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    SOCIAL COST-BENEFIT ANALYSIS: A STUDY OF POWER PROJECTS

    Rishi Shankar Pathak

    Summer Intern, PMI-NTPC, Noida

    Keywords: Social Cost Benefit Analysis-UNIDO Approach, Coal Plant, Hydro Plant, Power

    Project

    Abstract:

    Capital is the limited resource in a developing economy like India and must be invested with

    utmost care. While a private individual investor is not expected to be an altruistic seeker of

    only national interest, he must be motivated by commercial return on his investment. It is also

    true that development financial institutions of country must examine social cost benefit

    implication of their investment decisions. Social cost benefit analysis is an appraisal tool to

    evaluate a project from the view point of the society as a whole. It refers to the analysis of thecosts and/or the benefits that a society may have to bear and/or get from the proposed project.

    It is a study of feasibility of a project in terms of its total economic cost and total economic

    benefits. The paper analyses the application of Social Cost Benefit Analysis using UNIDO

    approach on thermal coal based power plant and a hydro power plant and tries to highlight

    the social costs and benefits associated with each project. It also focuses on the comparative

    analysis of the coal and hydro projects. The paper suggests the key steps that can be taken to

    make the projects more lucrative.

    1. Introduction

    Social Cost Benefit Analysis (SCBA) is also referred as Economic Analysis (EA). SCBA or

    EA is a feasibility study of a project from the viewpoint of a society to evaluate whether a

    proposed project will add benefit or cost to the society. That is, it is an approach that is

    concerned to judge the economic and social viability of a project especially public

    expenditure project or donor-led programs.

    SCBA model is based on the theory of welfare economics, according to which the welfare of

    a society depends on the aggregate individual utility levels of all members of that society.

    SCBA had, at first, used for evaluating public investments in the decade of 1960s and 1970s.

    In those decades, this model had got a good emphasis; because public investments in many

    countries, especially in developing countries, were immensely increased. Nowadays, SCBAis also becoming important for private project or investment as more often there is a

    possibility for this kind of projects to bring adverse impact to the society.

    In the context of planned economies, SCBA aids in evaluating individual projects within the

    planning framework which spells out national economic objectives and broad allocation of

    resources to various sectors. In other words, SCBA is concerned with tactical decision

    making within the framework of broad strategic choices defined by planning at the macro

    level. The perspectives and parameters provided by the macro level plans serve as the basis of

    SCBA which is a tool for analyzing and appraising individual projects.

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    As an aid to planning, decision-making, evaluation and control, the social cost benefit

    analysis provides a scientific and quantitative base for the appraisal of projects with a view to

    determine whether the total social benefits of a project justify the total social costs.

    The need for a scientific social cost benefit analysis arises because of the fact that the criteria

    used for measuring commercial or trading profitability that normally guide capital budgeting

    in the private sector investing projects may not be appropriate for public or social (macro)projects investment decisions. Private investors are most interested in minimizing private

    costs and hence they take into consideration only those elements or costs which directly

    affect their private earnings i.e. the private expenses and private benefits. Both private

    earnings and private costs are valued at the prevailing market prices for al accounting

    purpose. But the existence of externalities i.e. the social costs and social benefits introduces

    bias in the market price based investment decisions.

    To make a scientific and systematic social cost benefit analysis of projects, it is necessary to

    weigh each projects advantages (benefits) and disadvantages (costs) to the society or nation

    as a whole. Thereafter, various projects under consideration are ranked on the basis of social

    cost benefit ratio and the final decision about the selection of a project is taken based on thescore in ranking. In other words, a social costs benefit analysis is a vital tool for comparing

    economic alternatives.

    1.1 CBA vs. SCBA

    In general, any project appraisal must distinguish between three components: Financial,

    Economic, and Social Appraisal.

    a. Financial Appraisal examines the financial flows generated by the project itself,

    and the direct costs of the project measured at market prices.

    b. Economic Appraisal adjusts costs and benefits to take account of costs and

    benefits to the economy at large, including the indirect effects of the project that are

    not captured by the price mechanism.

    c. Social Appraisal examines the distributional consequences of project choices, both

    intertemporal concerns (i.e. effects over a period of time, today versus the future); and

    also intratemporal concerns (e.g. concerns between groups in society at a specific

    point in time).

    Cost Benefit Analysis can only perform the financial appraisal wholly for evaluating a

    project. In some instances, it can adjust costs and benefits to the economy except

    environmental externalities. But in case of social appraisal, it is fully incapable to do so. On

    the other hand, SCBA is able to perform all of these three appraisals to judge a project.

    CBA determines all costs and benefits of a project in terms of market price. But in imperfect

    market, market price can not reflect social value. Thats why; SCBA quantifies all social cost

    and benefits of a project at shadow price instead of market price. In addition, typically CBA

    uses consumer surplus to compute benefits and costs. But SCBA determine those in terms of

    either consumption or uncommitted social income. In fine, it can be said that CBA often

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    produces inferior results in terms of both environmental protection and overall social welfare

    in comparison to SCBA.

    1.2 Rationale for SCBA

    In SCBA the focus is on the social costs and benefits of the project. These often tend to differfrom the monetary costs and benefits of the project. The principal sources of discrepancy are:

    Market Imperfection

    Taxes and Subsidies

    Concern for Savings

    Concern for redistribution

    Merit Wants

    Market Imperfections

    Market prices, which form the basis for computing the monetary costs and benefits

    from the point of view of the project sponsor reflect social values only countries.When imperfections exist, market prices do not reflect social values.

    The common market imperfections found in developing countries are:

    (i) Rationing,

    (ii) Prescription of minimum wage rates, and

    (iii) Foreign exchange regulation.

    Rationing of a commodity means control over its price and distribution. The price

    paid to labor is usually more than what the wages would be in a competitive labor

    market free from such wage legislations. The official rate of foreign exchange in

    developing countries, which exercise close regulation over foreign exchange, is

    typically less than the rate that would prevail in the absence of exchange regulations.

    Taxes Subsidies

    From the private point of view, taxes are definite monetary costs and subsidies are

    definite monetary gains. From the social point of view, however, taxes and subsidies

    are generally regarded as transfer payments and hence considered irrevalant.

    Concern for Savings

    Unconcerned about how its benefits are divided between consumption and savings, a

    private firm does not put differential valuation on savings and consumption and

    savings (which leads to investment) is relevant, particularly in the capital-scarce

    developing countries. A Rs of benefits saved is deemed more valuable than a Rs of

    benefits consumed. The concern of the society for savings and investment is duly

    reflected in SCBA where in a higher valuation is placed on savings and a lower

    valuation is put on consumption.

    Concern for Redistribution

    A private firm does not bother how its benefits are distributed across various groupsin the society. The society, however, is concerned about the distribution of benefits

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    across different groups. A Rs of benefit going to an economically poor section is

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

    Merit Wants

    Goals and preferences not expressed in the market place, but believed by policymakers to be in the larger interest, may be referred to as merit wants. For example, the

    government may prefer to promote an adult education programme or a balanced

    nutrition programme for school-going children even though these are not sought by

    consumers in the market place. While merit wants are not relevant from the private

    point of view, they are important from the social point of view.

    1.3 Objectives of SCBA

    The objective o