2. Chapter Two: Project Formulation and Appraisal

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Project Formulation and Appraisal

2.1 Techniques of Project Formulation

Various techniques are available for project formulation. They are

1.      Feasibility analysis

2.      Cost Benefit analysis

3.      Input output analysis

4.      Environmental / ecological analysis

5.      Network analysis

6.      Financial analysis

A.    Feasibility analysis

Project involves massive investments. Project decisions have long term impacts and cannot be easily altered. Before investing in ay project, investors would like to know the potential of the project. Potential of project can be financial potential as well as socio-economic development potential or technical potential. Feasibility analysis makes it possible to screen out non-feasible project idea and selection of project idea. Feasibility analysis answers which project (s) to undertake. The aspects of feasibility analysis are described as follows:

a.      Technical analysis:

In the technical part of the feasibility study the alternate methods of selection of best available technology and course of action are identified. In this study following works are carried out.

·         Location of suitable site

·         Selection of appropriate method of construction

·         Selection of suitable equipment for construction

·         Specifications of construction materials

·         Determining the availability of different resources

·         Choice of available technology

·         Design requirements and HR requirements

·         Technical risks and uncertainties

b.      Economic analysis:

It is also required at the time of feasibility study stage of the project. Economic analysis is the systematic approach to determining the optimum use of scare human and non-human resources involving comparisons of two or more alternatives in achieving a specific objectives under the given assumptions and constraints. It measures the effect of the project on the community and national economy. It gives the answers about the economic viability of the project and also known as cost benefit analysis. The economic viability of a project is analyzed using four basic steps as:

                                i.            Identify the economic costs and benefits

                              ii.            Quantity the costs and benefits as much as possible

                            iii.            Value the costs and benefits

                            iv.            Compare the benefits and costs.

c.       Marketing analysis:

Marketing analysis is carried put to find out the project’s capability to address customer needs along with the integrity and consistency of the marketing assumptions and helps to reformulate the project if necessary on its likelihood of viability and sustained market performance. This analysis is carried out in four basic steps as:

                                i.            Marketing definition

                              ii.            Market analysis

                            iii.            Strategic appraisal

                            iv.            Expected performance

d.      Management analysis:

Management analysis during feasibility analysis deals with the assessment of managerial capability in terms of planning, organizing, staffing, leading and controlling. The areas of focus in management analysis include:

                                i.            Institutional relationship with the project, funding agency, contracting authority, implementing agency and beneficiaries

                              ii.            Project management

                            iii.            Stakeholder analysis

 

e.       Financial analysis:

Financial analysis during feasibility analysis examines the adequacy of return to the project operating entity and to the project participants. In financial analysis, all expenditures incurred under the project and revenues from it are taken into account. Financial analysis also identifies the estimation of the capital cost requirements, and the sources and means of financing, cash flow, accounting and reporting system, profitability. Generally six approach step is carried in financial analysis as:

                                i.            Preparing cost estimates

                              ii.            Forecasting incremental project net cash flow

                            iii.            Determining the financial NPV

                            iv.            Calculating financial IRR

                              v.            Understanding risk

                            vi.            Performing sensitivity analysis

f.        Environmental analysis:

It studies the impact of the project on the environment. Study of EIA or IEE is carried simultaneously during the feasibility analysis. Environmental assessment is the process of identifying, predicting, evaluating and mitigating the bio-physical, social and other relevant effects of development proposals prior to major decisions being taken and commitments made. The areas of focus during environmental analysis are environmental sustainability, environmental impact and its mitigation measures.

g.      Socio-political analysis:

Socio-political analysis is a systematic study of the social, political and economic relation and factors that shape a particular environment and how these affect the lives and opinions of those live within it. It is necessary because this forces positively or negatively impact project implement-ability a lot.

B.  Cost- Benefit analysis:

In simple term it is known as economic analysis of the investment proposal from the larger social point of view. Therefore it is regarded as social cost benefit analysis (SCBA) in general. Cost benefit analysis is the comparison of different projects competing for the same resource budgets. The use of payoffs matrices is currently fashionable in this regard. It evaluates the cost involved and the benefits of the projects. In developing economy, governments are involved large sum of investments; consider a SCBA in their investment including donor agencies.

SCBA measures the income gained or lost by individuals, groups within the society, other private business, government, workers, consumers, external forces. The gain or loss to an individual group within the society as a result of the project is equal to the difference between the shadow price and the market price of each input in case of physical resources or the difference between the price paid and the value received in the cost of financial transactions.

It is an analytical tool in decision making which enables a systematic comparison to be made between the estimated cost of undertaking a project and the estimated value and benefits which may arise from the operation of such a project. It is used in both sectors public and private. For private sectors, CBA examines the profitability but for public sector in examines the social profitability. Social profitability is determines in terms of economic growth, income redistribution, employment generation, social development and poverty reduction.

Rationale for SCB Analysis

Market imperfections:

Actual monetary costs and benefits of the project can be obtained only on perfect market system. When imperfection exists, market prices do not reflect social values. Market imperfection is due to rationing of commodity, minimum wages and foreign exchange regulations.

Externalities:

A project may have a beneficial effect externally or may have a harmful effect externally. The monetary value may not capture the beneficial or harmful effect to external.

Taxes and subsidies:

From the private point of view, taxes are definite monetary costs whereas subsidies are definite monetary gains. But from a social view point they are just regarded as transfer payments and hence considered as irrelevant.

Concern for savings:

For the private point of view, it is not a different valuation of consumption or saving in the economy. Form a social point of view, higher valuation for savings and lower valuation for consumption.

Merit wants:

Goals and preferences are not expressed in the market place, but believed by policy makers to be in the larger interest. It is referred as merit wants. The merit wants are not relevant form a private view point but are important in social point of view.

Concern for redistribution:

A private firm do not bothers how its benefits are distributed across various groups in the society. In contrary to this, the society concerns about the distribution of benefits across different social groups.

Procedure for SCBA

·         Determine the problem

·         Ascertain alternative solutions to the problem

·         Estimate costs and benefits

·         Decide on the optimal solution

·         Comparison of cost and benefits

·         B/C ratio computing

·         IRR

·         NPV

Limitations of SCBA

·         The estimation of costs and benefits are subjective and lack accuracy

·         Social costs and benefits are difficult to forecast and quantify

·         Spin-off benefit remains un quantified

·         Shadow price provides room for discretion and arbitrariness

Concept of Shadow price:

The shadow price is imputed market valuation of a commodity or service which has no market price. It is worth of obtaining an extra unit of a scarce resource.

Basis of shadow pricing

·         User’s willingness to pay

·         Cost of production and marginal cost of production

·         Border pricing

·         Foreign exchange value

·         Consumption rate of interest

·         Investment rate of interest

·         Marginal productivity of labor

C. Input output analysis:

It is used to analyze the inter industrial relations and dependencies among the sectors in a comprehensive economic system. The IOA can be used to determine intermediate materials, labor, capital and import requirements with mutually consistent production level and resource requirements. It is based on empirical investigations.

Input analysis:

It deals with the analysis of human and non-human resources that serves as inputs for the project. The inputs such as labor, capital, HR, information and physical resources etc. are used in order to produce finished goods or services in sectors and industries. In any investment project the inputs are analyzed and reviewed. The key areas of inputs are:

·         Human resources: to ascertain the right people at right post at right time

·         Materials: procurement, quantity and specification

·         Equipment: procurement, hiring, repair and maintenance, operating manual and technical know-how

·         Money: financial obligations, financial capability, cost of capital etc

·         Information: PMIS, reliable, accurate, updated and sufficient information for decision making

D. Environmental analysis:

It studies the impact of the project on the environment. The areas of focus for environmental analysis are Environment Suitability and Environment Impact.

a)      Environmental Suitability: A Resource management aspect of project is given prime consideration to examine the project as environmental suitability.

b)      Environmental Impact: Environmental Impact Assessment is carried out to identify the impact of the project in environment. The mitigation measures for the probable impact are justified in EIA.

An overview of EIA

Definition:

Need to “identify and predict the impact on the environment and in human’s health and wellbeing of legislative proposals, policies, programmes, projects and operational procedures and to interpret and communicate information about the impact.”

Usefulness of EIA:

EIA is considered as a project management tool for collecting and analyzing information on the environmental effects of projects to aid planning and implementation of decisions. It is used to:

·         Identify potential environmental impacts

·         Examine the significance of environmental implications

·         Recommend preventive and corrective mitigating measures

·         Inform decision makers and concerned parties of environmental implications

·         Advise whether development should go ahead

Purpose of EIA

·         EIA provides a systematic examination of environmental implications of proposed actions and alternatives to assist decision making.

·         The cost benefit and tradeoff analysis between the project implementation and associated environmental costs facilitate the decision makers in making decisions which are more likely to result in sustainable projects.

Project types:

EIA generally applies to projects, which require construction (e.g. infrastructure or manufacturing projects)

There are two types of projects

a.       Line projects (bridge, power station)

b.      Band project (road, electrical T & D line)

The EIA process

The main activities of EIA process are explained in brief in their logical sequence

1.      Project screening

2.      Scoping

3.      Project descriptions and consideration of alternatives

4.      Description of environmental base line

5.      Prediction of impacts

6.      Evaluation of impacts

7.      Mitigation measures

8.      Stakeholder involvement

9.      Monitoring and auditing measures

10.  EIA report

11.  Review

12.  Decision making

Screening the project

EIA needs for only those projects which adversely affect the environment and possessed likely impact.

Screening procedures in Nepal

Environment protection ACT 2053 B.S and Environmental protection rules categorize the project according to output. Act and rule clearly defines the project types which need either EIA or IEE.

IEE is carried out to determine if significant adverse effects are likely to occur which requires detailed study before mitigation measures can be determined

Mitigation measures

·         Mitigation measures are recommended actions which reduce, avoid or offset the potential adverse environmental consequences of development activities.

·         The objective of mitigation measures is to maximize benefits and minimize undesirable impacts.

Types of mitigation measures

Corrective measures:

To reduce the adverse impacts to acceptable level Example: pollution control device, fish ladder

Compensatory measures:

To address adverse impacts which are un-avoidable. Example: restoration, compensation

Preventive measures:

To prevent from the occurrence. Example: awareness, capacity development

This note has been prepared on the reference of below listed books, notes, published articles and related websites

2.2 Concept of project appraisal

Project appraisal is a generic term used to refer the process of assessing the investment proposals. It is a technique of evaluating, analyzing the investments and effort of calculating the project’s viability. Project appraisal is an overall assessment of the relevancy, feasibility and sustainability of a project prior to making decision whether to undertake it or not.

Project appraisal is done to answer two basic questions:

·         Will the project meet its objectives as well as the larger need of the societies or country?

·         How does project compare with other projects (alternatives) in term of funds and other resources?

Project appraisal is carried out in systematic and scientific manner because it determines the success and failure of the project. It helps in the optimum allocation of the resources, proper selection of project, systematic planning and evaluating the costs and benefits.

Project appraisal can be ex-ante, ongoing and ex-post.

Ex-ante appraisal is carried before the project implementation; it is the review of the investment proposal. Ongoing appraisal is carried during the course of implementation and ex-post is done after the completion of project before commissioning.

After the completion of project appraisal, the following issues are addressed:

·         Whether or not the objective of the project has been successfully achieved?

·         Whether or not resources were properly utilized?

·         Whether or not project completed within the stipulated time?

·         Whether or not decisions taken during project implementation were really useful?

·         Whether or not the quality of product and services of the project are according to standards?

Appraisal factors (types of project appraisal)

The feasibility study serves as the groundwork for project appraisal. The aspects covered in feasibility study are re-examined during the appraisal.

1.      Technical appraisal (assessment):

Technical and engineering analysis is necessary when a project is formulated. It ascertains whether the prerequisites for the successful commissioning of the project have been considered and reasonably good choices have been made with respect to technical solutions, technical specifications, technical risks and uncertainties, local resources availability, size, location, geology etc.

2.      Economic appraisal (assessment)

It is also known as social cost benefit analysis concerned with judging a project from the larger social point of view. It ascertains the contribution of the project on self sufficiency, employment generation and social order. Similarly it measures the impact of the project on saving, investment, distribution of income in the society.

3.      Financial appraisal (assessment)

It focuses on the financial viability of the project. In simple words, whether this project will be able to satisfy the return expectations of those who provide capital. The aspects to be looked during financial analysis include an investment outlay, cost of capital, means of financing, projected profitability, break even points, cash flows, investment worth judged in terms of various criteria of merit and risk.

4.      Management appraisal (assessment)

Management analysis focuses on project organization, management, institutional relationships and management capabilities in planning, organizing, staffing, leading, implementing and controlling.

5.      Marketing appraisal (assessment)

Marketing analysis is primarily concerned with marketing related issues. It will analyze the aggregate demand, sales forecast, estimated revenue, market share etc.

6.      Environmental appraisal (assessment)

Environmental assessment is concerned with the impact of the project on environmental issues such as environmental damage by the proposed project and environmental restoration measures. IEE, EIA are reexamined.

Once the appraisal is completed and the results come positive, the funding agency approves the project and the project is ready to move for planning followed by implementation.

2.2 Project Proposal (Technical and Financial)

A project proposal is common and better understood in academic, commercial, industrial and governmental sectors. The proposal could be a request for a grant to conduct academic research or to sell an item or to build infrastructure or to conduct income generation training and capacity development.

Once the project idea is identified, selected and projects parameters are developed, then the project proposal are prepared. A proposal is basic document containing the explanation of all activities to be performed while undertaking an investment venture. In other words, it is written document prepared to do something in a pre-planned way with the view to successfully carry out the proposed assignment. Generally project proposal should satisfactorily answer the following questions:

·         What are you preparing to do?

·         Why you are proposing to do?

·         What specific results you are expecting from it?

·         What is the proposed schedule?

·         What is the cost of resources?

·         What are significant and limitations?

·         How the outputs are measured?

Proposal writing: science or Art?

Proposal writing may be considered as management science as well as an art. It is management science in the sense that writing proposal essentially requires a careful consideration of the following points:

·         Identification and selection of right project/s from different point of view

·         Formulation of reasonable and achievable objective or objectives

·         Selection of appropriate design/method for executing project activities

·         Effective and efficient use of scarce resources (doing right things at right time)

On the other hand it is an art in the sense that the proposal you prepare should have a sales value. The sales value depends upon how much convincing strength lies in your proposal and how tactfully you organize and present it. The words you use, the sentences you construct and the logic you give in your project proposal make significance for its approval and disapproval.

Consideration for preparing project proposal

A project proposal is basic document for the project. Thus it should be prepared incorporating technical and professional details. The project manager must work as the role of the proposal manger. The project manager has to consider various aspects while developing or preparing project proposal.

1.      Project problem 

The proposal manger should identify the project problem. The problem of the proposed project is given in the terms of reference by the client. Client may be departments, donors, individual etc. the organization should have enough capability to handle the technical problem and issued as specified in TOR.

2.      Organization and staffing provisions

How the proposal preparing process should be organized and what are the staffing provisions should be answered by the project manager. Generally multi-disciplinary cross functional teams should be formed in this process.

3.      Cost of proposal

How much should be spent in preparing proposal for bids is considered while preparing project proposal. The proposal development involves cost for the organization. The guidelines can be:

a.      Cost estimates

How should the proposed bid price should be set is the customer’s ability to bear. So cost estimates (proposed project cost of work) should be prime considerations in estimating the cost of the proposal.

b.      Bidding strategy

Bidding strategy of the organizations (who calls proposal) affects the proposal so the cost of preparation. It can be:

·         Winning the project at any cost

·         Competing the bid

·         Participating in the bid

Contents of proposal

Every project is unique and different to each other. For instance, the development of project proposals relating to establish drinking water supply, to construct school building, conducting detailed feasibility study of hydropower (DPR), to provide some health facilities, to conduct socioeconomic survey, to conduct training packages etc. may differ to great extent. Since each project proposal entails its own uniqueness, it is not possible to get a standard format for developing a project proposal equally applicable for all types and natures of projects. However, the contents of all types of project proposal are broadly classified into two parts: technical and financial. Some time management part is highlighted separately from technical part.

1.      Technical part of project proposal

Technical part of the proposal gives the technical details and descriptions of the project. The contents of technical part are:

a.       Problem statement : description of the project problem

b.      Special requirements: any special requirements as specified in TOR by client is described

c.  Test and inspection: procedures related to testing, quality assurance, reliability and compliance along with specifications are prepared

d.      Logistics: details of equipment, facilities, skills and administrative aspects are listed

e.       Reporting: formats, timing and nature of reporting should be highlighted

f.        CV: CV of key persons for the execution of the proposed project is listed along with details

g.      Capability statement: organizational capability and past similar work experience is focused in this part

2.      Financial part of the project proposal

It deals with the financial details of the project. The financial part of proposal covers the aspects like:

a.       Cost of basic materials

b.      Statement of work

c.       Cost summary

d.      Supporting schedules

e.       Profit statement

f.        Elements of cost

g.      Cost break down and work break down structures

h.      Cost estimating techniques

In this part generally format of BOQ (provided along with TOR or bid document) is prepared and rate is quoted for the proposed work.

Management part of the proposal

It incorporates the administrative and management capability of the proposing organization interms of:

·         Organizational structure

·         The financial stability

·         Financial litigation history

·         Accounting system

·         Employee safety, health & Labor related aspects

·         Cost and schedules

·         Past work experiences

2.3 Procedures of Developing Project Proposal

A project proposal development is logical, systematic and professional activities which involves various steps.

Step 1: Project brief (Statement of Work)

            Statement of work is prepared by the client at the project formulation phase. It is also known as wish list of the client which describes the needs and requirements. It is provided by the client in the form of TOR. SOW some time called as scope of the work. The major contents covered in SOW are:

·         Need and description of the project

·         Scope of the project

·         Predetermined objectives and output / outcomes of the project

·         Funding constraints and budget

·         Specifications, quality assurance and acceptance criteria

·         Project schedules

·         Reporting system

·         Monitoring and evaluation mechanism etc.

Step 2: Pre/Feasibility study

            This study is carried to find the implement ability of the proposed project. If the proposed project work is to carry out the detailed feasibility study (DPR) then client has prepared the pre- feasibility study report but if the proposed project is the construction of infrastructure client should prepared the feasibility study. It covers the aspects like technical analysis, economic analysis, financial analysis, marketing analysis, management analysis and environmental analysis. Technical feasibility is the main focus aspect of pre/feasibility study.

Step 3: Preliminary/detailed design

This phase is also known as conceptual design or architectural design. It is the expanded form of project idea and is based on pre/feasibility study. The objective of this phase is to create a design that will correctly and completely implements the requirements shown by study. It includes technical aspects like survey, engineering drawings, project schedule, WBS, estimated project cost etc.

Step 4: Proposal Development

This is the final step of the procedures in developing project proposal. According to the SOW, pre/feasibility study and preliminary design the project proposal is then developed integrating with the goal and objectives of the proposing organizations. It contains following details:

·         Project title: a proposal begins with the title. Generally it is written in present participle of an action verb

·         Executive summary: a brief ES should be prepared which describes the brief information and objectives of the project

·         Project description: it provides the general description of the project. The major areas of descriptions include:

o   Project objective: the objective should be SMART. General objective is set up followed by specific

o   Project component: major sub sectors are specified if any

o   Methods of implementation: it deals with the description about the implementation methods proposed for the project

o   Project schedule: Bar chart, network schedule for proposed project duration etc

o   Project budget: cost component and sub components are detailed. Itemized in expenses head should be mentioned

o   Project monitoring and evaluation: mechanism of M&E. logical framework can be provided.

Appendices for separate supporting documents like tax clearance certificate, firm registration certificate, VAT registration certificate, previous work experience, signed CVs etc. can be provided with proposal.

References

1.       R.Panneerselvam and P. Senthil kumar “ Project Management” Eastern Economy Edition, PHI Learning Private Limited, New-Delhi, India

2.       Monisha Chattopadhya “Project Management”, New Edition, Neeraj Publications Delhi, India

3.       Dr. H.L. Kaila “Organizational Behavior and HRM” Third Edition, AITBS Publishers, India

4.       Dr. Govinda Ram Agrawal “Project Management in Nepal” New Edition, M.K Publishers and Distributors.

5.       A text book of Project Engineering (revised edition) by Santosh Kumar Shrestha & Ishwor Adhikari

6.       Acharya Kedar Prasad “Project Management”, Ashmita Books Publishers & Distributors (P) Ltd.

7.       Acharya Bhawani Shankar “Organizational Behavior”, Ashmita Books Publishers & Distributors (P) Ltd

8.       Dr. Govinda Ram Agrawal “ Dynamics of Human Resource management in Nepal” New Edition, M.K Publishers and Distributors

9.       Santosh Kumar Shrestha, Subash K. Bhattarai, & RK Shrestha ''A Text Book of Construction management" Heritage Publishers and Distributors Pvt. Ltd., Bhotahity, Kathmandu.

10.    A manual on fundamentals of project management (by Er. Harimohan Shrestha), manual note for MSc CM Nepal Engineering College

11.    Oxford English Dictionary

12.    Project Management Institute of America (PMI, USA)

13.    Other related websites and freely available materials