Proceedings of a New Zealand seminar on project evaluation in agriculture and related fields

Abstract

The evaluation of projects which demand capital strikes at the heart of the economic problem - that is - the making of decisions about the allocation of scarce resources amongst competing ends. In a perfectly competitive system, the invisible hand of the price mechanism would ensure an economic allocation of the resources. In New Zealand, as in virtually all countries, many of the major decisions concerning capital allocation are made by Government and local body agencies; rational decisions cannot merely be taken for granted. In the fields which will interest us during this seminar, for example, in large scale land development, in afforestation, large scale irrigation and drainage schemes, and in soil conservation projects, it is clear that such projects have not often been subjected to rigorous economic analysis. Alternative objectives which may have been adopted include the need to find employment for depression labour in the case of some forestry schemes or certain irrigation projects, the social need to rehabilitate servicemen in the case of large scale land development, the exigencies of local politics in the case of drainage schemes, or plain emotion in the case of some soil conservation work. Such criteria may of course be highly valid from a welfare viewpoint, which the community may consider to be more relevant than economics. Furthermore, projects justified in the first place on the grounds of noneconomic criteria may turn out to be economic. I imagine, for example that this would apply to the afforestation projects in the central North Island, during the thirties. It must certainly have applied if the then known agricultural potential of the pumice country had been incorporated in any analysis. Similarly the moral demands upon the nation to rehabilitate servicemen in occupations of their choice were very strong. But here again, had their settlement on farms been analysed during the forties it is clear that satisfactory results would have been obtained, especially if the analysis had used the prices characteristic of the fifties. It would be difficult to apply the same argument to some projects where the motivation has been parochial, and perhaps even emotional. For example there would be some irrigation operations which would have been unlikely to survive the economist’s scalpel, blunt though it may sometimes be. When we turn to the evaluation of farm development, those of us in the farm management profession would have to concede that we have been slow to adopt the methods of appraisal which are going to be discussed at this seminar. The main reason is that farmers motives can rarely be reduced to mere economics, they are much more complex and personal. Farm Management aims at meeting these different goals. It may also be argued that the pace of technological change and the degree of income fluctuation characteristic of New Zealand farming, has not provided a persuasive background for development evaluation. Additionally we may also argue that project evaluation principles have been incorporated in some of the rules of thumb we have characteristically used. For example the establishment of the total investment cost per stock unit increase resulting from development implies a marginal cost – marginal return principle and while it lacks a discounting principle, it gives us useful answer. Nevertheless these factors do not entirely forgive us our neglect of more comprehensive methods of appraisal of farm development, particularly in our research. After all, $40 million per year of state money has gone into farm development in recent years, and we have had to rely on the judgement, experience and insight of district appraisers, and field officers to allocate this money. It is a commendation of their ability that so little of this capital seems to have been seriously misallocated. This research report includes the full text of the following papers: W.F. Musgrave, Some Background and Perspective to Public Investment Analysis; J.T. Ward, Public Investment Evaluation in New Zealand; R.W.M. Johnson, A Review of Evaluation Studies in New Zealand Agriculture & Forestry; R.C. Jensen, Terminology for Project Evaluation in New Zealand; N.G. Gow, Measurement of Benefits & Costs in Farm Development Studies; W.F. Musgrave, Benefit-Cost Analysis & Aggregation Problems; R.C. Jensen, Characteristics of the Investment Process; G.R.J. Cleland, Uncertainty and its Effect on Capital Investment Analysis; R.W.M. Johnson, The Selection of Projects; A.T.G. McArthur & G.R.J. Cleland, The Estimation of Unit Cash Flows; E.J. Stonyer & W.G. Donovan, Preparation of Economic Reports for Government – Grass Roots Problems; A.T.G. McArthur, Computer Programs for Project Evaluation; Individual Research Notes – Index (R.A. Bonifant, G.A.G. Frengley, N.G. Gow, R.W.M. Johnson, A.C. Lewis, A.T.G. McArthur, A.C. Norton, R.J. Plunkett, N.W. Taylor); R.C. Jensen, The Economic Evaluation of Investment in Large Scale Projects - An Essay to Recommend Procedures; J.D. Stewart, The Economic Evaluation of Investment in Farm Development - An Essay to Recommend Procedures.