Salient Points - Report of the Committee on Pricing of Irrigation Water (Vaidyanathan Committee), Planning Commission, Government of India, New Delhi, September, 1992

Terms of reference of the Committee

(i)                 To review the existing water rate structure and the extent of subsidy in Government and Public Sector irrigation projects.

(ii)               To suggest:

a.    the norms for fixing water rates;

b.   the norms for cost escalation on O&M component of economic water rates;

c.    the norms for conversion of volumetric supply of water rates of crop-wise / area-wise water rates for different agro-climatic zones;

d.   the organizational measures including mechanism for efficient recovery of economic water rates; and

e.    operating controls for ensuring levy of appropriate irrigation water rates by the states,

(iii)             To evolve a rational water rate structure for both surface and ground water to promote conjunctive use.

(iv)             To review the present status of maintenance of irrigation projects in different states.

(v)               To review the norms of maintenance as recommended by earlier committees and different Finance Commissions.

(vi)             To suggest the norms for fixing maintenance charges including stipulating the upper ceiling per hectare of command for the expenditure on staff establishment for various irrigation systems in different states.

Structure of the Report

Chapter 1: Introduction

Chapter 2: Financial Performance of Public Irrigation Systems - presents the main characteristics of the existing system of irrigation pricing, and an overall picture of the financial results of public investments in irrigation. It also focuses on the deteriorating financial performance over time reflected in the very rapid growth in the magnitude of unrecovered costs.

Chapter 3: Pricing of Irrigation: Approach and Principle - reviews the ideas concerning the basis for the determination of water rates as proposed by earlier committees, and proceeds to outline a somewhat broader approach which links water rates to the quality of irrigation service and improvements in the efficiency of management of irrigation systems, both of which are seen to require a progressive shift to a system of volumetric pricing and a greater involvement of users in running irrigation systems. A phased programme covering all these aspects is also indicated.

Chapter 4: Operation and Maintenance - emphasises the need for greater efficiency in O&M activities and suggests a number of concrete measures to this end.

Chapter 5: Assessment and Collection

Chapter 6: Role of Farmers Group - discusses a strategy for ensuring greater farmer-participation in water management.

Chapter 8: Implementation - outlines the recommendations regarding rate revisions and their implications are set out.

Summary of the Report

There has been widespread concern about the large and growing magnitude of losses on irrigation projects. A need has been felt to examine in depth the existing mechanism of water pricing, its level and structure, modalities of improving the recovery of dues, the norms of maintenance and other related issues. The report relied heavily on work done and information compiled by earlier studies, supplemented by such information as could be obtained from State Governments through correspondence and discussions, field visits and meetings with experts. It is stated that the specificities of local situations will have to be taken into account while implementing the broad approach and specific principles embodied in the recommendations.

Financial Performance of Public Irrigation Systems

A number of Commissions and Committees are agreed that the income from irrigation works should cover the annual maintenance and operation costs, but there are some differences as to whether, and if so to what extent, capital related charges should be covered. The National Water Policy 1987 asserted that water rates should cover the annual maintenance and operation charges and a part of the fixed costs. It is against this background that the existing system of water pricing has been reviewed.

The incidence of irrigation charges varies a great deal across states, and the rate per unit volume of water consumed varies greatly across crops. The wide variability in the level and structure of rates per ha. cm suggests that there is scope for a rationalisation of the rate structure. In no State does the gross receipt by way of water charges per hectare account for more than 3 per cent of the gross productivity per ha of irrigated area.

Revision of water rates has been infrequent, hesitant and very much less than the increase in costs. The all-round deterioration in the financial performance of irrigation projects is stark and nearly universal. The gross receipts of major and medium irrigation and multipurpose projects fell short of their working expenses by about Rs. 168 million a year on an average during the three years 1974-77; the gap rose to Rs. 2775 million a year during the period 1984-87. Including interest on capital outlay, the deficit rose over the same period from about Rs. 1737 million a year to Rs. 9867 million a year.

There are some questions concerning the coverage and conceptual basis of the accounts figures. These are set forth in the text of this report. For working out the full cost of providing irrigation water, the capital outlay for the purpose of calculating the interest (as also depreciation) has to be the entire capital outlay on the irrigation sector, covering not only all major and medium projects without regard to the commercial/non-commercial classification, but also minor irrigation and the capital outlay, if any, under CAD as well. For working out the element of interest on capital, it is appropriate to take the average interest rate paid on the outstanding public debt of each State. There is also a strong case for the capitalisation of interest during construction in departmental management accounts.   

For determining the capital base, which should bear the interest, projects, which are still under construction, have to be excluded. At the same time, projects in many cases begin supplying water long before they are completed. Actual costs tend to be inflated by a variety of factors (such as time and cost over-runs; defects in project design; deficiencies in management; waste; leakages etc.). In the absence of accurate information regarding such matters the Committee took the cumulative outlays three years prior to the accounting period as the base for computing depreciation and interest. Depreciation is taken at 1% of capital investment.

The Committee estimated that the total unrecovered costs on account of major and medium irrigation works (14 major States) increased more than fivefold in a 10-year period from Rs. 280 crores in 1977-78 to Rs. 1525 crores in 1986-87. It urged that a serious and detailed scrutiny of the accounting of the costs and revenues of minor irrigation works also be undertaken to determine the order of subsidies involved.

It is not possible to determine how much of the implicit subsidy is attributable to inefficiency and how much really benefits farmers because of the under-pricing of water. Attempts to reduce the magnitude of overall subsidies must therefore focus both on improving the efficiency of planning and management of irrigation (thereby cutting costs) and on increasing the collection of user charges by raising rate and the more effective enforcement of the scheduled rates.

It is necessary to supplement the financial accounts by proper management accounts, the details of which have been indicated in the Committee’s report. The report recommended that the Government, with the assistance of the Central Water Commission, and in consultation with the Comptroller and Auditor-General of India, should examine the matter in the light of those observations and develop a suitable set of revised instructions and forms which will fully serve the purposes in view. Also, the Engineer in charge of each system (i.e., each major and medium project and clusters of minor irrigation projects) should be made responsible for the maintenance of these management accounts, and that the Irrigation Department should consolidate these for the State as a whole and produce an annual review presenting the total picture for the State.

Pricing of Irrigation - Approach and Principles

The report states that it is difficult to accept the case for subsidising such a user-oriented and capital-intensive infrastructure as irrigation. The government is not in a position to sustain subsidies on irrigation, or for that matter on any infrastructure, on the present scale.

Water rates are a form of users charge and not a tax. The basis of determining the cost of the irrigation service and the desirable extent of recovery may be debatable, but not the principle that users of public irrigation must meet the cost of the service.

Irrigation is one of the key inputs for crop production in as much as the productivity impact of better seeds, fertilisers and other inputs is critically dependent on the way water is used. It is therefore both legitimate and necessary to address the pricing of this input as one of the first steps and an integral component in the process of rationalising the totality of the price structure, and raising the efficiency of water use.

The underpricing of water adversely affects the availability of resources for the management of irrigation systems. Inadequate allocations for maintenance and repairs is a direct consequence of the poor financial position of the states, and is responsible for the low, possibly deteriorating, quality of service. This means that the potential increases in productivity which new technology makes possible cannot be realised in full.

A revision in the level and structure of water rates is thus necessary in the interest of both efficiency and equity. The revision should be such as to achieve full cost recovery in due course and in the process promote saving, create disincentives for waste and thereby enable the service area to be expanded and a more reliable service assured. Revision of water rates should go hand in hand with measures to improve the quality of service and to keep a check on costs.

In the light of a detailed assessment, rates for non- agricultural uses (domestic, industrial) should be revised so that the costs are fully recovered and arrangements built into the supply contracts for ensuring full and prompt recovery of dues.

Estimates of full productivity impact in terms of gross or net output for different categories of irrigation in different regions are not available. The report recommended that the design for regular crop-cutting surveys should make irrigated land (as a whole and preferably by major types) a separate stratum for the purpose of yield estimation.     

Translating the overall productivity impact of irrigation into rates for particular crops raises difficult problems. There is also the question of how the cost-recovery principle and the ‘capacity to pay' will be balanced. In view of these difficulties, and the severe resources constraints facing the government, cost-recovery should be the main consideration governing rate-determination. The rates should be based on O&M norms and capital charges (interest and depreciation). The government must ensure that the actual O&M outlays more or less correspond to norms, which should be revised once in every five years. The State irrigation agencies should undertake analyses to arrive at a well-grounded estimate of the capital investment attributable to the irrigation service.

Some sort of averaging of rates by region and/or category of projects, as is already being done by several states, is desirable. The following categorisation could be used: (1) major and medium storage systems; (2) major and medium projects based exclusively on barrages/diversion works; (3) minor surface irrigation works; (4) lifts irrigation from canals; and (5) lift irrigation from groundwater. For states with marked variations in agro-climatic conditions, the above categorisation may be done on that basis.

Attempts at distinctions in terms of head and tail reaches of a system, quality of soil, or other criteria for rate-determination should be approached with considerable caution, as they are difficult to apply and will add to the complexity of water pricing. There are divergent views on whether or not there should be any levy on conjunctive use. On the whole, recycling seepage from surface sources should not be taxed.

There is a strong case for applying a two-part tariff. All lands included in the command should pay a flat annual fee on a per hectare basis for 'membership' of the system which entitles them to claim water and gives them the benefit of several other facilities which are associated with the spread of canal irrigation; and a variable fee linked to the actual extent of the service (volume or area) used by each member. Such a two- part tariff would be applicable in the case of major/medium irrigation schemes. In the case of minor projects, wherever the O&M of the system is completely turned over to water users' associations, the associations would be charged only the basic flat rate on a per ha basis. However, till this is achieved, water charges for any minor scheme would be levied on par with major/medium schemes.

Many considerations - linking water rates to quality of irrigation service, rationalising rate structure and reducing cost of assessment and collections argue strongly for a system which makes water charges explicitly a function of the volume and season. Volumetric assessment at the level of individual farmers would be both expensive and impracticable. However, it is feasible at reasonable cost to monitor volumes delivered at the distributary outlets at different points of time.

The move to full-fledged volumetric pricing cannot be introduced immediately. The proposed rationalisation of water pricing will have to be accomplished in a phased manner.

The objective of the first phase should be to rationalise and simplify the existing system of assessment (based on crop-wise irrigated area on an individual basis) to a system of season-specific area rates. It is possible to estimate the relative water consumption per hectare irrigated in different seasons. The variable part of the tariff in the case of major and medium projects and such of those minor works as are still under state management should be fixed on this basis. The report suggested that all minor systems be turned over to users immediately after completion. Both categories of projects will pay a flat basic rate per ha. The level of cost-recovery to be aimed at in the first phase should at least cover the O&M costs and 1% interest on capital employed.

Irrigated area under a crop which spreads over two seasons will be charged at the rates applicable to both seasons, and perennials for all three seasons; but crops like paddy which take a lot of water for non-consumptive uses need specific treatment. Where paddy is a significant but not a dominant crop, some differentiation may have to be made, in each season, therefore, there is a need to distinguish at best three categories, viz, paddy, sugarcane and perennials and other crops.  

In the second phase to be implemented in the course of the next decade, the aim would be to shift to a fully volumetric system. Additional investments to modify the distribution system for effective regulation of volume delivered at outlets (estimated at approximately Rs.5000 crores) will be needed. As system efficiency and productivity improve, the targets of cost recovery can be progressively increased.

There are many important matters of detail to be decided in shifting to the volumetric system of charging. These are best decided in consultation with users' representatives. The most crucial and also the most difficult task in this phase will be to promote the formation of sufficiently large farmers' groups.

Phase III, which will spread over a much longer period should seek to extend and consolidate the system of farmer group management, and implement, with the involvement and participation of such groups, a programme for upgrading the system to a higher level of efficiency in water-use and therefore of productivity. Besides substantial investments in conjunctive use and distribution networks, the techniques of water management will have to become tighter and more sophisticated.

Operation and Maintenance

It is generally recognised that the funds allotted for O&M are inadequate. The amount actually spent on O&M on a conceptually clear and uniform basis cannot be determined from published budgets or accounts. The importance of improving the accounting of expenditures needs to be emphasised.

There is a case for earmarking the whole or a substantial part of the receipts from each irrigation system towards the operation and maintenance of that system. In the long run, there is a case for moving towards the conversion of each irrigation system into an independent self-financing system, whether through the formation of corporations or otherwise.

Salient Points - Report of the Committee on Pricing of Irrigation Water (Vaidyanathan Committee), Planning Commission, Government of India, New Delhi, September, 1992

Terms of reference of the Committee

(i)                 To review the existing water rate structure and the extent of subsidy in Government and Public Sector irrigation projects.

(ii)               To suggest:

a.    the norms for fixing water rates;

b.   the norms for cost escalation on O&M component of economic water rates;

c.    the norms for conversion of volumetric supply of water rates of crop-wise / area-wise water rates for different agro-climatic zones;

d.   the organizational measures including mechanism for efficient recovery of economic water rates; and

e.    operating controls for ensuring levy of appropriate irrigation water rates by the states,

(iii)             To evolve a rational water rate structure for both surface and ground water to promote conjunctive use.

(iv)             To review the present status of maintenance of irrigation projects in different states.

(v)               To review the norms of maintenance as recommended by earlier committees and different Finance Commissions.

(vi)             To suggest the norms for fixing maintenance charges including stipulating the upper ceiling per hectare of command for the expenditure on staff establishment for various irrigation systems in different states.

Structure of the Report

Chapter 1: Introduction

Chapter 2: Financial Performance of Public Irrigation Systems - presents the main characteristics of the existing system of irrigation pricing, and an overall picture of the financial results of public investments in irrigation. It also focuses on the deteriorating financial performance over time reflected in the very rapid growth in the magnitude of unrecovered costs.

Chapter 3: Pricing of Irrigation: Approach and Principle - reviews the ideas concerning the basis for the determination of water rates as proposed by earlier committees, and proceeds to outline a somewhat broader approach which links water rates to the quality of irrigation service and improvements in the efficiency of management of irrigation systems, both of which are seen to require a progressive shift to a system of volumetric pricing and a greater involvement of users in running irrigation systems. A phased programme covering all these aspects is also indicated.

Chapter 4: Operation and Maintenance - emphasises the need for greater efficiency in O&M activities and suggests a number of concrete measures to this end.

Chapter 5: Assessment and Collection

Chapter 6: Role of Farmers Group - discusses a strategy for ensuring greater farmer-participation in water management.

Chapter 8: Implementation - outlines the recommendations regarding rate revisions and their implications are set out.

Summary of the Report

There has been widespread concern about the large and growing magnitude of losses on irrigation projects. A need has been felt to examine in depth the existing mechanism of water pricing, its level and structure, modalities of improving the recovery of dues, the norms of maintenance and other related issues. The report relied heavily on work done and information compiled by earlier studies, supplemented by such information as could be obtained from State Governments through correspondence and discussions, field visits and meetings with experts. It is stated that the specificities of local situations will have to be taken into account while implementing the broad approach and specific principles embodied in the recommendations.

Financial Performance of Public Irrigation Systems

A number of Commissions and Committees are agreed that the income from irrigation works should cover the annual maintenance and operation costs, but there are some differences as to whether, and if so to what extent, capital related charges should be covered. The National Water Policy 1987 asserted that water rates should cover the annual maintenance and operation charges and a part of the fixed costs. It is against this background that the existing system of water pricing has been reviewed.

The incidence of irrigation charges varies a great deal across states, and the rate per unit volume of water consumed varies greatly across crops. The wide variability in the level and structure of rates per ha. cm suggests that there is scope for a rationalisation of the rate structure. In no State does the gross receipt by way of water charges per hectare account for more than 3 per cent of the gross productivity per ha of irrigated area.

Revision of water rates has been infrequent, hesitant and very much less than the increase in costs. The all-round deterioration in the financial performance of irrigation projects is stark and nearly universal. The gross receipts of major and medium irrigation and multipurpose projects fell short of their working expenses by about Rs. 168 million a year on an average during the three years 1974-77; the gap rose to Rs. 2775 million a year during the period 1984-87. Including interest on capital outlay, the deficit rose over the same period from about Rs. 1737 million a year to Rs. 9867 million a year.

There are some questions concerning the coverage and conceptual basis of the accounts figures. These are set forth in the text of this report. For working out the full cost of providing irrigation water, the capital outlay for the purpose of calculating the interest (as also depreciation) has to be the entire capital outlay on the irrigation sector, covering not only all major and medium projects without regard to the commercial/non-commercial classification, but also minor irrigation and the capital outlay, if any, under CAD as well. For working out the element of interest on capital, it is appropriate to take the average interest rate paid on the outstanding public debt of each State. There is also a strong case for the capitalisation of interest during construction in departmental management accounts.   

For determining the capital base, which should bear the interest, projects, which are still under construction, have to be excluded. At the same time, projects in many cases begin supplying water long before they are completed. Actual costs tend to be inflated by a variety of factors (such as time and cost over-runs; defects in project design; deficiencies in management; waste; leakages etc.). In the absence of accurate information regarding such matters the Committee took the cumulative outlays three years prior to the accounting period as the base for computing depreciation and interest. Depreciation is taken at 1% of capital investment.

The Committee estimated that the total unrecovered costs on account of major and medium irrigation works (14 major States) increased more than fivefold in a 10-year period from Rs. 280 crores in 1977-78 to Rs. 1525 crores in 1986-87. It urged that a serious and detailed scrutiny of the accounting of the costs and revenues of minor irrigation works also be undertaken to determine the order of subsidies involved.

It is not possible to determine how much of the implicit subsidy is attributable to inefficiency and how much really benefits farmers because of the under-pricing of water. Attempts to reduce the magnitude of overall subsidies must therefore focus both on improving the efficiency of planning and management of irrigation (thereby cutting costs) and on increasing the collection of user charges by raising rate and the more effective enforcement of the scheduled rates.

It is necessary to supplement the financial accounts by proper management accounts, the details of which have been indicated in the Committee’s report. The report recommended that the Government, with the assistance of the Central Water Commission, and in consultation with the Comptroller and Auditor-General of India, should examine the matter in the light of those observations and develop a suitable set of revised instructions and forms which will fully serve the purposes in view. Also, the Engineer in charge of each system (i.e., each major and medium project and clusters of minor irrigation projects) should be made responsible for the maintenance of these management accounts, and that the Irrigation Department should consolidate these for the State as a whole and produce an annual review presenting the total picture for the State.

Pricing of Irrigation - Approach and Principles

The report states that it is difficult to accept the case for subsidising such a user-oriented and capital-intensive infrastructure as irrigation. The government is not in a position to sustain subsidies on irrigation, or for that matter on any infrastructure, on the present scale.

Water rates are a form of users charge and not a tax. The basis of determining the cost of the irrigation service and the desirable extent of recovery may be debatable, but not the principle that users of public irrigation must meet the cost of the service.

Irrigation is one of the key inputs for crop production in as much as the productivity impact of better seeds, fertilisers and other inputs is critically dependent on the way water is used. It is therefore both legitimate and necessary to address the pricing of this input as one of the first steps and an integral component in the process of rationalising the totality of the price structure, and raising the efficiency of water use.

The underpricing of water adversely affects the availability of resources for the management of irrigation systems. Inadequate allocations for maintenance and repairs is a direct consequence of the poor financial position of the states, and is responsible for the low, possibly deteriorating, quality of service. This means that the potential increases in productivity which new technology makes possible cannot be realised in full.

A revision in the level and structure of water rates is thus necessary in the interest of both efficiency and equity. The revision should be such as to achieve full cost recovery in due course and in the process promote saving, create disincentives for waste and thereby enable the service area to be expanded and a more reliable service assured. Revision of water rates should go hand in hand with measures to improve the quality of service and to keep a check on costs.

In the light of a detailed assessment, rates for non- agricultural uses (domestic, industrial) should be revised so that the costs are fully recovered and arrangements built into the supply contracts for ensuring full and prompt recovery of dues.

Estimates of full productivity impact in terms of gross or net output for different categories of irrigation in different regions are not available. The report recommended that the design for regular crop-cutting surveys should make irrigated land (as a whole and preferably by major types) a separate stratum for the purpose of yield estimation.     

Translating the overall productivity impact of irrigation into rates for particular crops raises difficult problems. There is also the question of how the cost-recovery principle and the ‘capacity to pay' will be balanced. In view of these difficulties, and the severe resources constraints facing the government, cost-recovery should be the main consideration governing rate-determination. The rates should be based on O&M norms and capital charges (interest and depreciation). The government must ensure that the actual O&M outlays more or less correspond to norms, which should be revised once in every five years. The State irrigation agencies should undertake analyses to arrive at a well-grounded estimate of the capital investment attributable to the irrigation service.

Some sort of averaging of rates by region and/or category of projects, as is already being done by several states, is desirable. The following categorisation could be used: (1) major and medium storage systems; (2) major and medium projects based exclusively on barrages/diversion works; (3) minor surface irrigation works; (4) lifts irrigation from canals; and (5) lift irrigation from groundwater. For states with marked variations in agro-climatic conditions, the above categorisation may be done on that basis.

Attempts at distinctions in terms of head and tail reaches of a system, quality of soil, or other criteria for rate-determination should be approached with considerable caution, as they are difficult to apply and will add to the complexity of water pricing. There are divergent views on whether or not there should be any levy on conjunctive use. On the whole, recycling seepage from surface sources should not be taxed.

There is a strong case for applying a two-part tariff. All lands included in the command should pay a flat annual fee on a per hectare basis for 'membership' of the system which entitles them to claim water and gives them the benefit of several other facilities which are associated with the spread of canal irrigation; and a variable fee linked to the actual extent of the service (volume or area) used by each member. Such a two- part tariff would be applicable in the case of major/medium irrigation schemes. In the case of minor projects, wherever the O&M of the system is completely turned over to water users' associations, the associations would be charged only the basic flat rate on a per ha basis. However, till this is achieved, water charges for any minor scheme would be levied on par with major/medium schemes.

Many considerations - linking water rates to quality of irrigation service, rationalising rate structure and reducing cost of assessment and collections argue strongly for a system which makes water charges explicitly a function of the volume and season. Volumetric assessment at the level of individual farmers would be both expensive and impracticable. However, it is feasible at reasonable cost to monitor volumes delivered at the distributary outlets at different points of time.

The move to full-fledged volumetric pricing cannot be introduced immediately. The proposed rationalisation of water pricing will have to be accomplished in a phased manner.

The objective of the first phase should be to rationalise and simplify the existing system of assessment (based on crop-wise irrigated area on an individual basis) to a system of season-specific area rates. It is possible to estimate the relative water consumption per hectare irrigated in different seasons. The variable part of the tariff in the case of major and medium projects and such of those minor works as are still under state management should be fixed on this basis. The report suggested that all minor systems be turned over to users immediately after completion. Both categories of projects will pay a flat basic rate per ha. The level of cost-recovery to be aimed at in the first phase should at least cover the O&M costs and 1% interest on capital employed.

Irrigated area under a crop which spreads over two seasons will be charged at the rates applicable to both seasons, and perennials for all three seasons; but crops like paddy which take a lot of water for non-consumptive uses need specific treatment. Where paddy is a significant but not a dominant crop, some differentiation may have to be made, in each season, therefore, there is a need to distinguish at best three categories, viz, paddy, sugarcane and perennials and other crops.  

In the second phase to be implemented in the course of the next decade, the aim would be to shift to a fully volumetric system. Additional investments to modify the distribution system for effective regulation of volume delivered at outlets (estimated at approximately Rs.5000 crores) will be needed. As system efficiency and productivity improve, the targets of cost recovery can be progressively increased.

There are many important matters of detail to be decided in shifting to the volumetric system of charging. These are best decided in consultation with users' representatives. The most crucial and also the most difficult task in this phase will be to promote the formation of sufficiently large farmers' groups.

Phase III, which will spread over a much longer period should seek to extend and consolidate the system of farmer group management, and implement, with the involvement and participation of such groups, a programme for upgrading the system to a higher level of efficiency in water-use and therefore of productivity. Besides substantial investments in conjunctive use and distribution networks, the techniques of water management will have to become tighter and more sophisticated.

Operation and Maintenance

It is generally recognised that the funds allotted for O&M are inadequate. The amount actually spent on O&M on a conceptually clear and uniform basis cannot be determined from published budgets or accounts. The importance of improving the accounting of expenditures needs to be emphasised.

There is a case for earmarking the whole or a substantial part of the receipts from each irrigation system towards the operation and maintenance of that system. In the long run, there is a case for moving towards the conversion of each irrigation system into an independent self-financing system, whether through the formation of corporations or otherwise.

Salient Points - Report of the Committee on Pricing of Irrigation Water (Vaidyanathan Committee), Planning Commission, Government of India, New Delhi, September, 1992

Terms of reference of the Committee

(i)                 To review the existing water rate structure and the extent of subsidy in Government and Public Sector irrigation projects.

(ii)               To suggest:

a.    the norms for fixing water rates;

b.   the norms for cost escalation on O&M component of economic water rates;

c.    the norms for conversion of volumetric supply of water rates of crop-wise / area-wise water rates for different agro-climatic zones;

d.   the organizational measures including mechanism for efficient recovery of economic water rates; and

e.    operating controls for ensuring levy of appropriate irrigation water rates by the states,

(iii)             To evolve a rational water rate structure for both surface and ground water to promote conjunctive use.

(iv)             To review the present status of maintenance of irrigation projects in different states.

(v)               To review the norms of maintenance as recommended by earlier committees and different Finance Commissions.

(vi)             To suggest the norms for fixing maintenance charges including stipulating the upper ceiling per hectare of command for the expenditure on staff establishment for various irrigation systems in different states.

Structure of the Report

Chapter 1: Introduction

Chapter 2: Financial Performance of Public Irrigation Systems - presents the main characteristics of the existing system of irrigation pricing, and an overall picture of the financial results of public investments in irrigation. It also focuses on the deteriorating financial performance over time reflected in the very rapid growth in the magnitude of unrecovered costs.

Chapter 3: Pricing of Irrigation: Approach and Principle - reviews the ideas concerning the basis for the determination of water rates as proposed by earlier committees, and proceeds to outline a somewhat broader approach which links water rates to the quality of irrigation service and improvements in the efficiency of management of irrigation systems, both of which are seen to require a progressive shift to a system of volumetric pricing and a greater involvement of users in running irrigation systems. A phased programme covering all these aspects is also indicated.

Chapter 4: Operation and Maintenance - emphasises the need for greater efficiency in O&M activities and suggests a number of concrete measures to this end.

Chapter 5: Assessment and Collection

Chapter 6: Role of Farmers Group - discusses a strategy for ensuring greater farmer-participation in water management.

Chapter 8: Implementation - outlines the recommendations regarding rate revisions and their implications are set out.

Summary of the Report

There has been widespread concern about the large and growing magnitude of losses on irrigation projects. A need has been felt to examine in depth the existing mechanism of water pricing, its level and structure, modalities of improving the recovery of dues, the norms of maintenance and other related issues. The report relied heavily on work done and information compiled by earlier studies, supplemented by such information as could be obtained from State Governments through correspondence and discussions, field visits and meetings with experts. It is stated that the specificities of local situations will have to be taken into account while implementing the broad approach and specific principles embodied in the recommendations.

Financial Performance of Public Irrigation Systems

A number of Commissions and Committees are agreed that the income from irrigation works should cover the annual maintenance and operation costs, but there are some differences as to whether, and if so to what extent, capital related charges should be covered. The National Water Policy 1987 asserted that water rates should cover the annual maintenance and operation charges and a part of the fixed costs. It is against this background that the existing system of water pricing has been reviewed.

The incidence of irrigation charges varies a great deal across states, and the rate per unit volume of water consumed varies greatly across crops. The wide variability in the level and structure of rates per ha. cm suggests that there is scope for a rationalisation of the rate structure. In no State does the gross receipt by way of water charges per hectare account for more than 3 per cent of the gross productivity per ha of irrigated area.

Revision of water rates has been infrequent, hesitant and very much less than the increase in costs. The all-round deterioration in the financial performance of irrigation projects is stark and nearly universal. The gross receipts of major and medium irrigation and multipurpose projects fell short of their working expenses by about Rs. 168 million a year on an average during the three years 1974-77; the gap rose to Rs. 2775 million a year during the period 1984-87. Including interest on capital outlay, the deficit rose over the same period from about Rs. 1737 million a year to Rs. 9867 million a year.

There are some questions concerning the coverage and conceptual basis of the accounts figures. These are set forth in the text of this report. For working out the full cost of providing irrigation water, the capital outlay for the purpose of calculating the interest (as also depreciation) has to be the entire capital outlay on the irrigation sector, covering not only all major and medium projects without regard to the commercial/non-commercial classification, but also minor irrigation and the capital outlay, if any, under CAD as well. For working out the element of interest on capital, it is appropriate to take the average interest rate paid on the outstanding public debt of each State. There is also a strong case for the capitalisation of interest during construction in departmental management accounts.   

For determining the capital base, which should bear the interest, projects, which are still under construction, have to be excluded. At the same time, projects in many cases begin supplying water long before they are completed. Actual costs tend to be inflated by a variety of factors (such as time and cost over-runs; defects in project design; deficiencies in management; waste; leakages etc.). In the absence of accurate information regarding such matters the Committee took the cumulative outlays three years prior to the accounting period as the base for computing depreciation and interest. Depreciation is taken at 1% of capital investment.

The Committee estimated that the total unrecovered costs on account of major and medium irrigation works (14 major States) increased more than fivefold in a 10-year period from Rs. 280 crores in 1977-78 to Rs. 1525 crores in 1986-87. It urged that a serious and detailed scrutiny of the accounting of the costs and revenues of minor irrigation works also be undertaken to determine the order of subsidies involved.

It is not possible to determine how much of the implicit subsidy is attributable to inefficiency and how much really benefits farmers because of the under-pricing of water. Attempts to reduce the magnitude of overall subsidies must therefore focus both on improving the efficiency of planning and management of irrigation (thereby cutting costs) and on increasing the collection of user charges by raising rate and the more effective enforcement of the scheduled rates.

It is necessary to supplement the financial accounts by proper management accounts, the details of which have been indicated in the Committee’s report. The report recommended that the Government, with the assistance of the Central Water Commission, and in consultation with the Comptroller and Auditor-General of India, should examine the matter in the light of those observations and develop a suitable set of revised instructions and forms which will fully serve the purposes in view. Also, the Engineer in charge of each system (i.e., each major and medium project and clusters of minor irrigation projects) should be made responsible for the maintenance of these management accounts, and that the Irrigation Department should consolidate these for the State as a whole and produce an annual review presenting the total picture for the State.

Pricing of Irrigation - Approach and Principles

The report states that it is difficult to accept the case for subsidising such a user-oriented and capital-intensive infrastructure as irrigation. The government is not in a position to sustain subsidies on irrigation, or for that matter on any infrastructure, on the present scale.

Water rates are a form of users charge and not a tax. The basis of determining the cost of the irrigation service and the desirable extent of recovery may be debatable, but not the principle that users of public irrigation must meet the cost of the service.

Irrigation is one of the key inputs for crop production in as much as the productivity impact of better seeds, fertilisers and other inputs is critically dependent on the way water is used. It is therefore both legitimate and necessary to address the pricing of this input as one of the first steps and an integral component in the process of rationalising the totality of the price structure, and raising the efficiency of water use.

The underpricing of water adversely affects the availability of resources for the management of irrigation systems. Inadequate allocations for maintenance and repairs is a direct consequence of the poor financial position of the states, and is responsible for the low, possibly deteriorating, quality of service. This means that the potential increases in productivity which new technology makes possible cannot be realised in full.

A revision in the level and structure of water rates is thus necessary in the interest of both efficiency and equity. The revision should be such as to achieve full cost recovery in due course and in the process promote saving, create disincentives for waste and thereby enable the service area to be expanded and a more reliable service assured. Revision of water rates should go hand in hand with measures to improve the quality of service and to keep a check on costs.

In the light of a detailed assessment, rates for non- agricultural uses (domestic, industrial) should be revised so that the costs are fully recovered and arrangements built into the supply contracts for ensuring full and prompt recovery of dues.

Estimates of full productivity impact in terms of gross or net output for different categories of irrigation in different regions are not available. The report recommended that the design for regular crop-cutting surveys should make irrigated land (as a whole and preferably by major types) a separate stratum for the purpose of yield estimation.     

Translating the overall productivity impact of irrigation into rates for particular crops raises difficult problems. There is also the question of how the cost-recovery principle and the ‘capacity to pay' will be balanced. In view of these difficulties, and the severe resources constraints facing the government, cost-recovery should be the main consideration governing rate-determination. The rates should be based on O&M norms and capital charges (interest and depreciation). The government must ensure that the actual O&M outlays more or less correspond to norms, which should be revised once in every five years. The State irrigation agencies should undertake analyses to arrive at a well-grounded estimate of the capital investment attributable to the irrigation service.

Some sort of averaging of rates by region and/or category of projects, as is already being done by several states, is desirable. The following categorisation could be used: (1) major and medium storage systems; (2) major and medium projects based exclusively on barrages/diversion works; (3) minor surface irrigation works; (4) lifts irrigation from canals; and (5) lift irrigation from groundwater. For states with marked variations in agro-climatic conditions, the above categorisation may be done on that basis.

Attempts at distinctions in terms of head and tail reaches of a system, quality of soil, or other criteria for rate-determination should be approached with considerable caution, as they are difficult to apply and will add to the complexity of water pricing. There are divergent views on whether or not there should be any levy on conjunctive use. On the whole, recycling seepage from surface sources should not be taxed.

There is a strong case for applying a two-part tariff. All lands included in the command should pay a flat annual fee on a per hectare basis for 'membership' of the system which entitles them to claim water and gives them the benefit of several other facilities which are associated with the spread of canal irrigation; and a variable fee linked to the actual extent of the service (volume or area) used by each member. Such a two- part tariff would be applicable in the case of major/medium irrigation schemes. In the case of minor projects, wherever the O&M of the system is completely turned over to water users' associations, the associations would be charged only the basic flat rate on a per ha basis. However, till this is achieved, water charges for any minor scheme would be levied on par with major/medium schemes.

Many considerations - linking water rates to quality of irrigation service, rationalising rate structure and reducing cost of assessment and collections argue strongly for a system which makes water charges explicitly a function of the volume and season. Volumetric assessment at the level of individual farmers would be both expensive and impracticable. However, it is feasible at reasonable cost to monitor volumes delivered at the distributary outlets at different points of time.

The move to full-fledged volumetric pricing cannot be introduced immediately. The proposed rationalisation of water pricing will have to be accomplished in a phased manner.

The objective of the first phase should be to rationalise and simplify the existing system of assessment (based on crop-wise irrigated area on an individual basis) to a system of season-specific area rates. It is possible to estimate the relative water consumption per hectare irrigated in different seasons. The variable part of the tariff in the case of major and medium projects and such of those minor works as are still under state management should be fixed on this basis. The report suggested that all minor systems be turned over to users immediately after completion. Both categories of projects will pay a flat basic rate per ha. The level of cost-recovery to be aimed at in the first phase should at least cover the O&M costs and 1% interest on capital employed.

Irrigated area under a crop which spreads over two seasons will be charged at the rates applicable to both seasons, and perennials for all three seasons; but crops like paddy which take a lot of water for non-consumptive uses need specific treatment. Where paddy is a significant but not a dominant crop, some differentiation may have to be made, in each season, therefore, there is a need to distinguish at best three categories, viz, paddy, sugarcane and perennials and other crops.  

In the second phase to be implemented in the course of the next decade, the aim would be to shift to a fully volumetric system. Additional investments to modify the distribution system for effective regulation of volume delivered at outlets (estimated at approximately Rs.5000 crores) will be needed. As system efficiency and productivity improve, the targets of cost recovery can be progressively increased.

There are many important matters of detail to be decided in shifting to the volumetric system of charging. These are best decided in consultation with users' representatives. The most crucial and also the most difficult task in this phase will be to promote the formation of sufficiently large farmers' groups.

Phase III, which will spread over a much longer period should seek to extend and consolidate the system of farmer group management, and implement, with the involvement and participation of such groups, a programme for upgrading the system to a higher level of efficiency in water-use and therefore of productivity. Besides substantial investments in conjunctive use and distribution networks, the techniques of water management will have to become tighter and more sophisticated.

Operation and Maintenance

It is generally recognised that the funds allotted for O&M are inadequate. The amount actually spent on O&M on a conceptually clear and uniform basis cannot be determined from published budgets or accounts. The importance of improving the accounting of expenditures needs to be emphasised.

There is a case for earmarking the whole or a substantial part of the receipts from each irrigation system towards the operation and maintenance of that system. In the long run, there is a case for moving towards the conversion of each irrigation system into an independent self-financing system, whether through the formation of corporations or otherwise.

Salient Points - Report of the Committee on Pricing of Irrigation Water (Vaidyanathan Committee), Planning Commission, Government of India, New Delhi, September, 1992

Terms of reference of the Committee

(i)                 To review the existing water rate structure and the extent of subsidy in Government and Public Sector irrigation projects.

(ii)               To suggest:

a.    the norms for fixing water rates;

b.   the norms for cost escalation on O&M component of economic water rates;

c.    the norms for conversion of volumetric supply of water rates of crop-wise / area-wise water rates for different agro-climatic zones;

d.   the organizational measures including mechanism for efficient recovery of economic water rates; and

e.    operating controls for ensuring levy of appropriate irrigation water rates by the states,

(iii)             To evolve a rational water rate structure for both surface and ground water to promote conjunctive use.

(iv)             To review the present status of maintenance of irrigation projects in different states.

(v)               To review the norms of maintenance as recommended by earlier committees and different Finance Commissions.

(vi)             To suggest the norms for fixing maintenance charges including stipulating the upper ceiling per hectare of command for the expenditure on staff establishment for various irrigation systems in different states.

Structure of the Report

Chapter 1: Introduction

Chapter 2: Financial Performance of Public Irrigation Systems - presents the main characteristics of the existing system of irrigation pricing, and an overall picture of the financial results of public investments in irrigation. It also focuses on the deteriorating financial performance over time reflected in the very rapid growth in the magnitude of unrecovered costs.

Chapter 3: Pricing of Irrigation: Approach and Principle - reviews the ideas concerning the basis for the determination of water rates as proposed by earlier committees, and proceeds to outline a somewhat broader approach which links water rates to the quality of irrigation service and improvements in the efficiency of management of irrigation systems, both of which are seen to require a progressive shift to a system of volumetric pricing and a greater involvement of users in running irrigation systems. A phased programme covering all these aspects is also indicated.

Chapter 4: Operation and Maintenance - emphasises the need for greater efficiency in O&M activities and suggests a number of concrete measures to this end.

Chapter 5: Assessment and Collection

Chapter 6: Role of Farmers Group - discusses a strategy for ensuring greater farmer-participation in water management.

Chapter 8: Implementation - outlines the recommendations regarding rate revisions and their implications are set out.

Summary of the Report

There has been widespread concern about the large and growing magnitude of losses on irrigation projects. A need has been felt to examine in depth the existing mechanism of water pricing, its level and structure, modalities of improving the recovery of dues, the norms of maintenance and other related issues. The report relied heavily on work done and information compiled by earlier studies, supplemented by such information as could be obtained from State Governments through correspondence and discussions, field visits and meetings with experts. It is stated that the specificities of local situations will have to be taken into account while implementing the broad approach and specific principles embodied in the recommendations.

Financial Performance of Public Irrigation Systems

A number of Commissions and Committees are agreed that the income from irrigation works should cover the annual maintenance and operation costs, but there are some differences as to whether, and if so to what extent, capital related charges should be covered. The National Water Policy 1987 asserted that water rates should cover the annual maintenance and operation charges and a part of the fixed costs. It is against this background that the existing system of water pricing has been reviewed.

The incidence of irrigation charges varies a great deal across states, and the rate per unit volume of water consumed varies greatly across crops. The wide variability in the level and structure of rates per ha. cm suggests that there is scope for a rationalisation of the rate structure. In no State does the gross receipt by way of water charges per hectare account for more than 3 per cent of the gross productivity per ha of irrigated area.

Revision of water rates has been infrequent, hesitant and very much less than the increase in costs. The all-round deterioration in the financial performance of irrigation projects is stark and nearly universal. The gross receipts of major and medium irrigation and multipurpose projects fell short of their working expenses by about Rs. 168 million a year on an average during the three years 1974-77; the gap rose to Rs. 2775 million a year during the period 1984-87. Including interest on capital outlay, the deficit rose over the same period from about Rs. 1737 million a year to Rs. 9867 million a year.

There are some questions concerning the coverage and conceptual basis of the accounts figures. These are set forth in the text of this report. For working out the full cost of providing irrigation water, the capital outlay for the purpose of calculating the interest (as also depreciation) has to be the entire capital outlay on the irrigation sector, covering not only all major and medium projects without regard to the commercial/non-commercial classification, but also minor irrigation and the capital outlay, if any, under CAD as well. For working out the element of interest on capital, it is appropriate to take the average interest rate paid on the outstanding public debt of each State. There is also a strong case for the capitalisation of interest during construction in departmental management accounts.   

For determining the capital base, which should bear the interest, projects, which are still under construction, have to be excluded. At the same time, projects in many cases begin supplying water long before they are completed. Actual costs tend to be inflated by a variety of factors (such as time and cost over-runs; defects in project design; deficiencies in management; waste; leakages etc.). In the absence of accurate information regarding such matters the Committee took the cumulative outlays three years prior to the accounting period as the base for computing depreciation and interest. Depreciation is taken at 1% of capital investment.

The Committee estimated that the total unrecovered costs on account of major and medium irrigation works (14 major States) increased more than fivefold in a 10-year period from Rs. 280 crores in 1977-78 to Rs. 1525 crores in 1986-87. It urged that a serious and detailed scrutiny of the accounting of the costs and revenues of minor irrigation works also be undertaken to determine the order of subsidies involved.

It is not possible to determine how much of the implicit subsidy is attributable to inefficiency and how much really benefits farmers because of the under-pricing of water. Attempts to reduce the magnitude of overall subsidies must therefore focus both on improving the efficiency of planning and management of irrigation (thereby cutting costs) and on increasing the collection of user charges by raising rate and the more effective enforcement of the scheduled rates.

It is necessary to supplement the financial accounts by proper management accounts, the details of which have been indicated in the Committee’s report. The report recommended that the Government, with the assistance of the Central Water Commission, and in consultation with the Comptroller and Auditor-General of India, should examine the matter in the light of those observations and develop a suitable set of revised instructions and forms which will fully serve the purposes in view. Also, the Engineer in charge of each system (i.e., each major and medium project and clusters of minor irrigation projects) should be made responsible for the maintenance of these management accounts, and that the Irrigation Department should consolidate these for the State as a whole and produce an annual review presenting the total picture for the State.

Pricing of Irrigation - Approach and Principles

The report states that it is difficult to accept the case for subsidising such a user-oriented and capital-intensive infrastructure as irrigation. The government is not in a position to sustain subsidies on irrigation, or for that matter on any infrastructure, on the present scale.

Water rates are a form of users charge and not a tax. The basis of determining the cost of the irrigation service and the desirable extent of recovery may be debatable, but not the principle that users of public irrigation must meet the cost of the service.

Irrigation is one of the key inputs for crop production in as much as the productivity impact of better seeds, fertilisers and other inputs is critically dependent on the way water is used. It is therefore both legitimate and necessary to address the pricing of this input as one of the first steps and an integral component in the process of rationalising the totality of the price structure, and raising the efficiency of water use.

The underpricing of water adversely affects the availability of resources for the management of irrigation systems. Inadequate allocations for maintenance and repairs is a direct consequence of the poor financial position of the states, and is responsible for the low, possibly deteriorating, quality of service. This means that the potential increases in productivity which new technology makes possible cannot be realised in full.

A revision in the level and structure of water rates is thus necessary in the interest of both efficiency and equity. The revision should be such as to achieve full cost recovery in due course and in the process promote saving, create disincentives for waste and thereby enable the service area to be expanded and a more reliable service assured. Revision of water rates should go hand in hand with measures to improve the quality of service and to keep a check on costs.

In the light of a detailed assessment, rates for non- agricultural uses (domestic, industrial) should be revised so that the costs are fully recovered and arrangements built into the supply contracts for ensuring full and prompt recovery of dues.

Estimates of full productivity impact in terms of gross or net output for different categories of irrigation in different regions are not available. The report recommended that the design for regular crop-cutting surveys should make irrigated land (as a whole and preferably by major types) a separate stratum for the purpose of yield estimation.     

Translating the overall productivity impact of irrigation into rates for particular crops raises difficult problems. There is also the question of how the cost-recovery principle and the ‘capacity to pay' will be balanced. In view of these difficulties, and the severe resources constraints facing the government, cost-recovery should be the main consideration governing rate-determination. The rates should be based on O&M norms and capital charges (interest and depreciation). The government must ensure that the actual O&M outlays more or less correspond to norms, which should be revised once in every five years. The State irrigation agencies should undertake analyses to arrive at a well-grounded estimate of the capital investment attributable to the irrigation service.

Some sort of averaging of rates by region and/or category of projects, as is already being done by several states, is desirable. The following categorisation could be used: (1) major and medium storage systems; (2) major and medium projects based exclusively on barrages/diversion works; (3) minor surface irrigation works; (4) lifts irrigation from canals; and (5) lift irrigation from groundwater. For states with marked variations in agro-climatic conditions, the above categorisation may be done on that basis.

Attempts at distinctions in terms of head and tail reaches of a system, quality of soil, or other criteria for rate-determination should be approached with considerable caution, as they are difficult to apply and will add to the complexity of water pricing. There are divergent views on whether or not there should be any levy on conjunctive use. On the whole, recycling seepage from surface sources should not be taxed.

There is a strong case for applying a two-part tariff. All lands included in the command should pay a flat annual fee on a per hectare basis for 'membership' of the system which entitles them to claim water and gives them the benefit of several other facilities which are associated with the spread of canal irrigation; and a variable fee linked to the actual extent of the service (volume or area) used by each member. Such a two- part tariff would be applicable in the case of major/medium irrigation schemes. In the case of minor projects, wherever the O&M of the system is completely turned over to water users' associations, the associations would be charged only the basic flat rate on a per ha basis. However, till this is achieved, water charges for any minor scheme would be levied on par with major/medium schemes.

Many considerations - linking water rates to quality of irrigation service, rationalising rate structure and reducing cost of assessment and collections argue strongly for a system which makes water charges explicitly a function of the volume and season. Volumetric assessment at the level of individual farmers would be both expensive and impracticable. However, it is feasible at reasonable cost to monitor volumes delivered at the distributary outlets at different points of time.

The move to full-fledged volumetric pricing cannot be introduced immediately. The proposed rationalisation of water pricing will have to be accomplished in a phased manner.

The objective of the first phase should be to rationalise and simplify the existing system of assessment (based on crop-wise irrigated area on an individual basis) to a system of season-specific area rates. It is possible to estimate the relative water consumption per hectare irrigated in different seasons. The variable part of the tariff in the case of major and medium projects and such of those minor works as are still under state management should be fixed on this basis. The report suggested that all minor systems be turned over to users immediately after completion. Both categories of projects will pay a flat basic rate per ha. The level of cost-recovery to be aimed at in the first phase should at least cover the O&M costs and 1% interest on capital employed.

Irrigated area under a crop which spreads over two seasons will be charged at the rates applicable to both seasons, and perennials for all three seasons; but crops like paddy which take a lot of water for non-consumptive uses need specific treatment. Where paddy is a significant but not a dominant crop, some differentiation may have to be made, in each season, therefore, there is a need to distinguish at best three categories, viz, paddy, sugarcane and perennials and other crops.  

In the second phase to be implemented in the course of the next decade, the aim would be to shift to a fully volumetric system. Additional investments to modify the distribution system for effective regulation of volume delivered at outlets (estimated at approximately Rs.5000 crores) will be needed. As system efficiency and productivity improve, the targets of cost recovery can be progressively increased.

There are many important matters of detail to be decided in shifting to the volumetric system of charging. These are best decided in consultation with users' representatives. The most crucial and also the most difficult task in this phase will be to promote the formation of sufficiently large farmers' groups.

Phase III, which will spread over a much longer period should seek to extend and consolidate the system of farmer group management, and implement, with the involvement and participation of such groups, a programme for upgrading the system to a higher level of efficiency in water-use and therefore of productivity. Besides substantial investments in conjunctive use and distribution networks, the techniques of water management will have to become tighter and more sophisticated.

Operation and Maintenance

It is generally recognised that the funds allotted for O&M are inadequate. The amount actually spent on O&M on a conceptually clear and uniform basis cannot be determined from published budgets or accounts. The importance of improving the accounting of expenditures needs to be emphasised.

There is a case for earmarking the whole or a substantial part of the receipts from each irrigation system towards the operation and maintenance of that system. In the long run, there is a case for moving towards the conversion of each irrigation system into an independent