Applying the Sustainable Asset Valuation (SAVi) to the Southern Agricultural Growth Corridor of Tanzania (SAGCOT) Initiative, Tanzania

A focus on irrigation infrastructure

SAGCOT aims to strengthen Tanzania’s agriculture sector. It foresees a total expansion of 350,000 hectares of agriculture land to increase production and processing of agricultural goods. 51,800 hectares of this expansion is foreseen in the Kilombero basin. Given this level of expansion, SAGCOT will create job opportunities and growth in agriculture production. It provides an important opportunity for improving farmers’ livelihoods. On the other hand, it will increase pressure on natural resources, in particular on the water resources needed for irrigation.

The SAVi assessment compares two irrigation technologies for the implementation of SAGCOT: flood irrigation and drip irrigation.

Externalities

The SAVi analysis values the following externalities:

Water use

Valuation of the use of water.

Additional irrigated land

Valuation of the additional revenues and costs related to the additional irrigated land. The use of drip irrigation saves water, which in turn allows for a larger area of land to be irrigated. While this boosts revenue and employment, it also requires additional capital investment and operating and maintenance costs.

Social cost of carbon

Valuation of carbon dioxide emissions through the social cost of carbon. The energy use and accompanying carbon dioxide emissions are higher for flood irrigation than for drip irrigation because a larger quantity of water has to be extracted.

Summary of Results

The SAVi analysis is organized under three scenarios. The SAVi simulation demonstrates that the net benefits have a direct correlation with the cost of the irrigation technology. The higher the capital costs, the lower the net benefit realized. As a result, Scenario 3 brings the most net benefits.

The Net Benefits

The net benefits include the correction for the externalities described earlier: water use, additional irrigated land and the social cost of carbon.

1. The SAGCOT Reference Scenario (SAGCOT flood): The implementation of SAGCOT with the use of flood irrigation, with the capital cost of the technology estimated at USD 81.50 per hectare.

Net benefit: USD 12.88 million

2. The SAGCOT Green Economy Scenario (SAGCOT drip, high capex): The implementation of SAGCOT with the use of drip irrigation, with the capital cost of the technology estimated at USD 3,000 per hectare.

Net benefit: USD 3.98 million

3. The SAGCOT Green Economy Scenario (SAGCOT drip, low capex) with the use of drip irrigation, with the capital cost of the technology estimated at USD 1,500 per hectare.

Net benefit: USD 39.21 million

SAVi Results

SAVi estimates that the use of drip irrigation will generate water savings that will allow a larger area of land to be irrigated for agriculture production. That will lead to further job creation and increased revenues for the local population. It will also decrease pressure on water resources, especially in the dry season.

SAVi’s Integrated Cost Benefit Analysis (in USD millions)

* This cost will only be avoided if the energy used to provide water to the additional “unlocked” land will be renewable-based.

SAVi results: Financial indicators

SAVi simulation on the financial performance of SAGCOT

The internal rate of return (IRR) and net present value (NPV) indicate the financial viability of the project. In other words, they calculate whether the project can pay back investors and still generate a sufficient return. Flood irrigation generates a positive IRR of 6.20 per cent. Both drip irrigation scenarios, when corrected for the value of the externalities, generate a positive IRR as well. In the low capex case, the IRR is 13.42 per cent, significantly higher than the flood irrigation scenario.

The debt service coverage ratio (DSCR) and the loan life coverage ratio (LLCR) indicate the financial health of the project. These credit ratios are particularly of interest for lenders as they calculate how easily the cash flows can service the outstanding debt in each period. These minimum ratios do not reach the so-called lockup ratio, which is 1.15x for DSCR and 1.10x for LLCR.

Flood irrigation maintains a sufficient level of DSCR and LLCR during the life of the loan with 1.18x and 1.19x. In scenarios 2 and 3 the credit ratios of both the high and low capex versions outperform the flood irrigation scenario, e.g., minimum DSCR 1.22x and 2.33x respectively.

Of course, the inclusion of the value of externalities does not make the cash flows less or more robust in reality. The purpose of this exercise is to demonstrate that, when taking a high-level macro perspective, sustainability can have a positive impact on the financial health of public infrastructure investments.

By 2030 the implementation of SAGCOT with drip irrigation is estimated to provide 8 per cent more employment and 8 per cent more agriculture production and use 14 per cent less water compared to flood irrigation.

SAVi results: Projections on water use, employment and agriculture production

* Irrespective of a higher or lower capex for drip irrigation, the water use, employment and agriculture production remain the same.

Access the report or brochure of this assessment online to learn more.