The Project Appraisal Practitioners' Guide

385 Pages·2008·1.41 MB·English

Volume V
USAID/INDIA
REFORM PROJECT
COMPENDIUM WITH PRACTITIONERS’ GUIDE
State Fiscal Management Reform
The Project Appraisal
Practitioners’ Guide
USAID/India REFORM Project Compendium with Practitioners’ Guide: State Fiscal Management Reform
Authors:
Professor Graham Glenday, Duke University; Professor G.P. Shukla, Duke University; Professor Joseph
Than, Duke University; Mr. Deepak Kapoor, REFORM Project; Mr. Arunabha Maitra, REFORM Project;
and, Dr. Robert Voetsch, REFORM Project.
In addition, officials from the state governments of Jharkhand, Karnataka and Uttarakhand provided
invaluable input to complete the sector-specific Guidelines.
Compendium Disclaimer:
The REFORM Project Compendium with Practitioners’ Guides is made possible by the support of the
American People through the United States Agency for International Development (USAID). The
contents of this compendium volume are the sole responsibility of the authors and do not
necessarily reflect the views of USAID or the United States Government.
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Volume V: The Project Appraisal Practitioners’ Guide
REFORM
Rationale, Objective & Terms of Reference
The REFORM Vision ……
"State governments have the necessary organizational structures, analytical tools
and decision-making processes, information sources and trained staff that enable
them to make better informed choices on a transparent and accountable basis
with respect to state public finances. Subsequently, this capacity is institutionalized
into the mainstream of state government practices to ensure the sustainability
of the effort."
The Rationale:
The starting point of the USAID/India Fiscal Management Reform Project (REFORM) is that the fiscal
distress seen at the state level in early 2000 was, to a large extent, a result of the systemic weaknesses
in state fiscal management (Box 1), including within the key departments of finance and planning. This
prevented forward-looking fiscal decision-making grounded in careful analysis and leading to good
governance. In short, the majority of Indian states needed better analytical capacity backed by
appropriate institutional infrastructure to formulate and implement good fiscal policy.
Box 1: Systemic Weaknesses in Fiscal Management
The systemic weaknesses found in fiscal management at the state level may be described as "inadequate":
(cid:127) Technical know-how in modern fiscal management practices.
(cid:127) Comprehensive, current information databases.
(cid:127) Robust analytical tools and techniques that correspond to internationally accepted standards.
(cid:127) Integrated management information systems and systematic approaches to the fiscal decision-making processes.
(cid:127) Transparent, consistent and institutionalized fiscal practices, reporting systems, and structures that promote the
desired accountability for the effective and efficient mobilization, allocation and utilization of public funds.
Currently, therefore, many Indian states do not have the appropriate capacity1 and the necessary
practices2 to perform relevant, economic and statistical analyses (Box 2).
Box 2: Consequence of Systemic Weaknesses
As a consequence of the systemic weaknesses, most Indian states, for example, have inadequate fiscal management
expertise and institutional infrastructure to perform revenue and expenditure projections and distributional analysis,
assess multiplier and elasticity effects, and run policy simulation and develop alternative policy scenarios. This
includes their inability to establish strong links between budgetary outlays and program outcomes for efficient and
effective delivery of results, establish debt and investment frameworks to improve their quality and profile, and
conduct rigorous project appraisals to ensure selection of socio-economically viable projects.
1 i.e., fiscal management skill-sets, tools and techniques and organizational structures.
2 i.e., consistent, transparent and accountable processes.
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USAID/India REFORM Project Compendium with Practitioners’ Guide: State Fiscal Management Reform
Given increasing decentralization and the continued significance of public finance in India, many state
governments will be required to assume greater responsibility for the design and implementation of
their own development strategies. As a result, their ability to strike the right balance between fiscal
policy, broad-based growth, and financial sustainability will be fundamental to promoting and sustaining
development across every sector of the state economy and, consequently, the nation as a whole,
especially in light of the new challenges posed by the opening-up of the Indian economy and state
finances getting substantially linked with market forces.
The Objective:
As a response, USAID/India's REFORM project (September 2003 - 2008) was designed to provide practical
hands-on "how to" skills transferal, based on international best practices, to strengthen fiscal analytical
expertise, structures and systems of selected Indian states. The objective was to help these states to
better plan and manage their public finances, especially in the light of the challenges they faced
following the 2000-01 fiscal crisis. Jharkhand, Karnataka, and Uttarakhand were identified as the three
REFORM partner states.
The specific objectives of REFORM were:
1) To improve "informed" decision-making within state (sub-national) governments;
2) To ensure that decision-making processes followed consistent and transparent principles, leading
to greater accountability; and,
3) To sustain the efforts by institutionalizing and mainstreaming the capacity built.
REFORM, therefore, was not designed to advise or guide Indian state governments
on specific policy decisions but rather to enhance their ability to evaluate and to
address crucial policy choices and implementation options, based on an
understanding of the environment - i.e., its potentials, its limits and its perceived
needs.3
Terms of Reference:
Based on discussions with the respective partner states, the REFORM terms of reference were to help
enhance their fiscal management capacity in the following four (4) areas:
(cid:127) Revenue Management Capacity – To help states undertake detailed analysis of revenue projections
and the implications of alternative tax policies and revenue choices. Interventions included:
Introduction of improved revenue forecasting methodologies, an Input-Output (I-O) framework
and macro-economic database. A practitioners’ guide was also developed along with hands-on
training to build state capacity in the above areas.
3 Capacity-building as defined by the United Nations Center for Education and Development, (Agenda 21's definition, Chapter 37,
UNCED, 1992).
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Volume V: The Project Appraisal Practitioners’ Guide
(cid:127) Expenditure Planning and Management Capacity – To help states improve quality and accountability
of expenditures. Interventions included: Introduction of an outlays to outcomes budgeting
methodology (i.e., program performance budgeting (PPB)) to help states’ prioritise the allocation of
public funds, improve program planning, monitoring and evaluation, increase transparency,
accountability, and consequently, the quality of public services delivery. A practitioners’ guide with
related software was developed and delivered. Structured/hands-on training was provided across
all levels and in almost all departments. Detailed public procurement guidelines were also
developed for two out of the three states.
(cid:127) Debt and Investment Management Capacity – To help states to better document, track, analyze, and
manage debt, contingent liabilities and investments, in the medium to long term. Interventions
included structured and hands-on training as well as introduction of practical guides (with reporting
templates). Comprehensive debt datasets were developed and migrated into a database using the
Commonwealth Secretariat-Debt Recording and Management System (CS-DRMS) software.
(cid:127) Project Appraisal Capacity – To help states improve appraisal and selection of socio-economically
viable capital projects. Interventions included: Training in the Harberger project appraisal technique
which involves financial, economic, social and stakeholders’ risks analysis. A Project Appraisal
practitioners’ guide with sector-specific guidelines was also developed and introduced to serve as
a desk reference.
To sustain and mainstream the above fiscal management reform efforts, four (4) institutional structures
were designed and supported:
(cid:127) The Fiscal Policy Analysis Cell (FPAC) – To help states institutionalize continuous analysis of the
implications of policies, procedures and regulatory decisions on the fiscal health of the states. An
analytic unit supported by a team of dedicated and trained staff, with access to relevant and quality
data, tools and techniques was established.
(cid:127) The Debt and Investment Management Cell (DMIC) –To help states identify, generate, and analyze
data and support more effective and prudent debt/investment decision-making. Similar to the
FPAC, an analytic unit supported by a team of dedicated and trained staff, with access to relevant and
quality data, tools and techniques was established.
(cid:127) Project Unit (PU) – To help states offer a comprehensive range of services from project appraisal and
monitoring, to final end-of-project evaluation, a project unit was designed that would also help
promote public-private partnerships (PPPs).
(cid:127) Administrative Training Institutes (ATIs) and State Institutes for Rural Development (SIRDs) – To help
state civil service training institutes (ATIs and SIRDs) train entry level and mid-career state civil
servants in fiscal planning and management, training courses; training materials and reference guides
were developed and provided.
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USAID/India REFORM Project Compendium with Practitioners’ Guide: State Fiscal Management Reform
The REFORM project may therefore be considered as four-by-four (4x4), consisting of four intervention
areas (expenditure, revenue, project appraisal, and debt and investment management) supported by
four institutional structures (FPAC, DMIC, PUs, and ATIs/SIRDs).
REFORM: Four-by-Four
Fiscal Policy Analysis Cell (FPAC)
Debt & Investment Mgt Cell (DIMC)
Improved Debt and
Improved Revenue Improved Expenditure Investment Management:
Management: Planning & Management: Improved Project (cid:127) Management of:
(cid:127) Revenue Forecasting (cid:127) Program Appraisal: – Debt
(cid:127) Macro-Econ Database Performance Budgets (cid:127) Project Appraisal – Contingent Liability
(cid:127) Input-Out Tables (cid:127) Procurement (cid:127) Project Financing – Investment
(cid:127) Tax Analysis Guidelines – Credit Worthiness
Guidelines
Project Units (PU)
State Administrative Training Institutes (ATIs)
The Final Products:
A project Compendium with Practitioners’ Guides was developed under REFORM to assist state
governments to implement necessary fiscal management practices in the areas of forecasting,
budgeting, tracking of debt and investment, and improving project appraisal techniques. Specifically,
these Guides were developed to function both as desk references for government officers earlier
trained under REFORM as well as training tools for strengthening capacity of new officers. For officers
not earlier exposed to the new fiscal practices, the Guides will need to be supplemented with additional
technical support or guidance.
The Compendium also includes a variety of case studies including the experiences of the three REFORM
partner states – Jharkhand, Karnataka, and Uttarakhand – with respect to the implementing the new
practices under REFORM.
“Fiscal Watch”, a virtual resource center, has also been designed and launched to provide a dedicated
site to promote greater thinking, collaboration, discussions, best practices and, exchange information
and post current data on the fiscal health (and related issues) of Indian states and India. The key feature
of “Fiscal Watch” is the dedicated discussion forums to facilitate interaction between fiscal practitioners,
both Indian and international (e.g., to provide a platform for finance secretaries, budget officers, revenue
officials, and researchers). In addition, there are numerous hyperlinks to related online resources such
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Volume V: The Project Appraisal Practitioners’ Guide
as government websites, professional societies, consultancy opportunities, and training and education
providers.
To Conclude:
Despite spending large sums of money, governments and donors in many countries have been limited
in their ability to develop successful, sustainable programs due to the inadequacy of fiscal management
expertise and infrastructure. Such inadequacies prevent the productive absorption of funds. They also
prevent states from equipping themselves with the necessary fiscal shock absorbers to cushion them
against unexpected fiscal challenges - some arising out of discretionary, unplanned decision-making
and others as a result of increased globalization. More often than not, these unexpected challenges can
and have served as the tipping points, seriously affecting the fiscal condition of even fiscally healthy
states, as seen in India especially post 1995-96.
However, given the increasing recognition by state governments of the role of and need for improved
fiscal management capacity in Indian states' development process, and indeed for India as a nation, we
are confident that endeavors such REFORM will be sustained and further strengthened.
Madhumita Gupta, Team Leader REFORM, USAID/India
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Volume V: The Project Appraisal Practitioners’ Guide
Table of Contents
Preface 15
Why Develop this Guidebook? 15
What is the Guidebook? 15
When to use the Guidebook? 15
Who should use the Guidebook? 15
How to use the Guidebook? 16
Section I: Project Appraisal Methodology 17
Part 1: Introduction 17
Purpose of the Project Appraisal Guidebook 17
The Targeted Users of the Guidebook 17
What is a Project? 17
Project as an “Incremental” Activity 17
Uncertainty and Contractual Arrangements 17
An Overview of the Guidebook 18
Part 2: Project Development and Approval Cycle 19
Project Development Cycle 19
Projects and State Development Plans 19
Concept or Identification Phase 20
Action Points in Project Identification 20
Problems in Project Identification 20
Sources of Project Identification 21
Preparation Phase 21
Policies and Procedures 21
Technical and Institutional Alternatives 21
Prefeasibility Phase 22
Marketing or Demand Module 22
Technical or Engineering Module 23
Environmental Module 23
Manpower and Administrative Support Module 23
Institutional Module 24
Financial Module 24
Economic Module 25
Social Appraisal or Distributive and Basic Needs Analysis 25
Nature of Distributive Analysis 26
Nature of Basic Needs Analysis 26
Use of Secondary Data in the Prefeasibility Phase 26
Feasibility Study and Financing Negotiations 26
Detailed Design 27
Project Implementation 27
Ex Post Appraisal and Evaluation 28
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USAID/India REFORM Project Compendium with Practitioners’ Guide: State Fiscal Management Reform
Part 3: Project Evaluation Framework 30
Integrated Project Analysis 30
Financial Analysis 31
Investment Plan 32
Operating Plan 32
Financing Plan 32
Financial Attractiveness 32
Economic Analysis 33
Distributional Analysis 34
Risk Analysis 34
Part 4: Project Evaluation Framework: Schematic Diagram 36
Basic Facts 36
Project Outcomes 36
Part 5: Project Evaluation Criteria 39
Introduction 39
Time Dimension of a Project 39
Time Value of Money 39
Compounding 39
Discounting 40
The Net Present Value (NPV) Criterion 40
Internal Rate of Return (IRR) Criterion 42
Problems with the IRR Criterion 42
Benefit-cost Ratio (BCR) Criterion 46
The BCR Criterion 46
Part 6: The Financial Analysis of a Project 48
Introduction 48
Why a Financial Appraisal for a Public Sector Project? 48
Financial Sustainability 48
Distributional Impacts 49
Profitability 49
Financial Cash Flows: Concepts, Principles and Conventions 49
What is a Financial Cash Flow Statement? 49
Components of a Cash Flow Statement 50
Investment Plan 52
Data and Data Breakdown 52
Opportunity Cost of Existing Assets 52
Investment Financing 55
Operating Plan 55
Adjustment of Sales 55
Adjustment of Purchases 57
Adjustment for Changes in Cash Balance 59
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