Letaba Catchment: Macro Economic component of Socio-Economics – Scenario EvaluationPresented by:William MullinsMosaka Economists

31 October 2013

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Letaba NWRCS integrated steps

7: Gazette class configuration

6: Resource Quality Objectives (EcoSpecs & water quality (user))

5: Stakeholder process

4: Identification and evaluation of scenarios within IWRM

3: Quantify EWRs and changes in EGSA

2: Initiation of stakeholder process and catchment visioning

1: Delineate units of analysis and describe the status quo

Economics: Where does it fit in?

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

Scenario

Social

EvaluationProcessSustainability

Economic Environmental

• Water Resource Decision Making is an integrated process

Water Resource Framework

Application of Economics tools

• Macro-economic indicators to determine the impact in reduction of water

or Assurance of Supply.Changes in GDPChanges in EmploymentChanges in income distributionChanges Surplus ValueChanges in Capital

• New Infrastructure: Cost Benefit Analysis

• Cost indicators of construction of raising of dam wall, pipeline and canal costs.Net Present Value (NPV) > 0Internal Rate of Return (IRR) > Discount RateBenefit - Cost ratio (BCR) > 1

Application of Economics tools (cont.)

Macro Economic Indicators• Why the specific indicator?

Show Economic GrowthPoverty 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.

Macro Economic Indicators (cont.)• 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 householdsOne 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. 8

Macro Economic Indicators (cont.)• Impact on CapitalCapital formation and use is the basis of the continuation of any business and the estimated capital change is often a good indication of future GDP movement (continuous growth).

• Impact on Surplus ValueVery often a project still appears economically viable, but for the individual producer there is no profit margin, the calculation of “surplus value” assists in this.An example is where in irrigation projects the individual units are to small. In total the scheme appears viable but on a individual level the profit margins are very small and unsustainable.

Outstanding Issues

• Who is the implementation agent?

• Affordability!

• How is the “project” financed?

Scenarios Evaluation• Water volume change

Result- Area change

• Assurance of Supply change Long term yield change

• Possibilities: Volume reduced, Assurance improved Volume reduced, Assurance reduced Volume increased, Assurance reduced Volume increased, Assurance reduced Volume constant, Assurance reduced Volume constant, Assurance improved (proposed dam)

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Modeling of Primary Sector in WIM-model

Inputs: Example - Irrigation

Agriculture

EconomicWater

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

Future outputs

Future inputs

GLIB water supply – Crop Areas (Hectares)Above

Tzaneen dam From Dam to Letsitele river

From Letsitele to

Klein Letaba

Letsitele River

Molototsi River

Letaba Catchment

Irrigation Crops ER1 ER2 ER3 ER4 ER5 Total

Bananas 83.2 365.2 243.5 0.3 - 692.2

Citrus (Valencias) 1.1 1 520.0 2 822.8 1 461.9 - 5 805.7

Avocados 1 110.4 157.3 472.0 - - 1 739.8

Macadamias 51.3 27.6 27.6 6.5 - 113.0

Mangos 53.7 433.7 354.9 654.8 - 1 497.1

Tomatoes - 1.3 - - - 1.3

Brassicas 21.9 211.9 53.0 461.4 - 748.2

Litchis 160.1 114.5 93.7 30.7 - 399.0

Cucurbits 13.0 267.4 89.1 522.6 - 892.1

Citrus (Grapefruit) 0.5 1 505.9 355.3 626.5 - 2 488.1

Total 1 495.1 4 604.8 4 511.8 3 764.7 - 14 376.4

ER 2: GLIB - Baseline ResultsSurplus Value

(R Mil)GDP

(R Mil)Employment (Numbers)

Capital (R Mil)

Household Income(R Mil)

DirectIndirect & Induced Total Direct

Indirect & Induced Total Total Total

High & Med Low

Irrigation 207.4 367.6 231.7 599.3 6 174 2 155 8 329 1 136.5 530.3 389.6 140.7

Industry 55.2 126.5 126.3 252.8 542 1 006 1 548 529.6 271.2 190.3 80.9

Total 262.6 494.1 358.0 852.1 6 716 3 161 9 877 1 666.1 801.6 579.9 221.6

Scenario Evaluation

• Volume • Assurance • Options:

– Volume Constant, Assurance Reduction by 10%

Values after reduction in AssuranceSurplus Value

(R Mil)GDP (R Mil) Employment

(Numbers) Capital (R Mil)

Household Income(R Mil)

DirectIndirect

& Induced

Total DirectIndirect

& Induced

Total Total TotalHigh &

Med

Low

Irrigation 133.9 281.6 190.5 472.1 5 032 1 787 6 819 989.6 435.9 320.2 115.7

Industry 51.6 118.5 119.0 237.5 521 953 1 474 499.4 255.4 179.1 76.3

Total 185.5 400.1 309.6 709.7 5 552 2 741 8 293 1 489.0 691.3 499.3 192.0

Reduced ValuesSurplus Value

(R Mil)GDP

(R Mil)Employment

(Numbers)Capital (R Mil)

Household Income (R Mil)

Direct

Indirect &

Induced Total Direct

Indirect &

Induced Total Total TotalHigh & Med Low

Irrigation -73.44 -86 -41.14 -127 -1 142 -367 -1 510 -146.94 -94.44 -69.38 -25

Industry -3.64 -8 -7.24 -15 -21 -53 -74 -30.16 -15.80 -11.22 -4.6

Total -77.08 -94.1 -48.39 -142 -1 164 -420 -1 584 -177 -110 -81 -30

Assurance Reduction: Negative Percentage

Surplus Value GDP Employment Capital Household Income

Direct

Indirect &

Induced Total Direct

Indirect &

Induced Total Total TotalHigh & Med Low

Irrigation -35% -23% -18% -21% -19% -17% -18% -13% -18% -18% -18%

Industry -7% -6% -6% -6% -4% -5% -5% -6% -6% -6% -6%

Total -29% -19% -14% -17% -17% -13% -16% -11% -14% -14% -13%

Idea of the detail!Surplus Value GDP Employment Capital Household Income

Direct Total Direct Total Total Total Low

Bananas -36.9% -31.1% -29.5% -29.0% -28.7% -27.5% -28.2% -28.2%

Citrus (Valencias) -31.4% -23.3% -21.3% -20.0% -18.9% -13.8% -17.6% -17.6%

Avocados -62.9% -19.8% -19.8% -16.1% -15.3% -10.4% -14.2% -14.2%

Macadamias -66.0% -28.1% -25.9% -24.4% -23.6% -15.6% -22.2% -22.2%

Mangos -35.4% -15.1% -12.4% -11.4% -11.0% -7.3% -9.7% -9.7%

Tomatoes -24.6% -12.1% -8.7% 0.0% -2.1% -4.1% -6.5% -6.5%

Brassicas -44.5% -24.0% -18.2% -16.7% -16.3% -8.9% -14.2% -14.2%

Litchis -101.4% -28.3% -22.1% -20.3% -19.7% -12.8% -18.1% -18.2%

Cucurbits -53.8% -9.6% -7.1% -6.4% -6.3% -3.2% -5.3% -5.3%

Citrus (Grapefruit) -41.9% -23.6% -21.4% -20.0% -19.2% -10.1% -17.7% -17.8%

Total -35.4% -23.4% -21.2% -18.5% -18.1% -12.9% -17.8% -17.8%

Sectoral structure of the economy

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• If the primary sector is economically affected, it will spill over to the tertiary sector as well (positive or negative).

Thank You!