Social Cost Benefit Analysis of Projects of a State Industrial Development Corporation
Prajnan, Vol. 22, No. 3, 1993
Posted: 2 Dec 2004
The need for social cost benefit analysis (SCBA) for a appraising industrial projects in developing economies has been felt since long. United Nations Industrial Development Organization (UNIDO), Organization for Economic Cooperation and Development (OECD), and World Bank have sponsored research for developing practical methodologies for the purpose. Their publications are well-known. It is interesting to note that the most sophisticated and comprehensive methodologies were developed in the 1960s and early 1970s. The practitioners found them too demanding in terms of information and skill requirements. As a result attempts were made to simplify them.
India is one of the foremost countries where attempts have been made to apply these methodologies in a simplified form. Industrial Credit and Investment Corporation of India (ICICI) simplified the Little-Mirrlees methodology with the help of the World Bank and used it for appraising its projects. Popularly known as partial Little-Mirrlees methodology, it is applied by ICICI, Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India (IFCI) for appraising their projects costing more than five crores of rupees.
In addition, there are only a few studies reported in published academic literature where an attempt has been made to apply the UNIDO or OECD (Little-Mirrlees) methodology. For example, Chopra, Lal, Beyer, Mishra and Beyer, Sinha and Bhatia, and Singh have applied SCBA in the case of water projects; Das Gupta and Murthy have applied SCBA in the context of water pollution due to pulp and paper industry; ICAI has applied SCBA in a steel-complex project and an underground railway project; Jain has used basically the Little-Mirrlees methodology of SCBA to six industrial projects in the public sector and one in private sector. All these studies have applied either UNIDO guidelines or OECD manual (Little-Mirrlees) but only partially.
The feeling of inapplicability of the advanced SCBA methodologies (UNIDO or OECD) in the Indian context does not appear to be well founded. The information contained in the project report of Development Financial Institutions (DFIs) in India is quite sufficient. Singh and Anand have recently conducted a study in which they used SCBA for an auto-ancillary project of a State Industrial Development Corporation (SIDC) in as much detail as illustrated in the UNIDO guidelines. The present study derives the social cost benefit implications of 19 projects of an SIDC. The methodology used is as much comprehensive as in the case of the auto-ancillary project.
First, the paper describes the methodology along with an illustrative case study and then it studies the implications of social cost benefits of some SIDC projects under appraisal.
The study finds that the four projects of Group III could not have been selected on social desirability criterion if a proper analysis was done, their goals of import substitution and backward area development notwithstanding. The ten projects of Group I had all positive aggregate consumption benefits under the most unfavorable combinations of values of national parameters that were considered in this study. Thus, these projects would have been accepted if the social cost benefit analysis was done during the project appraisal by the SIDC. The five projects of Group II had negative values of aggregate consumption benefit under the most unfavorable combinations of values of national parameters. But they had positive value of aggregate consumption benefit under the most optimistic combinations of values of national parameters. One of these five projects is in a developed area. The remaining four are socially viable under the least favorable combinations of values of national parameters if a reasonable positive premium is given to the net benefits flowing to the backward areas. Therefore, it can be safely concluded that all these four projects would have been selected, if social cost benefit analysis was used in the appraisal by the SIDC. The Oil Field Equipment Project located in a developed area is viable only under the most optimistic assumption. Perhaps, this project would not have been selected if its social cost benefit analysis were done.
The projects belonging to Group III are not acceptable even under maximum net aggregate consumption benefit criterion unless high premium is attached on the redistribution benefits. All these four projects are import substitution projects. It appears that the import substitution objective has been unduly emphasized in the project choice in these cases.
In sum, it can be said that if social cost benefit analysis were done, many of the projects would have been selected. Yet, some of the decisions, particularly those in the name of import substitution, might not have been taken. Now that these projects have been selected, SCBA points at a management style with a stronger built-in-system for cost control and capacity utilization.
This study corroborates the hypothesis that social cost benefit analysis under a sensitivity analytic framework for project appraisal by SIDCs is feasible; it sharpens the project choice decision and it provides useful information for better project management.
Keywords: Social Cost Benefit Analysis, UNIDO Guidelines, India
JEL Classification: G20, G21, G28
Suggested Citation: Suggested Citation