Task 1: Provide critical analysis of Fahrer (2015)
The AdaniMine project is one of the most complex and major projects ever done in Australia. There is need therefore to apply an appropriate technique that can be used to assess the benefits against the costs of the project. The best technique that can be used to analyze the analyses the viability of the project is the Cost-Benefit Analysis (CBA) technique (Abelson, 2015).
Cost-Benefit Analysis helps to determine and attain appropriate economic impact assessment guidelines to assist improve the accuracy, robustness and consistency of the materials to be used in the AdaaniMine project (inputs) (Damigos, 2006). This paper seeks to suggest ways in which the socio-economic costs and benefits analysis of the project can be improved.
Although the Input-Output methodology of assessing CBA has been criticized for long by economists due to its weakness of overstating benefits and understating costs, the proper application can make it suitable. In my opinion, the input-output methodology can make CBA analysis for Adani Mine more accurate if the following steps are followed.
- All the inputs for the project should be monetized. Monetizing means assigning a dollar value to all the inputs after valuing them at the opportunity cost. Opportunity cost, in this case, should be the fair market value of those inputs rather than the best price that could be drawn from using an alternative.
- The benefits of the project should be valued based on the society’s willingness to pay for the goods or services produced (output) as opposed to amount to be paid for the product (price). This means that the benefit of Adani Mine project should not only be determined from the price of the output but also the social benefit derived from the project.
Since it difficult to ascertain the costs and benefits attributable to shareholders based on the constant prices, it should be ideal to go beyond the direct costs and benefits of the project.. Indirect costs could be the effect of the existence of the project on the environment while indirect benefits could be the creation of employment opportunities to the community neighbouring the location of the project (Gillespie & Bennett, 2015).
Cost and benefits that are attributable to shareholders should, therefore, be based on both economic and financial analysis. Financial analysis is concerned with direct costs and benefits used and generated from the project while economic analysis includes supplementary social costs and benefits using different techniques of estimation (Gillespie & Kragt, 2012). When Financial and economic analysis is used, benefits are likely to be taken into account at a different basis and therefore create a more accurate basis of conclusion.
Conclusion
To sum up, the quality of the cost-benefit analysis of a project is based on the quality of financial as well as the economic analysis of the project. The quality of analysis done is vital in accepting or rejecting an investment project because both economic, as well as the financial rationality, has to be respected as opposed to only focusing on a positive Net Present Value (NPV) as discussed above.
References
Abelson, P. (2015). Cost-Benefit Evaluation of Mining Projects. Australian Economic Review, 48(4), 442-452. doi: 10.1111/1467-8462.12132
Damigos, D. (2006). An overview of environmental valuation methods for the mining industry. Journal Of Cleaner Production, 14(3-4), 234-247. doi: 10.1016/j.jclepro.2004.06.005
Gillespie, R., & Kragt, M. (2012). Accounting for Nonmarket Impacts in a Benefit-Cost Analysis of Underground Coal Mining in New South Wales, Australia. Journal Of Benefit-Cost Analysis, 3(2), 1-29. doi: 10.1515/2152-2812.1101
Gillespie, R., & Bennett, J. (2015). Challenges in Including BCA in Planning Approval Processes: Coal Mine Projects in New South Wales, Australia. Journal Of Benefit-Cost Analysis, 6(2), 341-368. doi: 10.1017/bca.2015.12
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