OECD WORKSHOP ON IMPROVING THE INFORMATION BASE TO BETTER GUIDE WATER RESOURCE DECISION-MAKING. 4-7 May, 2010, Zaragoza

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1 OECD WORKSHOP ON IMPROVING THE INFORMATION BASE TO BETTER GUIDE WATER RESOURCE DECISION-MAKING 4-7 May, 2010, Zaragoza Carlo Cafiero 1, Antonio Massarutto 2, Raffaella Zucaro 3, SIGRIAN AS A DECISION SUPPORT SYSTEM FOR THE ECONOMIC EVALUATION OF IRRIGATION INVESTMENTS Executive Summary The paper illustrates the methodology implemented in the context of a project funded by the Italian Ministry for Agriculture to INEA to support budgeting for public investments in irrigation at the national level and to evaluate their impact on water resources and agriculture. In particular, the paper presents a methodology for the economic evaluation of irrigation investments, based on the assessment of benefits and costs of irrigation at micro level. The activities are integrated in the context of the existing SIGRIAN (National Geographic Information System for Water Management for Agriculture) and make substantive use of the information contained in the FADN - RICA (Farm Accountancy Data Network) database. SIGRIAN is a geographic information system (GIS) for territorial analysis, planning and programming of all activities related to the irrigation sector, both at national and regional levels, implemented and managed by INEA. It is a decision support system (DSS) used to support short and medium-term actions (such as water crisis management) as well as long-term actions (policies and financial investments programming). In Italy, INEA is the responsible agency for the FADN database. Microeconomic information on farm production obtained from FADN data is aggregated, processed and combined with meteorological data, in order to determine the link between water availability, use and agricultural production. 1 University of Naples Federico II 2 University of Udine 3 National Institute of Agricultural Economics (INEA) 1

2 INDEX 1. Introduction 2. SIGRIAN 3. National Irrigation System 4. Economic Value of Irrigation Water: proposal for an evaluation method 4.1 Specific major issues to be addressed 4.2 Phases in the evaluation method 4.3 Details of the various phases Identifying the reference area unit Choice of the time horizon Estimation of the probability distribution of water availability Estimating the relationship between water availability at the source and water use for agriculture Estimating the relationship between water availability and water use Estimating the relationship between water use and agricultural productions 5. Conclusions 2

3 1. Introduction In Italy, agricultural development has always been strictly related to the building of infrastructures for water catching and distribution to allow irrigated agricultural productions. This is witnessed by the huge investments realized, both in the North and the South of the country, starting from Second World War. Even though, over the years the Country s historical, economical and agricultural scenarios have profoundly changed, the availability and use of water in Italy maintain their centrality for the primary sector, also for the implications of the Common Agricultural Policy (CAP) and the dynamics of food consumption. After the droughts that have hit Southern Italy in and Centre-North Italy in 2003, the need of a tightened coordination between the administrations competent for water management and use has become evident. At national level, the competences for water sector are fragmented and complex, and they have been changing during recent years because of the regulatory framework imposed by the European Water Framework Directive 2000/60 (WFD). Regions and Independent Provinces have now a central role in the water administration, since they participate to planning and are responsible for budgeting and management, as well as for the collection of information about water quality and its monitoring. In the irrigation sector, Local agencies for water management called Consorzia, (associations of farmers) are the operational bodies. The Central State coordinates and provide indicative planning through the Ministry of Environment, the Ministry of Infrastructure, the Ministry of Agriculture and Forestry and, for emergencies activities, the Prime Minister Office. After the implementation of the WFD, eight River Basin Districts Authorities have been identified that are responsible for water sector planning: Eastern Alps, Padano, Northern Apennines, Serchio Central Apennines, Southern Apennines, Sardinia, Sicily. In Italy the Ministry of Agriculture and the Regional Administrations are together competent for programming and budgeting public irrigation investments. During recent decades, budgeting of irrigation investments has not always clearly followed a logic related to territorial vocation and/or environmental problems. Starting from 2004, the Ministry of Agriculture, together with the competent Regional authorities, have started to look for different methods for programming and budgeting investments in irrigation infrastructures, to reduce water losses and to promote a more rational and efficient use of water. They begun to develop a programming and budgeting process by identifying priority measures able to cope with inadequacy of the current national irrigation system. The priorities are: a) restoring efficiency in water supply, b) completing existing irrigation schemes to achieve their full functionality, c) improving water catching systems, d) modernizing distribution networks, e) setting up measurement and control systems; f) increase reuse of treated waste water for irrigation purposes. With reference to these priorities, the Ministry started the planning phase in coordination with Regions and Independent Provinces, which led to the approval of the National Irrigation Plan detailing current national 3

4 infrastructure requirements. Considered projects mainly concern structural adjustment, conversion of irrigation networks to save water, and completion of structures already funded but not yet completed. In this context, the Italian Ministry of Agriculture asked INEA to design a research project aiming at identifying a methodology to produce indicators useful to guide the funding and prioritize budgeting to irrigation investments. The indicators ought to take into account specific territorial characteristics, the profitability of water use and any future effects that climate change might have on agriculture. Such indicators should enable the ranking of proposed projects in terms of the economic value of water they generate, in addition to the social costs and benefits of proposed alternative methods for water management. With respect to the effects of climate change, acknowledging the European Commission Communication Addressing the problem of water scarcity and droughts in EU the idea is to consider, in the selection of the infrastructures to fund, the principle of evaluation and assessment of possible variations due to climate change, in order to build infrastructures which are expected to be efficient in the future. Climatic anomalies recorded in Italy in 2003, 2006 and 2007 showed that reduction in water availability produce important consequences on the primary sector, therefore, possible adaptation strategies to climate change have to include efficient management of surface water and reduced groundwater withdrawals. Efficient budgeting of irrigation investments may contribute to achieve these objectives. Further measures have to include the effective use of economic instruments that can ensure a sustainable and more efficient water use. The database and the reference instrument for the implementation of the methodology has been identified in the National Information System for Water Management in Agriculture (SIGRIAN) implemented by INEA and funded by the Ministry of Agriculture. SIGRIAN is a decision support system for public decision makers and other water system stakeholders, able to provide information on the wide irrigation system of the Country. 2. SIGRIAN The project denominated SIGRIAN, National Information System for Water Management in Agriculture started 1994 by INEA and involved Regions Objective 1. In 2004 the Italian Ministry of Agriculture financed the implementation of the GIS for northern and central Regions. Now the system contains information about all national territory. INEA is in charge for technical and methodological support and Regions, Independent Provinces and Local Agencies are directly involved in monitoring and updating. SIGRIAN is a geodatabase, where all information, collected by Access database, are associated to geographic data; it is also an historical database that can be used to analyze the evolution of the irrigation in different areas. Information are organized into 4 sections: Section I: Local Agencies for water management Section II: Water supply Section III: Adduction ad distribution networks Section IV - Miscellaneous. 4

5 Section I collects the main characteristics of Local agencies for water management. They are divided into districts, divides into sub-districts. There are data about structural and agronomics characteristics and about staff employed in irrigation management. In addition are collected information about water pricing that can be monomial or binomial: in the first case, the contribution is unique, while in the binomial there is a fixed rate related to reclamation services and a variable fee related to irrigation ones. In different Consortia exist different water pricing methods: per irrigated hectare; per unit, varying with the quality of the crops, higher for irrigated water demanding crops and for crops that produce higher incomes; per unit varying depending on the irrigation system, higher for crops irrigated with low efficiency systems that need higher water volumes; per cubic meters of water delivered, used where there are water meters in place. For economic analysis, information about regional contribution to Local Agencies, other public contribution and revenues from production and sale of hydropower are collected. For each irrigation district data are collected on administrative areas, areas equipped by irrigation nets, irrigated areas and the period of irrigation season. Moreover information is collected about the major cropping systems, irrigation systems, irrigation season (period and turns), water quantity for each irrigation and total amount of water for the entire irrigation season. 5

6 Section II describes the irrigation nets, from the sources to the distribution. Sources are springs, natural or artificial lakes, rivers, wells or wastewater treatment plans. Sources are described from a management point of view, withdrawal rights and structures. Information is collected on volumes of water withdrawal, type of supplies, potential and actual availability of water for irrigation and water quality from the different sources. Section III contains data about technical and structural characteristics of irrigation network, from the supplies to the distribution. Irrigation schemes are structured in knots and trunks. Knots are points of discontinuity in the hydraulic network: change of geometric characteristics (diameters, sections) or type of material. Trunks represent channels and pipelines and are delimited by knots. Analyzing these information it is possible to describe irrigation networks starting from structural characteristics (length, diameter, material), typology of use (for irrigation or reclamation or both), the date they were built and water volumes transported. 6

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8 Section IV contains information relating to other authorities involved in irrigation water management and wastewater treatment plants. With respect to the latter, data are collected describing the location and the main characteristics of the plants located close to agricultural land, to evaluate the potential reuse of purified wastewater as a source of irrigation water. All the themes are organized following GIS standard and using GIS programs like ArcView by ESRI. The work scale is 1:10,00, the international reference system is the ED-50 Datum and Projection Transverse Mercator (UTM) according to which Italy is included in the zones 32, 33 and part of 34. These types of information makes SIGRIAN a support tool for environment analysis, planning, programming of irrigation water. It can give answers to different information needs and territorial analysis related to irrigation sector and it can combine data about climate and soil. With SIGRIAN it is possible to analyze infrastructure to be financed in the contest of existing irrigation system to evaluate the impact on irrigated areas in terms of water supplies, irrigation services, type of agriculture and water use. 3. National Irrigation System Starting from the information collected by SIGRIAN the national irrigation system has been characterized, with reference to collective irrigation areas with the aim to start the valuation of irrigation water profitability. In Italy, according to ISTAT, 53% of irrigated farms take water exclusively from collective irrigation network and 18% both from collective and private irrigation network (ISTAT, 2007). Collective irrigation management is guaranteed by more than 600 Local Agencies for water management: 86% of them operate in the North, 6% in the South, 5% in the Centre and the rest in the Islands. In subalpine areas, there is a very large number of small Local Agencies, linked to orography and topography of the zone and to the historical conditions. In hilly and plain areas, Local Agencies have medium to large dimension. At national level, the total area equipped for irrigation is of 2.8 million hectares, 1.9 million of which served by collective structures. There exist different degree of utilization of irrigation infrastructure; on average the ratio irrigated/equipped area is of 68%. This ratio is much higher in North-West and North-East (92% and 71% respectively) and much lower in the South (43%) and the islands (40%). This situation is related to water availability, plentiful in the North, where historic water abundance has allowed the spread of irrigated cultivations and the construction of an impressive network of canals that now characterize the agricultural landscape. In the South and in the Islands, despite the presence of many irrigation infrastructure, water scarcity does not usually allow full utilization of existing networks. At the farm level, the most common irrigation system is sprinkling (40%), followed by furrow (37%) and drip irrigation (10%), the most efficient in terms of water saving. Flooding is used only for rice (9%). Within SIGRIAN about 3,400 sources of water were surveyed, 73% of them are located in the North, 18% in the South, 7% in the Centre and the rest in the Islands. They are mainly withdrawal from surface water sources (40%), followed by withdrawal from groundwater (37%). With regard to irrigation infrastructure, 12,300 km of irrigation networks have been surveyed in the North and 6,100 km in the South and the Islands; in the Central Italy, irrigation networks are not very developed, amounting at only approximately 1,500 km. The most modern and efficient networks, which allow the use of efficient irrigation systems prevail in the South and Islands (where 52% of the existing networks consist of pressure pipes), and even more so in the Central Regions (70% ) and close to Alps in Trento (91%). In the 8

9 wider North, open channels prevail (80% of the total). In general, irrigation network are in a bad conservation state because of the old age. Despite the great potential it is important to underline the existing widespread lack of information about the availability of water and its consumption for agriculture because Local Agencies do not collect these data. In some contexts these information are available but it is not available a comprehensive framework. This lack of information concerning water use and the irrigated crops contributes to an inefficient management of water resource because these information are essential to know real irrigation needs of our territory. 4. Economic Value of Irrigation Water: proposal of an evaluation method This section details the steps that have been taken by a group of researcher at INEA in devising a comprehensive model for the processing of information related to water use in agriculture, to be implemented within the SIGRIAN system to the aim of providing an evaluation of the economic value of irrigation water across the Country. The starting point of the project s activities has been the consideration that the major component of the economic value of irrigation water stems from its contribution to agricultural production. Such value is particularly high during periods of relatively scarce natural supply through rain and snow. We look at irrigation water as a drought risk management tool more than as an input in agricultural production, which allows us to better describe the highly non-linear relation existing between water availability and its economic value. Such a relationship presents a discontinuity at the point where there is a transition from normal conditions, when small changes in irrigation water availability have limited impact on the value of agricultural production, to water stress conditions when further reduction of water availability might have very large impacts. From such a perspective, we can better highlight the benefits and costs of alternative methods for water management. The questions we ask are: provided that the improvement of irrigation water management systems in Italy is a desirable objective, what are its costs? And what are the benefits? How can we measure both costs and benefits? How net benefits will be distributed among interested stakeholders? 4.1. Specific major issues to be addressed The problem we address is complex from a technical point of view (including hydrographic, geologic engineering and agronomic considerations), but that is not our focus. We consider instead the following aspects makes the analysis difficult: a) The number and variety of stakeholders and their interests, ranging from public health, social welfare, and economic prosperity, necessarily call for actions with strong law and political connotations. b) The dynamic nature of the problem, that is, the fact that design, implementation and monitoring of an irrigation management system must be considered over a rather long time horizon. Such dynamic perspective, on the other hand, implies: a. The existence of large uncertainty associated with prediction of event that might occur over the time span of the system (think for example to climate change and its foreseeable effects on volumes and distribution of rainfall) 9

10 b. The need to express judgments in terms of the expected impact on the probability distribution of benefits and costs, and to find a way to discount them to the moment in which decisions are made. This set of problems guided the choice of the criteria we adopted in the various phases of the research, detailed in the following section 4.2. Phases in the evaluation method The research activity toward the definition of the evaluation method we propose has progressed with the following steps: a) Identification of the unit area of analysis, which may overlap with an hydrographic basin or (more likely) part of it. b) Identification of the relevant time horizon c) Estimation of the time distribution of water availability in each area d) Estimation of the relationship existing between water sources and farm gate water availability, which depends on the conditions of the existing infrastructures, including reservoirs, network, etc. e) Estimation of the relationship existing between farm gate water supply and quantity of agricultural production, fundamentally linked to aspects such as the technical conditions of production (latitude, longitude, altitude, soil nature on one hand, and species, crop rotation and other features of the agronomic technology employed on the other.) f) Estimation of the relationship between quantitative agricultural production and its economic value, which depends on economic aspects such as the price elasticity of demand for the agricultural products, the storability of such products, and the presence of other arbitrage mechanisms affecting price formation. The set of the above functional relationships, once known, will constitute our analytical model, through which, in principle, we can measure the impact of any change in the various parameters that are under the direct control of the irrigation authority, in terms of agricultural value added, to the extent that such parameters would change the quantity of water available to agricultural users. Before detailing the content of each of the above steps, it is worth preliminarily reiterate one aspect that, in our opinion, has often been treated rather superficially in the analyses of the incidence of public policies. The point is that, when properly considering the dynamic and uncertain dimension of the problem, any proposed evaluation ought to be presented and interpreted as relative to the expected change in the probability distribution of the analyzed variables. Thus, as an example, in a context like the one we are studying, a statement such as the value of a cubic meter of water for agriculture in region A is of X /year, ought to be properly understood as meaning the foreseeable impact of an increase in water availability in that region, over the considered time span, and net of any other concomitant effect not explicitly considered in the analysis, is a change in the mean of the distribution of the agricultural value added of X /(year x cubic meter). Depending on the situation, such a limited forecast may not be deemed sufficient to address the policy makers and the managers needs. In cases where the relationship between water availability and economic 10

11 value were non linear as we anticipate, that is, if the unit value of irrigation water depends on the total amount of water available, then it is evident that only knowing the impact on the average of the distribution would hide the crucial information. Much more informative would be, were it possible, to know the impact of the proposed action on the entire probability distribution of value, which would allow the decision maker to better choose between, for example, (a) a reform that, while keeping unchanged the average value of water, reduces the occurrence of particularly negative situations, and (b) a reform that, though increasing the average value, might expose the system to possible crises Details of the various phases Identifying the reference area unit In identifying the relevant reference area unit, we consider the following: a) The area ought to be homogeneous so that the functional relationships identified in the following phases could be deemed representative of all economic units inside the area. For example, if it is deemed important to address the value at the level of individual farms, then the reference should be limited to areas where similar farms operate, that is, farm with similar cropping patterns, size, and other structural characters. b) Data needed to the estimation of the relationships of interest ought to be available at the level of the chosen area unit. c) There should be a way to aggregate the results referred to the individual area units to broader reference areas, such as the regions or the nation s level. To these general principles, other particular aspect are added that contribute to determine the ultimate unit of analysis in our model. Given that one of the goals is to produce a method that is of simple and fast use to be integrated into SIGRIAN, we assumed, in general, the unit reference are to be the area served by a Consorzio Choice of the time horizon There exist several aspects linked to the choice of the time horizon to consider. The first one, and the most important, is that relevant phenomena such as rainfall are characterized by large variability over time. To be able to characterize such variability, the analysis should consider a long enough time horizon to cover the range of possible situations that we are interested in. For example, if the model aims at addressing the performance of a proposed management system when facing a severe drought, such as those that might occur, say, once in ten years, it is clear that the time horizon considered cannot be shorter than a decade. For other reasons, the horizon should be even longer, as for example when there is the need to estimate the probability of rare events based on historical data Estimation of the probability distribution of water availability To be able to assess the effectiveness of an irrigation management system, one must consider the random nature of water availability, which largely depend on natural phenomena not under direct control of the policy maker or the administrators. Precise characterization of the probability distribution of such phenomena is thus likely to condition the reliability of any other result that the model might produce. One way to validate any assumption made on these distribution may be the correspondence with historically 11

12 observed data. There are several sources of climatic data to be referred to, and one of the activities currently being carried on is the construction of a catalogue of such sources, including the Consorzia. How to express effective water availability is an issue that has been repeatedly tackled in the literature. Many proposals have been made on how to create indexes of rainfall and other meteorological data that would be highly correlated to agricultural production (see the review by DiFalco, 2010) and no single choice seem to dominate. Given what we know of the complex relationship between plants, soil and the atmosphere, the raw measure of the amount of water that reaches the ground (for example through rainfall) is not sufficient to provide a measure of effective water, which instead depends on such factors as soil structure (i.e., its permeability, absorption capacity, etc.), air and soil temperature, the growing stage of the crop, etc. All these difficulties are exacerbated by the need to define a measure that can be calculated quickly and precisely, if it has to serve as a guide for intervention. If, on one hand, the diffused and growing availability of weather stations on the Italian territory is potentially capable of providing huge amount of data at high time frequency, fruition of such data is not immediate. Though efforts have been made by institutions such as UCEA, there is still lack of an effective coordination among various entities (local and state administrations, research institutes, military bodies, private entities, etc.) which, in a varying degree, collect and maintain weather data series Estimating the relationship between water availability at the source and water use for agriculture To be used in agriculture, water must be available at the farm location, which implies the needs to have a distribution network. We foresee no particular difficulties in forming an estimate of the amount of water that can be used by agriculture per unit of available water at the source, in any particular area, once information on the conditions of the distribution system and of the presence of other competing uses is available Estimating the relationship between water availability and water use Traditionally, farmers are not charged a cost for water reflecting the full cost of water provision, which might have contributed to exacerbate some problems associated with excessive water use. One of the major contribution of the model that we aim to build is the possibility to predict how water use may change if farmers are charged a full cost recovery fee Estimating the relationship between water use and agricultural productions. This is likely to be the more substantial aspect of the model, and the one on which most effort has been put so far. We have been taking two parallel directions, aiming at achieving the same information with different approaches. The first one involves the collection of data on time series of available water at the source, and of time series of production of the major crops in each region. The prospected use of such data is the conduction a regression analysis of the latter on the former. In the terminology introduced by Baier (1977; 1979), these would amount at applying empirical-statistical models Our empirical-statistical model is based on data available from the FADN data maintained in Italy by RICA- INEA database. This database includes accounting data on a sample of Italian farms, including data on individual crop yield from 1980 through This ought to be a long enough period to be able to capture the underlying reduced-form relationship between the yields and water availability with some precision. 12

13 The RICA database might be also used to provide the series of crop specific gross margins, that is a measure of the value of production rather than physical quantity, which might be regressed against the relevant water availability measure. This would have the advantage of avoiding the need to explore in detail the relationship between quantity produced and prices, but the drawback that its results would be conditional on whatever market structure prevailed in the past remaining constant. The choice of measuring production in physical terms is safer, and potentially would give the model more flexibility in the simulation of alternative scenarios in terms of cropping patterns and agricultural market organization. The second road involves the build-up of a simulation model that, starting from the structure of crop production in the area and using the data on crop water need provided by experts, would allow to experimentally trace down the relationship between water use and production. (This might be considered a hybrid between what Baier names crop-growth simulation models and crop-weather analysis models.) Regional mathematical programming models will be set up to reproduce observed patterns of crop production and associated water consumption in each of the areas. Two reference years, representative of an average water availability and of a drought year, will be used to calibrate the parameters of the model on observed data on both crop production and water availability. The objective of these models is to provide an estimate of the welfare loss that society would suffer in case a shortage of water occurs, by comparing the total value of production in a good year and the total value of production in the bad year. The model may allow to evaluate two types of scenario. The first one is of an unanticipated water shortage, such that farmer do not have time to adjust their cropping pattern. The impact would therefore be spread across all existing crop, making no distinction based on the relative profitability of the various crops. A second scenario allows for the possibility that the water shortage (or the reduction in water availability due to the diversion toward other uses) is anticipated. Then, a response by farmers may be anticipated in considering that water would be allocated to the most profitable use, that is, to the crops where it has the largest effect. This ought to be able to provide a rough estimate of the upper and lower bound to the welfare loss. 5. Conclusion This paper has reported on the major criteria that INEA is following in responding to a request from the Italian Ministry of Agriculture to provide a methodology for the assessment of the value of irrigation water. INEA response has been a methodology strongly based on the existing SIGRIAN, a geographic information system on the Italian network of irrigation infrastructures. After a summary description of the state of the irrigation system in Italy, we have illustrated the broad lines that inspired the design of the evaluation model that will be used to provide answers to several relevant questions. The system is developed with an eye carefully devoted to the optimization of existing data and information, by avoiding duplication of efforts and in the attempt to make the most out of the already rich wealth of information. With respect to existing data, there is a lack of information about the availability of water and its consumption for agriculture because in Italy Local Administrations and Agencies are not forced to monitoring them. This lack of information concerning water use and the irrigated crops contributes to an inefficient management of water resource because these information are essential to know real irrigation needs of our territory. 13

14 The work described in the paper is still ongoing, but the progress achieved so far makes us confident that in the near future, policy makers, administrative bodies and various other stakeholders concerned with water use in Italy will have a comprehensive and flexible system to guide water resource decision-making. 6. Bibliography Baier, W. Crop-Weather Models and Their Use in Yield Assessments. Technical Note No. 151, World Meteorological Organization, Geneva, Switzerland, Baier, W. Note on the Terminology of Crop-Weather Models. Agricultural Meteorology 20(1979): Green Paper from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Rrgions Adapting to climate change in Europe options for EU action {COM(2007)354 final} Comunication from the Commission to the European Parliament and the Council Addressing the challenge of water scarcity and droughts in the European Union - {SEC(2007) 993}{SEC(2007) 996} EUROSTAT (2007), Water resources assessment and water use in agriculture 27th of February (2007) 14