NOTES AGRICULTURAL & RURAL DEVELOPMENT SHAPING THE FUTURE OF WATER FOR AGRICULTURE Designing and Implementing Quality Investments in Agricultural Water Management ISSUE 4 FEBRUARY BY: THE WATER FOR FOOD TEAM 2006 Irrigated agriculture has been vital to meeting fast However, in recent years the pace of irrigation develop- rising food demand and has driven rural development ment has slowed as has donor support to the sector. and poverty reduction in developing countries, where World Bank lending for irrigation and drainage aver- the agricultural area under irrigation has doubled over aged about five percent of total lending in the 1970s the last forty years. Cereals output increased threefold and 1980s, but dropped to less than two percent in the between 1960 and 1999, while the production of irri- early 2000s. In some countries, this reflects constraints gated fresh fruit and vegetables increased fivefold and to area expansion, in others there has been disappoint- now accounts for one-fifth of all developing country ment with the performance of past investments. There agricultural exports. More than two-thirds of this have been considerable technological advances, but the increase came from yield increases, and the water take up of new technology is slow. For instance, needed to feed each person fell by a half. This massive although drip technology is widely available, it is used productivity increase was key to reducing world on less than one percent of irrigated lands worldwide. hunger--average daily calorie intake in the develop- Furthermore, the negative environmental impacts have ing world went up from 2,054 calories in 1964 to sometimes been neglected. 2,681 calories in 1999. Yet the challenge has never been greater. Pressures on agricultural water are intensifying as demand for increased rural incomes and for agricultural produce grows. The World Bank is working to meet these chal- lenges through its three corporate strategies-- for rural development, water resources, and environ- ment--which underline the role of higher water pro- ductivity and sustainable resource use in rural devel- opment and poverty reduction. To achieve these goals, investment in agricultural water management will have to increase and its quality must improve. In the report Shaping the Future of Water for Agriculture: A Sourcebook for Investment in Agricultural Water Management a range of solutions and good practices from World Bank and worldwide experience are documented to meet the challenges of agricultural water management. The Sourcebook has an opera- tional focus, concentrating on investments in policy and institutional reforms and in technology and man- agement to improve water productivity and farming profitability. It provides a basis for training of both spe- cialists and non-specialists, enabling practitioners to see agricultural water management in its bigger context of poverty reduction, growth of livelihoods, and wealth creation. The Sourcebook outlines an indicative picture of the messages that are priorities in user associations. On the service provision side, irriga- different regions of the world. The real work of adap- tion institutions need restructuring to increase their tation and implementation will begin as practitioners accountability and improve performance. In addition, become familiar with the Sourcebook and apply it in the development of an increasingly knowledge- and developing countries. skills-based agricultural and irrigation economy requires investment in capacity building. RESPONDING TO THE CHALLENGES Improving the economic and financial framework for Below are specific recommendations to help practi- investment tioners design and implement quality investments in agricultural water management. Within agricultural water use, there is scope for improv- Reforming policies ing returns to water. However, service providers often and institutions have scant incentives or accountability to deliver good service. Farmers have been faced with an array of prices and markets suffering from price distortions and subsi- In the past, governments have been principal dies, administrative decisions, and trade and other investors and service providers, and have promoted macroeconomic policies. The results have been risk agricultural water use through subsidies, controlled aversion, slow adoption of new technologies markets and trade policy. Government plan- and diversification, low cost recovery, and groundwater ning and top-down depletion and other solutions often led environmental degra- to poor investment dation. Distorted choices, high costs, incentive structures poor service, low cost have been at the root recovery, and a cul- of poor water man- ture of dependency agement. The incen- on the state. Now, in tive framework has to many countries, poor encourage farmers to irrigation perform- invest and to manage ance, slow diversifica- water efficiently and tion and intensifica- sustainably. tion, and growing environmental prob- Countries need to lems have prompted establish an economic a shift towards a new and financial frame- public/private para- work for profitable digm, a revised incen- investment. Market- tive framework, and a driven approaches are more market-oriented approach. Governments are necessary to improve investment in agricultural water. progressively becoming facilitators and regulators, Policies are needed at the macro- economic level to while users and markets play a growing role in invest- encourage open trade and market development. ment, finance, and management. Undistorted incentive frameworks are also needed, downplaying the use of subsidies and encouraging cost Investment in policy reform can help define institution- sharing wherever possible. In irrigation, the financial via- al and governance frameworks and establish incentive bility of water service providers is crucial, and water serv- and market frameworks favorable to profitable irrigat- ice charges, although often contentious, are ultimately to ed agriculture. Investing in institutional development is the benefit of the farmer. Cost recovery as a mechanism also crucial. On the user side, this may entail investing to finance a high level of water service would improve in participatory irrigation management through water farmer incomes and investment outcomes. 2 Increasing investment levels and improving outcomes --would increase efficiency. Examples include--inte- grated water saving approaches to on-farm manage- ment, supplementary irrigation and surface-groundwa- Worldwide, investment in irrigation has been declin- ter conjunctive use, combined water and soil fertility ing as investment costs in new surface irrigation have management, and integrated approaches to combat- risen and rates of return and investment performance ing drought, salinity, and floods. Water saving technol- have deteriorated. In particular, investment in on-farm ogy for profitable investment exists in abundance but water management has been constrained by distorted its adoption requires efficient knowledge transfer sys- incentive frameworks and, despite good economic tems, reliable water service, and an economic envi- returns, drainage investments have been neglected. ronment that provides undistorted incentives, man- ageable risk and market access. There are ways to increase both private and public investment. A priority is to ensure that the policy and incentive environment for private investment is in place. In large-scale irrigation, where the public sector is usu- ally involved because of the scale of investment, mod- ernization approaches combine institutional changes with physical investments to target the service delivery goal of cost effective and timely water delivery. The World Bank can improve the quality of its lending for agricultural water not only by the application of good practices, but also by the appropriate choice of lending instruments. Piloting of institutional or techni- cal innovations may be done by Learning and Investment Loans (LILs); scaling up of good practices or financing of multi-functional operations may best be supported by Specific Investment Loans (SILs); and broad policy and institutional reforms may be promot- ed by a Development Policy Loan (DPL). World Bank safeguard policies can be viewed not as a constraint but as an aid to investment. Effectively, safeguards can help improve investment quality by integrating environmen- tal and social issues into projects and by supporting par- Investing in agricultural water to ticipatory approaches and transparency. meet the poverty and rural incomes challenge Investing in technology and water resources management Agricultural growth is central to poverty reduction. to supply growing demand Seventy per cent of the world's poor live in rural areas, and most of them are dependent on agriculture. Investing in improved management of available water Although the pace of technological change has slowed thus has a critical role to play in both poverty reduction down, the scope for efficiency gains in irrigation is and food security. enormous. Efficiencies world wide are well below technical maxima, pressurized systems and protected Participatory approaches and farmer empowerment agriculture still occupy only a small area, low-value play a central role in poverty reduction. An inclusive staples predominate in cropping patterns, and agricul- farmer organization is a powerful force for improving tural yields and farmer incomes are well short of water management. Investment quality can be potential in most developing countries. improved by participation at every level, bringing the voices of the rural poor to such areas as policy making, Application of an integrated approach to the different technology development, and drought management. inputs to the production system--soil, water, agronomy Community driven development (CDD) approaches 3 can also be excellent investment vehicles for that. that promotes self-management and responsibility. Investment in irrigation and other agricultural water Strong economic logic exists for increasing investment management projects can be effective in reaching the in drainage, but this should be considered through its poor, but care is needed to ensure a pro-poor element "multi-functional" dimensions. In watershed manage- in programs, as a purely market-driven approach will ment, integrated and participatory approaches can favor the better off. Options for pro-poor investment have an impact on both soil and water conservation include small scale irrigation, water conservation and and on poverty reduction. watershed management, as well as programs to help poorer rainfed farmers such as investments in supple- mentary irrigation, water harvesting, rural infrastruc- ASSISTANCE FROM ture, credit and market development. THE WORLD BANK Factoring environmental dimensions and the sustainability The World Bank Country Water Resources Assistance imperative into investment Strategy (CWRAS) provides a link between the World Bank's program and national strategies, and opens opportunities for systematically building best practice Many countries are at the limit of water resources approaches in agricultural water management into development, and pressure on land and water is World Bank lending. The recommendations made in intense. Over-abstraction of groundwater is leading to this note will also help in targeting sector and techni- a drop in water tables and a decline in quality. cal work and studies to strategic priorities and in iden- Salinization and waterlogging have affected 30 million tifying the appropriate World Bank lending and sector hectares worldwide, and a further half a million policy support instrument, depending on whether the hectares go out of production each year, as much farm priority is to support policy reform, long-term invest- land as new irrigation creates. Drought and floods, ment programs, free-standing investments, pilot exacerbated by climate change, have a heavy impact on projects, or emergency recovery. The application of agriculture, and particularly on the poor. In many coun- the practices recommended here is thus also expected tries, watersheds are degrading under multiple use. to help to revive and reorient the lending program. The range of possible investments is broad and should Groundwater management is likely to be a significant complement existing World Bank strengths of inter- investment area as resource mining problems grow national expertise, cross-country experience, worse. Options for recovering control over groundwa- and multi-sectoral involvement, all directed towards ter include introducing an incentive structure favorable the over-riding goal of poverty reduction and to conservation, and creating a governance structure economic growth. Selected reading: Reengaging in Agricultural Water Management. Directions in Development Report. World Bank, Washington DC, 2005. Agricultural Growth and the Poor: An Agenda for Development. Directions in Development Report. World Bank, Washington DC, 2005. Agriculture Investment Sourcebook. Washington DC: World Bank, Agriculture and Rural Development Department. This note is a product of the Water for Food team. It was written by Christopher Ward, an independent consultant, Ariel Dinar, a Lead Economist in the Agriculture and Rural Development Department at the World Bank, and Salah Darghouth, a Water Adviser for the Agriculture and Rural Development Department at the World Bank. It is based on the Shaping the Future of Water for Agriculture: A Sourcebook for Investment in Agricultural Water Management. The Sourcebook will be updated periodically and new notes on contemporary issues will be added. You can download a full copy of the report at www.worldbank.org/rural or email ard@worldbank.org THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural