Project Appraisal

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 organization 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 organization'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
organization. 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 organization
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/ organizations 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

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

• 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
 Key elements of appraisal
• Eligibility • Legal Framework
• Regional development • Policies, public acceptance
• Rational use of energy • Licensing
• Environmental protection • Environmental compatibility
• R&D • Procurement
• Promoter's Standing • Technology & Design
• Management capacity • Project Definition
• Business Strategy • Viability
• Financial Robustness • Adaption to Technology
• Access to Loan • Local requirements
• Technical capacity
• Life expectancy
• Time Schedule • Investment Cost
• Date of start and till launch • Total project cost
• Various clause in schedule • ROI
• Procurement • Environmental Compatibility
• Raw Materials • Overall project addressing the
• Legal consideration environmental issues
• Taxation and customs
• Market Prospects
• Growth rate
• Economic contribution
• Economical & Financial Viability
• Profitability
• Consumer size