Presentation Transcript

1. Improving the Effectiveness of Feed the Future Programs through the Use of Economic Analysis

   Juan A. B. Belt Senior Economic Advisor Economic Growth OfficeUS Agency for International Development (USAID)
2. Key References CBA in more general terms Cost-Benefit Analysis for Investment Decisions Harberger, Arnold C. ; Jenkins, Glenn http://www.fiscalreform.net/index.php?option=com_content&task=view&id=892&Itemid=52 Economic Analysis of Investment Operations: Analytical Tools and Practical Applications, Belli, Pedro, et al, World Bank, 2001 http://www.fiscalreform.net/images/CBA/WB001%20Ec%20Anal%20of%20Investments.pdf Economic Analysis of Agricultural Projects, Gittinger, J. Price., 2nd ed. World Bank 1982 http://www-wds.worldbank.org/servlet/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&entityID=000178830_98101903531847 Farm Budgets, Brown, Maxwell, World Bank, 1979 Road Economic Decision Model World Bank Web Sitehttp://www4.worldbank.org/afr/ssatp/Resources/HTML/Models/RED_3.2/red32_en.htm CBA of agricultural projects CBA rural roads
3. Outline & Purpose Outline Resurgence of CBA in USAID CBA training at USAID How is EGAT/EG supporting the missions? What is cost-benefit analysis? Links with M&E (summary on next slide) Group exercise: obtaining beneficiary-level targets from a cash flow Purpose: Familiarize you with Cost Benefit Analysis concepts Inform you of how FtF is rolling out CBA in 20 countries Show you the links between CBA and M&E
4. Ex-post CBA Ex-ante CBA How CBA Complements M&E Provides summary statistic of social benefits Quantifies Helps choose best alternative Economic Internal Rate of Return (ERR) -Sets targets for direct beneficiaries -Identifies critical indicators
5. Some Initial Comments CBA/CEA and are not some esoteric subjects CBA simply adds up costs and benefits.It quantifies the development hypothesis. CBA should be a multidisciplinary team effort CBA should be intrinsic part of the design process & not carried out just at the end; it is essential for establishing realistic targets for direct beneficiaries A CBA/CEA will help improve resource allocation ensuring USAID activities contribute to the welfare of our clients The basic unit of analysis is the farm. The analyst must interact with typical farmers, leading farmers, extension agents, research stations, other donors, etc.
6. Resurgence of Cost Benefit Analysis MCC applies it to most programs USAID emphasis on better project design, effective use of resources & M&E World Bank Decline in use of CBA at Bank now being reversed with strong Board support CBA essential component of “results agenda” Bank ensuring that cost-benefit analysis is done with quality, rigor & objectivity CBA carried out early in the project cycle to ensure improved resource allocation
7. Feed the Future: Proposed Types of Analysis Beneficiary Analysis (BA) of entire program Computable General Equilibrium (CGE) modeling of policy interventions Cost Effectiveness Analysis (CEA) of nutrition interventions Cost Benefit Analysis (CBA) of agricultural production interventions CGE CEA CBA Note: percentages are illustrative.
8. Former USAID Chief Economist & leading CBA thinker explaining key concepts to Agency officers EGAT/EG Strong Emphasis on Training CBA effort led by USAID officers supplemented by consultants Formal training & on the job training for economists and other USAID staff All CBA teams include DLIs
9. Training in CBA/CEA Four-week course at Duke 2010 & 2011 Four-week course planned for 2012 & 2013. These courses will include small number of counterparts Six-week online course (requiring 5-6 hours of work each week) being developed jointly with the World Bank. Funding for 40 USAID officers & 40 counterparts November 2011 three-day course on financial analysis of agricultural projects Five one-week regional workshops in Ghana, Kenya, South Africa, Thailand & Guatemala planned for early 2012 (this will be discussed in more detail later)
10. CBA & CEA of Feed the Future CBA first six countries being carried by teams composed of EGAT/EG & mission staff
11. Plans for the Next 14 Countries: the Workshops January/February 2012 Workshops in: South Africa Kenya Ghana Thailand Guatemala Participants: USAID staff from neighboring missions with FtF programs Agenda: 2.5 days principles of constructing cash flows for CBA 2.5 days working on actual CBA with data brought by participants Facilitators/Presenters: EGAT/EG & Mission Staff
12. What is Cost-Benefit Analysis?
13. What is Cost-Benefit Analysis (CBA)? Cost-benefit analysis (CBA) is used both in government and business CBA is used to: determine whether a proposed project is worth doing choose between several alternative proposals It involves comparing the total expected costs of each option against the total expected benefits Costs & benefits are discounted to reflect the time in which the costs and benefits happen via a discount factor Shadow prices: market failures and government policies may mean market prices do not reflect the true cost to the economy. Analysts need to adjust for that, but not as critical as 20 years ago, as most countries are following better policies.
14. Identification Concept Paper Detailed design M&E Project Cycle & CBA/CEA/BA: Earlier is more useful
15. Project Analysis: Should Include Complementary Types of Analysis R I S K A NA L Y S I S
16. Why Cost-Benefit Analysis? CBA can help answer critical questions ex-ante Is this project beneficial for the economy/society? Is it sustainable? Who are the winners and who are the losers? Are we benefiting our target population, i.e. the poor? What are the risk factors for performance? Why is USAID funding it?Are the benefits to society higher than the costs? CBA is closely linked with Monitoring and Evaluation: Performance monitoring: CBA collects baseline data, generates targets & identifies critical variables to monitor Impact evaluation: CBA compares with- and without-project scenarios. Ex-post economic rate of return a good summary statistic
17. Time Value of Money NowLater Most people value money today more than the same amount in the future
18. Decision Criteria Net Present Value: a positive financial NPV means this project is profitable for the beneficiaries. A positive economic NPV means it will make the country better off IRR and ERR: Internal Rate of Return shows what is the return on investment for the various actors (beneficiaries). Economic Rate of Return shows the same for the economy at large
19. Net Present Value Defined
20. Internal rate of Return Defined The internal rate of return, ρ, is defined as the ρ that solves the equation: The IRR is the discount rate that would make the present value of the project equal to zero.
21. Numerical Example
22. CBA of Agricultural Projects Focus is on the farm unit and/or household Steps: Identify the potential beneficiaries: Geographically By main activity By other characteristics – poverty level, size of farm, gender, etc. Define “representative” farm units Develop farm cash flow “without the project” (financial & economic) Identify possible interventions & likely effects Quantify the cost of interventions: public & private Cash flow after interventions (financial & economic) Special case: road projects - savings in vehicle operating costs & time
23. CBA Generally is Incremental Analysis With project Net cash flow Without project Situation improving slowly If flat, no improvement without project If negative slope, a worsening situation without project Base line Years
24. Examples of Incremental Costs & Benefits Typical incremental costs: Labor: farmer’s own & hired labor Land Inputs such as seeds, fertilizers, pesticides Equipment: pumps, tools, etc. Transport costs farm-to-market Loan service Public works such as rural roads, irrigation Extension services R&D Typical incremental benefits: Increased production Quality improvements that lead to higher prices Increases in prices through change in time of sale made possible by storage, cold storage, Cost reductions through mechanization Reduced transport costs as a result of better roads Post-harvest losses reduced Greater capacity to borrow as a result of more secure tenure
25. “Representative” Farms From Farm Cash Flows to Project Flows Small farm (10,000 farms) Medium farm (500 farms) Large farm (10 farms) Aggregate cash flows Adjust flows for economic prices Add costs borne by government & donors TOTAL PROJECT FLOWS
26. Basic Concepts of Farm Budgeting Revenue: total volume X farm gate price Gross margin: revenue – variable costs Gross margin can be computed per acre, per animal, per fish pond, etc. Profit: gross margin – fixed costs (FC include inter alia depreciation) Net family income: profit + imputed costs of farm labor + on-farm consumption Net family income should be USAID’s main objective--M&E should capture this outcome
27. Illustrative Farm Budget used for Estimating NPV & IRR from the Total Investment Point of View (TIP)
28. Graphical Representation of Net Cash Flow
29. Aggregating Enterprise Level Flows “Representative” farms can be classified by size, type of crop or some other characteristic Main objective is to be able to develop a realistic project level cash flow Same analysis is carried out of other participants in the value chain: Brokers & other hubs Input suppliers, etc
30. From Financial to Economic Flows #1 Eliminate all transfer payments (taxes & subsidies) Determine if the good is tradable If the country is a net exporter of the good in question, the appropriate border price is the FOB price of exports—also known as the export parity price If the country is a net importer, the appropriate border price is the CIF price of imports plus internal transport costs—or the import parity price For non-tradables, may need to estimate consumer surplus Main goods where there may be a need to estimate consumer surplus are transportation services, potable water & electric power Adjust imports & exports by foreign exchange premium which results from commercial (trade) policy
31. From Financial to Economic Flows #2 Value externalities: Positive – e.g. knowledge spillovers Negative – e.g. environmental Include all costs incurred by government & donors, e.g. extension services that are free to the farmer & roads (untolled) Include costs necessary to strengthen key institutions Include costs necessary to compensate individuals affected negatively, e.g. relocation of farmers in the area of a reservoir
32. Economic & Financial NPVs USAID could fund but need to ensure sustainability USAID should fund NegativeFinancial NPV Positive Financial NPV In general, USAID should NOT fund but should promote policy change Would not be funded Negative Economic NPV Positive Economic NPV
33. Economic & Financial NPVs #2 FNPV>0, ENPV<0 Examples: (1) output price is higher in financial terms because the of an import duty (2) input price is lower in financial terms because of subsidy USAID should not support as project has negative effect on welfare USAID should promote policy reform to reduce distortions FNPV<0, ENPV>0 Example: electrification project with that generates consumer surplus USAID should finance if there is there is assurance that fiscal resources will be made available to ensure sustainability
34. Road Projects: Benefits Savings in vehicle operating costs (VOC) Reduced road user travel times Decrease in number of accidents Environmental effects
35. Road Projects: Key Concepts Normal: traffic passing along the road in the absence of any new investment Generated: traffic due to a decrease in transport costs, i.e. traffic associated with existing users driving more frequently or driving further than before, or with new trips undertaken Diverted: traffic that diverts to the project road from an alternative road while keeping the same origin and destination Induced: traffic diverted to the project road from other roads, changing its origin or destination, due to increased development activity in the road’s zone of influence brought about by the project.
36. HDM-4 vs. RED
37. Vehicle operating costs What HDM-4 & RED Measure Benefits (consumer surplus) Cost 1 Cost 2 Normal traffic Generated traffic Traffic
38. Generated Traffic <> Lower Transport Costs Induced Traffic <> Local Economic Development(Archondo-Callao, World Bank)
39. Risk Analysis Sensitivity Analysis: effect on NPV of changing the values of some parameters such as yields or prices Scenario Analysis: effect on NPV of changes in all parameters. Usually involves defining a base scenario, a bad, and a good scenario Monte Carlo analysis: allows for the greatest variation in parameters & also for interplay among parameters. It is a problem-solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations  Risk analysis identifies the variables that have the greatest potential impact on outcomes. This is useful for: Project design: points to requirements for information Monitoring: identifies variables that need to be monitored closely
40. Cost-Benefit Analysis Monitoring & Evaluation CBA/CEA & M&E CBA quantifies the development hypothesis CBA can help establish realistic targets for direct beneficiaries CBA can identify key variables for monitoring Ex-post CBA provides summary of benefits to society
41. CBA Can Provide Essential Inputs for M&E With project Net cash flow Without project Base line Years
42. FtF First-Level Objective & CBA First-Level Objective: Inclusive agriculture sector growth Indicators: Agricultural sector GDP Per-capita expenditures of rural households GDP per farm is equal to farm sales minus the cost of purchased inputs, or equal to the returns to labor, capital & land. It can be estimated directly from the farm’s cash flows This indicator comes from the National Income Accounts
43. Improved Agricultural Productivity Gross margins per unit of land or animal of selected product This indicator may not necessarily provide you information on the increased welfare of beneficiaries
44. Expanding Markets and Trade Value of incremental sales (farm-level) Can be obtained directly from farm cash flow
45. Increased Investment in Agriculture & Nutrition-Related Activities Value of new private investment in agriculture sector or value chain Can be obtained from budgets of farms and other enterprises # of local firms & CSOs engaged in food security operating sustainably The only way to determine whether the firms are sustainable is by examining the cash flow
46. Increased Employment Opportunities in Targeted Value Chains Number of jobs attributed to FtF programs The jobs directly attributable to FtF can be obtained from the farm cash flow. The indirect jobs created could be estimated by making some additional assumptions.
47. Group Exercise
48. Calculating some FtF Direct Beneficiary Targets from a Farm Budget
49. Exercise: Cash Flow & Beneficiary Level Targets What is the income per capita per day of the household What is the increase in income per capita per day? Will the farm family still be considered poor in year 8? What is the gross margin per hectare according to the FtF definition? What are the incremental sales (year 8 compared to without the project) How much new investment per farm? How many full time jobs created (for hired labor)? How many more hours is the farm family working?

50. Any questions?

    jbelt@usaid.gov