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Economic and financial issues

Economic and financial issues at the regional level

At present the region is still in a transition and its economy is in decline. This significantly undermines the possibilities for water authorities to maintain systems and facilities.

This is why the State has taken on itself the regulatory function of the transition process in Central Asian countries. To this end, water management, energy industry, agricultural and other installations have been privatized to a varying degree in the different countries. The reform has already had some positive results by stimulating entrepreneurial initiative. On the other hand, destructive processes have intensified, especially in agriculture. Without support from the State, independent agricultural companies are not in a position to cover the considerable cost of maintaining irrigation and drainage systems. Disorderly water use in agriculture has led to the waste of water. The need to develop new agricultural areas, especially in Tajikistan and Kyrgyzstan, involving the construction of new water supply systems, requires finance, which is scarce.

As a result of the disintegration of the unified economic system, there have been structural changes in the region, which sometimes result in unfounded ambitions on the part of some countries to develop inefficient and unprofitable ways of production, primarily in agriculture. The lack of a regional division of labour and economic cooperation, which indirectly leads to an increase in water use at the national level, gives rise to complaints and accusations that some countries’ demand for water is artificially high. The present practice of fuel and energy exchange has also come in for criticism.

Without additional external subsidies to their budgets, the countries of the region simply have to follow this destructive path. This applies both to the upstream countries, which are trying to add to their budget by intensifying the development of the hydropower production industries, and to the downstream countries, which encourage the development of agriculture and agricultural water use. All countries try to save money by restricting capital investment in repair, maintenance and purification of canals, irrigation systems of national importance, river bank and water protection.

Each State, depending on its national interests in the development of water-using economic sectors, formulates its own position with regard to cost distribution for water management facilities and water bodies. To legitimize these decisions, a legal basis for the country’s policies is created. In all countries water bodies have been declared State property. In Kyrgyzstan State ownership also includes water resources in the same way as State ownership covers mineral resources, e.g. fuel, in other countries. On this basis a concept of water sales has been developed for water formed on the territory of Kyrgyzstan to be sold to other countries as a commodity. This concept, which is reflected in the Law on the inter-State use of water bodies, water resources and water management facilities in Kyrgyzstan of 2001, has been negatively received by the downstream countries. These argue that in the broad practice of international cooperation water in a transboundary body of water is regarded as joint property of all countries of the watershed and therefore cannot be sold.

Notwithstanding all conflicting opinions, there is a common understanding that the solution to each country’s financial problems lies in inter-State cooperation, particularly on matters of joint financing of the upkeep of water management facilities, monitoring systems, etc. No principal objections have been recorded in the following areas:

  • Definition of methods and procedures of cost reimbursement for the maintenance of water management facilities according to the required technological standards;
  • Joint development of reimbursement mechanisms for the joint use of inter-State abstraction facilities and reservoirs;
  • Evaluation of the countries’ expenditure and incomes with regard to water use for agricultural purposes, energy and other industries in order to define each country’s share in the activities aiming to maintain inter-State water management facilities and water bodies;
  • Development of a harmonized evaluation method for damage resulting from water use and compensation procedures, including damage resulting from the violation of water allocation regimes, flooding of low-lying land and insufficient energy supply;
  • Definition of rights and responsibilities in the prevention of water pollution and other forms of water degradation and their harmful effects;
  • Establishment of agreements on the division of labour and a balanced development of economic sectors for the entire region based on the needs of each individual country;
  • Introduction, where possible, of economic mechanisms of water use at national levels, which would reduce State funding for water management activities by attracting funds from water users;
  • Development of protection mechanisms for the countries if agreements are breached, including a legal protection mechanism.

It is against this background that discussions are continuing about disputed initiatives by some of the countries applying market conditions to inter-State water relations. In the first place this applies to the main premise, i.e. recognition of water as a commodity. However, there are other disputed issues, such as:

  • Introduction of penalties for exceeding agreed quotas of national water consumption;
  • Application of what would be a precedent in international relations that one country could sell its own water consumption quota to another;
  • Introduction of payments for water as a natural resource belonging to a country;
  • Introduction of payments for seasonal or long-term flow regulation in favour of other countries.

It goes without saying that these proposals should be further discussed by the countries concerned. Payment for water use is each country’s own business. However, it should be noted that without a sensible and fair economic mechanism the countries would find it difficult to stimulate water conservation and, particularly, to introduce state-of-the-art technologies.

conomic and financial issues at the national level

In Kazakhstan, with new market relations emerging, it has become necessary to further develop the State system of control and distribution of irrigation water and to set up additional structures. In the course of the privatization of the agricultural sector and the splitting of former collective and State-owned farms into smaller private farms, the status of canals and other installations has been transformed from on-farm to between-farm installations. These facilities cannot be divided and are used collectively. However, in some places they do not appear to have been assigned to anybody.

Protection of private property rights with regard to water use and the operation of jointly used irrigation and drainage systems were ensured when water user associations were set up. The main problems of these associations are their economic weakness, numerous legal and registration fees, compulsory payments and an undeveloped legal framework.

In the area of internal water policies, Kyrgyzstan favours the principles of a market economy providing for a payment-for-use in the implementation of water relations. This ideology manifests itself also in its relations with the other countries of the region.

The development strategy for water management resources foresees a gradual easing of the State budget burden with regard to the fixed assets in water management by optimizing tariff and tax policies and taking into account the real purchasing power of the polluting and water-consuming economic entities. In this regard the policy of targeted support by the State budget of development programmes for prioritized water-using economic sectors and water protection should be maintained.

It has been suggested that tariff policies with regard to water relations should be based on a cost-recovery principle and a gradually raising of tariffs to the level ensuring the profitability of both State-owned and independent water companies. Privatization projects in State-owned water management systems planned for the near future provide for the introduction of legalized tariff differentiation principles for water supply services, whereby different rates will apply depending on the specifics of the individual water system.

Payment for the use of water resources and water bodies has also been proposed. This would partly make up for the State’s expenditure on the protection and improvement of water resources, the upkeep of strategically important infrastructure, water resource monitoring, inspections and other activities, which are the monopoly of the State.

Tariff regulation of the use of water and water bodies, the imposition of tariffs for excessive use, as well as penalties for violations of water legislation should in the long run remain in the competence of the highest institutions of State authority. The power to establish differentiated tariffs for water supply services should be handed over to special authorities, selected in the course of the reform of the water management system.

On the other hand, the transformation of the water management sector into a fully self-sufficient sector is considered to be unrealistic. Considering the extremely poor technological condition of the fixed assets in this area, current prices of equipment, material and resources used, as well as the actual purchasing power of the water users, the discontinuation of State support may well result in an irreversible degradation of the sector.

In the short term, attention should be given to tariff policy regulation with regard to such factors as depreciation of fixed assets, shortage of water in low-water years, and tariff differentiation by water-use category for the introduction of water conservation technologies. Tariffs and tax breaks provided for in the legislation but until now not implemented should be further specified.

The basis of Tajikistan’s agriculture is irrigated farming, accounting for 90% of total production. Its development is defined and at the same time restricted by a shortage of available land and water resources, which are costly to deliver to the fields.

Because of the shortage of land, the country has had to develop land that would be considered wasteland in other countries. Such wasteland requires high inputs of energy and resources in the development period as well as for production. In the 1980s Tajikistan had the highest yield from irrigated land in Central Asia.

The reform in the water management sector in Tajikistan was initiated by presidential decree N 40 on the Introduction of Paid-for Services to Supply Water from State-owned Irrigation Systems to Users of 8 April 1996. This was just the first step in the direction of market relations in the water management sector, since the payment rate set by the State does not cover all water supply costs, to say nothing of the cost of water as a natural resource and compensation for violations of water legislation and environmental damage. Because of the difficult economic conditions, only 15-17% of the projected payments were actually collected in 1996-99, while in 2000 they reached 40%, part of which was covered by agricultural produce.

It is necessary to introduce differentiated tariffs on water in Tajikistan depending on the climatic zones, type of water supply (natural or pumped flow), profitability of the water sector, etc. The absence of a clear payment mechanism between the supplier and the consumer because of the seasonal nature of agriculture, as well as between different parts of the irrigation chain, poses a serious problem. So far the maintenance of irrigation systems has been partly financed by the State and local budgets, as well as insignificant allocations from the land tax. The combined financing from these sources amounted to 50% of the required funds, i.e. 13.5 times lower than in 1990.

The organization of the water market and the market for services should facilitate privatization of fixed assets in the water management sector. So far the management of the water system, despite the introduction of market elements, is primarily based on principles inherited from the former command-and-control system. The surviving central budget funding and State ownership of water and irrigation systems of both on-farm and between-farm nature serve as a basis for this system.

It has become clear that the development of regional cooperation in the interest of mutually advantageous solutions to common financial problems calls for efforts to be made at the national levels. The following measures could guarantee a certain degree of financial stability in the region:

  • Increasing the administrative and legal responsibility of water users for an inefficient use of water for irrigated farming, hydropower industry and other economic sectors;
  • Defining the share of the State budget that could be allocated to cover internal maintenance costs for water management installations and monitoring systems;
  • Making water users responsible for the upkeep of water management installations and water bodies of national importance;
  • Development of the economic structure, elimination of unprofitable production and stimulation of economically viable industries;
  • Economic stimulation of water conservation;
  • Promoting the idea of socio-economic values of water.