Development Planning and Project Analysis

For MSc. Students in Economics Department

Debre Markos University

Course Code: DEC541
Credit Hours: 3
Classification: Core
Semester: Year 1, Semester I
Instructor: Arega Sh.(PhD.)
 Course outline
• Chapter 1. Basic Concepts and Development Planning Issues
➢ Basic Concept of Development Planning
➢ Links among Development Planning, Program and Project
➢ Evolution of development planning in the history of economics
➢ Objective of planning, Elements of Planning, Rationale of Planning
➢ Types of Development Planning (In terms of time Horizon, Spatial
horizon, level (macro, micro and sectoral planning) and others
• Chapter 2. Techniques of Project Appraisal
➢ Concepts, Characteristics and Preparation of a Project
➢ Project Initiation and Feasibility study
➢ Project Planning and Scheduling
➢ Technical appraisal
➢ Social appraisal
➢ Economic and financial appraisal
➢ Choosing the discount rate, risks and uncertainties…
➢ Measuring Project Worthiness
 Course outline
• Chapter 3. Models of Development Planning
❖ Harrod-Domar Model of development Planning
❖ The Fel‘dman Model of development Planning
❖ The Mahalanobis Model of development Planning
❖ The Leontief Input-Output Model of development Planning
❖ The Linear Programming (Optimizing) Model of development Planning
❖ Macro econometric Model of development Planning
• Chapter 4. Development Project Analysis
❖ Valuing the environment
❖ Contingent valuation method (CVM)
❖ The environmental impact assessment
❖ Multi-criteria analysis
• Chapter 5. Project Implementation, Monitoring & Evaluation
❖ Project Implementation
❖ Monitoring & Evaluation
❖ Project Closing
 Chapter 1
1. Basic Concepts and Development Planning Issues
1.1. Basic concept of development planning.
1.2. Links among development planning, program and
project .
1.3. Evolution of development planning in the history
of economics
1.4. Objective, elements and rationale of planning.
1.5. Types of development planning (In terms of time
Horizon, Spatial horizon, level (macro, micro and
sectoral planning) and others
 Introduction
• Developing a project follows a logical process, with the first step
being to understand and identify what the community wants to
accomplish.
• Once that is established, you can move towards identifying the
problem you want to solve and what resources and assets are already
available to address the problem.
• You can then begin working through the project and figuring out how
much the project will cost.
• This development process does not involve reviewing funding
opportunity announcements to determine the type of project for the
community, rather, the project idea must come from the community
and match the community’s long range goal.
 1.1. Basic Concept of Development Planning
• Development means making a better life for everyone.
• A better life means, essentially meeting basic needs:
• sufficient food to maintain good health;
• a safe, healthy place in which to live;
• affordable services available to everyone;
• being treated with dignity and respect.
• Development is a founding belief of modernity.…in TGL, Econ..
• It is changing the world for a better livelihood.
• It implies starting change at the bottom rather than the top.
• Economic growth means achieving a more massive economy.
• It is producing more goods and services.
• It may be a larger total income on the other.
• It can occur without touching problems like inequality or poverty
if all increment snatched be few people.
 1.1.1. Difference between Growth and Development
• There may be parallel increment in income inequality and
economic growth.
• Development planning refers the strategic measurable
goals that an entity plans to meet within a certain time.

• Usually it includes time-based benchmarks.

• It generally considers criteria that will be used to evaluate
whether or not the goals were actually met.
• Development planning refers to all the various activities
related to fund raising, grant writing, donor relations,
capital campaigns, annual fund drives and fund-raising
events.
 1.2. Links among Development Planning, Program and Project
• Planning, in general, can best be described as the process
of selecting the enterprise objectives and establishing the
policies, procedures, and programs necessary for
achieving them.
• Planning in a project environment may be described as
establishing a predetermined course of action within a
forecasted environment.
• Development planning is a process of defining and
identifying development goals and objectives, strategies,
resources needed, and determine the levels of growth of
outputs/results and, assessing risks and assumptions.
1.2.1. Links among Development Planning, Program & Proje
• Program: is a group of projects that are closely linked,
wherein managing them together provides shared benefit.
• Projects: are means of organising activities that are
impossible to address within the normal operation of the
organisation.
• A project is a singular effort of defined duration, whereas a
program is comprised of a collection of projects.
• Actually, program is a bit more complex than a project.
• They do have different functions within an organization
• They have several difference, and many commonalities.
• Even project and program management are two different
roles within an organization, as well, yet they share similar
duties.
 1.2.1. Difference Between Them
• Structure: A project is well-defined, with a Project
Charter that spells out exactly the scope & objectives.
• A program tends to have greater levels of uncertainty.
• The labor (team) is also bigger for a program.
• The program team are supervising and coordinating the work
on a number of projects.
• Effort: This is the most significant difference between
projects and programs.
• A project represents a single effort.
• It is a group of people forming a team working towards for a
common goal.
• A program is a collection of projects.
• All the projects together form a cohesive package of work.
• The different projects are complimentary that help a program
to achieve its overall objectives.
 1.3.1. Difference Between Them
• Duration: Some projects may go for several years but
mostly they will work for a shorter.
• However, programs are definitely longer.
• Programs tend to be split into tranches or phases.
• All projects may not last long to be delivered in
multiple phases.
• Benefits: A project is towards achieving certain
outputs.
• The benefits of a project tend to be tangible: you get a
‘thing’ at the end of it.
• A program team works towards delivering outcomes,
and outcomes can be tangible but are often not.
• Benefits of a program are sum of the benefits from
projects and this could generate policies.
 1.3.2. Similarities Between Projects and Programs
• They do have some characteristics in common.
• Here are four traits that projects and programs have
in common.
• They are temporary: They are not long term
endeavors.
• They exist for a while until the work is done, and then
the project or program structure and the team are
disbanded.
• They have business cases: This is similar to all the
work that a company does. Projects and programs
should only start when they have a valid business case.
• Project and program managers work on activities that
will add some real value to make good business sense.
• There is no point in wasting time working on something
that isn’t going to benefit the company.
 1.3.2. Similarities Between Projects and Programs
• They are aligned to strategic objectives: It should be
easy to see how projects and programs work to
achieve the company’s strategic objectives.
• The work on the project or program directly contributes
to the company’s goals.
• They deliver change: Both of them deliver a change.
• You do a project or program, and at the end something
is different.
• The change could be something big or small.
• Programs tend to have larger goals for changing the
status quo and often include an element of cultural
change but the concept is the same.
1.3. Evolution of development planning in the history of
economics
• Planning is rooted in applied disciplines.
• Early planning theories emerged out of practice.
• Efforts to develop a coherent theory emerged in
the 1950s and 60s.
• Pre-Modern Planning: Focus on Urban Design
and Street System
• The classical economic thought and development
planning….
• The Keynesian thought and development planning..
• The Marxism and development planning..
• The recent thought and development planning …
 1.4. Objective and aims of planning
• Planning establishes the policies, procedures, and
programs necessary for achieving them.
• It aims to establish a predetermined course of action
within a forecasted environment.
• It schedule and control to meet the completion date of
tasks, reporting the progress against the schedule.
• It identifies activities and end products that will be
performed; and describes how the activities will be
accomplished.
• Thus the purpose of planning is to define each major
task, estimate the time and resources required a
framework for management review and control
 Elements of planning
• A plan has the following elements:
• 1. Aim:- The aim should be clearly defined so that it can
guide and direct the activities of the enterprise.
• 2. Objectives: - it may be described as the ends towards
which the group activities are aimed.
• 3. Policies:- A policy is a verbal, written or implied basic
guide that provides direction to a manager for action.
• 4. Procedures: it refers the actions to be taken out in
practice to achieve the organizations objectives as stated in
the policies. Procedures may be static or changed often.
• 5. Methods: they are work plans, which provide the manner
and order, keeping the objectives, time and facilities
available.
 Cont’d
• 6. Rules: they are different from procedures and policies. A
rule requires a specific and definite action be taken or not
taken with respect to a situation.
• 7. Budget: it is essentially a plan expressed in quantitative
terms.
• 8. Programs: they show the way and lay down procedure
for activities to take place within a time limit for
accomplishing, the stated objectives.
• 9. Strategies: it concerns the direction in which human and
physical resources will be deployed to maximize the chance
of achieving a selected objective.
 1.5. Types of development planning
• The division will be based on (Time and Spatial horizon,
level (macro, micro and sectoral planning) and others).
• "Planning is deciding in advance what to do, when to do,
and how to do. It bridges the gap from where we are and
where we want to be."
• Planning involves systematic thinking about ways and
means for accomplishing long-term goals.
• Thus, it could be different across d/t dimension
• Business planning, Strategic planning, Tactical Planning,
Product planning, Marketing Planning , Operations
Planning, Project Planning, Budgeting planning..
 1.5. Types of development planning

(With Spatial horizon)

• Spatial planning is to provide for the fair, orderly,
economic and sustainable use of land…..
• National Spatial Plan ….
• Regional Spatial Plan …
• Local Spatial Plans …..
• The plans shall be prepared on the basis of a complete
study of the planning area and its surrounding
context..
•
 Types of development planning

(With time Horizon)

• Each plan shall establish the estimated length of
time to be completely implemented (time
horizon) and the needs for periodic review.
• The time coverage of plans purely deepened on the
objective to be addressed and the inputs
• Each plan should be time bounded …..to be
measurable ….and achievable….
 Macro and Microeconomic planning
• It aims and prepared to solve macroeconomic
problems..
• Economic growth
• Unemployment reduction
• Inflation reduction
• Balance of payment stabilization

• GTP I &II
Microeconomic planning
• It aims to solve microeconomic problems
• Regional level
• Specific to a sector
• Specific to part of a society
 Sectoral Planning
• The different sectors of the economic system have
their own growth and development plan.
• The sectoral plan of a nation depends on the
economic dependency….
• Agrarian economy……

• Industry based economy…..

• Service based economy……..

• All the above do have different plans….

 Chapter 2
Techniques of Project Appraisal
2.1. Concepts, Characteristics and Preparation of a Project
2.2. Project Initiation and Feasibility study
2.3. Project Planning and Scheduling
2.4. Technical appraisal
2.5. Social appraisal
2.6. Economic and financial appraisal
2.7. Measures of project Worthiness
2.8. Choosing the discount rate, risks and uncertainties…
“Great ideas are born within one
hour, but killed in a second”
2.1. Concepts, Characteristics and Preparation of a Project
• Program: is a group of projects that are closely linked, to the point where
managing them together provides some shared benefit.
• Projects: are means of organising activities that are impossible to address
within the normal operational limits of the organisation.
• Definition of Projects:- A unique set of coordinated activities, with definite starting
and finishing points, undertaken by an individual or organization to meet specific
objectives within defined schedule, cost and performance parameters.
• Project planning, scheduling, and control is the art of preparing a plan that meets
the completion date, scheduling the individual tasks.
• A project planning defines the project activities and end products that will be
performed; and describes how the activities will be accomplished.
• Thus, the purpose of project planning is to define each major task, estimate the time
and resources required a framework for management review and control.
• Project may be initiated by some stakeholder driven by a need.
The project planning activities and goals include defining:-
▪ The specific work to be performed and goals that define and bind the project
estimates to be documented for planning.
▪ Commitments that are planned, documented and agreed by the affected groups
▪ Project alternatives, assumptions, and constraints
 Cont’d
Project Identification
• It is the second step in the realms of project management.
• Project ideas may originate from various circumstances.
• A project may designed to solve a problem, to satisfy a need, or to use
available resources.
• Many projects are conceived , just b/s there is a ready market.
• In a poverty stricken community, a project may be identified to cater
for the needs of the poor.
• Projects can be designed to use available labor and raw materials.
• A project is identified from the constraints of existing env’t in an
activity, a business, a sector, a community or a country.
• Such env’t may characterized by unsatisfied strong needs like
shortage of water in a village, or inadequately utilized resources like
fruits rotting in markets b/s of lack of fruit processing factory.
 Cont’d…. Project cycle /;#dT/
::

Project
identification /Ly¬/

Monitoring and
evaluation /KTTLÂ Project preparation
GMg¥ /formulation ZGJT

Project Project appraisal /

Implementation MzÂ
/ TGb‰

27
 Cont’d…… Why a Project?
• A project is generally called upon to provide a solution to a problem or to
take advantage of an opportunity. These needs might have to do with:-
– Reducing costs
– Increasing revenues
– Eliminating waste
– Increasing productivity and efficiency
– Solving a business or functional problem
– Taking advantage of market opportunities
– Filling social needs; improving service to customers or clients
– Responding to the activities of competitors
– Responding to external changes (e.g development of new technology)
– Responding to government initiatives or new laws or political
consideration
– Resource availability–opportunity to make profitable use of available
resource
– Natural calamity–hedging against the adverse effects of natural events as
drought or floods
 Cont’d ….. Defining a Project?
• Projects have four essential elements:- a specified timeframe, a
coordinated approach to co-dependent events, a desired outcome, and
unique characteristics.
1. Temporary. Projects always have a start and a finishing date.
2. A project is an exception/unique. Unlike routines, projects involve
investigation, compilation, arrangement, and reporting of findings that
provides value.
3. Progressively Elaborated
• Projects are developed in steps.
• The project scope will be broadly described early and becomes more
explicit and detailed when the team develops better and more
complete understanding of the objectives and deliverables.
• We learn more and more about the project as it goes on.
• When we start, we have goals and a plan.
 Cont’d……Defining a Project?...
4. Project goals and deadlines are specific and the desired result is identified. A
project is well defined only when a specific result is known.
5. Connected Activities/Interdependencies.
• It implies that there is a logical or technical relationship between pair of activities.
• There is an order to the sequence wherein activities that make up the project must be
completed.
• They are considered connected because the output from one activity could be an
input to the other.
• A project consists of a number of interrelated activities that are performed
sequentially or in parallel.
6. Within Budget
• Projects also have resource limits, such as labor, money, or machines.
• These resources can be adjusted up or down by management.
 Cont’d…..Defining a Project?...
7. According to Specification
• The customer, expects a certain level of functionality and quality from the project.
• Specification of the project completion date, or customer-specified.
• A number of factors can cause the specification to change.
• It is unrealistic to expect the specification to remain fixed through project’s life.
High level of uncertainty & risk
• As a result of its uniqueness, dependency on other agencies and its relatively long-
term nature; a project is faced with a lot of uncertainty and risk
Teamwork/multi-skill
– Projects require a team of people with different skills to get the job done
• A project can create:-
✓ A product that can be either a component of another item, an enhancement of an
item, or an end item in itself;
✓ A service or a capability to perform a service (e.g., a business function that
supports production or distribution);
✓ An improvement in the existing product or service lines (e.g., A Six Sigma
project undertaken to reduce defects)
 2.2. Project Initiation and Feasibility study
Project Initiation
• It is the first phase within the project management life cycle, as it
involves starting up a new project.
• In this phase, the business problem or opportunity is identified, a
solution is defined, a project is formed, and a project team is
appointed to build and deliver the solution to the customer.
• The business case includes:-
• A detailed description of the Introduction, Business Objectives,
Problem/Opportunity Statement, Assumptions, and Constraints.
• A list of alternative solutions available.
• An analysis of the business benefits, costs, risks, and issues.
• A description of the preferred solution.
• Main project requirements.
• A summarized plan for implementation that includes a
schedule and financial analysis.
• The project sponsor and the required funding is allocated to
proceed with a feasibility study.
 2.2. Project Initiation and Feasibility study
Project Initiation
• The feasibility study may also show that the project is not worth pursuing
and the project is terminated; thus the next phase never begins.
• The success of your project depends on the clarity and accuracy of your
business case and whether people believe they can achieve it.
• Whenever you consider experiences, your business could be more realistic.
• Whenever you involve other people in the business case’s development, you
encourage their commitment to achieving it.
• Projects are filled with misunderstandings between customers and project
staff.
• What the customer ordered is often not what they get.
• The need for establishing clear project objectives cannot be overstated.
• An objective or goal lacks clarity if, when shown to five people, it is
interpreted in multiple ways.
• Ideally, if an objective is clear, you can show it to five people who, after
reviewing it, hold a single view about its meaning.
• The best way to make an objective clear is to state it in such a way that it can
be verified.
• It is important to provide quantifiable definitions to qualitative terms.
 2.2. Project Initiation and Feasibility study
Contents of Project Identification Report
• Status & background of the project- present the origins & historic
background of the project.
• Project objectives- describe the major objectives in short paragraph.
• Project rationale- explain alternative strategies to attain project
objectives & shows the reasons for the selection of the selected
alternative.
• Type of product & service- show a list of detailed goods or services to
be delivered by the project.
• Project components- show the project items on which project funds
will be spent.
• Markets- assess the supply demand gap for the products or services to
be delivered & shows the market outlets and the marketing strategy to
sell the project output.
• Sources- of raw materials, equipment, & labor.
 Contents of Project Identification Report
• Magnitude of project costs- show preliminary estimate of the
cost of investment & operations including overheads.
• Sources of finance- draw a list of potential project donors
along with the reasons of their selection.
• Project benefits- present a forecast of project outputs, revenues,
foreign exchange, employment, technologies…
• External benefits of the project- describe secondary costs &
benefits expected in the special env’t of the project & the
projects effect that have a marginal impact on the economy as a
whole.
• Implementing agency- describe the type of organization which will
be responsible for project execution.
• Critical assumptions of the project- presents a brief analysis of
conditions of success of a project & shows possible policy or
institutional changes which can bring about success of project
implementation.
 2.4. Contents of Feasibility Study
1. Executive summary
2. Background and history
3. Market and plant capacity
4. Material inputs
5. Location and site
6. Plant organization and overhead costs
7. Man power
8. Project implementation
9. Financial and economic evaluation
 Project Feasibility Study
• A feasibility study is part of the process of project identification,
preparation and selection.
• This process involves appraising of projects and then choosing to
implement some of them.
• This process is very important for projects that are implemented by
governments and big organizations.
• In developing countries, it is common to find a situation where only a
few projects are sufficiently prepared and carefully selected.
• This happens because of several reasons:-
❖(1) there aren’t enough skilled people to perform this task;
❖(2) there is some unwillingness to spend money on this process.
• It is believed that this process is wasteful if many projects are
appraised but eventually abandoned.

37
 Feasibility Study
• Proper feasibility studies of projects imply choice of investment projects.
• Proper choice of projects is crucial to the long run economic development of a
country.
• If a firm implements projects, then proper choice is crucial to its long run survival.
• It is true that many projects are implemented without any extensive feasibility
studies.
• This happens mainly because of using non-numeric project selection models.
• However, the application of these models to project selection may be limited to
projects, which do not involve huge investment resources.
• For those projects which involve huge resources feasibility studies must be usually
carried out before a project is selected for implementation.
• A feasibility study should provide all data necessary for an investment decision.
• The market, technical, financial, economic and environmental prerequisites for a
project should be defined and critically examined with alternative solutions.

38
 Preparation of Feasibility Report
• A feasibility report of a project provides information which will be
required by the decision-makers for project appraisal.
• Project appraisal usually builds on the project plan, but it may also
involve new information if data or assumptions in the feasibility study
are questionable.
• The appraisal done is meant to show whether or not the project plan as
contained in the feasibility study, is sound and it is worth investing in.
• Project appraisal a feasibility report should contain the following:-
❖Market Analysis
❖Technical Analysis
❖Organizational analysis
❖Financial analysis
❖Economic analysis
❖Social analysis
39
❖Environmental analysis
 Market Analysis
• It is the demand and supply aspect of the project.
• It needs to ensure existence of effective demand at remunerative price.
• It also assesses how much output the market will absorb without
affecting the output price and if price inevitably be affected, we would
have to assess its magnitude.
• Similar arrangements need to be done on the input side too.
• 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 study?
• To answer those questions the project analyst requires a wide variety
of information and need to use appropriate forecasting methods.

40
 Market/Demand Analysis
• This step aims to estimate the potential size of the market for the
product proposed to be manufactured and to get an idea about the
market share that is likely to be captured.
• Hence, the two broad issues raised are:
– What is the likely aggregate demand for the product/ service?
– What will be the share of the market for the proposed product/service?
Answers to those questions call for an in-depth study of various factors
like:
▪ patterns of consumption growth,
• income and price elasticity of demand,
• composition of the market, nature of competition,
• availability of substitutes,
• reach of distribution channels, etc.
 The objectives of market/demand analysis
• It has objectives of addressing the following questions:-
• Who are the buyers?
• What is the total current demand for the product?
• How is demand distributed geographically?
• What is the demand for the product segmented in different sizes?
• What price will the customers be willing to pay for the new/improved
product?
• How can potential customers be convinced about the superiority of the
new product?
• What price and warranty will ensure its acceptance?
• What channels of distribution are most suited for the product?
• What trade margins will induce distributors to carry it?
 Technical Feasibility
• It may include the works of qualified individuals in the project
preparation.
• It is concerned with the projects inputs (supplies) and outputs of real
goods and services and the technology of production and processing.
• It is the analysis of the technical aspects of a project to be done
continuously when a project is formulated.
• Technical analysis seeks to determine whether the prerequisites for the
successful commissioning of the project have been considered.
• Is there a reasonably good choices with respect to location, size,
process, etc.
• It is from this aspect analysis that all physical quantity of inputs and
outputs will be determined for the estimation of costs and benefits.

43
 Technical Analysis
• Analysis of technical and engineering aspects is done continually
when a project is being examined and formulated.
• The technical analysis is made to identify and evaluate:-
– availability of technology
– availability of technical experts
– appropriateness of technology
– affordability of technology
• Technical analysis is concerned primarily with:-
– Material inputs and utilities
– Manufacturing process/ technology
– Product mix
– Plant capacity
– Location and site
– Machineries and equipments
– Structures and civil works
– Work schedule
5/6/2020
 Technical Feasibility
• Poor technical analysis will result in under- or over- estimation of
quantities related to inputs required by and outputs of the project.
• Further analysis based on these estimates would eventually lead to
spurious cost and benefit estimates.
• Care must also be taken in assessing alternative designs and
techniques.
• 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.

45
 Technical Feasibility
• In general the technical analysis is primarily concerned with
❖Work schedule
❖Location and site
❖Project charts and layouts
❖Structure and civil works
❖Machines and equipment
❖Plant capacity
❖Manufacturing process and technology
❖Material inputs and utilities
❖Product mix

46
 Technical Feasibility
• Is the proposed technology or solution practical?
• Do we currently possess the necessary technology?
• Do we possess the necessary technical expertise, and is the schedule
reasonable?
– Is relevant technology mature enough to be easily applied to our
problem?
• What kinds of technology will we need?
• Some organizations like to use state-of-the-art technology
– …but most prefer to use mature and proven technology.
• A mature technology has a larger customer base for obtaining advice
concerning problems and improvements.

47
 Technical Feasibility
• Is the required technology available in the information systems shop?
– If the technology is available:
• …does it have the capacity to handle the solution?
– If the technology is not available:
• …can it be acquired?
– Project appraisal is an exercise dealing with working out the value,
quality and condition of the project
Main Features of Technical Feasibility:-
– Time:- different processes take different time to complete
– Relationship:- the inputs being processed bear a definite relation to
each other and with also the resulting outputs, factor-factor and
factor-output relationships, respectively
– Economies and diseconomies of scale:- former:- when output
increases with an increased scale of a proces, saving of inputs
occurs. The latter refers to a situation where scale is increased
beyond a point. E.g Irrigation wells. 48
48
 Technical Feasibility...
• Choice of processes:-input usage: a) same inputs or b) different inputs
• Technical efficiency:- producing X outputs using less of inputs

Inputs Project Variants Input Prices

A1 A2 A3 A4 (A) (B)
1 5 4 4 3 2 2
2 2 3 2 1 4 -
3 3 2 2 1 3 3
4 0 0 0 2 6 6
Output X X X X

Which project to choose? Why?

49
49
 Technical Feasibility...

Input

A2 A1
1

4 5 X (Output)

50
 Exploring Operational Feasibility
• The “PIECES” framework useful for identifying operational
problems to be solved, and their urgency.
❖Performance:- Does current system provide adequate response
time?
❖Information:-Does current system provide end users and
managers with timely, pertinent, accurate and usefully formatted
information?
❖Economy:- Does current system provide cost-effective information
services to the business? Could there be a reduction in costs and/or
an increase in benefits?
❖Control:- Does current system offer effective controls to protect
against fraud and to guarantee accuracy and security of data and
information?
❖Efficiency:- Does current system make maximum use of available
resources, including people, time, flow of forms,...?
❖Services:- Does current system provide reliable service? Is it
51
flexible and expandable?
 Financial Feasibility
• The following aspects should be considered in financial appraisal:-
❖Investment outlay and costs of the project
❖Means of financing; source of finance, credit terms, interest rates,
etc
❖Projected profitability
❖Projected financial position
❖Cash flows of the project
❖Break-even point
❖Investment worthiness judged in terms of various criteria of merit
❖Level of financial risk
• It 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.
• The analysis must show fund flows in each period in the project life.
 Financial Feasibility
• Objectives of Financial Analysis
1. Assessment of financial impact
• The most important objective of financial analysis is to assess the financial effects
the project will have on participants (farmer, firms, government, etc). This
assessment is based on the comparison of each participant’s current and future
financial status with the project against the projection of his future financial
performance as the project is implemented.
2. Judgment of efficient resource use
• For management especially, overall return is important because managers must
work within the market price framework they face. Investment analysis &
financial ratio analysis provide the tool for this review.
3. Assessment of Incentives
• The financial analysis is of critical importance in assessing the incentives for
different participants of the project.
• Will participants have an incremental income large enough to compensate them
for the additional effort and risk they will incur?

53
 Financial Feasibility
• Will private sector firms earn a sufficient return on their equity investment &
borrowed resources to justify making the investment the project requires?
• For semi-public enterprises, will the return be sufficient for the enterprises to
maintain a self-financing capability and to meet the financial objectives set out by
the society?
4. Provision of sound financial plan
• The financial plan provides a basis for determining the amount and timing of
investment, debt repayment capacity, and also helps to coordinate financial
contributions.
• Assessment of financial management competence especially for large projects,
financial analysis will enable the analyst to judge the complexity of the financial
management & the capability of managers so that he can judge what changes in
organization and management may be necessary.

54
 Financial Feasibility
• For project management purposes, there are three fundamental financial statements
that can be used to determine the financial status of a project
1. The trading and profit and loss account: - indicates the relative efficiency of the
project operations represented in terms of income over expenditure in a given
period of time
2. The cash flow: - indicates the physical flow of money through the project over a
given period of time, i.e, month-by-month, yearly basis. It indicates the liquidity of
the project (its ability to meet cash requirements)
3. The balance sheet: - indicates the net worth and nature of the project in financial
terms at a specified point of time. Indicators are: value of assets. The balance sheet
indicates how these assets are funded (like from shares, loans, retained profits from
previous periods of operation).
• An analysis of the profitability of a project is undertaken from the determination of
the profit and loss account. It has three main purposes:
➢ To derive indicators of relative efficiency
➢ To determine the net profit to be incorporated in the balance sheet
➢ To determine the tax liability of the project
55
 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 or financial
costs, and benefits.
• The financial analysis views the project from the participants (or
owners) point of view, while the economic analysis form the society’s
point of view.
• 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.
56
 Economic & Social……….
• The aim is to measure the loss and gains in economic welfare of the society
in which a project is implemented.
• Issues to be considered include:
a. The price of inputs and outputs
b. The valuation of the outputs of certain services
c. The evaluation of indirect effects-externalities
▪ It is difficult to compare costs & benefits directly b/s the prices used are
distorted by inflation, foreign exchange and reducing all the costs &
benefits to a common denominator is so difficult that we use adjusted
price, shadow price, or accounting price.
• 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.
• Similarly, economic analysis uses the marginal value of a given output to
approximate the real value.
• Thus, economic analysis require adjustment of market prices, which may not reflect
the real value of resources and outputs, into economic prices.
• It also require determination of economic prices of those goods that might not have
 Economic Analysis
• Purpose of Economic Analysis
• Economic analysis is an assessment of a project’s costs and benefits from the
national point of view and is therefore concerned with the impact of a proposed
project on the national economy.
• It can be distinguished from financial analysis in that attention is not confined to the
costs and benefits affecting a single group, the focus of economic analysis is on the
net return to society.
• In economic analysis the most important question is whether or not the project under
study is beneficial to the national economy.
• Economic analysis is, therefore, conducted to identify costs and benefits where there
is a significant divergence between market prices and economic costs or values.
• Economic analysis can be useful for private-sector projects since it will assist
government agencies to make decisions if they have to give loan guarantees.
• The aims of economic analysis in the context of project preparation are:
– To ensure that public investment funds are used only for economically viable
projects.
– To ensure that a convincing economic case can be made for PIP or PEP projects
to benefit from external funding. 58
 Economic Analysis
• Economic analysis is less likely to be needed when:
– The project is small (unless it is a pilot project likely to be replicated),
– The project is financially viable and although to producing primary products for the local
market,
– Involves no significant negative externalities and no significant use of under valued local
resources,
– The project is financially viable and producing mainly for export with no significant
negative externalities and no significant use of under valued local resources, and
– The project is in a sector where valuation of the benefits is not practical and where there
are no issues of cost effectiveness in determining the project design.
• Stages of economic Analysis
• 1. A statement on a year by year basis of costs and benefits at constant market prices.
• 2. The identification of linkages and externalities.
• 3. The adjustment of prices of goods and services taking into account their relative scarcity or
estimation of economic or ‘shadow’ prices.
• 4. Comparing economic costs with economic benefits to determine which among alternative
project proposals have acceptable returns.

59
 Economic Analysis
• The costs and benefits of a proposed project must, therefore, be identified. Furthermore, once
costs and benefits are known, they must be priced, and their economic values determined.
• In economic analysis, anything that reduces national income (or a wider definition of public
welfare) is a cost and anything that increases national income/welfare is a benefit.
• Once financial prices for costs and benefits have been determined and entered in the project
accounts, the formulators must estimate the economic value of a proposed project to the
nation as a whole.
• Financial prices are, therefore, the starting point for economic analysis; they are adjusted as
needed to reflect the value to the society as a whole of both project inputs and outputs.
• The principle of opportunity cost underlies all estimation of values in economic efficiency
analysis.
• This principle states that the economic value of a resource is determined by its next best
alternative use.
• The idea that the value of a project is determined by the difference between the assumed
situations ‘with’ and ‘without’ project is an application of the opportunity cost principle.
• An example of the use of the opportunity cost principle in economic analysis is provided by
the case of opportunity
• The opportunity cost of land can be investigated by asking what the alternative use of the land
might be.
• Urban land can be used for houses, offices, shops, factories, and the like. cost of land. 60
 Social appraisal
• The process of development is inherently social, dealing as it does with the improvement of social
conditions and working through social structures to achieve these objectives.
• It is, therefore, crucial to integrate comprehensive social assessment into the project formulation
process.
• The precise role of social assessment can be defined as ensuring that people, their capacities, values
and needs are put at the centre of the development process.
• Project planners must make careful consideration of social factors when formulating projects.
• Experience has shown that ignorance of these factors can lead to project failure.
• Project formulators who have designed projects by applying expert knowledge without stakeholder
consultation have often failed to achieve positive results.
• If social assessment is primarily concerned with ensuring that projects, and consequently the
development process, are ‘people- centered’ then the following points must be taken into account in
any project formulation exercises.
• These are:
❖ Identifying of stakeholders and target groups.
❖ Participation issues.
❖ Social impact assessment (SIA)
• Assessing of mitigation measures, strategies and costs of SIA.
• Once the various stakeholders have been identified it is then necessary to consider their interests.
These interests should be entered in the second column of the stakeholder table.
• When identifying stakeholder interests it is important to keep the following points in mind:
• Relate the stakeholders’ concerns to the project objectives.
• Identify direct or indirect benefits which they are likely to receive from the project.
• Consider the costs they are liable to incur directly or indirectly as a result of the project.
61
 Social appraisal
• The aim of participation is to produce a situation where stakeholders are willing to contribute
to the successful implementation of the intended project and its future sustainability.
• Participatory approaches, which create an awareness amongst stakeholders of their own
situation, of the socio-economic environment they live within, and of measures they can take
to begin changing their environment, should be considered during project formulation.
• When dealing with participation as an element of project formulation it is important to think
in terms of both quality and quantity that should be related to project objectives.
• This is because the level of participation necessarily varies from project to project and, while
participation is important in all projects, some projects may even have participation as an
objective in its own right.
• A useful place to begin when analyzing the level of participation expected and actually
present in project formulation is with the construction of a participation matrix.
• Social impact assessment (SIA) is a term used to classify the process of assessing how the
benefits (and Costs) of a project are distributed amongst various stakeholders over time.
• SIA is often used in evaluating the ‘winners’ and ‘losers’ of proposed policy reforms but its
techniques can also be applied to project analysis.
• SIA is essentially concerned with three distinct areas:
• Impact of the project on its stakeholders.
• Impact of the stakeholders in terms of achieving the project objectives.
• People’s response to the opportunities created by the achievement of the project objectives.
62
 Social appraisal
• SIA is inextricably linked with stakeholder analysis; indeed stakeholder identification is the
first of five distinct stages which together comprise Social Impact Assessment:
• Stage 1, Scoping - This involves stakeholder identification with environmental scoping. If
scoping of social impact, determines no significant negative effects then there will be no need
to carry out further SIA.
• Stage 2, Baseline and impact identification- This involves a consultative process of
information-gathering regarding community baseline data like that undertaken in PRA and a
consultative process in terms of identifying the potential social impacts of the project. This
process is liable to utilize a variety of techniques such as:
• Quantitative surveys
• PRA
• Qualitative questionnaires
• Community discussions
• Ethnographic field research
• Stage 3, Development of mitigation measures- Once the potential impacts have been
identified the ‘next stage is to formulate measures to minimize those negative impacts whilst
maximizing the positive impacts.
• Stage 4, Production of draft SIA- Once the impacts have been identified and mitigation
measures formulated the next stage is to produce a draft of the social impact assessment
document which contains this information
63
 Social appraisal
• Stage 5, Production of final SIA and social impact management plan- The final
document will consist of a social impact assessment report and a management plan
containing details of the mitigation measures and strategies to be undertaken together
with their associated costs.
• The time required to undertake SIA can vary greatly dependent on the scale of research
and size of sample areas.
• Due to overlapping data requirements and the need to minimize resource duplication, it
is recommended that SIA be carried out simultaneously with stakeholder analysis and
institutional Aspect.
• Assessment of mitigation measures, strategies and costs
• The success of this stage of the social assessment process is largely dependent on the
quality of stakeholder analysis and social impact assessment carried out previously.
• The assessment of mitigation measures, strategies and costs will form the social impact
management plan produced along with the SIA report.
• The analytical work carried out in previous stages of social assessment (stakeholder
analysis, participation and gender analysis etc.) is likely to have identified potential
options to limit the negative impact on stakeholders.
• These options now need to be studied in more detail in order to develop a comprehensive
strategy to mitigate negative impacts.
• Stakeholder consultation is essential in order to suggest both feasible and desirable
mitigation measures.
• Both costs and benefits of mitigation strategies should be calculated.
64
 Environmental Analysis
• Environmental analysis is a field of growing importance in project preparation.
• Underestimation of the environment has resulted in negative outcomes such as poor human
health, social disruption, reduced productivity and, ultimately, the undermining of
development. When considering environmental aspects into project formulation exercises
there are a number of issues that should be taken into considerations, these include:
– A clear understanding of the meaning of Sustainability
– Assessment of the potential environmental impact of the project: landfill, forest, soil,
biodiversity, water, fishery
– To suggest ways in which that impact could be reduced at a reasonable cost.
– To formulate mitigation strategies and a plan of action.
• Environmental sustainability of a development project
• The World Commission on Environment and Development (WCED) defined sustainable
development as “development that meets the needs of the present without compromising the
ability of future generations to meet their own needs”.
• This proposition raises the problem of defining the economic value of a capital stock. To help
resolve the problem and also to provide guidance for the formulators a distinction needs to be
clear among the following:
❖ Man made capital, which is potentially expandable.
❖ Critical natural capital, which is priceless.
❖ Other natural capital, which may be nonrenewable and renewable. 65
 Environmental Analysis
• The implications of the above classifications of capital stock are that the project formulators
must seek to:-
❖ Maintain, if possible increase, the value of man made capital.
❖ Avoid damage to critical natural capital at all costs.
❖ Limit exploitation of renewable natural capital to sustainable level.
❖ Internalize the cost of depleting non-renewable resources through some form of
compensation measures.
• Stages of environmental assessment
1. Environmental screening
• Not all projects will require a full-scale environmental study.
• Nonetheless, it is important to be aware of the potential environmental effects of a project.
• The purpose of this screening process is to assess the type and complexity of environmental
analysis techniques, which are likely to be necessary.
• The process aims to assess the project against simple criteria, to determine whether more
detailed analysis are needed.
• Criteria used in environmental screening may include:
❖ Location- projects that are being implemented in environmentally sensitive areas need further
assessment.
❖ Type of project- projects such as mines and dams are liable to cause a more damage than social
projects.
❖ Size- larger projects are more likely to require further or more detailed assessment
 Environmental Analysis
• Complexity- a project with a number of disparate components is liable to have a wider range
of environmental impacts, which need careful consideration.
• Data used in the screening process may take the form of general estimations or information
already gathered from any similar projects.
• There are two possible results of environmental screening:
❖ The project can continue as planned with no further EIA.
❖ There is a need to prepare a more detailed preliminary assessment.
2. Preliminary assessment
• The preliminary assessment involves conducting a process of research and utilizing expert
advice in order to achieve three objectives:
– To identify the key impacts of the project on the environment
– To predict and describe the impacts identified above
– To assess the potential importance of these impacts to decision makers.
• The information from this preliminary assessment will help the formulators in deciding
whether a project is cleared, rejected on environmental grounds or submitted to EIA.
• There are a number of useful checklists produced by different organizations, including
the Ethiopian Environment Authority (EPA) that can help to assessment.
• The formulators are advised to refer to the appropriate guidelines or concerned authority.
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 Environmental Analysis
3. The meaning of environmental impact assessment (EIA)
• EIA is concerned with the identification, prediction and evaluation of the impacts of
proposed project alternatives and measures aimed at eliminating or minimizing impacts
and optimizing benefits.
• It is now widely accepted that those projects which incorporate EIA when necessary are
more effective and often less costly.
• Not all projects require EIA to the same degree and intensity.
• Thus, classification of projects to determine the level of assessment is very useful
for project formulation.
• Many donors/lenders and countries, including Ethiopia have developed four
categories of EIA procedures. These are, named as category A, B, C and D.
• Category “A” projects are those that have diverse and significant environmental
impacts. These types of projects require full environmental impact assessment. Dams and
reservoirs, mineral development, resettlement and urban development.
• Category “B” projects are those that have specific environmental impacts. As the
impact is specific limited environmental analysis is appropriate. E.G. rural water supply
and sanitation, renewable energy and small scale projects.

68
 Environmental Analysis
• Category “C” projects are those projects that normally with no significant
environmental impact. These projects do not require environmental assessment.
Technical assistance, consultancy, training and workshops are good examples.
• Category “D” projects are environmental projects. These are projects with a major
environmental focus whose objective can be waste disposal, desalination or wildlife
protection etc. They do not require EIA.
• In identifying significant EIA, project formulators must consider the following criteria:
❖ Length of time and geographical coverage over which the effects will be felt.
❖ Urgency that refers to how quickly a natural system might deteriorate and how long it takes to
stabilize.
❖ Degree of irreversible damage to the environment, natural resources and life supporting
systems.
• In conducting EIA there are clearly defined stages or procedures which should be taken
into consideration. These are:
❖ Identifying of the various potential impacts of the project on the environment.
❖ Predicting of the extent of the environmental changes.
❖ Assessing of whether or not the identified and predicted changes are of any environmental significance.
❖ Planning of mitigation measures or alternatives that could reduce the project’s environmental impacts.
• EIA will lead to an eventual decision to accept, reject or modify a project.
• If a project have a serious environmental impact then it is necessary to prepare an
environmental management plan (EMP) with the required financial expenditure.
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 Environmental Analysis
• Assessment of mitigation measures, strategies and costs
• Where potentially negative environmental impacts have been identified, it is necessary to
consider ways in which these impacts can be overcome.
• This involves suggesting various measures and strategies to avoid, reduce or overcome
these impacts.
• These various measures and strategies can be defined as forms of mitigation.
• A general overview of the various types of measures, include to:
– Avoid negative impacts- redesign the project to avoid those areas with the potential to cause significant
environmental impact.
– Abandon the project altogether because the potential impacts are too serious.
– Other avoidance strategies may include: changing the project’s location; establishing buffer zones around
sensitive ecosystems; avoiding transport routes with the potential to disrupt local populations and related
activities; and deciding to exclude a certain project component because of its potential impact.
– Reduce negative impacts- this involves introducing mitigation measures to reduce the impact of
existing activities.
– Reduction activities could include: treatment plants to reduce pollution; landscaping and using local
materials to reduce the visual impact of new structures; scheduling project activities during the dry
season to reduce.
– Compensate for negative impacts- in some instances it will not be possible to avoid or reduce
environmental impacts entirely. If this is the case then it will be necessary to include compensation
for victim society.
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 Environmental Analysis
• Compensation could be financial or in the form of a compensatory project which aims to
produce benefits for affected people.
• It is essential that mitigation measures be planned in integrated manner to ensure the
effectiveness in combination and do not transfer the negative impact to another area.
• In projects where serious environmental impacts have been identified it will be necessary to
collate these mitigation strategies in the form of an environmental management plan (EMP).

Environmental valuation techniques

• Valuation of environmental effects includes the measurement of environmental costs and
benefits. There are various methods of estimating environmental costs and benefits. These
methods can be categorized as:
• Objective Valuation (OV) methods that are based on physical relationships describing cause
and effect to value the physical effect.
• Subjective Valuation (SV) methods are based on subjective assessment derived from real or
hypothetical market behavior.
• Valuation techniques can also be divided between those that attempt to:
❖ Value both costs and benefits that can be included in an overall cost and benefit calculation.
❖ Concentrate on the cost side and might be used in either in cost effectiveness analysis or in some other form of
analysis.

71
 Environmental Analysis
• The various approaches to the valuation of environmental effects are described below:
• Those that attempt to based on “OV” include:
✓ Effect on production or changes in productivity approach involves estimation of the effect of
an environmental change on production in the affected project area. It is mainly applicable in
projects affecting natural resources such as forests, fish and soil. Determining the physical
effects of a project on the environment and estimating the values of the effects are a
straightforward approach to estimate the costs of environmental mitigation.
✓ Lose of Earnings Approach includes the valuation of human life and cost of illness
approaches. This applies particularly to air and water pollution. The methodology involves
calculating the loss of earnings through sicknesses or premature deaths.
✓ Replacement cost and compensation approach, which take into account environmental
damage by compensating or replacing/restoring the damaged asset. These techniques are
applicable if cost of restoration/compensation is less than the value of the resources destroyed.
The SV a methods include:
❖ Hedonic Pricing methods attempt to value a particular environmental state based on surrogate markets.
❖ These markets use ‘property value approach’ (e.g. housing) and ‘wage differential approach’ (e.g. labor).
❖ In property value approach, environmental impacts are derived from changes in values.
❖ The wage differential is used to estimate the costs associated with the risk of ill health or death at work.
• These methods are applicable where market efficiencies are strong to justify the
assumptions, which will be unlikely for developing countries.

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 Environmental Analysis
❖ Contingent valuation techniques which are used to establish ‘willingness to pay’ for environmental improvement
or ‘willingness to accept’ environmental damage.
• It is not possible to provide exhaustive lists/methods of valuation techniques. It is up to the
formulators to select those techniques applicable to a project under consideration.
• Whatever strategy is chosen, it will be necessary to consider the associated costs and who has
the responsibility to provide funds to cover these costs.
Environment Management Plan (EMP)
• The EMP sets out the various mitigation measures and related monitoring and institutional
arrangements to be carried out to reduce the environmental impact of a project.
• An EMP is not required for all projects, but if serious potential impacts were identified during EIA.
• Relating this to the project categorization for EIA mentioned above an EMP should be prepared for:
– All Category ‘A’ projects.
– Some Category ‘B’ projects.
• A project’s EMP should consist of the following components:
❖ Mitigation: potential mitigation strategies are identified from the categories described in EIA as
mentioned above.
❖ Monitoring: the EMP must set out arrangements for monitoring of potential impacts and mitigation
measures throughout the implementation and operational phases of the project cycle.
❖ Institutional Arrangements: this may relate to the establishment of environmental units with the
specific task of implementing the EMP.
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 Environmental Analysis
Implementation Schedule and Costs.
• The EMP must provide:
✓ A project implementation schedule for all aspects of mitigation,
monitoring and institutional arrangements.
✓ A detailed breakdown of the costs related to the implementation
of mitigation, monitoring and institutional arrangements.
• These costs should be integrated into total project costs tables.
• The environmental management plan should be integrated into the
overall implementation plan, budget and project analysis.
• It should not be seen as a separate, external component, but rather as
an integral part of the project as a whole.

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The 8 Step EA Process & Its Associated Outputs
1. Identify the Project: Identify the purpose and need of the proposed action.
• Develop a goal to provide a framework for EA.
2. Scoping, identify the issues, opportunities, and effects of implementing
• The proposed action
3. Collect and Interpret Data
• Identify probable effects of project implementation.
4. Design of the Alternatives Consider a reasonable range of alternatives.
• Usually at least three alternatives are considered.
• Include a No-Action Alternative.
• Consider the mitigation of negative impacts.
5. Evaluate Effects, Predict and describe the physical, biological, economic, and social
effects of implementing each alternative.
• Address the three types of effects --Direct, Indirect, and Cumulative.
6. Compare Alternatives, Measure the predicted effects of each alternative against
evaluation criteria.
7. Decision Notice Select preferred alternative and Public Review Allow for review and
comment by the affected and interested public.
8. Implementation, Record results and Monitoring, Implement selected
alternative.
• Develop a monitoring plan.
• Insure that EA mitigations are being followed.
 The generally accepted method includes the following
• Define Objectives: define what you have to achieve to be
successful and establishes a basis for dealing with risk and future
decisions.
• Identify Risk: identify areas of risk which may limit or prevent
achievement of objectives.
• Quantify Risk: evaluate and prioritize the level of risk and
quantify frequency of occurrence and impact.
• Develop Response: define how we are going to respond to the
identified risks; eliminate, mitigate, deflect or accept.
• Document: the risk management plan documents how we propose
to tackle risk on the project.
• Risk Control: the risk control function implements the risk
management plan.
• This may involve training and communication.
• And as the risks and work environment are continually changing, it
is essential to continually monitor and review the risk level and
your ability to effectively respond.
 Techniques for identifying risk include:
• Analyzing historical records
• Structured questionnaires
• Structured interviews
• Brainstorming
• Structured checklists
• Flow charts
• Judgment based on knowledge and experience
• System analysis
• Scenario analysis (what-if)
 Risk Assessment
Political Risk Assessment
• Political economy
• Political stability/predictability
• Political commitment of the authorities to the public
• Incentives
• Subsidies
• Company ‘s success is achieved by pursuing opportunities to gain a competitive
advantage, and projects have typically been setup to take advantage of these
opportunities:-
– to make something new, or
– change an existing facility.
• Risk has always been an intrinsic part of project management.
• Risk management is gaining significance and importance due to:
– increasing market competition,
– increasing technology and
– an increasing rate of change,
• Risks are generally deemed acceptable if the possible gains exceed the possible
losses.
• A project risk may be defined as any event that prevents or limits the achievement of
project objectives as defined at the outset of the project, and these objectives may be
revised and changed as the project progresses through the project life-cycle.
 Why Do Project Plans fail?
No matter how hard we try, planning is not perfect, and sometimes it may fail.
Typical reasons include:-
● Aggregate goals are not understood at the micro level.
● Plans encompass too much in too little time.
● Financial estimates are poor.
● Plans are based on insufficient data.
● No attempt is being made to systematize the planning process.
● Planning is performed by a planning group.
● Planners may not know the ultimate objective, the staffing requirements, and
the major milestone dates.
● Project estimates are best guesses, and are not based on standards or history.
● Not enough time has been given for proper estimating.
● No one has bothered to see if there will be personnel available with the
necessary skills.
● Individuals may not work towards the same specifications.
● Individuals are consistently shuffled in and out of the project with little
regard for schedule.
 Major criterion for Sustainable Project
• Low investment cost
• Adaptability to local skills
• Use of local raw materials
• Out put to meet the needs of the local people
• Import substitution & foreign exchange savings
• Creation of employment
• Profit generation
• Environmental harmony
• Continuity of production
• Supportive institutions
• Gender balance
 Sensitivity Analysis
• Project planning starts by establishing assumptions & conditions on
which the project is based
• They are generally based on inputs, outputs, costs, prices, and
revenues
• Since the planner cannot make assumptions that will hold true with
certainty, it is usual to check what will happen if this base changes.
• This study of assumption under varied assumptions is called
sensitivity analysis
• What will happen to our project if all costs are increased by 10%?
• What will be the profitability of the project if the price of one unit of
output drops by 20%?
• What will be the net income of a farming project if the output drops
by 10% as an effect of bad rains?
• N.B. All these changes will affect the revenues, the costs, and the
financial results of the project directly or indirectly through other
means.
 2.7.Measures of Project Worthiness
Project Selection....
• The selection of the right project for future investment is a crucial
decision for the long-term survival of the company.
• The selection of the wrong project may well precipitate project failure
leading to company bankruptcy .
• The execution of a project will tie up company resources, and as an
opportunity cost the selection of one project may preclude the
company from pursuing another project.
• We live in a world of finite resources and therefore cannot carry out
all the projects we may want or need.
• Therefore a process is required to select and rank projects on the basis
of beneficial change to the company.
 2.7.Measures of Project Worthiness
• Project selection is the process of evaluating proposed projects, and
then choosing to implement the best to achieve objectives of the
organization.
• Each project will have different costs, benefits, and risks, which are
known with certainty rarely.
• In the face of such differences, the selection of one project out of a set
is a difficult task.
• Choosing a number of different projects, a portfolio, is even more
complex.
• Project selection is only one of many decisions associated with project
management.
• To deal with all of these problems, we use methods that can abstract
relevant issues about a problem from the detail in which the problem
is embedded-reality is far too complex to deal with in its entirety.
• The methods allows us to strip away almost all the reality from a
problem, leaving only the relevant aspects of the “real” situation for
us to deal with.
 2.7.Measures of Project Worthiness
• A numeric methods is usually financially focused and quantifies the project in terms
of either time to repay the investment (payback) or return on investment. While non-
numeric methods look at a much wider view of the project considering items from
market share to environmental issues.
❖ The main purpose of these models is to aid decision-making leading to project
selection.
• When choosing a selection method the points to consider are; realism, capability,
ease of use, flexibility and low cost.
❖ Most importantly the method must evaluate projects by how well they meet a
company's strategic goals and corporate mission.
❖ The following sub-headings indicate the type of questions to ask:
• Will the project maximize profits?
• Will the project maximize the utilization of the workforce?
• Will the project increase market share or consolidate market position?
• Will the project enable the company to enter new markets?
• Will the project satisfy the needs of the stakeholders aspirations?
• Is the project's risk and uncertainty acceptable?
 Numeric Methods
• The numeric selection methods presented here may be sub-divided
into financial and scoring methods. The financial ones are:
• payback period
• return on investment (ROI)
• net present value (NPV)
• internal rate of return (IRR)
• Companies tend to prefer financial ones and often select solely on
profitability. This may not be as drastic as it sounds because
subconsciously the managers will consider a wider scope of
selection criteria.
• In an investment appraisal only the incremental income and
expenses attributed directly to the project under consideration should
be included.
• Costs that have already been incurred (sunk costs) should be ignored
as they are irrelevant to decisions effecting future projects.
 Scoring Methods
• The numeric methods discussed so far all have a common limitation;
they only look at the financial element of the project.
• In an attempt to broaden the selection criteria a scoring method called
the factor method which uses multiple criteria to evaluate the project.
• The factor method simply lists a number of desirable factors on a
project selection performance along with columns for selected and not
selected.
• A weighted column can be added to increase the score of important
factors while reducing the scoring of the less important.
• The weighted column is calculated by first scoring each factor, and
then dividing each factor by the total score.
• The total weighted column should always add up to one.
• The factors can be weighted simply 1 to 5 to indicate; 1 "very poor", 2
"poor", 3 "fair", 4 "good" and 5 "very good".
 2.7.Measures of Project Worthiness
• When costs and benefits have been identified, quantified and priced
(valued), the analyst is trying to determine which one, among various
projects, to accept and which to reject.
• There are two methods for measuring the worthiness of projects:
undiscounted & discounted methods.
• The arithmetic of these discounted methods, and the way we interpret
the measures and their limitations, is exactly the same whether we are
using them for financial analysis or for economic analysis.
• Before embarking on the methods, it is important to note two critical
points. First, there is no one best technique for estimating project
worth; each has its own strength & weakness.
• Second, these financial and economic measures of investment worth
are only tools of decision-making, i.e., they are necessary conditions
& are not sufficient condition for final decision.
• There are many other non-quantitative and non-economic criteria 87
for
making final decision of whether to accept or reject a project.
 2.7.Measures of Project Worthiness
1. Non-Discounted Measures of Project Worth
• Use the cash flow as obtained through the project period without
taking into account the present value of future cash flows
• There are 3 most commonly used NDM of project worth are:
a. Ranking by inspection
b. Payback period
c. Return on Investment
2. Discounted Measures of Project Worth
• DM takes into account the d/c between the value of money today,
& the same value tomorrow-timing value of money.
• This measure is based on the concept that “to receive some today is
better than to receive more tomorrow”
• Three major techniques in DM project worth computation:
a. Net Present Value (NPV)
b. Benefit - Cost Ratio (BCR)
c. Internal Rate of Return (IRR)
5/6/2020
 2.7. Measures of Project Worthiness
The Non-Discounted Measures (NDM)
• Use the cash flow as obtained through the project period
without taking into account the present value of future cash
flows.
• There are three most commonly used NDM of project
worth:-
a. Ranking by inspection
b. Payback period
c. Return on Investment
 a. Ranking by Inspection (RI)
• Given alternative investments which one should exclusive investments
• There may be an alternative as to build a hotel or a factory on the same
site.
• The investor might choose to start one with limited resources he/she has.
• RI consists of choosing the best investment by comparing the net proceeds
of alternative investments.
• The project having more cash proceeds will be preferred though are some
peculiarities on inspectionsbe implemented and which one should be
discarded in a mutually.
• Comparing the net proceeds of A & B projects, we can find out which
project has shorter life period
• Compare the net proceeds of the short lived project with long lived one
• If the two have the same initial investment & proceeds throughout the
period of investment; & if the long lived investment continues to earn
income after the end of the short lived one, then the long lived one is more
desirable as the second project continues to earn proceeds while the first
one has ended.
 Net Cash Flow of 4 Hypothetical Projects with identical
initial investment outlays & life periods
Project Initial Net Cash Proceeds in Years
Cost 1 2 Total
A 20,000 20,000 - 20,000
B 20,000 20,000 2000 22,000
C 20,000 14,625 9825 24,450
D 20,000 16325 8125 24,000

• Then, which one is more desirable-taking into account the net

proceeds?
• Although the total net proceeds of C & D are identical, D earns more
income earlier than C.
• Thus, D is more desirable than C
• Project B is more desirable than A
 b. Payback Period (PP)
• PP is dealing with the question of how long will it take to earn an
amount of proceeds equal to the initial cost of investment?
• It involves with the calculation of the length of the period that i
required for the stream of the earned cash proceeds to equal the
initial cost of investment
• If the net annual proceeds are constant, the payback period in years i
found by dividing the total initial outlay by the amount of expected
annual cash proceeds
• If the total initial cost of investment was $500, & if the net amoun
proceeds is $100, for 10yrs, the PP would be $500/$100= 5yrs
• The implication is the investment cost would be covered in 5 yr
period.
• If the annual proceeds are not constant, the payback period will be
obtained by finding out after how many years the total net proceed
will equal the original outlay.
• This is done by adding up the net proceeds year to year, until the
amount of the initial investment cost is reached.
 The PP period on the basis of the Previous Table
Project Payback period (Yrs) Ranking
A 1 1
B 1 1
C 1.5 4
D 1.4 3

• Both projects A & B have the same payback period, investment B is

preferable, b/s it earns more proceeds than investment A.
• Both investment C & D have identical 2years PP, but looking at the
proceeds earned, investment D will have earned $1,700 more than
investment C only in the first year.
• Therefore, although investments C & D have the same PP, investment
D is preferable than C. B/S it earns more than investment C in the
earlier period.
Weakness of PPM of Project Worth
• It fails to take into account the proceeds earned after the PP
• It does not account for the timing of proceeds earned prior to the PP date
 Payback Period
• The payback period is the length of time from the beginning of the project
until the sum of net incremental benefits of the project equal to total capital
investment. It is the length of time that the project requires to recover the
investment cost.
• The method is very simple, and it is a good measure when the project has
problem of liquidity.
• The pay-back period is also a common, rough means of choosing among
projects in business enterprise, especially when the choice entails high
degree of risk.
• Since risk generally increases with futurity, the criterion seems to favor
projects that are prima facie less risky. This method has two important
weaknesses: First, it fails to consider the time & amount of net benefits after
the payback period. Second, it does not adequately take into account the
time value of money even in the payable periods.
• Payback Analysis: how long will it take (usually, in years) to pay back the
project, and accrued costs:It indicates the number of years the project will
take to repay its investment cost 94
 Measures of Project Worth
Alternativ Year Investment cost Net incremental Cumulative net
e projects benefits incremental benefits
I 1 20000 -
2 2000 31,000
3 8000
4 12000
5 9000
II 1 20000 -
2 2000 34,000
3 12000
4 8000
5 12000
III 1 20000 -
2 1000 37,000
3 5000
4 6000
5 8000
6 10000
7 5000
8 2000 95
 Measures of Project Worth
• Project I & II have a payback period of 4 year.
• But project III has a payback period of 5 years.
• Thus, based on this criterion, project I & II have equal higher rank
than project III.
• Therefore, the method fails to consider the time & amount of net
incremental benefit after the payback period- project III.
• In addition, the method results equal rank for both project I and II.
• Yet we know by inspection that we would choose project II over
project I because more of the returns to project II are realized earlier.
• This method is a measure of cash recovery, not profitability.

96
 c. Return on Investment (RI)
• Also called average income on cost.
• The simplest way to ascertain whether the investment in a project is viable is
to calculate the return on investment (ROI).
• If a project investment is Birr 100,000, and gives a return of 20,000 per year
over 10 years, the average return/year = (10 × 20,000) –100,000 = 1,000
X10 , in terms of percentage, it is 1%.
• Calculated by dividing the average income by the cost of investment.
• Some planner prefer to take the ratio of the average income to the book
value (cost of investment after depreciation).
• Project C & D are preferred than A or B, but B is preferred than A.
• Weakness of RI: It doesn’t take into account the timing of the cash flow.
Investment Cost ($) Average income Average income on cost (%) Ranking
A 20,000 0 0 4
B 20,000 660 3.3 3
C 20,000 800 4 1
D 20,000 800 4 1
 Discounted Measures (DM) of Project Worth
• DM takes into account the d/c between the value of money today, &
the same value tomorrow-timing value of money.
• This measure is based on the concept that “to receive some today is
better than to receive more tomorrow”
• Three major techniques in DM project worth computation:-

Net Present Value (NPV)

Benefit - Cost Ratio (BCR)

Internal Rate of Return (IRR)

 a. Net Present Value (NPV)
• The philosophy is “better today than tomorrow”- principle of the wise.
• One dollar today is worth more than one dollar tomorrow- the concept
of NPV is based on this wisdom
• E.g the present value of $100 payable after 3 years from now can be
defined as “that amount of dollars necessary to invest today at
compound interest in order to obtain $100 in 3 years”
• The amount to invest today/the present value will depend on the rate
of interest at which the money will grow & the frequency at which the
rate of interest will be compounded.
• The NPV represents the net benefit over and above the compensation
for time and risk.
• Hence, the decision rule associated with the net present value criterion
is: accept the project if the NPV is positive and reject it if NPV is
negative.
 a. Net Present Value (NPV)
• Properties of NPV:-
• NPVs are additive:- The NPV of a package of projects is simply the
sum of the net present values of individual projects included in the
package.
• Intermediate Cash Flows are Invested at Cost of Capital:- The
NPV rule assumes that the intermediate cash flows of a project-that is,
cash flows that occur between the initiation and the termination of the
project-are reinvested at a rate of return equal to the cost of capital
• NPV calculation permits time-varying discount rates:- when the
discount rate changes over time

100
 a. Net Present Value (NPV)
• Net Present Value
• The Net Present Value (NPV) of a project is the sum of the project
values of all the cash flows-positive as well as negative-that are
expected to occur over the life of the project.
• The general formula for NPV is:-
n
ct
NPV =  −I
t =1 1 + r )
t

• Ct = cash flow at the end of year t

• n= life of the project
• r = discount rate

101
 Examples and Implications of NPV
Periods/Years Investment Interest Total Earnings
1 1 0.10 1.10
2 1.10 0.11 1.121
3 1.121 0.121 1.331
▪If $1.00 is invested at the beginning of the first year at 10% compound
interest, the total return at the end of the 3rd year will be $1.331.
▪It is possible to find the present value of a $100 future earning at 10%
interest of by dividing $ 100 with 1.331 = 75.13, which implies that the
sum of $75.13 that earns 10% compound annually will be $100 at the
end of the 3rd year.
▪This implies that an offer of $ 100 in 3yrs time is as attractive as an
offer of $ 75.13 now-this is the justification for discounting, which
enables flows of d/t yrs to be compared with the present flows.
PV = 100/ (1-0.1)3 = 75
 a. Net Present Value (NPV)
Cash flow analysis (Cost benefit Analysis)
Description Year
1 2 3 4 5 6 7 8
Cost/Expenditure 100 150 200 200 250 300 400 500

Benefit/Income 150 200 250 300 350 420 500 650

Profit 50 50 50 100 100 120 100 150

Discount Factor (%) 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47
NPV 46 41 38 68 62 68 51 70
Total NPV 444
 a. Net Present Value (NPV)
• Financial tables give the appropriate conversion factor for various rates of
interest.
When doing NPV, consider the ff:
• Choose an appropriate rate of discount
• Compute the present value of the cash proceeds revenues expected from
the investments
• Compute the present value of the cash outlays/costs
• The present value of the revenues minus the present value of the costs is
the net present value of the investment
• For any enterprise carrying out a financial analysis, the discount rate used
is normally the interest rate at which bank loans are available
• When the enterprise funds are used, the rate which the bank would pay for
the deposited of these funds are used. This is the “Opportunity Cost”
• The formula of the NPV of a project is generally the sum of the flows
obtained as follows:-
Let x be the cash flow:-
t =the particular year from initial year (0) to the last (n)
r=the discount rate of the investment
 a. Net Present Value (NPV)
• The NPV of a project then is the sum of the flows (xt) discounted:-
x0/ (1+r)0 + x1/ (1+r)1 + x2/ (1+r)2…… xn/ (1+r)n or

• In order to make the present value net, we need to go further to the

benefit and cost computation:- let B & C respectively be the total
benefits & costs of a project duly discounted. The selection criterion
for the project is then that the discounted benefits should exceed the
discounted costs:-
 a. Net Present Value (NPV)
Year Cash flow
0 Birr (1,000,000)
1 200,000
2 200,000
3 300,000
4 300,000
5 350,000
If the cost of capital (discount rate) is 10%, then NPV is calculated as
follows
200,000 200,000 300,000
NPV = 1
+ 2
+ 3
+
(1.10) (1.10) (1.10)
300,000 350,000
4
+ 5
− 1,000,000 = −5,273
(1.10) (1.10)

NPV/I = Profitability Index

106
 a. Net Present Value (NPV)
• The NPV represents the net benefit over and above the compensation
for time and risk. Hence, the decision rule associated with the net
present value criterion is: accept the project if the NPV is positive and
reject it if NPV is negative.
• Properties of NPV:
• NPVs are additive:- The NPV of a package of projects is simply the
sum of the net present values of individual projects included in the
package.
• Intermediate Cash Flows are Invested at Cost of Capital:- The NPV
rule assumes that the intermediate cash flows of a project-that is, cash
flows that that occur between the initiation and the termination of the
project-are reinvested at a rate of return equal to the cost of capital
• NPV calculation permits time-varying discount rates:- when the
discount rate changes over time, we use a different formula like the
one shown below:
107
 Measures of Project Worth
Interest rate 14% 15% 16% 18% 20%
Investment 12000
Cash flow 4,000 5,000 7,000 6,000 5,000

PVC1 = 4,000 / 1.14 = 3509

PVC 2 = 5,000 /(1.14  1.15) = 3814

PVC3 = 7,000 /(1.14  1.15  1.16) = 4603

PVC 4 = 6,000 /(1.14  1.15  1.16  1.18) = 3344

PVC5 = 5,000 /(1.14  1.15  1.16  1.18  1.20) = 2322

NPV of Project = 3509 + 3814 + 4603 + 3344 + 2322 - 12000 = 5592

108
 NPV Computation….
Period (1) Cash Flow (2) Present Value (3)Present value (Col.
($) Factor 1* Col. 2)
0 2227.80 1.000 2227.80
1 12356.60 0.690 8526.00
2 24116.60 0.476 11479.50
3 23766.60 0.328 7795.40
4 24116.60 0.226 5450.30
5 24358.60 0.156 3799.90
6 12974.50 0.108 1401.20
7 14576.60 0.074 1078.70
8 20268.60 0.051 1033.70
9 20686.60 0.035 724.00
10 31036.60 0.024 744.90
NPV 44261.40
 NPV Cont’d…
• We computed the present value of the investment in the previous
slide table using 0.45 as the discount rate.
• The present value of $1 due 0 periods from now discounted at any
interest rate is 1.00.
• The present value of $1 due 1 periods from now discounted at 0.45
is 0.690.
• The present value of $1 due 2 periods from now discounted at 0.45
is 0.476.
• By the same analogy we found the value of $ 1 due 10 periods from
now discounted at 0.45.
• The NPV of the investment is the algebraic sum of the 11 present
values.
• The NPV is +ve indicating the project is acceptable.
• Any investment with NPV >0 is acceptable using this single
criterion.
• NPV>0, the investor could pay an amount in excess of costs of $
44261.40 & could still break-even economically by undertaking an
investment.
 B. Benefit-Cost Ratio (BCR) Computation
• The ratio of the present worth of Gross benefits to the present worth of
Gross Costs.

• BCR =

Or Present value benefits/Investment

• If the ratio is greater than 1, the implication is the investor will recover the
investment.
• If the bank interest rate is as equal as or les than the discount rate used for
the computation that gives 1, it is better to invest the money in the project
than save in the bank.
• It is usual to compare the present worth of the net benefits with the present
worth of the investment cost plus operating costs.
• Thus, Net Benefits =Gross Benefit –Production Costs
• BCR is used in economic analysis – in the evaluation of economic
benefits vis-à-vis the entire economy.
• For private investment, Internal rate of Return is widely used.
 B. Benefit-Cost Ratio (BCR) Computation
• Benefit-Cost Ratio: There are two ways of defining the relationship between benefits and
costs:
PVB
(1) BCR =
I
PVB − I
(2) NBCR = = BCR − 1
I
PVB = present value of benefits, I = initial investment, NBCR= Net Befit Cost Ratio
• Example:
100,000 25,000 40,000 40,000 50,000
+ + +
(1.12) (1.12) 2 (1.12) 3 (1.12) 4
Benefits Year 1 25000 BCR = = 1.145
100,000
Year 2 40000
Year 3 40000
NBCR = BCR-1= 0.145
Year 4 50000

This discount factor is 12% When BCR > 1 or NBCR > 0 accept
When BCR < 1 or NBCR < 0 reject the project

112
 C. Internal Rate of Return (IRR)
• It is the rate of discount at which the total discounted cash
proceeds/benefits expected from the project equals the total
discounted cash outlays/costs required by the investments.
• The IRR is defined as the rate of discount, which brings about
equality between the present value of future net benefits & initial
investment.
• IRR = Discount Rate, which makes the NPV zero
• It is the value of r in the following equation.
n
Ct
• I – investment cost
I = 
t =1 (1 + r )t

• Ct – Net benefit for year t

• r - IRR
• n - Life of the project
▪ IRR can be found by trial and error
113
 Measures of Project Worth
Year 0 1 2 3 4
Cash flow (100,000) 30,000 30,000 40,000 45,000

IRR is the value of r which satisfies the following equation:

30,000 30,000 40,000 45,000
100,000 = + + +
(1 + r )1 (1 + r )2 (1 + r )3 (1 + r )4
• The calculation of r involves a process of trial and error.
• Try different values of “r” till you find that the right-hand side of
the above equation is equal to 100,000.
• Let us try to use 15%. This makes the right-hand side to be:
30,000 30,000 40,000 45,000
100,000 = + + + = 100,802
(1.15) (1.15) (1.15)
2 3
(1 .15)4

Since the value is slightly higher than our target value, which is 100,000, we increase the value to
16%.

30,000 30,000 40,000 45,000

100,000 = + + + = 98,641
(1.16 ) (1.16 ) (1.16 )
2 3
(1 .16 )4
114
 Measures of Project Worth
• Since this value is now less than 100,000, then the value of r lies
between 15 and 16%.
• For most of the purposes, this indication suffices.
• If a more refined estimate of r is needed, we use the following procedure:
1. Determine the NPV of the two closest rates of return.
(NPV/15%) = 802
(NPV/16%) = 1,359
2. Find the sum of the absolute values of the NPVs obtained in Step 1
802+1,359 = 2,161
3. Calculate the ratio of the NPV of the smaller discount rate, identified in
Step 1, to the sum obtained in Step 2
802/2,161 = 0.37
4. Add the number obtained in Step 3 to the smallest discount rate
15+0.37 = 15.37
115
 C. Internal Rate of Return (IRR)
• Since this value is now less than 100,000, we conclude that the value of r lies
between 15% and 16%.
• For most of the purposes, this indication suffices.
• If a more refined estimate of r is needed, we use the following procedure:
1. Determine the NPV of the two closest rates of return
(NPV/15%) = 802
(NPV/16%) = 1,359
2. Find the sum of the absolute values of the NPVs obtained in Step 1
802+1,359 = 2,161
3. Calculate the ratio of the NPV of the smaller discount rate, identified in Step 1, to
the sum obtained in Step 2
802/2,161 = 0.37
4. Add the number obtained in Step 3 to the smallest discount rate

NPV
15+0.37 = 15.37 NPV

IR
116 R
15.37%
 Measures of Project Worth

NPV
NPV

IRR
15.37%
If two discounting rates are given, we can use this formula to find
IRR
Lower discounting rate + (NPV at lower rate/difference b/n NPVs) x
difference in rates)
For example, lower discount rate : 20% and higher 24%
The cash flow is: Year 1, Year 2 and Year 3 having 60,000 each.
Find IRR. It should be 23.365% . NPV

IRR = 23.365% 117

 IRR…
• Can be described as the rate of growth of an investment
• Can be interpreted as the highest rate of interest an investor could
afford to pay, with out losing money, if all the funds to finance the
investment are borrowed, and if the debt services (loan and accrued
interests) was repaid by use of cash proceeds from the investment.
• When using IRR, the investment criterion is that the IRR should be
greater than the discounted rate
IRR r/n ship with other methods
▪ When the NPV (the discounted benefits are excess of the discounted
costs) is positive, then the IRR is greater than the rate of discount
▪ When the NPV is 0, then the IRR is equal to the rate of discount and
the discounted benefits are equal to the discounted costs
▪ When the NPV is negative, then the IRR is smaller than the discount
rate and the discounted benefits are smaller than the discounted costs
 Accounting Rate of Return (ARR)
• ARR differs from the payback period in using accounting profits rather than cash
flows
• It is calculated by taking the average annual profits expected from a project as a
percentage of the capital invested

ARR = Average annual profit x100/outlay,

Cash Flows A B C

Outlay 120,000 120,000 120,000

After deducting depreciation
Year 1 30,000 20,000 10,000
Year 2 30,000 20,000 70,000
Year 3 30,000 20,000 80,000
Average Annual Profit 30,000 20,000 53,000

ARR of A = 30,000 x100/120,000 = 25%,

ARR of B = 20,000 x 100/120,000 = 16.7%,
ARR of C = 53,333 x 100/120,000 = 44.44% 119
 Chapter 3
Models of Development Planning

• Harrod-Domar Model of development Planning

• The Fel‘dman Model of development Planning
• The Mahalanobis Model of development Planning
• The Leontief Input-Output Model of development
Planning
• The Linear Programming (Optimizing) Model of
development Planning
• Macro econometric Model of development Planning
 Introduction
• Planning models can be classified in several different categories: aggregate,
main sector, multi-sectoral, regional and project specific models
(Chowdhury and Kirkpatrick, 1994).
• They may be simulation models or more traditional econometric models.
• The former use informal calibration procedures, while the latter are
calibrated more formally, using statistical theory which is in turn based on
the assumption of time-phased structural stability.
• The simulation approach was developed in response to the self-evident
observation that structural stability is precisely what the process economic
development is designed to undermine.
• Planning models are useful for several reasons.
• The most obvious is that they allow policymakers to form quantitative
estimates of the various trade-offs in preparing development policies.
• Planning models reflect the accounting regularities and conventions of
national income and product accounts, balance of payments and income and
expenditure balances of the public sector (Taylor, 1979).
 Introduction
• Analytical models combine behavioral equations with accounting
identities from these sources.
• As a result, the planner becomes aware of limitations imposed by the
adding-up principle implicit in the underlying accounts and limitations
on the degrees of freedom of the parameters that determine behavior.
• Planning models also serve as a means of communication with outside
aid agencies, signaling donors that donated resources will be used
wisely and in ways consistent with the broad development objectives.
• They communicate the thinking about how the resources will be best
employed and the explicit assumptions (behavioral parameters,
elasticities and the like) underlying the model can be reviewed and
evaluated by outsiders.
• Inappropriate assumptions can be identified and removed.
• In contrast, planning models with sufficient structural detail also can
be used to counterbalance any undue influence of generic, one-size-
fits all models in discussions of multilateral agencies.
 Introduction
• Aggregate growth models which may involve either optimization
or balance are due to Solow, Ramsey and Mahalanobis, Chenery
and monetary models for financial programming at the
International Monetary Fund and the World Bank (Chowdhury and
Kirkpatrick, 1994).
• They can serve as guide to the formulation of lower-level models,
providing control totals for more disaggregated approaches.
• Aggregate planning models are indicative of the potential growth
path of the economy and can be used to generate various scenarios
ranging from pessimistic to optimistic.
• The can also be used to determined optimal accumulation paths far
into the future.
• One of the most well-known models in economics employs the
calculus of variations to find the optimal savings rate, the one that
maximizes the discounted value of future consumption.
• In the 1960s, a by-product of the space program emerged in the
form of optimal control models, a dynamic analogue to static
Lagrangian nonlinear programming models.
 Introduction
• The models were more flexible than the classical calculus of
variations models of Ramsey and his followers, admitting piecewise
continuous and inequality constraints.
• Planning models is a term applied to several disciplines, each using
certain techniques to achieve the planning objectives.
• For example, in construction industry “Fast Track,” Program
Evaluation and Review Technique, PERT; Critical Path Method,
CPM; and “CPM/Cost,” are various planning tools devised for
systematic and accelerated project implementation.
• However, development economists have concentrated most of their
efforts on the analysis of the conditions currently facing various
countries, the requisites for economic development, and the
consequences and the experience of various countries in their
development efforts.
• There is an absence of extensive economic development models in the
literature. A number of theories on economic development have been
 Introduction
• Beyond Leontief’s and Kooros’ models, (although the latter provide an optimum
planning strategy, and the former does not), other so-called economic
development models are descriptive or normative.
• Both Rostow, (1990) and Kooros, (1996) have described the “stages of economic
development.” and conditions that would lend to such an aspiration.
• Contrary to North (1993) the growth and development of industrialized economies
was not merely the result of democratic institutions, but due to many other
conditions including technology, resources, productivity, and economic policies.
• The Leontief's Input-output analysis accounts for general equilibrium phenomenon
in the empirical analysis of inter-industry production.
• It forecasts the dynamics in both the final and intermediate goods.
• Accordingly, demand plays no role in this theory, unless demand for a product
increases, which will impact the derived demand for other factors of production, and
intermediate products.
• Even with its simplicity of assumptions, the input-output model will need massive
amount of data on the economy's production interdependence.
• This model is particularly useful in predicating future production requirements given
the availability of demand information.
 Introduction
• “Several assumptions restrict the use of the model, among which are:
homogeneity of the product by each industry and the fixity of proportions of
input used in the production of any good. The second assumption
momentarily dispels the idea of technological progress" (Henderson 1971).
• This latter assumption is addressed later on in the conclusion section.
The input-output model consists of n simultaneous linear equations, with n
variables to be determined. However, the ingenuity of Leontief to provide an
eloquent predictive system pertaining to the real-world behavior through the
formulation of this mathematical model that won him the Noble prize.
Whereas to many it was initially considered pure abstraction, it is now a
well-recognized model.
To illustrate the model, the following simple example shows the structure of
this general equilibrium for a three-industry structure, (steel, coal, and
railroad), where each industry utilizes the input from others:
• Almost all-economic planning models deal with causal forecasting or
economic growth determination, including Harrod-Domar Model.
• These models include: a simple Keynesian macroeconomic growth model,
Leontief’s Input/Output model, the social accounting matrix, general
equilibrium models, and cost benefit analysis approach, [Gills, et. Al 1996].
• For example Horrod-Domor Model simply states the following:-
 Introduction
• As stated in the introduction, the Markov-Chain model determines the
consequence of changes in consumer preferences affecting a firm within an
industry, or the consumers’ behavioral changes or their economic
performance, (with or without any growth in the total market).
• Leontief’s Model estimates the impact of growth or dynamic change of one
industry on the entire economy, whether such growth is uniform or skewed
due to technology, differential capital injection, productivity, etc; and
Kooros’ model determines the need for resources, and prescribes the manner
by which these resources should be allocated to each economic sector or
programs so that the overall economic development objective (social welfare
function) is maximized.
• After briefly describing each model in some details, Table VIII in the
conclusion section shows the comparative structure, input and output of
these models.
• Planning failed largely because of the lack of political power or will to
enforce command and control measures in the absence of appropriate
incentives.
• When targets were missed, little could be done other than revise the targets.
 Introduction
Models of Development Planning:-
• Economic development occurs when all segments of the society
benefit from the fruits of economic growth through economic
efficiency and equity.
• It transforms a traditional dual-system society into a productive
framework wherein every one contributes and receive benefits
accordingly.
• “Economic development is a process by which an economy is
transformed from one that is dominantly rural and agricultural to
one that is dominantly urban, industrial, and service in composition”
(Manley, 1987).
• It brings higher standard of living and welfare to a nation, while
attempting the Parato Optimality, or a “win-win strategy”
without negative externalities.
• Planning models is a term applied to several disciplines, each using
certain techniques to achieve the planning objectives.
 Cont’d
• A number of theories on economic development have been posed by
economists dating back to Adam Smith, (1776), David Richrado,
(1830), Karl Marx, (1880), W.W Rostow (1953), Leontief (1965), and
others.
• However, none of these theories, except Leontief’s, provide a viable
functioning structure for a development model.
• Almost all-economic planning models deal with causal forecasting or
economic growth determination, including Harrod-Domar Model….
• These models include: a simple Keynesian macroeconomic growth
model, Leontief’s Input /Output model, the social accounting matrix,
general equilibrium models, and cost benefit analysis approach (Gills
et al., 1996).
•
• Economic growth is defined as a sustainable rise in
real GDP.
• Growth in strict sense does not refer to expansion of
output for a brief period of timerather growth has to
be understood in the long-run.
• Growth rate of GDP at a given time (year or quarter)
can be calculated as:

𝑌𝑡 −𝑌𝑡−1
• g= . 100
𝑌𝑡−1
• where 𝑌𝑡 = GDP at time t.
 Measuring Growth
• Given the formal definition for growth, it is required
to determine the growth rate for a longer period.
• Given the annual growth rates of real GDP, 𝑔𝑖 , the
average growth rate over T period is given by:
σ𝑇
𝑖=1 𝑔𝑖
• 𝑔𝑎𝑣 =
𝑇
• Under this approach, there is an implicitly
assumtionthat the variable at hand (GDP) is
compounded annually. That is,
• 𝑌1 = 𝑌0 + 𝑔𝑌0 = 𝑌0 (1+g)
• 𝑌2 = 𝑌1 + 𝑔𝑌1 = 𝑌1 (1+g)
• 𝑌2 =𝑌0 + 𝑔𝑌0 + 𝑔(𝑌0 + 𝑔𝑌0 ) = 𝑌0 (1+g)2
• 𝑌2 = 𝑌0 (1+g +g+𝑔2 ) =𝑌0 (1+2g +𝑔2 )
• .=…………………=…
• 𝑌𝑡 = 𝑌0 1 + 𝑔 t
𝑌𝑡 −𝑌𝑡−1 𝑌0 1+𝑔 t −𝑌0 1+𝑔 t−1
• Thus, growth = =
𝑌𝑡−1 𝑌0 1+𝑔 t−1

𝑌0 1+𝑔 t 𝑌0 1+𝑔 t−1

• = −
t−1 𝑌0 t−1
𝑌0 1+𝑔 1+𝑔

𝑌0 (1+𝑔)𝑡
• ൘𝑌0 1+𝑔 t − 1= 1+g-1=g
(1+𝑔)
 Harrod-Domar Model of development Planning
• For example Horrod-Domor model simply states the following .
• Economic growth can be thought of as result of abstention from
current consumption.
• If a farmer wants to increase output more than he used to
produce, all he needs to do is increase the amount of seed by
foregoing current consumption.

• The act of increasing the stock of seed is investment while the

total accumulated level of seed is capital stock.

• Thus, capital stock is the machinery, equipment and the like

which is used to produce output, and investment is the flow of
output to increase or maintain capital stock.
• That determines the resource gap (St -It )for a
targeted level of g. That determines the financial
requirement from abroad in the form of aid, loan,
and foreign direct investment (FDI).
• The Harrod-Domar model can be extended to
account for population growth:
𝑠
• = 𝑔∗ + 𝑛 + 𝑛𝑔∗ + 𝛿 ≅ 𝑔∗ + 𝑛 + 𝛿
𝑔
• where g* and n are growth in per capita GDP and
population, respectively.
• The Harrod-Domar equation relates growth of an
economy to two fundamental variables:
• the ability of the s/θ =g+ 𝛿 economy to answer the
two fundamental variables:
• the ability of the economy to save (s) and the
capacity (efficiency) of capital to produce (θ).
• To foster growth just increase s and/or increase
efficiency of capital (decrease θ).
• For a given θ, given the domestic saving, one can
see the resource gap (St -It) for a targeted level of g.
 The Fel‘dman Model of development Planning
• It is a Neo-Marxian model of economic development, created
independently by a Soviet economist Grigory Fel’dman in 1928.
• It was amended by an Indian statistician Prasanta Chandra
Mahalanobis in 1953.
• Essence of the model is a shift in the pattern of
industrial investment towards building up
a domestic consumption goods sector.
• The model argued that to reach a high standard in consumption,
investment on capital goods is firstly needed.
• A high enough capital goods in the long-run expands the
capacity of producing consumer goods.
• It is therefore continuing to follow “heavy-industry-first”
policies.
 Fel‘dman Model Cont’d
• It recognizes the significance of a number of factors, viz:

• (a) the pattern of income distribution…….. Marxian thought

• (b) increase in the effective utilization of the existing capital stock

• (c) distinction between degrees of effective utilization of the old and

the new capital stocks.

• (d) consideration of the rate of growth in terms of capital capacity

as well as in terms of the absorption of a growing labor supply.
 Fel‘dman Model Cont’d
• The model assummed that:-
- there is no government expenditure, only household
consumption and firm investment,
- Production is independent of consumption, there is no lags in
the growth process.
- Capital is the only limiting factor, among others.
• It follows the Marxian division of the total output of an economy
(W) into capital goods for both producer and consumer goods,
and all consumer goods including raw materials for them.
• Production is the sum of constant capital ,C, variable capital
(wages), V, and surplus value, S.
• CaW1 = C1 + V1 + S1
• + CoW2 = C2 + V2 + S2
• W=C+V+S
 Fel‘dman Model Cont’d
• The fraction of total investment allocated to Capital Goods is the
key variable in the model.
• The rate of investment is purely determined by the coefficient and
stock of capital.
• Fel’dman (1928) employed the following notations to demonstrate the
two-sector model:-
❖ The fraction of total investment allocated on capital goods;
I = annual rate of net investment allocated to the respective
categories, so that; I = I1 + I2;
• The investment measured in years, t,
V = the marginal capital coefficient for the whole economy; as V1
and V2 represent for the respective category.
 Fel‘dman Model Cont’d
• C = the annual output of consumer goods;
• Y = the annual net output/income of the whole economy;
• α = the marginal propensity to consume;
• ά = the marginal propensity to save;
• t0, C0, and Y0 = the respective initial magnitudes of t, C, and Y; and
• I1 = γI = the annual net investment allocated to capital
• Thus, since only I1 increases the capacity of producing capital goods,
then it follows that
• = = [since I1 = γI]; vi is the accelerators.
• In time t, total investment will grow at an exponential rate..
I=
• In other words, total investment will grow at a constant exponential
rate of γ/V1. It could be certain proportion…
 Fel‘dman Model Cont’d
• Similarly, the annual rate of net investment allocated to category 2
(consumer goods) is given by I2 = (1-γ)I.
• I2 being the source of increased capacity in consumer goods,

• = = since [since I = ]

• The annual rate of output of consumer goods is given by

C = C0 + ( -1)
• The elements which determine the national income and the growth
rate of the economy are given by
• Y=I+C
• By substituting the values of I and C in the above equation, it gives
Y= + C0 + ( -1)
 Fel‘dman Model Cont’d
• Y= -1 + 1 + C0 + ( -1)
• Y=( -1) + 1 + C0 + ( -1)
• Y = [1 + C0 + + 1] ( -1)
• Assuming that I0 = 1, the equation becomes.
• Y = I0 + C0 + + 1] ( -1)
• Y = Y0 + + 1] ( -1) [Since Y0 = I0 + C0]
• The fundamental equation shows that C and Y each represent a sum of a
constant and an exponential in t.
• Their rates of growth will differ from γ/V1.
• The values of C and Y will be greater than the value of I.
• With the going of time, the exponential will dominate the scenario
and the rates of growth of C and Y will gradually approach γ/V1.
• But this may take quite a long time, but the following happens:
 Fel‘dman Model Cont’d
• C0 =
• The C and Y will grow at the rate of γ/V1 from the very beginning.
• If the purpose of economic development is the maximization of
investment or national income at a point of time.
• This is always true for investment and nearly always for income, and
this will happen when V1 greatly exceeds V2 and even then for a short
period of time.
• A high γ does not imply, however, any reduction in consumption.
• With capital assets assumed to be permanent, even γ = 1 would merely
freeze consumption as its original level.
• If assets were subject to wear and tear, consumption would be slowly
reduced by failure to replace them.
 Critics on Fel’dman
• It is generally valid in a long term growth model to ignore some short-
run issues,
• It is not valid to assume that long term growth does not alter the
environment of the model.
• Fel’dman model ignores the impact of technological change on the
rate of growth.
• It has no place in a long run theory, where the available techniques of
production cannot be realistically “held constant”.
• The irreversibility assumption ‘capital goods are used by both sectors
but, once investment is made, they cannot be transferred from one
sector to the other’.
• Surplus labor assumption…
 The Mahalanobis Model of development Planning
• The Mahalanobis model holds true based on the following
assumptions:
• A closed economy.
• The economy consists of two sectors:- consumption goods (C)
and capital goods (K).
• Capital goods are non-transferable once installed in any of the
sector
• Full capacity production.
• Investment is determined by capital goods supply.
• Constant prices.
• Capital is the only scarce factor.
• Production of capital goods is independent of consumer goods
production.
 Mahalanobis Model cont’d
• Mahalanobis, (1953 & 1955) developed a single-sector, two-sector,
and a four-sector model that fit into development planning of the
Indian economy.
• In the two-sector model the entire net output of the economy could
be produced in the investment and consumer goods sector.
• Based on the above assumptions, net investment of the economy is
divided into capital goods sector (with a proportion λk) and consumer
goods sector with a proportion (λc).
• Thus,
λc + λk = 1
• At any point of time (t), net investment (I) is divided into the two
sectors:-
λkIk = for improving capacity of the capital goods sector, and
λcIc = for the consumer goods sector.
In the form that It = λcIt + λkIt
 Mahalanobis Model cont’d
• Take β as the total productivity coefficient when βk and βc are the
capital-output ratio of the capital goods and consumer goods sector,
then it can be shown that,
β =
• The income identity equation for the entire economy is
Y t = I t + Ct
• If the national income changes, investment and
consumption also.
• The change in investment and consumption depends upon
previous year’s investment (It-1) and consumption (Ct-1).
Hence, the increase in investment in period t, is
ΔIt = It - It-1
and increase in consumption is
ΔCt = Ct - Ct-1
 Mahalanobis Model cont’d
• Essentially, improvement in the two sectors is related to productive
capacity of investment and the output-capital ratio.
• Initially, the investment growth path is determined by the
productive capacity of investment in the capital goods sector (λk Ik)
and its output-capital ratio (βk), such that
• It - It-1 = λkβkIt-1 there could be reinvestment from the capital goods
• It = It-1 + λkβkIt-1
• It = (1 + λkβk )It-1
• Substitute different values for t (t= 1, 2, 3, . . .,) the solutions to the
above equation.
• I1 = (1 + λkβk) I0
• I2 = (1 + λkβk) I1
• I2 = (1 + λkβk) (1 + λkβk) I0
• I2 = (1 + λkβk)2 I0
 Mahalanobis Model cont’d
• Similarly, by putting the value of t in above equation, it gives…
• It = I0 (1 + λkβk)t
• It - I0 = I0 (1 + λkβk)t -I0
• It -I0 = I0 (1 + λkβk)t -1 -------------------------------(1)
• Also, substitute the value of t (t= 1, 2, 3, . . .,) in the consumption
growth path, as Ct - C0 = λcβcI0
C2 - C1 = λcβcI1
Ct - C0 = λcβc (I0 + I1 + I2 + . . . + It )
• Substitute the values of I1, I2, . . ., It on consumption, then:-
Ct - C0 = λcβc [I0 + (1 + λkβk)I0 + (1 + λkβk)2I0 + . . . + (1 + λkβk)t I0]
Ct - C0 = λcβcI0 [1+ (1 + λkβk) + (1 + λkβk)2 + . . . + (1 + λkβk)t]
Ct - C0 = λcβcI0
Ct - C0 = λcβcI0 -------------------------------(2)
 Mahalanobis Model cont’d
• As such, the growth path of income for the whole economy, given
above equation is:-
ΔYt = ΔIt + ΔCt
or Yt - Y0 = (It - I0)+ (Ct - C0) ---------------------(3)
• By substituting the values of equations (1) and (2) in equation (3), it
gives….
• Yt - Y0 = [I0 (1 + λkβk)t -1] + λcβcI0

• Yt - Y0 = I0[(1 + λkβk)t -1]

• Yt - Y0 = I0 [(1 + λkβk)t -1] ---------------------(4)

• Supposing that I0 = α0Y0 and substituting it in equation (4) above, it
gives
• Yt - Y0= α0Y0 [(1 + λkβk)t - 1]
 Mahalanobis Model cont’d
• Yt= α0Y0 [(1 + λkβk)t 1] + Y0 ---------------------(5)
• Supposing that I0 = α0Y0 and substituting it in equation (5), it gives.
Yt - Y0 = α0Y0 [(1 + λkβk)t -1]
Yt = α0Y0 [(1 + λkβk)t -1] + Y0
Yt= Y 0 [ ] (1 + λkβk)t -1)
• Where α0 is the rate of investment in the base year, Y0 and Yt are
the gross national income on the base and at year t, respectively.
• The ratio is the overall capital coefficient.
• Assume that βk and βc are given, then income growth will depend
on α0 and λk.
• Assuming further that α0 to be constant, income growth will
depend on, λk (the policy instrument).
 Mahalanobis Model cont’d
• If βc >βk, implies that larger percentage investment on consumer goods
industries, the larger will be the income generated.
• The expression (1+ λkβk)t, shows that after a range of time, larger
investment in capital goods industries, will generat larger income.
• Initially a high value of λk increases the magnitude (1 + λkβk)t., and
lower the overall capital coefficient ( ).
• As time goes a higher value of λk would lead to higher income growth
in the long run.
• On the other hand, if βc = βk, then the reciprocal of the overall capital
coefficient, that is, = λk equals marginal rate of saving.
• The important policy implication of the model is that for a higher rate
of investment (λk), marginal rate of saving could also be higher.
• A higher rate of investment on capital goods in the short run would
avail a smaller volume of output for consumption.
• In the long run, it would lead to a higher consumption growth rate.
Leontief Input-Output Model of development Planning
• Sectoral planning models have their roots in the model described
by the young Harvard graduate student W. Leontief just after the
turn of the century (Blitzer et al., 1975).
• The inter-industry or input-output approach pioneered by Leontief
and first implemented in the Soviet Union, served a means by
which consistent inter-sectoral plans could be drawn up.
• Input-output models have their roots in Quesnay’s Tableau
Economique, a physiocratic device that was the first effectively to
separate real from nominal resources flows.
• In the standard input-output model, there is no substitution of
factors in the production functions and final demand is
exogenously determined, or in a later refinement later by a set of
Engel curves.
• A dynamic version of the input-output model accounted for the
accumulation of capital stock but was computationally clumsy and
its linearity led to either a balanced growth turnpike or explosive
diversion there from.
Leontief Input-Output Model of development Planning
• The input-output model is used to analyze inter-industry relationship
to understand the interdependencies and complexities of the economy
• It is also known as “inter-industry analysis.”
• It shows conditions for maintaining equilibrium b/n supply & demand.
• The assumptions of the technique operates:
- No substitution between inputs to produce a given unit of output
- The input coefficient are constant
- The linear input functions imply that the marginal input coefficients
are equal to the average
- Joint products are ruled out,i.e, each industry produces only one
commodity and each commodity is produced by only one industry
- External economies are ruled out
- Production is in a constant returns to scale.
• If the total output of say Xi of the ith industry be divided into various
number of industries, 1, 2, 3,…n, then it gives the balance equation
(Leontief (1951 & 1986)):-
 Leontief Input-Output Model Cont’d
• Xi = xi1 + xi2 + xi3 + . . . + xin + Di --------------- (1)
• If an amount Yi absorbed by the outside sector is also considered, then
the balance equation of the ith industry becomes:-
• Xi = xi1 + xi2 + xi3 + . . . + xin + Di + Yi --------------- (2)
or = Xi --------------- (3)
• Where Yi is the sum of product outflows from the ith industry, to
consumption, investment and exports, net of imports.
• Equation (3) shows the conditions of equilibrium between demand
and supply (Xi).
• It illustrates the flows of outputs and inputs to and from one industry
to other industries and vice versa.
• In the analysis of input-output, the system of equations (1) and (2)
presents the conditions of internal consistency of the plan.
• If these equations are not satisfied, there might be excess of some
goods and deficiency of others.
 Leontief Input-Output Model Cont’d
• As xi2 represents the amount absorbed by industry 2 of the ith industry
it then follows that xij stands for the amount absorbed by the jth
industry of ith industry.
• Thus, the technical coefficient or input coefficient of the ith industry is
denoted by…..
• aij = xij /Xj ------------------ (4)
• where xij is the flow from industry i to industry j, Xj is the total output
of industry j and aij is constant which is called technical coefficient in
the ith industry.
• it shows the number of units of one industry’s output that are required
to produce one unit of another industry’s output.
• Cross-multiplying the terms in equation (4) gives……
• aij . Xj = xij
• By substituting the value of xij in equation (3) and transposing the
terms gives the basic input-output system of equations in the form.
 Leontief Input-Output Model Cont’d
Xi - = Yi
• n represents the number of sectors in the economy.
• If n = 2, that is, two-sector economy, then two linear equations
could be stated symbolically in the form……
x1 - a11x1 - a12x2 = Y1
x2 - a21x1 - a22x2 = Y2
which can be represented in matrix notation as….
X- [A]X = Y
or [I-A]X = Y
• Where matrix (I-A) is known as the Leontief Matrix and is
further extended as…..
(I-A)-1 (I-A) X = (I-A)-1Y
such that
X = (I-A)-1Y and I, is the identity matrix of the form,
 Leontief Input-Output Model Cont’d
• I=
• Hence, =
• For analytical illustration purpose, there are only two
sectors, agriculture (X1) and textiles (X2) in the economy.
• The Input-Output coefficient table depicts economic activity
as:
Agriculture Textiles
Agriculture 0.6 0.2
Textiles 0.4 0.3
• Then, A =
and
• I-A= =
 Leontief Input-Output Model Cont’d
• = =
• If the final demand is given by;
• D=
such that, x = D
• Thus, given that X = =

• Implying that the two sectors agricultural (X1) and textiles sector
(X2) would produce 40 and 30 units, respectively.
• The analysis can be extended to include many other sectors, like
health, education, communication, transportation, manufacturing,
banking, foreign trade and balance of payments, and so on, in the
economy.
• The above presentation, however, is an open static model of Input-
Output analysis.
 Leontief Input-Output Model Cont’d
• In reality, most economic variables are dynamic
• Causes and effect, and action and reaction do not occur
immediately after one and other:
• It takes some time for certain economic activities to happen as a
result of some causes or actions.
• Thus, the analysis becomes dynamic when it is closed by the
linking of investment part of the final goods to output.
• In the Leontief dynamic input-output model, the output of a given
period is supposed to go into stocks (capital goods), which in turn
are distributed among industries.
• The dynamic balance equation is of the form…..
• Xi(t) = xi1(t) + xi2(t) + xi3(t) + . . .+ xin(t) + (Si1 + Si2 + Si3 + . . . +
Sin) + Di(t) + Yi(t)
The Linear Programming Model of Development Planning
• The model is essentially an extension and generalization of input-
output analysis, it can be interpreted as a LP problem.
• Thus, the LP model differs in several important respects from the
standard input-output model on which it is based.
• In particular, production, imports and exports are variables whose
level in each sector are to be determined by an optimizing solution.
• In addition, alternative activities and resource limitations are
explicitly taken into account.
• The input-output model can be expressed in LP form.
• LP requires that all the mathematical functions in the model be linear
functions.
 LP Model
• It is well known that an input-output model provides, for
each commodity- sector, balance equalities, which indicate
that the total supply of and total demand for commodities
are equal.
• Hence: Production + imports = inter-industry demand +
export demand + consumption + other final demand.
• The LP version of the input-output model is then developed by
formulating the following balance inequalities, for each
commodity- sector:-
• Production ≥ inter-industry demand + export demand - imports +
consumption + other final demand.
• To complete the LP format, an objective function - the
maximization of the level of consumption – and resource
constraints are added.
 LP Model
• Max. C = ∑βi Xi
Subject to: (A-I) Xi + cXic +eXie - mXim ≤ -di
aljXi ≤ L0
akjXi ≤ K0
and all Xi ≥ 0
Where A= matrix of input coefficients
Xi = levels of production
Xic = level of consumption.
Xie = products produced for exports
Xim = products from imports
c = vector giving desired commodity composition of consumption,
D = other final Demand vector,
alj = labor input coefficients,
akj = capital input coefficients,
L0 and K0 initial stocks of labor and capital
 The LP Model
• The LP version of the input-output model maximizes the linear
function Z.
Let: Z = Objective function or linear function
X1, X2, X3, ………, Xn = decision variables
Z = c1X1 + c2X2 + c3X3 + ………+ cnXn
subject to the following constraints:-

…..Eq (2)

where aij, bi, and cj are given constants.

❖ GAMS can solve complex LP problems.

 Macro econometric Model of development Planning
• The planning exercise and plan formulation of developing
countries has found basis in macroeconometric models recently.
• Application of such models takes the form of a simple Keynesian
framework of analysis; wherein, Ct = consumer expenditure, It =
capital formation, Yt = national income, rt = interest rate, Mt = the
exogenously supplied money, t = time.
• Ct = α0 + α1Yt + α2rt + μt
• It = b0 + b1Yt + b2rt + νt

• Yt = Ct + It
• Mt = a0 + a1Yt + a2rt + zt
and
• μt, νt , zt are error terms as in the equation below.
 Macro econometric Model
• Such a model is not dynamic, it does not determine prices and it
ignores foreign trade. Also, a change in government taxes and
spending (public policy) is not assigned any role.
• Klein (1965) set out a more sophisticated version of the model
which is presented as follow:-
• Ct = α0 + α1 + α2Ct-1 + μ1t

• It = b0 + b1 + b2Kt-1 - b3rt-1 + μ2t

• Ft = c0 + c1 + c2 Ft-1 + c3 + μ3t

• Et = d0 + d1Twt + d2 + μ4t

• = Ct + It - Ft + Et + Gt
• Tt = e0 + e1Yt + μ5t
• It = Kt - Kt-1
 Macro econometric Model
• = g0 + g1Lt + g2 Kt + μ6t
• Pt = h0 + h1 + h2 + μ7t
• = j0 + j1 + j2 + μ8t
• Nt = k0 + k1 (Nt- Lt) + k2wt / Pt + μ9t
• = l0 + l1 + l2rt + μ10t
• Pe = m0 + m1 P + μ11t
• In the above model; C=the real consumer expenditures, Y=national
income in current prices, T=taxes less transfer payments,
p=general price index, I=net real investment, K=real capital stock,
r=interest rate, F=real imports, E=real export, L=employment,
w=wage rate, and N=labour supply are the endogenous variables .
 Macro econometric Model
• The exogenous variables are p, import prices, is volume of world
trade, G is real government expenditures, and M is money supply.
• Practically, however, the planner will have to determine different
types of the mentioned variables to render such a model applicable
to the special problems of LDCs.
• The actual econometric techniques to be used depend upon initial
specifications of the equations…
• Subjective judgement of the planner in the light of the actual state
of information also determine the econometric model.
• See Agarwala (1970), Chenery et al (1971), Ghosh (1968), and
Ghosh et al (1974).
 Chapter 4.
Development Project Analysis

❖Valuing the environment

❖Contingent valuation method (CVM)

❖The environmental impact assessment

❖Multi-criteria analysis
 Valuing The Environment
• Virtually all projects are planned and implemented in a social,
economic, and environmental context, and have intended and
unintended positive and/or negative impacts.
• A project should consider how it affects people and how people
affect it.
• Therefore, it is very essential to consider projects in their
cultural, social, international, religious, political, physical
environmental and economic contexts.
• Thus, a project should consider:-
– Socio-cultural environment: how it affects people and how
people affect it.
– International and political environment: applicable
international, national, regional, and local laws and customs,
and the political atmosphere.
– Physical environment: how it affects physical surroundings
including the local ecology.
 Environmental Factors
• Environmental factors vary widely in type or nature of the enterprise. The
factors include, but are not limited to:-
– Organizational culture, structure, and governance;
– Geographic distribution of facilities and resources;
– Government or industry standards (e.g., regulatory agency regulations,
quality and workmanship standards);
– Infrastructure (e.g., existing facilities and capital equipment);
– Company work authorization systems;
– Marketplace conditions;
– Stakeholder risk tolerances;
– Political climate;
– Existing human resources (e.g. skills, disciplines, and knowledge);
– Personnel administration
– Organization’s established communications channels;
– Commercial databases (e.g., standardized cost estimating data, industry
risk study information, and risk databases); and
– Project management information system. 172
 Contingent Valuation Method (CVM)
• The Contingent Valuation Method (CVM) is an economic, non-market
based valuation method especially used to infer individual’s preferences for
public goods, notably environmental quality.
• CVM is known in the literature by exploring the use of questionnaires and
asking directly consumers.
• CVM is the most applied valuation method in recent years, and it has been
developed mainly in the context of environmental valuation, over the last 30
years.
• The respondents could be asked for their maximum willingness to pay
(WTP) for improving the environmental quality.
• CVM circumvents the absence of markets for public goods by presenting
consumers with a market survey in which they have the opportunity to buy
the good in question.
• Because the elicited WTP values are contingent upon the market described
to the respondents, this approach came to be called the CVM.
• The CVM mean that the value of an environmental good is elicited directly,
as answer to a question about WTP to have more of the good, or willingness
to accept (WTA) to have less of it.
 Contingent Valuation Method (CVM)
Basics of the CVM
• It has 5 steps in establishing the method as follows:-
• Step 1: Construction of a hypothetical market
• The main idea here is to construct a scenario that corresponds as closely as possible
to a real-world situation.
• It is still usually hypothetical for the persons being interviewed.
• In most cases there may not be a direct link between the answers of the persons
being interviewed in the CVM survey, and a possible decision to implement or not
implement the environmental change to be valued.
• a) Sets the reason for payment.
• With standard market goods: We must pay to get more of a good.
• The improvement specified is contingent on payment actually being made.
• This scenario must be understood by respondent.
• b) Must construct a so-called bid vehicle or method of payment.
• It should fulfill conditions with respect to incentive compatibility, realism, and
subjective justice among respondents.
• Relevant vehicles are:
– Direct sum of money to be paid
– Payment to a fund/contribution
– Support of a particular tax
– Payment in the form of higher price of goods to improve it (like electricity, water ).
 Contingent Valuation Method (CVM)
• c)Construct a provision rule. This is a mechanism by which the good is to be
provided, as a function of the stated value.
• Step 2: Obtaining the data
• We select a limited sample of the underlying population, and let this sample
go through an interview (or possibly a sequence of interview sessions).
Interviews can be obtained in the following possible ways:
• a. Personal interview, person to person
• b. Personal interview session using an interactive medium (computer)
• c. Mail questionnaire (with follow-ups)
• d. Telephone interview Most research and recommendations about research
departs from person-to-person interviews.
• These have advantages of face-to-face contact, increasing engagement and
awareness by interviewee, reduces mis-understading, makes spontaneous
questions possible (may be important).
• b can sometimes have advantages, in cases where a computer program may
be better at choosing a (complex) path of questions when there are several
alternatives.
 Contingent Valuation Method (CVM)
• Valuation measure sought:-
• a. Maximum WTP for an improvement in environmental quality,
• b. Minimum WTA to abstain from an improvement in environmental quality
• c.WTP to avoid a worsening in environmental quality
• d.WTA to accept a worsening in environmental quality.
• Possible bidding mechanisms:
• a.“Bidding game”: ask a sequence of questions until maximum is found.
• May suffer from lack of incentive compatibility and starting point bias, and fatigue
effects.
• b. Payment card: Card indicates range of possible values, one of which is pointed
out by interviewee. May have problems of starting point bias.
• c. Open-ended question: no anchor. Here high degree of individual impreciseness,
and sometimes systematic bias, may be a problem.
• d. Closed-ended single-bounded referendum.
• e. Double-bounded referendum (same as d, but with an additional follow-up
question of maximum WTP).
• The others provide more information, but this may be distorted.
 Contingent Valuation Method (CVM)
• Step 3: Estimating average WTP/WTA.
• Straightforward with open-ended and bidding-game formats. More
difficult with single-bounded referendum.
• Must estimated probability functions, requiring more data.
• Step 4: Estimating bid curves.
• Define bid curve for individual i as:-
• WTP(i) = f(Y(i), E(i), A(i), X(i), Q, U(i), e(i)),
Where Y = income, E = education, A = age, Q = environmental quality, X
= vector of other background variables we want to include, U =
individual use of the environmental asset/object, e =random disturbance.
• Objective is to find a “best” fitting function of this sort, from the
material collected.
• Since material is “experimental”, simple estimation methods are
usually sufficient (OLS or GLS with direct bid data, logit or probit
with referendum-type data).
• Step 5: Aggregating the data
• Convert mean bids to population aggregates
• Utilize derived bids and bid functions for benefit transfer.
 The Environmental Impact Assessment (EIA)
• It is a tool designed to identify and predict the impact of a project on the bio-
geophysical environment and on health and well-being of the society.
• It is to communicate information about the impact, to analyze site and process
alternatives and provide solutions to sift out or mitigate the negative consequences
on the environment.
• The EIA is a means of avoiding environmental disturbances that are always much
more expensive to correct after their occurrence.
• It is also important to underline that very few projects have been deemed not viable
merely because of the cost of pollution control and that modern environmental
control.
• Today, there is world-wide evidence that man cannot ignore the quality of the
environment.
• Thus environmental issues must be addressed as soon as possible during project
planning.
• There should not be any hesitation in abandoning a project at an early stage if it has
very detrimental impact on the environment, like projects which are not
economically or financially viable.
• In the same way as economic, financial, institutional, or technical analyses, EIA is
an integral part of the project.
• Aware of this necessity, numerous countries have implemented EIA regulations.
• International agencies generally also lend their assistance to any industrial project of
importance implementing an EIA, including pulp and paper industries.
 Environmental Assessment (EA)
• Successful economic development depends on the rational use of
natural resources and on reducing as far as possible the adverse
environmental impacts of the projects.
• EA is a primary tool for achieving this objective, by inserting critical
environmental information in to the process of project identification,
preparation, and implementation.
• Economic analysis, by comparison, is employed to determine if the
overall economic benefits of a proposed project exceed its costs, and
to help design the project in a way that produces a solid economic rate
of return.
• Adverse environmental impacts are part of the costs of a project, and
positive environmental impacts are part of its benefits.
• Consideration of environmental impacts, therefore, should be
integrated with the other aspects of the project in the economic
analysis to the extent possible.
 Environmental Analysis (EA)
• EA is a systematic, interdisciplinary process used to identify the purpose of a
proposed action, develop practical alternatives to the proposed action, and predict
potential environmental effects of the action.
• An EA identifies problems, conflicts, or resource constraints that may affect the
natural environment or the viability of a project.
• It also examines how a proposed action might affect people, their communities, and
their livelihoods.
• The analysis should be conducted by an Interdisciplinary Team consisting of
personnel with a range of skills and disciplines relevant to the project.
• Team members should include a team leader and may include
• Engineers, geologists, biologists, archaeologists, and social workers.
• The EA process and findings are communicated to the various affected individuals
and groups.
• At the same time, the interested public helps provide input and comment on the
proposed project.
• The document produced as a result of the EA guides the decision maker toward a
logical, rational, informed decision about the proposed action.
 Cont’d....
• The EA process and interdisciplinary Team studies can reveal sound
environmental, social, or economic reasons for improving a project.
• After predicting potential issues, the EA identifies measures to minimize
problems and outlines ways to improve the project’s feasibility.
• Environmental mitigations a designer can use to avoid potential impacts on
wildlife like use of animal underpasses and culvert requirements for fish
passage.
• The EA process can provide many benefits to the road builder, local
agencies, and the communities who will be affected by road construction
and maintenance activities.
• The process and resulting reports are tools that road managers to guide their
decisions, produce better road designs and maintenance plans, identify and
avoid problems, and gain public support for their activities.
• An EA document can be long and complex for major, potentially high
impact projects, or it may only be a few pages long for a simple road project
presents an eight-step process that is useful for doing Environmental
Analysis. SEE THE SECOND CHAPTER
 Multi-criteria analysis (MCA)
• MCA is a general framework for supporting complex decision-making situations with multiple and
often conflicting objectives that stakeholders groups and/or decision-makers value differently.
• MCDA methods are integrative evaluation methods that combine information about performance
of the alternatives with respect to the relative importance of the evaluation criteria.
• A MCA is when a project is evaluated by more than just monetary terms.
• It is a form of appraisal that measures variable like material costs, time savings and project
sustainability as well as the social and environmental impacts that may be quantified but not so
easily valued.
• MCA describes any structured approach used to determine overall preferences among alternative
options, where the options accomplish several objectives.
• In MCA, desirable objectives are specified and corresponding attributes or indicators are identified.
• The actual measurement of indicators need not be in monetary terms, but are often based on
quantitative analysis (through scoring, ranking and weighting) of a wide range of qualitative impact
categories and criteria.
• Different environmental and social indicators may be developed side by side with economic costs
and benefits.
• Explicit recognition is given to the fact that a variety of both monetary and nonmonetary objectives
may influence policy decisions.
• MCA provides techniques for comparing and ranking different outcomes, even though a variety of
indictors are used.
• MCA includes a range of related techniques, some of which follow this entry.
 Multi-criteria analysis (MCA)
• MCA or multi-objective decision making is a tool that is particularly
applicable to cases where a single-criterion approach (such as cost-benefit
analysis) falls short, especially if significant environmental and social
impacts cannot be assigned in monetary values.
• MCA allows decision makers to include a full range of social,
environmental, technical, economic, and financial criteria.
• Analysis that is carried out in monetary terms does not usually, in practice,
present the analysts with problems of choosing between the interests of
different groups in society.
• A cost-effectiveness appraisal may be compare options with slightly
different outputs, but these differences will should be weighted by decision
makers at a later stage.
• The valuations used in cost-benefit analysis will include distributional
judgments, but these will have been determined at an earlier stage.
• A broadly satisfactory criterion which appears to underlie many cost benefit
analysis valuations is that they should reflect informed preferences of the
people, to the extent that these preferences can be measured and averaged.
• The objectives included in any MCA analysis should sufficiently wide to
encompass the main concerns of people as a whole.
 Chapter 5
Project Implementation, Monitoring & Evaluation

1. Project Implementation

2. Monitoring & Evaluation

3. Project Closing
 Plan execution
• At the beginning of the process, the core planning team should discuss
the planning exercise and how it will be approached.
• The internal policies and procedures should consulted for information
on the timelines, roles and responsibilities in the processes, and the
internal quality assurance and approval arrangements.
• Information should be collected on the major global, regional, country
or community challenges that need to be addressed.
• In the initiation phase, the team should put together a brief issues note
and draft work plan.
• This would refine the planning process.
• The note should capture the available information on the critical
challenges that need to be addressed.
• Inadequate stakeholder involvement is one of the most common
reasons programs and projects fail.
• Thus, every effort should be made to encourage broad and active
stakeholder engagement in the planning, monitoring and evaluation
processes.
 Cont’d
• Any given program, project or development plan is likely to have a
number of important stakeholders.
• Effective planning is done with the participation of these stakeholders.
• The implemented development plan should be followed and kept
checking at every stage to make it effective.
• The predefined objectives will be achieved if the implementation is as
to the plan….
• In the absence of effective monitoring and evaluation, it would be
difficult to know whether the intended results are as to the plan.
• What corrective action may be needed to ensure delivery of the
intended results towards human development.
• Monitoring and evaluation always relate to pre-identified results
in the development plan.
 Project Executing/Implementing Stage
• It is the stage where we get things done.
As project managers, we make sure that what we plan gets
implemented.
• Project Executing: involves the actual implementation of the project
activities to achieve the set targets and objectives.
• Project managers try to acquire, develop, manage staff, manage
communication, communicate with stakeholders, conduct
procurements, assure quality.
• During the Implementation phase, the project is mobilized and
executed.
• This may require the tendering and award of contracts for technical
assistance or works and supplies.
• During implementation, and in consultation with beneficiaries and
stakeholders, project management assesses actual progress against
planned progress to determine whether the project is on track towards
achieving its objectives.
• If necessary the project is re-oriented to bring it back on track, or to
modify some of its objectives in the light of any significant changes
that may have occurred since its formulation.
 Project Monitoring & Evaluation
• Monitoring and evaluation are tools that make it possible to identify and measure
the results of projects, programs or policies
❖ To evaluate and adjust strategies and activities.
❖ To report on progress to interested parties.
❖ To identify and share the best practices and lessons learned
❖ To improve the programming of new interventions and strategies.
• Monitoring involves watching the progress of a project against time, resources and
performance schedules during the execution of the project and identifying lagging
areas requiring timely attention and action.
• Monitoring is defined as a management function to guide in the intended direction
and to check performance against pre–determined plans.
• Monitoring means periodic checking of progress of works against the targets laid
down in order to ensure timely completion of the project.
• Monitoring provides regular information on how things are working.
• It is a continuous data collection and analysis process is implemented to assess a
project and compare it with the expected performance.
• Evaluation can only be done after a certain time and requires more thorough
investigations.
• Evaluation is a systematic and objective measurement of the results achieved
by a project, a program or a policy, in order to assess its relevance, its coherence,
efficiency of its implementation, its effectiveness and its impact, as well as the
sustainability .
 Project Monitoring & Evaluation
• Monitoring assesses progress in implementation of ongoing projects.
• It should be an on-going activity during implementation.
• It can be carried out by beneficiaries, the managing staff, supervisory staff
and the project management staff.
• Evaluation provides a snapshot against some benchmarks at a point in
time of the project that may or may not be continuing.
• Monitoring
– Holds implementers accountable for delivery of inputs
– Provides basis for corrective action
– Provides assessment of continued relevance
 Monitoring
❖Was delivery according to plan?
❖ What were the deviations?
• Evaluation
❖ Accountability - was money well spent?
❖ Learning - what could we do better next time?
❖ Focus on; Relevance, Appropriateness, Effectiveness/Success, Cost
effectiveness, Lessons learned, Impact, Sustainability and Efficiency
 Monitoring & Evaluation
Relationship Between M&E
• M & E are two different management tools that are closely related,
interactive and mutually supportive.
• Through routine tracking of project progress, monitoring can provide
quantitative and qualitative data useful for designing and
implementing project evaluation exercises
• Through the results of periodic evaluations, monitoring tools and
strategies can be refined and further developed.
• The aim should be to ensure that activities of the project are being
undertaken on schedule to facilitate implementation as specified in the
project design.
– Are the right inputs being supplied/delivered at the right time?
– Are the planned inputs producing the planned outputs?
– Are the outputs leading to the achievement of the planned objectives?
– Is the policy environment consistent with the design assumptions?
– Are the project objectives still valid? 190
 Monitoring and Evaluation
• Evaluation can be done internally or by external reviewers.
• The aim of evaluation is largely to determine the extent to which the
objectives are being realized.
• It is about evaluation of success or failure of a project.
• Sometimes it could be done only at the end by sponsoring company,
agency, etc.
– Are or have objectives being/been met? If not, were the objectives realistic?
– Was the technology proposed appropriate?
– Were the institutional, management arrangements suited to the conditions?
– Were the financial aspects carefully worked out?
– Were the economic aspects carefully explored?
– Did management quickly respond to changes?
– Was its response carefully considered and appropriate?
– How could the project’s structure be changed to make it more flexible?
 Monitoring and Evaluation - Timing
• Monitoring is an ongoing or periodic throughout the life of the
program
• Evaluation:-Typically at mid-point in a funding cycle, a year before
the end. It may be an impact evaluation between 3 to 5 years
afterwards.
• Monitoring is the systematic, regular collection and occasional
analysis of information to identify and possibly measure changes
over a period of time.
• Evaluation is the analysis of the effectiveness and direction of an
activity and involves making a judgment about progress and impact.
• The main differences between M&E are the timing and frequency of
observations and the types of questions asked.
• However, when M&E are integrated as a project management tool, the
line between the two becomes rather blurred.

192
 Monitoring & Evaluation
• Participatory M&E is the joint effort or partnership of two or more
stakeholders to M&E , systematically, one or more activities.
• Why to M&E ? In general, the purpose of M&E can be:
– To assess project results:
– To find out if and how objectives are being met and are resulting in desired
changes.
– To ensure accountability: to assess whether the project is effectively,
appropriately, and efficiently executed to be accountable to the key agencies
• Projects even with a good planning, adequate organizational
machinery and sufficient flow of resources cannot automatically
achieve the desired result.
• There must be some warning mechanism, which can alert the
organization about its possible success and failures, off and on.
• Constant watching not only saves wastage of scarce resources but also
ensure speedy execution of the project.
• Thus, monitoring enables a continuing critique of the project
implementation.
 Monitoring & Evaluation
• Efficiency refers to the amount of time and resources put into the project
relative to the outputs and outcomes.
• A project evaluation may be designed to find out if there was a less
expensive, more appropriate, less time-consuming approach for reaching the
same objectives.
• Effectiveness describes whether or not the research process was useful in
reaching project goals and objectives, or resulted in positive outcomes.
• Relevance or appropriateness describes the usefulness, ethics, and flexibility
of a project within the particular context.
• Combined, these criteria enable judgment about whether the outputs and
outcomes of the project are worth the costs of the inputs.
• Purpose of Monitoring: Project monitoring helps to provide constructive
suggestions like.
• Rescheduling the project (if the project run behind the schedule).
• Re-budgeting the project (appropriating funds from one head to another;
avoiding expenses under unnecessary heading).
• Re-assigning the staff (shifting the staff from one area to other; recruiting
temporary staff to meet the time schedule)
 Monitoring & Evaluation
• Steps in Monitoring:
❖ Identifying the different units involved in planning & implementation
❖ Identifying items on which feedback is required.
❖ Developing performance for reporting. Determining the periodicity of reporting. Fixing the responsibility
of reporting at different levels.
❖ Processing and analyzing the reports. Identifying the critical/unreliable areas in implementation.
❖ Providing feedback to corrective measures.
• Indicators for Monitoring: Projects are usually monitored against. Whether the projects .
Running on schedule. Running within the planned costs.
• Meaning of Evaluation. Evaluation has its origin in the Latin word “Valupure” which
means the value of a particular thing, idea or action.
• Evaluation helps us to understand the worth, quality, significance amount, degree or condition
of any intervention desired to tackle a social problem.
• Evaluation means finding out the value of something.
• Evaluation simply refers to the procedures of fact finding.
• Evaluation consists of assessments whether or not certain activities, treatment and
interventions are in conformity with generally accepted professional standards.
• Any information obtained by any means on either the conduct or the outcome of
interventions, treatment or of social change projects is considered to be evaluation.
• Evaluation is designated to provide systematic, reliable and valid information on the conduct,
impact and effectiveness of the projects.
• Evaluation is essentially the study and review of past operating experience.
 Monitoring & Evaluation
• Purpose of Evaluation. From an accountability perspective: The purpose of evaluation is to make the best
possible use of funds by the program managers who are accountable for the worth of their programs.
• Measuring accomplishment in order to avoid weaknesses and future mistakes.
• Observing the efficiency of the techniques and skills employed.
• Scope for modification and improvement.
• Verifying whether the benefits reached the people for whom the program was meant.
• Form a knowledge perspective: The purpose of evaluation is to establish new knowledge about social problems
and the effectiveness of policies and programs designed to alleviate them.
• Understanding people’s participation & reasons for the same. Evaluation helps to make plans for future work.
• Principles of Evaluation .The following are some of the principles, which should be kept in view in evaluation.
1. Evaluation is a continuous process (continuity).
• 2. Evaluation should involve minimum possible costs (inexpensive).
• 3. Evaluation should be done without prejudice to day to day work (minimum hindrance to day to day work).
• 4. Evaluation must be done on a co-operative basis in which the entire staff and the board members should
participate (total participation).
• 5. As far as possible, the agency should itself evaluate its program but occasionally outside evaluation machinery
should also be made use of (external evaluation).
• 6. Total overall examination of the agency will reveal strength and weaknesses. (agency/program totality).
• 7. The result of evaluation should be shared with workers of the agency (sharing).
• Stages in Evaluation.1. Program Planning Stage. Pre – investment evaluation or Formative evaluation or Ex –
ante evaluation or Early / Formulation Pre project evaluation or Exploratory evaluation or Need assessment.
• 2.Program Monitoring Stage. Monitoring Evaluation or Ongoing / interim. Concurrent evaluation.
• 3. Program completion Stage. Impact evaluation or Ex- post evaluation or (Summative / Terminal / Final) Final
evaluation.
 Monitoring & Evaluation
Types of Evaluation. Evaluation can be categorized under different headings.
• A) By timing (when to evaluate).
– Formative Evaluation. Done during the program -development stages. (Process
Evaluation, ex-ante evaluation, project appraisals).
– Summative Evaluation. Taken up when the program achieves a stable of
operation or when it is terminated (Outcome evaluation, ex post evaluation etc.)
• B) By Agency. Who is evaluating? Internal Evaluation Vs External Evaluation.
– Internal Evaluation is a progress/impact, unbiased, objective detailed monitoring
by the management itself
– External Evaluation is assessment by an outsider (Ongoing / concurrent
evaluation)
• C) By Stages:- On going = During the implementation
– Terminal =After a time lag of a project or immediately from completion
– Ex–post =after the completion of a project
• Internal/External Evaluation: Internal Evaluation: (Enterprise Self Audit)
(concurrent evaluation) is a continuous process which is done at various points and in
respect of various aspects of the working of an agency by the agency staff itself i.e.
staff board members and beneficiaries.
• External/Outside Evaluation: (by outsiders /Certified Management Audit) how the
program is implemented experienced and qualified evaluators (inspectors) may assess
the work.
• Inter agency evaluation. In this type two agencies mutually agree to evaluate their
program by the other agency. Inter agency tours.
 Monitoring & Evaluation
• Methods of Evaluation: (Tools/techniques) a variety of the methodologies have
been evolved by academicians, practitioners and professionals for evaluating any
program/project.
• Some of the commonly used practices are given below.
• First hand Information : One of the simplest and easiest methods of evaluation by
getting first hand information about the progress, performance, problem areas etc,.
of a project from a host of staff, line officers, field personnel, other specialists and
public who directly associated with the project.
• Direct observation & hearing about the performance and pitfalls further facilitate
the chances of an effective evaluation.
• Formal/Informal Periodic Reports. Evaluation is also carried out through formal
and informal reports. Formal reports consists of Project Status Report.
• Project Schedule chart -Project financial status Report. Project Status Report:
From this one can understand the current status, performance, schedule, cost and
hold ups, deviations from the original schedule.
• This indicates the time schedule for implementation of the project. From this one
can understand any delay, the cost of delay and the ultimate loss.
• Project Financial Status Report: It is through financial report, one can have a look
at a glance whether the project is being implemented within the realistic budget and
time.
 Monitoring & Evaluation
• Areas of evaluation: Evaluation may be split into various aspects, so that each area
of the work of the agency, or of its particular project is evaluated. These may be:-
• 1.Purpose: The review objectives of the agency/project and how far these being
fulfilled.
• 2.Programs: Aspects like number of beneficiaries, nature of services rendered to
them, their reaction to the services, effectiveness and adequacy of services etc. may
be evaluated.
• 3.Staff: The success of any program depends upon the type of staff it employs. Their
attitude, qualifications, recruitment policy, pay and other benefits and organizational
environment. These are the areas which help to understand the effectiveness of the
project / agency.
• 4.Financial Administration: The flow of resources and its consumption is a crucial
factor in any project/agency. Whether the project money is rightly consumed over
spending in some headings, appropriation and misappropriation.
• 5.General: Factors like public relations strategies employed by the project / agency,
the constitution of the agency board or project advisory committee and their
contribution future plans of the agency are important to understand the success or
failures of any project.
• Evaluation Analysis on how successful the project has been in transforming the
means (i.e. the inputs allocated to the project) through project activities into concrete
project results.
• Provides the stakeholders with information on inputs/costs per unit produced.
 Monitoring & Evaluation
Criteria for Evaluating Development Assistance.
• Relevance. The extent to which the project is suited to the priorities and policies of
the target group, partner country and donor. Possible questions: To what extent are
the objectives of the program still valid? Are the activities and outputs of the
program consistent with the overall goal and attainment of its objectives? Are the
activities and outputs of the program consistent with the intended impacts and
effects?
• Efficiency = It measures outputs’ qualitative and quantitative in relation to the
inputs. It is a term which signifies that the project uses the least costly resources in
order to achieve the desired results. The issue here is comparing alternative
approaches to achieving the same outputs, to see whether the most efficient process
has been adopted.
• Effectiveness = A measure of the extent to which a project attains its objectives
• Impact = The positive and negative changes produced by the project, directly or
indirectly, intended or unintended. Possible questions: What has happened as a result
of the project? What real difference has the activity made to the beneficiaries? How
many people have been affected?
• Sustainability = Sustainability is concerned with measuring whether the benefits of
an activity are likely to continue after the project funding has been withdrawn.
• Possible questions: To what extent did the benefits of a program or project continue
after it has been closeout? What were the major factors which influenced the
achievement or non-achievement of sustainability of the project?
 Participatory Monitoring and Evaluation
Conventional M &E Participatory M &E
Who? External experts Stakeholders, including communities
and project staff; outsiders:- facilitate
What? Predetermined indicators, to measure Indicators identified by stakeholders,
inputs and outputs to measure process as well as outputs
or outcomes
How? Questionnaire surveys, by outside Simple, qualitative or quantitative
“neutral” evaluators, distanced from methods, by stakeholders themselves
project
Why? To make project and staff To empower stakeholders to take
accountable to funding agency corrective action
 Monitoring and evaluation…
•Evaluation Criteria
• A major issue that affects any evaluation is the choice of criteria. Mostly the following
criteria are used:
• Relevance - the appropriateness of project objectives to the problems that it was
supposed to address, and to the physical and policy environment within which it
operated
– RELEVANCE- does the project address needs?
• Project preparation and design – the logic and completeness of the project
planning process, and the internal logic and coherence of the project design
• Efficiency - the cost, speed and management efficiency with which inputs and
activities were converted into results, and the quality of the results achieved
– EFFICIENCY- are we using the available resource wisely?
• Effectiveness - an assessment of the contribution made by results to achievement
of the project purpose, and how assumptions have affected project achievements
– EFFECTIVENESS- are the desired output being achieved?
• Impact - the effect of the project on its wider environment, and its contribution
to the wider sectoral objectives summarized in the project’s Overall Objectives
– IMPACT- has the wider goal been achieved? What changes have occurred that
 Comparison Between M&E
Item Monitoring Evaluation
Frequency Regular, ongoing Episodic
Main action Keeping track/oversight Assessment

Basic purpose Improving efficiency Improve effectiveness, impact,

Adjusting work plan future programming
Focus Inputs/outputs, process Effectiveness, relevance,
outcomes, work plans efficiency, impact,
sustainability
Information Routine systems, field visits, Same plus
sources stakeholder meetings, output Surveys (pre-post project)
reports, rapid assessments Special studies
Undertaken by Project/program managers External evaluators
Community workers Community (beneficiaries)
Supervisors Project/program managers
Community (beneficiaries) Supervisors
Funders Funders
Other Stakeholders

Adapted from UNICEF, A UNICEF Guide for Monitoring and Evaluation: Making a Difference? New York, 1991, p.3 203
Differences between Monitoring and Evaluation
Item Monitoring Evaluation
Frequency routine, regularly scheduled episodic
Primary Objective tracking / oversight assessment
Purpose improve efficiency improve effectiveness, impact,
mid-course corrections to future programming
workplan
Focus Conformity/fidelity to program effectiveness, impact, cost-
guidelines, process indicators, effectiveness, relevance
quarterly and annual goals,
workplans
Data Sources routine surveillance systems, same, plus surveys, special studies
field observation, progress
reports
Conducted by TB Focal Person and TBCO TBCO, BNTP supervisors, MOH,
external evaluators
Reporting to TBCO, District PHS, Matron, District PHS, Matron, BNTP, funders
BNTP, MOH, community (e.g., Global Fund), other policy-
makers
 Project Closing
• Close project
• Document lessons learnt
• Close contract/procurement

• READ ON THOSE ISSUES

THANK

YOU

!!!