Project: Plan, implement, and hand over the key

Dr B K Mukhopadhyay

(The author is a Professor of
Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

The purpose of project evaluation is to document, as clearly and specifically as possible, the implementation and impact of the project. The evaluation describes how to collect evidence concerning project activities and their outcomes. A strong evaluation plan is a core element of the project.

In fact, under the ongoing facts and circumstances hitting all of the economies, big or small, the crucial requirement is to ensure that the projects taken to boost up activities [call it stimulus or jump start] should be specific, measurable, achievable, realistic, and time-bound, which, in turn, should be evaluated and accordingly reviewed as the situation warrants.

As is widely known, a project refers to a set of development measures undertaken either by an individual or by the government for the benefit of a class of persons or for the community as a whole [e.g., utilising the water resources of a region for the benefit of the population through irrigation, flood control, fishing, power generation, etc.].

Simply speaking, project evaluation is the process of collecting and analysing information in order to understand the progress, success, and effectiveness of a project. Evaluation is essentially the most important aspect of project management in as much as it can facilitate the successful completion of the project while confirming decisions about the future of both the project at hand and other projects.

There are two general types of evaluation, with somewhat different purposes. Formative evaluation details a plan to evaluate the project during its completion; it helps to identify the changes or modifications that are needed along the way. A formative evaluation:

Since a project usually involves huge expenditures, private efforts often prove to be inadequate to shoulder it. Hence, the state’s participation becomes essential. The state has to shoulder the responsibility by undertaking projects of social or strategic importance. A project is, therefore, a public investment where profit maximisation cannot be the sole criterion. A public investment aims at rendering maximum social service by maximising the benefit of the project concerned at the minimum possible cost—to undertake those projects that facilitate the progress of the entire economy.

As it is not possible to undertake a huge number of projects at a time, the question of choice—whether or not a particular project is worthwhile, which is the best of several alternative projects, or when to undertake a particular project—comes before the decision-makers. Different criteria of project evaluation are used for the same: 1) the benefit-cost criterion, 2) the rate of return criterion, and 3) the maximisation of benefit over cost criterion.

Under the benefit-cost [b-c] criterion, either the benefit-cost deviation or the benefit-cost ratio is considered. This b-c criterion usually favours a large project over a small one, though in both projects the rates of return are identical. Hence, it is not largely accepted by the planners.

The other aspect of the benefit-cost criterion requires the calculation of the benefit-cost ratio [b/c]. If b/c is 1, the project is marginal. If b/c is greater than 1, the project can be undertaken. If b/c is less than 1, the project cannot be recommended; if not, the secondary or indirect benefits are substantial. The greater the ratio, the greater the importance attached to the project. Top priority is given to the project that has the highest b/c ratio.

The b-c criterion is usually preferred to other criterions for several reasons: 1) it seeks to evaluate all projects—large or small—on an equal basis; 2) it enables the planner to take a long and wide view of the projects; and 3) it yields a ranking of projects—scientifically and satisfactorily.

The b/c criterion is also superior to the rates of return criterion since the former yields a scientific ranking of projects that usually differs from the ranking determined by the latter. The other criterion, the rate of return criterion, takes into account the rates of return from different projects, on the basis of which it is decided which project is to be assigned top priority and which next.

The two criteria are not the same.

The two criteria will yield the same ranking of the projects if either of the two conditions is fulfilled: 1) current cost must be nil, so that o/k=0 [o stands for annual operation and maintenance cost and k for fixed investment]; and 2) b/c ratio must be equal. In practice, neither of these things happens, and thus the ranking according to one criterion will differ from that according to the other.

Benefits of a project are of two types: primary [direct benefits that are derived immediately after the project is taken up] and secondary [indirect benefits that areincidental or complementary to the original primary benefits]. tangibles and intangibles.

Costs refer to primary costs incurred for the operation and maintenance of the project—project cost proper and associated [additional cost, which is to be incurred over and above the project cost proper for making the output of the project available] costs.

Another major problem in evaluation is choosing the appropriate discount rate.

Then there are external and internal constraints.Two projects may be mutually exclusive on technical grounds. Legal problems may be there. Administrative, distributory, and budgetary constraints may also be present.

Thus, the steps involved in computing the b/c ratio of a project are:

1. Calculation of the annual cost of the project: converting all the categories of estimated amounts of original investment on a yearly basis

2: Add the annual operation and maintenance costs to the annual costs of all the categories of the project; the sum gives the total annual cost of the project.

3-calculation of the primary tangible benefits: 

Benefit=(x-y) p-z

(x-y) p=gross value of product made possible by the project 4-calculation of b/c.

The core of social cost-benefit analysis is the calculation or estimation of the prices to be used in determining the true value of benefits and the real magnitude of costs. There is a need for governments to choose an appropriate discount rate when calculating the worth of project benefits and costs that occur over time. The social rate of discount [social time preference] is essentially a price of time—the rate the planners use to calculate the NPV [net present value] of a time stream of project benefits and costs.

The higher the future benefits and costs are valued in the government’s planning scheme, the lower the social rate of discount.

The tools of social cost-benefit analysis for project appraisal are now considered essential to an efficient process of project selection in developing countries.

Normally, economists advocate for using the NPV rule in choosing investment projects—that is, projects should be accepted or rejected according to whether their NPV is positive or negative. NPV calculations are very sensitive to the choice of a social discount rate. An alternative approach is to calculate the discount rate that gives the project an NPV of zero, compare this IRR with either a predetermined social discount rate or the market rate of interest, and choose the project whose internal rate exceeds the predetermined or market rate. This approach is widely used in evaluating educational investments.

Most developing countries face capital constraints. So the question of choice naturally comes up. The choice of investment projects will normally also involve a ranking of all projects that meet the NPV rule. Projects are ranked by descending NPV, and more precisely, the NPV/K ratio is calculated for each project. A project or set of projects with the highest NPV/K is chosen first, then the next highest, and so on down the line until all available capital investment funds are exhausted.

Whatever it is, it is always better not to develop the evaluation plan as an after thought!