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land and water management plans

in the Murray Valley

Land and water management plans

in the Murray Valley

Assessment of the critical economic

and farm management assumptions

ABARE report to the

Murray-Darling Basin Commission

Anthea McClintock and Doug Young

November 1 996

ABARE

McClintock, A. and Young, D. 1996, Land and Water Management Plans in the Murray Valley: Assessment of the Critical Economic and Farm Man- agement Assumptions, ABARE report to the Murray-Darling Basin Com- mission, Canberra, November.

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601

Telephone (06) 272 2000 Facsimile (06) 272 2001 Internet http://www.abare.gov.au

ABARE is a professionally independent government economic research agency.

ABARE project 1109

LAND AND WATER PLANS

Foreword

Increasing areas are being affected by high groundwater and salinity in the irrigation areas of Victoria and New South Wales. To address these issues salinity and land and water management plans have been, and are continuing to be, developed. The plans are aimed at addressing waterlogging and associated salinity problems through improved resource management. While government funding is provided to the plans, they are essentially community driven projects. Since the first salinity management plan was developed in Victoria in 1983, the plans have evolved to incorporate more refined data, different methods of addressing salinity and waterlogging issues, and improved modelling procedures.

Under the Murray-Darling Basin Commission's Natural Resource Manage- ment Strategy, ABARE was commissioned to review the key economic and farm management assumptions of the nine salinity and land and water management plans prepared in the Murray Valley. These assumptions underlie estimates of the financial and economic viability of program proposals. Consequently, the robustness of the assumptions and the sensitivity of the plans to these assumptions are important in assessing the estimated benefits from implementing the plans.

BRIAN F I S H E R Executive Director

November 1996


Acknowledgments

Advice given by staff from the Department of Land and Water Conservation, New South Wales Agriculture, the Department of Natural Resources and Environment (then Agriculture Victoria and Department of Conservation and Natural Resources) and Professor Warren Musgrave during the preliminary stages of this report was greatly appreciated.

The authors wish to acknowledge the assistance of ABARE colleagues who contributed to the preparation of this report. In particular, the authors wish to thank Nigel Hall and Colin Mues for their contributions. The authors also wish to thank Thilak Mallawaarachchi, Lawrie Stanford, Geoff McLeod, Jane Branson and Scott Davenport for valuable comments made on drafts of this report.


Contents

Summary I

I . Introduction 6

2. Background to the Murray Valley plans Resource management problems Estimated losses from soil salinisation Costs of plan development and implementation

3. Content of land and water management plans 14

Options considered in the plans 14

Evaluation and assessment methods 15 Review and monitoring arrangements 18

4. Overview of economic assumptions 20

Costs of salinity and accessions Commodity prices and yields Road damage costs Timber infrastructure Residual values Restrictions on rice growing

5. Adoption rates New South Wales Victoria Significance of adoption rates Observed adoption rates Summary comments

6. Economic value of irrigation water

Impact on net benefits Estimation of the economic value of irrigation water


Recent research Summary comments

7. Water policy environment Implications of COAG recommendations Summary comments

8. Discount rates 43

Impact on benefit-cost evaluations 43 Discount rates in land and water management planning 44 Summary comments 46

9. Conclusion 47

Appendixes A Project objectives 48 B Economic results of the Murray Valley plans 49 C Farm financial performance in the Murray Valley Irrigation Districts 52

References 55


Box 1 Definition of soil salinity classes

Tables 1 Salinity and land and water management plans, Murray Valley 2 Extent of high watertables, area covered by plans, 1995 3 Extent of salinity on surveyed agricultural land in the Victorian

Murray Valley, 1995 4 Soil salinity predictions under the 'no plan' scenario -

New South Wales Murray Valley 5 Estimated on-farm losses from soil salinisation, selected regions -

net present value, at discount rates of 4 and 7 per cent over 30 years

6 Monitoring and research expenditure as a percentage of net plan benefit

7 Sensitivity of net present value to changes in adoption: irrigated woodlots option, Cadell Land and Water Management Plan

8 Target and realised levels of adoption - totals to 1994-95 9 Effect of changes in the economic value of irrigation water on net

present values - Denimein Land and Water Management Plan 10 Effect of changes in the economic value of irrigation water on net

present values - Boort West of Loddon Salinity Management Plan 11 Selected estimates of economic values of irrigation water 12 Sensitivity of the Tragowel Plains Salinity Management Plan to

changes in the discount rate applied C1 Selected physical characteristics of irrigated farms in the

Murray Valley C2 Selected financial characteristics of irrigated farms in the

Murray Valley

vii


Summary

Salinity management plans in Victoria and land and water management plans in New South Wales have been developed by community working groups, with assistance from consultants and specialists from government agencies, in response to existing and potential environmental problems. The overall aim of the plans has been to develop regionally based strategies to improve natural resource management and agricultural productivity.

Salinity and land and water management plans have been prepared in nine irrigation districts of the Murray Valley:

Shepparton, Torrumbarry East of Loddon (Tormmbarry), Boort West of Loddon (Boort), Kerang-Swan Hill and Tragowel Plains in Victoria; and

Berriquin, Cadell, Wakool and Denimein, in New South Wales.

Since the first salinity management plan was developed in Victoria in 1983, the plans have evolved to incorporate more refined data, and different methods of addressing salinity and waterlogging issues, including new investment options and improved modelling procedures.

In this report the Murray Valley plans and their economic evaluations were reviewed in order to identify the key economic and farm management assumptions made. An extensive list of assumptions was reduced to those which appeared to have both a significant impact on the estimated benefits identified by the plans and were subject to considerable uncertainty. On this basis, four assumptions were selected for further review in this study:

adoption rates,

economic value of irrigation water,

water policy environment and

discount rate.

The economic evaluations in the plans were conducted by drawing on additional assumptions about agronomic and biophysical processes. Assessment of the potential impact of these assumptions is, however, beyond the scope of this study.


The following economic and farm management assumptions were not reviewed further:

costs of groundwater accessions,

value of downstream salinity,

commodity prices,

crop and pasture yields,

road benefits,

value of hardwood timber,

residual value of assets and

alternative use of land and water removed from rice production.

Some of the assumptions were associated with a high degree of uncertainty - such as the costs of groundwater accessions and the residual value of assets -however, the likely ranges in values of these variables were considered to have a negligible impact on the results. The value of other variables -in particular road benefits, commodity prices and yields - were more important in the evaluation results of some plans but, for different reasons described later in the report, were not included for further review.

The assumptions reviewed in the report are briefly outlined below.

Adoption rates In the plans, rates of adoption were used to define the number or proportion of farms, or total district area, that would adopt the management options specified in the plans, and the time period over which adoption would occur. By specifying the timing of costs and benefits and their magnitude, adoption rates have a direct impact on the estimated net benefit from implementing plan options. To estimate the incremental benefits from implementing the plan it is necessary to specify the adoption rates for both the 'with plan' and 'without plan' scenarios to determine net adoption levels. This was done for the New South Wales plans but was less evident in some of the Victorian plans.

The Community Working Groups responsible for developing the plans relied on a broad range of information to determine feasible adoption rates, including landholder surveys, expert opinion and extrapolation from adoption experiences in other districts. However, greater documentation of the assumptions underlying adoption predictions, such as any financial incentives or extension programs, would allow a better critical review of the plans. This would help


to demonstrate more clearly the link of moving from the 'without plan' adoption scenario to the 'with plan' scenario, and would help to ensure that the cost sharing arrangements are based on the same assumptions. Such documentation would also help to distinguish between the information value of plans and their implementation value. The baseline adoption predictions should account for the information benefits attributable to the plan development phase. The approach taken in some of the plans may overstate the public benefits from implementation.

Economic value of irrigation water In the plans, the economic value of irrigation water was required to value water obtained or conserved through groundwater pumping, on-farm storage and the repair of leaking supply channels, and to estimate gross margins for the economic evaluations. In some plans, the benefits from conserving or reusing water represented a significant proportion of the benefits from implementing a particular option. Based on the results of sensitivity testing in certain plans, some program options have demonstrated a sensitivity to changes in the economic value of water.

Different approaches have been taken in the New South Wales and Victorian plans to estimate the economic value of irrigation water. In the Victorian plans, state government guidelines set a standard economic value of inigation water to be used in plans across all inigation districts. In New South Wales, linear programming models based on fixed capital and management structures were used to estimate the economic value of irrigation water for certain regions. Further research undertaken more recently has improved estimates of water values.

Ideally, the value of water used in the plans to quantify benefits arising from conserved or reused water should represent the economic value of water at the time benefits are realised and take account of changing capital and management structures on farm. In the benefit-cost evaluations, changing the value of water over time to reflect expected changes in the market for irrigation water could improve the reliability of the estimated benefits.

Water policy environment An implicit assumption underlying the evaluations of Murray Valley plans has been that current water use and irrigation water charges will continue. However, implementation of COAG (Council of Australian Governments) water policy reforms will have implications for the direction of the plans, and their viability, by affecting farmers' incomes and by changing the demand for


irrigation water in many districts. The adjustment implications of the COAG reforms for irrigation areas will vary between districts depending on their water use intensity and the financial performance of farms.

During the development phase of the plans there was limited information available on which to base expectations about the implications of water policy reforms on their viability. However, research into the regional and farm level impacts of current policy reforms in the southern Murray-Darling Basin is being undertaken by the state departments of agriculture and ABARE. This research will provide an indication of the expected impact on farm incomes, particularly in the dairy and broadacre industries, and the likely pattern of water trade between regions.

The implications of the results of these analyses for the plans should he considered as plans are reviewed or updated or when new plans are developed. For example, adoption rate predictions may need to be modified given the effects of water policy reforms on farm incomes, particularly if the on-farm options involve high capital costs. Where large volumes of water are likely to he traded out of a region, the viability of, or need for, community surface drainage or channel sealing may need to be re-evaluated.

Discount rates In the economic evaluations of the plans, the discount rates used to calculate the present value of net plan benefits differed from the market or private discount rate. The discount rate determines the relative value placed on future costs and benefits and, as such, affects the acceptability and ranking of projects.

To maximise returns from investments the discount rate used should be based on the opportunity cost of capital. For governments this will be the cost of raising capital from borrowing or taxation. There are likely to be differences between states in borrowing and taxation costs but the difference cannot pos- sibly approach the levels set for appraisal by the New South Wales and Victorian governments.

Implementation of the plans will require finance from governments, communities and farmers. To produce meaningful estimates of net present values it is important that a suitable discount rate is used. The fact that several different

contribute to the plans makes the selection of an appropriate rate difficult. The analysis could be clarified if the costs and returns to the different parties were considered separately. This would facilitate the use of diff&ent


discount rates. Overall the benefit-cost results generated could be used more confidently to guide investment decisions.

Concluding comments The review of the four assumptions has brought out another issue that affects land and water and salinity management plans more generally - the use of information generated from benefit-cost evaluations. The plans are packages of investment options including some activities which have a high benefit-cost ratio and others, with a benefit-cost ratio of less than one, included because of their assumed complementarity with other activities. The practice of aggregating results from individual evaluations without consideration of complementarity, to produce a single estimate of the net present value for the plan overall has many shortcomings. It may mislead rather that inform decision makers about the merits of a plan. The benefits associated with the investments required to implement the plans have only been partially quantified. Where benefits cannot be fully quantified, as for example for some environmental and social benefits, the use of an absolute benefit-cost criterion to guide investment decisions is inappropriate.

The costs of plan development, monitoring and research should be considered in the light of the expected, or realised, net benefits from plan implementation. In some cases, the costs of plan development are likely to be greater than the expected benefits of implementing the plan. In other cases, the costs of monitoring and research represent a high proportion of the expected net benefits of implementing the plans. Such ex post examinations are likely to make useful contributions toward improving future planning and investment decisions. The benefit of further refining the data and assumptions used in the plans should be assessed in terms of how the evaluations can be used to guide better investment decisions on Australia's natural resources.


I . Introduction

Rising watertables, soil salinisation and waterlogging are important environmental issues which affect both agricultural productivity and farm viability in the irrigation districts of the Murray Valley. The extent and severity of these problems vary between and within districts, depending on the hydrological characteristics of the districts and agricultural practices such as the intensity of water use.

In response to these existing and other potential environmental problems, salinity and land and water management plans (hereafter referred to as the plans) for the Murray Valley irrigation districts were developed through a community based process. As part of the planning process, studies were undertaken to assess the nature and extent of natural resource degradation problems affecting these irrigation districts, but with particular focus on waterlogging and salinity. The plans include assessments of the likely effectiveness of ameliorative actions available to prevent or minimise losses caused by this degradation and identify and rank the viable options according to the expected benefits and costs.

The purpose in this report is to review each of the plans, for the nine irrigation areas in the Murray Valley, identifying critical assumptions in the light of changing recent developments affecting each of these assumptions. This review was designed to provide those involved with the development and implementation of plans with indications of areas in which further effort and attention may be warranted. The review focused on the assumptions considered most likely to have an important effect on the benefit-cost calculations. However, because of the differences between districts and the nature and extent of particular problems addressed by the plans, the importance of the assumptions reviewed differs for individual plans.

Furthermore, for some assumptions reviewed, such as the economic value of inigation water and the impact of water policy reforms, the research required to provide benchmark data could not be undertaken within the bounds of this review. For other assumptions, such as adoption rates, the region specific nature of such data precluded ABARE from providing benchmarks. Instead, frameworks have been provided to help guide and improve the collection and estimation of this information for future reference.


2. Background to the Murray Valley plans

Salinity management plans in Victoria and land and water management plans in New South Wales have been developed by community working groups in response to existing and potential environmental problems. The overall aim of the plans is to develop regionally based strategies to improve natural resource management and agricultural productivity. In particular, the plans are used to identify viable investment options which will help communities to address waterlogging and salinity problems and to determine the appropriate level of public and private funding.

The Victorian salinity management plan process commenced during the early 1980s, under the Victorian salinity program, Salt Action-Joint Action. Since then five plans have been completed for the irrigation regions in the %ctorian Murray Valley. All plans have received government support and are currently being implemented (table 1).

In New South Wales, the development of plans commenced in the Murray Valley irrigation districts between 1991 and 1992. The draft Berriquin plan was examined by the New South Wales government's Land and Water Management Plan Assessment Team (LWMPAT) in 1994. The final plan was completed in 1995 and implementation has commenced. Draft plans for the Wakool, Denimein and Cadell districts have been completed and were recent-

1 Salinity and land and water managementplans, Murray Valley

Working group formed Plan released Victoria Bam Creek-Torrumbarry East of Loddon a 1983 1995 Shepparton 1986 1989 Kerang-Swan Hill 1986 1992 Tragowel Plains 1986 1989 Boort West of Loddon 1991 1994

New South Wales Berriquin 1991 1994 Cadell 1991 1995 Wakool 1991 1995 Denimein 1992 1995 a The area covered in the Barr Creek plan was expanded in 1994, and it became the Talrurnbany East of Loddon Salinity Management Plan.


ly reviewed by LWMPAT. The plans have since been accepted and implementation commenced in March 1996.

While both the communities and governments involved with the plans have emphasised the need for improved resource management, their views on the extent to which investments should be made to minimise or rehabilitate degraded lands are likely to diverge at some stage. There could be cases where the most appropriate use of resources from a national perspective will be to retire degraded land rather than invest in ameliorative actions or the prevention of further degradation, even when the value of existing infrastructure and the social costs of adjustment have been taken into account. In other circumstances, investments in enhanced resource management activities by governments and landholders may be appropriate. In order to make fully informed decisions about the nature of the problem and the most appropriate levels of government and private contributions to implement the works proposed in each plan, individual investment options must be assessed from the viewpoint of each contributing party.

The economic evaluations in the plans were also a basis for determining cost sharing arrangements for implementation. Recommendations in the plans on the relative contributions from government and the community for plan implementation were generally based on the relative apportionment of estimated benefits to the private and public sectors. Many issues have been raised about cost sharing, such as whether the polluter or the beneficiary should pay, or if it would be better for the government to contribute only the minimum amount required to achieve the desired rate of implementation (Blackmore 1996). These issues are being further investigated through other MDBC commissioned research and are not discussed further in this report.

However, in determining the cost sharing arrangements the ability of farmers to pay is taken into consideration in the plans. To facilitate this consideration, ABARE farm survey results for selected characteristics of dairy and broadacre farms are provided for the New South Wales Murray and Shepparton and Kerang-Swan Hill regions in appendix C.

The extent and severity of rising watertables, soil salinisation and waterlogging between and within regions in the Murray Valley varies considerably. Based on assessments made as part of the planning process, and in some cases information collected since implementation, a brief description of the extent and costs of high watertables and soil salinisation in the Murray Valley irrigation districts is provided in the following sections. While rising watertables and soil salinisation are major issues, contamination of surface waters with


nutrients and chemicals is an issue of increasing concern also being addressed through the plans.

Resource management problems

Victoria From table 2 it can be seen that high watertables underlie a significant proportion of the Victorian Murray Valley irrigation districts. Precise areas affected by high water tables will vary from year to year according to rainfall. However, the area usually affected by high watertables is not expected to increase further in Torrumbany, Kerang-Swan Hill and Tragowel Plains. In Shepparton and Boort, watertables are still increasing. For example, the proportion of the Boort irrigation area with watertables within two metres of the surface is expected to increase to approximately 60 per cent by the year 2020 (Boort West of Loddon Salinity Working Group 1994).

As shown in table 3, high soil salinity levels occur in a large number of irrigation areas. For example, more than 20 per cent of the area on which soil salinity surveys had been undertaken was affected by C (high) and D (extreme) class soil salinity in the Kerang-Swan Hill and Tragowel Plains Salinity Management Plan areas. Without intervention, the area estimated to be affected by C and D class salinity levels in Boort will increase to 9000 hectares within twenty years (see box 1 for a definition of soil salinity classes and the effects of soil salinity on crop and pasture production). As part of the Victorian plans, with the exception of Shepparton, extensive soil salinity surveys are being undertaken to assess and monitor the extent and severity of soil salinity.

2 Extent of high watertables, area covered by plans, 1995 a

Area of water tables within 2 metres of surface

Plan region (proportion of plan

area affected) Area irrigated Total area

Shepparton b 53 280 000 500 000 Boort West of Loddon e 22 23 000 89 000 Torrumbarry East of Loddon c 71 106 000 130 000 Kerang-Swan Hill e 33 31 500 110000 Tragowel Plains c 9 1 70 000 130 000

a The area of watertables within 2 metres of the surface is for 1995. Water table levels are influenced by rainfall and vary somewhat from year to year b S o w e : Sinclair Knight Merr (1995). e Source: S. Lattkowitz, Agriculture Victoria (now Depmment of Natural Resources and Environment), personal communication, March 1996.


Box 1: Definition of soil salinity classes

Soil salinity a Salinity impact Soil salinity class

EC dS/m < 2 EC dS/m Crop growth unaffected A+ (very low) 2-4 EC dS/m Most crops unaffected; some clovers affected A (low) 4-6 EC dS/m Some grain yields reduced; clovers affected B (moderate) 6-8 EC dS/m Grain yields reduced; too saline for clovers C (high) > 8 EC dS/m Too saline for most agriculture D (extreme)

a Electncnl conductivity in deciseirnens per metre is u measure of eleculcnl conductivity which is used to measure salt content of roil.

3 Extent of salinity on surveyed agricultural land in the Victorian Murray Vallev. 1995

Soil salinity class Total of

P l a n region A (low) B (moderate) C (high) D (extreme) surveyed area

Shepparton 7 256 1 495 1 0 8 752 Boort 17 095 2 992 855 1 132 22 074 Torrumbarry 103 47 33 95 278 Kerang-Swan Hill 8 338 2 829 1 191 2 531 14 889 Tragowel Plains 48 7 11 22 345 8 044 10 278 89 378

Source: C. Norman, Institute of Sustainable Ag"culture, Ag~iculture Victoria (now Depanment of Natural Resources and Environment). personal communication, March 1996.

New South Wales In the Murray Valley of New South Wales, the Berriquin, Wakool, Denimein and Cadell irrigation districts comprise an area of almost 1 million hectares. The area within each district currently with high watertables -that is, watertables within two metres of the surface - ranges from less than 2 per cent in Cadell and Denimein to 11 per cent in Wakool and almost 28 per cent in Berriquin. However, while watertables were predicted to continue rising, soil salinity was not predicted to become a major problem in the Cadell and Denimein Irrigation Districts over the thirty year period considered in the respective communities' plans.

Predictions of soil salinity levels over the thirty year period ending 2025, indicated that approximately 1 per cent (752 hectares) of Denimein would be affected by soil salinity, but the level of salinity would be below 4 dS/m -


4 Soil salinity predictions under the 'no plan' scenario - New South Wales Murray Valley a

Berriquin

ha Soil salinity A+ (very low) 145 400 A (low) 70 400 B (moderate) 78 000 C (high) 21 200 D (extreme) 7 000

Total 322 000

Wakool Cadell Denimein

. . . Wakaol Land and Water i&agement Plan Working Group (1995).

-

that is, not high enough to significantly affect agricultural productivity. In the Cadell district, the area affected by soil salinity above 4 dS/m was predicted to be less than 3 per cent (9320 hectares).

It is important to recognise that the thirty year time frame of the plans covers only the period in which the process of salinisation for these districts is in early stages. In these districts, soil salinisation is expected to become a greater problem in the years beyond 2025.

In the Berriquin and Wakool plans, severe soil salinity was predicted to be more widespread, with approximately 33 per cent (106 200 hectares) of the Berriquin district predicted to have soil salinity above 4 dS/m by 2020 and approximately 11 per cent (30 900 hectares) of the Wakool district by 2025 (table 4). It should be noted that at the time the plans were being prepared, there was little reliable information available on the extent or severity of soil salinisation affecting the New South Wales Murray Valley districts. As a result, predicted rates of soil salinisation used in the plans (reported in table 4) were based on assumptions about current levels of soil salinity and on data drawn from other areas in the Murray Valley and MIA on rates of increase in soil salinity.

Estimated losses from soil salinisation Losses from soil salinisation can be estimated in several ways. One approach is to measure the revenue loss from any associated reduction in yields. While estimates of the total value of yield losses are likely to overestimate the economic costs of degradation on-farm, they provide an indication of the magni-

I 1


tude of the problem facing irrigation districts. Estimated avoidable losses are also important to consider as they represent the size of expected benefits from achievable reductions in soil salinity. In table 5 the predicted total and avoidable losses caused by salinity, in terms of declines in agricultural income are presented for selected regions. The estimates reflect the value of production undertaken in the respective districts and the proportion of district area predicted to be affected by salinity.

The avoidable loss estimates for the Wakool and Cadell regions, shown in table 5, account only for the expected salinity benefits from implementing the off-farm programs. In the Wakool and Cadell plans, it was assumed that losses resulting from salinity in year 1 were $5.7 million and $6 million, respectively, and that no on-farm adjustment would be made in response to increasing soil salinisation. In the Shepparton plan, the assumed adjustment response to salinity by farmers was not documented and salinity costs were set at zero in year 1. If farmer response and existing levels of soil salinity have not been accounted for, estimates of future on-farm salinity losses will be over- stated.

Other costs associated with soil salinity have not been accounted for in the loss estimates presented in table 5, and in some districts, are likely to be significant. Oliver, Wilson, Gomboso and Muller (1996) list a range of on-farm and off-farm costs associated with dryland salinity which includes damage to on- farm infrastructure, salinisation of stock water supplies, reduced biodiversity in stream, river and wetland ecosystems and damage to sewerage pipes and disposal systems. Based on surveys of local councils, public utilities and government agencies within the Murray-Darling Basin, the annual estimated expenditure by these groups on salinity related repairs and maintenance to infrastructure was $12.5 million (Oliver et al. 1996, p. 3).

5 Estimated on-farm losses from soil salinisation, selected regions - net present value, at discount rates of 4 and 7per cent over 30 years

Total loss Avoidable loss

Plan region @ 4 per cent @ 7 per cent @ 4 per cent @ 7 per cent

$m $m $m $m

Shepparton a 390.5 245.6 na na Kerang-Swan Hill b na na 26.7 15.1 Wakool c 100.5 71.8 57.2 40.8 Cadell d 101.8 73.4 18.3 25.7

a Go~lhum-Rruken Kegloo S.al~n~r) PII.,~ Pr,>gr;un ..\d!~\ory C,?~n;il (I989 h Kcrang Lake, ,\rr.a Working Grt,up{lYY2,. r EK\4 \l~lcl>cll hliCcrrer ~14~15.11 d EK\( M~tcl1cll \I;Concr !IYrShj na N$a a\atlihle


Costs of plan development and implementation

Some information has been collected on the cost and time taken to develop the plans. Development of the Berriquin plan was estimated to have cost $3 million over four years (Soil and Water Conservation Association of Australia 1995). Similarly in Victoria, the Kerang-Swan Hill and Shepparton plans cost $3.4 million and $3.3 million respectively (Victorian Auditor General's Office 1993). In Kerang-Swan Hill the plan was developed over six years; for the Shepparton region planning was completed in four years.

Once completed the costs of plan development are sunk costs - that is, they are no longer relevant for future decision making because they cannot be avoided. However, a cursory ex post review of the costs of plan development reveal the high cost of developing some plans relative to the expected net benefits. The Shepparton, Kerang-Swan Hill and Berriquin plans were expected to generate benefits in excess of the costs of plan development. If the Cadell and Denimein plans cost similar sums to develop, the net benefits of the plans would not cover the costs of the planning phase (see appendix B).


3. Content of land and water management plans

Since the first salinity management plan was prepared in Victoria, the planning process has evolved to incorporate more refined data, different methods of addressing salinity and waterlogging, and improved modelling procedures. Different plans have used different approaches in terms of the method used and assumptions which reflect the time at which they were developed, the constraints under which they were developed and the nature of each plan's objectives. As a result it is difficult to make direct comparisons between the plans.

Options considered in the plans -

The plans for each district comprise a set of programs designed to address the main environmental and economic issues identified in the district. In the Victorian plans, with the exception of Shepparton, extensive soil salinity was the major problem affecting the districts, whereas in the New South Wales Murray Valley and Shepparton districts, management of rising watertables represented the prime focus of the plans. The programs included in plans have varied between districts, reflecting the different problems and the emphasis of each district's plan objectives.

Similarly, the content or options evaluated in programs also differed - for example, options chosen to comprise the farm program depended on the particular management options proposed by communities. The options proposed within the farm program of the Victorian plans tended to focus on broader management options such as the concentration of resources on A and B class soils and whole farm plans, whereas in the New South Wales plans the farm management options assessed were more specific, like the earlier application of final autumn pasture irrigation and the establishment of irrigated woodlots.

In New South Wales, the benefits of some options were included in the estimated net present value of implementing some plans but not others. For example, in the Denimein plan, revenues from the sale of hardwood timber grown along farm channels (planted to control channel seepage where sealing was not economically viable) and in irrigated woodlots were not included in the total summation of plan benefits, while they were in the Cadell plan. In the Cadell plan, these benefits represented 58 per cent of net plan benefits, and were included despite the uncertainty surrounding expected timber growth rates and quality and the establishment of a timber mill in the district.


The extent to which structural adjustment issues, particularly land retirement options, have been assessed in the plans has varied considerably. In the Victorian irrigation districts, for which significant areas are expected be affected by high levels of soil salinity even with plan implementation, land retirement may be especially relevant. While the implications of large scale land retirement were not evaluated in these plans, the option of concentrating resources on A and B class soils amounted, to a lesser extent, to the down- scaling of production on highly saline land.

Other options proposed in plans to address structural adjustment have included stamp duty rebates and in the Wakool plan the establishment of an Alternative Crops Assistance Scheme, and a Land and Water Fund to facilitate the concentration of resources on less saline soils (Wakool Land and Water Management Plan Working Group 1995).

Recognising adjustment pressures arising from policy reform will also help the plans to achieve sustainable outcomes. However, efforts to account for policy changes within the plans have been hindered by a lack of information on policy settings and limited research into the implications of policy reforms on the irrigation industry.

Summaries of the economic results of the evaluations for the Murray Valley plans are presented in appendix B. The economic results provide an indication of the relative contribution of each program to the net plan benefits.

Evaluation and assessment methods In the Murray Valley plans, benefit-cost analysis has been used to evaluate plan proposals. This evaluation framework was used in all the plans, in line with government requirements. However, there have been variations between the plans with respect to the modelling procedures used and the approaches taken to quantify the impact of salinity and waterlogging. The variation in assessment methods between plans partly reflect the different focus of the plans, different time frames over which they have been developed (see table 1) and available data and resources. In this section the benefit-cost evaluation framework and analytical approaches are discussed.

Benefit-cost framework In the context of the plans, the benefit-cost analyses have been conducted in a forward looking or ex ante manner to assess the merits of particular investment options. The results of each analysis were then aggregated to produce an overall estimate of the net present value (NPV) for the plan.


While benefit-cost analysis can provide useful information to guide investment decisions, where there are a number of options for using resources, the generation of a net benefit from any one option is not sufficient grounds to jus- tify investment in that option. In addition, the estimated net benefits may not always be sufficient grounds on which to judge the viability of a project. In the case of the ~ l ans . the benefit-cost evaluations undertaken are only partial analyses. ~ o m ~ i m ~ o r t a n t benefits (and costs) fall outside the plan ti&eAframe or mav not be able to be meaningfullv quantified or quantified with certainty. where benefits or costs cannot i e f;ll; quantified, as for example for some environmental and social benefits, the use of an absolute benefit-cost criterion to guide investment decisions is inappropriate.

In the plans each benefit-cost ratio is surrounded by uncertainty, which reflects the use of assumed relationships and values. However, by providing one value for the net present value of individual projects and then the overall plan rather than a range, the decision maker is not informed of the potential variability or risk. Furthermore, if a large part of the uncertainty can be attributed to a limited number of variables then this information could be used to guide further research and extension activities or identify minimum levels for a project to be viable. However, the marginal benefit of further refining data and assumptions in the plans needs to be considered.

In many cases, it remains unclear what proportions of the net return to the activities identified in the plan should be directly attributed to the plan itself. Some beneficial options are likely to be adopted even if the plan were not formally implemented. It is appropriate to deduct these benefits; however, this requires some plausible baseline representing changes which may have occurred without implementation. Unless this baseline is feasible and is set objectively, the results of benefit-cost evaluations will be of limited value.

Analytical approach The modelling method used for benefit-cost evaluations in the plans involved several implicit assumptions. These relate to the extent to which farmers respond to changes in their operating environment through enterprise substi- tution and changes in their management practices. While farmer response rate was not a relevant concern for all options considered in the plans, at least in particular cases it was an important determinant that affected the quantified plan benefits.

Recognising the ability to substitute between existing and new enterprises as relative enterprise profitabilities change is critical when estimating productivity losses (costs) or gains (benefits) associated with soil salinisation and

I6


changes to management practices. In Marshall et al. (1994) it was estimated that the present value of salinisation costs, assuming no farmer response, were 4.5 times higher than results when farmer response was accounted for, assuming a ten year lagged response period.

In the New South Wales plans linear programming models were used to assess the economic and financial viability of certain options, and to estimate derived values for inputs such as irrigation water. An advantage of linear programming is that it allows planners to monitor the costs of changes in farm inputs or farm output mixes and their impact on farm returns.

Spreadsheet based cash flow models were used in all plans to assess the feasibility of district drainage options. In the Victorian plans a similar approach was used to evaluate water management options relating to soil salinity levels and changes in water availability through on-farm reuse and storage systems. In some of the Victorian plans, assumptions were built into models to represent farmer response - for example, in the Boort plan it was assumed that farmers responded to increasing soil salinity by transferring a certain proportion of water from C and D class soils to A and B class soils.

While there may be some advantages from using these cash flow models in terms of lower data requirements and development costs, the limited ability of such models to account for farmer response makes them less desirable. Furthermore, as discussed in Marshall et al. (1994), spreadsheet models are unable to account for the effects of changes in output on the opportunity costs of limited resources such as irrigation water, channel capacity and farm fam- ily labour.

Inevaluating these approaches, it is difficult to assess the adequacy of the modelling procedures used because of the differing levels of complexity and different assumptions that underlie the models developed for use between the plans. While some modelling procedures may be conceptually better for deal- ing with particular issues, such as farmer response and opportunity costs, the extent to which such models may be applied is often governed by available data and tradeoffs between the depth of analysis or level of accuracy against time and resource availability. Furthermore, although some methods offer the potential to generate estimates with a higher degree of accuracy - for example, through an improved ability to represent particular relationships - this advantage will not be realised unless the underlying assumptions and data are reliable.


Review and monitoring arrangements

An important component of the development of the plans are provisions for monitoring and review during the implementation phase. The importance of performance monitoring has been emphasised in each of the Murray Valley plans, through program components specifically targeted at monitoring and review.

In each of New South Wales Murrav Vallev olans. similar sets of oerformance indicators have been developed, to assess the'effectiveness of plancomponents as the plans are implemented. The indicators cover changes in: the rate of water - table iise; the area affected by waterlogging and soil salinisation; drainage water quality; farm financial performance; farmer contributions to plan implementation; and other changes in the natural environment including soil acidi- fication. Formal reviews of the New South Wales plans will be undertaken in their fifth year of implementation, 2001.

In Victoria, the working groups responsible for the plans are required by the state government to submit annual reports on their progress and provide detailed reports at five year intervals covering key indicators of the plans, the effectiveness of plan programs and future monitoring requirements (Boort West of Loddon Salinity Working Group 1994). The Shepparton plan was revised in 1995, and a detailed review of the Tragowel Plains plan commenced in 1995.

Expenditure on implementation costs, in particular the costs of monitoring and research, was examined for four of the Munay Valley plans: Cadell, Denimein, Wakool and Shepparton. In table 6, expenditure on research and monitoring is presented as a percentage of the net benefits of the selected plans. These

6 Monitoring and research expenditure as a percentage of net plan benefit

Plan region Monitoring and research Net benefit a Share

$m $m %

Cadell Denimein Wakool Shepparton

Agricultural sector 262.7 b 3473.0 c 8 a Net plan benefits from appendix B excluding monitoring and research costs. b Estimated expenditure an research and development based on I per cent of the gross value of farm production (0.5 per cent contributed by industry and 0.5 per cent by government). c Net value of farm production (ABARE 1996a).


costs represent considerable proportions of the net benefits from plan implementation. In comparison, research and development expenditure for Australia's agricultural sector as a whole represents only 8 per cent of the net value of farm production. Such discretionary expenditure may need to be reconsidered, especially if plan benefits are not being realised.


4. Overview of economic assumptions

The Murray Valley plans were reviewed in order to identify the economic and management assumptions used. An extensive list of assumptions was reduced to those which appeared to have a significant impact on the magnitude of estimated plan benefits and those which were subject to the greatest uncertainty. Documents containing the economic evaluations of the plans were used to provide information about these two criteria. For the first criterion, particular attention was paid to any sensitivity analyses that had been completed as part of the evaluations. For the second criterion, variability of the assumed values, both between and within the plans, was used as an indicator of uncertainty. Information about this criterion was also gained from other sources, especially for factors such as expected long term trends for commodity prices or expected changes to policy, such as COAG water policy reforms.

In deciding on the key assumptions to be reviewed, consultations were also held with Victorian and New South Wales agencies involved in evaluating and implementing the plans.

The following four assumptions were selected for further analysis:

adoption rates,

the economic value of irrigation water,

the water policy environment, and

the discount rate.

It was considered that these assumptions were most likely to have a significant bearing on the economic assessments made in the plans, and that it was therefore important to assess the validity of the assumptions made and, where possible, the sensitivity of the evaluations to changes in these variables. Each of these assumptions is reviewed separately in subsequent chapters.

While this report is focused on the above assumptions, it is recognised that there is also a high degree of uncertainty in the biophysical information used in the economic evaluations - for example, levels of channel seepage, watertable predictions and assumed effectiveness of on-farm practices and capital works in reducing the effects of high watertables. This uncertainty stems from significant gaps in available technical information. As improve-


ments in this information take place there will be a need to adjust economic analyses and any conclusions drawn from them.

The following economic and farm management assumptions were not reviewed further:

costs of groundwater accessions,

value of downstream salinity,

commodity prices,

crop and pasture yields,

road benefits,

value of hardwood timber,

residual value of assets and

alternative use of land and water removed from rice production.

Each of these assumptions is discussed briefly below.

Costs of salinity and accessions There was a high degree of uncertainty about the cost of downstream salinity and groundwater accessions. However, analysis of the economic evaluations indicated they did not have a significant impact on the viability of the plans over the range of values analysed. These costs were therefore excluded from further review.

In the New South Wales plans economic values were estimated for the costs imposed by groundwater accessions. A value of $12 per megalitre of accessions was used in the plans based on soil salinity, watertable and enterprise data for the Berriquin district. As discussed by Marsden Jacob Associates (1995), the Berriquin value is not representative of the cost of accessions in the other New South Wales districts because of the difference in salinisation profiles and enterprise mixes. Marsden Jacob Associates (1995) estimated that values of $7 per megalitre and $3 per megalitre for Wakool and Cadell, respectively, would be more appropriate. However, these selected values were found to have only a minor impact on the estimated net benefits and hence are unlikely to have a material effect on the viability of the plans overall (Marsden Jacob Associates 1995).

Cost estimates for downstream salinity associated with drainage schemes were based on figures provided by the Murray-Darling Basin Commission through


the Drainage Evaluation Spreadsheet Model (DESM). The estimated costs of downstream salinity were negligible compared with the capital costs associated with drainage schemes. As such, changes in the value of downstream salinity were considered unlikely to have a significant impact on the evaluation results.

Commodity prices and yields Commodity prices, with the exception of butterfat and rice, were assumed to be set in competitive markets and to remain stable in real terms over the evaluation period. However, the commodity prices used in the evaluations were based on different premises in each state. For example, in Victoria the commodity prices reported by ABARE were used, whereas in New South Wales average local prices which reflected production in the district and local trans- port costs have been used (R. Jones, New South Wales Agriculture, personal communication, March 1996). Both methods have advantages and disadvan- tages. The values for rice and butterfat used between the plans were broadly consistent and likely price ranges were considered to have a negligible impact on the economic results.

In the New South Wales plans, crop and pasture yields used in gross margin calculations were based on estimated achievable yields, whereas in Victoria information from local surveys were used to identify average yields. To the extent that yield assumptions are not representative of yields realised by farms in the area, there is potential for over or underestimation of benefits derived from on-farm options. The assumptions made about changes in yields over time will also influence the outcomes of planning decisions.

Although assumptions about crop and pasture yields will have an important influence on gross margin estimates, such assumptions were not included for further review as it was not possible to demonstrate the impact of such changes on the net benefits of plan options. However, when selecting estimates for yields care should be taken to ensure the values used are representative of the technology used on typical farms within a district.

Road damage costs In some plans the benefits of reduced or avoided road damage were significant enough to affect plan results. In most cases the method set out in the Murray-Darling Basin Commission's study (1994), The Benefits to Roads and Other Infrastructure of Providing Drainage in the Irrigation Area of the Murray-Darling Basin, was adopted. Only in the Cadell, Wakool and Denimein plans did the road benefits method appear to differ, through the


omission of damage costs associated with surface waterponding. According to Marsden Jacob Associates (1995) this led to some underestimation of benefits.

Further research is being funded by the Murray-Darling Basin Commission to assess expenditure on road maintenance and construction costs, which will identify the accuracy of the data used in the DESM to determine these costs. Given that road benefits represent a considerable proportion of benefits for the Boort, Shepparton and Kerang-Swan Hill plans in particular, this may be an assumption in need of review if the research results indicate estimated annual maintenance and construction costs differ from the values used in the DESM. In the New South Wales plans, because of the relatively lower levels of soil salinisation in irrigation districts, road maintenance and construction costs were negligible.

Timber infrastructure In the New South Wales plans, two of the on-farm options considered were the establishment of trees in woodlots and along farm channels. The profit- ability of these options will depend on assumptions made about estimated timber growth, quality, prices and the establishment of a local timber mill, which are associated with a considerable degree of uncertainty.

While preliminary results from research into the growth rates and quality of output from irrigated plantations are promising, there is debate on the potential for tree production to achieve watertable control and at the same time generate commercial returns. The assumptions underlying the tree establishment options were not included for review in this study as research is currently being undertaken to investigate the potential for tree production in the Murray Irrigation Region and the extent to which trees contribute to watertable control.

While tree establishment options were included in all New South Wales plans, the associated benefits derived from the sale of hardwood timber were not always included in the final summation of estimated net plan benefits. For example, in the Denimein plan, benefits from tree establishment were quantified; however, further research into the suitability of agroforestry was recommended.

Residual values In the New South Wales and some Victorian plans residual values were included in the benefit-cost evaluations of some options. Residual values were


included to account for the expected future benefits of assets, when the economic life of the asset continued beyond the thirty year evaluation period - for example, for supply channels and drainage schemes. There is considerable uncertainty associated with estimates of future benefits flowing from an asset after thirty years. However, assumptions about estimates of residual asset values were not included for further review, as these values generally represented a very small proportion of total estimated net benefits, partly a result of the effects of discounting.

Restrictions on rice growing In the Denimein and Wakool plans the net benefit from removing rice from permeable soils represented 3 1 per cent and 65 per cent, respectively, of the estimated net benefits of the on-farm practices program. Most benefits from this option arise from assumptions made about alternative uses for land and water resources removed from rice production. For example, it was assumed that 80 per cent of the irrigation water saved would be used to grow new areas of rice and that 20 per cent of the area removed from rice production would be whole paddocks which could be replaced by high input annual pasture production. To the extent that these changes are profitable to individual farmers they might be expected to take place whether or not there was a plan in place.

The review of these farm management assumptions are best conducted by the respective Community Plan Working Groups, where the feasibility of these resource use assumptions, given the physical existing structure of irrigation farms in the districts. are better known.


5. Adoption rates

In the plans developed for the Murray Valley irrigation districts, the rate at which an option would be implemented has been described as the adoption rate. Adoption rates define the number or proportion of farms or total district area in which an option would be implemented, and the time period over which that adoption is expected to occur. As such, adoption rates used in the plans have a direct effect on the estimated net present value of options by specifying the timing of costs and benefits and their magnitude.

Of particular significance is the extent to which implementation of the plan is expected to increase adoption levels and the time pattern of adoption above what would otherwise have taken place. This is especially difficult to judge when the option recommended is already an attractive investment possibility, and there are public benefits to be realised in earlier time periods if uptake is encouraged. A shortcoming in the plans has been the lack of information detail- ing the assumptions underlying some adoption expectations, in particular the incentives included in the plan to encourage on-farm adoption.

The following sections describe the methods used to predict adoption rates, how they were used in the evaluations to estimate the net benefits of implementing an option, and their effect on the estimated net present value of plan options.

New South Wales In the New South Wales Murray Valley plans, adoption rates were defined either in terms of the number of hectares or in terms of the number of farms on which a proposal would be implemented over a specific time period. Therefore, the per hectare or farm level impact was first estimated and then aggregated to yield the district level impact.

Predicted adoption rates specified the uptake of each proposal or option under two scenarios: adoption if the proposal was recommended in the plan; and adoption if the proposal was not recommended in the plan. The economic impact of a recommendation, and consequently the plan overall, was measured by the extent to which it was expected to increase or lead to faster implementation of an option. For example, in the Denimein plan it was predicted that 2500 hectares of irrigated annual pasture would incorporate phalaris within ten years if the option was recommended in the plan, compared with 500


hectares over the same period if the option was not recommended in the plan (Gunaratne et al. 1995a).

The adoption rate predictions were developed by the Community Working Groups in each district. It is understood that the predictions were based on indications of future adoption levels obtained from landholder surveys and through discussions with government agencies. In predicting reasonable rates of adoption, the suitability of implementing certain farm management options on farms in the districts was taken into account. For example, in the Berriquin plan, the pattern of implementation predicted for spearpoint pumping took into account the fact that this option would not be relevant to all farms because of the lack of a suitable site for pumping on some farms (Wall, Marshall, Jones and Darvall 1994).

Victoria In several of the Victorian plans it appears that no rate has been specified for the adoption of particular practices or options in the absence of the plan. For example, in the evaluation of on-farm management options for the Kerang-Swan Hill area (Young 1991), no adoption rates for land forming, soil salinity surveys or the installation of reuse systems were specified in the absence of the plan. However, it might be expected that some uptake of these activities would have occurred in the absence of a plan, though perhaps to a lesser extent, or over a longer time period.

Furthermore, in the Kerang-Swan Hill plan it appears that no concentration of resources on A and B class soils was assumed to occur in the absence of the plan. This differs from the Boort plan in which it was assumed that landholders would recognise salinity on C and D class soils and change their enterprise mix and/or water use to some degree even in the absence of a plan (Branson 1994). The advantage of the soil salinity surveys included in this part of the program was that landholders would identify the salinity status of their soils more quickly and adjust water use accordingly. It was stated in the Tormmbany plan that the difference between the 'with plan' and 'without plan' scenarios is the time taken for farmers to respond to soil salinity and adjust. In this plan, it is assumed that the presence of the plan shortens this adjustment period from thirty years to ten years (Torrumbarry East of Loddon Working Group 1995).

The approach taken to determine estimates of future adoption of plan proposals has varied between Victorian plans over time. In the Shepparton plan adoption rate objectives were based on Rural Water Commission data and discussion with regional staff (Dwyer Leslie 1989). In the plans completed more recently, predictions about the pattern of adoption were based on adop-


tion experiences reported in plans for which implementation had commenced, the advice of regional personnel and the level of community interest expressed for particular options. For example, based on the experience in Tragowel Plains, in the Torrumbany plan it was assumed that 64 per cent of the water used on C and D class soils would be transferred onto A and B class soils.

Signijicance of adoption rates Benefit-cost evaluations can be used to provide information about the rate of adoption required to achieve a positive net present value1 or the cost of achieving the targeted reduction in groundwater accessions and runoff. Such analysis can also help decision makers to assess the value or benefit from any measures used to hasten adoption so the benefits occur in earlier time periods.

The potential sensitivity of the net present value of the Cadell plan to a change in the adoption rate for one particular option is shown in table 7. In the Cadell plan, 58 per cent of the plan benefits were derived from the establishment of woodlots and trees along farm channels. Realisation of these benefits hinges on achieving the predicted level of adoption and revenue from the sale of hardwood timber.

The base scenario presented in table 7 represents the estimated net rate of adoption for the establishment of irrigated woodlots in the Cadell lrrigation District used in the plan. In scenario A, the period over which adoption takes place has been extended from fifteen to twenty years, while the level of adoption has remained unchanged. In scenario B, the level of adoption has been reduced by 30 per cent, from 4065 hectares to 2850 hectares, but the period over which adoption takes place is unchanged from the base scenario. The results indicate that a divergence from the adoption rates predicted for this option under the base scenario has the potential to significantly affect the net present value of the option and, in this case, the net benefits from implementing the plan.

The estimated benefits from on-farm options represented a major proportion of total net benefits from plan implementation for the Cadell, Denimein and Wakool plans (see appendix B). As such, estimates of the net benefits for these plans will be sensitive to assumptions made about the rates and levels of adoption, although to a lesser degree in the Denimein and Wakool plans than demonstrated for the Cadell plan in table 7.

1 Only part of this total benefit will be attributable to implementation of the plan as for most options a certain rate of adoption could b e expected to occur in the absence of the plan.


Sensrtzvity of netpresent value to changes in adoption - irrigated woodlots 7 . " optron, Cadell Land and Water Management Plan

Net ~resent value

Scenario Area established Time period Option Plan

Base 4 065 15 3.6 1.9 A a 4 065 20 3.1 1.5 B a 2 850 15 2.5 0.9 a ABARE estimate derived from model provided by New South Wales Agriculture. NPV option exceeds NPV plan because the whole plan includes some options which are not profitable in themselves. Note: In the Wakool, Denimein and Berriquin plans, relatively lower adoption predictions, in camparison with those uscd in the Cadell plan, reduced the significance of the tree establishment options in terms of the impact on total plan viability. S,,,urre: Gunarvtne et al. (1995b).

Issues Changes in input and output prices, technological change, developments in the market for irrigation water, weather conditions and government incentives will all influence the rate at which plan proposals are adopted over time through their impact on the financial performance of farming operations. Divergence between the realised adoption rate and the rate predicted in the plan can affect the estimated value of net benefits associated with implementing particular options and the plans overall. While some factors may lead to greater adoption, others may impede uptake of plan proposals by reducing the returns to farmers from proposed options.

The adoption rates predicted in the plans have been based on the assumption that no significant change will occur in the financial and technological operating environment which will affect the ability of farmers to implement proposals at the anticipated rates. While changes in the operating environment will occur over time, it is difficult to assess what these changes are likely to be and the extent to which such changes will affect the level and speed of adoption predicted for different options.

However, one change to the operating environment which will have implications for adoption rates of on-farm options is the current rural water policy reform process. Water policy reforms are likely to influence the extent to which adoption rates are realised through their impact on farm incomes and water demand. Most of the recent plans have acknowledged that pressure will arise from implementation of the reforms; however, in the absence of research into the farm and regional level impacts, it has been assumed that there will not be major changes in water availability. In the Berriquin plan it was stated that the future effects of the COAG reforms, including implications for water charges,


would be addressed during the review process (Berriquin Land and Water Management Plan Working Group 1995). The implications of changes in the water policy environment are discussed in chapter 7.

The provision of government incentives underlie many of the adoption rates specified in the plans. In the Murray Valley plans, extension and education programs, regulations and financial incentives, including rebates and subsidies, have been proposed in order to achieve the rates of adoption used in the evaluations. In some cases, eligibility for financial inducements has been tied to certain conditions - for example, in Cadell, landholders will receive rebates on selected items, such as lucerne seed, salinity mapping and fencing for revegetation, where a farm development plan and a Land and Water Management Plan Awareness Test have been undertaken (Cadell Land and Water Manage- ment Plan Working Group 1995).

Conditions within water supply contracts that relate to complying with plan recommendations have also been proposed by Murray Irrigation Ltd. These conditions could include restricting the transfer of water rights to landholders who fail to install recycling systems within a specified period. In the Denimein plan, a surcharge of $2 per megalitre will be placed on irrigation water used after 30 April as an incentive to reduce the practice of late autumn waterings.

Observed adoption rates One of the Victorian government requirements for the implementation stage of plans is that annual reports be submitted providing information about the achievement of implementation targets. The information contained in these reports can be used to measure adoption rates, which can then be compared with those assumed in the plans.

In table 8, the target and realised adoption rates for the Tragowel Plains and Kerang-Swan Hill plans are presented. While higher than anticipated levels of adoption have been achieved for options such as whole farm plans and in Kerang-Swan Hill strategic reuse systems, the realised adoption rates of several options have lagged behind target levels. For some options, such as soil salinity surveys, drought conditions limited the extent of surveying which could be undertaken because of the soil moisture requirements of the EM38 survey technique. The delay in surveying had a direct effect on the adoption of other plan components such as fencing and revegetation of C and D class soils which, under the plans, require soil surveys before fencing can be carried out.


fJ Target and realised levels of adoption - totals to 1994-95

Tkagowel Plains KerangSwan Hill

Unit Target Realised Target Realised

Soil salinity survey ha 110 000 89 065 17 200 11 955 Whole farm plans ha 22 OM) 23 256 1 600 2 168 Strategic reuse systems no. - - 4 5

Surface drainage -community construction km 350 257 - - - farm ha 10 OM) 3 416 - -

Refencinglrevegetation of C and D soils ha 2 500 2 021 1 000 688

Rehabilitation and management of salt affected wetlands and streams $ 109 000 82 940 83 000 54 117

Salt tolerant vegetation ha 6 000 2 470 - -

Sources: Tngawel Plains Salinity Management Plan (1995); Kerang-Swan Hill Salinity Management Plan (1995).

In the Tragowel Plains plan annual report (1995) it was noted that in addition to seasonal constraints in meeting adoption targets, drought conditions had placed financial pressure on landholders which slowed investment. In the Shepparton annual report (Salinity Program Advisory Council 1994) it was reported that adoption of land forming 1 laser grading, tree establishment and irrigation reuse systems had well exceeded adoption targets.

Summary comments Community Working Groups responsible for the plans relied on a broad range of information to determine feasible adoption predictions, although this was not clearly documented in the plans. The information used included farm financial performance, the level of apparent community interest in the proposed option, the perceptions and advice of regional personnel, recent adoption patterns and experiences in other plans.

However, a shortcoming identified in most plans was the lack of documentation about the assumptions on which the adoption predictions were based. In the Victorian plans it was unclear whether the adoption rates used measured only the incremental benefits attributable to implementing plans. For other plans it was unclear to what extent the realisation of 'with plan' adoption predictions relied on expectations of financial incentives or further extension programs financed by governments.

30


The plans do not distinguish between the information value of the plans and their implementation value. There are likely to be benefits from undertaking the planning process which would be generated even if a plan was not formally implemented. Greater awareness of the symptoms, causes and possible management and ameliorative measures to address problems and better infoma- tion about the natural resource base are likely to improve the uptake of some investment options or management practices even if a plan were not implemented. It is important that baseline adoption predictions attempt to account for any benefits attributable to the plan development phase. The approach taken in some of the plans may overstate the public benefits from implementation.

A future consideration is that the assumptions behind estimates of adoption rates be made more explicit. This would help to explain the assumed links between the plan and expected changes in behaviour and help ensure cost sharing arrangements are based on the same assumptions.


6. Economic value of irrigation water

Within the Murray Valley plans, the economic value of irrigation water was used to estimate the benefits of particular programs. For example, the economic value of irrigation water was required to value water obtained or conserved through groundwater pumping, on-farm storage and the repair of leaking supply channels, and to estimate gross margins for the economic evaluations. In some plans, the benefits from conserving or reusing irrigation water represented a significant proportion of the benefits from implementing a particular option and the plan overall. Consequently, assumptions about the economic value of water can have a significant impact on the viability of some plans.

In a perfectly competitive market the value of water used on farm would be the market price of transferable water entitlements and delivery charges. However, in Australia, water is not freely traded and there are external costs from water use, such as river salinity. Hence, market prices for water and current delivery charges are not likely to reflect the economic value of water. Furthermore, when water is traded, market values and water delivery charges are not independent. An increase in delivery charges will result in a commen- surate decline in the market value of transferable water entitlement. In this sit- uation an increase in delivery charges would only affect the economic value of water if the increase exceeded the market price of the entitlements.

Water is delivered to individual farms in the Murray Valley by monopoly agencies that fix delivery charges on a cost averaging basis. Water deliveries are also subject to losses between the source and the farm gate, depending on the quality and length of the inlet channels. These losses can average as much as 30 per cent between river and farm gate and may well be greater for farms further than average from the river. In these circumstances, the value of water saved on farm is its value in its highest alternative use. If this is on another farm, the value will be affected by the difference in losses through the delivery system and any change in externalities from applying water in one place rather than another. The value of water depends on where it is and can be expected to be greater on farm than in the river because of delivery losses.

When water value is derived from a water market model, such as that used by Hall, Poulter and Curtotti (1994) and Eigenraam, Stoneham, Branson, Sappideen and Jones (1996), it is value in the river, whereas the modelled values used in New South Wales plans are at the farm level.


Impact on net benefits

Many of the options considered in the New South Wales Murray Valley plans involved changes in requirements for irrigation water either on farm or at the district level. For the on-farm options where water was conserved or reused, the estimates of benefits were based on the additional agricultural production from using the irrigation water. At the district level, the external costs of downstream salinity were taken into account.

For some options, such as groundwater pumping and channel sealing, the benefits arising from the conservation or reuse of water represented a significant proportion of the benefits associated with implementing the option. For example, in the Denimein plan, water reuse and conservation accounted for 54 per cent of the total benefits from the subsurface drainage program and 62 per cent of the total benefits from channel sealing (Stanton-Hassall Joint Venture 1995). As shown in table 9, a 20 per cent change in the value of irrigation water for the subsurface drainage program alone has a considerable effect on the estimated net plan benefits.

Sensitivity testing undertaken in the Boort plan (Branson 1994) indicates that the estimated benefits of some plan programs and the plan overall were also relatively sensitive to changes in the economic value of irrigation water (table 10).

9 Effect of changes in the economic value of irrigation water on net present values - Denimein Land and Water Management Plan

Water value

Net present value

Subsurface drainage Plan

$43NL $2.6 million $2.6 million $34RvIL $1.1 million $1.2 million

Source: ABARE estimates baed on data in Stanton-Hasall Joint Venture (1995).

10 Effect of changes in the economic value of imgation water on netpresent values - Boort West of Loddon Salinity Management Plan

Net present value

Water value Channel program Drainage program Overall plan a

$5O/ML $1.3 million $7.6 million $9.1 million $28/ML $0.3 million $7.1 million $7.6 million a The estimated economic net present value of the overall plan includes the cast of stamp duty rebates ($94 102). Sources: Branson (1994: personal communication, May 1996).


While the acceptability of individual options may not change, a decline in benefits arising from a reduction in the economic value of irrigation water may affect the viability of the overall plan, particularly where those benefits make a key contribution to offsetting implementation costs.

Estimation of the economic value of irrigation water The economic value of irrigation water will be influenced by any external effects of water use, by changes in enterprise mix, output prices, farm costs and yields, by institutional factors, by physical constraints on trade between regions and by demands from other sectors. As such the value of irrigation water is likely to change over time and will be different in different parts of the basin.

The following sections briefly describe how the economic values for water used in the Murray Valley plans were actually derived.

New South Wales In the New South Wales plans, the economic value of irrigation water was derived from the net value of agricultural production made possible from each incremental megalitre of irrigation water. The linear programming approach used by NSW Agriculture to estimate the value of irrigation water in each district was based on mean allocation and off-allocation water supplies, current enterprise mixes and commodity prices and existing trade conditions. The commodity prices used in the New South Wales plans were average prices based on farmgate returns over the previous five years. The forecast value for butterfat was estimated by NSW Agriculture, and for rice was provided by the Ricegrower's Cooperative Ltd.

The values of irrigation water estimated were particularly sensitive to the allocation levels assumed and the availability of off-allocation supplies (Marsden Jacob Associates 1995).

In the Berriquin district the economic value of irrigation water was estimated to be $35 per megalitre (Wall et al. 1994). This value was used to derive economic gross margins and to value water conserved by sealing supply channels. The value of irrigation water made available from subsurface drainage in the Berriquin district was estimated to he $21 per megalitre (Jacob and Associates 1995). Based on channel and groundwater salinity estimates it was assumed that one unit of drainage water could replace 0.615 units of channel water. In the Denimein, Cadell and Wakool regions where water salinity levels were


low, it was assumed that pumped water displaced an equivalent volume of diversion water.

Based on a regional model of the Cadell, Denimein and Wakool districts, the economic value of irrigation water for these districts was estimated to be $43 per megalitre (Gunaratne et al. 1995abc). This value was used to quantify benefits from the conservation and reuse of all irrigation water.

The values of water used in the New South Wales plans represent the marginal value of water, given that capital stocks are fixed. Given the time period under consideration and the amount of change in the water market and policy environment, changes in farm capital and management should be taken into account. It is likely that taking account of these factors would reduce the estimated value of water below that estimated for these plans.

Victoria The economic value of irrigation water used in the Victorian Murray Valley plans, $50 per megalitre (1988 dollars), was set by the Victorian Departmental Salinity Economic Working Group (1987). In their guidelines for pricing, depreciation and cost share calculations in salinity management plans, the same group recommended that this value be used to represent the shadow price of irrigation water in economic evaluations undertaken in the plans (Victorian Departmental Salinity Economic Working Group 1989). The selection of $50 per megalitre value was based on an average of various water values estimated by Ferguson, Smith and Taylor (1979) for the Kerang region. It is of similar magnitude to the values for the economic value of water, $55-70 per megalitre, derived by Read Sturgess and Associates (1991) through their Model of the Irrigated Regions of Victoria's North (MIRVN). While the MlRVN model is also based on gross margins and does not account for the costs of on-farm capital, it does allow for trade between regions.

The value put on reclaimed water varied between different plans in Victoria. For example, in the Tragowel Plains plan the value of groundwater for reuse is given as $40 per megalitre, whereas in the draft Kerang-Swan Hill plan water collected in reuse systems is valued at $7 per megalitre (Young 1991), the difference between the costs of Rural Water Commission supply water and the costs of pumping. This is not an appropriate way to value this water, as its use value is likely to be much higher. In the same draft plan, water saved through the sealing of leaking supply channels is valued at $50 per megalitre. In the economic evaluation of the Boort plan (Branson 1994) water saved both through sealing leaking channels and through farm reuse systems is valued at


$50 per megalitre. In the revised evaluation of the Boort Drainage Program (Branson 1996), the value used for reused water was $20 per megalitre.

By using a standard value for irrigation water across all irrigation regions, differences between regions in terms of enterprises or water availability will not have been accounted for. Differences arise through differences in the value of irrigated production and delivery costs. In addition, from variations in the assumptions made and methods used between the plans, it appears that an appropriate economic value for water may not have been used in all circumstances. This was most evident in the variation of values estimated for irrigation water made available by groundwater pumping in the New South Wales and =ctorian plans.

Recent research While the approaches used in the plans to estimate economic values for irrigation water do incorporate some factors influencing the value of water for irrigation, they do not account for changes in the value of water over time arising from changes in capital structures, trade between regions and water demands from other sectors. Recent research has been undertaken in which some of these factors are accounted for.

Since the Victorian plans were first developed, further region specific modelling has been undertaken to estimate the derived demand for irrigation water. A recent study by Eigenraam et al. (1996) presented preliminary results from a spatial equilibrium model representing fourteen irrigation regions in Victoria which required estimation of the demand for irrigation water in each of these districts. Estimates of the value of water from the spatial equilibrium model for the Murray Irrigation System and the Goulburn Campaspe Loddon System were $35 and $37 per megalitre, respectively.

The results from a spatial equilibrium model recently developed by Jones and Fagan (1996) indicated that the value of water for the Murray and Murrumbidgee Irrigation Areas in New South Wales was $3 1 per megalitre, assuming current water availability. These estimates arecomparable with those produced by the ABARE IMMS model (Hall et al. 1994) of the southern Murray-Darling basin. IMMS is a basinwide model with 18 farm regions linked by trading activities and a mass flows model of the river system. Each farm region is a linear programming farm model with constraints on water and land availability. The regional models are linked into a spatial equilibrium framework. The market price of irrigation water entitlements was estimated, using the IMMS model, at $34 per megalitre. (The model has been updated with 1994-95 prices and costs.)


All these estimates are of the value of water entitlements being traded. They represent the marginal value to the buyer of one extra megalitre of entitlement. To use the entitlement the buyer must pay the regional water charge and the water has to be drawn from the river to the farm. This can involve losses of up to 30 per cent. Hence, in a region where water charges are $20 per megalitre and transmission losses, in getting the water to the region, are 25 per cent, the marginal value of the water, on farm, must be $65 (65 = 3410.75 + 20).

The water is bought and sold in the river and has to be delivered to the farm subject to losses in delivery and has to be paid for through water charges. This implies that the value of water will be different in each region depending on water charges and transmission losses. Trade in water entitlement may reduce these differences but will not eliminate them. It should be noted that water charges are usually equalised over an irrigation area or district although the cost of delivering water, to a particular farm, will depend on the channel pattern and rate of water loss in each channel. Hence the economic value of water may well differ between farms within irrigation areas and districts.

Estimates of the value of irrigation water made by a number of studies are sum- marised in table 11.

Summary comments Based on the available results of sensitivity tests documented in the plans, some program options have demonstrated a sensitivity to changes in the water value. The viability of some plans might be substantially eroded if changes in the

11 Selected estimates of economic values of irrigation water

Source Region Value

$IML Victorian Departmental Salinity Economic Working Group ( I 987) Victorian irrigation 50

Read Sturgess and Associates 1991 Victorian irrigation 55-70 Wall et al. (1994) Berriquin NSW 35 Gunaratne et al. (1995a,b,c) Cadell, Denimein and Wakool NSW 43 ABARE IMMS model a Southern Murray-Darling Basin 34 Eigenraam et al. (1996) Victorian Murray Irrigation System 34 Eigenraam el al. (1996) Goulburn Campaspe Loddon 37 Jones and Fagan ( 1 996) NSW Murray and MIA 31 s Simulation from the updated ABARE IMMS model (Hall et al. 1994). prepared for this repolf. Nore: The results in the shaded section are the most recent shott run estimates of the economic value of inigation water allowing for trade within the regions defined.

37


value of irrigation water were considered in line with changes to other assumptions such as the realisable benefits from tree establishment and volumes of water lost through channel seepage. Moreover, none of the plans look at the effects of policy changes on water use and value. Further investigation of these issues may be warranted depending on the constraints of time and funding and perceived benefits from any data improvements.

Ideally, the value of water used in the plans to quantify benefits arising from conserved or reused water should represent the economic value of water at the time benefits are realised. Unless the models take account of changes in management and capital structures, the value estimated will be an overestimate. However, if for example water quantity continues to decline or total water demand increases, the values may in fact be an underestimate.

In the benefit-cost evaluations, changing the value of water over time to reflect expected changes in the market for irrigation water would improve the reliability of estimated benefits. In the evaluations undertaken in New South Wales and Victoria, only one value has been used over the thirty year time frame. Modelling recently undertaken by the New South Wales and Victorian departments of agriculture and ABARE provides some indication of the likely economic value of irrigation water entitlements if trade were permitted between districts. However, the willingness of fanners to pay for water derived from these models is valid where the existing management of capital structures are fixed.

Competing water demands from other uses such as hydroelectricity generation and household and industrial uses will be an important issue affecting water values in the future. Although it would be expected that the value of water would increase in response to this competition, there is inadequate information available on which to base an assessment of the implications of such demands on water values, and irrigated agriculture more generally. In the models currently used to estimate water values, demands for water from alternative uses are typically included as constants in irrigation water availability, rather than as sectors with implicit value schedules for water. For the purpos- es of land and water management plans this may be all the effort that is warranted, but it is an issue worthy of further consideration which decision makers may like to keep in mind when assessing investment options.


7. Water policy environment

An implicit assumption underlying the Murray Valley plans has been the continuation of current water use patterns and irrigation water charges. However, in February 1994 the Council of Australian Governments (COAG) agreed to a number of important water policy reforms, including a move toward 'full cost recovely' charging in the supply and distribution of irrigation water, provisions for environmental flows and fully tradable water entitlements (TWEs). The reforms are expected to be fully implemented by 2001. While development of most of the plans commenced before the COAG reform process, the structural changes likely to occur as a result of the reforms will have implications for the plans and their viability.

Implications of COAG recommendations Moves toward implementing a system of fully tradable water entitlements and the development of water property rights, including environmental water provisions, may create significant pressure for structural adjustment in irrigation districts. However, the plans developed in the Murray Valley have been based on a continuation of current water use and availability in the districts. Consequently, the effect of increased environmental water allocations and increased tradability on irrigation water demands and future infrastructure requirements of irrigation districts has not been fully assessed in the land and water management planning process. (In the Cadell, Wakool and Denimein plans, consideration was given to the potential for water transfers in and out of the districts; however, in each plan similar quantities of water were expected to be used in the future.) The main reason for this has been the lack of available information on policy settings and their implications for irrigators and regional water management. However, within the plans, risk analysis would have been a useful means of gaining an indication of the potential variability of expected returns from different likely policy scenarios.

The reforms could affect the viability of the options and overall plans in two ways. First by affecting the level of farmers' income from agriculture, the reforms could have direct implications for the ability of landholders to implement the options predicted in the plans. The net effect of water reforms will vary between farmers and options depending on the relative attractiveness of investments and the availability of investment capital. Second, by permitting changes in the use of irrigation water at the regional level, the COAG reforms may change the viability of plan activities.


In addition to COAG water policy reforms, implementation of the plans themselves will have implications for water charges. For example, Murray Irrigation Ltd has proposed increasing water charges to meet some of the costs of implementing off-farm proposals. In the Berriquin plan an increase in water charges of $3.14 per megalitre based on farmers' water allocations was proposed (Berriquin Land and Water Management Plan Working Group 1995, p. 135).

Farm level impact An indication of how irrigators could be expected to respond to higher water charges and reduced irrigation allocations associated with COAG reforms can be gained from farm level analysis. Recent collaborative work between ABARE, NSW Agriculture and the Victorian Department of Natural Resources and Environment (then Agriculture Victoria) has produced a farm level model of dairy farms in the Murray Valley (Scoccimarro, Branson, Wall and Mallawaarachchi 1996). This study was undertaken as part of an ongoing research report. As such the findings reported in Scoccimarro et al. (1996) are preliminary. From the model, it was estimated that as water charges are increased, on-farm water use changed little as reduced purchases from public supplies were generally matched with on-farm storage and reuse systems and groundwater pumping. However, the types of adjustment responses differed between Victoria and New South Wales, reflecting differences between the fanning conditions and policies affecting dairying in the two states.

Scoccimarro et al. (1996) found that in some instances the effect on dairy farms of increasing water delivery charges to achieve full cost recovery targets was to defer adoption of certain on-farm investments, such as spearpoint pumping, because of the effect on financial performance of the farm business. In broadacre industries, where the level of financial performance is generally lower and highly variable, the impact of water policy reforms on the rate of adoption may be more significant (see appendix C). This could have the effect of reducing both the 'with plan' and 'without plan' adoption expectations. Alternatively, increased allocation of water to the environment made at the expense of the security attached to irrigation entitlements will increase the attractiveness of investments in on-farm storage systems.

Overall, the net effect of water reforms on the investment patterns of irrigation farms in the Murray Valley is unclear. Collaborative research between ABARE, NSW Agriculture and the Victorian Department of Natural Resources and Environment is currently being undertaken to develop models of irrigated broadacre farms which are expected to be able to provide further information on the likely responses of broadacre irrigation farmers to increased water charges and other policy reforms.

40


Regional level impact Trade in water allocations is expected to increase overall efficiency and incomes but could cause structural changes in regions from which large amounts of water are sold. If significant volumes of water are traded out of particular regions this could result in further water charge increases as fixed delivery costs are spread over a reduced volume of water. Irrigation assets in these circumstances could become redundant and the irrigation fanning base could contract, affecting the benefits from implementing plans.

Spatial equilibrium models at the regional level have been developed by the Victorian and New South Wales departments of agriculture with the objective of evaluating 'alternative property rights structures and the impact of COAG reforms on irrigated agriculture' (see Eigenraam et al. 1996; Jones and Fagan 1996). Preliminary results from the New South Wales and the Victorian models provide an indication of the direction of trade between regions and the equilibrium trade price of water. In addition, recent simulations from the ABARE IMMS model, developed by Hall et al. (1994), suggest that if regions were free to trade in water entitlements, the move to full cost recovery is likely to result in the trade of water from the MIA and Kerang region toward irrigation regions in the Upper Murray including Shepparton and Berriquin. The estimated volume of trade represented approximately 10 per cent of total water use in the selling.

Each of the models described share a number of shortcomings which limits their applicability to longer term analyses, in particular their treatment of capital investment. Subject to these qualifications, the modelling provides some indication of the order of magnitude of the economic value of irrigation water if trade were permitted between districts.

Further development of such models would make them more suitable tools for evaluating the longer term regional impacts of policy reform implementation. This would help to provide useful information about future district water use for those involved in the development and implementation of plans. Estimates of the volume of water traded, based on recent simulations of the IMMS model, are small relative to the total water use in the selling regions. However, the sensitivity of plans to assumptions about future water use is largely untested. If the plans are found to be highly sensitive, the decline in demand for irrigation water that may occur in some regions could adversely affect the viability of some plans.


Summary comments

During the development phase of the plans there was limited information available on which to base expectations about the implications of water policy reforms on the viability of plans. In the New South Wales plans, cursory assessments were made about the likely influence of changes in water charges on adoption rates and the effect of increased tradability on regional water demand. (In the Denimein and Cadell plans, current levels of water use were expected to continue over the planning period taking into account increased water tradability.) However, these are areas warranting further research in order to fully assess the implications of reforms for the plans. The regional and farm level adjustment responses to current water policy reforms are beyond the scope of this report. However, information available from limited recent research sug- gests responses to the reforms could have a significant impact on the viability of plans.

Research into the regional and farm level impacts of current policy reforms in the southern Murray-Darling Basin is being undertaken by the state departments of agriculture and ABARE. This research will provide an indication of the expected impact of reforms on farm incomes and the likely pattern of water trade between regions. The implications of the results of these analyses for the plans should be considered as they are reviewed or updated, or when new plans are developed. For example, adoption predictions may need to be modified given the effects of water policy reforms on farm incomes, particularly if the on-farm options involve high capital costs. Where large volumes of water are likely to trade out of a region, the viability of, or need for, community surface drainage or channel sealing may need to be re-evaluated in the light of such expectations.


8. Discount rates

To compare benefits and costs which occur in different time periods it is necessary to weight them so they reflect their equivalent present day value. Discount rates vary according to the preferences and situations of individuals and groups based on such factors as the cost of capital, taxation, risk attitudes and the characteristics of particular projects. As cited in Rose and Cox (1991), society's discount rate may be lower than an individual's if by acting collec- tively individuals can spread their risk or invest more effectively in the wel- fare of future generations. However, there will be a range of private and social discount rates and in some cases a social discount rate may be higher than some private rates (Stiglitz 1982 as cited in Rose and Cox 1991).

In undertaking benefit-cost evaluations to guide investment decision making, it is important that the discount rate selected is suitable. To maximise net returns from government investments, the rate should match the opportunity cost of capital. The opportunity cost of capital is the possible relum on capital if it were used, or invested, in its next best alternative use. In particular, the discount rate should reflect the source from which government investment capital is obtained, either from taxation or borrowings. Similarly, for individual's investment decisions, the discount rate should also reflect the opportunity cost of capital. This may be the interest on a loan or the potential return from investing in an alternative option.

In the land and water management plans the question of an appropriate discount rate is confounded by the number of different parties involved in the investment decision. This issue and the significance of using different discount rates in the evaluations are discussed in the following sections.

Impact on benefit-cost evaluations The discount rate selected to calculate the present value of net benefits over time will affect the net present value and ranking of options in a plan. High discount rates reduce the present value of net benefits (and costs) that occur in later periods. As many plan activities involve high initial short term costs and long run benefits (some of which extend beyond the planning period used in the evaluations), the net present values of plans will fall when a high discount rate is used.


12 Sensitivity of the Tragowel Plains Salinity Management Plan to changes in the discount rate applied

Discount rate Plan net present value

4 per cent $10.635 million 7 per cent $0.162 million 10 per cent - $4.870 million

Nore: In the Tmgowcl Plains Salinity Management Plan interest subsidies and stamp duty rebates were included in the economic evaluation of the plan. These transfer payments were removed in the sensitivity testing undertaken by ABARE reported in this table. S o m e : ABARE estimates based on results fro," the Tragowel Plains Sub- Regional Working Group (1989).

A spreadsheet from the Tragowel Plains plan was reproduced to illustrate the impact of a change in the discount rate on the estimated present value of net benefits from implementing the plan. As may be seen from table 12, the net present value will vary considerably depending on the rate chosen.

Different rates have been used to discount costs and benefits to present values in the New South Wales and Victorian plans. For example, in Victoria the discount rate used in the economic evaluations was 4 per cent, compared with 7 per cent in New South Wales plans. In both states the discount rates used in the evaluations were specified by state government guidelines. It is unlikely that this difference reflects a difference in the cost of raising capital in the two states. In the DESM a discount rate of 5 per cent is used. The New South Wales Treasury guidelines stipulate discount rates of 4 per cent and 10 per cent be used for sensitivity testing; however, this sensitivity testing was not documented for the on-farm program evaluations of the New South Wales plans.

The (Commonwealth) Department of Finance, in 1991, recommended a benchmark real discount rate of 8 per cent for use in economic evaluations in the absence of project specific discount rates. This rate was considered appropriate in 1991 (Department of Finance 1991, p. 57). However, real interest rates have since fallen by about 3 percentage points.

Discount rates in land and water management planning The plans are supported by a mix of funding from Commonwealth and state governments, in addition to contributions made by landholders and local communities. To the extent that each of these parties faces different borrowing rates, it is suggested that the use of a single rate would not be suitable for the needs of the plans. By failing to distinguish between the cost of raising capital for different parties, and between those who bear the costs and who receive


the benefits from implementation, the benefit-cost ratios estimated will be dis- torted and of limited reliability for guiding investment decisions.

One approach which may be taken to resolve this problem is to consider the costs and returns to different parties separately rather than as a whole as has been done in the plans. This would allow the application of discount rates which reflected, as closely as possible, the opportunity cost of capital to the contributing parties. Greater clarity in other areas could also be realised by taking this approach, as explained below.

Where private behaviour is being modelled, private rates of discount must be used. The rate of interest paid by landholders to raise capital, either through a loan or overdraft would be appropriate. In the plans, evaluations of the 'with plan' scenario should only include costs incurred by individual landholders - that is, any contribution made by governments toward offsetting the on-farm costs should be excluded. This approach will help to explain the faster uptake of options predicted in the 'with plan' scenario and will make the assumptions underlying the adoption rates explicit. It is acknowledged that the 'with plan' scenario may not involve a reduction in the on-farm costs of implementing a particular options. For some, increased uptake may just reflect better targeted extension efforts. If this is the case, it should be clearly stated.

In evaluations undertaken from a government perspective, the costs of providing financial incentives to landholders andlor the cost of providing funding for extension or research activities should be quantified. The expected community or social benefits arising from the implementation of a certain option, primarily any reduction in external costs, must also be estimated to work out the expected net public benefit. These benefits and costs were identified in the economic evaluation of the plans. A discount rate representing the government's cost of raising capital may then be applied to the stream of costs and benefits.

It should be noted that it may not be possible, or appropriate, to quantify all the benefits arising from a public investment when reliable data required to measure costs and benefits are not available. In the plans, qualitative assessments of the expected environmental and social benefits were made. The weighting to be placed on these is a judgment open to broader community debate.

By setting out the evaluations on the basis of who bears the costs and receives the benefits, a more informative benefit-cost ratio will be produced, links between moving from the 'without plan' adoption rates to 'with plan' rates


will be clearer and a greater consistency between assumptions underlying the adoption rates and cost sharing arrangements will be ensured.

Summary comments To maximise returns from investments the discount rate used should be based on the opportunity cost of capital. For governments this will be the cost of raising capital from borrowing or taxation. There are likely to be differences between states in borrowing and taxation costs but the difference cannot pos- sibly approach the levels set for appraisal by the New South Wales and Victorian governments.

Implementation of the plans will require finance from governments, communities and farmers. To produce meaningful estimates of the net present values it is important that a suitable discount rate is used. The fact that several different parties contribute to the plans makes the selection of an appropriate rate difficult. The analysis could be clarified if the costs and returns to the different parties were considered separately, and this would also facilitate the use of different discount rates. Overall the benefit-cost results generated could be used more confidently to guide investment decisions.


9. Conclusion

An extensive number of assumptions, not just economic or farm management related, have had to be made in order to fulfil state government requirements of providing an estimated net present value for land and water management plans. In this report, twelve assumptions from the Murray Valley plans were assessed, with four being selected for further review on the basis of their impact on estimated plan benefits and their reliability. The assumptions reviewed were: adoption rates; the economic value of irrigation water; the water policy environment; and the discount rate.

When reviewing these assumptions it was kept in mind that, as with all benefit-cost analyses, the evaluations undertaken in the plans worked within a set of constraints. This meant that tradeoffs had to be made between the accuracy of data and depth of analysis with time and funding. It has been an aim in this report to identify assumptions which can have a significant impact on estimates of net plan benefits, with the view that this information may help to target further efforts to refine data or modelling procedures, based on where the most significant improvements could be achieved. However, the marginal benefit of further refinements to data and assumptions needs to be considered.

An important issue arising from the review that affects land and water and salinity management plans more generally is the use of information generated from benefit-cost evaluations. Decision makers using this information must have an understanding of the level of confidence which can be placed on these estimates and an awareness of other valuable information apart from the estimated net present value which can help them to make an informed decision. Benefit-cost evaluations do not measure in absolute terms the benefits generated and are only intended to be one input into an investment decision. Measurement of the costs and benefits of most plan options is a difficult task, and the uncertainty associated with this is one factor which reduces the reliability of the estimates. Other factors which will affect the reliability of estimates are the use of an inappropriate discount rate and attempts to generate a single number indicating the viability of the whole plan by aggregating the results of individual evaluations. These issues should be considered in determining how the benefit-cost evaluations can be used to guide better investment decisions.


Appendix A: Project objectives

Identify key economic data and farm management assumptions embodied in existing and developing land and water management plans in each of the Shepparton, Kerang and New South Wales Murray regions.

Assess the validity of these data and assumptions, and where problems are found, to assess the implications of alternative assumptions on the outcomes of plans.

Where possible, provide benchmark methods and data for use in future land and water management plans and evaluation of these plans.


Appendix B: Economic results of the Murray Valley plans

In this appendix, extracts of the economic evaluations of programs included in the plans are presented. All evaluations were undertaken over a thirty year time frame. This information, and more detailed evaluations on subcompo- nents of the programs, were used to help identify assumptions within programs which were likely to have the most significant impact on the net present values of programs and overall plans.

It is important to note that the results presented below are not an indication of the costs of plan implementation as proposed in cost sharing arrangements. The cost sharing arrangements are based on financial rather than economic costs, and in some of the plans, at least the New South Wales plans, were not expressed in terms of net present values. For example, the present value of costs in the Berriquin plan was $57.4 million, while the landholder and government contributions outlined in the cost sharing arrangements amounted to $324.4 million.


Present value Present valne Present valne Program of benefits of costs of net benefits

$m a $ma $ma Boort West of Loddon (@ 4 per cent) Farm 2.21 1.23 0.97 Channel 1.86 0.53 1.33 Revised flooding and drainage a na na 7.60 Environment 0.02 0.76 -0.74 Social - 0.09 -0.09 Overall plan na na 9.10 Benefit-cost ratio na

KerangSwan Hill (@ 4 per cent) Fann 13.82 9.32 4.50 Environment - 3.94 -3.94 Water quality 23.71 10.01 13.70 Channel seepage reduction 2.47 1.44 1.03 Floodplain management 3.56 2.77 0.79 Implementation, education and extension - 1.11 -1.11 Overall plan 57.26 39.92 17.34 Benefit-cost ratio 1.4

Revised Sbepparton (@ 4 per cent) Farm 252.29 235.52 16.77 Surface drainage 219.80 129.93 89.87 Subsurface drainage 154.35 93.06 61.29 Environmental 4.15 4 . 1 5 Extension support 8.51 -8.51 Planning1 community support 22.32 -22.32 Monitoring 8.78 -8.78 Research and investigation 31.8 -31.8 Overall plan 626.44 534.07 92.37 Benefit-cost ratio 1.17

Torrumbarry East of Loddon ( 0 4 per cent) Farm 7.65 3.06 4.59 Barr Creek interception scheme 20.46 8.39 12.08 Koondrook Murrabit drainage scheme 5.38 4.24 1.14 Gunbower Island drainage program 1.08 0.47 0.61 Overall plan 34.56 16.15 18.42 Benefit-cost ratio 2.14

Tragowel Plains (@ 4 per cent) Program Net benefits Overall plan 9.99 (The resultsfmm individualprograms and thepresent value of costs and benefits were not reported separately in the Tragowel Plains D r 4 Salinity Management Plan.)


Present value Present value Present value Program of benefits of costs of net benefits

$ma $ma $ma Berriquin (@ 7 per cent) Farm practices 6.1 4.1 2.0 Surface drainage 36.6 33.2 3.4 Groundwater pumping 14.3 6.2 8.1 Sealing supply 16.9 1.6 15.3 Implementation costs - 12.3 -12.3 Overall plan 73.9 57.4 16.5 Benefit-cost ratio 1.3

Cadell (@ 7 per cent) Farm practices 72.05 62.45 9.6 Surface drainage 2.67 1.01 1.66 Subsurface drainage 0.37 0.10 0.27 Sealing supply b 1.53 1.14 0.39 Implementation costs - 9.97 -9.97 Overall plan 76.62 74.67 1.95 Benefit-cost ratio 1 .O

Denimein (@ 7 per cent) Farm practices 75.25 70.75 4.50 Subsurface drainage 3.32 0.71 2.60 Deep bore pumping 4.58 3.36 1.22 Sealing supplya 0.18 0.21 4 . 0 3 Implementation costs - 4.11 4 . 1 1 Overall plan 83.32 80.69 2.63 Benefit-cost ratio 1 .0

Wakool (@ 7 per cent) Farm practices 66.77 60.73 6.04 Surface drainage 23.07 18.67 4.39 Gmundwater pumping and structural adjustment 8.21 6.40 1.81 Sealing supply b 1.78 1.26 0.52 Wakool-Tullakool subsurface drainage scheme 14.7 6.80 7.90 Implementation costs - 5.55 -5.55 Overall plan 114.53 99.59 14.94 ~enefit-cost ratio I .2 a 1. Branson. Depanment of Natural Resources and Environment, personal communication, May 1996. b Includes the use of mechanical means for channel supply sealing and trees for seepage control. na Not available. Nule: Rounding errors may occur Sources: Boon West of Laddon Salinity Working Group (1994); Kerang Lakes Area Working Group (1992); Young (1995); Tonumbmy East of Loddon Working Group (1995); Tragowel Plains Sub-Regional Working Group (1989): Marsden Jacob Associates (1995).


Appendix C: Farm financial pe$ormance in the Murray Valley irrigation districts

The farm survey data presented in this appendix have been included to provide those involved with salinity and land and water management plans with more information about farm financial performance over the period 1990-91 to 1993-94, although the data are for regions larger than the plan areas. While financial surveys were undertaken for each plan area at the development stage of the plans, the information collected only covered farm financial performance in one particular year. In some cases, the data were not weighted to account for the characteristics of the region population. In table C1 selected information about the physical characteristics of farms is provided. From the data in table C2, the variation in farm financial performance from year to year is demonstrated.

Selectedphysical characteristics of irrigated farms in the Murray CI Valley o, 1993-94 Average perfam,

Unit Broadacre Sample size Farm area operated b ha Area irrigated ha Crop area harvested c ha Sheep on hand b no. Beef cattle on hand b no.

Main income sources Share of total cash receipts Crops % Wool % Rice % Livestock %

Water use MUha

Dairy Sample size Farm area operated b ha Area irrigated ha Dairy cattle on hand b no. Milk yield Llcow

Water use ML/ha

Kerang Shepparton NSW Murray

. . . . - ~ - ,

a Figures in parentheses are relative standard enors, expressed as percentages of the survey estimates. These figures indicate the reliability of the survey estimates. Generally, the smaller the relative standard error the more reliable the estimate (see ABARE 1996b). b At 30 June 1994. c Cash crops only.


C2 Selectedfinancial characteristics of irrigated farms in the Murray Valley a Average per farm (in 1996 dollars)

1990-91 1991-92 1992-93 1993-94 1994-95 Broadacre farms Kerang region Sample size 24 21 21 33 23 Farm debt 46 685 (16) 50 282 (22) 51 250 (51) 73 598 (24) 64 359 (68) Farm caoital 469 236 (12) 540 724 112) 485 444 117) 567 519 (10, 552 519 125) . . Farm cash income 4 176 (1.42; 3 060 (;51; 15 156 i56; 17 967 (36) 13 535 (60; Farm business profit -34 652 (11) -30457 (18) -20 064 (18) -15 434 (48) -33 216 (32)

Shepparton region Sample size 20 19 12 3 1 19 Farm debt 31 649 (28) 49 075 (36) 31 920 (60) 22 365 (35) 40 309 (39) Farm capital 508 336 (15) 599 050 (13) 718 644 (16) 562 036 (10) 591 877 (11) Farm cash income 15 342 (22) 10 622 (35) 17 026 (23) 16 049 (27) 10 757 (58) Farm business profit -16 734 (22) -23 622 (21) -14 906 (29) -1 9 765 (22) -28 648 (25)

NSW Murray Valley Sample size 23 22 30 29 25 Farm debt 64 825 (23) 76 219 (27) 94 432 (23) 118 764 (18) 131 740 (20) Farm capital 433 055 (8) 494 808 ( 1 1 ) 641 055 (47) 745 383 (10) 871 696 (13) Farm cash income 26499 (23) 40415 (19) 32 915 (41) 64222 (12) 65 505 (18) Farm business profit -17 339 0 1 ) 1240 (639) -11 654 (104) 33 953 (30) 18 225 (64)

Dairy farms Kerang region Sample size - - - 27 - Farm debt - - - 93 452 (26) - Farm capital - - - 698 038 (4) - Farm cash income - - - 56 922 (13) - Farm business profit - - - 17 842 (42) -

Shepparton region Sample size 22 22 20 35 - Farm debt 114 546 (22) 112 288 (20) 122 898 (13) 150 981 (12) - Farm capital 600 273 (12) 530 134 (7) 636 104 (8) 699 11 1 (8) - Farm cash income 32 145 (14) 32 703 (9) 52 793 (13) 58 678 (12) - Farm business profit -2 713 (324) -1 1 173 (48) 12 305 (47) 15 456 (40) - NSW Murray Valley Sample size - - - 29 - Farm debt - - - 165745(17) - Farm capital - - - 922 805 (8) - Farm cash income - - - 76 702 (7) - Farm business profit - - - 25 983 (22) -

Nore: Figures in parentheses are relative standard erron, expressed as percentages of the estimates.


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