CHAPTER TWO

ASPECTS OF PROJECT ANALYSIS

Introduction

Dear learner! In this chapter, we would like to familiarize you with some of the aspects of project analysis in the project work. Since project studies are a multi-disciplinary exercise, an exposure towards the different aspects of
project studies is expedient. In addition to practical expediency, financial and economic analysis will essentially depend upon the outcomes from the chapters on market, technical and human resource aspects of a project.
Governments and corporate entities considering their vision into the future, the external environment and the performance of competitors set up policies which serve as a basis for strategic /medium- and long-terms/ plans, which
in turn serve as a basis for project identification and its selection.

Learning Objectives

Dear distance learner! After completing this chapter, you will be able to:

Realize the significance of demand and market analysis in project preparation

Understand the implication of technical analysis in project preparation

Recognize the importance of organizational analysis in project preparation

Know the merit of financial and economic analysis in project preparation

Appreciate the value of social and environmental analysis in project preparation

If there is no organic link between policies, plans and projects, then the effectiveness and efficiency of investment decisions could be compromised. A large part of project analysis serves to establish a project‟s technical and
institutional feasibility, whether it is fit with the strategy and the appropriateness of the socio-economic context for the project. The conventional cost-benefit-analysis-based economic analysis takes for granted that a project is
technically sound and that its institutional arrangements will be effective during implementation. With this note the major questions that any economic analysis should address are:

What is the objective of the project?

What will happen if the project proceeds or not?

Is the project the best alternative?

Does the project have separable components?

Winners and losers: who enjoys the music and who pays the piper?

What is the project‟s fiscal impact?

Is the project financially sustainable?

What is the project‟s environmental impact?

Techniques for assessment: is the project worthwhile?

Is this a risky project?

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The project analyst must consider several aspects when carrying project analysis. The major aspects of project preparation and analysis are outlined below:

2.1. Demand and Market Analysis

It is the first process of identification of the target beneficiary groups of a public projects. The primary task is to identify the need and estimate the nominal and effective demand of the envisaged product or service. This depends
upon the nature of the particular product/service/ under consideration. If the product is a public good, or publicly provided private good, the task may be to undertake social and institutional need assessment. If the product is
private good, the first task is to determine whether there is sufficient market or not. The subsequent discussion of this section will be on market and demand analysis. The market study needs to ensure the existence of effective
demand at remunerative price. Market analysis is basically concerned with the following questions:

What is the product/service to for which feasibility study is to be undertaken?

What is the specific need which is the basis for the product/service?

Are there alternative ways of satisfying the need?

Have there been noticeable changes in the nature and structure of needs?

Who should define the need and the corresponding product/service/?

What would be the aggregate demand of the proposed product/service in future?

What would be the market share of the project under appraisal?

What is the ongoing and competitive selling price?

Will the realization of the project affect the selling price(s) of the products/services? If yes what is the likely selling price? What is the implication of this price on the viability of the project?

What are the marketing strategies that enable the firm to enter into a market and capture adequate market size?

Example: Saying on perspectives on effective demand and market promotion.

A saying goes, “an economist and marketer were sent to make market study for shoes in an island. Immediately after their arrival, they observed that the people there were all barefoot. Both had to write independent reports. The
economist reported that there is no market because there is no revealed demand for shoes as the entire population is barefoot. The market reported that there is big, untapped market, no has not entered into the market and
hence he appreciated the possibility of taking the entire market. But he/she qualified the fact that there is a need for promotional work.”

To answer the above questions the project analyst requires a wide variety of information and appropriate forecasting methods. The kinds of information required include the following.

Consumption trends in the past and the present consumption levels

Past and present supply positions

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Production possibilities and constraints

Imports and exports

Structure and competition

Cost structure

Elasticity of demand

Consumer behaviour, intentions, attitudes, preferences, and requirements

Distribution channels and marketing policies in use

Administrative, technical, and legal constraints.

The market analysis is also concerned with the arrangement for marketing the output to be produced and the arrangement for the supply of inputs needed to build and operate the project. Given the importance of market and
demand analysis in project analysis it should be carried out in an orderly and systematic manner. The key steps in such analysis are as follows.
Situational analysis and specification of objectives

In order to get a feel for the relationship between the product and its market, the project analyst may talk to consumers, competitors, middlemen, and other in the industry. He/she may also look at the preferences and purchasing
power of consumer‟s, actions and strategies of competitors and practices of the middlemen/distributors, whole sellers and retailers/. Key steps in market and demand analysis and their inter-relationships.

Collection of

secondary

data

Situational analysis

And Specification of

objectives

Conduct of

Market survey
Characterization

of the market
Demand

forecasting

Market

planning

If such a situational analysis generates enough data to measure the market and get a reliable projection of the demand and revenues a formal study may not need to be undertaken. In order to carry out such a study it is necessary
to spell out its objective clearly and comprehensively. A helpful way of spelling out the objectives would be to structure the objective in the form of questions.

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Example: suppose a given project aims at producing wheat in a given locality. The project initiator and implementer need information about where and how to market their product. The objective of the market and demand
analysis in this case may be to answer some of the following questions.

Who are the buyers of this product? (Consumers)

What is the total current demand for wheat?

How is the demand distributed temporally /pattern of sale over the year and geographically?

What price will the consumers be willing to pay for the product?

How can consumers be convinced that wheat could be substituted for other foodstuffs?

What channels of distributions are most suited for the product?

What trade margins will induce distributors to carry it out?

What are the possible immediate sales?

Methods of Data Collection

There are two principal sources of assembling market information: Secondary data sources; and Primary data sources. The secondary sources will include the analysis of regular statistics and the study of the published results of
previous surveys. Demographic, economic, financial and commercial statistics can collected from the following sources:

Official sources: customs statistics, various kinds of fiscal and monetary statistics, statistical abstracts, etc.

Trade groups: trade union and associations, chambers;

Enterprises and government organizations who possess statistics for their own use

In general there are several sources of information including census data, national sample survey reports, plan reports, statistical abstracts, industry specific sources of data etc. Special survey provides a very effective method of
investigating a market. Their purpose will be either to obtain quantified data or to find out how people feel about a product.

Methods of Estimating Future Demand

There are many possible methods for estimating future demand for a product. In some cases a simple study of import statistics, possibly backed up by a survey among local consumers will give a fairly clear idea of the size of the
future market. In other cases it may be necessary to pursue the investigation further, possibly using advanced econometric techniques. Between these two extremes there exists a whole range of methods from which to choose,
depending on:

The nature of the market studies;

The quality and quantities of the data available;

The degree of accuracy to be achieved.

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The most commonly used methods include:

Projection of the trend

Using technical coefficients

International comparisons

Possibilities for export or for import substitution

Econometric models

Utilization of the result of family budget surveys

Forecasting without statistical data

It has to be noted that each of the above techniques are not mutually exclusive methods of projections. Rather if the case at hand and nature of data allows, one will have to adopt more than one technique. In fact, it is not unusual
to find many studies which use simultaneously many techniques of estimating and forecasting.

Marketing Strategy: Feasibility studies need to incorporate the design of a marketing concept, which should be based on proper marketing research. Marketing can be characterized by the following elements:

Business philosophy: marketing is a business philosophy that doesn‟t focus on products or production, but puts the problems, needs and desires of existing or potential consumer groups at the center of the business activities of
the firm.

Marketing Research: well-planned and systematic market and marketing related research is a precondition for market-oriented decision-making. On the basis of information obtained about the potential market as well as the
human, production and financial resources available for the project, marketing strategies are to be developed to ensure the achievement of the project objectives.

Marketing Instruments: the successful implementation of marketing strategies requires shaping and influencing the market in a well-planned manner, using the necessary combination or mix of marketing instruments. The
marketing mix includes the analysis of distribution channels, Analysis of the strength and weakness of competitors, pricing policy, and the identification of appropriate promotion mix.

Methods of Demand Forecasting

The various methods of demand forecasting may be classified into three broad categories as follows: Some of the most commonly forecasting methods are discussed here under.

Qualitative methods

Jury of executive opinion method:

This method, which is very popular in practice, involves soliciting the opinions of a group of managers on expected future sales and combining them into a sales estimate. The advantages of this method are:

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It is an expeditious method for developing a demand forecast

It permits consideration of a variety of factors like econometric climate, competitive environment, consumer preferences, technological developments, and so on. To be included in the subjective estimates provided by the experts.

It has immense appeal to managers who tend to prefer their judgment to mechanistic forecasting procedures.

Delphi method

This method is used for eliciting the opinions of a group of experts with the help of a mail survey. The steps involved in this method are:

A group of experts are sent a questionnaire by mail and asked to express their views.

The responses received from the experts are summarized without disclosing the identity of the experts, and sent back to the experts, along with a questionnaire meant to probe further the reasons for extreme views expressed in
the first round

The process may be continued for one or more rounds till a reasonable agreement emerges in the views of experts

Delphi method appeals to many organizations for the following reasons

It is intelligible to users

It has a fancy name

It seems to be more accurate and less expensive than the traditional face-to-face group meetings.

Time Series Projection Method

Trend Projection Method

The trend projection method involves determining the trend of consumption by analyzing the past consumption statistics and projecting future consumption by extrapolating the trend. Various trend relationships could be
identified including the following:
Linear relationship: Yt = a + bT, Where Y is the variable to be forecasted and T is to be estimated.

Exponential (Semi-log) relationship: Yt = aebT Or lnY = lna +bT. This method assumes that there is a constant growth rate b within each period.

Polynomial relationship: Yt= a0+ a1t+a2t2

Cobb Douglas Relationship: Yt = atb

Exponential Smoothing Method

In exponential smoothing forecast are modified on the light of observed errors. If the forecast value for year t, St, is less than the actual value for year t, the forecast for the year t+1, Ft+1, is set higher than Ft.

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If Ft>St is set lower than Ft. In general Ft+1= Ft + aet Where:

Ft= forecast for year t+1

a= Smoothing parameter (which lies between 0 and 1)

et= error in the forecast for year t= St-Ft

Casual method

Consumption Level Method

Consumption Level Method is useful for a product, which is directly consumed.

This method estimates consumption level on the basis of elasticity coefficients, the important ones being the income elasticity of demand and the price elasticity of demand.

End-Use Method

This method is suitable for estimating the demand for intermediate products, the end use method, also referred to as the consumption coefficient method, involves the following steps:

Identify the possible uses of the product

Define the consumption coefficient of the product for various uses

Project the output levels for the consuming industries

Drive the demand for the product

Dear learner! Would you please explain the significance of demand and market analysis in the fruitfulness of a project?

2.2. Technical Analysis

Technical study of a project provides the technical basis for all other aspects of a project study, since a technically unfeasible project cannot be promoted. The main and challenging task in this technical analysis is to identify the
appropriate technology for the objective the project is intended to meet. Recall that problem identification leads to establish project objectives against which the appropriateness of a project and specifically the technology is
evaluated. In general this part of project study address issues related to:

Project design and processes: to ensure that there is appropriate technology and engineering work, the study should consider and evaluate alternative technologies and alternative machines and equipment;

The input-output relationship: 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. Analysis of the technical and engineering aspects of a project should do continuously when a project is formulated.

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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. This
is crucial because the rest of the project analysis cannot be conducted without information from the technical study. In general the technical analysis is primarily concerned with

Material inputs and utilities

Location and site

Manufacturing process/technology/ and engineering

A. Materials and inputs Aspects

In the materials and inputs study part of the feasibility study, the experts assigned for the task have to:
Identify the required types of inputs, their sources and brief assessment of alternative types of inputs, their relative merits in terms of quality of the product (and hence competitiveness in the market); and alternative sources of
supply;

Describe general availability of Raw materials, Auxiliary materials, Factory Supplies, and Utilities

List annual supply requirements of material inputs;

Summarize availability of critical inputs and possible strategies of acquiring these inputs;

Determine the procurement period of each imported input, if any.

Outline costs related to procurement and storage of inputs (stores, containers of required type; transport costs required e.g. forklifts etc.), and

Identify the number of personnel required for this function giving due emphasis for quality of man power.

B. Location, Site and Environment Aspects

A feasibility study should determine the location and site suitable for an industrial project. The choice of a location should be made from a fairly wide geographical area, within which several alternative sites can be considered. The
main criteria or key requirements for selecting proper locations should always be determined at an early stage of the study. The qualitative analysis of these key requirements would then allow the assessment of a number of
potential locations and the rejection of those not fulfilling the key requirements. To this effect one has to identify the major variables that need to be taken into account when determining the location of a project under
consideration. This involves the identification and analysis of:

Access to raw material and the corresponding weight;

Access to market and the corresponding weight;

Access to basic infrastructure like power, water, communication, etc. and corresponding weights;

The implication on labor supply and issue of residence;

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Cultural considerations, etc.

However it should be noted that the choice of location is not always based on a systematic step-by-step analysis and assessment of gradually reduced number of possible locations, ending up with the optimum solution. The
promoter of the project may suggest a location at an earlier stage without undertaking the above analysis. Once the location of the project is decided, alternative sites have to be analyzed and the final selection made. This will
require an evaluation of the characteristics of each site, and the following requirements and conditions are to be assessed:

Ecological conditions on site (soil, site hazards, climate etc)

Environmental impact (restrictions, standards, guidelines)

Socio-economic conditions (restrictions, incentives, requirements)

Local infrastructure at site locations

Strategic aspects (future expansion, supply and marketing policies)

Cost of land

Site preparation and development, requirements and costs

This task is followed by description of location and plant site selected, and the statement of significant costs.

C. Engineering and Technology Aspect

It is the task of the engineering to design the functional as well as the physical layout for the industrial plant necessary to produce the defined products (outputs), and to determine the corresponding investment expenditures as
well as the costs arising during the operational phase. The scope of engineering also includes the plant site and all activities required to deliver both inputs and outputs and to provide the necessary ancillary infrastructure
investments.

The initial task and scope of engineering is to define the whole range of project activities and requirements, including production levels to be achieved under the technical, ecological, social and economic constraints. This
necessitates identifying the principal products or product range, including by-products, determining the volume of production, and relating production capacity to the flow of material and performance of services at the selected
site.

The range and volume of products to be produced depends primarily on the market requirements and the proposed marketing strategies. The initial engineering work consists in designing at preliminary production layout suitable
for manufacturing the products defined in accordance with the marketing concept, and in the qualities and quantities required. After the required sales program has been determined, the detailed production program should be
designed in a feasibility study. The production program should define the levels of output to be achieved during specified periods and, from this viewpoint, should be directly related to the specific sales forecasts.

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Once a production program defines the levels of outputs in terms of end products, and possibly of intermediate products and the interrelation between various production lines and processes, the specific requirements of materials
and labour should be quantified for each stage. For this purpose, a material-flow diagram should be prepared, showing the material and utilities balance at various stages of production. The input requirements and costs have to be
assessed for basic material such as raw material and semi-processed and bought-out items; major factory supplies (auxiliary materials and utilities); other factory supplies; and direct labour requirements. Under this sub topic the
issues addressed include:

I. Plant Capacity
Plant capacity refers to the volume or number of units that can be produced during a given period. Plant capacity is expressed usually in terms of feasible capacity and nominal capacity. Feasible capacity refers to the attainable
capacity under normal working conditions, taking into account not only the installed equipment and technical conditions of the plant, such as normal stoppages, down time, holidays, maintenance, tool changes, desired shift
patterns and indivisibilities of major machines to be combined, but also the management system applied. Nominal capacity however refers to the technically feasible capacity, which frequently corresponds to the installed
capacities as guaranteed by the supplier of the plant‟s machinery. In determining the capacity of a plant the following factors are taken into account:

The marketing concept and the volume of sales, and

The minimum available economic size of production technology and equipment

Technology

An integral part of engineering at the feasibility stage is the selection of an appropriate technology, as well as planning of the acquisition and absorption of this technology and the corresponding know-how. Technology is an
important factor in determining the production program and plant capacity. The major issues addressed in the technological analysis include:

Brief review of the technology development history, focusing on the areas of change and the implications of these changes on the competitiveness of a business organization in terms of quality of product, cost leadership and other
relevant areas of competitiveness;

Identification of alternative technologies and alternative scales under use and their relative merits and demerits in terms of the major areas that determine competitiveness of the product and the business organization;

Identification and analysis of the technology selection criteria and description of the selected one.

Engineering

 Plant lay out

After selection of technology, the next task is to prepare the plant layout, drawings, basic design and engineering. These charts and drawings should adequately reflect the interrelationship

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between environmental conditions and constraints, socioeconomic infrastructure, technology flow, constructions and material flow and inputs. The plant layout and basic engineering are prepared in accordance with the selected
technology and know-how.

Selection of Machinery and equipment

The selection of machinery and equipment at the feasibility study stage should broadly define the optimum group of machinery and equipment necessary for a specific production capacity by using a specific production technique.
This selection differs in emphasis with the type of project. Equipment can be variously categorized. One classification can take the form of the machinery requirements for each stage of the production processes. In other cases, the
machinery can be listed under plant machinery, mechanical equipment, electrical equipment, instrumentation and control, transport and conveying equipment, testing and research equipment and other machinery items.

Civil engineering

The feasibility study should provide plans and estimates for the civil works related to the project. This should cover site preparation and development, factory and other buildings, civil engineering works relating to utilities,
transport, emissions and effluent discharge, internal roads, fencing and security, and other facilities and requirements of the plant. Civil engineering works are fairly project-specific and have to be related to a particular plant site
and the facilities that may be required. The plans and estimates for the civil engineering works should be detailed for cost estimates and implementation scheduling. The nature of each construction should be defined, including
modular construction where appropriate, the quality of construction materials and the quantities and cost of materials required. Detailed civil engineering drawings are usually not required before the start of project
implementation. The estimates for buildings and other constructions should be based on unit costs such as building costs per square meter in the plant surroundings.

IV. Maintenance and Replacement Requirements

An important aspect of project engineering is the determination of critical maintenance and replacement requirements for the project. Satisfactory maintenance of plant, buildings and various facilities is essential for efficient plant
operations. Maintenance requirements should be assessed in terms of both the maintenance equipment that may be necessary for efficient maintenance of the plant and facilities, and the maintenance skills and capability that
need to be developed.

Estimates of Overall cost

On the basis of the estimates from technology, machinery and equipment and civil engineering works, the feasibility study should provide an overall estimate of the capital costs of the project. Such an estimate will undergo
modifications in accordance with the bids and offers received

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from suppliers and the contractors but will nevertheless provide a fairly realistic estimate of capital costs.

What are the primary concerns of technical analysis in the project preparation?

2.3. Organizational Analysis

This basically incorporates the socio-cultural patterns and institutions or the population that the project is believed to serve. Does the project takes into account the cultural setup and customs of the beneficiaries? Or will it disturb
the accepted pattern? If so how should this be included as part of the project design? To have a chance of being carried out, a project must be related properly to the institutional structure of the country or region where the
project is to be carried. Examples include the land tenure system, use of local institutions such as Idir or Debbo. Similarly, managerial issues are critical for successful completion of projects. Thus, the project analyst must examine
the ability of available staff to identify whether they have the capacity to carry out the managerial needs of the project.

Organization and Managing

A division of the company into organizational units in line with the marketing, supply, production and administrative functions is necessary not only from the operational point of view, but also during the planning phase, to allow
the assessment and projection of overhead costs. It is also essential for the feasibility of a project that a proper organizational structure should be determined in accordance with the corporate strategies and policies. The
organizational set-up depends to a large extent on the size and type of the industrial enterprise and the strategies, polices and values of the organization.

Plant organization and management

Organization is the means by which the operational functions and activities of the enterprise are structured and assigned to organizational units, represented by managerial staff, supervisors and workforce, with the objective of
coordinating and controlling the performance of the enterprises and the achievement of its business targets. The organizational structure of an enterprise indicates the assignment of responsibilities and delegation of authorities to
the various functional units of the company, and is normally shown in a diagram, often referred to as an organigram. The organizational functions are the building blocks of the company. There may be grouped into the following
organizational units in line with the specific requirements of the individual company:

General Management
Finance, financial control and accounting

Personnel administration

Marketing, sales and distribution

Supplies, transport, storage

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Production:

Main plant

Service plants

Quality assurance

Maintenance and repair

The organizational structure of the company can also take a number of shapes, the most common being the pyramid shape, which has the following three organizational levels:

Top management

Middle management, and

Supervisory management

Human Resources

The successful implementation of any operation of an industrial project needs different categories of human resources- management, staff and workers-with sufficient skills and experiences. The feasibility study should identify and
describe such requirements and assess the availability of human resources as well as training needs. On the basis of the qualitative and quantitative human resources requirement of the project, the availability of personnel and
training needs, the cost estimates of wages, salaries, other personnel-related expenses and training are prepared for the financial analysis of the project. In case an economic evaluation is intended, the costs of unskilled labor
should be shown separately.

Human resources as required for the implementation and operation of industrial projects need to be defined by categories, such as management and supervision personnel and skilled and unskilled workers, and by functions, such
as general management, production management and supervision, administration, production control, machine operation and transport. The numbers, skills, and experience required depend on the type of industry, the technology
used, plant size, the cultural and socio-economic environment of the project location, as well as the proposed organization of the enterprise. Since the lack of experienced and skilled personnel can constitute a significant
bottleneck for project implementation and operation, extensive training programs should be designed and carried out as part of the implementation process of investment projects.
Overhead Costs

Overhead costs could be categorized into the following:

Factory overheads: costs that accrue in conjunction with the transformation, fabrication or extraction of raw materials. Typical cost items include:

Wages and salaries (including benefits and social security contributions) of manpower and employees not directly involved in production

Factory supplies: utilities (water, power, gas, steam), effluent disposal, office supplies, Maintenance

These cost items should be estimated by the service cost centers where they accrue.

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Administrative Expenses: These are cost elements that should be estimated for administrative cost centers such as management, bookkeeping and accounting, legal services and patents, traffic management and public relations,
etc. these costs should only be calculated separately in cases where they are of considerable importance. Otherwise they could be included under factory overheads. Typical cost items categorized under administrative overhead
costs include:

Wages and salaries (including benefits and social security contributions)

Office supplies, communications

Engineering, rents, insurances (property), taxes (property)

Marketing overhead Costs: Indirect marketing costs that cannot be easily linked directly with a product are dually treated as marketing overheads costs. These costs are often included under administrative overheads. Typical cost
items include:

Wages and salaries (inculcating benefits and social security contributions)

Office supplies, utilities, communication, indirect marketing costs, advertising, training etc.

Depreciation Costs: depreciation is an accounting method used to distribute the initial investment costs of fixed assets over the lifetime usually the fiscal standard lifetime of the corresponding investment. Depreciations are
frequently included under overhead costs. Since, however, these costs are treated differently for the discounted cash flow method, depreciation costs should be shown separately from overhead costs.

Financial Costs: -Financial costs such as interest on long-term loans, should be shown as a separate item, because they have to be excluded when computing the discounted cash flows of the project, but are to be included for
financial planning.

The different fields of project study so far considered are essentially relevant for financial/private project study, which may not be required to incorporate other social and environmental costs and benefits.
Dear learner! Can you explain the importance of organizational analysis and its contribution to the final success of a project?

2.4. Financial Analysis

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. Here the project analyst is concerned with the financial effects of the proposed project on each of its various participants (firms, framers/workers, government etc.). By examining the financial
implications 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 firms have enough working capital?). For
instance projections of receipts of one particular participant may help to

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identify the possibility of/or the demand for credit for that participant. The aspects which have to be looked into while conducting financial appraisal are:

Investment outlay and costs of the project II. Means of financing

III.Cost of capital

Break-even point

VI.

Cash flows of the project

VII.

Investment worthwhile ness judged in terms of various criteria of merit

VIII.

Projected financial position

IX.

Level of financial risk

2.5. Economic Analysis

The economic aspect of project preparation is primarily 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). In such evaluation the focus is on the social costs and benefits of a project, which may often be different from its monetary costs, and benefits. The financial analysis views
form the participants (or owners) point of view, while the economic analysis from the society‟s point of view.

There are three important distinctions between the two types of analyses

Treatments of taxes and subsidies: these items are treated as transfers in the economic analysis while in financial analysis taxes are usually treated as cost and subsidy re a return/income. The reason for this distinction is basically
the point of view (society as opposed to firm).

Use of Prices: in the financial analysis we will use actual market prices. In economic analysis the market prices are adjusted to accurately reflect social and/or economic values.

The latter prices are termed as „shadow prices‟ or „accounting prices‟ or „economic accounting prices‟.

Treatment of interest on capital: in economic analysis interest on capital is never separated and deducted from the gross return since it is part of the return from capital which is available for the society as a whole. Such interest is
deducted from benefit stream in financial analysis whose point of view is the firm and hence interest is a cost to the firm.

2.6. Social Analysis

This aspect is more important to public projects. Project analysts are expected to examine the broader social implications of the proposed project. Sufficient attention should be given to the social soundness of a project. This is
particularly related to the:

The attitude and the likely response of the beneficiary groups;

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The existence of potential implementation capacities or organization within communities;

The cultural factors related to the implementation and outcomes of the project;

The political factors;

Income distribution implications of the project,

Employment creation: income distribution could be related to employment creation.

Issues of balanced regional development,

The displacement impact of the project (the Wonji-Methara sugar plantations displacement is a good case in point);

The gender implication of the adopted technology;

Environmental impacts etc.

Guidelines for the social analysis of poverty reduction projects

Assess the socio-cultural and demographic characteristics of the beneficiary community: its size, sex distribution, and social structure, including ethnic, tribal and class composition;

Determine the way in which the beneficiary community has organized itself to carry out productive activities, including the structure of households and families, the availability of labor, the ownership of the land to be used, and
access to and control of resources;

The project‟s cultural accessibility; that is, its capacity both for adapting to and fro bringing about desirable changes in the beneficiary group‟s behavior and in how the group perceives its needs.

The strategy necessary to elicit commitment from the beneficiary population and to ensure the population‟s sustained participation from design through to successful implementation, operation and maintenance;

The needs and concerns of sensitive beneficiary groups, such as minorities, women, and so on.

Guidelines for ensuring the project is grounded on an understanding of the culture and the environment of the intended beneficiaries

Consult with beneficiaries on the scope and implementation strategy of the proposed project;

Ascertain the willingness of each of the affected groups to commit the financial resources and labor assumed in the project design;

Assess the likely response to the project of powerful local economic and political groups and identify ways in which their support, can be obtained or their opposition reduced;

Assess the potential conflict the project may cause within the community and surrounding areas, and identify ways in which the conflict could be avoided or reduced;

Try to understand the “psyche” of the poor and destitute, and seek to understand why they may be reluctant to participate in a project that appears attractive to an outsider;

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Development Planning and Project Analysis II Econ 4132 Module

Use social impact assessment techniques to assess how each of the principle socio economic groups is likely to be affected, place particular emphasis on assessing the extent to which project benefits will be accessible to the most
vulnerable groups.

2.7. Environmental /Ecological Analysis

In recent years environmental concerns have assumed a great deal of significance. Ecological analysis should be done particularly for major projects, which have significant ecological implications like power plants and irrigation
schemes, and environmental polluting industries. 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?