2.

PROJECT APPRAISAL AND PROJECT FORMULATION [8 hours]

2.1 Concept of Project Appraisal,

2.2 Project Proposal (technical and financial),
2.3 Procedure for Developing Project Proposal,
2.4 Techniques of Project Formulation: Feasibility
analysis, Cost Benefit analysis, Input analysis,
Environmental analysis
2.1 Concept of Project Appraisal
Development project impose costs and benefits on recipient countries.
Those costs and benefits can be social, environmental, or economic in
nature.
For example, Irrigation projects may facilitate the growing of cash crops in
one locality, but may cause water shortage, and hence economic, social, and
environmental pressures in another.
Project appraisal is the evaluation of overall ability of feasible project to
succeed.
Project appraisal process starts after the completion of feasibility study.
The aim of project appraisal is to consider and compare feasible project.
2.1 Concept of Project Appraisal
Appraisal is based on the findings of the feasibility studies. It focuses on:
Project’s ability to achieve stated objectives.
Comparison of proposed project in terms of investment costs/benefits, job
creation, profit, social benefits etc.
Primary function of appraisal is to evaluate a project’s ability to achieve its
objectives. For private project, the objective is profitability. For a public project,
the objective is socio-economic development in the country through economic
growth, employment, poverty reduction etc.
Project appraisal will take a holistic view of the costs and benefits associated
with development activities. The objective of appraisal is to ensure that the
project is viable from the following angles:
2.1 Concept of Project Appraisal
1. Technical Appraisal: Technical know-how, process, design
requirements, specifications, risks and uncertainties, resource
availability, capacity, location and geology,, break-even point etc. are
assessed.
2. Marketing Appraisal: Marketing capacity, demand, coverage,
revenue, distribution network, transport facilities, competition, ability
to satisfy customers etc. are assessed.
3. Management Appraisal: Organization and management, institutional
relationships, management capability and impact of stakeholders on
the project are assessed.
2.1 Concept of Project Appraisal
4. Environmental Appraisal: Positive and adverse environmental
aspects are assessed. EIA is reexamined.
5. Financial Appraisal: Capital requirements, sources of fund, cash flow,
capacity to meet financial obligations are assessed. Sensitivity analysis
is done to test effects of change in variables such as cost, price and
time. Ratio analysis is done to assess liquidity and profitability. Effect of
inflation is assessed.
6. Economic Appraisal: Social cost benefit analysis is made.
After appraisal, the competent authority approves the project.
2.1 Concept of Project Appraisal
Project appraisal report should contain:
1. Executive summary.
2. Overview - description of objective.
3. Comparison with ongoing projects.
4. Technical feasibility assessment.
5. Marketing feasibility assessment.
6. Management feasibility assessment.
7. Environment feasibility assessment.
8. Financial feasibility assessment.
9. Integration of pros and cons of feasibility findings.
10. Recommendations - choice and reasons of choice
11. Appendix.
2.2 Project Proposal (technical and financial)

• PP is prepared after feasibility study.

• PP aims to compare feasible projects to select the best one.
• PP begin with a project brief including expected benefits.
• PP should deal with:
i. Nature of the technical problem how it is approached.
ii. Plan for implementing the project.
iii. Plan for logistic support and administration.
iv. past experience in similar work.
2.2 Project Proposal
• Presenting PP is the organization’s opportunity to sell itself to
the potential customer.
• To make a good first impression, PP document should reach
the customer on time, be presented in a way that demands
attention, and be free from stupid mistakes (i.e. spelling and
grammatical errors).
• Very rough PP can left the dangerous impression to the
customer, and that may not favor in the future.
• Project brief of PP should be very precise.
2.2 Project Proposal
• PP should contain:
i. an executive summary,
ii. main body of the report, and
iii. appendices
• PP has to pass through the stages of project scrutiny and
clearances as follows :
i. Pre-feasibility study
ii. Techno-economic feasibility study
iii. Detailed project report/detailed cost estimate
2.2 Project Proposal
• The plan is the first step in providing the means of satisfying the
requirements of the project owner or sponsor. It is the beginning of
the project manager’s input to ensure that whatever possible,
potential problems are identified and solved in advance. The plan is
an explicit statement of the intended timing of project activities and
the basis for estimating the resource requirements.
• Planning as a process involves the consumption of resources; it has
costs associated with it. The project manager has to decide on the
balance between the costs incurred in the process and the benefits
that will be reaped from it.
2.2 Project Proposal
PP should have the following sections and headings:
1. Title Page
a. Title of project in initial capital letters
b. Sponsoring company, contact person’s name and information
c. Team name and individual member names
d. Date
e. An appropriate picture of the product, a team logo, or both
2. Executive Summary
3. Content: A brief summary of the proposal
4. Length: one-third to one-half page, never more than one page
5. Emphasis: highlighting of technical and management approach
6. Table of Contents
2.2 Project Proposal
7. Statement of Problem: the “Why?”
i. summary of the request by the sponsor (the original
problem statement)
ii. Background:
iii. Brief description of the project.
iv. Background information to educate the reader
v. Previous related work by others: literature review with
credible sources
2.2 Project Proposal
7. Statement of Problem: the “Why?” contd.
vi. Objectives: the “What?”
a. Specify the customer’s quantitative and qualitative needs into
clear, objective design specifications.
b. Define the scope of work and clearly state the project
objectives, including the following:
c. Design specifications in specific, quantitative terms.
d. Critical design issues, constraints, limitations.
vii. Technical Approach: ‘How?’ (have some design concepts).
2.3 Procedure for Developing Project Proposal
• PP is a convincing document.
• PP should be professionally developed.
• Objectives of PP are:
1. Identify what work is to be done
2. Explain why this work needs to be done
3. Convince the reader as proposers are qualified, have a reasonable
management plan and technical approach, and have resources needed
to complete project within the stated time and cost.
2.3 Procedure for Developing Project
Proposal
The steps in developing a PP process are:
• Project brief (statement of the work),
• Prefeasibility study,
• Preliminary design,
• Proposal development.
2.3 Procedure for Developing Project
Proposal
1. Project brief
Project brief indicates ‘Wish list’ i.e. needs & requirements of customer
It serves as the starting point for the development of PP.
Project brief states facts about the project which includes:
i. Need for the project
ii. Scope of the project
iii. Objectives and output of the project
iv. Estimated budget for the project
v. Estimated time table and deadlines
2.3 Procedure for Developing Project
Proposal
2. Prefeasibility study
Prefeasibility study include:
Technical Analysis: technical specifications and resources required.
Financial Analysis: capital requirement, capacity to meet obligations, and cost.
Economic Analysis: Benefit/cost analysis.
Marketing Analysis: market demand, sales forecast, revenue generation and
competition.
Management Analysis: management system and human resource requirement.

Environmental Analysis: impact of the project on the environment.

2.3 Procedure for Developing Project
Proposal
3. Preliminary design
Preliminary design includes preliminary survey, engineering design, preliminary
project schedule, estimated project costs and implementation plan.
4. Proposal development
Proposal development should contain the following information:
i. Project objectives and output
ii. Project activities
iii. Project implementation plan
iv. Project schedule
v. Project budget
vi. Project monitoring and evaluation
2.4 Techniques of Project Formulation

Techniques of project formulation include:

1. Feasibility analysis
2. Cost/benefit analysis
3. Input analysis
4. Environmental analysis
2.4 Techniques of Project Formulation
1. Feasibility analysis
Feasibility analysis include:
I. Examination of the potential of felt need, conception or an idea to be converted into a
project.
II. Analysis and evaluation of the project concept from all the relevant angles
III. Identification of possible alternatives to achieve project objectives and goal
IV. Selection of the best alternative
Project’s success depends on feasibility study and evaluation.
It helps in making a decision whether or not to proceed with the project.
It also helps in determining justification to take up a chosen project.
It is conducted in view of that project do not go wrong.
Feasibility study confirms the viability of investment opportunity.
2.4 Techniques of Project Formulation
A team of specialists should carry out the feasibility study in the areas as follows:
i. Technical Analysis
It aims to analyze the followings:
• choice of available and suitable technology
• requirement and specification
• assess the technical risk analysis
• cost effectiveness of technology in the long run.
• enough experience to use that technology
• how difficult it will be to build
• whether the technology will perform adequately or not.
2.4 Techniques of Project Formulation
ii. Economic Analysis
• cost/benefit analysis for the comparison of benefits and costs .
• assess the overall economic impact of the project.
• studies economic viability of the project. studies contribution of the project
and economic impacts on the society.
• most frequently used method for evaluating the effectiveness of a project.
• examines project’s ability to earn net profit for a private project.
• examines project’s ability in poverty reduction, economic growth, social
development, employment generation etc. for public project.
• B/C ratio, NPV, and IRR techniques can be used to decide optimal solution.
2.4 Techniques of Project Formulation
iii. Market Analysis
important for production and service oriented projects.
studies importance of the business, marketing viability i.e. testing project locations.
studies project capacity, market demand and sales forecast etc.
studies availability and quality of raw materials.
studies availability of labor.
studies market demand estimates and trends: domestic, international, and target
customers.
studies sales forecast and estimated revenue.
studies extent of the market, prevailing competition and competitors.
Cost of procurement and transportation.
Market feasibility take into account the in the selected area.
2.4 Techniques of Project Formulation
iv. Management Analysis
studies institutional viability of the project.
analyzes the adequacy of management system.
The area of focus in management analysis as follows:
• Institutional relationships: with donor agencies, regulatory agencies and support agencies.
• Project organization: appropriateness of the project structure, authority/responsibility
relationships, communication channels.
• Project management: The project manager and project team are are studied in terms of
capabilities, experience, qualification, and availability. The need for training is also assessed.
• Stakeholders: The key stakeholders of the project are identified and their impact on the
project is assessed.
2.4 Techniques of Project Formulation
v. Environmental Analysis
studies the impact of the project on the environment.
impact of the project activities on the environment is analyzed in terms of pollution, soil
erosion, resource depletion, and damage to flora and fauna.
environmental impact of project activities can be analyzed in the following areas:
ecological: impact on flora and fauna.
physical: impact on quality of air, water etc.
social: impact on society. social impact analysis (sia) may be done.
aesthetic: impact on scene beauty.
Initial Environmental Examination (IEE) or EIA is essential as per the guidelines of
government.
2.4 Techniques of Project Formulation
vi. Financial Analysis
• studies the funding needs and sources.
• analyze the availability of funds, capability of meeting of
financial obligations, breakeven point of the investment and
the time of returns etc.
2.4 Techniques of Project Formulation
. Generation of ideas for a product or service

Initial screening

Is the idea prima facie promising? No End

Yes
Plan feasibility analysis

Market analysis Technical analysis

 
Financial analysis
 
Economical and ecological analysis
  No
Project is viable End

Prepare funding proposal

Figure: Schematic diagram of feasibility study
2.4 Techniques of Project Formulation
Feasibility Report
It is prepared during the planning phase of a project and report should include:
a. Executive Summary
• Include conclusions on basic issues to facilitate a quick grasp about the project.
• technical, operational, financial data, advantages and drawbacks, and the
prospects of implementing the project should be highlighted.
b. Background and History
• Economic, industrial, financial & relevant policies should be briefly described.
• information about promoters or sponsors and the reasons for their interest.
• should give the project highlights and the costs incurred.
2.4 Techniques of Project Formulation
c. Demand and Market Study
• estimated revenues and costs of marketing, and distribution.
• projected sales & income that affects the viability of the project.
d. Sales forecast and Marketing
• demand analysis gets transformed into sales forecast.
• modes of distribution, market promotion strategy, pricing strategy etc.
e. Materials and Inputs
• selection of major materials should be described with possible alternatives.
f. Supply Program
• detail assessment of utilities such as technology, plant capacity and location.
• availability of sources of supply that are critical for the success of the project.
2.4 Techniques of Project Formulation
g. Location and Site
i. Raw material survey: availability of raw materials, finished product, to be
imported.
ii. Demand study: demand, supply, distribution, prices.
iii. Technical study: feasibility of meeting technical specification.
iv. Location study: availability of land, approach to site, transportation, water,
power, manpower, acceptability of local bodies, alternative location etc.
Project capital cost estimates and sources of finance: cost estimates, capital
cost, working capital, operating costs, sources of finance.
v. Profitability and cash flow analysis:
vi. Cost benefit analysis:
2.4 Techniques of Project Formulation
2. Cost Benefit analysis
• commonly known as economic analysis.
• examines project’s ability to earn net profit (profitability).
• used to assess overall economic impact of the project on the
society.
• studies the economic impacts for a private project.
• studies economic growth, poverty reduction, social development,
income redistribution, and employment generation etc.
• B/C ratio, NPV, and IRR can be used to decide optimal solution.
2.4 Techniques of Project Formulation
c. Input analysis
Inputs include human resources, materials, machines and
equipment.
• defines the inputs required for each activity.
• assess the input requirements.
• assess the resources availability.
• assess the project cost.
2.4 Techniques of Project Formulation
d. Environmental analysis
• studies the impact of the project on the environment in terms of
pollution, soil erosion, resource depletion, and damage to flora and
fauna.
• base line data is collected for studying environmental impact as
follows: Ecological: impact on flora and fauna.
• Physical: impact on quality of air, water etc.
• Social: impact on society. Social Impact Analysis (SIA) may be done.
• Aesthetic: impact on scene beauty.
• IEE or EIA clearance may require as per the EIA guidelines.