Page 129 - DMGT521_PROJECT_MANAGEMENT

Project Management

Notes
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8.4 Little Mirrlees Approach

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 project investment
at opportunity cost (shadow prices) of resources to correct distortions due to market imperfections.
Both methods make use of border prices to correct distortions but with 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 non-tradables. 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 Mirrlees procedure is
relatively more practical, although, unlike guidelines, it does not provide sufficient insights by
examining project investment from different angles.
There is a considerable similarity between the UNIDO approach and the L-M approach as both
the approach call for:
1. Calculating shadow pricing.
2. Considering the factor of equity.
3. Use of DCF analysis.

4. But despite of these similarities there are some differences also.
5. The UNIDO approach measures cost and benefits in term of domestic rupees price whereas
the L-M approach measures cost and benefit in terms of international prices.

6. The UNIDO approach measures cost and benefit in terms of consumption whereas the
L-M approach in terms of uncommitted social income.
7. The stage by stage approach of UNIDO focus on efficiency, saving, and redistribution
consideration in different stages. The L-M approach, however, take these consideration
together.

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