Francois Molle, IRD

1. What scope for water demand management in agriculture? Francois Molle, IRD

2. Whyis agriculture the largest water user? • Agriculture is 'responsible' for 70% of water withdrawals worldwide • but this goes up to 85% in terms of "consumption" or "depletion" • and to –perhaps- 98% if rainwater on crops is computed

3. Can agriculture produce with less water?Yes it can,… yes it does! • Reduce evapotranspiration per unit of food produced (WP) • Reduce diversions to agriculture:can pricing help? • Reallocate water to non-ag uses

4. A great part of these savings occur when there is plentiful water A part of these savings occur where there is no need (no connectivity) These "losses" were not lost but reused downstream 70% Agriculture 30% M&I

5. Reducing diversions in closed basins: High probability of third-party impacts Renewable resources Available renewable resources not withdrawn withdrawn at least once not depleted Withdrawn once depleted withdrawn several times depleted time

6. Water pricing : a "good idea" withlimitedpotential in large scalegravityschemes • Is water scarce ? • Are losses really lost? • Are "savings" used? • Are losses at the farm level? • Is demand elastic ?

7. Is demand elastic ? • Demand is usually inelastic at prices close to O&M costs • In very few schemes are O&M costs covered • State-run schemes: very hard to justify water charges much over O&M costs • IMT schemes: farmers will not inflict themselves prices over O&M costs

8. Water pricing : a "good idea" withlimitedpotential in large scalegravityschemes • Is water scarce ? • Are losses really lost? • Are "savings" used? • Are losses at the farm level? • Is demand elastic ? • Is pricing volumetric? • Is supply on-demand ?

9. Bulk allocation at the secondary/tertiary level • Allotments are flexible and users can request less water if they want; the shortfall can sometimes be carried out to the next year or season. • When supply availability is below demand, quotas are reduced in proportion to the shortfall; prices remain constant and are not raised in order to reduce demand in line with supply. • Water charges in surface irrigation too low to generate changes in behaviors; group incentives are not easily passed on to individual farmers • Pumping irrigation has higher costs often fully borne by the user. Costs are implicitly volumetric and incentives may exist (on-demand systems), depending on the relative cost of water. Sri Lanka (Mahaweli System H); Turkey; Mexico (módulos); China (diversity of water reforms); Israel (bulk allocation through quotas to cooperatives and communities); Japan (to LIDs); Iran (Zayandeh Rud); Andhra Pradesh; Maharashtra (India), Northern Vietnam, and Taiwan.

10. Volumetric pricing at the individual level • Morocco • Italy (Capitanata) • Spain (various schemes) • France (Neste, Charentes, Canal de Provence) • Jordan (Jordan Valley) • California (Broadview district) • Other examples: Peru, China and Canada

11. Pricing is mainly oriented toward revenue generation and maintenance, (sustainable cost pricing) rather than toward economic efficiency Even if volumetric supply is possible at the farm level, in practice price incentives are predominantly used at the margin, to control use in excess of defined quotas or entitlements. Even in such cases, the option to resort to the second tier has to be cancelled sometimes when supply is insufficient Systems with quotas deal with droughts and shortages by revising quotas downward Reduction of quotas is generally uniform across users (with exceptions : trees vs. seasonal crops / ancient water rights / etc). Even in the rare cases where water is scarce and where conditions are met to regulate demand through pricing, supply is invariably managed through administered quotas or water entitlements. None of the systems reviewed has used prices to raise pressure over users in order to price out underachievers and reduce demand according to available supply. This holds true for both the short term (seasonal shortages), and the longer term (conservation objectives).

12. Two ways to deal with scarcity and elicit adjustments Quotas Efficiency pricing Share scarcityAllocate water through quotas or entitlementsEquity is maximized, in general at the expense of efficiency, unless reallocation mechanisms are offered Raise prices, so that water goes to activities with higher economic efficiency.“underachievers are priced out”. Efficiency is maximized, in general at the expense of equity, unless blocks offer protection Regulation through quotas is transparent, simple, equitable, and puts use in line with supply; but adjustment of quotas to new situations is problematic Regulation through prices entails a transfer of income to the agency

13. “Allocation stress” “The potential for economic benefitsfrom allocation-oriented institutional change are substantial” Dinar (1999) “In the field of water resources management a widely held beliefexists that allocation stress is to be found in many parts of the world” Merrett (2003) “There is considerable scope for water savings and economic gainsthrough water reallocation to higher value uses” Rosegrant and Cline (2002) The value of water differs greatly between agriculture and other sectors, “often indicating gross misallocations if judged by economic criteria"World Bank (1993)

14. Basin levelevolutions Environment Agriculture Cities/indus.

15. Competition in the short run: droughts In 1991, the California State Water Project cut off supplies to farmers and the Bureau of Reclamation reduced its supplies to the Central Valley Project by 75% In Thailand, supply to the Chao Phraya delta in the dry-seasons of 1992, 1993 and 1994 was around 50% of normal levels, while Bangkok was given priority When Indonesia was hit with a major drought in 1994, residents' wells ran dry but supply to Jakarta's golf courses was ensured so as not to impact on tourism. In 1998, in the midst of a three-year drought, the Cyprus government cut the water supply to farmers by 50% while guaranteeing the country's annual two million tourists the water they needed.

16. Competition in the long run: investments • Is the growth of non-ag activities significantly constrained by the lack of water? • In contexts with physical scarcity/or economic scarcity • Industries bring tax revenues, employment, and investors are generally politically connected: They generally get priority water supply… or just drill wells

17. So, whether short term or long term… • “farmers are losing out” (Winpenny) • “urban interests are getting the upper hand” (Lundqvist) • “without a doubt, cities will continue to siphon water away from agriculture” (Postel)

18. Water transfers in practice • Administrative decisionReallocation to cities, gradual / outright Outright transfers are more sensitive and generally give way to negotiations and compensations. • By stealthThe transfer remains partly unnoticed by farmers because it occurs underground (e.g. pumping of groundwater by cities); or by encroachment upon irrigated land • Markets of formal or informal rightsBuying water rights, land+water rights, etc* to nature or tribal reservations • If gradual, transfers often generates adjustment by users. Farmers face scarcity and invest in conjunctive use, adapt crops and techniques, etc.

19. BUT: Cities often access water in a way that is costly,has third party impact, or is not environmentally sustainable Distant costly transfers, over-exploitation of aquifers (salinization, land subsidence), desiccation of wetlands, etc

20. The fundamental role of prices is to help allocate scarce resources among competing uses and users. One way to achieve an efficient allocation of water is to price its consumption correctly Johansson, 2000 World Bank (1993) Setting prices at the right level is not enough; prices need to be paid if they are to enhance the efficient allocation of resources “it is impossible to explain to the general public (let alone to angry farmers) why they should pay for something that doesn’t cost anything to produce”. World Bank 2003 “Yawning gap between simple economic principles… and on-the-ground reality” “Cost recovery for irrigation remains… very important for infrastructure sustainability, but not for allocative efficiency”

21. Does irrigation receive the "lion's share"? But the ultimate residual user is often… nature

22. Conclusions • Irrigation and water uses do adjust in the face of scarcity; and efficiency increases • Potential of pricing is overstated: it will only help regulate water use in on-demand schemes (a marginal situation) • Management of scarcity is done through volumetric management and quotas

23. Conclusions • "Allocation gap" much overstated • Transfers do occur, with adjustments to scarcity by farmers - or dispossession, or compensation • Context allowing, compensations can be assured by water market mechanisms, • But transfers will likely remain mediated by the state on a case-by-case basis • Competition chiefly occurs in dry years: contingency plans with compensations

25. Thank you for your attention

26. No effect Groundwater irrigation Potentialeffect Effect at the margin Possible effect of pricing Volumetric management % of Irrigated area W1 W0 D0/D1 Bulk (S/T) Q O Type of scheme management

27. Effective impact Desirable evolution: improving management Possible effect of pricing % of Irrigated area W1 W0 D0/D1 Bulk (S/T) Q O Type of scheme management