NOTESAGRICULTURAL & RURAL DEVELOPMENT

Irrigated agriculture has been vital to meeting fast rising food demand and has driven rural developmentand poverty reduction in developing countries, wherethe agricultural area under irrigation has doubled overthe last forty years. Cereals output increased threefoldbetween 1960 and 1999, while the production of irri-gated fresh fruit and vegetables increased fivefold andnow accounts for one-fifth of all developing countryagricultural exports. More than two-thirds of thisincrease came from yield increases, and the waterneeded to feed each person fell by a half. This massiveproductivity increase was key to reducing worldhunger—average daily calorie intake in the develop-ing world went up from 2,054 calories in 1964 to2,681 calories in 1999.

However, in recent years the pace of irrigation develop-ment has slowed as has donor support to the sector.World Bank lending for irrigation and drainage aver-aged about five percent of total lending in the 1970sand 1980s, but dropped to less than two percent in theearly 2000s. In some countries, this reflects constraintsto area expansion, in others there has been disappoint-ment with the performance of past investments. Therehave been considerable technological advances, but thetake up of new technology is slow. For instance,although drip technology is widely available, it is usedon less than one percent of irrigated lands worldwide.Furthermore, the negative environmental impacts havesometimes been neglected.

Yet the challenge has never been greater. Pressures onagricultural water are intensifying as demand forincreased rural incomes and for agricultural producegrows. The World Bank is working to meet these chal-lenges through its three corporate strategies—for rural development, water resources, and environ-ment—which underline the role of higher water pro-ductivity and sustainable resource use in rural devel-opment and poverty reduction. To achieve thesegoals, investment in agricultural water managementwill have to increase and its quality must improve.

In the report Shaping the Future of Water forAgriculture: A Sourcebook for Investment in AgriculturalWater Management a range of solutions and goodpractices from World Bank and worldwide experienceare documented to meet the challenges of agriculturalwater management. The Sourcebook has an opera-tional focus, concentrating on investments in policyand institutional reforms and in technology and man-agement to improve water productivity and farmingprofitability. It provides a basis for training of both spe-cialists and non-specialists, enabling practitioners to see agricultural water management in its biggercontext of poverty reduction, growth of livelihoods,and wealth creation. The Sourcebook outlines an

SHAPING THE FUTURE OF WATER FOR AGRICULTUREDesigning and Implementing Quality Investments in Agricultural Water ManagementBY: THE WATER FOR FOOD TEAM

ISSUE 4FEBRUARY 2006

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indicative picture of the messages that are priorities indifferent regions of the world. The real work of adap-tation and implementation will begin as practitionersbecome familiar with the Sourcebook and apply it indeveloping countries.

RESPONDING TO THE CHALLENGESBelow are specific recommendations to help practi-

tioners design and implement quality investments in

agricultural water management.

Reforming policies and institutions

In the past, governments have been principalinvestors and service providers, and have promotedagricultural water use through subsidies, controlledmarkets and trade policy. Government plan- ning and top-downsolutions often led to poor investmentchoices, high costs,poor service, low costrecovery, and a cul-ture of dependencyon the state. Now, inmany countries, poorirrigation perform-ance, slow diversifica-tion and intensifica-tion, and growingenvironmental prob-lems have prompteda shift towards a newpublic/private para-digm, a revised incen-tive framework, and amore market-oriented approach. Governments areprogressively becoming facilitators and regulators,while users and markets play a growing role in invest-ment, finance, and management.

Investment in policy reform can help define institution-al and governance frameworks and establish incentiveand market frameworks favorable to profitable irrigat-ed agriculture. Investing in institutional development isalso crucial. On the user side, this may entail investingin participatory irrigation management through water

user associations. On the service provision side, irriga-tion institutions need restructuring to increase theiraccountability and improve performance. In addition,the development of an increasingly knowledge- andskills-based agricultural and irrigation economyrequires investment in capacity building.

Improving the economic and financial framework forinvestment

Within agricultural water use, there is scope for improv-ing returns to water. However, service providers oftenhave scant incentives or accountability to deliver goodservice. Farmers have been faced with an array of pricesand markets suffering from price distortions and subsi-dies, administrative decisions, and trade and othermacroeconomic policies. The results have been riskaversion, slow adoption of new technologies and diversification, low cost recovery, and groundwater

depletion and otherenvironmental degra-dation. Distortedincentive structureshave been at the rootof poor water man-agement. The incen-tive framework has toencourage farmers toinvest and to managewater efficiently andsustainably.

Countries need toestablish an economicand financial frame-work for profitableinvestment. Market-driven approaches are

necessary to improve investment in agricultural water.Policies are needed at the macro- economic level toencourage open trade and market development.Undistorted incentive frameworks are also needed,downplaying the use of subsidies and encouraging costsharing wherever possible. In irrigation, the financial via-bility of water service providers is crucial, and water serv-ice charges, although often contentious, are ultimately tothe benefit of the farmer. Cost recovery as a mechanismto finance a high level of water service would improvefarmer incomes and investment outcomes.

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Increasing investment levels and improving outcomes

Worldwide, investment in irrigation has been declin-ing as investment costs in new surface irrigation haverisen and rates of return and investment performancehave deteriorated. In particular, investment in on-farmwater management has been constrained by distortedincentive frameworks and, despite good economicreturns, drainage investments have been neglected.

There are ways to increase both private and publicinvestment. A priority is to ensure that the policy andincentive environment for private investment is in place.In large-scale irrigation, where the public sector is usu-ally involved because of the scale of investment, mod-ernization approaches combine institutional changeswith physical investments to target the service deliverygoal of cost effective and timely water delivery.

The World Bank can improve the quality of its lendingfor agricultural water not only by the application ofgood practices, but also by the appropriate choice oflending instruments. Piloting of institutional or techni-cal innovations may be done by Learning andInvestment Loans (LILs); scaling up of good practices orfinancing of multi-functional operations may best besupported by Specific Investment Loans (SILs); andbroad policy and institutional reforms may be promot-ed by a Development Policy Loan (DPL). World Banksafeguard policies can be viewed not as a constraint butas an aid to investment. Effectively, safeguards can helpimprove investment quality by integrating environmen-tal and social issues into projects and by supporting par-ticipatory approaches and transparency.

Investing in technology and water resources management to supply growing demand

Although the pace of technological change has sloweddown, the scope for efficiency gains in irrigation isenormous. Efficiencies world wide are well below technical maxima, pressurized systems and protectedagriculture still occupy only a small area, low-value staples predominate in cropping patterns, and agricul-tural yields and farmer incomes are well short ofpotential in most developing countries.

Application of an integrated approach to the differentinputs to the production system—soil, water, agronomy

—would increase efficiency. Examples include—inte-grated water saving approaches to on-farm manage-ment, supplementary irrigation and surface-groundwa-ter conjunctive use, combined water and soil fertilitymanagement, and integrated approaches to combat-ing drought, salinity, and floods. Water saving technol-ogy for profitable investment exists in abundance butits adoption requires efficient knowledge transfer sys-tems, reliable water service, and an economic envi-ronment that provides undistorted incentives, man-ageable risk and market access.

Investing in agricultural water tomeet the poverty and ruralincomes challenge

Agricultural growth is central to poverty reduction.Seventy per cent of the world’s poor live in rural areas,and most of them are dependent on agriculture.Investing in improved management of available waterthus has a critical role to play in both poverty reductionand food security.

Participatory approaches and farmer empowermentplay a central role in poverty reduction. An inclusivefarmer organization is a powerful force for improvingwater management. Investment quality can beimproved by participation at every level, bringing thevoices of the rural poor to such areas as policy making,technology development, and drought management.Community driven development (CDD) approaches

can also be excellent investment vehicles for that.Investment in irrigation and other agricultural watermanagement projects can be effective in reaching thepoor, but care is needed to ensure a pro-poor elementin programs, as a purely market-driven approach willfavor the better off. Options for pro-poor investmentinclude small scale irrigation, water conservation andwatershed management, as well as programs to helppoorer rainfed farmers such as investments in supple-mentary irrigation, water harvesting, rural infrastruc-ture, credit and market development.

Factoring environmental dimensions and the sustainabilityimperative into investment

Many countries are at the limit of water resourcesdevelopment, and pressure on land and water isintense. Over-abstraction of groundwater is leading toa drop in water tables and a decline in quality.Salinization and waterlogging have affected 30 millionhectares worldwide, and a further half a millionhectares go out of production each year, as much farmland as new irrigation creates. Drought and floods,exacerbated by climate change, have a heavy impact onagriculture, and particularly on the poor. In many coun-tries, watersheds are degrading under multiple use.

Groundwater management is likely to be a significantinvestment area as resource mining problems growworse. Options for recovering control over groundwa-ter include introducing an incentive structure favorableto conservation, and creating a governance structure

that promotes self-management and responsibility.Strong economic logic exists for increasing investmentin drainage, but this should be considered through its“multi-functional” dimensions. In watershed manage-ment, integrated and participatory approaches canhave an impact on both soil and water conservationand on poverty reduction.

ASSISTANCE FROM THE WORLD BANKThe World Bank Country Water Resources AssistanceStrategy (CWRAS) provides a link between the WorldBank’s program and national strategies, and opensopportunities for systematically building best practiceapproaches in agricultural water management intoWorld Bank lending. The recommendations made inthis note will also help in targeting sector and techni-cal work and studies to strategic priorities and in iden-tifying the appropriate World Bank lending and sectorpolicy support instrument, depending on whether thepriority is to support policy reform, long-term invest-ment programs, free-standing investments, pilot projects, or emergency recovery. The application ofthe practices recommended here is thus also expectedto help to revive and reorient the lending program.The range of possible investments is broad and shouldcomplement existing World Bank strengths of inter-national expertise, cross-country experience, and multi-sectoral involvement, all directed towardsthe over-riding goal of poverty reduction and economic growth.

THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural

This note is a product of the Water for Food team. It was written by Christopher Ward, an independent consultant, Ariel Dinar, aLead Economist in the Agriculture and Rural Development Department at the World Bank, and Salah Darghouth, a Water Adviserfor the Agriculture and Rural Development Department at the World Bank. It is based on the Shaping the Future of Water forAgriculture: A Sourcebook for Investment in Agricultural Water Management. The Sourcebook will be updated periodically and new notes on contemporary issues will be added. You can download a full copy of the report at www.worldbank.org/rural or email ard@worldbank.org

Selected reading:Reengaging in Agricultural Water Management. Directions in Development Report. World Bank, Washington DC, 2005.

Agricultural Growth and the Poor: An Agenda for Development. Directions in Development Report. World Bank, Washington DC, 2005.

Agriculture Investment Sourcebook. Washington DC: World Bank, Agriculture and Rural DevelopmentDepartment.