Development project appraisal for sustainable development

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Development Project Appraisal for sustainable development

M A Kamal, Ph.D Director General National Academy for Planning and Development

6 Objectives of Project Appraisal

7 Scope of Project Appraisal

8 Methods of Calculating Profit Worthiness

1 Introduction:

1.1 Development projects impose a series of

communities or countries.

1.2 Those costs and benefits can be social,

environmental, or economic in nature, but may often involve all three.

1.3 Irrigation projects may facilitate the

growing of cash crops in one locality, but cause water shortages, and hence economic, social and environmental pressures in another locality

2 Definition: Project

2.1 A Project is a set of interrelated

investment activities to attain certain specific objectives by utilizing limited resources within a particular period of time.

3 Projects types:

Projects are:

3.1 Type ‘x’ : Self financing projects i.e projects which

earn revenue through sale of output (goods & services) These are called directly productive projects,

i.e Industrial Projects

3.2 Type “y” : In directly productive but non-revenue

earning projects, i.e., projects which give rise to tangible output, benefit of which do not accrue directly to projects themselves but to other parties Example: Irrigation Projects, Roads, Bridge etc

3.3 Type “z” : Service Sector Projects Projects which do not

give rise to tangible output but provide service benefits

to the society

4 Projects Cycle

4.1 There tends to be a natural sequence in the way

projects are planned and carried out and this sequence has come to be known as ‘ the Project Cycle’

4.2 Project Cycle Covers following stages:

I Project Identification.

II Project Preparation & Analysis III Project Approval / Negotiation

IV Project Appraisal

V Project Implementation & Monitoring

VI Project Evaluation & Follow-up Analysis.

4.3 A Project generally goes through all these phases

sequentially from identification to evaluation & follow-up This sequence has come to be termed or referred to as

“Project Cycle”

5 Project Appraisal

costs and benefits If benefits exceeds costs, the project could be considered for acceptance Otherwise, it is not.

5.2 The basic principle in appraisal / CBA is for

potential acceptance of a project

analysis of a project to determine whether the project should be implemented or not.

6 Objectives of Project Appraisal

6.1 Project Appraisal is necessitated because the resources or

means are limited as compared to the needs of the society

6.2 As a result, any investment undertaken implies depriving

other projects resources

6.3 Hence, it is very important to appraise each project before

investment decision so that scarce resources are utilized in the best possible ways.

6.4 In other words, before allocation of resources for a

particular project, the decision making authority must convince itself that the proposed project is the best and most economical way of achieving the desired objective (in terms of socio-economic benefits)

6.5 For this and for ensuring economic use of resources, we

have to appraise each project very minutely from different angles

6 Objectives of Project Appraisal

pre-investment analysis of market & technical feasibility, financial soundness, economic desirability and, finally, measuring its investment worth.

6.7 The task aims mainly at ensuring that scarce

resources are put to most effective use.

6.8 It requires the combined efforts of a team of

persons from various disciplines such as engineers, financial analysts, economists, etc

7 Scope of Project Appraisal

7.1 Market Feasibility study.

7.2 Technical Feasibility / viability.

7.3 Financial Soundness.

7.4 Management and Organizational

Aspects / Managerial Soundness.

7.5 Economic viability / Appraisal.

7.6 Environmental Appraisal / Viability

7.1 Market Feasibility

a) Whether does a sufficient demand

exist?

b) In case of import substitution,

whether the domestic cost of

production is less than the cost of

import.

7.2 Technical Appraisal

a Availability of inputs at reasonable cost.

b Consistency & soundness of engineering

design.

c Economics of scale in production.

d Appropriate technology & alternative ways of

production.

e Advantageous location of the project.

f Maintenance & Repairs.

g Provision for expansion.

h Balancing of equipment

7.3 Financial Soundness

a Exhaustive & realistic cost estimation

b Sound capital structure: Fund Source

c Provision for working capital requirement

d Generation of sufficient cash flows to cover

debt-service liability

e Generation of adequate profit

f Safety margin

g Break- Even Point

h Pay back period

Project’s Capital recovery It is defined as the length of time it takes to recover the initial investment of a

7.4 Managerial Soundness

a Experience of the top managerial

personnel in the line.

b Expertise and ability of supervisory

staff.

c Balance between supervisory staff

and workers

d Clarity of job description,

responsibility and accountability

7.5 Environmental Aspects

The environmental impacts include –

Land / Wet Land Habitats, Forests.

b Physico- Chemical : Flood Control & Drainage

Erosion, Drainage, Congestion / Water Logging, Obstruction to waste water Flow, Soil Fertility, Early Flooding.

c Human Interest : Areas of Settlements,

Communication, irrigation Facilities, Landscape,

7.6 Measurement of Investment Worthiness

its sponsors or owners?

the national economy?

questions provide the prime test of a project’s acceptability.

8 Methods of Calculating Profit Worthiness.

8.1 Net Present Value = NPV

8.2 Benefit Cost Ratio = B/C Ratio

8.3 Internal Rate of Return = IRR

8.1 Formula for:

i) NPV = Discounted Total Benefits – Discounted Total

costs

ii) B/C Ratio = Discounted Total Benefits

Discounted Total costs

8.3 Formula for IRR:

NPV

iii) IRR = LRD + LRD x ( HRD – LRD )

NPV - NPV LRD HRD Where,

LRD = Lower Rate of Discount at which NPV is positive;

HRD = Higher Rate of Discount at which NPV is negative;

NPV = Net Present value at the Lower Rate of Discount;

LRD NPV = Net Present value at the Higher Rate of Discount.

HRD

What is IRR?

IRR = Internal Rate of Return is that rate of discount

that makes/ reduces the Net Present Value

Year Cost Benefit Discount

Factor at 15%

Discounted Cost DiscountedBenefit D.F at 25% Discounted Cost Discounted Benefit

337.04 = 1.08

NPV at 25% = 312.32 – 317.12

= - 4.8 IRR = 15 + 28.4 × (25 -15)

28.4 – (- 4.8)

= 15 + 28.4 × 10

28.4 + 4.8

= 15 + 28.4× 10 33.2 = 15 + 8.55 = 23.55

11 The basic difference between Financial

Appraisal &Economic Appraisal

Financial Appraisal Economic Appraisal

a Profitability or worthiness of any

project is determined or judged

from the point of view of an

individual/ Entrepreneur

a Profitability/ viability or

worthiness of any project is determined or judged from the point of view of the society or nation as a whole

b Only direct cost and direct benefits

are considered while determining

the profitability of the project

b Include both direct and indirect

cost and benefits

c Cost and benefit are evaluated at

market prices

c Costs and benefits are

evaluated at shadow price/

Accounting price

d Use Market Rate of Discount d Use Social Rate of Discount

12 Types of Project Appraisal

13 Conclusion:

13.1 It involves comparison of costs and benefits

13.2 Objectives of a project Appraisal are needed because of

limited resources, allocation of resources, investment analysis, etc

13.3 It involves Market, Technical, Financial, Management,

Economic and Environment Feasibilities

13.4 It entails measurement of investment worthiness

13.5 Methods of calculation of profit worthiness is highly

essential

13.6 Acceptability criteria are needed

13.7 Differences between Financial and Economic Analysis's

and required

14 Farewell Call:

14.1 There is a widespread concern that adverse

environmental effects of economic activities will seriously affect both the present and the future welfare of people in less developed countries, and that the present project

address the issues

14.2 It is necessary to use the idea of sustainable

development in project appraisal with the help of cost-benefit analysis methodology.