|
TECHNICAL REPORT: Investment in Irrigation Technology: Water Use Change, Public Policy and Uncertainty
CRC for Irrigation Futures Technical Report series No. 01/10, Investment in Irrigation Technology: Water Use Change, Public Policy and Uncertainty, by Anthea McClintock is now available online.
Executive Summary Investments in irrigation infrastructure and technologies, particularly those that reduce on-farm water use, have become a major focus of government programs both at a state and federal level. Particular attention has been given to increasing the uptake of water “saving” technologies to achieve a range of environmental and social objectives. The design of programs capable of achieving public objectives requires an understanding of farm level investment decisions.
It is widely documented that technology adoption is usually motivated when a critical limit in the capacity of one part of the business operation is approaching, or has been reached. This point will usually be a trigger for change and often, the adoption of a new technology or process. It is when such a critical limit or stage is reached that the opportunity to adopt new technology becomes relevant. Government and industry groups are interested in understanding the key cause of delays in technology adoption.
In this context, the influence of uncertainty on decisions of when to invest in irrigation technology and infrastructure is examined. The potential for uncertainty to influence investment decisions is demonstrated using the method of Real Options valuation. The approach is applied to a case study which observes investment in on-farm storage evaporation mitigation systems. These technologies were chosen as reductions in evaporation represent a genuine water saving. It is shown that there are circumstances where uncertainty surrounding the value of water savings is sufficient enough to influence the decision to invest in such water saving technologies. Delaying an investment to wait for additional information about the project’s returns can have value in terms of the potential to avoid losses from downside risk. Where the loss avoided is greater than the profit forgone by waiting, it can be worthwhile for an individual to delay adoption.
Where uncertainty exists, rates of subsidy to encourage uptake of these technologies will be higher than rates indicated by traditional NPV analysis. When irrigators are required to relinquish water entitlements in return for a subsidy, the rate of subsidy required to change investment from current rates will be further increased. Depending on the magnitude of the public benefit expected from increased technology adoption, potential losses from adverse price movements may mean that delay is an optimal strategy from a social perspective as well (Rosenburg, 1976). Where this is the case, policies that encourage, adoption without regard for the influence of uncertainty on private investment decisions, may simply transfer the potential costs of uncertainty from the private investor to the taxpayer. Such circumstances will increase the likelihood of investments taking place in areas unlikely to generate a return on public investment.
“Value for money” criteria for investment of public funds in farm infrastructure projects are also discussed. Rates of subsidy, to encourage technology adoption, will have to be justified by the environmental benefits generated from using infrastructure investment programs to acquire water entitlements. Where premiums are paid above the market price for water entitlement recovered through infrastructure investment programs, evidence of the long term benefits to the community should be required. Such community benefits will be underpinned by the potential to achieve basin-level water savings, rather than localised savings, and to demonstrate that the same benefits cannot be achieved at a lower cost through other forms of public investment, either in agriculture or elsewhere in the economy.
Download the full report at the link below.
More information...
Contacts:
Ms Anthea McClintock
|