Social cost-benefit analysis

One of the most important elements of financial management relates to investment decisions. There are always more projects than there are sources, and so projects have to be appraised for selection. As between two projects, that investment which gives higher 'return' (benefit), in relation to cost, has to be preferred. But, in a world of uncertainty of the kind that exists today, project appraisal, involving, as it does, a great deal of forecasting, is a difficult affair.

In the case of so-called private sector projects, appraisal is regarded as being relatively easy, since all the 'prices' (of goods and factors of production) are taken at their face value, though recently, on account of endemic inflation, adjustment for inflation is being attempted, so as to present a true picture of capital consumption, the burden of debt payment and profits and dividends.

In the case of public sector projects, especially those involving the building up of infrastructure, project appraisal becomes more complex. The determination of social cost and benefits involves an elaborate exercise, in an effort to convert actual magnitudes into ideal or fair magnitudes, to reflect the numerous distortions in the economy, as a result of which the actual costs and benefits de viate from the 'true' ones.