Cost-Benefit Analysis of Pipes Cost-Benefit Analysis of Pipes and Risers Irrigation System and Risers Irrigation System in Northern Victoria, Australiain Northern Victoria, Australia

Asia Climate Change Adaptation ProjectAsia Climate Change Adaptation ProjectFirst Training in Economics of AdaptationFirst Training in Economics of Adaptation

Bangkok, ThailandBangkok, ThailandMarch 11-14, 2013March 11-14, 2013

Olive MontecilloOlive MontecilloVictoria, AustraliaVictoria, Australia

Structure of PresentationStructure of Presentation

IntroductionIntroduction MethodologyMethodology Data analysisData analysis ResultsResults Other informationOther information

IntroductionIntroduction

Part of Water for Growth project to Part of Water for Growth project to encourage adoption of efficient water encourage adoption of efficient water use technologies.use technologies.

Objectives of the P&R projectObjectives of the P&R project– To improve water delivery in permeable To improve water delivery in permeable

soils and increase water availability for soils and increase water availability for agriculture agriculture reduce evaporation lossesreduce evaporation losses reduce channel leakage =>reduce reduce channel leakage =>reduce

watertable recharge and salinitywatertable recharge and salinity

IntroductionIntroduction

Project was available only in the Project was available only in the Loddon-Campaspe Irrigation Area Loddon-Campaspe Irrigation Area from 2001 to 2004.from 2001 to 2004.

Objective of CBAObjective of CBA

To quantify the costs and benefits of To quantify the costs and benefits of P&R system to determine level of P&R system to determine level of financial grants/rebate to farmers to financial grants/rebate to farmers to encourage adoption of the encourage adoption of the technology.technology.

MethodologyMethodology

Discounted cash flow analysisDiscounted cash flow analysis Partial budgetPartial budget Two scenarios:Two scenarios:

– ““Without” project (WOP):Without” project (WOP):Flood (gravity) irrigation from open channel systemFlood (gravity) irrigation from open channel system

– ““With” project (WP):With” project (WP):Flood (gravity) irrigation using P&R systemFlood (gravity) irrigation using P&R system

MethodologyMethodology

Discount rate: Discount rate: – 4% for the economic analysis 4% for the economic analysis – 8% for the financial analysis8% for the financial analysis

Analysis period: 20 yearsAnalysis period: 20 years Gross margin to value extra cow (Net Gross margin to value extra cow (Net

milk income less variable cost)milk income less variable cost) Net milk income is gross revenue Net milk income is gross revenue

less milk levyless milk levy

from this

to this

Photos from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

Open farm channel system (WOP)Open farm channel system (WOP)

Photo from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

Pipes and risers system (WP)Pipes and risers system (WP)

Photos from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

Main irrigation channelMain irrigation channel

Photo from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

Project area: Loddon Campaspe Project area: Loddon Campaspe Irrigation Region (LCIR)Irrigation Region (LCIR)

Maps copied from Loddon Campaspe Irrigation Region Land and Water Management Plan (2010 draft)

Map of Victoria showing the LCIR

Project areaProject area

LCIR is about 180 to 350km north-LCIR is about 180 to 350km north-north east of Melbourne, the capital north east of Melbourne, the capital city of Victoriacity of Victoria

Total area is 714,000haTotal area is 714,000ha– 500,000 ha irrigated (mainly dairy and 500,000 ha irrigated (mainly dairy and

horticulture)horticulture)– 140,000ha (beef, sheep, crops)140,000ha (beef, sheep, crops)– 74,000ha public land (native forest, 74,000ha public land (native forest,

grasslands, wetlands)grasslands, wetlands)

Project areaProject area

Salinity and waterlogging are major Salinity and waterlogging are major problemsproblems

Salinity in some areas can be as high Salinity in some areas can be as high as half the salinity level of sea water as half the salinity level of sea water

Groundwater is less than 2m from Groundwater is less than 2m from the surface in many parts of the the surface in many parts of the regionregion

Case study dataCase study data

Dairy farmDairy farm Area to be developed: 48.5haArea to be developed: 48.5ha Length of on-farm open Length of on-farm open

channel:1,745m; width: 5mchannel:1,745m; width: 5m Land use: perennial pastureLand use: perennial pasture Water use: 10ML/ha/yrWater use: 10ML/ha/yr

Case study farmCase study farm

P&R system part of major farm P&R system part of major farm development:development:– improving farm layout fro quicker improving farm layout fro quicker

irrigationirrigation– construction of a recycle dam to catch construction of a recycle dam to catch

irrigation run-off.irrigation run-off.

AssumptionsAssumptions

Evaporation losses: 10%Evaporation losses: 10% Channel leakage: 5%Channel leakage: 5% Labour requirement:Labour requirement:

– Irrigation: 58hr/yrIrrigation: 58hr/yr– Channel maintenance: 6hr/yrChannel maintenance: 6hr/yr

Channel maintenanceChannel maintenance– Cost of chemicals and earthworksCost of chemicals and earthworks

Assumptions: WPAssumptions: WP

BenefitsBenefits Labour savings: 50%Labour savings: 50% Channel maintenance savings: 100% Channel maintenance savings: 100% Water savings: 100% Water savings: 100% (equiv to 15% of water use WOP)(equiv to 15% of water use WOP)

Extra income from area of land reclaimed: Extra income from area of land reclaimed: 0.72ha0.72ha– Can carry/feed 2 extra cowsCan carry/feed 2 extra cows

No increase in pasture productionNo increase in pasture production

Assumptions: WPAssumptions: WP

Capital costsCapital costs Cost of the system, pump and Cost of the system, pump and

earthworksearthworks Purchase of 2 cowsPurchase of 2 cows Pasture establishment (for the Pasture establishment (for the

reclaimed area)reclaimed area)

Assumptions: WPAssumptions: WP

Operating costs:Operating costs:– Variable cost: feed, shed and herd cost of 2 Variable cost: feed, shed and herd cost of 2

extra cowsextra cows– Annual pasture maintenance cost: fertiliser Annual pasture maintenance cost: fertiliser

(reclaimed area)(reclaimed area)– Annual operating and maintenance cost of P&R Annual operating and maintenance cost of P&R

system: pumping costsystem: pumping cost No extra fixed/overhead costsNo extra fixed/overhead costs No extra labour cost to manage 2 extra No extra labour cost to manage 2 extra

cows and 0.72ha of farm landcows and 0.72ha of farm land Residual value of the system in Yr 20 Residual value of the system in Yr 20

calculated using straight line depreciationcalculated using straight line depreciation

……Assumptions (WP)Assumptions (WP)

Water to irrigate reclaimed area Water to irrigate reclaimed area (~6.2ML from water saving)(~6.2ML from water saving)

Value of remaining water saved: Value of remaining water saved: price of water: $70/ML (temporary price of water: $70/ML (temporary water entitlement)water entitlement)

Milk production from extra cows: Milk production from extra cows: 50% of full production in Yr1; 100% 50% of full production in Yr1; 100% Yr2-20. Each cow produces 235kg of Yr2-20. Each cow produces 235kg of butterfat/yrbutterfat/yr

Public benefitPublic benefit

Difficult to quantify salinity and Difficult to quantify salinity and waterlogging benefitswaterlogging benefits

Result of CBAResult of CBA

Economic analysis (Economic analysis (4% discount rate4% discount rate))– NPV: $1,900NPV: $1,900– BCR: 1:1BCR: 1:1

Financial analysis (Financial analysis (8% discount rate8% discount rate))– NPV: NPV: -$38,200-$38,200– BCR: 0.7:1BCR: 0.7:1

ResultResult

Project not financially viableProject not financially viable To break-even after 20 yrs, rebate to To break-even after 20 yrs, rebate to

farmers should be 35% of total cost.farmers should be 35% of total cost. Although the public benefits were not Although the public benefits were not

quantified, rebate of 25% of total cost* of quantified, rebate of 25% of total cost* of the P&R system was made available the P&R system was made available between 2001 and 2004.between 2001 and 2004.

In 2010-12, the water saved from the In 2010-12, the water saved from the technology became part of environmental technology became part of environmental flowsflows* subject to a maximum length and cost per m.* subject to a maximum length and cost per m.

Adoption of the technologyAdoption of the technology2001-20042001-2004

Number of systems installed:Number of systems installed: 4242

Length of pipeline installed:Length of pipeline installed: 37,300m37,300m

Area irrigated:Area irrigated: 1,340ha1,340ha

Total cost of all systems installed:Total cost of all systems installed: $2.27M$2.27M

Total rebate/grants to farmers:Total rebate/grants to farmers: $428,000$428,000

Notes:

•Loddon-Campaspe Irrigation Area only

•Costs not adjusted

Ex-post evaluationEx-post evaluation

Would have been done in 2008-9Would have been done in 2008-9 Difficult to establish “with” project Difficult to establish “with” project

scenario because of the drought from scenario because of the drought from 2001 towards the end of 20102001 towards the end of 2010

Take home message - CBATake home message - CBA

Identify clearly the parameters of Identify clearly the parameters of “with” and “without” the project “with” and “without” the project scenariosscenarios

Identify and quantify extra costs and Identify and quantify extra costs and extra benefits associated with both extra benefits associated with both scenariosscenarios

Be conservative in making Be conservative in making assumptions or/and do a sensitivity assumptions or/and do a sensitivity analysisanalysis

Other information: Northern Other information: Northern VictoriaVictoria

Anecdotal evidence: a number of Anecdotal evidence: a number of systems were installed without systems were installed without government financial assistance government financial assistance (2004-2010)(2004-2010)

Some farmers planted trees on Some farmers planted trees on reclaimed areareclaimed area

Other information: Northern Other information: Northern VictoriaVictoria

Technology is being adopted: Technology is being adopted: ~12,000ha irrigated; government ~12,000ha irrigated; government funding thru on-farm irrigation funding thru on-farm irrigation efficiency project (OFIEP), 2010-2012)efficiency project (OFIEP), 2010-2012)

Current application for government Current application for government funding (2012):funding (2012):– 88 systems88 systems

Estimated area to be irrigated: 4,455ha Estimated area to be irrigated: 4,455ha Estimated water saving: 8,165MLEstimated water saving: 8,165MLEstimated cost: $16.8M Estimated cost: $16.8M

Other information: OFIEPOther information: OFIEP

To return water to the environment To return water to the environment by encouraging irrigators to adopt by encouraging irrigators to adopt water saving technologieswater saving technologies

Government pays for all or part of Government pays for all or part of the capital costthe capital cost

In exchange farmer returns half of In exchange farmer returns half of the water saving to the governmentthe water saving to the government

Other information: OFIEPOther information: OFIEP

Example:Example:Cost of technology: $100,000Cost of technology: $100,000Water saving: 40MLWater saving: 40MLValue of water saving (set by the government): Value of water saving (set by the government): $2,200/ML$2,200/MLTotal value of water saving: $88,000Total value of water saving: $88,000Farmer pays $12,000 of capital cost and Farmer pays $12,000 of capital cost and surrenders 20ML of irrigation water entitlement to surrenders 20ML of irrigation water entitlement to the government for environmental flows.the government for environmental flows.

AcknowledgementAcknowledgement

Sigmund Fritschy for assisting in the Sigmund Fritschy for assisting in the analysisanalysis

Archards Irrigation P/L for providing Archards Irrigation P/L for providing the case study farmthe case study farm

Thank you.Thank you.