The Ex Post Economic and Financial Analysis

5. This section summarizes the estimated results obtained by the IIIMP, based on the ERR and the NPV calculated with FARMOD software. As at appraisal, the incremental costs and benefits of the project to society as a whole, using the with- and without-project approach, was followed. A description of the differences in costs and benefits and key underlining assumptions are presented below, including market prices used for key input and outputs, shadow pricing, and phasing of improvements. Incremental net benefits were obtained by deduction of the project costs from increased revenues. These took account of the impact on productivity increases, cost reductions through the new approach for improvement designs, and the electrification of pump sets. Water savings which were assumed as a benefit at appraisal were not included for the ICR because water lost to drains or groundwater aquifers and ‘saved’ in improved buried mesqa and marwa areas was (and is) anyway reused downstream by other farms to a large extent. Essentially it can be argued that water is not really ‘saved’. That is the reason why in the economic analysis, no value was assigned to the water ‘saved’.¹⁸

6. The economic benefits of the project were calculated by estimating average crop and activity budgets for the main crops and livestock components, and aggregating them in farm models representing the three type of improvements: (a) areas previously not improved incorporating new mesqas in 85,347 feddans; (b) areas previously improved but only at the mesqa level incorporating piped marwas covering 24,546 feddans; and (c) areas with SSD totaling 95,385 feddans.¹⁹

7. Crop budgets were built on data obtained through interviews with farmers in the improved areas integrating the changes induced under the project including average yield increases and irrigation cost reductions. In determining the production costs and yields obtained before and after the project, and in estimating their future development, several sources of data were used including the WaterWatch Studies performed in 2008 and in 2014 using remote sensing approaches; the results of the M&E activities implemented under the IIIMP as well as field observations from the ICR mission. The cropping patterns did not show any significant change as a direct result of the project investments. Cropping intensities were assumed to be 188 percent without project and 194 percent with project, considering that there was a 3–5 percent increase in land use as the open mesqas and marwas were piped and buried. Table 3.2 shows the assumed cropping pattern.

9. From the three sources of data taken into consideration—the WaterWatch remote sensing report, the Water Management Research Institute (WMRI) monitoring data, and the observations from the field and interviews with farmers’ benefited groups during the ICR mission—the following relevant conclusions are summarized:

1. 
   WaterWatch studies concluded that the yield differences in rice-cultivated areas between the improved and unimproved areas (considering the summers of 2008 and 2014) showed (i) slightly higher ET/water consumption; (ii) 3–10 percent lower ET-deficit; and (iii) 1–2 percent higher yields.
   
2. 
   The WMRI reported that, “improving subsurface drainage is a main factor that could result in an increase of productivity up to 20 percent.” The WMRI also reported that irrigation costs for rice in El Mahmoudia command area before and after the improvements decreased by EGP 234 per feddan (65 percent) at the head of the canals according to farmers’ estimates, while at the tail end the average reduction was about EGP 200 per feddan (48 percent). Similarly, in Meet Yazid canal command area these reductions averaged to EGP 175 (53 percent) and EGP 133 (42 percent) at the head and tail end of the canals, respectively.
   
3. 
   From the ICR mission visits to improved works at several project sites including mesqas from El-Ezbah on the Nekla Canal, farmers reported that with the project yields have increased about 20 percent to 30 percent at the tail end of the canal, while irrigation costs were reduced from an average of EGP 500 to EGP 200 per feddan.
   

7. 
   Based on these sources, the assumed incremental yields for this ICR impact assessment for the main crops in the project area are summarized in Table 3.3:
   

12. Financial and economic prices have been estimated for this assessment using 2016 data and are presented in Table 3.4. CFs for shadow pricing were based on estimates prepared by the ICR Borrower’s report built on World Bank Commodities Price Forecasts dated March 2016. For nontraded commodities, such as berseem and other forages, the financial prices were assumed to represent fairly well their economic prices. Future prices for traded inputs and outputs are not expected to show major variations according to the most recent World Bank forecasts. A CF of 0.7 was considered for labor costs, and CFs of 2.06 and 1.4 were used for diesel and electricity costs, respectively.²⁰

13. Project economic costs were derived from the financial costs by excluding taxes, duties, and subsidies (table 3.5) and expressed in 2016 constant prices using the gross domestic product deflator.²¹ As at appraisal, all investment costs were included in the cost stream for this analysis with the exception of those from the environmental component.

Table 3.6. Farms Per Subproject and Farm Size

16. Economic results. The evaluation exercise conducted with FARMOD software allowed for the analysis at the crop/activity level, for showing representative farm models per type of improvement, and for the overall project area. Based on the stated assumptions, the project shows an ERR of 12.2 percent (instead of the 20.5 percent estimated at appraisal). The NPV at a discount rate of 6 percent (representing the marginal utility of consumption of the project beneficiary)²² was estimated at EGP 1,350 million (about US$153 million equivalent) as shown in Table 3.8. Using the same discount rate used for the analysis at appraisal (12 percent), the NPV was EGP 27.56 million, or about US$3.13 million equivalent. These result indicators are not considering significant additional benefits from (a) the employment generation during a period in which unemployment was exacerbated by the social unrest in the country; (b) the environmental and climate change impact; and (c) the improved conditions for supplying water to the city of Alexandria.

17. The nonquantified project impact. The project has spent a total of US$248 million in the period 2007–2016 mainly for small rural works, which are rather labor intensive. It is estimated that the equivalent of 26 million man-days of work have been created, plus a further 2 million annually for scheme O&M and for incremental labor as a result of increased agricultural intensification.

18. Climate change impact. The replacement of open mesqas from which farmers push water with diesel pumps individually, by underground piped mesqas served by communally managed electrical pumps, results in a significant reduction in the use of diesel and also a significant reduction of the emissions of the greenhouse gas CO₂. The replacement of individual diesel pumping results in a decrease of 80.62 kg CO₂ per feddan per year. With a total farm area of 85,200 feddans of improved mesqa area, it amounts to a reduction of 6,869 ton CO₂ per year, not counting the CO₂ emitted for the generation of the electrical power.

19. Another nonquantified benefit was the improved conditions for supplying water to the city of Alexandria which is 70 percent dependent on the Mahmoudia Canal for their drinking water supply. Because of constrictions in the Mahmoudia Canal in the Kafr El Dawar area, it was not possible to pass the required flow down the canal without excessively high water levels and with high risk of breaches. Four contracts with a combined value of over EGP 24.1 million were implemented to enlarge the capacity of the Mahmoudia Canal so that sufficient water could be delivered to Alexandria. Also, the dredging works below Kafr El Dawar from 44.77 km to 62.457 km ensured that the Mahmoudia Canal had sufficient capacity to supply the water requirements for Alexandria. 

20. Given the lower than anticipated economic results, the project efficiency is rated as modest. The overall result is lower than the appraisal estimate because (a) the project spent half of the budgeted amount (in 2004 real U.S. dollar) covering a smaller than the original planned area with improved mesqas and marwas and (b) implementation was delayed because of political unrest in 2011 and 2012. The main benefits are (a) an increase of about 10 percent in the gross value of agricultural production because of the combined effect of slightly higher yields obtained mainly at the tail ends of the water conveyance system and about 3 percent to 5 percent of recovered land for production and (b) a decrease in irrigation costs mainly because of the single-point electric pumping stations at the mesqa level, instead of thousands of individual farmers’ diesel pumps, together with reduced labor time required for irrigation. The lower irrigation costs are consistently reported on the M&E reports prepared by the WRMI and were also verified in the field by the ICR mission directly from beneficiaries.

21. One of the major sources of benefits of the project is the reduction in irrigation costs, mainly from substituting diesel pumps for electricity pumps. In addition, the relative prices between diesel and electricity may not necessarily reflect the reality of their opportunity costs because of the existing distortions of the subsidy policies in Egypt. In the absence of a recent study for determining the CFs for these energy market prices, a sensitivity analysis was made using as a proxy the average values for diesel and electricity in the United States for estimating alternative CFs.²³ The project ERR under these parameters becomes 12.3 percent and the NPV LE 1,372 million (US$155.9 million) when using 6 percent as discount rate or LE 37.1 million when using 12 percent as discount rate. These values are almost identical to those obtained in the base analysis.

22. Farm models allowed for the assessment of the project impact at the beneficiaries’ family income level. Seven farm models were built to represent the beneficiaries’ income increases induced by the project improvements. In the case of the first two subareas improved, they are represented by three farm sizes: 0.7 feddans, 1.5 feddans, and 4 feddans, while for the third subarea with SSD, a 1.5 feddans farm model was prepared. Tables 13 to 19 in the Appendix in project files present the financial budgets including changes in farmer net income for the seven farm models. In the farm budgets, full cost recovery of the on- and off-farm investments (up to mesqa level) was included to analyze the payment capacity of small farmers and the resulting net income after cost recovery. Farm models confirmed the financial justification of the project improvements and the expected impact on rural incomes where most of Egypt’s poor make their living.

23. Annual family benefits show a 5 percent to 12 percent increase after the improvements and after payment of the annual installments for cost recovery of the investment.²⁴ The annual net income weighted average of benefited households has increased by 8.2 percent from US$5,957 to US$6,449 alleviating poverty in rural areas in Egypt. Table 3.9 shows the number of farms represented in the project areas, and the expected family income increases after full cost recovery of on-farm improvements.

Table 3.9. Farm Models and Expected Income Increases (EGP)

25. As a conclusion of the analysis, it can be said that the economic and financial analysis confirmed that although having a lower impact than expected, the IIIMP had a positive impact for the country and for the beneficiaries. The results confirm a way forward to significantly improve water use efficiency in Egypt, agricultural productivity, and equity toward a shared prosperity.