A Framework for Public Private Investments for Irrigation Modernisation: Response to Climate Change

A framework for public private investments for irrigation modernisation: Response to climate change

MUNIR A. HANJRA

B.Sc. (Honours) Agriculture M.Sc. (Honours) Agricultural Economics Master of Economics (Macquarie, Australia)

A thesis submitted to the Charles Sturt University for the degree of Doctor of Philosophy

International Centre of Water for Food Security Faculty of Science, School of Environmental Sciences Charles Sturt University

September 2009

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HD7 CERTIFICATE OF AUTHORSHIP OF THESIS & AGREEMENT FOR THE RETENTION & USE OF THE THESIS DOCTORAL AND MASTER BY RESEARCH APPLICANTS To be completed by the student for submission with each of the bound copies of the thesis submitted for examination to the Centre of Research & Graduate Training. For duplication purpose, please TYPE or PRINT on this form in BLACK PEN ONLY. Please keep a copy for your own records.

I Mr. Munir Ahmad Hanjra

Hereby declare that this submission is my own work and that, to the best of my knowledge and belief, it contains no material previously published or written by another person nor material which to a substantial extent has been accepted for the award of any other degree or diploma at Charles Sturt University or any other educational institution, except where due acknowledgment is made in the thesis. Any contribution made to the research by colleagues with whom I have worked at Charles Sturt University or elsewhere during my candidature is fully acknowledged.

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ACKNOWLEDGEMENT

In the Name of Allah, the Merciful, the Compassionate

Many people have contributed to this dissertation through their direct and indirect support. The splendid support of all those people named or un- named in this brief note is gratefully acknowledged.

The funding support from Charles Sturt University is dully acknowledged.

With feelings of great pleasure and deep sense of gratitude, my acknowledgement goes to my principal supervisor Assoc Prof. Mohsin Hafeez, Dr M. Nadeem Asghar and Dr Richard Culas.

My acknowledgement also goes to my ex-supervisor Professor Shahbaz Khan for his initial guidance and support.

Thanks are also due to all staff and colleagues, and the members of International Centre of Water for Food Security, Charles Sturt University, Wagga Wagga.

This PhD is dedicated to my loving parents for their kind support and guidance. Thanks are due to my brothers, wife, children Aeman and Asher and other family members for their unreserved love, benevolent prayers, and sacrifices in sustaining my efforts during the studies. Sincerest thanks go to my friends all over the world for their support and dedication for my work.

Munir A Hanjra

ABSTRACT

Climate change, water shortages, and continued population growth have intensified the search for measures to conserve water in irrigated agriculture, the world’s largest user of water. Policy measures that encourage investments in water-conserving irrigation technologies are widely believed to ‘save’ water and make more water available for cities and the environment. Investments in irrigation infrastructure to conserve water remain critical for water security and addressing climate change challenges. However, little integrated analysis has been conducted to test this hypothesis. Public financing of irrigation infrastructure has been the predominant model during the last four decades. Global irrigation sector is currently undergoing tremendous restructuring, involving the upgrade of old infrastructure and investments in new infrastructure, institutions and policies. There is a surge in interest in new models, particularly public private investment models, for financing irrigation modernisation but their pros and cons are unclear, especially in terms of impacts on economic efficiency, food security, equity, and environmental quality.

This thesis hypothesized that public-private investments can provide a rational basis for sharing the costs of irrigation infrastructure modernisation among farmers, private investors and governments. The primary objectives of the research are: (i) a comprehensive review of the literature on public private partnerships in irrigation infrastructure at national and global level;

(ii) integration of hydrologic, agronomic, economic and biophysical data to

4 develop an integrated modelling framework to evaluate the costs and benefits of investments in irrigation modernization; (iii) evaluation of the impacts of public private investment models on efficiency, equity, and the environment at national and global level; and (iv) the use of detailed modelling framework to tailor institutional and policy measures for fostering public private investments in irrigation.

This thesis provides a meta-analysis of the investment models for financing global irrigation infrastructure with emphasis on socioeconomic issues such as equity, efficiency, cost-recovery, and environmental sustainability.

Previous hydrologic-economic modelling advances and frameworks are also reviewed. An integrated hydrologic-agronomic-economic model called

HAEMAN (Hydrologic-Agronomic-Economic MANagement) model is developed in GAMS (General Algebraic Modeling System). The essential principle of the hydrology model is mass balance both for water flows and water use. The model is calibrated for the lower Murrumbidgee Catchment of the Murray-Darling Basin of Australia. The model was developed to support analysis of policy options affecting the use of water resources in the catchment for multiple uses including urban water supply, irrigated agriculture, and the environment. It was designed to analyse and assess selected investment models and policy options based on their cost, returns, water demands, affects on water use, water savings, crop productivity, and long term sustainability.

The results show that water conservation subsidies enhance agricultural productivity and economic returns and offer high pay offs but they are unlikely to ‘save’ water by reducing water depletions by agriculture under

5 conditions that occur in most river basins. Modelling results also show that persistent hydrological drought have reduced crop water yield, such that under conditions of climate change and water scarcity, significant adjustments in irrigated area, crop mix, crop productivity are likely with implications for the profitability and economic wellbeing of agricultural communities. Past models of financing the irrigation are reviewed. The synthesis shows that public private partnerships in irrigation are rare because of heavy investment needs, political economy of water pricing, and low cost recovery and high risk – both financial and political. Global investments lending is also examined over the past 50 years with a focus on key social sectors including irrigation which remain important to eradicate hunger and extreme poverty worldwide. The findings and recommendations of the thesis work will be helpful to national policy makers and global donors and investors.

TABLE OF CONTENTS

CHAPTER ONE...... 16 1. Introduction...... 16 1.1 Global context ...... 16 1.1.1 Food security...... 20 1.1.2 Water security...... 22 1.1.3 Resource degradation...... 24 1.1.4 Climate change ...... 27 1.1.5 Investments in irrigated agriculture ...... 29 1.2 Context of this thesis...... 32 1.3 Research questions...... 33 1.4 Objectives ...... 34 1.5 Outline ...... 34 CHAPTER TWO ...... 36 2.1 Introduction...... 36 2.2 Conceptual framework...... 36 2.3 Partial equilibrium models...... 38 2.4 General equilibrium models...... 52 2.5 Investment linkages to poverty and inequality ...... 63 2.6 Conclusion and knowledge gaps...... 68 CHAPTER THREE ...... 70 3 HAEMAN Model Development...... 70 3.1 Introduction...... 70 3.2 Location of the study area...... 73 3.3 Conceptual framework...... 73 3.4 HAEMAN model structure...... 75 3.4.1 Objective function...... 78 3.4.2 Model constraints...... 81 3.4.3 Model solution ...... 83 3.4.4 Data collection and data sources...... 84 3.4.5 Model algorithm ...... 84 3.4.6 Model calibration...... 85 3.4.7 Scenarios modelled...... 86 3.5 Scope of the study...... 86 3.6 Summary...... 90 CHAPTER FOUR...... 91 4 Investments in Irrigation Modernisation...... 91 4.1 Introduction...... 91 4.2 About the study area ...... 91 4.3 Model calibration...... 103 4.4 Modelling results ...... 104 4.4.1 Investment costs...... 105 4.4.2 Investment benefits...... 109 4.4.3 Water balance and potential savings...... 114 4.5 Summary and conclusion...... 116 CHAPTER FIVE ...... 118 5 Climate Change and Water Security...... 118 5.1 Introduction...... 118 5.2 Drought and water security...... 118

5.1 Water security scenarios ...... 124 5.2.1 Water security model runs ...... 127 5.2.2 Investment policy and planning...... 130 5.3 Climate change scenarios...... 131 5.3.1 Climate change model runs...... 137 5.3.2 Response to climate change – farm management...... 146 5.3.3 Response to climate change – institutional...... 147 5.4 Summary and conclusion...... 149 CHAPTER SIX...... 151 6 Public Private Investments – Global Perspectives...... 151 6.1 Introduction...... 151 6.2 Conceptual framework...... 152 6.2.1 Types of irrigation system ...... 152 6.2.2 Components of irrigation system...... 156 6.2.3 Functions of irrigation system ...... 157 6.3 Global experience in infrastructure projects...... 164 6.4 Global experience in water and sanitation...... 175 6.4.1 Types of PPP...... 175 6.4.2 Global experience ...... 179 6.4.3 Key issues...... 189 6.4.4 Lessons learnt...... 190 6.4.5 Key findings...... 192 6.5 Global experience in irrigation sector...... 193 6.5.1 Social investments ...... 193 6.5.2 Public investments ...... 195 6.5.3 Private investments...... 198 6.5.4 Management transfer ...... 202 6.5.5 Public private partnerships...... 206 6.6 Summary and water policy implications ...... 211 CHAPTER SEVEN ...... 213 7 Public Private Investments - International Analysis...... 213 7.1 Introduction...... 213 7.2 Eradicating hunger and extreme poverty...... 215 7.3 Agriculture, irrigation and drainage...... 217 7.4 Education ...... 241 7.5 Health and other social services...... 249 7.6 Water supply and sanitation...... 255 7.7 Global investment lending...... 263 7.8 Key conclusions and implications ...... 266 CHAPTER EIGHT ...... 269 8 Summary and conclusions ...... 269 8.1 Backdrop...... 269 8.2 Model development ...... 273 8.3 Model results...... 275 8.4 Global assessment...... 277 CHAPTER NINE...... 281 9 Policy Implications and New Directions ...... 281 9.1 Synthesis ...... 281 9.2 Policy lessons...... 281 9.3 Future research directions...... 282

LIST OF FIGURES

FIGURE 1.1 WATER COMPETITION IN AGRICULTURE AND OTHER SECTOR...... 23 FIGURE 3.1 BROADER GOALS UNDERPINNING WATER INVESTMENTS IN THE HAEMAN

MODEL ...... 75 FIGURE 3.2 THE HAEMAN MODEL STRUCTURE ...... 76 FIGURE 3.3 CLIMATE CHANGE AND WATER SECURITY SCENARIOS MODELLED ...... 89 FIGURE 4.1. MONTHLY EVAPORATION FIGURES, AS MEASURED AT CIA FOR THE YEAR

2007/08 (SOURCE: CICL, 2009)...... 96 FIGURE 4.2 PROPORTIONS OF TOTAL DELIVERIES FOR CROPS IN CIA FOR 2007/08 (DATA

SOURCE: CICL, 2009)...... 97 FIGURE 4.3 LAND USES FOR RESPONDENTS REPORTING A CHANGE IN ENTERPRISE MIX,

2007/08 (SOURCE: CICL, 2009)...... 97 FIGURE 4.4. PERCENTAGE OF IRRIGATION AREA USED BY IRRIGATION SYSTEMS IN THE

MURRUMBIDGEE VALLEY (ABARE, 1998)...... 100 FIGURE 4.5. MODEL PREDICTED AREA VERSUS ACTUAL IRRIGATED AREA FOR VARIOUS

IRRIGATION DISTRICTS...... 105 FIGURE 5.1 MONTHLY INFLOWS INTO THE MURRAY RIVER SYSTEM (DATA SOURCE: MDBA, 2009)...... 122 FIGURE 5.2 ANNUAL GENERAL SECURITY ALLOCATIONS SINCE 1982/83 (CICL, 2009) ...... 122 FIGURE 5.3 RICE PRODUCTION IN THE MURRAY-DARLING BASIN ...... 123 FIGURE 5.4 IRRIGATED AREA UNDER VARIOUS WATER SECURITY SCENARIOS ...... 128 FIGURE 5.5 MODEL ESTIMATED INCOME FOR VARIOUS WATER SECURITY SCENARIOS IN THE CIA...... 129 FIGURE 5.6 CLIMATE CHANGE AND THE INDEX OF AUSTRALIAN AGRICULTURAL OUTPUT

FROM 2006 (=1) TO 2050 (SOURCE: ABARE, 2009)...... 134 FIGURE 6.1 TYPES OF IRRIGATION SYSTEMS AROUND THE GLOBE (SOURCE: WORLD BANK, 2008)...... 153 FIGURE 6.2 MAJOR COMPONENTS AND PPP FUNCTIONS IN IRRIGATION SYSTEM (SOURCE,

WORLD BANK (2008)...... 158 FIGURE 6.3 INCOME AND AVERAGE TARIFF FOR WATER SUPPLY IN MEXICO CITY...... 187

FIGURE 7.1 GLOBAL WORLD BANK LENDING FOR AGRICULTURE SECTOR AND IRRIGATION

AND DRAINAGE SUB-SECTOR PROJECTS (CONSTANT 1995 US$ MILLIONS ), 1949-2003 ...... 218 FIGURE 7.2 IRRIGATION AND DRAINAGE SUB-SECTOR LENDING AS A PERCENT OF

AGRICULTURE SECTOR LENDING, 1947-2003...... 220 FIGURE 7.3 WORLD BANK LENDING TO TRADITIONAL AND SOCIAL SECTORS (CONSTANT

1995 $ MILLIONS), 1970-2003...... 243 FIGURE 7.4 HEALTH AND OTHER SOCIAL SERVICES SECTOR LENDING FOR VARIOUS REGIONS, 1986-2003 ...... 250 FIGURE 7.5 WATER AND SANITATION SECTOR LENDING FOR VARIOUS REGIONS (CONSTANT

1995 $ MILLIONS), 1968-2003...... 257

FIGURE 7.6 PER CAPITA INVESTMENT LENDING BY THE WORLD BANK TO VARIOUS REGIONS (CONSTANT 1995 $), 1960-2001...... 264

FIGURE 7.7 GLOBAL LENDING BY THE WORLD BANK (CONSTANT 1995 $MILLION), 1960- 2003...... 265

LIST OF TABLES

TABLE 1.1 OVERVIEW OF MODELS DEVELOPED IN MURRUMBIDGEE CATCHMENT FOR WATER ALLOCATION AND PLANNING...... 67 TABLE 3.1 STATE SHARES IN THE MURRAY DARLING BASIN ...... 71 TABLE 3.2 KEY STATISTICS ON BURRINJUCK DAM AND BLOWERING DAM IN THE

MURRUMBIDGEE CATCHMENT...... 72 TABLE 3.3 ELEMENTS OF THE HAEMAN MODEL...... 77 TABLE 3.4 WATER ENTITLEMENTS IN THE MURRUMBIDGEE CATCHMENT ...... 78 TABLE 4.1 SUMMARY OF CLIMATIC DATA FOR MIA...... 99 TABLE 4.2 HISTORICAL DELIVERIES TO MAJOR CROPS IN MIA...... 101 TABLE 4.3 MAIN IRRIGATION DISTRICTS MODELLED IN THIS STUDY ...... 102 TABLE 4.4 INPUT PRODUCTION COST ($/HA) ACCOUNTING FOR SUBSIDY PAYMENT ...... 108 TABLE 4.5. GROSS REVENUE FROM CROP PRODUCTION ($/HA)...... 110 TABLE 4.6 NET REVENUE FROM CROP PRODUCTION ($/HA)...... 111 TABLE 4.7 TOTAL NET REVENUE PER MEGA LITRE ($/ML) OF WATER USE...... 113

TABLE 4.8. AGRICULTURAL INCOME FOR VARIOUS IRRIGATED AREAS UNDER OPTIMAL CROPPING PATTERNS...... 114

TABLE 4.9. WATER USE, SEEPAGE AND RETURNS FLOW FOR VARIOUS CROPS, MODEL OUTPUT (ML/HA) ...... 115 TABLE 5.1 PROJECTED CHANGE IN PRECIPITATION IN AUSTRALIA COMPARED TO 1990. ....126

TABLE 5.2 PROJECTED CHANGES IN AGRICULTURAL PRODUCTIVITY DUE TO CLIMATE CHANGE WITHOUT CARBON FERTILISATION EFFECT...... 133 TABLE 5.3 CLIMATE CHANGE SCENARIOS MODELLED IN THIS STUDY ...... 136 TABLE 5.4 GROSS REVENUE ($/HA) FROM CROP PRODUCTION - SIM 1...... 138 TABLE 5.5 TOTAL NET REVENUE PER HECTARE ($/HA) - SIM 1 ...... 138 TABLE 5.6 TOTAL NET REVENUE PER MEGALITER OF WATER USE - SIM 1 ...... 139 TABLE 5.7 GROSS REVENUE ($/HA) FROM CROP PRODUCTION - SIM 2...... 140 TABLE 5.8 TOTAL NET REVENUE PER HECTARE ($/HA) - SIM 2...... 140 TABLE 5.9 TOTAL NET REVENUE PER MEGALITER OF WATER USE - SIM 2 ...... 141 TABLE 5.10 GROSS REVENUE ($/HA) FROM CROP PRODUCTION - SIM 3...... 142 TABLE 5.11 TOTAL NET REVENUE PER HECTARE ($/HA) - SIM 3 ...... 142 TABLE 5.12 TOTAL NET REVENUE PER MEGALITER ($/ML) OF WATER USE - SIM 3...... 143 TABLE 5.13 GROSS REVENUE ($/HA) FROM CROP PRODUCTION - SIM 4...... 144 TABLE 5.14 TOTAL NET REVENUE PER HECTARE ($/HA) - SIM 4 ...... 144 TABLE 5.15 TOTAL NET REVENUE PER MEGALITER ($/ML) OF WATER USE - SIM 4...... 145 TABLE 6.1 MAJOR PPP PROJECTS IN CANADA ...... 167

TABLE 6.2 TRADEOFFS IN EFFICIENCY AND EQUITY IN PPP INVESTMENTS IN DEVELOPING COUNTRIES –AN ILLUSTRATIVE EXAMPLE ...... 181

TABLE 6.3. EXAMPLES OF PUBLIC-PRIVATE PARTNERSHIPS WITH AN OUTLINE OF INVESTMENT AND OTHER FUNCTIONS...... 188 TABLE 6.4 GROSS REPORTED DECLINE IN IRRIGATED AREA IN CHINA BY CAUSE...... 198 TABLE 6.5. INTERNATIONAL PPP MODELS AND THE INCREASINGLY TRANSFERRED

FUNCTIONS...... 208 TABLE 7.1 PER CAPITA INVESTMENT LENDING BY THE WORLD BANK TO KEY SECTORS OF

IMPORTANCE TO THE POOR (CONSTANT 1995 $) ...... 216 TABLE 7.2. PER CAPITA ($) IRRIGATION SECTOR LENDING IN VARIOUS REGIONS...... 222

TABLE 7.3 IRRIGATION AND DRAINAGE SUB-SECTOR LENDING INDICES FOR VARIOUS REGIONS (BASE PERIOD 1975-79) ...... 222

TABLE 7.4 TOP TEN RECIPIENTS OF IRRIGATION AND DRAINAGE SUB-SECTOR LENDING FOR VARIOUS REGIONS (CONSTANT 1995 $ MILLION) ...... 224

TABLE 7.5 AGRICULTURE, FISHING AND FORESTRY SECTOR LENDING FOR VARIOUS REGIONS (CONSTANT 1995 DOLLARS) ...... 228

TABLE 7.6 AGRICULTURE SECTOR LENDING PER CAPITA FOR VARIOUS REGIONS (CONSTANT 1995 $)...... 229

TABLE 7.7 TOP TEN RECIPIENTS OF AGRICULTURE SECTOR LENDING FOR VARIOUS REGIONS (CONSTANT 1995 $ MILLION)...... 230

TABLE 7.8 EDUCATION SECTOR LENDING INDICES FOR VARIOUS REGIONS (1995-1999 AS BASE PERIOD), 1965-2003 ...... 245

TABLE 7.9 TOP 10 RECIPIENTS OF EDUCATION SECTOR LENDING FOR VARIOUS REGIONS (CONSTANT 1995 DOLLARS, MILLION), 1964-2003 ...... 246 TABLE 7.10 EDUCATION SECTOR LENDING PER CAPITA FOR VARIOUS REGIONS (CONSTANT

1995 $)...... 247 TABLE 7.11 TOP TEN RECIPIENTS OF HEALTH AND OTHER SOCIAL SERVICE SECTOR LENDING

(CONSTANT 1995 $ MILLIONS)...... 252 TABLE 7.12 HEALTH AND OTHER SOCIAL SERVICES SECTOR LENDING PER CAPITA

(CONSTANT 1995 $ MILLION)...... 253 TABLE 7.13 WATER AND SANITATION SECTOR LENDING INDICES (CONSTANT 1995 DOLLARS,

MILLION), 1968-2003 ...... 259 TABLE 7.14 WATER SUPPLY AND SANITATION SECTOR LENDING PER CAPITA (CONSTANT

1995 $), 1968-2001 ...... 260

ACRONYMS AND ABBREVIATIONS

CIA Coleambally Irrigation Area CICL Coleambally Irrigation Cooperative Limited CSIRO Commonwealth Science and Industry Research Organisation CSU Charles Sturt University FLD Flood irrigation GAMS General Algebraic Modeling System GM Gross Margin HAEMAN Hydrologic-Agronomic-Economic MANagement Model MDB Murray-Darling Basin MDBC Murray-Darling Basin Commission Mha Million hectare MIA Murrumbidgee Irrigation Area MIS Modern irrigation system ML Mega liter NPV Net Present Value NSW New South Wales PPP Public Private Partnerships

Research publications and contributions

Book chapters

Zhang, F., Hanjra, M. A., Young, H., & Khan, S. (2009). Green strategies for enhancing economic growth and ecological sustainability in Xianjiang province in China (Chapter 4). In P. Basu & Y. Bandara (Ed.), WTO Accession and Socio-Economic Development in China. Oxford, UK. Molden, D., Oweis, T. Y., Steduto, P., Kijne, J. W., Hanjra, M. A., Bindraban, P. S., Bouman, B. A. M., Cook, S., Erenstein, O., Farahani, H., Hachum, A., Hoogeveen, J., Mahoo, H., Nangia, V., Peden, D., Sikka, A., Silva, P., Turral, H., Upadhyaya, A., & Zwart, S. (2007). Pathways for increasing agricultural water productivity. In D. Molden (Ed.), Comprehensive Assessment of Water Management in Agriculture. Water for Food, Water for Life: A Comprehensive Assessment of Water Management in Agriculture. Colombo: International Water Management Institute: London: Earthscan. de Fraiture, C., Wichelns, D., Rockström, J., Kemp-Benedict, E., Eriyagama, N., Gordon, L. J., Hanjra, M. A., Hoogeveen, J., Huber-Lee, A., & Karlberg, L. (2007). Looking ahead to 2050: scenarios of alternative investment approaches. In D. Molden (Ed.), Comprehensive Assessment of Water Management in Agriculture. Water for Food, Water for Life: A Comprehensive Assessment of Water Management in Agriculture. Chapter 3, pp.91-145. Colombo: International Water Management Institute: London: Earthscan. Castillo, G. E., Namara, R. E., Ravnborg, H. M., Hanjra, M. A., Smith, L., Hussein, M. H., Béné, C., Cook, S., Hirsch, D., Polak, P., Vallée, D., & van Koppen, B. (2007). Reversing the flow: agricultural water management pathways for poverty reduction. In D. Molden (Ed.), Comprehensive Assessment of Water Management in Agriculture. Water for Food, Water for Life: A Comprehensive Assessment of Water Management in Agriculture. Colombo: International Water Management Institute: London: Earthscan.

Journal articles

Hanjra, M. A., Ferede, T., & Gutta, D. G. (2009). Reducing poverty in sub-Saharan Africa through investments in water and other priorities. Agricultural Water Management, 96, 1062-1070. Hanjra, M. A., Ferede, T., & Gutta, D. G. (2009). Pathways to breaking the poverty trap in Ethiopia: Investments in agricultural water, education, and markets. Agricultural Water Management, 96, 1596- 1604.

Namara, R. E., Hanjra, M. A., Castillo, G. E., Ravnborg, H. M., Smith, L., & Van Koppen, B. (2010). Agricultural water management and poverty linkages. Agricultural Water Management. Molden, D., Oweis, T., Steduto, P., Bindraban, P., Hanjra, M. A., & Kijne, J. (2010). Improving agricultural water productivity: Between optimism and caution. Agricultural Water Management, doi: DOI: 10.1016/j.agwat.2009.03.023. Khan, S., & Hanjra, M. A. (2009). Footprints of water and energy inputs in food production - Global perspectives. Food Policy, 34, 130-140. Khan, S., Khan, M. A., Hanjra, M. A., & Mu, J. (2009). Pathways to reduce the environmental footprints of water and energy inputs in food production. Food Policy, 34, 141-149. Khan, S., Hanjra, M. A., & Mu, J. (2009). Water management and crop production for food security in China: a review. Agricultural Water Management, 96, 349-360. Khan, S., Tariq, R., Hanjra, M. A., & Zirilli, J. (2009). Water markets and soil salinity nexus: Can minimum irrigation intensities address the issue? Agricultural Water Management, 96, 493 – 503. Khan, S., Mushtaq, S., Hanjra, M. A., & Schaeffer, J. (2008). Estimating potential costs and gains from an aquifer storage and recovery program in Australia. Agricultural Water Management, 95, 477-488. Khan, S., Rana, T., & Hanjra, M. A. (2008). A cross disciplinary framework for linking farms with regional groundwater and salinity management targets. Agricultural Water Management, 95, 35-47. Mu, J., Khan, S., Hanjra, M. A., & Wang, H. (2008). A food security approach to analyse irrigation efficiency improvement demands at the country level. Irrigation and Drainage, 58, 1-16. Mushtaq, S., Khan, S., Dawe, D., Hafeez, M., & Hanjra, M. A. (2008). Does Reliability of Water Resources Matter in the Adoption of Water-Saving Irrigation Practices? A Case Study in the Zhanghe Irrigation System, China. Water Policy, Accepted. Mushtaq, S., Khan, S., Dawe, D., Hanjra, M. A., Hafeez, M., & Asghar, M. N. (2008). Evaluating the impact of Tax-for-Fee reform (Fei Gai Shui) on water resources and agriculture production in the Zhanghe Irrigation System, China. Food Policy, 33, 576–586. Khan, S., & Hanjra, M. A. (2008). Sustainable land and water management policies and practices: a pathway to environmental sustainability in large irrigation systems. Land Degradation and Development, 19, 469–487. Hanjra, M. A., & Gichuki, F. (2008). Investments in agricultural water management for poverty reduction in Africa: case studies of Limpopo, Nile, and Volta river basins. Natural Resources Forum, 32, 185-202.

CHAPTER ONE

1. Introduction

1 1.1 Global context

World water and food security are intimately linked. Past investments in irrigation and related support measures were instrumental in expanding the irrigated area and boosting crop yields and insulating the communities against famine and hunger. The progress made towards food security over the last half century has already been threatened in recent years.

Many environmental factors and international forces are working against agriculture today. The world as a whole is food secure, while food security issues still exist in parts of Asia and much of Africa (UNDP, 2006).

Nevertheless, continued population growth poses immense challenges for feeding the future populations (Molden et al., 2010). The prospects for expansion in area are limited in many of the food producing areas around the world, although some potential remains in Latin America and eastern

Europe. African countries have yet to launch a Green Revolution of their own by harnessing hydrology, agronomy, economics, institutions and policies geared towards sustainable water resources management for enhancing food production. In addition to this, food insecurity hotspots are emerging in many of the large and intensively irrigated systems in Asia that have served as a food bowl for the region in the past. Loss of productive

1 This section is based on some of the background papers written for and published during this PhD, as listed above, and cited in the text.

16 land to urbanisation, land degradation, salinity, industrialisation and water competition in agriculture are limiting the prospects for any sustained improvement in agricultural productivity in many of these systems. With falling investments and surmounting challenges, the prospectus for global sustainability in food production systems seem daunting (Khan and Hanjra,

2009).

Climate change is adding another layer of uncertainty and may worsen the already intricate situation. Climate change is expected to accelerate water cycle, slowing the increase in number of people living under water stress, but changes in seasonal and spatial patterns and surge in the probability of extreme events may offset this effect (Oki and Kanae, 2006). Prolonged droughts and extreme rainfall events can cause a step change in water supplies and worsen the risk pervasive in agriculture (Pannell et al., 2000).

Both climate normals (average long-term surface wetness and temperature) and interannual climate variance impact farm cropland and revenue

(Mendelsohn et al., 2007a) but interannual climate variability is much more important than climate normals (Easterling et al., 2000). There is a larger degree of uncertainty on the future impacts of climate change on water resources than climate variability. Greater interannual rainfall variability may be associated with lower GDP particularly in poor countries (Brown and Lall, 2006). Rising water demand may greatly overweigh greenhouse warming in defining the state of global water systems (Vorosmarty and

Sahagian, 2000). Climate change and population growth may have significant implications for agricultural production and its environmental footprint, especially for irrigated agriculture which provides about 40% of

17 global food production from just 18% of cropland. Rainfed food production systems will also come under intense pressure due to shifts in weather patterns and changes in rainfall events and hydrological regimes and greater dependency on land and water resources, causing further resources degradation and eroding productivity (Khan and Hanjra, 2009).

With economic growth and development, millions of people from the developing world are entering into a flat world with food and nutritional standards similar to those in the USA and Europe. The nutritional transition currently underway in China as well as India poses unprecedented challenges to mankind in terms of meeting additional food demands (De

Fraiture et al., 2007; Renault and Wallender, 2000). Vegetarian diets may well have an environmental advantage, exceptions may also occur.

Environmental costs associated with long-distance transport, freezing, and some agricultural practices may lead to environmental burdens for vegetarian foods exceeding those form locally produced organic meats

(Reijnders and Soret, 2003). Growing consumption can cause major environmental damage (Myers and Kent, 2003) and have major implications for global water security and food security (Pimentel et al.,

2004).

18 produced in land abundant and water abundant countries and imported into land scarce or water scarce countries through virtual water trade, many of these countries are unable to afford sustained food imports due to ongoing financial and economic issues (Wichelns, 2004; Wichelns, 2005a;

Wichelns, 2005b). What virtual water trade achieves is not global water use efficiency, simply because land scarce-water abundant countries cannot afford to produce and export food. What it does achieve and could further achieve is integrated global land and water use efficiency.

Globally, there is enough water to meet the demands of mankind. Yet water is often at the wrong place at the wrong time, and the use and productivity of available water resources remains low. With population growth and economic development setting a strong ceiling on land use expansion and further exploitation of water resources, the key pathway to enhancing food security is to produce more crop per drop while minimising the negative environmental impacts associated with unsustainable land and water management practices. It has been estimated that improvements in water productivity alone can meet 70% of the future food needs (Molden et al.,

2010). However, achieving these gains in water productivity poses several challenges.

Global cropland, plantations and pastures have expanded in recent decades accompanied by large increases in fossil energy, water, and fertilizer consumption, imprinting considerable footprint on the environment (Khan and Hanjra, 2009). Should past dependences of the global environmental impacts of agriculture on human population and consumption continue,

19 another 109 hectares of natural ecosystems would be converted to agriculture by 2050 (Tilman, 1999; Tilman et al., 2001), introducing larger uncertainties for water demands and climate projections for irrigated agricultural regions (Bonfils and Lobell, 2007). Other projects such as agricultural production for carbon sequestration Long et al., 2006)and energy production (Mendelsohn et al., 2007b) including biofuel crops will also increase demand for water resources (Burnes et al., 2005). Thus these pressures are likely to amplify the environmental footprint of agricultural production on ecosystem productivity and services (Scanlon et al., 2007).

Some studies predict that the impacts of land use changes on water resources, specifically those associated with agricultural production may rival or exceed those of climate change (Barnett et al., 2005 IPCC, 2007).

Much will depend on how additional agricultural production takes place and what adaptation strategies could be adopted (Pannell et al., 2006; Parry et al., 1998). In any case the costs of adaptation to climate change are likely to be substantial (Kandlikar and Risbey, 2000) and have implications for distributional and social issues such as effects on poverty and equity, and preservation of land and water resources and the environment (Khan and

Hanjra, 2009).

1.1.1 Food security

Over the past three centuries, global crop and pasture land increased by four and five orders of magnitude respectively (Goldewijk and Ramankutty,

2004). Limits are being met on further expansion in the area as much of the land suitable for agricultural production has already been developed. Crop

20 intensification through high inputs of water, energy and macro nutrients has been articulated as the way forward, especially in land scarce regions, but this has profound implications for global water and energy cycles (Pimentel et al., 2004). For instance, in many of the world’s most important crop producing regions (Brazil, China, India, Iran, Pakistan, and Western

Europe) the historical sources of growth in agricultural productivity are being rapidly exhausted, yield growth are stagnating or decelerating, and a significant share of irrigated land is now jeopardized by scarce water resources, groundwater depletion, a fertility sapping build up of salts in the soil, or some combination of these factors (Khan et al., 2008e; Postel,

2000). Further intensification can have adverse impacts on land and water quality and thus worsen the environmental footprint (Khan and Hanjra,

2009).

Today rainfed agriculture accounts for about 80% of global cultivated area and produces 60% of world’s food, whereas irrigated agriculture which is more intensively managed produces 40% of world’s food from just 18% of global cropland (Rockstrom et al., 2007). Irrigated agriculture has significant impacts on water resources, for instance, it accounts for 67% of global freshwater withdrawals and 87% of consumptive water use (Döll and

Siebert, 2002). Irrigated agriculture has expanded by 480% during the past century and is projected to expand by 20% by 2030 (FAO, 2003).

Ecosystem needs and environmental flows requirements are unlikely to be met in large parts of the world (Smakhtin et al., 2004). A paradigm shift is needed to focus on the better manage green water in rainfed agriculture to boost food production (Rockström et al., 2010).

1.1.2 Water security

Rising water scarcity is partially a consequence of the increasing demand for food or “food factor” (Hanjra et al., 2009e). Feeding a growing and affluent population will increase food demand and further intensify the scramble for water (Molden et al., 2007). The calories produced per cubic meter of water range from 1,000-7,000 for corn and 1,260-3,360 for legumes such as fava beans compared to 500-2,000 for rice and 60-210 for beef (Molden et al., 2007); nutritional transition to more meat based diets will require far larger quantities of water to meet the same daily calorie requirements. Growing more food requires more water, as gains in yield, when yield is already beyond the 50% potential, come at a near proportionate increase in water depletion. More water depletion for extending the crop yield- or area-frontier may exact significant costs on the environment (Figure 1.1). The environmental impacts associated with increased water use for food production are often not taken in account partly because the links between crop production processes and the environment are poorly understood; agricultural water input often does not reflect the full opportunity cost of water use to the society and the environment (Khan and Hanjra, 2009); and policies and institutional infrastructure to protect the environment are weak or lacking and above all food security concerns dominate domestic political agenda such that negative externality issues rarely feed into the policy processes (Hanjra et al., 2009e).

Much of the gains in food production in the past came from high technology, and energy intensive food production systems with significant environmental footprints around the globe. Risk averse consumers and governments around the globe are calling for measures to halt these undesirable impacts and avoid the ills of the past in future investments.

Figure 1.1 Water competition in agriculture and other sector

The FAO (2007) data show that for the 90 developing countries, the water requirement ratio (irrigation water requirements in km3/total agricultural

23 water withdrawals in km3) was around 38% in 2000, varying from 25% in areas of abundant water resources (Latin America) to 40% in Near

East/North Africa and 44% in South Asia where water scarcity results in higher ratio FAO (2007). An additional nine countries used more than 20% of their water resources, a threshold that could be used to indicate impending water scarcity (Khan and Hanjra, 2009). Already by 2000, irrigation water use was several times larger than their annual renewable water resources for three countries; Libya (712%), Saudi Arabia (643%) and Yemen (154%). None of these countries is a major agricultural producer; all are quite arid. Libya relies largely on fossil groundwater withdrawn from the desert and transported a substantial distance to water users. These countries desalinize water to meet their water needs.

Groundwater mining also occurs at the local level in several other countries

(Giordano and Vilholth, 2007). Intra country variations are large; China, for instance, is facing severe water shortage in the north including the Yellow

River Basin while the south still has abundant water resources. Water rivalry poses huge challenges as water shortages rise and the scramble for water intensifies among contending uses for water. Intense water sharing issues could be in the making as transboundry water conflict spreads to lower level across India (Gujja et al., 2006), for instance.

1.1.3 Resource degradation

Unsustainable land and water management practices can compromise the capacity of the ecosystems to provide these services (Pimentel et al., 2004).

There are many examples of rivers in developing world where waterflow

24 have been altered significantly by water resources development such as dams and irrigation schemes and where the associated riverine floodplains and wetland systems have been degraded (Dudgeon, 2000). Intensification of agricultural production have already doubled the amount of nitrogen sequestered globally and tripled the phosphorous use (Fujimori and

Matsuoka, 2007). This has led to eutrophication of lakes and coastal catchments, damaging fisheries, reducing recreational values and increasing the occurrence of toxic algae blooms (Hendry et al., 2006). Other negative impacts on the ecosystem services include (Khan and Hanjra, 2009):

 Increase in continental water storage formerly flowing to deltas,

wetland and inland sinks and its impacts on greenhouse gases (Milly et

al., 2003)

 Loss of natural habitat on agriculturally usable land (Green et al.,

2005).

 Homogenization of regionally distinct environmental templates/

landscapes, due to excessive construction of dams (Poff et al., 2007),

thereby altering natural dynamics in ecologically important flows on

continental to global scale (Arthington et al., 2006).

Irrigation delivers major benefits in food security and human development.

Poorly managed irrigation can also have unintended environmental consequences and social disbenefits (Hussain and Hanjra, 2003; 2004).

About 1/3rd of global irrigated land have lower productivity due to poorly managed irrigation causing waterlogging and salinity. Annually about 10 million hectares (Mha) are lost to salinisation of which about 1.5Mha are irrigated lands (Khan and Hanjra, 2008). Estimates differ widely for various

25 irrigation systems. Cumulative global productivity loss due to land degradation over three decades has been estimated at 12% of total production from irrigated, rainfed and rangeland or about 0.4 percent per annum (World Bank, 2003: 85). National costs of dryland salinity in

Australia are estimated at $130 million per annum in lost agricultural production, $100 million per annum in infrastructure damage and $40 per annum in the loss of environmental assets (Hajkowicz and Young, 2002).

Data spanning 1971-93 from India and Pakistan Punjabs show that intensification of land and water resources caused resource degradation, slowing overall productivity growth (Murgai et al., 2001). For Pakistani

Punjab these data show that resource degradation has reduced over all productivity growth from technical change, education and infrastructure investments by 1/3rd. Estimates for the left bank main canal of Tungabhadra project in south west India show that land degradation alone accounted for about 15 percent of the system’s productive potential (Janmaat, 2004).

Many of the high-potential irrigated areas such as Punjabs in India and

Pakistan and parts of the Yellow River basin in China are now experiencing signs of stagnation in crop productivity growth, over-use of water resources, pest infestations, and buildup of toxic salts (Khan et al., 2006b;

Postel, 1999), threatening the livelihoods of millions (Khan and Hanjra,

2008).

The carrying capacity based irrigation management means mitigating negative water quantity and quality externalities (Khan and Hanjra, 2008), which may involve options such as optimal irrigation volume, timing and quality (Dinar and Zilberman, 1991); irrigation and drainage reduction

26 technologies (Dinar et al., 1992) and incentive policies (Hahn, 1989;

Wichelns, 2002); investments in water resource information (Dinar and

Xepapadeas, 1998); joint management of surface and groundwater aquifers

(Zeitouni and Dinar, 1997); integrating environmental and water policies

(Dinar and Howitt, 1997); and cross-sectoral approaches such as input pricing policies say energy pricing especially for groundwater overdraft management (Scott and Shah, 2004).

1.1.4 Climate change

Climate change challenges to future food security seem immense. There are two potential pathways in dealing with the climate change, i.e. mitigation and adaptation (Hanjra et al., 2009). Mitigation is about gases but adaptation is about water, therefore our focus in this study is on adaptation.

Water sector adaptations can address water scarcity and food security issues but the costs of adaptation are particularly high in the developing world

(Kandlikar and Risbey, 2000). Under population growth and climate change scenarios, irrigated land will be expected to produce most or about 70% of the additional food supplies, in turn placing increased pressure on existing water supplies (Döll and Siebert, 2002). Uncertainties as to how the climate will change and how irrigation systems will have to adapt to these changes pose complex issues that water policy and water institutions must address.

The major challenge is to identify short-term strategies to cope with long- term uncertainties regarding climate change and its impacts on food security (Hanjra et al., 2009).

The response to climate change (EPA, 2008) must:

. adapt implementation of core water programs to maintain and improve

program effectiveness in developed countries, and tailor such programs

in developing countries, in the context of changing climate

. use a river basin approach to adapt core water management programs to

climate change challenges

. strengthen the link between water programs, food security and climate

change research

. educate water program stakeholders on climate change impacts on water

and food security

. establish the management capacity in food insecure hotspots to address

climate change challenges on sustained basis (Hanjra et al., 2009).

Further, studies are needed to identify and quantify more clearly the potential impact of climate change on water resources, water productivity and poverty to help identify the current “adaptation deficit” in water resources management.

Getting consumers to eat more grains rather meat, go veg (Mancino et al.,

2008) and reducing energy intensive lifestyle offers the best hope to tackle climate change and food security issues. Government must provide incentives to mitigate greenhouse gas emission and promote more efficient use of energy and water resources as well as to reduce food wastage from farm to fork. Global level collective action framework and policies and investments are needed to adapt and mitigate the effects of climate change on agriculture and global food security (Hanjra et al., 2009).

1.1.5 Investments in irrigated agriculture

The expansion in irrigated agriculture brought tremendous benefits to billions of poor people (Narayanamoorthy and Hanjra, 2006). These include

(Hanjra et al., 2009b; 2009c; Namara et al., 2009) higher production and productivity; significant gains in food security and rural development; lower food prices for the rural and urban poor; better nutrition and health; better education; improved access to rural infrastructure; higher and more stable rural employment and reduced pressure on urban services; resettlement of population to high potential agricultural areas; moderation of socioeconomic inequality; and community cohesiveness (Hussain and

Hanjra, 2003; 2004). Macro level benefits include gains in agricultural and food exports and strategic regional/global interests (Khan, 2007). Irrigated agriculture also had substantial unintended social, economic, and environmental costs as discussed earlier.

New investments in irrigation infrastructure and improved water management can minimise the impact of water scarcity and partially meet water demand for food production (Falkenmark and Molden, 2008).

However, in many arid or semi-arid areas and seasonally in wetter areas, water is no longer abundant. The high economic and environmental costs of developing new water resources limit expansion in its supply (Rosegrant and Cai, 2000). Once assumed unlimited supply, now even in developed countries water is considered scarce. Further, it is believed that the climate change will increase water scarcity in the coming decades (Lobell et al.,

2008). Even new supplies might not be sufficient for maintaining existing or any increased food demand (Brown and Funk, 2008).

The severity of water crisis has prompted the United Nations (2007) in concluding that it is water scarcity not a lack of arable land that will be the major constraint to increased food production over the next few decades

(Hanjra et al., 2009). For instance, Australia is one of the major food producing and land abundant countries but recent drought reduced its agricultural and food production substantially (Goesch et al., 2007).

According to 2001 and 2006 land use data by the ABS (2008), in the

Murray-Darling Basin of Australia, there was about 40% decline in rice and cereals production (Hanjra et al., 2009). Drought in other food producing countries such as parts of USA and Europe is regarded as one of the major factors that contributed to global food price crisis of 2008 (Piesse and

Thirtle, 2009).

For the first time in last three decades, the World Bank’s World

Development Report (2008) has devoted to Agriculture for Development.

The report states, “the world of agriculture has changed radically. It is time to place agriculture afresh at the centre of development, taking account of the vastly different context of opportunities and challenges that has emerged”. This indicates that agriculture is firmly back on global development agenda (Hanjra et al., 2009). The challenge would be to reach to those poor households and smallholder farmers who were largely bypassed during the past Green Revolution and whose productivity largely did not rise. Future investments must target geographic areas and food

30 crops of the poorest to make such investments more pro-poor (Alene et al.,

2007).

International donor community and national governments must reengage in activities critical for global food security (Hanjra et al., 2009), including:

1. invest in global public agricultural research and development, with

emphasis on water for food security and poverty reduction.

2. disseminate new food production technologies to small farmers in

both irrigated and rainfed systems.

3. promote Global Water Stewardship and Food Sovereignty as an

alternative development paradigm encompassing water security,

food security, energy security and poverty alleviation through

national ownership and participatory approaches across the full

spectrum of water stakeholders (Hanjra et al., 2009).

Reinventing today’s irrigation for tomorrow’s need to feed another 4 billion people by 2050 remains a daunting task (Molden et al., 2007). Future agricultural investments must avoid ills of the past while focusing on

(Hanjra et al., 2009):

 more water storage including, large and small irrigation schemes,

modern water infrastructure, recycling and water conservation,

upgrading rainfed agriculture, payment to irrigators to use less

water, and better targeting of subsidies to reach the smallholders and

women farmers.

 better policy packages to take advantage of technical, financial,

institutional and organisational synergies between sectors such as

agriculture, irrigation, food, trade, energy, health, water supply and

sanitation, communication, and global cooperation.

 integrated service delivery for food production and trade such as

irrigation water, agrochemicals, microcredit, extension, harvesting,

processing, storage, transport, and price information etc.

 Better agricultural governance to adapt to the changes in water and

related sectors, brought by global change (Hanjra et al., 2009).

1.2 Context of this thesis

Investments in irrigation infrastructure to conserve water remain critical for food security and addressing climate change challenges. However, little integrated analysis has been conducted to test this hypothesis. Public financing of irrigation infrastructure has been the predominant model during the last four decades. Global irrigation sector is currently undergoing tremendous restructuring, involving the upgrade of old infrastructure and investments in new infrastructure, institutions, and policies. For instance,

National Water Security Plan in Australia proposed a 80:20 public private cost sharing for 50:50 sharing of saved water, involving $10 investment over 10 years in 10 point water security agenda including irrigation modernization. Northern Victorian Irrigation Renewal Project is investing

$1 billion to modernise the irrigation infrastructure (Government of

Australia, 2007) with 90:10 public-private investment. Spain has invested several billions recently in a similar program (Playán and Mateos, 2006).

Multi-billion investments are planned for irrigation infrastructure modernisation in the Indo-Gangetic Basin as well as the Indus Basin of

Pakistan (World Bank, 2006). There is a surge in interest in new models, particularly public private investment models, for financing irrigation modernisation but their pros and cons are unclear, especially in terms of impacts on economic efficiency, food security, equity, cost recovery and environmental quality.

1.3 Research questions

This thesis seeks to examine the role of investments in irrigation infrastructure modernization on agricultural income, regional income and water productivity along with potential to water save water. This is achieved through optimisation modeling at a catchment scale, using an integrated model that links hydrology, economics, institutions and policy elements to generate an optimal outcome in terms of gross and net income from cropping activities and the economic water productivity.

The main research questions addressed in this research is:

What is the role of capital investments in irrigation infrastructure

modernisation and what are the impacts on economic efficiency, equity,

cost recovery and environmental sustainability? What financing models

have been used for irrigation infrastructure development in the past and

what paradigm underpinned these models? What is the role of

institutional and policy measures for fostering public private

partnerships to finance future irrigation infrastructure investments?

1.4 Objectives

This study hypothesized that public-private investments can provide a rational basis for sharing the costs of irrigation infrastructure modernisation among farmers, private investors and governments.

The objectives of this research study are as follows:

. A comprehensive review of the literature on public private

partnerships in irrigation infrastructure at national and global level.

. Integration of hydrologic, agronomic, economic and biophysical

data to develop an integrated modelling framework to evaluate the

costs and benefits of investments in irrigation modernization.

. Evaluation of the impacts of public private investment models on

efficiency, equity, and the environment.

. The use of detailed modelling framework to tailor institutional and

policy measures for fostering public private investments in

irrigation.

1.5 Outline

In pursuit of the above objectives, the thesis work is structured as follows:

. Chapter 1 gives a comprehensive overview of the global water

and food security issues and the need for re-engagement in

irrigation investments under climate change.

. Chapter 2 provides a comprehensive review of the past modelling

efforts directed at the integration of hydrologic, agronomic,

economic, and institutional data to evaluate the costs and benefits

of investments in irrigation.

. Chapter 3 describes the structure of the HAEMAN model

(Hydrologic-Agronomic Economic Management Model) used to

assess the impacts of investments in irrigation modernisation.

. Chapter 4 presents the results from HAEMAN model in terms of

impacts of public private investments on economic efficiency, cost

recovery, equity and sustainability and the potential of these

investments to deliver any real water savings through irrigation

modernization.

. Chapter 5 presents the modelling results under Climate Change

scenario and Water Security scenario.

. Chapter 6 examines public private investments in irrigation and

related social sectors, with a global perspective to identify the

knowledge gaps in the financing models.

. Chapter 7 analyses the international investments in irrigation

sector, with a case study of the investments lending by the World

Bank and explores the linkages between these investments and

food security and poverty issues around the globe.

. Chapter 8 presents a short summary of the findings and the main

conclusions.

. Chapter 9 articulates the policy implications and directions for

future research.

CHAPTER TWO

2 Hydrologic-Economic Models in Water Economics – Review

2.1 Introduction

This chapter presents an exhaustive and critical review of the past modelling efforts on hydroogic-economic models with emphasis on the water sector in general and irrigated/agriculture sector in particular. The main goal is to review and identify the models that present the best efforts at linking hydrology, economics, institutions and policy aspects of water management. Linking these aspects of water management is a critical challenge for modellers since the integration of hydrologic models with economic models is problematic. Modelling outputs therefore rarely feed into the policy decisions on irrigation investments. Often the modelling platforms, protocols, languages and algorithms are not compatible with each other. Input based models are problematic in terms of time and other costs of manually linking the various models. Underlying data and data sharing issues present another layer of constraints, making these models less robust. This chapter also articulates a way forward to integrate hydrology, economics, institutions and policy aspects of modelling in water economics, to underpin irrigation investment decisions.

2.2 Conceptual framework

Investments in irrigation infrastructure modernisation and water policy reforms can generate benefits and costs for the agricultural sector or even

36 other sectors of the economy (Hanjra et al., 2009b; 2009c; Namara et al.,

2009). A conceptual approach for capturing the benefits and costs of these investments through water use must be multidimensional because water use covers a range of sectors and activities (Smajgl and Hajkowicz, 2005).

Water use generates both direct and indirect benefits and costs. Direct water use concerns activities such as crop irrigation or drinking. Indirect water use means that several activities that generate benefits need water. For example, crop irrigation generates employment, income and revenue.

Increased diversions for consumptive uses such as irrigation may take water away from environmental usages impacting their value and thus imposing a cost. For example, fishing and wildlife viewing require a certain quantity and quality of water. A change in water quantity or quality may have an effect on fish or wildlife species, lowering the benefits that agents can derive by participating in these activities. Prolonged over extraction of groundwater may lower the aquifer’s water table, impacting the value of groundwater to society. Water logging and salinization can aversely impact agricultural productivity, reducing aggregate returns to investments in other rural infrastructure and education and increasing the costs of maintenance and replacement to rural roads, for instance (Khan and Hanjra, 2008). The negative impacts from irrigated agriculture may be transmitted to the sectors outside agriculture, slowing economic growth in the economy as a whole. The slower growth can impose social costs on the society by slowing the pace of poverty reduction. To capture the direct and indirect benefits of water use one needs an integrated conceptual framework for linking hydrological, economic, social, and ecological components.

This integrated conceptual framework can be developed from an economic perspective using a partial or general equilibrium approach. For instance, under a general equilibrium approach the economic activities are modelled as a production process where each sectors requires inputs such as capital, labour, natural resources including land and water, and intermediate inputs to produce goods and services for consumption by the agents.

Representative agents supply inputs and on this basis receive an income which is spent on consumption. Production can be consumed domestically or exported; consumption can come from domestic goods or imports. The main idea is that economic systems attains an equilibrium where all markers are cleared, all prices cover full costs and all income is spent. The theory underlying the general equilibrium approach was developed by Arrow

(1959; 1958) and Deberu (1952; 1956). The above is a generic framework that can underpin water investment decisions. Many variants of this framework have been used in partial or general equilibrium models, as reviewed below.

2.3 Partial equilibrium models

Water is a complex social, cultural, political, ecological and economic good. Verbal, graphical, mathematical and computational models have been used to model the economic good nature of water. These models enable simplifications to avoid complexities of real life that are beyond the scope of modellers’ interest and focus specifically on aspects of interest. For the economic analysis of water investments mainly two types of models that can be used are partial and general equilibrium models. Both depend on the

38 assumption of equilibrium but differ by the level of equilibrium modelled, partial or full.

Partial equilibrium models focus specifically on the effects of water policy investments on a specific sector which is part of the whole economy, say irrigated agriculture, but ignore the linkages between that specific sector and the whole economy (energy, environment, services and the likes). For instance, effects of investments in modernising irrigation can be analysed using a partial equilibrium model at catchment or basin scale since they will have limited effect on the whole economy2.

Where basin water resources are a larger part of the economy in terms of value added and the expected effects of the investment is relatively large, a general equilibrium model may be more suitable to analyse the full impacts of investments across sectors of the whole economy and the welfare of populations within the country. In estimating the impacts of irrigation investments, CGE models suffer from the same limitations, such as definition of costs and benefits, as does standard cost benefit analysis. For large irrigation projects (e.g., Tarbella dam in Pakistan, Aswan high level dam, and Central Valley Project in California, and Linking of the Rivers

Project in India) CGE will allow estimates of those endogenously determined variables. It can also evaluate policy alternatives outside

2 Such models assume that the prices are fixed in other sectors. When the share of good under study (water) is a small share of consumer’s total budget, firstly the income effects will be minimal such that the sector studied can be assumed independent of the micro macro linkages that affect the whole economy, and secondly the interaction between prices of various goods can also be assumed to be minimal. Under these assumptions a market for a single good is independent from the rest of the economy (Marshall, 1920).

39 agriculture sector such as energy policy, and is also useful for estimating potential secondary benefits for other sectors of the economy.

Demand and supply of the commodity analysed (water) must be modelled in detail in partial equilibrium framework. Water demand is generally estimated by maximising the objective function, either the profit or surplus of producers, subject to a set of constraints. Farmers are consumers while irrigation service providers or authorities are suppliers. Alternatively a biophysical farm model can be used to estimate crop water demand at specific months. This needs more detailed data on irrigated areas, crops produced, yields, water requirements, temperature, rainfall, soil types and related biophysical parameters. In the case of substitution of water with other inputs this approach may be problematic, and may require an integrated economic-hydrologic model to analyse the role of other factors in crop input substitution, including the spatial connections among water resources and demands, hydro-agronomic conditions, and institutional settings for water use and demand (Cai et al., 2008). Results from Maipo

River basin in Chile show that irrigation districts with a high share of low- value crops have a low potential for substituting water with other crop inputs. Therefore investments for water substitution to conserve water in the face of water scarcity should also be kept low in these areas.

Water supply is more difficult to model due to uncertainty. Future water supply depends on unpredictable climatic conditions. Outputs from hydrological models or historical data on climatic conditions can be used to predict future water supply. For instance one study (Khan et al., 2005) used

40 the correlation between sea surface temperature and dam inflows to predict the water supply from Blowering and Brunjik dams in the MDB.

If water supply is not a binding constraint to production, water supply can be determined by maximizing the profits of water suppliers under given structural characteristics on water supply market (monopolistic, competitive etc), and institutional and financial setup underpinning irrigation investments. In most cases this assumption is unrealistic.

Generally water supply functions are calibrated to historical data, the water supply is made exogenous to the model, and external shocks are given to the model to analyse the effects of changes in water supply pricing.

The early modelling efforts focussed on the allocation of water resources among different industries. For example, a partial equilibrium approach was used to determine the optimal allocation of water between hydropower production and irrigation in the North Plate River (Tolley and Hastings,

1960). Vaux and Howitt (1984) are cited as the pioneer work on using partial equilibrium models to analyse the effects of regional water transfer.

They used a static non-linear model specification of water markets to examine their effects and potentials. Others then used partial equilibrium models that incorporated the institutional arrangements such as option contract with irrigation districts as an alternative option to investments in water infrastructure required to address cyclical water shortages (Fisher et al., 1995; Hamilton et al., 1989; Michelsen and Young, 1993); biophysical variables to examine water markets (Booker and Young, 1994; Dinar and

Letey, 1991; Weinberg et al., 1993); game theory framework to simulate international water market as an alternative to investments (Dinar and Wolf,

1994); performance assessment of different pricing mechanisms (Brill et al.,

1997); effects of different water price levels on crop pattern throughout the year (Ray, 2002); and incorporating the geographic extent of inter-district water markets, transaction costs, and the effect of asymmetric drought impacts affecting various irrigation districts (Garrido, 2000).

The latter model (Garrido, 2000) consists of three interconnected mathematical programming modules, a farm level model that maximizes farmer’s profit to determine the district level water demand; an intra-district water markets model which maximizes the aggregate surplus of the district to estimate the water supply within the regions, and an inter-district water markets model to analyse the potential exchanges between irrigation districts. This approach converts the problem into dynamic one in order to link to previous results (Fisher et al., 1995; Michelsen and Young, 1993) on one hand and to a farmer’s multiyear investment planning horizon on the other. This setting allows one to examine perpetual water trading rights, leasing contracts, and irrigator’s incentives to invest in more efficient irrigation technologies in the face of water trading options. When irrigators were assumed to have full information about prices and water availability, decisions were multi-periodic to illustrate investments along the planning horizon (Varela-Ortega et al., 1998). Results show that differences in water demand across three river basins were explained by structural flexibility in farming, and regional and institutional conditions. Thus, equivalent water charges would create widespread effects on water savings, farm income and

42 government revenue across regions and irrigation districts. Water markets provide irrigators an option by which to slow investments in the adoption of modern irrigation technologies (Carey and Zilberman, 2002).

Others (Rosenberg et al., 2008) also extend a single year water allocation model to include non-price water conservation efforts, leak reduction programs, and investments in infrastructure expansion with variable water availability in a stochastic two-stage model that identifies the net benefit maximizing program mix for Jordan.

Garrido (2000) applied their modelling framework to a set of four water districts in Guadalquivir River Basin (South of Spain). Four out of the five crops (cotton, corn, sunflower, wheat) comprising 80% of the region’s irrigated land are modelled. Results show that water markets would be highly dependent on the level of transaction costs and on the relative reduction in water allocations due to non-overlapping drought cycles among water districts. Water markets at the regional level would be more effective and efficient than those exclusively limited to the farmers in the same district and different structures of irrigation districts derive these efficiency gains.

Positive mathematical programming. A key caveat with linear programming models was their inability to calibrate the actual behaviour by adding risk terms or constraints. The alternative came from positive mathematical programming (Howitt, 1995) which uses the actual data on crops and livestock to estimate a quadratic cost function such that

43 competitive conditions of production are satisfied, and thus can calibrate the model without unrealistic constraints. It has become a standard calibration method recently, and there are several examples (Hall, 2001; He et al.,

2006) as discussed below.

Hall (2001) used PMP approach to develop a quadratic programming model of MDB, Australia, based on a linear programming model called Integrated

Murray-Murrumbidgee Modelling System of ABARE. Hall’s model is a spatial equilibrium model that uses partial equilibrium framework to link regional level models of water supply and demand, covering 20 regions or about half of the irrigated areas in Australia. The model was reformulated using PMP approach and then compared the results of linear model and quadratic model on three criteria: complexity; closeness to actual land use; and water trading and demand response for water at basin and region level, i.e., two models of the same system using the same input data are compared. Both models show superiorities in different situations. Quadratic model outperforms in simple cases as it involves smaller and simpler matrix; linear model performs better when a more detailed modelling is required (Greiner, 1998). The two models are broadly equivalent and neither can be said to be a superior model on every criteria. PMP is very suitable for rapid assessment of complex system but can not replace a detailed specification of a structural model if required for investment decision making.

Others (Marino et al., 2008) use an agriculture sector model called SWAP–

Statewide Agricultural Production Model– integrated with CALVIN, the

UC Davis Statewide Economic-Engineering Water Model. It models interlinked storage and conveyance infrastructure to generate estimates of groundwater water supply, environmental water needs, and agricultural and urban water demand, and is designed to highlight system operation based on economic criteria. The objective function of SWAP is each region’s total net returns subject to resources, production and policy constraints under various water supply regimes such as drought. SWAP extends previous modelling by incorporating more regions, allowing yield to vary as a quadratic production function, using market prices instead of calibrated

PMP costs, fixing regional output prices, and performing monthly analysis instead of annual one. The model can thus identify specific monthly water allocations and assess monthly willingness to pay be user based on shadow prices; and this data may be used to infer investment needs for a reliable water supply.

Other examples using PMP to calibrate partial equilibrium models are

Morocco (Diao et al., 2005) and Morocco and Egypt (He et al., 2006). Both models maximize consumer and producer surplus form agricultural based commodities under resource, technical, and policy constraints. Water supply is assumed constant over time. For Morocco (Egypt) the model covers 50 (25) crops and 7 (6) livestock products in 5 (8) regions. Results suggest that effective policy depends on social, economic and environmental context of given regions.

For Egypt where most farm land is irrigated, taxes on nitrogen fertilizer, energy and water intensive and low profit crop production are more

45 effective. Morocco has both irrigated and rainfed land; thus the taxation of crop inputs and outputs not only affects water use in the public irrigation sector but also private irrigation sector and rainfed agriculture as a whole.

Water pricing and output tax policies are better suited and effective than water complementary input taxation (e.g. energy), and there was an increase of welfare from the model results. For instance, energy tax policy is less effective in Morocco but works well in Egypt. Findings from Morocco might be generalized to characterize cost recovery and investment policies for other countries with similar irrigation characteristics and mix of public private irrigation and rainfed land.

Multi-model approaches. These approaches came into use during last eight years. Several examples of multi-models (De Fraiture, 2006; Medellin-

Azuara et al., 2007; Perret and Touchain, 2002; Roe et al., 2005; Sunding et al., 2002) are discussed below. The approach use partial equilibrium models as a module to capture economics of water, and seeks inputs from biophysical and hydrological models to incorporate heterogeneity among farms or risk and uncertainty. Sunding at al. (2002) use a multi-model approach that nests three empirical models in a general conceptual framework. The model is applied to the issue of water quality improvements in the San Francisco Bay/Delta (14 regions, 34 crops). The economic module called the California Agricultural Resource Model

(CARM), rests on partial equilibrium concept and estimates the economic impacts such as impacts of supply cuts on producer surplus, revenue, production, employment and irrigated acreage, and thus maximises the sum of producer and consumer surplus from Californian agricultural crop

46 production under water availability/policy change. Heterogeneity among farms is introduced by modelling farms of different sizes and risk and uncertainity by short- and long-term impacts. Prior appropriation and riparian water rights systems are modelled as barrier to water trade. Then an agro-economic model, which generates data on water productivity, is linked with a rationing model which estimates the immediate impacts (Sunding et al., 2002). Results show that the over all cost of improving water quality can be cut by allowing broad-scale water trading among farmers but this least-cost solution may face political or physical constraints. Investments in conveyance infrastructure could lower the costs of water quality regulations. Investments in more storage can further reduce the impact of supply cuts.

Another study (Perret and Touchain, 2002) also use a multi-model approach to assess the impacts of different options for irrigation pricing and distribution for the New Forest irrigation scheme in South Africa, by nesting five modules: cost, farmer, irrigation scheme, crop, and cost recovery module. Cost and crop models give output and hence water demand; scheme module uses different water availability options to give water supply. The five modules interact to give a set of microeconomic, socioeconomic and technical variables to assess hydraulic and economic performance. Results show the high costs of irrigation services compared to the low income derived from irrigated production in smallholder schemes and hence call for renewed public intervention and subsidy, especially in the context of irrigation modernisation, privatization, and liberalisation.

Yet another study (Rosegrant et al., 2000) developed an integrated model for the Maipo River Basin in Chile. This framework nested a hydrologic model, a water use model based on water response functions, and an economic model that includes municipal and industrial demand and benefits from energy generation. The model examines the impact of tradeable and non-tradable water rights on agricultural production and economic welfare.

Results show water transfers from agriculture into higher valued municipal and industrial use. Net profits in irrigated agriculture increase substantially.

Agricultural production does not decline significantly and net benefits for some irrigation districts can be even higher than the basin level optimisation case.

A multi-region multi-crop model on irrigation in Mexicali valley in Mexico

(Medellin-Azuara et al., 2007) using PMP and a less restrictive CES production function was used. Profit maximization for different groups of farmers gives water demand. Modelling different crops and farm groups addresses the heterogeneity. The model yields the ratios of shadow value of water to actual water fees ranging from 2.7 and 5.9 and low value crop producers and regions with poor quality land are likely sellers of water under water scarcity. The authors (Medellin-Azuara et al., 2007) also use

CALVIN to explore and integrate water demand management options such as water markets, reuse, desalinisation, while minimising the sum of economic costs of water scarcity and operating costs within a region. The model is applied to Ensenada region of Mexico to estimate agricultural and urban economic water demands to 2020. The optimisation results indicate that wastewater reclamation and reuse is the most economically promising

48 alternative option to management water demand to 2020 while seawater desalinisation and other options are not economically feasible alone.

An exceptionally rare study for a developing country (Rogers et al., 1993) developed an integrated water sector and macroeconomic model for

Bangladesh using 1985 data. The macroeconomic non-linear programming model was able to examine the linkages between the water sector investments and macroeconomic performance. The model optimizes the present value of investments for water resources development, while embedding a macroeconomic model into the framework to allow for an examination of the interactions between water investments, agricultural sector growth, and the performance of the whole economy. Results show a strong disincentive against producing an export crop if the food needs of a rapidly growing population were to be met. Strategic thinking (includes issues beyond the macroeconomic such as sustainability, environmental quality, and social and political goals) could lead to widely differing implications for water investments than conventional project-by-project or river basin models.

Others (Beare et al., 1998) have developed a model of the Murrumbidgee

Valley of the MDB in Australia. An integrated optimal control model linked supply (inflow model, storage management model) and irrigation water demand model that includes water trade, uncertain weather conditions and infrastructure constraints. Inflow data on two main dams namely

Blowering and Burrinjuck dam, evapotranspiration and seasonal maximum outflows were generated and fed into a farm level demand and production

49 module. The first objective was to screen the water pricing rules that give the highest farm income and revenue from water sales. Pricing rules that allowed prices to adjust based on seasonal weather delivered water at lower prices and gave higher objective value that fixed prices at the beginning of the irrigation season. Next, simulations were done that either changed objective or the constraint on infrastructure. Results imply that changing infrastructure constraints via public financing may results in transfers to growers to increase the value of their water use above the gross revenue that would be derived from the investment. The importance of taking economy- wide perspective when analysing the decision to invest in irrigation infrastructure is evident from the results: when an infrastructure investment results in a transfer of rent from the constraint to growers through lower water prices, then the private incentive for the farmers to pay for this infrastructure investment may be substantially higher than the gross revenue that would be derived from the investment; there is an apparent link between infrastructure investments and access rights to inflows in determining the benefits to future infrastructure investment or refurbishment; and effective trade and investments property rights to both inflows and infrastructure must be well defined. A similar integrated model was developed for network flow optimization for California (Draper et al.,

2003) and Vietnam (Malano et al., 1999).

A recent example of multi-models is the WATERSIM model developed by

IWMI under its program on Comprehensive Assessment of Water

Management in Agriculture (Molden et al., 2010). It models water supply and demand, food supply and demand and environmental issues at global

50 scale as well as at regional scale for Asia and Africa using a river basin perspective (De Fraiture, 2006). WATERSIM (Water, Agriculture,

Technology, Environment and Resources Simulation Model) adopts an integrated and multidisciplinary modelling approach to explore the impacts of water and food related policies on water scarcity, food production, and environment. The model consists of two broad integrated modules:

Agricultural/Food Demand and Supply Model (underlying PODIUM (De

Fraiture, 2006; De Fraiture et al., 2001); and Agro-HydroEconomic River

Basin Model (combines with elements from IMPACT-WATER (Rosegrant and Cai, 2002). Feedback mechanisms between water and food sectors are a key feature of the model. The model integrates different water management issues to estimate world water and food demand to 2050 and identifies strategies to meet that demand through scenario analysis focusing on: improvement in yield and water productivity on existing irrigated and rainfed areas; expanding irrigated area and upgrading rainfed agriculture, and some combination of the two; and global food trade, and then estimates investments needs for each scenario. Impacts of such investments on environment, food security and poverty are identified (De Fraiture et al.,

2007).

2.4 General equilibrium models3

Partial equilibrium models can not model the whole economy and are unable to inform investment and policy decisions with economy wide impacts. Classical economists were attracted towards a general equilibrium framework (Debreu, 1952) but were unable to provide it analytically.

Arrow’s work made the general equilibrium theory a standard theoretical framework for the analysis of whole economy (Arrow et al., 1959; Arrow and Hurwicz, 1958). First examples include: short term implementation of general equilibrium models, development of algorithms to facilitate applied work (Arrow 2005), applied general equilibrium models of economic growth in Nowray and ORANI model in Australia (Dixon, 1975), and computable general equilibrium models initiated by the World Bank since

1970 to analyse income distribution and economic growth in developing countries (De Maio, 1999) and regional CGE models (Partridge and

Rickman, 1998). Surveys of existing regional CGE models can be found in the literature (Kraybill, 1992; Partridge and Rickman, 1998).

3 Like the SAM multiplier model (Bhatia et al., 2007), a CGE model is a general equilibrium model of an economy. It uses the SAM as its database and represents the same transactions as the SAM model. But unlike the SAM, CGE model permits non-linear relationships between actors in the economy and adjust through changes in relative prices rather than quantity (Berck and Hoffmann, 2002; Rose, 1995) As a result, the CGE allows for substitution among inputs in production and goods in consumption. This permits a more realistic representation of the adjustment process and results in less extreme assessments of the impacts of investment and policy changes. However, this potentially more realistic representation of the relationships in the economy comes at the cost of significantly greater data and modelling requirements. Each relationship represented in the economy must be modelled. This is computationally expensive, and only recently has the availability of computing power allowed for the widespread use of CGE models. Use of non-linear relationships also means more decisions must be made about the functional form and choice of parameter values. In practice while these choices are sometimes based on estimated relationships, they more often draw on modeller’s judgement and a stylised understanding of the economy being modelled. This has been a major criticism of CGE models. CGE modelling can advance in accuracy over time through more extensive estimation of the parameter values needed to describe the economy.

Yet the parallel criticism of linear SAM models is that these same relationships are modelled under the arbitrary assumption that they are linear.

Water scarcity is an overarching issue and has the potential to impact the whole economy. This mindset led to the use of CGE models in water economics to help examine the impacts of water investments and policy options at economy level. One study (Seung et al., 2000) combined a county level dynamic CGE model with a recreational demand model to estimate the temporal effects (welfare gains) of reallocating water from agriculture to recreational use. The model is estimated for water transfers from the Churchill County to Stillwater National Wildlife Refuge wetlands

Nevada, USA to which water will be reallocated, and for all sectors of the regional economy over 6 years. Water is modelled as a scarce resource, and it is an input for both recreational and agricultural use. Water demand for recreation use is modelled as a utility function in household consumption basket. The study analyses the policy effects on both the agriculture sector and recreation-related sectors. Results show that water transfers out of agriculture to recreation areas would significantly reduce regional gross domestic product; and the increase in non-agricultural output does not offset the reduction in agricultural output due to water transfers. Likewise, the results from a basin-wide model of agricultural production in the Snake

River Basin, the Snake River Agricultural Model, present evidence that flow augmentation to facilitate movement by juvenile salmon to ocean have unequal effects on farms profitability across agricultural regions within the basin, and older water rights are used towards production of less valuable crops (Briand et al., 2008).

A CGE model of south-eastern Colorado economy was used (Goodman,

2000)to compare the economic impact of a proposed investment in new

53 infrastructure for the Arkansas River Basin to increase storage capacity as an alternative to temporary water transfers. Water is modelled as a storable production factor, and the demand for irrigation municipal water was exogenously forecast to 2040. A separate module supplies water availability levels for the CGE model. The model use four factor of production (land, labor, capital and water) and four sector (irrigated agriculture, rainfed agriculture, commerce and industry). Results show that temporary water transfers can provide municipalities with reliable water supplies at much lower economic and environmental costs than by simply investing in more storage capacity, and the transfers are shown to benefit both rural and urban communities.

In a similar vein, a 15 sector CGE model was used to examine the gains from voluntary water rights exchange from agriculture to urban sector for

Balearic Islands of Spain, characterized by cyclical droughts. The study specifically evaluates investments in water exchange vs. water works.

Results show that increased efficiency due to water market/exchange makes this option more advantageous than the popular alternative of investments in new desalinisation plants. Also a water market can have positive and significant impacts on the agricultural income (Gomez et al., 2004). The model is further refined to introduce the Water Framework Directive, to explore the impact of increasing irrigation efficiency and technical efficiency of water use in tourism sector (Tirado et al., 2006). Results show that efficiency measures alone may not be effective to reduce economic pressure on water ecosystems. Hence, a combination of water saving measures (10% savings) and a price increase (10%) are needed for

54 reduction in water withdrawals. This policy package may impact water conservation, real income and environmental quality outcomes. The water policy package will have a positive effect on labour, capital and land revenue, provided not much of the water is transferred to nature. However this analysis does not complement data on the costs of implementing efficiency measures to calculate the net costs of achieving improvements in water ecosystems.

Braind (2004) use a static CGE model for Senegal that allows for comparative analyses of water pricing schemes. The model defines five water sectors, with duality in formal-informal drinking water sector (public tap, own connection, carer) allowing substitution possibilities for households in choosing their water provider. The main aim is to determine the investment policy which makes water services affordable for all households and to analyse the effects on efficiency and equity/income distribution for three sets of consumers including Dakkar city, other urban areas and rural. It concentrates on drinking water production; its distribution, and agriculture sector. Drinking water is modelled as consumer good and primary water as a production factor for agriculture, both produced jointly by the government. The model thus introduces competition between irrigation and drinking water in a CGE framework (Velazquez

2007). Urban areas will likely gain but at the expense of agriculture sector.

Efficiency will improve but income distribution may not, particularly for smallholders and landless households dependent on agriculture for their livelihoods.

International trade in water can address regional water scarcity issues, and this has been modelled in CGE framework (Berrittella et al., 2007;

Berrittella et al., 2005; Berrittella et al., 2006; Kohn, 2003; Letsoalo et al.,

2007). One study analysed the impacts of North-South water transfer project on the economy of China and rest of the world. Results show that

China will benefit, but at the expense of international trade and global GDP

(Berrittella et al., 2006). Kohn (2003) used a Heckscher-Ohlin general equilibrium framework to analyse the impacts of international trade in freshwater among Middle East countries. Results show that water trade benefits both countries, and also promotes efficient allocation among competing uses within countries. Water trade is argued to foster investments including in land leases and bring much needed peace and stability to the region.

Another study (Berrittella et al., 2007) introduced a water module to a very large global trade model GTAP to analyse the effects of reduction in water availability on global trade. The model comprises 16 household types, 17 sectors and 16 regions and considers a market and non-market case solution. Results show that welfare losses are substantially larger in the non-market case–supply restrictions imply productivity losses; water taxes reduce water use and impact production, consumption and international trade; the tax affects other countries; and the impacts of water tax on production and final consumption are different; there are regional winners and losers from trade such that water constrained agricultural producers lose, constrained producers gain, industry gains as well. Given the current distortions in agricultural markets, international trade could improve

56 allocative efficiency and the welfare gains may more than offset the losses

(Berrittella et al., 2007).

Other examples of very large water CGE models come from Australia

(Dwyer et al., 2005; Peterson et al., 2005) and South Africa (Letsoalo et al.,

2007). Based on the structure of ORANI model, 48 sector and 20 regions are modelled to analyse the effects allowing both inter- and intraregional water trade among irrigators in the MDB. Such trade is shown to substantially reduce the impact of reducing water availability on regional gross domestic product (Peterson et al., 2005). Another CGE model (Dwyer et al., 2005) extends the trade to both irrigators and urban users, and shows that the trade can more than offset the losses from reduced water availability to irrigators. Urban sector benefits in a major way from cheaper water supplies. In a similar vein, others (Letsoalo et al., 2007) develop an

ORANI based CGE model for South Africa, using 65 sectors and 48 household categories. They apply a CGE model to analyse the triple dividends of water consumption charges: reduced water use, more rapid economic growth, and more equal income distribution. Results show that appropriate water charges, particularly on irrigated agriculture and coal mining, and reduced indirect taxes, specifically on food, would yield triple dividends, i.e., less water use (1st dividend), more growth, and less poverty

(2nd dividend due to increase in government revenue), and improved income distribution (3rd dividend) . It is not clear how the assumed appropriate

“budget natural water charges” can be designed in a society marked with poverty and inequality. This requires a more careful water policy design as consumption charges are typically regressive.

The distribution impacts of water utility regulation and privatization have been examined for Senegal using a CGE model. This study (Boccanfuso et al., 2005) uses an integrated CGE multi-household model, consisting of large number of households using household level data. Two water utilities that sell water to suppliers with an exogenously determined price are modelled to identify the winners of losers after water privatisation. Impacts of the privatization of water utilities on poverty and inequality are analysed.

Price changes are shown to have different general equilibrium effects which in turn determine the winners and losers. The simulated price increases for the water utility sector have marginal effects on government revenue and positive and pro-poor effects on most groups but negative effects on other agents. This shows that water investments/reforms may be positive at macroeconomic level, a batter understanding of the impacts on specific social groups and compensating the losers can be a key element to its success.

Inventing and implementing social mechanisms for optimal allocation of irrigation water to more productive uses remains a challenge due to poor property rights and relatively high fixed costs of dams and canals and the negative externality that groundwater extraction imposes on the others.

Decentralized water allocation, for instance through water markets can have diverse impacts within sectors of an economy. One study developed a detailed intertemporal CGE model for 82 agricultural production activities and 49 final products in 20 regions of Morocco to analyse the economy wide gains obtainable from the allocation of surface irrigation water to its

58 most productive use. Decentralized water trading is shown to significantly increase agricultural output by around 8.3%, and have economy wide effects that entail a decline in the cost of living, an increase in aggregate consumption, and expansion in international trade. The model is then extended to include both ground and surface water resources. Groundwater is modelled as an input to agricultural production, along with urban water demand. They study effects of, an increase in groundwater extraction costs due to prolonged extraction that lowers the aquifer’s water table; a transfer of surface water from rural irrigation to urban use; and a reduction in water availability due to drought. Results show that groundwater is important in reducing the severity of these types of economic and climatic shocks.

The sequencing and packaging of water investments and reforms poses complex challenges to water policy design and has been the subject of CGE modelling. For instance, one study (Roe et al., 2005) combined both micro and macro policy interventions for improving irrigation water allocation decsions in a unified CGE model of Morocco. The model allows for analysing both top-drown macro-to-micro links such as trade reforms and bottom-up micro-to-macro links such as water management assignments and water trading. A farm level model estimated the monthly irrigation allocations for crops; prices are exogenous. The linked CGE model accounts for the whole economy; prices are determined endogenously.

International trade is differentiated between EU and rest of the world.

Results show that productivity is strongly influenced by these policies but trade reform has a higher effect compared to water reforms. Thus the general equilibrium (indirect) effects sometimes reverse the partial

59 equilibrium (direct) effects and the sequence of reforms matter. Reforming trade policy alone can make farmers worse off. Creating a water market post trade reform not only compensates farmers’ profits but also raises efficiency of water allocation and the benefits to the economy as a whole.

The model also shows how such reform might be sequenced to allow for the losers in the reform process to be partially compensated and thereby made more willing to engage in the reforms (Diao and Roe, 2003).

Both water quantity and quality issues are critically linked to water investments and policy decision making. Quality aspects of water are complex and therefore rarely captured in water CGE models, with some notable exception (Finnoff and Caplan, 2004; Smajgl, 2005). One study

(Smajgl and Hajkowicz, 2005) develops a model to examine water use benefits, both market based and non-market based, using an integrated multidisciplinary focus within a CGE framework. The model is applied using different scenarios for the Great Barrier Reef Region in Australia.

The model integrates a hydrological component, an ecological component, and economic component that links the above components, and finally the links from all three components to a measure of benefit from single elements and the net benefit. The model thus makes explicit the quantification of trade offs between economic sectors, catchment values and agent-based land and water use decisions. Herein demand side emanates from an agent based model based on preferences from a non- market based utility function that generates costs and revenue for each decision set to determine the final economic payoff. The model integrates market values and non market values in CGE modelling with multi-attribute

60 utility theory to integrate socioeconomic, ecological and hydrological aspects of water use (Smajgl et al., 2006). Another study (Finnoff and

Caplan, 2004) for the first time introduces a bio economic model based on

CGE approach to analyse the effects of both stochastic changes in salinity levels and initial salinity stock to population levels of species on the economic and ecological activities. Salinity levels and biomass output are determined by water while the agents in the model are energy maximisers.

The integration of environmental issues such as land degradation into CGE models has been “ad hoc and has often involved abandoning some of the most important properties of the CGE models (Coxhead and Warr, 1991).

Most models simply aggregated such costs as decreased land productivity and simply subtracted these from GDP to estimate the “green GDP”. Such models do not allow for feedback effects between land degradation, its costs, land productivity and socioeconomic implications. Some notable exceptions are the model of soil degradation and its implications for economic development for Nicaragua (Alfsen et al., 1996) Ghana (Alfsen et al., 1997) and Brazil (Cattaneo, 2001). This integrated economy-soil productivity model estimated the drag on Ghana economy due to soil erosion and soil fertility mining, through dynamic modelling (Alfsen et al.,

1997). No agent optimization over time was used; it was assumed that small farmers were excluded from intertemporal decisions making due to poverty and were unable to sell inherited stock of assets and tend to hold these assets in liquid unproductive forms. A tropical soil productivity module was linked with the standard regional CGE model, to account for the feedback effects of output and fertilizer use decisions made in prior periods on

61 soil/agricultural productivity. Production levels and soil fertility determined the demand for productive agricultural land, which accounted for deforestation pressure. Another feedback into the economy resulted from the linkages between fertiliser use, short run increase in productivity and long run reductions in soil erosion. Effects of different policies aimed at a reduction in land degradation were estimated with and without the feedback from the soil model. The economic development cost of soil degradation was a 5% reduction in real GDP after 8 years or the loss of almost one year’s economic growth. Agricultural subsidy substantially increases the use of agricultural land, at the expense of forest, and a slight decrease in

GDP. Direct subsidy on fertilizer increases fertilizer usage, reduces land use preserving forest but also causes a large decrease in real GDP due to decline in investments: subsidies are financed by lowering public savings and hence investments, and hence economic growth. If fertilizer subsidy can be financed through tax on agricultural output, there will be substitution from land to fertilizer use but growth will not be inhibited rather accelerate to almost 15% above the base case scenario. Thus, well chosen policy instruments offer scope for simultaneous economic growth and environmental improvements with win-win outcomes.

Another model also considers both direct impacts of macroeconomic policy on natural resource base and physical processes of natural resource transformation and its effects on resource quality as a factor of economic production in Brazil (Cattaneo, 2001). This multi-sector multi-region model can be used to identify and develop win-win equitable and sustainable natural resource management policies.

2.5 Investment linkages to poverty and inequality

This section focuses on how general equilibrium models fit into the big picture of rural poverty alleviation in the context of agricultural development as well as achieving the Millennium Development Goals. It is argued that while economic growth is pro-poor, agricultural growth is more pro-poor and can therefore reduce poverty faster than comparable growth in urban or services sectors (Hanjra et al., 2009a,b).

Partial equilibrium evaluates the effects of irrigation investments to a specific sector such as irrigated agriculture or rural region, where as general equilibrium analysis includes other sectors or regions. Direct effects of irrigation investments generally correspond to partial equilibrium effects, holding prices constant. Indirect effects are due to general equilibrium effects, which may dominate direct effects. The overall effect of water policy investments is the sum of direct and indirect effects. The distribution of direct, indirect and total effects among various socioeconomic and political groups determines the impacts of investments on poverty and inequality.

Due to interactions among sectors within an economy, the micro to macro/and vice versa or upstream/downstream linkages between irrigation investments and policy interventions are likely to be significant. For example, farm level irrigation management and investment policies may impact agricultural output and growth with stimulus transmitted to non-

63 farm sectors. Input pricing policies such as energy and water, and trade policies and macroeconomic management may impact agricultural performance and productivity of individual regions or farm, with differential implications for equity and poverty across human and spatial scales. Global trade and economic socks such as credit crisis and energy crisis, for instance during 2008, may also impact returns to irrigation investments and farmer’s welfare.

Irrigation investments can contribute to poverty reduction through upstream linkages via the micro-, meso, and macro-pathways. These linkages are well-established through a review of 120 empirical papers mainly from

Asia (Hussain and Hanjra, 2003; 2004) and 130 studies with emphasis on sub-Saharan Africa (Hanjra et al., 2009d). Irrigation investments can contribute to poverty reduction due to higher agricultural productivity and production, increased food supplies, lower food prices, higher wage incomes, higher income and consumption, better nutrition and health, better education, income diversification, lower variability and risk, and higher demand for no-farm goods and services within a beyond the irrigation command areas all with favourable impacts on equity and poverty. A full discussion of these pathways is omitted here for brevity. Overall, irrigation investments result in agricultural growth and thus contribute to economic growth, which is pro-poor or universally poverty reducing (Dollar and

Kraay, 2002). The discussion below focuses mainly on insights from general equilibrium studies.

One study used an applied general equilibrium model to show that irrigation investments are important necessary conditions for maintaining high growth rates in the Indian agriculture sector. Such investments would have reduced the relative agricultural prices by 1.5% per annum, yet not eliminate poverty even with a 4% growth rate in agriculture for 10 years. Higher wages and food-for-works program are a preferable option to address poverty. Policy reforms that impact returns to public investments often benefit those areas with more developed transport infrastructure (Poulton,

1998) and better access to health and education services (Datt and

Ravallion, 1998). Where these conditions are lacking the impacts of public investments on poverty reduction may be lower.

For instance, in South Africa the high costs of irrigation development compared to low benefits derived from irrigation in smallholder agricultural systems justify public investments in irrigation modernisation (Perret and

Touchain, 2002); and water charges to save water can deliver the “triple dividend” of simultaneous economic growth, poverty reduction and environmental protection. Impacts of water ulitility privatisation on poverty and inequality are shown to positive and pro-poor on most groups in a CGE model of Senegal (Boccanfuso et al., 2005). Likewise, one study shows that investments for doubling the irrigated area in Ethiopia might make attainable the target of halving poverty by 2015 under the Millennium

Development Goals. However such investments are more pro-poor when combined with education and other priorities in rural infrastructure investments (Hanjra et al., 2009d). Trade reforms can create winners and losers. For instance, results of a CGE model for Morocco show that

65 reforming trade policy alone can make farmers worse off; while packaging and sequencing a water market after trade reform can partially compensate to lessen the adverse impacts on welfare (Diao and Roe, 2003).

General equilibrium model are quite capable of indicating the big picture of a sector or an economy under given investment policy, institutional and hydrological and environmental regime but may not provide micro level insights into the pathways that are key to poverty reduction. For instance, gains in food production and per capita calorie supply have not been evenly distributed (Davis et al., 2001). Studies show that supporting outflows out of poverty is as important as avoiding slippage into poverty (Krishna,

2007). While the over all growth rates may indicate good economic progress and indicate a reduction in poverty some social groups may be left behind or even become worse off as there is often considerable churning of the poor who are located deep below the poverty line (Ravallion, 2001).

Broader investments may benefit the average citizen not poorest of the poor. Such households may not be touched by growth in average incomes.

Targeted investments in irrigation and other policy measures may be needed to address their innate disadvantages such as poor health and education to help raise the returns in poverty reduction to their entitlements of land, water and labour resources.

Given the significance of integrated modelling, a number of models have been developed in the Murrumbidgee Catchment of the MBD in the field of water allocation and planning. These models have been assessed to determine their suitability for this study (Table 2.1).

Table 1.1 Overview of models developed in Murrumbidgee Catchment for water allocation and planning

Authors Approach Objective Limitations

Hyde et al., Multi criteria To optimise water -Time scale is too (2003) decision allocation, by short to capture the analysis, plus analysis of weights seasonal and time multi coefficients used in trend in water objective the decision allocations optimisation analysis -Models the economic and environmental factors as constraints to the system rather than their interdependencies Singh et al., Simulation To examine the - Farm scale model, (2005) model, impacts of water mainly for rice mainly for trading at different - Not irrigation area or rice water allocations on catchment scale crop rotations model Khan et al., Simulation To simulate - The model uses (2004) model possible regional scale but not management the whole catchment scenarios for -Economic factors and surface and ground seasonal irrigation water interactions in demand are not MIA captured -Feedback links are not captured in the model Graham, Systems To determine -Economic factors are (2004; dynamics alternative not modelled 2009) simulation management -Crops and irrigation scenarios for system variable are wetlands not represented Yu et al., Linear To determine water -The model treats the (2003) programming, trading and irrigation area as one WARM reallocation in the node model Murrumbidgee -Water allocation is catchment treated as given Khan and SWAGMAN To optimise -Farm scale model Hanjra, Farm model, agricultural -Policy and (2008) optimisation production under institutional factors in GAMS alternative land and are not modelled environment water management -Focus is on salinity options at the farm management level Data source: Updated from Elmadhi (2008).

It must be noted that, none of the above models is suitable for the analysis of PPP investments in irrigation modernisation, because they have different model objectives, temporal and spatial scale and none of the models presents an integrated framework for linking biophysical, hydrologic, economic, and institutional and policy factors that underpin PPP investments in irrigation modernisation. The HAEMAN model offers several improvements over the previous models, as discussed and shown in the next chapters.

2.6 Conclusion and knowledge gaps

The main conclusions from this chapter can be drawn as below:

. General equilibrium models are quite capable of indicating the big

picture of a sector or an economy under given investment policy,

institutional and hydrological and environmental regime but may not

provide micro level insights into the investment pathways and they

are also effort intensive.

. Partial equilibrium models can provide finer details for the sector

under study and can better capture micro level details that have

greater relevance for sectoral and local policy decisions on

investments and resource management for improving efficiency and

sustainability.

. Integrated hydrologic, economic, institutional and policy models in

unified modelling framework are rare though recently some new

models have been developed and used mainly in the USA. Such

models for Australia are almost none.

Thus, there is a need to develop and calibrate hydrologic-economic models in water economics that link hydrologic, economic, and institutional and policy dimensions of water management in a single, unified framework. As noted earlier, hydrologic-economic models in water economics can be divided into general or partial equilibrium models, as a bases for using

HAEMAN as an integrated modelling framework and calibration of the model in the MBD catchment. The HAEMAN is an integrated hydrologic- agronomic and economic management model cast in a partial equilibrium environment. It integrated catchment level hydrologic model that defines the water balance and water allocation, with agronomic, economic, policy and institutional module, all set at the catchment scale or regional economy.

Thus, it focuses on irrigated agriculture sector in a regional context in

Australia; other sectors such as construction, transport, local business etc are not calibrated either. The main advantages of the partial equilibrium approach, as noted earlier in this chapter, are that it enables the modelling of finer details at regional and irrigation area level; it avoids broad generalisations and assumptions that are the core basis of general equilibrium models and also their main limitations.

CHAPTER THREE

3 HAEMAN Model Development

3.1 Introduction

This chapter describes the structure of the HAEMAN Model (Hydrologic-

Agronomic Economic Management Model) developed and calibrated for the Murrumbidgee River catchment in Australia. The catchment is located in the southern Murray Darling Basin. The Murray Darling Basin covers most of inland south-eastern Australia (Map 3.1). It includes much of the country’s farmland and a population of over 2 million people (MDBA,

2009). Located in south-east Australia, the Murray-Darling Basin covers

1,061,469 km2, equivalent to 14% of the country’s total area.

Map 3.1 The Murray Darling Basin, showing the Murrumbidgee Catchment (DEWHA, 2009).

As shown in Table 3.1 the Basin extends over three quarters of New South

Wales more than half of Victoria, significant portions of Queensland and

South Australia, and includes the whole of Australian Capital Territory.

Table 3.1 State shares in the Murray Darling Basin

State Total Area in Percentage Percentage area of Basin of of the area States (km2) States in of the Basin (km2) Basin New South Wales 802,081 599,873 74.8% 56.6% Victoria 229,049 130,474 60.0% 12.3% Queensland 1,776,620 260,011 14.6% 24.5% South Australia 984,395 68,744 7.0% 6.5% Australian Capital 2,367 2,367 100% 0.2% Territory Totals 3,7945,12 1,061,469 28% 100.0% Data source: MDBA (2009).

The Murrumbidgee River is the most regulated river in the whole Basin, with a catchment area of 84,000 km2 and length of 1,600 km2 from its source in the Snowy Mountains to its junction with the Murray River. The

River has two head water dams that regulate its flow: the Burrinjuck Dam and Blowering Dam. The total catchment area above the Burrinjuck Dam is

13,000 km2 and its storage capacity is 1.026 million ML. Below the

Burrinjuck Dam, the river flows initially through a narrow reach and then a widening Valley near the town of Gundagai. The Tumut River joins the

Murrumbidgee River upstream of the Gundagai. The Tumut River has a small catchment area of 4,000 km2. Table 3.2 gives further statistics on the two dams. The Murrumbidgee River has a very steep slope upstream of

Gundagai to its confluence with the Tumut River. Blowering Dam is the major storage on the Tumut River, storing both natural river flows and water released from the Snowy-Tumut section of the Snowy-Mountains

Hydroelectric Scheme. The capacity of the Blowering dam is 1.632 million

ML.

Table 3.2 Key statistics on Burrinjuck Dam and Blowering Dam in the Murrumbidgee Catchment Item Burrinjuck Dam – Blowering Dam – Murrumbidgee River Tumut River Year Built 1928 (enlarged 1957) 1968 Storage Capacity 1,026,000 megalitres 1,628,000 megalitres Catchment Area 12,953 sq kilometres 1,606 sq kilometres Water Depth 72 metres 101 metres Type of Dam Concrete gravity Rock fill with clay core Surface Area 5,500 hectares 4,460 hectares Height 93 metres 112 metres Length of Crest 233 metres (158 metres 747 metres between sector gates) Spillway 3 sector gates plus 2 Spillway: Concrete side chute channel spillways Spillway Capacity: 2,506,000 203,000 megalitres/day megalitres/day Data source: State Water (2009), online database at: http://www.statewater.com.au/Water+Delivery/Dams, accessed June, 2009.

Downstream of Gundagai, the Murrumbidgee River flows through flat alluvial plains towards its junction with the Lachlan and Murray Rivers. In certain reaches of the rivers, the conveyance capacity is limited e.g., the

Tumut River and Gundagai Choke. Under average flow conditions this results in flows away from the main river through streams such as Yanco

Creek downstream of the town of Narrandera. Yanco Creek flows south- west for about 180 km to its junction with Billabong Creek, a tributary of the Murray River.

The river section between Burrinjuck Dam and Wagga Wagga has the following unregulated tributaries which flow into the Murrumbidgee River:

Jugiong Creek (catchment area: 2200 km2), Muttama Creek (catchment area: 1200 km2), Adelong Creek (catchment area: 520 km2), Billabong

Creek (catchment area: 1200 km2), Hillas Creek (catchment area: 520 km2),

Tarcutta Creek (catchment area: 2000 km2), and Kyeamba Creek

(catchment area: 700 km2). These tributaries are the main source of gain within this river reach between the dams and Wagga Wagga (Pratt Water,

2004).

3.2 Location of the study area

This research focussed on the main irrigation areas located in the

Murrumbidgee Catchment, namely Murrumbidgee Irrigation Area (2009) and Coleambally Irrigation Area (CIA). Further details on the irrigation water nodes are given later (Pratt Water, 2004). Both MIA and CIA are served by the Murrumbidgee River, particularly the middle three reaches:

Wagga Wagga-Narrandera; Narrandera-Darlington Point; and Darlington

Point-to Hay. These reaches support the off-take main canals known as the

Murrumbidgee Main Canal, Sturt Canal and Colemabally Canal. MIA and its irrigation districts are located on the north side of the River and CIA is located on the southern side of the Murrumbidgee River. These irrigation districts with various hydrological and agronomic attributes were modelled in this thesis. Various elements of the HAEMAN model link these hydrological components with agricultural, economic and institutional elements, as explained below.

3.3 Conceptual framework

This thesis conducted interdisciplinary research crossing social and natural sciences. Public-private investment were analysed through integrated

73 hydrologic, agronomic, economic and biophysical knowledge. The research work developed a practicable HAEMAN model which involved socioeconomic issues including equity, efficiency, cost recovery, and environmental sustainability. This contribution improved previous models a lot practically on supporting policy options affecting the use of water resources in the catchment for multiple uses, and for engaging multiple stakeholders in policy dialogue.

The conceptual framework envisaged that, infrastructure modernization and water sharing plans and policies can improve water availability and reduce vulnerability to events such as droughts, floods and fires and thereby enhance water security. Not all water security issues can be solved with infrastructure modernization alone; all problems cannot be addressed through better water management either. Packaging and sequencing water infrastructure and management interventions together must become the corner stone to address the issues. Joint attention should be paid to linking environmental security, water security and food security by analysing water-dependent and water-impacting activities and ecosystems for developing reconciliation between water interests, land use interests, and ecosystem interests thereby building a compromise between these activities

(Falkenmark, 2001; Molden et al., 2007). Water resources should be developed and managed in such a manner that they stimulate and underpin economic growth, for the achievement of broad goals (the three E’s), given in the Euro-water definition of sustainability (Barraque, 2003) (Figure 3.1):

. Economy–to adopt an efficient economic policy, and implement full

cost recovery and polluter-pays.

. Environment–to rehabilitate, protect and enhance the quality of the

aquatic environment.

. Equity–to make policies more transparent, and develop public

information and participation to enhance social equity.

Economy: Economic efficiency, full cost

Investments: Water infrastructure Water management

Equity: Environment: Surface Public participation, social and groundwater quality

Figure 3.1 Broader goals underpinning water investments in the HAEMAN model

3.4 HAEMAN model structure

The HAEMAN model is a comprehensive framework for holistic catchment scale analysis of water policy issues. The model builds on the previous modelling efforts in North America (Gürlük and Ward, 2009; Ward, 2009;

Ward and Michelsen, 2002; Ward and Pulido-Velazquez, 2008; Ward and

Pulido-Velázquez, 2008), South America (Cai et al., 2003; Maneta et al.,

2009), Turkey (Gürlük and Ward, 2009), Africa (Ahrends et al., 2008) as well as Australia (Table 2.1). It integrates various hydrological, agricultural, economic, environmental, policy and institutional elements for decision making on investments for irrigation modernisation (Figure 3.2). The key

75 elements of the model are given below (Table 3.3). It is a simple yet comprehensive prototype expandable model that requires minimal detailed documentation. Water managers and policy analysts can use this model and apply the results of the model for decision making on irrigation modernisation. Yet, despite its simple framework considerable details on hydrology, economics, institutions, and policies can be added to the model.

Public Private Investment Framework under HAEMAN Model

Economic Model Find inputs in Xith that maximise net revenue under resource constraints

Agriculture Economics Irrigation technology Institutions Investment policy Environment

Calculate available water, water use, Use optimised land, groundwater and water depletion, returns, groundwater surface water to provide the hydrologic for each node, both agricultural and module with the new area of crops, water non-agricultural applied for each crop, and total water diversion, and water balance for each node

Run the hydrologic model with desired climatic conditions

Hydrologic Module

Figure 3.2 The HAEMAN model structure Image credit: 3-D hydrologic model, CRC IF (2007).

Table 3.3 Elements of the HAEMAN Model

Element Variables Approach used Hydrology Initial staring volumes Hydrological water balance at Inflows into the system the catchment scale through Outflows and net release from Dams modeling nodes on water Evaporation (based on surface area) inflows, outflows, diversion, Diversion application, use, and returns Application down to the two major irrigation Consumptive use areas that account for about Seepage/returns 70% of the water use in the Net seepage Murrumbidgee Catchment. Groundwater pumping Surface return flows directly to the river Net seepage to groundwater Gains in aquifer volumes Agriculture All agricultural uses Major agricultural crops in the Municipal and industrial uses modelled irrigation areas, with Crops grown crops and irrigation technology Crop water applied, use, seepage, details returns Crop yields Crop prices Crop input costs Water production relations Water allocation by agricultural nodes Cropped area

Irrigation Flood irrigation Investment cost of irrigation technology Modern irrigation system (MIS) with each technology Allowable technology combinations Allowable crop combination Area restrictions on certain crops Investment Flood irrigation – no subsidy Planning horizon for technology policy Modern irrigation – Public-Private and annual historical and investment with government subsidy forecast volumes are for the period 2006-2025. Economics Annual forecast of population growth Population of major cities in the Environmental and recreation benefits catchment including Wagga Energy plus capital costs of pumping Wagga and Griffith city is modelled as municipal use, where as industrial uses are small but modelled as a lump sum Institutions Wet river rules The Murrumbidgee River Environmental flow requirements Management Committee has Water Cap on diversions designed a set of rules for water Interstate water sharing rules sharing among users to protect Biodiversity conservation Act the river health, whilst providing some level of security to irrigators.

Water resources in the Murrumbidgee Catchment are allocated according to a hierarchical structure; water is first allocated to environmental provisions, then basic rights requirements, licensed domestic and stock requirements,

77 local water utility requirements, any water carried forward in water accounts, and then high security allocation for perennial crops and finally general security allocation to irrigators for all other field crops. These data are shown below (Table 3.4). The holders of high security licence for irrigation are guaranteed 100% with a minimum of 95% of their licence while the holders of general security receive a percentage based on annual available volumes in the river systems after all other provisions have been met. Further details on water allocation to irrigation in individual districts are given in the next chapter. The HAEMAN model estimates an optimisation function subject to various hydrological, biophysical, economic and institutional constraints.

Table 3.4 Water entitlements in the Murrumbidgee catchment Category Volume (ML) Basic landholder rights 4560 Native title rights 0 Local water utility access licences 23,403 Domestic and stock access licences 35,572 High security 278,252 General security 2,416,432 Data source: Pratt Water (2004).

3.4.1 Objective function

The objective function of the HAEMAN model is to optimize the net benefits, defined as discounted net present value (NPV) for the planning horizon or time (t) at discount rate (r), expressed in its standard algebraic form using the following notation (Gürlük and Ward, 2009; Ward and

Pulido-Velazquez, 2008):

NBuut NBeut NPV   [ t  t ] u t (1 ru ) (1 re )

That is, the net present value (NPV) of water use related benefits (NBu) and benefits from water environment (NBe) are summed together. Water use related net benefits (NBu) are given by the following simple equation, involving the subtraction of use related benefits (Bu) from use related costs

(CBu):

  NBuut Buut CBuut

Environment related costs and benefits are defined as (1) the opportunity cost equal to environmental benefits lost by a policy choice and (2) environmental operational costs equal to the cost incurred to protect the water resources for greater environmental benefit (per capita expenditure on public parks and forests in this case).

With sufficient water supplies from snow, rainfall and groundwater, the model maximises use related net benefits at each use node as well as the sum over all use nodes/catchment. For irrigated agriculture, the benefits are measured for each irrigation district as net revenue/income (Y) from farm activities:

Y uct  [( PucYielduc  Costuc )H uct ]

th th th Net farm benefits (Yuct) at the u irrigation district for the c crop at t period per hectare equal the crop price (Shah et al.), crop yield (Yield), minus total cost of production (Cost) multiplied by the number of hectares under irrigation (Elmahdi et al.). For irrigated agriculture the discounted net present value, at a given discount rate (r) is expressed after taking account

79 of the alternative costs for various crops and alternative investments in irrigation technologies:

Y uct NPVagri    t u c t (1 ru )

3.4.1.1 Model equations

Expressed in standard algebraic form, the model equations are defined by using the following notation (Gürlük and Ward, 2009; Ward and Pulido-

Velazquez, 2008) for hydrology, economics, and environment etc.

Hydrology

The basic principal of hydrologic model is the mass balance, for surface flows, reservoir, and groundwater interactions. It defines headwater run off

(Xht), stream flows for all nodes (Xvt), water diverted (Xdt), water applied

(Xat), water use/consumed (Xut), gross surface returns to river (Xrt), reservoir evaporation (Xet), and reservoir storage (Zrt):

X all   X ht   X vt   X dt   X at   X ut   X rt   X et  Zrt h v d a u r e r

Economics

Water use related benefits are defined by the following total benefits function:

2   B X  B X XBuut B0u 1 ut 2u ut

Where Bou, B1u, and B2u are parameters for the constant, linear, and quadratic terms for the use benefits of water at each node (u).

Environment

Environment related benefits of water for each reservoir are defined as:

2    XBert B0e B1Z et Beu Zet

Discounted Net Present Value (NPV)

Discounted NPV is the sum of benefits from water use and water environment summed together:

XNBuut XNBeut XNPV   [ t  t ] u t (1 ru ) (1 re )

For irrigated agriculture (A), NPV is expressed by accounting for alternative crops and irrigation technologies (flood or MIS) using the earlier notation:

Y uct XNPVA   [ t u c t (1 ru )

3.4.2 Model constraints

This model uses a simple hydrological constraint defined by a known volume of runoff from the various inflow points in the Murrumbidgee

Catchment. For base case model, historical past water allocations are used.

For future analysis, such as climate change analysis and water security

81 analysis, future water forecasts and allocation are used. Given that such data are less robust, historical water allocation trends could be used on how irrigation modernisation could improve economic efficiency, cost recovery, and potential environmental impacts. The hydrological constraints are implemented using historical data on dam inflows, outflows, evaporation, ground water pumping, aquifer levels, net recharge and water use by agricultural and municipal uses. All application nodes use node, seepage nodes, and returns nodes are the same for all agricultural and municipal uses. The method used to estimate the economic values of irrigated agriculture is to develop and estimate representative farm budgets for the five irrigation districts to identify costs and returns from various crops.

Based on the parameters, equations and variables in the model, water related total and marginal benefit functions are derived and specified for the basin model. Water use benefit functions are quadratic functions of water diverted, such that the marginal functions are linear and downward sloping.

For those benefit functions the optimal solution determines what combinations of crops and water use for each node maximise the over total productivity and economic benefits subject to the constraints on water withdrawals at the catchment scale. These constraints include: reservoir starting levels, reservoir sustainability constraints (Table 3.2); hydrologic balance or water entitlements (Table 4.3); and surface and ground water abstraction rules; irrigable land in each of the irrigation area modelled; institutional constraints, defined by water allocation and the MDB Cap on allowable extractions; and population growth rate in the catchment, set at no more than 3% per annum. Water allocation and irrigated area constraints are specified in details in the Chapter 4 (Table 4.3).

3.4.3 Model solution

A water balance check is executed for each node, during every model run, then optimal areas and crop choices are determined to generate the range of indicators of economic efficiency, equity and sustainability. The indicators include gross margin, net gross margin, and economic productivity of water. The model interaction occurs explicitly in a linked scheme, so the modules are run sequentially and the feedback information updated after each model run. The economic model provides the boundary conditions to the hydrologic model, which in turn provides the water constraints to the economic model as shown previously (Figure 3.1). The model runs until an optimal solution is found iteratively. The intertemporal optimization problem is solved for the period 2006-2025. The discount rate used is 7% per annum. The MIS is modelled as drip irrigation in most crops that gives higher crop yield and reduces water application. For rice crop, it is assumed that the equivalent of MIS is the modern irrigation system involving alternative wetting and drying that also gives higher crop yield and reduces water application (Mushtaq et al., 2008). This is advisable since rice is normally grown under ponded conditions and its cultivation under drip irrigation may not give optimal yield.

Various model runs are generated for base case model run with zero government subsidies (for flood irrigation) to full (100%) subsidy for modern irrigation, with equal increments of 10%. Water security and climate change scenarios are also estimated, as discussed later.

3.4.4 Data collection and data sources

The data on hydrological and economic parameters was used for calibrating and validating the model. This data was obtained from previous CSIRO studies in the area (Khan et al., 2008e). Annual Reports and License

Compliance Reports of MIA (2009) and (CICL, 2009) and other secondary sources. The meteorological data was obtained from the Bureau of

Meteorology, Australia (www.bom.gov.au/silo/). The data on seasonal irrigation allocations, deliveries, application and leakage was collected from the documents and reports of irrigation service providers (Cicl, 2009; Mia,

2009). Such data is scarce, and the knowledge of applied groundwater hydrology is a major gap in science. The historical data on agricultural commodity prices was collected from various publications by the Australian

Bureau of Statistics and the Australian Bureau of Agricultural and Resource

Economics.

3.4.5 Model algorithm

The entire model is coded in GAMS. No software used with MODFLOW can handle hydrologic, legal, agronomic, and economic complexities modelled here. The model has been written in General Algebraic Modeling

System (GAMS) (Brooke et al., 2004) and utilizes Mixed Integer Non-

Linear Programming solvers such as Discrete and Continuous Optimser

(DICOPT) to find optimum solution for given climatic, irrigation and hydrogeological conditions. The convergence and appropriateness of optimisation routines is checked using sensitivity analysis techniques. The

84 objective function is solved using an integer programming solver, GAMS-

OSL and DICOPT, subject to the constraints (Brooke et al., 2004). As noted earlier, a non-linear programming structure is used rather than the mostly used linear programming approach because of the complexity involved in water production functions for agricultural activities.

The mathematical solution to the Mixed Integer Non Linear Problem

(MINLP) is found using the DICOPT (DIscrete and Continuous OPTimser) solver under a GAMS environment. DICOPT starts solving the MINLP using the MINOS NLP solver (Brooke et al., 2004). If the solution to this problem results in an optimal solution, the search stops. Otherwise the search is continued with an alternating sequence of NLP till the optimal solution is found (Brooke et al., 2004).

3.4.6 Model calibration

The hydro-economic model is developed, calibrated and validated for all the major irrigation districts in the Murrumbidgee Catchment, including five major irrigation districts located within the Murrumbidgee Irrigation

Area and Coleambally Irrigation Area. The model finds the optimal solution for water management to maximise the total agricultural production subject to land and water management constraints that are typical of the relevant irrigation districts. The parameters on investment policy, water security, and climate change are then interactively scaled to find the optimal outcome for each state of nature. The model outputs are written to an external spreadsheet without human interference.

3.4.7 Scenarios modelled

The model considers a base case optimisation scenario that serves as a counterfactual to assess and compare the impacts of various investment policies against the alternative scenarios of low to high investment. For

Water Security, four scenarios are estimated. Water security consider full water security versus various states of nature such as 75% water security,

50% water security and finally below 25% water security. Also for Climate

Change, four scenarios are estimated to 2030. These scenarios apply yield penalty to various crops in different periods and compare the performance in terms of the indicators by considering the base case scenario (no yield penalty) versus the alternative scenarios of moderate climate change and severe climate change (Figure 3.3). Further details on these scenarios are given in the relevant chapters. The HAEMAN model shows how catchment/basin scale optimisation models can be build and illustrate its use to inform policy choices in the wake of future water security and climate change issues.

3.5 Scope of the study

The HAEMAN model can be scaled-up to the whole Murray Darling Basin or calibrated in any other basin with similar water security and governance issues. However, it must be noted that watery catchment is a complex system such that an applied range has to be strictly defined for the

HAEMAN model; the model is calibrated for the Murrumbidgee Catchment in the southern Murray Darling Basin.

This thesis also examined the global public private investments (Chapter 6 and 7). The review of hydrologic economic models and the HAEMAN modelling results (Chapter 2-5) showed that public private investments in irrigation modernisation can deliver positive sum-solutions by enhancing food production, food security and environmental sustainability and are an effective policy response to climate change challenges (such as water security and food security). These findings apply to the modelled catchment and might apply to the entire MDB (due to the intense water shortages that recent drought have caused and the need to use the available water more efficiently). However, the up-scaling of these findings to other river basins and irrigation systems with similar water scarcity issues and governance arrangements might be challenging; how to use these findings to develop and design the most appropriate framework for public private investments for irrigation modernisation around the globe is particularly challenging. To establish this link (Chapter 2-5), past models of public private investments from a global perspective are examined (Chapter 6); types of irrigation systems around the world are analysed to identify and define various components and function within each irrigation system where the public private investment model may be applicable. For instance, where irrigation systems are publicly owned and operated, and dominated by low value cereal production – important for food security, a higher level of public subsidy would be required to foster public private partnerships even in the few operational components of the irrigation system that could be outsourced. Public private partnerships in irrigation are rare because of heavy investment needs, political economy of water pricing, low cost recovery and high risks – both financial and political, and this is also true

87 for the case study catchment modelled in the HAEMAN model. The international analysis of public private investments (Chapter 7) extends that link further. Global investments lending was examined over the past 50 years with a focus on key social sectors, including agriculture and irrigation sector, which remain important to eradicate hunger and extreme poverty worldwide. The international analysis shows that the motive behind past investments in irrigation were not purely altruistic and went well beyond to encompass the economic and political derivers such as rural development, food security, environmental sustainability, poverty reduction, and equity and social inclusion. Furthermore, the realisation of the benefits from public private investments on a sustained basis required the coordinated functioning of the key elements such as hydrological and physical infrastructure for water management, institutional infrastructure to protect and safeguard the water rights of all parties including the environment, and policy infrastructure to guide national water vision and provide incentives for public private investments. These elements are explicitly modelled in the HAEMAN model, and are examined in greater detail in Chapter 6-7.

The analyses presented in Chapter 6 and 7 also indicates the size of the future investment market globally, although the future may not be like the past. Nevertheless, the countries with historically high investments in irrigation over the past 50 years would likely be the countries with high investments in the future as: (1) irrigated agriculture is significant and important to food security in those countries; (2) irrigation system modernisation, rehabilitation, and upgrade needs are likely to be higher in the future as the system deteriorates or malfunctions or even to address the climate change and water scarcity challenges; and (3) institutional and

88 policy infrastructure is more likely to be in place for a pubic private investment model, given their past experience in receiving the foreign investment lending as well as in-country capacity to engage with international and regional investment partners. Therefore, the packaging and sequencing of water sector reforms, water institutions, water policy, water economics, and climate change becomes inevitable, which is also the core framework of the HAEAMN model.

However, to link these two efforts, future work may keep the focus on modelling framework (HAEMAN) and the area of the study (MDB), for instance, by making use of the findings on the global and public private investments (Chapter 6 and 7) to develop and design the most appropriate models of public private investments at the MBD level as a whole.

Public Private Investment Framework

CLIMATE CHANGE SCENARIOS

WATER SECURITY SCENARIOS

Level of water security 100% 75% 50% 25% Indicators Cost of Production Gross Return Net Return Water Productivity Economic return Return on Capital Investment

Figure 3.3 Climate change and water security scenarios modelled

3.6 Summary

This study builds on previous modelling efforts to develop comprehensive decision support systems for informing water policy. An integrated hydrologic-agronomic and economic model called HAEMAN was developed in a unified modelling environment in GAMS. This allows the integration of hydrologic, agricultural, economic, and institutional and policy elements in a single model. Accepted economic theory and water production relations were used to develop the model. Economic efficient water planning at the catchment or basin scale can be found by estimating maximum net discounted value of benefits of water use summed over time periods for “with” and “without” public private investment policy choices for irrigation modernisation, and under alternative climate change and water security scenarios. These results can help inform policy decisions through improved investment planning and incorporating climate change adaptations into the decision making process.

CHAPTER FOUR

4 Investments in Irrigation Modernisation

4.1 Introduction

This Chapter presents empirical findings from the modelling framework, to highlight the economic efficiency, cost recovery and sustainability aspects of investments in modern irrigation systems (MIS). The model is calibrated for the whole Murrumbidgee Catchment of the Murray Darling Basin, modelling all five major irrigation districts in the catchment. The impacts of investments on aggregate agricultural productivity and economic returns are presented for all the irrigation areas modelled, with emphasis on

Coleambally Irrigation Area (CIA) to help better interpret the results. This emphasis is also justified in view of the data and time constraints encountered by this study. The modelling results can inform optimal land and water management decisions under water scarcity constraints that prevail in most irrigation districts in Australia, and many other countries around the globe.

4.2 About the study area

This study was conducted in the Coleambally Irrigated Area (CIA) and

Murrumbidgee Irrigation Ara (MIA, 2009) of Australia (Map 4.1 and Map

4.2). The Coleambally Irrigation Area (CIA) is located in the Riverina district of southern New South Wales. The area is situated between the

Murrumbidgee River to the north and Yanco Creek to the south.

Establishment of an irrigation area began in the late 1950s in order to use

91 water diverted westward from the Snowy Mountains Scheme. (Proust,

2003). The CIA covers about 79,000 hectares of intensively irrigated area out of 121,000 ha. The water supply network and delivery infrastructure is managed by the Coleambally Irrigation Cooperative Ltd (CICL, 2009).

Water supplies are regulated, provided either by irrigation companies through a channel network or can be pumped by the farmers directly from the rivers or creeks. Water rights are defined by an existing water supply contract between the Cooperative and State Water and between individual irrigators and the cooperative. The CIA is unique in the southern Murray

Darling Basin in that it nearly uses all its water mainly on annual crops though some farmers are now beginning to plant perennial plantations such as citrus, grapes, almonds, pecans and other stone fruits (CICL, 2009).

Furthermore, the CIA is relatively distant from rivers with relatively little salt export downstream through either surface or sub-surface flows compared to most irrigated areas. September to February are the irrigation months and March to August are the non-irrigation months (Khan et al.,

2008e). Rice remains the major crop, and is normally grown in ponded water conditions. Often leguminous pastures or dryland crops are grown in rotation with rice to help improve soil fertility and limit pesticide use. The drainage water from rice fields is recycled to maximize the utility of irrigation water and minimize off-farm impacts. Due to limited water available for irrigation, area caps for rice on each farm are applied, depending upon the ability of the soil to pond water without excessive recharge to groundwater or environmental effects to other lands.

Map 4.1 Location of the Coleambally Irrigation Area (Cicl, 2009)

Map 4.2 Location of the Murrumbidgee Irrigation Area and its districts (source: MIL, 2009)

Recently, under the National Water Security and Water Smart Australia

Program, automated remote control sluice gates have been installed in almost all main canals and delivery network in CIA (CICL, 2009). While these modern irrigation systems will be installed at farmer outlet level in due course. In terms of water management and irrigation infrastructure modernisation, CIA is often regarded as the best practice in irrigation management and achieves efficiency of about 92%, which is one of the highest in open channel irrigation systems in the world. Thus high-tech sets new international benchmarks in irrigation management (Smith, 2008).

Nevertheless, flood irrigation is the most common method in CIA. Further irrigation modernization through water efficient modern irrigation systems

(MIS) such as drip irrigation, sprinkler irrigation, and centre pivots offer substantial potential for investments and efficiency improvements at farm level. Water courses are kept full during the whole irrigation season to minimize water losses; however options for alternative irrigation water supplies (Smith and Maheshwari, 2002) offer substantial potential for improving the wealth and wellbeing of the rural community.

In the CIA, the total average rainfall in the area varies between 400–450 mm/year, and the area can generally be described as a semi-arid environment. Total rainfall for 2006/07 was 239.5 mm or 40% less than the long term average of 396.4 mm (CICL, 2009). The total evapotranspiration

(of 2182 mm) is 341mm or 18.5 percent higher for 2006/07 than the long term average of 1841 mm (Figure 4.1). Almost every month of the year, the

95 monthly evapotranspiration exceeded the long term average rainfall (Khan et al., 2008e).

Figure 4.1. Monthly evaporation figures, as measured at CIA for the year 2007/08 (source: CICL, 2009).

Rice is the main crop grown in the region. Irrigation water is also used for other field crops such as barley, oats, canola, soybeans, maize, sunflowers, lucerne, grapes, prunes and pastures for sheep and cattle (Figure 4.2). Much of the wheat is normally grown under rainfed conditions during the winter season. Farms differ in basic resource characteristics such as size of landholding, various soil types, depth to watertable (i.e., current impact of salinity and waterlogging), property size, soil type, and the crops grown.

Majority of the farmers report a significant change in their cropping patterns during the recent years (Figure 4.3) as confirmed by the respondents in the CIA.

6% 0% 1%1% 4%

29%

Wheat Pasture 6% Barley Canola Oats Tritical Corn/Maiz 7% Vegetables Lucern Rice Others

22% 19%

Figure 4.2 Proportions of total deliveries for crops in CIA for 2007/08 (Data source: CICL, 2009).

Figure 4.3 Land uses for respondents reporting a change in enterprise mix, 2007/08 (Source: CICL, 2009).

Irrigation water is diverted to the area from the Murrumbidgee River through a 41 km main canal and 477 km of supply channels. Coleambally

Irrigation has a bulk license of 629 GL. Drier than average conditions and competition from other users has seen a reduction in water allocations in recent years. Groundwater and surface water are conjunctively managed in the area. The CIA has around 86 groundwater licenses and two large communal bores which pump water directly into the main canal system.

The groundwater use during 2005/06 was 67,743ML (CICL, 2009). Surface irrigation is the most common form of irrigation, accounting for 97.8% of irrigation methods (CICL, 2009). Surface irrigation remains common because generally lower value broad acre crops are produced in the area, as pressurised systems are generally associated with high value perennial crops.

The study also modelled the Murrumbidgee Irrigation Area (Mia) located in the south-eastern Murray Darling Basin. The Murrumbidgee River has a catchment area of around 84,000 km2 and a length of 1,600 km from its source in the Snowy Mountains to its confluence with the Murray River.

The main irrigation areas in the Murrumbidgee catchment are the MIA and

CIA. The MIA covers about 362,400 hectares, of which some 180,000 ha are intensively irrigated. The MIA consists of five irrigation districts:

Yanco, Mirrool, Benerembah, Tabbita, and Wah Wah. The topography is a flat open plain at an elevation of 100–135m above sea level. Water for the

MIA is diverted from the Murrumbidgee River at Berembed Weir into the

Main Canal and further downstream at Gogeldrie Weir to the Sturt Canal.

Drainage water from irrigation farms flows through Mirrool Creek (natural drainage channel) to Barren Box Swamp and then flows into the irrigation districts of Benerembah, Tabbita and Wah Wah. The Wah Wah district is the last in the MIA system and is thus entirely dependent on return flows from upstream irrigation districts. Table 4.1 gives a summary of the main climatic features of the (MIA, 2009)

Table 4.1 Summary of climatic data for MIA

Month ETo 2007-08 Rainfall (ETo-Rainfall) LTA Eto LTA Rainfall (mm) 2007-08 Net Eto (1962-2007) (1962-2007) (mm) (mm) (mm) (mm) July 50.9 29.8 21.1 49.7 34.2 August 115 6.4 108.6 77.3 September 174.6 2.2 172.4 116.3 36.7 October 239.7 13.6 226.1 175 41.3 November 235 79.8 155.2 227 29.9 December 285.6 84.2 201.4 274.9 30.1 January 315.1 51.6 263.5 282.4 33.2 February 230.4 18.2 212.2 230.9 28.2 March 223.7 8.4 215.3 192.7 32.9 April 131.6 24.2 107.4 115.6 30.9 May 72.5 9 63.5 66.8 36.9 June 53.3 34 19.3 44.3 35.3 Total 2127.4 361.4 1766 1852.9 405.4 Data source: MIA (2009). Notes: LTA = Long term average (1962-2007), weather data and LTA Rainfall from CSIRO ETo = reference evapotranspiration, calculated from CSIRO weather data.

Large farmers grow rice, corn, wheat, vegetables, and pastures for prime lamb, wool and beef cattle. The size of their farms ranges from 200-320 hectares. Horticulturists grow wine grapes, oranges, lemons, peaches, apricots, grapefruit, cherries, prunes and plums. Their average farm size is

16-20 hectares. The MIA has experienced significant transformation in its farming business and the cropping pattern has changed significantly over

99 recent years. Irrigation modernisation was an essential feature of this transformation. All type of farms have their own network of on-farm earthen channels to which water is delivered and metered from the company’s supply channels, for various crop (Table 4.2) (MIA, 2009).

Flood irrigation is used for broad acre crops and rice production; horticultural crops are grown under modern irrigation systems such as drip irrigation or other pressurised systems. In 1998 ABARE reported that surface irrigation accounted for approximately 91% of the total irrigation area in the Murrumbidgee Valley (Figure 4.4). In the last few years there has been some adoption of MIS. While there are no recent data available on the extent of the rate of this adoption, it is assumed that the majority of irrigation systems are still flood or furrow systems and irrigation modernization offers a potential pathway to enhancing water use efficiency and economic returns.

Fixed overhead, Drip/sub-surface, 0.30% Travelling irrigator, 1.70% 1% Moveable spray, 5.80%

Surface, 91.20%

Figure 4.4. Percentage of irrigation area used by irrigation systems in the Murrumbidgee Valley (ABARE, 1998)

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Table 4.2 Historical deliveries to major crops in MIA

Year Rice Pasture Cereal and Oil Seeds Cereal/Oil Total Rice % of Total Pasture % of Total Total Seeds % (ML) Total (ML) (ML) of Total 2007/08 1,006 0.5 8,217 4.3 39,537 20.7 2006/07 41,296 10.8 23,419 6.1 149,441 39.1 2005/06 355,254 45.4 65,878 8.4 181,641 23.2 2004/05 101,494 16.7 77,364 12.8 247,267 40.8 2003/04 221,732 34.6 63,960 10.0 182,940 28.6 2002/03 251,424 34.0 64,093 8.8 237,612 32.5 2001/02 469,513 52.0 85,556 9.5 184,253 20.4 2000/01 479,757 56.0 112,668 13.1 108,690 12.7 1999/00 394,224 61.2 54,159 8.4 68,366 10.6 1998/99 477,563 58.1 101,791 12.4 65,231 7.9 1997/98 489,363 50.1 179,246 18.3 126,247 12.9 1996/97 519,053 51.0 187,441 18.4 143,746 14.1 1995/96 446,917 51.4 185,931 21.4 87,725 10.1 Year Vegetables Citrus + Vines+Other Fruits Other Crops + Plantations Total Vegetable % of Total Citrus/Vines/Other Total Other % (ML) Total (ML) % of Total (ML) of Total 2007/08 9,190 4.8 123,510 64.8 9,273 4.9 2006/07 15,577 4.1 138,234 36.2 13,834 3.6 2005/06 27,588 3.5 142,025 18.2 9,481 1.2 2004/05 22,736 3.7 150,601 24.8 7,078 1.2 2003/04 16,504 2.6 132,866 20.7 22,519 3.5 2002/03 14,970 2.0 138,929 19.0 24,983 3.4 2001/02 17,989 2.0 122,884 13.6 23,403 2.6 2000/01 18,794 2.2 98,285 11.5 39,262 4.6 1999/00 12,013 1.9 75,108 11.7 40,060 6.2 1998/99 24,967 3.0 105,522 12.8 47,504 5.8 1997/98 19,714 2.0 115,200 11.8 47,176 4.8 1996/97 23,464 2.3 104,561 10.3 40,461 4.0 1995/96 32,348 3.7 87,983 10.1 28,905 3.3 Data source: MIA (2009).

The Gogeldrie Weir, located some 50 km downstream of Brembed Weir was completed in 1959 to allow the diversion of extra water to the MIA and its irrigation districts (site visit, June 2009) and later to the CIA. Sturt Canal leading north from the Gogeldrie Weir was constructed to supply water to parts of the Mirrool Irrigation Area, Benerembah Irrigation Area and the

Colemabally Canal leading south. The diversion and application nodes have been appropriately modelled to capture the hydrological linkages in

101

Murrumbidgee River System and its irrigation and drainage districts, as discussed in the previous chapter. Table 4.3 gives the main irrigation districts modelled in this study.

Table 4.3 Main irrigation districts modelled in this study

Irrigation area Location Farming area Water use/licence Colembally Can be divided About 9,000 629 GL Irrigation Area into 5-zones based hectares (CIA) on their soil suitability and groundwater quality but modelled into one diversion node. Murrumbidgee Irrigation Area (MIA, 2009)

Divided into Yanco Yanco 53,650ha 583.7 GL water four diversion Mirrool Mirrool ha; licence nodes. 50,725 ha; Benrembah/Tabita Benrembah and 225 GL water Tabita, 42,827 licence ha; 120 GL water Wah Wah Wah Wah deliveries 28,016 ha Data source: State Water (2009).

Both MIA and CIA are served by the Murrumbidgee River, particularly the middle three reaches: Wagga Wagga-Narrandera; Narrandera-Darlington

Point; and Darlington Point-to Hay. These reaches support the off-take main canals known as the Murrumbidgee Main Canal, Sturt Canal and

Colemabally Canal. MIA and its irrigation districts are located on the north side of the River and CIA is located on the southern side of the

Murrumbidgee River. These irrigation districts with various hydrological

102 and agronomic attributes were modelled in this study. The results are presented below.

4.3 Model calibration

The hydrologic-agronomic economic model called HAEMAN was developed for the all the irrigation areas in the Murrumbidgee catchment.

The model was calibrated and validated for five major irrigation districts in the Catchment, which together account for 70% of the irrigation supplies in the Murrumbidgee River. The results are reported for these areas with detailed emphasis on the Coleambally Irrigation Area. The indicators used to compare the performance across investment policy option include the per hectare cost of production, gross revenue, net revenue, economic productivity of water and the potential to save water (or at least reduce diversion to allow more in-stream water flows – modelled as the benefits from water environment in Chapter 3) and the associated cost of policies and program to modernise irrigation. The policy options include capital investments in irrigation modernisation with various levels of public private partnerships that ranges from full (100%) subsidy by the government to full investment by the farmers (0% subsidy, modelled as flood irrigation not subsidised by the government). Current government proposal under the

National Water Security Plan envisages a 80:20 public-private investment for 50:50 sharing of the any water saved as a result of the investment.

Therefore, the discussion on modelling results gives emphasis to this policy proposal.

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4.4 Modelling results

The calibration of model predicted outcomes should be done against long term data and a number of years observed data. The biophysical and economic data used in the model come from different sources at different scales and are rarely reported on the same format and frequency on time- series basis. This caveat limits the possibility to conduct a full inter- temporal calibration of the model against the recorded data. Data on annual water use was available as bulk value for MIA and CIA irrigation districts for several years while spatially explicit data on cropping patters and water use for each irrigation district was available only for limited years (2000-

2006).

Model predicted land use was compared against the land use in the irrigation areas for the year 2006. The results show reasonable correspondence with total irrigated area for all the five districts. The differences are attributable to several factors including the differences in water delivery, assumption on irrigation efficiency, conveyance losses and evaporation loss. In particular the data on groundwater surface water interaction and hydrology across the whole catchment as well as modelled irrigation areas are rare. To address this issue, water allocations were calibrated to predict actual irrigated areas during the year 2006.

The results show that model predicted optimal irrigated area match reasonably well with the actual irrigated areas (Figure 4.5). Thus reasonably accurate estimate of irrigated areas could be produced through the model.

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Moreover the model is able to pick the crops that are fairly representative of each irrigation area, as discussed later.

70 Actual area Optimal area 60

Area (1000 ha) 30

0 Yanco Mirrol Colli B/Tabita Wah Wah

Figure 4.5. Model predicted area versus actual irrigated area for various irrigation districts

It must be noted that while the actual irrigated areas match closely with model predicted areas, the differences in the case of Wah Wah are slightly more than other districts. As noted earlier this irrigation district recycles the return flows from up-stream irrigation districts, such that the difficulties in modelling the hydrological connections might derive this large variation.

However, this is an expected outcome and model predicted value fall within reasonable accuracy band for catchment scale models.

4.4.1 Investment costs

Reduce availability of irrigation water in the wake of continued drought, and prospectus of long term climate change and a range of environmental

105 issues related to water management in agriculture have intensified the pressure on irrigation industry to use water more efficiently and productively through irrigation infrastructure modernisation and optimal crop choices. While there is substantial scope to improve the efficiency of commonly used flood irrigation method, irrigators are also looking at alternative methods such as drip and centre pivot systems jointly termed as modern irrigation system (MIS) in this thesis.

The MIS entails capital costs that could range anywhere between $2,500 to

$10,000 per hectare, and depending on the system. The modeled cost was

$6,000 per ha discounted at an interest rate of 7% per annum. The annuity payment or annualized up front cost of installing MIS is $350.106 per hectare. The subsidy affects the cost of production for the irrigators. For various levels of subsidy payments, the input production cost per hectare accounting for subsidy payment as predicted by the model is shown in

Table 4.4. It is readily clear therein that:

. Input production costs are higher under MIS than flood irrigation

system

. Input production cost falls with increase in the subsidy level. Higher

is the subsidy, the lower will be the cost and higher will be the gross

margin thus.

. The input production cost varies greatly for different crops, being

highest for the perennial fruits and lowest for field crops and coarse

grains such as sorghum.

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It must also be noted that input production costs for 80% subsidy level are shown in the bold faced column in Table 4.4. This corresponds to the subsidy payment under the current irrigation modernization initiative under the National Water Security Plan as mentioned earlier.

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Table 4.4 Input production cost ($/ha) accounting for subsidy payment

Crop Subsidy (%) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% FLD MIS MIS MIS MIS MIS MIS MIS MIS MIS MIS MIS Lucerne 1196.29 2741.10 2654.59 2568.07 2481.56 2395.05 2308.53 2222.02 2135.51 2048.99 1962.48 1875.97 Rice (medium) 1790.53 2473.80 2387.29 2300.78 2214.27 2127.75 2041.24 1954.73 1868.21 1781.70 1695.19 1608.67 Rice (long) 1712.74 2147.15 2060.64 1974.12 1887.61 1801.10 1714.59 1628.07 1541.56 1455.05 1368.53 1282.02 Vegetables 1344.32 1747.34 1660.82 1574.31 1487.80 1401.28 1314.77 1228.26 1141.75 1055.23 968.72 882.21 Vines 6066.19 8729.80 8643.29 8556.77 8470.26 8383.75 8297.23 8210.72 8124.21 8037.69 7951.18 7864.67 Citrus 8122.48 11841.98 11755.47 11668.96 11582.44 11495.93 11409.42 11322.90 11236.39 11149.88 11063.36 10976.85 Stone fruit 5349.05 7649.11 7562.60 7476.09 7389.57 7303.06 7216.55 7130.03 7043.52 6957.01 6870.49 6783.98 Sorghum grain 1211.73 1388.70 1302.19 1215.68 1129.16 1042.65 956.14 869.62 783.11 696.60 610.08 523.57 Wheat 1115.42 1695.93 1609.42 1522.90 1436.39 1349.88 1263.36 1176.85 1090.34 1003.82 917.31 830.80 Summer vegetables 1633.19 2024.89 1938.38 1851.86 1765.35 1678.84 1592.32 1505.81 1419.30 1332.78 1246.27 1159.76 Tomato 1557.07 1912.57 1826.06 1739.55 1653.03 1566.52 1480.01 1393.50 1306.98 1220.47 1133.96 1047.44 Pecan 5743.98 7644.22 7557.71 7471.19 7384.68 7298.17 7211.65 7125.14 7038.63 6952.12 6865.60 6779.09

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4.4.2 Investment benefits

The benefits of irrigation modernization were assessed using a range of indicators including: gross revenue from crop production, total net revenue, water productivity or economic returns per mega litre of water, potential water savings and impacts on aggregate regional income. For each indicator the base case scenario of flood irrigation is compared against the MIS scenario. The data on gross revenue from crop production (Table 4.5) show that:

. Gross revenue is higher under MIS than flood irrigation system for

all crops

. The perennial fruits, vegetable crops and rice have the highest gross

margin

. The increases in gross margin with irrigation modernisation from

flood to MIS are (25%) higher for the perennial fruits and vegetable

crops and lowest for rice (10%).

This implies that irrigation modernization may benefit the producers of all crops, although the benefits in terms of gross margin are relatively low for rice producers and this has implications for equity and food security.

However this is an expected result since rice is grown mostly under ponded conditions, and the gains in yield that result in changes in gross margin are likely to be small for rice in the case of MIS. The cost of production must be accounted into the gross margin to better understand the impacts of MIS on crop profitability. Therefore the analysis was done for net revenue per hectare (total revenue – total cost per hectare), as discussed below.

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Table 4.5. Gross revenue from crop production ($/ha) FLD MIS Lucerne 1630.89 2041.09 Rice (medium) 2834.60 3113.89 Rice (long) 3155.90 3475.04 Canola 1908.14 2389.63 Vegetables 1714.58 2142.67 Vines 9444.83 11808.97 Citrus 14412.20 18018.04 Stone fruit 8902.16 11127.69 Sorghum grain 1265.22 1582.86 Wheat 1224.18 1533.09 Summer vegetables 7746.74 9683.43 Tomato 9017.75 11272.19 Pecan 9835.86 12302.84

The data on total net revenue ($/ha) tells a story that is fully consistent and more supportive of the irrigation modernisation and shows that efficiency gains can be made through capital investments in the irrigation sector.

These data (Table 4.6) show that the net gross margin is higher for all crops under MIS than flood system, and the total net revenue would increase substantially with irrigation modernisation. For instance, MIS results in the gains in net revenue for vines (16%), stone fruits (22%) and pecans (34%) as well as all other crops modelled. Even the net revenue for rice increases substantially (44 to 52%); the only exception is the lucerne crop where net revenue may be net negative. This is plausible since lucerne is a drought and salinity resistant crop and can withstand water shortages, but still giving high yield such that the gains in yield are unlikely to be large under

MIS to offset the additional cost of production. Likewise the coarse grain crops, not shown here, do not generate net positive revenue due to relatively low yield and minimal gains in productivity if grown under MIS. Over all, the modelling results show that even at a set up cost of $6,000 per hectare,

110 on average, there is substantial increase in the gross ($1338.34/ha) and net margin ($968.82/ha) to give a reasonable return from the investment against annualised upfront cost of installation of $350.11/ha. This is consistent with the field data and actual experience of the farmers. For instance, one farmer, like many others, modernised the irrigation system and installed the drip irrigation on his citrus orchard using own funds and recovered the entire investment within two years (Ikram, personal communication, June 2009).

The water savings were about 50% and alone sufficient to pay back the entire cost. Increase in productivity was a benefit over and above the investment cost. This suggests that the payback period for the MIS could be less than two years.

Table 4.6 Net revenue from crop production ($/ha) FLD MIS Lucerne 434.60 165.12 Rice (medium) 1044.07 1505.89 Rice (long) 1443.16 2193.91 Canola 458.16 905.82 Vegetables 369.38 1260.47 Vines 3378.66 3944.31 Citrus 6289.74 7041.20 Stone fruit 3553.12 4343.72 Sorghum grain 53.60 1059.29 Wheat 108.77 702.29 Summer vegetables 6113.55 8523.67 Tomato 7460.91 10224.75 Pecan 4091.89 5523.76

The economic water productivity defined as the total economic returns per mega litre of water is a robust indicator to assess the benefits of investments in MIS. This indicator is more robust than others for at least two reasons.

First, it incorporates total net revenue from crop; second, it also captures the differences in water use. Experts recommend (Molden et al., 2009b) that water productivity must be assessed at catchment or basin scale to

111 determine the true benefits of irrigation modernisation and/or any potential water savings. Since this indicator, like others, has been estimated from the complete mass balance at the catchment scale, it gives a comprehensive assessment of the impact of irrigation modernisation.

The data on economic water productivity (Table 4.7) show that for most grains, vegetables, tomato and pecans the water productivity is higher under

MIS than flood irrigation. However, this does not hold in the case of vines, citrus, stone fruits and they surprisingly have slightly lower water productivity. The one plausible explanation for this is that under MIS the water use (depletion) for these horticultural crops is higher which may mimic the effect of increase in total net revenue and keep the water productivity low. Another plausible explanation is that under the current meteorological drought the water requirements of these horticultural crops are greater than the normal water requirements. However, this will change as the “accumulated water deficit” due to the recent drought improves; the rainfall has returned to above normal during 2008 but the water deficit that has accumulated during the past dry years continues, with greater water use per ha and lower yields, thus impacting water productivity.

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Table 4.7 Total net revenue per mega litre ($/ML) of water use FLD MIS Lucerne 20.40 6.19 Rice (medium) 52.05 68.33 Rice (long) 82.62 113.85 Canola 143.02 267.79 Vegetables 52.57 143.21 Vines 338.88 316.44 Citrus 459.49 411.46 Stone fruit 211.53 206.88 Sorghum grain 6.87 108.49 Wheat 21.61 111.45 Summer vegetables 706.01 787.52 Tomato 699.15 766.59 Pecan 239.69 258.69

A full cost benefit analysis that considers all the direct and indirect costs and benefits of irrigation investments and incorporates actual and potential benefits and associated dimensions of efficiency and equity is yet to be done (Saleth et al., 2003). Most impact assessments consider direct and on- site impacts only; indirect and off-site benefits that often accrue in the long term and to a wider segment of the society are often ignored due to conceptual and modelling difficulties on one hand and lack of base line data to compare the expected benefits with actual benefit on the other hand

(Castillo et al., 2007). These benefits accrue through flow-on effects, triggering regional growth multipliers, and benefit the wider society through income, consumption and human capital linkages (Hanjra et al.,

2009a; 2009d). Due to the lack of base line data and the above mentioned difficulty of comparison with a base line, this study assessed the benefits of irrigation modernization in terms of direct benefits in agricultural income through the optimization of crop mix and improvements in water use efficiency. Agricultural income for various irrigation districts modeled in

113 the study are shown below (Table 4.8). It must be noted that irrigation modernization offers huge potential to improve income. For instance, for the Coleambally Irrigation Area the model estimated income is about

$188.81 million. New plantations, for instance stone fruit and pecan etc, would add some $55.47 million in agricultural income. Thus without these plantation, the estimated income is about $133.47 million. This compares well with the only existing estimate in the literature, showing an estimated income of $130.00 million for the CIA (Khan et al., 2008c). New jobs created in the local economy, forward and backward supply chain effects and flow-on effects on local, regional and wider national economy will be in addition to these estimates.

Table 4.8. Agricultural income for various irrigated areas under optimal cropping patterns Irrigation district Predicted agricultural income ($1000) Yanco 24,778.72 Mirrol 52,230.51 Colli 188,818.70 B/Tabita 45,818.00 Wah Wah 17,518.23

4.4.3 Water balance and potential savings

Under the water scarcity conditions that prevail presently in most irrigation districts modelled, it is not clear whether irrigation modernisation will lead to net water savings. What is clear is that MIS has more efficiency in terms of water use; yields are also higher for most crops such that economic efficiency will improve but the gains may come at a cost to the environment. An improved understanding of the potential water savings requires a better understating of the various components of water balance

114 including applied water, water use, and seepage and returns flows to the system (Table 4.9). Water applied is lower for most crops under MIS but that does not mean real water savings. The proportion of the applied water that returns as seepage must be accounted for (Perry, 2007). The depleted fraction (water use/applied water after accounting for the seepage) is about

70% in most crops under flood irrigation system. This depleted fraction may be as high as upto 100% as return flows are negligible under MIS, and most water applied to crop is depleted as crop evapotranspiration. Further most crops give higher yield under MIS and those higher yields often come at proportionately greater depletion of water. This is typically the case when yields are above 50% of their potential. Australia has one of the highest crop yields in the world. Therefore any gains in yield will deplete proportionately much more water, such that efficiency gains and productivity improvements will come at the cost of greater depletion.

(Molden et al., 2009c).

Table 4.9. Water use, seepage and returns flow for various crops, model output (ML/ha)

Applied Use Seepage FLD MIS FLD MIS FLD MS Lucerne 12.32 10.79 8.62 10.79 3.70 0.00ng Rice (medium) 11.59 8.92 8.12 8.92 3.48 0.00ng Rice (long) 10.10 7.78 7.07 7.78 3.03 0.00ng Canola 1.85 1.62 1.30 1.62 0.56 0.00ng Vegetables 4.11 3.56 2.85 3.56 1.22 0.00ng Vines 5.76 5.04 4.03 5.04 1.73 0.00ng Citrus 7.91 6.92 5.54 6.92 2.37 0.00ng Stone fruit 9.71 8.50 6.80 8.50 2.91 0.00ng Sorghum grain 4.50 3.95 3.16 3.95 1.36 0.00ng Wheat 2.90 2.55 2.04 2.55 0.88 0.00ng Summer vegetables 4.98 4.38 3.50 4.38 1.50 0.00ng Tomato 6.17 5.40 4.32 5.40 1.85 0.00ng Pecan 9.87 8.64 6.91 8.64 2.96 0.00ng Notes: ng = negligible or zero

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It can hence be suggested that irrigation modernisation may not necessarily save water; rather adoption of more efficient irrigation technologies that reduces valuable return flows and limits aquifer recharge can actually deplete more water. Policies and programs aimed as “water savings” can actually increase water depletion. This may typically be the case with

National Water Security Plan, which offers 80% for irrigation modernisation in exchange for giving back 50% of the saved water to the government, to allow more water for the environment. Farmers to-date have shown little support for the program as water is simply too precious and the subsidy scheme simply does not offer the value for money. Achieving real water savings requires institutional, technical, policy, and accounting measures that accurately track water depletions and offer economic incentives to reward water conservation. Other studies (Huffaker, 2008;

Ward and Pulido-Velazquez, 2008) support this conclusion.

4.5 Summary and conclusion

The main findings and conclusions can be summarised as below:

. The HAEMAN model generates reasonably accurate estimates of

the irrigated areas in all the irrigation districts modelled. The model

is also able to select the crops that are fairly representative of the

crops grown in the districts.

. Investments in modern irrigation systems offer high returns in terms

of aggregate income, gross and net returns, and water productivity

improvements and can thus enhance economic efficiency in

116 irrigated agriculture and also improve cost recovery as the

investments would pay back within less than two years.

. Investments in irrigation modernization offer huge potential to

improve agricultural income. For instance, for the Coleambally

Irrigation Area the model estimated income is about $188.81 million

under optimal crop choices. New plantations, for instance stone fruit

and pecan etc, would add some $55.47 million in agricultural

income to the regional economy. The indirect and flow-on impacts

on the regional economy are likely to be far higher than this base

case direct income but those impacts are not estimated.

. It is not clear that modern irrigation systems can achieve real “wet

water savings”. Achieving real water savings requires institutional,

technical, policy, and accounting measures that accurately track

water depletions and offer economic incentives to reward water

conservation. This aspect requires further research.

117 CHAPTER FIVE

5 Climate Change and Water Security

5.1 Introduction

Climate change and its potential impacts on water resources pose serious challenges to agriculture. Climate change can affect water availability and allocation to agriculture as well as yield and productivity of crops. Water scarcity can impact crop choices, yield, costs and return on investments.

Therefore, this chapter attempts to better understand the impacts of climate change and water security on the yield and profitability of irrigated agriculture to highlight the role of new capital investments in irrigation modernisation to address these challenges. Four water security scenarios are used to highlight the impact of water constraints on aggregate cropped area at catchment scale and the income in selected irrigation districts. Four climate change scenarios are then modelled to predict the impact of climate change on agricultural profitability and investment returns as well as water productivity. The results can provide some guidance on policy and institutional response measures to tackle climate change.

5.2 Drought and water security

The Murray-Darling Basin (MDB) accounts for 65% of the irrigated agriculture in Australia and is commonly regarded as the “food bowl” of

Australia, supplying over one-third of the nation’s food supply (Charters and Williams, 2006) from just 2% of the land that is irrigated. Murray-

118 Darling Basin occupies about one million square kilometres in the south- eastern corner of Australia. Of that, the southern Murray-Darling Basin is an economically significant part of the irrigated agriculture. Irrigated agriculture in parts of the Murray-Darling Basin is supported by large reservoirs in the Snowy Mountains – the Snowy Hydro Scheme, and to a lesser extent groundwater aquifers across much of the region. The construction of the Snowy Mountains Scheme began in 1940s for supplying water to the region, in addition to hydropower production. By early 1970s,

16 major dams, 145 km of underground tunnels, 80 km of aqueducts, and seven major power stations were completed. The Snowy project has been recognized as “one of seven civil engineering wonders of the modern world” by the American Society of Civil Engineers. The investments in

Snowy scheme and supporting water and public policies promoted agricultural development and water use, diverting 86% of the natural flows of the Murray Darling Basin by 1995 (Blackmore, 1995).

Australia has pursued frontier based development like many areas of the world including Latin America, Russia, Canada, South Africa, and New

Zealand (Barbier, 2004; 2005). Frontier expansion was characterized by the initial existence of abundant land, mostly new, and unexploited water resources and by a large migration of capital and labor. The clearing of native vegetation and conversion of forest and wetlands to agriculture, and lately the emergence of intensive agriculture under irrigated conditions are symptomatic of classic frontier expansion process. Such frontier based economic development in Australia was characterized by the opening of new irrigation schemes in early 1900s for population settlement and food

119 production. Irrigation development in Australia dates back to late 1880s.

The Mildura Irrigation Colony was the first scheme established on the

Victorian side of the Murray River in 1887 (Proust, 2003). Pseudo irrigation schemes were initiated in the 1890s in New South Wales. The

Murrumbidgee Irrigation Scheme was the first intensive irrigation project in

NSW, Australia. The scheme officially opened in June 1912 when water was first made available to Yanco irrigation area (Blackmore, 1995).

Thriving agriculture and rural communities and increasing water diversions were accompanied by environmental problems such as decreased water quality, rising salinity particularly in the lower reaches and during dry years, altered hydrology and low flows, loss of wetlands, and toxic algal blooms (Proust, 2003). Capital investment in new irrigation schemes, technological innovation and social and economic institutions dependent on the opening up of new frontier which delivered large gains to key economic sectors including agriculture, regional industry and services (Acemoglu,

2002; Acemoglu et al., 2001; Sturt, 1833). Such frontier expansion in

Australia’s Murray Darling Basin, the nations’ food bowl, had met its limit, due mainly to water constraints and environmental concerns; new policy approaches to growth based on more efficient and sustainable use of available land and water resources are increasingly sought.

Unfavourable resource endowments and environmental conditions are believed to invite an institutional legacy that may be inimical to long run growth (Easterly and Levine, 2003). Open access water resource exploitation will reduce welfare in the long run. This realisation became the

120 basis of Cap imposed on maximum allowable water diversion from the

MDB since 1995. In many parts of the Basin water resources are currently over allocated and environmental flow requirements are not being met. In the face of protracted drought and the prospects of long term climate change, the MDB needs a radical and permanent change in water allocation and water management practices (Australia, 2007). The decline in environmental flows and increases in salinity beyond acceptable levels led to the persuasive sense of river health crisis, triggering new thinking on water security. Water is not yet a binding constraint on economic growth and regional development, yet the social and environmental costs of further water diversions in many parts of the Basin are higher than the expected benefits.

Aridity and highly variable rainfall has always posed significant challenges to regional growth and development in the Basin. Over the last decade, these issues have intensified due to prolonged drought and serious water security issues and emerging climate change impacts. Between 2006 and

2008 much of the Basin received extremely low annual precipitation and the 2006 water year had the lowest run off on record in the Murray Darling

Basin (Figure 5.1). Serious water security issues emerged and regional communities and irrigated agriculture faced daunting challenges. For instance, many irrigators with general security water allocation received zero percent of their annual water allocation during this period in the study area (Figure 5.2). Those irrigators with high security water allocations received severally reduced and lowest ever water applications. This water security situation has catastrophic impacts on agriculture sector in both

121 economic and social terms.

Figure 5.1 Monthly inflows into the Murray River system (Data source: MDBA, 2009).

Figure 5.2 Annual general security allocations since 1982/83 (CICL, 2009)

Drought related water security severally affected all of Australia’s most agricultural intensive and food producing regions, reducing agricultural

122 output by 20 percent or more (Horridge et al., 2005). Widespread rainfall failure caused a total failure of wheat crop for example in the

Murrumbidgee catchment in 2007. Impacts on irrigated agricultural production are best illustrated by the rice production which is concentrated mainly in the Murrumbidgee catchment and its downstream in the Murray valley in Australia. Rice production declined by about 98%, from more than one million tons in 2006 to about 20,000 tons in 2008 (Figure 5.3).

Production of other food commodities such as cereals, pasture for dairy, grapes, citrus and vegetables were also severally affected.

Figure 5.3 Rice production in the Murray-Darling Basin

Data source: Annual crop reports from 1960-2008 from the Australian

Bureau of Agricultural and Resource Economics (ABARE, 2009).

The impacts of water security on economic returns in irrigated agriculture and related activities are poorly understood. There is a need to quantify these impacts. The primary objective of future research should be the

123 empirical analysis of the relationship between the water use and economic production across the individual irrigation districts of MBD and over time; estimation of water growth relationship between key water use sectors/commodities in irrigated agriculture; and identification of food crops whose growth is especially at risk from moderate or extreme water scarcity.

5.1 Water security scenarios

Water security related to drought was initially considered as one of the many issues in the Basin that has historically been prone to such events.

Recent research has led scientists to believe that recent water security situation in Australia are harbinger of long term climate change. Today, scientists believe that current drought and water security is different from the past and is clearly linked to climate change. For instance, Australian

Bureau of Meteorology (2009) predicts that within next two to three decades, drought will occur twice frequently and will be twice as severe.

Worsening water security situation and drought frequency and severity are consistent with recent CSIRO projections (Chiew et al., 2009) on climate change and run-off modelling in the Basin.

Climate change represents a significant social, economic and ecological challenge. For example, the CSIRO (2008) published a study on water availability under a medium global warming scenario for the Murray

Darling Basin. Agriculture is the dominant form of land use in the Basin, accounting for nearly 90 million of its 106 million hectares and producing approximately 39% ($15 billion) of Australia’s gross value of agricultural

124 production ($38.5 billion) in 2005-06. The report estimated that surface water availability will decline by between 3% and 21% for individual regions in the Basin alone by 2030. This report by CSIRO (2008) is one in a series of technical reports from the CSIRO Murray Darling Basin

Sustainable Yields Project. The report describes the rainfall-runoff modelling for 0.05 x 0.05 degree grid cells, that is ~ 5km x 5km, across the

Basin and presents the runoff estimates for the four modelling scenarios for the 18 regions of the Basin. Under recent climate scenario (1997-2006), mean runoff is about 21% lower than the 1985 to 2006 long term mean. The biggest difference is in the southern half of the Basin, where runoff is 30% lower than the long term mean, and upto 50% lower in the southern most parts.

The future climate is used to assess the likely water security conditions under a range of likely climate conditions around the year 2030 by CSIRO

(2008). Forty-five future climate variants, each with 112 years of daily climate sequences are used. The future climate variants come from scaling the 1895 to 2006 climate data to represent the ~2030 climate, based on analysis of 15 global climate models (GCMs) and three global warming scenarios from the Fourth Assessment Report of IPCC. More than two-third of the modelling results show a decrease in mean annual runoff in the southern MBD; the extreme estimates range from a 40% decrease to a 20% increase in the mean annual runoff in the southern most MDB (Chiew et al.,

2009). Increased forest water use under global warming and enhanced CO2 concentrations and commercial forestry plantation could have significant

125 effect on runfoff (Herron et al., 2002). In sum, water security for irrigated agriculture will worsen in the 2030 and future development scenario.

The best estimate projections from CSIRO and Bureau of Meteorology

(CSIRO and BOM, 2007) indicate that south and western areas are projected to experience decreased rainfall of upto 40% by 2070 in winter and spring relative to 1990 levels (Table 5.1). Further there will be 20% more drought months over most of Australia by 2030 relative to 1990 levels; upto 40% more drought months in eastern Australia and upto 80% more in south western Australia are projected by 2070. Projections based on the IPCC 2007 global warming scenarios are not available. In a separate study carried out at the Headly Centre, UK, projected changes in the Palmer

Drought Severity Index (PSI) for the SRES A2 scenario indicate an increase over much of eastern Australia between 2000 and 2046. The PSI uses temperature and rainfall information in a formula to determine dryness, and is commonly used in the USA.

Table 5.1 Projected change in precipitation in Australia compared to 1990. 2030 2050 2070 Annual % % % Northern (and central -10–5 -20–10 -30–20 and eastern for 2050 and 2070) Southern areas -10–0 -20–0 -30–5 Winter & spring South-east -10–0 -20–0 -35–0 South-west -15–0 -30–0 -40–0 Eastern areas -15–5 -20–10 -40–15 Summer & autumn -15–10 -20–15 -40–30 Source: CSIRO & BOM (2007)

126 Declining water availability across Australia’s agricultural regions will have a significant impact both on crop yields, input costs and Australian export earnings as agriculture must adapt to changing environmental conditions. This in turn has major effects on the sustainability of regional communities, economies and ecologies. For the purpose of this study, four water security scenarios are modelled:

. Business as usual (BAU) scenario: 100% water security under

this base case scenario

. 75% Water Security Scenario: 75% water security (of BAU)

. 50% Water Security Scenario: 50% water security (of BAU)

. 25% Water Security Scenario: <25% water security (of BAU)

The impacts were estimated in terms of adjustment in irrigated area at the catchment scale and aggregate income from the agriculture for the case of

Coleambally Irrigation Area, as discussed below.

5.2.1 Water security model runs

The above scenarios were calibrated through HAEMAN model runs to estimate the impact on irrigated area at regional scale, and the impact on aggregate income for the CIA. For each model run the parameter on water security was interactively scaled to estimate the impact on crop acreage. In terms of the impact on irrigated area, the model runs show that (Figure 5.4):

. Under the 100% water security scenario, the Yanco has the lowest

irrigated area (76% of the base case), followed by CIA (88%) while

other irrigated area continue to cultivate above 90% of their total

area.

. Under the 75% water security scenario, the CIA and Yanco has the

127 greatest reduction in cropped area cultivating about 38% and 46% of

their total irrigated area.

. Under the 50% water security scenario, the CIA has the lowest

irrigated area (17%) and thus experiences the greatest decline in

cropped area.

. When water security falls to 25% or below, irrigated acreage in

almost all areas falls to the lowest levels (just 1-4%) and thus

irrigated cropping can not simply be practiced as the water is

insufficient to support crop production over a reasonable area.

Under the 25% water security scenarios, farmers will trade water in the

water markets to mimic their losses. Should farmers invest in cropping

operations and variable inputs, they risk foregoing their investments and

incur heavy financial losses. It must be noted that Tabita and Wah Wah

has relatively less reduction in irrigated area, under all water security

scenarios. This is plausible since these are downstream systems that reuse

the return flows from upstream irrigated areas and hence the impacts are

lower.

70 100% 75% 50% <25% 60

30 Area (1000 ha)

0 Yanco Benerembah CIA Tabita Wah Wah

Figure 5.4 Irrigated area under various water security scenarios

128 Under the baseline scenario defined by the business as usual conditions in terms of water availability, the aggregate agricultural production in the CIA is estimated at about $104m (Figure 5.5). Under 75% Water Security

Scenario the income falls to about $91.5m (about 13% reduction). Where as under the 50% Water Security Scenario, the income is just $32m or 30% of the base case income. The more severe scenario is modelled as the 25%

Water Security Scenario with water security falling to below 25% of the base allocation. Under this scenario the estimated income is just above $5m or 5% of the base case income.

$120,000

$100,000

$80,000

$60,000

$40,000 Income ($1000) Income

$20,000

$0 100% 75% 50% <25% Water Security

Figure 5.5 Model estimated income for various water security scenarios in the CIA.

While the estimates are reasonably robust, they are subject to changes in prices and lower and upper bound constraints on area, particularly under the high return perennial crops. These indicative estimates nevertheless suggest that when water security is jeopardised, the water allocations may become insufficient to sustain a productive and rewarding agriculture. This last scenario of is representative of the water security conditions during the

2006-2008 drought spell when seasonal water allocations fell to all times

129 lows of just 13% of the full entitlements and only few farmers opted for cropping during that year. Clearly, with insufficient water for a reasonable summer cropping program the irrigators opted to sell water out of the settings. Others made changes to their cropping patterns. For instance, some farmers produced hay for the first time abandoning rice production and earned higher profit/ha than they ever earned from rice production. Still others exchanged their low security water allocation with high security water at 50% exchange rate. These responses denote that farmers act to water security situations to mimic the adverse impacts on their income and enhance returns to their investments.

5.2.2 Investment policy and planning

The above findings have important implications for investment policy and public planning. Australia has the most highly variable arid climate in the world that exposes agriculture to considerable challenges and risk (Proust et al., 2007). In arid and semi-arid settings of Australia, agriculture is often dependent upon available irrigation water allocations to farmers that in turn depend on the availability of water flows and storages in the reservoirs.

Climate change and climate variability makes seasonal rainfall less predictable and seasonal irrigation supplies uncertain, eroding agricultural production and profitability. Climatic uncertainty often leads to conservative farming strategies that sacrifice some productivity to reduce the risk of losses in poor years (Jones et al., 2000). In addition, prolonged droughts and extreme rainfall events can cause abrupt changes in water supplies and worsen the risk pervasive in agriculture (Pannell, 2006;

130 Pannell et al., 2000). Water is the most important input used in agriculture, with the timely and reliable supply of water being a major determinant in cropping decisions. However, irrigators often have to make key decisions on production levels and input investments in the absence of reliable information on water availability. Irrigators risk foregoing their investments in inputs should actual water availability fall short of expected volumes

(Babcock and Shogren, 1995). Estimated show that the quality losses from weather-damaged wheat cost the Australian wheat industry on average around $30m annually (Abawi et al., 1995). In addition to the stresses of climate variability, environmental water demands, which have a priority for water allocation over agriculture, are putting even further strain on dwindling water resources available to farmers (Ward et al., 2006) and blurring the occurrence of information on seasonal allocations to irrigators.

Uncertain water allocations also deter irrigators from making long-term investment or entering into seasonal water trading contracts (Hafi et al.,

2006). Reliable forecasts on water availability under climate change and various states of nature can provide relevant information for improved decision making and planning to optimize returns from investments in land and water management.

5.3 Climate change scenarios

Climate change poses serious challenges to irrigated agriculture and regional communities, across the MBD. Potential changes in climate are projected to cause decline in agricultural productivity, reduction in crop yields, pasture growth and returns from investments in perennial and

131 livestock activities. Cost of production might also increase but the reductions in yields would be the most significant in terms of impacting economic returns to agriculture (Kingwell and Farré, 2009). The relative impact of climate change on Australian agriculture will be more severe than in other countries, which may result in reduced income, reduced competitiveness, and exports and might have serious consequences for regional food security and even peace and stability. Any slow down in global economic activity due to climate change impacts would likely reduce the demand for Australian agricultural products in some regions relative to the business as usual scenario. The extent of decline in demand will vary depending on the degree of responsiveness of demand to changes in incomes and prices of agricultural products in importing countries with respect to different farm commodities and the degree of differentiation between local and imported food (Bakhshoodeh, 2009). In any case irrigated agriculture will face lower productivity and returns on investments.

According to ABARE (Gunasekera et al., 2008) the projected climate change and associated fall in agricultural productivity and global and regional economic activity are likely to affect the production of key food crops in Australia and globally. In this analysis, estimates of potential impacts of climate change on regional agricultural productivity from a recent well respected study (Cline, 2007) were used, assuming no carbon fertilization effect. The assumed climatic changes which underline projections by Cline (2007) are based on IPCC’s SRES emission pathways, defined as A2 Storyline Scenario, and show one of the highest decline

132 (17%) in agricultural productivity in Australia Table 5.2). According to

Stern (2006) potential climate change can affect long term global economic activity through three pathways: through market impacts (for instance through impacts on energy sector and coastal regions); through non-market impacts such as impacts on the environment and its productivity; and through risk of catastrophic impacts such as flooding, cyclones and calamities, which may impair agricultural productivity due to shifts in climate. Based on this background and the modeling assumption under the

Stern Review, the impacts of climate change on crop productivity and agricultural profitability are modeled.

Table 5.2 Projected changes in agricultural productivity due to climate change without carbon fertilisation effect % decline Australia -17 Japan -4 New Zealand 1 Canada -1 USA -4 EU -4 Rest of Europe -4 Brazil -10 Argentina -7 China -4 India -25 ASEAN -12 LDCs -18 Rest of the world -13 Data source: Cline (2007)

The ABARE modeling (Gunasekera et al., 2008) indicates that with potential climate change in Australia, the production of key agricultural crops is likely to decline: wheat by an estimated 9.2% at 2030 and 13% at

2050; beef (dairy and pasture activities) by 9.6 and 19%; sheep meat

(pasture) by 8.5 and 14%; and sugar by 10 and 14% respectively. Total

133 agricultural productivity continues to increase, albeit with a slower growth rate under the climate change scenario (Figure 5.6). For instance, under the

BAU scenario, agricultural output is projected to double from between 2006 and 2050. Climate changes reduced the growth in agricultural output by

11.5% at 2050, which is about 78% increase over the 2006 level.

Figure 5.6 Climate change and the index of Australian agricultural output from 2006 (=1) to 2050 (Source: ABARE, 2009).

Irrigated agriculture is believed to be one of the most adversely affected activities in the Basin, due to water security issues as discussed above as well as adverse effects on crop yields. The slowdown in economic activity and the loss of potential productivity in a regional and commodity differentiated manner will have important implications for the profitability and net economic returns from specific agricultural activities and crops. For instance, recent studies show that climate change will affect perennial and field crops differently (Lee et al., 2009). Perennial crops and more vulnerable to climate change impacts in the near term; yield of table grapes,

134 wine grapes, cherries, berries, walnuts and peaches are projected to decline by 2050, while slight increase in almond yields. Impacts on field crops were not significant upto 2050 but yields were projected to decline during the latter part of the century. The exception was alfalfa as its yield did not consistently respond to climate changes over countries. It must be noted that there were significant differences in the decline of crop yield between the two emission scenarios (A1 and B1). For instance, corn yield declines by 4% under the medium emission scenario but would decline by 12% by the end of the century under medium-high emission scenarios. Despite variations, the analysis generates two key conclusions: Climate change will directly affect agricultural production and productivity as a result of changes in precipitation, temperature and extreme wet and dry events; and climate change will affect perennial and field crops differently (Cooley et al., 2009). Changes in productivity of specific crops and the associated impacts on economic returns for each crop have not been previously quantified for the Australian region. This study quantified the changes in economic returns to different activities in irrigated agriculture under various climate change scenarios as shown in Table 5.3.

135

Table 5.3 Climate change scenarios modelled in this study Crop Activity Decline in yield (%) Sim 1 Sim 2 Sim 3 Sim 4 Lucerne Dairy No change No change No change No change Barley Grain 10 10 14 Soyabean Grain 10 10 14 Summer grain Grain 10 10 14 Sorghumhay Dairy 10 10 14 Corn Grain 10 10 14 Rice (medium) Rice 10 10 14 Rice (long) Rice 10 10 14 Canola Oilseed 10 10 14 Vegetables Veg 10 10 14 Vines Perennial 15 15 20 Citrus Perennial 15 15 20 Stone fruit Perennial 15 15 20 Sorghum grain Wheat 10 10 14 Wheat Wheat 10 10 14 Summer vegetables Veg 15 15 20 Tomato Veg 15 15 20 Pecan Perennial 15 15 20

Under the first climate change scenario (Sim1), yield of perennial activities plus some summer vegetables and tomato that are sensitive to water stress decline by 15% where as the yield of all other crops are not allowed to change. Under the second climate change scenario (Sim2), yields of field crops other than those perennials decline by 10%. A lower reduction in the yields of field crops (10%) than perennial crops (15%) is justifiable as indicated by the above empirical studies. The perennial yields under Sim2 are not allowed to change for the sake of simplicity. However, in a real world situation, the yields of both perennial and field crops would decline, albeit differently. This is shown by the third climate change scenario (Sim3) which combines Sim1 and Sim2. These scenarios may be representative of the medium emission and climate change impact scenario under IPCC.

Under the high emission scenario, the declines in yields are severe. This is modeled as the Climate Change Scenario 4 (Sim4) where the yield of

136 perennial decline by 20% and the yield of other field crops decline by 14%.

Lucerne yield are not allowed to decline and are kept constant in all scenarios. This is consistent with the above studies where alfalfa did not show consistent decline in yield under a range of settings. The HAEMAN model was run for each scenario to estimate the impact of changes in yield parameters on economic returns and the shadow value of water, while keeping all other parameters constant. The modeling results are presented below.

5.3.1 Climate change model runs

Under Sim1, the yield of perennial crops plus tomato and summer vegetables are 15% lower than the base case yield. Given that, it would be expected that the gross revenue (per hectare) from the sale of these crops would decline whereas the gross revenue from other crops will remain the same. The optimisation results from model runs are consistent with this priori expectation and thus reflect on the robustness of the modelling framework. For instance, the gross revenue from crop sales falls for all perennial crops as well as tomato and summer vegetables (Table 5.4).

Nevertheless the gross revenue is higher under MIS than under flood irrigation systems, as expected. This suggests that investments in farm capital and help to achieve higher gross revenue even when yield are lower.

The fall in net revenue (per ha) with the same yield decline is however higher than the fall in gross revenue because of the investment cost of MIS and other cost items (Table 5.5). For instance, with 15% yield decline the fall in net revenue ranges from 34 to 45% for vines, citrus and stone fruits

137 and from 17 to 36% for summer vegetables, tomato, and pecan. However, total net revenue is higher under MIS than flood irrigation for each crop under Sim1.

Table 5.4 Gross revenue ($/ha) from crop production - Sim 1

Base case Sim1 FLD MIS FLD MIS Lucerne 1630.89 2041.09 1630.89 2041.09 Rice (medium) 2834.60 3113.89 2834.60 3113.89 Rice (long) 3155.90 3475.04 3155.90 3475.04 Canola 1908.14 2389.63 1908.14 2389.63 Vegatables 1714.58 2142.67 1714.58 2142.67 Vines 9444.83 11808.97 8028.69 10041.72 Citrus 14412.20 18018.04 12253.16 15313.64 Stone fruit 8902.16 11127.69 7566.83 9465.29 Sorghum grain 1265.22 1582.86 1265.22 1582.86 Wheat 1224.18 1533.09 1224.18 1533.09 Summer vegetables 7746.74 9683.43 6584.73 8232.67 Tomato 9017.75 11272.19 7665.09 9579.63 Pecan 9835.86 12302.84 8362.09 10460.62

Table 5.5 Total net revenue per hectare ($/ha) - Sim 1 Base case Sim1 FLD MIS FLD MIS Lucerne 434.60 165.12 434.60 165.12 Corn 871.33 0.00 871.33 0.00 Rice (medium) 1044.07 1505.89 1044.07 1505.89 Rice (long) 1443.16 2193.91 1443.16 2193.91 Canola 458.16 905.82 458.16 905.82 Vegatables 369.38 1260.47 369.38 1260.47 Vines 3378.66 3944.31 1962.52 2177.06 Citrus 6289.74 7041.20 4130.69 4336.83 Stone fruit 3553.12 4343.72 2217.79 2681.99 Sorghum grain 53.60 1059.29 53.60 1059.29 Wheat 108.77 702.29 108.77 702.29 Summer vegetables 6113.55 8523.67 4951.54 7072.91 Tomato 7460.91 10224.75 6108.03 8532.18 Pecan 4091.89 5523.76 2618.11 3681.54

In terms of total net revenue per mega litre of water use, or crop per drop, a decline would be expected because the total net revenue is lower due to decline in yield, and the water use remains the same. Thus economic water

138 productivity must fall with decline in yield, gross revenue and net revenue hence. This expectation is confirmed by the modelling results on net revenue per mega litre of water for the Sim1 (Table 5.6). The water productivity of perennial fruits falls by a greater margin (37-45%) than tomato and summer vegetables (17 to 19%). Further the results show that water productivity is higher under MIS than flood irrigation system and this holds for all crops included in Sim1.

Table 5.6 Total net revenue per megaliter of water use - Sim 1 Base case Sim1 FLD MIS FLD MIS Lucerne 20.40 6.19 20.40 6.19 Rice (medium) 52.05 68.33 52.05 68.33 Rice (long) 82.62 113.85 82.62 113.85 Canola 143.02 267.79 143.02 267.79 Vegatables 52.57 143.21 52.57 143.21 Vines 338.88 316.44 196.84 174.60 Citrus 459.49 411.46 301.76 253.51 Stone fruit 211.53 206.88 132.03 127.64 Sorghum grain 6.87 108.49 6.87 108.49 Wheat 21.61 111.45 21.61 111.45 Summer vegetables 706.01 787.52 571.81 653.34 Tomato 699.15 766.59 572.39 639.81 Pecan 239.69 258.69 153.36 172.39

Under Sim2, the yield of all field and vegetables are 10% lower than the base case yield. Given that decline in yield, the gross revenue from crop sales, net revenue excluding total cost of production and economic productivity of water per mega litre would be lower for these crops than the base case scenario. The modelling results support these expected results.

For instance gross revenue from crop production is lower (by about 10%) for all the crops modelled under Sim2 (Table 5.7). The net revenue from all crops including rice, sorghum and wheat is lower under SIM2 than base case scenario. Further, the relative decline in net revenue is lower under

139 MIS than flood irrigation (Table 5.8). For instance, rice-medium revenue falls by 20 and 26% where as rice-long revenue falls by 22 to 16% under

MIS and flood irrigation respectively. In terms of water productivity the impacts are similar. Water productivity of all field crops falls with the decline in the yield (Table 5.9) and the declines are greater under flood than

MIS, and this holds for all crops modelled under Sim2.

Table 5.7 Gross revenue ($/ha) from crop production - Sim 2

Base case Sim2 FLD MIS FLD MIS Lucerne 1630.89 2041.09 1630.89 2041.09 Rice (medium) 2834.60 3113.89 2554.64 2799.60 Rice (long) 3155.90 3475.04 2836.77 3130.79 Canola 1908.14 2389.63 1720.89 2148.88 Vegatables 1714.58 2142.67 1542.90 1928.63 Vines 9444.83 11808.97 9444.83 11808.97 Citrus 14412.20 18018.04 14412.20 18018.04 Stone fruit 8902.16 11127.69 8902.16 11127.69 Sorghum grain 1265.22 1582.86 1140.24 1424.10 Wheat 1224.18 1533.09 1104.05 1378.64 Summer vegetables 7746.74 9683.43 7746.74 9683.43 Tomato 9017.75 11272.19 9017.75 11272.19 Pecan 9835.86 12302.84 9835.86 12302.84

Table 5.8 Total net revenue per hectare ($/ha) - Sim 2 Base case Sim2 FLD MIS FLD MIS Lucerne 434.60 165.12 434.60 165.12 Rice (medium) 1044.07 1505.89 764.11 1190.93 Rice (long) 1443.16 2193.91 1124.03 1847.29 Canola 458.16 905.82 270.91 541.69 Vegatables 369.38 1260.47 198.59 1046.42 Vines 3378.66 3944.31 3378.66 3944.31 Citrus 6289.74 7041.20 6289.74 7041.20 Stone fruit 3553.12 4343.72 3553.12 4343.72 Sorghum grain 53.60 1059.29 38.77 900.52 Wheat 108.77 702.29 13.84 547.84 Summer vegetables 6113.55 8523.67 6113.55 8523.67 Tomato 7460.91 10224.75 7460.91 10224.75 Pecan 4091.89 5523.76 4091.89 5523.76

140 Table 5.9 Total net revenue per megaliter of water use - Sim 2 Base case Sim2 FLD MIS FLD MIS Lucerne 20.40 6.19 20.40 6.19 Rice (medium) 52.05 68.33 38.09 54.18 Rice (long) 82.62 113.85 64.35 95.87 Canola 143.02 267.79 84.57 195.66 Vegatables 52.57 143.21 28.19 118.86 Vines 338.88 316.44 338.88 316.44 Citrus 459.49 411.46 459.49 411.46 Stone fruit 211.53 206.88 211.53 206.88 Sorghum grain 6.87 108.49 6.87 108.49 Wheat 21.61 111.45 13.51 87.19 Summer vegetables 706.01 787.52 706.01 787.52 Tomato 699.15 766.59 699.15 766.59 Pecan 239.69 258.69 239.69 258.69

The analysis combined Sim1 and Sim2 to capture the real world situation where the yield of perennial crops as modelled under Sim1 fall by 15% whereas the yield of all other field crops as modelled under Sim2 fall by

10%. Thus under Sim3 was modelled by interactively adjusting these yield parameters for all the crops included in the model. The modelling results are capturing the simultaneous impacts of Sim1 and Sim2. The gross revenue from crop sale (Table 5.10), net revenue per hectare (Table 5.11) and water productivity per megalitre of water (Table 5.12) show expected results as discussed under Sim1 and Sim2, for individual crops as well as for the MIS and flood irrigation systems.

141

Table 5.10 Gross revenue ($/ha) from crop production - Sim 3

Base case Sim3 FLD MIS FLD MIS Lucerne 1630.89 2041.09 1630.89 2041.09 Rice (medium) 2834.60 3113.89 2554.64 2799.60 Rice (long) 3155.90 3475.04 2836.77 3129.31 Canola 1908.14 2389.63 1720.89 2148.88 Vegatables 1714.58 2142.67 1542.90 1928.63 Vines 9444.83 11808.97 8028.69 10041.72 Citrus 14412.20 18018.04 12253.16 15313.66 Stone fruit 8902.16 11127.69 7566.83 9465.96 Sorghum grain 1265.22 1582.86 1140.24 1424.10 Wheat 1224.18 1533.09 1104.05 1378.64 Summer vegetables 7746.74 9683.43 6584.73 8232.67 Tomato 9017.75 11272.19 7670.03 9579.63 Pecan 9835.86 12302.84 8362.09 10460.62

Table 5.11 Total net revenue per hectare ($/ha) - Sim 3

Base case Sim3 FLD MIS FLD MIS Lucerne 434.60 165.12 434.60 165.12 Rice (medium) 1044.07 1505.89 764.11 1190.89 Rice (long) 1443.16 2193.91 1124.03 1847.29 Canola 458.16 905.82 270.91 541.69 Vegatables 369.38 1260.47 198.59 1046.42 Vines 3378.66 3944.31 1962.52 2177.06 Citrus 6289.74 7041.20 4130.69 4336.83 Stone fruit 3553.12 4343.72 2217.79 2681.99 Sorghum grain 53.60 1059.29 38.77 900.52 Wheat 108.77 702.29 13.74 546.28 Summer vegetables 6113.55 8523.67 4951.54 7072.92 Tomato 7460.91 10224.75 6108.03 8531.47 Pecan 4091.89 5523.76 2618.11 3681.54

142

Table 5.12 Total net revenue per megaliter ($/ML) of water use - Sim 3

Base case Sim3 FLD MIS FLD MIS Lucerne 20.40 6.19 20.40 6.19 Rice (medium) 52.05 68.33 38.09 54.18 Rice (long) 82.62 113.85 64.35 95.87 Canola 143.02 267.79 84.57 195.66 Vegetables 52.57 143.21 28.19 118.86 Vines 338.88 316.44 196.84 174.60 Citrus 459.49 411.46 301.76 253.51 Stone fruit 211.53 206.88 132.03 127.64 Sorghum grain 6.87 108.49 6.87 92.38 Wheat 21.61 111.45 13.51 87.19 Summer vegetables 706.01 787.52 571.81 653.34 Tomato 699.15 766.59 572.39 639.81 Pecan 239.69 258.69 153.36 172.39

As noted earlier, these scenarios may be representative of the medium emission and climate change impact scenario under IPCC. Under the high emission scenario, the declines in yields are severe. This is modeled as the

Climate Change Scenario 4 (Sim4) where the yield of perennial decline by

20% and the yield of other field crops decline by 14%. The yields of these crops are adjusted interactively in the model, and all optimization routines are checked in the model to generate the optimal solution. Since the decline in yield is higher for each crop, and for each group of perennial and field crops, it is expected that the gross revenue, net revenue and water productivity would be impacted to a greater extent than Sim1 and Sim2.

The modeling results confirm this. These results show that the gross revenue of all perennial crops falls with reduction in yield and the revenue is lower under MIS under Sim4 than Sim3, as the yield are lower (Table

5.13). The net revenue shows similar results. The net revenue under Sim4 is lower than Sim 3 and this holds for all crops, perennial or field crops (Table

5.14). Water productivity is also lowest under Sim 4 than any other scenario

143 modeled. Further the fall in water productivity is far higher for perennial activities (about 50%) than field crops (from 22 to 37%) (Table 5.15). In all cases MIS have higher gross revenue, net revenue and water productivity than flood irrigation.

Table 5.13 Gross revenue ($/ha) from crop production - Sim 4

Base case Sim4 FLD MIS FLD MIS Lucerne 1630.89 2041.09 1630.89 2041.08 Rice (medium) 2834.60 3113.89 2440.90 2677.11 Rice (long) 3155.90 3475.04 2712.65 2987.47 Canola 1908.14 2389.63 1640.64 2050.80 Vegetables 1714.58 2142.67 1473.78 1841.67 Vines 9444.83 11808.97 7560.54 9444.83 Citrus 14412.20 18018.04 11529.76 14386.93 Stone fruit 8902.16 11127.69 7121.72 8902.15 Sorghum grain 1265.22 1582.86 1087.31 1361.55 Wheat 1224.18 1533.09 1052.56 1315.71 Summer vegetables 7746.74 9683.43 6197.39 7746.74 Tomato 9017.75 11272.19 7214.20 9017.75 Pecan 9835.86 12302.84 7865.48 9835.86

Table 5.14 Total net revenue per hectare ($/ha) - Sim 4 Base case Sim4 FLD MIS FLD MIS Lucerne 434.60 165.12 434.60 165.12 Rice (medium) 1044.07 1505.89 650.37 1068.44 Rice (long) 1443.16 2193.91 999.91 1705.45 Canola 458.16 905.82 190.66 371.96 Vegetables 369.38 1260.47 129.46 959.46 Vines 3378.66 3944.31 1494.37 1580.17 Citrus 6289.74 7041.20 3407.29 3435.37 Stone fruit 3553.12 4343.72 1772.61 2118.18 Sorghum grain 53.60 1059.29 32.42 838.15 Wheat 108.77 702.29 12.62 484.91 Summer vegetables 6113.55 8523.67 4564.20 6586.9 Tomato 7460.91 10224.75 5657.13 7970.31 Pecan 4091.89 5523.76 2121.51 3056.78

144 Table 5.15 Total net revenue per megaliter ($/ML) of water use - Sim 4 Base case Sim4 FLD MIS FLD MIS Lucerne 20.40 6.19 20.39 6.19 Rice (medium) 52.05 68.33 32.42 48.56 Rice (long) 82.62 113.85 57.24 88.65 Canola 143.02 267.79 57.24 172.73 Vegetables 52.57 143.21 18.38 109.01 Vines 338.88 316.44 149.84 126.88 Citrus 459.49 411.46 248.91 200.78 Stone fruit 211.53 206.88 105.53 100.85 Sorghum grain 6.87 108.49 6.08 85.73 Wheat 21.61 111.45 11.43 77.09 Summer vegetables 706.01 787.52 527.08 608.58 Tomato 699.15 766.59 530.13 597.56 Pecan 239.69 258.69 124.27 143.19

The overall modeling results from the all climate change scenarios can be summarized as:

. Under all climate change scenarios, the gross revenue from crops

sale, net revenue and economic productivity of water are lower than

the base case scenario without climate change.

. The declines in net revenue are greater than decline in gross

revenue, under all climate change scenarios.

. Water productivity is lower under all climate change scenario than

the base case.

. The proportionate decline in net revenue and water productivity are

greater for perennial crops than field crops.

. The gorss revenue from crops sale, net revenue and economic

productivity of water are higher under MIS than flood irrigation, and

this holds for all scenario with climate change.

These results suggest that climate change has the potential to impact economic returns from irrigated agriculture and high return activities such as perennial fruits are likely to be affected more than field crops. They also

145 suggest that investments in capital technology for irrigation modernization offer potential pathway to offset these impacts at reasonable costs. Since agriculture is the key provider of food and other environmental goods and services, and has essential attributes of public goods, public funding in the form of subsidies or related support measures is justified to help irrigators adapt to climate change.

5.3.2 Response to climate change – farm management

Risk is pervasive in agriculture and irrigated agriculture is no exception.

Farmers respond to predictions of drought, low water allocations and signs of water stress through adaptations to climatic change and variability. The adaptations are costly and require significant investment. Responses by farmers may also generate new opportunities/markets, with gross margins being higher than in a post-drought, low allocation scenario. For instance, some farmers in the CIA sold hay for the first time during the 2006-07 drought and earned higher gross margins than from rice crop in a pre- or post-drought year. Others switched from surface to drip irrigation for orchard production while the pruning of citrus blooms from outer canopy layer saved water and improved fruit quality and price. The sale of “saved water” and gains in gross margin from premium price were enough to payback the investment immediately. The analysis presented here therefore tells only part of the story as it does not include farmer’s responses to climate variability or the impact of prices and government support measures. The analysis can be extended by considering these aspects and

146 incorporating state or federal farm programs such as the Australian government drought assistance package.

5.3.3 Response to climate change – institutional

Climate change directly affects crop production primarily by affecting water security through effects on surface runoff and recharge of shallow groundwater aquifers, important to irrigated agriculture. Because the biological response is generally nonlinear and concave over some range of variability in environmental parameters, climate change tends to reduce yields. Climate driven fluctuations in agricultural production can contribute substantially to volatility in food prices and undermine regional growth and vitality of rural communities. Climate change and water security issues creates a moving target for adaptation and management of irrigated agriculture that reduces efficiency of input use, investments and hence profitability and competitiveness of agriculture. Climate change adaptation is key component of the official policy and core item on the economic reform process. Water policy reforms launched since 2007 and the passing of the Commonwealth Water Act are the examples. The Act gives constitutional rights over water resources in MDB assigned to the states to the Commonwealth and investment of $10 billion under the National Water

Security Plan, as discussed earlier. Related measures in water reform include:

. Adaptation of core water programs and policies to climate change

(EPA, 2008)

147 . Establishment of independent water and climate change program

(Government of Australia, 2007)

. Development of commonly agreed standardised methodology for

hotspots assessment (Khan et al., 2008d)

. Hotspots assessment for identification of seepage for targeting

investments to bring more water to the services of agriculture and

the environment (Abbas et al., 2008)

. Integrated management of surface and ground water resources, as

one resource (Khan et al., 2008e)

. Sustainable land and water management policies and practices for

enhancing environmental sustainability (Khan, 2009; Khan and

Hanjra, 2008)

. Support for water markets through transferable property rights in

water and pilot projects on water trading across the states in the

MDB (Khan et al., 2009b)

. Forecasting future water allocation, and water trading prices to

allow irrigators, more information on expected water supplies and

water markets prices (Mushtaq et al., 2009).

. Purchase and compulsory acquisition of water entitlements for

allocating more water to the environment (Government of Australia,

2007)

. Investments and direct support for modernization of irrigation

infrastructure to enhance water use efficiency through canal lining,

drip irrigation, and more water efficient crops (Khan et al., 2008a)

148 . Federal control over all water data, water accounting and greater

regulatory reporting on water balances (Government of Australia,

2007)

Moreover, today farmers in the Basin are leaders in implementing and adopting on-farm efficient and water conservation practices and technologies. Some examples have already been presented in the previous section.

5.4 Summary and conclusion

The main conclusions from the water security and climate change modelling can be summarised as below.

. Water security will have huge impact on irrigated agriculture, both

in terms of cropped areas as well as returns to investment. For

instance, under 75% water security scenario irrigated area nearly

reduces by 50%, where as under 50% water security scenario

irrigated area is lowest (17%).

. When water security falls to 25% or below, irrigated acreage in

almost all districts falls to the lowest levels (just 1-4%) and thus

irrigated cropping cannot simply be practiced as water is insufficient

to support crop production over a reasonable irrigated area.

. The aggregate income and returns from agriculture fall substantially

with decline in water security levels compared to the 100% water

security scenario.

. Net revenue, economic returns, and water productivity are lower

under all four climate change scenarios and the profitability of

perennial plantation, with long term investments, suffers the most

149 under the climate change scenarios. All these indicators fare better

under modern irrigation systems than conventional flood irrigation

system.

The above results suggest that, capital investments in infrastructure and support measures for irrigation modernization offer potential pathway to offset these impacts at a reasonable cost. Since agriculture is the key provider of food and other environmental goods and services, and has essential attributes of public goods, public funding in the form of subsidies or related support measures is justified to help irrigators better adapt to climate change.

150

CHAPTER SIX

6 Public Private Investments – Global Perspectives

6.1 Introduction

The objective of this chapter is to examine the investment and financing models in irrigation sector with the aim to identify possible roles and opportunities for private sector participation, including the national and local governments and farmers, in developing and managing irrigation infrastructure. The goal is to identify the knowledge gaps in the global literature. It offers a review of some 185 published studies on the subject.

Globally, irrigation sector is facing three major challenges: overall poor performance with low water use efficiency, and low water productivity

(Molden et al., 2009a); fiscal burden involving heavy and recurring reliance on government financing for operation, maintenance, and management of the system (Massarutto, 2007), and poor service delivery (Huffaker, 2008); and poor standards of asset management and maintenance, with deteriorating system health, a backlog in system rehabilitation and maintenance, dysfunctional infrastructure (Perry, 1995), and weak management and institutional failure all along the line (Easter, 1993). Much of the research on institutional and investment models has been driven by these challenges (Saleth and Dinar, 2004; 2005). Finding the investment and institutional models that can break the vicious cycle of underfunding

151 and poor assets management is still a challenge (Saleth and Dinar, 2000).

Research on public private participation models for financing irrigation is particularly limited because the idea of involving private sector investors and managers in publicly managed systems was debated and less acceptable to stakeholders until recently (Faures, 2007). Private sector was seen as a way to bring efficient management and fresh funds, relieving government of its fiscal and administrative burdens (Rosegrant and Svendsen, 1993;

Svendsen et al., 2003). But much of the effort was driven by government’s own desire to part its role to private sector, and thus there is todate limited experience of private sector participation in large irrigation projects

(Faures, 2007).

6.2 Conceptual framework

This section presents the conceptual framework that gives, the typology of irrigation systems based primarily on mode of governance; identifies various components; and delineates the functions of a typical irrigation system. This framework can help identify the components and functions of irrigation system that may be best leveraged through public private financing models. The key components of the conceptual framework are explained below.

6.2.1 Types of irrigation system

The term irrigation system covers a diversity of situations associated with a variety of crops, leading to multiple water management and development

152 strategies. There are fundamental differences between public and private management systems, underpinned by the investment and financing model as well as food grain and cash crop production, and between arid areas and humid tropics.

Irrigation systems can be classified into various types using six criteria on wether the system is: individual or collective; small or large; surface or groundwater; supplemental or essential; subsistence or cash crops; and privately or publicly managed. Based on these criteria, major types of irrigation systems are discussed here. A comprehensive database of farming systems is given in global farming system study (Dixon et al., 2001) as shown in Figure 6.1. Examples of irrigation systems relevant to the analysis reported here are discussed below.

Figure 6.1 Types of irrigation systems around the globe (source: World Bank, 2008).

153 Individually managed farm scale irrigation systems. These include individual small scale irrigation using surface or ground water for producing subsistence crops. Examples include small scale irrigators using shallow tubewells or treadle pumps in rainfed areas in India and Pakistan

(Shah et al., 2000) or diesel pumps to lift water from streams and rivers in some parts of Africa (Merrey and Sally, 2008).

Collectively managed small to medium scale systems. These systems use surface water for producing cash crops on publicly managed schemes.

While this category covers a wide range of systems, it is characterized by small size of the system, private or community investments and management. Public sector involvement focuses on rehabilitation, expansion, or improvement. Such systems are found across the world in

Afghanistan, Balochistan province of Pakistan, Indonesia, Nepal, southern

China (Hussain et al., 2008) the Andes mountains (Ravnborg and Guerrero,

1999) and parts of sub-Saharan Africa (Dixon et al., 2001).

Collectively managed large scale public irrigation systems. These systems use surface water in conjunction with groundwater to produce staples and cash crops. This type accounts for more than 50% of the global irrigated area (Faurès et al., 2007). They include most of the large public irrigation systems in Australia (Khan and Hanjra, 2008), Northern China (Wang et al.,

2007), Indo-Gangetic Plains (Hussain et al., 2004), Nepal Terai (Bhattaraia et al., 2005), Central Asia (Abdullaev et al., 2009; Rosen and Strickland,

1999), Middle East, Sudan, (Hassan et al., 1989) and Mexico (Dayton-

Johnson, 2000). These systems were built post-World War II for the

154 purpose of providing large number of farmers with either full or partial irrigation to stabilise and boost staple food production and support population settlement to newly irrigated areas (Faurès et al., 2007). These systems were publicly managed and funded and were usually not expected to cover their own operational expenses, and have been the focus of irrigation management transfer programs. Most of these systems are run by public management agencies and typically have inflexible water service delivery and marked inequities between the head and tails ends, often resulting in water misuse and lost agricultural productivity (Hussain et al.,

2004). Water charges are inadequate to cover operational costs and the recovery rates are often low (Cornish et al., 2004; Hellegers and Perry,

2006). Today they face the challenge of economic and financial viability and technical and managerial modernisation to allow better water service delivery to irrigators and to address their emerging water service needs.

These systems are a key candidate of public private investment initiatives.

Commercial privately managed systems producing for local and export markets. These systems are managed on commercial principles and specialize in producing cash crops for local and global markets (Clevo,

2000). They are governed by cultivators and employ paid staff to manage and operate the system and use modern irrigation technologies. Essentially they are responsive to emerging opportunities in local and export markets.

Examples include sugar estates, wines, olives, orchard and citrus plantations, and stone fruits, where commercial irrigation and cultivation is managed by a single firm (Deressa et al., 2005; Khan et al., 2008e). Such systems can be found in Australia, Fiji, Zimbabwe, South Africa, Morocco,

155 Turkey and Latin American countries including Argentina, Brazil, Chile, northern Mexico. Other examples include the GM crops such as cotton and soybeans (Qaim and Janvry, 2003; Srinivasan and Thirtle, 2000; Zhang,

2005a), and perti dish foods (Koning et al., 2008) grown by commercial firms in some land scarce developed countries such as the Netherlands.

6.2.2 Components of irrigation system

A typical irrigation system4 can be distinguished form its headworks to downstream into four successive components and discussed below (World

Bank, 2008):

Water storage. This is the bulk water mobilization component related to physical headworks and hydraulic infrastructure for tapping the water at source from its storage (dam, reservoir, aquifer storage), and management

(release, allocation).

Water conveyance. This component corresponds with the physical main or primary system, for conveying water from water storage to distribution

(main canal, river, aqaduct, or pipeline) and the related hydraulic structures and water management and governance rules.

Water distribution. This component entails water delivery to farmers through secondary and tertiary canals or laterals as per their water rights,

4 A typical irrigation system is assumed as publicly financed and managed, gravity fed rotational or scheduled water service, growing subsistence or cash crops.

156 quotas, schedule, or rotation. For instance, water deliveries in Australian irrigation systems are demand based while a supply based rotational systems is followed in most large irrigation systems in India and Pakistan

(Bandaragoda, 1998).

On-farm water management. This component is concerned with on farm management of delivered water by the farmers themselves using irrigation equipment directly owned and managed by the farmers (e.g., channels, pipes, furrows, drips, sprinklers) according to their own land and water management practices (irrigation schedule, method of application, crop water budget and rotation, fallowing, land and water conservation practices).

6.2.3 Functions of irrigation system

There are four sets of function for operationalzing various components of irrigation system. These include: the investment functions; the governance functions; the operation, maintenance and management functions (OMM); and agricultural production function.

6.2.3.1 Investment functions

The investment functions involve the decision to invest; financing the investment; project design; and project implementation as explained below.

157 The decision to invest. The owner of irrigation infrastructure makes a decision to invest in a given type of irrigation system, whether individual or public, small or large. In private irrigation systems, the decision is individual and is based purely on economic criteria such as internal rate of return. In large collective systems a public decision is made taking into account the demand for water and costs and benefits of investments

(Sampath, 1991; 1992) using multicriteria analysis such as triple bottom line of economic, social and environmental impacts (Christen et al., 2006) and often involves an act of balancing the interests of various stakeholders; the economic and social benefits usually overweigh construction costs and environmental costs and farmers are often targeted as a major beneficiary of the investment decision (Hayami and Kikuchi, 1978; Kikuchi et al., 2003).

Various components of irrigation system and PPP functions are shown below (Figure 6.2).

Figure 6.2 Major components and PPP functions in irrigation system

(Source, World Bank (2008).

158

Financing the investment. The decision to invest depends on the availability of sufficient funds sourced through self-financing, private or bank loans, government funding or subsidy or investor funds. Financing the investment function is usually exercised by the owner of future infrastructure assets although sometimes professional assistance may be required for tailoring the investment package. The financing function is affected by three main aspects that have also been the main reasons for dominance of public financing. First, often irrigation projects are very costly and require high investments depending upon water storage volume and the length of water conveyance and distribution system involved (Hanjra and Gichuki, 2008;

Inocencio et al., 2007). Costs may vary from as little as $10-60 for bucket kits and treadle pumps (Postel et al., 2001b) to $500-700 million in Nile delta upto 2017 (Kandil, 2003) upto a dollar for a large irrigation development project such as Tarbella Dam in Pakistan or Linking of the

Rivers Project in India (Amarasinghe et al., 2008; Gupta and Deshpande,

2004). Second, the pay back period is quite long, 20-30 years. Third, the investment involves significant economic, social, environmental, regulatory and political risks such as risks associated with cost recovery from smallholders and poor farmers (Kandil, 2003) or population resettlement in mega projects (Cernea, 2003).

Project design. For large irrigation projects, project design involves different stages including, feasibility study, preliminary design, detailed design, tender invitation, and bidding. Project design is generally contracted out to local or international professional firms depending on the size of project, sources of financing, and financer’s procurement regulations. For

159 example, feasibility study document for the Tarbella Dam comprised three main volumes and associated annexure all measuring some 10 feet high document (WCD, 2000). For small projects, the design needs may be simple and may involve local contractors or service providers. For instance, under the Australian Water Security Plan the irrigators were required to provide a water tender matrix identifying the preferred on-farm water saving investment options, expected water savings, estimated costs, and a quotation from service provider.

Project implementation. Project implementation involves work implementation and supervision functions. Often work implementation function is contracted out according to agreed rates, timeline, and procurement procedures. Project supervision function may be retained by the asset owner or contracted out to an engineering firm.

6.2.3.2 Governance functions

The governance functions involve water regulation and control functions: water resource allocation; water resource monitoring; and supervision of irrigation management. Generally these functions are public although some functions may be outsourced.

Water resource allocation. Water allocation decisions are complex and have implications for socioeconomic and welfare outcomes (Hussain et al.,

2004). This function involves two levels: water allocation between competing uses at national level; and within a sector such as irrigated agriculture. Water allocation between competing uses such as urban and

160 rural drinking water, industry, irrigation, environment and other non- consumptive uses is a public good function to be exercised by a sovereign national institution beholding to protect national higher interest and strategic regional interests (Bhatia et al., 2006). Water supply and demand coordination is the main domain of water allocation, done either annually such as allocations to irrigation but also seasonally such as during drought as a spot reaction to water scarcity (Freebairn and Quiggin, 2006; Quiggin,

2006) or multiannually such as the over all and broad irrigation diversions from the river system (e.g., the 1995 Cap in MDB and currently the water sharing plans in various catchments) (Connell and Grafton, 2008).

Intrasectoral water allocation involves apportioning a scarce resource within a given sector, such as irrigated agriculture within a state. This requires a legal framework for clearly defining the water rights and a regulatory and institutional framework to deliver and protect the water rights. This function is also public generally exercised by public authority acting on behalf of the government. Rational and equitable water sharing among farmers is one of the biggest challenges in irrigation governance. It requires technical skills to accurately estimate and forecast water demand and supply, as well as political, diplomatic and dialogue skills to engage stakeholders, explain water balance and allocation process and arbitrate and manage any conflicts (Briscoe et al., 2005; Quiggin, 2007). Transboundry water sharing involving quality and flow variability issues poses far complex challenges to water allocation function (Drieschova et al., 2008).

Water resource monitoring. This regulatory function supports water allocation function. It involves monitoring actual deliveries against water

161 rights, withdrawals volumes and compliance with withdrawals permits, monitoring water quality, and monitoring all the hydraulic structures such as catchment, creeks, mains, wells and tubewells (Blackmore, 1995).

Requirements include a legal mandate to monitor, appropriate techniques, capacity and equipment, and a reliable and sound database for monitoring compliance against benchmarks.

Water supervision. The supervision of irrigation management is generally the domain of the asset owner (a board including government officials and farmer representatives) who must ensure that irrigation system is well run and managed, implement necessary repairs and maintenance satisfactorily, fully finance services, deliver an efficient low cost water services as per farmer’s needs, equitably and fairly set and collect water service charges, and keep the system financially viable. One case example is the

Coleambally Irrigation Area (Smith, 2008) in the southeastern Murray

Darling Basin of Australia. Water supervision functions are often neglected.

Political economy of neglect perpetuates a legacy of oversight, disrepair and dependence on public funds in most developing countries (Easter,

1993).

6.2.3.3 OMM functions

The OMM functions involve: the management of water allocation service at irrigation system level; water service delivery related operational tasks including customer service; and system maintenance.

162 Management of water allocation service. This requires: technical capacity to coordinate water demand and supply with databases and analytical tools

(Khan et al., 2008b); economic, social and environmental understanding of how water acts as an input to farming (Hussain et al., 2004); drivers of economic change and farmer responses to emerging pressures and market opportunities (Turral et al., 2005); managing water scarcity (Connell and

Grafton, 2008); and delivery of unfettered water service in terms of quantity, quality and timeliness (Turral et al., 2002).

Water service. This function includes: operation of irrigation system including canals and delivery network; hydraulic monitoring and data collection, management and control; delivery of agreed service to farmers through agents such as ditch tenders; and management of water service including service charges, billing, collection, recovery and farmer relations

(Briscoe et al., 2005).

System maintenance. This function has three core elements: preventive or scheduled maintenance programs (e.g. annual desilting of canals in

Pakistan; repairs to channel bridges, embankments and roads in Australia); curative maintenance or breakdown repairs (canal breaches, non functional or chocked inlets or gates); and routine or daily maintenance (debris and weeds removal). Together these maintenance functions are central to a well performing irrigation system and sustainable water service delivery

(Malano et al., 1999; Turral et al., 2002). Maintenance work can be contracted out or done by the farmers or jointly by the government agency and farmers as in the case of canal irrigation in India and Pakistan.

163 Infrastructure owners are generally required to provide an assets management plan, covering daily, short and long term maintenance.

6.2.3.4 Agricultural production function

This function is a clear and sole responsibility of the irrigators, who manage to make their entire enterprise profitable or to enhance household food security. It consists of combining land, water, capital, labour and other inputs to maximise income from farming. This function generates economic and social value from water service and in turn depends on all other preceding functions. Where all upstream functions work well, a cheap and efficient water service serves to boost agricultural production and generates maximum income and livelihoods per drop of water (Hussain et al., 2004).

6.3 Global experience in infrastructure projects

Different public private partnership models are promoted to address an ever increasing gap between available public funding and the greater need for infrastructure projects, and to address both government failure and market failure to improve efficiency. Innovative PPP models have been used recently worldwide (Estache, 2001; Estache and Gomez-Lobo, 2001;

Estache et al., 2005) but neither a purely public nor a private approach to infrastructure development projects have proven sustainable in either the developed or developing world. Infrastructure projects involve social, economic, political, legal, and environmental dimensions and have significant distributional impacts on various segments of the population

164 (Boccanfuso et al., 2005; Narayanamoorthy and Hanjra, 2006). Winners and losers are neither easy to identify no immediately clear. Public benefit consideration often overweighs private returns such that the political economy of decision making is not always straightforward or transparent either, and the model is subject to wide criticism and sometimes faces strong challenges from private providers because of the broad discretion that is used to award contracts (Darghouth, 2008; Ward et al., 2009; Zhang,

2004a). This calls for the need to develop a robust, impartial, and equitable methodology for assessing the best value of money from the PPP model for each dimension of the project objective (components, functions, governance). Broadly similar principles would apply to PPP for irrigation projects.

International PPP practice in infrastructure development projects have been widely studied (Zhang, 2004a; 2004b). These studies include BOT type toll road projects US , private finance initiative projects in UK, concession and lease contracts for urban and rural water infrastructure in Australia (Mckay,

2008), BOT tunnel projects in Hong Kong, BOT type projects in Australia,

, BOT power projects in many developing countries including China and

Pakistan, India, Lao PDR, the Philippines, Sri Lanka, and Thailand, and a range of projects in Canada (Vining and Boardman, 2008) (Table 6.1).

These PPP projects include roads, bridges, airports, ports, railways, and highways in the transport sector; thermal and hydropower, telecommunication, internet, water supply, and waste disposal systems in the utilities sector; and universities, schools, childcare, hotels, hospitals, and community services. In these diverse PPP projects, many have been

165 successfully developed with significant increased value in output, for example Sydney Harbour Tunnel project in Australia (Jones and Noble,

2008), and the Laibin power project in China (Watson, 2003). Serious problems have also been encountered in a number of other PPP projects, including the second stage Motorway project in Pakistan and the Lao project due to high toll rates and resulting political opposition to the project.

166 Table 6.1 Major PPP projects in Canada

Project Start Term Design Build/ Operate Finance Contract size Public partner Private partner year (years) buy/lease Abbotsford 2004 30 Y Y Y Y $355 million plus Ministry of Health, Fraser Access Health Regional Hospital $40.6 million/year Health, Provincial Health Abbotsford Ltd. and Cancer Centre services, BC Cancer Agency, Fraser Valley Regional Hospital Partnership Aurora College 2000 20 Y Y Y Y $4.7 million plus NWT provincial Aurora Building Family Student $475,000/year government Developers Housing Brampton Centre 1997 34 Y Y Y Y $26.5 million plus City of Brampton Realstar & of Sports and $230,000/year Edilcan Groups Entertainment Britannia Mine 2005 21 Y Y Y Y $27.2 million Province of British EPCOR Water Water treatment Colombia Services Plant Centracare 1997 25 Y Y Y $6.5 million Province of New Pomerleau Inc. & Psychiatric Care Brunswick Cardinal Facility Construction Inc. Charleswood 1995 30 Y Y Y Y $15 million City of Winnipeg DBF Ltd. Bridge

167 Project Start Term Design Build/ Operate Finance Contract size Public partner Private partner year (years) buy/lease Highway 104 1997 30 Y Y Y Y $113 million Province of Nova Scotia Highway 104 Western Western Alignment Corporation Confederation 1997 30 Y Y Y Y $730 million Government of Canada Strait Crossing Bridge Development Inc. Cranbrook Civic 1999 30 Y Y Y Y $22.6 million plus City of Cranbrook Vestar Inc. Arena Multiplex $801,000/year Evergreen Park 1995 25 Y Y Y Y $14.8 million Province of New Greenarm School Brunswick Corporation Goderich Harbour 1996 15 Y Y Y $650,0000 plus Town of Goderich Sifto Canada Ltd. Revitalization $1.4 million annual trust fund Guelph Sports & 1998 35 Y Y Y Y $21 million City of Guelph Nustadia Entertainment Development Inc. Club Halifax Harbour 2004 30 Y Y Y Y $133 million Government of Canada, harbour Solutions Solutions Province of Nova Scotia Consortium Hamilton- 1999 5 Y Y Y Y $7.5 million City of Hamilton Azurix Wentworth Water & Wastewater Highway 407 1999 99 Y Lease Y Y $3.1 billion Province of Ontario 407 International ETR Inc. Moncton Water 2005 20 Y Y Y Y $85 million City of Moncton USFilter Canada 168 Project Start Term Design Build/ Operate Finance Contract size Public partner Private partner year (years) buy/lease Treatment Facility O’Connell Drive 1994 35 Y Y Y Y $85 million plus Province of Nova Scotia Nova Learning Elementary $59,000/month Inc. School Ottawa 2003 25 Y Y Y Y $3.5 million City of Ottawa Thunderbird Superdome (Shared) Mgmt. Services Inc. RAV Line/Canada 2005 35 Y Y Y Y $1.8 billion Greater Vancouver Intransit BC Line Transport Authority, Government of Canada, province of BC Royal Ottawa 2004 23 Y Y Y Y $120 million Province of Ontario The Healthcare Hospital Infrastructure Company of Canada Sarina Sports and 1997 20 Y Y Y Y $15.9 million City of Sarina Nustadia Entertainment Development Inc. Facility The Secure 2001 5 Y Y Y Y $57 million Government of Canada Team BCE Channel Toronto Union 2003 25 Y Restore Y Y $5 million City of Toronto The Union Station Pearson Group Revitalization Inc. Waterloo Landfill 1998 25 Y Y Y Y $7.5 million Regional municipality of Toromont Energy

169 Project Start Term Design Build/ Operate Finance Contract size Public partner Private partner year (years) buy/lease gas Power Plant Waterloo William Osler 2001 25 Y Y Y Y $550 million Province of Ontario The Healthcare Health Centre Infrastructure Company of Canada Adapted from various sources cited in (Vining and Boardman, 2008)

170 Public private partnerships are increasingly5 deployed as a mechanism for the delivery of infrastructure projects6 around the globe. Nevertheless the scientific and expert opinion remains divided on their effectiveness. There are inherent tensions between efficiency and commerciality on one hand and accountability and transparency on the other (Watson, 2003)as most

PPP exhibit the characteristics of “incomplete” contracts such that it would be unusual if “opportunistic behaviour” was not an issue (Hart, 2003).

However the model can successfully deliver public infrastructure goods and services and can provide value for money if risk can be allocated to the party best able to manage it. The projects may fail where risks are not appropriately managed and private partner does not have a strong financial capability to deal with financial consequences and exploit financial opportunities (Zhang, 2004a; 2004b).

The risks can be managed by improving financial capability. A statistical analysis of expert opinion identified some 35 financial criteria to measure the financial capability that is a pre-requisite to the success of BOT projects

(Zhang, 2005b; 2005c). These 35 financial criteria can be grouped to measure financial capability in four dimensions: sound financial and engineering techniques; advantageous finance sources and low service

5 The importance of PPP can be judged from an increasing number of published articles but also from the fact that prestigious journals have allocated a complete issue or special section to the topic. The American Behavioural Scientist devoted its September 1999 issue to the topic of “public-private policy partnerships” and The Economic Journal published a special section in its March 2003 issue to the topic “private provision of public services”. The Australian Accounting Review also devoted its July 2003 issue to accounting changes in the public sector including PPP (Watson, 2003). The topic is receiving increasing attention in parliaments in Australia, Canada, Scotland and UK and public inquiries by the auditors general. Private sector is a strategic partner in the delivery of $10 billion National Water Security plan in Australia.

6 Includes capital projects across all areas of government such as water and wastewater, sanitation, waste disposal, transport, communication, internet, (hydro)power generation, energy delivery, hospitals, courts, jails, legislative assemblies, childcare and other social services, education, schools and recreational and sports facilities. 171 costs; sound capability structure and requirement of low-level return to investments; and strong risk management capability. These criteria can be used for assessing and evaluating the financial capability of BOT infrastructure projects for improved risk management.

The public policy rationale and the case for public private partnership arrangements include (Murphy, 2008) off-book financing, a declining factor in infrastructure investments; accelerating project construction; on time and on budget delivery; shifting risk to the private sector, cost savings; improvements in customer service; and enabling the private sector to focus on core business and outcomes (Zhang, 2006a; 2006b). The case against the model rests on five key points (Murphy, 2008): higher real cost, less value for money; lower design and service quality; reduced transparency and accountability to the public good; threats to the rights of the workers; and loss of public policy flexibility to respond to public demands.

Accountability of PPP can be improved by enhanced accountability of finances, fairness, and performance (Watson, 2003). As PPP projects are part of the public finance, it is necessary to compare them to the correct standard, which is not perfection but traditional public finance methods for meeting state obligations. For instance, the government of British Colombia uses the Capital Asset Management Framework as part of its “objective- based government” to give answers to the questions what government aims were in embracing the PPP, how they related to core values of the public sector, and how public officials go about evaluating the options available

172 for undertaking any given project (Cohn, 2008). For example, the framework’s overview states the following objectives:

1. To establish best practice in capital asset management across the

public sector.

2. To support public sector to think creatively and find the most

efficient ways to meet BC’s infrastructure needs.

Under each objective, a number of principles are laid out and each is associated with guidelines and tools. The principles associated with the first objective are:

1. a focus on sound fiscal and risk management;

2. accountability in a flexible streamlined process; and

3. an emphasis on service delivery.

Under the second objective, the principles are:

1. achieving value for money;

2. protecting the public interest; and

3. encouraging competition and transparency.

The framework thus provides a powerful statement of transformational leadership by seeking to align the use of alternative service delivery model with deeper values of the private sector and financial and political goals of the public sector. In advocating the use of market-type mechanism for public service delivery, it acknowledges that value for money does not necessarily equal lower costs in a project overall, though obviously costs are a factor to be considered (Cohn, 2008).

The arguments for and against public private partnerships (Murphy, 2008) indicate that ensuring successful partnerships by achieving the best value

173 for money7, that is at the core of the case for PPP, rests on three variables: the nature of the project; effective project and contract management skill by the government; and reduced uncertainty and clear and effective risk allocation–genuine and appropriate transfer of risk to the private sector is one critical element required for successful PPP (Watson, 2003). Getting the equation right is fundamental for delivering a public service through these arrangements. Literature leads to four principles that should guide this determination:

1. Ensure that the services to be provided respond to a clear public

need and can be clearly identified and measured.

2. Ensure that the public sector has the expertise to assess and manage

risk.

3. Ensure that the partnership can deliver high quality, efficient, low

cost and responsive service through optimal risk allocation.

4. Ensure that there are clear lines of accountability and redress.

In summary, PPP model can deliver public infrastructure projects and services. However, risk management, accountability, and cheaper and affordable service delivery are still the main concerns, particularly in many developing countries where institutions and policy structures are weak and

7 The best value objective should be the ultimate objective of PPP model, which encourages creativity and innovativeness from the private sector and gives the public sector the flexibility to choose a project proposal that offers the best value. Studies on global PPP models using factor analysis (Zhang, 2006a; 2006b)show that major agreeable best value contributing factors are: early project completion and service delivery; low tariffs; reduced disputes; acquisition of a fully completed and operational infrastructure project; reducing the size of public borrowing via off-book financing; improved design and construction; utilizing private sector technologies and managerial skills for innovative and cost effective projects; additional finances for national or priority projects; increased project development and operation efficiencies; and transfer of risks related to construction, finance and operation.

174 political instability and rule of law deter private and foreign investments. A better investment climate for all can improve the delivery of infrastructure projects through PPP model with win-win-win outcomes for public-private- consumer entities.

6.4 Global experience in water and sanitation

Due to limited PPP experience in irrigation and drainage sector the overview of PPP models in water and sanitation sector from an investment perspective was done. This may help complement the gaps in knowledge because of the similarities in the two sectors: both sectors have a long history of public financing and management (Perard, 2009); both provide water and are priority sectors for economic development and poverty reduction and have aspects of public good (Soussan, 2006); political economy issues related to water rates and equity are quite similar

(Komives, 1999; Ruijs et al., 2008); and private investment is suited to a number of functions in both sectors (IADB, 2003) in developed and developing countries.

6.4.1 Types of PPP

The PPP in water and sanitation can be divided into two main categories depending on whether payment for the service is linked to operational results: public contract – a PPP where the fee paid to private service provider/operator by the public client is not linked to operational results;

175 public service delegation – a PPP where the fee paid to private service provider by the public client is linked to operational results.

Under public service delegation (PSD) the service provider usually collects fees from the end users and not from the government. The key difference between the two categories is thus the treatment and allocation of risk. In a public contract the private service provider bills the public client and normally gets paid irrespective of the operational results on the ground and whether the service charges were collected. This leaves most of risk with public client. In a public service contract, the private service provider is responsible for operational results; it normally bills the end users, collects the charges and thus assumes a major risk of collecting charges from large number of end users.

Various PPP types differ in terms of three main aspects: their duration and allocation of risk; responsibility for the investment function; and the extent of public subsidies for managing commercial risk and as discussed below.

6.4.1.1 Public contracts

Under this category come two PPP contracts: service contracts; and management contracts.

Service contracts. These are usually task specific short term contracts suitable for outsourcing specific tasks such as system maintenance, metering, billing, and collection of charges. The public client simply hires a service provider instead of performing the task herself. Payment is arranged

176 on a fee per task basis. The duration of the contract is short (1-2 years).

Service contracts may sometimes be renewable (Darghouth, 2008).

Management contracts. These contracts transfer responsibility to a private operator for a period of 3-5 years for providing specific services on behalf of the government agency (Darghouth, 2008). The public authority retains financial responsibility. The operator is paid a fee for performing the task but is not responsible for operational results although efficiency incentives may be incorporated into the contract clause by making a part of the fee payment conditional on achieving the set performance targets. This may be problematic where except for a few executives all personnel continue to be employed by the public agency.

6.4.1.2 Public service delegation

Under this category come five PPP contracts namely, lease, affermage, concession, build-operate transfer type, and divestiture or asset sale.

Lease and affermage. Under these contracts the private operator (lessee) is responsible for operation and management but not for financing the investment. Public agency is generally responsible for financing the investment by raising funds and coordinating the investment with private operator. Where the distinction between investment in ongoing but heavy maintenance and system modernization is unclear the operator may be delegated some responsibility for investment in system rehabilitation.

Financial risk for operation and maintenance is borne entirely by the lessee.

177 The operator thus has a direct incentive to improve efficiency and cut costs to increase profit (Vining and Boardman, 2008). However, the key difference between a lease and affermage is that the operator pays the public authority a fixed rent under the contract and bears greater risk; whereas in affermage the rent depends on the revenue collected by the operator from end users and public authority bears more of the commercial risk. The duration of lease contract is usually 10 years.

Concession contract. Under a concession contract the private operator has full responsibility for asset operation and maintenance as well as financing and managing the new investment over 25-30 year period (Vining and

Boardman, 2008). The final ownership rights revert to the government at the end of concession.

Build-operate transfer model. Under this model the government pays the operator a contract payment irrespective of operational results or what happens to water service delivery and thus the level of risk for the operator is lower and it resembles more a public contract than public service delegation. This model (Prefol et al., 2005; Vining and Boardman, 2008) includes:

. Build-operate-own (BOO) model where the assets remains indefinitely

with the private operator.

. Design-build-operate (DBO) model where the responsibility for

investment is shared between the public and private entities.

178 . Rehabilitate-operate-transfer (ROT) model where private operator has

designated responsibility to extensively overhaul and rehabilitate the

asset.

Divestiture or outright sale. The entire infrastructure and assets are sold off to the private sector, either directly or by issuing share on the stock market.

This simply means sale of asset to a private operator or privatization; however it may involve a fixed term licence with asset reverting back to the public at expiry of the contract and the asset losing most of its value

(Perard, 2009). The concession differs from divestiture as the concession transfers the main economic rights for such a long time that operator’s incentives seem similar to ownership at least for the initial years.

6.4.2 Global experience

The early 20th century French historical PPP model (gestion deleguee–a blend of concession and affermage) became the driver of modern PPP models in the water and sanitation sector (Mehta and Canal, 2004). The

1980s saw a slow period of PPP development followed by a rapid rise in the

1990s and a slow down then onwards. This rapid rise coincided with the release of first World Development Report on poverty in 1985 which provided much needed boost to investments in global water and sanitation sector (Glewwe, 2002). The slow down can be attributed to several factors.

First, most PPP were concession types involving large projects and big investments by the operators; the investments were made in strong international currencies but revenue were collected in weak local

179 currencies. Deterioration in exchange rate in Asia and Latin America, where large PPP contracts were enacted, eroded the profitability. Second,

PPP came under strong criticism due to poor performance and governance issues which deterred public and private investors to initiate new projects.

Estimates suggest that PPP provide water services to 5% of the world population, and private funding accounts for around 10% of the total investment in the sector (Foster et al., 2000).

A recent study examined eight public private partnerships in four sub-

Saharan African countries (Jones et al., 2008). Results were measured at three levels: the transaction, to assess the time taken to sign the deed; the firm, to assess efficiency effects; and the stakeholders, to assess impacts on consumers, workers, government, and operators or owners (Table 6.2). A welfare analysis was carried out to measure the relative distribution of benefits among stakeholders for two cases that has sufficient data – Côte d'

Ivoire and Senegal water. These two and Uganda clay were unqualified success with no contract issues. The first lease contract in Mozambique water ended abruptly over disputes about pricing, investment and bidding issues. Both management contracts were fulfilled in Uganda water but neither party renewed the first contract and agreement on price was not reached in the second contract. Both external and internal factors explain these results, including strategic partner’s decision to disengage from Africa and new government regarded the privatization a mistake. Problems arose with Mozambique water that has an independent regulatory authority but major contractual disputes did not arise with Senegal water that has no such authority (Jones et al., 2008).

180 Table 6.2 Tradeoffs in efficiency and equity in PPP investments in developing countries –an illustrative example

PPP case Type of PPP Competition Impacts on stakeholders in the sector Consumers Workers Government Operators or owners Côte d'Ivoire Lease No ++ + ++ ++ electricity Mozambique Lease No ++ - N - water Senegal Sale, Yes + ++ ++ ++ airlines majority Senegal Sale, No N N + -- electricity minority Senegal Lease, No ++ - ++ N water affermage variant Uganda clay Sale, full No + ++ ++ ++

Uganda Sale, Yes + N ++ ++ telecoms majority Uganda Management No N+ N - + water contract Legend: ++ major net gains; + modest net gains; N no significant net gains;

- modest net losses; -- major net losses.

181 Efficiency gains came in Senegal water from new investments and a tough incentive structure built into the contract. Performance improved in terms of new connections and collection efficiency in case of Uganda water under the two management contracts. The drop in connection charges and government’s new policy of paying its debts also contributed to efficiency gains. Mozambique water showed some improvement in distributed and paid for water. Consumers lost in none of the eights cases. Consumers had major gains in Mozambique water and Senegal water because of gains in access to services and the quantity supplied. Access to investment capital allowed expanded coverage with only moderate increase in water charges.

Uganda water was a counterfactual case, as consumers would have done as well without privatization because of good public sector management. By contrast workers were modest net losers in Mozambique water and Senegal water because both reduced staff before privatization. Uganda water was the only case with modest government losses, reflecting annual fee payments to the management contractor. A full welfare analysis showed that, consumers received about 70% of the net gains from an increase in water consumed in the case of Senegal water, governments got the balance

30% while workers lost and private sector operator made no gains because of the incentive regime in the contact agreement (Jones and Noble, 2008)

There has been mixed experience with PPP models elsewhere. Management of water supply, sanitation and electricity in the city of Casablanca in

Morocco since 1997 is considered to be a successful case of private sector involvement by users. The private operator is recognized (Jamati, 2003) as

182 being professional, efficient, innovative, transferring know-how, has a citizen role, and has achieved spectacular results, namely:

 invested more than 220 million euros during the first five years;

 population served with water and electricity increased by 20%;

 a saving of 24 million cubic meters of water annually;

 a significant reduction of flooding risks; and

 modernisation of customer service.

The Water Authority of Jordan entered into a management contract with an international water service operator in April 1999 for the management of all water related services within the governorate of Amman and BOT contract for As-Samar wastewater treatment plant. The specific objectives include increasing the efficiency of enterprises, consolidating public finance, attracting private investment into the economy, and deepening the financial markets (Abu-Shams and Akram, 2003). Capital investments of $201 million went ahead, the reduction in water losses due to the capital investment plan was small, and the management contract could not relieve the government of Jordan of the financial burden of capital investment but was a good first step towards greater PPP (Abu-Shams, 2002).

Another best practice example of private sector participation in bulk water supply is the Johor Bahru, Malaysia (Memon, 2005). The contract was aimed to guarantee a sufficient supply of drinking water to the WHO standards (Mckay and Moeller, 2001). The PPP process (1991 to 1992) involved a 20-year concession contract through BOOT and rehabilitate operate (ROT). A 10-year domestic loan of $88 million was arranged within 3 months of the signing of the contract to cover the first two of the

183 three stages of investments, comprising total financing of $177 million. The

PPP, consortia made up of local and international companies, was incorporated under the Companies Act in 1994, with the state government holding 100% of the equity, and was managed by a board made of state government officers having full autonomy except for three decisions, namely the water supply contract with Singapore, the Malaaca water supply contract, and two bulk water supply contracts which supplied the new company with its treated water. As a corporation the private service provider can borrow from non-government sources and corporatisation arrangements, but could not cut staff for the first five years. A regular panel reviews proposed tariff increases and other matters. The bulk water supply capacity increased by 75% within 30 months of PPP; the costs also increased in nominal terms but water tariff has not increased since 1991, and the volume of non-revenue water was reduced to 20%, and no water management was implemented during times of drought (Memon, 2005).

However there should be a link between the bulk water tariff and retail tariff, and the management of catchments and inter-catchments are important issues, which currently no one is responsible for in Malaysia.

The Johor Bahru PPP experience differs from a well known concession agreement in metro Manilla, where consumer water supply and the collection of charges is also being managed by the private service provider who provides bulk water supply under a BOT contract whereas the government pays private sector directly for that water (Mcintosh and

Yniquez, 1997). These payments, in most similar agreements, are being made under a “take or pay” rule, which means that even if the water

184 demand falls, the government has to buy an agreed minimum amount of water from the private provider. If the minimum levels under the take or pay rule are unrealistic or demand curve is not accurately estimated, the replication of this rule may create a problem (Aiga and Umenai, 2002).

Metros planning to replicate this type of BOT model should therefore evaluate this rule carefully before implementing it. For instance, under

BOOT and ROT agreements the private provider in the Johor Bahru was required to supply the 10% of the demand curve, drawn by the provider of bulk water with consultants and a tariff revision formula where the variable component of the bulk water tariff is adjusted annually based on inflation, costs of energy, chemicals and labour.

Overall these PPP models suggest that bulk water supply or bulk wastewater treatment is a viable pathway to address the lack of public investments and to improve efficiency at water delivery. Most cities in the developing world have yet to develop the political will and financial capacity to use concession agreements where the private provider is responsible not only for bulk water supply but also for the management of retail services and collection of tariffs directly from the consumers. In such cases the government only plays the role of regulator to protect the interests of private sector as well as the consumer, for instance in China (Braadbaart,

2005), the Philippines (Aiga and Umenai, 2002), and Sri Lanka (Jones et al., 2006) and elsewhere in Asia (Gunatilake and Jose, 2008). Meanwhile

BOT model for bulk water supply provides a way to transform services that were previously handled by the public sector into services managed by the private sector in developing world.

185

A more critical issue relevant to sustainable potable water supplies is the change towards demand management (Hussain et al., 2002). This issue is also critical in irrigation management. This is because the tariff structures are never designed in a rational manner, and the exact cost of water remains unknown, as does its relationship to average tariff. Yet that relationship is fundamental in estimating the dimensions of each range of consumption and is the key criterion in assigning the corresponding tariff (Bakker, 2001;

Massarutto, 2007). Nor at an institutional level has sufficient progress been made in creating a body that would integrate all the data relevant to demand management that could, on the basis of precise knowledge of the income and expenditure, establish a coherent tariff structure to promote water conservation while taking account of all social, economic and political dimensions (Ward, 2009; Ward and Pulido-Velázquez, 2008; Young,

1996). Evidence from a new policy based on demand management for water supply in Mexico City supports the conjuncture. The new strategy for water in the City introduced consumption based charges to different users, domestic and non-domestic, updating prices annually based on inflation rate, cutting off service to non-domestic users due to non-payment, allowing exemption of payment only to lower consumption groups, pensioners and schools etc, and financing the investment through PPP model. Real income (1996 prices, million pesos) increased while average tariff (1996 prices, pesos per cubic meter) fell for water in Mexico Cit

(Figure 6.3). Physical and measurement efficiency improved; collection efficiency in terms of water paid and water billed also improved during

1996-2001 (Maranon-Pimentel, 2003).

186

2,000 million peso/m3 6

1,800 5.5

1,600 5 1,400

4.5 1,200 Real income

Real tariff (right axis) 1,000 4

800 3.5

600 3 400

2.5 200

0 2 1996 1997 1998 1999 2000 2001

Figure 6.3 Income and average tariff for water supply in Mexico City

The Third World Centre for Water Management carried out a series of in- depth analyses on the performance of private sector in various developing countries, and drew the following conclusions (Biswas, 2003; Marañón,

2005): the forms of private sector involvement could range from outright sale of assets, to management concessions to run the system, to outsourcing of specific activities (Table 6.3). Since England and Wales sold all their assets out rightly to the private sector in 1989, no other country has followed this model, and there is no agreement as to its actual impact on consumers and service quality and the assessments range from highly favourable to highly deplorable. No universal judgement can be made for management concessions either. Results have sometimes varied within a single country (for example in Morocco, Casablanca was a success but not

Rabat), even within same metro area (half of Manila works but the other half does not) (Biswas, 2003), and even within private or public sector companies, and over time within the same city or company. Public sector is

187 not necessarily uniformly bad; and private sector is not essentially uniformly good. Each project must be judged by its performance based on objective analysis of facts, and generalized statements of high priests and die hard activists of private sector must be avoided.

Table 6.3. Examples of public-private partnerships with an outline of investment and other functions

Hybrid PPP Profit PPP Item Management Service Concession Full Total contract contract (BOO/BOT) concession privatization Ownership G G G G P Investment G G P P P Operation P P P P P Invoice G/P P P P P recovery Recent  Mexico  Guinea  Australia  Argentina  England examples  Puerto  Poland  Malaysia  China and Rico  Czech/R  Mexico  Malaysia Wales  Trinity  Morocco  Brazil Tobago  Turkey  Ivory  Turkey Coast

G = Government function; P = Private sector function; G/P = Joint function of G and P.

Data source: Khalifa and Essaouabi Khalifa (2003).

188

6.4.3 Key issues

6.4.3.1 Major issues

Water sector PPP models have delivered significant benefits in terms of service delivery and reducing the pressure on public finances. Competitive pressure from multinational water companies has improved and is likely to improve significantly the performance of public sector companies. Yet significant problems persist. Tackling the institutional, legal and practical problems for the participation of PPP in water infrastructure projects must consider a holistic perspective to address the core issues. Water and sanitation sector PPP are beset with four major issues as discussed below.

Pervasive risk. The initiative for PPP came from the government sectors in its quest to relieve its fiscal burden and to part its management responsibilities to the private sector. Often water service was seriously affected; coverage rates fell sharply and majority of the population cannot be served water, as heavy investments were needed. Due to high risks, investors were reluctant to financing unless the risk was partly underwritten by government (Camdessus, 2003).

Charges for good water service. Poor maintenance and asset management often cut water service quality. Good water service requires a surge in operation and maintenance expenditure (Mehta and Virjee, 2005), which must be offset by revenue raising either through increase in water service

189 charges and/or downsizing overstaffed former public agency–sensitive political and social issues for private investors and operators.

Raising professional standard. Private operators base their investment decisions on business principle and a long term outlook and gradually introduce sound management practices (Komives et al., 2005). This requires a clear mandate and continued political commitment on part of the public sector and political governments.

Fairer subsidies. Providing reliable and high quality water services to all segments of the society including poor is expensive and may not always be financially feasible. Due to the public good nature of the universal water service, public subsidies are often required (Foster et al., 2000). These cross subsidies need to be fairer and transparent and private operators must be compensated to cover any shortfalls in revenue.

6.4.4 Lessons learnt

The PPP experience in water and sanitation sector offers several lessons which are relevant to PPP functions in irrigation sector such as project financing function, project design and implementation function, project operation and maintenance function, project management function, and water governance function as discussed below.

Project financing function. The private sector has been able to mobilize finances through concession and BOT type contracts in water and sanitation sector, and is already a major investor in irrigation sector but significant

190 constraint remain to expanding this investment role. The World Panel on

Financing Water Infrastructure (Camdessus, 2003) made three recommendations to overcome these constraints in water and sanitation sector that may also have relevance to irrigation sector. These recommendations include: the long term risks specific to water require risk sharing and guarantees from the government; international risk management instruments should be used to handle country risks like devaluation; and multilateral financial institutions should provide direct funding for private operators and sub sovereign entities.

Project design and implementation function. Here the private sector has played a major role in irrigation sector. There is further value to be gained from the management expertise of the private sector through cost reduction and efficiency gains which are pivotal to financial sustainability (Johansson et al., 2002).

Project operation, maintenance and management function. These irrigation functions can be contracted out easily like in water and sanitation sector, through contracts or public service delegation. Irrigation management transfer is unique to irrigation sector only, involving a PSD contract with farmer organization rather than with private operator (that is, the water and sanitation sector has no such parallel experience). Irrigation infrastructure may also be transferred by concession in a new model.

Water governance functions. These functions belong to public governance in both sectors. Experience in water and sanitation does suggest that some

191 of these function, for example water monitoring may be contracted out through service contracts.

6.4.5 Key findings

The above analysis offers following key conclusions relevant to PPP in irrigation sector.

Achieving financial autonomy. Water and sanitation sector PPP experience could provide the foundation for establishing the core principles and practice of financial autonomy for irrigation agencies. This would require downsizing overstaffed public agency; reduction or gradual elimination of government operating subsidies; and an increase in water service charges and recovery rates (Briscoe et al., 2005). Short terms costs would be offset through efficiency gains in the long run brought by the PPP; improved water service must increase farmer income. Overall, these gains could increase the finances available to the sector in the long run and help achieve financial autonomy for the sector.

Improving professional standards. Improved management and business practices can improve standards in irrigation management. The unbundling of irrigation functions–the separation of governance function and management function and the professional conduct of each–can bring accountability and transparency to irrigation financing, by clarifying who is responsible for financing and implementing each function (Prefol et al.,

2005) and what are the expectations of each stakeholder.

192 6.5 Global experience in irrigation sector

6.5.1 Social investments

Past irrigation investments have undoubtedly contributed to increasing food production and reducing world poverty and hunger (Hussain and Hanjra,

2003; 2004). Since times immemorial irrigation began as a social experiment with the boarder social goals of food production, bringing new land under cultivation, population settlement, and social cohesion as well as a key instrument for exercising control over rural masses and extending rights over new lands and territories (Hunt, 1988; Hunt and Hunt, 1976).

Irrigation technology has as much to do with power as with water. There was an association between bureaucracy and irrigation; the development of successful irrigation system of any scale depended on the rise of a bureaucratic hierarchy, and the development of irrigation thus enhanced the power of the bureaucracy, which became the core of state power in ancient agrarian societies such as China, India and Egypt (Lees, 1994).

Bureaucratic management and mismanagement of irrigation technology mediated the outcome of such development projects on the affected populations. Irrigation and the origins of the sate is one of the few “big ideas” in irrigation development (Lees, 1994). Irrigation imposed the necessity for a closely integrated society, since an elaborate system of canals can only be maintained and the water shared out by strict control

(Hunt, 1989). It was widely assumed that all irrigation systems must have constituted authority and that all irrigation systems must have centralized authority. However, an inspection of the data reveals no relationship

193 between size and structure of authority in systems ranging from 700 to

458,000 ha. Furthermore, an irrigation system of 458,000 ha is managed by farmers such that, irrigation systems without constituted authority exist; and large systems do not require central authority (Lees, 1994).

Irrigation has been important for agricultural production in Mesopotamia comprising parts of present day Iran and Iraq for 6,000 years. During the

Han Dynasty in the fourth and third centuries BC, the Chinese started to transform the natural landscape of eastern China into rice paddies. This process that reached its climax during the eleventh and twelfth centuries represents one of the earliest large scale irrigation schemes, scientifically planned and coordinated by the dynastic bureaucracy (Heilig, 1994). Dou

Jiang Yan area in Sichuan province of China has a 3,000 year old irrigation system; whereas groundwater irrigation system covering 5,300 km2 in

Xianjiang province dates back to 2056 BC. The Dual Canal system in

Udawalawae irrigated area of Sri Lanka dates back to 2000 BC (Kenyon et al., 2006). China’s Mayan civilization presents an example of perils of human intervention in nature. The decline of the Mayan empire was largely the result of human induced ecological degradation, resulting in deteriorating agricultural productivity (Alexandratos, 1997). Today economically significant parts of the Indo-Gangetic basin in India and

Pakistan are affected by salinity and land degradation, resulting in lost productivity and lower returns to investments in irrigation and related rural infrastructure (Khan and Hanjra, 2008). The Karkeh and other basins in Iran also have similar issues and grim prospectus for environmental sustainability and the population wellbeing (Ahmad et al., 2009).

194

Despite all this diversity, the main problems for earlier civilizations were water storage, flood control and maintenance of canal. For instance, the problems of irrigated agriculture in Mesopotamia (Khan et al., 2006a).

Over all the social function of irrigation investments was a mixed bag of policies and actions used to promote income redistribution, economic stability, or to develop backward areas and encourage investments by beneficiaries (Sampath, 1991; 1992). For example it was for social and geographical purposes that irrigation was federally subsidized as a mechanism for settling the American West during the first half of the 20th century (Cortez-Lara, 2000). With the West settled these social investment policies became the target of increasing criticism on financial and economic efficiency grounds. Similar rationale was used for financing irrigation infrastructure in India and Pakistan during British rule. In recent years policies have shifted to reduce significantly the government role in and subsidies for social investments in irrigation (Fan et al., 2008).

6.5.2 Public investments

During the past half century, Asian governments invested heavily in irrigation infrastructure development involving large head works and major conveyance and distribution systems (Svendsen and Rosegrant, 1994). Bulk of these investments was publicly funded (Gulati and Sharma, 1992; Gulati et al., 1994). The main objectives of these investments were to increase agricultural production; enhance food security and self-sufficiency; protect rural areas from drought and famine; uplift the socioeconomic status of

195 rural masses; broaden the revenue base of government finances; and, arguably, to attain specific equity objectives such as to redistribute income and wealth among households, social classes, and geographic regions

(Sampath, 1991; 1992) – but government motives were hardly altruistic.

For instance a classic study taking the case of irrigation infrastructure investments in the Philippines and Sri Lanka over the last half century

(Kikuchi et al., 2003) shows that, government’s decisions to invest in irrigation infrastructure were motivated by short run changes in rice prices in the global market (driven by the food crisis in the 1970s) and her desire to achieve self-sufficiency in rice, and were therefore short run rational.

Irrigation investments were driven by public welfare paradigm – to achieve the greatest good for all by investing public monies. The pitfalls of this approach became soon clear with increasing fiscal burden on the government for system operation and maintenance, widening gap between current expenditure and revenue, and poor and falling performance of many public irrigation systems (Murray-Rust et al., 2003; Rijsberman, 2006).

The first phase of these investments began in 1960s with massive investments in irrigation hardware, a heavy focus on civil works, and financing and management chiefly by government through public sources.

These investments mainly took place in Asia and culminated in the Green

Revolution (Evenson and Gollin, 2003). The second phase continued into the 1970s and 1980s involving bulk of investment still being directed towards the construction of infrastructure and many of these investments were financed by the multilateral lending institutions, principally the World

Bank (Hayami and Kikuchi, 1978). For instance, irrigation and drainage

196 sector lending by the Bank reached all times high during late 1970s and then declined somewhat during mid 1980s but recovered and peaked again in early 1990s.

Irrigation received bulk of the public agricultural investments in developing world –and most of the public operating subsidies. Irrigation investments peaked at 60% of total public agricultural investments in the Philippines and 50% in Sri Lanka during 1980s and more than half in Viet Nam until the 1990s (Kikuchi et al., 2003). Direct cost recovery did not fully cover either investments costs or operation and maintenance costs, making these investments public subsidies to agricultural sector.

Recent data show a rapid expansion in irrigated area in China during the

1950s, due largely to the mass mobilization campaigns that accompanied collectivization and were focused on the construction of surface water systems, especially large reservoirs and diversions (Mu et al., 2008). The advent of pumping in the 1960s brought far more new farmland under irrigation. The development was first concentrated on pumping surface water in low-lying rice growing southern areas such as the Pearl River and

Yangtze. By mid 1970s the focus turned to pumping wells in north China which brought previously unserved areas under irrigation and the impact was highly concentrated regionally (Huang et al., 2006). The irrigated area stabilized by 1976, followed by a small decline during the mid-1980s, and recovery to new peak levels in 1990 and a gradual but steady increase thereafter. Studies (Nickum, 2003) have identified a range of causes for the reported decline in irrigated area in China (Table 6.4).

197

Table 6.4 Gross reported decline in irrigated area in China by cause Cause Percentage of total decline in irrigated area 1984 1989 1990 1994 1995 1996 Facilities destroyed and 14 18 19 26 13 12 abandoned Pump wells abandoned 35 35 22 24 25 34 Inadequate water 16 14 13 6 5 5 Land lost to construction 5 10 10 20 19 16 Other 30 23 36 24 39 32 Data source: Khan et al., (2009a).

6.5.3 Private investments

Private investment in irrigation has grown substantially over time. The private investments came from private sector investors, commercial irrigators, and farmer’s own investments in irrigation and is even larger than public investments in some cases and continues to grow. For example, parts of Latin America has most dynamic private irrigation sector comprising 56% of the irrigation (Dixon et al., 2001). Much of the private investments were made by large and medium farmers.

Farmers also made private investments into small scale localized systems as they were most suited to their needs. Examples include diesel and electric tubewells in China (Zhang et al., 2008), India and Pakistan (Shah et al.,

2003) and low cost drip and sprinkler systems elsewhere (Postel et al.,

2001a) and water tanks in southern states of India (Narayanamoorthy,

2007a). Low lift pumps and deep tube wells were installed by corporations under rental arrangements to farmers in 1960s in Bangladesh but private investments in shallow tube wells spread rapidly irrigating boro rice from

198 groundwater during mid 1970s, financed through credit schemes of national banks (Palmer-Jones, 2001). In the 1980s the World Bank invested in a tubewell initiative in Bangladesh that made available subsidized diesel pumps capable of irrigating 2-20 hectares. Dry season mechanized irrigation consolidated. Private investments in tubewells selling irrigation water (services) to farmers of contiguous block of land helped overcome collective actions problems posed by the fragmented and unequal smallholding land structure, and improved agricultural productivity that reduced poverty but the implications for inequality are not clear (Castillo et al., 2007). Tube wells were operated on the basis of one-fourth crop share as water charge, which proved very profitable to managers and financially convenient for the farmers as most were cash constrained and were so able to get water on credit (Palmer-Jones, 2001). This system attracted new entrepreneurs for investments in water selling on a business model in addition to own cultivation. While these investments were successful in expanding the irrigated areas and agricultural production, they tilted access towards large and wealthier farmers (Shah et al., 2003). To facilitate the speared of smaller irrigation technologies among small and women farmers, microcredit schemes were developed that allowed even women groups to acquire loans for pumps sets for water sale (Ahmad, 2003).

Private investments in small scale technologies were also spearheaded and targeted to smallholders in many parts of the world. For example, on the late 1980s International Development Enterprises led a program to mass market treadle pumps, promoting emergence of 75 private sector manufacturers, several thousand village dealers and well drillers and

199 technicians, and a variety of extension and awareness raising activities.

Over 15 years some 1.5 million treadle pumps were purchased and installed by small farmers at market prices and without any subsidy at a total investment cost of about $50 million, brining 300,000 ha under irrigation– this would have cost $1.5 billion with traditional dam and canal irrigation system (Polak, 2004). For $10-15 investments in each treadle pump the returns to farmers are about $100 per year. Thus this treadle pump investment is generating about $150 million per annum in ongoing income for smallholders (Maisiri et al., 2005; Polak, 2005; Polak and Yoder, 2006).

Many international organizations and FAO are now involved in treadle pump programs in many countries in Asia and Sub-Saharan Africa (Kay and Brabben, 2000).

Other examples of private investments include drip irrigation systems

(Keller, 2004), low-cost water storage systems (Polak, 2004) and informal irrigation systems (Batchelor et al., 1994; Pigram and Mulligan, 1991). Drip irrigation systems are low cost and can provide a reliable source of water, boost crop yield and improve quality, and reduce water use, leading to cultivation of high valued marketable crops. Examples include low cost drip irrigation systems in parts of India and Bangladesh, facilitated by a private sector network of manufacturers, village dealers and technicians who install a one hectare drip kit in five days for just $10 (Verma et al., 2004). Large pressurised drip irrigation systems are widely used in citrus and wine plantations in Australia and other developed countries (Khan et al., 2008a).

Such systems are widely seen as a panacea to water scarcity problems in many parts of the world. However their impacts on the environment such as

200 soil salinity due to reduced water use and drainage are contested. Detailed hydrologic-economic and institutional and policy modelling shows that drip irrigation for water conservation may not lead to wet-water savings and can even increase water use (Ward and Pulido-Velazquez, 2008).

Israel demonstrates the results of extensive investments in water infrastructure. With 90% of the irrigation by drip, per capita water consumption for agriculture has been cut in half, compared to the 1960; at the same time agricultural production has risen by 150%. About 30% of the water provided to agriculture is recycled, 93% of sewage is treated and 60% of wastewater is sent to agriculture. Investment cost is high. For instance, annualized water costs for wastewater treatment with recycling to farmers

$0.47 compared to $.30 per cubic meter for freshwater groundwater

(Kislev, 2002). Israel plans to invest $120 million in infrastructure in coming years or about $12 per capita annually. The investment will be partly funded by private investors (Loehman, 2009).

Over the eleven years since privatization of irrigation infrastructure in

Australia, corporate or managed investments has driven modernization of even small irrigation systems. For instance, Central Irrigation Trust pumps water from the River Murray in South Australia, providing water to 1,500 family farms using sprinkler, micro or drip irrigation systems for 95% of their irrigation. The Trust (CIT, 2008) is investing $8 million to replace mechanical water meters with solar powered electronic meters and another

$2 million to install radio on the meters to download flow and consumption data via the web to the irrigators every 15 minutes. Major investments are

201 currently underway in similar infrastructure modernization programs in almost all large irrigation districts in Australia, as part of the National

Water Plan (Commonwealth of Australia, 2007).

6.5.4 Management transfer

Poor performance and deteriorating health of public irrigation systems and in particular growing fiscal burden for the operation and maintenance of large irrigation systems led to new thinking on a better model of irrigation management. Over time, increasing emphasis was directed at extension programs for on-farm water management and better agricultural practices, but these programs did little to improve irrigation systems performance because the quality of service provided by public agencies was not addressed (Merrey, 1997). Momentum built at participatory irrigation management (PIM) first and then irrigation management transfer (IMT) to water user associations. The PIM made impressive strides and by the end of

1990s irrigation schemes in about 60 countries have some form of water organization although real participation and empowerment of the farmers was limited (Giordano et al., 2006).

Participatory irrigation management, PIM, involved water user associations in the financing and management of schemes. This solution has its logical culmination in irrigation management transfer, IMT, the handover of responsibility for scheme operation and maintenance to farmers and their organization (Pant, 2008). Apart from water scarcity that generated endogenous pressure for change (Peter, 2004; Yildirim and Cakmak, 2004), some factors originate outside the strict confines of water sector. These

202 factors include macroeconomic adjustment policies and socio political liberalization programs in many countries including China (since the

1980s), Chile (during the 1970s), Mexico (during the 1980s), the

Philippines (during the 1970s), Spain (during the 1980s) and South Africa

(during the 1990s), and lately the poor performance of large irrigation systems and land degradation and salinity issues in India, Pakistan and

Australia (Khan et al., 2008e).

Mexico vigorously pursued IMT. The macroeconomic crisis of 1980s prompted Mexico to initiate water sector reforms, starting first with its irrigation sector in 1988. The irrigation sector reforms involved a massive transfer of public irrigation systems to water user associations. About 2.9 mha or 87% of the area under small and medium irrigation schemes and

46% of the all irrigated area was transferred to 386 water user associations.

This IMT led to dramatic improvements in cost recovery, system maintenance and water use efficiency (Dayton-Johnson, 2000).

Sri Lanka is often cited example of IMT for promoting integrated water resources management. Likewise IMT in Sri Lanka involved 85,700 ha operated by 757 associations by 1997. The IMT in Sri Lanka has two desirable features. Not only do the associations serve as the organizational basis for an integrated delivery of water with farm inputs and extension services but also function in a vertically integrated process of user participation (Samad and Vermillion, 1999). In 1997 a water company was piloted with shares owned by farmers in the Ridi Bendi Ela area as a part of promoting water privatization. As most of the farmland belongs to the state

203 in Sri Lanka, irrigation privatization cannot succeed without land privatization (Samad and Vermillion, 1999). Although IMT in Sri Lanka is less extensive than Mexico, it is notable for promoting multi-purpose water user associations (Hussain and Perera, 2004).

India has one of the biggest water sectors in the world. Most states attempted to involve users in water distribution, system maintenance and cost recovery although the extent of actual IMT remained insignificant with some notable exceptions such as Andhra Pradesh, Gujarat, Tamil Nadu and

Orissa (Jairath, 1999; Parthasarathy, 2000; Reddy and Reddy, 2005). These states restructured their water administration, developed their own state water policies and achieved significant progress in promoting user participation in irrigation. The macroeconomic crisis of the 1980s and reduced water sector investment in India forced many states to raise internal resources for better cost recovery and external resources by mobilizing private funds through state guarantees for long term water bonds

(Keremane et al., 2006; Narayanamoorthy, 2007b). A high level committee advocated the promotion of private water investments, few states tried to secure private funds by directly inviting bids for project construction and indirectly by issuing water bonds for tapping public funds for irrigation infrastructure development (Madu, 2002; Raju et al., 2003).

Chile offers three major sets of best practice in water management: transferable water rights, register of water rights, and multi-tiered water user associations with clear demarcation of responsibility between water users and administration – project construction being conditional on user’s

204 prior commitment for payment and the mandatory formulation of water user associations right to the project level (Hearnea and Donosob, 2005).

The Philippines National Irrigation Administration was transformed by removing operating subsidies to achieve full financial autonomy –an important accomplishment as few irrigation agencies in the world have been able to do this. Other impacts were dramatic, including reduced staffing levels and lowered operating expenses while the revenue from irrigation held constant. The change in operating rules and procedures led to increase in equity of water distribution with 13% increase in irrigated area with the same water supply (Svendsen, 1993).

Australia has experienced tremendous economic reform and water sector also went under dramatic changes to reflect the changing water sector realities worldwide and partly through deliberate reforms affected since the late 1980s. Apart from national, state and regional initiatives there are also notable attempts at sub-sectoral level. Corporatization and privatization can be seen in both urban sector (Hunter Water in 1991 and Sydney Water in

1994) and in irrigation sector such as the Coleambally Irrigation Area,

Murray Irrigation Area and Murrumbidgee Irrigation Area since 1997

(Pigram, 1993; 2007). These changes have enhanced the role of economic instruments and market-based water allocations while attracting investments and protecting physical health and sustainability of the water sector in Australia (Khan, 2007; Madden et al., 2007; Watson, 2007).

205 IMT began, based on government desire to relieve its fiscal and administrative burden and that farmers as owner would operate system more efficiently, better adjust to their changing circumstances, and were more likely to pay the water charges. IMT was preceded by unbundling as most transferred schemes were very large for farmers to manage as a whole; public agency kept the head works and main system, delegating responsibility for the tertiary or secondary canals to farmers. Such transfers took place globally, but met with limited success (Giordano et al., 2006).

The most recent focus shifted to improving irrigation performance with less regard for particular investment/financing and institutional models but certainly more emphasis on outcomes–results based management seeking the mix of models that can result in best water service. This derives closely from the World Bank’s CDM framework that made investments lending conditional on outcomes (Wolfensohn, 1999) such as the actual number of pupils enrolled in school or people lifted out of poverty. For irrigation sector lending the multicriteria analysis such as triple bottom line of economic, social and environmental impacts (Christen et al., 2006) has been articulated.

6.5.5 Public private partnerships

The role and degree of PPP involvement in irrigation may be based on the following criteria (Elarabawy et al., 1998):

 scope and domain of the service;

 the need for self-financing mechanisms for operation and

maintenance;

206  the need for ongoing improvement and upgrading;

 existing government constraints;

 the financial resources needed to improve and expand the service;

 the advantage of creating a PPP for competition;

 the existing laws and regulations and their modification; and

 the political and social constraints.

They (Elarabawy et al., 1998) also carried out a strength-weakness- opportunities-threats analysis of private sector participation in the irrigation sector. The results showed the importance of selecting and adopting appropriate outsourcing service contracts to minimise risks and ensure service improvement. The private sector participation is also viewed as a good opportunity to introduce new technologies in irrigation water management and the service upgrade and improvement. Socioeconomic and environmental considerations need to be properly addressed for future institutional reforms, which might require some capacity building for new roles and responsibilities (Franks and Others, 2004). Table 6.5 (Tuinhof et al., 2003) shows typical PPP with increased transfer of responsibilities for groundwater development and possibly management.

207 Table 6.5. International PPP models and the increasingly transferred functions

Hybrid PPP Profit PPP Function Service Management Lease Concession BOT Outright contract contract contract contract contract sale Decision making G G G G G/P G/P Policy development G G G G G/P G/P Tariffs/fees G G G G/P G/P P Planning G G G G/P P P Fixed assets G G G P P P (canals, pumps) Working capital G G P P P P Commercial risks G G/P P P P P Design and G/P P P P P P construction Operation and G/P P P P P P maintenance Payments, G to P, Delivered Service and - - - - based on service performance

Payments, P to G, - - Lease Concession - Contract based on rights rights price

Duration of contract <2 3-5 5-10 10-30 25-30 No limit (years) Notes: G = Government function; P = Private sector function; G/P = Joint function of G and P.

Source: Adapted from Tuinhoff (2003).

Two examples of PPP from Egypt are the decentralization and management transfer in the old lands, and PPP in new land involving mega projects

(Wichelns, 2003b). About 90% of the landownership is below one acre in the old land of Nile valley, Delta and fringes. With expansion of irrigation into new land and to reduce the fiscal burden, the government policy is to withdraw up to a higher level, through the application of water boards concept that takes over responsibility for water management at branch canal level (Tuinhof et al.,

2003). Water boards are seen as a form of decentralizing water management alongside IMT and privatization. Under the new law, government owned water management infrastructure can delegate part of the management function

(operation and maintenance) or transfer complete management to water boards or specialized companies, at the level of branch canal or above (Abu-Zeid,

2003). The government plans to increase cultivable area from 8 million acres to

11.4 million acres by 2017, by new land involving mega projects (Wichelns,

2003a). Two holding companies were established for greater PPP to manage, operate and maintain the irrigation and drainage infrastructure in the Toshka

($54 billion investment) and North Sinai development projects ($12 billion investment). The companies provide mechanisms for appropriate services to both small farmers and investors. Main infrastructure including irrigation networks and pump stations are still owned and operated by the government

(Wichelns, 2003b). The government financed upto 25% of the total expenses, and the rest financed by the local and foreign private sector in five major sectors: land development, new community development, industry, agriculture, and tourism. The companies raise enough funds by selling new lands to investors and from beneficiaries in the projects (Kandil, 2003).

This PPP for land reclamation is being implemented on a large scale in Egypt,

Jordan and Saudi Arabia (Tuinhof et al., 2003). Land is either given to private investor or sold at a very low price. Private investor has to reclaim the land from the desert and/or cultivate it using groundwater. The amount of groundwater use is restricted through licensing by the public regulator, and certain payments for land use and cultivation are also stipulated. The investor invests in infrastructure, seeds and staff. At maturation of PPP land may be

209 retained by the investor or transferred back to the public sector. In this PPP the profit margins are normally substantive and risks are relatively small. Land reclamation in East Oweinat and Darb El Arabien as well as long the fringes of

Nile valley and Delta in Egypt is done mainly through private investors with assistance from the public sector (Wichelns, 2003b).

Likewise the PPP on water boards or water/well user associations is broadly implemented in most MENA countries and is often advocated by international donors and investors. It involves the transfer of public sector tasks and responsibilities to beneficiaries such as water boards or water/well user associations. Benefits include decreased staffing for (ground)water management for public sector, and more control over water management for private sector (Tuinhof et al., 2003).

Brackish groundwater use for the development of new coastal areas is another potential PPP in the MENA region (Tuinhof et al., 2003). Development of brackish groundwater through consortia of private and public sector companies may benefit numerous stakeholders. Tourism development becomes viable using brackish groundwater as a resource; the effluent of brackish groundwater treatment can be used for fisheries and concentrated as table salt (Khan et al.,

2007); and other options include agriculture using salt-tolerant crops. Whereas the development of brackish groundwater resource can be carried out by the private sector, public sector must guard the interest of local population and the natural environment.

210

6.6 Summary and water policy implications

The synthesis of international literature presented above shows that:

. Different public private partnership models have been promoted to

address an ever increasing gap between available public funding and

the greater need for infrastructure projects.

. Innovative PPP models have been used recently worldwide but neither

a purely public nor a private approach to infrastructure development

projects have proven sustainable in either the developed or developing

world. More is true for irrigation sector projects.

. Irrigation projects involve stronger social, economic, political, legal,

and environmental dimensions and have significant distributional

impacts on various segments of the population, making PPP less

popular in the sector.

. PPP in irrigation can improve efficiency and bring new project funding

but the gains may not be equitably shared across the stakeholders. Not

all components of irrigation are open to PPP due to heavy investments

and low cost recovery in irrigation projects and the political economy of

these investments.

. Tensions remain high among economic efficiency and commerciality

and accountability of PPP projects, but improved risk management

through partnerships with the private sector can improve their financial

viability.

211

. A better investment climate for all can improve PPP in irrigation with

win-win-win outcomes for public-private-consumer entities.

. There is a need to develop robust, impartial and equitable methodology

for assessing the best value for money from public private investments

in irrigation.

. Donors and international development lending banks must hear loud

and clear that PPP is not a panacea to the lack of funding in irrigation

but good practice in PPP and institutional support measures can greatly

improve outcomes in terms of eradicating hunger and poverty and

improving human wellbeing (as shown in the next chapter).

The key implication of these findings is that Australian agriculture, and in particular irrigated agriculture, is undergoing tremendous restructuring and reform and have emulated some of the best models in PPP investments, for instance, to modernise the irrigation infrastructure in the MDB. Examples include: National Water Security Plan with 80:20 public-private investments for 50:50 sharing of water savings; Northern Victoria Irrigation Rehabilitation

Project (NVIRP) Stag 1 that has a budget of $1.1 billion, and has assigned a management contract to a private sector firm for overseeing the implementation of the project. Australia nevertheless leads the international community in PPP in irrigation infrastructure modernisation and this offers tremendous opportunities for new PPP models and capacity building in the sector overseas.

212

CHAPTER SEVEN

7 Public Private Investments - International Analysis

7.1 Introduction

Rural development paradigms tend to change almost every decade. There have been major changes in thinking about rural development and conceptions of and approaches to water management for food security and poverty alleviation over the period 1950-2000. It is possible to characterize the 1960s as an era of modernization, the 1970s as state intervention, the 1980s as market liberalization, and 1990s as empowerment and participation for rural development. Each of these paradigms is the outcome of myriad interactions among the stakeholders including academics of different backgrounds, influential think-tanks, government agencies, international donors, and lately community based organizations and the poor countries themselves. And, these development paradigms on food security and poverty conceptions have had implications for policy making and investment lending for real poverty reduction outcomes, because how we perceive poverty and food security and think of the poor and their water management options matters for the actions we take on those fronts. Actions would determine outcomes and provide feedback for conceptual and policy refinements. The political economy of investments has implications for redistributive policy in developing countries.

213

Against this backdrop the public private investment lending to the developing countries over the course of past 50 years is analyzed, with the goal to provide a comprehensive assessment of the effectiveness and targeting of these investments, the economic and political drivers of investments, and how those investments has driven the discourse on irrigation development for food security and poverty reduction efforts around the globe. With emphasis on global irrigation and drainage sector investments, the investment lending to other social sector such as public health, education and water supply is also examined since donor investments in many of the developing countries targeted these sector together and were often packaged. The World Bank’s private sector participation database sine 1947 to 2005 is used to examine the investments to those sectors. The scope of the analysis is global, yet the emphasis is on the developing world.

We a focus on investment lending by the World Bank, over the period 1947-

2005, to agriculture sector, with a special focus on irrigation and drainage sub- sector, and those sectors that have the most direct link with human development–education, health and other social services, and water supply and sanitation (Table 7.1). The purpose is to delineate patterns of change in poverty mindset and its impact on inter-temporal investment lending patterns, and relate these changes to poverty reductions.

214

7.2 Eradicating hunger and extreme poverty

This section presents an overview of per capita investment lending for various regions. It is readily clear that education has been the largest sector of investment in Sub-Saharan Africa, and Latin America, while agriculture sector lending has dominated in all other regions (Table 7.1). The following section presents a detailed sector-wise discussion of the transitions in investment lending8.

8 Helpful discussions with IWMI researchers on some of the material reported here are thankfully acknowledged. Discussion with and comments from Madar Samad are in particular acknowledged. 215

Table 7.1 Per capita investment lending by the World Bank to key sectors of importance to the poor (constant 1995 $) Period Sub-Saharan Africa East Asia and Pacific Latin America & Caribbean Period Irrigation Agriculture EducationHealth WAST Irrigation Agriculture Education Health WAST Irrigation Agriculture Education Health WST 1960-64 0.97 0.97 0 .. .. 0.16 0.16 0.03 .. .. 0.59 0.59 0 .. .. 1965-69 0.00 0.11 1.53 .. 0 0.61 0.61 0.1 .. 0.02 0.97 0.97 0.74 .. 0 1970-74 1.06 1.18 2.35 .. 0 0.47 0.55 0.47 .. 0.03 1.35 1.35 1.52 .. 0.04 1975-79 1.02 1.68 2.38 .. 0.25 2.52 2.58 0.68 .. 0.04 3.40 3.52 1.31 .. 0.2 1980-84 0.88 1.64 1.54 .. 0.09 1.07 1.13 1.42 .. 0.1 2.33 2.34 1.57 .. 0.35 1985-89 0.28 2.24 1.04 0.75 1.1 0.75 1.11 1.07 0.19 0.21 1.22 4.03 1.63 1.90 1.63 1990-94 0.11 2.66 2.91 2.25 2.4 0.71 2.26 1.39 0.56 1.54 1.68 5.87 6.98 3.36 0.88 1995-1999 0.09 1.39 1.84 2.14 1.36 0.55 1.52 1.13 1.03 1.3 0.42 2.68 4.56 8.29 1.79 2000-01 0.10 0.54 0.99 1.77 6.89 0.04 0.1 0.08 0.19 4.59 0.01 0.33 1.18 2.71 6.25 Average annual 0.11 0.3 0.38 0.43 0.38 0.17 0.24 0.17 0.12 0.24 0.30 0.52 0.51 1.02 0.35 All periods total 4.51 12.4 14.58 6.92 12.09 6.89 10.03 6.36 1.98 7.82 11.97 21.7 19.48 16.27 11.15 Note: WAST means water and sanitation, and “..” means no lending. 7.3 Agriculture, irrigation and drainage

Poverty has largely been viewed as a rural phenomenon, with households engaged in subsistence agriculture being particularly exposed to cascading episodes of poverty, and enhancing agricultural productivity, through growth promoting investments in agriculture and other related sectors, including irrigation and drainage sub-sector, has been considered as drivers of rural growth and a direct attack on rural poverty. Agricultural sector investments, particularly those in irrigation and drainage sub-sector, have been key drivers of agricultural growth and rural poverty reduction. Until 1960s, the WBs conception of poverty was that of unmet basic needs - primarily a consequence of lack of income or lack of access to essential commodities. Promoting overall economic growth was seen as way out of poverty. During 1950s, and until late 1970s, enhancing agricultural productivity, through agriculture sector investment lending, was seen as a progenitor of rural growth and a pre- condition for an effective attack on poverty in general and rural poverty in particular. Investments in infrastructure, such as large irrigation projects, were seen as the classic and most obvious way in which investment lending could attack poverty. This orthodoxy is well reflected by WBs lending portfolio during 1950s through to late 1970s. For example, agriculture sector was one of the first on WBs lending portfolio, with modest beginnings in 1949 - two projects worth $23 million only (Finland and Yugoslavia being the first recipient of a forestry sector loan), lending to this sector continued to rise throughout 1950s and 1960s, with a sharp increase noticeable first during 1960 and then in 1970 and onwards (Figure 7.1). Also, until late 1970s, irrigation and drainage sub-sector investments lending accounted for over 95 percent of total investment lending to agriculture sector such that “agriculture meant irrigation”. Iraq ($59 million) and Thailand ($83 million) became the first beneficiary of irrigation and drainage sector lending in 1950.

Global World Bank lending for agriculture sector and irrigation and drainage sub-sector projects (constant 1995 US$ millions ), 1949-2003

3500

3000

2500

2000

1500 US$ millions 1000

500

0 1949 1951 1955 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Agriculture sector lending (US$ millions-1995 constant) Irrigation and drainage (US$ millions- 1995 constant)

Figure 7.1 Global World Bank lending for agriculture sector and irrigation and drainage sub-sector projects (constant 1995 US$ millions ), 1949-2003

During 1950s, the World Bank, on average, approved one irrigation

(agriculture) project per year, which rose to 4.2 (4.4) projects in the 1960s; 15

(17) in the 1970s; 15 (26) during the 1980s; 15 (65) during the1990s; and 12

(60) in the 2000-2003 period. Until the end 1960s, the maximum number of irrigation projects approved in a single year remained below 10, but during

1970s, it crossed this barrier, achieving its first spike in 1978, with 27 irrigation and 31 agricultural projects approved respectively. Form this point onwards, and until mid 1980s, the number of agriculture/irrigation projects approved per

218 year continued to decline with irrigation continuing this trend until early 1990s followed by another spike in 1998 and 1999. From mid 1980s onward, however, the number of agricultural sector projects approved begin to rise again, reaching all time high by early 1990s (76 projects in 1990). Overall, the

World Bank approved 543 irrigation9 and 1371 agriculture sector projects in total during 1949-2003, with largest number of projects falling in South Asia

(28.4 percent), followed by East Asia and the Pacific (22.7 percent), Middle

East and North Africa (14.2 percent), Sub-Saharan Africa (12.0 percent), Latin

America and the Caribbean (11.6 percent), and Europe and Central Asia (11.2 percent).

The average dollar volume of irrigation (agriculture) projects approved per year rose steadily from $71 million in the 1950s to $310 ($313) millions in the

1960s and crossed one billion dollar mark during the 1970s, with irrigation and agriculture sector lending reaching all time high of $2777 and $ 2993 million, respectively, during 1978. Further, until then irrigation sector lending closely followed agriculture sector, such that ‘agriculture meant irrigation’. From

1978 onwards, divergence started - irrigation and drainage sector lending accounted for a declining proportion of agriculture sector lending, such that by mid 1980s irrigation sector became quite dislocated/isolated from the

9 A 1993 review of the World Bank’s experience with irrigation reports that overall, the Bank has supported 585 irrigation projects, including 340 where more than half of project costs were spent on irrigation. Notice, the focus there is on “irrigation-related” projects (World Bank, 1993), where as our estimates don’t define an irrigation projects as a project with an irrigation sector component, as usually done, rather purge irrigation projects net of any other project component. Further, we don’t report projects which were “dropped”. This might account for the apparent discrepancy. 219 agriculture sector: agricultural research, agriculture marketing, animal production, crops, livestock, forestry and general agriculture gained currency on agriculture sector lending portfolio from mid 1980s onwards, while irrigation sector lending received a continued battering. Agricultural sector lending reached all times high during late 1980s and early 1990s (crossing three billion mark in 1991), while irrigation sector lending continued to decline throughout 1980s and 1990s (Figure 7.1). During this period, irrigation sector lending from the WB, as a percentage of the agriculture sector lending, declined continuously and came to below half by late 1980s and down to 1/3rd during 1990s (Figure 7.2) there was a clear shift in emphasis from traditional agriculture and irrigation sector lending to scientific agriculture which resulted in diversification of the lending portfolio.

Irrigation and drainage sub-sector lending as a percent of agriculture sector lending, 1947- 2003

100 90 80 70 60 50

% share 40 30 20 10 0 1949 1951 1955 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Years

Figure 7.2 Irrigation and drainage sub-sector lending as a percent of agriculture sector lending, 1947-2003

In terms of per capita lending, same inter-temporal trends hold, that is, per capita irrigation sector lending reached all time high in all continents during the 220

1975 -1979 period , and declined then onwards, except South Asia where it continued to rise and reached all time high during early 1980s and then fell for all development across the regions, followed by a decline in emphasis across the board (Table 7.2). In terms of cumulative irrigation sector lending volume, the four poorest regions around the globe can be ranked as South Asia, the largest beneficiary ($13266 million), followed by East Asia and the Pacific

($9638 million) 10 and Latin America ($4374 million), while Sub-Saharan

Africa ranks at the bottom ($1567 million). The inter-temporal lending patterns however, are more or less similar across regions: average annual/total lending reached all time high during the late 1970s and declined afterwards, and this holds for all regions except South Asia, where it continued to rise until early 1980s and declined afterwards (Table 7.3) which attires with the transitions in poverty conceptions, as outlined below. This points to a

“consistency” in over all emphasis on irrigation.

10 Asia has been the major recipient of the Bank lending for irrigation sub-sector and accounts for about 2/3rd of the total. More than half of this lending was targeted to humid tropics in Asia where rice is the dominant crop. The Asian projects has generally been large-scale surface irrigation projects, and bigger in cost, loan volume, command area, and production. By contrast, Africa accounts for the smallest share (4.5 percent), but a higher share of the number of projects (12 percent), which implies that African projects are relatively smaller in size, lending volume, and command area. 221

Table 7.2. Per capita ($) irrigation sector lending in various regions

East Europe Latin Middle Sub- Asia & America East & Saharan & Central & North South Period Africa Pacific Asia Caribbean Africa Asia 1960-64 0.97 0.16 0.25 0.590.68 1.83 1965-69 0.00 0.61 0.23 0.972.14 0.17 1970-74 1.06 0.47 1.19 1.354.19 1.24 1975-79 1.02 2.52 2.79 3.40 4.05 3.67 1980-84 0.88 1.07 1.57 2.332.16 3.79 1985-89 0.28 0.75 0.74 1.222.89 2.33 1990-94 0.11 0.71 0.08 1.682.65 0.60 1995-1999 0.09 0.55 0.44 0.420.55 0.97 2000-01 0.10 0.04 0.32 0.010.42 0.01 All years total (1960- 2001) 4.51 6.89 7.61 11.9719.72 14.61 Average annual lending (1960-1999) 0.11 0.17 0.18 0.30 0.48 0.37

Table 7.3 Irrigation and drainage sub-sector lending indices for various regions (base period 1975-79)

d an - t b orth as Period u Africa South Asia S Saharan Africa East Asia and Pacific Europe and Central Asia America and Caribbean E N Before 1950 0.00 0.00 0.00 0.00 0.00 0.00 1950-54 0.00 2.53 0.00 0.53 9.272.89 1955-59 0.00 0.99 0.00 7.27 0.000.00 1960-64 60.99 4.65 7.62 11.82 11.8934.34 1965-69 0.00 19.34 7.44 22.17 42.773.65 1970-74 91.16 17.02 40.80 36.94 93.0229.74 1975-79 100.00 100.00 100.00 100.00 100.00 100.00 1980-84 97.29 45.53 58.79 75.21 61.51 114.94 1985-89 34.79 34.35 28.77 44.31 97.4577.96 1990-94 16.34 35.62 3.43 66.49 105.3222.27 1995-1999 15.12 29.29 18.22 17.91 24.2439.59 2000-2003 18.66 4.86 25.70 0.27 24.450.43 Base period (1975-79) total lending (constant US$ millions) 360.68 3276.05 1155.54 1142.27 636.65 3115.59

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In general, from early 1970s through to mid 1980s, the World Bank poured money heavily into irrigation sub-sector, and this happened across the board in all continents. In terms of highest per capita average annual irrigation sector lending, the four poorest regions in the world can be ranked as South Asia

($0.37); Latin America ($0.30), East Asia and the Pacific ($0.17) and Sub-

Saharan Africa ($0.11). With the only exception of SSA, lowest per capita irrigation sector lending came in 2000-0111. In terms of total lending per capita, same rankings hold. The relatively lower per capita lending in SSA’s case is due to its low irrigated agriculture potential. The geographic distribution of top recipient countries around the globe is given in Table 7.4.

There are at least 58 countries, 23 in SSA and 13 in Latin America, who had never received an irrigation sub-sector loan from the World Bank during 1947-

2003, despite receiving an agriculture sector loan. Bhutan and Maldives are the only countries in South Asia who has never received an irrigation sector loan. The country-wise cumulative irrigation sub-sector loan approval by the

World Bank for various lending brackets and the geographic distribution of countries with no irrigation sub-sector loan (despite agriculture sector lending) shows that India has been the largest client, accounting for one-fourth of global irrigation sub-sector lending followed by Indonesia (9.6 percent), Mexico (7.3 percent).

11 What caused this slow down in poor regions? First, the irrigation infrastructure/water resource potential became satiable (except Africa, where irrigation infrastructure is still under- provided). Second, poor irrigation sector performance; inequity in distribution of benefits; growing disillusion with trickle down effect; decline in commodity prices; a more relaxed attitude towards the agrarian problems with the fall of communism; social and environmental externality concerns; and fear of default and repayment concerns among the donors led to a general drift away from irrigation sub-sector lending.

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Table 7.4 Top ten recipients of irrigation and drainage sub-sector lending for various regions (constant 1995 $ million) Africa East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa Asia South Sudan 631.30 Indonesia 3469.11 Romania 1117.90 Mexico 2633.81 Egypt 1227.28 India 9132.29 Madagascar 175.47 Philippines 1546.75 Turkey 972.40 Brazil 648.12 Morocco 781.12 Pakistan 2542.66 Mali 158.97 China 1510.45 Yugoslavia 431.80 Peru 384.68 Tunisia 429.21 Bangladesh 945.87 Ethiopia 120.60 Thailand 984.89 Greece 259.55 Colombia 339.85 Algeria 294.42 Nepal 432.96 Senegal 96.91 Korea Rep. 663.06 Kazakhstan 123.03 Dominican 118.35 Syria 252.44 Sri Lanka 380.62 Kenya 89.17 Malaysia 644.33 Cyprus 118.18 Guyana 58.44 Iran 204.17 Afghanistan 93.15 Niger 76.17 Myanmar 406.79 Armenia 78.81 Ecuador 52.75 Iraq 176.22 Mauritania 62.02 Vietnam 321.22 Uzbekistan 68.98 Chile 49.77 Yemen 166.20 Cameroon 59.03 Japan 32.29 Azerbaijan 62.82 Uruguay 25.98 Jordan 46.47 Chad 56.87 Lao (PDR) 29.94 Kyrgyz Rep. 37.96 Bolivia 18.86 Lebanon 45.60 Overall, the irrigation sector lending accounted for 5.8 percent of all WB lending during the 1980s and three quarters of the agriculture sector lending globally. Irrigation sector lending was all time high during late 1970s and early 1980s. During 1990s, irrigation and drainage sector lending dropped to about 30 percent of agriculture sector lending, the lowest level being in 1992

(14 percent). Irrigation remained largest single sector of the Bank lending commitments and user of public agriculture investments in poor countries. Of the global Bank lending (715610.76 million), about 5.05 percent has been for irrigation, which amounts to $ 36119.70 million in 1995 constant US dollars.

Asian countries were the main client for irrigation sector investments. Again, among these, the South Asian countries, including India and Pakistan were the largest beneficiary of irrigation investments until late 1970s and have experienced the largest drop in relative importance of irrigation sector lending from the WB. These investments helped to harness waters of the Indo-

Gangetic basin for irrigation and hydropower, and stabilize newly independent countries through productivity, income, and employment growth. There are at least five generic reasons to believe that the World Bank’s irrigation sector investments has large anti-poverty and social impact dividend: First, massive irrigation sector investments began in the 1960s in response to explosive population growth, food crises, higher agricultural prices, social unrest, and neo-Malthusian concerns, particularly in Southeast Asian and other poorer countries, and culminated in higher food production, low food prices, and subsiding fears of agrarian problems. Second, irrigation lending was predominantly directed towards enhancing agricultural productivity and producing more food grain (food grain –principally rice and wheat- was the sole output targeted by over half of the irrigation projects, while cotton, sugarcane, fruits, and vegetables were other non-grain main outputs); Third, the benefits of irrigation projects should have reached the poor, as median farm size of the project beneficiaries was two hectares (World Bank, 1994); Fourth, higher cropping intensity, higher labor demand, and project construction and maintenance related employment opportunities must have benefited millions, including the poor; Fifth, in its initial years, most of the irrigation projects were new constructions12, but by mid 1970s the Bank began to fund many more integrated rural development projects (containing an irrigation component) and finally its emphasis shifted from financing of specific schemes to advancing sub-sectoral loans –the Bank financing of irrigation was deeply integrated, initially, with borrowers’ irrigation investment programs, and lately with rural development programs, which must have contributed to expanding rural infrastructure stock and making infrastructure available to the poor.

The World Bank has regarded agriculture sector as a sector of prime importance to the rural population in general, and the poor in particular. This is well reflected in its lending approvals. For example, in terms of agriculture sector lending volume, among the four poorest regions around the globe, South

Asia is the largest beneficiary ($16972 million), followed by East Asia and the

Pacific ($14925 million) and Latin America ($8929 million), while Sub-

12 The World Bank (1994) warns that it is a mistake to think of Bank-financed irrigation projects as projects built from scratch: “less than half the projects [evaluated] were clearly new constructions. About one- fifth were clearly rehabilitation. The rest were some combination” [new construction, rehabilitation, up-grading, extension etc]. 226

Saharan Africa ranks at the bottom ($5986 million). However, inter-temporal lending patterns differ slightly among various regions: with the exception of

Europe and South Asia, total agriculture sector lending approvals reached all time high during 1990-1994 (Table 7.5). In terms of per capita lending, the same pattern holds. This implies that the World Bank’s agriculture sector lending operations in most regions were driven by a central orthodoxy, which matches closely with the transition in its conception of poverty. In general,

WB poured heavily into agriculture sector during early 1990s and this happened across the board in all regions, with the exception of South Asia where higher per capita agriculture sector lending, however, came as early as during mid 1970s to late 1980s. And, this coincides with the commencement of National Agricultural Research Systems (NARS) in several of these countries, including India and Pakistan, which aimed to enhance agriculture productivity. Likewise, lowest per capita lending came in 2000s, and this holds for all regions, save Europe, where former with the fall of former Soviet Union, agriculture sector required cushioning in nascent market economies for the transformation of their old and inefficient agriculture sector.

227

Table 7.5 Agriculture, fishing and forestry sector lending for various regions (constant 1995 dollars) ia s Africa East Asia and Pacific Europe and Central A Latin America and Caribbean Middle East and North Africa Asia South Before 1950 0.00 0.00 2.31 0.00 0.00 0.00 1950-54 0.00 2.25 0.00 0.23 3.88 5.00 1955-59 0.00 0.87 0.00 3.13 0.00 0.00 1960-64 15.65 4.12 8.80 5.09 4.97 59.46 1965-69 2.08 17.16 8.60 9.54 17.88 6.31 1970-74 25.98 17.64 53.32 15.90 38.88 51.49 1975-79 42.15 91.00 137.72 44.65 41.79 180.15 1980-84 46.71 42.70 76.51 32.59 28.38 214.06 1985-89 75.32 45.40 39.70 62.72 46.31 178.06 1990-94 100.00 100.00 100.00 100.00 100.00 100.00 1995-1999 60.18 72.50 82.09 49.90 34.12 111.20 2000-2003 57.70 10.66 136.22 12.69 23.54 37.39 Base period total lending (constant US$ millions) 1405.94 3691.41 1000.28 2654.07 1523.31 1799.48

In terms of average annual per capita agriculture sector lending, among the four poorest regions in the world, the Latin America ranks at the top ($0.53 per capita per annum), followed by the South Asia ($0.43), the Sub-Saharan Africa

($0.30), while East Asia ranks at the bottom ($0.25) (Table 7.6). In terms of cumulative lending per capita, same rankings hold. The relatively lower per capita lending in latter’s case is due to its higher population density, else in absolute dollar terms it has second highest lending, as noted above. The temporal distribution of investment lending varies widely, and is omitted here for brevity reasons. Table 7.7 gives the geographic distribution of top-most agriculture sector loan recipients countries around the globe.

228

Table 7.6 Agriculture sector lending per capita for various regions (constant 1995 $)

Europe Latin Middle Sub- East & America East & Saharan Asia & Central & North South Period Africa Pacific Asia Caribbean Africa Asia 1960-64 0.97 0.16 0.25 0.59 0.68 1.83 1965-69 0.11 0.61 0.23 0.97 2.14 0.17 1970-74 1.18 0.55 1.35 1.35 4.19 1.24 1975-79 1.68 2.58 3.32 3.52 4.05 3.82 1980-84 1.64 1.13 1.77 2.34 2.38 4.08 1985-89 2.24 1.11 0.88 4.03 3.27 3.08 1990-94 2.66 2.26 2.13 5.87 6.03 1.56 1995-1999 1.39 1.52 1.73 2.68 1.86 1.57 2000-01 0.54 0.10 2.02 0.33 0.54 0.10 Average annual (1960-2001) 0.30 0.24 0.33 0.52 0.60 0.42 All years total (1960-2001) 12.40 10.03 13.68 21.70 25.13 17.44

Table 7.7 Top ten recipients of agriculture sector lending for various regions (constant 1995 $ million)

Africa East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa Asia South Sudan 635.33 China 5045.23 Turkey 1911.15 Mexico 3890.96 Egypt 1489.32 India 11749.83 Cote d’Ivoire 413.41 Indonesia 4068.90 Romania 1377.47 Brazil 2199.47 Morocco 1227.69 Pakistan 2751.07 Ethiopia 402.43 Philippines 1920.39 Yugoslavia 490.88 Colombia 776.58 Tunisia 656.57 Bangladesh 1286.41 Kenya 386.66 Thailand 984.89 Russian Fed. 347.02 Peru 474.34 Algeria 605.20 Nepal 544.32 Madagascar 376.08 Malaysia 959.83 Ukraine 329.81 Venezuela 195.19 Iran 354.24 Sri Lanka 516.25 Mali 334.04 Korea Rep. 663.06 Greece 306.50 Ecuador 158.15 Yemen Rep. 258.64 Afghanistan 107.10 Cameroon 327.41 Myanmar 621.69 Poland 305.80 Chile 146.33 Syrian 252.44 Bhutan 13.98 Ghana 295.10 Vietnam 446.97 Kazakhstan 134.92 Honduras 138.52 Iraq 176.22 Maldives 2.67 Uganda 273.12 Lao PDR 66.38 Cyprus 118.18 Dominican R. 122.27 Jordan 85.50 Zambia 272.14 PNG 38.80 Uzbekistan 108.35 Uruguay 117.21 Lebanon 63.40

230

Do these transitions in investment lending to agriculture and irrigation and the changes in sectoral emphasis over time has any concordance with the general policy framework adopted by the WB and its conceptions of poverty? Yes, indeed they do. For example, during his first speech as president of the WB group, Robert McNamara spoke highly of past lending priorities to agriculture/irrigation sector adding “Much has been achieved - harnessing the waters of the Indus River system for power and irrigation for instance - and much remains to be achieved”, and hinted that agriculture would be the sector of greatest expansion in next five year lending program, while overall greater increases will occur in sectors of education and agriculture (Mcnamara, 1968).

He noted that traditional seeds did better with irrigation and fertilizer, but increase in yield was moderate. New strains of wheat and rice can improve yield three to five times, and these varieties are particularly sensitive to the input of water and fertilizer. “Here is an opportunity where irrigation, fertilizer, and peasant education can produce miracles in the sight of the beholder”. …. “Irrigation schemes, fertilizer plants, agriculture research and extension, the production of pesticides, agricultural machinery, storage facilities - with all of these we will press ahead in the immediate future.

Indeed, in the coming year we plan to process more than twice the value of agricultural loans as in the last, and our agricultural dollar loan volume over the next five years should quadruple”. Our estimates show that the number of agriculture sector loans approved increased from 5 in 1968 to 15 in 1973, while lending volume increased from $234.77 to $764.27 million, respectively, showing a 3.25 times increase. The words were matched closely by the actions. Further, this stance underscored that there are strong, positive interactions between irrigation and other major sources of growth: improved seeds, fertilizers, better crop husbandry, integrated pest management, and improved storage and marketing are all required for growth.

The speech also hinted that while past lending efforts were largely concentrated on the South Asian subcontinent, new efforts will be directed to countries and regions in greater need for help, particularly Latin America and Africa, where

WBs investment lending should increase by two to three folds, respectively.

Lending volume to Africa rose from $930 million in 1968 to $2260 million in

1973, while it rose from $2131 to $2650 million, respectively, in case of Latin

America. Over all, during the period 1968-1973, Africa (Latin America) accounted for over 16 (29) percent of total lending, while South Asia accounted for 17 percent of total lending. Likewise, Africa’s agriculture sector lending rose from $9.3 million in 1968 (8 percent of sectoral total) to 205.1 million in

1973 (27 percent of sectoral total). The poorest regions and countries in greater need were given higher priority for investment lending, particularly agricultural investments.

During 1970s, disillusionment with trickle down effects of growth increased and the notion of poverty expanded to include unmet basic needs including food, healthcare, and education. The 1973 Nairobi speech by McNamara hinted a shift in lending priorities away from overall economic growth towards strategies designed to benefit absolute poor. The perceived need to deal simultaneously with poverty and economic growth led to the formation of new

232 strategy spelled out in the WBs 1974 publication Redistribution with growth13, which made the case for more concerted efforts to secure the basic needs of the poor and for systematic Bank investments in human development. It emphasized that:

“Policies of wealth redistribution must still be consistent with and

conducive to programs to promote growth. As Chenery later recalled,

"This theme began to pervade a substantial part of the Bank's more

project-oriented research and, after three or four years, no longer

needed much selling in-house. Staff were soon accustomed to the idea

that there could be no tradeoffs between growth and the fight against

poverty (World Bank, 2003)14."

Chenery and his associates at the Bank recognized that there is a natural tendency toward income concentration in a developing economy. They argued, however, that this is not inevitable, that policy can make a difference. Programs that broaden access to education or redistribute land may not always directly stimulate growth, but they ultimately offset the initial disadvantages of the poor

(resource endowments). This paradigm therefore argued that specific, focused policy packages can also be used to integrate efforts to address the problems of the poor. At the same time the Bank economists emphasized the complementarities of growth with efforts to improve income distribution.

13 Chenery, Ahluwalia, Bell, Duloy and Jolly (1974). Redistribution with Growth, The World Bank, Oxford University Press (c.f., WB, 2003a).

233

Poverty-focused planning does not, they pointed out, imply abandoning growth as an objective. It implies instead adding distribution as an objective. Within the permu of this new orthodoxy, Bank lending to sectors of prime importance to the rural poor, such as agriculture and irrigation, rose sharply during mid

1970s. The fiscal 1974-76 period came in the wake of 1972 World Bank

Nairobi Annual Meeting, which put rural poverty at the center of the Bank's agenda and resulted in the popular "integrated rural development" projects of the mid- to late-1970s. Consequently, agriculture/irrigation sector lending rose sharply following Nairobi speech and continued to rise throughout 1970s and in the lead upto the release of WDR 1980, which spoke highly of the role of agriculture in poverty alleviation. The Report endorsed that agricultural research has in particular been successful for reducing poverty. Green revolution technology, for example HYVs of rice and wheat improved the life of poor consumers and small farmers in many parts of Asia. It also pointed for urgency of dry farming research needs. Therefore, productivity improvements in traditional smallholder agriculture, increasing the rate at which rural labor is absorbed into the industrial sector, and by not concentrating investments/services in few places/groups, and reducing inequalities through measures such as: distribution of productive assets (labor, capital, and skills); avoiding price and wage policies that benefit urban middle class at the cost of the rural poor; and progressive taxation, were seen inevitable but complimentary for growth to reduce absolute poverty. Agriculture sector lending reached all time high during the 1980s.

234

Although WDR 1980 made a strong case for investment lending to agriculture and other rural development projects, particularly for human development, the fiscal 1984-86 period became a turning point not only because of disillusionment with integrated rural development, but also because of the serious questions raised about the implicit "central planning" frame of mind on which it rested. Agriculture sector lending became sand-witched with other sectoral lending programs, that is, the lending portfolio became more diversified, and other lending sector such as education, health, industry and trade gained currency: multi-sectoral lending programs became the key strategy of Bank’s fight against poverty, as spelled out by the WDR 1980.

During 1980s, the Bank’s agriculture sector lending portfolio underwent substantial transformation, that is, it became more diversified, as it moved away from financing of specific schemes, traditionally irrigation and drainage projects, to other sub-sector lending. The sub-sectors themselves increased in numbers as well as diversity. For example, during the late 1980s, agricultural research and extension rose heavily on Bank’s lending portfolio, and the trend continued during 1990s, with a slow down in late 1990s. Likewise, from mid

1980s onwards, animal production emerged and continued throughout 1990s, while crop, fishing, forestry, general agriculture rose to centre stage from 1986 onwards, but their relative importance diminished from mid 1990s onwards.

Also, by late 1980s and mid 1990s, agricultural marketing and agricultural trade rose heavily, while agricultural industries became a focus during 1990s.

This deepening and broadening of lending portfolio conjures to the changing

235 conception of poverty and the strategies triggered to alleviate poverty, as spelled out by the 1980 and 1990 WDRs on poverty.

The Bank spearheaded this transformation through its support for the development of national agricultural research systems (NARs) in developing countries in the 1980s and early 1990s. The majority of economic impact evaluations on these research programs show highly positive returns. For example, a number of studies have hinted at strong anti-poverty and food security impacts of agricultural research and development expenditure that culminated in the Green revolution in Asia (Estudillo et al., 2005). National agricultural research programs enhance both the efficiency and poverty alleviation impacts of competitive research funds. Investments in agricultural research and development (R&D), and irrigation, have high pay offs. For example studies show that in India, for per 100 billion rupees investment in agriculture R&D (irrigation) the incidence of rural poverty would be reduced by 0.45 (0.05) percent, and about 85 (10) people would be lifted out of poverty per million rupees spent (at 1993 prices). In China for per million Yuan expenditure in R&D (irrigation), about 679 (133) people would be lifted out of poverty (Fan and Chan-Kang, 2008). Empirical studies on NARS impact evaluations, particularly ex-ante ex-post type, are extremely rare and those that exist have mostly been on program-wide or commodity aggregates, but have generally indicated high internal rate of return and very favorable economic benefits. Further, there is every reason to believe that the benefits of NARS have reached the poor. For example, taking the case of national commodity

236 research program in Pakistan, which is heavily biased towards irrigated agriculture studies (Murgai et al., 2001) show that equity and efficiency based rankings are similar. Redistribution of research funds away from current research priorities would therefore do little to improve equity in favor of the poor. The solution to food insecurity and poverty therefore lies in enhancing efficiency of available research funds. Although most economic assessments of NRAS have been done in developed countries, results obtained from other developing countries generally show a positive impact. The NARS interventions, in general, has a significant positive impact on rural sector development and growth, poverty alleviation and improved management of natural resources, notwithstanding evidence that too little emphasis has been given to system sustainability issues, and institutionalization of indigenous capacity in research planning, priority setting and evaluations.

In addition to its support for NARS, the Bank has been a major financial contributor to international research through its long-term commitment to the

CGIAR since its establishment15 in 1971. The CGIAR, over the past thirty years, has created a knowledge-machine and technology-warehouse that harnessed international interest in agriculture science and technology to combat famine and food insecurity and promote agricultural development. The effectiveness of this strategy is widely acknowledged. For example, more than

15 In a memorandum (dated March 31, 1970) to the Executive Directors, President McNamara proposed the formation of a Consultative Group for the support of existing and new international agricultural research organizations. The Consultative Group for International Agricultural Research, or CGIAR, was formally established on May 19, 1971. For more details on CGIAR supported centers and their research programs, visit: www.cgiar.org 237

300 CGIAR-developed varieties of wheat and rice, and more than 200 varieties of maize, are being grown by farmers in developing countries. The CGIAR has worked in partnership with developing countries in strengthening national agricultural research capacity. More than 75,000 scientists and technical personnel have received training through these canters. Further, it holds in public trust, under FAO’s oversight, the world’s largest collection of plant genetic resources (comprising of 0.6 million accessions of more than 3000 crop, forage, and pasture species (CGIAR, 2000).

In addition to these direct interventions, World Bank lending orthodoxy spearheaded changes that improved the efficiency of traditional agriculture and supported transition to market economy. For example, throughout the 1980s, the public production and control model underpinned lending operations.

During 1990s, the Bank did clearly go to the markets and decisively supported liberalization and a market orientation in agricultural reform programs: the public production and control model gave way to agricultural reform model, with the latter including pricing reforms, public enterprise reforms, public expenditure program reform, policy oriented agriculture investments operations, and investment projects with front-loading of agriculture sector reforms. The political economy of agricultural policy reforms submerged traditional irrigation and rural development projects and reform agenda came to the forefront of agriculture sector lending operations. This entailed that all previous prognostications, including the case for enhanced investments in irrigation, seeping up the pace of technical change in agriculture and

238 population control etc., ignore the impact of economic policy and institutional failure on growth, food security, and poverty: that is, agricultural policy matters as much as the production technology itself for enhancing the productivity and combating poverty. Better policy and institutional framework can improve the productivity of existing technologies, which matters as much for productivity growth as does the development of new technology.

The sole driver behind the reform orthodoxy was the failure of public production and direct control model, which resulted in punitive output prices, non-competitive markets, poorly performing public enterprises, inefficient government services, and dysfunctional regulatory frameworks, all being profoundly destructive of agricultural growth. In many countries, rather than intensification in agriculture and rapid adoption of new technology, land and water resources were degraded and destroyed often because of rapid increase in population directly dependent on traditional low-input, long-fallow, slash-and- burn agricultural production techniques. Low private investments in agriculture, capital flight, stagnation and dependence on traditional exports pointed to weak national policies and the existing institutions. In the low income poor countries, the failure of the agriculture sector caused general economic stagnation, at least clearly in Sub-Saharan Africa, where three quarters of the population is dependent on agriculture for their survival and about two thirds of the exports are agricultural. The economic stagnation in other low income countries was also seen as a direct outcome of distorted policies that penalized agriculture heavily. The legacy of this policy failure

239 was increasing number of malnourished children and adults. Widespread poverty was also seen as one of the consequences of agricultural failure nested in weak institutional frameworks:

“Third world countries are poor because the institutional constraints

define a set of payoffs to political/economic activity that do not

encourage productive activity” (North, 1991)

The Bank responded to this situation through its structural adjustment program.

Initially, agricultural adjustment was timid and constrained by the prevailing public production and control model and reforms sought to make it efficient.

By late 1980s, the emphasis shifted to liberalization and competitive marketing. By 1991, the stance shifted completely to market-based approaches.

The ensuing agricultural sector structural adjustment operations sought to: eliminate price controls; develop competitive local markets for inputs (land, agro-chemicals, credit) and outputs; reduce state intervention in international trade to enhance integration into world markets; improve aspects of the regulatory systems; and privatize inefficient public enterprises. These five reforms became the norm for agriculture policy reform programs spearheaded by the Bank to revitalize ailing agriculture sector. In implementing these front- end agricultural policy reforms, the Bank adopted a cautious approach by

“eschewing an asymmetric treatment of distortions”, that is, reforms that increase farmer costs (such as eliminating input and irrigation subsidies) should not be undertaken until those that increase output prices (such as export taxes and price controls) are implemented. Attention to potential economic plight of

240 smallholders and market driven distributional concerns was given due consideration.

To sum up: investment lending to agriculture sector programs and policies, in particular to irrigation projects, until 1980s and agricultural reform programs of the mid 1980s and 1990s all attempted to promote agriculture sector growth with the over all objective of benefiting the poor.

7.4 Education

Poverty alleviation became catch-cry during 1980s. Recall that the 1980 WDR on poverty placed a strong emphasis on human development dimensions of poverty and marked a shift away from traditional agriculture lending to human development sectors focused lending. In particular, the Report made a strong case for investments in education, health, nutrition, and family planning programs, as these investments would help to increase productivity of small farmers, improve their educational skills and employability elsewhere, reduce exclusion of the poor from the development process/innovations, and increase the rate of agricultural/industrial job attainment for the poor. The following section distills evidence on Bank’s lending operations to human development sectors, taking education, health and social services, and water and sanitation as examples.

Following the release of WDR 1980, the pattern of investment lending altered significantly in favor of human development sectors: there was a sharp increase 241 in education sector lending from mid 1980s onwards; water and sanitation sector lending also followed suit; health and other social services appeared on the WBs lending portfolio for the first time, and lending to these sectors continued to rise thereafter through to early and mid 1990s. The orthodoxy and poverty conception underlined by the WDR and the ensuing change in lending patterns and sectoral emphasis is picked up classically by (Figure 7.3), which shows that lending to social sector such as: education; water and sanitation; and health and other social services, rose heavily after the release of WDR 1980.

The emphasis on education sector rests on the notion that education would make the poor more productive and empowered communities. The notion drew particularly from the experience of US and Japan, which impelled them to adopt universal primary education in the 19th century, and the empirical work of early 1950s and 1960s, which showed a positive relationship between the quality of human capital, or education, and economic development. The WDR

1980 therefore made a human, social, economic, and political case for education. “Less hunger, fewer child deaths and a better chance of primary education are almost universally accepted as important ends in themselves”

(WDR, 1980 P.32).

242

World Bank lending to traditional and social sectors (constant 1995 $ millions),1970-2003

4000

3500

3000

2500

2000

US$ millions US$ 1500

1000

500

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Agriculture Irrigation and Drainage Education Health and other Social Services Water and Sanitation

Figure 7.3 World Bank lending to traditional and social sectors (constant 1995 $ millions), 1970-2003

Education sector lending started in 1964, with Pakistan (West Pakistan $36.8 million; East Pakistan-Bangladesh, $19.5 million) and the Philippines ($26.0 million) being the first loan recipient. The number of education sector loans remained below 10 until end 1960s; stayed between 10-20 during 1970s and till mid 1980s; crossed 40 in the early 1990s and rose to above 50 in the late

1990s. In terms of dollar volume, education sector projects approvals crossed one billion mark in 1981. The real emphasis on education sector came in mid

1980s: education sector has another spike in early, mid, and late 1990s.

In terms of cumulative education sector lending volume, the four poorest regions around the globe can be ranked as East Asia and the Pacific ($9889 million), Latin America and the Caribbean ($9571 million), Sub-Saharan

Africa ($7002 million), and South Asia ($5374 million). The lowest education lending ($2880) went to Europe and Central Asia. Also, for the four poorest regions, inter-temporal lending patterns changed in keeping with the poverty reduction paradigm as outlined by the WDR 1980. For example, education sector lending indices rose sharply in early 1980s and continued their upward trend until late 1990s (Table 7.8). It is readily clear that with the exception of

African and MENA region, education sector lending indices rose sharply in all regions during early and mid 1980s. Inter-regional emphasis on education sector lending varied considerably, though poor countries in general remained key target. Table 7.9 gives top ten education sector loan recipients countries for various regions.

Table 7.8 Education sector lending indices for various regions (1995-1999 as base period), 1965-2003

Europe Latin Middle Sub- and America East and Saharan East Asia Central and North Period Africa and Pacific Asia Caribbean Africa South Asia 1965-69 4.12 9.65 0.00 24.13 4.43 0.00 1970-74 7.23 49.27 23.62 55.41 6.74 14.62 1975-79 8.25 78.50 13.89 53.26 39.51 40.25 1980-84 6.19 176.37 8.14 70.75 31.54 56.51 1985-89 4.87 143.17 10.48 81.58 31.55 194.57 1990-94 15.48 201.22 20.70 388.13 26.28 417.51 1995-1999 100.00 100.00 100.00 100.00 100.00 100.00 2000-2003 12.68 39.70 26.82 215.61 20.43 151.12 Base period total lending (constant 1995 $ million) 9985.00 1129.23 1982.62 824.90 2238.67 440.66

In terms of cumulative education sector lending per capita (1964-2003), the four poorest regions can be ranked in the descending order as: Latin America and the Caribbean ($19.48); Sub-Saharan Africa ($14.58); East Asia and the

Pacific ($6.36); and South Asia ($4.36). In terms of average annual lending per capita same rankings hold (Table 7.10).

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Table 7.9 Top 10 recipients of education sector lending for various regions (constant 1995 dollars, million), 1964-2003

Africa East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa South Asia Nigeria 715.30 Indonesia 3154.81 Turkey 986.67 Mexico 2568.20 Morocco 992.19 India 2756.35 Kenya 466.76 China 1999.59 Greece 352.48 Brazil 2164.63 Algeria 739.04 Pakistan 1267.30 Uganda 422.72 Malaysia 1253.32 Hungary 312.16 Argentina 1069.79 Tunisia 631.44 Bangladesh 862.81 Ethiopia 407.27 Korea, R. 1073.80 Romania 226.14 Colombia 678.21 Jordan 549.10 Sri Lanka 218.60 Tanzania 394.72 Philippines 1026.95 Russian F. 196.48 Chile 444.83 Egypt 475.21 Nepal 168.60 Cote d’Ivoire 391.72 Thailand 655.21 Spain 195.75 Peru 350.49 Yemen 313.05 Afghanistan 48.23 Malawi 366.77 Vietnam 317.58 Portugal 153.47 El Salvador 291.15 Lebanon 123.27 Maldives 37.14 Zambia 363.22 PNG 171.74 Ireland 109.13 Guatemala 214.74 Syrian 68.18 Bhutan 15.05 Ghana 306.59 Singapore 81.80 Poland 61.15 Jamaica 207.34 West Bank 41.82 Mozambique 232.91 Taiwan, China 30.69 Bosnia-Herz. 27.60 Honduras 178.53 Iraq 39.95

Table 7.10 Education sector lending per capita for various regions (constant 1995 $) Middle East Europe Latin East Sub- Asia and America and Saharan and Central and North South Period Africa Pacific Asia Caribbean Africa Asia 1964 0.00 0.03 0.00 0.00 0.00 0.09 1965-69 1.53 0.10 0.00 0.74 0.86 0.00 1970-74 2.35 0.47 1.19 1.52 1.08 0.09 1975-79 2.38 0.68 0.67 1.31 5.49 0.21 1980-84 1.54 1.42 0.37 1.57 3.84 0.26 1985-89 1.04 1.07 0.45 1.63 3.21 0.81 1990-94 2.91 1.39 0.88 6.98 2.35 1.59 1995-1999 1.84 1.13 1.74 4.56 1.59 1.14 2000-01 0.99 0.08 0.31 1.18 0.87 0.17 Average annual lending (1960- 2001) 0.38 0.17 0.15 0.51 0.51 0.11 All years total (1964-2003) 14.58 6.36 5.61 19.48 19.29 4.36

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In terms of cumulative lending, Indonesia ($3154 million; or 8.1 percent of total lending) has been the largest client followed by India ($2756 million; 7.1 percent), Mexico ($2568 million; 6.6 percent), Brazil ($2165 million; 5.6 percent), China ($2000 million; 5.2 percent); and Pakistan ($1267 million; 3.3 percent). The largest number of countries receiving education sector loans falls in the category of below $50 million, while only two countries, namely Slovak

Republic and St. Vincent and the Grenadines never received an education sector loan from the WB, despite receiving other financial support, during

1964-2003.

Within the education sector, primary education has been the heaviest item on

WB lending agenda, since 1968 onwards, and its lending continued to rise during 1970s and 1980s. Likewise, secondary education showed up since

1965, but has been less prominent after mid 1990s. Tertiary education lending also sparked from 1964 onwards. Vocational education lending rose heavily during 1970s and 1980, but fell during 1990s. While sub-sectoral emphasis has varied considerably from country to country, depending on the existing quality of human capital, the gap to be abridged, and country priorities and needs, in general financial support to education sector has echoed the sentiment spelled out by the WDR 1980, as above, and placed considerable emphasis on achieving universal primary education. Countries with low literacy and high poverty rates (such as India, Indonesia, Brazil, and Pakistan) has been the largest beneficiary.

7.5 Health and other social services

Like education, as noted earlier, health and other social services emerged on the lending portfolio during 1986, following the release of WDR 1980 and in the lead up to the release of WDR 1990, which reinforced and widened earlier themes on poverty reduction. Health sector loans approvals increased steadily from only six in 1986 to 34 in 1990. Further, the distribution of loans remained uneven during the 1980s. For example, all five Regions received a health sector only in 1989, but never before simultaneously. During early 1990s, the number of loans approved per year rose to between 50-60, and crossed the 80 mark by 1995 and rose to all time high of 109 loans in 1998. After the release of WDR 2000, the number of health sector loans has remained above 115 per annum. During the period 1986-2002, 1151 health sector loans were approved totaling $27983 millions in constant 1995 prices.

Health sector lending started in 1986 with Benin ($2.54 million), Brazil

($96.15 million), China ($104.29 million), and Sierra Leone ($6.91 million) being the first loan recipient. In terms of dollar volume, health sector lending remained slightly below $400 million until 1988, but crossed the one billion mark during 1989. Following the release of WDR 1990, which added the half element of ‘social safety nets for the poor’, health and other social services sector received renewed emphasis: lending rose sharply across the board and in all continents and continued its upward trend until mid 1990s (Figure 7.4).

During 1998, health sector lending reached its highest ever level of $3545 millions.

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Health and other social services sector lending for various regions, 1986-2003

2000 1800 1600 1400 1200 1000 800

1995 US$ (millions) 600 400 200 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

AFRICA EAST ASIA AND PACIFIC EUROPE AND CENTRAL ASIA LATIN AMERICA AND CARIBBEAN MIDDLE EAST AND NORTH AFRICA SOUTH ASIA

Figure 7.4 Health and other social services sector lending for various regions, 1986-2003

In terms of cumulative health sector lending volume, the four poorest regions can be ranked in the descending order of Latin America and the Caribbean

($8296 million), South Asia ($5866 million), Sub-Saharan Africa ($4727 million), and East Asia and the Pacific ($3676 million). Inter-temporal lending patterns for various regions vary, but in general keep with the notion of poverty articulated the WDRs. For example, Sub-Saharan Africa, East Asia and the

Pacific, and Europe and Central Asia, all three has their first health sector lending spike in 1991, to coincide with the issuance of WDR 1990. Poorest countries were, in general, top recipient of health and other social service loans, in each regions, as shown in Table 7.11.

In terms of cumulative health sector lending per capita (1986-2003), the four poorest regions can be ranked in the descending order of Latin America and the

Caribbean ($16.27), Sub-Saharan Africa ($6.92), South Asia ($4.50) and East

Asia and the Pacific ($1.98). In terms of average annual per capita lending, same rankings hold (Table 7.12).

Table 7.11 Top ten recipients of health and other social service sector lending (constant 1995 $ millions)

Africa East Asia and Europe and Central Latin America and Middle East and North Pacific Asia Caribbean Africa South Asia 1347. Russian 1103. Ethiopia 590.9 Indonesia 3 Fed. 5 Brazil 2279.6 Morocco 331.0 India 4447.3 1024. Uganda 423.7 China 1 Turkey 899.6 Mexico 1684.4 Egypt 228.5 Bangladesh 680.6 Philippine Nigeria 306.3 s 344.2 Poland 356.5 Argentina 1639.7 Iran 223.0 Pakistan 553.3 Zambia 255.3 Thailand 280.6 Romania 325.6 Colombia 507.9 Yemen 181.3 Sri Lanka 105.9 Senegal 231.6 Vietnam 234.6 Bulgaria 148.1 Peru 492.9 Tunisia 167.8 Nepal 37.9 Madagasc Afghanista ar 216.9 Malaysia 128.2 Croatia 121.2 Venezuela 277.7 Algeria 160.0 n 37.8 Kenya 215.6 Cambodia 113.0 Ukraine 118.7 Ecuador 182.9 Jordan 91.5 Bhutan 2.9 Cote d’Ivoire 184.3 Korea, R. 97.8 Hungary 98.3 Bolivia 174.6 West Bank 70.4 Mozambi que 159.1 PNG 29.4 Georgia 82.7 Honduras 174.6 Lebanon 47.5 Burkina Timor- Bosnia- El Faso 145.1 Leste. 27.0 Herz. 80.9 Salvador 160.7 Djibouti 28.5

Table 7.12 Health and other social services sector lending per capita (constant 1995 $ million)

Europe and Middle East Sub-Saharan East Asia and Central Latin America and North Year Africa Pacific Asia and Caribbean Africa South Asia 1986 0.02 0.07 0.00 0.24 0.00 0.00 1987 0.04 0.00 0.00 0.28 0.00 0.04 1988 0.24 0.00 0.00 0.34 0.02 0.12 1989 0.45 0.12 0.20 1.05 0.28 0.14 1990 0.34 0.01 0.07 1.00 0.57 0.32 1991 0.66 0.20 0.58 0.29 0.45 0.44 1992 0.39 0.09 0.80 0.64 0.22 0.49 1993 0.27 0.20 0.25 1.15 0.76 0.30 1994 0.59 0.06 0.40 0.29 0.14 0.43 1995 0.67 0.22 0.15 1.73 0.06 0.14 1996 0.40 0.16 1.22 0.93 0.84 0.38 1997 0.36 0.05 1.37 1.25 0.25 0.44 1998 0.52 0.17 0.26 3.47 0.62 0.67 1999 0.20 0.43 0.68 0.90 0.38 0.18 2000 1.18 0.08 0.51 0.71 0.53 0.30 2001 0.59 0.11 1.41 2.00 0.13 0.10 Total (1986-2002) 6.92 1.98 7.90 16.27 5.25 4.50 Average annual 0.43 0.12 0.49 1.02 0.33 0.28

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In terms of country-wise cumulative health and social services lending, India

($4447 million; or 15.9 percent) is the largest beneficiary, followed by Brazil

($2280 million; 8.2 percent); Mexico ($1684 million; 6.0 percent); Argentina

($1640 million; 5.9 percent); Indonesia ($1347; 4.8 percent); Russian

Federation ($1103; 3.9 percent); and China ($1024; 3.7 percent). The largest number of countries receiving health sector lending falls in the category of

$100 to $250 million. Only six countries, namely Belarus, Dominica, Kiribati,

Maldives, Swaziland Tonga never received a health sector loan despite receiving funding from the Bank, during 1986-2003 period.

It bears pointing that during 1980s and early 1990s, health sector loan were an

“all exclusive health package” with major share going to health sector ONLY, but less so after 1993, as the health sector loan became packaged with other sub-components. Other social services are mainly a 1990s story, little exists before that, though it showed up/flashed from 1987 onwards, but indeed emerged strongly from 1990 onwards and received maximum emphasis from mid 1990s onwards and especially late 1990s. Other social services loans were

“packaged” with other major sector loans, ensuing the adoption of empowerment paradigm. For example, governance emerged from the late

1980s onwards, and came heavily on lending agenda during 1990s. Likewise, sub-national government administration emerged during 1990s. The emergence of these sub-themes embody a central theme: to enhance availability of social services for the poor, as outlined in WDR 1990 and reinforced by the CDF and

WDR 2000.

7.6 Water supply and sanitation

The water supply and sanitation sector refers to general water, sanitation, sewage, water supply, and flood protection sub-sectors. The water supply and sanitation sector lending started in 1968, with a single loan going to Singapore

($22.61 million), but until mid 1980s the sector remained largely off the

Bank’s lending portfolio. For example, until 1985, neither the Bank approved more than 3 projects in a single year, nor did all Regions simultaneously receive a water and sanitation project in a single year. From 1986 onwards, there was a significant increase in both the numbers of projects approved per annum as well as the dollar volume of projects approved. For example, South

Asia received its first ever projects in 1986 (India, $241.18 million; Sri Lanka,

$48.24 million). By the end of 1980s, maximum number of projects approved in a single year jumped to 23 and crossed 50 by mid 1990s, and reached all time high of 64 projects in 1998, and then declined somewhat during 2000s.

Over the period 1968-2003, the Bank approved 741 water and sanitation projects with largest numbers of projects going to Sub-Saharan Africa (25.2 percent), followed by Latin America and the Caribbean (21.5 percent); East

Asia and the Pacific (17.1 percent); Europe and Central Asia (13.9 percent);

Middle East and North Africa (12.6 Percent); and South Asia (9.7 percent).

Likewise, with the exception of 1978, cumulative dollar volume of projects approved in a single year remained around $100 million, until 1985. During

1986, the lending volume of water and sanitation projects reached $520 million, and then onwards continued to rise reaching all time high in 1994

($2849.2 million), followed by a slow down during 2000s, as the emphasis

255 shifted on private sector involvement in infrastructure provisioning. It is therefore clear that during mid 1980s, after the release of WDR 1980, and then again in mid 1990s, following the release of WDR 1990, vis-à-vis in response to entailed refinements in poverty conceptions, there was an across-the-board swell in number of water and sanitation projects and dollar volume of lending.

(Figure 7.5) clearly depicts the change mindset posited by the WDR 1980 on poverty. That is, from mid 1980s, the size of the water and sanitation portfolio enlarged substantially in all regions and enable more number of developing countries to share-in dollar-pie to help improve their water and sanitation infrastructure stock. Further, the water and sanitation sector portfolio diversified afterwards, particularly after the release of WDR 1990 on poverty.

For example, sewerage sub-sector showed up on lending portfolio from 1968 onwards, with 2-3 projects on average, but rose mainly in 1990s. Other sub- sector such as general water, sanitation, water supply, and flood protection emerged only from 1986 onwards and became mainly a 1990s story. During

1980s and 1990s, there has been an impressive, but insufficient, increase in the provision of water supply and sanitation services. For example, the number of urban people with access to adequate water supply increased by about 80 percent in the 1980s, and the number of urban people with adequate sanitation facilities increased by about 50 percent. The gains to access in rural areas were even greater (WDR, 1992).

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Water and sanitation sector lending for various regions, 1868-2003

1400

1200

1000

800

600

1995 US$ (millions) 1995 US$ 400

200

0 1968 1973 1977 1980 1984 1987 1990 1993 1996 1999 2002

AFRICA EAST ASIA AND PACIFIC EUROPE AND CENTRAL ASIA LATIN AMERICA AND CARIBBEAN MIDDLE EAST AND NORTH AFRICA SOUTH ASIA

Figure 7.5 Water and sanitation sector lending for various regions (constant 1995 $ millions), 1968-2003

Poor countries and regions were the main recipients of water and sanitation sector investment lending: all regions benefited but to varying extent, with poorest region sharing more in the water and sanitation sector pie than relatively well-off regions. In terms of cumulative lending volume to water supply and sanitation, over the period 1968-2003 ($26194 million), the four poorest regions can be ranked in the descending order of East Asia & Pacific

($6873.6 million, or 26.2 percent); Latin America & Caribbean ($6621.2 million, or 25.3 percent); Sub-Saharan Africa ($3605.8 million, or 13.8 percent); South Asia ($3485.1 million, or 13.3 percent); Middle East & North

Africa ($2912.7 million, 11.1 percent); and Europe & Central Asia ($2695.6 million, or 10.3 percent. It bears pointing that Sub-Saharan Africa accounted for larger share of total number of projects (25.2 percent), but a smaller share

257 of dollar volume (13.8 percent), which implies that African region water and sanitation projects were relatively smaller in size, while the reverse holds for

South Asian region projects. The regional inter-temporal lending patterns, as captured by water and sanitation sector indices, depict a story which is consistent with the poverty notions and ensuing sectoral emphasis, as noted earlier (Table 7.13).

In terms of total water supply and sanitation sector lending per capita over the period 1968-2003, the four poorest regions can be ranked in the descending order of Latin America & Caribbean ($27.9), Middle East & North Africa

($23.8), Sub-Saharan Africa ($12.1), Europe & Central Asia ($11.2), East Asia

& Pacific ($7.8), and South Asia ($6.0). For average lending per capita, these rankings are order preserving (Table 7.14).

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Table 7.13 Water and sanitation sector lending indices (constant 1995 dollars, million), 1968-2003

Latin Sub- Europe and America Middle East Saharan East Asia Central and and North Year Africa and Pacific Asia Caribbean Africa South Asia 1965-69 0.00 0.89 0.00 0.00 0.00 0.00 1970-74 0.00 1.38 4.22 0.00 12.65 0.00 1975-79 7.03 1.96 20.22 7.94 39.30 0.00 1980-84 2.72 5.52 37.16 0.00 17.06 0.00 1985-89 42.24 12.61 180.67 40.77 77.36 80.40 1990-94 100.00 100.00 100.00 100.00 100.00 100.00 1995-1999 64.75 89.11 205.31 52.50 83.65 93.27 2000-2003 67.33 58.75 104.18 27.03 66.45 20.04 Base period total lending (constant US$ millions) 1269.33 2543.77 413.59 2900.92 734.64 1186.60

Table 7.14 Water supply and sanitation sector lending per capita (constant 1995 $), 1968-2001 Europe Middle Sub- East & Latin East & Saharan Asia & Central America & North South Period Africa Pacific Asia Caribbean Africa Asia 1965-69 0.00 0.02 0.00 0.00 0.00 0.00 1970-74 0.00 0.03 0.04 0.00 0.67 0.00 1975-79 0.25 0.04 0.20 0.67 1.80 0.00 1980-84 0.09 0.10 0.35 0.00 0.65 0.00 1985-89 1.10 0.21 1.63 2.79 2.63 0.90 1990-94 2.40 1.54 0.88 6.32 2.88 1.02 1995-1999 1.36 1.30 1.79 3.11 2.21 0.88 2000-01 6.89 4.59 6.25 14.97 13.02 3.17 Average annual lending (1960- 2001) 0.38 0.24 0.35 0.87 0.75 0.19 All periods total 12.09 7.82 11.15 27.86 23.85 5.98 Total lending (95 $million) 3605.83 6873.58 2695.61 6621.22 2912.66 3485.06

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In terms of cumulative water supply and sanitation sector lending six countries fall in over one billion dollar category and the same holds for over

500 million to below one billion category. By far, the largest number of countries fall into 10 to 50 million dollar category, while Dominica and

Slovenia are the only countries not to have received any water and sanitation sector loan despite receiving investment lending from the Bank.

Among the top ten recipient countries, China is the largest client ($3993.6 million; 15.2% of total sectoral lending) followed by Brazil ($2770.0 million; 10.6 percent), India ($2215.3 million; 8.5 percent), Indonesia

($1468.0m million; 5.6 percent), Mexico ($1412.0; 5.4 percent), Turkey

($1218.6 million; 4.7 percent), Nigeria ($798.0 million; 3.0 percent),

Argentina ($733.1 million; 2.8 percent), Algeria ($696.7 million; 2.7 percent) and Pakistan ($553.0 million; 2.1 percent). It is therefore clear that with the exception of Turkey, top ten water and sanitation sector loan recipients are located in poorest regions of the world, although they are not necessarily poorest of the poor in the Region.

To conclude: water and sanitation sector investment lending depicts the temporal and geographic patterns that are consistent with the notion that improving social services for the poor is one way to alleviate inherent disadvantages suffered by the poor. Despite these efforts, large access gaps remain. For example, accordingly to WDR 1992, in Bank financed sewerage projects, substantially less than one fifth of all spending is for sewerage and sanitation components. This figure has varied little over the last 18 years. The effects of such small investments are exacerbated by the fact that most existing facilities function poorly in developing countries.

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For example, in Mexico, more than 90 percent of all wastewater treatment plants are dysfunctional, and in Latin America only less than 2 percent of the sewage is treated: coverage has been insufficient and inefficient

(Briscoe, 1999a; Briscoe, 1999b; Briscoe, 1995)

Experts show that the "hard path" approach of construction of massive infrastructure in the form of dams, aqueducts, pipelines, and complex centralized treatment plants brought tremendous benefits to billions of people, reduced the incidence of water-related diseases, expanded the generation of hydropower and irrigated agriculture, and moderated the risks of devastating floods and droughts (Gleick, 2003). However, he shows that

ODA for water supply and sanitation projects from OECD countries and the major international financial institutions has actually declined over the past few years from $3.4 billion per year (average from 1996 to 1998) to $3.0 billion per year (average from 1999 to 2001). Moreover, those countries most in need receive the smallest amount of aid. Ten countries received about half of all water-related aid, while countries where less than 60% of the population has access to an improved water source received only 12% of the funds. The most serious unresolved water problem is the continued failure to meet basic human needs for water. More than 1 billion people worldwide lack access to safe drinking water; 2.4 billion—more people than lived on the planet in 1940 —lack access to adequate sanitation services (WHO, 2004). The failure to satisfy basic water needs leads to hundreds of millions of cases of water-related diseases and 2 million to 5 million deaths annually. He points out that a transition to a comprehensive

"soft path" is already under way, but it has to be implemented quickly to

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help address serious unresolved water and sanitation problems in developing countries.

7.7 Global investment lending

During Bank’s lending history, particularly after mid 1960s onwards (when poverty reduction emerged on its lending agenda), the Bank lending has remained heavily focused on poorer regions of the world, although over time it also responded to the financial needs of other regions (as warranted by political and economic crisis). For example, between the period 1960-

2003, four poorest Regions in the world accounted for about 79 percent of total investment lending, save Europe and Central Asia and the MENA region. Further, over the period 1960-2001, the World Bank, on average, invested $25.39 per capita annually in Latin America and the Caribbean

(highest), followed next in the declining order by East Asia and the Pacific

($21.50) – a region with very fast growing and high poverty rates initially,

South Asia ($17.93), and Sub-Saharan Africa ($13.97) – one of the poorest region. It bears pointing that poorest SSA received relatively lower lending per capita, which must be interpreted in terms of very low population density and high transaction costs of infrastructure and service provision therefore, poor social capital and capacity constraints. The relatively well- off regions, on the other hand, have one of the lowest annual investment lending per capita over the reference period: Europe and Central Asia

($13.75) and MENA ($7.46).

Interpreted in terms of changes in poverty conceptions, per capita investment lending rose heavily in all regions after McNamara’s 1968

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speech, which for the first time put poverty on Bank’s lending program, and continued to rise in the lead upto the release of WDR 1980 on poverty, in all regions (Figure 7.6). For example, total investment lending rose from

$4.67 billion ($11.11 per capita) in 1960 to $21.73 billion ($48.88 per capita) in 1980, and jumped to $24.37 billion ($42.37 per capita) in 1990 - the fourth highest level ever. These lending spikes therefore correspond to

Bank’s emphasis on poverty as spelled out by respective WDRs (Figure

7.7).

Figure 7.6 Per capita investment lending by the World Bank to various regions (constant 1995 $), 1960-2001

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Global lending by the World Bank (constant 1995 $million), 1960-2003

35000

30000

25000

20000

15000 Constant 1995 US$ million US$ 1995 Constant

10000

5000

0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

AFRICA EAST ASIA AND PACIFIC EUROPE AND CENTRAL ASIA LATIN AMERICA AND CARIBBEAN MIDDLE EAST AND NORTH AFRICA SOUTH ASIA

Figure 7.7 Global lending by the World Bank (constant 1995 $million), 1960-2003

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7.8 Key conclusions and implications

This study explored the nexus between poverty conceptions and the volume and composition of investment lending by the World Bank over the period

1947-2005, by answering a simple question:

Does the broadening and deepening of the concept of poverty result in a shift in Bank’s lending operations and policy changes, and what does this shift meant for investment lending to irrigation and other social sectors for real reductions in poverty over time?

The three World Development Reports on poverty serve as the database for evaluating transitions in poverty mindset. The focus is on investment lending by the World Bank, over the period 1947-2005, to agriculture sector, with a special focus on irrigation and drainage sub-sector, and those sectors that have the most direct link with human development—education, health and other social services, and water supply and sanitation. The purpose was to delineate patterns of change in poverty mindset and its impact on inter-temporal investment lending patterns, and link these changes to poverty reduction. Key findings and their implications are:

1. The transitions in poverty mindset, as spelled out by the three World

Development Reports (1980; 1990; 2000) on poverty has a decisive

impact on the composition, volume, and allocation of investment

lending across regions and countries. Non-availability of time series

data on poverty and the multi-dimensional nature of poverty

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problem makes hard to establish clear links between investment

lending and real reductions in poverty.

2. Policy changes triggered by the Bank during the period 1968-1981,

placed poverty firmly on the Bank’s global lending portfolio, and

resulted in a manifolds increase in investment lending to

smallholder agriculture, including irrigation sector with a view to

fight poverty and population explosion.

3. The 1980 WDR on poverty articulated that both growth and human

development (education, health, nutrition, water supply and

sanitation) are needed for poverty reduction. Consequently

investment lending to these sectors rose sharply, with health and

other social service lending emerging for the first time on lending

portfolio (during mid 1980s). These themes were broadened by the

1990 WDR, by adding half element of safety nets for the poor.

Lending moved away from traditional sectors such as agriculture

and irrigation, and portfolio became diversified with more emphasis

on social sectors.

4. The 2000 WDR articulated a paradigm of opportunity,

empowerment, and security for results-based reductions in poverty,

with set targets for poverty reduction and modalities for tying-up

investment lending to actual reductions in poverty, rather than

expenditure on poverty reduction. It adopted a multi-dimensional

model of poverty, nested in a comprehensive development

framework, with greater emphasis on the value of growth,

empowerment, country ownership, and building partnerships for

poverty reduction. It is too early to evaluate the effectiveness of this

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strategy and delineate the impact on irrigation sector investments

lending.

5. Data from WDI (2003) show that there have been significant

improvements in social indicators in most regions, and modest

reductions in the proportion of people living below dollar-a-day

poverty line during the past three decades. Despite clear progress in

poverty reduction, millions continue to remain in extreme poverty.

Poverty is on the rise in Sub-Saharan Africa.

6. Knowledge gaps exist. Information on other external sources of

financial assistance and public/private spending is incomplete.

Insufficient information exists whether lending for social services

have reached the poor. Empirical studies evaluating poverty and

food security outcomes related to the Bank and other donor’s

assistance to irrigation sector are rare.

The key implications of these findings to the area under study (MDB-

Australia) is that investments in global irrigation sector have been driven by complex factors but the most noticeable ones have been the eradication of world hunger and poverty and human resource development imperative in the developing countries. Australian government is a key player in these global efforts. For instance, priority investments areas for AusAID and ACIAR are: rural development; food security; poverty reduction; gender; and environment. These are also the key priority areas of international donors, the UN system and the World

Bank. Thus, synergies can be gained from the lessons learnt in international PPP investment for water and food security, and targeting the investments to irrigation modernisation in the Basin.

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CHAPTER EIGHT

8 Summary and conclusions

8.1 Backdrop

Global water and food security issues pose complex challenges to mankind under a changing climate. Irrigated agriculture has responded to the doubling of the human population during the past 50 years by more than doubling food production. Much of the gains in food security came from the expansion of irrigated area as well as sustained improvements in crop yield, principally wheat and rice in much of Asia, as well as elsewhere. Past investments in irrigation were instrumental in boosting productivity and improving access to water resources. These investments virtually insulated rural communities against episodes of hunger and malnutrition, and while food security issues still exist in parts of Asia and much of Africa, the world as a whole is food secure. Nevertheless, continued population growth poses immense challenges for feeding future populations. The prospects for expansion in area are limited in many of the food producing areas around the world, although some potential remains in Latin America and eastern

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competition in agriculture are limiting the prospects for any sustained improvement in agricultural productivity in many of these systems.

Furthermore, for the first time ever in the history of mankind, a greater proportion of the population will live in non-Anglo countries. Corporate redistribution and economic boom may become the drivers of global change, however harnessing this potential will require immense resources including water, energy, land and capital investments. While food can be produced in land abundant and water abundant countries and imported into land scarce or water scarce countries through virtual water trade, many of these countries are unable to afford sustained food imports due to ongoing financial and economic issues. What virtual water trade achieves is not global water use efficiency, simply because land scarce-water abundant countries cannot afford to produce and export food. What it does achieve and could further achieve is integrated global land and water use efficiency.

In order to realise these efficiency gains and distribute food to the places where it is needed most, related support measures and infrastructure are often lacking, such that food insecurity can worsen even amidst plentiful supply. Developing countries have the option of investing in new irrigation infrastructure and water resources development, new cropping technologies

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and educational and support measures to boost food production for feeding their future populations. However, the underlying institutional infrastructure is often lacking, and policy mechanisms tend to be opaque, which deters international investors and donors. Unless the underlying institutional environment improves significantly, further investments are unlikely.

Markets often fail and fail consistently in these countries because they are poorly integrated into the world market system. Such crippling market failures can further undermine investments. Many of these countries are political hotspots, and ongoing geopolitical issues and turbulence in these markets further undermines stability and capital flows to finance these investments on a long term basis.

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governments around the globe are calling for measures to halt these undesirable impacts and avoid the ills of the past in future investments.

Reducing the carbon footprint of a mankind’s food and water needs is one of the emerging challenges. According to the UN, the greatest risk to future food security is not land scarcity, rather the emerging water security situation. This does not mean that the world will run out of water, rather that human response mechanisms, policies and institutions must harness new opportunities to address water scarcity challenges alongside other constraints.

Reinventing irrigation to address the needs of the future, while avoiding the problems of the past is the main pathway for improving food security. This requires significant investments. It is commonly believed that improvements in water use efficiency, especially in irrigated agriculture, can meet much of the future food needs, yet it is not clear how best to match irrigation technology to the needs of the many smallholders in almost all developing countries where much of the food is produced and consumed locally, and where the food security issues are likely to be most intense.

Investments for irrigation modernisation are not forthcoming either, limiting prospects for easy gains in food production through irrigation modernisation. Tools for decision-making on sustainable irrigation investments are lacking.

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8.2 Model development

Against this backdrop, this thesis examined the world water and food security situation. The main focus of the thesis was on examining the role of public-private investments for irrigation modernisation. A conceptual framework linking hydrology, agriculture, economics, institutions and policies was developed in a unified environment for improved decision- making. A decision support model called HAEMAN (Hydrologic-

Agronomic-Economic Management Model) was developed. The model is coded in the GAMS environment and can link various components without input from any hydrological model such as Modflow. The model was successfully calibrated for the entire catchment of the Murrumbidgee River in Australia, as described below.

For the development of HAEMAN Model, an exhaustive and critical review of the past modelling efforts on hydrologic-economic models was done with emphasis on the water sector in general and agriculture and irrigation sector in particular. The main goal was to review and identify the models that present the best efforts at linking hydrology, economics, institutions and policy aspects of water management.

The HAEMAN model provides a complete mass balance for all water uses from its headwater catchments to the water users in major irrigation districts as well as municipal, industrial and environmental users. The model incorporates several elements including hydrology, agriculture, irrigation technology, investment policy, institutions, policies and interstate water sharing and biodiversity production protocols. The hydrology element

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connects starting volumes in the upper catchment reservoirs, inflows and controlled releases from these reservoirs. Water application, use, seepage, net groundwater recharge, and net returns at each diversion node are dynamically estimated to generate an optimum solution subject to the constraints on overall water availability and economic parameters. The model generates estimates of economic efficiency, equity, cost recovery and environmental sustainability using a range of indicators including gross revenue, net revenue, economic productivity of water, and environmental sustainability. The model outputs are downloaded to a spreadsheet using

GDX utility without any manual intervention. Each time, the model checks the water balance for each node and for the catchment as a whole to generate an optimal outcome in terms of crop choices, aggregate income, and agricultural output.

The base case scenario is run under the conventional flood irrigation system to generate a counterfactual argument by comparing the base case outcomes against alternative scenarios such as irrigation modernisation. Public- private partnerships are modelled as a parameter denoting public subsidies for irrigation modernisation with values ranging from zero (no subsidy for flood irrigation) to 1 (100% subsidy for modern irrigation). The results of each model run are compared with the base case model to estimate the model predicted benefits from various forms of public-private partnership.

Water security and climate change are then modelled in eight scenarios.

The water security scenario considers a full allocation of 100% for the base case, and interactively scales down to 25%. The climate change scenarios

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apply a yield penalty on crop yields depending upon the states of nature in terms of climate outcomes that vary from moderate, to medium, to severe.

For the sake of clarity, a yield penalty is first applied to the perennial crops plus tomatoes and summer vegetables that are more susceptible to water scarcity, while holding the yield of all other field crops constant. In the second scenario, the yield penalty is applied only to field crops, not to perennials. In the third scenario, the first two scenarios are combined to reflect the true world situation in which both scenarios are likely to play out simultaneously. In the fourth scenario, it is assumed that greenhouse gas emissions up to and beyond 2070 will continue to increase unabated, resulting in further global warming and climate change such that the yield penalty on these crops is severe. The yield penalty for perennials is scaled to 20%, while for other crops it is scaled from 10% in the previous scenario to 14% in this scenario.

The modelling results show that all indicators are negatively affected with yield penalties due to climate change, and this holds for all crops including perennials and field crops. Per hectare gross revenue, net revenue and economic productivity of water are all lower in Scenario 1 than the base case scenario. Likewise, these indicators are lower for the extreme scenario than the medium climate change scenario.

8.3 Model results

The HAEMAN model generates reasonably accurate estimates of the

irrigated areas in all the irrigation districts modelled. The model is also

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able to select the crops that are fairly representative of the crops grown in

the districts.

Investments in modern irrigation systems offer high returns in terms of

aggregate income, gross and net returns, and water productivity

improvements and can thus enhance economic efficiency in irrigated

agriculture and also improve cost recovery as the investments would pay

back within less than two years.

Investments in irrigation modernization offer huge potential to improve

agricultural income. For instance, for the Coleambally Irrigation Area the

model estimated income is about $188.81 million under optimal crop

choices. New plantations, for instance stone fruit and pecan etc, would

add some $55.47 million in agricultural income to the regional economy.

The modelling results for water security and climate change scenarios show that:

. Water security will have huge impact on irrigated agriculture, both

in terms of cropped areas as well as returns to investment. For

instance, under 75% water security scenario irrigated area nearly

reduces by 50%, where as under 50% water security scenario

irrigated area is lowest (17%).

. When water security falls to 25% or below, irrigated acreage in

almost all districts falls to the lowest levels (just 1-4%) and thus

irrigated cropping cannot simply be practiced as the water is

insufficient to support crop production over a reasonable irrigated

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area.

. The aggregate income and returns from agriculture fall substantially

with decline in water security levels compared to the 100% water

security scenario.

. Net revenue, economic returns, and water productivity are lower

under all four climate change scenarios and the profitability of

perennial plantation, with long term investments, suffers the most

under the climate change scenarios. All these indicators fare better

under modern irrigation systems than conventional flood irrigation

system.

For water allocation levels below 25%, the agricultural income is almost negligible and the agricultural activity is at its lowest ebb. This finding is consistent with recent drought in the study area, when water allocations fell to an all time low of 13% and only a few farmers cultivated their land. The above results suggest that, capital investments in infrastructure and support measures for irrigation modernization offer potential pathway to offset these impacts at a reasonable cost

8.4 Global assessment

The thesis also provides the most comprehensive review of emerging public-private partnerships (PPP) in irrigation, as well as in the water sector across the globe in general. Due to the lack of studies that specifically deal with PPP in irrigation, the literature review was also conducted for the related sector of water and sanitation, with emphasis on water supply

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systems in the developing world. This is justified in view of the similarity across the two sectors, as well as the institutional and policy issues that affect both sectors in these countries. The review shows that while PPP can enhance economic efficiency and bring new investment funds into the sectors, there is limited evidence of their success in the irrigation sector although there are some exceptions. The die-hard critics of PPP and their proponents need to hear this message loud and clear; PPP are not a panacea to funding constraints in the sector. Nor is there overwhelming evidence showing consistent gains in economic efficiency, cost recovery, equity and social outcomes. Rather, the PPP suffer from the same kind of caveats as the public sector, and there is no guarantee that the future PPP will ensure universal service delivery to excluded groups, particularly to the small and developing landholders in the developing world. The review also shows that

PPP encounter the greatest failings in terms of equity, and that the corporatisation of water carries a far greater risk of taking water away from the poor. With the current economic and social conditions that prevail in much of the developing world, water will continue to flow uphill towards money and away from the poor. Institutional and policy interventions are needed to address these issues and make PPP work for the dispriveliged groups including women, the poor, and the environment.

Institutional matrices in PPP were empirically examined using the PPP international database on global investment lending to the private sector.

The database is developed and maintained by the World Bank and covers the period from 1947 – 2005. The dataset for this period was analysed and critically examined to trace the links between the targeting and phasing of

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these investments and the changes in the institutional matrices underpinning these investments. The institutional matrices were defined in terms of the changes in the conception of human welfare promulgated by the UN/ World

Bank family over time. It is argued that rural development paradigms tend to change approximately every 10 years, and have transformed dramatically since the inception of these global institutions. For instance, until the mid

1960s, the provision of basic needs was regarded as the core business of human development by the UN and its implementation arm, the UNDP.

During the McNamara era at the World Bank, this global institution launched the first World Development Report that changed the institutional landscape and its global development lending dramatically. Then with the launching of the first human development report on poverty in the 1980s, lending to the social services sector including irrigation and drainage, water supply, health and sanitation improved dramatically and reached all time highs. The peak in irrigation and drainage sector lending came earlier than this spike in lending to these social sectors. The irrigation and drainage sector lending was largely packaged into the broader agricultural lending during the first period. Until the 1970s, agriculture meant irrigation, and these global institutions invested heavily in developing countries in Asia; for example, China, India and Indonesia received more than $1 billion each in irrigation investment lending from the World Bank during that period.

Irrigation and drainage sector lending reached an all time high during the mid 1970s, followed by a slowdown in the early 1980s and an all time low by the year 2000. Post 2000, irrigation sector investments have recovered mainly due to renewed investment lending in much of Africa. However, past investments in Africa were less successful due to peculiar socio-

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economic and political issues, and it remains to be seen whether new investments will be any more successful. Water scarcity in Africa is a serious constraint to harnessing the bonanza from these international investments. It is not clear whether these investments should be targeted to large or small scale irrigation systems, to large or small farmers or both.

The role of technology, local institutions, capacity and implementation also remains unclear.

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CHAPTER NINE

9 Policy Implications and New Directions

9.1 Synthesis

Irrigation is important to world’s food security. Investments in irrigation remain vital for eradicating extreme hunger and world poverty. The economic efficiency and equity of past investments can be questioned.

Irrigation is at cross roads. Agricultural productivity and investments are falling. Climate change is challenging the core water programs. Water and food entitlements would be greatly redefined under global change.

Irrigation must reinvent to these emerging realities. New investments are vital but must target niches depending upon the biophysical, economic, social, and policy settings in each region. New investments must avoid the ills of the past and seek re-engagement of public to private stakeholders.

9.2 Policy lessons

The main policy lessons from this research are threefold:

. Addressing world water and food security issues requires integrated

research on issues affecting water security, water productivity, food

security and climate change. Without a strong knowledge base and

robust data, policy makers will continue to act in a vacuum and the

opportunities for future food security may be missed by the same

kind of mistakes made in the past in harnessing irrigation

investments and enhancing food production.

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. The investment in climate and local governance environment must

improve. While regional food security is important, a global vision

is needed to ensure sustainable food production through sustainable

management of available land and water resources. Bringing new

land and water resources to the service of agriculture and the

environment may be necessary, but the gains from this strategy will

be limited if land and water resources continue to degrade and

productivity slowdown takes hold and leads to yield stagnation or

decline. Reversing these productivity declines requires strong

institutions, supportive policies and political leadership committed

to implementing the change.

. Global PPP are essential, for re-engaging in agricultural and

irrigation sector investments. Without such partnerships, developing

countries would neither have the financial resources needed to

harness the full potential of natural resources available to them, nor

to maintain the productivity of their current systems. Donors and

international investors must ensure that investments are socially

responsible and incorporate strategies to manage future climate

change and global change issues.

9.3 Future research directions

This thesis developed a unified framework that can be applied to other catchments and up scaled to a basin scale. USAID is developing a similar

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model to underpin irrigation infrastructure investments in Afghanistan and

Africa. Data constraints are binding, and in particular the knowledge on basin hydrology that provides the core structure of the model is limited. The

HAEMAN model can be scaled-up to the whole Murray Darling Basin or calibrated in any other basin with similar water security and governance issues. However, it must be noted that watery catchment is a complex system such that an applied range has to be strictly defined for the

HAEMAN model; the model is calibrated for the Murrumbidgee Catchment in the Murray Darling Basin.

This thesis also examined the global public private investments (in Chapter

6 and 7). It is possible to make use of these global experience findings to develop alternative PPP framework in the area of study (MDB). To make use of these findings, the future work may keep the focus on modelling framework (HAEMAN) for the MDB as a whole to develop and design the most appropriate models of public private investments at the MBD level as a whole, by considering the following findings:

The global analysis of past PPP models and international investments in the social sector, including irrigation, over the past 50 years (Chapter 6-7) links with the HAEMAN model and its empirical findings (Chapter 2-5) in important ways and offers several lessons that can be used to develop an alternative PPP framework: First, the analysis of the past PPP models in the social sector, including irrigation, shows that there are no universal models or one size fits all solutions that would work everywhere. Rather, the PPP models are setting specific and their suitability depends on the irrigation

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system, and its types; neither all functions of the irrigation system are attractive to private investments due to higher risk involved and basically the public good nature of the irrigation benefits. Second, irrigation provides social benefits that go beyond public and private benefits; worldwide investments in irrigation over the past 50 years (Chapter 7) have delivered significant benefits to the wider community – rural and urban – in terms of livelihoods, food security, rural development, economic growth, poverty reduction and ecosystem services; and further investments are now critical as a response to climate change through water sector adaptations and to safeguard the future food security. These lessons must not be forgotten on the Australian policy makers that in the last 50 years the majority of the

Australians, whether living in the country or the cities along the coast have benefited from the development of irrigated agriculture in the MDB, and have developed an industry that produces much of the top quality food and also contributes to regional food security in important ways. Further investments are needed today for more resilient communities and healthier rivers in the MDB. Third, there is a mosaic of irrigation systems worldwide, some of which offer the best opportunities for public private investments, to the clear advantage of Australia (due to its rich experience in usng PPP model in infrastructure building for the nation). However, irrigation investments must be packaged as a key component of the overall rural development package including rural infrastructure such as rural roads, education, healthcare, water and sanitation, and other services (examined in

Chapter 7). Where such complementary investments are lacking, the benefits to irrigation investments alone will be sub-optimal. Fourth, international investments were instrumental in enhancing world food

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security and reducing poverty in much of Asia, Pacific and Africa. These investments remain vital for the global fight against hunger and poverty.

Australian is a respectable member of the global community and has a strong commitment to assist countries in Asia Pacific and Africa affected by the food security and poverty. While Australia is food secure, even for the foreseeable future, her own investments in the MBD remain vital to sustained increase in food production and food exports to the Asia Pacific region. Fifth, the key priority goals for the Australian government for the next five years and beyond are: lifting agricultural productivity; improving rural livelihoods; and building resilient communities, all requiring new investments in rural development. Therefore, the lessons from the analysis of the global investments in rural development sectors over the past 50 years (Chapter 7) are directly relevant for investment planning and policy reforms as well as defining and reshaping the current irrigation investment paradigm in the MDB. Sixth, the global analyses of irrigation sector investments showed that not all projects were successful; some projects underperformed while still others failed. The causes of failure and success must be clearly documented and lessons must be learnt from these findings to improve the effectiveness of future investments and develop alternative

PPP framework for the MDB. Seventh, investment climate matter – a finding applicable to the analysis of past PPP models (Chapter 6) and investment lending to irrigation and related rural infrastructure sector

(Chapter 7) and the HAEMAN model (Chapter 2-5). Without this, the investments in irrigation modernisation would likely under-perform.

Political will and public incentives must provide a supportive framework to

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attract PPP and equity investments from diverse sources ranging from private investors to equity funds and international donors.

Lastly, the conceptual advances must also consider incorporating other dimensions of agricultural change into the model. These include ecosystem services, greenhouse gas emissions, carbon trading, offset programs and global carbon pollution reduction schemes. Such modelling efforts can serve humanity by extending the current production frontier on one hand, and ensuring the sustained productivity of current irrigation and agricultural systems.

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