An economic analysis of the Wauna-Yarakita oil palm project using the Little and Mirrlees approach to project appraisal

Abstract

This study investigates the relative merits of the two most frequently used methods of agricultural project appraisal - the Conventional Efficiency Analysis as described by Gittinger and the Little and Mirrlees methods - in relation to the development of an oil palm project in Guyana and in the context of Guyana's relatively open economy. An evaluation of the two alternative techniques are given in light of results. Using the existing literature on project evaluation techniques, available methods are reviewed in an effort to justify the choice of the two methods. The Conventional Efficiency Analysis and the Little and Mirrlees methods are discussed in detail, the latter particularly, because of its relative complexity. The nature and history of oil palm production in Guyana is also discussed to indicate the possible contribution of the oil palm to the development of Guyana. The crop's world production, trade and its position in the world fats and oils economy are also considered in an appendix. In the investigation of the social profitability of the Wauna - Yarakita oil palm project using both methods the criterion used is the internal rate of return supplemented by the net present value and benefit - cost ratio in some cases. The rates of discount utilised in the calculation of the net present values are 8 and 10 percent. The study mainly utilised data contained in the report on Oil Palm Development in Guyana, South America 1976-1980 by Ndaeyo and Isang. The main conclusion of the study is that, in the context of Guyana, there was no difference in the decisions taken, as the rates of return obtained in both cases were quite high. The use of the Little and Mirrlees for marginal projects could, however, make the difference between acceptance and rejection. It could also be deduced that the contribution of the Little and Mirrlees method may only be substantial in a situation where border prices are thought to differ substantially from domestic [)rice levels. Where such a situation does not occur, one need not go all the way to Little and Mirrlees but rather modify the Conventional Efficiency Analysis procedures (e.g. SER, SWR) and yet obtain similar results. The project when the extraction of timber was included yielded an investment which although profitable had no real rate of return. Finally, the effects on the rates of return of cost over-run, increased oil palm yields, different levels of consumption in the unorganized sector and a higher shadow wage rate were also discussed. Show more