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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
Evaluating market segments
• 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
Competitive strategy
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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
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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