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Suppose that you were recruited as an economic and financial analysis consultant for proposed

ADB funded project on 45 km rural road in Gorkha district connecting Barpak with district

headquarter (Gorkha Bazar). Outline your plan on following.

a) Identify the fixed investment, annual operating cost and gross revenue of this project.

b) Collect the price information of the project.

c) Undertake financial analysis and economic analysis of this project.

d) Financial and economic approach to capture risk on project implementation, and mitigation

plan?

Introduction

The project involves financial and economic analysis for road construction connecting Barpak in

Gorkha district with its district headquarter, Gorkha Bazar. This construction of 45 km rural road

will provide all-year road access to the rural communities in Gorkha lying within the proximity

of Barpak and Gorkha Bazar. After the devastating earthquake on April, 2015, the village was

left with less than 10 homes standing out of1200 homes and hence this project to facilitate road

connection between Barpak and Gorkha Bazar would reinforce the recovery phase Barpak

district is going through. Road access between Barpak and Gorkha Bazar aims to provide

convenience for the local people in reaching the district headquarter as well as increase value

addition for income generating activities of people like agricultural production and directs local

market towards commercialization by increasing access to the market. The project ultimately

extends to upgrade living standard of people by augmented access to connectivity and market

development and hence aims to reduce poverty in the long run.


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Financial Analysis

The cost for the project would be as follows:

 Cost of constructing new roads

 Cost related to management

 Cost for earthwork

 Cost for designing pavement

 Cost of upgrading of road

 Cost of structures, such as retaining wall, longitudinal drains, cross drainage structure

 Cost of bridges

 Cost of bio engineering for slope protection, traffic safety, road furniture

 Cost of feasibility study

 Cost of environmental study and environmental mitigation works

S. No. Details Amount (NRs.)

1 General Item 42,30,710

2 Site Clearance 5,21,575

3 Earthwork 1,55,32,195

4 Pavement Work 12,95,14,891

5 Structures 4,69,33,083

6 Road Furniture and Traffic safety measures 2,83,95,460

7 Environmental Mitigation (including Bio- 1,11,50,029

engineering)

8 Day works 26,80,125


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9 Relocation of services 50,00,000

A Subtotal without contingencies and VAT 24,39,58,068

A Physical Contingency @10% 2,43,95,806

B Price Contingencies @10% 2,43,95,806

Subtotal with contingencies and without VAT 29,27,49,680

VAT @13% of a 3,17,14,548

Grand total including VAT for 7.5 km 32,44,64,228

B Cost per km 4,32,61,897

Cost for 45km (b * 45) 1,94,67,85,365

Cost of land & house 83,484,900

Total project cost for 45km 2,03,02,70,265

For the revenue, gross revenue will be collected from various direct and indirect sources which is

explained briefly below:

- Trade of agricultural products: Road construction will increase access for local

agricultural products to a wider market. With Gorkha Bazar being the headquarter of

Gorkha district, the connection will facilitate agriculture and trading goods from Barpak

to a larger mass.

- Tourism: With access to transportation from headquarter, the tourism at Barpak can be

enhanced. Local communities can earn revenue from more traffic of tourists flow into

Barpak.
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In addition, the construction of roads also brings non-monetary benefits. With road access,

there is improvement in the health of people as they have access to better health facilities and

at the same time, they don’t have to go through the polluted and dusty roads. The road

construction further decreases the chances for mortality and accidents. It increases the

convenience for people and saves time as well as energy of people to reach the district

headquarter.

Price information

The projected price details for the project would be as follows:

Sn Description Unit Rate in

NRs 000

1 Feasibility Study Km 7

2 Detailed Engineering Survey, Roads Km 48

3 Environment Study Km 15

4 Detailed Engineering Survey, Bridges No. 800

5 Geo-Technical Studies No. 500

6 Construction Survey Km 20

7 Earthwork

7.a Cutting Cum 0.175

7.b Filling Cum 0.15


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8 Retaining Structures including Chutes Cascade etc.

8.a Gabion Cum 3.6

8.b RRM Cum 8

8.c Dry Stone Cum 2.9

8.d RCC Cum 20

8.e Rock/Soil Anchoring and Dowelling Cum 15

9 Bridge Construction Rm 1000

10 Pavement Works

10.a Sub-Grade, Capping and Sub-base Sqm 0.4

10.b Base Sqm 0.6

10.c DBST Sqm 0.3

10.d RCC Pavement Sqm 1

11 Road Furniture and Traffic Safety

11.a Traffic Sign No. 3.5

11.b KM Post No. 7

11.c Safety Barrier Rm 7

11.d Guard Rail Rm 20

11.e Information Board No 5


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Sub Total 1

12 Mis Work

12.a Bioengineering Works and Environment Mitigation Works (3%

of Sub Total 1)

12.b Maintenance during Construction (3% of Sub Total 2)

Sub Total 2 (Sub Total 1+ 12. a+12.b)

12.c Administration Expenditure (5% of Sub Total 2)

Grand Total (Sub Total 2 + 12.c)

Economic analysis

Performing economic analysis ensures that this project of road construction is efficiently using

the scarce resources and the investment made on the rural road connecting Barpak and Gorkha

Bazar will bring benefits to the people and result to overall welfare. Projects should be

economically viable and for this, there should be:

- Use of least-cost ways to reach to the outcome

-Economic surplus above the opportunity cost such that the opportunity cost depicts that the

resources used in the road construction can be used in other tasks

- Finally, there should be availability of funds and resources to make the project happen. The

distribution of cost and benefits within the project further should be aligned with the

development objectives and consider the environmental effects.


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Economic analysis for the project of constructing 45 km rural road connecting Barpak and

Gorkha Bazar would be as follows:

Technical feasibility:

This test the feasibility of the technical aspects for the project. Human resources like engineers,

working labors for the designing, structuring and construction of roads are available. For the

construction of the roads machineries required can be leased and used. Hence, the project is

technically feasible. For being more technically sound, the road made should last long being

adaptive to climates and sustainable in the long run.

Financial attractiveness:

Cost of the system:

a. Maintenance costs:

 Regular

 Emergency

b. Variable cost schedule

c. Revenue:

If the revenue exceeds the costs then the project is financially attractive.

Social acceptability:

Social acceptability as this project of road construction arrives as positive impact for the people

living in Gorkha. After the earthquake, Barpak has been in the recovery phase and hence access

to roads that connects Barpak to the district headquarter comes as a reinforcement to speed up
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the recovery. People can now easily visit the headquarters for any activities and they have access

to better commercial market to promote their local products and earn income. The road

construction comes as connectivity for people to have better access to needs as well as amenities

like education, health and businesses. The project uplifts the standard of the people and benefits

the society in different aspects like economic, social, cultural etc. Due to these positive impacts,

the project is socially acceptable.

Economic Viability:

Access of road will create value addition through better access to education and commercial

transactions. Tourism can be enhanced as the availability of roads can increase the traffic of

visiting tourists in the village. Living standard of people can be uplifted as they get access to

resources in less time. In the long run, poverty can be reduced. Considering all these factors, we

can say that the project is economically viable.

Environmentally impact:

The project should be environment friendly and should preserve the surroundings around. During

road construction, there are chances of cutting down of trees and other environmental properties.

The road construction should be directed in such way that the environment is not affected badly.

Standards of IEE and EIA should be followed.

Institutional:

Participation and support from local communities is a pivotal factor for the project to happen.

For the road construction, locals should be able to show their willingness and address the project

as their own. Their opinions should be valued through interviews and discussions and the sense

of belongingness should be present.


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Financial and economic approach to capture risk on project implementation, and

mitigation plan

The achievement of the project will bring different positive aspect such as:

- Connection of road network from rural area to the district headquarter

- Development of social and cultural environment of the district

- Improvement in the economical condition through agricultural development, tourism and

other commercial activities

Nevertheless, the project implementation can encounter various risks like uncertainties

requiring additional resources, equipment and funds and these should be traced through

approaches like BEP analysis. To ensure the project is economically feasible there should be

study on factors like EIRR, MPV and BCR which should be positive for all sections of road.

Mitigation plan reduces the chances of risk to occur or reduces the effects that risks can

create. Mitigation plan includes the following approaches:

- Finding out the root causes of risks that need to be identified and quantified in earlier

stages of risk management process

- Evaluation of risk interaction and common causes

- Identification of alternative mitigation strategies, methods and tools like contracting for

each risk

- Assessment and choosing priorities on mitigation alternatives

- Selection and allocation of resources for specific risk mitigation alternatives

- Communication of planning results to all project participants for implementation.


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For instance, to cope with the environment mitigation, measures can be used in three phases of

design phase, construction phase as well as operation and maintenance phase. In design phase,

for example, route selection such that proper selection of apt road during road construction can

minimize the probability of environment degradation. Detailed survey and design can be another

option.
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References

National Research Council. 2005. The Owner's Role in Project Risk Management. Washington,

DC: The National Academies Press. Doi: https://doi.org/10.17226/11183.