This document outlines the 5 stages of the UNIDO approach to social cost-benefit analysis of projects: 1) Adjustment for project impact on savings and investment by determining income gains/losses of groups and adjusting NPV. 2) Adjustment for impact on income distribution between rich/poor by calculating distribution weights to value impacts. 3) Further adjustment of NPV to account for projects involving merit/demerit goods using economic/social values. 4) Examples are provided for each stage's calculations to illustrate the adjustments made at each progressive stage of the analysis.

1. Project Appraisal
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2. Wednesday, September 27, 2023 2
Social Cost Benefit Analysis

3. UNIDO Approach (Contd.)
Stage – 3: Adjustment for the impact of the project on Savings & Investment
The purposes of this stage are to –
• determine the amount of income gained or lost because of the project by
different income groups (such as project other than business,
government, workers, customers etc.)
• evaluate the net impact of these gains and losses on savings
• measure the adjustment factor for savings and thus the adjusted values
for savings impact.
• adjust the impact on savings to the net present value calculated in stage
two.

4. UNIDO Approach – StageThree (Contd.)
• Measurement of Gain or Loss:
A project appoints 1,000 laborers at a wage rate of Tk. 150 per day. These
workers were ready to work for a daily wage ofTk. 100.
Therefore, the gain of the group of 1,000 workers from the project is {(150 -
100) × 1,000} =Tk. 50,000 per day.
• Evaluation of the Net Impact on Savings:
Net Savings Impact of a project =
Here , ΔYi = change in income of group i as a result of the project
MPSi = marginal propensity to save of group i

5. UNIDO Approach – StageThree (Contd.)
Assuming that the income gained or lost by 4 group is:
Worker (W)=Tk. 2,50,000, Consumer (C) =Tk. -7,00,000
Project (P)=Tk. 10,00,000, External Sector(E)=Tk.5,00,000
The marginal propensity to save of these four groups is:
MPSW = 0.04, MPSC= 0.25, MPSP = 0.4 & MPSE =0.3
Therefore, the net impact of the project on savings is:
{2,50,000×0.04+(-7,00,000)×0.25+10,00,000×0.4
+ 5,00,000×0.3}
= 1,00,000 – 1,75,000 + 4,00,000 + 1,50,000
=Tk. 4,75,000

6. UNIDO Approach – StageThree (Contd.)
• Adjustment Factor for Savings (AFs):
AFs measures the percentage by which the social value of investment of
one taka exceeds social value of consumption one taka.
Here,
MPC = Marginal Propensity to Consume
MPS = Marginal Propensity to Saving
MP Cap = Marginal Productivity of Capital
CRI = Consumption Rate of Interest (social discount rate)

7. UNIDO Approach – StageThree (Contd.)
• Assuming that MPC, MPS, MPcap & CRI of an economy is given:
MPC = 70%, MPS = 30%, MPcap = 25% and CRI = 10%
Therefore, adjustment factor for saving is:
• Adjusted value of the impact of the project on savings:
Adjusted value of saving = (Net impact on savings × AFs)
=Tk. 4,75,000 × 6
=Tk. 28,50,000.

8. UNIDO Approach – StageThree (Contd.)
• ThisTk. 28,50,000 is now added to the net present value of the project
calculated in stage -2 (Tk. 237.48 crore)
• Therefore, the adjusted net present value at this
stage will be Tk. ( 237.48 + .285) =Tk.237.765 crore.

9. UNIDO Approach (Contd.)
Stage – 4: Adjustment for the impact of the project on Income Distribution
• Government considers a project as an investment for the redistribution of
income in favor of economically weakens sections or economically
backward regions.
• This stage provides a value on the effects of a project on income
distribution between rich & poor and among regions.
• Distribution Adjustment Factor (Weight) is calculated and the impacts of
the project on income distribution have been valued by multiplying the
adjustment factor with the particular income of a group. This value will
then be added to the net present value re-calculated in stage three to
produce the social net present value of the project.

10. UNIDO Approach – Stage Four (Contd.)
Determination ofWeights:
• It there are only two groups in a society, poor and rich, the determination
of weight is just an iterative process between the analysts (at the bottom)
and the planners (at the top).This is called “bottom-up” approach.
• When more than two groups are involved, weights are calculated by the
elasticity of marginal utility of income. The marginal utility of income is the
weight attached to an income is:
Where, wi = weight of income at ci level
ci = level of income of group i
b = base level of income that has a weight of 1.00
n = elasticity of the marginal utility of income

11. UNIDO Approach – Stage Four (Contd.)
• Assuming that the worker group gains an income of Tk. 2,50,000 from a
project, the base level of income is Tk. 50,000 which has a weight if 1.00
and elasticity of marginal utility of income is 0.20.
Therefore, weight is:
• So, value of the impact of the project on income distribution to this group
is:
(Tk. 2,50,000 × 0.72) =Tk. 1,80,000.
• Now, this value will be added to the net present value adjusted in stage
three.
• Therefore, Adjusted NPV in this stage will be
Tk. (237.765+ 0.018) =Tk. 237.78 crore

12. UNIDO Approach (Contd.)
Stage – 5: Adjustment for Merit and Demerit Goods
• If there is no difference between the economic value of inputs and outputs
and the social value of those, the UNIDO approach for project evaluation
ends at stage four.
• In practical, there are some goods (merit goods), social value of which
exceed the economic value (e.g. oil, creation of employment etc.) and also
there are some goods (demerits goods), social value of which is less than
their economic value (e.g., cigarette, alcohol, high-grade cosmetics etc.)
• Adjustment to the net present value of stage 4 is required if there is any
difference between the social and economic value.

13. UNIDO Approach – Stage Five (Contd.)
• The steps of adjustment procedure are:
• Estimating the present economic value
• Calculating the adjustment factor
• Multiplying the economic value by the adjustment factor to obtain the
adjusted value
• Adding or subtracting the adjusted value to or from the net present
value of the project as calculated in stage four.

14. UNIDO Approach – Stage Five (Contd.)
An alcohol factory is under construction. The present economic value of the
project is Tk. 237.78 crore (Adjusted NPV up to stage 4). The output of the
project has no social value than its cost of production. Cost of production
is the 60 percent of the economic price.
Therefore, adjustment factor is:
So, the adjusted value = (Tk. 237.78 crore × - 0.40)
= -Tk. 95.11 crore
Therefore, the net present value of the project in terms of socially
acceptable consumption is
Tk.(237.78-95.11) = Tk. 142.67 crore.