Chapter 2

Aspects of Project Preparation and

Analysis

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Aspects of Project Preparation

 The project analyst must consider several aspects

when carrying project analysis

 The major aspects of project preparation and

analysis are :
Technical Aspects
Commercial /Demand and Market/ Aspects
Institutional-Organizational-Managerial Aspects
Financial Aspects

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Aspects of Project Preparation …
• Economic Aspects
• Social Aspects
• Environmental aspect analysis

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 2.1 Technical Aspects

 This aspect may include the works of

engineers, soil scientists and agronomists in
case of, say, agricultural projects.

 The technical analysis is concerned with the

projects inputs (supplies) and outputs of real
goods and services and the technology of
production and processing.

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 Technical Aspects…
 Technical analysis seeks to determine
 whether the prerequisites for the successful
commissioning of the project have been
considered and reasonably good choices have
been made with respect to location, size,
process, etc.

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 Technical Aspects…
 It is from this aspect of analysis that all
physical quantity of inputs and outputs will
be determined for the estimation of costs
and benefits.

 Poor technical analysis will result in under-

or over- estimation of quantities related to
inputs required by and outputs of the project.

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 Technical Aspects…
 The project’s expected life time must also be
determined carefully for it has greater
implication on its overall analysis and
preparation.

 All these require creative, committed and

competent specialists from different fields.

 It also requires coordination among these

specialists, as every technical aspect is
interrelated and interacting.

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Technical Aspects…
 In general the technical analysis is primarily
concerned with
Material inputs and utilities
Manufacturing process and technology
Product mix
Plant capacity
Location and site
Machines and equipment
Structure and civil works
Project charts and layouts
Work schedule

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2.2 Commercial /Demand and Market/ Aspects

 This aspect of analysis needs to ensure the

existence of effective demand at remunerative
price.

 It also assesses possible means in which the

market will absorb the output without affecting
the output price and if its price inevitably be
affected, we would have to assess its
magnitude.
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 Commercial aspect…
 Similar arrangements need to be done on the
input side too (including procurement of
equipment and intermediate input supplies).
 Market analysis is basically concerned with
two questions:
 What would be the aggregate demand of
the proposed product/service in future?
 What would be the market share of the
project under appraisal?
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 Commercial aspect…
 To answer the above two questions the
project analyst requires a wide variety of
information and need to use appropriate
forecasting methods.

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2.3 Institutional-Organizational-
Managerial Aspects
 Project analysis must make a detail analysis
of project organization and management.
 This analysis aims at answering the
following questions:
 Is the organizational set-up of the project
adequate?
 Will the project be provided with competent
personnel to manage it?

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 Institutional--Organizational…
Institutional
 The problem of project staffing raises many
other questions:
 Is local manpower market enough to provide
the project with the required manpower?
 Can competent staff be recruited freely?
 Should they be recruited locally or overseas?

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Institutional--Organizational…
Institutional
 But even if the right staff is available,
their success will depend mostly on
the institutional set-up i.e., the
relationship between the various
organizations involved with the
implementing agency.

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 Institutional--Organizational…
Institutional
 Appraising organization therefore
includes appraisal of the project related
institutions like
subsidiary companies, ministries,
headquarters, banks, transport
companies and others.

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Institutional--Organizational…
Institutional
 What are the regulations or procedures?

 What are the policies – that favor and

disfavor the project?

 Once the right institutions to facilitate project

implementation are available, the project
should be implemented by competent,
responsible and committed managers.
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Institutional--Organizational…
Institutional
 Thisrequires arrangement of adequate
incentives to attract competent managers.

Managerial appointment should be a

function of competence and
commitment, not a function of race,
tribe, creed or political opinion.

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2.4 Financial Aspects

 Financial analysis seeks to ascertain whether

the proposed project will be financially
viable in the sense of being
 able to meet the burden of servicing debt
and
 whether the proposed project will satisfy the
return expectations of those who provide the
equity capital.

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 Financial Aspects…
 Here the project analyst is concerned with the
financial effects of the proposed project on
each of its various participants (firms,
farmers/workers, government etc.).

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 Financial Aspects…

 By examining the financial implications of

the project for these parties, the analysts
need to identify the projects
 financial efficiency,
 incentive impact to the participants in the
project,
 creditworthiness and liquidity (say, could
the firm have enough working capital?).

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 Financial Aspects…
 The financial analysis establishes
 themagnitude of costs of investment,
 production and overheads and
 magnitude of benefits.

 This analysis will be the basis for evaluating

the project profitability.

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 Financial Aspects…

 Project profitability depends on a

comparison of costs versus revenues using
realistic market prices of materials, labor
and outputs

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 Financial Aspects…

 The aspects, which have to be looked

into while conducting financial appraisal,
are:
1. Investment outlay and costs of the project
2. Means of financing; source of finance,
credit terms, etc
3. Cost of capital

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Financial Aspects…

4. Projectedprofitability
5. Break-even point
6. Cash flows of the project
7. Investment worthiness judged in
terms of various criteria of merit
8. Projected financial position
9. Level of financial risk

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Financial Aspects…

 Financial analysis must generate

 future financial statements such as income
statement, balance sheet and uses-and-
source-of-fund statement.
 After these statements are produced,
analysts can undertake
 different financial ratio analysis so as to
ascertain financial feasibility.

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Financial Aspects…

 Thefinancial analysis must clearly

show fund flows in each period in the
project life.

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 2.5 Economic Aspects

 This is concerned with the determination of

the likelihood of the proposed project, and
hence the committing of scares resources, by
 Justifying the significance of the project
from the whole economy point of view
(the society as a whole).

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 Economic Aspects…
 In such evaluation the focus is on
 the social costs and benefits of a project,
which may often be different from its
monetary or financial costs, and benefits.
•The financial analysis views the project
form the participants (or owners) point of
view, while the economic analysis form the
society’s point of view.
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 Economic Aspects…
 Decision makers here are concerned about
 the investment of scarce capital and other
resources that will best further national
objectives.

•This is true whether the resources committed are being

invested by government directly or by individuals
within the economy

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 Economic Aspects…
 While financial analysis uses projected
market prices to value inputs and outputs,

 economic analysis uses ‘economic prices’ or

‘shadow prices’ or ‘efficiency prices’ to
better approximate the opportunity costs of
an input –
the amount the economy must give up if
the resource is transferred from its present
use to the project.

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 Economic Aspects…
 Similarly, to value project’s output,
economic analysis uses the marginal value of
a given output to approximate the real value
–
 the value that consumers place on that
commodity.
Thus economic analysis requires adjustment of
market prices,(which may not reflect the real value of
resources and outputs) into economic prices.

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 Economic Aspects…
 It also requires determination of economic
prices of those goods that might not have
market prices but that involve commitment of
real resources.

The mechanics of adjusting market prices

into economic prices will be discussed in
detail in the later chapter

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 2.6 Social Aspects
 Project analysts are also expected to examine
the broader social implications of the
proposed project.
 Although the economic analysis will
determine the amount of income stream
generated over and above the costs of labor
and other inputs, it does not specify who
actually receive it and hence it does not
consider the issue of income distribution.

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 Social Aspects…
 So the social aspect analysis should address
the income distribution implications of a
project.
• Other closely related aspects as:
employment opportunities,
gender aspects,
stimulating or competing effects with other
sectors, and
other desired objectives must be considered.

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 2.7 Environmental aspect analysis

 In recent years environmental concerns have

assumed a great deal of significance.
 In most developed countries and for projects
financed by foreign donors in developing
countries, an environmental impact
assessment is a prerequisite for project
financing.

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 Environmental aspect analysis…
 Environmental impact of a project refers
to the effect of a project on the world of
animals, plants, water, air, and humans
existing in the project area.
•Ecological analysis should be done particularly
for major projects, which have significant
ecological implications like power plants and
irrigation schemes, and environmental polluting
industries.
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 Environmental aspect analysis…
 In such projects environmental impact
assessment is important because
economic benefits that may be generated
from the project can be counter-balanced
by undesirable environmental effects.

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Environmental aspect analysis…
The key questions raised in ecological
analysis are:
What is the likely damage caused by the
project to the environment?
What is the cost of restoration measures
required to ensure that the damage to the
environment is contained within
acceptable limits

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