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Nutrition Toolkit Tool #3: The Economic Analysis of Nutrition Projects

Tool contents. Although economic appraisal of projects is an imperfect business, it is receiving increasing attention as the Bank emphasizes improved project performance and measurable project impact. Economic analysis is one approach to making decisions about resource use. Guidelines for applying cost-effectiveness and cost-benefit analysis to nutrition project design decisions are the main focus of the tool. Five case studies -- choosing a vitamin A delivery strategy in Guatemala, increasing coverage of a prenatal iron supplementation program in Jamaica, looking at hospital-based breastfeeding promotion as an efficient way to improve health status of infants, selecting between distribution of food or cash transfers in Honduras, and deriving the benefit-cost ratio of providing food to malnourished children -- illustrate these applications.

Broad lessons learned
1. Cost-effectiveness analysis can be a useful framework for arriving at an appropriate focus for project work. Careful articulation of the questions/issues for study and the breadth of alternatives considered are the crucial factors to an effective outcome of the analytical exercise.
2. A critical step is the identification of known relationships among project inputs and welfare outcomes and those that can only be determined on the basis of project-specific data collection and analysis.
3. Project proposals tend to underestimate costs with detrimental consequences for project performance.
4. While nutrition benefits are multi-dimensional and difficult to capture in single indicators, this is not a barrier to the application of economic techniques to nutrition project appraisal.

Economic analysis: The options. Convincing arguments for the importance of investing in nutrition abound, and economic analysis is best focused on selecting among alternative methods and strategies for improving the nutrition status of at-risk groups served in Bank projects. Two questions -- "whether" (cost-benefit analysis) or "which" (cost-effectiveness analysis) -- can be applied to existing or proposed activities. These questions are also useful for task managers faced with decisions concerning expanding or reducing coverage and adding or dropping project components.

The groundwork for economic analysis.

Economic Analysis: The basic steps
- Specify the problem and define the objectives of the project in relation to that problem
- Identify all plausible options for achieving those objectives
- Decide what level of analysis is worthwhile
- Describe in detail the options being considered
- Estimate the costs of each option
- Estimate the benefits or effectiveness of each option, based on the projected demand
- Analyze the relationship between costs and benefits (or effectiveness) for each of the options being considered.

The principal objective of a project generally determines the analytical approach used, and is expressed in terms of some specified reduction in a defined problem. Greater specificity in the objective leads to a more straightforward set of steps in the economic analysis. An example of this precision in objectives is the aim "to reduce by 50% the level of vitamin A deficiency in young children in rural areas of Guatemala by the year 2000."

Alternative methods for addressing the problem of malnutrition generally take three routes: Changing preferences, nutrition habits or values, changing the price of food or food inputs, and changing the resources available to procure appropriate food in adequate amounts. Along with looking at intervention options, the nature and extent of public sector involvement should be assessed, with much of the rationale for public involvement in nutrition dependent upon market failure resulting from imperfect information and the desire to redistribute income to poorer segments of society. It should be noted that cost-benefit or cost-effectiveness analysis is not an appropriate analytical strategy for determining the advisability of government involvement.

Estimating costs. Four general points preface the section on cost estimation. 1) Consistent definition and calculation of costs for all options under consideration is essential for reaching valid conclusions about best program choices. 2) Under-estimation of project costs -- not uncommon in nutrition projects -- is counterproductive and unnecessary since there is growing evidence of significant returns from nutrition investments. 3) Financing public investment in nutrition through taxation introduces distortionary costs and these must be included in calculations (approximately 20 cents to a dollar for every dollar of additional taxation). 4) Because the cost of providing a nutrition good or service will likely change with scale, it is important to analyze how costs will vary as output increases.

The basic task of estimating project costs involves calculating the comprehensive cost data as well as the opportunity costs of all additional resources required for implementation. Project inputs are grouped in standard categories such as personnel, materials and supplies, utilities, buildings, and equipment. Cost data may be modified or adapted from existing estimates in the case of scaling up from a pilot project or when replicating a program. In most instances however, it will be necessary to derive estimates from predictions about likely quantities and prices of required inputs. This demands a good understanding of the technical content of the intervention(s) and a realistic assessment of project wastage.

Estimating effectiveness. Selecting an appropriate indicator of effectiveness and measuring its value for each of the interventions being appraised are the two essential tasks for this stage of the analytical exercise. In choosing the indicator, strive for the simplest measure common to all alternatives under consideration, and one that will change proportionately with welfare. The indicator must also have comparable welfare implications for each intervention option. For example, it is not possible to use morbidity reduction as the indicator of effectiveness for one intervention and mortality reduction for a second. If the alternative strategies for tackling a problem such as vitamin A deficiency are very different, it may be necessary to do a cost-benefit analysis.

Once the indicator has been selected, it should be defined with the greatest precision possible. It should capture relevant qualitative concerns (e.g., "kilograms of in-date wheat flour delivered within the first week of each term to designated schools" as opposed to "food distributed"), include crucial age and sex dimensions such as pregnant and lactating women and children 0 - 36 months, and reflect internationally-established biochemical, anthropometric or consumption thresholds which distinguish adequate from inadequate levels for good functioning (e.g., "grams of weight gained in malnourished children" and "additional days of exclusive breastfeeding in infants under six months of age").

Estimating benefits. Cost-benefit analysis can be performed if all of the outcomes of a nutrition intervention can be captured in monetary units. In some instances, this is a straightforward task. For instance, the switch to breastfeeding results in quantifiable savings on formula, bottles, and decreased morbidity due to diarrheal disease. Consumption benefits such as improvements in the quality of life and availability of leisure time from reduced morbidity are less easily quantified.

When calculating outcomes -- effectiveness, utility or benefit measures -- it is necessary to decide on the duration of the benefits stream to be captured as well as the appropriate discount rate (which should be the same as the rate used for costs). Finally, it is important to consider how the underlying relationships determining welfare improvements will change over time as general health conditions improve and levels of education rise. For example, mortality reduction resulting from an increase in the breastfeeding rate will not continue indefinitely.

Analyzing the results. Comparisons of project options in cost-benefit analysis offer the possibility of selecting between two types of projects having different main outcomes or assessing whether or not a project is worthwhile independent of a comparison with alternative interventions. For interventions with identical outcomes use cost-effectiveness analysis; if one intervention achieves more impact at the same or lower cost, it is the optimal choice.

The more likely scenario is a fair degree of uncertainty about the prediction of costs, effectiveness and benefits, necessitating the accommodation of unknown degrees of variability over time, and uncertainties about issues such as the length of project horizon and choice of discount rate through sensitivity and risk analysis tools.

To obtain the Toolkit or individual tools, please contact the Nutrition Advisory Service by sending an e-mail to nutrition@worldbank.org