Economic analysis of agricultural projects

'Y> % ■ W i -A' 4- ECONOMIC m

ANALYSIS C p i

AGRICULTURAL

PROJECTS

Second Edition,Completely Revised and Expanded

J. PRICE GITTINGER

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Economic Analysis

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Agricultural Projects

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Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

Economic Analysis

Agricultural Projects

Second Edition,

Completely Revised and Expanded

PUBLISHED FOR

THE ECO N O M IC DEVELOPMENT INSTITUTE

OF THE W ORLD BANK

T h e Jo h n s H opkins U niv ersity Press

BALTIMORE AND LONDON

J. Price Gittinger

No. 0 08 I

Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

SECOND ED ITION, COMPLETELY REVISED AND EXPANDED,

COPYRIGHT © 1982 BY THE INTERNATIONAL BANK

FOR RECONSTRUCTION AND DEVELOPMENT / THE WORLD BANK

1818 H STREET, N .W ., W ASHINGTON, D .C . 20433, U .S.A .

ALL RIGHTS RESERVED

M ANUFACTURED IN THE UNITED STATES OF AMERICA

The Johns Hopkins University Press

Baltimore, Maryland 21218, U.S.A.

The views and interpretations in this book are the author's and should not be attributed to

the World Bank, to its affiliated organizations, or to any individual acting in their behalf.

e d it o r Jam es E. McEuen

p r o d u c t io n Christine Houle

f ig u r e s Raphael Blow

in d e x Ralph Ward and James Silvan

b o o k d e s ig n Brian J. Svikhart

c o v e r d e s ig n Joyce C. Eisen

Photo credits-. World Bank photographs (facing pages) by Hilda Bijur, 437; William Gra￾ham, 431; Per Gunvall, 188; Yosef Hadar, 242; Edwin Huffman, papercover, 298; Jaim e

Martin-Escobal, 42,411 ; Peter C. Muncie, 64; James Pickerell, 286; Tomas Sennett, frontis￾piece, 362, 445, 457; and Ray Witlin, 2, 84, 214.

Frontispiece: Milking tethered sheep in Syria.

• Karya ini tersedia pula dalam Bahasa Indonesia dengan judul Analisa Ekonomi Proyek￾Proyek Pertanian diterbitkan oleh Penerbit Universitas Indonesia (Jin. Salemba Raya 4,

Jakarta).

• Une version en français de cet ouvrage a été publiée sous le titre Analyse économique des

projets agricoles, Editions Economica (49, rue Héricart, 75015 Paris, France; distributeur au

Canada: Le Diffuseur, C.P. 85, Boucherville, Québec J4B 5E6).

• Esta obra también ha sido publicada en español bajo el título Análisis económico de

proyectos agrícolas, por la Editorial Tecnos (distribución en España: Grupo Editorial, S.A.,

Don Ramón de la Cruz 67, Madrid 1; distribución en otros países: GSR Internacional,

Villafranca 22, Madrid 28, España).

f* j ----- ^ 3 ÍL * _ .^ a Jl ¡üá I IL-, 4—- I «ÁJk ^ t»

*pl --*ÍI _ " ÏL-eljjJl I J ., h. . )l "

• Á— »y < iy k L J L J l . ‘ i b j l __ 1

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First hardcover and paperback printing July 1982

Second paperback printing April 1984

Library o f Congress Cataloging in Publication Data:

Gittinger, J. Price (James Price), 1928—

Economic analysis of agricultural projects.

(e d i series in economic development)

Bibliography: p. 445

Includes index.

1. Underdeveloped areas—Agriculture—Cost

effectiveness. 2. Agriculture—Economic aspects.

I. Title. II. Series.

HD1417.G58 1982 338.1 '3 82-15262

is b n 0-8018-2912-7 AACR2

is b n 0-8018-2913-5 (pbk.)

Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

Foreword

To i n c r e a s e t h e g r o w t h a n d e f f ic ie n c y of the ag ricu ltu ral an d ru ral

sectors of the developing countries is of prim e concern to the in te rn a ­

tio n al com m unity. M ore rap id progress is crucial not only to im prove the

q u ality of life of the 60 percent of the w orld's p opulation earning its living

from ru ra l labor, b u t also to ensure adequate food supplies for all nations

in th e face of ra p id w orldw ide p opulation grow th an d rising incom es that

lead people to w an t m ore and better-q u ality food. Unless dom estic food

pro d u ctio n in developing countries steadily increases, these req u ire￾m en ts w ill place u n b earab le strain s on the w o rld ’s food p roduction and

d istrib u tio n system —th reaten in g w idespread m aln u tritio n in the

poorest co u n tries and adding to inflationary pressures in the industrial

nations.

In the next few years, ag ricu ltu re an d ru ral developm ent w ill be a

p rio rity in the lending p ro g ram s of The W orld B ank an d In ternational

D evelopm ent A ssociation (id a ). The W orld B ank w ill m ain tain its su p ­

p o rt of m em b er governm ents w ith technical expertise an d a continuing

flow of resources. It w ill help governm ents to expand irrig atio n system s

provide m ore effective extension services, increase food storage capacity

d issem in ate agronom ic technology, an d im prove the m arketing and dis

trib u tio n of a g ricu ltu ral goods.

T his effort w ill req u ire large q u an tities of scarce resources—both peo

pie an d m oney—from o ur m em ber n atio n s and from the B ank itself. Wt

m ust use these resources efficiently. Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

SECOND ED ITION, COMPLETELY REVISED AND EXPANDED,

COPYRIGHT © 1 9 8 2 BY THE INTERNATIONAL BANK

FOR RECONSTRUCTION AND DEVELOPMENT / THE W ORLD BANK

1 8 1 8 H STREET, N .W ., W A SHINGTON, D .C . 2 0 4 3 3 , U .S.A .

ALL RIGHTS RESERVED

M ANUFACTURED IN THE UNITED STATES OF AMERICA

The Johns Hopkins University Press

Baltimore, Maryland 21218, U.S.A.

The views and interpretations in this book are the author's and should not be attributed to

the World Bank, to its affiliated organizations, or to any individual acting in their behalf.

e d it o r Jam es E. McEuen

p r o d u c t io n Christine Houle

f ig u r e s Raphael Blow

in d e x Ralph Ward and James Silvan

BOOK DESIGN Brian J. Svikhart

c o v e r d e s ig n Joyce C. Eisen

Photo credits: World Bank photographs (facing pages) by Hilda Bijur, 437; W illiam Gra￾ham , 431; Per Gunvall, 188; Yosef Hadar, 242; Edwin Huffman, papercover, 298; Jaim e

M artin-Escobal, 42,411 ; Peter C. Muncie, 64; James Pickerell, 286; Tomas Sennett, frontis￾piece, 362, 445, 457; and Ray Witlin, 2, 84, 214.

Frontispiece: Milking tethered sheep in Syria.

• Karya ini tersedia pula dalam Bahasa Indonesia dengan judul Analisa Ekonomi Proyek￾Proyek Pertanian diterbitkan oleh Penerbit Universitas Indonesia (Jin. Salem ba Raya 4,

Jakarta).

• Une version en français de cet ouvrage a été publiée sous le titre Analyse économique des

projets agricoles, Editions Economica (49, rue Héricart, 75015 Paris, France; distributeur au

Canada: Le Diffuseur, C.P. 85, Boucherville, Québec J4B 5E6).

• Esta obra tam bién ha sido publicada en español bajo el título Análisis económico de

proyectos agrícolas, por la Editorial Tecnos (distribución en España: Grupo Editorial, S.A.,

Don Ramón de la Cruz 67, Madrid 1; distribución en otros países: GSR Internacional,

Villafranca 22, Madrid 28, España).

f l J — ¡ U- J LJ L- À— I j j J l ^ 4 - w :. v ^ >

<f l j — - "i - í l j j J l J „. K-. II " o 1

• ' « y » L J U l . « i U J I |— i,

* * + r u. * t

First hardcover and paperback printing July 1982

Second paperback printing April 1984

Library o f Congress Cataloging in Publication Data:

Gittinger, J. Price (James Price), 1928-

Economic analysis of agricultural projects.

(e d i series in economic development)

Bibliography: p. 445

Includes index.

1. Underdeveloped areas—Agriculture—Cost

effectiveness. 2. Agriculture—Economic aspects.

I. Title. II. Series.

HD1417.G58 1982 338.1 '3 82-15262

is b n 0-8018-2912-7 AACR2

is b n 0-8018-2913-5 (pbk.) Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

Foreword

To i n c r e a s e t h e g r o w t h a n d e f f i c i e n c y of the ag ricu ltu ral an d ru ral

secto rs of the developing countries is of p rim e concern to the in te rn a ­

tio n al co m m unity. M ore ra p id progress is crucial not only to im prove the

q u a lity of life of the 60 p ercen t of the w o rld ’s p o p u latio n earning its living

from ru ra l labor, b u t also to ensure ad eq u ate food supplies for all n ations

in th e face of ra p id w orldw ide population grow th a n d rising incom es th a t

lead people to w an t m ore and b etter-q u ality food. U nless dom estic food

p ro d u ctio n in developing countries steadily increases, these req u ire￾m en ts w ill place u n b earab le strain s on the w orld's food pro d u ctio n and

d istrib u tio n system —th reaten in g w idespread m aln u tritio n in the

p o o rest co u n tries and add in g to inflationary pressures in the in d u strial

n ations.

In the next few years, ag ricu ltu re an d ru ral developm ent w ill be a

p rio rity in the lending p ro g ram s of The W orld B ank an d In tern atio n al

D evelopm ent A ssociation (id a ). The W orld B ank will m ain tain its su p ­

p o rt of m em b er governm ents w ith technical expertise an d a continuing

flow of resources. It w ill help governm ents to expand irrig atio n system s,

p rovide m ore effective extension services, increase food storage capacity,

d issem in ate agronom ic technology, and im prove the m ark etin g an d d is￾trib u tio n of ag ricu ltu ral goods.

T his effort w ill req u ire large q u an tities of scarce resources—both peo￾ple an d m oney—from o ur m em b er natio n s and from the B ank itself. We

m ust use these resources efficiently.

v

Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

v i FO REW O RD

Since its founding th e B ank h as encouraged, indeed in sisted upon, th e

responsible p re p ara tio n of the developm ent p ro jects for w hich it lends.

This book is one m ore im p lem en t by w hich the a g ric u ltu ra l w ork of the

B ank is carried out.

The B ank shares its experience an d skill w ith m em b er governm ents

an d th e ir technical an d ad m in istrativ e staffs so th a t w ise a n d careful

in vestm ent decisions w ill yield higher n atio n al incom es a n d a b e tte r

q u ality of life for the people of the developing w orld. In no secto r is this

sh arin g of inform ation m ore im p o rtan t th an in a g ricu ltu re a n d ru ral

developm ent, w here sound investm ent has such effects on th e lives of

m illions.

The E conom ic D evelopm ent In stitu te (e d i) has played an im p o rta n t

role in d issem in atin g the B ank's experience. Since its founding in 1954,

m ore th an 10,000 senior officials from m em b er governm ents have

atten d ed e d i courses both a t h ead q u arters in W ashington, D.C., an d

overseas, e d i has helped dozens of in stitu tio n s th ro u g h o u t the w o rld to

provide courses in econom ic m anagem ent and p roject analysis in th eir

ow n cu rricu la.

E conom ic Analysis o f Agricultural Projects derives from the B ank's

concern to h asten a g ricu ltu ral and ru ral developm ent a n d from the

course activities of e d i. The book presen ts a sound, careful m ethodology

for p roject analysis based on the efforts of ag ricu ltu ral sp ecialists in the

B ank and th ro u g h o u t the w orld. C are has been taken to m ake th e tech n i￾cal topics discussed u n d erstan d ab le to those w ith o u t ad v an ced train in g

in econom ics. The book w as w ritten to be used e ith e r in in d iv id u al stu d y

o r in the classroom .

We are pleased th a t the first ed ition has enjoyed such w ide acceptance.

Since it w as pub lish ed in 1972, it has becom e a sta n d a rd text for those

plan n in g ag ricu ltu ral projects an d teaching pro ject an alysis. In offering

th is revised edition, w ith ex panded coverage an d the ad d itio n of m ore

recent experience, we hope to m ake its c o n trib u tio n even m ore effective.

A. W. C la u s e n

President

The W orld B ank

Washington, D C.

June 1982

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Contents

F o re w o rd by A. W. C lausen v

P reface x iii

U sin g T h is B ook x v ii

p a r t o n e The Project Concept

1. Projects, The Cutting Edge o f Development 3

What Is a Project? 4

Plans and Projects 6

Advantages of the Project Format 7

Limitations of the Project Format 9

Aspects of Project Preparation and Analysis 12

Technical aspects 12

Institutional-organizational-managerial aspects 13

Social aspects 15

Commercial aspects 16

Financial aspects 16

Economic aspects 18

The Project Cycle 21

Identification 21

Preparation and analysis 22

Appraisal 24

Implementation 24

Evaluation 25

Accuracy of Agricultural Project Analyses 26

Economic effects 27

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v iii C O N TEN TS

Effect on incomes o f rural poor 28

Implementation experience 28

Why Agricultural Project Analyses Prove Wrong 29

Problems o f project design and implementation 29

Problems o f poor project analysis 35

Steps in Project Analysis 37

2. Identifying Project Costs and Benefits

Objectives, Costs, and Benefits 43

"W ith" and "W ithout” Comparisons 47

Direct Transfer Payments 50

Costs of Agricultural Projects 52

Physical goods 52

Labor 53

Land 53

Contingency allowances 53

Taxes 54

Debt service 54

Sunk costs 55

Tangible Benefits of Agricultural Projects 56

Increased production 56

Quality improvement 57

Change in time o f sale 57

Change in location o f sale 57

Changes in product form (grading and processing) 58

Cost reduction through mechanization 58

Reduced transport costs 58

Losses avoided 58

Other kinds o f tangible benefits 59

Secondary Costs and Benefits 59

Intangible Costs and Benefits 61

p a r t t w o Financial Aspects of Project Analysis

3. Pricing Project Costs and Benefits

Prices Reflect Value 65

Finding Market Prices 69

Point o f first sale and farm-gate price 70

Pricing intermediate goods 71

Other problems in finding market prices 72

Project boundary price 74

Predicting Future Prices 74

Changes in relative prices 75

Inflation 76

Prices for Internationally Traded Commodities 77

Financial Export and Import Parity Prices 78

4. Farm Investm ent Analysis

Objectives of Financial Analysis 86

Assessment o f financial impact 86

Judgment o f efficient resource use 86

Assessment o f incentives 86

Provision o f a sound financing plan 87

Coordination o f financial contributions 87

Assessment o f financial management competence 87

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CO N TEN TS

Preparing the Farm Investment Analysis 89

Elements of Farm Investment Analysis 95

Accounting convention for farm investment analysis 95

Farm resource use 99

Farm production 111

Farm inputs 119

Farm budget 127

Net Benefit Increase 140

Unit Activity Budgets 141

Computing Debt Service 147

Simple interest 147

Repayment o f equal amounts o f principal 150

Equal installments 153

Equal installments with interest capitalized 157

Declining real burden o f debt service 158

Appendix. Herd Projections 163

Terminology and definitions 164

Computational conventions 164

Technical coefficients 165

Animal units 174

Determining the stable herd 175

Tracing the herd growth 179

Machine computation 183

Feed budget 183

5. F inancial A nalysis o f Processing Industries

Balance Sheet 192

Income Statement 195

Sources-and-Uses-of-Funds Statement *198

Financial Ratios 202

Efficiency ratios 203

Income ratios 206

Creditworthiness ratios 207

Financial Rate of Return 209

6. A n a lyzin g Project E ffects on G overnm ent R eceipts

a n d E xpenditures

Government Cash Flow 217

Foreign Exchange Flow 220

Cost Recovery 222

Objectives o f cost recovery 223

Setting the level o f water charges and benefit taxes 225

Measuring cost and rent recovery 226

Joint Cost Allocation 233

General principles o f cost allocation 233

Separable costs-remaining benefits method 234

p a r t t h r e e Economic Aspects of Project Analysis

7. D eterm ining E conom ic Values

Determining the Premium on Foreign Exchange 247

Adjusting Financial Prices to Economic Values 250

Step 1. Adjustment for direct transfer payments 251

Step 2. Adjustment for price distortions in traded items 251

Step 3. Adjustment for price distortions in nontraded items 253

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X C O N TEN TS

Indirectly traded items 265

Economic export and import parity values 269

Trade Policy Signals from Project Analysis 271

Valuing Intangible Costs and Benefits 279

Decision Tree for Determining Economic Values 284

8- Aggregating Project A cco u n ts 287

Aggregating Farm Budgets 287

Other Aggregation Issues 289

Appendix. A Diagrammatic Project Model 291

Measures o f national income 292

Value added 293

Project model 293

p a r t f o u r Measures of Project Worth

9. Comparing Project Costs and Benefits 299

Undiscounted Measures of Project Worth 300

Ranking by inspection 300

Payback period 302

Proceeds per unit o f outlay 302

Average annual proceeds per unit o f outlay 303

Average income on book value o f the investment 303

The Time Value of Money 304

Interest 305

Compounding 305

Discounting (present worth) 308

Present worth o f a stream o f future income 309

Discounted Measures of Project Worth 313

Choosing the discount rate 313

Discounting convention for project analysis 315

Derivation of Incremental Net Benefit (Incremental Cash Flow) 315

Net Present Worth 319

Internal Rate of Return 329

Computing the internal rate o f return 332

Reinvestment o f returns 339

More than one possible internal rate o f return 339

Point in time for internal rate o f return calculations 341

Benefit-Cost Ratio 343

Net Benefit-Investment Ratio 346

Selecting among Project Alternatives 350

What Happened to Depreciation? 351

Length of the Project Period 355

How Far to Carry Out Computations of Discounted Measures 356

Comparisons among Discounted Measures 358

Appendix. Mathematical Formulations of Discounted Measures

of Project Worth 361

10. Applying D iscounted M easures o f Project W orth 363

Sensitivity Analysis (Treatment of Uncertainty) 363

Price 364

Delay in implementation 364

Cost overrun 364

Yield 365

Technique o f sensitivity analysis 365

Switching Value 371 Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn

C O N T E N T S XI

Choosing among Mutually Exclusive Alternatives 373

Entirely different projects 377

Different scales o f a project 379

Different timing o f a project 381

Choice between technologies (crossover discount rate) 383

Additional purposes in multipurpose projects 388

Applying Contingency Allowances 393

Replacement costs 395

Residual value 397

Domestic resource cost 398

Calculating Measures of Project Worth Using Current Prices 400

Calculator Applications in Project Analysis 401

Appendixes

A. G uidelines fo r Project Preparation Reports

1. Summary and Conclusions 412

2. Introduction 412

3. Background 413

3.1 Current economic situation 413

3.2 The agricultural sector 413

3.3 Development and social objectives 413

3.4 Income distribution and poverty 413

3.5 Institutions 414

4. Project Rationale 414

5. The Project Area 414

5.1 Physical features 414

5.2 Economic base 415

5.3 Social aspects 416

5.4 Infrastructure 417

5.5 Institutions 417

6. The Project 417

6.1 Project description 418

6.2 Detailed features 418

6.3 Project phasing and disbursement period 419

6.4 Cost estimates 420

6.5 Financing 421

6.6 Procurement 422

6.7 Environmental impact 422

7. Organization and Management 422

7.1 Credit administration 423

7.2 Marketing structure 423

7.3 Supply o f inputs 424

7.4 Land reform 424

7.5 Research 424

7.6 Extension 424

7.7 Cooperatives 424

7.8 Farmer organization and participation 424

8. Production, Markets, and Financial Results 425

8.1 Production 425

8.2 Availability o f markets 425

8.3 Farm income 426

8.4 Processing industries and marketing agencies 426

8.5 Government agencies or project authorities 426

8.6 Cost recovery 426

411

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