deficiencies, lessons learned and possible strategic options for each case, as shown in chapter 6. Seven ofthe 11 schemes analyzed presented satisfactory ERR, which varied between 14.2% (GorutubdLagoa Grande) and 25.4% (Tourgo). However, with the application of socia 1 variable discount rates varying between 19.1% and 16.8%, only four projects had positive NPV results. Even the Nilo Coelho Project, which is for many reasons considered an example in the region, with an ERR of 16.8%, shows a negative NPV when applying the social variable discount rate. The same occurs with the Maniqoba Project, with an ERR of 16.7% and a negative NPV. The main findings in this analysis and evaluation lead to the recommendation that studies should be continued on these 11 sample projects for a comprehensive benchmarking survey for possible use as a reference for studies and analyses ofother projects. The New Conceptual Model for Irrigation (NCMI) suggests a series ofchanges in focus and strategy that could help improve public irrigation projects. At the fiRh level ofevaluation (group ofschemes or poles), for the purpose ofimproving social and economic development conditions, it would be interesting to analyze macro situations in order to evaluate integral performances, where multipk purposes can be considered. In the case ofthe six irrigation schemes ofthe Petrolina and Juazeiro poles, the overall impact is satisfactory, with an ERR of 18.9% and a positive NPV ofUS$49.0 million. As a whole, the other two areas (CE/RN and Northern Minas Gerais) do not reach favorable conditions in terms ofERR and NPV. In multkpurpose financing programs, as is the case with irrigated agricultural projects, an expost evaluation should also consider technological,

98 environmental and managerial objectives in addition to social and economic parameters. The traditional method ofanalyzing and evaluating projects based on costhenefit analysis was therefore complemented with multi-objective analysis techniques, known as the Multi-Criteria Decision Analysis Method (MCDM), in which six criteria (natural resources and environment, legal and regulatory aspects, productive infrastructure, productive-technological context, public and private management) were added to social and economic aspects. The MCDM distinguishes two groups of clearly differentiated schemes: the six Petrolina-Juazeiro projects as a higher group, and the other five as a lower group. For this pole level it is advisable that Integrated Development Projects or Plans be developed. Finally, remote sensing techniques are essential for improving data surveys in a dynamic way, and are relevant for all five of the above-mentioned levels. In addition, there is an urgent need for advanced videography and radiography studies, as they are important tools for monitoring and evaluation. It is advisable and highly recommended to record the further developments ofthe pilot study in the Gorutuba scheme. A suggestion would be to encourage universities and research centers to prepare M.Sc. and/or Ph.D thesis work on the subject. A brief description on some of the characteristics and main findings for the five development poles follows.

99 I.Petrolina Development Pole (PE and BA)

The Petrolina Pole, located in southwestern Pernamb~co~~,bordering the State ofBahia, is one ofthe most important fruit-producing poles in the country, currently with 44,500 hectares under cultivation. It produces 40 different hitsand vegetables and 40% ofBrazil's mango and table grape exports, which were worth US$40 million in 2002. This pole is destined to grow, given the amount ofland already cultivated and ready to enter production. The area of the pole with irrigation potential is 100,000 ha, with fruit production continuing to be the principal growth activity in the region, a result ofthe synergy between the industrial, commercial and service sectors. The first public irrigated settlement scheme in the pole, the Bebedouro Project, was implemented with 1930 irrigable ha in the 1970s. It was consolidated through the implementation of the Nilo Coelho Project (15,600 ha) in the 1980~~and the Maria Tereza area (4,800 ha) in the 1990s. In less than 30 years, the region has attracted both national and foreign investments, as well as migrants from the arid interior ofthe Northeast. The population grew 257% between 1970 and 2000 in the municipality ofPetrolina, while other municipalities with similar characteristics grew only 27%. This motivated the state and federal governments to finance technological research and improve infrastructure in the region. The following map and figure show the state ofpublic and private irrigated areas in the region (Petrolina- Juazeiro), in the year 2000/01 and the development of irrigation since 1973.

Figure AI.l- Map of the public and private irrigated areas in 2001, in the Petrolina (PE and BA) and Juazeiro (BA) Development Poles

MULTIYEAR ANALYSIS OF IRFUGATED AREAS - 1973,1987,1992,1995,1999,2001-

Others marked areas: public irrigation

Projetos P6blicos: 1.Bebedour0 2.Maria Tereza 3 .Nil0 Coelho 4.Touri'o 5 .Maniceba 6.Curaqa 7. Pedra Branca 8. Caraibas

I I I L 1. 'I 14: x ' I:

36 Covers the municipalities of Petrolha, Lagoa Grande, Santa Maria da Boa Vista and Oroc6

100 The public irrigation schemes being analyzed include an area of22,849 ha already being imgated, 43% of which is in the hands of 202 entrepreneurial farmers and 57% is in 2,025 family farm units, as shown in Table AI.1.

Table AI.1 Areas of Family Farm and Entrepreneurial Units in Schemes in PE

Bebedouro I 1,931 I 8.5% I 2 22% I 134 I 1,494 I 78% 1/ Includes the Nil0 Coelho and Maria Tereza scheEnes Source: CODE VASF, satellite image interpretation, June 2003

Table AI. 1 presents a summary ofthe current irrigation situation among the pole’s public schemes, comparing furnishedcollected data and information interpreted from satellite imagery in relation to the actual irrigated area in the schemes under cultivation. The impact ofpublic works in this pole, even when 17% refers to uncultivated areas with installed infrastructure, appears to be 42% higher than the official data available on infrastructure usage.

Table AI.2 - Area of Public Schemes in PE, Registered and Real Use

Bebedouro Sub-total Pole PE I 22,849 I 18,880 I 26,806 I 83 Yo 1 142% I 70 %o Source: CODE VASF, interpretation of satellite imagery, June 2003

With regard to land use, there is clearly a radical transformation in terms of types ofcultivation. In the early 1990s, less than 10% ofthe area had hittrees and 90% was planted with annual crops. Today the opposite is true, with this rapid process ofreconversion being the result ofpersistent drops in the prices of traditional annual crops and the higher returns from tropical hits. The analysis of family and entrepreneurial lots showed that reconversion to hitproduction was relatively faster among family lots, with 79% ofthem having been reconverted to hit-tree growing by 1977, compared to only 54% ofthe entrepreneurial ones.

101 BOX 10 - Petrolina: Beyond Irrigation

The largest commercial and services pole in the S2o Francisco Valley, Petrolina is adding new economic vocations to irrigated agriculture, which has transformed it from a mere highway crossing into Brazil’s principal fruit-production pole in less than 30 years. Exporting grapes and tropical fruits to Europe and the United States, it also attracts large industrial concems for producing and processing fruits and vegetables.

Petrolina and neighboring Lagoa Grande and Santa Maria de Boa Vista, where grapes and good wines are produced, are among the priorities of the Government of Pemambuco for tourism development. The Tourism Secretariat organizes tours to the region to attract visitors. Another sector being developed in this pole is that of medical services. A survey carried out by the Gazeta Mercantil shows that the Petrolina region has nearly 90 hospitals and clinics treating over 1000 outpatients per day. Patients come from as far as 300 km away, Le., they offer services to nearly 1.6 million people who live within this radius. The municipality offers different types of specialized treatment and surgery, using state-of-the-art equipment. In fact, Petrolina was the first city in the Northeast to have MRI equipment.

II Source: News. Northeast Bank. Thursdav. October 10.2001

Nil0 Coelho irrigation scheme

Now the largest public irrigation scheme in operation in Brazil, Nil0 Coelho was inaugurated in the mid- 1980s with 15,600 ha. Another 4,800 ha were added in 1997 (M. Tereza). Fifteen per cent or 3,000 ha are not under cultivation at the present time. Around 56% ofthe area is distributed among 2,000 family lots, an average of5.7 ha each, and 44% among 200 entrepreneurial lots, an average of46 ha. The irrigation district has pressurized water distribution systems. Conventional sprinkler systems predominate, and there is a trend towards drip irrigation and micresprinklers. The settlers have been responsible for the administration ofthe irrigation district since 1989. Cutting off the water supply ofnon-payers has facilitated removing those who are less efficient, with only 25% ofthe original settlers still remaining.

Technical assistants from the district encouraged reconversion to fruit production, which was financed with CODEVASF resources. Bananas became the transition crop before planting other, more profitable fruits such as mangoes, guavas and coconuts, which are less costly to plant and faster growing. The gross annual production value rose from R$20 million to a180million between 1993 and 2001 due to the replacement oftraditional crops with fruit trees.

Bebedouro irrigation scheme

This irrigation scheme was inaugurated in 1969 and consolidated by the beginning ofthe 1970s. It began with 8,077 ha, of which 1,93 1 ha were irrigable, and was divided into 104 lots between 4.5 and 14 ha, most ofwhich had 8 ha. According to SUDENE (1971), this variation in size was used to determine the ideal area per family unit and to study the success ofthe settlers as entrepreneurs at the same time. There are currently 128 x 10 ha family lots, and 5 x 130 ha entrepreneurial lots in this scheme. Title deeds to land were first handed over in 1989, when farmers won their freedom from CODEVASF. The settler selection process was carried out following criteria in use at that time, according to which poor families were the proclaimed targets, and settlers got used to the excessive paternalism ofCODEVASF. The scheme’s Mixed Cooperative was created from the top down by CODEVASF at considerable expense, and is now in debt due to weak management. The area being cultivated is no more than 1,000 ha, with 80% ofsettlers in arrears. This poor performance led to the takeover of a number ofthe larger lots by illegal settlers (%em terra”).

102 The scheme was a major producer of short-cycle temporary crops (melons, watermelons, tomatoes, beans and onions) before the 1990s. The farmers themselves have been administering this irrigation district through the Bebedouro Irrigation District since 1998, and 50% ofthe area has now been abandoned. This project requires urgent attention in order to rehabilitate drainage systems, make changes and encourage the automation ofirrigation systems, improve access and roads, and provide environmental solutions for solid residues and waste (cartons from used agrechemicals) and greater support to farmers in general.

In 1984, EMBRAPA carried out a study seeking to identi% the causes for the scheme’s poor performance, and concluded that the group of farmers who had larger areas under irrigation showed better results. A correlation comparing farms with and without grapevines showed that the best performers had an average of3.3 ha in grape production (90% with permanent areas) and an average yield of 12,000 kg per harvest, whereas those with the worst performances had an average of 1.96 ha in grape production and yields of only 7,375 kg per harvest, apart from the difference in the quality and price of grapes produced. They also noted that both experience and ability were closely related to plot size. Socioeconomic variables related to the way of administering the lots also differentiated the groups, for example: (i)planning for harvest; (ii) existence of cost controls; (iii)conservation oflot infrastructure; and (iv) a businesslike attitude. With regard to TARE, 80% ofthe sample interviewed considered it insufficknt, regardless ofwhich group they belonged to.

Private irrigation

According to the satellite image interpretation carried out in 1973 (Annex G, Volume In), no private areas were under irrigation when government investment began in Petrolina. Fourteen years later (images from 1973 to 1987 are not available), of the 32,431 ha under irrigation, 48% were in public schemes and 52% private. In 1999, ofthe 48,950 ha under irrigation, 68% were in public schemes and 32% private. The advance ofprivate irrigation paralleled the development ofpublic schemes until 1987, with investments in areas that did not require heavy infrastructure costs. The private sector actively developed new areas and introduced new production methods and farmer organizations. The changes in public and private areas are presented in the following table, as identified in satellite imagery data provided by CODEVASF.

Table AI.3 Changes in Irrigated Areas in the Petrolina Development Pole

Source: CODE VASF, Satellite image data, June 2003

Of the 15,846 ha under private irrigation in 1999, there was a reduction of25% by 2000. Some 2,900 ha were planted with hittrees (25% ofthe area), but the more important crops in economic terms were grapes with 1,120 ha, mangoes with 560 ha, and coconuts with 530 ha, the frst two being for export (unprocessed) and for wine production. Next in importance are guavas and bananas at 580 ha. Production ofseedless table grapes and grapes for local wine consumption is increasing because ofthe singular advantages in relation to the traditional wine-growing areas in the south, as vineyards in the pole can reach maturity in half the time, with the possibility oftwo and a half harvests a year, and a top quality product.

103 Table AI.4 Priorities, Options and Instruments for the Petrolina Development Pole (PE and BA)

PRIORITY ISSUES

.auction available encourage efficient ,turnover ofsettlers ots in irrigation processes in the Nilo md sustainable A, n each scheme and iistricts Coelho public irrigation )&M :mission oftitle district ieeds for lots complete Priority -complete small works in nvestments . updated and complete small the PontaVMaria Teresa iigitalized geo- . PROMOTE FULL USE Norks in distribution irrigation districts encourage full use of .eferenced Rural Iuilt lots IF BUILT ietworks Cladastre--establish - lack ofup-to-date land NFRASTRUCTURE improve selection wstainable rates cadastre in the Valley :riteria of users in . modernize irrigatior . maximize and mblic irrigation - lack of land titling iistricts aiming at A, xioritize use of iistricts :xisting - difficulties in getting 3&M cost reduction land titling and infrastructure back unused lots - repossess and re- 'acilitation ofland auction under-utilize( narkets in the Nilo Lots 2oelho, Bebedouro, Maria Teresa and Pontal Irrigation Districts

-consolidate mango, .reduce plant health -improve table grapes, risks and inadequate dissemination, :oconut, guava, -development and management of communication and research banana, onion, agrochemicals calls for private melon, passion fruit investors -encourage !. ENSURE PRODUCTIVE and watermelon agricultural research -agrochemical, solid ZOMPETITIVENESS AND :lusters -plant health risks residues and toxic EFFICIENCY directed at irrigated fruit production and management plan horticulture -diversify and -development ofnew -expand lines of expand new markets -improve and expand export credit clusters, attract national and export -implementation of ago- industries market information plant health barriers and an infestation extermination plan -extend training programs -continue attracting -inefficient instruments -regulate, concede -water rights and user more private for land markets and ensure reliable register investors, water rights -modem multi-use agribusiness and 3. EXPAND -facilitate modem rural cadastres professional farmers 4GRIBUSINESS -encourage organization means for land -increase 4CTIVITIES INTHE ofagribusiness chains markets REGION dissemination, -make strategic communication and information available calls for private to the private sector investors

104 11. Juazeiro Development Pole (BA)

The Juazeiro Development Pole 37 is in the north ofthe State ofBahia, bordering Pernambuco, and includes four of the 11 municipalities under analysis in this study. The pole has an area of23,162 ha, of which 81% is in 118 entrepreneurial lots and 19% is distributed among 593 family fmunits, according to the map presented in the Petrolina Development Pole and the following table:

Table AI.5 Family and Entrepreneurial Farm Units in Schemes in BA

Juazeiro Mandacad 2 51 12% 54 368 88%

Maniqoba 4,293 18% 80 2,404 56% 234 1,889 44%

Tour50 14,100 62% 14 13,889 98.5% 37 211 1.5%

Curaci I’4.350 I 18% 22 2,391 55% 268 1,959 45% Total I 23,162 I 100% 118 18.735 81% 593 4.427 19%

Source: CODEVASF, Satellite image interpretation, June 2003

The Tourb Project is the largest scheme in the pole, with 98% belonging to a company that produces and processes sugar cane. It underwent a major product-reconversion process in the early 1990s, moving from 45% sugar cane, 50% annual crops and 5% fruit trees, to 40% fruit trees and 50% sugar cane. The largest reconversion, from 13% to 68%, was carried out among family units between 1991 and 1997. In entrepreneurial areas, the area dedicated to fruit trees rose from 8% to 16% during the same period. The greatest change was in the Maniqoba Project, where 77% of the area had been planted with fruit trees in 1977. That same year, 51% ofthe area of Curaqa had been planted with fruit trees, while in Mandacaru and Touriio, this percentage was only 29%. In 1977, among the entrepreneurial areas, 54% (111,700 ha) had been planted with sugar cane, the highest reconversion rate being in Curaqa, where fruit trees covered 87% ofits area, followed by Maniqoba with 46%.

37 Covers the municipalitiesof Juazeiro, Sobradinho, Casa Nova and CuraGa

105 Figure AI.2 - Public and private irrigation in the Petrolina-Juazeiro Development Pole (BA), 1973 to 2001 per hectare

However, when the amount of irrigation scheme infrastructure actually used, according to official statistical data, is compared with satellite imagery, the latter shows that the differences are less significant than those found in Pernambuco. According to official records, 2,000 ha (8.6%) ofthe schemes were not being utilized, 'with 42% more irrigated area than was declared in the records ofthe irrigation districts and CODEVASF.

Table AI.6 Area of Public Schemes in BA, Registered and Real

Manigoba 4,293 4,500 7,105 105% 158% 63% Sub-Total Pole BA 23,162 21,206 30,023 92 yo 142% 71%

Source: CODE VASF, satellite image interpretation, June 2003

106 Mandacaru irrigation scheme

This project was implemented in 197338and has 54 family lots (368 ha), 6.8 ha on average, and two entrepreneurial lots, one ofthem operated by EMBRAPA for agricultural research. The irrigation scheme was administered by a cooperative that failed to maintain its infrastructure, the farmers themselves being highly in debt. Since 2000,O&M has been the responsibility ofthe Mandacaru Irrigation District (DIMAND). The fanners’ high level ofdebt has made renewing equipment and reconverting productive activity difficult, resulting in low output, productivity and quality levels for their products. Drainage works, changes to the irrigation system including automation, access infrastructure and general support to farmers, are required. The scheme started being modernized at the end of 2001, with technical assistance given to fanners to help them reconvert to fruit production, with fmancial support from the Ministry of National Integration (MI). The construction ofa new reservoir should help reduce power costs, as will night irrigation.

Tour60 irrigation scheme

This scheme:’ with 11,690 irrigable hectares, all under cultivation, has the lowest investment cost per hectare (US$3,73 lh),because it was built by means of an agreement between CODEVASF and a group ofprivate investors to develop an integrated sugar-alcohol agreindustry. The company owns 9,300 ha, I,177 ha belongs to 13 other agricultural companies and the remaining 2% (2 11 ha) belongs to 3 7 family lots. The land did not need to be purchased, nor was it necessary to build pipelines and distribution networks to serve many ofthe small lots. This scheme has the highest water-use efficiency rate along this stretch ofthe SbFrancisco River. The road network is small and maintenance costs for bridges, draw- offs, culverts, etc. are reduced. There was also no need to build houses or villages or to provide basic services such as drinking water or electricity to houses, etc. The agreindustrial activity of the AGROVALE Company provides 2,500 full-time jobs and 4,500 temporary ones for eight months. Sugar cane from 1,330 ha ofthe neighboring Maniqoba scheme is also processed here. Average productivity is 100 tons per hectare, using modern irrigation techniques including central pivots, drip irrigation and plastic tubes with gauges to control water flows. Sugar and fuel alcohol are obtained from the sugar cane, with steam being generated from the bagasse to power turbines, thus ensuring self-sufficiency with regard to electricity. The surplus energy produced (5 MWH) is sold to the main power grid operators. The bagasse is also used to produce compost, which retains soil moisture, and is altered through hydrolysis so that smallholder farmers may use it to feed their animals.

Maniqoba irrigation scheme

This irrigation district4’ covers a total of 12,317 hectares, with 4,290 irrigable hectares. It was inaugurated in 1981 with 234 family units of 7.8 ha (1,890 ha) and 80 entrepreneurial units with 2,400 ha, and is administered by the Maniqoba Irrigation District (MID). As is the case with Nilo Coelho, the area planted with temporary crops on family fmsfell from 95% in 1992 to less than 10% in 2001 as the area dedicated to fruit-growing increased. In the case ofthe entrepreneurial units, 50% of the area is planted

38 The draw-off and pumping station move 0.72m3/salong a pipeline to a 15,000 m3holding reservoir, serving 419 ha. A 19 km main canal and a 6.2 km secondary network distribute water to the lots. The project has 30 km of drainage canals, 17 km ofroads and two villages with schools, health facilities, technical-administrative headquarters and a social center. 39 The 19.8m3/spumping station draws water directly from the SbFrancisco River, supplying the principal canal and secondary networks and with 4 intermediate pumping stations. 40 Draw-off directly from the S2o Francisco River pumping 6.43m3/s (five 3.165 kw pumps) and secondary pumping stations, 8.8 km pipeline, 16 reservoirs and 156 km of lined channels, 7 km of drains and 500 ha ofunderground drains, 233 km of roads, two towns with schools, health facilities. etc.

107 with sugar cane. This irrigation district, which was financed by CODEVASF, offers technical assistance to smallholder farmers.

Curagi irrigation scheme

First begun in 1982, this irrigation district41 still uses the furrow irrigation system, conventional sprinkling, drip irrigation and micresprinkling on an irrigated area of4,350 ha, with 268 small farm lots in an area of 1,959 ha, and 22 enterprises within 2,386 ha. Two of these have been deactivated and others only make partial use of their lots due to a complete lack of funds. The area planted with fruit trees increased from 10% to 66% from 1992 to 2001, while the area planted with annual/temporary crops decreased from 90% to 34%. Contrary to the Nil0 Coelho and Maniqoba Irrigation Districts, in this scheme the family farms maintain one-third ofthe area for short-cycle crops such as watermelons (450 ha) and beans (175 ha), and are gradually increasing areas for coconuts (700 ha) and mangoes (460 ha). Among the entrepreneurial areas, 400 ha are not being used, but mango and grape plantations use good technological practices. Around 100 ha are being used to plant peppercom for industrial processing. Companies show a high level of organization, technical capability and post-harvest infrastructure. In a smaller part ofthe Curagh Project, which is administered by UPROPIC - the Curaqh Rural Producers Association, the situatbn is precarious, similar to that ofthe Mandacaru Project.

Private irrigation

According to 1973 satellite images, when public investments started in the Juazeiro Development Pole, only 240 ha were under irrigation, 66% of which was in Mandacaru, and only 8 1 ha were under private irrigation. Fourteen years late$2, in 1987, the images show that irrigated areas have expanded to 31,587 ha, with 57% in public areas and the rest in private projects. Thirteen years after that, in 2000, 51,000 ha were under irrigation, 66% ofwhich were in public and 34% in private areas. Privately irrigated areas grew side by side with public projects during the first years and continued to expand in areas that required less investment in pumping and distribution infrastructure. The following table shows the growth of public and private areas and the map presented in the Petrolina Pole shows their location in the year 2000.

Table AI.7 Changes in Irrigated Areas in the Juazeiro Development Pole

Source: CODEVASF, satellite image interpretation, June

The 17,200 ha in private irrigation that existed in 2000 have 7,100 ha ofhit trees (41%), the most important crops being mangoes (4,000 ha), coconuts (1,250 ha) and grapes (750 ha). Following these are

41 Two independent irrigation systems, one covering 3,404 ha and pumping 4.37m3/s, serving 127 family lots and 22 enterprises, administered by the CID; and another covering 945 ha, with another 1.29m3/spumping station serving 141 family lots, adrmnistered by the Curaqa Rural Producers Association. 42 Satellite images between 1973 and 1987 do not exist. This was the period when the private sector grew most.

108 guavas and bananas (300 ha each). Seedless table grapes are gaining ground with a reasonable increase in the area being cultivated, as is the case for wine grapes.

Table AI.8 Priorities, Options and Instruments for the Juazeiro Development Pole (BA)

PRIORITY TC ICS/PROBLEMS PRIORITY NEEDS RESTRICTIONS ISSUES .encourage efficient and -turnover ofsettlers in -slowness in land titlineI processes in public sustainable A, O&M each scheme and -auction available lots irrigation districts and emission oftitle deeds in public irrigation complete Priority repossessing abandoned for lots 1. PROMOTE FULL districts [nvestments andor under-utilized lots USE OF EXISTING -updated and digitalized .title and promote full [NFRASTRUCTURE -complete works in the Geo-referenced Rural ise of equipped lots -complete small-scale Salitre Irrigation District Cadastre--establish works in distribution -improve selection sustainable rates -lack ofup-to-date land networks xiteria ofusers in cadastre in the Valley -modernize irrigation public irrigation districts aiming at A, districts -complete and update O&M cost reduction land titling of lots in public irrigation districts -facilitate land markets -repossess and re- in the Valley auction under-utilized lots -consolidate mango, -development and -reduce plant health -improve dissemination, table grapes, coconut, research risks and inadequate communication and calls sugar cane, guava, management of for private investors banana, onion, melon, agrochemicals -agrochemical, solid passion fruit and -plant health risks residues and toxic watermelon clusters -encourage agricultural research directed at management plan 2. ENSURE irrigated hit -expand lines of export PRODUCTIVE -development ofnew production and credit COMPETITIVENES -diversify and expand markets horticulture new clusters, attract S AND EFFICIENCY -implementation ofplan new agro-industries -improve and expand national and export health barriers and an -agrochemical infestation exterminatiot market information contamination plan -agrochemical, solid waste and toxic management plan -training programs

-regulate, grant and -water rights and uses ensure reliable water register -inefficient instruments rights for land markets -modem multi-use rural -continue attracting -facilitate modem cadastres more private investors -stable water supply means for land markets 3. EXPAND agribusiness and -improve dissemination, -encourage organization AGRIBUSINESS professional farmers -make strategic communication and ACTIVITIES IN of agribusiness chains information available to search for private THE REGION -relative isolation in the private sector investors which areas suitable for -complete priority and -transport and electrical irrigation are located, on strategic public network logistics in the the edge of Sobradinho infrastructure for municipality ofCasa Lake agribusiness, including Nova transport logistics

109 111. Northern Minas Development Pole (MG)

The Northem Minas Development Pole43covers an area of 12,600 km2 and has a population of 180,000. Irrigation emerged as a strategy to be implemented in the semi-arid regions as a means ofdevelopment in the northem part of the state. The pole is implemented by CODEVASF and comprises the Jaiba, Gorutuba, Pirapora and Lagoa Grande Projects. Socioeconomic studies and preliminary programing for the Gorutuba Project began with construction in 1969, with the first settlements occurring in 1978. The Jaiba Project is the largest of all the projects in the Northeast and Northem Minas Gerais. It was part of the I1National Development Plan, which also included the POLONORDESTE Program and the Northwest Plan. The project’s aim was to develop the northem expanse of Minas Gerais. The implementation of the Jaiba Project, with its current intention of irrigating 100,000 ha, including 67,000 ha in public schemes in four stages, began in 1975, and the first settlers occupied their lots in 1989/90.

43 Covers the municipalitiesof Janauba, Jaiba, Matias Cardoso, Porteirinha, Nova Porteirinha and Verdelhdia.

110

GorutubuLugoa Grunde irrigation scheme

The Gorutuba scheme is situated on the right bank of the Gorutuba River, on the municipal limits of JanaGba and Porteirinha. The system, constructed in 1978/82, is supplied by the Bico da Pedra Dam44 with an outflow of 6 m3/s, supplying fmlots by gravity along 172 km of the canals. Lagoa Grande was built in 1986/88 on the leR bank ofthe river, and starts from a pumping station supplying 2.4 m3/s,which feeds four main channels and two secondary ones. The dam also supplies the town ofJanauba, industries and rural areas as well as the town ofNova Porteirinha, which is separated from Porteirinha by the Gorutuba Project. The US$7.0 million cost ofthe Bico da Pedra Dam, at 2002 prices, was shared between flood control and flow regularization (20%), urbadrural water supply (40%), water in private irrigation projects (25%) and the two public irrigation schemes (15%). Gorutuba covers a total area of 8,900 ha, containing 400 family units (6.1 ha on average) and 50 entrepreneurial units (45 ha, on average) equivalent to 2,540 and 2,272 ha of useful agricultural area, respectively, totaling 4,s 12 irrigable hectares. Ofthe settled family farmers, 86% have not even finished their primary education, whereas 72% of entrepreneurial farmers have college degrees, which explains innovations such as the introduction of bananas and other fruit crops. All areas in the Lagoa Grande Project had been implemented by 1987.

Figure AI.4 Changes in public and private irrigation in the Northern Minas Development Pole - 1973 to 2001

t

In 1986, the management ofthe scheme was transferred from CODEVASF to COVAG - Gorutuba Valley Agricultural Irrigation Cooperative, which was founded in 1980. However, CODEVASF resumed the responsibility ofmanaging the scheme in 1992. The Gorutuba Irrigation District was created in 1993 and took over the management and O&M ofall shared infrastructure. In 1995,4,400 ha were being cultivated, 64% (2,800 ha) with fruit crops, including 2,260 ha with bananas. Currently, 4,100 ha are being cultivated, including 70% with fruit crops (2,520 ha with bananas and 175 ha with mangoes). Banana- growing was introduced in 1982, expanding in 1985 and reaching a dominant position by 1990. Well below acceptable levels ofproductivity were registered for most crops due to frequent pest attacks and insufficient funding for the introduction ofbetter techniques. Technical assistance for family plots has been hired by CODEVASF. According to estimates made by Cavalcanti et al., the irrigation schemes employ 3,400 workers, 815 of whom are in full-time and 2,100 in temporary jobs. The remainder work on

44 Dam constructed by CODEVASF with a capacity for 705 million m3 of water, fulfilled an important social role in supplying the city of Janauba and the Municipality ofNova Porteirinha, created recently.

112 a daily basis. At the industrial level, the number ofjobs created rose from 33 to 202 between 1975 and 1993, i.e., between the start of implementation and the scheme’s consolidation. The most important industrial establishments include a tomato-processing plant, small lumber companies, and metalworking and ceramic companies.

There is a total of 3,600 industrial workers, with a relation of 0.78 between direct jobs created in the schemes and indirect jobs outside in industrial activities within the municipalities in question. According to 1993 data, Janacba and Porteirinha had 5,471 jobs in commerce, which represented 1.07 jobs in commerce for each direct job created within the irrigation schemes. In other words, 1.75 jobs were generated for every job created within the schemes. The 13-year period between 1980, when the first farmers settled and 1993, can be characterized as one of accelerated growth in income and job levels around Gorutuba compared to similar municipalities without irrigation schemes. All agricultural inputs required by the schemes still come from outside the region.

Jaiba irrigation scheme

The Jaiba scheme has been implemented since 1975 in the municipalities of Jaiba and Matias Cardoso, and is located between the S5o Francisco and Verde Grande Rivers. The project has sufficient hydraulic infrastructure to irrigate 100,000 ha, 67,000 ofwhich will be in public settlement scheme$5. It was almost abandoned in the mid 1980s due to lack offunding, although it had enough infrastructure installed to pipe 80 m3/s ofwater. Only 5,150 ha were under cultivation at that time (4,150 for seed production and 1,000 ha under public gravity-fed irrigation, only 600 ha ofwhich were being planted with grains and cotton).

In 1988, works began on implementing the “IBRD Northeast Irrigation Jaiba” Project and were completed in June 2000 at a cost ofUS$151.3 million46. When this foreign loan was signed it was expected that phase one would be complete by 1993, settling 350 entrepreneurs and 2,010 smallholder farmers on 5 ha plots. However, by the end of2001, only 40% of the area had been occupied. Among the lessons learned, the project’s final report states that: (i)Oversized project infrastructure had a significant impact on O&M costs and affected its financial viability, and that the ID would only be sustainable when 75% ofthe first phase’s agricultural area was under cultivation; (ii)From the beginning, the project should have been considered a regional development project and not simply engineering works, without regard for settlement, agricultural and social aspects; (iii)It is essential to mantain a balanced combination oflot sizes and numbers offamily members to supply labor to entrepreneurial lots. These are benefited by technology, thereby facilitating market development; (iv) The emission oftitle deeds for land is a prerequisite; (v) World Bank support and supervision funding should be provided until the end ofthe project when assistance should be greatest to ensure sustainability; and (vi) Rules should be carefully and equitably designed, applying criteria for differentiated selection and special exemptions from payment of water tariffs, which generate inequality in the community and hinder the successful operation ofthe irrigation district.

The installation ofthe infrastructure ofthe main pumping station and principal water distribution channels for the 100,000 ha has now been completed, together with the frst ofthe four phases containing 26,000

45 Water supply for 33,000 ha ofprivate irrigation is foreseen, and for 26,790,29,982, 16,000 and 21,264 inigable hectares, respectively, in the public scheme during the four respective phases. 46 According to Implementation Completion Report No. 22.435 from June 29,2002, the Project (Loan 3013-BR) had a cost of US$151.3 million, with a total loan disbursement ofUS$71 million, after two threeyear extensions. By reallocating resources, funds for civil works were increased by 30% and recurring costs by 13%, with consulting services suffering a reduction of 43%. Despite the poor performance in area and settlement expansion, the ICR concludes that the results were satisfactory. In the expost evaluation prior investments were considered sunk costs.

113 irrigable hectares. Only marginal investments remain, estimated at US$8 million for 2,500 ha of family lots. By the end of2001, CODEVASF had invested US$268.2 million and the State ofMinas Gerais another US$113 million in Phase 11, which remains unfinished to date. To evaluate the present study, only Phase Iof the Jaiba Project was considered, covering 15,800 ha, of which only 10,500 ha are being cultivated. The 1,370 family lots have an average area of 5.1 ha, the 130 entrepreneurial lots an average of 55 ha, and two large enterprises work 3,400 ha. The irrigation systems used are conventional sprinkler irrigation (74% of the area) and micresprinkling (24%). When the second phase comes into operation there will be 46,000 ha available, which will still require some small investments and minor adjustments to bid invitations to attract experienced farmers interested in upgrading production systems. Phases 3 and 4 are being studied.

Private irrigation

Before implementing public irrigation projects in Northern Minas Gerais, private irrigation was embryonic and nearly non-existent. This practice started to expand around 1985, based on smallholder farmers in two to 10 ha areas using conventional sprinkling systems, with some large farmers using central pivots. Beans were the main crop at the time, but from 1993 onwards, this crop was no longer encouraged for economic reasons and due to water scarcity. Only some subsistence crops remained. With the beginning of operations in public schemes in 1989/90 and the expansion of fruit production, current estimates indicate that there are 9,000 ha in fruit production and 1,100 ha with short-cycle crops under private irrigation. According to satellite images, in 1973 there were only 1,662 irrigated hectares, mainly in the Jaiba, Porteitinha and Janacba municipalities. Twelve years later, in 1985, images revealed that the irrigated area was 5,721 ha, 40% in public schemes and 60% in private areas. Fifteen years later, in 2000, the irrigated area had grown to 28,500 ha, half of it in public schemes. Private initiative, in this case, also had a significant impact in areas with less costly shared infrastructure requirements, bringing another 3,000 ha under cultivation using pumped well water. The following table presents the expansion of irrigated areas in the Northern Minas Development Pole.

Table AI.9 Changes in Irrigated Areas in the Northern Minas Development Pole

Source: CODE VASF, Satellite image interpretation, June 2003

Ofthe 40,000 ha under private irrigation, 8,800 ha (62%) are used for fruit crops (bananas 6,000 ha, mangoes 800 ha, grapes 600 ha and coconuts 460 ha). Other fruits occupy 940 ha.

114 Table AI.10 Priorities, Options and Instruments for the Northern Minas Development Pole

’ICSIPROBLEMS PRIORITY ISSUES RESTRICTIONS

-slowness in land titling .encourage efficient and turnover of settlers and Iprocesses in public sustainable A, O&M :mission of title deeds for lots -accelerate auction irrigation districts processes of complete Priority digitalized and updated geo- 1. available lots in -complete works in the [nvestments eferrenced rural cadastre ENCOURAGE public irrigation Jaiba Irrigation District FULL USE OF districts .title and encourage full establishment of sustainable EXISTING -lack ofUP -to-date land me of built lots ‘ates sadastre in the Gorutuba INFRASTRUCTURE Valley -improve selection criteria modernization of irrigation Jfusers in the Jaiba Iistricts aiming at the reduction -lack of land titling of lots migation districts )fA, O&M costs in Jaiba -facilitate land markets in repossession and reauctioning the Jaiba and Gorutuba )funder-utilized lots [mgation Districts -increase -assignthe issue to the competitiveness state highway plan -lack ofplanning .bridge over the SZo Francisco 2. IMPROVE -ensure quality of -establishan aerodrome herand establishment of a TRANSPORT perishable products -high recurrent costs for regional, agricultural ink to the Brasilia highway ACCESSIBILITY and second level aviation -attract new private AND LOGISTICS investors

-consolidate banana, -development and research -support with cofmancing .improve dissemination, tomato, mango and and shared risks pioneer :ommutication and calls for table grape clusters initiatives for new export private investors businesses -development ofnew -expand lines of export credit markets -strengthen and promote -diversify and export support -creation ofplant health barriers 3. ENSURE and an infestation extermination expand new clusters! organizations PRODUCTIVE attract -plant health risks Plan COMPETITIVITY agroindustries -reduce plant health risks and inadequate use of -agrochemical, solid waste and AND EFFICIENCY agrochemicals toxic management plan -agrochemical -creation ofp lant health barrier2 -increase contamination -promote agricultural productivity research directed towards and an eradication plan for irrigated fruit production focuses of infestation and horticulture together -agrochemical, solid waste and with EMBRAPA and toxic management plan EPAMIG -training programs -improve and expand information on national and export markets -reduce high future -limited knowledge of the -encourage rational and -studies and hydro-geological risks (economic and regional hydrogeology anc sustainable management mappings ofregional aquifers 4. MITIGATE THE social) stemming lack of rationa of underground water from collapse due to management -update well cadastres HIGH RISKS -deepen technological current improper use -aquifer legislation, norms and -proliferation of “pirate” knowledge of regional STEMMING FROM of regional aquifers regulations UNSUSTAINABLE wells hydrogeology USE OF -lack ofuser knowledge -encourage and -water rights and usage register UNDERGROUND and sector authorities disseminate issue -judicious licensing ofnew WATER especially among wells interestedparties and decision makers

115 IV. Lower Jaguaribe Development Pole (CE)

The State of Ceara is practically all semi-arid, with quite diversified natural resources, including mountains, alluvial valleys, plateaus and coastal areas with a mild climate. The Lower Jaguaribe Pole47is located in a strategic region ofthe state and has easy and rapid access to regional capitals, with Fortaleza bemg 200-250 km away, Natal 350 km away and Recife 600 km away, which facilitates the export of fresh fruit. Close to 90% ofthe pole’s 49,000 irrigated hectares are used to cultivate beans, corn and rice. The rest are used for growing hits, vegetables and as grassland for dairy farming. Of this total, 9,000 ha have public infrastructure, which is partially in use in the Morada Nova and Jaguaribe-Apodi schemes. In addition, there are 10,660 ha ofthe Tabuleiro de Russas Project with public infrastructure ready to operate, with the water due to be piped in. Ofthe 38,000 ha ofirrigated private land, 22,000 ha use the perennial waters of Banabuih River, maintained by the Arrojado Lisboa Dam and the Oros and Castanha0 Dams (in the final stages ofconstruction and flooding), on the Jaguaribe River. Once this complex is completed, another 20,000 ha ofnew irrigable areas in the Lower Jaguaribe Pole can be added. The dams reached up to 26% of capacity over the past three years but the water had to be used to supply the metropolitan region ofFortaleza. The following figure illustrates the growth ofpublic and private irrigation in the pole.

Figure AI.5 Map of public and private irrigated areas in 2001, in the Lower Jaguaribe (CE) and AsswMossor6 (RN) Development Poles

MULTIYEARANALY515 OF IRRIGATED AREAS - ism, I=, IW, IM, 1994,2001 -

Others marked areas: private irrigation (surface)

47 Covers the municipalities of Limoeiro do Norte, Morada Nova, Russas, Jaguaruana, Itaiqaba, Aracati, SbJob do Jaguaribe and Quixerk.

116 Figure AI.6 Changes in Public and Private Irrigation in the Lower Jaguaribe Development Pole - 1973 to 2001

BOX 11 - Tabuleiro do Norte Illustrates the Impact of Irrigated Agriculture on Other Sectors.

Tabuleiro do Norte (CE) is a municipality that has not benefited from public irrigation schemes. However, using its business sense, its urban community capitalized on the opportunities created by the development of irrigated agriculture in neighboring municipalities, turning Tabuleiro into an important service center that supports irrigation activities. These services include: agricultural production transport logistics; the provision and maintenance of irrigation equipment, vehicles, tractors and agricultural machinery; the distribution of inputs and the provision ofcredit to producers.

By occupying such an important position in the sector's production chain, the municipality has captured a significant part of the wealth generated by irrigation and, as a result, stimulated the growth of its GDP to achieve rates similar to those of municipalities with irrigation. Tabuleiro is a very good example of the impact of irrigated agriculture on other sectors within a radius that extends to the municipalities where this activity is carried out.

Morada Nova irrigation scheme

Located in the valley of the Banabuiu River, Morada Nova receives water from the Arrojado Lisboa Dam:' whose main function is to supply water for this public scheme and for irrigated areas implemented by the private sector. The Morada Nova Project was originally intended to have 3,611 ha of area under

48 Multipurpose dam constructed between 1979 and 1983 with a storage capacity of 1.7 X [email protected] from the perennial Banabuiu River is supplied from the dam by gravity distribution. Cost of construction: around US$50.7 million (US$. . . at June 2002 rates). The main objective is to supply the Morada Nova Irrigation Scheme. It has also been used to supply the metropolitan region of Fortaleza. It has been at a minimum storage level over the last two years.

117 irrigation. However, this was reduced to 2,939 ha in lots of 4.7 ha49due to the risks of soil salinity. The first 621 lots were settled between 1970 and 1979, then expanded spontaneously as new subdivisions were added, reaching a total of 1,380 families and 4,000 ha of land under irrigation. During this expansion, adjoining and environmental preservation areas were brought into the district. Of the original occupants, 95% still remain on their lots, even without title deeds. Settler turnover has not occurred as in other schemes. Even though only 30% of the scheme had been designed for rice production, this has become the main crop, with 7,000 ha under irrigated rice production, with two harvests per year, resulting in excessive pressure on the soil and causing problems for the natural replenishment ofthe watershed as well as resource sustainability. The considerable demand for water for irrigation, combined with reduced rainfall over the last few years, resulted in water shortages for human consumption in Fortaleza. As the Morada Nova Project uses the same amount of water as the city of Fortaleza, farmers have had to suspend irrigation activities for the past two years and are being paid not to plant rice. At the same time, the Agricultural Secretariat (SEAGRI) of the State of Ceara has been carrying out training programs for the reconversion of land to irrigated hit production or intensive cattle raising, to increase water-use efficiency.

Jaguaribe-Apodi irrigation scheme

The Lower Jaguaribe includes 11 municipalities in the State of Ceara, covering more than 10,000 km2 and with 320,000 inhabitants. The main economic activities are irrigated agriculture, sheep and goat farming and tourism. The Jaguaribe-Apodi scheme obtains water directly from the Pedrinhas Dam Reservoir on the Quixerk River, a branch ofthe Jaguaribe River. The scheme is located on the Apodi Plateau and water has to be pumped to a height ofmore than 120 m. The scheme was put together in two phases: the first with 5,400 ha of land, and the second brought the scheme total to 9,850 ha, 8,139 ha ofwhich was expropriated land. Construction began in 1987 with an initial pilot area of 1,143 ha, partly financed with resources from World Bank Loan 2680-BRS0. The Completion Report shows that in mid- 1994, the area implemented was still not in use due to successive postponements motivated by design changes, political interference and as the result ofcounterpart funds being used on an adjacent irrigation scheme. The report calls attention to project oversizing and to the fact that fundamental socioeconomic aspects were not given due consideration. The first 2,516 ha containing 380 lots were to start operations in 1989, with 1,750 ha using central pivots and the rest using conventional sprinkler irrigation. By 2000,2,893 ha had been implemented, with 2,5 18 ha under cultivation. The entrepreneurial lots ofthe last 2,500 ha in the frst phase are presently up for bids, and it is planned that 46.6% (336 lots) are to be put into the hands of smallholder farmers, 48.7% will be placed with 53 companies and 4.7% is destined for a religious institution. According to an operational audit carried out by the Brazilian National Audit Office (Tribunal de Contas da Unih -TCU) in May 2000, investments had reached a total of m139.6 million, the equivalent of US$84 million in June 2002, or US$15,560/ha. According to the National Audit Office, this cost is not compatible with that of similar projects. The various suspensions of work over the 13 years caused unit prices to increase. Even though DNOCS began management transfer procedures in 199 1 and in 1997 established the value ofquota KI to be charged to users, no payment or charge has yet been made, with

49 In addition to building the dam, canals and protection dikes, the project also built 1,114 houses for technicians, workers and settlers, eight barns, 23 storehouses, 12 schools, six leisure areas, medical and veterinary facilities, etc. 50 The Northeast Irrigation and Technical Assistance Project (NIETA) signed in June 1986 with a total ofUS$48 millionand concluded in June 1993, three years after the foreseen closing date. One ofthe components financed the construction ofthe Jaguaribe-Apodi and Lower Assu Project pilot area. According to the report, construction and purchasing of equipment for both projects experienced delays and were not completed.

118 the argument that the works have not been completed or handed over. Public goods and infrastructure have not been transferred to the irrigation district, apparently because they belonged to the extinct DNOS until mid-2000. The district’s lack ofmanagerial capability and the absence ofDNOCS, the agency responsible for supervising the works and checking adherence to norms and rules, means that the project is effectively only a group offarmers, each one trying to survive. The pole needs to provide the Morada Nova Scheme with ongoing technical and credit assistance and allow reconversion within this scheme, as in the Jaguaribe-Apodi scheme. The “Aguas do Vale” Program seeks to compensate these deficiencies. As an incomplete irrigation scheme, the second phase ofthe Jaguaribe-Apodi should have priority to include 4,450 ha, which would lead to a very high marginal rate ofreturn. In the case ofthe Jaguaribe-Apodi there is the complication that the project was started by DNOS, then passed on to the DNOCS, with works completed on 2,500 ha. However, no bids were invited due to a lack ofwater.

Private irrigation

Private irrigation was almost non-existent in this region. It began with the Jaguaruana and Morada Nova public schemes, expanding rapidly until in 1986 it had three times the area under irrigation ofthe public schemes. This expansion was the work of smallholder farmers in 2-5 ha lots, using conventional sprinkler irrigation, and other farmers in larger areas of up to 600 ha. According to satellite images, there are currently 49,000 ha of irrigated land, 22% in public schemes. As in prior cases, the private sector responded quickly, implementing three to five times their area side by side with public schemes. More or less 8% (3,250 ha) ofprivate irrigation is done using well water.

Table AI.11 Changes in Irrigated Areas in the Lower Jaguaribe Development Pole (in ha)

Source: CODEVASF, satellite image interpretation, June 2003

The above table indicates that Morada Nova had 7,300 ha under irrigation in 2001, although official data only shows 1,680 ha, i.e. only 23% of the area effectively under irrigation. Differences are not significant in the Jaguaribe-Apodi Project, possibly due to the control that water users who pay exert over the others. This cost is high due to the need for pumps and the ensuing electricity consumption. The costs ofreservoirs and the results achieved in the 22,500 ha ofprivate irrigation, which are divided mainly into small family units that receive water from these reservoirs, were included in the evaluation of the impact of public investments in this pole. In addition to the areas mentioned, there are tracts ofland being irrigated by large private companies that are producing bananas, melons, acerola, grapes, graviola

119 and guavas, with the transnational DELMONTE company alone cultivating 1,500 ha ofmelons for export on 600 ha using drip irrigation. This company is investing a18million to produce and export pineapples. The hiring of 2,000 workers in early 2002 had the immediate effect ofraising salaries from R$6 to R$8 per day and increasing salaries throughout the region. Another private company visited by the team cultivates 432 ha ofbananas, employs 210 workers and provides technical assistance to farmers in the Apodi region. The techniques taught are applied to growing and marketing an additional 170 ha of bananas, improving the prices obtained by producers.

Table AI.12 Priorities, Options and Instruments for the Lower Jaguaribe/Apodi Plateau

PRIORITY ISSUES

-urban and rural competitive use xonomic management 'illing of the CastanhBc -continue to conflicts ofsurface water used to Dam reservoir improve 1. MITIGATE THE maintain the perennial surface water -great variations -conclude and operate the SCARCITY OF waters ofthe Banabui6 I.-SURFACE WATER management during year in Zeara Central Aqueduct and Jaguaribe Rivers water supply [North Axis) according to demand -frequent multi- -modernize irrigation -make -complete small annual droughts systems and application competing advanced water and methods to save water demands and -precarious system road infrastructure uses for operating works -integrate overflow dams compatible succession of as part ofreal-time -multi-hour adjustments small overflow demand operation of to demand and not dams to maintain inter-annual reservoirs supply as currently the perennial occurs waters ofthe Jaguaribe and Banabuiu Rivers -slowness in title -promote efficient and -update user standards in deed processes of sustainable A, O&M each irrigation district and -auction lots in public land titling available lots ir -complete Priority 2. PROMOTE FULL irrigation districts public irrigatioi Investments -update and digitalize USE OF EXISTING M. Nova and J. INFRASTRUCTURE districts geo-referenced rural Apodi -promote land rights cadastre and full use ofequipped -complete small lots -establish sustainable -complete works in the rates small-scale Jaguaribe-Apodi -improve selection works in Perimeter criteria ofusers in -modernize irrigation distribution public irrigation districts aiming at A, -lack ofup-to-date networks districts O&M cost reduction land cadastre in the Valley -facilitate land markets -repossess and re-auction in the M. Nova, under-utilized lots -lack of land titling Jaguaribe-Apodi and T. for lots in M. Nova Russas Irrigation Districts -consolidate -development and -support with -improve dissemination, -melon, papaya, research cofinancing and shared communication and calls 120 banana, mango risks, the pioneer for private investors pineapple, initiatives for new 3. ENSURE -plant health risks -expand export credit guava, grape, export businesses PRODUCTIVE lines lemon, orange, COMPETITIVENESS -strengthen and acerola, uta -implement plant health AND EFFICIENCY -new market encourage export binha) 7 barriers and an infestation development support organizations watermelon extermination plan and early dwari -reduce plant health -training programs cashew clusters risks and inadequate use -contamination by ofagrochemicals -agrochemical and solid -diversify and agrochemicals and toxic waste expand new -stimulate agricultural management plan clusters, attract research directed at ago-industries irrigated fruit production and horticulture -improve and expand information regarding national and foreign markets inefficient -regulate, grant and -water rights and uses instruments for ensure reliable water register 4. EXPAND -attract private land markets rights 4GRIBUSINESS investors, -modern multiuse rural QCTIVITIESIN THE agribusiness -facilitate modern cadastres REGION and means for land markets -reliable water -improve dissemination, professional -make strategic :ommunication and calls farmers supply information available to for private investors the private sector strategic investment plan -encourage agro- -complete priority and 'or transport logistics industries and strategic public organization of supply ofcredit lines for infrastructure for agribusiness igro-industry agribusiness, including chains transport logistics -reduce high -limited -encourage sustainable -hydro -geological studies future 3. MITIGATE RISKS risks knowledge of groundwater and mapping (economic and regional hydro - management in the STEMMING FROM -update well cadastres VON- SUSTAINABLE social) geology Lower Jaguaribe and USE OF stemming from Apodi plateau -aquifer legislation, norms GROUNDWATER collapse due to and regulations -increase knowledge of current misuse -lack ofan action local aquifers (Arenito, -water rights and usage of regional plan for rational Assu, CalcQeo Jandaira register aquifers management and Barre iras) -judicious licensing of -disseminate issues new wells among interested parties/decision-makers

121 V. AsswMossor6 Development Pole (RN)

The State ofRio Grande do Norte was one of the main growers of long-fiber cotton plants until the early 1980s, with more than 400,000 ha being cultivated. Over 50 agro-industries were involved in this activity. It was therefore the main source ofrevenue and jobs in the rural part of the state. Due to plant health problems and falling prices, cotton was gradually replaced in the 1990s with irrigated fruit growing", especially by melons for the export market. The Northeast is currently the country's largest melon producer, with the Apodi Plateau alone being responsible for over 90% ofannual production. The main producing area is the Assu-Mossor6 Development Pole,s2with over 6,000 ha under cultivation. Between US$35 to 40 milliodyear worth ofproduce is exported fiom this area. Crops grown there include bananas, coconuts, cashew and mangoes. It is estimated that irrigated agriculture in RN creates 100,000 direct and 200,000 indirect jobs, generating around US$l50 million a year, including exports ofUS$% million. The Assu Valley covers 10 municipalities, with an area of over 5,000 km2,and 120,000 inhabitants. The Armando Ribeiro Gonqalves Dam serves three municipalities in the micro-region ofAngicos, Afonso Bezerra, Triunfo Potiguar and Espirito Santo do Oeste, with an area of 1,230 km2. Some 5,400 ha of the Lower Assu scheme is located in this valley, with 850 ha producing grain and seed crops and 1,800 ha producing fruit. In 2002, 16,600 hectares were under irrigation, 2,600 ha of which were public and 14,000 ha were private lands.

Figure AI.7 Changes in public and private irrigation in the AsswMossor6 Development Pole - 1973 to 2001

x

It is estimated that there are 55,000 ha under irrigation in RN: 7,250 withmelons; 5,450 with bananas; 2,950 with mangoes; 1,800 with watermelons; 1,350 with papayas; 5,200 with grains and seeds and 30,000 ha with other hitsand vegetables, as well as pastures and forage for cattle raising. '*Includes the municipalities of Bmh,Camaubais, Upanema, IpanguaGu, Alto Rodrigues, Afonso Bezerra, Pendhcias and Itajfi.

122 Lower Assu irrigation scheme

This scheme is located on the right bank ofthe final stretch ofthe Assu River, in the north-central region ofRN, 150 km from Natal, the state capital. Water for irrigation comes from the Armando Ribeiro Gongalves Dam53,which was completed in 1983. The present area, with public irrigation infrastructure, is 5,629 ha and was implemented in three phases: (i)a pilot phase, implemented in the early 1990s with 75 family plots of 8.16 ha, totaling 612 ha; (ii)the first phase, with six entrepreneurial lots, an average of97 ha each; 15 lots for technicians, each with 16.32 ha; and 84 family lots, with 8.16 ha each, totaling 2,017 ha; and (iii)the second phase, with 3,000 ha, including 14 entrepreneurial lots, most ofwhich are still to be implemented, and 1,000 ha to be offered for bidding in the near future. The pilot and first phases were implemented with conventional sprinkler irrigation systems on family lots and central pivots on entrepreneurial lots, and were partially financed by the NIETA Project - IBRD Loan 2680-BRYfrom 1986 to 1993. According to DNOCS, the cost ofconstructing the scheme was US$34.4 million (at June 2002 rates) without including investments in the multipurpose reservoir. The cost is around US$6,100 per irrigated hectare. However, when 10% is added for the dam (details in Annex J, Volume III),the cost per irrigated hectare increases to US$9,125. As in the other cases, the lots were given to subsistence farmers with no prior experience in irrigation, without considering whether they had the entrepreneurial skills or sufficient knowledge ofeconomics to understand processes as complex as those relating to irrigated agriculture. The result was a turnover of the 95% of farmers during the pilot phase and 50% during the first phase. Farmers did not pay for water until 1997, and since the creation of the Lower Assu Irrigation District, only the K2variable costs are being paid.

I BOX 12 - Groundwater Protection

Groundwater sources are becoming increasingly important to the irrigation schemes of the Semi-Arid Region, and Jaguaribe-Apodi (CE-RN) and the Gorutuba Project (MG) are no exception. However, underground sources are being exploited without having previously assessed their potential, granting of usage rights or due controls. This is leading to the over-exploitation of the aquifers, and to the probable depletion of reserves and the progressive capping of wells in the medium term. Measures for the identification, measurement and conservationlprotectionof aquifers are urgently needed.

The increasing water supply problems in various parts of the State ofRio Grande do Norte, due to falling well-water levels in Baraha, particularly in the main melon-exporting regions, are indicative ofthe need for irrigated land. This will undoubtedly lead to renewed interest from melon producers in the under- utilized Lower Assu public irrigation scheme. Investments in collective infrastructure in the Lower Assu scheme are nearly complete; the only ones remaining are: (i)relatively small investments in the main pumping unit and in two sectors ofthe first phase, including canal, reservoir and drainage maintenance; (ii)immediate private sector involvement or reallocation of lots through new bidding processes; and (iii)bidding, awarding and implementation of

53 Constructed between 1979 and 1983 to be a multipurpose dam, with a flow capacity of2.4 x 109m3and regularized flow of 30m3/s. Construction cost was US$170 million, with a distribution of 35% for water supply, 25% for flood control, 25% for private irrigation, 10% for public irrigation and 5% for fishing.

123 1,000 ha for private irrigation in the second phase, the infrastructure for which has been ready for over two years.

Private irrigation

Long before the construction ofthe Lower Assu public scheme, local farmers irrigated vegetable crops by drawing top quality water from deep, well-replenished, and low-maintenance wells. At that time, melon and watermelon growing predominated, but other hitssuch as bananas, coconuts and cashews were also grOWIl. The construction of the Armando Ribeiro Gonqalves Dam, which not only supplies various towns in the region, controls floods, maintains the perennial waters ofthe Assu River, supports fishing activities and enabled the construction ofthe Lower Assu public settlement scheme, also allowed another 14,000 ha to come under private irrigation in the state. There are currently 6,000 ha using drip irrigation and micre sprinklers, 5,000 ha using inundated hows, and 3,000 ha with central pivots and conventional sprinkler systems. A Vicunha Group company is developing integrated organic production systems including 160 ha with mangoes, avocados and papayas, using water pumped directly from the perennial waters ofthe Assu River. Together with the 22,200 tons ofmangoes produced in 2001/02, the company processed another 1,000 tons, purchased regionally, in its packing house for export to the U.S., to the European Community and soon also to Japan. The company employs 172 workers. In 1995, the Directivos Company, with 420 employees, began to plant 400 ha with Gran Naine bananas, yielding an average of 55 t/ha, and aims to plant some 2,000 ha with bananas.

Table AI.13 Priorities, Options and Instruments for the Lower AsswMossor6 Development Pole

PRIORITY TO ICS/PROBLEMS PRIORITY ISSUES AXEDS RESTRICTIONS -limited regional -promote -studies and hydro- hydro-geological sustainable and geological mapping of knowledge and lack of rational the four regional aquifers -reduce high future rational management management of 1. MITIGATE HIGH -update well cadastres risks (economic and underground water RISKS STEMMING -proliferation of social) stemming -aquifer legislation, FROM NON- unauthorized wells -deepen from collapse due to norms and regulations SUSTAINABLE USE technological current misuse of -contamination from OF UNDERGROUND knowledge of -water rights and usage regional aquifers oil well pumping WATER regional register activities hydrogeology -mitigation of -lack ofknowledge on -disseminate issues contamination plan the part ofusers and among interested sector authorities partiesidecision- -judicious licensing of new wells makers -consolidate melon, -development and -support with -improve dissemination, banana and mango research cofinancing and communication and calls clusters shared risks, for private investors pioneer initiatives -expand export credit -plant health risks for new export lines 2. ENSURE diversify and businesses PRODUCTIVE expand new clusters -create plant health -strengthen and 0 r--~ --~---

124 I COMPETITIVENESS 2nd attract -new market xomote export Jarriers and plans for an igribusiness jevelopment iupport nfestation extermination xganizations Aan reduce plant health .training programs contamination by isks and inadequate igrochemicals .agrochemical, residue, ise of solids and toxic waste igrochemicals nanagement plan .promote igricultural research jirected towards irrigated fruit xoduction and lorticulture improve and :xpand information 3n national and :xport markets inefficient -regulate, grant and -water rights and uses instruments for land ensure reliable register -attract private 3. EXPAND markets water rights AGRIBUSINESS investors, igribusiness and -facilitate modem ACTIVITIES IN THE -modem multiuse rural professional farmers means for land -reliable water supply cadastres markets -make strategic -encourage agro - information improve dissemination, industries and available to the communication and calls organization of private sector for private investors agribusiness chains -complete priority and strategic public infrastructure for agribusiness, including transport logistics

-slowness in title deed -encourage efficient -settler turnover and lanc processes in Lower and sustainable A, titling -auction availab Assu public irrigation O&M lots in pub1 -update and digitalize districts 4. PROMOTE FULL irrigation districts -complete priority geo-referenced rural USE OF EXISTING -complete small works investments cadastre in the valleys INFRASTRUCTURE in the irrigation and plateaus -promote full use of -complete small scheme built lots -establish sustainable works in -lack ofup-to-date rates distribution -improve selection land cadastre in the networks criteria of users in -modernize irrigation Assu, Apodi and public irrigation districts aiming at A, Apodi Plateau Valleys districts O&M cost reductions -lack of land deeds foi -facilitate land lots in Lower Assu markets in the Lower Assu Irrigation District

125 ANNEX I1

Jaiba Economic Evaluation: A case study54

I.Introduction

One ofthe main conclusions and recommendations ofthis ESW is that absolute priority should be given to the completion ofunfinished irrigation projects before starting new ones. The most important unfinished irrigation project in the BSA is by far the Jaiba scheme due its enormous size, production potential, investments already made, extension ofthe area ready for new settlements, and considering the fact that only about 9% of the foreseen 100,000 hectare area has become effectively operational to date. However, during the ESW review meeting held in October 2003, the issue was raised whether it is advisable to make additional investments in Jaiba, given the project’s extremely low implementation performance and poor economic results that have been observed over a 30-year period since start-up. The purpose ofthis annex is to analyze the viability ofthe marginal investments required for project completion.

11. Background Information

Jaiba is one of the largest irrigation projects in South America. It is located in Northern Minas Gerais, covering part ofthe Jaiba and Matias Cardoso municipalities, 665 km north ofBelo Horizonte (by road), 980 lun east ofBrasilia and 1,065 and 1,265 km north ofRio de Janeiro and SbPaulo, respectively. The region is one of the greatest poverty pockets in Brazil. Although it is situated in one ofthe driest parts of the Semi-Arid zone, it is served by the Slo Francisco River and therefore has excellent agreecological conditions for the development ofirrigated agriculture. The project arose in 1966 out of the 11 National Development Plan. Conceived as a means for social and economic development, the plan was that the project would irrigate a perimeter of about 100,000 ha (67,000 ha public and 33,000 ha totally private), to be implemented in four phases. Construction began in 1975, and the first settlements were recorded in 1989-90. The project was almost abandoned in the mid-80s due to a lack of additional funding, after about US$ 150 million had been invested and most of the main irhastructure had been completed. Only some 5,150 ha were under cultivation at that time, 4,150 of which were in the hands oftwo enterprises, producing mainly seeds, and 1,000 ha were under public irrigation by gravity, about 600 ha of which were cultivated with basic grains and cotton. The project started up again in 1988 with World Bank support (Loan 3013-BR), with a total cost ofUS$ 151.3 million55.According to information provided by CODEVASF, a total ofabout US$ 280 million was invested in the main works and in the implementation ofthe first phase (Jaiba I)from start-up until the end of 2002. Another US$ 120 million was invested in the second phase (Jaiba 11) by the Government ofthe

54 This document was prepared by Juan B. Morelli (FAO-CP Consultant), for the preparation of the Economic Sector Work on the Social Impacts and Extemalities of Irrigated Agriculture in the Brazilian SemiArid Region. Brasilia, 24th December 2003. 55 According to the Implementation Completion Report (N@22435) June 29,2001, the project (Loan 3013-BR) had a cost of US$151.3 million from which US$71 million of the loan were totally disbursed after two extensions totalling three years. By reassigning resources 30% were incremented to foreseen resources for civil works and 130% were destined to recurrent costs, reducing by 43% those foreseen for consultancy services. Despite a poor performance in area and settlement expansion, the ICR concluded that the results were satisfactory. The large investments made to develop the larger infrastructureconstructed from the mid 70s, were considered as sunk costs.

126 State ofMinas Gerais, with financing from the Japanese Government through OECF56,starting in 1999. All infrastructure investments for the first two of the four phases, encompassing 46,000 irrigable hectares, have now been made. On-farm equipment in entrepreneurial areas will be financed by the future settlers. The settlement ofthe devebped areas began in the late 1980s, on 5 ha lots, with local traditional smallholder farmers (colonos) who had no previous experience with irrigation. They also lacked the required support to counteract the extreme isolation ofthe region. The first entrepreneurial lots were only occupied in 1997, with 154 small-scale entreprenerial farmers. Positive changes in perimeter organization and technical assistance were made between 1994 and 1999, with the implementation ofthe World Bank loan. Jaiba became the first public irrigation project in Brazil to transfer administration and O&M responsibilities to the users. This was a change from the traditional paternalistic approach, where state agencies controlled and decided everything without any stakeholder participation. With the support of 18 professionals contracted by the project, 144 farm units were created, with grapes, mangoes, coconuts and other fruit species, under a crop diversification program. The production ofhits and vegetables increased the cultivated area from 5% to 74%, while the area cultivated with traditional crops declined from 95% to 26% during the same period. In 2000, fruit trees covered 3,600 ha ofthe irrigated area, distributed equally among family and entrepreneurial units, with bananas (2,400 ha) being the main crop. Small farmer cooperatives managed the marketing ofthe produce directly, the main customers being wholesale outlets and supermarkets in the southeast and center-west. They obtained better prices than when the output was channelled through intermediaries. With the World Bank project, it was expected that Phase Iwould have been totally implemented by 1993, with the settlement of350 entrepreneurial farmers and the 2,010 colonos. However, by the end of2001, only about 40% ofthe Phase Iarea had been occupied. Among the lessons learned, the project completion report referred to the following: (a) Oversized infrastructure has a significant impact on O&M costs and affects its financial viability. The district will be sustainable only when 75% ofthe area ofPhase Iis under production; (b) The project should have been a regional development project from the very beginning, and not simply an engineering project, disregarding settlement, agricultural and social aspects; (c) A balanced mixture of family lots and entrepreneurial units is essential. Family lots provide manual labor for entrepreneurial lots and benefit from their technology, while large units facilitate market development. Entrepreneurial lots are usually more efficient, but most of their income is invested outside the project area, whereas the small ones concentrate on the perimeter itself, generating greater demand for goods and services, thereby maximizing project impact; (d) Land titling should be a priority to ensure project effectiveness; (e) Bank support and supervision should be financed adequately until project completion, at which time assistance should be made available to ensure sustainability; (f) Guidelines should be drawn up carefully and applied across the board differentiated selection criteria and the adoption ofspecial water tariffs create inequalities in the community, impairing the successll operation of an irrigation district.

An economic performance analysis of the Jaiba Project carried out by L. Rodrigue (June 2001) 57 detected a series of implementation problems and production way below the targets. The analysis also concluded that decisions made on investments for a very large project tending towards regional development should

56 Overseas Economic Cooperation Fund 57 Potencial da Agricultura Imgada como Indutora do Desenvolvimento Regional: 0 Caso do Projeto Jaiba no Norte de Minas Gerais. Rodrigues Luciene. Revista EconBmica do Nordeste, Fortaleza, v. 32, abr-jun 2001

127 be based on financial performance indicators, to ensure their capacity to pay their own costs. However, these indicators should be evaluated in their general context, considering the project’s impact on: (i) increased production; (ii)introduction ofnew information and techniques; (iii)relation to other sectors (e.g. development ofagreindustries, commerce and services); (iv) job and opportunity generation and their quality; (v) contribution to social equipment and economic support infrastructure (transport, services, storage, etc.); (vi) social mobility; (vii) increased fiscal revenues; and (viii) the strengthening ofsocial organizations in the rural area. With the completion ofthe first two phases, Jaiba now has the capacity to deliver 80 cubic meters ofwater per second, and to supply the 46,000 ha, including the area already occupied and the one ready for new settlements (Jaiba I26,000 ha and Jaiba II20,OOO ha) distributed as follows:

Table AII.l Structure of Lot Sizes in Jai3a Iand I1

Type of Lot I Area of Lot (ha) Noof Lots Total area (ha) Smallholder farmers 5 1,824 9,120 Small- scale entrepreneurial farmers 10 243 2,430 Medium- scale entrepreneurial farmers 20 - 90 511 23,500 Entrepreneurial farms (private areas) 500 - 3,000 12 10,950 Total Phases Iand I1 2,590 46,000

111. Expost Evaluation

First Approach (Volume I11 Annex C, August 2002)

A first report was written in August 2002, after the mission’s initial visit to the selected irrigation perimeters (see Annex C of Volume 111 ofthe ESW). The economic analysis in this preliminary exercise showed a negative ERR of 10.8% and a negative NPV of-US$132 million for the Jaiba Project, using 12% as the social discount rate. These estimates were obtained using market prices for inputs, products and services involved, disregarding seasonal market variations.

Second Approach (September 2003)

A second approach, which culminated in September 2003, incorporated various adjustments, the most important ofwhich were: (a) Instead ofusing average prices for the period 2000-2002 for the financial evaluation, historical market prices ofinputs, services and products were used, incorporating future market trends. This was done in order to reflect representative values ofthe useful life ofthe investments analyzed. All prices in the monetary unit corresponding to the respective historical moment were converted to constant values (R$ ofJune 2002), using the IGP-DI GelAlio Vargas Foundation rates. Average annual prices were converted to US$ ofJune 2002, using the commercial exchange rate of June 2002. Prices (at constant values) ofmain products, inputs and services showed a persistent decline during the period analyzed. In the case ofbananas, for example, the most important crop in Jaiba, the mean inter-annual price was US$235 per ton between 1990 and 1994; US$219 between 1995 and 1999; and US$ 120 between 2000 and 2002. 58 The use of average prices in 2000-02 in the

58 Figure 12 Evolution ofMarket Prices for the Producer and Conversion Factors at Social Prices, page 6, Chapter VI, Volume 11, ESW

128 preliminary analysis of August 2002 greatly affected the benefits generated in Jaiba during the first years, resulting in underestimated economic benefits. (b) For evaluation purposes, the lots ready for settlement presently under the bidding process were added to the projected current irrigated area. Their incorporation into production in the following three to five years followed the current land-use trend rate. The replacement oftraditional crops by more profitable ones (fruits and vegetables) would continue at the present rate. (c) The entrepreneurial models used in the analysis included enterprises integrating agricultural production and packing and/or processing, and packing plants for mangoes, grapes and bananas. Benefits generated in post-harvest activities were incorporated and used to estimate other benefits such as taxes, which, while being expenses for private producers, are benefits transferred to other economic sectors, channelled to society through public services and investment^.^' (d) Input and service prices were corrected based on social prices and Conversion Factors (CF) estimated by the mission.

For the second approach, only Phase Iof the Jaiba Project was considered - 26,000 ha, of which 15,800 ha was already assigned, but only 8,300 ha were under production (10,500 ha when double cropping is considered). It included 1,370 family lots averaging 5.1 ha (7,000 ha), 130 entrepreneurial lots with 55 ha on average (5,400 ha) and two large enterprises totalling 3,400 ha. About 74% ofthe area was under conventional sprinkler irrigation and 24% under microsprinkler systems. Jaiba Phase 11, with 20,000 irrigable hectares under the bidding process, was not included despite the fact that clearing and leveling has been completed with a parallel investment ofUS$ 120 million. Phases 111 and IV were also not considered, even though they were under study and design. With the adjustments made and assuming, optimistically, that the developed areas ofJaiba Iwould be under production over the next five years, the ERR ofthe Jaiba Project would reach 7.7% and the NPV would remain negative at -US$ 92 million. This hypothesis of area expansion was carried out assuming that the situation was changing for the better. The slow evolution in the past was strongly influenced by (i)early settlement constraints resulting from the type ofbeneficiaries, mostly local smallholder farmers without any previous irrigation experience, and (ii)the initial isolation ofthe region, which significantly affected project output performance. The incorporation of entrepreneurial farmers from 1998 onward and the development ofnew commercial channels, combined with significant progress in crop diversification and the use ofadvanced technologies, created new development perspectives capable of attracting innovative entrepreneurs and ensuring faster development in the future. This perspective is reinforced by (i)the fact that almost all ofthe new areas to be occupied are destined to be settled by entrepreneurial farmers, and (ii)the commitment ofthe new state administration, whose plan is to transform Jaiba into a major agricultural export pole. However, despite all these optimistic assumptions, it was concluded that, based on the project's past poor performance, it would take many years for the whole perimeter to become fully operational6'.

Third approach (December 2003)

In the case ofmost incomplete development projects, when previous investments are considered as sunk costs, marginal investments aimed at making them fully operational tend to present high economic returns. They should therefore be considered a strategic priority in an irrigated agriculture expansion program.

s9 Page 9, chapter VI, volume II, ESW 6o Page 14, Chapter VI, Volume 11, ESW

129 A third analysis was carried out in December 2003, whose aim was to verify the viability ofthe required additional investments to complete the Jaiba project, by comparing alternative scenarios, both with and without new investments. These investments would be mainly for activities aimed at eliminating the factors that have negatively affected the motivation for investment and private business in the past, thus attracting new investors, dynamizing the development process and accelerating project completion. The additional investments were estimated to be about US$32 million over five years, representing about 8% ofthe roughly US$400 million already spent mainly on the irrigation infrastructure.The methodology used and the results of the analysis are presented in Section IV.

IV. Future Alternatives

4.1 Current status

The data used for the second approach were updated during a subsequent visit to Jaiba and used for the third approach. Jaiba I.Until now, about 15 years after the first settlements began on Phase I(26,000 ha), only about 16,000 ha have been allocated, ofwhich only about half ofthe area (8,800 ha, 33% of Phase Iand 8.8% of the total area) is under production. There are 1,363 small-scale farmers (548 have difficulty continuing this activity) and 203 entrepreneurs settled. Another 122 entrepreneurial lots and 453 smallholder lots are ready for settlement, pending long drawn-out judicial processes. Land titling is also dependent on extended judicial sentences. Jaiba 11. Two thirds ofthe hydreelectremechanical equipment has been installed and water provision is ensured at 30 MVA (10% for residential nuclei with their infrastructure completed, and 90% to irrigate an additional 20,000 ha). Land titling is well-defined and environmental licences have been approved ad referendum. More than 300 applications have been sold for the bidding ofnew lots, introducing new systems for their adjudication to the most adequate offers, which are currently being evaluated. Developed areas have been adjudicated at values equivalent to the land prices ofnon-irrigable adjacent areas (US$ 300-500 per ha), indicating that conditions for the development ofirrigated agriculture are still not favorable in the region, despite public investments ofUS$ 10,000 per ha. Different factors contribute to this situation and the time it takes to overcome them depends on the efficiency of the actions to neutralize or minimize their effect. The main factors that have been limiting the interest of new settlers are, among others: (i)high access costs and long distances to markets; (ii)limited available technologies that are adapted to the ecological particularities ofthe region; (iii)lack ofan adequate plant protection scheme; (iv) reduced human and social capital among the smallholder settlers; (v) uncertain land tenure in the smallholder sector; (vi) limited access to credit lines for production requirements; and (vii) an inadequate internal road network. In the smallholder sector, the lack of property titles in the 9,000 ha assigned to the settlers precludes the operation ofa land market and limits farmers’ access to credit. Over 400 smallholder lots (over 2,000 ha) and a number ofentrepreneurial lots in Jaiba I,whose settlers have no access to credit, have been practically abandoned. CODEVASF has been unable thus far to get support from the courts to reassign these lots to more efficient producers who can develop them. The lack of sufficient adapted technologies is a limiting factor to crop diversification. Banana prices plunged 50% over the last 10 years. This, together with the lack of a phytosanitafy control system, contributed to the reduction ofthe banana plantations in smallholder plots from 2,000 ha to the current 300 ha. The limited replacement ofbananas by alternative crops is proof ofthe slow progress towards crop diversification. By contrast, the entrepreneurial areas, taking advantage ofan economy of scale, have developed a clearly different

130 dynamic: banana yields are twice those achieved by the smallholders; fruit quality and prices are significantly higher; and new areas are being constantly incorporated, totalling about 2,500 ha at present. The environment for future district development is becoming increasingly favorable, unlike the prevailing conditions of previous years. The main changes are: (i)Until 1998, Jaiba was occupied exclusively by smallholder farmers with no experience in irrigation. Now about one third ofthe irrigated area is being successfully cultivated by entrepreneurial farmers. Although the main problems that affect smallholder farmers persist, many of these settlers have been able to adopt new technological and management practices and have become competitive producers; (ii)About 30,000 ha ofadditionalareas, already cleared and systematized, are being made available for entreprenueurial lots, ranging fiom 10 to 3,000 ha in size; (iii)Technologies and trade channels, which were non-existent during the early years, have been developed over the past decade; (iv) There is now a willingness to provide land titles for all lots and replace the current occupants ofabandoned properties with more competent farmers; (v) The State Government of Minas Gerais (GOMG) regained leadership in the process, declared Jaiba a structural and strategic development priority, and has initiated a series of support activities such as setting up a specialized technical assistance structure to smallholder farmed1; (vi) In the ongoing bidding process for the additional 16,000 ha, selection criteria that have been judiciously adjusted by the state government and large agreindustries with economic capacity are being incorporated, to serve as development catalysts; and (vii) A US$ 11 million fund has been made available to finance farm development with favorable financing conditions. However, if the basic factors that are inhibiting development are not eliminated, especially since occupation is increasing at a rapid pace with the currently more favorable environment, it will take another 25 to 30 years before the 46,000 ha now ready for settlement become fully productive. It would take many more years to develop the remaining 40,000 ha that are suitable for irrigation with the pumping plants and head infrastructure already constructed. To overcome or reduce the constraining factors and promote a more accelerated development towards full capacity, some specific complementary investments are required, whose costs are hardly significant compared to those already incurred. A comparative analysis of scenarios with and without the missing investments appears in the following section.

V. Possible Scenarios With and Without Complementary Investments

The mission visited the Jaiba Project again in December 2003. Working closely with the district management and technical team, it was able to identify the type and approximate amount of public investments that would be necessary to facilitate the rapid settlement and development ofthe unoccupied 37,200 ha ofJaiba Iand It2that had already been cleared and systematized for irrigation. It was estimated that, after an additional public investment ofUS$32 million, the additional area would generate about 40,000 additional jobs and an added annual production ofabout US$150 million - roughly 15 times the current output - once fully operational. Phases I11 and IV (totaling another 64,000 ha) were not considered in this analysis. They would be developed only once Phases Iand I1have been consolidated. Two potential future scenarios were devised based on concrete proposals by district user organizations. According to the first scenario, once the physical works are completed (water conveyed to the individual plots) it is assumed that production .will increase in response to market signals and the dynamics ofthe private sector. The second scenario incorporates the input ofpublic investments wherever necessary to create more attractive conditions for private investments and improve the farmers’ performance and yield,

The GOMG established an Extraordinary Secretariat for the Development of the Jequitinhonha or Mucuri Valley and the North of Minas. It formulated a plan for the Jaiba Project to develop m 15 years, for which it is coordinating the development of activities and articulating different GOMG agencies, including EMATER-MG 62 The total area of Jaiba I+ I1 is 46,000 ha, of which 8,800 ha are currently being irrigated.

131 including the construction ofcomplementary infrastructure and the development of “public goods” considered very difficult to be assumed by private users. The differences between the costs and benefits in both situations would be the incremental gains that can be expected as a direct result of the proposed new public investments. The performance and impact indicators obtained from missing incremental investments are analyzed based on these estimates. 5.1. Irrigated Areas

The first scenario should take into account the development constraints related to: (i)the remoteness ofthe Jaiba region; (ii)the limited trade channels; (iii)the production difficulties due to technological constraints; and (iv) the countless restrictions that have been affecting the smallholder farmer sector for 10 years. It should also take into account the positive factors, particularly the entrepreneurial producers’ dynamism, which helps further accelerate the expansion ofthe entrepreneurial sector. It is expected that in 15 years (2018) the additional area under production will reach 25,000 ha (67% ofthe available incremental area). The second scenario calls for complementary marginal investments that would help eliminate the constraints responsible for high production risks, uncertain results and a low demand for irrigable land in the region. With these investments, it is estimated that the total incremental area available for irrigation could be completely developed in 15 years. In this case - and only then - the necessary investments to expand the foreseen areas in Jaiba III and IV, estimated at US$60 to 80 million, would bejustified. Both scenarios, including probable crops to be incorporated, were defined based on technicians’ observations and market perspectives, current yields and prices, as well as those of smallholder farmers and entrepreneurial producers. In Table AII.2, a current productive profile ofirrigable areas in Jaiba is presented as well as the two scenarios mentioned.

Table AII.2 Areas Currently Cultivated and Expected Scenarios

Current Projected Situation 2017 situation Scenario I I Scenario 11

Smallholders (1824 farmers with 5 ha, 9,120 ha) Beans, Corn and Rice 2,740 3,250 3,900 Vegetables 1,550 2,240 3,500 Seeds 260 680 450 Subtotal Annual Croas 4.550 6.170 7.850 Bananas 710 460 300 Lemons and Tangerines 310 790 1,100 Mangoes 120 230 300 Guavas and Coconuts 140 300 1,600 Papaya and Passion Fruit 230 480 650 Pineapples and others 10 390 650 Subtotal Permanent Croas 1.520 2.650 4.600 Total Cultivated 6,070 8,820 12,450 Entreareneurial Area ( 766 farmers, 36,880 ha) Beans, Corn and Rice 400 2,500 3,900 Vegetables 350 2,500 3,900 Seeds 50 280 450 Subtotal Annual Croas -800 5.280 8.250 Bananas 1,430 6,400 9,700 130 4,500 7,400

132 Mangoes 240 3,500 5,700 Guavas and Coconuts 50 980 1,600 Papaya and Passion Fruit 60 830 1,350 Pineapples and others 50 2,610 4,350 Subtotal Permanent CroDs 1.960 18.820 30.100 Total Cultivated 2,760 24,100 38,350 Total Jaiba Iv I1(2,590 farmers, 46,000 ha) Beans, Corn and Rice 3,140 5,750 7,800 Vegetables 1,900 4,740 7,400 Seeds 310 960 900 Subtotal Annual Croos 5.350 11.450 16,100 Bananas 2,140 6,860 10,000 Lemons and Tangerines 440 5,290 8,500 Mangoes 360 3,730 6,000 Guavas and Coconuts 190 1,280 3,200 Papaya and Passion Fruit 290 1,310 2,000 Pineapples and others 150 3,460 5,750 Subtotal Permanent Crops 3,480 21,930 34,700 Total Cultivated I 8,830 I 33,380 50,800

The development oftrade channels and access to new markets - including external markets - will bring about an increase in product prices. This, together with the development ofadaptive research to improve productive technologies, will help boost yields and improve product quality, resulting in higher profits, lower risks and a better environment to attract private investors. It has been estimated that profits would be about 15 to 25% higher with the investments foreseen than without them.

5.3. Complementary Investments

Once both scenarios were defined, the type and cost of investments that could produce different answers from the private sector were analyzed. The experience of the Petrolina and Juazeiro Poles was considered for these estimates, as the joint public and private efforts resulted in considerable development over the past 15 to 20 years. It has been estimated that US$32 million are needed to implement additional infrastructure over the next five years, as shown in Table AII.3, to create a favorable environment for further investment and to attract entrepreneurial farmers to the Jaiba Project.

Table AIL3 Jaiba Iand 11. Required Complementary Investments

Cost estimates (US$OOO) 1. Support to smallholder farmers 2,900 Land titling 700 Technical assistance 2,200 2. Support to technical development 1,700 Adaptive research of productive technologies 1,500 Diversification Program 200 3. Support to production and management 2,100 Plant protection control and barriers 600 Strengthening of the irrigation district 1,500

133 I 4. Support to commercialization I 15,100 Packing plants and CENTRALJAI cash flow 2,000 Export development 600 Roads 6,500 Airports and equipment (dry port) 6,000 5. Attraction of new investors 6,600 Project marketing 3,000 Plan for developing support infrastructure 600 Support to agro -industries 3,000 6. Environmental Protection 600 Basic investments 600 7. Others 3,000 Total Complementary Investment 32,000

5.4. Expected Results

The objective of this new evaluation exercise is to determine how the complementary strategic investments would affect the global results by comparing alternative scenarios for future action and the respective results expected. Only the development ofPhases Iand I1of the project is considered according to the scenarios mentioned, in an effort to identi@ the incremental benefits from the complementary public investment ofUS$ 32 million (detailed in Table AII.3), compared to the alternative scenario with no investments. Ifpast investments and performance are considered, the economic results would still be highly unsatisfactory even with the complementary investments, due to the high unproductive costs that were squandered for about 30 years. As shown in Tables AII.5 and AII.6, the ERR would improve only from 4.7% (without the complementary investments) to 6.8% (with the investments). However, if the incremental benefits attributed to the proposed complementa7 investments are analyzed, the results would be highly satisfactory, as shown in Table AIIA. The ERR of the marginal investment would reach 47% and the NPV would be positive by US$ 98.6 million.

Table AIL4 Summary of expected results with and without complementary investments

(*) The global evaluation of Jaiba Iand 11 comprises the 1975-2002 expost analysis and the ex ante 2003 - 2020 in both scenarios considered- without and with complementary public investment of US$32 million. The base year for estimating the NPV is 1980. (**)This includes US$23,43 million ofNPV from complementary public investments to be made between 200408 and US$61,2 million from incremental private investments. The NPV is referred in this case to

134 5.5. Conclusions and Recommendations

The main conclusions drawn from the economic analysis ofthe results obtained from the investment of over US$400 million ofpublic funds for the development ofJaiba, are as follows: While public investment in the Petrolina-Juazeiro Pole, where similar sums (about US$460 million) were invested during the same period, produced highly positive results, the opposite occurred in Jaiba. The latter is a paradigmatic example of inevitable failure resulting from mistaken investment strategies. The negative results are obvious. Their magnitude will depend on how quickly investments become operational. However, whatever the speed of future development, the 111 recovery ofpast investments is not likely. In fact, due to the considerable amount ofpast investments and the long period oftime that has elapsed since project start-up, it will be quite impossible to revert the project’s negative NPV. However, this analysis shows that some targeted complementary investments aimed at accelerating and dynamizing the enormous amount ofexisting irrigation infrastructure, which is still not productive, could generate very high marginal returns. It was estimated that an additional investment ofUS$ 32 million over the next five years, aimed at developing missing public goods and attracting private investment to the project, would generate an ERR of 47% and an NPV ofincremental benefits estimated at US$98.6 million ofyear 2003. The analysis thus indicates that the completion of idle infrastructure for the development of irrigated areas in the BSA constitutes an excellent opportunity for highly profitable investments, with a great capacity for job generation. On the other hand, the beginning ofnew works should be proposed in a timely manner, while the highest priority should be given to applying scarce resources to completing works in progress and providmg indispensable support so that they can realize their great productive potential.

135 Table AII. 5 Evaluation of the Jaiba Irrigation District

IRR=4.7%, NPV=-51,066.57 \a It began in 1988. No additional public investment is presumedand consequently, the incorporation of 30,000 ha to production until 2017 under irrigation.

136 Services 55 Fertilizers I 154 I 130 I 1,174 I 1,076 ater costs for irrigation I I 33 I 19 I 146 I 116 1-1431 6 Seeds and seedlings 82 82 I 205 450 ,Agrochemicals 30 30 I 93 186 MachineIy & equipment 116 130 Productive investiments 350 Hand labor 87 33 196 430 1.492 I 2.425 I 27 I I 401 I 306 I 2,232 I 2,449 9,652 118,321 I 170 I1 I I - I 67 I 585 I 1,160 2,545 I 4,339 I I 746 I 1.668 I 3.134 7.911 I 12.8161 14.821 Water costs for irrigation I I 175 I 818 I 4,791 Other inputs 1 - I 23 I 215 1 2,497

37;l~ 67r5~ 55r7 ~

&M Irrigation Dishkt I I - I - 1261 I 14,256 I 8,654 I 23,661 I 750 3,865 3,865 Incremental investments I I - I - I 6,500 700 700 700 SubTotal Other Costs - 110,535 I 6,395 117,619 I 7,381 3.983 I 3.983 I 787 11 OUTFLOWS I - I 10,937 I 8,129 I 25,647 I 26,993 41,794 I 71,158 I 56,054 11 , 40,958 85,348 97,156

IRR= 6.8%, NPV=-49,501.42

137 ANNEX111

COLLABORATORS FROM PARTNER INSTITUTIONS

Banco do Nordeste

Francisco Mavignier Cavalcanti Fraqa Jos6 Maria Marques Carvalho Ricardo Marques

CODEVASF team

Valdir Castelo Branco Luiz Bezerra Aristbteles F. de Mello Elson AntGnio Fernandes Miguel Farinasso Paul0 Afonso Silva Rosemary Josk Carlos Niviane Aparecida Barros Medeiros

Ministry of National Integration

Edson Zorzin Arthur Saabor

138 ANNEX IV

CONTACTS AND CONSULTATIONS

People interviewed during the preparation of the study (Partial list)

~~ ~~~ Place Institution People Brasilia (DF) CODEVASF Valdir Castelo Branco Rosany 4rist6teles 3Crgio Borzino da Silva lost Ancelmo de G6es LJbirajara Gomes Luiz Bezerra Borella Rui Junqueira Athadeo Ferreira da Silva Gerald0 Gentil Vieira Ministry of National Lazar0 Luiz Neves htegration - PROAGUA (Coordinator, Civil Works Management Unit - PROAGUA -UGPO) National Water Agency Albert0 Santana (International ANA Advisor) Fortaleza (CE) Northeast Bank Francisco Mavignier Cavalcanti Franqa (Manager of Policy and Development) Jonas Souza Sala (General Manager Recife - PE) Jost Maria Marques Carvalho (ETENE - Manager in Lower Jaguaribe) Mauricio Teixeira Rodrigues (Board Manager) Francisco Raimundc Evangelista (Board Manager) Ari Jereissatti Monitoring and Control Otacilio Benvindo Diocleciano (Rural Extension PLANTEWPlanning Office) Rubens Sonsol Gondim (Policy technician)

139 Rbmulo Cabral (Consultant IICA) Mauricio Teixeira Rodrigues (ETENE) Ricardo Marques (Consultant) DNOCS JosC Felipe AmCrico Cordeiro (Director for Development of Technology and Production) Deodato Machado Pinheiro (Coordinator of Technology and Agricultural Production) Almir Fernandes Thvora (Consultant IICA) Andrk Montenegro (Director of Works) Flaminio Araripe (Press Assistant) CENTEC Glhucia (Director) Secretariat for Water HipCrides Macedo (Secretary of Resources State of SRH) IDACE Antbnio Bezerra Peixoto (Superintendent) Ricardo Durval Eduardo de Lima (Manager of Department of Land Resources) Ricardo Magalhiies (Head of Legal Department) Antbnio Mhrcio Alves de Souza (Geographer) Renis Espindola Freire (Geographer) Secretariat for Irrigated Carlos Matos Lima (Secretary Agriculture (SEAGRI) of State of SEAGRI) Marcia M. Peixoto (Sub- Secretary) Jog0 Pratagil P. de Arafijo (Advisor) Jos6 Airton Lacerda da Cruz (Coordinator, Commercialization Support Center) Newton Crispino Leite (Superintendent for Business Development) Odilio Coimbra Rocha Jr.

140 (Coordinator, Federal Public Projects) Marcos Tavares (Superintendent, Production Development) EMAF (Freeze-dried fruit Carlos Augusto Napravnik cmxx" (President) Anya Ribeiro Consultoria Anya Ribeiro (President) Ltda. Limoeiro do Norte (CE) Northeast Bank, Limoeiro Jog0 Catamigabr Cirilo Branch (Manager) Jose Wanderley Augusto Guimarges CENTEC Jose Jesival da Macena (Director) Afonso OdCrio Nogueira Lima (Professor) Ricardo Luiz Lange Ness (Professor) CAPIVAB (Farmers' Grupo de 12 produtores (Group Cooperative) of 12 nroducers) Eletrovale Sew. de Luiz Albert0 Freire Maia Engenharia (Agricultural Engineer, partner) (irrigation projects and eauinment sales) Delmonte Reginald0 de Lima (Manager, (multinational fruit Pineapple farm) producer) Empresa Jog0 Teixeira Aldair Gomes (General (large banana producer) Manager) AssdMossorCt (RN) Finobrasa/Grupo Vicunha Ryu Takahashi (Production I(large producer of Manager) mangoes, papayas and cotton) Diretivos Agricola Ltda. Manager) Marcos Leite (Human Resources) Lessa Prod. e Com. Frutas Mansueto Rodrigues Lessa Ltda. Crista1 Produ$io e. Distribuiqgo de Frutas Ltda. ESAM (Mossorb Marcel0 JosC Pedrosa Pinheiro I Agricultural School) (General Director)

141 Josivan Barbosa Menezes (Post- Harvest Study Group) ISRATEC - Campo Jorge Moreira Maia Net0 Irrigaqgo (design and sales (Businessman) of irrigation equipment.) Plantimax (inputs and Frederico Campos Pereira equipment for agriculture (Commercial Manager) I and cattle raising)raisine) DIBA (Lower Assu Eviltisio Dantas de Farias Irrigation District) (Agronomist) Esdra de Oliveira Franqa (Technician from BN) Paul0 Azevedo (BN Manager in Assu) Francisco William de Souza (Topographer from DIBA) Tasso Soares de Lima PDI Technical Coordinator for Assu/Mossorb - BNNatal) Janilson Ara~jode Macedo, (Banana Concessionaire) Ronald0 Soares (Mayor) Djacira Gondim (Fishing Engineer) Yuri Lei60 (Owner)

NatCrcio Melo (Head of Production Division) Albtrico de Souza Filho (Business Contacts) Pedro Bezerra de Oliveira (Planning) Zacarias Lourenqo Vaz Ribeiro Filho (Head of Special Projects) Bebedouro Project JosC Adauto Valenqa (Manager of Irrigation District) Herald0 Rego, Eng. Civil (Grape grower) Jog0 Batista Rodrigues (Grape grower) DI de Nilo Coelho Danilo Stivio Biones Barreto (Executive Manager) Cleber Del Rei Mendes Rosa,

142 Jr. ‘Technical Assistant) VALEXPORT Albert0 S. S. GalvZo :Administrative/Financial Manag.er) EMBRAPNCPATSA Clbvis Guimarges Filho :Assistant Manager for R&D Municipal Development M6rcio Arahjo Lima Agency (Advisor to the Presidente) Juazeiro (BA) CODEVASF 6a. SR JoZo Curi (Superintendent) H6lio Silva Barros (Assistant Superintendent) Humberto Arrumatega (Consultant) Alcides Lins de Farias (Legal Advisor) Abilio Santos (Planning.) CAMPIM - Mandacarh Jdio Barros de Sii Irrigation Agricultural (President) Cooperative Eric0 Cavalcanti (Advisor) Celino Borges Vieira (Manager ofID) Maria Iracema Pereira de Sii Cardoso (Coordinator- Mango Chamber) Jorge de Azevedo Silva (Coordinator-Tomato Chamber) JoZo Domingos dos Santos (Farmer) TourZo Project Josemar Raimundo da Silva (Head of ID) AGROVALE Mechanical Engineer (Plant Chief - sugar cane, alcohol and sugar production) Municipal Government Joseph Bandeira (Mavor) SEIFUN - Com. Ind. Ltda. HClio Paes Barreto de Paiva (Paprika for export) (General Manager) Couraqii Project Francisco Miranda (Manager ofID 1) Anthio Moreira (Operation & Maintenance)

143 Benedito JosC dos Santos Ramos (Manager of PROPIC - ID 2) AdZo Rodrigues Machado (Smallholder farmer) Jaiba (MG) Jaiba Irrigation District Carlos Antbnio Landi Pereira (Executive Manager) Lindomar Ferreira (Chairman ofBoard of Directors of ID) Gerald0 Nunes da Silva (President of Statutory Audit Committee of ID) Northeast Bank Davidson Barbosa Dantas (General Manager of PDI) Cliudio JosC Saraiva 7 Jaiba Project Central Marcelino Dias Mark Committee of Farmers (President); farmers using Associations irrigation CENTRALJAI Technical Assistance SCrgio Luis Pinheiro de Cooperative Azevedo (Coordinator of USAP) Banana Growers Assoc. JoZo Carlos Schmolz de Matos for Area C2 (ABC-2) (Director) ClAudio JosC Saraiva (Development Agent/BN) Municipal Government Giovani AntBnio Fonseca (Mayor) Helber Aloisio Souza (Agnicultural Secretarv) Tire sales company Nei Luiz Marinho (Businessman) Futura Agrocihcia Ltda. Rodrigo Ferreira Vaz (agricultural inputs) (Manager) Leila Wagna da Cruz (Assistant Manager) Jaiba FCrtil - Produtos Reginald0 AntBnio da Silva Agropecuhrios Ltda. (Businessman) Vitasolo (company that ClCber Bellini (Director) prepares agricultural and Char Bellini (Aviation cattle raising projects and Manager) agric. aviation)

144 Farming lots Farmers from area C1 Farmers from area C2 AquaJet (irrigation projects Jackson Rocha and eauinment) (Businessman) Matias Cardoso (MG) Municipal Government Josemir Cardoso dos Santos (Mayor) Luiz Mirio Cardoso da Silva (Assessor) .. . . (Organic banana producer) +Banco do Nordeste Geraldo Domiciano Filho Janauba (MG) (Branch Manager of BN) Gorutuba Irrigation District Geraldo Batista (Manager) EMBRAPA - Test Station Carlos Eduardo Prado (Researcher and Station Head) Researchers EPAMIG Murilo Regina (Researcher - Grape growing) PLANTEC Assist. TCcnica JosC Francisco de S. Genuino (Coordinator) WALE JosC Adilson Alves Barbosa (Owner) Small farmers Edson Bernardino de Souza (Ex-President of Cooperative) TRIAMA - Massey Marcel0 Miranda Ferguson (Sales Manager - Montes Claros) Luiz Otavio Veloso Santiago (Salesman) BIOSOLO Juracy Fagundes Jacome (Manager) METAFIM - irrigation Paul0 Maeno Equipment (Manager) FRUCOOP - 22 JosC Carlos Carmanini Cooperatives (President) hgelo A. P. Oioli (Commercial Superintendent) Farmers Association for Orlando Antunes Left Bank of Gorutuba (President) River - ASSIERG Jorge Kakida (Treasurer) Ana Paula Alessi (Manager) BEST POLP BRASIL Jeferson Bertoli Ltda. (Manager and owner)

145 Jerry Bertoli (Administrator) Recife (PE) Banco do Brad Luiz Roberto de Lima Botelho (Business Manager for State Superintendency) BNDES JosC Eduardo Fitipaldi Dantas (Director for Automatic Products) Fabiola Patricia de Oliveira Lima (Lawyer) Maria Gegina Pinto Oliveira Melo (Legal Dept. - DECON) Northeast Bank Jonas Souza Sala (General Manager ofMelo Branch) Ideval Machado Femandez (Advisor to Regional Superintendency)

146 ANNEX V

PARTICIPANTS IN THE SEAIN SEMINAR - 10/06/2003

Name Institution

Patricia G6es Bakaj SEAIN Valdir Castelo Branco CODEVASF Humberto Rey Castilla IICA/MI Dorian Ponte Lima DDH/MI Edvardo Magalhiies Lordello SPI/MP Reginald0 Alves Paes CODEVASF Carlos R. Carvalho SEAIN Leda Maria Marques Cavalcante SEAIN Josk Eduardo Borella CODEVASF Dorotea Bios SPR/MI Jalbas Aires Manduca MAPNSE Lkaro Luiz Neves SRH/MI Carlos cotta CODEVASF Mauricio Lobo CODEVASF Paul0 Josk Wanderley Braga BN Antonio Rocha Magalhiies World Bank Guilherme Almeida Gongalves de Oliveira CODEVASF Clementino Coelho CODEVASF Carlos Lampert SEAIN Ivo Marzall World Bank Juan Morelli FAO/BIRD Elmar Wagner World Bank Jose Simas World Bank

147 ANNEX VI

PARTICIPANTS IN SEMINAR HELD IN THE MINISTRY OF NATIONAL INTEGRATION - MI - 17/06/2003

Name Institution

Ana ClAudia Oliveira IICA/SIH Anaquimedes Cartuliars SIH Antbnio Cabral Cavalcanti ANA Antbnio Cardoso Net0 ANNSTC Antbnio Magalhiies World Bank Carlos Fernandes SIH CClia Maria Ravazzani Ribeiro SIH/DDH CCsar Carvalho SIH/DDH Daniel Vilani SIH/PRO AGUA Dorian Ponte Lima SIH/DDH Eder Joiio Poffebon S 0 C/ANA Eduardo Carrari SOC/ANA Erika Franqa Gerbrin SIWDDH Eusthquio Costa Hecta C & A Elmar Wagner WB/Consultant Francisco Guedes Filho CODEVASF Francisco Lopes Viana S 0 C/ANA Gustavo Diaz WB/Consultant JosC Simas World Bank Humberto Rey Castilla IICA/MI Hyperides Macedo SIH/MI Jader Verdade SIH/DDH JosC Bento Correa SIH JosC Elias Mentari ANA JosC Gentil SIH JosC Raposo SIH/DDH Luiz Henriqw S. Lopes SIH Marcelo Mancuso SIH Marcelo Pereira Borges SIH/MI Marcio Andrade SECEWMI Marcos da Silva Ramos SIH Marcus Andrt Almeida SIWDDH Maria da G16ria Teixeira SIH/D DH Maria Eugenia de Aquino SIH/GSC Roberto Nascimento SIWDDH Sebastiiio Jader de Siqueira SIH/MI Thales Sampaio SIH/MI Valdir Castelo Branco CODEVASF

148 ANNEX VI1

TABLE OF CONTENTS: VOLUME I1

I BACKGROUNDAND INTRODUCTORY SUMMARY

I1 PURPOSES OF THE STUDY Objectives Scope Public/Audie nce Cooperating Entities Description of Report I11 REFERENCE POINT Regional characteristics of the Semi- Arid Region New Conceptual Model for Irrigation National Irrigation and Drainage Plan IV CHARACTERISTICS OF IRRIGATION IN BRAZIL Irrigation in the Brazilian Semi- Arid region Current Situation Implications and Nature of Restrictions Key Factors: Human Capital, Technology and Markets. Additional Investments V EVALUATION METHODOLOGY Identificationmission: First phase Analysis of satellite images: Second phase Social and economic externalities: Second phase Multi-criteria Decision Analysis Method: Second phase Validation and dissemination: Third phase VI ECONOMIC, FINANCIAL AND FISCAL EVALUATION OF PUBLIC INVESTMENTS IN IRRIGATION Evaluation methods Financial, economic and fiscal analysis Comparative analysis of the different Poles Conclusions VI1 FINDINGS, EXTERNALITIES AND ECONOMIC AND SOCIAL IMPACTS Concept Externalities Social impacts Economic and social impacts on other sectors Some indicators of direct impacts Summary of findings VI11 MULTIPLE-OB JECTIVE OR MULTI-CRITERIA EVALUATION Introduction Short description of methodology Objectives, criteria and attributes Impact evaluation

149 Weighting of attributes Weighting ofcriteria Impact matrix calculations Results of analysis IX RESULTS AND STRATEGIC OPTIONS Key themes Lessons learned Policy failures and corrective actions X POLICY AND STRATEGY OPTIONS Scenarios e percepqdes do estudo Recomendaqdes de opqdes estratkgicas Strategies Questions left open Agenda for the future IX. BIBLIOGRAPHY LIST OF TABLES LIST OF FIGURES AND GRAPHS LIST OF BOXES LIST OF ACRONYMS AND ABBREVIATIONS

150 ANNEX VI11

TABLE OF CONTENTS: VOLUME I11 (Thematic Annexes)

ANNEX A Seminar and Agreement in Fortaleza

ANNEX B Project Concept Document Josk Simas

ANNEX C Identification Mission Report Volume 1 Identification Mission Report Volume 2 Elmar Wagner, Juan Morelli, Ivo Marzall and Regina Martinez

ANNEX D Legal themes: Final Report (main point of Volume 2) Regina Martinez

ANNEX E Analysis of the social cost and benefits from public investments Guilherme S6ria Bastos Filho, Josk Luiz Carvalho and Jaime Artigas

ANNEX F Financial, Economic and Social Evaluations Juan Bautista Morelli

ANNEX G Analysis of satellite images Arist6teles F. de Mello, Elcio, Miguel, Paul0 Afonso,

ANNEX H Videography and radiometry: case study of Gorutuba Project Osmar, Renato, Juliana

ANNEX I Social and economic externalities: A) Quadros, Ivo Marzall with the collaboration of Fhbio August0 AssungZio, B) Study of the impacts of irrigation on poverty reduction, Regis Bonelli, and C) Contributions to the analyses, Guilhenne %ria Bastos Filho

ANNEX J Dam infrastructure Eldan Veloso

ANNEX L A Conceptual Note on the Approach to Social Cost-Benefit Analysis of Public Investment in Irrigation in the Northeast of Brazil Jaime Artigas and Albert0 Valdks

151