Project Appraisal and Selection

Dr. Ranjan Ghosh

Mentor Professor,
IIM Kashipur

Projects and Objectives

of Development Strategy

Growth in Income (National and Per Capita)

Increase in Share of Industry
- (Percentage Share in National Income)
Increase in Industrial Employment

(Share of Workforce in Secondary Sector)

Reduction of Poverty
Balanced Growth

Objectives of
Development Strategy

Human Development

Education
Basic Civic Amenities
Drinking Water & Sanitation
Health

Savings & Investment

GDP Growth Depends on Level of Investment

Investment Financed from Domestic Savings
or Borrowings
Sustained GDP Growth & Human
Development Requires High Level of
Savings/Investment

GDP Growth

GDP Growth is a Function of Rate of

Investment
Investment May be Financed from
Domestic Savings or Foreign Savings

Portfolio Strategy

Selecting a Investment Path to Realize

the Goals
Evaluating Each Investment Project for
Costs and Returns
Selecting a Set of Projects and
Executing Them

Why Appraisal?

Resources are Scarce

Alternative Demands on Resources
Benefits from Projects

Do they match the outlay?

Will it provide surplus?
Will it worsen the resource position?
Can we repay?

Appraisal

Facets of Project Appraisal

Market Analysis
Technical Analysis
Financial Analysis
Economic Analysis
Ecological/Environmental Analysis

Appraisal

Projects with Market(s) and Competition

or Alternative Suppliers

Prices and Costs as Benchmark

Choice to the Consumer

Social Sector Projects with No Clear

Market Returns

Returns More Difficult to Evaluate

Cost Per Unit of Service Easier
Importance of Quality of Service

Appraisal

Can We Rank the Projects?

In order of benefits/returns
In order of social/economic benefits
Fixed Outlay vs. Operating Costs
In order of time flow of benefits

Choose the Project with Best

Returns or Benefits

Market Analysis

Market and demand analysis concerned

with two broad issues What is the projected demand for the
good/service?
What share of the market will the
proposed project enjoy (more important
for private sector)?

Market Analysis

Key steps are:

Specification of objectives
Collection of secondary information
Conduct of market survey
Characterization of the market
Demand forecasting
Market planning

Technical Analysis

Concerned with estimating if the

project is technically feasible

Material inputs and utilities

Manufacturing process/technology
Product mix
Plant capacity
Location and site
Machinery and equipment
Structures and civil works
Work schedule

Financial Analysis

Financial Viability of the Project:

Cost of project
Means of financing
Estimates of sales and production
Cost of production
Working capital requirements and its financing
Estimates of working results
Break-even point
Projected cash flow statements
Projected balance sheets

Economic Analysis

Concerned with Economic/Social

returns of a project
Projects with Market(s) & Competition or
Alternative Suppliers
Prices and Costs as Benchmark
Choice to the Consumer
Social Sector Projects with No Clear Market Returns
Returns More Difficult to Evaluate
Cost Per Unit of Service Easier
Importance of Quality of Service

Ecological Analysis
Environmental Impact Assessment
What is the likely damage caused by
the project to the environment?
What is the cost of restoration
measures required to ensure that the
damage to the environment is
contained within acceptable limits?

Project Objectives

Given the Socio-economic Conditions of the

State Which Are the Pressing Needs or
Unsatisfied Demand?
What Is the Capacity Already Available and
How Does It Compare With Needs of
Development?
How Does Existing Availability Compare With
Other More Developed States?

Project Appraisal

The Financing Agency Wants to Know Why

This Project Is Preferred Over Alternative
Projects?
What Social or Economic Needs or Demand
Will Be Fulfilled From the Output of the
Project?
What Will the Outlay and How Does It
Compare With Similar Projects Elsewhere?

Project Appraisal

If Project Outlay or Costs Higher

What are the local conditions that are

responsible?
Could they be lowered through another
configuration like Size, Location, or Project
Design or Mode of Financing?

Project Parameters

The Need for the Services or Goods

Produced From the Project

Existing capacity and demand, current and future

Social or economic needs that will be satisfied

Location of the Project

Why this location is preferred - advantages and

disadvantages
Factors considered like good transport facilities,
nearness to market or demand.
Demand for output

Project Parameters

Location

Availability of inputs for the project like water,

power, and material resources
Impact of the project on immediate vicinity

Project Implementation

Who will implement

Time Frame
Organisational capability

Project Parameters

Environment Impact Assessment

Ecological
Effluents and waste disposal
Impact on flora and fauna
Displacement of People

Detailed Project Features

Capacity of the Project

Full capacity or maximum output envisaged
Basis of capacity (No. of Shifts)
Do the Capacities of Various Section in the
Project Match the Overall Planned Capacity
Furnish details
Internal consistency
Technical Arrangements

Project Features

Land

Total Area Needed

Topography of the land
Nearest road/rail link
Land acquisition

Detailed Project Features

Buildings

Total Area with justification (including

housing)
Kind of construction
Architect and detailed drawings
Cost per unit
Justification for cost per unit
Who will construct (contractor or PWD)

Detailed Project features

Buildings for the main plant and

equipment
Buildings for auxiliary services like
workshops
Godowns, warehouses
Non-factory - canteens, guest houses
Quarters, etc.

Detailed Project Features

Plant and Machinery

Technical specifications
Probable suppliers
Imported vs. indigenous
Method of acquisition (Competitive bidding
or turnkey)
Consultants or contractors

Detailed Project Features

Raw Materials
Detailed specifications and quantity required
Is it in short supply
Probable suppliers
Utilities
Power required and availability / sources
Location of sub-station & its distance from site
Internal generation

Detailed Project Features

Utilities (cont.)

Details for obtaining water

Source and capacity
distance from the site
Steam, Compressed Air, Fuel
Details and availability

Detailed Project Features

Effluent

Solid and liquid waste generated

Disposal arrangements
Impact on environment

Housing

Number of personnel to man the project

Availability of housing
Houses to be constructed

Detailed Project Features

Schedule of Implementation

Detail each activity and time required

Bar diagram or PERT chart giving schedule
Parallel and sequential activities

Project Cost

Land
Buildings

Project
Utilities
Housing and Social Infrastructure

Plant and Equipment

Main Plant
Utilities

Project Cost (contd.)

Raw Materials and Consumables

Pre-operative Expenses
Interest Cost Capitalized

Financing

Sources of Finance

Own funds
Loans and Grants (Indian & Foreign)
Foreign Exchange needed
Security and Repayment Terms
Interest cost
Amortization details
Collateral and Guarantees

Benefits and Returns

Evaluation of Market Related Benefits

Buildup of output
Selling price assumed
Beak even point
Operating Costs, returns and profitability
Cash flow and repayments

Non-market Benefits

Benchmarks (mortality, illiteracy etc.)

Cost per unit of output
Quality of service and service benchmarks

Evaluation

Relating Project Costs and Objectives

Cost and Returns

Economic returns
Social returns
Time flow of returns

Externalities

Impact on the area

Benefits to other sectors (e.g. health on education
or labour productivity)

Evaluation

Environment

Is the environmental cost acceptable?

Can it be offset by sound environment practices
and investment

Feedback Mechanism

Are the social and other objectives realised?

Are the beneficiaries satisfied?
What mechanism/monitoring will be used to
assess satisfaction?

Project Sustainability

What Would Be Required to Keep the Project

From Becoming Obsolete?
Does It Require Recurring Investment to
Ensure Benchmark Levels of Efficiency

e.g. De-silting of irrigation canals, reservoir etc

Who will finance it
Responsibility for monitoring and corrective action.

Project Risk

Time and Cost Overruns

Endogenous and Exogenous factors

Inadequate Funding
Inadequate Implementation
Mechanisms
Adverse Impact on State Finances