So far in Literature, we heard about “Project Finance or Project Financing”. It talked about different ways of funding a typical project; and discussed several sources of funding a Project. Now, I would like to coin a new keyword known as “Project Economics”. This specific Management Insight provides meaning and intricacies of Project Economics.
“Project”-“Economics”-“Economy”: As we know Project means “it is a temporary endeavor undertaken to create a unique product, services or result” (according to Project Management Institute (PMI) definition). Now, What is the Economics? Economics is “a way of distributing scare resources to all the stakeholders in the country”. Economy is the Size ($/Rs) of all the input/Investment Value, intermediate and output value/commercial value being generated from the economic process. If you have difficulty read above two sentences twice. One can understand the clear difference between Economics and the Economy. Economics is the Process of Distribution of Resources in an efficient way. Economy is the size/amount of money flown in this process, starting from investment, project spending, saving till benefits ($) delivered and the return on investment generated or the recurring income generated from the Projects or Activities done as part of the economic process.
Project Economics: Now, lets come to Project Economics.Project Economics is the amount of investment ($) made in project, intermediate spending on project resources and raw material, amounts paid to vendors and project team members, and the commercial value of the benefits delivered to stakeholders and shareholders, return on investment, profits generated, and recurring income project product is giving. All this is part of Project Economics. Over a Period of time (may be over 7 to 8 years of time), the Economic Value ($) being generated from a project investment of $X would be $8X.
Example of Project Economics: For example, in an Indian small state capital, an airport can be setup with an investment of Rs 1000 crore ($120 million). This specific airport project can generate an economic value over 10 years can be around Rs 8,000 crore (or $1,000 million, that is $1 billion economic value). This specific economic value generated by the airport project includes aircraft parking charges/revenues, aircraft fuel filling charges, passenger taxes (if any), rent from shops/outlets in airport, car parking space income, rent from currency exchange outlets kept in airport etc and all the establishments kept inside airport, their employees’ salaries and spending. All these components are part of the supply chain/economic cycle starting from “Input InvestmentàEconomic ProcessàBenefits Delivery”.
Now, let’s understand that Project Financeconsidered only financing the project, and different ways/sources of financing the project. However, Project Economy considers all the commercial ($) value being part of the economic cycle. That is spending and income in the entire life cycle by all the parties involved in the economic cycle. One person’s income becomes in the form of spending given to other person. It considers entire supply chain network in the path. Thus, over a period of 10 years, the economic value being generated is 8 times the investment made in the project.
Sometimes, Project Economics may be global in nature. Where raw material suppliers, employees and beneficiaries of projects, and customers of project are spread across multiple countries, then the project economics becomes global in nature.
As the Infrastructure projects are growing in the country, technology, automobile, healthcare projects are growing globally; to assess and evaluate project proposals, now, it is best practice to include this Project Economics keyword into practice. This may give a macro level or a consolidated vision and valuation for the project and the project investments. Going further this would be best practice to evaluate and approve the project proposals based on the economic value expected to be generated from the project. Because this includes the larger sections of population and beneficiaries as part of the Project Economic Cycle; rather than just focusing on micro level concept Project Financing.
All the best. As the economy grows; individual project economies also grow; as the economic cycle keep changing, project economic cycle also goes up and down; that is boom and bear time.
Thank You,
Greetings on “Christmas and Happy New Year”.
Best Wishes,
Dr.Goparaju Purna Sudhakar, PhD, PMP, D.Litt.