2.

0 Project Appraisal and Formulation Techniques

2.1 Concept of project appraisal
Project appraisal is a generic term used to refer the process of assessing the investment
proposals. It is a technique of evaluating, analyzing the investments and effort of calculating the
projects viability. Project appraisal is an overall assessment of the relevance, feasibility and
sustainability of a project prior to making decision whether to undertake it or not.
Project appraisal is done to answer two basic questions:

Will the project meet its objectives as well as the larger need of the societies or country?
How does project compare with other projects (alternatives) in term of funds and other
resources?

Project appraisal is carried out in systematic and scientific manner because it determines the
success and failure of the project. It helps in the optimum allocation of the resources, proper
selection of project, systematic planning and evaluating the costs and benefits.
Project appraisal can be ex-ante, ongoing and ex-post.
Ex-ante appraisal is carried before the project implementation; it is the review of the investment
proposal. On going appraisal is carried during the course of implementation and ex-post is done
after the completion of project before commissioning.
After the completion of project appraisal, the following issues are addressed:

Whether or not the objective of the project has been successfully achieved?
Whether or not resources were properly utilized?
Whether or not project completed within the stipulated time?
Whether or not decisions taken during project implementation were really useful?
Whether or not the quality of product and services of the project are according to
standards?

Appraisal factors (types of project appraisal)

The feasibility study serves as the groundwork for project appraisal. The aspects covered in
feasibility study are re-examined during the appraisal.
1. Technical appraisal (assessment):
Technical and engineering analysis is necessary when a project is formulated. It
ascertains whether the prerequisites for the successful commissioning of the project have
been considered and reasonably good choices have been made with respect to technical
solutions, technical specifications, technical risks and uncertainties, local resources
availability, size, location, geology etc.
2. Economic appraisal (assessment)

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 1

2.0 Project Appraisal and Formulation Techniques

3.

4.

5.

6.

It is also known as social cost benefit analysis concerned with judging a project from the
larger social point of view. It ascertains the contribution of the project on self sufficiency,
employment generation and social order. Similarly it measures the impact of the project
on saving, investment, distribution of income in the society.
Financial appraisal (assessment)
It focuses on the financial viability of the project. In simple words, whether this project
will be able to satisfy the return expectations of those who provide capital. The aspects to
be looked during financial analysis include an investment outlay, cost of capital, means
of financing, projected profitability, break even points, cash flows, investment worth
judged in terms of various criteria of merit and risk.
Management appraisal (assessment)
Management analysis focuses on project organization, management, institutional
relationships and management capabilities in planning, organizing, staffing, leading,
implementing and controlling.
Marketing appraisal (assessment)
Marketing analysis is primarily concerned with marketing related issues. It will analyze
the aggregate demand, sales forecast, estimated revenue, market share etc.
Environmental appraisal (assessment)
Environmental assessment is concerned with the impact of the project on environmental
issues such as environmental damage by the proposed project and environmental
restoration measures. IEE, EIA are re examined.
Once the appraisal is completed and the results come positive, the funding agency
approves the project and the project is ready to move for planning followed by
implementation.

2.2 Project Proposal (Technical and Financial)

A project proposal is common and better understood in academic, commercial, industrial and
governmental sectors. The proposal could be a request for a grant to conduct academic research
or to sell an item or to build infrastructure or to conduct income generation training and capacity
development.
Once the project idea is identified, selected and projects parameters are developed, then the
project proposal are prepared. A proposal is basic document containing the explanation of all
activities to be performed while undertaking an investment venture. In other words, it is written
document prepared to do something in a pre-planned way with the view to successfully carry out
the proposed assignment. Generally project proposal should satisfactorily answer the following
questions:

What are you preparing to do?

Why you are proposing to do?
What specific results you are expecting from it?
What is the proposed schedule?
What is the cost of resources?

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 2

2.0 Project Appraisal and Formulation Techniques

What are significant and limitations?

How the outputs are measured?

Proposal writing: science or Art?

Proposal writing may be considered as management science as well as an art. It is management
science in the sense that writing proposal essentially requires a careful consideration of the
following points:

Identification and selection of right project/s from different point of view

Formulation of reasonable and achievable objective or objectives
Selection of appropriate design/method for executing project activities
Effective and efficient use of scarce resources (doing right things at right time)

On the other hand it is an art in the sense that the proposal you prepare should have a sales value.
The sales value depends upon how much convincing strength lies in your proposal and how
tactfully you organize and present it. The words you use, the sentences you construct and the
logic you give in your project proposal make significance for its approval and disapproval.
Consideration for preparing project proposal
A project proposal is basic document for the project. Thus it should be prepared incorporating
technical and professional details. The project manager must work as the role of the proposal
manger. The project manager has to consider various aspects while developing or preparing
project proposal.
1. Project problem
The proposal manger should identify the project problem. The problem of the proposed
project is given in the terms of reference by the client. Client may be departments,
donors, individual etc. the organization should have enough capability to handle the
technical problem and issued as specified in TOR.
2. Organization and staffing provisions
How the proposal preparing process should be organized and what are the staffing
provisions should be answered by the project manager. Generally multi disciplinary cross
functional teams should be formed in this process.
3. Cost of proposal
How much should be spent in preparing proposal for bids is considered while preparing
project proposal. The proposal development involves cost for the organization. The
guidelines can be:
a. Cost estimates
How should the proposed bid price should be set is the customers ability to bear. So
cost estimates (proposed project cost of work) should be prime considerations in
estimating the cost of the proposal.
b. Bidding strategy

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 3

2.0 Project Appraisal and Formulation Techniques

Bidding strategy of the organizations (who calls proposal) affects the proposal so the
cost of preparation. It can be:
Winning the project at any cost
Competing the bid
Participating in the bid
Contents of proposal
Every project is unique and different to each other. For instance, the development of project
proposals relating to establish drinking water supply, to construct school building, conducting
detailed feasibility study of hydropower (DPR) , to provide some health facilities, to conduct
socioeconomic survey, to conduct training packages etc may differ to great extent. Since each
project proposal entails its own uniqueness, it is not possible to get a standard format for
developing a project proposal equally applicable for all types and natures of projects. However,
the contents of all types of project proposal are broadly classified into two parts: technical and
financial. Some time management part is highlighted separately from technical part.
1. Technical part of project proposal
Technical part of the proposal gives the technical details and descriptions of the project.
The contents of technical part are:
a. Problem statement : description of the project problem
b. Special requirements: any special requirements as specified in TOR by client is
described
c. Test and inspection: procedures related to testing, quality assurance, reliability and
compliance along with specifications are prepared
d. Logistics: details of equipments, facilities, skills and administrative aspects are listed
e. Reporting: formats, timing and nature of reporting should be highlighted
f. CV: CV of key persons for the execution of the proposed project is listed along with
details
g. Capability statement: organizational capability and past similar work experience is
focused in this part
2. Financial part of the project proposal
It deals with the financial details of the project. The financial part of proposal covers the
aspects like:
a. Cost of basic materials
b. Statement of work
c. Cost summary
d. Supporting schedules
e. Profit statement
f. Elements of cost
g. Cost break down and work break down structures
h. Cost estimating techniques

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 4

2.0 Project Appraisal and Formulation Techniques

In this part generally format of BOQ (provided along with TOR or bid document) is
prepared and rate is quoted for the proposed work.
Management part of the proposal
It incorporates the administrative and management capability of the proposing organization in
terms of:

Organizational structure
The financial stability
Financial litigation history
Accounting system
Employee safety, health & Labor related aspects
Cost and schedules
Past work experiences

2.3 Procedures of Developing Project Proposal

A project proposal development is logical, systematic and professional activities which involves
various steps.
Step 1: Project brief (Statement of Work)
Statement of work is prepared by the client at the project formulation phase. It is also
known as wish list of the client which describes the needs and requirements. It is provided by the
client in the form of TOR. SOW some tie called as scope of the work. The major contents
covered in SOW are:

Need and description of the project

Scope of the project
Predetermined objectives and output / outcomes of the project
Funding constraints and budget
Specifications, quality assurance and acceptance criteria
Project schedules
Reporting system
Monitoring and evaluation mechanism etc

Step 2: Pre/Feasibility study

This study is carried to find the implement ability of the proposed project. If the proposed
project work is to carry out the detailed feasibility study (DPR) then client has prepared the pre
feasibility study report but if the proposed project is the construction of infrastructure client
should prepared the feasibility study. It covers the aspects like technical analysis, economic
analysis, financial analysis, marketing analysis, management analysis and environmental
analysis. Technical feasibility is the main focus aspect of pre/feasibility study.
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 5

2.0 Project Appraisal and Formulation Techniques

Step 3: Preliminary/detailed design
This phase is also known as conceptual design or architectural design. It is the expanded form of
project idea and is based on pre/feasibility study. The objective of this phase is to create a design
that will correctly and completely implements the requirements shown by study. It includes
technical aspects like survey, engineering drawings, project schedule, WBS, estimated project
cost etc
Step 4: Proposal Development
This is the final step of the procedures in developing project proposal. According to the SOW,
pre/feasibility study and preliminary design the project proposal is then developed integrating
with the goal and objectives of the proposing organizations. It contains following details:

Project title: a proposal begins with the title. Generally it is written in present participle of
an action verb
Executive summary: a brief ES should be prepared which describes the brief information
and objectives of the project
Project description: it provides the general description of the project. The major areas of
descriptions include:
o Project objective: the objective should be SMART. General objective is set up
followed by specific
o Project component: major sub sectors are specified if any
o Methods of implementation: it deals with the description about the
implementation methods proposed for the project
o Project schedule: Bar chart, network schedule for proposed project duration etc
o Project budget: cost component and sub components are detailed. Itemized in
expenses head should be mentioned
o Project monitoring and evaluation: mechanism of M&E. logical framework can
be provided.

Appendices for separate supporting documents like tax clearance certificate, firm registration
certificate, VAT registration certificate, previous work experience, signed CVs etc can be
provided with proposal.

Step 4

Step 2
Project Brief
(SOW)

Pre -feasibility
Study

Preliminary Design

Proposal
Development

Step 3

Step 1

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 6

2.0 Project Appraisal and Formulation Techniques

2.4 Techniques of Project Formulation
Various techniques are available for project formulation. They are
1. Feasibility analysis
2. Cost Benefit analysis
3. Input output analysis
4. Environmental / ecological analysis
5. Network analysis
6. Financial analysis
A. Feasibility analysis
Project involves massive investments. Project decisions have long term impacts and cannot be
easily altered. Before investing in ay project, investors would like to know the potential of the
project. Potential of project can be financial potential as well as socio-economic development
potential or technical potential. Feasibility analysis makes it possible to screen out non-feasible
project idea and selection of project idea. Feasibility analysis answers which project (s) to
undertake. The aspects of feasibility analysis are described as follows:
feasibility Study

preliminary Work

Analysis

Generation of ideas

Conduct technical
analysis

Initial Screening

conduct financial
analysis

Is the idea promising?

conduct economical
analysis

If yes plan for Study

conduct ecological
analysis

Evaluation

is the project
worthwhile?

if yes prepare funding

proposal

if no terminate

If no terminate
a. Technical analysis:
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 7

2.0 Project Appraisal and Formulation Techniques

In the technical part of the feasibility study the alternate methods of selection of best
available technology and course of action are identified. In this study following works are
carried out.
Location of suitable site
Selection of appropriate method of construction
Selection of suitable equipment for construction
Specifications of construction materials
Determining the availability of different resources
Choice of available technology
Design requirements and HR requirements
Technical risks and uncertainties
b. Economic analysis:
It is also required at the time of feasibility study stage of the project. Economic analysis
is the systematic approach to determining the optimum use of scare human and non
human resources involving comparisons of two or more alternatives in achieving a
specific objectives under the given assumptions and constraints. It measures the effect of
the project on the community and national economy. It gives the answers about the
economic viability of the project and also known as cost benefit analysis. The economic
viability of a project is analyzed using four basic steps as:
i.
Identify the economic costs and benefits
ii.
Quantity the costs and benefits as much as possible
iii. Value the costs and benefits
iv.
Compare the benefits and costs.
c. Marketing analysis:
Marketing analysis is carried put to find out the projects capability to address customer
needs along with the integrity and consistency of the marketing assumptions and helps to
reformulate the project if necessary on its likelihood of viability and sustained market
performance. This analysis is carried out in four basic steps as:
i.
Marketing definition
ii.
Market analysis
iii. Strategic appraisal
iv.
Expected performance
d. Management analysis:
Management analysis during feasibility analysis deals with the assessment of managerial
capability in terms of planning, organizing, staffing, leading and controlling. The areas of
focus in management analysis include:
i.
Institutional relationship with the project, funding agency, contracting authority,
implementing agency and beneficiaries
ii.
Project management
iii. Stakeholder analysis
e. Financial analysis:
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 8

2.0 Project Appraisal and Formulation Techniques

Financial analysis during feasibility analysis examines the adequacy of return to the
project operating entity and to the project participants. In financial analysis, all
expenditures incurred under the project and revenues from it are taken into account.
Financial analysis also identifies the estimation of the capital cost requirements, and the
sources and means of financing, cash flow, accounting and reporting system,
profitability. Generally six approach step is carried in financial analysis as:
i.
Preparing cost estimates
ii.
Forecasting incremental project net cash flow
iii. Determining the financial NPV
iv.
Calculating financial IRR
v.
Understanding risk
vi.
Performing sensitivity analysis
f. Environmental analysis:
It studies the impact of the project on the environment. Study of EIA or IEE is carried
simultaneously during the feasibility analysis. Environmental assessment is the process of
identifying, predicting, evaluating and mitigating the bio-physical, social and other
relevant effects of development proposals prior to major decisions being taken and
commitments made. The areas of focus during environmental analysis are environmental
sustainability, environmental impact and its mitigation measures.
g. Socio-political analysis:
Socio-political analysis is a systematic study of the social, political and economic relation
and factors that shape a particular environment and how these affect the lives and
opinions of those live within it. It is necessary because this forces positively or negatively
impact project implement-ability a lot.
B. Cost- Benefit analysis:
In simple term it is known as economic analysis of the investment proposal from the larger social
point of view. Therefore it is regarded as social cost benefit analysis (SCBA) in general. Cost
benefit analysis is the comparison of different projects competing for the same resource budgets.
The use of payoffs matrices is currently fashionable in this regard. It evaluates the cost involved
and the benefits of the projects. In developing economy, governments are involved large sum of
investments; consider a SCBA in their investment including donor agencies.
SCBA measures the income gained or lost by individuals, groups within the society, other
private business, government, workers, consumers, external forces. The gain or loss to an
individual group within the society as a result of the project is equal to the difference between
the shadow price and the market price of each input in case of physical resources or the
difference between the price paid and the value received in the cost of financial transactions.
It is an analytical tool in decision making which enables a systematic comparison to be made
between the estimated cost of undertaking a project ad the estimated value and benefits which
may arise from the operation of such a project. It is used in both sectors public and private. For
private sectors, CBA examines the profitability but for public sector in examines the social
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 9

2.0 Project Appraisal and Formulation Techniques

profitability. Social profitability is determines in terms of economic growth, income
redistribution, employment generation, social development and poverty reduction.
Rationale for SCB Analysis
Market imperfections:
Actual monetary costs and benefits of the project can be obtained only on perfect market system.
When imperfection exists, market prices do not reflect social values. Market imperfection is due
to rationing of commodity, minimum wages and foreign exchange regulations.
Externalities:
A project may have a beneficial effect externally or may have a harmful effect externally. The
monetary value may not capture the beneficial or harmful effect to external.
Taxes and subsidies:
From the private point of view, taxes are definite monetary costs where as subsidies are definite
monetary gains. But from a social view point they are just regarded as transfer payments and
hence considered as irrelevant.
Concern for savings:
For the private point of view, it is not a different valuation of consumption or saving in the
economy. Form a social point of view, higher valuation for savings and lower valuation for
consumption.
Merit wants:
Goals and preferences are not expressed in the market place, but believed by policy makers to be
in the larger interest. It is referred as merit wants. The merit wants are not relevant form a private
view point but are important in social point of view.
Concern for redistribution:
A private firm do not bothers how its benefits are distributed across various groups in the
society. In contrary to this, the society concerns about the distribution of benefits across different
social groups.
Procedure for SCBA

Determine the problem

Ascertain alternative solutions to the problem
Estimate costs and benefits
Decide on the optimal solution
Comparison of cost and benefits
B/C ratio computing

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 10

2.0 Project Appraisal and Formulation Techniques

IRR
NPV

Limitations of SCBA

The estimation of costs and benefits are subjective and lack accuracy
Social costs and benefits are difficult to forecast and quantify
Spin-off benefit remains un quantified
Shadow price provides room for discretion and arbitrariness

Concept of Shadow price:

The shadow price is imputed market valuation of a commodity or service which has no market
price. It is worth of obtaining an extra unit of a scarce resource.
Basis of shadow pricing
Users willingness to pay
Cost of production and marginal cost of production
Border pricing
Foreign exchange value
Consumption rate of interest
Investment rate of interest
Marginal productivity of labor
C. Input output analysis:
It is used to analyze the inter industrial relations and dependencies among the sectors in a
comprehensive economic system. The IOA can be used to determine intermediate materials,
labor, capital and import requirements with mutually consistent production level and resource
requirements. It is based on empirical investigations.
Input analysis:
It deals with the analysis of human and non human resources that serves as inputs for the project.
The inputs such as labor, capital, HR, information and physical resources etc are used in order to
produce finished goods or services in sectors and industries. In any investment project the inputs
are analyzed and reviewed. The key areas of inputs are:

Human resources: to ascertain the right people at right post at right time
Materials: procurement, quantity and specification
Equipment: procurement, hiring, repair and maintenance, operating manual and technical
know-how
Money: financial obligations, financial capability, cost of capital etc
Information: PMIS, reliable, accurate, updated and sufficient information for decision
making

A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 11

2.0 Project Appraisal and Formulation Techniques

D. Environmental analysis:
It studies the impact of the project on the environment. The areas of focus for environmental
analysis are Environment Suitability and Environment Impact.
a) Environmental Suitability: A Resource management aspect of project is given prime
consideration to examine the project as environmental suitability.
b) Environmental Impact: Environmental Impact Assessment is carried out to identify the
impact of the project in environment. The mitigation measures for the probable impact
are justified in EIA.
An overview of EIA
Definition:
Need to identify and predict the impact on the environment and in humans health and
wellbeing of legislative proposals, policies, programmes, projects and operational procedures
and to interpret and communicate information about the impact.
Usefulness of EIA:
EIA is considered as a project management tool for collecting and analyzing information on the
environmental effects of projects to aid planning and implementation of decisions. It is used to:

Identify potential environmental impacts

Examine the significance of environmental implications
Recommend preventive and corrective mitigating measures
Inform decision makers and concerned parties of environmental implications
Advise whether development should go ahead

Purpose of EIA

EIA provides a systematic examination of environmental implications of proposed

actions and alternatives to assist decision making.
The cost benefit and tradeoff analysis between the project implementation and associated
environmental costs facilitate the decision makers in making decisions which are more
likely to result in sustainable projects.

Project types:
EIA generally applies to projects, which require construction (e.g. infrastructure or
manufacturing projects)
There are two types of projects
a. Line projects (bridge, power station)
b. Band project (road, electrical T & D line)
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 12

2.0 Project Appraisal and Formulation Techniques

The EIA process
The main activities of EIA process are explained in brief in their logical sequence
1. Project screening
2. Scoping
3. Project descriptions and consideration of alternatives
4. Description of environmental base line
5. Prediction of impacts
6. Evaluation of impacts
7. Mitigation measures
8. Stakeholder involvement
9. Monitoring and auditing measures
10. EIA report
11. Review
12. Decision making
Screening the project
EIA needs for only those projects which adversely affect the environment and possessed likely
impact.
Screening procedures in Nepal
Environment protection ACT 2053 B.S and Environmental protection rules categorize the project
according to output. Act and rule clearly defines the project types which need either EIA or IEE.
IEE is carried out to determine if significant adverse effects are likely to occur which requires
detailed study before mitigation measures can be determined
Mitigation measures

Mitigation measures are recommended actions which reduce, avoid or offset the
potential adverse environmental consequences of development activities.
The objective of mitigation measures is to maximize benefits and minimize
undesirable impacts.

Types of mitigation measures

Corrective measures:
To reduce the adverse impacts to acceptable level Example: pollution control device, fish
ladder
Compensatory measures:
To address adverse impacts which are un-avoidable. Example: restoration, compensation
Preventive measures:
To prevent from the occurrence. Example: awareness, capacity development
A reading Material and note (Prepared by: Er. Subash Bhattarai)

C:2 Page 13