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Use of benefit cost analysis with equity considerations to evaluate social forestry projects in India Khetarpal, S. K. 1989

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USE OF BENEFIT COST ANALYSIS WITH EQUITY CONSIDERATIONS TO EVALUATE SOCIAL FORESTRY PROJECTS IN INDIA By S.K. Khetarpal M . Sc. (Chemistry) Delhi University, 1973 A.I .F.C. FRI & Colleges, Dehra-Dun, 1978 A THESIS S U B M I T T E D IN P A R T I A L F U L F I L L M E N T OF T H E R E Q U I R E M E N T S F O R T H E D E G R E E O F M A S T E R O F S C I E N C E in T H E F A C U L T Y O F G R A D U A T E STUDIES F O R E S T R Y We accept this thesis as conforming to the required standard T H E U N I V E R S I T Y OF BRIT ISH C O L U M B I A January, 1989 © S . K . Khetarpal, 1989 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of The University of British Columbia Vancouver, Canada Date / £ , m*} DE-6 (2/88) Abstract Benefit cost analysis (BCA) has been found'to be an inadequate tool for evaluating social forestry projects because of. its indifference, to income distribution and inability to evaluate some environmental benefits (Sirivastava and Pant, 1979). Application of BCA, with consideration of income distribution, to the evaluation of social forestry projects in India is the subject of this thesis. A social forestry project has been implemented since 1982 in Maharashtra State (India) with the help of the Government of the U.S.A. to meet increasing requirements for fuelwood, fodder and small timber, to save existing forests, and to improve income distribution. Most of the village (common) lands included in the project for establishing fuelwood and fodder plantations are degraded and severely overgrazed. More productive but distant public forest lands are also available for establishing plantations. Whether or not the use of public forest lands for establishing fuelwood plantations is socially more efficient than planting on village (common) lands, is investigated and answered. The various approaches to incorporating equity in economic benefits are reviewed and the Squire and Van der Tak (1975) method is used. Five alternative plantation programs are considered\in this thesis. Three of the plantation programs have been implemented since 1982 under the'Maharashtra State social forestry project. The other two plantation' programs; are plantation programs on the public forest lands proposed to meet social forestry objectives. Costs other than the labour employed during the off-agriculture season have been valued at market prices. The labour cost during the off-agriculture season is valued at the shadow price of labour. A methodology is established for valuation of indirect benefits from saving the forests from deforestation. Social benefits n are valued by attaching equity weights. From the results of the economic and social benefit cost analysis it is concluded that the program of distributing free seedlings to the farmers for planting on the field bound-aries is economically and socially far more efficient than any other plantation program considered in this thesis. Establishing of fuelwood and fodder plantations on public forest lands is economically and socially more efficient than establishing plantations on degraded and severely overgrazed village (common) lands. in Table of Contents Abstract ii List of Tables ix Acknowledgements xi 1 Introduction 1 1.1 Objective and research problems 4 1.2 Hypotheses 4 1.3 Organisation of thesis 5 1.4 Assumptions 5 2 BCA an evaluation tool 7 2.1 Methodology of BCA 7 2.1.1 Denning the project and identification of alternatives 8 2.1.2 Identification of costs and benefits 9 2.1.3 Estimation of benefits and costs 10 2.1.3.1 Valuation of unpriced (extra-market) ..goods 11 2.1.3.2 Valuation of non-use,or non-consumptive values 14 .2.1.4 Discounting of benefits and costs . . . 15 2.1.5 Selection of the project 18 2.1.6 Limitations of BCA as an evaluation tool 20 3 Approaches to incorporating equity in BCA and decision criteria 23 iv 3.1 Equity weights 23 3.2 Approaches to incorporating equity in BCA . . 24 3.2.1 Methods of attaching distributional weights to monetary gains and losses '25 3.2.2 Methods of determining income distribution weights 28 3.2.3 Attaching distribution weights to goods and factors 31 3.2.4 Using welfare ratio as a measure of welfare 33 3.3 Decision criteria in social forestry projects 34 4 Social forestry and proposed alternative plantation programs 38 4.1 Objectives of the social forestry project in Maharashtra 39 4.2 Plantation alternatives 39 4.2.1 Plantations on village (common) lands 40 4.2.2 Planting of tree seedlings along village roads 41 4.2.3 Distribution of seedlings to the farmers 42 4.3 Proposed forest lands for establishing fuelwood and fodder plantations . . 43 4.3.1 Planting scheme on forest lands under CWR 44 4.3.2 Planting scheme on deforested lands 45 4.4 Species selection 45 4.5 Calculation of yield 45 4.5.1 Rotation 46 -4.5,2 ' Stocking density 47 -4.5.3 Site index .47 5 Valuation of economic and social benefits and costs of plantation alter-natives 49 5.1 Definition of society 50 v 5.2 Discount rate 50 5.3 Project alternatives . . . . 51 5.4 Identification of costs 51 5.5 Identification of benefits 53 5.6 Estimation of costs and benefits . . . . 53 5.6.1 Valuation of land cost 54 5.6.1.1 Valuation of cost of using forest land managed under CWR 54 5.6.2 Planting cost . 57 5.6.2.1 Calculation of the shadow wage rate of labour 58 5.6.3 Harvesting cost 59 5.6.4 Administrative costs 59 5.7 Valuation of direct benefits 62 5.8 Valuation of indirect benefits 63 5.8.1 Valuation of saving of forests from deforestation 64 5.8.1.1 Valuation of the loss of wood growth per hectare from deforestation 65 5.8.1.2 Estimation of loss of revenue obtained from Tendu leaves 65 5.8.1.3 Estimation of monetary value of benefits due to grass . . 66 5.8.1.4 Total value of benefits due to one hectare of plantations 66 5.9 Social value of net benefits , . 67 5.9.1 Estimation of value of /3 .• 70 .5.9-2 Estimation of value of?/ 71 5.9.3 Estimation of value of v 71 5.9.4 Sources contributing to consumption increase 72 5.9.4.1 Distribution of incremental consumption due to increased wages 73 vi 5.9.4.2 Distribution of incremental consumption due net profits 73 5.9.5 Assumptions 74 5.9.6 Calculation of distribution weights for various consumption level groups . 75 5.9.7 Calculation of net social benefits from the inciease in wages . . . 75 5.9.8 Calculations of net social value due to distribution of net financial benefits 76 6 Economic and social benefit cost analysis 77 6.1 Economic BCA 77 6.1.1 Results of economic analysis 80 6.2 Social benefit cost analysis (social BCA) 81 6.2.1 Results 81 6.3 Comparison of results of social and economic BCA 84 6.4 Discussion 85 7 Summary and conclusions 87 7.1 Summary 87 7.2 Conclusions 88 References Cited 90 Appendices 98 A Derivation of distribution weight (D) 98 B Value of regression constant and coefficients 100 C Financial and economic planting costs 101 D PV of financial and economic harvesting cost 107 vii D.l Financial harvesting cost 107 D.2 PV of financial harvesting cost 108 D.3 PV of economic cost of harvesting 110 E Distribution of administrative cost into various cost categories 112 F PV of financial and economic initial investment and total costs 113 G Financial and economic value of direct and indirect benefits 116 G.l Financial value of direct benefits 116 G.2 Present financial value of direct benefits 117 G.3 Present value of benefits from grass . 119 G.4 Present value of indirect benefits 120 G.5 Total PV of financial and economic benefits 123 H Determination of v (value of the public income) 125 I Increase in consumption due to wages and benefits 126 J Derivation of formula for shadow wage rate of labour 129 K Net present social value of increased wages and economic benefits 131 K.l Net present social value of increased wages .131 K.2 Net social value of economic benefits 132 "K-.3 Total present social value of economic benefits'-and increased-wages 133 vni List of Tables 4.1 Table showing stocking density, N, mean site index, S, and Yield per hectare or equivalent number of seedlings of fuelwood and timber at age 8. 48 6.1 PV of economic costs, benefits, and environmental benefits in rupees. . . 78 6.2 PNW positive or (negative), PV of benefits(B), PV of initial investment cost(C = Cl) in rupees, number of man days of labour generated(L), and number of man days generated(L/C) per unit initi al cost. 79 6.3 Plantation alternatives in decreasing order of B/C. . 80 6.4 Present net social benefits(S), initial investment cost(C = C*), and social benefits per unit initial investment cost(5/C). . 82 6.5 Plantation alternatives in decreasing order of S/C . 83 6.6 Plantation alternatives in decreasing order oiBjC and S/C 84 B. l The value of regression constant and coefficients of regression equation for the estimation of yield of Eucalyptus hybrid . 100 C l Yearly and PV at 4% discount rate of financial and economic.planting costs in rupees of alternative No. 1 102 C. 2 Yearly and PV at 4% discount rate of: financial'and economic planting costs in rupees of alternative No. 2 103 C. 3 Yealy and PV at 4% discount rate of financial and economic planting cost in rupees of alternative No. 4 105 D. l Financial harvesting cost of timber and fuelwood in rupees 108 ix D.2 PV at 4% discount rate of financial harvesting cost of timber and fuelwood in rupees 110 D. 3 PV at 4% discount rate of economic cost of harvesting of timber and fuelwood in rupees Ill E. l Distribution of:administrative costs (rupees) into various cost categories. 112 F. l PV of financial costs in rupees and mandays of employment generated. . 114 F. 2 PV at 4% discount rate of economic costs in rupees and man days of employment generated 115 G. l Financial value of benefits from timber and fuelwood in rupees 117 G.2 PV at 4% discount rate of benefits from timber and fuelwood in rupees from all three rotations 119 G.3 PV at 4%.discount rate of benefits from grass in rupees 121 G.4 PV at 4% discount rate of indirect benefits in rupees. 123 G.5 PV of financial and economic benefits from timber, fuelwood, grass and saving of forests 124 1.1 PV of increase in consumption due to wages in rupees 127 1.2 PV of increase in financial consumption in rupees due to present net fi-nancial benefits 128 K.l Net present social value (NSPV) of increased wages due to,,wages in rupees. 132 i.K.2 Net present social value of economic benefits in rupees ,134 K.3 Total present social value of economic benefits and increased wages in rupees. 135 x Acknowledgements Many individuals and organisations have contributed to the completion of this thesis. I convey my gratitude and thanks to: Professor and Head Dr. J.H.G. Smith, my supervisor, for guidance and encourage-ment; Professor Dr. J.V. Thirgood and Associate Professor Dr. D. Haley, my committee members, for their valuable comments and useful suggestions; Professor Dr J.W. Wilson, advisor forestry graduate studies, for his encouragement: My colleagues with whom I worked (1978-1986), Sh. U.B. Patil, Principal Chief Conservator of Maharashtra State, Sh. P. Keswani, Director Indira Gandhi National Forest Academy, Sh. S.L. Dabral, Conservator of Working Plans, Nagpur Circle, and Sh. J.N. Saxena, Joint Director Social Forestry, Akola, for sending me data for Maharashtra State Social Forestry Project and Gondia Forest Division; The Canadian Commonwealth Scholarship/Fellowship Administration for their finan-cial support during my stay in Canada; The Government of India and the Governent of Maharashtra State (my employer) for providing,me this opportunity; and finally, , My wife Alka, my sons Achal. and Ankit, and my daughter Anar'for their love. ..and : understanding. xi Chapter 1 Introduction Non-commercial energy is the major source of fuel for cooking in India (Revelle, 1976). Fuelwood, animal wastes and agriculture wastes are the three major sources of non-commercial forms of energy. Fuelwood constitutes about 65% of the total non-commercial energy in India. The total consumption of fuelwood has increased from 86 million tonnes in 1953-54 to 133.1 million tonnes in 1975-76, and the estimated fuelwood requirement for 1987-88 is 1391 million tonnes. In India about 98% of the forest lands are in the public domain. The reported production of fuelwood from the forests was 9.27 million cubic metres2 (6.48 million tonnes) in 1953-54 and 16.63 million cubic metres (11.62 million tonnes) in 1975-76. The gap between consumption and production of fuelwood is being met from the illicit cutting of firewood from public forests by woodgatherers and from felling of trees in agricultural fields. Little attention was given to meeting the local requirement of fuelwood, small timber and fodder during India's five-year economic development plans (1951-74) (Khetarpal, 1988a). The National Commission on Agriculture (NCA) (1972) recommended the adoption of social forestry to meet the growing requirements for fuelwood, fodder and small timber. The term social forestry refers to establishing plantations with the help of local people for their own use on village (common) lands, wastelands and planting of seedlings on 1Source: Aggarwala, V.P., (1985), Forests in India, Oxford Publishing Co., New Delhi. 2One cubic metre of fuelwood is approximately equivalent to 0.7 tonne of fuelwood. Source: National Commission on agriculture, 1976, Part IX, Govt, of India, New Delhi, 456 pp. 3Source: Aggarwala, V.P., (1985), Forests in India, Oxford Publishing Co., New Delhi. 1 Chapter 1. Introduction 2 the boundaries of agricultural fields, and planting of seedlings along road sides, canal banks and railway lines. In India since 1974, fourteen social forestry projects have been implemented with the help of international aid agencies. The major objectives of social forestry programs include: to increase supply of fuelwood, fodder and small timber; to reduce the rate of deforestation; and, to increase rural employment and improve income distribution. The major reason for establishing fuelwood and fodder and small timber plantations through social forestry projects was to change property rights over the resources and hence the beneficiaries. When plantations are established on the forest land4, government receives net benefits as public income while in most of the social forestry plantations, individuals or communities receive the net benefits. The accrual of benefits to individuals in social forestry plantations is an incentive for them to protect social forestry plantations better than the plantations on forest land. If the lands used for establishing plantations under social forestry and the forest lands are equally productive, then the yield in the former case will be more due to higher survival rates and better protection ;than in the latter case. As the income distribution benefits are greater in social forestry plantation programs, these plantation programs are preferred over establishing plantations on forest lands. But most of the village (common) lands used for establishing plantations are degraded, severely overgrazed, and are less productive than forest lands managed under the coppice with reserve (CWR) silviculture system and other recently deforested lands. In such circumstances, plantations on degraded village (common) lands are justified by the authorities responsible .for making "decisions ;on the basis of generation of employment close to the villages, improved distribution of income, and generation of consciousness about the importance of trees among the local people. This needs to be investigated. Further, there are various plantation programs under social forestry projects such as 4Forest lands in this thesis refers to public forest lands. Chapter 1. Introduction 3 establishing plantations on village (common) lands, planting seedlings on the boundaries of agriculture fields and along road sides and canal banks. All these plantation programs do not appear to be equally efficient. The order of efficiency5 of these programs has not been investigated. Benefit cost analysis (BCA) is the most familiar method to evaluate investments in public projects (Pearce, 1971). BCA is a systematic technique for estimating and comparing benefits and cost of a project to society. Traditional BCA, also known as economic BCA, addressess the single objective of economic efficiency. In essence economic efficiency relates to gross national product or national income whereas equity (income distribution) is concerned with the way this wealth is shared. In economic BCA, financial costs and benefits corrected for market imperfections are used as economic costs and benefits. When income distribution benefits are also included in economic BCA, then it is known as social BCA (Squire and Van der Tak, 1975). Some forest economists like Sirivastava and Pant (1979), have attempted to do eco-nomic benefit cost analysis of various social forestry plantation programs. They have pointed out the inadequacy of BCA as a criterion for evaluating social forestry projects because of lack of methodology for including some of the social and indirect benefits, such as income distribution and saving forests, in economic benefits. Income distribution is one of the major objectives of social forestry projects because of acute poverty and large unemployment prevailing in rural India. In order to compare the various social forestry plantation programs and plantations on forest lands, it is imperative to include some measure of income distribution in economic BCA. So far no social benefit cost studies of various social forestry plantation programs have been made for India. 5Efficiency refers to social efficiency in this thesis. Social efficiency includes economic and income distribution benefits and costs. Chapter 1. Introduction 4 1.1 Objective and research problems The main objective of the thesis is to demonstrate the application of social benefit cost analysis to the evaluation of social forestry plantation programs in India. Three questions are addressed in this thesis. These are: 1. How to value indirect benefits from saving the forests? 2. How to incorporate income distribution in economic benefits of social forestry projects? 3. How to investigate and compare the efficiency of various social forestry plantation programs, and also compare the efficiency of these programs with the establishment of plantations on forest lands managed under the C W R silviculture system and recently deforested lands? 1.2 Hypotheses This thesis addresses two hypotheses: 1. The use of social B C A can improve decision making in the evaluation of planta-tion programs under social forestry projects and in the establishment of fuelwood plantations on forest .lands managed under the C W R silviculture system and on ' recently : deforested lands. 2.. Because most of the Village (common) lands included in the social forestry project of Maharashtra State are degraded and severely overgrazed, the use of forest lands managed under the C W R silviculture system and recently deforested lands for the establishment of fuelwood plantations for meeting the objectives of social forestry is more efficient than establishing plantations on village (common) lands. Chapter 1. Introduction •5 1.3 Organisation of thesis In the second chapter the methodology of BCA and its limitations as an eval-uation tool are reviewed and discussed. In chapter 3, the various methods to in-corporate equity in BCA are reviewed. The Squire and Vander Tak (1975) method of incorporating equity is explained in detail. In chapter 4, the scheme for creating and distributing the benefits of various plantation programs of a social forestry project in Maharashtra State is described. Plantation schemes and proposed al-ternative sites for establishing fuelwood and fodder plantations are also described. In chapter 5, benefits and costs of all the alternative plantations are identified and estimated. The methodology of valuation of indirect benefits of saving forests from deforestation is established. In chapter 6, economic and social BCAs of alternative plantations are carried out. Results are compared and discussed. In chapter 7, a summary is given and conclusions are drawn. 1.4 Assumptions Following are the major assumptions made in this thesis: (a) The social value of a project is the sum of the values of the project to the individual members of the society. (b) The wage rate paid to labour does not reflect the opportunity cost of labour. (c) The base year for measuring prices of goods and services is . 1984 and the relative prices of inputs and outputs will remain constant during the project period. (d) The effects of changes brought about by a policy or project will be analysed in partial equilibrium. Chapter 1. Introduction 6 (e) All the residents in the State of Maharashtra in India will comprise the society for the purpose of analysis. Chapter 2 B C A an evaluation tool BCA, which originated in France in the 19th century, is one of the most fa-miliar methods of project evaluation. Serious development of methodology and application of the BCA as a method for evaluation of the net economic benefits to society from a particular investment project dates from the early 1930's and is identified with the U.S. Army Corps of Engineers. It was not until the 1960's that its application was extended to assess the economic feasibility of a wide range of large scale public investments. In this chapter, the methodology of BCA and its limitations as an evaluation tool are discussed. 2.1 Methodology of B C A The methodology of BCA, in general, involves the following five major steps: (a) Defining the project and identification of alternatives. (b) Identification of benefits and costs. (c) Estimation of benefits and costs. (d) Discounting of benefits and costs to the present. (e) Selection of the project. 7 Chapter 2. BCA an evaluation tool 8 2.1.1 Defining the project and identification of alternatives This is the preparatory step and gives direction to the remainder of the analysis. Each project has its unique features, but aspects such as technical description of the project, defining objectives, establishing constraints, and identification of alternatives are common to most. A detailed technical description of the project helps the analyst to identify all the project inputs and outputs and the calendar time in which they will occur. Objectives give direction to the analyst to proceed with identifying and analyzing the alternatives and also help in designing the detailed methodology of subsequent analysis. Quite often the project has to satisfy diverse budgetary, legal, institutional, social, and political constraints. Knowledge of the constraints helps the analyst to exclude those projects which are not feasible. The purpose of the search for project alternatives is to facilitate the efficient use of resources through the comparison of benefits and costs of various alternatives. Every project has one universal alternative, the status quo, i.e., 'do nothing', and this forms the base line scenario. The do nothing project implies leaving the re-sources in their present use. It is the base-line scenario that forms the reference line with which the time streams of net benefits of alternative projects are compared. This approach is also known as the 'without project' approach for comparing the alternatives. Alternatives are identified., by varying the scale of the .project, time horizon, mix of inputs and outputs, location and social institutions. Chapter 2. BCA ran evaluation tool 9 2.1.2 Identification of costs and benefits Once the project has been completely defined, and the alternatives identified, the next step is to identify the relevant costs and benefits. There are arrays of terms by which the various costs and benefits are designated. For example, direct benefits, primary benefits and internal benefits connote the same benefits. Positive externalities and indirect benefits refer 'to the same type of benefits. The benefits and costs may be classified as: (a) Direct benefits and costs. (b) Externalities (positive and negative) or indirect benefits or costs. (c) Secondary benefits. Direct benefits and costs are those which are directly related to the main ob-jective of the project. In other words, direct benefits are those benefits received directly from the output, and direct costs are the resources necessary to produce the output by an economic entity such as, a person, community, firm or an industry. External benefits are those benefits which accrue to economic agents through the action of some other economic agent; i.e., the action of one economic entity affects the other economic entity. Similarly, external costs are those costs which are borne by economic agents through the action of some other economic agent. •Secondary benefits reflect the indirect impact of the project through its forward and backward linkages with the rest of the economy. For example, secondary ben-efits derived in the form of increase in production of inputs used in the project and the increase in output of consumer commodities generated by the increased employ-ment may be attributed to the project. The secondary benefits are the responding multiplier effect of the project. Chapter 2. BCA an evaluation tool 10 The incorporation of secondary benefits and costs within BCA is discouraged by economists because these benefits, in fully employed economies, do not reflect increased production capability in the economy but are relevant only for distribu-tional policies (Eckstein, 1957, Margolis, 1957, Mackean, 1958). However, when the market prices do not represent the social costs, secondary effects become important and 'constitute a real net change in the welfare' under the following the conditions (Gittinger, 1982): (a) The public expenditure is not financed out of tax revenues so that the multi-plier creating expenditures are not drawn away from the private sector. (b) The conditions of supply for all factors induced to employment by the invest-ment are perfectly elastic at prevailing prices. (c) The opportunity costs of those factors in the absence of the investments are zero. (d) The outputs which result do not simply substitute for other products in the market place and, thus, do not result in unemployment of other factors of production. 2.1.3 Estimation of benefits and costs In BCA, the value of a project to an individual is the.maximum-amount he would be willing to pay to have the project adopted;such that'he is at least on the same welfare level as before undertaking the project. Willingness to pay implies consumer sovereignty and each individual is the best judge of what a given thing is worth to him. In a competitive market, price is the willingness to pay at the margin and represents marginal value or marginal costs, as the case may be, of Chapter 2. BCA an evaluation tool 11 income. When the change in the quantity of a commodity due to the project is small, i.e., marginal, and does not cause a price change, then the competitive equilibrium market price multiplied by the number of the units of the commodity produced is the economic value of the entire output of the project. When there are non-marginal changes in the quantity due to the project and these cause a change in the price of the commodity, the net value of the output to each individual is measured by the consumer surplus enjoyed by the individual. Given the existing income distribution, the net social value of the change due to the project is the sum of the consumer surpluses across individuals. Sometimes the observed market prices do not reflect the true opportunity costs due to imperfections in the market. Imperfections in the market are caused by government policies of levying taxes and extending subsidies, labour unemployment, imperfect competition, the existence of monopoly in the productions of certain vital inputs, etc. In the presence of imperfections in the market, market prices are corrected to reflect the true economic value. The corrected prices are called shadow prices1. 2.1.3.1 Valuation of unpriced (extra-market) goods .Beside imperfections in the market, there are many goods and services pro-duced (benefits) and/or used (costs) by the projects which are not traded in the market and, therefore, do not have dollar values. This kind of problem is more per-vasive in forestry and environmental projects. For example, forest benefits, such as recreation, environmental and aesthetic benefits, are not directly bought and xThe methods for estimating the shadow prices of goods and services are given in many text books on BCA, for example, Mishan, 1971; Squire and Van der Tak, 1975; Ray, 1985; and Sugden and Williams, 1986. • . . Chapter 2. BCA an evaluation tool 12 sold in the market. These are called unpriced or extra-market benefits. Moneti-zation and incorporation of unpriced benefits in the B C A are essential; otherwise these benefits will be excluded from the total monetary benefits, and thus the total benefits of the project will be under estimated. In the last 25 years, much effort has gone into the development of methods for the monetary valuation of unpriced benefits. There are four methods, viz., Contingent Valuation Method (CVM), Travel Cost Method (TCM), Hedonic Price Method (HPM) and Perfect Substitute Method (PSM). The first method is based on the income compensation approach and the last three methods are based on the income expenditure approach. The income compensation approach seeks directly to determine the amount of money compensation, paid or received, which will restore the initial level utility of the individual who experiences an increment or decrement in the level at which the good is provided. The income expenditure approach seeks to generate the information about the economic value of the non-marketed goods and services by observing its influence on the demand for other relevant marketed goods and services. The C V M method involves establishing a hypothetical market situation and asking individuals to reveal extramarket values contingent upon the existence of this hypothetical market. The deficiency of this method (CVM) is the lack of incentive compatibility and the.use of a. strategy by the beneficiaries not to reveal accurately their willingness to pay, i.e., not to reveal the true value of the resource. These deficiencies, theoretically, to some extent have been circumvented by using iterative bidding methods but the results are yet to be confirmed empirically (Peterson and Randall, 1984). This method has often been used for estimating recreation values Chapter 2. BCA an evaluation tool 13 in the U.S.A., for example, to find the value of salmon sport fishing in Washington in 1970, and a national average value for deer hunting in 1979 (United States Department of Agriculture, 1984). This method has been approved by the U.S. Water Resources Council, 1979, for the estimation of recreation benefits (Peterson and Randall, 1984). TCM is used for estimating the recreational value for parks, reservoirs, lakes and wilderness area. It uses the actual market transaction such as travel cost and/or other expenditures, and makes inferences about the value of the recreation benefit. The difficulty with this method is that it cannot separate the value attributed to a particular recreation site from the total expenditure in multi-purpose or multi-site visits. This method has been widely used to estimate recreation values in the U.S.A., e.g., to estimate the state average value of sport fishing in Idaho in 1970, and to estimate the value of antelope hunting in Utah in 1979 (United States Department of Agriculture, 1984). This method has also been recommended for the estimation of recreation benefits in the province of British Columbia in Canada (Loose, 1977). The HPM is used to estimate amenity values associated with natural and/or environmental characteristics, like landscape, and air pollution of residential areas. The value of an amenity can be determined by observing the difference: in market prices of houses in two localities which are otherwise similar. Considerable work in this regard has been done to infer values about associated amenities such as waterfront, airport noise and .air .pollution, and mode of. transport (Foster ..and Beesley, 1963; Freeman, 1974; Freeman, 1979). The PSM is used to estimate the value of the goods and services can be estimated by determining the market prices of the substitutes. The substitute method has Chapter 2. BCA an evaluation tool •14 been used in estimating the value of the fuelwood in a community plantation project in Korea (Gregersen and Contreras, 1979). The problem with this method is that of market clearance at the price imputed for the substitute. 2.1.3.2 Valuation of non-use or non-consumptive values The values derived from the goods and services produced from some of the resources, for example, forest resources, are of two types: (a) Use or consumptive value, which is defined as the economic value derived from using the goods and services provided by the resource. For example, raw materials, medicinal products, recreation, aesthetic value, etc. are the goods and services provided by the forests which have use or consumptive value. (b) Non-use or non-consumptive value, which is defined as the economic value from the resource derived by not actually using its output but by having the option to use it in future or by having the knowledge of its existence or by retaining the option of its becoming more useful in future with the development of technology and research. Non-use values, also referred to as off-site values, are of three kinds: (a) Option value. This value arises from retaining an option to use in the future, goods and services produced by the resource. It is immaterial whether the individual exercises that option or not. (b) Existence value. This value arises from the mere knowledge of the existence of the resource regardless of its use (Krutilla, 1967). ipter. 2. BCA an evaluation tool 15 (c) Quasi-option value. This concept is related to the probability of future use of the resource, which is being subjected to irreversible development, because more information and knowledge: about its use will be available in the future. The methods used to estimate the values of consumptive benefits have been given earlier for both market and extra-market goods and services. Some progress has been made to estimate the value of non-consumptive uses but much research is needed before the non-use values enjoy the same credibility as the market price or even extra-market values measured by CVM, TCM or PSM (Peterson and Sorg, 1988). 2.1.4 Discounting of benefits and costs Benefits and costs of a project occur during its lifetime. Benefits or costs occurring •at different times are valued differently. In-order to compare the total benefits and costs of a project or to compare the total net benefits of one project with another, one needs the sum total of the time stream of costs and benefits at one point of time. Most often, all the benefits and costs occurring at different times are reduced to the present time, t=0. The rate at which the future benefits and costs are discounted is called the discount rate. In BCA the term used for the discount rate is the social discount rate. It is the rate at which society as a whole is willing to trade present benefits .and costs for future benefits and costs, respectively. The choice of the social discount rate is one of the controversial and still unre-solved topics in BCA. The controversy revolves around the conceptual basis of the discount rate, i.e., what it ought to measure, and its numerical value. Chapter 2. BCA air evaluation tool 16 There are two approaches to the choice of the discount rate. The proponents of the social time preference rate (STPR) approach advocate that for discounting future benefits or costs in a public project, society's time preference rate of discount should be used. It is the rate at which the whole of society prefers its present consumption to its future consumption. The problem is how to determine the society's time preference rate. Some economists have suggested that the market rate represents the social time preference rate. However, Sen (1961) and Marglin (1963a) objected to the use of market rate as the social discount rate. The observed market rate does not reflect the society's true time preference rate because individuals may behave differently than they would behave collectively. The proponents of the opportunity cost of capital (OCC) approach base their arguments on the premise that the opportunity cost of the resources used in the public project should be considered. By opportunity cost is meant what members of the society forego now and in future in employing the resources in the public project rather than in their best alternative. Baumol (1968) suggested that the rate of return on the corporate investment project is the opportunity cost of diverting funds from the private corporate sector to the public sector and this should be used as a benchmark for comparing the public sector project investments. There are two objections to the use of rate of return on the corporate investment projects as the discount rate: (a) The rate of return from the private sector is in fact the financial rate of "return because there are social costs, like externalities, associated withprivate indus-tries which do not enter into the total cost function. Therefore, the private cost is less than the social cost and, thus, the rate of return is higher than otherwise it would be. Chapter 2. BCA an evaluation tool 17 (b) The sources of funds are diversion of funds from private investment as well as private consumption and savings. These sources do not have the same opportunity cost because of imperfections in the capital market. Marglin (1963b) has synthesized the STPR and OCC approaches. He has con-sidered the opportunity costs of diverting funds from private investment, consump-tion and savings. The opportunity cost of the capital is called the social oppor-tunity cost of capital or shadow price of investment. Harberger (1969), Sjasstad and Wisecarver (1977) and others have given various models to calculate the social opportunity cost of investment. Choice of discount rate has not been based on one single criterion. The basis of the choice of discount rate usually varies from country to country and from project to project in the same country. In the U.S.A for water resources related projects, the discount rate still is based upon the estimated average cost of federal borrowing as determined by the Secretary of the Treasury (U.S. Water Resources Council, 1973). The United States Department of Agriculture (USDA) Forestry Service recommended the use of 4% discount rate based on OCC for long term forestry projects (Row, et al., 1981). In the province of British Columbia in Canada, the guidelines issued by the Environment and Land Use Committee Secretariat, regarding the discount rate to be used for the evaluation of public projects have their basis in the opportunity cost of the capital (Loose, 1977). It was'recommended that the discount rate should be equal to the weighted average of the pre tax rates of return to capital invested in the private sector. Chapter 2. BCA an evaluation tool 18 2.1.5 Selection of the project In economic BCA, the discounted monetary value of the economic benefits and costs are compared to select the project. The three most-commonly employed indicators for the selection of a project among the alternatives. are present net worth (PNW), internal rate of return (IRR) and benefit cost ratio (B/C). The PNW is the difference between discounted benefits and costs. Mathematically, it is written as, PNW = ± ' f - °<\ where, Bt and Ct) are the benefits and cost at time t, respectively, r is the discount rate, and n is the project period in years.. The value of PNW > 0 indicates that the project is economically viable. If there is more than one alternative, projects are ranked in order of'decreasing PNW. B/C is a variant of PNW. It is used when there is a budget constraint. It is the ratio of the present value of the benefits to the present value of the costs of the project. Mathematically, it is expressed as, v^n Bt-OPt _ -t=o (1+7-)' ~ CH ' 2^t=o ( i + r )t where, OPt is the operational cost at time t, and Clt is the initial investment at time t. If B/C is > 1, then the project is economically viable. If there is more than one-'project they are ranked in the decreasing order of theirvB/C ratio, i.e., in,the decreasing order of marginal productivity of capital. IRR is the value of the discount rate which makes PNW equal to zero. It is Chapter 2. BCA an evaluation tool 19 determined by solving the following equation, t=o n {Bt - Ct) (1 + IRR)1 = 0. If there is one project, it is economically viable when IRR exceeds some prede-termined level of social discount rate. Projects are ranked in the order of decreasing discount rate. All the three indicators do not lead to the same conclusion regarding the choice of the project. The majority of economists (Feldstein and Fleming, 1964; Dasgupta and Pearce, 1971; Layard, 1972; Mishan, 1972; Price and Nair, 1985) and a host of manuals have preferred PNW as an indicator for the choice of a project. B/C may be used to rank projects when there is a capital constraint, provided the total capital is absorbed by all the projects so chosen. IRR criterion is an accepted alternative but there are two difficulties in using it as a choice criterion: (a) The value of IRR found from the above equation is not necessarily unique because the equation is of degree n and has n roots. Thus, it creates the problem of choosing which value of IRR among the many should be considered in the decision making. (b) The second difficulty arises when the analyst deems it appropriate to set two social discount rates, one for the first x years of the project and the other for the remaining n-x years of the life of the project. There is no apparent method using IRR that can account for the above constraint. Further, the higher IRR will cause the society to give less weight to the future benefits as compared to the present benefits, even if society feels that future benefits ' are more important than indicated by the IRR. Chapter 2. BCA an evaluation tool ,20 2.1.6 Limitations of BCA as an evaluation tool The PNW reflects the present net worth of all the monetary economic benefits and costs. The selection of the project only on the basis of PNW or B/C satisfies only the-objective of economic efficiency and is indifferent to income distribution. The criticism regarding its indifference to income distribution arises due to the use of the Potential Pareto Improvement (PPI) principle as the basis of the selection criterion. In fact, the Potential Pareto criterion provides a means of making estimates about a project's contribution to economic efficiency, but it does not provide any guidance on the distribution of income (Nath, 1969; Sen, 1973). This principle states that state A is preferred over state B, if the gainers in state A could compensate the losers and still be better off regardless of whether the compensation is actually paid or not. In other words it amounts to choosing of a state with the greatest net benefits. When this principle is applied in BCA, it ascer-tains the net benefits of a project or policy change regardless of who receives them. Harberger (1971) has argued that this should form one of the 'three basic postu-lates' of applied welfare economics. This postulate as the basis of welfare economics does not find universal acceptance because it does not demand that the compen-sation be actually paid. The justification for applying this principle in evaluating the net effects of a policy change or a project is that the aggregate money gains and losses measure the efficiency gains from a project or a policy change. The justification of the use of this principle on efficiency grounds is widely accepted in the literature and statements to this effect may be found in a wide variety of sources (Mishan, 1972; Dasgupta and Pearce, 1972, Pearce, 1971; Layard, 1972), but this is not to say that all the authors advocate the use of compensation test as a welfare criteria (Boadway, 1974), Chapter 2. BCA an evaluation tool 21 The use of willingness to pay as the basis of valuation and the PPI with com-pensation (hypothetical) as the basis of welfare criterion implies that: (a) The existing distribution of-income is accepted. (b) The marginal utility of income is constant and the same for all gainers and losers. But in the real world these assumptions do not hold. The problem arises be-cause in the compensation test, compensation is not actually paid by the gainers to the losers and, therefore, there is a movement from the existing income distribution. The compensation test (without actual compensation ) is called the Kaldor-Hicks Test and it was proved by Scitovsky (1942) to be susceptible to self-contradiction. He stated that gainers in a move from the state B to the state A might be able to 'bribe' losers to accept the change. The gainers might compensate the losers and be better off, but, once the change has occurred, the losers might in the state A be able to bribe the gainers back to status quo. This is known as the Scitovsky reversal. Boadway (1974) has further shown that even if the compensation test is accepted, the positive sign of the net benefits obtained by simple aggregation of money gains and losses is not a sure test that the gainers could compensate the losers. Thus, the Kaldor-Hicks test may lead to inconsistent ranking. It follows that it is not possible to separate ;efficiency,.from equity and the'redistribution ef-fects should be measured and incorporated in BCA (Boadway, 1974). This view is not shared by all economists. Krutilla and. Eckstein (1958) argued that redistribution effects are not significant. Mishan (1972) and others are of the view that the benefit cost analyst should only estimate and evaluate the costs and benefits and leave the matter of redistribution of income to the decision maker. They further argue that the projects should be selected on the basis of economic iptei 2. BCA an evaluation tool 22 efficiency and any redistributional consequences should be corrected by the govern-ment through taxation policy etc. If it would have been possible to make transfers in a lump-sum manner, efficiency could be separated from equity, but transfers are not costless and there is a waste of some amount of income in the process. Mass (1966), Dasgupta, Marglin and Sen (1972), Little and Mirlees (1974), Boadway (1974) and others argued that the distributional objective should be incorporated explicitly in the BCA by the analyst. In addition to monetary benefits and costs, there may be other benefits which cannot be monetized. The monetary benefits and costs which are compared for the ranking of projects in fact do not reflect the total benefits and costs due to the project. Projects, besides having economic efficiency as an objective, probably have many other objectives like distribution of income, conservation and improvement of environment, and generation of employment. The traditional approach to BCA of comparing monetary costs and benefits does not indicate how efficiently objectives other than economic are being met by the selected project. The final selection of the project on the basis of the traditional approach to multiple objective projects may not be acceptable. Chapter 3 Approaches to incorporating equity in B C A and decision criteria Application of BCA to evaluate public projects has been criticised on account of its inability to monetize the intangible benefits and costs, and to deal with equity (Sassone and Schaffer, 1981). The criticism regarding its indifference to income distribution arises due to the use of the Potential Pareto Improvement (PPI) principle as the basis of the selection criterion. In this chapter, approaches to incorporating equity in BCA are reviewed and the decision criteria for social forestry projects are established. 3.1 Equity weights Let the social welfare function, W, be expressed as the function of the individual utilities in the following form, where, £P(1°) is the utility function of income, Y\ ofan individual j, j=l,2,....,h. The change in-social welfare, dW, is given by the total differentiation of the above expression as, W = W{Ul(Yl), ...,Uj(Yj),...,Uh(Yh)} dW = SW 8U> SU* SYi rdY3 23 apter 3. Approaches to incorporating equity in BCA and decision criteria 24 where, Hjjjyj is the marginal social utility of income of individual j. Let the marginal social utility of income, fjjjfpj be represented as aJ, the dW is equal to, h •dW = l^aidYi, J'=I where, ajs are equity, social or distributional weights. It is a common practice in BCA to assume that the marginal utility of income is the same for all, which implies a gain of a dollar of income has the same utility to both rich and poor. If we also assume constancy of marginal utility of income, i.e., a1 := a2 = aj = • • • = an = 1, then the change in social welfare, dW, becomes, dW = dY1 + dY2 + • • • + dYj + • • • + dYj. This simply requires the money values to be< estimated and then summed up to ob-tain the change in social welfare, which is indifferent to distributional consequences. But in reality the weights are not the same for all individuals. 3.2 Approaches to incorporating equity in B C A There are three approaches to incorporating equity in BCA: (a) Attaching distribution-weights to monetary gains and losses-according to the group that gets them. (b) Attaching distribution weights to goods and factors. (c) Using welfare ratios as a measure of welfare change. Chapter 3. Approaches to incorporating, equity.in BCA and decision criteria .25 The problem of incorporating equity in BCA is determination of weights acceptable  to all. There are various practical methods that may be used to determine weights, but none has gained universal acceptance because of inherent arbitrariness in the determination of distribution weights. 3.2.1 Methods of attaching distributional weights to monetary gains and losses In this approach the utility to an individual is assumed to be a function of his income. Distributional weights are thus attached to the monetary gains and losses according to the individual or group that gets it. There are two methods of attach-ing distributional weights to efficiency gains: (a) Respective equity weights are directly attached to the individuals' incremental income. (b) Differences between private incremental consumption and incremental non-consumption (savings) expenditure are recognised. Distributional weights are attached to the private incremental consumption to obtain its social value arising due to the project. This method of integrating equity with efficiency was given by Squire and Van der Tak (1975). The-Squire and Van der Tak (1975) method of integrating equity with efficiency is described below: Assume that the life of the project is one year and results in net increase of E (net efficiency benefits) in real resources (expressed in public income or in foreign exchange) to the economy. Also assume that: Chapter"3. Approaches to. incorporating equity in BCA and 'decision criteria •26 (a) As a result of the project the income of one particular group in the private sector is increased by G and all other net financial benefits accrue to the public sector. (b) The private sector spends the entire increase in income C, i.e., the entire increase in income is allocated to consumption and there are no savings. (c) The increase in social welfares resulting from the marginal increase in real resources and consumption to a particular group are Wa and Wc, respectively. The increase in consumption C has a cost in real resources which may or may not be equal to C because of distortions in the economy. To obtain the real cost of the resources of the financial measure of the increase in consumption C needs to be adjusted. Let the adjustment factor be /3 so that the value of the increase in consumption in terms of cost of real resources is C/3, and the public sector retains E — C/3 portion of the total increase in real resources. The net social benefit is thus equal to, (E - Cf3)Wa + CWC. In this expression, Wg is defined for real resources and, Wc is defined for consumption at market prices. Therefore, it needs to be expressed in a common denominator. Dividing the above expression by Wg, the net social benefit, S,is given by, S = (E - C/3) + Cu. where, _ = Wc/Wg. The above expression can be written as, S = E + C(u>-0). (3.1) Chapter 3. Approaches to incorporating equity in BCA and decision criteria. 27 Dividing numerator and denominator in the expression u> = Wc/Wg by Ws, the value of the marginal increase in consumption at domestic prices to someone at the average level of consumption is c. The expression for u> becomes, The ratio, Wc/Ws, represents the value of marginal increase in private consumption at domestic prices at consumption level c relative to the one at domestic prices at the average level c. Let this ratio be denoted by D. The factor D is an income distribution parameter. It measures the value of the increase in consumption to a particular income group with respect to one with average income. Let the ratio, Wg/Ws be denoted by v, which represents the value of the common denominator relative to private sector at the average level of consumption. The expression for u reduces to D/v. The value of u> depends on D and v. It allows accounting for the effect of the different existing levels of consumption on the value of the additional consumption generated by the project. In fact the value of D depends on the choice of the social welfare function and thus introduces value judgement in the determination of D. The factor v allows for the different weights to be assigned to the public sector income in terms of foreign exchange relative to the private sector consumption at the average level of consumption. Substituting the value of a> in the expression (3.1) w = w£wg ..Chapter 3. Approaches to incorporating equity in BCA and decision criteria 28 The factor C(D/v) reflects the social benefit of the additional consump-tion in the private sector, and C/3 reflects the cost of the increased con-sumption. In words, the above relationship is expressed as, ;'Net social benefit = Efficiency benefit + Distributional impact. The advantage of this method is that it separates equity from efficiency, but there are practical difficulties in the determination of real economic efficiency gains, E, and conversion factor, /3, because it requires many data and involves complex analysis (Singh, 1987). 3.2.2 Methods of determining income distribution weights There are five methods to determine the income distribution weights which are explained below: (a) In this method, the determination of weights is to impose an explicit value judgement on the social utility function biased towards those with lower in-comes. Foster (1966) recommended the use of the following weighting scheme, 1 _ Y a 2 _ Ya j _ Ya where, Ya is the average national personal income and Y' is the net income of the individual. Thepurpose of this weighting scheme is to inflate the value of the benefits of the poor, arbitrarily. (b) A second approach to weighting was suggested by Krutilla and Eckstein (1958). This involves adoption of the marginal rate of income tax as weights. As the income tax rate increases with the increase in income, the marginal social valuation of income falls with the rise in income. The weighting scheme based Chapter 3. Approaches to incorporating:equity in BCA and decision criteria 29 on this method gives more weight to the gains or losses of the poor than the rich. Mathematically, it is expressed as, a* = {Y={l-bj)}/Y\ where,' bj is the marginal tax rate. Though this weighting scheme is based on the weighting scheme followed by the government to correct distribution of income through fiscal policies, it suffers from the following defects: i. The marginal income tax rate does not often vary over substantial income ranges. The implied weighting scheme based on marginal rate of income tax assumes constant marginal utility of income for a large income range and, leads us back to square one. ii. Besides income tax, there are many other taxes such as, sales tax and ex-cise tax, imposed by the government to redistribute income. To apply the weighting scheme based on the marginal rate of all taxes, their marginal incidence should be assessed. (c) Weisbrod (1968) suggested that the weights attached to the benefits received by the people belonging to different income groups, regions, race, etc., for the redistribution of income should be derived from the past policy of the government. Acceptance of projects in the past-with lower PNW might favour a particular income group or region over the competing higher PNW. The weights observed from such decisions of the past would reflect the decision makers' preference for the various groups in the society. This approach suffers from: / i. The huge amount of data required for analysis to find out empirically the weights attached to the various groups in the past. Chapter 3. Approaches to incorporating equity in BCA and decision criteria 30 i i . The assumption of consistency of the decisions by the different govern-ments in the past and in the future. (d) Squire and Van der Tak ( 1975) gave another method of determining distribu-tion weights. They derived a formula1 for the distribution weight by assuming utility function, 11(c), where, c is the level of consumption and e is the parameter of utility. The formula for the distribution weight , D, derived by them is, In the above expression the consumptions are being compared at one point of time. The value of D changes with the change in the value of e and with the different levels of consumption. Given the value of e, weights for the people belonging to different income groups can be found. If the value of e is assumed to be one, D — c/c. The value of the marginal additional consumption for a person with existing level of consumption twice that of the average, i.e., 2xC, would be half of the value to a person with the average level of consumption. With higher values of e, the project would be more in favour of the poor. (e) Harberger's (1978) method to determine weights is based on.the consumption of certain types of commodities (basic needs) by the poor. For example, if a project increases incomes of different groups of people by Y1,' then the change in welfare, AW, is, AW = Ei=1AYi(l+ai) + AYj,-Derivation of the formula is given in the appendix B. Chapter 3. Approaches to incorporating equity in BCA and decision criteria 31 where, AY1, i — 1, ... , k, are the income increments of the deprived groups, AY3, j = k -f 1,... , h, are the increments of non-deprived groups, and als, are income weights. The income weights are given by, i •a =ciy, where, c; is the marginal propensity to consume a basic-need good, say food, of group i, P is the market price, and w*s are welfare weights for additional quantities of food consumed. The welfare weights are given as, where, II is an average of the price elasticities of demand of a nondeprived group, weighted by the share of consumption of each group in the total con-sumption of such groups; g% and g measure deprivation of group i and all deprived groups, respectively. 3.2.3 Attaching distribution weights to goods and factors This approach was developed by Boadway (1974). He called the distribution parameter attached to the goods and factors 'distribution characteristic'. In this approach the utility function, U°, is taken as a function of commodities which include both goods consumed and.factors supplied. Let the,utility function of the individual be represented as, V> = W(X3l,...,XH, ...,X>n), where, X3i is the commidity i consumed by the invidual j. The number of individ-uals are assumed to be h, i.e., j — 1,..., h, and the number of commodities are n, Chapter 3. Approaches to incorporating equity in BCA-and decision criteria 32 i.e., i = 1,... ,n. Assuming the social welfare function, W, of the following form, W = W{U\Xl),... ,Uj(Xj),... ,Uh(Xh)}, where, XJ denotes the (nxl) vector of A"J'. The change in social welfare, dW, can be obtained by the total differentiation of W which is equal to, h n 8W SlJii dW = YY dXH, where, UH is the change in utilty of individual j, with respect to change in con-sumption of commodity, i. Assuming that all individuals face the same set of prices, Pi,..., Pn, then from the utility optimising conditions, SUHSXn Pi _. r „ . , . rniwn=Pi = P h f o r a l l j a n d z ' where, PI •= 1, is the price of the good in .terms of which the prices of all other goods are expressed. Substituting the value of 8UH/8XH from the above expression in the expression B, then dW is equal to, h n dw^Y,JlbJ'PidXJh j = l i = l where, V — (8W/8UH) (811^1/8X^1), is the marginal social utility of the good Pi to the jth individual. Further, asssume that each consumer faces a budget constraint of the following form, n PiXH = 0. .i=i Totally differentiating the above expression, it becomes n n PidXji =.- Yl XHdPi. " i = i 'j=i Substituting the value of _ 7 = 1 PidXH in the expression, it becomes, h n dW = - ^ j O T P i , j = i » = i = ~Y RiXidPi Chapter 3. Approaches to incorporating equity in BCA and decision criteria 33where, Ri — Ylj^&XH/Xi, is the distribution characteristic of the ith good. The distribution characteristic, Ri, is the weighted average of the IPs, weighted by each individual's consumption of Xi. Since X^ijXi generally varies from com-modity to commodity for an individual, the value of Ri will be different for each commodity. If the marginal social value tV diminishes, then Ri will be higher for necessities and lower for luxuries. This approach can help choose which commodity to produce. 3.2.4 Using welfare ratio as a measure of welfare Blackorby and Donaldson (1985) argued that consistent aggregation of surpluses forbids the attachment of different weights to the surpluses of various people. Fur-ther, consistency demands that preferences belong to a restricted class. Blackorby and Donaldson (1987) introduced a new method for distributionally sensitive BCA. They advocated the use of welfare ratios rather than consumer surplus as a measure of welfare change. Welfare ratio is the ratio of the household income to its poverty line. Mathematically, welfare ratio, Wh, of a household h, having income Yh, is represented as, wh = Yh/C(Ur,P,Ih), where, C(Ur, P, lh) is the minimum income necessary at prices, P, for household h, with characteristic2 Ih, to achieve utility level UT, at the.poverty line. The welfare ratio of the household provides indices of welfare for household members. Social judgements are made by aggregating these welfare ratios with a function, a cost benefit rule. The advantages of this method are: 2Households are described by vectors of characteristics such as, number of adults and children in the household, age and sex of the members of the household, and education level. Chapter 3. Approaches to incorporating equity in BCA and decision criteria 34 (a) Poverty lines are consistent with household preferences and capture both effi-ciency and distributional effects of the price changes. (b) Economies of scale in household consumption are taken.into account by the welfare ratios through poverty lines. (c) Interpersonal comparisons-are supplied by the poverty lines since dissimilar households with incomes at their respective poverty lines are equally well-off. This method is worth pursuing but needs lot of data to establish poverty lines and changes in them due to price changes on account of the project or a policy change. 3.3 Decision criteria in social forestry projects In social forestry projects, there generally are the following socio-economic and environmental objectives: (a) Production of fuelwood, fodder and small timber. (b) Generation of employment. (c) Improvement in income distribution (d) Improvement of environment and aesthetic values. The first objective .can be measured in physical units which can be converted . to monetary units. The. second objective also can be expressed in .physical'units but it is not explicitly expressed by the authorities in physical units like how many person days of employment a project should generate. Similarly, the objective of income distribution is simply stated that poor people should get the benefits of the project. It is not often explicitly mentioned as to how many people of what level of Chapter 3. Approaches to incorporating equity in BCA and decision criteria 35 consumption should get the benefits, and by how much amount their income should increase through the project. If a limit is set, it becomes a constraint maximization problem. For example: (a) The objective is to maximise PNW subject to.generation of X number of man days of employment. Mathematically it can be expressed as, Max PNW, subject to L=X, • ' • where, L can be any measurable objective, say employment and its value is given by X . (b) If some objective other than the economic efficiency is to be maximized but a given minimum level of economic efficiency is to be achieved, then the problem can defined as, Max L, subject to PNW > 6. For-example, there is a fuelwood project financed by a foreign government. The domestic government wants to maximize labour employment subject to the PNW > 0 using the discount rate equal to the borrowing rate say 2% (real). Assume, there are three alternative projects, each having the same intial investment cost and time horizon. The first one has PNW=65000 ru-pees but generates 750 man-days of employment per year, the second one has PNW= 55000 rupees but generates 940 man-days of employment per year, and the third one has.PNW=50000 rupees but.generates 1000 man-days of employment per year. As per the given conditions, alternative -three is the preferred alternative. To choose an alternative that achieves all the objectives most efficiently, it is necessary to express the net social benefits of the income distribution, employment Chapter 3. Approaches to incorporating'equity in BCA'and decision criteria 36 and environmetal improvement in the same units in which the net benefits from the production of fuel fodder and timber are expressed. When all the benefits are ex-pressed in a common denominator, the best alternative can be selected objectively. The expression of net social benefits from such objectives involves monetization of all environmental benefits and inter-personal comparison of utilities. Inter-personal comparison of utilities is essentially not possible to measure un-less subjectivity is introduced. As mentioned earlier, Squire and Van der Tak (1975) have incorporated these objectives in an economic efficiency objective as-suming the nature of the welfare and individual utility function. The choice of the nature of welfare and utility function depends upon the value judgement and so does the results. Nonetheless, the nature of welfare and utility function assumed conforms to objectives to be achieved, and is, therefore, a better method to select the project rather than by introducing distribution weights purely arbitrarily, or selecting the project only on the basis of economic efficiency, where it is assumed that the marginal utility of income is the same for all persons. This assumption is contradictory to the objective of income distribution. Some of the benefits from the improvement of the environment can be measured in physical units and monetized but others cannot be monetized. In such cases, the cost or benefits can be compared qualitatively (Khetarpal, 1988b): "If all the project alternatives produce almost the same incremental .benefits, as generally, is the case with social forestry plantation alterna-tives, they should be given equal value for all alternatives. If projects have different type of benefits, then the difference should be compared with the difference in net monetary social benefits. The trade-off between net environmental benefits and net monetary benefits should be left to Chapter 3. Approaches to incorporating equity in BCA and decision criteria 37 the decision maker for the assignment of relative weights to the objectives of environmental benefits and net monetary social benefits." Chapter 4 Social forestry and proposed alternative plantation programs In India, in the State of Maharashtra, a social forestry project has been imple-mented since 1982 with the help of the U.S. Government. The U.S. Government has loaned funds at a 2% interest rate (real) to meet half the cost of the project. The loan is to be repaid in U.S. dollars in 40 years from the date of first disbursement of the loan. The project covers a total of 73,172 hectares of village (common) lands, waste-lands, strips of land along road sides, and agriculture field boundaries. Most of the village (common) lands included in the project are degraded and severely overgrazed1. For the implementation of this project, a new department named the Social Forestry Department (SFD) has been opened. The establishment cost (cost of construction of new residential and office buildings, purchase and operational cost of vehicles and office equipment and salaries to employees) is also included in the total cost of the project. The social forestry project in Maharashtra State is used as a case'study ,in this thesis for investigating the hypotheses laid out in chapter 1. In this chapter, the objectives of Maharastra social forestry project are given. The planting scheme and distribution of benefits of various project plantation pro-grams and proposed alternative plantation programs on forest lands are described. Source: Social forestry project, Govt, of Maharashtra, 1981 38 Chapter 4. Social forestry and proposed alternative plantation programs 39 The yields from various plantation programs have been calculated. 4.1 Objectives of the social forestry project in Maharashtra Objectives of the project are: (a) To increase supply of.firewood, fodder, fruits and small timber. (b) To reduce the rate of deforestation (c) To increase rural employment and improve income distribution. It has the following three major plan ting, programs: (a) Plantations on village (common) lands and wastelands. (b) Planting of tree seedlings along the State highways and village roads. (c) Distribution of seedlings free of cost to the farmers for planting on field bound-aries. 4.2 Plantation alternatives Five plantation alternatives are chosen for analysis. The chosen alternatives meet the objectives of the social forestry project to varying degrees. The alternatives are . as follows: (a) Plantations on village (common), lands and wastelands. (b) Planting of tree seedlings along village roads. (c) Distribution of seedlings free of cost to farmers for planting on the field bound-aries. Chapter 4. Social forestry and proposed;alternative.plantation programs ,40 (d) Plantations on forest lands under coppice with reserve. (e) Plantations on recently deforested lands. These plantation alternatives vary in productivity and have different institu-tional property rights. The first three alternatives are social forestry plantation programs. The last two alternatives are for comparison with the social;forestry plantation programs. 4.2.1 Plantations on village (common) lands Under this program, plantations are established on about 25 hectares of village (common) land or on wasteland near the village. Generally, fuel and small timber, fodder and fruit species are planted in consultation with the village community. Afforestation scheme, plantation activities, arrangements for labour supply, the agency responsible for bearing plantation expenditure, and arrangements for dis-tribution of benefits are given below: (a) Total number of seedlings to be planted per ha are 1600 at a spacing of 2.5 m x 2.5 m. (b) Seedlings are raised in a village nursery by the SFD. (c) Site preparation, fencing of plantation site, digging of pits, and'filling of pits are done from the months of January to May during off-agriculture season. (d) Planting of seedlingsvand weedings, are done from July to October during the agriculture season. (e) As community plantations, the village community will take all precautions and actions needed to protect plantations from grazing by animals and from illicit cutting. Therefore, no watchman is posted to protect the plantations. Chapter 4. Social forestry and proposed alternative plantation programs 41 (f) Raising of seedlings in the nursery and all the planting work is done under the supervision of SFD by employing labour from the village where the plantations are established. (g) All expenditure for raising seedlings and establishing plantations is borne by the SFD (h) In the social forestry project report it is not stated whether the SFD or the village community will be responsible for harvesting of plantations. For the purpose of analysis it is assumed that the SFD will harvest the plantations and will recover its expenditure from the sale of forest produce. (i) It is mentioned in the social project report that the arrangements for the distribution of benefits are to be decided. For the purpose of this analysis, it is assumed that the net benefits will be distributed equally among the members of the community. (j) Final survival percentage is assumed to be 80%. 4.2.2 Planting of tree seedlings along village roads In this program, seedlings are planted in one to four rows on either side of the road depending upon the availability of land. A mixture of species of fuel-wood, fruit, and aesthetic value is planted along the road sides. The afforestation scheme, planting activities, arrangement of labour, agency bearing expenditure for establishing ^plantations,, and arrangements for the distribution of benefits are given below: (a) Raising of seedlings and all other plantation related activities are undertaken by the SFD by hiring laborers from the village through which the road passes Chapter* 4. Social forestry and proposed alternative plantation programs 42 or from the nearby villages. (b) Spacing between rows and between seedlings is assumed to be 2.5 m. It is assumed that two rows of seedlings will be planted on either side of the road. The total number of seedlings planted on both sides of the road will be 1600. (c) The yield data for any species for road side plantations are not available. For . the purpose of yield calculation, the edge effects on the growth of trees have been assumed to be negligible, and it is assumed that the plantations are of 2.5x2.5 m spacing on a block of one hectare of area. (d) Raising of seedlings, digging of pits and filling of pits are done from January to May during the off-agriculture season. (e) One regular watchman at the rate of one per 3 kilometres is assumed to be employed for the first three years and at the rate of one per 5 kilometres from the fourth year until the plantations are finally harvested. (f) All expenditures on the raising of seedlings and establishing and harvesting of plantations at maturity will be borne by the SFD. (g) The project report does not mention whether the SFD, or the villagers living near the roads, will get the benefits from the felling of trees along the road sides. It is assumed here that all the benefits from the sale of fuelwood, fodder, and fruits will accrue to the SFD. (h) -Survival percentage, is assumed to be 70%. 4.2.3 Distribution of seedlings to the farmers In this program, assuming that the average land holding is one hectare, a maximum of 100 seedlings are given to a farmer for planting on field boundaries. Chapter 4. Social forestry and proposed alternative plantation programs 43 Arrangement for raising and distribution of seedlings, and the planting scheme are given below: (a) Nurseries for distribution of seedlings are either established by the SFD. in the villages or a contract is given to small farmers for the raising of- seedlings under the supervision of the SFD (b) Seedling are distributed free of cost to the farmers. (c) Seedlings are assumed to be planted in one row at a distance of 4 m. (d) The distance between field boundaries is assumed to be 2 m. (e) For the purpose of the calculation of the yield, it is assumed that plantations are at an espacement of 4x2 m. (f) Planting of seedlings is done by the farmer and his family in their leisure time. (g) Average survival percentage is asssumed to be 90% because all the benefits of planting trees will accrue to the farmer and, therefore, it is assumed that the trees will be protected better in this program than in the other two programs. 4.3 Proposed forest lands for establishing fuelwood and fodder planta-tions Mixed forests which are being managed under CWR and recently deforested lands are proposed to be alternative sites for establishing fuelwood-and fodder plantations. Low density mixed forests, of Teak (Tectona grandis Linn.) and'mis-cellaneous coppicing tree species, are being managed under CWR in Gondia Forest Division of Maharashtra state (Sardar, N.G., et al., 1981). In the past these forests were managed under a 40 years rotation but in the present management scheme Chapter 4. Social forestry and proposed alternative plantation programs •44 (1981-90), the rotation period has been changed to 50 years. From the last man-agement scheme (1971-80), it is revealed that the average annual yield per hectare of timber and firewood from these forests is 0.15 cubic metres of timber and 0.625 cubic metres of firewood. 4.3.1 Planting scheme on forest lands under CWR The proposed planting scheme on these forest lands is given below: (a) The standing crop will be harvested. (b) The total number of seedlings to be planted are 1600/ha at a spacing of 2.5x2.5 m. (c) Seedlings will be raised in the central nursery and will be transported in trucks at the time of planting. (d) Clearance of forest growth, site preparation, fencing, digging of pits and filling of pits will be done in the off-agriculture season during January to May. (e) Planting and weeding will be done in the agriculture season during the months of July to October. (f) Harvesting of plantations will be done by the forest department. (g) Labour will be employed from the villages near the planting site. If the dis-tance of the village from the planting site is more than 3 km, laborers will be transported in hired vehicles during planting and weedings. All the .planting and harvesting work will be done under the supervision of the forest depart-ment. (h) All the expenditure will be borne by the forest department and all the sale proceeds from the sale of fuelwood, fodder and timber will be appropriated by Chapter 4. Social forestry and proposed alternative' plantation programs 45 the forest department. 4.3.2 Planting scheme on deforested lands The planting scheme for the deforested lands is the same as given above for forest lands managed under CWR 4.4 Species selection The choice of a species or mixture of species to be planted depends upon the objectives of establishing plantations and the climatic and edaphic conditions of the planting site. In the present study, only Eucalyptus teriticornis Sm. (also called. Eucalyptus hybrid) is used because yield data for various levels of stocking are available for this species. 4.5 Calculation of yield In all alternatives except alternative No. 3 , a total of 1600 seedlings per hectare are planted. In alternative No. 3, seedlings are assumed to be planted at a spacing of 4x2 m, i.e., 1250 seedlings per hectare. This assumption is plausible because: (a) The total cost of plantations does not vary. (b) Given the constraints of 100-seedlings per farmer per hectare and~the distance between field boundaries, a spacing of 4x2 m is the optimum choice. In this case there is no constraint on land. Chapter 4. Social forestry and proposed alternative plantation programs •46 In this case the yield for an equivalent number of seedlings will be 1.28 times the yield2 obtained from 1250 seedlings per hectare. Three site quality classes, I, II and III, for Eucalyptus hybrid have been con-sidered for all the five alternatives, three under social forestry and two on forest lands. The yield for various site quality classes and for various levels of stocking is calculated by using the following regression equation prepared by Sharma (1978), logV = b0 + bx- + b2S' + 6 3 log N + bA, A D where, V is the yield in m3 per hectare, A is the age of the crop expressed in years, S is the site index which is specific to site quality class, N is the number of stems per hectare, b0 is a constant, and bi, b2, b3 are regression coefficients3. The above equation has been determined by using data from 124 samples of Eucalyptus hybrid all over India. 4.5.1 Rotation Three coppice rotations have been assumed for the crop before it is replanted. Rotation period has been fixed on the basis of maximisation of mean annual in-crement for all the five alternatives. From the yield tables of Eucalyptus hybrid prepared by Sharma (1978), it is found that when the crop is 8 to 9 years, old, the current annual increment is equal to the mean annual increment. Therefore, the annual average yield is maximum when the crop, is between 8 and 9 years old-and a rotation period of 8 years is fixed for the first rotation. -An-'eight year'rotation has also been fixed for coppice crops, assuming that the subsequent crops follow the same growth pattern as the first rotation. In this case edge effects on the growth of trees are also assumed to be negligible. The value of the regression coefficients is given in the appendix C. Chapter 4. Social forestry and proposed alternative plantation programs 47 4.5.2 Stocking density Stocking densit3', N , (number of stems per hectare) has been calculated by multiplying the total number of seedlings planted/ha with survival percentage. Stocking density for all the five alternatives is given in table 4.1. 4.5.3 Site index Site index for Eucalyptus hybrid for the three quality classes, I, II, III, is given in the appendix. Mean site index of respective quality classes has been used to calculate yields. Yields for one rotation for all the five alternatives found by using the regression equation given above is shown in the table 4.1. Chapter.4. Social forestry and proposed alternative plantation programs 48 Table 4.1: Table showing stocking density, N, mean site index, S, and Yield per hectare or equivalent number of seedlings of fuelwood and timber at age 8. Alt. Quality Stocking density6 Mean site Yield in m3 No°. class index0 Timber fuelwood Total I 1280 21 95.09 33.86 128.95 1 II 1280 15 48.70 48.70 III 1280 9 11.07 11.07 I 1120 21 87.56 31.30 118.36 2 II 1120 15 47.31 47.31 III 1120 9 10.18 10.18 I 1440 21 112.32 40.23 152.55 3 II 1440 15 60.62 .60.62 III 1440 9 13.06 13.06 I 1120 21 87.56 31.30 118.36 4 II 1120 15 47.31 47.31 III 1120 9 10.18 10.18 I 1120 21 87.56 31.30 118.36 5 II 1120 15 47.31 47.31 III 1120 9 10.18 10.18 "Alternatives are in the same order as given in section 4.2. ^Stocking density is the number of trees/ha at maturity. c ln metres at age 8 years. Chapter 5 Valuation of economic and social benefits and costs of plantation alternatives The economic principles and the methodology of BCA have been given in Chap-ter 2. Plantations established under social forestry projects and on forest lands have both tangible and intangible benefits. There is a well developed competitive market for firewood and timber. For grass, the auction price obtained in some of the forest divisions can approximate its economic value. There is no way of measuring the value of indirect benefits received from saving the forest land from deforestation due to social forestry plantations. The benefits of soil and water conservation are treated as intangible benefits. All material costs have been valued at market prices. Since there is involuntary unemployment, a shadow wage rate has been used for valuing the cost of labour during the off-agriculture season. Market wages have been u agriculture season. The shadow wage.rate for the off-agriculture season has been calculated. The cost of forest land used during the project period has been valued by assuming that the land has been leased. The lease rent has been calculated by valuing the net benefits foregone during the lease period. Employment and inco distribution benefits have been integrated into economic benefits by using the Squire and Van der Tak (1975) method. The data for valuing costs and benefits have been taken from the social forestry project of Maharashtra 49 50 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives' State and from the Gondia forest division. The financial rate structure for various items of work for establishing plantations in the social forestry project has been adopted for valuing the cost of plantations. The rates of various items of work have been increased by 25% because the daily wage rate increased by 25% from 1981 (the year in which social forestry project was prepared) to 1984, taken as the base year for the calculations of benefits and costs. 5.1 Definition of society People living in the state of Maharashtra constitute the society for the purpose of analysis. 5.2 Discount rate The opportunity cost of capital is the basis for assuming the discount rate. There are two sources of funds for the Maharashtra social forestry project: (a) The United States Goverment has loaned funds at a 2% interest rate (real) to meet the half the cost of the project. (b) The state government of Maharashtra will contribute from its resources to meet the other half of the cost. The data for the,-rate of return before taxes.for private enterprises in Maharashtra State and public enterprises under the Govt, of Maharashtra are-not .available. The data regarding the rate of return before taxes for public enterprises under the Govt, of India are available. The average rate of return (real) from 1981-82 to 1983-84 of public enterprises under the Govt, of India has been assumed to be the 51 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives. opportunity cost of capital of funds contributed by the Govt, of Maharashtra. The avarage real rate of return before taxes from 1981-82 to 1983-84 has been calculated by subtracting the average wholesale price increase for the above period from the average rate of return1. The average real rate of return is 6.'4% but for the sake of convenience, 6% has been assumed as the real rate of return. The opportunity cost of one half the capital of the project is 6% and for the rest of the capital is 2%. Therefore, the average oportunity cost of the capital of the project is 4%, which is assumed as the discount rate in this study. 5.3 Project alternatives Alternatives chosen for analysis are the same as given in Chapter 4. 5.4 Identification of costs Costs of establishing and harvesting plantations are identified under the fol-lowing headings: (a) Land cost. (b) Planting cost. (Nursery cost has been included in planting cost.) (c) Harvesting cost. (d) Administrative cost. (e) Loss of agricultural crop yield due to planting of trees on field boundaries. 1Source: Datt, R, and Sundharam, K.P.M., (1986): Indian economy, S. Chand and Co., New Delhi, pp. 779. Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives. The cost of using land for establishing plantations has been assumed as the benefits foregone in its best alternative use. Planting works include raising of seedlings in the nursery, surveying, clearing of brush growth, fencing, digging and filling of pits, transportation and planting of seedlings, first-year mortality replacement and protection of plantations. Harvesting operations for timber include marking and felling of trees, debranch-ing and bucking, dragging of timber to road side and transportation to sale depots. In the case of fuelwood, small trees and branches are metre length pieces and are collected in stacks of 2x1 m on the road sides. Some of the above harvesting oper-ations for timber and fuelwood may not be necessary for all the alternatives under consideration. For example, for road side and village (common) land plantations, transportation of felled timber is not necessarj' because it can be collected on the road side or on the road to village (common) land plantations. Administrative costs involve building costs, purchase of vehicles and office equip-ment, operational and maintenance costs of vehicles and equipment, and salaries to the employees belonging to officer and non-officer cadres. Loss of agriculture crop yield due to planting of tree seedlings on field boundariess has not been calculated because of lack of data. It is assumed that the loss of crop yield will be compensated by the increase in crop yield due to windbreak effect2 of trees on field boundaries. 2Studies conducted in 1978 arid. 1979 by the Farm Forestry Department - of Andhra Pradesh Agri-culture University (Reddy et al., 1981)regarding the infuence of shelterbelts on yields of annual crops have,shown that protection due to shelterbelts led to increased yields of groundnuts ranging from 40% to 43% and of millet from 23% to 64%. • Similar, results were obtained in another, study,carried out by the Gujarat'University with the .help of Gujarat Forest Department (Vohra'et al., 1982). 53 Chapter 5. Valuation of economic and social benefits and costs of plantation .alternatives: 5.5 Identification of benefits Benefits received from all alternatives are categorised into direct and indirect benefits. Direct benefits from plantation alternatives are: (a) Fuelwood-and small timber. (b) Grass Indirect benefits received are given below: (a) Saving of forests from deforestation. (b) Aesthetic benefits from planting of trees on road sides and on village (common) lands. (c) Water conservation benefits. (d) Improvement in productivity of wastelands and (common)lands. (e) Secondary impact benefits. 5.6 Estimation of costs and benefits For estimation of costs and benefits, the following assumptions are made: (a) The relative prices of all inputs and outputs will remain constant during the project, period. (b) The domestic market prices of material inputs used in the project reflect the opportunity cost of inputs. (c) Wages paid to the laborers employed during the agriculture season reflect the opportunity cost of labour. 54 Chapter 5. Valuation of economic and social benefits andcosts of plantation alternatives? (d) Costs and benefits are expressed in domestic currenc}r in rupees. (e) The relative exchange rate of the rupee will remain constant. (f) The base year for measuring prices is 1984. (g) Analysis is done in partial equilibrium. 5.6.1 Valuation of land cost Most of the lands used for establishing plantations in alternatives 1, 2, 3, and 5 are degraded. These lands are lying idle. Community lands in the villages are used for squatting (sitting) of animals i.e the animals sit under sun on this land during winter months. It is assumed that a few hectares of village (common) land will be left unplanted for squatting (sitting) of village animals. It is considered that lands under alternatives 1, 2, 3 and 5 would have no alternative economic use for the period of the project. Therefore, land is valued at zero. For alternative 4, land used for establishing plantations is the forest land currently being managed under CWR which generates some revenue for the state government. Therefore, cost of using this land is not assumed to be zero. 5.6.1.1 Valuation of cost of using forest land managed under CWR The standing crop on the forest land will be.harvested and the cleared land will be used for establishing plantations. It is assumed that cleared forest land is leased for the project period... It is-further* assumed'that,, in-the .absence of the project, the present management plan would have continued for the project period, i.e., the best alternative economic use of the forest land would be its present use. Thus, lease 55 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives' rent for using this land can be approximated to the net revenue foregone during the project period. The lease rent is the cost of using the land. The revenue received from the forest land managed under CWR is from the sale of the forest produce given below. (a) Timber and firewood harvested after the rotation period. (b) Leaves of Diospyros Melanoxylon Roxb. (Tendu3) plucked annually. (c) Grass. The procedure to calculate the average net present revenue per hectare from forest land under CWR from the sale of timber and firewood for the project period is given below: (a) Let Vt and Vf be the volumes of timber and fuelwood obtain after the rotation period, TM. (b) Let Pt and Pf be the prices of timber and fuelwood, and Cht and Chf be the harvesting cost per cubic metre of timber and firewood, respectively. (c) Total net revenue, RV, after one rotation from timber and firewood is equal to, RV.= [Vt(Pt - Cht)} + [Vf(Pf - Chf)}. (d) Since the net revenue obtained above is at the time of rotation period, its present value, PRV,-at discount rate, r, is, RV PRV = (1 +r) 3Tendu leaf is used for smoking. 56 Chapter 5. Valuation of economic and social benefits-and costs of plantation-alternatives' (e) The net present value of the revenue/ha for the project period, PP, is calcu-lated by multiplying the net present value of revenue obtained in step 4 by PP, and dividing it by the rotation period, TM. The net: present value of revenue/ha from CWR forest area of Gondia forest division, worked on a rotation period of 40 years, for the project period of 25 years, at a 4% discount rate is 977,78 rupees. The present value of revenue from the sale of Tendu leaves for the project period is calculated below: (a) The net annual revenue from the sale of Tendu leaves is calculated by dividing the total net revenue from the Tendu leaves of a forest division by the total forest area of the forest division. (b) Let the net annual revenue/ha from the sale of Tendu leaves be RYTendu and r be the discount rate. (c) The present value of the revenue for the project period, PP, is given as, 1 1 r r ( l + r)pp The average annual revenue from the sale of Tendu leaves in the Gondia forest division is 32/ha-rupees. The.net present value of revenue lost during the project, period, PP=25years, has been calculated at .4% discount .rate by using the formula given above. The net present value of revenue from Tendu comes out to be 499.90 rupees. The present value of revenue due to grass for the project period is calculated by using the same formula as was used in calculating the present value of Tendu. The RV Tendu 57 Chapter 5. Valuation of economic and social benefits and costs: of plantation alternatives')!: annual net revenue per hectare obtained from grass is assumed to be 25 rupees. The present value of the revenue lost from one hectare of forest land during the project period has been calculated at a 4% discount rate. The present net value of revenue from grass for 25 years is 390.55 rupees. The present value of the total revenue/ha from timber and fire wood, Tendu leaves, and grass for 25 years for the project period is the loss for using the land for establishing plantations. Therefore, this loss of revenue represents the present value of the lease amount that an agency should charge for renting the land. The cost of land so calculated is, 977.78 + 499.90 +390.55 = 1868.23 rupees/ha. 5.6.2 Planting cost The average financial planting cost/ha for all alternatives is given in appendix C. To calculate the economic planting cost, all inputs are divided into two compo-nents: (a) Material which includes inputs such as, polythene bags, fertilizers, seeds, transportation by vehicles, tools and equipment. (b) Labour which, includes wages paid to.laborers. Material is evaluated at market prices and should reflect opportunity cost of the material inputs. Labour is evaluated at the shadow wage rate. During the off-agriculture season, there is involuntary unemployment and the wages paid to the laborers do not reflect the opportunity cost of employing them. Planting occurs both during agriculture 58 Chapter 5. Valuation of economic-and social benefits and costs of plantation alternatives and off-agriculture seasons. Planting and weeding are done during the agriculture season. As there is no involuntary unemployment during the agriculture season, wages paid to the laborers reflect the economic cost of the laborer employed. Plant-ing, operations such as site preparation, fencing, digging of pits and filling of pits are done during the off-agriculture season. The cost of labour for these operations is valued at its shadow wage rate. 5.6.2.1 Calculation of the shadow wage rate of labour Assumption: (a) The new job may call for an increased effort on the part of the labour but the value of the reduced leisure time is assumed to be zero. There are no data available regarding the opportunity cost of unemployed labour during the off-agriculture season in Maharashtra State. The opportunity cost of labour per day employed in forestry operations during the off-agriculture season has been taken to be equivalent to the amount earned by woodgatherers per day. On average, the amount earned per day by the woodgatherers in 1984 in Gondia and Bhandara forest divisions in Bhandara district varied between Rs. 3 and 3.5. This includes the risk of being caught by the forest department for bringing illicitly cut'wood from the forests. Woodgatherers walked about 10 to 12 kilometres to reach the forests and spent about six to seven hours for collecting about ten to twelve kilograms of fuelwood. A similar amount was earned by the bamboo mat weavers for working about seven to eight hours. Therefore, the shadow price of labour during the off-agriculture season has been taken as Rs. 3 per day. Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives Yearly and P V of financial (market value of material inputs and wages paid to laborers) and economic costs of planting of each alternative are given in appendix C 5.6.3 Harvesting cost The labour component of the total harvesting cost is 95 percent and material component is 5 percent. Bullock carts remain unemployed during the off-agriculture season. It is assumed that the transportation of timber will be done by bullock carts and, therefore, expenditure on transportation of timber is included in the labour component. Al l the timber harvesting operations are done during the off-agriculture season, therefore, the labour component of harvesting cost is valued at the shadow price of labour during the off-agriculture season. Yearly and P V of financial and economic harvesting cost of each alternative are given in appendix D. 5.6.4 Administrative costs The administrative costs for establishing plantations up to age five have been taken into account. The administrative costs of harvesting operations occuring later in the life of the project have been included in the material component of harvesting costs. Total administrative costs are categorised as-follows: (a) . Material costs which include part of building costs (costs of materials .used) purchase of vehicles and office equipment, .and operative and maintenance costs. (b) Salaries paid to the employees in the officer cadre. 60 Chapter 5. Valuation of economic and social benefits and costs of plantation alternativesQO (c) Salaries and wages paid to skilled and unskilled employees which includes peons, office-watchmen, drivers, forest guards (plantation supervisors), clerks and typists. (d) Labour costs of building construction. Valuation of administrative material costs is given below: Assumptions for the valuation of material costs are: (a) The life of buildings is assumed to be 40 years and their book value after 40 years is assumed as zero. (b) The life of vehicles and office equipment is assumed to be 10 years and the scrap value has been taken as zero. (c) The material component of the building costs has been assumed to be 75 percent and labour component 25 percent. (d) Material costs are valued at market price. As the administrative costs up to the first 5 years of the project period have been taken into account, one eighth of the total building costs and one half of the total vehicles and equipment costs have been included towards the total administrative costs. Valuation of salaries paid to employees of officer cadre: From the social forestry project of Maharashtra1 State (1981), it is found thatabout 60% of the total salaries and wages paid to the employ-ees goes to the employees of the officer-cadre. The salaries paid to the officers are valued as equal to the amount actually paid to them. Valuation of salaries paid to unskilled and semiskilled employees: 61 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives'. On average the monthly salary paid to a semiskilled or an unskilled employee is 500 rupees. Semiskilled and unskilled workers are also em-ployed on daily wages. From the personal experience of the author in . Bhandara district, on average, daily wages paid to workers employed as typists or helpers to the accountants were 9 rupees. There were enough people ready to work at this wage rate. Taking 22 working days in a month, the opportunity cost of these workers can be assumed to be about 200 rupees per month. Therefore, the shadow wage rate of semiskilled and unskilled employees has been valued at 40 percent of the actual salary paid to them. Valuation of labour cost of building construction: The labour component has been valued at a shadow price because most construction of buildings falls in the off-agriculture season. The shadow wage rate of Rs.3, as calculated for planting operations, is applied to value labour labour costs. Alternative No. 3 involves only the distribution of seedlings; therefore, admin-istrative cost for this alternative is assumed to be 10 percent of the total cost of raising seedlings. Data for calculating administrative cost have been taken from the social forestry project report of Maharashtra State. The present values of financial and economic administrative costs per hectare of plantation are 1768 and 1420 rupees, respec-tively. Distribution of administrative cost into various categories is shown in ap-pendix E. 62 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives' The total present value of financial and economic costs of establishing plan-tations (costs of land, planting, and administration) and harvesting cost and the employment generated in number of man-days is shown in appe 5.7 Valuation of direct benefits Direct benefits include fuelwood, small timber and grass. Firewood and small timber are traded in the markets and market prices for fuelwood and timber do exist. Prices of timber and fuelwood vary from town to town. The reason for variation in prices is due to the distance of the town from the forests. In this study, timber and firewood are valued at their average prices obtained in open auctions conducted by the forest department in forest depots. The average price of miscellaneous poles of 35 to 45 cms girth and 5 m in length in 1984 in Nagpur circle of Maharashtra State was about 300 rupees per cubic meter. Nagpur circle includes the Gondia and five other forest divisions. The average price of fuelwood received in the Nagpur circle was about 60 rupees per cubic metre in* the forest. Grass from the forests is not (commonly) traded in the market in India because grazing by animals is allowed on concessional rates. Fodder sold in the markets differs from the grass grown in the forests both in protein and;fibre content." Some of the forest divisions in Nasik circle in.Maharashtra-State sell standing grass in the forests in open auctions. The average rate .obtained per tonne, in 1984 .was about 50 rupees. The total economic value of direct benefits is shown in appendix G. 63 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives' 5.8 Valuation of indirect benefits Indirect benefits obtained from establishing fuel wood plantations are: (a) Saving of forests from deforestation. (b) Aesthetic benefits from planting of trees on road sides and village (common) lands. (c) Water conservation benefits. (d) Improvement in productivity of wastelands and village (common) lands. (e) Benefits due to secondary impacts. The value of aesthetic benefits in this study is taken as zero. About 50% of the people in villages live below the poverty line and another 30% are on the subsistence level. This benefit may not be included in the consumption basket of these people. Given the choice, these people will prefer food, fuel, shelter and clothing to aesthetic benefits. They would prefer the increase in income which provides increases in the consumption of necessities of life. In other words, the willingness to pay for the aesthetic benefit for these people is assumed as zero. Water conservation benefits, improvement in productivity of wastelands and village (common) lands, and environmental benefits are being considered outside the scope of this thesis. Secondary impact benefits arise due to the forward and backward linkages of the. project with the rest of the economy, and due to the spending of wages and net benefits accruing from the project. As the alternative plantation programs are labour intensive, benefits associated with secondary impacts will largely be due to the spending of wages by the laborers, and due to the spending of net benefits by 64 Chapter 5. Valuation of economic and social benefits.and costs of plantation alternatives the beneficiaries. Since the beneficiaries vary with the alternative, the secondary impacts of the spending of net benefits will vary with alternatives. There are methods to evaluate benefits due to secondary impacts (F.A.O, 1979), but they are considered outside the scope of this thesis. 5.8.1 Valuation of saving of forests from deforestation The woodgatherers, if employment is provided to them, will not go to the forests to collect wood. Therefore, it is assumed that most of the labour employed in planting will be from the pool of woodgatherers; Supply of fuelwood from plan-tations and employment of woodgatherers will save the forests from illicit cutting. The forest area saved by establishing one hectare of fuelwood plantations is equiv-alent to the.area having growing stock equal to the yield per hectare from the fuelwood plantations. For example, yield/ha from site quality, I, Eucalyptus tereti-cornis Sm. plantations on the forest land is estimated to be 118.86 cubic metres. The average growing stocks/ha of forests under CWR in the Gondia forests division is 56.244 cubic metre. The equivalent forest area saved, therefore, is 118.86/56.24 = 2.1134/ha At the extreme the total loss to the society due to deforestation of forest area is comprised of: (a) Perpetual loss of wood growth harvested-after every rotation. (b) Perpetual loss of net annual revenue obtained from Tendu leaves. (c) Perpetual loss of annual grazing benefits. (d) Perpetual loss of storage of water due to presence of vegetation and loss of soil down stream due to increased run-off. 4A11 India average of growing stock for the type of forests growing in Gondia division is 50m3. 65 Chapter 5. Valuation of economic and social benefits -and costs of plantation alternatives( (e) Environmental and existence value losses. The procedure of estimation of the first three losses has been given in sections below and losses due to reduced storage of water, soil.loss and environmental losses are extra-market and/or intangible losses and are not being considered for valuation. 5.8.1.1 Valuation of the loss of wood growth per hectare from defor-estation It is assumed that the area deforested is currently being managed under the CWR silviculture system, and the rotation period is TM years. Let us assume the net revenue obtained from the sale of timber and fuelwood after the rotation period is, RV. This is the loss after every rotation period, TM, in perpetuity due to deforestation. The total present value of of this loss is calculated by using the formula, 1 ( H r )r M - 1 ' Let the present value of loss/ha of deforestation be PL. Using data from Gondia forest division, the value of PL calculated at 4% dis-count rate is 1973.15 rupees. 5.8.1.2 Estimation of loss of revenue obtained from Tendu. leaves Due to deforestation of forests, the annual revenue from the sale of Tendu leaves will be lost in perpetuity. Let the average annual net revenue/ha from the sale of Tendu leaves be RVTendu. The present value of revenue in perpetuity at r% discount rate is given by, RVTendu/r RV 66 Chapter 5. Valuation of economic and social benefits and costs of plantation-alternatives'1' The average annual net revenue/ha obtained from the sale of Tendu leaves in Gondia forest division in 1984 was 32 rupees. The present value of the perpetual loss of revenue/ha discounted at 4% would be 32/0.04=800 per hectare. 5.8.1.3 Estimation of monetary value of benefits due to grass Let the net annual monetary losses per hectare from grass be RG. The present value of the perpetual loss is given by, RG/r. . The net average annual reveue from grass in 1984 is assumed to be 25 rupees per hectare. The present value of this perpetual loss at 4% discount rate is 25/.04=625. The grazing benefits from the deforested land do not stop instantaneously. It is assumed that the grazing benefits will continue for the first 20 years after the forest land is deforested but will reduce gradually. The benefits are asssumed to reduce to half in the first ten years and to zero in the next ten years, i.e., from 11 to 20 years. The value of grazing benefits that will accrue after deforestation are 186.32 rupees. The loss/ha due to deforestation is 625-186.32=438.68 rupees. 5.8.1.4 Total value of benefits due to one hectare of plantations The total loss due to one hectare of deforestation is, 1973:15+800+438.68=3211.83 rupees. When one hectare of forest area is saved, the society gets indirect tangible benefits worth 3211.83 rupees. The same amount of indirect benefits will accrue from the 67 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives:. second and third rotations. The time when these benefits start accruing is assumed to be the time of respective rotations from the time of planting seedlings in the field. For example, the time of the first rotation is to be taken 8 years from the planting year. The planting year is taken as 1. Therefore, the time of the first rotation is the 9th year from the beginning of the project which is year zero. The times of the second and third rotations are the 17th and 25th years, respectively. Therefore, to calculate the total present value of these benefits from all the three rotations, the benefits from each needs to be discounted. The present value of benefits from the first rotation at the end of the 9th year is 2256.58 rupees. Similarly the benefits that would accrue due to saving of area in second and third rotations are 1648.86 rupees and 1204.81 rupees, respectively. The total present value of benefits due to saving of one hectare of area from defor-estation is 5110.25 rupees. Since the area saved due to one hectare of plantation, as calculated earlier, is 2.1134 hectare in one rotation, the total benefits of one hectare of plantation due to three rotations are, 5110.25x2.1134=10800 rupees. The calculations of total value of indirect benefits for all the five alternatives are shown in appendix G. 5.9 Social-value of, net benefits Employment and income distribution are among the major objectives of social forestry projects. The benefits from the various alternatives under consideration accrue to private individuals and/or as revenue to government. Individual ben-eficiaries belong to different income groups and value differently a given amount 68 Chapter 5. Valuation, oi economic and social benefits and costs ofplantation alternatives1., of economic benefits. In other words, each individual attaches different weight to the given economic benefits. The objective of the Government is to maximise the social benefits. As the given amounts of economic benefits are valued differently by individuals, there is a need for relative social weights (distributional weights) to be attached to the individual economic benefits to find out the total social benefits. As mentioned in chapter 3, to calculate distributional weights, the social welfare function and individual utility function must be specified. The choice of social and individual utility functions depends upon the objectives to be achieved through the project. As improvement in income distribution is one of the major objectives of social forestry projects, the social welfare function, W, chosen is, h y i=i a where, U1 is the utility of an individual and a is the elasticity parameter of marginal social welfare of individual utility. The above social welfare function assumes the following: (a) The total welfare in any period is the sum of the individual utility levels. (b) The nature of the utility function is the same for all individuals. (c) The elasticity of marginal social welfare of utility is constant. (d) Additive separability. (e) Strict concavity. Strict concavity is needed because it ensures that the marginal contribution to social welfare diminishes as a person's utility increases. An aversion to unequal income distribution is, thus, built into the function. 69 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives*. The individual utility function chosen is, IP = — Cl~\ 1 — e where, e is the private marginal utility of consumption. The chosen function as-sumes the following: (a) Individual utility is a function of consumption. (b) The elasticity of private marginal utility of consumption is constant. (c) Marginal utility diminishes with the increase in consumption. The distributional weight, D of an individual", at consumption level, C, relative to an individual with average level of consumption, C, is given as, •£\"i(l-e)+e D = [ c ) , t / 0 < e < 1, where, m = 1 — a, the elasticity of marginal social welfare of individual utility. If the value of e is greater than one, then the social welfare function6 chosen is, W = - ^ ( t / i ) 1 + m , W < 0. 1=1 .1+771 . . The above social welfare function has also the same characteristics as were as-sumed by the earlier welfare function. The formula for the distribution weight, D, now is given as, £f\ m(e-l)+e 5 The formula for distributional weight is derived following the same procedure as was followed in deriving the formula for distributional weight in the Squire and Van der Tak method in appendix A. They have chosen a utilitarian welfare function with a = 1. 6Source: Stern, N., 1977, Welfare weights and the elasticity of the marginal value of income, in, Artis, M, and Nobay, R, eds., Studies in modern economic analysis, Oxford, Blackwell, 350 pp. 70 Chapter 5. Valuation of econonncand social benefits and costs of plantation .alternatives • The relative distributional weights depend on two parameters, m and e. The elas-ticity of social marginal welfare of consumption, n as, depending upon the value of e. The distribution weight D is now expressed as, Net social benefits, S, which include income distribution effects, are calculated by using the following relation7, where, E represents economic efficiency benefits, /3 is the consumption conversion factor, D is the distributional weight, and v is the value of public income. The calculation of net social benefits requires the estimation of values of /?, 77, and v. The value of 77 is required for calculating Ds at different levels of consump-tion. 5.9.1 Estimation of value of (3 The value of j3 for-Maharashtra State has been, estimated by Lai (1980). The value of estimated by, him for rural'people in Maharashtra for the year .1973 at 1970-71 prices is 0.77. The value of 0.77 for /3 has been adopted in this study, assuming that the consumption behaviour of rural people and the relative prices of the commodities consumed by them have not changed since 1973. This relation is given in Chapter 3. v — m ( l — e) + e. or, TJ = m(e - . 1) + e, 71 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives, 5.9.2 Estimation of value of 77 Attempts have been made to estimate 77 empirically. Brown and Deaton (1972) have estimated empirically the value of 77, based on linear expenditure demand systems, for a large number of countries. They opined that an average value of 2 for 77 is consistent with most such studies and with the results from fitting other models (Lai, 1980). He (Lai) used their methodology and estimated empirically the value 77 as 2.3 for India. The realism of these empirical estimates of 7/ has been questioned by Ray (1984). His main objection among many was that the empirically estimated value of 77, based on demand systems, was an approximation of private marginal utility of income (consumption), e, and not of 77. The reason was that the value of TJ is a sum of two parameters, e and m, and the value of rn depends purely on value judgement. The value of an empirically estimated value e can be taken as the value of 77, if we assume the classical utilitarian social welfare function having a = 1. and, therefore, m=0. However, this approach is indifferent to unequal income distribution (Sen, 1973). Lai (1980) asssumed the value of m=l, accepted the estimates from consumer demand studies of a value for e of 2, and recommended the value for 77 as 3 for India. In the present study, the value of 77 as 3 has been used. 5.9.3 Estimation of value of v Lai (1980) estimated the value of v as 2.51 for India using the data from 1960 to 1973 at 1971 prices. He assumed the value of 77 equal to 3. As shown in appendix I, the value of v depends upon the opportunity cost of capital, q, the consumption rate of interest i, and f3. The value of i in turn depends upon the per capita growth rate of consumption, g, the time preference rate of consumption p, and 77. The 72 Chapter 5. Valuation of economic and social benefits and costs of plantation alternatives) projected value of g assumed by him in his calculation of v is far from the actual value realised. A value of 3.1% for real per capita growth of consumption, g, was assumed by him, but the real per capita income growth for the period from 1973 to 1985. has'been about 1.2% 8 . The per capita consumption would have even been less. The value of q used by him is 11%, which is based on the return to the sector considered to be most important at the margin without distinguishing between private and public sectors. The opportunity cost of capital of 6%, as assumed in this study, has been used in the calculation of v. Assuming the value of 0.012 (1.2%) for g and zero for p, the value of i is calculated as, i=3x0.012+0=0.036. The value of v is given by, i{3 0.06 = 1.998 0.036x0.77 5.9.4 Sources contributing to consumption increase Increase in private consumption is on account of: (a) The increase;in wages of the labour because the shadow .wage rate of.labour is lower than the minimum wage paid to the laborer. (b) Distribution of net financial benefits of the project. 8Source: Datt, R, and Sundharam, K.P.M., (1986): Indian Economy, S. Chand and Company, New Delhi, pp. 799. 73 Chapter 5. Valuation oieconomicand social benefits and costs of plantation alternatives'.0 5.9.4.1 Distribution of incremental consumption due to increased wages The total incremental consumption due to extra wages accrues to laborers and office workers belonging to different income level groups. The income level groups to which they belong are assumed as: (a) Laborers working on plantations belong to below the poverty line 9 income level group. (b) Semiskilled and unskilled employees, not belonging to the officer cadre, belong to the average national per capita income 1 0 level group. The increase in consumption due to increased wages to the two level of income groups are shown in appendix I. 5.9.4.2 Distribution of incremental consumption due net profits The incremental net financial profits accrue to the people who belong to differ-ent income level groups. The income levels to which the beneficiaries belong are assumed as: (a) Small and marginal farmers, and landless laborers belong to below the poverty line income level group. (b) Medium farmers and petty shop, keepers belong to the average national per capita income level group. (c) Big farmers belong to an above the average national per capita income group. 9The poverty line in 1984 at current prices was fixed at per capita annual income of 1377 rupees. °The average national per capita income in 1984 at current prices was 2349 rupees. 74 Chapter 5. ' Valuation of economic and social benefits and costs'of plantation alternatives^ The ratios in which these three income level groups are divided in rural areas are given below: (a) About 50.7% of the total rural population of the country live below the poverty line; therefore, it is assumed that 50% of the beneficiaries belong to this group. (b) The other 50% are assumed to be divided in the ratio of the all India medium and large land holdings. Therefore, 30% of the total beneficiaries belong to the average national per capita income level group. (c) The beneficiaries above the average national per capita income are the remain-ing 20%. 5.9.5 Assumptions For the calculation of social net benefits from the increase in wages and distribution of net financial benefits, the following assumptions are made: (a) Net economic benefits are expressed in pubbc income measured in rupees. (b) The value of the pubbc income remains constant over time, i.e., it has constant purchasing power. (c) The net economic benefits calculated by measuring costs and benefits in do-mestic prices are measured in terms of public income. (d) There are no savings from the incremental income due to increase in wages and distribution of financial.benefits from the various alternatives. (e) Increase in incremental consumption is marginal. (f) Average national per capita consumption (C) is 2200 rupees. 75 Chapter 5. Valuation of economic: and social benefits and costs of plantation-alternatives, (g) The average initial consumption of the people with income levels below the poverty line, average national per capita income, and above the national per capita income are 900, 2200, and 10000 rupees, respectively. 5.9.6 Calculation of distribution weights for various consumption level The distributional weights for various income level groups have been calculated by the following formula, where, D' is the distribution weight of the income level group, i, and Cl is the aver-age consumption of the income group level, i. The distribution weights calculated by using the above formula for the below the poverty line income level group is, Similarly for the average level and above average level income groups, the distribu-tion weights are 1 and 0.0106, respectively. 5.9.7 Calculation of net social benefits from the increase in wages The net social benefits due to increase in wages are calculated using the formula11, where, Wi—m-i, are the increase in wages of ith income group, D; is the distributional weight of the ith income group, and is the consumption conversion factor of group 1 1This formula, the second element of the shadow wage formula derived by Squire and Van der Tak (1975), is from appendix J. groups n Di 1. 76 Chapter 5. Valuation of economic and social benefits, and-costs of plantation^ alternatives The net social benefits due to increase in wages of labour and office employees in alternative 1, when the land used is of site quality, I, are, 2122(^ - 0.77) + 340(^ - 0.77) = 13856.66 - 91.-80 = 13764.86 •Similarly the value of net social benefits from increased wages of aD the alternatives for respective quality classess are calculated. The values of net social benefits due to increases in wages for various alternatives are shown in appendix K. 5.9.8 Calculations of net social value due to distribution of net financial benefits The sum of the values of net social benefits due to.distribution of net financial benefits among various income level groups is calculated using the formula, where, C,- is the financial increment consumption of the income group i. The sum of net social benefits due to distribution of net financial benefits among various income groups for alternative No. 1 when site quality, I, land is used is, ! = i + ^ ( ' T - f t ) 54213+40034 ( . 5 i i ? + . 8 i + . 2^f-.77(. S + . S + .2) 54177+121383.08 = 175596.08. The total value of net social benefits is the sum of.the.net socialyalue?;from; the increase in wages and distribution of net financial benefits. The total net social value of benefits is, 13764.86+175596.08=189360.94. The total net value of benefits is calculated for various alternatives and these are shown in appendix K. Chapter 6 ^Economic and social benefit cost analysis In this chapter, both economic and social BCA have been done for all plantation alternatives and the results of economic and social BCA are compared. 6.1 Economic BCA Economic costs and benefits and environmental benefits are shown in table 6.1. The total costs are shown as the sum of initial investment costs, C%, and operational costs, OP. Initial investment costs include land cost, plantation cost, and administrative cost. Operational cost refers to harvesting cost. Total benefits are shown as the sum of direct and indirect benefits. Environmental benefits of all the alternatives are almost the same. They have been indicated with 'yes' against the alternative, which impHes that the alternative produces environmental benefits. Total initial investment costs of establishing plantations, as shown in table 6.2, vary in each alternative. Since: there is a budget constraint, B/C will be used as an indicator for ranking various alternatives. The table above gives the present net worth, PNW, benefits, B1, initial investment cost, C1, number of man days generated2, L, and the number of man days generated per unit initial cost, L/C1. XB is equal to total benefits minus operational costs. 2Number of man days generated have been calculated by dividing the present value of financial wages paid to laborers and semiskilled employees by the their respective financial wages. 77 Chapter 6. Economic and,social benefit cost analysis Table 6.1: PV of economic costs, benefits, and environmental benefits in rupees. Alt. Quality P.V.. of costs P.V. of benefits Environment No. class OPb Total Direct Indirect Total benefits I 4284 2231 6515 49011 11717 60728 yes 1 II 4284 240 4524 5039 4425 9464 yes III 4284 55 4339 1253 1006 2259 yes I 11119 1882 13001 44782 10800 55582 yes 2 II 11119 233 11352 4516 4299 8815 yes III 11119 49 11158 972 925. 1897 yes I 890 0 890 57453 13861 70314 yes 3 II 890 0 890 5787 5508 10295 yes III 890 0 890 1246 1187 2423 yes I 6813 5541 12354 45172 14012 59184 yes 4 II 6813 933 7746 4906 7511 12417 yes III 6813 202 7015 1362 4137 5499 yes I 4945 5541 10486 45172 10800 55972 yes 5 II 4945 933 5878 4906 4299 9205 yes III 4945 202 5147 1362 925 2287 yes aC1 is investment cost which includes land, plantation and administrative costs. 6Operational cost is the harvesting cost. Chapter'6. Economic and social benefit cost analysis '79 Table 6.2: PNW positive or (negative), PV of benefits(B), PV of initial investment cost(C '= Cl) in rupees, number of man days of labour generated(L), and number of man days generated(L/ C) per unit initial cost. Alt. Quality PNW BQ C=Cib B/Cc L L/Cd No. class I 54213 58497 4284 13.65 1320 0.30 1 II 4940 9224 4284 2.15 710 0.16 III (2080)e 2205 4284 0.51 653 0.15 I 42581 53700 11119 4.83 3375 0.30 2 II (2537) 8582 11119 0.67 2860 0.26 III (9261) 1848 11119 0.14 2814 0.25 I 69424 69424 890 79.00 110 0.12 3 II 9405 9405 890 11.56 110 0.12 III 1533 1533 890 1.72 110 0.12 I 46830 53643 6813 7.87 2489 0.36 4 II 4671 11484 6813 1.69 1077 0.16 III (1516) 5297 6813 0.77 852 0.12 I 45486 50431 4945 10.20 2489 0.50 5 II 3327 8272 4945 1.67 1077 0.22 III (2860) 2085 4945 0.42 852 0,17 "Benefits, B, are equal to total benefits minus operational costs. hCl is initial investment cost which includes land, planting and administrative costs. C B / C ratio is B/Ci in this case. d L / C is L/C'in this case. eFigures, in parenthesis show negative PNW. Chapter:6. Economic and social benefit cost analysis "80 Table 6.3: Plantation alternatives in decreasing order of B/C. Alt. No. Quality B/C 3 I 79.00 1 I 13.65 3 II 11.56 5 I 10.20 4 T 7.87 2 I 4.83 1 II 2.15 3 III 1.72 4 II 1.69 5 II 1.67 4 III 0.77 2 II 0.67 1 III 0.51 5 III 0.42 2 III 0.14 6.1.1 R e s u l t s o f e c o n o m i c a n a l y s i s Alternatives in decreasing order of B/C ratio are shown in table 6.3. When economic efficiency is the only objective: (a) Alternative No. 3 (Q I)3 which involves distribution of free seedlings to the farmers for planting on field boundaries has the highest benefit-cost ratio and, therefore, is the preferred alternative. (b) Alternative No. 3 (Q I) is about 6 times more economically efficient than -alternative No. . 1 (Q I), which involves establishing of plantations on village common lands. Alternative No. 3 ( Q I) is about 10 times more efficient than alternative No. 4 (Q I) which involves establishing of plantations on the forest (Q I) indicates quality I land is used in the alternative. Chapter 6. Economic and social benefit cost analysis 81 land under CWR. (c) Alternative No. 1 (Q I) is the next preferred alternative. (d) Alternative No. 3, even with quality II lands has higher benefit-cost ratio than alternatives 2, 4, and 5 with quality I lands-and, therefore, is the; preferred alternative. When maximisation of employment per unit of initial investment with B/C greater than one is the objective, then: (a) Alternative No. 5 (Q I) is the preferred alternative because it has the highest labour-cost L/C ratio. It implies that income distribution benefits per unit of initial investment due to employment are higher in alternative 5 than in others. 6.2 Social benefit cost analysis (social BCA) In social BCA, the objective of income distribution due to employment and net financial benefits are considered along with economic efficiency. Present value of social benefits, S, initial investment costs, C = C, and social benefits per unit of social initial investment cost, S/C, are shown in table 6.4. 6.2.1 Results Alternatives in decreasing order of S/C ratio are shown in table 6.5. Results of social BCA are given below: (a) Alternative No. 3 (Q I) has the highest net social benefit per unit initial social investment cost and, therefore, is preferred. Chapter 6. Economic and social benefit'cost analysis '82 Table 6.4: Present net social benefits(S), initial investment cost(C = CJ), and social benefits per unit initial investment cost(5'/C). Alt. Quality S" C = Cl S/C No. class I 193645 4284 45.20 1 II 15022 4284 3.50 III 7252 4284 1.69 I 90881 11119 8.17 2 II 41780 11119 3.76 III 34380 11119 3.09 I 241707 890 271.58 3 II 25040 890 28.13 III 3399 890 3.82 I 83060 6813 12.19 4 II 22461 6813 3.30 III 13335 6813 1.96 I 79848 4945 16.14 5 II 19248 4945 3.89 III 10123 4945 2.05 "The value of S has been calculated by adding net social value of net financial benefits and increased wages to the economic benefits, B. The value of S is calculated in appendix K. Chapter 6. Economic and social benefit cost analysis 83 Table 6.5: Plantation alternatives in decreasing order of S/C. Alt. No. Qualit3' S/C 3 I 271.58 .1 I 45.20 3 II 28.13 5 I 16.14 4 I 12.19 2 I 8.17 5 II 3.89 3 III 3.82 2 II 3.76 1 II 3.50 4 II 3.30 2 III 3.09 5 III 2.05 4 III 1.96 1 III 1.69 (b) For Q I, alternative No. 3 (Q I) is about 22 times more efficient than alternative No. 4 and about 17 times more efficient than alternative No. 5. (c) Alternative No.3 (Q I) is about 33 times more efficient than alternative No. 2 (Q I) and about 6 times more efficient than alternative No. 1 (Q I). (d) The next preferred alternative is alternative No. 1 (Q I), which is about 3.7 times higher than No. 4, and about 2.8 times higher than No. 5 of the same quality. (e) Alternative No. 3 (Q II) is about 2.3 times higher than alternative No. 4 (Q I) and about 1.75 times higher than alternatives No. 5 (Q I). (f) Alternatives No. 4, (Q I), is about 3.5 times more efficient than alternative No. 1 (Q II). Alternative No. 5 (Q I) is about 4.5 times efficient than alternative No. 1 (Q II). Chapter 6. Economic and social benefit cost analysis :84 Table 6.6: Plantation alternatives in decreasing order of B/C and S/C. Rank Alt. No. Quality B/C Alt. No. Quality S/C 1 3 I 79.00 3 I ,271,58 2 1 I 13.65 1 I 45.20 3 3 II 11.56 3 II 28.13 4 5 I 10.20 5 I 16.14 5 4 I 7.87 4 I 12.19 6 2 I 4.83 2 I 8.17 7 1 II 2.15 5 II 3.89 8 3 III 1.72 3 III 3.82 9 4 II 1.69 2 II 3.76 10 5 If 1.67 1 II 3.50 11 4 III 0.77 4 II 3.30 12 2 II 0.67 2 III 3.09 13 1 III 0.51 5 III 2.05 14 5 III 0.42 4 III .1.96 15 2 III 0.14 1 III 1.69 6.3 Comparison of results of social and economic BCA The results of economic and social BCA are shown in table 6.6. (a) Alternative Nos. 1, 2, 4 and 5 using Quality II and III lands for establishing plantations are inefficient in economic BCA but are efficient in social BCA. (b) The order of ranking of alternatives untill 6 does not change in both economic ;and social BCA. (c) Alt. Nos. 2 (Q II) and 2 (Q. Ill) move up in ranking from 12 and 15:in economic BCA to 9 and 12 in social BCA," respectively. (d) Alternative No. 4 (Q III) moves down in ranking from 11 in economic BCA to 14 in social BCA. Chapter 6. Economic and social benefit cost analysis 85 6.4 Discussion Alternative No. 3 (Q I), which involves distribution of seedlings to the farmers for planting on field boundaries is the preferred alternative. It is economically and socially more highly efficient than alternatives Nos. 4 (Q I) and 5 (Q I) which pertain to establishing plantations on forest lands. The reason for high efficiency of alternative No. 3 is that field boundaries and leisure time of the farmer and his family used for establishing plantations are assumed to have no other economic use and have been valued at zero. This assumption seems plausible on the grounds that the field boundaries are lying idle and have never been used for growing anything of economic value. Given the large scale unemployment and under employment of small and marginal farmers, the value of leisure time of about one hour for two days spent by each member of the family for planting 100 seedlings can safely be assumed as zero. The other important reason for its high efficiency pertains to the private prop-erty rights of the farmer on the land used for establishing plantations. In this alternative, there is no need of administrative machinery for the supervision of work and distribution of benefits, and for watchman to protect plantations. The benefits from the plantations will accrue solely to the farmer and his family and, therefore, they have a vested interest in the survival and protection of plantations. The •administrative -and protection costs are m of the total costs in other al-ternatives because the benefits are distributed either among a large number of beneficiaries as in alternative No. 1 or accrue to the government as public income as in alternative Nos. 2, 4 and 5. In alternative No. 1, the administrative cost can be approximated to the transaction cost for achieving distribution of income which is very high compared to alternative No. 3. In the case of alternative Nos. 2, 4 and Chapter 6. Economic and social benefit cost analysis 86 5, plantations are established on lands with public property rights. Protection cost involved in these alternatives is an internalised externality of the public property rights to the resources. The next preferred alternative, No. 1 using quality I land for establishing plan-tations, is about 3.7 times more efficient than alternative No. 4, using quality I forest land under CWR and is about 2.8 times more efficient than alternative No. 5 using quality I deforested land. But it is mentioned in the Maharashtra social forestry project report that the lands proposed for establishing plantations in al-ternative I are wastelands and overgrazed and degraded lands. These lands can be approximated to quality II lands. The lands available in alternatives Nos. 4 and 5 are quality I lands. As mentioned in the results of the social BCA,-alternatives Nos. 4 and 5 with quality I land are about 3.5 to 4.5 times more efficient than alternative 1 with quality II land. Chapter 7 Summary and conclusions 7.1 Summary In India, about half the population lives below the poverty line and about 30% have income equal to the average per capita income. In other words, income distribution is very skewed. The objective of the government for the past decade has been to improve income distribution, in favour of those living below the poverty line, through fiscal policies and resource allocation. There is acute scarcity of basic minimum necessities and fuelwood is one of them. Scarcity of fuelwood has led to relative increases in the prices of fuelwood. On account of rising prices of fuelwood and unemployment, rural poor are going to the forests to collect wood for their personal use and also to sell to earn their livelihood. Consequently, there has been large scale deforestation. To increase the supply of fuelwood and provide employment, the government has launched a program of social forestry in about 14 states for establishing planta-tions on community lands and along road sides, and.for free distribution of seedlings to the farmers for planting on field boundaries. The lands;generally taken for com-munity plantations are wastelands or overgrazed and degraded lands. Forest lands and recently deforested lands, which are more productive, can also serve the objec-tives of supplying fuelwood and fodder, providing employment, and improvements in income distribution. 87 Chapter '7. Summary and conclusions 88 Traditional BCA compares economic costs and benefits and selects the project on the basis of economic efficiency but is indifferent to the other objective of income distribution. Some of the indirect benefits from the social forestry projects such as saving forests from deforestation are not valued due to lack of appropriate methods. These- indirect benefits remain unaccounted for and, therefore, total benefits are under estimated. In all the programs of social forestry, the environmental benefits are almost the same and do not affect the ranking of alternatives. Social BCA includes both economic and income distribution benefits. The ob-jective of this thesis was to demonstrate the application of social BCA to evaluate social forestry plantation programs. .It. was hypothesised that social BCA can improve decision making in the evalu-ation of social forestry projects and fuelwood plantation programs on public forest lands, and the use of public forest lands is more efficient for establishing fuelwood plantations to meet social forestry objectives than the use of village (common) lands, which are degraded and severely overgrazed. The question of equity has been dealt with by using the Squire and Van der Tak method (1975) of incorporating equity with efficiency. A methodology to evaluate benefits of saving forests from deforestation has been proposed and used. 7.2 Conclusions When- economic efficiency, employment and, improvement in income distribu-tion, and improvement in environment are the objectives of the project: (a) Subject to value judgements regarding the choice of the social welfare functions and individual utility functions, the proposed methodology of BCA with equity Chapter 7. Summary and conclusions 89 considerations can be applied for the evaluation of social forestry projects. (b) In order of preference, as shown in social BCA in Chapter 6, the program of free distribution of seedlings to the farmers (alternative No. 3 of this study) should be the preferred program for the social forestry project of Maharashtra and should be given priority over other'social forestry plantation programs. This program alone, if implemented in the whole of India, could solve about one-third of the total requirements for fuelwood in India (Khetarpal, 1988a). (c) Village (common) lands used for establishing fuelwood and fodder plantations in the Maharashtra State social forestry project are degraded and severely grazed lands which can be approximated to site quality II lands. As shown in the results in Chapter 6, using forest lands under CWR (alternative No. 4 (Q I)) and recently deforested lands ( alternative No. 5 (Q I)) for the production of fuelwood is more efficient than using village (common) lands for this purpose. (d) Sensitivity analysis should be carried out with respect to the value of elasticity of social marginal welfare of income (consumption), 77, because the results of social BCA appear to be sensitive to 77. 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Rocky Mountain Forest and Range Experiment Station; 43 pp. 95 Ray, A., (1984): Cost benefit analysis, issues and methodologies, World Bank Publication, John Hopkins Press, Baltimore, U.S.A., 158 pp. Reddy, G. et al., 1981): The effect of shelterbelts on the productivity of annual field crops, Indian Forester, Vol. 107; pp. 465-475. Revelle, R., (1976): Energy in rural India, Science, 192, pp. 969-974. Row, C, et al., (1981): Discount rate for long term forest service investments, Journal of forestry, Vol. 79; pp. 367-368. Sardar, N.G. et al., (1981): Working plan for the Gondia forest division, 1981-1995, Revenue and Forest Department, Mantralaya, Bombay, India. Sassone, P.G., (1981): Social impact assessment and cost benefit analysis, in, Finsterbusch, K., and Wolf, CP., eds., Methodology of social impact assessment, Hutchison Ross Publishing Company, Mas-sachusetts, U.S.A., pp. 91-99. Scitovsky, T., (1942): A note on Welfare propositions, Review of Economic Studies, Cited from, Nath, S.K., 1969, A reappraisal of welfare economics, Routledge and Kegan Paul, London, 277 pp. Sen, A.K., (1961): On optimising the rate of saving, Economic Journal. Vol. 71; pp. 479-496. Sen, A.K., (1970): Collective choice and social welfare, Holden Day, San Fran-cisco, U.S.A., 225 pp. Sen, S.K., 1973: On economic inequality, Oxford University Press, 118 pp. Sharma, R.P., (1978): Yield tables for Eucalyptus hybrid (plantations) for various levels of stocking, Indian. Forester, Vol. 104; pp. 387-397.. 96 Singh, R., (1987): Towards a development policy, Unpublished directed study, Forestry 519, Faculty of forestry, University of British Columbia, Vancouver, Canada, 57 pp. Srivastava, B.P., and Pant, M.M., (1979): Social forestry on a cost-benefit analysis frame work, Indian Forester, Vol. 105; pp. 1-29. Sjaastad, L.A., and Wisecarver, D.L., (1977): The social cost of public finance, Journal of Political Economy, vol. 85, pp. 513-547. Cited from, Boadway, R., and Bruce, N., (1984), Welfare economics, Basil Blackwell, New York, U.S.A., 344 pp. Squire, L., and Van der Tak, H.G., (1975): Economic analysis of projects. John Hopkins University Press, Baltimore. 153 pp. Sugden, R., Williams, A., (1986): The principles of practical cost benefit anal-ysis, Oxford University Press, Toronto, Canada, 275 pp. Trivedi, S.N., (1986): Financial appraisal for some afforestation species in Bihar (India) under the risk of illicit felling, Forest Ecology and Management, Amsterdam, vol. 17; 261-277 pp. U.S. Water Council, (1973): Principles standards, and procedure for water and related land resource planning , Federal Register pp. 38-174, Cited from, Sassone, P.G., and Schaffer, W.A. (1979): Cost benefit analysis, A handbook, Academic Press New York, 177 pp. United States Department of Agriculture, (1984): Empirical estimation of amenity forest values: A comprehensive report, General Techni-cal Report, RM-107, Rocky Mountain Forest and Range Exper-iment Station, Fort Collins, Colorado, United States, pp. 27. 97 Vohra, A.B. et al., (1982): Effect of windbreak and shelterbelts on wheat and mustard as well as on wind velocity, Indian Forester, Vol. 108; pp. 239-253. Weisbrod, B.A., (1968): Income redistribution effects and benefit cost analysis, in, S.B. Chase, eds., Problems in public expenditure analysis, Brookings Institution, pp. 177-209. Appendix A Derivation of distribution weight (D) Mathematically, D is defined as, D - —. Wc-To derive a formula for estimating the value of D, one needs to specify the social welfare function. Squire and Van Der Tak (1975) have used the utilitarian form of social welfare function, W = YlUi(c), with the assumptions that: (a) The social welfare is the sum of the individual utility levels. (b) There are no consumption externalities, i.e., an individual derives utility solely from his own consumption. (c) The nature of the utility function is the same for all the individuals and the marginal utility diminishes with consumption. The utility function chosen by them that satisfies the above assumptions is given below, where, c is the level of consumption and e is the parameter of utility. The marginal utility U(c) is given by, U{c) = c-€. 98 endix A. Derivation of distribution weight (D) 99 Therefore D = Wc _ U(c) _ (c W-c U{c) \c, In the above expression the consumptions are being compared at one point of time. Appendix B Value of regressions constant and coefficients Table B.l shows the value of regression constant and coefficients. Table B.l: The value of regression constant and coefficients of regression equation the estimation of yield of Eucalyptus.hybrid. Crop Qty: bo • "6i b2 b3 ' b4 char." class Volume I 3.08754 -7.51748 0.02206 0.60997 - 44.4364 II -2.34040 -10.93654 0.264975 0.21684 31.0078 III 3.50694 -14.93375 -0.04531 0.62240 -29. 5316 °char. = Character. 100 Appendix C Financial and economic planting costs 101 Appendix C. Financial and economic planting costs 102 Table Cl: Yearly and PV at 4% discount rate of financial and economic planting costs in rupees of alternative No. 1. • Cost category. Year Total 1 2 3 9 17 cost Fina. cost6 a. Labour i. Agrc. 793.00 273.20 13.20 ii. Off-agrd. 1878.25 50.00 50.00 Total 2671.25 273.20 132.00 50.00 50.00 b. Mat.e 636.00 Total a+b 3307.25 273.20 132.00 50.00 50.00 -Econ/ cost a. Labour i. Agr. 793.00 273.20 132.00 ii. Off-agr. 1126.95 30.00 30.00 Total 1919.95 273.20 132.00 30.00 30.00 .b. Mat. 611.54 Total a+b 2555.95 273.20 ,132.00 30.00 30.00 -PV of fin. cost a. Labour i. Agr. 762.50 252.58 117.34 ii. Oft-agr. 1806.00 35.12 25.66 Total 2568.50 252.58 117.34 35.12 25.66 2999.20 b. Mat. 611.54 611.54 Total a+b 3180.04 252.58 117.34 35.12 25.66 3610.74 PV of econ. cost a. Labour i. Agr. 762.50 252.58 117.34 ii. Off-agr. 1083.60 21.07 15.40 Total 1846.10 ,252.58 .117.34 '21.07 15.40 2252.49 b.Mat. 611.54 611.54 Total a+b 2457.64 252.58 .117.34 ;21.07 15.40 2864.03 ?Fin. = Financial The figures are taken from.the social,-forestry project of Maharashtra, 1982, after modifying for the daily wage rate. The daily wage rate was Rs.4 in 1981 and was Rs. 5 in 1984. Since the'daily wage rate had gone up by 25% in 1984, the rates of items of works have been increased by 25%. cAgr. = Agriculture season. dOff-agr. = Off-agriculture season. cMai.= Materials._ •'Econ. = Economic. Appendix C. Financial and economic planting costs 103 Table C.2: Yearly and PV at 4% discount rate of financial and economic planting costs in rupees of alternative No. 2. Cost category. Year Total 1 2 3 4 5 to 25Q 9 and17" cost Fin.c cost a. Labour i. Agr.d 3731.60 254.40 128.00 ii. Off-agr.e 3596.00 720.00 784.00 784.00 360.00 50.00 Total 7327.60 974.40 912.00 784.00 360.00' 50.005 b. Mat.'1 856.00 18.80 Total a+b 8183.60 993.20 912.00 784.00 360.00 50.00 -Econ.1 cost a. Labour i. Agr. 3731.60 254.40 128.00 ii. Off-agr. 2157.60 432.00 474.40 474.40 216.00 .30.00 Total 5889.20 686.40 598.40 474.40 216.00 30.00 b. Mat. 856.00 18.80 Total a+b 6745.20 705.20 598.40 470.40 216.00 30.00 -PV Fin. cost a. Labour i. Agr. 3588.07 235.20 113.79 ii. Off-agr. 3457.69 665.68 696.97 670.16 4317.19J' 60.80fc Total 7045.76 900.88 810.76 670.16 4317.19 60.80 13805.57 b. Mat. 823.08 17.38 84.46 Total a+b 7868.84 918.27 810.76 670.16 4317.19 60.80 14646.03 PV Econ. cost a. Labour i. Agr. 3588.07 235.20 113.79 ii. Off-agr. 2074.61 399.40 418.18 402.09 2590.31 36.48 Total 5662.68 634.60 531.97 402.09 2590.31 36.48 9858.13 b. Mat. 823.08 17.38 840.46 Total a+b 6485.76 651.98 531.97 402.09 2590.31 36.48 10698.59 "An annual expenditure of Rs. '360 for watchman from 5th year to 25th year is listed under this column. b An annual expenditure of Rs. 50 is incurred in the year 9th and 17th for stump dressing and cut back operations. "jFin. = Financial. Agr. = Agriculture season. c0ff-agr. = Off- agriculture season. •'This is an annual expenditure. •'This is an annual expenditure. ''Mat^Materials. 'Econ. = Economic. •'Total PV of expenditure of watchman from 5th year to 25th year. fcTotal present value of expenditure incurred in 9th and 17th year. 1 Appendix C. Financial and economic planting costs 104 Financial and economic planting cost of alternative No 3. Total number of seedlings raised 18401. The financial cost of raising seedlings @Rs.0.6 per seedling is Rs. 1104. The material and labour components are assumed to be 50% each. The economic cost in the year 1 is 883.20 rupees (Rs. 552 material and Rs. 331.20 labour cost). The PV of financial and economic costs at 4% discount rate are 1061.53 and 849. 23 rupees, respectively. This includes 240 seedlings required for mortality replacement in the first year. Appendix C. Financial and economic planting costs .105 Table C.3: Yearly and PV at 4% discount rate of financial and economic planting cost in rupees of alternative No. 4. Cost category Year Total , 1 2 3 4 to 25° 9 and 17b cost Finc. cost a. Labour i. Agrd. 667.25 249.40 127.00 ii. Off-agre. 1700.00 74.00 74.00 74.00 50.00 Total 2367.50 323.40 201.00 74.00' 50.009 b. Mat'1. 891.00 18.80 Total 3258,50 342.20 201.00 74.00 50.00 Econ.1. cost a. Labour i. Agr. 667.25 249.40 127.00 ii. Off-agr. 1020.00 43.40 43.40 43.40 30.00 Total 1687.25 292.80 160.40 43.40 30.00 b. Mat. 891.00 18.80 Total 2578.25 311.60 160.40 .43.40 30.00 PV Fin. cost a. Labour i. Agr. 641.58 230.58 112.90 ii. Off-agr. 1634.61 68.41 65.78 950.67' 60.80fc Total 2276.19 298.99 178.68 950.67 60.80 3765.42 b. Mat. 856.73 17.38 874.11 Total 3132.99 316.38 178.68 950.67 60.80 4639.53 PV Econ. cost a. Labour i. Agr. 641.58 230.58 112.90 ii. Off-agr. 980.76 40.12 38.58 570.40 3^6.48 Total 1622.34 270.70 151.45 570.40 36.48 2651.37 b. Mat. 856.73 17.38 874.11 Total 2479.07 288.08 151.45 570.40 36.48 3525.48 "An annual expenditure of Rs. 360 for watchman from 4th year to 25th year is listed under this column. 'An annual expenditure of Rs. 50 is incurred in the year 9th and 17th for stump dressing and cut back operations. 'jFin. ~ Financial Agr. = Agriculture season. cOff-agr. = Off- agriculture season. •'This is an annual expenditure. "This is an annual- expenditure. / lMat.= Materials. 'Econ. = Economic. •'Total PV of expenditure of watchman from 4th year to 25th year. *Total present value of expenditure incurred on 9th and 17th year. Appendix C. Financial and economic planting costs 106 PV of financial and economic costs for alternative No. 5 is the same as of alternative No. 4. Appendix D PV of financial and economic harvesting cost D.l Financial harvesting cost Financial cost of harvesting of an alternative is calculated by multiplying yield with the harvesting rate. Table D.l gives the financial harvesting cost of all the alternatives. 107 Appendix D. PVof financial and economic harvesting cost Table D.l: Financial harvesting cost of timber and fuelwood in rupees. 108 Alt. Qty.a Yield Harvesting Harvesting Total No. class in m3 rateb cost cost Tim.c Fld.d Tim. Fid. Tim. Fid. I 95.09 33.86 22 5 2091,98 169,30 2261.28 1 II 48.70 243.50 243.50 III 11.07 55.35 55.35 I 87.56 31.30 ' 20 5 1751.20 156.50 1907.70 2 II 47.31 236.55 236.55 III 10.18 50.09 50.09 I 112.32 40.23 nil6 nil nil nil nil 3 II 60.62 nil nil III 13.06 nil nil I 87.56 31.30 57 20 4990.92 626.00 5616.92 4 • II 47.31 946.20 946.20 III 10.18 203.60 203.60 I 87.56 31.30 57 -20 4990.92 626.00 5616.92 4 II 47.31 946.20 946.20 III 10.18 203.60 203.60 °Qty.=Quality. h Harvesting rate is per m 3 . '•Tim. = Timber. d Fld. = Fuelwood. e Harvesting cost is taken as nil in this case assuming that the trees will be felled by the farmer and his family. D.2 PV of financial harvesting cost The financial harvesting costs are incurred, after every 8 years starting from 9th year. The project period, is, 25 years. ' During this period the harvesting costs will be incurred three times on. 9th, 17th. and 25th year of the-project. The PV of the total financial cost is calculated by using the formula, 1 1 _" (1 + r)' ~ (1 +r)»*[(l +r)«.- 1]J ' where, A (1+r) Appendix D. PV of financial, and*economic harvesting cost 109 • A = periodic cost beginning in t+1 years and continuing every t years. • t = time interval between periods. • n-= number of periodic benefits. • r = rate of discount. Substituting, t—8, n=3, and r=0.04, in the above formula, the present value of the periodic benefits is, A(l.591077). The factor 1.591077 is known as the periodic factor. The PV of financial harvesting cost is obtained by multiplying periodic financial cost with periodic factor. Table D.2 shows the PV of financial harvesting cost. Appendix, D. PV of financial and economic harvesting cost 110 Table D.2: PV at 4% discount rate of financial harvesting cost of timber and fuelwood in rupees. Alt. Qty.a Financial PV of No. class harvesting harvesting cost cost Labrb. Matc. Lab. Mat. Total I 2148.21 113.07 3417.96 179.90 3597.87 1 TI 231.32 12.18 368.04 19.37 387.42 III 52.57 2.77 83.64 4.41 88.05 I 1812.31 95.39 2883.52 151.77 3035.29 2 II 224.72 11.82 - 357.54 18.80 376.35 III 47.59 2.50 75.71 3.97 79.69 . I nil nil nil nil nil 3 II nil nil nil nil nil III nil nil nil nil nil I 5336.08 280.84 8490.11 446.83 8936.95 4 II 889.17 47.03 1430.64 74.82 1505.47 III 193.42 -10.18 307.74 16.19 323.94 I 5336.08 280.84 8490.11 446.83 8936.95 5 II 889.17 47.03 1430.64 74.82 1505.47 III 193.42 10.18 307.74 16.19 323.94 aQty.=Quality. fcLabr. = Labour. Labour cost of harvesting is assumed to be 95% of the total harvesting cost. cMat. = Materials. D.3 PV of economic cost of harvesting The market price of the material used in harvesting reflects the opportunity cost of the materials. Therefore, financial and economic cost of materials are the same. The shadow wage rate of labour has been taken as 60% of the actual wage rate paid. Therefore, the PV of economic cost of harvesting is the PV of the financial cost of materials plus 60% of the PV of the financial cost of labour. Table D.3 gives the economic cost of harvesting. Appendix D. PV of financial and economic harvesting cost 111 Table D.3: PV at 4% discount rate of economic cost of harvesting of timber and fuelwood in rupees. Alt. Qty a PV of PV of No. class financial economic cost cost Labr. Mat. Labr. Mat. Total I 3417.96 179.90 2050.77 179.90 2230.67 1 II 368.04 19.37 220.82 19.37 240.19 III 83.64 4.41 50.18 4.41 54.59 I 2883.52 151.77 1730.10 151.77 1881.87 2 II 357.54 18.80 214.52 18.80 232.32 III 75.71 3.97 45.42 3.97 49.39 I nil nil nil nil nil 3 II nil nil nil nil nil III nil nil nil nil nil I 8490.11 446.83 5094.05 446.83 5540.88 4 II 1430.64 74.82 858.38 74.82 933.20 III 307.74 16.19 185.36 16.19 201.55 I 8490.11 446.83 5094.05 446.83 5540.88 5 II 1430.64 74.82 858.38 74.82 933.20 III 307.74 16.19 185.36 16.19 201.55 a Qty.=Quality Appendix E Distribution of administrative cost into various cost categories Table E.l: Distribution of administrative costs (rupees) into various cost categories. Cost category PV of costs Financial Economic Material 332.80 332.80 Salaries: i. Officer-cadre 849.42 849.42 ii. Unskilled and 566.28 226.51 semi-skilled employees. Labour 19.50 11.70 Total 1768.00 1420.43 112 Appendix F PV of financial and economic initial investment and total costs 113 Appendix F. PV of financial arid economic initial investmentmrid totaLcosts 1.14 Table F.l: PV of financial costs in rupees and mandays of employment generated. Alt. Qty. PV of costs Initial Total Employment No. class Land Planting Admnt.a Harvesting investment cost cost generatedb I 0 3611 1768 3598 5379 8977 1320 1. II 0 3611 1768 387 5379 5766 710 III 0 3611 1768 88 5379 5466 653 I 0 14646 1768 3035 16414 19049 3375 2 II 0 14646 1768 376 16414 16790 2860 III 0 14646 1768 80 16414 16494 2814 I 0 1062 53 0 1115 1115 110 3 II •o 1062 53 0 1115 1115 no III 0 1062 53 0 1115 1115 110 I 1868 4640 1768 8937 8276 17213 2489 4 II 1868 4640 1768 1505 8276 8937 1077 III 1868 4640 1768 324 8276 8600 852 I 0 4640 1768 8937 6408 15345 2489 5 II 0 4640 1768 1505 6408 7913 1077 III 0 4640 1768 324 6408 6732 852 "Admnt. = Administrative cost. Employment generated in man days has been calculated by dividing the PV of financial wages paid to the laborers and semi-skilled and unskilled employees by their respective daily financial wage rate. Appendix F. PV of financial and economic initial investment and total costs 115 Table F.2: PV at.4% discount rate of economic costs in rupees and man days of employ-ment generated. Alt. Quality PV of costs Initial0 Total6 Employment No. class (1) (2) (3) (4) Investment cost generated0 Land Planting Admnt.d Harvesting cost (man days) I 0 2864 1420 2231 4284 6515 1320 1 II 0 2864 1420 240 4284 4524 710 III 0 2864 1420 55 4284 4339 653 I 0 10699 1420 1882 11119 13001 3375 2 II 0 10699 1420 233 11119 11352 2860 III 0 10699 1420 49 11119 11158 2814 I 0 849 41 0 890 890 110 3 II 0 849 41 0 890 890 110 III 0 849 41 0 890 890 110 I 1868 3525 1420 5541 6813 12354 2489 4 II 1868 3525 1420 933 6813 7746 1077 III 1868 3525 1420 202 6813 7015 852 I 0 3525 1420 5541 4945 10486 2489 5 II 0 3525 1420 933 4945 5878 1077 III 0 3525 1420 202 4945 5147 852 "Initial investment cost is (l)+(2)+(3). '"Total cost is (l)+(2)+(3)+(4). cEmployment generated in man days has been calculated by dividing the present value of financial wages paid to laborers and?semiskilled employees by their respective daily financial wage rate. dAdministrative cost. Appendix & "Financial and economic value of direct and indirect, benefits G.l Financial value of direct benefits Benefits from timber and fuelwood are obtained by multiplying their yields with their market price. The market rate for timber and fuelwood used are Rs. 300/m3 and Rs. 60/m3, respectively. The benefits from timber and fuelwood are given in table G.l. 116 Appendix G. Financial and economic value of direct and indirect benefits 117 Table G.l: Financial value of benefits from timber and fuelwood in rupees. Alt. Qty-a Value of benefits from Total No. class. Timber Fuel value Yield Value Yield Value I 95.09 28527 33.86 2031.60 33558.60 1 II 48.70 2922.00 2922.00 III 11.07 664.20 664.20 I 87.56 26258 31.30 1878 28146 2 II 47.31 2838.60 2838.60 III 10.18 610.80 610.80 I 112.32 33696 40.23 2413.80 36109.80 3 II 60.62 3637.20 3637.20 III 13.06 783.60 783.60 I 87.56 26258 31.30 1878 28146.00 4 II 47.31 2838.60 2838.60 III 10.18 610.80 610.80 I 87.56 26258 31.30 1878 28146.00 5 II 47.31 2838.60 2838.60 III 10.18 610.80 610.80 aQty.=Quality. G.2 Present financial value of direct benefits The benefits from timber and fuelwood shown in the last column of the table G.l accrue every 8th year on the 9th, 17th and 25th years of the project. The present value of the benefits from timber and fuelwood is calculated by using the formula given below. 1 1 (l-+-r)* ~ ( l+r) n t [( l+r)'- 1]J ' where, • A = periodic benefit beginning in t+1 years and continuing every t years. • t = time interval between periods. ( 1 + r ) Appendix G. Financial and economic value of direct and indirect benefits 118 • n = number of periodic benefits. • r = rate of discount. Substituting, t=8, n—3, and r=0.04, in the above formula, the present value of the periodic benefits, A, is, A(1.591). The factor 1.591077 is known as the periodic factor. Taking the value of a from the last column of the table G.l, PV of benefits from timber and fuelwood can be calculated. These are shown in table G.2. Appendix G. Financial and economic value of direct and indirect benefits 119 Table G.2: PV at 4% discount rate of benefits from timber and fuelwood in rupees from all three rotations. Alt. Qty. Periodic value Periodic PV of No. class of benefits factor benefits I 30558.60 1.59107 48620.87 1 II 2922.00 4649.10 III 664.20 1056.78 I 28146 44782.25 2 II 2838.60 4516.41 III 610.80 971.82 I 36109.80 57453.21 3 II 3637.20 5787.03 III 783.60 1246.76 I 28146 44782.25 2 II 2838.60 4516.41 III 610.80 971.82 I 28146 44782.25 2 II 2838.60 4516.41 III 610.80 971.82 G . 3 Present value of benefits from grass It is assumed that the yield of grass/ha is half a tonne. The market valaue of grass is assumed to be Rs. 50/tonne. Therefore, the value of benefit from grass/year/ha is Rs.25. The PV of benefits from grass for the project period of 25 years is calculated byiusing the formula, r r(l +r)n ' where, • A = annual benefits (A=25 rupees in this case) • n = number of annual receipts of benefits (n=25 annual receipts) endix G. Financial and economic value of direct and indirect benefits 120 • r = discount rate (r=0.04 per year) Substituting these values in the above formula, the PV of benefits from grass is, 390.55 rupees. The benefits from grass for all quality classes have been assumed to be the same except for Alternative No. 1, quality class III. In this alternative lands used are very poor and it is assumed that they will improve in 9 years to give grass benefits from the 10th year. The present value of benefits of alternative No. 1 quality III is calculated by using the annuity factor for 16 years and then discounting it for 9 years. Annuity factor for 16 years at 4% interest rate is 11.6523. Therefore, the disounted value of annual benefits of 25 rupees for 16 years is, 25x(11.6523)=291.30 rupees. Since benefits start accruing from the 10th year, the above value of 291.30 is dis-counted at the rate of 4%. The present value comes out to be 196.79 rupees. The table G.3 gives the PV of benefits from grass. G.4 Present value of indirect benefits It is assumed that 56.24 cubic metre of yield saves one hectare of forest area from deforestation. The total present value of indirect benefits from three rotations by saving one hectare of forest area in each rotation is 5110.25 rupees. Alternative No. 4, in which plantations are established after clearing the present growth, which is equal to 56.24 cubic metres, will save an additional hectare of forest area in the Appendix G. Financial-and economic value of direct and. indirect benefits 121 Table G.3: PV at 4% discount rate of benefits from grass in rupees, Alt. Qty. PV of No. class benefits I 390.55 1 II 390.55 III 196.79 I nil 2 II nil III nil I nil 3 II nil III nil I 390.55 4 II 390.55 III 390.55 I 390.55 5 II 390.55 III 390.55 Appendix G. Financial and economic value of direct and indirect benefits ,122 year zero. The value of benefits for this additional hectare of forest area saved is 32121 rupees. Table G.4 gives the PV of indirect benefits. This value is given on page 96 of the thesis. Appendix G. Financial and economic value of direct and indirect benefits Table G.4: PV at 4% discount rate of indirect benefits in rupees. 123 Alt. Qty. Yield Area PV of Additional Total No. class in m3 saved" indirect indirect benefits benefits6 benefits0 I 128.95 2.2928 11716.78 nil 11716.78 1 II 48.70 0.8659 4425.12 nil 4425.12 III 11.07 0.1968 1005.87 nil 1005.87 I 118.86 2.1134 10800.21 nil. 10800.21 2 II 47.31 0.8412 4298.82 nil 4298.82. III 10.18 0.1810 925.00 nil 925.00 I 152.55 2.7124 13861.46 nil 13861.46 3 II 60.62 1.0778 5508.23 nil 5508.23 III 13.06 0.2322 1186.69 nil 1186.69 I 118.86 2.1134 10800.21 3212 14012.21 4 II 47.31 0.8412 4298.82 3212 7510.82. III 10.18 0.1810 925.00 3212 4137.00 I 118.86 2.1134 10800:21 nil 10800.21 5 II 47.31 0.8412 4298.82 nil 4298.82. III 10.18 0.1810 925.00 nil 925.00 "Area saved is equal to yield divided by 56.24. ''Area saved multiplied with 5110.25. cIndirect benefits obtained by clearing the present forest growth in CWR areas. G.5 Total PV of financial and economic benefits Direct financial and economic benefits are the same because market prices of timber, fuelwood and. grass reflect the real value of the benefits. Table G.5 gives the total value of financialand economic benefits. Appendix ,G. Financial and economic value of direct-and indirect benefits 124 Table G.5: PV of financial and economic benefits from timber, fuelwood, grass and saving of forests. Alt. Qty- PV of benefits Total PVof Total No. class from financial indirect economic Tim. and Gra- benefits benefits benefits Fid. sses I 48621 390 49011 11717 60728 .1 II 4649 390 5039 4425 9464 III 1057 196 1253 1006 2259 I 44782 nil 44782 10800 55582 2 II 4516 nil 4516 4299 8815 III 972 . nil 972 925 1897 I 57453 nil 57453 13861 70314 3 II 5787 nil 5787 5508 10295 III 1246 nil 1246 1187 2423 I 44782 390 45172 14012 59184 2 II 4516 390 4906 7511 12417 III 972 390 1362 4137 5499 I 44782 390 45172 10800 55972 2 II 4516 390 4906 4299 9205 III 972 390 1362 925 2287 Appendix H Determination of v (value of the public income) To estimate the value of public income relative to the value of additional con-sumption at the average level of consumption, it is assumed that at the margin the value of the additional public expenditure for all purposes is equal. The practical advantage of this assumption is that the value of the public expenditure at the margin in one sector will be sufficient to calculate the value of v. The formula for calculating the value of v is given below1, where, q is the perpetual stream of output from public investment measured in foreign exchange, and i is the consumption rate of interest given by i = r/g + p, n is the rate of diminishing marginal utility, g is the rate of growth of consumption, and p is the pure time preference rate. In the derivation of the above formula, it is further assumed that: (a) There is diminishing marginal utility of consumption. (b) The future consumption is less valuable than the present only because of. its accrual in the future. 1Squire and Van der Tak, 1975: 67-69. 125 Appendix I Increase in consumption due to wages and benefits Total increase in financial consumption is due to increase in wages and dis-tribution of net financial profits. Incremental income due to wages accrues to the laborers below the poverty line and to the semi-skilled and unskilled employees on the average national income level. The difference between the PV of financial and economic costs gives the total increase in financial wages. The PV of increase in financial wages to semi-skilled and unskilled employees is calculated to be 340 rupees. Table 1.1 gives the increase in financial consumption (income) due to in-crease in wages to the two income level groups of people. Table 1.2 gives the PV of increase in financial consumption due to present net financial benefits of timber, fuelwood and grass. 126 Appendix I. Increase in consumption due.to wages and benefits 127 Table 1.1: PV of increase in consumption due to wages in rupees. Alt. Qty. PV of Total Increase in wages of No. class Financial Economic increase unskilledand laborers costs costs in wages semi-skilled employees I 8977 6515 2462 340 2122 1 II 5766 4524 1242 340 902 III 5467 4339 1127 340 787 I 19049 13001 6048 340 5708 2 II 16790 11352 5438 340 5098 III 16494 1158 5336 340 4996 I 1115 890 225 0 225 3 II 1115 890 225 0 225 III 1115 890 225 0 225 I 17213 12354 4859 340 4519 4 II 9781 7776 2035 340 1695 III 8600 7015 1585 340 1245 5 I 15345 10486 4859 340 4519 II 7913 5878 2035 340 1695 III 6732 5147 1585 340 1245 Appendix I. Increase in consumption due to wages and benefits 128 Table 1.2: PV of increase in financial consumption in rupees due to present net financial benefits. Alt. Qty. PV of PV of Increase in No. class gross financial financial financial benefits costs consumption I 49011 8977 40043 1 II 5039 5766 (727) III 1253 5466 (4213) I 44782 19049 25773 2 II 4516 16790 (12274) III 972 16494 (15522) I 57453 1115 56337 3 II 5787 1115 4672 III 1246 1115 131 I 45172 17213 28000 4 II 4906 9781 (4874) III 1362 8600 (7237) I 45172 15345 29868 5 II 4806 7913 (3006) III 1362 6732 (5369) Appendix J Derivation .of formula for shadow wage rate of labour Conceptually, the derivation1 of the formula for the shadow wage rate of labour to be employed in the project involves the following three elements: (a) The foregone output. (b) The cost of increase in consumption due to the increase in wages. (c) The cost of the reduced leisure. Consider a. worker, who works on an agriculture field, is drawn to a forestry project from an efficient labour market. Assume, his wages per day as agriculture worker (laborer) are ra per day but he gets more wages, say w per day, when em-ployed on forestry work. Since the market is efficient, the value of the marginal product of the labour (marginal product of the labour per day x price of the prod-uct) is equal to his wages m, which is the value of the foregone output at domestic market prices. The foregone output, m, at domestic market prices needs adjust-ment to reflect its real cost at border (imported) marginal prices. The adjustment is done by means of an accounting ratio, a, to obtain the value of the foregone output m. Therefore, the.labour's foregone marginal product is ma. The> employment on the forestry project increases the wages (income) by w — m. Increase in income will 1Source: Squire and Van der Tak, 1975. Economic analysis of projects, John Hopkins University Press, Baltimore, pp. 79-84. 129 endix J. Derivation of formula for shadoM' wage rate of labour 130 result in an increase in consumption. The amount of increase in consumption de-pends upon the propensity to consume. Suppose the propensity to consume is one, then the net social cost of the increased consumption is given hy (w — m)(b — where, /3, is the accounting ratio to obtain the cost of the increased consumption in common denominator, and ^  reflects the value of the increased consumption to a particular income group whose consumption has been increased relative to the common denominator. The common denominator chosen is the public income. The value of D, denotes the distribution weight. It is defined as the welfare value of a marginal increase in consumption at domestic prices to an individual or an income group at some consumption level relative to the welfare value of marginal increase in consumption to someone at the average level of consumption. The value of ^  expresses the value of the marginal increase in consumption at domestic prices to someone at the average level of consumption relative to the common denominator. The new job may call for an increase in effort on the part of the labour. Therefore, the cost of the reduced leisure needs to be calculated. This has been calculated by multiplying the difference in the supply price of the labour {w — m) in the new job and the old job with e, the ratio of the wage earner's own evaluation of the disutility of the effort to his additional income. It is further multiplied with (j), the ratio of the social to the private evaluation of the utility, and by —. Combining the -value''of the foregone output, the.net social cost of the increased consumption, and the social cost of the reduced leisure, the expression for the shadow wage rate is given by, ma + (w — m)(/S — —) + (w — m)(j)e—. v v Appendix K Net present social value of increased wages and economic benefits K . l Net present social value of increased wages Net present social value of increased wages has been calculated by using the follwing formula, (wt - m i ) - /3) + (w2 - m2) - 0) , where, the first term gives the net value of social benefits due to the increased wages of the laborers below the poverty line and the second term gives the net social value of increased wages of the semiskilled and unskilled employees. The financial PV of the increased wages (wj — m1 and w2 — m2) is given in table Ll in appendix I. Using the value of JD 1 =14 .6 , D2=l, (3 — .77 and v—2 in the above formula, the present social values of the increased wages can be calculated. The present social value of the increased wages are shown in table K.l. 131 Appendix K. Net present social value of increased wages and economic benefits 132 Table K.l: Net present social value (NSPV) of increased wages due to wages in rupees. Alt. Qty. PV of increased Corresponding Total No. class wages NPSV NPSV (wi - mj) (w2 — m2) I 2122 340 13856.66 (91.80)° 13764.86 1 II 902 340 5890.06 (91.80) 5798.26 III 787 340 5139.11 (91.80) 5047.31 I 5708 340 37273.24 (91.80) 37181.44 2 II 5098 340 33289.94 (91.80) 33198.14 III 4996 340 32623.88. (91.80) 32532. 08 I 225 0 1469.25 0 1469.25 3 II 225 0 1469.25 0 1469.25 III 225 0 1469.25 0 1469.25 I 4519 340 29509.07 (91.80) 29417.27 4 II 1695 340 11068.35 (91.80) 10976.55 III 1245 340 8129.85 (91.80) 8038.05 5 I 4519 340 29509.07 (91.80) 29417.27 II 1695 340 11068.35 (91.80) 10976.55 III 1245 340 8129.85 (91.80) 8038.05 "Figures.in the parenthesis show negative value. K .2 Net social value of economic benefits Net social value of economic benefits has been calculated by using the formula, The increase in consumption is equal to the net financial benefits given in the last appendix. Using the values of D=14.6, D=l and D=0.0106 for the people below the poverty line, people having income equal to the national average per capita and people having income above the national average per capita, respectively, /3 = .77, and i;=2, in the above formula, the net social values of financial benefits can be calculated. The net present social value of economic benefits is shown in table K.2. Appendix K. Net present social value of increased wages and economic benefits 133 K.3 Total present social value of economic benefits and increased wages. Appendix ,K. Net,present social value of increased wages and-economic benefits 134 Table K.2: Net present social value of economic benefits in rupees. Alt. Qty. Econ. N.° fin. N. social Total No. class benefits benefits value of social fin. value of benefits econ. benefits Eb EC; £ Ci - A) I 58497 40034 121383.08 179880.08 1 II 9224 (727) 0C 4940 III 2205 (4213) 0 (2080) I 53700 25773 Qd 42581 .2 II 8552 (12274) 0 (2537) III 1848 (15522) 0 (9261) I 69424 56337 170813.78 240237.78 3 II 9405 4672 14165.50 23570.50 II 1533 131 397.19 1930.19 I 53643 2800 0 46830 4 II 11484 (4874) 0 4671 III 5297 (7237) 0 (1515) I 50431 28968 0 45486 5 II 8272 (3006) 0 3327 III 2085 (5369) 0 (2860) "N.=Net. E=Total economic benefits-economic operational costs. '^ Social value of net financial benefits has been taken to be zero because there is no increase in benefits. The net financial benefits accrue to the government as public revenue. The public income (revenue) has been assumed as the.unit expressing economic benefits. Appendix K. Net present social value of increased wages-and economic benefits 135 Table K.3: Total present social value of economic benefits and increased wages in rupees. Alt. Qty. Net social value of Total social No. class econ. benefits increased wages value I 179880 13765 193645 1 II 9224 5798 15022 III 2205 5047 7252 I 53700 37181 90881 2 II 8582 33198 41780 III 1848 32532 34380 I 240238 1469 241707 3 II 23571 1469 25040 II 1930 1469 3399 I 53643 29417 83060 4 II 11484 10977 22461 III 5297 8038 13335 I 50431 29417 79848 5 II 8272 10976 19248 III 2085 8038 10123 

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