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
