Chapter Two

Project Cycle

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 2.1. Meaning and Definition of Project Cycle
• A project is not a one shot activity as well and thus every
program, project, or product has certain phases of
development.
• All projects are subject to a process that undergo a salient
transition from inception to maturity that is referred to us
“Project Life cycle” which is spread over a period of time.
• Before any project is actually realized it goes through various
planning phases through which a project passes constitutes
what is often called “the project cycle”. The main features of this
process are information gathering, analysis and decision making.
• A project life cycle is the series of phases that a project passes
through from its start to its completion.
• It provides the basic framework for managing the project.

2
 Con’d
• A project cycle is a sequence of events, which a project can
follow.
• Project cycle is the sequence through which every projects are
planned and carried out.
• Project planning proceeds from inception to an
implementation. It crosses various stages are often called
“Project Cycle Phases”. It is the life cycle though which a
project advances from infancy to maturity.
• The main features of this process are information gathering,
analysis and decision-making.
• Through the project cycle the primary preoccupation of the
analyst is to consider alternatives, evaluate them and to make
decisions on which of them should be advanced to the next
stage.
3
 Con’d
• Main features of the project cycle is to:
• Gather information
• Analyze and
• Make Decision
• The project cycle considers various stages.
• Each stage comes out of the preceding activities, and also
leads into subsequent ones.
• The project cycle is a way of viewing the main elements that
projects have in common, and how they relate to each
other in a sequence.

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Project Life Cycle
 2.2. Project Cycle Models
• There are many project cycle models and all these models differ in their
perspective, emphasis and level of detail.
 The various models that deal with the project cycle are:
A. BAMU’S project cycle (BAUM’s model, 1978)- is also called World
Bank procedure.
B. United Nations Industrial Development Organization (UNIDO)
Model.
C. S Choudhury’s Project Life Cycle (1988)
D. Integrated Project Planning and Management cycle (IPPMC)
model.
E. MDF model
F. Visitask – Project life cycle model
G. Global knowledge Approach
 Though there are various models that deal with the project cycle, here
we give more emphasis on the basic models. The Baum’s cycle (World
Bank procedure) and the UNIDO project cycle. 6
(A) The Baum Cycle (also called World Bank Procedures)
 The first basic model of a project cycle is that of Baum (1970),
which has been adopted by the world bank and initially
recognized four main stages, namely:
1. Identification
2. Preparation
3. Appraisal and selection
4. Implementation
 At a later stage (in 1978) the author has added an additional
stages called “Negotiation” and “Evaluation” which usually
closes the cycle as it gives rise to the identification of new
projects.

7
 Con’d
Thus, making the stages 6 in number.
1.Identification
2.Preparation (feasibility study)
3.Appraisal and selection
4.Negotiation- added after a certain period (1978).
5.Implementation
6.Evaluation – added after a certain period (1978).

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The Baum Cycle (also called World Bank Procedures)

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 Stage 1. Identification
 The first stage in the cycle is to find potential projects.
 Some sources of projects are given here:-
 Some may be “resource based” and stem from the
opportunity to make profitable use of available resources.
 Some projects may be “market based” 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 projects.
 Technical specialists will have identified many areas where
new investment might be profitable, while local leaders may
have suggestion about where investment might be carried
out.
 Ideas for new projects also come from proposals to extend
existing programs.
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 Stage 2. Preparation (Pre-feasibility and/or
feasibility studies)
 Once projects have been identified, there begins a process of
progressively more detailed preparation and analysis of
project plans.
 At this stage the project is being seriously considered as a
definite investment action.
 Project preparation (or formulation) covers the establishment
of technical, economic and financial feasibility.
 It is a detailed design of the project addressing technical and
operational aspects
 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.
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 Con’d
 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.

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 Stage 3. Appraisal

 After a project has been prepared, it is generally appropriate

for a critical or an independent review to be conducted. This
provides an opportunity to reexamine every aspect of the
project plan to assess whether the proposal is appropriate
and sound before large amount of money is committed.
 analysis of the project from technical, financial, economic,
gender, social, institutional and environmental perspectives.
 Appraisal should cover at least seven aspects of a project,
each of which must have been given special consideration
during the project preparation phase.

13
 Con’d
a. Technical – here the appraisal concentrates in verifying
whether what is proposed will work in the way suggested or
not.
b. Financial– to see:
– if money needed for the project have been properly
calculated.
– their sources are identified, and
– reasonable plans for their repayments are made.
c. Commercial
– to examine whether the necessary inputs for the project are
supplied.
– to see whether the arrangements for the disposal of the
products are verified.
d. Incentive - to see 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.
e. Economic – to see the economic significance of the project
towards the development the nation. 14
 Con’d
f. Managerial – this aspect of the appraisal examines:
– to see if the capacity exists for operating the project,
and
– to see if the responsible ones are given sufficient
power and scope to do what is required.
g. Organizational – to see if it is organized internally and
externally into units so as to allow the proposals to be
carried-out properly and to allow for change as the
project develops.
 On the basis of this appraisal report financial decisions
are made – whether to go ahead with the project or
not.
NB 1. If the project involves loan finance, the lender will
almost certainly wish to carryout his own appraisal before
completing negotiations with the borrower.
2. Comments made at the appraisal stage possibly results in
alterations in the project plan (Project proposal).
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 Stage 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.
• Conditions for grants,
• Repayment period (for loans),
• Interest rates on loans,
• Flow of funds,
• Contributions from stakeholders, and
• Whether there is co-financing or not.
• This culminates into an “Agreement Document” –binds all
the parties involved in the implementation of the project.

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 Stage 5. Implementation
• It is the most important part of the project cycle.
• The objective of any effort in project planning and analysis
clearly is to have a project that can be implemented to the
benefit of the society.
• In this stage,
– Funds are actually disbursed to get the projects started and
keep running,
– A major priority during this stage is to ensure that the
project is carried out in the way and within the period that
was planned.
– Many of the real problems of projects are faced in this
stage. E.g.. technical changes ,price changes, changes in
economic and political policy, environmental changes, etc.
Therefore, to allow the management to become aware of
the difficulties that might arise, recording, monitoring and
progress reporting are important activities during the
implementation stage.
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 Stage 6. Evaluation
 The final phase in the project cycle is evaluation.
 It is periodic review of the project with feedback for next
project cycle.
 Once a project has been implemented, it is often useful, to look
back over what took place, to compare actual progress with
the plans, and to judge whether the decisions and actions
taken were responsible and useful.
 Evaluation is not limited only to completed projects. It is
important managerial tool in ongoing projects. And formalized
evaluation may take place at several times in the life of a
project.
 Evaluation should be undertaken when a project is terminated
or is well into routine operation.
 Primary criterion for an evaluation is the extent to which the
objectives of a project are being realized.
- Systematically look at the elements of success and failure in
the project experience
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 (B) UNIDO – Project Cycle
• UNIDO gives emphasis to industrial projects.
• It is more practical than conceptual.
• The development of an industrial investment project from
the stage of the initial idea until the plant is in operation
has three distinct phases.
 UNIDO has established a project cycle comprising three
distinct phases:
I. The pre-investment
II. The investment, and
III. The operational phase
 Each of these three phases is divided into stages, some of
which constitute important consultancy, engineering and
industrial activities.
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 Phases of the project cycle – UNIDO manual
Phase 1 – Pre-investment

Opportunity Prefeasibility Feasibility Appraisal &

study study Study Decisions

Phase 2 – investment

Construction Commissioning
Negotiation and Engineering & Manpower
Contracting Design & start up
training

Phase 3 – Operation
 Con’d
• Pre-investment phase
– Identification of investment opportunities (opportunity
studies)
– Analysis of project alternatives and Preliminary project
Selection
– Project Preparation (feasibility studies).
– Project Appraisal and investment decision (appraisal
report) – by the people who has an interest on the project.

21
 Con’d
• Investment phase
– Negotiation and contracting
– Engineering design
– Construction
– Reproduction marketing
– Training
– Commissioning and start up
• Operational phase
– Replacement and rehabilitation
– Expansion and innovation

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UNIDO – Project Cycle

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 Con’d
• The difference between the three stages is the level of
resource commitment and detail of work.
1. The pre -investment (which includes identification, pre-selection,
preparation, support studies and appraisal) is generally the
study stage, where the project has to pass through different
levels of refinement so as to increase the level of information
about the project feasibility.
2. The investment phase is the stage where the project
initiator/owner gets convinced by the feasibility of the project
and decides to commit some resources in expectation of high
return more than the cost.
– Under this stage the project would be transformed from
paper work into actual practical implementation activities.
3. The last stage is the stage at which the project starts to give
the production/service to the beneficiaries.
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 I. The Pre-investment Phase
• There are four Phases to the Pre-investment Stages:
1. Opportunity study
2. Pre-feasibility study
3. Feasibility study
4. Appraisal decisions

NB. Support or functional studies are also part of the

project preparation stage and are usually conducted
separately, for later incorporation in the pre-
feasibility or feasibility study.

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 A. Identification of project idea and Opportunity studies
• The Identification phase is one of identifying the problems,
which need to be addressed, and analyzing the ways in
which they can be addressed.
• It refer to the process of finding project ideas which are
expected to contribute towards the achievement of specified
objectives.
• The identification of investment opportunities is the starting point in a
series of investment related activities.
• It may also eventually even be the beginning of the mobilization of
investment funds.
 The opportunity study would analyses:
 The general availability of natural resources,
 Future demand for consumer goods,
 Imports substitution and export possibilities,
 Environmental impact,
 Expansion of existing capacity, etc. 26
 Con’d
 Opportunity studies could be general or specific:

A. General Opportunity Studies (Sector Approach):

 It requires an analysis of the overall investment
potentials in developing countries and the general
interest of developed countries in investing abroad.
It could be:-
(a) Area studies - designed to identify opportunities
on a given areas (Adm. Province, backward regions,
etc),
(b) Industry studies – to identify opportunities to
delimit industrial branch, and
(c) Resource-based studies – to reveal opportunities
based on the utilization of natural, agricultural or
industrial resources.

27
 Con’d
B. Specific Project Opportunity Study (Enterprise
Approach):

 Involves the identification of specific investment

requirements of individual project promoters.
 Are seen in the form of products with potential for
domestic manufacture.
 A specific project opportunity study may be defined
as the transformation of a project idea into a broad
investment proposition.

NB. Opportunity studies are rather sketchy in nature and

rely more on aggregate estimates than on detailed
analysis. Cost data are usually taken from comparable
existing projects and not from suppliers quotations.

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 B. Pre-feasibility studies and preliminary selection
 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 costly and
time – consuming task.
– Therefore, before assigning larger funds for such a study,
further assessment of the project might be made in a pre –
feasibility study.

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 Con’d

• 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.

30
 Con’d
 The structure of the pre-feasibility study should be the
same as a detailed feasibility study.
 A detailed review of available alternatives must take place
at the stage of the pre-feasibility study.
 A pre-feasibility study is conducted if the economics of the
project are doubtful.

Note: A well prepared and comprehensive opportunity

study may justify bypassing the pre-feasibility stage.

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 Con’d
 The objectives of pre-feasibility study are to see whether
All possible project alternatives have been examined,
The project concept justifies detailed study,
All aspects are critical and need in-depth investigation
through functional (support) studies
The project idea is viable and attractive for a particular
investor or investor group.
The environment situation at the planned site and
the potential impact of the projected production
process are in line with national standards

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 Con’d
 Support (or functional) studies covers aspects of an investment
project, and are required as a pre-requisites for, or in support
of, pre-feasibility and feasibility studies, particularly for large
scale investment proposals. This may include:
Market studies of products to be manufactured
Raw materials and factory supply studies
Laboratory and pilot plant tests.
Made to determine the suitability of a particular raw
materials (products).
 Location studies: Particularly for potential projects where
transport costs would constitute a major determinant.

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 Con’d
 Environmental impact assessment:
- Carried-out particularly for project involving for
examples, chemical plants, paper and cellulose mills,
petroleum refineries, the Iron & Steel Industry, and
nuclear, thermal and hydropower plants.
 Economies of scale studies:
- The main objective here is to assess the size of plants
that would be most economic after considering
alternative technologies, investment costs, production
costs and prices.
 Equipment selection studies:
- Which are required when large plants with numerous
divisions are involved.
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• Preliminary Screening - eliminate the least desirable project with
minimum costs.
• The purpose of the preliminary screening is to reduce the number
of projects, which will be subjected to a detailed investigation.
• General consideration in preliminary screening may include:
– Compatibility with the promoter
– Consistency with government priorities
– Availability of inputs
– Adequacy of market
– Reasonableness of cost
– Acceptability of risk level.
• A detail review of available alternatives must take place at the
stage of the pre-feasibility study, since it would be too costly
and time consuming to have this done at the feasibility study
stage. 35
 C. Project preparation – Feasibility study
 It is the stage at which over all feasibility of an identified
project is established thereby making it (if found
feasible) ready for appraisal and financing.
 It should provide all data necessary for an investment
decision.
– The commercial, technical, financial, economic and
environmental prerequisites for an investment project
should therefore be defined and critically examined in
the basis of alternatives solutions already reviewed in
the pre-feasibility study.

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
Con’d
The financing part of the study covers:-
a) The scope of the investment,
b) The production and marketing costs,
c) The sales (revenue), and
d) The return on capital invested (RoE)
 Even a feasibility study that does not lead to an investment
recommendation is of great value as it prevents the
misallocation of scarce resources.
 A feasibility study should be carried-out only if the necessary
financing facilities, as determined by the studies, can be
identified with a fair degree of accuracy.

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 Con’d
• The study also determines whether the project would
generate sufficient benefits to offset estimated investment
and operating costs.
• Similarly, it ascertains which, if any, of the alternative
would yield the largest positive returns to the economy
that would justify the allocation of resources to it.
• Finally, project preparation seeks the most suitable legal,
administrative and organization arrangements to ensure
that implementation would proceed as planned and that
completed facilities would be properly maintained and
operated

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 D. Appraisal Report and Decision
• The appraisal/audit phase involves a systematic review of
all aspects of the project in order that a decision can be
made as to whether to proceed.
• When a feasibility study is completed the various parties
involved in the project will carryout 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
formalized project appraisal procedures and usually prepare an
appraisal report.
• The better the quality of the feasibility study, the easier will be
the appraisal work.

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 Con’d
 Project appraisal as carried-out by financial institutions
concentrates on:-
i. The health of the company to be financed,
ii. The returns obtained by equity holders, and
iii. The protection of its creditors.

NB. Appraisal reports as a rule deal not only with the project
but also the industries in which it will be carried-out
and its implication on the economy as a whole. For
example, if a car manufacturing plant is to be
appraised, the report will also review the relationship
of the plant to its feeder industry, the transport sector,
the availability of highways, and the energy supply.
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 Con’d
 The following questions are often the subject of an appraisal
report on the basis of which a series of decisions may be
made. These could involve discarding the project or
alternation of some of the plans.
• Technical: Is the project design appropriate and will the
project work as expected?
• Financial: Has proper provision been made to cover the
financial requirements and obligations of the project? Is
the financing planned adequate? Are the financial aspects of
the project beneficial to the different actors and beneficiaries
involved with the project? If the project is commercial how
will the necessary inputs be obtained and (where relevant)
how will the output be sold?
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 Con’d
• Economic: Is the project advantageous from the point of view
of the economy as a whole?
• Social: Is the project both advantageous and acceptable to the
people affected by it?
• Institutional: Are there suitable organizations in place to
implement and manage the project? Is the legal framework
appropriate?
• Environmental: Have the environmental impacts of the
project been properly considered?
• Sustainable: Will the project be sustainable in the long term
both financially and institutionally?

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 II. Investment Phases
 The investment phase of a project provides wide scope for
consultancy and engineering work, first and foremost in the field of
project management.
 Under this stage the project would be transformed from paper
work into actual practical implementation activities.
 The investment phase can be divided into the following stages:
Establishing the legal, financial, and organizational basis for
the implementation of the project.
Technology acquisition and transfer, including basic
engineering
Detail engineering design and contracting, including
tendering, evaluation of bids and negotiations.
Acquisition of land, construction work and installation
Recruitment and training of personnel
Plant commissioning and start-up 43
 III. Operation or Implementation Phases
• A project reaches its operational stage after the
investments have been made, i.e. after the physical
structure has been constructed or the plant has been
installed in the case of the infrastructure projects, and or
the development services have been completed; in other
words when the expected project benefits start being
generated .
• The problems of the operational phase need to be
considered both from long and short – term viewpoint.
• This is the phase where actual commissioning and start – up
activities are started.
• The Implementation phase is one of actually performing the
project and ensuring that the objectives are met and the
out puts made..
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 Con’d
 This includes:
 Mobilization of resources for each task and
objectives
 Project marketing
 On-going monitoring and reporting arrangement
 Identifying problems
 Addressing failures
 Modification of the planned results and project
objectives as appropriate

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