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Value of Flexibility in Irrigation Projects

This document explores the critical importance of flexibility in irrigation projects, particularly in the context of the Nile Basin Initiative, which involves ten countries disputing Nile waters. It focuses on the Ethiopian Irrigation Drainage Project and a feasibility study for an 80,000-ha irrigation plan aimed at achieving food security, drought prevention, and agricultural productivity. The analysis compares deterministic and stochastic approaches, presenting scenarios for flexible and inflexible designs. Key factors include water input, crop prices, and demand forecasting, highlighting the significant role flexibility plays in optimizing project success.

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Value of Flexibility in Irrigation Projects

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  1. Value of Flexibility in Irrigation Projects Anjuli Jain Figueroa DEC 7, 2010 Esd. 710

  2. Outline • Big Picture • AP6 Scope and Assumptions • Deterministic • Accounting For Uncertainty • Incorporating Flexibility

  3. Nile Basin- The Big Picture • Nile Basin Initiative: 10 countries disputing Nile waters • Ethiopia vs. Egypt • Ethiopian Irrigation Drainage Project -feasibility study for an 80,000ha irrigation plan Goal: mutually beneficial solution >> food security, drought prevention, agricultural productivity http://www.ess.co.at/WATERWARE/NILE/background.html

  4. Project Scope Variable/Stochastic Water Flow Compare big and small irrigations projects on basis of ENPV, P(<0), range, 5% and 95% and B/C ratio Deterministic Flexible Inflexible 20,000 ha x4 80,000 ha 80,000 ha Key Reservoir Irrigation Plot Crop Yield Crop Price

  5. Simplifying Assumptions *If the average change in water level in the past 2 years is negative then the corn yield will decrease at a rate of 0.9% for every 1% decrease in water level *Uncertainties sampled from historical data’s fitted distributions

  6. Deterministic Deterministic 80,000 ha

  7. Accounting For Uncertainty-Forecasting by Sampling Distributions- Water Input Crop price Corn demand Corn yield INFLEXIBLE DESIGN

  8. Water Input Sample from Log logistic Distribution

  9. Crop Price Sample from Log logistic Distribution

  10. Corn Demand Sample from Exponential Distribution * Ignored trend

  11. Corn Production Yield Sample from Uniform Distribution

  12. Input Sensitivity When the input changes by +1 standard deviation, the output will change by the X-axis value associated with the length of the bar

  13. Inflexible Inflexible 80,000 ha

  14. Incorporating Flexibility Expansion Rules Flexible DESIGN comparisons Value of Flexibility

  15. Expansion Rules • Start with 20,000 ha instead of 80,000 ha • *Assume no additional upfront cost or cost to exercise flexibility • IF: • Price of corn is greater than $63 and, • (in deterministic model this price gives NPV of 0) • Demand this year is greater than last year and, • (increasing demand) • Change in water level in last two years is greater than 0, and • (increasing water level) • 4. Land size has not reached capacity of 80,000 ha • THEN: • Expand by 20,000 ha

  16. Flexible Flexible 20,000 ha x4

  17. Comparisons ENPV Probability of Losing Money Range 5th and 95th Percentiles B/C Ratio

  18. ENPV Comparisons

  19. B/C Comparisons

  20. Conclusions No “all-time” best “Best Project” depends on the evaluation metric used and risk tolerance of project manager.If a plan is made on a deterministic basis, there may be a lot of surprises. http://www.google.com/imgres?imgurl=http://agricultureguide.org...

  21. QUESTIONS? http://www.themillionairesecrets.net/4-questions-that-will-lead-you-to-success/

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