6. Assessing the net benefits of certification and branding

6.1 Introduction and some issues of methodology

How then should producers and governments in the Asia–Pacific region assess the relative merits of different certification and branding schemes? The previous sections have discussed the actual and hypothetical benefits and costs of different options that are available. It is important to note that in much of the literature there is often a failure to assess the benefits (in terms of both the market access/price benefits and the wider long-term benefits, e.g. sustainability) and the costs in an assessment of resulting changes to net value-added/profit. This section therefore describes how cost–benefit analysis can be used as a practical tool in the Asia–Pacific region to inform decision-making.

Cost–benefit analysis can be used to make rational economic decisions about the feasibility of investing in a particular scheme or initiative. It can also help to prioritize between different investment options. A key aspect of such analysis is that it considers not just the benefits (i.e. the common focus on potential price premiums), but also the wider benefits and the costs. This allows for an assessment of value-added or profit premiums.

A second key factor is that cost–benefit analysis compares the costs and benefits over a time-period. This is important because it means that decisions can be made based on the long-term stream of net benefits. As we saw from the example of organic bananas, long-term assessment of feasibility may be very different to a short-term assessment, if initial price premiums are not maintained.

6.2 Some issues of methodology

Before explaining how the steps in a cost–benefit analysis could be used in the Asia–Pacific region, the reader may find some brief methodological discussion to be of some benefit. A number of key points in conducting cost–benefit analyses are:

The basis for assessing changes in benefits resulting from an investment is changes to value-added. This is the profit and labour earnings generated from the catching, processing or marketing activity. It should be assessed based on costs and earnings studies that examine revenues, fixed and operational costs, share earnings schemes (in the case of the catching sector) and profits.
Before commencing any cost–benefit analysis it is important to decide on the project area and scope of stakeholders involved. For example, with respect to a branding exercise, a cost–benefit analysis may be undertaken solely from the perspective of marketing/export companies. For an environmental certification scheme, analysis may just consider the producers who are paying for certification. Or it could also assess changes to value-added throughout the supply chain.
Cost–benefit analysis requires an appreciation of the "time-value of money" i.e. the fact that an amount of money now is worth more than the same amount in later years, and the use of a discount rate.²⁰ In all societies, greater value is placed on investment and consumption now compared with that in the future. This is because resources available today can be invested to produce goods and services which will be available in the future. So if the same resources were made available two years later, the economy would have lost the benefit of two years of investment which would have been realized. Cost–benefit analysis therefore examines the Net Present Values (NPVs) of an investment by using a discount rate and comparing a series of future payments (negative values) and income (positive values). Analysis also typically includes assessment of an Internal Rate of Return (IRR). The IRR is the interest rate received for an investment consisting of payments (negative values) and income (positive values). Because of the use of a discount rate in the estimation of the NPV, the IRR and NPV are closely related — the rate of return estimated by the IRR is the interest rate corresponding to a zero NPV.
It is of course important to remember that it is not always possible to quantify all costs and benefits. Cost–benefit analysis therefore typically also includes some supporting descriptive text outlining qualitative costs and benefits, which may include issues relating to social or socio-economic issues. However, standard investment appraisal methodology is not to consider any employment-related benefits which may result from the investment. This is because if the investment was not supported, it is assumed that the money would be available for use in other ways with equivalent consequences on employment.
Because cost–benefit analysis has to make many assumptions about expected costs and benefits, it is also usual to include a sensitivity analysis. This analysis can be used to make changes in key variables so as to view the resulting impacts on NPVs and IRRs. Analysis typically provides information about which variables are most important (and which should therefore be particularly scrutinized for their validity). It also allows for various scenarios to be presented, e.g. a worst case scenario, a best case scenario.
Due to the requirement to quantify benefits on the basis of information that is in some cases incomplete or only partially justified, it is useful to take the approach of defining the extent and scale of the expected benefits prior to any calculation of the NPVs. This ensures that analysis does not seek to justify the investment by scaling benefits accordingly, but rather, remains objective in the estimation of benefits resulting from the proposed investment.

6.3 Steps in cost–benefit analysis

Key steps in a cost–benefit analysis typically include the following:

Explaining the strategic context and describing the objectives.
Considering the options.

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²⁰ Typically similar to the prevailing interest rates in a country.

Assessment of costs and benefits.
Numerical modeling and analysis of the results obtained for each option with summary tables and matrices to facilitate comparison.
Discussion of the risks/assumptions and completion of a sensitivity analysis.
Conclusion and identification of a preferred option.

Step 1: Explaining the strategic context and describing the objectives

The first step in a cost–benefit appraisal should be to explain the strategic context using a review of existing marketing and management arrangements and problems that could potentially be addressed through a certification or branding exercise. For example, such a review could include discussion of fisheries management problems that could be solved through engaging with an environmental certification process, a description of increasing requirements by supermarkets in a particular export market for fish to be sourced from sustainable supplies that are threatening market access and/or the successful use of branding by a competitor product which has resulted in reduced market share.

These problems should then be turned around into the specified objectives of engaging with a certification or branding scheme. These objectives should be as "SMART" as possible (Specific, Measurable, Agreed, Realistic and Time-dependent).

Step 2: Considering the options

In considering the options, a review should be completed of all the different schemes presented in Section 3 of this paper and any others that may not have been picked up during the research completed in preparing this paper. An assessment should be made of which scheme, or schemes, is most suitable in addressing the key problems and specified objectives.

In addition, the analysis should always consider a "do nothing option", which can be assumed to be no investment. The do nothing option is important as a base case against which the incremental differences of other options can be compared. As noted in the methodological discussion above, later steps in the analysis compare differences in value-added that can be expected when comparing different options against the do nothing option.

Options may also involve the different combinations of phasing investment/expenditure.

Step 3: Assessment of costs and benefits

In considering the costs of different schemes, estimations should be made of upfront and ongoing costs that can be expected over the time period of analysis. Some potential costs are discussed in Section 5. All costs should be separately itemized by year for subsequent use in the analysis.

Potential benefits are discussed in Section 4. They should be assessed in terms of the impacts of any price changes, market access, improved quality, etc. on changes to value-added. Attempts should be made to value benefits wherever possible, and benefits should be shown separately with an explanation of how the figures have been derived.

Discussion should also be presented on any non-quantifiable benefits; these can be very important in the final decision-making process, especially when the results of a cost–benefit analysis suggest that investment is only marginal in terms of net benefits.

Step 4: Numerical modeling and analysis of the results obtained for each option with summary tables and matrices to facilitate comparison

The appraisal should then compare the costs and benefits which can be valued in a discounted cash flow to calculate an NPV and a benefit: cost ratio for different options, using a discount rate as agreed (to reflect the "time value" of money). Two hypothetical examples are presented below. Stated costs and benefits are in no way intended to reflect the actual costs that may be required, or the benefits generated, and are purely intended to provide an example of the workings of a cost–benefit analysis.

Table 2: Hypothetical cost–benefit analysis of environmental certification
Discounted cash flow analysis — environmental certification
Year	0	1	2	3	4	5
Costs
Pre-assessment costs	10 000
Assessment costs		25 000
Annual audit			5 000	5 000	5 000	5 000
Monitoring, control & surveillance (MCS) assets	50 000
MCS running costs		10 000	10 000	10 000	10 000	10 000
Total costs	60 000	35 000	15 000	15 000	15 000	15 000
Benefits
Price premium		10 000	5 000	0	0	0
Maintenance of market share		35 000	26 250	19 688	14 766	11 074
Increases in long-term catch rates		15 000	12 500	10 000	7 500	5 000
Total Benefits	0	60 000	43 750	29 688	22 266	16 074
Net Benefits	-60 000	25 000	28 750	14 688	7 266	1 074
NPV	8 062
IRR	1 286%
NPV of costs	142 053
NPV of benefits	150 115
B:C ratio	1.06

Notes:

The hypothetical analysis includes costs and benefits to both the catching and processing sectors.
Benefits of maintained market share are the value-added for both catching and processing that would have been lost over time if certification had not taken place, and the product had to be sold into alternative markets with lower prices. i.e. the do nothing option.
Price premiums are assumed to erode in year three, and represent the value-added changes resulting from premiums in years 1 and 2.
Chain-of-custody and logo licensing costs are assumed to be paid for by organizations in destination markets.
Costs for MCS equipment and running costs are those costs necessary for the fishery to comply with, and maintain, certification standards.
Improved management is assumed to result in increased stock status, higher catches and therefore additional value-added through the supply chain from increases in long-term catch rates.
A 6 percent interest rate is assumed.

Table 3: Hypothetical cost–benefit analysis of branding
Discounted cash flow analysis — branding
Year	0	1	2	3	4	5
Costs
Logo and graphic design	5 000
New packaging/processing equipment	25 000
Changes to annual packaging costs		2 500	2 500	2 500	2 500	2 500
Attendance at trade fairs		5 000	5 000	5 000	5 000	5 000
Other marketing and PR initiatives		10 000	10 000	10 000	10 000	10 000
Total costs	30 000	17 500	17 500	17 500	17 500	17 500
Benefits
Price premium		15 000	15 000	15 000	15 000	15 000
Increased market share		10 000	10 000	10 000	10 000	10 000
Total benefits	0	25 000	25 000	25 000	25 000	25 000
Net benefits	-30 000	7 500	7 500	7 500	7 500	7 500
NPV	1 593
IRR	7.93%
NPV of costs	103 716
NPV of benefits	105 309
B:C ratio	1.02

Notes:

Costs and benefits relate only to processing/marketing sectors.
Marketing and public relations initiatives might include brochures, advertising, visits to clients, etc.
Price premiums reflect increased value-added in the processing and marketing sector from both a) improved quality of products brought about by the branding exercise and greater attention to quality; and b) higher prices paid by consumers due to more attractive packaging and the aspirational qualities of a branded product.
Increased market share reflects increased value-added from greater sales volumes/values.
A 6 percent interest rate is assumed.

Step 5: Discussion of the risks/assumptions and completion of a sensitivity analysis

It is important in this step to consider and describe in detail the assumptions and risks to the project's costs and benefits. These risks may include factors such as:

Higher than expected, or unforeseen costs.
Lower than expected benefits.
Externalities which might impact on either costs or benefits. For example, other producers may engage in branding exercises targeted at the same market, thereby minimizing the positive effect of the branding exercise being assessed for viability. Buyers may change purchasing decisions, and consumer demand may alter through factors that are completely outside the control of those considering engaging in certification or branding schemes.

A sensitivity analysis should also be conducted to quantify the importance of different costs and benefits assumed in the analysis. It is typically presented in numeric and graphic form showing the impact on NPVs of changes in costs and benefits. As a result, assumptions which appear to be prone to risk or uncertainty, and their potential implications, can be highlighted in the analysis, and double-checked for their validity.

Step 6: Conclusion and identification of a preferred option

Finally, based on all the proceeding analysis, in Step 6 rational decisions can be made using NPVs, IRRs, benefit: cost ratios and non-quantifiable benefits about whether a particular scheme should be taken fo*-rward, or if multiple schemes are being considered, and which one demonstrates the best performance.