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.
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.
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.
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.