UNIDO Approach to Economic Analysis of Hydroelectric Projects

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CHAPTER-4
ECONOMIC ANALYSIS OF HYDRO ELECTRIC PROJECTS

—UNIDO APPROACH
“Economy is art o f making most o f life

The love o f economy is the root o f all virtue "
— George Bernard Shaw
4.0 INTRODUCTION
The quest of developing countries for economic and social progress inevitably
involves the basic problem of the most rational use o f limited resources, such as
labour, managerial and administrative talent, capital, foreign exchange and natural
resources to yield the best economic result. Each country has its own development
objectives and this in turn requires that the resources be marshaled and judiciously
allocated in order to attain these objectives. The use o f resources are limited to
attain one objective implies their reduced availability for other objectives. If the
resources are used efficiently, the number of objectives that can be pursued
simultaneously increases. Development planning therefore requires the fixing and
ranking of objectives and the efficient allocation and use of scarce resources. Once
objectives are established and ranked for a certain period, individual investment
proposals should be scrutinised to determine whether and to what extent they can
contribute to the desired results.
A project is a proposal for an investment to create, expand and develop certain
facilities in order to increase the production of goods and services in a community
during a certain period of time. Furthermore, for evaluation purpose a project is an

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unit of investment, which can be distinguished technically, commercially and
economically from other investments.
4.1 PUBLIC & PRIVATE SECTOR PRO JECT EVALUATION
The necessity o f evaluating and national profitability o f an industrial project applies
to both the private and public sectors. Although our discussion and analysis of
project evaluation is based on the methodology used mainly by Government, it will
also be a help to private investors, too. Private investors cannot be expected to be
concerned with national profitability as their business is guided by the profit motive
based on the commercial profitability and return on their investment.
The need of project evaluation is felt more significant, even if it is assumed that a
public sector project may not be expected to yield commercial profit, and subsidies,
for whatever reason, are envisaged from the beginning, commercial analysis is
necessary in order to determine the magnitude of such subsidies before hand so that
they can be properly incorporated in the budgeting procedure.
The public sector projects may be undertaken even though they are not judged
suitable from the point of view of both commercial profitability (e.g. for balanced
regional growth, backward area development, defense related projects), but
Government would take such decisions in full awareness o f the magnitude o f the
financial and social burden, of the “price” to be paid for solving certain political,
social or other problems o f crucial importance to the country.

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Both commercial and national project, evaluation should be carried out not only for
the fiscal reasons. The process of analysing a project’s financial and social
implications is in itself a highly commendable exercise, because it confronts
decision-makers with a variety of parameters both favourable and unfavourable to
the project. It forces the decision-maker to think in terms o f alternatives and
policies conducive to the economic development of the nation.
National project evaluation is a broad exercise because it comprises not only the
application of certain set of basic, additional and supplementary indices but also
numerous consultations, discussions, clearances, coordination among different
government institutions, socio-economic planning, financing, balance of payments,
manpower training, technological development, territorial location, prevention of
pollution, medical and fire regulation etc. Discussion held at different levels (macro
& micro) throughout the formulation and implementation of the project by means of
quantitative and qualitative, economic & non-economic analysis. It would be a over
simplification to believe that in practice the national evaluation of a project is a
procedure carried out only through a set of indices for final overall appraisal, no
matter how comprehensive they are, and to underestimate the importance of other
ways, means and procedures of social evaluation.
4.2 EVALUATION OF PROJECTS: UNITED NATIONS INDUSTRIAL
DEVELOPMENT ORGANISATION (UNIDO) APPROACH & NATIONAL
PROFIT ABILITY
The development process is a process with multi objectives: economic, political,
social, national security, ecological etc. National development objectives are closely
interrelated. This relationship is very complex and its nature differs from country to
country and from time to time within the same country. What renders project
evaluation an indispensable, though sometimes a rather elaborate, task is the
existence of alternative economic opportunities for the commitment of resources,
since, the selection and making decision to execute the project would be considered
rational only if that project is superior in some respect to others. Its superiority
could be based on commercial profitability, i.e. the net financial benefit accruing to
the owners of the project, or on national profitability, i.e. the net over all impact of
the project on the nation as a whole. Whether the interest is in commercial or
national profitability, the core of the evaluation process is somewhat similar and
consist of the following three steps.
❖ Identification of the quality, quantity and timing of physical inputs and
output.
❖ Attachment o f appropriate prices to the inputs and outputs in order to
compute the respective values of cost and benefits.
❖ Co-measurement of cost and benefit of the project; in such a way that
facilitates its comparison with the alternative projects.
This has been adapted in the “Manual for Evaluation o f Industrial Projects” jointly
prepared by UNIDO & Industrial Development Centre for Arab States (IDCAS) for
evaluation of investment projects by a single aggregate criterion incorporating
several multi objective aspects o f the development process. The incorporation of
different aspects into a single aggregate criterion is possible only by assigning
numerical weights (directly reflecting political value judgement) to these partial
considerations:
❖ Nominal unit of future consumption o f the rich as compared with the poor.
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❖ Nominal unit of present or future income of wage earners and profit
earners compared with a unit of income of government.
❖ Nominal unit o f income earned by a backward region as compared with
that in a more developed region.
This approach requires highly reliable justification of the distribution o f the net
benefits generated by a project between present consumption and savings (for future
consumption), o f marginal propensities of different groups to save and consume; of
the marginal rate of return on investment; of marginal rate o f savings, o f the shadow
price of investment etc. Moreover, these weights and other value judgements, which
produce, what might be termed normatives (national parameters) are true only on
certain conditions. As soon as the condition changes, as they often do, this set of
interrelated weights and normatives should be re-adjusted accordingly. This
exercise requires highly qualified personnel, abundant information and use of
computers.
Even if ideal conditions are assumed in a highly developed country in terms of skill,
information and computers, it is hardly possible to apply this approach consistently
in evaluating investment projects. It has in fact, never been applied on a large scale
in any developed country. It could not, therefore, be expected to be valid for the
developing countries. Such a high degree of aggregation o f the criterion for
accessing investment projects, in the developing countries is unrealistic at present
and within the foreseeable future. Hence, the manual has taken into consideration a
set of criteria (basic, additional and supplementary) for assessing the contribution of
an investment project towards the achievement o f different national development

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objectives. This approach is theoretically well founded, practical and easy to apply
under the conditions prevailing in the developing countries.
It is agreed that the incorporation o f distributional and other aspects into the
methodology for project evaluation by assigning numerical weights to them is
justified because of the weakness or unwillingness o f the. government of developing
countries to achieve certain distribution or other objectives by other ways and
means. It is difficult, however, to comprehend how a government that is weak or
unwilling to implement distributional or other objectives through more direct and
efficient ways such as price, tax, monetary and other policies would be strong
enough and willing enough to achieve the same objective, by an indirect,
complicated and less efficient way, such as the methodology for project evaluation.
A fundamental strategic objective of the national development policy of any country
is to raise the present standard of living of its population and to allocate investment
to achieve a higher growth rate of the economy and thus to increase the future
consumption. As is well known, the national income is the only source for
increasing both consumption and savings. It is a basic quantitative measure of the
level and rate of increase in national welfare. The level o f national income is
regarded as proxy for national welfare, reflecting both the source o f endowment of a
country and the degree to which the basic needs and ambitions of the people are
satisfied.
Thus, a fundamental ultimate aim o f an investment project undertaken by a country
is to contribute as much as possible to the national income. National income may be

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translated at the project (factory or generating station) level as net value added. The
problem, therefore may be reduced to the assessment o f the value added expected to
be generated by an investment project on the basis o f real social value o f inputs and
outputs.
Net value added comists of two major components:
❖ Salaries and wages
❖ Social surplus
The question arises, why not confine the analysis to the social surplus and abandon
other components o f the value added ?
The Manual (UNIDO & IDCAS) provides the answer to the question. From the
point of view o f a project or existing production unit (public or private), the salaries
and wages are inputs, but from the viewpoint of the society they are part of the
national income. More salaries and wages means higher employment, higher
income per person employed or both. Larger wage bills (balanced with appropriate
commodities) mean higher purchasing power o f the population or, in other words,
higher national welfare. The wages are a component o f national income already
directed through the channels of the national distribution process in the form of
personnel cash income of the population. The society cannot be indifferent to the
level of income of individuals. Higher the income, it is better. A higher wage bill is
one of the major prerequisites for higher present consumption.
The social surplus is that portion o f the value added that has been directed through
other channels of the same national distribution mechanism. Taxes to the treasury,
net profit (dividends) to the share holders, interest on borrowed capital to the
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financial institutions, rent, allocations for the expansion, renovation, modernisation,
reserve and social welfare funds of the firm etc. Through the complex network of
distribution and redistribution process part of the social surplus is being used for
present private and public consumption. These are taxes in the national budget, the
social welfare funds o f the firms, the reserve funds, and a small part of the net
profits. The larger portion of the social surplus is usually saved and invested are
part of the taxes, dividends, interest & rents and expansion funds of the firms.
Therefore, a larger social surplus is a major pre condition for higher private present
consumption and the normal functioning of the entire state machinery. On the other
hand it is the basic source o f savings for accelerated socio-economic development of
the country. This in turn is a prerequisite for higher future consumption.
The value added o f an investment project has special characteristics that must be
taken into account.
❖ In case of the evaluation of an investment project, both outputs and inputs
are anticipated and expected. A realistic estimation or in actual is to be
taken very carefully.
❖ The thorny problem of whether to include or exclude unfinished or not yet
sold products in output value in a given period (one year) fortunately
disappears when value added is calculated for the whole economic life of
the project.
❖ Value added can be measured either in terms o f gross or net vale added.
Net value added is equal to gross value added minus investment. In
project evaluation, investment outlays are material inputs and therefore,
when considering the whole life of a project, value added should by

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definition be net of investment, i.e. net value added. When a project is
evaluated on the basis of a normal year, net value added is derived from
the gross value added by subtracting the amount o f depreciation for the
same year.
❖ Value added can be estimated at market price (including tax and excluding
subsidies) or at factor cost (excluding taxes or including subsidies). But the
value added of an investment project for evaluation purposes should be
estimated on the basis of including both taxes and subsidies. The inclusion
of taxes in the value added produced by a project is clearly based on the
argument that there exists the “willingness to pay” at actual market prices
which include direct & indirect taxes. On the other hand, the argument for
the inclusion of subsidies is based on the assumption that subsidies reflect
the social preferences (“merit want”) for given products or services.
4.3 SOCIAL COST BENEFIT ANALYSIS-UNIDO APPROACH

1
Social Cost Benefit Analysis, commonly known as economic analysis, is a
methodology developed for evaluation of investment projects of national importance
from the paint of view of the national economy. This has a great significance for
evaluation of both public and private projects, specially in developing countries,
where resources are scares and mainly government is playing a crucial role in
economic development.
The United Nations Industrial Development Organisation (UNIDO) approach was
first articulated in guidelines for project evaluation, which provides a comprehensive
framework for Social Cost Benefit Analysis in developing countries. The rigour and
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length of the work created a demand for a concise and clear operational guide for
project evaluation in practice. United Nations Industrial Development Organisation
(UNIDO) has fulfilled this need by the way of publication o f “Guide to Practical
Project Appraisal” in 1978. Our analysis and findings will be based on this
guideline as recommended by UNIDO.
The guidelines method of project evaluation has been broken down into the
following five stages, each of which leads towards a measure o f the social benefit of
the project.
1. Calculation of financial profitability at market prices.
2. Shadow pricing of resources to obtain the net benefit at economic
(efficiency) prices.
3. Adjustment for the project’s impact on savings and investment.
4. Adjustment for the project’s impact on income distribution.
5. Adjustment for projects production on use o f goods such as luxury
consumer goods and basic needs whose social values are less than or
greater than their economic values.
Stage II of the UNIDO approach is concerned with the determination o f the net
benefit of the project in terms of economic (efficiency) prices, which is commonly
known as shadow price. Market prices, which form the basis for computation of the
monetary costs and benefit from the point of view of the project sponsor, reflect
social values only under conditions of perfect competition, which is rarely seen in
the developing countries. Because of the imperfection in the market, market prices
do not reflect the social values.

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The main reasons for the market imperfection in the developing countries are
❖ Rationing
❖ Administration of minimum wage rate
❖ Foreign exchange regulation etc.
Rationing of a commodity means control over price & distribution. Rationed price
is always less than the competitive market price. When minimum wage rates are
prescribed, the wage paid to labour is usually more than the competitive wage
market in absence of labour legislation. The official rate o f foreign exchange in
most developing countries, which exercise close regulation over foreign exchange, is
typically less than the rate that would prevail in absence of foreign regulation. For
this reason, foreign exchange usually commands a premium in unofficial
transactions. Market prices represents showed prices only under perfect market
which are never seen in the developing countries. As such for the analysis of the
benefit from a project needs to be measured in economic (efficiency) price or
shadow price.
4.4 BASIC ISSUES RELATED TO SHADOW PRICING
Some of the important issues related to shadow pricing are numeraire, tradability,
sources o f shadow price, treatment of taxes & consumers willingness to pay.
General guidelines in respect of the shadow pricing as suggested by UNIDO
approach is discussed in brief in this section.
❖ The Numeraire: One of the important step in shadow pricing is to
determine the unit of account, or numeraire, in which the value of the
outputs & inputs are expressed. The specification of the UNIDO
numeraire in connection with the net present consumption in the hands of

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people at the base level of consumption in the private sector is expressed
in terms o f constant price in domestic accounting Rupees. Numeraire in
UNIDO approach is considered as imaginary unit o f account, which allows
the measurement of benefit and cost without any distortion, by inflation.
❖ Tradability: A central issue in shadow pricing is whether a good is
tradable, that is, can be imported or exported? If a good is tradable, the
international market place offers on option to domestic production and
consumption and thus a measure of its economic opportunity cost or its
real value to the country in terms of pure efficiency.
The major categories related to tradability are: -
Tradable: - A good that would be imported or exported in the absence of trade
barriers such as tariffs and quantitative restriction.
Traded: - A tradable that is actually traded.
Non Tradable: - A good whose real domestic cost of production together with its
international transport cost is too high to permit export and too
low to make import attractive, in other words, a price higher than
f.o.b. but lower than c.i.f.prices.
Non Traded: - A tradable that is not traded because o f the trade policies of the
country. The policy may undergo changes during life of the
project, as such evaluation of future trade policy is needed.
From the above it is quite clear that, for a tradable good, it is possible to substitute
import for domestic production and export for domestic consumption and vice versa.
❖ Sources of Shadow Prices:
In a perfect market the shadow price for any resource would be its market price. In
the ideal world, the price consumers were willing to pay for one more unit (its
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marginal value) would be exactly equal to the producer’s cost o f supplying it (the
marginal cost). If the resources were traded internationally, the market price would
also equal the relevant border price (c.i.f. for importables & f.o.b. for exportables).
The price cannot move higher, otherwise consumers will import instead of paying
more than the c.i.f. price to domestic producers; and it cannot move lower otherwise
producers will export rather than sell for less than the f.o.b. price on the domestic
market. In the real world, market imperfections such as tariffs, quotas and
monopolies create distortions in demand and supply, there is little chance that the
market price will reflect the true economic value and cost o f inputs and outputs. For
tradable resources, the domestic market price is likely to be higher than the border
price.
Because of the market distortions, marginal social cost, as seen from the supply side
and marginal social value, as seen from the demand side for non-traded goods also
will not probably equal. It is therefore, necessary to decide whether the projects
impact will be on demand or supply to determine its shadow price.
The UNIDO approach suggests three sources o f shadow pricing, depending on
impact of the project on national economy. A project, as it uses and produces
resources, may for any given input or output:
1. Increase or decrease the total consumption in the economy
2. Decrease or increase the production in the economy
3. Decrease imports or increase imports
4. Increase exports or decrease exports

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If the impact of the project is on consumption in the economy the basis of shadow
pricing is consumer willingness to pay. If the impact of the project on production in
the economy, the basis of shadow pricing is the cost of production. If the impact of
the project is on international trade—increase in exports, decrease in imports,
increase in imports or decrease in exports—the basis of shadow pricing is the foreign
exchange value.
. 9?
4.5 GUIDELINES FOR SHADOW PRICING
Inputs (Raw Materials and other inputs excluding Labour and Capital)
IMPACT SHADOW PRICES

1. If it leads to increased production of 1. Marginal cost o f production of these
inputs units
2. Depriving others from the use of this 2. What others are willing to pay for that
input. material
FOR TRADED INPUTS
1. Increase in import 1. Cost o f import (c.i.f.)
2. Decrease in export 2. Value of export (f.o.b.)
CAPITAL GOODS
1. If the project induces additional 1. Cost of production o f these assets
domestic production o f assets
2. If the product takes assets from the 2. Consumer willingness to pay
other users
FOR FULLY TRADED ASSETS
1. Increase in import 1. Cost o f import (c.i.f.)
2. Decrease in Export 2. Value of export (f.o.b.)
COST OF CAPITAL
1. If the capital comes from additional 1. Consumption rate of return
savings
2. If it comes from the denial of capital to 2. Investment rate o f return i.e. the rate of
other producers return that would be earned for those
alternative projects
LABOUR INPUTS
1. If it takes away from other 1. What other user of labour willing to
employment pay for this labour
2. If it induces production of new 2. Consists o f marginal product + value
workers assigned by workers on leisure +
additional consumption of food when
the worker is fully employed + cost of
transport and rehabilitation from rural
to urban areas + cost of training a
worker to improve his skill
3. If it involves import of workers 3. The wages the foreign workers
command the premium on account of
foreign exchange remitted abroad by
the workers form their savings-
OUTPUTS
1. If it leads to increased consumption 1. Consumers willingness to pay
2. If it replaces other producers 2. Cost o f production of other producers
3. Decrease import or increase export 3. Cost o f imports (c.i.f.) or value of
exports (f.o.b.)
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4.6 TAXES
Taxes assume a significant role in UNIDO approach when efficiency shadow prices
are calculated. UNIDO approach suggests the following guidelines:
1. When a project takes away non-traded inputs, which are in fixed supply
from other producers, or addition to non-traded consumer goods, taxes
should be included.
2. When a project impact is to generate more domestic production by other
producers, taxes should be excluded.
3. For fully traded goods, taxes are to be ignored.
4.7 GUIDELINES FOR SHADOW PRICING OF SPECIFIC RESOURCES
BY UNIDO
4.7.1 TRADABLE INPUTS & OUTPUTS
The guidelines suggested by UNIDO tends to predict that tradable goods that are not
freely traded today will not be freely traded in the future and it should be treated as
non-tradable goods. Existing trade policies in most o f the countries are such that
some goods are fully traded, others are partially traded and remaining is non-traded.
A good is fully traded if the impact of any increased consumption will result in more
imports or fewer exports or if any increased production will result in more exports or
fewer imports, other things being equal. For such fully traded goods, the shadow
price is the border price converted to domestic currency at the market exchange rate,
(a) If the goods are subject to an import quota, the available quantity is at
present either only partially taken up or the quota will be expanded to

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allow all additional demand for inputs to be met in the international
market.
(b) The import supply tends towards perfect elasticity over the relevant range
of import volumes, which means no rise in supply cost and thus no
decrease in demand.
(c) There is no excess capacity in the domestic industry; all additional supply
must come abroad.
(d) If the additional demand occurs inland, transport cost from the port of
entry do not raise the cost of imported goods above the marginal cost of
local production, so that imported goods are still cheaper.
(e) The import price of the input, including taxes, is less than the domestic
marginal cost plus purchase (including taxes, profit margin etc.).
In practice, it is probably best to assume that tradable inputs and outputs are fully
traded, if the above conditions are satisfied and additional demand will be met fully
by the external trade. Similar conditions must be satisfied for importable output,
exportable inputs and exportable outputs, if they are to be considered fully traded.
A good is non traded if it is tradable but conditions (a) through (d) do not prevail
and are not expected to in the future, so that the border price no longer reflects its
economic value. The value of non traded goods should be measured in terms of
what domestic consumers are willing to pay, if the output o f a project adds to its
domestic supplies or if the requirement of a project causes reduction of its
consumption by others. The value of non traded goods should be measured in terms
of its marginal cost of production if the requirement of a project induces additional

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production or if the output of the product causes reduction o f production by other
units.
4.7.2. NON TRADABLE INPUTS & OUTPUTS
A good is non tradable when the following conditions are satisfied:
(a) Its import price (CIF price) is greater than its domestic cost of
production and
(b) Its export price (FOB .price) is less than the domestic cost of production.
The valuation o f non-tradable is done as per pricing rule discussed above. On the
input cost side, if the additional production of the good (tradable or not) reduces the
availability of one of its non-tradable inputs to other producers, the willingness to
pay for this input is the shadow price. If the project’s demand for the input generates
additional domestic production of the input, production costs of the non-tradable
input are relevant. In the latter case, the international trading opportunity cost
(boarder price) may again relevant. A project may require inputs o f civil works,
which are not tradable. However, the production of such works involves the use of
cement, steel, brick, aggregate, earthmoving equipment, fuel etc, which are all
tradable. Thus other than assigning a domestic market price for the civil work
(which may reflect heavy duties on cement and steel and perhaps even a monopoly
profit of the contractor) the cost of producing the civil work should be broken down
into its components.
Each tradable component than be valued at its border price. The labour should be
valued at its shadow wages. If the residual non-tradable items are major, then they
should further broken down to tradable, labour and residual non traded components
& if they are minor, they can be valued at domestic willingness to pay.
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4.7.3 EXTERNALITIES
Externalities may be considered as a special class of non-traded goods that may be
either positive or negative. These “goods” or “bads” do not have the market price
and in some instances may be by law or custom or policy o f the project sponsor.
Society has not designed a mechanism for charging beneficiaries or for paying
producers.
The characteristics of this special class of goods are:
(a) It is not deliberately created by the project sponsor but is an incidental
outcome of the economic activity.
(b) It is beyond the control of the persons, who are affected by it.
(c) It is not traded in the market and location specific.
Some examples of the beneficial effects are:
1. A hydro electric project may generate some useful information for the flood
control, irrigation, tourism in the region.
2. Geological study for a river valley project may provide some basic
information leading to setting up a cement plant in the vicinity.
3. Highway maintained/constructed by a oil company for exploration may
improve transport business and ultimately improve business or industry in
the locality.
Similar harmful affects (external) may be also created by:
1. A power plant based on coal/nuclear fuel may cause environmental
pollution or radiation hazard, which may cost the people of the surrounding
by lowering the life expectancy.
2. A bridge project may put all ferry providers to out of work or livelihood.
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3. Noise pollution by an airport may reduce the occupancy rate in the rented
house or tourist lodge located in the vicinity o f the airport.
The valuation of external effects is very complicated and difficult to measure
because they are often intangible in nature and there is no market price for
deduction. The values o f these externalities are measured by indirect means.
(a) The benefit of information about hydrometerological data provided by a
hydroelectric project for use of flood control, irrigation etc. may be
equivalent to the monitory cost would have to be spent to obtain such data
by the beneficiaries.
(b) The data related to geological belt of raw materials by a river valley
project (e.g. limestone, silica etc.) may be partly equated with the cost
would have to be bomed by the cement plant to obtain the same by the
way of field investigation.
(c) The benefit obtained from the highway maintained by oil company may
be estimated by increased earning power by the farmers and agro based
industries.
(d) The cost of environmental degradation by way o f air pollution by coal
based power plant or radiation exposed by nuclear plant may be estimated
by loss of earning by the people as a result of low life expectancy and cost
& time spent for treatment to keep them fit for economic activity.
(e) The loss of employment of the ferry provider may be calculated the
earnings foregone by them by what others willing to pay for them.
(f) The cost of low occupancy may be calculated due to noise pollution by
the airport from the loss of rent by the house owner & tourist lodge.
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From the above we have seen that the measurement o f the benefit and cost arising
out of external effect is very difficult for their intangible in nature. Though some
economists are o f the opinion that these effects are to be ignored. It is also
suggested by the economists that since the project is likely to have both beneficial
and harmful effects, ultimate net effect is assumed zero. However this argument
lacks validity. External effects must be taken into account, whenever it is possible
to do so. Even if these effects cannot be measured in monetary terms, some
qualitative evaluation is to be considered.
4.7.4 LABOUR INPUTS
The principles of shadow pricing for goods are also hold good in case of labour.
Labour is commonly considered as service than a good. Projects impact on the rest
of the economy is taken into consideration when it hires labour and
1. The project may take away from other users.
2. The project may stimulate the production of new workers.
3. The project may cause importation of worker.
If the first case is hold good, i.e. if the project takes labour away from other
employment, the shadow price is equal to what other users o f labour are willing to
pay for this labour. In free market it is equal to the marginal product o f labour. If
the project stimulates the production of new workers the shadow price consists of
the following:
1. The marginal products of the worker in the previous employment (if the
labour is unemployed previously then, this is treated as “Zero”).
2. The value assigned by the worker on leisure, that he might have to forego as
a result of employment in the project.

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3. The additional consumption of food when the worker is fully employed as
opposed to when he is idle or partly employed.
4. The cost of rehabilitation and transport from rural to urban area.
5. Cost of training to transform the unskilled worker to skilled worker.
Similarly in third type of impact inducing the importation o f worker the social cost
considered is the wage, the foreign workers command & the premium on account of
foreign exchange, remitted by the workers from their savings.
4.7.5 CAPITAL INPUT
The capital cost o f a project is viewed from two perspectives for shadow pricing. In
the developing countries, where the resources are scarce, when invested it leads to
two consequences:
❖ Financial resources are converted to physical assets.
❖ Financial resources are withdrawn from the national pool of savings that
might be used for investment in alternative projects.
In the first case the value (shadow price) of physical assets is calculated as the same
way the value of other resources are calculated. If the physical asset is fully traded,
its shadow price will be the border price. If it is non-traded asset, that it is valued in
terms of cost of production (if the project induces additional domestic production) or
consumer willingness to pay (if it take the asset from other users).
In the second case the opportunity cost of capital which depends on how the capital
required for the project is generated. The opportunity cost of capital may come from
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additional savings and it is measured as the consumption rate o f return. If it comes
from the denial of capital to the alternative projects, the shadow price is calculated
as the investment rate of return i.e. the rate of return that may be earned from the
alternative projects.
In practice the consumption rate o f interest may be used as the discount rate because
in stage III o f the UNIDO analysis all inputs and outputs are converted into their
consumption equivalent.
4.7.6 FOREIGN EXCHANGE
UNIDO approach advocates the use of domestic currency as the numeraire. Foreign
exchange impact must be identified so that project’s net present value may be
adjusted by appropriate premium, keeping in mind that, foreign exchange is more
valuable than indicated by the exchange rate. In principle all inputs and outputs
either tradable that can be valued directly in terms of foreign exchange or non
tradable whose inputs can be disaggregated in terms o f tradable, non-tradable and
labour.
The calculation of the shadow price of foreign exchange in terms of consumer
willingness to pay is based on assumption that the foreign exchange requirement of
a project is met from the scarifies o f others. Foreign exchange may be utilised by a
project for induce the production of foreign exchange by additional export or import
substitution. In this case shadow pricing of foreign exchange is the cost of
production of foreign exchange.

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4.8 MEASUREMENT OF IMPACT ON INCOME DISTRIBUTION
The additional income gained or lost by different individual groups within the
society because of the project is measured in terms o f its contribution to saving and
income distribution. The gains and losses are assumed in UNIDO approach is equal
to the distortion between shadow market payment to each input or output in case of
physical resources or the distortion between price paid and received in case of
financial transaction.
For income distribution analysis a different weight should be applied to each of the
income. Moreover, distinction should usually be made between government and
private, rural and urban, local & foreign, and often within the groups. UNIDO
method seeks to identify income gains and losses by the followings:
1. Project
2. Other private business
3. Government
4. Workers
5. Consumers
6. External factors
4.8.1 STAGE III ADJUSTMENT FOR THE PROJECTS IMPACT ON
SAVINGS & INVESTMENT
Scarcity of capital is a universal phenomenon in almost all developing countries.
The Governments of the developing countries usually adopts the policy of savings
are more valuable than consumption and concerned about the impact of a project on
savings and its value thereof. UNIDO approach is applied to measure the
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❖ Effects on savings resulting from the impact on income distribution by the
project.
❖ Value of the savings by the society as a whole.
In most cases the Government wants to ensure that savings shall be adequate by
increasing interest rate through macro-economic policies instead o f project selection.
It is only important to examine the impact of projects on savings and consumption,
but a vital consideration in the choice between capital intensive and a labour
intensive project or between different designs for the same project is necessary.
On the other hand, labour intensive projects tend to distribute more income to the
low-income groups vis-a-vis to the wealthy, who generally receive most of the
benefit of capital intensive projects and tend to save and reinvest more than the poor.
4.8.2 STAGE III OF THE UNIDO APPROACH IS APPLIED TO:
1. Determine the amount of income gained or lost because of the project by
different income groups.
2. Evaluate impact of these gains and losses on savings on availability of data
of marginal propensity to save by each group.
3. Place a premium on the additional savings, the project will induce by its
impact on distribution.
4.8.3 VALUATION OF SAVINGS IMPACT
The value of a rupee of savings is the present value of the additional consumption
stream produced when that a rupee of saving is invested at the margin.

110
The adjustment factor for saving (AFS) measures the percentage by which the social
value of a rupee invested exceeds that of one consumed. It is theoretically
calculated as:
AFs = (1 -s)g
i-s q
Where,
MPC = 1-s = Marginal propensity to consume
MPS =s —Marginal propensity to save
M P cap = q = Marginal productivity of capital
CRI = i = Consumption rate of interest
This simplified equation for saving adjustment factor is valid only if:
(a) The time until saving becomes optimal and the premium becomes zero is
infinitely far in future, that means saving rate in the society will not be
come optimal in near future.
(b) Marginal productivity of capital and reinvestment rate on additional
income is constant over time.
4.9 STAGE-IV ADJUSTMENT OF PROJECT IMPACT ON INCOME
DISTRIBUTION
The Governments of the developing countries always in favour of the weaker
section of the society or economically backward region. It is more socially
acceptable if the benefit goes to the poor in comparison to the rich section of society.
Due to practical difficulties in pursuing the objective of redistribution entirely;
through tax, subsidy and other measures taken by the Government in favour of the
Ill
poor need evaluation by suitably assigning weight and computation of the relative
values of income for different groups.
The UNIDO Guidelines suggests that the weights, which essentially reflect political
judgment, may be determined by an iterative process involving interaction with the
planners. Theoretically it is expressed as:
f ,y
W= —
Where,
W= weight attached to income at c, level.
b = base level of income that has weight of 1.00
n = elasticity of marginal utility of income.
In practice, however, the base level of consumption may be estimated by reference
to the level o f income at which people are neither taxed as are those with more than
a certain amount of income, nor subsidised, as are those who receive welfare
charges, subsidies and the like, because their income level is below a given cut off
level.
4.10 STAGE V ADJUSTMENT OF MERIT AND DEMERIT GOODS
When the social value of a good is more than its efficiency value, the good may be
called as merit good and an upward adjustment has to be made. On the other hand,
if the social value of a good is less than the efficiency value, it may be called as
demerit good and downward adjustment has to be made. The same approach is hold
good in case of creation of employment to the poorer class of the society, A country
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may place a higher social value than economic value on production of oil because it
reduces dependence on foreign supply. Similarly in absence of a project, the
Government perhaps would be willing to pay unemployment compensation or to
make arrangement some alternative jobs.
UNIDO guidelines suggest the following procedure for adjusting the difference
between social and economic value:
(a) Estimation o f the economic value.
(b) Calculation o f adjustment factor as the difference between the ratio at
social value to economic value and unity.
(c) Multiplication of economic value by the adjustment factor.
(d) To add the adjustment to the net present value with the value calculated in
Stage- IV.
UNIDO approach suggests a word of caution in applying of this method while
adjusting the value of goods per se for social reason, even economically disastrous
projects may appear “good” in terms of social rate of return. Further more the
borderline between social and political is extremely thin; it is easy to end up
maintaining that politically expedient projects, regardless o f how economically
wasteful they may be, are socially justifiable. There is no certain way to prevent
this. The dangers can be reduced, however, by following stage by stage procedures
outlined in UNIDO guidelines. This method generates a series of estimates of the
projects desirably, thereby making it possible to the exact cost in terms of Net
Present Value (NPV) or Internal Rate of Return (IRR) foregone of pursuing
objectives other than pure economic efficiency.

113
In some cases, the socially valuable output of a project does not appear as an output
in the economic analysis. For example where the project generates employment, its
output is treated as externality and it is adjusted in social terms.
Closely related to the equity-vs-efficiency decision that must be made in selection
and evaluation of projects, UNIDO method advocates that today’s consumption
should be sacrificed for an investment that will yield more consumption in the
future. There may be a possibility in UNIDO method that forces the planners to
come to grips with the critical problem by asking the analyst to assign values in
future consumption and present investment in terms o f present consumption.
4.11 LITTLE-MIRRLEES APPROACH
The pioneering work undertaken by I.M.D. Little and J.A. Mirrlees in the field of
project analysis, appraisal and evaluation specially in developing countries may be
considered as an important milestone in addition to the Guidelines suggested by
UNIDO. Their work in social cost benefit analysis with some partial modification is
taken up by the Planning Commission of India, Project Appraisal Division in
analysis, appraisal and evaluation of the projects sponsored by Government of India,
and funded by International Agencies.
Little-Mirrlees had developed the social cost benefit analysis in:
1. Manual of Industrial Project Analysis in Developing Countries (Paris,
OECD, 1968)
2. Project Appraisal and Planning for Developing Countries (London,
Heinmann, 1974)
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basically for evaluation of projects in developing countries, where the resources are
very limited and the National Government plays the vital role in committing these
resources based on their national priority. In our analysis we will use this
methodology in evaluation of the power projects.
There has been a considerable similarity between the UNIDO approach and Little-
Mirrlees approach, but some sort of dissimilarity is also observed. These are
enumerated as below:
❖ Similarities are:
1. Deduction o f accounting (shadow) prices particularly for foreign exchange
and unskilled labour.
2. Considering the factor of equity.
3. In arriving of discounted cash flow by discounted cash flow techniques
❖ Differences are:
1. UNIDO approach measures cost & benefit in terms o f domestic rupees
price, but L-M approach measures the same in terms o f international
(border) prices.
2. UNIDO approach measures cost & benefit in terms of consumption, where
as the L-M method measures cost & benefit in terms o f uncommitted social
income.
3. UNIDO method recommends stage by stage approach on efficiency, savings
and redistribution o f income, foreign exchange at different stages. The L-M
approach tends to view these considerations together.

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4.11.1 SHADOW PRICING BY LITTLE-MIRRLEES APPROACH
To arrive shadow prices o f different components of the projects the output and
inputs are broadly classified in 3 major categories.
1. Shadow price of traded goods
2. Shadow price of non traded goods
3. Shadow price of labour
In this section we will briefly discuss the methodology o f shadow pricing of. the
above step by step and use of conversion factors.
4.11.2 SHADOW PRICE OF TRADED GOODS
L-M approach suggests shadow price of a traded good is simply its border price. If
it is exported, shadow price is the FOB price and if it is imported, shadow price is
considered CIF price. In a non-perfectly elastic international market, marginal cost
of import is CIF price where as marginal export revenue is the FOB price of the
traded goods. In other words, border price represents the social opportunity cost or
benefits of production and consumption of a traded good.
4.11.3 SHADOW PRICE OF NON TRADED GOODS
Civil construction such as works, building, land, transport service, electricity, water,
fuel etc. are not amenable to international trade and commerce. Border price or
international prices of these commodities are not available in real sense. Non traded
goods, therefore is to be measured in terms of marginal social cost and marginal
social benefit.
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Marginal social cost of a product is the value in terms o f the shadow price of the
resources required to produce an additional unit of the product. Similarly the
marginal social benefit of a non-traded item is the value o f an extra unit of good
from social point of view. As a practical expedient, L-M approach recommends the
minatory cost a non-traded item is broken down into tradable, labour and residual
components. Tradable and residual components may be converted to social cost by
applying suitable Social Conversion Factor (SCF) and the labour component’s social
cost can be obtained by applying social wage rate.
4.11.4 SOCIAL CONVERSION FACTOR (SCF)
The ratio o f world market (border or international) price o f an average basket of
good to its domestic price, where the domestic price is expressed in dollars
converted at the official exchange rate. The same is known as accounting ratio or
adjustment factor. In Little Mirrlees method it is widely used to covert rupee cost to
social cost for the items where international prices are not directly available.
In some cases like civil construction, buildings, roads, bridge, transportation
services, water, fuel, electricity etc., the actual rupee cost is broken down into three
components.
1. Tradable component
2. Labour component
3. Residual component.
and these components are valued in social terms. In normal practice, social cost of
tradable component is obtained by a multiplying factor o f 1/1.5; social cost of labour
component is obtained by multiplying it by a factor of 0.5 (shadow price of labour is

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considered to be 50% of the actual); the social cost of residual component is
obtained by multiplying it by a factor of 0.5. Details of social conversion factors as
well as the proportions of the above three components, Tradable (T), Labour (L) and
Residual (R) are shown in Table 4.1.
TABLE-4.1
Social Conversion Factor(SCF) or Proportions of Three Components.

Tradableffl. Labour(L) and ResidualfR)
SL Item SCF or Proportions

No
SCF Proportion
T L R
1 Land 1/1.5
2 Building & Civil Construction 0.50 0.25 0.25
3 Indigenous Equipment 0.70
4 Transport Services 0.65 0.25 0.10
5 Engineering & Know-how fee 1.50
6 Bank Charge 0.02
7 Pre operative Expense 1.00
8 Labour 0.50
9 Salary 0.80
10 Repair & Maintenance 1/1.5
11 Water & Fuel etc. 0.50 0.25 0.25
12 Electricity 0.71 0.13 0.16
13 Domestic Stores or Indigenous 0.80
Raw Materials
14 Other Overheads 1/1.5
15 Working Capital Requirements CIF value
16 Imported Equipment CIF value
17 Imported Raw Materials CIF value
4.11.5 SOCIAL COST BENEFIT ANALYSIS BY FINANCIAL
INSTITUTIONS IN INDIA AND APPLICATION OF UNIDO APPROACH IN
EVALUATION OF POWER PROJECT
Industrial Development Bank of India (IDBI), Industrial Finance Corporation of
India (IFCI), Industrial Credit & Investment Corporation of India (ICICI), evaluates
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various projects from the point of view of the financial profitability as well as the
economic criteria. Most of the financial institution including the above three has
adapted the same approach as recommended by the Little-Mirrlees or UNIDO for
appraisal and evaluation of the projects, financed by them. In economic appraisal of
the projects, UNIDO method suggests the minimum economic rate o f return, to
maintain its viability as well as the social obligation to the society as a whole.
We will here analyse the different projects in the same line as suggested by UNIDO
Approach to find out the internal rate o f return on initial investment. The benefit to
the society is expressed into net social benefit and the cost i.e. the initial outlay
made to the projects and operational expenditure is converted to the social cost by
applying social conversions factors and other proportions.
As per the guidelines of the financial institution, the internal rate of return (IRR) on
investment of the public sector projects7 should be minimum 12%. If the IRR is
found more than 12% it may be accepted that the project is viable and has a good
contribution to the national economy. If it is less than its cutoff IRR i.e. less than
12% then the project implementation authority has to think other alternative to
improve its performance.

119
ECONOMIC ANALYSIS OF PROJECT
NAME OF THE PROJECT— KOPILI HYDRO ELECTRIC PROJECT
BRIEF BACKGROUND OF THE PROJECT
Kopiii Hydro Electric Project (150MW) is located 124KM away from Haflong, the
district headquarter o f N. C. Hills District of Assam. The Project is implemented by
Government of India under the central sector scheme to generate a quantum of
design energy o f 806 Million units (Million Kilo-watt-hour). The project is taken up
by the Government to meet the growing demand for power in the economy for
consumption as well as creation of employment opportunities to the unemployed
youths of the region. There is no raw material cost as such to be purchased by the
project, only just to impound the reservoir during monsoon and to use it for
generation of power throughout the year. However during operation, sufficient
manpower is required to run the power plant, to build up the reservoir, operation of
hydraulic gates besides consumables, lubricants, spares etc. The major capital cost
of the project involves in construction of civil structures and installation of plants
and equipments. The capital cost of the project comes to 24382.00 lakhs. The project
is financed by Government of India under North Eastern Council Schemes. As a
whole, the benefit o f the project goes mainly to the project, respective State
Governments (Assam & Meghalaya) and the workers associated with the project.
Unless otherwise the project had come up, these employment opportunities would
have never been created. The power generated by the plant is drawn by Power Grid
Corporation o f India Limited and the same is paid to the project as per power
available at ex-bus end. As such, in realisation of revenue no Transmission and
Distribution (T&D) loss is applicable.

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Salient parameters are as follows:
❖ Capital Cost of the Project = Rs.24382.00 Lakhs
❖ Selling price of the power (Consumer willingness to pay) =Rs.0.84 per
unit(KWH)
❖ Financial benefits paid to the workers by the project (Compensation paid to the
skilled & semiskilled labour is considered what the others are willing to pay,
where as unskilled labour is getting more than its competitive market rate
because of minimum wage legislation, quota, reservation, foreign exchange
regulation etc.)=Rs.0.47 per unit
❖ Expected production level = 806 Million Units(KWH) per annum
❖ Cost of production of power excluding own labour cost i.e. marginal cost of
production =Rs.0.24 per unit(KWH)
❖ The power is produced for consumption within the economy.
❖ State Governments are getting 12% free power from the power plant located
within their respective territorial boundary.
❖ The project leads to creation of employment opportunities to the unemployed
youths of the region.
Economic analysis is made to assess the economic viability of the project as per the
guidelines suggested by UNIDO. The process involves the following steps:

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5. Adjustment for projects production on use of merit goods or demerit goods,
whose social values are less than or greater than their economic values.
FINANCIAL VIABILITY
Revenue - 806 Million UnitsxRs.0.84= Rs.6770.40 Lakhs
Cost of production = 806Million UnitsxRs.0.47= Rs. 3788.20 Lakhs
Cash inflows Rs. 2982.20 Lakhs
NPV= - Rs.24382.00+193.73x0.8929+658.50x0.7972+Rs.l443.76x0.7118
+1959.32x0.6355+2109.89x0.5674+2352.83x0.5066+2200.17x0.4523
+1330.27x0.4039+2345.19x0.3606+825.03x0.3220+3944.29x0.2875+894.68x0.256
7+2219.05x0.2292+989.49x0.2046+2951.00x0.1827+3721.79x0.1631 +2982.20x 1.2
015(Sum of PV at 12% rate of discount for 19 years)
=(-) Rs.9574.40Lakhs, which is negative.
As such, the project is not financially viable.
ECONOM IC ANALYSIS
Economic analysis is made on the basis of shadow price to obtain the net benefit at
economic (efficiency) prices. The principles of shadow pricing of inputs and outputs
are as follows:
For outputs (Power): shadow pricing is consumer willingness to pay as it leads to
increase in consumption within the economy.
For inputs (Raw materials & labour): shadow pricing is marginal cost of
production of inputs as it leads to increased production of inputs.

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ECONOMIC VALUE OF THE PROJECT
Schedule of cash outflows:
SL Year Financial Value Rs. in Economic Value Rs.

No Lakhs in Lakhs
1 1977-1978 1750.00 1478.00
2 1978-1979 1848.00 1571.00
3 1979-1980 1819.00 1544.00
4 1980-1981 2560.00 2175.00
5 1981-1982 1125.00 957.00
6 1982-1983 2686.00 2283.00
7 1983-1984 2744.00 2330.00
8 1984-1985 1825.00 1551.00
9 1985-1986 1486.00 1262.00
10 1986-1987 2013.00 1712.00
11 1987-1988 2401.00 2040.00
12 1988-1989 893.00 760.00
13 1989-1990 269.00 228.00
14 1990-1991 248.00 210.00
' 15 1991-1992 100.00 85.00
16 1992-1993 213.00 180.00
17 1993-1994 211.00 179.00
18 1994-1995 191.00 162.00
19 Total 243,82.00 207,07.00
Major cost components are steel, cement and labour.
1. Commercial price of steel is Rs.7,200.00 per MT, the economic value of
steel is Rs.5,800.00 per MT because the project will lead to greater
utilisation of the capacity of steel industry. So, the production of steel will
be economic (social) value of steel.
2. In case of cement, the social value is much more than the commercial value.
3. Cost of skilled and semiskilled labour is taken as what the others willing to
pay for the same nature of job. For unskilled labour 50% of the financial
cost is considered for the works purely of unskilled in nature.
4. There is no imported equipment used in this project. The economic value of
indigenous power plant equipment is taken as 80% of the commercial value

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due to market imperfection, taxes, subsidies, import quota, foreign exchange
regulation, minimum wage legislation etc.
5. Social value o f afforestation, ecology and environment is much more than
the financial value because it keeps balance o f the greenhouse gases,
provides oxygen to the living entities, protects the earth from erosion and
fertility of top soil, flood moderation etc.
6. Social value of engineering and know-how fees is much more than the
financial value, because it will induce further growth of research and
development in the field of science and technology leading to cost reduction
the construction industry. Implementation o f sophisticated project
contributes to development of local skills and capacities. Furthermore, it
will help to change traditional values, attributes and the behaviour of the
society, build up and enterprising spirit among the people, develop a desire
for changing and improving conditions of life, introduce better work
discipline and thus changes the very pattern and basis o f economic
development.
A. SHADOW REVENUE
Shadow revenue = Rs.6770.40 Lakhs (As it leads to increased consumption rather
than replacement o f existing facilities or decrease import or increase exports in the
economy, shadow revenue is the consumer willingness to pay)
B. SHADOW COST OF PRODUCTION
Shadow cost of production (As it leads to increased production o f inputs rather than
deprive others from the use of the inputs or increase or decrease import or exports) =
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Marginal cost o f production o f raw materials and labour inputs means the social cost
associated with the inducing additional production of workers that consist of:
1. Unskilled labour
2. Semiskilled labour
3. Skilled labour
For the unskilled labour that are previously unemployed, the marginal product for
them are zero. Shadow wage rate of unskilled labour is taken 50% o f the prevailing
wage rate. In case o f semi skilled labour and skilled labour the shadow wage rate is
taken as what the others willing to pay for the same nature of job. However, for a
hydro power plant there is no raw material required to be purchased except few
consumables. = 806Million Units @ Rs.0.24 per Unit = Rs. 1934.40 Lakhs.
a. There is 4627.83 hactres o f cultivable land that was sacrificed by the
farmers for the project. It is seen from the field studies that only kharif
crops, mainly food grains (rice, wheat etc.) are produced once in a year,
either jhum or wet rice cultivation. Average agricultural out put converted
into the monetary equivalent comes to Rs. 12000.00 per hactre. The entire
land belongs to the state of Assam and a portion falls under the state of
Meghalaya. As such the benifit of 12% free power produced by the Kopili
power plant goes equally (6% each) to both the Government of Assam &
Meghalaya respectively.
b. It is seen that there is an incidence o f loss o f revenue to the farmers on
account of the agricultural produce, which had to be sacrificed. A
substantial quantum of land belong to the farmers is being inundated due to
creation of storage type of reservoir required for the project = 4627.83
Hactre@Rs. 12000.00= Rs.555.33 Lakhs per annum.

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c. Benefit that goes to the Government of Assam = 806MU @ 6%x0.84
=Rs.406.22 Lakhs
d. Benefit that goes to the Government of Meghalaya = 806MU @ 6%x0.84
=Rs.406.22 Lakhs
ECONOMIC BENEFIT = (Shadow revenue - Shadow cost of production^
Economic benefit goes to the Government of Assam & Meghalaya on account of
12% free power - Loss o f revenue to the farmers on account o f the agricultural
output that would have produced by the land sacrificed to the project = 6770.40-
1934.40 + 406.22+406.22 -555.33 = Rs. 5093.11 Lakhs.
C. ANALYSIS OF SAVINGS IMPACT
Benefit to the project =6770.40-3788.20= Rs.2982.20 Lakhs
Benefit to the workers =(0.47-0.24) x806MU= Rs. 1853.80 Lakhs
Benefit to the Government of Assam = 806MU @ 6%x0.84 =Rs.406.22 Lakhs
Benefit to the Government of Meghalaya = 806MU @ 6%x0.84 =Rs.406.22 Lakhs
Benefit to the farmers = -Rs.555.33 Lakhs
Total benefit=2982.20+ 1853.80+ 406.22+406.22 -555.33= Rs.5093.11 Lakhs
Workers savings @15%=1853.80 x0.15= Rs.278.07 Lakhs
Savings by the farmers @10%= -555.33x0.10= - Rs.55.53 Lakhs
Value o f savings in terms o f consumption (workers)=
j._ K1 ~ a )
k-ar
Where, 1= Value of savings in terms of consumption
r = Marginal productivity of Capital = 0.2
k =Social discounting rate = 0.10 i.e 10%

a = Reinvestment rate = 0.15
Value of savings = 0.2 (1.00 -0.15)/0.1-0.15x0.2 = 2.42
Value of savings 7=2.4 per unit of consumption
i.e. additional value = 1.42
Total value o f savings (workers)=1.42x Rs.278.07 Lakh = Rs.394.86 Lakhs
Value of savings in terms of consumption (farmers)=
7 r(l-o)
k-ar
Where, I - Value o f savings in terms of consumption
k =Social discounting rate = 0.10 i.e. 10%
Value o f savings = 0.2 (1.00 —0.10)70.1-0.10x0.2 = 2.25
Total value o f savings (farmers)=1.25x -Rs.55.53 Lakh = -Rs.69.41 Lakhs
Value of savings in terms of consumption project & government =
k-ar
Where 7= Value o f savings in terms of consumption
r = marginal productivity of Capital = 0.2
a = Reinvestment rate for project = 0.30
Value of savings = 0.2 (1.00 -0.30)70.1-0.30x0.2 = 3.50

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Value of savings 1= 3.5 per unit of consumption
Savings by the Project@30% = Rs. 2982.20x.030 = Rs.894.66 Lakhs
Total value of savings (Project) = 2.5x Rs.894.66= Rs.2236.65 Lakhs
Savings by Assam Govemment@30% = Rs. 406.22x.030 = Rs.121.86 Lakhs
Savings by Meghalaya Govemment@30% = Rs. 406.22x.030 = Rs.121.86 Lakhs
Total value o f savings (Assam Government) = 2.5x Rs. 121.86= Rs.304.65 Lakhs
Total value of savings (Meghalaya Government^ 2.5x Rs.121.86= Rs.304.65
Lakhs
Total savings impact= Rs.394.86 + Rs.2236.65 + Rs.304.65 + Rs.304.65 -
69.41=3171.39 Lakhs
D. ANALYSIS OF INCOME DISTRIBUTION IMPACT
Weight assigned to the benefits going to the workers
( hv
W= —
U
Where b= Base level income=Rs.20, 000.00 per annum for a family of five
members.
G=Current income level o f beneficiaries.
n = Elasticity of the marginal utility o f income = 0.5 for both the
workers and the project.
Wworkers =(20000/12000)°'5 =1.29
Additional weight = 1.29 -1.00 = 0.29
Value of distribution = 0.29x Rs. 1853.80 Lakhs = Rs.537.60 Lakhs.
Weight assigned to the benefits going to the Project
Wp,ojecl =(20000/17,00,00,000)°5 =0.01084

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Additional weight = 0.0108 -1.00 = -0.989
Value of distribution = - 0.989x Rs.2982.20 Lakhs = -Rs.2949.85 Lakhs
Weight assigned to the benefits going to the Assam Government
W AssamGov, =(20000/9775,00,00,000) 05 =0.000452
(In the Year 1990-91 Net State Domestic Product (NSDP) of Assam was Rs.9775.00
Crores. — Directorate o f Economic and Statistics o f Assam)
Additionai weight = 0.000452 -1.00 = -0.999547
Value of distribution = - 0.999547x Rs.406.22 Lakhs = -Rs.406.03 Lakhs
Weight assigned to the benefits going to the Meghalaya Government
WMeghalayaGovt. =(20000/884,00,00,000)05 =0.001504
(In the Year 1990-91 Net State Domestic Product (NSDP) o f Meghalaya was
Rs.884.00 Crores. — Directorate of Economic and Statistics o f Meghalaya)
Value of distribution = - 0.998495857x Rs.406.22 Lakhs = - Rs.405.60 Lakhs
Total distribution impact = 537.60 -2949.85 -106.03-405.60 = -Rs.3223.88 Lakhs
E. SOCIAL PREFERENCE USING THE CONCEPT OF MERIT AND
DEMERIT GOODS.
Power is neither merit goods nor demerit goods.
TOTAL ECONOMIC VALUE OF THE PROJECT = Rs.5093.11Lakhs
(economic benefit) + 3171.39 Lakhs (saving impact) - Rs.3223.88 Lakhs
(distribution impact) = Rs.5040.62 Lakhs
Economic NPV= -20707.00+ 5040.62x8.18(Sum o f PV at 12% rate o f discount for
35 years)= Rs.20525.27 Lakhs, which is positive.
As such, the project is economically viable.
Corresponding Economic Internal Rate of Return works out to be 24.36%

129
NAME OF THE PROJECT— KOPILI HYDRO ELECTRIC PROJECT
I st STAGE EXTENSION
Kopili Hydro Electric Project-1st Stage Extension (100MW) is located 124KM away
from Haflong, the district headquarter of N. C. Hills District of Assam. The Project
is implemented by Government of India under the central sector scheme to generate
a quantum of design energy of 500 Million units (Million Kilo-watt-hour). The
project is taken up by the Government to meet the growing demand for power in the
economy for consumption as well as creation o f employment opportunities to the
unemployed youths of the region. There is no raw material cost as such to be
purchased by the project, only just to impound the reservoir during monsoon and to
use it for generation of power throughout the year. However during operation,
sufficient manpower is required to run the power plant, to build up the reservoir,
operation of hydraulic gates besides consumables, lubricants, spares etc. The major
capital cost of the project involves in construction of civil structures and installation
of plants and equipments. The capital cost of the project comes to 11956.00 lakhs.
The project is financed by Government of India under North Eastern Council
Schemes. As a whole, the benefit of the project goes mainly to the project,
respective State Governments (Assam & Meghalaya) and the workers of the project.
Unless otherwise the project had come up, these employment opportunities would
have never been created. The power generated by the plant is drawn by Power Grid
Corporation of India Limited and the same is paid to the project as per power
available at ex-bus end. As such, in realisation o f revenue no Transmission and
Distribution (T&D) loss is applicable.

130
❖ Capital Cost of the Project = Rs.l 1956.00 Lakhs
❖ Selling price of the power (Consumer willingness to pay) = Rs.0.89 per
unit(KWH)
❖ Financial benefits paid to the workers (Compensation paid to the skilled &
semiskilled labour is considered what the others are willing to pay, where as
unskilled labour is getting more than its competitive market rate because of
minimum wage legislation, quota, reservation, foreign exchange regulation
etc.)=Rs.0.62 per unit(KWH)
❖ Expected production level = 500 Million Units(KWH) per annum
❖ State Governments are getting 12% free power from the power plant located
within their respective territorial boundary.
Economic analysis is made to assess the economic viability o f the project as per the

131
5. Adjustment for projects production on use o f merit goods or demerit goods,
FINANCIAL VIABILITY
Revenue = 500MiIlion UnitsxRs.0.89= Rs. 4450.00 Lakhs
Cost of production = SOOMillion UnitsxRs.0.62= Rs. 3100.00Lakhs
NPV=-Rs. 11956.00+1739.09x0.8929+1470.45x0.7972+802.34x0.7118+1089.82
x0.6355+564.65x0.5674+443.64x0.5066+928.97x0.4523+1350.00x3.6117
(Sum of PV at 12% rate of discount for 28 years)
As such the project is not financially viable.
ECONOMIC ANALYSIS
economic (efficiency) prices. The principles of shadow pricing o f inputs and outputs
are as follows:
For outputs (Power): shadow pricing is Consumers willingness to pay as it leads to
For inputs (Raw materials & labour): shadow pricing is Marginal cost of

No Lakhs in Lakhs
1 1993-1994 1326.00 1147.00
2 1994-1995 3566.00 3084.00
3 1995-1996 2269.00 1962.00
4 1996-1997 3083.00 2665.0
5 1997-1998 640.00 553.00
6 1998-1999 41.00 35.00
132
7 1999-2000 88.00 76.00

8 2000-2001 289.00 249.00
9 2001-2002 654.00 565.00
10 Total 119,56.00 103,36.00
1. Commercial price o f steel is Rs. 18,000.00 per MT, the economic value of steel is
Rs. 14,500.00 per MT because the project will lead to greater utilisation of the
capacity o f steel industry. So, the production of steel will be economic (social)
value of steel.
3. Cost of skilled and semiskilled labour is taken as what the others willing to pay
for the same nature of job. For unskilled labour 50% of the financial cost is
considered for the works purely of unskilled in nature.
indigenous power plant equipment is taken as 80% o f the commercial value due
to market imperfection, taxes, import quota, subsidies, foreign exchange
5. Social value of afforestation, ecology and environment is much more than the
financial value because it keeps balance of the greenhouse gases, provides
oxygen to the living entities, protects the earth from erosion and fertility of top
soil, flood moderation etc.
6. Social value of engineering and know-how fees is much more than the financial
value, because it will induce further growth of research and development in the
field of science and technology leading to cost reduction the construction
industry. Implementation of sophisticated project contributes to development of
local skills and capacities. Furthermore, it will help to change traditional values,
133
attributes and the behaviour of the society, build up and enterprising spirit
among the people, develop a desire for changing and improving conditions of
life, introduce better work discipline and thus changes the very pattern and basis
of economic development.
A. SHADOW REVENUE
than replacement of existing facilities or decrease import or increase exports in the
Shadow cost of production (As it leads to increased production o f inputs rather than
deprive others from the use of the inputs or increase or decrease import or exports) =
Marginal cost of production of raw materials and labour inputs means the social cost
associated with the inducing additional production of workers that consist of:
1. Unskilled labour
3. Skilled labour
them are zero. Shadow wage rate o f unskilled labour is taken 50% of the prevailing
wage rate. In case of semi skilled labour and skilled labour the shadow wage rate is
taken as what the others willing to pay for the same nature of job. However, for a
consumables. = SOOMillion Units @ Rs.0.32 per Unit = Rs. 1600.00 Lakhs
a. There is no involvement of land for this project. It is only an extension of
original Kopili H.E.Project, as such, cultivable land that has sacrificed by
the fanners for the project is nil. The entire land belongs to the state of
134
Assam and a portion falls under the state of Meghalaya. As such the benifit
o f 12% free power produced by the Kopili power plant goes equally (6%
each) to both the Government of Assam & Meghalaya respectively.
b. Benefit that goes to the Government o f Assam - 500MU @ 6%x0.89
=Rs.267.00 Lakhs
c. Benefit that goes to the Government o f Meghalaya = 500MU @ 6%x0.89
=Rs.267.00 Lakhs
ECONOMIC BENEFIT = (Shadow revenue - Shadow cost o f production)+
Economic benefit goes to the Government of Assam & Meghalaya on account of
12% free power 4450.00-1600.00+267.00+267.00= Rs.3384.00 Lakhs.
Benefit to the project =4450.00-3100.00= Rs. 1350.00 Lakhs
Benefit to the workers =(0.62-0.32) x500MU= Rs.l500.00Lakhs
Benefit to the Government of Assam = Rs.267.00 Lakhs
Benefit to the Government of Meghalaya = Rs.267.00 Lakhs
Total benefit=1350.00+1500.00 +267.00 +267.00= Rs.3384.00 Lakhs
Workers savings @15%= 1500.00x0.15= Rs.225.00 Lakhs
Value o f savings in terms of consumption (workers)=
j r(l-a)
k-ar
Where /= Value of savings in terms of consumption
Value of savings = 0.2 (1.00-0.15)70.1-0.15x0.2 = 2.42

Total value o f savings (workers)=1.42x Rs.225.00 Lakh = Rs.319.50 Lakhs
Value of savings in terms o f consumption (Project & Government) =
I _ r(l-a)
k-ar
k ^Social discounting rate = 0.10 i.e. 10%
a ~ Reinvestment rate for project = 0.30
Value of savings = 0.2 (1.00 —0.30)70.1-0.30x0.2 = 3.50
Value of savings 7= 3.5 per unit of consumption
Savings by the Project@30% = Rs. I350.00x.030 = Rs.405.00 Lakhs
Savings by Assam Government @ 30%=Rs.267.00x0.30= Rs.80.10 Lakhs
Savings by Meghalaya Government @ 30%=Rs.267.00x0.30= Rs.80.10 Lakhs
Total value of savings (Assam Government) = 2.5x80.10= Rs.200.25 Lakhs
Total value of savings (Meghalaya Government) = 2.5x80.10= Rs.200.25 Lakhs
Total savings impacts Rs.319.50+ Rs.1012.50 + Rs.200.25 + Rs.200.25
=Rs.l732.50 Lakhs

136
Where b = Base level income= Rs.25,000.00 per annum for a family of five
members.
C i ^Current income level of beneficiaries.
n = Elasticity o f the marginal utility of income = 0,5 for the workers,
government and project.
W workers =(25000/18000) 05 =1.18
Value of distribution = 0.18x Rs.1500.00 Lakhs = Rs.270.00 Lakhs
W project =(25000/80000000) °'5 =0.01767
Value of distribution = - 0.98x Rs.1350.00 Lakhs = - Rs.l323.00Lakhs
Weight assigned to the benefits going to the Assam Government
W Assam gov,. =(25,000/22710,00,00,000)0 5 =0.000331788
(In the Year 1998-99 Net State Domestic Product (NSDP) o f Assam was
Rs.22710.00 Crores. — Directorate of Economic and Statistics of Assam)
Value of distribution = -0.99966821 lx Rs.267.00 Lakhs = -Rs.266.91 Lakhs
Weight assigned to the benefits going to the Meghalaya Government
WMeghalayaGov, =(25,000/2580,00,00,000)05 =0.000984374
(In the Year 1998-99 Net State Domestic Product (NSDP) of Meghalaya was
Rs.2580.00 Crores. — Directorate of Economic and Statistics o f Meghalaya)
Value of distribution = -0.999015626x Rs.267.00 Lakhs = - Rs.266.73 Lakhs

137
Total distribution impact =270.00 -1323.00 -266.91-266.73= -Rs. 1586.64 Lakhs
E. SOCIAL PREFERENCE USING THE CONCEPT O F M ERIT AND
DEM ERIT GOODS.
TOTAL ECONOMIC VALUE OF THE PR O JEC T = Rs.3384.00Lakhs
(economic benefit) + Rs. 1732.50 Lakhs (saving impact) - Rs. 1586.64 Lakhs
Economic NPV= -10336.00 + 3529.86x8.18(Sum of PV at 12% rate of discount for
35 years)= Rs. 18538.25, which is positive.
As such, the project is economically viable.
Corresponding Economic Internal Rate o f Return works out to be 34.15%

138
NAME OF THE PROJECT— RANGANADI HYDRO ELECTRIC PROJECT
Ranganadi Hydro Electric Project (405MW) is located 80KM away from Zero the
district headquarter o f Lower Subansiri District of Arunachal Pradesh. The Project is
implemented by Government of India under the central sector scheme to generate a
quantum of design energy of 1509 (Revised from original 1874) Million units
(Million Kilo-watt-hour). The project is taken up by the Government to meet the
growing demand for power in the economy for consumption as well as creation of
employment opportunities to the unemployed youths o f the region. There is no raw
material co st as such to be purchased by the project, only just to impound the
reservoir during monsoon and to use it for generation of power throughout the year.
However during operation, sufficient manpower is required to run the power plant,
to build up the reservoir, operation of hydraulic gates besides consumables,
lubricants, spares etc. The major capital cost of the project involves in construction
of civil structures and installation of plants and equipments. The capital cost of the
project comes to 135050.00 lakhs. The project is financed by Government of India
under North Eastern Council Schemes. As a whole, the benefit o f the project goes
mainly to the project, Government of Arunachal Pradesh and the workers associated
with the project. Unless otherwise the project had come up, these employment
opportunities would have never been created. The power generated by the plant is
drawn by Power Grid Corporation of India Limited and the same is paid to the
project as per power available at ex-bus end. As such, in realisation of revenue no
Transmission and Distribution (T&D) loss is applicable.

139
❖ Capital Cost of the Project = Rs. 135050.00 Lakhs
unit(KWH)
etc.)=Rs. 1.17 per unit(KWH)
❖ Expected production level = 1500 Million Unit(KWH)s per annum
❖ Cost o f production of power excluding labour cost i.e. marginal cost of
production -Rs.0.60 per unit(KWH)
❖ Government of Arunachal Pradesh is getting 12% free power from the power
plant (RHEP)
Economic analysis is made to assess the economic viability of the project as per the
5. Adjustment for projects production on use o f merit goods or demerit goods,
140
FINANCIAL VIABILITY
Revenue = ISOOMillion UnitsxRs.l.82= Rs.27300.00 Lakhs
Cost of production = 1500Million UnitsxRs. 1.17= Rs. 17550.00 Lakhs
NPV= -Rs. 135050.00+ Rs.333.92x0.8929- Rs.6249.00x0.7972+ Rs.6164.84x0.7118
+ Rs.9750.00x5.774 (Sum of PV at 12% rate of discount for 32 years)
ECONOMIC ANALYSIS
economic (efficiency) prices. The principles of shadow pricing o f inputs and outputs
are as follows:
Schedule of cash flows:

No Lakhs in Lakhs
1 1987-1988 849.00 704.00
2 1988-1989 1203.00 998.00
3 1989-1990 2159.00 1791.00
4 1990-1991 1889.00 1568.00
5 1991-1992 2714.00 2252.00
6 1992-1993 4462.00 3703.00
7 1993-1994 7203.00 5978.00
8 1994-1995 9219.00 7650.00
9 1995-1996 13379.00 11104.00
10 1996-1997 12417.00 10306.00
141
11 1997-1998 10966.00 9100.00

12 1998-1999 12892.00 10700.00
13 1999-2000 20016.00 16613.00
14 2000-2001 18925.00 15707.00
15 2001-2002 16757.00 13908.00
16 Total 1350,50.00 1120,82.00
1. Commercial price o f steel is Rs. 14,600.00 per MT, the economic value of
steel is Rs. 11,550.00 per MT because the project will lead to greater
utilisation of the capacity of steel industry. So, the production of steel will
be economic (social) value of steel.
3. Cost of skilled and semiskilled labour is taken as what the others willing to
pay for the same nature of job. For unskilled labour 50% of the financial
cost is considered for the works purely of unskilled in nature.
indigenous power plant equipment is taken as 80% o f the commercial value
due to market imperfection, taxes, subsidies, import quota, foreign exchange
5. Social value of afforestation, ecology and environment is much more than
the financial value because it keeps balance o f the greenhouse gases,
provides oxygen to the living entities, protects the earth from erosion and
fertility of top soil, flood moderation etc.
6. Social value o f engineering and know-how fees is much more than the
financial value, because it will induce further growth of research and
development in the field of science and technology leading to cost reduction
the construction industry. Implementation of sophisticated project

142
contributes to development of local skills and capacities. Furthermore, it
will help to change traditional values, attributes and the behaviour of the
society, build up and enterprising spirit among the people, develop a desire
for changing and improving conditions of life, introduce better work
discipline and thus changes the very pattern and basis of economic
development.
A. SHADOW REVENUE
than replacement of existing facilities or decrease import or increase exports in the
Shadow cost of production Shadow cost of production (As it leads to increased
production of inputs rather than deprive others from the use of the inputs or increase
or decrease import or exports) = Marginal cost of production of raw materials and
labour inputs means the social cost associated with the inducing additional
production of workers that consist of:
1. Unskilled labour
3. Skilled labour
them are zero. Shadow wage rate of unskilled labour is taken 50% of the prevailing
wage rate. In case of semi skilled labour and skilled labour the shadow wage rate is
taken as what the others willing to pay for the same nature of job. Howev er, lor a
143
consumables. = 1500Million Units @ Rs.0.60 per Unit = Rs.9000.00 Lakhs
a. There is 300 hactres of cultivable land that was sacrificed by the farmers for
the project. It is seen from the field studies that only kharif crops, mainly
food grains (rice, wheat etc.) are produced once in a year, either jhum or wet
rice cultivation. Average agricultural out put converted into the monetary
equivalent comes to Rs. 12000.00 per hactre. The entire land belongs to the
state of Arunachal Pradesh. As such the benifit o f 12% free power produced
by the Ranganadi power plant goes to the Government o f Arunachal
Pradesh.
b. It is seen that there is an incidence o f loss o f revenue to the farmers on
Hactre@Rs. 12000.00“ Rs.36.00 Lakhs per annum.
c. Benefit that goes to the Government of Arunachal Pradesh = 1500MU @
12%xl.82 =Rs.3276.00 Lakhs
ECONOMIC BENEFIT = (Shadow revenue - Shadow cost of production^
Economic benefit goes to the Government of Arunachal Pradesh on account of 12%
free power - Loss of revenue to the farmers on account o f the agricultural output that
would have produced by the land sacrificed to the project = 27300.00-9000.00
+3276.00- 36.00 = Rs.21540.00 Lakhs.
Benefit to the project =27300.00-17550.00= Rs.9750.00 Lakhs

144
Benefit to the workers =(1.17-0.60) xl500MU= Rs.8550.00 Lakhs
Benefit to the Government of Arunachal Pradesh = Rs.3276.00 Lakhs
Benefit to the farmers = -Rs. 36.00 Lakhs
Total benefit=9750.00+8550.00 + 3276.00 -36.00 = Rs.21540.00 Lakhs
Workers savings @15%=8550.00x0.15= Rs.1282.50 Lakhs
Savings by farmers @10% = 36.00x0.10 = Rs.3.60 Lakhs
I _ r(l-a)
k-ar
Value of savings in terms o f consumption (workers)=
Where, 7= Value o f savings in terms of consumption
Value o f savings = 0.2 (1.00 -0.15)/0.1-0.15x0.2 = 2.42
Total value of savings (workers)=1.42x Rs.1282.50 Lakh = Rs.1821.15 Lakhs
/ = r0zf?)
k-ar
Where, 7= Value of savings in terms of consumption
a - Reinvestment rate = 0.10

145
Value o f savings - 0.2 (1.00 -0.10)/0.1-0.10x0.2 = 2.25
Value o f savings 7=2.25 per unit o f consumption
Total value o f savings (farmers)=1.25x -Rs.3.60 Lakh = -Rs.4.50 Lakhs
Value o f savings in terms o f consumption (Project & Government) =
j _ r ( \ - a)
k-ar
Where 7= Value o f savings in terms o f consumption
r = marginal productivity o f Capital = 0.2
k =Sociai discounting rate = 0.10 i.e. 10%
Value o f savings 7= 3.5 per unit o f consumption
Savings by the Project@30% = Rs. 9750.00x.030 = Rs.2925.00 Lakhs
Total value o f savings (Project) = 2.5x Rs.2925.00= Rs.7312.50 Lakhs
Savings by the Arunachal Govemment@30%=Rs.3276.00x.030 = Rs.982.80 Lakhs
Total value o f savings by Arunachal Govemment=2.5x Rs.982.80=Rs.2457.00
Lakhs
Total savings impact= Rs.1821.15 - 4 .5 0 + Rs.7312.50 +2457.00 =11586.15 Lakhs
f hy
W= *
UJ
Where b= Base level income=Rs.30, 000.00 per annum for a family o f five
146
members.
G=Current income level of beneficiaries.
n - Elasticity of the marginal utility of income = 0.5 for both the workers and
the project.
W workers =(30000/18000) 05 =1.29
Wproject =(30000/500000000)05 =0.00745
Value of distribution = - 0.99225x Rs.9750.00 Lakhs = - Rs.9674.48 Lakhs
Weight assigned to the benefits going to the Arunachal Pradesh Government
WfArunachal Pradesh Gov,) =(30000/1591,00,00,000) °'5 =0.001373173
(In the Year 2000-2001 Net State Domestic Product (NSDP) o f Arunachal Pradesh
was Rs. 1591.00 Crores. — Directorate of Economic and Statistics of Arunachal
Pradesh)
Value of distribution = -0.998626826x Rs.3276.00 Lakhs = -Rs.3271.50 Lakhs
Total distribution impact = 2479.50-9674,48 -3271.50 = -Rs.10466.48 Lakhs
DEMERIT GOODS.

147
TOTAL ECONOM IC VALUE OF THE PR O JEC T = Rs.21540.00 Lakhs
(economic benefit) + Rs.l 1586.15 Lakhs (saving impact) - Rs.10466.48 Lakhs
Economic NPV= -112082.00+ 22659.67x8.18(Sum of PV at 12% rate of discount
for 35 years)= Rs.73274.10 Lakhs, which is positive.
As such the project is economically viable.
Corresponding Economic Internal Rate of Return works out to be 20.19 %

148
NAME OF THE PROJECT— DOYANG HYDRO ELECTRIC PROJECT
Doyang Hydro Electric Project (75MW) is located 30KM away from the district
headquarter o f Wokha District o f Nagaland. The Project is implemented by
Government of India under the central sector scheme to generate a quantum of
design energy of 227 Million units (Million Kilo-watt-hour). The project is taken up
by the Government to meet the growing demand for power in the economy for
consumption as well as creation of employment opportunities to the unemployed
youths of the region. There is no raw material cost as such to be purchased by the
project, only just to impound the reservoir during monsoon and to use it for
generation of power throughout the year. However during operation, sufficient
manpower is required to run the power plant, to build up the reservoir, operation of
hydraulic gates besides consumables, lubricants, spares etc. The major capital cost
o f the project involves in construction of civil structures and installation of plants
and equipments. The capital cost of the project comes to 74048.00 lakhs. The project
is financed by Government of India under North Eastern Council Schemes. As a
whole, the benefit of the project goes mainly to the project, Government of
Nagaland and the workers associated with the project. Unless otherwise the project
had come up, these employment opportunities would have never been created. The
power generated by the plant is drawn by Power Grid Corporation of India Limited
and the same is paid to the project as per power available at ex-bus end. As such, in
realisation of revenue no Transmission and Distribution (T&D) loss is applicable.

149
❖ Capital Cost of the Project = Rs.74048 Lakhs
unit(KWH)
etc.)=Rs. 1.68 per unit(KWH)
❖ Expected production level = 250 Million Unit(KWH)s per annum
❖ Government of Nagaland is getting 12% free power from Doyang power plant.
❖ The project leads to creation o f employment opportunities to the unemployed
Economic analysis is made to assess the economic viability o f the project as per the
5. Adjustment for projects production on use of merit goods or demerit goods,
150
FINANCIAL VIABILITY
Revenue = 250Million UnitsxRs.2.05- Rs.5125.00 Lakhs
Cost of production = 250Million UnitsxRs. 1.68- Rs. 4200.00 Lakhs
NPV= -Rs.74048.00- Rs.3223.65x0.892- Rs.2923.84x.7972- Rs.2825x0.7118-
Rs.2276x0.6355+ Rs.925x5.13 (Sum of PV at 12% rate o f discount for 30 years)
=(-) Rs,77961.55Lakhs, which is negative.
ECONOMIC ANALYSIS
economic (efficiency) prices. The principles o f shadow pricing of inputs and outputs
are as follows:
ECONOMIC VALUE O F THE PROJECT

No Lakhs in Lakhs
1 1987-1988 713.00 598.00
2 1988-1989 1154.00 969.00
3 1989-1990 1372.00 1152.00
4 1990-1991 1590.00 1335.00
5 1991-1992 1600.00 1344.00
6 1992-1993 3470.00 2914.00
7 1993-1994 3506.00 2945.00
8 1994-1995 4218.00 3543.00
151
9 1995-1996 6373.00 5353.00

10 1996-1997 8104.00 6807.00
11 1997-1998 8536.00 7170.00
12 1998-1999 11633.00 9771.00
13 1999-2000 12424.00 10436.00
14 2000-2001 7316.00 6145.00
15 2001-2002 2039.00 1712.00
16 Total 74048.00 62194.00
1. Commercial price of steel is Rs.7,500.00 per MT, the economic value o f steel is
Rs.6,000.00 per MT because the project will lead to greater utilisation of the
capacity of steel industry. So, the production o f steel will be economic (social)
value o f steel.
3. Cost of skilled and semiskilled labour is taken as what the others willing to pay
for the same nature o f job. For unskilled labour 50% o f the financial cost is
considered for the works purely of unskilled in nature.
indigenous power plant equipment is taken as 80% o f the commercial value due
to market imperfection, taxes, subsidies, import quota, foreign exchange
5. Social value o f afforestation, ecology and environment is much more than the
financial value because it keeps balance of the greenhouse gases, provides
oxygen to the living entities, protects the earth from erosion and fertility of top
soil, flood moderation etc.
6. Social value of engineering and know-how fees is much more than the financial
value, because it will induce further growth of research and development in the
field of science and technology leading to cost reduction the construction

152
industry. Implementation of sophisticated project contributes to development of
local skills and capacities. Furthermore, it will help to change traditional values,
attributes and the behaviour of the society, build up and enterprising spirit
among the people, develop a desire for changing and improving conditions of
life, introduce better work discipline and thus changes the very pattern and basis
of economic development.
A. SHADOW REVENUE
than replacement o f existing facilities or decrease import or increase exports in the
Shadow cost of production = Shadow cost of production (As it leads to increased
production o f inputs rather than deprive others from the use of the inputs or increase
or decrease import or exports) = Marginal cost of production of raw materials and
labour inputs means the social cost associated with the inducing additional
production of workers that consist of:
4. Unskilled labour
6. Skilled labour
them are zero. Shadow wage rate of unskilled labour is taken 50% o f the prevailing
wage rate. In case o f semi skilled labour and skilled labour the shadow wage rate is
taken as what the others willing to pay for the same nature o f job. However, for a
153
consumables. = 250Million Units @ Rs.0.85 per Unit = Rs.2125.00 Lakhs
a. There is 3400 hactres of cultivable land that was sacrificed by the farmers
for the project. It is seen from the field studies that only kharif crops, mainly
food grains (rice, wheat etc.) are produced once in a year, either jhum or wet
rice cultivation. Average agricultural out put converted into the monetary
equivalent comes to Rs. 12000.00 per hactre. The entire land belongs to the
state o f Arunachal Pradesh. As such the benifit of 12% free power produced
by the Doyang power plant goes to the Government o f Nagaland.
b. It is seen that there is an incidence of loss o f revenue to the farmers on
Hactre@Rs. 12000.00= Rs.408.00 Lakhs per annum.
c. Benefit that goes to the Government of Nagaland = 250MU @ 12%x2.05
=Rs.615.00 Lakhs
ECONOMIC BENEFIT = (Shadow revenue - Shadow cost o f production^
Economic benefit goes to the Government o f Nagaland on account of 12% free
power - Loss o f revenue to the farmers on account o f the agricultural output that
would have produced by the land sacrificed to the project 5125.00-2125.00 +615.00-
408.00= Rs.3207.00 Lakhs.
Benefit to the project =5125.00-4200.00= Rs.925 Lakhs
Benefit to the workers =(1.68-0.85) x250MU= Rs.2075.00 Lakhs

154
Benefit to the Government of Nagaland = Rs.615,00 Lakhs
Benefit to the farmers = - Rs.408.00 Lakhs
Total benefit=925.00+2075.00 + 615.00 - 408.00= Rs.3207.00 Lakhs
Workers savings @15%=2075.00x0.15= Rs.311.25 Lakhs
Farmers savings @10%= -408.00x0.10= -Rs.40.80 Lakhs
Value of savings in terms of consumption (workers)=
k-ar
r= Marginal productivity of Capital = 0.2
k ==Social discounting rate = 0.10 i.e. 10%
a - Reinvestment rate = 0.15
Value o f savings = 0.2 (1.00-0.15)/0.1-0.15x0.2 = 2.42
i.e. additional value =1.42
Total value of savings (workers)=1.42x Rs.311.25 Lakh = Rs.441.97 Lakhs
j fjl-a)
k-ar
Where, 7= Value of savings in terms o f consumption
Value of savings = 0.2 (1.00 -0.10)/0.1-0.10x0.2 = 2.25

155
Total value of savings (farmers)=1.25x -Rs. 40.80Lakh = -Rs.51.00 Lakhs
Value of savings in terms o f consumption (Project & Government) =
k-ar
Where, /= Value of savings in terms o f consumption
r = marginal productivity of Capital = 0.2
Value of savings /= 3.5 per unit of consumption
Savings by the Project@30% = Rs. 925.00 x0.30 = Rs.277.50 Lakhs
Savings by the Nagaland Govemment@30% = Rs. 615.00 x0.30 = Rs.184.50 Lakhs
Total value of savings (Nagaland Government) = 2.5x Rs. 184.50= Rs.461.25 Lakhs
Total savings impact = Rs.441.97 - Rs.51.00+ Rs.693.75 + Rs.461.25 = 1545.97
Lakhs
W= A
VCJ
Where b= Base level ineome= Rs.30,000.00 per annum for a family of five
members.
156
Ci =Current income level of beneficiaries.
n = Elasticity of the marginal utility o f income = 0.5 for both the workers and
the project
Wworkers =(30000/18000)0,5 =1.29
Additional weight = 1.29 -LOO = 0.29
Wproject =(30000/102500000)05 =0.017
Value o f distribution = - 0.98x Rs.925.00 Lakhs = - Rs.906.50 Lakhs
Weight assigned to the benefits going to the Nagaland Government
WNagalandGovt =(30000/2330,00,00,000)05 =0.001134704
(In the Year 1999-2000 Net State Domestic Product (NSDP) of Nagaland was
Rs.2330.00 Crores. — Directorate of Economic and Statistics of Nagaland)
Additional weight = 0.001134704-1.00 = -0.998865295
Value of distribution = -0.998865295x Rs.615.00 Lakhs = -Rs.614.30 Lakhs
Total distribution impact =601.75 -906.50 -614.30 = -Rs.919.05 Lakhs
DEMERIT GOODS.
TOTAL ECONOMIC VALUE OF THE PROJECT = Rs.3207.00 Lakh
(economic benefit) + Rs.1545.97 Lakh (saving impact) - Rs.919.05 Lakh

157
Economic NPV= -62194.00+ 3833.92x8.18(Sum of PV at 12% rate of discount for
35 years)= -Rs.30832.54 Lakhs, which is negative.
As such the project Is not economically viable.
4.11.6 EXTERNALITIES
Externalities are commonly known as external economies, diseconomies,
neighborhood effects and its cost and benefits are beyond the confines o f the project
itself. As the society has not designed any mechanism for evaluation of these
external benefits & costs an attempt is being made to make a qualitative assessment
o f them.
From the field study it is seen that the public is not getting any subsidised or free
power after commissioning of the power project. As such, the economic benefit by
the way of any relief or decrease in tariff does not arise. However, the availability
and reliability of power has been improved considerably. The common people living
in and around the project are getting more benefits compared to the other areas of
the state. Moreover, due to coming up of the project, the infrastructure of the locality
has undergone a sea change. Vital facilities that is required to sustain a modern
society such as, road & telecommunication, electricity, gas, water, educational
institution, markets, medical and heath care services etc has been developed by the
project. In respect of the environment, hydropower has been treated globally as a
clean source of energy without any degradation to land, air or water. No endangered
species of flora & fauna is being disturbed or displaced due the project activities.
The researcher has not been reported any adverse consequence on the environment
due to coming up of the project. The local community is actively participating with
the environmental management and implementation team in afforestation and

158
monitoring of the environmental resources. As such they are getting part time
employment and benefited indirectly. It is seen that there is a growing awareness
among the farmers to arrest j hum cultivation, instead, they are found more interested
in horticulture farming. After coming up the projects, new markets have been
opened up for staffs and the workers. To meet up the requirement of growing
demand for their daily consumption the nighbouring villages have used to fill up this
demand. As such marginal farmers are getting benefit • indirectly. New road
connectivity has opened up transportation business and a portion of local population
is involved with i t The same logic is also hold good for other commercial
establishments such as grocery, hotels, hardwares & electricals, medical clinic,
telephone booths, vocational institutions, automobile workshops etc. People living
nearby the project are getting exposure to the latest electrical gadgets such as TV,
computer, refrigerator, pump, heater, motor etc. Moreover, there has been an
incidence of higher earning power among the people in and around the project, those
who are directly or indirectly associated with the project. Savings rate, literacy rate,
infant mortality rate etc are also found to be improved among the common villagers
living in the vicinity o f the project. In addition to it the changing attitude of the
public towards the disciplined life, for acquiring new knowledge through training
and in turn changing the value system of the society is a positive impact on the
society.
ECONOMIC VIABILITY & PERFORMANCE INMCAXQRS DEmQJECIS
Economic
Financial NPV NPV in
hJ
oo
Name of the Project in Crores at Financial Crores at Economic IRR Decision Rule
O
12% Discount IRR in % 12% in%
Rate Discount
Rate
Major turnaround required
& economic benefit is to be
3
o
*—
C \
CO
CO
CO
00
1
t
t"
t"
'w'
*
Doyang H E Project(75MW) Negative Negative increased by taking up
other economic activities
besides power generation.
6Y0Z
rs
Ranganadi H E Project (405MW) (-)790.52 4.90 732.74 Economically viable
I
*n
in
Os
CO
Kopili H E Project(150MW) 7.68 205.2600 24.36 Economically viable
t
VO
(N
CN
Nt
/ — N /— s
Kopili H E Project-Stage-1 (100MW) 9.74 185.3800 34.15 Economically viable
159
160
4.12 ENVIRONMENTAL IMPACT ASSESSMENT OF PROJECTS
One of the basic objectives of environmental impact analysis is to describe the
environmental resources or its attributes, which will likely be affected by the project.
It is an assessment of various impacts on the environment with and without the
project. The effects on the environment by the proposed impact in a quantified
manner in terms of time horizon, mode (direct or indirect) must be expressed, so as
to plan, design & formulate remedial measures for minimum degradation of the
environment.
4.13 BASIC METHODOLOGY OF ENVIRONMENTAL IMPACT
ASSESSMENT
There is no such methodology equally acceptable to all. The effects on the
environmental resources are very complicated and intangible in most of the cases.
Major problems in the assessment of environmental resources or values are due to:
1. Diffused nature of the impacts at different point of time and space and time
lag of their effects from the causes.
2. Environmental effects are multidimensional and product of several effects.
3. There is no adequate methodology or technique to estimate the impacts.
4. The impacts are not even perceptible to the common people.
As it leads to complexity in identification and quantification o f the effects, the
attempts such as checklists, matrices, networks, flowcharts, relationships, overlays,
or combination o f them leads to very much subjective, making the issue difficult for
quantification by the analyst. That too also depends upon the background and the
basis of the analyst or observer.

161
In the present context, environmental impact study deals with the item by item
review of effects on the individual values and resources including identification,
description and qualification of the effects to the maximum extent possible. Then
only it can be possible to group these effects in a systematic manner. The following
steps are adopted for environmental impact assessment:
1. To make a rapid or quick scanning of the basic environmental resources
such as land, water bodies, air at the macrolevel say at district level, where
the project is located.
2. To make a clear demarcation of the project with its surroundings zones.
Maps are very useful tool for this purpose.
3. To identify, assess and describe all the environmental attributes as given in
tabular form endowed in the project vicinity.
4. To make a ranking the identified environmental resources with respect to
their fragility, importance, relevance and quality. It will serve the purpose of
concentrating the attention to specific important items rather than taking
innumerable less important issues.
5. To make a review of effects item wise of the proposed project on the already
identified individual environmental resources embedded in the project
vicinity.
6. To arrange in groups the effects in the tabular format.
7. To suggest remedial measures for mitigating the adverse effects. They may
be
a. Corrective
b. Compensatory or
c. Enhancing
162
4.14 IMPACT ASSESSMENT METHODOLOGIES
The impact identification and assessment can be made through several ways. Briefly
they are:
Ad-Hoc: This methodology suggests broad areas o f possible impact (such as water
bodies, wet lands, lakes and forests etc.) rather than defining specific parameters to
be investigated. This methodology provides minimum guidance for impact
assessment o f the project.
Overlays; This type of methodology depends upon the environmental parameters
(e.g. physical, social, ecological and aesthetic) of the proposed project surroundings.
These maps are overlaid to take care o f the composite characteristics of the regional
environment.
Checklists: This methodology used to describe specific list of environmental
attributes to be investigated for possible impacts. It is not necessary to establish
cause effect relationship to the project activities. It may or may not include
guidelines about the procedure how the data are to be measured or interpreted.
Matrices: This type o f methodology deals with the list of project activities with a
checklist of environmental attributes that may be affected. The two lists are having
to form a matrix from which, it will identify the cause-effect relationship between
specific activities & its impacts.
Networks: this type of methodology works from a list o f project activities to
establish cause-condition-effect relationship. It is also believed that a series of
impacts on the environment is resulted from the project activities. A set of possible
networks to identify the impacts can be traced out from the project actions or
activities.
163
Combination o f computer aided: This type of methodology uses a combination of
matrices, networks, analytical models and a computer aided systematic approach. As
it is a combination of many complex methodologies, it can be applied to:
1. Identify activities associated with the Government policies & programmes.
2. Identify potential environmental impacts at different levels.
3. Provide analytical models to establish cause-effect relationship.
4. Provide methodology and procedure to utilise comprehensive information in
decision making.
4.15 DIFFICULTIES IN ENVIRONMENTAL IM PACT ASSESSMENT
The followings are some of the critical aspect that poses the Environmental Impact
Assessment (EIA) difficult to make an assessment in terms of quantity and quality.
1. Estimation o f the environmental impacts: Environment represents essentially a
dynamic term, which is used to describe the attributes to the environment. It is
very complicated and a distinction has to be made between the impacts and
changes in the attributes of the environment. In case of study of environmental
impact the researcher is concerned only on the aspect o f impacts not on the
changes, which normally takes place even without the project. It deals with the
a. Identification of the environmental attributes or resources
b. Measurement of impact on attributes.
c. Sum total of the impact on environmental resources to deal with the total
impact on the environment.
2. Estimation o f net changes: EIA is an attempt to measure the impacts on the
environmental attributes with and without the project. But the changes of the
attributes take place over time without the project activity. The net change in the
environmental impact is very much difficult to quantify at a given point of time.

164
3. Identification o f the impacts: The numbers o f attributes to be evaluated are
practically infinite. To make the EIA meaningful the analyst has to reduce these
infinite numbers of attributes eliminating dependable, recurring, redundant to
trace out the measurable/quantifiable variables. As such those attributes that are
difficult to quantify may still remain to be examined.
4. Base Characteristics: The basic properties of the attributes may have different
impacts, depending upon space, geographical location, time, quality, climate etc.
As such the impacts of one project on the existing environmental attributes may
not be similar with the another project. It is a very critical issue while making
choices between the projects.
5. Interrelationship o f attributes: The relationship o f the different attributes is
required to be determined which are very complex in nature. To access the
cause-effect relationship and its remedial measures are sometimes not traceable.
6. Measurement o f impact: It is an ideal approach to measure the impact and
translate them into a common unit. It is not possible to measure these impacts in
a common unit. For example population density & water quality. Even state of
art technology or methodology may not be able to equip the analyst to quantify
some impacts on the environment.
7. Quantification o f secondary impacts: Investment projects are having secondary
impacts such as, changed patterns of socio-economic and cultural activity,
natural condition, impacts on biophysical environment etc. These types of
secondary impacts cannot be quantified/predicted in advance in a precise nature.
8. Cumulative impact: Cumulative impacts are such as due to coming up of new
market, new technology, new investment avenues such as commercial
establishment, industrial estate etc. may have significant cumulative effect on

165
environment. The ELA should have a bearing in all respect in toto to deal with
the cumulative effects on the environment. It is not an easy exercise to interpret
or display these impacts on a summary sheet or matrix form.
4.16 ENVIRONMENTAL IMPACT ASSESSMENT OF HYDRO ELECTRIC
PROJECTS
Environment is the product mix of complex interaction of nature’s gifts and men’s
reaction on the same. Land is one of the most precious gift besides its undisturbed
product flora and fauna. Man exploits these gifts exclusively for his food and other
personal needs and comforts. There has been growing apprehension about the
complexity of the forest income and an unprecedented up-charge of the public
concern for the protection and preservation o f the environment in the recent years.
Forest is a living community of plants and animals. It is a product of the factors of
locality like climate, soil, topography and biotic influences. There is therefore a need
for balance between developmental needs and development hazards, between man
made and natural system and between exploitation and conservation of natural
resources. For the purpose of environmental impact assessment by the hydroelectric
project on the environmental resources deals with the following parameters before
taking up the project activities and monitoring the same during and after
implementation. Aspects incorporated in the guidelines for different phases adopted
from the World Bank publications modified to suit the Indian environment are as
follows:
4.16.1 COLLECTION OF BASELINE DATA
The basic information required for comprehensive Impact Assessment (IA) are the
descriptions of the environment, including its components such as atmosphere,
hydrosphere, lithosphere and the biosphere. Comprehensive Impact Assessment

166
tends to conduct socioeconomic survey among the human settlement located near
by. Data on population density, age & sex distribution, ethnic groups, educational
level, income level, mobility and mortality rates, means o f livelihood etc. are very
much essential for assessment of impact of development activities on human society.
More over it includes specific information about the community, life style, the needs
and problems o f the people, likely productivity levels, unemployment figures,
standard of living etc., which are necessary to access the socio-economic impact of
the project.
4.16.2 IMPACT IDENTIFICATION
It includes a list o f important impacts such as changes in ambient air quality,
changes in water and soil quality, noise level, wild life habitats, species diversity,
social and cultural system, employment level etc. when the project enters its
operational stages.
4.16.3 IMPACT PREDICTION
It examines the extent o f changes, which may occur in the system due to project
activity. As far as possible impact prediction attempts to scientifically quantify the
effect and,examine its secondary synergic consequence on the environment and
local community. The impact is closely studied and evaluated for its subsequent
effects on the components of the environment.
4.16.4 IMPACT EVALUATION
In this stage, attempt is being made to evaluate the predicted adverse impact & to
determine whether the impacts are significant warranting mitigation. If the project
has to come up on inhospitable land with very little biologically significant localities
around and no human settlements or very sparsely populated areas, a little
detoriation o f the environment may be permitted. If it is not so, then adequate

167
mitigative efforts should be taken up or the project has to be shifted to some other
locality. The judgement is taken on the basis of:
a. Comparison of the predicted information with the accepted standard.
b. Reference to pre-set criteria, protected places etc.
c. Consultation with relevant decision-makers.
4.16.5 M ITIGATIVE MEASURES AND M ONITORING PLANS
If the changes caused by the developmental activities are significant, the process of
environmental impact assessment proceeds to examine ways and means to mitigate
the adverse effects. The measures are critically examined for their effectiveness.
These may be categorised as:
1. Introduction of population control measures, strict monitoring to mitigate
the adverse effects by the developmental activity.
2. Changing project sites, routes, process, operating method, design etc.
3. Offering restoration of damaged resources, compensation to affected people,
concession, or by improving the quality o f life o f the community.
All mitigation measures cost something. The cost in the power project is included in
the Completed Cost Estimate and ultimately it is loaded in unit cost of power
produced by the plant. Environmental Impact Assessment should explicitly analyse
implications of adopting different alternatives so as to make policy decisions earlier.
In this regard, Ministry of Power, Government of India, as well as the Planning
Commission of India is the main mechanism in approving and clearing
Hydroelectric or Thermal power project on recommendation of MOEF for taking up
environmental safeguards.
168
4.16.6 INFORMING THE SOCIETY AND DECISION
Many technically sound Impact Assessment studies fail to exert their importance
and impress the decision-makers simply because of poor documentation. The
assessment can achieve its true purpose only if, its findings are well documented and
communicated to the policy makers. For effective communication one has to
identify the target audience and then shape the report accordingly so that it becomes
a meaningful document. Impact Assessment report is written as a non-technical
document as well, so the contents are intelligible to non-technical administrators and
general public while review committee and experts study it.
Basic environmental issues/specifications to be considered in a hydroelectric
project are:
1. Rehabilitation of affected population due to submergence.
2. Socioeconomic profiles or parameters of project affected families,
occupation, income, expenditure, literacy, household size & nos, sex ratio,
tribe, caste, religion, land holding etc.
3. Control of erosion due to removal of vegetation.
4. Watershed management and soil conservation.
5. Description of flora and fauna.
6. Description of aquatic life.
7. Design of the hydraulic structures on the basis o f hydrological, geological,
seismological and meteorological studies.
8. Silt load on the water bodies.
9. Energy conservation.
10. Compensatory afforestation.
11. Alternative uses of fuel supply.
/
169
12. Types, attributes of environmental resources and characteristics of the
submergence area.
13. Population characteristics and demographic pattern.
14. Cropping pattern, type and alternative source o f livelihood o f the people of
the project area.
15. Characteristics of soil, geology, topography, hydrological and
meteorological data of the environmental resources in the vicinity o f the
project up to a specified geographical territory.
All the above are essentially the part of the methodology o f Checklist as described
earlier in environmental impact assessment methodology. In case o f hydro electric
project there is no such type of pollution as in case of coal or gas based project. It is
treated as a clean source of energy to the human mankind having eco-friendly
production o f power in an economic price. From the environment and ecological
data of the projects under study it is seen that there is no any adverse environmental
impact found by the experts in the field.
4.17 TESTING OF HYPOTHESES
Professor Morris Humburg states that a hypothesis in statistics is simply a
quantitative statement about the population. It is an assumption that is made about
parameter values and then its validity is tested by statistical technique, which
ultimately tells us whether the hypothesis is correct and is sustained or whether it is
false and to be rejected. The purpose o f hypothesis testing is not to question the
computed value of sample static and hypothesized population parameter. To test the
validity o f our assumption, we gather sample data and determine the difference
between the hypothesized value and the actual value of the sample mean. Then we
170
judge whether the difference is significant. The smaller the difference, the greater
the likelihood that our hypothesized value for the mean is correct.
In hypothesis testing, we must state the assumed or hypothesized value of the
population parameter before we begin sampling. In this context, to test the
performance and viability of hydro electric power project, internal rate of return of
the project is treated as most critical indicator to judge the performance and viability
of the project and its contribution to the national economy. If the computed value of
internal rate o f return both financial or economic is found to be less than its cut-off
value, then we may conclude that the project performance is not good and it will not
be viable. Here we are making a formal statement o f our hypotheses. The research
work is proposed to test the following hypotheses: -
4.18 FINANCIAL PERFORMANCE & VIABILITY
Ho: IRR=T2%[The null hypothesis (Ho) is that the internal rate o f return is equal
to 12%, i.e. the cost of capital]
Hi: IRR<12%[The alternative hypothesis (Hi) is that the internal rate of return is
less than 12%, i.e. the cost of capital]
H 2: IRR>12%[The alternative hypothesis (H2) is that the internal rate of return is
higher than 12%, i.e. the cost of capital]
4.19 ECONOMIC PERFORMANCE & VIABILITY
H0: EIRR=12%[The null hypothesis (H0) is that the economic internal rate of return
is equal to 12% ]
Hi: EIRR<12%[The alternative hypothesis (Hi) is that the economic internal rate of
return is less than 12% ]
H 2: EIRR>12%[The alternative hypothesis (H2) is that the economic internal rate of

1 7 1
return is higher than 12% ]

If the computed sample result fails to support the null hypothesis we may conclude
that Hi or H2 is true. Again if, the result goes in favour of H2 , then we may conclude
that the project is economically or commercially viable as the case may be,
otherwise the project is not viable.
It is also believed that there is 95% probability that the internal rate of return either
financial or economical be equals to 12%
Standard error of the population using hypothesized value of H0 for a sample size of
35 is:
_ 0 .9 5 x 0 .0 5
V 35
=0.0368
As such, limits of acceptance region at 95% confidence level will be
= 12±1.96rr
The upper limit is=12+1.96x0.0368= 12.072%

The lower limit is=12-l.96x0.0368 = 11.927%
These above two limits of the acceptance region 12.072% & 11.927% are the most
critical values to establish the null hypothesis to be correct. If the sample mean lies
within the acceptance region we conclude that there is no significant difference
between the hypothesized mean and the sample mean, otherwise we will reject the
null hypothesis & conclude that the value of the sample observed is significantly
higher or lower than its hypothesized value.
As the computed value of financial rate of return of Kopili (150MW), Kopili Stage-I
Extension (100MW) & Ranganadi H.E. Project (405MW) are 9.74%, 7.68% &
172
4.90% respectively and that falls beyond the acceptance region, we can draw a
conclusion that their financial internal rate o f returns are significantly lower than the
hypothesized value. As such the null hypothesis is not sustained and the alternative
hypothesis Hi is true.
Similarly as the computed value o f economic rate o f return o f Kopili (150MW),
Kopili Stage-I Extension (100MW) & Ranganadi H.E. Project (405MW) are
24.36%, 34.15% & 20.19% respectively and that falls beyond the acceptance region,
w e can draw a conclusion that their financial internal rate o f returns are significantly
higher than the hypothesized value. A s such the null hypothesis is not sustained and
the alternative hypothesis H 2 is true.
NO TES AND REFERENCES
1. Public Enterprise Management- B.P. Mathur, Director General o f Audit, (Macmillan India
Limited), New Delhi].

UNIDO Approach to Economic Analysis of Hydroelectric Projects

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85

ECONOMIC ANALYSIS OF HYDRO ELECTRIC PROJECTS

“Economy is art o f making most o f life

— George Bernard Shaw

simultaneously increases. Development planning therefore requires the fixing and

contribute to the desired results.

A project is a proposal for an investment to create, expand and develop certain

facilities in order to increase the production of goods and services in a community

during a certain period of time. Furthermore, for evaluation purpose a project is an

unit of investment, which can be distinguished technically, commercially and

economically from other investments.

4.1 PUBLIC & PRIVATE SECTOR PRO JECT EVALUATION

The necessity o f evaluating and national profitability o f an industrial project applies

project evaluation is based on the methodology used mainly by Government, it will

also be a help to private investors, too. Private investors cannot be expected to be

based on the commercial profitability and return on their investment.

they can be properly incorporated in the budgeting procedure.

regional growth, backward area development, defense related projects), but

social or other problems o f crucial importance to the country.

implications is in itself a highly commendable exercise, because it confronts

decision-makers with a variety of parameters both favourable and unfavourable to

the project. It forces the decision-maker to think in terms o f alternatives and

policies conducive to the economic development of the nation.

numerous consultations, discussions, clearances, coordination among different

government institutions, socio-economic planning, financing, balance of payments,

manpower training, technological development, territorial location, prevention of

quantitative and qualitative, economic & non-economic analysis. It would be a over

simplification to believe that in practice the national evaluation of a project is a

ways, means and procedures of social evaluation.

4.2 EVALUATION OF PROJECTS: UNITED NATIONS INDUSTRIAL

DEVELOPMENT ORGANISATION (UNIDO) APPROACH & NATIONAL

The development process is a process with multi objectives: economic, political,

evaluation an indispensable, though sometimes a rather elaborate, task is the

existence of alternative economic opportunities for the commitment of resources,

the project on the nation as a whole. Whether the interest is in commercial or

consist of the following three steps.

❖ Identification of the quality, quantity and timing of physical inputs and

❖ Attachment o f appropriate prices to the inputs and outputs in order to

compute the respective values of cost and benefits.

❖ Co-measurement of cost and benefit of the project; in such a way that

facilitates its comparison with the alternative projects.

evaluation of investment projects by a single aggregate criterion incorporating

several multi objective aspects o f the development process. The incorporation of

different aspects into a single aggregate criterion is possible only by assigning

numerical weights (directly reflecting political value judgement) to these partial

❖ Nominal unit of present or future income of wage earners and profit

earners compared with a unit of income of government.

❖ Nominal unit o f income earned by a backward region as compared with

that in a more developed region.

consumption), o f marginal propensities of different groups to save and consume; of

interrelated weights and normatives should be re-adjusted accordingly. This

exercise requires highly qualified personnel, abundant information and use of

information and computers, it is hardly possible to apply this approach consistently

developing countries. Such a high degree of aggregation o f the criterion for

accessing investment projects, in the developing countries is unrealistic at present

an investment project towards the achievement o f different national development

under the conditions prevailing in the developing countries.

methodology for project evaluation by assigning numerical weights to them is

justified because of the weakness or unwillingness o f the. government of developing

countries to achieve certain distribution or other objectives by other ways and

means. It is difficult, however, to comprehend how a government that is weak or

unwilling to implement distributional or other objectives through more direct and