Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 1 PROJECT APPRAISAL AND RISK MANAGEMENT FOR THE PUBLIC SECTOR CAO HAO THI I. THE ROLE OF PROJECT APPRAISAL z To stop bad projects z To prevent good projects from being destroyed z To determine if components of project are consistent z To assess the sources and magnitudes of the risks z To determine how to reduce risks and efficiently share risks Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 2 II. STAGES IN PROJECT APPRAISAL AND APPROVAL z Why should a project evaluation be done in stages? a. Idea and project definition b. Pre-feasibility study. c. Feasibility d. Detailed design e. Project implementation B. PRE-FEASIBILITY STUDY z Example overall potential of project z Should maintain same quality of information across all variables z Whenever possible should use secondary information z Biased information better than mean values KEY QUESTION a. Is this project financially and economically feasible throughout the project’s life? b. What are the key variables? c. What are the sources of RISK? d. How can the RISK be reduced Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 3 C. FEASIBILITY STUDY z Focus is on improving accuracy of the key Variables z Alternatives for reducing risk are examined in detail z Some primary data may be needed KEY QUESTION – Is project financially attractive to all interested parties in activity? – What is level of uncertainty of key variables? – Can final decision for approval be taken? III. MODULES OF PRE-FEASIBILITY AND FEASIBILITY STUDIES Why break study into Modules? BUILDING BLOCKS a. Marketing or demand module b. Technical or engineering module c. Management and manpower module analysis d. Financial/budget module e. Economic module f. Social module Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 4 BASIC NEEDS ANALYSIS SOCIAL ANALYSIS ECONOMIC ANALYSIS FINANCIAL ANALYSIS MARKET ANALYSIS TECHNICAL ANALYSIS RESOURCES ANALYSIS ? ACCEPT REJECT ? ECONOMIC ANALYSIS FINANCIAL ANALYSIS + - -+ Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 5 A. IDEA AND PROJECT DEFINITION KEY QUESTIONS: a. Where is the demand? b. is this project consistent with company's expertise and strategy? A. MARKETING OR DEMAND MODULE z Study of sources of demand, nature of market, prices and quantities z Major distinction between domestic versus internationally traded goods and services z For internationally traded goods secondary information most important z For domestic market, primary research more important Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 6 OUTPUT OF MODULE – Forecast of quantities and prices for life of project – Taxes, tariffs, subsidies, public regulations, technological trends TECHNICAL OR ENGINEERING MODULE z A study of input requirements for investment and operations and their costs z In this module, secondary information can’t be used very effectively need to a void conflict of interest between supplier of technical information and seller of investment equipment, or contractor for construction Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 7 OUTPUT OF MODULE – Technology and life of project – Quantities of inputs by type needed – For investment and operation – Labour required by type and time – Input prices and sources of supply C. MANAGEMENT AND MANPOWER MODULE z What are managerial needs of project? z Does organization have the ability to get types of managerial skills needed? z Is timing of project consistent with quantity and quality of management? z What are wage rates for labour skills required? z Manpower requirements by category are reconciled with availabilities and project timing. Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 8 D. FINANCIAL MODULE z Integration of financial and technical variables from first three modules z Construct cash flow profile of project z Identify key variables for doing economic and social analysis KEY QUESTIONS: a. What is relative certainty of financial variables? b. What are sources and costs of financing? c. What are minimum cash flow requirements for each of private participants? d. What can be adjusted to satisfy each of the participants? E. ECONOMIC MODULE z Examines the project using the whole country as the accounting entity KEY QUESTIONS: a. What are sizes of differences between financial and economic values for a variable? b. What causes these differences? c. With what degrees of certainty do we know values of these differences? d. For economic viability what proportion of what externalities do we include? Fulbright Economics Teaching Program, 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 9 F. SOCIAL OR DISTRIBUTIVE APPRAISAL z Identification and quantification of extra-economic impacts of project z Income impacts on various group z Basic needs impact on specific sectors KEY QUESTIONS a. What social objectives could the project have an impact on their achievements? b. Who benefit and who pay the costs? c. In what ways does project generate beneficial and cost impacts on groups? d. What alternative ways are there to generate desirable social impacts? e. Is project relatively cost effective in generation of desirable social impacts? . 2004-2005 The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 1 PROJECT APPRAISAL AND RISK MANAGEMENT. The Appraisal of Development Expenditures - Project appraisal and risk management for the public sector Cao Hao Thi 2 II. STAGES IN PROJECT APPRAISAL AND