SCBA project case study.pdf

7/30/2019 SCBA project case study.pdf

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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 thecosts 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, SCBAis 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.


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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 projects 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 thescore 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. Thats 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


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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 differfrom 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 groupsin the society. The society, however, is concerned about the distribution of benefits


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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 policymakers 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 (self-

sufficiency, 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 benoted, 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.


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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 economicevaluation can be made. For this reason, financial profitability is a prerequisite in all cases.

Financial profitability produces an estimate of the projects 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

Yi MPSi

Where 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 forincome redistribution and their contribution toward this goal is considered in their evaluation


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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 isjust 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


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 Cost Year Cost Year Cost (Rs. Crores)

2017 1093.95 2026 1768.96 2035 2186.75

2018 1649.93 2027 1796.22 2036 2278.55

2019 1656.66 2028 1827.90 2037 2376.25

2020 1665.44 2029 1870.50 2038 2482.33

2021 1676.39 2030 1803.04 2039 2593.00

2022 1689.65 2031 1870.30 2040 2710.77

2023 1705.37 2032 1941.87 2041 2836.12

2024 1723.72 2033 2019.43 2042 989.84

2025 1744.85 2034 2100.49


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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.


3.1.2.1 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 Honble 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 insome cases it is directly injected into abandoned underground mines. Since coal


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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)


2017 76.34 2026 188.91 2035 313.85

2018 121.06 2027 199.72 2036 331.67

2019 127.98 2028 212.08 2037 350.52

2020 135.31 2029 224.16 2038 372.33

2021 143.04 2030 236.93 2039 393.39

2022 151.23 2031 250.43 2040 415.66

2023 159.88 2032 264.70 2041 439.20

2024 169.02 2033 281.04 2042 154.70

2025 178.69 2034 296.99

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.


During its Lifetime after taking into account Net Social Benefits and Costs


2017 1065.32 2026 1724.47 2035 2082.97

2018 1635.98 2027 1746.71 2036 2165.81

2019 1639.65 2028 1773.02 2037 2253.96

2020 1645.21 2029 1809.91 2038 2349.862021 1652.74 2030 1736.35 2039 2449.67

2022 1662.35 2031 1797.11 2040 2555.87

2023 1674.18 2032 1861.75 2041 2668.88

2024 1688.38 2033 1931.93 2042 950.59

2025 1705.09 2034 2005.10

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.


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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 washingwill 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.


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.


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Calculation of Social Value of Savings

Social value or shadow price of savings is calculated as follows:

I = r(1-a)/(k-ar)

Where,

Iis 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,

kis 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.


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

Stakeholder Income (Rs. cr) Weight

Impact

(Rs. cr)

Workers (Unskilled) 6.93 1.00 6.93

Government 767.82 0.001373321 1.05

Project 1370.95 0.000609965 0.84

Total Net Income Impact Rs. cr 8.82


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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.


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.


Adjustment Factor 0.39

NPV at Stage 4 Rs. cr 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.


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3.2 Application of UNIDO Approach on Hydro Plant


Table 3.2.1 presents the estimates of revenue collected by the project during its lifetime.


During its Lifetime

Year Revenue Year Revenue Year Revenue Year Revenue (Rs. Cr)

2014 144.78 2023 654.55 2032 931.62 2041 1325.99

2015 460.56 2024 680.73 2033 968.89 2042 1379.03

2016 497.40 2025 707.96 2034 1007.65 2043 1434.19

2017 517.30 2026 736.28 2035 1047.95 2044 1491.56

2018 537.99 2027 765.73 2036 1089.87 2045 1551.22

2019 559.51 2028 796.36 2037 1133.46 2046 1613.27

2020 581.89 2029 828.21 2038 1178.80 2047 1677.802021 605.17 2030 861.34 2039 1225.95 2048 1744.92

2022 629.37 2031 895.79 2040 1274.99 2049 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.


3.2.2.1 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 CERCs 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


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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 Cost Year Cost Year Cost Year Cost (Rs. Cr)

2014 16.76 2023 71.58 2032 101.89 2041 145.02

2015 52.31 2024 74.45 2033 105.96 2042 150.82

2016 54.40 2025 77.43 2034 110.20 2043 156.85

2017 56.57 2026 80.52 2035 114.61 2044 163.12

2018 58.84 2027 83.74 2036 119.19 2045 169.65

2019 61.19 2028 87.09 2037 123.96 2046 176.44

2020 63.64 2029 90.58 2038 128.92 2047 183.49

2021 66.18 2030 94.20 2039 134.08 2048 190.83

2022 68.83 2031 97.97 2040 139.44 2049 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.


During its Lifetime after taking into account Net Social Benefits and Costs

Year Revenue Year Revenue Year Revenue Year Revenue (Rs. Cr)

2014 144.78 2023 746.30 2032 1023.37 2041 1417.74

2015 552.31 2024 772.48 2033 1060.64 2042 1470.78

2016 589.15 2025 799.71 2034 1099.39 2043 1525.94

2017 609.05 2026 828.03 2035 1139.70 2044 1583.31

2018 629.74 2027 857.48 2036 1181.62 2045 1642.97

2019 651.26 2028 888.11 2037 1225.21 2046 1705.02

2020 673.64 2029 919.96 2038 1270.55 2047 1769.55

2021 696.91 2030 953.09 2039 1317.70 2048 1836.66

2022 721.12 2031 987.54 2040 1366.74 2049 1301.56


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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.


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 4469.39 0.6 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,

Iis 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,kis 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


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Table 3.2.5 gives the 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.


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

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

Stakeholder Income (Rs. cr) Weight

Net Impact

(Rs. cr)

Workers (Unskilled) 10.33 1.00 10.33

Government 4469.39 0.000203755 0.91

Project 1033.27 0.001583264 1.64

Total Net Income Impact Rs. cr 12.87


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Thus, the NPV after Income Distribution Impact turns out to be Rs 5284.93 crores.


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.


Adjustment Factor 0.41

NPV at Stage 4 Rs. cr 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:

Fig. 6.1 Government Savings of Unemployment Allowances

It can be seen from the above graph that the government savings of unemploymentallowances are more for the hydro plant as compared to the coal plant. This can be attributed

0

2

4

6

8

10

12

14

16

Coal Plant Hydro Plant

Rs.Crores

Govt. Savings of Unemployment Allowances

Govt. Savings of

Unemployment

allowances


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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:

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 thatsince 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.

Employment Generation for Workers:

Fig. 6.9 Trends for Employment Generation for Workers

0

100

200

300

400

Carbon Emission

Reduction

SO2 Emission

Reduction

NO2 Emission

Reduction

Rs.Crores

Present Value of Emission Reductions

Coal Plant

Hydro

Plant

0

500

1000

1500

2000

2500

3000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

No.ofWorkers

Year

Employment Generation for Workers

Hydro Plant

Coal Plant


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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 ourcase the employment generation calculation has been done for a single coal plant.

Impact on Savings:

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 thatconstruction 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 NTPCs 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):

Fig. 6.11 Impact of Savings on Workers (Unskilled)

0.00

500.00

1000.00

1500.002000.00

2500.00

3000.00

Government NTPC

Rs.Crores

Impact on Savings

Hydro Plant

Coal Plant

9.32

26.33

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Workers

Rs.Crores

Impact on Savings of Workers (Unskilled)

Hydro

Plant

Coal Plant


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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:

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 atmaximizing 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 tovalue 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

countrys 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.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Workers (Unskilled) Government NTPC

Rs.Crores

Income Distribution Impact

Hydro Plant

Coal Plant


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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 wasabout 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 cant 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 Naturally

Available

Emission Reductions Benefit Rs. 145.5 cr. Benefit Rs. 512.5 cr.


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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 projectsare 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 efficientutilization of ash and generation of employment.

NTPC should look out for efficient methods for reducing water consumption inthermal 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 ofhydro 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 attemptstowards 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 economiccosts and benefits.


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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 AnalysisThe Kansas City Light Rail Project by Sudhakar Raju,

Rockhurst University.

8. Social Cost-Benefit Analysis of Delhi MetroBy 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 DEVELOPMENTFUND 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

Documents

SCBA project case study.pdf