Participatory model for cost benefit analysis of livelihood interventions

Programme Initaitive overview / Background information What is cost benefit analysis? Understanding concepts and terminology Key steps for cost benefit analysis Cost Benefit Analysis – understanding the model & key parameters for measurement Field work

Contents Cover page Contents Instruction sheet Initiative investment – background Information Component costs

What is Cost Benefit Analysis? Cost benefit is an important tool applied in social / community investment planning It measures the costs and benefits associated with undertaking projects and programmes It is complements financial analysis and meant to internalise and account more fully for non-market benefits and costs and takes into account such variables as environmental costs, biodiversity preservation, disaster preparedness, shadow prices, informal activities (with economic value), social opportunity cost of labour, opportunity cost of investment, etc. Note: Commercial return is usually higher than social return

Concepts and terminology Financial analysis – measures the financial return / profit accruing to the project Economic analysis – measures the effect of a project / programme at a national scale by assessing the overall direct, indirect and macroeconomic impact of the project on improving the economic welfare of communities / citizens Note that for a project to be economically viable it needs to be financial sustainable and economically efficient If a project is not financially sustainable, economic benefits will not arise.

Concepts and terminology Cost-benefit ratio – the ratio of the present value of the economic benefits stream to the economic cost stream, each discounted at the opportunity cost of capital / investment Rule: Ratio should be greater than 1.0 for a project / programme to be acceptable. Opportunity cost of capital in economic prices on marginal unit of investment in its best alternative use. Poverty impact ratio – ratio of the net economic benefits accruing to the poor to the total net economic benefit of a project /programme

Concepts and terminology Discount factor / rate – a percentage rate re[presenting the rate at which the value of equivalent benefits and costs decrease in the future compared to the present value. The discount is used to determine the present value of future benefit and cost streams

Key steps for cost benefit analysis Identify: Costs Benefits Discount the costs Quantify Discount the benefits Calculate cost-benefit ratio

What is Cost Benefit Analysis? Measuring it……. Where: 𝐵0−𝐵𝑛 benefits between year programme started through to year to conduct study 𝐶0−𝐶𝑛 costs between year programme started through to year to conduct study 𝑟0 – rn discount rate for programme duration 𝑁𝑃𝑉= 𝐵0−𝐶0 (1+𝑟 ) 0 + 𝐵1−𝐶1 (1+𝑟 ) 1 ……… 𝐵𝑛−𝐶𝑛 (1+𝑟 ) 𝑛

Cost Benefit Analysis in the context of livelihoods programme Identify programme: Costs components Benefits components Quantify Costs components Discount the benefits Calculate cost-benefit ratio

Introducing the CBA model Excel spreadsheet with eight linked spreadsheets Formulae are imbedded Discount rate assumed at 10% (discuss and adjust accordingly)

Fieldwork The purpose of fieldwork is to collect data on programme costs and benefits Identify data sources Initiative/ project annual reports, quarterly reports, management reports, etc. (include indirect costs and benefits Interviews with communities and relevant staff Identify all risks

Analysis Quantify costs and benefits per programme component Populate the model Calculate the results Assess the benefit-cost ratio

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