Project Appraisal

Dr. Raghu Bista, NASC

Appraisal

• Project appraisal involves critically examining the basic data, assumptions and methodology used in project preparation to assure project’s viability, profitability, sustainability.

• In appraisal, project’s promoter takes a second look critically and carefully to assure project’s profitability

• Project is evaluated to check if all the aspects of project are consistent with the requirement, is it fit with policy and strategy of organisations/sectors

• Projects risks and sensitivity analysis are carried out in appraisal to check whether it is within their risk profile

Aspects of Appraisal

• Projects are examined from the Marketing, financial, economic, institutional/organizational/ managerial, environmental and social point of view.

• Questions are raised on the assumptions upon which estimates are raised.

• The study can be supplemented with further studies• Finally, judgment is made if the project is worth

undertaking or not• If the appraisal team concludes that the project

plan is sound,• the investment may proceed.

Project Background and Rational

• It is important to know in which background project is proposed for financing or what is the rational for the organisation to decide funding for that project.

Project Appraisal: Market Aspects

• A market appraisal reviews the project ‘s demand, number of local beneficiaries, prices of services or products, distribution mechanism, future market growth to ensure it will generate profits or it will able to recover costs.

Marketing

• Marketing is the business function that identifies an organisation’s customer needs and wants, determines which target markets it can serve best, and designs appropriate products, services, and programs to serve these markets. However, marketing is much more than just an isolated business function – is a philosophy that guides the entire organisation. The goal of marketing is to create customer satisfaction profitably by building value-laden relationships with important customers. Thus, marketing calls upon everyone in the organisation to “think customer” and to do all that they can do to help create and deliver superior customer value and satisfaction. (sources: Kotler, P. and Armstrong, G, 1994. Principles of marketing, Prentice hall International)

Marketing Activities Around Us

• Not only marketing is used by manufacturing companies, wholesalers, and retailers but by all kind of individuals and organisations. Lawers, accountants, and doctors use marketing to manage demands for their services. Political leaders, political parties are increasingly using the concept of marketing.

Marketing as a Matching Process

• A matching process to ensure that marketing mix and internal policies are appropriate to the market forces.

Market and Demand

• Is the demand expressed a real need or only demanded for particular benefits of certain group?

• Market and demand appraisal reviews how the demand size, demand growth, number of populations/ organisations that have demand for the product/service

• How much is the unfulfilled demand?• What sources of data were used in analyzing

market.

Market and Demand

• What price of product/service will be charged? How it was analyzed?

• Analysis of competitors, their strength, weakness

• Distribution mechanism etc.

Market Segmentation

• A market analysis can be made for either a market as a whole or for each market segment separately. The size of the segment should be of a separable size

• Segment size and growth • Specific needs of the segments, their paying

capacity. In case of a profit motive project, which particular segment is attractive. if there is less entry barrier, substitutes limit, less price reduction pressure, that can be attractive segment.

• Company objectives and resources

Evaluating market segments

Competitive strategy

If the services/ products have to face competition, is there any plan in the project preparation? Some competitive strategies are:

• Differentiation Strategy• Low cost Strategy • Focus strategy (Serving particular segment with higher quality)• The preemptive move (moving first to a new location, hiring

prime location so that sustainable competitive can arise and entry barrier can be created

• Strategic Alliances (Sharing ATM, cheque payment arrangements between bank)

Case I

• You are appraising a project on establishing security printing press. You are provided the feasibility study of the proposed project. When you see the needs/demands of the security printing services in document, you have found huge yearly demand of the services. The demand estimate has also calculated calculates the security printing needs of public schools to show high demand assuming that public schools also used services of security press to print Student Identity Card. Based on demand a large size printing press has been suggested to establish.

• You are in the appraisal team to evaluates market study. What will be your opinion/observation to the demand estimation?

Technical Appraisal

• Every project must be technically feasible. Technical Appraisal provides a comprehensive review of all technical aspects of the project.

Technical Appraisal

Technical aspects broadly involves a critical review of following:

• Choice of technological process and/ or appropriate technology,

• Is the technology proven or tested? • Does the technology/ process/ equipment technically fit

with the facility’s existing technology/process/ equipment & machinery?

• Equipment capacity & whether it is as per requirement?• List of recommended equipment suppliers.• Reputation of the suppliers and performance guarantees

Technical Appraisal Cont..

• Investment cost and operational cost of different technology/process

• Environmental aspects of different technology• Size and scale of operations• Location aspects of the project and availability

of infrastructural facilities with probable alternative locations

Technical Appraisal Cont..

• Availability of various inputs• Alternatives sites and other factors like

political factors• Plant layout and buildings• Network analysis for assessing the project’s

implementation schedules etc.

Case Study II: Dairy Farm

A cooperative is planning to establish a dairy farm specially to produce curd. It has completed feasibility study and based on the availability of sufficient milk, it wants to set up the farm in a village 5 km far from Lakeside, Pokhara. The market for the product is lakeside. The road from the village to Lakeside is graveled and in rainy seasons, vehicles movement is little difficult.

Do have any comments about the plan?

Environmental Aspects

• A project may causes environmental impacts in many ways

• Will the project have any adverse effects on the environment?

• Has the analysis Identified positive and negative impacts of projects?

• Required Mitigation measures are recommended• Is there environmental management plan• Is there adequate fund for environment

management plan

Case III: Delhi Metro Project’s Environment Friendliness

• According to Delhi Metro Corporation, in the survey and construction stage of Delhi Metro Project, all efforts are being made by the Corporation to save trees. For every tree cut during construction the DMRC is planting 10 trees as compensatory afforestation. Around 26000 trees have been planted at Najafgard, Isapur and Rebla Khanpur. (website Delhi metro)

Environment Friendliness Cont..

• The Delhi Metro Rail Corporation has been certified by the United Nations as the first metro rail and rail-based system in the world to get “carbon credits for reducing greenhouse gas emissions” and helping in reducing pollution levels in the city by 630,000 tons (630 Gg) every year. (http://en.wikipedia.org/wiki/Delhi_Metro, 2012 Aug)

Environmental Aspects

• Main acts/guidelines in Nepal are Environment Protection Act 1996, the Environment Protection Regulation 1997, National Environmental Impact Assessment Guidelines, 1993

Financial Appraisal

• The scope of financial appraisal varies considerably with the nature of project and whether it is revenue producing (e.g. industry, agriculture) or not (e.g. roads, public schools).

• Financial appraisal covers: - Analysis of investment cost and operating cost (is there over or

under estimation) - Pricing- Financing- Income and expenditure- Liquidity plan- Selection of discount rate- Profitability or self sustainability- Sensitivity analysis

Managerial Aspects

• If the management is incompetent, even a good project may fail. So financial institutions/donors very carefully appraise the managerial aspects before sanctioning assistance for a project.

- Background of the promoters- Their academic qualification, and experience- Their past performance- Assessment of other specific skills required for

the project- Training arrangement

Economic Appraisal

• Economic appraisal examines the project’s contribution to economy of the region or country.

• It assesses whether the project increases the net wealth of a region or country as a whole or not.

• A purely financial analysis normally does not provide an adequate basis for judging a project’s value to the economy, since the financial analysis looks at the project only from a limited viewpoint of revenues entering the project’s own account.

Case IV

• The feasibility study of a project has calculated financial net present value (FNPV) and economic net present value (ENPV). As per the study, it shows Positive FNPV and negative ENPV.

Your team is appraising a public sector project, what would be your recommendation for financing project?

Economic Appraisal Cont..

• So the economic appraisal looks at the project from the view point of whole economy asking whether the projects show benefits sufficiently greater than project costs to justify investment in it.

Concern of Economic Appraisal

• Increased output• Enhanced services• Increased employment• Larger government revenues• Higher standard of living• Increased income distribution etc.

Risk Analysis

• Projects operate in an environment composed of uncertainty. Uncertainties regarding fund, necessary inputs, potential technical problems, political disturbance etc. Project Appraisal examines whether

• All the risks are identified and analyzed• Risk mitigation strategies are proposed• Risk monitoring and control plan are prepared

Thanks