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Two measures of the social cost of subsidized development finance institutions (Working paper)
Schreiner, Mark & Yaron, J.
Publication Date: 1998
Published by: St. Louis, USA: Microfinance.com
Presenting the Subsidy Dependence Index and the Net Present Cost of society
The purpose of the measurement of the social cost of subsidized development finance institutions (DFIs) is to check whether DFIs are a good use of public funds. Public funds are well spent if the social benefit of a subsidized DFI exceeds the social cost. In most cases, it is so expensive to measure social benefits that a full-blown social cost-benefit analysis cannot be done. The measurement of social costs, however, is not as expensive, and it can inform choices of how to spend public funds
This paper presents two measures of social cost:- the Subsidy Dependence Index (SDI): since the SDI does not discount flows, it can measure social cost just in short time frames. The SDI is the ratio of subsidy to revenue from lending. Subsidy is the social opportunity cost of the public funds used by a DFI less what the DFI could pay for the funds and still break even. This measure of subsidy can also be used to adjust common measures of performance such as Return on Equity (ROE)
- the Net Present Cost of society (NPC): since the NPC discounts flows, it can measure social cost in any time frame. The NPC discounts the flows of funds between society and a DFI with the opportunity cost of society
Common financial ratios such as ROE use accounting data. These measures often hide the true performance of subsidized DFIs since some prices were set by government and donors and thus may not reflect social opportunity costs
The SDI and the NPC shift the paradigm from prices paid to opportunity costs. The two measures resemble standard tools of project analysis that answer questions from the point of view of society. These questions and answers also matter to government and donors who care about sustainability. Such measurements are the first step in the wise use of public funds. (author)
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