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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

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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

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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

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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

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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, ex-

post (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

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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

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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

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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

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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

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

Total flow Imported flow Imported flow Total RenewableCountry formed in from EU from non EU flow water

country neighboring neighboring resourcescountry country per capita

(km3) (km3) (km3) (km3) (m3/year)

Belgium 8 9 0 17 1715Denmark 11 2 0 13 2548France 170 3 12 185 3367F.R. Germany 79 9 84 172 2817Greece 45 0 14 59 5902Ireland 50 0 0 50 14045Italy 179 1 7 187 3284Luxembourg 1 4 0 5 13661Netherlands 10 80 0 90 6213Portugal 34 32 0 66 6433Spain 110 1 0 111 2874United Kingdom 118 2 0 120 2122

EU-12 total 816 n.a. 116 932 2897

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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 12-15-98; 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

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

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

River Basin Stream flows (2)/(1)Guaranteed Ecological

(1) average (2) very dry year very humid year(hm3) (hm3) (hm3) (hm3)

Minho 3700 2627 1421 4449 0,71

Lima n.a. 506 174 958 n.a.

Douro 3500 3081 1118 5112 0,88

Tejo 2700 3032 1000 5848 1,12

Guadiana 600 1766 162 4140 2,94

River Basin Guaranteed Flow 30 Year Average Average Flowat the Border Average Flow Guaranteed by Spain

(hm3/year) (hm3/year) (%)Minho 3700 9740 38%

Douro 3500 9000 39%

Tejo 2700 9500 28%

Guadiana 600 1540 39%

Total Convention 10500 29780 35%

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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

Source: Adapted from Cunha (2000)

10 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.

R iver B as in Cu rrent (1996) Predicted(hm 3) (hm 3)

D ouroAvailable W ater 20140 17780W ater U se 2500 2900W ater U se In tensity 12% 16%

T ejoAvailable W ater 15340 12740W ater U se 3270 4020W ater U se In tensity 21% 32%

G uadian aAvailable W ater 3880 2210W ater U se 560 1680W ater U se In tensity 14% 76%

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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.

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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

Source: INAG (2001)

TOTAL 2001-2006 2007-2012 2013-2020OBJECTIVES

E1- Environmental Sustainability 2426,357 1999,426 215,371 211,560

E2- Integrated Management ofWater Resources 503,561 293,847 100,722 108,992

E3- Sustainable Managementof Water Demand 5632,181 4198,661 1058,858 374,662

E4- Economic and Financial Sustainability 12,096 11,338 0,379 0,379

E5- Institutional FrameworkReform 104,683 44,972 26,546 33,165

E6- Citizens Involvement 18,710 8,884 5,158 4,669

E7- Applied Research 155,251 103,416 28,402 23,434

TOTAL 8852,840 6660,543 1435,436 756,861

19

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

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

TOTAL 2001-2006 2007-2012 2013-2020PROGRAMS

P1- Water Resources QualityImprovement 305,873 242,979 33,260 29,634

P2- Pollution Reduction 1882,663 1629,987 111,317 141,359

P3- Environmental Protection 237,822 126,460 70,794 40,567

P4- Water Resources Improvement 78,321 59,162 10,385 8,774

P5- Restrictions to Use andWater Resources Management 425,240 234,684 90,337 100,218

P6- Water Supply Development 4711,650 3523,972 890,319 297,358

P7- Water Resources Conservation 920,532 674,689 168,539 77,304

P8- Water Trade 0,564 0,449 0,050 0,065

P9- Application of the Economicand 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 FrameworkReform 75,119 35,360 17,967 21,792

P12- Citizens Involvement 15,358 6,953 4,165 4,240

P13- Users Involvement 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

TOTAL 8852,835 6660,428 1435,480 756,926

20

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

21

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

22

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.

23

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

24

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

25

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

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.

The Alentejo Portugal (1)/(2)region (1) (2) %

Number of farms (A) 35906 415969 9%

Agricultural area 1924044 3863116 50%

Agricultural area per farm 53,59 9,29 577%

Number of beneficiaries (B) 28928 265684 11%

% Beneficiaries (B)/(A) 81% 64% 126%

26

Table 8. CAP payments to farms in the Alentejo region and in Portugal

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.

CAP PAYMENTS The Alentejo Portugal The Alentejo Portugal The Alentejo Portugalregion (1) (2) (1)/(2) region (3) (4) (3)/(4) region (5) (6) (5)/(6)

DIRECT PAYMENTS (A) n.a. n.a. n.a. 219,581 513,123 43% n.a. n.a. n.a.Crops 24361 229764 11% 142,048 316,607 45% 5831 1378 423%Arable crops 10587 139271 8% 109,516 198,621 55% 10344 1426 725%Olive oil 17867 103628 17% 18,256 43,5251 42% 1022 420 243%

Animals 11248 88719 13% 77,533 196,516 39% 6893 2215 311%Bovines 1683 37891 4% 5,083 29,3892 17% 3020 776 389%Nursering cows 3429 29557 12% 38,537 58,923 65% 11239 1994 564%Sheep and goats 8772 28819 30% 33,719 61,7512 55% 3844 2143 179%

LFA PAYMENTS (B) 7206 71201 10% 10,510 46,1288 23% 1458 648 225%Animals 5110 56120 9% 6,070 27,1296 22% 1188 483 246%Areas 5625 63552 9% 4,439 18,9992 23% 789 299 264%

TOTAL (A)+(B) 28928 265684 11% 230,095 559,252 41% 7954 2105 378%

Number of beneficiaries Amount in million euros Amount per benificiarie in euros

27

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.

28

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.

29

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