Unit-3 SCBA

UNIT-III
SOCIAL COST BENEFIT ANALYSIS
INTRODUCTION
The economic analysis in project appraisal for evaluating investment projects an important
consideration is the analysis of social cost and benefits. In this analysis, the direct economic
benefits and cost of the project on distribution of income in society, level of savings and
investments in society, the contribution of the project towards fulfilment of certain merit-wants
(e.g. employment, social orders, self-sufficiency etc.) are analyzed.
Thus SCBA is also referred to as economic society benefit analysis, is a part of the economic
analysis in project appraisal. It is a methodology developed for evaluating investment projects
from the point of view of the society (or economy) as a whole.
SCBA is used primarily for evaluating public investments and has received increased emphasis
in recent years due to the growing importance of public investments especially in developing
countries where government play significant role in economic development. SCBA is also
relevant in major private investments, which require governmental approval since these
investments have bearing on national considerations.
Commercial and SCBA Computations: Distinction:

The basic difference between Commercial and SCBA computations in project appraisal lies
in the following:
Social Costs
Various social costs include mainly the following items:
 Goods and Materials Acquired

 Labor and services used:
 Work-related injuries and illness
 Occupational disease
 Social losses resulting from employment of children, women and young persons
 Fixed Assets Purchased
 Environmental Damage
 Public Service and Facilities Used
 Discrimination
 Other Costs:
•Depletion of animal resources
•Depletion of energy sources
•Costs of technological change
•Costs of unemployment and idle resources
•Monopoly costs
•Social costs of distribution
•Soil erosion and deforestation
•Social cost of transportation
•Disruption of family life
•Reduction In the life expectancy in hazardous industries
•Wastage of natural resources
•Economic disparity
•Adverse effect on social order
•Urbanization
Social Benefits
A project has many social benefits. These Benefits may be listed as follows:
 Product and Services provided

 Payments to the other elements of Society
 Creation of Employment Opportunities
 Additional Direct employee benefits
 Improvements in Environment
 Staff, Equipment and Facility Donated
 Other benefits
 Providing employment opportunities in those areas where unemployment or under
employment is prevalent.
 Creation of employment opportunities to weaker sections of the society e.g., schedule
castes, scheduled tribes etc. on a preferential basis.
 Postponing opportunities for the preservation of precious natural resources.
 Other Benefits: (contd)

 Programmes e.g. free day care Centres, special assistance to minority organizations etc.
 Establishment of projects in those areas which are comparatively less profitable but are
significant in the interest of the nation.
 Providing Good Township and better social life to the employees.
 Earning foreign exchange for the national welfare.
 Marketing efforts to enhance health of the workers.
 Rise in standards of living.
 Exploitation of natural resources.
 Equality.
 Decrease in poverty
 End of class system
 Population control
 Activities related to community welfare.
 Social welfare works.
STEPS IN SOCIAL COST BENEFIT ANALYSIS

There are five broad steps to be gone through in the process of social cost benefit analysis of a
project.
1- The project must be defined in clear terms. The time-frame of the project must be
specified.
2- The 2nd step in the application of technique is to list out all costs and benefits of the
project.
3- Similarly there are both explicit and implicit benefits to be listed
4- The fourth step in computing the SCBA of a project is to discount the future benefits
back to the present in order to determine the return on cost.
5- Last step in SCBA is to make decision in respect of inclusion or exclusion of a project in
the development programmes. Given the resources constraints, one way out is to list the
project in descending order and implement them one by one beginning with the first till
the investment resources are exhausted.
Social Discount Rate (SDR)

Costs and benefits occurring at different times must be discounted. Social Discount Rate is
defined as the rate at which future values in the economic analysis are discounted to the present.
It reflects the social view on how net future benefits should be valued against present ones. The
social discount rate is used to calculate the net present value (NPV) of a time stream of benefits
and costs of a project where its NPV is calculated as
NPV = Σt (Bt-Ct/(1 + i)t)
Bt is the expected gross benefit of the project at time t, C, is the expected gross cost of the project
at time I, and i is the social discount rate at time t. If the government chooses a high rate, the
future net benefits will discount mere. As a result, the project with a long life will be-less
beneficial than a project which yields a quick’s return. It is, therefore, advisable to choose a
relatively low discount rate.
Social discount rate reflects the market rate at perfect market condition however, it may differ
from the financial discount rate when the capital market is inefficient. For the 2007-2013 period,
the European Commission has suggested using two benchmark social discount rates: 5.5% for
the Cohesion countries and 3.5% for the others. These SDRs are based on estimates of long term
growth potentials and other parameters. SDRs that differ from the benchmarks may, however, be
justified on the basis of individual Member States’ or Candidate countries’ specific socio-
economic conditions. Once a social discount rate is set at country level by a planning authority, it
must be applied consistently to all projects belonging to the same country.
Application of SCBA
A project is also assessed from the social angle in addition to assessment of its commercial
viability.
1. Employment generation and Standard of living:
The impact of project on employment generation and standard of living is looked into. The deal
should lead to increase in employment and standard of living. A project with high employment
potential is considered highly desirable.
2. Foreign Exchange:
A project with potential to earn foreign exchange to the country or an import substitution project
which saves the country’s foreign exchange reserves is highly desirable and such kind of project
is considered for the development of the society and nation.
3. Social Cost-Benefit Analysis:
SCBA measures the social cost and benefit from different aspect. A project with net benefits to
the society over the costs to the society is preferred.
4. Capital-Output Ratio:
If the value of expected output in relation to the capital employed is high, the project is given
priority over the others.
5. Value Added Per Unit of Capital:
The amount invested in the project should generate the value addition to the capital employed by
earning surplus profits which can be used for further capital investments to contribute
development of the national economy.
6. Externalities: An externality is a positive or negative consequence of an economic
activity experienced by unrelated third parties. Pollution emitted by a factory that spoils the
surrounding environment and affects the health of nearby residents is an example of a negative
externality. The effect of a well-educated labor force on the productivity of a company is an
example of a positive externality.
7. Concern for savings: A rupee of benefits saved is deemed more valuable than a rupee of
benefit consumed. The concern of society for saving and investment is dully reflected in SCBA
wherein a higher a valuation is placed on saving and lower valuation is put on consumption.
8. Concern for Redistribution: The society is concern about the distribution of benefits across
different group. A rupee of benefit going to an economically poor section is considered more
valuable than a rupee of benefit going to an affluent section.
Strengths or Advantage of SCBA
The advantage of SCBA are as mentioned below:
 The ability to identify the projects that maximize the welfare of the society and nation.
 Use of shadow price to calculate real worth of the project.
 Measure of cost and benefits in terms of aggregate consumption.
 Use of discounted flow analysis to calculate net benefits.
 Use of domestic and international currency for valuation purposes.
 Focus on efficiency, savings and equity considerations through stage by stage analysis.
 The ability to objectively assess and quantify the purpose projects in relation to
community needs.
 Ability to rank and prioritize limited resources so that the maximum benefit is realized.
Disadvantage or Weakness of SCBA

The disadvantage or weakness of SCBA are as mentioned below:
1. Potential Inaccuracies in identifying and Quantifying Costs and Benefits
A cost benefit analysis requires that all costs and benefits be identified and appropriately
quantified. Unfortunately, human error often results in common cost benefit analysis errors such
as accidentally omitting certain costs and benefits due to the inability to forecast indirect causal
relationships. Additionally, the ambiguity and uncertainty involved in quantifying and assigning
a monetary value to intangible items leads to an inaccurate cost benefit analysis. These two
tendencies lead to inaccurate analyses, which can lead to increased risk and inefficient decision-
making.
2. Increased Subjectivity for Intangible Costs and Benefits

Another disadvantage of the cost benefit analysis is the amount of subjectivity involved when
identifying, quantifying, and estimating different costs and benefits. Since some costs and
benefits are non-monetary in nature, such as increases in customer and employee satisfaction,
they often require one to subjectively assign a monetary value for purposes of weighing the total
costs compared to overall financial benefits of a particular endeavor. This estimation and
forecasting is often based on past experiences and expectations, which can often be biased. These
subjective measures further result in an inaccurate and misleading cost benefit analysis.
3. Inaccurate Calculations of Present Value Resulting in Misleading Analyses

Since this evaluation method estimates the costs and benefits for a project over a period of time,
it is necessary to calculate the present value. This equalizes all present and future costs and
benefits by evaluating all items in terms of present-day values, which eliminates the need to
account for inflation or speculative financial gains. Unfortunately, this poses a significant
disadvantage because, even if one can accurately calculate the present value, there is no
guarantee that the discount rate used in the calculation is realistic. A cost benefit analysis
template has been developed to help reduce the likelihood of incorrectly calculating the present
value of costs and benefits.
4. A Cost Benefit Analysis Might Turn in to a Project Budget
Another disadvantage seen when utilizing a cost benefit analysis is the possibility that the
evaluative mechanism turns in to a proposed budget. When a project manager puts together a
cost benefit analysis and presents it to a leadership team, the leadership team might view the
expected costs as actual rather than estimation, which may lead to misappropriating costs and
setting unrealistic goals when approving and implementing a project budget. This can put a
project manager in an unfavorable situation when he or she attempts to control costs in order to
maintain the expected profit margin.
Legitimacy of Cost Benefit Analysis
It means the cost benefit analysis done in accordance with the law and policy formulated by the
government. Any project idea before it is implemented, feasibility study of the project is done
with respect to financial aspect, marketing aspect, environmental aspect etc. Besides, the positive
and negative impact of the project towards society and nation is also studied to identify various
social benefit and social cost associated with the project. In this regard, if the social cost of the
project exceed the social benefit of the project then the project will be considered to be failure
which will result into a big loss to the economy. Therefore, the project should be legitimate or
lawful i.e., it should be formulated and implemented according to the policy or act prepared by
the government officials. The project in accordance with the law is more likely to succeed.

Unit-3 SCBA

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UNIT-III

SOCIAL COST BENEFIT ANALYSIS

Commercial and SCBA Computations: Distinction:

 Goods and Materials Acquired

A project has many social benefits. These Benefits may be listed as follows:

 Product and Services provided

 Other Benefits: (contd)

STEPS IN SOCIAL COST BENEFIT ANALYSIS

Social Discount Rate (SDR)

NPV = Σt (Bt-Ct/(1 + i)t)

Disadvantage or Weakness of SCBA

2. Increased Subjectivity for Intangible Costs and Benefits

3. Inaccurate Calculations of Present Value Resulting in Misleading Analyses

Legitimacy of Cost Benefit Analysis

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