11th May 2017
This article was originally published in the LinkedIn. Read the full version here.
Built assets projects typically involve enormous amounts of investment in terms of monetary value and time. It is crucial to have a clear picture on the expected outputs of the project prior to investing on it. These outputs must be measurable with targets to calculate true impact on the ground for the People and this is not just financials or economics driven. With the world changing, from a digital and governance perspective, new models are now needed for better project evaluations, programme implementation and calculating real impact on quality of life.
Socio-Economic Models (SEM) have come in as a handy tool to forecast the potential socio-economic impact that could be derived from built asset projects. Traditionally, financial forecasts have been used for development projects to inform the developer on the financial obligations and potential revenues so they are aware of the risks associated with the project. This is even more crucial for the development of mega projects as it usually involves billions of investment and tens of thousands of workforce. Socio-Economic Model (SEM) go one step further than traditional development project financial models, aimed to depict and quantify the potential benefits that could be generated to Governments (local, districts, State and Federal) and the people, on top of the revenue for the investor cum developer cum promoter. Such projections can provide a better picture in terms of the overall benefits that could be delivered by the project.
There is no generic SEM that could be applied for all development projects. In fact, the structure of the SEM architect should be tailored-made for each mega project to truly reflect the circumstances faced to arrive at meaningful, realistic projections for the project. The approaches to collate the assumptions for SEM can be categorized into two major type, namely the Top-Down Approach and Bottom-Up approach. A typical SEM would use both technique to arrive at the projection in benefits. To increase the accuracy of the projection, a bottom-up approach is preferred in most situation where it takes into account real or actual numbers of all the developer’s costs and the associated costs. Such approach could provide more certainty and enhance efficient use of time. Under certain circumstance, a top-down approach could also be adopted when there is sufficient justifications to the inputs and acceptable accuracy of the projection.
The Top-Down approach will requires the benchmarking of similar developments, focusing on the resources required and outcomes delivered. Same type of project within the same vicinity in recent years is preferred. A set of assumptions based on the data gathered will then be developed and extrapolate using the development information of current project. In case the information is not available, reasonable assumptions will be made. Such approach could save the time required to construct the model but the accuracy and reliability might be slightly lower than the Bottom-Up approach. The Bottom-Up approach takes into account all the associated costs related to future activities within the projection period based on the current designs and planning of the development as well as the targeted economic activities to be included surrounding the development areas. The cost profile will then be constructed base on these and serve as a basis for the projections for socio-economic benefits. Such approach is more reliable and it could provide more certainty in terms of the projection outcomes but it also requires more time to gather the accurate set of assumptions. The true value of a SEM is the sensitivity and valuation analysis for the projected model built to measure the impact on model output from changing one or more model input. The uniqueness of the sensitivity test is its flexibility to allow changes in the design and planning of the development when the forecasted socio-economic benefits could not meet the targeted socio-economic benefits for project.
A strategy with specific objectives could be set to improve the forecasted project outcome by changing particular areas of the whole development. This could help the developer to fine-tune the development direction and other engineering works to align the project outcome with project vision. With proper utilization of the model, it helps to inform the socio-economic benefits that could be generated to the region and the surrounding population such as gross domestic production contribution, investment, and job creations under different scenarios. These projected benefits could also be used as a contrast to compare the socioeconomic condition of the development areas under status quo scenario.
The most significant application for such feature of SEM is the physical assessment on the development areas which would help to optimize the land use planning. By applying a particular combination of land use into the SEM, it can immediately inform the users on the forecasted socioeconomic benefits derived from this particular combination of land use. Different set of land use combinations could be designed with different core focus of development, such as commercial intensive, industrial-intensive or public-welfare focus which concentrate on a balance development among all components. By stress testing the different development scenarios identified, the SEM users will be able to synthesize a well-coordinated combination of land use available that would utilize the resources in the areas to be developed, namely the land bank, materials and human resource. The Worst and Best Cases Sensitivity tests on the other hand, allow the SEM users to view the project from an objective perspective and prepare for the rehabilitation strategy under the worst scenario.
With the finalized combination of land use, a series of implementation actions plan shall then be developed to facilitate and monitor the development project. These include the implementation structures, key performance indicators and significant milestones associated to the development. With the aid of SEM, the users can effectively breakdown the development components and closely monitor the progress according to the implementation road map which allow them to be more aware of the anomalies in the sub-projects.
Mega development projects have the potential to bring substantial appreciation in land values along the development site due to the project and its ancillary components. As an additional function of the SEM, Land Value Capture Strategy is a value adding feature that can help the land owners and typically Governments to effectively capture the appreciation in land value. The SEM can effectively evaluate the strategy such as land leasing, land sales or joint development and adopt a combination of strategy that would generate highest possible benefits from the land appreciation. In short, SEM is all about making the mega development projects viable through a series of risk mitigation measures, provide more clarity on the socio-economic benefits to be generated from the development, ensuring the cost effectiveness by more effective capital planning and ultimately increase the likelihood for a successful mega development that will deliver the desired socioeconomic outcome.
