Nepal: Chet Bahadur Tamang/Mercy Corps MANAGING RISKS THROUGH ECONOMIC DEVELOPMENT (M-RED) CASE STUDY

Transcription

1 Nepal: Chet Bahadur Tamang/Mercy Corps MANAGING RISKS THROUGH ECONOMIC DEVELOPMENT (M-RED) CASE STUDY A cost benefit analysis of the sugarcane nexus intervention introduced in the Terai region of Far West Nepal MAY 2016

2 Table of Contents Executive Summary 3 Acronyms and Terms 5 Background 6 Motivation and Methods 7 Analysis and Results 8 1. Over sugarcane s three-year growing period, did the income of the sugarcane nexus activity exceed the marginal costs? 9 2. Were profitable communities different than unprofitable ones? Over a three-year period, did the total benefits of the sugarcane nexus activity exceed the total costs? 18 Results 19 Conclusions 21 Recommendations 22 Tables and Graphics Nepal 5-Year Weather Trends 7 Input Costs per Bigha 9 Yearly Composition of Harvest 10 Three-Year Profit Estimates: Monetary Benefits Only 11 Three-Year Profit/Loss 11 Sugarcane Productivity per Bigha 12 Reduction in Active Plantation Size 12 Factors for Reduction in Active Plantation 14 Factors for Productive Communities 15 Factors for Profitable Communities 16 Categories of Sugarcane Plantation and Land Protected 18 Three-Year Profit Estimates: All Benefits 19 Cost for Structural Mitigation 20 MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 2

3 Executive Summary The Managing Risks through Economic Development (M-RED) program introduced a nexus intervention to simultaneously reduce disaster risk while increasing income, with 21 flood-affected target communities in the Terai (flood plain) region of Far West Nepal between This nexus intervention consisted of planting sugarcane along flood and erosion prone riverbanks, in an effort to mitigate damages and simultaneously generate income for vulnerable farmers through the sale of sugarcane. In this way, the nexus is meant to provide a long-term economic incentive for farmers to continue the risk reduction solution after the program s end. To evaluate the economic viability of the sugarcane nexus intervention, Mercy Corps commissioned this case study with an independent research firm, Causal Design. The study applied a cost benefit analysis (CBA), according to the following research questions: 1. Over a three-year period, did income from the sugarcane nexus exceed the marginal costs? 2. Did communities where the nexus was profitable demonstrate different characteristics than those where it was not? Were differences due to lack of productivity or reductions in productive area? 3. Over a three-year period did the total benefits of the sugarcane nexus activity exceed the total costs? How does the return compare to the fixed investment of structural mitigation? Farmers in many target communities anecdotally report increased income from the sugarcane. However, the results of this CBA demonstrate that profitability is actually more limited, and varies depending on which factors are included or excluded in the analysis: 1. A basic cost-benefit factoring only the cost of agricultural inputs versus revenue generated through sugarcane sales demonstrates that less than half of the target communities show profitability within the first three-year crop cycle. 2. A broader model including the benefit of value of land protected by the sugarcane demonstrates that almost all communities show a net benefit. 3. But when the full model is applied, including costs of mitigation infrastructure installed, the results are very mixed: some communities recoup the costs of infrastructure within a few years, while others do not. This variance in profitability led to a further analysis of potential factors that could be influencing the success of the nexus projects in the target communities. While the sample size of 21 communities is too small to make statistically significant conclusions, there are notable differences between the profitable and unprofitable communities that can inform refinement of the sugarcane nexus intervention: Proximity to input suppliers, technical service providers and buyers (agro-vets, sugar mill or molasses mill) is an important factor for both productivity and profitability. Severity of previous disaster experience matters for the productivity and profitability of nexus interventions, and also for maintaining active plantation areas year-to-year. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 3

4 Social cohesion may be a factor for profitability. Reported trust of neighbors was higher in profitable communities, and this cohesion may influence the performance of the nexus project. Recommendations based on the results of the CBA case study include: to establish productivity targets with every community; to promote expansion of suppliers, service providers and buyers to all target areas; to select new target communities using proximity to providers as criteria; and to enhance promotion of social cohesion, particularly with underperforming groups. The results also indicate the need for expanded research on social cohesion factors for success and impact; continued cost benefit tracking with communities; a deeper analysis of other motivating factors (beyond profit) for buy-in and expansion of the nexus project; and continued tracking of the DRR benefits of the nexus intervention through future Monsoon seasons. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 4

5 Acronyms and Terms Agro-vets Local level input and technical service providers Bigha Standard unit of measurement; one bigha is equivalent to 2/3 hectare CBA Cost Benefit Analysis DADO District Agriculture Development Office DLSO District Livestock Support Office DMC Disaster Management Committee DRR Disaster risk reduction FFS Field Farmer School Gabion Structural mitigation walls, boxes or fences INGOs International Non-Governmental Organizations Katha Standard unit of measurement; one katha is 1/20 bigha Maintained active plantation Area of land that continues to crop harvestable sugarcane M-RED Managing Risk through Economic Development MSD Market Systems Development Nexus Intervention Uniquely designed interventions to incentivize disaster risk reduction through economic opportunity Reduced active plantation Area of land that is no longer producing harvestable crops of sugarcane River-cutting Erosion of riverbanks Quintal Unit of measurement equivalent to 100 Kgs MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 5

6 Background The Managing Risks through Economic Development (M-RED) program aims to build resilience of vulnerable communities in Nepal and Timor-Leste by reducing the human and economic toll of natural disasters while simultaneously reducing poverty. In Nepal, the 3.5 year M-RED program was implemented with more than 40 communities located across four districts in the Far West region between December 2012-April M-RED piloted an innovative nexus model to integrate disaster risk reduction (DRR) and market systems development (MSD), in an effort to incentivize sustainable DRR activities while giving vulnerable communities an opportunity to increase their incomes. In the Far West the program tested two nexus interventions, each uniquely designed based on the local hazard risks, livelihood profiles, and economic opportunities. The nexus intervention believed to have the strongest evidence of dual benefit for both disaster risk reduction and direct economic incentives is the sugarcane nexus implemented with 21 target communities located in the Kalilali and Kanchanpur districts of the Terai (flood plains). For this nexus, M-RED promoted planting sugarcane on silted and erosion-prone riverbanks to prevent river cutting and withstand seasonal Monsoon floods, and selling that sugarcane to generate income. M-RED partnered with local private sector actors for the development of the sugarcane nexus intervention: a local sugarmill, molasses mill, and area agro-vets (input and technical service providers). The program also collaborated closely with the local government District Agriculture Development Office (DADO). These actors invested financial and human resources into strengthening the local capacity for sugarcane production in the silted and marginal riverbanks, alongside M-RED. The program facilitated these linkages for farmers to receive technical trainings, input supplies, financing, support for transportation, and ultimately sale of their sugarcane. In each of the 21 target communities, sugarcane was planted directly into silted riverbank soils at risk of river-cutting (erosion) and flooding. In many instances those areas were adjacent to very fertile productive lands or homes in the community, and the sugarcane served as a buffer against inundation of more valuable lands and assets. To shore up the riverbanks against erosion, M-RED also installed structural mitigation works(gabion boxes or fences) and/or bioengineering solutions (bamboo, grasses, trees) along the riverbanks in approximately half of these target communities. Mercy Corps commissioned a full impact evaluation of the M-RED program, conducted between December 2015 and February 2016, by an independent research firm, Causal Design. The findings of the impact evaluation 1 show that the sugarcane nexus intervention did not have a statistically significant impact on reducing disaster risks, compared to a control group. However, the program reports that the Monsoon Season during the two years for testing the model ( ) was more mild, with lower than average rainfall recorded and lower incidence of flood events in the target areas (see timeline on following page). As a result the impact evaluation was not able to conclusively determine the effectiveness of the sugarcane nexus at achieving disaster risk reduction impacts.! "#$%&$'"()&*+,-&"*./$01")2$'%$1*3,"3,"4567("$2$*'$8')"$1"999:.);0<03;/&:3;+=;)&*'*),0)" MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 6

7 Although the impact evaluation did not find a direct impact on household economic status, most income from sugarcane was managed at the community level (by DMC and/or Farmer Groups) and was reinvested after the first year harvest (these funds were not directly analyzed in the impact evaluation). While beneficiary farmers in the flood-vulnerable communities anecdotally reported economic gains from the sugarcane, the Causal Design and Mercy Corps evaluation team determined a more detailed Cost Benefit Analysis of the sugarcane investments and economic returns would shed light on the sustainability of the nexus model. In particular, community perceptions of the economic benefit may be exaggerated because their investments in the sugarcane (in the form of labor) comprise only a small part of the overall cost for the interventions. The M-RED program, local government, and private sector partners have invested heavily in agricultural inputs to start these projects. Therefore, community perceptions of economic gain may be accurate for their own investment/return to-date but not reflect a comprehensive understanding of the overall cost benefit. The CBA will indicate whether the economic incentive for the disaster risk reduction benefit is likely to be sufficient to motivate communities and government to continue investment in the sugarcane nexus beyond the M-RED program. Motivation and Methods Establishing an economic incentive for disaster risk reduction is the cornerstone of the sugarcane nexus intervention, and the key aspect differentiating the nexus approach from traditional DRR programs. Earning income through activities which also mitigate disaster risk is intended to ensure better sustained engagement of community in these activities even after the program has ended, when they must continue the activities independently. The combined promise of long-term disaster risk reduction and short-term income must be sufficient to keep community members mobilized and invested. If the sugarcane nexus approach can be recommended, then first we must answer the question do communities experience an economic benefit? And if so, are certain conditions necessary for the enterprise to be profitable? To conduct this cost-benefit analysis, we use production and sales data taken from community (DMC) records. These records are updated annually after harvesting and sales are completed, and verified by Mercy Corps staff. Exact records of costs are not available at the community level, but an estimate of total input costs per area was created by Mercy Corps staff, in conjunction with technical experts at the District Agriculture Development Office (DADO). MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 7

8 We use these estimates to understand the return experienced by the community. Sugarcane stands are typically harvested for three years, and then replanted to avoid decreasing yields. Therefore, many inputs, including the seeds themselves, are only required in the first year of the three-year cycle. Productivity varies throughout each year of the typical three-year cycle. For these reasons, we calculate the return over a threeyear period; looking at a single year s profit would either over or under-estimate the net benefits. It is important to note this provides a snapshot of the near term; longer-term cost/benefits are subject to many other factors including fluctuations in regional sugar prices and variability of input prices. These longer-term factors could flip the cost benefit balance in either direction; further research on the stability of the sugar market in the Far West would be required to make any informed estimates of longer-term cost benefit. We generally consider the marginal costs, such as seeds, fertilizer, and labor, to be more important to the community s experience and decision-making than the fixed investment costs, as communities will continue to provide these after the program is completed. Nonetheless, an initial investment in structural mitigation to protect both marginal and productive land and homes along flood-prone riverbanks is often required; in approximately half of the studied communities these investments were made before the sugarcane was planted. This investment is typically made by government agencies or INGOs, and is therefore less likely to affect communities decision-making process about investments in sugarcane. For this reason, we first conduct an analysis of the marginal costs and marginal benefits only, and then include the cost of the mitigation infrastructure as a fixed investment to be repaid over time. While the associated impact evaluation focused on average results, across the entire project area, this analysis seeks to explain differences in productivity and profitability of the nexus intervention; to better understand which factors make the nexus model work to provide economic incentives for DRR. Any DRR program will naturally be targeted at contexts where they are most appropriate and effective with particular interventions chosen depending on the risk profile. While a retaining wall might be very effective in a landslide-prone area, it would not be expected to improve well-being in areas affected by drought or crop disease. Likewise, if certain conditions can be identified where the sugarcane nexus intervention was especially profitable, these criteria can be used by Mercy Corps and other organizations for the selection of future sites for similar nexus interventions. For this reason, the following research questions were addressed: 1. Over a three-year period, did the income of the sugarcane nexus activity exceed the marginal costs? 2. Did communities where the activity was profitable demonstrate different characteristics than those in which it was not? Were differences in profitability due to lack of productivity or limited sales? 3. Over a three-year period, did the total benefits of the sugarcane nexus activity exceed the total costs? How does the return compare to the fixed investment of structural mitigation? MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 8

9 Analysis and Results 1. Over sugarcane s three-year growing period, did the income of the sugarcane nexus activity exceed the marginal costs? We initially look at the net profit from the nexus activity through a purely financial lens, including income and costs, but not the added value of land protected by the plantation. We calculate net profit separately for sugarcane planted in 2014, which has since had two rounds of harvest, and sugarcane planted in 2015 which only had one round of harvest. We anticipate that the results may differ, due to changes in communities technical capacity as well as environmental factors. Since neither of the plantings have gone through all three rounds of harvest, we estimate the expected production and income for 2016 and 2017 based on the area of undamaged plantation remaining in 2016 and the productivity of previous years. The net profit then follows the formula below: 3 Year Profit = (Year 1 Income Year 1 Costs) + (Year 2 Income Year 2 Costs) + (Year 3 Income Year 3 Costs) What marginal costs do we include? We use two estimates of the input costs per bigha 2 of land planted, since exact values were not tracked. The costs are broken down into agricultural inputs including pesticide and fertilizer, seeds, labor, irrigation, and tool maintenance. The high cost option follows the recommended level of inputs, while the low cost follows reports that many communities did not use fertilizer and other inputs beyond the first year. Both estimates include labor and irrigation costs in all years: INPUT COSTS FOR BIGHA Year 1 Year 2 Year 3 High Cost (NPR) 3 70,675 38,500 30,200 Low Cost (NPR) 70,675 23,700 21,700 Year 1 inputs are considerably higher, because heavier land preparation is required at the beginning of the 3-year crop cycle. Additionally, sugarcane seed is used more heavily in the first year of planting, and costs about 16,000 NPR per bigha. Labor costs associated with planting, weeding, irrigation, and harvest, as well as the costs of fertilizer and equipment, are approximately equal across the three years. > "?*+@$"*&"$"&1$,A$;A"%,*1"3B"'$,A".)$&%;).),1"*,"C)/$'D"3,)"8*+@$"*&")E%*2$'),1"13">=F"@)01$;):" F "G''"B*,A*,+&"/;)&),1)A"*,"C)/$')&)"6%/))"HCI6J:"#3,2);&*3,"*&"!KL:>!"CI6"13"!"MN(O"G/;*'">PO">K!P"HQ$,A$:03.J:"" MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 9

10 How is income calculated? We use income reported by each community each year. This can be divided into quantity and price; the quantity of sugarcane, and productivity per bigha, varied considerably between communities. Prices tended to be around 360 NPR per quintal of sugarcane, this varied depending on whether communities sold to molasses or sugar mills, and the transportation fees they paid. Because income earned is not differentiated between 2014 and 2015 plantings, we estimate the income attributable to each. The crop areas do not overlap year to year; plantation from 2014 was expanded in 2015 to additional areas. In the first harvest in 2015, only the 2014 planting was harvested, so all income is attributed to it. In the second harvest in 2016, we assign income to the 2014 or 2015 plantings according to the ratio of the area of each, after subtracting any damaged and reduced active plantations. This ratio is weighted to reflect the expected productivity levels of the three year cycle, 0.9 : 1 : 0.8 respectively. YEARLY COMPOSITION OF HARVEST 2015 Harvest Total Income = Income from 2014 Planting 2016 Harvest Income from 2015 Planting!!=!! Total Income Undamaged 2014 Planting Area Undamaged 2014 Planting Area!+ 0.9*!2015 Undamaged Planding Area MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 10

11 Break-Even Point Since price and costs are both fairly standard across communities, before looking at actual profit, we can use the standardized costs and average price to calculate the productivity per bigha needed to break even within three years. Using the ratio of 0.9 : 1 : 0.8 for each of the three years, we must solve the equation: Profit = 0 = (360 * 0.9 * X 70,675) + (360 * X 38, 500) + (360 * 0.8 * X 30,200) This gives us 972 X = 139,375; implying a needed productivity of quintals per bigha of sugarcane during peak productivity in Year 2. If we assume that each year suffers some loss of crop: with a 10% loss every year, the productivity needed rises to quintals per bigha. With a 20% loss each year this rise further to qt/bigha, and with 30% loss of land to 224 qt/bigha. Alternatively, using the reduced costs based on low agricultural inputs, we find: Profit = 0 = (360 * 0.9 * X 70,675) + (360 * X 23,700) + (360 * 0.8 * X 21,700) Giving 972 X = 116,075, or a break-even productivity of quintals per bigha of sugarcane. Results The table below shows the results of this estimation, using both high-cost and low-cost estimates for the profit of each of the 2014 and 2015 plantings after the end of their cycles, as well as the combined profit for both plantings. THREE-YEAR PROFIT ESTIMATES: MONETARY BENEFITS ONLY Analysis Average Profit (NPR) - low-cost estimate Communities with Net Profit low-cost estimate Average Profit (NPR) - high-cost estimate Communities with Net Profit highcost estimate 2014 Planting Only (estimate third year) 2015 Planting Only (estimate third year) 5RSOP!!:!" 5/16-198,138 2/16 5>>O!L>" 6/15-132,738 6/15 Combined Profit 5>TLOUUP 3/21-97,284 7/21 MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 11

12 The distribution of profit across communities is shown in the graph below: Clearly, the sugarcane activity has not been universally profitable at this point. When using our purely financial calculation of benefit, without including protection of land and community, we find that both the 2014 and 2015 rounds of plantation are expected to have an average loss rather than profit. As mentioned previously, communities themselves may not have perceived economic loss, since the majority of inputs were provided by M-RED, the Nepal government, or the private sector. Up to this point, all income generated is profit for communities. However, the program aims for the sugarcane nexus to provide a sufficient economic return to incentivize communities to continue their DRR activities independently (sufficient, even when total input costs are factored). The lack of profitability suggests that this may not be the case, or that the sugarcane intervention may not be appropriate in all contexts. Why Is This? In this first estimation of profitability, there are essentially three reasons why profit might be low or negative. 1. Price: First, the price of sugar received when communities sell to mills could be insufficient. However, the price received was fairly consistent across communities, and is largely outside the control of Mercy Corps and other NGOs. 2. Productivity: The amount of sugarcane produced per bigha could be lower than expected. Since costs per bigha of sugarcane are constant, low productivity directly contributes to a lower return. We calculated that the minimum productivity required to break even (not yet taking into account damaged or reduced active plantations of sugarcane) is 143 quintals per bigha. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 12

13 As shown in the table below, actual productivity was above this threshold for the 2015 harvest, but considerably less in The average across both harvests was quintal per bigha, also below the minimum: SUGARCANE PRODUCTIVITY PER BIGHA Year of Plantation 2015 Productivity of Active Sugarcane 2016 Productivity of Active Sugarcane N/A Sugarcane Loss: The 143 quintal per bigha minimum assumes no loss of planted crop. However, the sugarcane is intentionally planted in marginalized, at-risk land, and requires continued tending in order to remain productive. However, some plantations were left untended, and others were exposed to floods that may wash away seeds or cover the plantation in sediment. In all cases, the cost of inputs were paid but communities did not harvest the sugarcane and receive income. In many cases the sugarcane itself was not actually lost, but it was not actively cultivated for harvest. Therefore we treat losses and reduced active plantations as follows: REDUCTION IN ACTIVE PLANTATION SIZE Year of Plantation 2014 Reduced Active Plantation 2015 Reduced Active Plantation from previous year 2016 Reduced Active Plantation from previous year % 26% 9% (to date) 2015 N/A 19% 7% (to date) The reduction in active plantation appears to decrease each year, though the Year 3 estimates were taken approximately six months before the expected harvest and may still increase. Notably, the 2015 plantation experienced a lower level of loss than the 2014 plantation both in 2015 (19% versus 26%), and as a whole given the substantial 40% loss in In sum, the combination of low productivity and a substantial reduction in active plantation prevented the sugarcane activity from being profitable on its own. While participating communities have not felt this directly, due to the M-RED and government investments provided, if overall productivity cannot be increased and a higher portion of plantations do not remain active in the future, it is likely sugarcane will not be profitable for communities to pursue. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 13

14 2. Were profitable communities different than unprofitable ones? If a clear pattern can be observed as to which communities have experienced a profit, then we may be able to recommend the sugarcane nexus intervention for communities exhibiting a more specific profile. We therefore attempt an ad-hoc analysis of the 21 communities which planted sugarcane in 2014 or In the interest of full disclosure, this analysis was not an original component of the research agenda for the M-RED program, and the small sample size and limited data for this particular analysis is limiting and the results should be interpreted with caution. We compare the profiles of communities which were productive or not productive, and those which had high or low levels of damage; a more controlled regression analysis is not possible due to the small sample size. To further understand differences in profitability, and the underlying factors behind it, we also conduct this analysis for productivity and reduced active plantations. Communities were considered productive if they produced more than 140 quintal per bigha, in line with the original estimates of the break-even point. They were considered to have maintained active plantation if 80% or more of their sugarcane plantation was productive year-to-year. Were communities who maintained their active plantations different than those which suffered reduced active plantations of sugarcane? We compare those communities which still have 80% or more of their original plantation remaining active, against those with less than 80% remaining active. Of the 20 communities, 9 are above the 80% line, which we refer to here as maintained active plantation, while 11 of the 20 fall below 80% and are considered reduced active plantation. The 80% line is arbitrary, but reflects the increased productivity needed for communities that suffer extensive damage or have diminished active plantation. In examining the two sets of communities, we looked at the following factors: Proximity to Agro-vets: Count of communities within 10km of an Agro-vet Proximity to Sugar Mills: Count of communities within 20km of a sugar mill (few communities are within the 10km range) Proximity to Molasses Mills: Count of communities within 10km of a molasses mill Community Trust: Average % of community members who report trusting others at Endline survey Linking Capital: Average value of community members feeling able to influence DADO, District Livestock Support Office (DLSO), and DMC, at Endline survey. Reported on a 1-5 Likert scale, with 5 indicating very strong confidence and 1 indicating very little confidence Proximity to Roads: Count of communities located adjacent to national roads Previous Disaster Impact: Average % of community members affected by a disaster in the year prior to the program, collected through focus group discussions during program planning MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 14

15 Micro-Insurance: Average % of community members who report having micro-insurance at Endline survey Reduction in Active Plantation Results The chart below shows the breakdown of these factors for communities which maintained a high portion of their active plantations, and those which had a large reduction in active plantation: Trends in Reduction of Active Plantation Size The factors we tested show no clear explanation of change in active plantation size. Proximity to agro-vets and molasses mills was not a requirement to limit reduction in active plantations; nor was limited prior disaster experience. In fact, the maintained active plantation communities were slightly more disaster affected prior to M-RED, with 93% of households affected compared to 71% among reduced active plantation communities. Similarly, the average land loss before M-RED (not shown in table) was 32 bigha among maintained active plantation communities compared to just 22.5 bigha among reduced active plantation communities. Interestingly, only one maintained active plantation community was within 20km of a sugarmill, compared to 7 of the 11 reduced active plantation communities. However, this relationship likely reflects that the sugar mills are clustered in a specific geographic area, and so the difference was likely indicative of localized disasters in that area rather than a disadvantage to being near the mill. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 15

16 Were more productive communities clearly different than less productive ones? Productivity Results The following chart compares the same factors for high productivity communities (producing more than 140 quintals of sugarcane per bigha of active plantation) against less productive communities: Productivity Trends For productivity we also do not observe a factor that clearly divides productive communities from unproductive. However, the large majority (7/8) of the productive communities were within 10km of agro-vets and molasses mills, compared to 7/12 and 8/12 unproductive communities, respectively. Easier access and increased technical capacity through routine contact were likely a factor, though not sufficient on their own, for developing productive plantations. The difference in previous disaster experience was also noteworthy: on average, 97% of households in productive, compared to only 51% of households in unproductive communities were affected by disasters before M-RED, and lost 24 bigha of land, compared to only 16 in unproductive communities. This suggests that motivation may have been a related factor, with the more disaster-affected communities feeling a greater need to closely manage and tend their plantations. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 16

17 Were more profitable communities clearly different than less profitable ones? Profitability Results The following chart compares the same factors as above for communities which experienced a net profit, taking into account only direct financial benefits, against those which were unprofitable. Profitability Trends As with productivity, profitable communities are uniformly within 10km of agrovets and molasses mills, presumably this indicates a channel of increased technical skills and productivity. Disaster-affectedness before M-RED is also likely a factor, with 87% of households in profitable communities affected compared to only 61% of non-profitable. Interestingly, when examining profitability we also see community trust to be a significant factor: on average, 96% of surveyed households in the profitable communities reported trusting others, compared to only 62% of households in unprofitable communities. This increased cohesion may be either a cause or result of good management and success in the nexus activity. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 17

18 3. Over a three-year period, did the total benefits of the sugarcane nexus activity exceed the total costs? The nexus activity was designed to provide a sustainable economic incentive to protect land against disasters. The economic activity itself may not have been profitable to this point, but has there been an overall net benefit? We attempt to estimate this by adding the value of land preserved to our profit calculations. CATEGORIES OF SUGARCANE PLANTATION AND LAND PROTECTED The total area of land protected, and the value for a given area, was identified through discussions with each community. Community members were asked how much they pay for one bigha of land within their community and beside the riverbank, and the difference in price for land safe from or vulnerable to flooding. However, these prices vary considerably from government valuations, which are only a fraction of the market price. Since the reported market price is a more accurate estimate of the real value communities place on land, we use the community-reported price for land bordering the river and vulnerable to flooding (the lowest of the market prices). These data were only collected once, in 2016, so year-by-year estimates are not available. To convert the value of one bigha of riverbank flood-affected land to a value per year, we use an approximated rental price instead of the purchase price. We then consider total value of land protected to be: Total Value of Land = Rental Price + Units of Land + Duration Protected MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 18

19 There are several caveats to our estimation method: As we only have the value of land protected in 2016, we assume that there was not a greater value of land protected in 2014 and It is possible that, as the sugarcane plantations suffered loss each year, they were initially protecting more land. However, we consider the value of this land minimal if it was lost, damaged, or ultimately did not produce sugarcane for harvest after one year. There may be other benefits to sugarcane plantation, including improved soil composition, increased soil fertility, and the opportunity to inter- crop with the sugarcane plantations. By not including these benefits, we may underestimate the value of the land protected. Rental prices are not exact, and represent a broad estimate using a 10-to-1 price-to-rent-ratio, which is in line with other rural areas of Nepal, but substantially less than the country average (31.84-to-1). However, the country average draws on urban areas such as the Kathmandu Valley, and is considered less appropriate to the predominantly rural setting of the Terai region. Even the rural estimate may slightly overestimate the value; given these are marginal lands. We include the rental value of land on which sugarcane is currently grown, although this land cannot be used for other productive purposes or rented out for money. However, this over-valuing of the land is offset by reports of inter-cropping with other crops, and the possibility of increased agricultural productivity as a result of the sugarcane collecting nutrient-rich sediment in previously sandy areas. Results When we add our rudimentary valuation of land to the income earned through sale of sugarcane, we see the net benefit increase considerably from our income-only analysis: THREE-YEAR PROFIT ESTIMATES: ALL BENEFITS Year of Plantation Average Net Benefit (3 Year Income + Land) Maximum Minimum Communities with Positive Net Benefit 2014 SRPOPUP:P" LO!UPOKRF" 5T>TOKLK 11/ !OSUROKTU" POP!POFLP 5ULO>LK" 14/15 Both >OK>LOFLR"!!OUR>OTTS 5TRROFKK" 20/21 The clear majority of plantations are expected to have a net benefit over the three-year cycle. However, only just over two-thirds of the 2014 plantation experienced a positive return. Why the difference between the experience of the 2014 and 2015 plantations? In this case, the answer seems to be the large amount of 2014 plantation that was either lost or reduced active plantations within the first year. From a monetary perspective, this meant less harvested production, despite already having paid the expenses of the firstyear inputs. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 19

20 How does the return compare to the fixed investment of structural mitigation? For many communities, though not all, structural mitigation works were installed before the sugarcane planting could take place. This consisted of bamboo fencing to accumulate silt within the riverbed, where the sugarcane is then planted; sloping and planting grasses to maintain riverbank gradients; and in some locations mixed bamboo and stone or sandbag structures to protect banks. Among all 21 communities planting sugarcane, the average cost of the structural mitigation was 726,332 NPR. Six of the 21 communities reported no need for structural engineering, while the highest cost was 2,394,000 NPR. The range is shown below: If we consider the initial cost of mitigation structures to be an investment, how many years does it take to be repaid? Here we only consider communities that required structural mitigation work, and had net positive profits; for those with losses over the three-year cycle the investment would clearly not be repaid. Looking at monetary profit only, for the 15 communities with structural mitigation costs, six communities had positive profits after the combined three-year cycles for 2014 and 2015 plantations. The average time needed to recoup the mitigation costs among these six (excluding a single extreme outlier) is 32 years, but it varies considerably from three years up to 115 years. When including the value of land as well, all 15 communities expect net benefits after the combined threeyear cycles for 2014 and 2015 plantations. The time needed to repay is much lower, with an average of 12 years, and nine of the 15 communities able to repay within just 5 years. Clearly the expected repayment period depends upon how broadly we consider the benefits of the nexus intervention. Using actual earned profit, communities with relatively little production and high structural mitigation costs would functionally never pay off their investment. However, the most productive communities, and those with no or small structural mitigation costs, can reasonably pay off their investment within a few years. Overall, though, the fact that a minority of communities could pay off the investment through sugarcane profits alone speaks to the continued need for government or NGO involvement to help offset the at times substantial cost of structural mitigation infrastructure that is required at the initial stage of this nexus intervention. Interestingly, while there is a clear positive connection between the cost of structural mitigation and the time needed to pay it off, it is also clear that the most productive communities can still repay large investments within a feasible period of time. Of the three communities with the most expensive mitigation work, two are able to pay it off within two years through monetary profits alone. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 20

21 Conclusions This cost benefit analysis of the M-RED sugarcane nexus intervention in the Terai of the Far West region of Nepal demonstrates that the sugarcane intervention can be profitable in some cases for the targeted floodvulnerable communities. Where it is profitable, the M-RED intervention seems to have sufficient economic incentive for sustained investment by communities, local government and private sector to continue the interventions beyond the M-RED program. However, there are various factors that contribute to profitability which are important to analyze to understand how replicable this particular model is for similar flood-prone communities. The primary conclusions of this cost-benefit analysis include: 1. When using a basic cost-benefit model factoring only the cost of agricultural inputs vs. revenue generated from sales, the sugarcane is only profitable for some communities. Just less than half of the analyzed target communities show profitability to date with this basic CBA. 2. If the cost-benefit model is broadened to include additional benefit; namely, the value of land protected or improved by the sugarcane production, then the number of communities experiencing profitability within the three-year cycle increases significantly to include almost all communities. 3. But, when the full cost-benefit model is applied, by broadening yet further to include the additional costs of building mitigation structures that are required in some locations to protect riverbanks prior to planting sugarcane, the results are more mixed. Some communities with minimal structural investments are able to break even; and yet communities with high structural investments and low productivity of sugarcane are not able to break even in a reasonable timeframe. From these three sets of results we can conclude that an important factor in determining long-term viability of the sugarcane nexus intervention is the scope and price of mitigation structures required to protect any targeted plantation area. It is important to recognize, however, that structural investments are often prioritized for reasons beyond the nexus intervention (i.e. to protect nearby homes) so in many instances the cost of that mitigation infrastructure should not be weighed solely against the income generation benefit of associated agriculture production, but also the value of land protected (as here) and other assets protected such as homes or community infrastructure (not included here). An analysis of factors that may influence each community s sugarcane nexus profitability, productivity, and retention of productive sugarcane throughout the three-year crop cycle demonstrates a set of key factors for success of the model: Proximity to input suppliers, technical service providers and buyers (agro-vets, sugar mill or molasses mill) is an important factor for both productivity and profitability. Those who were located closest to these providers were not always the most profitable or productive; but among those who were profitable and productive, the vast majority were located near to these services. Severity of previous disaster experience matters for the productivity and profitability of nexus interventions, and also for maintaining active plantation areas year-to-year. It is possible that communities more readily buy into the M-RED model as a solution to manage their risks, the more severe their prior experiences with floods and river-cutting. This buy-in, in turn, translates to better management of their sugarcane plots and ultimately stronger outcomes. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 21

22 Social cohesion may be a factor for profitability. Whether the community members reported a high level of trust for their neighbors appears to possibly have relation to the performance of their sugarcane nexus project. Among six profitable communities under the basic CBA model, three of them had 100% scores on trust reported; whereas among the eight unprofitable communities, two of them had 0% scores on trust reported. This is a marked distinction between the two groups, but drawn from a very small sample size, so needs further inquiry. Recommendations Based on the above findings, the following recommendations are suggested to improve profitability of the sugarcane nexus interventions during the next three years of M-RED Phase 2 implementation (May April 2019), with the goal of solidifying the economic incentive for the sustained DRR benefits of sugarcane. 1. Establish productivity targets with all nexus communities. Work with Agro-vets, and technicians from DADO and the sugarcane and molasses mills to set these targets, using the break-even analysis in this report. Establish a system to carefully track productivity progress throughout the growing season to enable actors to problem-solve where underperforming. 2. Evaluate unproductive and unprofitable groups for continuation. During the start of the next phase, make a careful evaluation of viability to continue the sugarcane nexus intervention in the lowest performing communities. Evaluate their interest to continue, and their context as a potential fit for alternative nexus intervention or solutions to be introduced in Phase Orient the selection of additional target communities for the sugarcane nexus intervention to areas that (1) have severe previous experience of flood and river cutting; (2) are within proximity to both an agro-vet and a processing mill, or are in planned expansion areas. 4. Actively work with service providers to expand their service areas. Make efforts to expand the network of agro-vets, and the outreach of the sugar mill and molasses mill to provide more frequent services to the existing target communities that are more distant. Promote the sugar mill to open additional field locations for their technicians using geographic analysis. 5. Promote improved social cohesion among all groups, with particular attention on unprofitable groups. Make efforts to improve group management, particularly Farmers Groups and Disaster Management Committees in each community, and to actively promote the sharing of information, joint decision-making, and linking with other actors (government, private sector, etc). Ensure the voice of marginalized members (women, ethnic minorities, and lowest caste). Use the profitable groups as models for M-RED staff, partners and for cross-visits to learn about the best approaches for group management and improving social cohesion. Also based on the above findings, we recommend to do further research during Phase 2 on the following: 1. Deeper research on social cohesion. Gain better understanding of how the trust among community members is related to success of the nexus intervention. Is it the formal and informal management of the group? Is it the technical competency of members? Is it the level of care in tending and monitoring their plantation? Is it representation of marginalized community members? MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 22

23 Many factors can and should be unpacked for better comprehension on strengthening the model (across all of the nexus interventions in Nepal and Timor-Leste). 2. Continued analysis of sugarcane productivity, profitability and tracking the maintenance of active sugarcane. Rather than running an analysis at one time (at close of program), use this CBA as a basis from which to continue to track and provide check-ins on these three factors for each community, with all stakeholders (farmers, DMCs, agro-vets, sugarmills, DADO, etc). This is particularly important because of the short duration of the program, compared to the agricultural cycles involved. The CBA was only able to evaluate harvests from two years on the 2014 planting, and one year on the 2015 planting. We anticipate that the 2014 harvests are the weakest performers because they were the first round of implementation. The 2015, 2016 and subsequent seasons should perform better and better as technical skills continue to improve among farmers. 3. Additional analysis on perceived benefits of the nexus among community members. Community members are replicating the sugarcane planting on their own; it will be illuminating to better understand their motivations to invest in the nexus expansion. Is their perception of economic benefit skewed because of subsidies from M-RED and local government? Are they motivated by social values, or driven by a sense of agency as they recover control of lands previously considered lost to the river? 4. Establish an evaluation approach to capture the benefits of Disaster Risk Reduction within the CBA, beyond just the protection of land. Due to the constraint of low-rainfall and low incidence of flood events in the 2014 and 2015 Monsoon seasons, the full benefit of DRR impacts from the sugarcane nexus interventions was impossible to articulate in this analysis. However, over the course of the next Monsoon seasons ( ) continued analysis should be conducted to clearly capture the DRR benefits. Likewise, the performance of the sugarcane production during drought should be evaluated, if droughts continue. MERCY CORPS Managing Risks Through Economic Development (M-RED) Case Study 23

24 CONTACT LAURA BRUNO Program Director M-RED KEITH B. IVES Co-Founder and President Causal Design About Mercy Corps Mercy Corps is a leading global organization powered by the belief that a better world is possible. In disaster, in hardship, in more than 40 countries around the world, we partner to put bold solutions into action helping people triumph over adversity and build stronger communities from within. Now, and for the future. 45 SW Ankeny Street Portland, Oregon mercycorps.org 720 Village Center Drive Colorado Springs, CO causaldesign.com