31 Project Appraisal: Technical Analysis

Vishal Kumar

1. Learning Outcome

After completing this module, you will be able to:

Understand the meaning and concept technical analysis
Understand the techniques to be applied for technical analysis
Know about various aspects of study under technical appraisal

2. Introduction and Concept: Project Appraisal is a process of detailed examination of several aspects to a given project before recommending the same. After market and demand analysis, there is need for further suitability of the project as to whether it is feasible or viable in other dimensions so that the project idea is put to acid test of cold facts before it is accepted for formulation and implementations. So there is need for feasibility studies which include Market feasibility, Technical feasibility, Economic feasibility, Managerial feasibility and Commercial feasibility. Therefore, feasibility study is the process of investigating a problem and finding a solution in depth to determine its economic viability and worth of development. Project feasibility is a test where prima-facie viability of the investment is evaluated.

Technical analysis seeks to determine whether the prerequisites for successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size etc. it is carried out to measure whether the project is technically sound and viable. Technical analysis of a product is very essential to ensure that necessary physical facilities required for production will be sufficient and the best possible alternative is selected to procure them. A technical analysis should review the techniques to be applied and should incorporate:

A description of the product, including specification relating to its physical, mechanical and chemical properties, as well as the uses of the product.
A description of the selected manufacturing process, showing detailed flow charts and presenting alternative processes which may have been considered and the justification for the adoption of the selected process.
A determination of the plant size and production schedule.
Selection of machinery and equipment.
Identification of plants location and as assessment of its desirability in terms of its distance from raw material sources and markets.
A design of the plant layout and an estimate of the cost of the erection of the proposed buildings and land improvements.
A study of the availability of raw materials and utilities including a description of physical and chemical properties, quantities needed, current and prospective costs, terms of payment, location of sources of supply, and continuity of supply.
An estimate of labour requirements, including a detailed break-down of direct and indirect labour requirement, and the supervision required for the manufacture of the product.
A determination of the type and quantity of waste to be disposed of, together with a description of the waste method, its costs, and the necessary clearance from proper authorizes.
An estimate of the production cost of the product.

3. Technical Appraisal: Technical feasibility assesses the technical viability for coming to a conclusion as to whether it fulfills the expected norms or not. Technical appraisal involves the critical study of the following aspects:

1. Material inputs and utilities: This aspect is concerned with defining the materials and utilities required, specifying their properties in detail, and setting up their supply programme. Material inputs and utilities may be classified into four broad categories such as (a) raw-materials (b) processed industrial materials and components (c) auxiliary materials and factories supplies and (d) utilities.

a) Raw-materials: It may be full or semi processed. It can be further grouped into (a) agricultural products (b) Mineral products (c) Livestock and forest products (d) Marine products.

b) Processed industrial material and components: processed industrial materials and components represent important inputs for a number of industries that includes base metals, semi-processed materials, manufactured parts, components and sub-assemblies. To get authentic and sufficient information, answer of the following questions must be sought: what are their properties-physical-mechanical-chemical and electrical? What are the domestic sources? What are foreign sources subject to limit laid down by authorities? Extent of dependability on supplies and suppliers? What has been the price trend in the past? What will be the future trend?

c) Auxiliary materials and factories supplies: Any manufacturing project needs variety of auxiliary materials and factory supplies like chemicals, additives, packaging materials, paints, varnishes, oil, grease, cleaning materials, consumable stores in addition the first two categories of materials.

d) Utilities: Utilities stand for power, water, steam, fuel, gas which play a constructive role in converting raw materials into end products. Correct assessment of these in terms of location, technology, plant capacity and the like is a must. These utilities turn critical at times and become limiting factor in achieving highest level of efficiency or lowest level of cost.

2. Manufacturing Process/Technology: The methodology used in converting materials into final products in known as a technology. For manufacturing a product there are alternative technologies. To manufacture steel either open health process or Bossemer process can be used that represents a technology. In making cement the possible process are wet or dry. These technologies always changing from good to better and from better to best. Even, what is today the best can be supposed in case better than the best is made available. Research and development efforts make possible the best because even the very best can be improved upon a period of time. Feasibility study especially technical is to focus its attention on the significant aspects of choice of technology, acquisition of technology and the appropriateness of the technology.

a) Choice of technology: The choice of technology or technical knowhow is influenced by many variables. Some of these are given below:

Plant capacity: Plant capacity and manufacturing technology are closely related with one another. In order to meet a given plant capacity requirement only a specific production technology may be viable.
Investment outlay and production cost: The impact of alternative technologies on invest expenditure and production cost should be carefully assessed over a period of time. As we all know cost and technology are closely related in that the cost and quality is based on the technology and that is based on its cost.
Major inputs: Basic inputs play significant role in choosing a manufacturing technology. For example, in manufacturing of cement the quality of lime stone decides whether the manufacturing unit should go in for ‘Wet’ or ‘Dry’ processing.
Proof of success: The technology adopted must well be proven by its success for use by other units. That is, a latest technology may not be always the best. One which is tried, tested, and trusted by successful units in the line is more acceptable.
Latest advancement: The technology adopted is one which is the latest or one which is adaptable for updating easily with least cost and time.
The product mix: Product mix stands for the main products, co-products and by products that are resulting by use of a particular technology.
Ease of absorption: Technology, however, latest and effective, has no meaning unless it is easier to be absorbed by the company. Very often it so happens that high-level technology may not easily percolating to the absorbing firm due to some reason or reasons.

b) Acquiring technology: If technology is available openly, then the detailed information can be obtained even at feasibility stage. In case the know-how available with the owner, then this step-that is-evaluation of process, can altogether be eliminated. And if the know-how is not available with the owner, it has to be acquired from outside sources such as foreign collaborators, consultancy organizations, machinery suppliers, promoter’s knowledge and experience and recruitment of suitable personnel. The acquisition of technology from some other enterprise may be possible through:

Technology Licensing: This is the most popular way of acquiring technology. Under this arrangement, the technology license gives the licensee the right to use the patented technology and get the concerned know how on a mutually agreed basis. The supplier of technology generally provides a technology package which may consist of some components which are not essential. Therefore, it becomes essential to break the package into component parts such as technology proper, engineering services, supply of intermediate products, and supply of equipment by the licensor, use of a trade name, among other things. Every effort should be made to acquire only the essential and matching components of the technology package. The contract for technology licensing should be careful with regard to Definition of technology to be acquired, Cost of technology licensing, Guarantee provided by the licensor, Duration of the technology licensing and Purchase of intermediate products, components and other related inputs.
Outright purchase of technology: This alternative is most appropriate when:

A. There is no possibility of significant improvement in technology in the foreseeable future.

B. There is hardly any need for technological support from the seller of the technology.

Joint venture arrangement: This is also very popular method under which the supplier of the technology may participate technically as well as financially in the project. Financial participation is normally in the form of equity holding. Experts are of the opinion that financial participation is likely to strengthen the motivation of technology supplier to transfer improvements without hesitation.

c) Appropriateness of Technology: Appropriate technology means for those methods of production or process of production which are most fitting to the local, economic, social, cultural and environmental conditions. Technology should be considered appropriate if it satisfy the following questions:

Whether the technology uses the local raw materials?
Whether the technology employs the services of local labour force?
Whether the goods and services produced cater to the basic needs?
Whether the technology protects and maintains the ecological balance?
Whether the technology is in harmony with the social and cultural values of the area?

3. Product Mix: The choice of product mix is guided by market requirement. Variations in size and quality of products are aimed here at satisfying a broad range of customers. It enables a company to expand its market and enjoy higher profitability. There should be a degree of flexibility in the product mix to response as to changing market conditions and thereby enhancing the power of the firm to survive and grow under different situations. Product mix is so designed as to meet the requirements of target market or segment or segments of the entire market for the companies, products and services. All other mixes namely price, place and promotion mix go in consonance in a congruous way in requirements of a product mix. For example, a ready garment manufacturer of ladies suits will have a wide range of items of size and quality to suit individual differences in customers both physical and mental. Wide range of sizes, patterns and quality play significant role in enabling to garment maker to earn good profit through higher profitability. Thus each company comes out with different sizes, different colours, variation in inputs, packing and promotion package. These varieties meet the requirements of poor, middle and rich class. The idea is to arrive at maximum profit.

4. Plant capacity or production capacity: Plant capacity or Production capacity refers to the number of units that can be manufactured during a given period. According to experts “Plant capacity is defined in two ways namely, feasible normal capacity and normal maximum capacity”. The feasible normal capacity stands for the capacity attainable under normal working conditions. This is established on the basis of installed capacity, technical conditions of the plant, normal stoppages, down-time for maintenance and tool changes, holidays and shift patterns. Whereas, normal maximum capacity is the capacity which is technically attainable and this normally corresponds to the installed capacity guaranteed by the supplier of the plant.

5. Manpower requirement: Requirement of manpower of different skills, both for construction stage and operational stage, should be assessed based on phasing of project execution and completion. The requirement of people should be assessed category, operation and function wise. The assistance of Consultancy Company for recruitment of staff with desired skills and qualification may be sought, if needed. The object should be to ensure the availability of adequate manpower for future operation and to avoid over staffing at any stage of project execution. Adequate provision for fund for the training of key personnel with a time bound programme should be estimated beforehand. The introduction of scheme of productivity- linked incentive/bonus may be kept in mind.

6. Plant location and site: Location refers to a fairly broad area like city, an industrial zone, or a coastal zone and site refer to a specific piece of land where project would be set up. Plant location includes selection of a requisite region, credible community and suitable site. Selection of region is a broad decision. For selection of proper site, a survey may be conducted, and both monetary and non-monetary factors should be looked into. The choice of location influenced by a variety of considerations such as raw material supplies, proximity of supplies, communication and transport facilities, manpower, labour laws and government policy taxes and fees, etc.

After selecting of region, next step is to selection of a particular community or locality. The selection of a community or locality calls for rigorous factor like quality and quantity of labour force, banking and credit facilities, local taxes, rents, rates, and insurance charges, political stability, extent of state assistance and many more.

The final round selection is selection of site or space where industrial plant is going to be located. The important factors that decide the choice of suitable site are price of land, the type of choice, ease of waste disposal, people’s attitude, existence of religious and social institutions, etc.Taking all these factors, the most advantageous location is that at which the cost of gathering material and fabricating it plus the cost of distributing the finished product to the consumer is the least.

7. Machinery and equipments: It is the technology that determines the exact requirement of machineries and plant capacity. It is also influenced by the type of project. For a process, industrial plants, say petro chemical unit or pharmaceutical unit, the machineries and equipment required should be such that the various stages of manufacture are matched well. To determine the kind of machinery and equipment required for a manufacturing industrial plants, the following procedure is generally followed:

Estimate the likely levels of production over given period of time.
Define various machines and operations
Calculate machine hours required for each type of operation
Select machineries and equipments required for each function.

The equipment required for the project may be classified into the following types:

Mechanical equipments,
Plant or process equipments,
Electrical equipments,
Instruments,
Controls,
Internal transportation system, and
Earthmoving and construction equipment and others.

While selecting machines and equipments some possible constraints should be kept in mind like-shortfall of electricity, lack of cooperation on the part of employees when they are meant to advanced technological or numerical control of machines, hurdles in moving equipment or divided plant to remote places.

8. Structure and civil work: For the proper execution of civil work in the proposed project, the essential steps are:

Defining scope of work with respect to site preparation, construction of roads and buildings in factory and residential areas and construction of sewerage line and other civil works
Preparing cost estimates
Selecting agencies to be hired for construction Preparing plans, charts and drawings.
Civil work can be further divided:

a) Site preparation and Development: This involve a set of activities namely, grading and levelling of site, demolition and removal of the existing unwanted structures, relocation of existing pipelines, cables roads power-lines, reclamation of swamps and draining and removal of stagnant water, connection of the utilities from the site to the public net-work, electric power—both high-tension and low-tension, water for drinking and various industrial purposes, communications-telephone, telex, roadways, railways and other activities of site preparation and development.

b) Buildings and Structures: It includes factory or process buildings, ancillary buildings required for stores, warehouses, laboratories, utility supply centers, maintenance services and others, administrative buildings, staff welfare buildings, cafeteria, medical centre, gymkhana facilities, recreation buildings and residential buildings.

c) Outdoor works: The outdoor works involves

Supplies and distribution of utilities such as water, electricity, steam, gas, communication and the like
Handing and treatment of emission, wastage and effluents
Transportation and traffic arrangements such as roads, rail tracks, paths , parking areas, sheds, garages, traffic signals and so on
Outdoor lighting
Landscaping and
Enclosures and supervision that include boundary wall, fencing barriers, gates doors, security posts, sewerage openings and the like.

9. Project charts and layouts: When data collected on major dimension of project that is on market size, plant capacity, production technology, machines and equipments, building and civil works, then project charts and layouts are prepared. These charts and layout define the scope of the project and provide the basis for detailed project engineering and estimation of investment and production costs. General functional layout, transport, utility consumption, communication, organization, plant material flow and production line diagram are the major charts and layouts.

General functional layout: It shows the general relationship between equipments, building and civil work.
Utility consumption diagram: It shows the principal consumption points of utilities and their required qualities and quanties.
Transport layouts: It shows the distances and means of transport outside the production line.
Communication layouts: It shows how the various parts of the project will be connected with telephone, telex, intercom, and fax etc.
Plant layouts: It shows the physical layout of the factory, equipments dimensions, provision for material handling, level of computerization, nature of process etc. due consideration should be given while preparing a plant layouts to the followings:

Consistency with production technology
Effective use of space
Flexibility to take care future changes
Smooth flow of goods from one work station to another or one stage to another
Safety to the work force
Minimization of costs
Provision for better working conditions to enhance efficiency.

Material flow diagram: It shows the flow of materials, utilities intermediate products, final products, by-products and emissions.
Production line diagrams: It shows how the production would progress along with the key information for main equipments.
Organizational layouts: It shows the organizational set up of the project along with information on personnel required for various departments and their inter-relationship even reaching grass-root level of each work position.

Work schedule: Work schedule is the plan of the work relating to installation and initial operation. The purpose of the work schedule is to:

Anticipate problems likely to arise during the installation phase and suggest possible means for coping with them.
Establish the phasing of investments taking into account the availability of finances.
Develop a plan of operations covering the initial period

So in order to avoid the possible losses arising out of idle-plant capacity or idle capacity and the determination of stock of material, work schedule should be drawn in detail with clarity and ground realities. This help in making use of available inputs by adjusting plant capacity utilization or at least commissioning to start with.

Summary: Project appraisal is the assessment of project in terms of economic, social, commercial, ecological and financial viability. Technical feasibility assesses the technical viability for coming to a conclusion as to whether it fulfills the expected norms or not. Technical analysis seeks to determine whether the prerequisites for successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size etc. It is carried out to measure whether the project is technically sound and viable. Technical analysis of a project is very essential to ensure that necessary physical facilities required for production will be sufficient and the best possible alternative is selected to procure them. So, technical appraisal plays a very crucial role in acceptance or rejection of a project because a project which is not technical viable will not be financed by the lending institution.

Learn More

Suggested Readings:

Projects: Planning, Analysis, Selection, Implementation & Review, Prasanna Chandra, Tata McGraw-Hill Publishing
Project Management: A Managerial Approach, Jack R. Meredith, Wiley Publications
Project Management: A Development Perspective, Goyal B.B., Deep & Deep Publications.
Project Planning and Control, Mohsin M., Vikas Publishing House.
Project Management, Chaudhary, S., Tata Mc Graw Hill Publications.
Project Management, Maylor, Pearson Education
United Nations Industrial Development Organization, Guide to Practical Project Appraisal–Social Benefit Cost Analysis in Developing Countries, Oxford & IBH.

Points to ponder:

Project Appraisal:- Project appraisal is a process whereby the entrepreneur makes an objective and independent assessment of the various aspects of an investment preposition of a project idea for determining its total impact and also its liability.
Technical analysis: Technical analysis seeks to determine whether the prerequisites for successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size etc. it is carried out to measure whether the project is technically sound and viable.
Technology Licensing: This is the most popular way of acquiring technology. Under this arrangement, the technology license gives the licensee the right to use the patented technology and get the concerned know how on a mutually agreed basis.
Work schedule: Work schedule is the plan of the work relating to installation and initial operation. The purpose of the work schedule is to:

Anticipate problems likely to arise during the installation phase and suggest possible means for coping with them.
Establish the phasing of investments taking into account the availability of finances.
Develop a plan of operations covering the initial period