PIM and Financing

Problems and opportunities. Changing the way in which irrigation is financed can help make participatory irrigation management more effective and sustainable. Conventional approaches to irrigation finance through large government implemented projects can build infrastructure, but often create incentives and constraints that fail to promote local resource mobilization for operation, maintenance and improvement of irrigation systems, displacing and discouraging local efforts. Instead there is a need for financing mechanisms that encourage and strengthen local capacity. Developing financing mechanisms suitable for PIM requires overcoming several challenges:

Large investments. Construction and repair of irrigation systems sometimes requires large-scale, lumpy investments, demanding financial and technical resources in excess of those available locally. Unless the financial capacity of WUA can be strengthened they are likely to remain dependent on external aid to finance major construction works.

Externalities. Many of the benefits from investment in irrigation go not to farmers but to urban consumers. Profits in irrigated agriculture are often low and uncertain. The aggregate effect of irrigation investment often pushes down crop prices, as do other trends, so that farmers receive only a portion of the benefits of increased productivity, while the gains may primarily go to those who purchase irrigated crops, (including poor rural households). Irrigation investments that increase demand for goods and services, such as farm inputs and agricultural labor, yield multiplier effects beyond the benefits received directly by farmers. The distribution of benefits, and more general government policies to assist farmers, underlie the reality that almost all governments around world continue to assist agriculture and water resources. Rather than focusing only on reducing or elminating subsidies there is a need to ensure that any continuing government assistance for irrigation will be used as productively as possible.

Gaps in governance and finance. Water user organizations often lack the legal status and authority needed to carry out repairs and improvements to irrigation systems. Banks, bond markets and other financial intermediaries are often unaccustomed and unprepared to lend money to water user organizations. Institutional changes and learning may be needed to strengthen local financial capacity.

Finding ways to sustainably finance irrigation investments requires financing arrangements that fit with local conditions and needs to follow feasible pathways for developing the financial capacity of irrigators organizations. Simply increasing participation in conventional large-scale construction and rehabilitation projects may not lead to sustainable changes. However, strategies are available can help make financing for PIM more effective and sustainable.

Rechanneling financing for irrigation. Rather than channeling irrigation fees into the government treasury or government agency budgets, the funds can be retained by or returned to WUA. Experience with participatory irrigation management has shown that when irrigator's organizations have a greater say in how money is spent, they find ways to spend money more effectively, with less waste and solutions better attuned to local priorities. This can range from greater consultation during planning and implementation to putting WUA fully in charge of hiring contractors and disbursing funds.

Smart subsidies. Too often, government assistance is provided in ways that tend to displace and discourage local efforts. Any government subsidies that are provided can be linked to local resource mobilization, through eligibility criteria, matching formulas and other mechanisms. Grants can be offered on a competitive basis, subject to eligibility criteria for local contributions and WUA performance in maintaining irrigation infrastructure. One way to structure such financing is in the form of an irrigation investment fund.

Incremental investment. In practice, many of the works involved in repairing, replacing and upgrading infrastructure are relatively small, scattered throughout irrigation canal networks, and can feasibly be done piecemeal over a period of many years. An incremental approach to infrastructure improvement is more affordable, and more within the financial and managerial capacity of local irrigator's organizations. Rather than assuming that repairs and improvements must be deferred and then done as part of a single large project, a gradual approach to repairing, replacing and upgrading infrastructure can be applied.

Reserve Funds and replacement cost budgeting. Discussion of reform in irrigation finance is often framed in terms of "cost recovery," tending to look backward at the large capital outlays that government has sunk into irrigation systems. A more constructive approach is to look forward toward ways of enabling WUA to pay for repair, replacement and further development of shared irrigation infrastructure in the future. WUA should be able to accumulate money in a reserve fund to cover future needs. Initially irrigators may prefer to contribute directly to specific works, but over time if a WUA peforms well then members may grow more confident that fees will be used wisely and efficiently, and so more willing to pay higher fees that can be used to build up reserve funds for replacing and improving infrastructure.

Making WUA creditworthy. If WUA have to rely only on the cash, labor and materials they can collect in a single season, then their capacity is quite limited. If there are ways to borrow larger chunks of money and repay in installments over a period of months or years, this can greatly increase WUA financial capacity. Strengthening the capacity of WUA to borrow may require legal changes to strengthen the formal legal status of WUA and their authority to collect fees. However the most important need is to build creditworthiness with banks and other financial institutions. In some cases bond markets may be available, but often a more feasible option may be to work with banks and other local financial institutions. If WUA have bank accounts and demonstrate their capacity to mobilize and manage money, then that cash flow constitutes the most important basis for making financial institutions confident that loan will be repaid. Cash flow, not collateral, is the key requirement to establishing and increasing the creditworthiness of WUA. Borrowing can start small, taking out loans to be repaid withing a few months or years, and then expand as WUA demonstrate their capacity to repay.

Sources for additional information:

1. A theme paper on irrigation finance from the 2001 IMT E-mail conference reviewed issues of who should pay, incentive systems, fees and WUA financial management, followed by discussion and a synthesis note
2. The conference website also includes a presentation on: "Toward a New Paradigm for Maintaining and Financing Irrigation Systems: The Irrigation Investment Fund."
3. Lessons from microfinance for building WUA financial capacity are discussed in Making Irrigator's Organizations Creditworthy.
4. Additional documents on financing PIM can be found in the library section of this website, by searching this website, and through search engines such as Google.