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The UN Food and Agricultural Organization (FAO) Special Programme for Food Security (SPFS) commenced its operations in 1994 to help improve food security in developing countries both at national and household levels. Two years later at the World Food Summit in Rome , SPFS was expected to contribute substantially to the implementation of the Summit 's Plan of Action for food security. Its objectives include raising food production and increasing access to food, with the objective of cutting the present number of malnourished people in the world by half by the year 2015. In 1999, SPFS Central America was established in three countries, Guatemala , Nicaragua and Honduras , with the technical support of the FAO and financing from the Spanish International Cooperation Agency (AECI). SPFS Guatemala carries out its primary activities in two locations: Xibalbay, a semi-urban community in the department of Sololá in western Guatemala , and Jocotán in the department of Chiquimula in the eastern part of the country.

Why a Cost-Benefit Analysis

In 2004, the SPFS Scaling Up Strategy for Central America which projected budgetary costs and provided strategic guidelines for the next five years, outlined several principles governing SPFS activities. Included among those principles was the need to broaden to a national level SPFS best practices and coverage in order to expand their impact to the largest number of malnourished families in a faster and more effective way. In this endeavor, project financial sustainability and accessibility became of paramount importance. Expanding projects to a national level requires that they be accessible to the poor – hence inexpensive on a per family basis – and therefore the costs and benefits of carrying out a project must be clearly understood. Indeed, if costs are not affordable or sustainable by those who are benefiting from a project, then the project is unattractive from the point of view of both the donor and beneficiary. To this end, a project cost-benefit analysis (CBA) is a useful tool for the evaluation and comparison of different projects for which limited funds and resources are being sought. FAO, in conjunction with SPFS and its office in Jocotán, Chiquimula, prepared a report which elaborated the concept of a CBA for five of SPFS's best practices in the region. The objective was to begin the process of financially evaluating and comparing SPFS's best practices in order to be better equipped for decisions related to project expansion at a national level.

The five projects – Greenhouse tomatoes, Kuxur Rum agroforesty, ASEJO corn and bean seed producers, Small animal modules (specifically broiler chicken modules) and the Can-Gua concentrated feed mill– were evaluated using a CBA model in electronic spreadsheet format. Data on fixed and variable costs and direct and indirect (where applicable) benefits was collected directly from beneficiaries as well as from reports and figures compiled by SPFS staff. The evaluation and CBA development included the following steps:

The CBA model incorporates many aspects that are favorable from the perspective of evaluating and comparing SPFS projects. First of all, unlike previous analyses that only assessed profitability during Year 1 of the project, the CBA model captures projected costs and benefits over a five-year period. A five-year project life presents a more accurate picture of the timing of costs and benefits as well as how a project can be expected to operate. Five years also covers the planning and projections required by SPFS staff.

Secondly, the CBA calculates costs and benefits on a per family basis, which provides a useful way to compare between large projects involving many families working collectively and small household-level best practices. It also attempts to include all costs incurred in the project irrespective of whom – the beneficiary, FAO or another party – pays the cost. Included amongst these costs are the amounts spent on capacity building and technical assistance, some publicity and marketing expenses incurred by SPFS and a cost for labor and land. Estimates of these costs allow decision makers to know the overall economic cost of a project, rather than the cost actually paid in currency by a beneficiary or FAO. The accurate cost information also elucidates just how easily best practices can be scaled up at national level.

Thirdly, the opportunity cost of capital (OCC) becomes relevant in a multi-year CBA and is therefore incorporated into the model. As in most types of investment decisions, SPFS projects should only be executed if they are a better use of financial resources than the alternate use. The Net Present Value (NPV) calculation is used in the CBA to assess the financial sustainability of a project. NPV is the difference of costs and benefits discounted in future years by the OCC. If the sum of discounted benefits over the five years is greater than the sum of discounted costs, then the project should be executed; if not, the project should be altered or discarded. The model uses 10% as its OCC Using the OCC in project CBA presents a more realistic picture of the financial viability of a project. Without it, benefits of $100 in Year 1 would be treated on par with benefits of $100 occurring in, for example, Year 5. An NPV analysis with a relevant OCC correctly accounts for the time value of money.

A final advantage of the CBA model is the ability to test the sensitivity of different variables on the overall economic viability of the best practice. A sensitivity analysis was performed on each project to assess the risk of a change in key variables – prices of inputs, outputs or the cost of labor, for example – on the project's viability. In addition, inflation, particularly when affecting certain key variables and not others, can be easily incorporated into the model.

Conclusions and Recommendations
resulting from the CBA

Of the five projects analyzed by the CBA, only the Can-Gua feed mill had a negative NPV (discounted costs greater than discounted benefits) over the assumed five-year life of the project. Figure 1 displays the costs and benefits of each project on an annualized basis. The ASEJO association of seed producers, greenhouses and the Kuxur Rum best practices all showed strong positive NPVs, which signals that the investment is financially sustainable – given the choice, beneficiaries would prefer investing their own money into these best practices to investing at the OCC of 10%. In other words, these SPFS best practices should be expanded, where appropriate, at the national level.

E strategia del Programa Especial para la Seguridad Alimentaría de FAO en América Central (2005-2009).

E studio Costo-Beneficio de Buenas Practicas y Proyectos del PESA Guatemala.

The Can-Gua feed mill project is not considered to be a SPFS best practice (BP) because it does not fulfill the BP criteria, namely proven in the field, replicable, low-cost, low input, low labour demanding and locally adapted. However, SPFS Guatemala requested that this project be included in the study.

Some costs and benefits evaluated from the best practices are not easily quantifiable in dollar terms – family health benefits of a project, envirornmental benefits, improvement in the participation and decision making of women, etc. – and hence do not translate into a economic CBA. These costs and benefits were presented alongside the CBA results. To facilitate further evaluation of these best practices, a base-line survey of the best practices was developed alongside the CBA. Using the IFAD document A Methodological Framework for Project Evaluation, Main Criteria and Key Questions for Project Evaluation (September 2003) as a model, questions were designed to reveal specific changes in the family as a result of the best practice.

Non-profitable and high-cost practices are not eligible to be upscaled.

Some discussion on an appropriate OCC rate for development projects can be found in J.P Gittinger, Economic Analysis of Agricultural Projects , Johns Hopkins University Press. Second edition. 1982.

The small animal module proved marginally positive on an NPV basis. However, sensitivity analysis accompanying the CBA confirmed what both beneficiaries and SPFS experts expressed during meetings; the small animal modules that require the purchase of concentrated feed, such as laying chicken modules or broiler chicken modules, are extremely sensitive to its price. During project visitations, beneficiaries had expressed concerns over rising prices of the concentrated feed inputs, such as imported soy meal. As a result of this concern, SPFS Guatemala began investigating the use of basic feeds that are more easily accessed within the communities, or allowing the chickens to scavenge. Ensuring the beneficiaries receive an adequate price for their chickens was another key concern expressed by participants and confirmed by the sensitivity analysis. In summary, the broiler chicken module should be cautiously expanded with an effort to reducing its key operating risks.

Executing the Can-Gua feed mill project results in a net cost of about $125 per family over five years under present conditions. It should be noted again that these costs include spending by SPFS and the beneficiary as well as costs of labor and training. The CBA showed that current margins for Can-Gua were insufficiently large to finance the initial investments in building and machinery. In addition, much like the small animal modules, any increase in the price of inputs has a strong downward effect on the NPV, unless the Can-Gua mill responds immediately with a commensurate increase in its sale price. Reports from participants suggest that this is the case.

In addition to direct benefits calculated during the study, each of the projects demonstrated significant indirect benefits that were not quantified as part of the CBA. These benefits included but were not limited to: the participation of women in improving food security in the household; a heightened understanding of marketing and selling products, such as tomatoes, seed corn and chicken; an improvement in soil fertility and humidity and protection from erosion and; cooperation and participation within a group. It is recommended that a base-line survey be repeated after 5 years to determine additional household benefits of the best practices.

Besides calculating the NPV, a second objective of the study was to compare total costs of the five best practices. While ASEJO and Kuxur Rum are resilient projects with positive NPVs, Figure 1 shows that compared to the others, they have prohibitive costs that might impede expansion at a national level. Two observations are worthy of mention here. Firstly, both of these projects were evaluated assuming the use of one hectare of land, which is not a minimum requirement. In fact, both the project costs and benefits deriving from that hectare could be split amongst many more families with no change in the favorability of the project. Therefore neither best practice need be prohibitively expensive, in terms of costs in dollars and labor. Secondly, as Figure 2 below shows, both of these projects are particularly labor-intensive, as shown by the unshaded portion of costs. Approximately 76% and 64% of ASEJO's and Kuxur Rum's annual variable costs are for labor, compared to around 25% for small animal modules and greenhouses and less than 5% for Can-Gua. Therefore, much of the cost calculated for these projects is not in dollar terms but in terms of hours of work. Interestingly, the only project with a negative NPV, Can-Gua, is also the project using the least amount of labor as a percentage of its total costs. This result is consistent with the high returns to labor normally associated with projects in developing countries. Are SPFS best practices more likely to be successful if they rely heavily on returns to labor? This question merits further investigation.

The same could be said for all the projects studied. A positive NPV project split amongst additional families remains a positive NPV project.