- J. Agril. Univ. 1(1): 171-179,2003 ISSN Comparative profitability of deep and shallow tubewell irrigation technology: A sensitivity analysis

M.A. Al-Mamun, M. Akteruzzaman and Hasneen Jahan Department of Agricultural Economics, Bangladesh Agricultural University, Mymensingh

Abstract

This study examines the comparative profitability of both deep and shallow tubewell irrigation technology. Regarding this, 3 DTWs and 11 STWs were randomly selected for farm survey. Kharera union of Kasba of district was selected purposively. Data were collected during the period of February 2000 to July 2000. Tabular method of analysis as well as financial analysis and sensitivity analysis were applied. Evidence shows that investment in STWs was found to be profitable especially electrically operated STWs were more profitable than diesel operated STWs. While the DTW operation appeared as a loosing concern from the owners' point of view. Results of the sensitivity analysis suggested that the investments in diesel operated STWs were in break-even level with 20 per cent increase in operation and maintenance cost while electrically operated STWs were in break-even level with 15 per cent decrease in gross benefits, other things remaining the same. The result of sensitivity analysis also suggested that with 15 per cent decrease in gross benefit investments in diesel operated STWs were incurring loss. Thus, the investments in tubewell operation was largely affected either by increase in operation and maintenance cost or by decrease in water price. Finally, based on the above findings of the study, some recommendations were suggested for policy implication.

Keywords: Privatization, Profitability, Water market, Internal rate of return

Introduction

Provision of controlled irrigation is very important as it creates conditions for the rapid expansion and use of other inputs, Development of irrigation facilities is of course a necessary precondition in any agricultural modernization effort. Guaranteed supply of irrigation water greatly reduces the risks and uncertainties of crop production particularly rice. Irrigation offers an opportunity to produce crops throughout the year, which helps to achieve food security. The spread of high yielding varieties (HYVs) of rice in Bangladesh is contingent on the provision of irrigation. The use of HYVs and fertilizer has largely followed the spread of irrigation. Irrigation therefore has been termed the leading input(Palmer Jones, 1988).

Groundwater irrigation abruptly increased after the mid 1980's due to series of changes in irrigation policies in Bangladesh. As a result the price of the DTW increased while the cheaper STW entered in groundwater market. Thus, STWs increased dramatically and covered new areas under irrigation. The deregulation policy encouraged the farmers to install the cheaper STW with the potential command area of DTWS. The groundwater market therefore, faced a competitive situation. The actual DTW command area declined due to STWS and the rate of return decreased in DTWS. The DTW owners felt 172 Comparative profitability of deep and shallow tubewell reluctant to own and operate DTWS (Jaim, 1995). A number of DTWS thus were already shut down and most of the remaining DTWS have been facing a serous management crisis. The donor agencies have now been rethinking whether the rehabilitation of the DTWS will be profitable at all. But there is no alternative to increase the irrigation area to maintain existing growth of agricultural production. A number of studies have been conducted on groundwater irrigation system. Jaim and Rahman (1978) in their study found that the relative profitability HYV Boro under different systems of tubewell irrigation showed that DTW was more profitable than STW and STW was more profitable than HTW from both private and social point of view. But Nur Islam (1992) in his study found that STW projects were more profitable than DTW projects from the view point of the individual owner/manager. The net return per unit of land was significantly higher in irrigated than in non irrigated area but the cost of production was also higher in irrigated areas (Alam 1983). Miah and Hardaker (1988) found that DTW and STW were profitable from the viewpoint of the participating farmers and managers but unprofitable from the viewpoint of society. The operation and maintenance costs of diesel operated DTWs were higher than those of electricity operated DTWS. The findings of Mujibullah (1987) and Akteruzzaman (1990) were to show the similar trend which supports the above hypothesis. Mandal and Parker (1995) determined that the average net returns of STWs were higher in advanced districts than those in less advanced districts. Mannan (1996) and Saidur Rahman (1997) showed that investment in electricity operated STWs was more profitable than that of diesel operated STWs. Udclin (1992) showed that the diesel operated STWs and DTWs under cash payment systems were profitable which turn into electrically operated DTWs. After electrically operated DTWs under cash payment systems were making losses since the managers were required to pay a huge amount of bribes to the officials of Bangladesh Power Development Board for electricity connection. The command areas of hitherto monopolized DTWs have been encroached by the STW which caused a decrease in water price (Akteruzzaman, 1997). For this reason, the groundwater market has been transformed from a monopolistic situation to an oligopolistic structure after the introduction of STW. The previous studies mainly focused on the profitability of irrigation schemes and efficiency of tubewells in terms of command area but it was also found that the returns from tubewell operation vary from year to year and region to region. So the present study was a modest attempt to find out the comparative profitability of both DTW and STW irrigation technology.

Methods Materials and •••

The farm business survey methods were used in the present study because it was thought to be more advantageous than other method. Primary data were used for the study. Data were collected through farm survey from a sample of 78 farmers at the Kharena union of Kasba upazila of . Firstly, a list of DTW and STW owners was collected from the Agricultural Office of Kasba Upazila. Out of all DTWs and STWs under Kharena union of Kasba Upazila 3 DTWs and 11 STWs owners were randomly selected for the fulfillment of the objectives. To examine the profitability of tubewell irrigation both tabular and project appraisal methods were used. The tabular method of analysis includes classification of data in the form of table. Three alternative discounting measures are commonly applied for agricultural project analysis. These measures are Benefit cost Ratio (BCR), Net present value(NPV) and Internal Rate of Return (IRR). These may be illustrated as. Al-Mamun et al. 173

Bt t-=-1 (i+ )t BCR = Ct t=i 0.+Ot Bt — Ct NPV = E t=1 (i+Ot Bt Ct 0 IRR = E t=1 (1+ Ot where, B,= Present worth of benefit = Present worth of cost n = Number of years t = Discount rate

For calculating IRR interpolation method was usually used which was approximated by: Present worth of cash flow at Lower the lower discount rate Difference between the two IRR= discount + Absolute difference between • discount rate rate the present worth of the cash flow at the two discount rates.

The choice of an appropriate discount rate plays a vital role in the appraisal of projects. The available literatures (Giltinger 1994; Jaim, 1993; Rahman 1998; and Miah and Hardaker, 1988) suggested that in most developing countries the opportunity cost of capital varies between 8 to 15 percent. According to BBS (1998) the lending rates of nationalized commercial banks and specialized banks in agricultural sector lie between 12 to 14 per cent. In view of these circumstances only 14 percent discount rate had been chosen for the appraisal of economic use of DTWs and STWs.

Results and Discussion Financial Analysis of DTW and STW Irrigation Technology

The benefit of tubewell owners derived from selling water to the farmers. The water charges were fixed before the irrigation season. The benefits of the tubewell owners however, include water charge and salvage value of the tube well at the end of life cycle of the tubewell. The salvage value for the DTW was 10% of the original value and for STW it was 5% when the average life cycle for DTW and STW were considered as 20 years and 10 years respectively.

Further, investment cost is the fixed cost of tubewell operation. Investment cost includes the cost of engine/motor, pump, filter, pipe, hand tubewell, installation cost, cost of electricity connection etc. Operation and maintenance cost of STWs and DTWs varied from owner to owner but the average figure represented the actual -cost of the DTWs and STWs in the irrigation season. The different components of operation and maintenance cost for DTWs and STWs are diesel and mobil cost, cost of spare parts, cost of mechanics, cost of electricity, salary of driver and linemen, cost of channel making and repairing and interest on operating capital. 174 Comparative profitability of deep and shallow tubewell

Table 1. Benefits derived from DTWs and STWs (Diesel and Electrical) Average command Per hectare water Total water Salvage Item area (hectare) charge (Tk.) charge value (Tk.) (Tk.) DTW 15.168 7081 107400 21000 STW (Diesel) 4.968 8233 40900 2200 STW (Electrical) 5.223 8233 43000 2275 STW (All) 5.095 8233 41950 2237.5 Source: Field survey, 2000

To get a complete picture of financial profitability of DTW and STW operation it is better to accomplish through use of the project appraisal technique (Gittinger, 1994). The analyses were performed considering only Boro season. In Boro season HYV Boro is produced completely depending on irrigation.

It is evident frond Table 2 that investments on both diesel and electrically operated STW were profitable. It is also evident from the table that BCR of the DTW and both types of STW were also profitable at the selected 14 per cent discount rate. The IRR of both types of STWS were much higher than the opportunity cost of capital but the IRR of the DTW was found lower than the opportunity cost of capital. BCR, NPV and IRR of DTWS were 1.14 Tk. 88362.46 and 9 per cent respectively whereas the corresponding figures for diesel operated STW and electrically operated STW were1.27 and 1.31, TK 46153.76 and Tk. 53584.76 and 38 percent and 44 percent respectively. Therefore, it is concluded that the investment in DTW operation was not profitable because the IRR was less than the opportunity cost of capital (14 percent). Thus the DTW owners may disappear gradually from irrigation water marker and be reluctant to DTW operation. On the other hand the return on investment of STW was more profitable especially the electrically STW showed higher return than the diesel operated STW. Thus, there may be a possibility of expanding the number of STW in future.

Table 2. Results of Financial Analysis of DTW and STW Project Items STW (Diesel) STW STW DTW (Electrical) (All) Investment cost(Tk.) , 44000 45500 44750 210000 0 & M cost(Tk.) 24766 . 25193 24980 66476 BCR at 14% 1.27 1.31 1.29 1.14 NPV at 14% (Taka) 46153.76 53584.76 49866.65 88362.46 IRR (per cent) 38 44 41 9

Profitability of tube well operation: Sensitivity Analysis

Gittinger (1994) has pointed out that there are four kinds of uncertainties mainly price delay in implementation cost overrun and yields in which sensitivity analysis can be applied in agricultural project analysis. In this study, the IRR of the DTW has already been found lower than the opportunity cost of capital. So the sensitivity analysis for DTW was not done. Therefore, sensitivity analysis had been performed for STW only considering increase in operation and maintenance cost by 10 and 20 percent respectively and decrease in gross benefit by 10 and 15 percent respectively. Al-Mamun et at. 175

It is evident from table 3 that the BCRs of STWs were greater than unity, NPVs were positive and IRRs were also higher than the opportunity cost of capital (i.e. per cent).Table 3 also showed that the BCRs of both type of STWs were still greater than unity, NPVs were positive and IRRs of both type of STW were higher than the opportunity cost. These result also clearly indicate that if 0 and M cost increased by 20 per cent, the diesel operated STW owners could continue the tubewell operation only at break even level but the electrically operated STW owners enjoyed 20 per cent IRR which is also greater than the opportunity cost of capital.

Table 3. Results of Sensitivity Analysis of STWs (considering 10% and 20% increase in 0 & M cost)

Discounted measure 10% increase of0 and M cost 20% increase of0 and M cost STW STW STW STW STW STW (Diesel) (Electrical) (All) (Diesel) (Electrical) (All) BCR at 14% 1.18 1.21 1.20 1.10 1.13 1.12

NPV at 14% (Taka) 33235.52 40443.8 36836.79 20317.29 27302.84 23806.93

IRR (percent) 26 31 28 15 20 18

The sensitivity analysis has been done considering 10 percent decrease in gross benefit while all other costs would remain the same. It is evident from Table 4 that BCRs of both type of STWs were greater than unity, NPVs were positive and IRRs were higher than the opportunity cost of capital. This implies that if benefits decrease at the rate of 10 percent while all cost remain the same investment on both types of STWs would still be profitable but the rate of return of electrically operated STW would be greater than that of the diesel operated STW.

Sensitivity analysis has also been done taking into account 15 per cent decrease in gross benefits while all costs remain same (Table 4). Findings show that BCRs of both types of STWs were greater than unity. NPVs were positive and IRRs of STWs (diesel) were lower than opportunity cost (i. e; 14 per cent). It may be concluded that in this situation only the electrically operated STW could survive in the water market at break-even level.

Table 4. Results of Sensitivity analysis of STWs (considering 10 per cent decrease in gross benefits)

Discounted 10% decrease in gross benefits 15% decrease in gross benefits measure STW STW STW (All) STW STW STW (All) (Diesel) (Electrical) (Diesel) (Electrical) BCR at 14% 1.14 1;18 1.16 1.08 1.11 1.10 _ NPV at 14% . 24819.84 31155.46 27985.04 14152.89 19940.81 17044.24 (Taka)

IRR (percent) 19 23 21 10 14 12 176 Comparative profitability of deep and shallow tubewell

Competitive situation between STW and DTW

In 1972 and 1973, the BADC installed the selected three DTWs in the study area. At that time, only the DTWs were operated by rental system. With the result of the privatization policy, which was taken in mid 1980's the DTWs were sold to private individuals and KSS of BRDB. The withdrawal of the sitting restriction, private individuals were encouraged to install new cheaper STWs around the potential command area of the DTWs. For this reason, the DTWs faced a competitive situation with STWs. In the study area DTWs faced competition with STWs in terms of command area and water charges.

Table 5 shows that the command areas of DTWs were decreasing in every year for the installation of new cheaper STW. It is evident from the Table 5 that the command area of DTW-1 was about 26.31 hectares in 1989. In the year of 1996, 1997, 1998 and 1999 these were respectively 24.29, 23.48, 21.45 and 18.21 hectares. It indicates that the command area of DTW-1 rapidly decreased in 90th decade. While the corresponding figures for DTW-2 were 26.72 hectares in 1989 and 25.10, 21.86, 18.21, and 14.57 hectares were respectively in 1996, 1997, 1998 and 1999. In case of DTW-3 these were 27.53, 26.31, 24.29, 21.21 and 12.74 hectares respectively. Table 5 also shows that the command area of STW (both diesel and electrical) were 5.09 hectares in the year 1999. Thus, it is concluded that due to installation of cheaper STW all the DTWs were mostly affected.

Table 5. Changing Command Areas of DTWs after the Installation of Cheaper STW in the Study Area

Item Command area (hectares) 1989 1996 1997 1998 1999 DTW-1 26.31 24.29 23.48 21.45 18.21 DTW-2 26.72 25.10 21.86 18.21 14.57 DTW-3 27.53 26.31 24.29 21.86 12.74 STWs na NA(1) NA(2) NA(2) 5.09(6) Notes: na- not appropriate, NA- Not Available Figure in the parentheses indicate the number of STW installed respective years.

Table 6. Changing Water Charges Of DTWs after the Installation of Cheaper STWs in the Study Areas

Items Changing Water Charge (Taka/hectare) 1989* 1996 1997 1998 1999 DTW-1 7829 NA NA NA 7081 DTW-2 7829 NA NA NA 7081 DTW-3 7829 NA NA NA 7081 STW - - - - 8233 _ NA = Not Available * Water charge in the year of 1989 was deflated with the help of consumer price index. Consumer price index in the year of 1989 was 146.3) Source : Field Survey, 2000 Al-Mamun et al. 177

It is expected that the availability of tubewell irrigation may influence the water price. Evidence showed that the water charge of DTWs was Tk. 7829 per hectare in 1989 and it was Tk. 7081 in the year of 1999. Per hectare water charge of STWs was Tk. 8233. This result indicates that the water charge of DTWs were lower than the STWs.

Although the water charges of STWs were higher than the DTWs,farmers were interested to cultivate their land under STWs. Besides, DTWs also are faced various problems such as mechanical, electrical and financial during the irrigation season.

Before privatization, BADC provided mechanics and spare-parts at no cost but after privatization DTW owners were responsible for mechanics and spare parts. In this changed situation, DTW owners were not capable of solving the mechanical problem. Electricity problem was one of the major problems in study area. For this problem, each DTWs had to remain closed for several days and could not supply the irrigation Water in the Peak season and DTW owners paid large amount of money to electricity meter checker. Thus, this problem created moral hazard of the farmers and lost their interest in DTWs.

Moreover, the return on investment of DTWs was lower than that of the STWs which was discussed in earlier section; as a result, a number of DTWs in the study area have already been shut down and other DTWs were facing a serious management crisis.

Conclusion and Recommendations

It is clear from the above discussion that both electrically and diesel operated STWs were profitable in financial analysis, but the internal rate of returns of electrically operated STWs were higher than,diesel operated. It implies that more and more STWs may expand in future. While the return on investment of DTW was lower (9 per cent) than the opportunity cost of capital indicating that the DTW owners would be reluctant to operate in future. The results of sensitivity analysis clearly indicate that operation and maintenance cost and gross benefits have a strong influence on the profitability of tubewell operation. The results of sensitivity analyses indicate that if operation and maintenance cost increased by 20 per cent, the electrically operated STWs could earn marginal profit but diesel operated STW could run only at break-even level. SensitivitY.analysis also reveals that if 15 per cent decrease in gross benefit, the diesel operated STWs couldi,pot_maintain its return at opportunity cost level though the owners were faced serious competition to STWs in case of command area and water charge. The command areas of DTWs were decreasing in every year and the water charge of DTWs also decreased for installation of cheaper STWs. ). On the basis of the findings of the study following recommendations may be put forward which are likely to be useful for policy formulation: ;

The results of the study reveal that the investment on both the diesel and electrically operated STWs were profitable but the electrically operated STWs were more profitable than diesel operated STWs. The government and non-government agencies should encourage the adoption of STW especially electrically operated STWs as an appropriate technology throughout the country for minor irrigation development. 178 Comparative profitability of deep and shallow tubewell

With the elimination of the BADCs mechanics, there are few opportunities proper mechanical training in the study area, which is the major problem of the DTW and STW owners to maintain their tubewell in irrigation season. Thus, government should attending training on mechanical services. iii. Removal sitting restriction has affected mostly on the command areas of DTWs but the price of water still lower than the STW. Thus, this study recommended that government should undertaken rehabilitation of existing DTWs for greater interest of the water users. iv. Rural Electrification Board (REB) should ensure regular electricity supply in the HYV Boro season and availing electricity connection should be easy terms without rent seeking in order to reduce tubewell owners'(DTW and STW)operating cost for energy in tubewell(DTW and STW)operation.

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