3.1. Cost-Benefit Analysis - RTB Banana Research Priorities

Cost-Benefit Analysis (CBA) is the standard economic method to assess the financial viability of investments. By comparing the costs of a banana research project to the estimated benefits over time, a Cost-Benefit Analysis helps determine whether the benefits exceed costs.

Watch our video to learn more about CBA and understand how to calculate its two key performance indicators ‘Net Present Value’ and ‘Internal Rate of Return’ that can help us rank different banana research options.

Find out more about how we estimated the benefits and costs of banana research options within the Cost-Benefit Analysis framework.

Download the video script and visuals HERE

3.1.1. Benefits

Estimating the benefits of banana research options within the Cost- Benefit Analysis framework included the following steps. Click on the links below to find out more.

3.1.1.1. Benefit types and counterfactual

Now we understand how costs and benefits can be compared in a way that adjusts to the timing for when they occur. Let’s explore what types of benefits we expect from typical banana research investments and how we would go about assigning a monetary value to them. One fundamental concept that we will need to understand is the ‘counterfactual’, which is the economic term to describe ‘what would have happened without our intervention’ and constitutes the baseline for measuring changes.

This means that when assessing the benefits of a specific banana research intervention, we are comparing a situation with the research investment against an alternative situation without the investment. Watch the following video for an illustration of these two scenarios and a description of the types of benefits that can occur.

Download the video script and visuals here

3.1.1.2. Target domain

When starting to estimate benefits, we need to pay attention to the share of the production area that is affected by the constraint or for which the new technology is suitable i.e. the target domain for our intervention. Carefully defining the target domain is especially important for our assessment due to the diverse characteristics of different cultivar groups. Watch the following video for an illustration of how to identify the target domain.

Download the video script and visuals here

3.1.1.3. Adoption profile

Estimating the number of adopters (i.e. farmers who will use the new technology) as well as the pace of adoption (i.e. how long it will take for farmers to start using the new technology) is extremely crucial in the assessment of a research option’s benefits. The adoption estimates largely drive the results of the assessment and therefore, will later need special consideration in the sensitivity analysis.

The following video explains the characteristics of an adoption profile and illustrates how it changes if we modify key adoption parameters.

Download the video script and visuals here

3.1.1.4. Economic Surplus Modelling

The core of this priority assessment exercise is to quantify the benefits resulting from different types of banana research investments. All of the research lines included lead to the development of adoptable innovations such as a higher yielding variety or a new crop management regime. If these technologies are adopted by farmers, we expect changes in economic welfare – a term used by economists to describe the utility/benefits gained by an individual or a group of persons through, in our case, producing and consuming bananas. This change in economic welfare represents the benefits of research and can be quantified with an Economic Surplus (ES) Model.

Watch the following clip to learn more about ES models and the calculation of benefits.

Download the video script and visuals here

3.1.2. Costs

After estimating the benefits that would result from each research option, we need to calculate their costs in order to derive the Net Present Values and Internal Rate of Returns and to be able to assess and compare research options as described in the Cost-Benefit Analysis section.

In our framework, we considered two types of costs: Research and Develpment cost and dissemination cost.

3.1.2.1. Research and development costs

The Research and Development costs for this priority assessment were derived from detailed budgets extracted from either existing proposals or were specifically compiled for this exercise by resource persons.

In the table below we can exemplarily see the research and development costs for the ‘Recovery from Banana Bunchy Top Virus’ research option that are borne by the CGIAR research centres. The costs of, for example, scientists, fieldwork or laboratories were compiled for every year of the research phase.

As a next step, these Research and Development costs were matched 1:1 with similar costs expected at the level of national agricultural research systems (NARS) in the process of developing and adapting the technologies. Thus, the costs of research and development consist of the costs borne by the CGIAR research centres and the costs borne by the national agricultural research system. This provided the total Research and Development costs for each year to be then discounted to their present values.

R&D Costs: Example of “Recovery from BBTV” Research Option

Item	#	Rate (US$/day)	Year 1 [$’000]	Year 2 [$’000]	Year 3 [$’000]	Year 4 [$’000]	Year 5 [$’000]	Year 6 [$’000]	Year 7 [$’000]	Year 8 [$’000]	Year 9 [$’000]
Senior Scientist	1	800	160	160	160	160	160	160	160	160	160
Scientist	4	600	480	480	480	480	480	480	480	480	480
Research Assistant	7	110	154	154	154	154	154	154	154	154	154
NARS Scientist	7	250	350	350	350	350	350	350	350	350
PHD students	4	100	80	80	80	80	80	80	80	80
MsC Students	14	80	224	224	224	224	224	224
Field Work			1,000	1,000	1,000	1,000	1,000	1,000	1,000	1,000	1,000
Laboratory			210	210	210	210	210	210	210	210	210
Equipment			350	350	350	350	350	350	350	350	350
Others			50	50	50	50	50	50	50	50	50
Travel			350	350	350	350	350	350	350	350	350
Inst. support/overhead (15% of costs)			511	511	511	511	511	511	478	478	466
TOTAL			3,919	3,919	3,919	3,919	3,919	3,919	3,662	3,662	3,570

Source: Budget compiled for the RTB Priority Assessment to show funds required for research and development activities described in Section 3 of the report and under ” Recovery of smallholder banana production from BBTV in Africa and Asia”

As mentioned before, all past research costs are treated as sunk costs, which means that we disregard them for the assessment. This is important when interpreting results, since disregarded past costs result in higher net present values and rates of returns. Furthermore, technologies for which research has been going on for some time will likely perform more favourable in the assessment for two more reasons. First, the research lag will be shorter as adoptable innovations will be available earlier compared to similar research options just starting. Second, chances are that the probability of research success will be higher – effectively a factor with which benefits are multiplied – as some of the research has already been completed and thus the outcome is better known and/or success closer within reach.

3.1.2.2. Dissemination costs

Research results such as a new variety or improved agronomic practises need to be disseminated to users, in our case banana farmers. This process is linked to specific costs which are called dissemination cost. We used fixed dollar values that were derived from former CGIAR impact assessment studies for every new hectare of adoption.

In the assessment, we used two different levels of dissemination costs dependent on the type of the innovation: for knowledge intensive technologies, such as improved crop management, we assumed dissemination costs of $ 80 per every new hectare of adoption; and for less knowledge intensive and easier to spread technologies, such as new varieties, a lower, one-time rate of $ 50 per every new hectare of adoption was applied.