Value Chain Analysis Firewood in Burkina Faso

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1 1 of 34 Value Chain Analysis Firewood in Burkina Faso FAO VCA : A Tool for Quantitative Analysis of Socio-Economic Policy Impacts About the FAO Policy Learning Programme This programme aims at equipping high level officials from developing countries with cutting-edge knowledge and strengthening their capacity to base their decisions on sound consideration and analysis of policies and strategies both at home and in the context of strategic international developments. Related resources See all material prepared for the FAO Policy Learning Programme See the FAO Policy Learning Website: See more resources on VCA

2 2 of 34 Value Chain Analysis: Firewood in Burkina Faso FAO VCA : A Tool for Quantitative Analysis of Socio-Economic Policy Impacts By Lorenzo Giovanni Bellù, Policy Officer and Nathalie Guilbert, Consultant Policy Assistance Support Service, Policy and Programme Development Support Division of the FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS About EASYPol The EASYPol home page is available at: This presentation belongs to a set of modules which are part of the EASYPol Resource package: FAO Policy Learning Programme : The Policy Framework: Policy Impact Analysis Using Value Chain Analysis EASYPol is a multilingual repository of freely downloadable resources for policy making in agriculture, rural development and food security. The resources are the results of research and field work by policy experts at FAO. The site is maintained by FAO s Policy Assistance Support Service, Policy and Programme Development Support Division, FAO.

3 3 of 34 Objectives At the end of this session the participants will be able to: Name the constituting elements of a value chain Session based on the case of the formal firewood chain in Burkina Faso, Ouagadougou area (Data 2006) Explain why it is important to analyse whole value chains (VCA) for policy formulation purposes Mention some examples of VCA for policy formulation Recognize situations in which policy objectives may not be achieved due to leakages in the value chain.

4 4 of 34 The concept of a value chain The term Value chain denotes a set of agents, with related activities and markets, who contribute directly to the production, transformation and distribution to final markets of a single product. Value Chain Analysis is a technique applied to assess how public policies, investments and institutions affect existing or planned chains for agricultural commodities. VCA consists of quantitative analysis of inputs and outputs, prices, value added and margins of the different agents under different policy scenarios.

5 5 of 34 The global situation of the firewood chain in Burkina Faso National firewood annual production: 4,151,642 tons (around 400kg per capita) Around people are involved in the chain Estimated firewood consumption in Ouagadougou: 1,100,000 tons/year Source of energy consumed at national level 11% firewood other energies 89%

6 6 of 34 A pilot study at smaller scale for policy making A Pilot study at a reduced scale; regions analyzed are Center-West & Center-South. Poverty incidence is higher in these regions (around 50%) than the average of the country (around 46%). Around 800 woodcutters involved; most of them are also farmers ha of managed forests production of 1.37 tons of firewood/ha total production around 24,000 tons.

7 7 of 34 A pilot study at smaller scale for policy making

8 8 of 34 The production situation Formal chain: regulated wood production in publicly managed sites. Woodcutters are organized in socio-professional structures called (Forest Administration Groups ( Groupements de Gestion Forestière ) Groups are concessionaires of the forests. Producers carry out activities to preserve forest resources like: reforestation, fights against bush fires, land protection against cattle... Informal chain: uncontrolled wood extraction. More numerous. Economic agents are not grouped. No care/worry about forest preservation. Tax evasion. Unfair and illegal competition vs. activities under public regulation.

9 9 of 34 The firewood chain chart Woodcutters organized in Forest Administration Groups (GGF) & Unions of GGF Woodcutters Informal Collectors Wholesalers processors of firewood organized in Associations Self - consumption Collectors Wholesalers processors of firewood Informal Retailers of firewood organized in Associations Retailers of firewood Informal Final Consumers of firewood Main flows of firewood Other flows of firewood Self consumption flows

10 10 of 34 Actors of the chain Three main types of actors: Woodcutters (sale price of one ton : US$ 17.6) Wholesalers (sale price of one ton : US$58.4) Retailers (sale price of one ton : US$ 68) Value added: Value Added Distribution per group of economic agents 59% 5% 36% Net benefits for each group of economic agents producers wholesalers retailers Firewood producers: US$ 12.8 VA per ton Wholesaler : US$ 24 VA per ton Retailer : US$ 1.9 VA per ton 53% 8% 39% producers wholesalers retailers

11 11 of 34 Socio-economic profile, income and margins of woodcutters Socio-economic profile of woodcutters: Small-marginal farmers and landless-wage workers, who carry out firewood activities in the dry season. The average net benefit per woodcutter earned during the campaign (3 months) is around US$ 260, which represents an important part (more than one fourth) of the total annual income of its household (US$907). The national average household poverty line of around US$ Sell price of one ton of firewood (in US$) for organized chain Fund for Village investment Allocation of the revenue per ton (US$) Fund for Land Development Forest Tax (concession fee) Margin to woodcutter Thanks to firewood production activities, farmers are able to keep out of extreme poverty and vulnerability.

12 12 of 34 Policy issues Facts Opportunities/solutions High current and future demand of firewood Deforestation & environmental issues Market increase for woodcutters Gas subsidy implemented Gas used by only 2% of the population Gas used by urban and richer part of population Gas is a substitute for firewood, leading to less deforestation Gas subsidy very expensive for the budget

13 13 of 34 Policy issues Facts Opportunities/solutions Vulnerable Rural population Severe Poverty and food insecurity of small-holders and landless people Unfair distribution of income among fallers and traders Create employment within the chain Rationalize downstream activities Lack of forestry management No forestry control (agro-pastoral appropriation of the land) Unfair competition of informal vs. formal woodcutters in managed areas Loss of income for the State Non respect of rotation delays and environment Reallocate subsidy resources to invest in forests management Facilitate grouping of fallers Enforce forestry regulations Rationalize downstream activities

14 14 of 34 Policy objectives The objectives of the policy makers are: To increase income generated and distributed in rural areas To fight against deforestation and other environmental issues

15 15 of 34 Policy measures identified Proposal: a «package» of two policy measures: 1. Demand side policy: Stop the butane gas subsidy to sustain demand. 2. Supply side policy : investing in forest management to increase the productivity of forests ( tons/ha) through improved reforestation, technical and organizational capacities. Remark: The objective of the gas subsidy was to preserve forests. The assumption is that this objective can be achieved by investing resources of the gas subsidy in forest management. National annual gas consumption* 34,359,432 kg A Subsidy price US$/kg 0.68 B Subsidy cost to the budget US$ 23,364,414 A * B * Customs import data 2005

16 16 of 34 Expected socio-economic impacts of the demand-side policy measure Stop subsidy Price of gas Demand firewood Ouaga WHY? Because firewood is a substitute for gas Price firewood Ouaga Po Quantities actually sold Revenue traders? WHY? Depends on supply: 1) Supply rigid Po, Q 2) Supply elastic: Po, Q (likely) Because Po x Q as P and Q Margins traders Mt Revenue woodcutters Rf?

17 17 of 34 Expected socio-economic impacts of the demand-side policy Quantity (Q) Price (P) PxQ 000 Tons $/Ton 000$ trader revenue Costs Without Policy margin faller revenue Cost Margin Quantity (Q) Price (P) PxQ trader revenue Cost With policy margin (stop subsidy) faller revenue Cost Margin Quantity (Q) Price (P) PxQ Var % trader revenue % With policy - Cost % Without policy margin % faller revenue % Cost % Margin %

18 18 of 34 Expected socio-economic impacts of the demand-side policy Negotiating power of faller: Zero Low High Inelastic Supply MT RF MT RF MT RF Elastic Supply MT RF MT RF MT RF Mt =Margins traders Rf = Revenue fallers Margin fallers Mf? Depend on production costs Cf. Without supply policy: Cf, Mf Envir. Externalities Ee? Without supply policy: Ee

19 19 of 34 Expected socio-economic impacts of the supply-side policy Investment WHY? Marginal cost prod instead of Because firewood availability per ha Supply firewood Fallers? Depends on demand: 1) No shift: Pf, Qf 2) Shift due to demand policy: Pf, Qf Envir. Externalities Ee? Depends on demand: 1) No shift: Ee 2) Shift due to demand policy: Ee instead of

20 20 of 34 Summary of combined expected policy impacts 1. More forests managed less deforestation and more wood available 2. Higher level of firewood demand larger market employment created more revenues available for woodcutters better conditions for farmers 3. More people benefit from public financial resources 4. Technical and organizational capacities of the chain s actors improved 5. Likely changes in the negotiating power of woodcutters versus traders

21 21 of 34 Summary of combined expected policies impacts [cont d] 6. Increased Income to State through the forest tax, and to villages through the investment village tax; 7. Employment created to manage forests 8. Less informal circuits and better sensitization on environmental issues; 9. Sustainable firewood supply to meet demand of present and future generations.

22 22 of 34 Combined economic impact of policies: Value added generation Value Added per group of economic agents without and with policy (000US$) without policy with policy 0 producers wholesalers retailers

23 23 of 34 Combined economic impact of policies: Socio economic impacts Larger firewood supply Employment creation Scenarios Total production of firewood (tons) Production per woodcutter per year/campaign (tons) Number of woodcutters involved Revenue per faller (US$) per campaign Without policy (1.36 tons/ha) With policy (4.25 tons/ha) Difference US$ of net revenues created at the firewood producers level 1706 households will benefit from the policy In addition, more jobs will be created to manage and control the forests VA of the whole regional chain increased by +/- US$ 2 million

24 24 of 34 FAO VCA Software Tool: A facility for computations Tables extracted from the FAO VCA software

25 25 of 34 Competitiveness of the sector with and without policy: Economic pricing Economic prices needed for competitiveness assessment Economic price of firewood based on price of imported gas We know the following equivalences: 1 Ton of firewood 0.35 Ton Equivalent Petroleum (TEP) Tons of gas 1 Ton of gas 1.18 TEP 3.37 Tons firewood The gas subsidy represents 117% of the price paid by consumers: US$/Ton Subsidised Gas price 580 Subsidy 678 Cost of gas for the country 1258

26 26 of 34 International competitiveness of the sector: Economic pricing The gas generates greenhouse effects (environmental externalities): US$/Ton Cost of gas for the country 1258 Environmental externalities (estimated) 8 Total cost of gas 1266 Gas equivalent Economic price of 1 Ton of firewood Total cost of gas Firewood equivalent of one ton of gas price of one ton of firewood as Gas Equivalent (Us$1266/3.77) 1266 US$/Ton 3.37 tons firewood US$/ton

27 27 of 34 International competitiveness of the sector: Economic pricing Firewood energy is more difficult to use: Price of one ton of firewood as Gas Equivalent US$/ton Adjustment factor (estimated) 0.4 Adjusted firewood price (375.7 US$ ton x0.9) US$/Ton Firewood use may generate deforestation: Without policy With policy Adjusted firewood price US$/Ton US$/Ton Environmental externality per ton of firewood (estimated) 15 US$/Ton 0 US$/Ton Firewood price applied US$/ton US$/Ton

28 28 of 34 International competitiveness of the sector: Policy Analysis Matrix Scale factor 1000 Source: Tables extracted from the FAO VCA software tool

29 29 of 34 Combined impacts of policy measures on poverty: Selected indicators For this pilot exercise, poverty impacts are calculated at regional level*. With policy additional revenue of US$ 260/year for 1706 households. Additional revenue to the poorest Without policy: incidence 49.52% Additional revenue to the closest to the poverty line Additional revenue (random selection) With policy: incidence 49.52% 49.15% 49.52% Without policy P. Gap 34.5% of the poverty Line With policy P. Gap 34.2% 35.0% 34.4% * based on total expenditures (% of population)

30 30 of 34 Combined impacts of policy measures on poverty Remarks: 1 The importance of poverty reduction impacts of policies depends on how policy measures are targeted on different social groups. 2 Different poverty indicators could lead to rank policy options differently, e.g. poverty incidence versus poverty gap. 3 Time matters: policy implementation requires time to invest in reforestation, educate and train people in forest management.

31 31 of 34 Value Chain Analysis (VCA) accounting framework: an assessment General characteristics Relevance for poverty/fs Coverage of policy measures Technical structure Resource needs Value Chain analysis allow us to analyse the policy impacts that spread into the economic system by means of the path followed by a commodity. With VCA we can measure, among other things, the changes in the income of specific agents, due to sub-sectoral policies. Only policies with impacts that do not deviate too far from the base situation can easily be simulated. Otherwise, behavioural assumptions are needed. Accounting frameworks with no explicit modelling of behaviour. Prices and quantities are explicitly modelled. Some knowledge of accounting rules at farm/firm and meso-level is required. Much micro data needed.

32 32 of 34 Micro-accounting approach: an assessment General characteristics Relevance for poverty/fs Coverage of policy measures Technical structure Resource needs Use of detailed household data to generate policy scenarios, by directly introducing changes in the data base, after selection of households affected. Linked the quantity/quality of available data. Good for poverty (expenditures, consumption.) Take only the direct effects. Not suitable for structural policies with strong indirect effects. Accounting framework without explicit modelling of behavioural feedback. Used in general in association with other approaches. Limited, in terms of time, when good household surveys have been already carried out by statistical offices. Knowledge of data management needed.

33 33 of 34 Conclusions This analysis has been carried out following the value chain approach combined with the use of household-level data. The FAO VCA software tool allowed the authors to analyze value added, margins and competitiveness of the chain without and with policy. Household data + STATA software allowed the authors to calculate income/expenditure distribution without and with policy and related socio-economic indicators.

34 34 of 34 More FAO VCA Software Tool resources A Software for Value Chain Analysis. FAO VCA Software Tool 3:1 [2013] EASYPol module 073 A Software for Value Chain Analysis. Manual for FAO VCA Software Tool 3:1 EASYPol Module 074 Value Chain Analysis for Policy Making: Methodological Guidelines for a Quantitative Approach EASYPol module 129

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