Social Cost Benefit Analysis: Applications and Need for Standard
Management Accountant, Vol. 29, No. 7, pp. 532-536, July 1993
Posted: 31 Jan 2005
On the basis of a study of various documents of SIDCs and National level DFLs and discussions with their officials one finds that SIDCs do not have any formal system of social cost-benefit analysis. However, the extent of employment generation, and development of ancillaries is estimated. Emphasised too are location of the project in a backward area, import substitution and export promotion.
The national DFIs do use discounted cash flow techniques in appraising SIDC projects costing more than repees three crores. They also carry out social cost benefit analysis on the basis of partial Little and Mirrless' methodology for the projects costing more than rupees five crores. The resources are divided into tradeables and non-tradeables.
The non-tradeables are converted at border price by using a standard conversion factor of 1.5. They compute economic rate of return, domestic resource cost, and effective rate of protection.
A widespread feeling is that the information requirements of UNIDO Guidelines and Little Mirrless Manual are so much that these cannot be applied in case of the developing economies. We do not agree with it. An operational methodology along with suitable compute programmes can be formulated for either of the two approaches, which can be used to appraise projects of DFIS.
Much of the data for social cost-benefit analysis can be collected from project appraisal notes and projects files of DFIs even as these are prepared at present. Some simple modification in the format of the Project Reports will provide for requirements of SCBA.
As an illustration following can be done for applying UNIDO Guidelines. The social cost-benefit analysis can be done in several stages. In the first stage, benefits and cost due to the project can be calculated at market prices to estimate the net aggregate consumption benefit. This assumes that the market prices reflect the social opportunity cost. The second stage involves the adjustment of the market prices of specific resources. This can be done wherever the market prices do not reflect the real contribution of the resources to the net aggregate consumption objective. At this stage, adjustment in the prices of three resources, namely foreign exchange, skilled labour and unskilled labour should be made. A sensitivity analytic framework is necessary. Thus, foreign exchange component of costs and benefits can be adjusted upwards by 20%, 25% and 30%. The cost of unskilled labour component can be adjusted downwards by 0.5, and 1.0, and that of skilled labour can adjusted upwards by 0.5, and 1.0. At the third stage the fact that the social value of a rupee of investment is more than the social value of rupee of consumption can be taken into account. To evaluate indirect future benefits and costs of the project, the net aggregate consumption benefits and costs of the project, the net aggregate consumption benefits and costs of the project, the net aggregate consumption benefits can be divided into two components: consumption and investment. The investment component can be adjusted for shadow prices of investment. The shadow price of investment is dependent upon several parameters which can be estimated in a sensitivity analytic manner. Thus, marginal propensity to save (0.20, 0.22, 0.24), marginal productivity of capital (0.12, 0.15, 0.18) and social rate of discount (0.10, 0.12, 0.15) will yield 27 values of shadow price of investment.
The projects can be evaluated in terms of the aggregate consumption benefit criterion. It takes into account the net present value of the investment calculated in the basis of social rate of discount, shadow prices of various resource flows such as foreign exchange, skilled labour, unskilled labour and investment, as suggested in the UNIDO Guidelines (1972). The switching values of social rate of discount can be computed in a sensitivity analytic framework. For the given sets of values above there will be 108 switching values of social rate of discount.
The other national objective is development of backward areas. The projects can be evaluated in terms of the contribution of redistribution benefits to the underdeveloped areas. The premium that in necessary on the redistribution benefits of projects to make them socially desirable can be computed in a sensitivity analytic framework. Needless to mention that such a kind of exercise will need extensive use of computers. A recent work on the lines suggested above has been done by Anand (1990) for set of projects of HSIDC.
SCBA as outlined above will require assumptions and derivations about a set of parameters, such as social rate of discount, shadow exchange rate, shadow wage rate, shadow price of investment, redistribution premium, etc. The accountants and economists must develop standards for these parameters so that there could be national uniformity regarding this important approach for decision making.
Keywords: Social Cost Benefit Analysis, India
JEL Classification: G20, G21, G28
Suggested Citation: Suggested Citation