34361 v2 Shaping the Future of Water for Agriculture a Sourcebook for Investment in Agricultural Water Management a summary World Bank, Agriculture and Rural Development Department February 1, 2005 CONTENTS EXECUTIVE SUMMARY IV L OVERVIEW OF THE SOURCEBOOK 1 1. The Sourcebook Objectives 1 2. Challenges Facing Agricultural Water Management 4 3. Cross-eutting Themes ofthe Sourcebook 8 4. Lessons and next steps 14 2. CHAPTER HIGHLIGHTS 21 Chapter 1: Building Policies and Incentives 21 Chapter 2: Design of Institutional Reforms 23 Chapter 3: Investing in Irrigation Systems Improvement and Modernization 26 Chapter 4: Investing in Groundwater Irrigation 30 Chapter 5: Investing in Drainage and Water Quality Management 32 Chapter 6: Investing in Water Management in Rainfed Agriculture 34 Chapter 7: Investing in Agricultural Water Management in Multipurpose Operations 36 Chapter 8: Coping with Extreme Climatic Conditions 38 Chapter 9: Assessing the Social, Economic, and Environmental Impacts of Agricultural Water Investments40 3. REFERENCES 42 iii EXECUTIVESU~Y Agricultural water management is a vital practice in ensuring food security ~ poverty reduction, and environmental protection. As demand for increased rural incomes and agricultural productivity grows, human systems' increasingly put pressure on water supplies, and this is especially true for agricultural water. After decades of successfully expanding irrigation and improving productivity, farmers and managers face an emerging crisis in the form of poorly performing irrigation schemes, slow modernization, declining investment, constrained water availability, and environmental degradation. Three World Bank sectoral strategies-rural development, water resources management, and environment-all call for more productive water use and more sustainable resource management in the development of rural areas and in reducing poverty. To achieve these goals, we need more and better investments in agricultural water. To respond to this challenge, the World Bank, working with many partner agencies, has compiled a selection of good experiences that can guide practitioners in the design of quality investments in agricultural water. The Sourcebook's messages center around the key challenges to agricultural water management, specifically: · Building Policies and Incentives · Designing Institutional Reforms · Investing in Irrigation Systems Improvement and Modernization · Investing in Groundwater Irrigation · Investing in Drainage and Water Quality Management · Investing in Water Management in Rainfed Agriculture · Investing in Agricultural Water Management in Multipurpose Operations · Coping with Extreme Climatic Conditions · Assessing the Social, Economic, and Environmental Impacts of Agricultural Water Investments iv 1. OVERVIEW OF THE SOURCEBOOK TIlE SOURCEBOOK OBJECTIVES The problems facing agricultural water management I. Heavy demands are being made on agricultural water to provide more food to consumers and inputs to industry, to create incomes and wealth in rural areas, to reduce poverty among rural people, and to contribute to the sustainability of natural resources and the environment. As urban demand grows, agriculture is also increasingly viewed as a reservoir of water for transfer to towns, sometimes in exchange for recycled waste-water from cities. 2. After a century of expansion of large-scale surface irrigation and decades of rapid groundwater development, opportunities to harness new resources are fewer and more expensive. Improving the productivity of existing water use and reusing second-hand water are therefore becoming common investment objectives. However, returns on public investment have been generally disappointing. 3. New solutions have emerged, based on widely available technology and new management options. The role of government is changing, responsibility is being decentralized, farmers are playing an increasingly important role in decisions and investment, and markets are driving growth. 4. How to grow more food, increase incomes, reduce poverty, and protect the environment-all from an increasingly constrained resource base--is the challenge facing agricultural water management discussed and addressed in this Sourcebook. What is agricultural water management? Agricultural water management includes irrigation on large and small schemes and farms; drainage of irrigated and rainfed areas; watershed restoration; recycled water use; rainwater harvesting; and all in-field water management practices. Background of the three World Bank corporate strategies 5. The World Bank's approach to the agricultural water management challenges summarized above is guided by the recent corporate strategies for.Rural Development, Water Resources, and Environment. These corporate strategies all assign a vital role to agriCUlture and water management in promoting rural growth, sustaining the environment, and reducing poverty. 6. The Bank's Reaching the Rural Poor: a Renewed Strategy for Rural Development (World Bank 2003) highlighted the pivotal importance of the rural sector as the home of the vast majority of the world's poor and underlined the centrality of rural development to the Bank's poverty reduction mission. RDS demonstrates that agricultural development is the primary 1 instrument for poverty reduction in most developing countries and urges, against a sharp decline in agricultural lending in recent years, the return of agriculture to the forefront of the Bank's agenda. RDS also argues forcefully for a strengthened role for the Bank as an advocate for rural poverty reduction and as a leader in investment and policy dialogue. 7. Agricultural water management is critical to achieving key RDS objectives: durable rural growth, enhanced productivity and competitiveness, and sustainability of natural resource management. Underlining the growing shortage of water and competition from other users, RDS outlines the agenda for improved water resources management: to ensure that agricultural water is managed within an integrated basin approach, to allocate water to environmental uses, to prepare for the likely increase in recycled water use in irrigation, and to devise long-term approaches to issues of waterlogging and salinization. RDS also focuses on improving productivity of existing water management systems, especially on small-scale projects characterized by demand-driven on-farm improvements, rehabilitation, and participatory approaches. On the economic side, RDS emphasizes the key role of incentives and the need to increase the role of private investment and management as well as the efficiency of public investment. Finally, RDS outlines an agenda for reform of fragmented institutions and unaccountable and inefficient public bureaucracies. 8. The Bank's Water Resources Sector Strategy. Strategic Directions for World Bank Engagement (World Bank 2004 b) also gives prominence to irrigation as the key producer of food and source of livelihood for the world's poor, and as the largest user of water. WRSS underlines that water management and development are essential for growth and poverty reduction and argues that both broad and poverty-targeted interventions further those results. WRSS emphasizes two imperatives: to expand investment in irrigation and to change the way irrigation is managed. Calling for "principled and pragmatic reforms," the strategy stresses the need to return to basic economic principles that incentives should reflect both the fmancial cost of supplying services and the opportunity cost of water. WRSS also argues that, although the Bank portfolio in irrigation has been shrinking, there are compelling reasons to "get back in." As for RDS, WRSS envisages a broader and more active role for the Bank in the irrigation sector, arguing that dealing with complexity and risk is a strength of the Bank, which should embrace "affirmative engagement with risk," through a business model that puts development impact first. 9. WRSS proposes an agenda for agricultural water management directed toward improving the efficiency of water service delivery and use at the farm, scheme, and sector levels, underlining that water efficiency is pro-poor. The strategy emphasizes: the role of demand management (cost recovery and water pricing, water rights, and the links between energy subsidy and groundwater depletion); the need to improve governance (user associations, gender participation, modernizing formal irrigation institutions, addressing the political economy of reform); and integrated approaches and multifonctional technologies (basin management, packages for drought, saline soils and floods, and drainage). 10. The Bank's Making Sustainable Commitments: An Environment Strategy for the World Bank (World Bank 2001) recognizes irrigation's vital contribution to rural economies and welcomes the increased attention to mitigating adverse environmental impacts. For the resolution of the problems of groundwater depletion and drainage, the IES supports participatory approaches:.. 2 11. Although each corporate strategy has a different thematic emphasis, their combined messages for agricultural water management are clear: · Productivity. The age of expansion is drawing to a close. In the future, governance, management, and technology must combine to improve the productivity of existing assets and available resources. · Sustainability. Water has to be used sustainably within an integrated approach. · Incomes. The bottom line is sustainable increases in fanner incomes, with a focus on the poor. · Institutions. Improved governance is basic to increasing efficiency of resource use, and the energies of water users need to be harnessed through expanded private and user participation at every level, and through inclusion, notably of women. · Integration and Sustainability. Water has to be used sustainably within an integrated approach. Resource constraints and environmental risks impose integrated water management approaches. Productivity at every level hinges on integrated management of land and water and on integration of policies and programs between water management, agriculture, and the environment. Operationalizing the corporate strategies 12. The priority assigned to the agricultural sector in these three corporate strategies and their arguments that the Bank can and should play a central role in the development of the sector in the coming years, impelled the Bank's decision to prepare a set of documents putting into operational terms the messages in the strategies. For the agriculture sector as a whole, the Agriculture Investment Sourcebook sets out specific examples and guidance on project design and investments that World Bank task team leaders can consider when preparing their projects in order to promote sustainable development and poverty reduction in the sector. The Agriculture Investment Sourcebook is complemented by a Directions in Development Report, Agricultural Growth and the Poor: an Agenda/or Development (World Bank, 2005 a)that sets out guidance on policy interventions and reform initiatives that can underpin pro-poor investment and sustainable growth. 13. In conjunction with these documents, the present Sourcebook and its companion Directions in Development Report, Agriculture Water Management (World Bank 2005 b), and its companion, the present Sourcebook, have been compiled. The preparation of two documents specifically devoted to agricultural water management demonstrates the vital importance of agricultural water management in meeting the objectives of the corporate strategies and the intersectoral nature of water use in agriculture, reflected in its central place in all three corporate strategies. 14. Taken together, the above publications are among the World Bank's handbooks for its reengagement with the agricultural sector. They give policy, investment and implementation guidance for the operationalization of the Bank's corporate strategies on rural growth and poverty reduction through agricultural development and sustainable natural resources management. 3 The Agricultural Water Management Sourcebook 15. With the background of the corporate strategies and alongside its companion publications, the Agricultural Water Management Sourcebook is designed to show how-in conjunction with macroeconomic and broader sectoral policies and investments-policy and investment in agricultural water management can contribute to sustainable rural growth and poverty reduction. Although the Sourcebook covers a whole range of issues, the focus is operational, concentrating on: · The policy and institutional reforms needed to make improved water productivity profitable for the farmer andfor the nation through governance, management, markets, and trade policy. · The investment, technology, and management means available to increase water productivity. 16. The Sourcebook is intended to guide Bank staff in the design of agricultural water management investments. The Sourcebook · Documents a range of solutions and good practices from Bank and worldwide experience that can be mainstreamed into the Bank's portfolio, including policy and institutional reforms, investments in hardware and software, and recent innovations and successes for scaling up. · Highlights means of improving performance and increase production, incomes, and social returns. · Suggests ways of increasing investment and improving its quality and sustainability. What is not covered 17. The Sourcebook coverage is not always comprehensive and it is expected that there will be periodic updates as fresh topics arise and material comes available. The essential character ofthe Sourcebook is as a guide to designing investment programs. Policy issues are discussed in the Sourcebook where they are relevant to investment. However, enabling policy issues are treated more broadly in the companion Directions in Development paper (World Bank 2005 b), where they are presented within the wider strategic framework. ***** 18. This part of the Overview has briefly outlined the overall problem of investing in agricultural water and has described the purpose of the Sourcebook. Part 2 will look in more detail at the challenges facing investment in agricultural water. 2. CHALLENGES FACING AGRICULTURAL WATER MANAGEMENT 19. Part 2 of this Overview looks at challenges facing agricultural water management: (1) the policy and institutional challenge; (2) the economic and financial challenge; (3) the problem of declining investment; (4) the challenge of technology and water resources to supply growing demand; (5) the poverty and rural incomes challenge; and (6) environmental dimensions and the sustainability imperative. 4 The policy and institutional challenge 20. Governments readily shouldered the development mission in the 1970s and 1980s, with the state as principal investor and service provider. In irrigation, government planning and top-down solutions often led to poor choices, high costs, poor service, low cost recovery, and a culture of dependency on the state. In many countries, the poor track record of the state has prompted a shift toward a new public-private paradigm for irrigation, in which government progressively becomes more of a facilitator and regulator and users and markets play a growing role in management and fmance. Reconciliation of agricultural policy with macroeconomic policies is often challenging: governments that aim for low cost, domestically produced food encounter problems in providing adequate incentives-and incomes-to farmers, and governments have to adjust to the best tradeoff between support to agriCUlture and an economically efficient food security policy. Within agriculture, too, there is a need for integration of agricultural water management issues into broader agricultural policy. Both irrigated and rainfed agriculture use and invest in water resources and management as one of the many inputs to the agricultural production process and in response to market opportunities and incentives that are determined in the broader agricultural and macro economies. Thus, investment and incentive policies for agricultural water management have to be developed in an integrated way within a broader agricultural policy. At the same time, agricultural water allocations and management priorities have to be integrated with overall water management priorities at the basin and national levels. These and other policy and governance adjustments drive sector reforms in many countries. An understanding of the political economy of these reforms is needed, and of how reform processes work. New water management skills and institutional capacity building are also needed The economic and financial challenge 21. Compared to other water-using sectors, agriculture in most locations generates the lowest value added per unit of water, and so will progressively give up water to domestic, municipal, and industrial uses as water scarcity increases and competition mounts. Yet within agricultural use there is considerable scope for improving returns on water. Low returns mean low incomes; higher returns will boost incomes for farmers, including the poor. The key economic challenge is to get an incentive framework in place that encourages efficient water use and profitable high value agriculture. There is evidence that a well-balanced incentive framework both for the service provider and for the farmer improves efficiency and accountability, raises productivity, and promotes sustainable and environmentally responsible resource use. The parallel financial challenge on irrigation schemes is to generate cost recovery adequate to finance an excellent service to farmers. A broader fmancial challenge is to set up an enabling and incentive framework that will encourage both large- and small-scale private investment. These challenges are considerable. At the intemationallevel, markets are widely protected and commodity prices generally low. Domestically, many agricultural economies are characterized by inadequate or non-competitive markets, pervasive subsidies and food self-sufficiency goals inconsistent with comparative advantage. Cost recovery remains a contentious issue in many countries and private investment is often crowded out by public subsidy or deterred by uncertain investment environments and distorted incentive frameworks. 5 The problem of declining investment 22. Governments are investing less public money in agriculture worldwide; public investment in agriCUlture has dropped, and investment in irrigation, drainage, and other agricultural water management projects has also been declining worldwide. World Bank lending for new irrigation and drainage projects dropped to a record low of $220 million in FY03, a dramatic plunge from the levels of the 1980s and early 1990s, when it averaged between US$1.0 billion and $1.2 billion annually. There are several reasons specific to agricultural water management for this decline. First, investment costs have risen, as irrigation has moved into more marginal areas. With the average cost of developing new irrigated land now above $6,000 per hectare, rates of return on new schemes are generally in single digits. Second, the performance of large surface schemes has been disappointing. Third, much of the effort on large schemes now goes into rehabilitation and management changes to improve water delivery service. These investments are inherently lower cost than developing new schemes. 23. In groundwater irrigation, investment has been predominantly private. In most countries, groundwater is now fully exploited, often overexploited, and investment has to switch to improving on-farm efficiency. Improving water use efficiency pays high economic returns, but often the incentive framework is distorted so that farmers do not invest because it is not financially profitable. Another area in which investments are needed but neglected is drainage, where the multifunctional aspects and multiple impacts and externalities are not usually taken into account in project design and socio-economic justification. Cost-benefit analysis typically understates benefits, and cost recovery is difficult. A fmal reason sometimes adduced for decline in investment is that the safeguard policies of the World Bank are seen as adding to the transaction cost of preparing projects. The challenge of technology and water resources to supply growing demand 24. The threat of global food shortages that appeared in the 1960s has diminished through innovations and investments in the Green Revolution and water control technologies. Increases in irrigated areas and improved yields have helped to increase food production per capita, despite significant increases in popUlation. For all developing countries, average daily caloric intake per person has risen from 2360 calories in the mid-1960s to 2800 calories in 19979/9. Output per unit of water worldwide rose 100 percent in 1961-2001-for wheat, the increase was 160 percent. As a result, the water needed to feed a person for a year has been halved in the last 40 years, from 6 m3 a year to 3 m3· In addition, investments in irrigation, drainage, and general water management have driven the growth of rural economies and of lasting employment in many parts of the world. Today, irrigated agriculture supplies about 40 percent of the world's food, though occupying only 17 percent of the cultivated land. However, for the future, the Food and Agriculture Organization (FAO) estimates that by 2030, food production needs to grow at 1.4 percent a year, and about half of this growth would have to be generated from irrigated agriculture. The ability of the world's farmers to meet this increase in demand is constrained. Indeed, the pace of technological change has slowed down; the water resource base is in most places fully developed; and now more than half the world's population lives in water scarcity. Intersectoral competition for water is growing, with water supply to cities taking priority and demand for water for non-irrigation purposes projected to increase 62 percent between 1995 and 2025 (Rosegrant, Cai, and Cline (2002). Efficiency of agriCUltural water supply and use remains 6 well below technical potentiaL Groundwater overdraft and pollution are further reducing available resources, especially for poor and small farmers; and climate change is also expected to increase farmer vulnerability and reduce water availability in water-scarce regions, especially through increased risk of drought. Domestic, industrial, and, increasingly, environmental and resource protection needs will take a growing share of the world's water. The share of agriculture, which already uses about 70 percent of total water abstractions worldwide, can only shrink. The International Food Policy Research Institute (IFPRI) calculates that, on current trends, global annual cereals production would be 300 million tons less in 2025 than if adequate water had been available, a difference nearly as large as the entire U.S. cereals crop in 2000 (Rosegrant, Cai, and Cline (2002). 25. The water resources challenge thus requires better resource allocation-systems of integrated management and incentives that allow water to flow to the highest social and economic priorities. But it also requires a reinforcement of the intensification process: most of the extra production needed in the future will have to come from intensification of land and water use and only a minor share from newly harnessed land and water resources. Globally, cereals yields will have to increase from the current average of about 3 tons per hectare to 4 tons per hectare by 2030. Agricultural water management will thus have to provide more efficient and equitable solutions for intensification at basin level in order to increase water and land productivity at field level. Farmers everywhere will seek to improve their incomes from an increasingly constrained water resource, and this too will provide a powerful impetus to increasing water use productivity. The poverty and rural incomes challenge 26. Agricultural growth is central to poverty reduction. Seventy per cent of the world's poor live in rural areas, and most of them are dependent on agriculture. Typically, the rural poor live on marginal lands or on drylands, with little or no access to a controlled water sources. Their technological options for improved water management are limited, and they face high risks from rainfall variations. The poor are also exceptionally vulnerable to drought, floods, effluent discharge, aquifer depletion, waterlogging, salinization, and water quality deterioration. Thus the key agricultural water challenges for the poor are food security, risk mitigation, and income growth. Millennium Development Goal (MDG) I-Eradicate extreme poverty and hunger--can be achieved only if agriculture grows and can provide access to food for the poorest and most vulnerable. Improved management of available water thus has a critical role to play in poverty reduction and food security. Other MDGs such as gender equality,1 child nutrition, and market access also depend directly or indirectly on pro-poor agricultural growth and related management of scarce water. Environmental dimensions and the sustainability imperative 27. Rural people are the trustees of much of the world's land and water resources, and so are central to achieving MDG 6--Ensure environmental sustainability. However, this trusteeship is increasingly hard to respect. Many countries are at the limit of water resources development, and 1 Women form 70 percent of the rural poor and produce between 60 and 80 percent of the food in most developing countries (WHO 2000). 7 pressure on land and water is intense. The tension between production and protection of natural resources has grown. In some basins, water no longer reaches the sea, and environmental flows have virtually ceased. In many basins, where competition is allowed, overabstraction of groundwater is leading to irreversible decline in water tables. Salinization and waterlogging have affected 30 million hectares worldwide, and a further half million hectares go out of production each year-as much farm land as new irrigation creates. Disposal of agricultural drainage water and reuse and recycling of water are causing environmental and health problems. The "multifunctional" dimension of much agricultural water use and the prevalence of environmental externalities create a complex challenge, which integrated water resources management is only beginning to take up. At the same time, drought and floods, exacerbated by climate change, have a heavy impact on agriculture, and particularly on the poor. In many countries, watersheds are degrading under multiple use. ***** 28. Improvements in agricultural water management have much to contribute to the goals of improving productivity and sustainability, and thereby increasing incomes and reducing poverty. However, not all goals can be achieved together in all circumstances; tradeoff's will be needed, for example, where environmental concerns and poverty reduction goals cannot both be met. Informed policy decisions have a key role to play in selecting alternatives in these circumstances. The Directions in Development Report Agricultural Water Management (World Bank 2005 b) that accompanies this Sourcebook will give guidance on the management ofthese tradeoff's. 29. This part of the Overview has reviewed the challenges facing agricultural water management. Part 3 this Overview summarizes the cross-cutting themes that emerge from the Sourcebook. 3. CROSs-cuTTING THEMES OF THE SOURCEBOOK 30. Shifts have occurred in the way countries approach development policy for agricultural water management in recent years. These shifts include: · A stronger focus on poverty reduction · An awareness of the need to ''manage scarcity"-ofwater, capital, and institutions · Growing emphasis on sustainability and environmental externalities · More consideration of the value of markets and economic incentives · Political economy processes of democratization, decentralization, and participation 31. These shifts have brought about significant changes in agricultural water management. Almost every country is moving along the continuum shown schematically below. Changing Emphases From To Area expansion System improvement and increased water use efficiency, intensification, and reuse Major physical investments to harness water resources, large Targeted investment in irrigation improvement, drainage, and scale irrigation schemes agricultural intensification 8 Changing Emphases From To Development of institutions and the incentive structure Resources development Resources management and environmental protection Food self-sufficiency, increasing output Food security, increasing incomes, diversification, intensification, high-value crops, poverty reduction Centralized planning approaches Demand-driven approaches; participatory planning; dialogue and political economy analysis State focus Private sector, market, community-ownership focus Government as service provider Government as catalyst, facilitator, and regulator Subsidies and non-market interventions Market-led growth Government-run and subsidized irrigation schemes Participatory irrigation management. cost sharing, and irrigation management transfer Studies Dialogue, pragmatic political economy analysis Project focus, investment lending Long-term, program approaches, lending for selected investments and for policy reform Sectoral approach Integrated resources management approach 32. These shifts in emphasis are captured in the cross-cutting themes of the Sourcebook, which are presented briefly below. The references are to the relevant chapter of the Sourcebook. Facilitate policy reform 33. In most countries, agriculture uses more than 80 percent of water resources and produces most national food requirements, generating income, and supporting most of the poor. Therefore, policy for agricultural water management is vital: it must deal with managing scarcity, with water allocation, with food security, with poverty reduction, and with environmental risks. These issues are central to the Bank's mandate and are at the heart of poverty reduction strategies in most countries. The Bank should invest in agricultural water policy. (chapter Ii 34. Reconciling best-practice water management principles (integrated approach, basin management, participation and decentralization, water as an economic good ...) with local physical, economic, and sociopolitical realities is unlikely to be easy, and the policy reform agenda for agricultural water management is a difficult one: setting the legislative and regulatory framework; establishing an incentive regime consistent with poverty reduction, rural development, and agricultural goals and with trade and macroeconomic policies; matching investment and incentive policies in agricultural water management with broader agricultural policies on both the input and the output sides; ensuring that agricultural water fits within an integrated, intersectoral water management framework; designing institutional models to separate bulk water delivery from distribution and to provide efficient least-cost water service; redefming the role of public and private sectors and of markets; and ensuring an enabling environment for private investment. Although policies cannot be uniform, successfol reforms 2 The references in parentheses are to the Sourcebook chapter in which the theme is discussed. 9 generally: limit the role of government, decentralize responsibility to local authorities and agencies, and to water users, promote market-based solutions and private investment, and emphasize market-led growth policies with domestic and global trade reform. Tradeoffs between food self-sufficiency goals and efficiency goals will be increasingly on the policy agenda, as water-scarce nations faced with high opportunity costs of domestic food production turn increasingly to virtual water imports, which result in water savings for importing countries but also real global water savings because of the differential in water productivity between exporting and importing countries. (chapter 1) 35. Many water management reforms have high political transaction costs. These can be absorbed at least in part by investing in participatory processes of ownership building. Adjustment lending may also help. Typically, reform is likely to be a long business, requiring stamina and consistency both from the nation and from external partners like the Bank. Understanding the political economy ofreform is essential. (chapter 2) Build governance and capacity 36. The character of governance for agricultural water is changing everywhere. Many countries are pursuing decentralization, participation, and demand management policies in irrigation. In more than fifty countries, this movement has taken the form of participatory irrigation management, with user associations emerging as decentralized and democratic user groups and taking responsibility for some management tasks. In the long run, the transfer of irrigation management, or even of full ownership, may be the target. The counterpart is the modernization offormal irrigation institutions, tightening accountability and improving performance. These changes, together with the development of an increasingly knowledge- and skills-based agricultural and irrigation economy, create a need for significant investment in institutional development and capacity building. (chapter 2) Set an incentive framework 37. Investment and management in agricultural water are driven by incentives, and distorted incentive structures have been at the root ofpoor water management. Service providers often have little incentive or accountability to deliver good service. Farmers have been faced with an array of prices and markets distorted by subsidies and administrative decisions and by trade, energy. and macroeconomic policies. The results have been risk aversion and reduced private investment, slow adoption of new technology and diversification, low cost recovery, and groundwater depletion and other environmental degradation. Good outcomes from investment in agricultural water require an incentive framework that encourages both service providers and farmers to invest and to manage water efficiently and sustainably. (chapter 1) 38. Subsidies have been used to make irrigation accessible to farmers, to promote technological innovation, to compensate for externalities, or to target the poor through watershed management, flood-risk management, or drought preparedness. In general, the use of subsidies should be limited, as good investment packages have built-in incentives, and cost sharing creates ownership and improves investment quality and sustainability.Ifsubsidies are used, they need to be carefully designed to achieve their policy objective. (chapter 1) 39. Reticence on subsidies reflects the market-driven approaches to improving agricultural water management developed in the Sourcebook. Technological solutions are generally available, and 10 ways to improve water management and farm management are known and can be adapted. Successful investment is ultimately a matter of incentives, of the question "What is the bottom line for the farmer?"- The answer to this question lies in private markets, not public subsidies. New instruments being developed can offer a market-based approach to paying upstream farmers for good natural resources management in the common interest. (chapters 2 and 3) 40. Water charges are often contentious, but adequate cost recovery to pay for good service for farmers is a key element in improving investment outcomes. This can be best achieved where the institutional framework makes service providers accountable and efficient and where user associations have a positive effect on recovery. (chapter 1) 41. Often, lack of clear water rights, particularly for groundwater, drives excessive consumption and over-irrigation. Definition of water rights is, in principle, a strong incentive to efficient use. If water rights are tradable, water markets can develop, helping intersectoral transfer and optimizing economic incentives by raising the market price to match opportunity cost. However, there is often disagreement on the subject of water rights, particularly where there is cultural reticence and weak governance. In most countries water rights are a longer term solution. (chapter 2) Increase investment returns 42. Many approaches in the Sourcebook promise more income from better use of water; some promise more income for less water. Some complementary investments like conjunctive use pay particularly high returns. Increasing net returns to farmers is the main incentive to investment. Ultimately it is this potential to generate "more income for less water" that justifies investment. Already, many farmers fmance all their own on-farm investments in, for example, micro irrigation. As diversification continues, driven by market forces, farmer investment will grow. Thus, the policy and incentive environment for private investment is key. (chapters 1 and 3) 43. Investment in large-scale irrigation should have high returns because of economies of scale, especially where investment is in improvement of already existing systems. However, despite the availability of cost-effective technology for modernization, results of improvement projects have not been always satisfactory. Successful investment in irrigation modernization requires a systematic benchmarking approach to rank investments according to their contribution to the service delivery goal ofcost effective and timely water delivery. In the case of investments like watershed management or dams, benefits are too often understated, and investment preparation needs to ensure that all benefits are taken into account. (chapter 3) 44. The quality of Bank lending for agricultural water can be improved not only by the application of good practices, but also by the appropriate choice of lending instrument from the wide range available (see Part 4). Quality should be improved, too, by the application of Bank safeguard policies, which were designed not as a constraint but as an aid to investment, to integrate environmental and social issues into projects, and to support participatory approaches and transparency-all requirements for quality investment. (chapter 9) Put technology to work 45. With irrigation efficiencies worldwide well below technical maxima, pressurized systems and protected agriculture still occupying only a small area, low-value staples predominating in 11 cropping patterns, and agricultural yields and farmer incomes well short of potential, the scope for investing in efficiency gains is enormous. s (3.1, 3.4,4.3) 46. There is ''more technology available than we know what to do with" (box I). Technology to improve water service on major schemes is well known and available; on·farm technologies like piped distribution, drip, and bubbler are widely available and falling in price; abundant water management and crop husbandry improvements are known; drainage, drought management, and flood control technologies are all well developed; and technology exists for watershed management and for even the most unpromising of marginal rainfed systems .. Much technology already exists and only needs to be put to work. Adoption of water saving technologies has been slow and performance below potential. Adoption requires knowledge, reliable water service, and an economic environment that provides undistorted incentives, manageable risk, and access to product and credit markets. Ultimately, farmers will adopt new technology when it is shown to increase incomes and reduce risk, and when there is market access. However, the intensification needed to feed the world and to raise rural incomes in coming decades cannot rely only on existing technologies; the size of the increase needed creates a future research agenda on water and land productivity, both for irrigated and rainfod production. (chapters 1, 3, 6 and 8) Box 1 Some technologies and management practices discussed in the Sourcebook · Large scheme irrigation improvement (chapter 3) · On·farm improvement (chapter 3) · Conjunctive use (chapter 4) · Supplemental irrigation (chapter 6) · Drainage technology (chapter 5) · Reuse of treated waste and drainage water (chapter 5) · Groundwater recharge (chapter 8) Operationalize integrated approaches to agricultural water management 47. Successful investment in agricultural water requires an integrated approach to the different inputs to the production system-soil, water, agronomy. Many examples are discussed in the Sourcebook-integrated water saving approaches to on·farm management, supplementary irrigation and conjunctive use, combined water and soil fertility management, and integrated approaches to combating drought, salinity, and floods. At policy level, agricultural water management investments and incentives have to be integrated within overall agricultural policy, both on the input side-with polices for research, extension, fertilizer, investment, and input support, and on the output side-with policies for transport, market development and trade, agricultural prices, and protection. Integration is also imperative at the level of water resources management, where bulk water, irrigation, drainage, wastewater, and floods all have to be managed within basin plans that ensure intersectoral coordination, allocative efficiency, and social and environmental protection. (chapters 1,3 and 6) 3 There are a number of water use efficiency definitions and measures. These are best discussed and summarized in Jensen (1973) and Burt et fl. (1997). 12 Make participatory mechanisms more effective 48. Farmers in rainfed cropping, traditional irrigation, or watershed management traditionally worked together, and farmer organization is recognized as a powerful force for improving management. The Bank's effectiveness in implementing participatory irrigation management and helping user associations to develop has been rated highly by the Bank's Operations Evaluation Department (OED) (World Bank, 2002). Participation is a key element in successful investment for poverty reduction through agricultural water management. The Sourcebook gives many examples of how farmer involvement (including women's involvement) can also improve investment outcomes in other areas, including: policy making; technology development; intersectoral transfer through water rights and water markets; community-driven development (eDD) approaches to small-scale irrigation and watershed management; private irrigation (supplementary irrigation, groundwater management, conjunctive use); and drought management. (chapters 2 and 7) Target poverty reduction impacts 49. Irrigation projects have been found to be effective in reaching the poor, provided that macroeconomic policies are conducive (World Bank, OED 1994). However, as intensification proceeds, it is the better off farmers who benefit most, because they can fmance on-farm investments, assume risk, and access knowledge and information services. Care is needed to ensure a pro-poor element in investment programs, because a purely market-driven approach will favor the better off. To offset this, irrigation investments can be targeted at the poor. For example, priority can be given to small-scale irrigation and water conservation investments, which are more pro-poor and characterized by high flexibility and rapid implementation. (chapter 3) 50. Some investments described in the Sourcebook also help reduce risk for rainfed farmers (e.g., supplementary irrigation, infrastructure, and market development). Other investments to help the poor include improving market access and better management of environmental risk, including watershed management approaches, and drought and flood management (chapter 6) 51. Manage waterfor sustainability 52. The Sourcebook covers a range of environmental investments in agricultural water management. Recovering control over groundwater requires commitment of users and government, an incentive structure that favors conservation and efficiency, and a governance system that allocates and regulates rights. There are few successful examples of groundwater overdraft being brought under control, but as resource mining problems grow worse, this could be a significant investment area. In drainage, the economic logic is clear-the cost of "saving" an irrigated hectare through drainage is less than $1,000, compared with more than $6,000 to create a new irrigated hectare. Few countries are yet awake to this compelling case for investment in drainage, but those that are-Egypt and its participatory drainage program, for example-are benefiting. In watershed management investments, integrated and participatory approaches with a focus on poverty reduction are working. (chapters 4 and 5) 13 4. LESSONS AND NEXT STEPS 53. This part summarizes some of the lessons learned from the Sourcebook and gives guidance on how to put the knowledge to work in policy analysis, technical assistance, and-above all-in lending. Sourcebook lessons 54. Two principal areas of investigation are addressed in the Sourcebook: policy and institutional reforms, and investment, technology, and management practices. Much of the material is familiar, and the value added lies in bringing it all together in a systematic way within a single publication. Among the well-known elements on the policy and institutional front treated in the Sourcebook are solutions to problems of sector governance: decentralization, participation, and the emphasis on private sector involvement and the role of markets. The need for an integrated approach in agricultural water investment is another familiar element, and the Sourcebook emphasizes integration not only within the context of the whole rural market economy, but also as part of the hydrological and overall ecosystem, and as a component of the macroeconomy. One aspect of this need for an integrated approach is the insistence throughout the Sourcebook on the enabling environment, particularly input and output markets and prices, fmancial markets, and risk reduction for the poor: participation, land tenure, water control, disaster management. 55. Regarding investment, technology and management practices, the Sourcebook confirms that there is a broad array of technology available. For large-scale irrigation, combinations of management and investment can greatly improve the cost-effectiveness of water service. For small farmers, low-cost technology is widely available, and there are technical solutions for even the most marginal land and water situations. 56. Some of the main lessons for investment emerging from the Sourcebook are briefly summarized in the following paragraphs. 57. Trade and markets play a key role in improving agricultural water investment. The Sourcebook underlines the role of trade and markets in driving technology adoption, investment, and growth, even for smallholders. The lesson is that policy for agricultural water has to be analyzed within an integrated framework that includes trade and market development policy, and that investments may be needed to promote market development. 58. Adequate cost recovery and governance improvements are critical for sustainable irrigation modernization. The Sourcebook shows how adequate cost recovery is key to ensuring efficient water service, and how this has to be matched with accountability and cost-effective water supply on the part of the service provider. The lesson is that investments in irrigation modernization need to be accompanied by both a credible cost-recovery strategy and by governance improvements that ensure accountability, and by least-cost and efficient service delivery by the service provider. 59. There are new tools to help improve investment quality. Investment quality is a widespread concern, and the Sourcebook provides some tools and orientations to help improve outcomes and impacts. These include a rapid appraisal benchmarking tool to help focus irrigation modernization investment on cost-effective service delivery and a tool to plan for drainage 14 investments integrated within a basin approach. The lesson is that tools are available--or can be developed-for an output-based approach to investment design. 60. Investment in technology needs to be backed by a conducive incentive framework. There is disappointment with modernization programs in large-scale irrigation, and more generally a vast gap between potential and actual performance in irrigated agriculture overall. The finding is that there is a great deal of technology that can be applied but is underused at present, both on large schemes and on-farm, where supplementary use, conjunctive use, protected agriculture, agronomic improvements, and drainage have great potential for improving water use efficiency and farmer incomes. The Sourcebook finds the causes less in knowledge and technology transfer capability than in distorted incentive frameworks and markets, which reduce farmer motivation and increase risk. The lesson is that investment in crop intensification and diversification has to look not only at technical solutions but also at the incentive structure and market environment. 61. Integration is a key theme across the whole range ofwater investments. The role of water as just one input in complex production processes is reflected in the Sourcebook's insistence on integration of irrigation system modernization and farming intensification, on the need to integrate technical packages (soil, water, crop management), and on integration of technical and market aspects. The Sourcebook's underlining of the need for integration in mUltipurpose investments like dams and drainage reflects a more complex aspect of water: its multi-sectoral and multi-institutional character and the widespread externalities associated with its use. The lesson is that all agricultural water management investments have to consider integration aspects within the production system and within the agricultural sector, but also integration of agricultural water use with other uses and users and their representative stakeholders and institutions, together with environmental and social externalities. 62. Participation improves the quality of investments. Many contributions to the Sourcebook underline the value of participation in improving investment quality, in developing technology, in influencing policy, and in improving ownership across the board. One insight is that the social and environmental safeguards, with their transparency requirement, can be a mechanism to improve participation and ownership of investments. The lesson is that participation, properly adapted and managed, improves quality and ownership across the whole range of investments, innovations, and institutional development. 63. Agricultural water management is a vital component ofpoverty reduction strategies. The Sourcebook documents the wide availability of technologies that can help poverty reduction in both irrigated and rainfed situations and the scope for making this technology available and affordable for the poor. The Sourcebook also highlights the vulnerability of the poor to negative environmental and water-related impacts (drought, flood, watershed degradation, groundwater water depletion, surface water contamination) and the consequent high poverty reduction impact of investing in control and mitigation. The Sourcebook also underlines the potential of market liberalization to drive pro-poor growth and the parallel need to target interventions, because the better-off typically gain more from free market approaches. One lesson is that all agricultural water investments can be designed with a pro-poor approach but that targeted interventions may be needed. A second lesson is that certain types of agricultural water investment such as watershed management will have particularly high poverty reduction impacts. 64. Nonconventional water is an area for future investment. The Sourcebook reviews the possibilities of harnessing nonconventional water sources like drainage water, wastewater, and 15 flood water. The lesson is that "unwanted water" is not necessarily a problem; it can be turned to good account as a resource, and investment is likely to increase. 65. Following this summary of some of the key lessons for investment emerging from the Sourcebook, the next section examines ways in which the World Bank could put the Sourcebook knowledge to work. Putting the Sourcebook into practice 66. Getting the policy, strategies andprograms right. The Sourcebook describes the vital role of policy and strategy processes and of governance and incentives. It also describes how reforms take place, including political economy aspects. Clearly, it is important for the Bank to accompany its partner countries along the sequence from policy determination to choice of governance and incentive structures to sector strategy, and thus to choice of investments. One key instrument for following this sequence and for adding value through policy dialogue is the new Country Water Resources Assistance Strategy (CWRAS) introduced by the 2004 Water Resources Sector Strategy (see chapter 1). CWRAS links the Bank's program to national strategies, helps mobilize the linkages between sectors, and ensures that an integrated approach to water is incorporated into the CAS investment and sector work program. The agreed CWRAS becomes an agenda for a Bank/government partnership in the water sector. 67. Using World Bank instruments selectively. For sector work, the range of Bank products has widened. A CWRAS would normally propose a balance between policy dialogue, capacity building, technical assistance, and investment lending. Of particular value for long-term development processes such as water sector reform is "programmatic economic and sector work" (PESW) which allows the Bank and government to agree on a multi-annual structured program of study and technical assistance, supporting reform but not necessarily tied to subsequent lending. 68. For lending, a broad range of instruments is available (Table 1). To support policy reform, a Development Policy Lending instrument may be appropriate (see table). When a reform can be better implemented gradually through stepwise revised regulations, a Programmatic Development Policy Lending instrument could be appropriate. For long-term investment programs, the Adaptable Program Loan is indicated, or a Specific Investment Loan for a free standing investment project. If policy and investment components interact strongly, a Hybrid Investment Policy Loan, or two independent but highly correlated loans (e.g., a Development Policy loan, and an investment loan) can be used. A Learning and Investment Loan may support pilot projects, and an Emergency Recovery Loan can be used in the wake of disaster. Table 1 World Bank lending instruments for the water sector Nature ofinvestment Instrument What does it do ? Major multi-institutional policy and institutional Development Policy Lending It supports institutionally difficult policy reforms (e.g., changes in governance or incentive (DPL) "quick-disbursing" reforms, agreed with the government in structures for agricultural water) that can be done tranched balance of payments a Letter of Development Policy in a short time frame of I to 2 years. support Longer term water sector reform that can be Programmatic Development As for DPL but supports a long-term divided into phases with benchmarking. May be Policy Lending (PDPL) reform program through a series of used where issues are sensitive or political support DPLs over 3 to 5 years 16 Table 1 World Bank lending instruments for the water sector Nature ofinvestment Instrument What does it do ? for reform may shift. Investment program accompanied by reforms Hybrid Policy and Investment Supports sector investments and needed to ensure outcomes but which are not major Loan (HPIL) institutional development linked to and can be implemented during the investment relevant policy reforms period (e.g., restructuring an irrigation agency). Restoration of assets and production levels in the Emergency Recovery Loan Rapid appraisal and fast disbursing wake of disaster. Could also be used to establish a (ERL) investment loan. more provident disaster management capability. Long-term, phased water investment programs. Adaptable Program Loan Supports investment program in two to Performance criteria can be set to allow break (APL) three projects over 10 to 15 years, points and correction. subject to performance criteria at completion of each project Investment program in agricultural water with Specific Investment Loan Finances specific investments. Can set monitorable outputs and outcomes. Reforms may (SIL) reform conditions to accompany the be promoted but are not critical to outcomes. program Testing high-potential innovations for subsequent Learning and Innovation Loan Short-term pilot projects to test ideas for scaling up. (LlL) subsequent large-scale investment. Typically rapid preparation, lighter procedures, 2-year implementation period. 69. Targeting sector and technical work and studies to strategic priorities. The program of sector work, technical assistance, and studies agreed by Bank and government as part of a partnership approach will be determined by the country situation. Best-practice approaches will likely be characterized by a longer term commitment on both sides and by a structured approach to issues, by a focus on governance and institutions, and by integration of water sector issues with other sectors (rural development, agriculture, social, and environment). These characteristics of a Bank-government relationship would be mirrored within the Bank by a similar long-term commitment to a reform program and by internal integration of the Bank's work on water. 70. The Bank and its government partners would also seek and sustain partnerships with other international institutions in the field of agricultural water management, including FAD, IFPRI, International Water Management Institute (IWMI), International Commission on Irrigation and Drainage (ICID), International Fund for Agricultural Development (IF AD),. Also important will be financing from the Global Environmental Facility (GEF) and partnerships with international institutions in the environmental field, including World Conservation Union, and World Wildlife Fund (WWF). 71. Reviving and reorienting the lending program. The range of possible investments discussed in the Sourcebook is vast (Table 2). Each country situation will be different, but several common approaches can be proposed. A first investment approach is piloting for innovative solutions or for adapting practice from elsewhere. For this type of operation, the Bank has the advantage of international expertise and cross-country experience and a facility for learning and disseminating lessons. The Bank is also a development risk taker, with an appropriate lending vehicle (the 17 LIL). Areas suitable for piloting include institutional innovations such as water user associations or basin committees, water rights, and water markets. Piloting may also be appropriate for technically innovative solutions such as pressurized systems, integrated soil and water management for smallholders, water management by evapotranspiration quotas, and risk management instruments such as crop insurance or commodity risk management. 72. A second investment area that follows logically from a piloting approach is scaling up good practices and successful experiences. Here the Bank's comparative advantage is in its financing strength and its ability to commit to longer term programs. Examples include work on institutional change, watershed restoration, integrated water management, and new hardware and software mixes. 73. A third area of business is in multifunctional operations such as drainage and wastewater treatment and reuse, where the Bank has not only the financial resources needed but a comparative advantage in technical know-how and in integrating and convening power for the multiple institutions involved. Table 2 Some investment opportunities described in the Investment Notes and Innovation Profiles Some typical operations mentioned in the Sourcebook Notes Investment type Integration of smallholders into supply chains Pilots Controlled drainage Institutional innovations such as water user associations or basin committees, water rights, and water markets Technically innovative solutions such as pressurized systems or integrated soil and water management Development of financing and risk-management instruments such as crop insurance or commodity risk management Weather- based insurance. Modernization of irrigation schemes Specific inve.'~tment Water resources development for supplementary irrigation projects Water retention, flood mitigation, and flood protection Drought and salinity investments Watershed management Integrated water management Multifunctional operations such as drainage, wastewater treatment, storage and reuse Water trade facilitation Supplementary irrigation Alternative Pressurized irrigation with protected agriculture technologies within integrated programs Smallholder irrigation under social fund and community-driven development approaches Integrated land and water management Policy analysis and related capacity building Technical assistance Water resources assessment 18 Benchmarking to improve irrigation service delivery. Capacity building of farmer and extension DRAINFRAME multifunctional approach to drainage Participatory irrigation management, water user associations, and Irrigation Management Transfer Water markets development Groundwater management programs Water rights governance systems Drought and flood preparedness programs Irrigation and drainage research Rapid appraisals for irrigation modernization Water swap programs Monitoring and evaluation systems Impact evaluation 74. A fourth priority area for the Bank would be operations that directly reduce poverty. The Bank has the advantage of an integrated poverty reduction approach (in the poorer countries through PRSP, in all countries through its operations in most sectors of the economy). Examples of poverty-reducing investments include flood and drought preparedness programs, integrated programs that include supplementary irrigation, conjunctive-use or low-cost pressurized systems; programs that integrate smallholders into the supply chain; and watershed management programs. 75. A final area where the Bank can have a comparative advantage is investment in technical assistance at the cutting edge, for example programs to evaluate water resources, groundwater management programs, studies on multifunctional approaches to drainage, and benchmarking to improve irrigation service delivery. 76. Motivating and enabling Bank staff to promote good agricultural water management and to invest in it. Bank staff from all disciplines working on agricultural water management would benefit from focused training based on this Sourcebook. Training-and staffing-needs to be balanced between engineering and nonengineering considerations. Engineers are essential to trace out the critical path to efficient irrigation service delivery, to manage the benchmarking process, to bring in technical innovations, to factor in environmental risks and management requirements, and to set agricultural water management in its integrated context. Non engineering profiles and skills requisites include: governance, institutional development, economics, environment, political economy, and social and community-driven development expertise. Most importantly, all staff should have the ability and motivation to see agricultural water management in its bigger context of poverty reduction, growth of livelihoods, and wealth creation. 77. Adapt the messages to the specific needs of each region. Analysis of the main issues in the six regions of the World Bank reveals that each may have a unique situation requiring a different focus and perhaps a different set of approaches. Table 3, based on consultations with the regions, gives an indicative picture of the messages that are priorities in each region. The issues mentioned have been raised by staff in the regions. They are, of course, not mutually exclusive, and will evolve over time and be adapted to specific country situations. 19 Table 3 Some indicative agricultural water management issues in each region Type ofissue AFR MNA LAC SAR EAP ECA Policy, institutions, and governance Policy and strategy issues * * * * * * Demand management * * * Public-private role * * * Participatory irrigation management /water user * * * * * associations/ Irrigation Management Transfer Cost recovery * * * * * * Water resources management Integration, IWRM issues * * * * * Managing scarcity * * * Watershed management * * * * Surface water management * * * * Groundwater management * * * * Environmental issues, water quality * * * * Technology * Focus on productivity rather than area expansion * * * * Enabling environment Land tenure * * * Input markets and credit * * Output markets and prices * * Large-scale irrigation development New schemes * Rehabilitation * * * * * Management * * * * * * Smallholder programs, poverty focus Poverty focus * * * Rainfed issues (drought, floods ...) * * * Nonconventional water Drainage, waterlogging, salinity, soil depletion * * * * * AFR Sub-Saharan Africa; MNA Middle East and North Africa; LAC Latin America and Caribbean; SAR South Asia; EAP East Asia and Pacific; ECA Europe and Central Asia. 20 2. CHAPTER HIGHLIGHTS CHAPTER 1: BUILDING POLICIES AND INCENTIVES INOlO1 Preparing a national agricultural water strategy INOlO2 Development policy lending to support irrigation and sector reforms INOlO3 Agricultural trade, water and food security IN0104 Pricing, charging, and recovering for irrigation services INOIOS Economic incentives in agricultural water use IPOIOI Agricultural water in the new Country Water Resources Assistance Strategies IPOlO2 Enabling smallholder prosperity: irrigation investments for ready markets 78. This chapter presents a snapshot of different approaches to the many reform challenges in agricultural water management. There are key themes on process, particularly the need to be clear about goals and to orient policies, strategies and investments toward those goals; on the importance of political economy, identifying champions and winners and losers; on the central value of participation and inclusion in all processes; and on the need to pilot in areas where solutions are not yet proven. 79. The chapter also shows how reforms are driven and facilitated, and how they can be supported by dialogue, analysis, and lending. The role of incentives in change is examined at two levels. In reform, the incentives have to be sufficiently attractive to persuade all parties to make sometimes difficult policy adjustments. In agricultural water management, incentives are the key to adoption of new practices and open the door to higher productivity and incomes. Getting the policy framework right is essential 80. Governments are inevitably major players in the water sector because water resources are in part a public good, because water is closely linked to major public policy goals like poverty reduction, and because water use creates widespread "externalities" (what one person does with water affects other people and the environment). Because agriculture is the major water user (80 percent worldwide and more than 90 percent in developing countries), government policy is critical to successful investment in agricultural water management. (See INOIOI onformulating policy and strategy; and INOI02 on facilitating reforms with lending. See also "Preparing a National Agricultural Development Strategy," Module I in the Agriculture Investment Sourcebook (AIS). 4) 4 References to AIS are to the notes in the Agriculture Investment Sourcebook. 21 Policies on trade and markets drive growth ... 81. Open trade in agricultural products can contribute to growth in agricultural investment and incomes and promote more efficient and less water-intensive crop management practices and cropping patterns-fruit, vegetables, flowers. There are well known constraints to freeing trade internationally, particularly with the most lucrative markets. Often, governments will create internal restraints to market development, too. Trade-driven growth needs to be accompanied by knowledge intensive agriculture. Care is needed on the environment-market prices do not reflect the social cost of soil and water depletion or pollution, so some regulatory measures may be needed. Overall, evidence shows that properly managed liberalization drives growth and can benefit the poor. Trade reform enhances both domestic food security and national growth, and poorer countries benefit the most. Overall, investment outcomes are likely to improve where trade and markets are liberalized. At the household level, trade-driven modernization can be the engine of growth and poverty reduction by reducing food costs and supply uncertainties, generating growth through diversification and productivity gains, increasing and diversifying incomes, and providing employment. A case study from Zambia illustrates these effects. (See INIOI on overall growth policy, INI03 on agricultural trade, and IPOI02 on growth from smallholder irrigation in Zambia. See also "Reform of Agriculture Subsidy and Protection Policy," and "Facilitating Efficient Adjustment to Liberalized Trade" in AIS, Module 1) ··· and the incentive framework has to motivate farmers. 82. Incentives for agricultural water use are often identified with water charges. But economic incentives understood, in a broader sense, as "all signals that affect farmer decisions" provide the essential framework for quality investment in agricultural water. The incentive framework can encourage water use efficiency, promote environmentally friendly practices, reduce costs to government, and increase farmer income. The incentive framework should encourage the farmer to invest and manage his farm and his water resource efficiently and profitably. "Negative" incentives, which increase the costs of current behavior and provide a push for change, need to be matched with "positive" incentives, which facilitate change toward a more efficient, sustainable use of water. (See INOI05 on economic incentives in agricultural water use. See also IN0301 on incentives for on-farm water saving.) "Cost recovery" contributes to good investment 83. Properly managed, irrigation service charges are a key element in ensuring good investment outcomes. Full recovery of operation and maintenance costs ensures good water service and scheme sustainability and reduces reliance on government for subsidies or rehabilitation. However, the service provider must be held accountable within a well-designed governance framework. Irrigation service charges have proven less effective for encouraging water use efficiency. Volumetric pricing can affect use patterns, but it is hard to administer. (See INOI04 on cost recovery for irrigation.) Strategy is key to a good investment program 84. Agricultural water strategy translates policies of pro-poor economic growth and improved efficiency and governance into action. Best practice on strategy will bring all partners into a 22 coherent framework for action. Strategy should show how macro and sector policies are aligned; integrate land, water and environmental strategies; and define institutional relations and development paths. It will set the legal agenda and make the case for changes in the incentive framework. Strategy should be linked to an investment program, which can be a means of attracting donor and private investment. The World Bank frequently takes part in participatory water strategy processes and has devised a new instrument-the Country Water Resources Assistance Strategy (CWRAS)-to link national strategies and Bank programs. The CWRAS should set an agreed long-term strategic context, identify quality investments, and set out a policy and institutional agenda that will ensure sound investment outcomes. (See INOIOI on strategy and IPOIOI on the CWRAS.) Integration and coordination are vital 85. Water is a multi-sectoral and multi-institutional business, and integration of resource management and inter-institutional coordination are vital. For example, in China 12 separate departments are responsible for some aspects of water management at different levels. Coordination is vital within the Bank also, where interaction between the various sector departments, the country departments and the center requires constant attention. The new CWRAS is proving useful in this kind of coordination. (See INO101. For CWRAS, see IPO10.) Some typical investments Type Sample in vestments Technical assistance Policy analysis Water resources assessment Capacity building Strategy formulation, including Country Water Resources Assistance Strategy Policy based investment Major policy reform Project investments Trade facilitation Research and development Pilots Weather-based insurance contracts (perhaps with International Finance Corporation, IFC) Integration of smallholders into commercial supply chains (perhaps with IFC) Development of financing and risk management instruments (perhaps with IFC) CHAPTER 2: DESIGN OF INSTITUTIONAL REFORMS IN0201 Investing in participatory irrigation management IN0202 Investing in water rights, water markets and water trade IN0203 Investing in building capacity in agricultural water management 23 IP0201 Drivers of public irrigation refOlTIl in Australia IP0202 Investing in fanner networks for inclusive irrigation policy processes in South India 86. Together with public policy (chapter 1), institutions create the enabling environment in which markets guide the allocation of resources for efficient outcomes. This chapter examines key institutional reforms that can improve the pro-poor enabling environment and increase efficiency of water resource use. Water sector reform is a complex business demanding management of sometimes high political transaction costs 87. Water sector reform is a complex, multi-sectoral challenge, with many stakeholders and sometimes high associated political transaction costs. The process requires investment--of time, political capital, and financial resources (for studies, capacity building, and institutional development). Reform champions are needed, and experience shows that participatory approaches, though sometimes risky, strengthen ownership. Irrigation management transfer in Australia is an example of success achieved under conditions of well-developed governance, political commitment, skilled and devoted stakeholders, and extensive investment at every level in learning and participation. Another example (from South India), shows how farmer irrigators were brought into the policy reform process and made it more farmer oriented. (See IN0104 on stakeholder interests, IN010l and IN0102 on the political economy of reform, IP0201 on coalition building in Australia, and IP0202 for the South India case. See also "Strengthening Farmer Organizational Capacity to Influence Agriculture Policy," in the Agriculture Investment Sourcebook (AIS), Module 1.) For difficult reforms, adjustment lending may be suitable 88. Policy-based loans can provide an incentive for governments to undertake comprehensive, multi-sectoral policy and institutional reforms despite their high political transaction cost. Using a policy-based lending instrument focuses attention on a specific high-profile reform agenda and musters a constituency within government and civil society to implement it. It also has a democratic and "inclusive" nature, because program pUblicity stirs public debate throughout the nation. (See IN0102. See also "Adjustment Lending for Agriculture Policy Reform," in AIS Module 1) In agricultural water investment, decentralization, demand drive, and participation are routes to improve efficiency 89. About half of the irrigated area in the world has been developed and managed by governments, but inherent structural problems have sent government-owned irrigation schemes into a spiral of degradation. On these schemes, irrigators do not generally have a sense of ownership and responsibility for the system or for efficient water use. Service is often poor, and the systems cannot mobilize adequate resources to finance costs. Governments have become increasingly reluctant to pay subsidies. As a result, the condition of infrastructure and the quality of water services have declined. This poor experience has led to a shift of emphasis away from government and toward a new public-private paradigm in recent years. The private sector-in 24 the form of contractors, private investors, water user associations, community organizations, nongovernmental organizations (NGOs)-is taking on more responsibility for management and financing of irrigation. The key message is that investments are more efficient when accompanied by decentralization, demand drive, and participation. (See IN0201. Other chapters discuss the power of participation in: private irrigation improvement (IN0303); multipurpose operations like dams and groundwater management (IP040 1);community driven approaches to small-scale irrigation and watershed management (IN0701); and supplemental irrigation, watershed management, and drought and flood management (IN0601, IN0602, IN080I, IN0802). Water user associations are an important investment area 90. Water user associations in irrigation can play many roles along a sequence from the most basic cooperation at the tum-out (tertiary, quaternary) right up to managing irrigation schemes. As the degree of transfer of responsibility grows along the sequence, investments will be needed to build institutions and capacity. The approach has proven successful and popular. Water user associations can also help the inclusion of women and the poor in discussion and decision making, and even in leadership, on water rights and management. Participatory irrigation management (PIM) has been adopted in more than 50 countries since the 1980s. Investment in a well-designed PIM strategy can bring many benefits: reduced cost to government; increased cost recovery and farmer investment; improved maintenance; more equitable and efficient water distribution; improved water quality; fewer water conflicts; and improvement in government services. Participatory approaches and user associations are also now being introduced for drainage, for example, in Egypt. But there are risks, too. The cost of water to farmers may increase; water productivity may not rise quickly; local elites may capture control; and government may reduce its support too quickly. The most common causes of failure are inadequate preparation of the enabling framework, weak political and civil society support, and over-hasty transfer without capacity building. (See: IN020] for water user associations and participatory irrigation management. See IP0505 for participatory drainage in Egypt. See also '"Investments to Empower Farmers to Manage Irrigation and Drainage Systems," in AIS, Module 8.) As agricultural water management moves from an engineering phase to a technology-and management-intensive phase, investment in capacity building becomes more and more essential. 91. As the technical challenges of scarcity and environmental degradation grow, and as stakeholder involvement becomes more important, skill needs change. Capacity building is needed at all levels-from farmers to government, covering the whole range from adaptive research to hands-on management coaching for water user associations. The cost of adequate capacity building worldwide has been estimated at US$] billion a year, but actual investment does not come close. (See IN0203.) 25 Investing in a water rights system can help improve water management, but establishing a rights-based system is far from easy. 92. Where water rights are not secure, management is inefficient. Ifwater is treated as a public or common resource, incentives to efficient management and allocation are dulled. Management will also be inequitable, because use of water without a formal rights system results in exploitation by the most politically and economically powerful. Finally, water management without a clear rights system is unsustainable: absence of rights provokes irresponsible use through the law of capture and abuse of a common pool resource. A system of rights has proven to be an efficient, equitable, and sustainable water management option, promoting efficient water use and increasing cost recovery. Water rights are also a prerequisite for the development of water markets, which can allow intra-sectoral and inter-sectoral transfers. However, introducing rights-based systems can be politically contentious, particularly where there is cultural reticence and weak governance. A long-term participatory approach is essentiaL (See IN0202.) Some typical investments Type Sample investments Technical assistance Capacity building for sector management, farmer associations etc. Institutional development: water rights, PIM, IMT, law, water markets Project investments Investment in irrigation and drainage research Pilots Pilot projects for PIM, water markets CHAPTER 3: INVESTING IN IRRIGATION SYSTEMS IMPROVEMENT AND MODERNIZATION IN0301 Lending for on-farm water saving technologies IN0302 Investing in irrigation for crop diversification IN0303 Investing in smallholder irrigation IN0304 Selecting technologies for operation and maintenance of irrigation systems IN0305 Cost effective operation and maintenance of irrigation and drainage projects IN0306 Using satellites to assess and monitor irrigation and drainage performance IN0307 Prioritizing lending for public irrigation schemes with the Rapid Appraisal method IP0301 Investing in automation and centrally operated irrigation systems 93. In this chapter, the focus is on investing in irrigation management and service delivery, illustrating improvements that give farmers reliable service and so enable them to increase their incomes. The chapter also covers technologies and management systems available to encourage water saving, ranging from micro-irrigation installations on farms to an innovative system of regulation through the assignment of "evapotranspiration quotas." 26 Irrigation modernization has so far produced disappointing results. 94. With most of the world's irrigation already developed, and with very high costs for new development, the challenge is to get more out of existing systems. The scope is enormous for efficiency gains in large-scale irrigation. Irrigation efficiencies worldwide are well below technical maxima, water efficient technology is used on only a small area, and intensification and diversification are happening but slowly. Yet "irrigation modernization" has been disappointing: a recent study could not fmd a single example of a successful modernization package in a World Bank-financed irrigation project.s Successful modernization investment requires attention to economic, technical, managerial, and market considerations-within an integrated approach. Only after a clear vision has been established for developing an area's agricultural potential can investment objectives be set. The diagnostic phase using the Rapid Appraisal Procedure (RAP) can then be done with the real future objectives of irrigation systems in mind. (See IN0302, IN0305, IN0307. Other chapters cover the incentive framework (!NOl05, !NOl04) and the market environment (!NOl03). For on-farm improvements, see !N030l and IN0303.For irrigation modernization technology, see [P030l.) The goal is to improve water use and farmer incomes, thus creating a "virtuous circle." 95. Investment in irrigation improvement is justified-and risks for farmers reduced-only if the system delivers the high and reliable level of service that allows users to optimize water use and diversify into higher value production. Farmers well-served by irrigation systems can improve efficiency and incomes and can afford water charges. This is the "virtuous circle," the opposite of the old downward spiral of poor service, low cost recovery, system degradation, low-risk and low-value cropping, and ultimate need for rehabilitation. (See !N0302 and [N0307. See also "Investments in Irrigation for Crop Diversification, in AlS, Module 8.) Irrigation modernization has to focus on delivering cost-effective service to farmers 96. The recent focus in large-scale irrigation investment has been (correctly) on improved governance and on system upgrading to improve water control. Yet these investments have focused on major capital projects like canal lining and on computer modeling, rather than stepping back and looking at the problem to be solved-poor service to farmers and its economic and environmental consequences. A new tool "benchmarking" using RAP has been developed to help select investments. RAP first analyzes internal processes such as operating rules, budgetary processes, and hydraulic structures. It then "benchmarks" those internal processes along external indicators such as irrigation efficiency, crop yield, the environment. The last step is to prioritize the internal processes that must be improved through investment to affect the external indicators. (See IN0307 and [P0904.) Integrated investments stand the best chance of success. 97. Many factors affect water use productivity. These include: soil characteristics (soil fertility, fertilization, drainage, soil salinity and sodicity, breeding); agronomic factors (plant variety, S Burt, C.M. and S.W. Styles. 1999. Modem Water Control and Management Practices in Irrigation. FAO Water Reports 19. ISBN 92-5-104282-9. 223p. 27 cropping patterns); crop management practices (tillage, weed control, soil moisture management); irrigation practices (irrigation scheduling, deficit irrigation, irrigation technology and technique); and inputs, credit, markets, and prices. Investment packages should integrate ''hardware'' improvements with improved irrigation management, better crop selection and management, and access to profitable market outlets. (See IN030}, IN0303, and IN0306.} Physical systems may need to be adapted. 98. As farmers diversify, they are confronted with the technical challenge of adapting a rigid and uniform irrigation system to a more varied cropping pattern. Higher value crops need assured, controlled-flow water delivery directly to the plot, together with good drainage. Soil management and land consolidation may be necessary, too. Physical systems may have to be adapted, for example, from open channel to pressurized pipes. Investments need to incorporate an integrated approach. (See IN0307 for diagnosing the problem, IN0302 and IN0304 for technical solutions, and IN0305 for management approaches.) Users have to be partners in modernization programs. 99. The cooperation of users is critical to successful outcomes from modernization investments. There should be a clear up front agreement on service levels, technology, and roles and responsibilities. For example, where farmers install field irrigation system improvements such as micro irrigation, they have to work with scheme management to agree on technology and on subsequent management of the inlet structures. Already farmers on many schemes finance all their own on-farm investments in micro irrigation etc. As diversification continues, driven by market forces,farmer investment will grow. As farmers share more of the costs and take on more of the responsibility, their share in driving change will grow. This participation underlines the value of the user associations discussed in Chapter 2. (See IN0304. On participatory irrigation management and user associations, see IN020}) Many investments can contribute to on-farm water saving-but in the end it will only happen if the farmer himself is both motivated and enabled. 100. On-farm technologies like piped distribution, drip, and bubbler are widely available, and can cost as little as US$250 to $500/ha. Treadle pumps that can irrigate up to 0.5 ha using family labor cost only $50 to $100. A wide range of water management and crop management improvements is known. Yet adoption of water saving technologies has been slow and performance below potential. Investment in water saving will be optimal in the private and public interest only where both available technology and favorable incentive and institutional structures are present. In the end, the incentive structure is the key: if water is too cheap, markets are dysfunctional, or water rights are insecure, farmers will not save water. In the end, only the prospect of higherfarmer net income and lower risk will drive investment and water saving. (See IN030} and IN0303. On the role ofmarkets and incentives in general, see INO}05.) Complementary investment in market development may be needed. }O}. The objective is a sustainable increase in farmer incomes. Thus, the availability of profitable crops and markets is an important element in the success of modernization. Some complementary investments may be needed to develop product markets, financial markets, and 28 market information and to build infrastructure (e.g., post-harvest investments, rural and farm access roads). (See IN0302. See also IPO]02 on linking smallholders to international markets. See also "Market-Driven Diversification," in AlS, Module 4, and "Supporting Market and Supply Chain Development," in AlS, Module 6) Irrigation investment, combined with other factors, should bring more income for less water. ] 02. Better control of irrigation water, combined with the other factors listed above, should result in higher cropping intensities, higher value crops, and higher farmer incomes. One project described in this Sourcebook specifically targets more income for less water as its objective (Hai Basin project), using evapotranspiration quotas to assign rights and working with farmers not only on irrigation, but also on a broad range of improvements in agronomy, crop husbandry, and general management practices. The project uses satellite imagery to determine quotas and to monitor use. Output in the area is likely to be sustained, and expanded after completion, an optimal investment outcome of more income for less water-sustainably. (See IN030] on the benefits of water control, and IN0306 and IP080] on evapotranspiration quotas and the use of satellite imagery, including the Hai Basin project.) Care is needed to ensure a pro-poor element in modernization investments, because a purely market-driven approach will favor the better off. ] 03. An element of inequity pervades all irrigation, because the very poor do not control water resources. Diversification does create employment, but the better-off farmers benefit most, because they can finance on-farm investments, assume risk, and access knowledge and information services. To offset this, investments can be targeted toward the poor. For example, priority can be given to small-scale irrigation and water conservation investments, which are pro poor, highly flexible, and rapidly implemented. Conversion of public surface irrigation schemes may also be a pro-poor investment. For the very poor, investment in treadle pumps has allowed farmers in Africa and Asia to more than double their income. (See IN030] and IN0303. Other chapters cover inequitable resource distribution (lN070]); and innovative ways to bring irrigation to the poor (lPO]02). See also "Targeting Agricultural Investments to Maximize Poverty Impacts" in AlS, Module ]].) Some typical investments Sample investments Technical assistance Performance-oriented rapid appraisals for public itrigation Technical benchmarking Customer satisfaction surveys Development of operation and maintenance plans Data collection and evapotranspiration measurement Investments Modernization ofwater distribution systems Water measuring devices Advanced technologies for water control Desilting works Canal lining 29 Some typical investments Type Sample iBvestmeBts On-farm development Micro-irrigation, greenhouses, tunnels, and mulching Pressurized irrigation and protected agriculture: sprinklers, localized/piped, drip Pilots Pro-poor smallholder irrigation program Related investments Extension and financial and credit service development CHAPTER 4: INvESTING IN GROUNDWATER IRRIGATION lN0401 Investing in shallow tubewells for small-scale irrigation lN0402 Deep tubewell irrigation lN0403 Conjunctive use ofground and surface water lN0404 Groundwater governance and management IP0401 Yemen Sana'a Basin Water Management Project 104. The advantages of groundwater investment for irrigation, both as a main source of water and as a supplement, are examined in this chapter. Driven by technological advances, groundwater use has spread rapidly, bringing more reliable water supply, encouraging crop diversification, and improving incomes, including for the poor. The biggest problems are overabstraction and water-quality deterioration. Groundwater investment brings many advantages 105. With improved pump technologies, groundwater has become a key resource for farmers, used either as a sole source or as a complementary source to surface water or rainfall. Groundwater irrigation can be developed through shallow wells (drilled or hand-dug wells less than 30 meters to 50 meters deep) or with deeper tubewells. Groundwater irrigation is attractive to farmers who can control it to irrigate virtually "on demand." Water is often of good quality and is available close to the point ofuse. Groundwater offers natural storage capacity, reduced evaporation losses, improved drainage, and secure supply, even during droughts. Economically, groundwater irrigation is generally more productive than surface water irrigation, with crop yieldlm3 up to three times higher. Even the higher cost brings an advantage in incentives to efficient use. Groundwater investment, particularly in lower cost shallow wells, can have poverty reduction impacts, providing improved water supply for domestic use as well as gardens and crops. (See IN0401, IN0402, and IN0404. On poverty reduction benefits, see also IN0301 and IN0303. See also "Investments in Shallow Tubewells for Small-Scale Irrigation," in AIS, Module 8.) 30 Conjunctive use investments pay high returns. 106. Conjunctive use is the simultaneous use of surface water and groundwater. For example, fanners with access to canal water may also use groundwater. Investment in conjunctive use raises overall productivity o/irrigation systems, extends the area effectively commanded, helps prevent waterlogging, and can reduce drainage needs. Conjunctive use is growing as water becomes scarcer. Ideally, it is a component of an overall basin-level integrated water resource investment and management plan. It is institutionally challenging because it requires coordination between different public institutions, and usually a "public private partnership" because tubewells are usually private. Retrofitting planned conjunctive management on existing schemes entails changing the hydraulic structures and operating systems to fit new water use patterns. Other forms of conjunctive use investment include: (1) conjunctive use with saline groundwater to maintain water and salt balances; (2) conjunctive use with poor quality water such as urban wastewater; and (3) groundwater recharge from surface water for later abstraction. (See IN0403.) The chief problems of groundwater are over-abstraction and decline in quality. 107. Despite the advantages of groundwater investment, the biggest problems are overabstraction and the related water-quality problems. The poor are particularly vulnerable, because the richer fanners can pump out deeper and faster. Experience shows that the only workable groundwater management systems are those with intensive user involvement and user government partnerships. A governance system is needed that establishes clear and monitorable entitlements and allows self-management by user groups supported by government in resources assessment, regulation, and dispute resolution. Energy prices have to be set at unsubsidized levels, or they will encourage depletion. Groundwater management is likely to be a significant investment area as resource mining problems grow worse. (See IN0404. On the incentive structure, see IN0105.) Some typical investments Type SlUIlpJe investmellts Technical assistance Building capacity of irrigation system managers for improving main system management for better conjunctive use Evaluating groundwater and monitoring systems Developing groundwater governance structures and user associations Project investments Improving hydraulic infrastructure for optimal conjunctive use Enhancing recharge from precipitation and surface water imports to sustain groundwater use Investing in wells and efficient conveyance and on-farm irrigation systems for smaller farmers Investing in extension and training. Related investments Developing credit systems 31 CHAPTER 5: INVESTING IN DRAINAGE AND WATER QUALITY MANAGEMENT IN050 I Investing in land drainage IN0502 Investing in the reuse of agricultural drainage water IN0503 Investing in the reuse of treated wastewater IP050 I Drainage investments in the context of integrated water resources management IP0502 Investing in controlled drainage IP0503 Investing in evaporation ponds IP0504 Investing in biodrainage IP0505 Investing in user operation and maintenance of drainage 108. How to get the best out of used water is addressed in this chapter. Investment in countering problems of waterlogging, salinity, and wastewater can bring economic, environmental, and social benefits, particularly for poor people, but needs an integrated approach 109. Waterlogging and salinity are reducing water productivity over wide areas, yet investment in drainage is usually neglected in developing countries. Floods affect more people-140 million in an average year--than all other disasters put together, and the risk is growing. Ever more water is being used in towns, reducing volumes available to agriculture, and treated and untreated effiuent poses a major threat to the environment and health. The costs ofthese problems fall mainly on the poor, whose farms are most vulnerable to water shortages, waterlogging, and flooding. Yet these problems can be turned to good account, usually to the benefit of the poor. Drainage and urban wastewater flows represent precious extra resources, and floods can contribute to recharge and irrigation resources. The innovations described in this chapter have been proven beneficial. Typically, these investments require an integrated approach. Wastewater management involves several sectors and their institutional structures: urban utilities, agriculture, public health, environmental protection, and treatment and reuse must be agreed and coordinated. Drainage water reuse requires an integrated approach to irrigation design and management. Flood management requires a basin approach and multi-sectoral investments. (See IN0501 and IP0502 on waterlogging and salinity, IN0503 on urban wastewater, and IN0502 for reuse ofagricultural drainage water. On floods, see chapter 8, especially IN0802.) Waterlogging and salinization have become critical constraints, with at least 20 million to 30 million hectares requiring drainage investments. 110. Irrigated land may become waterlogged and salinized as water tables rise and salts build up. Most drainage projects have produced good rates of return and improved farmer incomes, yet investment has dwindled as projects have concentrated on upstream irrigation and farming. Investment costs are generally low, ranging from on-farm surface drainage systems at US$IOO to $200 per hectare up to US$I,OOO per hectare for pipe drainage in arid areas. Beyond individual economic benefit, drainage can contribute to overall land and water management and the environment. Drainage is a proven but demanding discipline and technology. Best investments are often highly case- and site-specific, and careful research and piloting are required. Integrated 32 approaches address all on-site and off-site impacts of drainage. Although governments usually have to take the initiative, investment sustainability requires farmer involvement, as experience from pilots has shown, for example, in Egypt. (See IP0501 and IN0501. For a case study on Egypt, see IP0505. See also "Investments in Waterlogging and Salinity Control," in Agriculture Investment Sourcebook (AIS), Module 8.) Drainage is a complex, multifunctional investment that has to be considered within an integrated water resource management framework. 111. Drainage is a complex phenomenon with mUltiple impacts, positive and negative, on other functions of the resource system. Integrated resource management requires a new focus on drainage, which has to be analyzed within the context of a hydrological unit like a basin, using an integrated approach and addressing all positive and negative impacts of drainage on-site and off-site. A new methodology ("DRAINFRAME") is described in this chapter. It shows how a participatory planning methodology looking at every aspect of the resource system and all the stakeholders can untangle the multiple impacts, costs, and benefits; prioritize investments; and begin to locate benefits and mitigate side effects. (See IP0501 on drainage and on DRAINFRAME. See IP0901 on assessing costs and benefits.) There have been significant innovations in drainage technology. 112. Several entries in this chapter describe innovations in drainage technology. One discusses how controlled drainage can be used for water table management. Land drainage systems often allow water to move too quickly through the soil profile. Controlled drainage slows down the loss through the drainage system. A second innovation described is the use of evaporation ponds. Costs are low, useful life can be up to a half century, and environmental problems are largely manageable. Finally, biodrainage can be used to remove excess water by using the uptake capacity of vegetation, especially trees. (See IP0502 for controlled drainage, IP0503 for evaporation ponds, and IP0504 for biodrainage.) Investment in reuse of treated waste and drainage water can offset water scarcity. 113. Investment in reuse ofpoor quality water in agriculture can offset water scarcity and preserve better quality water for higher value uses. Both wastewater reuse and recycling drainage water represent an important agricultural water management investment opportunity. Large and reliable volumes of drainage water are available close to reuse sites, and investments to enable reuse are low and can be added on to existing schemes. In Egypt, reuse of agricultural drainage water became national policy in the 1980s, and now reuse is practiced on 90 percent of the irrigated area. Investment in reuse of both resources often disproportionately benefits the poor, contributing to livelihoods and household food security. (See IN0502 for treated wastewater and IN0502 for reuse ofagricultural drainage water.) Winwwin is elusive in investing in nonconventional water, and good policy, planning, and participatory approaches are indicated. 114. Inevitably, some conflicts and downside risks are connected with drainage and use of low-quality water in irrigation. Environmental aspects need careful attention. Tradeoffs between different users may be essential, cost recovery is problematic, and technical innovations may be 33 hard to accept culturally and difficult to manage, all of which underlines the need for good policy and planning and for integrated and participatory approaches. (See IP0501, IN0503 and IN0502.) Some typical investments Sample investments Technical assistance Research, capacity building, and institutional development for drainage Flood mapping and flood management plans Research on reuse DRAINFRAME for a participatory approach to drainage Policy based Water swap programs Project investments Investments in drainage on the estimated 20-30 million ha of irrigated land in the developing countries badly affected by waterlogging Wastewater treatment and storage Water retention, flood mitigation and flood protection measures Pilots Controlled drainage, bio drainage CHAPTER 6: INvESTING IN WATER MANAGEMENT IN RA.lNFEn AGRICULTURE lN0601 Investing in supplemental irrigation lN0602 Investing in watershed management lN0603 Investing in water and soil fertility management IP0601 Investing in community-based soil conservation and watershed management projects 1P0602 Investing in watershed management in China's Loess plateau IP0603 Integrated water management to enhance watershed functions and to capture payments for environmental services 115. Investments to improve incomes and reduce vulnerability in rainfed farming systems are covered in this chapter. These systems are characterized by poor and variable water availability and by pervasive poverty. Successful investments described include supplementary irrigation, combined water and soil fertility management, and broader rural development and livelihoods investments within a watershed management approach. User groups are central to many of the investments described in this Sourcebook. Their role in investments in supplementary irrigation, watershed management, and drought management is described in this chapter. 34 Risk weighs on the daily lives of poor rainfed farmers, and investment packages have to help reduce that risk 116. Risks include not only climatic risk and limited access to reliable technology and water sources but also risks from unstable land tenure and from poorly functioning product and credit markets. Some approaches described in the chapter and elsewhere in the Sourcebook were successful in overcoming these risks. For example, investments in supplemental irrigation, in holistic and integrated watershed management, and in drought management can reduce the risk of uncertain rainfall. (See IN0601 on supplemental irrigation and IN0602 on watershed management. For the problem of drought and for ways to handle it, see chapter 8, especially IN0801.) Some technologies for rainfed areas can have high returns 117. Investing in supplemental irrigation-a '~ust-in-time" dose of water--can have a Significant impact on rainfed systems. Returns on water in supplementary irrigation are higher than in conventional irrigation, and are highest at lower-than-recommended applications-a powerful message in water-scarce localities. Farmers readily adopt supplementary irrigation once they are convinced it is profitable and reduces risk. Maximum benefits require an integrated investment package of water-harnessing and irrigation technology, irrigation scheduling, training, and cropping and fertilizing guidance. Combined soil and water management investments can also have a high return. The Loess plateau watershed rehabilitation project in the Yellow River Basin of China demonstrated on an area of 1.5 million hectares that profitable farming could be compatible with soil and water conservation. (See IN0601 on supplementary irrigation, IN0603 on combining water with soil fertility management, and IP0602 on the Loess Plateau project. See also" Integrated Nutrient Management for Sustaining Soil Fertility," in Agriculture Investment Sourcebook (AIS), Module 4.) Investment in soil fertility must deal with cost and risk factors. 118. Fanners see improving fertility as a costly and risky business. Research and development programs can promote adoption, and in some countries innovation grants to fanners have worked well. Where packages have been developed on a large scale, they have been successful in reducing poverty. One case study on Madagascar shows the broad impact of a nongovernmental organization program for transferring soil conservation technology. (See IN0603. See also IP0601 for the Madagascar program and IP0602 for the Loess Plateau project.) Watershed management investment should focus on poverty reduction. 119. Empirical evidence shows that the most sustainable watershed management projects focus on poverty reduction through improvements to roads, education, diversification, and livelihood improvement. Thus, sustainability starts with the farm family and its livelihood as the unit of development and recognizes the role of watershed communities as "conservation managers. " A typical approach is a participatory project with a poverty focus aimed at changing land use and boosting incomes through higher value crops and more sustainable practices, combined with conservation investments. Secure land tenure, a cash crop orientation, and investment profitability are crucial. Investments like planting fruit trees or adopting micro 35 irrigation have demonstrated success in both income improvement and soil conservation. Early returns are needed to maintain farmer interest. (See IN0602. For monitoring and evaluation of watershed projects, see IN0901. See also "Community-Based Natural Resource Management," and "Watershed Management for Agricultural Development," in AIS, Module 5.) Women's role needs to be considered in resource management investments. 120. Women can playa crucial role as "front-line resource managers" and as the educators of the next generation. Investment in lightening women's workload and diversifying their livelihood source is important. (See IN0602.) New instruments are being developed to pay populations upstream in watersheds for good resource management. 121. Watershed management has to give upstream populations incentives to manage the watershed for the benefit of all, including the popUlation downstream. Various market-based methods are being tried for rewarding good natural resource management by paying for the resulting environmental services. There is a need for a clear data base and decision making framework accessible by all stakeholders, such as DRAINFRAME (See IP0501.). The Carbon Fund under the Kyoto Protocol is an example of a payment mechanism for environmental services. (See IP0603.) Some typical investments Type Sample investments Technical assistance Capacity building of farmers and extension workers Integrated studies of watersheds and their stakeholders Studies to develop market-based mechanisms for paying for environmental services Policy based Development and support ofnational drought policy and preparedness plan Project investments Water resources development for supplementary irrigation Low energy pressurized systems Integrated pro-poor watershed management projects Related investments Post-conflict rehabilitation or emergency projects to restore assets and prodnction. promoting supplemental irrigation CHAPTER 7: INVESTING IN AGRICULTURAL WATER MANAGEMENT IN MULTIPURPOSE OPERATIONS IN0701 Investing in agricultural water management through community-driven and social fund approaches IN0702 Investing in aquaculture activities IP0701 Rural water supply and irrigation 36 122. The approaches described in this chapter all deal with multipurpose investments where the cost-benefit relations are complex. These investments require an integrated approach, often within a basin planning framework. Community-driven development investments can be applied to small-scale irrigation and watershed management, improving the quality of development. 123. How community-driven development programs and related social fund financing mechanisms can be applied to multipurpose investments is discussed in this chapter. Bottom-up stakeholder involvement through community-driven development (CDD) can improve the quality of natural resource management investments by building in "holistic" vision and reconciling individual motivation and public goods at grassroots level where individual farmers may otherwise see only their own interest,. Cost sharing is important, because it binds the community in and leads to better and more sustainable investment. It also reduces costs, because it gives the community a stake in economizing. The value of a community-driven approach to water management is confirmed by the Yemen case study discussed in chapter 4. Even in a situation resembling "water resources anarchy," individuals, through local interest groups and in a "partnership" approach, can be motivated to change their water resource management behavior in a way consistent with the public interest. (See IN070 1 on the benefits from CDD approaches and [P0401 on the Yemen illustration. On demand drive and community organization generally, see also chapters 2 and 6. On the virtues ofcost sharing, see IN0104 and INO105, and, for cost sharing in watershed management, IN0602. See also "Community-Driven Development for Increased Agricultural Incomes," in AIS, Module 11.) Aquaculture is the fastest growing animal food-producing sector. 124. A very different type of multipurpose investment is in aquaculture. Aquaculture has grown by an average 9 percent annually since the 1970s and is expected to provide more than 40 percent of fish consumed by 2020. Aquaculture investment can improve food security and nutrition, and create jobs and livelihoods for the poor. It can bring unproductive land and "unwanted" water (i.e., drainage and flood water) into use, and fish can even be sown into canals and cropped fields. However, intensive systems can harm habitats and affect both water and soil quality through eutrophication and acidification. Extensive, low-input systems dependent on local materials and wastes are good pro-poor investments. (See IN0702. See a/so "Aquaculture Production Systems" and "Income Generation through Aquaculture," in AIS, Module 4.) Considering investments together can create technical and economic synergies, as in the case of irrigation and potable water supply. 125. Water investments tend to be made on a sectoral approach, although integrated approaches at the planning level are now more common. At the community level, there can be advantages in considering investments together. For example, joint investment in potable water supply and irrigation can improve both incomes and health. (See [P0701 for examples from Vietnam and Guatemala) 37 Some typical investments Type Sample iBvestmentl Project investments Social fund and community driven development projects for small-scale irrigation and watershed management Integrated drainage investments Aquaculture investments Joint potable water and irrigation systems CHAPTER 8: COPING WITH EXTREME CLIMATIC CONDmONS IN0801 Investing in drought preparedness IN0802 Investing in flood control and management IP0801 Planning scarce water resources using ET quotas: the Hai Basin Integrated Water and Environment Project in China IP0802 Fighting the adverse impacts ofclimate change on agriculture IP0803 Investing in participatory approaches for the cultivation of new varieties and soil and water conservation in India 126. Extreme climatic conditions most seriously affect poor farmers trying to eke out a living in the most vulnerable and marginal of the world's production systems. Climate change is likely to have a particular impact on the poor. Some of the available high-impact technologies and institutional responses to these climatic challenges are discussed in this chapter. Drought harms more people than any other natural hazard, but investment in proactive management can reduce risks and costs 127. Planners in most countries should now assume that climate is variable and that "drought is normal." The common response has been reactive and ineffectual in mitigating impacts on the vulnerable. Recent best practices concentrated on lessening risk through policies to reduce vulnerability, and through investments in preparedness and drought-mitigation planning. Investment in drought management brings benefits by reducing the associated economic, social, and environmental costs. Because the poor are especially vulnerable, drought preparedness is a critical part ofpoverty reduction strategies. (See IN0801. See also "Kenya: Community-Based Drought Management," in the Agriculture Investment Sourcebook (AIS), Module 10.) Even floods can be turned to good account 128. Floods can be harnessed beneficially as sources of irrigation water, groundwater recharge, and soil fertility renewal. They can improve water quality and sustain ecosystems and fisheries. Investment in integrated flood management within basin plans improves beneficial use and minimizes losses. Measures include investments to improve water retention, investments to mitigate flood impacts and reduce susceptibility to damage (including disaster preparedness), and 38 flood protection measures such as dikes, levees, and flood embankments. Because poor people are most vulnerable, investment in improved flood management and preparedness is pro-poor. Stakeholder involvement and appropriate environmental policies are essential to investment outcomes. (See IN0802. See also IN0404 on groundwater recharge in California.) Responses to climate change are possible, but they need site-specific flexibility, backed up by research. 129. The future incidence of climate change can only be guessed at, but it is likely to have particular impact on the poor in marginal areas who have the least knowledge and resources to cope. Experience has shown that programs can be adapted to help, particularly through technological innovations such as minimum tillage and improved water management. Future research and technology transfer will have to focus increasingly on helping poor farmers cope with climate change. (See IP0802.) Technologies are available for even the most unpromising marginal rainfed systems, but their adaptation and adoption is best done by participatory approaches. 130. The Green Revolution depended largely on water availability, and offered little to marginal rainfed areas where the challenge is low productivity due to environmental and soil problems of drought, salinity, temperature, and lack of nutrients. Recent pilot projects in India have successfully tested integrated soil, water, and agronomic investments in very marginal watersheds (cf. the Loess Plateau experience). Earlier attempts to "introduce" new technical packages top-down-for example, vetiver grass-had failed. Instead, new investments were based on a "bottom-up" approach, testing, evaluating and then scaling up innovations. Cost sharing cemented ownership. Uptake has been excellent. Family incomes have increased considerably. The projects have demonstrated a cost-effective investment mechanism for making a large and sustainable impact on the lives of poor people. (See IP0803 and IP0602.) Innovating investments can contribute significantly to agricultural water management and poverty reduction where climatic conditions are adverse and resources scant, provided that they are "integrated" within a favorable social and incentives framework 131. This chapter shows that even the most difficult technical problems can be overcome--for example, drought, salinity, and reclamation of sodic soils-but that the approaches require both "technical integration" (e.g., soil, water, agronomy) and parallel "socioeconomic integration/' for example, input and output markets, which create incentives and lead to income improvements. Success requires community involvement; a bottom-up approach; development and testing of locally adapted technical packages that address soil, water, and agronomic problems together; the availability of input and output markets; and a flexible approach with participatory monitoring. (See IN0803. See also "India: Community Organization for Sodic Lands Reclamation," in AlS, Module 4) 39 Some typical investments Sample IBvesimeJlts Technical assistance Drought and salinity programs Flood mapping and flood management plans Project investments Drought and salinity programs Water retention. flood mitigation. and flood protection measures Pilots Related investments Post-flood emergency operations CHAPTER 9: ASSESSING THE SOCIAL, ECONOMIC, AND ENVIRONMENTAL IMPACTS OF AGRICULTURAL WATER INvESTMENTS IN0901 Monitoring and evaluating the poverty impacts of agricultural water projects IP0901 Assessing the economic benefits of land drainage IP0902 Guidance on environmental and social safeguard assessment in agricultural water projects IP0903 Estimating the multiplier effects of dams IP0904 Benchmarking for improved performance in irrigation and drainage 132. In order to select the best investments, target them to the poor, and manage them efficiently measurement and evaluation tools and processes are needed. Social and economic analysis, benchmarking and monitoring, and evaluation are critical to getting the right investment design, targeting, and justifying projects to decision makers who may think them low yielding and diffuse in their impacts. These tools and processes, and the role of safeguards in improving program quality, are discussed in this chapter. Monitoring and evaluation help assess and improve poverty reduction impacts of agricultural water management investments 133. In a pro-poor operation, monitoring and evaluation should track multidimensional measures ofwelfare such as data on income and poverty and indicators of health and nutritional status. The resulting knowledge about investment returns and impacts enables choices about the most cost-effective way to reach poverty reduction targets. (See IN0901.) 40 Scientific analysis about benefits can provide powerful support to technical assertions or help overturn prejudices 134. The value of rigorous analysis of costs and benefits in steering resource allocation is high. Drainage, for example, the "forgotten investment," is systematically downplayed in investment programming, even though it is relatively cheap and irrigation investments developed without proper drainage may prove unsustainable A study in India showed that the cost of creating new irrigated land is US$6,400 per hectare, while the cost ofdrainage is between $700 and $1,000 per hectare. Rigorous analysis provides the material for advocacy to correct this neglect of drainage. (See IN 0901 on monitoring and evaluation and IP0901 on measuring the costs of "absence ofdrainage. " For more on drainage, see chapter 5.) Economic and financial analysis improve investment quality 135. Economic and financial analysis can help refine project design and ensure that financial flows improve sustainability. One case study in chapter 7 examines a project where analysis demonstrated that irrigation benefits could pay the costs of a community's water supply. Capturing indirect benefits and externalities can also improve investment choices. The indirect benefits of dams may double the direct benefits. The same is true for many agricultural water investments, because second-round multiplier effects of creating incomes and wealth in rural areas are high. Evaluation of these linkages is vital to assessing the real impact of agricultural and water investment in rural areas. Analysis is also invaluable to show the distributional impact of investments. In the case of untargeted programs, this has often revealed unexpected benefits for the poorest. (See IN0901 on methodology in general, IP0903 on multiplier effects, IP0701 on rural water supply and irrigation, and IP0501 on evaluating multifonctional investments within an integrated water resources management framework.) Safeguards should improve investment quality and ownership 136. Safeguard policies are designed to integrate social and environmental concerns into decisions about investment design. They can help to reduce and mitigate adverse environmental and social impacts, and transparency requirements ensure that stakeholders are consulted. Seven of the 10 safeguards may be triggered by agricultural water projects: typical impacts might include downstream and third party effects from surface and groundwater withdrawals, polluted runoff and drainage water, or loss of farmland and displacement. Safeguards may be seen as imposing a cost on countries and World Bank teams. However, technical support is available and properly applied safeguards should, in fact, improve investment quality and ownership. (See IP0902.) Benchmarking is a useful means of identifying shortfalls in irrigation performance and of designing improvement programs 137. To tackle the problem of poor irrigation performance, benchmarking systems have been developed that allow comparison of performance between similar schemes. Benchmarking allows decision makers to measure performance, to identify reasons for variations between schemes, and to draw up an agenda for change. The approach could be generalized within the World Bank as part of the monitoring of key performance indicators. (See IP0904.) 41 Some typical investments Sample investments Technical assistance Monitoring and evaluation systems Impact evaluation studies Economic modeling of multipliers and direct and indirect impacts of multifunctional investments like dams Benchmarking for irrigation modernization 3. REFERENCES Burt. C.M., Clemmens AJ., Strelkoff T.S., Solomon K.H., Bliesner R.D., Hardy L.A., Howell T.A, and Eisenhouer D.E.. 1997. Irrigation Performance Measures: Efficiency and Uniformity. Journal of Irrigation and Drainage Engineering 123(6):423-42. Jensen, M.E., ed. 1973. Consumptive use of water and irrigation water requirements. New York: American Society of Civil Engineers. Rosegrant, M.W., X. Cai, and S.A Cline. 2002. Water and Food to 2025: Policy Response to the Threat of Scarcity. Washington D.C.: IFPRI. WHO (World Health Organization). 2000. Gender, Health and Poverty. Fact Sheet no. 25, June 2000. http/who.intlinf-fs/enlfact251.html World Bank. 1994. Review of World Bank Experience in Irrigation. Washington, D.C.: World Bank, Operations Evaluation Department. World Bank:, 2001. Making Sustainable Commitments: An Environment Strategy for the World Bank. Washington, D.C.: World Bank World Bank. 2002. Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy. Washington, D.C.: World Bank, Operations Evaluation Department. World Bank, 2003. Reaching the Rural Poor: a Renewed Strategy for Rural Development. Washington, D.C.: World Bank World Bank, 2004 a. Agriculture Investment Sourcebook. Washington, D.C.: World Bank, Agriculture and Rural Development Department. World Bank, 2004 b. Water Resources Sector Strategy. Strategic Directions for World Bank Engagement. Washington, D.C.: World Bank World Bank, 2005 a. Agricultural Growth and the Poor: an Agenda for Development, Directions in Development Report. Washington, D.C.: World Bank. Draft - January. World Bank:, 2005 b. Agriculture Water Management, Directions in Development Report. Washington, D.C.: World Bank. In preparation - January. 42