Strategy for Appraising Public Sector Investments

1. Chapter 2 A Strategy for the Appraisal of Public Sector Investments

2. 1. Introduction • The appraisal stage should provide information on: - administrative feasibility, marketing, and technical appraisal; - financial capability; - expected economic contributions, - social objectives

3. Introduction (Con’t) • Need for professionalism. You should know the environment and apply professionally determined criteria. • Financial, economic and distributional aspects are closely interrelated and should be viewed as the three parts of an integrated evaluation. • Public sector projects if evaluated on only financial analysis, they will not be meaningful • There are four stages of appraisal and four decision nodes before the project receives an approval.

4. II. Stages in Project Appraisal and Approval Why should a project evaluation be done in stages? A. Idea and Project Definition B. Pre-Feasibility Study C. Feasibility and Financing D. Detailed Design E. Project Implementation F. Ex-Post Evaluation

5. 2 3 1 Pre - feasibility ty phase Definition or preparation Concept or identification Modules Tasks Sources of identification 1. Marketing or demand module 1. Review policies and 1.Government 2. Technical Module procedures departments/ministries 3. Environmental Module 2. Examine technical and 2. Development plans 4. Manpower and Administrative Support Module institutional alternatives 3. People’s representatives 5. Institutional Module 3. Assess costs, time schedules 4. In terest groups 6. Financial Module and operational requirements 5. Private sponsors 7. Economic Module 6. International agencies 8. Social Appraisal and Basic Needs Analysis 5 4 6 8 7 Feasibility and financing Approval Stage Detailed design Ex - post evaluation Tasks Tasks Future Project implementation Tasks 1. Define project parameters Re - check accuracy of 1. Detail basic programs Phases 1. Re - estimate 2. Present for “yes”/”no” information on parameters 2. Allocate tasks 1. Investment project’s outcomes decisions and financing of the project 3. Determine resources projects 2. Operational phase based on actual 3. Arrange financing in case 4. Complete blue prints 3. On - going evaluation performance of “yes” decision and spec ifications 2. Identify critical variations Components of Project Cycle

6. II. Stages in Project Appraisal1. Idea & Definition • Where is the demand? • Is this project consistent with the organization’s expertise, current plans and strategy for the future?

7. 1 Idea & Definition(Con’t) • What is the objective of the project? • What will happen if project proceeds or not. Is the project best alternative ? • Does the project has separable components? What are the project’s fiscal impacts? • What is the project’s environmental impacts?

8. 2 Pre-Feasibility Stage • Examines overall potential of project first time • Should maintain same quality of information across all variables • Wherever possible should use secondary information • Biased information better than mean values Key questions: a. Is this project financially and economically feasible throughout the project’s life? b. What are the key variables? c. What are the sources of risk? d. How can the risk be reduced?

9. 2. Pre-Feasibility Stage(Con’t) • Why break study into madules? a. Marketing and demand modules Demand for goods and services are estimated. Quantified and justified. b. Technical and engineering module The project is justified for its technical soundness.

10. 2. Pre-Feasibility Stage(Con’t) c. Manpower and administrative modules Manpower requirements are determined. Sources are identified and quantified d. Financial and budget modules Financial expenditures and revenues are evaluated. Alternative sources and conditions of financing are identified e. Economic module Financial data is replaced with economic prices and economic analysis is carried from the economy’s point of view. f. Social module Who receives the benefits and the costs. Quantification is made if possible.

11. 3. Feasibility Stage • Financial, economic and social analysis are carried, sensitivity analysis is used to determine the key variables. • To improve the accuracy of key variables more primary research is carried out. Second option is taken on other variables • At the end of this stage decision has to be made for the approval of the project. • It is difficult to stop a bad project after “detail design” has been carried out at the next stage.

12. 4. Detail Design • Involves setting down the basic programs, allocating tasks, determining resources and setting down the operational plan. Priorities are determined. • Manpower needs, operating plans, schedules, contingency plans are made. • Accuracy of data for all previous models is improved. • Not only physical design, but also administrative, operating and marketing programs are made. • Project is tested for approval and implementation. If it is unsatisfactory, authorities are informed for rejection of the project.

13. 5. Project Implementation • It involves negotiating the conditions for financing and formal approval of the project • Implementation involves coordination and allocation of resources. The project manager will form his team, consultants, contractors, suppliers • Responsibilities and authority will be assigned. • Proper planning is essential to prevent delays. Schedules and time frames, control and reporting procedures are determined. • When project nears completion, new operational administrator is appointed. Scaling down the organization. • Try to avoid start up costs which may fail the project

14. EX-POST EVALUATION • Usually more effort is given in the feasibility stage than reviewing the performance of the project during its implementation. • It is essential to compare the predicted and the actual performance of the project • The manager of the project will be asked to collect the required financial and technical data to enable an evaluation.

15. EX-POST EVALUATION (con’t) • Benefits of such an evaluation are: - Assess the performance of the project - Identify the critical variables. Successful experiences are repeated and failures are eliminated.