Nigeria Strategy Support Program, Working Paper No. 0015, International Food Policy Research Institute, Washington, DC. Takeshima, Hiroyuki, Adetola I. Adeoti and Sheu Salau. 2010

A study of small-scale private irrigation schemes in Nigeria finds that unobserved transaction costs are sufficiently high to discourage investment, particularly among female farmers, the landless, and farmers located furthest from markets, suggesting that policies to lower transaction costs are as effective in encouraging investment as is raising profitability.

There is great potential for modern irrigation technology in Nigeria to expand planted areas, raise crop yields, and allow dry season production. The government promotes large-scale, publicly-run schemes yet small-scale private irrigation schemes (SPRI) have emerged as the preferred technology. In addition to saving labour, SPRIs allow farmers to manage their irrigation schedules to meet crop needs and market demand. Despite their benefits, the pace of SPRI adoption remains low; only 12% of farmers surveyed have invested in an SPRI individually, and 5% as part of a group. This paper builds on prior studies of returns to technology and limited access to credit by examining the impact of transaction costs on farmers’ decision to invest in SPRI.

The transaction costs of purchasing a modern irrigation pump include searching for sellers, obtaining specifications and information on the quality, the time and costs of transportation, and learning how to operate the technology. In addition, the authors suggest that there is a set of unobservable transaction costs which can be estimated by studying observable farmer characteristics. Assuming that there exists some threshold minimum required level of investment, variations in this threshold will provide insight into the types and magnitudes of unobserved transaction costs. 

An Unobserved Stochastic Threshold (UST) model is used to capture both observed and unobserved transaction costs, and to account for thresholds which may vary significantly among individual farmers. The UST model is borrowed from the labour economics literature where it is used to analyse labour market participation. Data is obtained from a survey conducted alongside the Second Fadama Development Project (Fadama II) for 2,232 respondents, and annual rainfall data from the Nigerian Meteorological Agency. The model takes into account measures of rainfall risk across the area surveyed to capture differing needs for irrigation technology.

Findings indicate that the threshold, or minimum required investment level, is higher for female farmers than for male farmers, suggesting that female farmers face higher unobserved transaction costs. The authors point out that the cost of learning to operate the technology is eased by the assistance of extension agents, international NGOs, pump sellers, and farmer organizations. Female farmers, due mainly to cultural reasons, may have difficulty interacting with male farmers or vendors and are further limited by the lack of female extension agents. This reality is supported by the descriptive statistics; the proportion of male farmers who invest in irrigation technology is greater than that of females, yet the average amount invested by females is higher.

Other factors found to increase the minimum required investment level include landlessness, which incurs the complementary transaction costs of renting land. Also raising the threshold is a higher number of dependants in the farmer’s household, greater distance to the nearest town, and having no prior access to a modern irrigation technology. On the other hand, participation in the Fadama II project decreases the threshold as it enables network-building, information sharing, and even group formation for collective technology investment. Although the magnitudes need to be interpreted with caution, it is helpful to consider the result that “threshold investment level increases by $2,434 (USD) for being a female farmer, $160 with one unit increase of household dependency ratio, $25 with each kilometre of distance to the nearest town, but reduced by $932 for owning land, $2,461 for having access to irrigation facilities, and $2,468 for being a Fadama II member in [an arid] location..”

The results suggest that policies and programs that improve transaction costs will be just as effective in encouraging investment in SPRI as those that raise returns on investment, for example providing subsidies to farmers to invest. According to the results of this study, observed or unobserved transaction costs could be reduced by providing extension services to assist female farmers, constructing roads to link to the nearest town, or by investing in community-driven projects such as Fadama II.