Socio Economic Analysis

Class Notes on Socio-Economic Analysis
of a Venture
08-12-2015
- Anupam Kumar 2015 1
Socio – Economic Appraisal
Presented By:
Anupam Kumar
Reader,
School of Management Sciences,
Varanasi.
Email: anupamkr@gmail.com
1© Copyright 2013 Anupam Kumar
Project
Appraisal
Project
Appraisal
TechnologicalTechnological
LegalLegal
FinancialFinancial
EconomicEconomic
ManagerialManagerial
SocialSocial
CommercialCommercial
EcologicalEcological
OrganizationalOrganizational
Aspects of Project Appraisal
Economic Appraisal
• The Economic Appraisal takes
into account the various
economic aspects of a project
which directly or indirectly affects
the overall economy of the
location.
• Since the economic aspects shall
have far reaching effects on the
social structure, the economic
and social aspects may be viewed
together for project appraisals.
• The various aspects are:
– Incremental Output
– Enhanced Services
– Increase Employment
opportunities
– Large Revenues for
Government
– Higher overall earnings
– Improvement in the general
standard of living
– Increased National Income
– Distribution of Income to the
socially deprived sections of
society.
Social Appraisal
SOCIALASPECTSOCIALASPECT
Increased OutputIncreased Output
Enhanced ServicesEnhanced Services
Increased EmploymentIncreased Employment
Larger Government RevenueLarger Government Revenue
Higher EarningsHigher Earnings
Higher Standards of LivingHigher Standards of Living
Increased National IncomeIncreased National Income
Improved Income DistributionImproved Income Distribution
Appraisal Aspects
EVALUATIONASPECTSEVALUATIONASPECTS
Market ImperfectionsMarket Imperfections
ExternalitiesExternalities
Saving Impact & Its ValueSaving Impact & Its Value
Income Distribution ImpactIncome Distribution Impact
UNIDO ApproachUNIDO Approach
Little Mirrlees ApproachLittle Mirrlees Approach
Shadow PricesShadow Prices
SCBA by Financial InstitutionsSCBA by Financial Institutions
Rationale for Social Cost Benefit Analysis
Social Cost Benefit Analysis tends to evaluate projects from a social point of view. It
differs from the monetary cost and benefits of the project in the following terms.
• Market Imperfections
– Rationing
– Prescription of Minimum
Wages
– Foreign Exchange Regulations
• Externalities
– Environmental Pollution
– Water for areas around canals
• Taxes & Subsidies
• Concern for Savings
– Saving might be preferred
where the economy uses the
amount for investments
through banks
• Concern for Redistribution
– Percolation of economic
benefits up to the lowest
sections of society
• Merit Wants
– Issues like adult education,
healthcare for poor, etc

of a Venture
08-12-2015
Market Imperfection
• The market prices which are considered for calculation of the
monetary costs and benefits from any project reflects social
values and should be considered under perfect competition.
• Certain aspects in a developing country make the competition
imperfect. These are:
– Rationing
• The prices to the customers are sufficiently reduced to make certain
commodities available for the weaker sections.
– Prescription of Minimum wage rate
• Labour rate are place at higher than the market levels to ensure certain basic wages
– Foreign Exchange Regulations
• The actual rate of foreign exchange is monitored and kept different from the
prevailing market value of the same to support the local industry.
Externalities
• A project have create various external effects which
may or may not be beneficial for the society.
– The project may create roads up to a remote area and
may also result in better economic growth of the area.
– A large canal flowing from an area may tend to enhance
the water table level of the whole area it passes through.
– The project may create environmental pollution
SCBA Implications
• Taxes & Subsidies
– From a social point of view, taxes and subsidies are transfer payments and are
not relevant.
• Concern for Saving
– A developing country may need to invest more amount in the economy and
thus the individual savings in banks may actually create more money for the
industry to borrow.
• Concern for Redistribution
– The redistribution of income to the lowest or weakest sections of the
economy may be beneficial for the overall economy of the country.
• Merit Wants
– Concept of Merit Goods and Demerit Goods.
– Creation of an educational institution enabling creation of employment
opportunity is a merit want as the social implications are far larger than the
immediate financial implications
UNIDO Approach
• The UNIDO method of project appraisal involves 5 stages.
1. Calculation of the financial profitability of the project
measured at market price.
2. Obtaining the net benefit of the project measured in terms of
economic prices
3. Adjustment for the impact of the project on saving and
investment
4. Adjustment for the impact of the project on income
distribution
5. Adjustment for the impact of the project on merit goods and
demerit goods whose social value differs from the economic
values
Net Benefits in terms of Economic Prices
• Net benefits need to be calculated in terms of the
Economic Prices.
– Market Prices are not the economic prices due to various
market imperfections (discussed earlier).
– Economic (efficiency) Prices are also referred to as Shadow
Prices.
Shadow Prices
• To understand the Shadow Prices, the following need to be
considered
– Choice of Numeraire: Unit of account in which the value of inputs or
outputs is expressed.
– Concept of Tradability: If the good can be traded internationally
(through imports & exports), the international prices are the
opportunity cost to the country
– Sources of Shadow Prices:
• If impact of the project is consumption, shadow price is consumer
willingness to pay
• If impact of the project is production, shadow price is cost of production
• If impact of the project is international trade, shadow price is
international prices.

of a Venture
08-12-2015
Measurement of the Impact of
Saving & Distribution
• Value of Saving
– It is measured by the marginal productivity of the money saved if it is properly
reinvested.
• To measure the impact of distribution the society may be divided into
various groups like
– Project
– Other Private Business
– Government
– Workers
– Consumers
– External sectors.
• The measurement of gain or loss of any individual group within a society is
the difference between the shadow price and the market price.
Adjustment of Merit & Demerit Goods
• A Merit good is one for which the social value
exceeds the economic value.
– E.G.: Creation of Employment Opportunities
• A Demerit good is one for which the social
value is less than the economic value
Little Mirrlees Approach
This method is similar to the UNIDO approach in some manner
however maintaining certain distinctiveness.
• Similarities:
– Calculating account prices
particularly for foreign
exchange savings and
unskilled labour
– Considering the factor of
equity
– Use of Discounting Cash Flow
Analysis
• Distinctiveness
– Instead of measuring cost
benefit in terms of domestic
currency, L-M approach
measures it in international
currency.
– Measures Social Benefits in
terms of uncommitted social
income.
– This method tends to
consider efficiency, savings
and redistribution together
Shadow Prices in LM Approach
• Shadow Price for Non Traded Goods
– Defined in terms of marginal social cost and marginal social benefits
Shadow Price = 2/3 {Marginal Social Cost} + 1/3 {Marginal Social Benefit}
• Shadow Wage Rate
– Marginal productivity of labour
– Cost associated with urbanization
– Additional consumption as a result of the labour’s increased
consumption as he comes to the urban location and enjoys higher
income.
SCBA by Financial Institutions
• Social Cost Benefit Analysis by Financial Institutions can also
be seen as the Economic Appraisal of the project.
• Financial institutions take into consideration the following
aspects.
– Economic Rate of Return
– Effective Rate of Protection
– Domestic Resource Cost
Economic Rate of Return
• It is the interest rate at
which the cost and
benefit of a project
discounted over its life
is equal.
– It considers the price
controls, tax breaks, and
subsidies to calculate the
actual cost of the project
to the economy.
• How to calculate?
– Determine the cost of
investment.
– Determine the current value
of the investment.
• If the equity has been sold, it
would come under income.
• If the equity has not been
sold, it would be noted as
unrealized gains, which are
the gains the equity would
fetch if sold at that time.
Rate of Return = {(Current Value – Cost of Investment)/Cost of Investment} X 100

of a Venture
08-12-2015
Effective Rate of Protection
• This measures the degree of effective protection that a
product enjoys through its production cycle.
• The government imposes certain tariffs and subsidies on
imports or exports such the that overall margins of the
producers of the location gets increased.
• This increase of margins due the tariff rates is the effective
rate of protection.
Domestic Resource Cost
• It refers to the real opportunity cost in terms of
domestic resources.
• Domestic Resource Cost is defined as the ratio of
– the shadow value of its domestic net inputs to
– the shadow value of its traded net outputs.
For further details,…
Contact
Anupam Kumar
Reader,
School of Management Sciences,
Varanasi.
Email: anupamkr@gmail.com
Bibliography
• Desai, Vasant. Project Management. Third Revised Edition. Mumbai: Himalya Publishing House, 2008.
• Mishra, R.C. and Soota, Tarun. Modern Project Management. Second Edition. New Delhi: New Age
International Publishers, 2011.
• Badi, N.V. and Badi, R.V. Entrepreneurship. Delhi: Vrinda Publications (P) Ltd., 2005
• Desai, Vasant. Dynamics of Entrepreneurial Development and Management. Fourth Revised & Millennium
Edition. Mumbai: Himalaya Publishing House,2007.
• Nirjhar Abhishek Entrepreurship Development. First Edition. Lucknow: Word Press, 2011.
• Khanka, S.S. Entrepreneurial Development. New Delhi: S Chand & Company Ltd. 2010
• Kennedy, Dan S. How to make MILLIONS with Your IDEAS. Bangalore: Master Mind Books 2001.
• Sahay, A and Sharma, V. Entrepreneurship and New Venture Creation. First Edition. New Delhi: Excel
Books, 2008
• Hisrich, Rober D. and Peters, Michael P. Entrepreneurship. Fifth Edition. New Delhi: Tata Mc Graw Hill
Publishing Company Limited, 2002
• Acknowledgement for images & cliparts:
– rsachi.blogspot.com,projectcartoon.com; samyakonline.co.in;

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