CC16

Entrepreneurship and Project Management

Module 3
Cc
Concept of Project: Generation and screening of project idea-- Project formulation- market
demand and situation analysis-- technical analysis; financial analysis, analysis of project risk,
firm risk and market risk, cost benefit analysis, social cost benefit analysis—Environmental
appraisal of projects– stress on environment--a project report preparation..

Students please note that Generations and Screening of project idea, Project formulation by
performing Market demand and situational analysis and Technical analysis are topics already
covered in Module 2. Hence that is not repeated here and this notes starts with definition of few
terms/ concepts in Project management and directly starts from Financial Analysis.

Concept of Project

(Please memorize the following definitions)

Project- Projects are temporary endeavors that create unique products, services or results.
They are complex non routine and one time efforts that are constrained by time, money,
resources and performance.

Project management – Project management is the application of knowledge, skills, tools and
techniques to meet and exceed the needs and expectations of stakeholders regarding the
project.

Program- Interrelated set of projects undertaken together by organization to achieve specific

business objectives. For example- An organization undertakes a market share improvement
program to increase the market share of one of their product lines which has three interrelated
projects, namely- Launch Advertisement campaigns in social media, Organize road shows and
exhibitions in tier II cities, Introduce two variants of the existing product.

Portfolio- A set of projects not necessarily interrelated undertaken to achieve strategic business
objectives that create value addition to stakeholders. For example – In order to reduce the
working capital requirement of business various projects are undertaken to Reduction of credit
period, Reduction of Inventory, Reduction of manufacturing time. These all are totally unrelated
but work towards reducing the total

Financial Analysis

Project Appraisal starts with three basic questions

1. Can we produce the goods or services?

2. Can we sell the goods or services? and
3. Can we earn satisfactory return on investment made in the project?

The first two questions were dealt with in the earlier module by way of technical analysis and
Demand and Market analysis. In order to answer the last question we need to do a financial

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Entrepreneurship and Project Management
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appraisal. After doing the financial appraisal the socio economic appraisal and ecological
appraisal is also carried out to ensure the sustainability of the project and to generate
information to meet the statutory-regulatory requirements.

Project
Appraisal

Market Market Financial Socio Economic Ecological

Appraisal Appraisal Appraisal Appraisal Appraisal

In order to carry out the financial appraisals, a few estimates and projections are required.

1. Estimates of the project cost

2. Projection three financial statements- P&L, Cash flow statements, Balance sheet.
3. Based on the future cash flows evaluate the project proposal and select the best
proposal
Financial
Appraisal

Project Cost, Project

Project
Revenue & Investment
financing
Timing Evaluation

1. Estimation of Project cost and Revenue

a. Project cost – Project cost is the cost of all items associated with the project
which are supported by long-term funds. It is the sum of the outlays of the
following
i. Land and site development –cost of land, cost of development of land,
approach roads, compound wall, wells, bore wells etc.
ii. Buildings and civil works – Building cost for plant and administration,
Godown, warehouses, garages, sewers etc.
iii. Plant and machinery- cost of imported & indigenous (local) machinery,
cost of spare parts, foundation and installation charges.
iv. Technical know-how and engineering fees
v. Expenses on foreign technicians and training
vi. Miscellaneous fixed assets
vii. Preliminary and capital issue expenses- Cost associated with raising of
funds (capital) like brokerage, commissions, underwriting expenses,
printing postage, and advertisement.

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viii. Provisions and contingencies- Cash requirement to meet future expense
or emergencies.
ix. Initial cash losses
b. Project Revenue – Business revenue is the money you get from selling your
product or service.
Revenue ( Rs) = Sales ( Rs) – Cost of production ( Rs)
Revenue (Rs.) = Sales quantity X Selling price per unit – Production Quantity x
Cost of production per unit.
From the above it is clear that in order to estimate the revenue we need to
estimate the quantity produced and sold and also estimate the cost of production
likely to be incurred.
Estimation of Sales & Production quantity- Demand and sales forecast was done
in market analysis now production quantity has to be estimated based on the
production capacity planned in the project. It is not advisable to assume 100%
capacity utilization in the initial period of operations.
Estimation of Cost of production – Once the production quantity is estimated the
cost of production can be worked out by calculating the cost of components of
production like
Material cost- Total cost of all raw materials including transportation cost.
Labour cost- Direct labour wages
Factory overhead cost.- maintenance costs, repairs, taxes, rents, insurance on
factory assets.
In addition the working capital requirements should also be estimated and
forecasted
Profitability projection ( Or estimation of working results)
Given the sales revenue and cost of production, the next step is to prepare the
profitability projections or estimates of working results ( as they are normally
referred to by financial institutions). The figure below shows the format which can
be used for preparing the estimate of working results
Particulars Calculation
A Cost of production
B Total administrative expenses
C Total sales expenses
D Royalty and know how payable
E Total cost of production A+B+C+D
F Expected sales
G Gross profit before interest F-E
H Total financial expenses
I Depreciation
J Operating profit G-H-I
K Other income
L Preliminary expenses written off
M Profit and loss before taxation J+K-L

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N Provision for tax
O Profit after Tax ( PAT) M-N
P Dividend on Preference capital
Q Dividend on Equity capital
R Retained profits O-( P+Q)
S Net cash accrual R+I+L ( Finance specializations
should make a special attempt to
understand this very well)

Using the above format the cash flow can be easily projected. Now this yearly
cash flow of different project alternatives is used to evaluate them which will be
dealt with after the next section
2. Project Financing – To meet the cost of the project the following means of finance are
available
a. Share capital – equity and preference capital.
b. Term loans – Capital provided by banks and financial institutions
c. Debentures – same as promissory notes- two types – convertible and non-
convertible: convertible means at the end of the term these debentures would be
converted to equity share in non-convertible the principal amount will be paid
back to the investor.
d. Deferred capital – Some suppliers of plant and machinery provide a facility to pay
the cost of the equipment at a later date or in instalments this is called deferred
capital.
e. Incentive sources & miscellaneous sources- Government incentives and
promotional capital.
3. Project Investment evaluation – The final stage of financial analysis involve the
evaluation of the various project proposals to select the best alternative. The evaluation
requires information about the projected cash flows in the future time periods of all the
project proposals and the expected rate of return from the project. The cash flow
projections were already done earlier, now the expected rate of return is to be
determined. To determine the rate of return expected from the project it is necessary to
determine the cost of the capital involved for the project. To illustrate this point take a
project that costs 10 lakhs. Assume the entire project is financed by a bank loan and the
rate of interest charged by the bank is 12% per annum. This means the cost of the
project is 10 Lakhs and the cost of capital is 12% per annum. Now for the project to be
viable financial it should generate a minimum return of 12% per annum. So the expected
rate of return should be above 12% or the minimum expected return should be 12%.
Now all the projects will be evaluated based on this minimum rate of return.
Cost of capital is the cost of money used by the company to finance the project. If the
company used both the owners fund ( Equity ) and Debt taken from other financial
institution or by issue of Debentures then cost of capital = Cost of Equity + Cost of Debt.
Cost of equity is the rate of return expected by the equity shareholders and Cost of Debt
is the interest rate payable on the debt taken by the company.
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Based on the cash flow and the expected rate of return project proposals are evaluated
using various techniques like NPV, IRR, Payback period etc. to arrive at the best project
proposal financially.

So the entire financial appraisal process can be represented by the following figure

Select Best
investment
Calculate
NPV/ IRR of
Estimate all projects
Cost of
Estimate Capital
future Cash
Estimate flow
future profits
Estimate
Sales and
Estimate Production
initial Project cost
cost

Figure 1 - Step by step process of financial analysis.

RISK ANALYSIS

Risk - Risk is defined as the NEGATIVE CONSEQUENCE OF AN UNCERTAIN EFFECT. Or it

is the ADVERSE EFFECT OF UNCERTAINTY ON THE EXPECTED OUTCOME OF AN
EVENT.

Approaches to risk.

Any business is subjected to certain risk. We have estimated the future demand for the project
in Demand and market analysis and also predicted the future cash flow from business to identify
the best project. However there is always a possibility of these assumptions to go wrong and
that is the subject of Risk analysis. There are different levels of risks and based on this the
approaches to the risk also varies. The approaches to managing the risk are

1. Ignore the risk – if consequence of the risk very less or the probability of occurrence is
very less then it is best to ignore it and choose to face it when it occurs
2. Mitigate the risk – Take necessary precautions to mitigate the consequence or reduce
the probability of its occurrence
3. Remove the risk- Totally eliminate the risk so that it does not occur
4. Transfer the risk- Engage in third party insurers who would absorb the consequence of
the risk ( at least partly)

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Sources of project risk
The important sources of project risk are
1. Project specific risk – The earnings and cash flows of the project may be lower than
expected because of estimation error or due to some other factors specific project like
the quality of management.
2. Competitive risk – The earnings and cash flow of the project may be affected by the
unanticipated actions of the competitors.
3. Industry-specific risk- Unexpected technological developments and regulatory changes
that are specific to the industry to which the project belongs, will have an impact on the
earnings and cash flows of the project
4. Market risk – Unexpected changes in the macro economic factors like the GDP growth
rate, interest rate, and inflation have an impact on all projects, although in varying
degrees.
5. International risk- In the case of a foreign project, the earnings and cash flows may be
different than expected due to the exchange rate risk or political risk.
Measures of risk
Anything that has to be controlled need to be measured first. Risk refers to variability. It is
complex and multifaceted phenomenon. Popular and important measures of Risk are
 Range – It is the simplest of the measures of variations. It is the difference between the
highest and the lowest value.
 Standard Deviation- Is a statistical measure used to measure of variation of the
observed variable. The square root of SD is variance.
 Coefficient of variation- Standard deviation is not adjusted to scale. A standard deviation
figures cannot be directly compared and riskiness established. To illustrate the point a
project with 100 Lakhs investment and a SD of 4 lakhs would be concluded as more
risky than a project of 10 lakhs with a 2 lakh standard deviation. To overcome this defect
coefficient of variation is used. Coefficient of variation = SD / Mean value.
 Semi-Variance- Another problem with SD and variance is all variations from expected
both good and bad are considered for determining the measure of risk. Positive
variations cannot be construed as risks hence semi-variance is a measure which
considers only the negative variations in order to measure the riskiness of projects.
Perspectives of project risks

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Project risks can be viewed from various angles or perspectives. The project risk can be
categorized based on the perspective from which the projects are viewed. The different
perspectives are
1. Firm Risk or Standalone Risk or Corporate risk
2. Market Risk or Systematic Risk
Firm Risk or Stand-alone risks or Corporate risks – these represent the risks of a project
when viewed in isolation. They are also called the firm risks or corporate risks. This represents
the contribution of the project to the total risk of the firm. (Example- All firms have a certain risk
level, now if the firm undertakes a project, the total risk of the firm alters because of the risk
contributed by the firm. The risk contributed by the project to the overall risk of the firm is called
the Stand alone risk.)
Systematic risk or Market - this represents the project risk from the point of view of a
diversified investor. To clarify the point, these are risks that affect all projects, all businesses
alike. A diversified investor is safe from the risk in his individual investments. His one investment
may fail but others would succeed and cover up the failure in one investment. But systematic
risks affect all his investments. These are called also called the market risk or the systematic
risk. A war could be a systematic risk, or a financial crises like the subprime issue in 2008 that
pulled down all businesses.

Techniques of Risk analysis

Techniques of Risk Analysis

Analysis of Stand-alone risks Analysis of Contextual Risk

Corporate risk
Sensitivity Analysis analysis

Break even analysis

Market Risk
Analysis
Decision tree

Simulation

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Analysis of Stand-alone risk (Firm Risk)

Sensitivity Analysis- Sensitivity analysis is “What if”. What will happen if this inflation is
5%, What will happen to the project profit if dollar appreciates to 70 against rupee. Here in this
example inflation, exchange rate etc. are called the variables that affect profitability of project.
Inflation, exchange rate in this example are independent variable and profit is dependent
variable (dependent on inflation exchange rate etc.). In sensitivity analysis each independent
variable is changed and its effect on the dependent variable is analyzed. Normally in sensitivity
analysis the independent variable is changed to a pessimistic value, optimistic value and a
normal value to study the effect on the dependent variable.

Merits of Sensitivity analysis

 Shows how robust or vulnerable a project is to changes in the value of the underlying
variables
 It brings the focus on to those variables that have a significant impact on project.
 It is easy to understand.

Demerits of Sensitivity analysis

 It merely shows what happens to NPV when there is change in some variables without
providing any idea on how likely that change will be.
 In sensitivity analysis only one variable is changed but in real world variables tend to move
together.

Break even analysis- Break even analysis determines how much should be produced and sold
so that the project does not lose money. The minimum quantity at which loss can be avoided is
called the break-even point. Break-even point may be defined in accounting terms or in financial
terms.

Accounting breakeven point is the sales required to avoid loss and financial break-even point is
the level of sales that will make the NPV of the project equal to zero.

Larger the break-even point the higher will be the risk.

Decision tree Analysis

The key steps in decision tree analysis are

 Identifying the problem and alternatives

 Delineating the decision tree
 Specifying probabilities and monetary outcomes
 Evaluating various decision alternatives.

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Identifying the problem and alternatives- To understand the problem and to develop alternatives,
information from different sources- marketing research, engineering studies, economic
forecasting, financial analysis etc. has to be tapped. Imaginative effort must be made to identify
the nature of alternatives that may arise as the decision situation unfolds itself and assess the
kinds of uncertainties that lie ahead with respect to market size, market share, prices, cost
structure, availability of raw materials and power, Technology changes, competitive actions and
governmental regulations.

Delineating the decision tree- Decision tree reflects in a diagrammatic form, the nature of decision
situation in terms of alternative courses of action and chance outcomes which have been
identified in the first step of the analysis. Decision tree shows

 The decision points (also called decision forks) and alternative options available for
experimentation and action at these decision points.
 The chance points (also called chance forks) where outcomes are dependent on a chance
process and the likely outcomes at these points.

Specifying Probabilities and Monetary values for outcomes- Once the decision tree is developed
the following data have to be gathered

 Probabilities associated with each of the possible outcomes at various chance forks.
 Monetary value of each combination of decision alternative and chance outcome.

Evaluating the Alternatives- Once decision tree is developed and the data about the probabilities
and monetary values gathered, decision alternatives may be evaluated as follows:

1. Start at the right-hand end of the tree and calculate the expected monetary value at various
chance points that come first as you proceed leftward.
2. Given the expected monetary values of chance points in step 1, evaluate the alternatives
at the final stage decision points in terms of their expected monetary values.
3. At each of the final stage decision points, select the alternative which has the highest
expected monetary value and truncate the other alternatives.
4. Proceed backward ( left ward) in the same manner, calculating the expected monetary
value at chance points, selecting the decision alternative which has the highest expected
monetary value at various decision points, truncating inferior decision alternatives, and
assigning values to decision points, the first decision point is reached.

Simulation

Steps involved in simulation analysis are

1. Model the project. The model of the project shows how the net present value is related to
the parameters and exogenous variables. Exogenous variables are factors over which the
decision maker has no control.

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2. Specify the values of parameters and the probability distributions of each of the exogenous
variables
3. Select a value, at random, from the probability distributions of each of the exogenous
variables.
4. Determine the Net present value corresponding to the randomly generated values of
exogenous variables and pre-specified parameter values.
5. Repeat steps (3) and (4) a number of times to get a large number of simulated net present
values
6. Plot the frequency distribution of the net present values.

Simulation analysis is an important tool of risk analysis, simulation offers certain advantages.

 Its principal strength lies in its versatility. It can handle problems characterized by (a)
numerous exogenous variables following any kind of distribution, and (b) complex
interrelations among parameters, exogenous variables and endogenous variables.
 It compels the decision maker to explicitly consider the interdependencies and
uncertainties characterizing the project.

Shortcomings of simulation analysis

 It is difficult to model the project and specify the probability distributions of exogenous
variables.
 Simulation is inherently imprecise. It provides a rough approximation of the probability
distribution of net present value
 A realistic simulation model, likely to be complex would be most probably be constructed
by a management scientist, not a decision maker. The decision maker lacking
understanding of the model may not use it.

COST BENEFIT ANALYSIS

Cost benefit analysis is defined as analytical tool in decision-making which enables a systematic
comparison to be made between the estimated cost of undertaking of project and the estimated
value and benefits which may arise from the operation of such a project.

It is the measurement of resources used in an activity and their comparison with the value of the
benefit to be derived from the activity. CBA conducts a monetary assessment of the total costs
and revenues or benefits of a project, paying particular attention to the social costs and benefits
(SCBA) which do not normally feature in conventional costing exercises. The underlying object of
CBA is to identify and quantity as many tangible and intangible costs and benefits as possible.
The aim is then to see a strategy which achieves the maximum benefits for the minimum cost.
Only where benefits exceed costs, a project can be undertaken. CBA has been used in its more
specialized sense to describe techniques for making investment decisions in a nonprofit making
organizations

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Basically, CBA is used to determine

I. Whether or not a specific operation should be undertaken

II. Which of the possible alternative projects should be selected
III. Which time cycle would be most beneficial to the project?

It is important that not only should estimate costs and benefits be considered, but also that the
timing of a project should be right both in terms of cash flows and cost of capital.

Procedure for conducting a Cost Benefit Analysis (CBA)

I. Determine problem to be considered- It is important to establish at the outset what is being

attempted and, if possible to establish the objectives and possible advantages of pursuing
such a scheme.
II. Ascertain Alternative solutions to problem- It may be that there is only one solution to the
problem, in such case there will be a simple go-ahead/ no go-ahead decision.
III. Estimate and Analyze costs and benefits- This is the stage of the analysis which involves
most work. Having identified all the affected parties, the projects influence of their welfare
must be expressed in monetary terms, as it would be valued by them.
IV. Appraise Estimated costs and benefits- This stage is probably the most difficult, but most
crucial one The problems inherent in forecasting are considerable and particularly in
projects which have a long time cycle the problem of forecasting costs and revenues is of
some magnitude.
V. Decide on optimal solution- The estimated costs and benefits for each alternative solution
have been computed and presented to management for decision making.

SOCIAL COST BENEFIT ANALYSIS

Social Cost Benefit Analysis is a methodology developed for evaluation of investment projects
from the point of view of the society (Or economy) as a whole.

Normally projects are evaluated from the financial/ monetary point of view only and their impact
on the society or the economy, positive or negative is not given any consideration. In SCBA the
focus is on the social costs and benefits of the project. These often tend to differ from the monetary
costs and benefits of the project. SCBA is primarily used to evaluate public investments and has
received increased emphasis in recent years due to growing importance of public investments
particularly in developing countries. SCBA is also relevant in major private investments, which
require government approval since these investments have a bearing on national considerations.

Objectives of SCBA

1. Project should contribute to the GDP of the country

2. Contribute to the poorer sections of the society.
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3. Reduce regional imbalance in terms of growth and development.
4. Justify the use of scarce resource of the economy by the project
5. Protect and improve the environmental conditions.

Difference between Commercial evaluation of projects and SCBA evaluation of projects

Sl Commercial SCBA
No.
1 Higher margin of return is the most Effect on society, health of society, higher
important objective leisure, rest and improved quality of life on use
of product
2 Private interest is kept in mind Wider view on national interest is considered
3 Singular objective – of maximizing Rate of return to be compared with social
Return on investment economy, apportionment of benefits and costs
to different time periods, even generation
differences are analyzed.
4 Objective defined as achieving at Systematizing complex problems of project
any cost. planning from point of view of society and
nation

In SCBA, apart from the commercial viability the project is also assessed from social angle. The
following social desirability factors will be considered for acceptance or rejection of projects

 Employment Potential- The employment potential of a project is looked into. A project

with high employment potential is considered highly desirable
 Foreign Exchange- A project with potential to earn foreign exchange to the country or an
import substitution project which saves the country’s foreign exchange reserves is highly
desirable.
 Social Cost-Benefit analysis- A project with net benefits to the society over the costs to
the society is preferred.
 Capital-Output ratio- If the value of expected output in relation to the capital employed is
high, the project is given priority over the others.
 Value added per unit of capital- The amount invested in the project should generate the
value addition to the capital employed by earning surplus profits which can be used for
further capital investments to contribute development of the national economy.

Rationale for SCBA (Significance of SCBA, or why SCBA is better than commercial evaluation
of projects)

Commercial evaluation of project has a few discrepancies which affect the accuracy of the
evaluation of projects. The sources of discrepancy are

I. Market imperfection
II. Externalities
III. Taxes and subsidies
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IV. Concern for savings
V. Concern for redistribution
VI. Merit wants

I. Market imperfections- Market prices based on which the commercial evaluation of projects
are done reflect the true value of the item only under conditions of perfect competition.
This rarely happens in developing countries. This is one major source of market
imperfection in developing countries are
a. Rationing
b. Prescription of minimum wage rate
c. Foreign exchange regulation.
II. Externalities-
a. External benefit or cost created by the project.
b. Not usually included in the financial cost benefit analysis of the project
c. In SCBA all external costs and benefits, irrespective to whom they accrue and
whether they are paid for or not are relevant.
III. Taxes and Subsidies
From private point of view
a. Taxes are monetary costs
b. Subsidies are definite monetary gains
From social point of view taxes and subsidies are generally regarded as transfer
payments and hence considered irrelevant.
IV. Concern for savings
a. Parts of benefits saved is deemed more valuable than the part of benefits
consumed.
b. In SCBA higher valuation is placed on savings and a lower valuation is put on
consumption.
V. Concern for redistribution
a. A rupee of benefit going to an economically poor section is considered more
valuable than a rupee of benefit going to an affluent section.
VI. Merit wants
Goals and preferences not expressed in market place, but believed by policy makers
to be in larger interest, may be referred to as merit wants.

Approaches for SCBA

(Note for understanding: Approach means how do you overcome the discrepancies in
measurement of cost and benefits of project. Determining social costs and benefits is not easy
and there is no single standard for determining this so we have different approaches. The most
popular ones are UNIDO and Little Meyers. Only UNIDO is discussed
There are two approaches in determining the Social cost benefit analysis

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I. UNIDO Approach
II. Little Meyers Approach

UNIDO method involves five stages:

I. Calculation of financial profitability measured at market prices.

II. Obtaining the net benefit of the project measured in terms of economic( efficiency)
Prices also known as the Shadow prices.
III. Adjustment for the impact of the project on savings and investment.
IV. Adjustment for the impact of the project on income distribution
V. Adjustment for the impact of the project on merit goods and demerit goods.

ENVIRONMENTAL APPRAISAL OF PROJECTS

Environmental appraisal of projects is a formal process of assessing the impact of the project
on the environment. Environmental assessment is normally done with a systematic study called
Environmental Impact Assessment or EIA.

Environmental Impact Assessment EIA is defined as the process of evaluating the direct and
indirect environmental and social implications of a proposed development project or the
systematic examination of the likely environmental consequences of a proposed projects.

The results of the assessment which are assembled in a document known as Environmental
Statement – are intended to provide decision-makers with a balanced assessment of the
environmental implication of the proposed action and the alternative examined. The overall goal
of an EIA is to achieve better developmental interventions through protecting the environment
(human, physical and biotic).

The Goals of EIA

The goals of EIA are

1. To identify potential Environmental impacts and risks.

2. Examine the significance of environmental implications
3. Assess whether the impacts can be mitigated
4. Recommend preventive and corrective mitigation measures.
5. Inform decision makers and concerned parties about the environmental implications and
6. Advise whether development of the project should go ahead.

The With-Without Analysis

EIA describes the impacts on the environment with and without the project in a similar manner
to an economic analysis. EIA can be thought of as a data management process with three
components. First, the appropriate information necessary for a particular decision must be
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identified and collated. Second, changes in environmental parameters resulting from the
proposed project must be forecast and compared with the situation without the proposal. Finally,
the actual change must be assessed and communicated to the decision makers.

Measure
with

Net impact
Measurement o Environmental Attributes

of project
with time Tn

Measure
without

Time by the conditions of the environment Tn

T0 and importance of the impact is determined
The nature
without the project. Identifying impacts involves two aspects: the Stressors, or sources of
impacts i.e. what causes the impacts created by a project activity, and the receptors, or the
attributes. Some of the environmental attributes of a project are listed in the table below.

Air Water Land Ecology Sound

Diffusion Flow variations Soil Stability Large animals Physical effects
Particulates Oil Natural Hazard Predatory birds Psychological
effect
Carbon di oxide Radioactivity Land use pattern Fish, shell fish Communication
effect
Nitrogen Oxide Aquatic life Aquatic plants Social behaviour
effects
Hydrocarbons
Human Effect Economics Resources
Lifestyle Regional Economic stability Renewable resources
Psychological Public sector review Non renewable resources
needs

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Steps in EIA process

1. Screening - Screening is used to decide the nature and extent of the EIA to be carried
out. The process of screening usually involves the review of the project against a
checklist of projects to determine whether an EIA is mandatory requirement. Often there
is some uncertainty and an environmental assessment specialist may be required to
help advice. The environmental process begins with environmental screening at the time
a project is identified. In the screening the project team determines the nature and
magnitude of the proposed project’s potential environmental and social impacts and
assigns the project to one of three environmental categories listed below
a. Category A – A full EIA is required. These projects are expected to have adverse
impacts that may be severe, irreversible and diverse, with attributes such as
direct pollutant discharges large enough to cause degradation of air, water, or
soil; large-scale physical disturbances of the site and/or surroundings; extraction,
consumption or conversion of substantial amounts of forest and other natural
resources, hazardous material in more than incidental quantities, and involuntary
displacement of people and other significant social disturbances
b. Category B- Although a full EIA is not required, some environmental analysis is
necessary. Category B projects have impacts which are less significant, and not
as sensitive, major or diverse. Few, if any of these impacts are irreversible, and
remedial measures can be more easily designed. Typical category B projects
entail rehabilitation, maintenance or upgrading rather than new constructions.
c. Category C- No EA or other environmental analysis is required. Category C
projects have negligible or minimal direct disturbance on the physical setting.
Typical Category C projects focus on education, family planning, health and
human resource development.
The screening process results in the production of the Environmental Screening
Summary Not ( ESSN) which should contain the following information
 Brief project description
 Environmental issues apparent at screening ( Scope of environmental impacts,
risks and or benefits)
 Significance of environmental impacts, risks and/or benefits and likely mitigation
measures required.
 Environmental investigations proposed
 Other issues
 Actions to be taken ( and by whom)

The structure of the EIA is important. When a project is classified as Category A, a full
scale EIA is undertaken, and presented in an EIA report. Category B projects are subject to a
more limited EIA, the nature and scope of which is determined on a case-by-case basis

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2. Scoping- Allied to the screening process is scoping which commences early in the
project cycle, so that it can be influential in project design and provide the platform for
continuing dialogue on the environmental constrains and opportunities. A scoping
process is undertaken to identify key issues and develop the Terms of Reference ( TOR)
for EIA once a project is categorized. The specific objectives of the process are
a. To enhance the environmental benefits of the proposed project or programme.
b. To ensure compliance with relevant local legislation, as well as commitment to
multilateral environmental agreements and international best practice.
c. To consider the alternatives to the proposal that should be examined.
d. To identify any significant adverse environmental effects and identify actions.
e. To provide for public consultation and input to the identification of issues to be
examined.
f. To define the data assembly needs and field survey activities.
g. To determine the predictive techniques and environmental objectives that are to
be employed.
h. To provide a timetable for undertaking the EIA alongside the project design
process.
3. Impact identification
The process of impact identification is based upon an appreciation of how the proposed
project might interact with its receiving environment. As such, this requires an
appreciation of what are considered to be the valued environmental and community
resources within the vicinity of the proposal. As such, this requires an appreciation of
what are considered to be the valued environmental and community resources within the
vicinity of the proposal. A projection is then required of the future state of these
resources without the proposed project. From this a series of environmental design
objectives can be established to aid both the EIA and project design process.
4. Impact Prediction
Once the potential impacts are identified, the project design should be examined to
attempt to minimize those which are adverse and maximize those that are beneficial.
Once optimized, the process continues with the forecasting of the effects in the following
terms
 Magnitude
 The affected feature/ resource/ population
 Action causing the effect
 Timescale and duration of the effect
 Level of uncertainty in the forecast
 Proposed mitigation/enhancement measures
 Significance

The effects must be recorded in terms of whether they are short term, long term, direct,
indirect, synergistic, cumulative, increase or reduce with time. This is generally

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Compiled by Santhosh.S, Associate Professor, SCMS Cochin
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Entrepreneurship and Project Management
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undertaken with the use of expert opinion and is to be presented in a transparent way
stating all the assumptions employed.

5. Mitigation and Enhancement- Environmental mitigation can often result in reduced

project costs and lower community costs when incorporated as a fundamental part of
project design rather than as an add on exercise. Often simple design changes such as
the type of bridging strategy or the time of year that major earth moving activities take
place can have a dramatic effect upon improving environmental performance. The
mitigation and enhancement measures identified should be capable of being delivered in
a cost effective manner and be fully justified. Mitigation measures that have not been
though through generally do not happen.
6. Reporting- The purpose of the exercise is to improve the project design prior to its
submission for consent and then to report the findings to the decision makers and the
affected public in a manner that they ca understand. EIS should report the following
a. Environmental objectives and policy context
b. Existing environmental situation
c. Future do minimum situation
d. A description of the project
e. An Assessment of the effects of the project
f. An environmental action plan or management plan
g. A summary of the effects and recommendations
A summary of the EIS is often required for communication with the general public.

The figure below shows the main components of an EIA system.

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 CC16
Entrepreneurship and Project Management
Module 3
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Figure 3 – Main components of an EIA system.

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Compiled by Santhosh.S, Associate Professor, SCMS Cochin
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Entrepreneurship and Project Management
Module 3
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Compiled by Santhosh.S, Associate Professor, SCMS Cochin