PART III: Project Planning

Topic 3: Project Appraisal and

Project Risk Management
ROSE MBOYA
 Project Appraisal

• This is the detailed examination of

several aspects of the project before
RECOMMENDATION FOR
IMPLEMENTATION AND FUNDING
 Project Appraisal

• Project appraisal consist of the

following:
• Technical Appraisal
• Commercial Appraisal (market appraisal)
• Economic Appraisal
• Financial Appraisal
• Management Appraisal
• Social Cost Benefit Analysis (SCBA)
 1.1 Technical Appraisal
Covers the following:
• Selection of a process
• Scale of operation
• Technical know-how (if consultancy)
• Collaborative agreements (terms of agreement
must be well understood)
• Selection and procurement
• Location of the project
• Project scheduling and implementation
(arrangement of activities of the project in the
order of time that they to be performed)
 1.2 Commercial Appraisal
• Also known as market appraisal
• Look at availability of market for the product or
service
• The very survival and success of any project
depends as to whether the product /service
offered by the project is successful commercially
• Look at

Demand for the product/service

Supply position of your competitors

Distribution channels

Pricing

Government policies
 1.3 Economic Appraisal
• Measures the effect of the project on the
whole economy of the country
• Usually there is scarce resources
• Policy makers concerned as to where the
scarce resources can be directed to
maximize economic growth of the country
 1.4 Financial Appraisal

• Look at the total cost of the project and the

means of financing the project
• Revenue earning of the project should be
able to pay the debt if the project is funded
by borrowed money
 1.5 Management Appraisal
• Mgt is important for success of the project or
failure
• A good project at the hands of poor mgt may fail
and vice versa
• Financial institution for lending money puts
more emphasis on management appraisal
before releasing their money
• They look at:
– i) Capacity of the project to repay the loan
– This is assessed by technical, commercial
and financial appraisals
 Mgt Appraisal continues
• ii) Willingness of the borrower to pay the
loan this is subjective depends on past
records and trust
• While appraisal technique are quantitative
and objective, mgt appraisal is purely
qualitative and subjective based on
integrity, foresightedness, leadership
qualities, interpersonal relationships,
commitments, financial and technical skills
 1.6 Social Cost Benefit Analysis
(SCBA)
• Main objective of a company is to earn the
maximum possible returns for the investment
• Here project promoters only evaluates
commercial viability i.e does it make a
business sense
• Some projects do not offer attractive returns
as far as commercial viability is concerned but
have social implications e.g public projects like
roads irrigation, power projects, training
• These projects are analysed for their Net Socio-
Economic Benefits to the society
 SCBA
• The profitability analysis of such projects
are known as national profitability analysis
which is nothing but the socio –economic
cost benefit analysis done at the national
level
 1.6.1 Commercial profitability vs
national profitability cont..
• Every project has direct and indirect costs
• Similarly projects have direct and indirect
benefits
• For commercial profitability, only the direct
costs and direct benefits are analyzed
• Direct costs and benefits are assessed at
market prices (how much does it cost to
produce a product and how much is the price of
the finished product ) cost of production –cost
of selling= profit
 Commercial profitability vs national
profitability cont..
• Offering a course- Cost associated
• Hiring a premise
• Paying lecturers
• Preparing training materials
• Utilities
• Assessed based on the amount each
student will be paying for the course=
• profitability
 Commercial profitability vs national
profitability cont..
• National profitability analysis (socio economic
benefit analysis) differs from commercial
profitability as follows:
• SCBA looks at the “real cost” of direct cost
• And the “real benefit” of direct benefits
• For example if some of the inputs are subsidized
the subsidized prices is relevant for assessing
commercial profitability e.g govt subsidizes
electricity
 Commercial profitability vs national
profitability cont..
• SCBA takes into account the “real cost” of the
input had they not been subsidized
• Commercial profitability analysis will take into
account the controlled price (market price fixed
by Govt) while its actual benefit to the nation
may be more or less than the controlled price,
which is what is relevant for SCBA
• b) commercial profit analysis looks at direct
costs and direct benefits
 Commercial profitability vs national
profitability cont..
• Socio economic benefit analysis looks also at
indirect costs and indirect benefits
• It is difficult to assess exactly the quantum of
Indirect costs and indirect benefits
• Eg pharmaceutical company producing drugs
• The social benefit (prolong and saving lives)
might be much more than the benefit that accrue
to the pharmaceutical company
• Eg (technology transfer through spin off)
• Benefit has two different meanings to the
project promoters and the society
 Commercial profitability vs national
profitability cont..
• E.g pharmaceutical company
• Looks at the cost as the (financial cost of input
and direct benefits as profits)
• However there are indirect costs to the
society eg environmental pollution, harmful
side effects of the drugs
• Construction of a bridge
• Direct benefits to the society are improved
communication, facilities, reduction in transport
costs, traveling time
 Commercial profitability vs national
profitability cont..
• Indirect costs to the society
• Acquisition of private land by the state,
relocation of communities and
disturbances ecological balance
• SCBA is mainly used for evaluating public
investments project
• SCBA can be regarded as a refinement
over commercial appraisal taking the
hidden factors into a count (NEMA)
 1.6.2 Objectives of SCBA

• It appraises the total impact of the project

on the economy
• Its contribution to the GDP
• Justification of the use of scarce resources
of the economy by the project
• Contribution of the project in improving,
protecting the environmental conditions
(more focus on green technologies
currently)