Cost Benefit Analysis – Pacific Example 2

Cost-Benefit Analysis Workshop23-25 April 2012

Jonathan Bower, Resource Economist, Land Resources Division, Secretariat of the Pacific Community

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

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

Objective

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

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

WHAT MIGHT THE BENEFITS OF PRESERVING SOIL HEALTH BE?

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

Is this the case?

Benefit of soil health preservation = B - A

WHAT MIGHT THE COSTS OF PRESERVING SOIL HEALTH BE?

“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

WHAT DATA DO WE NEED TO MEASURE THOSE COSTS AND BENEFITS?

BENEFIT Data required Source of data

COST Data required Source of data

DATA GENERATION

BENEFIT Data required Source of data

Increase in revenue, sustained over time

Market price of taro, marketable taro yield from both control and all treatment scenarios

Field trial data collection, farmer survey or domestic market survey

COST Data required Source of data

Labour Labour time over and above ‘control’ scenario

Field trial data collection

Inputs Price and quantity of inputs over and above ‘control’ scenario

Field trial data collection, receipts from input purchase

DATA GENERATION

• What discount rate will you use?• What time period is the relevant one?• What assumptions do we need to make?

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

Calculating Costs and Benefits

Data - taro yields per hectareY0 Y1 Y2 Y3 Y4

Taro yields (kg)

Control 4000 3000 2500 2100 1900

Treatment A 4000 3000 2500 2100 1900

Treatment B 3500 3500 3500 3500 3500

Treatment C 3500 3500 3500 3500 3500

USING THE DATA, CALCULATE THE UNDISCOUNTED COSTS AND BENEFITS OF EACH SOIL HEALTH PRESERVATION TREATMENT

CALCULATE THE DISCOUNTED NET PRESENT VALUE OF EACH SOIL HEALTH PRESERVATION TREATMENT

SENSITIVITY ANALYSIS

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

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

Conclusion

• Treatment B is the most cost-effective treatment from the perspective of the farmers

• Treatment B is still beneficial even when costs double

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

Thank you

Jonathan BowerResource Economist, Land Resources DivisionSecretariat of the Pacific Communityjonathanb@spc.int+679 337 0733 – ext 35425

lrdeconomics.wordpress.comAlso available from ‘information and networks’ tab at www.spc.int/lrd