BS-2REVIEW OF FINANCIAL EVALUATION CRITERIA OF IRRIGATION PROJECTS

A. D. Mohile

<anildmohile@gmail.com>

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History of Benefit Cost Analysis

The need for considering the benefits from water projects, to the society and to the national economy, were ignored in analysis up to 1930’s. In India, only financial analysis was done.

The great depression in the USA, around 1928, lead to “welfare economics”

The Benefit Cost analysis was adopted in the USA. In the late 1950’s, D.R.Gadgil incorporated a simpler version in Indian practice.

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History of Benefit Cost Analysis (Contd)

• See the work of Otto Eckstein. His main contributions:

• Advocated the use of a much lower social interest rate, say around 35 per year

• Advocated the use of a Lagrangian multiplier, LAMDA, to hike cost in order to match budgetary constraints

• Use of annual cost and benefit streams was always envisaged

• Brings out how costs and benefits will vary as economy goes in recession

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History of Benefit Cost Analysis

• See the work of Prof. Marglin.(1961) His main contributions:

• Advocated that the investment of the project benefits (in say investments in farm machinery against immediate consumption), leads to changes in the Criteria.

• Study various comparatively recent reports and World Bank procedures for shadow pricing.

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History of Benefit Cost Analysis

• Then see the Nitish Desai Committee report. (Is this lost??) Surely, it requires updating and additions. However it has a lot of strengths which need not be given up.

• The D.R.Gadgil’s advocacy for economic analysis towards decision-making in Water projects is an important milestone. But the continued use of his methodology, developed in the late 1950’s, up to 2012, is a mockery on our adaptive capabilities.

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A Critique of the Current and Proposed Methodology

Not based on a literature survey and analysisDoes not indicate the principle “Costs and

Benefits, to whomsoever these accrue, are to be considered”

Fails to accommodate and differentiate amongst “national”, “ regional’ and “population group specific” analysis.

Does not advocate, or lay guidelines, for shadow pricing. Particularly important are situations where:

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A Critique of the Current and Proposed Methodology (contd)

Does not advocate, or lay guidelines, for shadow pricing. Particularly important are situations where:

International prices are different from the national

Administered pricing is prevalent Marginal price of labour (construction as also

farm labour) is different from what is to be paid.Compensatory payments (for forests,

displacement, etc.) have a large element of ‘transfer’ as opposed to ‘economic costs

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A Critique of the Current and Proposed Methodology, (Contd.)

Does not use cost and benefit streams to compute the PV, and thereby, condones delays/ fails to threaten withdrawal if money not provided annually.

Takes energy costs and benefits outside the B:C analysis. (this may have been ok earlier, but with improved situation, we need to evaluate benefits by the well recognised international principle of “Benefits as the cost of (thermal) alternative”, along with a compatible “firm energy” definition

Takes Domestic and Industrial water supply benefits outside the B:C analysis.

For flood control, either costs are taken as benefits (current), or benefits are taken as costs (proposed). Both need separate evaluation. However, flood control benefits, currently, do not consider the dis-benefits of “missed development opportunity” to flood prone areas. Similarly, the almost perpetual loss of benefits through land erosion, is under-estimated.

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Final Remarks• The work of the “working Group”, for reopening

the question of B:C analysis, needs appreciation• However, a better scientific analysis, with inputs

from a macro-economist with welfare economy background ,and aided by a literature survey, is necessary.

• Economic analysis, which integrates social and environmental aspects, is essential for public investments. No attempt should be made to dispense with this, under the guise of loosing “otherwise, technically feasible” projects. Few projects are technically not feasible

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