Project Identification

Project Identification

   Project identification amounts to finding

projects which can contribute towards achieving
specified development objectives.
   Project ideas should in general aim at
overcoming constraints to the development
effort. These constraints can be:-
. material
. human or institution
 . meeting unsatisfied needs and
demand for goods and services
. foreign exchange constraints that might
necessitate projects for import substitution
or export promotion
 Project ideas arise from identification of
a number of different factors.
a) At the micro-level project ideas
emanate from:-
 The identification of unsatisfied demands or
needs;
 The existence of unused or underutilized
resources;
 The need to remove shortages in essential
materials, services or facilities that constrain the
development effort;
 The initiative of private or public enterprise in
response to incentives provided by the
government;
 The necessity to complement or expand
investments previously undertaken;
 The desire of local groups or organizations
to enhance their economic status and improve
their welfare;
b) At the macro-level project ideas emerge from:- 
 National, sectoral, or regional
development plans strategies;
 Constraints in the development process due to
shortages of essential infrastructural facilities,
problem in the balance of payments, etc.
 Unusual events such as droughts,
flood, earthquakes, hostilities, etc;
 Project proposal could also originate
from foreign firms;
 Individual inspiration, institutions, workshops
development experiences of other countries;
 Project ideas can also originate
from multilateral or bilateral development
agencies;
 To correct social and regional inequalities.
Christian Children’s Fund (CCF)
Supported Projects
 

CCF supported projects, as a policy of the

organization, must focus on the alleviation of
the poorest of the poor people and mainly
designed to overcome problems related to:-
 health and nutrition;
 early childhood development and education;
 adult education and vocational
skills acquisition;
 provision of credit for small-scale
non-farm income generating productive
economic activities;
 small-scale agricultural development
programmes;
 environmental protection and community water
supply;
 Methods Of Project
Identification

There are five major methods of project

identification:
1.Analysis Major Development Problems
 Listing ideas in a random way,
  Place the problems by priority order,
 Select one problem as the basis for action,
 
 2.Analyzing National Development Objectives
   Policies are instruments designed to attain
stated objectives and projects are the tangible
realization of these policies,
 Projects are the end products of a process
which begins with an analysis of social needs
and gives rise to policies and plans to meet the
needs,
 Techniques illustrating linkages between
objectives and projects can be shown using
problem tree and objective tree analysis.
 
 3.Economic Analysis
 Statistical analysis of trade reports - on
examming the data on the flow of imports or
exports.
 Study of Comparative Advantage – the study
of successful replicable experience of other
countries.
 Analysis of Linkage – examine existing
economic activities (enterprises) in view of their
linkage potential so that backward and forward
linkages can be maximized.
4.National Resource Survey
 Natural resource surveys are important sources
of for identifying agricultural and mineral related
development projects.
5.Socio-spatial Approach To Project
Identification
 Participator Approach – consultation of the
community about the development needs of
their area and undertake together a situation
analysis of major development bottlenecks
which enable to identify key projects.
 Area Based Functional Analysis – this approach to
project identification focuses on assembling a
package of complementary projects within the
context of village/commune district level
development plan rather than an isolated project.

 During preliminary selection the analyst

should eliminate project proposals that are:-
 technically unsound and risky;
 expected to have inadequate supply of inputs;
 costly in relation to benefits;

 
 assumed over ambitious sales and profitability;
 not consistent with national development
objectives;
 environmentally unfriendly;
By the end of the identification stage we should
know:-
 whether further detailed work is justified,
 what major issue have been identified?
 what project alternatives have been considered?
  which of them have been rejected?
 rough estimate of costs including
specific for promising projects,
Thank You
Project Proposal
Formulation
 Project Proposal Formulation
 

1.Analyse Major Development Problems

 We may work on projects without consciously
relating it to the programme/objectives to which
they are contributing;
 In analyzing major development problems we
may even do something irrelevant!
  The best approach is:-
. identify what the problem is and what the
causes are,
. talk and discuss about the problem with
experts, stakeholders, beneficiaries, etc.,
. stimulate a range of possible solutions,
. end up with common agreement on the
solution(s) to be implemented,
 What are required?
. list problems in a random way,
. prioritize the problems,
 - Problem analysis is where project cycle starts
and ends to start again.
-   Project Cycle:
Problem Analysis Project Formulation
Project Implementation Evaluation
(assessing effectiveness and learning lessons)
2.Formulate A Project Proposal For Solving
A Problem
- The success of a project is directly related
to its success in solving the problem it was
designed to solve.
3.Project Formulation
- Project formulation is a systematic and
logical way of developing cost effective
solutions to development problems.
- You can learn about formulating a project
by formulating projects! Therefore,
. think!
. put your thoughts on paper,
. discuss with others,
 . check facts and it may require re-writing
several times, 
4.A development project proposal will always
contain the answers for the following key
questions:-
what is the problem?
which group of people will benefit
from the solution? 
to which development objective will
the project contribute?
what is the immediate objective(s)
of the project? 
 what will the project actually produce
(output) to enable the achievement of
that immediate objective(s)? 
 how will it produce these outputs?
 what activities will be undertaken?
 what financial, material and human
resources (inputs) are needed? 
 what is the institutional framework?
4.1 Context and Justification
-  Before starting to develop the “the technical
aspect” of a project it is useful to describe the
context in which it is going to be operating and
to provide valid justification for the project.
-  A concise description of the major problem to
which the project tries to provide a solution will
be given –its causes, its components, its
symptoms.
4.2 Beneficiaries
- The beneficiaries and the satisfaction of their
   needs is the major motivating element to bear
in mind when preparing a project. The needs of
beneficiaries must be compatible with the
project’s objective.
- The geographical coverage of the project
(i.e., national, regional, local) will be indicated.

- Note that terms like “target group”, “target

audience” and “target population” often used
instead of beneficiaries.
4.3Development Objective
- In the context of formulating a development
project,development objective is used to describe
a desired end, a solution to development problem.

-  In project proposals a distinction is made

between development objectives and immediate
objectives. 
-  The development objective is normally the
higher objective one step un in the hierarchy from
the project immediate objective. The immediate
objective is the micro – objective and the
development objective is the macro – objective.
 -In the formulation of development of projects
macro will normally mean country or regional
level, referring to development objectives
usually with long-term results and beyond one
project’s scope and time - scale.
4.4 Immediate Objectives
-The immediate objective will usually be a short-
term objective which contributes to the
achievement of the long-term development
objective. It describes the situation that will exist
and the results achieved at the end of the project.
 - Immediate objectives should be expressed in
concrete, measurable terms, answering as
factually as possible the question: what will be
the situation at the end of the project? 
4.5 Outputs
- Outputs are the results of project activities
(i.e., services made available, infrastructure built
human resources trained, etc.) intended
to achieve the immediate objective.
- Outputs are tangible and visible.
 
4.6 Activities
- Activities are the action taken to produce the
outputs. Activities take place overtime and are
coordinated to be completed by the date required
in the description of the output. They are often
expressed in the form of bar or gant charts. 
4.7 Calendar
- A planning calendar indicating the beginning of
each of the project’s activities, their sequencing
and sequencing and duration has to be included in
project documents.
 4.8  Inputs
-Inputs are the financial (budgets, specify if self
financed or externally financed), material
(equipment,logistics) and human resources
(project team, partner organization) necessary for
carrying out the activities.
-These may be at various levels: international,
regional, national, institutional, the ultimate
beneficiaries. It is necessary to indicate who is
providing the inputs.
9. Organization and Administration
- The project’s:
. internal organization
. Relation to partners organizations
have to be expressed in hierarchical and
operational terms.
• The collaborations
- with institutions or individuals must be
clearly indicated
- whether it is permanent or occasional or
informal should be described.
• Indicate where the project is located: the
headquarter and/or decentralized units.
• Describe the monitoring and control
procedures during the project
implementation.
 4.8 Assumptions
- Assumptions on which the project is based have
to be as realistic as possible, expected problems
have to be described as well as the worse
scenario if assumptions are found to be wrong. 
4.9Legal Consideration
- Laws, regulations, standards in the field of
finance,labour, customs, insurance, taxes, etc.
must be considered if they have any impact on
the project.
Thank You
Project Preparation and
Appraisal of Investment
Decisions
 Appraisal of Investment
Decisions in Private and Public
Sectors

• This part of project planning is concerned

with methodologies that are used in
selection and appraisal of investment
decisions both in private and public sectors.
The need for these techniques and
methodologies arises from the
importance of investment in
allocating productive resources over
time and between different sectors,
and activities in an economy.
For example, consider these questions:
• Does Addis Ababa need a new airport?
• Should Ethiopia build urban motorways or
improve its rural road network?
• Should more investment be allocated to
expanding primary education or universities
(tertiary educations)?
These are some of the typical questions that
investment and project analysts are faced with.
To tackle these kinds of problems, one requires:-
• The ability to choose the right investment
package/s; and
• To discriminate between them on the basis of
appropriate criteria;
Private sector investment initiatives have
to be assessed against the objective of
maximizing profit or shareholders’ wealth
{i.e., the value of the enterprise to owner(s)}
 Public sector projects, including development
projects funded and assisted by donors and
international development agencies, be appraised
in terms of their net contribution to the economy
and/or society as a whole.
 
The concept of investment is
defined as an increase in the
stock of physical assets.
 In economics the notion of
(productive) investment refers
to the flow of resources into
the production of new capital.
• First, investment is a flow concept, that is,
it is measurable over a period of time and
refers to changes in the level of capital
stock.

• Second, investment refers to physical assets

(as distinct from financial assets).
 The economic notion of investment thus
takes a variety of forms, which includes the
following:

• Net addition to stocks (this includes

changes in inventories and work in
progress as that part of current output
which is not consumed).
• Plant and Machinery (the acquisition of
laths, computers, lories, etc. This includes
both replacement and additions to capital
stock).

• Construction ( comprising houses, offices,

shops, storage, etc.)
 The following are a few examples of
different types of investment activities:
• Building a factory;
• Extending a ware house;
• Instituting a staff training programme;
• Buying ( or leasing) a new machine;
• Improving a delivery service;
• Launching a new product line;
• Automating baggage handling, etc.
• In the world of business and finance all
investments are not in the form of addition
to real physical assets.
• In business and finance it involves finical
transactions that diversify an enterprise’s
asset portfolio (Example: purchase of
shares and bonds, antiques and arts
collections, foreign currencies, etc.).
Appraisal techniques are needed to help
investors or public organizations and their
agents make correct decisions and select
the best projects from other alternative
investment schemes.
 Project Pre-feasibility Study
 
  Pre-feasibility analysis is carried out to screen
out the promising project ideas from the not - so -
promising ideas.
  Pre-feasibility analysis helps to utilize
the scarce project preparation resources
for more promising projects.
  The difference between pre-feasibility and
feasibility analysis is one of degree
rather than kind. 
 Project Preparation (Feasibility
Study)
  There are five important project feasibility
Studies:-
      Market Analysis,
      Technical Feasibility,
      Institutional Feasibility
      Financial (Commercial Profitability)
Analysis,
Economic (National Profitability)
Analysis,
The content of the study vary according to
the projects size and technical sophistication.
Technical Feasibility
Some of the general technical aspects are the
following:-
a)Technology Package
. Has the package been well researched
and field tested?
.What are the costs and benefits of alternative
technological package?
. Is the machinery or equipment
appropriate to the receiving situation?

b) Location 
. What is the optimum area to be covered
by the project in terms of resources

management, etc.?
. What is the minimum catchments for
schools, clinics, roads, etc.?
c) Scale of Operation
. Are there significant economies of scale
production of provision of services?
. At what point do diseconomies set in?
d) Land Use
. Does the physical layout of settlement schemes
pay adequate attention to land - use?
e) Recurrent Costs
. Has adequate provision been made for recurrent
costs of operating the project including the
maintenance?
 f) Environmental Consideration
. If virgin forest or jungle is to be cut down and
planted up with long-gestation tree crops, has
provision been made for adequate terracing,
budding, and providing ground cover until the
crops have canopied? 
. If a dam is to be built, what are the
environmental effects up-stream and down-stream of
the dam?
. How can bad effects be mitigated,
and have the costs been included?
 
 . If insecticides, pesticides, etc. are to be
used in large quantities in irrigation
projects, what will be the effects on fishing,
farming, etc.? 

Institutional Feasibility 
   Institutional constraints can be
tackled through good project preparation.
   Salient factors of institutional
feasibility study include:-
  Identification of things which can be
 controlled and influenced,
  Sound internal organizational structure of the
project, i.e., efficient -
- coordination
- interaction
- information exchange and
flow between sub-systems
 Competent management and supervisory
personnel,Adequate technical and skilled
personnel,
    Provision of any necessary training facilities,
    Effective channels of communication,
    Good relationship with contributing agencies,
    Realistic implementation schedules,
    If policy changes are necessary for the full
success of the project, whether and when they
are likely to be made,
 
 The Time Value Of Money

Example on how to calculate the value of money.

Birr 1,000 deposited in a bank at 10% interest rate
compounded annually for a period of three years.
First Year
-Principal at the beginning Birr1,000.0
- Interest (birr1,000 x 10%) " 100.0
- Principal at the end of the year " 1,100.0
Second Year
- Principal at the beginning Birr1,100.0
- Interest (Birr1,100x10%) “ 110.0
- Principal at the end of the year “ 1,210.0 

Third Year
- Principal at the beginning Birr1,210.0
- Interest (Birr1,210x10%) “ 121.0
- Principal at the end of the year “ 1,331.0
 Therefore, a birr1,000 today is equivalent
to birr1,100,birr1,210 and birr1,331after
one, two and three years time respectively,
at 10% compound rate.
 
 The Need For Economic Analysis
Of Development Project
All the resources used in any development
project should make the maximum
contribution in achieving the fundamental
objective specified in the development
strategy of the country.
 Economic analysis of projects is concerned with
the investigation of the impact of proposed
projects on the national economy. 
 It can be distinguished from financial analysis
in that attention is not confined to the costs and
benefits affecting a single organization. 
 In financial analysis the goal is profitability to
the sponsor while in economic analysis the most
important question is whether or not the project
under examination is beneficial to the national
economy.
 Economic analysis can be used to provide
information on the impact of the project or
key economic variables. 
National Profitability Analysis
 Price Adjustment
 Discounting (SRD)
 Measures 
Value Added
- New Investment
- Modernization (Expansion)
 
Additional Indices
 Effect on Employment
 Effect on Income Distribution
 Effect on Net Foreign Exchange
International Competitiveness
Supplementary Considerations
 Implication on Infrastructure
 Implication on Technical Know-how
 Environmental Implication
Commercial (Financial) Feasibility Analysis 
 Relevant only for projects which are designed to
produce goods or services that will being charged. 
 Not relevant for social services projects (in
which social services considered to be “public
good” and provided “free”)  
 For other projects there are four ways to look at
financial feasibility. These are from the point of
view of:-
- direct project beneficiaries,
- project as a whole,
 - any financial intermediary,
- government,
 In general, financial feasibility analysis:-
-values directly quantifiable project inputs
and outputs at a market prices,
- government policy measure effects can either
be costs or benefits,
- debt services are costs, and
- presents an owner’s point of view,
Project Statement
a) Cash (Resource) flow statement
The beginning of the financial and economic
analysis of a project is drawing up of a statement
of project costs and benefits (which are
investment of the project).
b) Fund Flow Statement For Liquidity
Presents the sources (inflows) and application
(outflow) of funds committed.
c) Profit and Loss Statement (for profitability)
- Provides the financial performance of
a project during a fiscal or accounting
period (a year).
- It gives details of revenues to be earned, and
costs to be incurred including
expected gains and losses in a financial year.
d) Balance Sheet for Business Worth
-  Gives the status of directly
productive investment undertaking.
-  The common practice is to divide into:
i) Asset – what a project would own,
 ii) Liabilities – what a project would owe,
iii) Net worth/Capital – what a project would
be worth,
  The Concept of Compounding
- Money is the resource which has a time value.
A one Birr received now is more than one Birr
received in three years time, because:-
 current consumption is preferred to future
consumption (psychological explanation),
 capital can be employed productively to
 generate positive returns. An investment of one
Birr today would grow to (1+r) in a year, r being
the rate of return on investment (macro
economic explanation).
 in inflationary period a Birr today represent a
greater real purchasing power than a Birr after a
year.
- In general, to calculate the future value of a
single flow the formula is:
F = P(1 + r)n
 Where F is future value in year n,
P is amount invested today,
r is interest rate per period, and
n is number of years of investment, 
- The process of discounting is simply the reverse
of compounding 
F
P = --------- and
(1+r)n
 1
---------- is a discount factor
(1 + r)n 
- The discounting factor is used for
the calculation of the present worth (P),
if future value (F) at the end of n th period at
the interest rate r. 
- Different types of projects will have different
profiles for the costs and benefits.   
- There are four principal elements of
project resources and these are:
   Investment Costs
. land preparation
. buildings
. equipment
. vehicles
. etc.
  Operating Costs
. fixed costs
. variable costs
- material
- power
- labour
  Working Capital Costs
. physical stock needed for production to be
continuous
- initial stock of materials
- work in progress
- final stock of output
  Benefits
  - In resource flow net benefits are negative in the
first years while investment is taking place and
utilization of the new assets is building up. Net
benefits then become positive for the remaining
years
Methods of Investment Profitability
Analysis
 

a) Static Methods
i) Simple Rate of Return Method
. Simple rate of return is a ratio of net profit in
normal years to the initial investment. This rate
could be calculated for both total investment and
equity.
 
 NP + i
Ri= ----------
I
Where , Ri=Simple Rate of Return
NP=Net Profit
i=Annual Interest Changes
I=Total Investment
NP
Re = -------- x 100
Q
 
Where Re = Simple Rate of Return
Q = Equity 

DECISION RULE
Given "r" the market interest rate:
       If Ri or Re > r, Accept r;
       If Ri or Re < r, Reject r;
 
ii) The Pay Back Period

The pay back period measures the time needed for

a project to recover its investment through its net
cash earnings.
 
 -  It is the number of years during which a project
will accumulate sufficient cash earnings to cover
the amount of total investment.
p
I = ∑NPt + Dt
t=0
Where I = Total investment
P = Pay back period
NPt = Annual net profit in year t
Dt = Annual depreciation in year t
(NPt + Dt) = Annual cash earning in year t
b) Dynamic Methods
 Dynamic measures of project performance
provide an uninterrupted view of projected
project financial performance over the entire
life of the project. 
 More reliable indicator than the
static method. 
i)Financial Net Present Value Method (FNPV)
 The financial net present value (FNPV) of a
project is defined as the difference between the
present value of its future cash inflow and
outflow.
 This means that all annual cash flow should be
discounted to zero point of time (i.e., the start of
the implementation) at a predetermined discount
rate.
FNPV is expressed as: FNPV=
NCFO+(NCF1xa1)+(NCF2Xa2)+…+(NCFnxan) 
Where , FNPV=Financial net present value of a
project,
NCE=Net cash flow of a project in year
0,1,2,…,n
a=Discount factor in years 1,2,…,n
corresponding to the selected rate of discount.
The same expression could be presented in a
more aggregated way in the following formula: 
FNPV = ∑ (CIt - COt)at 
Where CIt = cash inflow in year t,
COt = cash outflow in year t,
at = discount factor,
- When alternative projects of different
magnitudes of investment are compared it
becomes important to relate the absolute amount
of the project net benefits to its total investment.
 - In such instances, divide the net present value
by the discounted value of total investment.
NPV
NPVR = --------
P(I)
Where NPVR = Net present value ratio, and
P(I) = Present value of total investment,
  - This ratio shows how much of the project's
net present value is generated by a unit of
total investment.
 
 - Among alternative projects, the one with
the highest ratio can be selected
for implementation. 
ii)The Internal Rate Of Return Method(IRR)
  By definition the Internal Rate Of Return
(IRR) is a rate of discount that reduces the net
present value of a project zero.  
0 = ∑(CI - CO)tat 
  Unlike the NPV method the discount rate is
unknown.
  When applying the IRR, one starts with an
assumption that NPV=0 and try to find out the
discount rate that will make the present value of
cash inflows of a project equal to the present
value of cash outflow.

Methods of Calculating IRR

 Trial and Error Method
 Interpolation - Arithmetic Method
-  The arithmetic rule for interpolation implies
using two discount rates, one which gives a
positive NPV close to zero and the other
which gives negative NPV,close to zero.
PV(i2 - i1)
ir = i1 + ------------
PV + /NV/
Where Ir= IRR of a project,
PV=positive value of NPV at the lower d. rate,
/NV/=negative value of NPV at the higher d. rate
in absolute terms.
i1=lower discount rate at which NPV is still
positive but close to zero.
i2=higher rate of discount at which NPV is
already negative but close to zero.
Thank You