Letaba Catchment: Macro Economic component of Socio-Economics – Scenario Evaluation Presented by: William Mullins Mosaka Economists 31 October 2013

2 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 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 GDP  Changes in Employment  Changes in income distribution  Changes Surplus Value  Changes in Capital

New Infrastructure: Cost Benefit Analysis Cost indicators of construction of raising of dam wall, pipeline and canal costs.  Net Present Value (NPV) > 0  Internal Rate of Return (IRR) > Discount Rate  Benefit - Cost ratio (BCR) > 1 Application of Economics tools (cont.)

Macro Economic Indicators Why the specific indicator?  Show Economic Growth  Poverty 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 households One 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 Capital Capital 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 Value Very 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 constant, Assurance reduced  Volume constant, Assurance improved (proposed dam)

12 Modeling of Primary Sector in WIM-model Inputs: Example - Irrigation Agriculture Inputs: Example - Irrigation Agriculture Economic Water Modelling Economic Water Modelling Output: Results  Main Drivers: (Water Volume; Hectares)  Specific Crop Production Budgets (Income and Costs)  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 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 CropsER1ER2ER3ER4ER5Total Bananas Citrus (Valencias) Avocados Macadamias Mangos Tomatoes Brassicas Litchis Cucurbits Citrus (Grapefruit) Total

ER 2: GLIB - Baseline Results Surplus Value (R Mil) GDP (R Mil) Employment (Numbers) Capital (R Mil) Household Income (R Mil) Direct Indirect & InducedTotalDirect Indirect & InducedTotal High & MedLow Irrigation Industry Total

Scenario Evaluation Volume Assurance Options: – Volume Constant, Assurance Reduction by 10%

Values after reduction in Assurance Surplus Value (R Mil) GDP (R Mil) Employment (Numbers) Capital (R Mil) Household Income (R Mil) Direct Indirect & Induced TotalDirect Indirect & Induced Total High & Med Low Irrigation Industry Total

Reduced Values Surplus Value (R Mil) GDP (R Mil) Employment (Numbers) Capital (R Mil) Household Income (R Mil) Direct Indirect & InducedTotalDirect Indirect & InducedTotal High & MedLow Irrigation Industry Total

Assurance Reduction: Negative Percentage Surplus Value GDPEmploymentCapitalHousehold Income Direct Indirect & InducedTotalDirect Indirect & InducedTotal High & MedLow Irrigation-35%-23%-18%-21%-19%-17%-18%-13%-18% Industry-7%-6% -4%-5% -6% Total-29%-19%-14%-17% -13%-16%-11%-14% -13%

Idea of the detail! Surplus ValueGDPEmployment CapitalHousehold Income DirectTotalDirectTotal Low Bananas-36.9%-31.1%-29.5%-29.0%-28.7%-27.5%-28.2% Citrus (Valencias)-31.4%-23.3%-21.3%-20.0%-18.9%-13.8%-17.6% Avocados-62.9%-19.8% -16.1%-15.3%-10.4%-14.2% Macadamias-66.0%-28.1%-25.9%-24.4%-23.6%-15.6%-22.2% Mangos-35.4%-15.1%-12.4%-11.4%-11.0%-7.3%-9.7% Tomatoes-24.6%-12.1%-8.7%0.0%-2.1%-4.1%-6.5% Brassicas-44.5%-24.0%-18.2%-16.7%-16.3%-8.9%-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% 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%

Sectoral structure of the economy 20 If the primary sector is economically affected, it will spill over to the tertiary sector as well (positive or negative).

Thank You!