A PORTUGUESE HYDRODINOSAUR : THE HIDDEN COSTS OF THE ALQUEVA DAM Leonardo Costa1 Water transfers in some countries of the European Union (EU) are still driven by the supply-side or “needs” model. The Alqueva dam can be compared to the Rhone to Barcelona aqueduct projects as an example of supply driven transfers. Many similar factors are behind the Alqueva dam and the Rhone to Barcelona aqueduct projects, two large European water infrastructures. Overestimation of water demands, irrigation development and lack of water pricing, extra benefits not paying extra costs, high support provided by the EU, lack of project alternatives, disrespect for the subsidiarity principle applied to water, and a strong domestic political support (although not necessarily for the best reasons), are key factors behind both projects. Any water transfer from France to Spain should be welcomed by Portugal, as it may substitute to shared water resources between Portugal and Spain. Customary international water law helps little on this matter. Between both countries it seems to exist a deep agreement to build as many hydraulic projects as possible, with the help of European funds. Portugal has signed the 1998 Albufeira Convention with Spain to guarantee stream flows to the Alqueva dam in the Guadiana River in the south. When completed, the Alqueva dam will be Europe’s largest dam. The estimated cost is 2,091 billion euros. The EU pays more than half of the cost. Irrigation is an important component of the project and a major cause of its bad economic and ecological performances. Yet, farmers are of course not going to pay the full-cost of the water. Therefore, the possibility to downscale irrigation, in order to minimize the economic losses and the ecological impacts of the project must be discussed. Josep Vergés, an independent Catalan economist, has proposed that the amount of water devoted to farmers be renegotiated with their representatives in the area: what he calls the Alqueva Irrigation Agreement (AIA) would lead to downscale irrigation, despite the dam is already installed. The AIA project has considered several options. The most easily acceptable option, where farmers would pay full operation costs, but where investments would be “sunk” (called sunk costs option) would allow a 60% savings on water consumed by farmers; then a water level at 139 m could be maintained in the dam instead of 152 m, with a reduction of half of the drowned area; and about 222 million euros of investment would be saved in irrigation infrastructure. This paper argues that the AIA sunk costs option is even more attractive when three hidden costs to Portugal of the Alqueva dam project are considered: first, in the Albufeira Convention Portugal accepts a reduction of the northern rivers’ stream flow incoming from Spain to guarantee instead stream flows to the Alqueva dam in the south, which works against the subsidiarity principle applied to water; second, the predicted expenditure allocation in the Portuguese River Basin Plans and National Water Plan, is driven by supply development in the south; and third, the Portuguese government’s position towards the Commission proposals for the midterm review of the CAP, is in part determined by the will of some farmers in the southern Alentejo 1

Leonardo Costa, Faculdade de Economia e Gestão, Universidade Católica Portuguesa Rua Diogo Botelho, 1327 4169-005 Porto, PORTUGAL

1

region to capture more of the current CAP first pillars’ payments using the cheap water of the Alqueva. The AIA sunk costs option would allow the Portuguese government to largely reduce these three costs of the Alqueva dam project. 1. Introduction Water transfers in some countries of the European Union (EU) are still driven by the supply or “needs” model. They are still largely dictated by the will of hydraulic engineers. Hydraulic engineers use the needs model to build large infrastructures and allocate water. They see needs everywhere. They usually don’t have a clue on the economics of water. In addition, public works companies, water suppliers, targeted water users, and others like the model, while taxpayers pay the bill. International customary “soft” water law doesn’t help on this matter. For instance, the Helsinki Rules (ILA, 1967), an important cornerstone of international water law, claim that reasonable sharing of international waters should take into account past and present uses. This unfortunately pushes countries to over invest in water infrastructures and uses when a negotiation is in sight, in order to make the result of reasonable sharing of international waters more favorable to them. This is part of the story of the Portuguese Alqueva dam project. Within the needs model, any water allocated from France to Spain, for instance the Rhone transfer to Barcelona, must be welcomed by Portugal. The idea is that such transfers from France to Spain would symmetrically diminish the Spanish needs for waters that are shared with Portugal. However, there is no reason why Spain would not take both French and Portuguese waters. Hydraulic engineers of the three countries can make the needs case for that. Spanish and Portuguese hydraulic engineers already made an agreement on water transfers from the north to the south of the Iberian Peninsula, via Spain, to maximize the physical exploitation of both countries’ water resources – the Albufeira Convention. Only the recently approved

2

Water Framework Directive (WFD 2000/60/EC) may reframe a bit the allocation rules of the needs model. Among other things, “getting prices right” is one of the main objectives of the WFD (Blöch, 1999). Portugal is building Europe’s largest dam on the Guadiana River in the south.2 The Alqueva dam reservoir will be used to generate electricity, to irrigate 110,000 hectares of newly irrigated agricultural land in the low-income region of Alentejo, to promote tourism development in this region, and to provide water for the Algarve, an important tourist region on Portugal’s southern coast. Presently, the estimated cost is 2,091 billion euros (Público, 10-02-2002). The EU pays more than half of the cost (Vergés, 2001a,b). Irrigation is a major component of the Alqueva dam project. The total cost of providing water from the Alqueva to farmers in the Alentejo region is estimated to be 30 eurocents per cubic meter (Vergés, 2001a,b). If one excludes the cost of building the dam, the cost is still 9 eurocents per cubic meter (30% of the total cost) from which 5 eurocents pay the electricity necessary to supply the water (17% of the total cost) (Vergés, 2001a,b). In the year 2001, the former socialist government announced that farmers would pay for the Alqueva water 5,5 eurocents in 2002 and 8 eurocents in 2008 (Público 08-04-01). Based up on the official numbers and calculations, and from an economic point of view, the benefits of the Alqueva dam project will not pay its costs. Some authors suggest that agricultural water demands, and thus the projected newly 2

The Alqueva dam has 3150 hm3 of useful capacity, which is more than 50% of present dam useful capacity in Portugal (6000hm3). Its water surface is 250 km2 (25000 ha). Its margins more than double the entire Portuguese coast from Caminha, in the northern Entre Douro e Minho region, to Vila Real de St. António, in the southern Algarve region (1600 km length). The project includes 17 other intermediate dams, 18 main elevation stations, 17 main open-air canals (680 km length), 96 smaller reservoirs, 96 secondary elevation stations, secondary underground canals (4400 km length), access roads to parcels (1000 km length), and a drainage network (1000 km length). To be supplied to farms on the above plateau, water must be elevated 90 m in the Alqueva dam elevation station. On the Alqueva dam figures see INAG (2001).

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irrigated area, are overestimated (see Costa, 2000; Vergés, 2001a,b), particularly at the prices announced by the government (Vergés, 2001a,b). Vergés (2001a,b) proposes a renegotiation of the amount of water devoted to irrigation, which he calls the Alqueva Irrigation Agreement (AIA). The idea is to downscale the irrigation component of the project, reducing its ecological impacts, and making the project more viable from an economic point of view. This paper supports the AIA proposal, particularly its sunk costs tariff option. It illustrates three hidden costs of the Alqueva dam – the Albufeira Convention, the predicted expenditure allocation in the Portuguese River Basin Plans and National Water Plan, and the present Portuguese government refusal of Commission’s proposals for the midterm review of the CAP that could be largely reduced with the AIA sunk costs tariff option. This option would allow the 139 m level to be maintained in the dam. Many similar factors are behind the Alqueva dam and the Rhone to Barcelona aqueduct projects, two large European water infrastructures. In both projects demands are overestimated, irrigation demands and the correlative lack of water pricing are an important part of the story, EU support is high, the absence of project alternatives is notorious, the subsidiarity principle applied to water is disrespected, domestic political support is strong (although not necessarily for the best reasons). The Alqueva dam hidden cost story presented in this paper certainly has a Rhone to Barcelona aqueduct counterpart.

2. The Rhone to Barcelona aqueduct and the Alqueva dam projects In the first phase report coordinated by B. Barraqué (1998) on the evaluation of the Rhone to Barcelona aqueduct project, Francesc Magrinya shows that population projections in the Barcelona area are overestimated by water planners compared to

4

traffic planners. Population in the Metropolitan Region of Barcelona is decreasing and thus it is decreasing in the area served by the Agùes Ter Llobregat (ATLL). Therefore, demands for the ATLL water are probably overestimated. Josep Vergés finds no demand or cost justification for the Rhone to Barcelona transfer. He presents several more plausible and economically efficient alternatives to the projected transfer. Pricing irrigation and releasing some Ebro’s water from agriculture to Barcelona is one of the alternatives. The pros and counters of the several alternatives seem to have been absent from the public discussion of the Rhone to Barcelona aqueduct project. Michel Drain contribution analyses the Rhone to Barcelona transfer mainly from a subsidiarity point of view. According to the author, the subsidiarity principle applied to water implies that local or regional water demands should be locally or regionally supplied, unless it is impossible to do so. The Rhone to Barcelona transfer has not followed the subsidiarity principle, as local or regional alternatives have not been explored or discussed. Additionally, the benefits don’t pay the costs of the transfer. Michel Drain provides then excellent insights on the political scene/constraints behind water allocation decisions in Catalonia. Although the Rhone to Barcelona transfer is not consistent with the subsidiarity principle and with economic efficiency, there are strong political (not necessarily the best) reasons supporting the project. Among others, Michel Drain shows the desire of political authorities to protect Lleida farmers use of Ebro’s water, and beyond, to expand the irrigated area thanks to a new reservoir now built on the Segre at Rialb. Finally, Esperanza Alcaín Martinez shows that Spanish law would allow reallocating water from farmers to Barcelona, temporarily or permanently, with or

5

even without financial compensation. Legally speaking, a Segre to Barcelona water linkage is an alternative to the projected Rhone to Barcelona water transfer. The Alqueva dam project has many stories similar to the ones concerning the Rhone to Barcelona aqueduct project for water transfer. Agricultural water demands have been overestimated. Benefits don’t pay the costs of the project. The subsidiarity principle has not been followed, as the Albufeira Convention supports a virtual water transfer, via Spain, from northern rivers to the Guadiana River, in order to fill the Alqueva dam. Alternatives to the project have not been analysed or presented for public discussion of the pros and the counters. Finally, strong political (not necessarily the best) reasons have supported the project. The project has had the support of all the political parties of the country. The next sections of the paper discuss a scenario attempting to minimize, expost (now that the dam is already installed), the economic losses and the ecological impacts of the Alqueva dam project, through a bargaining with the projected irrigation area.

3. The Alqueva Irrigation Agreement The AIA is a set of alternative proposals to reduce the consumption and the quality impact of irrigation through a cooperative agreement with farmers in the Alentejo region (Vergés, 2001a,b). The AIA does not fully implement the full cost recovery principle recommended by the recently approved WFD (2000/60/EC). However, some of the options for an agreement would allow the 139 m level to be maintained. The Alqueva plan will take 15 years to irrigate half the area and will be completed only in 30 years. Investment in irrigation infrastructure is beginning and

6

will not end until 2030. Therefore, savings to tax payers are still possible through reduction of the irrigation infrastructure. Vergés (2001a,b) first option for an agreement is to reduce the Alqueva plan large assignation of water to farmers in the early stages, increasing hydroelectricity generation in these stages. His second option for an agreement is to adapt the plan to 66% of current irrigation, which is equivalent to a competitive irrigation forecast at the liberalized world prices. His third option for an agreement is to introduce a defensible water tariff that is not full cost. Two tariffs are analysed. The sunk costs tariff (9 eurocents per cubic meter) excludes the main infrastructure as a sunk cost. The equitable tariff (20 eurocents per cubic meter) shares the cost of the main infrastructure with farmers. The tariff announced for 2008, in the year 2001, by the former Portuguese socialist government (8 eurocents per cubic meter) is in fact very similar to the sunk costs tariff option proposed by Vergés (2001a,b). According to Vergés (2001a,b), the AIA will allow water savings going from 8% to 78% of current planned water use and investment savings going from 31 to 311 million euros. With the sunk costs tariff, water consumption by farmers would be reduced by 60% (being 40% of the current plan), which would permit the 139 m level to be maintained in the dam, and investment savings would be about 222 million euros.

4. The hidden costs of the Alqueva dam 4.1. International water law and the Albufeira Convention International law applies differently to national laws. No power dictates and enforces international law. Except for treaties or conventions ratified by governments, international laws are not binding (Cano, 1989; Dellapenna, 1999). “International soft

7

law” refers to the set of principles adopted or recommended by international organizations, such as the International Law Commission (ILC) and the International Law Association (ILA). More than 280 treaties dealing with water issues have been signed by nations (Frey, 1993). For instance, in 1885, Mexico complained about water shortages on the Rio Grande, caused by the US increasing water diversions for irrigated agriculture. In 1906, the US and Mexico signed the Rio Grande Irrigation Convention to guarantee Mexico a quantity of river water (Utton, 1996a). The 1998 Albufeira Convention provides another bilateral example. Five years after release of the 1993 Spanish Hydrologic Plan, Portugal and Spain signed a Convention to establish rules for allocating the water of transnational river basins (INAG, 1999; Serra, 1999). Five alternative principles emerge from these bilateral agreements: absolute sovereignty (a nation can do what it wants with the water), absolute integrity of a river (no one can change the natural flow), community of property (equitable use by all, not causing unreasonable harm to any other user), optimal development (development without regard to national boundaries), and restricted sovereignty (shares tied to criteria, such as historic use, arable land, or population) (Frey, 1993; Correia, 1999b; Vlachos, 1999). The first principle is contested by downstream users, the second by upstream users, whereas the other three involve arguments about what is meant by “reasonable”, “equitable”, and “optimal”, as well as the choice of allocation criteria. The 1998 Albufeira Convention is a mixture of the third and fifth principles. However, the EU WFD supports the fourth principle. The first agreement on water use dates to 1815. After the fall of Napoleon, the European powers accepted free navigation on international rivers. At this time, human consumption was small and industrial uses were rare, as was irrigation. After World

8

War I, these latter uses became more important (Cano, 1989). By 1970, the UN General Assembly had instructed the ILC to study the “Law of Water Courses for Purposes Other than Navigation”. After several decades of deliberation, the ILC released its recommendations (Frey, 1993). The ILC published its Draft Articles in 1994 (Utton, 1996a). In 1997 the UN approved the ILC recommendations (Dellapenna, 1999)3. The ILC recommendations are still to be ratified. In the meantime, other multilateral agreements were signed, such as the 1972 Oslo Convention, the 1976 Barcelona Convention, the 1991 Espoo Convention, the 1992 Helsinki Convention, and two 1992 Paris Conventions (INAG, 2000; INAG, 2001).4 Among non-governmental organizations, the International Law Association (ILA), founded in 1873, has been particularly active. The work of its Committee on international rivers resulted in the 1966 “Helsinki Rules” (ILA, 1967). The cornerstone of the Helsinki Rules is the concept of “international basin drainage” (Dellapenna, 1999), defined over a geographic area of two or more states, determined by the watershed limits of the waters flowing into a common terminus. Three doctrines emerge from international laws- the Harmon Doctrine, the ILA Helsinki Rules, and the ILC Recommendations. In 1885, asked about the rights that Mexicans had to the Rio Grande waters, US Attorney General Judson Harmon said that the US was entitled to do as it pleased with the waters flowing in its territory, without regard for downstream users. The concept of absolute sovereignty was born,

3

1997 New York Convention on the Law of Water Courses For Purposes Other Than Navigation (Dellapenna, 1999). 4 The 1972 Oslo Convention attempts to protect all seas from pollution from ships and airplanes. The 1976 Barcelona Convention attempts to protect the Mediterranean, whereas the OSPAR Convention attempts to protect the North Atlantic Sea. The 1991 Espoo Convention regulates transboundary environmental impacts, whereas the 1992 Helsinki Convention regulates transboundary watercourses and international lakes. The UN Economic Commission for Europe has promoted the 1992 Helsinki Convention. This Convention adopts the Polluter Pays Principle (PPP) as well as the principle of sustainable development.

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also known as the Harmon Doctrine. The world has spent much of the twentieth century fighting over it (Utton, 1996a). The 1966 ILA Helsinki Rules are based on the sharing of international waters (Utton, 1996a; Dellapenna, 1999). They address the equitable use of water, pollution, navigation, and conflicts between states about international basins (Cunha et al., 1980; Dellapenna, 1999). The equitable use of water establishes that all states that have a portion of an international river basin have the right to a reasonable share of its waters. Reasonable sharing considers geography, hydrology, climate, past and present uses, the economic and social needs of the states, the population depending on the waters, the cost of alternative ways to satisfy the needs of each state, and monetary compensation. The fact of past and present uses being considered in reasonable sharing gives an incentive for countries to over invest in water infrastructures and uses. The Helsinki Rules define pollution as any change in the quantity or quality of water caused by human intervention (Cunha et al., 1980; Dellapenna, 1999). Based on the principle of equitable use, every state must avoid new forms of pollution. If avoidance is impossible, states should negotiate and the harmed states should be compensated. To solve water conflicts in international basins, states should follow the UN recommendations. When facing water conflicts, states should constitute commissions of inquiry and reconciliation, and, if necessary, present their claims to a permanent court or the International Court of Justice. The third legal doctrine is provided by the ILC recommendations (Dellapenna, 1999). The recommendations follow very closely the Helsinki Rules. They attempt to better define “equitable use” and “non-significant harm”. In the Helsinki Rules, “equitable use” has applied mainly to water quantity issues, whereas “non-significant

10

harm” applies to transboundary pollution issues. Utton (1996b) suggests that “equitable use” should be used in water quantity matters, so as to avoid granting veto power to downstream states, and that “non-significant harm” should be limited to cases of environmental damage. This approach has been followed in the Albufeira Convention. Most Iberian transnational rivers have their origins in Spain and flow to the Atlantic Ocean through Portugal. Portugal is rich in surface waters (Margat, 1989). But Portuguese water dependence on Spain is enormous (Table 1; Margat, 1989; Correia, 1999b; Serra, 1999). About two-thirds of Portugal is located in transnational basins (Correia, 1999b). The Portuguese parts of the Douro, Tejo, and Guadiana River Basins comprise 62% of the country and 36% of the basins (Cunha, 2000). Portugal gets from Spain 25 km3 of water in these rivers, 40% of its water (Barraqué, 1997). Portugal’s vulnerability is high because of its downstream position (Correia, 1999b). Table 1 Renewable Water Resources in EU-12 Countries Country

Total flow formed in country (km3)

Imported flow Imported flow from EU from non EU neighboring neighboring country country (km3) (km3)

Total flow

(km3)

Renewable water resources per capita (m3/year)

Belgium Denmark France F.R. Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain United Kingdom

8 11 170 79 45 50 179 1 10 34 110 118

9 2 3 9 0 0 1 4 80 32 1 2

0 0 12 84 14 0 7 0 0 0 0 0

17 13 185 172 59 50 187 5 90 66 111 120

1715 2548 3367 2817 5902 14045 3284 13661 6213 6433 2874 2122

EU-12 total

816

n.a.

116

932

2897

Source: Adapted from Margat (1989) (1) Per capita water resources relate to the 1985 population

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In 1998, Portugal and Spain signed the Albufeira Convention, valid for seven years. The Convention replaces earlier bilateral agreements for the Douro, Minho, Lima, Tejo, and Guadiana Rivers.5 It may be affected by the EU WFD, approved a year and a half after the Convention, but it probably will take years. The Albufeira Convention follows very closely the recommended rules of international water law.6 The “equitable use” of water is used in allocating water quantity. “Non-significant harm” is limited to cases of environmental damage. All the international recommendations to solve potential conflicts are adopted. The Convention creates an intergovernmental Commission to exchange information concerning hydrologic data, new water uses, and transboundary environmental impacts. Up to the present, the works of this Commission are very much unknown to the public. Except for the Lima River, the Albufeira Convention establishes annual guaranteed stream flows to Portugal in normal years. Table 2 shows the guaranteed stream flows for normal years. The critics complain that the guaranteed stream flows have been set too low (APRIL et al., 1999; CNA, 1999; Correia, 1999a). Spain has promised to supply only 35% of the water that has flowed to Portugal in recent decades. Further, the guarantees apply only in normal rainfall years. In exceptionally dry years, Spain is obliged to little. In the Guadiana River, the definition of a normal 5

The 1864 “Borders Agreement” (“Tratado das Fronteiras”) is the first bilateral agreement on water resources between Portugal and Spain. It identified the international river streams and established their common use. The first bilateral hydroelectric agreement between Portugal and Spain dates to 1927. The 1927 agreement regulated both countries use of the Douro River international section for hydroelectric power development. The 1964 agreement on the Douro River extended and updated the 1927 agreement. In 1968 another agreement shared both countries use of the international sections of the Minho, Lima, Tejo, and Guadiana Rivers for hydraulic development purposes. The 1864, the 1964, and the 1968 bilateral agreements have been called into the 1998 Albufeira Convention (INAG, 2001). On these bilateral agreements see INAG (2000, 2001).

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year depends also on the volume of water accumulated by Spain in its dams. By transferring water from northern basins to the Guadiana River Basin, Spain will be reducing the number of exceptional dry years in the Guadiana River Basin (Costa, 1999, 2000, 2001).7 The “non-significant harm” rule is expected to mean that Spain supplies Portugal at least the ecologically needed stream flows in dry years, once the intergovernmental Commission establishes them.8 The Portuguese transnational River Basin Plans (RBPs) and National Water Plan (NWP) contain some proposals on these. Table 3 lists the guaranteed annual stream flows and the Portuguese proposals.9 The proposed ecological stream flows are close to or surpass the annual stream flows guaranteed in normal years. This result supports the claim that the Convention guarantees Portugal extremely low stream flows. The 2000 Spanish national water plan was first summarized in the Libro Blanco (MMA, 1998). The plan is a scaled-down version of the 1993 Hydrologic Plan. The idea of connecting all northern and southern basins, contained in the 1993 plan, was dismissed as technically and economically infeasible. The new irrigated agricultural areas have been much reduced. However, the plan still considers some river basins, such as the Segura basin, as having a structural deficit of water that should be supplemented from other (northern) basins.

6

The 1998 Albufeira Convention followed very closely the rules provided by the 1991 Espoo Convention (on transboundary environmental impacts) and the 1992 Helsinki Convention (on protection and use of transboundary watercourses and international lakes) (INAG, 2001). 7 A dry year will happen every ten years in the Minho, Douro, and Tejo River Basins. However, the frequency in the Guadiana River Basin depends on the use that Spain makes of its dams (Público 1215-98; INAG, 1999). 8 By ecological stream flows it is meant the stream flows that will prevent environmental damage on the Portuguese side. 9 See INAG (2001) for the Portuguese proposals on monthly ecological stream flows.

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Table 2. The Albufeira Convention Guaranteed Stream Flows River Basin

Guaranteed Flow 30 Year Average Average Flow at the Border Average Flow Guaranteed by Spain (hm3/year) (hm3/year) (%) 3700 9740 38%

Minho Douro

3500

9000

39%

Tejo

2700

9500

28%

600

1540

39%

10500

29780

35%

Guadiana

Total Convention

Source: Adapted from INAG (1999), APRIL et al. (1999), and Vergés (2001b).

Table 3. Annual Guaranteed Stream Flows and Portuguese Annual Ecological Stream Flows Proposals River Basin

Minho

Stream flows Guaranteed Ecological (1) average (2) very dry year very humid year (hm3) (hm3) (hm3) (hm3) 3700 2627 1421 4449

Lima

n.a.

506

174

(2)/(1)

0,71

958 n.a.

Douro

3500

3081

1118

5112

0,88

Tejo

2700

3032

1000

5848

1,12

600

1766

162

4140

2,94

Guadiana

Source: Adapted from INAG (2000, 2001)

The Portuguese priority in the Convention was to guarantee the stream flows needed for the Alqueva dam project in the south. The flow of 600 hm3 guaranteed for the Guadiana River is just equal to the water to be transferred from the dam to irrigated agriculture in the Alentejo region (550 hm3), and the southern tourist region

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of Algarve (50 hm3) (INAG, 2000; INAG, 2001).10 The Portuguese transfers may be supplemented by Spain. Portugal gets more water in the Guadiana River, for example, when Spain transfers water to southern regions (Costa, 1999, 2000, 2001). Table 4 shows 1996 and projected available water and water use for the Portuguese side of the Douro River Basin. Supplies could contract in the Douro. Although Spain has selected the Ebro River as its main northern supply basin (Público, 09-06-00), the Douro is very close to the Ebro (50 km) and water could be transferred in the future. Stream flow reduction causes already an annual loss of 44,9 million euros worth of hydroelectric power in the Douro. The loss is projected to rise 39 percent, to 62,3 million euros (Público, 03-26-99).11

Table 4. Water Use in Portugal R iver B as in

Cu rrent (19 96 ) P redict ed (hm 3) ( hm 3)

D ouro A v ailable W ater W ater U se W ater U se In te ns ity

20 140 2 500 12 %

1 778 0 290 0 16%

T ejo A v ailable W ater W ater U se W ater U se In te ns ity

15 340 3 270 21 %

1 274 0 402 0 32%

G uadian a A v ailable W ater W ater U se W ater U se In te ns ity

3 880 560 14 %

221 0 168 0 76%

Source: Adapted from Cunha (2000)

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Besides these water transfers, in Portugal water is being transferred between the Douro River Basin and the Tejo River Basin (Sabugal-Meimoa Transfer) to supply irrigated agriculture in Cova da Beira. 11 The loss is projected to rise to 12,5 million of contos in the absence of water transfers in Spain from the Douro to the other basins. In the presence of a 1000 hm3 water transfer, the loss is projected to rise 72%, to 15,5 millions of contos. These numbers are from EDP, the company that supplies electricity in Portugal.

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Northern rivers’ stream flow reduction is the first major hidden cost of the Alqueva dam project. In exchange of guaranteed stream flows needed for the Alqueva in the south, the Albufeira Convention supports this reduction. The reduction does not respect the subsidiarity principle applied to water. With the AIA sunk costs tariff option, the reduction could be renegotiated in 2005 (end of the first seven year period of the Albufeira Convention).

4.2. The Portuguese River Basin Plans and National Water Plan The RBPs and NWP cover 20 years, split in three periods - the short run (2000-2006), the medium run (2007-2012), and the long run (2013-2020).12 Planned investments are concentrated in the first period. Considering the likely budgetary effects of the EU Eastern Enlargement, the first period is probably the last time Portugal will have access to EU structural funds. Further, given the difficulties faced by the RBPs, such as lack of data, they surely will be replaced before the end date is reached. In fact, the WFD mandatory first RBMPs cover only fifteen years, with the first three years provided for data collection. Nevertheless, the experience that the water administration has gained with the RBPs will be useful in development of the RBMPs (INAG, 2000). Supply development, demand management, pollution control, water pricing, and inappropriate institutional arrangements are discussed in the RBPs and the NWP. Although the RBPs and the NWP claim their focus is on water demand, their concern is mainly with water supply. Nonetheless, the RBPs and the NWP call for demand management to try and reduce conflicts among users. The RBPs propose the Water Institute (INAG) to be the regulator in multiple use dams, such as the Alqueva dam.

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Other demand management proposals charge for water under public domain, recovering the costs of supply.13 The RBPs and the NWP identify water legislation dissemination as a problem. The number of government agencies involved with water resources and overlapping responsibilities create difficulties for action. The NWP proposes the creation of a National Water Authority (INAG, 2001). It would be a single government agency under MAOT that would centralize all government responsibilities for water and manage the river basins (INAG, 2001). The RBPs and NWP point out that water quality monitoring is insufficient, ecological monitoring is nonexistent, stream flow monitoring is experiencing increasing difficulties, and solid stream flows (sediments) are not monitored. Among other things, the administration lacks people prepared to perform these tasks. The DRAOTs are responsible for water quality monitoring, whereas INAG is responsible for stream flow monitoring. The RBPs are organized into eleven programs of measures. For the five transnational river basins, 71 % of predicted expenditures go to measures to improve water supply, and 20% go to improve water quality (INAG, 2001). There are differences among river basins. The emphasis on water supply increases from north to south. The NWP has seven objectives and sixteen programs of measures that have correspondence with the RBPs objectives and programs. Tables 5 and 6 show predicted expenditure by time period and respectively by objective and program.

12

2006 is the last year of Agenda 2000 and corresponding Community Framework Support III. 2012 is the time horizon of current Spanish water plans. 2020 was arbitrarily chosen for the long run. It took into account, however, the time horizon of returns for the major investments. 13 Recently (Público, 10-09-02) the government has announced that water prices to domestic consumers will be uniform in the entire country. The role of prices in water allocation is still barely understood by policy decision makers.

17

Total predicted expenditure is 8852,840 million euros by 2020. About 75% of this expenditure (6660,543 million euros) is planned in the short run (2000-2006), before Portugal looses its access to EU structural funds. Sustainable Management of Demand (objective 3), which is mainly supply development, gets 63% of expenditure (5632,181 million euros, 4198,661 million euros before 2006). Program 6, supply development to economic activities, corresponds to objective 3 and gets 53% of expenditure (4711,650 million euros, 3523,972 million euros before 2006).

Table 5. The NWP predicted expenditure by period of time and objective TOTAL

2001-2006 2007-2012 2013-2020

OBJECTIVES E1- Environmental Sustainability

2426,357 1999,426

E2- Integrated Management of Water Resources

215,371

211,560

100,722

108,992

5632,181 4198,661 1058,858

374,662

503,561

E3- Sustainable Management of Water Demand

293,847

E4- Economic and Financial Sustainability

12,096

11,338

0,379

0,379

E5- Institutional Framework Reform

104,683

44,972

26,546

33,165

18,710

8,884

5,158

4,669

155,251

103,416

28,402

23,434

8852,840 6660,543 1435,436

756,861

E6- Citizens Involvement E7- Applied Research

TOTAL

Source: INAG (2001)

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Table 6. The NWP predicted expenditure by period of time and program TOTAL

2001-2006 2007-2012 2013-2020

PROGRAMS P1- Water Resources Quality Improvement

305,873

P2- Pollution Reduction P3- Environmental Protection P4- Water Resources Improvement P5- Restrictions to Use and Water Resources Management P6- Water Supply Development P7- Water Resources Conservation

242,979

33,260

29,634

1882,663 1629,987

111,317

141,359

237,822

126,460

70,794

40,567

78,321

59,162

10,385

8,774

425,240

234,684

90,337

100,218

4711,650 3523,972

890,319

297,358

920,532

674,689

168,539

77,304

0,564

0,449

0,050

0,065

P9- Application of the Economic and Financial Regime

11,532

10,774

0,379

0,379

P10- Inplementation of the Albufeira Convention

29,564

9,612

8,579

11,373

P11- Institutional Framework Reform

75,119

35,360

17,967

21,792

P12- Citizens Involvement

15,358

6,953

4,165

4,240

3,352

1,930

0,993

0,429

P14- Monitoring

79,369

59,666

9,891

9,811

P15- Research

63,148

40,024

14,365

8,759

P16- Evaluation of PNA and PBH

12,729

3,726

4,140

4,863

8852,835 6660,428 1435,480

756,926

P8- Water Trade

P13- Users Involvement

TOTAL

Source: INAG (2001)

The RBPs and NWP define three objectives for agriculture: the increase of technical efficiency, the increase of water use intensity, and an increase in the availability of water. The first objective is linked to modern irrigation techniques that use water more efficiently than traditional techniques. The second objective arises

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because public water resources for agriculture have not been fully used. For instance, in the Alentejo region, farmers had problems accessing land (Costa, 2000). This problem persists, reducing water demand. The objective to increase water supply is most common in the south and is done, for instance, with the Alqueva dam project. For pollution, the reduction of agricultural emissions through the adoption of BMPs is seen as the only alternative. New studies are needed to define vulnerable areas in accordance with the Nitrates from Agriculture Directive and advise farmers on BMPs (INAG, 2000, 2001). The predicted expenditure allocation in the RBPs and the NWP is driven by supply development, particularly the Alqueva dam project in the south. The AIA sunk costs tariff option would allow the reallocation of some of the expenditure and to curb down this second and important hidden cost of the Alqueva dam project.

4.3. Portugal and the Commission proposals for the midterm review of the CAP Recently (Commission, 2002), the European Commission made a proposal to reform the Common Agricultural Policy (CAP). The proposal has appeared in the context of the midterm review of the Agenda 2000 CAP reform, approved in 1999 and to invigorate up to 2006. Such a radical proposal, as the one advanced by the Commission, was unexpected in the context of the midterm review. The Commission considers the dynamic modulation of direct payments and their complete decoupling of production. Among others, the need to advance with such proposal comes from the budgetary pressures with the EU Eastern enlargement and from the desire to make stronger the EU position in the next round of negotiations of the World Trade Organization (WTO) that follows the Doha agreement. The extension of current direct

20

payments to the new Eastern member countries of the EU is unsustainable (Swinbank and Tangermann, 2000). Direct payments are entirely supported by the EU budget. Presently, the annual budget of the EU is about 95 thousand million euros and the agricultural component (FEOGA) absorbs 40 thousand million euros (42%). In the Doha agreement, the EU member states have decided unanimously to reduce the support to farmers provided by agricultural policies that distort the markets and penalize the less developed countries. Since Agenda 2000 CAP has gained two pillars. The first pillar provides support to farmers through the Common Market Organizations (CMO’s). It guarantees prices and gives direct payments. However, even direct payments are not fully decoupled from production. Farmers must plant some crops or hold some animals to receive them. Most of the first pillars’ benefits go to the typical Northern and Central European productions - milk, beef and cereals. The first pillar of the CAP represents 84% of the FEOGA (33,6 thousand million euros). The second pillar of the CAP provides support to other functions of the EU agriculture (multifunctionality): production of quality products, health safety products, traditional products, products with local origin, etc; support to organic farming, Less Favoured Areas (LFA), landscape preservation, environmental protection, protection of the territory, cultural heritage, public health, animals well being, etc. The second pillar of the CAP represents only 16% of the FEOGA (6,4 thousand million euros). This pillar contains, for example, the agri-environmental payments, the LFA payments, and the LEADER+ program of the current CAP. The Portuguese farmers receive on average from the CAP five times less than their European fellows, in spite of having less than one third of their income. Comparing the net value added (NVA) per agricultural work unit (AWU) in Portugal

21

and in the remaining countries of the EU, Portugal is at the bottom (GPPAA, 2000). However, the situation is different when CAP payments are not considered. Without CAP income transfers, NVA per AWU is smaller in Portugal than in the United Kingdom (UK) but higher than in Ireland, Germany, Luxemburg, Finland, Austria and Sweden (GPPAA, 2000). CAP first pillars’ direct payments have been introduced in the 1992 MacSharry reform to provide compensation for the reductions in price support. Agenda 2000 has strengthened these payments and kept their allocation among farmers and regions in the EU based in the historical levels of productivity and herds. Together with the establishment of quotas to national productions and with the introduction of the set aside, this has been the chosen way to avoid surpluses and subsidies to exports, the latter largely restricted by the WTO. This way meant, however, the maintenance of the historical unequal distribution of the benefits of the CAP. About 20% of the European farmers receive 80% of CAP benefits (Commission, 2002). To receive CAP first pillars’ direct payments, Portuguese farmers must plant and hold respectively the typical Northern and Central European crops and herds. This means a wealth sacrifice, from the points of view of the European economy, the Portuguese economy, and the economy of the Portuguese farmers. In addition, Portugal is largely penalized in the amount of payments it receives, because its historical productivities are very low and the national quotas attributed by the EU are very limiting of the country’s agricultural growth. The current CAP is not good for Portugal or its farmers. It is not good for Europe. It is good for some (very few) European farmers.

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The Commission midterm review proposals are: dynamic modulation of the CAP first pillars’ direct payments and decoupling of these payments from production (Commission, 2002). The first measure aims to reduce about 20% the amount of direct payments (3% annually, in a period of 6 to 7 years, from 2004). Farms occupying less than two AWU and receiving less than 5000 euros annually are exempt of this measure. For farms occupying more than two AWU the 5000 euros exemption benchmark is increased by 3000 euros per extra AWU. This measure creates a ceiling to payments received by farmers of 300 thousand euros annually. According to the Commission, about 4% of the Portuguese farmers would be affected by the proposed reduction of CAP first pillar’s direct payments. The great majority (96%) would not be affected. However, the 4% of the farmers that would be affected presently receive almost two thirds of the payments to Portuguese farmers, 237 million euros over 380 million euros (Público, 10-02-02). The saved amounts of money in each Member State in this way (about six thousand million euros annually in the EU) would be transferred to the second pillar of the CAP in the form of national envelopes, supported entirely by the EU, and having as allocation criteria farmed area, generated jobs, needs for agricultural development, etc., instead of the historical greater support of the CAP to some of the farms. Thus, most of the Portuguese farmers (96%) could see the payments they currently received from the CAP increased with this proposal, as they would not be affected by the CAP first pillars’ payments reduction and they could be affected by the CAP second pillar’s payments reinforcement This second pillar reinforcement would be done mainly at the expenses of first pillar payments reductions to the other 4% of Portuguese farmers, as the Commission considers national envelopes instead of

23

an European envelope in the allocation of the money that would be transferred trough modulation from CAP first to second pillar’s.The second measure aims to completely disconnect from current production CAP first pillars’ direct payments, which would allow to give an end to the system of quotas This is positive for Portugal. Portuguese farmers could finally make the productions more appropriated to the territories where they operate without loosing the payments. Also, they would not be subject anymore to penalties when the country exceeds the quotas. However, direct payments to farms would be computed based on current allocation of payments to farms (that is, based on the historical greater support of the CAP to some of the farms). Since no deadline is established for these payments, the proposed measure freezes and perpetuates the historical unequal support to farms by the CAP, across Member States and within each Member State. As they are, the Commission proposals for the midterm review of the CAP would help little to correct the unequal distribution of CAP payments across Member States within the EU. Nonetheless, it seems from the above that Portugal should support these proposals and demand more of the reform. The position of the Portuguese government has been instead to refuse tout court the proposals (see MADRP, 2002). According to the Commission (Público, 10-02-02), in 2000 only 4% of the Portuguese farmers (about 10330 farmers) have received payments above 5000 euros and only ten have received payments above 300 thousand euros. CAP first pillar’s payments to these farmers would be reduced by the Commission proposal of dynamic modulationTable 7 shows that the Alentejo region represents 9% of the number of farms and 50% of the agricultural area in Portugal. Relative to the country, large-scale

24

and extensive farms dominate the region and most of its farmers (81%) benefit from the CAP first pillars’ direct payments and second pillars’ LFA payments.

Table 7. Farms and CAP payments beneficiaries in the Alentejo region and in Portugal

Number of farms (A)

The Alentejo Portugal (1)/(2) region (1) (2) % 35906 415969 9%

Agricultural area

1924044 3863116

Agricultural area per farm

53,59

Number of beneficiaries (B)

28928

% Beneficiaries (B)/(A)

81%

50%

9,29 577% 265684

11%

64% 126%

Source: adapted from INE (2001) and INGA (2001)

Table 8 shows that the Alentejo region has 11% of the beneficiaries and receives 41% of the amount of CAP direct and LFA payments in Portugal.14 CAP first pillars’ direct payments are the bulk of these payments in the Alentejo region and in Portugal. Average direct payments received by farmers are above 5000 euros for the Alentejo region while for the country as a whole (including the Alentejo region) they are well below 5000 euros. Additionally, farms in the Alentejo region are large-scale and (also in labour) extensive farms. Therefore, although only 4% of the Portuguese farmers would be affected by the Commission dynamic modulation proposal, many farmers in the Alentejo region would be affected and would see their current CAP first pillars’ payments being reduced.

14

That is, 11% of the farmers in Portugal receive 41% of the CAP support.

25

Table 8. CAP payments to farms in the Alentejo region and in Portugal CAP PAYMENTS DIRECT PAYMENTS (A) Crops Arable crops Olive oil Animals Bovines Nursering cows Sheep and goats LFA PAYMENTS (B) Animals Areas TOTAL (A)+(B)

Number of beneficiaries Amount in million euros Amount per benificiarie in euros The Alentejo Portugal The Alentejo Portugal The Alentejo Portugal region (1) (2) (1)/(2) region (3) (4) (3)/(4) region (5) (6) (5)/(6) n.a. n.a. n.a. 219,581 513,123 43% n.a. n.a. n.a. 24361 229764 11% 142,048 316,607 45% 5831 1378 423% 10587 139271 8% 109,516 198,621 55% 10344 1426 725% 17867 103628 17% 18,256 43,5251 42% 1022 420 243% 11248 1683 3429 8772

88719 37891 29557 28819

13% 4% 12% 30%

77,533 196,516 5,083 29,3892 38,537 58,923 33,719 61,7512

39% 17% 65% 55%

6893 3020 11239 3844

2215 776 1994 2143

311% 389% 564% 179%

7206 5110 5625

71201 56120 63552

10% 9% 9%

10,510 46,1288 6,070 27,1296 4,439 18,9992

23% 22% 23%

1458 1188 789

648 483 299

225% 246% 264%

28928

265684

11%

230,095 559,252

41%

7954

2105

378%

Source: adapted from INE (2001)

With the current system of payments and with minor changes in their patterns of production, some farmers in the Alentejo region are expecting to capture more of the CAP current first pillars’ payments using the cheap water of the Alqueva dam.15 With the Commission’s proposal of decoupling and fixing (or freezing) the payments, the opportunity would be lost. Therefore, from the point of view of these farmers, the Commission proposals for the midterm review of the CAP should be refused. This is the third major hidden cost of the Alqueva dam. By downscaling irrigation, the AIA sunk costs tariff option would decrease the capacity of some farmers in the Alentejo region to capture more subsidies with the current system of payments and would allow the Portuguese government to have more flexible, constructive, and public

15

Maize and sunflower would be the main productions of these farmers to capture more of the CAP first pillars’ payments. With no changes in the quotas attributed to Portugal, CAP first pillar’s payments to these farmers would be increased at the expenses of reductions on these payments to other Portuguese farmers.

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oriented positions towards the Commission proposals for the midterm review of the CAP.16

5. Conclusions Water transfers in some countries of the European Union (EU) are still driven by supply or the needs model. The Rhone to Barcelona aqueduct and the Alqueva dam projects provide two examples of supply driven water transfers. International water soft law somehow invites countries to over invest in water infrastructures and uses, in order to make the result of reasonable sharing of international waters more favorable to them. Many similar factors are behind the Alqueva dam and the Rhone to Barcelona aqueduct projects, two large European water infrastructures. In both projects demands are overestimated; irrigation and the lack of water pricing is an important part of the story; the extra benefits don’t pay the extra costs; the absence of analysis and public discussion of project alternatives is notorious; the subsidiarity principle applied to water is disrespected; and the political support is strong, although not necessarily for good reasons. The AIA is an attempt to minimize, after the fact (ex-post), the economic losses and the ecological impacts of the Alqueva dam project. The AIA proposes to downscale the irrigation component of the project, which is a major reason of its bad performance, and improve its economic and ecological viability. The long run (2008) water price for irrigation announced in the year 2001 by the former socialist government (8 eurocents per cubic meter) is very close to the sunk costs tariff

16

As an alternative to simply refuse the Commission proposals for the midterm review of the CAP, the Portuguese government could try to negotiate with the Commission a compensation for the farmers affected by first pillars’ payments reductions in terms of the second pillars’ support to investment and agri-environmental payments.

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proposal of the AIA (9 eurocents per cubic meter). At these prices, the planned irrigation area is overestimated. Therefore, savings are still possible for taxpayers, if the irrigation infrastructure is downscaled and the level of water in the dam brought down to 139m, with considerably less ecological impacts. Three major hidden costs of the Alqueva dam make the AIA, particularly its sunk costs tariff option, even more attractive: the Albufeira Convention, the predicted expenditure in the RBP and the NWP, and the Portuguese government refusal of Commission’s proposals for the midterm review of the CAP. The Albufeira Convention supports northern rivers’ stream flow reduction to guarantee streams flows needed to the Alqueva in the south, which disrespects the subsidiarity principle applied to water. The predicted expenditure allocation in the RBPs and the NWP is supply oriented and driven by the Alqueva dam project. The Portuguese government refusal of Commission’s proposals for the midterm review of the CAP is in part linked to the situation of some farmers in the Alentejo region and the opportunity that Alqueva’s cheap water would give them to capture more of the current CAP first pillar’s payments. With the AIA, particularly with its sunk costs tariff option, the reduction of northern river stream flows of the Albufeira Convention could be renegotiated in 2005 (end of the first seven year period of the convention); some of the expenditure of the NWP could be reallocated to other objectives, programs or regions; the Portuguese government could have more constructive positions towards Commission’s proposals for the midterm review of the CAP.

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