Project Analysis/Appraisal

By: Birhanu Beshah

 Contents

Technical analysis
Market and demand analysis
Financial analysis
Socio-economic analysis
Institutional analysis
 Take five minutes and write you expectations
 Project life cycle
Identification

Preparation
Evaluation

Implementation Appraisal/
financing

Different terms can be used to describe the various stages of the project cycle.
 Identification
It is to find potential project ideas
That appear to represent a high priority use of
the countrys resources to achieve an important
development objective.
Such project ideas should assure that technical
and institutional solutions at costs
commensurate with the expected benefits-will be
found and suitable policies adopted.
 Reasons for Identification

Every human made advancement is an attempt

to solve problem
The first step in solving a problem is recognition and
acceptance that the problem exists
To use opportunities created
 Sources of Project Ideas

1. Macro-level Sources
2. Micro-level Sources
 Macro-level Sources

National, regional, sectoral plan

Example
Reduce disparity of regional devt.
the need is the source of project idea
Decision by macro-planners to reduce regional devt imbalances
Growth and transformation plan
Sugar sector plan
Basic Metal and Engineering Industries
Leather and Leather Products
Textile and Garment
Agro-processing
 Constrains in the devt effort
Examples
lack of infrastructure,
health centers,
roads,
ports,
power,
Education
financial institutions.

Shortage of foreign exchange gives rise to

project ideas, New project ideas for import
substitution, export oriented commodities, etc.
 Self-sufficiency objective in critical resources
Examples
in supply of food
finding of oil/petroleum.
Military

Events such as
drought,
flood Natural
calamities/disasters.
 Micro-level Sources of Project Ideas
Identification of unsatisfied demand
Can be of macro-level magnitude
Examples
Cement
Sugar
Telecommunication
Energy
Existence of unused/underutilized natural or human
resources.
Water potential of Ethiopia
Labor intensive
Iron ore 11
 Response to govt incentives
Example
Charge in mortgage interest rate triggers construction of houses
demand for construction materials.
Micro and small enterprises development
Investment

Local group initiative for economic

independence.
Examples
Source of drinking water,
feeder road,
power supply.
 Examples

1. Case of Tekeze Hydropower Project

2. Fincha Amerti Neshe Multipurpose project
 Tekeze Hydropower Project Identification

Ethiopia is a country having abundant natural

recourses such as:

Hydropower, Geothermal, natural gas, coal, solar

and wind energy etc.
Hydropower potential of the country is estimated
to be up to 30, 000 MW.
 Major rivers of the country

The country is watered by four major river

systems:
Tekaze (Atbara), the Abbay ((Blue Nile), starting from
Lake Tana and Baro (Sobat), which all flow westward to
the Nile;
Ganale (Juba) and Wabe Shebele which flow to the
Indian Ocean;
The Gibe (Omo) originates and ends in the
Southeastern higlands with Lake Rudolf as its terminate
and
Awash, which originates in the highlands West of Addis
Ababa and vanishes in the northeastern sands.
 EEPCO
At the project study,
the annual electricity production capacity of the
corporation is about 3380 GWH
the number of customers is about 800,000.
The demand is increasing by more than 10% annually.
Hence, the corporation is required to think and work
strategically to meet the power supply need of the
socio-economic development of the country.
 Tekeze basin

It is situated in the north of Ethiopia.

It is a major tributary of the river Atbara which in
turn flows into the Nile downstream of the
confluence of the Blue and White Niles at
Khartoum.
The topography of the basin is flat and relatively
low lying in the west, close to the Sudanese
border
 potential hydropower sites on the Tekeze river:

Damsite Flowrate Head (m) Power(MW) Energy(GWh)

( m/s)

TK1 44 100 43.1 264.3

TK2 67.3 100 65.9 404.2
TK3 89 100 87.2 534.8
TK4 96.8 100 94.9 581.7
TK5 101.3 100 99.3 608.9
TK6 114.8 100 112.5 689.5
TK7 130.8 90 115.4 707.9
TK8 154.2 90 136.1 834.4
TK9 167 75 122.7 752.4
TK10 175 20 34.3 210.3
 The study evaluated three of the schemes that
are identified in the WAPCOS report
summarized above, namely TK5, TK6 and TK7,
in response to unit energy cost of:
1. Construction
2. Environmental costs and
3. Comparative value of the energy benefits.
 The study found that the lowest unit capacity cost
was produced by TK6, closely followed by TK5.
The unit cost was considerably higher for TK7.
The Report therefore recommended that both TK5
and TK6 should be selected for further
prefeasibility study.
Fincha Amerti Neshe Multipurpose project
This project is found in Ethiopia, located 250 km
north west of Addis Ababa, in the Nile river basin
The objective of this project comprises
development of the Hydropower potential of the
Neshe river and irrigation of some Ha, located in
the vicinity of the existing Fincha Sugar, and to
increase the total energy production of the nation
in general.
The scope of Fincha Amerti Neshe Multipurpose
project is construction of 97 MW hydro electric
power generations and 6000Ha of land irrigation.
 The potential of the Neshe River was previously
identified and studied at reconnaissance and
master plan level by a number of consultants:
US Bureau of Reclamation, USA, 1964, Land
and Water Resources of the Blue Nile Basin,
WAPCOS, India, 1990, Preliminary Water
Resources Development Master Plan of
Ethiopia,
BCEOM-BRGM-ISL consortium, France, 1998,
Abbay River Basin Integrated Development
Master Plan.
 Identification of the hydropower component
started at the inception phase with identification
of 4 main options and continued through the
Pre-Feasibility studies to include a total of 17
options.
Such a large number of options were the result
of the particular project setting, presence of two
existing reservoirs and a power plant in the
project area and the multipurpose character of
the project, which opens a large number of
feasible scenarios and project layouts.
 It is easy to identify problems and muse about
solutions, but the vast majority of ideas are
ephemeral or of small worth
Few projects are selected for project preparation
 Discussion topics

Try to identify project ideas.

Identify an organizations activity that could be
treated as a project.
Is it possible to propose scientific methods/tools
to select ideas for feasibility study?
 Remark

Do you get an idea that could be converted in to

a project?
A person should have at least one big project, in
his/her life time, that will solve societys problem
 Preparation

It includes
1. Pre feasibility study
2. Feasibility study
 Pre-Feasibility Study

Presence of two existing reservoirs and a power

plant in the project area and the multipurpose
character of the project, which opens a large
number of feasible scenarios and project layouts
lead to the pre feasibility study of the following
condition at the project area:-
Qin Average annual inflow (mcm)
Qev Average annual evaporation loss (mcm)
Qc Average annual riparian compensation flow (mcm)
Qdiv Diversion flow
Qir Neshi area average annual irrigation demand (mcm)
Vl Reservoir live volume
Hn Average net head
Qt Average annual generation flow (mcm)
E Firm (total) energy generation (GWh)
 Feasibility Study

Lets see with simple examples

Computer installation
Electric light addition
Consider your own project
 User requirements

User: You installed my computer. Why didnt

you install the printer, too?
Contractor: you said you wanted the computer
installed.
User: But the computer wont be of much use
without a printer. Arent they usually installed
together?
Contractor: you specified you wanted the
computer installed. I did just what you
requested.
 Contractor: The lighting for the office addition is
finished. As we agreed, I wired 20 ceiling lights
User: But you said there would be enough lights
to make the room bright. The room seems kind
of dark.
Contractor: For a room this size, 15 lights are
standard. As we agreed, I put in 20 just to be
sure.
User: Yes, but you said 20 would make the
room bright, and they dont. you will have to put
in more lights.
 In this cases detail feasibility study will be the
remedy.
To align the end outcomes with the real
requirements of the user
 Feasibility Study requires a progressive
refinement of the design of the project in all its
dimensions
1. Technical analysis
2. Market and demand analysis
3. Financial analysis
4. Socio-economic analysis
5. Institutional analysis
 Assume

An investor hire you to conduct a feasibility study

Textile industry
Tannery
Coffee processing
Gold mining
Coal mining
Steel processing
Sugar factory
Cement factory
 Technical analysis
Material Inputs and Utilities
Production process/technology
Machinery and equipment
Plant capacity
Location and site
Project charts and layout
Schedule of project implementation
 Material Inputs and utilities

Raw materials
Processed Components
Utilities
 Raw materials

Agricultural products
Livestock and forests products
Marine products
Mineral products
 Processed Components

Base metals,
Semi-processed materials,
Manufactured parts,
Components, and
Sub-assemblies
 Utilities

Power,
Water,
Steam,
Fuel and etc
 Production process/technology
For manufacturing a product/service often two or
more alternative technologies are available. For
example:
Steel can be made either by the Bessemer process or
the open hearth process.
Cement can be made either be the dry process or the
wet process.
Soda can be made by the electrolysis method or the
chemical method.
Paper, using bagasse as the raw material, can be
manufactured by the karft process or the soda
process or the simon cusi process.
 Production process/technology analysis
includes:
1. Choice of Technology
2. Acquiring Technology
3. Appropriateness of Technology
 Choice of Technology

The choice of technology is influenced by a

variety of considerations:
Plant capacity.
Principal inputs.
Investment outlay and production cost.
Use by other unities.
Product mix
Latest developments.
Ease of absorption.
 Acquiring Technology

The acquisition of technology from some other

enterprise may be through
technology licensing,
outright purchase, or
joint venture arrangement.
 Appropriateness of Technology

Appropriate technology refers to those methods

of production which are suitable to local
economic, social, and cultural conditions.
In recent years the debate about appropriate
technology has been sparked off by many
researchers.
 Technology should be analyzed in terms of the
following questions:
Whether the technology uitlises local raw materials?
Whether the technology utilizes local manpower?
Whether the goods and services produced cater to
the basic needs?
Whether the technology protects ecological balance?
Whether the technology is harmonious with social
and cultural conditions?
 Product Mix
The choice of product mix is guided by market
requirements.
In the production of most of the items, variations in size
and quality are aimed at satisfying a broad range of
customers.
For example, a garment manufacture may have a wide
range in terms of size and quality to cater to different
customers.
It may be noted that variation in quality can enable a
company to expand its market and enjoy higher
profitability.
The degree of flexibility may be based on a careful
analysis of the additional investment requirement
 Plant Capacity

Plant capacity (also referred to as production

capacity) refers to the volume or number of units
that can be manufactured during a given period.
Several factors have a bearing on the capacity
appraisal.
Technological requirement
Input constraints
Investment cost
Market conditions
Resources of the firm
Governmental policy
 Plant location

Systematically location problems are divide into

two:

1. The selection of a general territory

2. The selection of a specific community and site

 Choice of a territory

Cost of construction

Market

Wages and Labor

Raw Material

Transport

Energy
 Selection of a Specific Site

Community Attitude
Transport
Water
Communication
Wind Direction
Condition of the Site
Future Development
Complementary Plants
 Territory Selection of Site
Selection and Community
Location Factor

1.Market *
2.Raw Materials *
3.Transportation * *
4.Power * *
5.Climate and Fuel *
6.Labor and Wages * *
7.Laws and Taxation * *
8.Comm.ty Services and Attitude *
9. Water and Waste *

A typical team studying location possibilities

might include accountants, lawyers, marketing
experts, various consultants, executives, and
industrial engineers.
 Machineries and Equipments

To determine the kinds of machinery and

equipment required for a manufacturing industry,
the following procedure may be followed:
Estimate the likely levels of production over time.

Define the various machining and other operations.

Electrical equipments,

Instruments,

Internal transportation system, and others.

 In addition to the machineries and equipments, a
list should be prepared of spare parts and tools
required. This may be divided into:
Spare parts and tools to be purchased with the
original equipment, and
Spare parts and tools required for operational wear
and tear.
 Constraints in Selecting Machineries and
Equipments
there may be a limited availability of power to set up an
electricity-intensive plant like, for example, a large electric
furnace;

there may be difficulty in transporting a heavy equipment to a

remote location;

workers may not be able to operate, at least in the initial

periods, certain sophisticated equipments such as numerically
controlled machines;

the import policy of the government may preclude the import of

certain machineries and equipments.
 Procurement of Plant and Machinery
For procuring plant and machinery, orders for different
items of plant and machinery may be placed with different
suppliers or a turnkey contract may be given for the entire
plant and machinery to single supplier.
The factors to be considered in selecting the supplier/s of
plant and machinery are ate desired quality of machinery,
the level of technological sophistication, the relative
reputation of various suppliers, the expected delivery
schedules, the preferred payment terms, and thee
required performance guarantees.
 Structures and Civil Works

Structures and civil works may be divided into

three categories:
Site preparation and development,
Buildings and structures, and
Outdoor works.
 Project Charts and Layouts

The important charts and layout drawings are

briefly described below.
General Functional layout

Material Flow Diagram

Production Line Diagrams

Transport Layout

Utility Consumption Layout

Communication Layout

Organizational Layout

Plant Layout
 Work Schedule

The purpose of the work schedule is:

To anticipate problems likely to arise during the
installation phase and suggest possible means for
coping with them.
To establish the phasing of investments taking into
account the availability of finances.
To develop a plan of operations covering the initial
period (the running-in period).
 Market and demand analysis

Demand analysis
Supply analysis
Marketing strategy
 General method
Given the importance of market and demand
appraisal, it should be carried out in an orderly
and systematic manner . The key steps in such
appraisal are as follows:
Situational analysis and specification of objective

Collection of secondary information

Conduct of market survey

Characterization of the market

Demand forecasting

Market planning
 The general list of major dimension of the
demand and market analysis should cover the
following aspects:
General Characteristics of the Economy:
Economic potential
Production structure
Foreign trade
Economic policy
Product
Characteristic features
Substitutes and complementary goods
 Demand

Sales and orders

Buyers characteristics
Demand determining factors
Purchasing power
 Supply

Supply potential
Local production
Imports and exports
Competitors position
 Marketing environment

Marketing environment (marketing strategy,

marketing mix)
Price levels and tendencies
Distribution channels
Physical distribution network
Promotion
Legal and political environment
 Socio-economic analysis

Employment effect
Net foreign exchange effect
Impact of the project on net social benefits or
welfare
Environmental impact
 Employment effect

While assessing the impact of a project on

employment, unskilled and skilled labor has to
be taken into account.
Not only direct employment, but also indirect
employment refers to the new employment
opportunities created within the project and first
round of indirect employment opportunities
created in projects related on both input and
output sides of the project under analysis.
 Net foreign exchange effect
A project may be export oriented or reduce
reliance on imports.
In such analysis of the effects of the project on
balance of payments and import substitution is
necessary.
The assessment of the project on the countrys
foreign exchange is don in two stages, first,
balance of payments effects of the project and
second, import substitution effect of a project for
this purpose.
 Net social benefits or welfare
Evaluation of the sociological aspect of the project
should focus on the extent to which projects adequately
take in to account four main factors:
the socio-cultural and demographic characteristics of local
beneficiaries,

the social organization of productive activities of the population

in the project area,

the actual acceptability of the project and its compatibility with

the behavior and perceived needs of the intended beneficiaries,
and

the social strategy for project implementation and operation

needed to elicit and sustain beneficiaries participation.
 Environmental impact

Evaluation of environment should include:

existing environmental base line conditions,
potential environmental impacts including
opportunities for environmental enhancement,
preventive, mitigatory and compensatory measures,
in the form of action plan,
monitoring.
Institutional analysis

1. Managerial analysis
2. Organization
3. Manpower
 Managerial analysis
A project management should be evaluated to
measure the ability of management to plan,
direct, coordinate, motivate, control ad
implement the over all activity of the project
Management analysis include:
knowledge of the business and experience, financial management,

technical management,

personnel management,

management ability to cope with changing environment and even

management and or the client personal character.
 Manpower

Project manpower should be evaluated to

understand their capability in knowledge,
wisdom, know-how and character to implement
the project idea according to the plan.
 Organization

The traditional form of organization is not

suitable for project work for the following
reasons:
It has no means of integrating different departments
at levels below top management, and
It does not facilitate effective communication,
coordination, and control.
 Is it the some for all projects?

Geothermal energy
Wind energy
Solar energy
Hydropower
 Feasibility study for wind energy

Wind potential Assessment

Energy Production Estimation
 Feasibility Study of the case of
Hydropower

Topographical Survey

Geology of The Project Area

Project Hydrology

Reservoir Operation Study

Hydropower Civil Structures

Electrical and Mechanical Equipment

Grid Connection
 Discussion Topics

Consider the case of

product development project
Research project
Implementation of TQM/MIS in an
organization
Project based manufacturing and
 Research ideas

Is there any factors that is not explained?

Is there any short and simple methods to know
feasibility of a project?
Is there any irrelevant factors that could be
rejected out of the list?
 Appraisal

Before approving a loan external agencies

normally require a formal process of appraisal to
assess the overall soundness of the project and
its readiness for implementation for an internally
generated and financed investment.
An explicit appraisal is necessary or at least a
desirable, part of the decision making process
before funds are committed.
 Project appraisal is evaluation of design of the
project in all its dimensions
1. Technical analysis
2. Market and demand analysis
3. Financial analysis
4. Socio-economic analysis
5. Institutional analysis
 Discussion Topics

Identify the appraisal process of Development

Bank of Ethiopia, African Development Bank and
the World Bank
 Take five minute and write your reflections