Section 12
Thematic reviews
12.6. Public Private Partnership in Irrigation: What are the lessons for Central Asia?
The irrigation sector of all Central Asian countries is in serious need for investment to improve water use efficiency and modernize aging infrastructure. Currently, the state bears the main burden for financing water in all Central Asian countries. However, to improve the situation, countries are looking also for other options such as public private partnership (PPP) arrangements. PPP is one of the sophisticated financing modalities, which is very different from traditional procurement. It allows bigger participation from the private entity by means of financial structure and engineering, technology and innovation, and risk-sharing schemes. PPP performance is based on service quality and delivery, not on inputs; and contract period is defined by the project life cycle. Consequently, it requires comprehensive understanding and sufficient endowment from the public sector. It also introduces the benefits of market incentives for the public sector.
A PPP refers to a long-term contractual arrangement between public (national, state, provincial, or local) and private entities through which the skills, assets, and/or financial resources of each of the public and private sectors are allocated in a complementary manner, thereby sharing the risks and rewards, to seek to provide optimal service delivery and good value to citizens. In a PPP, the public sector retains the ultimate responsibility for service delivery, although the private sector provides the service for an extended time. All contracts such as performance-based contracts (management and service contracts), lease–operate–transfer, build–own–operate–transfer, design–build–finance–operate, variants, and concessions are considered as various forms of PPP.
Source: ADB, Public–Private Partnerships. Guidance note on procurement
The Central Asia enacted PPP laws demonstrating political commitment to use PPP as a tool to attract foreign and local investments. The countries differ however in the number of PPP projects implemented and in the priority sectors for PPP investments.
In Kazakhstan, out of the $195.6 billion investments tracked between 2000 and 2019, water projects (which include water supply, irrigation, and water resources management projects) are limited to only $471 million; while energy projects account for more than half of Kazakhstan’s planned and under construction infrastructure projects at around $112.5 billion (58%). Between 2006 and 2010, investment in the sector was less than $20 million annually, which was inadequate to maintain millions of hectares of irrigation facilities. Although investment resumed in 2014 and 2015, reaching $250 million, water demand is rising in Kazakhstan, with projections that by 2030, demand will outstrip all possible water supplies.
In Kyrgyzstan, out of $140 million investments in 6 PPP projects only one is in the water and sewerage sector, with the largest share of ICT projects. In Tajikistan, 5 PPP projects accounting for $961 million investments in total are reported between 1999 and 2020. In Uzbekistan, for the period of 2019–2022, the highest number of PPPs projects was recorded in the water management sector (157 out of 423 PPPs projects in different sectors) accounting for $29.82 million.
Based on few examples of PPPs in the irrigation sector, this review will draw some lessons for Central Asian countries informing their endeavours to implement successful PPP projects.
Examples of PPP in irrigation projects
Olmos irrigation project in Peru
The Olmos Irrigation Project (hereinafter, Proyecto Especial Olmos Tinajones, PEOT) is a set of engineering works, consisting of 3 main components: i) the transfer of water through a 20 km Trans-Andean Tunnel and the Limon Dam, which started operating in 2012; ii) the generation of hydroelectric power; and iii) the implementation of irrigation infrastructure. A 44 million m3 capacity dam (Limon Dam) and the trans-Andean tunnel were to be constructed with the purpose of transferring the water from the Huancabamba River, on the Atlantic watershed, to the Pacific watershed for agricultural and power generation purposes in the new Olmos Valley.
In July 2004, the legal framework for the procurement procedure for the PEOT was set and transfer works were awarded by the Regional Government of Lambayeque (GORE Lambayeque) to the Olmos Transfer Concessionaire (Concesionaria Trasvase Olmos, CTO). In 2004, the GORE Lambayeque, in the framework of Legislative Decrees No. 994 and 1012 and their respective regulations supporting private investment in irrigation projects, awarded the works that allow for the diversion of water from the Atlantic watershed to the Pacific watershed, to the Olmos Transfer Consortium of the Odebrecht Group for a period of 20 years at a cost of $185 million, of which $77 million funded by the Andean Development Corporation (CAF). In June 2010, another concession contract was signed between GORE Lambayeque and H2Olmos, a private company created in 2009, in order to manage the distribution of water for the irrigation component of the PEOT. In October 2010, the economic compensation contract was signed between GORE Lambayeque and the private company SINERSA S.A. (Sindicato Energetico) dedicated to the construction of electricity generation plants, their operation and administration, and the trade of energy (as part of the hydropower component). In 2012, the public tendering process was developed by GORE Lambayeque and H2Olmos for the award of the lands of the “new Olmos valley”, as part of the irrigation component. In November 2014, the irrigation works was inaugurated and the transfer and irrigation works was put into operation. New concession contracts for more hydropower plants to be built in the area are being currently planned and negotiated.
Zambia’s Kaleya and Manyonyo schemes
So far, there have not been many examples in sub-Saharian Africa of PPPs involving irrigated agriculture. Some of them are found in Zambia, which has developed models of inclusive PPPs with smallholders. These PPPs have in common that smallholders have established farmer-owned liability companies to run profitable commercial businesses. The farmers are organized in water user associations, which are represented on the management board of irrigation projects along with representatives of the government and the farmers’ union. While the farmers hire irrigation professionals to run the irrigation scheme profitably, the management units organize agricultural production in parallel, assuring professional cultivation.
The Kaleya irrigation scheme has 161 farmers cultivating 2,165 ha in Southern Zambia’s Kafue River basin. Irrigation infrastructure was publicly financed, but operation and maintenance has always been the responsibility of the Kaleya Smallholders Company Ltd. (KASCOL), a private company owned by independent individual and institutional investors. Smallholder farmers collectively hold 19% of the company’s shares. KASCOL owns the land and recruits farmers by offering them land on a four-year lease base. It holds a water-use permit but receives additional bulk water in drought periods supplied by Zambia Sugar Plc. at an advantageous fee. On-farm irrigation and farming operations are carried out by farmers on their individual (leased) plots. Benefits from this arrangement have been manifold, but farmers particularly complain about the short-term land lease arrangement.
The Manyonyo smallholder irrigation scheme is located in the same river basin. It was initiated by the Zambian Ministry of Agriculture, who assisted farmers in forming a liability company and running the irrigation scheme. Each of the 145 households contributed four hectares of their land which are clustered into and managed as one single farm. The farmers maintain their property as well as individual land titles, thus guaranteeing membership to the scheme but also reversibility of membership. The company holds a group permit for water abstraction from the river. The water infrastructure is constructed by using public funds and is leased out to the farmer-company through a suitable PPP arrangement. The company is a stand-alone firm, but its production is sold to nearby Zambia Sugar Plc. The model provides security for smallholders vis-a-vis the (farmer-owned) company and its management.
These farmer-owned companies are often linked to large enterprises (e.g. Zambia Sugar) as contract farmers (Kaleya Smallholders Company Ltd.), but some, such as the Manyonyo smallholder irrigation scheme, are also stand-alone firms.
In one or the other way, smallholders contribute to debt financing (cash or land contributions) and share operation and maintenance costs of providing irrigation services. Individual farmers can benefit from improved income, job opportunities and the dividends generated by their equity stake in the collective company. Finally, involving local communities in PPPs is in many cases also a means to integrate them in larger value creation and rural development by improving e.g. access to electricity, health services and transportation.
The projects in Zambia successfully address two other common challenges of irrigation schemes: inequitable water distribution and frequently unclear water and land ownership and use rights. Concerning water distribution, farmers at the head of a canal are often privileged compared to “downstream” users at the tail end. In cases where water provided by the PPP does not cover all water needs, financially strong farmers are privileged as they can invest in deep drilling to complement this, while poorer farmers cannot do so and are in addition faced with rapidly sinking water tables due to the boreholes of their rich neighbours. Such situations arise where farmers are very heterogeneous, as in the Moroccan El Guerdane case.
Morocco's El Guerdane project
The El Guerdane project, operational since 2009, is considered as the first public-private partnership in irrigation in which the private partner participates not only in the financing and construction, but also in the operation and maintenance of the system. In contrast to the Zambian cases, the private partner is not involved in agricultural development. A complex of two dams feeds a 90 km irrigation canal to carry 45 million m3 of water per year to the 300 km distribution network that makes up the El Guerdane scheme situated in a highly water-scarce valley. The project is designed to supply 597 citrus farms, covering 9,600 out of the 30,000 irrigable hectares.
The $80 million of investment costs was covered by the Moroccan State (48%), the National Investment Company (SNI, 44%) and the farmers involved (8%). However, the project has contributed to increasing inequalities between family farming and agro-investors: the investment costs required, the type of crop targeted (citrus fruits), the quality requirements for export and the political choice to initially restricted call for tenders to pre-selected farmers have marginalized smallholders. The average size of project farmers’ plots is one indicator of this trend: they cultivate an average of 16 ha - more than five times the average size of farms in the project’s immediate surroundings in Taroudant. Moreover, the project provides water to only a small proportion of the farmers in the region (597 farms, equivalent to about 11% of the total number of farms in the area).
The collective ownership chosen for the PPPs in Zambia instead provides for an innovative solution to these two distribution challenges; at least until now, inequitable water distribution has not been reported. The collective model also helps to address the challenging issue of unclear water and land use rights, which is particularly complex in settings with many smallholders. Hybrid and sometimes contradictory forms of collective and individual land, water and other resource ownership and user rights coexist in a continuum from customary tenure systems to formal ownership systems, often with the state as final custodian and owner. Mostly, these tensions are not clarified and formalized. The resulting uncertainty is detrimental to investments, regardless of who invests, not only in irrigation but also in all kinds of machinery, equipment and long-term land improvement. The way land can or cannot be used as collateral has implications for the ability of individual actors to engage in PPPs. In the Manyonyo PPP, for instance, where farmers hold individual land-use rights, it is prohibited to use land as collateral for loans so as to avoid the danger of farmers losing the land to “bogus investors” offering “slave loans”. Banks seem to be ready to provide credits relying on the soundness of business models.
Lessons Learned
The most commonly used contractual forms of PPP in the irrigation sector include:
• Operation, Management and Maintenance (OMM) contract, under which the private sector is engaged to undertake operation, management and maintenance of infrastructure services for defined recipients. The private sector provides a service for which it receives a fee (either from the government or from users). Where rehabilitation or construction works are required, they can also be part of the contract. Assets are publicly financed, and this is an appropriate form of contract where there is limited scope to raise private capital.
• Infrastructure concession, under which the private sector is engaged to raise commercial finance for infrastructure development and then construct, operate, manage and maintain the infrastructure. Investment and financing costs must be recovered through fees (either from the government or from users). End user risk is significant in irrigation projects where often the users are not fully defined at the beginning of the project (it depends on how many farmers take up the water from the system). It might be possible to share end user risk between the public and private parties, for instance with a guarantee on minimum revenue. The investment may be undertaken in whole or in part by the private sector where for instance there is grant funding available to bear some of the investment cost.
• Farm service agreement, under which the private sector can also partner with smallholder farmers and communities for the provision of farm-level services. Services might be on-farm, such as planting, harvesting and water application; or off-farm, such as storing, processing and marketing (e.g. outgrower services). Such farm services, by improving the agricultural performance of water users, are likely to improve the viability of irrigation infrastructure. The level of investment private finance required depends on the services provided. Farm services can be integral or separate from infrastructure OMM contract.
• Hub farm agreement, under which the private sector can be engaged to undertake commercial agricultural production through a land concession or lease. This might be on unoccupied land owned by the government or third parties, or community land held under collective title (or especially consolidated) and leased in return for a fee of share in commercial operations. The hub farm has purely commercial aims, and will require a certain scale in order to offer commercial opportunities (especially for food crops). Private capital is required for on-farm investments, while irrigation fees can reflect any or all infrastructure related costs (e.g. OMM, investment and finance).
Key legal issues that arise in irrigation PPPs include (while some of the legal issues are not confined to irrigation PPPs they can take on a new dimension and complexity when applied to irrigation):
• Land ownership – all irrigation projects are dependent on land ownership – both in relation to the land that is needed for the project, and also in relation to the customers for the project, the farmers, and their legal interest in the land. Some countries limit land ownership to locals or may prohibit ownership in private hands. There may also be restrictions on land use, irrigation or types of irrigation may be restricted – and the rules may vary within a country from state to state or county to county.
• Water extraction – there may be limitations on levels of water extraction, both at national and international level. If extraction from a river or other water source is subject to international waterways, then there may be restrictions on the amount of water that can be extracted. The regimes for charges for water extraction may be complex and/ or vague. These will be key issues in a PPP as the private provider will want to ensure a steady revenue stream and so will want to be sure of the price that it is buying raw water, the price that it can on sell irrigation water and the quantities that it can extract and sell.
• Public Sector Counterpart – in irrigation PPPs it can be difficult to ascertain which public institution will be responsible for developing the project and the signatory to the project agreement - in most emerging markets where PPPs have been used for developing irrigation systems, the national entity in charge of irrigation services would be the counterparty to the PPP contract.
Although PPP policies and projects are at various stages of maturity, some lessons can be drawn from irrigation PPPs implemented in different parts of the world:
• PPP arrangements require country- and site-specific solutions and must address the risks of the various parties involved, including nature, to ensure that such projects are development-friendly and economically viable while protecting natural resources.
• Look beyond the irrigation scheme as such since potential socioeconomic and environmental benefits and threats extend way beyond the geographical area of the scheme. Primarily targeting financially strong farmers or not actively supporting the smaller ones creates an unequal race for access to potentially irrigable land and sometimes scarce water resources. Neither does it necessarily assure an optimal return on investment since smaller farmers can be very efficient in value and employment creation, also compared to larger entities. Finally, the public sector must ensure the long-term ecological viability of a project as well.
• PPPs in irrigation need to be embedded in comprehensive development plans and include specific support measures to ensure sustainable and equitable development. This may include access to extension services and financial products, input supply, and – above all – access to stable markets. The PPPs we reviewed in Zambia and Morocco have in common that smallholders have established farmer-owned liability companies to run commercial businesses. These companies have entered into contracts with private sector companies for irrigation management, service provision and market access. Farmers are represented on the management boards of their companies. For such arrangements, smallholders need long-term support along with assistance in designing contracts and acquiring management skills. If one compares the Zambian schemes with the Moroccan El Guerdane, these PPPs are better characterized as PPPs in irrigated agriculture, i.e. investments in agricultural production that include irrigation components.
• PPPs, when properly implemented, can help reduce a nation’s infrastructure deficit. With a strong enabling environment, PPPs can help to fulfil the vision for the nation’s infrastructure needs by setting goals to align departmental policies, attracting private sector investment and expertise, ensuring best value from government investments, and optimizing project risk allocation. The PPP model has in-built mechanisms which reduce the potential for schedule slippage and cost overruns in delivering major projects, and can accelerate availability of service improvements.
• Taking smallholders concerns, but also local government and administrations capacities, into account when developing PPPs in irrigation is a key prerequisite for achieving mutual benefits. Successful irrigation PPPs which are not only able to mobilize investment but also provide long-term perspectives for local smallholders require sound design and monitoring of networks and contracts with respect to equitable cost-benefit sharing and environmental impacts. However, many smallholders as well as local administrations currently lack the capacities to fully oversee potential impacts of such projects and related contracts.
• Encourage dialogue between stakeholders for more integrated and resilient water governance. In the Olmos Irrigation Project case, for example, it was suggested to create the River Basin Council as a multi-stakeholder platform that could help improve plans and dialogues across players in the old and new parts of the Olmos Valley, as well as between the peasant communities established upstream and the water users downstream. Also, the distribution arrangement established in the concession contract between GORE Lambayeque and H2Olmos could be modified in order to accommodate demands from the small and medium-sized farmers in the “old” valley, where appropriate, in order to stimulate economic development across this area of the basin. This represents an opportunity for local, regional and national governments to work together to ensure the legal framework surrounding the PEOT adapts to present and future demands.
• Local, regional and national governments should join forces to ensure greater data collection and monitoring. Collecting, using and disseminating more data will not only reinforce the technical solutions but they will also encourage greater transparency and stakeholder engagement. However, this measure would require a clear allocation of responsibilities across authorities and agreement on what should be prioritised in terms of data collection, as well as the target groups.
• Good planning and timely execution. It is better to come up with a few selected prioritized and well-prepared projects that the government has carefully defined than a long list of several projects intended to attract any type of investor that the government does not actually have the capacity to deal with. Management of deal flow is equally important to make investors know what to expect, and to attract the most ready and matching bidders.