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

Daly@gnet.tn

• 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

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)

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

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.

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

• 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

• 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

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

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)

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

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

- 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

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

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

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