SOCIAL COST-BENEFIT ANALYSIS: A STUDY OF POWER PROJECTS Rishi Shankar Pathak Summer Intern, PMI-NTPC, Noida
Keywords: Social Cost Benefit Analysis-UNIDO Approach, Coal Plant, Hydro Plant, Power Project Abstract: Capital is the limited resource in a developing economy like India and must be invested with utmost care. While a private individual investor is not expected to be an altruistic seeker of only national interest, he must be motivated by commercial return on his investment. It is also true that development financial institutions of country must examine social cost benefit implication of their investment decisions. Social cost benefit analysis is an appraisal tool to evaluate a project from the view point of the society as a whole. It refers to the analysis of the costs and/or the benefits that a society may have to bear and/or get from the proposed project. It is a study of feasibility of a project in terms of its total economic cost and total economic benefits. The paper analyses the application of Social Cost Benefit Analysis using UNIDO approach on thermal coal based power plant and a hydro power plant and tries to highlight the social costs and benefits associated with each project. It also focuses on the comparative analysis of the coal and hydro projects. The paper suggests the key steps that can be taken to make the projects more lucrative.
1. Introduction Social Cost Benefit Analysis (SCBA) is also referred as Economic Analysis (EA). SCBA or EA is a feasibility study of a project from the viewpoint of a society to evaluate whether a proposed project will add benefit or cost to the society. That is, it is an approach that is concerned to judge the economic and social viability of a project especially public expenditure project or donor-led programs. SCBA model is based on the theory of welfare economics, according to which the welfare of a society depends on the aggregate individual utility levels of all members of that society. SCBA had, at first, used for evaluating public investments in the decade of 1960s and 1970s. In those decades, this model had got a good emphasis; because public investments in many countries, especially in developing countries, were immensely increased. Nowadays, SCBA is also becoming important for private project or investment as more often there is a possibility for this kind of projects to bring adverse impact to the society. In the context of planned economies, SCBA aids in evaluating individual projects within the planning framework which spells out national economic objectives and broad allocation of resources to various sectors. In other words, SCBA is concerned with tactical decision making within the framework of broad strategic choices defined by planning at the macro level. The perspectives and parameters provided by the macro level plans serve as the basis of SCBA which is a tool for analyzing and appraising individual projects.
As an aid to planning, decision-making, evaluation and control, the social cost benefit analysis provides a scientific and quantitative base for the appraisal of projects with a view to determine whether the total social benefits of a project justify the total social costs. The need for a scientific social cost benefit analysis arises because of the fact that the criteria used for measuring commercial or trading profitability that normally guide capital budgeting in the private sector investing projects may not be appropriate for public or social (macro) projects investment decisions. Private investors are most interested in minimizing private costs and hence they take into consideration only those elements or costs which directly affect their private earnings i.e. the private expenses and private benefits. Both private earnings and private costs are valued at the prevailing market prices for al accounting purpose. But the existence of externalities i.e. the social costs and social benefits introduces bias in the market price based investment decisions. To make a scientific and systematic social cost benefit analysis of projects, it is necessary to weigh each project’s advantages (benefits) and disadvantages (costs) to the society or nation as a whole. Thereafter, various projects under consideration are ranked on the basis of social cost benefit ratio and the final decision about the selection of a project is taken based on the score in ranking. In other words, a social costs benefit analysis is a vital tool for comparing economic alternatives.
1.1 CBA vs. SCBA In general, any project appraisal must distinguish between three components: Financial, Economic, and Social Appraisal. a. Financial Appraisal examines the financial flows generated by the project itself, and the direct costs of the project measured at market prices. b. Economic Appraisal adjusts costs and benefits to take account of costs and benefits to the economy at large, including the indirect effects of the project that are not captured by the price mechanism. c. Social Appraisal examines the distributional consequences of project choices, both intertemporal concerns (i.e. effects over a period of time, today versus the future); and also intratemporal concerns (e.g. concerns between groups in society at a specific point in time). Cost Benefit Analysis can only perform the financial appraisal wholly for evaluating a project. In some instances, it can adjust costs and benefits to the economy except environmental externalities. But in case of social appraisal, it is fully incapable to do so. On the other hand, SCBA is able to perform all of these three appraisals to judge a project. CBA determines all costs and benefits of a project in terms of market price. But in imperfect market, market price can not reflect social value. That’s why; SCBA quantifies all social cost and benefits of a project at shadow price instead of market price. In addition, typically CBA uses consumer surplus to compute benefits and costs. But SCBA determine those in terms of either consumption or uncommitted social income. In fine, it can be said that CBA often
produces inferior results in terms of both environmental protection and overall social welfare in comparison to SCBA. 1.2 Rationale for SCBA In SCBA the focus is on the social costs and benefits of the project. These often tend to differ from the monetary costs and benefits of the project. The principal sources of discrepancy are: • Market Imperfection • Taxes and Subsidies • Concern for Savings • Concern for redistribution • Merit Wants
Market Imperfections
Market prices, which form the basis for computing the monetary costs and benefits from the point of view of the project sponsor reflect social values only countries. When imperfections exist, market prices do not reflect social values. The common market imperfections found in developing countries are: (i) Rationing, (ii) Prescription of minimum wage rates, and (iii) Foreign exchange regulation. Rationing of a commodity means control over its price and distribution. The price paid to labor is usually more than what the wages would be in a competitive labor market free from such wage legislations. The official rate of foreign exchange in developing countries, which exercise close regulation over foreign exchange, is typically less than the rate that would prevail in the absence of exchange regulations.
Taxes Subsidies
From the private point of view, taxes are definite monetary costs and subsidies are definite monetary gains. From the social point of view, however, taxes and subsidies are generally regarded as transfer payments and hence considered irrevalant.
Concern for Savings
Unconcerned about how its benefits are divided between consumption and savings, a private firm does not put differential valuation on savings and consumption and savings (which leads to investment) is relevant, particularly in the capital-scarce developing countries. A Rs of benefits saved is deemed more valuable than a Rs of benefits consumed. The concern of the society for savings and investment is duly reflected in SCBA where in a higher valuation is placed on savings and a lower valuation is put on consumption.
Concern for Redistribution
A private firm does not bother how its benefits are distributed across various groups in the society. The society, however, is concerned about the distribution of benefits
across different groups. A Rs of benefit going to an economically poor section is considered more valuable than a Rs of benefit going to an affluent section.
Merit Wants
Goals and preferences not expressed in the market place, but believed by policy makers to be in the larger interest, may be referred to as merit wants. For example, the government may prefer to promote an adult education programme or a balanced nutrition programme for school-going children even though these are not sought by consumers in the market place. While merit wants are not relevant from the private point of view, they are important from the social point of view. 1.3 Objectives of SCBA The objective of social cost-benefit analysis is, in its widest sense, to secure and achieve the value of money in economic life by simply evaluating the costs and benefits of alternative economic choices and selecting an alternative which offers the largest net benefit. Therefore, it can be said that the main focus of Social Cost Benefit Analysis i to determine: 1. Economic benefits of the project in terms of a price (shadow price) that reflect social value; 2. The impact of the project on the level of savings and investments in the society; 3. The impact of the project on the distribution of income in the society; 4. The contribution of the project towards the fulfilment of certain merit wants (selfsufficiency, employment etc).
2. Methodology The UNIDO Approach for Social Cost Benefit Analysis as prescribed by United Nation Industrial Development Organization (UNIDO) was applied to a thermal coal based power plant and a hydro plant. 2.1
UNIDO APPROACH
The United Nation Industrial Development Organization (UNIDO) and the Centre for Organization of Economic Co-operation and Development (COECD) have come with useful publications dealing with the problem of measuring social costs and social benefits. It may be noted, in this context, that the actual cost or revenues from the goods and/or services to the organization do not necessarily reflect the monetary measurement of the cost ant or benefit to the society. This is because these figures are grossly distorted on account of restriction and controls imposed by the government. Hence a different yardstick has to be used for evaluating a particular in terms of cost and sacrifice on the part of the society. Such payments are easily valued at opportunity cost or shadow prices to judge their real impact in terms of cost to society for the purpose of social cost benefit evaluation. UNIDO Approach is a five stage methodology: 1. Calculation of financial profitability measured at market prices. 2. Obtaining the net benefit of the project measured in terms of economic prices.
3. Adjustment for the impact of the project on savings 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 2.1.1 Calculation of Financial Profitability Measured at Market Prices A good technical and financial analysis must be done before a meaningful economic evaluation can be made. For this reason, financial profitability is a prerequisite in all cases. Financial profitability produces an estimate of the project’s financial profit or the net present value of the project when all inputs and outputs are measured at market prices. The first step in stage one is to complete standard tables of income statement, balance-sheet and cash-flow. The financial income statement is the central table in this analysis as it is used to record the inputs and outputs of the project. Cash flow statement is also important here as the financial income statement only shows the annual profit and disguise investment. The net cash flow is derived from the financial income statement by standard accounting procedures and is equal to the gross cash flow (operating profit before interest and taxes plus allowances for depreciation) minus capital investments. 2.1.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices Stage two of the UNIDO approach is concerned with the determination of the net benefit of the project in terms of economic prices, also referred to as shadow prices. Market prices represent shadow prices only under conditions of perfect markets which are almost invariably not fulfilled in developing countries. Hence, there is a need for developing shadow prices and measuring net economic benefit in terms of these prices. 2.1.3 Adjustment for the Impact of the Project on Savings and Investment Most of the developing countries face scarcity of capital. Hence, the governments of these countries are concerned about the impact of a project on savings and its value thereof. Stage three of the UNIDO method, concerned with this, seeks to answer the following question: • Given the income distribution impact of the project what would be its effects on savings? • What is the value of such savings to the society? Impact on Savings The saving impact of a project is equal to ∑ Δ Yi MPSi Where Δ Yi is the change in income of group i as a result of the project, and MPSi is the marginal propensity to save of group i. 2.1.4 Adjustment for the Impact of the Project on Income Distribution Many governments regard redistribution in favour of economically weaker sections or economically backward regions as a socially desirable objective. Due to practical difficulties in pursuing the objective of redistribution entirely through the tax, subsidy, and transfer measures of the government, investment projects are also considered as investments for income redistribution and their contribution toward this goal is considered in their evaluation
this calls for suitably weighing the net gain or loss by each group, measured earlier, to reflect the relative value of income for different groups and summing them. Determination of Weights: If 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 Wi = (b/ci)n Where, wi = weight of income at ci level c i = 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 2.1.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods 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. 3. Application The UNIDO Approach was applied to a thermal coal based power plant and a hydro plant. 3.1 Application of UNIDO Approach on Coal Plant 3.1.1 Calculation of Financial Profitability Measured at Market Prices Table 3.1.1 presents the estimates of revenue collected by the project during its lifetime. Table 3.1.1: Estimates of Financial Flows of Revenue Earned by the project During its Lifetime Year 2017 2018 2019 2020 2021 2022 2023 2024 2025
Cost
Year
Cost
Year
1093.95 1649.93 1656.66 1665.44 1676.39 1689.65 1705.37 1723.72 1744.85
2026 2027 2028 2029 2030 2031 2032 2033 2034
1768.96 1796.22 1827.90 1870.50 1803.04 1870.30 1941.87 2019.43 2100.49
2035 2036 2037 2038 2039 2040 2041 2042
Cost (Rs. Crores) 2186.75 2278.55 2376.25 2482.33 2593.00 2710.77 2836.12 989.84
The calculation of NPV at market prices for the Thermal based Coal Power Plant turned out to be Rs. -309.10 crores, therefore as per financial evaluation of the project since NPV is negative, project should not be undertaken. 3.1.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices 3.1.2.1 Identification of Economic (Social) Benefits and Costs
Social Benefits: The major benefit of setting up this Thermal Power Plant would be the establishment of fly ash bricks manufacturing that will lead to creation of employment opportunities for unskilled and skilled workers. Also, after the ban on manufacturing of Red Bricks as per the mandate of Hon’ble Supreme Court, fly ash bricks will be used for construction purpose going forward. The use of fly ash in manufacturing of fly ash bricks would lead to reduction in waste disposal costs and environmental costs as plant residue can be reused. The total project workforce is estimated to peak at 1,700 during the 5-year
construction period and additional employment of about 100 workers per fly ash manufacturing plant will be generated. This labor will be otherwise unemployed or under employed in the Indian economy. The project provides employment benefits to the skilled labor during its operational period. Revenue earned by the government in the form of taxes. By indulging in coal washing process, the ash content in Indian coal can be reduced significantly, which will lead to reduction in residue/ash produced in a plant. Thus, the cost of electricity would increase marginally but there will be huge environmental benefits. Also, currently only 4% of coal in India is washed by Coal India.
Social Costs: Health costs incurred to workers of about Rs. 10 crores annually. Increase in air pollution by increased emissions of carbon dioxide, sulfur dioxide, nitrogen oxides, particulate matter (PM), and heavy metals leading to smog, acid rain, toxins in the environment, and numerous respiratory, cardiovascular and cerebrovascular effects. Coal sludge, also known as slurry, is the liquid coal waste generated by washing coal. It is typically disposed of at impoundments located near coal mines, but in some cases it is directly injected into abandoned underground mines. Since coal
sludge contains toxins, leaks or spills can endanger underground and surface waters. Loss or degradation of groundwater - Since coal seams are often serve as underground aquifers, removal of coal beds may result in drastic changes in hydrology after mining has been completed. Increased costs of power to end consumers due to rising fuel and coal costs. Table 3.1.2 shows the Operation and Maintenance (O&M) cost of the project in terms of shadow (economic) prices. Table 3.1.2: Estimates of Financial Flows of Operation and Maintenance (O&M) Expenditures in terms of Shadow Prices (During its Life Time) Year 2017 2018 2019 2020 2021 2022 2023 2024 2025
Cost
Year
Cost
Year
Cost (Rs. Crores)
76.34 121.06 127.98 135.31 143.04 151.23 159.88 169.02 178.69
2026 2027 2028 2029 2030 2031 2032 2033 2034
188.91 199.72 212.08 224.16 236.93 250.43 264.70 281.04 296.99
2035 2036 2037 2038 2039 2040 2041 2042
313.85 331.67 350.52 372.33 393.39 415.66 439.20 154.70
Table 3.1.3 presents the estimates of revenue collected by the project during its lifetime after taking into account net social benefits and costs. Table 3.1.3: Estimates of Financial Flows of Revenue Earned by the project During its Lifetime after taking into account Net Social Benefits and Costs Year 2017 2018 2019 2020 2021 2022 2023 2024 2025
Cost
Year
Cost
Year
1065.32 1635.98 1639.65 1645.21 1652.74 1662.35 1674.18 1688.38 1705.09
2026 2027 2028 2029 2030 2031 2032 2033 2034
1724.47 1746.71 1773.02 1809.91 1736.35 1797.11 1861.75 1931.93 2005.10
2035 2036 2037 2038 2039 2040 2041 2042
Cost (Rs. Crores) 2082.97 2165.81 2253.96 2349.86 2449.67 2555.87 2668.88 950.59
The NPV calculation was done after doing below mentioned adjustments for social costs and social benefits: The health costs of workers amounting to Rs. 8 crores will be incurred during the construction phase of the project.
The O&M cost components i.e. spares, salaries and other expenses were multiplied by factor of 1.1, 0.8 and 1 to convert into corresponding components in shadow prices. The water availability costs were also taken into account. Coal Washing is a upcoming phenomenon in Indian Coal industry as currently, only 4% of domestic coal is washed by Coal India. Thus, considering that coal washing will be strictly mandated, the cost of domestic coal would increase by Rs. 300 per tonne and since the ash content will reduce from 40% to 10%, the gross calorific value of the coal will also increase by about 25%. Thus, there will be reduction in ash generated and consequently, less amount of land will be required by disposing of bottom ash by means of slurry. Also, due to reduced ash content, the coal consumption will reduce by 20%. The Carbon, SO2, NO2 emissions of the plant are well below the global baseline emission standards for a thermal plant, thus, the emission reduction savings have been added as revenues. Another important new revenue source for NTPC will be the revenue from selling fly ash to brick manufacturers as after the ban on red bricks for construction purposes, fly ash bricks will be used for construction and NTPC will earn revenue of about Rs. 500 per tonne of fly ash. NPV of the project after Stage 2 turns out to be Rs. 120.51 crores. This shows that after taking into account the net social benefits and costs, it is worthwhile to take up the project as NPV is positive. 3.1.3 Adjustment for the Impact of the Project on Savings and Investment Following are the groups which will be benefited by the project: Government NTPC Labor Table 3.1.4 gives the calculation of saving impact on the above mentioned stake holders Table 3.1.4: Calculation of Saving Impact on Stakeholders (Rs Crores) Stake holders Net Benefit MPS Savings Impact Government
767.82
0.6
460.69
NTPC
1370.95
0.55
754.02
Workers
90.80
0.29
26.33
The Net Savings Impact turns out to be Rs. 1241.05 crores.
Calculation of Social Value of Savings Social value or shadow price of savings is calculated as follows:
I = r(1-a)/(k-ar) Where, I is the social value of Rs of savings (investment), r is the marginal productivity of capital, a is the reinvestment rate on additional income arising from investment, k is the social discount rate. The value of I used in this study is 1.55, which is taken from the study done by Murty (1980) in which he has explored the problems related to the evaluation of income distributional effects of public investment projects. Therefore, Net saving impact in terms of shadow prices is: = Total savings × I = 1241.05 × 1.55 = Rs. 1923.62 crores Table 3.1.5 gives the calculation of NPV at Stage 3 Table 3.1.5: Calculation of NPV at Stage 3 (Rs Crores) NPV From stage two
120.52
Net saving Impact
1923.62
NPV at Stage 3
2044.14
Thus, the NPV after taking into account the savings impact turns out to be Rs. 2044.14 crores.
3.1.4 Adjustment for the Impact of the Project on Income Distribution Table 3.1.6 gives the Calculation of Income Distribution Impact at Stage 4 Table 3.1.6: Calculation of Income Distribution Impact at Stage 4
Stake holde r Workers (Unskilled) Government
Income (Rs . cr) We ight 6.93 1.00 767.82 0.001373321
Project Total Net Income Impact
1370.95 Rs . cr
0.000609965
Ne t Impact (Rs . cr) 6.93 1.05 0.84 8.82
The average annual income turns out to be Rs. 50.27 crores from the cash flows obtained in Stage 2. The total net income impact is Rs. 8.82 crores. So, the difference in income turns out to be Rs. 41.45 crores. Now, distributing the difference in income over the life of the plant i.e. 25 years, we get present value of income to be adjusted which turns out to be Rs. 259.33 crores. Adjustment of Income Distribution Impact: The total net income impact turns out to be Rs 8.82 crores while average annual income of Rs 50.27 crores was estimated while calculating NPV at stage 2. Thus, a negative adjustment of Rs 259.33 crores has to be done to the NPV obtained at Stage 3. Table 3.1.7 gives the Calculation of NPV after Income Distribution Impact Table 3.1.7: Calculation of NPV after Income Distribution Impact Adjusted NPV NPV from Stage 3
Rs. cr
2044.14
Income distribution Impact
Rs. cr
-259.33
New NPV of the project
Rs. cr
1784.81
Thus, the NPV after Income Distribution Impact turns out to be Rs 1784.81 crores.
3.1.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods The adjustment factor turns out to be 0.39. This shows that social value of the project exceeds its economic value by 39%. Calculation of Adjustment Factor and Adjusted NPV: Table 3.1.8 gives the Calculation of NPV at Stage 5. Table 3.1.8: Calculation of NPV at Stage 5 Adjustment Factor NPV at Stage 4
Rs. cr
0.39 1784.81
New NPV after Stage 5
Rs. cr
2480.68
Thus, the final NPV of the project after application of Social Cost Benefit Analysis turns out to be Rs. 2480.68 crores. Hence, the project should be undertaken as it has multiple social benefits which are reflected in the final positive NPV of the project.
3.2 Application of UNIDO Approach on Hydro Plant 3.2.1 Calculation of Financial Profitability Measured at Market Prices Table 3.2.1 presents the estimates of revenue collected by the project during its lifetime. Table 3.2.1: Estimates of Financial Flows of Revenue Earned by the project During its Lifetime Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Revenue
Year
144.78 460.56 497.40 517.30 537.99 559.51 581.89 605.17 629.37
2023 2024 2025 2026 2027 2028 2029 2030 2031
Revenue 654.55 680.73 707.96 736.28 765.73 796.36 828.21 861.34 895.79
Year 2032 2033 2034 2035 2036 2037 2038 2039 2040
Revenue
Year
931.62 968.89 1007.65 1047.95 1089.87 1133.46 1178.80 1225.95 1274.99
2041 2042 2043 2044 2045 2046 2047 2048 2049
Revenue (Rs. Cr) 1325.99 1379.03 1434.19 1491.56 1551.22 1613.27 1677.80 1744.92 1209.81
The calculation of NPV at market prices for the Thermal based Coal Power Plant turned out to be Rs. -594.23 crores, therefore as per financial evaluation of the project since NPV is negative, project should not be undertaken. 3.2.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices 3.2.2.1 Identification of Economic (Social) Benefits and Costs
Social Benefits: The major benefit of setting up this Hydro Power Plant would be the creation of employment opportunities for unskilled and skilled workers. The total project workforce is estimated to peak at 2,600 during the 7-year
construction period and about 8,200 additional people (project workforce, service people, and families) will be residing in the valley during construction. This labor will be otherwise unemployed or under employed in the Indian economy. The project provides employment benefits to the skilled labor during its operational period. Revenue earned by the government in the form of taxes. The 2,353 GWh of electricity to be generated each year by the Project will offset the electricity now generated from other sources. According to the CERC’s database on CO2 emissions in the Indian power sector, the combined margin for the Northern grid is 0.75 ton of CO2 emissions per MWh (based on a 75:25 mix of thermal power to hydropower generation). The CO2
emission reduction from the above Project is estimated to be 1.756 million MT per year. In addition, the Project is expected to offset the emission of 73.87 MT/day of SO2 and 37.47 MT/day of NOx, given the emissions from an equivalent amount of electricity generated from the NTPC Sipat Thermal Power Plant, a modern coal-fired plant.
Social Costs: Rehabilitation costs. Loss of agricultural and forest land. Rehabilitation costs comprising of resettlement of households.
Table 3.2.2 shows the Operation and Maintenance (O&M) cost of the project in terms of shadow (economic) prices. Table 3.2.2: Estimates of Financial Flows of Operation and Maintenance (O&M) Expenditures in terms of Shadow Prices (During its Life Time) Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Cost
Year
Cost
Year
Cost
Year
Cost (Rs. Cr)
16.76 52.31 54.40 56.57 58.84 61.19 63.64 66.18 68.83
2023 2024 2025 2026 2027 2028 2029 2030 2031
71.58 74.45 77.43 80.52 83.74 87.09 90.58 94.20 97.97
2032 2033 2034 2035 2036 2037 2038 2039 2040
101.89 105.96 110.20 114.61 119.19 123.96 128.92 134.08 139.44
2041 2042 2043 2044 2045 2046 2047 2048 2049
145.02 150.82 156.85 163.12 169.65 176.44 183.49 190.83 132.31
Table 3.2.3 presents the estimates of revenue collected by the project during its lifetime after taking into account net social benefits and costs. Table 3.2.3: Estimates of Financial Flows of Revenue Earned by the project During its Lifetime after taking into account Net Social Benefits and Costs Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Revenue 144.78 552.31 589.15 609.05 629.74 651.26 673.64 696.91 721.12
Year 2023 2024 2025 2026 2027 2028 2029 2030 2031
Revenue 746.30 772.48 799.71 828.03 857.48 888.11 919.96 953.09 987.54
Year 2032 2033 2034 2035 2036 2037 2038 2039 2040
Revenue 1023.37 1060.64 1099.39 1139.70 1181.62 1225.21 1270.55 1317.70 1366.74
Year 2041 2042 2043 2044 2045 2046 2047 2048 2049
Revenue (Rs. Cr) 1417.74 1470.78 1525.94 1583.31 1642.97 1705.02 1769.55 1836.66 1301.56
NPV of the project after Stage 2 turns out to be Rs. 381.01 crores. This shows that after taking into account the net social benefits and costs, it is worthwhile to take up the project as NPV is positive. 3.2.3 Adjustment for the Impact of the Project on Savings and Investment Following are the groups which will be benefited by the project: Government NTPC Labor Table 3.2.4 gives the calculation of saving impact on the above mentioned stake holders Table 3.2.4: Calculation of Saving Impact on Stakeholders (Rs Crores) Stake holders Net Benefit MPS Savings Impact Government 0.6 4469.39 2681.64 NTPC
1033.27
0.55
568.30
Workers
32.14
0.29
9.32
The Net Savings Impact turns out to be Rs. 3259.26 crores. Calculation of Social Value of Savings Social value or shadow price of savings is calculated as follows:
I = r(1-a)/(k-ar) Where, I is the social value of Rs of savings (investment), r is the marginal productivity of capital, a is the reinvestment rate on additional income arising from investment, k is the social discount rate. The value of I used in this study is 1.55, which is taken from the study done by Murty (1980) in which he has explored the problems related to the evaluation of income distributional effects of public investment projects. Therefore, Net saving impact in terms of shadow prices is: = Total savings × I = 1241.05 × 1.55 = Rs. 1923.62 crores
Table 3.2.5 gives the calculation of NPV at Stage 3 Table 3.2.5: Calculation of NPV at Stage 3 (Rs Crores) NPV From stage two
381.01
Net saving Impact
5051.85
NPV at Stage 3
5432.86
Thus, the NPV after taking into account the savings impact turns out to be Rs. 5432.86 crores. 2.1.4 Adjustment for the Impact of the Project on Income Distribution Table 3.2.6 gives the Calculation of Income Distribution Impact at Stage 4 Table 3.2.6: Calculation of Income Distribution Impact at Stage 4
Net Impact (Rs. cr) Income (Rs. cr) Weight 10.33 1.00 10.33 4469.39 0.000203755 0.91
Stakeholder Workers (Unskilled) Government Project Total Net Income Impact
1033.27
0.001583264
Rs. cr
1.64 12.87
The average annual income turns out to be Rs. 35.07 crores from the cash flows obtained in Stage 2. The total net income impact is Rs. 12.87 crores. So, the difference in income turns out to be Rs. 22.20 crores. Now, distributing the difference in income over the life of the plant i.e. 35 years, we get present value of income to be adjusted which turns out to be Rs. 147.93 crores. Adjustment of Income Distribution Impact: The total net income impact turns out to be Rs 8.82 crores while average annual income of Rs 50.27 crores was estimated while calculating NPV at stage 2. Thus, a negative adjustment of Rs 259.33 crores has to be done to the NPV obtained at Stage 3. Table 3.2.7 gives the Calculation of NPV after Income Distribution Impact Table 3.2.7: Calculation of NPV after Income Distribution Impact Adjusted NPV NPV from Stage 3
Rs. cr
5432.86
Income distribution Impact
Rs. cr
-147.93
New NPV of the project
Rs. cr
5284.93
Thus, the NPV after Income Distribution Impact turns out to be Rs 5284.93 crores.
3.2.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods The adjustment factor turns out to be 0.41. This shows that social value of the project exceeds its economic value by 41%.
Calculation of Adjustment Factor and Adjusted NPV: Table 3.2.8 gives the Calculation of NPV at Stage 5. Table 3.2.8: Calculation of NPV at Stage 5 Adjustment Factor NPV at Stage 4
Rs. cr
0.41 5284.93
New NPV after Stage 5
Rs. cr
7457.95
Thus, the final NPV of the project after application of Social Cost Benefit Analysis turns out to be Rs. 7457.95 crores. Hence, the project should be undertaken as it has multiple social benefits which are reflected in the final positive NPV of the project. 4 Comparative Analysis Government Savings of Unemployment Allowances:
Rs. Crores
Govt. Savings of Unemployment Allowances 16 14 12 10 8 6 4 2 0
Govt. Savings of Unemployment allowances
Coal Plant
Hydro Plant
Fig. 6.1 Government Savings of Unemployment Allowances It can be seen from the above graph that the government savings of unemployment allowances are more for the hydro plant as compared to the coal plant. This can be attributed
to the fact that more workers are engaged during the construction of hydro plant. But, the coal based plant generates employment for workers not only during the construction period but also after the commissioning of plant, so the government savings of unemployment allowances have a long term effect in case of coal plant as compared to hydro plant in which the savings are only during the construction period. Also, the wage rates are assumed to be same for arriving at above results. Present Value of Emission Reductions:
Rs. Crores
400
Present Value of Emission Reductions
300
Coal Plant
200
Hydro Plant
100 0 Carbon Emission Reduction
SO2 Emission Reduction
NO2 Emission Reduction
Fig. 6.3 Present Value of Emission Reductions
It is clearly evident from above graph that emission reductions are more in case of hydro plant as compared to coal based power plant. The above graph supports the obvious fact that since Carbon, SO2, NO2 emissions are negligible for a hydro plant, thus, the reduction savings are more pronounced in a hydro plant. It can also be seen that in case of coal plant the emission reduction savings are positive and quite significant as the coal plant emissions are well below the specified threshold emission levels given by international standards for a thermal plant. Also, NTPC can make use of reduced emissions from above plants in the form of emission reduction certificates that can be tradeoff with plants whose emissions are above threshold level, thereby adhering to emission norms in totality.
3000 2500 2000 1500 1000 500 0
Employment Generation for Workers Hydro Plant Coal Plant
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
No. of Workers
Employment Generation for Workers:
Year
Fig. 6.9 Trends for Employment Generation for Workers
The above graph shows the trends of employment generation for hydro plant and coal plant. It can be seen from the above graph that hydro plant generates employment only during the construction phase of the project while coal plant will be able to generate employment even after the construction of the plant by means of manufacturing of Fly Ash bricks thereby reducing the unemployment in the society and the unemployment will further reduce as in our case the employment generation calculation has been done for a single coal plant. Impact on Savings:
Impact on Savings
3000.00
Rs. Crores
2500.00 2000.00
Hydro Plant
1500.00 1000.00
Coal Plant
500.00 0.00 Government
NTPC
Fig. 6.10 Impact of Savings on Government and NTPC The graph shows the impact on savings for Government and NTPC. It can be seen that construction of Hydro project will lead to more income in the hands of the Govt. and consequently more savings for Govt. as compared to coal plant which increases the savings of the Govt. by a marginal amount only. On the other hand, coal plant adds more to the savings of NTPC, so coal project is more desirable from NTPC’s point of view. Thus, impact on savings yields net gains for both the stakeholders i.e. Government and NTPC for Hydro as well as Coal project Impact on Savings of Workers (Unskilled):
30.00
Impact on Savings of Workers (Unskilled) 26.33
Rs. Crores
25.00 Hydro Plant
20.00 15.00 10.00
Coal Plant
9.32
5.00 0.00 Workers
Fig. 6.11 Impact of Savings on Workers (Unskilled)
The graph shows the impact on savings of workers. It can be seen from the graph that there are net gains to the workers from both the plants, but the net gains in savings are more pronounced in case of coal plant as coal plant is beneficial for the workers in a way that it generates more employment opportunities for workers as compared to hydro plant. Income Distribution Impact:
12.00
Income Distribution Impact
Rs. Crores
10.00 8.00
Hydro Plant
6.00 Coal Plant
4.00 2.00 0.00 Workers (Unskilled)
Government
NTPC
Fig. 6.12 Income Distribution Impact The graph shows the income distribution impact on key stakeholders. It can be seen from the graph that there are net gains in income to all the stakeholders – Government, NTPC and Workers from both the plants, but the income re-distribution is more pronounced for workers in case of hydro project which is more desirable as income re-distribution concept aims at maximizing the benefits to the weaker income group of the society. So, hydro project is more desirable as it leads to more income re-distribution to workers.
5 Conclusions and Suggestions Social Cost Benefit Analysis is an important tool for analyzing a project to reflect its positive and negative impact on the society. Today, it has expanded to evaluation of private projects as they are much more responsible for good and bad effects on the society. SCBA differs from financial analysis in the sense that it avoids market price and adopts shadow price to value the inputs and outputs of a project. There are two good approaches, viz., UNIDO approach & L-M approach for Social Cost Benefit Analysis of a project. Practically, these methods are not widely used by private sectors. The logic behind the appraisal criterion is to select those projects for which the country’s resources are more appropriate. Thus, the decisions regarding capital allocation should be taken with regard to Rule Utilitarian approach i.e. maximizing benefits to people (various stakeholders) at large as businesses cannot strive on profit motives for long term. It is high time that businesses should align their strategies in line with the needs of the community in order to foster long term sustainability of the business.
The stage wise application of UNIDO approach to coal plant and hydro plant showed that net savings impact, net income re-distribution impact are positive for the key stakeholders i.e. Government, Workers and Project (NTPC) identified for the project. This shows that both the projects result in net gains to all the stakeholders. Also, electricity is a merit good, so its social value exceeds its economic value. During the project study it was found that social value of coal plant exceeded its economic value by 39% and that in case of hydro plant was about 40%. Hence, it is evident from these figures that these projects are socially viable and net social benefits will be accrued to the stakeholders. The study shows that both the plants are improving the demographic factors namely – savings, income distribution, employment generation. It can be seen from above SCBA calculations of the plants that both the plants will lead to significant employment generation with coal plant leading to sustained employment generation even after the commissioning of the plant. The study has also thrown light on certain factors that will lead to more efficiency such as coal washing in case of thermal plants that will reduce the ash content in domestic coal from 40% to 10%, which will lead to reduced coal consumption in thermal plants and consequently lower tariffs for the end user. After applying UNIDO approach on the coal and hydro plants respectively, it can be seen that rejecting the project on the basis of its financial viability is not justified as it is evident from above results that incorporation of social cost benefit analysis mechanism yields positive results (NPV) for both the projects i.e. coal plant and hydro plant. Thus, taking into account the social costs and social benefits associated with the project plays a key role in project assessment as needs and wants of community at large can’t be ignored.
Table 7.1 below shows the comparative analysis on key demographic factors for both coal and hydro plants.
Table 7.1: Comparative Analysis of Key Factors for Coal and Hydro Plant
Factors
Coal Plant
Hydro Plant
Employment Generation
Benefit
Rs. 6.93 cr.
Benefit
Rs. 10.33 cr.
Savings Impact
Benefit
Rs.1923.6 cr
Benefit
Rs.5051.8 cr
Income Distribution Impact
Benefit
Rs. 8.82 cr.
Benefit
Rs. 12.87 cr.
Water Availability
Cost
Rs. 2.11 cr.
Benefit
Emission Reductions
Benefit
Rs. 145.5 cr.
Benefit
Naturally Available Rs. 512.5 cr.
Hence, it can be seen from the above table that Hydro plant provides more benefits as compared to Coal based power plant and more focus should be given to development of hydro projects as our country has huge hydro potential and only 25% of it has been explored so far. The Social Cost Benefit Analysis of coal and hydro projects has reveals that these projects are socially viable and net social benefits will be accrued to the stakeholders.
Suggestions
Social Cost Benefit Analysis should be a part of project assessment for projects whose merit needs are more i.e. whose social value exceeds the economic value for instance, electricity.
By determining the social costs and benefits of above said socially viable projects, companies can eventually land up with low interest rate finance for the project.
Coal Washing should be made mandatory for Coal India as currently only 4% of total domestic coal is washed by Coal India. This will lead to reduced ash content thereby leading to reduced coal consumption in thermal plants and reduced tariffs for end consumers.
NTPC should go for manufacturing fly ash bricks at their thermal plant sites or could sell the fly ash produced to the fly ash brick manufacturers thereby leading to efficient utilization of ash and generation of employment.
NTPC should look out for efficient methods for reducing water consumption in thermal plants. For instance, using dry or hybrid cooling technologies in place of traditional wet cooling towers would reduce the water consumption by about 30% 40%.
Wet ash handling through slurry should be shifted to dry ash handling by use of ‘hydro bins’ where water is separated from the ash slurry within the plant and the dry lumps are conveyed to the ash dykes through conveyer belts. This would significantly reduce the amount of water consumed in ash handling units.
Government and power generation companies like NTPC should make some attempts towards enhancement of the hydro power projects as India has a hydro potential of about 1,48,701 MW of which only 25% i.e. 36878 MW has been utilized so far.
Wastewater should be treated and recycled to achieve zero discharge and savings on freshwater intake.
Shadow prices of the inputs and the outputs used in the projects should be benchmarked so as to avoid flaws and biasness in the calculation of the economic costs and benefits.
References 1. Chandra, Prasanna, (2006), Project: Planning, Analysis, Financing, Implementation, and Review, 7/e, Tata McGraw-Hill Publishing Co. Limited, New Delhi, Chapter 14. 2. Tevfik F. Nas, (2001), Cost-Benefit Analysis: Theory and Application, 1/e, Sage Publications, New Delhi, Chapter 4 3. Murty, M. N. and B. N. Goldar (2006), Economic Evaluation of Investment Projects,Report of Project Sponsored by Planning Commission, Government of India. 4. Belli Pedro, (2001), Economic Analysis Of Investment Operations: Analytical Tools And Practical Applications 5. R. B. Khanna, (2011), Project Management, PHI Learning PVT. Ltd., New Delhi 6. Environmental Assessment Report 2007 Prepared by NTPC Limited for the Asian Development Bank (ADB). 7. Social Cost-Benefit Analysis—The Kansas City Light Rail Project by Sudhakar Raju, Rockhurst University. 8. Social Cost-Benefit Analysis of Delhi Metro By M N Murty, Kishore Kumar Dhavala, Meenakshi Ghosh and Rashmi Singh ,Institute of Economic Growth Delhi University Enclave, October, 2006. 9. Mombasa - Nairobi Transmission Line Project Kenya by AFRICAN DEVELOPMENT FUND PROJECT APPRAISAL REPORT 10. Social and Environmental Impacts of a Mini-hydro Project on the Ma Oya Basin in Sri Lanka Bhadranie Thoradeniya, Malik Ranasinghe and N T S Wijesekera, Department of Civil Engineering, University of Moratuwa, Moratuwa , Sri Lanka. 11. M N Murty , Paper on Environmental Accounting For Sustainable Development. 12. The Energy And Resources Institute (TERI) (2012), Enhancing Water-Use Efficiency Of Thermal Power Plants In India: Need For Mandatory Water Audits
