Value Chain Analysis for Policy Making

1 Value Chain Analysis for Policy Making Methodological Guidelines and country cases for a Quantitative Approach Lorenzo Giovanni Bell Policy Officer (Economist), Agricultural Development Economics Division About Value Chain Analysis : VCA is the assessment of a portion of an economic system where upstream agents in production and distribution processes are linked to downstream partners by technical, economic, territorial, institutional and social relationships. The effects of policies targeting specific production processes extend their primary impacts in the economic system according to the same path as the main inputs and outputs. Analyzing impacts of Policy options through Value chains provides decision makers and other stakeholders with anticipated evidence on likely changes directly induced by policies. See all VCA resources on EASYPol resource package: Value Chain Analysis About EASYPol: EASYPol is a multilingual publishing series and knowledge exchange platform with freely downloadable resources for Policy Making in agriculture, rural development and food security.

2 The EASYPol is available at: Resources focus on Policy issues, guidelines, methodological tools, comparative findings, country studies and applications. EASYPol is maintained by FAO's Policy Support Group FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS, FAO EASYPol Series 129 Resources for Policy Making The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned.

3 The views expressed in this information product are those of the author(s) and do not necessarily reflect the views of FAO. E-ESBN 978-92-5-107664-4 E-ISSN 2219-9497 All rights reserved. FAO encourages reproduction and dissemination of material in this information product. Non-commercial uses will be authorized free of charge, upon request. Reproduction for resale or other commercial purposes, including educational purposes, may incur fees. Applications for permission to reproduce or disseminate FAO copyright materials, and all queries concerning rights and licenses, should be addressed by e-mail to or to the Chief, Publishing Policy and Support Branch, Office of Knowledge Exchange, Research and Extension, FAO, Viale delle Terme di Caracalla, 00153 Rome, Italy. FAO 2013 Value Chain Analysis for Policy Making Methodological Guidelines for a Quantitative Approach Table of contents 1. Introduction .. 1 2. Value Chain Analysis for Policy Making : the approach.

4 3 Conceptual background .. 3 Domains of Value Chain Analysis for Policy Making .. 7 Value Chain Analysis and Policy Making .. 8 Limits of the Value Chain approach .. 9 3. Some domains of Value Chain Analysis .. 11 Socio-economic context of the Value Chain ..11 Demand for Value Chain outputs ..13 Analysis of the institutional set up ..14 Analysis of input and output markets ..17 Functional Analysis of the Value Chain ..22 Setting the boundaries of the Value Chain ..22 Identifying activities ..23 Identifying agents ..23 Quantifying physical flows ..28 Appendix: exercises ..31 Exercise 1: Value Chain functional Analysis ..31 Exercise 2: Quantity flows in the paddy rice sub-sector ..31 4. Economic Analysis : general aspects .. 34 Economic Analysis at market Building the production account of an economic activity ..36 Total output Value ..37 Intermediate input costs .. 38 Consumption of fixed capital ..39 A two-side production account.

5 40 Building the income account of an economic activity ..40 Calculating the interest cost on fixed capital ..43 Choosing the appropriate discount rate ..47 Pricing the consumption of non-man-made fixed assets ..47 Agents accounts and Value Chain accounts ..48 Consolidating accounts at Value Chain level ..50 Appendix to chapter 4 ..54 Data requirements and data sources to implement a Value Chain Analysis ..54 Loss of Value of an asset in a given period ..57 Equivalent Annual Cost ..58 Averaging interest costs across periods ..59 Exercise: Cost-Benefit Analysis of Policy options for Rice Value Chain in Burkina Faso..62 5. Policy impacts in VCA: scenarios for counterfactual Analysis .. 65 Counterfactual Analysis for Policy impacts ..65 Impact models ..66 Building scenarios in the VCA framework ..68 Value Chain Analysis for Policy Making Methodological Guidelines for a Quantitative Approach VCA for monitoring Value Chain performances.

6 77 Appendix ..79 Cost-Benefit Analysis of Policy options for Rice Value Chain in Burkina Faso 79 6. Decision Making in an open-economy setting .. 82 Computing parity prices ..83 Parity price of an output as import substitute ..84 Parity price of a domestic output as export ..86 Parity prices of importable and exportable inputs ..88 Appendix: exercises ..94 Exercise 1: Calculating rice parity price ..94 Exercise 2: Calculating milk parity price ..94 Exercise 3: Calculating cattle parity price ..94 7. Decision Making from an economy-wide (societal) perspective .. 97 Social values versus market prices ..97 Market Failures ..98 Missing policies .. 103 Policy failures .. 103 Social values and reference 104 Choosing the numeraire for reference prices .. 105 8. Computing reference prices ..107 Calculating reference prices of tradable goods .. 107 Share of taxes as transfer .. 108 Exchange rate .. 110 Externalities.

7 116 Calculating reference prices of non-tradable goods and services .. 115 Reference prices applied: Analysis of organic bananas in Ecuador .. 122 Exercise: computing reference prices with externalities .. 126 9. Profitability, competitiveness and protection indicators ..128 Structure of the Policy Analysis Matrix (PAM) .. 129 Impact Analysis of Policy options and PAMs .. 133 Profitability and Value added indicators at market prices .. 135 Profitability and Value added indicators at reference 139 Protection indicators .. 142 Other protection indicators .. 147 A synoptic view of PAM indicators for Policy impact Analysis .. 150 Assessing Policy impacts with PAMs. A real-case example from Burkina Faso . 154 Expanded PAMs .. 157 How to deal with protection pass-through between agents .. 160 10. Glossary to the guide ..164 11. References ..167 Value Chain Analysis for Policy Making Methodological Guidelines for a Quantitative Approach Acknowledgements These guidelines are based on the material used and experience gained in recent years by the author and other colleagues at FAO, in carrying out Value Chain analyses for Policy Making in various countries.

8 The final version of these guidelines benefited from contributions by different sources. Substantial contributions come from Nathalie Guilbert, FAO consultant, who worked on a first set of slides and contributed to selected country cases in Burkina Faso. Eleonora Gentilucci, FAO consultant, provided interesting references to prepare the conceptual background. Piera Tortora, FAO consultant, assembled the first sparse material on this topic and substantially contributed to the first draft of chapters 6, 7 and 9. Important hints and suggestions came from Carlo Cappi and Materne Maetz, former FAO Policy officers. Comments and suggestions also came from many partners involved in the FAO- Policy assistance activities, including Moussa Kabor and his team at the Ministry of Agriculture of Burkina Faso, who stimulated the authors to deepen and clarify various aspects of the proposed methods. Lucia Battaglia, Fabrizio Moscatelli and Ilaria Tedesco, FAO consultants, contributed to finalize the document with extensive revisions and drafts of various country examples and boxes.

9 Paola Landolfi, FAO, carried out the editing and formatting of the various versions of the document. These guidelines have been funded to a large extent by FAO s regular programme and contribute to the achievement of FAO s strategic objectives. Indirect and direct contributions were also provided by the FAO Norway cooperation programme (FNOP). The author would like to acknowledge and sincerely thank all the above mentioned contributors. Value Chain Analysis for Policy Making Methodological Guidelines for a Quantitative Approach Acronyms CIF Cost, Insurance, Freight included (Import price) CIRAD French Agricultural Research Centre for International Development CBA Cost-Benefit Analysis CRR Cost-Revenue Ratio DOFAR Domestic Factor Ratio DRC Domestic Resource Cost Ratio EPC Effective Protection Coefficient EPPF Export Parity Price at production level EXR Exchange Rate FOB Free on Board (Export price) GDP gross domestic product GHG Greenhouse gases GGF Groupements de Gestion Foresti res (in Burkina Faso)

10 GVA Gross Value Added GVC Global Value Chains INRA French National Institute for Agriculture Research NPCI Nominal protection coefficient on tradable inputs NPCO Nominal protection coefficient on outputs MC Marginal production cost MR Marginal revenue MU Monetary unit NVA Net Value added PAM Policy Analysis matrix PCR Private cost ratio PREM Foreign exchange premium PVAR Private Value added ratio SADC Southern African Development Community SER Shadow exchange rate SNA System of national accounts SRP Subsidy ratio to producers SUA Supply utilization accounts SURPA Subsidy ratio to private agents SVAR Social Value added ratio VA Value Added VCA Value Chain Analysis WiP With Policy WoP Without Policy Value Chain Analysis for Policy Making 1 Methodological Guidelines for a Quantitative Approach 1. INTRODUCTION Objectives: These guidelines provide users with the key notions required to carry out analyses of Policy impacts by means of a Value Chain approach and show how to do it by Making use of relevant approaches and tools.