Financial Appraisal With Risk Assessment Lens

Collaborated with KPMG and SNG program to conduct orientation on Financial Appraisal with a Risk Assessment Lens. The training equipped P&D Department's staff with modern financial appraisal techniques, enabling them to perform effective financial assessments. By imparting financial expertise, we aim to strengthen the capacity of P&D Department's officers and line department planning cells to make informed decisions and allocate resources efficiently. The orientation was also attended by district governments' F&P offices. For FY25, Financial appraisal with a risk assessment lens is crucial for ensuring resilient, sustainable, and impactful public investments. #FCDO #SNG #KP #FinancialAppraisal #RiskAssessment #CapacityBuilding #PublicInvestment #Development #Governance

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Quiz Break
Orientation on
Financial Appraisal With Risk Assessment Lens
KPMG Taseer Hadi & Co.
Chartered Accountants

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Orientation
Objectives,
Approach &
Purpose

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1
Introducing P&DD staff with the horizon of modern financial
appraisal techniques.
2
Provide insights to P&D staff so that they can perform
financial appraisals effectively.
3
Imparting financial expertise among P&DD staff in order to
boost the skill set.
Orientation Objectives

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GOALS
Comprehensive approach ensures effective learning and skill development
Mentorship: Imparting mentorship in the arena of financial expertise
Customize training material developed for capacity building of P&DD staff.
Interactive workshop: Engaging staff to deliver knowledge in a digestible way1
2
3
Orientation Approach

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GOALS
Purpose of Orientation
PURPOSE
OF ORIENTATION
The orientation targets P&DD staff in KPK to enhance their skills in financial appraisal,
financial risk identification & mitigation, and carrying out capacity building within the P&D.
To empower P&DD staff in improving the efficiency in appraisal process & thus ensuring
effective allocation of public resources.
This orientation aims to impart advanced financial appraisal techniques to P&DD staff &
equipping them with the risk management approach.

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Orientation Agenda

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Orientation Agenda
Introduction
&
Background
Scope of the
Assignment
Financial
Appraisal
Tools for
Financial
Appraisal
Financial
Risk
Assessment
Target
Outcomes of
Financial
Appraisal

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Introduction &
Background

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Introduction & Background
emphasizing
The necessity
of enhancing the appraisal,
monitoring, and evaluation
capacities within the P&D
Departments
Significant weaknesses in
project appraisal and risk
assessment
mechanisms within
technical sections of P&DD
Government requested
assistance from the SNG II
initiative to strengthen
project appraisal and risk
assessment systems
through an embedded
support mechanism
1 2 3

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Scope of
Assignment

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Scope of Assignment
DIRECT TECHNICAL
ASSISTANCE FOR
SELECTED PC-IS
DEVELOPING
STANDARDS AND
GUIDELINES
ON-THE-JOB TRAINING
SESSIONS FOR P&DD
STAFF
The scope of work entails the deployment of five embedded specialists who will provide support in the
following key areas:

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Embedded Experts
Economist
Economic Appraisal
Expert
Financial Appraisal
Expert
Risk Management
Expert
Environmental
Expert
The following sector experts are deployed and embedded within P&DD

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Financial
Appraisal

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What is Financial Appraisal
“Financial appraisal refers to the process of
evaluating the feasibility, profitability, and
financial viability of a project or investment
either public or private”

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Key Benefits of Financial Appraisal
•Assessment of Feasibility
•Risk Management
•Optimized Resource Allocation
•Enhanced Decision Making
•Long term Planning
•Improved Accountability
•Facilitation of financing
•Benchmarking & Performance
Evaluation

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Objectives of Financial Appraisal
Determining
viability of
development
projects
Evaluation of
sustainability
of development
projects
Identify and
assess
financial risks
associated with
development
projects
Benchmarking
performance
against
industry
standards or
competitors
Ensuring
effective
decision
making
1 2 3 4 5

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Difference in Financial Appraisal at Public & Private Sector
Stakeholders are public at large
Accountability to taxpayers & government bodies
Primary focus on ROI & Profitability
…
Decision making is quicker & profit driven
Funding comes from private investors
Private Sector Public Sector
Primary focus on Societal Benefits & Public Value
…
Stakeholders include shareholders, investors, etc
Decision making is involves compliance & public opinion
Accountability to shareholders & investors
Funding comes from taxpayers& grants

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Tools for Financial
Appraisal

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Tools used for Financial Appraisal
Internal Rate of Return
Benefit Cost Ratio
01
Net Present Value
02
Unit Cost Analysis
03
04
Earned Value Analysis
05
Payback Period
06

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Benefit Cost Ratio
(BCR)

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Benefit Cost Ratio (BCR)
“The BCR is the discounted net revenue/benefits divided by Initial Investment”
Benefit
Cost Ratio
(BCR)
BCR = PV of Benefits/PV of Costs

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BCR – Decision Rule
The preferred option is the one
with a ratio in excess of 1
A project with a BCR of less than 1
should generally not proceed

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Benefits
•Simplicity
•Does not involve
intricate calculations
•Simple to use
•Easy to understand
Limitations
•Sub-Optimal decisions
•Best option may not
be selected
•Assumptions may not
be true
BCR – An Overview

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Net Present Value
(NPV)

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Net Present Value (NPV)
NPV
“It is a financial metric that
calculates
the present value of future
cash flows discounted at
a specific rate, minus the
initial investment”
NPV

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NPV – Decision Rule
The preferred option is the one
with the highest positive NPV.
Projects with negative NPVs
have to be rejected.

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NPV - Overview
Benefits Limitations
•Most reliable
technique
•Helps in strategic
decision
making
• Considers time value
of money
• Accounts for Risk
•Statistic technique
prone to error
•Assumptions may
not hold true
• Ignores non-
monetary factors
• Potential for
misinterpretation

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Unit Cost Analysis

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Unit Cost Analysis
“Unit cost analysis is the process of
determining the cost of producing or
delivering one unit of a product or
service”

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Decision Rule - Unit Cost Analysis
1.Pricing: Setting a competitive price that covers costs and
generates profit.
2.Production Volume: Determining the optimal production
volume that maximizes profitability or meets demand
efficiently.
3.Cost Reduction: Identifying areas where costs can be
reduced to lower the unit cost and improve profitability.

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Unit Cost Analysis - Overview
Operational
Efficiency
Cost
Transparency
Profitability
Insights
01
02
03
Complexity of
Cost allocation

Static
Analysis
Difficulty in
Cost Identification
01
02
03
Benefits Limitations

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Internal Rate of
Return (IRR)

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Internal Rate of Return
All relevant
cashflows
Taken over the life of
project
Initial
investmen
t
Discounted
at a rate
“The IRR represents the discount rate at
which the NPV of an investment is zero”
NPV = 0

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Decision Rule - IRR
When?
Acceptance?
Rejection?

Decision
Making
When considered worthwhile?
If the IRR is greater than the required rate of return or hurdle
rate, the project or investment is considered acceptable or
worthwhile
When to accept?
Accept the project if IRR > Hurdle Rate
When to reject?
Reject the project if IRR < Hurdle Rate

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Overview - IRR
Considers Time
Value of Money
Single
measure of
return
Flexible for
different
project
timelines
Assumption of
reinvestment
rate
Multiple
IRR
problem
Compariso
n
challenges
Benefits Limitations

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Earned Value
Analysis

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Earned Value Analysis
Schedule Variance
SV = EV - PV
Cost Variance
CV = EV – AC
Earned Value
EV = PV to date * RP
Estimated time to complete
Original Time Estimate / SPI
“Earned Value Analysis is a project management technique that measures project performance
by integrating scope, schedule, and cost metrics to assess progress and forecast outcomes”
Cost Performance Index
CPI = EV/AC
Estimate at Completion
EAC = BAC/CPI

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Earned Value – Performance Metrics
SV
CPI
SPI
CV
CV =EV-
AC
Cost Variance
“Difference between Projected cost
and actual cost”
Schedule Performance Index
“A measure of how close the project
is to performing work it was actually
scheduled” SPI= EV/PV
Schedule Variance
“Difference between projected schedule
& actual schedule”
SV= EV-PV
CPI=
EV/AC
Cost Performance Index
“A measure of how close the project is to
spending on the work performed to what
was planned to have been spent”
Index Values <1: over budget or behind schedule | >1: under budget or ahead of schedule

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Overview – Earned Value Analysis
Benefits
•Clear & integrated view of project
performance
•Helps identify deviations early
•Informed decision making
Limitations
•Complexity involved.
•Assumptions are prone to error
•Subjectivity involved in
•Interpretation of index factors

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Pay Back
Period

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Payback period
“The payback period is the time a project
will take to pay back the money spent on it”
Constant Cashflows
Payback period = Initial Investment / Annual Cashflow
Uneven Cashflows
Payback is calculated by working out the cumulative cash
flow over the life of the project.

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Decision rule – Payback period
• Only select projects which pay back within the specified time period
• Choose between options on the basis of the fastest payback

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Overview – Payback Period
Benefits
• Clear metric for quick decision making
• Liquidity focus
• Simplicity
Limitations
• Ignores time value of money
• Ignores cashflows beyond payback period
• Suitable only for small scale projects

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YEAR CAPITAL COST O&M COST
TOTAL
COST
TOTAL BENEFITS
DISCOUNT
FACTOR
(10%)
PV OF
COST
PV OF
BENEFITS
NPV OF
BENEFITS
(PV OF
BENEFITS -
PV OF
COST)
1 (10) (10) 0 0.906 9.058 0 (9.058)
2 (12) (12) 0 0.820 9.846 0 (9.846)
3 (14) (14) 0 0.743 10.404 0 (10.404)
4 (0.3)(0.3) 5.0 0.673 0.202 3.366 3.164
5 (0.3)(0.3) 7.0 0.610 0.210 4.268 4.058
6 (0.4)(0.4) 8.1 0.552 0.219 4.446 4.227
7 (0.5)(0.5) 9.3 0.500 0.228 4.631 4.403
8 (0.5)(0.5) 10.6 0.453 0.238 4.824 4.586
9 (0.6)(0.6) 12.2 0.410 0.248 5.025 4.777
10 (0.7)(0.7) 14.1 0.372 0.258 5.235 4.977
Total (36) (3.30)(39.30) 66.30 30.91 31.80 0.88
Case Study –
Here is a hypothetical case study of XYZ Transport Project
•Here we are assuming a discount rate of 10.4%
•We’re assuming all figures to be in billions (PKR)
•BCR = 1.03
•NPV = PKR 0.88 billion
•IRR = 11.04%

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Target Outcomes
of Financial
Appraisal

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Target outcomes of financial appraisal
01
Maximization of effective use of limited resources
02
Selecting projects with the highest potential returns and benefits
03 Ensuring transparency in project selection and implementation
04
Promotion of sustainable economic growth
05
Build trust and confidence among stakeholders

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Financial Appraisal and Social/Environmental Impacts
Resource Allocation
& Impact on Society
Environmental
Sustainability
Long Term
Economic Impact
Social Equity

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Financial Risk
Assessment

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Key financial risks
Operational
Risk
“risk of indirect or
direct loss caused by
failed or inadequate
internal people”
Foreign
Exchange
Risk
“Risk of un-favorable
changes in the
exchange rate between
the transactional
currency and operating
currency”
Credit Risk
“the risk that a
borrower or client
defaults on their debts
or outstanding
payments.”
Budgetary
Constraints
“Risks include revenue
shortfalls due to economic
downturns, changes in tax
policies, or unexpected
expenditures exceeding
budgetary allocations.”

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Mitigating strategies
☺
☺
Strong Internal
Controls Hedging Contracts
Diversification
Collateral and
Security
Stress Testing and
Scenario Analysis
Costefficiency
measures
Revenue
Diversification
Risk Assessment and
Monitoring

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Thank you
KPMG Taseer Hadi & Co.
Chartered Accountants