Mumbai : In this year’s Union Budget India’s Finance Minister announced that henceforth irrigation projects shall also be considered for the Viability Gap Funding (VGF) scheme.
VGF is provided by the Government of India in the form of grants (one-time or deferred) for infrastructure projects which are commercially unviable and where the private sector is encouraged to participate. Government’s support in the form of VGF is expected to bring action in this sector.
States that have tried to initiate some sort of public private partnership (PPP) projects in the past have experienced a lackluster response and such projects have largely been considered unfeasible by the private sector.
It is though surprising to see a sudden u-turn in Government’s viewpoint on inclusion of irrigation projects under VGF. The Planning Commission in its March 2010 report on infrastructure had pointed out that irrigation projects are the responsibility of the Government.
The report quoted said, “The investment strategy of the Government primarily relies on promoting investment through a combination of public investment, private participation through Public Private Partnerships (PPPs) and stand-alone private investment. Since private investment would not be sustainable in financially unviable projects in rural infrastructure, irrigation and water resources management, inland waterways and in the economically or situationally disadvantaged regions, they would continue to be funded by public investment.”
The report had further made it clear that for sectors which are financially viable, such as highways, airports, ports, railways and urban transit systems - PPPs would be encouraged as the preferred mode of project implementation.
A quick look at statistics can provide some logic to this change of policy. Though India ranks number one in terms of absolute area of land under irrigation (59 million hectares) – it is still just a third of the country’s arable land.
This means that if we can provide irrigation facilities to the rest two-thirds arable land, our food production can substantially go up. This not only will lead to reduced food inflation but shall also mean higher employment ratio and faster rural development.
Since water is under the state jurisdiction, the Union Government supports states through the Accelerated Irrigation Benefit Programme (AIBP). The programme requires States to match balance funds in accordance with the contribution from the Centre. The Centre’s contribution may range from 75 per cent for special category states (northeastern states and drought-prone areas) to 10 per cent for developed states.
The Centre’s allocation remains unutilized if the states fail to make their contributions. Several states in the past have failed to make use of AIBP in the absence of enough funds – and for these states, support in the form of VGF can help in attracting private investment.
However, PPPs in irrigation pose some basic questions which need a detailed debate.
For instance, in case of an irrigation project the farmers are the end-users and determining their ability to pay is a subjective issue. Further, in case if the farmers fail to pay, then what kind of payment security mechanism shall be provided to the private concessionaire?
In many cases, PPPs in irrigation has been opposed on this parameter with the fear that non-payment by farmers can lead to them losing their lands to the private company. Alternatively, can a mechanism be developed where the farmers can pay in proportion to their farm produce – whereby they can directly see the benefits of better irrigation facilities?
Another pertinent question is whether the Government shall be willing to give full powers to the Water Regulatory authorities to make changes to water rates, without fearing the political impact of such freedom. In the absence of a sound governing structure, on which the private concessionaire can fall back for a legitimate increase in water rate, the response from private developers would not be very encouraging.
If we look for examples globally, there are very limited instances of irrigation projects where PPP models have been tried.
One such example is the Guerdane (Taroudant province, Morocco) project which is the world’s first irrigation PPP project. In 2004, the project was awarded to Omnium Nord-Africain, a consortium led by a Moroccan industrial conglomerate.
The $85 million project involves construction, co-financing and management of an irrigation network which envisages water flow from a dam situated 60 miles from Guerdane. The water will be utilized by about 600 citrus farmers. The concessionaire has been given a responsibility to operate for a period of 30 years.
France and Australia are other two countries where different models of irrigation PPP have been tried and tested.
In France, a private company CACG serves 51000 hectares of irrigated land in addition to providing drinking water services to about 0.2 mn inhabitants. In Australia, the Murray Irrigation Company is a farmer-owned company, where the farmers elect their board of directors and staff. This is more like a cooperative system.
It is often very hard to decide on advantages and disadvantages for freeing up markets for a public good. The debate on whether water shall be considered as an economic good will draw responses from both sides.
On one hand, the fact remains that higher water cost can lead to better utilization; along with the fact that profit making motives can put economically backward groups into danger.
It is, therefore, important to establish whether water is to be considered as an economic good or not. If not, then it is better to keep private companies at a distance; corollary private companies would themselves not be interested in the sector – even with an assured VGF.
Rasika Gokhale Athawale is the Founder of MindCrunch, a boutique business outsourcing and advisory firm which assists companies in conceptualizing and developing high quality Thought Leadership content – including White Papers, Case Studies and Thought Leadership Position Papers. She has earlier worked with Management Consulting firms KPMG and PwC.
(Disclaimer: India Water Review does not take any responsibility for the views expressed in the article. The article published also does not in anyway reflect the opinion of India Water Review.)