irrigationppp ethiopia study final report

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Ethiopian Nile Irrigationand Drainage Project:

Public-Private PartnershipOptions and Action PlanStudy

Final Report to the WorldBank

March 2008


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Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance onthis document. Castalia is a part of the worldwide Castalia Advisory Group.

Public-Private PartnershipOptions and Action Plan

Study

Final Report to the World Bank

March2008


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Table of Contents

Executive Summary 1

1 Introduction 7

1.1 The Importance of Agriculture and Irrigation 7

1.2 Report Outline 8

2 Basic Facts on the Megech, Ribb and Anger Irrigation Schemes 10

3 Key Stakeholders Objectives and Views 15

3.1 Government 17

3.2 Farmers 27

3.3

Private Operators 47

4 Public-Private Partnerships in Irrigation 56

4.1 Basics of Public Private Partnerships 56

4.2 PPPs vs. Public Service Provision 66

4.3 International Experience with a Private Sector Approach toIrrigation 69

5 Legal Framework for PPPs in Ethiopia 75

5.1 Key Findings on the Current Legal and Regulatory

Framework and their Implications 75

5.2 Possible Changes to Improve the Framework 77

5.3 Analysis of Legal Framework for PPPs 78

6 Key Considerations for PPP Design 88

6.1 Operating Subsidy 88

6.2 Non-Irrigation Services 92

6.3 Demand and Payment Risk 93

7 Public Private Partnership Options 95

7.1 Approach to PPP Options 95

7.2 Role of Farmers 96

7.3 Potential PPP Options 105

7.4 Analysis of PPP Options 115


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7.5 Government Views on PPP Approach and RecommendedPPP Option 120

8 Recommended PPP Options 123

8.1 Overview of PPP Model 123

8.2 Tariff and Subsidies 129

8.3 Administration of Subsidies and Other Payments 137

8.4 PPP Arrangement for Anger 148

9 Contract Monitoring and Enforcement Arrangements 150

9.1 Why is Economic Regulation Needed? 150

9.2 Traditional Regulatory Options and Lessons Learned 152

9.3 Economic Regulation Options for Megech, Ribb, and Anger155

9.4

Comparison of Options and Recommendation 159

9.5 Recommendations for Contract Monitoring andEnforcement 163

10 Action Plan 168

AppendicesAppendix A : Meetings with Government Officials 173

Appendix B : Project Brief Presented to Potential Private Partners 176

Appendix C : Profiles of Potential Private Investors 182

Appendix D : Willingness-to-Pay Methodology and Full Results 185

Appendix E : Smallholder Farmer Questionnaire 229

Appendix F : Commercial Farmer Questionnaire 242

Appendix G : Encouraging Private Investment in Ethiopia 251

Appendix H :Laws and Policies Reviewed 257

Appendix I : Government Ministries and Agencies 260

Appendix J : Key Drafting Instructions of PPP Contract 263

Appendix K : Projected Availability and Variable Payments 266

Appendix L : Rules and Procedures for Independent Panel of Experts 268

Appendix M : CMU Budget and Technical Assistance Needs 273


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Table D.5: Kebele-specific Data - Megech 212

Table D.6: Kebele-specific Data - Ribb 212

Table D.7: Kebele-specific Data - Anger 213

Table G.1: Industries Reserved for Investment by Government,

Domestic Investors, or Ethiopian Nationals 253

Table H.1: Laws Reviewed 257

Table M.1: Summary of Expenditure for CMU During First ThreeYears 273

Table M.2: Three-Year Training and Technical Assistance for CMU 275

Table M.3: Costing of 3-Year Training and Technical Assistance forCMU 277

Table M.4: Estimate of Annual IPE Costs 280

FiguresFigure 1.1: Tariff Transition Period 3

Figure 1.1: Rainfall Variation around the Mean and GDP Growth 7

Figure 2.1: Locations of Irrigation Schemes 10

Figure 3.1: Current Approach to Irrigation for Smallholders 21

Figure 3.2: Willingness-to-Pay Results: Megech 31

Figure 3.3: Willingness-to-Pay Results: Ribb 31

Figure 3.4: Willingness-to-Pay Results: Anger 32

Figure 3.5: Willingness-to-Pay of Farmers Using Irrigation: Megech 33

Figure 3.6: Willingness-to-Pay of Farmers Using Irrigation: Ribb 34

Figure 3.7: Willingness-to-Pay of Farmers Using Irrigation: Anger 34

Figure 3.8: Smallholder Farmer Incomes (Categorized by Irrigation

Use) - Megech 40

Figure 3.9: Smallholder Farmer Incomes (Categorized by IrrigationUse) - Ribb 41

Figure 3.10: Smallholder Farmer Incomes (Categorized by IrrigationUse and Households with Associated Irrigation Cost) Ribb 42

Figure 3.11: Smallholder Farmer Incomes (Categorized by IrrigationUse) Anger 43


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Figure 3.12: PPP Option Preferred by Private Operators 55

Figure 4.1: Basic PPP Structure 57

Figure 4.2: Range of PPP Structures 59

Figure 6.1: Transition Period 91

Figure 7.1: Approach to Developing PPP Options 96

Figure 7.2: Structure of Outgrower Scheme 98

Figure 7.3: Structure of PPP Option One 108

Figure 7.4: Structure of PPP Option Two 110

Figure 7.5: Structure of PPP Option Three 111

Figure 7.6: Structure of PPP Option Four 112

Figure 7.7: Structure of PPP Option Five 114

Figure 7.8: Structure of PPP Option Six 115

Figure 8.1: Structure of Recommended PPP Option 124

Figure 8.2: Translating Irrigation into Higher Incomes 131

Figure 8.3: Projected Household-Level Incomes of Farmers UsingIrrigation 132

Figure 8.4: Projected Average Incomes in Megech and Ribb 133

Figure 8.5: Possible Tariff Paths 134

Figure 8.6: Tariffs and Subsidies over the Transition Period 136

Figure 8.7: Structure of Trust Account 138

Figure 8.8: Effect of Reduced Collection Efficiency 143

Figure 8.9: PPP Arrangement for Anger 148

Figure 9.1: Economic Regulation Balances Needs of Customers andPrivate Operators 151

Figure 9.2: Comparison of Regulatory Traditions 154

Figure 9.3: Option 1: Regulatory Office 158

Figure 9.4: Option 2: CMU with Independent Panel of Experts 159

Figure 9.5: Suggested Organization of the CMU 166

Figure 10.1: Action Plan Gantt Chart 172

Figure B.1: Location and Characteristics of Irrigation Schemes 178

Figure D.1: Smallholder Farmer Income - Megech 194

Figure D.2: Smallholder Farmer Income - Ribb 194


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Figure D.3: Smallholder Farmer Income Anger 195

Figure D.4: Land Area Worked 196

Figure D.5: Crops Cultivated Megech 197

Figure D.6: Crops Cultivated Ribb 197

Figure D.7: Crops Cultivated under Irrigation Ribb 198

Figure D.8: Crops Cultivated Anger 199

Figure D.9: Irrigation of Land - Ribb 200

Figure D.10: Annual Irrigation Cost per Hectare Irrigated - Ribb 201

Figure D.11: Farm-based Problems Megech 202

Figure D.12: Farm-based Problems Ribb 203

Figure D.13: Farm-based Problems Anger 203

Figure D.14: Farm-based Problems Market, Financial/Legal andProduction Issues 205

Figure D.15: Annual Amount Willing to Pay per Hectare Megech 209

Figure D.16: Annual Amount Willing to Pay per Hectare Ribb 209

Figure D.17: Annual Amount Willing to Pay per Hectare Anger 210

Figure D.18: Amount Willing to Pay for Registration Megech 214

Figure D.19: Amount Willing to Pay for Registration Ribb 214

Figure D.20: Amount Willing to Pay for Registration Anger 215

Figure D.21: General Interest in Partnerships Megech 217

Figure D.22: General Interest in Partnerships Ribb 218

Figure D.23: General Interest in Partnerships Anger 218

Figure D.24: Interest in Partnerships with Private Sector IrrigationOperator Megech 219

Figure D.25: Interest in Partnerships with Private Sector IrrigationOperator Anger 220

Figure D.26: Interest in Partnerships with Private Sector Irrigation

Operator Ribb 221

Figure D.27: Difference in Interest in Assistance when in Partnershipwith Private Sector Irrigation Operator Ribb 222

Figure D.28: Interest in Becoming an Outgrower to the Private SectorIrrigation Operator 223


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Figure D.29: Interest in Leasing Land to the Private Sector IrrigationOperator 224

Figure D.30: Temporary Staff Numbers of Commercial Farmers 226

Figure D.31: Commercial Farmers Annual Amount Willing to Pay

per Hectare 227Figure D.32: Commercial Farmers Registration Fee 228

Figure G.1: Foreign Direct Investment into Ethiopia, 19932006 253

BoxesBox 1.1: Gradual Tariff Increase and Operating Subsidy 3

Box 3.1: Ministry of Finances View on Subsidizing Irrigation forSmallholders 25

Box 5.1: Amhara Revised Rural Land Administration and UseDetermination Proclamation: Provisions for Irrigation Land 81

Box 5.2: The Nile Basin Initiative 82


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Executive SummaryThe World Bank and the Government of Ethiopia (the Government) are currentlyimplementing the Ethiopian Nile Irrigation and Drainage Project (EIDP). This projectseeks to increase household incomes and reduce the effects of climate variability onagricultural productivity by financing irrigation development and by strengthening theGovernments strategy for irrigation and drainage. The EIDP will finance thedevelopment of three irrigation schemesin Megech (via pump from Lake Tana), onthe Ribb River, and in the Anger Valley, with a total cost of US$110 million. Thisincludes financing of feasibility and detailed design studies for all three irrigationschemes and capital costs of up to US$46.5 million for the capital costs of Megech andRibb.The Ministry of Water Resources (MoWR) is leading this project on behalf ofthe Government of Ethiopia (the Government).

The World Bank and the Government would like to develop the three irrigationschemes by way of public-private partnerships (PPPs). This could provide farmers with

access to irrigation services that is more reliable than under the Governments currentapproach to providing irrigation.

The World Bank has engaged Castalia to:

Identify various PPP options, and recommend one option to be used foreach of the three schemes

Prepare contract monitoring arrangements for the recommended PPPoptions

Prepare an action plan for implementing the recommended PPP options,including a road map for transaction implementation.

Castalia has identified six possible PPP options that could be applied to each irrigationscheme. We recommend that the Government implements a PPP that is structured asfollows:

The Government and the private operator will enter into a 20 to 30 Build-Operate-Transfer (BOT) contract

The private operator finances a small portionfor example, 5 or 10percentof the capital costs of building the irrigation system. TheGovernment finances the remaining portion of the capital costs

The private operator is responsible for building and testing the systemfollowing the standards and specifications defined by the Government and

farmers. These specifications could include dimensions as well asconstruction materials and techniques

The private operator is responsible for operating and maintaining theirrigation system, providing water to farmers according to the terms andstandards established in the BOT contract and a service agreement between


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the private operator and the farmers. This means that the private operatorassumes all risks associated with operating and maintaining the system tomeet the agreed-upon standards

Farmers will start paying a tariff that is closer to what they revealed as beingwilling to paythat is, around ETB 300/ha/year, but this tariff willgradually increase to close to ETB 2,000/ha/year during the first seven yearsof the systems commercial operations date. A tariff of ETB 2,000/ha/year isreasonable given what farmers are currently paying for irrigation. Farmers inthe Ribb project area that are currently paying for irrigationrenting pumpsand buying fuelare already paying on average ETB 1,970/ha/year. Box 1.1below discusses the tariff transition in more detail

The Government will collectvia the water user association or privateoperator, tariff payments from farmers

The Government will make the following three payments to the private

operator: Construction Milestone PaymentsThese will be made when the private

operator has reached certain construction milestones and will be for atotal amount equal to the portion of the capital costs funded by theGovernment

Availability PaymentsThese will be made periodically, say everymonth, if the private operator maintained the system according to thestandards set in the contract. This payment is intended to reimburse theprivate firm for the portion of the capital costs that it financed

Variable PaymentsThese will be made periodically, say every month, ifthe private operator delivered water to farmers according to thespecifications and standards defined by farmers and the Government. Thispayment is intended to reimburse the private operator for the costs ofoperating the system.

Farmers will be organized in water user associations (WUAs) alongsecondary canals. Each WUA will collect tariff payments from farmers andschedule delivery of water to farmers. WUAs may also perform otherfunctions to support farmers, such as negotiate the purchase of inputs onbehalf of farmers, aggregate farmers crops for marketing, disseminate

information, and assist with training Farmers will be given the option to buy from the private operator non-

irrigation servicessuch as storage, processing, marketing and so on


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Box 1.1: Gradual Tariff Increase and Operating Subsidy

Tariffs should increase gradually as farmers realize increased incomes from the use ofirrigation. The World Bank has estimated how fast farmers may transition toirrigated farming and how their incomes will grow as a result. Given these estimates,we think it is reasonable for tariffs to increase from ETB 300/ha/year to ETB

2,000/ha/year over a period of approximately seven years. This is the tariff pathrecommended for Megech and Ribb. Given that no reliable cost information existsfor the Anger scheme, the tariff path is yet to be determined.

An operating subsidy will be required during the period in which tariffs charged tofarmers are less than the amount required for the private operator to recoveroperating and maintenance (O&M) costs. Figure 1.1 illustrates the tariff transitionperiod and the required operating subsidy for Megech and Ribb. All amounts are inreal terms.

The subsidy is needed until tariffs per hectare become greater than O&M costs perhectare of each scheme. We estimate that, using the recommended tariff transition

path, an operating subsidy of ETB 9.7 million (US$1.1 million) will be needed overthe first five years of operation of the Megech scheme, and an operating subsidy ofETB 16.9 million (US$1.9 million) will be needed over the first four years ofoperation of the Ribb scheme.

The World Bank has allocated US$1.76 from the EIDP to fund an operating subsidyfor Megech and Ribb. Our estimates show that an additional US$1.17 million will beneeded if the recommended tariff path is implemented and O&M costs are asestimated in the pre-feasibility studies for the Megech and Ribb projects carriedforward to 2008 prices.

Figure 1.1: Tariff Transition Period

0

500

1,000

1,500

2,000

2,500

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

ETB/ha/year

O&M Megech O&M Ribb Tariff

O&M Subsidy

0

500

1,000

1,500

2,000

2,500

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

ETB/ha/year

O&M Megech O&M Ribb Tariff

O&M Subsidy

We recommend this PPP option for the Megech, Ribb, and Anger irrigation schemes.The PPP option for Anger could also include commercial farming, and multi-purposecomponents such as hydropower generation if the ongoing feasibility study finds thatthis is indeed feasible. In Anger, if the irrigation operator also engages in commercialfarming, smallholder farmers could also become outgrowers to the commercialfarming operation.


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We have developed a structure for administering subsidy and other payments to theprivate operator. It involves a trust account managed by a private financial institution,into which all funds used to make payments to the private operator will be deposited.

We have developed a regulatory structure, including contract monitoringarrangements, for this type of PPP. It involves the following:

Tariffs, service standards, and how they change over the life of the contractare regulated through the PPP contract

An Independent Panel of Experts (IPE) approves extraordinary tariff andservice quality adjustments, which are those that cannot be regulatedthrough the PPP contract

A Contract Monitoring Unit (CMU) within the MOWR monitors andenforces private operator terms of service, and supports the IPE wherenecessary.

This regulatory structure effectively relies on the parties to the contract to self-regulate, and where there are disagreements on service quality or tariffs, defer decisionsto an independent panel of experts.

In terms of contract monitoring, we recommend that the CMU require the privateoperator to report water availability in terms of the number of hours of waterdelivered per day, and data on farmer complaints about service. The CMU willmonitor the private operators performance through theses reports (private operatorself-reporting), farmer feedback, and auditing and inspections. If the private operatordoes not deliver water as scheduled, it will face a financial penalty (pay a fine).

We have also developed an action plan that can serve as a guide for the World Bank

and the MOWR to implement the PPP schemes. This plan shows the steps needed toengage a private operator under a PPP contract for each scheme.

Public-Private Partnership Options

To develop PPP options that could be implemented for each irrigation scheme, weconducted general due diligence to identify the:

Objectives and views of the key stakeholdersGovernment, farmers andprivate investors that could potentially be party to the PPP contract

Lessons that may be learned from other countries experience involving theprivate sector in the provision of irrigation services through PPPs and

reforms

Legislative and regulatory framework for these schemes

Financial viability of the schemes.

We developed a range of PPP options and analyzed how each option performs withregard to:

Providing strong incentives to deliver reliable services


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Minimizing the level of subsidy required

Attracting strong interest from potential private investors

Being relatively simple for the Government to implement.

We developed a preliminary set of recommendations and discussed these

recommendations with some of the key stakeholders. We held these discussions at aworkshop in Addis Ababa on February 11, 2008. Based on the feedback received inthese discussions, we developed our final recommendations.

We recommend the PPP option described above because it:

Provides strong incentives to deliver reliable services. This is because theprivate is only reimbursed for capital costs over time as it complies with theterms and service standards agreed upon in the PPP contract and serviceagreements signed with farmers

Has the potential to attract strong interest from potential private investors.

This is because the Government bears demand and payment risk, and thePPP option allows for the private operator to provide non-irrigation servicesto farmers

Is simpler for the Government to implement than other options that providestrong incentives.

Contract Monitoring Arrangements

To develop the recommended regulatory framework, we considered the three types ofregulatory structures that have been used around the world:

Institutional regulator

Regulation by contract, supported by an independent panel of experts

A hybrid of the two.

In practice, hybrid regulatory frameworks have not delivered the desired results. Thisis because it is difficult to define how an independent regulator (institutional regulator)can coexist with rules defined in contracts and subject to final decisions by bindingarbitration (regulation by contract).

We compared how these options perform with regard to:

International best practice

Organizational consistencyperforming the necessary regulatory functionscompetently and impartially in a way that does not strain the countrys orsectors organizational capabilities and that is consistent with legal andadministrative traditions.

We recommend regulation by contract, supported by an independent panel of expertsbecause:


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International experience has demonstrated that:

Because it is difficult to define how an independent regulator(institutional regulator) can coexist with rules defined in contracts andsubject to final decisions by binding arbitration (regulation by contract),hybrid regulatory frameworks do not work well

An institutional regulator for a PPP project that has as its heart a PPPcontract performs essentially the same as a hybrid regime

The recommended option allows the irrigation schemes to benefit frominvolvement of foreign experts with extensive experience in economicregulation, and the independent nature of the IPE ensures impartiality

Regulation by contract is easier to integrate with existing legal andadministrative traditions.

Action Plan

We have recommended an action plan for implementing the Megech, Ribb, and Angerirrigation PPPs. The action plan is essentially a road map for implementing atransaction that will engage a private operator as the private party to each of these PPPcontracts. It includes the steps required to prepare and carry out this transaction and isbased on our knowledge of what has been necessary to implement similar PPPtransactions around the world.


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1 IntroductionThis section will first describe the central role that agriculture plays in the Ethiopianeconomy, and why irrigation is a priority for the Government and the World Bank(Section 1.1). It will then outline the rest of this report (Section 1.2).

1.1 The Importance of Agriculture and Irrigation

Agriculture is central to the Ethiopian economy, with approximately 86 percent of thepopulation engaged in agricultural activities. Agriculture also provides around 52percent of the gross domestic product (GDP) and 90 percent of export earnings.

Lack of sufficient and effective irrigation in agriculture contributes to low agriculturalyields, and is a significant constraint to economic growth. Irrigation increases the yieldof cultivated lands, and allows for the extension of cultivated areas. Greaterproductivity will have a positive impact on rural income, food security, agriculturalexports, and, ultimately, on the overall Ethiopian economy.

The Government is aware that in order to increase agricultural productivity it willneed to increase the number of hectares with access to irrigation. As evidence of theimportance that irrigation has on Ethiopias economy, Figure 1.1 presents a chartprepared by the World Bank that clearly shows how economic growth is correlated torainfall.

Figure 1.1: Rainfall Variation around the Mean and GDP Growth

Source: World Bank (2006), in Sadoff, C (2006) Can Water Undermine Growth? Evidence from Ethiopia,Agricultural & Rural Development Notes, The World Bank

The Government has prioritized the development of irrigation schemes as a centralcomponent of its poverty reduction strategy. Irrigation is a key component of theGovernments Plan for Accelerated and Sustained Development to End Poverty


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(PASDEP) and the Governments strategy for meeting the Millennium DevelopmentGoals.

The Government plans to support the development of irrigation for over 260,000hectares in the Nile Basin by 2016. This means doubling the amount of land underirrigation there in less than 15 years. The Government expects the amount of landunder irrigation to increase by 4.5 percent annually in the short term, and 6.5 percentannually in the long term.

The World Bank is also committed to supporting the development of irrigation inEthiopia. One of the four priority objectives in the World Banks May 2006 InterimCountry Assistance Strategy for Ethiopia is to increase agricultural productivity. TheEthiopian Nile Irrigation and Drainage project is a key element of the World Banksstrategy in Ethiopia.

The objective of the Ethiopian Nile Irrigation and Drainage project is to increasehousehold incomes, increase sustainable agricultural output and productivity, and

reduce the effects of climate variability on agricultural productivity by financingirrigation development and by strengthening the Governments strategy for irrigationand drainage. The project will finance the development 20,000 hectares of ground andsurface water irrigation (Megech and Ribb) and preparation of irrigation projects for anadditional 80,000 hectaresincluding Anger.

1.2 Report Outline

This report presents the recommended PPP models for each irrigation scheme, thecontract monitoring arrangements that we propose, and an action plan forimplementing the recommended PPP models for each scheme.

Section 2 shows the location of and describes some basic characteristics of the Megech,Ribb, and Anger irrigation schemes and the farmers in the command areas for eachscheme.

Section 3 discusses the objectives and views of the key stakeholders for the irrigationschemes. The key stakeholders are the Government, farmers and private partners. Forthe irrigation schemes to be successful, the objectives of all of the key stakeholdersshould be met.

Section 4 defines public-private partnerships (PPPs) and discusses how PPPs can beused to provide farmers with access to irrigation services that is more reliable thanunder the Governments current approach to providing irrigation. It also reviews the

experience of other countries implementing PPPs, and other private sectormanagement approaches, for irrigation and draws lessons from them for the case ofEthiopia.

Section 5 outlines the legal framework for PPPs in irrigation in Ethiopia.

Section 6 summarizes the key implications of the previous sections for the design ofPPPs in Megech, Ribb, and Anger irrigation schemes. This includes:


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Comparing the costs of developing the schemes with the amount thatfarmers are willing to pay for irrigation, and discussing how an operatingsubsidy could be minimized and implemented

Considering how non-irrigation services could be incorporated in to thePPPs

Considering how demand and payment risk could be allocated, given theprivate sectors views on bearing these risks.

Section 7 discusses the PPP options that we have developed, analyzes them, and stateswhich PPP option we recommend for each scheme. Section 8 presents therecommended PPP option in more detail. It also includes estimates of the requiredsubsidy and recommendations for administering payments to the private operator.

Section 9 presents the contract monitoring arrangements that we recommend, andSection 10 presents a step-by-step plan for implementing the PPPs for each scheme.


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2 Basic Facts on the Megech, Ribb and AngerIrrigation Schemes

The Abbay (or Blue Nile) river basin is one of three river basins in Ethiopias Nile

drainage system. The irrigation potential is estimated at over 1 million hectares. TheMegech, Ribb, and Anger irrigation schemes are located within the Abbay basin. Thissection shows the location of and describes some basic characteristics of the irrigationschemes and the farmers in the command areas for each scheme.

Figure 2.1 shows the location of each scheme.

Figure 2.1: Locations of Irrigation Schemes

Table 2.1 presents characteristics of the irrigation schemes, including:

Size of project area and irrigable area

Number of woredas and kebeles in each project area

Source of water

Me ech

Ribb

Anger


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Assumed crop pattern

Type of system

Peak demand

Phasing

Estimated capital costs

Estimated operating and maintenance costs

Economic internal rate of return


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Table 2.1: Basic Characteristics of Megech, Ribb, and Anger Irrigation Schemes

Megech Ribb Anger

Project Area 5,254 ha 17,700 ha 17,200

Irrigable Area 4,466 ha 14,460 ha 14,450

No. of Kebeles 13 Kebeles within project area; 8Kebeles partly within project area

8 Kebeles within project area; 8Kebeles partly within project area

22 Keb

No. of Woredas Project within 1 Woreda Project within 2 Woredas Projec

Source of water Lake Tana Ribb River Anger

Assumed crop pattern Rice NA NA

Type of System Two pumping stations and openchannels

Dam on Ribb River and openchannels

Dam a

Peak Demand 8,700 m3/ha/year 9,300 m3/ha/year NA

Phasing 6 phases of which this project isfirst phase

None 2 phasone ph

Capital Costs (ETB2008)

ETB 213 million ETB 984 million NA

O&M Costs (ETB2008/ha/year)

ETB 1,157/ha/year ETB 874/ha/year NA

Economic InternalRate of Return

22% 14% NA

Sources: Castalia Willingness to Pay Surveys, BCEOM Pre-Feasibility Study, World Bank Project Appraisal Document (2


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The Megech and Ribb command areas are populated with smallholder farmers. Thereare approximately 13,600 farm households in Megech and 10,700 farm households inRibb. These households cultivate an average of 2.0 hectares and 1.2 hectares,respectively, for Megech and Ribb.

The Anger area has areas of unoccupied land, which are suitable for commercialfarming. There are approximately 10,300 farm households in the command area. Theycultivate an average of 1.7 hectares.

Further details on the characteristics of farmers in each command area, their interest inreceiving irrigation and other agricultural services, and their willingness to pay forirrigation are provided in Section 3.2

Table 2.2 presents characteristics of the farmers in the command areas, including:

Number of households/farms

Average farm size and distribution

Average income per farm Current crops grown

Current irrigation practices

Percent of farmers with land use certificates.


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Table 2.2: Basic Characteristics of Farmers in Megech, Ribb, and Anger Command Areas

Megech Ribb

Number of Farms(Farming Households)

13,600 (approximate) 10,700 (approximate)

Average Farm Size(Cultivated Land)

Size Distribution

2 ha

87% of farms have 1 to 3 ha

1.2 ha

75% of farms have 1 to 3 ha

Average income per farm ETB 4,750/year ETB 3,360/year

Current Crops >70% cultivate chick peas, teff, fingermillet and sorghummostlysubsistence

>70% cultivate rice, chick peas andvetchmostly subsistence

Current use of Irrigation 11% use irrigation 40% use irrigation

average reported cost is ETB1,970/ha/year

Rights to use land 100% of farmers have been certified touse land, but over 60% of farmers rentland from other farmers

97% of farmers have been certified to useland, but over 25% of farmers rent landfrom other farmers

Sources: Castalia Willingness to Pay Surveys, BCEOM Pre-Feasibility Study, World Bank Project Appraisal Document (2


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3 Key Stakeholders Objectives and ViewsThe first step in the process of identifying public-private partnership (PPP) models forthe Megech, Ribb, and Anger irrigation schemes involves consultation with keystakeholders. This is important because to be successful, the PPP model chosen foreach irrigation scheme must respond to the expectations, concerns, and objectivesinshort, the viewsof these stakeholders.

The key stakeholders are:

The Government of Ethiopia

The farmers in the command areas 1

The private partners who develop the irrigation schemes.

We met with 37 central, regional and local Government officials in Addis Ababa, BahirDar, Nekemte, and the project areas. These officials represent 24 ministries, agencies,

and local governments. We carried out a survey of approximately 200 farmers in eachproject area. We also contacted 16, and spoke with eight, potential private investors togauge their views on the various PPP models under consideration.

Governments Views and Objectives

In our consultations with the central, regional, and local Governments in the Megech,Ribb, and Anger project areas, we found that:

The Government is committed to developing the Megech, Ribb, and Angerirrigation schemes and supports the idea of private-sector involvement intheir development and management

The Government would like to help farmers access reliable irrigationservices

The Government would like to improve water management practices inirrigation

The Government would like to involve the private sector in thedevelopment and operation of irrigation schemes

The Government would like to attract investors to commercial farming inthe Anger Valley

The Government would like to help farmers access inputs, post-harvestservices, and other related services

The Government would like to encourage investors to engage smallholderfarmers as outgrowers

1 The command area of each irrigation scheme is the land area that will be served with irrigation from the scheme.


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The Government is prepared to subsidize the capital costs of developingirrigation infrastructure for smallholder farmers, but less willing to subsidizeoperating and maintenance costs.

The Government does not have experience designing or implementing PPPsfor infrastructure projects

Although private ownership of land is not permitted in Ethiopia, there isforeign investment in commercial farming

The lack of private ownership of land may make it difficult for investors tosecure financing for irrigation schemes.

Farmers Views

The smallholder farmers in the command areas are very interested in receivingirrigation, even if this means paying for it. At least 93 percent of farmers in all threecommand areas are willing to pay for irrigation.

However, the amount that smallholder farmers are willing to pay for irrigation is low.In Megech, the average amount that farmers are willing to pay is 310 ETB per hectare,per year. In Ribb, it is 294 ETB per hectare per year, and in Anger it is 216 ETB perhectare per year. Only approximately one-third of respondents in each project areastating they were willing to pay 300 ETB or more per year. This will cover only afraction of the estimated cost of operating and maintaining the systems.

Farmers in the Ribb project areas that are currently using irrigation (43 percent of thefarmers surveyed) pay up to 1,970 ETB per hectare per year. These farmers are willingto pay an average of 373 ETB per hectare per year under the irrigation scheme to bedeveloped as a PPPthis is 27 percent higher than the average willingness to pay. This

leads us to believe that once farmers see the benefits of irrigation, in terms of increasedproductivity and incomes, they would be willing and able to pay more than theyreported in the survey.

Farmers in the command areas also have a high degree of interest in receiving servicesbeyond irrigation from the private investor in the irrigation schemes. This includestraining, post-harvest services, and possibly becoming outgrowers to the privateinvestor.

Private Investors Views

Based on consultations with eight potential private investors, we found that to be

attractive to potential private investors, the PPP structures for each irrigation schemeshould:

Give the private investors comfort that they will recover their costs andreceive adequate return on any capital they invest

Allocate the following risks to the Government:


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Demand riskthe risk that demand for irrigation will be lower thanexpected

Payment riskthe risk that farmers will not pay for the water that theyuse

Allow for irrigation operation and maintenance to be combined with othercommercial activities such as:

Commercial farming

Providing complimentary services to farmerssuch as marketing

Delegate responsibility for design and construction of the irrigation systemto the private investor

Not require the private investor to have capital at risk

Give secure land use rights to the private investor, in the form of a land leasewith a term that is as long as legally possible

Ensure that the portion of revenue to the investor that is meant to covercosts incurred in hard currency (US dollars, euros) is paid in hard currency.

The rest of this section presents in more detail what we understand to be the objectivesand views of these three groups of stakeholders, based on our consultations. It alsodescribes the methodology we followed to consult with them. Section 3.1 presents theGovernments objectives and views, Section 3.2 presents the farmers views, andSection 3.3 presents the potential private investors views.

3.1 Government

The Government recognizes that a new approach to developing irrigation schemes forsmallholder farmers is necessary. It is interested in using PPPs to develop the Megech,Ribb, and Anger irrigation schemes.

We consulted with central, regional, and local government officials to gather theirviews on issues related to the design of these PPPs and irrigation schemes, and togather information on the context in which these PPPs will be implemented.

This section summarizes the results of our consultations with central and regionalgovernment agencies, and with woreda administrators (local governments) in theproject areas. In Section 3.1.1 we present the list of Government agencies we spokewith during our work. In Section 3.1.2 we discuss the results of our consultations, as

outlined above.3.1.1 List Government Stakeholders Consulted

The key Government stakeholders are those that will make decisions regarding, andimplement the PPPs. We consulted Government stakeholders at the central, regional,and local levels. We also consulted agencies that will not be directly involved inmaking decisions or implementing the PPPs, but that do have relevant information forour work.


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Oromia Agriculture BureauIt is the regional branch of the Ministry ofAgriculture and Rural Development for the Anger scheme

Oromia Irrigation Development AgencyIt is responsible for developingsmall-scale irrigation projects

East Wellega Investment OfficeIt is the agency responsible for attractingprivate-sector investment to the Oromia region.

We also consulted with the Regional Project Coordinator of the EIDP in the Amhararegion.

Local Government Level

At the local level, we met with key officials in the following woredas in the commandareas:

Fogera (Ribb)

Libokemkem (Ribb)

Gida Ayana (Anger)

Sibu Sure (Anger)

Appendix A contains a list of our meetings with central, regional and local governmentstakeholders.

3.1.2 Findings on the Governments Objectives and Views

Implementing the Megech, Ribb, and Anger irrigation schemes is a high priority forthe Government. Section 1.1 explained why the Government is committed todeveloping these (and other) irrigation schemes.

In our consultations with the Government, we gathered their objectives and views onissues directly related to the design of the PPPs and irrigation schemes.

We have found that the Government:

Is committed to developing the Megech, Ribb, and Anger irrigation schemesand supports the idea of private-sector involvement in their developmentand management

Would like to improve the reliability of irrigation for smallholders

Involve the private sector in the development and operation of irrigationschemes

Would like to attract investors to commercial farming in Anger

Would like to provide farmers with access to inputs, post-harvest servicesand infrastructure, and other related services

Would like to encourage investors to engage smallholder farmers asoutgrowers


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Is prepared to subsidize the capital costs of developing irrigationinfrastructure for smallholder farmers, but less willing to subsidize operatingand maintenance costs.

The following sections discuss each point in more detail.

Support for the irrigation schemes and a private sector involvementOfficials in the central, regional, and local governments are committed to developingthe Megech, Ribb, and Anger irrigation schemes. The Ministry of Water Resources,which has responsibility for developing large-scale irrigation schemes, is completelycommitted to their development. Other officials note that these three irrigationschemes are very important, as they will give farmers access to irrigation that theydesire, increase crop yields, and therefore increase farmers incomes.

Almost none of the officials whom we consulted are familiar with PPPs; however,they support the idea of a private-sector entity developing and operating the irrigationschemes. Officials at the central and local government levels are already involved in

preparing the projects and have committed to developing them with participationfrom the private sector. Officials at the woreda offices in the project areas expressedtheir full support for the projects and the private-sector approach. The concept ofinvolving a private company in the development and operation of the irrigationschemes was relatively new to them when we consulted them, but they did not hesitateto support this concept.

It is also interesting to note that the Minister of Finance is working on developing aconcept paper on PPPs in large-scale irrigation. There was no information available onthe content of this paper when we consulted the Ministry.

We have observed this high level of support for PPPs during our initial consultations,in which Government officials are learning of the plans for the irrigation schemes andthe benefits that PPPs can have. However, the Governments true level ofcommitment will be seen when decisions regarding the implementation of the PPPshave to be made. Some critical decision points that would reveal the Governmentstrue level of commitment may include:

Drafting and passing legislation or regulations, such as a PPP law or policy,or a Water Code, to strengthen the legal framework for PPPs

Establishing a subsidy fund, administered by a private financial institution,to pay any subsidies required to the private investor.

Improve the reliability of irrigation for smallholders

From our consultations with the officials listed in Section 3.1.1, we understand that theGovernments principal objective for the Megech, Ribb, and Anger irrigation schemesis to provide more reliable irrigation for smallholders than past approaches have. Thisis the overriding objective at all levels of Governmentcentral, regional, and local. Itinvolves assuring that the farmers receive the quantity of water they need wheneverthey need it, accurate to the day and even hour that they need it.


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Government stakeholders including the Ministry of Water Resources, Ministry ofAgriculture, Oromia Irrigation Development Agency, several regional bureaus inAmhara and Oromia, and woreda officials, recognize that the Governments pastapproach to developing irrigation for smallholders has not provided the reliability thatfarmers need to effectively increase the yield of their land and increase their income,

and have a positive impact on economic growth. These Government stakeholders wishto take a new approach to improve the reliability of irrigation for smallholders.

Under the current approach, fees paid and contributions-in-kind from farmers barelycover operating costs and do not cover maintenance costs. Because of this, massiverehabilitations are usually needed every few (approximately 4-5) years. If theGovernment cannot fund these rehabilitations, the farmers are left without access toirrigation.

Figure 3.1 illustrates the Governments current approach to providing irrigation forsmallholder farmers.

Figure 3.1: Current Approach to Irrigation for Smallholders

Ministry of

Finance

Ministry of

Water

Resources /

Ministry of

Agr icul ture

Farmers

Budget

Funding for Construction

and Rehabilitation

Taxes

Contributions in-

kind and Cash

Irrigation

Scheme

Ministry of

Finance

Ministry of

Water

Resources /

Ministry of

Agr icul ture

Farmers

Budget

Funding for Construction

and Rehabilitation

Taxes

Contributions in-

kind and Cash

Irrigation

Scheme

The Ministry of Water Resources (in the case of large-scale schemes of over 3,000hectares) or the Ministry of Agriculture and Rural Development (in the case of small-and medium-scale schemes) fund the construction of the irrigation system. Typicallythese funds are sourced from a concessional loan or grant from a multilateral orbilateral donor agency. Farmers make contributions in-kind, and in some instancesmake cash payments, to support the construction and operation of the system. Forexample, they may provide construction materials. Farmers themselvesorganized inwater users associations or irrigation cooperativesoperate the systems.

In cases cited by the Oromia Irrigation Development Agency, farmers cash payments

cover no more than 10 percent of operating and maintenance costs. Farmers totalcontributions including labor and materials given in-kind cover no more than 15percent of operating and maintenance costs.

Under this approach, the Government and farmers bear all of the risks of building,operating and maintaining the irrigation systems. For example:


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Construction cost overrunsconstruction is delayed or implementingagency must increase its budget for the project, or both. Here, theGovernment bears risk

Construction delaysfarmers must wait longer than expected to receiveirrigation. Here, the farmers bear risk

Operating problemsif the irrigation system experiences problems thatresult in farmers not being able to extract water from the system as needed,the farmers have no recourse. For example, if the gate that controls theinflow of water to a canal on a farmers property is not opening, the farmercannot receive water until he or she finds a way to fix the gate. Here, thefarmers bear risk

System repairsthe Government must fund repairs to the system. Farmersmay be without irrigation for a time while the Government secures thefunding. Here, the farmers bear risk

As described by the Ministry of Agriculture, the Oromia Irrigation DevelopmentAgency, and other government officials, this approach has resulted in:

Inefficient irrigation systems, with technical and non-technical losses of upto 75 percent or more

Unsustainable irrigation systems

Inadequate operation and maintenance leading to system breakdowns thatrequire massive rehabilitations

In most cases, the Government does not have funds available for theserehabilitations and must secure funding from donors such as the UnitedNations Food and Agriculture Organization, United NationsDevelopment Program, and others.

Government ministries, regional bureaus, and local governments concur that a newapproach is needed to provide more reliable irrigation to smallholders. This includesreducing system losses and improving maintenance so that the schemes are moresustainablethat is, they do not require massive rehabilitations every 4-5 years or so.

Improve water management practices in irrigation

The Government is also interested in taking a new approach to irrigation that willreduce the amount of water lostor wastedfrom irrigation systems. The Ministry of

Agriculture and the Oromia Irrigation Development Agency have told us thatprevious irrigation schemes built to serve smallholders have losses of between 50percent and 75 percent. There are many reasons for these high levels of losses. One ofthe reasons is poor maintenance of irrigation systems, as described in Section 0.Another reason is that farmers lack incentives to use the water they obtain fromirrigation systems efficientlyin part, because they do not pay for the water they useon a volumetric basis.


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Involve the private sector in the development and operation of irrigation schemes

Another of the Governments objectives for the Megech, Ribb, and Anger irrigationschemes is to expand the role of the commercial private sectorthat is, the privatesector beyond smallholder, subsistence-level farmersin the agriculture sector. Thisobjective has three sub-components. The Government would like to involve the

private sector in the development and operation of irrigation schemes

The Ministry of Water Resources document on the operationalization of its irrigationstrategy states that the Government wishes to encourage the involvement of theprivate sector in:

Implementation or construction of medium/large scale schemes

The O&M and management phases of the schemes.

Officials at the Ministry of Water Resources have noted that involving the privatesector in the operation and maintenance of irrigation schemes will introduce bestpractices to these areas. As discussed in the sub-section above, best practice has beenlacking in irrigation schemes developed for smallholder farmers.

Attract investors to commercial farming in the Anger Valley

In the Anger Valley, large tracts of unoccupied land exist and can be used forcommercial farming. The Ministry of Water Resources has expressed interest inattracting commercial farmers to this land. Officials at the Oromia IrrigationDevelopment Agency, East Wellega Investment Bureau, Gida Ayana woreda, and SibuSire woreda also share this view. Officials in the woreda administration offices in GidaAyana and Sibu Sire stated that attracting commercial farmers to the valley is a highpriority because it would provide additional sources of jobs and income for the people

living in the valley.Officials also recognize that in order to make a large plot of land available for acommercial farm, some smallholder famers may need to be relocated. While theMinistry of Water Resources has stated that it would not like to relocate farmers,regional agencies and woreda officials think that relocation would be possible. Officialsat the Oromia Agriculture Bureau, East Wellega Investment Office, and Gida Ayanaworeda Sibu Sire woredas have expressed that the Government could relocate farmerswithout much difficulty if the farmers are properly compensated.

Provide farmers with access to inputs, post-harvest services and infrastructure,and other related services

At the central, regional, and local Government levels officials concur that they wouldlike for the private investor in the irrigation schemes to provide non-irrigation servicesto farmers as well. This objective comes in the context of Ethiopias ongoing transitionfrom a centrally-planned to a market economy. The commercialization of agricultureand the promotion of non-farm private sector growth is one of the main elements ofthe Governments Plan for Accelerated and Sustained Development to End Poverty(PASDEP).


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The Government is interested in having the private investor in the irrigation schemesprovide any combination of the following services to farmers:

Input supply

Training on:

Crop selection

Use of irrigation

Post-harvest services, including:

Storage, including cold storage for perishable crops such as tomatoes

Processing

Marketing

Transportation.

Interest in the private investor to providing these types of services is strongest at thelocal Government level and weakest at the central Government level. There is also ahigher level of interest in having the private investor provide post-harvest services,than in having the investor provide inputs and training.

Officials in Fogera woreda (Ribb) stated that the most critical issue for farmers is thelack of access to markets, and that farmers would welcome assistance with marketingtheir crops. Officials at Libokemkem woreda (Ribb) had a similar position. In both ofthese woredas, and in the opinion of the Oromia Irrigation Development Agency,another critical issue is the lack of cold storage facilitiesfarmers would like tocultivate high-value vegetable crops, but these crops are perishable. Without cold

storage, the market is flooded at harvest time and crops that are not sold rot.Woreda officials and officials at the Amhara Cooperative Promotion Agency also statethat farmers also need access to inputs, transportation, and processing facilities. Theofficial at the Amhara Cooperative Promotion Agency noted that although marketingis one of the irrigation cooperatives main responsibilities (where these cooperativesexist), their marketing systems are not well-established and tend to be insufficient.

Officials at the Gida Ayana and Sibu Sire woredas (in Anger) state that farmers needsupport in marketing their crops. Officials in Sibu Sire also state that farmers needbetter physical access to markets through roads. Most kebeles in the woreda do nothave access roads.

Officials perceive that farmers have a stronger need for post-harvest services than forinput supply and training. Also, agricultural extension workers at the woreda levels arealready providing training (coordinated and funded through the regional Bureaus ofAgriculture), and cooperatives are already providing some access to inputs in some ofthe project areas. In Amhara, the Bureau of Water Resources provides training tofarmers on the use of irrigation.


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Smallholder farmers as outgrowers

Government officials are also interested in the possibility that the private investor inthe irrigation schemes engages smallholder farmers as outgrowers. This is a definitepossibility in Anger, where an investor that develops commercial farming in additionto irrigation could include outgrowers in its commercial farming scheme. It is less clear

how this would work in Megech and Ribb, where there is no land available for theprivate investor to develop its own farm.

The official at the Oromia Bureau of Agriculture stated that developing smallholders asoutgrowers to commercial farmers is its main strategy in the region. An outgrowerstructure could also help to resolve the problem of inadequate marketing.Furthermore, the official in charge of the PPP Department at the Privatization andPublic Enterprises Supervising Agency has also mentioned that engaging smallholdersas outgrowers to a commercial farmer would be feasible and attractive to investors inthe agriculture sector.

Subsidize the costs of developing irrigation infrastructure for smallholder farmersThe Government is prepared to fund the capital costs of developing irrigation schemesfor smallholders. The Governments water sector policy states that irrigation schemesshould achieve total cost recovery, but the Government also acknowledges that this isnot likely to be achieved for schemes that serve smallholders.

The Government is prepared to finance the capital costs of developing irrigationschemes that serve smallholders. Of the funds from the EIDP, the Government hasdestined US$46.5 million to finance the capital costs of the Megech and Ribb schemes.

Approval for Government subsidies comes from the Ministry of Finance and theCouncil of Ministers. Box 3.1 describes the Ministry of Finances view on subsidizing

irrigation for smallholders and the process of subsidy approval.

Box 3.1: Ministry of Finances View on Subsidizing Irrigation for Smallholders

The Ministry of Finance supports the policy of subsidizing irrigation schemes thatare developed for smallholder farmers. The Minister is currently leading thedevelopment of a concept paper regarding the Governments approach to subsidizinglarge-scale irrigation systems.

The Council of Ministers, led by the Prime Minister, is responsible for approvingsubsidies for large projects such as Megech, Ribb, and Anger. The Ministry ofFinance recommends subsidies for approval by the Council of Ministers. In makingthis recommendation, the Ministry of Finance considers each project on a project-by-

project basis. The Ministry of Finance considers budget capacity, other spendingpriorities, and political aspects in making this decision.

The Governments position on subsidizing operation and maintenance costs is unclear.According to the water sector policy, the Government is not prepared to provideoperating subsidies for irrigation schemes. However, in practice, the Government has


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indicated that it may be willing to provide operating subsidies over a short period oftime.

The Ministry of Water Resources is overseeing the development of the Koga irrigationscheme. This is the first large-scale irrigation project in the country to servesmallholder farmers. The Governments position on this project is that the full costs ofoperating and maintaining the irrigation system should be recovered through tariffspaid by farmers. However, tariffs have not yet been set. The results of the ongoingwillingness-to-pay survey will help to determine at what level tariffs will be set. TheGovernment realizes that full recovery of operation and maintenance costs may not beachieved.

The Government and the World Bank are also aware that smallholder farmers in theMegech, Ribb and Anger command areas may not be willing and able to pay tariffsthat allow the full operation and maintenance costs to be recovered. The Governmentand the World Bank have set aside some funding in the EIDP to finance an operatingsubsidy during the first four years of operation of the Megech and Ribb schemes.

No experience with PPPs

The Government does not have experience designing or implementing PPPs of thetype under consideration for the Megech, Ribb, and Anger projects. PPPs of the typeunder consideration for these projects are contractual arrangements whereby theGovernment transfers some of the responsibilities, and some of the risks, of serviceprovision to a private-sector party. The private-sector party delivers a service over aperiod of time, and ensures that the service meets certain standards defined in theagreement. The private-sector party delivers these services by operating a facility forwhich it has provided a combination of the following: design, construction, and

finance.The Government has implemented PPPs per its own definition. Its definition of PPPsincludes long-term leases, short-term leases, or joint ventures used to transfer existingGovernment assetsmainly state-owned farms and factoriesto the private sector.However, this is not the type of PPP that would be developed for the EIDP project

Therefore, an important component of our work will be to familiarize theGovernment with the definition of, and issues related to the implementation of, PPPsof the type that will be implemented for the EIDP.

Foreign investment in agriculture

Although no PPPs of the type that will be implemented for this project exist, andthere is no foreign investment in infrastructure in Ethiopia, there are some largecommercial agriculture ventures involving foreign investment. This suggests that whilethe private sector is not allowed to own land (per the Constitution of Ethiopia),foreign investors have still found attractive investment opportunities in Ethiopiasagricultural sector. Some examples of foreign investment in agriculture include:


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Green Focus 3,000 hectare farm near Anger Valley. This is a joint venturebetween Ethiopian and Indian investors

Fri El Green Power 60,000 hectare palm oil plantation in Omo Basin. This isa US$3 billion investment by an Italian company

A sugarcane plantation in the Belles valley. This is a joint venture betweenEthiopian and Brazilian firms (BDFC and FP Aeroparts Ethiopia).

There are also a number of commercial farms in Awash valley, some of which havedeveloped their own irrigation systems.

Lack of land ownership may make financing difficult

While foreign and domestic companies have invested in the agriculture sector despitenot having full land ownership, the lack of full land ownership may make it difficultfor investors to obtain financing. This is especially true in irrigation.

In agriculture schemes, companies may use crops, land leases, buildings, or vehicles as

collateral for loans. Investors in the irrigation schemes will not have crops or a leaseover a consolidated land territory. They also may not have a lease for the land that theirrigation system runs throughthe Government may instead issue another type ofcertificate giving them the right to use the irrigation infrastructure financed by theGovernment. This could be the case if the Government finances 100 percent of thecapital costs. Thus, it may be difficult for the investor to provide collateral that bankswill accept.

3.2 Farmers

To ensure that the PPPs for the Megech, Ribb, and Anger irrigation schemes respondto the expectations and needs of farmers it is necessary to determine:

The farmers degree of interest in receiving irrigation from the schemes

How much the farmers are willing to pay for irrigation from the schemes,and if the amount that farmers are willing to pay follows any geographicalpatterns

The farmers interest in receiving complimentary agricultural services suchas marketing services and storage infrastructure, for example.

To determine the farmers views regarding these points, we carried out a survey of asample the farmers in the command areas. The results of the survey indicate that:

Farmers have a very high degree of interest in receiving irrigation from allthree schemes, even when this means paying for it. At least 93 percent offarmers in all three command areas are willing to pay for irrigation

However, the amount that household farmers are willing to pay forirrigation is low. In Megech, the average amount that farmers are willing topay is 310 ETB per hectare, per year. In Ribb, it is 294 ETB per hectare peryear, and in Anger it is 216 ETB per hectare per year. Only approximately


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one-third of respondents in each project area stating they were willing to pay300 ETB or more per year. This will cover only a fraction of the estimatedcost of operating and maintaining the systems

Farmers that currently use irrigation11 percent of farmers surveyed inMegech, 43 percent in Ribb, and 8 percent in Angerare, on average, willingto pay higher amounts than farmers that do not use irrigation. They alsotend to have higher incomes and cultivate higher-value crops. Farmers in theRibb area that currently use irrigation that has an associated cost pay onaverage ETB 1,970 per hectare per year. This payment would be sufficient tocover the operating and maintenance costs of the Megech and Ribb irrigationschemes estimated in the pre-feasibility studies for each scheme

The amount that farmers are willing to pay for irrigation within eachcommand area does not vary significantly between kebeles in the samecommand area. In other words, no significant geographic patterns emergeregarding the amount that farmers are willing to pay for irrigation withineach command area

Farmers in the command areas also have a high degree of interest inreceiving complimentary services from the private investor in the irrigationschemes, including possibly becoming outgrowers to the private investor.

A summary of the survey methodology and results is presented below in six parts.

First, we present the survey methodology (Section 3.2.1)

Second, we present the willingness to connect of household farmers to theirrigation system (Section 3.2.2). This explains the farmers degree of interest

in receiving irrigation, what amounts they are willing to pay for irrigation,and if these amounts follow any geographical patterns

Third, we present the farmers interest in receiving complimentaryagricultural services from, and entering into other types of partnershipswith, the private investor (Section 3.2.3)

Fourth, we present information on the socio-economic characteristics offarmers (Section 3.2.4). This includes their incomes, the amount of land theycultivate, the types of crops they grow, and their current irrigation practices.This helps to understand the context in which the irrigation PPPs will beimplemented

Fifth, we analyze in more detail the incomes and crops grown by the farmerscurrently using irrigation (Section 3.2.5)

Fifth, we present what farmers perceive to be their main problems (Section3.2.5). This provides more information on how strongly they valueirrigation and the other types of services that may be provided as part of thePPP, compared to other types of agricultural services and assistance


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Finally, we present the results of our consultations with commercial farmersseparately from our consultations with smallholder farmers (Section 3.2.7).

Appendix D presents the survey results and methodology in more detail.

3.2.1 Methodology

This section summarizes the methodology used to carry out the willingness-to-paysurvey. A full description of the methodology, along with tables on the sample size, isprovided in Appendix D.1.

Initial survey design work commenced in September-October 2007. A draftquestionnaire was developed with the field manager and tested in the field in between 2and 10 November 2007. Training of the supervisors and interviewers was undertakenincluding in the fieldbetween 2 and 9 December 2007 in Megech and Ribb, andbetween 11 and 14 December in Anger. Further field testing was completed during theinterviewer and supervisor training. This led to no significant content changes,although a number of local language updates were made.

Formal field work was completed between 10 and 22 December 2007. Data input andcleaning was then completed by 6 January 2008.

The sample frame includes household farmers and commercial farmers in the threeproject areas. The project areas are split into woredas which are in turn made up ofkebeles. A woreda is an administrative ward, or local government, equivalent to adistrict. Kebeles are neighborhood associations and are the smallest unit of localgovernment in Ethiopia. There is no complete and accurate data on which kebelesdefinitely lie within the project areasespecially in the Anger project area. The kebeleswithin the sample frame were identified through meetings with the Ministry of WaterResources and with relevant Woreda and kebele officials in the field.

In total, a sample of 615 household farmers was used, with a minimum of 200household farmers sampled in each of the three project areas. There were six kebelessampled in each of the Megech and Ribb project areas, and seven kebeles in Angermaking a total of 19 sampled kebeles. Both the sampled kebeles in each project areaand the sample within each kebele were identified randomly.

3.2.2 Willingness of Smallholder Farmers to Connect to the Irrigation Systems

For each command area, this section summarizes farmers degree of interest inreceiving irrigation that they would have to pay for, how much they would be willingto pay, and whether and how much they would be willing to pay as a one-time

registration fee. The question of a registration fee is relevant because some PPPs inirrigation and other network infrastructure sectors have sought to recover a portion ofthe projects capital costs through a one-time registration fee.

This section provides a summary of our results. Full results and figures may be foundin Appendix D.3.


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Interest in Principle

In Megech, 96 percent of respondents were interested in principle in connecting to theirrigation system. 98 percent were interested in Ribb and 99 percent in Anger. Ofthose respondents in Megech that stated they were not interested, around half statedthe reason was that they did not have land suitable for irrigation and half stated they

did not have the capacity to use irrigation.

Of those which expressed an interest in connecting, virtually all agreed that theywould pay an annual charge to be connected:

Megech: Of those 96 percent interested in connecting, 97 percent werewilling to pay an annual charge (thus, in total, 93 percent of the sample werewilling to pay an annual charge to be connected)

Ribb: Of those 98 percent interested in connecting, all were willing to payan annual charge (thus, in total, 98 percent of the sample were willing to payan annual charge to be connected)

Anger: Of those 99 percent interested in connecting, 98 percent were willingto pay an annual charge (thus, in total, 96 percent of the sample was willingto pay an annual charge to be connected).

Payment

Of the farmers that were willing in principle willing to pay for irrigation, the averageamount per hectare that they were willing to pay were as follows:

Megech: ETB 310 per hectare per year

Ribb: ETB 294 per hectare per year

Anger: ETB 216 per hectare per year.In all three project areas, only approximately one-third of respondents (36 percent inMegech, 38 percent in Ribb and 30 percent in Anger) were willing to pay ETB 300 ormore per year. Thus whilst interest in the irrigation system and willingness inprinciple to pay an annual charge was very high, the amount that many of the farmerswere willing to pay annually was relatively low.

Figure 3.2, Figure 3.3, and Figure 3.4 illustrate the cumulative proportion ofrespondents that stated they were willing to pay between ETB 100 and ETB 800 andmore per year. Thus, for instance, in Megech, 56 percent of respondents stated theywere willing to pay at least ETB 200 per year.

The figures emphasize that there is little substantial difference between the results fromeach kebele and that for the relevant project area.


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Figure 3.2: Willingness-to-Pay Results: Megech

93%

56%

36%

29%

22%

14%11%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

100 200 300 400 500 600 700 800 and Over

C

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P

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Ann ual Amoun t per Hec tare (ETB)

Megech Project Area

Woina Tera

Guraba Bate

Guranba MichaelJerjer

Seraba Dablo

Debir Zuria

Source: Castalia Willingness-to-Pay Survey

Figure 3.3: Willingness-to-Pay Results: Ribb

98%

66%

38%

30%

20%

11%9%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100 200 300 400 500 600 700 800 and Over

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Ribb Project Area

Abua kokit

Diba Sifatra

Shaga Mariam

Shina Tsion

Banbiko

Genda Wuha



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Figure 3.4: Willingness-to-Pay Results: Anger

96%

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Anger Project Area

Lelistu Anger

Worebu

Tulu Lench a

Village 15

Village 21

Galessa

Uke


Of the farmers surveyed in Ribb, 43 percent currently use irrigation. Approximatelyhalf of these farmers report that they pay for irrigation servicesusually by renting apump and purchasing fuel for it. The average of this cost for these farmers was ETB670 per year, which equates to a cost of ETB 1,970 per hectare per year. The averagethat they reported they would be willing to pay under the irrigation scheme to be

developed is ETB 373 per hectare per year. This is 27 percent more than the overallaverage willingness to pay of ETB 294 per hectare per year.

About a fifth of respondents in Ribb initially stated they were only willing to pay alower annual figure for the proposed services than they currently pay for theirirrigation use. In the main, the reasons given were that they would adjust theirwillingness after seeing the benefits, and that it should be the governmentsresponsibility to pay, for instance because they own the service.

In Megech, 11 percent of the farmers surveyed currently use irrigation. They statedthat they would be are willing to pay, on average, ETB 495 per hectare per year under

the scheme to be developed. This is 60 percent greater than the overall average of ETB310 per hectare per year.

In Anger, 8 percent of the farmers surveyed currently use irrigation. They stated thatthey would be are willing to pay, on average, ETB 229 per hectare per year under thescheme to be developed. This is only slightly greater (6 percent) than the overallaverage of ETB 216.


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Figure 3.5, Figure 3.6, and Figure 3.7 show the willingness to pay of farmers currentlyusing irrigation in Megech, Ribb, and Anger, respectively, compared to the amountsthat farmers not currently using irrigation are willing to pay. The farmers currentlyusing irrigation are shown in blue.

Figure 3.5: Willingness-to-Pay of Farmers Using Irrigation: Megech

91%

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27%23%

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Ann ual Amo un t per Hec tare (ET B)

Farmers that Irrigate Farmers that do not Irrigate



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Figure 3.6: Willingness-to-Pay of Farmers Using Irrigation: Ribb

98%

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Figure 3.7: Willingness-to-Pay of Farmers Using Irrigation: Anger

100%

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These results lead us to believe that once farmers see the benefits of irrigation, in termsof increased productivity and incomes, they would be willing and able to pay morethan they reported in the survey.

Registration

Almost all respondents that expressed an interest in being connected to the irrigationsystem were also willing to pay a one-off registration fee. However, the respondentsthat were willing to pay a registration charge in Megech were only willing to pay ETB18 per hectare of cultivated land. Those in Ribb were willing to pay an average of ETB20 per hectare of cultivated land and those in Anger were willing to pay an average ofETB 18 per hectare of cultivated land.

3.2.3 Non-Irrigation Services from the Irrigation Operator

We asked farmers what types of services, if any, they would be interested in receivingfrom the private investor in the irrigation scheme. We also asked them if they wouldfind the prospect of becoming an outgrower to the private investor attractive, and

whether they would be willing to lease their land to the private investor if the termswere attractive. This section presents a summary our results in terms of farmersinterest in receiving agricultural services, becoming an outgrower, and leasing theirland. Full results and figures may be found in Appendix D.4.

Interest in Receiving Services

Respondents were asked to state whether they would be interested receiving thefollowing types of assistance from the irrigation operator, with the understanding thatthey would have to pay for the assistance received:

Provision of storage facilities

Provision of processing facilities Provision of selling services for your crop output to traders and/or

consumers

Provision of inputs, such as seeds and fertilizer

Provision of training in how to cultivate the varieties

Provision of assistance in determining standards which the crops must meet

Provision of assistance in determining the highest-value crops and varietiesyou could produce.

In Anger, over 95 percent of respondents stated they were interested in each of theseries of assistance types identified. In Megech, over 93 percent of respondents statedthey were interested in each of the assistance types, with the exceptions of theprovision of storage facilities and provision of processing facilitiesin which slightlyless than 90 percent of respondents stated they were interested. Approximately one-third of respondent in Megech which did not express interest in the provision ofstorage and/or processing facilities stated this was because of financial constraints.


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In Ribb, overall interest was slightly lessalthough at least 70 percent of respondentsstated they were interested in each of the series of assistance types identified. Interestwas lowest for the provision of storage facilities, provision of processing facilities,provision of selling services for your crop output to traders and/or consumers, andprovision of inputs, such as seeds and fertilizer. In the main, the reasons provided by

the respondents in Ribb for not expressing interest in these assistance types were: The land is already fertile

General financial constraint

Likely price would be too high.

In some cases, this lower interest was a result of respondents in Ribb stating theywould be interested in general in an assistance type but not if the assistance were to beprovided in partnership with the private sector irrigation operator. For instance, atotal of nearly 18 percent of respondents in Ribb stated that they would have beeninterested in general in the provision of storage facilities, but not if in partnership with

the private sector irrigation operator.

Outgrowing

Over 90 percent in all three project areas answered positively to the option ofbecoming an outgrower to the private irrigation operator.

Land Leasing

In Megech and Ribb a majority or respondents (63% in Megech and 76% in Ribb)stated that they were not interested in leasing their land to the irrigation operator.Respondents in Anger were more positive, with just over half (52%) of them statingthey were willing to lease some or all of their land.

Of those that were not willing to lease land, the majority in each project area statedthat the land was small and/or they wanted to use it themselves and so were notinterested in leasing their land.

3.2.4 Characteristics of Smallholder Farmers

This section summarizes our findings on the average incomes of smallholder farmers inthe command areas, the average amount of land each farmer cultivates, the types ofcrops they grow, and their current irrigation practices (if any). Full results and figuresmay be found in Appendix D.2.

Farmers current irrigation practices influence their perception of the benefits of

irrigation, and thus their willingness to pay. We can assume that farmers currentlyusing irrigation are aware of its benefits, while farmers not currently using irrigationmay not be fully aware.


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Incomes

On average, incomes were highest in Megech, followed by Anger. The average annualincomes in each of the project areas were as follows2:

Megech: ETB 4,750

Ribb: ETB 3,360

Anger: ETB 4,240.

There was a relatively wide range of household farmers incomewith most farmersincomes ranging between ETB 1,000 and 6,000 per year.

It is important to measure farmers average incomes in order to determineapproximately what portion of their income they would be willing to spend onirrigation. This gives an indication as to how the amount they are willing to pay forirrigation may increase as their incomes increase due to productivity gains fromirrigation (though the ratio of irrigation payments/income will not necessarily remain

constant).Land Area

The average household farmers cultivated land area worked was lowest in Ribb (1.2hectares). The average household farmers cultivated land area in Anger was 1.7hectares, and 2.0 hectares in Megech. Some farmers not only cultivated land of theirown but also cultivated land rented from other farmers.

It is useful to know the average amount of land each farmer cultivates for purposes ofdesigning the system and planning business models that involve outgrowing orproviding services to farmers.

CropsThere was a wide variety of crops cultivated in all three project areas, although a fewcrops were cultivated by the majority of farmers in each project area:

Megech: Over 70 percent of farmers cultivate chick peas, teff, finger milletand/or sorghum

Ribb: Over 70 percent of farmers cultivate rice, chick peas and/or vetch

Anger: Over 90 percent of farmers cultivate maize and/or sorghum.

It is useful to know what crops farmers cultivate for purposes of planning businessmodels that involve outgrowing or providing services to farmers, and in order todetermine how irrigation will increase the yields of the current cropping pattern.Irrigation is more effective in increasing the yields of some crops, and less effective forothers.

2 For the assessment of household farmer income, the highest and lowest 5% of responses from each of the projectareas have been eliminated. This was done to limit the impact of outliers on the assessment.


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Current Use of Irrigation

Only a small proportion of farmers in Anger (8%) and Megech (11%) stated that theycurrently use irrigation on all or some of their land. In Ribb, however, 43 percent offarmers stated that they use irrigation.

A total of 22 percent of far

irrigationppp ethiopia study final report

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