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Economic analysis of improved water management techniques

Economic analysis of improved water management techniques. Hamed Daly- Hassen INRAT Daly@gnet.tn. WLI Regional Knowledge Exchange Workshop on Decision-support Tools and Models 23-27 September, 2013, jerba , Tunisia.

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Economic analysis of improved water management techniques

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  1. Economic analysis of improved water management techniques Hamed Daly-Hassen INRAT Daly@gnet.tn WLI Regional Knowledge Exchange Workshop on Decision-support Tools and Models 23-27 September, 2013, jerba, Tunisia

  2. 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

  3. 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)

  4. Method : Cost-benefit analysis (CBA) Please insert a picture that represents your work • 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

  5. Stages for conducting CBA Please insert a picture that represents your work Identify the improved WMT impacts Quantify impacts Estimate costs and benefits Predict the magnitude of annual incremental costs & benefits over the life span of the technology 5. Discounting 6. Measure of main indicators 7. Sensitivity analysis to consider risks and uncertainties.

  6. 1. Identification of costs and benefits

  7. 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

  8. 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

  9. Cost of water The full cost of water provision shouldbeconsidered in valuing alternative WMT Environmentalexternalities Economicexternalities Full cost Opportunitycost Full economiccost Capital charges Full supplycost O&M cost Source : Rogers et al., 2002

  10. 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)

  11. 5. Discounting over time 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 Daly, MEDFOREM, June 2006

  12. 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

  13. - 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

  14. NPV (10%, 20 years) in TND - 2007 AN ExAmple : Comparison between different Improved WM Techniques (Barbara watershed) - Land use : Pasture Source : World Bank, 2010

  15. explicit consideration of costs and benefits; • rational assessment of their magnitudes. • Use sensitivity analysis in order to guide Intervention design decisions • Simple CBA, using a decision matrix Recommendations

  16. Thank you for your attention

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