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# B.4 Discussion of Cost Recovery Issues

14. As far as cost recovery is concerned, it appears that recovery of operation and maintenance costs is the key issue with respect to irrigation projects. Governments in general aim to recover full O&M costs as embodied in irrigation ordinances which formally empower the government to levy water charges on users or through arrangement toward self-management of irrigation schemes by user groups. Lack of adequate revenues from the irrigation subsector imposes a heavy burden on fiscal budgets and subsequently results in poor maintenance of existing irrigation schemes. Full recovery of O&M costs ii, therefore, rationalized on the grounds of reducing government subsidies and ensuring that irrigation schemes are properly maintained. In contrast, there have been no stated government policies which would achieve full capital cost recovery. In this regard policies are formulated to recoup only a 'reasonable, share of capital costs, and only if feasible, in view of sociopolitical issues.

15. Although various cost recovery instruments exist in line with govertn nts' objective to recoup fully OM costs, our review shows that such **an** objective is not attained in all cases. The existing cost recovery levels in project areas at **the** time when the tppraisal reports were prepared ranged from 0 to 100 percent of O&M costs. Four cases apparently had 100 percent recovery, another four reported very insignificant collections from water users, and three cases had levels that varied from 40 to 60 percent. No estimates were cited in three cases, but it was suggested in the appraisal reports that cost recovery was at satisfactory levels. Difficulty of enforcing irrigation ordinances for collecting water charges in rural areas or lack of an effective enforcement mechanism despite the presence of suitable legislation; unreliability of irrigation service; farmers' reluctance to pay in account of perceived right to free irrigation water; and equity considerations were some of the factors that had constrained full recovery of O& costs. Meanwhile, only 9 out of 14 cases reviewed made indications of cost recovery levels as a fraction of capital costs. These levels ranged from 0 to 25 percent, with a mean value of about 5 percent. Thus, cost recovery as a proportion of total costs amounted to only between 0 aned 37 percent, and averaged as low as 7 percent.

# B.5 **Use** of Pricing/Cost Recovery Covenants

16. In general, projects have covenants that are aimed to achieve 100 percent O& cost recovery. The only exception is the West Tarum Canal Improvement Project in Indonesia where no covenants exist for recovery of O&M costs; however, there are agreements for land reclassification and reassessment of the IPEDA levies which should eventually lead to improvement in cost recovery levels. Agreements were also reached for the partial recovery of capital costs in 9 projects, subject to beneficiaries' ability to pay. The implementation of the foregoing covenants is proposed through increases in water charges or revision of charge structure (fourd in 9 cases), elimination of existing subsidies to village cooperatives (1), enforcement of land ownership transfer (1), or internaliziiig construction and O&M costs via arrangements for self-management of irrigation schemes by user groups