Evaluation and appraisal are sometimes used interchangeably. This is for two reasons: (i) both mean assessment and (ii) at times they over-lap, especially when we talk of ex-ante evaluation.
In fact, both are materially different as shown below:
Appraisal is the process of examining a proposal, like the setting-up of a fertilizer plant. It involves weighing up the costs and benefits, risks and uncertainties of putting up the plant before a decision is made.
Evaluation is a review of actual operations of the fertiliser plant, which covers (i) how successful or otherwise it had been and (ii) what lessons we learn for future industrialisation. To be short, it is like a before-project and after-project situation.
What is covered in the evaluation
In evaluation, actual performance is compared with planned performance. The gap or difference, if any, is analysed and investigated. It runs like (i) what was expected, (ii) what has actually happened, (iii) what should have been the position under the circumstances, (iv) action, if required, for penalties or rewards and for future guidance.
Here it is like variance analysis as in cost accounting where actual cost is compared with standard cost and the variance is broken into its component like price variance, quantity variance and, in overhead analysis, capacity variance. Were the variances favorable or un-favorable, avoidable or unavoidable? What action, in any, to be taken against the executives (purchase manger, production manager and marketing manager.)
Still wider coverage of evaluation
But evaluation goes much beyond the current operations. It looks at objectives set at the time of appraisal and tries to find out if the objectives were met or not.
Here are some examples:
CHANGE IN CONCEPT
A company was granted loans for replacement of 25,000 old and obsolete spindles. Instead, the company installed the same spindles at another location and continued with the old and inefficient spinning plant. When this came to the notice of the bank, it changed its follow-up procedures to ward off such future attempts.
Being financier, the bank holds all ‘titles’ including shipping documents. When machinery arrives at port, the company obtains the documents from the bank, gets the machinery released and transports it to the site. The bank decided that henceforth, the shipping documents would only be released when the site has been inspected and the visiting officers confirm that (i) old and obsolete machinery had been dismantled and scrapped, (ii) foundations for new machinery have been laid down and (iii) necessary arrangements have been made within the premises for installation of new machinery and equipment. (This was meticulously followed and no further infringement reported.)
OBJECTIVE NOT ACHIEVED
For poverty alleviation, Asian Bank granted loans to small farmers in Laos for plantation of eucalyptus trees. According to the bank own report, the project "failed to improve the socioeconomic conditions of intended beneficiaries, as people were driven further into poverty by having to repay loans that financed failed plantations."
CHANGE OF IN PRODUCT
A bank financed a company for installing a baby food plant with the collaboration of Cow & Gates. But the company failed to maintain quality standard and shifted to producing ordinary powdered milk, butter and cheese. Though the company is profitable, it has defeated the bank’s efforts to develop industries for better health of the infants.
APPROPRIATE TECHNOLOGY
A project was approved for making seamless pipe using locally available steel. When completed, it switched over to imported steel nullifying bank efforts to contribute towards development of down-stream projects of Pakistan Steel Mills Ltd.
Financial & Socio-Economic Indicators
Project feasibility Reports or Appraisal Reports is normally divided into three parts: (i) Financial (ii) Economic and (iii)n Social. A project may be financially sound but may be in-appropriate for the economy or community. For each sector, various ratios are calculated and form part of the appraisal reports. On the basis of these ratios or indicators, a project is approved or rejected.
When project is completed and put into operations, the same indicators are computed from real-life data. These are compared with estimated ones and differences, if any, are analysed as a normal routine under evaluation process. A short list of such indicators is given below:
Financial & Socio-Economic Indicators
FINANCIAL | ECONOMIC | SOCIAL |
|---|---|---|
Internal Rate of Return | Internal Economic Rate of Return | Jobs created |
Debt Service Cover | Domestic Cost per $ earned or saved | Size of Loan |
Average Weight Cost of Funds | Effective Rate of Protection | % local content |
Fixed Assets Cover to Debt | Value added in manufacture | Impact on income distribution |
SUCCESSFUL PROJECTS
A sound feasibility report should result in sound and successful projects. Such projects should meet all their obligations towards workers, suppliers, governments and owners and have sufficient funds to keep them in an adequate state of liquidity. These projects serve the purpose for which they were established, such as improvement in balance of payment, regional development and job creation. Their neighbourhood or spill over affects should be positive and a model for further industrialization.
CHALLENGED PROJECTS
Unfortunately, there is a time lag between project appraisal and project evaluation. Suppose, a project for a pager (sometimes called a beeper or bleep) was established in Pakistan and became instantly famous for sending short messages at very low rates. The sponsors left no aspect un-examined before launching the project. But, at that point of time, they could not envision the onslaught of mobile phones for communication conveniently, cheaply and instantly. The pager company had to be liquidated.
Delays and Cost overruns are norms rather than exceptions. In such cases, the evaluator conducts in-depth studies to find whether the delays or over-runs were unavoidable or not? In fact, the evaluator tried to determine if there was any dishonesty or inefficiency.
The evaluation gives useful feedback to avoid pitfalls experienced earlier, and if recommendations are followed, the project appraisal standards would improve, adding more and more successful projects in the country.
For various reasons, the project becomes terminally sick, and no amount of bailout can save them. It may be due to wrong location, fiscal anomalies, technological obsolescence or dis-interested management. Such projects should be abandoned, and resources so released be applied for other valuable purposes.
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