Capital Expenditure Project Decision in Public Sector | Project Management

In public sector units, capital expenditure project appraisal and management consist of four stages:

1st Stage—Appraisal:

Appraisal involves sponsoring agency and the sanctioning authority.

Both the parties should be clear about the objectives/a capital expenditure project aims to meet and considerations of all the possible alternatives to achieve the given objectives.

i. Sponsoring Agency:

It has the overall responsibility for proper planning and management of projects. It must obtain the necessary approvals from sanctioning authority and ensure that the project proceeds as per lines approved by sanctioning authority.

Sponsoring agency may be a government department, local authority, health board or other state body or agency.

ii. Sanctioning Authority:

It should evaluate all the alternatives on the basis of costs and benefits and make recommendation on the most cost effective solution. Where possible, recommendations should be quantified so as to facilitate comparison.

Capital expenditure project requires sanctioning at different level. So it is important to identify an appropriate sanctioning authority for a particular proposal.

Sanctioning authority can be government, department of finance, a local or regional authority or its management, board or manager of state or regional bodies and agencies. It depends upon the size of proposal, complexity of issues, whether to change the existing policy or not and experience and expertise of the department.

Preliminary Appraisal:

Sponsoring agency does preliminary appraisal. It involves detailed description of the nature and objectives of the project and other relevant information of social, economic and legal basis.

Format of Preliminary Appraisal:

A preliminary appraisal should include a clear statement of the need for which a project is designed to meet and the degree to which it would aim to meet. It should identify all the possible alternatives including the alternative of doing nothing and quantify the key elements of all alternatives. They should choose the best alternative and must support their judgment on cost benefit basis.

On the basis of preliminary appraisal, sponsoring agency gives recommen­dation whether conducting detailed appraisal of the project is worthwhile or to drop the project. The recommendation should clearly state the terms of reference and if detailed appraisal are required more staff and other cost, prior approval from sanctioning authority must be taken.

Detailed Appraisal:

Detailed appraisal serves four very important functions:

i. It provides the sponsoring agency with a basis for taking a decision to proceed further with project.

ii. It provides the sanctioning authority with a basis for deciding whether to approve or reject the proposal.

iii. It serves as the reference document to assess the effects of changes that may occur during the development of the project.

iv. It serves as the reference document to ensure evaluation of the project after completion.

Detailed Appraisal Checklist:

i. Define clearly the needs the project should meet and its objective why there is a need of project and what are the requirements on which needs will be met.

ii. List the alternatives—maximum possible ways through which the objective can be achieved including the alternative of doing nothing.

iii. List the constraints—there will invariably be constraints in reaching objectives. Constraints can be financial, technological, legal, environmental, physical, social, etc. Constraints’ must be explored and should be taken account because they will limit the range of possible alternatives which are feasible or acceptable.

iv. Quantify cost and specify the sources of funding—cost quantification should cover cost and benefits generated by the use of asset as well as cost involved in their establishment.

v. Analysis of alternatives—analysis includes financial analysis, cost-benefit analysis, cost-effective analysis and cash flow analysis.

a. Financial analysis includes projection of profit and loss account and balance sheet.

b. Cost benefit analysis helps to assess whether or not the social and economic benefits associated with a project are greater than social and economic costs.

c. Cost-effective analysis helps to compare the costs of all possible alternatives of achieving a particular objective so that best choice can be made.

d. Cash flow analysis should be done with discounting and non-discounting techniques to analyze cash inflows and cash outflow of all possible alternatives so has to choose the best one.

vi. Identify the risk associated with each alternative and if possible suggest a strategy to deal with the risk.

vii. Choose best alternative and draw a plan of action for final execution.

viii. Sponsoring agency should give recommendation for the alternative which according to them is the best for the final approval and should be ready for any change in their choice by sanctioning authority.

IInd Stage—Planning:

This stage involves detailed planning and costing of the project.

It consists of seven steps:

1. Establishment of Project Management Structure:

It involves the following steps:

i. Kind of management structure suitable for the project.

ii. Accountability for various aspects of the project.

iii. Kind of reporting system.

2. Preparation of a Design Brief:

The design brief is a detailed description of the project alternative which has been approved finally, describing about the objectives and the parameters to be taken in account by planning professionals.

3. Detailed Planning and Design:

On the basis of parameters given in design brief detailed planning and designing in terms of cost for final implementation of the project is done.

4. Review of proposal by using information provided by planning process.

5. Obtaining approval of the sanctioning authority.

6. Calling tenders.

7. Review of proposal—using tender prices for the review.

IIIrd Stage—Implementation:

The critical task of implementation stage is to manage and monitor the project to ensure that it is executed satisfactorily within the budget and on time.

IVth Stage—Post-Project Review:

This aims to draw lessons for the future.

It includes the following:

i. Whether the basis on which a capital expenditure project was undertaken proved correct.

ii. Whether the planned outcome is matching with actual outcome.

iii. Whether the appraisal and management procedure adopted proved to be satisfactory.