Irrigation of agriculture is central to rural development and growth. To achieve the best results, governments must carefully consider how investments can improve the use of existing water resources. Public-private partnerships (PPPs) can improve delivery and management of irrigation services. The construction method, the way investment is recovered throughout the life of the project, and terms by which agricultural production is linked to the project are critical aspects of the design of sustainable irrigation PPPs.

Many aspects of the irrigation sector have changed throughout the decades, but not the basic development paradigm. Public funding for capital investment, combined with public management and a subsidized supply of water resources to farmers, has until recently moved the sector forward incrementally but dependably. Now, climate change, constraints on water resources, and the need for increased agricultural yields to resolve food security have altered the rules of the game. Governments concede that public resources are limited, and they need to prioritize to achieve better value for money for the agricultural sector. One promising solution involves a combination of public and private expertise for improved sector management and delivery of irrigation services.

How to improve irrigation schemes?

Resulting from decades of massive investments in water development schemes, irrigation today waters one-fifth of the world’s cultivated land. Much of this investment has taken place in developing countries, and many of the world’s poorest people depend on food produced on irrigated land.

Irrigation investment reached its peak during the mid-1980s, when $2.5 to $3 billion per year was committed by external funding agencies globally. However, since the 1980s, total investments have substantially decreased. The World Bank now invests less than $1 billion per year in irrigation projects, and total spending by all donors and financial institutions averages around $2 billion per year. This fall is partly a result of the general decline in agricultural finance since the mid-1980s.

Lower levels of investment in irrigation schemes

While some irrigation systems have operated successfully for long periods of time, high and increasing construction costs of the schemes, poor production performance of many irrigation systems, falling real prices of crops, and concerns about negative environmental impacts of projects have led to a slowdown in the rate of irrigation investment. This has also significantly reduced the willingness of donors and international financial institutions to invest in irrigation activities. And the tight financial position of many governments limits their ability to fund projects from domestic budgets.

Lack of financing for operations and maintenance

The dramatic expansion of irrigated areas in the world has not been matched by a similar expansion in financing the management of irrigation systems after construction. Consequently, in many systems water is wasted in the upper and unavailable in the lower sections, while water deliveries are often untimely and unreliable. Pumping stations, canals, gates, and metering systems are in disrepair, and only about 25 to 30 percent of water diverted into large canal systems in developing countries reaches thirsty crops.

Insufficient cost recovery

Low water charges and poor recovery rates risk the efficient maintenance of the existing water infrastructure as well as additional investments on future water-development projects. Charges rarely reflect the cost of production, consumption increases beyond the optimum level, and subsidies that may be in place disproportionately serve the better-off. This pattern of financing creates a vicious cycle: financial difficulties cause irrigation departments to defer maintenance to the detriment of the water system, while farmers complain about the poor services and have little incentives to pay for services. Despite all this, the politically-rooted system of public provision and subsidized water charges protects the water economy from the influence of actual market forces.

Emphasis on physical infrastructure

Government efforts to improve the management of irrigation have focused mostly on building hydraulic infrastructure and on the creation of physical capital in the form of dams, aqueducts, diversion weirs, and canals, and less on institutional and implementation arrangements. However, persistent problems with the design, construction, operation, management, and use of irrigation projects have led donors and national governments to reevaluate the emphasis on engineering and technical design in irrigation planning and management.

Private participation: A possible solution?

In response to these challenges, governments have delegated management responsibility to other institutions, notably user associations or private companies. However, along with the pressures to decentralize and transfer the management of irrigation systems comes a need to understand the factors that contribute to the long-term success of irrigation schemes. Understanding how to design and manage this sub-sector is necessary for market forces to improve irrigation systems’ performance and sustainability.

Including private participation in this sector is complex. The system needs to be designed sustainably from an engineering and environmental perspective, and also in terms of operations and maintenance (including any linkages between production and capital investment). Appropriate institutional arrangements and contractual frameworks need to be put in place to transition seamlessly from one implementation arrangement to the next. Most importantly, the right incentives need to be created for the private sector, farmers, public agencies, and others to achieve a sustainable, truly collaborative scheme.

Governments will continue to play a major role

As this incipient market evolves, the need to create the necessary linkages between the private sector and the public becomes even greater. Regardless of the level of private sector involvement (for example, in construction, financing, and agricultural production), some form of active public sector collaboration is needed to make these projects successes. This underscores the fact that in irrigation PPPs there is a need to create a market that is prepared to invest in long-term assets, and that the necessary incentives are in place to ensure sustainability. Innovation is needed in structuring projects, whether it is in contract design, financing structures, or procurement.

A number of other factors will affect success, and they are all rooted in understanding that the currently constrained financial markets will affect the design and type of any developing PPP structure. Strategies and projects must be adapted to new market conditions. These include an early focus on bankability of the proposed scheme and a clear delineation of roles among the construction of assets, their maintenance and operation, and the production of agricultural goods. Flexibility in bidding to allow financial close is also key. Most important, rethinking the manner of government support—both financial and regulatory—will transform today’s limited progress into the next generation’s irrigation success story.