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UNIDO:United Nations Industrial Development Organization Approach UNIDO approach is one of the methods of calculating Social cost benefit analysis (SCBA).infact very popular.Normally we calculate financial benefits from a project while evaluating it,but this method caculates economic benefits from the project.although earlier it was commonly used by government organizations but now it is being used by private players also.In this analysis the monetary priced are replaced by shadow prices.shadow prices are prices at perfect market conditions,also caled as economic prices.thus the market prices are replaced by the Econmic prices and then the benefit or returns are calculated.in aditon to this, adjustment is made for Externalities(+ve like road facility,hospital facility etc. or -ve externalities lik pollution),savings(a rupee saved is valued more than a rupee consumed),redistribution of income(a rupee distributed to poor is valued more than a rupee distributed to rich) ,taxes are not considered and merits.then finally the economic rate of return is calculated by the same method as IRR is calculated.
The UNIDO guidelines provide a comprehensive framework for appraisal of projects and examine their desirability and merit by using different yardsticks in a step-wise manner.The desirability is examined from various angles, such as the impact on (a) financialprofitability of utilization of domestic resources, (b) savings and consumption pattern, (c)income distribution, and (d) production of merit and demerit goods. These different aspects are examined in five stages, each stage leading towards a social benefit-cost of the project. Stage one measures financial profitability from detailed integrated standard analytical tables enumerating various costs and benefits at the market price and examines profit viability from investors point of view. Stage two adjusts the financial costs and benefits to various distortions introduced by market imperfections by valuing costs and benefits or net benefits in terms of economic efficiency or shadow prices.For shadow prices, it categorizes project inputs and outputs into traded, tradable andnon-traded. For traded and tradable, the guidelines use the border prices (f.o.b/c.i.f)as the relevant shadow prices, whereas nontraded inputs and outputs are broken down into their components and each tradable subcomponent is valued at border prices, andso on. The residual non-traded components of commodities are valued at domestic willingness to pay criterion and the labour is valued at shadow wage rate. Stage three This stage designed to examine the impact of projects on savings and consumption which are of vital consideration in the choice of alternative investments in labour-intensive and capital-intensive projects. If saving is assigned great importance, as should be the case in capital-scarce countries, this stage
recommends the rate for adjustment for savings by which the social value of a rupee/dollar investment exceeds its consumption value. Stage four This important for those countries that regard income redistribution in favor of weaker sections and backward regions as desirable objectives. The guidelines suggest weighting net benefits to various income groups or regions that reflect the judgment of politicians or the planners. Stage five Finally, in stage five, the UNIDO analysis suggests a methodology for necessary adjustment of the deviations in economic and social values and difference between the efficiency and social value of project output, say, between good and bad or merit and demerit goods.It has been claimed that the analysis of merit and demerit goods is not designed forpurists in economics who think that economics should be devoid of political or subjective judgements (UNIDO 1978).
The seminal work of Little and Mirrlees on benefit-cost analysis systematically develops a theoretical basis for the analysis and its underlying assumptions and lays down step-wise procedure for undertaking benefit-cost studies of public projects. The mathematical formulation is identical to the UNIDO method except for differences in assigning value to discount rates and accounting for imperfections and other market failures and social considerations. Like UNIDO guidelines, the Little-Mirrlees method also suggests valuation of projectinvestment at opportunity cost (shadow prices) of resources to correct distortions due tomarket imperfections. Both methods make use of border prices to correct distortions butwith a major difference.
While Little and Mirrlees express the numeraire in terms of border prices in foreign currencies, the guidelines recommend that foreign exchange values be calculated in terms of domestic currency. Little and Mirrlees have also suggested an elaborate methodology for calculating shadow prices of nontradables. Use of detailed input-output tables is suggested with a view to tracing down the chain of all non-traded and traded inputs that go into their production. However, in the case of non-availability of detailed input/output tables, a conversion factor based on the ratio of domestic costs of representative items to world prices of these items could be used for approximation of shadow prices of non-traded resources. Little and Mirrlees believe that in all less developed countries, one of the major criteria for the choice of a project should be its ability to generate savings and, hence, the Little-Mirrlees method suggests the use of accounting rate of interests to calculate present worth of future annuities of savings and consumption. Guidelines, on the other hand, do not make any adjustment for consumption and saving impact of project investment. Unlike the five stages of UNIDO, the Little and Mirrleesprocedure is relatively more practical, although, unlike guidelines, it does not provide sufficient insights by examining project investment from different angles. Source : 1) unescap.org/ttdw/Publications/TPTS_pubs/pub_1959/rurpov_ch6.pdf
The benefits of risk management in projects are huge. You can gain a lot of money if you deal with uncertain project events in a proactive manner. The result will be that you minimise the impact of project threats and seize the opportunities that occur. This allows you to deliver your project on time, on budget and with the quality results your project sponsor demands. Also your team members will be much happier if they do not enter a "fire fighting" mode needed to repair the failures that could have been prevented. This article gives you the 10 golden rules to apply risk management successfully in your project. They are based on personal experiences of the author who has been involved in projects for over 15 years. Also the big pile of literature available on the subject has been condensed in this article.
pay attention to a project, especially when a lot of money is at stake. The ownership issue is equally important with project opportunities. Fights over (unexpected) revenues can become a long-term pastime of management.
technology or, if you deal with a fatal risk, terminating a project. Spending more money on a doomed project is a bad investment. The biggest category of responses are the ones to minimise risks. You can try to prevent a risk occurring by influencing the causes or decreasing the negative effects that could result. If you have carried out rule 7 properly (risk analysis) you will have plenty of opportunities to influence it. A final response is to accept a risk. This is a good choice if the effects on the project are minimal or the possibilities to influence it prove to be very difficult, time consuming or relatively expensive. Just make sure that it is a conscious choice to accept a certain risk. Responses for risk opportunities are the reverse of the ones for threats. They will focus on seeking risks, maximising them or ignoring them (if opportunities prove to be too small).
Risk management is the identification, assessment, and prioritization of risks(defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events[1] or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures (at any phase in design, development, production, or sustainment lifecycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards.[2][3] Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety. The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk. Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.[1]
Almost everything we do in today's business world involves a risk of some kind: customer habits change, new competitors appear, factors outside your control could delay your project. But formal risk analysis and risk management can help you to assess these risks and decide what actions to take to minimize disruptions to your plans. They will also help you to decide whether the strategies you could use to control risk are cost-effective.
Here we define risk as 'the perceived extent of possible loss'. Different people will have different views of the impact of a particular risk what may be a small risk for one person may destroy the livelihood of someone else. One way of putting figures to risk is to calculate a value for it as: risk = probability of event x cost of event Doing this allows you to compare risks objectively. We use this approach formally in decision making with Decision Trees. To carry out a risk analysis, follow these steps:
1. Identify Threats:
The first stage of a risk analysis is to identify threats facing you. Threats may be: Human from individuals or organizations, illness, death, etc. Operational from disruption to supplies and operations, loss of access to essential assets, failures in distribution, etc. Reputational from loss of business partner or employee confidence, or damage to reputation in the market. Procedural from failures of accountability, internal systems and controls, organization, fraud, etc. Project risks of cost over-runs, jobs taking too long, of insufficient product or service quality, etc. Financial from business failure, stock market, interest rates, unemployment, etc. Technical from advances in technology, technical failure, etc. Natural threats from weather, natural disaster, accident, disease, etc.
Political from changes in tax regimes, public opinion, government policy, foreign influence, etc. Others This analysis of threat is important because it is so easy to overlook important threats. One way of trying to capture them all is to use a number of different approaches: Firstly, run through a list such as the one above, to see if any apply. Secondly, think through the systems, organizations or structures you operate, and analyze risks to any part of those. See if you can see any vulnerabilities within these systems or structures. Ask other people, who might have different perspectives.
2. Estimate Risk:
Once you have identified the threats you face, the next step is to work out the likelihood of the threat being realized and to assess its impact. One approach to this is to make your best estimate of the probability of the event occurring, and to multiply this by the amount it will cost you to set things right if it happens. This gives you a value for the risk.
3. Manage Risk:
Once you have worked out the value of risks you face, you can start to look at ways of managing them. When you are doing this, it is important to choose cost effective approaches in most cases, there is no point in spending more to eliminating a risk than the cost of the event if it occurs. Often, it may be better to accept the risk than to use excessive resources to eliminate it. Risk may be managed in a number of ways: By using existing assets: Here existing resources can be used to counter risk. This may involve improvements to existing methods and systems, changes in responsibilities, improvements to accountability and internal controls, etc. By contingency planning: You may decide to accept a risk, but choose to develop a plan to minimize its effects if it happens. A good contingency plan will allow you to take action immediately, with the minimum of project control if you find yourself in a crisis management situation. Contingency plans also form a key part of Business Continuity Planning (BCP) or Business Continuity management (BCM). By investing in new resources: Your risk analysis should give you the basis for deciding whether to bring in additional resources to counter the risk. This can also include insuring the risk: Here you pay someone else to carry part of the risk this is particularly important where the risk is so great as to threaten your or your organization's solvency.
4. Review:
Once you have carried out a risk analysis and management exercise, it may be worth carrying out regular reviews. These might involve formal reviews of the risk analysis, or may involve testing systems and plans appropriately.
Key Points:
Risk analysis allows you to examine the risks that you or your organization face. It is based on a structured approach to thinking through threats, followed by an evaluation of the probability and cost of events occurring. Risk analysis forms the basis for risk management and crisis prevention. Here the emphasis is on cost effectiveness. Risk management involves adapting the use of existing resources, contingency planning and good use of new resources.