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Thailand UNDP-GIZ workshop on CBA - A review of conduction cost-benefit analysis

Thailand, 27-28 November 2017 - UNDP and GIZ partnered with the Thailand Office of Agriculture Economics (OAE) to launch a workshop designed to connect vital stakeholders to build an effective National Adaptation Plan. The two-day workshop at the Rama Garden Hotel had 20 participants from each department under the Ministry of Agriculture and Cooperatives (MOAC). The workshop was designed to build capacity of planning officers to formulate better projects and budget submissions as well as potential climate finance proposal using cost-benefit analysis and ecosystem-based analysis appraisal tools.

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Cost-Benefit Analysis: Advanced Training
Presentation by Dr. Benoit Laplante
Bangkok, Thailand
November 27-28, 2017
Session 1:
A Brief Review of Key Issues when Conducting CBA
2
4) Economic versus cost-effectiveness analysis
3) Economic, financial, and fiscal analysis
2) The role of cost-benefit analysis
Outline of presentation
1) Climate change and agriculture
7) Climate-proofing investment projects
6) Selecting adaptation options
5) Steps when conducting cost-benefit analysis
3
4) Economic versus cost-effectiveness analysis
3) Economic, financial, and fiscal analysis
2) The role of cost-benefit analysis
Outline of presentation
1) Climate change and agriculture
7) Climate-proofing investment projects
6) Selecting adaptation options
5) Steps when conducting cost-benefit analysis
Climate change and agriculture
In general:
“The study shows that temperature and precipitation changes in
both climate scenarios will significantly lower crop yields and
production— with irrigated and rainfed wheat and irrigated rice
affected the most.”
Source: World Bank. 2010. Economics of Adaptation to Climate Change. Washington, D.C.
Scientific literature:
 Climatic Change
 Nature Climate Change
 Science
 Proceedings of the National Academy of Sciences (PNAS)
Climate change and agriculture
In general:
Agriculture
yield
Temperature22C 28C
Increase of 1
degree
increases yield
Increase of 1
degree has limited
impact on yield
Increase of 1
degree
reduces yield
Climate change and agriculture
In Thailand:
Climate change already has an impact on the sector.

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Thailand UNDP-GIZ workshop on CBA - A review of conduction cost-benefit analysis

  • 1. Cost-Benefit Analysis: Advanced Training Presentation by Dr. Benoit Laplante Bangkok, Thailand November 27-28, 2017 Session 1: A Brief Review of Key Issues when Conducting CBA
  • 2. 2 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 3. 3 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 4. Climate change and agriculture In general: “The study shows that temperature and precipitation changes in both climate scenarios will significantly lower crop yields and production— with irrigated and rainfed wheat and irrigated rice affected the most.” Source: World Bank. 2010. Economics of Adaptation to Climate Change. Washington, D.C. Scientific literature:  Climatic Change  Nature Climate Change  Science  Proceedings of the National Academy of Sciences (PNAS)
  • 5. Climate change and agriculture In general: Agriculture yield Temperature22C 28C Increase of 1 degree increases yield Increase of 1 degree has limited impact on yield Increase of 1 degree reduces yield
  • 6. Climate change and agriculture In Thailand: Climate change already has an impact on the sector.
  • 7. Climate change and agriculture Results from selected studies • In a study conducted by ONEP in 2008, negative impacts on corn productivity ranged from 5–44%, depending on the location of production. • By using the Crop Environment Resource Synthesis (CERES) model, the Office of Environmental Policy and Planning (2000) has estimated that rice grown under rainfed conditions was found to be highly vulnerable to climate change. The study estimated that yields of rice could decline by as much as 57% compared to the baseline. Office of Environmental Policy and Planning. 2000. Thailand's Initial National Communication under the United Nations Framework Convention on Climate Change. Ministry of Science. Technology. and Environment. Bangkok, Thailand. 100 p.
  • 8. Climate change and agriculture Results from selected studies • In a more recent paper, Felkner et al (2009) used the computer crop growth model DSSAT to estimate the impacts of climate change under the A1FI (highest emissions trajectory scenario) and the B1 (lowest emissions trajectory scenario) for the period 2040-2069. The authors estimate a reduction in aggregate yield ranging between 3.5% and 13.8% compared to neutral climate simulations Felkner, J. et al. 2009. Impact of climate change on rice production in Thailand. American Economic Review. 99. 2. 205-210.
  • 9. Climate change and agriculture Results from selected studies • Using a Ricardian approach, Attavanich (2012) estimates the impacts of climate change on farm value under the A2 and B2 scenarios for the 2040-2049. Results indicate that farmland values per rai are projected to decrease from $2,703 per rai to $2,068 and $2,538 per rai in climate scenarios A2 and B2, respectively. This would indicate decreases in agricultural output ranging approximately between 6.1% and 23.5%. Attavanich, W. 2012. The Effects of Climate Change on Thailand’s Agriculture. Mimeo. Kasertsart University, Thailand.
  • 10. Climate change and agriculture ADB. 2009. The Economics of Climate Change in Southeast Asia: A Regional Review. Manila. • The Asian Development Bank estimated a potential reduction of rice yield under the B2 and A1FI emissions scenarios of approximately 5% and 15% respectively by 2050. Results from selected studies
  • 11. Climate change and agriculture Overwhelming message: Crop yields will fall as a result of climate change. This may raise prices of agricultural commodities (with adverse impact on the poor), and endanger food security. What to do? Simple question: Answer: Not so simple. Especially if we consider that climate change will have impacts on many things other than agricultural productivity. So….what is the best to use our limited resources across sectors? How much should society invest in adaptation?
  • 12. 12 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 13. In presence of limited resources, decision makers are left with the difficult problem of evaluating and choosing investment projects and assessing policies in a context of significant complexity and uncertainty. For this purpose, decision makers have a need for a framework which structures information in a way which makes feasible and transparent this process of evaluation and selection. The role of cost-benefit analysis
  • 14. Cost-benefit analysis provides a means of assessing and comparing the impacts of projects and policies, even when benefits and costs occur over long time horizons. It provides a systematic means to identify, quantify, and wherever possible monetize all impacts of a project or policy (including their environmental impacts), and present these impacts as social costs and social benefits. The role of cost-benefit analysis is to provide information to the decision-maker about the costs and benefits of the project or the policy. The cost-benefit analysis informs decision-makers, does not replace them. The role of cost-benefit analysis
  • 15. 1) Is a process (technique) to compare all the gains and losses resulting from a project or from a policy into a common unit of measurement. Technically, cost-benefit analysis… 2) Summarizes all positive (benefits) and negative (costs) impacts of a project or policy into one number. 4) Aims to provide information about the economic efficiency of a project or policy. 3) The economic analysis of a project (or policy) serves as an organizing framework for stakeholders to discuss the various aspects, both positive and negative, of projects or policies. The role of cost-benefit analysis
  • 16. Numerous criteria are used (or should be used, or must be used) to assess projects or policies, such as: • The physical or biological impacts; • Economic efficiency; • Distributional equity; • Social and cultural and religious acceptability; • Operational practicality; • Administrative feasibility; • Legality. Warning The economic analysis informs decision-makers and policy- makers about the economic efficiency of projects or policies. The role of cost-benefit analysis
  • 17. Economic efficiency is only one criterion used to decide whether a project should be funded or not. Other criteria are also used. Hence, even if the economic analysis of an investment were to show that the project should not be recommended from an economic efficiency point of view, it does not mean that the project will not go ahead. Warning The role of cost-benefit analysis
  • 18. For any given project (or policy), we want to know: Is this a good project (or policy)? For any given group of projects (or policies), we want to know: Which project (or policy) is better? Given a set of options all achieving a given objective, we want to know: Which of these options is better? The role of cost-benefit analysis
  • 19. However: • Good or better for whom? • For a project proponent OR for Government OR for society? The role of cost-benefit analysis
  • 20. 20 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 21. • Cost-benefit analysis has become a generic term. As its name suggests, it is an analysis which aims to compare the costs and benefits of a project or a policy. Cost-benefit analysis: • The question is: Whose costs and whose benefits? • The answer to this question will determine the difference between a financial analysis, a fiscal analysis, or an economic analysis. Economic, financial and fiscal analysis • Economists will generally equate cost-benefit analysis to economic analysis where costs and benefits to society are included in the analysis. However, project proponents also do cost-benefit analysis where costs and benefits to the project components are included in the analysis.
  • 22. Financial analysis: • A financial analysis is a cost-benefit analysis but where: • The only stakeholder included in the analysis is the developer (or investor). • The only costs included in the analysis are the costs of the project to the developer or investor. • The only benefits included in the analysis are the benefits to the developer or investor. • A financial analysis examines the profitability of a project for the developer of the project or for the investor; it is based on a cash-flow analysis and looks at costs paid by the investor, and revenues received by the investor. The question is: Will the project increase investors’ wealth? Economic, financial and fiscal analysis
  • 23. Fiscal analysis: • A fiscal analysis is a cost-benefit analysis but where: • The only stakeholder included in the analysis is the Government. • The only costs included in the analysis are the costs of the project to State budget. • The only benefits included in the analysis are the benefits of the project to State budget. The question is: What is the impact of the project on Government budget? Economic, financial and fiscal analysis • A fiscal analysis examines the impacts of the project on government’s fiscal (budgetary) position.
  • 24. Economic analysis: • An economic analysis is a cost-benefit analysis but where: • The stakeholder is all society, not only the developer or investor. • The costs included in the analysis are all costs of the project for society resulting from all impacts. • The benefits included in the analysis are all benefits of the project for society. The question is: Will this project increase society’s well-being (welfare)? Economic, financial and fiscal analysis
  • 25. Is this a good project? For investor For society Private sector Public sector Conduct a financial analysis or private cost- benefit analysis Conduct a fiscal analysis Conduct an economic analysis or social cost- benefit analysis For government These 3 types of analyses are very different from one another and will provide different types of information to different types of decision-makers. Economic, financial and fiscal analysis
  • 26. Hence: • Before conducting a “cost-benefit” analysis, a first key step is to ask: What type of cost-benefit analysis or whose point of view will this analysis take? Economic, financial and fiscal analysis • Once an answer is given to the above question, then the analyst must ensure that only those costs and benefits consistent with that point of view are included in the analysis. • As mentioned earlier, economists will generally equate cost- benefit analysis to economic analysis in which one aims to assess the impacts of the investment project or policy on society’s welfare.
  • 27. 27 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 28. Economic (cost-benefit) analysis: • When undertaking a cost-benefit analysis, we compare the costs and the benefits of a proposed investment (or policy) and ask the question: “Is this a good project (or policy) for society?” Economic versus cost-effectiveness analysis
  • 29. Cost-effectiveness analysis: • When undertaking a cost-effectiveness analysis, we do not ask the question: “Is this a good project (or policy) for society?” • Instead, we ask the question: Economic versus cost-effectiveness analysis “What is the least cost way of achieving the same stream of benefits or the same objective or the same target?”
  • 30. Examples: “We must achieve net zero GHG emissions by 2050.” “Roads must be able to withstand a 1-in-50 flood event.” Economic versus cost-effectiveness analysis Question is: What is the least cost way of achieving these targets? “Agricultural productivity (yield) in Thailand must be maintained in the future despite the projected impacts of climate change.”
  • 31. What about multi-criteria analysis? Common statement: “When the benefits of an investment or a policy cannot be quantified monetarily, then a multi-criteria analysis can be used to assess the investment or policy.” This is not quite correct. MCA is not a substitute to cost-benefit analysis. MCA is always done. Decisions are always based on many criteria. Sometimes economic efficiency is one criteria, and sometimes it is not. Sometimes economic efficiency is very important, and sometimes it is not so important.
  • 32. 32 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 33. Step 2: Identify all potential physical impacts of the project. Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 8: Make recommendations. Step 3: Quantify the predicted impacts: With and without project Step 1: Define the scope of analysis. Step 7: Perform expected value and/or sensitivity analysis. CBA: 8 steps
  • 34. Step 2: Identify all potential physical impacts of the project. Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 8: Make recommendations. Step 3: Quantify the predicted impacts: With and without project Step 1: Define the scope of analysis. Step 7: Perform expected value and/or sensitivity analysis. CBA: 8 steps
  • 35. The impacts of a proposed investment project are NOT defined by comparing a situation today (before) project and after project. Step 3: With and without project The impacts of a proposed investment project are defined by comparing a situation in the future without project and a situation in the future with project.
  • 36. 36 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 37. Provided that adaptation is still needed, then society faces a number of important questions, including: • What is the cost of climate change expected to be for different sectors (e.g. agriculture, water, health, coastal resources, etc.)? Selecting adaptation options
  • 38. Provided that adaptation is still needed, then society faces a number of important questions, including: • What is the cost of climate change expected to be for different sectors (e.g. agriculture, water, health, coastal resources, etc.)? • How much to invest in adaptation? Selecting adaptation options
  • 39. Selecting adaptation options Net revenues per rai Time (as temperature increases) If no adaptation available, this is the cost of climate change. Today Today +1 Today +2 Today +3 etc More precisely: The cost of climate change would be computed as the present value of the estimated reduction in annual net revenues.
  • 40. Selecting adaptation options Net revenues per rai Time (as temperature increases) Today Today +1 Today +2 Today +3 etc
  • 41. Selecting adaptation options Net revenues per rai Time (as temperature increases) Let’s now suppose that there is one adaptation option possible. ?? Today Today +1 Today +2 Today +3 etc
  • 42. Selecting adaptation options Net revenues per rai Time (as temperature increases) Let’s now suppose that there is one adaptation option possible. Benefits of adaptation Today Today +1 Today +2 Today +3 etc Net benefits of adaptation = Benefits of adaptation (increase in net revenues per rai) – Cost of adaptation investment
  • 43. Selecting adaptation options Net revenues per rai Time (as temperature increases) Let’s now suppose that there is one adaptation option possible. Benefits of adaptation Today Today +1 Today +2 Today +3 etc ??
  • 44. Selecting adaptation options Net revenues per rai Time (as temperature increases) Let’s now suppose that there is one adaptation option possible. Benefits of adaptation Today Today +1 Today +2 Today +3 etc Residual damages
  • 45. Selecting adaptation options Net revenues per rai Time (as temperature increases) Let’s now suppose that there is one adaptation option possible. Benefits of adaptation Today Today +1 Today +2 Today +3 etc Residual damages Cost of climate change = Cost of adaptation investment + Residual damages
  • 46. Provided that adaptation is still needed, then society faces a number of important questions, including: • What is the cost of climate change expected to be for different sectors (e.g. agriculture, water, health, coastal resources, etc.)? • What are the costs and benefits of different adaptation measures? Which adaptation measure to select? • How much to invest in adaptation? • What is the appropriate combination of soft measures (policies) and hard measures (infrastructure)? How to account for the co- benefits of ecosystem-based adaptation measures? Selecting adaptation options
  • 47. 47 4) Economic versus cost-effectiveness analysis 3) Economic, financial, and fiscal analysis 2) The role of cost-benefit analysis Outline of presentation 1) Climate change and agriculture 7) Climate-proofing investment projects 6) Selecting adaptation options 5) Steps when conducting cost-benefit analysis
  • 48. Climate-proofing investment projects Society invests in: • Roads, bridges, railways, ports, airports; • Energy power plants; • Irrigation schemes; • Schools and hospitals; • And many other things. Many of these assets may be exposed and vulnerable to climate change. How much more should society be willing-to-pay to increase the resilience of these assets to climate change?
  • 50. A menu of possible decisions: Invest now Be ready and invest later if needed Do nothing and invest later if needed Climate-proofing investment projects
  • 51. • costs of climate-proofing now are relatively small while the expected benefits are estimated to be very large (a low-regret approach), and/or • costs of climate-proofing at a later point are expected to be prohibitive, or climate-proofing at a later point in time is technically not possible; and/or • among climate-proofing options there exist options which deliver net positive economic benefits regardless of the nature and extent of climate change, including the current climate conditions (a no-regret approach); and/or • the set of climate-proofing options includes options which not only reduce project climate risks, but also have other social, environmental or economic benefits (co-benefits). The presence of co-benefits, if any, must be included in the economic analysis of adaptation options. Invest now if: Climate-proofing investment projects
  • 52. Climate-proofing investment projects • No climate-proofing investment is needed now, but the project can be designed to accommodate climate-proofing in the future if and when circumstances indicate this to be a better option than not climate- proofing. • This type of decisions aim to ensure that a project is climate ready. Be ready and invest later if:
  • 53. Climate-proofing investment projects • costs of climate-proofing now are estimated to be large relative to the expected benefits; and/or • costs (in present value terms) of climate-proofing (e.g. retro-fitting) at a later point in time are expected to be no larger than climate-proofing now; and/or • expected benefits of climate-proofing are estimated to be relatively small. Do nothing and invest later if: Note: The decision to “do nothing” does not come from ignoring climate change, but from rationally deciding out of a technical and economic assessment that the best thing to do for now is to do nothing.
  • 54. Climate-proofing investment projects Economic (cost-benefit) analysis aims to provide information and guide decision-making.
  • 55. Cost-Benefit Analysis: Advanced Training Presentation by Dr. Benoit Laplante Bangkok, Thailand November 27-28, 2017 Session 1: A Brief Review of Key Issues when Conducting CBA