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- This paper a product of the Agricultural Policies Division, Agriculture and Rural Development - Department is part of a larger effort in PRE to provide analytical reviews of major issues in the sustainability of natural resources and prescrvation of environmental quality. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Cicely Spooner, room N8-035, extension 30464 (32 pages).

Until 1976, Bank policy emphasized recovery of all costs on irrigation projects, or at least complete recovery of operating and maintenance (O&M) costs. Subsequently, policy specified three pricing objectives for the design of irrigation service fees: economic efficiency, income distribution, and public savings.

The objective of economic efficiency was framed in irrelevant terms and the detailed objectives for income distribution wcre unwork- able. This left the objective of public savings for which there are no clearcut instructions.

So betwcen 1976 and 1988 no effective formal policy guidelines existed for cost recov- ery on irrigation although the Bank was active in lending for irrigation in those 12 years.

No OED review of loan conditionality on cost recovery for irrigation has been produced for the period, but the 1986 OED review on the period before 1976 concluded tha thie record for the earlier period was not good.

* Acccpt the diversity of wultures and institutional arrangements in borrowing countries and incorporate flexibility and ingenuity into the design of feasible irrigation institutions.

* Focus the Bank dialogue on the physical sustainability of irrigation investments and associated natural resourecs. In short, the Bank should be more flexible about institutional preferences but should insist more strongly on arrangements that preserve sustainability.

* Approach the financing of irrigation as a policy adjustment issue.

* Base cost-recovery policy on an analysis of the total complex of government interventions. Most countries prefer to impose direct and indirect taxes on agricultural commodity output although such taxes are often unjustified in terms of equity or cost recovery.

Decisions on the third and fourth points require thorough economic analysis.

In at Ieast two-thirds of the projects reviewed, the covenant requiring cost recovery to cover at least O&M costs had not been honored. In many cases, the covenants covering cost recovery were so vague that it was difficult to judge if there had been compliance. Auditors found O&M of the irrigation satisfactory in only half of the projects.

Existing guidelines are inadequate, and the need for quality control is great, so O'Mara proposes six points as the basis for a new policy framework for Bank irrigation projects:

* Assign tax policy instruments to appropriate policy objectives.

> * Accept indirect cost recovery where it exists, but insist on an accounting of the equity issues associated with rent transfers for irrigation.

On the fifth and sixth points, analysis must take into account the welfare effects on the major groups involved. The appropriate objective for irrigation serviec fees (if there are no equity issues) is public savings or cost recovery.

The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy. Research, and External Affairs Complex. An objectivc of the serics is to get these findings out quickly, even if presentations are Icss than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

'roducc(i at the PRE Dissemination Ccnter