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Cost Benefit Analysis – Pacific Example 2

Cost Benefit Analysis – Pacific Example 2. Cost-Benefit Analysis Workshop 23-25 April 2012 Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community. Example 2: Soil health preservation in Taveuni.

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Cost Benefit Analysis – Pacific Example 2

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  1. Cost Benefit Analysis – Pacific Example 2 Cost-Benefit Analysis Workshop 23-25 April 2012 Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community

  2. Example 2: Soil health preservation in Taveuni • Fictional example but inspired by a set of ACIAR field trials on soil health preservation among taro farmers in Taveuni • This is an ex-post CBA, using fictional data that would have been collected AFTER field trials • Trials of 4 different techniques, over a 5 year time period

  3. Problem Statement • Taro yields in Taveuni (major taro producer) are on the way down due to degrading soil health • Natural predators of crop pests/nematodes cannot work in degraded soil • Nutrient levels become depleted. • Over time this could eliminate profits for taro farmers and increase poverty • Also hurts production of an important Fiji export crop

  4. Objective • To preserve taro yield and hence profit at a level that is sustainable, by using techniques that preserve soil health

  5. The “projects” • Treatment A – e.g. Lime/Macuna/Soil Test Fertilizer/lime recommendations • Treatment B - Macuna /Fert-NPK(13:13:21) + Biobrew • Treatment C - Lime/Macuna/Fish manure + Rock P • Control – no treatment or farmer’s usual tratment

  6. What might the benefits of preserving soil health be?

  7. “With and without” Analysis • Benefits with each treatment: • Increased taro yield and therefore revenue

  8. Is this the case?

  9. Benefit of soil health preservation = B - A

  10. What might the costs of preserving soil health be?

  11. “With and without” Analysis • Costs with each treatment: • Labour • Substances applied to the soil e.g. macuna seed or fertiliser • Any special tools needed for application over and above the ‘control’ • In the short run, revenue could decrease if fallow periods are used, but in the long run it will be sustained

  12. What data do we need to measure those costs and benefits?

  13. Data generation

  14. Data generation

  15. Calculating Costs and Benefits • What discount rate will you use? • What time period is the relevant one? • What assumptions do we need to make?

  16. Calculating Costs and Benefits • What discount rate will you use? • 7% • What time period is the relevant one? • All time periods in which data are measured. In our example this is 5 years. • What assumptions do we need to make? • All differences between control and treatment can be attributed to the treatment (and not other factors) – requires a sound field trial design

  17. Data - taro yields per hectare

  18. Using the data, calculate the Undiscounted Costs and Benefits of each soil health preservation treatment

  19. calculate the discounted net present value of each soil health preservation treatment

  20. Sensitivity analysis

  21. Uncertainty and Sensitivity Analysis • Over what? • Prices of key inputs • Not much else: a field trial leaves little room for uncertainty • If we were to extrapolate the benefits of the best treatment to a certain % of Taveuni’s taro industry, there may be uncertainty over • Number of farmers who take up the technique • Extension and training costs • How well the farmers apply the technique • Suitability of soil to the technique compared to the soils used in the field trial

  22. Uncertainty and Sensitivity Analysis • Do a sensitivity analysis of a doubling of all costs • Perhaps due to price increases • In real life we would be more precise – e.g. what if the price of mucuna seed doubles

  23. Conclusion • Treatment B is the most cost-effective treatment from the perspective of the farmers • Treatment B is still beneficial even when costs double

  24. Thank you Jonathan Bower Resource Economist, Land Resources Division Secretariat of the Pacific Community jonathanb@spc.int +679 337 0733 – ext 35425 lrdeconomics.wordpress.com Also available from ‘information and networks’ tab at www.spc.int/lrd TANGIO TUMAS/TENKYU TRU/THANK YOU/VINAKA VAKALEVU/SULANG/KO RABWA/TUBWA KOR/MALO 'AUPITO/FA'AFETAI TELE LAVA/MERCI BEAUCOUP/KIA MANUIA/KIAORA KOE/KOMOL TATA/FAKAUE LAHI/SI YU'US MA'ÅSE‘/TEKE RAOI/KALANGAN/FAKAFETAI

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