Making water cheap, especially to crop farmers, leads to excessive use and environmentally harmful consequences, benefitting no one, says Roger Cowe

Andhra Pradesh, the state that occupies a large chunk of eastern central India, describes itself as "the essence of India". Tourists are tempted with "lush rainforests, breathtaking valleys, hill stations, waterfalls and rivers".

Like much of India, however, there isn't enough water, despite large rivers such as the Krishna flowing across to the Bay of Bengal. The state is also known as the rice bowl of India, and rice is traditionally grown in flooded fields, which require extensive irrigation systems.

Andhra Pradesh, like other states in India and many other countries, provides substantial subsidies to help develop irrigation, increase production of rice and other crops and support the state's impressive pace of development. It is three-quarters through a 10 year, $37bn irrigation infrastructure programme to boost agricultural output.

The Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development has made a conservative estimate that the state has subsidised water to the tune of nearly $300m a year during the last decade. And the GSI says this is not the way to sustainable development. It calls for lower subsidies, not just to save public money but also to save water.

Unsustainable subsidies

Water is a precious resource all over the world. Like other natural resources, it is becoming more precious as climate change disrupts supplies and demand increases because of the growing global population. Policies should therefore aim to support conservation, reduce waste and increase efficiency in its use.

On the other hand, availability of water – for domestic use as well as agriculture and industry – is fundamental to improved health, social and economic development. Almost two million children die each year because of inadequate water supplies, and many more suffer illness and preventable diseases.

This is the difficult dynamic of sustainable development. Social and economic priorities clash with environmental goals. And subsidies are stuck in the middle.

As in Andhra Pradesh, governments want to help farmers by financing irrigation schemes, and they want more and more people to have access to clean water. They oversee prices that may not even be enough to cover operating costs, let alone investment needs, the result is inefficiency and waste. Where irrigation is based on drilling wells, as in some Andhra Pradesh projects, overuse can result in depletion of underground water.

The implication for business is that the cost of water can only go up, putting a premium on efficiency. For those in the water industry, there is clearly and enormous challenge to come up with financial structures that make sense economically, environmentally and socially.

Expensive rain in Spain

This is not just a poor world problem. The Organisation for Economic Co-operation and Development says that water subsidies for agriculture "misalign farmer incentives and aggravate overuse and pollution of water" in most member countries.

A recent study of environmentally harmful subsidies for the European Commission examined irrigation subsidies in Spain. It concluded that the rationale – improving agricultural incomes, supporting remote areas and combating desertification – was no longer entirely valid.

The trouble is that low water charges mean inadequate income for the utility, which leads to poorly maintained infrastructure. This undermines the original purpose, leading farmers to choose unsustainable practices and the wrong crops. And it is not cheap. This study estimated total water subsidies in Spain at about €165m a year but it could be much higher, given the difficulties of quantifying these things. An assessment by the GSI came up with a figure of around €1bn a year – more than half the actual cost of the services.

Subsidies are not always direct, whether for agriculture or domestic use. In the US, the National Flood Insurance Program is just one of the ways the Green Scissors report shows the government getting it wrong. The programme subsidises insurance for private homes in flood-prone areas, which seems like a good idea, especially if you live in one of those homes. Perversely, a scheme intended to promote water conservation has led to more intensive development and environmental harm in areas subject to flooding – as well as an $18bn bill for the government.

Failing the poor

Like most other perverse subsidies, the goal of improving access to water is not at issue. The perversity arises because making water cheap, especially to crop farmers, leads to excessive use and unintended, environmentally harmful consequences. And the poor, who are often the main targets of subsidies, typically don't benefit. Irrigation benefits landowners rather than their tenant farmers. And surprisingly, consumption subsidies do few favours for poorer families.

Based on wide-ranging experience in developing countries, the United Nations says that even water pricing targeted specifically at poor consumers doesn't tend to work. Such systems often have charges that rise the more you use, so that heavy users subsidise people who use less and everyone is encouraged not to over-indulge. But in practice the benefits go to the better off because they are more likely to be connected to the water supply, and on average they don't use more water than poorer consumers.

Roger Cowe is a writer and consultant on sustainable business

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