Professional Documents
Culture Documents
Project Formulation
Project Formulation
Project Formulation
It is essential to examine the most critical aspects of the project before making commitments on
investment. Thus, it is worth spending a small amount of money on an exercise called pre-
investment study/formulation. This cost may vary depending on the size of the project. However,
during this process, based on the analytical study of the data and other information collected,
enables the project sponsoring organization/Department to stop further expenditure at any stage
of investigation when the data indicate unfavorable trends. Today’s projects especially in the
urban development sector are focused on achieving specific social & economic development
objectives. Although, problems galore in all types of projects, it is now increasingly noticed that
development projects generated by the local governments, public agencies and Government
departments have been faced with unclear output in terms of quality and quantity.
Case 2: A SWM project under PPP model on build operate and transfer basis was implemented
in one of the cities was abruptly ended as the private partner who was supposed to operate and
maintain the solid waste of about 250 tpd and convert and recover the waste into manure did not
obey the agreement and violated the terms. After three years the private partner simply stopped
functioning putting forward a demand for payment of salaries to all the personnel working in the
plant. The corporation did not agree to the request and as a result plant stopped working.
Case 3: Solid waste management project in one of the major city corporations had delayed by
one and half years due to improper location of land for land filling site. The public/villagers
residing around the location protested to the site as they thought it would cause environmental
pollution. Consequently, the site was deleted and alternative location was identified.
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Case 4: A public shopping complex built by a municipality was not auctioned due to improper
location of the complex for three years. The investment of the order of Rs 5.0 crores had become
dead investment
Case 5: A public bus terminal after completion was not put to use for five years due to distant
location from the city.
Case 6: A sites and services project implemented by public authority remained unused for fifteen
years due to litigation.
Case 7: At a micro level, a micro-enterprise project launched by a group of BPL women under
self-employment component of SJSRY project closed after 6 months as there was no adequate
demand for the products or project formulation did not take into account the demand.
Case 8: A slum rehabilitation project in one of the cities had taken 7 years due to conflicts
between Government authorities, Community & NGO’s. Later on the project was successfully
implemented by taking the support of NGOs, Community, and Slum Board & Local elected
representatives by developing partnership between the community & the other agencies.
3. A well formulated project is the one which presents a very unbiased picture of the
project idea in more clear-cut terms with regard to all the above factors.
4. The project authorities should use the information generated through the formulation
exercise to identify the deficiencies and gaps and take remedial measures ahead of
time.
5. Projects leading to loss in terms of money, time and desired output need immediate
attention.
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7. Preparation of detailed feasibility report should be undertaken only when there are
evidence of number of positive indicators to go for the project.
9. The project has also to be assessed from the point of view of social benefits. Most of
the urban development projects are aimed to achieve direct and indirect social
benefits. For example, a water supply project for a town has direct benefits such as
supplying the required quantity of safe water to the house-holds. At the same time, it
has indirect benefits such as reducing the water borne diseases, health improvement
of the people, increased work out-put because of improved health etc.
Therefore, a project may have to be assessed for the positive & negative benefits as well as short-
term & Long-term benefits and effects. Therefore, during pre-investment assessment of a project,
the project is evaluated for all the consequences. Normally, an approach to project formulation
involves various stages in the order of importance namely project idea, reasons for going in for a
new project, need/demand for the project, project technology, project inputs, project location,
project cost, project economics, time frame, social benefits, environmental issues etc.
Project formulation is a process by which one obtains a complete picture about the project being
undertaken without really arriving at a detailed feasibility study. The information collected
through this exercise can be used for preliminary evaluation and screening of projects. The
structure adopted for project formulation will slightly vary depending upon the types of projects.
The factors that have to be considered and weightage to be given to each one of the factors will
be different for different projects. At the time of exercise, we get an indication as to whether the
project has high possibility of success or not. This information will help the decision makers in
deciding whether to analyse the project further or drop at this stage.
All projects have to undergo through different processes of preparation from the conceptual stage
to completion stage. These processes are;
I. Pre-investment planning
• Identification of Project
• Preparation of Project
II. Appraisal
III. Controlling and Monitoring
IV. Operation and Maintenance
V. Evaluation and feedback for correction
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Absence of qualified persons to deal with key issues of formulation, implementation and O & M is
the result of inadequate project efficiency. A review of some of the projects in ULBs reveals that
the formulation of projects by various agencies and urban local bodies is not seen as a discipline
and integral part of their functions. There is a need to develop a full-fledged system in the form of a
formulation cell which could take care of formulation and implementation on continuous basis.
Every time a project is required to be implemented, a new set of officials are assigned the job of
implementation. Project Formulation has following indicative processes;
Project Formulation
1. Feasibility Analysis
2. Technical Analysis
3. Economic Analysis
4. Project Planning & Design
5. Network Analysis
6. Input Analysis
7. Financial Analysis
8. Cost-Benefit Analysis
9. Pre-Investment Analysis
Feasibility Analysis:
• First stage in project formulation
• Examination to see whether to go in for a detailed investment
proposal or not
• Screening for internal and external constraints
Conclusion could be:
• The project idea seems to be feasible
• The project idea is not a feasible one
• Unable to arrive at a conclusion for want of adequate data
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Techno-economic Analysis
Financial Analysis
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Cost- Benefit Analysis
• The overall worth of a project
• The project design forms the basis of evaluation
• Total costs and benefits there to (Benefits > Costs or B/C>1)
Pre-investment Analysis
• The results obtained in previous stages are consolidated to arrive at clear
conclusions
Project Report
Comprises of;
• Detailed analysis of the project
• An expert prepares the report before the investment in project is done
• The report assesses the demand for proposed product/service
• Works out cost of investment and profitability on this investment
• It acts as an instrument to convince investors to invest in project
A project report gives information on the following:
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Existing Approach to Project Preparation
Almost all Government departments, ULBs, PRIs and other public authorities follow certain
steps to prepare and implement a project.
Generally, any medium to major civil work or a project involves the following stages for
preparation and execution;
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Problems in Project Formulation
Project Inadequate
Components not pre-assessment Absence of Pre-
tailored to the of the services project Planning
requirements of and demands Modalities
the towns
Absence of
Absence of Feasibility Improper
Demand survey Study acquisition of land
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The chart above gives the reasons for failure, non-completion and deviations in the project
objectives and scope. Therefore project formulation report should be prepared with a view to
foresee the likely hurdles and explore options that may give sufficient evidence of benefits to the
investor and end users/public.
• Project formulation exercise should precede all other steps since it is the first and critical
step in the selection of any project. It is evident from the experiences that in several of the
urban infrastructure and housing projects implemented by the public agencies, problems
of not meeting the required levels of results during and after the implementation of the
projects only highlight the in-effective project formulation.
• Evaluation of a few projects located in Mysore City, Tumkur and Davanagere have
indicated non- accomplishment and the failures were mainly due to improper planning,
wrong selection of contractor, poor contract management, unrealistic estimation for
different project activities, poor scheduling of works/activities, improper allocation of
resources (Manpower, equipment and materials), absence of work breakdown structure.
• A good project scheduling provides information on when the project should begin and
what should be the total duration of the project, preceding and succeeding relationship
among the activities and allocation of time and budget for each activity. One of sewage
treatment plant projects planned by Mysore City Corporation was delayed by
approximately one year due to land litigation in the Court. This project was implemented
by the private sector as per the design and budget.
• A State level project funded by a financial institution to all the Municipalities in the State
could not be implemented on time due to change in the scope and sub-contracting at the
Municipal level without giving adequate role to the Municipalities since the contractor
was selected by a State level agency and the project was formulated at the State level
with little or no representation from the Municipalities. As a result, many of the project
components such as drain construction, solid waste management, storm water drains,
roads etc., were partially completed with delay ranging from 3 months to 2 years.
• It is seen that the efforts to introduce a “social component” into “productive” projects,
intended to make a balance, turns out to be counter-productive. Formal education is only
a first prerequisite for competence in project analysis. On-the-job training is vital. There
is a need to improve the quality and quantity of their manpower. Training of local staff
has not been adequate. Officers and key staff need to be trained in project management
tools.
• Evaluation of various projects such as Housing, Buildings, Roads, Water supply and
SWM etc., implemented by the Departments and Local Governments has indicated
poor application of tools relevant to systematic approach to project management.
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• The projects faced delays, poor fund flow, and confusing scope resulting in not reaching
the desired output.
• Barring a few small projects, formulation exercise has not been adequately carried out
either due to lack of know-how and skills or may be due to the little importance attached
to this basic stage of project management.
The project evaluation studies on the scheme of Integrated Development of Small and
Medium Towns conducted by the author(2006), TCPO(1985), All India Institute of Local
Self Government(1986), Regional Centre for Environmental Studies(1988), National
Institute of Urban Affairs(1990) and Edelman and Banerjee(1994) have brought out the
following shortcomings in the formulation and implementation of projects;
Selection of the town not done based on its growth potential (at times selection was
purely on political consideration)
Various project components selected were not sufficiently tailored to or identified with
reference to the dominant functions of the town
In many cases, survey and feasibility studies were not done for sites and services,
shopping complex and low cost sanitation project components
Mismatch between the scale of land acquisition and actual requirement for housing and
infrastructure development.
Non availability of land for projects and considerable delays in land acquisition due to
legal disputes in court(Dharmarajan, 1995)
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Absence of proposals for development of industrial sheds and small scale
enterprises as may be best suited to the local economy and the objectives of the
schemes for generation of employment
A lack of suitable institutional mechanism to ensure proper interagency co-
ordination at the field level, particularly the involvement of local Governments in
contracting and monitoring of the work
Inadequacy of technically qualified and trained personnel at the town level and
inability of the personnel at the state and central agencies to provide necessary
support
Reluctance of the state Governments to give matching share of funds.
Lack of balance between remunerative and non remunerative project components
with a bias towards basic infrastructure facilities.
Inadequate feedback, evaluation and monitoring mechanisms.
Based on the above evaluation points, it could be concluded that the schemes were unable
to create the required services nor had a discernible impact in the surrounding hinterland or
linked to proper state urbanization strategies. Project staff were not aware of project output in
terms of quality and demand. Project staff including Engineers, Head of the Dept., Accounts
were unaware of feasibility study, project appraisal, financial appraisal, cost benefit analysis. It is
also seen that tools like Gantt charts for scheduling were not used. Skills to use network
techniques such as CPM and PERT was remotely existent.
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Deriving Innovative Project Formulation Components – Common Flow chart/list
Project Formulation
Review of the
Existing Assessing the
Collection of
economic Base of
Data/Information Projects
the Orgn.
Analysis of Additional
Services Resource Defining
Mobilisation Objectives
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FLOW CHARTS:
No Segregation of waste
Secondary storage
bins are not as per Open Secondary Storage
MSW Rules Bins: ULB Maintenance
No
Compost
Transportation of wastes:
Improper Recovery
ULB has poorly
Design of maintained vehicles with
Secondary Bins open containers
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Steps for Innovative Formulation of SWM Project
Funds/Capital
Assessing the Designing of Solid Waste from various
Existing Capacities Management Project sources
Outsourcing Plans –
RWAs/CBOs/NGOs/Private Firms
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Formulation of an Urban Infrastructure Project: Corrective Actions
Project Formulation
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Case Study Template
EXERCISE ON
“PROJECT FORMULATION”
This exercise is linked with an actual rural housing project which is already implemented. The
participants with different professional backgrounds such as:
i) Engineering
ii) Planning
iii) Community Development
iv) Administration
v) Finance
vi) Legal
vii) Political
Are put to the tasks of analysis and selection of various programme components through the
process of intensive discussions and decision making to re-formulate the housing project from
the initial stage with an emphasis on the arrival of a most appropriate proposal over the already
implemented project.
The exercise is supplemented by the physical and socio- economic date of the project.
The role of each participant in each sub-group of three to four participants is considered as
crucial in the integration of ideas and solutions of each individuals background to various critical
problems associated with the project formulation. The working experiences and the disciplines
of the participants combined with expert views of the coordinating faculty are expected to be
explored to the maximum extent in the whole process of formulation.
Objectives:
The first step in the housing project formulation for the rural poor is to understand the existing
living conditions, needs and priorities of the target group. The precise understanding of the
priorities of the target group and their positive response to the norm set and interventions from
different sources to link house with employment and productive activities within the constraints
of resources available is considered an important step. The growing realization of recovery of the
capital investment in housing and the provision and maintenance of basic infrastructure services
keeping in view the future development of the village is a major task in the formulation.
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Exercise Task:
Participants have to generate innovative and appropriate action based on the situations
encountered at the village settlement level within the overall framework of policy guidelines.
Resources are available with reference to guidelines for scheme application but need to be
utilized taking into account the community needs and priorities with the possible interventions
and participatory approach for the integrated formulation of housing project.
A checklist of various aspects to be discussed and analyzed is supplied to guide the participants
in the whole process.
Checklist:
1. Identification of Target Groups and its housing needs. This should include household
incomes, expenditure, savings and their priorities of demand.
2. Assessment and selection of project site:
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4. Assessment of Employment Opportunities:
i) Existence of nearby industrial areas
ii) Potential opportunities for gaining employment
iii) Home based economic activities
8. Assessment of Economic Support Schemes and their integration in the Rural Housing
Schemes.
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10. Project Monitoring:
Appropriate monitoring system is to be evolved and adopted for the project monitoring.
- Gantt Chart or PERT/CPM etc.
The following details are the physical and socio-economic features of a village situated
about 12 kms from a Taluka headquarters. An EWS housing project is to be formulated
under Indira Awazs Yojana (IAY) for about 72 households.
Data Bank:
Socio-economic Data:
Household size:
Building Plan/ designs are to be suitably fixed taking into account the ceiling cost, extra
money or labor available from beneficiaries and NGO,s/CBO,s and the finance/grant being
made available under various central government sponsored schemes for employment basic
services, the finance/ grant from financial institutions like HUDCO for services.
Suitable layouts without distorting the community and economic life of the village with
minimum basic services must be evolved in the plans/ layout of dwellings cluster concept
could be adopted which is an efficient way of planning without distortion of building bye
laws.
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Soil Type:
Building Materials:
Locally available materials with innovative and cost effective technology applications.
Basic Services:
Water supply, sanitation electric supply, social forestry could be provided under central
government schemes
Financial Aspects:
Finance from HUDCO, State Government/ Central Government/ other FIs/NGOs, as per the
guidelines. The guidelines for IAY are given.
Grants available for employment under Govt.schemes for social forestry, roads, digging
tanks could be co-related with housing scheme. Self- help component of beneficiaries may
also be incorporated to maximize the other amenities in the housing scheme.
The likely involvement of NGOs or CBOs for services with regard to guidance, finance
recovery loan should be made in the scheme execution and implementation.
Types of Employment
4% Government Service
56% Informal sector
30% Construction laborers
10% Widows, physically handicapped, artisans, etc.
Permanent employment - 5%
Temporary employment - 20%
Casual employment - 60%
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Self employment - 15%
Total - 100%
Legal Situation
No legal title is held by the residents. You may make reasonable assumptions about legal
title of the land based on your experience.
Soil Survey
The soil is sandy with normal bearing capacity. The land plan with centaurs enclosed.
Educational Survey
School enrolment
Health Survey
Health Statistics
58% children suffering from intestinal worm infection
Children diet
Educational statistics
Adult literacy rate
Male: 35%
Female: 15%
Estimated cost of Construction:
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Roads
Drainage:
Sanitation:
Electricity:
Water supply:
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Open well Rs. /Unit
Dustbins:
Community buildings:
Project Budget:
The project formulation is done within budgetary resource entrants there are:
Grant: the grant portion of the budget represents the amount that the government considers
as non-recoverable funds for the various programme components. This may be reduced,
when appropriate, by cash and labour contributions from the residents.
Loan: Loan and subsidized finance under various formal programmes are available from.
different sources depending on the paying capacity for loans.
Cash contribution: There is lump-sum contribution by families either in the form of down-
payment for loans and land tenure leases or cash support for the implementation of various
programme components. There is no upper limit specified in formulation exercise for each
contribution. However, income distribution in the settlement will obviously define the
saving capacity of families to support cash contributions.
Charges: The use and maintenance of some programme components involve monthly
changes. There is no upper limit specified in the formulation exercise for charges however,
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the income distribution in the settlement will obviously define the amount that the families
can regularly pay.
Total budget
Budget / family
Grant / family
Total Loan
Loan / family
Labour/ family(Days)
Delivery system:
Suitable system for the execution. Monitoring and delivery of the houses is to be evolved
before the scheme implementation. Various alternative based on the local conditions could
be formed.
- Contracting system
- Self – help/ NGOs / CBOs involvement
- Government agency built housing
- Transfer mechanism of housing to the beneficiaries for effective delivery of housing
scheme.
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FEASIBILITY CHECKLIST:
2. Site Data
(i) Land:
d. Availability: to be acquired but may take very less time / to be acquired and
may take considerable time/ available
(ii) Location:
a. Distance to the city centre – Long/ Medium/ Short
b. Type of surrounding development – residential/commercial/industrial/others
(specify)
(iii) Physical characteristic
a. Topography – Flat/undulating/existing natural features/low lying/prone to
flooding/earthquake/others (specify)
b. Social Condition- firm/ filled up/ expansive/ rocky/ others (specify)
(iv) Services Network linkage
a. Availability of means of access:
Adequate/inadequate/economic/costly
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(v) Community/Social Facility Linkage with surrounding area:
a. Effective demand i.e. what is the range of dwelling space and amount, people
of different categories are willing to pay for housing
Category 1- Swelling space range - Amount Range
Category 2- Swelling space range - Amount Range
Category 3- ……………
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Category 1 – sq.m
Category 2 – sq.m
Category 3 – sq.m
6. Project Feasibility
Is it feasible to design and implement the project:
a. Type of development and grouping patterns i.e. layout topology and planning
standards.
b. Materials, finishes and specifications of dwelling components.
c. Materials specifications and standards of infrastructure services networks and
facilities.
d. Dwelling space cost and price range for different categories.
e. Any other special features
The above exercise provides a comprehensive list of indicators and parameters to be studied
before a housing project is prepared and implemented.
Note: On similar lines, with appropriate set of indicators and exercises, any social
development projects in the areas of water supply, self employment, Municipal services
such as parks, roads, sanitation, swm, etc., can be prepared and implemented
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TEMPLATE (Indicative)
1. Introduction
• Project title
• Implementing Depts/Agencies
• Project location (incl. a map)
• Total project cost and Funding mechanism
• Project objective (s)
Short-term Project objectives (s)
Long-term project objective (s)
2. Project Background
Area covered by the project
Reaction of the affected people / target group (s)
a) Their felt needs and previous activities towards the satisfaction of these
needs
b) Their participation in project identification process
Arrangements between executing , funding agencies and the target group (s)
3. Project Justification
Benefits to beneficiaries and when these begin and end?
Tangible / measurable benefits
Non-tangible / non- measurable benefits
Expected project impact
a. Projected Project Outputs
• Services
• Products
• Etc.
b. Projected Activities
List of all physical and managerial project inputs needed to carry out the project activities
such as land, buildings, site works, materials/tools, machinery / equipment, man power
requirements, management requirements. briefly explain when, where and from whom
these inputs are required.
a. Estimated Project: Costs and Funding Source (S) (for non-remunerative Project)
• Project costs (e.g. for personnel, sub-contracts, training, equipment, working capital
for a venture etc.)
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• In –kind contributions (e.g. in terms of land, local materials, local labour etc.)
• Running costs costs which will occur upon project execution for maintenance,
depreciation, personnel etc.)
• Funding source (s)
The feasibility analysis examines whether the project can be successfully implemented based
on the criteria and assumptions of the project proposal. It also provides a framework for design
modifications as well as for monitoring and evaluation. It assists the project implementation
process by identifying potential trouble spots and discussing contingency plans. For
convenience, the feasibility analysis is classified into seven major feasibility studies. However,
they are interdependent and must be integrated in a single feasibility document.
Technical stud
Key questions
Key Issues
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Administrative / Managerial Study
Key questions
a) Which strategy (ies) should the executing agency (ies) adopt in carrying out
project activities?
b) What information and guidelines and necessary for the upgrading of project
administration?
Key Issues
Key questions
Key Issues
Environment Study
Key questions
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• Display the findings for dissemination to decision makers.
• The environmental impact assessment study collects
environmental baseline data for periodical checks in order to monitor
the project’s environmental impact.
Marketing Study
Key questions
a. Is there a need or demand (purchasing power) for the project’s goods and
services?
b. Are the marketing strategies appropriate enough to ensure that the project’s
outputs will reach the target groups and will be accept by them?
Key Issues
Financial Study
Key question
a. Will the project have a positive cash flow at any time during the project life?
b. In the case of income – generating projects: what is the projected net profit
and when will project break even?
Key issues:
1. To calculate the incremental net benefit because only the net benefits with the
project in excess of those which would have accrued without the project
should be taken in to account. If the project results in cost reductions, they
should be considered as incremental net benefits.
2. To determine the project life. It is usually the economic life of the major
investment item which is shorter than the technical life due to technological
obsolescence.
3. To assess the debt-servicing capacity of the project during the entire project
life in order to ensure that the project will be capable of meeting its financial
obligations at any time. Cash flow analysis calculates the expected net cash
flow as the differences between receipts and expenses for each year over the
project life. Receipts and expenses for each year over the project life. Receipts
and expenses comprise all monetary transactions (cash inflows and out flows)
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irrespective of an impact on real income. A continuous project
implementation and later operation requires a positive net cash flow at any
time.
In case of an income – generating project, the commercial profitability of the project has to be
assessed by estimating all revenue and costs. Revenue and costs comprise all transactions that
generate or reduce real income irrespective of cash flows. The commercial profitability is only
given, if a net profit is likely to be achieved at the end of the project life or, in the case of a
continuous operation, after an respected point in time depending on the project type. Funding
assistance is usually required to finance the capital investments needed to get project started.
Economic Study
Key questions:
Key issues:
1. Measurement of all input and output flows in terms of macroeconomic / society costs and
benefits for each year of the project life (quantitative effect). Major difference compared
to the microeconomic perspective of the financial study.
Indirect project effects like externalities and multiplier effects as well as intangible must
be considered.
Transfers of control over resources within the society are not considered.
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3. Comparison of the discounted macroeconomic/societal costs and benefits by calculating a
single figure, such as:
• Net present value = present value of benefits minus present value of costs
• Benefit-to-cost-ratio = discounted sum of benefits divided by discounted sum
of costs
• Internal rate of return = the discount rate that makes present benefits equal to
present costs
4. Recommendation either to accept, reject and modify the project or to prioritize the
project.
In sum, due to its various limitations, the cost-benefit analysis should be considered only as
one among other feasibility methods. The scale of measurement applied must be clearly stated.
A sensitivity analysis is necessary to assess the project’s vulnerability due to questionable
estimates and assumptions. Moreover, long-term dynamic effects, such as linkages and
training, should also be considered.
The co-effectiveness analysis is another economic feasibility method which compares
alternative project proposals of the same project type without the need to measure benefits
I. The project costs are measured and discounted in the same way as in the cost-benefit
analysis;
II. Project outputs (e.g. social services) are quantified in order to calculate the costs per unit
of achieved output;
III. Cost-effectiveness can be expressed in two ways;
• Varying cists + fixed output (e.g. rupees per hectare of irrigated land)
• Fixed costs + varying output (e.g. land area irrigated per Rs. 10,000 invested)
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QUIZ
Chapter 2
1. Project formulation is about
a. Pre investment study
b. Determining feasibility of the project
c. Deciding on project selection
d. a, b & c
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