ECONOMIC EVALUATION OF ECONOMIC EVALUATION OF IRRIGATION PROJECTSIRRIGATION PROJECTS

Pre-Independence- Pre-Independence- Development of financial policyDevelopment of financial policy

Considered as commercial ventures like Considered as commercial ventures like any other infrastructure projectsany other infrastructure projects

The feasibility of irrigation projects The feasibility of irrigation projects essentially evolved from the concept of essentially evolved from the concept of financial soundness of public investmentfinancial soundness of public investment

Close of last century with the Close of last century with the acceptance of the proposal for acceptance of the proposal for construction of irrigation works through construction of irrigation works through loan fundsloan funds

Pre-Independence- Pre-Independence- Development of financial policyDevelopment of financial policy

The Select Committee on Indian Public The Select Committee on Indian Public Works reporting to the House of Commons Works reporting to the House of Commons in 1879in 1879

ObservedObserved“ “ The financial results of works of irrigation are in the The financial results of works of irrigation are in the

opinion of your committee, the best test of their utility. A opinion of your committee, the best test of their utility. A rail road may traverse between certain districts which it rail road may traverse between certain districts which it does not materially improve, yet the work may on the does not materially improve, yet the work may on the whole, be beneficial, to the country. However, an whole, be beneficial, to the country. However, an irrigation work benefits the immediate locality in which it irrigation work benefits the immediate locality in which it is placed, it can be of no use to outside districts.”is placed, it can be of no use to outside districts.”

Pre-Independence- Pre-Independence- Development of financial policyDevelopment of financial policy

The committee further observed that:The committee further observed that:

“ “ the construction of new works from borrowed money the construction of new works from borrowed money for the future be limited to those schemes alone for the future be limited to those schemes alone which upon the responsibility of the Government are which upon the responsibility of the Government are estimated to be productive by yielding an annual estimated to be productive by yielding an annual income equal to the interest in the capital expended income equal to the interest in the capital expended on their construction including in such capital on their construction including in such capital interest during construction.”interest during construction.”

This recommendation formed the basis for selection of This recommendation formed the basis for selection of irrigation projects. irrigation projects.

Pre-Independence- Pre-Independence- Development of financial policyDevelopment of financial policy

First Indian Irrigation Commission (1901-1903)First Indian Irrigation Commission (1901-1903)

“ “ An irrigation work is classed as productive and An irrigation work is classed as productive and sanctioned against loan funds when it has shown to sanctioned against loan funds when it has shown to the satisfaction of the Secretary of state that it is the satisfaction of the Secretary of state that it is likely to fulfill the conditions of productive public likely to fulfill the conditions of productive public work, that is to yield a net revenue 10 years after work, that is to yield a net revenue 10 years after completion, sufficient to cover interest charges on the completion, sufficient to cover interest charges on the sum at charge at that date. By sum at charge is sum at charge at that date. By sum at charge is meant the total direct and indirect capital cost plus meant the total direct and indirect capital cost plus the excess, if any, of interest charges to date over the excess, if any, of interest charges to date over the net revenue.”the net revenue.”

Productivity rateProductivity rate

The productivity of a scheme was The productivity of a scheme was judged with reference to the rate of judged with reference to the rate of return earned by it on full return earned by it on full developmentdevelopment

The criterion for the sanction of The criterion for the sanction of irrigation projects was based on irrigation projects was based on financial results financial results

Financial results Financial results

1. 1. The capital cost of any work was taken as the sum The capital cost of any work was taken as the sum actually spent on its constructionactually spent on its construction

2. The revenue on account of direct receipt and indirect 2. The revenue on account of direct receipt and indirect receipt was estimatedreceipt was estimated

3. The revenue account was debited yearly with3. The revenue account was debited yearly with the simple interest on the capital cost of the works at the the simple interest on the capital cost of the works at the

commencement of the yearcommencement of the year The working expenses of the year The working expenses of the year

4. 4. The revenue account was credited yearly with the The revenue account was credited yearly with the direct receipts and the indirect receiptsdirect receipts and the indirect receipts The difference between 4 and 3 above for any year gives the The difference between 4 and 3 above for any year gives the

profit or loss for that year profit or loss for that year

Productivity rateProductivity rate The acceptable value of ‘productivity rate’ The acceptable value of ‘productivity rate’

was linked to prevailing Rate of interestwas linked to prevailing Rate of interest The productivity rate varied between 4 to 6 The productivity rate varied between 4 to 6

percent during 1919 to 1937percent during 1919 to 1937 After April, 1937, Government of India After April, 1937, Government of India

prescribed Rate of Return as 6 percent prescribed Rate of Return as 6 percent

However, recognising the importance of irrigation to meet However, recognising the importance of irrigation to meet the food and fiber requirement of the public at large, most the food and fiber requirement of the public at large, most of the Provinces reduced the productivity rate to 4 percent of the Provinces reduced the productivity rate to 4 percent

Productivity rateProductivity rate

The financial viability test was rigidly applied The financial viability test was rigidly applied to all irrigation projectsto all irrigation projects

Earlier large irrigation schemes were mostly Earlier large irrigation schemes were mostly diversion works and were relatively diversion works and were relatively inexpensive. inexpensive.

During Development of New projects it was During Development of New projects it was felt that the development of irrigation was felt that the development of irrigation was being held up by the rigid application of the being held up by the rigid application of the financial criterionfinancial criterion

Apart from direct irrigation revenues, other Apart from direct irrigation revenues, other benefits accrued to the Government in the benefits accrued to the Government in the shape of increased revenue from excise shape of increased revenue from excise duties, income tax, sales tax, transport etc.duties, income tax, sales tax, transport etc.

Resolution of The Central Board of Resolution of The Central Board of Irrigation (1936)Irrigation (1936)

“ “ as the expansion of irrigation is as the expansion of irrigation is seriously handicapped by the seriously handicapped by the restricted view taken of the value restricted view taken of the value of irrigation, an economic survey of irrigation, an economic survey should be carried out with a view should be carried out with a view to estimate the direct and indirect to estimate the direct and indirect financial benefits accruing to the financial benefits accruing to the Central and Local Governments Central and Local Governments from Irrigation Projects”. from Irrigation Projects”.

Protective WorkProtective Work

A view was taken that if a project did A view was taken that if a project did not fulfill the financial criterion, but not fulfill the financial criterion, but was still considered necessary in the was still considered necessary in the public interest, it could be sanctioned public interest, it could be sanctioned as a protective work. as a protective work.

Number of irrigation projects which Number of irrigation projects which failed to satisfy the financial criterion failed to satisfy the financial criterion were accordingly taken up as were accordingly taken up as protective works.protective works.

Plan era Plan era

A change in the approach to the irrigation A change in the approach to the irrigation projects projects

These projects were viewed as investment in the These projects were viewed as investment in the development and social benefit where profit was development and social benefit where profit was not the sole motivenot the sole motive

Rate of return on the capital outlay for classifying Rate of return on the capital outlay for classifying a capital work as productive was reduced to 3.75 a capital work as productive was reduced to 3.75 percent which continued upto the year 1954 percent which continued upto the year 1954

The rate was raised to 4.5 per cent and this rate The rate was raised to 4.5 per cent and this rate continued up to March, 1960. continued up to March, 1960.

Benefit Cost RatioBenefit Cost Ratio

It was felt that irrigation project in an area It was felt that irrigation project in an area should not only be viewed as source of should not only be viewed as source of income to the Govt. but as a means for income to the Govt. but as a means for increased agricultural produce and increased agricultural produce and economic development of that area and in economic development of that area and in the process, of the country as a whole.the process, of the country as a whole.

The Planning Commission in 1958 initiated The Planning Commission in 1958 initiated studies of some of the major projects to studies of some of the major projects to assess the overall benefits of the irrigation assess the overall benefits of the irrigation projects and to find a more appropriate projects and to find a more appropriate criterion for deciding whether various criterion for deciding whether various irrigation projects should be undertaken. irrigation projects should be undertaken.

Committee headed by Committee headed by Prof. D.R.GadgilProf. D.R.Gadgil

Large benefits accrued from irrigation in terms of Large benefits accrued from irrigation in terms of double cropping, diversification and better quality double cropping, diversification and better quality crops, higher yields, larger income and greater crops, higher yields, larger income and greater opportunities of employment.opportunities of employment.

Indirect benefits that accrued were the Indirect benefits that accrued were the establishment of processing industries, expansion establishment of processing industries, expansion of consumer industries, retail trade, transport and of consumer industries, retail trade, transport and communications. communications.

Total benefits from irrigation were far larger that Total benefits from irrigation were far larger that the direct financial returns accruing to Government the direct financial returns accruing to Government from water rates and betterment levy. from water rates and betterment levy.

Gadgil CommitteeGadgil Committee

The Committee recommended that in The Committee recommended that in future the concept of benefit cost ratio future the concept of benefit cost ratio should be used for assessing the feasibility should be used for assessing the feasibility of new projects instead of the traditional of new projects instead of the traditional criterion of the direct financial return to the criterion of the direct financial return to the Government. Government.

For simplicity it was considered that the For simplicity it was considered that the indirect or secondary benefits and cost indirect or secondary benefits and cost need not be taken into account. need not be taken into account.

Gadgil Committee RecommendationsGadgil Committee Recommendations The net annual benefit was to be The net annual benefit was to be

worked out as the difference between worked out as the difference between the monetary value of the net the monetary value of the net agricultural production (total value of agricultural production (total value of produce- cost of cultivation ) ‘before’ produce- cost of cultivation ) ‘before’ and ‘after’ the introduction of and ‘after’ the introduction of irrigation. irrigation.

The annual cost should be taken to The annual cost should be taken to comprise the annual interest on comprise the annual interest on capital, depreciation and expenditure capital, depreciation and expenditure on maintenance and operation.on maintenance and operation.

Recommendations- Contd.. Recommendations- Contd..

Gadgil Committee report submitted in 1964 Gadgil Committee report submitted in 1964 recommend the adoption of economic recommend the adoption of economic benefit criterion instead of the financial benefit criterion instead of the financial criterion. criterion.

The Government accepted this The Government accepted this recommendations and benefit cost ratio recommendations and benefit cost ratio criterion has been adopted.criterion has been adopted.

Benefit-Cost Ratio criterion for judging the Benefit-Cost Ratio criterion for judging the economic soundness of irrigation projects is economic soundness of irrigation projects is in practice till date. in practice till date.

B.C. RatioB.C. Ratio

B.C. ratio is obtained by dividing the annual B.C. ratio is obtained by dividing the annual benefits by the annual cost. benefits by the annual cost.

Net annual benefit is estimated as the Net annual benefit is estimated as the difference in the net value of agricultural difference in the net value of agricultural produce “before” and “after” irrigationproduce “before” and “after” irrigation

The annual cost in the denominator compriseThe annual cost in the denominator comprise interest on capital cost of the project at the rate of

ten percent per annum depreciation charges at the rate of 1 percent in case

of projects having 100 years life say storage scheme and 2% in case life of the project is considered as 50 years

operation and maintenance expenses.

B.C. Ratio B.C. Ratio

CriteriaCriteria Irrigation projects with B.C. ratio greater than Irrigation projects with B.C. ratio greater than

1.5 are considered acceptable from economic 1.5 are considered acceptable from economic point of view.point of view.

BC ratio of 1.5 instead of 1.0 was suggested as BC ratio of 1.5 instead of 1.0 was suggested as a prudent precaution against likely increase in a prudent precaution against likely increase in cost of the project.cost of the project.

Subsequently, acceptable value of B.C. ratio Subsequently, acceptable value of B.C. ratio was reduced to 1.0 for irrigation projects in was reduced to 1.0 for irrigation projects in drought prone areas.drought prone areas.

PRE PROJECT

POST PROJECT

A GROSS RECEIPTS 1 GROSS VALUE OF FARM PRODUCE

2 DUNG RECIEPT(30% OF B6)

3 TOTAL (A) GROSS RECEIPTS

B EXPENSES

1 EXPENDITURE ON SEEDS

2 EXPENDITURE ON MANURE

3 EXPENDITURE ON FERTILISERS

4 EXPENDITURE ON PESTICIDES

5 EXPENDITURE ON HIRED LABOUR

6 FODDER EXPENSES (15% FOR PRE AND 10%FOR POST PROJECT OF A1)

7 DEPRECIATION (2.7% OF A1 )

8 SHARE AND CASH RENT(5% FOR PRE AND 3% FOR POST PROJECT OF A1)

9 LAND REVENUE (2% OF A1)

TOTAL (B) EXPENSES

C NET VALUE OF FARM PRODUCE

1 TOTAL GROSS RECEIPTS

2 TOTAL EXPENSES

NET VALUE (1-2)

B.C.Ratio (Rs. In Lacs)

D ANNUAL BENEFITS

1 NET VALUE OF PRODUCE AFTER PROJECT

2 NET VALUE OF PRODUCE BEFORE PROJECT

3 ANNUAL BENEFIT (1-2)

COST OF THE PROJECT

(a) CAPITAL COST (After apportionment)

(b) COST OF LAND DEVELOPMENT @ Rs 20000/- per ha of CCA - ha

Total

E ANNUAL COST

1 INTEREST ON TOTAL COST

2 DEPRRICIATION OF THE PROJECT @ 1 % OF THE CAPITAL COST

3 O & M CHARGES @ Rs 300/- PER HA ON ha4 MAINTENANCE OF HEAD WORKS @ 1% OF

THE COST OF Head Works of lac Rs. 5 TOTAL ANNUAL COST

B. C. RATIO (D3/E5)

Estimated value of Produce and cost of inputs before IrrigationCost of inputs

Seed Manure Fertilisers Pesticides Labour Total

Kharif123456 Rabi 12345

6Total

S. No. CropsArea ( ha)

Cost of inputs per hectare Total cost in

lakh Rs.

Estimated value of Produce before Irrigation

Levy Market Levy Market

Kharif123456

Rabi 12345

6

Total

Total Value of Produce (lac Rs.)

Receipt (lac Rs.)

Rate Rs./Qtl.

Yield (Qtls./ha)

Area ( ha)

CropsS.No.

Internal Rate of ReturnInternal Rate of Return

Reflect the further cost involved in long Reflect the further cost involved in long gestation that takes place during the gestation that takes place during the construction construction

Obligatory For World Bank aided project Obligatory For World Bank aided project Internal Rate of Return is calculated on Internal Rate of Return is calculated on

the basis of market prices without any the basis of market prices without any adjustment for economic prices because adjustment for economic prices because of non availability of national of non availability of national parameters for economic pricesparameters for economic prices

(Rs in Lacs)

%ageArea in

ha With A% rate

With B% rate

With A% rate

With B% rate

1 2 3 4 5 6 7 8 9 10 11 12 131 12 23 34 45 56 67 78 89 9

10 10

Upto 50 (For Medium Projecs) Upto 100(For Major Projecs)

I.R.R = Discount rate(A) = (Total of Col.12) X (Difference of rate of Col.11-Col.10)Arithmetic sum ofCol.12 & Col13

Net Cash Flow

(Col.8-Col.7)

Net Present BenefitDiscount Factor

Internal Rate of return

Sl.No.Year

(at the end of)

Project Cost

Incured during

the year

CCA Developed O&M Cost @

Rs 1175/- per ha

Total Cost

(Col.3 + Col.6)

Benefit

Views of Irrigation Commission (1972)Views of Irrigation Commission (1972)

The economic benefit criterion is more The economic benefit criterion is more suitable than the financial return criterion.suitable than the financial return criterion.

The rate of return methods is more suited The rate of return methods is more suited as a basis for making a choice between as a basis for making a choice between two investments where financial return is two investments where financial return is the dominant consideration and no the dominant consideration and no constraints are imposed by national goals constraints are imposed by national goals

Recommended the continued use of the Recommended the continued use of the benefit cost ratio for irrigation projects not benefit cost ratio for irrigation projects not only because it is simpler but also because only because it is simpler but also because it is used in most countries.it is used in most countries.

Views of Irrigation Commission (1972)Views of Irrigation Commission (1972)

The application of the benefit-cost-ratio The application of the benefit-cost-ratio criterion minimises the importance of securing criterion minimises the importance of securing adequate return from investments on irrigation adequate return from investments on irrigation projectsprojects

Recommended that at the time of considering Recommended that at the time of considering project for acceptance that the financial return project for acceptance that the financial return of the project should also be carefully of the project should also be carefully examined. examined.

If the return does not cover working expenses and If the return does not cover working expenses and interest charges on capital, the impact of the project interest charges on capital, the impact of the project on the irrigation revenues of the State should be on the irrigation revenues of the State should be examined to see if an upward revision of the water examined to see if an upward revision of the water rates in the States, would be necessary.rates in the States, would be necessary.

Review of CriteriaReview of Criteria

The Fifth Conference of Irrigation The Fifth Conference of Irrigation State Ministers (1980)State Ministers (1980) Recommended that whole criteria of B.C. Recommended that whole criteria of B.C.

ratio should be reviewed on the basis of ratio should be reviewed on the basis of actual performance of irrigation system actual performance of irrigation system and norms for evaluation of benefits. and norms for evaluation of benefits.

Accordingly a Committee under the Accordingly a Committee under the Chairmanship of Shri Nitin Desai was Chairmanship of Shri Nitin Desai was constituted by Government of India in constituted by Government of India in December, 1981December, 1981

Nitin Desai- ReportNitin Desai- Report

The Committee noted the following The Committee noted the following methodological deficiencies in the methodological deficiencies in the approachapproach

The method of calculation of benefits and the The method of calculation of benefits and the criterion for selection relies on the increment in criterion for selection relies on the increment in the net value of agricultural production. This does the net value of agricultural production. This does not reflect the range of objectives which irrigation not reflect the range of objectives which irrigation investments have to subserve.investments have to subserve.

Irrigation projects take time to implement and, Irrigation projects take time to implement and, what is important, the time required varies from what is important, the time required varies from project to project. The comparison of annualised project to project. The comparison of annualised benefits and annualised costs does not reflect the benefits and annualised costs does not reflect the value of time adequatelyvalue of time adequately

Desai Committee FindingsDesai Committee Findings

Generally all costs and benefits are Generally all costs and benefits are evaluated at market prices. Because of the evaluated at market prices. Because of the presence of many distorting influences, presence of many distorting influences, these market prices may not reflect the these market prices may not reflect the true value of these costs and benefits to true value of these costs and benefits to the economythe economy

Many of the cost parameters are evaluated Many of the cost parameters are evaluated on the basis of ad hoc norms. For instance, on the basis of ad hoc norms. For instance, fodder expenses and dung receipts. fodder expenses and dung receipts.

Desai Committee- Desai Committee- recommendationsrecommendations Recommendations of Nitin Desai CommitteeRecommendations of Nitin Desai Committee

The committee reviewed the existing norms of The committee reviewed the existing norms of evaluating project benefits, cropping patterns, evaluating project benefits, cropping patterns, yields, valuation of outputs, cost of cultivation, yields, valuation of outputs, cost of cultivation, international prices, concept of opportunity cost international prices, concept of opportunity cost adjustment for social cost etcadjustment for social cost etc

The present procedure does not take into account The present procedure does not take into account the time taken to reach the full benefitthe time taken to reach the full benefit

Discounted cash flow (DCF) method must be Discounted cash flow (DCF) method must be followed in the benefit-cost analysis of irrigation followed in the benefit-cost analysis of irrigation projectsprojects

Review of Existing CriteriaReview of Existing Criteria

There is no analysis of risk and uncertainty and the There is no analysis of risk and uncertainty and the extent to which the project will help to reduce the extent to which the project will help to reduce the variability of agricultural production, a deficiency variability of agricultural production, a deficiency which is particularly serious since stabilisation of which is particularly serious since stabilisation of production is one of the major objectives of irrigation production is one of the major objectives of irrigation developmentdevelopment

There is no systematic attempt at sensitivity analysis There is no systematic attempt at sensitivity analysis to take into account likely variations in yields, costs to take into account likely variations in yields, costs etc.etc.

The benefit cost analysis is generally “added” on to a The benefit cost analysis is generally “added” on to a project after technical parameter are firmed up. A project after technical parameter are firmed up. A techno-economic analysis of all available options is techno-economic analysis of all available options is seldom attemptedseldom attempted

Review of Existing CriteriaReview of Existing Criteria Working Group(1999) for updating Existing Working Group(1999) for updating Existing

Guidelines on “Guidelines for preparation of Guidelines on “Guidelines for preparation of Detailed Project Reports of Irrigation and Detailed Project Reports of Irrigation and Multipurpose Project”(1980)Multipurpose Project”(1980) W.G. recommended for continuation of existing W.G. recommended for continuation of existing

practice with the following modificationspractice with the following modifications Cost of on-farm Development works be worked Cost of on-farm Development works be worked

out separately and two sets of the benefit cost out separately and two sets of the benefit cost ratio of the project be worked out with and ratio of the project be worked out with and without considering the cost of these works.without considering the cost of these works.

WG (1999) recommendationsWG (1999) recommendations Benefits due to fisheries, horticulture, Benefits due to fisheries, horticulture,

catchment area treatment, aforestation, catchment area treatment, aforestation, animal husbandry etc. in addition to animal husbandry etc. in addition to agricultural production may also be agricultural production may also be assessed and accounted in benefitsassessed and accounted in benefits

the quantity of water reserved for the quantity of water reserved for domestic and industrial water supply may domestic and industrial water supply may be assigned certain cost in consultation be assigned certain cost in consultation with concerned authoritywith concerned authority

Recommendations – Contd..Recommendations – Contd.. For modernisation project, the two sets of benefit For modernisation project, the two sets of benefit

cost ratio be computed one considering net benefit cost ratio be computed one considering net benefit and net costs and other considering total benefits and net costs and other considering total benefits and total cost. The higher of the two be considered and total cost. The higher of the two be considered for deciding economic viability of the project.for deciding economic viability of the project.

B.C. ratio limits of 1.5/1.0 (for drought prone areas) B.C. ratio limits of 1.5/1.0 (for drought prone areas) and above need to be reviewed in view of landing and above need to be reviewed in view of landing of the project with so many additional costs and a of the project with so many additional costs and a lower B.C. ratio of 1.0 may be acceptable for lower B.C. ratio of 1.0 may be acceptable for determining economic viability of the project.determining economic viability of the project.

Where do we Stand Today?Where do we Stand Today?

The recommendations of the Nitin The recommendations of the Nitin Desai Committee not implementedDesai Committee not implemented

The Format for estimating Benefit The Format for estimating Benefit Cost Ration remains the same Cost Ration remains the same

The ratio is the sole criteria for The ratio is the sole criteria for acceptance of the project may not acceptance of the project may not give a true pictue of the economics give a true pictue of the economics of the projectof the project

Issues UnansweredIssues Unanswered

Sensitivity analysis are rarely Sensitivity analysis are rarely performedperformed Benefits and costs are estimated at the Benefits and costs are estimated at the

end of the preparation of the projectend of the preparation of the project Such exercise needs to be carried out at Such exercise needs to be carried out at

planning stage to evaluate various planning stage to evaluate various Project alternatives as decision making Project alternatives as decision making aidaid

ConcernsConcerns

Irrigation systems are largely Irrigation systems are largely designed based on inadequate or designed based on inadequate or unreliable data on water resources, unreliable data on water resources, irrigation efficiencies, distribution of irrigation efficiencies, distribution of cropping pattern in the command cropping pattern in the command etc.etc.

The lack of detailed survey & The lack of detailed survey & Investigation dataInvestigation data

Issues of concernsIssues of concerns

In many cases the project is in advanced In many cases the project is in advanced stage of construction even before it is stage of construction even before it is appraised appraised it is already a fait accomplice it is already a fait accomplice

Most econometric models of investments Most econometric models of investments are based on implicit assumption that are based on implicit assumption that investment expenditure are reversible.investment expenditure are reversible.

However, most large irrigation projects are However, most large irrigation projects are irreversible, once started. They can of course irreversible, once started. They can of course be restructured, but not completely shiftedbe restructured, but not completely shifted

Concerns…Concerns…

The Planning Commission’s capital cost The Planning Commission’s capital cost estimation procedure suffers from manyestimation procedure suffers from many

serious limitations. It neglects gestation serious limitations. It neglects gestation lag that exists between the time lag that exists between the time investment is undertaken and the time investment is undertaken and the time irrigation potential is created and it fails irrigation potential is created and it fails to recognise that society values to recognise that society values investments differently as time passes, investments differently as time passes, among others. among others.

Concerns…Concerns…

Analysis of 346 M & M irrigation Analysis of 346 M & M irrigation projects show that a fixed period of projects show that a fixed period of 1212

years between the time investment years between the time investment is made and potential created is is made and potential created is representative of most irrigation representative of most irrigation works.works.

Other ConsiderationsOther Considerations

The present format deals with static The present format deals with static aspects. aspects.

The dynamic aspects such as shift in The dynamic aspects such as shift in demand and supply post project also demand and supply post project also needs to be looked intoneeds to be looked into

The costs of inputs such as fertilizers The costs of inputs such as fertilizers etc have a component of subsidy where etc have a component of subsidy where as benefits are at market price there is as benefits are at market price there is need to look into this aspect as wellneed to look into this aspect as well

Other aspects Other aspects

Rent of the land ( % of Gross Rent of the land ( % of Gross Produce) do not reflect the Produce) do not reflect the opportunity cost of the land opportunity cost of the land

Labour cost is only towards hired Labour cost is only towards hired labours and do not account for the labours and do not account for the family laboursfamily labours

Benefits /Costs not Accounted Benefits /Costs not Accounted

Flood ControlFlood Control RecreationRecreation Inland fishingInland fishing Improvement in life of the peopleImprovement in life of the people The flow of funds over long period The flow of funds over long period

remains locked and the benefits are remains locked and the benefits are delivered ( Partial or full) much laterdelivered ( Partial or full) much later

Recent DevelopmentsRecent Developments

Planning Commission constituted a Planning Commission constituted a committee to revisit the committee to revisit the methodology of computation of BC methodology of computation of BC ratioratio

Ministry of Water Resources Ministry of Water Resources constituted a committee to study the constituted a committee to study the issues related to estimation of BC issues related to estimation of BC Ratio (Chawla Committee) Ratio (Chawla Committee)

Findings – Planning CommissionFindings – Planning Commission

Concept of with and without project Concept of with and without project introduced – Opportunity cost of the introduced – Opportunity cost of the projectproject

Intangible benefits recognised but in the Intangible benefits recognised but in the absence of procedure to assign monetary absence of procedure to assign monetary value – not proposed to be included in value – not proposed to be included in the benefitsthe benefits

Irrigation projects compared with other Irrigation projects compared with other infrastructure projects such as metro, infrastructure projects such as metro, roads, communication etc.roads, communication etc.

Planning Commission- reportPlanning Commission- report

Need for accounting the factor for Need for accounting the factor for deferred irrigationdeferred irrigation

The valuation of cost & Benefits The valuation of cost & Benefits should reflect preferences for the should reflect preferences for the choices madechoices made

Benefits are measured by the market Benefits are measured by the market choicechoice

Some measurements of benefits Some measurements of benefits requires valuation of Human Life requires valuation of Human Life

Findings of Planning CommissionFindings of Planning Commission

Projects having BC ratio more than 1 Projects having BC ratio more than 1 be compared for the NPVbe compared for the NPV

The discount rate be varied for The discount rate be varied for sensitivity analysis of NPVsensitivity analysis of NPV

The present estimation of BC ratio is The present estimation of BC ratio is not on realistic data and do not not on realistic data and do not clearly reflect the contribution of the clearly reflect the contribution of the project to the economic growthproject to the economic growth

Planning CommissionPlanning Commission

The data on costs are not based on The data on costs are not based on detailed survey and investigationsdetailed survey and investigations

There is a need for post facto There is a need for post facto evaluation of project as a feed back to evaluation of project as a feed back to the appraisalthe appraisal

Discounted cash flow method be used Discounted cash flow method be used for estimation of BC ratiofor estimation of BC ratio

Positive and negative social impacts Positive and negative social impacts balance each other balance each other

Chawla Committee- FindingsChawla Committee- Findings

Need to do away with BC ratio Need to do away with BC ratio criteria for water supply projects criteria for water supply projects

Cost towards rent, depreciation on Cost towards rent, depreciation on implements, land revenue on %age implements, land revenue on %age basis needs modification or to do basis needs modification or to do away withaway with

Benefits towards the flood protection Benefits towards the flood protection needs to be evaluated and added to needs to be evaluated and added to the benefitsthe benefits

Findings of Chawla CommitteeFindings of Chawla Committee

Benefit from afforestation, CAT, also Benefit from afforestation, CAT, also needs to be addedneeds to be added

Tertiary benefits to be addedTertiary benefits to be added

Issues for DiscussionsIssues for Discussions

The BC ratio criteria is used to make The BC ratio criteria is used to make investment decisions in irrigation sector. investment decisions in irrigation sector. Can we afford not to achieve the available Can we afford not to achieve the available command area potential?command area potential?

Aren’t irrigation projects essential for Aren’t irrigation projects essential for maintaining food self sufficiency maintaining food self sufficiency

Why the irrigation projects cannot be Why the irrigation projects cannot be treated similar to defense preparedness, treated similar to defense preparedness, climate change, sewage treatment plants, climate change, sewage treatment plants, pollution control etc. ?pollution control etc. ?

Issues Issues

Do we really need to have BC ratio as the Do we really need to have BC ratio as the criteria for economic evaluation of irrigation criteria for economic evaluation of irrigation projects? projects?

Should not BC ratio be used for Should not BC ratio be used for benchmarking / inter-se priority of the project benchmarking / inter-se priority of the project or ranking of the projects for developmentor ranking of the projects for development

Impact of LARR 2014 policy on irrigation Impact of LARR 2014 policy on irrigation projects, it will severely impact the BC ratio, projects, it will severely impact the BC ratio, should the land cost be excluded from BC should the land cost be excluded from BC ratio estimation ratio estimation

Issues for considerationsIssues for considerations

The concept of with & without project The concept of with & without project is not applicable because of water is not applicable because of water availability constraints and spread of availability constraints and spread of irrigable areairrigable area

Usefulness of BC ratio evaluation for Usefulness of BC ratio evaluation for ongoing projects / RCE as irrigation ongoing projects / RCE as irrigation investments are irreversibleinvestments are irreversible

Rationality of BC ratio criteria for Rationality of BC ratio criteria for drinking water projectsdrinking water projects

IssuesIssues

There is always a criticism of irrigation There is always a criticism of irrigation projects for time and cost overrunprojects for time and cost overrun

The scheduled completion time of the The scheduled completion time of the project be realistic and not linked with project be realistic and not linked with the Plan periodthe Plan period

The fund flow to the irrigation projects The fund flow to the irrigation projects should be timely and smooth so that should be timely and smooth so that realistic time schedule can be realistic time schedule can be maintainedmaintained

Issues for considerationsIssues for considerations

The performance evaluation has to be The performance evaluation has to be must for the projects which are declared must for the projects which are declared completedcompleted

Cost towards O&M be made part of the Cost towards O&M be made part of the Plan funds of the state- ERM projects are Plan funds of the state- ERM projects are largely because of O&M issueslargely because of O&M issues

The reasonableness of applicability of The reasonableness of applicability of concept of opportunity cost and concept concept of opportunity cost and concept of with and without project to irrigation of with and without project to irrigation project project

Other IssuesOther Issues

Detailed Survey & Investigation must Detailed Survey & Investigation must for accepting the DPR for appraisal for accepting the DPR for appraisal

ERM project proposals should contain ERM project proposals should contain detailed survey & investigations and detailed survey & investigations and performance analysis of the current performance analysis of the current stage of the projectstage of the project

Need for sensitivity analysis Need for sensitivity analysis considering the ground condition for considering the ground condition for completion of the projectcompletion of the project

Other IssuesOther Issues

How the period when no benefits have How the period when no benefits have been derived can be reflected in financial been derived can be reflected in financial terms for evaluation of BC ratio?terms for evaluation of BC ratio?

The benefits for drinking water are not The benefits for drinking water are not commensurate with the costs as beyond commensurate with the costs as beyond head works huge cost is incurred for head works huge cost is incurred for making the drinking water available making the drinking water available

Benefits from forests, CAT etc not Benefits from forests, CAT etc not accounted for – need for accounting accounted for – need for accounting

Issues Issues

Benefits accrued at RCE stage needs Benefits accrued at RCE stage needs to be accounted towards the cost to be accounted towards the cost and the BC ratio be estimated on net and the BC ratio be estimated on net costs rather than total costscosts rather than total costs

Sometime even the full costs have Sometime even the full costs have been recovered but not compensated been recovered but not compensated

Some ThoughtsSome Thoughts

Do the BC ratio for irrigation projects has Do the BC ratio for irrigation projects has relevance in light of new Land acquisition relevance in light of new Land acquisition act 2014 ?act 2014 ?

DiscussionsDiscussions

Inputs/ Suggestions Invited Inputs/ Suggestions Invited Please!Please!

Thank YouThank You