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WLI REGIONAL KNOWLEDGE EXCHANGE WORKSHOP ON DECISION-SUPPORT TOOLS AND MODELS
23-27 SEPTEMBER, 2013, JERBA, TUNISIA
Economic analysis of improved water management techniques
Hamed Daly-HassenINRAT
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• Decision makers need an evaluation of the different options for improved management
• Low adoption of SMT by farmers• MANAGEMENT ALTERNATIVES COULD GIVE
LOWER INCOME FOR FARMERS BUT HIGHER SOCIAL BENEFITS,
• THUS, COMPENSATION FOR PROVISION OF WATER SERVICES ARE NEEDED.
INTRODUCTION
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Objectives
- To assess private and social profitability of improved WMT at private and social perspective- to estimate the private and social benefits accruing from different alternative Water Management Techniques (WMT)
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Method : Cost-benefit analysis (CBA)
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• A useful tool to apply in analysing individual options, especially those publicly-funded producing both private and public benefits.
• Justify investments for different interventions• Allows comparisons between WMT / land use options
• For two alternate activities : A and B, A would be preferred if its Net Benefits NBA are higher.
• May expand to include the range of benefits & costs
• ‘With’ and ‘without’ interventions comparisons
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Stages for conducting CBA
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1. Identify the improved WMT impacts2. Quantify impacts3. Estimate costs and benefits 4. Predict the magnitude of annual incremental costs &
benefits over the life span of the technology5. Discounting6. Measure of main indicators 7. Sensitivity analysis to consider risks and uncertainties.
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COSTS CONSIDERED BENEFITS CONSIDERED
1. FARMER
COST OF EQUIPMENTCOST OF LABORCOST OF WATERLOSS OF CROPPED AREA(INTERCROPPING)
ON SITE INCREASED AGRICULTURAL PRODUCTIONWATER SAVINGS
2. NATIONAL SOCIETY
ON SITE AND OFF SITE+a. WATER STORAGEb. REDUCED EROSION
3. GLOBAL COMMUNITY
ON SITE AND OFF SITE+a. BIODIVERSITY PROTECTIONB. CARBON SEQUESTRATION
1. Identification of costs and benefits
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• Predictions of increased productivity of crops and livestock
• Increased Crop production due to increased volume of water retained in the soil for uptake by crops
- reduced losses of rainwater to runoff and evaporation;
- increased storage of water
2. DATA COLLECTION : PREDICTING THE BIO-PHYSICAL INDICATORS
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• Survey for valuation of private costs and benefits of different WMT,
• Market price for Private valuation• Real price / opportunity cost of labor/ Full Cost of water
for Social valuation
3. VALUATION OF COSTS AND BENEFITS
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The full cost of water provision should be considered in valuing alternative WMT
Environmental externalities
Opportunity cost
Economic externalities
Capital charges
O&M cost
Full economic cost
Full cost
Full supply cost
Source : Rogers et al., 20029
Cost of water
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4. Assessing Incremental net benefit
• Assess annual net benefits• Assess Incremental net benefit : Net benefit ‘with project’ - Net benefit ‘without project’
NB(S) = NB(P) + NEB (net Environmental Benefit)
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Daly, MEDFOREM, June 2006 11
How to compare benefits and costs which occur over relatively long periods of time ?
• Discounting is justified by pure preference for time, and by opportunity cost of capital
• Discounting an amount C at future year (t) with a discount rate r = C / (1+r)t
5. Discounting over time
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Calculating Using excel- Net present value (NPV) : Sum of the incremental net
benefit - Internal rate of return (IRR) : the discount rate that makes the NPV = 0- B/C ratio : using discounted incremental values
When can the option be accepted ?-NPV ≥ 0 when discounted at a suitable discount rate ;- IRR > the opportunity cost of capital- B / C ratio ≥ 1
6. MEASURING MAIN INDICATORS
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- Needed To examine the effects of risks and uncertainties:
• Cost of the initial investment • Prices of inputs and outputs.• Yields (they may be lower than predicted).• Water erosion, water storage• Duration : There may be implementation delays• Alternative discount rates.
6. SENSITIVITY ANALYSIS
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AN EXAMPLE : COMPARISON BETWEEN DIFFERENT IMPROVED WM TECHNIQUES (BARBARA
WATERSHED) - LAND USE : PASTURE
Source : World Bank, 2010
Private Social
-1000
-500
0
500
1000
1500
2000
Permanent grasslandAcacia plantationSulla plantation
NPV (10%, 20 years) in TND - 2007
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explicit consideration of costs and benefits;rational assessment of their magnitudes.Use sensitivity analysis in order to guide Intervention
design decisionsSimple CBA, using a decision matrix
RECOMMENDATIONS
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Thank you for your attention