The case for a real options approach to ex-ante cost-benefit analyses of agricultural research projects

The United States Agency for International Development (USAID), like many other development agencies and donors, increasingly emphasizes evidence-based programming. This requires assessments of project performance at all stages of implementation, comprising ex-ante impact assessment, monitoring and evaluation, and ex-post attribution of outcomes. Ex-ante impact assessment, in particular, involves performing Cost-Benefit Analysis (CBA) to determine the Expected Net Present Value (ENPV) of the project in question. Unfortunately, the traditional ENPV approach has proven inadequate for dealing with uncertainty in the timing of investments and flexibility in future decision making. This is especially relevant for Research and Development (R&D) projects which require several stages of product development and multiple rounds of testing prior to releasing final products. As a consequence, the real-options approach to CBA has increasingly been used to evaluate private sector R&D projects. This paper advocates for the adoption of the real options approach in the evaluation of public investments in agricultural research, and illustrates its practical utility with an assessment conducted by USAID to determine the economic viability of a proposed project to develop improved varieties of critical food security crops in Uganda.