Namrata K

Cost-benefit analysis
 Cost-benefit analysis (CBA) is the most
common mainstream approach to project
appraisal. Social and Environmental CBA
introduces the concepts of social value and/or
environmental sustainability into the balance
sheets of cost-benefit models. This is
particularly useful as projects, programmes or
policies have strong impact in terms of socio-
economic and environmental components.

 Itis a process of evaluating a project from the

point of view of total impact which the project
will have on the economy of nation.
 It is an analytical tool in decision making which enables a
systematic comparison to be made between the
estimated costs undertaking of project and the estimated
value and benefits which may arise from the operation of
such a project. Thus SCBA is a decision support tool that
measures and weighs various costs, impact or benefits to
be derived from the activity undertaken in a project.

 It compares project costs (capital and operating

expenses) with a broad range of (social) impacts, e.g.
travel time savings, travel costs, impacts on other modes,
climate, safety, and the environment. Also impacts on
property values and economic impacts can be analysed.

 Decision planners and economists have been using SCBA

for improving the quality of our business decisions in
development project areas like transport rail, highways,
waterways, airports, renewable energy, water
management and tourism.
 Thus it assess the desirability of a project i.e.
reflects the real value of a project to society
 Identification and measurement of costs and
benefits.
 It sees impact both positive (Social Benefit)
and negative (Social Cost)
 The effect of time in project appraisal i.e.
Risk and uncertainty.
 Presentation of results i.e. Investment
criteria and costs/ benefits of project and the
impact on stakeholders.

 Thus ,when we evaluate a project from the

view point of the society (or economy) as a
whole, it is called Social Cost Benefit
Analysis (SCBA) / Economic Analysis.
 It is developed by French engineer Jules
Dupuit(1844) in early stages of 20th
century it was adopted and reviewed by
A.C.Pigou working on welfare economics
pointed out the distinction between
financial costs / benefits as against social
cost / benefits.

 However the practical applications started

in 1930’s accepted by U.S Government in
1936 to analyze flood control projects.

 “A Project which may yield profit in

monetary terms may not bring
corresponding benefits to society.”
SCBA can be applied to both public and private investments

• Public Investment: SCBA is

important specially for the developing
countries where govt. plays a
significant role in the Economic
development

 • Private investment: Here, SCBA is

also important as the private
investments are to be approved by
various governmental and Quasi-
governmental agencies.
 Itis a sophisticated tool introduced for long term
decision making in capital projects appraisal as
projects cannot be looked upon as merely capital
investment proposition but rather as resource
investment proposition wherein the whole
community or nation is involved.

 This tool indicates weather benefits outweigh

costs of certain projects and allow for comparison
of different (variations of) measures.

Outputs indicate which measure has the

highest 'social yield', to what extent
goals are reached, which side effects
occur and to which parties costs and
benefits accrue.
 Objectives of SCBA
 Systematize the complex problem of
project planning.
 Identify and quantify tangible benefits/costs
 Devising a strategy for minimum costs and
maximum benefits.
 Feasibility of project by discounting costs &
benefits.

• Technique of decision making

whether to carry a specific
operation, selection of possible
alternatives and most beneficial
 Social Costs
Environmental damage
Ecological imbalance
Usage of HR, material, technology
Use of public utility services
Unemployment caused
Depletion of energy and global
warming
Usage of foreign exchange
Subsidies
 Social Benefits
Improve environmental aspects
Better quality of Products and
services provided
Employment creation
Taxes
Indirect employment
Earning foreign reserves
Development of backward areas
Health, education facility .
 Rationale of SCBA
Market imperfections in developing nations
(rationing, min wage rates, market
regulations)
Taxes & subsidies(transfer payments ignored)
Externalities (no monetary cost of delivered
social benefits eg: roads, electricity)
Savings(not concerned with national
savings/consumption pattern)
Distribution of income( private not concerned
with redistribution of profits)
Regulation on Foreign exchange
Merit wants & preferences

(eg: junk food is not in interest)

 Importance of SCBA
 It is a methodology developed for evaluating investment
projects from the point of view of the society (or
economy) as a whole.

 1. Choices of project in the context of total national

impact.
 2. Evaluation of total impact in terms of consistent and
appropriate set of objectives having bearing on nations
economy , objectives and on society.
 3. Correlation to national planning.
 4. The contribution of the project towards the fulfilment
of certain merit wants (self-sufficiency, employment etc)
 5. The impact of the project on the level of consumption,
savings, Foreign exchange earnings, income etc.
 6. The impact of the project on the distribution of income
in the society
 7. Economic benefits of the project in terms of shadow
prices
 Approaches to SCBA
• There are two principal approaches for Social Cost
Benefit Analysis.

 A. UNIDO Approach, and

 B. L-M Approach.
 C. Indian Planning Commission method
 A. UNIDO Approach: This approach is mainly based
on the publication of UNIDO (United Nation
Industrial Development Organization) named Guide
to Practical Project Appraisal in 1978.

 B. L-M Approach: I.M.D Little & J. A. Mirlees have

developed this approach for analysis of Social Cost-
Benefit in Manual of Industrial Project Analysis in
Developing Countries and Project Appraisal &
 Shadow prices are prices indicating the
intrinsic or true value of a factor or
product in the sense of equilibrium
prices. These prices may be different for
different time periods as well as
geographically separate areas and various
occupations (in the case of labour). They may
deviate from market prices.

 An example of a commodity requiring shadow

pricing might be the value of a park to the
social well-being of a community when
calculating the cost of a construction project.
By assigning a numerical dollar value to the
park, analysts can evaluate its value to a
community with regard to the costs of new
 Stages of Social Cost Benefit Analysis of a
Project

 Determine the financial profitability of the

project based on the market prices using capital
budgeting techniques like NPV, IRR, ARR etc.
 Converting market price into economic price using
shadow prices for the resources to arrive at the net
benefit of the project at economic process.
 Computing NPV and IRR at economic prices (ERR)
and adjustment of the net benefit for the projects
impact on savings and investment.
 Adjustment of the net benefit for the project’s
impact on income distribution, externalities, savings
and preferences.
 Adjustment of the net benefit for the goods
produced whose social values differ from their
economic values.