Chapter 2 - Project Appraisal and

PROJECT ENGINEERING Project Formulation

Contents:
2.1 Concept of Project Appraisal
2.2 Project Proposal (technical and financial)
Chapter 2 - Project Appraisal and 2.3 Procedure for Developing Project Proposal
Project Formulation 2.4 Techniques of Project Formulation
• Feasibility analysis
• Cost Benefit analysis
• Input analysis
-Er. Sandip Duwadi • Environmental analysis
Asst. Professor
Pashchimanchal Campus

Concept of Project Appraisal Objectives of Project Appraisal

• Project Appraisal is systematic and comprehensive

review of economic, environmental, financial, • To evaluate a projects ability to achieve its
social, technical and other aspects of a project to objectives
determine if it will meet its objective i.e. overall • To test whether or not resources are properly
assessment of the relevancy, feasibility and utilized or not.
sustainability of the project likelihood for the
success and its viability, prior to making decision • To assess the sources and magnitude of risk.
whether to undertake or not. • To determine if component of projects are
• It is the process of assessing and questioning consistent or not.
proposals before resources are committed.

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 Project Appraisal … What can Project Appraisal deliver
Project Appraisal helps project initiators and
The project appraisal answers following questions: designers to :
• Be consistent and objective in choosing the
Will the project meet its objective ? project
• Make sure that the program benefits the all
sections of community, including those from
How does the project compare with other
ethnic groups who have been left out in the
alternatives? past.
• Provides documentation to meet financial and
audit requirements and to explain decisions to
the local people

Technical Appraisal
Ecological Appraisal
• Whether pre-requisites for the success of project
considered? • Impact of project on quality of :- Air, Water,
• Good choices with regard to location, size, process, Noise, Vegetation, Human life
machines etc.
• Major projects ,such as these, cause
Economic Appraisal environmental damage
• Social cost -benefit analysis
• Direct economic benefits and costs in terms of shadow
• Power plants
prices • Irrigation schemes
• Impact of project on distribution of income in society
• Impact on level of savings and investments in society
• Industries like bulk drugs, chemicals and leather
• Impact on fulfillment of national goals :- processing.
(1) Self sufficiency (2) Employment and (3) Social order • Likely damage & the cost of restoration

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 Project Appraisal Criteria
Financial Appraisal Technical:
• Will the project work? Has due attention been paid
• Whether the project is financially viable?
to technical factors affecting the project design?
• Servicing debt • Given the human and material resources identified,
• Meeting return expectations can the project activities be undertaken and
outputs achieved within the time available and to
the required standards?
Financial:
• Can the project be financed?
• Will there be sufficient funds to cover the
expenditure requirements during the life of the
project?

Project Appraisal Criteria Project Appraisal Criteria

Economic: Social and gender:

• What will be the effect of the project on different
• Will the nation and society at large be better groups, at individual, household and community
off as a result of the project? levels?
• Will the project benefits be greater than the • How will the project impact on women and men?
project costs over the life of the investment • How will they participate in various stages of the
project cycle?
when account is taken of time (namely, is the • Will the social benefits of the project be greater
Net Present Value of the project positive at than the social costs over the life of the
the test discount rate)? investment when account is taken of time?

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 Project Appraisal Criteria Project Appraisal Criteria
Institutional:
• Are the supporting institutions in place? Can they Political:
operate effectively within the existing legislative • Will the project be compatible with
and policy environment? government policy, at central, regional and
• Has the project identified opportunities for local levels?
institutional strengthening and capacity building?
Environmental: Sustainability and risk:
• Will the project have any adverse effects on the • Will the project be exposed to any undue
environment? risks? Will the project benefits be sustainable
• Have remedial measures been included in the beyond the life of the project?
project design?

Technical Appraisal
Technical Appraisal
• Clearly, every project must be technically feasible. Here is a checklist that can be used:
• Technical Appraisal provides a comprehensive
• Does the technology/ process/ equipment technically
review of all technical aspects of the project such fit with the facility’s existing technology/ process/
as rendering judgment on merits of technical equipment & machinery? If not, what aspects of the
proposals and operating costs. technology / process do not fit and what measures is
the implementing agency planning to take in this
Here is a checklist that can be used: regard?
• Is the technology proven or tested? If not, has it • List of equipments and machinery to be installed with
cost and specifications of the equipment.
ever been successful elsewhere and can that
• Equipment capacity & whether it is as per
success be replicated in current context and requirement?
conditions? • List of recommended equipment suppliers.

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 Social Appraisal Social Appraisal

• A social appraisal reviews the project design Stakeholders participation and their analysis
and the process of project identification • Based on the distinction of primary, secondary and
key stakeholders, stakeholder analysis reviews the
through the implementation and monitoring, following:
from a social perspective.  Who comprise the different stakeholders?
• Particular attention is paid to the likely impact  What are their interests?
of the project on different stakeholders, their  How will they be affected by the proposed project?
opportunities for participation, and the  What are the project priorities between the
different groups?
project’s contribution to poverty reduction
 What is their capacity to participate in the project?

Social Appraisal Social Appraisal

• Stakeholders have different abilities to influence the
outcome of a project. Poverty focus
• Often target beneficiaries are in a relatively weak • Many projects are required to specifically address
position to influence the outcome of a project issues of poverty. In order to ensure the project
whereas much of the control lies in the hands of incorporates a poverty dimension, it is necessary to
secondary and key stakeholders. determine:
• The former may be frustrated by a lack of access to  Who are the poor (at community, household and
information or be placed in a weak social position due individual level)?
to traditional hierarchies.  What are the characteristics of their poverty (in terms
of access to and control of resources and benefits,
• In contrast the latter may have the time, money, vulnerability and exclusion)?
organizational capacity or political power necessary
 How may issues of poverty be addressed in the
influence the project; however, if they are not project?
interested in the project, they could pose a risk to the
project’s success by withholding support.

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 Economic and Financial Appraisal Economic and Financial Appraisal
Social Cost Benefit Analysis
• Cost Benefit Analysis (CBA) is used for determining the
• This includes an analysis of economic attractiveness of a proposed investment in terms of the
soundness of the project and the welfare of society as a whole. By presenting social benefits
and costs in a monetary format, CBA not only facilitates
quantification and valuation of costs and choices between alternative investment options but also
benefits to ensure financial viability gives an idea of the project worth. The technique is
principally used with regard to public sector investments.
• CBA differs from financial appraisal which views an
investment solely from the perspective of individual
participants, focusing on private benefits and costs and
using market prices. In contrast, CBA adopts a much
broader approach, considering both monetary and non-
monetary benefits and costs, and uses prices that more
accurately reflect economic, environmental and social
values.

Economic and Financial Appraisal ENVIRONMENTAL APPRAISAL

• Internal Rate of Return Environmental Assessment (EA)
• The IRR of a project is defined as that rate of discounting the • Environmental Assessment (EA) is supposed to provide
future that equates the initial cost and the sum of the future the project analyst with a good quantification of the
discounted net benefits. It is the discounted rate that makes
the NPV of a project equal to zero OR its BCR = one. biophysical and social impacts from developments.
Environmental Assessment generally refers to the
• The decision criterion: A project with an IRR exceeding some broader system of environmental analysis, including
predetermined level (Social discount rate) is deemed project-specific Environmental Impact Assessment (EIA).
acceptable.
• The internal rate of return is a very popular method of project • Most countries have an EIA policy and supporting
appraisal and it has much to commend it. In particular it takes legislation. Traditionally, EIA was designed to operate at
into account the time value of money. Basically, what the IRR the project level; that is to identify impacts and
tells you is the rate of return you will receive by putting your mitigation measures for an individual project. In the past
money into a project. It describes by how much the cash several years however, the EIA process has gradually
inflows exceed the cash outflows on an annualised percentage been extended to sectoral levels, strategic reviews of
basis, taking account of the timing of those cash flows. policy, and even at a global level. This section will briefly
• IRR is also referred to as the ‘yield’ of a project. discuss focus on project EIA.

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 Project Proposal Project Proposal
• A proposal is basic document containing the Contents
explanation of all activities to be performed while • A strong proposal has attractive, professional,
understanding an investment venture. inviting appearance. In addition, the information
• Due to the uniqueness of the project every proposal should easy to access. It has well organized plan of
are different. affect and technical details.
• However, its objectives are to: • The proposal should have following section and
– Identify what works to be done heading :
– Explain why this works needs to be done – Title page
– Title of project in initial capital letters
– Persuade the readers that the proposer are qualified
for the work, have a plausible management plan and – The sponsoring company and contact person’s name
technical approach and have the resources needed to and information
complete the tasks within the stated time and cost co – Team name and individual members name

• Date • Literature review

• An appropriate picture of the product or team • Details problems description
logo or both • Objectives ; what
• Executive summary – In objectives section you translates the customers'
• A brief summary of the proposal. quantitative and qualitative needs into clear
objectives
• Table of the contents
• Technical approach :how?
• Statement of the problem; why?
– Although you may not know all the details solution
• Background information to educate the ,you should know how you will attack the problems
readers and you should have some designs concepts. The
• Previous related work by others purpose of this section is to present the process by
which you will arrive at the final answer.

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Deliverables Financial part of the project proposal
• In section provide a detailed description of what
you are providing and when you will provide it. • It describes the financial parts of the projects and
Be as specific as possible. Possible item include covers
• Detail design drawings • Statements of work
• Engineering analysis • Costs of basic materials
• Data from experiments, etc • Supporting Schedule
• Cost Break down and work break down structure
• Budget; ”how much”;
• Cost estimates techniques
• Provide your best estimate of how much funds
• cost summary
will be required and how they will be spent.
• Profit statement

BE/ ME thesis report Procedure for developing Project Proposal

1. Introduction
1.1 Background
1.2 Objectives
1.3 Statement of Problem 1. Proposal Brief
1.4 Scope/ Limitations
2. Literature review 2. Pre/feasibility study
3. Methodology 3. Preliminary Detail design
3.1 Study Area
3.2 Data Collection and Analysis 4. Proposal Development
4. Result and Discussion
5. Conclusions
6. References
7. Appendices

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 Project Brief Pre/Feasibility Study
• The client develops the project idea and prepares • This study is performed to check the implement
the statement of work which describes the need ability of the project. If detail feasibility study is
and requirements. The content includes: required, then feasibility study is done before it.
– Need of project • The area for which information is collected and
– Scope of project analyzed is:
– Objectives and output of project – Technical
– Specification and acceptance criteria – Economical
– Estimated budget for the project – Financial
– Estimated time tables – Market
• The project brief serves as a starting point of the – Management
development of project proposal. It indicates the – Environment
need and requirements of the customer

Preliminary/Detail Design Proposal Development

• It is the elaboration of project idea and is based • After collecting the all required information , the
on the requirement of pre/feasibility study. final step is developing the project proposal. It
should contain following information:
• It prepares the conceptual design and – Problem Statement
architectural drawing for implementation. It – Objectives and outputs
includes: – Activities
– Technical aspects consisting of preliminary surveys – Project Implementation
and engineering design – Project Schedule
– Preliminary project schedule and implementation – Project budget
– Estimated project cost – Project monitoring and Evaluation

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 Project Formulation Techniques of Project Formulation
• Project formulation is the systematic development of a • Project Formulation is a concise , exact statement
project idea for arriving at an investment decision. of a project to set the boundaries or limits of
• It has the built-in mechanism of ringing the danger bell work to be performed by the project.
at the earliest possible stage of resource utilization. • It is formal document that gives a distinctive
• Project formulation is the process of examining identity of the project and precise meaning to the
technical, economic, financial & commercial aspects of a project work to prevent conflict, confusion,
project. overlap. Project formulation aims to:
• It refers to a preliminary project analysis covering all – Carefully identify and weight various components of
aspects such as technical, financial, commercial, project work
economic & managerial to find out whether it is – Analyse project feasibility and cost effectiveness
worthwhile to take project for detailed investigation & – Identify the stakeholders and their involvement and
evaluation. contribution
– Define benefits and expectations

Techniques of Project Formulation Techniques of Project Formulation

– Estimate resources needed

– Perform a preliminary analysis of risks
– Make outline of project schedule
– The techniques of project formulation are
– Feasibility analysis
– Cost Benefit analysis
– Input Analysis
– Environment analysis

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 Feasibility Analysis 1. Technical Feasibility
• Centered to the technical resources available to
• It is used to determine the viability of the idea the project.
• The objective of such analysis is to ensure a • Whether technical resources and team is capable
project is legally and technically feasible and of converting the ideas in to working systems.
economically justifiable
• It evaluates the projects’ potential for success
2. Economic Feasibility
• Areas of project Feasibility:
• Assesses the viability, cost associated with the
1. Technical Feasibility projects before financial resources are allocated.
2. Economic Feasibility
• Helps decision makers determine the positive
3. Financial Feasibility economic benefits to the organization that the
4. Market Feasibility propose system will provide and help to quantify
5. Managerial Feasibility them
6. Legal Feasibility

3.Financial feasibility
• Whether the project is viable after the 5. Managerial Feasibility
considerations its total cost and probable • Studies the rationally uncover the strengths and
revenues. weakness of an existing business , opportunities
• If the revenue covers the cost of the project then threats which are preset in the environment.
project is viable • Management support, employee involvement
and commitment are the key element required to
4. Market Feasibility gauge managerial feasibility
• Study and analyze the economic, demographic
and competitive factors that impact the 6. Legal Feasibility
development project. • Investigates if proposed system conflicts with
• Determines what type of project would be legal requirements
appropriate for specific location.

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 Cost Benefit Analysis ( CBA ) Advantages
• The ability to identify the project that maximize the
welfare of the country
• It estimates and totals up the equivalent • The ability to objectively assess and quantify the
money value of the benefits and cost to the purpose projects in relation to community needs
project to establish whether they are • Exposure of the basis for decision making for projects
and opportunity for public criticism
worthwhile • Ability to rank and prioritize limited resources so that
• It evaluates the project from social point of maximum benefit is realized
view, also known as Social cost benefit
analysis Disadvantages
• Comprises not only financial effects but also • Difficulty in measuring social cost and benefits and
converting them into monitory form
social effects like pollution, safety, market • Complexity
• Conflict between social welfare and financial
justification.

Input Analysis Environment Analysis

• It is the process of estimating and evaluating
• Project requires various input. It includes 5 M significant short term and long term effects of
Manpower project on quality of locations environment.
• Identifies ways to minimize , mitigate and
Materials eliminate these effects and/or compensate these
Money impact
• It includes:
Minute
Machines Environment suitability
• It is necessary to check whether the project is
suitable for existing environment or not

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Environment Impact Environment Impact Assessment
• It is also necessary to identify the possible • Process of assessing the likely environment
adverse effects caused by the development, impacts and identifying options to minimize
industrial, or infrastructural project or release of the environmental damage
substance in the environment • Carried out for large projects
• It can be down in two ways :

 Initial Environment Examination

• First review of reasonably foreseeable effects
• Describes the environment condition of project

Assignment 1 (ii)
Make a complete note on following topics :
2.1 Concept of Project Appraisal
2.2 Project Proposal (technical and financial)
2.3 Procedure for Developing Project Proposal
2.4 Techniques of Project Formulation
• Feasibility analysis
• Cost Benefit analysis
• Input analysis
• Environmental analysis

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