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Investment decisions are based on appraisal and evaluation techniques. Apart from technical and financial viability the project's economic and socio-political costs also matter.

 

Economic Aspects

 

Institutions and banks consider various economic factors before deciding to invest in a project. Various analytical tools exist to assist the decision maker in dealing with this situation. Among these tools are: cost-benefit analysis, risk-benefit analysis, risk-cost benefit analysis, project economic viability, opportunity cost and insurability limits. It is not suggested that these methods give exact results, but only that they reveal something of the nature of the underlying valuation.

 

For a completely satisfactory assessment of the cost and benefit aspects of the acceptability of risk, the assessment has to include evaluation of the following:

1.                  The total costs associated with each option.

2.                  The benefits in money terms associated with each option. It must be recognized that, at least initially, all the benefits may not be expressed directly in quantitative terms and there may be problems in converting qualitative statements about benefits into quantitative statements.

3.                  The costs in quantitative terms associated with the direct and indirect risks inherent in each option.

4.                  The errors and uncertainties associated with the estimates of costs and benefits.

5.                  The overall economic implications of the options considered.

 

Given the doubts about the feasibility of finding universal criteria for assessing the ranking that economic factors justify, it is suggested that for many cases ranking of acceptability of the economic factors could be made on the basis of the life cost and benefits, the calculation taking into account all direct and indirect costs and benefits. It also has to be accepted that the calculation has to include a factor to allow for the risk of the project not being completed. Such a factor may be a compound factor, which includes allowance for all the features of the economic environment that may cause a project to fail.

 

It should be recognized that simply postulating a ranking criteria does not resolve the moral question of how the costs of benefits should be distributed, answer questions about the macro-economic significance of the proposal, or explain how the calculation should be made. The moral question is partly answered by assessing public reaction to a proposal and this point is discussed next under the heading of socio-political factors.

 

Socio-Political Aspects

 

When these decisions are considered from the point of view of society, they go beyond finding out cash inflows and outflows, the benefits to society are also worked out. For example, whenever a new capital intensive project is undertaken, its impact on the health of the society is seen in terms of environmental pollution, noise pollution, employment generation, etc.

 

Because of the nature of socio-political factors the problems involved in assessing their significance in decision making are quite different to the problems of assessing technical and economic factors. Socio-political aspects of a decision are concerned with what ought to be, and such decisions are quite different from technical judgments which are concerned with what can be done.

 

The conclusions that can be made about the problems of assessing socio-political factors are:

1.                  The socio-political factors related to complex decisions can be evaluated by carefully designed surveys.

2.                  Changes in opinion that take place over a period as short as two years can be detected by conventional survey methods.

3.                  Variations in views can be detected over a relatively small geographical area.

4.                  For an effective survey to be made the nature of the risk must be explained to the population being surveyed.

5.                  A sample opinion survey does not represent any kind of commitment by the people being surveyed, whereas voting procedures may be binding.

6.                  For the decision maker considering a major public project there may be considerable uncertainty about the viability of the assessment of public acceptability unless it is based on the results of a voting procedure.

7.                  For small non-conventional projects' surveys of the public's view of the acceptability of a proposal may not be justified.