Supplemental Annex: Economic and Financial Analysis (EFA) Additional Financing for Yemen Food Security Response and Resilience Project (P178439) 1. Introduction. This supplemental annex summarizes the ex-ante economic and financial analysis of the Additional Financing for Yemen Food Security Response and Resilience Project (AF FSRRP), which assesses the incremental benefits and costs derived from the main investments identified in the project description and theory of change. The analysis attempts to evaluate the project´s expected performance and the feasibility of planned investments from the perspective of its financial net benefits and costs, and also from the standpoint of the project’s overall economic benefits, costs and externalities. 2. The FSRRP is expected to reach about 1 million beneficiaries, in the areas with the highest food insecurity, poor nutrition outcomes and livelihood constraints, and in need of emergency assistance. A set of 59 target districts in which the project would operate, was selected across 11 governorates (Figure 1) based on vulnerability and accessibility criteria, and subject to adjustment based on the evolution of those criteria. Most activities under the FSRRP are scalable, and the project’s original design recognizes that while the project is expected to achieve positive outcomes in reducing food insecurity in the project area, additional funding and interventions would be required going forward, to scale up the response to more beneficiaries. Figure 1. Project Governorates. 3. The AF will scale-up investments in community-based climate-resilient infrastructure, increasingly emphasizing water infrastructure. Water scarcity is a major constraint for agricultural production, exacerbated by climate change. In addition, floods which have become more frequent due to climate change, destroy crops and significantly affect livelihoods. Therefore, the AF will increase the project’s emphasis on climate-resilient small-scale community water infrastructure to protect agricultural lands from floods, and collect and store water for irrigation and livestock use. Similar to the 1 FSRRP, such water infrastructure investments under Component 1 will be closely coordinated and sequenced with agricultural production-focused investments under Component 2. 4. The AF will add around 107,500 beneficiaries who would participate in various project activities and around 735,000 beneficiaries who would benefit from livestock vaccination campaigns. In total, it is expected that the direct beneficiaries of the AF will be around 842,500. Therefore, together with the FSRRP, the total number of beneficiaries is expected to be around 1,842,500. 5. Financial analysis consists of assessing financial returns and viability of major investments from the point of view of direct beneficiaries. For this purpose, a set of typical financial models are developed to illustrate the financial results of investments. It concerns terrace rehabilitation, improving access to water and small irrigation facilities, promoting income-generating activities, combined with marketing and technical advice on crop and livestock production to improve farmers’ incomes, and food accessibility and availability in targeted areas. 6. Economic analysis provides an evaluation of project´s economic profitability from the perspective of the country as a whole by aggregating project total costs and benefits derived from models considering economic values. In addition to this, the current analysis also includes other relevant positive externalities that allow to assess important project benefits in terms of a. reduction in undernutrition, wasting and stunting due to the increase in food access and availability, among other interventions, following a methodology1 to value the impact of decline in wasting in terms of long-term increase in human capital an incremental life-time earnings of non-undernourished children as well as avoided health care expenditures of non-undernourished children and; b. the greenhouse gas (GHG) emissions reduction that is calculated by using the EX-ACT tool (FAO) and valuated following the World Bank guidelines on carbon accounting in projects. 7. Sources of information. Data collection for the analysis was made from a wide range of sources, including consultations among FAO Yemen officers, local farmers, local suppliers and other key informants in the field. Information was also obtained from World Bank´s SAPREP and FSRRP Projects’ formulation and implementation, and other IFIs recently formulated projects as IFAD´s RLDP (2020). 8. EFA Guidelines. The incremental benefits and costs derived from the Project are evaluated according to the guidelines of the World Bank for the Economic and Financial Analysis of Investment Operations, which comply with the World Bank's Environmental Strategy and Climate Change Policy. 9. Project Impact. The Project Development Objective is to improve the availability of and access to food and nutritious diets, both in the short and medium-term, for targeted households in the project area, and to enhance Yemen's capacity to respond to food insecurity. The project will target poor households and will invest in increasing household food accessibility and availability and improving nutrition through four main components, namely: 10. Component 1: Improving agricultural production infrastructure and building climate resilience. This focuses on improving climate-resilient agricultural production infrastructure, with increasing emphasis on water infrastructure. Activities will be grouped in four categories: (a) agricultural land improvement and protection including terracing and flood control; (b) small-scale irrigation improvement including on-farm spate irrigation; (c) water harvesting; and (d) rural road improvement. The component focuses on improving existing infrastructure. These infrastructure investments will target farmers currently growing staple crops (wheat, sorghum and millet) and crops such as sesame that will be supported under Component 2. 1 The methodology is informed by the emerging literature on the economics of nutrition, as well as economic appraisals from similar recent projects such as WB- SAPREP (2017), World Bank (2014), Income Support Program for the Poorest, Bangladesh November 17 2014, Report No: PAD957; IFAD (2015) Strategic Support for Food Security and Nutrition Project (SSFSNP), Final design report. 2 11. Component 2: Increasing domestic food production and market development. The component aims to restore agricultural production (including staple crops, livestock, and beekeeping) through improvements in the delivery of public goods and services and through the facilitation of commercial rural activities and improved links to markets. The component has two sub-components. The Sub- component 2.1: Restoring climate-smart agricultural production, focuses on the delivery of public goods and services for: (a) staple crop production, (b) animal health, and (c) apiculture. And the Sub- component 2.2: Restoring food supply chains and value addition, which facilitate commercial rural activities and improved market linkages by supporting selected Micro, Small and Medium Enterprises (MSMEs) and formal or informal groups involved in agricultural input and service provision, food production, processing, storage, and distribution. Activities are grouped in four categories: (a) support to MSMEs livestock producers; (b) support to supply chain enablers; (c) develop the sesame value chain; and (d) strengthen producer groups, associations and cooperatives. 12. Component 3: Improving the nutritional status and incomes of vulnerable households (US$27.0 million), which is focused on alleviating the impacts of the food crisis in the short-term and reducing households’ vulnerabilities in the medium-term by supporting household-level food production and safe storage. Activities are grouped in four categories: (a) improved kitchen gardens; (b) feed for livestock; and (c) innovative activities (including hydroponics). 13. The following Figure 2 illustrates the structure of the economic and financial analysis, and the main financial models used in each component. Figure 2. Economic and financial analysis map 14. Financial Analysis. The following analysis summarizes the main assumptions and results of the financial analysis and financial models considered. 15. Terrace rehabilitation (models a1 & a2). Based on activities implemented under World Bank SAPREP Project (2017) and its ex-ante evaluation, this model illustrates the impact of rehabilitating terraces and supporting the adoption of better agricultural practices which leads to an increase in cereal and coffee yields. Terraces are traditionally used in the project area to grow cereals, coffee, animal fodder and it is a proven technology to improve agricultural biodiversity adapted to rainfed conditions and based on a cereals-legumes intercropping and rotation system2. Being a dominant cereal crop grown in rainfed systems, a sorghum model has been used as proxy for cereal crops and also coffee 2 Economic and social impact of terraces and outcomes of terrace rehabilitation study (Pelat, 2009) 3 was selected to capture the variety of crops. Incremental revenue is derived from increased yields due to improved soil fertility and better agricultural techniques. Terracing will not only contribute to return previously fallow land into productive use but also will reduce runoffs, water losses and water- originated damaging floods which might contribute to soil erosion and destruction of further downstream terraces. On the rehabilitated terrace, reduction of soil erosion will translate into an increase of the productive potential of the soil, into less depletion of the soil’s nutrient content and ultimately into an increase of soil fertility. The model presents an incremental net benefit per ha of US$ 1,435 for Sorghum and US$ 815 for Coffee. 16. Irrigation canals (b) model builds upon SAPREP (2017) Ex-ante EFA estimates (spate irrigation). It is based on traditional Yemeni irrigation techniques when floodwater is diverted from its river bed and channeled to basins where it can be used for irrigation and also to feed water ponds for animal watering. Sorghum, a drought-resistant crop, was selected to illustrate the benefits of incremental production as irrigation water diverted from floodwater cannot be predicted. A without project situation of rainfed sorghum is assumed and investments lead to an increase in yields by 20 percent due to improved irrigation (SAPREP; 2017). Under a conservative approach, one year for construction is considered before starting to provide benefits. For sustainability purposes, maintenance and replacement costs are also needed and included but assumed to remain constant. It consists of unskilled labor that the beneficiaries can provide over the year which would make sure that the benefits of reservoirs can be sustained. The incremental net benefit per structure per year is expected to be around US$ 7,588. 17. Water harvesting cisterns (models c1 & c2). Water harvesting structures with a capacity of about 153 m3 will provide water for human consumption (40 percent) and agriculture (10 percent) and animal consumption (50 percent). Hence, three sources of benefits are being identified: a. Value of water available for domestic consumption, that represent economies for households that don´t need to buy water from alternative water sources at market price; b. Value of incremental agricultural production due to water available to irrigate agricultural land (command area initially estimated at 0.012 ha) depending on the water requirement per crop); and c. Value of incremental livestock production as each water tank will provide daily water to approximately 201 heads of small ruminants per year. It was conservatively assumed that only 50 percent of the benefits of the livestock model (benefits in terms of meat and milk production) would be due to a substantially better water supply, following SAPREP (2017) EFA estimates. Model shows the incremental net benefit of US$ 1,903 per family for new cisterns and US$ 1,692 per family for rehabilitated cisterns. 18. Individual rooftop water harvesting cisterns (c3). The rainwater harvesting structures will improve the access of rural households to potable water, with water used mainly for domestic consumption (90 percent) and agriculture (10 percent). More water available for domestic consumption will reduce costs of drinking water for the family and will reduce drudgery and the travel distance to fetch water, particularly for women. Based on SAPREP estimates (2017), it is assumed that the cistern (18m3) will have to cover at least a dry period of three months (90 days) with an average use of 195 liters per household and per day. Hence, each cistern will have a capacity of 17.5 m 3 which is equivalent to 17,550 liters of water. It is assumed that an average family needs 195 liters of water per day3 and the tank is not the sole water source of the household. As a result, this cistern would then supply one family per 90 days. The economies made in terms of cost of drinking water reduced to households are calculated using the following assumptions: 15,005 liters of water per tank will be available for domestic consumption, with a 5 percent evaporation rate; 1/3 of this water can be used as drinking water, and the market price of 1 liter of drinking water is 3 YER (0.5 cent US$). The total value of economies made in terms of cost of drinking water reduced per tank is about 27 US$. 3 Source: Comparative study of Social Fund water Interventions (2013) 4 19. It is understood that a woman can take up to 1.2 hours to fetch water for her family for drinking daily and the objective is to reduce this time to 30 min (per day)4. One hour saved per day can then be valued using the actual hourly wage of unskilled labor based on YER 4,000 per day (about US$ 10), after shadow pricing to take into account the estimated underemployment in rural areas. Economies made in terms of time saved for fetching water are not presented in financial analysis but are estimated at about US$ 320 per family and per year. 20. Seeds production (d). This model considers upgrades on the production of sorghum seeds, which results in improved quality of seeds, reduced losses (6 percentage points), and a substantial increase in the quantity of commercial seeds produced (increase by 70 percent) compared to BAU. Given the investment support to improve production, adoption of high quality foundation seeds, and the improved practices, production of commercial seeds available for use by farmers or marketing would increase from the initial level of 950 kg per ha to 1550 kg per ha, showing an incremental net benefit to farmers of US$ 310 per ha per year. 21. Vaccinations (e). This model simulates the impact of livestock vaccination and treatment program focused on small ruminants. The national herd of about 20 million heads of small ruminants will be vaccinated against the transboundary Peste des Petits Ruminants (PPR) and sheep and goat pox, highly infectious animal diseases affecting most small ruminants in Yemen, decreasing the viability of the livestock sector and reducing incomes for the rural population. Small ruminants will also be treated for parasites, and cattle against Lumpy Skin Disease. The model assumes that the PPR vaccination will reduce the current rate of mortality from 4.5 percent to 3.6 percent in the first years (3.4 percent, 3.8 percent, and 4.1 percent in the second, third and fourth year after vaccination, respectively). This yields a number of animals that are saved from death due to the vaccine, which is translated into monetary value for livestock owners. The whole vaccine campaign generates an ENPV of US$ 70.1 million, and a benefit cost ration of 10. 22. Apiculture (f). Establishing new beehives and promoting honey production is included to offer a new source of income to farmers currently engaged in subsistence production on small areas. Given the difficult terrain (limited agricultural land, terraces in Western mountainous districts, etc.) farmers need to grow high value, low-volume crops or initiate some off-farm IGAs. The project will provide willing farmers with beehives, bees, necessary equipment and training in order to start a beekeeping activity. Based on the SAPREP ex-ante evaluation (2017) there is a high premium price that is paid for local honey, turning bee-keeping into an attractive income generating activity. Honey production would increase from the initial level of 12 kg per year to 23 kg per year, showing an incremental net benefit to farmers of US$ 1,860 per year (10 hives per farmer). 23. Supporting SMEs (g.). Support smallholder farm households who are engaged in small ruminant and cattle farming has a great potential to increase household incomes. This model considers support (mostly for women) to engage in small-scale dairy processing facility. The investment is complemented with technical support involving training on personal hygiene and health, climate-smart animal husbandry practices, micro business training, basic financial literacy and group saving schemes, and household level production of cheese, labneh, and yoghurt. The processing group (9 women per group) would process 100 litters of milk per day (36,000 l/year). The main products produced in the plant are cheese (20 percent), labneh (30 percent), and yoghurt (50 percent), yielding an incremental net benefit per member of about US$ 310 per year, and a value added per cow of nearly US$ 100. 24. Women agro-processing (h). This considers processing of tomatoes paste by groups of women with a membership of 10 women per group. These women have low opportunity cost for their labor (about 10 percent of daily wage). It considers a production of 20 kg of tomato paste per day. Considering that women have other tasks, the model considers 100 days of production each year for a total annual 4 Comparative study of Social Fund water Interventions (2013) 5 production of 2,000 kg of paste. The potential incremental benefit to the opportunity cost of family labor is about US$ 630 dollars per group per year, or US$ 63 per women per year. 25. Sesame production (j). This model considers upgrades on the production of sesame, which results in improved sesame quality, and an important increase in productivity (increase by 38 percent) compared to BAU. The support to sesame producers also include the mechanization of some activities, such as land preparation, which are labor intensive. Given the investment support to improve production, adoption of high quality seeds, and the improved practices, production of commercial seeds available for use by farmers or marketing would increase from the initial level of 650 kg per ha to 900 kg per ha, showing an incremental net benefit to farmers of US$ 215 per ha per year. 26. Horticulture seedlings centers – HCC (j). This model illustrates the impact of constructing a new horticultural seedling center integrated by three greenhouses of 200 square meters each, with capacity to produce 200,000 seedlings per cycle each. The center is designed to carry out one and a half production cycles per year per greenhouse for a total annual production of 300,000 seedlings per greenhouse or 900,000 by HSC.5 Each HSC will benefit up to 20 tomatoes, hot pepper and cucumber farmers that are members of the HSC. The farmers will have a significant financial benefit (40 percent) due to the difference between the seedlings market price (70 YER) at which they buy today, and HSC members sale price (50 YER). The model foresees supplying exclusively to its members, however the expansion of operation capacity could enable the centers to shift towards also benefiting other farmers in the area, which could increase the business performance of the centers while also expanding the impact of the centers in the communities. Three new jobs are expected to be created, with each HSC having an incremental benefit estimated at US$ 22,240 per year, or US$ 1,110 per farmer. 27. Horticultural collecting centers – HCC (j2). This illustrates the impact of constructing a new horticultural collecting center that will benefit 20 horticultural farmer members. These centers will help the farmer associations to have more capacity to perform group post-harvest handling activities (sorting, cleaning, drying and grading) and aggregate products for joint commercialization through women groups. Each HCC at full capacity will be able to handle 1 thousand tons per year. The investments will cover the costs of the construction of the storage/work area, and the post-harvest handling and the equipment (crates and cleaning, sorting and grading machines). Each new HSC will create three new jobs. Net incremental benefits per year are estimated at US$ 21,500 (nearly US$ 1,100 per member). The HCC will facilitate joint marketing by ensuring greater volume, better quality, a steadier supply to the market and better product prices for its members. 28. Milk collection center (j3). Yemen’s local milk production is processed and commercialized outside the modern industrialized channels, in local medium- and small-sized dairy collection and processing facilities and informal household processing operations. While these are reasonable alternatives for small and medium dairy producers, these facilities face major quality issues due to the limited use of cooling facilities and poor hygiene standards. Milk and other processed dairy products are sold at lower prices, thus generating lower margins for producers and small-scale processors. This investment supports establishment of a milk collection and cooling center, with total capacity to collect 900 tons of milk per year. Each facility is considered to benefit groups of 50-60 small-scale dairy producers (8-10 cows/farmer) with an average annual production of 13,000 kg of milk per producer. The model suggests that investments to support milk collection centers would add a net value of about US$ 65 per cow per year, and net incremental benefit of more than US$ 18,350 per center per year. 29. Dairy processing facility (j4). This support focuses on the production of yoghurt (50 percent of processing capacity), labneh (30 percent of processing capacity), and white soft cheese (20 percent of processing capacity), with a total processing capacity of 700 tons of milk per year. Each facility is considered to benefit groups of 50-60 small-scale dairy producers (8-10 cows/farmer) with an average annual production of 13,000 kg of milk per producer (540 cows feeding the plant every year). In 5One and a half cycles relate to the fact that in the minor season (shorter season) the demand for seedlings will be smaller and the center will operate at half capacity. 6 summary, the analysis suggests that this dairy processing plant have the potential to add a net value of about US$ 100 per cow per year. The estimated net incremental benefit is about US$ 29,370 per plan per year, and about US$ 580 per member per year. The average cost for processing milk is about US$ 1.03 (YER 558) per kg of milk processed (including the cost of fresh milk), while the average sale price of the processed product (yogurt, labneh or cheese) equivalent to a kg of fresh milk processed is about US$ 1.11. This means that this processing facility offers a value-added potential of around US$ 0.08 per kg (or YER 42 YER) with modest prices of dairy products used in the models. 30. Homestead gardens (k). This model illustrates the impact of a family homestead garden (10 by 10 square meters) to produce vegetables. The model considers a diversified garden using 25 percent of the surface to produce tomatoes, 25 percent cucumber, 20 percent onions, 10 percent okra, 10 percent hot pepper and 10 percent mallow. The Home Garden contemplates total investments of US$ 530 per family on a production kit that includes seeds, tanks, protection materials, tools and organic manure. The results show an incremental benefit of about US$ 155 per year, and a return to family labor of about US$ 8 per day (YER 4,550). This is within the range of US$ 6-8 (3,000-4,500 YER/day) that they can earn as laborers elsewhere, and much higher than the opportunity cost of their time given the limited job opportunities. 31. Animal feed (l). The model shows financial results for small-scale livestock producers that enhance their animal husbandry through improved hygiene, supplementary feeding, and animal health management. The existing animal husbandry practices limit the milk and meat yields keeping them below the potential. Low animal productivity and profitability in livestock husbandry are largely due to inappropriate livestock feeding practices, limited availability of clean drinking water, poor housing and livestock husbandry practices. This model estimates an increase in milk production (15 percent) and in number of animal sold (8 percent). The incremental net benefit per stable is expected to be US$ 920. 32. Hydroponic unit (m). This model illustrates the impact of investing in a new deep-water hydroponic greenhouse system of 285 square meters for the production of vegetables based on recent studies for this technology in the region6. It estimates a production capacity of about 6,220 heads of lettuce per cycle, for a maximum capacity production of 47,280 heads per year. From the total production, about 10 percent is expected for self-consumption and 90 percent for commercialization. The model foresees remunerating on average 160 days of family labor per year. The beneficiaries are expected to contribute 5 percent of the total investment. Overall, the model shows an incremental benefit of about US$ 5,070 per year, and a return to family labor of about US$ 39 (YER 21,170 YER per day), which is fairly high compared to the range of 3,000-4,500 YER/day that they can earn as laborers elsewhere. 33. Financial analysis results. The financial analysis results of the models presented above are summarized in Table 1 below. Based on the estimation of incremental flows of benefits and costs derived from the models, financial indicators were estimated for 20-year evaluation period (with the exception of some models) at a financial discount rate of 6 percent. As indicated in Table 1 below, overall, all the models were found financially profitable as they showed positive financial internal rates of return. The Models showing the highest financial returns on investments are animal feeding (118 percent) and water harvest rehabilitation (78 percent), and the range goes from a 15 percent IRR in apiculture to 118 percent in animal feeding. Table 1. Summary financial profitability results 6World Bank; 2018. Middle East and North Africa Food Security in Yemen and Djibouti Improving Food Availability and Access for Rural Households in Yemen and Djibouti. Report No: AUS0000454 7 With Project Incremental Models WOP Margins* IRR NPV Ratio B/C Costs Revenue margin a1. Terrace rehab (coffee) 113 1,182 2,730 1,435 19.9% 8,110 1.60 a2. Terrace rehab (sorghum) 3 824 1,642 815 24.5% 2,489 1.9 b. Irrigation canals 8,846 45,866 62,300 7,588 27.5% 41,335 1.27 c1. Water harvest rehab. 1,412 18 4,534 3,104 77.8% 28,107 24.02 c2. New small water harv. - 100 2,002 1,903 18.3% 10,626 2.02 c3. Rooftop water harv. - 3 91 88 21.9% 528 2.20 d. Seed production (sorg) 278 2,117 2,701 306 39.1% 2,481 1.24 e. Vaccination - - - - 0.0% - 0.00 f. Apiculture 3,011 11,874 28,611 13,726 15.1% 17,895 1.21 g. Supporting SMEs (SS dairy processing) 4,517 34,718 42,067 2,832 37.7% 11,106 1.18 h. Women agro-processing 301 2,837 3,769 631 32.1% 1,722 1.18 i. Sesame production 15 1,771 2,000 215 25.5% 1,445 1.08 j1. Seedling center 9,389 53,345 83,333 20,599 19.6% 40,339 1.29 j2. HCC (new) 4,361 11,172 37,037 21,504 26.1% 105,376 1.58 j3. Milk collection centers 9,033 722,612 750,000 18,355 23.7% 119,868 1.03 j4. Dairy processing centers 25,533 723,516 778,416 29,367 21.6% 180,879 1.06 k. Kitchen garden 21 80 257 156 20.7% 378 1.45 l. Animal feeding (small ruminants) 313 1,384 1,720 23 117.8% 1,081 1.23 m. Hydroponics 1,204 6,581 12,855 5,069 49.5% 40,341 1.64 *When new activities / plantations are put in place, WOP margins are considered at the opporunitty cost of equivalent amount of time, weighted by unemployment rates *When new activities / plantations are put in place, WOP margins are considered at the opportunity cost of equivalent amount of time, weighted by unemployment rates 34. Economic benefits. A stream of economic benefits derived from models was obtained using shadow prices to get economic values in models and aggregating given an estimated implementation calendar for realizations. In addition to this, economic benefits include positive externalities due to: (i) expected impacts on nutrition and health; and (ii) on the environment, taking into consideration estimates of the activities’ capacity to mitigate GHG emissions. 35. Environmental externalities in the economic analysis. Net GHG emissions reduction due to the project interventions are integrated into the EFA by using an economic value for carbon pricing with a high and low case scenario following the guidelines of the World Bank: “Guidance note on the shadow price of the carbon in the economic analysis� (September 2017). Net GHG emissions reduction are calculated by using the FAO 'Ex-ACT Tool. In terms of additional environmental benefits, based on the shadow price calculation using carbon price starting at US$ 51 and US$ 102 with the growth rate of 2.25 percent per year, the project would generate an additional US$ 3.15 and US$ 6.29 million for the economic lifetime of the project.7 Overall, the project shows a total GHG emissions mitigation capacity of nearly -90,850 tCO2-e considering a time span of 20 years. This is about -2.3 tCO2-e/ha, or -0.1 tCO2- e/ha/year. The main factors contributing to this GHG emissions mitigation capacity are the reduction in the use of synthetic NPK fertilizers, the change in soil coverage, and the increased adoption of climate-smart soil and water management practices, including terracing, reduced tillage, mulching, and introduction of organic matter in the soil. 36. Economic benefits of reduction in undernutrition and wasting. Economic benefits of improving nutrition in poor societies is described in the literature as emerged from two main sources8. One source of benefits is the impact estimated in the reduced healthcare costs and expenditures that otherwise would have been required or avoided costs (i.e. reduction in resources required to deal with mortality or morbidity). Malnutrition increases risks of mortality9 and illnesses that hinders the wellbeing of individuals, requires increased resources for health care services, and results in loss of time in the 7 Shadow prices of carbon is set according to World Bank's FY23 SPC values. 8 Alderman, H., Behrman, J. R. and Hoddinott, J. 2007 “Economic and Nutritional Analyses Offer Substantial Synergies for Understanding Human Nutrition,� J Nutr. 2007 March; 137(3): 537–544. 9 Probability of infant mortality, for example, is estimated to be significantly higher for low birth weight (LBW) than for non-LBW infants. When the impact of poor early nutrition is added to the effect of LBW, it is estimated that 56 percent of child deaths in developing countries are attributable to malnutrition 8 productive activities of caregivers. The second source of economic benefits derives from the link between nutrition and productivity, measuring project´s impacts on malnutrition by estimating the expected increase in earnings of non-undernourished individuals. It is assumed that the project interventions have an impact on the beneficiary children’s ability to complete school and thereby earn higher wages in their adult life. The analysis includes the discounted stream of benefits in the form of incremental expected lifetime income plus avoided health care costs as a positive externality. 37. Economic costs. The economic analysis includes all the costs associated with the project. Besides, an estimate on recurrent costs required to enable the realization of benefits (maintenance, replacement, operation) is also included during the lifespan of benefits. 38. Economic profitability. The economic analysis shows that the project is an economically viable investment for society. Using a social discount rate of 6 percent, the project economic net present value (ENPV) is US$ 129.21 million, with an economic internal rate of return EIRR of 23.57 percent for the base case scenario. 39. Following the World Bank guidelines on EFA and carbon accounting, economic profitability indicators are also estimated for two additional scenarios using a higher carbon price (HCP) assumption and a lower carbon price (LCP) assumption to include economic benefits derived from GHG emissions avoided. For the first case, under the high case scenario, the EIRR is estimated at 24.35 percent and the NPV is approximately US$ 135.50 million. Under the low case scenario, the EIRR is 23.96 percent and the NPV was approximately US$ 132.36 million. 40. Sensitivity Analysis. The robustness of these indicators was tested and confirmed with a sensitivity analysis assuming different risk scenarios. These include (a) increase in project costs (10 percent, 20 percent and 50 percent), (b) reduction in project benefits (10 percent, 20 percent and 50 percent), (c) combined scenarios (reduction in benefits and increase in costs), (d) delay in project benefits (1 and 2 years), and (e) occurrence of external shocks (climate change, prices, others) affecting overall benefits (every 2, 3 and 4 years). The project is assumed to be profitable and resilient, as profitability indicators remain in a positive range under most of scenarios. Table 2 shows a summary of results from the sensitivity analysis. Table 2. Sensitivity analysis of economic indicators Sensitivity Analysis ∆% Risk eIRR eNPV (US$) Base scenario 23.57% 129,211,118 -10% 21.84% 110,034,149 Benefits Combined risks on sale prices, yields, adoption rates -20% 19.90% 90,857,180 10% 22.01% 122,955,261 Costs Increase in expenses, input prices and unit costs 20% 20.57% 116,699,404 Delay 1yr in Benefits 20.41% 113,727,214 Adoption rate / delays Delay 2yr in Benefits 17.86% 99,091,820 External Shock every 2 yr 50% Benefits 21.91% 89,726,157 External shock (prices, quantities, climate) External Shock every 3 yr 50% Benefits 22.50% 112,775,380 10% -10% 20.27% 103,778,292 10% -20% 18.34% 84,601,323 Mixed Scenarios Costs 20% Benefits -20% 16.92% 78,345,466 20% -30% 10.87% 27,070,416 20% -10% 18.84% 97,522,435 41. Finally, switching values (SV) for cost and benefits are also estimated. The SV for cost increments are 217 percent, 212 percent and 207 percent under the high case, low case and baseline scenarios respectively. Concerning reductions to economic benefits, SV are estimated at 68 percent, 68 percent and 67 percent for under the high case, low case and baseline scenarios, respectively. 42. The following table summarizes the economic profitability indicators for three scenarios discussed in this analysis. While the baseline scenario only considers net incremental economic benefits derived from the financial streams of the investments valued at economic prices, the high case and low 9 case scenarios also include environmental co-benefits valued at low and high prices as per the World Bank guidelines on shadow pricing of carbon (2017). These results suggest that the project is expected to be an economically worthwhile investment from the perspective of society. Table 3. Summary of economic indicators (US$) Indicator Baseline Low case High case EIRR (%) 23.57 23.96 24.35 ENPV (million US$) 129.21 132.36 135.50 Switching value for costs (%) 207.00 212.00 217.00 Switching value for benefits (%) -67.00 -68.00 -68.00 10