Agricultural Project Analysis: Issues And Case Study

This dissertation focuses on several key technical issues of investment analysis within the overall framework of project analysis. It begins with introduction on integrated approach to economic/financial analysis, brief review of international financial institutions (mostly World Bank) financed agricultural projects and the application of cost benefit analysis in China, followed by the studies on key issues in the analysis--including inflation and its impacts on financial and economic analyses, risk analysis and the pricing of irrigation water. The last part is devoted to a case studyuanzhong Irrigation Project in Shataxi Province, illustrating the keys points covered by the proceeding sections. Agricultural project as a major vehicle for agricultural development: Agricultural investment and its role in agricultural and overall economic development have been well acknowledged by both academics and government bureaucrats. While the argument for increasing the share of agricultural investment in the national budget is desirable, the efficient use of available capital for agricultural development is equally if not more important. The waste and under- utilization of current agricultural investment is, to no small part, caused by the mismanagement of, and lack of project approach to agricultural investment. The application of project approach would reduce the uman factor?in investment decision and impose more rigorous monitoring and evaluation of the project implementation, thus improving the performance of agricultural investment. The main issues discussed in the dissertations are of both theoretical and practical nature. These are: Inflation and its Impact on Financial Analysis: Inflation affects the outcome of an investment by altering the amount and timing of the cash flow through its impact on the requirements and terms of financing, working capital needs, taxes and exchange rats. It is also an additional element of uncertainty a~ffecting the outcome of the project. and as a result, the real (net of tax) financial returns over the life of the project can be seriously misstated, simply as a result of using incorrect procedures to account for expected inflation. In the economic appraisal of the projects, analysts have tended to ignore the financing and liquidity constraints the inflation imposes on the operation of the projects. As a consequence, the impacts of these constraints on a project ultimate economic performance are not properly accounted for. Even a purely public sector project must have adequate financing and sufficient working capital to function efficiently. While inflation may have little direct impact on the measurement of economic benefits and costs, it can affect these variables through the financial performance of the project and the way the financial outcomes alter the behavior of the sponsors, financiers and managers of the project. Risk Management: The sensitivity analysis assesses risk by identifying the variables that most influence a project net benefits and quantifying the extent of their influence. It does not, however, take into account of the correlation among the variables, or the probabilities of occurrence of the events, and the practice of varying the values of sensitive variables by standard percentages does not necessarily bear any relations to the observed variability of the underlying variables. Monte Carlo simulation provides a generally applicable procedu...