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Report No. 1963-BD

Bangladesh: Irrigation Water ChargesA Discussion Paper With Proposals for Action toDevelop an Irrigation Water Charge Policy

March 6, 1978 FILL COPSouth Asia Projects DepartmentAgriculture Division A

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

The Bangladesh Taka is pegged to the Pound Sterlingat a rate of L 1.00 = Tk 26.70. The Pound floats relativeto the US Dollar and consequently, the Taka, US Dollar rateis subject to change. The rate below has been used through-out this report, except where stated to the contrary.

US$1 = Tk 15.0

Tk 1 US$0.067Tk 1 million = US$67,000

WEIGHTS AND MEASURES

1 acre (ac) = 0.405 hectares (ha)1 maund (md) = 82.3 lbs (37.3 kg)1 metric ton (ton) = 26.8 mdI cubic foot per = 0.0283 cu meters per

second (cusec) second

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BADC = Bangladesh Agricultural Development CorporationBKB = Bangladesh Agricultural Development Bank

(Bangladesh Krishi Bank)CE Certainty EquivalentDTW = Deep TubewellEV = Expected ValueGDP = Gross Domestic ProductGOB = Government of BangladeshGVP = Gross Value of ProductionHYV = High Yield VarietyIRDP = Integrated Rural Development ProgramLLP Low-Lift PumpNVP Net Value of ProductionO&M = Operation and MaintenanceSTW = Shallow TubewellTIP = Thana Irrigation ProgramWDB = Water Development Board

FOR OFFICIAL USE ONLY

BANGLADESH

IRRIGATION WATER CHARGES

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS . .......................... . * i - ii

I. INTRODUCTION ........... .. . ............... ..................... .

II. BACKGROUND ............. ......................... . 2Agricultural Sector ................................. 3Irrigation ... ..... *................. **** ** * * * * * **** * 3

III. WATER CHARGES REVIEW .... ............. . . ..... ... .. . ........ * 5Present Policies . .................... ............ 5WDB Schemes ........... . ...................... 5BADC Schemes . .................. **..O.*.* ... * ..... 6Issues in Formulating Water Charges Policy ....... 8An Assessment of Current Policies ................ 9

IV. CONCLUSIONS AND RECOMMENDATIONS ..................... 12

ANNEXES

1. IDA Support for Water Resource Development

2. Extracts from Development Credit Agreements

3. Cost Recovery Policies for Irrigation Projects:Informal Guidelines

4. Scope for Cost Recovery

5. Draft Terms of Reference for the ProposedWater Charges Unit

BANGLADESH


SUMMARY AND CONCLUSIONS

1. Over the past two decades, the Government of Bangladesh (GOB) hasmade large investments for the control and development of the country's waterresources. However, so far it has given little attention to formulatinga comprehensive policy on recovery of costs from the beneficiaries of thevarious water development schemes. The purpose of this paper is to assistGOB in formulating appropriate policies in this regard consistent with itsnational objectives of "growth", "efficiency" and "equity."

2. A review of existing policies on irrigation water charges indicatesthat the two major agencies involved in water resource development in Bangla-desh -- the Water Development Board and the Bangladesh Agricultural Develop-ment Corporation -- have so far followed essentially independent policies onthe recovery of costs from the beneficiaries of their developmental schemes.Although most irrigation facilities in Bangladesh are subsidized, the levelof subsidies varies considerably among the various modes of irrigation; costrecovery rates range from practically nothing for gravity schemes, to 30%for deep tubewells, 50% for low-lift pumps, and 75-90% for shallow tubewells.These subsidies, besides being a heavy burden on the Government budget, promoteinefficient resource allocation, wasteful water use as well as capacity under-utilization. Also, the present subsidies mostly benefit the relatively "betteroff" farmers rather than the small or marginal farmers.

3. Analysis of the benefits associated with irrigation facilities indi-cates that such facilities are highly attractive to the users and the currentcharges can be raised substantially without any adverse effect on the overalldemand for irrigation.

4. Present charges on irrigation facilities other than shallow tubewellsare so low that as a first step serious consideration should be given to sub-stantially raising the charges on gravity irrigation schemes, low-lift pumpsand deep tubewells.

5. For the longer run, GOB should develop a more refined policy aimedat establishing cost recovery levels that are mutually consistent with pro-viding adequate incentives to farmers to use irrigation water; beneficiaries'abilities to pay; and minimizing the charge on the national budget for theconstruction, operation and maintenance of irrigation facilities. It isrecommended that GOB should establish a Water Charges Unit to conduct thenecessary surveys and analyses, and to draft the policy together with a time-table for its implementation. The Unit should be directed by a high levelcommittee representing the Planning Commission, Ministry of Finance,

Ministry of Agriculture, Ministry of Water Resources and Flood Control, BADC,WDB and IRDP. A section within the Unit should be responsible for the inves-tigation of means of improving operational efficiency and should work closelywith the operational agencies in this field -- BADC, WDB and IRDP. Subjectto request by GOB, IDA would be prepared to finance through a TechnicalAssistance Credit, the equipment and consultancy services required by theproposed Unit as well as provide part-time services of IDA staff in develop-ing programs for improving the operational efficiency of the irrigationfacilities.

BANGLADESH


A Discussion Paper With Proposals for Action toDevelop an Irrigation Water Charge Policy

I. INTRODUCTION

1.01 Since the late 1950s, the official developmental strategy forthe agricultural sector of Bangladesh has heavily emphasized the controland development of the country's water resources. Typically, over the pasttwo decades, public investments in irrigation and flood control works haveaccounted for some 10-15% of the total developmental budget and over one-quarter of the total allocations for agriculture and rural developmentactivities. A rough estimate of the total Governmental expenditures, at1977 price levels, for development of water resources during the past twodecades, would be about US$1.5 billion. 1/ As a result of these efforts, itis estimated that over the past two decades, about 1.7 M ac have been broughtunder irrigation and about 2 M ac have been provided with total or partialflood protection. While there is a considerable variation in the levelof benefits derived from the various water development schemes, there islittle doubt that wherever reasonably assured irrigation water has beenmade available, there has been a marked increase in farm production andincome levels.

1.02 The World Bank Group has long supported efforts aimed at watercontrol and development in Bangladesh. Prior to independence, the BankGroup made four credits to the erstwhile Province of East Pakistan, totalingUS$13.6 M for surface irrigation projects, two engineering credits totalingUS$3.2 M for preparation of irrigation projects and one credit of US$2.0 Mfor technical assistance to the East Pakistan Water and Power DevelopmentAuthority. Since independence in 1972, there have been six new waterdevelopment credits, totaling US$113 M (Annex 1). A number of other irri-gation and drainage projects are in various stages of preparation.

1.03 Practically all irrigation development in Bangladesh has beenfinanced from the Government budget. The charges assessed to the benefi-ciaries vary with the type of irrigation; in most cases, however, they in-volve very large subsidies.

1.04 It has become increasingly clear that the present policies onirrigation water charges need a thorough review and overhaul because:

1/ This should be treated as indicative only; due to incomplete data,exchange rate variations, rapid inflation, and complex accountingprocedures the "value" of actual investments may differ significantlyfrom this estimate.

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(a) being the result of a series of ad hoc decisions, theycontain numerous anamolies e.g. different charges forsimilar facilities in the same locality depending uponthe implementing agency;

(b) they impose an excessive burden on the Government budget.Given the considerable scope for increasing chargesfrom the present low levels, the burden could be sub-stantially reduced, if not eliminated altogether;

(c) they promote wasteful water use as well as capacityunderutilization. Also, the current rate structure actsto distort relative economic priorities by promotingdemand, and therefore developmental expenditures onthe least efficient modes of irrigation; and

(d) they mostly benefit the relatively "better off"farmers and the rural elite rather than the smallfarmers.

On several occasions, the Bank Group has stressed the need for the formula-tion and implementation of a new water charges policy, more in line with thenational objectives of "growth", "efficiency" and "equity." In fact, sinceindependence, all IDA credits for irrigation have included specific agree-ments by GOB to prepare and implement plans for "appropriate" cost recoveryfrom the beneficiaries (Annex 2). However, little progress has been made inthis regard and GOB is already in default of cost recovery covenants in fourprojects.

1.05 The purpose of this paper is to help GOB in the formulation ofappropriate cost recovery policies for the future which would, inter alia,be in accord with the requirements of the credit agreements for IDA-financed irrigation projects. The paper, based on the findings of a Bankmission led by Mr. F. L. Hotes in the late summer of 1976, was preparedby Mr. P. Garg.

II. BACKGROUND

2.01 Bangladesh, with an estimated population of 81 M in an area of55,000 sq mi, is among the most densely populated nations in the world.About 90% of the population is rural. Due to the poor natural resourcebase and inadequate development of human resources, per capita income levels,estimated at US$125 (1977 price levels), are among the lowest in the world.

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ARricultural Sector

2.02 Agriculture dominates the economy of Bangladesh. It employs about80% of the labor force, generates 55% of the Gross Domestic Product (GDP)and accounts for over 90% of the country's foreign exchange earnings. Some22.5 M ac (out of a gross area of 35 M ac) are under cultivation. Over thepast five years, the annual cropped area has averaged about 30.3 M ac givinga cropping intensity of about 135%. Rice, by far the most important crop,accounts for 80% of the cropped area; jute, the main export, for 6% and avariety of other crops such as pulses, oilseeds, wheat, sugarcane and vege-tables for the remaining 14%.

2.03 During the 1960s, agricultural production grew at an annual rateof about 2.5% and foodgrain production at a rate of 2.4%. However, bothlagged behind the growth in population which averaged 2.8%. During thefirst half of the 1970s, for a variety of reasons, production remained belowthe 11.8 M ton peak of 1969/70. Since then, due to generally favorableweather conditions and improved availability of fertilizers, foodgrain produc-tion has increased significantly (1975/76: 12.8 M tons; 1976/77: 11.8 Mtons; and, 1977/78 (provisional): 13.2 M tons). However, production isstill inadequate to satisfy domestic requirements. Foodgrain imports haverisen steadily from 700,000 tons in 1960/61 to an annual average of about 2 Mtons in the 1970s. Substantial food imports are likely to continue for theforeseeable future.

2.04 The major objectives of the Government's agricultural developmentefforts are to achieve food self-sufficiency, create employment for the ruralpoor, and to increase export earnings. Its strategy for development of thesector emphasizes strengthening of rural institutions, improvement of farminput supplies, better utilization of existing irrigation facilities, andfurther expansion of irrigated area expecially through low cost, quickyielding, minor irrigation schemes.

Irrigation

2.05 For centuries, Bangladesh farmers have used bucket-lift methodsfor irrigating a dry-season rice crop (boro) on lands near low-lying waterbodies and perennial rivers and streams. Until the late 1950s, however,almost no effort was made for further development of the water resourcesand the irrigated area remained stagnant at around I M ac. The estab-lishment of the Water Development Board (WDB) in 1959 and the BangladeshAgriculture Development Corporation (BADC) in 1961, gave a major impetusto the development of water resources in Bangladesh. Currently, irrigationis available for about 2.7 M ac -- 0.2 M ac by gravity supply; 0.2 M ac bygroundwater from tubewells; 1.3 M ac by low-lift pumps, and about 1.0 M acby traditional methods.

2.06 Constraints to Development. The development of water resourcesin Bangladesh presents many difficulties. The need to maintain minimumflows in the rivers during the dry season (in order to prevent salineintrusion from the Bay of Bengal and adverse effects on navigation andfisheries) limits the potential for surface water irrigation. The flat

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terrain precludes the development of large reservoirs for either floodcontrol or water storage for irrigation in the dry season. Poor trans-portation facilities cause problems in moving equipment and materials toconstructibn sites. Finally, the small holding size and high degree offragmentation -- the typical holding is about 2 ac fragmented into fiveplots -- necessitates the organization of (and cooperation among) a largenumber of farmers for full utilization of even minor irrigation facilities.

2.07 Strategy, Programs and Performance. In the early i960s, much ofthe development effort was focused on large-scale gravity irrigation andflood control projects such as the Ganges-Kobadak, Chandpur and CoastalEmbankment Projects. Although these projects now provide irrigation toabout 0.2 M ac and flood protection to about 1.5 M ac, their overall impacthas been disappointing. Most of these projects have suffered from largecost overruns and long implementation delays and benefits to date havegenerally been much smaller than projected.

2.08 Considerably more successful have been the relatively low-costand quick-yielding minor irrigation schemes such as low-lift pumps and tube-wells. Most of these pumps and tubewells have been deployed and maintainedby BADC. Low-lift pumps (LLP) are small capacity (1-2 cusecs), diesel-powered centrifugal pumps used to raise irrigation water from perennialstreams and ponds. Starting from scratch in the late 1950s, the program hasnow expanded to some 40,000 pumps, irrigating an estimated 1.3 M ac. De-spite problems of underutilization and inadequate maintenance, the LLP pro-gram is economically attractive. The major constraint to further expansionof the program is the availability of surface water during the dry season.It is estimated that installation of some 10,000 additional pumps wouldexhaust the current potential. Further expansion of the program would haveto be in conjunction with improvement of natural channels, building of con-trol structures and regulators and, in some cases, double pumping (e.g.IDA-supported Barisal, Karnafuli and Muhuri Projects). This would be moreexpensive but still quite attractive in many cases.

2.09 Tubewells to exploit groundwater offer one of the best prospectsfor further expansion of the irrigated area. Conservative estimates basedon preliminary investigations indicate that some 4 M ac could be irrigatedby tubewells. Tubewell irrigation, although somewhat costlier than that byLLPs, has the advantage that it allows extension of irrigation to many areaswhere surface water resources have already been exhausted (e.g. northwestregion). Two kinds of tubewells are used in Bangladesh -- deep tubewells(DTWs -- typically 8-in diameter wells equipped with 20 hp diesel enginescoupled to submersible pumps and yielding about 2 to 3 cusecs) and shallowtubewells (STWs -- 4-in diameter wells equipped with 5 to 6 hp diesel enginesand a surface-mounted centrifugal pump, typically yielding a fraction of acusec). Until recently, much of the emphasis in groundwater developmentwas placed on DTWs. Some 4,000 DTWs, irrigating an estimated 150,000 ac,are currently in use. Programs for installation of an additional 5,000 DTWs(including about 3,000 under the IDA-financed NW Tubewells Project --Credit 341-BD) are also underway. It is expected that by 1978/79, all 9,000DTWs would be in operation and the irrigated area should total at least0.3 M ac.

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2.10 Compared to DTWs, STWs are simpler to install and maintain, re-quire a much smaller group of farmers for optimal utilization and are con-siderably less expensive. Accordingly, GOB has rightly shifted its priorityto STWs. Although so far only about 7,000 STWs have been installed, propo-sals have been approved or are under consideration for installing an addi-tional 35,000 STWs over the next 4-5 years -- 2,500 under the IDA-financedRural Development Project (Credit 631-BD), 5,500 under an ADB-financed Agri-cultural Credit Project, 17,000 under bilateral assistance from Japan, Germanyand India, and 10,000 under the IDA-financed STW Project (Credit 724-BD).By the early 1980s, the STWs are expected to irrigate about 0.4 M ac.

2.11 Overall performance in minor irrigation has been relatively satis-factory but serious problems remain in utilization and maintenance of irri-gation facilities. Pump/well utilization is only 15 to 20 ac per cuseccompared to the potential of 25 to 30 ac per cusec. The underutilizationis partly due to the poor siting of pumps and tubewells, often under polit-ical pressures, and partly a reflection of difficulties in organizing andmanaging groups with a large number of farmers. The maintenance problemsare due to inadequate workshop facilities, poorly trained field staff, andlack of incentives for farmers and BADC mechanics to keep the equipment ingood working condition. Heavy subsidies on irrigation by GOB also contri-bute significantly to inefficient utilization and poor maintenance.

III. WATER CHARGES REVIEW

Present Policies

3.01 The two major agencies involved in water resource development inBangladesh -- WDB and BADC -- have so far followed essentially independentpolicies as regards the recovery of costs from the beneficiaries of theirdevelopmental schemes. Although both agencies have subsidized their facil-ities, the users of the WDB facilities have generally enjoyed a markedadvantage over those of the BADC facilities. Specific details of thecurrent policies of the two agencies are described below.

WDB Schemes

3.02 Until June 1976, WDB levied no charges for water on the benefi-ciaries of its gravity or gravity-pumping schemes. In areas wheresuch schemes required the supplemental use of low-lift pumps, WDB imposedno, or only nominal charges for the use of the low-lift pumps as well. OnMay 10, 1976, GOB announced that a 1963 Irrigation (Imposition of WaterRates) Ordinance, which had never been implemented, would become effectivefrom July 1976. As promulgated, the Ordinance provides for the impositionof a water rate of 3% of the gross incremental benefits accruing to theowners or occupiers of cultivated lands benefiting from the developmentalschemes of WDB. According to the Ordinance, the benefited lands are to begazetted from time to time and the incremental benefits are to be estimated

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by determining the gross returns from the lands prior to and after thesupply or regulation of water by the WDB schemes. 1/

3.03 Very few details were available either on how the level of chargeswere to be established or how they were to be collected. WDB indicated,however, that it planned to use 1967/68 as a base year for preinvestmentyields, and some crop-cutting experiments to establish actual yields in1976/77. Details on the acreage to be affected by the implementation ofthe Irrigation Ordinance or the likely level of per ac charges were un-available. The 1976/77 budget estimated that collections would amount toabout Tk 2 M for the year, although informal WDB estimates were that thecollections could go as high as Tk 10 M. According to information availableto-date, there was no collection at all during 1976/77 as the details forimplementation of the Ordinance could not be worked out in time.

3.04 As things stand now, beneficiaries of most WDB schemes receivewater as a free good. It is estimated that once the Irrigation Ordinanceis implemented, the charges would be about Tk 50-60 per ac. It is unclearhow soon the implementation of the Ordinance will start. Rowever, when itdoes, it will not go very far in meeting WDB expenditures, which are esti-mated at about Tk 40 M per annum for O&M alone, or about Tk 200 per acirrigated.

BADC Schemes

3.05 BADC is involved in three types of irrigation schemes: low-liftpumps, deep tubewells, and shallow tubewells. The present level of chargesunder the three schemes are as follows:

(a) Low-Lift Pumps (LLPs). LLP program is the most successfulirrigation program in Bangladesh accounting for aboutthree-quarters of the total irrigated area developedthrough GOB schemes. GOB has a monopoly on the import ofpumps, engines and spare parts and effectively controlsthe supply of locally made pumps. Most of the pumps areowned by BADC 2/ and rented to groups of farmers on aseasonal basis although recently BADC announced itsintention to sell 5,000 LLPs to farmers. In additionto paying for the direct operating costs (i.e. diesel,lubricating oil and the operator salary), the users

1/ Currently, areas gazetted are those served by the following WDBProjects: Groundwater and Low-Lift Pump Irrigation Projects inthe Northwest, Buri Bund, Bhulli Bund, Path Raj Bund, and DhurangIrrigation Schemes; Teesta Barrage Sub-Project of Buri-TeestaProject; Kushtia Units of Ganges-Kobadak Project; and Dacca-Narayanganj-Demra Project.

2/ A small number of LLPs and DTWs, particularly in the northwestregion, are owned and managed by WDB.

pay Tk 400 for spare parts and Tk 600 as rental charges.Assuming 800 hours of operation per year (necessary toirrigate about 40 ac of boro), the estimated costs perLLP is about Tk 7,000 or about Tk 175 per ac of boro. 1/Taking into account the pump amortization and indirect O&Mcosts borne by BADC (e.g. workshop facilities), the costborne by the users represents a recovery rate of about50% (Annex 4, Table 2).

(b) Deep Tubewells (DTWs). Like LLPs, most DTWs are alsoBADC-owned and rented to groups of farmers. The userspay for diesel, lubricating oil and the operator salary.In addition, they pay to BADC Tk 400 for spare partsand Tk 1,200 as rental charges. Assuming 1,000 hoursof operation per year (50 ac of boro), the estimatedcosts per DTW are about Tk 11,000 or about Tk 220 per acof boro 1/. Because of the relatively high capitalcosts, the cost recovery rate for DTWs is only about30% (Annex 4, Table 3).

(c) Shallow Tubewells (STWs). Unlike LLPs and DTWs, theGovernment policy on STWs calls for their private owner-ship. Under the ongoing "hire-purchase" scheme, to bephased out over the next few months, BADC sells STWs tofarmers roughly at cost (net of import taxes). The userspay 10% of the price as downpayment and the rest in fiveequal annual installments. No interest is charged on theunpaid balance. Maintenance is supposed to be providedfree of charge by BADC. All other operating expenses areborne by the users. Assuming 700 hours of operation peryear (irrigating about 12 ac of boro), the estimatedannualized cost to the users under the "hire-purchase"scheme is about Tk 5,500 per STW or about Tk 450 per acof boro, representing a cost recovery rate of about 75%.Under the IDA and ADB Shallow Tubewells Projects, theessential terms would be similar to those under the"hire-purchase" scheme. However, buyers would pay aninterest of 12% per annum on the outstanding balance.Also they would pay 50% of the indirect O&M costs in-curred by BADC. The estimated costs to users wouldbe about Tk 7,000 per STW or about Tk 580 per ac of boro.The corresponding cost recovery rate would be about 90%(Annex 4, Table 4).

3.06 Two qualifications to the estimated per ac charges given aboveare worth mentioning here. First, they ignore any "extra-legal" payments

1/ The per ac costs are only slightly affected by capacity utilizationsince most of the costs borne by the users are directly proportionalto the number of operating hours.

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by the users for obtaining and operating minor irrigation facilities suchas pumps and tubewells. In practice, at least in some cases, the farmershave to pay a substantial sum to BADC field staff at various times, e.g.in getting allocation of a newer pump 1/ or getting timely maintenancefrom BADC mechanics in case of a breakdown. Second, the above estimatesassume that the per ac costs would be applied uniformly to all members ofthe group. In practice, it often happens that a few relatively "betteroff" farmers take effective control of the pump/tubewell and de facto "sell"water to other members of the group, at rates substantially higher thanthose necessary to cover the various costs. Because of these, the actualper ac cost to the farmers, particularly the small ones, can be consider-ably higher -- as high as Tk 800-1,000 per ac of boro.

3.07 Summary. It is clear that currently a large variation exists inthe charges paid by the beneficiaries of the various irrigation schemes,ranging from practically nothing in the case of WDB schemes to about Tk 580per ac (boro) for STWs schemes. The continued demand for the higher pricedirrigation sources (LLPs, STWs) 2/ as well as willingness of farmers to paysubstantial premiums over the official rates are indicative of the scopefor higher charges, at least for users who at present pay none, or nominalcharges only.

Issues in Formulating Water Charges Policy

3.08 There are three general considerations which go into the formu-lation of a water charges policy. These are:

(a) Economic Efficiency. The extent to which the variousirrigation facilities, often built at a heavy cost tothe economy, are used to the best advantage of the eco-nomy. In turn, this implies minimizing wasteful use,avoiding capacity underutilization and using thefacilities for purposes which maximize net returnsto the economy.

(b) Public Savings. The extent to which Government capturespart of the increased net benefits for funding invest-ment in the economy and for operation, maintenance, andrehabilitation of the previously constructed facilities; and

1/ Under the present system it is not uncommon for a farmers' group tobe given a pump different from the one given in the preceding year.

2/ The decline in the number of LLPs fielded during 1976/77 boro wasprimarily the result of extremely low farm gate prices for paddy (aslow as Tk 35 per maund compared to the official procurement price ofTk 74 per maund) due to breakdowns in the GOB's food procurementmachinery.

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(c) Income Distribution. The manner in which the benefitsgenerated by the irrigation facilities are shared by thevarious income groups, particularly the small farmers.

3.09 Two additional, and many times dominating, considerations arethose of political feasibility and availabiliy of suitable administrativemachinery for a satisfactory implementation of the policy. In most devel-oping countries, irrigation charges are a very sensitive issue oftendrawing strong opposition from the "better off," and hence more vocal andinfluential farmers. The socio-economic merits of their case notwith-standing, it would be unrealistic to ignore the prospects of such opposi-tion in formulating the policy. Similarly, for successful implementation,it is necessary that the policy not be too demanding administratively, orat least that it be phased such that adequate time is available for developingsuitable new administrative mechanisms.

3.10 Annex 3, a paper prepared by the World Bank staff to assist thoseengaged in formulating cost recovery policies for irrigation investments,includes further discussion of the various relevant issues.

An Assessment of Current Policies

3.11 In order to assess the extent to which the present policies onirrigation water charges satisfy the general criteria listed in para 3.08,a review was undertaken of the cost/benefit structure of the various typesof irrigation prevalent in Bangladesh. The review, detailed in Annex 4, ispreliminary and the results from the review should be treated as indicativeonly. Also, due to a lack of adequate data on farm sizes and family incomes,the review is largely concerned with the issues of "economic efficiency" and"public savings" only.

3.12 The review deals with two assumed cropping patterns (with the mainirrigated crops being boro rice or winter wheat, respectively) in combina-tion with three alternative assumptions on foodgrain prices:

Alternative I: Prices would average 1977 official procure-ment prices (in constant 1977 values).

Alternative II: A continuation of the price situationexperienced during the past two or threeyears, wherein good harvests and largefood aid shipments from abroad havedepressed farm gate prices to 20-25%below official procurement prices.

Alternative III: Prices would correspond to projected 1980world market prices appropriately adjustedfor freight, handling, processing, andquality differentials.

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3.13 The main conclusions from the review are summarized below:

(a) In most cases, irrigation facilities are a highly attrac-tive investment in financial terms. Depending uponcropping patterns and crop prices, the annual net valueof production (NVP) 1/ is increased by Tk 800-2,000 per ac,representing generally a more than 150% increase in the"without irrigation NVP". These levels are more than ade-quate to cover the full per ac costs (capital and O&M) ofirrigation from LLPs and STWs, which are estimated to rangefrom Tk 215-660 per ac. The returns also would be adequateto cover the costs of most DTW operations, estimated atTk 460-880 per ac, but would appear to be inadequate tocover the capital and O&M costs of many composite gravity-pumping schemes which are estimated to range from aboutTk 800-1,300 per ac. The analysis clearly indicates thatfor most irrigation facilities even after a substantialincrease in charges, there would be enough incentive forthe beneficiaries to continue using the facilities and,accordingly, there should be little adverse effect on theoverall demand for irrigation.

(b) The potential for cost recovery is highly sensitive toassumptions about foodgrain prices. Estimated incrementsin NVP would be doubled if the foodgrain prices were to bein accordance with Price Alternative III rather thanAlternative II. On the one hand, this highlights the needfor GOB efforts at stabilization of domestic foodgrainprices; on the other, it indicates the need for keepingpolicies on irrigation charges flexible so as to adapt tothe prevailing foodgrain price levels in the country, andto be able to reflect the effects on farm income of sig-nificant changes in subsidies and/or costs of importantagricultural inputs.

(c) Currently, most irrigation facilities in Bangladesh areheavily subsidized. Cost recovery ranges from a low ofabout 5% for gravity schemes (calculated on the basis ofthe 3% charge described in para 3.02), to 20% for compositegravity-pumping schemes, 30% for deep tubewells, 50% forlow-lift pumps, and 75-90% for shallow tubewells. Generally,the most expensive irrigation modes are also the ones with

1/ NVP is return after deducting all production costs, including costof all labor -- hired and family but excluding irrigation costs.A better indicator of the farmers' willingness to pay for irrigationis the "irrigation rent." Simply stated, "irrigation rent" is theincremental NVP adjusted for uncertainty in farm incomes and appro-priate rewards for farm management. The corresponding per ac irriga-tion rents are estimated to vary from Tk 650-1,500.

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the largest subsidies. As a result, present policiesencourage misallocation of developmental resources asevidenced by the current share of budgetary resourcesdevoted to expensive gravity and gravity-pumping schemes.

(d) Even though the net and gross values of production forwheat growing areas are somewhat smaller than those forboro growing areas, wheat cultivation is more economicalwhere feasible climatically. 1/ This is particularly truein areas with porous soils where boro cultivation means veryhigh seepage losses. Since farmers bear only a smallfraction of the total costs for irrigation, they fail toappreciate the comparative economics of rice and wheatgrowing, and this results in inefficient use of the scarcewater resources.

(e) In many cases, current policies on water charges encouragecapacity underutilization. In the case of LLPs and DTWs,about 85% of the costs borne by the users are direct costs.Consequently, even with serious underutilization of thepump/tubewells, per ac costs to beneficiaries increaseonly marginally. For example, assuming that a LLP isoperated only 400 hours per annum (rather than 800 hours,cf para 3.05), the irrigated area would be only 20 ac ofboro instead of a potential 40 ac. However, the cost perac increases only from Tk 175 to Tk 200. The difference ofTk 25 per ac is a rather small price to pay in order toreduce the administrative problems associated with orga-nizing and managing the larger group of farmers needed tocultivate 40 ac. This explains, at least in part, thesevere underutilization of installed irrigation capacityin Bangladesh.

(f) To make the overall water development program self financing,recovery rates of about Tk 300 per ac for wheat and Tk 600per ac for boro would be necessary. These levels are roughlyequal to those envisaged under the IDA and ADB-financedshallow tubewells projects and only marginally higher thanthose already paid by tubewell buyers under BADC's "hire-purchase" scheme. Were such rates applied to existing irri-gation facilities and those foreseen for the next few years 2/

1/ The imputed value of water, assuming official procurement prices,is about Tk 29 per acre inch for boro growing areas and Tk 43 peracre inch for wheat growing areas.

2/ It is estimated that by the early 1980s, the area irrigated by GOBschemes would total about 2.5 M ac -- 1.4 M ac by LLPs, 0.4 M by STWs,0.4 M ac by DTWs and 0.3 M ac by composite gravity-pumping schemes.

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incremental annual revenues of about Tk 900 M should accrueto Government, a very substantial sum considering thedifficult budgetary situation of GOB.

(g) Although definitive studies on the distribution of irriga-tion benefits are lacking, the limited data availablesuggests that benefits have largely accrued to relatively"better off" farmers. This is because such farmers, beingbetter educated and politically well connected, are ableto influence the siting of developmental schemes in linewith their interests. Also, often they take effectivecontrol of Government-owned facilities, such as LLPs, andextract from small farmers charges substantially higherthan those envisaged under the GOB policies.

3.14 In summary, it would appear that present policies are far fromoptimal as regards the three criteria of "ecoaomic efficiency", "publicsavings" and "income' distribution," and that there is considerable scopethrough appropriate changes in present policies, to do considerably betteron all three accounts.

IV. CONCLUSIONS AND RECOMMENDATIONS

4.01 For most irrigation facilities, particularly the gravity schemes,preseat charges are so far below levels which are financially feasible andeconomically desirable that a first step should be to substantially raise thepresent charges. Specifically, it is.-tecommended that priority considerationbe given to:

(a) doubling rental charges on LLPs and DTWs, i.e. to Tk 1,200per annum for LLPs and the Tk 2,400 per annum for DTWs; and

(b) raising annual charges on gravity irrigation schemes to alevel at least as high as that paid by users of LLPs. Itis estimated that this would require raising the current3% charge on gross incremental production to about 10%.

On a per ac basis, the recommended new charges would mean an additionalcost to users of about Tk 15 per ac in case of LLPs, Tk 30 per ac for DTWsand about Tk 140 per ac for gravity schemes. These measures would addroughly Tk 60 M per annum to GOB revenues. In addition, they would, at leastpartially, rationalize the existing rate structure for the various irriga-tion facilities.

4.02 Additionally, it is recommended that BADC should accelerate itsnewly introduced program of selling LLPs to farmers. By raising rentals,purchase of LLPs by farmers would be made more attractive and sales couldtherefore be facilitated. Purchase arrangements should be similar to thoseunder IDA and ADB supported Shallow Tubewell Projects.

- 13 -

4.03 For the longer run, GOB should develop a more refined overallnationwide policy on water charges. This policy, while applicable to allGovernment and parastatal agencies or entities, would not necessarilyestablish uniform water charges throughout the country and for all typesof irrigation. Basically, the policy should be aimed at establishing costrecovery levels that are mutually consistent with providing adequate in-centives to farmers to use irrigation water and thus with promoting thegrowth of irrigation development; beneficiaries' abilities to pay; andminimizing the charge on the national budget for the construction, opera-tion and maintenance of irrigation facilities.

4.04 The preparation in detail of such a policy will entail a substan-tial amount of work. Farm and household budget surveys and analyses willbe needed to establish definitively irrigation costs and benefits and todetermine the capacity of various categories of farmers to repay investmentand O&M costs without losing the incentive to irrigate. Particular attentionwill have to be paid to the irrigation costs actually incurred by the usersand in case they differ significantly from those intended under the officialpolicies, measures will have to be worked out for minimizing the divergence.The operational efficiency of the various irrigation modes will also requirestudy, and plans developed and implemented to improve efficiency. Ideally,increases in recovery rates should be promulgated hand in hand with actionsaimed at improving the efficiency of irrigation facilities since the twomeasures will be mutually supportive. Additionally, consideration will haveto be given to the means and agencies that will be needed for the physicalcollection of water charges. A difficult issue will be consideration ofthe special arrangements that may be necessary for smaller farmers whoseability to pay for irrigation may be limited.

4.05 Given the magnitude and importance of the task and the involve-ment of several GOB agencies in the irrigation sector, it would appeardesirable that GOB establish a Water Charges Unit to conduct the necessarysurveys and analyses, and to draft the policy and timetable for its imple-mentation. The Unit should be directed by a high level committee representingthe Planning Commission, Ministry of Finance, Ministry of Agriculture, Ministryof Water Resources and Flood Control, BADC, WDB and IRDP. A section withinthe Unit should be responsible for the investigation of means of improvingoperational efficiency and would work closely with the operational agenciesin this field -- BADC, WDB and IRDP. Draft Terms of Reference for the pro-posed unit are given in Annex 5.

4.06 The Unit should give priority attention to irrigation schemes andprojects financed by IDA where GOB has commitments to produce specific costrecovery proposals. The final GOB approved work program for the Unit shouldspecify dates, agreed by IDA, by which proposals for cost recovery on theseprojects would be completed. As data and results obtained in the IDA projectareas can be extrapolated to many other areas in Bangladesh, this initialconcentration on the IDA project areas would in no way inhibit the evolutionof a national policy.

- 14 -

4.07 Subject to request by GOB, IDA would consider:

(a) financing through a Technical Assistance Credit equipment andshort-term consultancy services required by the Unit; and

(b) providing the part-time services of IDA staff to assistin the preparation of investment programs aimed at improvingthe operational efficiency of the irrigation facilities.

ANNEX 1Page 1

BANGLADESH


IDA Support for Water Resource Development

1. Currently, IDA is financing the following six irrigation andflood control project in Bangladesh:

(a) Chandpur II Irrigation Project (Credit 340-BD, 1972, US$13.0 M),to provide flood protection for about 140,000 ac and irrigationfor about 75,000 ac.

(b) Northwest Tubewells Project (Credit 341-BD, 1972, US$14.0 M),to provide irrigation from groundwater for about 180,000 ac bysinking some 3,000 deep tubewells.

(c) Barisal Irrigation Proiect (Credit 542-BD, 1975, US$27.0 M) toprovide irrigation for about 140,000 ac by low-lift pumping.

(d) Karnafuli Irrigation Prolect (Credit 605-BD, 1976, US$21.0 M)for providing irrigation, flood control and drainage to46,000 ac.

(e) Shallow Tubewells Project (Credit 724-BD, 1977, US$16.0 M), toprovide irrigation from groundwater for about 150,000 ac bysinking some 10,000 shallow tubewells.

(f) Muhuri Irrigation Project (Credit 725-BD, 1977, US$21.0 M), toprovide irrigation to about 35,000 ac and improved drainagefor about 50,000 ac.

2. In addition, the following two projects also include support forirrigation development:

(a) Rural Development I Proiect (Credit 631-BD, 1976, US$16.0 M).Includes about US$10.0 M for financing 1,400 LLPs, and 2,500 STWs,expected to increase the irrigated area by about 40,000 ac.

(b) Extension and Research ProJect (Credit 729-BD, 1977, US$10.0 M).Includes about US$0.8 M for assistance in command area develop-ment of 1,500 DTWs.

ANNEX 2Page 1

BANGLADESH


Extracts from Development Credit Agreements

1. Credit 340-BD - Chandpur II ProJect, October 18. 1972

Section 3.08. The Borrower shall ensure that fees are collectedfor the rental in the Project Area of low-lift irrigation pumps, and thatsuch fees shall be on a graduated scale rising by the tenth year of opera-tion to a level sufficient to provide recovery of the full annual cost ofoperating, maintaining and replacing such low-lift irrigation pumps.

Section 3.09. (a) The Borrower shall prepare and submit, or causeto be prepared and submitted, to the Association by a date not later thantwo years from the date of this Agreement (or such other date as may beagreed upon between the Borrower and the Association), a plan providing forrecovery of operation and maintenance costs of the works included in Part Aof the Project, and shall consult with the Association as to the measures tobe taken to give effect to such plan. (Due October 1974.)

(b) The Borrower shall prepare and submit, or cause to be preparedand submitted, to the Association by a date not later than five years from thedate of completion of the Project (or such other date as may be agreed uponbetween the Borrower and the Association), a plan providing for recovery ofas much as practicable of the capital costs of the Project, and shall con-sult with the Association as to the measures to be taken to give effect tosuch plan.

2. Credit 341-BD - N.W. Region Tubewells (Joint Financing Agreement)November 6, 1972

Section 4.14. (a) The Borrower shall ensure that fees are collec-ted for the rental in the Project Area of each tubewell and that such feesshall be on a graduated scale rising by the tenth year of operation to alevel sufficient to provide recovery of the full annual cost of operating,maintaining and replacing such tubewell.

(b) The Borrower shall prepare and submit or cause to be preparedand submitted to the Association by a date not later than five years fromthe date of this Agreement (or such other date as may be agreed upon betweenthe Borrower and the Association) a plan providing for the recovery of asmuch as practicable of the capital costs of the Project, and shall consultwith the Association as to the measures to be taken to give effect to suchplan. (Due November 1977.)

ANNEX 2Page 2

3. Credit 542-BD - Barisal Irrigation Project, April 29, 1975

Section 3.10. The Borrower shall, within two years from the dateof this Agreement, prepare proposals to recover from the farmers benefittingfrom the Project, operation and maintenance costs of irrigation facilitiesunder the Project and as large a proportion of the capital costs as appearscompatible with the maintenance of adequate incentives for participatingfarmers;' said proposals to include consideration of' appropriate arrangementsfor the purchase by farmers of low-lift pumps. While formulating said pro-posals, the Borrower shall keep the Association informed and take into con-sideration such comments as the Association may make in respect of theseproposals. (Due April 1977).

4. Credit 605-BD - Karnafuli Irrigation Prolect, January-28, 1976

Section 4.04. Except as the Association shall otherwise agree, theBorrower shall, within two years from the date of this Agreement, prepareproposals to recover from the farmers benefitting from the Project the fullcosts for operation, maintenance and replacement of the low-lift pumps andother devices (amortized over the expected lift of such pumps and other de-vices at a reasonabe rate of interest) plus the costs of operation and main-tenance of the civil works, under Part A of the Project. Said recovery shallcommence 18 months after completion of physical works of the Project. TheBorrower shall also recover as large a prop9rtion of the capital costs ofthe works included in Part A of the Project as appears compatible with themaintenance of adequate incentives for farmers participating in the Project.In formulating said proposals to achieve the required recovery of costs, theBorrower shall keep the Association informed and take into considerationsuch comments as the Association .may make (Due January 28, 1978).

5. Credit 724-BD - Shallow Tubewells Prolect, July 1. 1977

Section 4.06. (a) The Borrower shall cause BADC to furnish to theAssociation for its comments, not later than December 31, 1978 or such otherdate as shall be agreed with the Association, a plan to recover the operatingand maintenance costs and as much as possible of the capital costs (includ-ing interest thereon at rates sufficient to account for any depreciation orappreciation of said capital) of all irrigation facilities provided or to beprovided by the Borrower through BADC from the beneficiaries of such irrigationfacilities, such plan to take into account, (A) the impact of such plan on theBorrower's budgetary allocations to BADC and the Borrower's growth require-ments for its agricultural sector, (B) the relative efficiency of thevarious modes of irrigation and (C) incentives to the various categoriesof projected beneficiaries.

(b) The Borrower shall consult with the Association on the measuresrequired to implement the plan referred to in paragraph (a) of this Sectionand on an implementation schedule therefore.

ANNEX 2Page 3

6. Credit 725-BD - Muhuri Irrigation Project, July 1, 1977

Section 4.03. Except as the Association shall otherwise agree, theBorrower shall, within two years from the date of this Agreement, prepareproposals to recover from the farmers benefitting from the Project the fullcosts of operation, maintenance and replacement of the low-lift pumps and.other devices (amortized over the expected life of such pumps and otherdevices at a reasonable rate of interest) plus the costs of operation andmaintenance of the civil works under Part A of the Project. Said recoveryshall commence 18 months after completion of physical works of the Project.The Borrower shall also recover as large a portion of the capital costs ofthe works included in Part A of the Project as appears compatible with themaintenance of adequate incentives for farmers participating in the Project.In formulating said proposals to achieve the required recovery of costs,the Borrower shall keep the Association informed and take into considerationsuch comments as the Association may make.

BANGLADESH ANNEX 3Page 1


COST RECOVERY POLICIES FOR IRRIGATION PROJECTS:

INFORMAL GUIDELINES

Table of Contents

Page No.

1. INTRODUCTION 1

II. PRINCIPLES 1

Economic Efficiency 1

Income Distribution 2

Public Savings 3

III. SELECTED ISSUES

Sector-wide Setting 3

Vollmetric Pricing 4

Benefit Taxes 4

Land Redistribution 6

Need for Grace Periods 6

IV. bMASURING COST AND RENT RECOVERY 6

V. E=ENT OF COST RECOVERY 10

Note- This paper has been prepared by Messrs.A. Ray, C.Bruce and F.L.Hotesof the World Bank staff, for the informal guidance of personsinvolved in establishing cost recovery policies for irrigationprojects. It represents their personal interpretation of impor-tant issues and approaches to the question, and the views expressedare not necessarily those of the World Bank. (August '976)

ANNEX 3Page 2

COST RECOVERY POLICIES FOR IRRIGATION PROJECTS:

Informal Guidelines

I. INTRODUCTION

1. The development costs and recurrent costs of operation and maintenance(O&M) of irrigation projects tend to be high, on a per hectare or per projectbeneficiary basis, compared with many other forms of agricultural investment andother agricultural inputs. Hence the charges made for irrigation water in rela-tion to the investmnt and O&M costs to the public sector of supplying water isan important issue in the formulation and operation of irrigation projects andthe irrigation components of rural development or other multi-purpose projects.

2. This is an informal discussion paper intended to assist Bank staffand others in developing satisfactory approaches to cost recovery issues. Itattempts to explain only the general framework in terms of which recommendationson cost recovery should be developed in specific cases. It puts special emphasistherefore on the three basic aspects of costrecovery analysis, viz.,

-economic efficiency - the extent to which scarce waterresources are optimally allocated among different uses;

--income distribution - the manner in which the benefitsflcwing from irrigation are shared among project benefi-ciaries; and

-public savings - the extent to which government capturespart of the increased net benefits for funding futureinvestment in agriculture and elsewhere.

Indeed, the principles set forth here are generally relevant to all kinds ofpublic sector projects,and in particular, to kindred projects such as drainage.flood control, settlement and other kinds of land development projects.

II. PRINCIPLES

Economic Efficiency

3. The first of the principal issues requiring analysis is concernedwith the level and structure of the prices to be charged for supplying theirrigation water input so as to minimize waste and to allocate it optimally,or, to put it another way, to maximize the project's net benefit to the economy.now feasible is it to charge such "economic efficiency" prices? True efficiencypricing is rarely encountered in existing irrigation projects since it normallyrequires accurate measuring of supplies by metering the volume of water delivered(or close volumetric estimates), plus a sales mechanism to obtain market-clearingprices for the water. There are both technical and political problems in suchrequirements. However, even a nominal price for water would offer users someincentive to eliminate at least some of the conspicuous waste and over-wateringthat often results in drainage and salinization problems which occur when water

ANNEX 3Page 3

is treated as a free good. Volumetric pricing of water, whether through theactual installation of meters or through other means of estimating water allo-cation, are used in several countries. It is desirable, therefore, to investi-gate seriously the possibilities of pricing based on volume metering (or approx-imations thereto) in irrigation projects, rather 'than automaticallyruling outsuch possibilities.

4. Even if it were possible to charge economic efficiency prices, suchprices may not be compatible with income distribution and public savings/invest-ment goals. Hence, other methods of assessing charges may also have to be con-sidered to ensure an equitable income impact of the project and an adequate re-covery of project costs, with charges that are within the caciyofbenefici-aries to pay and leave them with adequate incentives to participate. Some re-covery of benefits and costs will normally result from existing general taxes,say, an export tax, or income tax. But this recovery is not geared to the cir-cumstances of the particular project and is often unsatisfactory from the pointof view of both income distribution and public savings. Moreover, capturing alarger part of the benefits and recovering more of the costs of a project throughan increase in general taxation impinges also on those who do not directly bene-fit from the project. Changes in general taxation should be decided on broaderfiscal grounds, and not just within the context of a particular project. Hence,any recovery of costs and benefits considered necessary beyond those throughefficiency pricing, if any, or existing general taxes, should be selective andaffect as much as possible the project beneficiaries only. Such measures arehere designated as "benefit taxes."

Income Distribution

5. Specific taxes designed to capture part of the benefits of a projectshould take into account the ability of project beneficiaries to pay such taxes.This means that benefit taxes should allow for differences in net benefitsgenerated by the project as well as for differences in income levels: :nshort, benefit taxes should be progressive, while taking into account disincen-tives, tax evasion and problems of cost collection. These will be discuasedlater.

6. To serve as an indicator of benefits received, the increase Laincome induced by the project clearly must be net of a number of factors.Instead of income,the concepts of "project rent," the "rent of individualfarmers" and the "rent of income groups" should be used. Rent, in thiscontext, is defined as follows: one starts with the incremental grossvalue of farm production, and arrives at "rent" by deducting the value ofall incremental cash payments, incremental depreciation of farm assets, theimputed values for incremental family labor and management, a return on in-cremental own capital, incrpmental general taxes, and an allowance for addi-tional risk/uncertainty; incremental water charges or special benefit taxesrelated to the project are not deducted. In practice, estimates of rent canonly be approximate, since several of these elements are difficult to determine.

ANNEX 3Page 4

7. It is desirable to identify the target income group, preferablyclassified into a number of sub-groups. One such classification uses thecritical consumption level (CCL) as the reference point, with the CCL beingdefined as the (consumption) level at which the social value of a uait ofextra consumption equals the social value of a unit of extra public revenue.In principle, those who remain below the CCL are judged to be so poor thatno additional tax burden should be imposed on them, while those who remainabove the CCL should be taxed progressively by a proportion of their incre-mental rent. The CCL varies considerably from country to country: as arough guide, it is likely to range between two-thirds and one-third of thenational average level of income. The CCL is an extremely important conceptin cost recovery, especially in projects deae.Ang with small farmers. It shouldnot change with projects, but should rpmnin the same for all projects in thecountry. If no special estimates are available, then the CCL should be takenas one-half the national per capita income.

Public Savings

8. Most governments in developing countries are short of fiscal re-sources for development, and such resources are therefore at a premium bycomparison with additional consumption, at least that of relatively moreaffluent citizens. Consequently, it may be desirable for the government tocollect more revenues than would result solely from efficiency pricing (whichin any case, is frequently impractical). This would help make projects finan-cially self-supporting and enable governments to undertake additional ruraldevelopment projects that would reach a larger number of the rural poor. Onthe other hand, as suggested in the previous paragraph, the project benefici-aries may be so poor, i.e., below the CCL, that it would be undesirable torecover costs greater then would result from efficiency pricing of water, andit may be desirable to recover less. The trade-offs between these considera-tions will determine the appropriate level of cost recovery.

III. SELECTED ISSUES

9. The issues that tend to arise in the case of irrigation Projectsare discussed below.

Sector-wide Setting

10. Recommendations on benefit taxes and cost recovery policies for aparticular project should be related to nationwide cost recovery policies inthe irrigation sector, both to ensure consistency of principles and becausein practice it is often difficult to change policies through a single project.Changes in sector policies are often desirable and could be a topic for aspecial study. The consistency referred to above does not mean uniftrm ityof water charges or benefit taxes. Volumetric water charges should reflectmarginal supply costs,which may differ from project to project and betweendifferent areas within countries, and benefit taxes should differentiatebetween income classes, preferably on a progressive basis.

ANNEX 3Page 5

Volumetric Pricing

11. To meet the goal of efficiency, volumetric pricing of water isdesirable in all irrigation schemes, but is likely to be most easily adoptedin public tubewell and pumping schemes where deliveries are relatively easilymetered. Where metering is too difficult or costly to allow volumetric pricing,it may sometimes be feasible to use alternative charging schemes that havesimilar efficiency effects. However, ualess proxies for volumetric pricing,for example, differential taxes on crop production related to the water consump-tion of the crops, are carefully constructed, they may induce uneconomic crop-ping patterns and water use.

Benefit Taxes

12. Efficiency pricing of irrigation water is usually not feasible, andat any rate efficiency pricing, or some form of volumetric pricing togetherwith the effects of general taxation, are unlikely to meet fully the objectivesof income distribution and public savings. It is then necessary to considerthe possibility of levying a benefit tax. The most robust form of benefit taxis a land betterment tax spread over, say, the life of the project. As longas the tax base is an accurate measure of the benefits conveyed, which impliescareful revaluation of land values at reasonably frequent intervals, it shouldmeet the test of user acceptability. Land taxes offer scope for a progressiverate structure and thus achievement of distributional objectives.

13. In order to achieve income distribution and public sector savingsobjectives, recovery policy in the context of a specific project should con-centrate on selective benefit taxes that are to be Paid by beneficiaries ofthe prolect and not by others. The effects of a project on revenues fromgeneral taxation should be taken into consideration, i.e., they are deductedin the computation of the available rent on which water charges and benefittaxes may be levied, but adjusting such general taxation to achieve the costrecovery objectives of a particular project is generally difficult as thisinvolves much wider fiscal considerations.

14. The level of benefit taxes should preferably incorporate a degreeof progressivity, subject to the constraints of disincentives to work ax&dtax evasion propensities. Thus, it may be desirable to charge very poorfarmers, (i.e., those with incomes below the Critical Consumption Level' (CCL))at a low rate, while those beneficiaries whose incomes are above the CCLmight be taxed progressively up to the limit of their rent. Imparting a degreeof progressivity into benefit taxes should lead to higher levels of cost re-covery than otherwise would be the case.

15. The requirements for designing satisfactory benefit taxes are:

-identification of the project beneficiaries and their classifica-tion into a number of income groups, using total farm incomes inthe "with" project situation at full development; l/

1/If feasible, the classification should be according to the total farmplus non-farm income.

ANNEX 3Page 6

estimation of the distribution of the "rent" by these incomegroups; as defined earlier (para.6), the "rent" accruing toan individual indicates the maximum amount he can pay and stillbenefit from the project;

-ability to make suitable provisions for making the benefit taxsystem selective, progressive, and acceptable to the beneficiariestaking into account administrative problems and the disincentiveeffects of such taxation, if any;

-judgments on the appropriate "social" weights for valuing gainsto different income groups, both relative to each other andrelative to the needs for additional revenues of the govern-ment. The design of benefit taxes will, of course, be greatlyfacilitated if explicit judgments on these weights are available,which are in any case implicit in all cost recovery decisions.Such judgments might be developed on the basis of the treatmentthat others in similar situations receive, but this is not alwaysa helpful basis.

16. It was stated earlier that, for reasons of efficiency and equity,recovery of costs and benefits should be project-specific. It should berecognized that the design and implementation of desirable benefit taxes arein practice often constrained by various administrative and political factors,and the full implementation of such taxes may thus be a prolonged process.Two common difficulties, for example, relate to the measurement of incomeand the problems of controlling tax evasion. First, accurate monitoring ofthe incomes of project beneficiaries may be very difficult, especially whenthe beneficiaries also have non-agricultural sources of income. Even apartfrom this, the land ownership pattern, and changes in the pattern, need tobe taken into consideration, as progressivity implies that, say a personowning 10 hectares should pay more than 10 times the tax payable by anot.herowning only 1 hectare. Second,partly because of the income measurement prob-lem, it is difficult to avoid tax evasion, especially if the tax structureis made too progressive: the higher the progressivity, the highez. is I-kelvto be the incentive to evade and also the greater may be the politicalproblems of implementing benefit taxes.

17.. Benefit taxes should bechosen and designed so as to minimize anyadverse effects that these taxes may have on production and consumptiondecisions of the farmers and of others in the economy. For example, in somecases, it may be possible to recover costs by selling farm inputs to theproject beneficiaries at priceshigher than those paid by others. However,such discriminatory pricing of farm inputs, even if feasible, could inducethe farmers to adopt the wrong production techniques. Similarly, discrimina-tory taxes on farm outputs (or monopolistic "marketing margins") may inducethe choice of wrong crops by the farmers. Although it may be impossible inpractice to avoid such adverse effects completely, project-specific better-ment levies on land holdings are generally the best of the available options.

ANNEX 3Page 7

Land Redistribution

18. In some instances, it may be desirable to consider-the feasibilityof land redistributioc within command areas. To the extent that such redistri-bution is effected, the need for progressivity in benefit taxes would be reduced.

Need for Grace Periods

19. When establishing water charges and benefit taxes, it is oftendesirable to include a grace period in the early project years, during whichproject beneficiaries would be required to pay substantiAlly less than at fulldevelopment. A grace period of about five years is often appropriate, but alonger period may be justified in some cases. During the grace period, aschedule of gradually increasing rates should be adopted.

IV. MEASURING COST AND RENT RECOVERY

20. The determination of appropriate pricing and taxation policies maybe facilitated if cost and rent recovery indices are computed, as discussedbelow. H ratios are descritive only; higher or lower ratios donot by themselves indicate that recovery is satisfactory. Use of the ratios,therefore, should only supplement but not substitute for the analysis of theproposed prices and charges as they bear on efficiency, income distributionand public sector savings, and of the allowances being made for the incrementalimputed values of family labor and management costs, and such factors as thereturn on capital, uncertainty, tax disincentives, costs of tax collection andpolitical difficulties, where relevant. The indices are defined as follows:

-The Cost Recovery Index is the: Ratio of (incremental revenuesfrom water sales, if any, and from benefit taxes) to (incrementalpublic sector projectoutlays at market prices).

-The Rent Recovery Index is the: Ratio of (incremental revenuesfrom water sales, it any, and from benefit taxes) to (inc'rementalrent accruing to project beneficiaries, before payment of watercharges, if any, and benefit taxes, but net of their incrementalpa7ments for general taxes ) -- with rent being defined as inpara. 6.

21. These ratios focus on the policy instrumezets that may be adjustedto achieve the desirable level and pattern of cost and benefit recovery inthe context of a particular project. It may also be helpful when discussingrecovery issues to define these ratios on a gross basis. In that case, theratios are calculated by including certain increases in general tax paymentsthat affect benefits received, such as export taxes, income taxes and general(non-project specific) betterment levies, in the recovery payments made bythe beneficiary and by not excluding those payments from the gross "rent"received from the project. Betterment levies may, in fact, apply to a dis-trict or river basin rather than a particular project area and it may be amoot question in such cases whether they should be treated as general taxesor benefit taxes.

ANNEX 3Page 8

22. The above indices should always be computed in real (constant pricelevel) terms and in present value terms. The discount rate used should repre-sent the best estimate of the economic opportunity cost of capital, or 10%if no estimate is available. The grace period, and the period over whichrecovery is expected to take place should be specified. Appropriate arrange-ments should be made for adjusting charges in light of actual developmentsduring the course of the project.

23. To facilitate evaluation of the recommended water charges andbenefit taxes, rent recovery indices should be presented separately forbeneficiaries in different income classes. It is suggested that, wherefeasible and relevant, the following income classes be distinguished:

-- those with incomes below the CCL (see para.7);

-those with incomes between the CCL and the nationalaverage;

-those with incomes between the national average andtwice the national average;

-- those with incomes above twice the national average.

Where available data on the distribution of income cannot be fit into thesesuggested classes, other income classes may be used, or it may be necessaryto use different farm sizes as proxies for income groups.

24. The significance of themanner in which the cost and rent recoveryratios have been defined above (paras. 20 and 21) may be illustrated with acomparison with some alternative definitions. Two other measures of costrecovery may be defined for contrast as follows:

-- The "Fiscal" Ratio: In this definition all incrementalrevenues that accrue to the public sector as a result ofthe project are considered "recoveries," whether such revenuesstem from general or specific taxes, beneficiaries or non-bent-ficiaries. Such a comprehensive fiscal measure may have somerelevance in economic or social analysis of projects, but is notreco=ended for use in the context of cost recovery.

-- A "Comprehensive" Ratio for Beneficiaries: In this ratio, allincremental payments due to the project that are made by bene-ficiaries only are counted as "recoveries." In principle, allsources of revenues will be eligible, e.g., the tax componentof the incremental consumption expenditures of the beneficiarieswill be an eligible source. Such a comprehensive ratio is alsonot recommended.

ANNEX 3Page 9

25. It should be emphasized here that judgments on the appropriate-ness of the level of cost recovery in any particular project would not beaffected by whatever definition of the cost recovery ratio has been adopted.Suppose, for example, that in a particular case, the fiscal ratio is estimatedto be, say, 200%, the comprehensive recovery ratio for beneficiaries only as,say, 120%, and the more restricted cost recovery ratio defined in para. 24as, say, 50%. In each case, the same set of issues will need to be examinedto judge whether it is desirable to increase or decrease the amount of addi-tional revenues that will accrue to the government. The desirable (andfeasible) amount of additional revenues, and the project-specific instrumentsthat may be available for collecting any additional revenues, are the same inany event, whatever cost or rent recovery ratio is used to describe thesituation.

26. The derivation of the recovery indices defined in paras. 20 and 21might be conveniently presented In tabulla format on the fcllcs-ing page.

RENT AND COST RECOVERY INDICES-

Income Group forBeneficiaries h/ Total

dl d2 d Project1 2 3_ 4

1. Gross value of farm production at farm gate ex sales taxes2. less production (cash) costs ---- ----3. equals net cash income [1 - 2] ------ ----4. less - depreciation ---5. - imputed value of family labor ---- ---- - - -6. - Imputed value of management services ---- ----7. - imputed return on own capital ---- ---- ---- ----8. - allowance for risk/uncertainty ---- ---- ---- ---- ----9. - general taxes ---- -----

10. equals rent/surplus _--11. rent as a percentage of net cash income [10 t 31 -- - ---- ____12. volumetric water charges --13. benefit taxes -- --- - --- ----14. total direct charges/taxes [12 + 131 - ----

15. rent recovery index 114 t 101 c/ --16. public sector outlays (capital + O&) ----17. cost recovery index [14 t 161 c/18. farmers' income per capita, in project year , at full

development19. estimated critical consumption level (CCL), same project year ----20. estimated national per capita income, same project year ----

a/ Items 1 through 17 are incremental, discounted values at constant year-prices, or ratios derived fromthem.

b/ If feasible and relevant, income groups should preferably be:di - below the CCL.

A - between the CCL and c, where c is the national per capita Income.

d3 " between c and 2c. D

d4 - above Z c. o WWhatever income groups ar- used, the income groups should refer to total farm and non-farm income atfull development. Individ"al farmers may, of course, move from one income category to another, over time.

c/ If the ratios are defined on,a gross basis, as in para. 2J, item 9 (general taxes) should be includedin item 10 (rent), as well as In Item 14 (total charges).

ANNEX 3Page 11

27. It is not easy to estimate project rent or the rent, as definedhere, *of different income groups because of difficulty in determiningvarious non-cash or imputed values of costs; however, using benefitsgross of these costs does not solve this problem because the judgmentwhether a sufficient proportion of benefits is being recovered involvesnecessarily an estimation of the very same cost elements which arededucted from gross farm income to arrive at project rent. Still lesscan one fall back on some principle of cost recovery because,whetherone should recover more or less than the full project costs (invest-ment plus O&M costs),while an important issue for public savings, dependsalso on the ability to pay and considerations of equity.

28. How are the imputed costs of family labor, management services,return on capital and risk/uncertainty to be determined? In principle,the value of family labor should be determined by its supply price.Where this is difficult to estimate in practice, it is suggested that aweighted average of seasonal market wages be used as a proxy for thesupply price. An allowance of about 5% of the net value of incrementalfarm output 1/would probably be sufficient for incremental managementcosts. The imputed return on the farmer's own capital should be basedon the incremental net value of assets financed by farmers out of theirown savings and should reflect the rate of return that their fundscould earn elsewhere. In principle, allowances for uncertainty shouldbe built into the value of incremental gross farm output, i.e., thevalue of gross farm output should be its ezpected value, derived fromthe estimated probabilities of a range of outcomes. In addition, how-ever, some farmers may prefer a lower but more certain income to a higherbut riskier income; a risk allowance, not to exceed 10% of the value ofnet farm output, may be in order.

V. MMM1T OF COST RECOVERY

29. What can reasonably be expected with respect to capturing part ofthe benefits and recovering the costs of projects? The amount of revenuewhich could be collected from water charges and benefit taxes will always beless than total project rent, as defined here, for several reasons. Leawjqaside questions of equity for the moment, if each farmer were chtargedthe rent that remains after mak-ing adequate allowances for depreciation,imputed farm family labor, management costs, return on own capital, in-crease in general taxes, and a realistic allowance for risk, he should stillhave sufficient incentives to participate in the project. Taking equity con-siderations into account, however, it is clear that lOOZ of project rent shouldbe regarded as the upper limit that cannot be reached if allowances are madefor Iicome distribution. 7Tor example, if project beneficiaries below the CCLrate to be charged water charges and benefit taxes only to the extent necessaryto discourage wasteful use, and those total less than project rent, and if thebenefit tax system is to be progressive,

1/ Net cash income, e.g.,, item 3 in table on.p. 9.

ANNEX 3Page 12

recovery of 100% of total project rent could be achieved only by chargingthe richer farmers more than 100% of their rent. This is obviously bothundesirable and Impractical. Thus, the extent to which project rent canbe recovered will depend upou.the distribution of incomes in the projectarea-and upon the degree of tax progressivity deemed desirable and feasible.In addition, an allowance may have to be made for political acceptabilityand administrative constraints. It should be noted that if appropriaterecovery is determined by ability to pay of beneficiaries, as measured bytheir "rents" and income levels, then the extent of cost recovery becomesa residual. While cost recovery is important for its impact on publicrevenues and savings, these aspects are implicitly taken into accountwhen determining the CCL (see para. 7 ).

30. Project rent adjusted for income distribution is the desirableamount of benefit tax each farmer should pay. What is the practicalsignificance of this rule for cost and rent recovery? To put it anotherway, is there any lower liTmt of the recovery ratios which can be set asa guideline ? Since judgments are involved in estimating many of theitems which have to be deducted from incremental net farm income to arriveat a measure of incremental rent, and since judgments are also involved inmnking allowances for income distribution, as well as political and practicalprobLems, clearly it is difficult to set a precise lower limit to the normof capturing part of the project benefits.

31. There is therefore no prima facie reason why any particular shareof costs, such as OEM costs, should normally be recovered. The most desirablelevel of recovery should exceed the total financial costs incurred by theirrigation projects. On the other hand, if all or most beneficiaries havelevels of income below or near the CCL, the desirable cost recovery may wellbe close to zero. It is for this reason that the level of OM coats may be apoor yardstick by which to measure the adequacy of water charges and benefittaxes. Nevertheless; it is important for irrigation authorities whichare not autonomous and dependupon their governments for annual subventi=ns,that these subventions be fully adequate to cover O0M costs and other finan-cial obligations, if any, of the irrigation authorities. Where irrigationauthorities are autonomous and donot receive annual budget subventions, itis important thatthey receive revenues from charges sufficient to cover nOtonly OEM costs and other financial obligations but also as much of the costsof their justified future investments as is possible when farmers are chargedan adequate proportiou of their rent.

ANNEX 4Page 1

BANGLADESH


Scope for Cost Recovery

1. This annex examines the cost benefit structure of the publiclyfinanced irrigation schemes in Bangladesh in order to analyze the scope forrecovering the costs (capital as well as operation and maintenance (O&M))from the beneficiaries. Because of the wide diversity in "with" and"without" irrigation cropping patterns, agricultural practices, and costsfor various modes of irrigation, the following analysis is restricted toa few representative cases. Accordingly, the results and conclusions fromthe analysis should be treated as merely indicative; substantial differencesmay occur in specific situations.

Benefits from Irrigation

2. Cropping Patterns. The most common use of irrigation facilitiesin Bangladesh is for growing a dry season rice (boro) crop on lands whichotherwise are used for cultivation of either a rainfed aus crop or catch-crops such as pulses and oilseeds. Recently, in some areas wheat cultiva-tion under irrigation conditions has also become popular. A secondarybenefit from the irrigation facilities is their impact on the wet seasonaman crop. Given erratic weather conditions in many parts of Bangladesh,the availability of supplementary irrigation can avoid the loss (partialor total) of aman crop during periods of drought. The reduced risk of cropfailure can also ease the adoption of high yielding varieties (HYVs) forthe aman crop.

3. For simplicity and to be conservative, the following croppingpatterns have been assumed for the analysis in this annex.

Area Cultivated (M)

Crop- W1 w2

T. Aman (local) 85 75 75T. Aman (HYV) 15 25 25Aus (local) 100 - -

Boro (HYV) - 100 -Wheat (HYV) _ - 100

Overall Intensity 200 200 200

W - Before Irrigation, WI - Alternative I with Irrigation,

W2 - Alternative II with Irrigation

ANNEX 4Page 2

4. Crop Yields and Input Requirements. The estimated yields andinput requirements for the various crops are shown in Table 1. The esti-mates are based on the cultural practices and yields found in typicalfarms under present conditions. Substantial improvements, particularlyunder irrigated conditions, should be possible if cultural practicesrecommended by the extension service were to be followed.

5. Prices for Analysis. Since independence in 1971, the foodgrainprices in Bangladesh have experienced wide swings. The wholesale pricefor medium quality rice, for example, rose from Tk 56 per md in 1971/72to Tk 272 per md ini March 1975 and then declined to Tk 113 per md inDecember 1975. In part, these swings have been related to the fluctuationsin the world market prices. To a large extent, however, the main deter-minants have been the domestic supply demand conditions which, in turn,have depended upon quantity and timing of food aid shipments, local weatherconditions, and the attractiveness of smuggling to neighboring countries.Although throughout this period, the Government has intervened in the marketthrough compulsory procurement at fixed prices, or through "guaranteedsupport prices", its impact on the domestic prices has been rather limited.The high degree of uncertainty in many of the parameters which determinedomestic prices, makes the task of projecting prices for farm budgetanalysis particularly difficult.

6. Three different assumptious are used for the foodgrain prices inthe following analysis. Under alternative I, it is assumed that the farm gateprices in constant 1977 values would average the current official procure-ment prices adjusted for transportation cost between the farm gate and theprocurement centers. Alternative II is basically a continuation of theprice situation experienced during the past year or so. It is assumed thatdue to good harvests domestically and large food aid shipments from abroad,the farm gate prices for foodgrains would remain (20-25%) below the officialprocurement prices. Under alternative III, the farmgate prices correspondto the projected 1980 world market prices appropriately adjusted for freight,handling and processing, and quality differentials.

7. For farm inputs such as fertilizer, pesticides and seeds, it isassumed that prices (in constant 1977 terms) would be maintained at thepresent level under alternative I, somewhat lower under alternative IIand at the world market levels under alternative III. For animal andhuman labor, it is assumed that the wage rate expressed in terms of paddy,would remain approximately constant.

8. The estimated prices for the various inputs and outputs are asfollows:

ANNEX 4Page 3

Farm gate PriceItem Alt. I Alt. II Alt. III

(Tk/md)

Paddy

Aman 70 55 100Aus 65 50 95Boro 65 50 95

Wheat 70 55 110

Inputs

Urea 60 50 110TSP 48 40 135MP 40 30 80Diazinon. 280 250 700Sumithion 950 800 2,300Seed HYV Paddy /a 90 80 150Seed HYV Wheat /a 110 100 150Animal Labor /b 10 8 12Farm Labor /c 8 6 10

/a For local varieties same as crop prices.lb Tk/animal-day./c Tk/man-day.

9. Per Acre Production. On the basis of the yields and input require-ments in Table I and the price data in para 8, the estimated gross and netvalues of production for the various cases are as follows:

ANNEX 4Page 4

Price Alt. I Price Alt. II Price Alt. III

W /a W W-W w w W-W w w W-W(Tk/ac) -

Cropping Alt. I

GVP 2,065 3,980 1,915 1,610 3,090 1,480 2,975 5,765 2,790Cost of

Prod. /b 1,445 2,030 585 1,120 1,570 450 1,905 2,765 860Of which

Farm Labor (950) (1.305) (355) (715) (980) (265) (1.190) (1.635) (445)

NVP /c 620 1,950 1,330 490 1,520 1,030 1,070 3,000 1,930FamilyIncome /c /d 1,380 2,995 1,615 1,060 2,305 1,245 2,020 4,310 2,290

Cropping Alt. II

GVP 2,065 3,535 1,470 1,610 2,780 1,170 2,975 5,330 2,355Cost of Prod. /b 1,445 1,890 445 1,120 1,480 360 1,905 2,530 625Of which Farm

Labor (950) (1.180) (230) (715) (885) (170) (1.190) (1.475) (285)

NVP /c 620 1,645 1,025 490 1,300 810 1,070 2,800 1,730Family

Income /c /d 1,380 2,590 1,210 1,060 2,010 950 2,020 3,980 1,960

W - Before Irrigation, W = After Irrigation, W-W = Increment.Excluding cost of irrigation but including cost of all farm labor.Before paying for irrigation costs.

/d Assuming that 20% of farm labor is hired and the rest is family labor.Thus, family income - NVP + 0.8 x cost of farm labor. This would,of course, differ with the farm siz-e.

Thus, depending upon the price assumption and the cropping patterns, the netvalues of production (before allowing for irrigation costs) would increaseby about Tk 800-2,000 per ac. Increase in "family incomes", taking intoaccount additional demand for family labor, would be about Tk 1,000-2,300.For a given price assumption, the larger increase would be in areas wherethe irrigated crop is boro rice rather than wheat 1/.

10. Irrigation Rents. The net values of production as well as the'family incomes' estimated above are inappropriate for analyzing thefarmers' ability and willingness to pay for irrigation water since they

1/ However, as boro irrigation requirements, and hence irrigation costs,are also substantially higher than those for wheat, the incremental netvalues after allowing for irrigation costs would be much closer (para 21).

ANNEX 4Page 5

do not take into account either the risky nature of farm incomes or thedpmands on the managerial and entrepreneurial skills of the farmers. Moreappropriate for this purpose are the "irrigation rents" which, simply stated,are the net values of production adjusted for uncertainty in farm incomesand appropriate rewards for farm management. 1/

11.' The need to account for the risky nature of farm incomes arises fromthe fact that farmers, particularly the small farmers, are risk averse. Arelatively simple way to incorporate the risk-averse behavior of the farmersis to use a certainty equivalent (CE) instead of the expected value (EV) forthe gross production. Under a number of simplifying assumption about theunderlying probability distributions for uncertain parameters and aboutfarmers' risk aversion, CE can be expressed as:

CE - EV - n x swhere n - a factor expressing farmer's risk aversionand s - the standard deviation of EV.

12. The uncertainty in farm incomes comes primarily from two sources-- the fluctuation in farm prices and the variation in crop yields. Thevariation in crop prices is partially a function of the effectiveness ofthe Government intervention-in the foodgrain market. As mentioned in para 5,the prices have fluctuated considetably during the last few years. It islikely that even for the future, the annual price variation around the meanwould average 15-20%.

13. The variation in crop yields is primarily related to croppingcalendars and climatic factors. Typically, aus is the most risky crop withaverage variation of 25-30% from the mean yield and irrigated boro and wheatthe least risky, with variations of about 10% from the mean. The aman crop isin between the two extremes, probable variation being about 20% underrainfed conditions and 15% under irrigated conditions.

14. It is safe to assume that variations in prices and yields wouldhave a substantial negative correlation with each other. Also, it is likelythat in a given year, yields for the various crops would be largely un-correlated. In view of these and taking into consideration the relativeimportance of various crops in the gross value of production, it is assumedthat the GVP would have a standard deviation of 15% without irrigation and10% with the irrigation.

1/ For further definition of "rent" and other pertinent cost recoveryindices, such as "cost recovery index" and "rent recovery index,"see "Cost Recovery Policies for Irrigation Projects - InformalGuidelines," by Ray, Bruce, and Hotes, August 1976 (Annex 3 ofthis report).

ANNEX 4Page 6

15. Reliable estimates for farmers' risk aversion are lacking. Empi-rical studies so far indicate that the farmers' choice of cropping patternand production techniques can be predicted reasonably accurately for valuesof 'a' in the range of 1-2. Expectedly, the value of 'n' decreases withthe farm size. In view of the relatively small farm size in Bangladesh, avalue of 1.5 is assumed for the base case. Sensitivity tests have beendone for n - I and n - 2.

16. On the basis of the above, for the base case the certainty equiva-lent of the GVP would amount to 77.5% of the GVP for the without irrigationcase and 85% for the with irrigation case.

17. A reward for farm management is necessary because in addition tosupplying family labor for farm operations, the farmers supply some entrepre-neurial skills as well. Also, many farm related activities such as applyingfor credit and other inputs, attending meetings organized by extension officersand supervising hired labor are not included in estimating the crop laborrequirements. It is reasonable to assume that the demands for the entrepre-neurial skills are related to the complexity of cultural practices followedby the farmers. A measure of the complexity are the crop production costs.Somewhat arbitrarily it is assumed that the management fee would equal 10% ofthe cost of production. Since for the with irrigation case, the cost ofirrigation:has been treated separately, the management fee is assumed to be15% of the remaining production costs.

18. Incorporating the premiums for the uncertainty and the managementfee, the estimated irrigation rents on a per ac basis would be as follows:

ANNEX 4Page 7

Estimated Irrigation Rents (Tk/ac)Price Alt. I. Price Alt. II Price Alt. III

_w w _ w

Cropping Alt. I

Expected Value (EV)of GVP (from para9) 2,065 3,980 1,610 3,090 2,975 5,765

Certainty Equivalent(CE) of GVP 1,600 3,385 1,245 2,625 2,305 4,900

Cost of Production(from para 9) 1,445 2,030 1,120 1,570 1,905 2,765

Management Fee 140 305 110 235 190 415Implicit Land Rent 15 1,050 15 820 210 1,720Irrigation Rent 1.035 805 1,510

CroppinR Alt. II

EV of GVP 2,065 3,535 1,610 2,780 2,975 5,330CE of GVP 1,600 3,005 1,245 2,365 2,305 4,530Cost of Production 1,445 1,890 1,120 1,480 1,905 2,530Management Fee 140 285 110 220 190 380Implicit Land Rent 15 830 15 665 210 1,620

815 650 1,410

Thus, the estimated irrigation rent per ac varies from a low of Tk 650 forwheat growing areas with low projection for foodgrain prices, to a high ofTk 1,500 for boro rice-growing areas and with high projections for foodgrainprices.

19. Assuming lower risk aversion by the farmers ('n' - 1) would changethe range of estimated irrigation rents to Tk 670 - 1,575 while the higherrisk aversion ('n' - 2) would change them to Tk 630 - 1,450. Thus, the irri-gation rents are relatively insensitive to the degree of risk-aversion bythe farmers.

Cost of Irriaation

20. Most non-traditional irrigation schemes in Bangladesh belong to oneof the following four types - low-lift pumps (LLPs), shallow tubewells(STWs), deep tubewells (DTWs), or composite gravity-pumping schemes. Tables2-4 of this annex detail the estimated capital and O&M costs for representativesizes of LLPs, DTWs and STWs. For utilization rates typical in Bangladesh,the total costs per operating hour are estimated to be:

ANNEX 4Page 8

Capital O&M Total-- (Tk/hour)---- --

2 cusec LLP 7.2 10.9 18.10.75 cusec STW 4.4 6.4 10.82 cusec DTW 25.1 13.1 38.2

21. For the crop irrigation requirements indicated in Table 1, the perac cost of irrigation for the two cropping patterns in para 3 would be asfollows:

LLP STW DTWHrs/ac Tk/ac Hrs/ac Tk/ac Hrs/ac Tk/ac

Cropping Alt. I 23 415 61 660 23 880Cropping Alt. II 12 215 31 335 12 460

22. Estimating capital and O&M costs for the composite gravity-pumpingschemes is more problemAtic because the costs for civil works vary widelyfrom project to project. The data from some of the on-going projects inBangladesh indicates that the annualized cost for civil works (and primarypumping, where necessary) varies from about Tk 500-1,000 per ac in boro grow-ing areas. In addition, the operation and maintenance of the civil workscosts Tk 100-200 per year. To these costs must be added the cost of second-ary pumping which is generally the same as for low-lift pumps. Thus, forboro growing areas, the total cost per ac for composite schemes would rangefrom about Tk 1,000 to 1,600. Due to lower crop irrigation requirements,the per ac cost in wheat growing areas would be lower, probably in the rangeof Tk 600-1,000. For the purpose of this annex, an average figure of Tk 1,300per ac is used for the boro growing areas and Tk 800 per ac for the wheatgrowing areas.

Scope for-Cost Recovery

23. The foregoing data on benefits and costs has been combined inTables 5-8 in order to examine the suitability of various policies on irri-gation water charges. Five different policies have been analyzed. The mainfindings from the analysis are as follows:

(i) Irrigation facilities are highly attractive to the bene-ficiaries. Depending upon the cropping patterns andcrop prices, the net value of production would increaseby Tk 800-2,000 per ac, representing generally a morethan 150% increase in the without "irrigation NVP."

(ii) Presently, most irrigation facilities in Bangladesh areheavily subsidized; the cost recovery index being about20% for composite gravity-pumping schemes, 30% for deeptubewells, 50% for low-lift pumps and about 75% forshallow tubewells.

ANNEX 4Page 9

(iii) Even after full cost recovery, the LLPs and STWs wouldremain highly attractive to the users. Assuming low pricesfor foodgrains (Price Alt. II) for full cost recovery, therent recovery index would vary between 30-50% for LLPs and50-80% for STWs. At official procurement prices for food-grains, the rent recovery indices would be 25-65%, and forhigh foodgrain prices (Price Alt. III), historically themore probable alternative, the indices would be 15-50%. Onthe basis of estimated irrigation rents, it should be possibleto recover substantially more than the full cost of irriga-tion by LLPs and STWs.

(iv) There may be a need for some subsidies on DTWs and compo-site gravity-pumping schemes, particularly if the foodgrainprices were to remain low - full cost recovery would requireclose to 100% rent recovery for DTWs and over 100% for compo-site gravity-pumping schemes. With higher foodgrain prices,the full cost recovery, even though feasible on economicgrounds, may still be difficult because of likely politicalproblems associated with setting charges significantly higherthan those on LLPs and STWs. The likely difficulties in fullcost recovery on DTWs and composite gravity-pumping schemesindicates that these perhaps should be of lower prioritythan LLP and STW schemes in development plans for the irri-gation sector.

(v) The potential for cost recovery is sensitive to the assump-tions about foodgrain prices. Estimated project rents wouldbe doubled if the foodgrain prices were to be in accordancewith Price Alt. III rather than Alt. II. On the one hand,this highlights the need for GOB efforts at stabilizationof domestic foodgrain prices; on the other, it indicates theneed for keeping policies on irrigation charges flexible soas to adapt to the prevailing price levels in the country, 1/and to be able to reflect the effects on farm income of sig-nificant changes in subsidies and/or costs of importantagricultural inputs.

(vi) Even though the net and gross values of production for wheatgrowing areas are somewhat smaller than those for the borogrowing areas, given the lower irrigation requirements ofwheat and limited availability of irrigation facilities,wheat cultivation is more economical. 2/ This would

1/ One possible way to incorporate this flexibility would be to base theirrigation charges on production (e.g. x mds of paddy or wheat) ratherthan on monetary units.

2/ The imputed value of water, assuming official procurement prices, isabout Tk 29/ac-in for boro growing areas and Tk 43/ac-in for wheatgrowing areas.

ANNEX 4Page 10

particularly be the case in areas with porous soils whereboro cultivation means excessive seepage -losses. Althoughwheat cultivation under irrigation conditions is alreadybecoming popular in Bangladesh, it is desirable that inareas suitable for wheat cultivation, wheat should bepromoted more aggressively by the agricultural extensionservice.

(vii) An increase in overall irrigation rent would mean increasedpotential for cost recovery by the Government. A rough esti-mate indicates that for the existing irrigation facilitiesand those proposed for the next few years 1/, full rentrecovery could mean incremental annual revenues of aboutTk 1.3 billion above revenues based on present cost recoverypolicies if the foodgrain prices were to remain low, andTk 2.0 billion if the prices were to be at the officialprocurement levels.

(viii) To make the various irrigation programs self-financing, GOBwould not need to achieve full rent recovery, but would needto recover from the beneficiaries an additional Tk 700 M peryear. Setting the annual irrigation charges at an averageof about Tk 600 per ac (approximately equal to the suggestedcost to beneficiaries under IDA-STW project) would be ade-quate to generate the additional revenues. This would re-present an increase of 25-300% in the costs presently borneby the beneficiaries. To avoid any disruptive effects onproduction, it would be desirable to implement the policyin a phased manner - perhaps over a 3-5 year period. Suc-cessful implementation would also require greatly improvedavailability of agricultural credit.

Distributive Considerations

24. To serve the dual objectives of 'growth' and 'equity', it is gene-rally desirable that the irrigation charges should be progressive; i.e. thecosts recovered per ac from the relatively better off beneficiaries shouldbe greater than those recovered from the poorer ones. In the Bangladeshcontext, however, it is likely that imposition of progressive charges wouldnot be desirable at this time because of associated administrative andpolitical problems. While Government has records of who owns each farmplot, apparently the information is not compiled by name. That is, whilethe owner of every plot of land can be identified by name, the total land-holdings of an owner are not recorded. This information could be obtainedonly by tedious, time-consuming record searches and compilations, since the

1/ It is estimated that by the early 1980s, the irrigated area would totalabout 2.5 M ac - 1.4 M ac by LLPs, 0.4 M ac by STWs, 0.4 M ac by DTWsand 0.3 M ac by composite gravity-pumping schemes.

ANNEX 4Page 11

basic data is not computerized. Also, if the purpose of the compilationwere to become known, large scale falsification of land records could resultto avoid the increased rates applicable to larger landowners. Implementationof progressive charges also would face severe opposition from the politicallyinfluential large farmers who generally are among the most vocal groups inthe rural areas.

ANNEX 4

BANGLADESH Table 1

IRRIGATION tJATER CHARGES1/2/

Yields and Crop Input Requirements

Aus T. Aman T. Aman Boro(local) (local) (fYV) (lXV) Wheat

Yield (mds/ac) 12 17 20 26 30 37 28

LtPUT REQUIREMENTS

Fertilizers and Pesticides

Urea (46% N) (mds/ac) - 0.3 0.4 1.2 1.5 1.8 1.4

TSP (46% P205) (mds/ac) - 0.2 0.2 0.6 0.8 1.0 0.7

M P (60% K) (mds/ac) - - 0.1 0.1 0.3 0.5 0.3

Diazinon (mds/ac) - 0.005 0.005 0.01 0.01 0.01 -

Sumith:.cn (mds/ac) - 0.005 0.005 0.01 0.01 0.01 _

Lahor

Preparation (m-d/ac) 17 21 22 22 22 22 21

Planting & Nursing(m-d/ac) 2 18 18 18 18 18 2

Crop Management (m-d/ac) 6 11 12 12 13 15 16

Harvesting andThreshing (m-d/ac) 20 23 24 27 28 31 31

Sub-total 45 73 76 79 81 86 70

Other Inputs

Animal ?ower (a-d/ac) 15 17 17 17 17 17 16Seed (mds/ac) 1.0 0.4 0.4 0.4 0.4 0.4 1.0Miscellaneous (TIJac) 10 15 15 30 40 40 40

Irrigation

Monthlv Peak (ac-in/ac) - - 3 5 15 6Total (ac-in/ac) - - 3 - 5 42 20

1/ Source: Mission Estimates.

/ W - Without Irrigation, W a With Irrigation

AN= 4Table 2

3ANGLADESR


Estimated Capital and O&M Cost of a 2-Cusec Low-Lift Pumwp

Total Cost ToCost usersa/

(Tk)

A. Annualized Capital Costs-/1 '

(a) Engine (Tk 18,000) 3,750(b) Pump (Tk 4,000) 820(c) Trolly (Tk 1,500) 250(d) Pipes.(Tk 3,500) 480(a) Fittings (Tk 3,000) 500 -

Sub-Total (A) 5,800 600

B. Direct O&M Costs

(a) Pay of operator annual lump sum 800 800(b) Spars parts @ Tk 800 per o 800 400(c) Diesel, 500 gallons @ Tk 9.50

per gallon 4/ 4,750 4,750(d) Lub. oil 10 gallons @ Tk 50 per gaLlon 500 S00

Sub-Total (B) 6,850 6,450

C. Indirect O&M Costs

(a) Salarins & allowances of BADC staff 1,200 -(b) Depreciation of buildings and

structures valued at Tk 100 million,for 50,000 pUmps and tubewells 5/ 250

(c) Maintenance of structures e 2.5 ofthe initial cost 50

(d) Depreciatiou workshop equipm-et valuedat Tk 100 million for 50,000 pumpsand tubevells 6/ 300

Sub-Total (C) 1,800 -

Total 06& Cost (3+C) 8,650 6,450

D. Total Annual Cost (A+BtC)

For 800 hours of operation per anum 14,450 7,050

F. Total Cost per Hour 18.0 8.8

of which: Capital Cost (7.2) (0.8)Direct O&M Cost (8.5) (8.0)Indirect O&M Cost (2.3) ( - )

1/ Missioin estimates based on the raw data supplied by BADC.21 Figures in parenthesis refer to the estimated initial cost.3/ Assuming a 10% scrap value, a 122 annual interast rate and a useful life of

7 years for engine and pump, 10 years for trolly and fittings and 15 yearsfor the pipes.

4/ Assuming 800 hours of operation per year.1 Assuming useful life of 40 years and an asnual interest rate of 121.

6/ Assuming useful life of 10 years and interest rate of 12S.7/ Assuming rental only during boro season. Rental during aman season requires

additional charge of Tk 300.

ANNEX 4Table 3

BANGLADESH


Estimated Capital and O&M Cost of a 2-Cusec Deep Tubewell-

Total Cost ToItem Cost Users

(Tk) -

A. Annualized Capital Costs-/3/

(a) Engine (Tk 20,000) 4,150(b) Turbine pump (Tk 30,000) 5,150(c) Tubewell boring (Tk 65,000) 8,700(d) Tubewell materials (Tk 38,000) 5,100(e) Pump house (Tk 15,000) 2,000

Sub-Total (A) 25,100 1,200

B. Direct O&M Costs

(a) Pay of operator annual lump sum 1,000 1,000(b) Spare parts @ Tk 1,200 per annum 1,200 400(c) Diesel 800 gallons per annum @ Tk 9.50

per gallon 4/ 7,600 7,600(d) Lub. oil 25 gallons @ Tk 50 per

gallon 1,250 1,250

Sub-Total (B) 11,050 10,250

C. Indirect O&M Costs

(a) Salaries and Allowances of BADC staff 1,500(b) Depreciation of buildings and

structures 150 -(c) Maintenance of structures 50 -(d) Depreciation of workshop equipment 400 -

Sub-Total (C) 2,100 -

Total O&M Cost (B+C) 13,150 10,250

D. Total Annual Cost (A+B+C) for 1,000hours of Operation per year 38,250 11,450

E. Total Cost per hour 38.2 11.5

of which: Capital Cost (25.1) (1.2)Direct O&M Cost (11.0) (10.3)Indirect O&M Cost (2.1) C - )

1/ Mission estimates based on the raw data supplied by BADC.2/ Figures in parenthesis refer to the estimated initial cost.3/ Assuming a 12% annual interest rate, a useful life of 7 years for the

engine, 10 years for the turbine pump and 20 years for the rest. Alsoassuming 10% scrap value for the engine, pump and the pump house.

4/ Assuming 1,000 hours of operation per year.

ANNMC 4Table 4

BANGLADESE

Tt3IA=TN WATE CHGES

Estimated Capital and O&S Cost of a 4-Tnch Diameter Sballow TubeweUll-

Cost to Usersirep-Purchase MA-STW

Item Total Cost Scheme Protect

(Tk)-

A. Annualized Capital Costst23/

(a) Engie (Tc 6,000) 1,260(b) Centrfugal Pmp (Tk 3,500) 610(c) Tubewll HaterIals (Tc 5,500) 790(d) Tubewell Boring (Tk 3,000) and Misc. 440

Sub-Total (A) 3,100 2,2003/ 3,100

B. Direct 0&Z Costs

(a) Pay of Operator, Annua1 Lump Sum 500 500 500(b) Spara parts 6 Tc 500 per a-ni 500 500 500(c) Diesel. 210 gallons at Tk 9.50 per

gallon, / 2,000 2,000 2,000(d) Lub. oil 5 gallons at Tk 50 per gallon 250 2S0 250

Sub-To tal (B) 3,250 3,250 3,250

C. Indirect 0&M Costs

(a) Salarles and Allowances of BADC Staff 700 -(b) Depreciation of Buildings and

Structures 200 -(c) Maintenance of Bu±14±ngs 50 -(d) Depreciation of Workshop Equipment 2-0 -

Sub-Total (C) 1,200 - 600

Total OAK Cost OCB) 4,450 3,250 4,850

D. Total Annual Cost (A+B+C) for 700 hours ofOperation 7,550 5,450 6,950

E. Total Cost per hour 10.8 7.9 9.9

of which: Capital CoGst (4.4) (3.2) (4.4)Direct O&M Cost (4.7) (4.7) (4.7)Iadirect 0& Cost (1.7) ( ) (0.8)

17 mission estimates based on the raw data supliad by BADC.2 Figures in parenthesis refer to ths estImated initial cost.3/ siminltg a 122 annual intereast rate, a useful life of 7 years for engine,

10 years for pump and 20 yers for the tubewell, and ass,ing 102 scrapvalue for the engine, pp and tubewell materials.

4/ Assim4-g 700 hours of operation per year.ItTa -average subs:iy ourzarcosr7du, to abs-acaof iutarest charges

under the irepurchase scheme is estimated to be about 301.

BANGLADESH


Scope for Cost Recovery on Low-Lift Pumps

Cropping Total Price Alt. 'I Price Alt. II Price Alt. IIIAlter- Annual Charges CRI_/ BRI RRI CRT BRI RRI CRI BRI RRI

No. Description of Policy native Tkiac Tk/LLP ----_------___ --- X-----------------------

1. Present Policy2/ I 200 7,000 48 12 19 48 16 25 48 9 13II 105 7,000 49 9 13 49 11 16 49 5 7

2. Full Cost Recovery I 415 14,4!U luO 26 40 100 33 52 100 18 27II 215 14,450 100 18 26 100 23 33 100 11 15

3. Full Rent Recovery, assumingofficial procurement prices I 1,035 36,;050 249 64 100 249 83 129 249 45 69for foodgrains (Price Alt. I) II 815 54,,800 379 67 100 379 86 125 379 42 58

4. Full Rent Recovery, assuuminglow prices for foodgrains I 805 28,.000 194 50 78 194 65 100 194 35 53(Price Alt. II) II 650 43,700 302 54 80 302 68 100 302 33 46

5. Recovery at 20% of Incremental. I 265 9,200 64 16 26 64 21 33 64 12 18NVP (i) Price Alt. I II 205 13,800 95 17 25 95 22 32 95 10 15

(ii) Price Alt. TI I 205 7,150 49 13 20 49 16 25 49 9 14II 160 10,750i 74 13 20 '74 17 25 74 8 11

(Mi) Price Alt. III I 385 13,400 93 24 37 93 31 48 93 17 25II 345 23,200 160 29 42 160 36 53 160 18 24

1/ CRI -Cost Recovery Index - Ratio of irrigation charges to O&M and annualized capital costs.BRI -.Benefit Recovery Index - Ratio of irrigation charges to net incremental family income.RRI Rent Recovery Index = Ratio of irrigation charges to irrigation rent. A

2/ In addition to paying for diesel, lub. oil and the operator salary, the users pay T;c 400 for spare Ln asparts and Tk 600 as rental charges, i.e. a total of about Tk 7,000 per pump per annum.

April 7. 1977

B.AŽ4LADESII

IRRIGATION' WATER CIIARGES

Scope for Cost Recovery on Shailow Tubewells

Cropping Total Annual Charges Price Alt.1 Price Alt.II Price Alt.IIINo. Description of Policy Alternative I/ (TkIS¶) CRI-/BRI RRI CRI BRI RRI CR1 BRI RRI

1. Present Policy(i) BADC's Hire-Purchase l 480 5,500 73 30 46 73 39 60 73 21 32

Scheme 2/ 3/ 11 245 5,500 73 20 30 73 26 38 73 13 17(it) ADB and IDA-STW Projects- I 610 7,000 92 38 59 92 49 76 92 27 40

II 310 7,000 92 26 38 92 33 48 92 16 22

2. Full Cost Recovery I 660 7,550 100 41 64 100 53 82 100 29 44II 335 7,550 100 28 41 100 35 52 100 17 24

3. Full Rent Recovery, asaumingofficial procurement prices 1 1,035 11,850 157 64 100 157 83 129 157 45 69for foodgrains (Price Alt. I) II 815 18,300 243 67 100 243 86 125 243 42 58

4. Full Rent Flecovery, assuminglow prices for foodgrains I 805 9,200 122 50 78 122 65 100 122 35 53(price Alt. II) II 650. 14,600 194 54 80 194 68 100 194 33 46

5. Recovery at 20% of IncrementalNVP(I) Price Alt. I I 265 3,050 40 16 26 40 21 33 40 12 18

II 205 4,600 61 17 25 61 22 32 61 10 15(11) Price Alt. II I 205 2,350 31 13 20 31 16 25 31 9 14

II 160 3,600 48 13 20 48 17 25 48 8 11(11) Price Alt. III I 385 4,400 58 24 37 58 31 48 58 17 25

II 345 7,750 103 29 42 103 36 53 103 18 24

1J CRI - Cost Recovery Index Ratio of irrigation charges to 0&H and annualized capital costs.BRI - Benefit Recovery Index Ratio of Irrigation charges to net incremental family Income.RRI - Rent Recovery Index - Ratio of Irrigation charges to irrigation rent.

2i Tubewells are sold to the users at cost-with a 10% down payment with rest to be paid in five equal annual Installment.No Interest is charged on the unpaid balance. Maintenance is provided free of charge by BADC. On an annual basis thetotal cost borne by the users amounts to about Tk 5,500 per tubewell.

3/ Same as in footnote 2 except that a 13% Interest is charged on the unpaid balance and the users pay for spares as wellas 50% of the maintenance costs. The total annualized cost to the users would be about Tk 7,000 per tuhewell.

BAN(CLADESI


Scope for Cost Recovery on Deep Tubewells

Cropping Total Annual Charges Price Alt. I Price Alt. II Price Alt.I11No. Description of Pollcy Alternative (Tk/ac) (Tk/iMy) CR11/BRI RRI CR1 BRI RRI CRI BRI RRI

2/1. Present Policy 1 265 11,500 30 16 26 30 21 33 30 12 18

II 140 11,500 30 12 17 .30 15 21 30 7 10

2. Full Cost Recovery 1 880 38,250 100 54 85 100 71 109 100 38 58II 465 38,250 100 38 57 100 49 67 100 24 33

3. Full Rent Recovery, assumingofficial procurement prices I 1,035 44,900 118 64 100 118 83 129 118 45 69for foodgrains (Price Alt. I) II 815 66,950 175 67 100 175 86 125 175 42 58

4. Full Rent Recovery, assuminglow prices for foodgrains I 805 34,950 91 50 78 91 65 100 91 35 53(price Alt. 11) II 650 53,400 140 54 80 140 68 100 140 33 46

5.. Recovery at 20X of IncrementalNVP(i) Price Alt. I 1 265 11,500 30 16 26 30 21 33 30 12 18

II 205 16,850 44 17 25 44 22 32 44 10 15(ii) Price Alt. II I 205 8,900 23 13 20 23 16 25 23 9 14

II 160 13,150 34 13 20 34 17 25 34 9 11(lii) Price Alt. III 1 385 16,700 44 24 37 44 31 48 44 17 25

II W3l5 28,350 74 '") 42 74 36 53 74 1U 24

1/ CR1 - Cost Recovery Index - Ratio of irrigation charges to 0&t4 and annualized capital costs. |BRI - Benefit Recovery Index - Ratio of irrigation charges to net lncremental famtly income.RRI - Rent Recovery Index - Ratlo of Irrigation charges to irrIgation rent. - 5

2/ In addition to paying for diesel lub. oil and the operntor salary, the users pay Tk 400 for spare partsand Tk 1,200 as,rental clharges i.e. a total of about 'I'k 11,500 per tubewell per annum.

TIt r CAT I ON CA'I' AR (:IIA II'S

Scope for Cost Recovery oni Compositc (Cravity-l'timping Schemes

Cropping Total Annual Charges Price Alt.I Price Alt.l1 Price Alt.IIINo. Description of Poltcy Alternative (Tk/ac) Cll BRI RnI CRI BR! RRI CRI BRI RRI

2/.X1. Present Policy 1 .260 20 16 25 20 21 32 20 11 17

II 150 19 12 18 19 16 23 19 8 11

2. Full Cost Recovery 1 1,300 100 80 126 100 104 161 100 57 86II 800 100 66 98 100 84 123 100 41 57

3. Full Rent Recovery, assumingofficial procurement prices 1 1,035 80 64 100 80 83 129 80 45 69for foodgrains (Price Alt. I) II 815 102 67 100 102 86 125 102 42 58

4. Full Rent Recovery, assuminglow prices for foodgrains I 805 62 50 78 62 65 100 62 35 53

- (Price Alt. II) II 650 31 54 80 81 63 100 81 33 46

5. Recovery at 20% of IncrementalNVP(i) Price Alt. I I 265 20 16 26 20 21 33 20 12. 18

II 205 26 17 25 26 22 32 26 10 15(ii) Price Alt. II I 205 16 13 20 16 16 25 16 9 14

II 160 20 13 20 20 17 25 20 8 11(iii) Price Alt. III I 385 30 24 37 30 31 48 30 17 25

II 345 43 29 42 43 36 53 43 18 24

1/ CRI - Cost Recovery Index - Ration of irrigation charges to MIH and annualized capital costs.BRI = Benefit Recovery Index = Ratio of irrigation charges to net incremental family income. nRRI - Rent Recovery Index - Ratio of irrigation charges to irrigation rent.

2/ 3% of the incremental gross value of production. In addition, farmers using BADC's low-lift pumps pay thenormal BADC charges (cf Table 5, footnote 2). The policy regarding HIDB's pumps is yet unclear. It is assumedliere that their rates would be consistent with those with BADC's LLPs. Estimation of the gross value of pro-duction is taken according to Price Alternative I.

ANNEX 5Page 1

BANGLADESH


Draft Terms of Reference for the Proposed Water Charges Unit

Background and Oblectives

1. Over the past two decades, the Government of Bangladesh (GOB) hasmade large investments for irrigation, drainage and flood protection schemesand as a result an estimated 1.7 M ac have been brought under irrigationand about 2 ' ac have been provided with total or partial flood protection.However, so far it has lacked a comprehensive policy on recovery of costsfrom the beneficiaries. A 1976 IDA mission reviewed the water chargessituation in Bangladesh and coucluded that:

(a) Most irrigation facilities in Bangladesh are heavilysubsidized, with cost recovery rates ranging frompractically nothing for gravity schemes, to 30% fordeep tubewells, 50% for low-lift pumps, and 75-90%for shallow tubewells. These subsidies, besidesbeing a heavy burden on the Government budget, pro-mote inefficient water use as well as capacity under-utilization. Also, the present subsidies mostlybenefit the relatively large farmers rather than thesmall or marginal farmers;

(b) Irrigation facilities are highly attractive to the usersand the current charges can be raised substantially with-out any adverse effect on the overall demand for irrigation;

(c) Existing data on the cost/benefit structure of the variousirrigation facilities as well as on the distribution ofirrigation benefits among the various income groups needsconsiderable improvements before formulating a comprehen-sive cost recovery policy.

2. The principal-objective of the proposed Water Charges Unit is tohelp the Government in formulating appropriate cost recovery policies forthe various types of water development schemes in Bangladesh. Inter alia,this-would involve undertaking necessary surveys and investigations tofill in the current gaps in the relevant data. In addition, the Unit isexpected to help the Government in developing and implementing plans forimurovina the operational efficiency of the various irritation facilities.

ANNEX 5Page 2

Basic Principles

3. The general approach used in formulating the cost recovery policiesshould be that outlined in "Cost Recovery Policies for Irrigation Projects:Informal Guidelines," World Bank Staff Paper, August 1976 (copy attached).These guidelines should not, however, be construed as limiting the scope ofthe analysis and the work should incorporate all significant factors in theBangladesh context which should be considered in the development of policiesconcerning, and the establishment of systems for, the imposition and collec-tion of irrigation water charges.

4. Specifically, the proposed policy should take into account thefollowing main factors:

(a) the efficient allocation of investment resources betweenthe various types of water development schemes (includinggravity schemes, major pump schemes, low-lift pumps, shallowtubewells, deep tubewells and flood protection and drainageworks);

(b) the need to provide reasonable incentives to beneficiaries;

(c) the need to minimize capacity underutilization and waste-ful water use;

(d) the relative income levels of irrigated versus non-irrigated farms;

(e) the ability of the beneficiaries in various incomegroups to pay water charges;

(f) the demands on the national budget for construction,operation and maintenance of the various waterdevelopment schemes;

(g) adequacy of existing legislative provisions forimposition of charges on beneficiaries of publicly-financed water development schemes; and

(h) the availability of adequately staffed Governmentdepartments and agencies for collecting water chargesand enforcing the water charges legislation.

5. Recommendations for policies and procedures should be applicableto all government and parastatal agencies or entities. This does not mean;however, that recommended water charges should be uniform throughout thecountry. On the contrary, it is anticipated that in many instances theapplication of basic principles would result in different water chargesand assessments, appropriate to the physical situation, costs, and socio-economic conditions of each project.

ANNEX 5Page 3

6. In view of GOB commitments to IDA under various IDA-financedirrigation and flood control projects, the Unit will give priority attentionto formulating cost recovery proposals for those projects. As data and re-sults obtained in IDA project areas can be extrapolated to many other areasin Bangladesh, this initial concentration on the IDA project areas should inno way inhibit the evolution of a national policy.

Detailed Responsibilities

7. In order to fulfill the objectives listed in para 2, it is anti-cipated that the Unit will need to undertake the following:

(a) Review of past expenditures by GOB in irrigation, drainageand flood control facilities. The expenditures should bedisaggregated according to the type of facility as wellas the implementing agency. The estimates should be pre-sented in both current and constant (say 1978) prices.Preferably, the expenditure series should be constructedfrom 1960 onwards but at least for the last five years.Data sources for this work would be the budgetary publica-tions of GOB and reports of the various implementing agencies.

(b) Estimates of total acreage as well as number of householdsdirectly benefitted by the various GOB programs for irriga-tion, drainage and flood control. The figures reported bythe various implementing agencies should be evaluated andadjusted as necessary.

(c) Disaggregation of the total benefitted acreage accordingto the income status of the benefitted households. Giventhe paucity of detailed data on farm income levels, it maybe necessary to use different farm sizes as proxies forincome groups.

(d) Review of the proposed irrigation and water developmentprogram of GOB for the next decade and the projectedbudgetary requirements for replacement, expansion andO&M during that period.

(e) Per acre costs (capital and O&M) of various types ofwater development facilities in Bangladesh.

(f) Per acre benefits derived from irrigation, drainageand flood control works in various agro-climatic zoneswith alternative cropping patterns and different assump-tions about crop prices and input costs.

(g) Review of current policies and procedures on costrecovery for the various irrigation and water develop-ment facilities. Particular attention should be givento the level of charges and the administrative mechanismfor collection of charges.

ANNEX 5Page 4

(h) Review of costs actually incurred by users of thevarious irrigation facilities. Where such chargesdiffer significantly from those intended under theofficial policies, reasons for the divergence shouldbe investigated.

(i) Review of existing legislation as regards impositionof water charges.

(j) Review of capacity utilization of the various irriga-tion fadilities in Bangladesh. Reasons for under-utilization will be investigated in detail.

8. It should be noted that a considerable amount of preliminary worktowards formulation of a cost recovery policy has already been done and wherefeasible the Unit should build on the work already accomplished. This wouldapply particularly in estimating unit costs and benefits of the various typesof irrigation facilities. Since existing data on some of the items, particu-larly (b), (c), (h) and (j), is limited and also unreliable, the Unit wouldhave to organize appropriate field surveys for filling in the data gaps.

Staffina and Time Tables

9. In preparing the recommendations, the Unit is estimated to requirea total of 84 man-months consisting of the following specialities:

Man-months

(a) Team Leader (Ag. Economist) 12

(b) Irrigation Engineer 12

(c) Agronomist 12

(d) Economist/Ag. Economist (2) 24

(e) Macro Economist 6

(f) Statistician 6

(g) Sociologist 6

(h) Miscellaneous 6

Total * 84

ANNEX 5Page 5

Preferably, the Unit should be located in the Planning Commissiou and staffedwith suitable personnel drawn from the concerned agencies such as the PlanningCommission, Mrinstry of Finance, Ministry of Agriculture, BADC, WDB and IRDP.Local cousulting firms could be engaged for undertaking the necessary fieldsurveys under the supervision of the Unit. An expatriate consultant may beretained for a total period of about 3 months for assistance in planning theUnit's work program as well as periodic review of the progress. It is ex-pected that the Unit's recommendations should be ready within 12 months ofstarting the work.

10. Following preparation of the recommendations, it is expected thata 3 man-team consisting of an Irrigation Engineer, Economist and Agronomistwould work with the operating agencies (BADC, WDB & IRDP) for a period of2 years for improving the capacity utilization of the various irrigationfacilities.

bangladesh: irrigation water charges - world bank · 2016. 7. 8. · development credits, totaling...

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