CHAPTER 6: EVALUATION OF MARKET DEVELOPMENT OPTIONS

A. Options for Development
B. Appraisal Methods and Tools for Economic and Financial Analysis
C. Which Technique to Use to Evaluate Simple Markets
D. Evaluation of Wholesale Markets
E. Estimating Development Costs
F. Social and Environmental Impact of Marketing Projects

It is essential that all the market infrastructure options are fully evaluated and that any key social and environmental issues are identified. This chapter reviews the following subjects:

• the options for development;
• possible appraisal methods and tools for economic and financial analysis;
• which evaluation techniques to use;
• the specialised issues that need to be considered in evaluating wholesale markets;
• methods for estimating development costs; and
• criteria for assessing the social and environmental impact of marketing projects.

A. Options for Development

If the steps outlined in the previous chapters have been followed it is almost inevitable that a range of possible development options will need to be evaluated. These might include:

• selecting the most suitable site for improvement, from a list of potential rural primary or assembly market sites;
• choosing whether to upgrade an existing wholesale market or whether to relocate to a new site;
• evaluating whether traders would be willing to pay increased rents for improved retail markets; or
• deciding whether to make an investment or whether to maintain the marketing system in its existing, unimproved state.

B. Appraisal Methods and Tools for Economic and Financial Analysis

Making the most effective use of resources depends on an effective planning and appraisal process. Therefore, the decision-maker needs to appraise the options and select the most appropriate solution. The first point to emphasise is that any evaluation method must include a role for all the concerned parties, in addition to the decision makers and their technical advisors. For this reason evaluation methods need to be systematic, quick, simple and inexpensive to use and comprehensive enough to take account of all the main factors relevant to decision making. It is important that an evaluation method can organise the information in a way that the decision-maker and users can test the financial indicators against their personal experience. Cost per ton or trader, or anticipated rental levels, are the type of simple indicators which can easily be understood. The range of tools conventionally used is:

• payback period;
• financial analysis: net present value, annual equivalent and internal rate of return;
• cost-effectiveness and break-even analysis; and
• screening, decision trees and ranking techniques.

Payback period: this is a technique for simply comparing the number of years which will be necessary to recover the overall development costs, i.e. by comparing the costs to the total annual rents and charges, less estimated operating costs. It is a fairly crude technique, but easily understood

Financial analysis: This is a means of assessing whether the sum of the discounted benefits exceeds the sum of the discounted costs, i.e. whether the revenues will exceed the sum of the investment and recurrent costs. The conventional way of expressing these costs is as a net present value (NPV) and the profitability as an internal rate of return (IRR). A similar technique to the IRR is to express the profitability as a benefit-cost ratio (BCR) This technique is particularly useful where other variables, such as environmental impact, need to be taken into account.

Cost-effectiveness and break-even analysis: At the identification stage it is unlikely that there will be sufficient information to undertake a financial analysis such as that considered above and other techniques will have to be used. A cost-effectiveness analysis is a simpler technique based on using the benefits as outputs (such as tons of produce traded) against the minimum cost of development. A similar method is a break-even analysis, which is a useful technique where there is a clear idea of the returns the project should be making. In this case the idea is to calculate the minimum monetary value per unit traded to justify the project. Other techniques use the equivalent rents as the indicator.

Simpler techniques: In many cases, the types of methods described above will be too complex and a simple screening, decision-tree or ranking method will be more appropriate. An example of this is given in Appendix B.

Marketing Margins: For a financial or cost-effectiveness analysis realistic estimates will also need to be made of the potential impact of the project on marketing efficiency and the possible affordable level of market charges. To do this will require reliable information on marketing costs and margins. For selected crops, at key urban and rural locations, the average marketing costs will need to be computed. Techniques for doing this are given in detail in the FAO publication “A guide to marketing costs and how to calculate them”. The procedure may be more complex in the case of wholesale markets, which if they have a monopoly can charge what they like, regardless of existing margins. This may mean traders adjusting their mark-ups or lead to the departure of inefficient traders and some consolidation.

DEFINITIONS: Net Present Value (NPV): The sum of the discounted costs and benefits. The higher the NPV the greater the project benefits. Internal Rate of Return (IRR): The discount rate at which the base year value of costs and benefits are equal (i.e. NPV = 0). If the IRR is higher than planning discount rate then the project is viable. Benefit Cost Ratio (BCR): The ratio between the discounted total benefits and the discounted total costs. If the NPV is zero then the NPV divided by the discounted costs is zero and the BCR is unity (1). If it exceeds unity it is profitable.

C. Which Technique to Use to Evaluate Simple Markets

The choice of technique to evaluate simple market proposals will depend on two factors: the type of project and the stage of the analysis. In applying any technique two broad considerations are essential. Firstly it must be recognised that the capacity for project formulation is usually limited. Secondly, any simplification that is applied must not ignore the need for the intended beneficiaries to understand the analysis. The most conventional technique is to use discounted costs, but at the identification stage this is not always practical as it needs a substantial level of information.

Identification stage: For most projects (but excluding wholesale market developments) at the identification stage, the most effective technique is to use a simple screening and ranking approach which prioritises the options. An example of this methodology, applied to rural markets and urban retail markets, is given in Appendix B.

Pre-feasibility stage: The pre-feasibility stage, where selected options or a single preferred solution need to be examined in greater detail, can often be undertaken by simply looking at the pay-back period. Such a methodology is shown in Box 9.

BOX 9 Assessing the viability of a simple market project 1. Add together all the expected annual rents, revenues and required profit. 2. Subtract the value of any existing total annual rents and revenues. 3. Subtract any additional annual recurrent costs (e.g. electricity, and water). 4. Multiply the result by 5 to obtain a value for 5 years total net revenues (if the project is less risky and/or a high return is not required multiply by 10 for 10 years revenues, i.e. equivalent to a 10 percent yield). 5. Estimate the total costs of buildings, infrastructure and equipment, plus the existing site value or cost of site acquisition (if applicable). 6. Compare the total net revenues (4) to the budget capital cost estimate (5). If they are roughly equal then the project is viable. 7. If capital cost exceeds the revenues, increase the annual or monthly rents. 8. If this looks to produce rents that traders will not be willing to pay (discuss with them the new rent levels) review the project and reduce capital costs.

However, where the investment in individual market improvements is likely to be high (say, exceeding US$ 50,000) they should be subjected to a rudimentary financial analysis to ensure that the additional revenues are going to be sufficient to cover the capital costs.

Feasibility stage: Unless the project is very simple (such as a single rural market or small urban retail market) the feasibility stage will always require some form of financial analysis, which is outside the scope of this guide. The essential thing to ensure at the identification and pre-feasibility stages is that the surveys and studies needed to prepare the feasibility stage have been setup. A simple economic analysis is also useful to test whether the potential economic savings (such as reduced post-harvest losses and reduced vehicle operating costs) are significant.

D. Evaluation of Wholesale Markets

Evaluating wholesale markets requires a slightly different and more detailed approach as it is likely that the level of investment will be quite high and that there will be a need to choose the most cost-effective site location. Thus, after estimates of land requirements for the market have been made, an initial choice of potential sites for the wholesale market needs to be made. This will often be based on studies prepared by technical experts or local consultants. The factors involving the choice of sites are summarised in Box 10.

BOX 10 Initial choice and suitability of wholesale market site overall land availability, including whether the site conforms to planning regulations and zoning requirements; terrain - the flatter the site the better; potential flooding hazards and the level of the water table; the site’s suitability for construction (geotechnical constraints); the presence of mains services at a reasonable cost; and any potential environmental pollution mitigation measures or land reclamation requirements.

BOX 11 Sources of wholesale market revenues
Description	Unit
Rental of Space (including service charge):
Individual Wholesaler Units:
· Fruit and vegetable units	m2
· Dry goods units	m2
· Flower sales	m2
Semi-Wholesaler Stalls:
· Fruit and vegetable units	per stall or m2
· Dry goods units	per stall or m2
Restaurants m2
Independent Commission Agent’s Offices	m2
Bank Rental m2
Wholesale Parking Area:
· car parking space (0.1 to <0.5 t)	per day per space
· pick-up/small truck parking space (>0.5 to <3 t)	per day per space
· medium and large truck parking space (>3 t)	per day per space
Farmers’ Market Parking/Selling Spaces:
· farmers’ car selling space (0.1 to <0.5 t)	per day per space
· farmers’ pick-up/small truckselling space (>0.5 to <3 t)	per day per space
· farmers’ medium and large truck parking space (>3 t)	per day per space
· buyers’ parking space	hourly per space
Miscellaneous services:
· rental of fork lift trucks	daily rental
· rental of palletizers	daily rental
· rental of pallets	daily rental
· rental of hand trolleys	daily rental
· rental of scales	daily rental

From this preliminary review a short-list of suitable sites can be drawn up and considered in more detail by the technical advisors and by consultants. The methodology used for detailed site selection might be as follows:

• an evaluation should be made of technical and physical planning criteria (land availability, existence of mining and other reserves, service regulations, environmental conditions, road and rail access, scale of earthworks, and availability of water supply, sewage, stormwater drainage, gas supply, heating, electricity and telecommunications). The evaluation could be based on comparing development costs or, where information is limited, a weighted ranking method;
• an initial economic assessment should be made of land values of each of the potential sites and the relative costs of service provision in comparison with likely market rental values;
• an assessment should then be made of the institutional factors that could influence the choice of site, including:
  • the immediate population served;
  • potential local authority budgetary contributions; and
  • the proportion of the land in public ownership.

• finally, a preliminary financial analysis should be made of the entire project for the most likely locations. This will require that development costs are prepared in some detail and that at least an initial assessment is made of the potential sources and level of revenues. Typical examples are shown in Box 11.

E. Estimating Development Costs

The financial evaluation of any project will depend on the flow of development costs and revenues. These are broadly of two categories: (i) the initial investment costs and (ii) recurrent costs and revenues over the market’s useful life. A summary of typical cost components is shown in Box 12.

The conventional way of estimating costs is to use representative “historical” cost (or more correctly “price”) data for each of the major components or elements. The costs need to be carefully identified as they can be significantly affected by the methods of project procurement, i.e. whether it is by a conventional, turn-key or force-account contract.

BOX 12 Typical cost and revenue components for a market Investment costs pre-development costs, including site survey, planning fees, official permit fees and financing costs for banks and other lending institutions; site purchase costs, including legal fees and taxes; demolition and site preparation; construction costs, including: infrastructure costs, such as roads and services; environmental impact mitigation measures; building costs, including structure, building cladding, internal finishes and infill walls; refitting or rehabilitation costs for existing buildings; the cost of labour, tools, equipment, materials and the establishment of workers’ camps (for direct or “force” account contracts where employment or labour-based technology is to be used); disruption costs for relocating the market users during construction and loss of market income from vacated stalls; fitting-out costs, including equipment, machinery and mechanical services, such as environmental controls, fire safety, security and sanitation; and design and supervision costs (for planning consultants, architects and engineers). Recurrent costs and revenues potential fees, rents, premiums and sale value or other incomes from the market; the cost of staff and employees; running and maintenance costs, including management fees; the opportunity cost of alternative investments which could be financed from the same resources; and potential asset value (which might be the value of the market’s goodwill, improved site value or just its residual value), expressed as an annual equivalent revenue.

At the initial identification and pre-feasibility stages it is usual to make budget estimates using a square metre basis or some other simplified measure (such as cost per stall). At the detailed design stage, particularly with any project of a complex nature, such as a major wholesale market, the costs for each element should be built-up from rates reflecting the actual materials which it is intended to use in constructing the project.

Often the costs which will significantly influence the viability of a project are the site purchase and staffing costs. The fitting-out costs may also be a significant cost element, particularly for wholesale markets. Some of these costs can be transferred to the market tenants, such as the construction of infill partitioning and the provision of specialised equipment such as cool stores. This is only possible where the tenants have been fully involved in the design process and where long leases are going to be made available. Since the cost of design is a small proportion of the total investment cost, the value-for-money return on ensuring good and economic design is substantial.

F. Social and Environmental Impact of Marketing Projects

Even when no significant environmental problems are foreseen, a review of the environmental and social impact for each of the project sites needs to be undertaken. At the identification and pre-feasibility stages this usually only needs to be a general screening or examination, which can be followed-up and more thoroughly assessed at the feasibility study stage. Common environmental and social impact issues of a marketing project are shown in Box 13 and include:

• land acquisition and resettlement impact;
• air, groundwater, soil pollution, noise pollution and effluent disposal;
• handling, storage and transport of hazardous materials;
• potential asbestos, dust and fibre pollution issues;
• solid-waste management;
• occupational health and safety implications;
• energy conservation;
• natural environment, heritage and landscape impact implications; and
• emergency, security and safety plans.

Lending agencies and donors, such as the World Bank, designate wholesale markets (and sometimes other categories of markets) as Category “A” projects (in accordance with World Bank Operational Directive 4.01). This means that environmental impact mitigation measures will need to be incorporated into the project design and that these will need to be fully considered at the time of project appraisal (usually corresponding to the feasibility stage). In addition, local environmental laws often require that a formal environmental impact assessment be made, as well as providing formal documentation demonstrating that there are no unresolved planning issues, i.e. a change-of-use certificate should be available (if applicable) and proof be provided that there is no conflict with a local structure plan or land-use zoning plan. In some cases a formal management plan may also be required.

SUMMARY OF EVALUATION ISSUES

• clearly set out the design alternatives;
• estimate the development costs - investment and recurrent;
• choose an evaluation technique, from among: payback period, financial analysis, cost-effectiveness, break-even analysis, screening, decision tree and ranking techniques;
• for identification of rural markets and urban retail markets, use a simple ranking method to evaluate alternatives;
• for a pre-feasibility study of rural markets and urban retail markets, use a payback period or a simple financial analysis to test the selected alternatives;
• with wholesale markets, apply a more rigorous evaluation methodology; and
• evaluate the proposals in terms of their social and environmental impact and if any significant negative effects are discovered build into the project design appropriate mitigation measures.

BOX 13 Desirable environmental and social impact of a market project
Component	Environmental impact	Socio-economic impact
Land	No loss of natural habitat	Limited land acquisition
	No land-use conflicts	No land ownership conflicts
	General amenity gain	Limited loss of existing property
	No additional soil pollution
Labour	None	Benefits local construction industry Use of local labour not requiring additional accommodation
Health	Improved hydrological and drainage conditions	Improvement to sanitation system
	Reduced health hazards
	Public health benefits
	Reduction in disease transmission
	Reduced water contamination
	No impact on water table
Waste collection	No hazardous waste	Improved solid-waste
	Limited construction waste	No additional disposal quantities
Construction	Use of renewable resources	Use of local materials
Energy	Marginal resource depletion	Marginal increase in market operating costs
Air pollution	Marginal change	None
Noise	Marginal change	None
Heritage	Conservation gain	Parallel socio-economic gain