Should cost-benefit analysis be mandatory part of USAID project design?

At some USAID missions, project designers overlay maps that display information like population, land tenure, and health access points to determine where they should conduct a more thorough analysis. Photo by: KOMUnews / CC BY

The U.S. Agency for International Development is hiring economists and arming in-house staff with cost-benefit analysis expertise to make project design more “rational” and help missions choose between alternative investment opportunities.

Officials say the effort is part of Administrator Rajiv Shah’s drive to reposition USAID as a “premier” development institution and restore project design know-how to the agency after a decade spent outsourcing it to contractors and nongovernmental organizations.

As development donors everywhere are looking to get more bang for their buck, cost-benefit analysis gives project designers a helpful tool for choosing between alternatives — like which road to rehabilitate in Haiti, or which agricultural supply chain to support in Egypt — USAID Senior Economic Adviser Juan Belt told Devex.

Belt noted agency leaders have asked him whether cost-benefit analysis ought to be a required part of project design. His answer: USAID is “not ready” yet.

“If it comes from Washington, first people will push back, because they push back about anything that comes from Washington,” Belt said. “We want it to be done seriously.”

Testing models

USAID’s “project design guidance” defines cost-benefit analysis as “a decision-making approach used to determine if a proposed project is worth doing, or to choose between several alternative ones.”

It is one of several types of project design analysis the agency recommends missions to undertake, though it is not one of the three “mandatory” analyses: “gender analysis,” “environmental analysis,” and the most recent addition, “sustainability analysis.”

CBA requires missions to identify and classify a proposed project’s beneficiaries as “poor,” “near-poor,” or “non-poor,” and then to determine whether project activities will have a “direct,” “less direct” or “indirect effect” on those beneficiaries.

Next, analysts identify the “benefits and costs that will accrue to the beneficiaries, if a project is undertaken” and “the benefits and costs that will accrue to the host country.” Based on these analyses, planners derive the estimated “unit cost,” which can then be compared across potential projects for choosing between them and used during implementation to monitor the ongoing cost of the project.

Some USAID missions are already taking cost-benefit analysis seriously.

For example, Missions in Haiti and Afghanistan will not approve infrastructure project proposals that do not include economic analysis, said Belt, who described a basic analysis that might precede a Haiti road building project:

Project designers overlay maps that display information like population, land tenure, and health access points to determine where they should conduct a more thorough analysis. Within that more limited scope, planners conduct traffic counts for a week at a time, and in multiple seasons. Then they produce lists of the highest impact road segments.

“We don’t have money to do all the roads, so we choose the ones that contribute most to economic development,” Belt said.

Roads and agriculture have made up the bulk of USAID’s recent cost-benefit analysis portfolio — but now Belt and his team are working closely with staff in the agency’s Africa bureau to help them prepare to analyze the economic benefits of energy projects.

That work is in support of Power Africa, a major Obama administration initiative which aims to double energy access in sub-Saharan Africa and increase U.S. businesses’ access to African markets.

Seeking better returns on investments

CBA’s resurgence at USAID began when the bureau for food security encouraged six priority countries within the agency’s Feed the Future initiative to conduct cost-benefit analysis on their agriculture programs. Belt led that effort, and then added 13 additional countries to his portfolio. The analysis was applied to projects at various stages of their implementation, from early design to mid-implementation.

“You would like to do this at the beginning of the design phase, but it’s not always possible,” said Paul Pleva, a USAID economist who recently oversaw the cost-benefit analysis of a $26 million Feed the Future project in South Sudan.

He explained the demands placed on implementers to submit to the analysis were “nothing particularly arduous,” and mostly involved a series of interviews to help understand the “production function,” or what he described as “the chain of cause and effect we really believe is going on.”

Pleva’s in-house CBA team helped steer a 3-year-old crop development project toward a less expensive seed variety, which the analysis showed could yield greater return on investment for South Sudanese farmers.

Beginning in the 1990’s, as USAID contracted more and more of its project design work to nongovernmental organizations and private firms, the agency’s design evaluation expertise — including cost-benefit analysis — likewise faded, Belt said.

Under USAID’s Development Leadership Initiative, which sought to reverse the staffing decline for foreign service officers, the agency has also managed to bring on board economists with CBA experience.

Procurement dilemma

As official development assistance funds represent a smaller and smaller piece of overseas capital flows, and USAID and others face a harsh budget appropriations environment, cost-benefit analysis can help build the case for investing in development projects that will yield the highest return.

Later-stage cost-benefit analyses can also serve to validate the use of U.S. government funds, Belt said.

While Belt and others help the agency to mainstream cost-benefit analysis, they have run into a tricky procurement dilemma. Many large development contractors fear supporting CBA efforts during the project design stage could expose them to insider information and consequently prohibit them from bidding on and winning more significant work down the line.

Some implementing companies’ legal departments have raised concerns that since USAID bases its cost-benefit analyses on data from potential projects that have not yet been procured, contractors who consulted on those analyses would be barred from bidding on related future projects, Belt explained.

“It’s more difficult for the large firms who hope to bid on the large contracts,” he said.

That’s why USAID has used “blanket purchase agreements” to bring in small businesses with “premier” cost-benefit analysis credentials and “who don’t care to be implementers” to take the lead on supporting design stage CBA training and consulting, according to Belt.

Staff training

Avoiding those kinds of conflicts is one reason Belt is eager to see project design and cost-benefit analysis skills return to the agency, and why he has been pushing so hard to develop more training opportunities for USAID’s in-house staff.

“In a sense you could say I’m the opposite of a bureaucrat. Instead of gathering power, I try to disperse it. I’m the anti-bureaucrat,” Belt said.

USAID is looking to expand the use of project design evaluation tools like CBA by partnering with universities like Duke and Queens to create and deliver “flagship” training courses, and by building out training modules for staff in the missions. About 500 people have been trained so far.

“I think I have a strong alliance supporting this concept,” Belt said.

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About the author

  • Michael Igoe

    Michael Igoe is a Senior Reporter with Devex, based in Washington, D.C. He covers U.S. foreign aid, global health, climate change, and development finance. Prior to joining Devex, Michael researched water management and climate change adaptation in post-Soviet Central Asia, where he also wrote for EurasiaNet. Michael earned his bachelor's degree from Bowdoin College, where he majored in Russian, and his master’s degree from the University of Montana, where he studied international conservation and development.