Policy Perspectives for Irrigation Sector Reform in Tajikistan: A Paper for Decision Makers by OECD

Policy Perspectives for Irrigation Sector Reform in Tajikistan A Paper for Decision Makers POLICY PERSPECTIVES

Policy Perspectives for Irrigation Sector Reform in Tajikistan A Paper for Decision Makers

CONTENTS . 1

Contents: 1. Introduction 2 2. Water sector reform in Tajikistan 3 Background 3 Water resources management 5 3. Economics of irrigation sector in Tajikistan 7 Irrigation water tariff 7 Real cost of irrigation water supply 8 Areas fed by pumps 8 Areas fed by gravity 8 Areas fed by groundwater wells 8 Sustainability of ALRI operations 8 Sustainability of Water Users Associations 10 Taxation 11 4. Proposed changes to ALRI institutional policies 12 Optimisation of the ALRI organisational setup 12 Support to Water Users Associations 12 5. Reforming irrigation water tariffs to improve efficiency of bulk water supply 13 Cost recovery goals 13 Differentiated tariffs for bulk water supply 14 Irrigation service fee paid by farmers 16 Assessment of economic, social and environmental impacts 16 Subsidies 18 6.

Using economic instruments to improve efficiency of bulk water supply 19 Options for cost reduction 19 Revolving fund to facilitate improvement of irrigation system 20

7. Economic analysis in river basin management planning 21 References 25

2 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

Introduction

In 2017-18, the Organisation for Economic Co operation and Development (OECD) provided support to the Tajikistan Government Agency for Land Reclamation and Irrigation (ALRI). This work was implemented with financial support from the European Union (EU) under the EU Water Initiative for Eastern Europe, Caucasus and Central Asia (EECCA), and f rom Finland under the FinWaterWEI-II Programme. The OECD focused on strengthening the economic dimensions of irrigation sector reform. This aimed to help create economic incentives for much-needed improvements of irrigation efficiency and water productivity to achieve financial sustainability in the sector. The recent OECD work recommended a wider use of economic instruments in policy making through integration of economic analyses into the key stages of the river basin management planning cycle. It also suggested a policy framework for reform of irrigation water supply tariffs, including how they are

set, to promote more efficient water use and improve cost recovery. This OECD Policy Perspectives summary paper outlines the key messages from the above work. It gives an overview of the main challenges to irrigation sector reform in Tajikistan. These include improving economic sustainability of the land reclam ation and irrigation sector, strengthening institutional governance structures, and rehabilitating and modernising the irrigation and drainage infrastructure.

Note: For ease of reference, prices outlined throughout this document refer to the average 2018 exchange rate 1 Dirham = 0.11 USD

BOX 1. Tajikistan development challenges Tajikistan emerged as an independent state in 1991 following the collapse of the Soviet Union. It is one of the world’s poorest countries with gross domestic product (GDP) of USD 6.9 billion (USD 796 per capita) according to the International Monetary Fund World Economic Outlook. Although rich in water resources, Tajikistan is the poorest of the five Central Asian economies. About 31% of Tajikistan’s population of 9 million live below the poverty line. Since the early 2000s, after

a difficult decade of political strife and civil war, the country’s economy has been gradually improving. As a landlocked country with some of the world’s highest mountains covering 93% of its territory, Tajikistan faces significant challenges to its development. These include food insecurity affecting about 26% of the population, poverty, limited transport connectivity, limited access to power supply, low levels of investment and climate change.

WATER SECTOR REFORM IN TAJIKISTAN . 3

Water sector reform in Tajikistan

BACKGROUND In Tajikistan, about 70% of the economically active population is involved in agriculture. Irrigation is one of the key drivers of economic growth, employment, poverty reduction and food security. More than 90% of arable land in the country is irrigated. Irrigation is responsible for 85% of the total water used in the country; irrigated lands produce about 90% of total agricultural output, accounting for about 22% of GDP and 39% of tax revenues. BOX 2. Tajikistan irrigation infrastructure The Tajikistan irrigation infrastructure is vast and complex. It was designed, built and centrally managed by the Soviet government between the 1950s-1980s to fulfil state production quotas for cotton and wheat. These remain the two main crops in Tajikistan, taking 36% and 24% respectively of the total cropped area. The system, which was overengineered, includes about 26 000 km of irrigation canals, more than 6 000 km of drainage network, 388 pumping stations with about 1 500 pumps, 1 823 irrigation and reclamation tube-wells, 377 electrical substations and 150 km of power lines, 10 reservoirs for irrigation and energy purposes, and about 23 km of irrigation tunnels.

Since Tajikistan independence in 1991, the irrig ation infrastructure has suffered from chronic underfinancing of operation and maintenance (O&M), and a lack of equipment, machinery and technical expertise. Most parts of this infrastructure, including hydraulic structures, regulators, pumping stations and water meters, fell into disrepair and do not meet contemporary technical requirements. A number of international development projects in Tajikistan have recently helped improve some parts of the irrigation infrastructure. According to BRL Ingénierie (2017), the average level of international investment was USD 250-450 per hectare of irrigated land. This is not sufficient to solve the most pressing technical problems. As estimated by ADB (2013), over 40% of the total irrigated land base in Tajikistan, the highest percentage in Central Asia, relies on water delivery by pumps. With the current unstable electricity supply, poor condition of pumps and

leaking pipelines, the actual quantities of water delivered to the farms are limited. Farmers are losing about one-third of the associated income. BOX 3. Agricultural productivity in Tajikistan Agricultural productivity in Tajikistan is low compared to other countries in Central Asia. For example, when using a simple measure of productivity, yields of major crops (2.2 tonnes/ha for wheat, 1.7 tonnes/ha for cotton and 21.9 tonnes/ha for potatoes) are lower than Uzbekistan’s yields (4.5 tonnes/ha for wheat, 2.3 tonnes/ha for cotton, and 24.5 tonnes/ha for potatoes). These yields are below average by international standards for irrigated crops. A study by the Asian Development Bank also reports Tajikistan water productivity as being low. Water productivity for fully irrigated wheat (unconstrained by water) with sufficient related inputs should be 0.8–1.0 kg/m3 (based on a potential yield of 4 tonnes/ha and annual water demand of 4 000 m3/ha). However, the water productivity for both wheat and cotton is less than 0.5 kg/ m3. This low productivity is due to irrigation constraints (supply) and limits on-farm inputs. Source: ADB (2013)

During Soviet rule, the arable land in Tajikistan was centrally managed through large state collective farms. After Soviet rule ended in 1991, a process of land reform redistributed land to about 100 000 smaller private businesses. This process provided farmers land and freedom of production, but gave little consideration to who should operate and maintain the on-farm irrigation system. As a result, the productive part of the irrigation and drainage network was left without maintenance.

4 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

Tajik farmers commonly use farrow irrigation. However, simple water applications, such as irrigation pipelines and siphon tubes, are not used due to many years with no field levelling. In many places, this inefficient irrigation led groundwater level to rise and soil quality to deteriorate. Most farmers typically grow four to five different crops in relatively small fields (1 to 4 ha). They are facing serious problems in adapting land use to an irrigation infrastructure originally designed and built to fulfil state production quotas of one or two main crops. The creation of smaller farming units with many more fields, along with differing cropping patterns, make the irrigation system far more complex and difficult to manage than in Soviet times. Food security and poverty reduction in Tajikistan are the core government priorities. In recent years, Tajikistan has been pursuing reforms in agriculture, energy and water resources management.

The reforms aim to increase agricultural production and income, improve the efficiency of irrigation, reduce water delivery costs and cut public expenditure on irrigation. In this way, they make the irrigation sector economy more sustainable. Improving irrigation efficiency and water productivity is a major challenge to the Tajik economy. It requires upgrading of irrigation infrastructure and putting in place a set of institutional, economic, technical and agronomic measures aimed at the following: l

achieving a reliable and predictable water supply

operating and maintaining infrastructure sustainably and reducing water losses

creating economic incentives to adopt water-saving technologies, reduce costs and improve water productivity.

improving water demand planning and water management by farmers and Water Users Associations (WUAs)

FIGURE 1. Tajikistan is among the world’s most water-intensive economies with the lowest water productivity Total Water Productivity Calculated as 2010 GDP in constant prices in USD per cubic meter of the total freshwater abstraction in the country 1.40 Afghanistan Kyrgyz Republic 1.20

Tajikistan Turkmenistan Uzbekistan

1.00

0.80

0.60

0.40

0.20

0.00

–0.20 1997

1999

2001

2003

2005

2006

Data source: World Bank, World Development Indicators (last updated June 30, 2016) https://www.indexmundi.com/facts/indicators/ER.GDP.FWTL.M3.KD/compare?country=tj#country=af:kg:tj:tm:uz

2008

2010

2012

2014

WATER SECTOR REFORM IN TAJIKISTAN . 5

WATER RESOURCES MANAGEMENT Water sector reform was initiated as part of the “Agriculture Reform Program” for 2012-20. A Presidential Decree of 19 November 2013, No. 12, “On Improvement of the Management Structure of Executive Authorities of the Republic of Tajikistan”, created the legal basis for reforms. This decree effectively abolished the former Ministry of Land Reclamation and Water Resources (MLRWR). In its place, the government created the Ministry of Energy and Water Resources (MEWR) and the Agency for Land Reclamation and Irrigation (ALRI). MEWR oversees water policy and regulations. ALRI operates and maintains the irrigation network, which comprises the principal water in-take, conveyance and drainage infrastructure. It includes pumping stations, as well as main and secondary canals. ALRI is also responsible for land reclamation, riverbank protection, prevention of mudflows and floods, and improvement of conditions of irrigated lands. In December 2015, the government of Tajikistan approved the “Water Sector Reforms Programme of the Republic of Tajikistan for 2016-2025”. The programme focuses on modernisation of irrigation infrastructure. It also pursues economic and institutional reforms of the irrigation sector to adopt the river basin management approach.

BOX 4. Current water resources management framework in Tajikistan The water resources management framework in Tajikistan is based on the geographical boundaries of the government’s administrative districts. These match neither the boundaries of river basins nor the hydrological boundaries of irrigation systems. It makes effective planning of water allocations problematic. Furthermore, it puts unnecessary constraints on water resources management. In practice, local authorities tend to exercise unlimited rights to the water resources formed within, or that move across, the territories under their jurisdiction. It also creates an adverse effect on operation and maintenance due to “transboundary issues” with work planning and responsibilities. As a result, farmers often do not know when water will be delivered. This is a particularly pressing problem in pump-fed areas where frequent power outages mean that farmers cannot rely on a schedule. Water sector reform is laying the foundations for adoption of Integrated Water Resource Management (IWRM) in Tajikistan based on the river basin management principles. This approach considers economic, social and environmental factors for the sustainable and balanced management of water resources. Water resources in Tajikistan are

6 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

abundant and, in addition to river flows, include groundwater, springs, lakes, glaciers and other water bodies. Tajikistan uses about 18% of the river flow formed in its territory for its own needs. Management of river basins depends on their size, complexity, trans-boundary issues, number and type of water users, and environmental factors. As proposed under water sector reform, the country is divided into five river basins: Kafirnigan, Pyanj, Syr Dariya, Vakhsh and Zaravshan. The irrigation sector is by far the largest water user in Tajikistan. As a result, it will play a critical role in the design and implementation of river basin management plans (RBMPs). These will require planning water allocation in the most efficient way. Specifically, RBMPs must consider the water-foodenergy nexus. This is central to achieving the UN Sustainable Development Goals as adopted by the Tajikistan National Development Strategy 20162030. Implementation of the RBM principles will improve water efficiency and productivity. In the short term, however, they may bring the administration

challenges of reforming ALRI management units in the regions according to the hydrological boundaries of the irrigation systems.

BOX 5. ALRI total service area and total water abstraction In Tajikistan, the total ALRI network service area is about 555 000 ha, which is 74% of the total 750 000 ha developed for irrigation. The remaining 26% include mountainous areas not connected to the ALRI network. They are irrigated either by small mountainous streams through local community schemes or by wells regulated by special local water use permits. Gravity supplies about 260 000 ha of the 555 000 ha. Pumps supply 295 000 ha (including 16 000 ha with groundwater wells) of which 212 000 ha irrigated by pump cascades lift water several times to various heights. In 2016, total water abstraction by the ALRI network was 9.6 billion m3, of which 2.2 billion m3 was for industrial purposes. The annual water losses on transfer up to the boundaries of the service area of WUAs, agricultural co operatives and dekhan farms is about 1.8 billion m3, which is about 24% of total water use for the irrigation sector.

FIGURE 2. Tajikistan river basins

Republic of Tajikistan

Source: Water Sector Reform Strategy. Draft Report of the Donor Coordination Council/UN FAO, 2011.

ECONOMICS OF IRRIGATION SECTOR IN TAJIKISTAN . 7

Economics of irrigation sector in Tajikistan

IRRIGATION WATER TARIFF In 1996, the government of Tajikistan introduced payments for water supply services through the stateowned irrigation systems based on contracts between the water supplier (ALRI) and water user (WUA, farmers). Water users are charged a tariff (called the irrigation service fee, or ISF) for the volume of water delivered. In 2009, the ISF was set at 0.16 USD (exclusive of 18% VAT) per cubic metre of water supplied. In May 2018, the ISF rate was increased to 0.19 USD (0.22 USD inclusive of VAT). The irrigation water tariff in Tajikistan is the same for water delivered either by gravity or by pumps and not related to any particular irrigation system. In 2016, ALRI signed 6 580 water supply contracts. Of these, WUAs had 417 contracts for the combined service area of 403 000 ha. Agricultural cooperatives and dekhan farms had the remaining 6 177 contracts for the combined service area of 152 000 ha. Due to a widespread lack of water meters, the contractable water quantities are estimates based on mutual agree ments of acceptance. The estimates are based on the cropped area and the national irrigation norm in cubic metre per hectare per crop type as illustrated in Table 1.

Tajikistan should switch from a uniform national ISF to one specific to the irrigation scheme. There should be a differentiated tariff for bulk water supply to WUA. In addition, farmers should pay another tariff to WUA to cover other costs to the association, including delivering water to the field, and operating and maintaining on-farm systems. This would be on top of expenses paid by WUA to ALRI for bulk water supply.

TABLE 1. Irrigation service fee by crop

BOX 6. Irrigation sector key actors

Crop

Crop irrigation norm (m3/ha)

ISF per ha (2009-2017) (USD/ha)

Rice

37 000

60.8

Alfalfa

12 500

20.5

Vegetables

12 000

19.7

Cotton

10 000

16.4

Orchards

9 500

14.8

Maize grain

9 000

14.7

Maize fodder

7 800

12.8

Tobacco

5 500

8.9

Melons

5 000

8.2

Maize silage

3 500

5.7

Winter wheat

2 200

3.6

Potatoes

6 500

0.99

Source: ALRI (2018)

The irrigation water tariff is far too low to cover the real cost of irrigation water supply. It does not provide any incentives to reduce water losses.

ALRI Central Office is responsible for the overall planning and management of the national irrigation network. ALRI District/Regional Branches (Rayvodkhoz) are responsible for operation and maintenance of the main and secondary canals, pumping stations, hydraulic structures, regulators, and the associated auxiliary infrastructure in the Administrative Districts of the Government. Rayvodkhozes are not directly controlled by the ALRI Central Office as they are paid/funded through the respective District Government. But the lack of financial resources, competent staff and technical capacity makes it difficult to operate, maintain and to slow down the infrastructure deterioration. The tertiary and on-farm canals are responsibility of WUAs and dekhan farms. Their financial resources and capabilities are very limited to be able to maintain the network up to the required standard. This is often complicated by lack of clarity with the boundaries of the on-farm systems. The updated canal network inventories are being developed to delineate and clarify WUAs’ boundaries and areas of responsibility.

8 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

COST OF IRRIGATION WATER SUPPLY Areas fed by pumps About half of the ALRI total service area is pumpfed. In 2017, according to ALRI, the pump-fed areas received 2.15 billion m3 of water. However, to deliver this quantity, ALRI had to pump about 5.07 billion m3. Water has to go through pumping cascades that lift water in two to seven steps to irrigate fields on various heights up to 300 m. Pumping efficiency is low because most pumping stations under ALRI responsibility are old and in disrepair. About half of the 600-km pressure pipes need replacement. As a result, the stations do not meet technical requirements. In 2014, the subsidised electricity tariffs were 0.24 USD/ kWh for the vegetation period AprilSeptember and 0.9 USD/kWh for October-March. The rate was insufficient to cover the real pumped water supply cost of 0.77 USD/m3 estimated by ALRI in 2017. Since 2014, the electricity tariff has been raised three times. In January 2018, it was set at 0.64 USD/kWh for April-September and 1.85 USD/kWh for October-March. The electricity tariff has more than doubled compared to 2014. This has raised the cost of pumped water supply accordingly, by a factor of at least two. But the real costs are likely to be even higher because of the impacts of climate change. In 2017-18, ALRI had to run some pumping stations during the off-vegetation period (October to March) when the electricity tariff is three times higher than during the vegetation period. A more detailed cost estimate is needed that would require additional data collection and analysis. But it is clear that the current ISF rate does not recover the costs of pumped water supply from farmers. It puts a heavy burden on public funds and raises questions about the sustainability of farming in pump-fed areas.

Although water supply by gravity does not involve pumping costs, the ISF rate is far below the level required to cover the real costs of water supply. According to an estimate based on ALRI data for 2017, the real cost of water supply by gravity is about 0.27 USD/m3. This estimate should be revisited, based on additional studies using disaggregated data (e.g. per canal command area, per crop) when they became available. Most data provided by ALRI are aggregated by administrative district.

Areas fed by groundwater wells About 3% of the ALRI total service area is fed by groundwater wells with submerged pumps. In 2017, according to ALRI, water delivery to these areas was approximately 122 million m3. The unit cost of operation and maintenance of this system is significantly higher compared to the gravity system. Technicians using special equipment must service the wells with submerged pumps quite often to keep the system operational under unstable electricity supply and frequent power outages. Based on ALRI data for 2016, the estimated cost of water supply by the groundwater wells was about 0.42 USD/m3. In 2018, this figure was likely to be at least two times higher because the electricity tariff has more than doubled since 2016. The increased electricity costs were neither subsidised by public budget nor covered by irrigators, thus contributing to ALRI financial losses. A more detailed estimate is needed that would require additional data collection and analysis.

FINANCIAL SUSTAINABILITY OF ALRI OPERATIONS ALRI’s financial situation depends on the following sources: the central (state) and local government budgets, and the irrigation service fee (ISF). In addition, the Tajikistan government attracts grants and loans from international financial institutions for development projects in the irrigation sector.

Areas fed by gravity About 47% of the ALRI total service area is gravity-fed. In 2017, the gravity-fed areas received 2.3 billion m3 of water. This water is delivered through the system of the main, secondary, tertiary and various smaller inter-farm and on-farm canals. More than half of this infrastructure is dilapidated. Furthermore, most canals are heavily silted, which substantially reduces their carrying capacity.

On average, about 65% of funds from the state budget is spent on ALRI’s staff salaries. The remainder is earmarked for land reclamation, river bank and flood protection, landslide prevention, and rehabilitation of some parts of the irrigation infrastructure. The funds from the district budgets are mainly used by the Rayvokhoz (ALRI district branches) to improve the ameliorative conditions of arable lands. The ISF collected is used to operate and maintain

ECONOMICS OF IRRIGATION SECTOR IN TAJIKISTAN . 9

FIGURE 3. Irrigation Service Fee (ISF) collection rate from 2008 to 2017

ISF planned

ISF collected

% ISF collection rate

100

ISF, Million TJS

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: ALRI (2018)

the irrigation network, to pay staff for water manage ment in the field and to pay taxes. Figure 3 provides information about the ISF collection rate over the last ten years. The collection rate has improved significantly since 2008, reaching nearly 75% in 2017. But even if the ISF collection could reach 100%, ALRI would still have a substantial financial deficit. The annual cost of electricity alone in the irrigation sector is more than 12 million USD.

Figure 4 summarises ALRI’s financial needs for 2018 to cover operation and maintenance of the irrigation network. The costs total 59.6 million USD. When ALRI was established in early 2014, it started without any debts for electricity. This is because the government wrote off the debt of 26 million USD accumulated by the ALRI predecessor (MLRWR) to Tajik Energy (“Barqi Tojik”). The debts of dekhan farms to Rayvodkhoz were also written off.

FIGURE 4. ALRI’s financial needs for 2018 COSTS

Main costs, Million TJS

Staff salaries Social security Fuel and lubricants Irrigation infrastructure maintenance Electricity Purchase of spare parts and repairs Staff training State sectorial and regional programmes 0

Source: ALRI (2018)

100 150 ALRI financial needs, Million TJS (2018)

200

250

10 . POLICY PERSPECTIVES FOR THE IRRIGATION SECTOR REFORM IN TAJIKISTAN

However, in 2014-16, ALRI accumulated a debt of about 14 million USD because the irrigation tariff was not sufficient to recover pumping costs. In 2017, ALRI’s debt was about 12 million USD. This was mostly for electricity, but also for staff salaries, payments to the Social Protection Fund and VAT. In 2018, the state allocated 5.5 million USD for ALRI. About 2.9 million USD was used to subsidise electricity, with the remainder earmarked for staff salaries. ALRI has to cover all other O&M costs from the IFS. The government expects ALRI to become fully selfsufficient by 2019. To achieve this, it should adopt the new methodology for setting irrigation water tariffs. This should include annual adjustments to account for growing electricity prices and inflation. At the same time, it should take measures to substantially increase the ISF collection rate. It should also consider exempting ALRI from VAT to reduce its tax burden.

Financial sustainability of Water Users Associations The first Water Users Associations (WUAs) in Tajikistan were organised in the early 2000s to manage on-farm irrigation systems. These had been managed by irrigation brigades on Soviet collective farms in the 1950s-1980s. According to ALRI there are 417 WUAs, which cover about 403 840 ha, mainly in gravity-fed areas. Many WUAs were organised

quickly by administrative order and received little or no professional training. A significant number were formed on the basis of Jamoat (sub-district) administrative boundaries. Most WUAs suffer from a dilapidated irrigation infrastructure, and lack of management and technical expertise. This is exacerbated by high staff turnover and unnecessary interference from local authorities. Low institutional and technical capacity, lack of training and lack of access to professional advice are the key hurdles to improving WUAs’ operations. Over the past 15 years, a number of international development projects provided capacity building, training and technical support to WUAs. These projects produced a significant positive effect, but the sustainability of WUAs’ operations remains a challenge. Many are too small to be economically viable, experiencing both low irrigation fee collection and shortages of operational funds. Water supply service contracts with the owners of homestead areas/presidential plots (on average taking about 3040% of the WUAs service areas) must be done through ALRI’s Rayvodkhoz. This delays payments of salaries for WUA staff. The economic viability of WUAs is impacted by the following main factors: i) WUA membership fee is too low to cover WUA O&M costs within their service

ECONOMICS OF IRRIGATION SECTOR IN TAJIKISTAN . 11

WUAs to supply water to farmers in the field is well over 0.32 USD/m3. Considering the extent of their services, WUAs should benefit from a new water tariff that charges farmers for water supply service. This tariff will include the costs of the bulk water supply by ALRI to the boundary of WUAs.

TAXATION

areas; ii) all the ISF collected by WUAs goes directly to ALRI where it is blended with other funds and often diverted to other purposes; and (iii) WUAs are heavily indebted to Rayvodkhoz and tax authorities. WUAs do not add O&M costs to the bulk water supply tariff. They only take membership fees from farmers, on average 3.2 -11 USD per ha per year with an average annual water use of 10 000 m3/ha. This means that, on average, WUAs take about 0.03-0.1 USD/m3 from farmers for water services. This number is symbolic. Some estimates show the real cost for

The government imposes 18% VAT on ALRI’s district branches (Rayvodkhoz). This may help the government to increase national tax revenue, but the tax has a strong negative impact on the quality of irrigation water supply services. The tax office’s extraction of a significant part of income is substantially reducing ALRI’s annual budget and undermining O&M of the irrigation system. As a result, Rayvodkhoz have to cut down on essential maintenance, leaving many technical tasks unfinished and undone. This puts the infrastructure at risk of even faster deterioration and reduces capacity of the irrigation system to meet farmers’ needs. Rayvodkhozes are not profit-making entities so there is a little justification for imposing such a tax on them. The need to pay this tax encourages the Rayvodkhoz to concentrate more on collecting irrigation service fees than on improving water management. Even worse, after ALRI signs the contract for bulk irrigation water supply, the tax is imposed immediately on the amount not (yet) received by ALRI. It faces fines and penalties for not paying this tax. Exemption of ALRI from VAT would free up about 11.4 million USD a year for much-needed maintenance.

BOX 7. Future WUAs in Tajikistan According to ALRI, newly established WUAs will cover about 350 000 ha of irrigated land in Tajikistan. If larger WUAs (say, covering on average 1 500-2 500 ha each) are more likely to be economically viable, then 140-230 WUAs will be organised over time. For effective water management, WUA boundaries should match the hydrologic boundaries, which may somewhat limit a WUA’s size. International experience indicated a smaller size is not necessarily a barrier to economic viability. If smaller neighbouring WUAs could share some tasks (e.g. monitoring, accounting), it should help significantly to reduce operational costs. Or, perhaps, smaller WUAs may choose to form a larger unit that could be more productive and more economical to operate.

WUAs are subject to VAT, although they are nonprofit and non-governmental organisations. WUAs experience economic problems similar to Rayvokhoz; for that reason, there is little justification to impose VAT on WUAs. It creates negative incentives leading to poor maintenance and infrastructure deterioration. Furthermore, it puts the dominant focus on collecting revenue rather than on improving irrigation service delivery and agricultural production, which should be its priority. At the same time, massive deterioration of tertiary and on-farm irrigation infrastructure continues, due to scarcity of funds for maintenance. Exemption of WUAs from this taxation would help to significantly improve the economic viability of WUAs. Continuing to tax WUAs will have the opposite effect.

12 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

Proposed changes to ALRI institutional policies

OPTIMISATION OF THE ALRI ORGANISATIONAL SETUP ALRI regional/district branches are organised and operate on the basis of boundaries of the regional (oblast) and district (rayon) government. This organisational setup creates two main problems. ALRI district branch is only responsible for those portions of canals that pass through the respective district. This creates two main issues. l First, budgets and other data for these canal portions are merged, packaged and controlled by the district. There are no separate cost centres or units for each canal. This obscures the relevant data and severely limits accountability for performance. l Second, organisation by boundaries makes integrated planning, budgeting and management of the irrigation system extremely problematic. Often, the canal command areas spread into the other districts. In this case, farmers’ request for water in District A would go to the ALRI District A branch. It would then have to reach a higher management level at the ALRI regional office before being relayed to the ALRI District B branch, which controls the water flow. A single ALRI office controlling the entire canal, from head to tail, would operate far more effectively, efficiently and responsibly. Optimisation of the ALRI organisational setup to the river basin management principles would help solve problems and make the irrigation system more costeffective.

SUPPORT TO WATER USERS ASSOCIATIONS The traditional approach of creating hierarchical government units to support WUAs has proved ineffective and unsustainable. A new approach is required that goes beyond viewing WUAs as Rayvodkhoz extensions that collect the irrigation tariff. ALRI should embrace the concept of WUAs as independent, self-governing, farmer-controlled

organisations. By Government Resolution No 755 of December 2014, ALRI is the main national body responsible for the regulations and provision of support to WUAs. There is a pressing need to create a competent and sustainable national training and support programme for WUAs. The WUA Support Unit in ALRI should take the lead in adopting and replicating best practices developed by international projects. The best practice example is the WB PAMP II project. It provided capacity building and support to a number of WUAs in the six pilot project areas. As a result, the targeted WUAs have improved their management practices. This, in turn, helped improve trust and understanding between farmers and WUAs. It led to improvements of the WUAs’ operational management and administration, resulting in more signed water supply contracts, increased WUA membership and improved collection of membership fees. In the six pilot project areas, the WUA membership fee collection rate increased from 25% to up to 100%. WUAs’ accountability to their members also improved. WUA membership meetings are held regularly where proposed budgets and work plans are openly reviewed and approved. And reviews of the WUA accounts by either an external accountant or an audit committee comprised of WUA members independent of the Board is becoming the norm.

REFORMING IRRIGATION WATER TARIFFS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 13

Reforming irrigation water tariffs to improve efficiency of bulk water supply

The proposed framework for the irrigation water tariff reform and applying economic instruments to improve efficiency of bulk water supply is given in Figure 5. FIGURE 5. Framework for irrigation water tariff reform

Set the long-term cost recovery goals

Apply economic instruments to reduce costs

Define differentiated tariffs for bulk water supply up to the boundaries of WUAs

Calculate the real O&M costs of WUAs for supplying water to farmers and set the final tariff

Revolving fund for increasing irrigation water efficiency

Assess economic, social, environmental and climate change impacts of the proposed tariffs

Define transparent scheme of targeted subsidies

COST RECOVERY GOALS As a first step, it is necessary to define long-term costrecovery goals. The “Water Sector Reforms Programme of the Republic of Tajikistan for 2016-2025” clearly stated the “user pays” principle should be considered along with the values agriculture represents for Tajik society. This policy decision should consider the benefits of improved food security, increased employment, and purchasing power parity of the rural population and other benefits that stem from improved agricultural productivity. OECD analysis indicates that charges for water supplied to farms have been increasing in some

countries (OECD (2016). However, in many countries, farmers are only covering operation and maintenance, which are part of the full water supply costs, with little recovery of capital costs for water supply infrastructure. Water charges rarely reflect scarcity and social values, or environmental costs and benefits (i.e. full cost recovery). These are usually addressed by other policy measures, including agri-environmental payments, pollution taxes and water allocation mechanisms. These measures, however, do not address the scarcity value of water. In response, some countries are using the principle of full cost recovery to guide their water policy frameworks. Trading of water entitlements can provide a scarcity market price and lead to the higher value use of water resources.

14 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

In recognition of the difficulties in moving towards full cost recovery, the OECD recommends that charges for water supplied to agriculture reflect at least full supply costs, using social and adjustment policies when needed to compensate the poorest farmers. This highlights the need to establish the water sector on a financially sustainable basis and find the right mix between the ultimate revenues for the water sector, the so-called “3Ts”: tariffs, taxes and transfers. Every country finds its own balance among these three basic sources of finance. Within the OECD, with most of the agricultural sector connected to a water infrastructure network, member countries largely rely on water tariffs to cover O&M costs for water supplies to agriculture. The path to improved cost recovery may involve a phased approach. Tariffs can initially cover O&M costs. Subsequently, they can increase to cover depreciation of assets, new investment and, eventually – where relevant and possible – the externality and opportunity (resource) costs of water. Where tariffs are extremely low relative to full cost recovery or sustainable cost recovery, a gradual approach may be insufficient; more drastic action may be needed. Increasing cost recovery rates through water tariffs also requires a comprehensive approach. This involves reforming tariff levels and structures, and increasing bill collection rates. But it also includes improving service levels and establishing social protection measures where necessary.

DIFFERENTIATED TARIFFS FOR BULK WATER SUPPLY Once the cost recovery goal is set, the next step is to analyse operational costs, maintenance costs and depreciation costs for each type of water supply: i) water supply by gravity; and ii) mechanised water supply that involves pumps. Table 2 summarises key factors to consider during cost analysis. After that, the differentiated tariffs should be defined, taking into consideration all real costs for bulk water supply up to the boundaries of the service area of WUAs. Table 3 summarises the proposed methodology for calculation of tariffs for bulk irrigation water supply. This can be used as a general guide for setting up calculation spreadsheets. The table lists the main costs that should be considered to calculate tariffs for the gravity water supply and for the mechanised water supply. Based on this approach, an averaged tariff can also be calculated in case of a political decision to apply a uniform tariff for water supply to WUAs. Once adopted by the government, automatic calculation of tariffs adjusted for inflation and growing electricity prices could be added to the methodology. But this would require additional data collection and analysis.

TABLE 2. Factors to consider during cost analysis Costs

Relation to water supply

Factors to be considered

Operational costs

These costs (including the cost of energy and the cost of labour responsible for operation) are directly related to the volume of water supplied, These costs should be fully covered by the water user as soon as possible.

l water supply would stop if these costs are not covered.

Maintenance costs

These costs (e.g. servicing, inspections, repairs, cleaning) have less direct relation to the volume of water supplied, but these costs should be properly covered by the water user.

l If these costs are not covered it will cause an irrigation system to stop

Depreciation costs

These costs have indirect relation to the volume of water supplied.

l on an annual basis depreciation costs can provide a source of cash that can

l subsidy of these costs does not stimulate an efficient use energy and water. l direct subsidy of commodity crops (e.g. cotton, wheat) benefits large rich

farmers, the traders, but not the smaller and poorer farmers. Therefore consider for review and possible phase-out. l subsidy for an export crop like cotton means subsidy for a consumer living abroad. functioning within a few years, especially in irrigation where the user can do much of the maintenance. l a policy that encourages user maintenance has priority. l provision of water directly to WUAs divides maintenance costs between public provider and private users. be used either as a reserve for a replacement/rebuilding of the system, OR, a new system. l a fee policy should aim at covering most of depreciation costs in the long term. l to cover the financial debt obligations made to invest in

REFORMING IRRIGATION WATER TARIFFS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 15

TABLE 3. Proposed tariff methodology for bulk irrigation water supply No.

Cost Description

unit

Volume of water supplied to water users, including

mln m3

1.1

Water users associations

mln m3

1.2

Dekhan economies or other water users

mln m3

Necessary costs for operation and maintenance of the irrigation water supply, total, including

mln TJS

2.1

Operational costs

mln TJS

2.2

Current renovation costs

mln TJS

2.3

Capital renovation costs

mln TJS

Expenses related to salary of the employees

mln TJS

3.1

Average salary

TJS

3.2

Average number of employees

individual

Fund for social protection of the population (25% of row 3)

mln TJS

Expenses related to electricity

mln TJS

5.1

Electricity costs for operation of pump stations

mln TJS mln kWh

5.2

Other electricity costs

mln TJS

Depreciation (14.4% of the balance cost of the main assets)

mln TJS

Expenses for maintenance of the management staff (12.6% of row 2)

mln TJS

mln kWh

Insurance fund in case of water scarcity (10%)

mln TJS

Prime cost of the services (rows 2-8)

mln TJS

Profitability (8%)

mln TJS

10 11

Prime cost of the good (rows 9-10)

mln TJS

Road fund (2%)

mln TJS

Tariff

13.1

Without VAT (rows 11-12 divided by row 1)

dirham/m3

13.2

Including VAT (row 13.1 plus 18%)

dirham/m3

16 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

BOX 8. Case studies from Armenia and Kyrgyzstan “Irrigation Water Intake” Closed Joint Stock Company (CJSC) under the State Committee on Water System of the Ministry of Energy Infrastructures and Natural Resources is in charge of bulk irrigation water supply up to the boundaries of WUAs in Armenia. Based on the irrigation supply mode (gravity, mechanical), “Irrigation Water Intake” CJSC charges a different iated tariff for bulk water supply from WUAs: 0.2 USD/m3 for gravity water supply, 2.3 USD/m3 for pumped water supply. WUAs in Armenia add their own costs related to supplying water to the field and sell water to farmers at the following unitary tariff: 2.4 USD/m3. However, the tariff of 2.4 USD/m3 paid by farmers is not enough to cover operation and maintenance (O&M) costs of WUAs; the state subsidises 37% of O&M costs for WUAs.

The above-mentioned forms only part of the final tariff charged to individual farmers (OECD, 2016). On top of this tariff, WUAs charge additional fees to cover administration and O&M costs of the irrigation network down to the farms. Thus, tariffs for water for irrigation for the end-users vary between 0.08 USD/ m3) and 0.25 USD/m3. In recent years, the tariffs of 0.08 USD/m3 up to 0.25 USD/m3 paid by farmers for irrigation services represent only 10% of funds required to cover O&M costs. The state effectively subsidies 90% of the financial costs through the state irrigation system.

The bulk irrigation water supply tariff in Kyrgyzstan from the state irrigation network to operators of on-farm irrigation networks (WUA) during the growing seasons varies according to the following breakdown: i) in areas classified as having a severe (inhospitable) climate – 0.01 USD/m3; and ii) in all other areas – 0.04 USD/m3).

IRRIGATION SERVICE FEE PAID BY FARMERS The World Bank-funded PAMP II project (BRL Ingénierie, 2017), in collaboration with ALRI, has developed an elaborate methodology for setting ISF for farmers. On top of costs incurred for purchasing bulk water from ALRI, WUAs add their O&M costs of the on-farm irrigation network and water delivery to farmers in the field. Application of this methodology is a multistep process, which is being piloted in Tajikistan. The most laborious part of the process is development of updated inventories of massive on-farm irrigation and drainage infrastructure. O&M costs are determined for a specific year based on inventories and other relevant data. The costs are agreed at the general meeting of the WUA or of representative areas of the WUA. The cost of servicing the internal irrigation and drainage network include costs paid by WUA for water supply services, costs of O&M and creation of a depreciation fund that comprises 5% of the total funds collected annually.

ASSESSMENT OF ECONOMIC, SOCIAL AND ENVIRONMENTAL IMPACTS According to legislation in Tajikistan, public hearings are organised to assess the ability of farmers to pay tariffs for goods, works and services of natural monopolies. It is proposed to supplement the affordability assessment with an assessment of the economic, social and environmental impacts of the new tariff methodology. This section considers several key questions that explore potential impacts.

Economic impacts Does the application of the new tariff methodology affect the prices irrigators pay? Application of the proposed methodology for calculation of the tariffs for bulk water supply may lead to an increased irrigation service fee paid by farmers. According to rough estimates, on average, the real cost for WUAs to supply water to the farmers is about 0.3 USD/m3. Based on 2018 analysis, the real cost of bulk water supply up to the boundaries of WUAs in Tajikistan on average is roughly 0.27 USD/m3 for gravity water supply

REFORMING IRRIGATION WATER TARIFFS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 17

and 0.76 USD m/m3 for mechanised water supply (OECD, 2017). The average irrigation tariff for farmers could constitute roughly 0.6 USD/m3 for gravity water supply and 1.1 USD/m3 for mechanised supply, without accompanying mitigation measures. While such a tariff would help cover all O&M costs for ALRI and WUAs, it might not be affordable for many farmers.

Social impacts

Will application of the new methodology have a stronger impact on certain regions of the country? The proposed reforms will likely have a higher economic impact on regions with pumped irrigation. However, the impact will vary significantly among regions. For example, according to ALRI, the cost of water supply from ALRI to the boundaries of WUAs through the pump stations in Kurgantyube zone of Khatlon region is 0.35 USD/m3. The cost in Kulyab zone of Khatlon region is 1.09 USD/m3.

Will application of the methodology create affordability issues for farmers? There is no sound scientific basis for determining the value of affordability thresholds for irrigation water tariffs. In many developing countries and economies in transition, 3-7% is normally considered as the affordability threshold for the share of the irrigation service fee within overall water productivity or the certain crop. Under this assumption, the application of the methodology envisaged full coverage of O&M costs for irrigation water supply. The estimated irrigation service fee for farmers might be as high as 0.6 USD/m3 for gravity water supply and 1.1 USD/m3 for pumped water supply. As a result, farmers may have significant affordability issues without accompanying mitigation measures.

Does the proposed methodology promote greater productivity/resource efficiency? The subsidised uniform tariff of 1.09 USD/m3 (VAT excluded) does not provide any incentives for farmers to use water efficiently. According to the recent World Bank study (“Central Asia: The Costs of Irrigation Inefficiency in Tajikistan”), the costs of irrigation inefficiency are about USD 11.16 million per year on average, or USD 44.11 per irrigated hectare per year. Application of the proposed methodology is expected to greatly promote productivity and significantly reduce resource inefficiency.

According to ALRI estimates, farmers growing winter wheat, rice, alfalfa, corn and forage will likely have affordability issues without accompany mitigation measures. For cotton, even the current tariff of 0.22 USD/m3 creates significant affordability issues. Thus, measures should be developed to mitigate the impact, including promoting transition to more profitable crops. For certain agricultural produce, the proposed methodology should not create significant affordability issues, even in the case of pumped water supply. This includes potato, vegetables, orchards, melon and water melons.

18 . POLICY PERSPECTIVES FOR THE IRRIGATION SECTOR REFORM IN TAJIKISTAN

Environmental impact Will the increased irrigation service fee reduce water use? The application of the proposed tariff methodology will significantly increase the irrigation service fee for farmers. It is highly likely this will lead to significant reduction of water use. According to the World Bank, the average annual abstraction for irrigation in Tajikistan is over 15 000 m3 per ha, which is among the highest in the world with the lowest water productivity. As a result of population growth, climate change and economic development, water resources in Central Asia, including Tajikistan, are increasingly under pressure. At the regional level, annual water availability per person per year is 2 500 m3. It is expected by 2030 to drop to 1 700 m3 per person per year, the internationally recognised level for water stress. Does the new methodology affect a country’s ability to adapt to climate change? The expected reduction in irrigation water use with the application of the new tariff methodology is likely to improve Tajikistan’s ability to cope with climate change. This is particularly important given

the expected vulnerability of water resources due to climate change. A 2017 Oxfam report states that about 20% of the country’s 8 492 glaciers are in retreat and 30% more are likely to retreat or disappear by 2050.

SUBSIDIES Continued subsidy of inefficient pumping systems at high costs should be further analysed case by case. There are two main issues: inefficiencies in water delivery and farm output, and cross-subsidies. Do better-off people need to pay a higher price than cost recovery to support worse-off people who are dependent on systems with a higher cost? Any increase in gravity systems to support pumped systems needs to be approved by stakeholders. Where all pay actual costs, the laws of supply and demand will dictate that farmers operate in the most economically efficient manner. In so doing, they will use only low-cost irrigation water or shift to crops that require less water. If the government wishes, for whatever reason, to retain farmers in high water-cost areas, it should pay them out of the central budget through tax credit or cash refunds, not through crosssubsidies as is presently the case.

USING ECONOMIC INSTRUMENTS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 19

Using economic instruments to improve efficiency of bulk water supply

OPTIONS FOR COST REDUCTION Application of economic instruments is useful in assessing options to reduce water supply costs in the short-, medium- and long-term. This is particularly true for areas where the new tariffs would cause significant affordability issues for farmers. In this respect, the most vulnerable farmers are those lilifteing water several times through pumping cascades. A number of options to reduce costs and improve water efficiency should be considered. Shift from pump-fed to gravity-fed irrigation Electricity costs represent the largest share of ALRI’s expenses. According to some estimates, the annual electricity cost is around 13 million USD, which the agency is not able to pay (even when it collects all payments from WUAs). Conversion from pumpfed to gravity-fed irrigation is the obvious way to substantially reduce the cost of electricity. In this regard, construction of a number of small reservoirs in the mountainous areas should be considered. This could be done using grants and loans from international financial institutions (IFIs) given the high rate of return of IFI projects in some similar countries of the former Soviet Union.

Construction of small reservoirs Small reservoirs are one alternative to the pumping cascades. There are several reservoirs constructed in Tajikistan, which improved water supply to irrigated areas in Soghd and Khatlon regions. Construction of small reservoirs solves several inter-related problems and helps reduce damage by mudflows during spring and winter. ALRI has mapped 26 potential locations where small reservoirs could provide gravity water flow to areas served by pump-fed irrigation. However, the small reservoirs could not replace all the pumping stations, which deliver a massive 2.15 billion m3 of water annually. This is the equivalent of some 600 small reservoirs; it is not feasible to build so many reservoirs. Indeed, about 10.9 million USD would be required to build a reservoir with a capacity of 3.5-4 million m3. A thorough feasibility study is required to identify the exact locations, capacity and other characteristics of small reservoirs that could replace

pump stations and provide reliable gravity water supply. ALRI estimates construction of small reservoirs could provide 130 million m3 of water. This could help ALRI save 0.98 million USD on its annual electricity bill.

Drip irrigation Introduction of drip irrigation in pump-fed areas could be another option to increase irrigation efficiency and reduce costs. On average, about 4.4 USD/ha would be required to introduce drip irrigation, where feasible. This is a one-time investment, which later on will save O&M costs compared to pumped systems, provided farmers still maintain the pipes properly as they rapidly clog otherwise.

20 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

The cropping patterns should be kept under perm anent review with more emphasis on high-value and less water-intensive crops. This could help generate higher value per unit of water used. For example, ALRI estimates that introduction of drip irrigation on the fourth and upper levels in areas fed by pumping cascades would save about 128 million m3 of water and over 0.9 million USD in electricity costs annually. Recent ALRI studies also suggest that drip irrigation and a shift to higher value crops could significantly improve water productivity, particularly in the case of sweet cherries, melons and potatoes.

Exemption of irrigation water supply from taxation Extraction by a tax office of a significant share of the ISF collected from farmers deepens the scarcity of funds available for maintenance. Relieving the tax burden imposed on irrigation service providers, who are, in fact, non-profit making entities, would significantly help to improve O&M. It could also free about 1.4 million USD annually for much-needed maintenance. Retaining the present taxation will only produce more damage.

Improving efficiency of pump-fed irrigation

REVOLVING FUND TO HELP IMPROVE THE IRRIGATION SYSTEM

A number of options could improve efficiency of pumping systems, including better monitoring and prevention of water losses through leakage, where feasible. Other options, such as reducing the height of water lift, should also be considered. This would probably require a cost-benefit analysis of the peoples’ resettlement from some of the most inefficient cascade pump-fed areas. According to some preliminary ALRI estimates, the above measures could reduce overall annual O&M costs by up to 50% and help save about 1.9 million USD annually. More land reclamation in gravity-fed areas would help reduce reliance on pumping and improve overall efficiency of the irrigation system.

Employing the above economic instruments could potentially help reduce annual costs of bulk irrigation water supply and save millions TJS. These savings could be directed to a revolving fund managed by ALRI. Such a fund would aim to implement projects that improved efficiency of the irrigation system. Specifically, the fund would help rehabilitate irrigation infrastructure and promote water saving technologies to increase the efficiency of water and energy use. Donor funds would provide the statutory capital to start up the revolving fund. Subsequent replenishment would draw on savings from improved efficiency of the irrigation system and reduced O&M costs.

USING ECONOMIC INSTRUMENTS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 21

Economic analysis in river basin management planning

OPTIONS FOR COST REDUCTION The Water Sector Reforms Programme for 2016-2025 in Tajikistan includes development of management plans for all river basins. The programme emphasises economic principles (e.g. the polluter pays principle) and economic instruments (such as pricing, cost recovery assessment, cost-effectiveness and cost-benefit analysis) for development and implementation of such plans. A number of international donor-funded projects support the river basin management plan (RBMP) process: European Union (Zaravshan), the Swiss Agency for Development and Cooperation (Syr Darya); World Bank (Kafernigan); and the Asian Development Bank (Pyanj). The government agreed to the draft National Conceptual Framework (NCF) for RBMP development. The draft NCF provides guidance to river basin planning and defines the key elements of the RBMP

process based on international experiences. In its current draft, the NCF is mainly focused on legal and technical matters of water management with less attention to economics. Yet economics is the key to sustainability of RBMPs, particularly under the budgetary constraints of Tajikistan. Economic instruments help prepare a more realistic RBMP and reduce risk of failure. They should be integ rated into the river basin management planning cycle and the associated policy decisions, as illustrated in Figure 6.

FIGURE 6. Integration of economic instruments in the river basin management planning cycle Economic importance of water uses

Analyse existing water uses, impacts and pressures

Defining penalties

Evaluating the impacts of programmes

Assessment of current levels of cost-recovery for water services Trends in supply and demand Identifying potential measures

Assessment of unitary cost of measures Assessment of effectiveness of measures Assessment of cost-effectiveness of measures

Implementing programmes of measures

Justifying potential derogations

Identifying programme of measures

Assessment of costs/benefits of packages of measures Definition of less stringent objectives

Identification of a cost-effective set of measures Assessing role of pricing as a mechanism

Justification of time derogations Justification of proposed cost recovery levels

22 . POLICY PERSPECTIVES FOR IRRIGATION SECTOR REFORM IN TAJIKISTAN

Application of economic instruments may vary depending on the basin characteristics and RBMP objectives. Table 4 summarises the status of economic instruments for RBMPs in Tajikistan.

The draft NCF is not clear about the application of economic instruments. The RBMP planning process defined by the NCF would benefit from inclusion of the economic instruments as specified in Table 5.

TABLE 4. Current role of economic instruments for river basin management in Tajikistan Policy question

Current status

What are the economic instruments in place?

Tariffs for water services, such as the supply of drinking water and irrigation water, are in place.

Are these instruments coherent with the “polluter pays” or “user pays” principles?

Some limited application of these two principles is taking place. However, due to absence of a water abstraction fee in the country, the user pays principle does not apply in an equitable manner.

Do the revenues collected from these instruments cover the costs?

Revenues collected from water tariffs do not cover the financial costs of water services. Generally, only a small part of the O&M costs is recovered, and no investment costs are considered. This accelerates progressive deterioration of the water infrastructure. Taxes, including VAT, further undermine cost coverage, and therefore present the opportunity for the reform.

Do existing economic instruments provide an incentive for more efficient use of water resources?

It is unlikely that the existing economic instruments, or lack of them, could provide incentive for efficient water use. The absence of water abstraction fee does not create any incentive for hydropower and irrigation sectors to use water rationally. For the drinking water supply the consumers pay a fixed fee, which is not based on the volume of water used. It does not provide any incentives to use water efficiently. The same applies to farmers. Due to a wide spread lack of water meters, farmers pay for the cropped area based on the national irrigation norm in m3 per hectare per crop type. The irrigation norms are based on the wasteful soviet standards and have not been revised since.

TABLE 5. Recommendations on integrating economic instruments in the National Conceptual Framework for RBMP planning RBMP planning stage defined by NCF

Economic Instruments

Stage 2: River basin characterisation

Economic analysis of water use is needed as part of the basin characterisation as a means for better understanding the relationship between economic development and water use. Such economic analysis should include: l An analysis of the economic importance of the main water uses, in terms of value added,

production in revenues, employment, etc.; l An assessment of the current water tariffs and other economic instruments

(environmental taxes and charges applied to the water sector for example) with regards to (i) cost-recovery levels (at which levels are costs of water services covered by revenues from water tariffs), and (ii) how successful are existing economic instruments in giving the right signals to water users to encourage them to reduce water consumption and stop polluting discharges to the natural aquatic environment. Stage 4: Assessment of future trends and scenarios for use, protection and development of water resources

The baseline scenario that will be developed for the river basin, to the extent possible, shall analyse and present the expected future socio-economic changes in the river basin and their translation into changes in pressures and risks without the programme of measures. Investigating the dynamics of the river basin and providing economic input into the development of baseline scenario is important in that aspect. The specific role of the economic analysis as the assessment of forecasts in key economic drivers is likely to influence pressures, and thus water status. Focus is likely to be on changes in general socioeconomic variables (e.g. population growth), in key sector policies that influence significant water uses (e.g. agricultural policy), in economic growth of main economic sectors and in implementation of planned investments linked to water regulations.

USING ECONOMIC INSTRUMENTS TO IMPROVE EFFICIENCY OF BULK WATER SUPPLY . 23

RBMP planning stage defined by NCF

Economic Instruments

Step 6: Strategy and programme of measures

Economic analysis should also be part of the development of programme of measures and selection of priorities: l Costing of measures, and in case information on costs of measures is not readily available.

Policy makers should investigate using costs from similar projects and experiences (e.g. from the same river basin/country or from neighbouring countries offering similar conditions) as a rough estimate of costs to be applied to the river basin. l The different measures mentioned and selected must refer to economic instruments as a

measure for helping achieve defined objectives in an effective manner. Changes in water tariff or setting water abstraction fees (which are absent) could be proposed and analysed in the draft RBMPs. l Cost-effectiveness analysis should ensure that the programme of measures helps

achieve the desired objective at the lowest cost. This implies two assessments. First, costeffectiveness ratios (e.g. ratio in terms of TJS per kg of nitrate or organic matter removed) should be calculated. Second, measures should be selected from the lowest to the highest ratio up to where measures are sufficient to achieve the target/objective. Such cost-effectiveness assessments are of particular importance for Tajikistan, which faces significant budgetary constraints. l Finally, there is potential for using cost-benefit analysis and affordability assessment.

A cost-benefit analysis compares the costs of measures with the benefits obtained from the measures to achieve the basin vision and its strategic objectives. In cases where total benefits are lower than total costs it is possible to propose lower (less ambitious) basin vision and strategic objectives, and a reduced programme of measures. An affordability assessment compares the costs of measures with the revenue of water users to assess their capacity to support these costs. Economic instruments should also be used to design supplementary measures to the programme of measures. Article 9 of the European Union (EU) Water Framework Directive (WFD) deals with water pricing tariffs, and also refers to economic and fiscal instruments as possible supplementary measures to be considered. The following key issues are reflected in EU WFD: l It emphasises water pricing, referring to tariffs for water services and environmental

charges and taxes on abstraction and polluting discharges that target water users. A specific Article of the WFD (Article 9 – Recovery of costs of water services) is dedicated to this economic instrument. l It approaches water pricing from different angles. In terms of cost-recovery, it asks

whether revenues collected from the instrument cover costs of services. With respect to efficiency and effectiveness, it asks whether the instrument provides an incentive for more efficient water use that will help achieve the environmental objectives of the WFD. l It refers to a wide range of costs to be considered. Financial costs of water services are

traditionally computed as part of wastewater or drinking water projects. Environmental and resource costs account for the remaining degradation of the aquatic environment. The key question with these costs is whether they are internalised in some way.

River basin management in Tajikistan is in its infancy. Adoption of the EU WFD methodology (see excerpt in Box 9) would help apply economic instruments

more consistently for the benefit of water sector reform in Tajikistan.

24 . POLICY PERSPECTIVES FOR THE IRRIGATION SECTOR REFORM IN TAJIKISTAN

BOX 9. EU Water Framework Directive on the Use of Economic Instruments in RBMP Article 4 – Objectives of the RBMP The aim is long-term sustainable water management based on a high level of protection of aquatic environment. The Article also introduces the possibility of extending deadlines and creating less stringent objectives. According to Article 4.4, “The deadlines established for the objectives may be extended for the purposes of phased achievements of objectives for bodies of water, when completing the improvements within the timescale would be disproportionally expensive”. Further, Article 4.5 states that “Member States may aim to achieve less stringent objectives than those required for specific bodies of water when they are affected by human activity or their natural condition is such that the achievement of these objectives would be infeasible or disproportionately expensive, and the following conditions are met: (i) the environmental and socio-economic needs served by such human activity cannot be achieved by other means, which are a significantly better environmental option not enabling disproportionate costs, and (ii) the establishment of less stringent objectives, and for the reasons for it, are specifically mentioned in the river basin management plans and those objectives are reviewed every six years”. Article 5 – Characteristics of the river basin district, review of the environmental impact of human activity and economic analysis of water use 1. Each Member State shall ensure that for each river basin district or for portion of an international river basin district falling within its territory it undertakes: – an analysis of its characteristics – a review of the impact of human activity on the status of surface waters and on groundwater – an economic analysis of water use. Article 9 – Recovery of costs for water services 1. Member States shall consider the principle of recovery of costs for water services, including environmental and

resource costs, based on the economic analysis (Annex III) and the polluter pays principle. Member States shall ensure that water-pricing policies provide adequate incentives for users to use water resources efficiently, and thereby contribute to the environmental objectives of this directive. They shall also ensure an adequate contribution of the different water uses, disaggregated into at least industry, households and agriculture, to the recovery of the costs of water services. This will be based on the economic analysis and the polluter pays principle. Member States may in so doing have regard for the social, environmental and economic effects of the recovery, as well as the geographic and climatic conditions of the region or regions affected. 2. Member States shall report in RBMPs on the planned steps towards implementing paragraph 1. These will contribute to achieving the environmental objectives of this directive and on the contribution of various water uses to the recovery of the costs of water services. Annex III – Economic analysis The economic analysis shall contain enough information in sufficient detail (taking account of costs associated with the relevant data collection) to: –m ake relevant calculations for considering Article 9 the principle of recovery of the costs of water services, taking account of long-term forecasts of supply and demand for water in the river basin district and, where necessary: i) estimates of the volume, prices and costs associated with water services; and ii) estimates of relevant investment including forecasts of such investments. –m ake judgments about the most cost-effective combination of measures in respect of water uses to be included in the programme of measures under Article 11 (based on estimates of potential costs). Source: EU WFD

REFERENCES . c

References ADB (2013), Republic of Tajikistan: Developing Water Resources Sector Strategies in Central and West Asia, Asian Development Bank, Manila. BRL Ingénierie (2017), Supplementary Assessment and Studies. Volume 1: Improving the of Irrigation Systems. Volume 2: Economic and Financial Aspects of Irrigation. Volume 3: Annexes, Nîmes, France. FAO (2014), The Water-Energy-Food Nexus: A new approach in support of food security and sustainable agriculture, Food and Agriculture Organization of the United Nations, Rome. OECD (2018), Support to the implementation of irrigation sector reform in Tajikistan: Challenges and opportunities of revising irrigation tariff methodology, OECD Working Document.

OECD (2017), Support to the implementation of irrigation sector reform in Tajikistan: Towards developing guiding principles on the use of economic instruments to promote efficient water use in the irrigation sector, OECD Working Document. OECD (2016), Reforming economic instruments for water management in EECCA countries, OECD Publishing, Paris. WB (2017), Central Asia: The costs of irrigation inefficiency in Tajikistan, World Bank, Washington, DC.

This study was delivered under the FinWater WEI II programme with financial support from the government of Finland.

For more information: Eap.contact@oecd.org http://www.oecd.org/environment/outreach/ partnership-eu-water-initiative-euwi.htm @OECD_ENV © OECD Environment Directorate – March 2020