How to analyse government projects

1. Project AppraisalProject Appraisal
 Critical examination of the project from all aspects isCritical examination of the project from all aspects is
called appraisal.called appraisal.
 Analysis of prospective costs and benefits that leads toAnalysis of prospective costs and benefits that leads to
desirability for committing resources.desirability for committing resources.
 It is carried out at two stages:It is carried out at two stages:
 Internal AppraisalInternal Appraisal
 External AppraisalExternal Appraisal
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ASPECTS OF PROJECT APPRAISAL
 Social Aspects
 Economic Aspects
 Environmental Aspects
 Financial Aspects
 Administrative/Management Aspects
 Commercial Aspects
 Technical Aspects

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Preliminary StepsPreliminary Steps
 Read the document thoroughlyRead the document thoroughly
 Check the completeness of the documentCheck the completeness of the document
 Are the PC-I & PC-II prepared on prescribed formatAre the PC-I & PC-II prepared on prescribed format
 Cost estimates are attached?Cost estimates are attached?
 Accompanied by drawings, maps etc.Accompanied by drawings, maps etc.
 Are the PC-I/PC-II provided in sufficient numbersAre the PC-I/PC-II provided in sufficient numbers
 Check Signatures of concerned officersCheck Signatures of concerned officers
 Determine the sector to which the scheme will contributeDetermine the sector to which the scheme will contribute
 Determine the project’s contribution to the sector objectivesDetermine the project’s contribution to the sector objectives
 Mark problems mentioned in the documentMark problems mentioned in the document
 Mark objectives mentioned in the documentMark objectives mentioned in the document
 Compare marked problems with the objectives forCompare marked problems with the objectives for
establishing cause and effect relationshipestablishing cause and effect relationship

4. 4
TECHNICAL ASPECTS
The technical aspects related to the following sectors as
well as the social aspects have already been covered
under the project document.
 Engineering;
 Agriculture
 Forestry
 Fisheries;
 Health;
 Education;
 I.T Infrastructure
 Social
 Administrative/Management

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COMMERCIAL ASPECTS
• Arrangements for supply of inputs and marketing the
projects output.
• Effective demand at a reasonable price.
• Where will the products be sold?
• Is the market large enough to absorb the new production
without affecting the price?
• If the price is likely to be affected, by how much? Will the
project still be financially viable at the new price?
• Is the product for domestic consumption or for export?

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FINANCIAL ASPECTS
• Analysis encompass the financial effects of the
proposed project.
• Relates purely with finances and revenue
generation.
• Based on internal rate of return (IRR)

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ECONOMIC ASPECTS
• Determination of the projects contribution
to the development of economy.
• Justification of investing scarce resources
to the project.

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ENVIRONMENTAL ASPECT
• A specific concern is that those who enjoy the fruits of
economic development today may be making future
generations worse off by excessively degrading the earth’s
resources and polluting the earth’s environment.
• A general principal of sustainable development is that
current generations should meet their needs without
compromising the ability of future generations to do the
same.
• Common applications include valuation of damage due to
soil erosion, deforestation ,air and water pollution. For
environmentally related health risks, income foregone
because of illness, or premature death can be used to
measure welfare losses.

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Concept of Time Value of Money
• The cost & benefits of a project occur at different points
of time depending upon the life of the project.
• The value of money changes over time, as such value of
costs & benefits would depend upon the time of their
occurrence.
• To compare the value of resources at different points of
time, apply the compounding and discounting techniques.

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Presentation of Results
Discounted Analysis:
1. Benefits Cost Ratio (BCR)
The ratio of the present value (at an appropriate discount
rate) of benefits and costs. A project is accepted if BCR>1.
2. Net Present Value (NPV)
The difference between the present value(at an appropriate
discount rate) of benefits and present value of costs. A
project is accept if NPV>0 and rejected if NPV<0.

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3. Internal Rate of Return (IRR)
That IRR is a discount rate which just equates discounted
benefits to discounted costs. If IRR exceeds from the discount
rate, the project is accepted (otherwise rejected).
IRR = Lower + Difference x ( NPV at Lower Discount Rate)
discount between two (Sum of NPVs at two Discount Rates (signs
ignored)
rate discount rates

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UNDISCOUNTED ANALYSIS
Break-Even Analysis:
The break even point is the minimum capacity utilization
beyond which a firm starts making profit from its operation.
PAY-BACK PERIOD
The pay back period is the length of time required to recover
the investment.

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LIMITATIONS OF THE PROJECT APPRAISAL
- Quality of project analysis depends on the quality of data
and forecast made about costs and benefits. Over-
estimation of benefits and underestimation of costs is quite
common to get the project approved.
- In view of the uncertainty about the future it is impossible to
quantify completely the risks.
- Project analysis is a partial analysis where it is assumed
that project will not change the macro economic variables.
- It is a useful device where benefits can be quantified.
- Project analysis is useful when there is a definite starting
and finishing points.

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- Project analysis is a useful tool only if major part of
benefits are quantifiable. In cases where non quantifiable
externalities (e.g. job creation, regional development,
development of skill, transfer of technology) are
substantial, project analysis becomes less formal.
- There is a conflict of evaluation in project analysis.
Political, social, economic, financial valuation, most often
are conflicting.