The conceptual problems and difficulties doing a social cost benefit analysis can be summarized:
1. Some benefits and costs are not measurable in monetary terms.
2. When it is a situation of multiple projects, which is true in the case of many governmental or public systems, it is difficult to apportion or allocate the expected benefits amongst the different projects. This is so because the exact component of the expected benefits may not be directly attributable to each individual project. The benefit expected may be as result of the integrated developmental projects. For example, we all know that rural development is the result of various projects such as major irrigation, minor irrigation, providing infrastructure facilities, credit facilities, provision of fertilizers and seeds, development of rural industries, and the integration of a host of other such developmental projects to get the desired beneficial effect. In such cases, the location of the developmental benefits to any one of the projects is definitely a difficult exercise.
3. Public systems projects, which are development oriented projects, may alter the income distribution of the people who make use of these projects. This redistribution of income may alter the price structure significantly from what it was at the time of the initial project feasibility analysis. This would therefore pose questions regarding the validity of the project feasibility analysis.
4. A particular discount rate of interest is assumed in the calculations. This assumed rate of interest of the comparison of costs and benefits, is actually an assumption regarding the public’s time preference rate of interest: which means that it is the rate of interest to be charged for the future flow of benefits which will come as a result of the sacrifice of current consumption by the consumers (i.e. public). This expression of time preference also raises questions regarding the entire cost benefit comparison and feasibility analysis.
Inspite of such difficulties of applying the cost benefit principles to public systems, projects, the objective of such analysis is sound. In the absence of such analysis, we shall only be disregarding the effect of various public projects on the people for whom it is primarily meant. Moreover, for many public projects for instance, road building there is little or no financial return to be gained. In such cases, there is no alternative but to resort to social cost benefits analysis is either out of the question or not of much help.
The cost benefit information can be used to rank the technically feasible projects and thus select projects optimally. The analysis may be Financial Feasibility Analysis and/or Social Cost Benefit Analysis. The principles of capital budgeting and the choice of projects under limited availability of funds have already been discussed.
Projects which look financially feasible may need to be looked at more rigorously through Technical Feasibility Analysis. The idea is to screen the project initially with a broad technical and financial analysis. Those that are obviously not very good ideas may thus be rejected and rigorous analysis of technical and financial or economic feasibility can be applied to the remaining project ideas.
Although project formulation and appraisal process was mentioned in a step wise or sequential fashion, it should be emphasized that there is much feedback or to and fro interaction in the entire project formulation process. The processes of considering financial, manpower, organizational or other resource constraints, the process of technical feasibility and the processes of the financial and socio-economic feasibility all have various feedbacks. There are various grey areas within all these considerations and there are many flexibilities within the constraints and therefore the entire project formulation and appraisal process is a multi round exercise where all the relevant aspects of checking the feasibility and relative comparison of the project are taken care of.
Although a few ranked projects can now be selected the feasibility analysis cannot be complete unless we apply the Network Techniques. What may emerge after a network analysis may be different from the earlier result. A technically and financially feasible project may encounter constraints of time; network techniques may clearly bring out certain errors of omission in the earlier analysis.