ECONOMIC EVALUATION
1. General Approach
The economic viability of the Scheme
is considered here from the standpoint of the national economy and also
from the viewpoint of the farmers. The main criteria from the viewpoint
of national economy are: the contribution to national income, and the
net foreign exchange earnings (or savings) arising from the Scheme. The
important goals of providing employment and of meeting the food requirements
the country are also considered.
2. Method of Assessment of Economic Viability
The Scheme is defined as including
the following activities : the supply of irrigation water to 9C0,000 acres
of the arable land by means of reservoirs, diversions, canals and irrigation
systems; the production of electric power to be sold at bus bars of the
hydropower stations (excluding transmission and distribution); agricultural
production from farms within the area (produce assessed at its value on
the farm) ; housing of the farmers; the provision of extension and other
agricultural services, an implementation agency, experimental and model
farms, and other free services supplied by Government for the benefit
of the farmers; the provision of the basic infrastructure needed to support
these activities.
All activities outside the Scheme thus
defined are considered as indirect effects.
Direct effects (benefits and costs)
have been examined in detail and used to appraise the Scheme by the calculation
of rates of return with as much precision as possible. Indirect effects
have only been roughly estimated to show the investment and employment
opportunities opened by the Scheme in other sectors. Secondary effects
(income effects) have been evoked to indicate the probable overall impact
of the Scheme on the economy of Ceylon
.
The internal rate of returns has been
adopted as an indicator of social profitability from the national economic
standpoint.
Since the rate of return is itself
an interest rate, no such rate need enter its calculation. However.
a rate of interest is still useful as a benchmark
with which to compare the internal rate of return. To this end, it is
proposed to adopt an accounting rate of interest of 10 percent, reflecting
the shortage of capital for productive investment in Ceylon
. It-is felt that no project yielding
a return lower than 10 percent should be considered as economically viable.
A readily acceptable project should yield a markedly higher rate.
The internal rate of return has been
worked out using costs and benefits estimated on the basis of current
market prices (see Table IX-l I) as well as accounting prices (see Table
IX—l2).
3. Basis for Accounting Prices (sometimes called shadow prices’)
Accounting prices (different from prevailing
market and official prices) are used in order to reflect more accurately
the value of inputs and outputs to the economy. Thus, to eliminate distort-ions
brought about by Government subsidies, agricultural products have, as
far as possible, been valued at world market prices; similarly import
prices have been used for fertilizers. Moreover, an attempt has been made
at valuing primary factors of production (land, laborer,
capital) at their opportunity cost, which should be equal to the value
of production foregone by their utilization.
Unskilled labour in Ceylon
(including that of the average farmer)
and irrigable land in the Dry Zone are at present abundant, and are likely
to remain so for a long time. They have therefore been considered as having
an opportunity cost equal to zero. But skilled labour is scarce, despite
educational and training efforts by the Government. Its opportunity cost
has therefore been estimated at twice the prevailing salaries.
I. The internal rate of return may be defined as
the rate of interest which, if it were applied to all receipts
and expenditure of Scheme (no capital as well as on current accounts),
would reduce net benefits to zero.
As foreign exchange is very scarce,
ii is proposed to adopt, for the purpose of this analysis, an accounting
rate of exchange equal to twice the present rate of 5.95 rupees
to one US dollar. However, because of lack of reliable data on the import
component of certain elements of costs, and of great uncertainties concerning
the equilibrium rate of exchange of the Ceylon
rupee, the accounting rate proposed
will be used with caution and only to show in what direction and to what
extent results obtained without it would be modified by its use.
4. Capital Costs
Total
capital costs
The capital costs of works for irrigation,
drainage, flood control and power production for the Scheme as a whole
have been estimated on the basis of average prices for construction work
currently prevailing on the world market, taking into account the construction
of the large works (head works, hydropower stations and transbasin canals) by foreign contractors.
The total capital expenditure has been
summarized in Table IX-1, distinguishing between the Scheme itself and
the economic activities resulting directly from the Scheme.
The cost of irrigation systems includes
land development work (e.g. clearing and leveling) and the irrigation works required for water deliveries
to the farmers’ fields.
The settlement cost includes the cost
of farm buildings and farm working capital; capital expenditure relating
to agricultural extension and other free services and facilities provided
by the Government such as model farms, experimental stations, colonization
officers’ quarters, wells, village streets, community centre, etc.
Costs
retained for direct benefit/cost calculations
Revenue-earning Government activities
related to land settlement that may be considered as having their own
economic justification have been excluded from the direct benefit/cost
calculations made for the Scheme itself. For the same reason, capital
expenditures relating to storage, marketing. transportation
facilities, and processing industries have been eliminated from these
calculations. Similarly only half of the general overhead (infrastructure)
cost indicated above has been allocated to the project proper; the rest
has been allocated to other productive activities such as marketing and
processing.
TABLE
IX-1
Summary
of Total Capital Costs
Description
Cost
Rs. Million
A. The
Scheme
Reservoirs, Diversion Works and Power Plants
1,750
Transbasin canals (and pumping stations) ..
1,109
Irrigation systems .. .. .. .. 1,805
Settlement
.. .. .. .. 817
Overheads
.. .. .. .. 47
Implementation Agency
.. .. .. 55
Total ..
5,583
B. Activities resulting directly
from the Scheme
Power transmission .. .. .. .. 308
Marketing and processing of agricultural
products (and
revenue-earning Government Activities) ..
47
.
_____
Total
..
1,120
Foreign exchange component
of capital coats
The import component of the capital
cost of the Scheme itself ha~ been estimated at 38 percent of total costs,
corresponding to the equivalent of Rs. 2,220
million. This proportion varies from 35 percent for the first phase to
42 percent for the second and third phases of development.
Phasing of capital expenditure
Capital expenditures for
the Scheme itself by phase are summarized below
TABLE IX-3
Summary of Total Capital Costs of the Scheme by Phases
Phase
Works Settlement Implementation
Total
and
Agency
Infrastructure
Rs. Million
Phase I -~
Project 1 .. .. 446.7 123.3 5.7
575.7
Project 2 .. .. 571.0 99.0 6.7
676.7
Project 3 .. .. 264.1 30.5 2.9 297.5
Total Phase I .. .. 1,281.8 252.8 15.3 1,549.9
Phase I .. .. 1,282 253 15
1,550
Phase II ..
. . — 631 280
9 920
Phase III
. . .. 2,751
331 31 3,113
Whole Scheme .. .. 4,663 864 55 5,583
5. Cost Allocation of Multipurpose
Units Included in Phase I
The cost of a single-purpose irrigation
dam has been worked out and this cost is allocated to irrigation. The
difference between this and the total cost is allocated to power.
The question of allocation of any part
of the costs to flood control, or to industrial or domestic water supply
is ignored, as these are incidental benefits obtained from the units proposed
for construction.
Polgolla
Diversion with underground power plant
(35.8 MW) and tailrace tunnel is estimated to cost Rs.
97.4 million, of which Rs. 29.0 million are
towards items like penstock, turbines, powerhouse, power plant, switchyard
and equipment which are directly allocated to power. The balance of Rs.
68.4 million is allocated to irrigation.
Bowatenna power plant (3.7 MW) is located at the end of the tunnel which forms
pan of the PK canal (Polgolla-Kala
Oya Canal
). This power plant is estimated to cost Rs.
7 million; the whole cost is allocated to power.
Victoria Falls hydropower sc/seine (120 MW) is estimated
to cost Rs. 247.2 million, of which Ps. 1 28.0
million are for items like penstock, power plant, etc. which are directly
allocated to power,
I. Allocation of cost of multipurpose dams can
be done it many ways. The above method is one extreme in which the maximum
amount is allocated to irrigation. An alternative approach would be to
consider a single-purpose power dam, the cost of which could be allocated
to power and the difference to irrigation. This would be the other extreme
in which maximum allocation is made to power. Thus, it should be recognized
that the ratio of allocation of cost of the multipurpose remains an open
question and the final ratio to be adopted depends upon the policy of
the Government.
and the balance of R. 119.2 million are for the darn arid reservoir. It
is to be noted that the size of the proposed dam corresponds to N. W.
S. (Normal Water Surface) elevation of 1,4 It) feel; whereas for
the purpose of irrigation only, it would be adequate to provide a darn
with a N.V.S. (Normal Water Surface) elevation of 1,325 feet. The
smaller dam would cost Rs. 52.0 million. As
the higher dam was selected only from the power point of view,
the excess cost of raising the dam, which is (119.2 - 52.0) its
67.2 million is allocated to power.
Thus the total cost allocated to power
is Rs.(28.0 + 67.2)
195.2 million and the balance of Rs. (247.2
— 195.2) 52.0 million is allocated to irrigation.
Moragahakanda hydropower sc/wine
(41) MW) is estimated to cost its. 186.6 million, of which Ks. 32.6
million are for items like penstock, power plant, etc., which are directly
allocated to power. The balance of Rs. 154.0
million is for the dam and reservoir. The size of the proposed dam corresponds
to N. W. S. elevation of 640 feet, whereas for the purpose of irrigation
only, it would be adequate to provide a dam with a N. W. S. elevation
of 610 feet. The smaller dam would cost Rs.
122.0 million only. As the higher dam has been selected only from the
power point of view, the excess cost 5g raising the darn, which
is Ks. (154.0— 122.0) = 32.0 million, is allocated to power.
Thus the total cost allocated to power
is Rs. (32.6 + 32.0) 64.6 million and the balance
of Rs. (186.6— 64.6) = 122.0 million is allocated
to irrigation.
Table IX-3 below shows a summary of the allocation
to agriculture and power of all capital. costs
in the Scheme.
TABLE 1X-3
Summary of Capital Costs Showing Allocation
to Agriculture and Power
Phase
Power Agriculture Total
Rs. Million
Phase I
Project 1
36 540 576
Project 2
195 481 676
Project 3
65
223 298
Total Phase 1
Phase 1 296 1,254 1,550
Phase 11
22 898 920
Phase III 454 2,659 3,113
Entire Scheme 772 4,811 5,583
Current Costs (operation and maintenance)
Operation and maintenance expenditure
have been estimated in detail for the first phase projects, and are found
to be close to the following average values
For dams, hydro-electric stations and
transbasin canals
1 percent of the capital cost
For new irrigation systems
2 percent of the capital cost
For existing irrigation systems 3
percent of the capital cost
These percentages have been adopted
in determining the current expenditure involved in the operation and maintenance
of the whole Scheme.
Current costs relating to housing and
general infr4structure allocated to the Scheme, which are relatively small
and difficult to estimate, have been omitted.
Current costs relating to extension and other services provided free
by the Government have been estimated at Rs.
20 per acre per year, on the basis of the feasibility studies of the first
phase.
Production costs per kWh are approximately estimated at 10 percent
of the investment figures (6 percent interest + 3 percent depreciation + 1
percent for operation and maintenance).
The estimated data of the current expenditure involved in the Scheme
a whole arc summarized below:—
TABLE IX-4
Current Costs of Scheme
Area under Irrigation
Operational and Cost
of
Phase
Maintenance Costs Extension
Total
---------------------------------- ------------------------ Services
Existing New
Total Irrigation Power
(1,000 acres)
Rs. Million
I
..
.. 144.2
184.1 328.3
15.6 3.1 4.6
32.2
II
..
.. 20.8 209.0 229.8
11.06 0.21
4.3 15.57
III
..
.. 81.2
260.7 341.9
31.53 4.49
6.03 42.05
Whole Scheme
.
246.2
653.8 900.0 58.19
7.8
14.93 80.82
7. Benefits
The benefits of the Scheme are essentially derived from the sale of
agricultural products and electric power. Benefits derived from flood
protection of presently settled land and of cities, as well as from the
rental value of houses to be built for the settlers, are small and difficult
to estimate. They have been omitted.
Benefits may be defined as the value
of production minus the current costs involved in obtaining it.
From a national economic viewpoint,
and using the shadow prices indicated above, production benefits used
to calculate an internal rate of return may be considered as close to
the value added (V)’ concept of national account. As regards farm benefits,
the identity is complete (leaving out foreign exchange complications)
for skilled labour, for which an opportunity cost equal to twice its.
Market value is assumed.
The identity may also be considered as complete for electric power
production, neglecting the relatively small importance of skilled labour
in operation and maintenance costs. “Value added” is therefore used in
the national accounting to measure agricultural and electric power benefits
from a national economic standpoint.
1. V =. value of production minus value of goods and services purchased
from “other enterprises” remuneration of
primary factors (national resources, labour and capital) plus taxes.
Agricultural
benefits
Value added by agricultural production is given below for each phase
of the Scheme.
TABLE IX-5
Value
Added by Agricultural Production
With Minor
with Major
Improvements in
Improvements in
Phase
Agricultural
Agricultural
Methods
Methods
Rs. All/lion
Phase I Project1
128 167
Project 2 99 130
Project 3 37 47
Total Phase I - 264 344
Phase II
- 303 369
Phase III .
- 494 607
Entire Scheme ..
1,061 1,320
The figures correspond
to two different levels of yields defined as :
Better yields, attainable almost immediately
after land development and settlement because they require only the adoption
of minor improvements in farming practices, which could easily be introduced
in a climate of change, with the assistance of the recommended dense network
of extension assistance.
High yield requiring major improvements in farming practices, which could only
be introduced progressively over 5-10 years.
For the economic evaluation, it is
assumed that major improvements will not be adopted before 1981.
To take account of possible delays
in land settlement and in adoption of the improved agricultural practices
recommended, it has been assumed that agricultural production will increase
in the following manner after commissioning of a given irrigated area
Percentage of attainable
Year
agricultural output on the
irrigated
area
0 (year of commissioning)
5 percent
1
33 percent
2
67 percent
3
90 percent
4 (and following years)
100 percent
Net agricultural benefits, after deduction
of various related current costs of the Scheme, are given below for each
phase. These current costs have been deducted fully on the simplifying
assumption that they reflect the opportunity cost to the community of
the services they provide.’
_______________
1. A preliminary analysis of these costs, considered
as a whole, has shown that this assumption is valid, as skilled labour
constitutes approximately 50 per cent of the total wage bill and it has
been assumed that the accounting price of skilled labour is twice its
market value, and that of unskilled labour is zero.
TABLE
IX-6
Net
Agricultural Benefits with Major Improvements in Agricultural Methods
Value Added by Operation and
Extension
Phases Agricultural
Maintenance of and
other
Total Agricultural
Production
irrigation Works Services (rounded) Benefits
Rs. Million
I
344
15.6 4.6 20 324
11
369
11.1 4.3 15 344
III
607 31.5 6.0 38 569
Net agricultural benefits with minor improvements in
agricultural practices are similarly given below for Phase I
TABLE IX-7
Net Agricultural Benefits with Major Improvements in
Agricultural Methods in Phase 1
Value
Added by Operation and Extension Total Agricultural
Projects
Agricultural Maintenance of
and other
Production Irrigation Works Services (rounded) Benefits
Rs. Million
1
128 7.3 2.3 10 118
2 99 5.5 1.6 7 92
3 37 2.8 0.7 3 34
264 15.6 4.6 20 244
Electric power benefits
Benefits
derived from the generation of hydro-electric energy have been estimated as
follows:
only firm power has been taken
into consideration, non-guaranteed power being of little value, as its use
presupposes the presence of standby thermal plants.
The value of one kWh of firm (guaranteed) energy to the economy has been
estimated, on the basis of accounts of the Department of Government Electrical
Undertakings, at 6 Ceylon
cents. -
TABLE IX-8
Power Benefits by Phases
Firm
Sales Operation
and
Phases Energy
Value Maintenance Cost Benefits
kWh million .
Rs. Million
Phase I
Project I
..
202
12.1 0.4 11.7
Project 2
..
469
28.1 2.9 26.1
Project 3
..
149
9.0 0.7 8.3
Total
Phase I ..
820
49.2 3.1 46.1
Phase II ..
47
2.8 0.2 2.6
Phase III ..
1,169
70.1 4.5 65.6
Grand Total ..
2,036 132.1 7.8
114.3
Total
benefits
Total benefits, with major improvements in agricultural
practices, are estimated below by phase.
TABLE IX-9
Total Benefits with Major improvements an
Agricultural Practices
Flood
Phase
Agriculture Power Protection
1
Housing
Total
Rs. Million
1
324
46
370
II 344 3
347
III 569 65
634
Total 1,237
114
1,351
Pro memoria.
Total benefits
with minor improvements in agricultural practices are estimated for Phase
I:
TABLE IX- 10
Total Benefits with Minor Improvements for
Phase I
Projects
Agriculture Electric Power Total
Rs. million
1
118 12 130
2
92 26 118
3
34 8 42
Whole Phase
244
46 290
8. Profitability
Profitability has been considered both from
an overall economic and from a private financial point of view.
Social
profitability
Social internal rates of return and some other
indicators of social and financial profitability, based on costs and benefits
already discussed above, are given in Table IX-1 I for the Scheme as a whole,
for each of the three phases, and for the three projects of Phase I.
A study of this Table leads to the following conclusions.
With
a social internal rate of return of 15 percent and a capital/benefit ratio
slightly above 4, the Scheme as a whole may be considered economically sound.
The rates
of return and capital/benefit ratio calculated for the first and second phases
appear quite satisfactory. However, the unit cost of agriculture in the third
phase appears to be above normal (a 1,480 per acre), for which reason its
rate of return is almost at the lowest limit (12 percent).
This result has been obtained using
the present exchange rate of the Ceylon Rupee. Had the accounting rate
proposed earlier (of twice the present official rate) been used, the rate
or return would have been raised by several points (see Table IX-12).
Although “shadow pricing” in this field is subject to great uncertainties,
such considerations should prevent excessive pessimism regarding the level
of the rates of return.
In the first phase, attention is attracted by the relatively high
cost of agriculture tender the second and third projects, which is the
result of the incomplete utilization of the irrigation potentialities
provided by Victoria and Moragahakanda reservoirs. With the realization of the second
phase or development, based on these water sources, the indicators of
Projects 2 and 3 improve considerably and their rates of
return rise respectively to ii and 14 percent.
Private
financial profitability
On the basis of “guaranteed prices”
for farm products it is estimated that the average net farm income in
the area of the Scheme will be raised from the present low level of about
Ks. 600 to approximately Rs. 1.344) with minor
improvements in agricultural practices, and to Ks. 1,840 with major improvements.
With the completion of the Scheme, at least the latter level should be
obtained over the entire area of the Scheme.
|
TABLE IX-11
|
|
|
Indicators of Risibility for the whole scheme
|
|
|
(Market prices ,in round figures)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual benifts
|
|
Capitoal benfitRatio
|
Social Internal Rate of Return
|
Unit Capitol Cost
|
|
|
Phases
|
Capitol Cost
|
Total
|
Agri cultrue
|
Power
|
Total
|
|
Total
|
Agricultrue
|
Power
|
Agricultrue
|
Power installed Capacity
|
|
|
projects
|
Agricultrue
|
Power2
|
|
|
|
|
|
|
|
|
|
|
|
Rs. million
|
|
|
|
|
|
precent
|
Rs/acre
|
Rs/kw
|
|
|
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
540
|
36
|
576(a)
|
188
|
12
|
130
|
|
4.4
|
4.6
|
3.0
|
17
|
4,690
|
900
|
|
|
|
|
|
(b)
|
157
|
12
|
169
|
|
3.4
|
3.4
|
3.0
|
|
|
|
|
|
2
|
431
|
195
|
676(a)
|
92
|
26
|
118
|
|
5.7
|
5.2
|
7.7
|
13
|
6,170
|
1,630
|
|
|
|
|
|
(b)
|
123
|
26
|
149
|
|
4.5
|
3.9
|
7.7
|
|
|
|
|
|
3
|
233
|
65
|
298(a)
|
34
|
8
|
42
|
|
7.1
|
6.9
|
8.1
|
12
|
6,850
|
1,630
|
|
|
|
|
|
(b)
|
44
|
8
|
52
|
|
5.7
|
5.3
|
8.1
|
|
|
|
|
|
Total
|
1,254
|
296
|
1,550(a)
|
244
|
46
|
290
|
|
5.3
|
5.1
|
6.5
|
14
|
5,500
|
1,480
|
|
|
|
|
|
(b)
|
324
|
46
|
370
|
|
4.2
|
3.9
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II
|
898
|
22
|
920(a)
|
288
|
3
|
291
|
|
3.2
|
3.1
|
7.3
|
20
|
4,180
|
1,465
|
|
|
|
|
|
(b)
|
344
|
3
|
347
|
|
2.7
|
2.6
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
III
|
2,659
|
454
|
3113 (a)
|
456
|
65
|
521
|
|
6.0
|
5.8
|
7.0
|
12
|
8,830
|
1,550
|
|
|
|
|
|
(b)
|
569
|
65
|
634
|
|
4.9
|
4.7
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand
Total
|
4,811
|
722
|
5583(a)
|
988
|
114
|
1,102
|
|
5.1
|
4.9
|
6.8
|
15
|
6,470
|
1,520
|
|
|
|
|
|
(b)
|
1,237
|
114
|
1,351
|
|
4.1
|
3.9
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.Costs as
worked out for a single purpose
irrigation scheme
|
|
|
|
|
|
|
|
|
|
|
2 Total costs
minus costs allocated to irrigation
|
|
|
|
|
|
|
|
|
|
|
|
3 including
settlement, overheads and implementation agency for equivalent area
|
|
|
|
|
|
|
|
4 Marginal
costs only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) with minor improvements in agricultural practices.
|
|
|
|
|
|
|
|
|
|
|
(b) with minor improvements in agricultural practices.
|
|
|
|
|
|
|
|
|
Assuming farms of five acres for families
of 6.5 persons, these levels of farm productivity would correspond
respectively to per caput incomes of Rs. 1,030,
and Rs. 1.420. The figures compare favorably not only with the present average per caput income
in Ceylon
(Rs. 655) but also with tentative
projections in this magnitude for the year 1990 (Rs.
1,000).
Such levels of income should make it
possible for the farmers to contribute financially to the Scheme in the
form of payments for water rights and for the progressive purchase of
their lands and houses.
TABLE
IX-l2
Indicators of Profitability for Phase 1
(Accounting prices, in round
figures)
Capital Costs
Annual Benefits
------------------------------------------------- ----------------------------- Capital Social
Projects Works Settle- lmplemen- Agricul- Power Total
Benefit Internal
ment tation Total ture
Ratio Rate of
Irrigation
Agency
Return
Rs, million
Percent
I 581 139 7 727 207 18
225 3.2 21
2
789 103 10 902 162
36 198
4.5 -
15
3
362 35 4 401 59 13 72
5.6 15
Total
2,030 495
9. Effects of Devaluation
Devaluation of the pound sterling in
1967 was followed in Ceylon
by devaluation of the rupee (22nd November, 1967
) by 20 percent. The official rate before devaluation was U.S. $ 1.00
= Rs. 436 and £ I = Rs.
13.33. The rate has now been fixed at U.S.
sl.00 = Rs.
5.95 and £ 1 = Rs. 14.20.
The effect of devaluation on the costs
and benefits of the Scheme may be roughly estimated as follows:-
(i) Costs (capital
and current)
— considering the probable sources of imports
and expected changes in prices, the foreign exchange component of costs,
expressed in rupees, must be increased by 20 percent
— taking account of the probable incidence of
the devaluation of the rupee on local prices, total costs in rupees (foreign
exchange and local currency components) will increase by approximately
15 percent.
(ii) Benefits (sales value)
— benefits resulting
from sales abroad and/or estimated at world market prices will increase
by 20 percent.
benefits from total
sales will increase by 17 percent.
These relatively small differences
(between the effect of devaluation on costs and its effect on benefits)
will slightly increase the internal rates of return, but the increases,
very much inferior to one percent, may be considered negligible. The recent
devaluation of the Ceylon
rupee will not therefore significantly
alter profitability indicators.
