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Benefits and Impacts of Project to Third Parties
MSPM 6102 - Practices in Project Management
Walden University
Benefits and Impacts of Project to Third Parties
Many large projects promote the economic development of the host country by providing
employment, profits and technology transfer for local suppliers, tax revenue for the state, and, in
some cases, additional goods or services for local customers.
However, the operation of projects that make use of project financing may also have adverse
effects in the host society. For instance, many of the projects listed above can result in
environmental pollution or displacement of residents. In addition, where the project creates a
monopoly over the production of locally-consumed goods or services, such as electricity, water
or transportation, local consumers may be prejudiced by exploitative pricing policies.
Projects that generate revenues from overseas can also be associated with adverse economic or
political effects within the host state.
Economic effects:
According to Sifonis, 1994, if the project causes a large boost in exports, the result may be that
the host nation’s currency will appreciate in value. Generally, an appreciation of this sort makes
a nation’s other exports less competitive, as foreign buyers essentially must pay a higher price
for them. By driving up prices of non-traded goods – e.g. housing - resource industries can make
other industries such as manufacturing uncompetitive. This can be problematic if manufacturing
is more likely to contribute to growth than other industries. Governments can take proactive
steps to reduce these effects (known as the 'Dutch Disease'), such as investing certain amounts of
money overseas so as to avoid driving up either the currency or the price level and thereby
crowding out non-resource exports.
Political effects:
According to Goldberg, 1994, the more access a state has to cash flows from export-oriented
projects the less dependent it is on tax revenues or foreign financiers. This makes governments
less accountable to external constituencies and can undermine their incentives to govern soundly.
Actors' efforts to win control of lucrative projects, either directly or by obtaining control of the
project sponsors, can be wasteful and even destructive.
States sometimes respond to these concerns by adopting special laws that govern how revenues
from projects are to be spent. This strategy is particularly common among oil-producing
countries. Usually the proceeds from projects are put into special funds that serve specific
purposes, such as investing in education or simply to serve as reserve for a future time when
revenues are inadequate.
According to Owen, JM with Rogers, PJ 1999, the international community has responded to
these concerns by promoting transparency in financial transactions between states that host
lucrative export-oriented projects and foreign companies. For instance, the Publish What You
Pay coalition of over 300 NGOs worldwide calls for the mandatory disclosure of the payments
made by oil, gas and mining companies’ to all governments for the extraction of natural
resources. The coalition also calls on resource-rich developing country governments to publish
full details on revenues. Advocates of the movement argue that transparency will place pressure
on governments to use the revenues from projects to more effectively promote economic growth.
The World Bank has endorsed this strategy by adopting its Extractive Industries Transparency
Many lenders require the projects they support to meet social and environmental standards that
are independent of any binding legal obligations. A significant number of private project finance
lenders have endorsed the Equator Principles, which commit them to ensure that the projects
they support meet social and environmental standards set by the International Finance
Corporation to guide its own operations. Methods of enforcing these obligations vary. For
instance, some of the multilateral financial institutions have established ombudsmen or quasi-
judicial bodies charged with overseeing compliance with their operational policies.
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