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Project evaluation needs balanced intelligence

Dr B K Mukhopadhyay

Project refers to a set of development measures   undertaken either by an individual or by the Government for the benefit of a class of persons or for the community as a whole [e. g. utilizing water resources of a region for the benefit of the population   through irrigation, flood control, fishing, power generation, etc.]

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

Since a project usually involves huge expenditure private efforts often prove to be idequate to shoulder it.  Hence State’s participation becomes essential .The State has to shoulder the responsibility by undertaking projects of social /strategic importance.  A   Project is therefore a public investment where profit maximization cannot be the sole criterion. A public investment aims at rendering maximum social service by maximizing the benefit of the project concerned at minimum possible cost –to undertake those projects which facilitate the progress of the entire economy.

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

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

The b/c criterion is also superior to the rates of return criterion since the former yields a scientific ranking of projects which usually differs from the ranking determined by the latter.

The other criterion –rate of return criterion –takes into account the rates of return from different projects—on the basis of which it is decided which project is to be assigned top priority and which next.

The two criterions are not same. The b/c ratios yield a different ranking of the projects than rates of return

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

Benefits [b] of a project are of two types—primary [direct benefits which are derived immediately after the project is taken up] & secondary [indirect benefits-incidental or complementary to the origil primary benefits] —tangible & intangibles.

Costs [c] refer to primary costs incurred for the operation and maintence of the project—project cost proper &associated [additiol cost which is to be incurred over and above the project cost proper for making the output of the project available ]costs .

Another major problem of evaluation is that of choosing appropriate discount rate.

Then it is exterl &interl constraints .two projects may be mutually exclusive on technical grounds. Legal problems may be there. Administrative, distributory and budgetary constraints may also be there.

The core of social cost-benefit alysis is the calculation or estimation of the prices to be used in determining the true value of benefits & the real magnitude of costs. The need is there for governments to choose appropriate discount rate in calculating the worth of project benefits & costs that occur over time. Social rate of discount [social time preference] is essentially a price of time –the rate the planners use to calculate the NPV [Net Present Value] of a time stream of project benefits & costs

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

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

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

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

Evaluation and Assessment

The purpose of project evaluation is to document as clearly and specifically as possible the implementation and impact of the project.  The evaluation segment describes evidences that are collected concerning project activities and their outcomes.  A strong evaluation plan is a core element of a project and as such the evaluation plan must include, among others, the major aspects: (a) clear statement of the intended outcomes of the project; (b) the very evidence that will indicate the extent to which the outcomes are being achieved.

It would not be out of the context to mention that there are two general types of evaluation, with somewhat different purposes. While formative evaluation details a plan to evaluate the project during the completion of the project; it helps to identify the changes or modifications that are needed along the way. A formative evaluation calls for (a) focusing on improving a program or project; (b) identifying improvements, modifications, and magement needs of the project plus © judging  the value of a project during the implementation of the project. Summative evaluation calls for detailing a plan to evaluate the extent to which accomplished the goals or objectives of the project are accomplished, while at the same stroke the same helps to identify the changes or modifications that are needed for the next iteration of the project. That is why, a summative evaluation occurs after the completion of the project; evaluates the outcomes or accomplishments of the project; judges the value of a project after  fully implementation; as well as suggests what changes need to be made to the program.

It is better not forgotten that evaluation and assessment cannot be interpreted as interchangeable with respect to documenting the outcomes of a funded project.  Though evaluation and assessment are related, yet they are not identical.  Assessment refers to specifically the measurement of outcomes. Clearly, evaluation is a broader concept that takes into accounts not only program outcomes, but program inputs (resources and activities) also.  When a project has different purposes (such as furthering of a specific subject), assessment would not better be featured in the evaluation plan.

(The Writer, a noted Magement Economist, an intertiol Commentator on Business and Economic Affairs and Principal, Eminent College of Magement and Technology, can be reached atm.bibhas@gmail.com)

About the author

Ankur Kalita