value chain analysis firewood in burkina faso fao vca : a tool

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© FAO September 2009

Resources for policy making

Value Chain Analysis Firewood in Burkina Faso

FAO VCA : A Tool for Quantitative Analysis of Socio-Economic Policy Impacts

About the FAO Policy Learning Programme

This programme aims at equipping high level officials from developing countries with cutting-edge knowledge and strengthening their capacity to base their decisions on sound consideration and analysis of policies and strategies both at home and in the context of strategic international developments.

Related resources

• See all material prepared for the FAO Policy Learning Programme

• See the FAO Policy Learning Website: http://www.fao.org/tc/policy-learning/en/

• See more resources on VCA

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By

of the

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS



Value Chain Analysis: Firewood in Burkina Faso FAO VCA : A Tool for Quantitative Analysis of Socio-Economic Policy Impacts

Lorenzo Giovanni Bellù, Policy Officer and Nathalie Guilbert, Consultant

Policy Assistance Support Service, Policy and Programme Development Support Division

About EASYPol

The EASYPol home page is available at: www.fao.org/easypol This presentation belongs to a set of modules which are part of the EASYPol Resource package: FAO Policy Learning Programme : The Policy Framework: Policy Impact Analysis Using Value Chain Analysis EASYPol is a multilingual repository of freely downloadable resources for policy making in agriculture, rural development and food security. The resources are the results of research and field work by policy experts at FAO. The site is maintained by FAO’s Policy Assistance Support Service, Policy and Programme Development Support Division, FAO.

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Objectives

At the end of this session the participants will be able to:

Name the constituting elements of a value chain

Explain why it is important to analyse whole value chains (VCA) for policy formulation purposes

Mention some examples of VCA for policy formulation

Recognize situations in which policy objectives may not be achieved due to “leakages” in the value chain.

Session based on the case of

the formal firewood chain

in Burkina Faso, Ouagadougou area

(Data 2006)

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The concept of a value chain

Value Chain Analysis is a technique applied to assess how public policies, investments and institutions affect existing or planned chains for agricultural commodities. VCA consists of quantitative analysis of inputs and outputs, prices, value added and margins of the different agents under different policy scenarios.

The term “Value chain” denotes a set of agents, with related activities and markets, who contribute directly to the production, transformation and distribution to final markets of a single product.

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The global situation of the firewood chain in Burkina Faso

National firewood annual production: 4,151,642 tons (around 400kg per capita)

Around 60 000 people are involved in the chain

Estimated firewood consumption in Ouagadougou: 1,100,000 tons/year

Source of energy consumed at national level

89%

11%

firewoodother energies

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A pilot study at smaller scale for policy making

A Pilot study at a reduced scale; regions analyzed are Center-West & Center-South.

Poverty incidence is higher in these regions (around 50%) than the average of the country (around 46%).

Around 800 woodcutters involved; most of them are also farmers.

17 296 ha of managed forests production of 1.37 tons of firewood/ha total production around 24,000 tons.

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A pilot study at smaller scale for policy making

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The production situation

Formal chain: regulated wood production in publicly managed sites.

Woodcutters are organized in socio-professional structures called (Forest Administration Groups (“Groupements de Gestion Forestière”)

Groups are concessionaires of the forests.

Producers carry out activities to preserve forest resources like: reforestation, fights against bush fires, land protection against cattle...

Informal chain: uncontrolled wood extraction.

More numerous.

Economic agents are not grouped.

No care/worry about forest preservation.

Tax evasion.

Unfair and illegal competition vs. activities under public regulation.

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The firewood chain chart

Woodcutters organized in Forest Administration Groups (GGF) &

Unions of GGF

Collectors –Wholesalers –processors of firewood

organized in Associations

Self -consumption

Main flows of firewood

Other flows of firewood

Self consumption flows

Final Consumers of firewood

Retailers of firewood organized in Associations

Woodcutters Informal

Collectors –Wholesalers –processors of

firewood Informal

Retailers of firewood Informal

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Actors of the chain

Three main types of actors:

Woodcutters (sale price of one ton : US$ 17.6)

Wholesalers (sale price of one ton : US$58.4)

Retailers (sale price of one ton : US$ 68)

Value added:

Firewood producers: US$ 12.8 VA per ton

Wholesaler : US$ 24 VA per ton

Retailer : US$ 1.9 VA per ton

Value Added Distribution per group of economic agents

36%

59%

5%

producers

wholesalers

retailers

Net benefits for each group of economic agents

39%

53%

8%

producerswholesalersretailers

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Socio-economic profile, income and margins of woodcutters

Socio-economic profile of woodcutters: Small-marginal farmers and landless-wage workers, who carry out firewood activities in the dry season.

The average net benefit per woodcutter earned during the campaign (3 months) is around US$ 260, which represents an important part (more than one fourth) of the total annual income of its household (US$907).

The national average household poverty line of around US$ 1060.

Sell price of one ton of firewood (in US$) for organized chain

Allocation of the revenue per ton (US$)

Fund for Village

investment

Fund for Land

Development

Forest Tax (concession

fee)

Margin to woodcutter

17.6 1.6 4.8 2.4 8.8

Thanks to firewood production activities, farmers are

able to keep out of extreme poverty and vulnerability.

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Policy issues Facts Opportunities/solutions

Market increase for woodcutters

High current and future demand of firewood

Gas used by only 2% of the population

Gas subsidy very expensive for the budget

Gas used by urban and richer part of population

Deforestation & environmental issues

Gas is a substitute for firewood, leading to less deforestation

Gas subsidy implemented

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Lack of forestry management

No forestry control (agro-pastoral appropriation of the land)

Unfair competition of informal vs. formal woodcutters in managed areas

Loss of income for the State

Non respect of rotation delays and environment Rationalize downstream activities

Facilitate grouping of fallers

Enforce forestry regulations

Vulnerable Rural population

Severe Poverty and food insecurity of small-holders and landless people

Create employment within the chain

Unfair distribution of income among fallers and traders

Rationalize downstream activities

Reallocate subsidy resources to invest in forests management

Policy issues Facts Opportunities/solutions

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The objectives of the policy makers are:

To increase income generated and distributed in rural areas To fight against deforestation and other environmental issues

Policy objectives

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Proposal: a «package» of two policy measures: 1. Demand side policy: Stop the butane gas subsidy to sustain demand.

Remark: The objective of the gas subsidy was to preserve forests. The assumption is that this objective can be achieved by investing resources of the gas subsidy in forest management.

2. Supply side policy : investing in forest management to increase the productivity of forests (1.364.25 tons/ha) through improved reforestation, technical and organizational capacities.

National annual gas consumption* 34,359,432 kg A

Subsidy price US$/kg 0.68 B

Subsidy cost to the budget US$ 23,364,414 A * B

Policy measures identified

* Customs import data 2005

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Expected socio-economic impacts of the demand-side policy measure

Stop subsidy Price of gas

Price firewood Ouaga Po

Revenue traders

Demand firewood Ouaga

WHY? Because firewood is a substitute for gas

Quantities actually sold ?

Depends on supply: 1) Supply rigid Po, Q 2) Supply elastic: Po, Q (likely)

WHY? Because Po x Q as P and Q

Margins traders Mt ?

Revenue woodcutters Rf

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Quantity (Q) Price (P) PxQ000 Tons $/Ton 000$

trader revenue 23.6 68 1604.8Costs 23.6 17.6 415.36

Without Policy margin 1189.44

faller revenue 23.6 17.6 415.36Cost 23.6 4.4 103.84Margin 311.52

Quantity (Q) Price (P) PxQ

trader revenue 73.4 68 4991.2Cost 73.4 17.6 1291.84

With policy margin 3699.36(stop subsidy)

faller revenue 73.4 17.6 1291.84Cost 73.4 4.4 322.96Margin 968.88

Quantity (Q) Price (P) PxQ Var %

trader ∆ revenue 49.8 0 3386.4 211.0%With policy - ∆ Cost 49.8 0 876.48 211.0%Without policy ∆margin 2509.92 211.0%

faller ∆ revenue 49.8 0 876.48 211.0%∆ Cost 49.8 0 219.12 211.0%∆ Margin 657.36 211.0%

Expected socio-economic impacts of the demand-side policy

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Margin fallers Mf ? Depend on production costs Cf. Without supply policy: Cf , Mf

Envir. Externalities Ee ? Without supply policy: Ee

Negotiating power of faller: Zero Low High

Inelastic Supply MT RF

MT RF

MT RF

Elastic Supply MT RF

MT RF

MT RF

Mt =Margins traders Rf = Revenue fallers

Expected socio-economic impacts of the demand-side policy

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Depends on demand: 1) No shift: Pf , Qf 2) Shift due to demand policy: Pf ,

Qf

Investment Marginal cost prod instead of

Supply firewood Fallers

WHY? Because firewood availability per ha

?

Envir. Externalities

Ee ? Depends on demand:

1) No shift: Ee 2) Shift due to demand policy: Ee

instead of

Expected socio-economic impacts of the supply-side policy

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Summary of combined expected policy impacts

5. Likely changes in the negotiating power of woodcutters versus traders

1. More forests managed less deforestation and more wood available

2. Higher level of firewood demand larger market employment created more revenues available for woodcutters better conditions for farmers

3. More people benefit from public financial resources

4. Technical and organizational capacities of the chain’s actors improved

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9. Sustainable firewood supply to meet demand of present and future generations.

Summary of combined expected policies impacts [cont’d]

6. Increased Income to State through the forest tax, and to villages through the investment village tax;

7. Employment created to manage forests

8. Less informal circuits and better sensitization on environmental issues;

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Combined economic impact of policies: Value added generation

Value Added per group of economic agents without and with policy (000US$)

0

500

1000

1500

2000

producers wholesalers retailers

without policy

with policy

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Scenarios Total production of

firewood (tons)

Production per woodcutter per year/campaign

(tons)

Number of woodcutters

involved

Revenue per faller (US$)

per campaign

Without policy (1.36 tons/ha)

23 652 29.25 809 257

With policy (4.25 tons/ha)

73 510 29.25 2 513 257

Difference 49 857 - 1 706 -

Larger firewood supply →Employment creation

US$ 439 124 of net revenues created at the firewood producers’ level 1706 households will benefit from the policy In addition, more jobs will be created to manage and control the forests VA of the whole regional chain increased by +/- US$ 2 million

Combined economic impact of policies: Socio economic impacts

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FAO VCA Software Tool: A facility for computations

Tables extracted from the FAO VCA software

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Competitiveness of the sector with and without policy: Economic pricing

Economic prices needed for competitiveness assessment Economic price of firewood based on price of imported gas

We know the following equivalences:

The gas subsidy represents 117% of the price paid by consumers:

1 Ton of firewood 0.35 Ton Equivalent Petroleum (TEP)

0.296 Tons of gas

1 Ton of gas 1.18 TEP 3.37 Tons firewood

US$/Ton

Subsidised Gas price 580

Subsidy 678

Cost of gas for the country 1258

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International competitiveness of the sector: Economic pricing

The gas generates greenhouse effects (environmental externalities):

US$/Ton

Cost of gas for the country 1258

Environmental externalities (estimated) 8

Total cost of gas 1266

Total cost of gas 1266 US$/Ton

Firewood equivalent of one ton of gas 3.37 tons firewood

price of one ton of firewood as Gas Equivalent (Us$1266/3.77)

375.7 US$/ton

Gas equivalent Economic price of 1 Ton of firewood

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Firewood energy is more difficult to use:

Price of one ton of firewood as Gas Equivalent 375.7 US$/ton

Adjustment factor (estimated) 0.4

Adjusted firewood price (375.7 US$ ton x0.9) 150.3 US$/Ton

Without policy With policy

Adjusted firewood price 150.3 US$/Ton 150.3 US$/Ton

Environmental externality per ton of firewood (estimated)

15 US$/Ton 0 US$/Ton

Firewood price applied 135.3 US$/ton 150.3 US$/Ton

Firewood use may generate deforestation:

International competitiveness of the sector: Economic pricing

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Source: Tables extracted from the FAO VCA software tool

Scale factor 1000

International competitiveness of the sector: Policy Analysis Matrix

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Combined impacts of policy measures on poverty: Selected indicators

Additional revenue to the poorest

Additional revenue to the closest to the poverty line

Additional revenue (random selection)

Without policy: incidence 49.52%

With policy: incidence 49.52% 49.15% 49.52%

Without policy P. Gap 34.5% of the poverty Line

With policy P. Gap 34.2% 35.0% 34.4%

For this pilot exercise, poverty impacts are calculated at regional level*.

With policy additional revenue of US$ 260/year for 1706 households.

* based on total expenditures (% of population)

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Time matters: policy implementation requires time to invest in reforestation, educate and train people in forest management.

Combined impacts of policy measures on poverty

Remarks:

The importance of poverty reduction impacts of policies depends on how policy measures are targeted on different social groups.

Different poverty indicators could lead to rank policy options differently, e.g. poverty incidence versus poverty gap.

1

2

3

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Value Chain Analysis (VCA) accounting framework: an assessment

Value Chain analysis allow us to analyse the policy impacts that spread into the economic system by means of the path followed by a commodity.

With VCA we can measure, among other things, the changes in the income of specific agents, due to sub-sectoral policies.

Only policies with impacts that do not deviate too far from the base situation can easily be simulated. Otherwise, behavioural assumptions are needed.

Accounting frameworks with no explicit modelling of behaviour. Prices and quantities are explicitly modelled.

Some knowledge of accounting rules at farm/firm and meso-level is required. Much micro data needed.

Relevance for poverty/FS

Coverage of policy measures

Resource needs

Technical structure

General characteristics

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Micro-accounting approach: an assessment

Use of detailed household data to generate policy scenarios, by directly introducing changes in the data base, after selection of households affected.

Linked the quantity/quality of available data. Good for poverty (expenditures, consumption….)

Take only the direct effects. Not suitable for structural policies with strong indirect effects.

Accounting framework without explicit modelling of behavioural feedback. Used in general in association with other approaches.

Limited, in terms of time, when good household surveys have been already carried out by statistical offices. Knowledge of data management needed.

Relevance for poverty/FS

Coverage of policy measures

Resource needs

Technical structure

General characteristics

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Conclusions

This analysis has been carried out following the value chain approach combined with the use of household-level data.

The FAO VCA software tool allowed the authors to analyze value added, margins and competitiveness of the chain without and with policy.

Household data + STATA software allowed the authors to calculate income/expenditure distribution without and with policy and related socio-economic indicators.

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More FAO VCA Software Tool resources

A Software for Value Chain Analysis. FAO VCA Software Tool 3:1 [2013] EASYPol module 073

A Software for Value Chain Analysis. Manual for FAO VCA Software Tool 3:1 EASYPol Module 074

Value Chain Analysis for Policy Making: Methodological Guidelines for a Quantitative Approach EASYPol module 129

http://www.fao.org/docs/up/easypol/432/value_chain_analysis_software_fao_vca_tool_073en.zip�

http://www.fao.org/docs/up/easypol/432/value_chain_analysis_software_fao_vca_tool_073en.zip�

http://www.fao.org/docs/up/easypol/433/value-chain_analysis_fao_vca_tool_manual-074en.pdf�

http://www.fao.org/docs/up/easypol/433/value-chain_analysis_fao_vca_tool_manual-074en.pdf�

http://www.fao.org/docs/up/easypol/935/value_chain_analysis_fao_vca_software_tool_methodological_guidelines_129en.pdf�



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