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WELCOME

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Social Cost Benefit

Analysis

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Approaches to SCBA

Two approaches for SCBA

UNIDO Approach:- This approach is

mainly based on publication of UNIDO

( United Nation IndustrialDevelopment Organisations) named

Guide to Practical Project Appraisal in

1978. L-M Approach

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It involves five stages :

Calculation of financial profitability of the project,measured at the market prices of resources and

output.

Calculation of the net benefit of project measured

in terms of economic prices. Some resources arepriced at international prices and for others shadow

prices are considered.

Adjustment for the impact of the project on saving

and investment. Adjustment for the impact of project on income

distribution.

Adjustment for the impact of project on merit goods

and demerit goods whose social value differ fromtheir economic values.

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UNIDO ApproachStage - 1

Calculation of financial profitability of theproject

a) A good technical and financial analysis mustbe done before a meaningful economic(social) evaluation can be made so as todetermine financial profitability.

b) Financial profitability is indicated by the Net

Present Value (NPV) of the project, which ismeasured by taking into Account inputs(costs) and outputs (benefits) at marketprice.

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UNIDO Approach Stage - 2

Obtaining the net benefit of the project ateconomic (shadow) prices

a) The commercial profitability analysis(calculated in stage 1) would be sufficientonly if the Project is operated in Perfectmarket. Because, only in a perfect market,market prices can reflect the social value

b) If the market is imperfect (most of the casesin reality), net benefit of the Project is

determined by assigning shadow Prices toinputs and outputs.

c) Therefore, developing shadow pries is verymuch vital.

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UNIDO Approach Stage - 2

Shadow prices reflect the real value of aresource (input or output) to society

Shadow Prices are also referred as economicprices, economic / accounting efficiencyprices etc

Shadow prices can be defined as the value ofthe contribution to the country's basic socio-economic objectives made by any Marginalchange in the availability of commodities

(Output) or factor of production (input). Example: A project of power station may

increase the production of electricity whichcontributes to one of the socio-economicObjectives of the country.

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Sources of shadow pricing Basis of valuation

Increase/decrease total

consumption

Consumer willingness to

pay

Increase /decrease total

production

Cost of production

Increase/decrease export or

imports

Foreign exchange value

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Consumer Willingness to Pay (CWP)

What a consumer wants to spend for a

product or service

The difference between CWP and actual

payment is called consumer surplus

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Numerairea)A unit of account in which the values of

inputs and outputs are to be expressed.

b)Numeraire is determined at Domestic currency ,rather than border

price.

Present value rather than future value,

Because, "a bird in the hand is worth twoin the bush'

Constant price rather than current price

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Taxes:

If the project augments domestic

production, taxes should be excluded

if the project consumes existing fixed

supply of non-traded inputs, tax should

be included For fully traded goods, tax should be

ignored

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Shadow Pricing of Resources

Non-tradable Inputs and outputs

Shadow Price = Cost of production +

Consumer willingness to pay

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Non tradable inputs and outputs -:a good is non-tradableif following conditions are satisfied -:

If its CIF prices is greater than its domestic cost of production.

Its FOB price is less than its domestic cost of production.

For traded goods the shadow price border price translated in

domestic currency, at market exchange rate.

For non-traded goods the shadow price is measured in terms

of consumer willingness to pay or cost of production,

depending on the impact of project on the rest of theeconomy.

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Externalities -: since SCBA seeks toconsider all cost and benefits, to

whomsoever they may accrue external

effects should also be taken intoaccount. The valuation of external

effects is rather difficult because they

are often intangible in nature andthere is no market price, which can be

used as a starting point.

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Labour inputs -: the principle ofshadow pricing may be applied to labouras well, though labour is considered to be

services. When a project takes away labourfrom other employment, the shadow pricing

of labour is equal to what other user of

labour are willing to pay.

The shadow prices associated withinducing additional production of workers

consist of the marginal product of labour in

previous employment plus certain other

costs.

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Capital input -: the shadow pricing in case ofcapital investment involves -:

What is the value of physical assets?

The value of physical assets is determined the way

values of other resources are calculated.

What is the opportunity cost of capital?

The opportunity cost of capital depends on how the

capital required for the project is generated. To the

extent that it comes from additional savings itsopportunity cost is measured by the consumption

rate of interest.

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UNIDO Approach - Stage 3Adjustment for the impact of the project on

Savings and investment :The purpose of this stage is to Determine the amount of income gained or

lost because of the project by differentincome groups (such as business,government, workers, customers etc)

Evaluate the net impact of these gains andlosses on savings

Measure the adjustment factor for savingsand thus the adjusted values for savingsimpact

Adjust the impact on savings to the netpresent value calculated in stage two.

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UNIDO Approach- Stage 3

Evaluation of the Net Impact on Savings

Net savings Impact of the project =

Yi MPSi

o Here, Yi = change in income ofgroup i as a result of the project

o MPSi= Marginal Propensity to save a

group i

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UNIDO Approach- Stage 3

Adjustment Factor for Savings (AFs) AFs measure the percentage by which the

social value of investment of one Re.

exceeds social value of consumption one

rupee.

AFs = (MPC x MPcap) - 1

( CRI- MPcap) x MPS

Here, MPC = Marginal Propensity toConsume MPS = Marginal Propensity to

Saving

MPcap = Marginal Productivity of Capital=

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UNIDO Approach- Stage 4

Adjustment for the impact of the project on Incomedistribution

Govt. considers a project as an investment for the

redistribution of income in favour of economically

weaker sections or economically backward regions

This stage provides a value on the effects of a project

on income distribution between rich and poor and

among regions

Distribution Adjustment Factor (Weight) is calculatedand the impacts of the project on income distribution

have been valued by multiplying the adjustment factor

with the particular income of a group. This value will

then be added to the net present value re-calculated in

stage three to produce the social net present value of

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UNIDO Approach- Stage 5Adjustment for Merit and Demerit Goods :

If there is no difference between the economicvalue of inputs and outputs and the social valueof those, the UNIDO approach for projectevaluation ends at stage four.

In practical, there are some goods (merit goods),social value of which exceed the economic value(e.g oil, creation of employment etc) and alsothere are some goods (demerit goods), social

value of which is less than their economic value(e.g., cigarette, alcohol, high -grade cosmeticsetc)

Adjustment to the NPV of stage 4 is required if

there is any difference between the social and

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UNIDO Approach- Stage 5

The steps of adjustment procedure are:

Estimating the present economic

value

Calculating the adjustment factor

Multiplying the economic value by the

adjustment factor to obtain the

adjusted value Adding or subtracting the adjusted

value to or from the NPV of the project

as calculated in stage four.

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THANK YOU