Understanding Social Impact Bonds- Antonella Noya/ Stellina Galitopoulou, OECD
Project management self
1. CHAPTER: SOCIAL COST BENEFIT ANALYSIS
What do you mean by Social Cost benefit Analysis? Why is it importance?
Social Cost Benefit Analysis (SCBA) is a feasibility study of a project from the
viewpoint of a society to evaluate whether a proposed project will add benefit or cost
to the society. That is, it is an approach that is concerned to judge the economic and
social viability of a project especially public expenditure project or donor-led
programs.
shows the impact of a project on social health, welfare, pollution of environment,
climate and weather. Virtually, every project should be environmental friendly. So
that environmental disturbance is minimum level.
Importance of Social Cost Benefit Analysis:
We know that for economic growth of development of Social Cost Benefit Analysis is
very important. If the social cost is low social welfare is high and vice verse. The
importance has been explained with the help of the following factors:
1. Market Failure: Market failure when a big project is not affecting everyone but
only a few. A private firm would only look at profitability and related market prices
to take up a deal but the government has to look at other factors. To determine the
social cost in case of market failure and when market prices are unable to define
them. These social costs are known as shadow prices.
2. Savings & Investment: Impact of the project on general savings and
investment level. A project that induces more savings are investment in an economy
and not the other way round.
3. Distribution & Redistribution of Income: The project should not lead to
accumulating income in the hands of a few but, it should equally distribute the
income.
4. Employment and Standard of Living : How a project affects employment
and standard of living will be taken into account as well. The deal should lead to
increase in employment and standard of living.
5. Externalities : Externalities are impacts of a project which can be both harmful
and beneficial. Therefore, both the effects are to be assessed before sanctioning a
deal. Positive-externalities could be in the form improvement in technology and
negative-externalities could be in the form of increase in pollution and destruction of
ecology.
2. 6. Taxes and Subsidies : In a general cost benefit calculation, taxes and subsidies
are considered as expenses and income respectively. Though in case of social-cost
benefit analysis, taxes and subsidies are considered as transfer payments.
What do you mean by UNIDO Approach? Mention the stages of UNIDO
Approach.
UNIDO Approach : The United Nation Industrial Development Organization
(UNIDO) and the Centre for Organization of Economic Co-operation and
Development (COECD) have come with useful publications dealing with the problem
of measuring social costs and social benefits. It may be noted, in this context, that
the actual cost or revenues from the goods and/or services to the organization do not
necessarily reflect the monetary measurement of the cost and or benefit to the
society. This is because these figures are grossly distorted on account of restriction
and controls imposed by the government. Hence a different yardstick has to be used
for evaluating a particular in terms of cost and sacrifice on the part of the society.
Such payments are easily valued at opportunity cost or shadow prices to judge their
real impact in terms of cost to society for the purpose of social cost benefit
evaluation.
UNIDO Approach is a five stage methodology:
1. Financial profitability measured at market prices,
2. Economic efficiency,
3. The impact on savings and investment,
4. The impact of the project on income distribution,
5. Difference between social value and economic value.
1. Financial profitability measured at market prices: A good technical and financial
analysis must be done before a meaningful economic evaluation can be made. For
this reason, financial profitability is a prerequisite in all cases. Financial profitability
produces an estimate of the project’s financial profit or the net present value of the
project when all inputs and outputs are measured at market prices.
2. Economic efficiency: Stage two of the UNIDO approach is concerned with the
determination of the net benefit of the project in terms of economic prices, also
referred to as shadow prices. Market prices represent shadow prices only under
3. conditions of perfect markets which are almost invariably not fulfilled in developing
countries.
3. The impact on savings and investment: Most of the developing countries face
scarcity of capital. Hence, the governments of these countries are concerned about
the impact of a project on savings and its value thereof. Stage three of the UNIDO
method, concerned with the income distribution impact of the project and the value
of such savings to the society.
4. The impact of the project on income distribution: Many governments regard
redistribution in favour of economically weaker sections or economically backward
regions as a socially desirable objective. Due to practical difficulties in pursuing the
objective of redistribution entirely through the tax, subsidy, and transfer measures of
the government, investment projects are also considered as investments for income
redistribution and their contribution toward this goal is considered in their
evaluation this calls for suitably weighing the net gain or loss by each group,
measured earlier, to reflect the relative value of income for different groups and
summing them.
5. Difference between social value and economic value:
The steps of adjustment procedure are:
• Estimating the present economic value
• Calculating the adjustment factor
• Multiplying the economic value by the adjustment factor to obtain the adjusted
value
• Adding or subtracting the adjusted value to or from the net present value of the
project as calculated in stage four.
Similarity and dissimilarity between LITTLE- MIRRLEES Approach and
UNIDO Approach.
Similarities of LITTLE-MIRRLEES & UNIDO approach:
1. The calculation of shadow price particularly for foreign exchange saving and
unskilled labour is same in both methods.
4. 2. Both methods consider factors of equity.
3. Both methods use DCF (Discounted Cash Flow) methods.
Dissimilarities of LITTLE-MIRRLEES & UNIDO approach:
1. UNIDO method emphasis calculation of financial profitability of market prices
along with Social Cost Benefit Analysis (SCBA) but this is not so done in case of
Little-Mirrlees method.
2. Little-Mirrlees method measures cost and benefit in terms of international
currency that is in border price or world price in $. UNIDO approach measure costs
and benefits in terms of domestic currency.
3. The numeric in case of Little-Mirrlees approach measures cost and benefit in
terms of uncommitted social income. On the other hand in UNIDO method it
measures the same in terms of domestic consumption.
4. UNIDO approach focuses efficiency, saving and redistribution of income stage by
stage while Little-Mirrlees approach considers the same in totality.
What is Shadow pricing? Steps of Sources of shadow prices.
The outputs and inputs of a project are classified into the following categories:
i. Traded goods and services,
ii. Non-traded goods and services and
iii. Labor.
Define opportunity cost. With example.
Opportunity cost is the cost of a foregone alternative. If you chose one alternative
over another, then the cost of choosing that alternative is an opportunity cost.
Opportunity cost is the benefits you lose by choosing one alternative over another
one. The opportunity cost of choosing one investment over another one.
The term opportunity cost is often used in finance and economics when trying to
choose one investment, either financial or capital, over another.
5. Example: Let's say you have Tk. 15,000 and your choice is to either buy shares of
Company XYZ or leave the money in a Term Deposit that earns only 10% per year. If
the Company XYZ stock returns 15%, you've benefited from your decision because
the alternative would have been less profitable. However, if Company XYZ returns
15% when you could have had 10% from the term deposit, then your opportunity cost
is (15% - 10% = 5%)
CHAPTER: FINANCING OF PROJECTS
What do you mean by Capital Structure?
The capital structure is how a firm finances its overall operations and growth by
using different sources of funds. Debt comes in the form of bond issues or long-term
notes payable, while equity is classified as common stock, preferred stock or retained
earnings. Short -term debt such as working capital requirements is also considered
to be part of the capital structure.
Difference between Equity and debt
• Equity means ownership whereas debt means obligation.
• Everyone who owns the Equity is part owner of that company. He/She can also
influence the decision on the other hand; The Company who borrows money
from the investors to raise the capital is obliged to the coupons and finite
intervals and pays back the Principal amount at the end of tenure.
• Equity holders are owners of the company on the contrary, Debt holders are like
Money lenders.
• Raising Capital using Equity is that the Company who issues shares need not pay
any money to the share holders on the other hand Raising Capital using Dept is a
burden to the Company as they have to pay the interest monthly
• Investor only earns when Company issues dividends where as Coupon or
Monthly Interest is earned by the debt holder.
• Investment in Equity is risky compared to Debt.
6. • Returns are not fixed for equity where as Returns are periodic and almost fixed.
Define Business risk.
The term business risk refers to the possibility of inadequate profits or even losses
due to uncertainties e.g., changes in tastes, preferences of consumers, strikes,
increased competition, change in government policy, obsolescence etc .Every
business organization contains various risk elements while doing the
business. Business risks implies uncertainty in profits or danger of loss and the
events that could pose a risk due to some unforeseen events in future, which causes
business to fail.
For example, an owner of a business may face different risks like in production, risks
due to irregular supply of raw materials, machinery breakdown, labor unrest, etc. In
marketing, risks may arise due to different market price fluctuations, changing
trends and fashions, error in sales forecasting, etc. In addition, there may be loss of
assets of the firm due to fire, flood, earthquakes, riots or war and political unrest
which may cause unwanted interruptions in the business operations. Thus business
risks may take place in different forms depending upon the nature and size of the
business.
Define preference share. Advantages and disadvantages of preference
share.
Company stock with dividends that are paid to shareholders before common stock
dividends are paid out. In the event of a company bankruptcy, preferred stock
shareholders have a right to be paid company assets first. Preference shares typically
pay a fixed dividend, whereas common stocks do not. And unlike common
shareholders, preference share shareholders usually do not have voting rights.
Advantages and Disadvantages of Preferred Stock
The Advantages of Preferred Stocks (or preference shares) are as
follows:
1) The main benefit for the issue of preferred stock is that it raises capital for a
company without sacrificing the control of company.
2) It is useful for corporate restructuring or reorganization (Corporate restructuring
is the process of reconstructing a whole organization or certain divisions of a
7. corporation).
3) A preferred stock is more flexible in comparison to debt when a company is
financially distressed or when it comes to missing an annual payment.
The Disadvantages of Preferred Stocks are:
1) A company financing with preferred stock is obligated to pay its shareholders a
fixed and regular dividend.
2) The cost of preferred stock financing is generally higher than that of debt
financing. Preferred shareholders are compensated with a higher return as they are
willing to accept the added risk of purchasing preferred stock rather than long-term
debt.
Advantages and disadvantages of debt financing.
Advantages of debt financing:
1. Utilization of Resources – When a business uses debt to finance its
operation, they got no option than to fully utilize their resources because they
will have to payback the debt and interest to their creditor.
2. Short Term Needs – Debt finance can easily be secured on a short term
bases. This make it very advantageous to the small business as finance of this
type can easily be secured for short term business needs.
3. Tax Advantage – Debt financing also offers tax advantage to business as
interest is deductible for income tax purposes.
4. No Future Lender Claims - Lenders has no direct claim on future
earnings.
5. Not Dilutive – Debt does not dilute the ownership of your small business.
6. Simple Loan Repayment - Lenders are only entitled to loan repayment
and interest on loan.
7. Future Impact Forecasting – Interest and principal repayment are based
on fixed percentage and can be forecast.
Disadvantages of debt financing
1. This type of financing is usually difficult to make regular payment to
creditors due to shortage of cash flow.
8. 2. Most lenders provide severe penalties for late or missed payments, which
may include charging late fees.
3. Failure to make payments on a loan, even temporarily, can adversely affect a
small business’s credit rating and its ability to obtain future financing.
4. Since lenders primarily seek security for their funds, it can be difficult for
unproven businesses to obtain loans.
5. The amount of money small businesses may be able to obtain via debt is
likely to be limited, so they may need to use other sources of financing as well.
What are the various methods of offering? Discuss.
There are different ways in which a company may raise finances in the primary
market:
i. public offering
ii. right issue and
iii. private placement
i. Public offering: involves sale of securities to the member s of the public. There are
three types of public offering.
a. the initial public offering (IPO)
b. the seasoned equity offering, and
c. the bond offering
a. The initial public offering (IPO) : The first public offering of equity shares of
a company, which is followed by a listing of its share on the stock market, is called
the initial public offering (IPO)
b. The seasoned equity offering: For most companies their IPO is seldom
their last public issue. As company need more finances, they are likely to make
further trips to the capital market with seasoned equity offerings, also called
secondary offering.
c. The bond offering: The bond offering process is similar to the IPO. But some
difference are given below:
1. Highlights the company’s growth prospectus
2. Pure debt securities are typically offered at a predetermined yield.
9. 3. Debt securities are generally secured against the assets of the issuing
company.
4. The company should be rated by credit rating agency.
5. it is mandatory to create a bond redemption reserve for every issue of bond.
6. it is necessary to appoint one or more trustee before a bond issue.
ii. Right Issue:
A rights issue is when a company issues its existing shareholders a right to buy
additional shares in the company. The company will offer the shareholder a specific
number of shares at a specific price. The company will also set a time limit for the
shareholder to buy the shares. The shares are often offered at a discounted price to
encourage existing shareholders to take the company up on their offer.
iii. Private placement:
Private placement occurs when a company makes an offering of securities to an
individual or a small group of investors. Since such an offering does not qualify as a
public sale of securities, it does not need to be registered with the Securities and
Exchange Commission (SEC) and is exempt from the usual reporting requirements.
Private placements are generally considered a cost-effective way for small businesses
to raise capital without "going public" through an initial public offering (IPO).
Define Term Loan.
The basic elements that define a term loan are:
(1) credit extended to a business concern;
(2) a direct relationship between borrower and lender;
(3) provision at time of making the loan that some part of the principal is repayable
after the passage of one year. Term loans almost always mature between one and 10
years. While particular types of collateral security, repayment provisions, uses of
funds by borrowers or loan agreements may be associated with term loans, none of
these are essential characteristics.
Features of Term Loans:
Term loan is a part of debt financing obtained from banks and financial institutions.
The basic features of term loan have been discussed below:
1. Security:
10. Term loans are secured loans. Assets which are financed through term loans serve as
primary security and the other assets of the company serve as collateral security.
2. Obligation:
Interest payment and repayment of principal on term loans is obligatory on the part
of the borrower. Whether the firm is earning a profit or not, term loans are generally
repayable over a period of 5 to 10 years in installments.
3. Interest:
Term loans carry a fixed rate of interest but this rate is negotiated between the
borrowers and lenders at the time of dispersing of loan.
4. Maturity:
As it is a source of medium-term financing, its maturity period lies between 5 to 10
years and repayment is made in installments.
5. Restrictive Covenants:
Besides asset security, the lender of the term loans imposes other restrictive
covenants to themselves. Lenders ask the borrowers to maintain a minimum asset
base, not to raise additional loans or to repay existing loans, etc.
6. Convertibility:
Term loans may be converted into equity at the option and according to the terms
and conditions laid down by the financial institutions.