CHAPTER ONE

GENERAL INTRODUCTION
Introduction
The government of Ethiopia is planning to construct the great renaissance dam, thinking of an ambitious
plan to construct railways and road to connect all kebele’s and woreda’s to the main high way. All these
situations involve a capital expenditure decision. Essentially, each of them represents a scheme for
investing resources which can be analysed and appraised reasonably independently. The basic
characteristic of a capital expenditure (also referred to as a capital investment or capital project or just
project) is that it typically involves a current outlay (or current outlay and future outlays) of funds in the
expectation of a stream of benefit extending far into the future.
1.1 Meaning and definition of project analysis and design
1. What is a project?
There is no one comprehensive definition for a project. Its definition varies from author to author, from
organization to organization, and based on the nature, objective and other characteristics of the project.
As a result you may find several definitions of a project in the literature some of which are provided
below.
 A project is any scheme or part of scheme for investing resources, which can be reasonably
analyzed and evaluated as independent unit (Little and Mirrlees, 1974).
 Project is a temporary organization to which resources are assigned to undertake a unique,
novel and transient endeavor managing the inherent uncertainty and need for integration in
order to deliver beneficial objectives of change (Turner and Müller, 2003).
 A project is a temporary endeavor undertaken to create a unique product, service or result
(PMI, 2004). A project has a single set of objectives, and a when these objectives are
reached, the project is completed. Therefore, a project has a finite and well defined life span.
Further management must have a clear idea as to what these objectives are so that there can
be no doubt as to when the project is completed. Some people use the terms “Program” and
“project” as synonymous. But there is a difference. A program is usually larger in scope, is
activity-oriented, and is not necessarily time bound.
Features of a project (Distinguishing characteristics of a project)
According to Turner and Müller (2003), PMBOK (2004) and Nicholas and Steyn (2008), the following
features characterize a project:
i. Temporary – Project is not a ‘going concern’. It rather is a one-time non-routine activity that has
a definite beginning and a definite end. Each project is an ad hoc organization of human, phys-
ical and financial resources, and activities assembled to accomplish a goal within a scheduled
time frame. Project resources and activities are disbanded when the goals of the project are
achieved or when it becomes clear that the project goals will not or cannot be met or the need for
the project no longer exists. In practice, however, some projects last longer than we expect them
which makes them similar to permanent organizations, thus, seriously challenges the idea that
projects are temporary organizations.
ii. Unique – Projects are said to be as unique as fingerprints. A project is considered to be a unique
endeavour in various terms including its size, complexity, duration, timing, location,
stakeholders, design, objective and other several variables. For example, even in a project such
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 as construction of house, variables such as design, location, materials used, people involved and
timing make it unique. Besides, project uniqueness means that each project is a distinct and
separate entity which can be planned, financed and implemented as a unit. Uniqueness, however,
does not mean that there is no similarity between projects; it rather means that their differences
often outweigh their similarities. In relation to the level of routineness of a project, Resources –
Project involves different resources drawn from different functions, organizations and
professions that cross beyond the ordinary boundaries of an organization and its functional units
(Nicholas and Steyn, 2008). An exception to this could be a project in a portfolio of projects
which share common resource pool. Project resources include human, material, financial and
information. A typical project may involve organizations such as the owner, user, contractor,
supplier and financier. These organizations may be involved in a project through their different
functional units and contribute, among others, human resources from different professions
including engineering, architecture, accounting and environment, to mention some.
iii. Beneficial changes – Turner (2006b) stated that a project is meant to produce an output which in
its turn is meant to help its owner to achieve beneficial outcome. Collectively, project outputs and
outcomes are identified as goals. Thus, each project has a specific goal that can be identified,
quantified or valued. A distinction is usually made of the output and outcomes of a project. The
output of a project refers to the tangible or intangible thing created by undertaking the project and
the goods and services that this thing delivers. For example, the output of a construction project
may be a multi-story building and accommodation services it renders. The output of a training
project may include creation of awareness of say harmful traditional practices and not to practice
such harmful traditions.
A key point to note in relation to project goals is that they should be stated in a way that facilitates
measurement of achievements. The general rule is that project goals should be SMART – an acronym
for:
 Specific  Reliable/achievable
 Measurable  Time-based
 Action-oriented
Classification of projects
Projects may be classified into different categories in various ways as indicated below. However, note
that the classification bases are not mutually exclusive. For instance, government may undertake an edu-
cational project over some ten years period of time financed by resources from equity, loan and/or grant.
i) Ownership – this is based on who owns the project with no reference to the beneficiaries from
the project. Accordingly, we may have private sector projects undertaken by investors with the
main objective of earning profit and public sector projects undertaken by national, regional or
local government entities or non-governmental not-for-profit organizations with the objective
of improving the livelihood of citizens without expecting any return from citizens consuming
the goods and services of these projects.
Projects undertaken by public sector organizations, especially in developing countries, are com-
monly identified as development projects because such projects are primarily meant to bring de-
velopment to a nation, thus, enhance the living standards of its citizens. The term development
project is also used by the private sector to mean projects involved in product and/or process de-
velopment. A third group of projects classified based on ownership are non-institutional

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 projects such as those being undertaken by individuals including marriage, getting driving li-
cense, etc.
i) Source of fund – this is based on whether the project is financed by equity, loan and/or grant.
For example, most projects undertaken by public sector entities are financed by external assis-
tance and loan while projects undertaken by private sector entities use some combination of eq-
uity and loan financing.
ii) Time horizon – this is based on the time period the project takes to become operational. Though
highly subjective, the usual classification of projects according to time horizon is this: short-
term projects cover less than 5-year period of time; medium-term projects cover between 5 to
10 years; and long-term projects cover above 10-year period of time.
iii) Sectoral – this is based on the economic sector the project is involved in and may include such
groupings as agriculture, industry, mining, health, education, transport and communication,
financial service, defense, etc.
iv) Types of major resource required – it is not uncommon to classify projects as capital intensive
which highly depend on physical facilities and technology (e.g. chemical and steel industries)
and labor intensive which highly depend on human capital (e.g. service and agricultural projects
in developing countries)
v) Amount of resources required – although difficult to determine the amount, projects can be di-
vided in terms of the amount of resources (e.g. financial and human) deployed as small-,
medium- and large-scale.
vi) Assessment of benefits – in terms of the ways one may be able to assess the benefits obtainable;
projects may be classified as quantifiable and non-quantifiable. Quantifiable projects are those
to which plausible assessment of benefits can be made (e.g. industrial and mining projects)
while non-quantifiable projects are those projects to which application of plausible quantitative
assessments of benefits is not possible (e.g. health and education projects).
vii) How resources are committed – this includes new investment project which involve establish-
ment of new production unit; expansion investment which involves repeating or extending an
existing production unit; and updating investment which involves replacing or changing some
elements of an existing production unit to modernize and improve it.
Purposes and roles of projects
Why do organizations undertake projects? This relates to the goals of a project and the answer depends
on whether the project is being undertaken by a private or public sector entity.
The ultimate goal of a private sector project is to maximize the wealth of its stakeholders. On the other
hand, the primary goal of undertaking projects by public sector entities is to improve the living standards
of citizens. It does not, however, mean that private sector projects do not contribute to improving the liv-
ing standards of citizens. Rather, their primary goal is to maximize the returns to and, thus, wealth of
those who provide resources to the projects. Besides, regardless of whether they are from the public or
private sector, projects play key roles in national development. They:
 are catalyst agents of economic development, i.e. they initiate and support the process of de-
velopment and accelerate the process of economic, social, cultural and political develop-
ments,

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  create employment opportunities e.g. imagine the number of people employed in the con-
struction of roads, housing and business complexes, heath and educational centers all over
the country,
 enhance the supply of goods and services and lead to self-reliance e.g. imagine the types and
volumes of goods and services the country used to import which are currently being pro-
duced locally,
 support foreign currency earnings and improve balance of payment given that the projects are
export-oriented and consume local goods and services or they are not highly dependent on
imported goods and services,
 provide the framework for future activities of a nation or an enterprise and shape the future
pattern of production and delivery of goods and services, and
 serve as means of distributing national income e.g. imagine the number of projects in
progress and completed in the less developed areas of the country
 They initiative the process of development- production, employment, income generation and
so on
 They have consequences which are long-term in nature
 They also initiate development of basic infrastructure and environment
 Project identification brings the necessary change in society in course of time
 Project accelerates the process of socio-cultural development

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