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Can smallholder farmers meet the full financial costs of irrigation services?

Author(s): A case study in South Africa
IWRA World Water Congress 2008 Montpellier France
7. Financing Water Development
Author(s): S. Perret
M. Geyser
Authors: S Perret(1)(*) and M Geyser(2) Authors’ affiliation: (1) Centre de Coopération Internationale en Recherche Agronomique pour le Développement, and Asian Institute of Technology, Bangkok, Thailand (2) University of Pretoria, Department of Agric

Keyword(s): Financial costs, irrigation, smallholder farming, methodology, charging system

AbstractConsidering water as an economic good consists of, among other requisites, properly assessing the cost incurred by supplying and managing the resource, and the required infrastructure thereof. This paper investigates and assesses the full financial costs of irrigation services in smallholder conditions, and discusses the possible match between farmers’ performances and the costs incurred, from a case study in South Africa. The paper first presents the specific conditions and features of smallholder irrigation, with emphasis on South African examples. Several specific issues are identified and discussed, such as the lack of records on infrastructure and initial costs, the multiple purpose and actual uses of certain equipment and infrastructure, the shift in purpose of others over time, the inclusion of certain small, yet indispensable equipment in the calculation, the partial refurbishment works on particular assets, and the lack of a standard basis for calculation under tropical, developing conditions (e.g. on service life, maintenance requirements). Second, after a brief review of current frameworks, concepts and terminology, the paper attempts to evaluate financial costs of irrigation services on a case study in South Africa. The results suggest that the application of existing methodologies proves feasible, provided some adapted data and available information replace the original ones, especially for capital costs. This applies to the discount rate, calculation of the current value, and estimation of the service life of infrastructure and equipment. In particular, several scenarios have been tested in order to estimate a surrogate to the discount rate. The average yield on Negotiable Certificates of Deposit (NCD) is suggested as a surrogate for treasury bills, hence for the discount rate. The case study demonstrates the high costs of irrigation services as compared to the low income derived from irrigation production in smallholder schemes; hence the need for renewed public intervention and subsidization, especially on account of the current context of management transfer, privatization, and liberalization. The case also indicates that under the current production levels and marketing practices, farmers would not be able to achieve the targeted return on assets (ROA) of four percent, as suggested by Government. The paper suggests a shift in underlying policy and societal mindset about water charging system in smallholder irrigation. Cost recovery and water charges should not be considered a further burden or deterring factors for smallholder irrigation, but rather incentives towards increased production and ultimately improved contribution to the country’s economy.
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