Project Management

Social Cost Benefit Analysis

Meaning & Introduction

SCBA, called economic analysis, is a methodology developed for evaluating investment projects from the point of view of the society as a whole.

SCBA is the tool which help the government to evaluate the project which spells national benefits.

Meaning & Introduction(SCBA)

The term “social costs” refers to all those harmful consequences and damages which the community on the whole sustains as a result of productive processes and for which private entrepreneurs are not held responsible manifested.

Meaning & Introduction(SCBA)

The SCBA is a tool for evaluating the value of money, particularly of public investments, in many economies.

SCBA has achieved a significant importance in view of the growing importance of public investments in many countries, particularly in developing countries.

Objectives of SCBA

1. Estimates of costs and benefits which will accrue to individual members of the society as consumers or as suppliers of factor input.

2. Estimates of cost and benefits which will accrue to the project-implementing body.

Objectives of SCBA

3. Estimates of cost and benefits which will accrue to the community.

4. Discounting the cost and benefits which accrue over a period of time to determine the feasibility of the project.

5. Estimates overall benefits to the society as a whole.

Methods of SCBA

1. Rational for SCBA2. UNIDO approach3. Net benefit in terms of economic prices4. Income distribution impact5. Adjustment for merit and demerit goods6. Shadow Pricing

Shadow Pricing

Shadow pricing is one of the most widely used methods of social-cost benefit analysis.

This technique involves the use of hypothetical rather than predicted actual prices when evaluating a project.

Shadow Pricing

Shadow pricing technique has considered as the best suitable technique, since they are a better reflection of the real costs of inputs to society and the real benefits of the output to society than actual prices.

The term ‘shadow price’ suggests that an analysis based on these prices is remote from reality and, therefore, academic and highbrow (intellectual, scholar, educated).

Shadow Pricing

Shadow prices are unreal prices in that they are not the current prices of goods in the market.

Important aspects of Shadow pricing

1. Choice of numeraire: Determination of the unit of account in which the value of inputs or outputs is expressed.

2. Concept of tradability: Determine whether the goods are tradable or not.

Important aspects of Shadow pricing

3. Sources of shadow prices: UNIDO approach suggests three sources of shadow pricing, depending on the impact of the project on national economy.a. increase or decrease the total consumption in the economyb. decrease or increase production in the economy

Important aspects of Shadow pricing

c. decrease or increase importsd. decrease or increase exports

- If the impact of the project is on consumption in the economy the basis of shadow pricing is consumer willingness to pay

- If impact is on production the basis would be cost of production

Important aspects of Shadow pricing

- If impact is on international trade, the basis would be foreign exchange/currency.

4. Taxes: a. When a project results in diversion of non-traded inputs which are in fixed supply from other producers, taxes should be included.

Important aspects of Shadow pricing

b. when a project augments domestic production by other producers, taxes should be excluded.

c. for fully traded goods, taxes should be ignored.

UNIDO Approach(United Nations Industrial

Development organization)

UNIDO approach is concerned with the determination of the net benefit of the project in terms of economic prices.

UNIDO as a technique facilitate comprehensive framework to SCBA in developing countries.

UNIDO Approach(United Nations Industrial Development

Organization)

The UNIDO method of project appraisal involves five stages:1. Calculation of the financial profitability of the project measured at market prices.2. Obtaining the net benefit of the project measured in terms of economic prices(also called shadow prices.

UNIDO Approach(United Nations Industrial

Development organization)

3. Adjustment for the impact of the project on savings and investments.

4. Adjustment for the impact of the project on income distribution.

5. Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values.