Tejas Subrahmanya Associate Professor

What will be covered

y Project Definition y Characteristics of projects y Type of Projects y Project Life Cycle y Identification of Projects y Project Management meaning and scope y Project Appraisal Methods

What will be covered

y Technical Appraisal meaning and factors to be

considered y Market Appraisal market survey for forecasting future demand and sales, concept, terms and techniques involved y Financial Appraisal estimation of funds required, sources of funds, profitability analysis

What will be covered

y Capital: budgeting techniques, projected financial statements income, cash flow and balance sheet, guidelines for preparing project report y Project Ranking IRR, Pay back method, accounting rate of return, NPV, net terminal value method, multiple IRR y Social cost benefit analysis meaning, rationale, social appraisal of projects in developing countries, with special reference to India y Project Scheduling and control network analysis, Gantt Charts, PERT and CPM, Role of Project Manager, Project Audit y Contract Management Basic concepts, remedies for non performance of contract

Definition, types, characteristics, project life cycle and identification of projects

Project
y Project Management Institute Project Management

Book of Knowledge (PMBOK)

y A temporary endeavour undertaken to create a unique

product or service y Temporary every project has a definite end y Unique products and services are different in some distinguishing way for similar products or services

Project
y Turner y An endeavour in which human (or machine), material and financial resources are organized in a novel way to undertake a unique scope of work, of given specification, within constraints of cost and time, so as to deliver beneficial change defined by quantitative and qualitative objectives y Traditionally, construction and defense procurements considered as projects y Many companies structuring their work as projects and using project management techniques to ensure successful completion Software Development Companies

Projects
y Range in scope, size, cost and time from mega international projects to small domestic projects with low budget y Some examples y Career Development y Constructing a building, house or a yacht y Designing and testing a new prototype y Launch of a new product y Designing and implementing a new organizational structure y A R Rahman s World Tour y Going on a holiday

Projects
y Some distinctive features y A start and finish y A life cycle y Budget with an associated cash flow y Activities that are essentially unique and non-repetitive y Use of resources from different departments, requiring coordination y Single point of responsibility project manager y Fast tracking getting product to market faster than competitor y Team roles and relationships, subject to change, needs to be developed, defined and established (team building)

Project Management
y PMBOK y Application of knowledge, skills, tools and techniques to project activities in order to meet stakeholders needs and expectations from a project

Project Management
y APM (Association of Project Managers) y The most efficient way of introducing change, achieved by
y

Defining what has to be accomplished, generally in terms of cost, time and various technical and quality performance parameters Developing a plan to achieve these changes and then working this plan, ensuring that progress is maintained in line with these objectives Using appropriate project management techniques and tools to plan, monitor and maintain progress Employing persons skilled in project management including a project manager given single responsibility for introducing the change and accountable for successful completion

Benefits of Project Management

y Client y Project manager is single point of responsibility and company s representative to the client y Client finds dealing with one person, who is accountable, giving confidence that problem will be addressed and project completed on time y Single point of responsibility y Project manager being responsible, limits scope underlap and overlap y Estimating y Helps in estimating the overall cost of the project, forming the basis of the project plan

Benefits of Project Management

y CPM (Critical Path Method) y Calculates all activities start dates, finish dates and floats, forming a critical path with zero float, determining the duration of the project y Fast track y Bringing a new product to the market quicker than the competitor y Schedule bar chart y Communicates what is being done, where is the work happening, when are activities scheduled and who is responsible for the activity

Benefits of Project Management

y Project Integration y Coordinating and integrating the contribution of all project participants y Reporting interface y Integrated system for work breakdown structure for project reporting, and organization breakdown structure for corporate reporting y Response Time y Timely response on project performance for effective control, adjusting to the content and frequency of feedback to address needs of the project

Benefits of Project Management

y Trends y Monitoring the progress trends of time, cost and performance y Data Capture y Capturing data based on information supplied by the project manager y Procedures y Enables project manager to develop procedures and work instructions for specific project needs

Benefits of Project Management

y Project Office y Centre for project management excellence y Close out report y Performance of project forming the basis for future projects, learning from mistakes and strive for improvement y Marketing

On going exercise
y Identify a project that you would want to work on y E.g. construction of a building or setting up of a new

factory for a new product, etc. y Start preparing a report on this project

Types of Projects
y Small or big y Limited or comprehensive in nature and scope y Set up with purely indigenous or with help of bilateral or

multilateral technical assistance y According to National Income Criteria

y Economic activity of the country grouped into 13

development programs y Projects within these 13 programs further segregated to represent, say, industrial and commercial undertakings of the Central Government
y

E.g. manufacturing, construction and electricity

Types of Projects
y National Income Criteria y Bureau of Public Enterprise analyzed comparative performance of various groups under their purview and arrived at 21 groups y The 21 groups identified by BPE are y These groups are further disaggregated into individual enterprises

13 Development Programs
y Agriculture and Animal Husbandry y Forestry and Logging y Fishing y Mining and Quarrying y Manufacturing y Construction y Electricity y Gas and water Supply y Transport y Storage and Communication y Trade y Hotels and Restaurants y Banks and Insurance y Real Estate y Ownership of Dwellings and Business Services y Public Administration y Other Services

21 Groups of BPE
y y y y y y y y y y y

Steel Minerals and Metals Coal Power Petroleum Chemicals Fertilizers and Pharmaceuticals Heavy Engineering Medium and Light Engineering Transportation Equipment Consumer Goods

y y y y y y y y y y

Agro-based Products Textiles Trading and Marketing Transport Services Contracts and Construction Industrial Development and Technical Consultancy Development of Small Industries Tourist Services Financial Services Section 25 Companies

Types of Projects
y Input-Output Criteria y Grouped on the premise of availability of key inputs like workforce or raw materials y In developing countries, projects generate vast avenues of employment, thus being labour intensive y Also categorized on the basis of demand and supply y Size and complexity of a plant or the process can also form the basis for classifying a project y Financial investments can also be used to categorize projects as high investment, medium and low / small investment projects

Types of Projects
y Input-Output Criteria y Import substitution and foreign exchange earnings can be used to classify projects y Can also be classified on the basis of expansion plans or collaborative efforts y Former category includes projects which foresee an expansion to meet growth in demand, reduce cost, compete in the market, avoid stagnation and undertake new ventures of similar nature or a new product or technology y Latter category include projects funded internally using indigenous technology, or use foreign technology or are joint projects involving collaboration of various agencies

Assignment
y Project Life Cycle y What is a Project Life Cycle and how does it help in studying a project?

Project Identification
y Projects do not emerge y Impetus for a project can come from different agencies y Government y Credit and financial institutions y Non governmental organizations y People in general, includes organizations

Project Identification
y Government y Single most important agency for generating projects y Well conversant with development priorities and strategies y Commands resources y Access to all types of information leading to project ideas y Wherewithal for conducting surveys and analysis y Agencies include
y y y y y

Legislature Planning commission Ministries R&D institutions PSUs

Project Identification
y Government y Policy statements on the floor of the house by the Government culminates into project ideas y Plan documents are a fertile source for generating ideas y R&D institutions like CSIR, NCAER, ICMR, CFTRI among others have developed a number of project profiles for import substitution, export possibilities, new product introduction, controlling product price, among others

Project Identification
y Credit and Financing Institutions y Number of industrial financing institutions exist in India y E.g. IFCI, IDBI, ICICI, National Small Industries Corporation, EXIM Bank y These institutions have been set up for promoting industries y LIC, UTI, Nationalized Banks, MABARD and other state financial corporations, Small scale industrial development corporations, industrial development corporations extend medium to long term financing for industries y Conduct numerous studies to help identify bankable investment opportunities, adding to the pool of project ideas

Project Identification
y Non Governmental Organizations y Political parties, chambers of commerce and industry, technical consultancy organizations, inter institutional groups and international agencies y Look out for opportunities which can eventually be developed into projects

Project Identification
y People y Play an important role in generating new projects y Source was sparingly tapped y Recent years, increasing realization about the inevitable need for obtaining cross section of ideas through people s participation y People will get first hand information about their areas needs, problems and opportunities y Projects can be generated through a participatory approach, involving complex interactions with a variety of people during the development phase of a project

Project Identification
y After identifying project or venture ideas, they have to be screened and evaluated on basis of internal and external constraints y Important because it facilitates in determining whether y Investment opportunity is promising when an investment decision can be taken y Project concept justifies a detailed analysis by a feasibility study y Any aspect of the project is critical to its feasibility, like market survey y Information provided is adequate to decide whether the project is a viable enough for potential investors or not

Project Identification
y Three postulates y A project is feasible y A project is not feasible y Information provided is not adequate to take a decision y In case of the first two options, decisions are very quickly taken y In the case of the third option, investment decision can be deferred till additional data is provided and analyzed in proper perspective y Project objectives are arrived at, clearly, concisely and without any ambiguity, conveying the same meaning to all stakeholders of the project

Project Appraisal
y Is a crucial stage in the realm of projects y Project appraisal is an analysis of costs and benefits to

arrive at decisions, even though the project may not have been put into operation y Is a tool to examine whether in a given situation, would it be more realistic, reliable and reasonable to commit resources or not y Projects are appraised in relation to technical, economic, financial, commercial, organizational, managerial, social and environmental related factors

Project Appraisal
y If projects fulfill a major need or contributes to national /

sectoral goals, and is practically desirable, they are selected for implementation y All information put in a document, often called project appraisal, pre-investment report, project report, feasibility report, etc. y Attempts to consolidate the results of various exercises made at various levels, from different angles on various aspects of the project y Acts as an edifice for the implementation of the project in right earnest

Project Appraisal
y Through this report, investors, lending institutions, policy

making, advisory and regulatory agencies in the Government, beneficiaries and public at large can review the desirability of going ahead with the project y Helps various agencies join hands, pool scarce resources and ensure that the project is taken up for implementation within the constraints of time, cost and performance

Technical Analysis
y Deals with identifying, quantifying and evaluating human

and material resources required

y Project location y Raw materials y Manpower y Technology y Plant y Machinery

y Also focuses on the sources from where these resources

can be obtained in an integrated manner throughout the project life cycle

Technical Analysis
y Location y Has to be decided judiciously and objectively y Wrong site selection may cause various problems y Should not be finalized in a hurried and hasty manner y Group endeavour of generalists, professionals, technocrats, financial institutions, legal departments and government officials y More than one project site should be shortlisted, before finalizing on the best site y Most times, in utter disregard to technical considerations, sites are selected on social, economic or other national / regional / local considerations

Technical Analysis
y Location Planning Commission Guidelines y Availability and cost of land required for plant and township y Suitability of site for building purpose, seismic zone of the site, financial implications in design of structure on seismicity y Availability of water, power and other utilities y Extent of existing infrastructure, if available y Availability of trading network for supply of general store items y Availability of sufficient number of machine, welding, electrical repair shops, etc y State of local labour relations

Technical Analysis
y Size and cost of land y One of the main considerations y Availability of cheap or free land at a place where major infrastructural facilities are available y Land should not be too big nor too small y Should be worked out keeping in view the scope for likely diversification, ancillary units

Technical Analysis
y Raw Materials y Availability of raw materials, in adequate quantity, at the right place, right time and of optimum quality y Reduces transportation expenditure if raw materials are available close to the site y If market is close to the site, end products are likely to fetch good dividends y In case the project requires imported components, prevalent policies of the Government need to be ascertained so that there are no uncertainties in supply of raw materials

Technical Analysis
y Utilities y One of the prime considerations during site selection y Utilities should be available at regular intervals and at concessional rates, if possible y Utilities include
y

y y

Electricity supply interrupted supply of power, it should be possible to increase supply to meet expansion plans and rates should be constant over a period of time Water source of water, like wells, rivers, lakes, etc. and quantity of water available, charges for using water for various purposes Sanitary and sewage services Natural gas

Technical Analysis
y Manpower y Judiciously spell out manpower requirements and costs at the proposed site y Projects generate employment opportunities to a variety of skilled, semiskilled and unskilled labour y May not have a direct influence on the project, unless the project is being set up in a very remote area y Manpower requirements during various phases of the project have to be projected
y

Number of personnel, qualifications and experience, pay scales, sources of recruitment, likely resignations, retirements and other separations

Technical Analysis
y Transport Facility y Availability of adequate transport facility for goods and community residents essential for site selection y Has a direct bearing on operational costs y Rail-road facilities indicate that transport services are quite adequate at the site y Besides rail-road, highways are equally important and the cost of rail-road should be competitive with that of the highway y In case of highway, operating trucks across the country, restriction on their movements, state taxes collected, availability of suitably metalled roads have to be taken care of y Sea ports as well as air ports availability should be considered in case of emergency and urgent shipments to be sent within and outside the country

Technical Analysis
y Incentives and Concessions y Project selection depends on attitude of government, industry policy and incentives provided to entrepreneurs y Government policy
y

y y y

Set up new projects in backward or tribal areas which may have a bearing on balanced regional development Undertake new venture set up from beneficiaries point of view Preferential treatment to one particular sector of the economy Various incentives and concessions given by State and Central Governments

Incentives and Concessions

y Loans, capital subsidy and y y y y y y y

assistance Transport subsidy for transporting raw materials and finished goods between railheads Income tax exemptions extendable to the first 10 assessment years Purchase of machinery and ancillary on hire purchase basis Preferential treatment for import of raw materials, components Price preference on government purchases Sales and other tax exemptions Interrupted supply of power at concessional rates

y Concessional finance y Land acquisition and industrial y

y y y y

estates development on lease and subsidized rent basis Availability of water, with exemption from paying cess for five years from commencement of project Loan assistance to technical entrepreneurs Concessions to small scale units in terms of participation in equity up to 50% Investment subsidy to units located in backward areas Extending export support

Technical Analysis
y Environmental Considerations y Severe environmental problems with advancements in modernization and technological revolution y Concerns about environmental hazards should be a major scrutiny area for new proposals involving chemicals y Need to take care of environment related aspects like rehabilitation, resettlement and compensation for displaced community have to be considered in the cost of the project

Technical Analysis
y Climatic and Natural Hazard Considerations y Various climatic factors like temperature and humidity have to be considered y Some projects require cool and dry place, while others require to be set up in areas prone to natural calamities like earthquakes, floods, cyclones, etc

Technical Analysis
y Technological Aspects y Can include selection of process technology, cost and size of plant and equipment, foreign exchange requirements, construction schedules, layout designs, among others y Selection of appropriate technology is not an easy task y E F Schumacher technology should
y y y y y

Utilize local raw materials Utilize local manpower Cater to goods and services for basic needs Protect ecological balance Be harmonious with social and cultural conditions

y Selected in a way that running cost is low, is cheap and easy to

maintain

Technical Analysis
y Technical Aspects y Technology like any other commodity is highly priced and need oriented y Select indigenous technology as far as possible y If foreign technology to be resorted, adapt it, not adopt it y Investments for projects have to be analyzed with regard to size and cost of plant and equipment

Market Analysis
y Demand and supply analysis y One of the most essential dimensions for the success of a project y Makes an attempt to determine whether the proposed project would produce the goods and services at a time, price, place, quality and quantity for which there is a potential demand y Forecasts have to be made about existing and potential demand and supply of goods in a systematic and organized manner y Forecasting of demand and supply facilitates in reducing chances of committing errors

Market Analysis
y Demand and Supply Analysis y Lot of information to be obtained concerning buyers, consumers and sellers y Information gathered through well established techniques of research methods y Data obtained through secondary and primary sources y Secondary data provides clues to existing information on facilities, through reports, surveys, periodicals, guides

Market Analysis
y Market Surveys y Primary data collected through market surveys and sometimes, through personal observation y Surveys can be ad hoc or regular in nature y Can be classified as Sample Surveys, Consumer Panels and Retail Audits y Consumer panels and retail audits are regular surveys with a permanent sample of consumers and retailers, asked to provide required information

Market Analysis
y Sampling Scheme y Sampling scheme and size chosen taking care of constraints of time, resources, reliability and accuracy of data from various categories of respondents y Sampling techniques are used like quota sampling, random sampling, cluster sampling, systematic sampling and stratified sampling

Market Analysis
y Data Collection y Data to be collected from sources from a variety of methods, within the limitations of time, resource and efficiency y Mailed questionnaire, personal interviews and telephonic interviews can be conducted y Questionnaires and schedules carefully and cautiously developed for data analysis y Use open-ended and closed-ended questions to elicit views from respondents y Personal interviews conducted with the help of a structured schedule, partially structured schedule or an unstructured schedule

Using various techniques

y Within limitations of time, resources and efficiency, one or more techniques, in conjunction with each other to be made to carry out sample survey y Various techniques y Mailed questionnaire y Personal interviews y Telephone interviews y Various questionnaires and schedules carefully and cautiously developed for data analysis y Investigators use open ended and closed questions to elicit views from respondents y Personal interviews conducted with the help of pre-designed structured schedule, partially structured or unstructured

Data Analysis
y Data obtained through primary and secondary sources processed, analyzed and interpreted using a number of statistical tools and techniques y Correlations y Regressions y Econometric methods y Averages y Frequencies y Ratios y Analyzed data presented in the form of a report, supported by tables, charts, graphs, depicting trends and highlights of data gathered

Economic Analysis
y Determines viability of a project over a time period y Intended profit and loss used as basis for deciding the

selection and implementation of a proposed project y Carried out considering

y Capital cost y Working capital requirements y Operating cost estimates y Operating revenue estimates y Depreciation and taxes y profits

Economic Analysis
y Capital Costs y Costs incurred before the commencement of the commercial production y Categorized under five categories
y y y y y

Preliminary expenditure Land Plant Cost Equipment Cost Construction expenditure, including townships, engineering and project management

Economic Analysis
y Working Capital Requirements y Derived from data relating to
y y y y

Requirements of inventories Reserves of fuel or raw materials Spare parts Cash needs in production and marketing

Economic Analysis
y Operating Costs y Those that are incurred once the project commences production y Can be broken into direct and indirect costs y Direct Costs
y y y

Cost of raw materials Direct labour Overheads

Economic Analysis
y Operating Costs y Indirect Costs
y y y y y y y y y y

Cost incurred on supervisory and account staff Stores operation Technical staff Rentals Utility Consultant fees Interest on working capital Materials Transportation Sales Promotion and Advertising

Economic Analysis
y Operating Costs y Have to be worked out under two sets of formats
y y

Indicating cost on the basis of prices prevailing in the year Prices that are likely to be incurred at the time of actual commissioning of the project

Economic Analysis
y Operating Revenue y Worked out in the light of likely sales volume and price of end products, adding minimum margin to capital investment y Freely competitive climate, assured selling price has an important bearing on commercial profitability calculations

Economic Analysis
y Depreciation and Taxes y Adequate provision for depreciation and taxes to be made y Depreciation on plant and machinery, godowns, civil works, to be made as per norms fixed by Government y Taxes include
y y y

Sales tax Property tax Central State tax

y Have to be shown in current expenditure y Income tax to be deducted for determining net profits

Economic Analysis
y Profits y Factors affecting economic proposition of an investment project include
y y y y

Price fluctuations Inflation Government policy New technology

Financial Analysis
y One of the acid tests in the process of scientific

management, investment policy and decision making y Carried out on basis of solid data supplied by investor and consultant y Various tools employed in financial analysis y Funds need to be generated before employing financial analysis

Financial Analysis
y Funds procured through two sources y Equity y Debt y Equity y Share capital held by the owners and the public y Does not carry repayment obligation y Raised through issue of shares to public y Public organization entire share held by the Government

Financial Analysis
y Debt y Borrowings from institutional agencies, financial institutions, public y Generally in the form of debentures, bonds, deposits y Secured or unsecured in nature y Carry a repayment obligation after a fixed period or at regular intervals with interest y Government subsidies and grants facilitate promotion

and development of projects

Financial Analysis
y Expenditure can be divided into three phases y Pre-investment phase
y

Expenditure on conducting surveys, feasibility studies, technoeconomic surveys, consultancies, registration fee of company, cost of licenses, trade marks, patents Consumes maximum capital Responsible to provide a basic edifice of the project Capital expenditure non recurring in nature Purchase of land, buildings, civil works, machinery and equipment, ancillaries and contingencies

y Construction Phase
y y y y

Financial Analysis
y Three Phases of Expenditure y Operational Expenses
y y

Expenses are recurring in nature For raw materials, fuel, administrative and operative costs, maintenance, interest liability, depreciation

y Capital needs for projects grossly underestimated y Terms and conditions governing foreign exchange or foreign

loans not well spelt out y Most projects evaluated right from commissioning, irrespective of it having achieved rated capacity or not

Financial Analysis
y Sales and Distribution Costs y Expenses related to selling, distribution, manufacturing processes y Also includes general and administrative expenses y All costs, expenditure plans and overall likely

performance of project tabulated in

y Balance sheets y Income statements y Cash flow statements

Financial Analysis
y Financial analysts rely on these documents for

comparative appraisal y Constitute the financial profile, making it easier to evaluate operational, financial and investment strategy of a given project

Financial Analysis
y Balance Sheet y A snapshot of an enterprise ant any given point of time, listing assets as well as liabilities y Assets fixed, current, others like investments, cash, a/c receivables, inventories for sale, etc y Liabilities loans payable within a period of one year

Financial Analysis
y Income Statement y Statement of actual operations of an enterprise for a year y Gives a birds eye view of
y y y y

Total sales Cost of goods sold Operating and other expenses Gross / net profit and loss, before and after interest, depreciation and tax Also indicates growth and healthy development of an enterprise

Financial Analysis
y Cash Flow Statement y Depict changes accruing in the cash position of the enterprise in a year y Cash acts as fuel on which projects run and has to be kept ready all the time y Very useful to
y y y

Determine amount of cash needed to start the enterprise Plan for timing of loan funds Ensure project cash flows are met and cash will be available to meet payments

Financial Analysis
y Commercial Profitability y Intended direct benefits that a project is likely to achieve at the prevailing market prices y Includes investment profitability analysis and financial analysis y Investment profitability analysis aims at assessing the earning power of resources deployed for the project y Financial analysis focuses on the financial features for smooth implementation and operation of the project
y y y y y

Rate of Return Pay back period NPV IRR Financial Ratios

Report Design
y Project report design not an easy task y Requires constant attention of designers, well acquainted

with the organization, objectives, problem areas, responsibility and authority relationships of the receivers and senders y Care to be taken to ensure active involvement of all concerned y Everybody to be clear about need and usage of the report

Report Design
y Project reports to be suitably designed for various

departments and management levels y Preparing reports without giving weightage to expectations of various stakeholders considered suicidal for an organization y Can create problems like duplication, superfluous paper work, wastage of time as well as resources

Report Design
y M P Martin guidelines for preparing a project report y Effective report will effectively take care of y The use to be made of the report y Complexity / gravity of the problem y Need and temperament of the person for whom the report is being prepared

Project Report Design

y The following points to be considered while preparing a

report
y Project title
y y y y y

appropriate title with nature of contents y Report must clearly show

Period of time to which it relates Date on which it is prepared and submitted Units in which quantitative information is expressed Name of the person responsible for its preparation Name of the persons to whom it is submitted

Project Report Design

y Following points to be considered y Simplicity
y y y

General style, layout and wording as simple as possible Effectiveness dependent on achievements in this respect Using graphs instead of statistical arrays Should be purposeful, brief, consistent with pertinence and clarity Format should be one that can easily get the bird s eye view Produce precise and concise statements, leaving nothing to chance

y Brevity
y

y y

Project Report Design

y Accuracy y One of the prerequisites of any report y Is also the sheet anchor, the heart and foundation of any good report y Need to ensure the following considerations
y

Reports may not require a very high degree of accuracy; past performance used as a guide to the future Clarity improves if unnecessary details are avoided; e.g. correct figures up to paisa for large amounts Should not involve excessive cost of preparation nor achieved at the sacrifice of promptness in presentation

Project Report Design

y Timing and Frequency y Time reduced to a minimum y Depend on
y

y y y y

Total duration of the project; lifecycle is short, say one year, sufficient to have 20 25 reports In case of complex projects, frequent reporting may be required, a week s or fortnight s gap The frequency with which the recipient requires information Some data have a natural cycle from a report point of view; e.g. invoices Cost and time involved need to be considered Is also a must for projects that are running faultlessly, at predetermined intervals to make management aware of ongoing activities

Project Report Design

y Comparisons y Actual performance presented against a reference to assess actual performance y Actual performance against budget or to previous periods y One department against an other, or one factor against another y Must be true, fair and attention paid to significant points of difference

Project Report Design

y Coordination of all statistical information must have a

sound basis y Figures reported by different departments should be properly coordinated y Unrelated or uncoordinated figures lead to errors and misunderstandings, undermining confidence

Project Report Design

y Trustworthiness of Reports y Should repose the confidence of the receivers y Must be trustworthy and honest y No room for any misleading or conflicting reports to clients / beneficiaries vis--vis superiors about overall health and status of a project

Project Report Design

y Elimination of Redundant Reports y Regular submissions of statistical reports in standardized formats results in a progressively declining interest on the part of recipients y Advisable to investigate such reports for form content and timings y May be useful to discontinue the report altogether

Social Cost Benefit Analysis

y Also called SCBA y Methodology developed for evaluating investment projects from the society point of view as a whole y For evaluating public investments and received a lot of emphasis in 1960s and 1970s, specially in developing nations y Is also relevant to private investments, as many government and quasi-government agencies approve projects y Aids in evaluating projects within the planning framework spelling out national economic objectives and broad allocation of resources to various sectors

Social Cost Benefit Analysis

y Rationale for SCBA y Focus on social costs and benefits of a project y Differs from monetary costs and benefits because of
y y y y y y

Market imperfections Externalities Taxes and Subsidies Concern for savings Concern for redistribution Merit wants

Social Cost Benefit Analysis

y Market Imperfections y In developing countries, market imperfections exist on account of
y y y

Rationing Prescription of minimum wages Foreign exchange regulation

Social Cost Benefit Analysis

y Externalities y Projects may have external benefits y Can create infrastructural facilities like roads, rails, benefiting many neighbouring areas y While beneficial as far as SCBA is concerned, ignored in assessing monetary benefits because sponsors do not receive any monetary compensation y Similarly, projects can have harmful effects on the environment y While important consideration for SCBA, not important for sponsors as no monetary costs are involved

Social Cost Benefit Analysis

y Taxes and Subsidies y From private firms point of view, taxes are monetary costs and subsidies are monetary gains y From social point of view, taxes and subsidies are regarded as transfer payments and considered irrelevant

Social Cost Benefit Analysis

y Concern for Savings y Division of benefits between consumption and savings relevant; savings lead to investments y Benefits saved are deemed more valuable than benefits consumed y Concern for savings and investments are better reflected in SCBA where higher value is placed on savings and lower value on consumption

Social Cost Benefit Analysis

y Concern for Redistribution y Society concerned about distribution of benefits across different groups y Benefits accruing to economically weaker sections considered more valuable than benefits accruing the affluent section of society

Social Cost Benefit Analysis

y Merit Wants y Any goals and preferences believed by policy makers to be in the larger interest of society y Promoting an adult education program or a balanced nutrition program for school going children y Merit wants are important form a social point of view

Social Cost Benefit Analysis

y Approaches to SCBA y UNIDO Approach y Little Mirrlees Approach

SCBA
y UNIDO Approach y Released two books Guidelines for Project Evaluation and Guide to Practical Project Appraisal, in 1972 and 1978, respectively for focusing on SCBA in developing countries y Involves five stages
y

y y y

Calculating financial profitability of the project measured at market prices Obtaining net benefit of the project measured in terms of economic (efficiency) prices Adjustment for impact of project on savings and investment Adjustment for impact of project on income distribution Adjustment for impact of project on merit goods and demerit goods whose social values differ from their economic values

SCBA
y UNIDO Approach y Stage1 is the same as the financial evaluation discussed y Hence, the focus of SCBA will be on the remaining stages y Net Benefit in terms of Economic (Efficiency) Prices
y

y y

Market prices represent shadow prices only under conditions of perfect market economy Perfect market economy not fulfilled in developing countries Hence, need to develop shadow prices for measuring net economic benefit in terms of these prices

SCBA
y UNIDO Approach y Shadow Pricing basic concepts
y y y y y

Choice of Numraire Concept of Tradability Sources of Shadow Prices Taxes Consumer Willingness to Pay

SCBA UNIDO Approach

y Shadow Pricing basic issues y Choice of Numraire
y y y

One of the most important aspects of shadow pricing Is the unit of account in which the value of inputs or outputs is expressed Following questions to be answered to define numraire y Unit of currency used to express costs and benefits y Measure costs and benefits in current values or constant values y Should costs be evaluated on the basis of the present or future y How will the income from the project be used consumed or invested? y Reference of group against which the income of the project should be measured UNIDO specification Net present consumption in the hands of people at the base consumption level in the private sector in terms of constant price in domestic accounting rupees

SCBA UNIDO Approach

y Shadow Pricing y Concept of Tradability
y y

Key issue, whether a good is tradable or not If tradable, international price measure of opportunity cost to the country Tradable good is imported, possible to substitute with domestic production or vice versa Tradable good is exported, possible to substitute with domestic consumption or vice versa International price also referred to as the border price, representing real value of the good in terms of economic efficiency

SCBA UNIDO Approach

y Shadow Pricing Basic Issues y Sources of shadow prices three sources y A project uses and produces resources and may, for any given input or output
y y y

Increase or decrease the consumption in the economy Increase or decrease production in the economy Increase or decrease exports and imports

y If impact is on consumption in the economy, basis of shadow

pricing is Consumer Willingness to Pay y If impact is on production, basis of shadow pricing is Cost of Production y Impact is on international trade, basis of shadow pricing is foreign exchange value

SCBA UNIDO Approach

y Shadow Pricing Basic Issues y Taxes
y y

Taxes pose a lot of difficulties Include taxes if projects result in diversion of non-traded inputs, which are in fixed supply from other producers or are added to non-traded consumer goods When project augments domestic production by other producers, taxes excluded Fully traded goods, taxes are ignored

SCBA UNIDO Approach

y Shadow Pricing Basic Issues y Consumer willingness to pay