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 profitabilityProject is evaluated to check if all the aspects of project are consistent withthe requirement,is it fit with policy and strategy of organisations/sectorsProjects 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 studiesFinally, judgment is made if the project is worth undertaking or notIf 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 theorganisationto decide funding for that project.
Project Appraisal: Market Aspects
Amarketappraisal 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 is the business function that identifies anorganisation’scustomer 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 entireorganisation. The goal of marketing is to create customer satisfaction profitably by building value-laden relationships with important customers. Thus, marketing calls upon everyone in theorganisationto “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 andorganisations.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/organisationsthat have demand for the product/serviceHow 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, weaknessDistribution mechanism etc.
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 growthSpecific 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
If the services/ products have to face competition, is there any plan in the project preparation? Some competitive strategies are:DifferentiationStrategyLow cost StrategyFocus 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 createdStrategic Alliances (Sharing ATM,chequepayment arrangements between bank)
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 printStudent 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?
Every project must be technically feasible. TechnicalAppraisal provides a comprehensivereview ofall technical aspects of theproject.
Technical aspects broadly involves a critical review of following:Choice of technological process and/ or appropriate technology,Isthe technology proven or tested?Doesthe technology/ process/ equipment technically fit with the facility’s existingtechnology/process/ equipment & machinery?Equipmentcapacity & whether it is as per requirement?Listof recommended equipment suppliers.Reputation of the suppliersand performance guarantees
Technical Appraisal Cont..
Investment cost and operational cost of different technology/processEnvironmental aspects of different technologySize and scale of operationsLocation aspects of the project and availability of infrastructural facilities with probable alternative locations
Technical Appraisal Cont..
Availability of various inputsAlternatives sites and other factors like political factorsPlant layout and buildingsNetwork 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 fromthevillage to Lakeside is graveled and in rainy seasons, vehicles movement is little difficult.Do have any comments about the plan?
A project may causes environmental impacts in many waysWill the project have any adverse effects on the environment?Has the analysis Identified positive and negative impacts of projects?Required Mitigation measures are recommendedIs there environmental management planIs 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 compensatoryafforestation. Around 26000 trees have been planted atNajafgard,IsapurandReblaKhanpur. (website Delhi metro)
Environment Friendliness Cont..
The Delhi Metro Rail Corporation has been certified by theUnited Nationsas 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)
Main acts/guidelines in Nepal are Environment Protection Act 1996, the Environment Protection Regulation 1997, National Environmental Impact Assessment Guidelines, 1993
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)PricingFinancingIncome and expenditureLiquidity planSelection of discount rateProfitability or self sustainabilitySensitivity analysis
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 promotersTheir academic qualification, and experienceTheir past performanceAssessment of other specific skills required for the projectTraining arrangement
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.
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 forfinancing 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 outputEnhanced servicesIncreased employmentLarger government revenuesHigher standard of livingIncreased income distribution etc.
Projects operate in an environment composed of uncertainty. Uncertainties regarding fund, necessary inputs, potential technical problems, political disturbance etc. Project Appraisal examines whetherAll the risks are identified and analyzedRisk mitigation strategies are proposedRisk monitoring and control plan are prepared