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World Agroforestry Center Production
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Clean water for Wajir – building a business case for a pipeline
Eike Luedeling
Decisions under uncertainty
All decisions are made under uncertainty
We rarely know enough to be completely sure about how to decide
Decisions must be made, so we need strategies for making the best possible decisions under uncertainty
Image source: http://www.mynamesnotmommy.com
Uncertainty around the pipeline
Will the project succeed?
Will better water spur growth in Wajir?
Will Habaswein’s water supply be affected?
How much will water cost and how many people will buy it?
…Image source:
http://www.accountancyage.com
Decision modeling
Construct impact models for a decision
Identify all uncertain variables
Run simulations for many plausible scenarios that could happen
Summarize results for an idea of the range of likely outcomes
Image source: http://ronzopleaj.wordpress.com/
Decision modeling
Initial stakeholder workshop in November 2013 for joint framing of the decision.
Decision modeling
Two days of model development with core modeling team.
Decision modeling
Coding of the model
Incorporation of feedback
Elicitation and consolidation of estimates
Simulation runs
Identification of important variables
Image source: http://www.dignited.com
The model
Residents of Wajir
Residents of Habaswein
Residents along the pipeline
Upstream areas
Downstream areas
Water company
Donor
Separate calculations for all
stakeholder groups
Summed up to produce overall
project outcomes
Stakeholders
The model
Reduced infant mortality
Reduced costs for disease treatment
Higher productivity
Job creation
Higher investments
Reduced brain drain
Revenue from more demand for local products and services
Higher tax revenue
Reduced reliance on shallow wells
Sanitation benefits
Water during the dry season
General livelihood improvement
PES
Revenue from water sales
Benefits
The model
Initial investment
Running costs /metering
Salaries
Repairs
Aquifer monitoring
Infrastructure maintenance
Pipeline security
Payments for ecosystem services
Environmental impact
Costs for water purchases
Costs
The model
Negative feasibility report
Water yield too low
Inadequate benefit sharing
Political interference
Wells run dry
Increasing water
salinity
Oil development (raising the risks of wells running dry or turning saline)
Dam development (raising the risks of wells running dry or turning saline)
Maintenance
problems
Water price is too high
Regional conflict
Poor maintenance and operation
Illegal abstractions
Lack of cooperation
Risks
The model
Costs and
benefits
Success or
failure
Losses through inefficie
ncies
Time preference adjustmen
t (discounti
ng)
Outcome
Model structure
The model
Costs and
benefits
Success or
failure
Losses through inefficie
ncies
Time preference adjustmen
t (discounti
ng)
OutcomeOutcome
OutcomeOutcome
Outcome
Overall project outcome
Overall project outcome
Overall project outcome
Overall project outcome
Overall project outcome
Multiple stakeholders
Monte Carlo simulation10,000 plausible outcomes
Separate runs including and
excluding political risk
factors
Model structure
Results
Outcomes for Wajir … considering all risks
77.3% of project failure or unprofitability!
Probably too risky
Can risks be mitigated?
-1000 -500 0 500 1000Net present benefits
(million USD)
Pro
bab
ilit
yLo
w
h
igh
Chance of gains: 22.7%Chance of losses: 36.8%
Chance of zero: 40.6%
Results
Outcomes for Wajir … considering all risks
Variable Importance – where are the
important knowledge
gaps?
Future water purchase by person
Future water priceValue of surviving infant
Additional surviving infantsValue of disease treatment
Water revenue trendNumber of disease treatments
savedLosses due to poor project
designInadequate benefit sharing
Political interferenceLack of cooperation
Risk of increased salinityRisk of drying wells
Results
Outcomes for Wajir … considering all risks
Future water purchase by person
Future water priceValue of surviving infant
Additional surviving infantsValue of disease treatment
Water revenue trendNumber of disease treatments
savedLosses due to poor project
designInadequate benefit sharing
Political interferenceLack of cooperation
Risk of increased salinityRisk of drying wells
Variable Importance – where are the
important knowledge
gaps?
Can these risks be eliminated?
-1500 -1000 -500 0 500Net present benefits
(million USD)
Results
Outcomes for Wajir … excluding political risks
Chance of gains: 41.3%Chance of losses: 52.6%
Chance of zero: 6.1%
Pro
bab
ilit
yLo
w
h
igh
Results
Outcomes for Habaswein … excluding political risks
Chance of losses: 10.9%
Chance of zero: 6.1%
Better prospects than for Wajir
Lower expected water price Payments for ecosystem services
-100 0 100 200 300 400Net present benefits
(million USD)
Pro
bab
ilit
yLo
w
h
igh
Chance of gains: 83.0%
Net present benefits (million USD)
Results
The water company … excluding political risks
Chance of gains: 78.0%Losses: 22.0%
Good chance of substantial gains
But risk of loss not negligible
0 500 1000 1500 2000
Pro
bab
ilit
yLo
w
h
igh
Net present benefits (million USD)
Results
Overall outcomes … excluding political risks
Chance of gains: 72.4%Chance of losses:
27.6%
Good prospects for net benefits
Also substantial chance of loss
0 500 1000 1500
Pro
bab
ilit
yLo
w
h
igh
Results
Overall outcomes … with all risks
Very risky
More likely to fail than to succeed
-500 0 500 1000Net present benefits
(million USD)
Pro
bab
ilit
yLo
w
h
igh
Chance of gains: 37.9%Chance of losses: 62.1%
Results … all risks considered
downstream
upstream Pipeline communities
donor
Probably nil; losses more likely than
gains
Probably nil; gains more likely than
losses
Gains or losses; risky
Certain loss (or
nil)
Probably nil; gains more likely than
losses
Certain loss
Gains or losses; risky
Water company
Results … no political obstacles
downstream
upstream Pipeline communities
donorGains or
losses; risky
Gains more likely than
losses
Gains more likely than
losses
Certain loss (or nil)
Gains more likely than
losses
Certain loss
Likely profitable,
but still risky
Water company
Main sources of uncertainty
Disease treatment
The life of an infant (currently 200 to 100,000 USD)
Valuations
# of saved disease treatment
# of additional surviving infants
Impacts
Water users and water use per user
Price of water
Markets
Political
Hydrological and environmental
Risks
Risks
Environmental impacts
Risk of salinity, thickness of freshwater layer
Hydro, environment
Careful site selection (deep saline layer, far from Habaswein wells)
Groundwater recharge
Careful borehole design, interception wells
Risk mitigation
Political interference
Inadequate benefit sharing
Suboptimal cooperation
Political
Stakeholder inclusion
Benefit transfer mechanisms
Extra efforts to reduce hydrological risks
Risk mitigation
Conclusions
Given the current state of uncertainty (of the estimators), the project is very risky, for all stakeholders and as a business
Targeted measurements would help firm up the business case
Major uncertainties are related to stakeholder inclusion and benefit sharing
Hydrologically, the risk of salinity intrusion seemed greater than that of wells running dry
Careful project design should be able to minimize the hydrological risk
Recommendations
Test drills! Depth to saline water?
Careful cost/benefit analysis for the water company
Value of a life?
Market study to determine likely water price
Revisit of the present modeling approach with more concrete information on project design
Measurement Stakeholder inclusion
Benefit transfer (e.g. PES)
Select sites and optimize borehole technology to minimize risks
Careful aquifer monitoring for early detection of problems
Invest in robust technology to minimize inefficiencies and ensure reliable operation
Design / implementation
Take-home message
Targeted measurements, careful project design and a dedicated
monitoring system will be essential for making this project a success!
Water supply for Wajir
http://www.mercycorps.org
Water supply for Wajir
http://www.mercycorps.org
City of Wajir has major water problems: water supply and sanitation
What are the benefits? What are the costs?
Is it worth doing?
Water pipeline from Habaswein could help
Stakeholders
downstream
upstream Water company
donor
excited?
apprehensive?
unclear?
concerned?
impatient?
generous?
Stakeholders
Benefits
Costs
Benefits
Costs
Benefits
Costs
upstream
Benefits
Costs
downstream
Benefits
Costs
Water company
Benefits
Costs
donor
Risks to the projec
t
http://www.mercycorps.org
The modeling process
Participatory modeling
Calibration training for stakeholdersSolicitation of
estimates
Model runs with stakeholder estimates
Identification of high-value variables
Measurements
Model refinement
Identification of uncertainties
Stakeholder consultation
http://www.mercycorps.org
1-day stakeholder workshop Around 30 participants, many from Wajir county, including
senator 2-day core groups modeling workshop First draft of model developed Currently 132 uncertain variables
Costs and benefits for Wajir
http://www.mercycorps.org
CostsPayments for water
Payments for ecosystem servicesInfrastructure maintenance
Etc.
BenefitsPublic health benefits:Reduced infant mortalityLower treatment costs
Sanitation benefitsHigher productivity
Attractive location benefits:Higher investment
Job creationHigher taxes
More demand for local productsReduced brain drain
Clean reliable water:Reduced reliance on wellsWater during dry season
General livelihood improvement
Risks to the project
http://www.mercycorps.org
RisksNegative feasibility report
Low water yieldInadequate benefit sharing
Political interferenceDrying wells
Increased salinityMaintenance problems
Pipeline failureWater too expensive
Regional conflict
The model – overview
http://www.mercycorps.org
The model – benefit calculation
http://www.mercycorps.org
The model – cost calculation
http://www.mercycorps.org
The model – risk adjustment
http://www.mercycorps.org
Preliminary results
Bottom line for Habaswein
Modeled benefits for different stakeholders
Bottom line for Wajir
Preliminary results
Overall project bottom line
Modeled bottom line for the entire project
Preliminary results
Important variables(determined by PLS regression)
Preliminary results
Important variables(determined by PLS regression)
Preliminary results
High-value variables:
Knowledge gaps that should be closed for better decision making
Random factors that affect decision outcomes
Entry-points for modifications to the project design that increase chances of success
For Wajir project, analysis suggests that more stakeholder involvement will substantially reduce risks
Lessons learned
Most decisions can be described with fairly simple models
Estimating the range of probable outcomes from a decision is normally possible
Information gaps are often smaller than it seems
Important variables are often unexpected and can be easy to measure
Including stakeholders in model-building is possible and enhances buy-in
Thanks for your attention! e.luedeling@cgiar.
org