7. Economic evaluation of land suitability for irrigation

7.1 Terminology
7.2 Budgeting for comparisons of returns
7.3 Use of costs and benefits in determining land suitability class
7.4 Final selection of LUTs for the 'irrigable' land
7.5 Confirming financial viability from the farmers' viewpoint

As explained in Chapter 1, land suitability evaluation is essentially an economic concept. Suitability classes are applied according to economic measures rather than simply on the basis of assessments of physical productivity.

The application of any formal economic analysis is, of course, seldom possible in the earlier stages of a land evaluation exercise when only rough estimates of development costs and of potential levels of productivity are usually available. This is not to imply, however, that economic considerations should be disregarded at the outset of studies, when even 'back-of-the-envelope' calculations may help in distinguishing between land which is provisionally 'irrigable' and that which is not. Such initial calculations may also help identify alternative LUTs, including possible cropping, irrigation and management systems, and the approximate amount which can be invested in land development.

This chapter explains, with reference to examples, how economic considerations are introduced into the selection of LUTs and land suitability classes.

Because a major concern for most countries which embark on the development or rehabilitation of irrigation systems is the impact that the required investments will have on the economy as a whole, it is appropriate to apply economic rather than financial methods of analysis in the final classification of land suitability for irrigation 1/. This approach contrasts with that adopted by the USBR which classifies land according to its 'payment capacity'; this is essentially a measurement of financial impact of irrigation development on the income of the typical farmer (see Chapter 10). The FAO methodology employs financial analyses, using farm budgets, as explained later in this chapter, to confirm that, under current or expected market conditions, there are financial incentives for farmers to participate in a proposed irrigation development programme on a particular land area.

1/ For a description of the distinction between economic and financial analysis, see Gittinger (1982): excerpt is reprinted in Appendix 3.

Advantages of adopting 'economic' rather than 'financial' analyses in land evaluation include:

i. bringing the methodology for land classification into line with that conventionally applied in project evaluation, especially by international lending institutions;

ii. avoiding anomalies in classification caused by variations in cost recovery policy and law and in the extent of farmers' liability for land development costs;

iii. setting aside any distortions in values introduced by official intervention, such as subsidies, controls and quotas; first, because these obscure 'real' prices and second, because of their temporary and variable nature.

7.1 Terminology

i. Measures of Suitability

Three alternative measures of land suitability class have already been defined in Chapter 2, namely:

- Land Productivity Index defining the physical productivity of land relative to the best land (see Section 2.4);

- Net Farm Income, i.e. the value obtained by subtracting both the variable and fixed costs from the gross value of production on a given unit of land (Section 2.4);

- Net Incremental Irrigation Benefit (NIIB), a measure of the potential increase in productivity of a unit area of land when developed under a specified plan, expressed in economic terms as an Annual Equivalent Value (see later in this Chapter).

The land evaluation team must decide which of these measures of suitability is most appropriate for a given evaluation. In general, a physical measure of productivity will be appropriate in reconnaissance low intensity studies. Net farm income may be a sufficient measure for a classification of 'provisionally-irrigable' land, before reliable estimates of common project costs and land development costs are available. However, future revisions and adjustments can be reduced significantly by making early estimates of incremental net farm income and cut-off values between 'Suitable' and 'Not Suitable' land. In the final classification of 'irrigable' land under a specific project plan, NIIB is the appropriate measure of suitability class as explained in Section 2.4, and more fully in this chapter.

ii. Interest and Discounting Calculations

Explanations of interest and discounting calculations whereby monetary values are manipulated into various time-formats are given in standard economic textbooks. Streams of periodically occurring values can be converted to a lump sum present value, or to an end-of-period value. Conversely, a single value can be spread (amortized) over a period of time. The interest rate used in these calculations may be either the opportunity cost of capital, or a rate which is satisfactory to the client or sponsor of the investigation. In special cases, a social rate of discount may be appropriate in lieu of a discount rate related to the opportunity cost of capital. The required procedures are limited to a few standard practices which are illustrated in Appendix 2.

7.2 Budgeting for comparisons of returns

In order to attribute net values to the production of each LUT, it is necessary to prepare full or partial crop or farm budgets. References in the bibliography (Brown 1982; Gittinger 1982; Yang 1965) provide guidance on preparing farm budgets and enterprise analyses for crops or livestock production. Budgets are usually prepared in detail to show the net income for a farm, a unit of area, or an enterprise. Supporting data elaborating on methodology and assumptions can be filed and retained for future reference.

After eliminating the obviously less promising LUTs from the initial listing, the remainder can be analysed by farm budgets to obtain net farm income expressed in economic prices. For any one land unit or grouping, one or more alternative LUTs may be recommended. Where appropriate, variations in output and input levels can be tested by means of partial budgets.

Budgets are generally needed to represent:

i. the present situation 'without' the project;
ii. the future situation 'without' the project;
iii. the future situation 'with' the project.

The first two of these budgets for the 'without' project situation are usually alike except when trends are judged likely to make the future setting different from the present. In some cases (e.g. where salinity is projected to increase in the absence of the project), deteriorating conditions need to be recognized in the sense that the budget for the 'without' situation represents a worse state than that of the present situation. On many rainfed areas, the future situation without the project can be represented by a single budget (or a limited few) if the present situation is fairly uniform and stable throughout.

Budgets representing the future situation 'with' the project will be required for whatever number of LUTs it is desired to examine for a land unit. A few full-farm budgets representing the modal tendency can serve as a basis for related partial budgets which subsequently examine the effects of variations such as technology and management levels, size of farm, levels of outputs and inputs, different crop yield assumptions, water supply variations, etc., depending on the level of detail needed.

To begin the process of eliminating less promising LUTs, array the LUTs by land productivity index, net farm income, or NIIB, depending on which indicator is appropriate for the stage of the evaluation. Economic comparisons will assist the selection of 'class-determining' requirements and limitations for each LUT.

In making analyses at the farm level to choose the composition of enterprises or to test the feasibility of different kinds or levels of inputs or outputs, a shortened form of budget need only deal with the pertinent changes. Table 18 illustrates how three optional choices can be tested in terms of farm income. Two options for investment in irrigation improvements on the farm are compared with the option of no improvements. Many other applications will be found for the shortened form of budgeting.

Table 19 provides an illustration of a full farm budget, typical of the kind which is useful for analysing LUTs to obtain net farm income. Accompanying schedule C (Table 20) gives crop production costs per hectare and Schedule L (Table 21) gives labour requirements per hectare. Other similar supporting data could include schedules of the monthly and seasonal pattern of labour requirements, agrochemical usage and costs, etc.

A variation of LUT A (Table 22) that lends itself as an example of partial budgeting (i.e. shortened form of budgeting) could consist of a reduction of the land productivity index from, say 100% (i.e. 1.0) to 75% (i.e. 0.75) because of differences in the land. For the sake of illustration, assume that the crop yield is depressed because of a coarser textured soil and excessive permeability. Excessive percolation losses put a paddy rice crop on this land under more water stress resulting in yield depression. Table 22 is a partial budget that shows the changes in variable costs and returns for such a situation, and derives the net farm income.

Table 18 PARTIAL BUDGETS TO COMPARE THE PROSPECTIVE GROSS INCOME GAINS FROM ALTERNATIVE INVESTMENTS IN TOPOGRAPHIC LAND LEVELLING AND SPRINKLER IRRIGATION (One Hectare)

A comparison is made using three farmer-financed options for area-specific land development costs (unimproved furrow irrigation, land levelling, sprinkler irrigation). This land can be farmed under irrigation in the natural condition in spite of the undulating topography. However, the yield level is not up to full potential. The present conditions have the following disadvantages which are evaluated in terms of yield depression, inefficient irrigation application, higher labour requirements, loss of fertilizer due to uneven water distribution, and higher costs for some field work. The capital requirement for land levelling is estimated to be $1 000 per hectare. For the sprinkler system the investment would be $1 500 a hectare, with a useful life of 20 years. The interest rate is 8% p.a.

Case 1 - Testing the investment in land levelling as compared to (furrow) irrigating the unimproved land

Losses:			Gains:
Extra costs:			Costs saved:
	Interest and amortization of the land levelling cost	$102		Difference in land preparation	$ 2
	Taxes on increased investment	15		Extra labour for field irrigation	24
	Annual maintenance and repair	10		Lower interest on operating capital	4
				Value of fertilizer wasted	20
				Difference in cultivation	20
Revenues foregone:			Extra revenue:
	None			Value of increased crop yield	210
Total		$127			$280

Extra profit from land levelling for furrow irrigating the unimproved land: $280 minus $127 equals $153 per hectare.

Case 2 - Testing the installation of a sprinkler system in comparison with furrow irrigating the unimproved land

Losses:			Gains:
Extra costs:			Costs saved:
	Interest and amortization of the sprinkler system investment	$152		Difference in land preparation	$10
	Taxes on the increased investment	20		Difference in cultivation	20
	Annual maintenance and repair	150		Value of fertilizer wasted	20
	Fuel costs for engine	50		Extra labour for field irrigation	42
	Interest on extra operating capital	9	Extra revenue:
Revenues foregone:			Value of increased crop yield		300
	None
Total		$381	Total		$392

Extra profit from sprinkler vs furrow irrigation: $392 minus $381 equals $11 per hectare.

Table 19 FULL FARM BUDGET FOR LUT A (1.0) ON THE BEST LAND 1/
PADDY RICE FARM - 2.0 HECTARES WITH AND WITHOUT SUPPLEMENTAL IRRIGATION - Indonesia

Land Productivity Index Level 1.0

ITEM			WITHOUT PROJECT	WITH PROJECT
Wet Season Crops:
	Rainfed rice yielding 2.0 t/ha		1.0 ha
	Irrigated rice yielding 4.2 t/ha		1.0 ha	2.00 ha
Dry Season Crops:
	Irrigated soybeans yielding 0.6 t/ha			0.4 ha
	Irrigated rice yielding 4.0 t/ha			1.6 ha
Production:
	Rice		6.2 t	14.8 t
	Soybeans			.24 t
Value of Production			Rp values x 1 000
Rice @ Rp 100 000/t			620.0	1 480.0
Soybeans @ Rp 195 000/t				46.8
	Total		620.0	1 526.8
Variable Costs (from schedule C, see Table 20 for details):
	Rainfed rice (1.0 ha)		69.0
	Irrigated rice (1.0 ha)		113.0
		Wet season (2.0 ha)		238.0
		Dry season (1.6 ha)		184.0
	Soybeans (0.4 ha)			18.0
		Total	182.0	440.2
Fixed Costs			10.0	12.0
Total Costs			192.0	452.2
Net Farm Income, per farm			428.0	1 074.6
Net Farm Income, per hectare			214.0	537.3

Note: This table is prepared using economic analysis criteria (see Appendix 3).

1/ Land Productivity Index Level (1.0) represents the best quality land.

Table 20 SUPPORTING DATA SCHEDULE C FOR TABLE 19 - Cost of production on one hectare - Indonesia

Land Productivity Index Level 1.0 (Rp values x 1 000)

	Rainfed Rice	Irrigated Rice		Soybeans
	Wet Season	Wet Season	Dry Season	Dry Season
	WITHOUT PROJECT
Land preparation	15.0	15.0
Seed	4.7	4.0
Fertilizer	6.6	33.1
Pest control	2.1	8.5
Harvesting	6.0	11.4
Labour	32.0	38.0
Other	2.6	3.0
Total	69.0	113.0
	WITH PROJECT
Land preparation		15.0	15.0	3.0
Seed		4.0	4.0	6.6
Fertilizer		33.1	33.1	3.1
Pest control		8.5	8.5	6.2
Harvesting		12.6	11.0	1.0
Labour		42.0	40.0	22.0
Other		3.8	3.5	3.1
Total		119.0	115.1	45.0

Note: This table is prepared using criteria for economic analysis.

Table 21 SUPPORTING DATA SCHEDULE L FOR TABLE 19 - Labour inputs per hectare, - Indonesia

Land Productivity Index Level 1.0 (days)

	Rainfed Rice	Irrigated Rice		Soybeans
	Wet Season	Wet Season	Dry Season	Dry Season
	WITHOUT PROJECT
Land preparation	40	40
Planting	35	35
Care of crop	50	55
Harvesting	35	60
Total	160	190
	WITH PROJECT
Land preparation		40	40	25
Planting		35	35	20
Care of crop		75	75	30
Harvesting		60	50	35
Total		210	200	110

Note: In the economic analysis all labour, both hired and that supplied by the farm family, is considered as an expense.

Table 22 PARTIAL FARM BUDGET FOR LUT A (0.75) FOR LAND 1/ WITH AN INDEX OF 75% RELATIVE TO THE BEST LAND
PADDY RICE FARM - 2.0 HECTARES WITH AND WITHOUT SUPPLEMENTAL IRRIGATION - Indonesia

Land Productivity Index Level 0.75 (Rp values x 1 000)

ITEM	WITHOUT PROJECT	WITH PROJECT
Reduced crop value 2/	155.0	381.7
Reduced expenses:
Variable costs
Reduced harvesting
Rainfed rice (1.0 ha)	0.9
Irrigated rice (1.0 ha)	2.3
Wet season (2.0 ha)		3.8
Dry season (1.6 ha)		3.5
Soybeans (0.4 ha)		0.1
Other variable costs - no change
Fixed costs - no change
Net reduction in income	151.8	374.3
Net farm income from LUT A (1.0) per farm	428.0	1 074.6
per hectare	214.0	537.3
Net farm income from LUT A (0.75) per farm	276.2	700.0
per hectare	138.1	350.15

1/ Relative to LUT A (1.0) in Table 19.

2/ Soil deficiency evaluated as having the same effect on crop production without and with the project. Such may not be the case where the land use is to be changed appreciably by the project.

7.3 Use of costs and benefits in determining land suitability class

7.3.1 Establishing the cut-off between suitable and not suitable land
7.3.2 Establishing the range of permissible area-specific land development costs
7.3.3 Nomograph for quick determination of NIIB

The full or partial budgets described above provide an estimate of the net farm income per hectare attributable to a given farming system or LUT at various productivity levels under 'without' and 'with' project situations. To determine land suitability classes, it is necessary to take account also of:

- common project costs, and
- area-specific land development costs.

These benefits and costs may be integrated for classification purposes into a value termed the Net Incremental Irrigation Benefit (NIIB). The NIIB may be calculated as follows:

(A) Net Incremental Farm Income (i.e. net farm income 'with' project minus net farm income 'without' project derived from the budgets); normally assessed for the year of full development;

Minus (B) Annual Equivalent Value of Common Costs;

Minus (C) Annual Equivalent Value of Area-specific Land Development Costs.

It follows from this that if (A) minus (C) is less than (B), the land in question is 'Not Suitable' for irrigation development and can be classified as N1 or N2. The Annual Equivalent Value of Common Costs (B) thus represents the cut-off value for required net incremental farm income (after payment of area-specific development costs).

It must also be evident that (A) minus (B) is equivalent to the maximum permissible amount which can be spent on Area-specific Land Development (C), expressed in annual equivalent values.

To set the boundaries of 'Suitable' classes (i.e. between S1, S2 and S3), the range of NIIB between the cut-off point (NIIB = 0) and the maximum obtainable in a project area may be divided into three equal or unequal segments. The use of a nomograph simplifies the attribution of classes (see Subsection 7.3.3 and Figure 2).

Examples of the calculation of cut-off values, permissible development costs and NIIB, and of the translation of NIIB into land suitability classes are given below.

7.3.1 Establishing the cut-off between suitable and not suitable land

The economic consequences of changes in physical productivity and costs of production will demarcate a boundary or cut-off point between land which is suitable for irrigation and land which is not. The poorest land to be classed as 'Suitable' must be able to carry its share of the common project costs, otherwise it should be classified as 'Not Suitable'. The cut-off in an 'irrigable' classification is represented by the annual equivalent of the development, operating and maintenance cost of the project, less any area-specific development costs. Land that cannot generate a net incremental value of production equivalent to or greater than the cut-off value would normally be classified as 'Not Suitable'.

The cut-off value is calculated by dividing the investment in common project facilities by the number of hectares in the project, converting to an annual equivalent cost, and adding the project's annual operation and maintenance costs (replacement costs are most readily represented as an annual equivalent in the operation and maintenance costs, OM & R).

The conversion of investment values to annual equivalent costs (and any other discounting processes required) will utilize the investment rate of interest or opportunity costs of capital specified by the project sponsor. (In illustrations that follow a hypothetical rate of 12% and a project life of 50 years is assumed.) Appendix 2 shows how the discounting is performed.

Common project costs do not include costs of land improvements or land development (e.g. for land clearing, drainage, levelling, etc.). The latter are area-specific costs and are land class-determining.

Table 23 illustrates how the cut-off value might be calculated for a hypothetical project.

Table 23 CALCULATION OF AN ECONOMIC CUT-OFF VALUE - 2 500 hectare irrigation project - Indonesia

(Rp values x 1 000)

ITEM	TOTAL PROJECT	PER HECTARE
Investment in common project facilities	5 000 000	2 000
Annual equivalent cost (at 12% over 50 years)	602 000	240
Annual OM & R	25 000	10
Annual common project costs	627 000	250
Cut-off value, per hectare (or required net incremental farm income after attribution of area-specific development costs)		250

7.3.2 Establishing the range of permissible area-specific land development costs

The cut-off value described above sets the lower boundary for the range of permissible land development costs. In the context of economic analysis any expenditure must be justified, on the grounds that benefits exceed costs, and enable the resultant productivity of the land (after the expenditure) to remain above the cut-off value. The upper boundary for the economic range of suitable land is based on the NIIB for the most productive land on the project (not simply the best land in a LUT).

For example, if the cut-off value were, say, Rp 250 000 per hectare and the best land would produce incremental benefits of Rp 323 000, the NIIB range for suitable land would be Rp 1 to 73 000 (annual), if the land in question had no area-specific land development costs.

If the figure Rp 73 000 (Table 24) is the NIIB for LUT A (1.0) (from Tables 19-21) for land classified as S1 in an 'irrigable' classification and if the NIIB is capitalized (12%, 50 years), an investment limit of Rp 606 200 for an area-specific land development cost applies on the best land in the project. Land with lower productivity would bear proportionately lower investment costs.

Table 24 CALCULATION OF THE NET INCREMENTAL IRRIGATION BENEFIT - 2 500 hectare irrigation project - Indonesia

Land Utilization Type A (Rp values x 1 000)

	Land Productivity 1.0	Index Levels 0.75
Irrigation Benefits (per hectare):	(Land Unit 10)	(Land Unit 16)
Net farm income with project	537	350
Net farm income without project	-214	-138
Incremental irrigation benefit	323	212
Net of common project costs:
Project cost (2 500 ha)	5 000 000
Cost per hectare	2 000
Amortized (12%, 50 years)	240
Annual OM & R	10
Annual common project cost (per ha)	250	250
Maximum permissible area-specific land development cost on LUT A	73	-37
Estimated development cost, this land unit	0
NET INCREMENTAL IRRIGATION BENEFIT (the excess of benefits over costs	73)

If such a range of NIIB values were to be divided into three more or less equal classes, land generating a NIIB of Rp 50 000 - 73 000 per ha would be classified as S1, Rp 25 000 - 50 000 as S2 and Rp 0 - 25 000 as S3. In some cases, it will be appropriate to establish unequal ranges corresponding to prominent land characteristics and associated land improvements such as land levelling or drainage.

7.3.3 Nomograph for quick determination of NIIB

The nomograph in Figure 2 illustrates how Incremental Net Farm Income minus the Annual Equivalent Values of Common Costs and Area-Specific Land Development Costs can be conveniently represented to facilitate the calculation of NIIB. Example 1 shown on the nomograph represents an area that will become top producing land (Incremental Net Farm Income Rp 325 000) following an area-specific development cost expenditure of, say, Rp 200 000. The annual equivalent value of this investment is Rp 25 000 at an interest rate of 12% over 50 years. The broken line across the nomograph extends between the top of the net incremental farm income scale (representing the top productivity), to the point on the development cost scale that reads Rp 200 000 investment (Rp 25 000 annual). With a NIIB of Rp 50 000 the land is on the boundary between S1 and S2.

Figure 2 Nomograph for correlating incremental net farm income, net incremental irrigation benefit and area-specific development cost (Rupiahs)

Example 2, in Figure 2 shows how land requiring the same investment cost in land development can only produce a net incremental farm income of Rp 280 000. Note that the broken line on the nomograph intersects the NIIB scale at Rp 5 000 corresponding to a land suitability class of S3.

The nomograph does not reveal anything that could not be calculated directly, but serves as a convenient tool for demonstrating the interactions visually. The construction of a nomograph is quite simple. Using graph paper, the vertical scales are positioned equidistant from each other. The two outside scales are each of the same length, and are sized to fit the subdivisions of the graph paper and provide an easy read-out. The NIIB scale at the centre is half the length of the two outside scales.

Values used for the nomograph are generated by determining the cut-off value, the net farm income values in farm budgets, and the range of permissible area-specific land development costs.

The permissible area land development costs for any given land suitability class can be calculated using the value at the bottom of each class as a cut-off. If the land development costs exceed the calculated amount for the class, the land should be downgraded. For example, in the case where the per hectare ranges for 'Suitable' are established as follows:

Class S1 incremental benefits	Rp 325 000 ha/yr
Cut-off value	Rp 250 000 ha/yr
Range of NIIB	Rp 75 000 ha/yr,

the permissible area-specific land development costs for any given land suitability class can be calculated, using the value at the bottom of each class as a cut-off, as illustrated in Table 25. Highly productive land will, of course, bear greater investment costs than marginally productive land. In Table 25 it will be readily appreciated that land with a physical productivity factor rating of s3 would not tolerate the annual equivalent value of development costs of Rp 35 000? however, land with factor ratings of s1 and s2 would tolerate this cost but their final classifications might be downgraded to S2 and S3 because of such costs.

Table 25 PERMISSIBLE AREA-SPECIFIC LAND DEVELOPMENT COSTS

	FACTOR RATINGS FOR RELATIVE YIELD
	s3	s2	s1
Potential relative yield ranges	0.85-0.90	0.90-0.95	0.95-1.00
Permissible development costs (annual equivalent) Rp	25 000	50 000	75 000
Actual development costs, annual equivalent cost, say, Rp	35 000
NIIB (net incremental irrigation benefit) Rp	-10 000
Final classification	N1

7.4 Final selection of LUTs for the 'irrigable' land

At the 'provisionally-irrigable' stage of the evaluation, each unit or group of land units may be classified for one or several LUTs. The classification of 'irrigable' land is more precise and should generally result in a determination of the number of hectares, by land suitability classes and subclasses, comprising a recommended irrigation service area under a project plan. Alternatives must be resolved into specific cropping, irrigation and management systems proposals that are realistic, practicable and likely to occur. Thus, a likely land use pattern for the project area as a whole will emerge.

This land use pattern will serve as the basis for locating the project's major water supply and drainage systems, and for calculating irrigation benefits. Each land unit-LUT combination is finalized (i.e. as S1, S2, etc.) in a classification of 'irrigable' land.

Table 26 summarizes a classification of 'irrigable' land for a hypothetical project. It will be noted that within any land suitability class, more than one LUT may be represented. Note in this example, the apportionment of class S1 lands between LUT A and LUT B, for reasons other than land suitability, e.g. for market needs, to even out labour peaks, to improve seasonal cash flow, or to lessen overdependence on a given crop, etc.

Table 26 SUMMARY OF IRRIGABLE LAND CLASSES AND PROJECT AREA HYPOTHETICAL PROJECT - INDONESIA (Net Farm Income Rp/ha x 1 000)

Land Class & Land Unit No.	Hectares	LUT A Vegetables ha	LUT B Rice ha	Land Productivity Index	Net Farm Income Rp/ha x 1000	NIIB Range Rp/ha x 1000
Class S1 Land units: 7, 9, 10, 13, 15, 17	552	400 1/	152	0.95-1.0	300-352	50-75
Class S2 Land units: 1, 3, 4, 6, 8, 14, 19, 20, 21, 22	1 500		1 550	0.90-0.95	275-300	25-50
Class S3 Land units: 2, 5, 11	398		398	0.85-0.90	250-275	0-25
Total irrigable	2 500	400	2 100
Class N1 Land units: 12, 16, 18	505

1/ Apportionment of area in irrigable class S1 between LUT A and LUT B is made to facilitate the estimation of benefits from the project. It is based on the limited market demand for local vegetable production. No particular land unit or hectare is designated for this land use, but the ceiling on the extent of LUT A results from practical considerations.

The procedure described enables a determination of irrigation benefits, but avoids dictating the precise land use pattern to the farmer. Other considerations might apply where it would be desirable to specify ranges of land use, as appropriate, for the envisaged degree of control over land use. It is often desirable to examine more than one overall land use pattern for the project area. After consultation among appropriate personnel, a likely pattern of land use should evolve which meets the project objectives and the approval of the authorities, and produces sufficient benefits to justify the project in economic terms. However, there is a practical limit to the number of plans that can be analysed when deadlines must be met. Other members of a project planning team will expect the land evaluation to be presented without undue delay and in reasonably final form so that the hydrology, engineering and other parts of the project's investigations can be completed on schedule.

The form for tabulating the results of the land evaluation could vary widely, depending on what details are needed. If the table is extensive and deals with subclasses and several LUTs, it may not be useful to try to include the columns showing the land productivity index, net farm income and NUB ranges. Furthermore, the land suitability classes obtained using these three measures may differ, as explained in Section 2.4, for any given land unit or LUT combination.

7.5 Confirming financial viability from the farmers' viewpoint

The foregoing economic analyses for the 'irrigable' classification concerned the project as a whole. If the project plan is to be sustained, it must also be financially remunerative to individual farmers. An analysis using financial data prices and criteria, rather than economic ones (see Gittinger 1982 and Appendix 3) is needed to confirm the financial attractiveness of the proposal from the typical farmers' viewpoint.

For this purpose, full farm budgets for the representative types and sizes of farms are required. In these budgets:

i. all the increased production costs must be met (including water charges where relevant);

ii. increased investment costs charged to the farmer must be covered;

iii. imputed returns are calculated for equity capital, farm family management and labour input, prices or other contingencies (other items may be included);

iv. the net income is found by deducting all the costs and allowances from the value of farm sales and products consumed at the farm.

The above determinations are made for situations without and with the project in order to make proper allowance for project earnings and thus arrive at incremental income due to the project. Costs attributable to the farm must be distinguished from those which are rightfully attributable to the project as a whole.

Farm budget calculations are carried out using production or relative yield levels corresponding to the economic cut-off boundary between 'Suitable' and 'Not Suitable'; and also using ceiling values for the most productive land. For both these, the incremental net income is calculated as the difference between the values found for the 'without' and 'with' situations. It is from this net income that repayment obligations must be met including, if any, costs for area-specific land development performed by the farmer or by the project and assigned to the farmer for repayment.

Table 27 illustrates a case in which the values for the cut-off and the range of permissible development costs are determined using economic criteria pertinent to the project (as described in Section 7.3). Table 28 illustrates the financial verification using financial criteria pertinent to the farm. (The assumptions about water charges will, of course, vary widely from project to project.)

The economic analyses were concerned with the cut-off value and NIIB ranges. In the financial farm budgets, the bottom line (Table 28), shows a residual value available to the farmer to cover area-specific land development costs. If the financial residual, after water and operation and maintenance charges are paid out, remains more than the cost of area-specific development costs to be borne by the farmer, the farm's financial viability at the cut-off point is confirmed.

If the results of this check prove unfavourable, it is necessary to review and test all assumptions in the analysis. An unfavourable outcome might result from any of the following:

a. the level of assumed charges levied against the farmer may be unrealistic in terms of his repayment capacity;

b. the assumptions used in farm budgets may be incorrect, unrealistic, or both; this could apply to economic and financial budgets, or both;

c. financial prices or other factors subject to official intervention may be inappropriate;

d. inequities may prevail, for example, due to institutional factors such as tenure, farm size, rents, taxes, etc.

Some of the adverse factors that bear on the farm financial viability might be changed by project financing and as a result of negotiations between the client government and the financing institution. After thorough review, a decision must be made on whether to revise the land classification and economic analyses.

Table 27 FARM BUDGETS ESTABLISHING NIIB RANGE FOR IRRIGABLE LAND (ECONOMIC ANALYSIS) - 15 hectare farm

		Fixed cost or variable	LAND PRODUCTIVITY INDEX 0.70			LAND PRODUCTIVITY INDEX 1.00
			Without project	With project	Difference	Without project	With project	Difference
Receipts:
	Sales		630	2 520	1 890	900	3 600	2 700
	Home use		84	100	16	120	144	24
Income			714	2 620	1 906	1 020	3 744	2 724
Expenses:
	Taxes 1/	F	-	-	-	-	-	-
	Depreciation 2/	F	4	6	2	4	6	2
	Operating loan 3/	V	-	-	-	-	-	-
	Operating expenses (excl. labour)	V	70	180	110	85	226	141
	Hired labour 4/	V	0	60	60	0	75	75
	Family labour 5/	V	60	220	160	68	250	182
Expenses			134	466	332	157	557	400
Net Farm Income			580	2 154	1 574	863	3 187	2 324
Incremental Net Farm Income per farm					1 574			2 324
Incremental Net Farm Income per hectare					104.93			154.93
	Less: Annual equivalent of common project investment				100.00			100.00
	Annual operation, maintenance and replacement				5.00			5.00
Sum of common project costs					105.00			105.00
Net Incremental Irrigation Benefit (NIIB) 6/					-0.07			49.93

Note: This Table is prepared using economic analysis criteria.

1/ Not applicable in economic analysis
2/ On machinery and capital items having limited lives.
3/ Not applicable in economic analysis.
4/ At market wage rate.
5/ Shadow-priced at half the market wage rate.
6/ Establishes the maximum permissible area-specific land development cost.

Table 28 FARM BUDGETS ESTABLISHING FARMER'S FINANCIAL VIABILITY UNDER IRRIGATION (FINANCIAL ANALYSIS) - 15 hectare farm

			Fixed cost or variable	LAND PRODUCTIVITY INDEX 0.70			LAND PRODUCTIVITY INDEX 1.00
				Without project	With project	Difference	Without project	With project	Difference
Receipts:
	Sales			525	2 100	1 575	750	3 000	2 250
	Home use			70	84	14	100	120	20
Income				595	2 184	1 589	850	3 120	2 270
Expenses:
	Taxes		F	5	10	5	5	10	5
	Depreciation 1/		F	4	6	2	4	6	2
	Operating loan		V	0	18	18	0	20	20
	Operating expenses		V	64	170	106	75	200	125
	Hired labour		V	0	60	60	0	75	75
	Family labour 2/		V	-	-	-	-	-	-
Expenses				73	264	191	84	311	227
Net Farm Income				522	1 920	1 398	766	2 809	2 043
	Less Imputed Costs:
		Interest on equity capital		20	100	80	20	100	80
		Family labour input 3/		120	440	320	136	500	364
		Other 4/		7	26	19	8	31	23
		Contingency/Risk 5/		11	13	2	13	16	3
				(158)	(579)	(421)	(177)	(647)	(470)
Equals Rent/Surplus				364	1 341	977	589	2 162	1 573
Incremental Rent/Surplus per farm						977			1 573
Incremental Rent/Surplus per hectare						65.13			104.87
	Less annual project operation and maintenance cost					5.00			5.00
	Less annual charges for water (towards repayments)					12.00			12.00
Financial Residual						53.13			92.87

Note: This Table is prepared using financial analysis criteria

1/ On machinery and capital items having limited lives.
2/ Priced in the imputed costs.
3/ At market wage rate.
4/At 10% of cash expenses.
5/ At 15% of cash expenses for without project and 5% of cash expenses for with project.