CostBenefit Analysis of Pipes and Risers Irrigation System

Cost-Benefit Analysis of Pipes and Risers Irrigation System in Northern Victoria, Australia Asia Climate Change Adaptation Project First Training in Economics of Adaptation Bangkok, Thailand March 11 -14, 2013 Olive Montecillo Victoria, Australia

Structure of Presentation u Introduction u Methodology u Data analysis u Results u Other information

Introduction u Part of Water for Growth project to encourage adoption of efficient water use technologies. u Objectives of the P&R project – To improve water delivery in permeable soils and increase water availability for agriculture Þ reduce evaporation losses Þ reduce channel leakage =>reduce watertable recharge and salinity

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

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

Methodology u Discounted cash flow analysis u Partial budget u Two scenarios: – “Without” project (WOP): Flood (gravity) irrigation from open channel system – “With” project (WP): Flood (gravity) irrigation using P&R system

Methodology u Discount rate: – 4% for the economic analysis – 8% for the financial analysis u Analysis period: 20 years u Gross margin to value extra cow (Net milk income less variable cost) u Net milk income is gross revenue less milk levy

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

Open farm channel system (WOP) Photo from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

Pipes and risers system (WP) Photos from the staff of Sustainable Irrigation Services, Department of Primary Industries, Victoria

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

Project area: Loddon Campaspe Irrigation Region (LCIR) Map of Victoria showing the LCIR Maps copied from Loddon Campaspe Irrigation Region Land Water Management Plan (2010 draft)

Project area u LCIR is about 180 to 350 km north east of Melbourne, the capital city of Victoria u Total area is 714, 000 ha – 500, 000 ha irrigated (mainly dairy and horticulture) – 140, 000 ha (beef, sheep, crops) – 74, 000 ha public land (native forest, grasslands, wetlands)

Project area u Salinity and waterlogging are major problems u Salinity in some areas can be as high as half the salinity level of sea water u Groundwater is less than 2 m from the surface in many parts of the region

Case study data u Dairy farm u Area to be developed: 48. 5 ha u Length of on-farm open channel: 1, 745 m; width: 5 m u Land use: perennial pasture u Water use: 10 ML/ha/yr

Case study farm u P&R system part of major farm development: – improving farm layout fro quicker irrigation – construction of a recycle dam to catch irrigation run-off.

Assumptions u Evaporation losses: 10% u Channel leakage: 5% u Labour requirement: – Irrigation: 58 hr/yr – Channel maintenance: 6 hr/yr u Channel maintenance – Cost of chemicals and earthworks

Assumptions: WP Benefits u Labour savings: 50% u Channel maintenance savings: 100% u Water savings: 100% (equiv to 15% of water use WOP) u Extra income from area of land reclaimed: 0. 72 ha – Can carry/feed 2 extra cows u No increase in pasture production

Assumptions: WP Capital costs u Cost of the system, pump and earthworks u Purchase of 2 cows u Pasture establishment (for the reclaimed area)

Assumptions: WP u Operating costs: – Variable cost: feed, shed and herd cost of 2 extra cows – Annual pasture maintenance cost: fertiliser (reclaimed area) – Annual operating and maintenance cost of P&R system: pumping cost No extra fixed/overhead costs u No extra labour cost to manage 2 extra cows and 0. 72 ha of farm land u Residual value of the system in Yr 20 calculated using straight line depreciation u

…Assumptions (WP) u Water to irrigate reclaimed area (~6. 2 ML from water saving) u Value of remaining water saved: price of water: $70/ML (temporary water entitlement) u Milk production from extra cows: 50% of full production in Yr 1; 100% Yr 2 -20. Each cow produces 235 kg of butterfat/yr

Public benefit u Difficult to quantify salinity and waterlogging benefits

Result of CBA u Economic analysis (4% discount rate) – NPV: $1, 900 – BCR: 1: 1 u Financial analysis (8% discount rate) – NPV: -$38, 200 – BCR: 0. 7: 1

Result Project not financially viable u To break-even after 20 yrs, rebate to farmers should be 35% of total cost. u Although the public benefits were not quantified, rebate of 25% of total cost* of the P&R system was made available between 2001 and 2004. u In 2010 -12, the water saved from the technology became part of environmental flows u * subject to a maximum length and cost per m.

Adoption of the technology 2001 -2004 Number of systems installed: Length of pipeline installed: Area irrigated: Total cost of all systems installed: Total rebate/grants to farmers: Notes: • Loddon-Campaspe Irrigation Area only • Costs not adjusted 42 37, 300 m 1, 340 ha $2. 27 M $428, 000

Ex-post evaluation u Would have been done in 2008 -9 u Difficult to establish “with” project scenario because of the drought from 2001 towards the end of 2010

Take home message - CBA u Identify clearly the parameters of “with” and “without” the project scenarios u Identify and quantify extra costs and extra benefits associated with both scenarios u Be conservative in making assumptions or/and do a sensitivity analysis

Other information: Northern Victoria u Anecdotal evidence: a number of systems were installed without government financial assistance (2004 -2010) u Some farmers planted trees on reclaimed area

Other information: Northern Victoria u Technology is being adopted: ~12, 000 ha irrigated; government funding thru on-farm irrigation efficiency project (OFIEP), 20102012) u Current application for government funding (2012): – 88 systems u Estimated area to be irrigated: 4, 455 ha u Estimated water saving: 8, 165 ML u Estimated cost: $16. 8 M

Other information: OFIEP u To return water to the environment by encouraging irrigators to adopt water saving technologies u Government pays for all or part of the capital cost u In exchange farmer returns half of the water saving to the government

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

Acknowledgement u Sigmund Fritschy for assisting in the analysis u Archards Irrigation P/L for providing the case study farm

Thank you.