Approximation of a Cost-Benefit

analysis of Agricultural Investment in the region of Ancash for 2011

Econ. Mara Kattia Escudero Rodrguez

March, 2013

Approximation to a cost benefit analysis of the agriculture public investment 2011

Executive Summary
Nowadays there is an increased interest in analyzing the quality of public budget. This interest is focused on look if the budget spent in public interventions is obtaining the expected outcomes. Considering this, the present paper will analyze the importance of agricultural interventions and the channels through they contribute to development of an area. Second, the paperwill present a comparison taking into account an approximation of the cost and benefits of agricultural investments in the region of Ancash in Peru. Finally, I will present the final result or net benefit. I have selected theregion of Ancash because of its location, participation in the public budget and agricultural production and because of its higher level of poverty. Ancash is located at the north part of Peru and have border with Lima, (capital city). Ancash is the fourth region with mining activity and receive 4% 1 of the Peruvian budget. Besides, 4% of agriculture land of Peru is located in Ancash. This allows Ancash to provided 9% of the national wheat production, 7% of sugar and 5% of asparagus. Consequently, 6% of the Gross Domestic Product of Ancash comes from agriculture activity. However, poverty in the agriculture sector reaches 52.5% and social indicators such us malnutrition rate in children under five years reaches 23%2. These results allow me to ask if investments in this sector are working well. To answer this question I will begin my paper making a review about what is development, and presenting the linkages and contribution between agriculture and development. The evidence presented is very clear to pointed out that in developing countries where a great part of population live in rural area, agriculture activities play a crucial role. To support this significant importance of agriculture in Ancash I will estimate the net present value of agricultural activities for 2011. Iwill introduce a new approach about how to calculate the benefits of agriculture investments using a broad methodology involving economic and social elements such usincome for farmers, savings in malnutrition treatments and willingness to pay for irrigation systems. The final results will show that for 2011 benefits of agricultural investments were greater than costs.

I.

Research question, Hypothesis and Methodology

1 2

Ministry of Economy and Finance http://ofi.mef.gob.pe/transparencia/Navegador/default.aspx National Institute of Statistics and Informatics http://www.inei.gob.pe/

Approximation to a cost benefit analysis of the agriculture public investment 2011

This paper has the objective to analyze whether Ancash agriculture investment is obtaining benefits greater than costs for 20113.Consequently, my hypothesis is that benefits are greater than cost. In this paper I am going to compare the costs and benefits of agriculture investments which include activities and projects such as water infrastructure, trainings, financing, etc. I will focus my analysis to calculate the total cost of public investments at the national, regional and local level and, on the other hand, calculate the benefits of the public agriculture intervention in economic and social terms. For the cost analysis I use information from the Ministry of Economy and Finance about all the expenses made in 2011. It includes salaries, rents, material, and assets, among others. The benefit analysis will be calculated as a sum of the income for farmers, the savings in malnutrition treatments and the willingness to pay for irrigation systems. My purpose is to quantify, in monetary terms, the most relevant costs and benefit of the investment of this primary activity that nowadays employed 25% of the economically active population of Peru and represents 7% of the Gross Domestic Product (GDP)4. Also, I chose theregion of Ancash because is a city located at the north part of Peru and have border with Lima, (capital city). Ancash is the fourth region with mining activity and receive 4%5 of the Peruvian budget. Besides, 4% of agriculture land of Peru is located in Ancash. This allows Ancash to provided 9% of the national wheat production, 7% of sugar and 5% of asparagus. Consequently, 6% of the Gross Domestic Product of Ancash comes from agriculture activity. Despite investments made in Ancash, poverty in the agriculture sector reaches 52.5%.Moreover, malnutrition rate in children under five years reaches 23%6. Additionally, a farmer survey shows little public intervention in Ancash. For instance, only 2.6% of farmers and farming have been trained on modern irrigation systems in the last three years and 8% of farmers have been trained on use of agricultural inputs in the last three years. Considering this results it is important to make an approximation of the costs and benefits of the agriculture public intervention in this area.Also, it is important to examine the linkages between agriculture and other sector because in many cases they contribute to obtaining the same results. However; it seems that apparently farmers are not perceiving and recognizing the benefit that brings the current agricultural public intervention.It is interesting to examine why the state should continue investing in this sector and not leave the work to the private sector.
3

The study will cover only one year of analysis; however, I hope to expand my analysis for the period 2007-2011 4 Peruvian Central Bank http://estadisticas.bcrp.gob.pe/index.asp?sFrecuencia=A 5 Ministry of Economy and Finance http://ofi.mef.gob.pe/transparencia/Navegador/default.aspx 6 National Institute of Statistics and Informatics http://www.inei.gob.pe/

Approximation to a cost benefit analysis of the agriculture public investment 2011

Consequently, this paper is structured as follows. First, I am going to examine the concept of human development and how agriculture can contribute to achieve development. Second, by a review of literature I will explain what a cost benefit analysis is and which steps researcher should follow. Third, I will make a brief description of the country and the region focusing on agriculture indicators. Finally, I will estimate the costs and benefits of agriculture investments and obtain the Net present value using a discount rate of 10%. A final purpose of this paper is to introduce a new approach about how to calculate the benefits of agriculture investments using a comprehensive methodology involving economicand social element; however new and better methodologies can be obtained including environmental elements.

II. 3.1

LITERATURE REVIEW Definition of Development

When we talk about development we are entering into a complex world. There is not a single definition and dimension to define development. Also, there is not agreement in which criteria consider in order to evaluate the degree of development of one area. However, some authors have made useful approximations on this definition. Most of them focus their analysis taking into account as an initial point to departurethe income.Nielsen (2011) pointed out that after many years of debate classical economists focus the measure of development using per capita real income as a proxy variable. However, nowadays there is an increase concern to look at development considering more humanistic conditions. For instance, a more complete definition of human development is provided by the United Nation Development Program (UNDP) in its last report Human Development Report 2011. Sustainability and Equity, A Better Future for All: Human development is the expansion of peoples freedoms and capabilities to lead lives that they value and have reason to value. It is about expanding choices. Freedoms and capabilities are a more expansive notion than basic needs. Many ends are necessary for a good life, ends that can be intrinsically as well as instrumentally valuable we may value biodiversity, for example, or natural beauty, independently of its contribution to our living standards. This definition is closely related to AmartyaSen Theory of Human Development. The UNDP complement their definition providing each year the Human Development Index. TheIndex is calculated using life expectancy at birth, mean years of schooling, expected years of schooling and gross national income per capita. The index takes into account economic and social indicators, however, it is important to look at how this development can be sustainable. The International Institute for 4

Approximation to a cost benefit analysis of the agriculture public investment 2011

Sustainable Development defines sustainable development as the environmental, economic and social wellbeing for today and tomorrow. They focus their analysis of development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Besides, Constanza and Patten (1995) pointed out that sustainability can be seen in two ways, biologically speaking sustainability means avoiding extinction and living to survive and reproduce. Economically, it means avoiding major disruptions and collapses, hedging against instabilities and discontinuities. Sustainability, in this context concerns temporality and longevity.

Graph N 1: Sustainable development

Source: New South Wales, Australia. 2008

This means that development should consider take care of the environment preserving biodiversity, water, soil and forest. Also, means that people can access to basic services like education and health. Finally, it means that people have enough opportunities and resources to access to private services which are necessaries to have a plenty life. However, in developing countries the state rarely can provide all the necessary services to have educated and nourished people, so it is the people with their own resources that should provide some of the basic services. For instance, The World Health Report 2008 pointed out that countries can be divided into categories: high expenditure health economies which spent US$ 3,752 per capita and low expenditure health economies which spent US$103 per capita. In low expenditure health economies 30% of the total amount is invested by the government but 60% comes from the patient and 10% from

Approximation to a cost benefit analysis of the agriculture public investment 2011

private services. This means that income play a crucial role especially in developing countries.

3.2 Contribution of agriculture to human development

Agriculture as a primary activity is a powerful source of monetary resources for many poor families. The Word Development Report 2008, Agriculture for Development, recognizes the importance of this activity to provide resources to poor people. It mentioned that agriculture offers new opportunities to move of poverty many rural poor families. Anrquez and Stamoulis (2007) explain that extreme poverty continues to be a rural phenomenon. Of the 1.2 billion of extremely poor people in the world, 75% live in rural areas and for the most part they depend on agriculture, forestry, fisheries and related activities for survival. Also, they show that agriculture is more pro-poor than other sectors especially in poor countries like India and Ivory Coastas well as in middle income countries like South Africa. Considering this information improve results in agriculture sector could be seen as an effective way to reduce poverty. Christiaensen and Demery(2007) show that agricultural income growth is more effective in reducing poverty than growth in other sectors because the incidence of poverty tends to be higher in agricultural and rural populations, and most of the poor live in rural areas and a large share of them depend on agriculture for a living. Also, the World Bank(2008)demonstrates that agricultural growth is especially effective in reducing poverty. Through an econometric analysis, they found that Gross Domestic Product growth originated by agriculture is twice effective to reduce poverty than the effect of other sectors. They put the example of China where the rapid growth in agriculture helps to reduce poverty from 53% in 1981 to 8% in 2001. Moreover, Cervantes-Godoy andDewbre (2010) made and analysis of poverty reduction of 25 countries. They found that reduction on poverty was due to agriculture activities because agriculture has an impact of 52% on reduction of poverty while non-agriculture activities had an impact of 13% and remittance 35% on poverty reduction. Therefore, it is important to look through what mechanisms agriculture is promoting development. In this line a paper produced by DFID (2004) analyses the links between agriculture and poverty reduction through fourtransmission mechanisms: i) impact of improved agricultural performance on rural incomes;ii) impact of cheaper food for both urban and rural poor; iii) contribution to growth and the generation of economic opportunity in the non-farm sector; and iv) fundamental role in stimulating and sustaining economic transition( from primarily agricultural towards manufacturing and services). Moreover, Bresciani and Valdes (2007) frame their analysis in terms of three key channels that linksagricultural growth to poverty: i) labour market, ii) farm income, and iii) food prices.

Approximation to a cost benefit analysis of the agriculture public investment 2011

The World Development Report 2008 shows three ways as agriculture help to increase country development: i) as an economic activity, agricultureis a source of growth for the national economy, a provider of investment opportunities for the private sector, and a prime driver of agriculture and the rural nonfarm economy. Also, agriculture production is important for food security because it is a source of income for the majority of the rural poor; ii) as a livelihood, agriculture is a source of livelihoods for an estimated 86% of rural people. It provides jobs for smallholders and landless workers; iii) as a provider of environmental services, agriculture can create good and bad environmental outcomes (use of water, agrochemical pollution, soil exhaustion, etc.). However, they mentioned that is difficult to estimate the impact of the effects of agriculture in environment. Furthermore, The European commission (2009) made an analysis of a key set of effects and indicators covering expected outcomes and impacts for agriculture and rural development sector. They found that the intermediate outcomes in each country are reflected on their improvement in income, improvements on food security and improvements on the environment. The following graph explains the channels through public investments achieve those three goals. Graph N 2: Agriculture and Rural Development Intervention Logic

Source: European Commission, 2009.

Approximation to a cost benefit analysis of the agriculture public investment 2011

This study integrated development important outcomes for communities. Some of them are related to food production, irrigated land, labor, malnutrition, among others.

III.

Cost Benefit Theory

Many articles have being written about cost-benefit analysis. There is an agreement among authors that this economic analysis allow researchers to make a comparison between several alternatives. Kingston (2001) mentioned that cost benefit analysis generally refers to the tools and procedures needed to establishwhether a proposed public investment isworthwhile. Also, this analysis has to solve the question if the future stream of benefits justifies the costs upfront? OECD (2006) pointed out that in a cost benefit analysis benefits are defined as increases in human wellbeing and costs are defined as reductions in human wellbeing. For a project or policy, their social benefits must exceed its social costs. Elvik (1999) mentioned that most of the cost-benefit analysis share same characteristics: i) They involve public expenditures, often investments, ii) There are multiple policy objectives, often partly conicting and requiring tradeoffs to be made, iii) One or several of the policy objectives concern the provision of a non-marketed public good, iv) It is assumed that an efcient use of public funds is desirable, since these funds are scarce and alternative uses of them numerous. This technique has the objective of calculate if a project is profitable or not comparing with the best alternatives in the market. In one hand researchers must calculate all the cost associated with the intervention and on the other hand all the benefits both can be public and private. Considering the cost and benefits of the intervention it can be known its feasibility. According to Elvik (1999) the objective of cost benet analysis is to maximize welfare, it means know if a project increases welfare or not. To analyze this objective costbenet analysis relies on the Pareto criterion, which means that welfare increase when a change makes at least one personbetter off and nobody worse off. However, in practice, manypublic projects will make some people better andothers worse. That is why researchers focus their analysis in calculating the cost and benefits of the intervention. If the benefits are greater than costs we can say that the intervention can be implemented. Kingston (2001) presents the process of cost benefit analysis. It has six steps. The first step is to determine the scope and objectives of a project. The second step is to identify project constraints such us financial or time constraints. The third step is about identifying alternatives to solve the same problem. Of course one alternative could be to do anything. 8

Approximation to a cost benefit analysis of the agriculture public investment 2011

The fourth step is to identify all the costs and benefits. They include capital expenditures, operating costs and maintenance costs. Benefits tend to be spread out, and arrive further away in time. Some will be pecuniary (revenues) and others will not (time savings). The next step involves quantify the cost and benefits. Costs include expenditures on plantequipment, structures and land.Environmental coststend to be difficult to measure. Benefits are often moredifficult to quantify. One frequent suggestion here isto deal with tangible costs and benefits first, begin with the easy part of theproblem. Another standard piece of advice is tocarry out sensitivity tests, that is, develop scenarios for a range of possible outcomes forcosts and benefits.The final step is to calculate net present value that is the difference between total benefits and total costs, after taking into accountthe time value of money. Graph N 3: Process of Cost Benefit Analysis

Source: Geoffrey Kingston (2001)

The fourth stage is to identify costs and benefits of the intervention. OECD (2006) pointed out that estimations of costs are more certain than benefits because costs usually take the form of equipment and capital infrastructure. However, they mentionedthat sometimes the costs of major projects can be seriously understated. Consequently, it is important to conduct sensitivity analysis to show how the final net benefit figure changes if costs are increased or decreased by some percentage. In order to calculate costs and benefits OECD (2006) presented two conceptswillingness to pay for benefits, or willingness to accept compensationfor losses (WTP and WTA respectively). These two concepts WTP and WTA are grounded in the theory of welfare economics and correspond to notions of compensating.

Approximation to a cost benefit analysis of the agriculture public investment 2011

The study of OECD (2006) mentioned that cost benefit literature has focused on WTP more than WTA. WTP show the preferences of future beneficiaries and usually employ surveys which directly ask respondents for their willingness to pay for a good or service. Once all the costs and benefits are calculated the next step will be to estimate the net present value (NPV). Kingston (2001) defined NPV as the difference between total benefits and total costs, after taking into accountthe time value of money. If the result is higher than zero we will proceed with the intervention. In the case of public interventions most of the governments have established a fixed discount rate. Despite the advantages of this techniqueto quantify the costsand benefits of an intervention there are some critiques. OECD (2006) mentioned some of them. First, theextent to which cost benefit analysis rests on robust theoretical foundations of welfare economics. Second, the fact that the underlying social welfarefunctionin cost benefit analysis is one of an arbitrarily large number of such functions on which consensus is unlikely to be achieved. Third, the extent to which one can make an ethical case for lettingindividuals preferences be the determining factor in guiding social decision rules. Fourth, the whole history of neoclassical welfare economics has focused on the extent towhich the notion of economic efficiency can or should be separated out from the issue of who gains and loses. Moreover, Heinzerling and Ackerman (2002) mentioned that cost benefit analysis is a severely imperfect method thatrepeatedly leads to biased and misleadingresults. Also, oftenproduces inferior results, in terms of bothenvironmental protection and overall socialwelfare, compared to other approaches.

IV.

Countryagricultural description

In Peru, almost a third of the population lives in rural areas, coming to 50% of their income from agriculture. Nationally, 25% of the working population works in the agricultural sector contributing about 7% to the national GDP and 8.9% of total exports of the country (Agriculture Strategic Plan 2012-2016). In Peru, the set of renewable natural resources, soil for agriculture is the scarcest resource. It is estimated that only 7.6 million hectares. (5.92% of the country) have potential or natural vocation for agricultural crops (clean and permanent crops) and 17 million hectares have aptitude for pasture. In the highland region, which accounts for most of the population in extreme poverty in the country, there are only 1.3 million hectares of agricultural crops and 10.5 million are suitable for grazing.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Table N 1: Major usability of land in Peru

Use of land Totalsurface Land suitable for agriculture Lands suitable for grazing Land suitable for forestry Land Protection Surface (millionsha) 128.5 7.6 17 48.7 55.2 (%) 100% 6% 13% 38% 43%

Source: National Office for Natural Resources Evaluation, 1981

In the case of water, the main uses of freshwater are: agriculture, population, mining, industry and energy. Domestic consumption of water is formed by the consumptive use, being the most important consumptive exploitation nationally the following: 80% agriculture consumption, 12% population consumption, 6% industrial consumption and 2% mining consumption. Considering this information is important the use of more sophisticated irrigation systems; however only 2% of farmers in Peru use modern irrigation systems7. Table N 2: Consumption of water Peru (MMC/year)
Uses Vertiente Population Agriculture 14,051 1,946 61 16,058 80% Mining 302 97 2 401 2% Industrial 1,103 49 3 1,155 6% Total 17,542 2,437 93 20,072 100% Pacific 2,086 Atlantic 345 Titicaca 27 2,458 Total Part. % 12% Source: PESEM 2012-2016

The agricultural sector has the highest share in the economically active population, followed by the trade sector with 17.6% and 10.9% manufacturing. The economically active population in the agricultural sector has suffered a slowdown in 2005 (32.2%) to 2010 (25.1%). Thishappenedbecause farmers migrated to other profitablesectors. Table N 3: Economically active population by sectors 2005-2010
(%) Tipo de Actividad Total Agriculture Fishing Mining Manufacture Construction Comerce Transport and Telecom Publicadministration Hotels and Restaurants Rentals Education
7

2005 100 32.2 0.6 0.9 10.0 3.5 17.7 6.1 3.6 5.4 3.3 5.1

2006 100 31.4 0.5 1.0 10.3 3.9 17.7 6.5 3.6 5.3 3.5 4.9

2007 100 27.5 0.6 1.1 11.3 4.3 17.8 7.2 3.9 5.7 3.8 5.4

2008 100 26.8 0.6 1.2 11.3 4.5 17.4 7.7 3.9 6.0 3.8 5.3

2009 100 26.2 0.6 1.1 10.9 5.0 17.2 7.5 4.3 6.3 3.9 5.5

2010 100 25.1 0.5 1.2 10.9 5.6 17.6 7.5 4.3 6.6 4.1 5.3

National Household Survey 2008 http://www.inei.gob.pe/

11

Approximation to a cost benefit analysis of the agriculture public investment 2011

Otherservices

11.5

11.3

11.4

11.6

11.6

11.4

Source: NationalHouseholdSurvey 2005-2010

In rural areas, it is necessary to mention that the economically active population engaged in agriculture has had a slowdown from 79% (2005) to 73% (2010) this is due to the migration of labor to other sectors. In the case of the Coast Rural Agriculture there is reduction from 72% (2005) to 60% (2010), in therural highland there were a reduction from 79% (2005) to 74% (2010) and in the rural forest there were decreases of 81% (2005) to 76% (2010). In Peru, the economically active population consists of different ethnic groups with their own characteristics that maintain a similarity: much of its population is engaged in farming. The economically active population Quechua, Aymara and Ashaninka within the sector reaches 28%, 30% and 44%, respectively, of which it is necessary to highlight that 21%, 16% and 26% cannot read or write. Table N 4: Characteristics of Ethnics groups working in agriculture
Groups Total Farming and fishingpopulati on % Farming and fishingpopulati on Farming and fishing population cannot read and write % farming and fishing pop. cannot read and write

8,563,407 830,733 8,337 50 6,616 1,384 10,251,27 1,314,707 Total 2 Source: National Household Survey 2007.

Quechua Aymar Ashninka Othernativelangua ge Spanish Foreignlanguage DeafPeople

1,368,076 223,576 24,161 57,099

379,873 67,846 10,702 24,119

28% 30% 44% 42% 10% 1% 21% 13%

79,773 10,882 2,774 4,971 73,234 971 172,605

21% 16% 26% 21% 9% 70% 13%

In 2010, the average monthly income for the Agriculture sector was 129 euros, registering an increase of 4% compared to 2009 and 73% over 2005. However, the income of the agricultural sector is about half the average monthly income nationally, this is because most of the population develops agricultural activities have no proper education, no comprehensive studies that allow inserted into the labor market and access to domestic and international markets. Table N 5: Average agricultural income per month 2005-2010 (Euros)
Sector 2005 2006 2007 2008 2009 2010 P/ Var.% 2010/2009 4% 2%

Agricultue 75 81 90 109 National 181 191 208 233 Source: National Household Survey 2005-2010.

124 250

129 255

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Approximation to a cost benefit analysis of the agriculture public investment 2011

In rural area, the average monthly income for the agriculture was Euros farmers living in the rural jungle, reached the highest average monthly income (142 Euros) followed by the Coast Rural (141 Euros) and the Sierra Rural (105 Euros). Table N 6: Average monthly income in agriculture sector in rural areas 2005-2010 (Euros)
RuralAgriculture 2005 2006 2007 2008 2009 2010 Var.% 2010/2009 5% -1% 2% 14%

National 65 80 99 Coast 99 103 137 Highland 55 65 81 Forest 74 105 123 Source: National Household Survey 2005-2010

119 141 105 142

65 99 55 74

80 103 65 105

4.1 Regional description

The region of Ancash is located in the central coast part of Peru. It is bordered by the La Libertad region on the north, the Hunuco and Pasco regions on the east, the Lima region (capital) on the south, and the Pacific Ocean on the west. Its surface is 35.8 thousands squared kilometers where almost 23% is coast and 77% is Highland. The altitude in Ancash goes from 4 to 6,768 meters above sea level. The region of Ancash is divided into 20 provinces, 161 districts and 5,748 rural settlements. The province of Huaraz is the capital of the region and is located in the central part of the region.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Graph N4: Ancash Location

Source: Google Earth

In 2012, the population estimated is 1,129,391 habitants and represents 4% of the total population in Peru. Besides, 40% of the population lives in the rural area while 59% live in the urban area. Table N 7: Population by Province, 2012
Province Huaraz Aija Antonio Raimondi Asuncin Bolognesi Carhuaz Carlos FerminFitzcarrald Casma Corongo Huari Huarmey Huaylas MariscalLuzuriaga Ocros Pallasca Pomabamba Recuay Santa Sihuas Yungay Population 161,003 7, 974 16, 879 9,013 32,452 46,434 21,920 46,032 8,340 63,726 29,972 55,102 23,888 10,283 30,536 29,196 19,509 427,157 31,006 57,969 Partic. % 14.3% 0.7% 1.5% 0.8% 2.9% 4.1% 1.9% 4.1% 0.7% 5.6% 2.7% 5.0% 2.1% 0.9% 2.7% 2.6% 1.7% 37.8% 2.7% 5.1%

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Source: National Institute of Statistics and Informatics (INEI).

The level of education of the population of Ancash is poor. The rate of illiteracy reaches 20.5% of the population and 64% of the population has concluded elementary school. Moreover, only 9% of them have completed superior studies (university and technical studies). The level of total poverty of the region reaches 31.5% but the level of poverty in the agriculture sector reaches 52.5% (115 thousands of farmers). The population that works in the agriculture sector in the region of Ancash is 220,693 farmerswhich represent5% of the farmers of the country. The level of unnourished of children under five year reaches 23%. This value is 11% less than the value in 2000 and 1% less than 2010. In absolute terms, this rate means 26395.72 child with chronic unnourished. In 2011 the value of the agriculture production of Ancash reached 77.8 million of Euros. They represented 2.5% of the national value. The livestock production reached 58.9 million of Euros representing 1.3% of the national value. Table N 8: Agriculture Production Value by Region 2011 (Millions of Euros)
Region Total Amazonas Ancash Apurimac Arequipa Ayacucho Cajamarca Cusco Huancavelica Hunuco Ica Junin La Libertad Lambayeque Lima Loreto Pasco Piura Puno Madre de Dios Moquegua Tacna Tumbes San Martn Agriculture Jan.- Dec. 2011 3,218.7 184.1 77.8 53.4 302.4 55.6 229.7 133.9 55.0 102.1 183.4 272.8 332.0 131.5 266.2 92.7 42.8 154.2 178.3 22.1 29.0 56.7 22.6 196.3 Partic. % 100% 6.0% 2.5% 1.6% 9.5% 2.1% 7.6% 3.8% 1.4% 2.9% 5.4% 7.5% 10.1% 4.5% 8.4% 3.1% 1.1% 5.6% 5.5% 0.7% 0.8% 1.6% 0.6% 5.9% Livestock Jan.- Dec. 2011 2,271.5 30.4 58.9 24.8 169.6 51.0 128.0 62.0 25.0 53.2 107.9 41.0 298.0 31.4 836.5 29.1 24.3 59.5 126.5 9.2 7.0 21.2 4.1 52.5 Partic.% 100% 1.34% 2.59% 1.09% 7.47% 2.24% 5.64% 2.73% 1.10% 2.34% 4.75% 1.81% 13.12% 1.38% 36.83% 1.28% 1.07% 2.62% 5.57% 0.41% 0.31% 0.93% 0.18% 2.31%

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Ucayali 43.7 Source: Ministry of Agriculture

1.9%

20.3

0.89%

The principal agriculture products in the region are rice, potatoes, sugarcane, corn among others; meanwhile the principal meat production is bird and bovine meat. Table N 9: Agricultural Production of Ancash 2010-2011 (Tons)
Product 2011 Var % -2% 4% -19% -20% -10% -3% 0% 163% -7% 15% 3% 124% -5% -6% 57% -16% -21% 4% -33% -42% -7% -6% 31% 112% 13% Paddy rice 36,000 Corn 12,458 Beans 2,262 341 Pallar 97,479 Potatoe 19,098 Trigo Banana 1,437 Cotton 4,466 Cornhard 74,421 Sugarcane 663,722 Asparagus 18,272 Marigold 4,975 Barleygrain 10,463 Quinoa 140 Kiwicha 333 Haba 1,988 Peas 2,430 Chocho 826 Olluco 4,651 Oca 2,124 Sweetpotatoe 18,774 Yucca 6,960 Onion 13,628 Garlic 414 Tomatoe 5,040 Source: Ministry of Agriculture

Table N 10: Meat production of Ancash (Tons)

Product Production 2011 101 96 2,220 641 16,803

Ovine Porcine Bird Bovine

Milk Source: Ministry of Agriculture

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Approximation to a cost benefit analysis of the agriculture public investment 2011

V.

CostBenefitAnalysis

In this part of the paper I will estimate, in monetary terms, the cost and benefits of agriculture public investments. This analysis is first review in which I will take into account the most important and relevant costs and benefits of agricultural investments in Ancash. In the cost analysis I will focus my analysis on the public budget for the agriculture sector for each level (national, regional and provincial). I took the information available on the website of the Ministry of Economy and Finance for the year 2011.For the benefit analysis I will use three main outcomes: income for farmers, food security and willingness to pay for irrigation systems.

5.1 Cost analysis

The cost analysis includes the budget designed to the agricultural sector in 2011. The budget was obtained from the Ministry of Economy and Finance of Peru. The budget consists of all the recurrent and capital expenditures of the government at its three levels (national, regional and local) such us salaries, social security, rents, financial assets, nonfinancial assets, movable and immovable properties, etc. In 2011, the total budget oriented for the agricultural sector was 79.9 million of Euros. However, at the end of the year only 43.6 million of Euros (55%) were spent. The distribution of the budget spent was 3.6 million at the national level, 23.5 million at the regional level and 16.5 million at the provincial level. On the other hand, it is important to consider that 36.3 millions of Euros was not spent in 2011 because of management problems. The problems can be divided in three main issues: Difficulty in procuring goods and services, long stages of the public investment system, personnel with little training and no providers inside the country8. In 2011, the budget at the national level was 7.5 million of euros. This budget was divided into several programs that the ministry offers: water infrastructure represented by the Subsectoral Irrigation Program (PSI), rural development represented by the Program for Rural Agricultural Production Development (AGRORURAL), promotion of competitiveness represented by the Competitiveness Compensation Program (PCC), agriculture sanitation represented by the National Sanitation Service (SENASA), central administration (MINAG) and water regulation represented by the National Water Authority (ANA). The budget was divided as follows: 5.7 million Euros for SENASA, 676 thousand Euros for ANA, 551 thousand Euros for AGRORURAL, 507 thousand Euros for MINAG, 108 thousand Euros for PSI and 470 Euros for PCC.

I am not going to extend my analysis about the causes of this problem because I believe that the causes are so complex that deserves a more critical investigation.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Graph N 5: National Budget for the Agricultural Sector 2011 (Millions of Euros)

Source: Ministry of Economic and Finance.

In the case of the Regional level, in 2011 the regional budget for the agriculture sector was 39.1 million Euros. The budget was divided in different kind of interventions such as irrigation projects, promotion of markets, develop of agriculture production and administrative management. The graph below shows the budget divided into four groups. 98% of the budget was allocated to improve water infrastructure (38.2 million of Euros) and a lower proportion to develop agriculture production (520 thousand Euros), central administration (216 thousand Euros) and creation of value chains (152 thousand Euros).

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Graph N6: National Budget for the Agricultural Sector 2011 (Millions of Euros)

Source: Ministry of Economic and Finance.

Finally, the provincial budget was 33.2 million of Euros. The distribution of the initial budget was divided into four groups: irrigation infrastructure (84%), promotion of agriculture activities (12%), promotion of livestock (3.5%) and activities to prevent and act in emergency situations (0.5%). Graph N 7: National Budget for the Agricultural Sector 2011 (Millions of Euros)

Source: Ministry of Economic and Finance.

In the table above we can see the budget by province. The province of Huari and Huaraz receive more than 50% of the budget because of the distribution of mining royalties. Onthe other hand, the province of Asuncin does not oriented budget for agricultural interventions. 19

Approximation to a cost benefit analysis of the agriculture public investment 2011

Table N 11: Budget by Province 2011 (Euros) Province

Huaraz Aija Antonio Raimondi Asuncin Bolognesi Carhuaz Carlos FerminFitzcarrald Casma Corongo Huari Huarmey Huaylas MariscalLuzuriaga Ocros Pallasca Pomabamba Recuay Santa

Budget
4,819,072 225,710 330,411 0 1,301,547 598,908 384,880 1,017,082 215,850 15,577,857 1,033,391 1,880,868 442,707 644,503 840,881 955,285 524,463 820,184

%
14.5% 0.7% 1.0% 0.0% 3.9% 1.8% 1.2% 3.1% 0.6% 46.8% 3.1% 5.7% 1.3% 1.9% 2.5% 2.9% 1.6% 2.5% 3.1% 1.9%

Sihuas 1,040,171 Yungay 626,380 Source: Ministry of Economy and Finance.

The sum of the budget at each level gives us the total budget for the agriculture sector 2011. Consequently, the total cost of public agriculture investments was 79.9 million of Euros.

20

Approximation to a cost benefit analysis of the agriculture public investment 2011

Graph N 8: Agriculture budget 2011 (Millions of euros)

Source: Ministry of Economic and Finance.

5.2 Benefit analysis

The intervention inthe agriculture sector has a main objective to increase the production of food in order to satisfy the demand of the citizens. In the benefits analysis I am going to focus in three main aspects: income of farmers, food security as a savings in malnourished treatment and willingness to pay for irrigation systems.

a. Income for Farmers To calculate the direct benefit for farmers, I am going to use data of the Ministry of Agriculture for 2011. This data contains information about the production of the 25 principal products of Ancash9 and the prices paid to farmers. In one stage I am going to calculate the income for farmers considering agriculture production and on a second stage I am going to estimate income of livestock activity. Stage 1: Income of agriculture production The result discounting taxes10 is 100,819,312 Euros.

I take 25 products because of the availability of information in the web page of the Ministry of Agriculture http://www.minag.gob.pe/portal/herramientas/boletines/estad%C3%ADstica-agraria-mensual
10

21

Approximation to a cost benefit analysis of the agriculture public investment 2011

Table N 12: Monetary Value Paid to Farmers - Principal production of Ancash2011

Product Paddy rice Corn Beans Pallar Potatoe Trigo Banana Cotton Corn hard Sugarcane Asparagus Marigold Barley grain Quinoa Kiwicha Haba Peas Chocho Olluco Oca Sweet potatoe Yucca Onion Garlic Tomatoe National production (Kg.) 2,620,973,793 255,732,539 88,048,869 11,342,107 4,071,680,728 213,467,350 1,904,048,423 122,046,800 1,261,981,826 9,884,936,308 392,306,145 23,648,000 201,130,375 41,168,094 3,412,115 66,116,140 48,573,430 11,310,891 160,406,266 89,703,807 300,369,479 1,112,176,969 726,325,116 82,910,193 185,445,994 % of national production 1.37% 4.87% 2.57% 3.01% 2.39% 8.95% 0.08% 3.66% 5.90% 6.71% 4.66% 21.04% 5.20% 0.34% 9.74% 3.01% 5.00% 7.30% 2.90% 2.37% 6.25% 0.63% 1.88% 0.50% 2.72% Ancash production 2011 (Kg.) Prices Kg. Value of production 39,291,219 22,686,563 6,583,439 1,128,710 71,221,774 33,803,460 1,322,549 20,097,000 70,699,083 66,372,195 61,663,258 995,000 12,137,080 568,986 984,200 3,816,384 5,054,608 3,023,160 4,371,470 1,762,796 14,283,513 5,767,809 6,990,808 413,700 4,465,417 459,504,179 3.83 119,974,981 100,819,312

36,000,000 1.09 12,458,400 1.82 2,262,350 2.91 341,000 3.31 97,479,000 0.73 19,098,000 1.77 1,437,000 0.92 4,466,000 4.5 74,420,800 0.95 663,721,953 0.10 18,272,000 3.37 4,975,000 0.20 10,463,000 1.16 139,800 4.07 332,500 2.96 1,987,700 1.92 2,430,100 2.08 826,000 3.66 4,650,500 0.94 2,123,850 0.83 18,773,500 0.76 6,960,000 0.83 13,628,000 0.51 413,700 1.0 5,040,000 0.89 Total Soles Average exchange rate (Soles to Euros) Total Euros total discountingtaxes

Stage 2: Income of agriculture production The total value after discount taxes is 10,637,728Euros.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Table N 13: Monetary Value Paid to Farmers - Principal livestock production of Ancash2011
Specie Ovine Porcine Bird Bovine Milk Production 2011 (Kg./l.) 101,313 96,834 2,220,375 641,517 16,803,000 Price per Kg./ l. 9.0 8.7 6.7 8.0 1.6 Total Soles Total Euros Total discounting taxes Total Value 913,848 839,553 14,809,899 5,132,140 26,380,710 48,076,149 12,552,519 10,637,728

Finally, the total value of income that farmers receive is 111,457,040 Euros.

b. Saving of cost of Malnutrition treatment

Martinez and Fernandez (2009) pointed out that hunger is linked to the amount of food intake below that required to meet the energy requirements of the people. Consequently, this concept is strongly related to food security. They mentioned that to prevent huger there are some conditions needed: i) count with enough volume of food that satisfy the necessary body requirements, ii) have access to food in a permanent way and iii) have minimum standards of hygiene and nutrient balance. In the Rome Declaration on World Food Security (1996) was mentioned that food security exist when people have physical, social and economic access to food that satisfy the basic diet and food preferences in order enjoy of an active and healthy life. Consequently, there would be food vulnerability if people cannot access to food. Food security can be divided into three complementary dimensions: availability of food, access to food and customs and cultural practices that define the degree of utilization of food. The absence of food security brings malnutrition problems. Martinez and Fernandez (2009) define malnutrition as underweight or lack of height for age, low weight and height, and body mass deficit.Depending on the intensity, overweight can be translated into overweight or obese. Furthermore, the degrees of malnutrition are acute, grave and severe. Martinez and Fernandez (2009) showed the principal causes of malnutrition. The causes are associated to the environment factors, sociocultural and economic factors (production), and institutional factors. In the case of productive factors this includes food production and the access to the population at risk has to them.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

In the study they mention that malnutrition has negative effects on various dimensions of the lives of people, among which impacts on health, education and the economy (costs and public and private spending, and lower productivity). Considering this aspect I will focus my analysis in calculating savings in malnutrition treatments. This means to estimate in monetary terms savings for the government because of the reduction in 1% of malnutrition in Ancash. To make this estimation it is needed the cost of malnutrition treatment. This information for Peru, especially for Ancash is not available; but it can be estimated using some assumptions. For this paper, I am going to use information of treatment cost based on other papers. Bachmann (2010) made a recompilation of some treatments and their cost. He pointed out that community based treatment to have similar outcomes to hospital-based treatment, but witha lower cost. The costs of ambulatory community-based treatment of severe acute malnutrition have ranged between US$46 to US$453 per child, depending on the type of care provided and the costing methods used. Table N 14: Total savings of Malnutrition Treatment Ancash 2011 Reduction Number Cost of treatment 2010 2011 of children (Euros) Scenario I: cost of treatment 33 Euros 11 0-5 years 24.4% 23.3% 1,033 34,185

Scenario II: cost of treatment 326 Euros 0-5 years 24.4% 23.3% 1,033 336,654

Source: Ministry of Economy and Finance.

Finally, the savings of malnutrition treatments are in the range of 34,185 Euros to 336,654 Euros. c. Willingness to pay of farmers for irrigation infrastructure The Ministry of agriculture in last years has increased the investments for irrigation systems. These policy interventions were implemented considering three important facts: agricultural activities in Peru use 80% of the water and modern systems improve the agriculture productivity and prevent soil salinization.

11

The Exchange rate used was 1.39 Dollar per Euro.http://www.forexpros.es/currencies/eur-usdhistorical-data

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Niemi, Neculae, and Reich (2008) pointed out that there are three direct economic consequences of irrigation investments: For society the benefit is increase the supply of crops. For irrigators the benefit is the increase of the value of a farmers crops. For economic development the benefit is in some extent increase of jobs and income. Considering this advantages it is logical that countries support the provision of irrigation of modern irrigation systems. In the case of Peru most of the agricultural budget is oriented to improve water infrastructure. This includes the construction of dams, reservoirs, canals and irrigation systems. However, the government has designed a scheme of financing where the farmer has to pay a proportion of the irrigation system cost. For this analysis I will use the cost assume by farmers as a proxy of the willingness to pay for irrigation systems. In the case of Peru, the Subsectoral Irrigation Program (PSI) is financing the implementation of modern irrigation systems around the country. So, this program has several financial schemes: Table N 17: Financial Schemes PSI 2011 Natural Financial Financial Amount Regions participation (Euros) Coast 50% Highland Forest 80% 80% 7,050 14,099

Source: Subsectoral Irrigation Program (PSI).

I will take the information of highland for two scenarios. First, when the total cost reaches 7,050 Euros and second scenario, when the total cost is 14,099 Euros.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

Table N 15: Willingness to pay of farmers for modern irrigation systems 2011 Number of Prop. Paid Total cost Region 2011 farmers12 by farmers (Euros) Scenario I: Total cost 7,050 Euros Ancash Ancash 3.2% 3.2% 660 660 1,410 2,820 930,548 1,861,097 Scenario I: Total cost 14,099 Euros
Source: Subsectoral Irrigation Program (PSI).

As a result, the willingness to pay by farmers for access to modern irrigation systems is in the range of 930,548Euros to 1,861,097Euros. Finally, I can conclude making the estimation of benefits for four scenarios. The results are presenting in following table: Table N 16: Total Benefits 2011 (Euros) Scenarios Income+ Savings scenario I + Willingness scenario I Income+ Savings scenario I + Willingness scenario II Income+ Savings scenario II + Willingness scenario II Income+ Savings scenario II + Willingness scenario I Total benefit (Euros) 112,421,773 113,352,322 113,654,791 112,724,242

5.3 Net Present Benefit

Using a discount rate of 10%, I find that the net present value for each scenario is higher than zero. Consequently, the benefits of agriculture investments seem to compensate the budget invested.

12

For the estimation of number of farmers I use a proxy number. Considering that in 2011, 3.2% of farmers count with modern systems I have divided this outcome into the 10 years that PSI is implemented.

26

Approximation to a cost benefit analysis of the agriculture public investment 2011

Scenarios Income+ Savings scenario I + Willingness scenario I Income+ Savings scenario I + Willingness scenario II Income+ Savings scenario II + Willingness scenario II Income+ Savings scenario II + Willingness scenario I

Table N 17: Net Present Value 2011 (Euros) Present Total benefit Total Cost benefit (Euros) (Euros) (10%) 112,421,773 113,352,322 113,654,791 112,724,242 102,201,612 103,047,565 79,944,929 103,322,537 102,476,584

Net Present Value 22,256,683 23,102,636 23,377,608 22,531,655

VI.

Conclusion

This paper has made a review about the importance of agriculture for development. Especially, the paper present some waysand channels through agriculture help to achieve development outcomes. In developing countries, like Peru, where great part of the population lives in rural area, agricultural activities serves as a basic mean of income generation. To explain the importance of agriculture activities, in monetary terms, I used the cost benefit approach. Using three factors for estimate the total benefit (income, malnutrition, and willingness to pay) of the agriculture investments I obtained four scenarios. Each of them present a positive net present value which allow me to conclude, using this methodology, that benefits of agriculture investments are greater than cost.

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Approximation to a cost benefit analysis of the agriculture public investment 2011

VII.

References
1. Anrquez G. and Stamoulis K. (2007) Rural Development and Poverty Reduction: Is Agriculture Still the Key?ESA Working Paper No. 07-02, Italy, FAO, 139.http://www.fao.org/economic/esa/publications/details/en/c/120512/ (Last consulted: March 12, 2013) 1. Bachmann M. (2010) Costeffectiveness of community-based treatment of severe acute malnutritionin children, United Kingdom, Expert Rev. Pharmacoeconomics Outcomes Res. 10, 605-612.http://www.ennonline.net/pool/files/ife/bachmann-ceof-treating-sam-expert-reviews-2010.pdf (Last consulted: March 12, 2013) 2. Cervantes-Godoy, D. and J. Dewbre (2010) Economic Importance of Agriculture for Poverty Reduction, OECD Food, Agriculture and Fisheries Working Papers 23, OECD Publishing. http://www.oecd-ilibrary.org/agriculture-and-food/economic-importance-ofagriculture-for-poverty-reduction_5kmmv9s20944-en (Last consulted: March 12, 2013) 3. Costanza R. and Patten B. (1995) Defining and predicting sustainability, Elsevier Science publications, 193-196. 4. DFID (2004) Agriculture, growth and consultation.nri.org/summaries/wp1.pdf (Last consulted: March 12, 2013) povertyreductionhttp://dfid-agriculture-

5. European Commission (2009) Outcome and impact level, indicators agriculture & rural development http://ec.europa.eu/europeaid/how/evaluation/methodology/impact_indicators/wp_a gri_en.pdf (Last consulted: March 12, 2013) 6. Heinzerling L. and Ackerman F. (2002) Cost-Benefit Analysisof EnvironmentalProtection United States, Georgetown University Law Center, 135.http://www.ase.tufts.edu/gdae/publications/C-B%20pamphlet%20final.pdf (Last consulted: March 12, 2013) 7. Kingston G. (2001) Cost Benefit Analysis in Theory and Practice, Australia, The Australian Economic Review 34, 47887http://salises.mona.uwi.edu/sem2_10_11/SALI6102/cost%20benefit%20analysis .pdf (Last consulted: March 12, 2013)

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Approximation to a cost benefit analysis of the agriculture public investment 2011

8. Martinez R. and Fernandez A. (2006) Modelo de anlisis del impactosocial y econmico de la desnutricin infantil en Amrica Latina, Chile, CEPAL, Serie de Manuales 52, 1119.http://documents.wfp.org/stellent/groups/public/documents/liaison_offices/wfp1 42944.pdf (Last consulted: March 12, 2013) 9. Ministry of Health (2011), Executive report, Ancash- Nutritional Status, http://www.ins.gob.pe/repositorioaps/0/5/jer/resu_sist_cena/ANCASH(2).pdf (Last consulted: March 12, 2013) 10. National Center for Strategic Planning (2010) Regional Synthesishttp://www.ceplan.gob.pe/documents/10157/5b464ef1-ea21-4ac1-9d34341dc203ac66 (Last consulted: March 12, 2013) 11. Nielsen L. (2011) Classifications of Countries Based on Their Level of Development: How it is Done and How it Could be Done, IMF, 1-44. http://www.imf.org/external/pubs/ft/wp/2011/wp1131.pdf (Last consulted: March 12, 2013) 12. OECD (2006) Cost-Benefit Analysis and the Environment, http://www.oecd.org/greengrowth/tools-evaluation/36190261.pdf (Last consulted: March 12, 2013) 13. World Bank (2008) Agriculture and Poverty Reduction, http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/2235461171488994713/3455847-1192738003272/Brief_AgPovRedctn_web.pdf (Last consulted: March 12, 2013)

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