Scenarios to Management Classes
Role of Macro – Economic Analysis
Presented by:
William Mullins
Mosaka Economic Consultants cc
26 November 2013
Mvoti to Umzimkulu WMA NWRCS steps
1: Delineate units of analysis and describe the status quo
2: Initiation of stakeholder process and catchment visioning
3: Quantify EWRs and changes in EGSA
4: Identification and evaluation of scenarios within IWRM
5: Stakeholder process
6: Resource Quality Objectives (EcoSpecs & water quality (user))
7: Gazette class configuration
Socio-Economics: Where does it fit in?
2
Socio – Economic Approach
• It is important to keep in mind that the
classification process is an integrated process.
• The contribution of the socio – economic
sector is divided into two groups
– The Environmental Goods and Services Activities
(EGSA) which deals with the value of the water
left in the river.
– The Macro – Economic Activities which deals with
the value of the water removed from the river.
Water Decision Making as a Integrated Process
Water
Scenario
Social
Environment
Evaluation Process
Socio - economics
A little bit of theory
• Orthodox theory state that the scarcer a
product became, the more valuable the
product.
• Although this is correct : The water used for
economic production will become more
valuable.
• But how would this fit into a decision making
process in river classification?
• How do you incorporate this into a model?
Economic Approach
• This convinced us to use an approach that the
convey the value of the water in “popular”
indicators.
• It would also be easy to measure the change
and contribute to the decision making
process.
Also approach
• To contribute to the decision making process
in evaluating different scenarios during the
classification process.
• Approach
Establish a baseline
Measure deviation from the baseline.
Part of a integrated decision
Economic Approach
• The following approach was used for the different
sectors, keeping in mind that this one of three
parameters in the final classification:
A. Irrigation – Farm crop budget approach with elements of
Crop – Water production function analysis and Linear
Programming (L.P.) Analysis - It is possible to link
volume and assurance changes – use a wide range of
crops - value expressed in easy understandable
parameters.
B. Mining, Industry. – Based on Statistics SA input- output
relationships between product value and macro –
economic impact parameters– It is then possible to link
the water used to the parameters.
Economic Approach (cont.)
C. Tourism was added representing
beaches, nature, etc. – Using this as an
indicator for the beaches, estuaries ,nature
reserves, etc.
Linkage between primary sector and secondary
sector. The obvious sectors in this project area is
sugar cane production and the sugar mills. Also
forestry and the saw mills and the pulp
factories.
Sectoral structure of the economy
• If the primary sector is economically affected, it will spill
over to the tertiary sector as well (positive or negative).
10
Establishing the economic baseline
• Macro-economic indicators to determine
the impact of the available water.
Gross Domestic Product
Employment
Household Income
Economic Indicators
• Why the specific indicator?
Show Economic Growth
Poverty Alleviation Contributors
• Gross Domestic Product (GDP)
The impact on GDP reflects the magnitude of the values added
to the regional and wider economy from activities using the
water. Value added is made up of three elements, namely:
– Remuneration of employees (payments to households),
– Gross operating surplus (which includes profit and
depreciation), and
– Net indirect taxes.
Economic Indicators
• Employment
Labour is a key element of the production process. The study
estimate the number of employment opportunities currently
supported by the use of the water. These employment opportunities
is broken down into those created directly by the irrigation sector and
those created indirectly and those induced throughout the broader
economy
• Payments to households
One of the elements of the value added (i.e. GDP) which results from
the sector where water is allocated is the remuneration of employees,
which, in turn, affects households income.
Econometric models measures the magnitude of changes that occur
to both household income and the spending/savings pattern. As such,
the results highlight the impact of water use on the low-income
households as this can be used as an indicator of the extent to which
the water availability contributes to poverty alleviation throughout
the economy.
13
Modeling of Primary Sector in WIM-model
Future
inputs
Inputs:
Example Irrigation
Agriculture
Economic
Water
Modelling
Output: Results
 Main Drivers: (Water Volume; Hectares)
 Specific Crop Production Budgets (Income
and Costs)
Income distributed to economic sectors taken
up in the economy (Agriculture, Mining,
Manufacturing, Electricity, Water, Construction,
Trade and Accommodation, Transport and
Communication, Financial and Business Services)
Multipliers used from derived from Social
Accounting Matrix
Direct, Indirect and Induced impacts:
 GDP
 Employment
 Household Income
14
Future
outputs
Application of Evaluation Criteria - MCDA
• It is important to remember that in a river setup the
different parameters differ in importance.
 In a very rural area employment and the
accompanying household income is sometimes more
important than the creation of GDP.
 In a another setup where for instance industry
depends on the product delivered by irrigation (sugar
mill) GDP becomes the more important parameter
(indicator)
Application of Evaluation Criteria (cont.)
• The following grouping is used:
– GDP and Second Tier Industry impact
– Employment and Household Income (low)
• If the irrigation product is negatively impacted
– GDP impact calculated
– Jobs impact calculated
 Relative weights are allocated to the two
groups – differ from river region to region
o Rating x Weight = Score
o Score is transferred to MCDA
Trout farming,
recreation, dry-land
agric
Small
Dams
SFRs
TYPICAL WATER
RESOURCE SYSTEM –
STATUS QUO
Forestry
Releases down river for
irrigation, urban and industrial
Irrigation from canal,
high value crops
Rural
Irrigation
Rural: Subsistence,
settlements
Rural
Nature
Reserve
Town at estuary,
industrial (canal &
pipeline)
Gorge, protected
area
Irrigation. Primary
crop for a
secondary industry.
Industrial
Estuary
Urban
Scenario description
SC
Description
A
Dam is raised and water released down river (canal obsolete).
obsolete). Increased irrigation to maximum potential. Waste
Waste water release in estuary increased. No EWR releases
B
Status quo maintain but current waste water is re-used (i.e.
(i.e. decreased flow and better quality into estuary)
C
Dam is raised, canal and pipe enlarged so river not used as a
as a conduit. Increased irrigation and increased waste water,
water, but conveyed into marine system (sea outfall). EWRs
EWRs are released for the REC but the droughts are
decreased by 10%.
D
Dam is raised and existing canal system fixed. For the
additional irrigation (cut to 30% from the maximum potential),
potential), the water is released downstream in the river, but
but with some seasonality built in. Increased waste water into
SCENARIOS
A
Scenario description: Matrix
DRIVERS
Dam raising Increased Increased
irrigation waste water
 Release



Re-use

down river
B


C
; enlarge

D
EWR
release
Sea outfall -10%
pipe & canal
droughts
; Use
-30%.
existing canal
(fix problems)
Release
additional
water DS
with EWR
seasonality

-10%
droughts
ECONOMIC CONSEQUENCES
PES Sc A Sc B Sc C Sc D
1
1
1 1.3
Small
Dams
SFRs
PES Sc A Sc B Sc C Sc D
1
All Sc maintain PES except
for Sc C with a positive
impact.
All Sc’s cause an
improvement on PES.
Rural
Irrigation
1
1.2 1.2 1.1 1.1
1
1.2 1.2 1.3 0.7
Rural
Nature
Reserve
Sc’s B and C provides
positive impact while D is
negative.
1
1 1.2 1.3 0.8
Industrial
Estuary
Urban
Sc’s B and C provides
positive impact while D is
negative.
Some Remarks About Determining Feasibility of New Capital Projects
• Decision making indicators of new
infrastructure construction: ex- dam, pipelines
and canal costs. Cost Benefit Analysis:
Net Present Value (NPV) > 0
Internal Rate of Return (IRR) > Discount Rate
Benefit - Cost ratio (BCR) > 1
• Comparative tool: Unit Reference Value (URV)
URV = Discounted cost
•
•
Discounted water supply
Financial Issues impacting on the final decision but not the classification!
• Affordability!
• How is the “project” financed?
• Who is the implementation agent?
Thank you