Pricing of water for community irrigation schemes in New Zealand

Abstract

Social objectives and the need to increase agricultural production were the early reasons for the development of community irrigation schemes by Government in New Zealand. The economics of scheme development and operation only became an issue in the 1970s although the price charged for water had caused concern in the various schemes before that. Because irrigation water is a public good its price is not set by the normal market forces. Economic theory dictates that the price be set under marginal costing rules, but this rarely happens in reality as the theory is difficult to implement. Currently, water is charged for on an average price basis. The price charged does not take into consideration the water's opportunity cost or the external effects resulting from its use. Community irrigation schemes in New Zealand face financial problems. Many have large accumulated losses, they regularly show operating deficits, some require extensive refurbishment and as farming returns are low the farmers cannot pay higher water charges. This thesis proposes a water charging method that aims to encourage efficient use of water and ensure the benefits of irrigation are shared more equitably. It is the dual charging method which has a fixed and variable component. Capital servicing is met under the fixed component where an inflation indexed loan is amortised at a real rate of interest. The variable component is required to meet the scheme operating and maintenance cost. It does this by charging successive quota units of water under an increasing block rate tariff structure. The sale of water in quota units enables the creation of a secondary market where farmers can sell unwanted units. The water charges calculated under the proposed method are much higher than those being charged at present. They are, however, less than full charges that could be levied under the current Public Works Act legislation. Farmers under the current terms of trade could not sustain these new charges. Adjusting charges on the basis of ability to pay is not satisfactory as there is no encouragement to develop more profitable alternative enterprises. The present charging method used by the Ministry of Works and Development should be changed to incorporate a marginal charge component and a secondary market should operate for each scheme. The thesis also suggests that farmer cooperatives purchase irrigation schemes from the Crown to encourage more cost efficient operation.