Approaches to optimize Uzbekistan’s investment in irrigation technologies

Uzbekistan is located in Central Eurasia, within the Amu Darya and Syr Darya River basins, and is completely landlocked [McKinney, 20o3]. Its current population is about 3з million and its 2018 GDP was about US$ 47.9B1.

Climate of Uzbekistan

The climate of Uzbekistan is continental, characteristic of Central Asia, with both large seasonal and daily variations in air temperature. It is quite arid, with a long summer. Normally, the hottest month is July, with average mean monthly air temperatures from 37°С in the south to 32-33°С in the north. The absolute maximum air temperature reaches 48-50°С in the south, and 44-46°С in the northern areas. In winter, the average temperature for January, which is the coldest month, is about -10°С in the lower reaches of the Amu Darya, and in the south it is +2 to +3°СUzbekistan Country Overview. World Bank, 2019. https://www.worldbank.org/en/country/uz- bekistan/overview. Third National Communication of the Republic of Uzbekistan Under the UN Framework Convention on Climate Change. UzHydroMet, Tashkent, Section 4.1, 2016, pp. 88-89. https://unfccc.int/sites/de- fault/files/resource/TNC%20of%20Uzbekistan%20under%20UNFCCC_english_n.pdf..

From 1950 to 2013, the increase in temperature averaged 0.27ОС for every 10 years, which is higher than the global rate. The average annual temperatures over the last 25 years can be seen in Fig. 1 and overall are increasing. The number of days with air temperatures above 40°С has been rising. The number of days with frost has been decreasing significantly, by about 4-5 days on average every 10 years.

Source: Centre of Hydrometeorological Service at Ministry of Emergency Situations of the Republic of Uzbekistan (Uzhydromet). https://www.meteo.uz/tf/en/open-data.

Fig. 1. Average Annual Temperature in Uzbekistan (°C)

Annual precipitation in millimeters (mm) from 1991-2016 is shown in Fig. 2, and while it is quite low in general, there is a fairly significant interannual variability. Precipitation falls predominantly in winter and spring, and rainfall is extremely sparse from June to August. March and April typically have the highest rainfall. The monthly temperature and precipitation patterns can also be seen in Fig. 3Climate Change Knowledge Portal, World Bank, 2019..

Source: Centre of Hydrometeorological Service at Ministry of Emergency Situations of the Republic of Uzbekistan (Uzhydromet). https://www.meteo.uz/#/en/open-data.

Fig. 2. Average Annual Precipitation in Uzbekistan (mm)

Source: Climate Change Knowledge Portal.

Fig. 3. Historic Monthly Averages for Temperature (line with points, right bias) and Rainfall (bars, left bias) in Uzbekistan, 1901-2016

The hottest month of the year is July, in the middle of the growing season, and has been steadily warming, as illustrated in Fig. 4. This has serious implications to evapotranspiration and irrigation water loss.

Water for Irrigation

Water resources come mainly from the runoff of the Amu Darya and Syr Darya rivers (55%) that traditionally filled the Aral Sea, plus the runoff of small rivers (33%). These two rivers are mainly formed in Tajikistan and Kyrgyzstan. Only about 10% of the Syr Darya and Amu Darya flows start within Uzbekistan. Their flows are managed through reservoirs with a complicated irrigation system consisting of a large number of canals, pumping stations, drains and drainage collectorsThird National Communication.., pp. 88-89..

1. Cotton and the Uzbek Economy

Cotton production has played a very important role in the Uzbek economy for at least 20 years, with Uzbekistan usually being the fifth, or in some years the sixth, largest producer of raw cotton lint in the worldFood and Agriculture Organization Corporate Statistical Database (FAOSTAT), 2019. http://www. fao.org/faostat/en/#data.. Up until Uzbekistan became a significant exporter of natural gas in the early 2000s, cotton was the country's major export. While cotton has fallen behind the export of energy products in value, it still remains an important contributor to the Uzbek economyIndex Mundi 2019. Uzbekistan Economy Profile 2018. https://www.indexmundi.com/uzbekistan/ economy_profile.html..

Annual raw cotton production has averaged about 1,133,500 metric tons during the period 1992-20 1 6Sirtioglu I. Uzbekistan - Republic of, Cotton and Products Update 2017. United States Department of Agriculture (USDA), 2017, GAIN Report Number TR7053. Pp. 1-4. https://apps.fas.usda.gov/newgainapi/ api/report/downloadreportbyfilename?filename=Cotton%20and%20Products%20Update_Tashkent_Uz- bekistan%20-%20Republic%20of_11-30-2017.pdf; World Agricultural Production. Foreign Agricultural Service. United States Department of Agriculture (USDA), Circular Series, WAP 3-19, March 2019, Table 17 Cotton Area, Yield, and Production. P. 31. https://www.fas.usda.gov/data/world-agricultural-production.. Cotton yield can be seen in Fig. 5.

Source: Index Mundi.

Fig. 5. Cotton Yield (kg/ha)

2. Drip Irrigation

There exists a range of estimates of initial installation costs of drip irrigation systems in Uzbekistan. Costs significantly depend upon the existing conditions of the land; whether or not it has already been levelled; and whether other land improvements have already occurred or not. Estimates of installation costs (including materials and labor) on existing irrigated areas varied between US$ 2,300 and 3,500/hectare (ha)8. Other cost estimates range from about $3,000/ha [Larson et al., 2015] to as high as $5,000/ha [Niyazmetov, Rudenko, 2013].

Water savings of 20-40% have been reported with drip irrigation in Uzbekistan and increases in cotton yield of about 30% [Djumabo- ev et al., 2019]. Other studies have reported yield increases averaging 40%, and occasionally as high as 70%, along with fertilizer savings of 30-40%Food and Agriculture Organization Corporate Statistical Database. Ibid.. The energy savings associated with drip irrigation can also be significant since this technology requires considerably less pumping of water from canals to fields. In traditional canal irrigation systems, approximately 5,000 m3 of water must be pumped at a cost of about US$ 105/ha/season (authors' calculation), assuming the State electricity price of US 2.4 cents/kilowatt-hour (kWh).

Although the benefits of transitioning to drip irrigation are substantial, the potential costs are very large. At 1.18 million hectares of cotton productionWorld Agricultural Production., the higher-end cost estimates for the conversion of all this area to drip irrigation could range from US$ 2.7 billion to US$ 5.9 billion. These numbers represent about 5.5 percent to nearly 12 percent of Uzbek GDP for 201811. It is important to understand that there is significant variability in these numbers, due to the small scale of these pilots, uncertain labor costs, and the fact that some lands are already too salinized for drip irrigation. Nonetheless, the scale of these costs (upwards of 10 percent of GDP) is the major obstacle to large-scale adoption of drip technologies.

3. Methods

Real Options Analysis

Real options analysis (ROA) applies option valuation techniques to uncertain and high-risk capital budgeting and investment decisions. A real option is the right--but not the obligation--to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting an investment project. Real options are investments in real tangible assets, not financial assets. In this specific context, these real assets could be technologies, such as high-efficiency drip irrigation systems, that address environmental and economic problems [Golub, Brody, 2017].

ROA can also guide analyses and investments in water resource management. This method can be used to promote reasonable current investments while also creating incentives for future investments as water policies in Uzbekistan change and long-term effects of climate change on the water resources there become clearer. ROA can help decision makers understand the value and costs of irreversible investment decisions and weigh the costs of delay versus early actions. Advanced option pricing can provide consistent metrics to price risk and uncertainty in technology investments for complex problems such as climate adaptation [Anda et al., 2009].

4. Results

In this case study, drip irrigation is considered as an alternative technology for delivering irrigation water for cotton production. Drip irrigation technology has the potential to mitigate some of the risks associated with water shortages and corresponding fluctuations in cotton yield. This technology may also help minimize the impacts of rising electricity costs associated with pumping (water to fields) and any future fees levied on water allocations. Uzbekistan Country Overview; World Development Indicators. World Bank, 2019. https://data. worldbank.org/country/uzbekistan.

However, installation of this technology requires significant upfront capital as well as resources for long-term maintenance. These investments, in turn, are exposed to other major risks related to cotton price volatility. Additionally, drip irrigation may be exposed to currency exchange risks if any of the material components are imported. However, for a first-level analysis, we assume that labor costs are the same for both technologies. While this assumption may be a little weak, labor costs in Uzbekistan are not very transparent. To compare the two irrigation technologies, we calculated risk-adjusted benefits and costs for both, by applying the real options methodology described in [Golub, Brody, 2017; Golub et al., 2019]; see Table 1.

Table 1