ECONOMIC AND FINANCIAL ANALYSIS

Transcription

1 Water Resources Management Sector Development Program (RRP CAM 38558) ECONOMIC AND FINANCIAL ANALYSIS A. Introduction 1. This document summarizes the economic and financial analyses of the core subprojects selected for detailed feasibility studies, 1 O Mean (OM), O Touk (OT) and Spean Sraeng- Trapaeng Ambel (SS-TA) 2 irrigation schemes. The objectives, nature and scope of the subprojects are similar, with the development objective to reduce poverty and food insecurity in the subproject areas principally through increasing agricultural (predominantly rice) production and productivity. Each subproject will: (i) rehabilitate existing irrigation infrastructure to increase irrigation water supply; (ii) provide agricultural extension and support to ensure the efficiency and effectiveness of irrigation; and (iii) establish and strengthen the capacity of the Farmer Water User Community (FWUC) to ensure sustained operations and management (O&M) of the rehabilitated irrigation system and equitable water allocation. Consulting services will be provided to assist the relevant project implementation units (PIUs) in subproject implementation. B. Summary of Subproject Scope 2. Table 1 presents a summary of scope of the core subprojects. The command areas of the subprojects are significantly different, 530 ha for OM, 1,030 ha for OT, and 5,070 ha for SS- TA, representing a small, a medium and a large subproject. The financial and economic analysis of these core subprojects thus reflects the full spectrum of potential subprojects for rehabilitation considered in the long list of potential schemes. Table 1: Summary of the Scope of the Core Subprojects (ha) Item Command area and existing wet season cropping capacity 530 1,030 5,070 Existing dry season cropping capacity i Existing cropping intensity 100% 105% 100% Cropped area with project wet and dry season 875 1,448 8,619 Cropping intensity with project 165% 140% 170% Note: Ignores existing minor riverbank recession cropping C. Costs 3. Investment cost. The investment cost includes (i) civil works, (ii) FWUC capacity building, (iii) farmer extension support, (iv) consulting services, and (v) training for provincial department of water resources (PDWRAM) staff. It is acknowledged that the rehabilitation design proposed for O Mean is expensive and unlikely to be implemented in this form. Less expensive alternatives are more appropriate and will need to be examined during implementation. However, as the site has been demonstrated to be feasible with the higher cost rehabilitation option, the risks associated with maintaining feasibility are regarded as manageable. All costs have been analyzed using COSTAB software. Contingencies used in the analysis are: (i) general price contingencies of 6% per year for 8 years; (ii) consulting services 1 ADB Technical Assistance to the Kingdom of Cambodia for Preparing the Water Resources Management Sector Project. Manila. (TA 4848-CAM. Consultant report on economic and financial analysis, submitted April 2010). All costs and benefits have been re-evaluated, based on April, 2010 data. 2 Two core subprojects, Spean Sraeng and Trapaeng Ambel have been combined into a single unit for analysis as the sites are adjacent and share the same water source, although they are located in different provinces.

2 2 price contingencies are zero; and (iii) physical contingencies are zero for all inputs. Table 2 summarizes the total investment cost of the core subprojects. 4. Operation and maintenance (O&M) cost. This consists of (i) routine or recurrent O&M expenses for civil works and (ii) routine running and O&M costs for vehicles and equipment. The recurrent O&M cost represents the labor cost and cost of minor repair or maintenance of canals, reservoirs and concrete structures. As per a government decree, water charges for O&M may not exceed $10 per ha. Experience in other ADB-funded irrigation sector projects 3 indicates that this amount is about one-third of the O&M budget needed to sustain a scheme command area over a 20-year life. Thus O&M costs are shown in three parts: (i) government declining share of $10 per ha; (ii) FWUC increasing share of $10 per ha; (iii) additional $20 per ha to account for realistic O&M requirements. The decreed O&M costs ($10/ha) are progressively transferred from the government to the FWUC over 5 years, with the FWUC paying 20%, 40%, 60%, 80% in years 1 4, and 100% thereafter. O&M costs include an additional $20 per ha of supplemental O&M phased in after year 4. Table 3 summarizes the total recurrent cost of the core subprojects. Table 2: Summary of Investment Cost ($) Cost Elements O Mean Subproject O Touk Subproject SS-TA Subproject Project implementation support 4,900 9,800 63,600 Training and extension 157, ,700 1,001,300 Consulting services 103, , ,400 Vehicles and equipment 22,600 42, ,900 Civil works 970, ,300 3,896,000 Total investment costs 1,258,700 1,402,500 6,140,700 Civil works per ha 1, Total Investment costs per ha 2,376 1,356 1,211 Note: Costs generated from COSTAB, allocated on pro rata basis and include cost and physical contingencies Table 3: Summary of Operation and Maintenance (O&M) Cost ($) Cost Elements O Mean Subproject O Touk Subproject SS-TA Subproject Government assistance with O&M fee 12,000 23, ,700 Beneficiary contribution to O&M 34,300 67, ,500 Supplemental O&M 56, , ,500 Total O&M Costs 103, ,600 1,008,600 Note: Supplemental O&M is a government cost; costs generated from COSTAB, allocated on pro rata basis and include cost and physical contingencies. 5. Prices of farm outputs and inputs relevant to this project, both financial and economic value, are summarized in Table 4. The financial prices were established through the TA consultant s participatory rapid appraisal and household surveys in the core subproject areas, other projects and secondary sources. For estimates of civil works and construction costs, agricultural input and output costs were derived in the field, and unit costs from recent construction of Stung Chinit and NWISP irrigation projects. 6. Assumptions used in the calculation of economic prices from the financial prices are as follows: (i) use of the world price numeraire; (ii) use of World Bank long-term commodity forecasts (Table 5) and Pink Pages (February 2010) 4 for current year for rice, urea, and DAP (Table 5); (iii) values expressed in constant year 2010 prices to exclude inflation; (iv) the US 3 NWISP 2009 figures. 4 World Bank Commodity Price Data. Washington. Available at:

3 3 dollar is the main unit of account; (vi) the prevailing exchange rate of KR4,000 per $1 is used (because the dollar is openly traded, the shadow exchange rate is also set at KR4,000 per $1, and the standard conversion factor (SCF) is 1.0); (v) for the principal traded project inputs and outputs (rice, DAP, urea), import parity prices were calculated, on the basis of which the economic farm gate price of rice is estimated at $217/ton (KR869,000), as compared with a financial price of $217/ton, thus a ratio of 1.02, fairly reflecting the reality that the border price equates to farmgate price; (vi) for nontraded goods and services, conversion factors have been estimated, being 0.9 for all construction costs, and the shadow wage rate for unskilled labor is estimated at 1.0, reflecting the growing out-migration of labor, reducing rural labor supply at critical times; and (vii) transfer payments such as taxes, duties and subsidies are excluded from calculation of economic values. Table 4: Summary of Financial and Economic Prices Item Unit Prices (2010 constant) Financial Economic $ KR $ KR A. Outputs paddy $/t $ ,000 $ ,000 straw $/t $ ,000 $ ,000 Water melon $/t $ ,000 $ ,000 Forage (Napier grass) $/t $30 120,000 $30 120,000 B. Inputs Seed wet season $/t $625 2,500,000 $ ,000 IRR 66 $/t $625 2,500,000 $ ,000 Water melon $/t $3,750 15,000,000 $3,750 15,000,000 Fertilizer DAP $/t $875 3,500,000 $792 3,168,000 Urea $/t $562 2,250,000 $533 2,132,000 Land preparation $/day $ ,000 $ ,500 Organic manure $/t $25 100,000 $25 100,000 Pesticide (Folidol) L $ ,000 $ ,500 Threshing (3% of crop) $/t $ ,500 $ ,500 Irrigation fee $/ha $30 120,000 $30 120,000 Labour $/day $ ,000 $ ,000 Note: Most farm inputs are imported free of duties and taxes. DAP = diamonium phosphate, ha = hectare, IRR 64 = rice variety name IRR-64, L = liter, t = ton. 7. Cost of farm inputs. Based on the price data in the Table 4, the financial and economic costs of farm inputs per ha for the different models were determined for the core subprojects for "with" and "without" project scenarios. Under the with project scenario, it is assumed that farmers will spend more on inputs, especially seeds and fertilizers, than under the without project scenario. Consequently, under the with project scenario, the total cost of inputs for each model will increase. Financial labor costs are $2.50 per day (10,000 KR) for men and women. The economic conversion factor of 1.0 means the shadow wage rate equates to the financial rate. The source for labor person-days for the with and without project scenarios was a combination of the TA consultant s household survey and work done by the technical working group on agriculture and water in November D. Production and Income 8. Costs. With the subproject interventions, farmers in each subproject area will enjoy the following benefits (phased in over a 4-year adjustment period): (i) major benefit incremental

4 4 increase in the amount of rice production, (ii) supplementary benefits incremental increase in production of non-rice crops depending on the subproject, and (iii) improvements in household food security. Table 5 presents rice, water melon and forage yields as proxies under the with project and without project scenarios. 9. As shown in Table 1, cropping intensities vary, ranging from 140% to 170%. Table 6 shows the spread of increases by crop. Clearly, most of the additional cropping activity will be for the production of rice, either dry season irrigated or floating rice at SS-TA. Table 5: Crop Yields (t/ha) Particulars Without Project Wet season Rain fed transplanted (farm saved seed) Floating rice (broadcast) n.a. n.a Dry season Irrigated rice Water melon Forage With Project 2 Wet season Irrigated transplanted rice (commercial seed) Floating rice (broadcast) Na na 2.5 Dry season Irrigated (pumped) transplanted rice Water melon Forage Note: (i) These are hypothetical yields since nothing is currently grown on these sites during the dry season. (2) The projected with-project yields will not be achieved immediately, but would increase in stages of 60% and 80% of their peak in year 4 since the year of construction). Table 6: Cropping Intensity by Site Water Melon Forage Total Wet Season Dry Season Floating Without: Rainfed O Mean 100% % O Touk 100% 5% 105% SS-TA 95% 5% 100% With: Irrigated O Mean 95% 60% - 5% 5% 165% O Touk 100% 30% 5% 5% 140% SS-TA 100% - 55% 10% 5% 170% Note: Water melon is regarded as a proxy crop for a range of vegetable crops 10. The increase in irrigation water supply will enable farmers to modify their farming system from rain-fed varieties currently cultivated to irrigated transplanted high yield varieties. In addition, existing wet season rice areas will be modestly augmented by dry season cropping areas, mostly in rice production, but with some vegetable and forage output as well. 11. Farm income. Based on the estimated farm productivity, farm output prices, and farm input costs, farm production and net income were estimated for each subproject for with project and without project scenarios. Net income per ha was also determined. Estimates for the with project scenario are for peak production from year 4 when crop benefits are assumed to peak and to be stable. Until year 4, benefits are phased-in at 60% in year 2 and 80% in year

5 5 3. This is a flat peak model, which uses constant 2010 prices without attempting to predict longer-term changes (such as a decline in yields in the without-project scenarios, or changes in real commodity prices such as those projected by the World Bank). Table 7 presents a summary of the net farm income. Table 7: Incremental Farm Income per Hectare ($) Particulars Financial value Economic value Note: Based on land use and gross margin analyses, and includes labor costs. 12. Returns to Labor. The gross margin analysis demonstrates significant increases in returns to farm labor. Since the increases in global grain prices, returns to rice production have provided farmers with viable on-farm income opportunities that match or are better than offseason migrant labor alternatives. Assuming that all labor on these small farms is family labor, the returns from dry season rice crop production using irrigation water and improved technology are greater than off-farm wages by about 58%. Production of dry season rice, vegetable and forage crops require about 115 person-days of labor, of which about 35% is male and 65% is female (Table 8). Table 8: Comparative Returns to Labor by Crop ($/day) Without With Without With Without With Migrant work (benchmark) Wet season rice Dry season irrigated rice Floating rice Water melon Forage Note: Assumes returns for male and female labor are the same. E. Financial Feasibility 13. Weighted average cost of capital. The financial viability of a public sector development project can be determined by assessing the benefit:cost (B:C) ratio and the financial internal rates of return (FIRR). The B:C ratio is the ratio of the net present value of the benefit flow compared with the net present value of the cost flow. The value of FIRR is compared with the weighted average cost of capital (WACC) of the project the project is judged to be financially feasible if its FIRR is greater than its WACC. For the project, the cost of borrowing is very small. The interest on the ADB loan is 1% per annum during implementation and 1.5% during amortization. Interest on the OFID loan funds will be 1.25% per annum plus a 1% service charge. ADB technical assistance (6.5% of total) will be funded from grant funds. The government will fund 26% of the investment cost, and beneficiary farmers will fund about 2.5%. If the rate of inflation in Cambodia is 5%, and the commercial interest rate is 12%, the WACC for the project net of inflation will be 3.2%. A WACC of 3.2% was used as a benchmark for judging financial feasibility of the core subprojects. 14. Financial internal rate of return (FIRR). The FIRR of the core subprojects in constant 2010 prices was calculated over a 20-year project life. The FIRR of the O Mean subproject is lower than those of the other two subprojects because of its high investment cost per hectare (see para. 3). While the financial feasibility of O Mean subproject is marginal, at the individual

6 6 farm enterprise level there are clear financial benefits with returns to labor being equal to or greater than rates paid to migrant labor. By reducing the incentive for out-migration, this has significant social benefits, but all core subprojects are financially feasible as their FIRRs are higher than 3.2% (Table 9). Table 9: Financial Feasibility Financial internal rate of return 7.4% 11.4% 14.4% Benefit:cost ratio 0.8:1 1:1 1.1:1 Net present value ($) -$285,000 -$41,900 $744,800 F. Economic Feasibility 15. Economic internal rate of return (EIRR). The EIRR of the core subprojects was calculated over a 20-year project life. The EIRR of the O Mean subproject is lower than those of the other two subprojects because of its high investment cost per hectare (Table 10). However, all the core subprojects are regarded as economically feasible. Table 10: Economic Feasibility Economic internal rate of return 13.9% 20.5% 24.3% Net present value ($) 117, ,200 3,664,500 G. Sensitivity of Rates of Return 16. The sensitivity of the FIRR and EIRR was tested against changes in major variables related to cost and revenue of the subprojects. While rice prices may fluctuate between seasons, these variations are not likely to be by more than 10% on a long-term basis 5. There is a greater likelihood that yields will fluctuate more regularly and by greater amounts at all three sites. Assuming that yields are less than anticipated one year in five due to such factors as drought, pests, and disease, the analysis tests for a 50% reduction in benefits every fifth year. Sensitivity indexes were calculated for both FIRR and EIRR. The results are as follows. 17. O Mean. Viability is highly sensitive to declines in rice price or yield. When either declines by only 3%, the subproject becomes economically unfeasible. When yields fall by 50% every fifth year, the subproject is borderline unfeasible. When investment costs increase by 12%, the subproject becomes unfeasible. An important consideration is that investment costs at O Mean will probably be reduced, thus improving viability and reducing the risks associated with price and yield changes. However O Mean remains feasible under the other changes. 18. O Touk. Viability is fairly robust, but still sensitive to declines in rice price or yields. When rice yield declines by 12%, the subproject becomes economically unfeasible. However, O Touk remains feasible under other changes and is generally robust in financial and economic terms. 19. SS-TA. Viability is robust but still sensitive to declines in rice price or yields. When rice yields decline by 16%, the subproject becomes economically unfeasible. However SS-TA 5 Between May 2007 and May 2008 milled rice prices rose by 75% 119% in Phnom Penh. However, this event is seen as a result of an external shock and unlikely to be repeated.

7 7 remains feasible under the other changes outlined in Table 11 and is generally robust in financial and economic terms. Table 11: Result of Sensitivity Analysis of Core Subprojects BASE CASE Investment Cost +30% O&M Cost +30% price -20% yield -25% Nonrice price -20% Nonrice yield -25% 5 yearly 50% yield fall Case 3 plus Case 5 Case 4 plus Case 6 O Mean EIRR % S. Value +12% +280% -4% -4% % - - FIRR % B:C ratio FNPV ($) -0.28m -0.61m -0.33m -0.85m -0.97m -0.31m -0.31m -0.4m -0.89m -0.99m O Touk EIRR % S. Value +56% +557% -13% -13% FIRR B:C ratio FNPV -0.04m -0.39m -0.12m -0.87m -1.1m -0.08m -0.09m -0.22m -0.92m -1.1m SS-TA EIRR % S. Value +85% +770% -16% -16% FIRR B:C ratio FNPV 0.74m -0.77m 0.39m -1.9m -4.7m -1.2m m -3.9m -5.0m B:C = benefit:cost, EIRR = Economic internal rate of return, FIRR = financial internal rates of return, FNPV = financial net present value, m = meter, O&M = operation and maintenance, SS-TA = Spean Sraeng-Trapaeng Ambel. H. Economic Efficiency 20. Table 12 shows the comparative efficiency of the major enterprises at the core subproject sites. The effective protection co-efficient for the core main products (wet- and dryseason rice and water melon) indicate that the production is not protected through transfers. Table 12: Policy Analysis Matrix Summary Irr. Melon Irr. Melon Float. Melon Private profits/loss a Social/Economic profit/loss b Private (Market) Cost Ratio c Domestic Resource Cost Ratio d Nominal Protection Coefficient (on tradable outputs) e (on tradable inputs) f Effective Protection Coefficient g a Profit to farmer in financial terms; b If less than private production then the economic viability is less than the financial viability (e.g. subsidized); c Ratio of factor costs to value added showing how variations in factor prices affect profit; d Ratio of factor costs to value added in economic prices - between 1 and 0 then the product has comparative advantage; e Ratio of private prices to social prices for the commodity. If <1 protection is involved and there is no competitive advantage ; f Ratio of private prices to social prices for the input; g Ratio of value added at private prices to value added at social prices. If >1 the industry is protected or supported through transfers. Float = floating; Irr = irrigated; SS-TA = Spean Sraeng-Trapaeng Ambel; = wet season.

8 8 I. Poverty and Employment 21. The impacts of each subproject on employment and poverty were estimated. Table 13 presents the estimates of incremental employment and poverty impact ratio of each subproject and compares net economic benefits to the poor against net economic benefits to the whole subproject. Table 13: Incremental Employment and Poverty Impact Ratio (PIR) Particulars OM OT SS-TA Total annual incremental increase in employment, person-days 47,500 60, ,700 Average annual incremental increase in employment per 1 ha, person-days Poverty impact ratio 52% 46% 45% Poverty rates,% 63% 51% 46% Average farm size per household in the subproject area, ha Average farm size per poor household, ha J. Food Security 22. As a result of production increases, the share of household food rice requirements as a percentage of total rice output decreases and the amount of rice available for sale as a percentage of total rice output increases (Table 14). Without the project, food security is not an issue at O Mean, but at O Touk there is just enough rice to meet household demand. At SS-TA, annual rice output is sufficient to meet about half of annual demand. With the project, marketable surpluses as a share of total rice output are 33% 55%, indicating a strong improvement in food security. Table 14: Food Security Without With Without With Without With Household demand as % of total output 58% 30% 90% 57% 178% 41% Market surplus as % of total output 37% 70% 3% 43% -91% 59%