The major aspect of assessment work is economic assessment or appraisal. However, many other assessments should also be taken independently or in conjunction with the economic assessment. Consequently, assessments may cover seven aspects as follows:
- Technical aspects, including technical criteria, practicality, farmer's acceptability, technological effectiveness, etc.
- Managerial aspects, including institutional capability, coordination, extension services, training, etc.
- Economic aspects, including determination of investment justification for the project, identification of alternatives, and examination of project contribution to national and local economy, etc.
- Financial aspects, including examination of cash flows, returns to farmers and individuals, incentives, repayment schedules, etc.
- Commercial aspects, including marketing channels, supplies of material, arrangement of procurement, etc.
- Social aspects, including income distribution, employment opportunities, women and youth involvement, etc.
- Environment aspects, including soil stabilization, ecology, resources conservation, etc.
Not all the assessments apply equally to a project. Economic and financial assessments can be carried out together since they use similar input and output data. During economic assessment, detailed technical criteria and relationships together with managerial capabilities will have to be examined. Commercial assessment may little be needed if only subsistence type of agriculture is involved in a proposed project. For integrated and rural development type of watershed projects, social aspect of assessments should be much emphasized. Many of the impacts of a watershed project are also environmental and normally need to be analysed and assessed.
The main objectives of economic and financial assessments (or appraisals) are to provide answers to the questions asked by decision-makers such as follows: (FAO. 1987):
- Are economic benefits greater than costs?
- What is the budget impact likely to be for the agencies and for private entitles involved?
- Will the project increase economic stability of the affected region? Will it have balance of payments impacts?
- Will the project be attractive to the various private entities (e.g. upstream inhabitants) who will have to put resources into the project to make it work?
Since economic and financial assessments are important and necessary to every watershed project, watershed managers and planners who are not economists by training should understand the assessment techniques and procedures, and thereby provide the necessary inputs to such activities. On the other hand, economists who assess watershed projects should also understand the unique characteristics of watershed work for better coordination hence better results.
Watershed work usually needs long-term and persistent efforts to obtain planned results. For instance, land use adjustments, soil conservation, or reforestation requires long-term investment, management, and maintenance. Yet the full benefits may only be realized after one generation or more.
These characteristics make project planning and economic assessment difficult. One is that benefits predicted may not be realized in the long run due to rapid changes of socio-economic conditions of a country. For instance, the benefits or establishing fuelwood forests may be greatly reduced when the rural people change stoves. Another is the use of discount techniques to value future benefits. For example, using a 9% discount rate, , a $ 1 000 benefit 20 years from now is only worth $ 178.4 today, and for 30 years only $ 75.4.
The long term nature of watershed projects always puts these benefits unfavourably when compared with other projects in economic terms, unless economists and planners get together to identify fully their benefits to justify such projects.
Watershed projects usually relate to multiple use of watershed resources e.g. soils, water, forest, grass, fishery, mineral, etc. Use of one kind of resources may affect others. Increasing benefits of one type may impair or damage others. For instance, timber harvesting may increase erosion and sediments and impair fishery and recreation values of a watershed. On the other hand, the products of a watershed project can be many: food crops, fruits, fodder and livestock, fuelwood, timber, animals, and fresh water fish. Each of them is a specialized field.
For effective assessment, not only the production function, demands, price structures of each product need to be understood, but also the relationships and conflicts of resources use should be fully comprehended. Taking into consideration one aspect and forgetting the others, or counting only benefits and neglecting its negative impacts are not uncommon and can be misleading the decision-makers.
A watershed project generates a host of effects which are not accounted for in the analysis of financial or economic impacts because they occur outside the market and do not directly affect the project cash flow. These are commonly referred to as "indirect", "non-market", "spillover" effects or "externalities". These effects should be included in the analysis of watershed management projects, because they affect the whole economic and environmental system, although not the cash flow of the project in question.
In many cases externalities are difficult to identify and quantify. Many of them cannot be meaningfully valued. However, when important, an attempt should be made to describe them at least in qualitative terms, if quantification and valuation are not possible.
An important point to remember is that when a positive externality has been identified, it is also necessary to search carefully for any corresponding negative externalities.
There is not one way to proceed in the identification, quantifaction and valuation of externalities. A great deal of experience is needed as is a good knowledge of the complex interactions between watershed management activities and their effects outside the project. Some externalities can be accounted for in the economic analysis of projects through shadow pricing inputs and outputs.
Somewhat related to but not equal to externalities is the spatial distribution of costs and benefits of a watershed project. For instance, the effects of soil erosion alone may cover three areas (Sfeir-Younis, 1983):
- Intra-farm effects, e.g. loss in fertility, decrease in area cropped, decrease in cultivation intensity, reduction of soil depths and crop production.
- Inter-farm effects in a watershed, e.g. silting low lands or wetlands, sedimentation or eroding of upstreams, increase or decrease of runoff, decrease of groundwater supplies.
- Inter-area or downstream effects, e.g. sedimentation of river systems outside the watershed, siltation of reservoirs, clogging of irrigation canals, and increasing the probability of flooding.
Because of lack of basic data in many developing countries, quantification of benefits may constitute primary difficulties to any economic assessment. It is not enough, for instance, to say that the project will reduce flood damage. A series of data need to be collected such as flood frequency and magnitude, areas affected, heights and time of inundation in relation to crop and property damages, and the flood reduction effects of the proposed project. Without these, valuation of benefits is not possible.
As mentioned before, not all the benefits derived from a watershed project can be satisfactorily quantified and valued. Reducing losses of human life, improvement of living conditions, or increasing aesthetic beauty, etc. can hardly be put in terms of dollars and cents. Many attempts have been made (Hufschmidt _et al., 1983) to put values to these benefits. However a universal application of their methods remains to be developed. In many cases, a qualitative description of these benefits may satisfy the decision-makers.
Watershed managers and planners need to understand the functions and the limits of economic (and financial) assessment and what an economist can do to help in project planning.
The main functions of economic (and financial) assessment are as follows:
- To analyse the project worth in the context of national economy using cost and benefit analysis techniques.
- To determine whether the project is feasible and attractive to investors e.g. farmers, government agencies, banks and others.
- To examine risk factors of a proposed project using sensitivity tests and to see whether the project will stand for changes, physically or economically.
- To assist project design and to present various alternatives to the decision-makers on scale, technology, timing of a proposed project.
On the other hand, watershed managers and planners should realize that although economic assessment is a useful tool to project planning it does have its limits. The major ones are as follows:
- As mentioned earlier, not all the watershed benefits can be quantified and valued. This makes cost and benefit analysis difficult. Sometimes qualitative descriptions are allowed.
- Economic assessment is a tool. It is as good as the data put in. Lacking basic data in many developing countries such as erosion and sedimentation rates, erosion and productivity relationships, and flood damage records may affect greatly the assessment results.
- Finally, economic assessment is only one of the many needed assessments of a watershed project though it is an important one.
Watershed managers and planners who are not economists by training need to comprehend the major techniques used in economic assessment for the sake of better communication, understanding and coordination.
The following sections are brief introductions of the assessment techniques using plain language. Detail knowledge can be obtained from many publications (FAO, 1980, 1987; Gittinger, 1972; Shaner, 1979; and UNIDO, 1972).
Comparing the impact of "with" and "without" project is a normal technique to determine a project's worth. Their difference is the net additional benefit arising from the proposed project. However, this is not the difference between "before" and "after" the project because the "without" case is not static. For instance, erosion and land degradation will be going on over time without soil conservation measures ("without" project). Fig. 10 shows the with and without project conditions.
Project costs and benefits can only be compared at the same point of time. One hundred dollars 20 years from now does not represent the same value as one hundred dollars today. Therefore, the main objective of discounting is to bring the future values, benefits or costs, to the present values for comparison using an appropriate discounting rate.
Cost and benefit analysis is an important technique to systematically compare the streams of costs and benefits in order to determine economic efficiency of a project or project worth. There are basically three measures using the same input data and assumption, as follows:
1) Net present value or net present worth (NPV or NPW)This measure is used to determine the present value of net benefits of a project i.e. the difference between the present value of the stream of benefits and the present value of all the costs. A project (or certain component of a project) may only be accepted if this difference is zero or positive (B - C 2 0). To compare several alternatives, the analysis results can be ranked for decision making.
2) Benefit and cost ratio (B/C ratio)This measure is to determine a ratio using present value of all the benefits in the numerator and the present value of the costs in the denominator. A project is considered to be economically sound or acceptable when the calculated value is larger than or at least equal to 1 (B/C > 1). The results can also be shown as a ranking of alternatives.
This is the discount rate, which, when applied to the stream of benefits and costs, produces an equal present value of both or a net present value of zero (A discount rate when B = C, or B - C = 0). This particular rate is called IRR and represents the average earning power of the project's investment to be compared with other investments.
Each measure has its pros and cons. NPW shows the magnitude of the net benefit of a project but indicates nothing about returns per unit. B/C ratio and IRR, on the other hand, give no indication of the magnitude of net benefit. Since they use the same set of data and a microcomputer can now help the analysis, economists may use all three measures with little effort to obtain a complete picture.
When benefits have problems to be quantified or valued, or the work must be done by whatever the reason, cost effectiveness analysis can be used. The objective is to find out least cost to achieve the given goal (FAO, 1987). Or, costs are estimated in association with various levels of physical benefits and the results are presented to the decision-maker to decide which level of cost is justified (Shaner, 1979). Fig. 11 illustrates the principle of cost effectiveness analysis.
It is a test of the impacts due to changes in cost, benefit, discount rate or others on the net present value or profitability of a project. Because of the many uncertainties in estimating future benefits and costs, this analysis will find those elements and their relative magnitudes of change that will affect net benefit of a project. Once identified, planners can then change the design of the project, build contingencies, or adjust the decision criteria (FAO, 1987).
A project benefiting the nation as a whole may not be beneficial or feasible to the individuals who will invest in it, whether the individual is a farmer, businessman, private or public agencies. An apparent example is erosion control work which may sometimes benefit society more than the farmers in the upstream watershed who need to invest heavily in soil conservation work. As mentioned previously, financial analysis uses almost the same basic data as the economic analysis to study additionally cash flows, financial returns to the private entities, etc. in order to know whether the project is attractive.
An introduction
Planners or watershed managers should first realize that economic assessment or appraisal usually goes through a progressive and iterative procedure. Economists should be involved in the early stage of the survey and planning process for the purpose of initiating design, establishing technical relationships, recommending data needs, and analysing preliminary results. As the planning work proceeds, rough assessment and estimation of costs and benefits will have to be carried out many times, back and forth, to consider among alternatives. After the preliminary results put into the project's interim report, more work still needs to be done for revision or refinement as government authorities or funding agencies state their requirements.
Major Procedures
The major procedures involved in the economic (and financial) assessment are briefly explained here. Details can be seen from the Guidelines for Economic Appraisal of Watershed Management Projects (FAO, 1987) and the Public Management of Forestry Projects (OECD, 1986).
1) Developing technical relationships and quantifying physical inputs and outputs. The work includes defining and quantifying "without" project situation such as erosion and sediment rates over time; estimating "with" project impacts; and developing tables which show inputs and outputs for one or more alternatives.
2) Determining values and developing value flow tables. The procedure includes assigning monetary values; valuing watershed management inputs such as labour, equipment, material; valuing watershed
project benefits such as crop increases, dredging costs avoided, and flood losses reduced; and developing an overall value flow tables.
3) Measuring project worth. Using the techniques described in Section 9.4 to calculate and compare cost and benefit of each alternative.
4) Sensitivity Test. It is essential to test the sensitivity of the chosen measure(s) of project worth in terms of alternative values for many key factors, e.g. the discount rate, benefit value estimates, cost assumptions, etc. The results can be used for project revision or refining.
In the process of economic assessment, watershed managers and their team technicians need to work closely with economist(s). Not many economists have sufficient knowledge about the techniques of watershed management and soil conservation, and most of them will need technical inputs during the assessment of a project.
This is probably the first important step toward a sound assessment. The watershed technicians should try their best to provide technical information such as erosion figures on various land use types, sedimentation rates, effectiveness of various conservation measures in erosion reduction and crop production, and so forth. Such data should best be based on local experiment results and surveys. In developing countries where research and basic data are lacking, professional judgement, or information from similar ecological regions may be used. Realistic estimation should also be given concerning the watershed situation if no project were to be carried out over time. Likewise estimations of the expected results of the project should be realistic. Exaggeration or insufficiency will mislead the assessment.
Costs of various watershed rehabilitation or protection practices are relatively easy to identify. Labour, equipment, raw material and land (purchasing or renting) can be accurately determined by experienced technicians and provided to the economist. However, the economist, after investigating the market price, may for certain reasons use different set of values such as opportunity cost and shadow price to reflect the real situation. The technicians should make every efforts to understand the underlying reasons for such assumptions.
Indirect cost may not be easy to identify. Assessment of watershed project impacts should also look into indirect cost and negative impacts to show the real picture. For instance, in some countries, gravel reduction in downstream areas may cause high construction cost in the cities due to material stopped by check dams in the upstream watershed. Such cost should be included in the assessment calculations.
Insufficient identification of benefits has been one of the major reasons why watershed projects receive low priorities among other development projects. On the other hand, it is often difficult to identify, quantify, and value watershed project benefits when indirect and intangible benefits are involved.
Although much of the work will be done by the economist, watershed managers and technicians should understand some of the techniques used in quantification and valuation. Once understood, they can assist economist better to identify benefits. The following techniques are used quite often in the benefit valuation:
1) Increase value of production: Including crops, animals, timber, fruits, fish, etc. for greater physical production, quality improvement, better timing or better prices, etc.
2) Avoidance of losses: Such as dredging costs avoided, water treatment cost avoided, flood losses avoided, transportation losses avoided, and water use losses avoided, etc. A simple example of the latter is shown in Example 24.
3) Cost savings: Such as lower transportation cost due to new roads or better roads, less maintenance cost of hydro-power plants, and saving replacement cost of dams and equipment, etc.
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Example 24 AN EXAMPLE OF ESTIMATING WATER SUPPLY BENEFITS - Cave River/Pattoo Gully Municipal Watershed -
This benefit could be divided into two parts, benefit from non-stop pumping of water, and benefit from increase of streamflow. The first one can be estimated by cutting down about 80 percent of the pumping stoppage since very heavy rains may still make the streamflow unsuitable for treatment. The annual benefit, therefore, can be calculated as follows:
Ba = R F P
Ba = annual benefit in dollars
R = Reducing stoppage, i.e. 80 percent in a year, in hours
F = hourly pumping rate, in 1 000 gallons P = consumer price for 1 000 gallons
If we treat 1973 as a normal year, the total stoppage time is 302 hours. Eighty percent is 241.6 hours. Presently, the pumping rate is 30 x 1 000 gallons per hour. If the price of 1 000 gal. is J$ 0.60, then the annual benefit derived from this item is J$ 4 348.80. This is based on the present capability of the Plant. The benefit will increase with the increase in capacity in the future. On the other hand, the benefit for alleviating the discomforts of being without water cannot be estimated in monetary terms.
The other benefit of the watershed work is to increase the low flows during dry seasons. Vegetation cover and various kinds of terraces will provide excellent opportunities for infiltration of water and recharge of groundwater. It is also believed that with more water going into the ground rather than running off during the wet season, the low flows in the dry season could be increased. Although no figure could be given to the amount of increase without research findings in this country, any increase of low flows, or even sustaining the present level of low flow during critical periods, will benefit society a great deal.
J$ 1.00 = US$ 1.10
Source: FAO JAM/505 Project Working Document (1974). |
4) Increase value of land and properties: Due to both improvement of environment and increase of productivity.
Three important things should be kept in mind in identifying and valuing watershed project benefits. First is to avoid double counting. Second, the negative impacts of a project may easily be neglected by enthusiastic technicians. A fair economic assessment should be based on all impacts. Last but not least important is that not all the benefits can be put into dollars and cents. As mentioned previously, such benefits should also be clearly described in qualitative terms and included in the final assessment.
In the process of economic assessment, many other aspects will have to be included or implemented such as technical aspects, managerial aspects, financial and commercial aspects, or social aspects, etc. Depending upon project needs and manpower availability, these assessments can also be done independently.
Experience shows that since many watersheds in developing countries are inhabited by small farmers, the social aspects of a project usually merits an in-depth and separate assessment. Emphasis could be placed on many facets of social concerns such as who will be really benefited from the project? Will the small farmers and rural poor be better off? What are the employment opportunities for women and youth? And how many upstream inhabitants take part in the decision making on watershed resources use?
Environmental impact is also a growing concern. Fortunately, watershed management and soil conservation projects are usually good for the environment. However, when rural infrastructures are included in a project such as road building, settlement and housing, water diversion, etc., their environmental impacts need to be assessed. Sometimes, environmental assessments are also required on extensive reforestation proposal in a municipal watershed, large scale forest conversion and crop development, and drastic land use changes in a watershed.
