Water scarcity, pricing mechanism and institutional reform in northern China irrigated agriculture

Agricultural Water Management 61 (2003) 143–161

Water scarcity, pricing mechanism and institutional reform in northern China irrigated agriculture Hong Yanga,*, Xiaohe Zhangb,1, Alexander J.B. Zehndera a

Swiss Federal Institute for Environmental Science and Technology (EAWAG), Ueberlandstrasse 133, CH-8600 Duebendorf, Switzerland b Faculty of Business and Law, School of Policy, University of Newcastle, Newcastle, NSW 2308, Australia Accepted 18 November 2002

Abstract With water scarcity becoming an increasing constraint to food production in northern China, pricing mechanism has been given a high priority in dealing with the problem. Using selected irrigation districts in northern China as a case study, this paper probes the effectiveness of pricingbased water policies in addressing challenges facing irrigated agriculture under China’s current water management institutions. The examination shows that the rapid increase in irrigation cost during the past decade has failed to generate a force for water conservation. Over-exploitation of groundwater resources has even intensified with the shift to higher value-added but often more water intensive crops. Based on a normative analysis of water demand curves, the logic behind the reluctance for water authorities and farmers to conserve water is elaborated. The result suggests that pricing irrigation alone is not a valid means of encouraging water conservation under the current irrigation management institutions. Clearly defined and legally enforceable water rights and responsibilities for water operators and users in the irrigation system are the foundation underlying the incentives for conserving water and improving the irrigation efficiency. # 2002 Elsevier Science B.V. All rights reserved. Keywords: Water scarcity; Irrigation charge; Water demand elasticity; Institutional reform

1. Introduction Water scarcity and its impacts on agricultural production and food security are growing concerns worldwide. Among various policies in dealing with the intensifying water stress, * Corresponding author. Fax: þ41-1-8235375. E-mail addresses: [email protected] (H. Yang), [email protected] (X. Zhang), [email protected] (A.J.B. Zehnder). 1 Fax: þ61-2-49216919.

0378-3774/02/$ – see front matter # 2002 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 3 7 7 4 ( 0 2 ) 0 0 1 6 4 - 6

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pricing mechanism has been given a high priority (Bjornlund and McKay, 1998; Dosi and Easter, 2000; Forch, 2000; Berbel and Gomez-Limon, 2000; Ahmad, 2000; Cosgrove and Rijsberman, 2000). As the most populous country with a rapidly expanding demand for water and food, China’s situation in many aspects exemplifies the global picture. Water resources are scarce in much of the northern part of the country. Lack of water has posed an increasing constraint to the development of agricultural production (Liu and He, 1996; Shi, 1997; Brown and Halweil, 1998; Huang and Chen, 1999; Liu, 2000; Yang and Zehnder, 2001). Implementing pricing mechanism has been high on the agenda of policy makers at all levels (Wang, 1997; Jiang, 1998; Feng, 1999; Wang, 1999a,b; Yue and Wang, 2000; Wei, 2001). During the past two decades, agricultural development in northern China has been remarkable. The growth of irrigated agriculture in the Yellow River (Huanghe), Huaihe and Haihe River basins (thereafter the HHH region) has been particularly rapid and contributed greatly to the national growth (Yang, 1998). Currently, over 60% of the nation’s wheat and 40% of corn are produced in the HHH region. Although rice production in the region accounts for only 7% of the total national output, the desirable taste has earned its rice a high demand and accordingly high price at the marketplace (SSB, 2000; Ministry of Agriculture, 2000). Dominated by the continental monsoon climate, precipitation in northern China is generally low and concentrated in a few months of the year. Rainfall is often insufficient to meet the water demand of crops in the whole growing period or part of it. Irrigation is crucial for obtaining high yields. In the areas where multiple cropping is practiced, irrigation is simply essential. Given this important role, irrigated areas have been expanding continuously over the years (SSB, 2000). In some areas, facilitating the expansion of irrigation has also been incorporated with the objective of poverty alleviation (Chen, 1995). Nowadays, about half of the cropland in the HHH region has been brought under irrigation and over 75% of the crop output is generated from the irrigated land (Jin and Young, 2001). However, northern China lacks water resources. Many areas in the HHH region have the average water resources below 500 m3 per person. With the growing demand for water from agriculture, as well as industries and municipalities, water resources have been exploited excessively. Many rivers have run dry and groundwater tables dropped drastically. Pollution and environmental degradation have compounded the situation by reducing the availability of usable fresh water (Smil, 1995; Shi, 1997; Brown and Halweil, 1998; Widawsky et al., 1998; Wang, 1999a,b; Zheng, 1999; Liu, 2000). Currently, the water utilization ratio (the ratio of annual water withdrawal to renewable water resources) in the HHH region is excessively high. The ratio in the Haihe River basin has reached 100%, in comparison to the commonly suggested water criticality threshold of 30–40% (Postel, 1996; Alcamo et al., 1999). In the Yellow River and the Huaihe River basins, the ratios also exceeded 75 and 60%, respectively (Ministry of Water Resources, 2001). The excessively high water utilization ratios are indicative of an extreme water stress in the region. Faced with the decreased potential for additional water supply, a paradigm change in water management has been urged in recent years. The change is customarily termed as ‘a shift from engineering water to resource water’ (Wang, 1999a,b). Central to the shift is the improvement in the efficiency of the use of limited water resources. Pricing mechanism has

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been implemented swiftly nationwide to encourage the shift. In some major irrigation districts in the HHH region, irrigation water prices doubled between 1998 and 2000 (the authors’ own data from a field survey). This paper analyzes the effectiveness of the use of pricing mechanism as a policy tool in dealing with water stress in irrigated agriculture under the current water management institution in China. Based on a normative characterization of water demand, the study elaborates the gains and losses of different interest groups from increasing irrigation charges. The focus is on the HHH region because of its severe water stress and substantial role of grain production in the country. At the core of the analysis are the following two questions: Can increasing water prices conserve water? And, what are the needed institutional reforms for improving irrigation efficiency? The information used in the analysis is mainly from a field survey in Henan province, Ningxia Autonomous Region and Hebei province in May and July 2001 by one of the authors of this paper, together with local collaborators in China. The survey involved on-site observations and a series of interviews with provincial and county officials and village farmers. The five irrigation districts surveyed are Liuyuankou (Henan), the People’s Victory Canal (Henan), Weining (Ningxia), Qingtongxia (Ningxia), and Luancheng (Hebei). The source of irrigation water in the former four districts is from the Yellow River. The irrigation in Luancheng is almost entirely reliant on groundwater. Fig. 1 illustrates the location of the study area and the irrigation districts surveyed. The rest of the paper proceeds as follows: Section 2 provides an overview of the irrigation efficiency and the components of irrigation cost. Section 3 conducts a normative analysis of the relationship between irrigation charge, water consumption, farm income and public revenue. Section 4 elaborates the institutional barriers to the effective use of pricing-based policies from the perspectives of water authorities and farmers in the system. Section 5 addresses the needs for institutional reforms and several pertinent issues are highlighted. Concluding remarks and policy implications form Section 6.

2. Irrigation efficiency and components of irrigation cost 2.1. Irrigation efficiency and water-saving potential Inefficient use of water is a notorious phenomenon in irrigation system. Water leakage in irrigation networks is one of the major sources of the inefficiency. It is estimated that in the HHH region more than half of the water is lost to leakage in canal systems (Liu and He, 1996). Of the water reaching the field, waste is also substantial. Flood irrigation is predominant. The application of sprinkler and drip irrigation is almost negligible (ECCAY, 1998). Other more efficient and yet less capital- and energy-intensive water-saving methods such as canal lining, border irrigation, hose water conveyance, water quantity and timing control, and plastic mulch, are also not widely used, as suggested by the survey of irrigation districts. Table 1 shows the volume of water use per unit of irrigated area in the surveyed irrigation districts. On average, Ningxia uses more than twice as much water as Henan does for the same type of crop, and Hebei uses a volume 20–30% less than Henan. The difference is

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Fig. 1. Location of the HHH region and surveyed irrigation districts.

partly related to the varying precipitation among the respective provinces. The average precipitation in Ningxia is about 200 mm per year, whereas in Henan the figure is 800 mm per year. Therefore, the same crop in Ningxia needs more irrigation to meet the water demand than that in Henan. Nevertheless, the different water uses are also attributable to the variation in irrigation efficiency. The field observations found that farmers in Ningxia Table 1 Volume of water use per unit of irrigated area (1000 m3/ha)a

Ningxia Henan Hebei

Weining Qingtongxia Liuyuankou People’s Victory Canal Luancheng

Wheat

Corn

Rice

9.75–10.5 4.5 2.7–3.75

9.75–10.5 3.0 2.1–3.0

27.0–28.5 9.0–10.5 –

Source: Interviews with water bureau officials and technicians in the respective provinces. a The volume of water use per unit of irrigated area in Qingtongxia is similar to that in Weining. In the People’s Victory Canal, the volume is similar to Liuyuankou.

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used water much more extravagantly than that in the other two provinces. The upper stream location may have given Ningxia an advantage in tapping the water from the Yellow River. The local tradition of applying sediments as fertilizer has further encouraged the excessive use of water.2 In comparison, water deliveries in Henan are subject to more restrictions from both resources and the Yellow River Basin Commission in the lower region. In Hebei, the high pumping cost of groundwater and the depletion of aquifers have placed constraints on water use. Despite the widely recognized inefficiency in irrigation, it remains debatable how much water can be saved through the application of water-saving technologies. Some people have pointed out that the losses in individual irrigation schemes in upper streams partly return back to the water network and are available for the down stream users (Seckler, 1999; Perry, 1999). Hence, the real potential for water-saving in the whole river basin could be lower than in a specific scheme. In China, quantitative studies of the irrigation watersaving potential on a river-basin-scale have been absent. A study by Pereira et al. (2000) on several experimental sites in the North China Plain suggested that about 30% of water could be saved by improved irrigation methods. The officials and technicians interviewed in Henan, Ningxia and Hebei estimated that around 10–20% saving in water is attainable in their irrigation districts through application of conventional water-saving methods and better management. In spite of the rather wide range of estimates and the lack of studies on a river-basin-scale, there seems to be no doubt that a substantial potential for water-saving is possible in the irrigation system. The question then is what measures should be used to realize the potential. 2.2. Costs of irrigation Low water prices have been widely blamed for the poor efficiency in irrigation systems. Farmers have little incentive to conserve water. Innovation for water-saving technologies is also retarded due to the lack of incentive. Meanwhile, the low water price leads to a small capital accumulation and, consequently inadequate funding for the maintenance and rehabilitation of the irrigation infrastructure. With this view being prevalent, it comes as no surprise that raising water prices has been taken as a key measure for dealing with the water shortage. Excluding the labor contribution to the construction and maintenance of water projects, farmers’ irrigation costs stem primarily from four sources: (1) payment to water authorities to cover the cost of water supply; (2) payment to collectives for the construction and maintenance of local water irrigation infrastructure, such as canal building and lining and well digging; (3) expense of water pumping equipment and power and; (4) water resource levy, which has been progressively introduced in major irrigation districts since the late 1990s. Depending on the nature of water sources and the administrative arrangements, the actual irrigation cost in a specific area often consists of two or three of the above four sources. In areas irrigated by surface water, lack of volumetric measurement and the high cost in monitoring make it difficult to charge water supply on the actual volume used by each farm 2

This fact was pointed out by one of the reviewers who carried out studies in Ningxia.

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household. Small family-based farms typically with fragmented lands scattered around villages further complicate the situation. Therefore, charging a flat rate on the basis of land areas is common in surface water irrigated areas. A standardized quota is often assigned per unit irrigated land and the actual volume varies across districts and provinces depending on the local conditions. The amount of water released to a lateral canal is calculated as the irrigation quota multiplied by the irrigated areas the canal serves.3 The volumes of water shown in Table 1 are roughly the current quotas in the surveyed irrigation districts. In groundwater irrigated areas, the cost of irrigation is primarily the expense of power and equipment. Water itself is free. No restriction is imposed on the volume of water extraction in each well, though digging new wells in principle requires the approval of water authorities. Farmers measure their irrigation cost by electricity and fuel bills and the concept of water cost is generally absent. The field survey in Luancheng found that the scarcity of water resources has not signaled directly to farmers to conserve water, but perceived indirectly from the increasing depth of wells and the cost of equipment and power for pumping water. Currently, farmers in the surveyed irrigation districts in Henan pay a flat rate of 330 yuan/ha (US$ 1 ¼ 8:2 yuan) for irrigation. In Ningxia, the rates range between 300 and 450 yuan/ha. It is noted that the water charges in the two provinces do not conform to the volumes of water they use as shown in Table 1. Although Henan uses less than half as much water as Ningxia does on each unit of land, the irrigation charges are almost the same in the two provinces. This situation can be partly explained by the segmentation of water management at the river basin level. However, it may also reflect different costs of water supply that are associated with site-specific conditions of individual irrigation schemes. In Luancheng, the cost of irrigation is 750–900 yuan/ha, which is mainly incurred from the use of pumping equipment and electricity and diesel for extracting groundwater. All the officials interviewed considered that the current water charges in their districts are too low and are thus invariably in favor of further increasing irrigation water prices. The main argument is that the irrigation cost is only a small portion of the total material cost in crop farming, between 12 and 16% in the surveyed districts. Of the various production costs, irrigation cost is the only one that has not covered the cost of its supply. In the surveyed irrigation districts in Henan, for example, the average water supply cost is estimated at 0.08 yuan/m3, compared to the current irrigation charge of roughly 0.04 yuan/ m3. In Ningxia, the respective figures are 0.021 and 0.012 yuan/m3. The difference between supply cost and irrigation charge seems to justify a further increase in water prices. 3. A normative characterization of irrigation water demand Theoretically, increasing the price of a resource creates incentives for improving the allocative efficiency of that resource, and for better management, innovation and application of new technologies to conserve it. However, agricultural water use has so far been 3 Due to the widely acknowledged underestimation of arable land, however, the estimated irrigated areas are somewhat smaller than the actual areas. Accordingly, the actual water use per unit of irrigated area may be less than the assigned quota.

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treated as a special case in almost all countries, including developed ones. For example, Berbel and Gomez-Limon’s (2000) study shows that farmers in Spain pay less than 20% of the total costs of water supply for irrigation. The heavy subsidy on agricultural water in the western United States is widely known (Schaible, 1997; Nickum, 1998). In most developing countries, water itself is virtually free and the charge for water supply often only covers a small portion of the cost (Sampath, 1992; Bruns and Meinzen-Dick, 2000; Abderrahman, 2000). The special treatment for agricultural water use is largely due to the intrinsic links among irrigation charge, amount of water use, public revenue and rural welfare, which are illustrated in the following sections. 3.1. A static characterization of water demand curves Let Q ¼ QðpÞ denote the aggregate water demand function of a given irrigation district, in which p is water price and Q is water use measured by the volume of water use per unit surface area. Let eq be the water demand elasticity, which can be expressed as eq ¼ ðdQ=dpÞðp=QÞ. Fig. 2 illustrates the water demand curves under two circumstances: high water demand elasticity (elastic demand) and low water demand elasticity (inelastic demand). When the water price increases from p to p þ dp, a collected revenue is given by the area A ¼ dp  Qpþdp , which is a welfare transfer from farmers to water supplier. A level of water-saving is given by Qpþdp  Qp. Suppose a two-agent economy consisting of only farm irrigator and government water supplier, a given water pricing increase dp will induce a welfare loss denoted by area B þ C. The triangle B represents the welfare losses borne by the farmer because of the reduction in water use. The area C represents the revenue losses of the water supplier due to decreased water supply. However, in a multiple agent-economy, which is the reality, the welfare loss B þ C is often transferred to other sectors where the value of water use is higher than irrigation. From the graphical illustration in Fig. 2, it can be seen that the total loss of farmers due to the increase in water prices is the area B þ A; and the total gain of the water authority is A  C. Comparing the cases between the low water demand elasticity and the high water demand elasticity, it is evident that the same range of price increase generates different amounts of losses and gains for the irrigator and the water supplier. In the high water demand elasticity case (Fig. 2a), a price increase of dp results in a relatively small gain for the water supplier (A  C) and a loss for the irrigator ðB þ AÞ. In the low water demand elasticity case (Fig. 2b), both the gain for the water supplier and the loss for the irrigator are large. The graphic analysis demonstrates clearly that for different water demand elasticity, the same water pricing policy can impose significantly different impacts on the amount of water use, farm incomes, and collected revenues. 3.2. Changes in water use and collected revenue at different water rates Many previous studies of the price responsiveness in irrigation have found that the elasticity of water demand changes at different levels of water rates (Moore et al., 1994; Gardner, 1997; Schaible, 1997; Iglesias et al., 1998; Varela-Ortega et al., 1998; Berbel and Gomez-Limon, 2000). Below a certain price threshold, the demand is almost completely

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Fig. 2. Elastic and inelastic water demand curves: (a) high water demand elasticity; (b) low water demand elasticity.

inelastic, like the case in Fig. 2b. Farmers make a very small or zero response to price increases. They maintain the existing crop distribution and water demand and no significant change takes place in the amount of labor and the level of input uses. A direct impact of increasing water prices at this stage is on farm incomes, which decline as a result of the transfer of private funds to the public sector via water charges. When the increased public revenue is used to improve rural welfare and irrigation network efficiency, the transfer involves a redistribution of incomes. However, the increase in water price in the first instance is a burden borne directly by farmers. When the increased public revenue is used elsewhere, the transfer entails a welfare loss of farmers. Above the threshold price, water use changes at different water rates, denoted by the situation in Fig. 2a. Farmers respond to price increases by reducing water use. This can be taken in two ways: substituting their traditional crops with those that consume less water (or quitting irrigation), and/or shifting to higher value-added crops so that each unit of water use can generate more value. The transfer of income from farmers to the public sector at this stage is not as direct as the previous one. When the amount of water use falls slower than its price rises, the public revenue continues to increase. An inverse relation leads to a simultaneous reduction in water use and public revenue.

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Further increase in water prices beyond the elastic demand stage, once again makes the amount of water use unresponsive to price changes. This is characterized by farmers’ use of water almost exclusively for horticultural crops and self-consumed crops they have to produce. The remaining land is used for growing non-irrigated field crops or simply left fallow. At this stage, increasing water prices raises the public revenue provided that farmers stay in business. In the case that water prices are so high and farmers give up irrigation all together, the public revenue drops to zero. It should be pointed out that the adjustment of farmers’ production plans in response to different water rates will inevitably lead to changes in the market supply of agricultural products. Food production, particularly grain crops, will most likely decline and so will the market supply. This could have a series of impacts on China’s political economy and international trade. Food imports, especially the import of cereal grains, would increase. This could put further pressure on domestic food production, which has already been faced with mounting challenges from the international market since the late 1990s when China’s domestic prices for some major crops exceeded the international market prices (Huang and Rozelle, 2002). China’s recent accession to the World Trade Organization has only intensified such challenges. Given this situation, an increase in agricultural prices in the domestic market is unlikely to help farmers because that could further weaken the competitiveness of domestic production. The ultimate losers are again the farmers. The responsiveness of farmers’ water use to different prices is influenced by many factors concerning water management systems, market conditions, availability of substitute crops, the degree of freedom in production decision making and the overall rural and urban economic development. In general, a development of market and economy and a high involvement of farmers in the management and decision-making processes enhance their responsiveness to water price changes. Meanwhile, Varela-Ortega et al. (1998) found that farmers’ responses to price signals are also related to the physical and technical conditions of irrigation schemes. Old irrigation districts have a large potential for improving technical conditions and therefore for attaining large water-saving levels. Modern irrigation districts have already been endowed with more efficient irrigation systems and their response to price signals is small. The different elasticity of water demand at different prices renders significant policy implications. If pricing policies are intended to expand the public revenue, then price changes should be kept within the range where the price elasticity of water demand is low or completely inelastic. A relatively high increase in revenue collection is accompanied by a small water-saving. On the other hand, if the main objective is to generate large reductions in water use, the efficient price range should be in the segment where the price elasticity of water demand is high. In this case, however, the public revenue increases slowly or even decreases. For policy makers, it is important to be aware of the different responses and the nature and social structure of the beneficiary groups and their problems before setting up irrigation charges. Econometric and mathematical programming models have often been used to derive the price elasticity of water demand in irrigation. In China, however, lack of both time-series and cross-sectional data has deterred such approaches. One direct reason is that irrigation charges did not vary significantly until very recently. Meanwhile, the application of crosssectional data also encounters difficulties in that the price elasticity of water demand is

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influenced by an array of factors relating to site-specific conditions (Iglesias et al., 1998). Generalizing site-specific characteristics in the cross-sectional modeling may derive invalid results. Because of these constraints, a modeling approach in studying the price elasticity of water demand in irrigation is difficult in China. Nonetheless, the following analysis will show that under the current setting of irrigation institutions, the price elasticity of water demand is bound to be low and the adverse effect on rural welfare is large.

4. Irrigation governance, pricing objectives and farmers’ responses 4.1. Irrigation institutions In areas irrigated by groundwater, each pump is operated independently and serves only a small number of farmers. The irrigation management is taken primarily by village collectives and, to a much lesser extent, by individual farmers who acquired well leases from collectives (Wang et al., 2000). Digging new wells requires licenses from water authorities. In practice, however, the enforcement of the licensing system is far from effective. Villagers dig new wells subject only to the financial constraint and resource availability. As water itself is free, little public revenue is generated directly from groundwater irrigation systems. In some provinces, such as Hebei, charging a groundwater resource levy has been under intense discussion. The implementation is imminent. In surface water irrigated areas, the irrigation management institution is rather complex. Large- and medium-sized irrigation schemes are state-owned and managed by water authorities. Fig. 3 outlines the administrative structure and finance arrangement of the current surface water irrigation systems on a broad generalization. The river basin commission is the overall basin water resources regulator/planner. The provincial water bureau plays a dual role: water regulator/planner and water operator/supplier. The duties of the water bureau at this level include planning, survey, design, construction, operation and management of irrigation, drainage, flood control works and rural hydropower. The water resources bureau at the prefecture and county level is directly responsible for constructing and maintaining irrigation infrastructure, associated irrigation and flood control facilities and medium-size reservoirs. The township level water station shares responsibility for constructing and maintaining branch canals, ancillary works and small reservoirs and collecting water charges. The staff in the prefecture and county bureaus and township water stations is organized into an irrigation district water management authority. The number of employees in each district authority can be as many as several hundreds. In the Qingtongxia irrigation district, for example, a total of 212 employees, including 38 retirees, are affiliated with the district water authority. At the village level and below are field canals and ditches, which are maintained by village committees and individual farmers with leases from village committees. They handle the on-farm water management under the direction of the staff of the irrigation district authority. Despite the fact that integrated water resource management has been advocated in recent years as part of the effort for improving the efficiency of the use of water resources, the management system remains very much fragmented across sectors at all levels. There are many overlaps among different ministries and agencies, particularly in the areas of

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Fig. 3. Administrative structure and finance of the surface water irrigation system. 153

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irrigation, urban water supply, groundwater management, pollution control, and operation of reservoirs for hydropower. Typically, these entities are dedicated to a single type of water use. The result is that the current water management system is non-cohesive, and fraught with opportunities for misallocation. The situation can easily arise that two agencies independently develop conflicting policies for exploiting the same water source. China’s constitution gives the ownership of all water resources to the state. Water authorities manage the irrigation water on behalf of the state and collect the payment from farmers who use the water. Although the transfer of water from agriculture to the urban sector has been a trend evident since the 1980s, it has been conducted mostly by administrative means. Neither water authorities nor farmers are allowed to sell water. The water transfer is not compensated or only compensated partially. Water authorities and individual farmers generally do not benefit from the transfer of water out of their irrigation districts. Water authorities, in their statutory nature, are state-owned enterprises. Since the fiscal reform in the late 1980s, irrigation water charges have been the major sources of revenue for water authorities. The charges are used for paying salaries to the employees and for covering the costs of administration and infrastructure maintenance. Like the situation in most state-owned enterprises in China, overstaffing is common in water authorities. The responsibility to take care of retirees, housing and other welfare puts further financial burdens on the authorities (Wang, 2000). Overlaps in water management and administration at different levels only worsen the problem (Ma, 2000). With the salaries and administrative cost being the integral components of the irrigation cost, a full-cost recovery price of water supply is expected to be high, double the current charges as suggested in the irrigation districts surveyed. In many water authorities, the revenue from irrigation charges is not even sufficient for covering salaries and day-to-day operational cost. The fund left for infrastructure maintenance and rehabilitation is meager at best. The financial strait has made water authorities keen to raise irrigation charges. Nonetheless, the current water institution does not consign water authorities an independent discretion in setting irrigation charges. The ultimate decision power is held in the hand of the provincial level water bureau, where the staff salaries are paid directly from the provincial budget. With broader social-economic objectives in perspective, particularly food security, overall rural economic development and employment, etc., the provincial level water bureau is more cautious about increasing irrigation charges. This has, to some extent, curbed irrigation charges from rising as fast and as high as lower level water authorities would like to have. Nevertheless, substantial increases in irrigation charges have been seen in most irrigation districts in recent years, though often from a relatively low basis. Of the three expenditures of water authorities shown in Fig. 3, paying salaries to the employees and covering administrative cost naturally have high priorities in the budget plan. Infrastructure maintenance and rehabilitation are often sidelined. Given the insufficient cost recovery of water supply, an overwhelming portion of the revenue from irrigation charges is allocated to the priority uses. In the irrigation districts surveyed, most of the canals are in poor physical condition. Officials interviewed admit that they have no fund for carrying out the rehabilitation work and are awaiting the state to offer help. As increasing revenue is of great interests to water authorities, they generally have the incentive to expand irrigated areas in their jurisdictions. At a given level of irrigation

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charge, the larger the irrigated areas are, the more revenue the water authorities can collect. By the same token, water authorities are not willing to reduce water supply as this could lead to a decline in their revenue. The interests of water authorities have made them reluctant to engage seriously in promoting the application of water-saving technologies at the farm level. In the irrigated areas surveyed, the increase in water prices has so far had little influence on irrigation efficiency, the objective that prompted the implementation of water pricing policies in the first place. 4.2. Farmers’ responses to water prices In surface water irrigated areas, as water is charged at a flat rate on the basis of land areas, individual farmers cannot control their irrigation bills by altering irrigation methods and the quantity of water-use. This weakens farmers’ responsiveness to water price increases. They have little incentive to invest in the application of irrigation technologies, despite the concern about rising irrigation charges. In the irrigation districts surveyed in Ningxia and Henan, the increase in irrigation charges has not been accompanied with a change in the water quotas per unit irrigated land. Farmers’ water-use behavior and production plans are also more or less unchanged. Currently, farmers’ profit margins in crop farming are generally low. In some areas, the average return for grain crops is even negative, indicating that farmers already are operating at losses (Ministry of Agriculture, 2000). In spite of the unfavorable conditions, crop farming remains the major provider of rural employment because of the lack of opportunities elsewhere. The economic and political barriers on rural to urban migration in China further limit farmers’ alternative activities. Family-based and semi-self-sufficient farming is a basic characteristic of Chinese agriculture. Given the small size of family land, obtaining high yield is necessary and so is irrigation. This is reflected by the fact that in the irrigation districts surveyed; the increase in irrigation cost has not resulted in a reduction in irrigated areas. On the contrary, all the districts have recorded an increase to various degrees. When asked about production plans, should irrigation charges further increase, a common reply from the interviewed farmers was ‘we still have to irrigate, or what else could we do?’ Since the inception of rural economic reform in the late 1970s, there has been a trend in shifting from low yield grain crops to higher-value cash crops, typically vegetables and fruits (SSB, 2000). This has occurred primarily in response to the relaxation of the central control over production decisions and market demand (Yang, 1998; Ma, 2000). With the intensification of water scarcity, shifting to higher-value crops has been promoted strongly in recent years (Ma, 2000). The rationale is that the shift could generate higher output value with a given amount of water. However, the pace of this shift has not accelerated. This is not surprising given the fact that the shift to higher-value crops is subject to the constraints of marketing channels, processing and transport facilities, and market demand. It is particularly so for perishable crops, such as vegetables and fruits. Since the late 1990s, the domestic market for most of these products has appeared to be saturated, causing a fall in prices. It has been reported that the consumer price index dropped by 1.2% in June from the May level in 2001 due to a fall in vegetable and fruit prices (South China Morning Post, 2001). Moreover, in some poor areas, such as Ningxia, grain production remains the major

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source of farmers’ income and is essential to food security given the self-sufficient nature of agriculture in the region. In view of this situation, further raising irrigation charges are unlikely to lead to a substantial shift to cash crops. All in all, in surface water irrigation areas, farmers lack incentives to conserve water. The macro-economic and political conditions have presented additional constraints to farmers to adjust crop plans and economic activities in response to irrigation price increases. The price elasticity of water demand can only be low. This enables water authorities to raise public revenue via price increases. As illustrated in Fig. 2b, however, a large loss of farm incomes occurs as a result, while the level of water-use hardly changes. In groundwater irrigated areas, farmers have more control over the volume of water use and the cost of irrigation. This motivates them to adopt water-saving technologies. In the Luancheng irrigation district, for example, the application of hose water conveyance and other water-saving methods is more common than the other districts surveyed. The lower water-use per unit of irrigated land (Table 1) is partly attributable to this effort. However, as the extraction of groundwater is unrestricted on existing wells and the control on digging new wells is not effectively enforced, over withdrawal is a severe problem widely seen in groundwater irrigated areas. Although farmers are conscious about the volume of water they use in each unit of irrigated areas, the total water withdrawal has increased over the years with the expansion of groundwater irrigated areas. This is because without irrigation, farmers can only grow summer crops that come during the monsoon season. Farmers tend to expand irrigated areas subject to their financial constraints, as long as the marginal net return exceeds the marginal cost of irrigation. Given this fact, shifting to higher value cash crops may not necessarily help to alleviate water scarcity. On the contrary, chasing the marginal net return of higher value cash-crops may shift the irrigation demand curve upwards, resulting in an additional withdrawal of groundwater. Imposing a groundwater resource levy may also involve a risk of aggravating water scarcity. As the resource levy provides water authorities with incentives to issue more licenses to water users, the total withdrawal could even increase. For this reason, introducing the groundwater resource levy must be taken in parallel with a restriction on the total volume of water-withdrawal and an improvement in farm irrigation technologies.

5. Reforming the water management institutions and facilitating technology diffusion The above analysis has shown that the current irrigation management system does not accommodate the pricing-based water policies aimed at water conservation. This is because water authorities are not motivated to reduce water supply and farmers have no incentive to reduce water use. To create incentives for conserving water and improving irrigation efficiency, reforming the current irrigation management institution is necessary. It is worth noting that since the late 1990s, establishment of water-user associations at the village level (with a single or a group of villages) has been promoted as a first step in reforming rural irrigation institutions. Typically, water-user associations are responsible for water distribution, fee collection, operation and maintenance of the minor irrigation network (usually up to the lateral head), and solving conflicts among farmers over water in

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their areas. Referring to Fig. 3, water user associations are given the responsibilities formerly belonging to township water bureaux and village committees. In essence, they are expected to play a role of an intermediary between irrigation authorities and farmers. Positive results have been reported in several pilot projects sponsored by the World Bank in introducing water-user associations (Reidinger, 2000). In the irrigation districts surveyed, officials also pointed out that in the experimental villages that established wateruser associations, collecting water fees has become easier. With the water-user association directly responsible for fee collection, farmers are more confident that the money they pay will be devoted to provide water. There are fewer leakages to other purposes and the phenomenon of ‘collecting other fees taking the irrigation charge as a vehicle’ is also dampened. Three issues, however, remain untouched in the current reform effort. One is water rights. The above analysis has shown that the absence of water rights is an important reason for the lack of incentive for water conservation. Neither water authorities nor farmers can benefit from such an effort. To create the incentive, water rights must be defined and enforcement ensured. As the ownership of water resources is held by the state, water rights, in this case, refer to the user rights, operational rights and transfer rights. When water rights are transferable with compensation, assigning the water rights to water authorities and individual farmers would have similar effects on water conservation. Suppose water authorities are assigned the water rights, farmers can buy water from the former. This gives incentives to farmers to save water to reduce irrigation costs. Water authorities can sell the saved water to other sectors. Alternatively, when individual farmers have the water rights, saving water allows them to sell the spare water to other farmers or other sectors. Both water rights arrangements encourage a reallocation of water to higher value users. Given China’s social and political conditions, assigning water rights to water authorities is more realistic and encounters fewer institutional barriers than to individual farmers. So far, however, issues concerning water rights in irrigation remain at the stage of theoretical debate. With the absence of transferable water rights in the current reform effort, the scope of improving irrigation efficiency is limited. The second issue is the recovery price of water supply. Inadequate recovery of irrigation cost leads to inadequate funds for operation and maintenance of irrigation projects. Over time, it results in the deterioration of physical structures. Therefore, recovering the cost of operation and maintenance is necessary for a sustainable irrigation system. At the moment, no standardized guideline is available for calculating the irrigation cost. For most irrigation schemes, the full recovery cost is simply unknown. As analyzed earlier, however, the cost could be high due to the inefficient management and overstaffing of water authorities. Hence, streamlining water authorities and improving management efficiency must take place when implementing pricing policies. The third issue is who should shoulder the recovery cost of the irrigation water supply. Currently, efforts to recover cost have mainly focused on increasing irrigation charges, leading to a direct transfer of farm incomes to water authorities. Decentralizing the management of branch canals from water authorities to community-based water-user associations may help a more equitable and efficient water distribution. It may also be conducive to improving incentives for water conservation because of a more direct link between the level of water-use and irrigation charges for individual farmers. However, as

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elaborated earlier, there are some impediments on farmers’ responsiveness to price changes that are beyond the scope of irrigation institutional reform itself. These include the limited potential for shifting to higher-value crop, the lack of opportunities outside the farming sector, and the self-sufficient nature of farmers. As these impediments will not disappear with the reform of the irrigation institutional system, the price elasticity of water demand is expected to remain low in the near future. Implementing pricing mechanisms will have a large impact on the rural income but little impact on water-use behavior. For this reason, a full-cost recovery of irrigation price may be neither practically feasible nor effective as a tool for water conservation. Meanwhile, given the fact that there are many beneficiaries of low water prices outside the farming sector, it is also not fair to ask farmers to shoulder the full recovery cost. Furthermore, water is not only an economic good but also a social good. Making it accessible to farmers is of crucial importance for rural welfare, equality and societal stability. Many irrigation projects have been built with these objectives. From this point of view, it may be justified that part of the cost of water supply is recovered by the state. Directly devoting public funding to water conservation, maintenance, and technology innovation and diffusion conforms to the national objectives of rural development and water conservation.

6. Concluding remarks and policy implications This study examined the impact of water pricing as a policy tool on irrigated agriculture taking selected irrigation districts in the HHH region in China as a case study. Gains and losses of increasing water prices for different interest groups are elaborated. The needs for institutional reform to improve irrigation efficiency and conserve water are addressed. The analysis demonstrates that under the current irrigation management system, further increasing irrigation price may not serve the purpose of water conservation. This is because such a measure provides little incentive to water authorities to reduce irrigation water supply, and farmers are not motivated to adopt water-saving technologies. The response of water use behavior to price signals is intrinsically weak. For water authorities, the main gain of increasing water prices has been to raise revenue to alleviate the financial situation. Little has been done in improving management efficiency. For farmers, increasing irrigation prices means a loss of income, with little change in their water-use behavior. In groundwater irrigated areas, the lack of effective water licensing and extraction control leads to unrestricted withdrawal of groundwater. Imposing a resource levy may not halt this trend. Instead, a revenue gain from the resource levy may encourage water authorities to issue more water licenses, causing acceleration of resource depletion. To create a direct link between irrigation pricing and water conservation, reforming the current institutional system is necessary. Clearly defined and legally enforceable water rights and responsibilities of both water authorities and farmers are imperative for generating endogenous forces for innovation, diffusion and adoption of water-saving technologies. These conditions are also a prerequisite for water transfers to more efficient and higher value uses. In groundwater irrigated areas, imposing water extraction restriction through effective water licensing must take place to limit the total volume of groundwater withdrawal.

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Water scarcity has become an increasing constraint to agricultural development in northern China. Water stress is unlikely to decrease significantly even after the envisaged south-north water transfer project is completed sometime in the next decade. The limited volume of transfer, the high cost, and the continuous increase in water demand from industries and municipalities can only leave irrigation a marginal user of transferred water (Chinese Academy of Engineering, 2000). Improving irrigation efficiency through better management and the adoption of water-saving technologies is the ultimate way to deal with the challenges facing irrigated agriculture. The experience drawn from the selected irrigation districts in the HHH region in China has international implications. Water scarcity and food security are a worldwide concern. The situation is particularly critical in developing countries. By analyzing the case of the HHH region, however, we have shown that using the pricing mechanism as a single policy tool to deal with water scarcity may in many ways lead to results contrary to the objectives of the policy itself. Combating water scarcity and ensuring food security require appropriate institutional systems that are tailored to local conditions.

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