Investment in Water-saving Irrigation Options under Uncertainties - A Comparative Analysis

Absar, S.M., Fuss, S., & Reuter, W.H. (2012). Investment in Water-saving Irrigation Options under Uncertainties - A Comparative Analysis. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-12-017

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Abstract

The agricultural sector of Pakistan consumes 96 percent of the country's available fresh water resources. With a population of 187 million and increasing at an annual growth rate of 1.57 percent, the fresh water resources of the country will face severe stresses in the coming years, affecting its food security. At the same time, there is uncertainty prevailing in the region about climate change, timing and intensity of rainfall, flood and drought events, coupled with glacial melt and unresolved issues pertaining to trans-boundary water resource management. Under these circumstances, investment in agricultural practices that ensure crop productivity and water conservation are critical to Pakistan's food security. This study focuses on a sub-region of Punjab in Pakistan, where wheat is grown using flood irrigation. It examines whether an investment into water-saving irrigation options, such as canal lining, dredging, water saving irrigation technologies, and on farm water storage are feasible options to improve profits of the farmers. Irrigation in Pakistan is supplemented with low quality groundwater, which at times leads to very low yields per unit of water. By comparing the discounted cash flows under each of these options, this study investigates the best investment decisions on the part of the farmer and policy makers. This study also looks at the benefits of crop diversification and water markets, to examine whether these options would lead to higher profitability, hedging of risks and productivity in the study area. The economic analysis is complemented with real options analysis, and where applicable, sensitivity analysis to determine the minimum yield increases required to break even.

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