Benefits of puting up an Industrial Project

Benefit is a generic name. It may mean good, advantageous, boon or help. It is used differently in different situations. A shareholder gets benefits for investing in good shares like dividends, derivatives and capital gains.

An industrial project brings many benefits to owners, employees, financiers, economy and society.These benefits can be categorized in three ways: Financial, Economic and Social. These can be positive or negative.

For the sake of analysis, there could be two categories – (i) Internal Benefits and (ii) External Benefits. Internal benefits go to (i) Owners, (ii) Employees, (iii) Bankers, (iv) Suppliers, (v) Contractors and (vi) Insurers. At the same, industry, economy, consumers and community draw the benefits out of externalities caused by project.

A power-generating plant has been setup at Karachi by edge of the sea. It is based on furnace oil. Its smoke causes air pollution which affects health of the people in a nearby city, Karachi. Also, the water (taken out of the sea) is recycled which is detrimental to marine life as the water gets warm in the process. While setting up such plants, the economists take into consideration loss to the economy or society due to such events and help take a better decision whether to go for project or not.

SOCIAL EVALUATION

Unlike financial and economic evaluation, social evaluation is difficult as the project impact on society takes time. As stated earlier, power-generating plant based on furnace oil are highly polluting besides creating acid rain and greenhouse gas emission. But these drawbacks take time to surface.

One way to evaluate the project is to see who gains and who losses. Or in other words, was a common man better-off before the project or after. If people get poorer and poorer it would jeopardize sustainability of the project in the long run.

Who gets what? This can be seen through some logic. If size of the investment is large, it would certainly be using automation or even robotics. It would create few job opportunities and that too for high qualified and experienced persons who are already classified in upper-middle or rich classes. The poor lot would not draw any benefit out of it. Similarly, if the nature of good comes under luxuries, all benefit would go to the rich class. A poor cannot afford any luxury items. Economists can anticipate whether as a result of industrialization, rich: poor gap would narrow down or widen. Traditional industries, set up in developed area by well-established sponsors will certain make poor poorer and rich richer. Non-traditional industrial units setup in far-off areas by new-comers will reduce the income concentration or rich:poor gap

Watching quality of life can also indicate if the social sector is being protected or ignored. In other words, who are the beneficiaries of industrial development? One can watch life expectancy, literacy rate, access to necessities of life and income per capital in PPP$.

Benefits from the project can be measured through its changes in consumer surplus and producer surplus. The terms are explained in the side table. This would be discussed later in this hub.

The Centaurus, a 7-star hotel at Islamabad, Pakistan
The Centaurus, a 7-star hotel at Islamabad, Pakistan | Source

A 7-star hotel, The Centaurus

Islamabad is capital city of Pakistan. It was meticulously planned in 1960 and has since turned mega polis. It is one of the most beautiful cities with wide, tree-lined roads and boulevards. It has temperate climate, lush green scenery and excellent basic infrastructure.

Despite all progress, the city is suffering from lack of hotels. At present, there are some 5-star hotels and top-class guest houses but these are not sufficient to cater to the growing demand and many guest stay in the nearby city, Rawalpindi. There is, however, a silver lining. The Centaurus, a 7-star hotel, is being constructed and expected to be completed in 2012. It is 37 storey deluxe hotel, two 21-storey residential towers. When opened, it would certainly affect business of the existing hotel for some time.


Economic Benefits

In order to see impact of a new hotel, let us make a simplified model. The exiting demand and supply curve looks like as given in the side-chart.

Present Economic Benefits

The benefits from this scenario can be worked out through two measures: Consumer Surplus (CS) and Producer Surplus (PS). CS is the difference between what a consumer is willing to pay and what he actually pays. It is an economic measure of consumer satisfaction. On the other hand PS is the benefit of producers by selling at market price that is higher than the least they would be willing to sell for. In this case the CS was Rs.225,000 while PS worked out to be Rs.300,000 bringing total economic benefits to Rs. 525,000.


Expansion in industry-shift in supply

A new 50-room hotel is planned at a popular health resort which has 200-day season in a year. In other words, the new hotel can add 10,000 room-night (50 x 200) to the existing supply. This would change the scene. The average room rent of the industry would decline by 15% from $35 to $30, as the supply has increased while demand has remained the same. The $5 decline in price would expand the market as new consumers would enter in. But the same time, some suppliers would go out of the business since they cannot afford to run the hotel at reduced prices. (Efficient hotels having cost below $ 30 would continue).

In economic sense, there would be (a) more benefits to consumers and (b) release of resources tied up in in-efficient hotels. (Many loss-making cinemas have been converted into shopping centres).

This can be measured. Consumers Benefit work out to be $325,000 as exhibited by the right-side trapezoid. Resources worth $ 162,500 would be released shown as left-side trapezoid. Total benefit would amount to $487,500 marked by a pentagon.

These development can be further analysed to see their impact on income distribution. If consumers belong to rich category, it would had an adverse impact. Suppose, the hotel was a 5-Star. Benefit of any price or rent-reduction would go to those guests which were affording Room Rent of $150 or more. Similarly, release of resources and their investment in profitable areas depends on the nature of resources and economic conditions in the country. When a factory is closed, lot of people lose their job. If there is a full employment in the country, they would find the jobs otherwise not.



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Comments 17 comments

asadayub profile image

asadayub 5 years ago

Respected Sir, a very well written hub, specially the Consumer Surplus and Producer Surplus are explained enthusiastically.

Sir, can you please kindly elaborate some of the Financial Evaluation as well. I remember the course material of Project Management in which we have also been taught about the Evaluation, but i shall be much thankful if you would repeat it once again or give me reference of any other hub, which would be helpful for me in the near future.

Thanking You for such a nice hub.


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks Asad for your interest. My departure to Tanzania and neighboring countries has been delayed so I took this opportunity for write some hubs. God willing, I would go by 17th of July, 2011.

I have written in detail about financial evaluation. I would send the links by email.


Michael Schmidt 5 years ago

Good article! This reminds me of some of the economics classes I studied in college a couple of years (make that decades!) ago. Economic concepts are interesting - a way (at least in theory) to quantify a lot of intangible stuff. Are we better off if we build another hotel? And it even takes into account the "external" players - not just the hotel owners, but the residents of the city, the neighbors of the development, those living downwind of the pollution that the new hotel will create. Of course actually coming up with fair and accurate measurements of all these variables isn't always so easy. Look at the arguments going on in the EU today about whether Greece and Italy should engage in austerity measures and if so how much. In the U.S. we’re asking whether the solution to budget deficits is to raise taxes to increase revenues, or to reduce taxes to stimulate job growth. Such is the nature of economics! And Hafeez always keeps us thinking!


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks Michael for your comments.


kamran 5 years ago

dear sir. very informative article.. thnx for sharing knowledge


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks Kamran for your comments.


asadayub profile image

asadayub 5 years ago

I'm really happy to hear that you are travelling to Tanzania next week. If possible, kindly share that experience of Tanzania after coming back to Pakistan. Have a safe and sound tour sir.


Muhammad Muzammil 5 years ago

A,o,A, Sir, a very well written article with full of knowledge. God bless you.


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks Muzammil for your continued interest.


thesailor profile image

thesailor 5 years ago from Seven Seas

You really are an expert on this subject, Sir! My salute for you! Can't wait to see Hotel Centaurus in Pakistan next year.

PS. Good luck on you travel to Tanzania. :D


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks @thesailor for your comments.


Salman Khan 5 years ago

Dear Hafeez Sahab:

Even with the polluting power plant, Karachi is still suffering from load shedding and power break downs. KESC is in shambles. Just the other day electricity got shut in my house. KESC people didnt respond for a very long time. While still waiting for the KESC people to respond I was going out of home to do some chore, on the way I saw a KESC vehicle near the PNT which supplies electricity to my home. As I came nearer there vehicle started moving away. I yelled and pleaded and waved at them. Finally they stopped and asked me for my problem. They showed me a big thick wire hanging from the P&T, and told me that this wire is causing the problem and couldnt be fixed till next morning, however, they told me that they can fix problem of only my home if they are given some money for tea and water. Being without electricity for the whole day, I succumbed to their demand. They quickly connected wires here and there and got the electricity for my home. In return I gave them Rs. 300 on which they objected and asked me to give them more, so I ended up giving them Rs. 500. The rest of the houses in my street were not bothered because everyone has a generator. I don't have a generator because I got shot by it once due to my abscent mindedness because I am a professor like you. Now the point I am trying to make is that yes there is pollution and not only the KESC is involved the whole society is doing it because everyother home in Karachi has now its own power generation plant in the form of a generator. The second point is that through the example of the bribe you can see that KESC is not better off after privatization and laying off 4,500 workers. My theory is that in Pakistan we need a culture change both in organizations and in society. Culture is made up of values, and we need social scientists like sociologists and social psychologists help to make us a more conscientious society where we are more caring of the environment and helping each other.

About the other part of your article which is about the hotel in Islamabad is really a nice thing to read. We need more hotels and more foreigners coming to over country. I believe this is the gateway to globalization. I would never want to see Pakistan as a closed country like Iran or North Korea or like Afghanistan had become in the days of the Taliban rule there. Frankly we need a lot more inflow of foreigners in our country. You learn from foreigners.


Salman Khan 5 years ago

Dear Hafeez Sahab:

Even with the polluting power plant, Karachi is still suffering from load shedding and power break downs. KESC is in shambles. Just the other day electricity got shut in my house. KESC people didnt respond for a very long time. While still waiting for the KESC people to respond I was going out of home to do some chore, on the way I saw a KESC vehicle near the PNT which supplies electricity to my home. As I came nearer there vehicle started moving away. I yelled and pleaded and waved at them. Finally they stopped and asked me for my problem. They showed me a big thick wire hanging from the P&T, and told me that this wire is causing the problem and couldnt be fixed till next morning, however, they told me that they can fix problem of only my home if they are given some money for tea and water. Being without electricity for the whole day, I succumbed to their demand. They quickly connected wires here and there and got the electricity for my home. In return I gave them Rs. 300 on which they objected and asked me to give them more, so I ended up giving them Rs. 500. The rest of the houses in my street were not bothered because everyone has a generator. I don't have a generator because I got shot by it once due to my abscent mindedness because I am a professor like you. Now the point I am trying to make is that yes there is pollution and not only the KESC is involved the whole society is doing it because everyother home in Karachi has now its own power generation plant in the form of a generator. The second point is that through the example of the bribe you can see that KESC is not better off after privatization and laying off 4,500 workers. My theory is that in Pakistan we need a culture change both in organizations and in society. Culture is made up of values, and we need social scientists like sociologists and social psychologists help to make us a more conscientious society where we are more caring of the environment and helping each other.

About the other part of your article which is about the hotel in Islamabad is really a nice thing to read. We need more hotels and more foreigners coming to over country. I believe this is the gateway to globalization. I would never want to see Pakistan as a closed country like Iran or North Korea or like Afghanistan had become in the days of the Taliban rule there. Frankly we need a lot more inflow of foreigners in our country. You learn from foreigners.


sufyan_majeed profile image

sufyan_majeed 5 years ago from karachi

Beautifully Explained.......


irfanuddin 5 years ago

good good


FloraBreenRobison profile image

FloraBreenRobison 5 years ago

A lot of famous structures that have since become landmarks were originally built for the sole purpose that building them required labour and this created jobs.


hafeezrm profile image

hafeezrm 5 years ago from Pakistan Author

Thanks Salman Khan, Sufan_majeed and @FloraBeenRobinson for your comments.

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