means that is comparison of benefits and costs and this comparison pertain to both the entrepreneur as well as national economy. In the entrepreneurs case benefit mean the return on capital, however at the National economy level, we are faced with important questions namely:-
(a) What are costs?
(b) What are benefits?
Government undertakes a variety of activities. They are responsible for setting macroeconomic policy, they seek to promote equity by aiding the poor and the disadvantaged and they provided a variety of services such as education, health, defense, infrastructure, police and postal services. Many of these activities involve large investments public and private sectors undertake projects that require making some initial investments and are expected to provide benefits over a number of years. Both sectors must choose between making these investments and returning the cash to be invested to their beneficiaries, the shareholders in the case of private-sector firms, and the citizenry in the case of governments, who can then invest the cash directly in the capital merits or spend it on current consumption. One important point that should be stressed is that in any case of project evaluation at national economy level, the evaluation of the point of view of entrepreneur is indispensable. Since any society is interested in knowing whether and to what extent a proposed enterprise will be viable, it is necessary to work out the previously mentioned set of feasibility study. Whenever a project is being considered from a social point of view, it becomes indispensable to see it as a part of the economy as a whole, any single realized project is linked to national economy in several ways. Its construction as well as operation will exercise effects on many other units, as well as on the national economy as a whole, some of this effect will be direct and some
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indirect. Some of the indirect effect will be backward oriented and some forward oriented, some of them will bring about external economy and other perhaps dis-economy. The most severe problem faced by evaluation when appraising project from social point of view are those connected with quantification of the indirect effects. Precise, there is also the problem of weights and priority which should be attached to such effects. Apart from the effect of complementary nature, there exist a whole range of competitive effects and it becomes necessary to decide which of his competitive effects are more or less important.
6.2.1 Some Examples of External Economy and Dis-Economy
Some examples of external economy and diseconomy may help to clarify this problem, the examples are as follows:-
(a) Production of swamp-rice on formerly unused land in the vicinity of a rubber plantation may bring about the following incidence:- The slow moving water pools to be created by the rice-cultivation are likely to provide breeding places for mosquitoes, the result will be an increase of malaria among workers followed by a decrease of productivity of labour in the neighboring rubber plantation (External Diseconomy).
(b) An anti-malaria project financed by rubber-plantation will bring about decreased in malaria and consequently increased of productivity of labour in the plantation itself (Internal Economy or Direct Effect) as well as in other units in the adjacent area (External Economy or Indirect Effect).
(c) A hydro-electric plant project may bring about as an indirect effects floods control which in turn may result in the following external economy:-
(i) Decrease of expected losses (External Economy for the society (incommensurable).
(ii) Higher protection of private property means decrease or risks for individuals leaving along the streets which may leads to decrease of insurance premium (External Economy that is measurable).
(d) The construction of an airport will bring about discomfort of airport noise to those who lived in the area, there are two (2) possibilities of measuring this external effects (Diseconomy)
(i) Access the expected fall in the residential land values in the area.
(ii) Calculate the cost of sound proofing the noises in the area.
(e) Industrial plant requires concentration of labour and hence increases urbanization. Urbanization in turn imposes real cost on society for additional law enforcement and other public functions (External Diseconomy). There is need of schools, health, postal services, and social-activities.
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6.2.2 Interdependencies among Projects
The problem of interdependencies among projects can be explained with the help of simplified illustrative examples as follows:-
Suppose that the highest priority is given to a project of construction of a power plant which should help to promote the construction of various industries of given region of a developing country. In the cost of preparation of the technical, economic and financial feasibility study, the following problems emerged:-
(1) The decision must be taken as to what kind or type of power plant is to be constructed whether hydro or thermal plants. In the latter case there is the question of whether the thermal energy is to be obtained on the basis of coal, oil, gas or atomic energy, even this first basic question makes it necessary to work out optimal solution taking into account many factors e.g. the availability of fuel, the location of coal, oil, gas etc. as the case may be.
Their distance to the future consumption center etc. in the case of hydro-power, there is the necessity of preparing hydrological, geological, topographical and meteorological studies. Apart from many technical questions which must be resolved there is also the problem of supply e.g.
cement supply for the construction of the dam, the following questions will emerge:
(a) Should the cement demand be covered by import?
(b) Should the present capacity be extended?
(c) Should a new cement plant be constructed?
In other to answer these questions, a new set of feasibility study will be necessary.
(2) Should the dam to be constructed be a multipurpose project P e.g. if it would provide simultaneously power, irrigation, flood control etc. there will emerge the problem of differentiating the benefit from joint investments and the problem of rates to be charged for the various services to be produced by multipurpose projects.
(3) In the case of installation of thermo-plant based on local resources of coal, there could arise the question of how to secure sufficient supply of coal. His could mean considerable increase of man power (employed people), new-investment into coal mine, import of mining machinery etc. the increase in employment may mean solving the problem of housing services, there is also the problem of coal transportation from the mine to the plant and with it connected investments which in turn will involve increase consumption of cements, machinery, labour requirement etc. if the countries in question were exporting coal for which it has an established foreign markets, the coal consumption of a thermal power station might represent a loss in foreign exchange owing to lower exports. Consequently the country must have address question of whether to base foreign exchange through importing
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mining machinery for the purpose of increasing the output of coal or through reduction of coal exports.
(4) In any case there is the problem of fixing electricity rate according to the needs of overall development of the National economy. This may involve considerable subsidy. But subsidized rate actually mean subsidy o all the electricity consumers. It may therefore become necessary to apply the real and not subsidized projects. The above examples shows that there are several kinds of interdependencies among projects:-
(a) Demand and Supply Interdependency
Demand for output of project A is dependent on the existence of project B which in turn will be dependent on the supply of project A for example demand of motor-car depend on Iron and steel industries and cares to convey this iron and steel product.
(b) Conditional Interdependency
It is necessary to construct a dam, project „X‟ before an irrigation system, project „Y‟ have to be built.
(c) Blocking Interdependency
In this case raw-materials needed for plant A precludes its use to plant B.
(d) Economic Interdependency
In this particular instance, from the construction of plant A, some other plants may derive benefits (External Economy) and some other may suffer losses (External Diseconomy).
i. Cost interdependence: - The magnitude of cost in project A depends on the prices to be charged by project B for supply to project A for example flour-mills depend on NEPA power-supply, magnitude of cost of flour mills depend on cost form NEPA.
All the above mentioned problem should be considered only as illustrative examples that do not exhaust more than a fraction of actual inter relationship that exists among projects and between effects and factors that might emerged when preparing a projects. If we take into account the fact that there are several projects to be evaluated in other to make the best possible choice, the number of inter-relationship could really be of infinite magnitude, the task confronting those who evaluate project from social point of view could then become an impossible one if they are to given certain guidelines which will help them to determined the most important criteria to be used in selecting projects. Such guidelines are usually fixed by the government and his is usually done by way of comprehensive planning.
6.2.3 Project Evaluation and Macro Planning (Comprehensive Planning) For most developing countries, comprehensive planning becomes necessary for the starting point and the framework of project evaluation, the target indicated in the plan determines the basic criteria for the choice of projects. But this does not usually work in one direction namely:- that plan
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determine projects. In reality, the formulation of a plan depends to a great extent on the experience acquired in project evaluation. Project evaluation help to determine the targets of the development plan from the point of view of their practical realizability. Project evaluation supplies information throughout the whole process of planning and this information could be of crucial importance in determining the development strategy of a country, thus comprehensive planning shows the features of a chain like cycle in which project evaluation represent an important link.
1. Resources and Demand Analysis:- This is a reconnaissance of the