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CHAPTER 2 THE PROJECT CYCLE … CONT’D

THE PROJECT CYCLE EU PROJECT CYCLE
2.1. WHAT IS A PROJECT CYCLE?
• The answer lies in the general features of project planning
and the identifiable tasks involved.

– Th
There tends
d to be
b a naturall sequence in
i the
h way projects
j
are planned and carried out.

– A project goes through various planning phases before it

is actually realized.

– These phases constitute what is often called “the project

cycle”.
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THE PROJECT CYCLE … CONT’D THE PROJECT CYCLE … CONT’D

Main features of the project planning process (the project cycle): ‰A self
self--renewing cycle
cycle:: new projects may grow out of
‰information gathering the old ones in a continuous process and self-
‰analysis sustaining cycle of activity
‰decision-making
The project cycle considers various stages. A comprehensive sequence – each stage naturally follows
the preceding one and leads in to the next
‰Each stage comes out of the preceding activities, and also
leads into subsequent ones ‰The division into stages is artificial.

‰The planning process does not contain such a stringent ‰It helps to understand project planning, though a
sequence of events since all the aspects of the project continuous process, has distinct phases and stages.
have to be considered simultaneously and, if necessary,
adjusted to one another
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THE PROJECT CYCLE … CONT’D THE PROJECT CYCLE … CONT’D

The primary preoccupation of the analyst throughout the
project cycle is to: Project Cycle Models - Examples

‰consider alternatives
‰The Baum Cycle (a.k.a. the World Bank Project Cycle)
‰evaluate alternatives
‰The UNIDO Project Cycle
‰make decisions
‰The DEPSA’s Model (Development Projects Studies
Authority’s Model) – developed in Ethiopia in 1990
There are many equally valid ways in which the project
cycle may be divided.

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2.2. THE BAUM CYCLE  THE BAUM CYCLE … CONT’D

(THE WORLD BANK PROJECT  CYCLE)
This model amended in 1978 – to include
Developed by Warren C. Baum in 1970 – adopted by
“Negotiation” and “Evaluation”.
the World Bank by then.
‰Identification;
‰Identification; p ;
‰Preparation;
‰Preparation; ‰Appraisal and Selection;
‰Negotiation;
‰Appraisal and Selection; and
‰Implementation; and
‰Implementation
‰Evaluation

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THE BAUM CYCLE … CONT’D 2.2.1. IDENTIFICATION

First stage in the cycle – it is searching for and identifying
potentially feasible projects.

™ Most projects start as an elementary idea.

based project ideas – opportunity to make

‰Resource-based
‰Resource
profitable use of available resources.

‰Market-based project ideas – arising from identified

demand in home or overseas markets.

‰Need-based project ideas – to fulfill certain basic material

requirements and services (unsatisfied needs).
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THE BAUM CYCLE … CONT’D 2.2.2. PREPARATION /FORMULATION …

PROJECT DESIGN
‰Technical specialists may identify areas with technical
A progressively detailed preparation and analysis of the
deficiencies
aspects of a project follows identification.
‰Local leaders - may provide information about existing ‰The project seriously considered as a definite investment
problems and bottlenecks. action at this stage.

‰Proposals to extend and/or expand existing ‰I l

‰Involves pre-feasibility
f ibili and d feasibility
f ibili studies.
di
programs/projects. ‰Covers the establishment of
• commercial,
‰Identifying technological alternatives.
• technical,
9 Identification Studies and Approaches.doc • institutional,
• financial, and
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• socio- economic feasibility
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PREPARATION … CONT’D 2.2.3. APPRAISAL AND SELECTION

Decisions made on the: Critical review (independent appraisal) comes after
‰ scope of the project, preparation.
‰ location and site,
‰Opportunity to re-examine every aspect of the project
‰ soil and hydrological requirements,
plan.
‰ project size (farm or factory size), etc.
Resource base investigations
g undertaken and alternative forms ‰Helps to determine whether the proposal is appropriate,
of projects are explored. sound, and acceptable or not before large sums are
‰Outcomes: distinct proposal(s) in terms of technical specifications, committed.
financial and economic costs and benefits, institutional and Internal staffs only used for this work (government staffs for
managerial aspects, etc.
public projects).
‰Local and international consultants highly involve –
‰Consultants do not involve in this process.
especially for big projects (that cover large areas and have big
budgets). ‰Projects appraised both in the field and at the desk level.
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APPRAISAL & SELECTION … CONT’D APPRAISAL & SELECTION … CONT’D

‰ Financial
Financial:: see if the requirements for money needed by
‰For private investments too, only internal staffs involve
the project have been calculated properly, their sources
in the appraisal process.
are all identified, and reasonable plans for their
The appraisal process builds on the project plan. repayment are made where necessary.
‰ Commercial
Commercial:: examine arrangements for acquisition of
‰ The appraisal team may seek additional/new
inputs and disposal (marketing) of the products.
information if they feel some of the data used or
‰ Incentive
Incentive:: examine whether the project is in the best
assumptions made in the stage of preparation are faulty.
interest of all the participants (stakeholders).
Appraisals should cover at least 7 aspects of a project (that are ‰ Economic
Economic:: verify project’s soundness from the viewpoint
given special considerations during the preparation phase): of the national economic development interest, examine
‰ Technical
Technical:: verifying whether what is proposed will work whether all project effects (positive as well as negative)
taken into account, and check if all are correctly valued.
in the way suggested or not.
9Social Cost-Benefit Analysis (SCBA).
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APPRAISAL & SELECTION … CONT’D APPRAISAL & SELECTION … CONT’D

‰The technical design, financial measures, commercial
‰ Managerial
Managerial:: examine if capacity exists for operating the
aspects, incentives, and economic parameters are
project, see if those responsible ones can operate it
thoroughly scrutinized.
satisfactorily and are given sufficient power and scope to
do what is required. These issues are the subjects of specialized appraisal report.

‰ Organizational
Organizational:: examine the project if it is organized ‰Based on the appraisal report, decisions made whether to
internally and externally into units, contract, policy, go ahead with the project or not.
not
institution, etc. ‰The appraisal may also change the basic project plan or
9 to allow the proposals to be carried out properly, and develop a new plan.
9 allow for change as the project develops. ‰Comments given at this stage frequently give rise to
The implications (or impacts) of the project on the society and alterations in the project plan (project proposal).
the environment also are more thoroughly investigated and ‰Some projects may be discarded.
documented.
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APPRAISAL & SELECTION … CONT’D 2.2.4. NEGOTIATION AND FINANCING

Viable projects chosen for implementation after appraisal on Once the project to be implemented is agreed on, for donor funded
projects, discussions are held on funding and associated aspects of
the basis of the priorities of stakeholders and available
funding.
resources.
‰ Conditions for grants,
‰The Treasury, for public projects, may impose a ceiling ‰ Repayment period (for loans),
on the ministries with big portfolio of investments.
investments ‰ Interest rates on loans,
‰This calls for prioritization of projects. ‰ Flow of funds,
‰There can be a sequence of project selection decisions. ‰ Contributions from stakeholders, and
‰ Whether there is co-financing or not.
If the project involves loan finance, the lender may carry out
This culminates into an “Agreement Document” – binds all the
its own appraisal before completing negotiations with the
parties involved in the implementation of the project
borrower.
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2.2.5. IMPLEMENTATION IMPLEMENTATION … CONT’D

‰Many of the real problems of projects faced at this stage.
Is the most important part of the project cycle.
‰Funds actually disbursed to get the project started and ‰The feedback effects on the discovery and design of new
keep running. projects.
‰Deficiencies in the capabilities of the project actor can be
Major priority
priority:: accomplishing the project in accordance with
revealed.
the
h basic
b i plan
l (within
( i hi cost, quality,
li andd time
i standards)
standards).
d d ).
Recording, monitoring, and progress reporting should be
Recording,
‰Problems frequently occur as the economic and financial integral parts
parts..
environment during implementation often differ from
the expectations at the time of appraisal. ‰ Allows the management to be aware of the difficulties
that might arise.
‰Original proposals frequently modified, though with
difficulty, because of the need to get agreement between
the parties involved.
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IMPLEMENTATION … CONT’D 2.2.6. EVALUATION

Relevant aspects of implementation to project planning & analysis: Final phase in the project cycle - it is useful (though not always
done)
‰ (i) A better and more realistic project plan can be carried out
or realized easily (or with little difficulty) ‰Look back what has been done in the past,
• Emphasizes the need for careful attention to each of the
seven aspects of projects. ‰Compare actual progress with the plans,

‰ (ii) Project implementation must be flexible

flexible.. ‰Judge whether the decisions and actions taken were
responsible and useful.
• Circumstances will change - project managers must be able
to respond intelligently to these changes.
Primary criterion for an evaluation: the extent to which the
• Examples: technical changes (soils, water logging, and objectives of a project are being realized.
nitrogen application); price changes; economic policy and
environmental changes; political changes, etc. ‰Systematically look at the elements of success and failure
in the project experience
• These alter the way in which projects should be
implemented. ‰Helps to learn how better to plan – future projects.
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THE BAUM CYCLE … CONT’D THE BAUM CYCLE … CONT’D

Evaluation is not limited only to completed projects. Different bodies or units may do the evaluation of projects.
‰Important managerial tool in on-going projects. ‰Project’s management unit
unit..
‰May take place at several times in the life of a project.
‰Sponsoring agency (the
the operating ministry, planning
‰May be undertaken when the project is in trouble as the agency, or an external assistant agency)
agency)..
first step in a re
re-planning
planning effort.
effort
A separate evaluation unit (especially for large and innovative
‰Careful evaluation should precede any effort to plan for projects) might be organized for :
new projects and it is also needed to follow-up the
progress of projects. ‰ Monitoring the projects' implementation,

‰ Final evaluation – when a project is terminated or is well ‰ Bringing problems to the attention of the projects’
into routine operation. management.

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2.3. THE UNIDO PROJECT CYCLE THE
PROJECT
CYCLE -
The UNIDO Manual for Industrial Feasibility Study UNIDO
outlines 3 distinct phases:

‰The pre - investment phase

‰The investment phase, and

‰The operating phase

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THE UNIDO PROJECT CYCLE

2.3.1. THE PRE–
PRE–INVESTMENT PHASE
Identification
Pre-selection This phase also comprises several stages:
Expansion/Innovation ‰Identification of investment opportunities (opportunity
Preparation studies);
Pre-
Replacement/Rehab
investment
‰Analysis of project alternatives and preliminary project
ilitation Operational
Phase Phase Appraisal selection,

Negotiations & ‰Project preparation (pre-feasibility and feasibility

Commissioning & Investment
contracting studies);
Start-up Phase
‰Project appraisal, selection, and investment decision.
Engineering Design ‰ Support or functional studies are also part of the project
Training preparation stage and are usually conducted separately,
Pre-production Construction for later incorporation of the findings in a pre-feasibility
marketing study or feasibility study as appropriate.
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PRE--INVESTMENT PHASE … CONT’D

PRE A. OPPORTUNITY STUDIES
The division of the pre-investment phase into stages: Identification of investment opportunities is the starting
point in a series of investment related activities.
ƒ Avoids the attempt to proceeding directly from
project idea generation (identification) to the final ‰ Provides information on available investment
feasibility study. opportunities.
ƒ Cuts out many feasibility studies that would have ‰ Is rather sketch in nature and depend more on aggregate
little chance of reaching the investment phase. estimates than on detailed analysis.
Purposes:
ƒ Ensures that the subsequent project appraisal task,
made by national or international financing ‰ highlight the principal investment aspects of a possible
institutions, becomes an easier task when based on industrial proposition.
well-prepared studies.
‰ arrive at a quick and inexpensive determination of salient
‰ Low quality feasibility study and poorly prepared facts of an investment possibility.
document makes appraisals difficult.
Should not involve substantial cost
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OPPORTUNITY STUDIES … CONT’D OPPORTUNITY STUDIES … CONT’D

The opportunity study should analyze: Opportunity studies could be general or specific. General
‰Natural resources, opportunity studies (“sector approach”)
approach”)..
‰Area studies – to identify opportunities on a given area
‰The existing agricultural base (for agro-industries), (Administrative province, backward region, etc);
‰Future demand for consumer goods, ‰Industry studies – to identify opportunities in delimited
industrial branch; and
‰Imports substitution and export possibilities,
possibilities ‰Resource
R
Resource- -based
b d studies
d – to reveall opportunities based
b d on
the utilization of natural, agricultural, or industrial
‰Environmental impacts (mandatory or non-revenue
resources.
producing projects), Specific project opportunity studies (“enterprise
‰Expansions of existing capacity, approach") – may be seen in the form of products with potential
for domestic manufacturing.
‰Manufacturing sector (benchmarking from other ‰The transformation of a project idea into a broad
countries), investment proposition.
‰Diversification, etc.
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B. PRE-
PRE-FEASIBILITY STUDIES PRE--FEASIBILITY STUDIES … CONT’D
PRE
The project idea elaborated in a more detailed study.
Pre-feasibility study helps to see if:
‰A feasibility study is a costly and time-consuming
task. – all possible project alternatives are examined

‰Prior assessment of the project's idea might be made – the project concept justifies detailed study
in a pre-feasibility study.
– all aspects are critical and need in-depth investigation
‰ An intermediate stage between a project opportunity
study and a detailed feasibility study. – the project idea is viable and attractive or not

‰The structure of a pre-feasibility study should be the same

as that of a detailed feasibility study.

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C. SUPPORT /FUNCTIONAL/ STUDIES SUPPORT/FUNCTIONAL … CONT’D

Considers aspects of an investment project
‰Environmental impact assessment,
– required as prerequisites for or in support of pre-
feasibility and feasibility studies ‰Economies of scale studies, and
‰Equipment selection studies.
– particularly for large-scale investment proposals
The contents of a support study vary depending on the type
Functional studies include: and nature of projects.
‰Market studies of products, ‰The conclusions should be clear enough to give
directions to the subsequent stage of project preparation.
‰Raw material and factory supplies studies,
‰This study forms an integral part of the feasibility study.
‰Laboratory and pilot plant tests,
‰Location studies,
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D. FEASIBILITY STUDIES FEASIBILITY STUDIES … CONT’D

It should provide all data necessary for an investment decision. ‰the plant location
location,
‰Commercial, technical, financial, economic, and ‰ existing raw materials
materials,
environment prerequisites for an investment project
should be defined, refined, and critically examined. ‰appropriate technology and mechanical equipment,

Outcomes of the study

study:: ‰an environmental impact assessment
assessment.

‰ a project whose background conditions and aims have The financial part of the study covers:
been clearly defined in terms of its control objective and ‰ the scope of the investment (including net working capital),
capital)
possible marketing strategie
strategies,
‰ the production and marketing costs,
costs
‰the possible market shares that can be achieved,
‰ sales revenue,
revenue
‰the corresponding production capacities,
capacities
‰ the return on capital invested
invested..
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FEASIBILITY STUDIES … CONT’D FEASIBILITY STUDIES … CONT’D

‰ Final estimates on investment and production costs An industrial investment project must be worked out with the
greatest accuracy in an iterative optimization process, with
and its subsequent calculations of financial and feedback and inter-linkages, including the identification of
economic profitability are only meaningful if the scope commercial, technical, and entrepreneurial risks.
of the project is defined unequivocally in order not to ‰ More closely examine sensitive parameters – size of the market,
omit any essential part and its related cost. the production program, or the mechanical equipments selected.

– There is no uniform approach or pattern to cover all Carry out feasibility studies only if the necessary financing
industrial projects of whatever type, size, or category. facilities can be obtained with a faire degree of accuracy.
– Emphasis on the components varies from project to project. ‰ Reliable assurance of funding – pre-requisite for the study.
‰ Possible project financing must be considered as early as the
– There is a broad format of general application for most
feasibility study stage.
industrial projects.
‰ Financing conditions have direct effects on total costs and the
– Larger projects require more complex information. financial feasibility of the project.
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E. APPRAISAL REPORT THE UNIDO PROJECT CYCLE … CONT’D

Various parties will carry out their own appraisal of ‰The appraisal report will prove whether the pre pre--
the investment project in accordance with their production expenditures spent since the initiation of
individual: the project idea were well spent or not.
– Objectives,
Project appraisal carried out by financial institutions
– Evaluation of expected risks, costs, and gains.
concentrates on the financial health of the company,
p y, the
returns to be obtained by equity holders, and the
‰ Large investment and development finance institutions
protection of its creditors
creditors..
have a formalized project appraisal procedure and
usually prepare appraisal reports.
reports

‰ It is an independent stage of the pre-investment phase,

marked by the final investment and financing decisions
taken by the project promoters.
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2.3.2. THE INVESTMENT/IMPLEMENTATION  IMPLEMENTATION PHASE … CONT’D

PHASE
This phase provides wide scope for consultancy and engineering ‰Acquisition of land, construction work, and
work - primarily in the field of project management. installation
‰ Comprises the following stages: ‰Pre-production marketing, including the securing of
‰Establishing the legal, financial, and organizational supplies and suppliers and setting up the
framework; administration
d i i t ti off the
th firm;
fi

‰Tendering, evaluation of bids, and negotiations; ‰Recruitment and training of personnel; and

‰Technology acquisition and transfer; ‰Plant commissioning and start-up.

‰Detailed engineering design and contract, including
tendering, evaluation of bids, and negotiations;
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2.3.3. THE OPERATING PHASE OPERATING PHASE … CONT’D

Long-term view – problems that relates to chosen
... Problems arising strategies and the associated production and
Short-term view – relates to the initial,
Short- after marketing costs as well as sales revenues.
commencement of production period problems
problems..
‰These have direct relationships with the projections
‰Problems associated with the application of made at the pre-investment phase.
production techniques, operation of equipment, or
inadequate labor productivity owing to lack of ‰If such strategies and projections prove faulty, any
remedial measures will not only be difficult but may
qualified staff and labor.
prove highly expensive.
‰Their origin is in the implementation phase –
Summary of the Project Cycle.doc
relatively easy to overcome due to learning over time.

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THE PROJECT CYCLE: summary PROJECT EXECUTION PROCESS

Some authors describe the project execution process as:
Initiation – Planning – Controlling – Execution – Closure

_________________________//_________________________
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