SOCIAL ECONOMIC PLANNING AND PROJECT EVALUATION

THE CONCEPT OF PLANNING AND PLANNING PROCEDURE

1.0. INTRODUCTION

The overall aim of SOCIAL ECONOMIC PLANNING is to enable you

understand the strategic measurable goals that a person, organization or
community plans to meet within a certain amount of time. Usually the
planning includes time-based benchmarks. It generally also includes the
criteria that will be used to evaluate whether or not the goals were actually
met.

1.1. COURSE AIMS

To achieve the stated aims, the course sets specific objectives at the
beginning of each unit which you should read before studying the unit. You
should endeavor to look at the objectives after completing each unit to
ensure that they meet the requirements.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• Explain why Socio Economic Planning is very important in our society

• Explain the Socio Economic Planning in different ways
• Outline the types of Socio Economic Planning.
Planning is based on the theory of “thinking before acting”. Planning is an integral part of
our life. We make plans in each and every step of life whether it is to go to school or to
buy household goods during shopping. We make plans according to the limitations of our
budget and resources to get maximum satisfaction and to fulfill goals from out activities.
Planning is the most basic and primary function of management. It is the pre-decided
outline of the activities to be conducted in the organization. Planning is the process of
deciding when, what, where and how to do a certain activity before starting to work.
It is an intellectual process which needs a lot of thinking before a formation of plans.
Planning is to set goals and to make certain guidelines achieve the goals. Also, Planning
means to formulate policies, segregation of budget, future programs etc. These are all
done to make the activity successful.

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All other function of management is useless if there is not proper planning system in an
Organization. So planning is the basis of all other functions. Thus Planning is the map or
a blueprint for the organization.
According to Theo Haimann, “Planning is deciding in advance, what is to be done?
When a manager plans, he projects a course of action for the future, attempting to achieve
a consistent, coordinated structure of operations aimed at the desired results. According
to Alford and Beaty, “Planning is the thinking process, the organized foresight, the
vision based on fact and experience that is required for intelligent action. According to
ME. Hurley, “Planning is deciding in advance what is to be done. It involves the
selection of objectives, policies, procedures and programs from among alternatives.

3.2 Types of Planning

Any organization can have different plans. We can classify the types of plans in the
following ways:

3.3 On the basis of Nature

• Operational Plan: Operational plans are the plans which are formulated by the
lower level management for short term period of up to one year. It is concerned
with the day to day operations of the organization. It is detailed and specific. It is
usually based on past experiences. It usually covers functional aspects such as
production, finance, Human Resources etc.
• Tactical Plan: Tactical plan involves how the resources of an organization should
be used in order to achieve the strategic goals. The tactical plan is also known as
coordinative or functional plan.
• Strategic Plan: Strategic plan is the plan which is formulated by the top level
management for a long period of time of five years or more. They decide the
major goals and policies to achieve the goals. It takes in a note of all the external
factors and risks involved and makes a long-term policy of the organization. It
involves the determination of strengths and weaknesses, external risks, mission,
and control system to implement plans.

3.3.1 On the Basis of Managerial Level

• Top level Plans: Plans which are formulated by general managers and directors
are called top-level plans. Under these plans, the objectives, budget, policies etc.
for the whole organization are laid down. These plans are mostly long term plans.
• Middle-level Plans: Managerial hierarchy at the middle level includes the
departmental managers. A corporate has many departments like purchase
department, sales department, finance department, personnel department etc. The
plans formulated by the departmental managers are called middle-level plans.

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• Lower level Plans: These plans are prepared by the foreman or the supervisors.
They take the existence of the actual workplace and the problems connected with
it. They are formulated for a short period of time and called short term plans.

3.3.2 On the Basis of Time

• Long Term Plan: Long-term plan is the long-term process that business owners
use to reach their business mission and vision. It determines the path for business
owners to reach their goals. It also reinforces and makes corrections to the goals as
the plan progresses.
• Intermediate Plan: Intermediate planning covers 6 months to 2 years. It outlines
how the strategic plan will be pursued. In business, intermediate plans are most
often used for campaigns.
• Short-term Plan: Short-term plan involves pans for a few weeks or at most a
year. It allocates resources for the day-to-day business development and
management within the strategic plan. Short-term plans outline objectives
necessary to meet intermediate plans and the strategic planning process.

3.4 Planning Process

Planning is a complex process which requires high level of studies and analysis. A
planning process which is suitable for one kind of organization may not be
suitable for another type of organization.
Process of planning includes the determination of objectives and outlining the
future actions that are needed to achieve these objectives. To create a plan there
must be determination of objectives and outlining of the course of action to
achieve the goals. There is no set formula for planning.

3.5 steps to formulate a Good Plan

1. Analysis of the environment: Planning begins with the awareness of the
opportunities in the external environment and within the organization. For this
SWOT analysis is most suitable. Strength and weaknesses are the internal factors
whereas opportunities and threats are the environmental factors which are to be
analyzed.
2. Setting the objectives: The second step of planning is to set objectives and goals
for the organization as a whole and for each department. Long term, as well as
short-term plans, are to be created. Objectives are specified to each and every
manager and department head. Objectives give direction to the major plans. So
managers should have an opportunity to contribute their ideas for setting their own
objectives and of the organization.
3. Determine and evaluate alternatives: The fourth step is to search and identify
the alternative course of action. It suggests that a particular objective can be

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 achieved through numerous ways. But the most relevant alternatives must be listed
down so that selection is made easier. Once various alternatives are identified,
they must be well analyzed with their strong and weak points.
4. Selection of Best Alternative: This is the point where the certain plan is adopted.
When the alternatives are determined most suitable alternative must be chosen out
from the list which can give maximum output with minimum risk.
5. Formulation of a derivative plan: Derivative plans are the backing plans which
are very essential. Once the basic plan has been formulated, it must be translated
into day to day operation of the organization. Middle and low-level managers must
draw up the appropriate plans, programs and budget for their sub-units.
6. Budget formulation: After decisions are made and plans are set the next step is
giving them sufficient funds to carry them out. Optimum budgeting must be done
for every course of action.
7. Implementation of a plan: Once the plans are set up, now the plans must be well
informed and shared with the employees and managers expecting full commitment
and trust. Finally, the plans must be carried out.
8. Follow up action: Obviously once a plan is carried out it generates certain output.
The progress must be well monitored and managers need to check the progress of
their plans so they can take necessary steps to improve the plans if needed.
9. Hence these are the nine steps to formulate a proper plan.

3.6 Planning Hierarchy

The concept of the feeling of the plans at the different hierarchical levels can be
understood a great deal with the help of the planning hierarchy. Here the different plans
are treated as the hierarchy, involves going towards the lowest hierarchical plan from the
broader hierarchical plan. The planning hierarchy mainly consists of the following type
of the plans:

1. Business plans – These types of the plans include whole of the business.
2. SBU plans – These plans act as the strategic business unit plans including the
business units.
3. Corporate Plans – These plans act as the plans of the organization involving its
activities. It is the total plan for the whole organization, a corporate body working
as a functional unit. The complete unit is covered under such plans.
4. Departmental plans – These plans are also referred to as the functional unit plans
and cover the branches, the projects, the departments, the units that are separated
for the functional efficiency.

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2. Conceptual planning

Provides some type of the guidance for the planning but the major drawback in this type
of the planning is that the planning unit is not at all visible, whose presence is very much
critical in the planning. The conceptual planning must consist of the following:

1. Policy – One time decision i.e. usually effective for a length of the time.
2. Objectives – Focus direction of an achievement and the general outcome.
3. Goals – Very well defined quantitative or the numerical objectives by the end of a
particular period with the plan. The practical orientation to the implementation of
the plans is obtained here.
4. Procedures – Process rules that are carrying out the action.
5. Rules – Fixed direction unless expressly revised.
6. Budgets – Plans converted to the quantities and in the terms of the money having
the feature of the interpretation in the statistical and the accounting terms.
7. Vision Statement – The statement includes the purpose operating for the future
and then to take the others in the vision fold of the organization.
8. Mission – The purpose of offering the goods and the services in the terms of the
beneficiary.
9. Variable plans – In order to satisfy the different types of the contingencies, it is a
necessity to draw different types of the plans. The variations may include drawing
a realistic plan and then following this step by the preparation of an optimistic and
pessimistic plan.

3. The Plan document

For getting a planned document, all the above steps are performed and during this, one
particular thing to keep in mind is that the plan must start with the broader objectives and
must be linked step by step to the actionable and the implementation activity. The plan
document must consist of the following:

a. Premising – This step is needed at the each stage of the planning. Before
undertaking the plan, the strength, the weakness, the opportunity and the threats
(SWOT) can be calculated depending on the premises.
b. Vision – The way in which we visualize our future.
c. Mission – What we aim to deliver to the beneficiaries.
d. Policy – What restrictions on means we will note during the execution of the plan.
e. Objectives – What we will keep as the broad directions for the achievement.
f. Goals – Translate the objectives into the quantitative and the financial goals,
which can be achieved by the operational people.
g. Procedures – To prioritize and then draw the sequence of the action.

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h. Budget – Convert to the money terms in order to establish the standards for the
evaluation.

4. The program

Whenever any activity is carried out, it is carried out to achieve one thing or the other.
But the results that one expects to be obtained must be achieved in the proper frame of
the time, so that they can be used at the right time for various other activities. Hence, in
order to get the results within the certain time frame, a program is drawn.

The projects of the diverse nature within a subject are included in the program. The
program is actually a clubbing together of the things and for getting a good view of the
word program, it can be understood as the plan document on a much wider scale than the
planning document.

3.7 Factors Leading to the Failure of the Planning

1. Inadequate Preparation.
2. Lack of the study.
3. Lack of the vision mars planning efforts.
4. Becomes very haphazard when it is done for a certain group and when many plans
are built based on the compromises.
5. Lack of clarity in the objectives and the goals.
6. Absence of the feedback.
7. Lack of the staff control.
8. Inadequacy in defining the various businesses.
9. Absence of the review.
4.0 CONCLUSION

Whatever we do or perform in our day today life, which may include doing some work at
the job or may be doing some work at the home, to do it in an efficient way and to obtain
good results it is very necessary to plan every – thing so that one is prepared for the
various activities involved in the process and is able to face any type of the problem that
may arise during the process.

We can always learn from the past and at the same time we can also plan for the future,
depending on the past and the present. But one major fact is that we can act or take any
type of the action only in the present. The mistakes that have been committed in the past
can be improved by taking various steps in the present. In the future we can only plan and
think but cannot perform anything but when the time for the action comes, it becomes
easy to understand everything and take any type of the action with more ease.

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Very careful thinking and the planning is very essential, as it saves a lot of time and also
the cost is brought down. Hence, the planning can be defined as the process of deciding
the future course of the actions in terms of the time, the performance and the cost.

5.0 SUMMARY

In the process of the planning, the importance of the time is very much critical in the
nature and has been regarded as the most important criteria in the process of the planning,
by the various system analysts. It is very important that we look into the future and then
plan everything and get prepared and ready for the different types of the situations that
may arise but one very important point to remember here is that whole the time we
cannot and should not look into our future. We should look as far as we think it’s
worthwhile to do something in the present to make such a future feasible in the nature.

The planning is not just to think about the future but it also involves the forecasting and
the prejudging of the future and then forming some lines of the action. The more one
thinks of the future, the more one is able to amend the present.
Project Evaluation
What is Project Evaluation?
Project evaluation is a process of collecting and analyzing information in order to
understand the progress, success, and effectiveness of a project. Evaluation
involves the systematic collection of information about the activities, characteristic
and outcomes of an activity or action, in order to determine its worth or merit (Dart
et al, 1998). It is a major part of learning, and can provide a wealth of useful
information on the outcomes of a project or action, and the dynamics of those who
undertook the work.
Evaluation is an important aspect of project management. It can facilitate the
successful completion of the project, and inform decisions about the future of both
the project at hand and other projects. There is no one way to carry out an
evaluation, with strengths and weaknesses apparent in most approaches. A suitable
approach should be developed in consultation with stakeholders such as the
community, local government, relevant coastal management groups, State
government or the funding body. It is important to ensure all relevant parties have
an understanding of the evaluation process, and its anticipated outcomes.

How Can the Results of a Project Evaluation Be Used?

The purpose of any evaluation is to provide information for action (e.g., decision-
making, strategic planning, program modification). Once evaluation information is
available, it should be distributed among the project stakeholders and integrated
into management practices. If this is not done, evaluation is a waste of organization
resources.
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The results of project evaluation can be used to:
• identify ways to improve or shift project activities,
• facilitate changes in the project plan,
• prepare project reports (e.g., mid-term reports, final reports),
• Inform internal and external stakeholders about the project,
• Plan for the sustainability of the project,
• learn more about the environment in which the project is being or has been
carried out,
• learn more about the target population of the project,
• Present the worth and value of the project to stakeholders and the public,
• Plan for other projects,
• compare among projects to plan for their future, and
• make evidence-based organizational decisions.
What is Process Evaluation?
Process evaluation (also called Formative or Implementation Evaluation) examines
the ongoing operations of the project. It focuses on what staff and participants do,
whether the target population is being served, what parts of the project are working
as expected, and what parts are not working. The results of a process evaluation
can help the project manager improve the operation or implementation of the
project.
What is Outcome Evaluation?
Outcome evaluation (also called Impact Evaluation) assesses the extent to which a
project has affected participants or environment. It focuses on immediate,
intermediate, or ultimate outcomes¹ that are attained as a result of completing the
project. The results of outcome evaluation should identify or anticipate both the
desirable and undesirable impacts of the project. Outcome evaluation can also
determine how the needs that gave rise to the project were satisfied, or whether
these needs still exist.

How to Choose an Evaluation Type?

The evaluation type can be selected based on:
• The objectives and priorities of the project,
• The purpose of the project evaluation,
• The nature of the project (e.g., whether it is process oriented or outcome-
oriented),
• The time frame for conducting the evaluation
(i.e., during or after the project),
• How, and by whom, the results of the evaluation will be used, and
• The time frame and budget for completing the evaluation.
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Steps in Conducting a Project Evaluation
Step One – Develop an evaluation plan/Gather information
• This may be an ongoing requirement or staged at key points during the project.
1. Review the project goals and objectives.
2. Identify the stakeholders of the project and their roles.
3. Identify the project activities and how they are related to the objectives of the
project.
4. Identify key evaluation questions (the answers to these questions should show
the progress and success of the project.
5. Identify indicators (i.e., measurable factors) that can reflect the success of each
step of the project.
6. Identify measurement tools needed to gather information. Try to use both formal
tools (e.g., surveys, focus groups) and informal tools (e.g., meetings, checklists).
7. Identify sources for collecting data (i.e., who and where to get the information
from).
Step Two – Conduct evaluation/Design and plan the evaluation
• Clarify the specific purpose or intended outcomes of the evaluation. Why are you
doing it? Will the evaluation be in the form of a report or a series of stories?
• Determine the questions you want to answer.
• Identify stakeholders, such as the community, local government, coastal
management groups, State government or funding body, and their requirements.
They may provide you with important guidance, which could make the evaluation
more relevant.
• Identify possible sources of data.
• Identify potential methods, approaches and techniques.
• Agree on the evaluation purpose and procedures including timeframes and
indicators.
• Prepare any materials required, such as questionnaires.
 Develop a system to keep track of all information and observations.
 Develop rapport with the project stake holders, communicate the importance
of project evaluation, and encourage them to participate in information
collection.
 Develop the planned evaluation tools and apply them.
Step Three – Analyze data and develop report:
• This may involve preparing a report. Check that your conclusions respond to the
outcomes which the evaluation was originally seeking.
1. Enter data into data analysis program

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(e.g., Excel or SPSS for quantitative data; N6 or NVivo for qualitative data) and
analyze.
2. Create tables and graphs for presenting the results.
3. Interpret the findings and compare them against the project objectives and
evaluation questions.
4. Develop answers to the evaluation questions.
5. Identify strengths, weaknesses, lessons learned, and changes that should be
implemented.
6. Write the evaluation report and explain how it can be used.
Regardless of the method or approach, steps involved with any evaluation should
include the following:
Step 4. Use the conclusions
• Once you have evaluated the worth or merit of your project tell others about what
you have learned and achieved so they too can benefit from your experience. This
can empower others to undertake similar projects and make their journey easier
and more enjoyable.

PROJECT EVALUATION CRITERIA

Let us recall that the focus of this course is project evaluation. From unit 1, we discussed
the project cycle. From there we moved on to discuss factors affecting location of
projects. We also discussed capacity and production planning, demand analysis, supply
analysis, project cost analysis, projected income statements, cash flows and the balance
sheet.
All these have set the stage for us to tie the discussions. We now want to discuss a very
crucial aspect of this course, which is the project evaluation criterion. Project evaluation
criteria seek to present the methods to be adopted to measure the value of an investment
project. The evaluation enables us to choose between two or more projects once the
values are known. Any project evaluation criterion to be adopted should possess the
following characteristics:
• It should provide a means to distinguish between acceptable and unacceptable projects.
• It should also be able to rank projects in order of their desirability.
• It should be a criterion that is applicable to any conceivable project.
• It should recognize that bigger cash flows are preferable to smaller ones.
• It should recognize that early cash flows or benefits are preferable to later cash flows or
benefits.
Although there are a lot of project evaluation criteria in the literature, we shall discuss the
most widely accepted criteria which are the traditional criteria and the discounted cash
flow (DCF) criteria.

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2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss project evaluation criteria
• Distinguish between the traditional criteria and the discounted cash flow relative to
project evaluation.
3.1 Traditional Criteria of Project Evaluation
In the traditional criteria, we shall discuss two methods, namely: the payback period and
the accounting rate of return method.
The Payback Period
The payback period is one of the most popular methods of project evaluation. The
payback period is defined as the number of years required to recover the original cash
outlay invested in a project. If the project yields constant annual cash inflows, the
payback period can be computed by dividing cash outlay by the annual cash inflow. So
we say thus:
Payback period Cash outlay (investment) = Annual Cash inflow

Example
A project requires a cash outlay of SSP200, 000 and yields an annual cash inflow of SSP
50, 000 for a period of 10 years; calculate the payback period.

The payback period is SSP 200, 000 = 4 years.

SSP 50, 000

However, it is to be noted that in the case of unequal cash inflows, the payback period
can be computed by adding up the cash inflows until the total is equal to the initial cash
outlay. The payback period is greatly admired by project evaluators because it is very
simple to understand. Another good virtue of the payback period is that it costs less than
most of the other sophisticated methods.
However, despite its simplicity, the payback period may not be a desirable investment
criterion. In the first place, it fails to recognize the cash flows that come in after the
payback period. Again it fails to consider the pattern of cash inflows and that early cash
inflows rather than later cash inflows. Despite its weakness, the payback period is very
popular analogy. It tries to emphasize early recovery of an investment. This means that it
gives an insight into the cash inflows of the project.
The Accounting Rate of Return (ARR) Method
The accounting rate of return (ARR) is a method that uses accounting information to
measure the profitability of an investment. The accounting rate of return (ARR) is
computed by dividing average income after taxes by the average investment.
ARR = Average Income
Average Investment

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Example
A project costs SSP100, 000 and has a scrap value of SSP 40, 000. The stream of income
before depreciation and taxes are SSP40, 000, SSP 50,000 and SSP 60,000 for the first
three years. The tax rate is 50% and depreciation is on straight line basis.
Calculate the accounting rate of return for the project. As an accept or reject criterion, the
ARR method will accept all those projects whose ARR is greater than the minimum rate
established by management. If the ARR is lower than the minimum rate established by
management, then the project should be rejected.

The ARR method is very simple to understand and use. It can also be easily calculated
using accounting information. However, the ARR suffers from three main weaknesses.
First it uses accounting profits not cash flows in appraising projects. Secondly ARR
ignores the time value of money. The profits occurring in different periods are valued
equally.
Thirdly, it does not allow the fact that profit can be reinvested to earn more profits.
3.2 Discounted Cash Flow (DCF) Methods
We have discussed two of the traditional methods used in the evaluation of projects. One
is the payback period while the other is the accounting rate of return (ARR). Although
two of them are simple to use and understand, they are not theoretically sound. Both of
them fail to consider the timing of cash flows. Both fail to consider the time value of
money.
Because of these limitations, we shall consider two superior investment criteria which
fully recognize the timing of cash flows. The two methods are the net present value
(NPV) method and the internal rate of return (IRR) method. These two methods are
referred to as discounted cash flow (DCF) methods or the time-adjusted methods.
The Net Present Value (NPV) Method
This method correctly recognizes the fact that cash flows arising different time periods
differ in value and are comparable only when their equivalent- present values are found
out.
The following steps are followed when computing the net present value (NPV).

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1. A discount rate is selected to discount the cash flows. The correct discount rate
should be the firm’s cost of capital which is the minimum rate of return expected by the
investors to be earned by the firm.
2. The present value of cash inflows and outflows are computed using cost of capital
as the discounting rate.
3. The net present value (NPV) is the present value of cash inflows less present value
of cash outflows.
The acceptance rule using the NPV method is to accept a project if the NPV is positive,
and to reject it if the NPV is negative.
If NPV is greater than zero, then the value of the firm is expected to increase. It is also
important for us to understand the interpretation of NPV. The net present value may be
interpreted to mean the immediate increase in the wealth of a firm if the investment
proposal is accepted. It is equal to an unrealized capital gain. The net present value can
also be interpreted to represent the amount the firm could raise at a required rate of return
in addition to the initial cash outlay to distribute immediately to its shareholders and by
the end of the project life to have paid off all the capital raised plus interest on it.
The Internal Rate of Return (IRR) Method
The internal rate of return (IRR) can be defined as that rate which equates the present
value of cash inflows with the present value of cash outflows of an investment. Put in
another way, the internal rate of return is the rate at which the NPV of an investment is
zero. It is called the internal rate because it depends solely on the outlay and the resulting
cash inflows of the project and not any rate determined outside the investment.
Let C = Cash outlays of an investment
A1 = Cash inflows received in (I+R). Year I discounted at the cost of capital R.
A2 = cash inflows received in year 2, (I+R)² discounted at the cost of Capital R.
A3 = cash inflows received in year 3, (I+R)3 discounted at the cost of Capital R.
Write the basic equation

The value of R in the equation at which total cash outlays equal total cash
inflows is called the internal rate of return (IRR). Usually the value of R
can be found out by trial and error. Generally, if the calculated present
value of the expected cash inflows is lower than the present value of cash
outflows, a lower rate should be tried. On the other hand, if the calculated

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present value of the expected cash inflows is higher than the present value
of cash outflows, a higher rate should be tried.
Example
A barbers‟ shop costs SSP 32,400 to establish and is expected to generate
cash inflows of SSP 16, 000, SSP 14,000 and SSP 12,000 over its life of
three years. Calculate the internal rate of return.

The net present value is –SSP 514 at 16% discount factor. Let us try a lower
rate like 14%
You will observe from the above calculations that when we tried 16%
discount rate, the NPV was negative at –SSP 514, when we tried
14%discount rate, the NPV became positive at SPP 498. Therefore, the
internal rate of return we are looking for lies between 14% and 16%. The
basic accept-or-reject rule, using the IRR method, is to accept the project
if its internal rate of return is higher than the firm’s required rate of return.
However, the project should be rejected if its internal rate of return is
lower than the firms cost of capital. It is important that we understand the
interpretation of the internal rate of return (IRR).
The internal rate of return (IRR) represents the highest rate of interest a
firm would be ready to pay on funds borrowed to finance the project
without being financially worse-off, by repaying the loan principal plus
accrued interest out of the cash inflows generated by the project. We
should also see the internal rate of return method as a very sound method.
As we said, it is a discounted cash flow method and also it considers the
time value of money. It is also compatible with the firm’s desire to
maximize the owners‟ wealth. However the IRR method is fairly difficult
to understand and it involves complex computations.

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