Social Cost Benefits Analysis in Project Management

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by StarAgile

June 28, 2021
Category Project Management


What Is Social Cost-Benefit Analysis In Project Management?

The primary goal of all businesses is to get maximum return on investments. Thus, the promoters prefer to assess commercial viability. However, some ventures may not give appealing results for business profitability, so such programs are executed because they have social consequences. These are infrastructure works, including roadway, rail, bridges, and certain other construction works, irrigation, electricity initiatives, etc., that have a major role in socio-economic concerns instead of merely commercial prosperity. Therefore, such initiatives are assessed for the net socio-economic advantages and cost control that is nothing other than the national survey of potential socio-economic costs.

So, SCBA, often known as Social Cost-Benefit Analysis in project management, has become a tool for effective financial evaluation. It is an approach to assessing infrastructure investments from a social (or economic) perspective. Get to know more from PMP training, which is the most prominent credential in project planning worldwide. 

What is a social cost-benefit analysis? It is a technique used for determining the value of money, specifically public investments, and it is becoming extremely popular. In addition, it helps in decision-making regarding the numerous parts of the organization and closely related project design programs. 

Social cost-benefit analysis in project management

Benefits of SCBA in Project Management

Social cost-benefit analysis in project management enables a complete comparison of several project options. This is not merely a financial concern. Even so, an SCBA recognizes non-financial consequences as well. For instance, consider the effects of increased accessibility on the environment, the economy, and other factors.

Social cost-benefit analysis helps governments to pursue innovative initiatives that benefit all, not just a selected few. Additionally, it aids in the entire development of an economy by assisting in decision-making that increases job, investment, savings, and consumption, increasing a country's economic activity.

Social cost advantages can be used for both investments. Thus, public investment is vital for a developing nation's economic progress.

1. Market Instability

A private corporation would evaluate a deal based on productivity and relevant market prices. However, the government must consider additional variables. Determining social costs in the event of market inefficiency and when market pricing cannot specify them. These hidden social costs are referred to as shadow prices.

2. Investments & Savings

A venture that results in increased savings is considered an investment in a market.

3. Income is distributed and redistributed

The initiative should not lead to revenue accumulation in the control of a few and the distribution of income.

4. Career and Living Standards

The impact of a program on employment and level of livelihood will also be considered. Therefore, the contract should result in a rise in employment and living standards.

5. Externalities

Externalities can be detrimental and advantageous to an enterprise. As a result, both impacts must be considered before approving a deal. For example, positive externalities can take the shape of technological advances, while negative externalities might take the form of rapid urbanization and ecological degradation.

6. Subsidy and Taxation

Taxation and subsidies are treated as expenses and revenue, respectively. However, taxation and subsidy are regarded as transfer payments for social cost-benefit analysis.

What is the scope of SCBA?

SCBA's purpose is to establish the financial benefits of each venture in perspective of shadow prices because initiatives impact people's savings and investments and the development's impact on the revenue sharing in society. Additionally, it is critical to consider how certain factors like employment and self-sufficiency will be achieved if the strategy is delivered.

SCBA can be used to engage both in the public and private sectors.

1. Public investment: conducting social cost analysis for economic infrastructure development is critical for the developing world. When the national government contributes to shaping that country's economy, it is essential to analyze the development's social impact.

2. Private investment: Evaluating the social impact of private development initiatives is vital as federal and quasi-government authorities authorize these initiatives.

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Different Approaches of SCBA in Project Management

By the late 1960s and early 1970s, two distinct approaches to SCBA had developed. These are as follows: 1. UNIDO's Approach 2. L-M Approach. If you're seeking an online program for the PMP certification exam that includes thousands of PMP practice questions, the PMP Course Online package is a good alternative. 

1. UNIDO's Approach

The UNIDO (United Nations Industrial Development Organization) planning methodology is as follows: The UNIDO method was reflected in the project assessment principles, establishing a systematic assessment for SCBA in developing economies. However, due to the severity and complexity of this task, concise and functional guidance for project evaluation in execution was required. Therefore, the fundamental principle of the method is the introduction in 1978 of the UNIDO Guidance to Practical Project Assessment.

The appraisal process is carried out on both planned and completed projects. It is a systematic method for determining the feasibility of a project or idea. It helps determine the feasibility before allocating funds to it. It frequently entails an evaluation of various scenarios, which is accomplished by applying any decision procedure or financial evaluation criteria.

The UNIDO project evaluation technique consists of five phases:

  1. Assessment of the proposal's market performance at market values.
  2. Determining the net benefit from a financial perspective.
  3. Adaptation to account for the development's implications on savings and investment.
  4. Adaptation to account for the program's impacts on wealth distribution.
  5. Modifying the program's results on merit products with a social worth is not equivalent to their economic importance.

2. L-M (Little-Mirrlees) Approach

I.M.D. Little and J.A. Mirlees pioneered this technique in social cost-benefit analysis. The essential principle of this method is that in developing countries, the social cost of using a product varies significantly from the amount charged for it. As a result, Shadow Prices are required to signify the actual worth of a resource to the community. The LM Strategy covers all aspects of SCBA in developing nations.

L-M Numeraire is a source of uncommitted public revenue at the moment. A project's resources – inputs and outputs – are categorized primarily as labor traded goods and non-traded interests. As a result, to determine the actual value of such sources, we must choose –

Shadow Wage Rate (SWR)

The SWR is used to calculate the potential cost of adding a person to the assignment. This requires us to ascertain -

  • The value of production is lost as a result of the usage of a unit of labor.
  • The expense of extra consumption owing to labor transfer

Traded Goods Shadow Pricing

The shadow pricing of traded items is simply the cost at the international market.

  • If a commodity is shipped, its FOB price serves as the shadow pricing;
  • When goods are imported, their shadow price is equal to their CIF price.

Non-traded Goods' Shadow Pricing

Non-traded commodities are those that do not access international trade. (– for example, land, construction, and logistics). As a result, they have no noticeable border pricing.

UNIDO vs L-M Approach

UNIDO's approach is widespread in the country, whereas the L-M system incorporates international issues as well. The UNIDO methodology prioritizes efficiency, cost reductions, and redistribution at various levels. The L-M methodology, on the other hand, views these features in parallel.

Conclusion

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