Guidance

Land Sector Cost-Benefit Analysis Guidance

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Introduction

MCC is required by its statutory regulations to conduct cost benefit analysis (CBA) and to calculate the economic rate of return (ERR) on projects supported through country compacts. ERRs form a critical part of the project approval process and are required to equal or exceed a threshold level of ten percent over the medium term. To clarify methodology and to improve the consistency across country compacts, the division responsible for estimating ERRs is developing a series of reports outlining methodology for each major investment sector. This report covers Land and Property Rights (LPR) projects. The guidelines aim to help MCC economists better understand the methodological tools available, and to provide greater methodological clarity to external practitioners. This should help to provide more consistent application of CBA methodology. 1

The first section of the document reviews the theory and evidence on benefits of LPR investments. Section 2 provides a typology of LPR interventions and associated benefit streams to serve as a starting point for economic analysis. Section 3 presents principles to guide the modeling of LPR investment economic returns.

Footnotes
  • 1. This is a ‘living document’. As methods improve and new insights develop in the relevant literature, MCC’s approach also aims to evolve and to keep pace. MCC staff will periodically update the guidelines to reflect advances in economic theory and practice, and to provide tools to analyze new LPR investment types as they are encountered.
  • 2. As used in this paper, the term “land” refers to land and all related property and natural resources associated with that land (e.g., water, forests and minerals).
  • 3. Land governance concerns “the rules, processes and structure through which decisions are made about access to land and its use, the manner in which the decisions are implemented and enforced, and the way that competing interests in land are managed” (Palmer, Fricska and Wehrmann, 2009). Land tenure status refers to the particular property right type held by individuals and by groups within this governance system. This can include freehold right, use right (e.g. leasehold tenures), bundles of rights to common resources, or other right types, any of which may be limited in a variety of ways.
  • 4. Removal of regulations (e.g. building height restrictions) that suppress investment can have the same effect—although negative externalities must be carefully considered.
  • 5. Referred to as alienation rights in property law.
  • 6. Including execution of land-attached investments to develop those parcels.
  • 7. Sanjak 2012; Lawry et al, 2014; Higgins et al, 2017.
  • 8. Credit effects are more likely in contexts where beneficiary incomes are higher, plots are larger and/or located in urban areas (and so constitute an asset of value to lenders), contract enforcement mechanisms are strong, and the financial sector is well developed. Even in cases where evidence of a potential credit effect is insufficient for inclusion in ex-ante CBA, ex post evaluation tests for a LPR credit effect may be of interest where the effect is believed plausible.
  • 9. The FAO defines land administration as “the way in which the rules of land tenure are applied and made operational. Land administration, whether formal or informal, comprises an extensive range of systems and processes to administer, including Land rights: the allocation of rights in land; the delimitation of boundaries of parcels for which the rights are allocated; the transfer from one party to another through sale, lease, loan, gift or inheritance; and the adjudication of doubts and conflicts regarding rights and parcel boundaries; Land-use regulation: land-use planning and enforcement and the adjudication of land use conflicts; and Land valuation and taxation: the gathering of revenues through forms of land valuation and taxation, and the adjudication of land valuation and taxation disputes.” (FAO 2002).
  • 10. Since all future income streams from an asset should be reflected in its price (Rosen 1974), the inclusion of both land productivity and value of land as beneficiary streams would double count project benefits. Use of land productivity is generally favored for rural areas, while value of land is often favored for urban areas, for reasons discussed in section III.
  • 11. In contexts where users are not charged the full cost of public service delivery, reduction in service delivery cost may not be fully reflected in land productivity or values.
  • 12. Effects on non-land attached investments or labor activities resulting from increased credit access, ability of households to transfer land to other parties, or reduced land guarding (Field, 2005)—including reduced guarding impacts occurring through increased rural-urban migration (Field, 2005; Deininger et al. 2013; de Janvry et al. 2017)—may also be incorporated where there is evidence that they are substantial.
  • 13. Availability of accurate land ownership records also has potential to enable enforcement of rules (through penalties or subsidies) that require land owners to contribute to the provision of public goods—for example, connection to water infrastructure, or discouragement of electricity theft. A key example is the implementation of property tax collection, through which LPR investments have potential to reduce the cost and overall distortionary impact of municipal revenue mobilization (Ali et al. 2018). Property taxes are relatively fair and progressive as most benefits of municipal services are capitalized in land values (Collier et al, 2017). Effects on rule enforcement and revenue mobilization may also be included where there is evidence that they are substantial. Guidance on the CBA of revenue mobilization investments, however, is outside the scope of this document.
  • 14. See Feder and Feeny 1991; Besley 1995; Lawry et al 2014; Gignoux, Macours, and Wren-Lewis 2014; and Higgins et al 2017. While the literature is extensive, LPR evaluations have focused on tenure formalization effects, and few have used rigorous experimental designs. For internal users, the literature cited in this document is available in MCC EA’s Land Literature Library, located on the share drive here.
  • 15. Both impacts on land-attached investment and returns to increases in land-attached investment are likely to be higher in areas with poor baseline tenure security. In fact, high returns to investment in land attached vs moveable assets is a signal of tenure insecurity. For example, Deininger and Chamorro (2004) find that the return to land-attached investments in Nicaragua during a period of land tenure regularization following high tenure insecurity was 29%, versus a return of 12% to livestock and 3% to machinery investments.
  • 16. In many contexts all land is formally owned by the state, but long-term lease documentation serves as an effective title (e.g. 99-year leases in the case of Zambia) that provide sufficient tenure security.
  • 17. Lawry et al, 2014.
  • 18. Regardless of the legal strength of the right established, credibility, specificity and transparency both to the community and to outsiders through documentation or other means are key.
  • 19. Lanjouw and Levy, 2004 (page 906 and 930).
  • 20. Castaneda and Pfutze, 2013.
  • 21. Lawry et al, 2014 (page 42 and 59).
  • 22. Ali et al, 2014; Saint-Macary et al, 2010.
  • 23. Bellemare 2013. Similar issues were encountered in Mongolia prior to MCC’s first compact there. In Burkina Faso, MCC is evaluating the degree to which local institutions are operating and the demand for new registrations or transfers of land rights certificates.
  • 24. Ali, Deininger and Duponchel 2017
  • 25. Deininger and Castagnini, 2006.
  • 26. Goldstein et al, 2015 (page 21). However, it is unclear whether this is due to poor engagement with female headed households or lower interest from female participants, given that the project formalized customary tenure rights which women are less likely to hold.
  • 27. Lawry et al, 2014 (page 62). Exceptions include India and Mexico where individual states governments have authority over land governance and have implemented reforms.
  • 28. Ibid (page 18).
  • 29. Castaneda and Pfutze, 2013. “Customary,” as defined by USAID is “traditional authority,” or “communities as a whole,” depending on country context (Stickler and Huntington, 2015).
  • 30. Lawry et al, 2014 (page 12 and 53).
  • 31. Goldstein et al, 2015 (page 6); Smith 2004; USAID, 2007 (page 13).
  • 32. Lawry et al, 2014 (page 61). Other examples include Madagascar, Benin, Burkina Faso, and Angola.
  • 33. Ali, Deininger, and Goldstein 2014. Reforms were made to remedy the issue based this analysis.
  • 34. See, for instance, Goldstein and Udry 2008.
  • 35. Gignoux, Macours, and Wren-Lewis 2014 (page 8); Goldstein et al. 2015.
  • 36. Goldstein et al, 2015 (page 24). Long term effects on parcel rentals were not yet available at the time of writing.
  • 37. Ali et al, 2015 (page 1).
  • 38. Stickler and Huntington, 2015 (page 4).
  • 39. Dercon and Ali, 2007; Bandiera 2007.
  • 40. Field, Field, and Torero, 2006.
  • 41. A concurrent randomized trial was underway in Mongolia.
  • 42. This is an example of a decentralized, participatory process for land certification that is lower cost than standard freehold land titling approaches. In Benin certificates can be converted into ownership titles so that the right is similar to a freehold title (although the rights conferred by certification are weaker in many contexts).
  • 43. Demarcation also increased the percentage of newly fallowed female-headed household parcels by 1.5 p.p. on a base of approximately 0% (fallowing is an investment in soil fertility). This eliminated the gender gap in percentage of parcels newly fallowed (approximately 1% of male-headed household parcels were newly fallowed). Female-headed household parcels, however, made-up only 15% of parcels in the sample.
  • 44. No difference between treatment and control was observed for trees planted in the last 12 months at endline, suggesting that demarcation led to a long-term increase in the stock of trees but not the investment rate.
  • 45. Bardhan, Mookherjee, and Kumar, 2012.
  • 46. Field 2005; Galiani and Schargrodsky 2010.
  • 47. Models will typically set a floor for land rents on the outskirts at the agricultural value of land.
  • 48. Above some base height (around 7 stories) and below extreme heights (perhaps 50 stories), increases in building height reduce the mean cost per square meter of built space by leveraging fixed costs of construction (Glaeser, 2011).
  • 49. Robinson, Holland, and Naughton-Treves, 2014; Ferretti-Gallon and Busch, 2014.
  • 50. Birungi and Hassan, 2010; Kabubo-Mariara, 2007.
  • 51. Wannasai and Shrestha, 2008.
  • 52. Wendland et al, 2010.
  • 53. Alston and Mueller, 2010; Lawry et al, 2014 (page 19).
  • 54. Wendland et al, 2010; USAID, 2007 (page 8-9).
  • 55. Buntaine, Hamilton, and Millones, 2014 (page 24).
  • 56. Deininger, Carletto, and Savastano, 2007; Nguyen, 2008; Vranken and Swinnen, 2006.
  • 57. Lawry et al, 2014 (page 49).
  • 58. Alston and Mueller, 2010.
  • 59. Holden, Deininger, and Ghebru, 2009; Chand and Yala, 2009.
  • 60. Deininger, Carletto, and Savastano, 2007; Macours, de Janvry, and Sadoulet, 2010; Holden, Deininger, and Ghebru, 2011; Nguyen, 2008.
  • 61. Nguyen, 2008.
  • 62. Macours, de Janvry, and Sadoulet, 2010; Nguyen, 2008; Deininger et al, 2007.
  • 63. Jin and Deininger, 2009.
  • 64. Field, 2005; Field, 2007; Lanjouw and Levy, 2004 (page 918 and 920); Hallward-Driemeier and Gajigo, 2011.
  • 65. Deininger, Carletto, and Savastano, 2007; Jin and Deininger 2009; Macours, de Janvry, and Sadoulet, 2010.
  • 66. Lanjouw and Levy, 2004 (page 901).
  • 67. Stickler and Huntington, 2015 (page 19).
  • 68. Markussen, 2008; Macours 2009; Hallward-Driemeier and Gajigo, 2011; Galiani and Schargrodsky 2010. Note that it is not the case that LPR project effects on investment depend on increased credit access. For example, data from Argentina, Mexico and Nicaragua all show increased investment, but little to no impact on access to credit from the issuance of formal land rights, with the exception of a “modest but positive effect” on mortgage credit in Argentina. Likewise, increased credit access resulting from LPR projects does not necessarily result in increased investment. In Zambia, title- and lease-holders achieved greater credit access, but this did not clearly translate into greater investment, implying the loans were used for consumption smoothing.
  • 69. Kemper, Klump, and Schumacher, 2011; Galiani and Schargrodsky 2010; Lawry et al, 2014 (page 63).
  • 70. Lanjouw and Levy, 2004 (page 934).
  • 71. Kerekes and Williamson, 2010; Do and Iyer, 2008.
  • 72. WB Doing Business 2008; Calculations from Deininger and Feder, 2009. Note that the Doing Business indicator refers to the cost to register the transfer of an existing commercial parcel, rather than transfer of a residential parcel or greenfield investment involving land allocation.
  • 73. WB Doing Business 2010 and 2013; Gainer, 2017.
  • 74. Jacoby and Minten, 2007; Deininger, Ali, and Alemu 2011; Holden, Deininger, and Ghebru, 2009.
  • 75. Burns et al, 2007; Deininger, Ali, and Yamano, 2008. Although, this certification process involved little mapping, which may limit strength of the awarded rights. LPR investments may also improve the efficiency of and reduce dead weight loss from revenue mobilization, although these effects are not covered by this document.
  • 76. These benefits may manifest both as a direct increase in land value and as an incentive to make investments that increase land value beyond the investment cost. Where land users are not charged the full cost of public service delivery, however, land value changes may either over or understate benefits.
  • 77. See, for instance, Fuller and Romer 2014. Urban informal settlements are, “contiguous settlements where inhabitants are characterized as having insecure residential status, inadequate access to safe water, inadequate access to sanitation and other basic infrastructure and services, poor structural quality of housing, and overcrowding” (UN-Habitat, 2003).
  • 78. Cantuarias and Delgado 2004; and Durand-Lasserve and Selod 2009
  • 79. Nunns and Rohani, 2014.
  • 80. Macours, 2009; Deininger and Castagnini, 2006; Deininger and Jin, 2006. In addition to affecting perceived tenure security, land conflict reduction may also have a more direct economic effect through the channel of reduction in the administrative and user cost of resolving land conflicts.
  • 81. Santos, Fletschner, and Daconto, 2014; Ali, Deininger, and Goldstein, 2014; Deininger, 2007. “Succession-related uncertainty” is the probability of a household reporting that it is unknown who will inherit a parcel.
  • 82. This typology includes common MCC LPR investments; the typology may expand in the future as MCC country teams identify new investment types to effectively address the root causes of binding constraints in particular country contexts.
  • 83. The economist should closely collaborate with the M&E lead, land sector lead, and gender and social inclusion (GSI) leads both in selecting existing data and in any collection of original data. These team members must review any instrument used for original data collection to inform economic analysis. See section III for guidance on questionnaire design and data collection.
  • 84. The economist should closely collaborate with the M&E lead, land sector lead, and gender and social inclusion (GSI) leads both in selecting existing data and in any collection of original data. These team members must review any instrument used for original data collection to inform economic analysis. See section III for guidance on questionnaire design and data collection.
  • 85. Note that investments of this type correspond to investments at level 4a (Sector Policies) and 4b (Institutions of Sector Governance) in MCC’s PIR CBA Guidelines.
  • 86. See Henderson, Regan and Venables (2017) for an example of data requirements for a monocentric city model.
  • 87. Note that this comprehensive logic, however, includes several benefit streams for which existing evidence is insufficient for inclusion in ex-ante CBA models.
  • 88. For a comprehensive Evaluation Land Logic, see Lisher (2018).
  • 89. In keeping with standard CBA practice, none of MCC’s economic analyses attempt to assess a counterfactual where the same items are financed, with some probability, by other public entities or donors.
  • 90. For example, where threats are primarily from individuals or entities external to a particular area, and community-level land governance institutions exist, registration of group rights may be sufficient to secure tenure. Whereas, where the main threats come from within a community (or household), then strengthening household or parcel-level land rights may be necessary.
  • 91. The minimum time required to implement an LGAF is 4 months, but the exercise can take substantially longer. See the LGAF website here: http://www.worldbank.org/en/programs/land-governance-assessment-framework. Sanjak and Donovan (2016) review other lower cost and time intensive tools for assessing land governance. USAID’s land country pages, the international land coalition (ILC) Dashboard and forthcoming SDG 1.4.2 data on secure tenure (documentation and perceptions) are also useful references.
  • 92. Care should be taken to consider the quality of this administrative data, however, in drawing any conclusions. In many MCC partner countries, registry data is substantially incomplete, out of date, or otherwise inaccurate.
  • 93. Doing Business indicators appear in many cases to measure de jure rather than de facto conditions (Hallward-Driemeier and Pritchett 2015). Actual time and financial costs within a country may also vary substantially by firm and transaction type. For this reason, doing business indicators should be analyzed in combination with other sources, preferably data allowing disaggregation by firm and transaction type.
  • 94. For more information, see the Doing Business Registering Property Methodology webpage, here: http://www.doingbusiness.org/Methodology/Registering-Property.
  • 95. Deininger and Chamorro (2004) find that the return to land-attached investments in Nicaragua during a period of land tenure regularization following high tenure insecurity was 29%, versus a return of 12% to livestock and 3% to machinery investments.
  • 96. Available for 62 countries as of February, 2017 at eba.worldbank.org
  • 97. Where these procedures involve multiple institutions (e.g. the registry and judiciary for land conflicts), administrative data should be obtained from each institution to cross-check.
  • 98. Contact MCC M&E (Jenny Lisher) for suggestions on which data catalog land module may be most useful for your context and objectives.
  • 99. The literature cited in this document is available in MCC’s Land Literature Library, located on the share drive here. When complete, MCC M&E’s land literature database spreadsheet will be added here, and will include information on experimental and quasi-experimental studies’ primary research question(s), intervention/situation type analyzed; methodology applied, exposure period allowed for effects to materialize, and outcomes for which impacts were estimated.
  • 100. Where a LPR investment is expected to increase credit access, a large portion of the incremental credit may be applied to land-attached investment so that the welfare gains from this incremental investment are partially or fully reflected in land values/productivity. If land value/productivity is included as a benefit stream in these cases, then welfare gains from non land-attached investments must be separately quantified if substantial, or excluded if insubstantial.
  • 101. Alternatively, the value of the equivalent annual payment received in perpetuity beyond the 20th year can be subtracted from the price change. Or, equivalently, the remaining value in perpetuity of other cost and benefit streams in the model can be added to the last period.
  • 102. Note that past MCC LPR credit investment CBAs have sometimes erred in assuming that the opportunity cost of loan recipients’ own capital contribution is zero, that the real interest rate repaid to the mortgage lender is close to a pure welfare gain (in one case assuming a mortgage transaction cost equal to just 2% of the loan), and that the loan recipient and lender’s profit are an annual benefit into perpetuity without accounting for depreciation of capital investments financed by the mortgage loan or the possibility that these loans are used for consumption smoothing.
  • 103. In some contexts, use of appropriate methods will reduce variation in reported land value within implementation clusters. In these cases, the statistical power of the estimator may lower to the point that relevant effects sizes are not detectable and price cannot be used as an outcome indicator.
  • 104. Although rental rates are more likely to be available, the relationship between tenure security improvements and the rental rate is less clear. Improvements in tenure security may in fact reduce rental rates as the risk of losing rights to a parcel that is rented out diminishes.
  • 105. In some contexts, there may be a sufficiently high number of land transactions to have statistical power to use actual sale prices to estimate program effects, but the required data is unlikely to be available and the method would introduce sampling bias as the price of parcels that are not transacted is unobserved. For cases where such data is available, it is recommended that regressions using both the subjective land price and actual land sale price as the dependent variable be run to check for robustness.
  • 106. Geographic discontinuity designs using spatial fixed effects are also useful, although appropriate data is more unusual (Ali, Deininger, and Goldstein, 2014).
  • 107. In the case of agricultural investment, use human capital characteristics of the individual who makes decisions regarding cultivation of and controls output from the parcel.
  • 108. Except in contexts where the analyst believes title is likely to affect credit access.
  • 109. See Besley (1995) for an instrumental variable application to cross sectional data.
  • 110. Millennium Challenge Corporation, 2018.
  • 111. See MCC’s PIR CBA Guidelines for additional guidance and caveats. For example, the PIR CBA paper also identifies other circumstances in which PIR and non-PIR CBA analysis may be combined, including where PIR costs are low compared to costs of separate analysis, and where PIR supports sustainability of non-PIR investment.
  • 112. The peer reviewer should request a clear justification for cases where PIR and non-PIR components are not separately modeled.
  • 113. When considering use of stated preference questions, however, the analyst must carefully consider whether targeted respondents would have sufficient understanding of and information on potential amenities or services whose benefits they are asked to assess.
  • 114. For off-grid electrification, for example, World Bank Independent Evaluation Group 2008 shows that applying the wrong functional form for the demand curve can overstate consumer surplus versus a log-linear demand curve by up to eight times in extreme cases (pg. 131-139).
  • 115. See, for instance, Goldstein and Udry 2008.
  • 116. MCC M&E Division 2017 (internal document)
  • 117. Higgins et al, 2017. See also 3ie’s Evidence Map for Land Use Change and Forestry here: http://gapmaps.3ieimpact.org/evidence-maps/land-use-change-and-forestry
  • 118. Land administration reform was the largest of 5 activities included in MCC’s Private Sector Development project. The other activities originally included modernizing the commercial legal system, strengthening payment and settlement systems, supporting the provision of credit bureau services (including assisting the roll-out of a national ID scheme), and training and outreach to support gender equality in economic rights. The credit bureau services and payment and settlement systems activities were later cancelled.
  • 119. Orgut-Cowi contract (i.e., Dec 2012).
  • 120. IMF SISA (Jan 2007), p. 81 (Table 35: Financial Soundness Indicators for the Banking Sector.
  • 121. DUAT is from the Portuguese Direito de Uso e Aproveitamento dos Terras, meaning the right of use and benefit of land.
  • 122. USAID also has sample instruments available for download at www.usaidlandtenure.net/data.