SOCIAL COST BENEFIT

ANALYSIS

Dr. Amanpreet Singh

MEANING

Social cost benefit analysis (SCBA) called

Economic analysis, is a methodology
developed for evaluating investment
projects

Used primarily for evaluating public

projects useful for economic
development
SCBA is divided into four sections

1. Rationale for SCBA

2. UNIDO approach
3. SCBA by financial institutions
4. Public sector investment decisions in
India
1.Rationale for SCBA

In SCBA the focus is on the special costs

and Benefits of the project. The principle
sources of discrepancy are:
1.1 Market imperfections
1.2 Externalities
1.3 Taxes and subsidies
1.4 Concern for saving
1.5 Concern for redistribution
1.1 Market imperfections

The common imperfections found in developing countries

are:
1.Rationing:- Rationing of a commodity means control
over its price and distribution. The price paid by a
consumer under rationing is often significantly less
than the price that prevail in the competitive market.
2. Prescription of minimum wage rates :- Minimum
wages paid to a laborer under minimum wage rates are
more than the wages paid under competitive labour
market.
3. Foreign exchange regulation:- The official rate of
foreign exchange in most of the developing countries
under close regulation of foreign exchange, typically less
than the rate that would prevail in the absence of foreign
exchange regulation.
1.2 Externalities

A project may have a beneficial external effects.

For example, it may create certain infrastructural

Facilities like roads which benefit the neighbouring
areas.

Such benefits are considered in SCBA , though they are

ignored in assessing the Monetary benefits to the
project sponsors because they do no receive any
monetary compensation from those who enjoy the
external benefit created by the Project.
e.g. Rohtang tunnel
1.3 Taxes and Subsidies

From the private point of view, taxes are

definite monetary costs and subsidies
are definite monetary gains.
1.4 Concern for saving
A rupee of benefits saved in deemed
more valuable than a rupee of benefits
consumed.

A higher valuation is placed on savings

and a lower valuation is put on
consumption.
1.5 Concern for redistribution

A rupee of benefit going to a poor

section is considered more valuable than
a rupee of benefit going to an affluent
section.

e.g. Public distribution system

2. UNIDO Approach

UNIDO approach was first articulated in

the guidelines for project evaluation
which provides a comprehensive
framework for SCBA in developing
countries. UNIDO approach is based
largely on the latter publication though
at places we will draw on the former
publication too.
 UNIDO involves five stages

2.1 Calculation of the financial profitability of the

project measured at market places.
2.2 Obtaining the net benefit of the project measured
in terms of economic prices.
2.3 Adjustment for the impact of the project on
savings and investments.
2.4 Adjustment for the impact of the project on
income and distribution.
2.5 Adjustment for the impact of the project on merit
goods and demerit goods whose social values
differ from their economic values.
2.2 Net benefit in terms of economic prizes (shadow prices)

Shadow pricing : Basic issues

Choice of Numeraire: the unit of account in which the value

of inputs or outputs is expressed (interms of consumption or

investment)
Concept of tradability: good is tradeable or not? For

tradeable goods, international price is the opportunity cost to

the country
Sources of shadow prices: three sources;

Increase or decrease in the total consumption: willingness to pay

Increase or decrease in the total production: cost of production
Increase or decrease in the total import or export: foreign

exchange rate
Treatment of Taxes
2.3 Impact of the project on savings and
investments.
2.4 Impact of the project on income and
distribution.

Income distribution should be in favor of

low-income consumers
2.5 Impact of the project on merit goods
and demerit goods

Merit goods: for which social value

exceeds economic value. E.g. production
of oil reduces dependence on imports
Demit goods: for which social value is
less than economic value. E.g. alcoholic
products
3. SCBA by financial institutions

The leading financial institutions like IDBI, IFCI and ICICI

appraise projects from financial point of view
IDBI considers following three aspects:
Economic rate of return: simply a internal rate of return of
the stream of social costs and benefits
Effective rate of protection: it is the extent to which a
project is sheltered
value added at domestic price value added at world price
---------------------------------------------------------------------------
value added at world price

Domestic resource cost

Value added at domestic prices
------------------------------------------
Value added at world prices
4. Public sector investment decisions
in India

Public sector commands a predominant position

in many industries: coal, crude oil, refining, steel,
power, fertilizers etc.
Initiatives to improve the quality of investment
decisions:
1965: Bureau of Public Enterprises

1965: Manual of feasibility studies for public

sector projects by Planning Commission
1972: Project Appraisal Division (PAD), Planning
Commission
1972: Public Investment Board (PIB)
Steps in Public Investment Decision
Making

Planning commission prepares five years plan

Administrative ministers develop sectoral plans
Public sector enterprises prepare feasibility report
Scrutiny of feasibility report by administrative
ministry
PAD carries out detailed appraisal
Recommendation to PIB whether to accept, reject or
redesign the project
If PIB clears the report, it is sent to the cabinet for
further approval
Cabinet generally approves the report sent by PIB