FINAL REPORT Example Allocations of Operating and Maintenance Costs of Interstate Water Control Facilities Employing the Use-of-Facilities Method Prepared by: Adrian O. Hutchens Consultant December, 1999 Prepared for: Central Asia Mission U. S. Agency for International Development Environmental Policy and Institutional Strengthening Indefinite Quantity Contract (EPIQ) Partners: International Resources Group, Winrock International, and Harvard Institute for International Development Subcontractors: PADCO; Management Systems International; and Development Alternatives, Inc. Collaborating Institutions: Center for Naval Analysis Corporation; Conservation International; KBN Engineering and Applied Sciences, Inc.; Keller-Bliesner Engineering; Resource Management International, Inc.; Tellus Institute; Urban Institute; and World Resources Institute. TABLE OF CONTENTS 1.0 PROJECT AUTHORITY 1 2.0 PROJECT PURPOSE 3 3.0 RATIONALE FOR USING THE USE-OF-FACILITIES METHOD 3 4.0 GENERAL MATHEMATICAL USE-OF-FACILITIES MODEL 5 4.1 SUBMODEL FOR DERIVING ALLOCATABLE COSTS...........................................................................5 4.2 SUBMODEL FOR ALLOCATING COSTS TO THE REPUBLICS................................................................6 4.3 HYPOTHETICAL APPLICATION.........................................................................................................6 5.0 SPECIFIC EXAMPLE APPLICATIONS 9 5.1 IDENTIFICATION OF TRANSBOUNDARY FACILITIES AND ASSOCIATED O&M COSTS......................10 5.2 THE CHU RIVER SYSTEM..............................................................................................................12 5.2.1 Identification of Interstate Facilities...................................................................................12 5.2.1.1 Orto Tokai Reservoir.....................................................................................................................12 5.2.1.2 Chu Bypass Canal.........................................................................................................................14 5.2.1.3 East Big Chu Canal.......................................................................................................................14 5.2.1.4 Side Tributaries.............................................................................................................................14 5.2.1.5 Chumish Diversion........................................................................................................................14 5.2.1.6 Downstream from the Chapaev Hydropost....................................................................................14 5.2.3 O&M Cost Data.................................................................................................................15 5.2.4 Water Withdrawal Data......................................................................................................15 5.2.5 Example Allocation of O&M Costs of Chu River Interstate Facilities................................21 5.3 TALAS RIVER SYSTEM..................................................................................................................25 5.3.1 Identification of Interstate Facilities...................................................................................25 5.3.2 O&M Costs of the Interstate Facilities...............................................................................25 5.3.3 Water Withdrawals.............................................................................................................27 5.3.4 Example Allocation of Talas River Interstate Facilities......................................................31 5.4 TOKTOGUL AND KAIRAKUM RESERVOIRS....................................................................................32 5.4.1 Identification of Interstate Facilities...................................................................................33 5.4.2 O&M Cost Data.................................................................................................................33 5.4.3 Water Withdrawals.............................................................................................................34 5.4.3 Example Allocation of Interstate Facilities.........................................................................35 APPENDIX A: CHU RIVER SYSTEM DATA 36 APPENDIX B: TALAS RIVER SYSTEM DATA 63 APPENDIX C: TOKTOGUL RESERVOIR DATA 72 APPENDIX D: KAIRAKUM RESERVOIR DATA ERROR! BOOKMARK NOT DEFINED. APPENDIX D: KAIRAKUM RESERVOIR DATA 76 APPENDIX E: PROVISIONS, REGULATIONS, DRAFT AGREEMENTS, PROTOCOLS, AND POSITIONS 83 ii 1.0 PROJECT AUTHORITY As part of the USAID sponsored EPIC program, assistance is being provided to the Executive Committee of the Interstate Council for the Republic of Kazakstan, the Kyrgyz Republic, the Republic of Tajikistan and the Republic of Uzbekistan (ICKKTU) to develop regional principles on financing of operation and maintenance (O&M) of international (transboundary) water facilities of the region. The lack of funds for O&M of transboundary water facilities is a principle underlying cause of severe water mismanagement in the region. With the transition to market-based institutions, pricing schemes and other new approaches are being developed which may be used to generate revenues for routine O&M investments. The ability to recover such costs is also a precondition to most external financing of water related investments. The facilities considered here include transboundary water facilities of regional river basins, including interstate rivers, canals, and collectors. These facilities, which form the backbone of water management systems in Central Asia, have deteriorated rapidly since the collapse of the Soviet Union and they are in severe need of basic O&M repairs. The various water management authorities dealing with the transboundary facilities of Central Asia are well aware of the need for more integrated management and greater financing for O&M in order to resolve these problems. An agreement was entered into in March of 1998 by the Republic of Kazakhstan, the Kyrgyz Republic, and the Republic of Uzbekistan on the Use of Water and Energy Resources. (March 1998 Interstate Agreement) The Republic of Tadjikistan became a party to the agreement in June of 1999. That agreement did not specify how O&M funding would be generated. One of the economic issues that may constitute potential constraints to the full implementation of the Interstate Agreement identified is determining what cost sharing arrangements are appropriate for operation and maintenance of common hydro-technical structures. A paper on principles of sharing operation and maintenance costs of transboundary facilities was submitted at the August,1999, Water and Energy Uses Roundtable meeting.1 That paper presented a general cost allocation model based on the use-of-facilities principle. The participants of the Roundtable Meeting showed keen interest in that work and noted their need for practical cost sharing principles. They encouraged USAID to extend to another phase where 3 or 4 different types of facilities would be analyzed to demonstrate the applicability of the model to a range of facilities with different characteristics. A list of the types of transboundary facilities to be analyzed follows: • An irrigation canal facility. • A water supply reservoir. 1 Hutchens, Adrian O., Regional Principles of Sharing Operation and Maintenance of Shared Water Facilities, EPIC Project, Central Asia Mission, USAID, August, 1999. 1 • A multiyear water supply and hydroelectric generating facility; and • A seasonal re-regulation water supply and hydroelectric generating facility. Through consultations between EPIC Program Team Leader and representatives of the Committee on Water Resources of the Ministry of Agriculture of The Republic of Kazakhstan, the Department of Water Economy of the Ministry of Agriculture of the Kyrgyz Republic, JSC “KyrgyzEnergo”, Ministry of Amelioration and Water Economy of the Republic of Tajikistan, and State JSC Barki Tochik, the following interstate facilities were selected for applying the use-of-facilities method of cost allocation for example illustrative purposes: • West Big Chu Canal, in the Kyrgyz Republic, a component of the Chu River system serving the Kyrgyz Republic and Kazakhstan; • Chon Kakpah Reservoir on the Talas River in the Kyrgyz Republic, serving the Kyrgyz Republic and Kazakhstan; • Toktogul Reservoir and the associated Uch-Kurgan re-regulation reservoir in the Kyrgyz Republic, a multiyear water supply and hydroelectric generating facility serving the Kyrgyz Republic, Tadjikistan, Uzbekistan, and Kazakhstan; and • Kairakum Reservoir in Tadjikistan, a transboundary seasonal re-regulation water supply and hydroelectric generating facility serving Tadjikistan, Uzbekistan, and Kazakhstan. The Chu and Talas river systems can be analyzed separately since they are clearly independent of each other. However, that is not the case with Toktogul and Kairakum reservoirs. Toktogul and Kairakum reservoirs can not realistically be analyzed separately since they are so interdependent. Toktogul is a major water suppy and hydroenergy reservoir on the Naryn River which is a major tributary to the Syr Darya River. Kairakum, which is on the mainstem downstream from the confluence of the Naryn and Syr Darya Rivers, is arguably the principal reregulation and water distribution reservoir in the Syr Dary Basin. They, along with Andijan, Charvak, and Chardara reservoirs, constitute the primary transboundary facilities that must be operated as a coordinated unit in order to attain mutually beneficial use of the water resources of the basin. The operational mode of each is influenced by and dependent upon the operational modes of the others. Khamidov and Leshanskiy present a compelling argument for the joint operation of these transboundary facilities.2 2 See “Review of the Proposal of Constructing an Operation Model for Kairakkum Reservoir” in Appendix E. 2 2.0 PROJECT PURPOSE The purpose of this paper is to illustrate how the UoF method of cost allocation can be used to allocate O&M costs of facilities that have a wide range of operating characteristics and purposes. Before proceeding with the example allocations, a rationale for using the UoF method is presented followed by a general mathematical model. A simple hypothetical example is then presented to provide the reader with a conceptual foundation before addressing the more complex specific example allocations. 3.0 RATIONALE FOR USING THE USE-OF-FACILITIES METHOD When governments undertake the implementation of multipurpose projects, the problem of how to allocate the cost of the projects among the various beneficiaries invariably arises. The most common method utilized is one that allocates costs among the various purposes in proportion to the value of the benefits produced by each purpose. The most thorough application of that concept is found in the separable cost-remaining benefits method, which was developed by the U.S. Inter-Agency Committee on Water Resources with support from the Stanford Research Institute.3,4 It is commonly used in the international scene, most likely due to its recommendation by the World Bank.5 However, one must be conscious of the setting in which these recommendations have taken place. Each reference recommending use of a benefits-based cost allocation takes place in a planning setting. That is, a setting where the project in question has not yet been built, and the plans of what to build, if anything, are being formulated. No irreversible commitments have yet been made, and all options are still open. In that planning setting, a benefits-based method of allocation is appropriate since it will ensure attainment of the most economically efficient project. However, that is not the setting in which this investigation takes place. The interstate water facilities in question have already been built and are in need of upgraded O&M funding. Irreversible commitments have been made and, therefore, no realistic alternatives to the present facilities exist. In this setting, a benefits-based allocation method could result in undesirable effects, which can be illustrated with a hypothetical example. Suppose there is an irrigation project that serves two areas, Area A and Area B. For simplicity, let’s further suppose that A and B are equal in size and productivity and receive equal amounts of water. The original benefits-based cost allocation, conducted 3 U.S. Inter-Agency Committee on Water Resources, “Proposed Practices for Economic Analysis of River Basin Projects,” May 1950; revised May 1958. 4 Stanford Research Institute, “Economic Considerations in the Formulation and Repayment of California Water Plan Projects,” March 1958. 5 Gittinger, J. Price, “Economic Analysis of Agricultural Projects,” Economic Development Institute of the World Bank, Johns Hopkins Press, Baltimore, 1982. 3 during the planning phase, resulted in each area paying the same amount for initial construction and future O&M per unit of water delivered. Now, let’s suppose considerable time has gone by, several years at least, and the water users in Area A have changed their irrigation practices by adopting more modern techniques. As a result, productivity of their land has increased by 50%. In the meantime, water users in Area B have continued with their original irrigation practices which have resulted in a high water table and increasingly saline soil to the extent that their productivity has decreased by 50%. Suppose further that an argument is put forward that the costs should be reallocated because of the difference in benefits being realized between the two areas. A reallocation of costs based on benefits would result in Area A water charges increasing 50% per unit of water and Area B water charges decreasing by 50% per unit of water, which would mean Area A is paying three times more per unit of water than Area B. An argument could be mounted that this is fair since Area A is realizing three times the benefit. However, a rather compelling counter argument also could be mounted. Water users in Area A, on their own initiative, have exercised good management practices and have increased the efficiency and productivity of their irrigation system while water users in Area B, on their lack of initiative, have continued with inefficient practices that have led to the reduced productivity of a valuable natural resource. In that situation, the application of a benefit-based cost allocation method would penalize the good managers in Area A and would reward the poor managers in Area B. That seems incongruous with the increasing need for conservation of a scarce and precious natural resource such as water. If the UoF method of cost allocation had been used, costs would remain evenly divided and the good managers in Area A would reap the rewards of their good management practices, as they should, and the poor managers in Area B would suffer the losses stemming from their poor management practices, as they should. A more direct reason for using the UoF method of allocating O&M costs of the interstate water facilities is that the UoF method seems to be the main principle emerging from ongoing interstate negotiations. This principle is specified in the Protocol of the Commissions of Water Committee in the Ministry of Agriculture, Republic of Kazakhstan, and Water Department in the Ministry of Agriculture and Water Management, Kyrgyz Republic, where it is specified that these costs shall be shared “… in proportion to amounts of water supplied.”6 It is also specified in Article 3 of the draft agreement between the Government of the Republic of Kazakhstan, the Government of the Kyrgyz Republic, the Government of the Republic of Tajikistan and the Government of the Republic of Uzbekistan, where it is stated that, “In the joint use of water resources from the shared interstate water facilities the Parties shall agree to recover the costs 6 PROTOCOL of the Meeting on Operation of Interstate Water Facilities Jointly Used in the Chu and Talas Basins, Commissions of Water Committee in the Ministry of Agriculture, Republic of Kazakhstan, and Water Department in the Ministry of Agriculture and Water Management, Kyrgyz Republic, 11 March 1999, Bishkek. In Appendix E. 4 associated with operation, maintenance, capital repair and reconstruction of the facilities in proportion to the water received (share percent of each country).7 4.0 GENERAL MATHEMATICAL USE-OF-FACILITIES MODEL This model is limited to allocating O&M costs when there are no outstanding capital recovery obligations for any of the transboundary facilities; therefore there are no capital costs associated with those facilities to allocate. Of course, future capital costs for new facilities or capital improvements to existing facilities can be allocated when those facilities are being considered for implementation by including annualized costs of the capital improvements. The water supplies received by each Republic are treated in total amounts received rather than separating them according to the respective functions served. For example, within Kazakhstan water is distributed for irrigation, industrial use, municipal use, fisheries, and water transportation. How, when, or if the water supply received is allocated to these functions is an internal matter for each Republic to address according to their own national policies. The general UoF allocation model consists of two submodels. The first submodel is used to isolate the cost of consumptive water supply functions, such as irrigation, by subtracting the costs associated with non-consumptive water supply functions such as hydro-energy, recreation, social development, etc. The second submodel allocates the remaining consumptive water supply functions to the Republics receiving the water. 4.1 SUBMODEL FOR DERIVING ALLOCATABLE COSTS The O&M costs to be allocated can be identified by subtracting out the separable costs for all non-water supply functions from the total O&M costs for the facilities. The remaining costs are the costs that must be allocated between the Republics. That process is represented by the following formula: C = C - ( S + S ) (1) A T P E where C = water supply O&M costs to be allocated A C = total O&M costs for the facility in question T S = separable hydro-energy O&M costs P S = other non-water supply function O&M costs. E Equation 1 ensures that only O&M costs directly related to supplying water to the Republics will be allocated. 7 Draft AGREEMENT Between the Government of the Republic of Kazakhstan, the Government of the Kyrgyz Republic, the Government of the Republic of Tajikistan and the Government of the Republic of Uzbekistan, prepared by the Government of the Kyrgyz Republic and presented to the EC of the ICKKTU in 1998, unsigned and undated. In Appendix E. 5 4.2 SUBMODEL FOR ALLOCATING COSTS TO THE REPUBLICS After subtracting the separable non-water supply costs, the remaining costs, which should be only those O&M costs related to providing water supply, are then allocated to the Republics in proportion to the water received. The resulting allocation to each Republic is C = C ( W / W ) (2) Ri A Di T where C = water supply O&M cost allocated to Republic i, Ri W = water supply received by Republic i, and Di W = total water supply delivered to all Republics. T Subject to (cid:229) C = C (3) Ri A and (cid:229) (W / W ) = 1.0 (4) Di T Equation 2 ensures that those costs will be allocated in proportion to the amount of water received. Equations 3 and 4 ensure that all of the water supply O&M costs will be allocated to the receiving Republics. It should be noted that this model automatically allocates O&M costs associated with managing all waters passing through the facilities. For the Syr Darya River transboundary facilities example allocations, that includes waters that are released to the Aral Sea and to non-productive side locations such as the Arnasai depression. If delivery of water to the Aral Sea is assumed to be a joint responsibility of all of the Republics in the basin, and water spilled to Arnasai is assumed to be the collective result of management, or mismanagement of the system, which is also the joint responsibility of all of the Republics, it seems equitable that the costs of managing those waters should be allocated among the Republics. The costs of managing those waters are real and should be addressed equitably. Those releases are not included as specific water deliveries (W ) by this model, but they Di are included in the total water supply provided by the transboundary facilities (WT) and the cost of managing those waters is included in the total water supply O&M cost (C ). A Therefore, since the sum of the proportions ((cid:229) W / W ) of water supply delivered to each Di T Republic adds up to 100%, the costs associated with managing the water released to Arnasai and the Aral Sea are automatically allocated to the Republics in proportion to the water deliveries to each Republic. 4.3 HYPOTHETICAL APPLICATION Before addressing the more complex specific example applications, a hypothetical general application of the UoF method is presented. Figure 1 presents a schematic of a hypothetical river system and irrigation service areas that contains interstate water facilities. The schematic depicts a reservoir in Republic A that serves two areas in 6 Republic A by way of diversion structures and canals and delivers water to Republic B. All of the water delivered to Republic B is considered to be dependent on the interstate facilities. The UoF method of cost allocation can be applied to this example for illustrative purposes. This example has all of the data needed to identify the degree to which each hypothetical republic utilizes the interstate facilities. The particular criterion for determining the use of facilities, in this case, is water delivery. The degree or proportion of the water supply received by Republic B can be determined by tracing the water from the point of delivery to Republic B back to the original source, which is presumed to be the reservoir. The annual average volume of water received by Republic B is 30,008 units at the point of delivery to Republic B. Since Reach C has a delivery efficiency of 95%, there must be 31,587 units of water at Diversion B that is committed to Republic B. Since Reach B has a delivery efficiency of 95%, there must be 33,250 units of water at Diversion A that is committed to Republic B. Continuing that process, since Reach A has a delivery efficiency of 95%, there must be 35,000 units of water at the reservoir that is committed to Republic B. Since the reservoir has an annual average yield of 100,000 units of water Republic B’s use of the reservoir amounts to 35%, leaving 65% allocated to Republic A. The last point of delivery of water to Republic A is at Diversion B which delivers 31,587 units of water to the canal supplying Service Area #2. In order to do that, since Reach B has a delivery efficiency of 95%, there must be 33,250 units of water at Diversion A that is committed to Republic A plus the 28,500 units of water that is diverted to Service Area #1. Therefore, at Diversion A there would be 61,750 units of water that is committed to Republic A. Continuing on to the reservoir, since Reach A has a delivery efficiency of 95%, there must be 65,000 units of water coming from the reservoir that are committed to Republic A. 7 Reservoir Annual yield = 100,000 units O&M cost = 10,000 Release for area 1 = 30,000 (28,500/0.95) Release for area 2 = 35,000 Release for Republic B (31,588/ 0.95/ 0.95) = 33,250/ 0.95 = 35,000 DiversionA Reach A:Eff. = 95% O&M = 1,500 O&M = 6,000 Service Area # 1 Diversion = 28,500 Release for Republic B = 31,587/ 0.95 = 33,250 release for Area 2 = 31,587/ 0.95 = 33,250 Reach B:Eff. = 95% O&M = 4,000 DiversionB O&M = 1,000 Release for Republic B = 30,008/ 0.95 = 31,587 Service Area # 2 Reach C:Eff. = 95% Diversion = 31,587 O&M = 3,000 Republic A Republic B Annual Water Delivery. Border = 30,008 Republic Boundary Figure 1: Schematic of Hydropothetical irrigation System 8