4. Assessment Parameters

There has been a wide range of assessment parameters used in the past to assess the worth of community irrigation development schemes. The most significant element in choice of parameters is the viewpoint of the assessor. For example, schemes that may look worthwhile from a regional or national perspective may not be attractive from an individual farm businessmen point of view.

The assessment parameters examined in this report have been developed and identified as the key, or most important, parameters from different viewpoints. There are other assessment parameters which may be important from other party viewpoints or which may be specifically relevant to projects with unique or special characteristics.

4.1 Farmer Viewpoint

As farmer viewpoint assessments are unique to each individual farm situation it is very difficult to provide useful examples. Experience shows that it is much better for promoters of projects to provide information on the possible farming systems which can be adopted under irrigation and to assist by providing farmers with a decision-making framework which they can use to assess the impact on their own properties and businesses. Recent experience with the promotion of community schemes in Canterbury would indicate that farmers in dryland farming systems sometimes have difficulty evaluating the value of irrigation development on their property. This is recognised as a significant area of market failure in the promotion of community irrigation schemes.

Farm Profitability

Farm profitability as a result of the development of irrigation capability is the prime assessment parameter from a farmer viewpoint. Basically it tells the farmer whether the financial viability of their business will be improved as a result of the irrigation development. It is this assessment which forces farmers to make the greatest range of choices and assumptions. These choices include the:

land use and farm management system which they intend to adopt under irrigation;
irrigation application system;
degree of investment required in farm capital infrastructure; and
method of financing the capital required to carry out the development.

Once the farmers have calculated the total cost of the proposed development and simulated cash farm budgets for the operation they must determine their degree of comfort with the level of profitability created. This will depend on a number of aspects which are unique to the individual such as attitude to risk and debt.

Measure - cash farm surplus

Return on Marginal Capital

The development of irrigation capability through community-based irrigation schemes may require the farmer to find a significant amount of both the off and the on farm investment through the raising of capital. It is important to assess whether that investment is worthwhile.

The farmer needs to look at the cash farm surplus that they are producing with their existing farming system and the cash farm surplus that would occur under the system they choose to adopt with irrigation development. The difference between these two figures is the marginal return to irrigation development. The marginal return of the development can be divided by the total capital cost to give a return on marginal capital. The adequacy of this return on capital will be determined by the individuals cost of capital or their perceived opportunity cost of that capital being invested in another project.

In some cases there may be a requirement for the capital to be contributed well in advance of the availability of the water in order to fund off-farm development. Extra income can only be generated once water is available. Therefore the impact of timing of capital expenditure should also be considered in the return calculation.

Measure - % return on total development costs.

Water Affordability

Community irrigation schemes may have two costs for farmers who are water users. The first may be the requirement for a capital investment in the project and the second is the ongoing annual water charge which will cover the operation of the scheme. Whether the farm must contribute upfront capital or not, the cost of capital is reflected in the annual cost of water delivery. The more equity the farmers have put up the lower the water charge. However the cost of the equity capital will then impact on the individual farmers’ analysis of affordability.

Farmers must be aware of the relationship between this water cost and the marginal return which they are able to achieve from the water. Effectively this is calculating the proportion of the marginal return that they create which is being consumed by the cost of provision of the water. The sufficiency of this figure will be an individual decision.

Measure - annualised water charge as a % of marginal return.

Farm Asset Value

Historically farmers have been prepared to accept a relatively low marginal return to irrigation development, or improvement in farm profitability, based on their understanding that they will make significant capital gain out of the increased value of their land. Farm land values have traditionally born a relationship to the value of the output produced from that land and to the costs of production.

This relationship between output and land value mean that areas with severely limited output under dryland, which have great potential under irrigation tend to be the areas which achieve the greatest proportional lift in capital gain. The increase in asset value of a farming operation as a result of irrigation development has an initial increase related to the value or cost of the development and then a premium portion to reflect the increased farm output that will occur. The amount of that premium will be determined by the individual’s expectations of the degree of profitability they can produce.

There is evidence from the market that dryland properties with the ability to take part in a community irrigation schemes will receive a market premium over similar properties that do not have the opportunity. The true value of this is recognised over time as sales of land occur in the scheme area.

This is an important parameter for farmers to calculate as it tends to be used to underpin the investment decision and is balanced against other parameters which may appear to be marginal.

Measure - net increase in asset value.

4.2 Irrigation Company Viewpoint

The most difficult, yet crucial element for promoters of community irrigation schemes is the assessment of the likely annual water charge and its subsequent impact on the attractiveness of the scheme. This water charge will reflect the expected capital cost of the development of the scheme as well as ongoing operating costs. The quantum of this charge will have a huge impact on expectations of Farmer uptake of the scheme and therefore its viability as a commercial proposition from the water user’s and company’s points of view. One of the most important aspects of this is whether the Company is a profit or non profit organisation.

Scheme Viability

Non - profit irrigation Companies tend to budget to break even. As long as they are able to set a water charge which gives them coverage of operational costs (as well as depreciation and interest costs) and they have security of income in terms of long-term contracts to supply water they can satisfactorily work at a zero annual return. Irrigation Companies which have uncertainty about security of income, or perhaps future capital upgrade costs may be required to secure sufficient income to protect themselves against future fluctuations in revenue or capital demands.

Irrigation companies which are set up as profit-making operations would need to calculate a return on the investment which meets the company’s investment requirements or is at least greater than their average weighted cost of capital.

Measure - future revenue streams are sufficient to match operating costs (and profit).

Water Charge

Water charges are normally levied to reflect the total cost of off farm development as well as the ongoing operation and maintenance of the off farm components of the scheme. An important element in determining this is the way in which water is delivered to the farm gate. This can vary significantly between schemes. Some schemes are designed to deliver water under pressure to the farm gate while other schemes offer little more than the ability for farmers to take water in a catchment, leaving them to develop their own delivery and supply mechanisms.

Another important factor in the water charge assessment is the reliability of the water supply. This reliability is both in terms of volume of water provided and the probability of the availability of that water in all seasons.

Traditionally, New Zealand water charges for irrigation schemes have been levied to reflect capital and operating costs only. Water charges calculated under this system do not reflect the value of the water component itself. As water is becoming an increasingly scarce resource there is some argument that economic efficiency would be achieved by reflecting some financial value for the water itself in an annual water charge. It is felt that the extra financial value of the water to the farming system has been capitalised into the land value of irrigated land therefore the benefit accrues to the landowner rather than the owner of the water right.

Measure - annual water charge per hectare

Asset Value

Establishing the asset value of a community irrigation schemes is difficult. An asset value which is based on the capital cost of development of the scheme has problems in that if the scheme were to cease operating then there is little or no recovery value of that asset. This has caused irrigation company developers to experience difficulty in financing high capital cost schemes through normal lending institutions. The other method of valuation is to consider the irrigation company as an ongoing business entity with a regular income stream. Calculation of this value is dependent on the reliability of supply contracts with individual farmers. As most irrigation companies set water charges to do no more than cover operating costs, the values created under this valuation method quite often do not reflect the high initial capital cost of development.

Measure - total value of the irrigation company

4.3 Central and Local Government

Studies Three and Four have examined the role of central and local government in the development of community irrigation schemes. These studies have identified that government may have a role in the investigation and development of the schemes in order to overcome market failure. However governments willingness to take some role in this is dependent on the scheme’s ability to prove both commercial viability and / or sufficient economic and social impacts to justify intervention. These impacts should be proven to meet either central or local government’s regional development objectives which can be loosely defined as achieving social, economic and environmental development.

The national policy objectives and instruments identified in Study Three are based either on some key growth areas (that don’t include agricultural developments specifically) or leave the identification of priority strategic growth initiatives to the regions, or are aimed at assisting entrepreneurs to identify and develop commercially viable opportunities.

Gambell, in a concurrent study, reports that Local Government’s development objectives are generally loosely developed and lack formal assessment frameworks to aid the decision makers. The study also identifies that many of the small rural local authorities lack the resources to contribute to these schemes, therefore there is a need to look to a regional approach to utilise resources of larger authorities that benefit from impacts and have access to greater resources.

There is difficulty in assessing and quantifying these impacts with sufficient confidence to satisfy the decision makers and the community at large. The demands for assessment accuracy increase when irrigation schemes are competing with other projects for limited assistance resources. Therefore there is a need to better understand the impacts of development and intensification of irrigated agriculture and how these compare with other sector impacts.

This section of the report identifies the parameter values that can be used to prove the impacts of irrigation. It should be pointed out that a fair comparison with other non- agricultural projects requires that these parameters are similarly assessed for these projects.

4.3.1 Economic Parameters

It is widely recognised that growth in one area has spin-off effects through the rest of the economy. The effects of a growth in farm activity include both backward linkages (an increase of activity in rural service industries, and in the industries that supply them) and forward linkages (an increase in activity of processing companies, and in the activities of the industries that supply them).

Profitability

Profitability can be measured with a number of financial yardsticks. Return on Capital is the best general measure as it offers the opportunity for a scheme to be compared against a number of other investment opportunities or the investors weighted cost of capital or the investor’s opportunity cost of capital. From a local or central government point of view this measure can be used to assist with analysis of the financial merit of the investment.

Irrigation schemes can have lags between the capital cost of a scheme and the full productive benefits. This is due to issues such as speed of uptake, land use change and the time it takes for biological farming systems to reach maximum productivity. Farmers tend to accelerate development because of the high on-farm capital costs and the need to achieve increased revenue to pay for the capital costs incurred. Measures such as NPV and IRR can be used if there is a significant element of time delay between costs and benefits.

Measure - return on capital (% )

Output

Output is the value of sales at point of sale. Typically the output is valued at farm gate, factory door, or f.o.b. Output of itself is not a particularly interesting measure because it tells us little about the level of actual physical economic activity. The point of interest is whether people are better off, which is generally dependent on having additional jobs or earning greater income.

Measure - total output ($ million)

Employment

The number of people employed, expressed in Full Time Equivalents (FTEs, one full time equivalent is a person working more than 35 hrs per week) is the standard measure of employment. Because labour is "lumpy", what typically happens is that as output increases, some businesses cope with the extra demand without an increase in labour, and others employ an extra person, even though their extra output may not be sufficient to fully occupy another person, but they simply cannot cope with the demand without one.

Measure - total FTES

Value Added

Value added is the difference between output value and the cost of inputs (other than labour and capital). Value added is hence what is left for the business owner to pay wages to employees, interest, depreciation, and also leave a return for the owner’s time and investment. Value added is analogous to GDP (gross domestic product).

Measure - total value added. ($ million)

Location of Impacts

The location of impacts is important if decision makers care where impacts occur. Given that a policy objective is often to generate employment either in rural communities (a central government objective) or in specific regions (a local government objective), it is important to establish where impacts occur. In this paper, a "local" impact is defined as one which occurs within the area of the scheme, and is generally equivalent to the local spending by farm families and a few additional flow-on effects. A district impact is one which occurs in the local authority district, and a regional impact is one which occurs in the area defined as the Region.

Measure - all impact parameters by location.

4.3.2 Social Parameters

There has being a considerable amount of assessment of the social impacts of irrigation development of rural communities carried out over the years. However the majority of this assessment work has been based on qualitative and observational research techniques applied to the area being studied. Interpretation of this information has being regarded as providing more anecdotal type evidence and information of impacts. This has been difficult for decision makers to incorporate into their decision-making framework when they have to balance it against more quantitative data from economic analysis.

The parameters developed in this report are in five sections:

Population Trends.
Occupation Trends.
Employment Type.
Income Status.
Qualitative.

Population Trends

Usually Resident Population

Changes in the usually resident population of an area indicate whether there has been an inflow or exodus of people into the area that in certain circumstances is associated with changes in the local economy. These types of population movements are characteristic of rural districts with natural resource based industries that are subject to commodity price cycles. In an area such as the Lower Waitaki where a community irrigation scheme has been introduced, for instance, it would be reasonable to expect that the intensified use of the land would at least arrest population decline or even result in a moderate rate of population growth.

The usually resident population figure provides a better indicator of population growth than the total population figure which is also recorded by the census because it excludes people who are only temporarily visiting the area, and includes residents of the area who are elsewhere in New Zealand on the night of the census.

Measure - number and percentage change in usually resident population over time.

Population Age Structure

The age composition of the usually resident population provides information about the proportions of children and senior citizens living in an area, and the proportion of people of working age (15-64 years) who may be available for employment in the local economy. As the age composition of an area’s population changes over time the pattern of demand for particular educational, health, and community services will change. Thus the arrival of young families in a district to work on dairy farms, for example, may subsequently boost school rolls. Moreover, any decline in the proportion of people of working age may indicate that this segment of the population has to leave the area to find employment.

Measure - percentage of age group - 14 years and under

- 15 to 64 years

Occupation Trends

Age of Farmers

An examination of the ages of farmers and farm workers indicates whether there have been any changes in the age structure of residents directly involved in agricultural production. Sometimes changes in the age composition of farmers and farm workers indicate that there has been a major shift in land use in a particular area. These shifts in land use occur as a result of a combination of international, national, regional and local factors such as commodity prices, government policies, interest rates and irrigation schemes.

Measure - percentage of Farmers and Farm Workers under 30 years of age.

Dairy Farmers

Changes in the proportion of dairy farmers and dairy workers among the broader occupational group of farmers and farm workers reveals the extent to which particular areas have either taken up or opted out of this type of agricultural production. Although irrigation allows farmers to intensify their existing farming practices, there are often further waves of innovation as older farmers move out of the area, and the younger farmers who replace them convert their properties to other forms of land use. By examining census data about particular farming occupations over a period of twenty years the magnitude of that shift in land use can be quantified.

Measure - percentage of dairy farmers in the farm workers occupational group

Dairy Farmer Age

As dairy farmers and dairy workers have become a growing proportion of the farmers and farm workers occupational group in the study areas so their age structure has altered not only the demographic characteristics of farmers and farm workers in general, but has also influenced the cultural values and practices of farming itself. Thus an examination of the age structure of dairy farmers and dairy workers provides an indicator of the cultural gap between dairying and other forms of agricultural production.

Measure - percentage of dairy farmers under 30 years of age.

Educational Qualifications

The educational qualifications held by residents provide information about the quality of human resources available to employers in a particular area. Jobs earning high incomes demand skills that generally require higher educational qualifications than jobs which provide moderate or low incomes. An analysis of the highest educational qualifications held by residents would indicate whether a better educated workforce was a feature of irrigated areas.

Measure - percentage of population with or without tertiary or educational qualifications.

Employment by Industry

Employment by industry records the numbers of residents of a particular area employed by major industrial sectors. This information reveals the variety of industries in which residents are employed. It also provides a profile of the local economy, although that profile may not entirely be accurate as some residents work outside their area of residence and other workers employed in local industries reside outside the area. Over the long term (i.e. 15 to 20 years) changes in employment by industry may indicate how residents of an area have become more or less dependent on specific industries for their employment.

Measure - percentage of residents employed outside the primary sector.

Employment Type

Occupational Status

The type of occupations held by residents of a particular area reveals the diversity of jobs that are available to them and provides information about the access they have to quality jobs with high status and better than average incomes. Longitudinal data about occupations can indicate whether residents of an area have improved their economic welfare through holding higher status occupations.

Measure - percentage of residents with higher status occupations.

- percentage of residents with blue collar occupations.

Employment Status

The employment status of residents provides information about the numbers of residents of a particular area who are wage and salary earners, employers, self-employed, and unpaid family workers. This information can be used to assess changes in the scale of local enterprises, and to ascertain if more jobs are being generated in the area whether they are on farm or in agricultural support industries.

Measure - aid employees as a percentage of residents.

- employers as a percentage of residents.

- self employed as a percentage of residents.

Labour Force Status

The labour force status of residents of a particular area allows the quality of jobs in a particular area to be appraised. The classification of jobs into full-time and part-time provides a relatively unsophisticated measure of the quality of employment. A shift into part-time employment by residents with a concurrent loss of full-time jobs would indicate a decline in job quality; particularly in the current climate where part-time employment has become associated with unskilled and low paid work.

Measure - employed full time as a percentage of Labour force.

Income Status

Household Incomes

The median of household incomes provides a benchmark to compare levels of economic welfare between different areas at a particular time. Unless it is adjusted for inflation, however, it is a less reliable indicator of changes in economic welfare within a particular area over the long term.

Measure - median household income.

Distribution of Incomes

This section complements the analysis of median household incomes by examining the distribution of household incomes in particular areas. The manner in which incomes are distributed between households provides another benchmark with which to compare the economic welfare of particular areas. Like median household incomes it is not a reliable indicator of long term changes within a particular area unless an adjustment is made for inflation.

Measure - percentage of households with incomes under $30,000.

- percentage of households with incomes over $50,000.

Qualitative

Schools

The rolls of schools, and qualitative data about schools, provide important indicators of demographic and social change in rural communities. Not only do schools provide educational services to children, but they often provide an important focus for community activities. Those activities which may be directly associated with the school itself, or use the school’s facilities, create and maintain social networks that sustain the vitality of a community.

Measure - school rolls

- number of schools

- spread of age groups in school

- school facilities

Community Organisations

The variety and number of community organisations provide information about the vitality of community life in a particular area. When the lives of these organisations can be examined over a period of at least ten years, they often reflect the social change that has occurred in a rural community.

Measure - variety, number and range of community organisations.

Table 2: Summary Table of Assessment Parameters

Parameter	Measure
Farmer Viewpoint
Farm Profitability	Cash Farm Surplus
Return on Marginal Capital	% return on total development costs
Water Affordability	Water charge as % of Marginal Capital
Farm Asset Value	Net increase in asset value
Irrigation Company Viewpoint
Scheme Viability	Annual profit / break even
Water Charge	Annual Water Charge per Hectare
Asset Value	Net Value of Irrigation Company
Central and Local Government Viewpoint
Output	Total Output
Employment	Total Full Time Equivalents
Value Added	Total Value Added
Location of Impacts	All above by Location
Usually Resident Population	Number and % change over time
Population Age Structure	Percentage of Age Groups
Age of Farmers	Percentage of Age Groups
Dairy Farmers	% of Dairy Farmers
Dairy Farmer Age	Percentage of Age Groups
Educational Qualifications	% with or without educational qualifications
Employment by Industry	Employment by Sector
Occupational Status	Status of Occupations
Employment Status	Employees / Employers as % of population
Labour Force Status	Full time / Part time employment
Household Incomes	Median Household Income
Distribution of Incomes	% of household incomes by $
Schools	Numbers/ Rolls / Ages / Facilities
Community Organisations	Number / Variety / Range

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