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.