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I
nt. J. Green Economics, Vol. 14, No. 4, 2020 315
Copyright © 2020 Inderscience Enterprises Ltd.
Cost-effectiveness of investments in drip irrigation
projects in Ukraine
Nadia Frolenkova, Anatoliy Rokochinskiy
and Pavlo Volk
National University of Water and Environmental Engineering,
Rivne, 33028 Rivne Oblast, Ukraine
Email: n.a.frolenkova@nuwm.edu.ua
Email: a.m.rokochinskiy@nuwm.edu.ua
Email: p.p.volk@nuwm.edu.ua
Andrii Shatkovskyі
Institute of Water Problems and
Land Reclamation NAAS of Ukraine,
Kyiv, Ukraine
Email: andriy-1804@ukr.net
Nataliіa Prykhodko
National University of Water and Environmental Engineering,
Rivne, 33028 Rivne Oblast, Ukraine
Email: n.v.prihodko@nuwm.edu.ua
Ruslan Tykhenko and Ivan Openko*
National University of Life and
Environmental Sciences of Ukraine,
Kyiv, Ukraine
Email: rvtyhenko@ukr.net
Email: ivan_openko@ukr.net
*Corresponding author
Abstract: The article focuses on a topical subject – the evaluation of cost-
effectiveness of investments in drip irrigation projects. Drip irrigation is a
modern, advanced, high-tech and environmental technology, which providing
right scientific support, enables to get high yields and economic benefits with
minimum consequences for the environment. The proposed methodological
approaches to calculating the cost-effectiveness of investments were tested at
various sites of the irrigation zone of Ukraine. The results of the calculations
showed that the cultivation of high-productivity hybrids of vegetables and fruit
when using modern technology of drip irrigation provides high yields and
standard quality of production, that is the crop production is transformed into a
stable profitable business. At the same time, applying modern methods of
evaluation of the feasibility of investment will increase the validity of
management decisions as to the selection of crops and their combinations and
will facilitate investment attraction.
316 N. Frolenkova et al.
Keywords: cost-effectiveness; investments; water management projects; drip
irrigation; discount rate; irrigation regime; NPV; net present value; profitability
index; DPP; discounted pay-back period.
Reference to this paper should be made as follows: Frolenkova, N.,
Rokochinskiy, A., Volk, P., Shatkovskyі, A., Prykhodko, N., Tykhenko, R. and
Openko, I. (2020) ‘Cost-effectiveness of investments in drip irrigation projects
in Ukraine’, Int. J. Green Economics, Vol. 14, No. 4, pp.315–326.
Biographical notes: Nadia Frolenkova is an Associate Professor of the
Department of Management at the National University of Water and
Environmental Engineering (Rivne). She teaches such areas like ‘Environmental
project management’, ‘Financial management’, ‘Market infrastructure’.
Anatoliy Rokochinskiy is a Doctor of Technical Sciences, Professor of
Department of Water Engineering and Water Technology of the National
University of Water and Environmental Engineering (Rivne). His research
interests include the development of scientific principles, methods and models
to substantiate the climatologically optimal strategy for the creation and
management of natural technical facilities and complexes in the field of water
management, environmental protection, agro-industrial and energy sector using
information technology.
Pavlo Volk is a PhD, Associate Professor, Doctoral student of Department of
Water Engineering and Water Technology of the National University of Water
and Environmental Engineering (Rivne). His research interests include the
development of scientific principles, methods and models to substantiate the
type, design and parameters of drainage systems, taking into account
environmental and economic requirements using information technology.
Andrii Shatkovskyі is a Doctor of Agricultural Sciences, Corresponding
Member of the National Academy of Agrarian Sciences of Ukraine. He holds
the position of Deputy Director at the Institute of Water Problems and Land
Reclamation of the National Academy of Agrarian Sciences of Ukraine. The
main area of activity is research and scientific substantiation of the parameters
of drip irrigation of row crops of field crop rotation, in particular, the study of
the water-nutritional regime of the soil, the study of the patterns of water
consumption and the formation of moisture zones. He is author and co-author
of over 300 scientific publications.
Nataliіa Prykhodko is a Senior Lecturer in Department of Water Engineering
and Water Technologies at the National University of Water and Environmental
Engineering. She teaches such disciplines as ‘Agroengineering’, ‘Мelioration
Hydrogeology’ and ‘Engineering Geodesy and the Basis of Geoinformatics’.
Ruslan Tykhenko is an Associate Professor in Department of Management of
Land Resources at the National University of Life and Environmental Sciences
of Ukraine. He teaches such areas like ‘Engineering in land management’,
‘State examination of land management decisions’, ‘Geodetic works in land
management’. She is author and co-author of over 200 scientific publications.
Ivan Openko is a Associate Professor in Department of geodesy and
cartography at the National University of Life and Environmental Sciences of
Ukraine. He teaches such areas like ‘Surveying’, ‘GNSS observation’,
‘Topographic and geodetic maintenance of works in land management’. He is
author and co-author of 73 scientific publications.
Cos
t
-effectiveness of investments in drip irrigation projects in Ukraine 317
1 Introduction
Among the numerous environmental and socio-economic problems of mankind, there is
an exacerbation of existing energy, food and water crises in the face of significant
changes in climate. In the context of agrarian sector reforming and reclaimed
land privatisation, the types of landownership have changed greatly; the traditional
control schemes of reclamation systems, agro-technologies, industrial and economic
interconnections between agricultural production participants have been destroyed. And
most importantly, the state financial policy has changed as well. This problem has a
pronounced planetary as well as regional character (Bardsley and Sweeney, 2010;
Kovalenko et al., 2019; Massey, 2012; Rokochinskiy et al., 2019a, 2019b, 2020;
Poff et al., 2016).
The need to address this issue has increased significantly due to changing climate,
especially in recent decades. At that the precipitation is not increasing, but on the
contrary decreasing, for example, as it was in April of previous year the precipitation
decreased almost twice. However, there has been an increase in the number of showers
causing significant production losses. The aridity of the climate has increased and water
scarcity has become particularly noticeable. According to research results, the
dependence of crop yields on weather conditions remains high – almost 52%. Within
such a high dependence of food security on climate there must be adequate safety
barriers to ensure a sustainable food supply to the population. The manifestations of these
changes are observed on both rainfed and reclaimed lands both in irrigation and drainage
zones (Openko et al., 2017, 2020a, 2020b; Martyn et al., 2019).
As both world and domestic practices and experience attest, agricultural
hydrotechnical land reclamation is one of the effective measures to intensify agricultural
production in adverse weather and climatic conditions. Hydrotechnical land reclamation
increases soil fertility, ensuring high sustainable crop yields in combination with the
appropriate agricultural practices.
Therefore, the socio-economic changes taking place in the country, globalisation
processes and instability in all spheres that consume natural resources, require more
research on the improvement of management, planning and evaluation of investment
projects.
2 Methods
To use innovative world management methods that can be adapted to the domestic
conditions, and will contribute to positive changes in the investment policy of the country
it is advisable to study the world experience in this field. Existing domestic methods and
approaches to the estimation of the economic efficiency of water management projects
were developed mainly in the 1960s and were focused on the administrative-command
economy. However, economic reforms, changing the forms of management and
ownership for land and reclamation facilities, emergence of new sources of financing
reclamation restoration and development require an appropriate revision of the traditional
approaches to the development, economic justification and implementation of any
investment projects, as well as the further development, improvement and adaptation of
318 N. Frolenkova et al.
the existing methods to the features of modern national economy (Akimova et al., 2015;
Bardsley and Sweeney, 2010; Hamilton and Stover, 2012; Kovalenko et al., 2019;
Poff et al., 2016; Rokochinskiy et al., 2012; Openko et al., 2017, 2020a, 2020b;
Shevchenko et al., 2017; Martyn et al., 2017; Openko et al., 2019; Ievsiukov and
Openko, 2014; Martyn et al., 2020).
The economic feasibility of investment projects, including water management ones,
in advanced market economies is conducted applying the approaches proposed by the
United Nations Industrial Development Organisation (UNIDO) and is based on the
methodology developed by the International Centre for Industrial Research at UNIDO.
However, using these approaches and methods of project investment justification, it is
necessary to take into account the features of their application in each individual industry
under the conditions of different forms of ownership. After all, agricultural production on
reclaimed land has certain features and differences from industrial production, in
particular in terms of project output and costs, selection and justification of the discount
rate, selection of the best option for implementation, etc. (Bardsley and Sweeney, 2010;
Hamilton and Stover, 2012).
Therefore, in the context of market transformations, it is necessary to focus on the use
of world international standards in the design and evaluation of the economic feasibility
of construction and reconstruction projects for water management and reclamation
facilities, with a mandatory consideration of the current features of national economy
in Ukraine, as well as the practice of domestic economic calculations in this field
(Poff et al., 2016).
Today, major efforts in irrigation are aimed at the reconstruction and modernisation
of irrigation systems, improvement of irrigation efficiency, saving water resources, and
environmental protection (Kovalenko et al., 2019).
In the irrigated agriculture of Ukraine, the shift to resource-saving and
environmentally-friendly technologies is implemented by introducing new irrigation
methods and techniques. This provides a metered, low-loss water supply with dissolved
nutrients, trace elements, chemical ameliorants, crop protection agents and plant growth
regulators discretely to each plant.
One of the ways to solve these problems is drip irrigation. It is the determining factor
of modern high-intensity technologies for growing gardens, berry plantations, vineyards,
nurseries, vegetables, potatoes. Since, due to the technological capability of this method
(discrete supply of water with dissolved fertilisers and trace elements into the feeding
zone of each plant in strict accordance with its needs), favourable conditions are created
to maximise the plant productivity (Romashchenko et al., 2015).
In this regard, the development of methods for calculating the system parameters,
technical means of water purification, experimental and serial production of drip
irrigation emitters, parts and fittings for irrigation pipelines is a very pressing issue at the
present stage of irrigation modernisation (Rokochinskiy et al., 2008; Kyiv, 2014).
Unlike traditional irrigation methods, when the entire area is irrigated, when using
drip irrigation the soil is irrigated locally by strips or separate contours. The size of the
irrigated area (width and depth) depends on: crop type and planting system, water-
physical properties and antecedent soil water value, placement of irrigation pipelines
with drip emitters, phases of plant development, irrigation rates, etc.
Cos
t
-effectiveness of investments in drip irrigation projects in Ukraine 319
3 Results and discussion
Drip irrigation is a method of irrigation when water along with dissolved nutrients and
trace elements with low flow through drip emitters are fed directly into the feeding zone
of each plant according to its biological characteristics.
This irrigation method has the following technological features:
Local soil irrigation, mainly in the area of root system development;
The use of environmentally inert materials, primarily polymeric ones when setting
up the water distribution network of Drip Irrigation Systems (DIS).
With the invention of polyethylene, it became possible to use the distribution and
irrigation pipelines of different diameters made of polyethylene in DISs, as well as to
mass-produce drip emitters of various designs made of polymeric materials. The use of
plastics enabled to create DISs of required reliability for the technological processes of
irrigation and fertigation.
The high efficiency of drip irrigation has contributed to the fact that over a relatively
short period the species composition of crops grown using this technology has increased
significantly.
Compared to traditional irrigation methods (sprinkling or furrow irrigation), drip
irrigation has the following main advantages:
Water saving increases by 2–5 times depending on the type of crop, variety, planting
system, plant age, soil and climatic features;
Metered, low flow and low pressure water supply along with the dissolved nutrients;
Ensuring the optimal consumption of water and fertilisers in accordance with the
biological needs of fruit and berry crops due to the formation of favourable water
and nutrient regimes of soil;
Reducing the fertiliser input due to their supply directly to plant root system;
high level of mechanisation and automation of technological processes (irrigation,
application of fertilisers, plant protection agents);
Elimination of the effect of wind on the irrigation process;
Relaxation in the requirements for drainage systems;
The possible use of mineralised water, unsuitable for irrigation in other ways;
Minimising or completely eliminating harmful effects on the environment;
Increase in fruit and berry yields by 30–50% and improvement of product quality;
Possible development of slope lands up to 30°, as well as low-productive (shallow,
sandy, sandy-loam, reclaimed) lands;
Reduction of labour costs for construction, operation and maintenance of DISs due
to the high factory readiness of the units and overall automation of irrigation control.
320 N. Frolenkova et al.
These benefits have contributed to the rapid spread of drip irrigation in many countries.
In Ukraine, drip irrigation, as a method of irrigation, began to be used since the early 70’s
of the last century (Romashchenko et al., 2015).
Thus drip irrigation is a modern, advanced, high-tech and green technology that has
been widely used in growing vegetables, gardens and vineyards on the field. Drip
irrigation given that a proper scientific support (irrigation with water of normative
quality, compliance with irrigation regime, introduction of valuable crops into crop
rotation), enables to obtain high yields and significant economic effect with minimal
impact on the environment.
As evidenced by production practices and experience, vegetable growing and fruit
growing on the open soil are some of the most costly and, at the same time, highly
profitable sectors of agriculture. With regard to drip irrigation, the introduction of
modern technologies, on the one hand, significantly increased the initial investment for
its application on open soil (up to 200… 400 USD / ha depending on the culture and
growing conditions), and on the other - gave the opportunity to dramatically increase the
yield (in particular, vegetable crops up to the level of 80… 130 t / ha) and at the same
time minimise the cost of production. The most profitable crops when using drip
irrigation are tomatoes, onions, garlic, sweet peppers, eggplant, early potatoes,
cucumbers, napa cabbage. Vegetables of borscht set such as carrot, red beet, cabbage are
considered to be so-called “insurance” crops when using drip irrigation in Ukraine.
It should also be noted that net profit and profitability of production as a whole is
influenced not only by the yield, but also by the price situation that emerges during a
particular marketing year on the market. There is often a situation when at the same costs
in favourable weather conditions, it is possible to obtain 90… 100 t/ha of onion yield, but
at the same time, the purchase prices can be only slightly higher than the prime cost, so
as a result, net profit is minimal. In the inverse situation, when the weather is extremely
unfavourable, the yield is rather low (30… 40 t/ha), the market for these products is not
saturated, so the price for them is high and the producer gets an average or even high net
profit and profitability.
The impact of seasonal fluctuations in market prices can only be minimised if
vegetable products are long-term stored or processed. That is, it is necessary to establish
the so-called “closed-loop production cycle”. Also, the technological process of growing
vegetable products needs to be supplemented by such components as sorting, post-
harvest finishing, packaging, etc.
One of the ways to minimise the risks in irrigated vegetable production is to grow a
standard set of vegetable crops under drip irrigation in intensive rotation, which must
include valuable (highly profitable) crops. Offering at the same time 4–6 vegetable crops
on the market the producer reaches average profitability, which enables to stabilise his
business.
Thus, even in the most unfavourable (by price policy) year, vegetable producers
having reached high yields and proper organised sales in any case return the invested
funds and get guaranteed minimum profits.
According to the research results and accumulated practical experience, the
productivity of the crops grown under drip irrigation is significantly influenced by the
irrigation regime. The effect of different drip irrigation regimes on the main economic
indicators of crop production technology of tomato is given in Table 1.
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-effectiveness of investments in drip irrigation projects in Ukraine 321
Table 1 Major economic indicators of growing technology for tomatoes depending on the
selected drip irrigation regime
Irrigation
regime, %
MMHC
Investments,
USD
Gross
output, t
Sell
price,
USD /t
Gross
income,
USD
Net
income,
USD
Production
cost,
USD /t
Level of
profitability, %
Without
irrigation 980.1 2.0 28.4 1456.9 476.8 19.10 1.94
60 1093. 4.6 28.4 3266.0 2172.8 9.50 7.94
70-80-70 1113.8 5.5 28.4 3936.2 2822.4 8.03 10.24
80 1125.8 5.9 28.4 4237.2 3111.4 7.54 11.05
80-85-70 1128.2 6.0 28.4 4313.9 3185.6 7.42 11.29
90 1131.8 6.0 28.4 4285.5 3153.6 7.47 11.14
MMHC 1116.3 4.6 28.4 3271.6 2155.3 9.69 7.72
Notes: 1. MMHC is a minimum moisture-holding capacity; 2. In the check variant
(without irrigation), post-planting irrigation was carried out for seedling root-
taking.
It was specified that the most expedient, from the economic point of view, is the regime
of drip irrigation with differentiated by the stages of plant development antecedent soil
water 80% of minimum moisture-holding capacity (MMHC) in the “transplanting of
seedlings – blooming” stage, 85% of MMHC in the “blooming – fruit formation” stage
and 70% of MMHC in the “fruit formation – harvesting” stage. The highest gross
income, net profit, profitability, and the lowest production cost were recorded when
studying this option.
It was proved that the use of drip irrigation systems for growing vegetables and
potatoes is economically feasible already on the area of one hectare, but maximum
economic efficiency is achieved on the area not less than 10 ha. This makes it possible to
optimise the specific costs for a drip irrigation system per hectare.
Given the above, it can be argued that drip irrigation for today is one of the most
promising areas for the intensification of agricultural production and the realisation of
investments by both the state and the private sector. However, such investments cannot
be made without a proper justification for their economic feasibility. Based on modern
world approaches to the evaluation of projects in the field of environmental management
and taking into account the features of the domestic market environment, as well as the
specifics of water sector, the method of investment assessment of water management
projects should, in our opinion, be based on the following principles:
1
Using the indicators that are directly related to the main goals and objectives of the
project;
2
Focus on the indicators characterising the various aspects of the project;
3
Compliance of the selected indicators with the features of the country's economy
functioning, particular sector and the interests of main investors;
4
For the projects of national importance, the focus is not so much on the economic,
but on the environmental and social efficiency of a land reclamation project. If the
project is important for the economy, the principle of additionality and maximum
effect can be ignored.
322 N. Frolenkova et al.
5
Ffor commercial projects – obtaining the profit not below the expected level, which,
in addition, compensates for the uncertainty risk of the end result;
6
Full return on investment from the benefits generated from the project
implementation within the timeframe acceptable to the investor;
7
Involvement, where appropriate, of qualitative indicators and expert assessments that
enable to consider non- measurable effects (social, environmental).
The main indicators used in calculating the investment attractiveness of water
management projects in market conditions are: net present value (NPV), profitability
index, (PI), discounted pay-back period (DPP) (Frolenkova et al., 2007; Kyiv, 2014;
Rokochinskiy et al., 2011; Stakhiv, 2011).
Profitability index determines to what extent the value of the project increases per a
monetary unit of investment. Net present value method shows the future value of the
project. Discounted payback period calculation method is generally used in investment
analysis of land reclamation projects as a limitation when making an investment decision.
An important element of modern methods of investment analysis is an indicator that
enables to bring unequal flows of income and expenses to a single point in time – a
discount rate. The economic substance of the discount rate is generally to measure the
rate of decline in the value of money over time. The right choice of such a rate plays a
crucial role in the process of making optimal decisions on the implementation of
reclamation projects, as it ensures that the calculations made are consistent with the real
economic conditions in which the project is planned.
When determining such a rate, it should be borne in mind that in practice it is
considered as a minimal rate of return on investment, when the investor allows for the
possibility of investing his funds in this project, given that there are other alternative and
available investment options. The basis for establishing a discount rate in a market
economy is not an expertly substantiated standard, but a real rate of return, which in
modern conditions should be determined on the basis of: a central bank rate; deposit and
credit interest rates; inflation rate and risk level relates to a particular investment object.
In today’s economic conditions, drip irrigation is mainly provided at the expense of
individuals and legal entities, so the commercial efficiency of the project becomes more
relevant. Since land reclamation as a whole and drip irrigation in particular are extremely
capital-intensive, investment here should be made with some involvement of the state
and landowners. However, at the present stage, the investment in drip irrigation is carried
out mainly through private capital.
Commercial efficiency takes into account the financial results of a project for a
private investor (agricultural enterprises, cooperatives, joint stock companies, farms or
credit investors financing the investment project). The purpose of commercial evaluation
is to determine the feasibility of private capital investing (Frolenkova et al., 2007).
Increase of commercial annual discounted economic effect by the variants of design
solutions is proposed to determine by the formula
, 1 ,
i
Ki iiіi
ЕDПDПП DАКП Ii n
(1)
Cos
t
-effectiveness of investments in drip irrigation projects in Ukraine 323
where:
Пi – increase in profits from the sale of agricultural products under the i-th variant of
the project, USD;
КПi – annual flows of credit (paid interest rate) under the i-th variant of the project, USD
(when financing the project out of proceeds of credit);
ППi – increase in tax payments under the it-h variant of the project, USD;
Аi – increase in annual depreciation payments due to the introduction of new major
water, amelioration and agricultural funds upon the results of the implementation of the i-
th variant of the project, USD;
Ii – the annual investment for the implementation of the i-th variant of the amelioration
project, USD;
T – time horizon, years.
The commercial effect defined is used in investment analysis formulas to make decisions
about the feasibility of investing in reclamation measures (Frolenkova et al., 2007;
Rokochinska et al., 2004; Rokochinskiy et al., 2013).
When financing a loan project, it is necessary to determine the project term of loan
repayment, which is also the payback period of the investments. The interest paid on the
loan for each year is determined from the amount of the debt outstanding at the beginning
of the accounting year; the income tax for the year is calculated as a percentage of the
difference between the annual income and the interest paid on the loan, costs of loan
capital are taken as a base rate when determining the discount rate.
The proposed methodological approaches have been tested by us at various sites in
the irrigation area for growing fruit and berry crops, gardens, vineyards and vegetables.
The feed data for calculating the commercial efficiency of investment for the main
cultivated garden and vegetable crops and the corresponding designs of Drip Irrigation
Systems (DISs) are given in Table 2.
Table 2 Feed data for calculating commercial efficiency of investment by the cultivated crops
and corresponding structures of DISs
No. Indicator
Indicator value by the cultivated crops and the
corresponding structures of DISs
Apple Plum Tomato Pepper Onion
1
Increase in annual gross income from
the sales of commodity products,
USD/ha
3240 4480 2000 2400 2800
2 Increase in depreciation payments,
USD/ha 291 322 136 216 228
3 Increase in income tax payments,
USD/ha 884 1125 828 1051 900
4 Investment USD/ha 4912 6248 4600 5840 5000
The calculations used as a discount rate the average rate on deposits for commercial
banks – 13%, an increase in depreciation payments – 15.5%, and an increase in income
tax payments – 18%. The calculation was made for a period of 10 years.
324 N. Frolenkova et al.
The generalised results of the calculation of commercial efficiency by main cultivated
garden and vegetable crops and the corresponding designs of Drip Irrigation Systems
(DIS) are given in Table 3.
Table 3 Major indicators of commercial efficiency of investment by the cultivated crops and
corresponding structures of DISs
No. Indicator
Indicator value by the cultivated crops and the
corresponding structures of DISs
Apple Plum Tomato Pepper Onion
1 Investment return index 2.26 2.47 1.19 1.12 1.78
2 Net discounted income, USD/ha 6185 9170 885 724 3925
3 Discounted payback period, years 2 2 4 4 3
4 Conclusions
Thus, the cultivation of high-productivity hybrids of vegetables and fruits when using
modern drip irrigation technologies provides high yields at the level of 75… 120 t/ha
along with the standard quality of products, namely production is transformed into a
stable profitable business. In this case, the use of modern methods of evaluating the
feasibility of investment will increase the validity of management decisions on the
selection of crops and their combinations, as well as will help attract investment from
different sources.
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