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

1. Improving the Effectiveness of Feed the Future Programs through the Use of Economic Analysis Feed the Future Monitoring and Evaluation Regional Workshop: West Africa Region, Accra, Ghana October 4-6, 2011

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 • 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. 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.

7. CBA & CEA of Feed the Future CBA first six countries being carried by teams composed of EGAT/EG & mission staff

8. 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

9. Training in CBA/CEA • Four-week course at Duke 2010 & 2011 • Four-week course planned for 2012 & 2013. • Six-week online course (requiring 5-6 hours of work each week) being developed jointly with the World Bank – for USAID officers and counterparts. • November 2011 three-day course on financial analysis of agricultural projects • One-week regional workshops in Ghana, Kenya, South Africa, Thailand & Guatemala planned for early 2012

10. What is Cost-Benefit Analysis?

11. 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 • Shadow prices: market failures and government policies may mean market prices do not reflect the true cost to the economy. • Costs & benefits are discounted to reflect the time in which the costs and benefits happen: time value of money

12. Time Value of Money NowLater Most people value money today more than the same amount in the future

13. Identification Concept Paper Detailed design M&E Project Cycle & CBA/CEA/BA: Earlier is more useful

14. Project Analysis: Should Include Complementary Types of Analysis R I S K A NA L Y S I S

15. 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

16. 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

17. Net Present Value Defined

18. 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.

19. Numerical Example

20. 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

21. 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

22. 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

23. “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

24. 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

25. Illustrative Farm Budget used for Estimating NPV & IRR from the Total Investment Point of View (TIP)

26. Graphical Representation of Net Cash Flow

27. 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 • Examples of non-tradables: transportation services, potable water & electric power • Adjust imports & exports by foreign exchange premium which results from commercial (trade) policy

28. 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

29. 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

30. 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

31. 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

32. CBA Can Provide Essential Inputs for M&E With project Net cash flow Without project Base line Years

33. 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

34. 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

35. Expanding Markets and Trade • Value of incremental sales (farm-level) • Can be obtained directly from farm cash flow

36. 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

37. 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.

38. Group Exercise

39. Calculating some FtF Direct Beneficiary Targets from a Farm Budget

40. 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?

41. Any questions? Juan Belt jbelt@usaid.gov Theodora Dell tdell@usaid.gov