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- 1. Project Analysis 9/9/2022 ASSOSA UNIVERSITY SCHOOL OF POST GRADUATE STUDIES DEPARTMENT OF MANAGEMENT MASTER OF BUSINESS ADMINISTRATION WEEK END PROGRAM UNIT - II PROJECT CYCLE 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. Therefore, the different 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. The project cycle considers various stages in which each stage not only is grown out of the proceeding ones, but also leads into the subsequent ones. The planning process does not contain such a stringent sequence of events since all aspects of the project have to be considered simultaneously and, if necessary, adjusted to one another. Therefore, projects 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. As is in the case with aspects of project analysis, there are many equally valid ways in which the project cycle may be divided. There are various models that deal with the project cycle. However, here we give more emphasis on the Basic Models – The Baum’s cycle and other models such as DEPSA’s and UNIDO project cycle. 2.1 The Baum Cycle (World Bank Procedures) Project with the characteristics already outlined above typically run through at least several separable stages of activity which can be thought of as constituting a definite sequence that some authors /institutions/ have called a project cycle. 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
- 2. Project Analysis 2 At a later stage (in 1978) the author has added an additional stage called “Evaluation” which usually closes the cycle as it gives rise to the identification of new projects. Thus making the stages 5 in number. 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 us to understand that project planning, though a continuous process over time, has distinct phases and stages. 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. Thus, each of Baum’s main stages are discussed briefly below 2.1.1. 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 they feel 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. In general, most projects start as an elementary idea. Eventually, some simple ideas are elaborated into a form to which the title “project” can be formally applied. 2.1.2 Preparation (pre – feasibility 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 (project formulation) covers the establishment of technical, economic and financial feasibility. 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
- 3. Project Analysis 3 technical specifications of distinct proposals accompanied by full details of financial and economic costs and benefits are the out come of the project preparation stage. The project now exists as a set of tangible proposals. Project design and formulation is an area in which local and international consultants are very active especially for big project that cover large areas and have big budgets. 2.1.3. Appraisal After a project has been prepared, it is generally appropriate for a critical review or an independent appraisal to be conducted. This provides an opportunity to re-examine every aspect of the project plan to assess whether the proposal is appropriate and sound before large sums are committed. Generally, internal government staffs only are used for this work and not consultants and projects are appraised both in the field and at the desk level. Appraisals should cover at least seven aspects of a project, each of which must have been given special consideration during the project preparation phase: a) , on requirements for money needed by the project have been calculated property, their sources are all identified, and reasonable plans for their repayment are made where necessary. b) Commercial – the way the necessary inputs for the project are conceived to be supplied is examined and the arrangements for the disposal of the products are verified. c) Incentive – the appraisals 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. d) Economic – the appraisal here tries to see whether what is proposed is good from the viewpoint of the national economic development interest when all project effects (positive and negative) are taken into account and check if all are correctly valued. e) Managerial – this aspect of the appraisal 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 responsibilities are given sufficient power and scope to do what is required. f) Organizational – the appraisal examines 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. These issues are the subjects of specialized appraisal report. And on the basis of this report, financial decisions are made – whether to go ahead with the project or not.
- 4. Project Analysis 4 In practice, there can be quite a sequence of project selection decisions. Following appraisal, some projects may be discarded. If the project involves loan finance, the lender will almost certainly wish to carry out his own appraisal before completing negotiations with the borrower. Comments made at the appraisal stage frequently give rise to alterations in the project plan (project proposal). 2.1.4. Implementation 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. 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 the way and within the period that was planned. Problems frequently occur when the economic and financial environment at implementation differs from the situation expected during 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 effect on the discovery and design of new projects and the deficiencies in the capabilities of the project actor can be revealed. 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. There are some aspects of implementation that are of particular relevance to project planning and analysis. i. The first is that the better and more realistic a project plan is, the more likely it is that the plan can be carried out and the expected benefit realized. This emphasizes once again the need for careful attention to each aspect of project planning and analysis. ii. The second is that project implementation must be flexible. Circumstances will change and project managers must be able to respond intelligently to these changes. The common ones are technical changes (soils, water logging, nitrogen application) price changes economic changes, political changes and these will alter the ways in which it should be implemented. 2.1.5. 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) to look back over what took place, to
- 5. Project Analysis 5 compare actual progress with the plans, and to judge whether the decisions and actions taken were responsible and useful. The extent to which the objectives of a project are being realized provides the primary criterion for an evaluation. The analyst looks systematically at the elements of success and failure in the project experience to learn how better to plan for the future. Evaluation is not limited only to completed projects. It is a most important managerial tool in ongoing projects and rather formalized evaluation 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 follow – up projects. And, finally, evaluation should be undertaken when a project is terminated or is well into routine operation. Many different people may do evaluation. - Project management will be continuously evaluating its experience as implementation proceeds. - The sponsoring agency, perhaps the operating ministry, the planning agency or an external assistance agency – may undertake evaluation. - In large and innovative projects, the project’s administrative structure may provide a separate evaluation unit responsible for monitoring the projects implementation and for bringing problems to the attention of the projects’ management. Evaluation can help not only in the management of the project after the initial phase, but will also help in the planning of future projects. Experience with one project can give rise to new ideas for extension of the project, repetition, the need for “vertically” associated projects, which supply, inputs to or process products from this project, and other ideas which become the seeds or new project proposals. 2.2 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 2. Investment and 3. Operation Each of these three phases may be divided into stages. The Guidelines has divided the Project cycle into six stages 1. Identification 2. Preparation
- 6. Project Analysis 6 3. Appraisal/decision 4. Implementation 5. Operation 6. Ex-post evaluation
- 7. Project Analysis 7 PRE-INVESTMENT OPERATION INVESTMENT 2. PREPARATION (FORMULATION) 3APPRAISAL 1.IDENTIFICATION 6. EX-POST EVALUATION 5. OPERATION 4. IMPLEMENTAION 2.1 PRE-FEASIBILITY STUDY 2.2 FEASIBILITY STUDY 3.1 APPRAISAL 3.2 DECISION 4.1 TENDERING NEGOTIATION & CONTRACTUAL 4.2 DETAILED ENGINEERING DESIGN 4.3 CONSTRUCTION ERECTION & COMMISSIONING PROJECT CYCLE
- 8. Project Analysis 8 The pre – investment phase consists of the first–three stages, the investment phase includes the fourth stage and the operation phase covers the last two stages. The project cycle means the various stages of information gathering and decision-making, which take place between a project’s inception and completion. In reality, these are somewhat artificial, but do serve to emphasis the need to think of project planning as a process of decision-making taking place over time. Broadly speaking, what is important about this process is that it should begin with the identification of a number of alternatives, suing existing information and gathering new data in such a way as to limit alternatives under consideration to those few, which are most promising. 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 short, the project planning process is essentially one of eliminating and the planner naturally hopes that the best alternative will emerge. In this process: I. The results (output) of a given stage serve as the input or part of the input of the next stage, if it is decided to proceed to the next stage. II. The output or part of the output of one stage may be used as new input (feedback) to reconsider or revise, where necessary, the result of a proceeding stages and III. Most importantly, the results of the implementation, operation and ex-post evaluation stages of a project constitute valuable experience for the preparation of subsequent projects provided these inputs are systematically documented and analyzed. 2.3 UNIDO – Project Cycle UNIDO has established a project cycle comprising three distinct phases. I) The pre – investment II) The investment and III) The operational phases Each of these three phases is divided into stages, some of which constitute important consultancy, engineering and industrial activities. 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 interpretation, especially in the feasibility study.
- 9. Project Analysis 9 To reduce wastage of scarce resources, a clear comprehension of the sequence of events is required when developing an investment proposal from the conceptual stage by way of active promotional efforts to the operational stage. 2.3.1 The Pre – investment Phase According to the UNIDO Manual, the pre – investment phase comprises several stages: - Identification of investment opportunities (opportunity studies). - Analysis of project alternatives and preliminary project selection as well as project preparation (pre – feasibility, and feasibility studies) and - Project appraisal and investment decision (appraisal repot) Support or functional studies are also a part of the project preparation stage and are usually conducted separately, for later incorporation in a pre – feasibility study or feasibility study as appropriate. Though it is easier to grasp the scope of an opportunity study, it is not an easy task to differentiate between a pre – feasibility and a feasibility study in view of the frequently inaccurate use of these terms. The division of the pre – investment phase into stages avoids proceeding directly from the project idea to the final feasibility study without examining the project idea step by step or being able to present alternative solutions. This cuts out many feasibility studies that would have little chance of reaching the investment phase. And finally it ensures that the project appraisal to be made by national or international financing institution becomes an easier task when based on well – prepared studies. All too often project appraisal actually amounts to project preparation, given the low quality of the feasibility study submitted. 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. 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 analyses. - Natural resources - The existing agriculture (basis for agro industry) - Future demand for consumer goods. - Imports substitution and export possibilities
- 10. Project Analysis 10 - Environmental impact - Expansions of existing capacity - Manufacturing sectors (successful in other countries) - Diversification Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on detailed analysis. Opportunity studies could be general or specific. General opportunity studies (sector approach) could be area studies designed to identify opportunities on a given area (Administrative province, backward region), industry studies to identify opportunities in delimited industrial branch and resource – based studies to reveal opportunities based on the utilization of natural, agricultural or industrial. Specific project opportunity studies (enterprise approach) 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. A project opportunity study should not involve any substantial cost in its preparation, as it is intended primarily to highlight the principal investment aspect of a possible industrial proposition. The purpose of opportunity study is to arrive at a quick and inexpensive determination of salient facts of an investment possibility. 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, a further assessment of the project idea might be made in a pre-feasibility study. This is to see if: - All possible project alternatives are examined - The project concept justifies detail study - All aspects are critical and need in – depth investigation - The project idea is viable and attractive or not 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 alternative are discussed. The structure of a pre – feasibility study should be the same as that of a detailed feasibility study. 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 –
- 11. Project Analysis 11 feasibility and feasibility studies, particularly large – scale investment proposals. This may include: - Market studies of products - Raw material and factory supply studies - Laboratory and pilot plant tests - Location studies - Environmental impact assessment - Economics of scale studies - Equipment selection studies The contents of a support study vary, depending on its type and nature of the projects. However, as it relates to a vital aspect of the project, the conclusions could be clear enough to give directions to the subsequent stage of project preparation. In most cases a support study when undertaken either before or together with a feasibility study, form an integral part of the latter and lessen its burden and cost. 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 and critically examined on the basis of alternative solutions already reviewed in the pre – feasibility study. The results of these efforts is then a project whose background conditions and aims have been clearly defined in terms of its control objective and possible marketing strategies, the possible market shares that can be achieved, the corresponding production capacities, the plant location, existing raw materials, appropriate technology and mechanical equipment and, if required, an environmental impact assessment. 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. 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. 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.
- 12. Project Analysis 12 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 interlinkages, 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 selected should be examined more closely. 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. 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 a direct effect on total costs and thus on the financial feasibility of the project. E) Appraisal Report: When a feasibility study is completed the 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 gain. Large investment and development finance institutions have formalized project appraisal procedures and usually prepare an appraisal report. 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. 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 also 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, first and foremost in the field of project management. The investment phase can be divided into the following stages: - Establishing the legal, financial and organizational, including tendering, evaluation of bids and negotiations.
- 13. Project Analysis 13 - 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 suppliers and setting up the administration of the firm. - Recruitment and training of personnel. - 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 supplies 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 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. Of particular relevance is the timely initiation of marketing arrangements to prepare the market for the new products (pre – production marketing) and secure critical supplies (supply marketing). 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. In general, it is to be noted that in the pre – investment phase, the quality and dependability of the project are more important than the time factor, while in the investment phase, the time factor is more critical in order
- 14. Project Analysis 14 to keep the project within the forecast made in the feasibility study. 2.3.3 The Operational Phase The problem of the operational 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 when a number of problems may arise concerning such matters as the applications of production techniques, operation of equipment or inadequate labour productivity owing to a lack of qualified staff and labour. Most of these problems have their origin in the implementation phase. The long – term view relates to chosen strategies and the associated production and marketing costs as well as sales revenues. These have a direct relationship with the projections made at the pre – investment phase. If such strategies and projection prove faulty, any remedial measures will not only be difficult but may prove highly expensive. The given outline of the investment and operational phases of an industrial project is undoubtedly an oversimplification for many projects, and, in fact, certain other aspects maybe revealed that even greater short or long term impacts.
- 15. Project Analysis 15 Pre-Feasibility Study Techno-Economic Analysis (Technical and Market Analysis) Opportunity Study Project Conception Reformulation of The Project Financial Analysis Economic Analysis Acceptation Rejection