Project Activities Financial Analysis

Project activities financial analysis

1Introduction

Tat Lan’s aims at achieving its goals by producing 5 main outputs. The expected interventions and benefits under each output are summarized in Table 1. This paper aims at providing a summary of the results of a cost-benefit analysis undertaken for the different project outputs.

Table 1– Summary of project participants and expected benefits per output

Output / Number of participants / Major expected benefits
Output 1 - Community plans for livelihood development and increased equity produced, implemented and revised annually, and
Output 5 - Improved access to information on livelihoods practices and markets.
153,500 participants
31,000 households / Increased inclusiveness in decision making at village level, fairer resource allocation; improved equity at village level
Output 2 - Improved infrastructure for Giri affected rural communities
153,500 participants
31,000 households / Protection of crop fields and prawn farms from saline water intrusion; improved livelihoods in participant villages.
Outpu3 - Improved production technologies in use by Giri affected rural communities
Agriculture
Fisheries / 79,500 participants
16,500 households
99,871 participants
20,382 households / Improved seed quality, technologies and practices; increase in rice yields.
Establishment of communal fishing grounds, improvement of fishing gears and fisheries management; increased income from fisheries activities
Output 4 - Increased access to financial services for Giri affected rural communities
22,566 participants / Increase access to credit

This paper does not intent to present an ex-ante cost-benefit analysis of the Project as a whole. Rakhine is characterized as a rather isolated state, with villages witha large variety of livelihoods and access to resources, where development agencies just started their intervention.Reliable updated data is, thus, scarce and estimations of quantitative economic benefits for the project as a whole would have to rely in assumptions that would hardly translate the reality of the region. Instead this paper will look at possible scenarios and situations brought by the project intervention and highlight major potential opportunities as well as risks of low project efficiency.

Section two will focus on the assessment of crop budgets and farm profitability and how different practices might influence the population’s food security status. Section three provides a cost-benefit analysis of a possible investment in infrastructure, in which the main considered benefits are the increase in rice yields brought both by the recovery of embankments and the improvement of rice technology analyzed in section 2. Section three quantifies the minimum impact necessary on each participant household to justify the investment being made in the fisheries sector.

2Analysis of the interventions in the rice production sector

As mentioned above, Rakhine is characterized by a large variability of edaphic conditions, which depend on inherent soil chemical characteristics, as well as on the location of the land plots.The latter will determine not only farms exposure to erosion/sedimentation but also their vulnerability to saline water intrusion. Soils exposure to saline water intrusion has been exacerbated by Giri, as the destruction of embankments has rendered considerable areas unproductive or significantly lowered their yields. As a result of this variability in edaphic conditions, yields and adopted farm practices show considerable differences even within the same village. Adopted practices also depend on the households access to production factors, such as labour, animal traction, land and cash.

Thus the costs, yields and technical coefficients used in this analysis aim at providing a ground for discussion on issues the IPs should consider when assisting communities in making their choices on farming practices and agricultural investments. They should not be taken as representative of the reality of the rice sector in Rakhine.

2.1Major yield and cost assumptions

Indicative crop budgets were built for different situations and farm practices assuming different yields as summarised in Table 2 andTable 3.

Table 2 - Summary of assumptions on yield use in the crop budgets

Paddy yields (basket/acre) / Paddy yields (kg/hectare)
Situation pre-Giri
Broadcast / 50 / 2,580
Transplanting / 75 / 3,870
Present Situation in moderatly and severely affected areas
Monsoon rice - Broadcast / 40 / 2,064
Monsoon Rice - Transplanting / 50 / 2,580
Situation with project (maturity)
Improved seed and farming practices / 70 / 3,612
Improved seed and farming practices + fertilizer / 95 / 4,902
Improved seed + transplanting / 85 / 4,386
Seed multiplication plot / 100 / 5,160
Improved seed and farming practices with use of drum seeder / 75 / 3,870

Table 3 - Summary of the major cost assumptions used in the crop budgets

Major cost assumptions for 1 acre / Broadcast / Transplanting
Unit / Unit cost / Quantities / Quantities
Inputs
Seeds / basket / 8,000 / 2.00 / 2.00
Fertilizer
Urea / bag (50 kg) / 30,000 / - / 0.25
Super / bag (50 kg) / 35,000 / - / -
KCL / kg / 34,000 / - / -
Agrochemicals
Pesticide / application / 8,000 / - / -
Land preparation
Animal supported work a/ / animal-day / 4,667 / 7.50 / 7.50
Drum seeder / acre / 933 / -
Other
Storage / drum / 6,857 / - / -
Threshing/transport / animal-day / 10,000 / 0.50 / 0.75
Labour
Field preparation / person.day / 2,000 / 8 / 8
Nursery preparation / 1,500 / - / 1
Nursery sowing / 1,500 / - / 1
Uprooting and seedling spread / 1,500 / - / 2
Planting/transplanting / 1,500 / 0.25 / 8
Patching / 1,500 / 2 / 2
Weeding / 1,750 / 12 / 12
Fertilizing / 2,000 / - / -
Spraying / 2,000 / - / -
Water O&M (with embankment) / 2,000 / 2 / 2
Harvesting / 2,000 / 6 / 6
Threshing / 2,500 / 4 / 4
Transporting / 2,000 / 2 / 2
Drying, bagging / 1,750 / 4 / 4
TOTAL LABOUR / 40 / 52
a/ the models take a conservative approach in considering the need to hire animal traction for land preparation. While this is the case of many farmers, particularly after Giri, it is expected that most farmers will be able to rebuild their assets and eventually own their animals.

Table 4 - Summary of results obtained from possible paddy crop budgets for Rakhine

Table 5 - Summary of incrementalresults from possible intervention inpaddy in Rakhine

IMPORTANT NOTE: the first column was calculated for an increment from a post-Giri situation (without project); the following columnsshow estimates of the increment from a situation with improved seeds and practices, i.e. show possible increments from an intervention in which the major change is just improved seed and farming practices to a more input intensive alternative (fertilizer use, transplanting,...).

2.2Major considerations from the analysis of the example models

Lacking of significant representative data to generalize the conclusions from the analysis of the crop budgets, this section aims mostly at presenting some major considerations that should be taken into account by IPs when assisting project participants in deciding amongst different options for technical interventions:

It seems that major achievements can be made by changing from the current post-Giri situation to a situation in which farming practices and seed quality are improved[1]. In the examples under analysis this would mean trebling the months of self-sufficiency from 2 to 6 months in HH farming 1 acre of land and achieving a surplus for those farming 4 acres.
When considering alternatives between a farming system with improved seed and farming practices and one which to this adds the use of fertilizer, it seems that potential benefits are not significant – even if we consider considerable increases in yields (25 baskets/acre; 1.3tons/ha) – vis-à-vis the risk implied in the use of expensive inputs[2]. This together with the costs of capital in Rakhine possibly explains the low levels of fertilizer utilization in the region, even before Giri. However, as already mentioned, these models do not represent the diverse conditions in which rice is grown in Rakhine, and the experience of interventions in rice farms in the Delta region seems to indicate a potential for good results from the use of fertilizers. IPs should carefully evaluate the sustainability of the use of fertilizers before recommending their use to participant farmers[3].
The use of cheap less input intensive technologies, such as drum seeders, might in some cases result in higher net results than the use of fertilizers.
Transplanting seems to introduce fewer costs per acre than the use of fertilizers, despite the increase in required labour vis-à-vis direct seeding, and thus might be an interesting option. Considering an average household[4], those farming 4 acres would have to employ 2 additional women.day per acre, while those farming 7 acres would have to employ 4-5 additional women.day per acre to finish the transplanting in 45 days. The choice of technology for each village/group of farmers should – if soil characteristics and farmers interest allow – be based on an evaluation of the increase in income vs. risk to the farmer and on the potential to generate employment. The latter will depend on land concentration characteristics and labour availability in each village.
Another activity that shows good potential is the establishment of seed multiplication plots. The example considers a system in which rice is transplanted, which uses fertilizer and in which seeds are stored in plastic drums. The high production costs are offset by the higher value of seeds (5,000 kyat) vis-à-vis the value of paddy (3,000 kyats). However this system requires some financial capacity[5] and a risk-taking attitude, which means that might only be sustained by larger farmers. Benefits to smaller farmers will materialize in the form of greater seed quality and security.

Table 6 - Summary of results obtained from possible paddy crop budgets for Rakhine with credit

Table 7 - Summary of incrementalresults from possible intervention inpaddy in Rakhine

Table 6 shows a situation in which debt service costs are added to the models in Table 4. The assumptions are that loans are requested for 8 months for the entire working capital needs. Maximum amounts of 80,000; 240000; 360,000 kyats are lended at a 30% annual rate[6] to those farming 1,4, and 7 acres, respectively. Working capital requirements above that amount will incur an annual interest rate of 40%[7]. This is a conservative approach as it is expectedthat, after a few years of recovery, at least larger farmers will be able to build up some savings from the previous harvest to partially cover working capital needs of the following rice crop.

Even under a conservative analysis, credit does not change the considerations made for a situation without debt servicing costs, with regards to the profitability and contribution of food security of the various cropping system alternatives under analysis.

2.3Sensitivity analysis of expected yields

Major assumptions and uncertainty in the financial analysis regard paddy yields. Table 8 presents the results of a sensitivity analysis performed on paddy yields. The analysis shows robust results for a project intervention which introduces improved seeds and practices (first column – situation A). For this situation, breakeven would be achieved by an increment of no more than 3 baskets per acre from the considered post-Giri situation (40 acres)[8], i.e. a decrease of 39% in the assumed yield of 70 basket/acre (see column Improved seed).

The following columns in Table 8show a sensitivity analysis for the increment brought by different technologies when compared to just using improved seed and practices(Situation A). This means that the use of fertilizer would have to increase yields by at least 25 baskets/acre from a situation in which the yield would be 70 baskets per acre. Transplanting would need an increase of at least 11 baskets per acre, while the use of the drum-seeder would be offset by just one additional basket per acre, given the low cost of this equipment.

Table 8 – Results of theSensitivity analysis for the expected yields

3Cost benefit analysis of the investment in embankments

The success of the attempts to improve rice farming systems in Rakhine depends on the reconstruction of the embankments that protect paddy fields from saline water intrusion. The project will not support a the repair of the total length of embankments. The scale of the works done on embankments will largely depend on the village assessments made at the onset of the project. Additionally, as explained before, with the available data it would not be possible to estimate a representative increase in net benefits from rice production for the whole project area. Hence the evaluation of the financial feasibility of the investments in embankments is made through an example. Table 5 characterizes an average embankment and its estimated repair costs.

Table 9 - Characteristics of the average embankment

Length (ft) / 7,447
Cost of embankment (USD) / 17,643
Sluice gate cost / 7,500
Embankment economic life (years) / 3
Benefited paddy area (acres) / 167
Average area/farmer (acres) / 5
Number of benefited farmers / 33

Considering that the embankment allows a gradual recovery over 3 years of 90% of the 167 acres of paddy field, from a current post-Giri situation to a situation with improved farming practices and seed[9], the financial results over a period of 10 years would be:

Internal rate of return / 29%
Net present value / $22,911[10]
Net Present Value/household / $686

In addition to the estimated financial benefits to rice production, the repair of the embankments will enable the reconstruction of many other aspects of the livelihoods system of the villages in Rakhine. These are described in more detail in the LIFT report on embankments.

4Analysis of investments in fisheries

The investment amount and its distribution across activities in fisheries will mostly depend on the choices made during the formulation of village plans. However, it was estimated that the whole component might cost USD 1,946,750, of which USD 503,000 would be spent in pilots

403,750 in training and 500,000 in fishing gears.

Actual benefits from pilots and training are difficult to estimate. It is equally complicated to estimate the benefits brought by the introduction of new (and legal) fishing gears. Hence below we calculate the minimum benefits the project would have to produce to bring about a return of at least 12% to the investment.

It is expected that the Project interventions in fisheries reach 99,871 participants - 20,382 households – i.e. 65% of the total.This means an investment of USD19/participant or USD96/household. Thus, considering a period of analysis of 10 years and in order to attain an internal rate of return of 12%, project participants will only need to see an increase in yearly income attributable to the project of USD3.4/participant or USD17/household. A successful project implementation should be able to produce results over these modest minimums.

[1]This will also require an investment in embankment repair, which is analysed further on in this document.

[2] The high costs of transport of goods in Rakhine influences the costs of farm inputs and marketability of farm produce, bringing potential negative consequences on the feasibility of application of some technologies.

[3]It might also happen that the use of fertilizers is justifiable as an investment to bring the soil to its pre-Giri levels of fertility, but not as a recurrent annual cost. Soil mapping of each village and technical advice during village planning stage should identify where fertilizer application is justifiable.

[4]According to LIFT baseline report, the average rural household in Rakhine is comprised of 4.85 members, 65% of which are above 15 years.

[5]This system requires working capital for fertilizer and labour and an investment in storage drums, as well as the capacity to hold sales until the following sowing season, when seed will be procured.

[6]This is the maximum interest rate allowed for the credit cooperatives the project will support.

[7] As explained on the technical paper on credit, currently farmers have a few credit alternatives: gold pawn, credit from rice collectors, MADB, etc. all providing credit at different rates.

[8] This estimations are made on the net margin and do not consider the necessary investment in embankment reconstruction.

[9]This is a conservative approach, as some paddy fields are currently unproductive due to the accumulation of salt.

[10] The analysis used a discount rate of 12%.

Some embankments will benefit shrimp ponds, which show higher margins per acre than rice fields.