Using cost-benefit analysis to enhance our understanding of livestock management practices in the lowland of Ethiopia

A cost-benefit analysis (CBA) is a systematic approach used for estimating the benefits and costs (or strengths and weaknesses) of different projects versus their alternatives. These include business investments and the construction of dams or roads. In essence, a CBA helps determine the most cost-effective approach to obtaining a given benefit at the lowest cost. It can also be used retrospectively to learn, improve, and compare a course of action or to analyze benefits compared to the cost of a decision, project or policy.

At the International Center for Tropical Agriculture (CIAT), we commonly use CBAs to i)  determine if an investment or a decision is economically sound for farmers, and, if economically sound, ascertain if – and by how much – its benefits outweigh the costs, as compared to business-as-usual practices, ii) provide a basis for comparing agricultural investments to the expected costs of each investment with its total expected benefits. With this in mind, the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), led by CIAT, developed an idea aimed at enhancing institutional capacities and developing a systematic program and projects relating to Climate-Smart Agriculture (CSA). CSA stems from the need to provide innovative solutions to the complex trade-offs between increasing agricultural production, enhancing the quality of production, increasing resilience to climate and other environmental factors, and promoting low-emissions agriculture. Under this alliance, and financed by the International Fund for Agricultural Development (IFAD), a CBA tool – both online and offline versions –  was recently developed and made available for use by all free of cost.

While there is a debate about uncertainties associated with CBA results, especially those computed at the micro-level, in areas such as climate-change-related policy; CBA analyses are still crucial for policy- and decision-makers looking for appropriate alternatives for investment. This is because accurate estimates may lead to better policies and strategic investment at different scales (farm level, watershed level, national level). This post reports some preliminary results from a CBA study conducted recently by CIAT in the lowland of Ethiopia. More detailed and complete results will be posted after March 2019.

Restored degraded land – with pasture for livestock to graze on during the drought period in Yabello district, Southern part of Ethiopia. (Photo courtesy of the Decision and Policy Analysis Research Area of the International Center for Tropical Agriculture – Africa regional office).

In this study, the three studied practices for improved livestock management were improved rangeland, restoration of degraded land, and fodder cropping (see table). The practices have been in operation for at least three years, placing the assessment in an intermediate viewpoint when compared to the projected lifetime of all the three, which is typically 15–20 years.

This CBA analysis combines a quantitative and qualitative assessment of the costs and benefits of three improved livestock management practices compared to business as usual. The approach involved extensive household surveys and collection of data from stakeholders on costs and benefits associated with these practices, as well as market information and the lifecycle periods. The information was used to prepare the retrospective cost-benefit analysis. The collected information was also used to construct the practice history before and after the introduction of improved livestock management practice and to assess the effect of the improved practice on crop and livestock yield and their associated costs. The approximate area under the three practices was estimated, and this helped compute the expected environmental changes (i.e., carbon sequestration), even from an ex-post perspective. The environmental impacts were then translated into monetary terms using values for sequestered carbon per hectare per year. The information was also used to determine whether the practices were beneficial at both private and social point of view.

The objective of this CBA evaluation exercise was not limited to verifying the cost and benefit of the business as usual scenario as compared to the improved livestock management practices. Rather, the goal was to analyze the long-term cost and benefits of the three improved livestock management practices and to estimate their contribution to the quality of life (i.e., environment), and well-being, such as household income. For this reason, the methodology goes beyond a simple update of the ex-ante cost-benefit analysis with observed data. Rather, the benefit of this CBA evaluation exercise comes from performing a new cost-benefit analysis from today’s standpoint and trying to understand whether the practices are worth promoting for adoption or scaling up.

The CBA evaluation framework consists of nine building blocks, which are schematically presented in the figure below. This framework was consistently applied to the three practices.

Our preliminary findings suggest that the three practices are beneficial from a private and social point of view. That is, the economic Net Present Value estimated ex ante was positive for all the three practices. However, only one practice, fodder cropping for livestock supplementation, was fully beneficial without risks of profit falling below the discount rate used (i.e., 12%). In a practice such as fodder cropping, the crops and livestock are integrated leading to effective use of the resources on the farm: crop residues supplement livestock diets, while livestock manure is used on cropland in return. The grain yield is from crops, and livestock and livestock products are used as food for human consumption. The effectiveness of the fodder cropping practice and the high net present value is often influenced by the quick response of livestock and livestock products due to supplementation with fodder and crop residues. In general, however, we can say that based on our findings the three improved livestock management practices can be scaled up because their benefits are higher compared to those of the business as usual.

The bottom line of these preliminary results is that cost-benefit analysis is critical for any decision relating to practices aimed at development or a project that has already started but needs to be redesigned or improved. Notably, this can be done through astute hindsight: learning from the past. Retrospection is a reflective (at times bittersweet) process of learning. In this regard, retrospective or intermediate cost-benefit analysis (when appropriately implemented and integrated with qualitative evidence) is a valuable tool for policy learning. If the systematic retrospective exercise is part of the project cycle and feeds into the decision-making process, the lessons learned can be used to improve the ex-ante appraisal process by taking corrective action to errors that may arise due to poor decisions and spur result-oriented behavioral change.

Stanley Karanja Ng’ang’a is an agricultural development economist at the Decision and Policy research area of the International Center for Tropical Agriculture, where he works as the focal point on Cost-benefit analysis-related projects in Africa.

Each year, CIAT organizes a Training for Cost-Benefit Analysis of Investment Projects, which admits between 15-20 participants from East Africa, and all the international institutes hosted at ICIPE campus in Nairobi Kenya.