Project Appraisal is a very cardinal tool to gauge the key factors of a project and its viability. This essay seeks to discuss with practical examples the importance of project appraisal. It will begin with defining the key term namely project appraisal, thereafter an in-depth discussion will follow. Finally a conclusion will be draw as summary of what has been discussed.
Project appraisal is a basic term that simply refers to the process of assessing, in an organized and well planned way, the case for proceeding with a project or proposal or not. It often involves comparing various options, using economic appraisal or some other decision analysis technique (Anthony, Boardman, David, Greenberg, Aidan and Weimer, 1996). Project appraisal is simply a process of evaluating and enquiring on project proposals before resources are committed to them. It is a critical tool for effective action in community renewal. It’s a means by which partnerships can choose the best projects to help them achieve what they want for their community. The appraisal of the project is a systematic review of all the aspects of the projects with the aim of providing reliable information to proceed or not to proceed with the project. This involves checking the estimates and projections of the cost of resources and the expected flow of benefits from the project along with possible financiers and beneficiaries. The appraisal of the project may be undertaken internally or by independent experts (donors or consultants). Project appraisal reports are sometimes used when soliciting for funds for a project. Project appraisals basically assesses the technical, financial, economic, social, institutional, environment and sustainability aspects of the project. The key tools of planning and appraisal include logical framework or (log frames). (Kumar, 2006)
Project appraisal is basically the complete scanning of a project. Mostly the banks and financial institutions usually conduct critical appraisal of projects which are submitted to them by the entrepreneurs for getting loans. Previously, they have been accepting data that is provided by entrepreneurs as valid while they are assessing the project. The emphasis has been mostly on the cash flow and financial viability of a project in assessing their suitability for extension of loans. Project appraisal can be likened to being a promoter in that it takes a second look critically and carefully at a project. (Nwokeji, Obarisiagbon, Abiola ; Enodiana, 2015)
Project appraisal is a process of having the vital objective of providing decision makers with an suggestion of the likely consequences of their actions or the official appraisal process to identify, predict, evaluate and justify the ecological, social, and related biophysical effects of a proposed policy, program or project on the environment, while sustainable development is the maintenance of ecological integrity. Project appraisal is the practise of scrutinizing the various dimensions of a project be it Technical, financial, social, Environment etc. and providing a valuation of the projects likelihood for success and also its viability. It evaluates a project’s ability to meet its stated objectives and to provide long term Economic growth in the larger framework of local and National needs. (Anulika et al, 2015)
Baum (1982) outlines four main aspects of project appraisal namely technical, institutional, economic and financial. To the four main aspects is the fifth aspect that has gained a lot of recognition and use, Project impacts or project effects. Below are the five aspects of a project appraisal:
Technical Appraisal: This appraisal method is primarily concerned with questions of design and engineering. Technical Appraisal provides a comprehensive review of all technical aspects of the project such as rendering judgment on merits of technical proposals and operating costs. It emphasizes that the proposed project is soundly designed and engineered that is, it is appropriate for local conditions and it sticks to the legal and technical standards. Under this method, the type of technology or equipment used, type of approach followed (e.g. in education or health projects) and the type, location and dimensions of physical infrastructure. The time/implementation schedules and proposed output levels are have to be realistic and the costing has to be reliable. When it comes to larger and more complicated projects technical appraisal is primarily a matter of technical experts (engineers, architects, physical planners etc.) but when dealing with smaller projects, appraisal analysts rely on their own judgement and some outside advice. Technical appraisal of a project broadly involves a critical study of the following:
Location and site: There are a number of aspects that influence location because it may significantly influence the cost of production and distribution efficiency, the operating environment etc. The important factors that influence location are raw material, proximity to market, availability of water, power, transportation facilities, man power, labour laws, taxes, incentives, subsidies etc. The factors to be considered for selection of site are load bearing capacity, access to water, effluent discharge etc.
Size of the plant/scale of operation: The size of the plant or scale of operation determines the economic and financial liability of a project. An important aspect of size is the available process technology. Equipment is often standardized at specific capacities in production sectors. Operative capacities in such sectors are therefore available only in certain multiple
Institutional Appraisal: This aspect of project appraisal is concerned with issues of organisation, management and policy. It not only covers the project institution itself and its organisation, management, staffing, policies and procedures, but also the whole array of government policies that conditions the environment in which the institution operates. A proper institutional appraisal is of vital importance to the success of any project. However, there are no universally acceptable institutional appraisal criteria. This is partly due to the fact that different types of projects require different set-ups and partly to the variations in political, cultural and economic project environments. An institutional appraisal can therefore never be of a “blueprint-type” and will always carry a high degree of personal (expert) value judgement. (Baum, 1985)
Financial Appraisal: This appraisal method is concerned with the viability, efficiency and/or effectiveness of a project. The viability-aspect can be further subdivided into ‘profitability’ and ‘liquidity’. The former indicates whether in a project expected benefits (revenues) will exceed expected costs, while the latter deals with the question whether there will be sufficient funds available over the lifetime of the project to cover investment and operating costs. A market or demand study is normally an integral part of viability analysis. The efficiency-aspect in principle tells h e w efficient inputs (or costs) are transferred into outputs (or benefits) . It goes further on the profitability aspect above and intends to facilitate selection among viable alternatives. Cost-Benefit Analysis is the central technique developed to tell the extent to which benefits outnumber costs, or in other words: the degree of profitability or efficiency of a project. The last aspect of financial appraisal, effectiveness. It is concerned with the question whether the inputs chosen for a project are (sufficiently) effective to reach the stated aims or goals. Its main techniques, cost-effectiveness analysis, can specifically be applied where benefits of a project are hard or impossible to valuate. The purpose of the appraisal of the financial aspects of a project is generally to ensure its initiation of financial conditions for the sound implementation and efficient operation.
Economic and Social Appraisal: Where financial project appraisal is confined to the costs and benefits as experienced by the project as such, economic and social appraisal widens the scope. It is concerned with the projects’ contribution to the development objectives of the country at large. These can be many: growth in national income, a fairer income distribution, increased job creation, education for all, an improved health situation etc. However, from among these objectives economic appraisal selects maximisation of national income as the central objective and measures how much a project contributes to this goal. Social appraisal then goes one step further and also takes some other, sometimes more value loaded objectives into account (effects on income distribution, savings versus consumption, merit versus de-merit goods). The appraisal of proposed project includes an Economic analysis. An economic analysis looks at the project from the viewpoint of the whole economy, asking whether the latter will show benefits sufficiently greater than project cost to justify investment in it
A social appraisal further reviews the project design and the process of project identification through to implementation and monitoring, from a social perspective. Particular attention is paid to the likely impact of the project on different stakeholders, their opportunities for participation, and the project’s contribution to poverty reduction.
Project Impact Assessment: Although economic and social appraisal look at project effects from the viewpoint of the nation, they do so only to the extent that these effects can be expressed in terms of (monetary) benefits and costs. Projects, however, may have many impacts that can never be properly valued. Social and environmental impacts are a point in case. How does one value a (forced) change in lifestyle of a social group that is affected by a project? Or how to valuate air pollution? Impacts of these kinds do occur, but will normally not be taken into account by economic or social appraisal. “Impacts” in this respect refers to those changes that will occur because of the implementation of a project. In other words, they are project specific and they are not likely to occur anyway.
Market analysis: Financial institutions examine the project to ensure economic justification of investment details. They study the marketing scope of the project and also its worth to the national economy by analysing the consumption pattern and the potential demand for the project. Market analysis covers the following:
• Anticipated market for the product
• Analysis of market opportunity and specifying marketing objectives
• planning the process of marketing the product
• Organization for the marketing process
• Life cycle of the product
(Nwokeji, Obarisiagbon, Abiola & Enodiana, 2015)
IMPORTANCE OF PROJECT APPRAISAL
The objective of a project appraisal is to identify how the activities of the proposed development or project will an impact on the various components be it on the environment, people, economy etc. The impact assessment necessitates the identification and analysis of impacts as well as a prediction of the significance of the impacts. Project appraisal assesses both the positive and negative impacts. (Anulika et al, 2015)
Project appraisal is basically a cost and benefits analysis of different parts of proposed project with an objective to decide on its viability. A project involves employment of scarce resources. For example, an entrepreneur needs to ensure the various alternative projects are appraised before the scarce resources are allocated the best project. Thus project appraisal helps in selecting the best project among the alternative available. As alluded earlier when appraising a project, its economic, financial, technical, managerial and social aspects are all analysed. Financial institutions are the ones that often tend to carry out project appraisals to help in assessing the creditworthiness before considering financing a project. Project appraisal plays a vital role in selecting the best project and is essential to the final success of public investment projects. The importance of project appraisal raises when the scale of investments increases. (Abdulai Fofana, 2011)
The following are some of the reasons why project appraisal is very cardinal:
Project appraisal helps a partnership’s management to;
• Be objective and consistent in choosing projects
• Make sure that the project benefits all sections of the community ensuring that none is excluded
• Provide documentation to meet financial and audit requirements and to explain decisions to relevant parties (e.g. investors and sponsors) and the local people at large.
Project Appraisal justifies spending money on a project: Project Appraisal helps in asking fundamental questions about the funds required to kick start the project and whether or not the project offers a positive return on the money to be spent. When dealing with funds especially public funds it gives confidence that the money is being put to good use and also helps to identify other funding to support a project. Getting it right may entail helping a partnership make its resources go further in meeting local needs.
Project Appraisal is an important decision making tool: Project Appraisal encompasses the complete analysis of a wide range of data, judgements and assumptions, all of which need adequate evidence. This helps ensure that projects selected for funding:
• Will help achieve its objectives
• Are realistic and deliverable
• Involve local people and take proper account of their needs
• Are sustainable
• Have sensible ways of ensuring that risk managed.
Project Appraisal lays the foundations for delivery: Project Appraisal helps in ensuring that the projects will be properly managed by ensuring suitable financial and monitoring systems are put in place, that there are eventuality plans that will deal with risks and also setting milestones against which progress can be judged.
(Mehari ; Rodney, 2001)
An effective project appraisal provides important benefits to partnerships and, most notably to local communities where the project is implemented. A good project appraisal validates the funds to be spent on a project. It is an important tool in decision making and lays the foundation for delivery and evaluation. Getting the design and operation of appraisal systems right is important
Project appraisal follows the project formulation phase resulting in the preparation of feasibility report (FR). The main objective of project appraisal is to ultimately decide whether the project
Proposed / sponsored in the Feasibility Report has to be accepted for Capital Investment, or be rejected. The initial appraisal of the project sponsored also aims at, if need be, recommending the steps or ways in which the project can be redesigned or reformulated with a view to better technical, financial, commercial and economic viabilities; also mitigate or minimize any adverse on negative environmental impact. Thus, project appraisal is an essential tool for judicious investment decision-making, full and complete data and information need to be documented/presented, and analysed in the Feasibility Report so as to facilitate the appraisal authorities to carry out:
a. Demand analysis to establish convincingly the need for the project,
b. Check on optimal location,
c. Technical analysis to determine whether the specification of technical parameters are sound and realistic,
d. Financial analysis to assess whether the project proposal is financially viable,
e. Commercial analysis to establish the soundness of product or service specifications, marketing plans, organization structure (both project and for operation),
f. Socio-economic analysis to determine whether the project is worthwhile to implement from the point of view of the nation that is society at large and the economy as a whole, and
g. Environment and physiographical and ecological thresholds analysis which is concerned with the identification of these constraints, and make the evaluation of chances of success (or otherwise) which the project may have to face (these constraints). Internal consistency and external compatibility are two basic attributes of a viable project.
Development oriented administration and forward looking management may have under consideration, at any juncture or time, a number and variety of projects, resources being limited, a choice has to be made. Project appraisal is warranted to assess the material attributes of an investment proposition and to confirm the implications the project will pose for the sponsoring authorities (system) as well as for systems with which it will have to co-exist after its implementation. (Kumar, 2006)
In conclusion, a successful execution of a project relies heavily on the how effective the project plan, management and appraisal is. Project execution is centered on the expectation of goals and objectives of the project planning that is to be undertaken. The project is basically the roadmap of the project while the appraisal is the dry run. Effective planning provides appropriate and sound direction when carrying out a project and also assists insufficient monitoring and evaluation. Before any plan is executed, a project appraisal is undertaken to help partnerships select the best suited projects to assist them in achieving the intended goal. A lot of emphasis needs to be placed on how vital a project appraisal is and basically an “appraisal culture” as it helps in coming up with the right system for circumstances especially local ones and ensures that everyone that is part of the project understands the importance of a project appraisal and has the skills and knowledge to play their part.