Estimating the impacts of water pricing on smallholder irrigators in North West Province, South Africa

Abstract

Worldwide growing water scarcity has increased the call for economic instruments to stimulate rational water use in agriculture. Furthermore, cost-recovery is now widely accepted as a cornerstone of sustainable water management. In many developing countries, where agricultural water use is often still subsidised, water pricing policies are developed for allocating water efficiently and achieving sustainability of water systems. However, the impacts of water pricing policies on irrigation water use and on farm production systems is mostly unknown. We introduce an innovative two-stage methodology that allows estimating these effects at farm level. Applying the method to small-scale irrigators in South Africa, we show that water demand is quite responsive even to small changes in water price. In addition, the introduction of a water price significantly decreases farm profit. This appears to be a problem primarily for the poorer farmers.

Introduction

Irrigation is one of the main consumptive uses of water at world level. Due to the growing water scarcity, irrigators experience increasing pressure to release water for other uses and to find ways to improve water productivity (Perry, 2007, Malano et al., 2004). Efficient use of water resources is therefore considered as a fundamental target for farmers and water management (Ortega et al., 2004, Tsur, 2004). In this respect, the apparent misuse and waste of irrigation water, in the context of low and subsidised water prices, induces many authors (Liao et al., 2007, Russell et al., 2007, Bar-Shira et al., 2006, Becker and Lavee, 2002, Perry, 2001) to advocate a more prominent role of economic incentives in encouraging efficient water use. Irrigation water pricing is often regarded as a good tool to achieve efficient use (Singh, 2007). Moreover, this strategy also fits into the picture of cost-recovery, which is now generally considered as a basic requirement for sustainability (Molle et al., 2008, Massarutto, 2007).

In terms of efficiency, increasing the price of irrigation water or simply introducing a price is believed to have two important positive effects. Firstly, it will make consumers aware of the resource scarcity, creating a new respect for water, which should improve management efficiency and secondly it provides incentives to farmers to rethink crop choices, stimulating the shift to more profitable crops (Easter and Liu, 2007, He et al., 2006, Becker and Lavee, 2002). However, according to Tardieu and Préfol (2002) and Liao et al. (2007) rises in water prices are not without risk: they could lead to an overall reduction in a country's agricultural production, endangering the goal of securing food self-sufficiency; they could lead to higher prices for urban consumers resulting in increased import and loss of market share for local irrigating farmers; finally they could lower agricultural income with negative effects on rural development. Abu-Zeid (2001) adds that in many parts of the world increasing or introducing water charges is a sensitive issue, involving historical, social and even religious dimensions. Furthermore, the effect of irrigation charges on agricultural water use efficiency might be insignificant if irrigation water costs represent too small a proportion of the total production costs. Finally the low elasticity of demand for irrigation water reported by Albiac et al. (2007), Gómez-Limón and Riesgo (2004) and Berbel and Gómez-Limón (2000) is still another reason to expect limited water saving effects. Taking into consideration the possible disadvantages and the limited effect water pricing policies might have on water saving, it is clear that methodologies allowing to estimate as accurately as possible, the effects of water prices both on water demand and the agricultural production process are very important (Ortega et al., 2004).

South Africa is one of the countries currently in the process of introducing water charges, imposing a new challenge on the small-scale irrigation sector. Apart from increasing the cost-recovery rate for water supply, an expected benefit of this policy change is that water use efficiency will rise. However, the exact impact on the irrigation water use or on the farmers’ production system remains unclear. Assessment of these effects is important in South Africa, since small-scale irrigation is identified as a key sector for rural development. This study proposes a novel two-step method, which is applied to a sample of 60 small-scale irrigators in North West Province, South Africa. First technical and economic efficiency levels are calculated, then these are used as a representation of the production technology in a mathematical programming model to estimate the impact of changes in the water price. This method allows estimating the effect of water pricing at farm level and offers insight in the water saving effect of the introduction of water charges. In addition, the environmental effects (use of fertilizers and pesticides) and socio-economic effects (labour use, effect on farm profit and total agricultural output) can be assessed.