CHAPTER ONE: INTRODUCTION TO PROJECT

1.1. Defining a Project in Relative Sense

The word PROJECT comes from the Latin word PROJECTUM from the Latin verb PROICERE;
which means “to throw something forwards” which in turn comes from PRO-, which denotes
something that precedes the action of the next part of the word in time and ICERE, “to throw”.
The word PROJECT thus actually originally meant “something that comes before anything else
happens”.

The term project has a wider meaning. A project is accomplished by performing a set of
activities. For example, construction of a house is a project. The construction of a house consists
of many activities like digging of foundation pits, construction of foundation, construction of
walls, construction of roof, fixing of doors and windows, fixing of sanitary fitting, wiring etc.
Another aspect of project is the non-routine nature of activities. Each project is unique in the
sense that the activities of a project are unique and non-routine. A project consumes resources.
The resources required for completing a project are men, material, money and time. Thus, we
can define a project as an organized programme of pre-determined group of activities that are
non-routine in nature and that must be completed using the available resources within the given
time limit.
Let us now consider some definitions of ‘project’. Newman et. al define that “a project typically
has a distinct mission that it is designed to achieve and a clear termination point the achievement
of the mission”.
Gillinger defines “project” as the whole complex of activities involved in using resources to gain
benefits. Project management institute, USA defined project as “a system involving the co-
ordination of a number of separate department entities throughout organization, in a way it must
be completed with prescribed schedules and time constraints”.
According to the encyclopedia of management, “project is an organized unit dedicated to the
attainment of goal, the successful completion of a development project on time, within budget, in
conformance with predetermined programme specification.”

A project in business and science is a temporary endeavor undertaken to create a unique

product, service, or result. Basically, it is planned to achieve a particular aim. The aim of a
project is to attain its objective and then terminate. Some of the reasons to start a project can be:
A customer request or market demand, an organizational need, a technological advance, and a
legal requirement

1
Projects and operations differ primarily in that operations are ongoing and repetitive, while
projects are temporary and unique. Generally, a project is a means of organizing some activities
that cannot be addressed within the normal operational limits. Generally project is a non-routine
activity that has its own start and end date. Examples of projects include: Developing a new
product or service, designing a transportation vehicle, constructing a building, and Building a
water system for a community.
Project management is an organized venture for managing projects, involves scientific
application of modern tools and techniques in planning, financing, implementing, monitoring,
controlling and coordinating unique activities or task produce desirable outputs in accordance
with the determined objectives within the constraints of time and cost.

1.2. Features of a project

A project has several characteristics. The characteristic or features of a project are briefly
described below:
a. A project has a mission or a set of objectives. Once the mission is achieved the project is
treated as completed.
b. A project has to terminate at some time or the other; it cannot continue forever. The set of
objectives indicate the terminal stage of the project.
c. While the numbers of participants in a project are several, the project is one single entity
and its responsibility is assigned to one single agency.
d. A project calls for team-work the members of the team may come from different
organizational units, different disciplines, and even from different geographic regions.
e. A project has a life cycle represented by growth, maturity and decay. A project has a
learning component.
f. A project is unique and no two projects are similar, even though the plants set up are
identical. The organizations, the infrastructure, the location and the people make the
project unique.
g. Change is a natural phenomenon with every project throughout its life span. Some
changes may not have any major impact, but some others may change the very nature of
the project.
h. The happenings during the life cycle of a project are not fully known at any stage. As
time passes, the details are finalized successively. For example, more details are known
about the project at the erection stage than at the detailed engineering stage.
i. A project is always customer-specific. The requirements and constrains within which a
project must be executed are stipulated by the customer.
j. A project is a complex set of things. Projects vary in terms of technology, equipment and
materials, machinery and people, work ethics and organizational culture.

2
 k. A substantial portion of the work in a project is done by sub-contracting. The greater the
complexity of a project, the greater will be the extent of work performed by
subcontractors.
l. Any project is exposed to risk and uncertainty and the extent of these two depend upon
has the project moves through the various stages in its life span. A well defined project
has lesser risk and uncertainty, whereas an ill-defined project faces greater degree of risk
and uncertainty.

1.3. Classification of projects

Every Project is different. Projects can be classified on several different points. The classification
of projects in project management varies according to a number of different factors such as
complexity, source of capital, its content, those involved and its purpose. Projects can be
classified on the following factors.
1. According to complexity:
a) Easy: A project is classified as easy when the relationships between tasks are basic and
detailed planning or organizations are not required. A small work team and few external
stakeholders and collaborators are common in this case.
b) Complicated: The project network is broad and complicated. There are many task
interdependencies. With these projects, simplification where possible is everything.
Cloud-based apps such as Sinnaps will immensely help to simplify complicated projects
by automatically calculating the project’s best work path and updating any changes
introduced through its use of different types of project management tools. Here,
the importance of project management and how an effective tool could help you!
2. According to source of capital:
a) Public: Financing comes from Governmental institutions.
b) Private: Financing comes from businesses or private incentives.
c) Mixed: Financing comes from a mixed source of both public and private funding.
3. According to project content:
a) Construction: These are projects that have anything to do with the construction of a
civil or architectural work. Predictive methods are used along with agile techniques
which will be explained later on.
b) IT: Any project to do with software development, IT system etc.  The types of project
management information systems vary across the board, but in today’s world are very
common.

3
 c) Business: These projects are involved with the development of a business, management
of a work team, cost management, etc., and usually follow a commercial strategy.
d) Service or product production: Projects that involve themselves with the development
of an innovative product or service, design of a new product, etc. They are often used in
the R & D department.
4.  According to those involved:
a) Departmental: When a certain department or area of an organisation is involved.
b) Internal: When a whole company itself is involved in the project’s development.
c) Matriarchal: When there is a combination of departments involved.
d) External: When a company outsources external project manager or teams to execute the
project. This is common in digital transformations, process improvements and strategy
changes, for example.
5. According to its objective:
a) Production: Oriented at the production of a product or service taking into consideration a
certain determined objective.
b) Social: Oriented at the improvement of the quality of life of people.
6. Educational: Oriented at the education of others.
a) Community: Oriented at people too, however with their involvement.
b) Research: Oriented at innovation and the gaining of knowledge
7. According to project duration
a) Short Range Projects: they are completed within one year, and are focused towards
achieving the tactical objectives. They are less rigorous; require less or no risk. They are
not cross functional. These projects require limited Project Management tools, and have
low level of sophistication. It is easy to obtain approval, funding and organizational
support for short range projects. For example, reduce defect in shop number two from 6
to 4 percent.
b) Long Range Projects: These projects involve higher risk and a proper feasibility
analysis is essential before starting such projects. They are most often cross functional.
Their major impact is over long period of time, on internal as well as external
organization. Large numbers of resources are required to undertake long range projects
and they require breakthrough initiatives from the members.

1.4. National Development Planning and Project Analysis

Planning can be defined as a “continuous process that involves decisions or choices about
alternative ways of using available resources with the aim of attaining a particular goal or set
of goals at some time in the future”

4
  Planning serves as a tool for enhancing the effectiveness in mobilizing resources and as
well enables allocation of resources into priority areas of development.
 In this regard, development planning can be regarded as an attempt to raise the rationality
of decision making. The essence of development planning is futuristic, i.e., it is most
forward looking and involves systematic thought and preparation.
 Virtually, every nation, be it developed or developing, should have a systematically
elaborated national plan to hasten economic growth and further a range of social
objectives.
 In this regard, we can explain the relationships between development plans and
projects as follows:
1. Projects provide an important means by which investment and other development
expenditures foreseen in plans can be clarified and realized.
 Sound development plans require good projects, just as good projects require sound
planning.
 The two are interdependent.
2. A sound plan requires a great deal of knowledge about existing and potential projects.
 Sound planning rests on the availability of a wide range of information about existing
and potential investments and their likely effects on growth and other national objectives.
 It is project analysis that provides this information, and the projects selected for
implementation become the vehicles for using resources.
 Thus, plans require projects. Realistic planning involves knowing the amount that can be
spent on development activities each year and the resources that will be required for
particular kind of project.
3. Since projects commit scare resources, project selection is meaningful only when it is placed
within a broader development framework.
 This framework could be medium or long-term development plans and policy statements
issued by the government.
 The best economic appraisal of projects cannot be made without referring to such plans
and policies.
4. Effective project preparation and analysis must be set in the framework of a broader
development plan.
 Projects are part of an overall development strategy and a broader planning process.

5
5. Governments must allocate their available financial and administrative resources among
many sectors and many competing programs.
 Project analysis can help improve this allocation.
 Within the broad strategy, planners have to identify potential projects that address the
policy of production targets and priorities.
6. The more elaborated the plans and policies of the governments are, the easier becomes the
work of the project planner.
 For example, the project planner will have to refer to such plans and policies to see
whether the project being considered fits well in the plan and contributes most to the
fundamental objectives of the government.
 These objectives can include self-sustaining growth, promotion of employment, income
distribution, etc.
7. National plans and elaborated sectoral programs are of great help in identifying development
projects.
 A realistic plan should be prepared by assessing the development potentials in the various
sections of the economy.
 It is, therefore, obvious that the successful formulation and implementation of a national
development plan depends on the proper selection of projects and the associated sectoral
programs.
 Thus, project formulation and evaluation, being a continuous and integrated process, is
one of the basic components of economic planning.
 In order to ensure realistic planning, an iterative process with a sufficient flow of
information, suggestion, and guidance between decision makers at the macro levels are
essential.
8. As projects rightly called the “Cutting Edge” of development, they are powerful means to
achieve the development objectives; they are the crucial building blocks of a development
structure.
9. Projects aim mainly at increasing the production of goods and services, which are
fundamental components of people’s welfare, and the main objective of any development
effort is, of course, to advance social wellbeing.
The hierarchical relationship among development plans, programs, projects, tasks, and work
packages is:
The hierarchical relationships

6
Exhibit 1.1: Hierarchical Relationships

Developmental Plans
 Most forward looking (futuristic)
 Broad and require systematic thinking, preparation, and appraisal
 Attempts to bring welfare in the society

Programs
 Derived from developmental plans
 Exceptionally large with long term objectives
 Explores specific area with broader scope

Projects
 Derived from a program
 A development activity with specific objectives
 A tool for realization of a given set of objectives
 Funded by a program
 A unique implementation entity

Tasks
 Work elements under a project
 Specific approaches for doing things
 Set of activities comprising a project

Work Packages
 Sub-elements of a given task (or undertaking)
 Something accomplished stage by stage
 The collection of work packages define a given task

1.5. Role of project manager

The project manager (PM) is the leader of a team performing a project. The project manager and
his team must identify the stakeholders, determine their needs, and manage and influence those
needs to ensure a successful project. A key to stakeholder satisfaction is the diligent and accurate

7
analysis of the stakeholders themselves as well as their stated needs and unstated expectations. A
project manager should not just be handed a statement of work from upper management and then
try to complete it; rather the PM should be deeply involved with the development of that
statement of work. The roles of a PM are many, some of which include the following:
 Identifying the requirements and risks
 Making plans and organizing the effort
 Qualifying and possibly selecting project team, vendors, and other participants
 Communication among team, management, stakeholders
 Assessing the probability of occurrence of problems
 Developing solutions to problems (both in advance and on the spot)
 Ensuring that progress occurs according to the plan
 Deliverable management
Project stake holders are individuals and organizations that are actively involved in the project or
whose interests may be positively or negatively affected as a result of project execution or
project completion; they may also exert influence over the project or its results. The project
management team must identify the stake holders, determine their requirements and then manage
and influence those requirements to insure a successful project.
Key stakeholders on every project include:
 Project manager-the individual responsible for managing the project
 Customer – the individual or organization that will use the project’s product.
 Performing organization – the enterprise whose employees are most directly involved in
doing of the project work
 Project team members- the group that is performing the work of the project.
 Sponsor – the individual or group within or external to the performing organization that
provide resources in cash or in kind to the project.

8
 Exihbet.1.2 Relevant stakeholders

Project Management Environment

All projects are planned and implemented in a social, economic, environmental, political and
international context.
 Cultural and Social Environment is that how a project affects the people and how they
affect the project. This requires understanding of economic, demographic, ethical, ethnic,
religious and cultural sensitivity issues.
 International and Political Environment refers to the knowledge of international,
national, regional or local laws and customs, time zone differences, teleconferencing
facilities, level of use of technology, national holidays, travel means and logistic
requirements.
 Physical Environment is the knowledge about local ecology and physical geography that
could affect the project, or be affected by the project.

Exihbet.1.3 Project Environment

1.6. Project organization Structure

A project organization is a structure that facilitates the coordination and implementation of project
activities. Its main reason is to create an environment that fosters interactions among the team
members with a minimum amount of disruptions, overlaps and conflict. One of the important

9
decisions of project management is the form of organizational structure that will be used for the
project.
Each project has its unique characteristics and the design of an organizational structure should
consider the organizational environment, the project characteristics in which it will operate, and
the level of authority the project manager is given. A project structure can take on various forms
with each form having its own advantages and disadvantages.
One of the main objectives of the structure is to reduce uncertainty and confusion that typically
occurs at the project initiation phase. The structure defines the relationships among members of the
project management and the relationships with the external environment. The structure defines the
authority by means of a graphical illustration called an organization chart.
A properly designed project organization chart is essential to project success. An organization
chart shows where each person is placed in the project structure. An organization chart is drawn in
pyramid form where individuals located closer to the top of the pyramid have more authority and
responsibility than members located toward the bottom. It is the relative locations of the
individuals on the organization chart that specifies the working relationships, and the lines
connecting the boxes designate formal supervision and lines of communication between the
individuals.

Exihbet.1.4 Project Organization Chart

10
1.6.1. Factors in Designing a Project Structure
There are two design factors that significantly influence the process of developing a project
management structure. These are the level of specialization, and the need for coordination. The
project manager should consider these factors at the moment of designing the project
organization in order to maximize the effectiveness of the structure.
1. Specialization affects the project structure by the degree of specialty in technical areas or
development focus; projects can be highly specialized and focus on a specific area of
development, or have different broad specializations in many areas of development. For large
projects that have multiple specializations or technical areas, each area may have a different
need; from differences in goals, approaches and methodologies, all of which influence the
way the project will implement its activities. A project that has two components, a
reconstruction and education, will need to manage different approaches based on the
specialization of each one. In the education component, the needs is for a structure more
open and informal, where the time horizon is longer, with more emphasis on sharing and
generation of new ideas in order to achieve innovation and creativity. In a reconstruction
component, there are specific goals, a need for a rigid, hierarchical structure, and there is a
defined time horizon with little sharing of ideas. While specialization allows each project
component to maximize their productivity to attain their departmental goals, the
dissimilarities may lead to conflict among the members or leads of each component. In
general, the greater the differences, the more problems project managers have in getting them
to work together.
2. Coordination is required to bring unity to the various elements that make up a project. The
project work is organized around a work breakdown structure (WBS) that divides the overall
project goals into specific activities or tasks for each project area or component; the project
manager must design an organizational structure that ensure that the various components are
integrated so that their efforts contribute to the overall project goal. Integration is the degree
of collaboration and mutual understanding required among the various project components to
achieve project goals. Most projects are characterized by the division of labor and task
interdependencies, creating the need for integration to meet project objectives. This need is
greatest when there are many project components that have different specializations. The
goal of the project management structure is the achievement of harmony of individual efforts
toward the accomplishment of the group goals. The project manager's principal responsibility
is to develop integrating strategies to ensure that a particular component or activity is

11
 organized in a way that all of the components, parts, subsystems, and organizational units fit
together as a functioning, integrated whole according to the project master plan.

1.6.2. Types of Project Organizations Structures

A project may use three organization structures available for design and all are defined by the
level of organizational authority given to the project manager:
1. Programmatic based, in which project managers have authority only within the program
focus or area
2. Matrix based, in which the project manager shares responsibility with other program unit
managers
3. Project based, in which project managers have total authority.
1. Programmatic Based
The programmatic focus refers to a traditional structure in which program sector managers have
formal authority over most resources. It is only suitable for projects within one program sector.
However, it is not suitable for projects that require a diverse mix of people with different
expertise from various program sectors. In a programmatic based organization, a project team is
staffed with people from the same area. All the resources needed for the project team come from
the same unit. For instance, if the project is related to the health area, the project resources come
from the health unit.

The most obvious advantage of programmatic based projects is that there are clear lines of
authority, in large projects the project managers tend to also be the program unit manager. There
is no need to negotiate with other program units for resources, since all of the staff needed for the

12
project will come from the same program area. Another advantage of this type of organization is
that the team members are usually familiar with each other, since they all work in the same area.
The team members also tend to bring applicable knowledge of the project.
A major disadvantage of the programmatic based organization is that the program area may not
have all of the specialists needed to work on a project. A nutrition project with a water
component, for instance, may have difficulty acquiring specialty resources such as civil
engineers, since the only people available will work in their own program unit.
Another disadvantage is that project team members may have other responsibilities in the
program unit since they may not be needed fulltime on a project. They may be assigned to other
projects, but it is more typical that they would have support responsibilities that could impact
their ability to meet project deadlines.
2. Matrix Based
Matrix based project organizations allow program units to focus on their specific technical
competencies and allow projects to be staffed with specialists from throughout the organization.
For instance, nutrition specialists may report to one program unit, but would be allocated out to
work on various projects. A health specialist might report to the health unit, but be temporarily
assigned to a project in another project that needs health expertise. It is common for people to
report to one person in the programmatic unit, while working for one or two project managers
from other projects in different programmatic units.

The main advantage of the matrix based organization is the efficient allocation of all resources,

13
especially scarce specialty skills that cannot be fully utilized by only one project. For instance,
monitoring and evaluation specialists may not be utilized full-time on a project, but can be fully
leveraged by working on multiple projects.

The matrix based organization is also the most flexible when dealing with changing
programmatic needs and priorities. Additional advantages to matrix management are: it allows
team members to share information more readily across the unit boundaries, allows for
specialization that can increase depth of knowledge and allow professional development and
career progression to be managed. It is easier for a program unit manager to loan an employee to
another manager without making the change permanent. It is therefore easier to accomplish work
objectives in an environment when task loads are shifting rapidly between programmatic units.
The main disadvantage is that the reporting relationships are complex.
Some people might report to programmatic unit managers for whom little work is done, while
actually working for one or more project managers. It becomes more important for staff
members to develop strong time management skills to ensure that they fulfill the work
expectations of multiple managers. This organization also requires communication and
cooperation between multiple programmatic unit managers and project managers since that all be
competing for time from the same resources.
Matrix management can put some difficulty on project managers because they must work closely
with other managers and workers in order to complete the project. The programmatic managers
may have different goals, objectives, and priorities than the project managers, and these would
have to be addressed in order to get the job done. An approach to help solve this situation is a
variation of the Matrix organization which includes a coordinating role that either supervises or
provides support to the project managers. In some organizations this is know as the Project
Management Office (PMO), dedicated to provide expertise, best practices, training,
methodologies and guidance to project managers.

14
The PMO unit also defines and maintains the standards of project management processes within
the organization. The PMO strives to standardize and introduce economies of scale in the
implementation of projects. The PMO is the source of documentation, guidance and metrics on
the practice of project management and implementation. The PMO can also help in the
prioritization of human resources assigned to projects.
3. Project Based
In this type of organization project managers have a high level of authority to manage and
control the project resources. The project manager in this structure has total authority over the
project and can acquire resources needed to accomplish project objectives from within
or outside the parent organization, subject only to the scope, quality, and budget constraints
identified in the project.
In the project based structure, personnel are specifically assigned to the project and report
directly to the project manager. The project manager is responsible for the performance appraisal
and career progression of all project team members while on the project. This leads to increased
project loyalty. Complete line authority over project efforts affords the project manager strong
project controls and centralized lines of communication. This leads to rapid reaction time and
improved responsiveness. Moreover, project personnel are retained on an exclusive rather than
shared or part-time basis. Project teams develop a strong sense of project identification and
ownership, with deep loyalty efforts to the project and a good understanding of the nature of
project’s activities, mission, or goals.

15
Pure project based organizations are more common among large and complicated projects. These
large projects can absorb the cost of maintaining an organization whose structure has some
duplication of effort and the less than cost-efficient use of resources. In fact, one major
disadvantage of the project based organization is the costly and inefficient use of personnel.
Project team members are generally dedicated to one project at a time, even though they may
rarely be needed on a full-time basis over the life cycle of the project. Project managers may tend
to retain their key personnel long after the work is completed, preventing their contribution to
other projects and their professional development.
In this type of organization, limited opportunities exist for knowledge sharing between projects,
and that is a frequent complaint among team members concerning the lack of career continuity
and opportunities for professional growth. In some cases, project personnel may experience a
great deal of uncertainty, as organization’s or donor’s priorities shift or the close of the project
seems imminent.
One disadvantage is duplication of resources, since scarce resources must be duplicated on
different projects. There can also be concerns about how to reallocate people and resources when
projects are completed. In a programmatic focus organization, the people still have jobs within
the program unit. In a project-based organization it is not always clear where everyone is
reassigned when the project is completed. Another disadvantage is that resources may not be
needed as a full time for the entire length of the project, increasing the need to manage short term
contracts with consultants and other subject matter experts.
A variety of this pure project approach is temporarily project-based organizations. This
organization consists of a project team pulled together temporarily from their program unit and
led by a project manager that does not report to a programmatic unit. The project manager has
the full authority and supervision of the project team.

16
Another design is based on a mixed structure that includes a matrix, programmatic focus and
project based; this mix reflects the need for more flexibility in a development organization to
accommodate different requirements. For example a health program may have a couple of
projects short term and long term all reporting to the program manager. An education project
may be organized on a matrix using resources part-time from other units, and a large water
project organized as a fully project-based were all staff report to the project manager. It is not
unusual to find this type of mixed designs on development organizations.

1.7. Management-By Project

Project management is the application of knowledge, skills, tools, and techniques to project
activities to meet project requirements. Project management is accomplished through the
processes such as: initiating, planning, executing, controlling and closing.

It is important to note that many of the processes within project managements are iterative in
nature. This is in part due to the existence of and the necessity for progressive elaboration in a
project throughout the project life cycle: i.e., the more you know about your project the better
you are able to manage it. The term project management is sometimes used to describe an
organizational to the management of ongoing operations this approach more properly called
management by projects, treats many aspect of ongoing operations as projects to apply project
management techniques to them.
Each year millions of pounds are spent around the globe delivering projects. Therefore effective
project management is critical for today’s organizations.
Consider the organizational impact of:
 Delivering a project late.
 Delivering a project over budget.
 Delivering a project which doesn’t meet scope requirements.
For some projects the impact of not delivering within these three basic parameters can have
disastrous effects on an organization.

Delivering a project late

Some projects have a defined and fixed target completion date; if this date is missed then the
organization may not be able to realize the benefits. For example a manufacturing facility which
will support the launch of a new pharmaceutical product for the treatment of respiratory disease

17
needs to be complete in time for the winter launch of the drug and certainly before the launch of
a competitor drug.
Delivering a project over budget
A project budget is a key part of the ‘organizational contract’; the benefits which will be realized
are directly related to the investment monies approved. For example a project to automate a
production process is approved so that the production capacity increases; if the investment is
greater than budgeted then the organization will not realize the expected benefits.
Delivering a project that doesn’t meet the scope requirements (quantity, quality, functionality)
A project delivers a specific amount of scope at a specified level of quality with certain
functional requirements; if this is not delivered then the completed project may not be able to
deliver the anticipated benefits. For example a project to improve production efficiency if not
capable of enabling the business benefits to be realized, and for those benefits to be tracked,
cannot be considered as successfully supporting the organization.

18
CHAPTER TWO: THE PROJECT CYCLE
2.1. Project Cycle: Meaning
In order to answer this basic question, we need to see and understand the general features of
project planning and the identifiable tasks therein. In this regard, there tends to be a natural
sequence in the way projects are planned and carried out. Before any project is actually realized,
it goes through various planning phases. The different phases, through which a project passes,
thus, constitute what is often called “the project cycle”. The main features of the project planning
process (or the project cycle) are information gathering, analysis, and decision-making.
The project cycle considers various stages in which each stage not only is grown out of the
proceeding ones (i.e. activities in progress) but also leads into the subsequent ones. The planning
process does not contain such a stringent sequence of events since all the aspects of the project
have to be considered simultaneously and, if necessary, adjusted to one another. Therefore, a
project cycle is a self-renewing cycle in that new projects may grow out of the old ones in a
continuous process and self-sustaining cycle of activity. These processes can usefully be
considered as a comprehensive sequence in the sense that for the project that is implemented,
each stage naturally follows the proceeding one and leads on to the next. Actually, the division
into stages is artificial; but it helps to understand project planning, though a continuous process,
has distinct phases and stages. And therefore, throughout the project cycle, the primary
preoccupation of the analyst is to consider alternatives, evaluate them, and to make decisions as
to which of them should be advanced to the next stage in the planning process. There are
alternative models that deal with the project cycle. However, in this chapter, more emphasis will
be given to two basic "Models" that are well accredited as models of the project cycle and widely
dealt in academic literatures. These are “The Baum’s Cycle (also called the World Bank
Project Cycle)” and “The UNIDO Project Cycle”. In addition to these two, a third model
developed in Ethiopia in 1990 by Development Projects Studies Authority (called “The
DEPSA’s Model”), which is nearly identical with the UNIDO cycle, will be briefly discussed.

2.2. The Baum Cycle (World Bank Project Cycle)

n this regard, the first basic model was developed by Warren C. Baum in 1970, which was by
then adopted by the World Bank as a project cycle. Initially, this model had recognized only four
main stages in the project cycle, namely:
 Identification;
19
  Preparation
 Appraisal and Selection; and
 Implementation
Later in 1978, the author has added additional two stages called “Negotiation” and
"Evaluation”. In this version of the Baum model, the issue of negotiation comes when projects
pass the appraisal process and become a candidate for realization. It is after appropriate
negotiations that projects become implementation entity. Then, projects already implemented
will be the concern for evaluation, which usually closes the cycle as evaluation often gives rise to
the identification of new projects. This model, therefore, includes six identifiable stages in the
project cycle. The World Bank accepted the amendment and adopted the new version since then.
Each of these stages briefly discussed in the next paragraphs.

2.2.1. Identification
The first stage in the project cycle and in the planning process too, is to search for and identify
potentially feasible projects. The sources for identifying such projects may be one or more of the
following:
 “Resource-based” project ideas that stem from the opportunity to make profitable use of
vailable resources
 Some projects may be “market-based”, the idea of which is arising from an identified
demand in home or overseas markets.
 Others may be “need-based”, where the purpose is to try to make available to all people in an
area of minimal amounts of certain basic material requirements and services.
 Well-informed “technical specialists” and “local leaders” are also common sources of
project ideas.
Technical specialists could identify areas with technical deficiencies, where they feel that new
investments might be profitable; while local leaders may provide some insights regarding
existing problems and bottlenecks, where investments need to be carried out for alleviating the
same.
 Ideas for new projects also come from “proposals to extend and/or expand existing
programs and projects” as well as from identifying technological alternatives.
In general, most projects start as an elementary idea. Some simple ideas are elaborated to the
extent that eventually the name “project” can formally be given to it.

20
2.2.2. Preparation
Once projects are identified, there begins a new stage that calls for progressively more detailed
preparation and analysis of a project's aspects.
 At this stage, the project is being seriously considered as a definite investment action.
 Project preparation, (also called project formulation), involves pre-feasibility and feasibility
studies and covers the establishment of commercial, technical, institutional, financial, and
socio- economic feasibility.
 To this end, decisions have to be made on the scope of the project, location and site, soil and
hydrological requirements, project size (farm or factory size), etc.
 Resource base investigations are undertaken and alternative forms of projects are explored.
 Complete technical specifications of distinct proposals accompanied by full details of
financial and economic costs and benefits are the outcome of the project preparation stage.
 The project now exists as a set of tangible proposals. Practically, project design and
formulation is an area in which local and international consultants are very active, especially
for big projects that cover large areas and have big budgets.

2.2.3. Appraisal and Selection

After a project has been prepared, it is generally appropriate to make a critical review or conduct
an independent appraisal.
 This provides an opportunity to re-examine every aspect of the project plan and hence, helps
to determine whether the proposal is appropriate, sound, and acceptable before large sums of
budget, time and effort are committed.
 Generally, internal government staffs only used, for public projects, for this work and not
consultants, and projects, in this regard, are appraised both in the field and at the desk
level.
 For private investments too, only internal staffs opt to involve in the appraisal process.
 Appraisals should cover at least seven aspects of a project, each of which must have been
given special considerations during the project preparation phase.
The seven aspects, in this regard, are the following:
a) Technical: here the appraisers concentrate in verifying whether what is proposed will work
in the way suggested or not.

21
 b) Financial: the appraisers try to see if the requirements for money needed by the project
have been calculated properly, their sources are all identified, and reasonable plans for their
repayment are made where necessary.
c) Commercial: the way the necessary inputs for the project are conceived to be supplied is
examined and the arrangements for the disposal (marketing) of the products are verified.
d) Incentive: the appraisers see to it whether things are arranged in such a way that all those
whose participation is required will find it in their interest to take part in the project, at least
to the extent envisaged in the plan.
e) Economic: the appraisers here try to see whether what is proposed is good from the
viewpoint of the national economic development interest, all project effects (positive as
well as negative) are taken into account, and check if all are correctly valued. Socio-
economic aspect is the other name given to the same.
f) Managerial: this aspect of the appraisal process examines if the capacity exists for
operating the project and see if those responsible ones can operate it satisfactorily.
Moreover, it tries to see if the responsible are given sufficient power and scope to do what
is required.
g) Organizational: the appraisers examine the project if it is organized internally and
externally into units, contract, policy, institution, etc so as to allow the proposals to be
carried out properly and to allow for change as the project develops.
The appraisal process builds on the project plan, but may involve new information if the
appraisal team feels that some of the data used at preparation or some assumptions are faulty.
 The implications and/or impacts of the project on the society and the environment are also
more thoroughly investigated and documented.
 Similarly, the technical design, financial measures, commercial aspects, incentives, and
economic parameters are thoroughly scrutinized. These issues are the subjects of specialized
appraisal report.
 Based on an appraisal report, decisions are made whether to go ahead with the project.
 The appraisal may also change the basic project plan or develop a new plan.
 To this end, comments often made at the appraisal stage frequently give rise to alterations in
the project plan (project proposal).

22
After appraisal, the viable project proposals are chosen for implementation on the basis of the
priorities of the stakeholders and the available resources.
 If the project involves loan finance, the lender will almost certainly wish to carry out its own
appraisal before completing negotiations with the borrower.
 Following appraisal, some projects may be discarded as well.

2.2.4. Negotiation and Financing

Once the project to be implemented is agreed on, for donor funded projects, discussions are held
on funding and associated aspects of funding such as
 Conditions for grants,  Flow of funds,
 Repayment period,  Contributions from stakeholders, and
 Interest rates on loans,  Whether there is co-financing or not.
This culminates into an “Agreement Document” for the project, which binds all the parties
involved during implementation of the project.

2.2.5. Implementation
The objective of any effort in the process of project planning and analysis, clearly, is to come up
with projects that can be implemented and/or realized to the benefit of the society.
 Thus, implementation is, perhaps, the most important part of the project cycle.
 In this stage, funds are actually disbursed to get the project started and keep running.
 A major priority during this stage is to ensure that the project is carried out in accordance
with the basic plan (i.e. within the cost, quality, and time standards).
 Problems frequently occur as the economic and financial environment during
implementation often differ from the expectations at the time of appraisal.
 Frequently, original proposals are modified, though usually only with difficulty, because
of the need to get agreement between the parties involved.
 It is during implementation that many of the real problems of projects are first identified.
 Because of this, the feedback effects on the discovery and design of new projects as well
as the deficiencies in the capabilities of the project actor can be revealed.
 To this end, to allow the management to become aware of the difficulties that might arise,
recording, monitoring, and progress reporting should be integral parts of the
implementation stage.

23
Some of the aspects of implementation that are of particular relevance to project planning and
analysis, therefore, are the following:
1. The first aspect is that, the better and more realistic a project plan is, the more likely that
the plan can be carried out and obviously the expected benefits can be realized.
 This emphasizes once again the need for careful attention to each of the seven aspects of
projects.
2. The second aspect is that, project implementation must be flexible.
 Circumstances will change and, therefore, project managers must be able to respond
intelligently to these changes.
 The common ones are technical changes; price Changes; economic policy and
environmental changes; political changes, etc.
 Moreover, all these alter the way in which projects should be implemented.

2.2.6. Evaluation
The final phase in the project cycle is evaluation. Once a project has been carried out, it is often
useful, (though not always done),
A. To look back what took place in the past,
B. To compare actual progress with the plans, and
C. To judge whether the decisions and actions taken were responsible and useful.
Evaluation is not limited only to completed projects.
 It is a most important managerial tool in on-going projects as formalized evaluations
may take place at several times in the life of a project.
 Evaluation may be undertaken when the project is in trouble as the first step in a
re-planning effort.
 Careful evaluation should precede any effort to plan for new projects and it is also
needed to follow-up the progress of projects.
 Moreover, a final evaluation should be undertaken when a project is terminated or is well
into routine operation.
Different groups or units may do the evaluation of projects. Among others,
 Project’s management unit often continuously evaluates its experience as
implementation proceeds.

24
  The sponsoring agency, perhaps, the operating ministry, the planning agency, or an
external assistant agency may undertake evaluation.

2.3. The UNIDO Project Cycle

The UNIDO has established a project cycle comprising the following three distinct phases:
1. The pre - investment phase
2. The investment phase, and
3. The operating phase
Each of these three phases is divided into stages, some of which constitute important
consultancy, engineering, and industrial (manufacturing) activities. Above all, increasing
importance should be attached to the pre-investment phase as a central point of attention,
because the success or failure of an industrial project ultimately depends on the marketing,
technical, financial, and economic findings and their interpretations, especially in the feasibility
study.

2.3.1. The Pre–Investment Phase

According to the UNIDO, Manual for Industrial Feasibility Study, the pre-investment phase
comprises several stages. These are:
 Identification of investment opportunities (opportunity studies);
 Analysis of project alternatives, preliminary project selection, and project preparation
(pre-feasibility and feasibility studies);and
 Project appraisal, selection, and investment decision (specialized appraisal reports)
A. Opportunity Studies
The identification of investment opportunities is the starting point in a series of investment
related activities, when potential investors (private or public) are interested in obtaining
information on newly identified viable investment opportunities.
In this regard, the main instrument used to quantify the parameters, information, and data
required to develop a project idea into a proposal is the opportunity study, which should analyze:
 Natural resources,
 Future demand for consumer goods,
 Import substitution and export possibilities,
 Expansions of existing capacity,

25
  Diversification
 Environmental impacts (mandatory or non-revenue producing projects),
Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on
detailed analysis.
B. Pre-Feasibility Studies
The project idea must be elaborated in a more detailed study. However, formulation of a
feasibility study that enables a definite decision to be made on the project is a costly and time-
consuming task. Therefore, before assigning larger funds for such a study, prior assessment of
the project's idea might be made in a pre-feasibility study.
A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study, the difference being in the degree of detail of the
information obtained and the intensity with which project alternatives are discussed. The
structure of a pre-feasibility study should be the same as that of a detailed feasibility study,
however.
C. Support /Functional/ Studies
Support or functional studies cover aspects of an investment project, and are required as
prerequisites for, or in support of, pre-feasibility and feasibility studies, particularly for large-
scale investment proposals.
This may include:
 Market studies of products,  Environmental impact assessment,
 Raw material & factory supply studies,  Economies of scale studies, and
 Laboratory and pilot plant tests,  Equipment selection studies
 Location studies,
The contents of a support study vary, depending on the type and nature of projects.
D. Feasibility Studies
A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic, and environment prerequisites for an investment
project should, therefore, be defined, refined, and critically examined based on alternative
solutions already reviewed in the pre- feasibility study.
The financial part of the study covers the scope of the investment, including the net working
capital, the production and marketing costs, sales revenue, and the return on capital invested.

26
 Final estimates on investment and production costs and its subsequent calculations of
financial and economic profitability are only meaningful if the scope of the project is defined
unequivocally in order not to omit any essential part and its related cost.
There is no uniform approach or pattern to cover all industrial projects of whatever type, size, or
category in such studies.
 The emphasis on the components varies from project to project.
 For most industrial projects, however, there is a broad format of general application – bearing
in mind that the larger the project the more complex will be the information required.
 Although feasibility studies are similar in content to pre-feasibility studies, the industrial
investment project must be worked out with the greatest accuracy in an iterative optimization
process, with feedback and inter linkages, including the identification of commercial,
technical, and entrepreneurial risks.
The sensitive parameters such as the size of the market, the production program, or the
mechanical equipment’s selected should be examined more closely.
Moreover, a feasibility study should be carried out only if the necessary financing facilities, as
determined by the studies, can be identified with a faire degree of accuracy.
 There would be little sense in a feasibility study without the reliable assurance that, in the
event of positive study findings, funds could be made available.
 For that reason, possible project financing must be considered as early as the feasibility
study stage, because financing conditions have direct effects on total costs and, thus, on the
financial feasibility of the project.

E. Appraisal Report
When a feasibility study is completed, various parties will carry out their own appraisal of the
investment project in accordance with their individual objectives and evaluation of expected
risks, costs, and gains.
 Large investment and development finance institutions have a formalized project appraisal
procedure and usually prepare appraisal reports.
 This is the reason why project appraisal should be considered an independent stage of the
pre-investment phase, marked by the final investment and financing decisions taken by the
project promoters.

27
 The appraisal report will prove whether the pre-production expenditures spent since the
initiation of the project idea were well spent or not.
 Project appraisal as carried out by financial institutions concentrates on the health of the
company to be financed, the returns to be obtained by equity holders, and the protection of
its creditors.
 The techniques applied to appraise projects in line with these criteria center around
technical, commercial, market, managerial, organizational, financial, and, possibly, socio-
economic aspects.

2.3.2. The Investment/Implementation Phase

The investment or implementation phase of a project provides wide scope for consultancy and
engineering work, primarily in the field of project management.
The investment phase can be divided into the following stages:
 Establishing the legal, financial, and organizational framework;
 Tendering, evaluation of bids, and negotiations;
 Technology acquisition and transfer;
 Detailed engineering design and contract, including tendering, evaluation of bids, and
negotiations;
 Acquisition of land, construction work, and installation;
 Pre-production marketing, including the securing of supplies and suppliers and setting up the
administration of the firm;
 Recruitment and training of personnel; and
 Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the final selection
of construction planning and time scheduling of factory construction, as well as the preparation
of flow charts, scale drawing, and a wide variety of layouts.
During the stage of tendering and evaluation of bids, it is especially important to receive
comprehensive tenders for goods and services for the project from a sufficiently large number of
national and international suppliers of proven efficiency and with good delivery capacity.
Negotiations and contracting are concerned with the legal obligations arising from the
acquisition of technology, the construction of buildings, the purchase and installation of
machinery and equipment, and financing. This stage covers the signing of contracts between the

28
investor or entrepreneur, on the one hand, and the financing institutions, consultants, architects,
and suppliers of raw materials and required inputs, on the other.
The construction stage involves site preparation, construction of buildings and other civil works,
together with the erection and installation of equipment, in accordance with proper programming
and scheduling.
The personnel recruitment and training stage, which should proceed simultaneously with the
construction stage, may prove very crucial for the expected growth of productivity and efficiency
in plant operations.
Plant commissioning and start-up is usually a brief, but technically critical, span in project
implementation. It links the proceeding construction phase and the following operational
(production) phase.

2.3.3. The Operating Phase

The problem of the operating phase needs to be considered from both a short- and a long-term
viewpoint.
The short-term view relates to the initial, after commencement of production period, when a
number of problems may arise concerning such matters as the applications of production
techniques, operation of equipment, or inadequate labor productivity owing to lack of qualified
staff and labor. Most of these problems have their origin in the implementation phase and hence,
relatively easy to overcome as there is learning over time.
The long-term view relates to chosen strategies and the associated production and marketing
costs as well as sales revenues. These have direct relationships with the projections made at the
pre-investment phase. If such strategies and projections prove faulty, any remedial measures
will not only be difficult but may prove highly expensive.

29
 Exihbet.2.1: Summary of UNIDO Project cycle

2.4. The DEPSA’s Project Cycle

There are various ways in which the project cycle may be viewed and portrayed depending on
the purpose, emphasis, and detail required to illustrate. According to the Guidelines to project
planning in Ethiopia (1990) of Development Project Studies Authority (DEPSA), the project
cycle comprises three major phases.
1. Pre - investment phase, 3. Operating phase
2. Investment phase, and
Each of these three phases may be divided into stages. The Guideline has divided the above
phases into six stages as follows:
1. Identification, 4. Implementation,
2. Preparation, 5. Operation, and
3. Appraisal/decision, 6. Ex-post evaluation
The pre-investment phase consists of the first three stages, while the investment phase includes
the fourth stage, and the operation phase covers the last two stages.

30
2.5. Project Cycle Management [PCM]
Project management Covers the whole set of concepts, techniques, and tools involved in the
effective realization of project goals through dynamically coordinating and/or administrating the
human, material, and financial resources and by creating conducive environment for properly
doing things along with efficient utilization of resources. In this process, every one having stake
in the project implementation and/or realization need be regularly consulted in matters affecting
the project in order to ensure proper co-ordination of resources and project activities. More to
this, in the process of project management, the project manager (or the coordinator) should be
given commensurate authority and responsibility in order to enable him/her make decisions
consistent with the project goals and objectives, being responsible for it, without delay and as
required. This smoothen the process of implementation as well as enhances the achievement of
basic objectives and the satisfaction of stakeholders.
 Project cycle management, therefore, implies a process-oriented project management
system covering the whole project cycle from project conception to project completion.
 It involves a combination of the various project cycle phases with corresponding
management task.
 It is an effective decision-making process to ensure certain actions occur at the right time
within the life of a project in order to attain the desired and specified quality output within
the budget.
The basic tasks involved in project cycle management are
 Creating (or building) capabilities for implementation,
 Planning the tasks for implementation,
 Follow-up of the progress in implementation (referred to as monitoring), and
 Conduct performance evaluations periodically (i.e. on-going) as well as final evaluation
after full implementation of the project.
To this effect, the concerned (for instance, the project promoters) need to comprehend, as
early as the initiation of the project, the importance of designing and/or building sound
project organization. In general, a sound project organization enables the project
implementation team to overcome diverse obstacles that potentially encounter in the process
of implementation.

31
CHAPTER THREE: PROJECT IDENTIFICATION

3.1. Project Identification

The search for promising project ideas is the first step towards establishing a successful venture.
The key to success lays in getting into the right business at the right time. The objective is to
identify investment opportunities, which are prima facie feasible and promising and merit further
examination and appraisal.
Project identification is the process of finding projects that could contribute towards achieving
specified development objectives. In principle, project identification should be an integral part of
the macro-planning exercise, with sectoral information and strategies being the main sources of
project ideas.
In practice, projects often are not derived from national and/or sectoral plans, however. Instead,
projects may originate from several sources. Irrespective of their origin, project ideas generally
should aim at overcoming constraints on the national development efforts (be it material, human,
or institutional constraint) or at meeting unsatisfied needs/ demand for goods and services. The
prevailing constraints, needs, and demands should be interpreted broadly to include, for instance,
foreign exchange constraints that might indicate the need to undertake projects for export
promotion or import substitution.
The variety of projects makes it impossible to prepare an exhaustive list of sources from where
project ideas emanate; but much depending on the experience and imagination of those entrusted
with the task of initiating development project. In general, one can distinguish two levels where
project ideas are born: macro-level and the micro-level.

3.2. Sources of Project Ideas

A. Macro Sources of Project Ideas
Among the various institutions and sources, the following macro sources are considered the
major ones in order to generate project ideas, especially in developing countries:
 Federal/Central or Regional Governments;
 Bilateral and Multilateral Agreement; and
 International Development Agencies
In general, in developing countries, the government remains to be the major source of project
ideas.

32
The following are presumed to be the major reasons for governments to be important sources of
project ideas in developing nations:
 They often have the necessary resources for undertaking opportunity studies;
 They do also have unlimited access to data & information;
 They do have the required facilities to conduct survey, studies, and reviews;
Moreover, such governments are fully familiar with the development objectives, priorities, and
strategies.
 In this regard, the development goals, priorities, and strategies often are not clearly
communicated to groups (individuals and/or institutions) at micro-level.
 The development goals in such contexts also seem to be ambiguous to groups at the micro-
level and/or may not be consistent with the interests of local groups.
Specifically, project ideas often emanate from the following macro sources:
 National policies, strategies, and priorities as may be enunciated (or articulated) by
government from time to time.
 National, sectoral, sub-sectoral, or regional plans and strategies supplemented by special
studies, called opportunity studies, conducted with the explicit aim of translating national,
sectoral, sub-sectoral, and regional programs into specific projects.
 General surveys, resource potential surveys, regional studies, master plan and statistical
publications, which indicate directly or indirectly investment opportunities.
 Constraints on the development process due to shortage of essential infrastructure
facilities, problems in the balance of payments, etc.
 Government decisions to correct social and regional inequalities or to satisfy basic needs
of the people through development projects
 A possible external threat that necessitates projects aiming at achieving, for example,
self-sufficiency in basic material, energy, transportation, etc.
 Unusual events such as droughts, floods, earthquake, hostilities, etc.
B. Micro Sources of Project Ideas
Apart from the macro sources for generating project ideas, there are diverse kinds of institutions
and/or economic entities that are considered micro sources of project ideas. The following are
among the major micro sources of investment (or project ideas):
 Private and Public Enterprises;  Local Groups or Organizations;

33
  Consumer Groups and Associations;  Cooperatives, Farmers’ Unions, etc;
 Financial Institutions/Credit  New Technology Suppliers and so on.
Associations;
In general, project ideas that emanate from the micro-sources are obtained (and/or generated)
based on one or many of the following conditions:
 The identification of unsatisfied demand or needs;
 The existence of unused or underutilized natural or human resources and the perception of
opportunities for their efficient use;
 The need to remove shortages in essential materials, services, or facilities that constrain
development efforts;
 The initiative of private or public enterprises 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;

3.3. Who Identifies Projects?

There are quite large number of institutions and/or groups that often identify investment
opportunities (or generate project ideas) in the society. These entities may be private firms,
public enterprises, government units, local or international development agencies, financial
institutions, as well as profit seeking or not-for profit organizations. Listed below are the major
groups that are involved, by large, in the identification of projects in the society:
 Local and/or international NGOs;
 Large scale individual private sector producers;
 Product marketing organizations;
 Private sector companies (local/multinational);
 State owned enterprises & organizations;
 Development banks (local as well as foreign);
 Small producers organizations/producers’ unions;
 Government ministries, authorities, agencies, and commissions;
 International development agencies, aid agencies, and self-aid associations;
 Local governments and state, regional, and sub-regional authorities;

34
 Local political & pressure groups such as opposition parties;
 Credit institutions (such as credit unions, savings and loan associations, saving banks,
commercial banks) and cooperatives; and so on.

3.4. Project Concepts and Profiles

Project profiles provide basic information on the product, machinery required, source of
availability of men and machinery, raw material and profit margin etc. You can formulate   your
own plans depending upon the quantum and quality of the product you wish to manufacture.

3.4.1. Executive Summary

The executive summary is a summary of the findings in the feasibility study. It outlines the
project background, critical data & information, major outcomes, and relevant conclusions &
recommendations given by the team of professionals, who had participated in the feasibility
study.
Structure: the Executive Summary is prepared in line with the structure of the body of the
feasibility study.
Content: the Executive Summary presents summary of the contents of the feasibility study
pertaining to the following aspects:
 Project Background & History;
 Market and Demand Analysis;
 Raw materials & Supplies Aspects;
 Location, Site, and Environmental Impacts;
 Engineering and Technology Aspects;
 Organization and Management Issues;
 Human Resource Requirements;
 Financial Analysis and Appraisal (Total Investment Cost, COGS, Operating Costs,
Financial Costs);
 Economic Impacts/Social Cost-Benefit Analysis and Appraisal;
 Project Financing; and
 Project Implementation Schedule.

3.4.2. Project Background and Basic Idea

Deliberates how well the project fits in to the overall development framework and objectives.

35
 Description of the Project Idea includes:
 Project Objectives
 Project Location and Site;
 Product and Product Mix;
 Plant Capacity & Implementation;
 Project Consistency with Development Priorities;
 Policies Supporting the Project (Economic, Industrial, Sectoral, Social, etc);
 Geographic Spread of Sale of Products; and
 Project Coverage (Sectoral & Sub-Sectoral).
Project Promoter/Initiators par includes:
 Who are the promoters?
 What is the role of the promoters in the project?
Project History Part includes:
 Historical Developments of the project (major milestones).
 Opportunities Conducted (opportunity & feasibility Studies).
 Conclusions of the feasibility study (summary of the findings and conclusions in the study).
Feasibility Study Part includes:
 Who undertook the feasibility study?
 Who sponsored the feasibility study?
Costs of the Studies Part include:
 Costs of the opportunity and feasibility studies.
Table.1. project profile
Project Profile
 1. Project Title:
 2. Project location:
 3. Project Authorities:
 Administering Authority
 Implementation Authority
 4. Project duration:
 5. Project Background:
 What are the problems that you want to solve?

36
 Who are the main beneficiaries of the project? Duration of the project
 6. Overall Objectives of the Project: The Overall Objectives of the project should describe
the wider and longer-term sectoral or national plan objectives to which the project is
designed to contribute. It should concisely state the sector objective the project contributes
to. Note that other projects or activities will also be required for the Overall Objective to be
achieved.
 7. Project Purpose: There should only be one project purpose and it should contribute to the
achievement of the Overall Objective. The Project Purpose should describe the benefits that
beneficiaries derive from the project results or outputs.
 8. Project Results or Outputs: The Results or Outputs of the project describe the services to
be provided by the project to the target group. Project managers can be held directly
accountable for producing the project Results or outputs.
 9. Project Activities: The activities describe what the project will do in order to deliver its
intended Results or Outputs. Only the main Activities should be included.
 10. Costs of Activities (or inputs) for each year of the project: Donor component

3.5. Prioritization and Ranking

1. Prioritization
The need for project prioritization appears when an organization has two or more either
independent or dependent (portfolio) projects that are performed in parallel. In order to ensure
the achievement of strategic goals and objectives, that organization needs to focus on right
projects among the variety. But how can they do this? How to identify the most preferable
projects for implementation at the given point of time? Finally, how to be sure that the right
projects are being performed? In this article we are going to answer these critical questions. We
will focus on definition of the project prioritization process and explain what criteria to use for
ranking simultaneous projects.
Project Prioritization Process is a structured and consistent activity that aims to analyze the
current operational environment to identify any projects running in parallel within the same
portfolio, develop a scoring model including ranking criteria, and apply that model to prioritizing
the projects in order to determine the execution order that ensures the highest efficiency of the
overall portfolio. The process serves as a framework for managing the effectiveness of parallel
projects.

37
 We divide the prioritization process into the following key steps:
 Collection – you must collect and gather all the data about your projects.
 Ranking – you must develop and use a ranking model that includes criteria for prioritizing.
 Verification – you must approve the ranked projects.
Prioritization Techniques
A. Strategic Alignment
Strategic alignment refers to the linkage between what the organizations is trying to achieve, e.g.
vision, goals, and values against a core set of deliverables, such as projects, priorities, or business
processes. Alignment refers to comparing each of the deliverables against what the organization
is trying to achieve to discern relative fit. If items are strongly aligned, then it is surmised that
there is alignment. When items kind of fit or do not seem to match up then one could surmise
there is not an alignment. In most instances, these are a judgment call. Items which appear to
offer real value in meeting the organizations vision, goals and values should receive a higher
prioritization. Those deliverables that meet more than one strategic area should be rated even
higher than those that link to a single element.
B. High-Medium-Low
In its simplest form, High-Medium-Low is subjective criteria that could be applied to a list of
deliverables that use relative size as the criteria. While size is used most often when ranking
items high-medium-low or small-medium-large, the same criteria can also be applied to
complexity, duration, benefits and cost relatively easy.
Caution! When applying the use of small-medium-large or high-medium-low to multiple criteria
it is critical to ensure that when applied, all are referencing the same “desired” outcome. Merely
assuming “high” is good in all categories may result in ambiguity in your results. For example, if
we apply benefit and cost using high as a good outcome, we will tend to favor expensive
outcomes (cost=high=good) over other options or alternatives. This caution will be detailed
further later in this section. Use of high-medium-low as a simple prioritization technique is
detailed below:
Options RISK Low-Good, COST Low-Good, TIME TO DO Low-Good, RANK
Med-Depends, High- Med-Depends, High- Med-Depends, High-Bad
Bad Bad
Option A High High High 3

38
Option B Med Med High 2
Option C Low Low Med 1
As noted in the above example, items ranked low are preferred over items ranked high.
C. Weighted Criteria
This form of prioritization recognizes that all criteria are not created equal. A weighted criteria
approach allows the prioritizers to identify which criteria are more important and assign a higher
value/weight to the criteria. An example of this form of prioritization can be found in the
decision making section.
Weighted criteria is generally accepted as the best form of prioritization, however it does require
additional steps and is viewed as taking too much time or as too complex in some organizations.
2. Ranking
This form of prioritization is seen as the most difficult to undertake when done alone. The more
items to rank, the more difficult it is to classify. Given the subjective nature of the analysis, e.g.
item “C” is more important than “A” and “E” is more important than “C”, etc., this is often best
done in group settings with 2-3 people assigning the relative importance.
There are several techniques used to help facilitating rank ordering items, namely a clear focus as
to why they are ranked as they are and using pre-sorting to ease completion. The clear focus
technique identifies a single set of values by which to make the decision of what is most
important. Often in business, the focus is a positive impact on the bottom line. Conversely, in
government and non-profits will often look at what is best for citizens/clients. The higher
likelihood of a beneficial outcome, the higher the item will be ranked.
Using a pre-sort technique suggests sorting items into different categories before ranking, such as
looking at items from a high-medium and low perspective. The items with high benefits are put
in the top category and those with lessor benefits are put in the bottom category. Once all items
are initially sorted, ranking within the individual categories is an easier task. Once completed, it
is best to revisit the entire list to ensure that it is ranked appropriately and that each rank number
(1,2,3,4) is used only once.

3.6. Establish Ranking Criteria

Below we suggest a list of measures you can use as ranking criteria for prioritizing parallel or
portfolio projects. Please note the list is not full and can be supplemented with more items (for
example, Safety, Integration, Connectivity, Mobility, Cost-effectiveness, Implement ability,

39
etc.). In this publication we describe the key criteria only. If needed, you can develop your own
criteria when doing your project prioritization process.
a) Efficiency - The measure of efficiency shows a project’s ability to produce the desired
outcome with the minimized possible consumption of the resources available to the project.
If the project is able to turn inputs into output consuming fewer resources, then this project
appears to be efficient. Common formula for calculating project efficiency is:
Actual Output  x 100%,
Standard Output
b) Changeability - It proves a project’s ability to realize the planned changes as well as to
adequately react to any new changes that seem to be vital and important to project success.
As the higher changeability is, as the greater impact the project has to the changing
environment. This means your project is highly adaptable to the changes so the project gains
more chances to produce the desired outcome under preset or altering requirements.
c) Manageability - This item determines how much a project can be led and directed using
existing controls. The measure is characterized by:
 Planning  Leading
 Monitoring  Controlling
These characteristics determine whether your projects are manageable. Higher manageability
entails higher effectiveness.
d) Coordination - This metric proves whether a project is well coordinated and whether it
follows the adopted management plan. It relates to project effectiveness. The project manager
coordinates the project effectively if this person is able to ensure that the project resources
are used and consumed in pursuit of the specified goals and objectives. Remember: your
project gets higher value if it is highly “coordinatable”.
e) Sustainability - It indicates whether a project is able to maintain continued development,
without significant deterioration of the existing environment. Your project is sustainable if it
generates the desired results without reducing its current productive capacity. Sustainable
projects should obtain higher ranking.

3.7. Develop a Ranking Model

Now it is time to develop a scoring model that explains how you will do the ranking process. It
means you need to decide which criteria to use and what data is required for the evaluation. We

40
suggest you use all the criteria listed here. Also you can develop your own measures that fit into
your specific portfolio. Remember: as more criteria you use, as more accurate and appropriate
project ranking you are likely to get.
Now regarding the data required for ranking. Here’s a list of the data sources you need to
review to get the data required for project analysis and ranking:
 Current project status against plan (you can gain this data from status reports and
meetings)
 Deliverables accepted/unaccepted at any given point in time
 Scope creep data
 Stakeholder involvement level (can be retrieved from Stakeholders Matrix)
 User requirements
 Project goals and objectives and their status
 Issue and risk logs
 Team training and capabilities
 Other important papers and records that explain the current performance of every
individual project.
You must gather as much information on your portfolio projects as possible in order to get a
clear picture of what’s going on in the portfolio environment. Below we give a project score
table example.

In this example, Project 3 gets higher score (320) as compared to Project 1 (222) and Project 2
(253). The Score column of the table is used as the basis to set priorities for the projects.
Actually Project 3 gains the highest priority while the rest two projects obtain lower priority.
Please note we do not explain here how to calculate the data in the table. It is the matter of your
project portfolio management team to decide what scoring approach or methodology to use for
evaluating by the criteria. In the given example, we used our own method.

41
 3.8. Identification of Commercial Project Ideas
Any project can be commercially viable only if it is able to sell at a profit and the collection from
customers is on time. For this purpose it would be necessary to study demand and supply pattern
of that particular product to determine its marketability. Various methods such as trend method,
regression method for estimation of demand are employed which is then to be matched with the
available supply of a particular product. The prospects of exporting the product may also be
examined while assessing the demand.

3.9. Project Identification Studies and Process of Idea Generation

3.9.1. Identification Studies

When we are more concerned about project identification, the formal task of conducting
identification studies, (opportunity studies), is one of the best available option to project
planners, which is critically important to generate and/or come up with useful information.

3.9.2. Objective of Identification Studies:

The major objective of identification studies is to collect sufficient data and/or generate
beneficial information concerning the background, technical, economic, social, and
environmental aspect of a potential project.
In general, there are four approaches for conducting project identification studies. These are area
studies, industrial studies, resource-based studies, and sectoral studies. In this regard, each of the
approaches focuses on relatively unique aspects and pay attention to some important variables
(or considerations). One may follow any one of these approaches depending on the
appropriateness for the type of project being pursued and the significance it has to the concerned.
Exhibit 3.1 depicts the main approaches for project identification studies together with the
relevant aspects to be assessed and the major considerations therein.
Exhibit 3.1: Project Identification Studies
Approaches Aspects Considerations
Area Studies  Identification of opportunities in a given Backward (less developed and or
area such as localities, regions, states, etc. Marginalized areas.
Industry Studies  Identification of opportunities in the Development plans
industrial sector. & programs;
 Specific marketable product investment policies;

42
  Diversification opportunities economic policies; and industrial
 Import substitution and export policies.
possibilities; etc.
Resource- Based Opportunities in exploiting natural resources Resource allocation & utilization
studies Natural resource analysis policies; industrial policies; and
Import substitution; other policies &priorities.
Export possibilities

Sectoral Analysis/ Satisfaction of social needs/removing sectoral Sectoral strategies; sectoral

Studies problems: priorities;
• Agriculture sector, existing unsatisfied
• Manufacturing sector, needs; sectoral
• Health sector, development level;
• Education sector, etc.
• Service sector, etc.

3.9.3. Project Idea Generation Process

The aspects indicated in 1 through 7 below more or less explain the process of generating project
ideas.
1. Survey & Review of Endowments and Facilities (Infrastructures):
Surveying, reviewing, and analyzing existing policies, resource endowments, and socio-
economic variables.
 Natural Resources: review of the natural resource endowments of the country.
 Human Resource: review of educational standards and facilities.
 Socio-Economic Variables: review of various socio-economic factors. This, among others,
includes: Housing facilities & standards; Utilities services; Health and nutrition services; and
Income distribution.
2. Field Survey and Interview:
This includes asking people regarding what goods or services they want, which helps to identify
if any unsatisfied need exists. It also involves:
 Obtaining information about their existing problems may be through directly asking them
(i.e. people about what their problems are).

43
 Asking the public unit closest to the people at the grass-root level about their problems
and/or needs (asking him/her what the community needs/what the people need).
3. Observing and Analyzing Prevailing Situation:
Observation and analysis of the prevailing situation is also an important means in order for
generating project ideas. This includes:
 Observation & examination of current demand & supply situation for goods/services;
 Examination of past & future consumption/production trends for goods and services;
 Observing possibilities for improvement of goods and services (both in terms of quality &
quantity);
 Observing opportunities & threats in the invention & introduction of new technologies, etc.
4. Participating in Deliberations, Discussions, and Trainings:
Participating in various discussion forums and deliberations made in seminars, workshops, and
conferences (both local and international) are believed to be important for generating useful
investment ideas.
 Meeting at different levels within the organization;
 Educational & training programs; and the like.
5. Brainstorming:
Brainstorming is also an important means for generating project ideas. In brainstorming sessions,
a group of people suggests different ideas regarding future activities very quickly before
analyzing and/or considering the source of the idea more carefully. Brainstorming is essential
before detailed analysis of an idea of a project as well as before detailed planning.
6. Exposures to Publications & Media:
Reading various publications (scientific or otherwise) and exposures to different communication
media is essential for generating project ideas. This may include:
 Print media such as journals, books, magazines, newsletter, newspapers, etc;
 Audio-visual media (discussions and reports on radio, TV, etc); and
 Visual media (cinema, video, etc).
7. Informal Discussions and Meetings:
In addition to the above aspects, it is also useful to take note of ideas thrown in informal (or non-
formal) discussions and meetings.
This also includes exchange of ideas in friendship/fraternal gatherings and get-togethers.

44
In a nut shell, all the above aspects and/or procedures might eventually lead to the generation of
project ideas about which we develop feeling of feasibility. The individual(s) or entities
generating the idea(s) develop a kind of feeling that the identified project(s) might be feasible
candidate(s) for further and more detailed analysis, appraisal, and implementation.
Therefore, the feeling of feasibility is a good basis for identification of potentially promising
projects that worth considering. Eventually, the project idea generated becomes an eligible
candidate for further study and preparation. Such ideas need be thoroughly analyzed and
assessed based on tangible facts and data.

3.10. Approaches to Project Idea Generation

Broadly speaking, project ideas are said to be generated through one of the following two
approaches: Top – Down (Macro) Approach or Bottom – Up (Micro) Approach. Each of these
approaches is discussed next.

3.10.1. Top – Down Approach

It is an approach whereby individuals at the micro level, or grass root level, are not involved in
the process of project idea generation.
 Projects are identified at higher planning (or macro) level and implemented at the
decision of officials at the top.
 It is based on the national plan and strategies.
The Government need not go down because the problem might be understandable. However,
such projects may not relate to the existing reality in particular vicinity and hence, might
encounter resistance and/or implementation constraints, as the people in the context might lack
interest to cooperate with.
In general, the top-down approach for project idea generation helps to identify implementation
entities at given local area that may or may not be consistent with the needs in the context. In
other words, such projects have long-term orientations that, perhaps, need not necessarily be
compatible with the existing reality in the locality.

3.10.2. Bottom – Up Approach

A bottom – up idea generation process requires base line surveys, which is based on the realities
existing in different localities.

45
 Such projects might be easy to implement (or realize) due to their fitness to the realities in a
given context.
 May get community support, successfully implemented, and the potential benefits might
easily be visualized (seen) by the society. This may help to create good will and positive
images towards the institution.

3.11. Project Identification: Steps and Problems

3.11.1. Steps in Project Identification

Project identification generally involves four major steps. These are:
Step 1: Generation of project ideas;
Step 2: Screening of project ideas (giving priorities based on resources, compatibility to
objectives, its potentials to enhance competitiveness, and value adding in the society);
Step 3: Identification of candidate projects passing the screening criteria; and
Step 4: Propose for pre-feasibility/feasibility studies.
In this regard, once a list of project ideas has been put forward, the first step is to select one or
more of them as potentially promising. This calls for a quick preliminary screening by
experienced professionals who could also modify some of the proposals. At this stage, the
screening criteria are vague and rough, that become specific and refined as project planning
advances.
During the preliminary screening, to eliminate ideas that are not prima facie promising, it is
required to look into aspects pertaining to the following:
 Compatibility with the promoter,  Reasonableness of costs, and
 Consistency with government priorities,  Acceptability of risk level.
 Availability of inputs,
 Adequacy of market,
During preliminary selection, the analyst should eliminate project proposals that:
 Are technically unsound and risky;
 Have no market for the output;
 Have inadequate supply of inputs;
 Are very costly in relation to benefits; and
 Assume an overambitious sales and profitability target.

46
Obviously, since the criteria tend to be somewhat nebulous (vague, imprecise, and ill defined),
much depends on the experiences and sense of objectivity of the professionals applying them. It
is, however, necessary to conduct this screening, even with indistinct criteria, in order to reduce
the number of project alternatives to a manageable level to which more work and time will be
devoted.
Indeed, project planning can be viewed as a process of elimination, i.e. elimination of inferior
alternatives. As a result of the preliminary screening exercise, a project profile, an opportunity
study report, or an identification study report, as appropriate, is prepared showing which project
alternatives should be rejected and which ones may be advanced to the next stage.

47
 3.11.2. Problems in Project Identification
a) Ambiguity regarding the Development Goals (Objectives) of the nation:
 People may not clearly identify the national development goals.
 The development goals may not be well communicated, may not be in the best interests
of some groups, or may not get full-hearted acceptance from the public.
b) Priority Issues in the Existing Development Goals (Objectives):
 Conflict of views regarding the development priorities and goals set (that might entail
lack of interest & commitment).
 Differences in views regarding critical aspects of national priority.
 Differences in prioritizing sectoral goals & objectives.
c) Limited Data and Obstacles in Information Flow and accessibility:
 Problems in data and information flow;
 Constraint (bottlenecks) for accessing data;
 Limited availability of data & information;
 Data may not be dependable (reliable) for use; and so on.
d) Conflict of Interest between Local Beneficiary Groups [as some group(s) might bear the
cost while benefits accruing to others].
 What are the costs & benefits of identified projects?
 Who bears the costs & benefits in the society?
 Is benefits accruing to other groups while the cost paid by a given local group (unit)?
 Find mechanisms to compensate those bearing the costs.
 Unless compensated otherwise, the consequences might be unfavorable, severe, and
costly as well.

48 | P a g e
 CHAPTER 4
TECHNICAL ANALYSIS OF PROJECT

4.1 Introduction
Some investment proposals pass through the stage of project feasibility study. Project feasibility
is a test of where prima-fascia viability of investment is evaluated. Evaluation is based on
secondary data but comprehensive data. Rough estimates based on the experience of others
from the basis of the viability check in project feasibility study.

There are basically three types of feasibility study:

- Market feasibility
- Technical feasibility
- Financial feasibility
4.2 Market and Demand Analysis
In most cases, the first step in project analysis is to estimate the potential size of the market for
the product proposed to be manufactured (or service planned to be offered) and get an idea about
the market share that is likely to be captured.

Given the importance of market and demand analysis, it should be carried out in an orderly and
systematic manner. The key steps in such analysis are as follows:
1. Situation analysis and Specification of Objectives
In order to get a "feel" for the relationship between the product and its market, the project analyst
may informally talk to customers, competitors, middlemen, and others in the industry. Wherever
possible, he may look at the experience of the company to learn about the preferences and
purchasing power of customers, actions and strategies of competitors, and practices of the
middlemen. .
If such a situational analysis generates enough data to measure the market and get a reliable
handle over projected demand and revenues, a formal study need not be carried out, particularly
when cost and time considerations so suggest. In most cases, of course, a formal study of market
and demand is warranted. To carry out such a study, it is necessary to spell out its objectives
clearly and comprehensively. Often this means that the intuitive and informal goals that guide
situational analysis need to be expanded and articulated with greater clarity. A helpful approach
to spell out objectives is to structure them in the form of questions. Of course, in doing so,
always bear in mind how the information generated will be relevant in forecasting the overall

49 | P a g e
market demand and assessing the share of the market the project will capture. This will ensure
that questions not relevant to market and demand analysis will not be asked unnecessarily.
To illustrate, suppose that a small but technologically competent firm has developed an
improved air cooler based on a new principle that appears to offer several advantages over the
conventional air cooler. The chief executive of the firm needs information about where and how
to market the new air cooler. The objectives of market and demand analysis in this case may be
to answer the following questions:
o Who are the buyers of air coolers?
o What is the total current demand for air coolers?
o How is the demand distributed temporally (pattern of sales over the year) and
geographically?
o What is the break-up of demand for air coolers of different sizes?
o What price will the customers be willing to pay for the improved air cooler?
o How can potential customers be convinced about the superiority of the new cooler?
o What price and warranty will ensure its acceptance?
o What channels of distribution are most suited for the air cooler? What trade margins
will induce distributors to carry it?
o What are the prospects of immediate sales?

2. Collection of Secondary Information

In order to answer the questions listed while delineating the objectives of the market study,
information may be obtained from secondary and/ or primary sources. Secondary information is
information that has been gathered in some other context and is already available. Primary
information, on the other hand, represents information that is collected for the first time to meet
the specific purpose on hand. Secondary information provides the base and the starting point for
market and demand analysis. It indicates what is known and often provides leads and cues for
gathering primary information required for further analysis.
3. Conduct of Market Survey
The market survey may be a census survey or a sample survey. In a census survey the entire
population is covered. (The word 'population' is used here in a particular sense. It refers to the
totality of all units under consideration in a specific study.
The information sought in a market survey may relate to one or more of the following:

50 | P a g e
 o Total demand and rate of growth of demand
o Demand in different segments of the market
o Income and price elasticity of demand
o Motives for buying
o Purchasing plans and intentions
o Satisfaction with existing products
o Unsatisfied needs
o Attitudes toward various products
o Distributive trade practices and preferences
o Socio-economic characteristics of buyers

4. Characteristics of the Market

Based on the information gathered from secondary sources and through the market survey, the
market for the product/service may be described in terms of the following:
o Effective demand in the past and present
o Breakdown of demand into demand for different segments of the market such a
nature of the product, consumer group and geographical division.
o Price
o Methods of distribution and sales promotion
o Consumers
o Supply and competition
o Government policy

5. Demand Forecasting
After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate future demand. A wide range of
forecasting methods is available to the market analyst. These may be divided into three
categories: qualitative methods, time series projection methods, and causal methods.
Qualitative Methods
These methods rely essentially on the judgment of experts to translate qualitative information
into quantitative estimates. The important qualitative methods are as follows.

51 | P a g e
 o Jury of executive opinion methodVery popular in practice, this method calls for the pooling
of views of a group of executives on expected future sales and combining them into a
sales estimate.
o Delphi methodThis method involves converting the views of a group of experts, who do
not interact face-to-face, into a forecast through an iterative process.
Time Series Projection Methods
These methods generate forecasts on the basis of an analysis of the historical time series. The
important time series projection methods are as follows:
o Trend projection methodVery popular in practice, the trend projection method
involves extrapolating the past trend onto the future.
o Exponential smoothing method.in exponential smoothing, forecasts are modified in
the light of observed errors.
o Moving average method According to this method, the forecast for the next period
represents a simple arithmetic average or a weighted arithmetic average of the last
few observations.
Causal Methods
More analytical than the preceding methods, causal methods seek to develop forecasts on the
basis of cause-effect relationships specified in an explicit, quantitative manner. The important
methods under this category are as follows:
o Chain ratio methodA simple analytical approach, this method calls for
applying a series of factors for developing a demand forecast.
o Consumption level methodUseful for a product that is directly consumed,
this method estimates consumption level on the basis of elasticity
coefficients, the important ones being the income elasticity of demand and
the price elasticity of demand.
o End use methodSuitable for intermediate products, the end use method
develops demand forecasts on the basis of the consumption coefficient of
the product for various uses.
o Leading indicator methodAccording to this method, observed changes in
leading indicators are used to predict the changes in lagging variables.

52 | P a g e
 o Econometric method: it involves estimating quantitative relationship derived from
economic theory.
6. Market planning
To enable the product to reach a desired level of market penetration, a suitable marketing plan
should be developed. Broadly it should cover pricing, distribution, promotion, and service.
Pricing: ex-factory price, Taxes and duties applicable for the domestic price, Trade
margins/discounts, Final price to the domestic customer, Export price
Distribution: Packaging, Transportation arrangements, Channel of distribution, Role of
distributors, wholesalers, and retailers
Promotion: Branding, Advertising, Personal selling, promotional efforts
Service: Installation, User education, Warranties, After-sales service

Analysis of technical and engineering aspects is done continually when a project is being,
examined and formulated. Other types of analyses are dependent and closely intertwined with
technical analysis. Technical analysis is concerned primarily with:
o Material inputs o Location and site
and utilities o Machineries and
o Manufacturing equipment’s
process/ o Structures and
technology civil works
o Product mix o Project charts and
o Plant capacity layouts
o Work schedule

4.3 MATERIAL INPUTS AND UTILITIES

An important aspect of technical analysis is concerned with defining the materials and utilities
required, specifying their properties in some detail, and setting up their supply programme.
There is an intimate relationship between the study of materials and utilities and other aspects of
project formulation, particularly those concerned with location, technology, and equipments.
Material inputs and utilities may be classified into four broad categories:
(i) Raw materials,
(ii) Processed industrial materials and components,

53 | P a g e
 (iii) Auxiliary materials and factory supplies, and
(iv) Utilities.
Raw Materials
Raw materials (processed and/ or semi-processed) may be classified into four types:
(i) Agricultural products, (iii) Livestock and forest
(ii) Mineral products, products, and
(iv) Marine products.

Agricultural ProductsIn studying agricultural products the quality must first be examined. Then,
an assessment of quantities available; currently and potentially, is required. The questions that
may be raised in this context are: What is the present marketable surplus? What is the present
area under cultivation? What is the yield per acre? What is the likely increase in the area of
cultivation? What is the likely increase in yield per acre?
Mineral ProductsIn assessing mineral raw materials, information is required on the quantum of
exploitable deposits and the properties of raw materials. The study should provide details of the
location, size, and depth of deposits and the viability of opencast or underground mining. In
addition, information should be generated on the composition of the ore, level of impurities,
need for beneficiation, and physical, chemical and other properties.
Livestock and Forest ProductsSecondary sources of data on livestock and forest products often do
not provide a dependable basis for estimation. Hence, in general, a specific survey may be
required to obtain more reliable data on the quantum of livestock produce and forest products.
Marine ProductsAssessing the potential availability of marine products and the cost of collection
is somewhat difficult. Preliminary marine operations, essential for this purpose, have to be
provided for in the feasibility study.

Processed Industrial Materials and Components

Processed industrial materials and components (base metals, semi-processed materials,
manufactured parts, components, and sub-assemblies) represent important inputs for a number
of industries. In studying them the following questions need to be answered: In the case of
industrial materials, what are their properties? What is the total requirement of the project?
What quantity would be available from domestic sources? What quantity can be procured from
foreign sources? How dependable are the supplies? What has been the past trend in prices?
What is the likely future behavior of prices?

54 | P a g e
Auxiliary Materials and Factory Supplies
In addition to the basic raw materials and processed industrial materials and components, a
manufacturing project requires various auxiliary materials and factory supplies like chemicals,
additives, packaging materials, paints, varnishes, oils, grease, cleaning materials, etc. The
requirements of such auxiliary materials and supplies should be taken into account in the
feasibility study.

Utilities
A broad assessment of utilities (power, water, steam, fuel, etc.) may be made at the time of input
study though a detailed assessment can be made only after formulating, the project with respect
to location, technology, and plant capacity. Since the successful operation of a project critically
depends on adequate availability of utilities the following questions should be raised while
conducting the input study. What quantities are required? What are the sources of supply?
What would be the potential availability? What are the likely shortages/bottlenecks? What
measures may be taken to augment supplies?

4.4 MANUFACTURING PROCESS/TECHNOLOGY

For manufacturing a product/service often two or more alternative technologies are available.
For example:
o Steel can be made either by the Bessemer process or the open hearth
process.
o Cement can be made either by the dry process or the wet process.
o Soda can be made by the electrolysis method or the chemical method.
o Paper, using bagasse as the raw material, can be manufactured by the kraft process or the
soda process.
o Vinyl chloride can be manufactured by using one of the following reactions: acetylene on
hydrochloric acid or ethylene on chlorine.
Choice of Technology
The choice of technology is influenced by a variety of considerations:
o Plant capacity o Use by other units
o Principal inputs o Product mix
o Investment outlay o Latest developments
and production cost
55 | P a g e
 o Ease of absorption
Plant CapacityOften, there is a close relationship between plant capacity and production
technology. To meet a given capacity requirement perhaps only a certain production technology
may be viable.
Principal InputsThe choice of technology depends on the principal inputs available for the project.
In some cases, the raw materials available influence the technology chosen.
Investment Outlay and Production CostThe effect of alternative technologies on investment outlay
and production cost over a period of time should be carefully assessed.
Use by Other UnitsThe technology adopted· must be proven by successful use by other units.
Product MixThe technology chosen must be judged in terms of the total product-mix generated by
it, including saleable by-products.
Latest DevelopmentsThe technology adopted must be based on latest developments in order to
ensure that the likelihood of technological obsolescence in the near future, at least, is minimized.
Ease of AbsorptionThe ease with which a particular technology can be absorbed can influence the
choice of technology. Sometimes a high-level technology may be beyond the absorptive capacity
of a developing country which may lack trained personnel to handle that technology.
Acquiring Technology
The acquisition of technology from some other enterprise may be by way of
(i) echnology licensing, (iii) oint venture arrangement.
(ii) Outright purchase, or
Technology LicensingA popular method of acquiring technology, .the technology license gives the
licensee the right to use patented technology and get related know-how on a mutually agreed
basis. Often suppliers of technology tend to provide a technology package which may consist of
some elements which are not essential. Hence the technology package should be disaggregated
into its component parts like the technology proper, engineering services, supply of intermediate
products, and supply of equipment by the licensor, use of a trade name, etc. Efforts should be
made to acquire only the essential components of the technology package offered by the
licensor.
The contract for technology licensing should be carefully scrutinized with respect to:
(i) Definition of technology to be acquired,
(ii) Cost of technology licensing,
(iii) Guarantees provided by the licensor,

56 | P a g e
 (iv) Duration of technology licensing, and
(v) Purchase of intermediate products, components, and other inputs.
Purchase of TechnologyThis mode of acquiring technology may be used in certain kinds of
industries. It is appropriate when (i) there is no possibility of significant improvement in
technology in the foreseeable future, and (ii) there is hardly any need for technological support
from the seller of technology.
Joint Venture ArrangementThe supplier of technology may participate technically as well as
financially in the project. Financial participation is typically in the form of equity holding. It is
argued that financial participation may strengthen the motivation of technology supplier to
transfer improvements promptly.
Appropriateness of Technology
Appropriate technology refers to those methods of production which are suitable to local
economic, social, and cultural conditions. In recent years the debate about appropriate
technology has been sparked off. The advocates of appropriate technology urge that the
technology should be evaluated in terms of the following questions:
o Whether the technology utilizes local raw materials?
o Whether the technology utilizes local manpower?
o Whether the goods and services produced cater to the basic needs?
o Whether the technology protects ecological balance?
o Whether the technology is harmonious with social and cultural
conditions?
4.5 PRODUCT MIX
The choice of product mix is guided by market requirements. In the production of most of the
items, variations in size and quality are aimed at satisfying a broad range of customers. For
example, a garment manufacturer may have a wide range in terms of size and quality to cater to
different customers. It may be noted that variation in quality can enable a company to expand its
market and enjoy higher profitability. For example, a toilet soap manufacturing unit may by
variation in raw material, packaging, and sales promotion offer high profit margin soap to
consumers in upper-income brackets.
While planning the production facilities of the firm, some flexibility with respect to the product
mix must be sought. Such flexibility enables the firm to alter its product mix in response to

57 | P a g e
changing market conditions and enhances the power of the firm to survive and grow under
different situations. The degree of flexibility chosen may be based on a careful analysis of the
additional investment requirement for different degrees of flexibility.
4.6 PLANT CAPACITY
Plant capacity (also referred to as production capacity) refers to the volume or number of units
that can be manufactured during a given period. Several factors have a bearing on the capacity
decision.
o Technological o Market conditions
requirement o Resources of the
o Input constraints firm
o Investment cost o Governmental
policy
Technological Requirement
For many industrial projects, particularly in process type industries, there is a certain minimum
economic size determined by the technological factor. For example, a cement plant should have
a capacity of at least 300 tones per day in order to use the rotary kiln method; otherwise, it has to
employ the vertical shaft method which is suitable for lower capacity.
Input Constraints
In a developing country there may be constraints on the availability of certain inputs. Power
supply may be limited; basic raw materials may be scarce; foreign exchange available for
imports may be inadequate. Constraints of these kinds should be borne in mind while choosing
the plant capacity.
Investment Cost
When serious input constraints do not obtain, the relationship between capacity and investment
cost is an important consideration. Typically, the investment cost per unit of capacity decreases
as the plant capacity increases. This relationship may be expressed as follows:
C1=C2 [Q1/Q2] a
Where C1 = derived cost for Ql units of capacity
C2 = known cost for Q2 units of capacity
a
= a factor reflecting capacity-cost relationship.
This is usually between 0.2 and 0.9.

58 | P a g e
ExampleSuppose the known investment cost for 5,000 units of capacity for the manufacture of a
certain item is $ 1,000,000. What will be the investment cost for 10,000 units of capacity if the
capacity-cost factor is 0.6?
The derived investment cost for 10,000 units of capacity may be obtained as follows:
C1 = 1,000,000 * [10,000/5,000] 0.6 = $ 1,516,000
Market Conditions
The anticipated market for the product/ service has an important bearing on plant capacity. If the
market for the product is likely to be very strong, a plant of higher capacity is preferable. If the
market is likely to be uncertain, it might be advantageous to start with a smaller capacity. If the
market, starting from a small base, is expected to grow rapidly, the initial capacity may be higher
than the initial level of demand-further additions to capacity may be affected with the growth of
market.
Resources of the Firm
The resources, managerial and financial, available to a firm define a limit on its capacity
decision. Obviously, a firm cannot choose a scale of operations beyond its financial resources
and managerial capability.
GovernmentPolicy
The capacity level may be influenced by the policy of the government. Traditionally, the policy
of the government was to distribute the additional capacity to be created in a certain industry
among several firms, regardless of economies of scale. This policy has been substantially
modified in recent years and the concept of 'minimum economic capacity' has been adopted in
several industries.
4.7 LOCATION AND SITE
The choice of location and site follows an assessment of demand, size, and input requirement.
Though often used synonymously, the terms 'location' and 'site' should be distinguished.
Location refers to a fairly broad area like a city, an industrial zone, or a coastal area; site refers to
a specific piece of land where the project would be set up.
The choice of location is influenced by a variety of considerations: proximity to raw materials
and markets, availability of infrastructure, governmental policies, and other factors.
Proximity to Raw Materials and Markets
An important consideration for location is the proximity to sources of raw materials and nearness
to the market for final products. In terms of a basic locational model, the optimal location is one
where the total cost (raw material transportation cost plus production cost plus distribution cost

59 | P a g e
for the final product) is minimized. This generally implies that: (i) a resource-based project like a
cement plant or a steel mill should be located close to the source of basic material (for example,
limestone in the case of a cement plant and iron-ore in the case of a steel plant); (ii) a project
based on imported material may be located near a port; and (iii) a project manufacturing a
perishable product should be close to the centre of consumption.
However, for many industrial products proximity to the source of raw material or the center of
consumption may not be very important. Petro-chemical units or refineries, for example, may be
located close to the source of raw material, or close to the centre of consumption, or at some
intermediate point.
Availability of Infrastructure
Availability of power, transportation, water, and communications should be carefully assessed
before a location decision is made.
Adequate supply of power is a very important condition for location-insufficient power can be a
major constraint, particularly in the case of an electricity-intensive project like an aluminum
plant. In evaluating power supply the following should be looked into the quantum of power
available, the stability of power supply, the structure of power tariff, and the investment required
by the project for a tie-up in the network of the power supplying agency.
For transporting the inputs of the project and distributing the outputs of the project, adequate
transport connections-whether by rail, road, sea, inland water, or air- are required. The
availability, reliability, and cost of transportation for various alternative locations should be
assessed.
Given the plant capacity and the type of technology, the water requirement for the project can be
assessed. Once the required quantity is estimated, the amount to be drawn from the public utility
system and the amount to be provided by the project from surface or sub-surface may be
determined. For doing this the following factors may be examined: relative costs, relative
dependabilities, and relative qualities.
In addition to power, transport, and water, the project should have adequate communication
facilities like telephone and telex.
Governmental Policies
Government policies have a bearing on location. In the case of public sector projects, location is
directly decided by the government. It may be based on a wider policy for regional dispersion of
industries.

60 | P a g e
In the case of private sector projects, location is influenced by certain governmental restrictions
and inducements. The government may prohibit the setting up of industrial projects in certain
areas which suffer from urban congestion. More positively, the government offers inducements
for establishing industries in backward areas. These inducements consist of subsidies,
concessional finance, tax reliefs, and other benefits.
Other Factors
Several other factors have to be assessed before reaching a location decision: ease in coping with
environmental pollution, labor situation, climatic conditions, and general living conditions.
A project may cause environmental pollution in various ways: it may throw gaseous emissions;
it may produce liquid and solid discharges; it may cause noise, heat, and vibrations. The location
study should analyze the costs of mitigating environmental pollution to tolerable levels at
alternative locations.
The labor situation at alternative locations may be assessed in terms of: (i) the availability of
labor, skilled, semi-skilled, and unskilled; (ii) the past trends in labor rates, the prevailing labor
rates, and the projected labor rates; and (iii) the state of industrial relations judged in terms of
the frequency and severity of strikes and lockouts and the attitudes of labor and management.
The climatic conditions (like temperature, humidity, wind, sunshine, rainfall, snowfall, dust,
flooding, and earthquakes) have an important influence on location. They have a bearing on cost
as they determine the extent of air-conditioning, de-humidification, refrigeration, special
drainage, etc., required for the project.

General living conditions, judged in terms of cost of living, housing situation, and facilities for
education, recreation, transport, and medical care, need to be assessed at alternative locations.
Site Selection
Once the broad location is chosen, attention needs to be focused on the selection of a specific
site. Two to three alternative sites must be considered and evaluated with respect to cost of land
and cost of site preparation and development.
The cost of land tends to differ from one site to another in the same broad location. Sites close to
a city cost more whereas sites away from the city cost less. Sites in an industrial area developed
by a governmental agency may be available at a concessional rate.
The cost of site preparation and development depends on the physical features of the site, the
need to demolish and relocate existing structures, and the work involved in obtaining utility

61 | P a g e
connections to the site. The last element, viz., the work involved in obtaining utility connections
and the cost associated with it should be carefully looked into. It may be noted in this context
that the cost of the following may vary significantly from site to site: power transmission lines
from the main grid, railway siding from the nearest railroad, feeder road connecting with the
main road, transport of water, and disposal of effluents.
4.8 MACHINERIES AND EQUIPMENTS
The requirement of machineries and equipments is dependent on production technology and
plant capacity. It is also influenced by the type of project. For a process-oriented industry, like a
petrochemical unit, machineries and equipments required should be such that the various stages
are matched well. The choice of machineries and equipments for a manufacturing industry· is
somewhat wider as various machines can perform the same function with varying degrees of
accuracy. For example, the configuration of machines required for the manufacture of
refrigerators could take various forms. To determine the kinds of machinery and equipment
required for a manufacturing industry, the following procedure may be followed:
(i) Estimate the likely levels of production over time.
(ii) Define the various machining and other operations.
(iii) Calculate the machine hours required for each type of operation.
(iv) Select machineries and equipment’s required for each function.
The equipment’s required for the project may be classified into the following types:
(i) lant (process) equipment’s, (v) ontrols,
(ii) Mechanical equipment’s, (vi) Internal transportation system, and
(iii) Electrical equipment’s, (vii) Others.
(iv) Instruments,
In addition to the machineries and equipment’s, a list should be prepared of spare parts and tools
required. This may be divided into: (i) spare parts and tools to be purchased with the original
equipment, and (ii) spare parts and tools required for operational wear and tear.
Constraints in Selecting Machineries and Equipment’s
In selecting the machineries and equipment’s certain constraints should be borne in mind: (i)
there may be a limited availability of power to set up an electricity-intensive plant like, for
example, a large electric furnace; (ii) there may be difficulty in transporting a heavy equipment
to a remote location; (iii) workers may not be able to operate, at least in the initial .periods,

62 | P a g e
certain sophisticated equipment’s such as numerically controlled machines; (iv) the import
policy of the government may preclude the import of certain machineries and equipment’s.
Procurement of Plant and Machinery
For procuring plant and machinery, orders for different items of plant and machinery may be
placed with different suppliers or a turnkey contract may be given for the entire plant and
machinery to a single supplier. The factors to be considered in selecting the supplier / s of plant
and machinery are the desired quality of machinery, the level of technological sophistication, the
relative reputation of various suppliers, the expected delivery schedules, the preferred payment
terms, and the required performance guarantees. If in house technical expertise is inadequate,
external consultant/ s may be employed to select plant and machinery and supervise the
installation of the same.
4.9 STRUCTURES AND CIVIL WORKS
Structures and civil works may be divided into three categories:
(i) ite preparation and (ii) uildings and structures, and
development, (iii) Outdoor works.
Site Preparation and Development
This covers the following: (i) grading and leveling of the site, (ii) demolition and removal of
existing structures, (iii) relocation of existing pipelines, cables, roads, power lines, etc., (iv)
reclamation of swamps and draining and removal of standing water, (v) connections for the
following utilities from the site to the public network: electric power (high tension and low
tension), water for drinking and other purposes, communications (telephone, telex, etc.), roads,
railway sidings, and (vi) other site preparation and development work.

Buildings and Structures

Buildings and structures may be divided into: (i) factory or process buildings; (ii) ancillary
building required for stores, warehouses, laboratories, utility supply centres, maintenance
services, and others; (iii) administrative buildings; (iv) staff welfare buildings, cafeteria, and
medical service buildings; and (v) residential buildings.

Outdoor Works

Outdoor works cover (i) supply and distribution of utilities (water, electric power,
communication, steam, and gas); (ii) handling and treatment of emission, wastages, and

63 | P a g e
effluents; (iii) transportation and traffic arrangements (roads, railway tracks, paths, parking
areas, sheds, garages, traffic signals, etc.); (iv) outdoor lighting; (v) landscaping; and (vi)
enclosure and supervision (boundary wall, fencing, barriers, gates, doors, security posts, etc.)

4.10 PROJECT CHARTS AND LAYOUTS

Once data is available on the principal dimensions of the project-market size, plant capacity,
production technology, machineries and equipment’s, buildings and civil works, conditions
obtaining at plant site and supply of inputs to the project-project charts and layouts may be
prepared. These define the scope of the project and provide the basis for detailed project
engineering and estimation of investment and production costs.The important charts and layouts
drawings are briefly described below.
1. General Functional LayoutThis shows the general relationship between equipment’s,
buildings, and civil works. In preparing this layout, the primary consideration is to
facilitate smooth and economical movement of raw materials, work-in-process, and
finished goods. This means that:
(a) The layout should seek to allow traffic flow in one direction to the extent possible, with
a minimum of crossing.
(b) God owns, workshops, and other services must be functionally situated with respect to
the main factory buildings.
2. Material Flow DiagramThis shows the flow of materials, utilities, intermediate products, final
products, by-products, and emissions. Along with the material flow diagram, a quantity flow
diagram showing the quantities of flow may be prepared.
3. Production Line DiagramsThese show how the production would progress along with the key
information for main equipment’s.
4. Transport LayoutThis shows the distances and means of transport outside the production line.
5. Utility Consumption LayoutThis shows the principal consumption points of utilities (power,
water, gas, compressed air, etc.) and their required quantities and qualities. These layouts
provide the basis for developing specifications for utility supply installations.
6.Communication LayoutThis shows how the various parts of the project will be connected with
telephone, telex, intercom, etc.
7. Organizational LayoutThis shows the organizational set-up of the project along with
information on personnel required for various departments and their inter-relationship.

64 | P a g e
8. Plant LayoutThe plant layout is concerned with the physical layout of the factory. In certain
industries, particularly process industries, the plant layout is dictated by the production
process adopted. In manufacturing industries, however, there is much greater flexibility in
defining the plant layout. The important considerations in preparing the plant layout are:
a. Consistency with production c. Proper utilization of space
technology d. Scope of expansion
b. Smooth flow of goods from one e. Minimization of production cost
stage to another f. Safety of personnel
4.11 WORK SCHEDULE
The work schedule, as its name suggests, reflects the plan of work concerning installation as well
as initial operation. The purpose of the work schedule is:

o To anticipate problems likely to arise during the installation phase and suggest
possible means for coping with them.
o To establish the phasing of investments taking into account the availability of
finances.
o To develop a plan of operations covering the initial period (the running-in period).
Often, it is found that the required inputs like raw material and power are not available in
adequate quantity when the plant is ready for commissioning, or the plant is not ready when the
raw material arrives.
In the first case the plant remains idle and in the second the material may tend to deteriorate and/
or pose problems of storage. To avoid losses arising from idle capacity and deterioration of
stocks of material, work schedule should be drawn up with care and realism so that the
commissioning of plant is reasonably synchronized with the availability of the basic inputs.
4.12PROJECT PROPOSAL FORMULATION
Information requirement and formats of proposalsvary a great deal from donor to donor or
(project sponsor). Some insist that applications adhere to their format; others simply offer
guidelines to assist the applicant and to insure that major points are adequately covered.
It is noteworthy and comforting that some key sections tend to appear in almost all standard
formats of the major sponsors (donors).Smaller donors frequently leave the question of the
format to the applicant, provided that specified essential information is included.
Components of a project proposal
In most proposals, there are eight sections that are supposed to present all the required
information step by step and they are the following.

65 | P a g e
Section One: Summary/ project summary Section Five: Implementation plan
Section two: problem statement Section Six: Monitoring and Evaluation
Section three: Goals and Objectives Section Seven: Budget
Section four: strategy Section eight: Annex
Components Section (module) name What is included in it?

Section one Summary

What is all about?
Section two Problem statement Back ground and need analysis
(Where are we now?)
Section three Goals and Objectives Goals and objectives
(Where do we want to go?
Section four Strategy Components, Assumptions,
(Which root will we take?) Methods, Out puts, and
Feasibility
Section five Implementation plan Resource or inputs, Work plan,
(How will we travel there?) and organization
Section six Monitoring and Evaluation Monitoring and evaluation
(How will we now and when we arrive?)
Section seven Budget Capital costs and Recurrent costs
(how much will it cost)
Section eight Annex Records of organization’s
(profile of the applicants achievements
and who are we)

Section one: Summary/ project summary: The summary is the most critical section of
project proposal because decision makers are very busy people to go thoroughly attending many
meetings; they review large numbers of documents and propositions every day.
– Contracting companies need to provide project sponsors (donors) with a short and
concise, but interesting summary of their projects.
– The summary must convince the decision makers that the project is relevant to their
particular concerns and the needs of the country, and that it is well thought.
Contractors or any competing body must be sure that:
– They state the objective and the overall strategy of the project clearly and precisely.
– They have to explain how the project will solve or significantly contribute to the
solution of an urgent problem, or to addressing an important unmet need.

66 | P a g e
 – Outline the short comings of the present situation and then put forward a picture of
the future reflecting the changes that will result from the proposed project
intervention.
In order to allow the decision makers, to relate costs to anticipated outcomes and assess the
economic feasibility of sustaining the project activities in the long term, the total project cost is
an essential part of the summary.In the proposal the summary comes first, this section should be
written after completion of all other sections.
Section two: problem statement: This part should cover the general back ground as well
as an analysis of the need to be addressed and alleviated by the project interventions.The back
ground section should be short and confined to aspects of the general situation that are relevant
to the problem and interventions that are about to be proposed. This should be followed by an
analysis of unmet need, diagnosing and further defining the nature of the problem to be
addressed.
Section three: Goals and Objectives: Goals are broad statement of what is ultimately to
be accomplished. Objectives are more specific aims which the project is to achieve with its
resources and activities and within the time frame specified in the proposal. Statements of goals
and objectives form the basis for the consideration of different strategies for their attainment.

Contractors or companies need to be sure that this statement explain the purpose of the activities
to be performed and establish a logical link the problem stated in the preceding section and the
strategy that are proposed in the next section (section four). Because of the complexity of most
of the problems we try to address, we will find that there is a hierarchy of goals and objectives
pertaining to the project. Even if this can be confusing, we need to concentrate on the status we
want to achieve by the end of the project as a result of the project intervention - called End of
Project Status by some donors (EOPS). So, projective is a statement is EOPS we are striving for.
It will provide a standard against which to assess the project’s achievements. On the other hand,
project goal is the impact on the big picture.
Section four: strategy: Project strategy refers to the design for a set of interventions that
will meet objectives and contribute towards attainment of the larger developmental goal. The
underlying assumption of a strategy is that
• Its successful implementation will eliminate, reduce or control the stated problem and

67 | P a g e
 • That it can be implemented within the time frame of the project and with the financial
and organizational resources available to the project, including those resources
requested from the donor. The project strategy is the core of project design.
A strategy may consist of a single intervention or a number of simultaneous or sequential
interventions. It is useful to examine and describe your strategy both as a whole and by means of
its components. It has to describe the out puts resulting directly from the set of planned
activities. Out puts are those concrete and tangible products that are needed to be achieve the
project objective and that will happen as a result of specific activities. The economic, technical,
organizational and socio-cultural feasibility of interventions of the strategy has to be commented.
Section Five: Implementation plan: This is the core section of the proposal, describing
what is actually going to be done. Having decided where we want to go and what route to take,
we are now explaining the details of the journey. It begins by specifying all inputs required in
terms of:
•
• man power, • supplies and
• facilities, • operating costs.
• equipment’s,
Here, all inputs, not only requested to be funded by an external donor agency are included in the
resource requirement part of this section. Therefore, we also describe what resources are already
available and where will they come from.Next to it, the section needs to present a work plan
outlining activities, targets and schedules.
In a large project, we may be able to divide the work plan into several project components. And
these can be referred to as responsibility centers when different staff members head these
components.
Examples of tables of work plan
The following table is an example of a work plan containing the essential elements that permit
easy review of achievements and constraints.
Activity (By component) Timing Output Critical Indicator of Achievement
target Assumptions
Component one
Activity 1
Activity 2

68 | P a g e
Activity 3
Component two
Activity 1
Activity 2
Activity 3

Gantt chart
Another possibility of charting activities and their timing is the Gantt chart, which is illustrated
below
Activities Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Activity 1
Activity 2
Activity 3

Section Six: Monitoring and Evaluation: At a project midpoint, when donors usually
ask to evaluate achievements and project managers start to think about applying for a follow-on
grant, panic sets in as it become clear that no base line data is available and information has not
been systematically collected to allow a clear assessment of a project’s achievements against its
plans.
To insure such situations and to insure continuous review of the effectiveness of the project
strategy, it is important:
• To develop indicators of achievement and
• To set up a system for monitoring and evaluation at the design stage.
Monitoring: Refers to the process of systematically reviewing progress against planned
activities and targets. It is usually done by the project managers on the basis of reports, field visit
and regular meeting of the project team.
Evaluation: encompasses a more comprehensive review and assessment not only of project
results, but also of the initial assumptions underlying the project design, including
– The relevance of the problem statement;
– The relationship between the problem and the established objectives;
– Between objectives and strategy;
– Between strategy and implementation; and
– Between implementation and outcome.
69 | P a g e
 • Are commonly scheduled in the middle and towards the close of the project period.
Section Seven: Budget: Most organizations differentiate between capital cost which occur
only once during the life of the project and operating or recurrent costs which recur regularly.
An important characteristic of recurrent costs is that they usually continue beyond the project
period and after external funding expires.
Budgets should include a contingency for unforeseen events and expenditures. Provision also
needs to be made for inflation.
Section Eight: Annex (profile of the organization): In this section the organization
precisely describes itself and track of its records.
• Nature of the organization,
• Its legal constitution,
• Number of employees, and proportion of professional staff, and
• Key areas of operation are the major elements to be included.

HAPTER FIVE: PROJECT FINANCIAL APPRAISAL/ANALYSIS

1.1. Financial Analysis Basics
1. Objectives of Financial Cost-Benefit Analysis
The basic objective of financial cost-benefit analysis is to ensure the financial viability of the
industrial project for the private investor, commercial profitability being the yardstick for
selection among competing projects.
2. Components of Financial Analysis
The major components of the financial cost-benefit dimension and the aspects that require
detailed analysis are the following:
 Investment cost estimation
 Revenue estimation
 Estimation of production costs & expenses
 Profitability analysis
 Cash flow estimation and evaluation
 Financial ratio analysis
 Uncertainty (or Risk) analysis

70 | P a g e
  Preparation of debt repayment (or loan amortization) schedule
 Preparation of various schedules & documentation of the associated working papers

1.2. Financial Evaluation Criteria

There are several criteria that have been suggested by economists, accountants, and various
authors in order to be used for judging weather capital projects are worthwhile or not. Broadly,
these criteria are classified in to two as “discounting” and “non-discounting” criteria.
A. The Discounting Criteria:
1. Net Present Value (NPV)
2. Benefit-Cost Ratio (BCR) or Profitability Index (PI)
3. Internal Rate of Return (IRR)
4. Modified Pay Back Period (MPBP)
B. The Non-Discounting Criteria:
1. Payback Period (PBP)
2. Accounting Rate of Return (ARR)
As far as the evaluation of financial feasibility is concerned, these are the commonly used criteria
for the appraisal of investment projects.

1.3. General Guidelines for Estimating Financial Costs and Benefits

1. Project Inputs, Outputs, and Prices:
For the analysis of financial costs and benefits of a project, the starting point is the:
 Determination of project inputs to be used & outputs to be generated, and
 Identification of what price to use for making financial cost-benefit estimation
In general, in order to identify the prices of inputs and outputs to be used in the analysis, the
different alternative bases for pricing should be assessed. From the available pricing alternatives,
the analyst needs to choose the one most appropriate for valuation of inputs and outputs from the
perspective of a profit maximizing, private investor. In this regard, the following are the pricing
alternatives:
• Constant prices,
• Market (or explicit) prices, and
• Shadow (or imputed) prices, also called economic prices

71 | P a g e
Constant, and sometimes current, prices can be used to value project’s inputs & outputs in
financial cost benefit analysis. Although there is a general principle to use constant prices, it is
also common to use current (market) prices as well.
2. Impacts of Inflation:
Inflation complicates the process of estimating financial costs and benefits and the investment
appraisal aspect
It is always difficult to forecast the level of inflation potentially existing in the planning horizon
 Smaller changes in the level of inflation affect the individual components of cash flows,
the impact of which is not easily visible to account for
Simplifying assumptions regarding inflation:
 Inflation equally affects both future stream of cash inflows and outflows, the impact of
which, thus, offsets in the planning horizon; and
 Price contingency allowed while making estimations would take care of unforeseen price
increases during the construction period.
If we have strong evidence regarding inflation (future price levels), however, we need to
examine its impact on cost of capital (i.e. opportunity cost of capital), opportunity cost of
equipments & machineries, level of revenue & operating costs, etc. If ignored, it is possible, in
this regard, that:
• NPV of the projects being appraised would be distorted
• Investment proposals may be ranked incorrectly
3. Estimating the Economic Life of a Project:
A project’s economic life refers to the optimal period over which it would generate economic
gains.
 The project’s life, to a maximum, may be set to equal the technical life of the machineries
& equipment; or else it should be less than this technical life of machineries and
equipment. The economic life, in this regard, should never exceed the technical life of
plant machinery and equipment.
 Additional factors to be considered in determining project’s economic life include the
following:
• Duration of market demand (product life cycle);
• Change of taste & preference of customers;
• National/international competition;

72 | P a g e
 • Technology change (obsolescence);
• Extent or duration of natural/mineral resource deposits; etc
The time horizon for cash flow analysis is generally the minimum of the following:
a. Physical life of the machineries and equipment (Technical life of Plant Assets)
 Period during which the plant remains in a physically usable condition
 The number of years the machineries & equipment in the plant would perform the
functions for which they had been acquired
 It depends on the wear and tear which the plant is subject to
 Suppliers of the plant’s machineries and equipment may provide information on the
physical life under normal operating conditions
 While the concept of physical life may be useful for determining the depreciation
charge, it is not very useful for investment decision making purposes
b. Technological life of the machineries and equipment in the plant
 New technological developments tend to render existing machineries and equipment
obsolete.
 The technological life of a plant refers to the period of time over which the present
plant would not be rendered obsolete by a new plant.
 It is very difficult to estimate because any law does not govern the pace of new
developments. Yet, an estimate of the technological life has to be made.
c. Product Market life of the plant (Product Life Cycle):
 A plant may be physically usable, its technology may not be obsolete, but the market for its
products may disappear or shrink and hence, its continuance may not be justified.
4. Financial Analysis Period
A convenient starting point for establishing the period for financial analysis is the technical life
of the major investment item. In some projects, the technical life (physical life) of the major
investment item may be quite long.
However, the economic life of the same item might be shorter because of expected technological
obsolescence (as rapidly changing technology will make a major investment obsolete in short
period), frequently changing tastes and preferences of customers, international competitiveness,
and the extent of natural resources or mineral deposits available.
A distinction may be made between the physical life and economic (or optimal) life of an asset.
The physical life of an asset represents the number of years it can be used to produce a certain

73 | P a g e
output by regular maintenance and repair, which, of course, tends to cost more and more as the
years roll by. The economic life of an asset, however, refers to the optimum number of years the
asset should be used to produce a certain output. In short:
⇒ Physical life is a period, often longer, over which a fixed asset can continue to function,
notwithstanding its acquired obsolescence, inefficiency in operations, high costs of maintenance,
or the obsolescence of its products.
⇒ Economic life is the period during which a fixed asset is capable of yielding service to the
owner. The economic life of an asset is defined, conceptually, as the period after which the asset
should be replaced to minimize the sum of operating and maintenance costs and capital costs
expressed on an annual basis.
1. Project Costs
i. Initial Investment Costs
Initial investment costs are defined as the sum of fixed assets (fixed investment costs plus pre-
production expenditures) and investment in networking capital. Fixed assets constitute the
resources required for construction and equipping an investment project whereas the networking
capital corresponds to resources needed to operate the project totally or partially. At the pre-
investment stage, in this regard, the following two mistakes are frequently made:
 Networking capital, meaning current assets minus current liabilities, is either excluded at
all or included in insufficient amount that, in turn, might be causing liquidity problems for
projects.
 Total investment costs are sometimes confused with total assets, the latter constituting
fixed assets plus pre-production expenditures plus current assets.
The amount of total investment cost is, in fact, smaller than total assets, since it is composed of
fixed assets and net working capital, the latter being the difference between current assets and
current liabilities. The section following discusses, in detail, the components of the total
investment cost.

ii. Fixed Investment Cost

The fixed investment cost represents the total of all items of outlay associated with fixed assets
in the project, which are supported by long-term funds. It is the sum of the outlays on the
following major components:
A) Land and Site Development:

74 | P a g e
The cost of land & site development is the sum of broad range of costs, the following being the
major ones:
 Premium payable on leasehold,
 Cost of leveling and site preparation,
 Cost of laying approach roads and internal roads,
 Cost of gate ways,
 Cost of tube wells, etc
 Basic cost of land including conveyance (transfer) and other allied charges,
B) Buildings and Civil Works:
The cost of buildings & civil works depends on the following two basic factors:
• The kind of structures required, and
• The specific requirements of the manufacturing process
It covers the costs of the following major items:
 Buildings for the main manufacturing plant;
 Buildings for auxiliary services like steam supply, workshops, etc;
 Laboratory, water supply, etc;
 Warehouses, open yard facilities, etc;
 Non-factory buildings (e.g. guesthouse, cafeteria, clinics, etc);
 Garages, sewage, drainage, and other civil engineering works.
C) Cost of Plant & Machinery:
It is fundamental component of the project cost.
• Costs of Imported Machineries and Equipment’s:
• CIF import value (including shipping, freight, and insurance costs)
• Import duty (if any),
• Clearing, loading & unloading, and local transportation & insurance charges

Costs of Indigenous Machineries and Equipment’s:

 FOR (Free on Rail ) costs (in other words, purchase price plus freight charges),
 Sales taxes (if any),
 Rail way freights and transportation charges up to the site
 Cost of stores and spares acquired with machineries and equipment

75 | P a g e
  Foundation & Installation charges (depending on the specific requirements of the
project)
The cost of plant equipment and machineries is based on the latest available price quotations
being adjusted for possible escalation. The provision for escalation is equal to:
[Latest rate of annual inflation applicable to the Plant Equipment and Machinery]
Multiplied by [Length of the delivery period]
D) Technical Know-how and Engineering Fees: Technical consultants or collaborators, (local
or foreign), may involve for making:
 Project preparation report,
 Choice of technology,
 Selection of the plant machinery and equipment,
 Detailed engineering services, etc
The cost paid for these services in setting up the project is a component of the project cost.
However, any royalty payable (annually) on transfer of technology, which is typically a
percentage of sales, is an operating expense and hence, accounted in the projected profitability
statement.
E) Expenses on Foreign Technicians and Training of Local Technicians Abroad
Travel expenses of technicians to- and -from abroad,
 Boarding and lodging,
 Salaries and allowances, etc
F) Miscellaneous Fixed Assets and Expenditures:
These are not parts of the direct manufacturing process but necessary to run the organization as
an entity. For instance, the following costs are classified under this major group:
o Furniture and office equipment;
o Tools, vehicles, railway siding, diesel generators;
o Transformers, boilers, piping system;
o Laboratory and workshop equipment;
o Effluent treatment plants and firefighting equipment;
o Expenses for procurement (acquisition) of patents, licenses, trademarks, and copyrights
(for using a given technological package);
o Deposits made with the electricity board, and so on.

76 | P a g e
 iii. Pre-Production Expenditures
Pre-production capital expenditures include the following:
A. Establishment and Capital Issue Expenses
 Establishment Expenses: These are expenditures incurred during the registration and
formation of the company, including: Legal fees for preparation of the memorandum &
articles of association, similar documents, capital issues and Expenses for incorporating the
company
Capital Issue Expenses include:
• Underwriting commission and brokerage fees,
• Fees to managers and registrars,
• Printing and postage expenses,
• Advertising and public announcements,
• Listing fees and stamp duty expenses for processing of share applications and
allotment, etc
B. Pre-Operative Expenses
 Expenditures for pre-investment studies such as opportunity, pre-feasibility, feasibility, and
support or functional studies
 Consultant fees while project preparation, Pre-production marketing costs and promotional
activities and Training costs (fees, travel, and living expenses);
(Note also that preliminary expenses for identifying the project, conducting the market survey,
and preparing the feasibility report can be presented under this heading as well.)
iv. Working Capital (WC) Requirements
In estimating the working capital requirement and planning for its financing, the following points
have to be born in mind:
The WC requirement consists of the following:
• Raw materials & components ( indigenous as well as imported)
• Stocks of goods in process (WIP)
• Stocks of finished goods
• Debtors (receivables)
• Operating expenses (prepaid insurances, prepaid rents, etc)
• Consumable stocks (supplies)
v. Provision for Contingencies

77 | P a g e
Provisions should also be made for physical contingencies as an allowance, which is providing a
safety factor to cover unforeseen or forgotten minor costs. Contingency allowance is an amount
included in a project account to allow for adverse conditions that will add to baseline costs.
These are:
⇒ Physical Contingencies: Allow for physical events such as the effects of adverse weather
condition during construction, etc. (They are included in both Financial and Economic analysis)
⇒ Price Contingencies: Allow for general inflation. In project analysis, they are omitted both
from financial and economic analysis when the analysis is done in constant prices. Constant
price is a value, most often a price, from which the overall effect of general price increase
(inflation) has been removed.
By definition, a “constant price” is a price that has been deflated to real terms by an
appropriate “price index”, a price index being a series that records changes in a group of prices
relative to a given base period.
2. Project Benefits
Any project whether it is relatively simple, such as purchasing and operating a taxicab, or
complex, such as creating and operating a sophisticated global communication network, involves
costs and benefits. At the beginning of a project an investment is usually required. Equipment
has to be purchased, buildings have to be constructed, and a host of other activities have to be
conducted. All of these activities require expenditure of resources. As soon as the project gets
into its operating phase, some function, such as producing a product or performing a service, that
has tangible or intangible costs and benefits will be performed.
If the system is producing an end item, such as a factory producing motor vehicles, then the
revenue received by selling the produced items is the benefit obtained. If the project is an energy
producing system, such as a utility power station, then it receives income by selling its generated
power. The benefits or costs are not always given directly in monetary terms but they can be
converted to monetary terms for comparison purposes. For example, in the case of a public
project such as a new highway, even if there are no tolls taken, time saved, lives saved, or the
convenience received by the users can be transferred into monetary benefits. In the case of
defense systems, the value received is deterrence or national security which is not easily
measurable in monetary terms.
Costs and benefits do not always occur at one time; they occur at different points of time during
the life of the project. In most cases, the lifetime worth, that is the lifetime aggregate of all the

78 | P a g e
costs and benefits, taking into account the time of their occurrence, is used to compare different
projects and to decide which alternative to choose.
Let us look at the example of a housing development project. The cost items are purchase of land
and design and construction of the sites and buildings. As soon as the developer starts selling the
houses, benefits start coming in. Since all of the houses are not sold at the same time, the
developer has to bear the cost of maintaining the unsold buildings until all of the houses are sold.
This is the end of the project. The aggregate of these costs and benefits, taking into account the
time of their occurrence, is the lifetime worth of this project that will determine its economic
viability.

1.4. Criteria for Investment Decision

1. Net Present Value (NPV)
The NPV of a project is the sum of the present value of all the cash flows - positive as well as
negative that are expected to occur over the life of the project. It represents the net benefit over
and above the compensation for time and risk. The net present value of a project is also defined
as the value obtained by discounting, at a constant interest rate and separately for each year, the
differences of all annual cash outflows and inflows accruing throughout the life of a project. This
difference is discounted to the point at which the implementation of the project is supposed to
start. The present values of each of the annual cash flows, (be it negative or positive), over the
project’s economic life are added up (or aggregated) to obtain the total NPV of the project. That
is,
NPV = (CF0 + CF1 + …. + CFn ) - IO = Σ CFt - IO
(1 + K) 0 (1 + K) 1 (1 + K) n (1 + K) t; t - 0
Where: NPV = Net present value
CF t = Cash flow occurring at the end of year t, (t = 0, 1… n)
n = Economic life of the project
K = Cost of capital, (which is the discount rate)
When the cash flows exhibit conventional pattern, NPV simply means that present value of cash
inflows minus initial investment.
Considering the cash flow stream of a project given below and the cost of capital “k” being 10
percent, the net present value (NPV) of the project can be calculated easily as illustrated next:
Expected cash flows
Year Cash flows

79 | P a g e
 0 -1,000,000
1 200,000
2 200,000
3 300,000
4 300,000
5 550,000
Given at representing the discount factor applicable to the respective cash flow in year n,
NPV = Σ NCFt - IO
(1 + k) t; t=0
Where: NCFt: is the annual net cash flow of a project in year t; k is the discount factor in the
corresponding year, relating to the discount rate applied through the equation at = (1 + r) -t
Therefore, the NPV of the above project will be:

NPV= 200,000 + 200,000 + 300,000 + 300,000 +550,000 - 1,000,000 = 118,750

(1.10) 1 (1.10) 2 (1.10) 3 (1.10) 4 (1.10) 5 (1.10) 0
Net Present Value Ratio
If one of several project alternatives has to be chosen, the project with the largest NPV should be
selected. They need some refinement, since the NPV is only an indicator of the positive net cash
flows or of the net benefits of a project. In cases where there are two or more alternatives, it is
advisable to know how much investment will be required to generate these positive NPVs. The
quotient obtained by dividing the NPV to the present value of investment (PVI) is called the net-
present-value ratio (NPVR). As the formula yields a discounted rate of return, this value should
be used for comparing alternative projects and choosing among them. The formula is as follows:
NPVR = NPV/ PVI
2. Profitability Index
There are two ways of defining the benefit-cost ratio. The first definition relates the present value
of benefits to the initial investment. That is,
BCR = PVB/ I
Where:
BCR = benefit-cost ratio
PVB = present value of benefits
I = initial investment

80 | P a g e
The second measure, a net measure, relates net present value to initial investment. The formula
is:
NBCR = NPV = (PVB - I)
I I
Alternatively, the computation may use the BCR as the starting point and deduct one from this
ratio as shown below:
NBCR = BCR - 1
Where: NBCR = net benefit-cost ratio
NPV = net present value
PVB = present value of benefits
I = initial investment
Decision Rules:
BCR; NBCR Rule
>1; >0 Accept
=1; =0 Indifferent
<1; <0 Reject
To illustrate the calculation of these measures, let us consider a project, which is being evaluated
by a firm that has a cost of capital of 12 percent. In this regard, assume that the initial investment
on the project amounts to Birr 100,000 and the estimated cash flows over its economic life are as
given below:

Year Benefits
1 25,000
2 40,000
3 40,000
4 50,000
The two benefit-cost ratios (i.e. the gross and net measures) for this project are computed as
follows:
• BCR = 25,000(1.12)-1 + 40,000 (1.12)-2 + 40,000(1.12)-3 + 50,000(1.12)-4 = 1.145
100,000
• NBCR = BCR - 1 = 0.145

81 | P a g e
The foregoing benefit-cost ratios give the same decision signals, as the difference between them
is simply unity.
3. Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate at which the present value of cash inflows
is equal to the present value of cash outflows. It is the discount rate which makes its NPV equal
to zero or the rate which equates the present value of future cash flows with the initial
investment. In other words, IRR is the discount rate for which the present value of the net
receipts from the project is equal to the present value of the investment, and NPV is zero.
It is the value of r in the following equation:
NPV = (CF0 + CF1 + …. + CFn ) - IO = Σ CFt - IO = 0
(1 + K) 0 (1 + K) 1 (1 + K) n (1 + K) t; t - 0
Where: NPV = Net present value
CF t = Cash flow occurring at the end of year t, (t = 0, 1… n)
n = Economic life of the project
K = Cost of capital, (which is the discount rate)/IRR
Mathematically, it means that in the NPV equation, the value of “r” has to be found for which at
defined values of CFt, the NPV equals zero. An iterative process, using either table of present
values or a suitable computer program, finds the solution. The procedure used to calculate the
IRR is the same as the one used to calculate the NPV. The same kind of table can be used, and
instead of discounting cash flows at a predetermined cut-off rate, several discount rates may
have to be tried until the rate is found at which the NPV is zero. This rate is IRR, and it
represents the exact profitability of the project.
The calculation of IRR involves a process of trial and error. By using a technique called
“interpolation’’, we can approximately find the internal rate of return for a project. The IRR
calculation includes procedures:
 Preparation of a cash flow table
 An estimated discount rate is then used to discount the net cash flow to the present value
 If the NPV is positive, a higher discount rate is applied
 If the NPV is negative at this higher rate, the IRR must be between these two rates
 However, if the higher discount rate still gives a positive NPV, the discount rate must be
increased until the NPV becomes negative

82 | P a g e
  If the positive and negative NPVs are close to zero, a good approximation of the IRR can be
obtained, using the following linear interpolation formula:
Difference NPV at the lower
IRR = Lower discount rate + (D/c b/n the discount rates x (NPV at lower Dr))
Sum of NPVs at the two Drs
IRR = i1 + [(PV)/ (PV + NV)] x (i2 – i1)
Where:
PV is the positive NPV (at the lower discount rate i1), and
NV is the negative NPV (at the higher discount rate i2).
Note that we need to ignore the negative sign, i.e. take the absolute value of the two NPVs
obtained at the lower and higher discount rates, in order to approximate the IRR value through
interpolation. To this effect, the above formula can be re-written as follows:
IRR= i1 + NPVi1 – NPVi x (i2 –i1)
NPVi1 + NPVi2
Where: NPVi1 and NPVi2 are the net present values obtained at i1 and i2 respectively. NPVi
represents the net present value obtained at IRR, which is always 0.
The absolute value of both NPV1 and NPV2 are used in the formula. It should also be noted
that the lower discount rate (i1) and the higher discount rate (i2) should not differ by more than
one or two percentage points (in absolute terms). In this regard, the formula will not yield
realistic results if the difference is too large, since the discount rates and the NPV are not related
linearly.
Interpretation of the IRR
Internal Rate of Return is the maximum interest that a project could pay for the resources used if
it has to recover the initial investment, the subsequent operating costs, and still break-even. It is
the rate of return on capital outstanding per period while it is invested in the project.
The rationale for this method is that, the IRR on a project is its expected rate of return. If the IRR
of a given investment project exceeds the cost of the funds used for financing the project (cost of
capital), there is a surplus remaining after paying for the capital, and this surplus adds up on the
wealth of the shareholders of the firm.
Therefore, selecting a project whose IRR exceeds its cost of capital increases the shareholders'
wealth.
Decision Rule:

83 | P a g e
  Accept the project if the IRR is greater than the cost of capital,
 Reject the project if the IRR is less than the cost of capital, and
 The decision maker will be indifferent if the IRR is equal to the cost of capital.
Example: Consider the following data:
Year 0 1 2 3 4
Cash flows -100,000 30,000 30,000 40,000 45,000
The IRR is the value of r, which satisfies the following equation:
100,000 = 30,000 + 30,000 + 40,000 + 45,000
(1+r) 1 (1+r) 2 (1+r) 3 (1+r) 4
The calculation of r consists of a process of trial and error. We try different values of r till we
find that the right hand side of the above equation is equal to 100,000. Let us, to begin with, try r
= 12 percent. The right- hand side of the above equation becomes:
30,000 + 30,000 + 40,000 + 45,000 = 107,773
(1.12)1 (1.12)2 (1.12)3 (1.12)4
Since this is more than 100,000, we have to try a higher value of r. (In general, a higher r lowers
the right-hand side value and a lower r increases the right-hand side value.) Let us try r = 14
percent. This makes the right-hand side equal to:

30,000 + 30,000 + 40,000 + 45,000 = 103,046

(1.14)1 (1.14)2 (1.14)3 (1.14)4
Since this value is higher than the target value of 100,000, we have to try still a higher value of r.
Let us try r = 15 percent. This makes the right-hand side equal to:
30,000 + 30,000 + 40,000 + 45,000 = 100,802
(1.15)1 (1.15)2 (1.15)3 (1.15)4
NPV = 802
This value is a slightly higher than our target value, 100,000. Therefore, we increase the value of
r from 15 percent to 16 percent. The right – hand becomes:
30,000 + 30,000 + 40,000 + 45,000 = 98,641
(1.16)1 (1.16)2 (1.16)3 (1.16)4
NPV = -1,359
Since this value is now less than 100,000, we conclude that the value of “r” lies between 15
percent and 16 percent.

84 | P a g e
For most of the purposes, this information suffices; however, if a single value is required, we
have to resort to interpolation. In this regard,
IRR = 15% + (16% - 15%) [(802) / (802+1359)]
= 15.371%
IRR could also be obtained by trial and error using discount factors at different rates of return.
Assume that for a given level of capital invested, the NPV at 12% discount rate equals
6,967,000. In order to find the IRR for this investment, several discount rates greater than 12%
should be tried until the NPV is approximately zero.
In this regard, it is depicted in the table that discounted at 18%, the net cash flow is still positive,
but it becomes negative at 20%. Therefore, the IRR must lie between 18% and 20%.
IRR = 18% + 2% 265
265 + 486
= 18.71%
4. Payback Period (PBP)
The payback period is the length of time required to recover the initial cash outlay on a project. It
is defined as the number of years expected to take from the beginning of the project until the sum
of its net earnings, (i.e. receipts minus operating costs), equals the cost of the projects initial
capital investment. When the annual cash inflow is a constant sum, the payback period is simply
the initial outlay divided by the annual cash inflow. According to the payback criterion, the
shorter the payback period, the more desirable the project is. Firms using this criterion generally
specify the maximum acceptable payback period. Projects with a payback period equal to or less
than the specified period are deemed worthwhile.
Assuming a project that requires an initial cash outlay of Birr 1,000,000 and generating a
constant annual cash inflow of Birr 300,000, the payback period can be determined as
(1,000,000/300,000), which is 3 1/3 years.
When the cash flows from the project are not in an annuity, the payback period is computed as
follows:
Payback Period = Years before Full Recovery + Un-recovered cost
Cash Flow during the next year
Assuming a project that involves cash outlay of Birr 600,000 and generating cash inflows of Birr
100,000, Birr 150,000, Birr 150,000, and Birr 200,000 in the first, second, third, and fourth years

85 | P a g e
respectively, the payback period is four years because the sum of the cash inflows during the
four years is equal to the initial investment outlay. See the table below depicts this.
Year Annual CF Cumulative CF NCFs (Cumulative)
0 -600,000 _ -600,000
1 100,000 100,000 -500,000
2 150,000 250,000 -350,000
150,000 400,000 200,000
4 200,000 600,000 0
Illustration 2
The total initial investment for a given project is birr 10,300,000, of which birr 300,000 is
invested in land and birr 2,000,000 in net working capital. You are given the annual net
operating cash flows to be generated from the project from year 3 through 7. In this regard, the
periodic operating cash flows indicated in the table below are obtained in such a way that the
financial costs (net of tax) and the depreciation charges added back to the profit after tax balance.
Items Years
3 4 5 6 7
Net profit -280,000 920,000 1,270,000 2,540,000 2,630,000
Net interest 370,000 330,000 280,000 180,000 90,000
Depreciation 780,000 780,000 780,000 780,000 780,000
Net operating CFs 870,000 2,030 2,330,000 3,500,000 3,500,00
Required:
1. Determine the total Payback Period (PBP).
2. Determine the Payback Period (PBP) assuming the investment in land and networking
capital can be regained fully at the end of the project’s economic life.
Solution:
When calculating the payback period, the computation usually starts with the construction period
during which the initial investment is made. The initial investment, in this regard, can be seen in
terms of one of the following:
Total investments………………………………………... (10,300,000)
Initial investments, excluding cost of land and NWC….. (8,000,000)

Year Annual NCFs Balance at year end(case A) Balance at year end

86 | P a g e
 (case B)
1 _ (10,300,000) (8,000,000)
2 _ (10,300,000) (8,000,000)
3 870,000 (9,430,000) (7,130,000)
2,030,000 (7,400,000) (5,100,000)
5 2,330,000 (5,070,000) (2,770,000)
6 3,500,000 (1,570,000) 730,000
7 3,500,000 1,930,000 4,230,000
There are two ways of calculating the payback period under case A. In this regard, including the
construction period, the total original investment costs would be recovered after a little less than
6.5 years [i.e. 6 years +
(1,570,000/3,500,000]. Excluding the construction period, the payback period would be (6.5
years – 2 years = 4.5 years).
Under Case B, the cost of land and the net working capital are deducted from the total
investment costs with the assumptions that these values can be fully regained at the end of the
project’s life. Thus, only 8 million of the investment outlay must be recovered. In this case, the
payback period would be 5.8 years [i.e. 5 years + (2,770, 000/3,500,000)].
A project proposal may be accepted if the pay-back period is smaller than or equal to an
acceptable time period, a period usually derived from past experience with similar projects. The
major merit of the payback period as a project selection criterion is its ease for calculation.
5. Discounted Payback Period (DPBP)
The discounted payback period is defined as the number of years that is required to recover the
amount of money invested in a project at the beginning, after the future cash flows being
discounted to their present value equivalent.
The discounted payback period is computed in the same manner as that of the regular payback
period except that discounted cash flows are used in place of the nominal cash flows. In this
regard, the expected future cash flows are discounted using the project‘s cost of capital.
To illustrate the computation of the discounted payback period, suppose a project being
considered requires initial investment of birr 30,000 the economic life which is 5 years. The
after-tax cash flows from this project during years

87 | P a g e
1, 2, 3, 4, and 5 are birr 15,000, birr 18,000, birr 12,000, birr 20,000, and birr 22,000
respectively. The cost of capital (the required rate of return) is 10 percent. What is the discounted
payback period for this project?

Solution:
Year Cash flows Discount factor Present value Cumulative DCFs
1 15,000 0.909 13,635 13,635
2 18,000 0.826 14,868 28,503
3 12,000 0.751 9,012 37,515
4 20,000 0,683 13,660 51,175
5 22,000 0.621 13,662 64,837
As you can see from the cumulative discounted cash flows, the discounted payback period for
this project is between
2 to 3 years. This is because the cumulative discounted cash flow at the end of year 2 is less than
the initial investment of birr 30,000 and the cumulative discounted cash flow at the end of year 3
is greater than the net initial investment. The exact discounted payback period can be obtained as
follows:
Discounted Payback Period = 2 years + (1,497/9, 0120) years
= 2 years + 0.17 years = 2.17 years
Or = 2 years + (0.17 x 12 months)
= 2 years and 2 months
A period of 2 years and 2 months is required to recover the project’s initial net investment taking
the time value of money into account.
6. Accounting Rate of Return (ARR)
It is also referred to as the average rate of return on investment or a simple rate of return. It is a
measure of profitability that relates income to investment, both measured in accrual accounting
terms. This method relies on the operational accounts and is defined as the ratio of the profit in a
normal year of full production to the original investment outlay (fixed assets, pre-production
capital expenditures, and networking capital).
ARR = Average Income After tax (Annual)
Initial Investment

88 | P a g e
It is defined as the ratio of the annual net profit on capital and this ratio is often computed only
for one year, generally a year of full production. This ratio can be computed either for the total
investment outlay or for the equity capital. The simple rate of return, thus, can be computed as
follows:
1. The simple rate of return on total capital invested (R) is:
R (%) = NP + I x 100
K
2. The simple rate of return on equity capital paid (RE) is:
RE (%) = NP x 100
Q
Where: NP = net profit (after depreciation, interest charges, and taxes)
I = interest charge
K= total investment costs (fixed assets, working capital)
Q= equity capital (amount in the pre-production period)

89 | P a g e
CHAPTER SIX: ECONOMIC (SOCIAL COST – BENEFIT) ANALYSIS
1.1. Difference between Cost benefit analysis and Social cost Benefit
Analysis
Core differences between CBA & SCBA

CBA
• Limited range of effects is considered as •
it measures the profitability of individuals
who are only a part of the society.
• It is quantitative in nature.
SCBA
The evaluator has to take a wider view as
it tries to measure social values of the
whole society
• It can be quantitative or qualitative.

1.2. Rationale for SCBA

In SCBA, the focus is on the social costs and benefits of projects that often tend to differ from
monetary costs and benefits. The principal sources of discrepancy are discussed next.
1. Market Imperfections
Market prices form the basis for computing the monetary costs and benefits of projects from the
point of view of the private investor.
 Market prices, in this regard, could reflect social values only under conditions of perfect
competition.
 However, when imperfections exist, market prices do not reflect social values
The common market imperfections found in most economies, and especially in developing
countries, are:
i. Rationing on Prices and Distribution of Commodities:
 Rationing of a commodity refers to existing control over its price & distribution.
 In this regard, the price paid by consumers under rationing is often significantly less than
the price that would have prevailed in a competitive market.
ii. Existence of Minimum Wage Rate Legislations:
 In such cases, the wages paid to labor are usually more than what wages would have
been in a competitive market, which is free from such wage legislations.
iii. Foreign Exchange Regulation:
 Developing countries exercise close control and impose regulations over foreign
exchange transactions.

90 | P a g e
  The official rate of foreign exchange in such cases is typically less than the rate that
would have prevailed in the absence of foreign exchange control or regulations.
 The existence of such controls or regulations often results in an overvalued local
currency due to the undervaluing of the prices of foreign currency.
 Official exchange rate (OER) is controlled in most nations and often made to be less
than the real value of foreign currency, which has implications to reducing the volume
of foreign exchange transactions.

2. Externalities
A project may have beneficial external effects, for instance, it may contribute to the development
of certain infrastructural facilities like roads that benefit residents in the neighboring areas. Such
benefits are considered in
SCBA, though they are ignored in assessing the monetary benefits to the project sponsors, as
they do not receive any monetary compensation from those who enjoy this external benefit
created by the project. Likewise, a project may have harmful external effects like environmental
pollution. In SCBA, the cost of such environmental pollution is relevant, though the project
sponsors may not incur any monetary costs on this.
Externalities are relevant in SCBA because, in such analysis, all costs and benefits, irrespective
to whom they accrue and whether they are paid for or not, are relevant from the broader society
perspective.
3. Taxes, Subsidies, and Domestic Interests
Taxes, subsidies, and domestic interests are transfer payments. From the private point of view,
taxes are definite monetary costs and subsidies are definite monetary gains and hence, appear in
the financial analysis (in the costs & benefits stream).
 From the society (or national economy) point of view, however, taxes & subsidies are
generally regarded as transfer payments and hence, considered irrelevant.
 Taxes and subsidies do not represent direct claims on the country’s resources; but merely
reflect a transfer of control over resources from one member or sector of society to another.
In addition, interests on domestic loans merely transfer purchasing power from the project to the
lender. It does not use up real resources. Domestic loans and their repayments are also financial
transfers (and hence, not relevant from the SCBA perspective). The opportunity cost of such loan
funds is relevant in the analysis. However, interest payments to foreign lenders are always

91 | P a g e
relevant in SCBA, as payment of interests to lenders abroad needs the use of funds from the
national (domestic) pool of savings.
4. Concern for Redistribution of Income
A private firm does not bother as to how its benefits are distributed across various groups in the
society. The society, however, is concerned about the distribution of benefits across different
groups. In this regard, a birr of benefit going to an economically poor section is considered more
valuable than a birr of benefit going to affluent (rich) section.
In developing countries, relatively high social value is attached to income going to the poor.
Hence, projects benefiting the poor are more socially valuable. For instance, irrigation projects,
projects for opening hospitals in rural areas, and the like are more socially valuable relative to
networking projects, projects for opening hospitals in urban areas, and so on.
5. Concern for Savings and Investment
Project’s benefits might be described in terms of enhancing savings or increasing consumption in
the society. In this regard, a differential value should be attached to these benefits.
 From a social point of view, the division of benefits between “consumption” and
“savings” (the latter leading to investment) is relevant, particularly in the capital scarce
developing countries.
 In general, the benefits of a project may be seen from two angles, that is,
Those enhancing savings (for instance, opening hospitals to offer medical services at lower
fees, projects improving the nearby roads, which is, in turn, enhancing transport services &
lowering charges, etc)
Those enhancing (or contributing to the increase in consumption) in the society, for instance,
opening luxuries hotels, cinemas, etc
 As a birr of benefit saved deemed more valuable than a birr of benefit consumed, more
social-value is attached to projects that enhance savings than consumption in the society.
 The impact of the project on savings and investment should be reflected in SCBA,
whereby a higher valuation is placed on a benefit saved and lower valuation is put on a
benefit consumed.
 Increase in savings enhances investments in the society.
6. Merit Wants
Goals and preferences not expressed in the market place, but believed by policy makers to be in
the larger interest,

92 | P a g e
  Wants not sought in the market
 But are needed by larger society
Examples of merit want:
 The government may prefer to promote an adult education program
 Balanced nutrition programs for school going children and feeding center for rural
students
 Rural roads
 School for pastoralists
 Programs for empowering women in the society
Often, individuals do not seek these goals in the market place. While merit wants are disregarded
and irrelevant from the private point of view, they are important from the social point of view.
7. Project Linkages
A project may have wide-ranging repressions on demands of inputs and outputs in general. It
may cause gains and/or losses for producers and consumers other than those involving in the
project itself. In this regard, the project may have forward or backward linkages in the industry.
 For instance, other industries may use or process the project’s output, which is called
forward linkage; or
 The project may use inputs or outputs of others, which is called backward linkage.
As such, linkages have impacts on demands of inputs/outputs and often results in gain or loss on
producers & consumers in the economy. Although measurement of linkages is difficult, ignoring
them is not desirable. Hence, attempt should be made to identify and measure the project’s
externalities and linkages from the viewpoint of the society.
Overall Decision Framework
According to this framework, projects having unfavorable financial NPVs and IRRs could
possibly be accepted with subsidy provided by the concerned government bodies if the outcome
in the course of economic analysis turns to be favorable. However, such projects might be
discarded if there is no subsidy policy supporting such financially nonviable projects.
Conversely, projects, even those financially viable, are not acceptable if the outcomes in the
economic appraisals (SCBA) are unfavorable. Subsidy is also not given to projects that have
unfavorable economic NPVs and IRRs. In general, projects having favorable financial and
economic NPVs and IRRs are unconditionally acceptable.

93 | P a g e
 1.3. Approaches to SCBA
There are two principal approaches for Social Cost Benefit Analysis.
A. UNIDO Approach: This approach is mainly based on the publication of UNIDO
(United Nation Industrial Development Organization) named Guide to Practical Project
Appraisal in 1978.

B. L-M Approach.
I.M.D Little & J.A.Mirlees have developed this approach for analysis of Social Cost-Benefit in
Manual of Industrial Project Analysis in Developing Countries and Project Appraisal & Planning
for Developing Countries.

1.3.1. UNIDO Approach

The UNIDO approach of Social Cost Benefit Analysis involves five stages:
1. Calculation of financial profitability of the project measured at market prices.
2. Obtaining the net benefit of the project at shadow (efficiency) prices.
3. Adjustment for the impact of the project on Savings & Investment.
4. Adjustment for the impact of the project on Income Distribution.
5. Adjustment for the impact of the project on Merit and Demerit Goods whose social
values differ from their economic values.
Stage-1: Calculation of financial profitability of the project
 A good technical and financial analysis must be done before a meaningful economic
(social) evaluation can be made so as to determine financial profitability.
 Financial profitability is indicated by the Net Present Value (NPV) of the project, which
is measured by taking into account inputs (costs) and outputs (benefits) at market price.
Net Present value of a Project is calculated as:

Where,
Vt = Value of outputs at market price at time t
Ct = Value of inputs at market price at time t
K = Discount Rate
T = Lifetime of the project
I0 = Initial cost at the start of the project.
94 | P a g e
  The project is viewed as financially feasible if NPV > 0.
Stage-2: Obtaining the net benefit of the project at economic (shadow) prices
 The Commercial Profitability analysis (calculated in stage - 1) would be sufficient only if
the Project is operated in perfect market. Because, only in a perfect market, market prices can
reflect the social value.
 If the market is imperfect (most of the cases in reality), net benefit of the Project is
determined by assigning shadow prices to inputs and outputs.
 Therefore, developing shadow prices is very much vital.
 Shadow Prices reflect the real value of a resource (input or output) to society.
 Shadow Prices are also referred as economic prices, accounting prices, economic/accounting
efficiency prices etc.
 Shadow Prices can be defined as the value of the contribution to the country’s basic socio-
economic objectives made by any marginal change in the availability of commodities
(output) or factor of production (input).
 Example: A project of power station may increase the production of electricity which
contributes to one of the socio-economic objectives of the country.
1.3.1.1. General Principles of Shadow Pricing
1. Numeraire: This term refers to the unit of value – the standard of value – in terms of which
costs and benefits are to be counted. It is a unit of account in which the values of inputs and
outputs are to be expressed.
Numeraire is determined at-
 Domestic currency rather than border price.
 Present value rather than future value.
 Constant price rather than current price.

2. Tradability:
Tradability refers to whether a good or service is tradable or non-tradable; if tradable whether is
fully traded or non-traded. A good/service is tradable in the absence of or within limited trade
barriers.
 A tradable good/service is actually traded when-

95 | P a g e
 o The import (export) supply is perfectly elastic over the relevant range of volume.
o All additional demand (production) must be made (consumed) by import (export) due
to the full capacity in the domestic industry (fulfillment of demand by domestic
consumer).
o The import (CIF) price is less or the export (FOB) price is more than the domestic
cost of production.

 A good/service is non-tradable; if
o its import (CIF) price is greater than its domestic cost of production, and/or
o Its export (FOB) price is less than its domestic cost of production.
1.3.1.2. Sources of Shadow Pricing:
Depending on the impact of the project on national economy, there are three sources of shadow
pricing:

Consumer Willingness to Pay (CWP) is what a consumer wants to spend for a product or service.
The difference between CWP and actual payment is called consumer surplus.

1. Tradable inputs & outputs:

 For a fully traded good, the shadow price is border price translated into the domestic
currency at shadow foreign exchange.
To illustrate, assume that a project uses two indigenous equipment costing Bir. 250,000. These
equipment’s can be exported at $10,000. The shadow foreign rate of $ 1.00 is equivalent to Bir.
30. Therefore, shadow price of these equipment’s (inputs) are ($10,000 × 30) = Birr 300,000.

96 | P a g e
 2. Non-Tradable Inputs & Outputs:
To illustrate, assume that for a project, one-half of the required input is collected from additional
domestic production which has a domestic cost of Birr 200,000 and the rest one-half is collected
from diversion from other consumers who are willing to pay Birr 300,000. Therefore, the
shadow price of the inputs will be:
(Cost of production + consumer’s willingness to pay)
= Birr (200,000 + 300,000) = Birr 500,000
Assume again that a newly establishes power station having a total capacity of 5,000 mega watt
electricity, charges Birr 10 per one kilo watt electricity consumption. The consumers of that
particular area are willing to pay Birr 20 per kilo watt.
Therefore, the shadow price is:
(Birr 20 × 5,000,000kw) = Birr 100million, instead of Birr 50 million (10 x 5,000,000 kw).
Shadow Pricing of Externalities:
Although valuation of external effects is difficult as they are often intangible in nature and there
is no market price, shadow pricing of externalities may be made indirect means such as:
 The harmful effect of the bridge may be measured by the consumer willingness to pay
for the output of the people which has been reduced due to the bridge.
 The cost of pollution may be estimated in terms of the loss of earnings as a result of
damage to health caused by it.
3. Capital:
 Investment of capital in a project causes to happen two things:
i. Financial resources are converted into physical assets
ii. Financial resources are withdrawn from national pool of savings. Thus alternative
projects are foregone and there is an opportunity cost of it.
 The shadow price of physical assets is calculated in the same manner in which inputs and
outputs are calculated.
The opportunity cost of capital (shadow price of capital) depends on the source from
which the capital has generated.
1.3.1.3. Obtaining Net Benefit of the Project at Shadow Prices
 Determining the shadow price of
 One-Shot Costs
 Annual costs

97 | P a g e
  Annual benefits
 Calculating Net-benefit of the project from social point of view by :

Where,
Vt = Shadow price of Benefit at time t
Ct = Shadow price of Operating Expenses at time t
K = Social Discount Rate
T = Lifetime of the project
I0 = Initial cost at the start of the project.
Illustration
The Government is considering a project which would supply water for irrigation, generate
electricity and provide a measure of protection against floods. The project is expected to have a
25 year life time.
The costs and benefits of the project are as:
COSTS:

1. Power equipment costing Birr 300,000,000 (Additional Information: This equipment can be
exported at $ 17,500,000. The shadow price of Birr per one dollar is 20)
2. 30,000 tons of cement produced indigenously is used in the project at a cost of Birr
180,000,000. (Additional Information: However, one-half of the cement will come from
additional domestic production which costs Birr 5,000 per tone and one-half come from
diversion from other consumers who are willing to pay Birr 6,500 per ton.)
3. Other construction materials (sand, bricks, steel etc.) Cost Birr 150 million (Additional
Information: these materials comes from additional production, at production cost of 100
million Birr)
4. 6,000,000 man days of unskilled labor for which the project committee decided to pay a
daily wage of Birr 40. (Additional Information: The shadow price of unskilled labor is 30
Birr Per day)
5. Skilled labor costing Birr 60,000,000 ( However, this cost reflects what others are willing to
pay for the skilled labor)

98 | P a g e
6. Operating & Maintenance cost of the project will be Birr 75,000,000 annually. (However,
the operating cost should be Birr 65,000,000 from social view point)

Benefits:
1. 0.5 Million acres of land will be irrigated. The Government will charge the water levy at
Birr 150 for per acre. (Additional Information: The value of additional output per acre
due to the irrigation will be Birr 500 per acre).
2. 1000 mega watt of electricity will be generated for domestic use in a year. The
electricity tariff will be charged at Birr 100 per Kilo watt. (Additional Information: The
consumers are willing to pay Birr 150 per kilo watt consumption of electricity).
3. Flood damages can be saved by Birr 20,000,000 annually. However, the Government
will not able to collect anything for this.

Required: by assuming the discount rate to be 10%

1. Prepare a summary table for costs of the project

2. Prepare a summary table for benefits of the project
3. Determine profitability of the project from the private (financial) angle
4. Determine profitability of the project from the social (economic) angle

Solution
1. Summary table for costs of the project
Cost type Nature of the cost Private Angle Social angle
(Market price) (shadow price)
Power equipment One –shot 300,000,000 350,000,000
Cement (indigenous) One –shot 180,000,000 172,500,000
Other construction materials. One –shot 150,000,000 100,000,000
Labor cost (unskilled) One-shot 240,000,000 180,000,000

99 | P a g e
Labor cost (skilled) One –shot 60,000,000 60,000,000
Operating and maintenance cost Annual 75,000,000 65,000,000
2. Summary table for Benefits of the project
Benefit Type Nature of the benefit Private Angle Social angle
(market price) (shadow price)
Irrigation Annual 75,000,000 250,000,000
Electricity Annual 100,000,000 150,000,000
Flood relief Annual _ 20,000,000
3. Profitability of the project from the private (financial) angle
a. Determination of costs
i. One- shot costs (initial cost)
Cost of power equipment---------------------------- Birr 300,000,000
Cement------------------------------------------------------ 180,000,000
Other Construction materials----------------------------- 150,000,000
Labor (unskilled) -------------------------------------------240,000,000
Labor (skilled) -----------------------------------------------60,000,000
Total initial cost------------------------------------------Birr 930,000,000
ii. Annual cost
Operating and maintenance cost------------------Birr 75,000,000
b. Determination of annual benefit
Irrigation------------------------------------------------------Birr 75,000,000
Electricity-------------------------------------------------------- 100,000,000
Total annual benefit----------------------------------------- Birr 175,000,000
To determine the profitability of the project, the net present value of the project can be calculated
as follows:

Where,
Vt = Annual Benefit at time t which is 175 million Birr in this case
Ct = Annual cost at time t which is Birr 75 million for this case
K = Discount Rate = 10% (assumed)

100 | P a g e
 T = Lifetime of the project = 25 years
I0 = Initial cost at the start of the project which is Birr 930 million for this project

Therefore,

Therefore, the project is generating a negative NPV of Birr 22.3 Million from the private angle.
And this project would have to be rejected from the private investor perspective had it been
belongs to private owners or business people.

4. Determination of profitability from the social (economic) angle

Costs
One –shot costs
Cost of power equipment-------------------------------- Birr 350,000,000
Cement----------------------------------------------------------- 172,500,000
Other Construction materials--------------------------------- 100,000,000
Labor (unskilled) ------------------------------------------------180,000,000
Labor (skilled) ----------------------------------------------------60,000,000
Total initial cast------------------------------------------------------Birr 862.5M
Annual costs
Operating and maintenance costs------------------------------------65,000,000

Annual benefit
Irrigation--------------------------------------------------------Birr 250,000,000
Electricity------------------------------------------------------------ 150,000,000
Flood relief-------------------------------------------------------------20,000,000
Total annual benefit-------------------------------------------------- Birr 420M
Net Present value of a Project from Social angle is calculated as:

Where,
Vt = Shadow price of Benefit at time t which is Birr 420M for this project

101 | P a g e
 Ct = Shadow price of Operating Expenses at time t which is 65M for the project
K = Social Discount Rate = 10% (assumed)
T = Lifetime of the project = 25 years
I0 = Initial cost at the start of the project which is Birr 862.5M for this project.
Therefore:

= {355 (PVAF.10%, 25) – 862.5M} 1

= {355 X 9.0770 – 862.5M} 1- (1+i)n = 9.0770

= {3222.335B – 862.5M} i
= 2.35985B
From the view point of society, the project is generating a positive NPV of Birr. 2.35985 Billion.
Next to this,
Stage 3: Adjustment for the impact of the project on Savings & Investment
 The purposes of this stage are to –
 Determine the amount of income gained or lost because of the project by different income
groups (such as project other than business, government, workers, customers etc.)
 Evaluate the net impact of these gains and losses on savings
 Measure the adjustment factor for savings and thus the adjusted values for savings impact.
 Adjust the impact on savings to the net present value calculated in stage two.
Stage 4: Adjustment for the impact of the project on Income Distribution
 Government considers a project as an investment for the redistribution of income in favor
of economically weakens sections or economically backward regions.
 This stage provides a value on the effects of a project on income distribution between rich
& poor and among regions.
 Distribution Adjustment Factor (Weight) is calculated and the impacts of the project on
income distribution have been valued by multiplying the adjustment factor with the
particular income of a group. This value will then be added to the net present value re-
calculated in stage three to produce the social net present value of the project.
Stage 5: Adjustment for Merit and Demerit Goods are the subsequent activities to be taken in
SCBA

102 | P a g e
  If there is no difference between the economic value of inputs and outputs and the social
value of those, the UNIDO approach for project evaluation ends at stage four.
 In practical, there are some goods (merit goods), social value of which exceed the
economic value (e.g. oil, creation of employment etc.) and also there are some goods
(demerits goods), social value of which is less than their economic value (e.g., cigarette,
alcohol, high-grade cosmetics etc.)
 Adjustment to the net present value of stage 4 is required if there is any difference between
the social and economic value.
 The steps of adjustment procedure are:
• Estimating the present economic value
• Calculating the adjustment factor
• Multiplying the economic value by the adjustment factor to obtain the adjusted value
• Adding or subtracting the adjusted value to or from the net present value of the project as
calculated in stage four.
6.5. L-M Approach
I.M.D. Little and James A. Mirrlees have developed an approach to SCBA which is famously
known as L-M approach. The core of this approach is that the social cost of using a resource in
developing countries differs widely from the price paid for it. Hence, it requires Shadow Prices
to denote the real value of a resource to society.

6.5.1. Features of L-M Approach

• L-M Numeraire presents uncommitted social income.
 L-M method opts for savings as the yardstick of their entire approach. Present savings is
more valuable to them than present consumption since the savings can be converted into
investment for future.
 L-M approach rejects the ‘consumption’ numeraire of UNIDO approach since the authors
(L & M) feel that the consumption of all level is valuable.
This approach measures the cost and benefits in terms of international or border price. Due to
the fact that the border prices represent the correct social opportunity costs or benefits of using or
producing traded goods
For SCBA purpose, the resources – inputs & outputs – of a project are classified into:
Labor, Traded Goods and Non-traded Goods

103 | P a g e
Therefore, to find out the real value of these resources, we should calculate –
a) Shadow wage rate (SWR)
b) Shadow price of Traded Goods
c) Shadow price of Non-traded Goods
a) Shadow Wage Rate (SWR)
The purpose of computing the SWR is to determine the opportunity cost of employing an
additional worker in the project. For this we have to determine –
 The value of the output foregone due to the use of a unit of labor
 The cost of additional consumption due to the transfer of labor
b) Shadow price of Traded Goods
Shadow price of traded goods is simply its border or international price.
 If a good is exported, its shadow price is its FOB price;
 If a good is imported, its shadow price is its CIF price.
c) Shadow price of Non-traded Goods
 Non-traded goods are those which do not enter into international trade by their very
nature. (e.g. land, building, transportation)
 Hence, no border price is observable for them.
 Ideally, Shadow price of Non-traded Good is defined in terms of marginal social cost
(MSC) and marginal social benefit (MSB).
 L-M suggest that the monetary cost of non-traded goods be broken down into –
• Labor → SWR (Social Wage Rate)
• Tradable → Social Conversion Factor (SCF)
• Residual components → SCF
Similarities between Two Approaches
• Calculation of Shadow Prices to reflect social value
• Usage of Discounted Cash Flow Techniques
• Taking into account about the effect of a project on savings, investment and income of a
society

104 | P a g e
105 | P a g e
CHAPTER SEVEN: PROJECT PLANNING, ORGANIZING, AND
IMPLEMENTATION
7.1. Planning for Implementation
This is a stage either before actual implementation begins or before the start of a new
implementation phase of a project. The exercise is conducted at the level of the project and
involves the implementers, the beneficiaries, and the funding agency, or all stakeholders.The
exercise involves enabling the project management to address the important implementation
issues including the realism of project objectives, scope, financial arrangements, and
implementation schedule, given the overall resource structure of the project and the working
environment. The likelihood of further changes occurring either in design or physical and policy
environment to affect the project are also considered. During the exercise, the team should
define, as clearly as possible, the objectives and hierarchy of objectives. One technique for
defining and analyzing the objectives is the Logical Framework Approach (LFA) or Goal
Oriented Project Planning (GOPP).
It allows definition of activities, or inputs, outputs, and objectives with corresponding verifiable
indicator sand assumptions to attain the goals of the project. A plan of operation for a specified
period is usually desirable to form a basis for activities to be undertaken during the plan period.

7.2. Implementation
This is a crucial concern in any project planning process since the ultimate objective is to see
projects being implemented on the ground as planned and the long-term goals would be realized
in the continuum.
During implementation, the basic activities required for physically realizing projects are actually
carried out and funds are actually disbursed to enhance the process.
The project management team, in this regard, need to ensure whether the project is carried out
according to the design.
Monitoring of progress in implementation and reporting, therefore, becomes a crucial concern at
this stage.
In general, depending on the physical and policy environment, there may be a need for
flexibility in the implementation process as required in order to respond to the changes on the
ground or go with the reality.
Implementation, thus, is a process of refinement or learning from experience and can actually be
considered as a "mini - cycle" within the larger project cycle.
106 | P a g e
The implementation period usually involves three phases. These are the investment period, the
development period, and full development period.
The investment phase, in this regard, refers to period over which major project implementation
activities are undertaken, which might take one to three years depending on the nature of the
project.
The development period occurs as the production builds up; while full development is reached
when the production peaks up and continues until the project ends.
These phases form the life of the project and hence, both financial and economic analysis of
projects relate to this time horizon.

7.3. Monitoring and Reporting

This should be an on-going activity during implementation. The beneficiaries, the implementing
staff, supervisory staff, and the project management staff can carry out monitoring. The aim
should be to ensure the activities of the project are being undertaken on schedule and as well to
facilitate the process of implementation as specified in the project design. In the course of
monitoring, any constraint in operational sing the project design can quickly be detected as well
as corrective actions can be taken. Monitoring, therefore, enables the management to be
proactive rather than being reactive in correcting mistakes during implementation. In this regard,
relevant actions would be taken and the barriers to implementation should be monitored for
smooth implementation. The channels of communication & reporting should also be clear and
easy to allow transparency and accountability for all staff involved.

7.4. Project Evaluation

Evaluation involves a systematic review or examination of the elements of success and failure in
the project experience during the project life, which helps to learn how better to plan for the
future. This implies that evaluation is a continuous exercise during the project life and is much
related to project monitoring. Monitoring provides the data on which the evaluation is based.
However, formalized evaluation is undertaken at specified periods. There is usually a mid-term
and a terminal evaluation. Evaluation can also be undertaken when the project is in trouble as the
first step in a re-planning effort. Careful evaluation is also undertaken before any subsequent
project. Evaluation can be done internally or by external reviewers. Some organizations have
monitoring and evaluation unit. Such a unit can provide management with useful information to
ensure efficient implementation of projects, especially if it operates independently and

107 | P a g e
objectively, because what the unit needs is to judge projects on the basis of objectives, original
project design, and the reality on the ground (i.e. the operating, physical, and policy
environment). With no free hand, the feedback mechanism will be stifled and information may
be “held back" instead of being “fed-back". Some projects may even be subjected to external
evaluation. In general, the aim of evaluation is to determine the extent to which the objectives are
being realized.
7.4.1. Aspects of Project Evaluation
There are two aspects of evaluations in projects.
Project monitoring (characteristics)
• Emphasize on preventive mechanisms
• Follow up the progress of the actual activities (ongoing evaluation)
• Anticipate deviations from implementation plans
• Analyze emerging problems
• (Proactive feedbacks)
• Considerations (in Monitoring)
• Focus on critical aspects
• Emphasize on physical milestones and not on financial targets
• Keep the control system relatively simple (should not be complicated)
• Unless it leads to:
• Redundant paper work
• Diversion of resources
• It may become an end in itself rather than a means to implementation
Project controlling (characteristics)

• Focuses on corrective mechanisms

• (often at latter times)
• Regular comparison of performance
• against targets
• Anticipate deviations from
• implementation plans
• Search for causes of deviations (variance analysis)
• Commitment to check adverse outcomes (or variances)
• Feedbacks for future projects
108 | P a g e
Apart from this, you need to comprehend the fact that, as there are diverse obstacles in the course
of project management, which are impeding the achievement of project's objectives, project
planners need to ensure whether a sound project organization is designed and/or realized in order
to mitigate, at least, some of the project related (or internal) constraints for implementation.
􀀹 A sound project organization, among others, gives a critical attention to the human element, as
they are the forefront players that actually realize what is prepared and presented in a form of
project document.
􀀹 The understandings, experiences, skills, and motives of the human element in general and of
those involving in the project implementation team in particular, among other things, are very
important variables as they are influencing the realization of project ideas.
􀀹 In other words, the overall quality, in terms of the above variables, of the individuals
involving in the implementation process has important implications in ultimately defining the
success or failure of the project as a whole.
Together with this, individuals (i.e. members of the project implementation team) and/or
institutions that are responsible for implementing the project would better identify in advance the
dimensions (and/or the relevant criteria) that define the success of project implementation.

7.5. Project Management: Organization, Obstacles, and Success

• Sound Project Organization
 Lead by a competent leader who is accountable for project
 Commensurate authority and responsibility (given to project leader and team)
 Attention to the human side of the project
 Performance related rewards and penalties
• Obstacles in Project Management
• Projects complexity
• Customers’ specific requirement s
• Technology changes and obsolescence
• Economic policy changes
• Supply difficulties (supplier
• problems) associated with rise of raw materials prices, delay by suppliers,
likely defaults of suppliers, etc
• Availability of inputs such as raw materials, utilities, labor, etc

109 | P a g e
 • Project risks (political or local society actions)
• Design and civil works problem
• Successful Projects (Dimensions)
• Completed within the allocated time, cost, and performance specifications
• Minimal or mutually agreed upon scope changes (financial, size,
coverage, etc)
• Creating positive images for future projects
• Minimal restructuring (without
• disturbing the main workflows in the organization)
• Without changing the corporate culture

7.6. Project Implementation Planning

First, the project manager clearly defines the project objectives and reaches agreement with the
customer on this objective. The manager then communicate this objective to the project team in
such a manner as to create a vision of what will constitute successful accomplishment of the
objective. The project manager spearheads development of a plan to achieve the project
objectives. By involving the project team in developing this plan, the project manager ensures
more comprehensive plan than he or she could develop alone. Furthermore, such participation
gains the commitment of the team to achieve the plan. The project manager reviews the plan
with the customer to gain endorsement and then sets up the project management information
system-either manual or computerized-for comparing actual progress to plan progress. It’s
important that this system be explained to the project team so that the team can use it properly to
manage the project.

7.7. Project control/monitoring

Monitoring and evaluation are integral stages in the project cycle. Monitoring is an on-going
process during project implementation whilst evaluation occurs periodically, typically once a
project has been completed.
7.7.1. Project Monitoring
(i) Purpose
Monitoring considers the question ‘Are we doing the project correctly?’ Its purpose is to alert
management to any problems that arise during implementation.

110 | P a g e
Monitoring works within the existing project design, focusing on the transformation of inputs
and activities to outputs. It ensures that inputs are made available on time and are properly
utilized. If any unexpected results are observed, their causes are noted and corrective action
identified in order to bring a project back onto target.
(ii) Focus
There are two forms of project monitoring and both should be addressed.
A) Process monitoring reviews three main aspects of a project:
 the physical delivery of structures and services provided by the project (activities)
 the use of structures and services by the target population (outputs)
 The management of financial resources.
B) Impact monitoring focuses on the progress of the project towards achieving the project
purpose and the impact of the project on different groups of people.
(iii) Responsibility
Responsibility for monitoring lies within the project where it forms an essential and integral part
of the management functions. Stakeholder participation can strengthen the process, particularly if
it represents a continuation of their involvement in earlier stages of the project cycle. In addition
to ensuring a community perspective on a project, participation in monitoring activities can also
help develop community skills in analyzing situations and identifying solutions, strengthen their
accountability and commitment to a project, and act as a two-way flow of communication.
(iv) Checklist for Project Monitoring:
(i) Are the activities taking place as scheduled?
(ii) Are the outputs being achieved as expected?
(iii) How are the beneficiaries responding to the project?
(iv) Identify possible causes of differences between actual and target performance. Were the
original targets realistic?
(v) Have any unexpected outputs arisen? Should they be included in a revised logical
framework?
(vi) Are the assumptions identified in the logical framework relevant? Have any killer
assumptions emerged? Have any new risks appeared?
(vii) What is the likely achievement of the project purpose?
(viii) Recommend corrective action that would improve the implementation of the existing
project.

111 | P a g e
7.8. Project Evaluation
(i) Purpose
Evaluation adopts a broader perspective than monitoring by challenging the original assumptions
of the project design and considering ‘Are we doing the correct project?’ Evaluations focus on
progress towards realizing a project’s purpose and goal. Evaluations may be conducted at various
times during a project’s life:
 during project implementation (midterm), providing feedback to management to guide
the existing project
 at the end of implementation (terminal), providing guidance for the planning of new
projects
 Several years after the completion of a project (ex post).
(ii) Focus
Evaluations broadly focus on issues of the impact of the project and its relevance, its efficiency
and the coherence of project design. The specific criteria used for evaluation purposes vary
between evaluation teams. Many donor agencies prepare their own checklists to guide the focus
of evaluation studies.
(iii) Responsibility
Evaluations are usually led by people external to the project management (for example, from
relevant ministries, central government, funding body or donor agency). If members of the
implementing agency also participate, the evaluation process provides an opportunity for
capacity building and institutional strengthening.
An interdisciplinary team, including socio-economic and gender specialists, ensures the review
of a project is comprehensive and balanced.
(iii) Checklist for Mid Term Evaluation
(i) What did the project set out to achieve? Was the problem correctly identified?
Were the project activities appropriate? Were the targets realistic?
(ii) What were the expected linkages between outputs and purpose?
(iii) What is the likelihood that the project purpose will be fulfilled? What would have happened
in the absence of the project?
(iv) Is the project purpose still relevant? Are there other ways in which the same purpose could
be achieved? Would they be more appropriate? Would they be more cost effective?

112 | P a g e
(v) What are the indications about the likely achievement of the project goal? Are the project
benefits sustainable?
(vi) Who were the intended beneficiaries of the project? How were they to benefit? Did the
project address practical or strategic gender needs?
(vii) Were there any unexpected outputs or beneficiaries?
(viii) Were the assumptions identified in the logical framework relevant? Have any killer
assumptions emerged? Have any new risks appeared?
(ix) Identify the lessons learnt for the future design of similar projects.
1. Human aspects of project management
The ultimate success of a very well-conceived and viable project may depend on how
competently it is managed. This can be achieved through a satisfactory human relations system is
essential for the successful execution of a project. Without such a system, the other system of
project management, however sound they may be by themselves, are not likely to work well.
While technical problems can often be solved with additional investment of resources, people’s
problems may not be amenable to a satisfactory solution in the short span of the project life.
To achieve satisfactory human relations in the project setting, the project manager must
successfully handle problems and challenges relating to:
I. Authority
II. Orientation
III. Motivation
IV. Group focusing
I. Authority
Except in the divisional organization, the project manager, whose activities cut across functional
lines of command, lacks the desired formal authority over project-related personnel. Without the
conventional leverage of hierarchical authority, the project manager has to coordinate the efforts
of various functional groups (within the organization) and outside agencies. While he often has
formal control emanating from contracts and agreements, as far as outside agencies involved in
the project work are concerned, in his own organization he has to contend with split authority
and dual subordination.
Since the project manager works largely with professionals and supervisory personnel, the bases
of authority would be different from that found in simple superior –subordinate relationships. For
exercising leadership and influence over professional people, he has to explain the logic and

113 | P a g e
rationale for the project activities; show receptivity to the suggestions made by others; avoid
unilateral imposition of decisions; eschew dogmatic postures; and search for areas of agreement
which can be the basis of acceptable solutions.
His effective authority would stem from his ability to develop a rapport with the project
personnel, his skill in resolving conflicts among various people working on the project, his
professional reputation and stature, his skills in communication and persuasion, and his ability
act as a buffer between the technical, engineering, financial, and commercial people involved in
the project.
II. Orientation
Most of the managers working for a project are usually engineers (or Technologists). Typically,
an engineer:
 Works with physical laws, characterized by mathematical precision, as his tools.
 Adopts a structured, mechanical approach to his problems.
 Seeks an enduring solution to his problem.
 Attaches a high value on technical perfection.
When an engineer assumes managerial responsibilities, he faces a very different world in which
he is supposed to:
 Perform the task of planning, organizing, directing, and controlling, the resources of the
firm in a world of uncertainty.
 Adopt a more creative approach to solve non-programmed and unstructured problems.
 Attach greater importance to efficient utilization of resources and resolution of human
relation problems.
Thus the project manager has to strengthen the managerial orientation of project personnel so
that the project goals and objectives can be efficiently achieved within the constraints of time
and budget. Clearly for achieving this task he must himself be an accomplished engineer-
manager.
III. Motivation
The project manager functions within the boundaries of a socio-technical system. Most of the
factors of this system- organizational structure, technical requirements, and competencies of
project personnel- are more or less ‘given’ for him. The principal behavioral factor which he can
influence is the motivation of the project personnel. In this context he should bear in mind the
following:

114 | P a g e
  Human beings are motivated by a variety of needs: physiological needs, social needs,
recognition needs, and self-actualization needs. Individuals differ greatly in the importance
they attach to various need satisfactions. Further, their attitudes tend to change with time
and circumstances, and are significantly influenced by their peers and superiors.
 The traditional approach to management was based on the assumption that human beings
regard work as unpleasant, shirk responsibility, and ordinarily employ inefficient and
wasteful methods. Such a conception of human behavior suggests that a great deal of
pressure has to be applied behavioral research, however, has shown that while some
pressure is beneficial, an excess of it is undesirable. Beyond a certain point, pressure is
dysfunctional.
 Motivation tends to be strong when the goal set is challenging, yet attainable. If the goal is
too demanding, it results in frustration and conflict; if too lax, it induces complacency.
 Expectation of reward, rather than fear of punishment, has a greater bearing on individual
behaviour. Further, the effectiveness reward or punishment depends on how quickly it is
administered.
 In a project setting where hygiene factors (like pay, physical, working conditions, etc.) are
reasonably taken care of, the principal motivators would be a sense of accomplishment and
professional growth. In this setting, the project manager should rely more on participative
methods of management.
In order to succeed in motivating project personnel, the project manager must be a perceptive
observer of human beings, must have the ability to appreciate the variable needs of human
beings, must have skill in several styles of management suitable to different situations, and must
be sensitive to the reactions of people so that he can act supportively rather than threateningly.
Understandably, the project manager has a difficult task. In this endeavor, he can, however,
count on one blessing: the stimulating and satisfying nature of project work. In established
organizations many professional and supervisory personnel find it difficult to see how their
efforts redound to the realization of organizational goals. Separated from top management by
several layers of organizational hierarchy, they are unable to relate their work to the missions of
the firm (which themselves often may be blurred to them). In addition, the jobs in established
organizations are somewhat dull and routine. All this creates a sense of alienation and frustration
which dampens motivation. Fortunately, in a project setting, where the superordinate goals are
clearly defined and visible to all involved, where there is usually a great emphasis on

115 | P a g e
participative style of management, where the layers in the organizational hierarchy are few, and
where the jobs are more challenging, project personnel tend to have greater commitment. Being
able to relate their work easily to the goals of the project, their motivation is usually high.
IV. Group focusing
In large complex project, many persons drawn from different functions, departments, and
organizations are involved. This leads to formation of groups, formal and informal. According to
Rensis Likert, organizations may be considered as systems of interlocking groups. Thus, in a
typical project organization, many interlocking and independent groups are formed.
The groups formed in a project setting may be of three types: vertical groups, horizontal groups,
and mixed groups. A vertical group consists of people drawn from different levels in the same
department, or function, or company. A horizontal group consists of people drawn from different
functions, departments, and companies, but occupying similar hierarchical positions. A mixed
group consists of people drawn from different levels from various functions, departments, and
companies.
A vertical group tends to form most naturally because departmental/functional/ organizational
affinities. However, the existence of such groups may lead to a pronounced “we/they” attitude
and accentuate conflicts. A horizontal group is a useful instrument in linking the overall project
organization. The members of the horizontal group, occupying key positions in their respective
fields, serve as channels of communication. By this influence, they can strengthen the
commitment to the project. The mixed group tends to promote greater cohesion of the total
project organization. It is very conducive to creating a ‘project’ attitude and developing an
overriding commitment for the project. Hence the project manager should strive to establish a
mixed group as the principal group of the project. However, it is difficult to establish such a
group because of the temporary nature of a project- when members of a group know that the
group would be dissolved sooner or later, they retain strong links with their parent company or
department.
Building effective groups An effective group consists of members who are satisfied and
committed and who strive for the attainment of project objectives, without dissipating their
energies I inter-personal and inter-group conflicts. The manifest signs of an effective group are:
esprit de corps, pride in the project, supportive behavior, coordinated endeavor, mutual respect,
and resilience during trying periods. An effective group on the other hand, consists of
disgruntled members who are more involved in inter-personal and inter-group rivalries and less

116 | P a g e
concerned about project goals. Such a group is characterized by apathy, animosity, mutual
bickering, disjointed efforts, cynical attitudes, and low morale.
How can effective groups be established? Studies in group dynamics suggest several stages,
which are partially overlapping, in the formation of an effective group:
 Development of mutual trust
 Diminution of defensive behavior
 Openness and candor in communication
 Cooperation and supportive behavior
 Resolution of differences by mutual negotiation
For building an effective group, the firm must pursue a genuinely participative style of
management. With this managerial philosophy, the project manager can facilitate the
development of mutual trust and acceptance, open communication, cooperation, and project
attitude. In this task, he needs leadership capabilities, sensitivity to human nature,
perceptiveness, concern for welfare of others, maturity, and impartial approach. Clearly this is a
difficult and challenging task.
2. Pre-Requisits for Successful Project Implementation
Time and cost over-runs of projects are very common, particularly in the public sector. Due to
such time and cost-over runs, projects tend to become uneconomical, resources are not available
to support other projects, and economic development is adversely is adversely affected.
What can be done to minimize time and cost over-runs and thereby improve the prospects of the
successful completion of project? While a lot of things can be done to achieve this goal, the more
important ones appear to be as follows:
 Adequate formulation.  Judicious equipment tendering and
 Sound project organization. procurement.
 Proper implementation planning.  Better contract management
 Advanced action.  Effective monitoring
 Timely availability of funds.
 Adequate formulation
Often project formulation is deficient because of one or more of the following shortcomings:
 Superficial field investigation
 Cursory assessment
 Slip –shod methods used for estimating costs and benefits
117 | P a g e
  Omission of project linkages.
 Flawed judgments because of lack of experience and expertise.
 Undue hurry to get started.
 Deliberate over-estimation of benefits and under-estimation of costs.
Care must be taken to avoid the above deficiencies so that the appraisal and formulation of the
project is thorough, adequate, and meaningful.
 Sound project organization.
A sound organization for implementing the project is critical to its success. The
characteristics of such an organization are:
 It is led by a competent leader who is accountable for the project performance.
 The authority of the project leader and his team is commensurate with their responsibility.
 Adequate attention is paid to the human side of the project.
 Systems and methods are clearly defined.
 Rewards and penalties to individuals are related to performance.
 Proper implementation planning.
Once the investment decision is taken decision is taken-and often even while the formulation
and appraisal are being done-it is necessary to do detailed implementation planning before
commencing the actual implementation. Such planning should, inter alia, seek to:
 Develop a comprehensive time plan for various activities like land acquisition, tender
evaluation, recruitment of personnel, construction of buildings, erection of plant,
arrangement for utilities, trial production run, etc.
 Estimate meticulously the resource requirements (manpower, materials, money, etc.) for
each period to realize the time plan.
 Define properly the inter-linkages between various activities of the project.
 Specify cost standards.
 Advanced action.
When the project appears prima facie to be viable and desirable, advance action on the
following activities may be initiated: (i) acquisition of land, (ii) securing essential clearances,
(iii) identifying technical collaborators/ consultants, (iv) arranging for infrastructure
facilities, (v) preliminary design and engineering, and (vi) calling of tenders.

118 | P a g e
 To initiate advance action with respect to the above activities, some investment is required.
Clearly, if the project is not finally approved, this investment would represent an in fructuous
outlay. However, the substantial savings (in time and cost) that are expected occur, should
the project be approved (a very likely event, given the prima facie dispensability of the
project) often amply justify the incurrence of such costs.

 Timely availability of funds.

Once a project is approved, adequate funds must be made available to meet its requirements as
per the plan of the implementation-it would be highly desirable if funds are provided even
before the final approval to initiate advance action. Piecemeal, ad-hoc, and niggardly allocation,
with undue rigidities, can impair the maneuverability of `the project team. It is a common
observation that firms which have a comfortable liquidity position are, in general, able to
implement projects expeditiously and economically. Such firms can initiate advance actions
vigorously, negotiate with suppliers and contractors aggressively, organize input supplies
quickly, take advantages of opportunities to effect economies, support suppliers in resolving
their problems so that they can in turn redound to the successful completion of projects, and
sustain the morale of project-related personnel at a high level.
 Judicious Equipment Tendering and Procurement.
To minimize time over-runs, it may appear that a turnkey contract has obvious advantages. Since
these contracts are likely to be bagged by foreign suppliers, when global tenders are floated, a
very important question arises. How much should we rely on foreign suppliers and how much
should we depend on indigenous suppliers? Over-dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and cost, may mean considerable
outflow of foreign exchange and inadequate incentive for the development of indigenous
technology and capability. Over-reliance on indigenous suppliers may mean delays and higher
uncertainty about the technical performance of the project. A judicious balance must be sought
which moderates the outflow of foreign exchange and provides reasonable fillip to the
development of indigenous technology. In any case, the number of contract packages should be
kept to a minimum in order to ensure effective coordination.

 Better contract management

Since a substantial portion of a project is typically executed through contracts, the proper
management of contracts is critical to the successful implementation of the project. In this

119 | P a g e
context, the following should be done:
 The competence and capability of all the contractors must be ensured-one weak link can
jeopardize the timely performance of the contract.
 Proper discipline must be inculcated among contractors and suppliers by insisting that they
should develop realistic and detailed resource and time plans which are congruent with the
project plan.
 Penalties-which may be graduated –must be imposed for failure to meet contractual
obligations. Likewise, incentives may be offered for good performance.
 Help should be extended to contractors and suppliers when they have genuine problems –
they should be regarded as partners in a common pursuit.
 Project authorities must retain latitude to off-load contracts (partially or wholly) to other
parties well in time where delays are anticipated.
 Effective monitoring
In order to keep a tab on the progress of the project, a system of monitoring must be established.
This helps in:
 Anticipating deviations from the implementation plan.
 Analyzing emerging problems.
 Taking corrective action.
In developing a system of monitoring, the following points must be borne in mind:
 It should focus sharply on the critical aspects of project implementation.
 It must lay more emphasis on physical milestones and not on the financial targets.
 It must be kept relatively simple. If made over-complicated, it may lead to redundant
paper work and diversion of resources. Even worse, monitoring may be viewed as an end in
itself rather than as a means to implement the project successfully.

120 | P a g e