Project Monitoring and

Appraisal System in Nepal

UNIT-VIII
Concept of Project Monitoring
 Monitoring is a process of routinely gathering
information on all aspects of the project. It
continually looks that project progresses in line
with the plan and take corrective measures when
and where needed.
 Monitoring is an ongoing and continuous activity
throughout the entire life span of the project.
 It is a type of evaluation which is performed while
a project is implemented, with the aim of
improving the project design and functioning while
in action (Micheal & Elenor, 1986).
Concept of Project Monitoring
Monitoring is an ongoing analysis of
project progress towards achieving
planned results for the purpose of
improving management decisions making
(Macasio & Macapagal, 2008).
It is a management function to guide in
the intended direction and to check
performance against pre-determined plans
mainly during project implementation.
Objectives/Purpose of Monitoring
Analyzing the situation of the project
Determining whether the inputs in the
project are well utilized .
Identifying problems facing the project
and finding solutions.
Ensuring all activities are carried out
properly by the right people and in time.
Using lessons from one project
experience on to another.
 Objectives/Purpose of Monitoring
 Determining whether the way the project was
planned is the most appropriate way of solving the
problem at hand.
 Rescheduling the project (if the project run behind
the schedule)
 Recycle the budgeting the project (appropriating
funds from one head to another; avoiding expenses
under unnecessary headings);
 Re-assigning the staff (shifting the staff from one
area to another; recruiting temporary staff to meet
the time schedule)
Steps in Monitoring
In In Co
fo A ve rre
r na sti cti
m lys
Figure 9.1: The Project Monitoring Process ga ve
ati is tio act
on n ion
Steps in Monitoring
Information: Collection and
communication of information on
implementation, project operation and
achievement through report supplied by
project staff and other responsible people
supplemented by visits to the project area.
 Steps in Monitoring
Analysis: Analysis of information, such as the
comparison of actual versus planned or
targeted progress and costs, earned value
analysis and identification of disparities and
problems.
Investigation: Investigation of disparities
between actual and planned progress.
Corrective action: Initiation of action to
improve implementation and achievement of
targets.
Methods of Monitoring
There is increased interest in M&E among the
development community due to a stronger
focus on the results produced by interventions.

M&E processes allow those involved to assess

the impact of a particular activity, to determine
how it could be done better and to show what
action is being taken by different stakeholders.
This should translate into a more effective and
transparent way of working.
Methods of Monitoring
1) Key Performance indicators. 
 A Key Performance Indicator is a measurable value that demonstrates
how effectively a company is achieving key business objectives.
 Companies use KPIs to evaluate current progress and they serve as an
early warning of potential problems to allow management to take action
to resolve them. As a project manager you could use key performance
indicators to get a high-level overview of what is going on your
business.
 By setting KPIs the company enables the team to make smart business
decisions about the direction of all current projects.
 It is important to choose your KPIs in order to be able to quickly
identify gaps and risks of deviations from the objective, as well as the
effectiveness of the improvement measures initiated. It also allows for
effective communication with the different actors involved in the
project.
1. Key Performance indicators. 

If the Performance Indicator is green,

everything is fine, you will have to
continue the actions in progress in order
to maintain this good result.
If the indicator is red, then you must
take the necessary corrective action.
Example of Key Performance Indicator
 Compliance: Being in the food industry, Ms. Oat would have a number of
health-related standards with which she would have to comply. For
example, she would have to pass all health inspections by local and state
authorities. Her key performance indicator in this area could consist of no
major health inspection issues identified upon external inspection. After a
formal external inspection, Ms. Oat could compare her actual performance
to her key performance indicator and take immediate actual if her actual
performance differs from her target.
 Quality: In a manufacturing company such as the Healthy Granola
Company, producing a quality product will increase company profit. Ms.
Oat could implement a key performance indicator about the level of
quality that she expects in her manufacturing process. For example, she
could set a target of no more than one defect per 10,000 boxes of granola.
The company's quality control team could provide the data, and if Ms. Oat
concludes that the defects exceed this target, she can assemble a team to
determine the cause and take steps to correct it quickly.
2. Logical framework approach
 The LFA is like a diagnostic tool that helps you
understand why things are happening.  It helps uncover
what the core problem of an issue is and what are the
best ways to solve the problem.

 The LFA guides you to compile all the key information

for your project into a brief table called the Logframe
Matrix.  The matrix helps to communicate what your
project is about and how it will achieve its objectives. 
The matrix also contains monitoring and outcome
indicators to help measure progress and success.
 2. Logical framework approach

The assumptions column represents some of the complexity that projects need to consider.

Examples of assumptions can be having the staff with the rights skills, the target group
being actively engaged and involved, and whatever other internal and external factors are
appropriate to your project. If assumptions do not hold true, they represent a risk, and a risk
analysis should be undertaken. The assumptions column should be brainstormed by the
participants who contributed to the problem/solution tree.
2. Logical framework approach
A log frame matrix is a concise document that outlines the key
features that lead to a project achieving its goal.
 A log frame consists of a 4 column by 4 or 5 row matrix.
 The first column represents the hierarchy of activities to
outcomes that needs to occur for the project to succeed.
 The second column represent the indicators that are appropriate
measures of whether the activities, outputs or outcomes have
been achieved.
 The third column represents the data source, or means to verify
the indicator.
 The last column is very important, and outlines the assumptions
that need to hold true for that particular activity, output or
outcome to occur.
3.Participatory Methods
Participatory monitoring and evaluation
(PM&E) is the joint effort or partnership of
two or more stakeholders (such as
researchers, farmers, government officials,
workers) to monitor and evaluate,
systematically, one or more research or
development activities (Vernooy et al.,
2003).
4. Rapid appraisal Method
It is a less structured data collection
method aimed at supplying needed information
in a timely and cost-effective manner.
It is the process of collecting views and
feedback of beneficiaries and other stakeholders
in order to make effective decision.
Data is collected from, key informant interview,
focus group discussion, community group
interview and mini survey.
5. Formal surveys
Formal survey is a type of Monitoring
and Evaluation technique that can be used
to collect standardized information from
carefully selected sample.
6. Impact evaluation
Impact evaluation is the systematic
identification of effects- positive or
negative, intended or not intended-on
individuals, households, institutions, and
the environment caused by a given project
activity.

It measures the impact of a project or

project to its beneficiaries.
7. Cost Benefit and cost effectiveness

Cost benefits and cost effectiveness analysis

are tools for assessing whether or not the
costs of an activity can be justified by the
outcomes and impacts. CBA measures both
inputs and outputs in monetary terms.

CEA estimates input in monetary terms and

outcomes in non monetary quantitative
terms.
 Example of CBA
New Software purchased
1) Costs Solution Solution Solution
A B C
 Actual price of software
 Cost of installation
TC 10000 15000 20000
 User training
TB 12000 19000 23000
 Annual maintenance
CBA 1.20 1.27 1.15
2) Benefits
 More efficient business processes
 More efficient staff
 Better customer information
 Better data management
8. Public Expenditure Tracking Survey:
 It is a new method of tracking the flow of public funds
and determines the extent to which resources actually
reach the target beneficiaries.

 It is sometimes referred to as "following the money“

. 
 PETS are increasingly used at district level in countries
like Uganda and Tanzania to make budget flows
transparent from local government to service delivery
agents.

 Public expenditure survey focus on quality of service, and

facilities.
9. Theory based evaluation
It allows in-depth understanding of the
program or activity. It assumes more
complex cause and effect relationship.
Project Evaluation Techniques of International Agencies

International agencies such as UN,

OECD, the World Bank and others are
actively involved in assisting countries
and people for their well being.
They used to assess and evaluate the
projects by applying their own techniques
to determine that proposed project is
successful in achieving its objective.
UNIDO Approach
United Nations Industrial Development
Organization (UNIDO) is a specialized
agency of the united nations.
Its main emphasis is promoting
industrialization in developing countries with
an emphasis on manufacturing.
UNIDO approach is comprehensive
framework for SCBA in developing countries
articulated in the guidelines of the project
evaluation.
UNIDO Approach
UNIDO method is based on
Use of shadow price to calculate real worth of
the project.
Measure of cost and benefits in terms of
aggregate consumption.
Use of discounted flow analysis to calculate net
benefits.
Use of domestic currency for valuation purposes.
Focus on efficiency, savings and equity
considerations through stage by stage analysis.
UNIDO Approach
The UNIDO approach of Social Cost Benefit Analysis
involves five stages:
• Calculation of financial profitability of the project
measured at market prices.
• Obtaining the net benefit of the project at shadow
(efficiency) prices.
• Adjustment for the impact of the project on Savings &
Investment.
• Adjustment for the impact of the project on Income
Distribution.
• Adjustment for the impact of the project on Merit and
Demerit Goods whose social values differ from their
economic values.
 UNIDO Approach (Contd.)

Stage-1: Calculation of financial profitability of the

project

 A good technical and financial analysis must be done

before a meaningful economic (social) evaluation can
be made so as to determine financial profitability.

 Financial profitability is indicated by the Net Present

Value (NPV) of the project, which is measured by
taking into account inputs (costs) and outputs
(benefits) at market price.
UNIDO Approach – Stage One (Contd.)
 Net Present value of a Project is calculated as:

Here,
Vt = Value of outputs at market price at time t
Ct = Value of inputs at market price at time t
K = Discount Rate
T = Lifetime of the project
I0 = Initial cost at the start of the project.

 The project is viewed as financially feasible if NPV >

0.
 UNIDO Approach (Contd.)
Stage-2: Obtaining the net benefit of the project at
economic (shadow) prices

 The Commercial Profitability analysis (calculated in

stage - 1) would be sufficient only if the Project is
operated in perfect market. Because, only in a perfect
market, market prices can reflect the social value.

 If the market is imperfect (most of the cases in reality),

net benefit of the Project is determined by assigning
shadow prices to inputs and outputs.

 Therefore, developing shadow prices is very much

vital.
UNIDO Approach – Stage Two (Contd.)

Shadow price is any price which is less

than or more than a market price. It is the
extra price that is decided by UNIDO
Approach by social cost benefit analysis.
It is done for the betterment of market,
economic and social condition of the
nation.
For example market price salary is Rs
10000
Shadow price salary is Rs. 9000 in case
UNIDO Approach – Stage Two (Contd.)
 Shadow Prices reflect the real value of a resource
(input or output) to society.

 Shadow Prices can be defined as the value of the

contribution to the country’s basic socio-economic
objectives made by any marginal change in the
availability of commodities (0utput) or factor of
production (input).
UNIDO Approach – Stage Two (Contd.)
General Principles of Shadow Pricing
1. Numeraire :

One of the important aspects of shadow pricing is

the determination of the numeraire , the unit of
account or standard in which the value of inputs or
outputs is expressed.

Numeraire is determined at

Domestic currency rather than border price.

Present value rather than future value.
Constant price rather than current price
Consumption use rather than investment use.
   2.Concept of Tradability

 A key issue in shadow pricing is whether a good is

tradable or not. For a good that is tradable, the
international price is a measure of its opportunity cost to
the country.
Why?
 For a tradable good, it is possible to substitute import for
domestic production and vice versa; similarly it is possible
to substitute export for domestic consumption and vice
versa.

 Hence the international price, also referred to as the

border price, also represents the ‘real’ value of the good
in terms of economic efficiency.
3.Sources of Shadow Pricing
 The UNIDO approach suggests three sources of shadow pricing,
depending on the impact of the project on national economy.

If the impact of the project is Basis of shadow pricing is-

on -

Consumption in the economy Consumer willingness to pay

Production in the economy Cost of production

International Trade Foreign exchange value

4.Treatment of Taxes
When shadow prices are calculated, taxes
usually pose difficulties. The general guidelines
in the UNIDO approach w.r.t taxes are as
follows:

 If the project increases domestic production, taxes

should be excluded.

 If the project consumes existing fixed supply of non-

traded inputs, tax should be included .

 For fully traded goods, taxes should be ignored

5.Consumer Willingness to Pay (CWP)

If the impact of the project is on the

consumption in the economy, the basis of
shadow pricing is CWP

What a consumer wants to spend for a

product or service and what he actually
does pay. The difference between CWP
and actual payment is called consumer
surplus
 UNIDO Approach - Stage 2.
Shadow Pricing of Specific Resources : 
1.Tradable inputs and outputs:- A good is fully traded

a. when an increase in its consumption, results in a

corresponding increase in import or decrease in export
b. when an increase in its production, results in a
corresponding increase in export or decrease in import.

 For fully traded goods, the shadow price is border price

translated in domestic currency at market exchange rate.
 UNIDO Approach - Stage 2.
Shadow Pricing of Specific Resources : 

2. Non-tradable Inputs and outputs:- A good is non

tradable when the following conditions are satisfied

(i) its import price is greater than its domestic cost of

production and

(ii) its export price is less than its domestic cost of

production.
 UNIDO Approach - Stage 2.
Shadow Pricing of Specific Resources : 

 Assuming that for a project, one-half of the required

input is collected from additional domestic production
which has a domestic cost of Rs. 200000 and the rest
one half is collected from diversion from other
consumers who are willing to pay Rs. 300000.

 Thereforethe shadow price of the inputs will Be: Cost

of production + consumer willingness to pay = Rs
(200000+300000) = Rs. 500000
 UNIDO Approach - Stage 2.
Shadow Pricing of Resources : 

Assuming that a newly established power

station having a total capacity of 100 million
units electricity, charges tariff at Rs. 1 for per
unit electricity consumption.

The consumers of that particular area are willing

to pay Rs. 1.20 for per unit. Therefore, the
shadow price is (Rs. 1.20 x10 million) = Rs. 120
million, instead of Rs. 100 million
UNIDO Approach - Stage 2.
3.Externalities
 An externality, also referred to as an external effect
(either beneficial or harmful), is a special class of good
which has the following characteristics:

 It is not deliberately created by the project sponsor but

is an incidental outcome
 It is beyond the control of the persons, who are
benefited or affected by it
 It is not traded in the market place
 Examples of Externalities
Beneficial effects
1. An oil company drilling its own fields may generate
useful information about oil potential in the
neighbouring fields.
2. The approach roads built by a company may improve the
transport system in the area.

Harmful effects
3. A factory may cause environmental pollution by
emitting large volume of smoke and dirt, thereby
exposing people in the neighbourhood to health hazards .
4. The location of an airport in a certain area may raise
noise levels considerably.
 Shadow Pricing of Externalities
 Although valuation of external effects is difficult as
they are often intangible in nature and there is no
market price, their values are estimated by indirect
means. For example:

1. The benefit of information provided by the oil field to

neighboring oil fields may be equated with what the neighboring
oil fields would have spent to obtain such information.

2. The cost of pollution may be estimated in terms of the loss of

earnings as a result of damage to health caused by it and the
cost of time spent for coping with unhygienic surroundings.
 Shadow pricing of labour
4.Labour inputs :- The principles of shadow pricing for goods may
be applied to labour as well, though labour is considered to be
service. When a project hires labour, it could have 3 possible
impacts on the rest of the economy:

I. It may take labour away from other employments

II. It may induce the production of new workers and;
III. It may involve import of workers.

If it’s the 1st case, then the shadow price of labour is equal to what other
users of labour are willing to pay for this labour.
Obtaining Net Benefit of the Project at Shadow Prices : 

 Determining the shadow price of Annual costs,

Annual benefits, Calculating Net-benefit of the
project from social point of view.
 Here Vt = Shadow price of Benefit at time t
 Ct = Shadow price of Operating Expenses at time
t
 K = Social Discount rate
 T = Lifetime of the project
 Io = Initial cost at the start of the project
 UNIDO Approach - stage 2.
Obtaining Net Benefit of the Project at Shadow Prices : 

An Illustration

1.The Government is considering a project which would

supply water for irrigation, generate electricity and
provide a measure of protection against floods. The
project is expected to have 25 year life time.

The costs and benefits of the project are:

COSTS: Power equipment costing Rs. 30 crore.
(Additional Information: This equipment can be
exported at USD 4.5 million. The shadow price of per
dollar is Rs. 70)
UNIDO Approach - stage 2.
Obtaining Net Benefit of the Project at Shadow Prices : 

2. 30000 tones of cement produced indigenously are used

in the project at a cost of Rs 6000.

 (Additional Information: However, one half of the

cement will come from additional domestic production
which cost Rs. 5000 per ton and one half come from
diversion from other consumers who are willing to pay
Rs. 6500 for per ton)
 UNIDO Approach - stage 2.
Obtaining Net Benefit of the Project at Shadow Prices : 

3. Other construction materials (sand, bricks, steel

etc.) cost 20 crore

(Additional Information: these materials comes

from additional production, production cost of
which is 15 crore)
 UNIDO Approach - stage 2.
Obtaining Net Benefit of the Project at Shadow
Prices : 

4. Two million man days of unskilled labour for which the

project committee decided to pay a daily wage of Rs.
100. (Additional Information: The Shadow Price of
unskilled labour is Rs. 80 per day)

5. Skilled labour costing Rs. 5 crore

6. Operating and Maintenance cost of the project will be Rs.

7.5 crore annually. (However, the operating cost should
be Rs. 6.5 crore from social view point)
An Illustration :  Benefits
1. 0.50 million acres of land will be irrigated.
The Government will charge the water levy at
Rs. 150 for per acre.

(Additional information: the value of

additional output acre due to the irrigation will
be Rs. 500 per acre).
An Illustration :  Benefits
2.100 million Units of electricity will be
generated. The electricity will be generated at
Rs. 1 per unit (Additional Information: The
consumers are willing to pay Rs. 1.5 for per unit
of electricity)

3.Flood damages can be saved by Rs. 2 crore

annually. However, the Government will not
able to collect anything for this.
 Determining Project Profitability from the Private
Angle
• Net Present value of a Project is calculated as:

Here,
Vt = Annual Benefit at time t = 17.5 crore
Ct = Annual cost at time t = 7.5 crore
K = Discount Rate = 10% (assuming)
T = Lifetime of the project = 25 years
I0 = Initial cost at the start of the project = 93 crore

Therefore,

= {10 (PVAF.10%, 25) – 93}

= {10 X 9.0770 – 93}
= Rs.( 2.23) crore
Therefore, the project is generating a negative NPV of Rs. 2.23
crore from the private angle.
Determining Project Profitability from the Social
Angle
Net Present value of a Project from Social angle is calculated as:

Here,
Vt = Shadow price of Benefit at time t = 42 crore
Ct = Shadow price of Operating Expenses at time t = 6.5 crore
K = Social Discount Rate = 10% (assuming)
T = Lifetime of the project = 25 years
I0 = Initial cost at the start of the project = 84.75 crore
Therefore,

= {35.5 (PVAF.10%, 25) – 84.75}

= {35.5 X 9.0770 – 84.75}
= {322.23 – 84.75}
= Tk. 237.48 crore
From the view point of society, the project is
generating a positive NPV of Tk. 237.48 crore.
 UNIDO Approach...Stage 3:
Measurement of the Impact on distribution

The purpose of the stages 3&4 are concerned with

measuring the value of a project in terms of its contribution
to savings and income redistribution. That is to determine
the

1. Amount of income gained or lost because of the project by different

income groups (such as project other than business, government,
workers, customers etc)
2. Evaluate the net impact of these gains and losses on savings
3. Measure the adjustment factor for savings and thus the adjusted
values for savings impact
4. Adjust the impact on savings to the net present value calculated in
stage two.
UNIDO Approach - Stage 3

1.Measurement of Gain or loss : 

The gain or loss to an individual group within the society as a result of

the project is equal to the difference between shadow price and market
price of each input or output in the case of physical resources or the
difference between price paid and value received in the case of financial
transaction.

 For e.g. A mining project requires 1000 labourers at a wage rate of

Rs. 150 per day. These workers were ready to work for a daily wage
of Rs. 100.Therefore, the gain of the group of 1000 workers from
the project (150-100)x1000 = 50000 per day.
UNIDO Approach - Stage 3
2. Savings Impact and its value:

Most of the developing countries face scarcity of capital.

Hence the governments of these countries are concerned
about the impact of a project on savings and its value
thereof.
Stage three of the UNIDO method, concerned with this,
seeks to answer the following questions:
 Giventhe income distribution impact of the project what
would be its effect on savings?

 What is the value of such savings to the society?

 UNIDO Approach - stage 3
 Evaluation of the Net Impact on Savings :-
Net savings Impact of the project = ΣΔYi MPSi
Here,
Δ Yi = change in income of group i as a result of the project
MPSi= Marginal Propensity to save a group i

Assuming that the income gained or lost by 4 group is

 Workers (W) = Rs. 250000
 Consumer(C) = Rs. -700000
 Project (P) = Rs 1000000
 External (E)=Rs.500000

The Marginal Propensity to Save of these four groups is:

MPSw=0.04, MPSc=0.25, MPSp=0.4 and MPSe = 0.3

Therefore, the net impact of the project on savings is: {250000

x0.04+(-700000) x 0.25 + 100000 x 0.4 + 500000x0.3} =
Rs. 475000
UNIDO Approach - stage 3
Adjustment Factor for Savings (AFs)

 AFs measure the percentage by which the social value

of investment of one Re. exceeds social value of
consumption of one rupee.

 Here,
 MPC = Marginal Propensity to Consume
 MPS = Marginal Propensity to Saving
 MPcap = Marginal Productivity of Capital
 CRI = Consumption Rate of Interest (Social Discount Rate)
UNIDO Approach – Stage Three (Contd.)
 Assuming that MPC, MPS, MPcap & CRI of an
economy is given:
MPC = 70%, MPS = 30%, MPcap = 25% and CRI =
10%

Therefore, adjustment factor for saving is:

 Adjusted value of the impact of the project on

savings:
Adjusted value of saving = (Net impact on savings ×
AFs)
= Rs. 4,75,000 × 6
= Rs. 28,50,000.
UNIDO Approach - stage 3

This Rs. 2850000 is now added to the

NPV of the project calculated in stage
2(Rs.237.48 crore) .

Therefore, the adjusted NPV at this stage

will be Rs. (237.48+.285) = Rs. 237.765
crore
UNIDO Approach Stage 4:
Income distribution impact
 Government considers a project as an investment for the
redistribution of income in favour of economically weaker
sections or economically backward regions.

 This stage provides a value on the effects of a project on

income distribution between rich and poor and among regions.

 Distribution Adjustment Factor (Weight) is calculated and the

impacts of the project on income distribution have been valued
by multiplying the adjustment factor with the particular
income of a group.

 This value will then be added to the net present value re-
calculated in stage three to produce the social net present value
of the project.
UNIDO Approach – Stage Four (Contd.)
Determination of Weights:
 If there are only two groups in a society, poor and
rich, the determination of weight is just an repetitive
process between the analysts (at the bottom) and the
planners (at the top). This is called “bottom-up”
approach.
 When more than two groups are involved, weights
are calculated by the elasticity of marginal utility of
income. The marginal utility of income is the weight
attached to an income is:

Where, wi = weight of income at ci level

ci = level of income of group i
b = base level of income that has a weight of
1.00
n = elasticity of the marginal utility of income
UNIDO Approach – Stage Four (Contd.)
 Assuming that the worker group gains an income of Rs.
2,50,000 from a project, the base level of income is Rs.
50,000 which has a weight if 1.00 and elasticity of
marginal utility of income is 0.20.
Therefore, weight is:

 So, value of the impact of the project on income

distribution to this group is:
(Rs. 2,50,000 × 0.72) = Rs. 1,80,000.
 Now, this value will be added to the net present value
adjusted in stage three.
 Therefore, Adjusted NPV in this stage will be
Rs. (237.765+ 0.018) = Rs. 237.78 crore.
UNIDO Approach - Stage 5
Adjustment for Merit and Demerit Goods
 Adjustment is made to measure the impact of the project on merit
goods and demerit goods whose social value differ from their
economic value.
 If there is no difference between the economic value of inputs and
outputs and the social value of those, the UNIDO approach for project
evaluation ends at stage four.

 In practical, there are some goods (merit goods), the social value of
which exceed the economic value (e.g oil, creation of employment etc)
and also there are some goods (demerit goods), social value of which is
less than their economic value (e.g., cigarette, alcohol, high -grade
cosmetics etc)

 Adjustment to the NPV of stage 4 is required if there is any difference

between the social and economic value
 UNIDO Approach - Stage 5 : 

The procedure for adjusting the difference between

social value and economic value are:

1. Estimating the present economic value.

2. Calculating the adjustment factor.

3. Multiplying the economic value by the adjustment

factor to obtain the adjusted value.

4. Adding or subtracting the adjusted value to or from

the NPV of the project as calculated in stage four.
UNIDO Approach - Stage 5 : 
 An alcohol factory is being constructed. The present
economic value of the project is Rs. 237.78 crore
(Adjusted NPV up to stage 4).

 The output of the project has no social value than its cost
of production.

 Cost of production is the 60% of the economic price.

Therefore, adjustment factor is: ((60/100)-1) = -0.4
Therefore, the adjusted value = (Rs. 237.78 crore x - 0.4)
= Rs. -95.11 crore

 The NPV of the project in terms of socially acceptable

consumption is (Rs. 237.78 - 95.11) = Rs. 142.67 crore.
 Obtaining Net benefit of the Project
An illustration (contd.)
Cost & Benefit of the Project (at a glance)

One-Shot cost/ Net Investment/ Net cash

outlay:
Cost Type Private Angle Social Angle
(Market price) (Shadow Price)
Power Equipment 30 crore 31.5 crore
Cement 18 17.25
Other Materials 20 15
Unskilled Labor 20 16
Skilled Labor 5 5
Total 93 Crore 84.75 Crore
Cost & Benefit of the Project (at a glance) (contd.)

Annual cost:

Cost Type Private Angle Social Angle

(Market price) (Shadow Price)

Operating Cost 7.5crore 6.5 crore

Total 7.5Crore 6.5 Crore

Annual Benefit:

Benefit Type Private Angle Social Angle

(Market price) (Shadow Price)

Irrigation 7.5 crore 25 crore

Electricity 10 crore 15 crore
Flood Relief - 2 crore
Total 17.5 Crore 42 Crore
 Cost & Benefit of the Project (at a glance)
(contd.)
Private Angle Social Angle
Year (Market price) (Shadow Price)

Operating Cost 7.5crore 6.5 crore

Total 7.5Crore 6.5 Crore

Annual Benefit:
Benefit Type Private Angle Social Angle
(Market price) (Shadow Price)

Irrigation 7.5 crore 25 crore

Electricity 10 crore 15 crore
Flood Relief - 2 crore
Total 17.5 Crore 42 Crore
One shot cost/ Net Investment/ Net cash outlay
Particulars From Private Angle From social Angle
(In crore) (In crore)

Net Investment 93 84.75

Annual Net cash inflow for 1-25 years

Particulars From Private angle From Social Angle

(In crore) (In crore)
Annual benefit of the project 17.5 42
Less: Annual operating expenses 7.5 6.5
Net benefit of the project 10 35.5
NPV=annual cash flow * PVIFA 10%, 25) - Net
Investment
OECD Approach/Techniques for project
evaluation
Organization for Economic Co-operation
and Development (OECD) follows project
evaluation approach developed by M.D.
Little and J.A. Mirrlees in their works on
Manual for Industrial project analysis in
developing countries.
OECD Approach/Techniques for project
evaluation
LM approach is based on:
1) The resources – inputs & outputs – of a project are
classified into mainly:
 Labor
 Traded Goods
 Non-traded Goods
Therefore, to find out the real value of these
resources, we should calculate –
a)Shadow wage rate (SWR)
b)Shadow price of Traded Goods
c)Shadow price of Non-traded Goods
 OECD Approach/Techniques for project
evaluation
a) Shadow Wage Rate (SWR)

The purpose of computing the SWR is to determine

the opportunity cost of employing an additional
worker in the project. For this we have to
determine –
 The value of the output foregone due to the use of a
unit of labor
 The cost of additional consumption due to the
transfer of labor
 OECD Approach/Techniques for project
evaluation
b) Shadow price of Traded Goods
Shadow price of traded goods is simply its border or
international price.
 If a good is exported, its shadow price is its FOB
(Free on Board) price;
 If a good is imported, its shadow price is its CIF
(Cost, Insurance and Freight) price.
c) Shadow price of Non-traded Goods
 Non-traded goods are those which do not enter
into international trade by their very nature. (e.g.
land, building, transportation)
 Hence, no border price is observable for them.
OECD Approach/Techniques for project
evaluation
2)Use of discounted cash flow analysis to calculate net benefits.
Here the future value is discounted to Present value through NPV
which is measured by taking into account inputs (costs) and outputs
(benefits) at shadow price.

Net Present value of a Project from Social angle is

calculated as:

Here,
Vt = Shadow price of Benefit at time t
Ct = Shadow price of Operating Expenses at time t
K = Social Discount Rate
T = Lifetime of the project
I0 = Initial cost at the start of the project
OECD Approach/Techniques for project
evaluation
3. Costs and Benefits are measured in terms of
uncommitted social income.

All benefits and costs have to be converted into a common

unit of account or numeraire. The traditional approach is to
take consumption measured at domestic market prices as
numeraire.

contrast, Little and Mirrlees take the savings contribution

of the project as the objective and accordingly take as
numeraire what they call ' uncommitted social income ,
measured at border prices or international price.
OECD Approach/Techniques for project
evaluation
4) Standard Conversion factors are used to convert market
prices in to shadow prices.
For example: data for the estimate of the standard conversion
factor
(1) total imports (M) M = 2000
(2) total exports (X) X = 1500
(3) import taxes (Tm) Tm = 900
(4) export taxes (Tx) Tx = 25
The formula to be used for the calculation of the Standard
Conversion Factor is
(SCF): SCF = (M + X) / [(M + Tm) + (X - Tx)]

SCF = 0.8.
OECD Approach/Techniques for project
evaluation
5) A premium is added to foreign exchange rate
for inputs where the local currency is overvalued.
6) Consideration of impact of project on equity
factor is done.
Equity factor-based investing is a form of active
management that aims to achieve specific risk or
return objectives through systematic, rules-based
strategies.
7) Consideration of efficiency, saving and
redistribution are done together in one step.
Dissimilarities between Two Approaches
UNIDO Approach LM Approach
 LM-Approach measures
 The UNIDO Approach measures
costs and benefits in terms
cost and benefits in terms of
domestic prices of International prices
 The UNIDO Approach measures  The LM Approach
cost and benefits in terms of measures cost and
consumption. benefits in terms of
 The stage by stage analysis
savings.
recommended by the UNIDO
Approach focuses on efficiency,  The LM approach tends to
savings and redistribution view these considerations
consideration in different stages. together.
Similarities between Two Approaches

• Calculation of Shadow Prices to reflect

social value
• Usage of Discounted Cash Flow Techniques
• Taking into account about the effect of a
project on savings, investment and income
of a society
World Bank Approach/ Techniques for
Project Evaluation
The project evaluation technique used by the world bank is known as BTS
approach which is the improved version of the OECD LM -11 approach.
1)Implementation Progress Report:
 Prepared by project implementation agency on a quarterly basis and
forwarded to the bank.

 IPR are submitted on trimester basis aligned with the government

reporting cycle and provide to the GON official and World Bank teams
with a tool to monitor whether the project is on track with the planned
implementation schedule.
 IPRs comprise the following reports
a) Physical progress report
b) Financial monitoring report
c) Procurement monitoring report
World Bank Approach/ Techniques for
Project Evaluation
2) Third Party Monitoring
a) Performance audit: Office of the Auditor
General
b) Technical audit: National Vigilance Centre
c) Technical survey: Independent specialist
d) Social audit: Communities and civil
society organizations
e) Verification of Records: Independent
consultant
World Bank Approach/ Techniques for
Project Evaluation
3)Impact Evaluation: The world bank
relies on specialized survey to compare the
status of people in with and without the
project situation.
Evaluation ranged from questions
about knowledge, attitudes, and practices to
measurements focused on poverty.
World Bank Approach/ Techniques for
Project Evaluation
1) World Bank techniques emphasizes the
distributional efficiency factor in project
selection.
2) It uses scales for measurement of savings
and distribution of income. It focuses on
distribution patterns that provide more benefits
to the poor segment of people.
3) Project inputs and outputs are classified into
traded goods and services, non traded goods
and services and unskilled labor.
World Bank Approach/ Techniques for
Project Evaluation
4) The shadow price of trading goods and
services is calculated in terms of
international price.
5) The shadow foreign exchange rate is
used to calculate the shadow price of
trading goods and services.
6) The shadow price of non trade goods and
services is based on non consumption
factors.
World Bank Approach/ Techniques for
Project Evaluation
7) The shadow price of labor is what other
labor users are willing to pay.
8) The cost and benefits are discounted are
discounted to calculate net benefits.
9) All goods supplied locally which could
be traded international markets are subject
to a price adjustment.
Project Monitoring and Evaluation
Approaches of the ADB
ADB was established in 1996. It provides
loans, grant and technical assistance to its
member countries i.e., Asia and Pacific
Region to make them free from poverty.
The ADB monitors and evaluates
programs and projects periodically to
ensure that project or programs are
implemented as planned and the benefits
are reaching to its intended people.
Project Monitoring and Evaluation
Approaches of the ADB
Monitoring and evaluation of the progress
of projects and programs assisted by ADB
is based on a project management
information system of the project
implementation agency.
Based on the regular periodic reports,
accounting statements and statistical
analysis, ADB monitor the project
progress.
Project Monitoring and Evaluation
Approaches of the ADB
ADB evaluates projects and programs
through appraisal, ongoing evaluation,
project completion evaluation and benefit
monitoring and evaluation.
1) Appraisal: It is an evaluation before the
project implementation. It assesses project
implement ability to succeed. An appraisal
document is prepared which guides the
project activities for project implementation.
Project Monitoring and Evaluation
Approaches of the ADB
2) Ongoing Evaluation: The ADB mission
evaluates progress of the project before and during
the implementation phase. Corrective actions are
recommended in the aids memories prepared after
evaluation.
3) Project Completion Evaluation: ADB
evaluates the project after completion and prepares
“Project Completion Report”. Lesson learned are
presented with success stories and weakness which
serve as guidelines for the improvement of future
design, planning, and implementation.
Project Monitoring and Evaluation
Approaches of the ADB
4) Benefit Monitoring and Evaluation:
 Benefits monitoring provides information needed to
ensure that services are delivered to and benefits are
being provided to people whom the project is
intended to benefit. The delivery, use and immediate
effects of services provided are monitored.
 Evaluation of benefits of completed projects provide
information to improve the design, planning and
implementation of future projects.
 Independent consultants and third party are engaged
to monitor and evaluate the benefits.
Project Monitoring and Evaluation
Approaches of the ADB
Logical Framework in M&E of ADB
funded projects: ADB uses a logical
framework in M&E. It evaluates cause
and effect relationship as well as
assumptions and risks of the project
2. Logical framework approach
 The LFA is like a diagnostic tool that helps you
understand why things are happening.  It helps uncover
what the core problem of an issue is and what are the
best ways to solve the problem.

 The LFA guides you to compile all the key information

for your project into a brief table called the Logframe
Matrix.  The matrix helps to communicate what your
project is about and how it will achieve its objectives. 
The matrix also contains monitoring and outcome
indicators to help measure progress and success.
 2. Logical framework approach

The assumptions column represents some of the complexity that projects need to consider.

Examples of assumptions can be having the staff with the rights skills, the target group
being actively engaged and involved, and whatever other internal and external factors are
appropriate to your project. If assumptions do not hold true, they represent a risk, and a risk
analysis should be undertaken. The assumptions column should be brainstormed by the
participants who contributed to the problem/solution tree.
2. Logical framework approach
A log frame matrix is a concise document that outlines the key
features that lead to a project achieving its goal.
 A log frame consists of a 4 column by 4 or 5 row matrix.
 The first column represents the hierarchy of activities to
outcomes that needs to occur for the project to succeed.
 The second column represent the indicators that are appropriate
measures of whether the activities, outputs or outcomes have
been achieved.
 The third column represents the data source, or means to verify
the indicator.
 The last column is very important, and outlines the assumptions
that need to hold true for that particular activity, output or
outcome to occur.
THANK YOU