Project appraisal and financing

1. SOCIAL COST BENEFIT
ANALYSIS (SCBA)
Presented by :-
Binoy Agarwal
Prince Kumar
Rounak Modi

2. SOCIAL COST BENEFIT ANALYSIS
 It is also known as economic analysis
 It is a methodology developed for evaluating investment
projects
 When we evaluate a project from the view of society or
economy, as a whole, it is social cost benefit analysis

3. SIGNIFICANCES OF SCBA
 Market Imperfections
 Externalities
 Tax and Subsidies
 Concerned for Savings
 Concern for Redistribution
 Merit Wants

4. Approaches to SCBA
Two approach to SCBA –
 UNIDO Approach
 L-M Approach (Little- Mirrlees approach)

5. UNIDO APPROACH
 Measures Cost and Benefits in terms of domestic currency
 Measures Cost and Benefits in terms of consumption
 Focuses on efficiency, savings and distribution aspects in different stages

6. STEPS INVOLVED IN UNIDO
APPROACH
 Calculation of financial profitability of the project measured in market
prices
 Obtaining the net benefit of the project measured in terms of economic
prices
 Adjustment for the impact of the project on savings and investment
 Adjustment for the impact of the project on income and distribution
 Adjustment for the impact of the project on merit goods and demerit
goods whose social values differ from their economic values

7. Net Benefit in terms of economic
prices
Concept of Shadow Pricing-
One of the most important aspects of shadow pricing is determination of
numeraire, the unit account in the which the value of inputs or outputs is
expressed.
Concept of tradability-
A key issue in shadow pricing is whether a good is tradable or not. For a good
that is tradable, the international price is measure for its opportunity cost of
to the county. For a tradable goods, it is possible to substitute import for
domestic production or vice-versa
Sources of Shadow Price-
The UNIDO approach suggests three sources of shadow pricing:
 Increase or decrease the total consumption in the economy
 Decrease imports or increase imports
 Decrease or increase production in the economy

8. IMPACT OF THE PROJECT ON
SAVINGS AND INVESTMENT
The purpose of this stage is:
 Determine the amount of income gained or lost beause of the project by
different income groups
 Evaluate the net impact of these gains and losses on savings
 Adjust the impact on savings to the net present value calculated

9. ADJUSTMENT FOR THE IMPACT OF
THE PROJECT ON INCOME AND
DISTRIBUTION
 Government considers a project as an investment for the redistribution of
income in favour of economically weaker sections or economically
backward regions
 Distribution Adjustment Factor (Weight) is calculated and the impact of the
project on income distribution have been valued by multiplying the
adjustment factor with the particular income of a group.
 Hence, the value is added to the net present value to produce the social
net present value of the project

10. ADJUSTMENT FOR THE IMPACT OF
PROJECT ON MERIT AND DEMERIT
GOODS
Adjustment to the net present value in the previous stage is done as per
below procedure:
 Estimating the present economic value
 Calculating the adjustment factor
 Multiplying the economic value by adjustment factor to obtain the
adjusted value
 Adding or subtracting the adjusted value to or from the net present value
of the project as calculated in previous stage

11. L-M APPROACH (Little-Mirrlees
Approach)
The core of this approach is that the social cost of using a resource in
developing countries differs widely for the price paid for it. Hence, it requires
Shadow Prices to denote the real value of resource to society.
The resources-inputs& outputs – of a project are classified into mainly:
Labour, Traded Goods, Non-Traded Goods
Therefore, to find out the real value of these resources , we should calculate-
Shadow Wage Rate( SWR)
The purpose of computing the SWR is to determine the opportunity cost of
employing an additional worker in the project. For this we have to determine-
 The value of the output foregone due to the use of unit of labour
 The cost of additional consumption due to the transfer of labour

12.  Shadow price of Traded Goods:
Shadow price of traded goods is simply its border or international price
 If a good is exported, its shadow price is its FOB price
 If a good is imported, its shadow price is its CIF price
 Shadow price of Non-traded Goods :
Non-traded goods are those which do not enter into international trade by their
very nature. (e.g. land, building, transportation). Hence, no border price is
observable for them
L-M APPRAOCH (LIMIT-MIRRLEES
APPRAOCH)

13. Presently, a ferry service, operated privately, is being used to cross a river. The
ferry operator charges Rs. 3 per person. It costs him Rs. 2 per person. Currently
per year 50,000 persons use the ferry service for crossing the river. Now the
Government is considering construction of a bridge over the river. It is
estimated that after the bridge is constructed 2,50,000 persons will cross the
river on the bridge. The bridge is expected to cost Rs. 3 million initially and its
annual maintenance cost would be Rs. 10,000. It has an indefinitely long life.
Once the bridge is constructed the ferry operator is expected to close down the
ferry service and sell the ferry boats for Rs. 1,00,000
EXAMPLE- “BRIDGE PROJECT”

14. SOLUTION
Now the social costs and benefits of constructing the bridge may be defined
as follows:
Costs:
1) Construction cost = Rs. 30,00,000 (This is one shot cost)
2) Maintenance cost = Rs. 10,000 (This is an annual cost)
Benefits:
1)Value of ferries released = Rs. 1,00,000 (one time benefit)
2) Savings in the cost of ferry operations = Rs. 1,00,000/year
3) Increase in consumer satisfaction : This is equal to willingness to pay of
2,00,000 additional persons who are expected to use the bridge

15. THANK YOU