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ECONOMIC EVALUATION OF IRRIGATION PROJECTS

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Title: ECONOMIC EVALUATION OF IRRIGATION PROJECTS


1
ECONOMIC EVALUATION OF IRRIGATION PROJECTS
2
Pre-Independence- Development of financial
policy
  • Considered as commercial ventures like any other
    infrastructure projects
  • The feasibility of irrigation projects
    essentially evolved from the concept of financial
    soundness of public investment
  • Close of last century with the acceptance of the
    proposal for construction of irrigation works
    through loan funds

3
Pre-Independence- Development of financial
policy
  • The Select Committee on Indian Public Works
    reporting to the House of Commons in 1879
  • Observed
  • The financial results of works of irrigation
    are in the opinion of your committee, the best
    test of their utility. A rail road may traverse
    between certain districts which it does not
    materially improve, yet the work may on the
    whole, be beneficial, to the country. However,
    an irrigation work benefits the immediate
    locality in which it is placed, it can be of no
    use to outside districts.

4
Pre-Independence- Development of financial
policy
  • The committee further observed that
  • the construction of new works from borrowed
    money for the future be limited to those schemes
    alone which upon the responsibility of the
    Government are estimated to be productive by
    yielding an annual income equal to the interest
    in the capital expended on their construction
    including in such capital interest during
    construction.
  • This recommendation formed the basis for
    selection of irrigation projects.

5
Pre-Independence- Development of financial
policy
  • First Indian Irrigation Commission (1901-1903)
  • An irrigation work is classed as productive
    and sanctioned against loan funds when it has
    shown to the satisfaction of the Secretary of
    state that it is likely to fulfill the
    conditions of productive public work, that is to
    yield a net revenue 10 years after completion,
    sufficient to cover interest charges on the sum
    at charge at that date. By sum at charge is meant
    the total direct and indirect capital cost plus
    the excess, if any, of interest charges to date
    over the net revenue.

6
Productivity rate
  • The productivity of a scheme was judged with
    reference to the rate of return earned by it on
    full development
  • The criterion for the sanction of irrigation
    projects was based on financial results

7
Financial results
  • 1. The capital cost of any work was taken as the
    sum actually spent on its construction
  • 2. The revenue on account of direct receipt and
    indirect receipt was estimated
  • 3. The revenue account was debited yearly with
  • the simple interest on the capital cost of the
    works at the commencement of the year
  • The working expenses of the year
  • 4. The revenue account was credited yearly with
    the direct receipts and the indirect receipts
  • The difference between 4 and 3 above for any
    year gives the profit or loss for that year

8
Productivity rate
  • The acceptable value of productivity rate was
    linked to prevailing Rate of interest
  • The productivity rate varied between 4 to 6
    percent during 1919 to 1937
  • After April, 1937, Government of India prescribed
    Rate of Return as 6 percent
  • However, recognising the importance of irrigation
    to meet the food and fiber requirement of the
    public at large, most of the Provinces reduced
    the productivity rate to 4 percent

9
Productivity rate
  • The financial viability test was rigidly applied
    to all irrigation projects
  • Earlier large irrigation schemes were mostly
    diversion works and were relatively inexpensive.
  • During Development of New projects it was felt
    that the development of irrigation was being held
    up by the rigid application of the financial
    criterion
  • Apart from direct irrigation revenues, other
    benefits accrued to the Government in the shape
    of increased revenue from excise duties, income
    tax, sales tax, transport etc.

10
Resolution of The Central Board of Irrigation
(1936)
  • as the expansion of irrigation is seriously
    handicapped by the restricted view taken of the
    value of irrigation, an economic survey should be
    carried out with a view to estimate the direct
    and indirect financial benefits accruing to the
    Central and Local Governments from Irrigation
    Projects.

11
Protective Work
  • A view was taken that if a project did not
    fulfill the financial criterion, but was still
    considered necessary in the public interest, it
    could be sanctioned as a protective work.
  • Number of irrigation projects which failed to
    satisfy the financial criterion were accordingly
    taken up as protective works.

12
Plan era
  • A change in the approach to the irrigation
    projects
  • These projects were viewed as investment in the
    development and social benefit where profit was
    not the sole motive
  • Rate of return on the capital outlay for
    classifying a capital work as productive was
    reduced to 3.75 percent which continued upto the
    year 1954
  • The rate was raised to 4.5 per cent and this rate
    continued up to March, 1960.

13
Benefit Cost Ratio
  • It was felt that irrigation project in an area
    should not only be viewed as source of income to
    the Govt. but as a means for increased
    agricultural produce and economic development of
    that area and in the process, of the country as a
    whole.
  • The Planning Commission in 1958 initiated studies
    of some of the major projects to assess the
    overall benefits of the irrigation projects and
    to find a more appropriate criterion for
    deciding whether various irrigation projects
    should be undertaken.

14
Committee headed by Prof. D.R.Gadgil
  • Large benefits accrued from irrigation in terms
    of double cropping, diversification and better
    quality crops, higher yields, larger income and
    greater opportunities of employment.
  • Indirect benefits that accrued were the
    establishment of processing industries, expansion
    of consumer industries, retail trade, transport
    and communications.
  • Total benefits from irrigation were far larger
    that the direct financial returns accruing to
    Government from water rates and betterment levy.

15
Gadgil Committee
  • The Committee recommended that in future the
    concept of benefit cost ratio should be used for
    assessing the feasibility of new projects instead
    of the traditional criterion of the direct
    financial return to the Government.
  • For simplicity it was considered that the
    indirect or secondary benefits and cost need not
    be taken into account.

16
Gadgil Committee Recommendations
  • The net annual benefit was to be worked out as
    the difference between the monetary value of the
    net agricultural production (total value of
    produce- cost of cultivation ) before and
    after the introduction of irrigation.
  • The annual cost should be taken to comprise the
    annual interest on capital, depreciation and
    expenditure on maintenance and operation.

17
Recommendations- Contd..
  • Gadgil Committee report submitted in 1964
    recommend the adoption of economic benefit
    criterion instead of the financial criterion.
  • The Government accepted this recommendations and
    benefit cost ratio criterion has been adopted.
  • Benefit-Cost Ratio criterion for judging the
    economic soundness of irrigation projects is in
    practice till date.

18
B.C. Ratio
  • B.C. ratio is obtained by dividing the annual
    benefits by the annual cost.
  • Net annual benefit is estimated as the difference
    in the net value of agricultural produce before
    and after irrigation
  • The 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.

19
B.C. Ratio
  • Criteria
  • Irrigation projects with B.C. ratio greater than
    1.5 are considered acceptable from economic point
    of view.
  • BC ratio of 1.5 instead of 1.0 was suggested as
    a prudent precaution against likely increase in
    cost of the project.
  • Subsequently, acceptable value of B.C. ratio was
    reduced to 1.0 for irrigation projects in drought
    prone areas.

20
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24
Internal Rate of Return
  • Reflect the further cost involved in long
    gestation that takes place during the
    construction
  • Obligatory For World Bank aided project
  • Internal Rate of Return is calculated on the
    basis of market prices without any adjustment for
    economic prices because of non availability of
    national parameters for economic prices

25
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26
Views of Irrigation Commission (1972)
  • The economic benefit criterion is more suitable
    than the financial return criterion.
  • The rate of return methods is more suited as a
    basis for making a choice between two investments
    where financial return is the dominant
    consideration and no constraints are imposed by
    national goals
  • Recommended the continued use of the benefit cost
    ratio for irrigation projects not only because it
    is simpler but also because it is used in most
    countries.

27
Views of Irrigation Commission (1972)
  • The application of the benefit-cost-ratio
    criterion minimises the importance of securing
    adequate return from investments on irrigation
    projects
  • Recommended that at the time of considering
    project for acceptance that the financial return
    of the project should also be carefully examined.
  • If the return does not cover working expenses
    and interest charges on capital, the impact of
    the project on the irrigation revenues of the
    State should be examined to see if an upward
    revision of the water rates in the States, would
    be necessary.

28
Review of Criteria
  • The Fifth Conference of Irrigation State
    Ministers (1980)
  • Recommended that whole criteria of B.C. ratio
    should be reviewed on the basis of actual
    performance of irrigation system and norms for
    evaluation of benefits.
  • Accordingly a Committee under the Chairmanship
    of Shri Nitin Desai was constituted by Government
    of India in December, 1981

29
Nitin Desai- Report
  • The Committee noted the following methodological
    deficiencies in the approach
  • The method of calculation of benefits and the
    criterion for selection relies on the increment
    in the net value of agricultural production. This
    does not reflect the range of objectives which
    irrigation investments have to subserve.
  • Irrigation projects take time to implement and,
    what is important, the time required varies from
    project to project. The comparison of annualised
    benefits and annualised costs does not reflect
    the value of time adequately

30
Desai Committee Findings
  • Generally all costs and benefits are evaluated at
    market prices. Because of the presence of many
    distorting influences, these market prices may
    not reflect the true value of these costs and
    benefits to the economy
  • Many of the cost parameters are evaluated on the
    basis of ad hoc norms. For instance, fodder
    expenses and dung receipts.

31
Desai Committee- recommendations
  • Recommendations of Nitin Desai Committee
  • The committee reviewed the existing norms of
    evaluating project benefits, cropping patterns,
    yields, valuation of outputs, cost of
    cultivation, international prices, concept of
    opportunity cost adjustment for social cost etc
  • The present procedure does not take into account
    the time taken to reach the full benefit
  • Discounted cash flow (DCF) method must be
    followed in the benefit-cost analysis of
    irrigation projects

32
Review of Existing Criteria
  • There is no analysis of risk and uncertainty and
    the extent to which the project will help to
    reduce the variability of agricultural
    production, a deficiency which is particularly
    serious since stabilisation of production is one
    of the major objectives of irrigation development
  • There is no systematic attempt at sensitivity
    analysis to take into account likely variations
    in yields, costs etc.
  • The benefit cost analysis is generally added on
    to a project after technical parameter are firmed
    up. A techno-economic analysis of all available
    options is seldom attempted

33
Review of Existing Criteria
  • Working Group(1999) for updating Existing
    Guidelines on Guidelines for preparation of
    Detailed Project Reports of Irrigation and
    Multipurpose Project(1980)
  • W.G. recommended for continuation of existing
    practice with the following modifications
  • Cost of on-farm Development works be worked out
    separately and two sets of the benefit cost ratio
    of the project be worked out with and without
    considering the cost of these works.

34
WG (1999) recommendations
  • Benefits due to fisheries, horticulture,
    catchment area treatment, aforestation, animal
    husbandry etc. in addition to agricultural
    production may also be assessed and accounted in
    benefits
  • the quantity of water reserved for domestic and
    industrial water supply may be assigned certain
    cost in consultation with concerned authority

35
Recommendations Contd..
  • For modernisation project, the two sets of
    benefit cost ratio be computed one considering
    net benefit and net costs and other considering
    total benefits and total cost. The higher of the
    two be considered for deciding economic viability
    of the project.
  • B.C. ratio limits of 1.5/1.0 (for drought prone
    areas) and above need to be reviewed in view of
    landing of the project with so many additional
    costs and a lower B.C. ratio of 1.0 may be
    acceptable for determining economic viability of
    the project.

36
Where do we Stand Today?
  • The recommendations of the Nitin Desai Committee
    not implemented
  • The Format for estimating Benefit Cost Ration
    remains the same
  • The ratio is the sole criteria for acceptance of
    the project may not give a true pictue of the
    economics of the project

37
Issues Unanswered
  • Sensitivity analysis are rarely performed
  • Benefits and costs are estimated at the end of
    the preparation of the project
  • Such exercise needs to be carried out at planning
    stage to evaluate various Project alternatives as
    decision making aid

38
Concerns
  • Irrigation systems are largely designed based on
    inadequate or unreliable data on water resources,
    irrigation efficiencies, distribution of cropping
    pattern in the command etc.
  • The lack of detailed survey Investigation data

39
Issues of concerns
  • In many cases the project is in advanced stage of
    construction even before it is appraised it is
    already a fait accomplice
  • Most econometric models of investments are based
    on implicit assumption that investment
    expenditure are reversible.
  • However, most large irrigation projects are
    irreversible, once started. They can of course be
    restructured, but not completely shifted

40
Concerns
  • The Planning Commissions capital cost estimation
    procedure suffers from many
  • serious limitations. It neglects gestation lag
    that exists between the time investment is
    undertaken and the time irrigation potential is
    created and it fails to recognise that society
    values investments differently as time passes,
    among others.

41
Concerns
  • Analysis of 346 M M irrigation projects show
    that a fixed period of 12
  • years between the time investment is made and
    potential created is representative of most
    irrigation works.

42
Other Considerations
  • The present format deals with static aspects.
  • The dynamic aspects such as shift in demand and
    supply post project also needs to be looked into
  • The costs of inputs such as fertilizers etc have
    a component of subsidy where as benefits are at
    market price there is need to look into this
    aspect as well

43
Other aspects
  • Rent of the land ( of Gross Produce) do not
    reflect the opportunity cost of the land
  • Labour cost is only towards hired labours and do
    not account for the family labours

44
Benefits /Costs not Accounted
  • Flood Control
  • Recreation
  • Inland fishing
  • Improvement in life of the people
  • The flow of funds over long period remains locked
    and the benefits are delivered ( Partial or full)
    much later

45
Recent Developments
  • Planning Commission constituted a committee to
    revisit the methodology of computation of BC
    ratio
  • Ministry of Water Resources constituted a
    committee to study the issues related to
    estimation of BC Ratio (Chawla Committee)

46
Findings Planning Commission
  • Concept of with and without project introduced
    Opportunity cost of the project
  • Intangible benefits recognised but in the absence
    of procedure to assign monetary value not
    proposed to be included in the benefits
  • Irrigation projects compared with other
    infrastructure projects such as metro, roads,
    communication etc.

47
Planning Commission- report
  • Need for accounting the factor for deferred
    irrigation
  • The valuation of cost Benefits should reflect
    preferences for the choices made
  • Benefits are measured by the market choice
  • Some measurements of benefits requires valuation
    of Human Life

48
Findings of Planning Commission
  • Projects having BC ratio more than 1 be compared
    for the NPV
  • The discount rate be varied for sensitivity
    analysis of NPV
  • The present estimation of BC ratio is not on
    realistic data and do not clearly reflect the
    contribution of the project to the economic growth

49
Planning Commission
  • The data on costs are not based on detailed
    survey and investigations
  • There is a need for post facto evaluation of
    project as a feed back to the appraisal
  • Discounted cash flow method be used for
    estimation of BC ratio
  • Positive and negative social impacts balance each
    other

50
Chawla Committee- Findings
  • Need to do away with BC ratio criteria for water
    supply projects
  • Cost towards rent, depreciation on implements,
    land revenue on age basis needs modification or
    to do away with
  • Benefits towards the flood protection needs to be
    evaluated and added to the benefits

51
Findings of Chawla Committee
  • Benefit from afforestation, CAT, also needs to
    be added
  • Tertiary benefits to be added

52
Issues for Discussions
  • The BC ratio criteria is used to make investment
    decisions in irrigation sector. Can we afford not
    to achieve the available command area potential?
  • Arent irrigation projects essential for
    maintaining food self sufficiency
  • Why the irrigation projects cannot be treated
    similar to defense preparedness, climate change,
    sewage treatment plants, pollution control etc. ?

53
Issues
  • Do we really need to have BC ratio as the
    criteria for economic evaluation of irrigation
    projects?
  • Should not BC ratio be used for benchmarking /
    inter-se priority of the project or ranking of
    the projects for development
  • Impact of LARR 2014 policy on irrigation
    projects, it will severely impact the BC ratio,
    should the land cost be excluded from BC ratio
    estimation

54
Issues for considerations
  • The concept of with without project is not
    applicable because of water availability
    constraints and spread of irrigable area
  • Usefulness of BC ratio evaluation for ongoing
    projects / RCE as irrigation investments are
    irreversible
  • Rationality of BC ratio criteria for drinking
    water projects

55
Issues
  • There is always a criticism of irrigation
    projects for time and cost overrun
  • The scheduled completion time of the project be
    realistic and not linked with the Plan period
  • The fund flow to the irrigation projects should
    be timely and smooth so that realistic time
    schedule can be maintained

56
Issues for considerations
  • The performance evaluation has to be must for the
    projects which are declared completed
  • Cost towards OM be made part of the Plan funds
    of the state- ERM projects are largely because
    of OM issues
  • The reasonableness of applicability of concept of
    opportunity cost and concept of with and without
    project to irrigation project

57
Other Issues
  • Detailed Survey Investigation must for
    accepting the DPR for appraisal
  • ERM project proposals should contain detailed
    survey investigations and performance analysis
    of the current stage of the project
  • Need for sensitivity analysis considering the
    ground condition for completion of the project

58
Other Issues
  • How the period when no benefits have been derived
    can be reflected in financial terms for
    evaluation of BC ratio?
  • The benefits for drinking water are not
    commensurate with the costs as beyond head works
    huge cost is incurred for making the drinking
    water available
  • Benefits from forests, CAT etc not accounted for
    need for accounting

59
Issues
  • Benefits accrued at RCE stage needs to be
    accounted towards the cost and the BC ratio be
    estimated on net costs rather than total costs
  • Sometime even the full costs have been recovered
    but not compensated

60
Some Thoughts
  • Do the BC ratio for irrigation projects has
    relevance in light of new Land acquisition act
    2014 ?

61
Discussions
  • Inputs/ Suggestions Invited Please!

62
Thank You
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