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Abstract
Investment in irrigation infrastructure and technologies, particularly
those that reduce on-farm water use have become a major focus of
government programs both at a State and Commonwealth level.
Particular attention has been given to increasing the uptake of water
“saving” technologies among irrigators. The design of programs
capable of achieving government objectives at least cost requires an
understanding of farm level investment decisions. In this context, the
influence of uncertainty on decisions to invest in irrigation technology
and infrastructure is examined. The potential for uncertainty to
influence investment decisions via strategies to manage risk is
demonstrated using the method of real options valuation. The
approach is applied to case studies of investment in evaporation
mitigation technologies. It is shown that there are circumstances
where uncertainty surrounding the value of water savings is
significant enough to influence the decision to invest in water saving
technologies. The results also demonstrate that where uncertainty
exists, rates of subsidy to encourage faster uptake of these
technologies need to be higher than those indicated by traditional NPV
analysis. This is further exacerbated when irrigators are required to
relinquish water entitlements in return for the subsidy.