Approaches to Optimize Uzbekistan’s Investment in Irrigation Technologies

For many decades, Uzbekistan has been one of the largest cotton producers in the world. The irrigation water needed for these high production levels has been delivered by the massive diversion of the Amu Darya and Syr Darya rivers, which naturally flowed into the Aral Sea. This diversion for agriculture was the main cause of the rapid decline of the Aral Sea, which is at only 10% of its original size today. The traditional method of irrigation, which relies on simple open canal systems, is highly inefficient for managing the region’s critical and limited water resource. It has been qualitatively estimated, for example, that irrigation water lost to evaporation and system inefficiencies is quite large. With the future availability of water at risk for agriculture in Central Asia, primarily due to the loss of glacial volume from global warming, along with declines in seasonal snowpack, it is clear that new approaches to water management are needed. Any serious efforts to restore the Aral Sea and its ecological services would also reduce supplies of irrigation water for Uzbekistan. While regional conflict over water is unlikely, it must be considered since Uzbekistan is a downstream country among several that rely on the Amu Darya and Syr Darya rivers for most of their water supplies. To insure against these risks to cotton production and the underlying economy, better irrigation technologies are needed across Uzbekistan. However, these technologies can be quite expensive, especially given that water is still nearly free. In this case study we explore the use of real options analysis (ROA) to look for optimal investment strategies in efficient irrigation technologies in light of variable climate and policy uncertainties.